Monthly Archives: May 2018

Dividends

Buy and Hold Forever? Nah – I’d Sell If You See These 3 Signs

Year-to-date my Hidden Yields subscribers have booked total returns (including dividends) of 155%, 30% and 27%. These profits inspired a common question:

“How’d Brett know when to sell?”

Most investors focus on buying. But selling is an ignored art. And leave it to savvy readers like you to recognize this.

I believe in letting winners run, of course, especially with respect to dividend growers. Sometimes there’s never any reason to actually sell a stock if the dividend’s sponsor is consistently growing its profits and dishing them with shareholders.

Other times, however, we’re better off booking gains and re-deploying our money to more promising pastures. Which brings us back to my readers’ prescient question – how’d I know, because they want to be able to identify sell signals, too.

Remember, there are three ways a stock can pay us:

  1. With a dividend today,
  2. By repurchasing its own shares (to make each remaining one intrinsically more valuable), and/or
  3. By boosting its payout tomorrow so that its stock price follows its dividend higher.

Our Hidden Yields formula focuses on the third – and most lucrative – strategy. It’s led us to 24.3% annualized returns to date. But it takes a few months worth of patience to achieve these gains, because we give up the most obvious strategy – dividends today – in exchange for this price upside tomorrow.

Sell Signal #1: Slowing Dividend Growth

Which means if a dividend grower isn’t growing that payout fast enough, we should move on.

Earlier this year, warehouse landlord and Hidden Yields alumni First Industrial (FR) raised it quarterly payout by 3.6%. That may be enough to excite more “basic” dividend investors, but it doesn’t cut it for us.

FR had been fine for us. In nearly two years, my readers and I saw its payout climb by 14%. We enjoyed 21% price gains too. Add up our dividends and our share appreciation, and we banked 27% total returns.

FR Gains: 21% Price + 6%+ Dividends = 27% Total Returns

“Fine” dividend growth isn’t enough for us, however. So we parted ways as friends and put FR back on our watch list.

Sell Signal #2: Low “Relative” Yield

If you want to make real money with stocks, you should always put your money with the faster dividend grower. Boeing was a great example – we added it to the Hidden Yields portfolio in December 2015. Two massive dividend raises since have sent the stock soaring to the tune of 157% total returns for us:

Boeing Soars With Its Payout

Our catalyst was the 57% cumulative “raise” from Boeing, which in turn rocketed its stock price higher. It certainly helped that we bought shares when they were a coiled spring, due to “catch up” with the firm’s ever-growing payout.

Blue Line (Price) Was Due to Catch Up – and It Did

But the curse of high prices is low yields. And Boeing’s price moonshot cratered its current yield:

The Curse of a High Price: A Low Yield

Could shares keep moving higher? Sure. But we’re not in the “buy and hope” business. We banked our 157% gains and put our cash into the next 100%+ mover.

Such as? I’ll share seven stocks with similar setups in a minute. First, let’s wrap up this lesson with our third potential warning flag.

Sell Signal #3: Business is Fine Today, But Looks Dicey Tomorrow

“First-level” dividend growth investors look in the rearview mirror, fawn over past payout increases, and declare a stock an “aristocrat” simply because its past performance is good.

Warren Buffett, the guy who made a fortune on Coca Cola (KO) and inspired countless copycats who saw their late money grind sideways, said it well:

“If past history is all there was to the game, the richest people would be librarians.”

When you and I buy next year’s payout today, we need to picture the future. Are we looking at a retail REIT that is having its rent checks intercepted by Amazon (AMZN)? Or are we looking at an Amazon-proof retailer that is actually a bargain due to overblown worries?

Let’s consider the case of Best Buy (BBY), which boldly decided to take Amazon head-on in 2012 when turnaround CEO Hubert Joly took the helm. And not only did the electronics giant live to tell about it, but it’s now leveraging Jeff Bezos’ website as a shopping channel of its own!

In recent years, Joly has been smartly “doubling down” on the quality of its retail stores (which Amazon doesn’t have). This has powered impressive free cash flow (FCF) growth, which has in turn driven serious stock returns:

Expert Service. Unbeatable Stock Price.

What else doesn’t Amazon have? A dividend, of course. Meanwhile Best Buy pays one, and its growth has been spectacular. Joly & Co. just raised their dividend by 32%. This “high velocity payout” is now up 165% in the last five years! It’s a big reason investors have enjoyed 232% returns in the face of regular Amazon fears.

We dividend hounds don’t get the benefit of hindsight. We must determine up front whether the light at the end of a tunnel represents brightening prospects – or a train rolling in to smash our firm’s entire business model.

This Friday: 7 Fast Dividend Growers with Bright Futures and 100%+ Upside

Life is too short to waste our time with middling dividends! Since share prices move higher with their payouts, there’s a simple way to maximize our stock market returns: Buy the dividends that are growing the fastest.

Don’t be fooled by modest current yields. They often don’t capture the growth potential (and it’s the dividend’s velocitythat really makes us big money – not its starting point).

How to we buy high velocity dividends, the aristocrats of tomorrow? It’s a simple three-step process:

Step 1. You invest a set amount of money into one of these “hidden yield” stocks and immediately start getting regular returns on the order of 3%, 4%, or maybe more.

That alone is better than you can get from just about any other conservative investment right now.

Step 2. Over time, your dividend payments go up so you’re eventually earning 8%, 9%, or 10% a year on your original investment.

That should not only keep pace with inflation or rising interest rates, it should stay ahead of them.

Step 3. As your income is rising, other investors are also bidding up the price of your shares to keep pace with the increasing yields.

This combination of rising dividends and capital appreciation is what gives you the potential to earn 12% or more on average with almost no effort or active investing at all.

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Cryptocurrency

Blockchain Beer Vending Machine Debuts at Consensus 2018

When the history of blockchain technology is written, 2018 will be known as the year it arrived. How do we know that?

Beer.

Anheuser-Busch InBev – which makes Budweiser and Bud Light (among others) – and blockchain identity company Civic are demonstrating the first blockchain beer vending machine at Consensus 2018. Actually, Civic is doing most of the demonstrating because Consensus is the world’s most influential cryptocurrency and blockchain conference.

This vending machine is cool. If you’ve ever used your phone to pay for something with Apple Pay or Google Pay, it works a little bit like that.

