Thank you to everyone who joined us last week for our virtual Cabot Summit. We really missed seeing you in person, but were so happy that we could at least share some of our investing ideas and strategies during this strange time in which we are living. I hope you enjoyed the Summit!
We are keeping our fingers crossed that the coronavirus trend seems to be improving. Unemployment is still dismal, but there are some very bright spots in the economy—both housing starts, building permits, and manufacturing are rising.
And as you’ll see in our Advisor Sentiment Barometer and Market Views, sentiment continues to be bullish.
Market Views 832
No doubt, it is a market of stocks and not simply a stock market as the rising tide over the last five months has not lifted all boats equally, which should provide comfort to those concerned about the supposedly rich valuation of the “market.” True, we respect that the current P/E ratio for the S&P 500 of 26.4 is on the high end of the historical range, but we can’t forget that interest rates are microscopic today,… and that there is a big difference in how one should look at equity prices when yields on cash are close to zero as they are today, versus 500 (5.0%) or 600 (6.0%) basis points as they were when the S&P 500 was arguably expensively valued back in 2000 and 2007. We continue to believe that Value will recapture its former glory.
- John Buckingham, The Prudent Speculator, www.theprudentspeculator.com, 877-817-4394, August 24, 2020
Awaiting Two Catalysts
Investors are waiting for a resolution to the next two major catalysts on the horizon for stocks: 1) The passing of a substantive stimulus deal by Congress, and 2) A game-changing vaccine/therapeutic to combat the coronavirus.
On Wednesday, the S&P 500 officially extricated itself from the shortest bear market in history by eclipsing the previous Feb. 19 high. This move is remarkable, especially given the near-30% plunge in the S&P 500 from its Feb. 19 high to its March 23 low.
So, given that the breach of the former high (and therefore the official end to the COVID-19 bear market), I think it is safe to say that the smart money does expect positive news on both of those two aforementioned major catalysts.
- Jim Woods, Successful Investing, CustomerService@JimWoodsInvesting.com, 1-800-211-4766, August 21, 2020
Looking for Sell Signals
There are some potential sell signals setting up, and we will be trading them if they are confirmed. However, one must remember that the $SPX chart is still positive, and that is the most important indicator. Sell signals from other indicators can come and go, but if the $SPX chart does not break support (3200, in this case), then the price trend will remain higher. So, there are some cracks appearing in the dam, and while it’s not time for panic, you better have Hans Brinker on speed dial.
- Lawrence G. McMillan, The Option Strategist, optionstrategist.com, 973-328-1303, August 21, 2020
Spotlight Stock 832
Green Dot is best known for being the biggest prepaid debit card company by market cap, but there’s a whole lot more to the story of how this company brings home the bacon.
Green Dot also offers retail banking services to its customers. The company also offers banking services to businesses—think corporate bank accounts, branded debit or gift cards, digital payment solutions, and even payroll services and refund processing for tax returns.
Banks are known (and hated) for their fees. But Green Dot is different. There is no minimum balance. There are no account maintenance fees as long as you’re actively using your debit card for purchases. The company advertises fee-free ATM withdrawals worldwide and promises never to charge any overdraft fees.
It’s not just the fee structure that’s different at the Dot. Green Dot has no branches! It’s entirely digital. But customers can make cash deposits at a nationwide network of partner retailers, and it’s all done through the web or an app on your smart device. And there’s no charge for the in-person service.
So, while Green Dot will charge you a maintenance fee on your account if you’re not using your debit card for spending, it’s seen membership grow faster than many of the free banking platforms out there—even those offered by the bigger banks—as it’s executed a well-planned turnaround.
Green Dot’s got another way of making money for investors, and it’s got an early-mover advantage that should set it up for massive growth in the coming years.
Green Dot has brought the “as a service” to the banking world by offering Backend-as-a-Service (BaaS) to its corporate customers. This involves corporate bank accounts and account management so that a company can offer a place to park its customers’ money. To contextualize, think about investing apps like Stash Investing; if you’ve ever used Stash, you’ve used Green Dot’s banking services.
Green Dot allows nonbank companies to deliver a full-service banking experience that integrates seamlessly into their existing platforms.
Green Dot can also set companies up with their own branded debit cards. For example, if you’ve ever filed taxes using Intuit TurboTax’s platform and elected to get your refund in the form of a preloaded debit card, well, that card was actually a Green Dot card.
It also offers payroll services to make it easier for employers to pay their employees how and when they wish to be paid. Plus, it offers tax pro services that grant filers faster and easier access to their refunds. Uber uses Green Dot’s banking services, along with other heavy hitters like Wendy’s and Burger King.
Back in September 2018, Green Dot was trading for nearly $90 a share. But thanks to some incredible mismanagement of expenses and some incredibly expensive ventures, the company lost a good 70% of its value in 2019. It’s since reorganized itself and launched a newer, less costly initiative that’s been very successful on the retail banking side of the business. And since the coronavirus crisis, activist investors have brought in a new CEO.
Former-Netspend CEO Dan Henry helped guide Netspend from revenues of $128 million in 2007 to revenues over $430 million in 2014. Additionally, he helped take the company public in 2010 and negotiate a $1.4 billion exit for investors.
Henry also serves as chairman of the board at Paysign, another fintech company that’s helped investors to a 2,000% gain since going public in 2017. So, he’s got some ideas of how to run a successful fintech operation. Shares have already gained over 100% since he has taken the reins, but we’re convinced there’s still a lot more growth ahead.
The stock’s gone a tear since the new CEO came into the picture, but the company is still undervalued by pretty much every metric. With this new leadership, we’re convinced Green Dot is in the perfect position to take market share away from more established, traditional banks—and we see this trend playing out for some time and bringing lots of profit your way. The 12-month target will start at $65.
Jason Williams & Brit Ryle, The Wealth Advisory, www.angelpub.com, July 2020
Feature 832
In January, I moved from a rural town in Tennessee to a suburb of Knoxville. I loved my local family-owned bank, but they don’t have an office in my new town. However, just as I was in the process of moving, they entered the digital age with a new mobile banking app. Now, I’m not one for gadgets, and I’m never the first on the block to try out new technology, but I love that app! And with the coronavirus pandemic keeping me mostly at home, I can do just about all my banking with my phone.
And I’m not alone. As you can see from the following graph, digital banking has risen significantly—through all age groups since COVID-19 arrived. Source: icarvision.com
And like me, once you get the taste of how easy it is to use, I bet you’ll be hooked, too. In fact, according to MoneyWise, more than 80% of U.S. consumer spending is non-cash. Of course, a lot of that was credit card spending, but the debit portion is growing by leaps and bounds. The FinTech Times reports that 24% of folks in the U.S. rely on digital-only banking. And just 34% of those 35 and under even carry cash! By 2022, forecasts say that more than 75% of millennials will be digital banking users. And don’t forget about the Gen-Z’ers (born between 1995 and 2015). They control $45 billion in annual spending, and account for some 60 million people in the U.S., and they grew up using their phones for everything from texting, social media, playing games, and, oh, yes, even as a telephone! Most of them will never set foot in a bricks-and-mortar bank branch.
Those statistics are prompting banks to invest heavily in technology and digital infrastructure upgrades. And some, like our Spotlight Stock, Green Dot Corporation (GDOT) are becoming neobanks—strictly digital—online and mobile. A survey by Finder.com reported that 21.4% of U.S. internet users ages 18 to 91 already used neobanks, and 8.8% of the respondents said they plan to open a digital-only bank account in the coming months.
Besides millennials, there’s another whole section of the population—25.2% of people that don’t have bank accounts. Neobanks are also targeting that ‘unbanked’ sector.
Even the big tech companies are getting into banking—Apple with its Apple Card and Facebook with Facebook Pay, which works with Messenger, Instagram, WhatsApp and Facebook, in November. And even Uber is creating financial services products for drivers and customers in its recently created Uber Money division. Uber already offers a bank account, debit card and mobile banking app—through Green Dot. Banking is indeed, being reimagined, and Green Dot—by expanding its services beyond just digital payments—looks pretty attractive.
Top Picks - Healthcare 832
Anavex Life Sciences Corp. (AVXL) | Daily Alert July 21
Anavex continues to move forward with its lead compound Anavex 2-73, currently in clinical trials for Alzheimer’s, Parkinson’s dementia and Rett syndrome. The lead indication, Alzheimer’s, is currently in a 450-patient, 48-week pivotal Phase 2b/3 trial and way more than 50% enrolled.
While enrollment so far has been in Australia, enrollment was recently cleared for sites in the UK and Canada, so I expect some word on results towards the end of 2021. This could be huge as there is nothing out there that really helps Alzheimer’s patients.
While Anavex has some strong data showing a marked slowing, even improvement, in the advancement of Alzheimer’s from a Phase 2 trial, it was equally encouraging to read a quote in a news article by an Alzheimer’s clinician (who therefore knows how Alzheimer’s patients usually progress) who said, “It is so exciting to be part of this trial and seeing what we are seeing in these patients overall.”
Meanwhile preliminary data on its Phase 2 Parkinson’s dementia trial is due around mid-year (so, any time now). And data from a 50% overenrolled Phase 2 Rett trial is due by the end of summer (following encouraging data on improvements in sleep, hand movement and breathing from a readout of the first 6 patients). So, it is an exciting time for Anavex, and investors have been taking notice.
