While we are definitely not out of the woods yet—with the economy and the markets—we are making progress. The Dow Jones Industrial Average has had a nice bounce back, albeit, with some volatility. We can expect that to continue, probably through year-end. As you can see by our Advisor Sentiment Barometer and our Market Views section, we are turning more bullish.
As most of the economy is just beginning to reopen, unemployment remains a big issue. So far, some 38 million people have lost their jobs, bringing the unemployment rate in the U.S. to almost 15%. We can expect that to continue rising for the near future, also.
But in better news, housing seems to be holding up pretty well, and building permits this week were better than expected, around 1.074 million.
Of course, the bright side is that as more businesses reopen, we will start a steady climb back to normal.
Market Views 829
Bearish, but Trading
A double top is now evident on the $SPX chart in the 2950 area. So, for now that is strong resistance. The question is whether we’re in a trading range or a stronger downturn is in store. There are three important support levels: 2800, 2720, AND 2650. I feel that sellers would become more aggressive as each of these were violated on a closing basis. So far, none have been.
Volatility continues to be a very interesting aspect of this market. This past week, $VIX spiked up again, generating another short-term buy signal. From an intermediate-term perspective, though, the $VIX chart is still negative because $VIX continues to close above its 200-day moving average.
For that and other reasons, we maintain a “core” bearish position, but we will trade short-term buy signals around it.
Lawrence G. McMillan, The Option Strategist, optionstrategist.com, 973-328-1303, May 15, 2020
Next Phase of Rally
Today’s session was nothing short of spectacular for bulls, and especially small-caps and cyclical issues shined due to the positive headlines. The Russell 2000 rose by more than 6% today and all of the key cyclical industries registered lofty gains, and the broad rally could mean that, thanks to the vaccine-breakthrough, stocks entered the next phase of the post-crash rally following last week’s pullback.
Besides the Russell 2000, a whole host of other reliable risk measures confirmed today’s sharp risk-on shift, with the Volatility Index (VIX) plunging below 30 again, credit spreads narrowed considerably, and Treasury yields surging higher across the curve.
Ken Berman, Canaccord Genuity Research, canaccordgenuity.com, May 18, 2020
Crosscurrents
This morning’s positive news of a possible COVID vaccine helped the major indexes surge, but it also revealed some of the crosscurrents that remain—today saw a big bout of rotation, as leading growth titles were mostly lower while the lagging (usually economically-sensitive) areas did well. Even so, we don’t advise getting too involved in the day-to-day news or gyrations; overall, there’s still more positive evidence than negative, with the intermediate-term trend still up (today’s action helped on that front) and just about every leading stock remaining in a firm uptrend. Given the crosscurrents, we don’t advise going hog wild on the buy side, but we continue to think holding your strong performers (maybe with some partial profits here or there) and looking for decent entry points on strong names is the way to go.
Michael Cintolo, Cabot Top Ten Trader, cabotwealth.com, 978-745-5532, May 18, 2020
Spotlight Stock 829
While pot stocks have been hammered lately, just like everything else, there are a lot of solid companies that have found themselves stuck in the market trend. As the panic subsides and investors begin sorting through the rubble, they will find some solid stocks that are great bargains.
Curaleaf produces and sells cannabis and cannabis accessories, and provides professional services to other cannabis licenses holders, including cultivation and back-office support though management service agreements. In all, it operates 54 dispensaries in 17 states. Most recently, Curaleaf reported revenue of $325 million in the fourth quarter. Assuming those sales hold, and they likely will since the company is considered an essential business in most of the states where it operates, I expect revenue will break $1 billion in 2020.
Curaleaf is also one of the few marijuana stocks that sports a strong balance sheet. It has roughly $42 million worth of cash on its balance sheet and nearly $150 million when you count current assets and cash equivalents. It has the financial heft to survive this crisis.
Despite that, the stock hit an all-time low of $2.54 back in March. It’s still well off its 52-week high of $11.43 and, given its solid operations, leaves it well undervalued relative to many of its peers. That’s especially true since I think the $1 billion revenue forecast might be on the conservative side.
Based on available data, I don’t think the shares fully value the potential impact of recreational sales in Illinois, where recreational use only recently became legal. Given the available estimates on the size of the Illinois marijuana market, I think the market and Curaleaf itself could be underestimating sales there by as much as $50 million. Considering that Illinois only recently legalized recreational sales and just awarded its first recreational marijuana licenses, it’s possible Curaleaf is just trying to manage expectations ahead of any potential hiccups in the system.
I’m also not sure that estimate takes into account the significant capacity expansion Curaleaf is seeing from recent acquisitions. Last year, Curaleaf had about 1.3 million square feet of production capacity, but that number will almost double to 2.3 million by the end of this year. That’s a lot of extra production, which won’t go to waste since dispensaries are still open in most states.
Even if that $1 billion in revenue does prove to be a conservative estimate, it will still mark an important milestone in the American cannabis business. If Curaleaf hits the $1 billion mark in revenue, it will make it the first American cannabis company to do so.
Curaleaf has had its ups and downs over the past year or so. Targets have been beaten or missed and tangles with the FDA have come to light. That said, it has been smart about its acquisitions and exercised solid cash management. So, while it may not be profitable in the near-term, I suspect it will hit its revenue target and investors will take notice.
Recommended Action: Take advantage of Curaleaf’s bargain price and buy under $10.
Ian Wyatt & Ben Shepherd, Ian Wyatt’s Million Dollar Portfolio, wyattresearch.com, May 1, 2020
Feature 829
In a recent Cabot Marijuana Investor, Chief Analyst Tim Lutts had this to say about the pot industry: “The stocks remain cheap by historic measures and the best-run companies in the industry continue to expand at blazing speed. There’s no question that this remains a sector full of high potential—the potential to launch leading consumer brands like Budweiser and Marlboro. The only questions, really, are what stocks to own and when to buy them. However, the strength is not evenly distributed. The Canadian stocks in particular are weak, while the U.S. stocks are strong, and thus the portfolio will now become more U.S.-centric than ever (two years ago it was heavily Canadian).”
Here’s a picture of the ups and downs of marijuana stocks. After a stratospheric climb, they nose-dived last year, but now, the coronavirus pandemic has boosted demand, although that could be a temporary effect. However, the pandemic will undoubtedly ‘weed’ out the fundamentally strong marijuana companies from the weak. And the strong ones will be well-prepared for the next bull run.
In 2017, the Global Marijuana Market was valued at $17.2 billion. It is forecasted to grow at a CAGR of 22.9% from 2019 to reach $88.97 billion by 2025, with North America being the fastest growing market.
As I mentioned, the pandemic has helped. While retail, in general, has been decimated, online ordering for weed has blossomed. After the $2 trillion worth of stimulus checks began flowing, weed sales mid-April soared by 50%.
The industry has some financial problems—myopic profit growth and a lack of cash flow for further expansion after tons of new capacity hit the market in 2018. Some marijuana companies have managed to continue growing due to cash injections from blue chip companies, like Canopy Growth and Cronos Group, who received big investments from Constellation BrandsSTZ and AltriaMO, respectively. But many others burned through their cash by expanding too fast, and now find themselves with a weakened balance sheet.
That’s not the case with our Spotlight Stock, Curaleaf Holdings, Inc. (CURLF). As contributors Ian Wyatt and Ben Shepherd noted, the company has great cash reserves.
And at the end its recently reported first quarter, that cash had risen to $176.4 million. Total revenues came in at $96.5 Million and EBITDA was $20.0 million, with a loss of $0.03 per share. Total revenues were up 28% and EBITDA rose 45%, both sequentially. Retail revenues increased 197%; wholesale revenue rose by 134%; and management fee income was up by 160%.
There’s no guarantee fo an immediate return to a bull market for marijuana stocks, but select companies will continue to do well. And CURLF seems to have all the right stuff to continue accelerating.
Growth 829
Etsy, Inc. (ETSY) | Daily Alert April 23
Following the market close, Etsy provided an update on how COVID-19 has impacted its business. While Ql GMS grew ~32% y/y, broadly in line with our and consensus estimates pre-COVID, Etsy is withdrawing its FY20 guidance and will likely provide a FY outlook during its Q1 earnings call in May. Management also offered a range of GMS growth and profitability scenarios and reaffirmed its focus to deliver positive adj. EBITDA and CF for the year.