Everything starts with setting up your phone. You have to download the Civic app and set up an account that verifies your age and identity. It’s almost like signing up for a digital driver’s license or ID. Once your account is created, you can use the app to verify your age at the vending machine (or any service that accepts Civic). Then you transfer some bitcoin, and the machine gives you a can of cold beer.

Civic handles the identity verification. Anheuser-Busch InBev operates the vending machines.

And it’s important that Anheuser-Busch is involved. Its beers – from television commercials to consumption – dominate American culture. And when a major sector or company embraces a new technology, it’s an early indicator that mainstream consumer acceptance is on the way.

Consider the e-commerce landscape in 1989. Yes, there was e-commerce in 1989. The web wasn’t around. But dial-up services like Prodigy, America Online and CompuServe still connected people to the internet.

It was in that environment that American Airlines offered its easySABRE service on Prodigy. The service allowed you to book flights on 300 airlines, make reservations at thousands of hotels and even rent cars. It was ahead of its time. (Yes, I used it. Don’t judge.)

In 1996, with the web still in its infancy, Travelocity and Expedia were launched, making the travel sector the first to truly embrace e-commerce and the internet.

Civic and Anheuser-Busch are charting a similar path. And beer isn’t the only sector where large established players are getting into blockchain.

In finance, Nasdaq is actively using blockchain tech to settle certain transactions. In medicine, Quest Diagnostics has launched a pilot program with UnitedHealth, MultiPlan and Humana to create a data-sharing platform. In shipping and logistics, UPS and Maersk are investing heavily in blockchain to develop systems to track and manage global shipping and supply chains. In fact, they’re so vested in blockchain technology that they testified before Congress last week about its importance.

So as you watch blockchain take off this year and beyond, take time to appreciate that it all started with an ice-cold beer.

Good investing,

Vin Narayanan
Senior Managing Editor, Early Investing

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Source: Early Investing

Options

Is This Trade Really Going To Earn 24,900% Returns?

After over a year of basically no volatility in the stock market, we had something of a volatility revelation which began on February 5th. The selloff that day and the subsequent implosion of certain volatility products (like XIV) created a major jump in market volatility.

As you can see from the chart, iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) shot up above $50 on the day of the big selloff. Afterwards, it remained essentially above $40 until just this past week or so. As you can see at the start of the chart, VXX was far lower before the volatility event in early February.

As a reminder, VXX is a very popular ETN and is used to trade short-term volatility based on the VIX indicator – the most common measure of market volatility. VXX is one of the few exchange traded products to maintain a brisk business (i.e. volume) after the volatility blowout.

While many traders like to use VXX to speculate on volatility movement, it is also used to hedge against higher volatility. As an easy-to-access method for getting long short-term VIX futures (that’s what VXX does behind the scenes), it’s one of the simplest ways to protect long stock portfolios.

But what about tail-risk? That’s when something extreme happens, like a major market selloff. February 5th is an example of a “tail-risk day”. Can VXX protect your portfolio in that case?

At least one trader thinks so. This trader is using VXX as tail-risk hedge for the next month. Perhaps he or she thinks the Iran/Israel situation will escalate. Or, it could just be a cheap way to protect against a worst-case scenario.

The trade I’m talking about is an extra-wide VXX call spread. The trader purchased 10,000 June 15th 70 calls while at the same time selling an equal amount of 100 calls. The total cost of the call spread was only $0.12. The spread was so cheap because VXX was only trading for around $36 at the time of the trade (meaning it would need to double just to be in-the-money).

Of course, chances are this trade will expire worthless. And, while the trader spent $120,000 on 10,000 spreads, it’s not a lot to spend from an institutional standpoint. In other words, if this is a tail-risk hedge for a fund or major portfolio, it’s a relatively small price to pay.

As you would also expect, the trade pays off huge if the market does collapse and VXX goes to $100 or above. In that case, the trader would generate 24,900% returns! Granted, even the February 5th correction only pushed VXX from under $30 to about $55. A move above $70 is not likely to happen at any point, much less in the next month.

Regardless, if you’re looking for an ultra-cheap way to protect against a black swan event, this trade is a decent way of doing so. After all, tail-risk hedges are much more about peace of mind than they are about making profits.

Source: Investors Alley 

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Dividends

2 High-Yield Stocks to Buy from the Las Vegas MoneyShow

From the Las Vegas MoneyShow, Paris Hotel.

This week the Investors Alley editorial team is at the annual Las Vegas MoneyShow. As I have for the past several years I will be making presentations covering a diverse set of dividend stock investment strategies. This is a good time to share my stock picks for the show’s annual Top Picks feature.

I greatly enjoy attending and participating in the Las Vegas MoneyShow each May. It is a great event for investors and traders looking for top notch education and exposure to new ideas and strategies. I personally feel like I learn as much from my interactions with individual investors as they get from my presentation. OK, maybe not quite as much, since I humbly submit my presentations are very good and usually are in front of a packed room.

As a regular contributor to MoneyShow as a presenter and writer, for the last several years I have been asked to participate in their annual Top Picks survey released at the beginning of each year. For the survey I submit two stocks, one is a conservative pick and the other is an aggressive pick.

Since I am a dividend focused analyst, my picks are always dividend income stocks. The list selections from the writers and analysts invited to participate in the MoneyShow survey are published over the first several weeks of the year. Since I am here at the MoneyShow, I thought it would be a good time to see how well my picks have done through the first one-third of 2018.

My 2018 Conservative Income Stock Pick: MGM Growth Properties LLC (NYSE: MGP)

In April 2016, hotel and gaming company MGM Resorts International (NYSE: MGM) spun off about two-thirds of its hotel properties into a new real estate investment trust (REIT) IPO. MGM structured the new company, called MGM Growth Properties LLC (NYSE: MGP), to have a high level of cash flow safety to pay the planned dividend and with the potential for future growth.

At the IPO, MGM Growth Properties received seven properties on the Las Vegas Strip: Mandalay Bay, The Mirage, Monte Carlo, New York-New York, Luxor, and Excalibur. Outside of Nevada, at the IPO the REIT owned the MGM Grand in Detroit, the Gold Strike in Tunica, Mississippi and the Beau Rivage in Mississippi. Since the IPO, the REIT has purchased interest in one additional property from MGM and made one non-MGM property purchase bringing the current portfolio total to 14.