Tom Bishop, BI Research, www.biresearch.com, June 30, 2020
Growth 832
GCP Applied Technologies Inc. (GCP) | Daily Alert July 24
GCP Applied Technologies is a global construction materials company. Its largest segment, Specialty Construction Chemicals (about 57% of revenues), produces additives for concrete and cement that improve their performance. The Specialty Building Materials segment (about 43% of revenues) produces waterproofing membranes, roofing under-layments and a range of other materials for new construction and renovations that protect buildings from water, vapor, fire, and other types of damage.
About half of GCP’s revenues are generated from outside of the United States. Based in Cambridge, Massachusetts, GCP was formed within W. R. Grace & Company in 2015 and spun off to shareholders in February 2016. The company’s stock price rose steadily after the spin-off, more than doubling to over $33 by March 2018, due to GCP’s bright prospects, undervaluation, and potential for a breakup. Reflecting this sentiment, when GCP agreed to sell its Darex Packaging Technologies business to German company Henkel for $1.1 billion in March 2017, the shares jumped 25%.
However, the company’s remaining operations went on to produce disappointing results, with quarterly revenues and earnings regularly missing analysts’ estimates. At this point, GCP appears to be poorly managed: revenue growth has lagged the industry, expenses remain bloated, a steady stream of restructuring plans have produced no lasting improvements, and the board of directors has been plagued by problematic interlocking relationships that curbed its accountability and led to excessive compensation and other governance issues.
One indication of investor frustration: GCP shares jumped 13% in early 2019 when the company announced a strategic review along with respected and successful activist investor Starboard Value’s initial plans to nominate board members, only to fall sharply when the company later announced that the review would not result in a sale. GCP shares now trade at $17.96, not much higher than the roughly $16 price at the 2016 spinoff.
The GCP situation has the ingredients of an impressive turnaround. First, it has stable revenues in a relevant industry. Its organic sales growth has been flat since 2017, while its products (at least previously) held the #1 or #2 market shares in critical segments within the growing and steadily relevant global construction industry. Second, it has a capable new board of directors with a credible strategy to improve the company’s operations. Starboard Value, which holds a 9% stake, led a successful proxy campaign in which shareholders elected its slate of well-qualified directors to replace eight of GCP’s ten directors earlier in June. GCP has a relatively new CEO (Randy Dearth) who joined as president in July 2019. We anticipate that he will either become more effective or be replaced.
The company’s plan going forward includes detailed steps to boost organic revenue growth, expand margins by up to six percentage points, and rebuild product innovation effectiveness. Another possible outcome is a breakup and sale of the company. We note that industrial firm Standard Industries holds a 17% stake; perhaps because it would like to acquire the membranes business to add to its line.
Additionally, although the company is operating well below par, it remains profitable and generates free cash flow. The balance sheet has only a modest $348 million in debt, almost fully offset by $320 million in cash. Lastly, GCP shares are significantly undervalued. In a turnaround or sale, we believe the company is worth at least $28, providing investors with an attractive potential return.
We recommend the purchase of GCP Applied Technologies (GCP) shares with a $28 price target.
George Putnam III, The Turnaround Letter, turnaroundletter.com, 617-573-9550, July 2020
Chegg, Inc. (CHGG) | Daily Alert July 29
While the Nasdaq returned close to its highs from last Monday, many stocks we own or are watching didn’t. And then today happened, with growth stocks (and most others) getting dented across the board. (We know there were reasons behind today’s selloff, like some antitrust action against Apple, but we’re more interested in the what than the why.)
None of this evidence is super bearish when looking out a few months; indeed, our key market timing indicators (Cabot Trend Lines, Cabot Tides, etc.) are still bullish, and next to no leading growth stocks have cracked their intermediate-term uptrends as of yet. Moreover, some sort of hesitation was going to come eventually, and as we wrote in last week’s issue, the current time frame (we had 16 weeks up with very strong performance) fits with prior instances where the sellers finally put up a fight.
But shorter-term, we’re not in the mood to chase stuff, as many stocks are wobbling, and a ton have earnings reports coming during the next two or three weeks. Long story short, having trimmed last week, we’re content to stand pat tonight with a cash position right around 20% while holding onto our strong, profitable positions.
From here, we’re willing to move in either direction (buy or sell) depending on what comes, but right now we feel giving our names a chance to build new launching pads is the best course.
The debate over school reopening’s is raging across the country, but more and more seem to at least be starting out with a part-virtual option (with some going fully virtual for at least the first few weeks). That’s likely helping perception of Chegg, which rebounded excellently from last week’s selloff, tagging new highs today before reversing (on light volume).
Anything is possible, of course, but the trend is up here for the business and the stock. We’ll stay on Buy, though dips toward the 25-day line (near 70 and rising) would mark better entry points. Earnings are likely out in early August. BUY.
Michael Cintolo, Cabot Growth Investor, cabotwealth.com, 978-745-5532, July 23, 2020
Central Garden & Pet Company (CENT) | Daily Alert August 10
Central Garden & Pet Company sells branded and private- label products for gardening (42% of 2019 sales) and pet care (58%). The coronavirus outbreak coincided with peak gardening season, which could weigh on June-quarter results. Still, Americans’ willingness to spend on their dogs and cats bodes well for growth.
Decent organic growth and acquisitions should help lift sales and earnings. Central Garden has acquired more than 50 companies over the past 25 years.
Central Garden shares have returned 18% so far in 2020, exceeding the slight gain for the S&P 1500 Index. Yet the stock seems reasonably priced, particularly given the company’s operating momentum. Shares trade at 23 estimated full-year earnings, an 11% discount to its industry group. Analyst estimates expect Central Garden will grow per-share profits by 1% in fiscal 2020 ending September and 9% next year.
The stock is being initiated as a Buy.
Richard J. Moroney, CFA, Upside, www.upsidestocks.com, 800-233-5922, September 2020
*Berry Global Group, Inc. (BERY)
Berry Global Group is in a relatively enviable position in the packaging group. Nearly 65% of its products are in end markets that are either neutral to or benefiting from consumption trends driven by COVID-19. The plastic products maker is among the minority providing 2020 guidance. It expects free cash flow to exceed $800 million in 2020 with volume growing high single-digits in its Health Hygiene segment. Berry shares suit growth-at-areasonable-price investors. They trade at a forward P/E of 9.5 versus prospects of 28% EPS growth in the next 12 months.
Sam Subramanian, PhD, AlphaProfit Sector Investors’ Newsletter, alphaprofit.com, 281-565-6963, July 2020
Trex Company, Inc. (TREX) | Daily Alert August 26
TREX Company was one of the original manufacturers of the composite decking that has become the popular alternative to wood for outdoor decks and railings. Its decking is made primarily from recycled plastics and makes so much sense as concern for the environment becomes more and more widespread. The stock is not a bargain, with a PE ratio in the 40’s, and the company does not pay a dividend, definitely not to my liking. However, with earnings growing at over 30%/year over the last five years, it’s understandable why the PE is where it is, and the good news is TREX is quite profitable with great returns on investment, equity, and assets. The company has no long-term debt indicating a super conservative approach to business that should reward us over the next few years.
Neil Macneale, 2 for 1 Stock Split Newsletter, 2-for-1.com, 408-210-6881, August 2020
Growth & Income 832
IDEX Corporation (IEX) | Daily Alert July 17
We are launching coverage of IDEX Corp. with a BUY rating. This well-managed company has a long record of market outperformance and dividend growth. We think the company—which designs and manufactures fluidics systems and specialty engineered products for a range of industrial end markets, including healthcare, transportation, food, water, and energy—is well positioned for the future.
The company has a strong balance sheet and an experienced management team—two factors that we think are important during the pandemic.
IDEX has three operating segments: Fluid & Metering Technologies (38% of 1Q20 net sales); Health & Science Technologies (38%); and Fire & Safety/Diversified Products (24%). Based on expected sales and margin trends as well as the potential impact of the coronavirus on 2Q and 3Q results, we are establishing a 2020 EPS estimate of $4.68. Our estimate implies an earnings decline of 19% from last year’s $5.80. We expect growth to resume in 2021 and are establishing a preliminary EPS estimate of $5.25.
On a technical basis, prior to the pandemic, the shares had been in a long-term bullish pattern of higher highs and higher lows dating back to 2009. On a fundamental basis, the shares are trading at 29-times our 2021 EPS estimate, near the high end of the historical range of 20-30. Compared to the peer group (DHR, ECL, FTV, ROP), the shares are trading at discount multiples, which we think points to undervaluation. Our dividend discount model renders a 12-month target above $200, which we are lowering to $180 to reflect the uncertainty in the marketplace.
Jim Kelleher, CFA, Argus Weekly Staff Report, argusresearch.com, 212-425-7500, July 9, 2020
Stantec Inc. (STN) | Daily Alert July 22
Stantec (Rated “B”), based in Edmonton, Alberta, has exposure to a wide range of infrastructure and mining businesses—positioning it to benefit from increased stimulus spending and the booming precious metals market.
It’s one of the world’s top 10 project design, management, and consulting firms. It provides architecture, environmental, geotechnical engineering, transportation, and wastewater services to a wide range of government and private customers.
Recent projects include a cancer research building at the University of California, San Francisco, the Genale-Dawa 3 hydropower facility in Ethiopia the and the Cerro Corona mine in Peru. Stantec has even worked on the Kenmore Crossing traffic and pedestrian redesign effort near the campus of my alma mater, Boston University.