Consolidated GMS grew 41% y/y for January and February, before the COVID-19 pandemic started impacting the business in early March, with GMS declining 2% y/y in the third week of March. In the fourth week of March, Etsy saw demand recover; with GMS growth of 27% y/y, although demand remained volatile, with day-to-day changes ranging from -4% y/y to +23% y/y growth. In aggregate, Etsy’s consolidated GMS grew 32% y/y during Q1 to ~ $l.4B. Within the company’s marketplace, categories that would typically be strong in March, such as weddings and jewelry, have faced headwinds while categories that have benefited include self-care, puzzles and games, and bath & beauty. The company’s music marketplace Reverb is also seeing some benefit as many other stores in that industry are closed.
Etsy recently announced it will be spending $5M on Offsite Ads to promote products on behalf of sellers, who will not pay any fees on ads until at least May 1. The company is also giving sellers a one-month grace period to pay their bills and is offering 24/7 member support to address any questions on delivery times and shipping issues. Additionally, Etsy advocated to Congress to make sure its self-employed sellers were included in the relief bill and has provided a guide to sellers on how to navigate through the stimulus package and identify which benefits they are eligible for.
We are leaving our estimates and PT unchanged, with an intention to update both once we have more visibility. Our $72 PT is based on ~7.2x forward (2021E) revenue estimate and is supported by our DCF valuation.
Maria Ripps, CFA, Michael Graham, CFA, and Jason Tilchen, CFA, Max Masucci, Canaccord Genuity Research, www.canaccordgenuity.com, April 3, 2020
Raytheon Technologies Corporation (RTX) | Daily Alert May 4
Raytheon Technologies is the result of the merger of United Technologies’ aerospace and defense businesses (Collins Aerospace and Pratt & Whitney) with Raytheon, a major provider of defense systems. The combined company has annual revenue of approximately $74 billion with some 195,000 employees.
Defense-related companies have been finding decent investor support given that the federal government is expected to maintain a healthy appetite for defense spending. Aerospace business will likely remain under pressure as a result of the massive slowdown in commercial aviation.
I have long felt that United Technologies and Raytheon were both investment-grade stocks and worthwhile portfolio holdings. Thus, once the combined firm gets through its assimilation issues, I suspect the stock will provide, at a minimum, returns in line with the broad market.
Raytheon Technologies’ direct purchase plan has a minimum initial investment of $250. The firm will waive the minimum if an investor agrees to automatic monthly investment via electronic debit of a bank account of $50 for five consecutive months. There is a $10 enrollment fee for joining the plan. Partial dividend reinvestment is available. Dividend reinvestment fees are 5% of the amount reinvested (maximum $3) plus $0.03 cents per share. Optional cash purchase fees are $5 ($2.50 for automatic investments) plus $0.03 per share. Selling fees are $15 plus $0.12 per share for a batch sale and $25 plus $0.12 per share for market or limit-order sells.
The plan administrator is Computershare. For enrollment information call (800) 488-9281 or visit www.computershare.com.
Charles B. Carlson, CFA, DRIP Investor, dripinvestor.com, 800-233-5922, May 2020
ChannelAdvisor Corporation (ECOM) | Daily Alert May 5
ChannelAdvisor operates behind the scenes in the massive e-commerce market. Its software, which tracks inventory, pricing, and order fulfilment, connects retailers to third-party marketplaces run by Amazon, eBay, and Google. The company’s marketing software helps retailers build brand awareness on social media sites like Facebook and Instagram.
ChannelAdvisor is benefiting from a growing footprint that spans some 2,800 clients in more than 75 countries.
The microcap stock is an aggressive holding, partly reflecting a challenging retail environment. Still, ChannelAdvisor looks attractive from several angles. In Quadrix®, it earns an Overall score of 90, reflecting strong ranks for Momentum (97) and Financial Strength (80). The balance sheet has no long-term debt and cash of $52 million, putting net cash at nearly $1.30 per share.
March quarter results should be announced on May 7. Per-share earnings are expected to more than double to $0.09. Per-share profits are projected to advance 13% this year and 35% in 2021. The stock is being started as a Buy.
Richard J. Moroney, CFA, Upside, upsidestocks.com, 800-233-5922, May 2020
Electronic Arts Inc. (EA) | Daily Alert May 6
Even before the pandemic, the video game industry was lucrative, growing 7.2% YoY (year-over-year) in 2019. Video games are gradually becoming the preferred form of entertainment. Data from Newzoo and Comscore shows that global video game revenue of $148.8 billion surpassed worldwide movie box office collection of $42.5 billion in 2019.
The significant change in the technology and business models of the gaming industry is driving growth. Video games have expanded beyond consoles to PCs and mobile. Thanks to high-speed internet, game developers have gone digital. Instead of buying video game packages, gamers can download games, subscribe to cloud gaming services, and make in-gaming purchases like new missions and player skins to enhance their gaming experience.
Similar to other physical sports, video games have sporting events called esports, where professional gamers compete in front of millions of viewers. According to Newzoo, 443 million people watched esports in 2019, and this number is expected to reach 495 million in 2020. The secret to succeeding in gaming is developing games that generate a loyal fan base for sequels, prequels, and merchandise goods.
2020 is a good year for gaming stocks. Electronic Arts Inc. (EA) is a video game giant with annual revenue of $5.5 billion and a market cap of $32.8 billion The company offers games and services for consoles, mobile, and PC, and earn ~75% of revenue from digital channels. However, EA is more dominant in game console sales, earning 70% of its revenue from here. It earns 15% revenue each from PC and mobile games, and is witnessing increasing growth in mobile games.
EA has some of the best sports game franchises like Madden NFL, NCAA Football, NBA Live, and FIFA, and it is monetizing these games on esports. It also has an exclusive agreement with Disney for the rights of the Star Wars franchise. The franchisee licenses limit EA’s scope for merchandise sales. Its largest source of revenue is live services like in-game purchases, extra content, subscriptions, and esports. EA plans to monetize its games like Apex Legends and Battlefield through esports.
Ben Reynolds and Harvi Sadhra, Sure Dividend Newsletter, suredividend.com, support@suredividend.com, 800-531-0465, May 20, 2020
Growth & Income 829
PulteGroup, Inc. (PHM) | Daily Alert April 22
Shares of PulteGroup are down over 45% from their 2020 high. The homebuilder was performing well before the COVID-19 pandemic struck. Pulte’s fourth-quarter 2019 EPS topped analysts’ estimate by 3% while the value of new orders grew 33%.
Although Pulte has to bear shocks to housing demand and its supply chain from COVID-19, it benefits from low-interest rates and falling raw material prices. Its shares interest growth-at-a-reasonable-price investors.
They yield almost 2% and trade at 6.9X-2020 EPS estimate versus prospects for 20% EPS growth in two years. (Next earnings: April 23). Nancy’s Note: Estimated EPS is $0.70 per share on revenues of $2.32 billion.
Sam Subramanian, PhD, AlphaProfit Sector Investors’ Newsletter, www.alphaprofit.com, 281-565-6963, April 2020
The Coca-Cola Company (KO) | Daily Alert May 7
Historically, periods of severe stock-market turbulence have proven to be good times for investors with a longer-term time horizon to focus on the highest-quality and financially
strongest names. We believe that Coca-Cola is one of these companies. The company has increased the dividend for 58 consecutive years.
While we do not expect Coke to meet its initial 2020 financial guidance because of disruption from COVID-19, we believe that earnings will bottom in 2Q20 and begin to improve as economies reopen. Reflecting its financial strength, the company was recently able to issue $5 billion of new bonds and CEO James Quincey told CNBC, on March 24, that the offering was ‘massively oversubscribed,’ highlighting investor confidence in the company’s long-term prospects.
Management has recognized that it needs to diversify revenue away from sugary soda and we expect it to make progress toward this goal. The company eliminated more than 600 ‘zombie,’ or unproductive, products in 2019 and worked to reposition the business through changes in core products, pack sizes and serving sizes, as well as through deals like the recent acquisition of coffee company Costa. The company’s innovation has also improved, and progress should resume after the COVID crisis subsides.