All properties are being leased by subsidiaries of MGM under a single, triple-net Master Lease. The Base Rent has a 2% annual escalator. The Percentage Rent is fixed for six years, and after that will be a percentage of revenue generated by the properties. The Master Lease has an initial lease term of ten years with the potential to extend the term for four additional five-year terms at the option of the tenant. The lease has a triple-net structure, which requires the tenant MGM subsidiary to pay substantially all costs associated with each property, including real estate taxes, insurance, utilities and routine maintenance.

In 2017, the business operations of the properties to be owned by MGP generated earnings before interest, taxes, depreciation and amortization (EBITDA) to provide 4.1 times rent coverage. Since the great recession, EBITDA has varied, but has been at least 2.2 times the lease annual rental rate. The master net lease plus the high level of EBITDA to rent coverage is what makes MGP a conservative income stock.

So far in 2018, the MGP share price is down 2.1%. Two $0.42 dividends have been paid, bringing the total return to 0.83%. I forecast the MGP dividend will be increased by 8% to 10% this year, which will propel the stock to a low double-digit return for the full year.

Current yield for MGP is 5.9%.

My 2018 Aggressive Income Stock Pick: Energy Transfer Partners LP (NYSE: ETP)

At the end of 2017 I forecast that the energy midstream/infrastructure sector would return to valuation growth in 2018 providing lots of upside potential in the group. Through 2017 MLP sector market values declined sharply even as business fundamentals continued to improve. 2018 should be the year when investors realize very attractive returns from the quality companies in the sector.

Energy Transfer Partners LP (NYSE: ETP) is one of the largest MLPs, with a $21.6 billion market cap. The company owns and operates an extensive network of natural gas and crude oil pipelines, terminals and processing facilities. Energy Transfer Partners owns assets in all the major oil and gas energy plays. Those assets allow for commercial synergies across entire midstream value chain, including gas, crude and natural gas liquids (NGLs).

In recent years the company has invested heavily in new growth projects and will have $10 billion worth of those projects coming on line between mid-2017 and the end of 2019. As the projects start to earn revenues, the Energy Transfer Partners distributions will be covered by free cash flow and continue to grow.

Market participants are primarily worried about ETP’s large debt load, which has grown to fund the growth capex and currently stands at over $34 billion. Management has stated that they will not need to access the capital markets in 2018. With new projects coming on line, EBITDA growth will quickly bring down the debt/EBITDA ratio.

With a 13% yield at the end of last year, the market was pricing ETP with the expectation of a dividend reduction. Management is determined to continue and even grow the current distribution rate. Once investors see the current payout is stable and well covered by cash flow, the ETP share price will rise to bring the yield down to as low as 8%. To get the yield down to that level, the share price would need go close to double.

Currently, ETP continues to yield 12.5% and has paid two dividends so far this year. Total return to date is 9.75%. I see strong potential for this stock to add another 20% to that total by the end of this year.

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Source: Investors Alley 

Technology

The Artificial Intelligence Arms Race

Technology is key to whether a country’s economy grows and to whether a country can exert geopolitical influence. Every country knows this including the world’s top two economies – the United States and China.

The United States has held the technological top spot for longer than many people’s lifetimes. But that dominance is being challenged at the moment, particularly by China.

This challenge is a primary reason for the demand by the U.S. in trade talks that the Chinese government quit directly supporting technology start-ups and projects through its ‘Made in China 2025’ program whose aim is to make the China the leader in technology. The Chinese simply smile and point to the Apollo program where the U.S. put men on the moon as an example they’re following with joint efforts of government and private corporations.

For whatever reason, the U.S. seems to be losing its technology edge. For example, a recent study by the consulting and research firm Analysis Mason found that in the next global wireless technology, 5G, China had a narrow lead over both the U.S. and South Korea.

The company pointed to the benefits that 4G technology gave the U.S. with its leadership position as to the importance of the race to 5G. Findings from Recon Analytics include the following.

  • Winning the race to 4G boosted America’s GDP by nearly $100 billion and its 4G launch spurred an 84% increase in wireless-related jobs.
  • American 4G leadership helped secure leading positions in key parts of the global wireless ecosystem, including the app economy.
  • Losing wireless leadership had long-term negative effects on Japan and Europe, contributing to job losses and the contraction of their domestic wireless industries.

As important as 5G may be, even more important will be leadership in artificial intelligence (AI), which is one of the pillars of the Made in China 2025 plan. Russian president Vladimir Putin emphasized AI’s importance last year when he said: “Whoever becomes the leader in this sphere will become the ruler of the world.”

Related: The #1 Stock Powering the Artificial Intelligence Revolution

The AI Arms Race

And here, Michael Chui – a partner at McKinsey that led its most recent in-depth study on AI – said it best, “If you look globally, it’s a two-horse race in AI.” The McKinsey study found that the U.S. and China were the two clear leaders.

The study from the McKinsey Global Institute found that, for some industries, deep learning — the most advanced form of artificial intelligence — has the potential to create value equivalent to as much as 9% of a company’s revenues. Multiply that many times and it will translate into trillions of dollars of potential economic value.

That’s why the most important aspect of the AI revolution comes from a source that isn’t always visible with just a cursory glance — the ability to sweat the largest amount of data the hardest. Machine learning systems that can find patterns by analyzing huge volumes of data are at the cutting edge of today’s AI.

Overall, most experts still think the U.S. is in the lead. Here’s why – it takes three things to be a world-class AI power: the most advanced algorithms, specialized computing hardware, and as mentioned previously, getting your hands on as much of the raw material that machine learning systems depend on — data .

In the first category – algorithms – the U.S. has a lead, but it is narrowing fast. China’s growing capabilities were evident in the good showing by Chinese researchers in the annual ImageNet competition for image recognition or when relative newcomer Alibaba (NYSE: BABA) tied perennial powerhouse Microsoft (Nasdaq: MSFT) in a reading comprehension test for AI.

In the second category, the U.S. maintains a clear lead as China still struggles to get a homegrown chip industry off the ground. But keep in mind that semiconductors are also a pillar of the Made in China 2025 plan.