In 2019, infrastructure-related work (roads, rail, bridges, etc.) accounted for the largest chunk of revenue at 29%. Water-treatment and transport-related projects provided another 20% of its sales, while mining and energy work clocked in with 14%. The U.S. represented 52% of revenue, with Canada next at 30%. Only 18% came from other global sources.
We can pretty much expect near-term numbers to stink, given the COVID-19 related economic downturn. Second quarter results will be released in early August, and management recently withdrew its guidance for the second half of the year given all the uncertainty. But Stantec has made money in all 65 years it’s been in operation. It’s reducing executive salaries and discretionary spending to cope with the near-term challenges.
And there are several reasons to think the future looks brighter, given its specific business lines:
It has leverage to any increase in infrastructure stimulus spending we get in response to the downturn, especially here in North America. Its mining-related work should pick up as more companies look to capitalize on booming precious metals prices. It will likely benefit from the increased focus on environmental sustainability and increased health care and government spending to fight the outbreak. Finally, it should get tagged for redesign work to make things like office buildings safer in a post-pandemic world.
Throw in the indicated yield and the recent Weiss Ratings upgrade to “Buy” and I think the stock makes a nice Bedrock Income Portfolio addition. Add a 5% stake in STN at the market.
Mike Larson, Safe Money Report, 1-877-934-7778, www.weissratings.com, July 2020
MGM Resorts International (MGM) | Daily Alert July 28
Casino and resort operator MGM Resorts International is an S&P 500 global entertainment company with 30 U.S. and international properties. In the U.S., venues range from Maryland to Massachusetts, Michigan, Mississippi, Nevada, New York, and Ohio. In China, MGM resorts are in Macau (the largest gaming destination in the world), Cotai and Diaoyutai, and the group is bidding on a gaming license in Japan. Its very recognizable brands include Bellagio, MGM Grand, ARIA and Park MGM.
It hasn’t been a good year for the gambling industry, as it was shut down around the world. MGM shut down on March 15, however, analysts say gambling isn’t going to end, Las Vegas isn’t going away, and MGM seems to have the cash reserve to last more than a year even if business doesn’t return to normal in that time, and it is one of the businesses expected to show a quick return when customers are allowed out freely again.
When that will be is anyone’s guess. Las Vegas reopened a month ago, but we are not out of the woods yet, so re-openings for regions and businesses may even be reversed as COVID numbers increase. MGM has instituted a mask requirement and other safety protocols as it reopens resorts over time.
The first quarter included a lockdown in China, followed by one in this country. Q1 results showed revenue fell 29% year-over-year to $2.3 billion. Earnings were $806.9 million. The stock hit a multi-year low in March, but since then it has nearly tripled, although it is still below where it traded before the pandemic hit.
For the past several years, MGM has been strengthening its market-leading sports betting and online gaming platform and brands—BetMGM and partypoker—which will operate in 11 states by the end of this year and has secured access to 19 states. BetMGM is expected to generate more than $130 million in revenue this year, mostly from iGaming in New Jersey. The U.S. iGaming market is expected to produce revenues of nearly $7 billion by 2025.
In the last 12 months, management has reduced shares outstanding by 8.187%.
David R. Fried, The Buyback Letter, www.buybackletter.com, 888-289-2225, July 21, 2020
TFI International Inc. (TFII) | Daily Alert July 31
This company is a North American leader in the transportation and logistics industry. It operates across Canada, the United States, and Mexico offering package and courier service, truckload and less than truckload haulage, logistics, and other services.
After falling to the $23 range in March, the stock has rallied strongly and is now on the plus side year-to-date and trading close to its all-time high of $52.10.
TFI’s first-quarter results were very impressive. The Montreal-based company reported record first-quarter income of $118.5 million, an increase of 13% over the same period in 2019. Net cash from operating activities was $191.7 million, up from $160.7 million the year before.
Adjusted net income was $71.3 million ($0.83 a share) compared to $67.1 million ($0.77 a share) in the year-ago period.
The company benefitted from increased demand for its trucking and delivery services as the coronavirus pandemic gripped the economy. The bottom line also benefitted from the deferral of certain tax payments because of stimulus measures.
TFI has been actively expanding its business through acquisitions. On June 12, the company announced that it is acquiring privately held Gusgo Transport, a container transport and storage company operating out of Vaughan, Ontario. With its four company trucks and 48 owner operators, Gusgo delivers both dry and temperature-controlled commodities in approximately a five-hundred-mile radius around the Greater Toronto Area, including delivery points throughout Ontario, Quebec, New York, Pennsylvania, Ohio, and Michigan. Gusgo operates over 250 container chassis and has capacity for storing 6,000 containers at its Vaughan location. The purchase price was not disclosed.
On June 29, TFI announced the acquisition of substantially all the assets of CT Transportation. The company was originally the flatbed subsidiary of Comcar Industries, Inc., which along with its other subsidiaries filed Chapter 11 petitions in the U.S. Bankruptcy Court on May 17. TFI paid US$15 million.
Headquartered in Savannah, GA, CT Transportation operates more than 270 tractors and 560 trailers, with 11 terminals from Maryland to Florida, and generated revenue before fuel surcharge of approximately US$50 million in 2019. Its approximately 250 drivers transport drywall, lumber, tiles, cement board, and other materials to major building product manufacturers and home improvement distributors throughout the Southeast and Mid-Atlantic regions of the U.S.
The board of directors approved an 8% increase in the quarterly dividend, to $0.26 per share ($1.04 annually), effective with the April payment.
During the quarter, the company spent $43.8 million on share repurchases.
TFI is the right business for the times. We should continue to see strong results.
Action now: Buy.
Gordon Pape, Internet Wealth Builder, buildingwealth.ca, 1-888-287-8229, July 20, 2020
Quanta Services, Inc. (PWR) | Daily Alert August 6
Quanta Services is a leading specialty infrastructure solutions provider serving the utility, energy, and communication industries. The company’s infrastructure projects have meaningful exposure to highly predictable, largely non-discretionary spending across multiple end-markets, with 65% of revenues coming from regulated electric, gas, and other utility companies. Quanta achieved record annual revenues, operating income, and backlog in 2019, and is pursuing a multi-year goal of increasing margins. Dividend payouts and share repurchase activity have continued uninterrupted during the pandemic.
We view this company as high-quality, well-run, and resilient. The market views PWR shares as a safe haven in an unpredictable market and economy, helping the shares to fully recover from their March 2020 lows. The new 15-year contract to operate and modernize Puerto Rico’s energy grid is an encouraging positive as the company is seeking to shift toward a capital-light, recurring profit model.
Quanta confirmed that it will report earnings on Thursday, August 6. The consensus estimate remains at $0.47/share. For the full year, analysts estimate that Quanta’s earnings per share will dip about 5% in 2020 to $3.16, due to disruption costs related to the pandemic, then rebound over 22% to $3.86 in 2021.
PWR shares rose fractionally over the past week. On 2021 estimated earnings, the P/E is a reasonable 10.6x. Traders may consider exiting near 43. For long-term holders, Quanta stock looks well-positioned to continue to prosper. New investors should establish a starter position now and look to add on weakness. Buy.
Bruce Kaser, Cabot Undervalued Stocks Advisor,cabotwealth.com, 978-745-5532, July 29, 2020
*PetMed Express, Inc. (PETS)
Despite posting some solid second quarter results shortly after last month’s issue went to press, PetMed’s stock tumbled sharply following the release of the numbers due to the fact that the company “missed estimates by a penny.” For its second quarter, PetMed reported revenues of $96.2 million and net income of $7.8 million, or $0.39 per share (not $0.40, mind you!!), as compared to the revenues of $80 million and net income of $5.3 million, or $0.26 per share, that were reported for the same period a year ago. There are a lot of trends in the marketplace lining up in the company’s favor, and I am adding more shares this month. PETS is a strong buy under $30 and a buy under $40.
Nate Pile, Nate’s Notes, NotWallStreet.com, 707-433-7903, August 14, 2020
Value 832
Acuity Brands, Inc. (AYI) | Daily Alert August 12
Acuity Brands is a leading light manufacturer that designs, produces, and distributes a full range of indoor and outdoor lighting and control systems for commercial, industrial, infrastructure and residential applications.
Shares are off more than 25% year-to-date as lower demand due to the pandemic pushed revenue down 18% in the most recent quarter, while many have become worried about exposure to commercial real estate. Earnings have held up very well, though, with fiscal Q3 numbers blowing away expectations, while the balance sheet is very solid with more cash than debt.
We also like a recent partnership, exclusive in North America, with Ushio America to offer filtered excimer lamps that generate 222nm of far UV-C light capable of inactivating viruses and bacteria on indoor surfaces.
And, we are intrigued by the company’s opportunities in the Internet of Things. Acuity’s indoor location services data platform provides navigation, wayfinding, asset tracking, occupant behavior data and asset analytics using a connected lighting platform, a real plus as businesses are busy reconfiguring space for hygiene and social distancing purposes.
We also like the sub-13 forward P/E multiple, versus the 5-year average above 20.
John Buckingham, The Prudent Speculator, www.theprudentspeculator.com, 877-817-4394, August 4, 2020
Financials 832
Repay Holdings Corporation (RPAY) | Daily Alert August 4
Things could not be more interesting at the intersection of B2B payments and FP&A (financial planning & analysis) business processes. Software players are becoming gatekeepers of payments rails, while payments players are extending their value proposition into software; and all the while solutions get easier to implement.
