The markets have been a bit choppy of late, with the Dow Jones Industrial Average rising to 29,000 at the beginning of the month, then retreating and rising again. It looks like Fall may be a little volatile. As you’ll see in our Advisor Sentiment Barometer and Market Views, sentiment remains bullish, with a hint of caution.
That stands to reason, as we’ve been on a fairly unstoppable uptrend for quite some time. So, a period of catching our breath is not necessarily a bad thing. Especially, as the economy continues to hold its own, with consumer credit, job openings and the CPI all steadily improving. Unemployment, of course, remains the biggest challenge, but hopefully, the eventual end of COVID-19 will restore some semblance of normality to our hospitality and entertainment industries, which have suffered the most.
In the meantime, our contributors have continued to find some very interesting stock picks. We begin this month’s issue with our Spotlight Stock, a REIT with above average yield, and a Dividend Aristocrat. In my Feature article, I further explore the REIT industry and explain why it’s almost always a good time to hold a REIT or two in your portfolio.
Market Views 833
Looking Good, but Watch for New Lows
While today’s morning rally was encouraging, the afternoon session was a bit less convincing. The fact that the major indices remain stuck below strong short-term technical ‘resistance’ raises questions regarding the sustainability of today’s morning rally, even if bulls successfully defended the benchmarks’ 50-day moving averages today.
While all of the key sectors gained ground today, most cyclical issues continue to diverge from the market-leading tech sector. Real estate stocks, the tech sector, and healthcare stocks had a great day, but industrials and financials were slightly weaker, and energy stocks struggled to build up momentum as well. Small-caps finally gave something to cheer about for bulls, as the Russell 2000 outperformed its large-cap peers and the fact that the most COVID-sensitive issues also had a strong afternoon added to the optimism regarding domestic-focused equities.
The major indices continue to slowly work their way through the overbought momentum readings that developed during the historic post-crash rally, but new
correction-lows can’t be ruled out in the coming days.
Ken Berman, Canaccord Genuity Research, canaccordgenuity.com, September 14, 2020
Eye on Distribution
The InvesTech Negative Leadership Composite (NLC) has been a critical tool in identifying the bullish market conditions that emerged following the March 23 market bottom. The positive “Selling Vacuum” component of our NLC peaked at +66 last month, but has drifted lower in recent weeks as enthusiasm has cooled off. A retreating Selling Vacuum, however, isn’t necessarily a bearish signal. After strong readings following a bear market bottom, it is typical for the Selling Vacuum to begin retreating while the bull market remains intact.
In contrast, a sign of rising risk would be evident in the emergence of bearish
“Distribution”, which will become an important technical tool to watch as the stock market and U.S. economy sail further into uncharted waters.
James Stack, InvesTech Research, www.investech.com, 800-955-8500, September 4, 2020
Still Pointing Up
There’s been a lot of volatility of late, though not much price progress, which might be a small sign of support after the recent spate of abnormal selling. But net-net, nothing has really changed with our thinking—some fresher growth stocks are holding up well, and the broad market isn’t imploding, but the burden of proof remains on the bulls to keep the intermediate-term trend pointed up and to create some fresher leadership, too.
Michael Cintolo, Cabot Top Ten Trader, cabotwealth.com, 978-745-5532, September 14, 2020
Spotlight Stock 833
Realty Income Corporation (O): If you could own just one REIT, it might be this one
Throughout the COVID-19 pandemic, we’ve seen plenty of negative coverage of REITs. While we ourselves have offered our own fair share of bearish commentary, that’s been on a subsector and/or company-specific level. While we know there are areas of the REIT space we prefer to avoid due to their relatively higher risks and continued uncertainties, there are many individual examples that still seem attractive, no matter what the naysayers try to promote.
With this in mind, we decided to focus on some of the best beaten-down dividend aristocrats in the space—companies that increase their dividends for at least 25 years in a row.
And one of these steady and stalwart sleep-well-at-night (SWAN) stocks is a REIT that pays monthly dividends. Realty Income Corporation is arguably the best-known REIT in the entire market.
Realty Income is a triple-net REIT that focuses on single-tenant properties. It’s become famous for its uber-reliable monthly dividend, leading it to brand itself “The Monthly Dividend Company.” It’s no surprise then that retirees love it. But so should most other people, regardless of their life stage.
Realty Income has paid dividends for 601 consecutive months, staying steadfast for more than 50 years. And its total returns are potentially even more impressive. Since going public in 1994, O has generated a 15.3% total return compound annual growth rate. Using the rule of 72, we see long-term shareholder have seen their positions double every 4.7 years or so.
There are very few other companies out there that can boast such a strong track record.
Realty Income has generated a 4.5% dividend-growth CAGR over this 26-year period as well. This means the passive income it produces increased much faster than inflation— both growing investors’ passive income streams and protecting their purchasing power from being eroded away.
Today, O’s yield is quite a bit higher than U.S. Treasury notes even in today’s low-rate environment. It’s also much higher than the 1.57% yield the SPDR S&P 500 ETF (SPY) currently carries.
No equity dividend can be considered 100% risk free, of course. And the shutdowns have negatively impacted Realty Income. But its rent-collection results in recent months show a positive trajectory.
The company recently reported second quarter earnings, including how it received 86.5% in the second quarter and 91.5% in July, specifically. Its occupancy ratio was 98.5%, which compares favorably to Q2 2019’s 98.3%.
Roughly half its rent is now generated by investment-grade tenants that continue to pay up at much higher clips. And, during the second quarter, the company collected 99.1% of its rents due.
Its focus on quality also paid off in its ability to release properties with experiment rent agreements for strong, new rents. During Q2, O released 65 properties and recaptured 101.4% of the expiring rents. For the larger half of the year, meanwhile, it’s released 158 properties, recapturing 100.1% of expiring rents so far. In fact, since 1994, it’s released and/or sold more than 3,300 properties with expiring rents, recapturing over 100% of the rents it would have otherwise lost.
Nor has the pandemic slowed down its goal to invest in itself. Realty Income invested $640 million in properties across the U.S. and U.K. for the first half of 2020. As such, it now owns more than 6,500 properties featuring lease agreements with more than 600 tenants across more than 50 industries. And, in recent years, it has begun investing in international properties, further increasing that diversification.
Yet the FAST Graph below shows Realty Income shares still trading at a discount. Since falling 55% back to $38 in March, it has gained nearly 67% back.
However, that still puts it at a 25% discount to its 52-week high.
O currently trades for 18x adjusted funds from operations (AFFO) estimates, so slightly above its long-term average blended p/AFFO of 17.58x.
However, this is a blue-chip REIT we’re talking about. We still find shares to be fairly attractive in the mid-$60 range, especially in today’s low interest rate environment.
Brad Thomas, Forbes Real Estate Investor, forbes.com/newsletters, brad@theintelligentreitinvestor.com, September 1, 2020
Feature 833
Blue Chip Clients and an Above-Average Yield
Brad Thomas, editor of Forbes Real Estate Investor, and contributor for our Spotlight article, had this to say about the advantages of Real Estate Investment Trusts:
“To help explain the real value of REITs, we put together five of their most overlooked bullish features: Consider how the larger sector:
• Is a $1 trillion-plus equity market
• Is an exceptionally – even exclusively – liquid form of real estate ownership
• Provides an excellent form of portfolio diversification to reduce overall risk
• Offers extreme levels of corporate transparency
• Features an average dividend yield of 3.6%.”
