October was a surprisingly good month for the markets, until the very end, when investors took a rest. But since the election, they’ve come in off the sidelines and the markets are now close to all-time highs. Investors love the idea of a divided Congress.
As well, the unemployment picture continues to improve, although with the coronavirus causing more widespread shutdowns, we may see a temporary rise—at least until the vaccinations begin distribution. And that certainly looks promising, with both Pfizer and Moderna sharing terrific stats this past week.
Housing continues to be a mixed report. Inventories continue to decline, down 38.3% in October, and prices rose 12.2%. Mortgage rates are at a 5-year low. Once the pandemic eases, I expect the number of listed houses to rebound and sales to rise precipitously, at least until inventory is normalized.
Our issue this month, is focused primarily on growth companies, although we certainly offer plenty of dividend opportunities. We begin with our Spotlight Stock, a provider of technology, primarily to the U.S. Defense Department. This company is right on the cutting-edge of advanced technologies—the future of defense. In my Feature article, I discuss the coming technologies and CACI’s potential to harness and profit from them.
Moving on, our Growth stocks include companies from the payments, construction, and virtual healthcare arenas. In Growth & Income, we offer ideas in the equipment, tools, building products, toys, consumer goods, e-tail, and media sectors.
Our Financial picks are both from the insurance industry, and our Healthcare offerings include a contract research organization, a testing business, and biopharma. In Technology, you’ll find ideas from the cloud, cybersecurity, CRM, e-commerce, hardware, and streaming industries.
We have one Low-Priced Stock—a hybrid trading or emerging biotech, and a couple of banking ideas, as well as a company that serves the marijuana industry, in Preferred Stocks & REITs.
Our contributors still like High Yield, and here, we add companies from the insurance, banking, pest control, hardware, and communication sectors. And this month, we also feature a Short-Sale opportunity.
Lastly, our Funds & ETFs focus on growth, banking, energy MLP’s, and marijuana.
I wish you and your families a healthy and happy Thanksgiving, and look forward to hearing from you. Please don’t hesitate to email me with your feedback and questions.My address is nancy@financialfreedomfederation.com.
Market Views 835
The market remains volatile and—so far—within its previous trading range, on a closing basis. A breakout to the upside would be worth following. For now, though, we are trading positions from both sides—including a bear spread established near the top of the trading range. With COVID worries still bothering the market (and keeping $VIX elevated), there should be opportunities for both bulls and bears.
Lawrence G. McMillan, The Option Strategist, optionstrategist.com, 973-328-1303, November 15, 2020
Sector Rotation
Sector rotation was the theme of the week as investors shifted away from the “stay at home winners” and towards some of the most beaten-down segments of the equity market. Underscoring that theme, the tech-heavy Nasdaq 100 (QQQ) finished lower by 1.2% this week even as the Small-Cap (SLY) index surged 7.5% and the Mid-Cap (MDY) rallied 4.3%, one of the largest differentials between these broad-based indexes ever recorded. 10 of the 11 GICS equity sectors finished higher on the week, led to the upside by the Energy (XLE) and Financials (XLF) sectors while Technology (XLK) was the lone sector in negative territory. A continued rebound from residential REITs led the Hoya Capital Housing Index to another week of gains despite underperformance from the recently high-flying single-family homebuilders.
Brad Thomas, Forbes Real Estate Investor, forbes.com/newsletters, brad@theintelligentreitinvestor.com, November 15, 2020
Watch Out for Mortgage Defaults
There is one sector of the economy I worry about above all others. The pandemic has produced a tidal wave of defaults and deferrals in mortgages and rent payments in residential and commercial spaces. Many banks have set aside money to cover charges against future profits, but the worst is yet to come for many REITs and commercial developers. As government-mandated moratoriums on evictions disappear, the stress on the real estate industry is going to grow. Unless the Fed promptly deals with these stresses, we may experience some turbulent times in the financial markets.
David C. Jennett, The Investment Letter, P.O. Box 6170, Holliston, MA 01746, 800-542-5018, November 16, 2020
Spotlight Stock 835
CACI International Inc.is a technology and services provider, primarily to the U.S. government. The firm segments its business by customer type and service offering. “Enterprise” customers represent government agencies implementing business systems, business processing, and enterprise Information Technology solutions supporting operations like finance, personnel, and procurement. “Mission“ customers target military branches with capabilities like communications, intelligence gathering, electronic warfare, and cyber operations. “Enterprise” commonly refers to corporate customers, but CACI uses the term to refer to its government customers outside of the military.
As for service offerings, Expertise represents consultants and outsourced contract labor and Technology represents the development and implementation of business systems, enterprise applications, IT systems, signal intelligence, electronic warfare, and cyber operations.
Enterprise customers represent about 40% of total revenue, with 15% of total revenue from Expertise and 25% from Technology. Mission customers represent the other 60%, with 35% from Expertise and 25% from Technology.
Expertise business tends to be mostly outsourced labor services at lower profit margins while Technology carries higher margins due to the sale of proprietary software and high-value IT implementation services. CEO John Mengucci has consciously focused on expanding Technology such that the current mix is roughly 50/50.
CACI has emphasized building long-term relationships through multi-year contracts. Its largest customer is the Department of Defense, representing about 70% of sales and led by the U.S. Army. Growing worldwide threats have created the need for advanced communications systems, greater intelligence, and security from cyber threats.
CACI was recently awarded up-to a $1.5 billion contract, the largest in its history, with a base period of five years and five one-year annual renewals to provide mission and cybersecurity to the National Geospatial-Intelligence Agency. The firm has a backlog of $22 billion with contracts having an average duration of five years, up from 3.5 years in fiscal 2017.
Another strategy to protect and improve margins has been the movement toward more cost reimbursement contracts that allow CACI to bill at a consistent rate while implementing cost-saving initiatives over time. Cost reimbursement contracts represent 57% of Fiscal 2020 sales, up from 55% the year before, with the remaining 43% from fixed price and time and materials contracts.
CACI has completed more than 80 acquisitions in its long history and nine over the past three fiscal years. The recently announced Ascent Vision Technologies (AVT) acquisition brings advanced infrared imagining systems for airborne, ground, and maritime platforms for intelligence, surveillance, and reconnaissance for day and night operations.
CACI is coming off a record year for Fiscal 2019, but headwinds from the COVID-19 pandemic are hurting growth. Some of this has been alleviated by the CARES Act through additional reimbursement for providing stand-by labor should existing contract personnel get sick. Even so, guidance for Fiscal year 2021 is solid, with sales growth of 5%-8%, 5.5% from organic means at the midpoint, and EPS of $13.50-$14.28, up 7%- 13%.
The obvious risk to owning CACI shares is the near total reliance on government customers, particularly the military. Earlier in the decade, growth in military spending was curtailed by the Budget Control Act. However, recent growth has accelerated in a bipartisan fashion as Washington responds to threats increasingly waged online.
Analysts are projecting CACI can grow earnings 13% per year, but we will instead use roughly the past 10 years average growth rate of 11%. Five years of this growth and an average high P/E of 19.6 could generate a stock price as high as 416. We use a low price of 155, the product of fiscal year 2020 EPS of $12.61 and the average low P/E of 12.3. The upside/downside ratio is 3.5 to 1.
Doug Gerlach, InvestorAdvisoryService.com, 1-877-33-ICLUB, November 2020
Technology 835
Our Spotlight Stock, CACI International Inc. (CACI), as contributor Douglas Gerlach of Investor Advisory Service notes, is serving our country’s front lines, behind-the-scenes, with advanced technology products and services. The company’s offerings assist our nation’s defense in a variety of sectors, including healthcare, cybersecurity, enterprise technologies, communication, intelligence services, business systems, logistics, surveillance, space operations, and command and control. There’s virtually no defense strategy that CACI doesn’t touch with its technology.
That will become increasingly important as defense is shifting from a readiness approach to increased capabilities, efficiency, and responsiveness. This shift is to accommodate more advanced technologies in the cybersecurity, space, and electromagnetic sectors, in preparation for more advanced electronic warfare.
Right now, our defense budget is $676 billion, about 3.2% of our gross domestic product. It’s expected that Biden will rely less on the armed forces and more on investments in ‘soft power’ through diplomacy, economics and science and technology. And with a Biden presidency and divided Congress, that percentage is not expected to rise or fall significantly—which means we have to do more with the same amount of money.
