Monthly Archives: November 2017

Cryptocurrency, Energy

2 New Mega Trends Coming up to Bat

Every holiday season I’m reminded of my first few years living as an immigrant in the United States.

You see, when I first came to this country, I’d never heard of Thanksgiving Day. In fact, I spent the first few years that I lived here believing that Thanksgiving was a national holiday dedicated to appreciating whatever you were most thankful for in your life.

And while I would eventually go on to learn all about American history and the story of the harvest festival, this time of year still makes me humble. It forces me to take a step back and think about what I’m most grateful for.

I would encourage you to do the same this holiday season. The markets are now closed in observance of Thanksgiving, so take some well-deserved time this weekend to enjoy the presence of your loved ones.

There will be plenty of time to worry about the markets next week, so I’m going to use this article as an opportunity to tell you about two brand-new mega trends I’ll be looking to add to my flagship newsletter, Profits Unlimited, in 2018.

Blockchain Is Creating A Truly Decentralized Economy

The first of these new themes is going to be blockchain as it relates to finance.

 You’ve probably heard of blockchain before, but in case you have only a loose understanding of the term, I’ll give you a brief explanation.

Blockchain is an online global ledger that anyone can use, but that also doesn’t exist in any master location. Think of it like an Excel spreadsheet that exists on multiple computers at the same time and that automatically updates itself every 10 minutes.

The decentralization aspect of this ledger makes it impossible for hackers to encrypt it and also makes it communal, because anyone who has an internet connection and who wants the database can do so.

This technology has turned the financial industry on its head, because for the first time in history, two different parties can come together to make a safe exchange without having to involve intermediaries, such as banks, rating agencies or bodies of government.

Add in the fact that our traditional banking system is overrun with fraud, additional fees and lots of paperwork, and you can immediately see why more and more people are turning to blockchain to make their transactions.

Given how completely disruptive this technology is, it’s no surprise that the global banking community is scrambling to implement blockchain technology into its existing infrastructure. But banks aren’t the only entities about to be disrupted by blockchain.

Imagine a truly decentralized economy where the middleman could be cut out of all transactions. It would affect every single industry in the world, from retail to transportation, to crowdfunding initiatives.

This is the kind of game-changing technology I want to be a part of, because the returns it could bring early investors are potentially limitless.

Ridiculous Amounts of Energy

Having said that, there is one major drawback to blockchain that also affects the Internet of Things mega trend. Both emerging industries require ridiculous amounts of energy output.

In fact, a 2014 study by researchers Karl J. O’Dwyer and David Malone showed that the bitcoin network alone was likely to take up as much electricity consumption as the entire country of Ireland. So, imagine how much energy we would need if all the banks in the world started to move toward digital currencies just to keep up with their competition.

That’s just not sustainable with our current energy grid, and it’s the reason why I’ll be looking to bring storable, renewable, natural energy-solution companies into my Profits Unlimited portfolio next year.

I don’t want to give anything away just yet, but between my current mega trends and the two new themes I’m beginning to track, I can promise you that next year will be a very exciting time to be a Profits Unlimited reader.

If you’d like to get in on the action and join me as I unearth companies taking advantage of these brand-new themes.

I’m going to end there for this week, but from my family to yours, I wish you the happiest holiday season.

Regards,

Paul Mampilly

Editor, Profits Unlimited

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Uncategorized

This Employment Picture Looks Grim

The unemployment rate is probably the most widely watched economic indicator. In part, that’s because the Federal Reserve ties its policies to the rate.

That makes the unemployment rate important to the bond market. Interest rates affect the fair value of stocks. In the stock market, traders buy or sell immediately after the monthly update to the number.

Economists also watch the numbers. Many of them try to forecast changes in unemployment. One of the tools they use is data on the amount of money employers pay in taxes.

As you know, employers withhold money from your paycheck. They deposit these payroll taxes a few days after they pay employees. The Daily Treasury Statement offers real-time data on the amounts of deposits. This indicator shows unemployment could be rising.

This chart shows that there is serious weakness in the employment market. There are several possible causes for the decline...

(Source: MathInvestDecisions.com)

The chart shows the change in deposits compared to a year ago. Data is seasonally adjusted to account for swings in hiring and firing. For example, the school year requires an adjustment. Otherwise, employment data falls off when classes end, and then jumps when students go back to school.

The trend in payroll taxes is down. This means employers are paying less to employees.

The chart shows that there is serious weakness in the employment market. There are several possible causes for the decline.