If you were able to attend my “Getting Started with Investing” presentation at our Cabot Wealth Summit last month, you heard me talk about my love of REITs. In times of uncertainty, or when markets are in a down cycle, REITs have been very good to me, keeping my portfolio healthy with their regular distributions and appreciation. But even in periods of bullish runs, like now, REITs can offer investors a nice hedge, in case markets turn.
One of their best advantages—in my opinion—is that by law, REITs must return at least 90% of their taxable income to their shareholders. That fact has contributed to rapid growth of the REIT industry, with 186 REITs now trading on the New York Stock Exchange, with a total market capitalization of $982.1 billion.
As I said in my presentation, REITs get a bad rap when interest rates are rising, and many so-called industry experts scare investors away from them. But, as you can see in the following graph, unless interest rates have big spikes, REIT returns are just not that affected.
At any rate, we seem to be in no danger of rising rates anytime soon, which bodes well for our Spotlight Stock. Realty Income Corporation (O) is a triple-net lease REIT, which means that the tenant—in addition to rent and utilities—is responsible for all the expenses of the property, including real estate taxes, building insurance, and maintenance.
The company’s tenants are a who’s who of blue chips and household names. It’s Top 10 tenants include:
The shares of Realty Income were cut almost in half when the coronavirus pandemic began. They’ve recovered somewhat, but still remain at a very discounted level. And while you wait for further appreciation, you can enjoy the company’s 4.42% yield.
Growth 833
XPEL, Inc. (XPEL) | Daily Alert September 1
Until I started working on this piece, I had never heard of XPEL Inc. (Rated “B”). Not the company. Not its products. Not the stock.
But, if you’ve owned XPEL for a while, you’re one happy camper. Shares of the $760 million company have soared more than 91% in the last month and 225% in the last year.
The combination of solid fundamentals and strong performance have vaulted this small-cap name to the top of your Best Momentum Stocks Heat Map and Best Hot-Sector Leaders Heat Maps.
That helps bring this undiscovered gem to your (and my) attention, giving you the chance to profit if the strong performance continues.
For the record, Xpel is a San Antonio-based maker of protective films and coatings. They’re used to protect automotive paint from chipping and abrasions, tint car windows to reduce interior heating, and cover touch screens with an anti-microbial buffer.
Sales jumped 19% year-over-year in the second quarter, while profits surged 31%.
Mike Larson, Weiss Stock Ratings Heat Maps, issues@e.weissratings.com; phone: 1-877-934-7778, August 25, 2020
Carvana Co. (CVNA) | Daily Alert September 10
On the negative side, price earning’s multiples are through the roof and valuation levels are near historic highs. As an example, the Buffet Indicator recently hit the highest overvalued level in its history suggesting that the benchmark S&P 500 will lose 1% per year over the next eight years.
Since the March 25th lows, the market as measured by the S&P 500 has soared over 50%. This dramatic rise in share prices has come in the face of an economy that contracted by a third between April and June.
It is no wonder why many stock market participants feel that we are in a bubble and that the bull market is living on borrowed time. The American Association of Individual Investors in their latest weekly poll shows bears outnumbering bulls 42% to 30%. It is interesting to note that the bullish contingent has not been above 35% since the middle of April and was as low as 20% only two weeks ago. From a contrary opinion standpoint, this is a very healthy sign that the bull market has further to run.
Carvana Co. is an e-commerce platform for buying used cars. Consumers can research and identify a vehicle, inspect it using its proprietary 360-degree vehicle imaging technology, obtain financing and warranty coverage, purchase the vehicle and schedule delivery or pick-up, all from their desktop or mobile devices.
The company’s transaction technologies and online platform transform a traditionally time-consuming process by allowing customers to secure financing, complete a purchase, and schedule delivery online.
Mental stop: $172.93
Dan Sullivan, The Chartist, thechartist.com, 900-942-4278, August 20, 2020
Growth & Income 833
Williams-Sonoma, Inc. (WSM) | Daily Alert September 2
Our first pick is a home goods retailer whose online sales during this pandemic, have increased 46%. The company’s current annual dividend yield is 2.19%, paid quarterly. Our second recommendation is a sale of an aerospace/defense company whose shares are not moving.
Home-goods retailer Williams-Sonoma appears well-positioned to weather the coronavirus-driven recession, especially as Americans spend more time in their homes. In the April quarter, the retailer’s online business partially overcome widespread store closures, as per-share profits slipped 9% on flat sales. For the July quarter, rising analyst estimates target flat per-share profits on 3% sales growth.
The shares trade at 20 times estimated current-year earnings, a 7% discount to the median S&P 1500 Index specialty retailer. The stock is being initiated as a Buy and a Long-Term Buy.
Richard Moroney, CFA, Dow Theory Forecasts, dowtheory.com, 800-233-5922, August 10, 2020
Griffon Corporation (GFF) | Daily Alert September 14
Griffon Corporation is built around three attractive and growing businesses. The consumer products business (46% of trailing 12-month revenue), which traces its roots back to 1774, sells
storage and landscaping products. The home products division (39%) is the largest U.S. maker of residential and commercial garage doors. The defense electronic unit (15%) is a leading provider of surveillance and communications gear used in military and aerospace applications.
Griffon’s strong operating momentum reflects robust demand for home-improvement products spurred by the pandemic. A favorable product mix, improved profit margins, and acquisitions have boosted earnings and cash flow growth.
For fiscal 2020 ending September, the three-analyst consensus calls for per-share earnings of $1.54, up 43%. For fiscal 2021, per-share profits are expected to advance 3%—a conservative target based on recent operating momentum. Over the next five years, the consensus calls for per-share profits to grow 20% annually. While that figure seems optimistic, the company appears
capable of delivering 7% to 12% annual profit growth.
The stock trades at less than 14 times expected 2021 per-share earnings. Griffon, which earns an 83 for Quadrix® Value and 99 in Overall, is being initiated as a Buy.
Richard J. Moroney, CFA, Upside, upsidestocks.com, 800-233-5922, September 7, 2020
*Paychex, Inc. (PAYX)
Paychex is a leading provider of payroll processing, human resources, and benefits services to small business around the country and around Europe.
Roughly 99% of Paychex’s clients are businesses composed of 100-or-fewer employees. The average client size of the business is approximately 16 employees.
Paychex’s business is divided into two primary segments—payroll services (55% of revenue) and human resources services (45%). Paychex also partners with an array of insurance carriers to provide property and casualty coverage, workers’ compensation and business-owner policies.
Paychex reported fiscal-year 2020 (ended in May) revenue of $4.04 billion. Annual revenue has doubled over the past 10 years. It has grown at an average 7% annual rate. Earnings per share (EPS) posted at $3.04 in fiscal-year 2020. That’s double the EPS of a decade ago. Paychex’s competitors are few and far between, as barriers to entry are high.
I have a $90 price target for the next 12 months. That’s a 17% upshot from the market price today. The return potential is further enhanced by a generous dividend. I am expecting at least a 20% total return over the next 12 months.
Buy Paychex shares up to $80.