And that portends developing and using cutting-edge technologies. It’s predicted that the deployable technologies that will be needed from now until 2040 will include:
• Computer hardware
• Computer software
• Offensive cyber operations
• System of systems/Internet of things
• Artificial intelligence/Big data
• Robotics & autonomous systems
Source: Brookings.edu
The defense technology budget—at $106.6 billion—is the largest in history, and is focused on crucial emerging technologies, including:
• Cyberspace ($9.8 billion), including, which includes Cybersecurity ($5.4 billion), Cyberspace – Operations ($3.8 billion), and Cyberspace Science and Technology ($556 million)
• Artificial Intelligence -- $841 million
• Cloud -- $789 million
• Advanced Capabilities Enablers (ACEs), including Hypersonics ($3.2 billion), Autonomy ($1.7 billion), and Artificial Intelligence ($841 million)
Source: defense.gov
Most of these advanced capabilities fall into the realm of CACI. The company sees its future growth in the following categories:
• Cyber – offensive and defensive technologies, modeling and simulation
• 5G – technology for signal collection/processing and to ensure network resiliency
• Electromagnetic Spectrum – convergence of signals intelligence, electronic warfare, cyber, and communications
• Artificial Intelligence – over 100 projects developing AI capabilities across its business
• Ascent Visiton Technologies – well along in combining CACI’s capabilities to create next-generation, fully-integrated and interoperable countering unmanned aerial systems (C-UAS)
And with rising global threats, the need for increasing national security and modernization of defense IT, CACI is ready to claim its portion of the estimated $230 billion market.
Growth 835
Afterpay Limited (APT.AX) | Daily Alert October 16
The Explorer portfolio had another positive week, as the market is hostage to enacting another politically difficult stimulus package. Count me as skeptical. Stay-at-home stocks are leading the market while economic-recovery stocks struggle. Most overseas markets rose yesterday but Hong Kong’s Hang Seng Index was the one exception. That followed reports that the Trump administration is discussing potential curbs to digital payment platforms developed by Chinese tech companies Tencent Holdings and Ant Group on the grounds of national security.
Afterpay Limited shares bumped up to 84 this past, week building on momentum from announcing an expansion into Canada as well as partnership agreements in Spain and Italy. This company is revolutionizing the retail payment industry by effectively enabling interest-free loans at a growing number of retailers.
Founded in Australia in 2017, Afterpay has seen heady growth, with revenue zooming from $23 million in 2017 to $218 million in 2019. The company has quickly captured almost 10 million active customers and has 55,000 retailers participating in its network. I suggest you purchase shares, which trade on the Australian Securities Exchange. BUY A HALF.
Carl Delfeld, Cabot Global Stocks Explorer, cabotwealth.com, 978-745-5532, October 8, 2020
MYR Group Inc. (MYRG) | Daily Alert November 3
MYR Group Inc. was upgraded to Best Buy, reflecting its robust operating momentum and modest valuation. Scheduled to post September-quarter results on Oct. 28—a day after Upside went to press—MYR was expected to report per-share profits of $0.78, up 26%. Nancy’s Note: The company actually earned $1.02 per share, on revenues of $607.90 million.
The company has topped profit estimates in four consecutive quarters, by an average of 32%. Full-year earnings per share are projected to jump 30% to $2.93.
A leader in the electrical construction industry, MYR serves utilities, independent power producers, and industrial and transmission companies. Engineering and construction stocks have rallied in recent months, partly because a strong Democratic showing in the election could translate to a substantial infrastructure bill that is expected to include spending on highways, green energy, and broadband.
Up 35% over the past three months, MYR remains cheap, sporting a Value score of 82 and an implied value of $61 based on 10-year average price/sales. The stock is a Best Buy.
Richard J. Moroney, CFA, Upside, www.upsidestocks.com, 800-233-5922, November 2020
*Ontrak, Inc. (OTRK)
Though the stock could take a sizable tumble at any time, Ontrak is continuing to do a great job consolidating in the
$50-$70 range after the big run it has made from under $9 back in March to where it is today. For the third quarter, Ontrak reported revenues of $24.0 million and a net loss of just over $6.1 million, or $0.36 per share, as compared to revenues of just over $8.8 million and a net loss of $8.6 million, or $0.52 per share, in last year’s third quarter. Though I am selling a few more shares again this month in order to “prune” our position a bit after the run the stock has made, it is absolutely on the “first buy” list for new subscribers! OTRK is a strong buy under $45 and a buy under $70.
Nate Pile, Nate’s Notes, NotWallStreet.com, 707-433-7903, November 13, 2020
Growth & Income 835
Acme United Corporation (ACU) | Daily Alert October 19
For more than 150 years, Acme United Corporation has supplied innovative cutting, measuring, first aid, and sharpening products to the school, home, office, arts and crafts, hardware, sporting goods, fishing tools, and industrial markets. Its top brands include First Aid Only, PhysiciansCare, Pac-Kit, Spill Magic, Westcott, Clauss, Camillus, Cuda, and DMT.
The company’s diversified end markets provide exposure to both hobbyists and industrial facilities. Growing concerns about industrial health safety is driving interest in many of Acme United’s products. Its safety solutions include component kits that are often required by industrial safety regulations and can be restocked using its SafetyHub app. The kits focus on different needs, such as first aid, eye washes, or medications, and the app can deliver push messages about refills and maintain an OSHA compliance log.
The company is diversified globally, with operations in the U.S., Canada, Europe, and Asia.
Management sees several drivers for Acme United’s growth. New first aid programs being put into place at large industrial, food service, and other distributors should drive growth, along with an expanding refill business. The company’s widening product line should increase cross-selling opportunities, as well.
Acquisitions are part of the company’s growth strategy, enabled by a strong balance sheet and good cash flow. In January 2020, Acme United acquired First Aid Central, a Canadian supplier of first aid kits, refills, and safety products for a broad range of customers. This acquisition expanded the company’s distribution capabilities, product offerings, and online presence.
The COVID-19 pandemic caused an uptick in Acme United’s sales a wide array of products including fishing tools, hunting knives, craft scissors, sharpening tools, first aid, and safety products. Increasing awareness of the need for safe workplaces should benefit the company as the nation returns to work.
In the second quarter ended June 30, 2020, sales grew 9.5% and EPS grew 19.5% over Q2 2019. In the first half of 2020, EPS reached $1.28, up 27% over 2019 first half performance and closing in already on the 2019 full FY EPS of $1.60. Analysts expect EPS to reach $1.92 for the full year, a healthy increase over 2019.
We project future annual average growth of EPS and sales to be around 10% a year, plus dividends. Acme has increased dividends every year in the last decade.
Acme United’s stock is currently selling a P/E ratio of 12.0, just below our revised average P/E ratio of 12.4. We think the stock can sell for a P/E ratio of 15.7, which would take the price as high as $47.
Doug Gerlach, Smallcapinformer.com, 1-877-33-ICLUB, October 2020
Stanley Black & Decker, Inc. (SWK) | Daily Alert November 2
Stanley Black & Decker, Inc. (Conservative Growth Payer Portfolio; Dividend Sustainability Rating: Above Average) is one of the world’s largest makers of hand and power tools for consumers. In addition to Stanley and Black & Decker, you tap top-selling brands DeWalt, Craftsman and Irwin.
Tools and storage products accounted for 70% of Stanley’s 2019 sales and 77% of its profits. That’s followed by Industrial products (17% of sales, 17% of profits) and building security systems (13%, 6%). The U.S. supplies about 60% of overall sales.
Stanley has increased its dividend each year for the past 53 years and continuously for 143 years. With the September 2020 dividend, the company raised its quarterly payment by 1.4% to $0.70 a share.
That payment looks safe. In the 12 months ended June 27, 2020, Stanley generated free cash flow (regular cash flow less capital expenditures) of $970 million. That easily covers its total dividend payments of $447 million.
Since 2002, the company has spent $10.1 billion on purchases of other businesses. The biggest of those was its $4.5 billion all-stock buy of rival toolmaker Black & Decker in March 2010. In 2017, it also paid $2.8 billion for two more businesses: the Craftsman hand and power tools business of Sears Holdings Corp., and the hand-tool businesses (Lenox and Irwin) of Newell Brands (New York symbol NWL).
New businesses are primarily why the company’s overall sales rose 29.3%, from $11.17 billion in 2015 to $14.44 billion in 2019. If you exclude costs to integrate new businesses and other unusual items, Stanley’s overall earnings jumped 40.0%, from $903.8 million in 2015 to $1.27 billion in 2019. Due to fewer shares outstanding, investors saw earnings per share improve at a slightly faster 41.9%, from $5.92 to $8.40.
Stanley continues to make acquisitions. In February 2020, it purchased Consolidated Aerospace Manufacturing. That firm supplies specialty fasteners and components to Boeing Co. (New York symbol BA) and other aircraft makers. The price was $1.46 billion, but Stanley will hold back $200 million until aviation regulators let Boeing’s 737 Max jetliner fly again. Those planes remain grounded following fatal crashes in Ethiopia and Indonesia.