To be sure, even high quality consumer companies are not immune to disruption from COVID-19. On March 23, Procter & Gamble filed a supplement to the Risks section of its financial statements that outlines a number of risks that may also be relevant to KO. P&G noted that business may be hurt by reduced travel due to quarantines or fear of exposure to the virus; disruptions to production or the supply chain; the failure of suppliers and business partners; and restrictions that reduce employee travel or close manufacturing facilities. In addition, Coke has seen a significant decline in sales of beverages through restaurants, amusement parks, sporting events and schools. Volumes at grocery stores have risen, but not enough to make up the difference with so many ‘away-from-home’ locations closed or operating with limited take-out service.
Mr. Quincey said, in the CNBC interview, that anyone can draw up a list of all the things that can go wrong, but there are also opportunities. We agree and believe the KO shares areattractively valued at current levels.
On April 21, Coca-Cola reported 1Q20 adjusted earnings of $0.51 per share, up 8%, which topped our estimate of $0.45. Sales of $8.57 billion came in below our estimate of $8.67 billion. Organic sales were flat.
We are reducing our 2020 EPS estimate to $1.90 from $2.00 as a result of the COVID-19 pandemic. Our new estimate is for 2Q revenue to be down about 25%. We are modeling a 12% sales decline in 3Q, reflecting our expectation that away-from-home will still be down by 25% or a bit more. We are modeling a 3% sales decline in 4Q. The company has learned from its experience in Asia and that should help results in the U.S.
Before the COVID-19 and currency pressure caused the company to say that it did not expect to meet its 2020 guidance, management’s expectations were for 8% growth in comparable currency operating income. The EPS guidance before-COVID had been for a comparable (non-GAAP) profit of $2.25 versus $2.11 in 2019. Coke had planned to deliver free cash flow of $8 billion, resulting from about $10 billion of cash flow from operations offset by capital expenditures of $2 billion. We currently expect net income of a little more than $8 billion and depreciation of $1.4 billion. The company will probably spend less than $2 billion on capex. KO does not currently expect to repurchase shares. We are reducing our 2021 EPS estimate to $2.15 from $2.25 based on a lower sales forecast.
After the COVID crisis, we expect the company to grow earnings at a compound annual rate of 8% for a few years. KO’s sales goals are to enhance sales of dominant products (greater than 20% value share), boost sales of ‘challenger’ brands that are prominent but not the leader in their category (10%-20% share), and launch new ‘Explorer,’ brands. Important categories outside of ‘sparkling’ or soda, include energy drinks; juices and smoothies; water and sports drinks; and coffee and tea. Coke has an opportunity to add to its low market share in non-soda categories which are generally growing faster. KO increased the percentage sales from new products to 23% in 2019 from 17% in 2018 and 9% in 2015. The company has also been looking at mergers and acquisitions to boost sales.
The shares are trading at 24-times our 2020 EPS estimate and 21-times our 2021 estimate. We are maintaining our BUY rating and our price target of $54.
Jim Kelleher, CFA, Argus Weekly Staff Report, www.argusresearch.com, 212-425-7500, April 30, 2020
Tootsie Roll Industries, Inc. (TR) | Daily Alert May 8
Everybody knows Tootsie Roll. But you may not know just how long and storied this company’s history is. Leo Hirschfield founded Tootsie Roll in 1896, naming it after his five-year-old daughter, who went by the nickname “Tootsie.”
Tootsie Roll Industries (TR) has grown over the years, expanding its lineup of products to include Charms Blow Pops, Andes Mints, DOTS, Junior Mints, Charleston Chew, Dubble Bubble, and many more names recognizable to the forever young. Those products are sold to roughly 3,100 customers, including supermarkets, dollar stores, drugstore chains, vending machine operators and warehouse clubs.
Unlike other larger food and beverage companies, Tootsie Roll is essentially controlled by the Gordon family. Ellen Gordon became CEO after her then-95-year-old husband passed away in 2015. She now controls more than 53% of the outstanding common stock. I love it when insiders have a lot of their own “skin” in the game, and there are very few stocks with that degree of insider ownership.
Another thing I like about Tootsie Roll is that management doesn’t kiss Wall Street’s feet. They don’t hold quarterly conference calls; they don’t interact much with the media and they’re largely ignored by analysts.
Management has also been adamant that Tootsie Roll isn’t for sale. But a steady stream of candy acquisitions over the past few years keeps the question alive:
Mars Inc. bought Wrigley in 2016; The Hershey Company (HSY) bought Amplify Snack Brands for $1.6 billion in 2018; and Italian candy giant Ferrero bought Nestle’s (NSRGY) U.S. candy operations (including the Baby Ruth and Butterfinger candy bars) for $2.9 billion in 2019.
I don’t know when or if controlling family members would ever sell. But IF they were to do so, it would likely be at a nice premium to where the shares are trading today.
If you’re worried that COVID-19 will drag Tootsie Roll down … don’t. Tootsie Roll has been almost immune to the stock market selloff. TR traded as high as $37.64 and hasn’t fallen below $32 this year. That’s resilient!
Recommendation: Using 5% of the funds allocated to this service, buy Tootsie Roll Industries (TR) at the market. Then place a protective stop to sell all shares at $30.70. This order is good-till-canceled.
Tony Sagami, Weiss Ultimate Portfolio, 1-877-934-7778, www.weissratings.com, May 1, 2020
Deere & Company (DE) | Daily Alert May 14
Founded in 1837 by John Deere, and headquartered in Moline, Illinois, Deere & Company is the world’s leading manufacturer of agricultural equipment, which operates through three business segments: Agriculture and turf, construction and forestry, and financial services. The company markets its products primarily through independent retail dealer networks and retail outlets. Its current total market capitalization of $45.5 billion makes DE a large capitalization stock (a large-cap stock has a market capitalization value of more than $10 billion) and its long history of consistent earnings growth and dividend payments makes it a solid company.
It is considered a well-diversified business with a wide economic moat and a sustainable competitive advantage over its rivals, which also enjoys outstanding management and corporate culture. According to Yahoo! Finance, consensus estimates call for the company to earn about $6.40 per share this year, and to go to about $8.64 per share in 2021. Deere & Company has paid dividends to investors since 1937, and during the past five years has increased its dividends at an average rate of 5.1%. Its quarterly payment of $0.76 per share currently provides a yield of 2.1%.
Technically (from the chart’s perspective) DE also looks attractive, trading 24.2% below its 52 weeks high, while it is forming a price consolidation pattern between $182 and $106 approximately, in which $106 is acting as a strong technical support level. The index funds Vanguard Total Stock Market Index and Vanguard 500 Index are major shareholders of DE, holding 2.91% and 2.04% of its shares, respectively. The stock is also one of the 63 holdings of the mutual fund managed by Moneypaper Advisors, the MP 63 Fund (DRIPX). DE’s main competitors in the world are Caterpillar Inc. (CAT) and AGCO Corp. (AGCO). DE’s 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 1.05 so the stock is 5% more volatile than the Market.
Its Dividend Reinvestment Plan charges some fees for cash investing ($3, plus 5 cents per share), for dividend reinvestment (5% with a maximum of $3, plus 5 cents per share) and for selling ($10 plus 5 cents per share). To illustrate those fees: For example, a $100 investment at DE’s current price would cost a fee of $3.04 (or 3.04% of the investment). To minimize the effect of even such small fees, you may want to invest a larger amount but less frequently. The fee for a $300 investment, for instance, would be $3.11 (or 1.04% of the investment).
With the stock being fundamental and technically attractive, this company is an appropriate holding for investors who wish to build a holding over the long term.
Vita Nelson, www.directinvesting.com, 914-925-0022, May 4, 2020
*Texas Instruments Incorporated (TXN)
As expected, Texas Instruments Q1 revenue declined by roughly 7% from the year ago period, with Analog sales dropping by 2% and Embedded Processing by 18%. But earnings topped estimates by 14%, not including 10 cents per share in one-time benefits. And free cash flow hit $5.6 billion or 40% of revenue, which was also in line with targets. TI management struck a decidedly somber note during its Q1 earnings call, stating it’s “using the 2008 Financial Crisis” as a model to set earnings guidance. That includes a 26% sequential decline in Q4 2008 revenue, followed by an additional 16% sequential drop in Q1 2009. Nonetheless, the company will run its factories in Q2 “at about the level they ran” in Q1, in order to “support our customers during a time when they have limited ability to forecast.” Capital spending plans “are generally unchanged, because the bulk” concerns “roadmap capacity needs in the 2022 to 2025 timeframe.” Research and development spending are also “essentially unchanged,” because they’re “five and ten year time horizon decisions.” The ability to stick to a long-term plan during a worst-case short-term environment is the mark of an exceptional company. And it’s as much due to TI’s reach and seasoned management as to its A+ rated balance sheet and safe dividend. And it’s why this company will emerge more dominant than ever when the upcycle begins anew. Buy up to 120.
