Welcome to Wall Street’s Best Stocks! We are thrilled that you have joined us on this journey to find undervalued growth stocks that offer great upside potential.
In this monthly newsletter, our goal is to add to your knowledge about the markets while helping you make money. We’ll do that by leveraging our combined years of market expertise to uncover stocks in a variety of industries to help you build a diverse portfolio of growing wealth. We’ll tell you how to buy the stocks, giving you both our target price, as well as a stop-loss strategy.
Each month, we’ll also give you our take on the markets and keep you up to date on our stocks, including any important news that may affect our view of the stocks, as well as price and rating changes. And should an event occur that requires immediate notification to you, in between issues, we will send you an email containing all the information you need to know.
In this inaugural issue, you’ll see that we’ve already built a base portfolio, which will be augmented each month with a new stock. Right now, the market has risen so quickly that the stocks in the existing portfolio are too pricey to enter, but keep your eyes glued to your email, in case we see an opportunity to add shares. And, of course, in each monthly issue, we will update those ratings with either Buy, Hold, or Sell.
As for the markets right now, we are very bullish, but cautious. We believe these are markets that require judicious stock-picking, not the dartboard approach, and we will be very diligent in our selections.
The economy is beginning to gain strength, and as more of our population is vaccinated, we should see some great opportunities in industries and sectors that were hit pretty hard by COVID-19.
We are ready to roll, and are looking forward to bringing you some great investment opportunities.
Happy Investing!
Nancy Zambell and Kate Stalter
State of the Markets | WSBS 221
Market Commentary
The year 2021 kicked off with a busy news week. Despite raging COVID-19 cases, an assault on the U.S. capitol, greater Democratic-party presence in Congress (worrying some about higher taxes) and a drop in employment numbers, U.S. markets finished the week at record highs.
In fact, the numbers are startling: The average stock in the Russell 3000 index, which contains large, mid- and small caps, ended the week up 5.24%. As noted in more detail below, the energy sector jumped out of the gate with a strong start, following atrocious performance in 2020.
Industries to watch include those with a focus on clean energy, including electric vehicles. Several U.S.-traded, China-based makers of EVs had a stellar week, joining behemoth Tesla (TSLA) in a broad rally.
Solar energy stocks are also benefiting from renewed optimism among investors. Sunrun (RUN), a San Francisco-based company that installs solar systems to residential customers in 29 states, leapt 39% for the week.
Fourth-quarter earnings season gets under way later this month, and picks up steam in early February. Investors looking to make new buys or hold stocks through earnings should be aware of the potential for sharp up- or downticks based on company results or news.
Dow Jones Industrial Average
S&P 500 
Nasdaq Composite Index
| U.S. Equities - S&P Indexes | ||||
| ETF or ETN | Today | 1 Mths | 1 Yr | YTD |
| Large Cap Growth (SPYG) | ..Q.3 | 2.6 | 32 | 27.1 |
| Mid Cap Growth (MDYG) | ..Q.7 | 5.8 | 17 | 13.7 |
| Small Cap Growth (SLYG) | -1.4 | 9.5 | 13 | 7.7 |
| Large Cap Value (SPYV) | ..Q.9 | 7.1 | -1.3 | -3.8 |
| Mid Cap Value (MOYV) | -1 | 10.9 | -2.6 | -5.1 |
| Small Cap Value (SLYV) | -1.3 | 12.5 | -4.2 | -6.8 |
Source: SeekingAlpha.com
Feature Recommendation | WSBS 221
Our Feature Stock Recommendation, Spirit Realty Capital, Inc. (SRC), is a Real Estate Investment Trust. Before I get into all the reasons why I think this is the right time to buy this REIT, let me talk about REITs in general, as their corporate structure is a bit different from the typical stock that we will discuss in these pages.
REITs were created in 1960 by an act of Congress to allow individual investors to participate in the ownership (and profits) of large-scale, income-producing real estate properties. Like mutual funds, they allow individual investors to “pool” their monies to invest, while sharing the risk of the investments. They are also excellent tools when used to diversify your portfolio as well as to allocate your assets. And, as with mutual funds, they are professionally managed. But REITs have one tremendous selling point not shared by most mutual funds—high dividend yields.
By law, REITs must return at least 90% of their taxable income to their shareholders, annually, which generally translates into very nice yields for the REIT investor, making these investment vehicles very attractive.
