March 1, 2022

Welcome to the roller coaster marketplace! As if COVID, rising inflation, and increasing interest rates weren’t enough to spook the markets, Putin’s invasion of Ukraine finished the job. It’s been a rollicking ride, but yesterday’s recovery and today’s momentum up are great signals.

Face it, many sectors have been beaten down since the first of the year, but today, they are all in recovery mode.

Across the board, the economy continues to strengthen, and consumer confidence is holding up well. Retail sales and housing prices continue to climb; housing starts and building permits are strong; and unemployment is healthy.

That means that earnings should continue to rise, and generally, that means that stocks will also.

To take advantage of the bull market in energy, this month, I’m adding an energy company that doesn’t actually produce energy. It’s a royalty and mineral company, making money from leasing its acreage out to producers.

I look forward to hearing from you, so please keep your emails coming.

Happy Investing!

State of the Markets

The broad market averages--The Dow Jones Industrial Average, the S&P 500, and the Nasdaq, have been extremely volatile in the past month, experiencing some sizeable declines, but have made a nice recovery in the past few days.

The VIX, or CBOE Volatility Index, seems to have settled down a bit, but the volatility has left a variety of sectors and stocks in an oversold status.

Dow Jones Industrial Average

S&P 500

Nasdaq Composite Index

Feature Recommendation

This month’s Featured Recommendation is an energy company that has been exploring and producing since 1876. Houston-based Black Stone Minerals is a limited partnership that owns and manages oil and natural gas mineral interests. The partnership owns mineral interests in approximately 16.8 million gross acres, non-participating royalty interests in 1.8 million gross acres, and overriding royalty interests in 1.7 million gross acres. The company is geographically diversified with locations in 41 states in the United States.

Source: Company Investor Presentation

Black Stone is the largest pure-play (meaning it concentrates on just one area of interest) oil and gas mineral and royalty owner in the United States. Its holdings are primarily concentrated in the Permian (west Texas, southeastern New Mexico), Haynesville (western Louisiana, and east Texas), and Bakken (Montana, North Dakota, South Dakota, Saskatchewan and Manitoba) regions.

As you can see from the following table, the company’s geographical regions produce some of the most volumes of natural gas and oil in the U.S.

Source: https://www.eia.gov/petroleum/drilling/

In 1998, Black Stone shifted its focus away from the exploration and production business to the mineral and royalty business and began strategically acquiring acreage. In 2017, Black Stone made its largest purchase to date–mineral and royalty assets from Noble Energy for $335 million. The company leases its acreage to partners who are responsible for production.

Today, the company has more than 20 million gross acres of opportunity with no incremental capital requirements or operating costs. Its assets:

• Directly benefit from technology advances to enhance recovery and well economics
• Represent a perpetual call option on future oil & gas development activity
• And scale facilitate opportunities to partner with operators to initiate or accelerate drilling.

In the past few years, Black Stone has reduced debt by about $273 million, decreased G&A costs from ~$65 million in 2019 to ~$43 million, sold two assets for ~$150 million, and reduced distributions and increased the coverage ratio to divert retained cash to debt repayment. Outstanding debt at the end of Q4 2021 was at $89 million.

In the fourth quarter, Black Stone mineral and royalty production equaled 35.2 MBoe/d (thousands of barrels of oil equivalent per day), an increase of 7% over the prior quarter; total production, including working interest volumes, was 39.1 MBoe/d for the quarter.

Net income and adjusted EBITDA came in at $134.2 million and $77.6 million, respectively. Cash distribution per unit of the partnership was $0.27. For the quarter, EPS was $0.60, a huge surprise, as analysts had expected just $0.19.

For the full year, 2021, the company’s net income and adjusted EBITDA were $182.0 million and $292.5 million, respectively. And for the year, investors received $0.555 in cash distributions, an increase of 70%.

In recent news, investment company O’Brien Greene & Co., Inc. added positions in Black Stone’s shares, and four analysts have raised their earnings forecasts for the company in the last 30 days. Right now, Black Stone is expected to grow earnings at a rate of 11.2% next year.

With oil and natural gas prices continuing to rise (and going even higher with this Russia-Ukraine war), I anticipate we’ll continue to see some nice appreciation in these shares. And with the excellent dividend payout, investors shouldn’t be shy about adding this energy stock to their portfolios.

Top Institutional Holders

Source: Yahoo! Finance

Technical Analysis
The shares of Black Stone have recovered from their December lows and are on a nice upward trace. The 14-day RSI is 55%, and the shares are trading above their 50- and 200-day moving averages–both indicating shares are undervalued.

Volume is low, at an average of just 166,000 shares traded daily, so please make your purchases of the shares judiciously.