Elliott H. Gue, Energy Income Advisor, energyandincomeadvisor.com, 888-960-2759, April 30, 2020
Value 829
General Motors Company (GM) | Daily Alert May 13
General Motors (GM 22.60) reported solid first quarter results this morning. Adjusted diluted EPS of $0.62 beat the $0.33 consensus estimate. Revenue was $32.7 billion, exceeding the $31.1 billion estimate. The earnings press release details management’s actions toward responding to COVID-19 (both worker safety and manufacturing healthcare supplies), liquidity, reopening auto production and the company’s commitment to electric and autonomous vehicles. The company aims to restart U.S. and Canadian auto production on May 18.
I’m moving GM from Hold to a Strong Buy recommendation, based on the company’s financial strength as it successfully deals with the business lockdowns resulting from the virus pandemic, the favorable response from Wall Street, and the optimism reflected in the price chart. GM has traded consistently between 20-24 for five weeks. The stock is reacting well to the earnings report, up 6% this morning. I anticipate a near-term breakout past 24, at which time the stock could promptly rise to 27 or 30, depending on economic news and price action in the broader market. Strong Buy.
Crista Huff, Cabot Undervalued Stocks Advisor, cabotwealth.com, 978-745-5532, May 6, 2020
Lamb Weston Holdings, Inc. (LW) | Daily Alert May 20
Lamb Weston is the largest producer of frozen potato products in North America and the second largest in the world. Selling French fries to fast-food restaurants (McDonald’s is a 10% customer) is a major part of its business. While the United States produces 80% of its revenues, it has 27 processing facilities around the world that serve fast-food and full-service restaurants and other customers in 100 countries.
Based in Eagle, Idaho, Lamb Weston was founded in 1950 by F. Gilbert Lamb in Weston, Oregon. The company gained a reputation for valuable innovations, including inventing the Water Knife Gun in the early 1960s that became the industry standard for slicing potatoes. Lamb Weston expanded through organic growth and acquisitions in Asia and Europe. In late 2016, the company regained its independence with its spin-off from Conagra Brands.
Lamb Weston shares remain 32% below their highs on concerns over how deeply its profits will decline due to widespread Covid-19-related restaurant closures. Investors also worry about a slow re-opening pace and whether uneasy consumers and capacity-reducing social distancing protocols will initially and possibly permanently impair the return of normal restaurant traffic unless a vaccine or effective treatment for Covid-19 is found. Concerns also include recent in-creases in input and fixed costs, virus-related supply chain issues and general agricultural risks associated with sourcing potatoes.
Lamb Weston shares offer investors an opportunity to invest at an attractive price in one of the largest companies in a stable, high-margin secular-growth industry.
French fries remain a dining-out staple; there is hardly a menu item that is more universally popular. While near-term demand will clearly be weak, long-term global demand will likely rebound and resume its steady 3% growth rate.
Near-term demand won’t completely collapse, either. About 65% of all fries are purchased at fast-food restaurants, and about two-thirds of those are bought via drive-through windows, carry-out or delivery, which continue to remain open for business. States (and countries) are beginning to re-open their economies, providing some clarity to what we see as a normalizing of restaurant traffic by the end of 2020. Recent results from China, where sales quickly rebounded to 70% of normal, provide some encouragement. Also, Lamb Weston will capture some of the (temporary) surge in retail French fry demand.
Lamb Weston has a cost-advantaged position (given its high-quality potato sourcing and large-scale and efficient production facilities) and a high 42% market share in a concentrated industry. The North American potato industry is dominated by Lamb Weston and three other large, family-owned companies, somewhat limiting the risk of aggressive competition.
Last year, the company produced healthy profits (22.0% EBITDA margin) and surplus free cash flow (nearly $200 million) even after funding an elevated capital spending program and its dividend. In a prolonged recession, we estimate that the company would still have break-even or positive surplus free cash flow.
Lamb Weston’s balance sheet is sturdy, and its liquidity is plentiful. Quarter-end debt of $2.3 billion was only 2.6x last year’s $853 million in EBITDA. The company raised cash by drawing $495 million draw from its credit lines after quarter-end, and even in the unlikely event that it goes through all that cash, its leverage would still be manageable. And, the nearest maturity other than the line of credit is a modest $280 million due in November 2021, providing time for an eventual recovery.
With Lamb Weston’s overall business and financial strength, its shares look quite appetizing for long-term investors. We recommend the PURCHASE of shares of Lamb Weston Holdings (LW) shares with an $85 price target.
George Putnam III, The Turnaround Letter, turnaroundletter.com, 617-573-9550, May 2020
Financials 829
BlackRock, Inc. (BLK) | Daily Alert April 16
BlackRock is the largest asset management firm in the world with $7.43 trillion of AUM at the end of 2019. BLK offers a range of investment products and asset classes, both active and passive, to institutional and individual investors.
In addition, the company was just selected by the Federal Reserve to handle several of its massive bond buying programs to help stabilize the fixed income markets, as was also the case back in the 2008 Global Financial Crisis.
We like that BLK is well-diversified amongst product mix which keeps it somewhat agnostic to shifts between asset classes and investment strategies, helping to limit the impact that market swings or withdrawals can have on its AUM. Additionally, a heavier concentration of institutional clients has historically given BLK a more stable group of assets than many of its peers.
BlackRock’s iShares ETF platform is an industry leader and maintains sizable market share. BLK also offers alternative asset investments, which could enhance inflows as new strategies and funds gain traction. Broad opportunities for organic growth for BLK’s numerous offerings lay in the retail space, in U.S. retirement, and in the international distribution of iShares, as well as its up-and-coming risk management platform, known as Aladdin.
John Buckingham, The Prudent Speculator, www.theprudentspeculator.com, 877-817-4394, April 2020
The Progressive Corporation (PGR) | Daily Alert April 20
Progressive is an oddity among stocks this year—its shares have gone up. The stock has returned 11% including dividends in 2020, compared to average losses of 26% for S&P 1500 Index insurance stocks and 34% for all members of the financials sector. Among the index’s 26 property and casualty insurers, Progressive is one of only three stocks up this year.
Progressive controls a roughly 11% slice of the U.S. auto-insurance market, trailing only State Farm and GEICO. With an Overall rank of 97, Progressive scores in the top 30% of our research universe for five of seven Quadrix® categories. Progressive, already a Buy and a Long-Term Buy, is being added to the Focus List.
Progressive doesn’t insure companies for workers compensation or interruption, two areas likely to hammer other P&C insurers due to the coronavirus pandemic. Rather, Progressive’s businesses appear shielded from the coronavirus-driven downturn, at least for now. Personal auto insurance accounted for 78% of Progressive’s underwriting business last year. Commercial lines—covering business vehicles, taxis, trailers, dump trucks, and tow trucks—generated 12% of underwriting revenue. Personal insurance for motorcycles, recreational vehicles, watercraft, and snowmobiles represented 5%. Finally, property-insurance was 4%.
With many Americans staying home, the number of automobile accidents should decline, potentially fattening Progressive’s profit margins. In noting that driving mileage has plunged 35% to 50% in most states, Allstate ($97; ALL) said it will return to auto-insurance customers 15% of their monthly premiums for April, totaling more than $600 million.
Two smaller, regional insurers have announced similar moves. Progressive said it might also return some premiums to customers. However, Progressive has been far less aggressive than most insurers in pushing through higher auto rates over the past year, so refunds may be minimal.
Progressive does face the risk of policy cancellations, especially for its commercial-lines business. A wave of defaults on car loans could also hurt Progressive if it leads to a surge in policy cancellations. However, financially strapped consumers have historically stopped paying other bills long before they lapsed on car payments. Additionally, many individuals will still need vehicles for transportation—they may simply go with cheaper cars.