In the third category – data – China is far and away the leader. The reason is simple… not only are there a lot more Chinese people from which to gather data from, but with a Communist government there is no such thing as privacy rights. All Chinese citizens’ data is open for use by both government and companies.

So what does this AI race between the U.S. and China mean from an investment perspective?

Related: 5 Stocks to Buy in the AI Race Between the U.S. and China

China AI Investments

I’m largely in agreement with a Silicon Valley venture capitalist quoted in the Financial Times with regard to AI opportunities: “The business is bigger and better in China.”

However, some of the very best Chinese AI companies are either still in the start-up stage or their stocks trade only in China. That leaves the three national champions, the so-called BAT stocks – Baidu (Nasdaq: BIDU), Alibaba and Tencent Holdings (OTC: TCEHY).

These three giants often are the leading investors into the top Chinese AI start-ups. According to McKinsey Global Institute, China is in the world’s top three for venture capital investment in core sectors of digital technology: virtual reality, autonomous vehicles, 3D printing, drones, robotics and artificial intelligence (AI).

Baidu, the smallest of the BAT group, has staked out its strategic future on leading the global research in self-driving cars and other AI applications. The company is investing heavily into Apollo, its open-source autonomous car software. At the last Consumer Electronics Show in Las Vegas, it unveiled Apollo 2.0, which offers improved security against hacking.

Baidu already has partnerships with Intel and Nvidia, as well as automakers Ford and Daimler. In China, it is working with local auto manufacturers JAC and BAIC, who plan to start producing autonomous vehicles based on Apollo as soon as next year.

In addition to its own research, one start-up that Tencent invested into is UBTech. It has developed a small domestic robot called Lynx that costs only $800 and which has facial recognition and can be used to talk to Amazon’s Alexa. It also developed a Star Wars Stormtrooper that can be controlled with a smartphone or tablet, and which sells for $300 in partnership with Disney.

Alibaba is pouring $15 billion into its research and development projects. One prominent project it is working on is a neural network chip capable of carrying out AI functions such as facial and speech recognition with substantially less power used. And the company is also acquiring local chipmaker C-Sky Microsystems.

Meanwhile, one start-up that Alibaba invested into is SenseTime. Its facial recognition software is used by Chinese police and the plan is for it to have its technology adopted around the world. It is considered to have the best face recognition technology because it has had so much data – the faces of Chinese citizens – to work with and to learn from.

There are many more Chinese start-ups these companies have invested into. Today, there are almost as many Chinese unicorns as there in the U.S. Research firm CB Insights rates China second worldwide with 64 businesses valued at $277 billion versus America’s 114 unicorns valued at almost $400 billion. And CB Insights did not include one of the biggest companies – Ant Financial – in its calculation.

Bottom line – China is closing fast in the AI race. The best way for you to play that currently is through owning the BAT stocks.

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Source: Investors Alley

Technology

Sell These Stocks As Amazon Takes Over Payment Processing

There is no other company like Amazon.com (Nasdaq: AMZN), whose presence is becoming ubiquitous in so many segments of the U.S. economy. It’s almost easier to enumerate the sectors it is not getting into than the ones it is.

One such sector is the financial sector, where I shared with you in March that Amazon was in talks with potential partners about offering a checking account-like product. This would not be Amazon’s first foray into the financial sector. In a very low-key launch in 2011, Amazon began offering loans to the small businesses that operate on its Marketplace platform. Amazon said last June that it had made $3 billion worth of loans to these businesses.

The e-commerce giant also offers a pseudo-debit card, Amazon Cash. It lets consumers add cash to an Amazon wallet and purchase items online without a credit card. And in 2017, Amazon dipped its toe into the deposit business with Prime Reload. This gives customers a 2% bonus when they use their debit card to move funds from a bank account to their Amazon account for use for transactions on the website. This lowered the fees Amazon paid to credit card networks like Visa (NYSE: V) and Mastercard (NYSE: MA).  

The goal here is to disrupt the decades-old credit card payment system – the entire swipe-fee system is a $90 billion a year industry. This includes not only the aforementioned payment networks, Visa and Mastercard, but also payments processing companies such as First Data (NYSE: FDC) that collect 2% on every credit card transaction and 24 cents on most debit card transactions.

Now, Amazon has placed greater emphasis on targeting of companies involved in payments.

Amazon Offers Discounts to Adopt Its System

The company is now offering the discounts it receives on credit card fees to other retailers if they use its online payment system, Amazon Pay. This service, which was revived in 2013, has attracted more than 30 million users.

This latest move by Amazon is a very real threat to not only the credit card-issuing banks, but also payment processors like the aforementioned First Data and other online payments firms such as PayPal Holdings (Nasdaq: PYPL) and Square (NYSE: SQ).

Paypal is the current leader in streamlined online payment methods with 237 million accounts globally. Taking aim at them is Visa and MasterCard, which have teamed up to offer a one-button online checkout feature later this year that will replace their separate Visa Checkout and Masterpass initiatives. Other credit card companies – American Express and Discover – have announced they will also join in the project.

And now, looking to disrupt all of them, is Amazon and its Amazon Pay…

Previously, online merchants using Amazon’s service have paid about 2.9% of each credit-card transaction plus 30 cents. This in turn was divvied up among Amazon, the card issuers and the payment networks. But now, Amazon is offering to negotiate lower fees with merchants that make long-term commitments to use Amazon Pay.

Amazon is able to export the rates it has negotiated with banks and payment networks because, like PayPal, it is acting as a so-called payments facilitator. That means it aggregates smaller merchants to help them lower their cost for accepting electronic payments.

This move from Amazon here in the U.S. reminds me of what China’s technology giants, Alibaba Group Holding (NYSE: BABA) and Tencent Holdings (OTC: TCEHY) have done with Alipay and WeChat Pay in China. Alipay, for example, has a stand-alone valuation in excess of $80 billion.

Related: Add These Two Stocks to Your Portfolio as the Tech Rally Goes Global

And there’s no reason that Amazon cannot be just as successful. . . . .

Another Win for Amazon?

It has had a history of being a successful disruptor. And it will enter the payments space with several distinct advantages. These include a network of more than two million merchants, 100 million Amazon Prime users and those 30 million users already of Amazon Pay.