One possibility is that employers aren’t hiring as much as they were a year ago. Data shows the pace of hiring slowed over the past year.

It’s also likely employers are paying employees as little as possible. Federal Reserve datashows consumers are spending more on necessities and have less income for other items. This confirms wages are growing slowly, if at all.

This is something to watch for stock market investors. Bear markets begin after unemployment starts rising. We aren’t there yet, but we need to be watching for a change in the unemployment rate.

Regards,

Michael Carr, CMT

In this exciting NEW VIDEO, Wall Street legend and former multibillion hedge fund manager Paul Mampilly pulls back the curtain on the biggest investment opportunity in the market today. What insiders are calling “The Greatest Innovation in History,” this revolution will mint more millionaires and billions than any technology that came before it. Right now, the current market for this technology is just $235 billion, but given how fast this technology is moving experts predict it will soar to $19 trillion by 2020. But 8,000% growth is just the beginning—and now’s your chance to get in on the action. [CONTINUE TO VIDEO]

Source: Banyan Hill

ETF

How to Generate Income While Doing Nothing

In the investing world, generating income typically refers to slow, predictable payments from an investment over time. It may be a stock paying dividends or a bond with coupon payments. With options, generating income usually refers to selling options and collecting premium from option buyers.

The most common income generating strategy using options is the covered call. Well, technically a covered call includes a stock and an option. By selling a call against long stock you could potentially earn income from the stock (dividend payments) and the short option (premium). The two-fold income generation of a covered call strategy is one of the reasons it’s so widely used.

Of course, there are many different way you can generate income from options strategies. An options income strategy can range from obscenely complex to super simple.  Covered calls are generally considered simple, though they can be utilized in a more complex fashion if you choose.

Another income generating strategy used mostly by institutions is the short straddle. A short straddle is when a trader sells a call and put at the same strike in the same expiration. This trade is used when the seller believes the underlying asset is going to remain in a certain trading range.

Now, retail and smaller traders should never sell a straddle. It’s too risky and margin requirements are too high. However, seeing what straddles are being sold by the big players can be a good way to analyze assets.

For instance, if a bunch of short straddles trade in a certain stock or ETF, then someone with a lot of money believes that asset will be range-bound until expiration. In fact, this just recently occurred in the Utilities Select Sector SPDR ETF (NYSE: XLU).

Utilities are already known to be a slow moving asset. So, if someone with big bucks is selling straddles in utilities, you can bet the range is going to be extremely tight. In this case, the straddles don’t expire until January of 2019 – so utilities may remain in a narrow range for all of 2018.

To be specific, with XLU at around $56, the trader sold 1,100 of the January 2019 56 straddles for $7.37 per straddle. The trader collects over $800,000 on the trade and keeps it if XLU remains between roughly $48 and $64.

Okay, so this trade is not for the average investor – like I said, margin requirements would be insane. However, it really isn’t that risky. XLU doesn’t move that much to begin with and the trader has a very wide range to work with. The chance that utilities go crazy or collapse is basically zero. That’s not to say this trade is a guaranteed winner – not by any stretch – but I get what the trader is thinking.

If this trade idea appeals to you but you don’t want the risk or the margin requirements, you can pretty easily solve the situation by purchasing a call and put outside the short straddle. (In other words, go long an options strangle.)

Let’s say you purchased the 47 put for $1.25 and the 65 call for $0.50 in the January 2019 expiration. You’ve capped your risk (and your margin needed) and it only cost you $1.75 (off the $7.37 from the short straddle). So you’re still making decent money but you’ve substantially cut your risk. By the way, this short straddle surrounded by a long strangle has a name… the iron butterfly, and it’s a fairly popular strategy to use.

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Source: Investors Alley

Dividends

The 15% Yield Dividend Stock Set to Double

For the last three months, the value of Uniti Group Inc. (Nasdaq: UNIT) has been a real turkey for high yield stock investors. Since late July share owners have experienced a decline of the UNIT share price from the mid $20’s to a recent low under $14. With the recent earnings report out of Uniti, the stock now looks like a Thanksgiving dinner, offer a great yield and significant share price upside.

The suspension of dividend payments by Windstream Holdings, Inc. (Nasdaq: WIN) was the trigger event for the decline of the UNIT share price.

Uniti was spun-off by Windstream with an April 2015 IPO. Uniti is structure as a real estate investment trust (REIT), and in the spin-off received most of Windstream’s fiber and copper wirelines network. Windstream signed a 15-year (with options for extension out to 35 years) master lease with Uniti.