Reflecting its attractive business profile and relatively strong share price action, Progressive has a trailing P/E ratio of 14, above its industry’s median of 13. In the first two months of 2020,
Progressive’s operating earnings per share slipped 3%, though total revenue rose 2%. For the full March quarter, the consensus expects Progressive to report earnings per share of $1.45, up 7%, on revenue of $10.23 billion, up 11%. Nancy’s note: PGR missed EPS estimates, posting earnings of $1.17 per share (looks like, due to losses on securities held), on revenues $9.9 billion, which were up 7%.
Richard Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233-5922, April 13, 2020
Healthcare 829
Extendicare Inc. (EXE.TO) | Daily Alert May 12
Extendicare operates 120 senior care and retirement living centers in Canada, and provides home health care services. The world of eldercare has been thrown into turmoil as the coronavirus preys on the aged, with 79% of all Canadian COVID-19 deaths connected to long-term care and seniors’ homes.
When contemplating whether to invest in EXE or other outfits in this sector, investors have some major negatives to consider because of the coronavirus. One is the huge additional cost needed to keep the facilities spanking clean. Plus, more money is needed for masks, gloves, and gowns. Meanwhile, salaries are being bumped up and absenteeism has jumped as employees get sick and self-quarantine, while some choose to avoid the risk altogether and not go to work.
This kind of problem might discourage young people from embarking on careers as health care workers. While many seek out opportunities to help others, lots of folks embarking on their careers might decide that the rewards are not worth the risk. That will make it more difficult to fulfill future staffing needs.
Another danger for investors is that many homes have been experiencing a far higher rate of deaths than the historical norm. That raises the question of whether there will be future lawsuits. While the risk exists, EXE can point to the fact that it deals with viral threats and influenza on a continuing basis. Certainly, class action lawsuits are more likely in the litigious United States than in Canada. Still, the gravity of this situation is different than anything we’ve seen, and a proposed class action has already been filed against another owner of nursing and retirement facilities in Canada.
Meanwhile, as residents die—whether of natural causes or the coronavirus—prospective residents are generally not being admitted because of the lockdown. That lower occupancy can translate into reduced revenue. Eventually, of course, those beds will be filled; there is plenty of pent-up demand. The demographic of age 75 and over is expected to grow by about 4% a year for the foreseeable future, according to the company.
One key question for Extendicare is whether the bottom line can remain black. Given the $29-million profit last year, there seems to be margin to work with. There is also the question of the security of the monthly dividend of 4 cents a share, or 48 cents annually. The most recent dividend cut was necessitated by the red ink of 2014, the last time the enterprise lost money. This would suggest the company will decrease the payout as required. It’s worth noting that when the stock price teetered in March of this year, the dividend reinvestment plan was cancelled because it was decided that the exchange for shares was at too low a price. Nonetheless, more than $123-million in the kitty should help cover some future payouts.
Extendicare continues to grow. Over the past year and a half, 281 units have been added. Redevelopment is happening at 21 facilities, which will also increase the number of beds. Occupancy in most of its long-term care homes remains above 97%, notwithstanding the current crisis, while retirement-home occupancy is at about 93%, the company says. In addition, it is providing third-party services to about 64,800 residents in non-Extendicare facilities such as those owned by Amica Senior Lifestyles. Third-party growth has been huge, up approximately 27% since the end of 2018.
While governments deem many services non-essential during these turbulent times, and the definition varies from province to province, there is no question that housing for seniors is vital. Extendicare says more than 90% of its business lines are government funded, offering additional security for investors.
Extendicare appears to be a reasonable investment. The shares did drop somewhat in March but have recouped some ground. While the payout could be the best reason to invest, it would not surprise us to see capital appreciation of better than 50% over the next five years.
Benj Gallander, Contra the Heard Investment Letter, 416-410-4431, gall@pathcom.com, contratheheard.com, May 1, 2020
Pfizer Inc. (PFE) | Daily Alert May 15
Last week, I introduced the concept of Cornerstone Stocks—key companies that should perform well even in the midst of a pandemic and emerge stronger on the other side. The first five were Walmart, Costco, BCE, AT&T, and Franco-Nevada.
This week, I’m adding five more to the list, including:
Pfizer Inc. is one of the world’s leading biopharmaceuticals companies and a leader in the race to develop a vaccine for the coronavirus. Last week the company announced it is aiming to have 10-20 million doses available by year-end—assuming it meets regulatory standards. Right now, it’s in the trial stage in Germany.
But the company’s portfolio goes well beyond a COVID-19 vaccine. Its business units include Oncology, Inflammation & Immunology, Rare Disease, Hospital, Vaccines, and Internal Medicine. Its Upjohn division focuses on off-patent and generic medicines.
The company recently released first-quarter results, in which it reaffirmed its guidance for earnings per share of US$2.82-2.92 for 2020 and says it has adequate liquidity for the foreseeable future. The stock pays a secure quarterly dividend of US$0.38.
Gordon Pape, Internet Wealth Builder, www.buildingwealth.ca, 1-888-287-8229, May 5, 2020
*Johnson & Johnson (JNJ)
We’re moving to the sidelines on large segments of the consumer discretionary sector as well as energy and a lot of manufacturing. Those stocks simply aren’t worth our attention right now.
Johnson & Johnson, on the other hand, is worth our interest. The stock is up 3% year to date (YTD) and yields 2.6% right now. This is enough to replace Treasury debt in part of your portfolio, while also providing you with a growth opportunity.
When 2021 rolls around, I see JNJ handing shareholders 18% year-over-year growth. That’s only a few months away, with that dividend justifying a little patience in the meantime.9
Hilary Kramer, Trading Desk, Eagle Financial Publications, hilarykramer.com/, 844-419-4548, May 2020
Technology 829
NAPCO Security Technologies, Inc. (NSSC) | Daily Alert April 17
NAPCO Security is one of the world’s leading solutions providers and manufacturers of high technology electronic security, including door locking systems, access control, home alarm/detection systems to detect intrusion, fire, temperature, or glass breakage, and IoT connected home products.
With its share price cut to $16 back on 3/12, NAPCO announced that it would resume its 500,000 share repurchase plan which has 435,000 shares still to be purchased. The company made its case: “We believe that in light of the prospects that NAPCO has in front of us with the new products recently launched such as the iSecure, Firelink and the expectation of new locking and access control products with recurring revenue in the late summer or fall of 2020, these could lead to continued growth for us. Our recurring revenue from the existing Starlink line of communicators grew 45% year over year in fiscal 2019. As of our fiscal Q2 2020 [ended 12/31] the annualized run rate for [high margined] recurring revenue is now $24 million based on the month of December 2019.
“We also believe that the outlook for school security is strong and should add to our growth in the future as well as being driven by all of the funding legislation that many states have passed over the last year. The total of all the state funding legislation that has been passed is approximately $1 billion dollars. The Federal government has also allocated $100 million dollars per year for the next ten years for school security. Based on these prospects and other factors the company has determined that repurchasing shares at the current levels will be an attractive use of our capital. We are focused on creating shareholder value and with our senior management holding approximately 38% of the shares, our interests are aligned with our shareholders. NAPCO will continue its outreach program to raise awareness of the bright future we believe is ahead.”
NAPCO did not mention COVID-19 in this 3/12 press release, though it would certainly be a great time to install its door locking systems in schools while they are all closed. I imagine business has since slowed as the country goes into lockdown. Here too, I think the best way to look at this is one year out. 2020 is likely somewhat of a bust. Forget about it and assume NAPCO can hit this year’s EPS target of $.84, next year (when analysts otherwise had been foreseeing $1.20).
And, given NAPCO’s growth record I think there is good value here taking the longer term view. That seems to be out of fashion on Wall Street, for now. I don’t know where the stock will bottom, or when, but the stock market usually is looking 6 months out, so we may be about there. I believe this no-debt company will survive just fine.
As I’ve been typing this, the market has opened and NAPCO’s shares are up another 9% today as of 10:30 AM, now at $16.45). The company announced preliminary results for the recent quarter, its fiscal Q3. Despite everything, revenues advanced 4% to $26.2 million and recurring service revenues (primarily alarm monitoring) have now risen to an annualized rate of $25.4.
NAPCO notes that, “results would have been even higher were it not for supply chain interruptions (since remedied) caused by the initial shock of this unprecedented crisis.” The company gave no guidance for what is likely to be a challenging fiscal Q4 (nobody knows) except to say it is doing everything it can to stay safe and to focus on growing future sales and earnings, even if not temporarily in its fiscal Q4, then thereafter. And, of course, recurring revenue should be unaffected.