And importantly, people trust Amazon. A survey from the consultancy Bain on whether people were willing to try a financial product from a technology company showed that Amazon was at the top of the list of those most-trusted tech firms.

The list of firms that will be affected by Amazon’s new emphasis on the payments sector is long, but there are two firms perhaps most at risk – the two high-flyers in the sector, PayPal and Square. Both stocks fell sharply on the day the story on Amazon’s intentions hit the newswire.

PayPal is little changed year-to-date and is actually down slightly over the past three months. And while its stock didn’t crater after the latest earnings report, as it did after the prior report, it is still down in price from the earnings report date.

This relatively poor performance is likely due to the fact that it has become the target of not only Amazon, but also all the major credit card firms. And it lost eBay as a major customer earlier this year.

Square is still up solidly for the year, but that is largely due to Bitcoin hype. Famed short-seller Andrew Left said recently that the stock was rising solely due to Bitcoin mania from investors and that Square was a “collection of yawn businesses.”

The company has been incurring losses for several years now. It reported net losses of $212 million, $171.6 million and $62.8 million in 2015, 2016 and 2017, respectively. At the end of 2017, Square had an accumulated deficit of $842.7 million. And with the company continuing to invest heavily, there is no obvious path to profitability in the foreseeable future.

So once again, Amazon looks to be a likely winner, with Paypal and Square to be the long-term losers in this battle.

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Source: Investors Alley

Uncategorized

Does Government Debt Really Matter?

The numbers on the US Debt Clock are spinning at a dazzling pace. US government debt is now over $21 trillion, $174 thousand per taxpayer. Add another $3 trillion for debts of state and local government on the stack.

Unfunded federal government promises are almost $113 trillion, $900,000 per taxpayer, not including another $6 trillion in state unfunded pension liabilities.

It’s fiscally impossible for the debts to be repaid. Governments borrow money and make political promises on the backs of future generations. If the numbers were double (or triple) what they are today; would our lives be any different? We can’t pay it back, why not just continue frivolously spending as long as people are fool enough to lend us money?

“The Budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed, lest Rome will become bankrupt.”Cicero, 55 B.C.

Does anyone really care?

Ignore the political class and their allies. Here is an example.

Nobel Prize winning economist Paul Krugman has an impressive educational pedigree – on paper. While he may be an economics professor at Princeton and the London School of Economics, he tarnishes the reputation of all economists, putting politics ahead of common sense.

In October 2016, anticipating the election of Hillary Clinton, he wrote, “Debt, Diversion, Distraction”.

“Are debt scolds demanding that we slash spending and raise taxes right away? Actually, no: the economy is still weak, interest rates still low…and as a matter of macroeconomic prudence we should probably be running bigger, not smaller deficits in the medium term. (Emphasis mine)

…. So my message to the deficit scolds is this: yes, we may face some hard choices a couple of decades from now. But we might not, and in any case, there aren’t any choices that must be made now.”

After the election, Mr. Krugman reversed his position writing, “Deficits Matter Again”.

“…. Eight years ago, with the economy in free fall, I wrote that we had entered an era of “depression economics,” in which the usual rules of economic policy no longer applied…deficit spending was essential to support the economy, and attempts to balance the budget would be destructive.

…. But these predictions were always conditional, applying only to an economy far from full employment. That was the kind of economy President Obama inherited; but the Trump-Putin administration will, instead, come into power at a time when full employment has been more or less restored.”

In October 2016 the economy was “still weak” and we shouldn’t worry about deficits or debt for a couple of decades. Less than 80 days later the economy magically changed and now deficits matter?

It’s political crap! When the party in power implements their financial agenda, whether it’s more spending or tax cuts, the minority party screams about unsustainable debt. When the process reverses, the charade continues and the new minority party screams about the debt.

The Undeniable TruthWith few exceptions, the political class doesn’t give a damn about the debt. The politicos use the tax system and government spending to buy votes to keep them in power.

They kick the can down the road; secretly hoping any negative consequences happen when they are out of power, enabling them to make political hay and convince the public they should rule forever!

Their behavior won’t change; they will continue to pile up debt until the citizens revolt!

If the politicians don’t care, should we?

Prior to the recent tax cut, The Chicago Tribune reported:

“If the House GOP tax plan becomes law, nearly 81 million Americans – 47.5 percent of all tax filers – would pay nothing in federal income taxes next year.”

Those who pay no taxes (particularly when receiving government handouts) probably don’t care about the deficit.

What about the remaining 52.5% that are working their tails off, seeing their hard-earned tax dollars (and more) being spent by an irresponsible government?

Can something bad really happen?

Common sense economics would indicate, governments creating money out of thin air might temporarily prop up the economy, but eventually it would create a large debt bubble. When it pops, expect catastrophic consequences.

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In 2008, when the government started bailing out the banks, many urged caution, suggesting high inflation and our unsustainable debts would finally come home to roost. It hasn’t happened – yet.

Pundit Bill Bonner looked at the stock market and took a critical view of “Trump’s Quack Economists”:

“Markets don’t like uncertainty. …. Presidential advisors Peter Navarro and Larry Kudlow – wrong about just about everything for just about forever – could be right this time.

Maybe the economy really is as strong as an ox. And maybe stocks will go up from here to eternity. But it’s not what we see….

Not that we are always right. ….

Yes…our error was that we misjudged the power of wrongheaded claptrap. Fake money talks louder…and BS walks further than we thought! (Emphasis mine)

We thought the fake money-pumping scheme had reached its end back in 2009.

We were wrong.”

When economists criticize and advise the government; it makes little difference; elected lawmakers show zero fiscal responsibility. The train continues down the track, full speed ahead….

Yes, we should care, and yes bad things can happen. Count on the predictability of the political class. Anyone with wealth or income becomes a target to finance their political spending. We need to protect ourselves.

What economists should we listen to?

I prefer economists with no political agenda – genuinely concerned about helping average hard-working citizens navigate the current and future potential challenges ahead.

Good friend, Dr. Lacy Hunt is tops on my list. He “calls them like he sees them” without any bias. He’s an excellent educator helping us navigate some difficult economic waters.

I recommend his company’s recent Hoisington Investment Management Quarterly Review and Outlook, it’s a primer.