In the quarter ended June 27, 2020, revenue decreased by 6.3% to $3.15 billion from $3.76 billion a year earlier. Sales were down due to lower volumes during COVID-19 lockdowns. Without one-time items, Stanley earned $247.0 million, or $1.60 a share, in the latest quarter; that’s down 38.3% from $400.3 million, or $2.66. On a per-share basis, its earnings fell 39.8% due to more shares outstanding.
Despite its acquisitions, Stanley’s balance sheet is sound. Its long-term debt as of June 27, 2020, was $4.7 billion. That’s a very manageable 19% of its market cap. The company also held cash of $859.8 million.
Stanley Black & Decker is a buy.
Patrick McKeough, Dividend Advisor, tsinetwork.ca, 888-292-0296, October 2020
Masco Corporation (MAS) | Daily Alert November 9
Founded in 1929 and headquartered in Livonia, Michigan, Masco Corporation designs, manufactures, and distributes home improvement and building products worldwide, and offers its products in three different segments: Plumbing, Decorative Architectural Products and other Specialty Products. The company offers them through home center retailers, online retailers, mass merchandisers, hardware stores, homebuilders, distributors, and other outlets to consumers and contractors, as well as directly to consumers. The company is currently ranked at 373 on the Fortune 500. Its current total market capitalization of $14.0 billion makes MAS a large capitalization stock (a large-cap stock has a market capitalization value of more than $10 billion) with a long history of consistent earnings growth and dividend payments.
It is considered a solid and well-diversified business with a wide economic moat and a sustainable competitive advantage over its rivals, which also enjoys an outstanding management and corporate culture. According to Yahoo! Finance, consensus estimates call for the company to earn about $3.02 per share this year, up from $2.25 per share last year, and to go to about $3.21 per share next year. Masco Corporation has paid dividends to investors since 1944, and has increased its payments for six consecutive years. During the past ten years has increased its dividends at an average rate of 7.6%, and its quarterly payment is $0.14 per share.
The value of dividends reinvestment: A hypothetical investment in Masco has grown cumulatively (including dividends reinvested) 3,420.04% during the past forty years. The same investment has grown only 1,446.03% in the same period of time, excluding dividends. According to the data and calculations of the financial website dqydj.com (don’t quit your day job), a periodic monthly investment of $100 in MAS for the past 40 years would has grown to $486,680, including dividends reinvested. MAS still has room for significant dividend payments and dividend increases in the coming years, since the company’s current Dividend Payout Ratio (DPR), which is its dividend payments as a percentage of its earnings, is just 19%.
Its current Price to Earnings ratio (P/E –a measure of valuation) of 18.74 is 27.3% below the US Market Index, and its Forward P/E ratio is 18.18. Its Price to Sales ratio (P/Sales) of 2.08 is 13.3% below the US Market index. And according to Morningstar, the stock is trading at a 3% discount, making it attractive for investors with a long-term investment horizon. Technically (from the chart’s perspective) MAS also looks attractive, trading 10.9% below its all-time high), while it is forming a long price consolidation pattern between $60 and $52 approximately, in which $52 is acting as a technical support level.
The index funds Vanguard Total Stock Market Index and Vanguard Mid Cap Index are major shareholders of MAS, holding 2.8% and 2.3% of its shares, respectively. Masco’s main competitors are Fortune Brands Home & Security Inc. (FBHS) and Sherwin-Williams Co. (SHW). Masco’s 5-year Beta (a measure of the volatility, or systematic risk in comparison to the market as a whole as evidenced by the S&P 500® Index) is 1.51 so the stock is 51% more volatile than the Market.
Vita Nelson, www.directinvesting.com, 914-925-0022, November 2, 2020
Hasbro, Inc. (HAS) | Daily Alert November 113
Starting with Mr. Potato Head in 1952, Hasbro has grown into a global toy and game manufacturer with household names such as Transformers, Nerf, Play-Doh, Monopoly, Power Rangers, Peppa Pig, and many others. HAS also exclusively licenses Disney’s primary brands, including Marvel, Star Wars, and Disney Princesses/Frozen, and Sesame Street to develop toys and games.
Media revenue has been a challenge this year as live action production was put on hold due to COVID-19, but we like this business for the long term. Despite a recovery since March, shares are down roughly 20% year-to-date. We like that the firm has shown ability to keep expenses under control, and we see its business as resilient to economic downturns as parents and grandparents will sacrifice to ensure there are toys and games under the Christmas tree or at the birthday party, while folks spending more time at home are looking for additional options to keep the kids entertained.
Additional opportunities for growth come from overseas markets and its historically successful acquisition strategy. We expect a sizable bounce back for HAS over the long term and our patience is supported by a handsome dividend yield.
John Buckingham, The Prudent Speculator, theprudentspeculator.com, 877-817-4394, November 4, 2020
The Procter & Gamble Company (PG) | Daily Alert November 13
Procter & Gamble was an original member of the Editor’s Portfolio when I began writing DRIP Investor in 1992. The stock was selling at a split-adjusted price of around $12 in 1992, so the stock has been a decent performer over the last 28 years, especially when you consider the compounding impact from a decent dividend stream.
But it has not always been a one-way street for P&G. As happens for many companies, the stock has experienced its share of lulls, the latest being sideways trading action from 2013 through mid-2018. The company was having trouble showing meaningful organic growth, which provided little appeal save for the decent dividend yield. However, since bottoming at around $72 per share in April 2018, the stock has been on a tear, nearly doubling and far outpacing the performance of the S&P 500 Index over that time period.
What has changed for P&G? In a word—growth. Now, nobody is confusing P&G with a tech stock. However, the company has been putting up very nice growth numbers in recent quarters. In the most recent quarter, sales rose 9% to $19.3 billion, beating the estimate of $18.4 billion. Per-share profits increased 20% to $1.63, easily outpacing the consensus earnings estimate of $1.42. Perhaps most impressive was the 9% organic sales growth for the quarter.
The company continues to get a boost from the Covid pandemic and demand for cleaning products. Organic growth was evident in every product line. Fabric & Home Care posted a 14% increase in organic sales. Dish Care, Air Care, and Surface Care products each grew 20% or more in the quarter. Health Care saw 12% organic sales growth and was fueled by Oral Care products. The slowest business was Baby, Feminine, and Family Care, although this segment still posted 4% growth in organic sales.
Procter & Gamble must expect the sales momentum to continue, as the firm raised its outlook for fiscal 2021 from a range of 1% to 3% sales growth to 3% to 4% and boosted its organic sales growth projections from 2% to 4% to a range of 4% to 5%. The company also raised guidance for core earnings per share growth to a range of 5% to 8% for the fiscal year.
To be sure, Procter & Gamble is not a cheap stock. These shares trade for 25 times the fiscal 2021 earnings estimate of $5.57 per share. Thus, the stock is vulnerable to a sell-off should future growth numbers disappoint, or investors move away from Covid plays as the virus abates over time. Still, the company’s operating momentum, not to mention the stock’s dividend yield give these shares plenty of appeal for investors. I would expect the stock to at least match the market return for the remainder of the year, and I remain positive on the stock’s long-term prospects.
Procter & Gamble offers a direct purchase plan whereby any investor may buy the initial shares directly. Minimum initial investment is $250. There is one-time enrollment fee of $15. For enrollment information call (800) 742-6253 or visit the company’s transfer agent, Equiniti, at www.shareowneronline.com.
Charles B. Carlson, CFA, DRIP Investor, dripinvestor.com, 800-233-5922, November 2020
Wayfair Inc. (W) | Daily Alert November 16
Wayfair delivered another quarter of impressive results in Q3 as eCommerce adoption accelerates and consumers continue to shift discretionary spend to the home goods category, with 66% y/y direct retail net revenue growth and record profitability. Higher utilization of the company’s logistics network, along with increasing uptake of seller services, led to gross margin expansion, and both new and existing customers are displaying increasing repeat purchase behavior, which is driving advertising leverage. While Wayfair did not provide guidance, QTD gross revenue has been tracking to ~50% y/y growth, and the combination of an elongated holiday selling season and more time being spent at home this winter has the company optimistic that growth will remain strong throughout Q4. We continue to find shares of Wayfair attractive even as pandemic-driven tailwinds begin to subside, with the company’s years of logistics investments paving the way for operating leverage going forward.