The company also pointed out, as I did, that it has zero debt. It also has $10 million of cash and $11 million on its revolver. As to having risen 20% in a little over a day to $16.45, the stock has been to (over) $30 in better times on its growth prospects, so while the higher PE’s awarded earlier will likely not return soon, there remains plenty of upside.
Tom Bishop, BI Research, www.biresearch.com, April 6 & 7, 2020
Fanuc Corporation (FANUY) | Daily Alert April 28
While you have seen a multitude of stories about the rise of robots in manufacturing as well as everyday life, you may not be aware of Fanuc, a Japanese blue chip with zero debt, a sterling reputation, and a storied past. Headquartered in the shadow of Mount Fuji, Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the brains of industrial robots. Fanuc claims to be the only company that uses robots to make robots.
Fanuc, whose name is an acronym for Fuji Automatic Numerical Control, has been a world leader in robotics since the early 1970s. It was founded as a wholly owned subsidiary of Fujitsu in 1955 after that electronics giant decided to enter the factory automation business. Today, Fanuc is as global as it gets with over 240 joint ventures and offices in over 46 countries and a commanding 65% share of its world market. For example, industrial robot manufacturer Shanghai-Fanuc Robotics Co. Ltd. has a plant in Shanghai’s Baoshan district.
Fanuc should benefit from robust demand from developed markets as well as China as its manufacturing costs continue to increase and manufacturers look to robots to increase productivity. You can find Fanuc robots at Amazon warehouses as well as the shop floor of General Motors.
The question of whether robots will replace manufacturing workers is a common one at cocktail parties these days (well, maybe not these days, but back when cocktail parties were allowed before this global pandemic hit). But it shouldn’t be a question. The fact is, they already are. The use of industrial robots has allowed companies like Panasonic to run factories that produce 2 million plasma television sets a month with just 25 people.
Much of the company’s sales are channeled through GE Fanuc, a 50-50 automated machinery joint venture with General Electric Company. Fanuc does most of its manufacturing in Japan, and is building a new factory near Tokyo to double its domestic output capacity of machine tools to produce parts of smartphones.
I have been following Fanuc’s stock for some time, but it always seemed expensive. With the pullback in the market however, we now have a great entry point as the stock is trading just over 13, the lowest point in a decade, and well off its 52-week high of 19.Fanuc offers investors a pristine balance sheet with zero debt and a whopping $7 billion in cash. Profit margins are impressive, and Fanuc also bought back 72 million shares last month. In short, Fanuc is a high-quality play on what seems to be an unstoppable trend.
Timothy Lutts, Cabot Stock of the Week, cabotwealth.com, 978-745-5532, April 20, 2020
Twitter, Inc. (TWTR) | Daily Alert April 30
Twitter is an American microblogging and social media company whose platform allows users to post and interact with short written messages known as “tweets.” It has grown to play a vital role in journalism, politics, finance and many other fields, and is one of the 10 most-visited websites on the internet.
The company was founded in 2006 and is based in San Francisco, California. It has over 320 million monthly active users.
In late-March Twitter withdrew its Q1 guidance, saying that the economic slowdown caused by the COVID-19 pandemic is already hitting its advertising revenues. The firm now expects a Q1 operating loss.
In early April, the firm completed a large purge of accounts alleged to be unregistered promoters of certain countries’ governments—a violation of Twitter’s policies. Later in the month, founder Jack Dorsey pledged $1 billion of his stake in Square Inc., a payment processor he co-founded, to provide relief to victims of the COVID-19 pandemic.
We rate Twitter a “Buy” under $35. The risk level is “Medium.”
Jason Stutman, Technology & Opportunity, www.angelpub.com, 877-303-4529, April 2020
Zscaler, Inc. (ZS) | Daily Alert April 23
Businesses are accelerating their digital aspirations and work will never be the same. Gartner Inc. surveyed business leaders and found a majority of respondents were looking to make work from home a permanent part of their business model. Securing all those new connections is a big opportunity for investors.
But the opportunity for investors isn’t in the transition to telecommuting; it’s in security. Enter Zscaler. Zscaler builds walls around data, not applications. The San Jose, California, company makes cloud-based, next-generation firewalls. With millions of remote employees connecting to enterprise servers via unsophisticated home Wi-Fi, focusing on the data is clearly the way to go. In fact, it may be the only feasible solution in the new normal.
Zscaler’s Internet Access (IA) platform processes 35 billion requests with 125,000 unique security updates every day. Every endpoint, from powerful workstations and laptops, to smartphones and tiny Internet of Things devices, gets the same level of security. When a threat is identified anywhere, it gets blocked on the ZIA cloud platform everywhere.
That kind of versatility appeals to corporate customers. Consequently, Zscaler has grown quickly, attracting a stable of high-profile clients. Sales have been compounding in the 50% annual growth rate for years thanks to clients like Facebook (FB) and Google. Revenues jumped from only $53 million in 2015 to $302 million through 2019.
Long-term growth investors should enter new positions into a decline. In the meantime, get ready for innovative companies like Zscaler to start revolutionizing our new world.
Jon Markman, Pivotal Point, issues@e.moneyandmarkets.com, 1-800-291-8545, April 13, 2020
Zynga Inc. (ZNGA) | Daily Alert May 19
If you really want to become a better investor, then you need to be looking at where the smart money is heading. You need to understand what is truly driving the markets and how you can take advantage of these moves as—and before—they hit the mainstream. That’s how the long-term wealth can be found.
Zynga Inc. develops, markets, and operates social games as live services in the United States and internationally. The company’s games are played on mobile platforms, such as Apple iOS and Google’s Android operating systems, as well as on social networking sites, such as Facebook. It also provides advertising services comprising mobile and display ads, engagement ads and offers, and branded virtual items and sponsorships to advertising agencies and brokers, and licenses its own brands.
As analysts at Stephens recently noted, Zynga “is well-positioned for consolidation in the mobile gaming market,” as quoted by Barron’s. “We believe the next six to 18 months will be a period of consolidation as established mobile players further leverage their core publishing infrastructure by acquiring sub-scale studios to drive growth. Zynga has a proven ability to successfully execute.”
Better, it’s getting a boost from the World Health Organization’s note to play more video games. “We’re at a crucial moment in defining outcomes of this pandemic. Games industry companies have a global audience—we encourage all to #PlayApartTogether. More physical distancing plus other measures will help to flatten the curve plus save lives,” tweeted Ray Chambers, U.S. ambassador to WHO.
SunTrust Robinson Humphrey analyst Matthew Thornton is bullish on the stock as well, with a price target of $7.50. “The maker of mobile and social games is likely to hold up or perhaps benefit from the coronavirus outbreak,” as quoted by Investor’s Business Daily.
Ian Cooper, The Cheap Investor, support@thecheapinvestor.com, May 2020
Low-Priced Stocks 829
*KLX Energy Services Holdings, Quintana Energy Services (KLXE, QES)
This week, KLX Energy Services (KLXE) and Quintana Energy Services (QES) announced that they would be merging.
QES shareholders will receive 0.4833 shares of KLXE for every share of QES that they own. The transaction is expected to close in the second half of 2020.
There is an opportunity to short QES pre-merger at $0.72 and buy “QES post merger” by buying KLXE. For every 1 QES share sold short, you should buy 0.4833 shares of KLXE. Effectively, you are simultaneously buying QES at $0.54 and selling it at $0.72. This works out to a 33% return (not included interest cost to borrow) if the merger closes.
The transaction makes a lot of sense for a couple of reasons. It will enable both companies to achieve better 11
scale and cut costs as duplicative functions will be consolidated (executive team, marketing, sales, corporate headquarters).
It will enable KLXE to de-lever. Because QES has minimal debt, KLXE’s net debt to ‘19 EBITDA will decline from 1.6x to 1.3x. After factoring $40MM of cost cuts, it will decline further to 0.9x.