Ian Wyatt and Stephen Mauzy, Personal Wealth Advisor, www.wyattresearch.com, September 2, 2020
*Conagra Brands, Inc. (CAG)
Conagra Brands Inc. is a buy. (TSINetwork Rating: Above Average) makes a variety of popular foods, including Chef Boyardee canned pasta, Hunt’s tomato sauce, Peter Pan peanut butter, Orville Redenbacher popcorn and Reddi-wip whipped cream.
Due to strong demand for packaged foods during the COVID-19 lockdowns, Conagra’s sales in its fiscal 2020 fourth quarter, ended May 31, 2020, jumped 25.8%, to $3.29 billion from a year earlier. If you exclude the businesses that Conagra recently sold, foreign exchange rates and the impact of an extra week, sales gained 21.5%.
Excluding unusual items, overall earnings in the quarter soared 110.5%, to $367.6 million from $174.6 million.
The $0.85 a share dividend still looks safe. Conagra is a buy.
Patrick McKeough, Wall Street Forecaster, tsinetwork.ca, 888-292-0296, September, 2020
Value 833
Molson Coors Brewing Company (TAP) | Daily Alert September 8
The thesis for Molson Coors is straightforward—a reasonably stable company whose shares sell at a highly discounted price.
One of the world’s largest beverage companies, Molson Coors produces the highly recognized Coors, Molson, Miller, and Blue Moon brands as well as numerous local, craft and specialty beers. About two-thirds of its $10 billion in net revenues are produced in the United States, where it holds a 24% share of the beer market. Canada produces about 13% of its revenues, with the balance coming largely from Europe.
For a simple business, the company’s history is a bit complicated. In 2005, after years of speculation, two old-line brewing companies, Canada-based Molson (founded in 1786) and Colorado-based Coors (founded in 1873), combined in a merger of equals. In 2016, the company completed its multi-step acquisition of Miller’s global operations.
Enthusiasm for its post-consolidation prospects drove TAP shares to over 110 in October 2016. Supporting the stock was a modestly favorable revenue outlook, substantial opportunities to reduce redundant costs and $2.4 billion in tax benefits. However, since then, the share price has declined, initially due to a lack of growth, weak post-merger integration and continued margin pressure, with more recent weakness coming from Covid-19 stay-at-home orders that temporarily dried up much of the company’s revenues. Elevated debt also weighs on the shares.
However, Molson Coors’ annual revenues will likely remain relatively stable, backed by its highly recognized and popular brands. While revenues will dip from about $10.6 billion last year to perhaps $9.6 billion this year, they will likely recover to $10.2 billion next year. Cash operating profits have also been steady at around $2.3 billion (dipping to perhaps $2.0 billion this year). The profit margin is a healthy 21%, helping the company to generate free cash flow of about $1.0 billion in a typical year. Encouragingly, even with the global closing of restaurants, pubs and sports venues due to the pandemic, second quarter sales fell only 15% from a year ago. Cost-cutting measures and a temporary pullback in marketing spending allowed the company to generate an increase in quarterly profits compared to a year ago.
While its $8.7 billion debt is modestly elevated, at about 4.2x cash operating profits (compared to perhaps 3.5-4.0x being appropriate), it is partly offset by $800 million in cash and can be readily serviced by Molson Coors’ cash flow. The company has an investment grade credit rating, which it has pledged to keep, which is helping to keep the interest rate on its debt relatively low.
In October 2019, the company promoted its U.S. head to oversee the entire company. He is leading an efficiency program to cut as much as $150 million in annual run-rate costs, which includes more fully integrating the combined companies as well as accelerating new product introductions.
Molson Coors had raised its dividend by 39% a year ago, as its cash flow had reached its targeted levels, but suspended it due to the pandemic. We anticipate that the company will resume paying a dividend mid-next year. We think a $0.35 quarterly dividend is possible, providing a generous 3.8% yield on the current price.
At 37, the shares trade at a highly discounted 10.2x estimated 2020 earnings of $3.61/share, and about 9.5x estimated 2021 earnings of $3.87/share. This compares to multiples of 15x and higher for its beer-producing peers. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.8x estimates, again a sizeable discount to its peers. These multiples are also among the lowest in the consumer staples sector. In a market filled with companies that carry the curse of high expectations, TAP offers the blessing of low expectations. BUY.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, August 24, 2020
Financials 833
Enterprise Bancorp, Inc. (EBTC) | Daily Alert August 28
Enterprise Bancorp has 25 full-service branches in the North Central region of Massachusetts and Southern New Hampshire. About half of the company’s loan portfolio is in commercial real estate and about a third is in commercial construction loans.
Enterprise Bancorp has a market cap of $263 million and is an exceptionally managed bank, which has remained profitable in every single quarter since its formation. In late July, Enterprise reported financial results for the second quarter of fiscal 2020. Net interest margin shrank from 4.0% in last year’s quarter to 3.6% but net interest income grew 13% thanks to strong loan growth. Total loans and customer deposits grew 32% and 26%, respectively, over last year’s quarter. Excluding the Paycheck Protection Program, loans grew 11%. Thanks to its strong performance, Enterprise saw its earnings-per-share decrease only -8% over last year’s quarter and is on track to approach our annual forecast. On the other hand, as the eventual impact of the pandemic is still unknown, it is impossible to forecast the earnings of this small-cap bank precisely.
Enterprise has an outstanding performance record, as it has remained profitable for 123 consecutive quarters. This is a testament to its prudent management and its focus on sustainable long-term growth. The bank has grown its earnings-per-share at a 10.8% average annual rate in the last decade and has grown its earnings-per-share in all but one year throughout this period.
Enterprise has traded at an average price-to-earnings ratio of 14.5 in the last decade. Given the small market cap of the bank, we consider its fair earnings multiple to be around 12.0. The stock is currently trading at a price-to-earnings ratio of 10.5. If it reaches our fair value estimate over the next five years, it will enjoy a 2.8% annualized gain in its returns.
Enterprise has grown its dividend for 26 consecutive years. During the last decade, the bank has grown its dividend at a 5.8% average annual rate.
The stock of Enterprise has lost -35% in about eight months due to the severe recession caused by the pandemic. However, we believe that the stock has been beaten to the extreme due to the indiscriminate sell-off of all the banks caused by the pandemic. We expect Enterprise to recover from next year and offer a 14.2% average annual return over the next five years. Despite the risks associated with small-cap stocks, such as low liquidity and increased stock price volatility during downturns, we view the sell-off as a rare investing opportunity and thus rate the stock as a buy.
Ben Reynolds and Aristofanis Papadatos, Sure Dividend Newsletter, suredividend.com, support@suredividend.com, 800-531-0465, August 14, 2020
First Horizon National Corporation (FHN) | Daily Alert September 4
Regional banks tracked by the S&P Regional Banking ETF (KRE) are up nearly 20% in the past five weeks, buoyed over the past week by a sharp rise in long-term interest rates. The yield on the 10-year U.S. Treasury note over the past 10 days has risen from 0.51% to 0.71%. Short-term rates have remained steady. Banks benefit from this steepening of the yield curve because it boosts their net interest margin, since they borrow at short-term rates and lend at long-term rates.
With roots dating back to 1864, Memphis, Tenn.-based First Horizon National Corporation is a financial holding company that offers checking accounts, savings products, mortgage banking, lending, and financing to individuals and businesses. First Horizon generates 82% of revenue from the banking business, and 16% from its fixed income segment, which sells and distributes fixed income securities, loans, and derivatives, and provides portfolio advisory services. FHN trades at substantial discounts to historical valuations, including 53% below its five-year average price-earnings and price-to-book value ratios. Four company directors were buyers of the stock in March and April this year at prices between $8.95 and $9.51 per share.