Wayfair added 2.8M customers in Q3, well above CGe (Canaccord’s estimate), bringing total active customers to 28.8M (+51% y/y), with customers acquired during COVID displaying similar repeat purchase behavior as prior cohorts and 72% of total orders placed by repeat customers (vs. 67% in 3Q19). Direct Retail net revenue grew 66% y/y to $3.86 in Q3 (vs. 84% in Q2), 4% ahead of CGe, as the home goods category continued to see strong eCommerce demand as a result of pandemic-fueled tailwinds. This year’s 48-hour Way Day event represented the two largest sales days in Wayfair history, with the event contributing more to Q3 growth than expected due to logistics efficiencies, although overall sales trends moderated toward the back half of the quarter when excluding the impact of WayDay. GM expanded 650bps y/y to 29.9%, well ahead of expectations, due to continued logistics efficiencies driven by higher utilization along with a mix shift to in-house brands and increased uptake of supplier services. Adj. E6ITDA of $371M was roughly double both our and consensus estimates, representing a record 9.7% margin (+16pp y/y).
Logistics investments show value, progress in Europe: Although inventory levels are at times still below pre-COVID levels, Wayfair believes they are improving and is working with suppliers to drive demand to products with the best availability. While delivery speeds have also improved, fulfillment is expected to be slower than normal during the holiday season. The company reiterated that it has significant capacity available within the ~18M square feet of its CastleGate logistics network to support robust growth over the next few years, continuing to leverage its scale to gain extra space on cargo ships and grow its ocean freight forwarding business. Wayfair continues to expand its presence in Europe, which the company sees as a significant opportunity given the ~$400B total addressable market (TAM)—(B2C & B2B) and lower eCommerce penetration relative to the US. Consumers in the UK and Germany, two markets that make up ~45% of that TAM, can now choose from more than 4.2M products (+30% y/y) offered by Wayfair’s ~400 European suppliers, with some US-based suppliers also expanding their presence into Europe to access this growing market.
Strong demand trends expected in Q4 despite recent deceleration: Wayfair did not provide formal Q4 guidance due to ongoing macroeconomic uncertainty, but QTD gross revenue has been tracking up ~50% y/y. and the company expects strong demand during an elongated holiday season despite some deceleration in late Q3, as consumers are likely to spend more time at home this winter. The company expects Q4 gross margin to be between 26-28% (vs. prior CGe of 26.4%) as it sees continued logistics efficiencies, customer service & merchant fees at ~4 of revenue, advertising normalizing around 10-11% of revenue, and SOTG&A of tv$400M.
We are raising our PT to $350 (from $340), which is based on tv2x (no change) our increased 2022 revenue estimate and supported by DCF valuation.
Maria Ripps, CFA, Michael Graham, CFA, and Jason Tilchen, CFA, Canaccord Genuity Research, canaccordgenuity.com, November 4, 2020
*News Corporation (NWS)
The election is over. And it’s been a godsend for the media sector CNN Digital had its largest audience ever—including record-breaking international attention. The New York Times had 75 million views on the day of the election, and 200 million views the day after. And Fox News dominated the cable news ratings.
Fox News—perhaps News Corp’s most famous U.S. brand—tends to do even better during Democratic administrations, when it can play the incendiary outsider role. News Corp is well-diversified. If and when politics takes a backseat, News Corp owns a vast financial news empire as well, spearheaded by The Wall Street Journal.
While a smaller market, Australian news is thoroughly dominated by News Corp holdings, which has the number one brand in a number of media sectors. News Corp owns the TV rights to sports all over the globe.
Add it all up, and it’s clear that News Corp is in great shape going forward. And it doesn’t hurt that revenue per share is actually higher than current share prices. And the book value per share is only about 20% off the share price.
Ian Wyatt and Ben Shepherd, Ian Wyatt’s Million Dollar Portfolio, wyattresearch.com, November 6, 2020
Financials 835
The Travelers Companies, Inc. (TRV) | Daily Alert October 22
The Travelers Companies, Inc. is a leading property-casualty underwriter specializing in business and international insurance, personal lines, and bond and specialty insurance. The business and international insurance segment offers an array of property and liability coverages that include workers’ compensation, commercial multi-peril, commercial auto, general liability, commercial property, and international.
The bond and specialty insurance segment cover the surety bond business, the construction industry, and certain types of professional and managerial liability. The personal lines segment covers personal risks, primarily personal automobile and homeowners’ coverage.
The Travelers Companies Inc. (formerly The St. Paul Travelers Companies Inc.) was formed on April 1, 2004, as a result of the acquisition of Travelers Property Casualty Corp. by The Saint Paul Companies. The combined entity is one of the top 10 property-casualty insurers in the United States.
In early October 2018, TRV announced that it has joined forces with Amazon (AMZN) to create the insurance industry’s first digital storefront on the Amazon platform. This is a significant long-term strategic move that leaves TRV well positioned to further build out its digital and direct to consumer distribution capabilities.
Kelley Wright, IQ Trends, iqtrends.com/, info@iqtrends.com, 866.927.5250, Mid-October 2020
*United Health Group Incorporated (UNH)
UnitedHealth Group is the largest healthcare company in the world. It is divided into two segments, with UnitedHealth providing insurance coverage while Optum provides information and technology-enabled health services.
The stock jumped by over 10% last Wednesday as U.S. election results showed that the Republicans will likely retain control of the Senate. There had been concerns that if Joe Biden won and the Democrats gained majorities in both branches of Congress, they would push through legislation that could reduce the profits of health insurers. That could still happen, and the shares gave back $6.94 on Friday.
In the third quarter, the company beat estimates by reporting earnings attributable to shareholders of $3.2 billion ($3.30 per share), compared to $3.5 billion ($3.67 per share) a year ago. Revenue in the quarter was $65 billion, up from $60.3 billion a year ago.
The company updated its full year earnings per share outlook for 2020 to $15.65 to $15.90 per share and adjusted net earnings of $16.50 to $16.75 per share.
There seems no impediment at this time for UNH to continue to continue to grow revenues going forward.
Buy on weakness.
Gordon Pape, Internet Wealth Builder, buildingwealth.ca, 1-888-287-8229, November 9, 2020
Healthcare 835
Charles River Laboratories International, Inc. (CRL) | Daily Alert October 20
Charles River Laboratories may not be a household name, but it flows through all facets of the pharmaceutical industry. The company was involved in the development of about 85% of all drugs approved by the U.S. Food and Drug Administration last year. So, it comes as no surprise that Charles River, a provider of contract research, plays a major role in the efforts of dozens of drug makers to develop vaccines and treatments for the coronavirus.
The pandemic has had a mixed effect on Charles River, driving many clients to shut down laboratories and idle clinical trials. However, the near-term outlook is brightening, as customers reopen their research facilities faster than expected. Charles River said demand picked up substantially in June, as research activity in general and drug development in particular gained momentum.
The stock, which scores an 81 Overall in Quadrix® and tops 80 in four category scores, is rated a Focus List Buy and a Long-Term Buy.
The crisis has opened some encouraging doors:
• Charles River managed to keep all of its labs open, grabbing share from out-of-action competitors.
• Clients have been outsourcing to Charles River work they previously performed in-house.
• The company expects to retain a “meaningful amount” of the recently gained business, in part because some firms that used to do their own research will keep outsourcing, and in part because some firms that used multiple providers will opt to stick with a larger partner who can satisfy more of their research needs in one place.
Recent acquisitions have broadened Charles River’s portfolio of services, including cell therapy and manufacturing. While the company entered a number of new markets in recent years, mostly via acquisitions, it still specializes in preclinical research. Most of the largest competitors focus on human clinical trials, leaving Charles River as the strongest player in many of its markets.
In August, Charles River purchased Cellero for $38 million. This business will combine with HemaCare, acquired for $380 million in January, to provide biomaterials for cell therapy research. Charles River says acquisitions remain its preferred use for capital, and that many candidates are available. Expect more deals in the future, likely niche purchases that round out product lines or provide footholds in new markets.
June-quarter earnings per share topped the consensus by 24%, as Charles River’s earnings fell 3%, much better than its earlier projection of a 20% to 30% decline. In response, the company raised its full-year sales and profit targets, and analysts followed their lead. The consensus now calls for growth of 9% in sales and 8% in per-share profits this year despite an estimated loss of $100 million in revenue from the coronavirus.
Charles River trades at 30 times trailing earnings, pricey relative to the broad market but 13% below the median for life-sciences stocks and 16% below its own three-year average.
Richard Moroney, CFA, Dow Theory Forecasts, dowtheory.com, 800-233-5922, September 28, 2020
Quest Diagnostics Incorporated (DGX) | Daily Alert November 4
2wk H. $131.81 52wk L. 73.02
Mkt Cap: $16.94B, EPS: 8.11, P/E: 15.56,
The provider of diagnostic testing services is a beneficiary of pandemic Covid-19. Reported Q-3 earnings of $4.31/shr, up 145% vs. Q-3 a year ago, on revenue of $2.79B, up 42.5%. Forecasting earnings of $9-$10/shr on sales of $8.8B-$9.1B for the year. Reversal from the completed correction/retraction during Aug-Sept ’20. Rocketed through its 50-DMA (108-113) to (114-118) to (120-124). Gapping up (122-126) to new high of 131.81. Volatile.