Richard Howe, CFA, The Stock Spin-off Investing Newsletter, stockspinoffinvesting.com, 617-750-7454, May 7, 2020
*Precigen, Inc. (PGEN)
The FDA has cleared the IND application to initiate a Phase I/II trial for PRGN-2009, a first-in-class, off-the-shelf (OTS) investigational immunotherapy utilizing the AdenoVerse platform designed to activate the immune system to recognize and target human papillomarivus (HPV+) solid tumors. HPV+ cancers represent a significant health burden in indications such as head and neck, cervical, vaginal and anal cancer and are in need of new treatment options as current options are limited to radiation and chemotherapy.
HPVs are a significant and underserved market opportunity. Globally, high-risk HPVs cause nearly 5% of all cancers, with about 570,000 women and 60,000 men diagnosed with HPV-related cancers each year. Nearly 44,000 HPV-associated cancers occur in the United States each year. Of these, approximately 25,000 occur in women and 19,000 occur in men. HPV is considered responsible for more than 90% of anal and cervical cancers, about 70% of vaginal and vulvar cancers, and more than 60% of penile cancers. Recent studies indicate that about 70% of cancers of the oropharynx (top of throat) also may be related to HPV.
Importantly, the start of this trial positions PGEN for a significant catalyst when the company/NCI releases the first data late this year.
PGEN is a BUY under 12 with a TARGET PRICE of 24.
John McCamant, The Medical Technology Stock Letter, bioinvest.com, May 3, 2020
Preferred Stocks & REITs 829
Alexandria Real Estate Equities, Inc. (ARE) | Daily Alert April 29
Landlords and lenders have taken it on the chin since the world shut down. And until this place is actually open for business once again, many REIT (real estate investment trust) investors are unfortunately rolling the dice on the next rent payment coming in, the next commercial mortgage payment being made.
To be fair, however, select REITs are going to be OK, and many of them are selling at bargain prices right now. In the short run, REIT prices can move together (for example, drop when the 10-year Treasury yield rises). However, as weeks turn into months and years, we usually see a great variation in the performance of REIT stocks.
The REIT sector varies widely because, well, it really isn’t a sector at all. It’s a corporate vehicle that let’s firms get a pass on taxes provided they pay most of their profits to their shareholders as dividends.
A cell tower landlord like Hidden Yields holding American Tower (AMT) and a shopping mall owner like Simon Property Group (SPG) may both be REITs, but their cash flows are completely different. And their year-to-date returns reflect the diverging outlooks for cell phone usage and mall traffic:
(Think about Amazon (AMZN) and Macy’s (M). Both are technically retailers, but they have little in common. Ironically, AMZN is a major holding of many retail ETFs. Why investors would want to also own the firms that are being eaten alive by Bezos & Co., I do not understand.)
Buying a REIT ETF these days carries similar “loser risk.” This is a stock picker’s market, and we should be especially picky when combing through the wash out in REIT-land. Many stocks have been trashed for good reason, but bargains do exist. To find them, we should focus on the landlords who derive their income from “asset-lite” businesses, which often happen to be tech plays.
There’s a reason why the NASDAQ has whipped the S&P 500 in this rough start to the 20s. Many of us are sitting at homes with our cell phones nearby, Zoom (ZM) meetings running while we shop online at Amazon! The theme here is that our attention and our wallets are all focused on tech, and Mr. Market knows this:
We don’t talk tech often here, as most NASDAQ firms tend to pay little or no dividends. However, there is a backdoor way that we can profit from tech’s strength and collect dividends, and that’s by cherry-picking REITs (which do yield something) that rent to tech firms. We already discussed AMT—let’s get into a few more ideas for our shopping list.
Alexandria Real Estate Equities (ARE) is an undercover tech play. It owns offices and labs in what it calls “innovation clusters,” neighborhoods where companies and government agencies in a particular research area are concentrated.
Once tenants are in these clusters, they tend to stay. Heading into the pandemic, Alexandria boasted a sky-high 96.8% occupancy rate. Innovation-focused companies often let their employees work from home, so the current situation is nothing new. I would expect most are paying their rent just fine today, with no plans to shed the office.
Brett Owens, Contrarian Outlook, BNK Invest Inc., 500 North Broadway, Suite 265, Jericho, NY 11753 USA, 516-620-4294, info@bnkinvest.com, April 22, 2020
Omega Healthcare Investors, Inc. (OHI) | Daily Alert May 1
Investors were relieved to see Omega Healthcare Investors, the Maryland-based assisted living real estate investment trust (REIT), announce that it once again was paying a quarterly dividend of 67 cents per share. It reports first-quarter earnings in early May.
It rallied sharply after CEO Taylor Pickett issued a comforting statement to investors, “We are heartened by the recent progress on relief measures at the federal and state levels, including Medicaid reimbursements, which we believe may offer meaningful support for our skilled nursing and assisted living facility operators working so hard to meet the needs of their residents.”
Omega has been the most volatile of the dividend-paying stocks. The fear is that Omega Healthcare will see defaults on its triple-net lease loans with nursing homes and assisted living facilities as it saw in Texas a few years ago. Until this crisis, Omega was doing extremely well, with profit margins of 37%. The stock hit $42 a share in January. Suddenly, it fell in half, only to recover quickly (it actually rose 49% in one day in March!). It clearly is back on its way to recovery.
Mark Skousen, Forecasts & Strategies, markskousen.com, Eagle Financial, 300 New Jersey Ave. NW, Suite 500, Washington, D.C. 20001, May 2020
SVB Financial Group (SIVBP) | Daily Alert May 11
SVB Financial Group; 5.25% Fixed Rate, Non-Cumulative Perpetual; Par $25.00; Current Annualized Yield 5.29%; Call Date 02/15/25; Yield to Call 5.42%.
SVB Financial Group (SIVB) is a bank holding company based in Santa Clara, CA. Since inception, the company has assisted innovators in the technology and biotech sectors, along with their investors. The banking company is a key advisor and lender to companies in sectors such as Hardware & Frontier Technology; Software & Internet; Life Sciences & Healthcare; Energy & Resource Innovation; Private Equity & Venture Capital; and the Premium Wine Industry.
SIVB has historically achieved strong growth, driven by the exceptional growth of its clients and their related industries. The company reported first quarter 2020 net income of $132.3 million or $2.55 per share, missing analysts’ $3.07 estimates. Results were down sharply, due to higher loan loss provisions on top of the expected increase in realized loan losses, tied to weakening economic conditions arising from the COVID-19 pandemic.
Despite the likelihood of higher loan loss provisions and lower earnings throughout 2020, we are constructive on SVB’s outlook, given the banking company’s strong capital position and present low level of non-performing loans.
Dividends on this issue are taxed at the 15%-20% rate. This preferred is split-rated between investment grade and non-investment grade. However, senior debt ratings are investment grade by both Moody’s and S&P.
As a result, we recommend this issue for low- to-medium-risk taxable portfolios. Buy up to $25.50 for a 5.15% current yield and a 4.79% yield to call.
Martin Fridson, CFA, Income Securities Investor, www.isinewsletter.com, 800-472-2680, May 2020
High Yield 829
Cleveland-Cliffs Inc. (CLF) | Daily Alert April 21
In the same way that the recent market sell-off likely helped wash out any weak holders still in Bristol-Myers stock following the merger with Celgene, it likely had a similar effect on any holders of Cleveland-Cliffs who had recently become shareholders as a result of the closing of the acquisition of AK Steel and weren’t really sure if they wanted to be part of the new company or not. And when you’re in a “sell anything I don’t love” mode, these “oddly acquired” investments sometimes are the easiest to let go of.
Either way, the good news for those of us in the stock for the long haul is that a sizable percentage of those potential sellers likely got “cleaned up” as part of the sell-off. CLF is now a strong buy under $4 and a buy under $6.
Nate Pile, Nate’s Notes, NotWallStreet.com, 707-433-7903, April 10, 2020
Phillips 66 Partners LP (PSXP) | Daily Alert April 27
Phillips 66 Partners LP engages in the ownership, operation, development, and acquisition of crude oil, refined petroleum product and natural gas liquids pipelines and terminals, and other transportation and midstream assets. It also provides terminals and storages for oil.
Phillips 66 Partners L.P. (PSXP) benefits from stabilization in oil prices and offers a rich distribution. Keep in mind that this is a master limited partnership that will send K-1 statements, and which is subject to limitations when held in individual retirement accounts.