But dividends tell just part of the story. According to NAREIT, REIT’s outperformed S&P 500 stocks 56% of the time over the past 20 years. In fact, when REIT returns are measured over 19 years or greater, REITs outperform U.S. stocks every month. REITs underperformed in a ten-year period for March 2020, but outperformed in every period longer than 16 years.
It’s important to note that during periods of stock market volatility and economic uncertainty, REITs will generally outperform the broader markets.
There’s a REIT for Everyone
Most real estate investment trusts (REIT) own—and usually—operate income-producing properties. There are three primary types:
Equity REITs primarily own and operate income-producing real estate, but have become diversified into additional real estate activities, including leasing, maintenance and development of real property and tenant services.
Mortgage REITs lend money directly to owners and operators of real estate or acquire loans or mortgage-backed securities. Many of them also manage their interest rate and credit risks using derivative strategies such as securitized mortgage investments and dynamic hedging techniques. Their best-known investments are Fannie Mae and Freddie Mac, government-sponsored enterprises that buy mortgages on the secondary market.
Hybrid REITs, own properties and make loans to real estate owners and operators.
Today, there are some 186 REITs that trade on the New York Stock Exchange, with a total market capitalization of $1.078 trillion.
A Net-Lease REIT with Tenants on the Mend
Spirit is a net-lease REIT, which means that that the tenants are responsible for the payment of most, if not all, operating expenses including property taxes, insurance, and maintenance.
Most of Spirit’s investments are in single-tenant, operationally essential real estate assets, subject to long-term leases (usually 10-20 years). As of September 30, 2020, its portfolio consisted of 1,778 owned properties, with an aggregate leasable area of 37.2 million square feet in 48 states, included retail, industrial and office buildings leased to 296 tenants across 28 retail industries.
This chart illustrates the make-up of Spirit’s portfolio:
And here are its Top 10 Tenants:
- CHURCH’S CHICKEN; 2.7%
- HOME DEPOT, 2.3%
- AT HOME2.3%
- CIRCLE K2.3%
- WALGREENS2.1%
- GPM INVESTMENTS2.1%
- LIFE TIME FITNESS2.0%
- DOLLAR TREE / FAMILY DOLLAR2.0%
- BJ’S WHOLESALE CLUB2.0%
- CVS1.8%
As of Sept. 30, 2020; source: spiritrealty.com
As you can see, almost 80% of its portfolio comes from retail tenants, which means that 2020 was a very challenging year for Spirit.
Retail sales were going great in the U.S. until the pandemic struck. In April, they fell 15.33% from the previous year and 12.66% from the month before, according to oberlo.com. However, they picked up toward the latter part of the year, and for the first ten months of 2020, retail sales in the U.S. were $4.64 trillion, a 2.45%.
And that, of course, is great news for Spirit, and was reflected in the company’s third quarter report. Although sales didn’t meet analysts’ expectations, they were up 3.1%, to $112.9 million, over last year’s same quarter. But adjusted fund from operations (AFFO) beat forecasts of $0.69, coming in at $0.72 per share, a decline of 17.2% from 3Q19.
By the way, corporate earnings are usually measured in earnings per share (EPS). But as I said, REITs operate a bit differently, so FFO is the standard measure of performance for REITs. FFO is simply a measure of cash flow. It is calculated by adding depreciation and amortization to earnings and then subtracting any gains on sales.
In addition to better-than-expected FFO, Spirit begin acquiring properties again during the quarter. The REIT completed $214.3M in acquisitions, including a Florida used car dealership and Shutterfly, a market leader in personalized products. Existing tenant acquisitions included At Home, Mac Papers, FedEx, and Dollar General properties. The weighted average lease term is 14.8 years and consists of 58.4% retail and 41.6% industrial properties.
And Spirit raised its acquisition guidance for 2020 to $700 - $750 million from $600 - to $650 million.
Also, in the third quarter, rent collections improved significantly, from 75% to 90% of the REIT’s entire portfolio.
That, indeed, is excellent news, and affirms my recommendation of the shares. Trading at 42% less than its 2020 high, the time is Right to buy this REIT.