BUYING RANGE: 121-130
NR TERM OBJ: 141
INTERMED OBJ: 159
STOP LOSS: 112
Joseph Parnes, Shortex Market Letter, shortex.com, 800-877-6555, October 28, 2020
*Ionis Pharmaceuticals, Inc. (IONS)
IONS reported Q3:20 revenue of $160 million, below the consensus estimate of $172.6 million. Spinraza royalties were $74 million and product revenue (Tegsedi and Waylivra) of $19 million. Despite the miss, management reiterated FY20 guidance of $700 million in revenue as they navigate the COVID-19 crisis. Spinraza continues to dominate as the competition from NVS’ Zolgensma and ROG/PTCT’s risdiplam has yet to have a major impact on revenue. Up next for IONS will be updates on AZN-partnered IONIS-AZ4-2.5-LRx (targets PCSK9) in cardiometabolic disease (subcutaneous and oral formulations) at the American Heart Association (November 13-17, 2020) as well as Phase II data from IONIS-AGT-LRx in hypertension and IONIS-GHR-LRx in acromegaly. We are intrigued by the sub-q and oral data from the LICA platform as positive POC data would be a significant read through for the whole pipeline.
IONS is a BUY under 75 with a TARGET PRICE of 90 Vita Nelson, directinvesting.com, 914-925-0022, January 2, 2020.
John McCamant, The Medical Technology Stock Letter, bioinvest.com, November 5, 2020
Technology 835
Datadog, Inc. (DDOG) | Daily Alert October 27
Some of the best stock performers throughout history have been what are known as “follow-on” opportunities—companies that thrive as a secondary effect of some major change going on in the world. A classic example was hotels; when flying became commonplace decades ago for both leisure and business, there was a need for places to stay. Voila! Hotels began to be built up all over the place, launching some of the biggest, well-known chains that are still around to this day.
It’s a similar (but more complicated) story with Datadog. The catalyst was cloud computing; as companies have moved to the cloud, it’s allowed them to build all sorts of custom apps for their operations. That’s been a great thing, but it’s presented a new challenge: how to monitor all of them, not only to make sure that they’re working as designed but also whether they’re working with each other. More important still, tracing specific events that could hinder performance and gaining general insight on how the apps are being used (and hence, how they could be improved).
Broadly speaking, this sector is known as infrastructure monitoring and application performance management, and Datadog has one of the top platforms to address these issues. And the market is huge and growing—basically, every piece of cloud infrastructure has to be constantly monitored, so as firms get rid of on-premise setups, demand for Datadog’s offerings only increases.
Of course, unless you’re a tech aficionado, the details of the company’s platform can give you the proverbial ice cream headache. Some of the things it can provide include auto-generated service overviews of app performance, graphical error rates, and latency reports, automatically collected logs from a variety of sources, alerts on any performance issues (including testing user journeys and experiences online), visual reports on load times and frontend errors, traffic flow monitoring, new code problem detection and a variety of real-time interactive dashboards.
As investors, what counts more than the nitty-gritty is that the solution is (a) regarded as best-in-class, especially for infrastructure monitoring, and (b) is very well rounded, offering clients more of a one-stop shopping destination, which is becoming more attractive as clients are moving huge amounts of technology to the cloud.
Sure to help the cause is a recent partnership with Microsoft; Datadog’s services are now available as a so-called first-class service on that firm’s Azure cloud platform, basically making it easy for all of Azure’s customers to use Datadog. It’s likely to attract many new customers, and it’s also a perception-changer, as it’s the first third-party vendor to be integrated into one of the huge public cloud providers.
Not that Datadog was thirsty for growth—revenues had been booming for many quarters (even the slowdown in Q2 saw 68% revenue growth), earnings are in the black (six cents and five cents per share in the past two quarters) and the sub-metrics have been very impressive. In fact, Datadog has now had a same-customer growth rate above 30% for 12 straight quarters (!) as clients expand their usage, mainly due to the company continually expanding its offerings (68% of clients are now using at least two products vs. just 40% a year ago).
Analysts see growth slowing some going forward (revenues up “only” 35% in 2021), though we tend to think that will prove very conservative, especially as the pandemic drives everything online and the Microsoft deal helps attract new customers. The firm’s next quarterly report is likely out in early November.
As for the stock, it exploded out of a base in early May and basically doubled in just a few weeks. The 11-week rest that followed was normal given that advance, and the Azure deal prompted a massive-volume breakout near the end of September. We think DDOG is a decent buy around here. BUY.
Timothy Lutts, Cabot Stock of the Week, 978-745-5532, cabotwealth.com, October 19, 2020
Fortinet, Inc. (FTNT) | Daily Alert October 28
California-based cybersecurity leader Fortinet has distinguished itself by targeting software-defined wide area networks, or SD-WANs, an emerging computer networking technology. With SD-WAN, companies have less need for costly private data networks leased from telecom companies. But with the savings from SD-WAN comes an increased security risk from data going over the public internet.
Fortinet’s leading SD-WAN product was the fastest-growing in the industry during the first quarter. That was due to the company’s FortiGate 4400F firewall product, which contains Fortinet’s custom-designed NP7 network processor, offering a 13x speed boost over basic CPUs that power rival firewalls.
The pandemic has accelerated cybercrime attacks, with more employees working at home, making companies more vulnerable to various kinds of cybercrime. The cybersecurity market topped $156.5 billion last year across hardware, software, and services, and is expected to grow at a 10% annual rate through 2027.
Cloud stocks have been a bit of a bright spot during the pandemic, as organizations migrate away from old IT operating models. The advent of the cloud and this year’s remote-work boom it supports has ramped up the need for cybersecurity. Legacy firm Fortinet has developed its next-gen services in-house, while managing to stay in growth and profit mode. It’s still growing faster organically than the industry average, which means a growing market share, while maintaining disciplined spending. FTNT had $1.53 billion in cash and equivalents on hand at the end of June, plus another $100 million in liquid long-term investments and zero debt. Smaller peers seem to be feeling more of an effect from the rapid change and disruption in this industry.
In the most recent quarter, earnings per share and sales grew 41% and 18%, respectively, vs. the year-ago period. Both numbers topped estimates, and the company’s guidance also came in above expectations. Adjusted earnings came in at 82 cents a share, while sales increased to $615.5 million. It was at least the fourth quarter in a row of double-digit growth for both earnings and revenue. The next quarterly results are expected on or around October 31. FTNT has a market cap of about $20 billion.
The other emerging factor that will play into growth for FTNT is the market for fifth-generation mobile networks, which is already huge and expected to grow from $5.5 billion this year to $668 billion in 2026. The massive growth forecast is because 5G will radically change global communications, by advancing everything from the internet of things (IOT) to self-driving cars. Cloud computing, big data, artificial intelligence, virtual reality and IOT will surge forward in the coming years with 5G networks.
Cybersecurity is a big part of 5G mobile networks. It is crucial to keep the enormous volume of data and information safe, so 5G networks will require built-in, end-to-end security. The 5G security market will be worth $4 billion in 2023—and keep growing exponentially from there.
The company reduced shares outstanding by 5.356% in the last 12 months.
David R. Fried, The Buyback Letter, www.buybackletter.com, 888-289-2225, October 20, 2020
HubSpot, Inc (HUBS) | Daily Alert October 29
HubSpot is an early-stage CRM software company focusing on small and medium-sized enterprises that have traditionally been ignored by larger CRM providers. We expect HubSpot to grow by increasing its market penetration, upselling and cross-selling current customers with new products, and expanding upmarket into the enterprise segment. The company is also growing internationally and expanding its partner ecosystem, which includes systems integrators and third-party application providers.
The company’s platform is a multitenant, extensible, single-code-based software-as-a-service delivered through a web browser or mobile application. Management expects to drive growth by increasing market penetration, expanding product offerings (i.e., deploying new hubs), increasing value and customer wallet share, and driving upmarket growth into the medium and large enterprise segments. The company has focused on providing faster ‘time to value’ for clients and simplifying the use of its products through interoperability and application integration.
HubSpot employs a ‘freemium’ business model with a free basic CRM service aimed at small and medium-sized enterprise customers. One-third of revenue comes from businesses with fewer than 25 employees. HubSpot’s hubs feature an integrated suite of software products that mirror the sales, marketing, and customer service functions of typical businesses, and have three premium levels of service: Starter, Professional, and Enterprise. The company added a fourth hub, called Content Management System or CMS, in April 2020.