First Horizon, like most banks, slashed its dividend during the financial crisis, but over the past seven years has tripled the quarterly payout from $0.05 to $0.15 per share. The next ex-dividend date is coming up September 10.
John Dobosz, Forbes Dividend Investor, newsletters.forbes.com, 212-367-3388, August 15, 2020
*Kinsale Capital Group, Inc. (KNSL)
P/E/Growth: Peter Lynch
Kinsale Capital Group, Inc. is a specialty insurance company. The company focuses on the excess and surplus lines (E&S) market in the United States. Kinsale operates through the Excess and Surplus Lines Insurance segment. The company markets and sells these insurance products in approximately 50 states and the District of Columbia through a network of independent insurance brokers. Its commercial lines offerings include construction, small business, excess casualty, general casualty, energy, professional liability, life sciences, product liability, allied health, healthcare, commercial property, management liability, environmental, inland marine, commercial insurance and public entity. The company writes an array of coverages with a focus on smaller commercial buyers. Kinsale also writes a small amount of homeowners’ insurance in the personal lines market. Its subsidiaries include Kinsale Management, Inc. and Kinsale Insurance Company.
EPS GROWTH RATE: PASS
TOTAL DEBT/EQUITY RATIO: NEUTRAL
EQUITY/ASSETS RATIO: PASS
RETURN ON ASSETS: PASS
Vita Nelson, directinvesting.com, 914-925-0022, January 2, 2020
Bank of Hawaii Corporation (BOH) | Daily Alert September 16
Bank of Hawaii Corporation is a 123-year-old regional financial services company with $19.8 billion in assets, providing services in Hawaii, Guam, and other Pacific Islands. Bank of Hawaii is the second largest bank in the state with nearly $20 billion in assets, 67 branch locations, 367 ATMs, online and mobile banking services.
Bank of Hawaii operates in a unique competitive landscape where the top four banks control more than 80% of the regional market, providing the bank with a sticky, low-cost deposit base that reduces its sensitivity to pricing pressure. In addition to its low-cost deposit base, Bank of Hawaii is a low-cost operator, evidenced by its 2019 efficiency ratio (non-interest expense divided by total revenues) of 55.7%, which places it among the country’s most efficiently run banks.
The conservatively-managed bank maintains a pristine balance sheet with solid asset quality and robust liquidity and capital levels, far exceeding regulators’ requirements.
During the past five years, Bank of Hawaii has banked profitable growth with revenues compounding 4% annually, net income growing by 9% annually and EPS increasing at an 11% annual pace.
Since becoming a public company in 1972, Bank of Hawaii has paid uninterrupted quarterly dividends to shareholders, which have increased at a 10% annual pace during the past five years. While the bank has suspended share repurchases, it is still paying a substantial dividend and increased its dividend 3% to an annualized $2.68 per share.
Bank of Hawaii reported net interest income rose 5% during the second quarter to $178 million with EPS down 30% to $.98. Results for the second quarter included a provision for credit losses of $40.4 million compared to $4.0 million in the prior-year period, reflecting the uncertainty caused by the coronavirus on loan repayments. Loan and lease balances increased 10% during the quarter to $11.8 billion with total deposits up 12.5% to a record high of $17.4 billion. The bank performed well in a challenging environment with tourism halted due to the virus, yet the balance sheet continued to grow while maintaining strong levels of capital and liquidity. The efficiency ratio for the second quarter improved to 50% from 55% in the prior-year quarter.
Investors banking on attractive long-term returns should consider Bank of Hawaii, a HI-quality market leader with an efficient cost structure, profitable growth, and an attractive dividend yield. Buy.
Ingrid R. Hendershot, Hendershot Investments, hendershotinvestments.com, 703-361-6130, September 2020
*Rocket Companies, Inc. (RKT)
Investors cannot get enough of technology, and we are getting questions on if this reminds us of the dot-com craze in the late 1990’s. LanczGlobal’s only significant new recommendation from our last market notes was Rocket Companies (RKT) in the low-to-mid twenties. Its technology will stand out for refi’s and government stimulus, which should favor the company for at least the next 2-3 years. We would rather accumulate our tertiary opportunities that can still be considered undervalued, versus chasing the well known high flyers at this point.
Alan B. Lancz, The Lancz Letter, www.lanczglobal.com, 419-536-5200, September 2, 2020
Healthcare 833
*Luminex Corporation (LMNX)
There seems to be some solid support for the stock, and given where we are at in the fear-greed cycle for the overall market, I believe the longer it is able to hold that level without breaking down, the more bullish the chart will become.
Because we are still fairly underweighted in this stock, along with my belief that “big tech” money is going to start rolling into other sectors, I am adding a few shares to both Portfolios.
I believe that the company’s current market cap puts it in “the sweet spot” in terms of being a potential takeover candidate if the bull market remains intact (but, no—I am NOT predicting such an outcome!), I am comfortable adding a few more shares. LMNX is a strong buy under $30 and a buy under $36.
Nate Pile, Nate’s Notes, NotWallStreet.com, 707-433-7903, August 14, 2020
*Merck & Co., Inc. (MRK)
Merck & Co. (Rated “B-”) is one of the biggest of the “Big Pharma” names. Merck is working to develop two virus vaccines. One is the product of its acquisition of the Austrian company Themis Bioscience, while the other is the result of a collaboration with the research nonprofit firm IAVI.
Given the firm’s strong balance sheet and manufacturing capabilities, it could churn out enormous amounts of vaccine, should ongoing trials prove their effectiveness and safety.
Even without the potential boost of COVID-19 vaccine sales, Merck is humming along. Adjusted earnings per share came in at $1.37 in the second quarter. That easily beat the average forecast of $1.04. Sales topped estimates, too—$10.87 billion versus an average forecast of $10.39 billion.
The company raised its full-year profit targets because people are increasingly going back to their doctors to obtain medical treatments they had been postponing. That will favorably impact demand for Merck’s nonCOVID-19 vaccines and drugs. They include the cancer treatments Keytruda and Lynparza.
Merck currently pays out 61 cents per share in quarterly dividends. The stock looks solid from a technical perspective, recently taking out overhead resistance near $84.
I recommend you buy a starter position of 2.5% in MRK at market.
Mike Larson, Safe Money Report, 1-877-934-7778, weissratings.com, September 2020
*ACADIA Pharmaceuticals Inc. (ACAD)
Acadia Pharmaceuticals is buying privately-held CerSci Therapeutics for $52.5 million in order to access its portfolio of novel compounds for neurological conditions, including non-opioid therapies for acute and chronic pain. The lead development program is a unique Reactive Species Decomposition Accelerant (RSDAx), a first-in-class mechanism focused on interrupting pathways that sensitize neurons to pain. ACAD plans to initiate a Phase II trial for the lead molecule, ACP-044, in the first half of 2021.
The portfolio also contains additional developmental and preclinical stage drug candidates, including brain penetrant molecules, with potential for symptomatic and disease modifying treatment utility in neurodegenerative diseases. Potential disease targets include: diabetic neuropathy, migraine, neurodegenerative diseases and opioid abuse disorders.