Spirit Realty Capital, Inc. (SRC) 52-Week Low/High: $ 18.37 - 54.63 Shares Outstanding: 114.25 million Dividend yield: 6.67%, paid quarterly Website: spiritrealty.com |
Why Spirit: Great growth prospects, post-pandemic 5-year annual growth estimate: 37.47% Rent collections up significantly High dividend yield Undervalued; 42% off 2020 highs
|
Technical Analysis
by Kate Stalter
The stock cleared a three-weeks-tight pattern in mid-September, then corrected again, in tandem with broader market weakness. It struggled to clear resistance above $38.21, but staged a five-week rally in late November and through December. It is currently pulling back and finding support above its 50-day moving average. It may possibly be forming a double-bottom formation at this time. Watch for it to clear resistance above the December 29 high of $41.48. This is a high-beta stock, and is prone to being more volatile than the broader market. It reports earnings on February 1 after the close; earnings reports often result in a stock’s price swinging sharply in one direction or the other. Be aware of that if you buy before that date, or hold through earnings.
Price Target: $56
Stop Loss: $31.20
Sector Round-Up | WSBS 221
| Percent Gains | ||||
| Today | 1 Month | 1 Year | YTD | |
| Basic Materials (XLB) | -0.5 | 6.7 | 28.4 | 5.7 |
| Communication Services (XLC) | 0.3 | 0.3 | 22.5 | 0 |
| Consumer Discretionary (XLY) | 2.1 | 7.3 | 33.6 | 5 |
| Consumer Staples (XLP) | 0.5 | -1.2 | 7.5 | -0.8 |
| Energy (XLE) | -0.1 | 2.9 | -30.6 | 9.3 |
| Financial Services (XLF) | -0.1 | 7.5 | 0.6 | 4.9 |
| Healthcare (XLV) | 0.5 | 4.2 | 14.7 | 3.5 |
| Industrial (XLI) | -0.2 | 0.4 | 8 | 1.2 |
| Real Estate (XLRE) | 1.1 | -3.1 | -6.8 | -2.5 |
| Technology (XLK) | 0.6 | 3.1 | 39.8 | 0.6 |
| Utilities (XLU) | 0.8 | -0.4 | -2.4 | -0.6 |
Source: SeekingAlpha.com
In the new year, the beaten-down energy sector has assumed leadership, with a strong showing over the past week, a continuation of a rally that began in November. Gains in oil and gas prices fueled the move. The sector’s most heavily weighted stock, Exxon Mobil (XOM) advanced more than 9% the first week in January.
The SPDR Energy Select Sector ETF rose in heavy volume the first week of January.
In addition to the rise in oil and gas prices, analysts point to increased use of green energy sources as a factor that could drive further gains.
Last year’s clear leader, information technology, home to several of the leading techs, including Apple (AAPL), Microsoft (MSFT), Visa (V) and Nvidia (NVDA), is in the doldrums as 2021 begins, trading less than a percentage point to the downside.
Many investors believe President-elect Joe Biden will take a stronger role in regulating techs and possibly pursuing antitrust litigation.
Seasoned investors know to also pay attention to the less flashy sectors. Materials, whose most heavily weighted stocks include Linde (LIN), Air Products & Chemicals (APD) and Sherwin Williams (SHW), advanced 6.22% the first week of the year.
The Materials Select Sector SPDR Fund (XLB) burst out of a consolidation formed in late November and December, rallying to an all-time high.
What’s behind the move? The sector is sensitive to global economic growth. Low interest rates are giving it a boost, as materials can now be purchased less expensively both in the U.S. and abroad. Expectations for economic recovery in 2021 are also giving the sector some extra juice.
Portfolio Updates | WSBS 221
Determine Your Investing Style
It’s critical to take your investing temperature so that you know how much of a risk-taker you are, which will help you determine your investing strategy. I’ve devised a simple questionnaire to help you determine your investing style and risk temperament. You can access it here: cabotwealth.com/daily/how-to-invest/investor-profile-survey/
It is an important first step along your path to investing. Once you’ve taken the quiz, you will know if you are an aggressive, moderate, or conservative investor. And that will drive your investing decisions.
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.
Unilever PLC (UL)
This well established consumer goods firm is expected to report fourth-quarter and full-year earnings in early February. Analysts are eyeing earnings of $3.01 per share for 2020, 5% higher than 2019. In December the company expanded its deal with Burger King to supply plant-based meat patties to restaurants in the Caribbean, Latin America and China. The stock is currently consolidating in a sideways pattern after twice hitting resistance between $63 and $64. The company’s well known brands include Ben & Jerry’s, Dove, Lipton Pond’s and Popsicle.