It begins with a discussion of the Fed’s policies over the last decade:

“Nearly nine years into the current economic expansion, Federal Reserve policy actions appear to be benign…. Changes in the reserve, monetary and credit aggregates, which have always been the most important Fed levers…indicate however that central bank policy has turned highly restrictive. These conditions put the economy’s growth at risk over the short run, while sizable increases in federal debt will serve to diminish, not enhance, economic growth over the long run.” (Emphasis mine)

It’s not just a US problem:

“No matter how U.S., Japanese, Chinese, European or emerging market debt is financed or owned, and regardless of the economic system, the path is stagnation and then decline. Even central bank funding of debt will not negate diminishing returns.”

Might the historical cure make things worse?

“While many believe that surging debt will boost economic growth, the law of diminishing returns indicates that extreme indebtedness will impede economic growth and ultimately result in economic decline. …. The standard of living cannot be raised without increasing output.” (Emphasis mine)

Increased debt equates to increased spending and economic output – theoretically! While debt, both government and private, has reached historic levels, they question the premise over the long term.

Talk about diminishing returns…. In 2007, each $1.00 of global public and private debt increased gross domestic product (GDP) by $.36. In 2017 it dropped almost 14%, to $.31. The US dropped about 11%, from $.45 to $.40.

Where are we headed?

“As debt continues to increase, real GDP starts to fall. At this point, debt has reached the point of negative returns, resulting in the end game of extreme indebtedness.” (Emphasis mine)

What is the end game?

When Dr. Lacy Hunt uses the term “end game” we should all take heed; he chooses his words carefully.

Their current newsletter reinforces what we intuitively believed a decade ago, you don’t cure a debt problem with more debt.

How much longer can we borrow and spend before we see the inevitable economic decline? Might we face another great depression?

Might the end game be controlled by others? When creditors lose confidence in the US, the economy and the dollar, they’ll start unloading dollars, causing interest rates to rise – negatively impacting the economy.

No one knows what or when

At the end of a Casey conference a few years ago, the speakers were seated on the stage and the audience asked questions. The main concern – when and what will the end game look like.

They had no idea. Some made predictions, most felt the wheels were soon going to fall off soon – they were wrong.

One participant asked, “Inflation or deflation?” The response of the experts was, “Yes.” The consensus was we could experience high inflation which might be the last major blow to the economy; and then quickly move into deflation and perhaps a major depression.

No one knows for sure how it will shake out, but it won’t be pretty.

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And thank you all!

What can we do?

While government debt may not matter to the political class, it should matter to everyone who hopes to save and retire comfortably.

Prepare for the worst and hope for the best. Diversify, own real assets and not just paper. While many have been wrong on the timing, Dr. Hunt has clearly highlighted the trend. Take heed! Those who use some common sense and take some reasonable precautions will fare much better than most.

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Source: Investors Alley 

Technology

Why the Bull Thesis On Tesla Inc (TSLA) Stock Makes Sense

Tesla Inc (NASDAQ:TSLA) stock has always been a highly volatile stock with a wildly entertaining backstory. But recently, Tesla stock has been even more volatile than ever, while the backstory has become even more entertaining than ever.

Credit concerns amid sluggish Model 3 production caused Tesla stock to plunge from $350 to $250 in a just a few weeks in March. All the while, CEO Elon Musk was humorously engaging on Twitter Inc (NYSE:TWTR) as if nothing were going on with TSLA stock.

Why the Bull Thesis On Tesla Inc (TSLA) Stock Makes Sense

Source: Shutterstock

Then, Musk and company announced first quarter deliveries that were much better than what most feared. Tesla stock proceeded to bounce. All the way back to $300.

Shortly thereafter, Q1 earnings hit the tape. Those numbers were also better than expected, led by a surprise beat on margins. But those numbers took a backseat to what happened on the conference call, when Musk brushed aside questions from analysts, calling the questions “boring”, and instead fielded questions from a relatively unknown YouTube blogger.

All together, it has been a wild ride for Tesla stock. This volatility won’t smooth out any time soon. It will be a bumpy ride forward for TSLA investors.

But amid all this noise, investors shouldn’t lose sight of the big picture, which is that Tesla is building the car company of the future. Eventually, production issues will be resolved, profitability will ramp, and the balance sheet will be cleaned up.

At that point in time, Tesla stock will roar higher.

Here’s a deeper look:

Tesla Is a Big Growth Story

All conference call and Twitter theatrics aside, Tesla is still building tomorrow’s biggest car company.

The electric vehicle revolution is here, and traditional automotive manufacturers have been slow to pivot. Consequently, Tesla got a head start, and by getting a head start, the company has not only captured market leadership, but also brand leadership.

When you think of electric cars, you think of Tesla first. That is why Tesla’s Model 3, despite production issues, is still America’s top-selling electric vehicle.

Because of this brand leadership, as the electric vehicle market grows both nationally and globally, TSLA will be at the forefront of that growth. Considering growth in the electric vehicle market actually accelerated in the U.S. in 2017 to 40% (from 32% over the prior several years) and that global electric vehicle adoption is still anemic, Tesla’s leadership in the EV market means that this company has guaranteed itself a robust growth trajectory over the next several years as EV adoption rates rise.

Important note: that robust growth trajectory is big even without considering the company’s energy business, which could also be quite large at scale in 5-10 years.

All together, then, this is a big growth story. Bears will pound on the table about leverage, margins, and the need for a capital raise. But those things will get resolved. Tesla has a ton of options when it comes to raising money, and the company’s gross margins are already above its peers. Thus, once revenue scales and opex rates naturally drop, the company’s overall profitability profile will actually be best-in-class in the auto industry.

As such, the bear thesis seems short-sighted here and now, while the bull thesis seems to understand the full scope of Tesla’s growth narrative.


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Tesla Stock Could Reasonably Hit $500

Here is the case of Tesla stock hitting $500 in 4 years.

The EV market is growing at a 40% clip in America, and growth is only picking up. Globally, growth rates will likely also start to accelerate given secular trends towards EV adoption.

Consequently, even amid rising competition, TSLA should be able to grow revenues around 40% per year over the next 5 years, assuming the EV market grows in excess of 40% per year in that time frame.

Gross margins of other auto manufacturers hover around 15-20%. But Tesla’s gross margins over the past several years have hovered around 19-23%. Once Model 3 gross margins scale towards 25% and above over the next several years, the company’s overall gross margin rate should trend towards 25%.