Importantly, this acquisition strengthens ACAD’s clinical pipeline to include non-opioid pain therapies that have potential non-addictive properties and reduced side effects typically seen with current opioid treatments. Non-opioid pain relief is a huge market opportunity and we believe that $52.5 million is a very attractive price for a Phase II ready asset.
ACAD is a BUY under 46 with a TARGET PRICE of 60.
John McCamant, The Medical Technology Stock Letter, bioinvest.com, August 27, 2020
*Grifols, S.A. (GRFS)
Grifols SA of Spain is a global specialist in blood plasma based products. While the current move to use plasma to halt covid-19 may not work, I think the concept is worth investing in. So, buy GRFS on Nasdaq. Benzinga’s co-host Dennis Dick thinks plasma stocks are discredited by the FDA rush to approve trials. I don’t agree, and the fact that a Hong Konger who had Covid-19 in April got sick with a different variant last month merely indicates that like regular flu, there are variations in coronavirus.
Vivian Lewis, Global Investing, global-investing.com, 212-758-9480, August 25, 2020
Technology 833
Jamf Holding Corp. (JAMF) | Daily Alert August 31
Jamf is the leading device management platform for enabling Apple devices in the enterprise. The firm’s secret sauce is in preserving the native Apple experience that consumers have come to love while giving IT professionals the ability to provision, manage and secure the devices as is required by large enterprises. This is north of a $10B annual opportunity that is growing> 15% per year as Apple gains share, and Jamf is without a doubt the category leader in terms of combined scale and functionality.
Jamf is growing in the mid-30% range, the business is nicely profitable with FCF margins already in the teens, and we believe the combination of new products, improving customer cohort dynamics, and compelling unit economics paint a picture of sustainable growth and improving profitability. We find JAMF’s valuation at 14.5x EV/R on C2021E palatable in an otherwise expensive space, and we believe investors should have at least some exposure here to participate in Apple’s continued enterprise share gains and to benefit from what’s likely to be a beat-and-raise cadence for the next several quarters. We are initiating coverage of JAMF with a BUY and $45 price target.
Corporations are increasingly adopting bring your own device programs as a means to attract and retain talent. Jamf plays a huge role in this for those who choose to go with Apple. For the employee, they get to enjoy the native Apple ecosystem without the burden of what is typically Windows-based device management technology muddying the user experience. For the employer, over a multi-year period the cost savings can be measured in hundreds of dollars per device based on less IT helpdesk demand and improved employee productivity. And for Apple, who is both customer and partner, Jamf is a key enabler of their growing enterprise presence.
Apple is gaining share in the enterprise. Most stats peg Apple’s share of corporate devices at about 11% in 2019, heading to 14%+ by C2021. This is a natural, organic tailwind to growth. Second, Jamf has added more than 14,000 customers in the last 18 months, bringing the firm’s total to more than 40,000, and there’s still plenty of room to run on the customer acquisition front. Finally, continued innovation and the introduction of new products like Connect in 2018 and Protect in 2019 enables a cross- and up-sell motion that should put upward pressure on net dollar retention that already measures 120 as of the most recent quarter.
Jamf realizes all the benefits that investors have come to love with vertically focused software companies—go-to-market efficiency and attractive unit economics, focused R&D as you don’t need to be everything to everybody, and an ability to super-serve its segment based on the firm’s experience and alignment with Apple. In combination, these factors have propelled Jamf to category leadership and it will be hard for competitors to catch up. Vertical focus is not entirely without risk, as Apple disintermediation and platform unification will always pose a threat, but for now we believe Jamf remains well positioned.
Jamf is a roughly $240M ARR (annual recurring revenue) business that is growing 35%+ as of its most recent quarter. The firm is nicely profitable with gross margins hovering around 80% and uFCF (unlevered free cash flow) margins that are already in the teens. Revenues are >90% recurring, the firm has no customer concentration, and over time we see no reason why this business should not be able to generate 30%+ FCF margins at scale. Software stocks are expensive these days, but JAMF deserves a seat among the premium assets.
We believe the stock can sustain a mid-teen forward revenue multiple which, depending on your assumptions for upside embedded in C2021, gets you a $40-50 stock price—more than enough for a BUY.
David Hynes Jr. & Luke Morison, CFA, Canaccord Genuity Research, canaccordgenuity.com
*Alphabet Inc. (GOOGL)
One of my favorite stocks that beat on the top and bottom lines is Alphabet. The firm posted per-share profits of $10.13 in the quarter, beating the consensus estimate by a whopping 23%. Alphabet also had a slight beat on the revenue side.
While the firm’s advertising business is feeling a pinch from slowdowns in some segments of the economy, most notably travel and entertainment, I continue to like the long-term growth profile of the company.
I own Alphabet and view it as a core holding in portfolios.
Please note Alphabet is a participant in Computershare’s DirectStock online DRIP program. Minimum initial investment is $25, though the initial minimum is reduced to $10 if an individual signs up for automatic monthly investment from a bank account.
Charles B. Carlson, CFA, DRIP Investor, dripinvestor.com, 800-233-5922, September 2020
High Yield Stocks & Preferred Stocks 833
*Baker Hughes Company (BKR)
Baker Hughes is one of the world’s largest diversified energy services company. It became an independent company again in September 2019. GE continues to hold 377 million shares (37% stake), which will be divested over the next three years.
While the 15-18% drop in this year’s revenues are unnerving, they look likely to be nearly flat next year. For comparison, the company’s major peers are likely to see their revenues fall by 25-35% this year. Baker Hughes has lower direct exposure to drilling activity, particularly in North America, and is supported by a $15 billion services backlog.
The company’s second quarter revenues and margins were considerably stronger than consensus estimates, suggesting that the market remains too dour on its prospects. Helping its profits is a $700 million cost-cutting program that is on-track for completion this year. Better execution and integration of GE’s poorly-run businesses should further boost profits.
BKR’s valuation, at 9.3x estimated 2020 EV/EBITDA, assumes essentially no recovery from the currently depressed industry conditions. With its relevant products and services, sturdy balance sheet and improving free cash flow, along with even a modest cyclical recovery, Baker Hughes shares look like a highly attractive contrarian investment.
We recommend the purchase of Baker Hughes shares with a $23 price target.
George Putnam III, The Turnaround Letter, turnaroundletter.com, 617-573-9550, September 2020
World Fuel Services Corporation (INT) | Daily Alert September 11
Born out of a merger between International Recovery Corp and Trans-Tec in 1995, World Fuel is an aggregator and reseller of fuels for its many customers in the aviation, marine and land transport markets around the globe.
As fuel tends to represent a significant portion of client operating expense, the firm can pass along significant savings by aggregating orders. Through nearly two-dozen acquisitions over the past two decades, INT has grown into a leader in a highly fragmented market. While the company was still able to produce a profitable Q2, shares are down 38% year-to-date as the pandemic has put a dent in volumes within the aviation segment (which typically represents close to 50% of revenue).
Aside from brokering fuel, we like that World Fuel Service also provides value-added technology and services, which include flight planning and logistical support, and the stock gives us “picks and shovels” exposure to travel without the risk of the transportation companies as the balance sheet is conservatively financed with just $450 million of net debt and no material maturities until 2024.
Shares trade for 10 times the current 2021 consensus earnings estimate, just two-thirds of the average multiple.