The Coca-Cola Company (KO)
Coke’s stock lost its fizz to start the new year, skidding 6.86% the week of January 4. JPMorgan downgraded the stock to neutral ahead of a $3.4 billion tax case before the Internal Revenue Service. Wall Street expects earnings to pick up in 2021. Sales and earnings took a big hit in 2020 from pandemic-driven closures of restaurants, movie theaters and other out-of-home venues, where most of the company’s sales are made. The current downtrend could offer a buy opportunity in the not-so-distant future.
TC Energy Corporation (TRP)
In December, the oil-and-gas transportation and storage company said it would acquire all remaining outstanding shares of subsidiary TC PipeLines, LP (TCP) in stock transaction worth $1.68 billion. The stock has been in a first-stage consolidation since August, and undercut its previous structure low. That’s potentially a good sign, as it may result in new institutional money to propel the stock higher after weak holders are shaken out. An attractive aspect of this stock: A 5.94% forward dividend yield.
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.
National Storage Affiliates Trust (NSA)
The self-storage REIT is within striking distance of its February, 2020 all-time high, having rallied back strong from the 2020 global market meltdown, and an orderly, 12% pullback in November and December. The company beat analysts’ sales and earnings estimates in the third quarter; it’s due to report fourth-quarter results on February 4. Analysts expect $0.43 per share on revenue of $107.63 million. As of September, the company owned and operated 788 self-storage properties in 35 states and Puerto Rico.
Conagra Brands, Inc. (CAG)
The packaged foods company released fiscal second-quarter results on January 7, posting adjusted earnings of 81 cents per share, up 29% from the previous year. Sales also topped projections, with the grocery and snack business increasing 12.5%, with those segments benefiting from increased at-home eating during the pandemic. Notably, and understandably, food service was the only business unit that saw a revenue decrease. Conagra owns a number of familiar brands, including Duncan Hines, Hunt’s, Marie Callender’s and Healthy Choice.
The Toronto-Dominion Bank (TD)
This multinational bank stock is a favorite for investors who are seeking dividend yield. It’s currently paying out a dividend of $0.59 per share, with a forward dividend yield of 4.28%. The company offers consumer, commercial and wholesale banking services. It’s been investing in artificial intelligence technologies to enable better customer service. With all its various business lines, the bank has a global presence. Its stock recently rallied to its highest level since July 2019.
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.
cbdMD, Inc. (YCBD)
This Charlotte, North Carolina-based maker of CBD products offers tinctures, gummies, pet products, skin care and several other business lines. This is categorized as aggressive for a few reasons. It has a very small market capitalization, of just $168.9 million. Small caps can be more nimble than larger companies, but they may also have fewer resources to handle a business or economic downturn. These smaller companies have historically offered higher returns, but that comes with greater risk of volatility, something that can be difficult for many investors to stomach. This is a fairly recent IPO, having gone public in late 2017. Young companies can offer some of the best potential for fast growth.
OneMain Holdings, Inc. (OMF)
The personal lending specialist is trading at all-time highs, after breaking out of a consolidation in mid-August. The company is due to report fourth-quarter results on February 8, with analysts projecting earnings of $1.94 per share. In three of the past four quarters, the company handily beat earnings expectations. As of December, the number of mutual funds owning shares stood at 517. Institutional ownership is a good sign, as the large holders, such as mutual funds, pension funds, insurance companies, foundations and university endowments, are the ones who push prices higher with new buying.
Clean Energy Fuels Corp. (CLNE)
This alternative energy company, which was trading in the single digits until recently, is now trading at levels last seen in mid-2014. The company provides natural gas as an alternative fuel to fleet-vehicle operators. The stock popped 23% January 7, to $11.37, as renewable energy stocks as a group rose on optimism about policy boosts from the Biden administration and the new Congress. The character of trading has become more volatile recently, with larger intraday price swings. Investors should be aware that this high-beta stock may show some erratic trade.