Price Target: $17

Stop Loss: $8.25

Sector Round-Up

With first the inflation worries, and now the Russian invasion into Ukraine, most sectors have been beaten down. Energy is the only positive sector so far this year, up 20.9%. The worst three sectors are Consumer Discretionary (down 15.5%), Real Estate (-13.60%), and Communication Services (-13.2%).

Our Feature Stock this month is part of the Energy sector. And it falls into the moderate category.

Flows for 02/21/2022 - 02/25/2022

Source: ETF.com

Portfolio Updates

Conservative Stocks
As a conservative investor, you are less willing to accept market swings and significant changes in the value of your portfolio in the short- or long-term. Capital preservation is your primary goal, and you may plan on using the principal from your investments in the near-term, preferably as a steady income stream. The average level of return you expect to see is 5%-10%, annually.

The Coca-Cola Company (KO)
The Coca-Cola Company had a great fourth quarter, beating on both the top and bottom lines. EPS came in at $0.45, five cents above analysts’ estimates. And revenues were $9,464 million, beating the estimate of $8,922 million. The improved price/mix in the away-from-home venues helped boost both sales and profits.

Merger talks with Constellation Brands (STZ) and Monster Beverage (MNST) are ongoing.

Coke announced a dividend increase, to $0.44, as of April 1, which is the 60th consecutive dividend increase for the company. Coke also announced that it plans to buy back about $500 million worth of its shares this year.

Lastly, the company just reported that it is launching its first limited-time item, Coca-Cola Starlight, on February 21. Starlight is reddish in color and will be available in a zero-sugar format. It is part of the company’s new platform, Coca-Cola Creations, that will focus on limited-time items and experiences.

Continue to Hold.

Sun Life Financial Inc. (SLF)
Sun Life Financial also reported an earnings beat, with EPS of $1.20, a penny better than expected. Net income of $712 million rose 4.2% over the prior year, with insurance sales more than doubling (to $1.3 billion).

Global assets under management rose 15%, to $1.1 trillion.

The company’s Board of Directors announced that a dividend of $0.66 per share on the common shares will be payable March 31, 2022, to shareholders of record at the close of business on March 2, 2022.

The shares are still a Buy.

Mueller Water Products, Inc. (MWA)
In another good earnings report, Mueller Water posted EPS of $0.13, surpassing the estimate of $0.08 per share. The company has posted above-estimate surprises in three of the last four quarters. Revenues of $272.3 million also beat the consensus estimate, by 5.91%.

The company paid a dividend of $0.058 on February 21.

Buy

TC Energy Corporation (TRP)
TC Energy’s EPS of $0.84 met analysts’ expectations. Revenues rose 12.3%, to $2.84 billion.

The company raised its quarterly dividend by 3.4% to 90 Canadian cents per share (or C$3.60 per share annualized). That’s quite a record, the 22nd year of consecutive dividend increases.

Hold for now.

Moderate Stocks
As a moderate investor, you seek longer-term investment gains. You are comfortable with some swings in your portfolio’s performance, but generally seek to invest in more conservative stocks that build wealth over a substantial period of time. The average level of return you expect to see is 10%-25% annually.

TC Energy Corporation (TSX, NYSE: TRP) today announced that the Board of Directors of TC Energy declared a quarterly dividend of $0.90 per common share for the quarter ending Mar. 31, 2022, on the Company’s outstanding common shares. The common share dividend is payable on Apr. 29, 2022 to shareholders of record at the close of business on Mar. 31, 2022.

Kirby Corporation (KEX)
Kirby was our pick last month. The shares endured the market’s volatility for the past few weeks, and are now back to about where we started. No new news to report. Continue to Buy.

National Storage Affiliates Trust (NSA)
In another earnings beat, REIT National Storage posted funds from operations (FFO) of $0.64 per share, beating the estimate of $0.61 per share, and compares very favorably to FFO of $0.46 per share a year ago. Same-store net operating income increased 21.7%, and occupancy was 94.8%, up 310 basis points from December 31, 2020.

The REIT will pay a $0.50 per share dividend on March 31, 2022 to shareholders of record on March 15, 2022. That’s an increase of 43% over first-quarter 2021.

Our shares are up 113%. We’ve sold some of our position before to take profits, so let’s cash in the rest right now. Sell

Spirit Realty Capital, Inc. (SRC)
Spirit Realty also surpassed analysts’ FFO estimate, by a penny. FFO was $0.85 per share, up from $0.74 per share a year ago. Revenues were $156.06 million, beating estimates by 0.16%.

The company declared a dividend of $0.6380 per common share, payable to stockholders of record as of Thursday, March 31, 2022, who will receive the cash dividend on April 14, 2022.

Continue to Buy.