Though the acquisition of cPayPlus is relatively small, we still see it as a timely business model extension, adding recurring software revenue to Repay’s payment volume-based business model. This dual revenue model has proven to take valuations higher than peers in software and FinTech. Also, with CpayPlus, Repay can build holistic solutions focused on accounts receivable, and now accounts payables—both wrapped around Repay’s proprietary payment ecosystem. Finally, we still believe Repay is also one of the best plays in middle market payments consolidation. Payments is currently “barbelled” between mega caps on one end and a few smaller public players on the other.
Last night, Repay announced its acquisition of CpayPlus, a Saas-based accounts payables automation solution. AP automation is currently at the vortex of B2B payments revolution, especially as the Covid pandemic accelerates the push to electronic payments. While relatively small, the CpayPlus solution set should fit well with much of Repay’s mid-market customer base from a technology and functionality perspective. Repay paid $8M for cPayPlus at closing with another $8M in earnout payments.
While still small, cPayPlus is a 100% grower and positions Repay to derive both payment volume- and software subscription-based revenue. While growing triple digits, cPayPlus’ impact on Repay’s financial performance this year is not expected to be material. But over time, this deal could help to reposition RPAY shares more as a hybrid player with a revenue model driven both by payment volume and recurring software fees. We have seen this hybrid revenue model drive leading valuations at the intersection of FinTech and Saas. This, combined with Repay’s position as a consolidator in middle market payments creates an attractive medium-term investment case.
cPayPlus’ AP solution a great complement to Repay’s AR offering. Repay’s strength historically has been on driving debit-based AR payments. With this acquisition, Repay can now offer its clients a solid AP payments solution as well. Cross sell opportunities should also emerge. For instance, Repay’s biggest vertical is auto. cPayPlus is integrated with leading auto platform Dealertrack, while Repay’s business model to date hasn’t extended to this platform. cPayPlus’ core target markets also include property management and field services, which can serve as new vertical target market for Repay. Net, net, we think the unique but highly complementary combination of both AP and AR payments solutions could drive competitive advantage over time.
COVID has been an accelerator to Repay so far, but the pandemic’s duration an increasing short-term risk. Clearly COVID has accelerated adoption of electronic payment. Still, the majority of Repay’s revenue is derived via payment volumes coming from loan repayments. To date, borrowers have prioritized loan repayments. But in a drawn-out pandemic scenario, default rates on lender loan books could increase, creating headwinds to Repay’s payment volumes.
Joseph Vafi, CFA and Pallav Saini, Canaccord Genuity Research, canaccordgenuity.com, July 24, 2020
*S&P Global Inc. (SPGI)
S&P Global has been an outstanding stock, rising 44% over the last 12 months and 29% year to date, far exceeding the return of the S&P 500 Index over both time periods. The company’s lucrative index licensing business provides a way for investors to play the continued growth in index investing. Also, the surge in debt offerings has been a boost to the company’s credit rating business.
Given the company’s sensitivity to the financial markets, the stock is vulnerable to significant market weakness. That sensitivity was in full view earlier this year when the stock fell below $200 in late March. However, I have been a long-time fan of these shares and view significant declines as big opportunities in the stock.
Charles B. Carlson, CFA, DRIP Investor, dripinvestor.com, 800-233-5922, August 2020
Sprott Inc. (SII) | Daily Alert August 11
Baron Rothschild, known as the father of contrarian investing, famously said, “The time to buy is when there is blood in the streets.” Rothschild was talking about war, but this pandemic isn’t much different. Instead of fighting the Napoleonic Wars, we’re fighting a virus.
And the virus is doing real damage.
Yesterday the Commerce Department released its initial estimate of second-quarter GDP, and it wasn’t pretty. The U.S. economy contracted at a 32.9% annualized rate, the worst drop since the government started keeping records. The Eurozone saw its GDP fall by 40%, again, the biggest drop in the bloc’s history.
That’s not really surprising, considering that the U.S. and most of Europe was in lockdown for most of the quarter. It’s tough to generate much commerce when you aren’t supposed to leave your house. Factories weren’t running, shops were closed, people were out of work, the economy basically ground to a halt.
Understandably, that shutdown cut the demand for raw materials to virtually nil. Since this pandemic began, the price of almost every commodity under the sun has plunged, with the notable exceptions of gold and silver. Precious metals have recently hit yet another all-time high as investors up their stakes in safe haven investments.
I understand the flight to safety, given the impact the pandemic has had on the economy. I would, like Baron Rothschild, argue that now is the time to be buying most natural resources.
There’s another old saying that correlates with the Baron’s position.
“The cure for low oil prices is low oil prices.”
That’s true for most resources. When they’re cheap, we use more of them. And resources are definitely cheap at the moment.
That’s why I’m adding more resource exposure to the portfolio.
No, I do not have a crystal ball that tells precisely when this pandemic will end. What I do know is that there are several promising vaccine candidates in the works, there’s a major election coming up and, while this might be a bit of confirmation bias, pandemics have always ended.
Based on those assumptions, now’s the time to be buying.
That’s why I’ll be buying Sprott.
Sprott is the largest natural resource asset manager in the world, but it doesn’t actually produce anything.
It manages physical gold and silver funds which are available to investors around the world, allowing them to buy ownership interests in stockpiles of actual precious metals. It also acts as venture capital, pooling investor money to make loans to miners who actually produce the precious metals. Basically, it’s the perfect middleman.
Sprott is the investment arm of Canadian billionaire Eric Sprott, who made his fortune in the resources industry. His not intimately involved with running the asset manager anymore, serving as chairman emeritus, but he has imbued the investment team there with his knowledge and philosophy.
That’s played out well, both for the company and its investors.
There’s nothing terribly sexy about what Sprott does.
It runs bullion trusts and other investment funds and gets paid management fees. Right now, it has nearly $11 billion in assets under management and made nearly $100 million for running them. It also collects what amounts to interest on the loans its makes, typically approaching 20%, and it is working toward having a portfolio worth nearly $1 billion worth of loans—secured by mines with ore in the ground—by the end of this year.
That makes a lot of sense, since Sprott is basically making the same calculation I am.
Folks are understandably running into gold and silver, and Sprott has the expertise and resources to profit from that, without taking on the risk of actually digging it up itself.
Sprott’s management also understand that commodity demand will, sooner rather than later, recover. Now’s the time to buy.
That’s especially true since it essentially acts as a toll collector, getting paid a percentage of assets under management.
Sprott is a low-risk way to gain exposure to precious metals and other resources.
Recommended Action: Buy Sprott.
Ian Wyatt & Ben Shepherd, Ian Wyatt’s Million Dollar Portfolio, wyattresearch.com, July 31, 2020
Erie Indemnity Company (ERIE) | Daily Alert August 20
Erie Indemnity Company is smaller but unique, ‘mostly a Midwest/USA player’ in the insurance/brokerage business that was set up by the Hirt-Crawford family 125+ years ago, starting with $31,000 and building to what it is today—a $10 billion insurance company. The ‘family’ still owns about 46% of the stock and controls the vote, and one would conclude (if they looked at history) that they have done a good job of it and they are still doing a good job of it, even as the world spins.
Erie operates as a “managing attorney” (i.e., licensed insurance broker) for those that subscribe to the Erie insurance exchange. Erie has business relationships from a network of 2,000 local agencies with over 10,000 agents who use the Erie exchange to place business. Erie places insurance and then does the back-office work. Erie operates in and is well-established in 12 states: IL, IN, KY, MD, NV, NC, OH, PA, TN, VA, AND WV.
Erie offers a wide variety of insurance—auto, P&C, life, and many types of business insurance, and would be considered what is called a “main street” insurance business operator.
This is a fine company, A+ in all aspects with a very clean balance sheet, a business model that works, and a fine future ahead. The dividend is not large, but the stock has rewarded patient shareholders with steady gains SPX/beating returns for long-term investors.
Erie had its IPO in 1996 at $15; it was $68 by 2014, and now it’s around $210. Since the IPO, the S&P 500 is up about 5-fold. During the same time, Erie is up about 14-fold. That is why we love obscure/boring insurance stocks like Erie. The returns are exciting!
The real attraction here is the steady upside in the stock for patient buy/keep investors. We want stocks on offense and Erie fits the bill.
Bob Howard, Positive Patterns, P.O. Box 310, Turners, MO 65765, 417-887-4486, August 4, 2020
Healthcare 832
Zynex, Inc. (ZYXI) | Daily Alert August 14
The ADP National Employment Report showed that private employers added just 167,000 jobs in July, way below the 1.5 million Wall Street was expecting. Clearly, our country is not creating new jobs at a meaningful level. If the coronavirus infections continue to grow, even more businesses are going to shut down, making the jobs situation even worse.
And the situation for businesses that manage to stay open isn’t so pretty either. So far, 75% of companies in the S&P 500 have reported Q2 results. The average drop in revenues is 12.8% and the average decline in profits is a mind-numbing 48%.
Some industries are doing better (and worse) than others. Here’s how the 11 industry categories have fared:
• Technology: +0.4%
• Consumer Staples: -0.6%
• Health Care: -1%
• Utilities: -2%
• Communications: -8%
• Financials: -10%
• Real Estate: -11%
• Materials: -16%
• Consumer Discretionary: -22%
• Industrials: -29%
• Energy: -40%
No question—our economy has morphed into a tale of “haves” and “have-nots.” And one of the biggest “haves” in this market is health care, which is why I am recommending Zynex Inc. (Rated “B”)
One of my best friends in the world has rheumatoid arthritis and has suffered from chronic pain for years. The only medication that gave her pain relief were opioids, but they left her in a fog that inhibited her daily life. In fact, her physician was so concerned about the safety of opioids that he would only write smaller prescription. The consequence is my friend would run out of pills and be close to incapacitated by pain until she could get a refill.