John Dobosz, Forbes Dividend Investor, www.newsletters.forbes.com, 212-367-3388, April 3, 2020
Watsco, Inc. (WSO) | Daily Alert May 18
Watsco is an HVAC company connected to Carrier Global Corporation (CARR) by a large joint venture. WSO is the largest distributor of HVAC equipment in the U.S. and about 61% of its sales are Carrier products. WSO is mostly located in the sunbelt states where it’s about staying cool. The company also does a significant aftermarket business in parts/compressors, coils, motors, etc.
Revenues are about $5 Billion, and WSO has around 32 million shares outstanding. This is a wonderful company with an A+ balance sheet. It has just a sliver of debt, around $370 Million. WSO also sports very strong free-cash flow. With low debt and the-business the way it is, WSO has a bright future ahead of it and a very clean runway.
The Nahad family has controlled the stock for decades and the son and father make for a dynamic duo. They have large skin in the game, and a very solid track record of being good to shareholders. These two guys are focused, quiet, and they deliver the goods.
WSO also pays a nice dividend too.
In 2009 WSO/CARR started a joint-venture for the USA/Latin America and the Caribbean. Carrier helps WSO offer premium level product. This also affords WSO the opportunity to sell parts/supplies, and many other things through its Carrier partnership.
Carrier Enterprise, the joint-venture is structured similar to WSO/other tack-on acquisitions with a de-centralized management structure that has run smoothly for the last 10 years, as WSO has gobbled up partnership/rights from CARR along the way. WSO owns about 80% of the joint venture.
In April 2011, Carrier Enterprise Northeast LLC embarked on another JV to distribute Carrier products in the Northeast. This made WSO a 60% owner of this JV with Carrier owning the other 40%.
In April 2012, Carrier Enterprise Canada L.P started a 3rd JV with UTC/Canada, previously 100% owned by CARR that now has WSO controlling 60% of the JV and Carrier owning the rest.
This has been a definite win for both companies, and I think it’s a win for WSO to own control/of these Joint Ventures.
The company is in the right niche right now and HVAC costs are going to rise, as demand for cleaner/fresher indoor-air is going to be an issue for the future that will demand attention and lots of money too.
Bob Howard, Positive Patterns, P.O. Box 310, Turners, MO 65765, 417-887-4486, March 5, 2020
*Brookfield Property REIT Inc. (BPYU)
Brookfield Property REIT (BPYU) last week reported first quarter earnings. The actual earnings reports were from Brookfield Property Partners (BPY). We own BPYU shares, which are the IRS Form 1099 reporting equivalent to BPY units.
Brookfield Property is doing a good job of navigating the COVID-19 fallout in the real estate sector. The company declared a regular dividend of $0.3325 to be paid on June 30.
BPYU currently yields 15%. The also recommended Brookfield Property REIT Preferred A (BPYUP) yield is about 11%. Owning both is an attractive strategy to balance risk and reward.
Buy BPYU up to $11.00 to lock in a 12% yield.
Buy BPYUP up to $16.00 to lock in a 10% yield on the preferred shares.
Tim Plaehn, The Dividend Hunter, yn345.isrefer.com/go/cabmdpc/cab/, May 12, 2020
*Franklin Resources, Inc. (BEN)
One stock that we owned a few years ago has caught my eye again. Franklin Resources was not a winner for us when we sold in 2016. However, (those fateful words) this time may be different. BEN is trading below book value, with a PE below 7, while paying a 6% dividend. This is a profitable family-run business with insiders owning over 20% of the shares. I can’t help but think BEN’s brutal sell-off over the last two months is simply the herd following the market and not justified by any basic change in the fundamentals. We shall see.
Neil Macneale, 2 for 1 Stock Split Newsletter, 2-for-1.com, 408-210-6881, April 2020
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Sell: AdvisorShares Ranger Equity Bear ETF (HDGE) | Daily Alert April 21
Updated from WSBI 814, February 13, 2019
I have decided to sell AdvisorShares Ranger Equity Bear ETF and will be dropping coverage after this issue. That being said, if you have found success incorporating this “short ETF” into your portfolio, I would encourage you to continue doing so, especially if it has helped provide peace of mind when the market has gone haywire on the downside, as the odds suggest that there could still be a retest of recent lows in the market. And whether those lows hold or end up failing, HDGE ought to rally while the market is falling (and thus provide peace of mind). For everyone else, HDGE is now a SELL.
Nate Pile, Nate’s Notes, NotWallStreet.com, 707-433-7903, April 10, 2020
*SELL Brookdale Senior Living Inc. (BKD)
Updated from WSBI 810, October 17, 2018
The Covid-19 virus is bringing health and financial hardships to Brookdale Senior Living. We believe there is a 14
considerable risk that occupancy will decline as the elderly and their families find alternatives to its senior housing facilities. Also, higher staffing and supplies expenses will likely add further profit pressures onto Brookdale. These newer problems, when combined with its already- difficult financial picture and reluctance to sell additional properties, leave the company with limited prospects for recovery, so we are moving the shares to a Sell.
George Putnam III, The Turnaround Letter, turnaroundletter.com, 617-573-9550, May 2020
*SELL Washington Prime Group Inc. (WPG)
Updated from WSBDS 293, March 8, 2017
Washington Prime Group had a reasonable chance to succeed with its turnaround plan, which required relatively stable rent revenues to help fund the redevelopment of its in-transition malls. However, with its malls now closed, more stores in or approaching bankruptcy, and its access to additional capital likely limited, combined with the pressure of loan covenants, we believe the company’s future is irretrievably lost and are moving WPG shares to a Sell.
George Putnam III, The Turnaround Letter, turnaroundletter.com, 617-573-9550, May 2020
*Performance Food Group Company (PFGC)
Updated from WSBI 815, March 13, 2019
Performance Food is being downgraded to Sell because of its murky near-term outlook, deteriorating stock-price action, and mixed operating momentum. Aided by acquisitions, March-quarter earnings per share rose 38% and revenue increased 49%. But the food distributor said total organic case volume declined 7%, largely reflecting restaurant and theater closures. Gross profit margin fell more than one percentage point to 11.5%. Shares have rallied sharply off a March low of $7.41 and should be sold.
Richard J. Moroney, CFA, Upside, upsidestocks.com, 800-233-5922, May 5, 2020
*BMC Stock Holdings, Inc. (BMCH)
Updated from WSBI 821, September 18, 2019
BMC is being dropped from coverage. A leading supplier of building materials, the company has taken steps to bolster its balance sheet and conserve cash flow. But the stock has retreated near a recent low, hurt by a mixed outlook for residential construction and worsening profit picture. Full-year earnings per share are expected to tumble 36% on a 6% sales decline. The stock should be sold.
Richard J. Moroney, CFA, Upside, upsidestocks.com, 800-233-5922, April 21, 2020
*FLEETCOR Technologies, Inc. (FLT)
Updated from WSBI 819, July 10, 2019
FleetCor Technologies is being dropped from the Buy and Long-Term Buy lists. The shares have soared 45% since their March 23 low, but analyst estimates for both 2020 and 2021 are plunging. We anticipate a challenging environment ahead, given FleetCor’s heavy exposure to retail fuel purchases, representing 44% of sales last year. We’re cutting bait.
Richard Moroney, CFA, Dow Theory Forecasts, www.dowtheory.com, 800-233-5922, May 4, 2020
*General Electric Company (GE)
Updated from WSBI 812, December 19, 2018
I’m a big believer in Chairman & CEO Larry Culp but he’s been handed a very bad hand by Boeing and COVID-19. The company just announced a 25% reduction in its aviation workforce globally. Since it supplies engines to Boeing and other aircraft manufacturers, the outlook here is not good. The medical side of the business is doing fine, and the company is focused on improving its balance sheet and bringing down its high debt ratios but with aviation going down, the job just got harder.
I believe that Larry Culp will get the job done but it’s certainly going to take longer and in the medium term there are better places to put your money. Sell.
Glenn Rogers in Gordon Pape’s Internet Wealth Builder, buildingwealth.ca, 1-888-287-8229, May 11, 2020
*Industrias Bachoco, S.A.B. de C.V. (IBA)
Updated from WSBI 808, August 14, 2018
Just too much disappointment and lack of performance with IBA. Time to sell it and move on. There are plenty of food stocks to own here, so sell this one and get the money to a better place.
Bob Howard, Positive Patterns, P.O. Box 310, Turners, MO 65765, 417-887-4486, May 5, 2020
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