John Buckingham, The Prudent Speculator, theprudentspeculator.com, 877-817-4394, September 2020
Vale S.A. (VALE) | Daily Alert September 15
Vale is putting its January 2019 dam breach troubles behind. The disaster cost 270 lives, forcing Vale to incur huge expenses & charges. The Brazil-based iron ore and nickel producer also suspended its dividend and share buybacks.
Vale expects free cash flow to increase substantially in the second half of 2020 from the first as it ramps up iron ore production. The company expects to resume dividend payments after repaying $5 billion drawn on its revolver. Vale shares appeal to intrepid, turnaround investors. They trade at 5.4X-forward EPS versus prospects for EPS to more than triple in the next 12 months.
Sam Subramanian, PhD, AlphaProfit Sector Investors’ Newsletter, alphaprofit.com, 281-565-6963, August 2020
*CrossAmerica Partners LP (CAPL)
Fuel distributor CrossAmerica Partners posted a strong Q2 coverage ratio of 1.31 times, up from 1.24 times the year ago. That was thanks to a 16.6% boost in distributable cash flow off of flat EBITDA, as gross profit at the retail segment roughly doubled and gross profit at wholesale was up 21.9%.
The results demonstrate the resilience of the partnership’s business model and acquisition-led growth strategy, as added scale demonstrably helped the company cut costs. As expected, we also saw a strong rebound in volumes as regions of the US exited quarantine and appetite for driving increased versus public transportation.
Buy<16.
Elliott H. Gue & Roger S. Conrad, Energy Income Advisor, energyandincomeadvisor.com, 888-960-2759, September 1, 2020
*Edison International (EIX)
You could speculate on which car company will sell the most EVs. Or you could lock in growth from EV adoption with Edison International. Last month, the California utility won regulators’ approval for the largest build ($436 million) of 37,800 charging ports and energy storage in US history. And while Tesla sells for 17 times annual sales that shrank -5% this year, Edison sells for just 11.2 times earnings and pays a yield of nearly 5%. Edison is one of my favorites for long-term growth and income. It’s cheap because of understandable concern about the durability of California’s new utility wildfire insurance in a season of record heat.
But that risk is more than offset by the low price, which in no way reflects the massive rate base opportunity this company has in its power grid. The utility’s most recent earnings news was actually an increase in the lower-end of its 2020 guidance range, which at the mid-point now covers the payout by nearly 2-to-1. Edison is still a buy up to 75.
Roger Conrad, Conrad’s Utility Investor, www.ConradsUtilityInvestor.com, 888-960-2759, September 2020
*Ontrak, Inc. (OTRKP)
Ontrak 9.50% Series A, is a preferred stock issued by Ontrak, an artificial intelligence powered, virtualized outpatient healthcare treatment company that provides in-person or telehealth intervention services to health plans.
Although not credit-rated, these shares are cumulative meaning that Ontrak remains on the hook for any missed dividends. Recently trading at $25.10 per share, the market yield is 9.5% and the yield to its 8/25/25 call date is 9.4%.
Harry Domash, Dividend Detective, dividenddetective.com, 866-632-1593, September 5, 2020
Low-Priced Stocks 833
*Clean Energy Fuels Corp. (CLNE)
Clean Energy Fuels provides natural gas as an alternative fuel for vehicle fleets, helping reduce the amount of climate-harming greenhouse gas emissions by at least 70% and up to 300% depending on the source of the feedstock. The company supplies renewable natural gas (RNG), compressed natural gas (CNG) and liquified natural gas (LNG) for light, medium and heavy-duty vehicles.
Additionally, it builds and operates 550 natural gas fueling stations in the United States and Canada. As of the end of Fiscal 2019, the company served approximately 1,000 fleet customers operating around 48,000 natural gas vehicles.
While revenue has fluctuated, profits have increased consistently. Trailing twelve-month (ttm) profits show an increase of 14% to $94.2 million from $82.3 million in Fiscal 2019. EBITDA increased 48% to $85.6 million in Fiscal 2019, compared to $57.8 million in Fiscal 2018. Quarterly sales decreased due to the global pandemic. The slowdown in activity was primarily in airports, public transit and government fleet customer markets. However, we are still confident in the company’s ability to turn a profit and maintain a competitive advantage.
The world is shifting towards sustainability, and Clean Energy is in a great position to capture more market share with roughly 60% of the natural gas waste-collection truck market already. In addition to its growth potential, the stock is undervalued with a very healthy balance sheet. Although COVID-19 has temporarily slowed growth, this could provide investors with a better long-term entry point on a pullback.
Faris Sleem, The Bowser Report, thebowserreport.com, 757-877-5979, September, 2020
*Digital Ally, Inc. (DGLY)
Digital Ally, Inc. produces and sells digital video imaging and storage products for use in law enforcement, security, and commercial applications in the U.S. and internationally. Its digital audio/video recording, storage, and other products include an in-car digital audio/video recorder that is contained in a rear view mirror for law enforcement vehicles and commercial fleets; and hands-free automatic activated body-worn cameras and in-car video systems, as well as provides its law enforcement customers with audio/video surveillance.
While the company is best known for its body cameras for law enforcement, it’s also gaining traction with its temperature scanning technology with the pandemic. In recent weeks, the company received an order for 500 units of its screener, ThermoVu from Trust Think Products. “This order comes in response to the ongoing pandemic and the recommendations put forth by the CDC and other health organization to increase Covid-19 safety efforts in schools, offices, and other public venues. The order is expected to be shipped in the third quarter 2020,” according to a company press release.
Ian Cooper, The Cheap Investor, support@thecheapinvestor.com, September 2020
REITs 833
Essex Property Trust, Inc. (ESS) | Daily Alert September 3
Essex Property Trust is a real estate investment trust (REIT) that owns 248 apartment communities comprising over 60,000 apartments exclusively on the West Coast. Its primary markets are Northern California (44% of net operating income), Southern California (39%), and Seattle (17%). About 90% of its apartments are in the suburbs while 10% are considered urban.
The high cost of living in these markets is currently a negative as remote working promulgated under COVID-related regulations has allowed workers to live in cheaper locales while retaining their high income West Coast jobs. While some workers may remain far from their jobs even after the COVID crisis subsides, an investment in Essex incorporates a belief that the West Coast will remain an attractive and premium-priced place to live.
The West Coast, particularly California, has unique and attractive characteristics for rental housing. Economic growth and median incomes are much higher than the national average. High costs of homeownership drive rental demand. High construction costs and zoning laws seem to have a greater impact on West Coast housing than many other places of the country, helping insulate landlords like Essex from the competition that should come when return on investment is high. Residential construction permitting in Essex’s markets is consistently below the U.S. average. The West Coast is a great place to own apartment complexes.
The market has historically awarded Essex Property Trust a premium valuation because it has been able to increase rents faster than elsewhere. The average rent for an Essex apartment is $2,400 a month. Yet, vacancy rates have typically only run about 3%.
Like most businesses, Essex was humming along until coronavirus worries changed behaviors. As unemployment rose sharply, some tenants could no longer afford their rent. Government stimulus and unemployment benefits helped, but didn’t go as far in Essex’s expensive markets. Turnover has risen and Essex has made concessions to help tenants afford their apartments and attract new tenants when vacancies occur.