Meanwhile, other at-scale auto manufacturers operate with an opex rate of roughly 10-15%, with the median hovering closer to 10%. Tesla should be able to drive its opex rate down to around those levels at scale. Thus, in 5 years, Tesla’s opex rate should be down to about 15%.

A 25% gross margin on a 15% opex rate implies 10% operating margins in 5 years. That margin on 40% revenue growth per year over the next 5 years leads me to believe that Tesla can do about $25 in earnings per share in 5 years.

A market-average growth multiple of 20-times forward earnings on that implies a four-year forward price target of $500.

Bottom Line on TSLA Stock

As Musk said on the recent conference call, if volatility scares you, don’t buy Tesla stock. Otherwise, the bull thesis makes a ton of sense on Tesla stock. Over the next several years, a surge in global EV adoption rates will send TSLA stock to $500 and up.

As of this writing, Luke Lango was long TSLA.

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Source: Investor Place 

Dividends

10 Dividend Growth REITs “Breaking Out” to the Upside

10 Dividend Growth REITs “Breaking Out” to the Upside

Brett Owens, Chief Investment Strategist 
Updated: May 9, 2018

Have real estate investment trusts (REITs) finally “decoupled” from rising interest rates? In other words, has the popular (but untrue) “rates up, REITs down” reasoning been busted (again)?

For those of us who have been waiting for the stock market’s landlords to carve out a bottom before buying anything new, we may be back in business:

REITs Finally Rising with Rates?

Regular readers know that the best REITs do just fine as rates rise. That’s been the case historically, and they’ll rally again this time around.

Why? Because elite landlords simply keep raising their rents. These higher cash flows translate to higher dividends, and higher stock prices, regardless of what the Fed is up to.

Let’s consider the case of Ventas (VTR), which kept on hiking its payout as Uncle Sam’s 10-year IOU rallied from 2003 to 2006. Its investors were rewarded with total returns (including dividends) of 174% as the 10-year rate rose above 5%:

Ventas Outran the Long Bond

Also as you can see above, it didn’t take Ventas much time to start scaling the rate-induced wall of worry. We’re starting to see the same scenario unfold with the top REITs today.

But what exactly are “the best” REITs? Certainly not retail, where even reliable anchor tenants like grocers are seeing their business models threatened.

Heck, even Ventas is having a rough go of things today. Its dividend growth has slowed considerably in recent years.

We’re better off looking elsewhere. So let’s consider the early leaders – the sectors sparking this budding REIT rally. If it proves to have legs, these are the stocks likely to continue paving the way.

REIT Leader #1: Industrial Space

This asset class is growing just as fast as Amazon. Yet it’s much cheaper and – if you buy right – you can bank a soaring stream of dividends to boot.

“First-level investors” – the basic types who buy and sell of headlines without deeper thought – believe they must purchase Amazon.com (AMZN) itself to profit from the e-commerce boom.

We instead consider what Amazon CEO Jeff Bezos (and other e-commerce entrepreneurs) will need to gobble up themselves to keep their firms growing. By purchasing ahead of their curve, we can then “lease” our asset back to them (at higher and higher rates, of course).

Mark Twain presciently advised readers to invest in land because new supply would be limited. If Twain were advising us today, he’d probably buy warehouses – because they are quickly becoming the most valuable beachfront property in America.

Think about the number of deliveries you receive every week these days. Each package starts in a warehouse somewhere.

The Economist reports that online sellers (including Amazon) will need 2.3 billion square feet of new warehousing to fulfill their increasing order volume. And these firms want their warehouses to be close to big cities (where most of the online orders must be shipped to).

Which landlords is Wall Street buying aggressively? Here’s the rally leaderboard for stocks with momentum, dividends and payout growth:

REIT Leader #2: Self-Storage

As Americans acquire more and more “stuff” while they downsize their homes and move into cities, they look for places to put everything. Enter self-storage units, which save you from having to actually purge any of your worldly possessions. For a modest monthly fee (when compared with rent or mortgage payments), you get a slab of space and unlimited visitation rights!

Self-storage is a difficult business to get into. “Not in my backyard” (NIMBY) sentiments often make it difficult to land permits for a new facility.

But once you’re in the business, it’s highly profitable. Operators simply need to divide up the space, hand out unit keys, and make sure the facility doesn’t get too dusty while they cash their monthly rent checks.

Occupancy levels in self-storage facilities are above 90%. Owners don’t have much of a problem renting their facilities, and they are usually able to raise the rent each year – by 3% or more.

It’s traditionally been a fragmented business, with storage facilities run by independent operators. More recently, real estate investment trusts (REITs) have begun to consolidate the space.

The REIT structure is well suited to self-storage. These firms are able to tap the public markets for capital, which they use to buy more facilities. More storage space generates more rent, the bulk of which gets sent to investors in the form of ever-increasing dividend checks.

Recently the stocks in this sector have come under pressure as some markets creep towards saturation. But “storing stuff” is a local phenomenon, and investors are finally sorting and rewarding these stocks accordingly. Here are current REIT-rally leaders, which also boast current yield with yearly dividend growth to boot:

REIT Leader #3: Recession and Rate-Proof Landlords for 7.5%+ Yields with 25% Upside

My two favorite REITs today are comfortably positioned in recession-proof industries. They’ll have no problem continuing to raise their rents – and reward their shareholders – no matter what the Fed decides at its next meeting, what Trump tweets or when the stock market finally takes a breather.

My favorite commercial real estate lender lets us play Monopoly from the convenience of our brokerage accounts. They do all the legwork, building a secure, diversified loan portfolio featuring offices, retail space, hotels and multifamily units.

Management then collects the monthly payments, deposits the checks – and then it sends most of the profits our way as dividends (a requirement of its REIT status).

The stock’s current dividend (a 7.7% yield today) is covered by earnings-per-share (EPS) today. And don’t be fooled by the stagnant dividend (not that stability is bad). The firm continues to originate an increasing number of loans:

37% Loan Growth Today Tees Up Dividend Growth Tomorrow

This firm is a conservative lender with perfect loan performance (100%). Its growing portfolio will drive higher profits, which in turn will inspire the next dividend hike. The best time to buy the stock is right now, as it makes the investments which will drive its payout and share price higher from here.