Current Portfolio | WSBS 221
| Conservative Stocks | Symbol | Price Bought | Price on 2/1/2021 | Gain/Loss % | Rating |
| Unilever PLC | UL | $42.84 | $58.38 | 36.27% | Hold |
| The Coca-Cola Company | KO | $41.90 | $48.48 | 15.70% | Hold |
| TC Energy Corporation | TRP | $42.73 | $43.13 | 0.94% | Hold |
| Moderate Stocks | Symbol | Price Bought | Price on 2/1/2021 | Gain/Loss % | Rating |
| National Storage Af-filiates Trust | NSA | $27.39 | $37.43 | 36.66% | Hold |
| Conagra Brands, Inc. | CAG | $29.87 | $34.20 | 14.50% | Hold |
| The Toron-to-Dominion Bank | TD | $40.82 | $56.56 | 38.56% | Hold |
| Aggressive Stocks | Symbol | Price Bought | Price on 2/1/2021 | Gain/Loss % | Rating |
| cbdMD, Inc. | YCBD | $2.25 | $3.91 | 73.78% | Hold |
| OneMain Holdings, Inc. | OMF | $29.49 | $47.71 | 61.78% | Hold |
| Clean Ener-gy Fuels Corp. | CLNE | $2.63 | $10.57 | 301.90% | Hold |
Spotlight on Our Portfolio
cbdMD, Inc. (YCBD)
cbdMD, Inc. produces cannabidiol (CBD) products through consumer hemp-based CBD brands. Its products are based on the company’s Superior Broad Spectrum formula, which combines the purest hemp extracts, containing CBD, CBG (cannabigerol) and CBN (cannabinol). cbdMD adds terpenes (aromatic compounds) to create an enhanced CBD product that the company says redefines the industry standard for quality. Its products also retains no detectable THC (tetrahydrocannabinol, the principal psychoactive constituent of cannabis. Levels).
Its products include CDB tinctures, gummies, topicals, capsules, bath bombs, bath salts, and sleep aids. The company also offers veterinarian-formulated products, including tinctures, chews, and topicals under the Paw CBD brand name. It distributes its products through its e-commerce Website, third party e-commerce sites, wholesalers, and various brick and mortar retailers in the United States. Its customer base is 23% wholesale and retail and 77% e-commerce.
cbdMD, Inc. was founded in 2015 and is headquartered in Charlotte, North Carolina
The More You Know | WSBS 221
We recommend that you set a price target the day you purchase your stocks. Your target should be based on the P/E of your stock, multiplied out by expected future earnings. I recommend that you at least think about what price your stock can achieve within 18-24 months. And that should at least be a 30%-50% gain. If it doesn’t have that potential, keep looking.
Going forward, when the stock hits your target, reevaluate it and determine if it has the ability to continue double-digit price gains or if you would gain more by cashing in now and using those funds to purchase a different stock with more potential. Many of the contributors to my newsletters make this decision easy for you, by providing targets for their recommendations, and often cash in just a portion of the holding to take some profits and let the remaining half ride toward a new target.
When I speak at Money Shows across the country, I am frequently asked about how I set my target prices. If it’s not the most common question I get, it’s certainly up there in the top five.
First of all, I can’t emphasize too strongly that it is essential to set a target at the time you buy a stock. If you don’t, then how the heck do you know when your stock has appreciated enough to sell it?
I always ask my workshop attendees how many set price targets on their stocks, and I never see more than two or three hands go up. That’s a shame, but I think it’s because folks just don’t know how to set targets, rather than them not wanting to. So, let me tell you how I do it, but keep in mind that, like all investing, it is not black and white. It’s a combination of science, art and experience. But most of all, it’s easy! No complicated math here—just a few assumptions.
Let’s walk through an example step-by-step. For this example’s sake, we’ll set your holding period at three years, max.
You’ve done your research and have selected the stock you want to buy—the Widget Co. The price of the stock is $10 per share, the company made $2.00 per share in the last four quarters, so its price-earnings ratio (P/E) is 10 divided by 2, or 5.
The company’s earnings have been increasing at a 20% annual growth rate for the past five years. With a little calculation, you can project out over the next three years, and if that same growth rate continues, the company’s earnings will look like this:
Year 1: 2.00 x a 20% increase = $2.40 per share
Year 2: 2.40 x a 20% increase = $2.88 per share
Year 3: 2.88 x a 20% increase = $3.46 per share
So, at year 3, your company is earning $3.46 per share. Now, if its P/E ratio remains the same (5), the projected price of the shares can be found by mere substitution into the P/E equation, and solving for P:
P divided by E (3.46) = 5. So, a little algebra later, P = $17.30. Wow—that’s a 73% gain! Most investors would be tickled pink by that.
However, should you believe that the company’s earnings may grow even faster than 20% annually, due to some event such as a tremendous new product, gains in market share, new markets, etc., or that one of those occurrences might drive the company’s price greater than $17.30 (even without the requisite earnings growth), you would be even happier.
To be on the safe side, it’s also smart to calculate what would happen should the Widget Co. not grow as quickly over the next three years as it had done for the past three.
The next Wall Street’s Best Stocks issue will be published on March 2, 2021.