CMS enables clients to rapidly create and revise web content, personalize a website for different customers, and optimize websites for greater customer sales conversion. CMS comes in just two tiers: Professional and Enterprise. The functionality, service, number of seats, and price all increase as clients move to higher tiers, with HubSpot essentially growing along with the client. While the company’s hubs are designed to work together, they can also be licensed on a stand-alone basis.
The company sees its current addressable market as the 3 million small and medium-sized businesses in the U.S. and Europe.
While we do not wish to play M&A roulette, we note that HubSpot has exactly the kind of technology and client base that could make it an attractive target for a larger competitor.
We are establishing a 2020 non-GAAP EPS estimate of $0.95 and a 2021 forecast of $1.39. Our 2020 estimate is within management’s upwardly revised guidance range of $0.92-$0.96 but above the consensus estimate of $0.94. Our estimates imply a 24% decline in EPS in the COVID-19-impacted 2020 and a 45% rebound in 2021.
The trailing EV/sales multiple of 18 is above the high end of the five-year historical average range of 7.8-11.1. On a forward basis, HubSpot’s EV/revenue multiple of 14.3 is 60% above the peer average, well above the historical average premium of 33%. We are initiating coverage of HubSpot with a BUY rating and a target price of $350.
Jim Kelleher, CFA, Argus Weekly Staff Report, argusresearch.com, 212-425-7500, October 22, 2020
JD.com, Inc. (JD) | Daily Alert October 30
JD.com, Inc., the Beijing e-commerce company that is considered by many to be the next “Amazon of China,” is now profitable. Moody’s just upgraded JD’s rating to Baa1.
Alibaba is better known in the West, but in my judgment, JD.com has a better model for its “everything store” in China, as it sells a wider range of products, from home appliances to cellphones. It has fulfillment centers in seven cities and more than 700 warehouses in 89 cities. JD.com also has a more advanced logistics network and is launching next-generation delivery solutions such as drones and autonomous delivery vehicles.
In its most recent quarter, JD.com’s earnings jumped 56%. The number of customers grew by 30%, and revenues soared 34%, faster than e-commerce in general. Profit margins are thin but growing, and should exceed 5% later this year. The stock is selling for 30 times earnings. I expected JD.com to beat Street expectations when it reported this month. It has already beaten Street expectations four quarters in a row.
Mark Skousen, Forecasts & Strategies, markskousen.com, Eagle Financial, 300 New Jersey Ave. NW, Suite 500, Washington, D.C. 20001, October 23, 2020
Intel Corporation (INTC) | Daily Alert November 17
Shares of Intel are down 17% since the Santa Clara, California, company reported earnings on October 22. Although sales and profits topped estimates, results showed weakness in the data center segment. Valuations already reflect a slowdown, with the stock trading at 9.6 times expected next 12 months of earnings, 22% below Intel’s five-year average forward P/E of 12.6. The stock also trades 28% below its five-year average price-to-sales ratio. The boss is betting that the stock is cheap. CEO Bob Swan scooped up 8,000 shares of Intel on Wednesday at $44.96 apiece. In addition, even in an industry with significant capital spending requirements, Intel over the past year has generated free cash flow of $4.73 per share, well in excess of $1.32 in annual dividends. You don’t have long to wait for the next one. The ex-dividend date is this Thursday, November 5, for a $0.33 per share payout.
John Dobosz, Forbes Dividend Investor, newsletters.forbes.com, 212-367-3388, October 31, 2020
*Roku, Inc. (ROKU)
Streaming device maker Roku reported better-than-expected third-quarter earnings, and revenue that is up 73.1% from a year ago. As a result, the security earned no fewer than 11 price-target hikes this morning, including a huge one from D.A. Davidson to $300 from $190. The analyst in question sees significant growth opportunities for the company, citing the addition of The Roku Channel to Amazon’s (AMZN) Fire TV platform as a major milestone.
The 12-month consensus target price of $216.21 is a hefty 14% discount to current levels.
Shorts are already hitting the exits, though there is still plenty of pessimism to be unwound. Short interest is down 13.4% in the last two reporting periods, but the 6.35 million shares sold short still account for 7.8% of the stock’s available float.
An unwinding of pessimism in the options pits could also push the security higher. This is per ROKU’s Schaeffer’s put/call open interest ratio (SOIR) of 1.26, which sits higher than all readings from the past year. This suggests short-term option traders have rarely been more put-biased.
Bernie Schaeffer, Schaeffer’s Investment Research, SchaeffersResearch.com, 800-327-8833, November 6, 2020
Low-Priced Stocks 835
*JanOne Inc. (JAN)
JanOne is an interesting micro cap that should be considered as a dependable trading vehicle or a long term emerging biotech company.
The company acquired the worldwide right to JAN101, a twice-daily orally dosed slow-released formulation of the FDA-approved therapeutic sodium nitrite. Results from Phase 2a clinical trials support the use of sodium nitrite for the treatment and prevention of Peripheral Artery disease (PAD), and as a non-addictive treatment for Diabetic Neuropathy. There are also possibilities of using sodium nitrate for treating respiratory ailments due to COVID19.
Another division is its recycling household appliances and energy efficiency programs. This business could be sold at any point in time and bring in millions of dollars because of monetization which, would make our share price explode.
Geotraq is the company’s third division that is developing self-contained, fully integrated, Mobile loT modules that operate in a deep sleep mode 99% of the time and waken only for scheduled or trigger-based events. The divestiture or monetization of this division could also bring in a cash horde and create a huge share appreciation.
Revenue for the 6 months ending June 27,2020 ~ $12 million and $4.7 million in losses. Of course, the company shut down because of Covid~so numbers are skewed.
Looking at the chart, the stock has many short “pops” that can easily be taken advantage of. You just need to be in the stock prior to the move and in our opinion the current price range offers investors the perfect entry point for either a trade or a longer term outlook for share ownership.
Every few months like a volcano the JAN eruption happens and the profit dollars flow!
William Velmer, S.A. Advisory, saadvisory.com, 949-922-9986, October 30 2020
Preferred Stocks & REITs 835
First Midwest Bancorp, Inc. (FMBIO) | Daily Alert November 12
First Midwest Bancorp, Inc.; 7.00% Fixed Rate, Non-Cumulative Perpetual; Par $25.00; Annual Cash Dividend $1.75; Current Indicated Yield 6.26%; Call Date 08/20/25 at $25.00; Yield to Call 4.28%; Pay Cycle 2m; Ratings, Moody’s Ba1, S&P BB-; CUSIP 320867500;
First Midwest Bancorp, Inc. (FMBI) is small regional banking institution based in Chicago, with financial operations in Illinois, Wisconsin, Indiana, and Iowa, although the banking company remains concentrated in the greater metropolitan Chicago market.
FMBI had $20.0 billion in total assets and $15.7 billion in total deposits as of June 30, 2020. The company’s commercial banking operations include middle market lending, business banking, real estate lending, specialty finance, and equipment leasing. The consumer business is dedicated to the retail, small business owner, mortgage product, and eCommerce business lines. FMBI also has full-service wealth management capabilities, including private banking and investment management.
This preferred is callable at par on the initial 08/20/25 call date or any dividend payment date thereafter. Third quarter 2020 net income of $23.4 million or $0.21 per share missed analysts’ estimates by $0.02; revenue also missed the mark. Like most banking companies, FMBI’s operating results were negatively affected by the COVID-19 pandemic. FMBI took considerably higher provisions for loan losses while also taking measures to address balance sheet optimization.
Dividends from this issue are taxed at the 15%-20% rate. This investment is suitable for medium- to high-risk taxable portfolios. Buy up to $28.15 for a 6.22% current yield and a 4.12% yield to call.
Martin Fridson, CFA, Income Securities Investor, isinewsletter.com, 800-472-2680, November 2020
Innovative Industrial Properties, Inc. (IIPR) | Daily Alert November 18
Innovative Industrial Properties (Rated “B”) is a unique real estate investment trust, or REIT, that owns and leases back industrial and greenhouse buildings to legal and state-licensed growers of medical-grade cannabis.
As of October, it owned 63 properties in 16 states, with roughly 5 million square feet of rentable space already available or under development. The average lease was for more than 16 years, and roughly 99% of its space was rented.
In the second quarter, adjusted funds from operations (AFFO, a REIT industry benchmark similar to earnings for traditional corporations) jumped to $21 million, or $1.19 per share. That was a 263% surge from year-ago levels. Revenue soared 183% to $24.3 million. A couple tenants had an issue with rent payments for a short period of time this spring, thanks to the COVID-19 pandemic. But those issues don’t appear to be lingering into the fall. IIPR has also continued to announce new property acquisitions and fundraisings—transactions that lay the groundwork for future sales and earnings growth.