Plus this firm has also smartly eliminated interest rate risk because it uses floating rates. In fact, it’s actually set up to make more money as interest rates move higher:

More Income as Interest Rates Rise

Same for another REIT favorite of mine, a 7.5% payer backed by an unstoppable demographic trend that will deliver growing dividends for the next 30 years. Interest rates are no problem for this landlord because it will simply continue raising the rents on its “must have” facilities.

Its founder Ed admitted that, fourteen years ago, he had “zero assets, a dream, and a business plan.”

Well his dream and plan were plenty – the visionary entrepreneur parlayed them into $6.7+ billion in assets!

And right now is the best time yet to “bet on Ed” because his growing base of assets is generating higher and higher cash flows, powering an accelerating dividend:

I love dividend increases because they are proof that management is actually making more money, so can afford to pay us shareholders more. And an accelerating payout is a flat out cry for help!

Any management team that raises its dividend faster and faster is clearly making more money than it knows what to do with. This usually happens when it achieves a tipping point where its machine no longer requires as much reinvestment to continue growing. So leadership says: “Please, take a bigger raise, shareholders.”

Meanwhile investors and money managers who spot dividend accelerators lose their minds because, in theory, there is no valuation too high for a company that is increasing its dividend at an accelerating rate. Their spreadsheets literally break, and they buy the stock in a frenzy.

Ed’s stock should be owned by any serious dividend investor for three simple reasons:

  1. It’s recession-proof.
  2. It yields a fat (and secure) 7.5%.
  3. Its dividend increases are actually accelerating.

These two REITs are both “best buys” in my 8% No Withdrawal Portfolio – an 8% dividend paying portfolio that lets retirees live on secure payouts alone.

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Source: Contrarian Outlook

Cryptocurrency

The Five Waves of Crypto Investing Hide Some Very Good News

I met Jim in Florida while taking a break from work about a month ago. My friend Mike said I had to meet this guy.

“He loves crypto. You’re a bit of a skeptic of all things, Andy, but this guy is a true believer.”

And according to Mike, Jim has made a ton of money off crypto.

From the looks of it, Jim is in his late 20s. He founded a local brewery two years ago and probably makes the best sour beer in Florida (he gave me a six-pack). But he wasn’t really interested in talking about his brewery.

He wanted to talk bitcoin.

Jim wasn’t part of the original “true believer” club of developers, coders, libertarians, world-changers and cypherpunks. He’s been mining and investing in crypto for about 18 months – before crypto took off in early 2017 but way after the majority of original true believers got in around 2014.

“I talk to these true believers all the time,” Jim said. “They’re young entrepreneurs like me… they’re into craft beer and surfing – my two things – and they enjoy talking about their jobs. They’re very honest. They’ll talk about problems and progress, including pending announcements.”

“Meaning,” I said, “you see jumps in price before they happen. That’s convenient.”

Jim pushed back: “It helps, but believe me, I check on a lot of things before committing to investing in or mining their coins.”

I had fun talking to Jim, and he shared with me some of the message boards and crypto chat channels he uses to keep up with this incredibly dynamic investment space.

I’ve begun to use some of these myself (like discordapp.com). And even though I don’t belong to the original tightknit club of young believers, I had no trouble getting people to respond to my questions and comments.

Can’t ask for more than that.

It got me thinking about the different waves of investors who have been discovering, following and buying crypto through the years.

Here’s how I see the evolution of different cohorts of bitcoin/crypto buyers…

  1. 2009 to 2010 – The creator and his following: Satoshi Nakomoto created bitcoin in 2009. In mid-2010, this tiny, obscure and mysterious digital coin was worth less than a penny.The very few who invested got lucky. Please don’t tell me they knew their pennies would turn into thousands of dollars. Maybe they hoped. Maybe they had an inkling. But there’s no way they could have known.
  2. 2011 to 2014 – The trailblazers: Bitcoin was still well under a dollar. These were the true believers.My colleague Adam belongs to this cohort. He began following bitcoin closely in 2012. And he began investing in 2013.Was it about the money?

    Well, it wasn’t NOT about the money. But it was much more than that.

    It was also about the trailblazers’ deep distrust of big banks and government and their symbiotic relationship that pushes public debt to higher and higher levels. Bitcoin was created to blow up that relationship. This cohort was young, idealistic, striving, frustrated and distrusting. They believed in change at its most disruptive. They thought of themselves as revolutionaries. And bitcoin was their weapon of choice.

  3. 2015 to mid-2017 – The early professional investors: Venture capital firms, family offices (like LDJ Capital) and angel investors began recognizing the disruptive power of crypto and the tech talent that was driving it.This was the leading edge of institutional money that continues to build as it waits for regulatory clearance to begin investing in earnest. Peter Thiel’s Founders Fund exemplifies this cohort. It bought $15 million to $20 million worth of bitcoin now worth hundreds of millions of dollars.
  4. Mid-2017 to early 2018 – The momentum/speculative investors: Attracted to the market by a combination of fast-rising prices and rapidly advancing technology, they’ve become the “weak sisters” of crypto buyers.When the market’s momentum slows or reverses, these are the investors who bow out the quickest.
  5. Early 2018 to the near future – The sweet spot investors: What’s not to like? Prices have come down to attractive levels. Scaling solutions are being addressed. User cases are multiplying. And the investing infrastructure is slowly but surely being built out.It’s similar to the stage where startups raise their Series A or Series B funding. A lot is known, including price, market fit and growth strategy. But it’s still early, and scaling usually awaits.All this echoes crypto’s current stage. There’s still risk, of course – every investment has some level of risk. But there’s much less of it now, and profit potential is still incredibly high.

I can’t say this enough…

It may not feel early, but it really and truly is.

Data from Coinbase shows that 95% of cryptocurrency wealth is held by 4% of the owners. That’s not surprising. It’s exactly what a nascent market should look like.

As the crypto market continues to grow year after year after year, those percentages will draw closer together.

You’ll see a relatively modest number of big winners grow and become a much bigger number.

If you’re thinking of investing in crypto, you’re right on time.

Good investing,

Andy Gordon
Co-Founder, Early Investing

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Source: Early Investing