The Toronto-Dominion Bank (TD)
TD Bank Group will release its first-quarter financial results on Thursday, March 3, 2022. The EPS forecast is $2.60 on $8.53 billion in revenues.

Hold

Aggressive Stocks
As an aggressive investor, you primarily seek capital appreciation and are open to more risk. Swings in the market, whether short term or long term, do not impact your investment decisions and you have confidence that volatility is necessary to achieve the high return on investment you are looking for. You typically expect a 25%+ return, annually, though you do not need your principal investment immediately.

Evolent Health, Inc. (EVH)
Evolent reported revenues of $248.4 million, up 0.7% year over year, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $24.3 million. And best of all, annual adjusted earnings per share were $0.02, compared to an adjusted EPS loss of $0.14 in 2020.

During the quarter, the company reported Total Lives on Platform of 20.0 million as of December 31, 2021, composed of 1.6 million Evolent Health Services Lives on Platform and 18.4 million Clinical Solutions Lives on Platform.

Going forward, Evolent announced guidance for 2022 Q1 revenues of $280 million to $295 million. Buy

Entravision Communications Corporation (EVC)
Entravision announced it has partnered with Roku, the #1 TV streaming platform in the U.S., Mexico and Canada, to serve as Roku’s media advertising partner in Mexico. Buy

OneMain Holdings, Inc. (OMF)
OneMain Holdings’s quarterly earnings were $2.38 per share, beating the estimate by seven cents. Revenues were $784 million. Hold

Textainer Group Holdings Limited (TGH)
Textainer also posted results, with EPS of $1.46, compared to the $1.39 estimate. For the fourth quarter of 2021, the company reported lease rental income of $198 million and adjusted EBITDA of $182 million.

During the quarter, the company repurchased 741,163 shares and 2,426,725 shares of common stock at an average price of $35.60 per share and $29.70 per share, respectively. The $0.25 per common share cash dividend is payable on March 15, 2022 to holders of record as of March 4, 2022.

Hold

ETFs & Mutual Funds
This month, our leading ETFs and Funds are SPDR S&P 500 ETF Trust (SPY), up 98%, and Consumer Discretionary Select Sector SPDR Fund (XLY), up 48%. Vanguard Dividend Appreciation Index Fund ETF Shares (VIG) is also performing well, up 49%.

Invesco Aerospace & Defense (PPA) and Invesco S&P Global Water Index (CGW) are still Buys.

We’ll let all our other funds and ETFs ride for now. Hold

Current Portfolio

The More You Know

The A,B,C’s of Understanding Annual Reports
In my investing seminars, I make it a point to ask my audience for a show of hands to find out if they actually read the financial statements sent to them by the companies in which they invest. The answer is, invariably, yes for about 3-5% of the attendees. That is an abysmal percentage, yet completely understandable. Just the thought of reading and comprehending the small print, convoluted charts and the seemingly endless gobbledygook of the legalese contained in the pages of 10-K’s and annual reports can put a glaze over the eyes of even the most avid of investors.

However, the rapidly changing, instant-information, highly competitive age that we live in today necessitates that astute investors gain a thorough understanding of their investments. And financial reports—although historical in nature—are very important barometers for gauging just how well—or poorly—your companies are coping today, as well as good indicators of future performance. Consequently, you should learn to read them for one very good reason: To become a better and more profitable investor.

In the pages of these reports, you will find numerous tidbits that will give you a wealth of information about your company’s most recent, current, and future strategies, actions and results. And armed with that information, you can make much better investing decisions, which will hopefully, translate into increased portfolio returns.

In this article, I hope to convince you of two critical points: The importance of staying on top of the financial health of the companies in which you invest, and how easy it is to do that. Now, you’re surprised, but I promise you, once you get the hang of knowing just where to look and which parts are important, you will be breezing through the thickest of financial reports in less than an hour. So, where do you start?

Very simply, at the beginning—with the 10-K—the summary of a firm’s performance that the Securities and Exchange Commission (SEC) requires every public company to submit 60-90 days after the end of its fiscal year.

The 10-K incorporates the data from that nice, shiny-paged, colorful annual report that most investors receive from the companies in which they hold stock. If your companies don’t mail them to you, you can easily access them—for free—either through the companies’ own websites (generally, in the Investor Relations section) or through the SEC at:

https://www.sec.gov/edgar/search/Before you start your exploration, you need to know that the financial statements for just one year won’t give you a very complete picture of the company’s status. For a thorough review, you really do need to compare at least 2-3 years’ worth of data. So, pull up a 10-K, relax and let’s go investigating.

The easiest way to tackle a seemingly-complex task is to break it down into manageable tasks. Fortunately, the 10-K is already divided into 4 primary sections:

Part I includes Business; Risk Factors; Unresolved Staff Comments; Properties; and Legal Proceedings. This section will provide details on the company’s revenues, marketing plans, major products, competition, and risk factors. If you compare it from year to year, you will be amazed at just how much you can learn about the changes in the firm’s strategies, product lines and where it stands among its competitors and its marketplace.