Second quarter rent rose 2.5%, but declined 3.8% on a same-property basis. In addition, Essex set a high provision for delinquencies, implying that 75% of delinquent rent may never be repaid. Funds from Operations (FFO) per share fell 4.5%. FFO adds back depreciation to net income along with other adjustments for non-recurring items. Good real estate appreciates even though tax law allows depreciation expense.
Occupancy fell to 94.9% from 96.8% in the first quarter, but rebounded to 96.2% in July. Much of the increase in occupancy was due to reduced rents and other promotions. Essex has reduced its use of inducements, but occupancy continues to rise. Only its San Francisco market (4% of operating income) remains “challenged.” In several of its markets, rental conditions have returned to pre-COVID levels. The third quarter will still be impacted by some of its promotions while reduced rental rates will last longer. Conservative accounting appears to have front-loaded some of the pain, including aggressive reserving for delinquencies and reporting lease concessions (weeks of free rent) on a cash basis rather than averaging them over the lease term.
Reasonable debt levels and a modest 58% dividend payout rate help put a cushion underneath Essex Property Trust while its markets heal. A slight bounce back from its low share price this spring leaves it a rare bargain in a market that has become expensive once again.
The attractive characteristics of its markets suggest a return to the results it posted before COVID entered our vocabulary. A combination of its 12.5%-14.3% ROE (Return of Equity) and 42% earnings retention (one minus its 58% dividend payout ratio) implies FFO growth of perhaps 6% if it reinvests retained cash flow at the same ROE. Essex exhibits good capital management, lengthening debt maturities out to 30 years at a cost of less than 3% and occasionally buying back stock.
We, therefore, believe 6% FFO growth is a reasonable possibility. Five years of such growth could result in FFO/Share of $18.37. A repeat of the high price/FFO ratio of 21.8 could result in 84% appreciation to a price of 400. Add in dividends and the potential annual return could exceed 15% annually. We see the downside risk as 19% to 176, the low price during this spring’s market selloff.
Doug Gerlach, InvestorAdvisoryService.com, 1-877-33-ICLUB, August 27, 2020
Funds & ETFs 833
Fidelity Emerging Asia Fund (FSEAX) | Daily Alert August 27
Formally stated, Fidelity Emerging Asia invests primarily in stocks within Asian emerging markets, and also in stocks of firms that are economically tied to these markets.
Current manager Xiaoting Zhao has had full charge of this fund since January 1, 2020, but began running the fund with prior manager John Dance six months earlier. Zhao also manages the information technology and communication services sleeves of a number of other Fidelity emerging markets funds.
Zhao does not have to adhere to any strict parameters in managing the fund. His approach has been to focus on companies with strong long-term growth prospects, strong competitive advantages, and the potential to compound earnings over the long term. He also favors industry leaders, companies with solid free cash flow, strong business models, and capable, focused management teams.
Zhao targets certain thematic opportunities as well. He looks for companies he identifies as disruptive to existing business functions, for example. He also at times has selected cyclical investments, although he has felt, for the most part, these have become increasingly risky in this year’s market environment. He also looks for certain macro-oriented opportunities. Recently, these have included the move to 5G wireless networks; opportunistic investments in stocks overly beaten down by coronavirus concerns, but that still have good recovery potential; working from home and remote communication; and gaming and entertainment.
Underlying the investment strategy is the philosophy that markets are not wholly efficient, due to investor psychology, inefficient information distribution, and other factors. This can cause stock mispricing—leading to opportunities for active portfolio management. The manager, backed by an extensive global research team, employs in-depth fundamental research to find these opportunities.
The construction of the portfolio is driven by bottom-up stock selection, and often, industry and country allocations will deviate from the benchmark MSCI AC Asia ex-Japan Index. At the end of June there were about 100 positions in the fund, with about 40% of assets concentrated in the top ten stocks.
Compared to the benchmark, the fund was overweight in information technology, consumer discretionary, and health care, and underweight in financials, industrials, and consumer staples. The majority of assets (85%) were in emerging Asia nations, with 15% in developed markets.
The fund’s largest position is Tencent Holdings, an internet conglomerate, which has benefited from being the leading provider of instant messaging in China. It has also profited from earnings potential from its online gaming business. The stock has gained 45.4% this year. The third holding is Pinduoduo (up 312.2%) one of China’s largest e-commerce platforms. Zhao notes that the firm offers a “‘social shopping’ business model that offers greater discounts when customers encourage their contacts to shop the site and join in on a deal.” He adds, “I think this company offers an innovative way for value-conscious shoppers to use their social media networks to save money.”
The other big gainer is the fourth holding, Bilibili (up 187.7%), which has been described as the YouTube of China. It has expanded its customer base beyond its initial younger demographic to older consumers via an expanded content base.
Under previous management, Fidelity Emerging Asia performed well in recent calendar years compared to funds in its category, only once dipping below the average group performance since 2012. This year, under the guidance of Zhao, fund results—though negative—held up well during the coronavirus-driven downturn in early 2020 compared to the benchmark index. Looking at the year-to-date through the end of July, the fund has recouped its losses and is registering a gain of 28.9%, outpacing 92% of its Morningstar category peers.
Zhao noted, “Fortunately, even before the crisis began, we had over weighted a number of stocks in the communication services and information technology sectors that subsequently benefited from COVID-19. When the crisis struck, we added to many of these holdings, which we consider longer-term growth stories.” Looking forward, he stated, “I’m optimistic about the future. Although I believe the coronavirus will result in many changes to people’s daily lives and work habits, I think these changes will bring many opportunities from an investment standpoint.”
Brian W. Kelly, Moneyletter, moneyletter.com, 800-890-9670, August 2020
Fidelity Leveraged Company Stock Fund (FLVCX) | Daily Alert September 9
Fidelity Leveraged Company Stock Fund mostly invests in the equity of businesses with distressed balance sheets. However, with the flexibility that its prospectus affords, its two managers are not averse from holding stocks whose balance sheets are just fine, thank you. Microsoft and Facebook come to mind.
Co-managed by Mark Notkin and more recently Brian Chang, high yield is very familiar territory for both. In fact, they also run Fidelity Capital & Income Fund (FAGIX) which prioritizes the bonds of distressed companies. As such, the bonds, stocks, or both are sometimes found in the two funds.
With respect to the Unique Opportunities Model trade, Leveraged Company’s relative volatility (the measure we use to gauge risk over the past 36 months) is substantially higher than OTC’s, the fund it’s replacing: 1.42 vs. 1.17. Part of its elevated risk comes from Leveraged Company’s 37% stake in tech. More broadly, its risk is a function of its focus on companies that are in the process of repairing their balance sheets (i.e., paying down their debt).
That debt could be the result of M&A activity or something more ominous like declining business fundamentals. Either way, Fidelity has the research chops to understand any company’s capital structure, though that doesn’t make this fund any less volatile. But with interest rates likely to stay low and the economy crawling its way toward recovery, the fund has solid upside potential.
Jack Bowers, John M. Boyd and John Bonnanzio, Fidelity Monitor & Insight, fidelitymonitor.com, 800-397-3094, September 2020
*Third Avenue Small-Cap Value Fund Investor Class (TVSVX)
Third Avenue Small-Cap Value Investor Fund (TVSVX) invests in companies with small capitalizations using the same value-oriented approach as it does with its real estate value fund (TVRVX). Management scours the investment universe for companies that combine the three main features: creditworthiness, a meaningful discount to a conservatively estimated net asset value, and the ability to consistently grow NAV, with an initial targeted holding period of three to five years. A patient and price conscious acquisition is a critical first step in both protecting capital and in realizing an attractive investment return.