This all changed when she got an electrotherapy device known as “NexWave” from Zynex. This product completely changed her life.
Just take a look at some of the incredible highlights of the product:
Zynex has developed an electronic-stimulus device that is used for management of chronic pain. Unlike opioids, NexWave doesn’t have the risk of deadly side-effects.
In addition to this product, Zynex has invented other innovative, non-invasive electrotherapy devices that are used by people who suffer from chronic pain. Electrotherapy has proven to be an effective pain reduction treatment.
One out of three Americans experience persistent chronic pain at some time throughout their lives, and the loud outcry against opioids has sent Zynex’s business to the moon.
Order growth was a stunning 87% in Q2, and this would have been even better if not for the impact of the coronavirus pandemic, which has made in-person sales calls to medical clinics impossible.
In the most recent quarter, revenue jumped to $19.26 million—an 87% year-over-year increase, which beat forecasts of $19.12 million—and profits surged by 50% to 9 cents per share.
The reason for the monster growth, despite the coronavirus shutdown that made it impossible to visit medical offices, was Zynex’s genius business strategy to rent—not sell—its medical devices on a subscription basis.
People with chronic pain, like my friend, are no way going to give up on a solution to their pain. Once a patient signs up and enjoys comfortable pain relief, they’re a customer for life.
Tony Sagami, Weiss Ultimate Portfolio, 1-877-934-7778, weissratings.com, August 7, 2020
Celldex Therapeutics, Inc. (CLDX) | Daily Alert August 19
In our view, CDX-0159, Celldex Therapeutics’ anti-C-KIT antibody has blockbuster potential in various mast cell diseases. With a market cap of ~$375 million with ~$200 million in cash, in our view, CLDX is extremely undervalued based on the potential of CDX—0159 alone—especially when compared with ALLK (~$4 billion market cap), which is another mast cell targeted company. After releasing highly positive initial clinical data resulting in significant mast cell depletion and a clean safety profile, further updates and multiple trial initiations are due this Fall. These clinical trials are relatively quick to perform as trials go and data are released. Lastly, as a wholly-owned asset, we believe CLDX has also become an attractive potential takeover candidate. As a result, we think CLDX’s market cap will approach that of ALLK’s. BUY.
CDX-0159 is a humanized monoclonal antibody that specifically binds the receptor tyrosine kinase KIT (also called stem cell factor or SCF) with high specificity and potently inhibits its activity. KIT is expressed in a variety of cells, including mast cells, which mediate inflammatory responses such as hypersensitivity and allergic reactions. KIT signaling controls the differentiation, tissue recruitment, survival and activity of mast cells. In certain inflammatory and allergic diseases, such as chronic urticaria, mast cell activation plays a central role in the onset and progression of the disease. KIT inhibition is involved in the potential treatment of various multi-billion acute and chronic conditions.
CDX-0159 was well tolerated at all dose levels. Celldex plans to initiate Phase Ib studies in chronic urticaria this Fall, likely starting in September or October. Urticaria (hives) are red, itchy welts that result from a skin reaction. The welts vary in size and appear and fade repeatedly as the reaction runs its course. The condition is considered chronic hives if the welts appear for more than six weeks and recur frequently over months or years—leading to chronic spontaneous urticaria (CSU). There is also a more difficult to treat subset of chronic urticaria—chronic inducible urticaria (CINDU) which is defined as hives that are present for at least or greater than 6 weeks and for most days of the week. Physical urticaria is present only when certain physical stimuli are applied. These hives are intermittent and technically are not chronic. Current treatments include Roche’s Xolair and Novartis’ ligelizumab, both antibodies to IgE. However, not all patients respond to these treatments.
A recent clinician presentation suggests there is an unmet need in 20-40% of CSU and CINDU patients, respectively. This market alone could include 1 million CSU patients in the U.S./EU and 1.3 million CINDU patients in the U.S./EU.
In 2019, Allakos (ALLK) successfully completed a Phase I/II trial of AK002, a monoclonal antibody to Siglec-8, in Xolair naive chronic urticaria. patients, which demonstrated a benefit on the primary (UCT scale) and secondary efficacy endpoints (UAS7) and that the drug was generally well tolerated. The mechanism of action of AK002 differs from CDX-159 as it has multi-model activity for both mast cells and eosinophils. The main difference is that the ALLK compound reduces mast cells and mast cell activation by roughly 20%, while the CLDX compound is way more potent in blocking MCs—the EAACI data above shows that it almost completely depletes mast cells.
Specifically, CSU is a mast cell disease and there is a very high probably that CDX-159 will be successful. Consensus models of AK002 currently show peak CSU sales at $1.8 billion. When the positive AK002 in CSU data alone, ALLK’s valuation rose to approximately $2 billion. With further mast cell diseases and in AK002’s case eosinophil conditions as well, ALLK’s market capital is now over $4 billion. We expect that CLDX will perform a list of clinical studies in several of the mast cell conditions listed above. In our view, the CSU studies will be ready by Q1:21. Upon a positive outcome, we believe the market will begin to value CLDX on not just CSU but also discount success in some of the other MC indications as well.
Since the initial mast cell data of CDX-0159 was presented in June, CLDX raised $150 million in a follow-on offering and now has about $200 million in cash and no debt. The cash is sufficient to fund currently planned operations through 2023. Before the data/deal, only 11% of the stock was owned by institutions. That has changed dramatically as the secondary has brought in the most sophisticated and dedicated biotech investors. RTW Investment now owns 10% of the company, Ikarian Capital 7%, Biotech Value Fund (BVF) owns 4% and more recently, Adage Capital acquired 5%. 25% of CLDX stock is now owned by four top funds. (Funds are only required to disclosed >5% positions, so we believe other Blue Chip Biotech investors are establishing CLDX positions, too.)
We are initiating coverage of CLDX with a BUY UNDER 15 and a TARGET PRICE of 30 based on the early clinical results and commercial potential of CDX-0159 in mast cell conditions. With multiple clinical catalysts due beginning in H2:20 plus what we believe is an easy value comparison with Allakos (ALLK ~$3.7 billion market cap or 10x that of CLDX), in our view Celldex ($370 million market cap) is extremely undervalued. Several new top-tier biotech investors seem to agree. Lastly, with CDX-0159 as a wholly-owned asset, we also think that CLDX is an attractive takeover candidate.
CLDX is a BUY under 15 with a TARGET PRICE of 30
John McCamant, The Medical Technology Stock Letter, bioinvest.com, August 2, 2020
Eli Lilly and Company (LLY) | Daily Alert August 24
Founded in 1876, Indianapolis-based Eli Lilly is a global pharmaceutical giant with $23 billion in annual revenues, 34,000 employees and sales in 120 countries. It stands out from the rest of the large pharmaceutical companies in that it invests much more heavily in Research and Development and its new drugs and pipeline reflect that fact.
The stock has been in the news lately for having one of the leading Covid-19 drug candidates. The drug, for both treatment and prevention of Covid-19, is in late-stage trials and is the very first candidate to be tested for the National Institute for Health study. But that’s not why I’m buying it.
I have no idea what will happen with this Covid drug. And I learned long ago with these companies never to bet on the fortunes of one potential drug. That’s why I like Lilly. It’s got lots and lots of potential new drugs.
The company spends 25% of sales on R&D every year. The segment employs 23% of the company’s workforce and spends $5.5 to $6.0 billion annually. That’s a significantly larger commitment than its peers. But the pipeline is the key to this business. New drugs are how these companies succeed and grow. And Lilly has been spectacular.
I actually purchased the stock before, back in 2012. It was selling at a depressed price ahead of a huge patent cliff in 2014 (when a large number of existing drugs would lose patent protection and would see falling revenues as generic competitors took market share). But I had faith that Lilly’s R&D and pipeline could make up for the lost revenue. It did. Now over 60% of revenues are generated from drugs launched since 2014. The stock has also returned about 400% since my purchase.
Lilly specializes in developing drugs and treatments for unmet medial indications, where there is a higher chance of FDA approval and higher market share and profit margins. The drug company has a very strong presence in Diabetes (Trulicity, Basaglar, Jardiance), Oncology (Alimta, Cyramza, Vezenio) and new drugs in Immunology (Taltz and Olumiant).
Of particular note, Diabetes treatment Trulicity reported 29% sales growth in the first half of this year, with revenues of $2.5 billion. Retevmo recently received FDA approval for treatment of lung cancer but also reported very positive Phase 3 results in preventing the recurrence of breast cancer—a huge problem that could make the drug a blockbuster if it succeeds. The stock popped over 15% on news of the Phase 3 study.
However, the market was disappointed with second-quarter earnings as revenues fell 2.4% from last year’s quarter. The lower sales resulted from the pandemic as stockpiling in the first quarter as well as reduced doctor and hospital visits reduced drug sales. The stock fell about 5% after the report.
But those sales will come right back as lockdowns ease. Lilly also beat earnings forecasts with 26% growth over last year’s quarter and raised 2020 guidance by 11% to reflect anticipated 21% earnings growth over 2019.