You will also want to keep a keen eye on the firm’s legal proceedings. In today’s world, it is not unusual for a business to be involved in lawsuits. What you need to know is how much the proceedings could potentially cost or earn them, and if that amount will have a material effect on the company. If a business doesn’t or can’t answer those questions, you may want to reconsider your investment.

Part II includes Market for Registrant’s Common Equity and Related Stockholder Matters; Selected Financial Data; Management’s Discussion and Analysis of Financial Condition and Results of Operation; Quantitative and Qualitative Disclosures about Market Risk; Financial Statements and Supplementary Data; Changes in and disagreements with Accountants on Accounting and Financial Disclosure; Controls and Procedures; and Other Information.

The most important part of this section is management’s discussion of the most recent reporting period, as compared to prior years. Here, the company will give details of the major events affecting its operations, such as divestitures and acquisitions, which, when compared to previous years’ reports, will give you a good sense of the firm’s ongoing growth strategies. Any restatements of financial statements will also be noted here, and you want to make sure that will not create an ongoing problem for the business, nor should it be a regular occurrence.

Next, you get to the heart of the report—the financial performance summary of the company and the events that affected it—good or bad. This will include an analysis of income and expenses, margins, changes in debt, liquidity, capital, leases, taxes, pension plans, accounting changes, related-party transactions, and executive compensation. Here, you will want to watch for out-of-the ordinary changes that may have a major impact on the company’s bottom line. Are expenses, as a percentage of revenues out of line? Are margins steady, and growing? If the company has taken on large quantities of debt, is it funding growth of sales and earnings, or is it just creating more interest payments?

Pay special attention to the pension section to make sure the company is on top of its funding and hasn’t squandered the pension monies of its retirees. If it falls behind, one day it will have to play catch-up. Related-party transactions can also be of importance, to ascertain if a company’s shifting money among subsidiaries is on the up-and-up or suspicious. You may also find out if the firm is making unwarranted and unethical loans to upper management or directors.

Lastly, executive compensation needs to be reasonable. You will have to consult the company’s Proxy statement for complete details, but it’s a worthwhile task. Just ask yourself, is the executives’ pay (including options) in line with the revenues and earnings the company is producing?

Part III includes Directors and Executive Officers of Registrant; Executive Compensation; Security Ownership of Certain Beneficial Owners and Management; Certain Relationships and Related Transactions; and Principal Accountant Fees and Services. Take a good look at your company’s directors and officers. Is there a revolving door at the firm? If so, it could mean tumult in the management suite or board room and may create havoc in the company’s finances. Or has the company’s management been around too long—fat and happy—without the drive and ambition to continue making the company successful?

It is always interesting to see the level of and changes in management and beneficial owners’ shares. Are they buying or selling? How many shares do they have left? Is management putting its money where its mouth is? Beware of companies whose key management members do not invest in its shares.

Next, does the company change auditors frequently? This is a potential red flag and could possibly portend doom and gloom for the financial health of the business. Note that this information may not be complete in Part III; you may be referred to the company’s proxy statement or an exhibit accompanying the 10-K.

Part IV includes Exhibits and Financial Statement Schedules. In this section, you will find detailed financial statements. Please read them and compare them, year over year. Look to see how the individual accounts have changed. On the income statement, pay attention to changes in operating income, including cost of sales, and increases or decreases in selling & administrative and operating expenses, as a percentage of sales. Can the company easily cover its interest expenses? Is income growing because of increased sales, lowered expenses (including taxes), or both?

On the balance sheet, review the changes in inventories, accounts receivables and payables, which will give you a good read of the company’s efficiency. Again, run a keen eye over the firm’s debt levels. Is short-term debt growing too quickly and staying in place too long? Do goodwill and intangibles look reasonable?

The cash flow statement has one primary purpose—to show you where the company received cash and how it spent it. The most important line is Cash Flow from Operations. This is the cash that a company takes in from its day-to-day business. If it is an amusement park, the cash is from ticket, merchandise and food sales. Is this number positive? Is it trending positive from year to year? It’s great if a firm is making money from real estate sales or investments, too, but the bulk of its cash should be derived from the business in which it is in business to do.

Although a company’s 10-K is much more comprehensive than space allows me to review here, I believe these pointers will considerably aid you in your search for good investments.

And I hope that this information will encourage you to become regular readers of your companies’ financial statements. This process will give you greater insight into their current strategies as well as future possibilities. Once you have read a handful of these reports, you will begin to have a much better understanding of what makes a good company good and a bad company bad.