Gray Cardiff, Sound Advice, soundadvice-newsletter.com, 800-825-7007, August 31, 2020
*Virtus InfraCap U.S. Preferred Stock ETF (PFFA)
Virtus InfraCap U.S. Preferred Stock ETF uses a different strategy from passive preferred ETFs to provide a higher yield. And, it is a monthly dividend payer. the fund managers at InfraCap use the iShares U.S. Preferred Stock ETF (NYSE: PFF) as their benchmark and the starting point from which to differentiate PFFA as a better way to invest in preferred stocks.
PFFA is in great shape: the portfolio is earning more than the current dividend rate. The PFFA managers got ahead of the crash by deleveraging the portfolio. The crash and the deleveraging did result in a dividend reduction. The monthly rate went to $0.15 per share compared to the previous $0.19.
Coming out of the crash, they have again taken on about 25% leverage to boost the yield. The portfolio has about 100 different preferred stocks to own or trade, and there is an added emphasis on liquidity for the holdings.
I believe the share price will continue to appreciate up to a level of around $22 to $23.
Tim Plaehn, The Dividend Hunter, yn345.isrefer.com/go/cabmdpc/cab/, September, 2020
*Technology Select Sector SPDR Fund (XLK)
The Technology Select Sector SPDR Fund is up over 27% for the year. Its five biggest positions are in Microsoft, Apple, Visa, Mastercard, Intel, PayPal, Adobe, Salesforce and Cisco Systems.
Apple achieved a milestone, reaching a market cap of more than $2 trillion, after achieving blowout earnings last month. Buy.
Mark Skousen, Forecasts & Strategies, markskousen.com, Eagle Financial, 300 New Jersey Ave. NW, Suite 500, Washington, D.C. 20001, September 2020
*iShares Core U.S. Aggregate Bond ETF (AGG)
iShares Core US Aggregate Bond ETF is the bellwether ETF of fixed income. AGG is the easiest way to buy a basket of the bond types that Federal Reserve Chair Jay Powell is actively buying with his newly printed money.
AGG has two catalysts for price appreciation.
First, the Fed’s bond buying program supports these bond prices (and keeps their yields low). Plus, as stocks drop, more money flows into fixed income. This means bond yields will drop (especially on investment grade offerings) and bond prices will rise.
I don’t recommend ETFs too often for buy and hold investors because it’s difficult to find value in the ETF space. But they are sturdier ports in market storms than my beloved closed-end funds (CEFs), which have more yield, more upside, but wider swings than ETFs.
Brett Owens, Contrarian Outlook, BNK Invest Inc., 500 North Broadway, Suite 265, Jericho, NY 11753 USA, 516-620-4294, September 9, 2020
Updates 833
SELL: L3Harris Technologies, Inc. (LHX) | Daily Alert September 2
Updated from WSBI 827, March 19, 2020
For the June quarter, defense contractor L3Harris Technologies reported adjusted earnings per share of $2.83, up 13% and $0.25 above the consensus. We see few catalysts in the coming months to turn around a stock 13% lower for the year. The company’s heavy reliance on the U.S. government is helping stabilize operations during the pandemic but may offer limited upside, given that rising U.S. debt levels from combating the coronavirus could constrain future growth in military spending. L3Harris is now rated B (average) on the Monitored List and should be sold.
Richard Moroney, CFA, Dow Theory Forecasts, dowtheory.com, 800-233-5922, August 10, 2020
SELL Fidelity OTC Portfolio (FOCPX) | Daily Alert September 9
Updated from WSBI 816, April 10, 2019
To rebalance our models to better align them with their risk targets, we are selling this fund. We have put the proceeds into Fidelity Leveraged Company Stock Fund (FLVCX).
Read more: https://cabotwealth.com/topics/wall-streets-best-investments/focpx-2/
Jack Bowers, John M. Boyd and John Bonnanzio, Fidelity Monitor & Insight, fidelitymonitor.com, 800-397-3094, September 2020
*SELL DBS Group Holdings Ltd (DBSDY)
Updated from WSBI 828, April 16, 2020
DBS Bank (DBSDY) shares lost a little ground this week after reporting last week that net earnings were down 22% year-over-year. Given that Singapore is in a recession and its stock market off 20% so far in 2020, I’m moving this from a hold to a sell. Still a great bank and we will be back to this quality SEA idea down the road. MOVE FROM HOLD A HALF TO SELL
Carl Delfeld, Cabot Global Stocks Explorer, cabotwealth.com, 978-745-5532, August 20, 2020
*SELL DocuSign, Inc. (DOCU)
Updated from WSBI 822, October 16, 2019
DocuSign was a great winner for us, but we pulled the plug on the rest of our position after earnings last week. Not that our decision had anything to do with the firm’s results—sales growth accelerated to 45% and earnings of 17 cents were up from a penny a year ago. However, the weekly chart now has a big red flag: Last week is what’s known as an “iceberg,” a dramatically huge weekly bar that (a) comes after a huge run, (b) finishes at the bottom of the range and (c) takes place on monstrous volume, indicating that, after a prolonged move, big investors bailed out in droves when the stock spiked higher, marking a change in character. DOCU boosted the portfolio by about 13% all by itself in less a year—we’ll take it. SOLD.
Michael Cintolo, Cabot Growth Investor, cabotwealth.com, 978-745-5532, September 10, 2020
*SELL CDW Corporation (CDW)
Updated from WSBI 823, November 20, 2019
CDW is being removed from the Buy and Long-Term Buy lists. Although management remains confident CDW can keep outgrowing its market, the pace of outperformance will likely slow as customers delay purchases of new hardware. CDW also cautioned that sales for its end-markets were mixed in July, hurt by declines for health-care, corporate, and small-businesses customers.
Looking ahead, the one area of recent strength, public markets such as government and education, could face budget cuts in the aftermath of the pandemic. Additionally, the threat of bankruptcy for more small businesses could become an added challenge for CDW. With that in mind, the recent rise in profit estimates for 2021 could prove too optimistic. CDW is being dropped from the Monitored List and should be sold.
Richard Moroney, CFA, Dow Theory Forecasts, dowtheory.com, 800-233-5922, September 2, 2020
*Madison Square Garden Entertainment Corp. (MSGE)
Updated from WSBI 821, September 18, 2019
I think its time to move to the side lines on Madison Square Garden Entertainment (MSGE). Nancy’s Note: We recommended MSG, which was then split into MSGE and MSGS in March.
At the time of the spin-off, net cash was $1.47BN ($61.40 per share). Today, the company has net cash of $1.03BN ($42.80 per share). That’s a pretty big decline.
I really don’t like the risk/reward for the stock right now. My guess is it continues to trade down. I think it would be compelling in the mid $40 range (basically giving the company no credit for anything except cash).
I do still like Madison Square Garden Sports (MSGS) and will continue to hold that one.
Richard Howe, CFA, The Stock Spin-off Investing Newsletter, stockspinoffinvesting.com, 617-750-7454, August 21, 2020
Investment Index 833