The dividend still yields a measly 1.93%. But there are no significant patent expirations in the years ahead and the company will be able to focus on growing the dividend from here. Admittedly, there are a couple of other big pharma companies with sexy stories that some analysts like better right now. But those companies always tend to foul things up. Lilly is the best run of its peer and I trust it.
Eli Lilly is a global pharmaceutical company specializing in drugs and treatments for Diabetes, Oncology and Immunology:
Positives
• The company overcame a huge patent cliff.
• It has one of the best newly launched drugs and pipelines in the industry.
• Lilly has been the best-performing large pharmaceutical company.
• It has strong growth prospects but should hold up in a down market.
Risks
• The fortunes of drug companies rise and fall with trial success, which is difficult to predict.
• Competition is fierce and earnings are hard to predict.
• The stock has already risen 35% in the last year.
Tom Hutchinson, Cabot Dividend Investor, tom@cabotwealth.com, August 12, 2020
Technology 832
Apple Inc. (AAPL) | Daily Alert July 23
Great news! Katy Huberty, Morgan Stanley’s premier Apple analyst on 7/13 just raised her price target to $419, up from $340. Her Bull case is $636 with a Bear case $169. The Bull case requires services to grow beyond expectations. She now focuses upon the expanding iPhone trade-in programs which can unlock $147B of value and fund one third of iPhone purchases over the next three years. The iPhone has a strong resell value which is a key differentiator.
Of the 38 analysts who follow Apple: 12 rate it a “Strong Buy,” 16 as a “Buy,” 6 as a “Hold” and 2 as a “Sell.” We agree the strong analyst interest and look for Apple to have a great future. It has been a terrific PC stock ($388.23) up 497% from our portfolio purchase of $65 in January of 2013.
With a dividend of $3.29, our yield to cost is a little over 5%. It is our third largest holding behind Microsoft and our defense sector (RTX and PPA). Apple is one of America’s great companies. We plan to keep it.
Sean Christian, The Personal Capitalist, 9524 East 81st Street, Suite B #1715, Tulsa, OK 74133, July 15, 2020
Trimble Inc. (TRMB) | Daily Alert August 3
Trimble brings the “internet of things” concept to the industrials, energy, and utilities segments, by connecting physical objects, such as bulldozers and trackers, to the digital world. This lets customers track their equipment and create data models that boost efficiency.
Trimble epitomizes our focus on companies generating solid growth at a decent price. Trimble is a Buy and a Long-Term Buy.
Trimble supplies data-analytics services and automation equipment for a broad range of markets, including agriculture, construction, energy, trucking, and utilities. Some of these pockets are battling recessionary headwinds. But given management’s track record for breaking into new markets, we believe Trimble can keep finding broader uses for its technology.
North America accounts for 55% of sales, while Europe represents Trimble’s second-largest market at 28% of sales. Customers include Caterpillar (CAT) and Paccar (PCAR), though Trimble’s client base is diversified, with no single company accounting for more than 10% of sales.
For the 12 months ended March, the company increased per-share profits 6%, revenue 3%, cash from operations 8%, and free cash flow 7% to $522 million. In recent years, Trimble’s more-profitable businesses, services (21% of sales) and subscription (20%), have driven operating growth.
As a result, operating profit margins and return on equity are on the rise. Management says subscription utilization levels have held strong during the coronavirus pandemic. The pipeline for new sales remains solid, though conversions have slowed in recent months. Meanwhile, the hardware business is benefiting from new applications, such as crime-scene scanners, and higher adoption rates for equipment such as bulldozers.
Still, growth will prove challenging in coming quarters, with both earnings per share and sales projected to fall in the July, October, and January quarters. But analyst estimates are trending higher. And management anticipates continued widening of profit margins due to growth of the subscription business and lower fixed costs for hardware as Trimble switches to contract manufacturing. Additionally, the slowdown for operating momentum should be brief.
Analysts expect Trimble to return to growth in the March 2021 quarter, with profits up 17% next year on 9% higher revenue.
Trimble tends to use aggressive accounting practices, resulting in a large number of adjustments to reported earnings—increasing the risk of a nasty surprise for investors. However, the company’s operating cash flow routinely exceeds net income, which somewhat eases our concerns.
Accounting risks and near-term headwinds appear to be reflected in Trimble’s stock price. The shares trade at 22 times trailing earnings, below their three-year median of 40. At 26 times estimated current-year profits, the stock offers a 16% discount to the median for S&P 1500 electronic equipment stocks.
Richard Moroney, CFA, Dow Theory Forecasts, dowtheory.com, 800-233-5922, July 27, 2020
ServiceNow, Inc. (NOW) | Daily Alert August 13
The second-quarter earnings season rolls on. Of the roughly 130 S&P 500 companies that have reported, 80% have exceeded estimates. Expectations were of course already significantly lowered due to the impact of the pandemic. Overall, earnings are on pace to decline more than 40%, based on a blend of earnings already posted and estimates. If accurate, it would be the worst year-over-year earnings since the fourth quarter of 2008.
ServiceNow (NOW) came out with quarterly earnings of $1.23 per share, beating the Zacks Consensus Estimate of $1.02 per share. This compares to earnings of $0.71 per share a year ago. These figures are adjusted for non-recurring items. This quarterly report represents an earnings surprise of 20.59%.
A quarter ago, it was expected that this maker of software that automates companies’ technology operations would post earnings of $0.96 per share when it actually produced earnings of $1.05, delivering a surprise of 9.38%.
Over the last four quarters, the company has surpassed consensus EPS estimates four times.
Dan Sullivan, The Chartist, thechartist.com, 900-942-4278, July 30, 2020
Qualcomm Incorporated (QCOM) | Daily Alert August 17
We’re not generally into mega-cap stocks that are well known and well followed. Surprises tend to be relatively minor, and their sheer size means you’re far more likely to get so-so performance than something truly noteworthy. However, there are exceptions to every rule (“the young man knows the rules, the old man knows the exceptions”), and we think Qualcomm (market cap of $122 billion) is one of them—thanks to some catalysts, it looks poised to be a magnet for institutional money flows in the months ahead.
The company, of course, has been one of the leaders of the wireless and smartphone revolution for the past two decades, operating out of two main segments. The first is its QCT operation, which is the “traditional” business, where Qualcomm supplies integrated circuits and software based on its CDMA technology for smartphones, tablets, laptops, wireless infrastructure (routers, network access points) and gaming devices. QCT makes up the vast majority of revenues, though margins here are so-so.
The other segment is dubbed QTL, which is basically Qualcomm’s licensing arm—it cuts deals with various firms (the big ones involve handset makers), allowing them to access the firm’s massive intellectual property portfolio … in exchange for royalties, of course. While QTL revenues are far less than QCT, cash flow is usually much larger.
Qualcomm’s overall position in the industry has helped it remain solidly profitable for years, and with high profit margins to boot (pre-tax profit margins usually in the 25% to 35% range). But growth has been a bugaboo for the past few years, partly due to management, partly due to industry ups and downs and partly due to never-ending lawsuits—sales and earnings both topped back in 2014!
However, that’s the past, and big investors are paying up for what looks like a very bright future. The first catalyst here is the general 5G revolution, including the surge in 5G smartphone sales that’s just beginning—in March, the firm’s chips were being designed into 375 different 5G devices, but as of last month, that figure had lifted to 660. And one of those 660 is Apple, thanks to the legal agreement the two companies hashed out last April that paid Qualcomm north of $4 billion and set the stage for royalties in the future.
And speaking of deals, that’s the second catalyst—when the company announced earnings a couple of weeks ago, it also revealed that it struck a deal with giant Huawei, which (like Apple) had been battling Qualcomm in the courts for a long time. For that, Qualcomm is getting about $1.8 billion of catch-up payments along with royalties going forward. As the CEO said, “With the signing of the Huawei agreement, we are entering a period where we have multi-year licensing agreements with every major handset maker.” And, again, this is happening just as the 5G boom is starting to take off.
The result should be a step function leap in earnings next year, with solid growth after that—analysts see Qualcomm earning $6.32 per share in the fiscal year beginning in October, up 62% from $3.89 this year. As a side benefit, that should also allow the company to return more money to shareholders via share buybacks or boosting the already solid dividend.
As for the stock, it topped back in 2014 around 80 and was in the doghouse for years; it looked to be getting going after last year’s Apple deal, but that move didn’t stick, either. But now QCOM has decisively busted loose, breaking out to all-time highs (even above its 2000 bubble peak) on solid volume. It won’t be the fastest horse, but we think QCOM will do well from here, and the recent wobble as growth stocks have hit a pothole offers a good-looking entry point. BUY.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, August 10, 2020
*Pinduoduo Inc. (PDD)
Pinduoduo Inc. (ADR) offers a Chinese shopping app that brings groups of buyers together to win deeper discounts. It’s a mix of Groupon and a discount store.
Within 24 hours, Pinduoduo uses group buying and social networking via the popular WeChat mobile app to bring together the minimum number of buyers needed to secure a merchant’s discount on a particular item. The more buyers it gets, the better the price.
Pinduoduo continues to report big losses, which is likely to continue as it needs to put even more money into marketing and customer acquisition in order to maintain its user growth. Still, the company lets people in the Chinese market maximize their spending in both good times and bad. That should lead to profitability.
The company’s shares have held up well in the current volatile markets. That’s because its e-commerce model is ideally suited for Chinese consumers at a time when stores in many areas are still reopening. Pinduoduo is a Power Buy.