What about income? Well, IIPR recently declared a third quarter dividend of $1.17 per share. That was up 10% from the second quarter and a hefty 50% from year-ago levels.
Meanwhile, Innovative Industrial has earned a “Buy” Weiss Rating for most of the last eight months. And, in the wake of this month’s voting results, it started breaking out of a consolidation pattern dating back to August. Bottom line? Innovative Industrial looks like a solid Dynamic Income Portfolio play. I recommend you buy a 2.5% IIPR position at the market.
Mike Larson, Safe Money Report, 1-877-934-7778, www.weissratings.com, November 2020
High Yield 835
Unum Group (UNM) | Daily Alert October 21
Unum Group is an insurance holding company that can trace its roots back to 1848. The company operates through its Unum US, Unum UK, Unum Poland, and Colonial Life businesses; with these segments providing disability, life, accident, critical illness, dental and vision benefits. The company’s customers are primarily businesses providing benefits to employees.
Unum should generate revenue of about $12 billion in 2020 and has a $3.9 billion market capitalization. Unum reported second-quarter earnings on July 28th, with results coming in stronger than expected on the top and bottom lines. Revenue was up fractionally year-over-year to just over $3 billion. Premium income was 1.1% higher, but this gain was offset by a similarly sized decline in net investment income. Net income came to $250 million on an adjusted basis, or $1.23 per share versus $1.36 in the same quarter last year. Book value ended the quarter at $51.90, up from $45.11 at the same point last year.
Unum suspended its guidance and share repurchase program due to the impact of COVID-19. We now see adjusted earnings-per-share at $5.00 for 2020, which would represent a ~9% decline from last year. The company’s domestic segment is holding up relatively well during the current downturn, but its international business is suffering, posting a halving of operating income in the second quarter.
Competitive advantages are difficult to achieve in the financial services industry as customers are often motivated by price, and switching costs are low. That said, Unum has a solid position in its industry with a long track record of reliable service and establishing deep relationships with customers. We expect Unum to only see moderate declines during the current economic decline.
Over the past decade, Unum grew its earnings-per-share by approximately 8% per year on average. Results were helped by rising premium income, as well as aggressive share repurchases, which retired 5% of the share count each year. The company suspending its share repurchases will be a headwind for future earnings-per-share growth. However, we believe Unum can continue to grow through reasonable improvement in premium and investment income, along with expense management.
We expect Unum to generate adjusted earnings-per-share of $5.00 for 2020. Based on this, the stock has a price-to-earnings ratio (P/E) of just 3.8. During the past decade shares of Unum have traded with an average P/E multiple of 8 to 9. Our fair value estimate is a P/E ratio of 6.0, which implies the potential for a 9.7% tailwind to annual returns over the next five years. In addition, shareholder returns will be driven by expected earnings growth of 2% per year, and the 6.0% dividend yield. Overall, we expect total annual returns of 17.7% per year over the next five years for Unum stock.
Ben Reynolds, Bob Ciura, Josh Arnold, and Samuel Smith, Sure Retirement Newsletter, www.suredividend.com, ben@suredividend.com, October 14, 2020
Bank of Montreal (BMO, BMO.TO) | Daily Alert October 23
The rates we’re seeing right now will probably be the new normal for the next several years, even if inflation moves higher. That means five-year rates in the 2% range at smaller institutions and 1% or less at most of the big banks.
Dividend-paying issues have tended to underperform in recent months, but high-quality companies have maintained their payouts and, in some cases, even raised them.
I suggest it is time to reconsider the traditional 60-40 stocks/bonds split and move a higher percentage of assets into low-risk, dividend-paying stocks. Let me be clear about the meaning of low risk: I’m suggesting securities that may (and probably will) fluctuate in market value in the coming years but will maintain or increase their dividends/distributions. As an income investor, that should be your main focus. Don’t fret if the price of a stock temporarily goes down. The time to worry is if a company you own cuts its dividend.
The pandemic is squeezing banks in two ways. They are having to raise loan loss provisions to protect against customer defaults, which is cutting into earnings. Plus, the low interest rate environment is squeezing profit margins. It’s going to take some time for them to recover and investors have responded by dumping shares and driving down share prices. However, the sell-off has been overdone, as Bank of America analyst Ebrahim Poonawala said last week in a research report. He raised his rating on two Canadian banks, including Bank of Montreal, which has been on our Recommended List since 2015. The shares pay a quarterly dividend of $1.06 ($4.24 per year).
Gordon Pape, Income Investor, buildingwealth.ca, 1-888-287-8229, October 15, 2020
Terminix Global Holdings, Inc. (TMX) | Daily Alert November 6
Terminix Global Holdings is both a new company and an old company. While the name “Terminix” is one of the largest and most widely recognized names in pest control, the company previously was obscured inside of the ServiceMaster conglomerate. With the sale of its ServiceMaster Brands operations recently completed, the company changed its name to Terminix and started trading under the TMX ticker symbol on October 5th.
Terminix shares fell sharply last year due to new disclosures about its legal liability from deficient termite treatments. These liabilities will likely cost the company upwards of $100 million or more.
In early 2020, the company fully addressed its problems by removing the CEO, announcing plans to divest its non-pest control operations, and ring-fencing the termite treatment liabilities. These steps should allow the company to put its difficult past behind it. In August, Brett Ponton, former head of Monro (MNRO) joined as the new CEO. His leadership at Monro led to sales growth and a strong recovery in its share price. Our expectation is that he will bring sales growth, operational efficiency and integrity to Terminix, ultimately leading to a higher share price.
There was little news on Terminix in the past week. Terminix shares were unchanged in the past week and have 20% remaining upside to our 57 price target.
Reliable consensus earnings estimates are not yet available, but we anticipate that 2022 estimates will settle at around $1.60/share. This would put the TMX multiple at a high 29.7x, but we recognize that these types of companies generally are valued on EV/EBITDA. On this basis, the shares trade at about 16.5x EBITDA.
Major risks include the possibility of new disclosures that would significantly increase the company’s litigation expenses, difficult industry competition that may exert pricing pressure, and possible execution risks by the new leadership. TMX shares carry more risk than our typical recommendations, but if its litigation and sub-par margins are behind them, we see a clear path to a higher stock price.
With a reasonable valuation, solid balance sheet, renewed focus and better revenue and margin outlook, there is a lot to like about Terminix. BUY.
Bruce Kaser, Cabot Undervalued Stocks Advisor, cabotwealth.com, 978-745-5532, October 28, 2020
International Business Machines Corporation (IBM) | Daily Alert November 10
International Business Machines announced lackluster earnings in October which caused a dip in the stock price. However, the company also announced that it will be spinning off its managed infrastructure service business into a new company, called “NewCo”. This spinoff should prove to be a positive event for IBM over the longer term because getting rid of this legacy business will enable management to focus on its growing hybrid cloud business, spawned by the 2019 purchase of Red Hat.
IBM has been showing strong growth from its Cloud and Cognitive Software segment, offering technology consulting services to customers modernizing legacy cloud services to work on scalable public platforms, including IBM Cloud, Amazon AWS, Microsoft Azure, Google Cloud, and even Alibaba.
Management will also be better able to focus and promote its artificial intelligence (AI) platform, corner-stoned by its super-computer it calls “Watson”, which can “think” like a human.
The hybrid cloud market is expected to grow by at least 20% annually for the foreseeable future. Renewed growth prospects from IBM’s core sectors are enhanced by the spin-off, which should bode well over the longer term from today’s depressed price of the stock. The financial strength of the company makes the per share $6.52 dividend solid.
The spinoff won’t materialize until mid-to-late 2021. We will advise whether or not to sell your shares of NewCo when the time comes.
Gray Cardiff, Sound Advice, soundadvice-newsletter.com, 800-825-7007, October 30, 2020
*Verizon Communications Inc. (VZ)
Verizon Communications (VZ – 4.2%) – This stock has also been tough to figure of late. It is a good pandemic stock as people locked up at home rely on cellular service more than ever. It isn’t very cyclical and has a beta of just 0.39. But it was up almost 3% on the vaccine rally yesterday, a big move for this stock. And it’s not far from the 52-week high. My guess is that the stock rally is about 5G. On the other side of this pandemic, the 5G story will likely take center stage and VZ will benefit. The normally stodgy income stock should get a growth catalyst from the new technology as it will create more demand for cellular service and Verizon has built out the most comprehensive infrastructure for it. We may see the 5G part of the story come to fruition in future quarters. BUY.