Patrick McKeough, Power Growth Investor, tsinetwork.ca, 888-292-0296, August 2020
High Yield and Preferred Stocks 832
Swire Pacific Limited (SWRAY) | Daily Alert July 20
Hong Kong is a story of progress and a symbol of how a combination of religious and social tolerance, together with economic freedom, built one of the most prosperous, cosmopolitan, and dynamic places in world history.
I first started visiting Hong Kong in the 1980s as a corporate banker and then later pitching U.S. stock research and ideas to Hong Kong institutional investors. Later, I followed the negotiations leading to the turnover to China in 1997 quite closely, and with a well-warranted skepticism.
Over the years, Hong Kong has established a well-earned tradition of being one of the most open, entrepreneurial, and international economies in the world. This is why 1,389 multinationals based their regional headquarters there in spite of the fact that rents were triple that of Shanghai. One reason is that it is home to 7.5 million industrious and talented Hong Kongers and has a very competitive tax system and light regulatory burden.
According to the closely followed 2020 Heritage/Wall Street Journal Index of Economic Freedom, Hong Kong ranked #2 just behind Singapore while America ranked #17 and China came in at #103.
The protests in Hong Kong over the last year have raised some important issues and, unfortunately, China has responded by imposing a new national security law and this will no doubt impact its future. The new Committee for Safeguarding National Security has broad new police powers, including the ability to conduct warrantless searches.
The bottom line is that Hong Kong has little leverage to fight back against these measures. While in the 1980s, Hong Kong represented about 30% of China’s GDP, it now accounts for only 3%.
As you might expect, some Hong Kong shares have pulled back over the last six months, presenting us with a great entry opportunity. There are two blue-chip conglomerates with a long history in Hong Kong that I have followed closely and have greatly admired over the years: Jardine Matheson (JMHLY) and Swire Pacific.
Founded in 1832, the Jardine Matheson is incorporated in Bermuda but headquartered in Hong Kong. A substantial amount of its profits are from greater China, with even more coming from Southeast Asia.
Here is just a sampling of its diversified businesses. It owns the region’s leading supermarket and health & beauty chain; the 7-Eleven convenience store chain; IKEA furniture stores; and operates the Starbucks franchise in Hong Kong. Jardine owns large amounts of prime commercial property in the heart of Central Hong Kong, where its buildings form an interlinked network of offices and retail space. The company also currently owns or has substantial interests in 15 hotels worldwide including the Mandarin Oriental as well as car dealerships in Hong Kong, Macau, China, and the U.K.
The other esteemed Hong Kong blue chip is Swire Pacific. Founded in 1816 and headquartered in Hong Kong, Swire is active in a wide range of commercial activities throughout Asia including aviation, property, and retailing. According to its website, Swire owns 23 million square feet of property, the premier airline Cathay Pacific, 18 Coca-Cola plants and distribution rights in Hong Kong and parts of China and Southeast Asia, plus extensive retail businesses in fashion, food and auto.
Both of these blue chips are way off their 52-week highs and substantially below their book (break-up) value.
It was a tough call, but I’m inclined to go with Swire Pacific because it has a much less complex corporate structure and is trading at only about 25% of its book value and therefore probably offers more upside potential. I’m sure there are some concerns about its flagship Cathay Pacific airline, but all indications are that its Asian operations will recover to profitability much more quickly than major U.S. and European carriers.
I recommend that we buy into old Hong Kong for some new growth and profits through Swire Pacific. BUY A FULL POSITION
Carl Delfeld, Cabot Global Stocks Explorer, cabotwealth.com, 978-745-5532, July 9, 2020
Philip Morris International (PM) | Daily Alert August 7
If a weak dollar props up U.S. multinationals, you have to love an American-headquartered company that reports its results in U.S. dollars but doesn’t generate a cent of revenue domestically.
NYC-based Philip Morris International, which was spun off from Altria Group (MO) in 2008, sells cigarettes and other products in more than 180 international markets, where it often holds either the No. 1 or No. 2 position. It boasts six of the top 15 international brands, including longtime leader Marlboro.
It has also invested heavily in heated tobacco, which is yet another cigarette alternative that’s picking up speed. Its IQOS brand boasted 15.4 million users as of the end of the second quarter, up from 14.6 million in Q1, its pace of growth slowed by COVID-19, but not squashed.
While Philip Morris is fighting many of the same anti-tobacco trends here in the U.S., it has been slowly but surely able to grow revenue for several years without interruption. While 2020 should end that streak, it still appears far better-positioned than its American counterparts.
No yield concerns here, either. PM shares are at the high end of what you can expect from traditional blue chips. Its dividend growth rate of 3.2% annually, while modest, outstrips current-day inflation; we’ll see if the Fed’s printing press changes that.
Just be realistic. Tobacco, at best, will provide merely glacial growth. The yield will be most of your returns, so ask yourself: Is 6%+ enough?
Brett Owens, Contrarian Outlook, BNK Invest Inc., 500 North Broadway, Suite 265, Jericho, NY 11753 USA, 516-620-4294, July 31, 2020
MetLife, Inc. (MET-PF) | Daily Alert August 21
MetLife, Inc.; 4.75% Fixed Rate, Perpetual Par $25.00; Annual Cash Dividend $1.1875 Current Price $25.70; Current Indicated Yield 4.62%; Call Date 03/15/25; Yield to Call 4.09%; Pay Cycle 3m; Exchange NYSE; Ratings, Moody’s Baa2, S&P BBB; CUSIP 59156R850; Symbol MET-F
MetLife, Inc. (MET) ranks among the largest global providers of insurance products and services, annuities, and employment benefit programs. The company has operations in nearly 50 countries, with over 900 investment professionals around the globe serving individual and institutional clients. MET offers life, accident, and health insurance, as well as retirement and savings products through various distribution channels. In March 2017 MET completed the spinoff of its U.S. Retail Business into a separate organization called Brighthouse Financial (BHF).
MET reported 1Q 2020 adjusted net income of $1.4 billion or $1.58 per share, up almost 7% from a year earlier. Results outpaced analysts’ $1.44 estimates. Operating revenue of $15.5 billion was flat from a year ago and missed estimates. With interest rates very low all along the Treasury yield curve, MET’s profitability measures may be challenged this year. However, MET’s low leverage and strong capital position, which enabled the company to navigate through the 2008-2010 financial crisis, will serve it well during this cycle. This preferred investment is suitable for low- to medium-risk taxable portfolios. Dividends are qualified and taxed at the 15%-20% rate. Buy up to $26.25 for a 4.52% annualized yield and a 3.58% yield to call.
Martin Fridson, CFA, Income Securities Investor, isinewsletter.com, 800-472-2680, August 2020
REITs 832
Federal Realty Investment Trust (FRT) | Daily Alert July 16
A dividend king is a stock with 50 or more consecutive years of dividend increases. Federal Realty is a Real Estate Investment Trust, or REIT. It concentrates in high-income, densely-populated coastal markets in the US, allowing it to charge more per square foot than its competition. Federal Realty trades with a market capitalization of $6.5 billion today, with $950 million in annual revenue.
Federal Realty’s business model is to own real estate properties that it rents to various tenants in the retail industry. This is a difficult time for retailers, as competition is heating up from e-commerce players such as Amazon (AMZN) and many others. Mall traffic is declining, which has put pressure on many brick-and-mortar retailers. Conditions for retail real estate have become even more challenging due to the coronavirus, which has forced many stores to close.
Federal Realty’s competitive advantages include its superior development pipeline, its focus on high-income, high-density areas and its decades of experience in running a world-class REIT. These qualities allow it to perform admirably, and continue growing even in a recession.
The company reported first-quarter financial results on May 7th. Revenue of $232 million declined fractionally, while adjusted FFO-per-share of $1.50 declined 3.9% from the same quarter last year. The company collected 53% of April rent, and reported that about 47% of its commercial tenants are open and operating based on annualized base rent.
The company later updated investors that it collected 54% of rent in May, with 54% of its tenants open and operating as of June 1st.
In response to the coronavirus-related shutdowns, the company is boosting its liquidity to help it get through the coronavirus crisis. Federal Realty completed a $400 million term loan issue on May 6th, and a separate $400 million note issuance on May 9th. The company has approximately $2 billion in available liquidity consisting of cash on hand and its undrawn credit facility.
Federal Realty’s FFO did not decline on a year-over-year basis at any point in the past decade, a tremendously impressive feat given that the U.S. economy dealt with the Great Recession. And it should also be noted that the company operates in the highly cyclical real estate sector. The simple fact that it has such a consistent track record of steady FFO growth makes it one of the most desirable REITs in the market. We are forecasting 5.5% annualized FFO growth for the next five years.
Based on expected 2020 FFO-per-share of $5.73, Federal Realty stock trades for a price-to-FFO ratio of 14. Our fair value estimate for Federal Realty is a price-to-FFO ratio (P/FFO) of 15. We view Federal Realty stock as slightly undervalued. A rising P/FFO multiple could reduce shareholder returns by approximately 1.4% per year over the next 5 years.
However, expected annual FFO-per-share growth of 6.9%, plus the 5.2% dividend yield, lead to expected total annual returns of 9.8% per year over the next five years.
Ben Reynolds and Bob Ciura, Sure Dividend Newsletter, suredividend.com, support@suredividend.com, 800-531-0465, July 9, 2020
LTC Properties, Inc. (LTC) | Daily Alert July 27
Westlake Village, California-based LTC Properties is a real estate investment trust that invests in senior housing and health care properties primarily through sale-leaseback transactions, mortgage financing and structured finance solutions, including mezzanine lending. LTC holds more than 200 investments in 28 states with 30 operating partners. The portfolio is comprised of approximately 50% seniors housing and 50% skilled nursing properties.
Funds from operations this year are expected to dip 3.9%, with revenue down 0.07% to $151.7 million. Discounts to historical valuations more than adequately reflect the tough year to be in the nursing home business. LTC trades at 12.3 times the next 12 months of expected funds from operations (FFO), 15.7% below the stock’s five-year average price/FFO multiple. It also trades 23.5% below its average price-to-sales ratio over the past five years.
LTC pays a monthly dividend at a rate of $0.19 per share. Earnings are due on July 30.
John Dobosz, Forbes Dividend Investor, www.newsletters.forbes.com, 212-367-3388, July 17, 2020
VICI Properties Inc. (VICI) | Daily Alert August 25
The market, ignoring the worsening pandemic news, rewarded stocks that beat analyst forecasts, even if those forecasts called for a 50% drop in earnings from last year. Despite all you hear about tech stocks, consumer discretionary stocks and utilities did the best in July.
An October 2017 spin-off from Caesars Entertainment, VICI owns gaming and hospitality properties, including Caesars Palace in Las Vegas that it leases to third party operators. VICI also owns four championship golf courses. VICI, growing mainly by acquisition, recently announced two significant new deals and more are probably on the way.
Analysts are forecasting 14% revenue growth, 7% EPS growth, and 12% dividend growth over the next 12-months.
VICI Properties reported June quarter FFO (adjusted) of $0.36 per share, $0.01 above analyst forecasts but down $0.02 vs. year-ago. Revenues were up 17% to $257.9 million.
Harry Domash, Dividend Detective, www.dividenddetective.com, 866-632-1593, August 5, 2020
Funds & ETFs 832
Artisan Small Cap Fund Investor Shares (ARTSX) | Daily Alert July 30
“Stocks follow profits” is the mantra for Artisan’s investment philosophy. The firm notes that exposure to growing assets is essential. In selecting stocks, the growth team evaluates if a company has “franchise characteristics.” The second component of the selection process is valuation. The third consideration is to identify companies well positioned for long-term growth at an early stage in their growth cycle so as to capture profit acceleration.
Another part of the growth team’s bottom-up fundamental analysis has always been the consideration of environmental, social, and governance (ESG) factors. But in late 2018, the team began to more heavily and formally integrate ESG into the way the team invests.
The final step of the Artisan growth investment process is capital allocation, which is designed to build portfolio position sizes according to conviction in a stock’s potential. Artisan identifies its fund investments as passing through three stages: “Garden, Crop, and Harvest.”
Garden investments are small positions which managers have approved, but where firms are early in the profit cycle development. Crop investments are those where the managers have conviction in the sustainability of the profit cycle: these holdings are larger and make up the majority of portfolio assets. In the Harvest category, investments that have exceeded the managers’ estimate of intrinsic value, where there is a deterioration in the profit cycle, or negative developments. Harvest investments are generally being reduced or sold from the portfolio.
Artisan Small Cap Fund Investor Shares reopened to new investors in March after being closed since 2013. It is structured similarly to the Mid Cap Fund, with between 60 and 90 holdings (65 recently) and concentrations in technology and health care (46.6% and 28.7% of assets, respectively). The management team’s focus on quality firms have generally allowed the fund to hold up well in downturns.
For 2020, a year-to-date return of 19.1% outpaces nearly 95% of its small growth peers. And for the trailing 3-, 5-, and 10-year periods, it bests more than 90% of its category.
Brian W. Kelly, Moneyletter, moneyletter.com, 800-890-9670, July 2020
Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS) | Daily Alert August 5
Invesco S&P 500 Equal Weight Consumer Staples ETF is a diversified way of investing in the consumer staples sector—those unexciting products we use every day without much thought, ranging from food, beverages (including alcohol), household goods (including cleaning supplies), hygiene products, and tobacco.
These are products that people are unable (or unwilling) to remove from their budgets regardless of their financial situation. The nature of these products makes this sector defensive and much less vulnerable to recessions and bear markets.
RHS tracks a collection of 33 consumer staple stocks within the S&P 500 index. This ETF is unique because it invests equal amounts in these 33 stocks and rebalances the investments at the beginning of each calendar quarter. This practice has given RHS a superior performance because it gives investors exposure to many consumer staple stocks that are under-weighted in most portfolios, making them targets for new investment capital.
Earnings of consumer staple stocks are expected to continue to grow or remain steady while earnings of most other stocks are crashing and expected to be even worse throughout 2020.
The current coronavirus outbreak has given us a lesson on why consumer staples stocks generally provide stable investments, and this pandemic is giving cleaning products a larger boost than a typical recession, a demand that will likely reflect a “new normal”.
Gray Cardiff, Sound Advice, soundadvice-newsletter.com, 800-825-7007, July 31, 2020
Baron Partners Fund Retail Shares (BPTRX) | Daily Alert August 18
Baron Partners Fund has a heavy position in Tesla (TSLA). Ron Baron released his quarterly report, noting that Tesla, which represents 35% of the Baron Partners Fund, “demonstrated its new China factory could produce vehicles at lower costs than at old facilities. It has also manufactured at higher volumes than predicted to meet unprecedented foreign demand.”
Ron Baron also reported that the Baron Partners Fund has been the ninth-top-performing U.S. equity mutual fund out of 2,325 since its conversion to a mutual fund in 2003. It is beating the market this year.
Mark Skousen, Forecasts & Strategies, markskousen.com, Eagle Financial, 300 New Jersey Ave. NW, Suite 500, Washington, D.C. 20001, August 3, 2020
Updates 832
SELL Thor Industries, Inc. (THO) | Daily Alert July 24
Sell: Thor Industries, Inc. (THO)
Updated from Wall Street’s Best Investments 824, December 18, 2019
Shares of recreational vehicle maker Thor Industries surged to over $109 as the company has reduced its excess inventory and the pandemic is boosting demand for RVs. The shares are fully valued on optimistic 2022 earnings. We moved THO shares to a SELL.
George Putnam III, The Turnaround Letter, turnaroundletter.com, 617-573-9550, July 2020
SELL Cigna Corporation (CI) | Daily Alert August 20
Cigna Corporation is in excellent shape and should make big money ahead, but the political situation unfolding could be a problem for CI, and since there are plenty of good insurance stocks to own here, I recommend you sell this one. At some point (after the election) I may buy it back. SELL CI for now.
Bob Howard, Positive Patterns, P.O. Box 310, Turners, MO 65765, 417-887-4486, August 4, 2020
*SELL Keysight Technologies, Inc. (KEYS)
Updated from WSBI 828, April 16, 2020 - Keysight Technologies shows signs of deteriorating in Quadrix, its Overall rank down to 57 from 81 in April. Keysight delivered disappointing March-quarter results, and the stock’s recent weakness adds to our concern that its June-quarter results could also fall short of expectations. The stock has treaded water in the past month, missing out on the S&P 500 Index’s 6% rally. Keysight is being removed from the Monitored List and should be sold.
Richard Moroney, CFA, Dow Theory Forecasts, dowtheory.com, 800-233-5922, August 10, 2020
*SELL Netflix (NFLX)
Updated from WSBI 827, March 19, 2020 - Netflix (NFLX) is the world’s leading streaming entertainment service with 193 million paid subscribers in over 190 countries.
We appreciate Netflix’ strong (enormous) lead in subscriber numbers over its growing roster of competitors. We also recognize the immense advantage it has built up and continues to generate by understanding what its subscribers watch – to an extent that no other firm can match.
While the shares may resume their upward march, and we aren’t worried about any serious issues that suggest it should be sold immediately, NFLX shares are no longer undervalued nor undiscovered. We are moving Netflix to Retired.
Bruce Kaser, Cabot Undervalued Stocks Advisor, cabotwealth.com, 9787455532, July 22, 2020
*SELL 1/3 Twilio (TWLO)
Updated from WSBI 813 - January 16, 2019 - The combination of a good-not-great quarterly report, a large ($1.4 billion) share offering and the general downturn in growth stocks hasn’t been kind to Twilio; indeed, because of the big-volume reversal last week, we decided to book partial profits (selling one-third of our shares).
Still, while we’re always flexible, at this point we’re willing to give the rest of our shares a lot of rope because of (a) the stock’s massive blastoff and run since May, and (b) due to its one-of-a-kind story—Twilio’s communications platform remains in great demand (total revenues up 46%; same-customer revenue growth of 32% in Q2) and there’s no reason to think the firm isn’t going to get much, much bigger as companies of all sizes sign up and increase their usage in order to automate communications (text, emails, voice, etc.) with customers and employees.
Michael Cintolo, Cabot Growth Investor, cabotwealth.com, 978-745-5532, August 13, 2020
*SELL Copart, Inc. (CPRT)
Updated from WSBI 793, May 17, 2017 - Copart has remained in the Index for longer than the prescribed three-year “stock split advantage” would dictate so, reluctantly, I will be deleting this great company from the list. CPRT has delivered a 40+% annualized return for us, making it one of the all-time best performers in the 2 for 1 Index. Maybe we’ll get lucky and the board will announce another split.
Neil Macneale, 2 for 1 Stock Split Newsletter, 2-for-1.com, 408-210-6881, August 2020
Investment Index 832