Tom Hutchinson, Cabot Dividend Investor, cabotwealth.com, 978-745-5532, November 11, 2020
Short-Sale 835
Short: Acuity Brands, Inc. (AYI) | Daily Alert November 4
52wk H. $143.55 52wk L. 67.46
Mkt Cap: $3.75B, EPS: 6.27, P/E: 15.10 Beta: 1.40
The provider of lighting control building management solution for commercial/industrials/institutional. Pressured by pandemic Covid-19. Causative of its share falling by 10% on its F/Y Q-4 earnings report, despite a beat on revenue and profit. Erratic technical picture where managed to exit death cross. Its brief stay in golden cross was manifested with sharp plunge (115-101) with deteriorating pattern (101-97) to (96-94) to continue. Volatile.
SHORT RANGE: 85-100
COVER SHORT: 69
STOP LOSS: 115
Joseph Parnes, Shortex Market Letter, shortex.com, 800-877-6555, October 28, 2020
Funds & ETFs 835
Liberty All-Star Growth Fund, Inc. (ASG) | Daily Alert October 15
The market’s fall pullback is starting to reverse itself, but don’t worry; there are still bargain dividend payers with high yields to be had out there.
But investing (along with everything in our lives!) has changed. You simply won’t get safe, high payouts by clutching to old habits and buying big-name, high-yielding S&P 500 stocks. The real dividend bargains are in closed-end funds (CEFs), which give you higher payouts, greater safety, and often better returns over the long haul.
The Liberty All-Star Growth Fund is full of companies that have beaten dividend darling AT&T (T) over the long haul—like Amazon.com (AMZN), Microsoft (MSFT) and Alphabet (GOOG).
Source: Liberty All-Star Growth Fund June 30, 2020, quarterly update
Plus, ASG gives you much more diversification than buying a single telecom stock: the fund boasts 121 holdings spread over a range of sectors.
ASG’s timely stock selection has helped it dominate over the last 10 years, returning 329% to the S&P 500’s 256% and AT&T’s 72%.
Brett Owens, Contrarian Outlook, BNK Invest Inc., 500 North Broadway, Suite 265, Jericho, NY 11753 USA, 516-620-4294, October 8, 2020
First Trust NASDAQ ABA Community Bank Index Fund (QABA) | Daily Alert October 26
We’ve all have been affected by the coronavirus pandemic. The major disruptions to our social lives naturally mean that our spending habits have drastically changed.
Bank of America Corp. (BAC, Rated “C”) knows a thing or two about credit card spending patterns, and according to a recent study, Americans are spending a lot more money on things like pets, education, and their homes. For example, spending on pets is up 23% over the last year to an average of $200 per month.
On the opposite end, Americans are cutting back in a big way on things like travel and entertainment, which are down 21% and 22%, respectively.
Millions of Americans are out of work and struggling, but for the fortunate ones that are still working, we’re simply shuffling our budget from one area to another. Instead of buying airplane tickets and hotel rooms, we are remodeling and furnishing our homes. Instead of eating at restaurants, we are cooking at home and funneling the savings into investments.
Americans are spending less and saving more. 53% of Americans are saving more money than usual and 51% say they will continue to save more regardless of what happens with coronavirus.
As an investor, you should be asking yourself where all those savings dollars are going: Big national banks like Bank of America Corp. and JPMorgan Chase & Co. (JMP, Rated “C”)? Or smaller regional banks? What about credit unions?
The answer is probably all three, and there are a handful of ETFs that will help you profit from the savings wave.
Megabanks have a sizable cost advantage over smaller banks. The average community bank has less than $5 million in assets per employee, while big banks can have $20 million in assets per employee. But bigger isn’t always better. That size can work against big banks because the rise in savings will only have a modest impact compared to how it can affect the profits of smaller regional or local banks.
The best banking ETF for exposure to smaller banks is the First Trust NASDAQ ABA Community Bank Index Fund (Rated “D”). Its portfolio of community banks trades for an average of 11 times earnings, 94% of book value and pays a 3%+ dividend.
Tony Sagami, Weiss Ratings, 1-877-934-7778, weissratings.com, October 17, 2020
InfraCap MLP ETF (AMZA) | Daily Alert November 5
InfraCap MLP ETF launched in October 2014, so the timing could not have been worse. The investment strategy for AMZA was to boost returns over the Alerian MLP Infrastructure Index (AMZI) by actively managing the AMZI components for investment potential.
The fund also used up to 30% leverage and sold call options to boost income. In a level to rising market, the AMZA strategy would have produced significant over-performance compared to the AMZI. In the declining MLP market from IPO until late 2019, AMZA underperformed. But if from December 2019 into January 2020, AMZA performed strongly in an upmarket.
When the pandemic hit, management was early to eliminate the leverage in AMZA. The deleveraging produced losses but kept the fund from complete liquidation. Several leveraged MLP closed-end funds went to zero value during the crash.
To stay eligible for stock exchange listing, AMZA did a ten-for-one reverse stock split. The dividend was reduced to a sustainable level, following the changes triggered by the crash. Which leads us to the present.
Currently, AMZA covers its dividend rate with distributions earned by its portfolio. The fund owns the largest, most stable MLPs tracked by the AMZI. From now on, the AMZA share price should more closely track the AMZI sector.
My thoughts and expectations are as follows: The midstream sector is stable financially and will grow nicely as we move out of the pandemic era. Companies are committed to supporting distributions, and growth plans are conservative. The current high-teens yield closely matches the yields on large MLPs. At some point, the investing public will be attracted to earning 15% to 20% and start again to buy into the midstream sector.
I don’t see any reason why the sector and the AMZA share price can’t double or more from here. Possibly a lot more. To drive average MLP yields to 6% requires a tripling of market values. Hopefully, I, along with everyone in the MLP space, have learned from the past half-decade of pain. Energy midstream provides essential services to the overall economy.
Tim Plaehn, The Dividend Hunter, yn345.isrefer.com/go/cabmdpc/cab/, November 2020
*ETFMG Alternative Harvest ETF (MJ)
“MJ” stocks have caught fire post-election.
This beaten-up ETF has reversed course now and closed last week above its 50 dma. Like the two above (and lots of other stuff, for that matter) it will open higher this morning.
But with this new industry’s second big investment wave seemingly unfolding, I think MJ has a great future.
MJ is started as a BUY; Growth investors should put 4% of your portfolio here and more Conservative accounts 3%.
Chris Temple, The National Investor, nationalinvestor.com, 224-308-2587, November 9, 2020
Updates 835
SELL ManTech International Corporation (MANT) | Daily Alert November 3
Updated from WSBI 828, April 16, 2020
ManTech International was removed from coverage because of its mixed Quadrix® scores and sluggish stock price action. A provider of technology solutions that generates nearly all of its revenue from the U.S. government, ManTech boasts a large backlog. But it is not among our favorite technology stocks, and we would not buy it today.
Richard J. Moroney, CFA, Upside, www.upsidestocks.com, 800-233-5922, November 2020
SELL Hanesbrands Inc. (HBI) | Daily Alert November 17
Updated from WSBI 831, July 16, 2020
We only had one stock that did not move higher this week—Hanesbrands—which tumbled after the underwear maker and owner of the Champion athletic brand posted disappointing quarterly results. Management announced a comprehensive strategic review of the business. The stock is being removed from the FDI portfolio. Even if you sell the stock, you have already earned a $0.15 per share dividend that will be paid on December 1.
John Dobosz, Forbes Dividend Investor, newsletters.forbes.com, 212-367-3388, November 7, 2020
*SELL Riviera Resources, Inc. (RVRA)
Updated from WSBI 822, August 16, 2019
Riviera Resources just announced that it expects to have between $0MM and $30MM ($15MM at the midpoint) available to distribute at some point in 2021. This is down from its previous range of $0MM to $40MM. It appears that winddown costs will be quite expensive. At the midpoint, a $15MM distribution works out to a $0.26 per shares potential distribution. I recommend selling Riviera shares.
Richard Howe, CFA, The Stock Spin-off Investing Newsletter, stockspinoffinvesting.com, 617-750-7454, November 11, 2020
*HOLD TD Ameritrade Holding Corporation (AMTD), will become The Charles Schwab Corporation (SCHW)
Updated from WSBI 791, March 15, 2017
The Charles Schwab Corporation completed its acquisition of AMTD on 10/6/20. The integration of the two entities is expected to occur over the next 18-36 months. Until then, both companies will continue to operate separate broker-dealers to serve clients. Early on, it looks like the combination will create a company with enhanced scale and a better portfolio of world-class services and solutions. Welcome to our portfolio SCHW.
Sean Christian, The Personal Capitalist, 9524 East 81st Street, Suite B #1715, Tulsa, OK 74133, October 15, 2020
Investment Index 835