When Windstream announced that it would no longer pay common stock dividends, the immediate fear was that Windstream was in immediate danger of bankruptcy and that Uniti would stop receiving lease payments from its largest by far customer. The fate of Windstream and dangers to Uniti have both been overblown by online financial pundits and fear driven investors. Here are the pertinent fundamentals for each company.

Windstream made the decision to stop paying dividends for a couple of reasons. First, the market kept the stock’s yield in the high teens, not putting much value on the dividend amount. More importantly, the Windstream board decided that the cash being used to pay dividends would be better utilized to pay down the company’s debt load. Soon after the announcement of the dividend suspension, Windstream was sued by a vulture fund, claiming the company had broken its debt covenants with the Uniti spin-off. This claim was two years late and widely analyzed as blackmail to get a payoff out of Windstream. The company has fought back hard and has made strategic moves that will significantly improve the overall debt situation. Here is the financial situation for Windstream.

The company will generate $2.0 to $2.2 billion per year of operational income before depreciation, amortization and rent (OIBDAR). The rent is the $653.6 million annual lease payment to Uniti. The company spends about $800 million per year on capital expenditures. A little math shows the company has a $650 million cash cushion above the Uniti lease payments and capital spending required to keep the business functioning. While Windstream is a company that faces the financial challenge of developing new revenue to replace the declines in its traditional landline service, it is not a company on the brink of financial disaster. The company has put in place growth initiatives that will result in a reversal of recent revenue declines. The lease payments to Uniti can be viewed as a contract that must be paid if Windstream is to stay in business. The master lease cannot be changed in bankruptcy, should that highly unlikely event occur.

At the IPO, the Windstream lease accounted for 100% of Uniti’s revenue and earnings. Over the last 2 ½ years, the company has been making acquisitions that have driven the Windstream lease share of revenues down to 65%. The acquisitions have been fiber and small cell service providers. The number of Uniti customers has increased from one to over 16,000. Of greater importance, the purchased companies are growth businesses. During the third quarter, Uniti closed on the two acquisitions of Southern Light and Hunt Telecom. The company now has one of the largest pure-play fiber operating platforms in the country with the ability to deploy small cells, fiber-to-the-macro tower, dark fiber, enterprise services and E-Rate services. These lines of business are growing and will lead to growing free cash flow per share to protect the current dividend and provide for possible future dividend increases.

The current UNIT dividend is $0.60 per quarter, or $2.40 annually. The company will generate AFFO per share of $2.51 in 2017 and is forecast to produce AFFO of $2.67 per share in 2018. With the stability of its revenues, this is strong dividend coverage for Uniti. The company has already declared another $0.60 dividend to be paid in January.

See also: 5 REITs Raising Dividends in December

At $16 per share, UNIT yields a very high 15%. As the market sees continued stability of the cash to pay the dividend, the stock will climb to at least $24, which would give a 10% yield. If there is cash flow growth, the stock will again approach $30 in 2018.

UNIT and stocks like it would be a great addition to your dividend growth portfolio. You see, it’s not just important to include high-yield stocks that give you income now, but to hold stocks that can give you a high return from a blend of high yield and rapid share price appreciation.

That’s the kind of stock that I recommend as a core part of my high-yield income system called the Monthly Dividend Paycheck Calendar. It’s a system used by thousands of investors right now to produce average paychecks of nearly $4,000 in extra income every month. And it’s helped to solve a lot of income problems and retirement worries.

Quality high-yield stocks need to be a core component to your income portfolio. Not only do you get the high yields but you also enjoy share price gains as an added bonus. There are several best in class REITs just like UNIT in the portfolio of my Dividend Hunter service which features the Monthly Dividend Paycheck Calendar.

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Source: Investors Alley

Uncategorized

Why Investors Should Be Concerned About Amazon.com, Inc. Stock

Amazon.com, Inc. (NASDAQ:AMZN) appears poised to take over the world. From groceries, to streaming, to its original business of retail, Amazon seems to succeed at everything it does — and AMZN stock reflects this.

The stock prices of competitors fall at the mere hint of having Amazon as a competitor. Dozens of cities have offered billions in tax breaks to secure its second headquarters. However, amid its popularity, a pattern of history repeating itself has emerged.

And this pattern bodes poorly for AMZN stock.

Historical Patterns Should Concern Holders of AMZN Stock

Amazon is becoming the new Wal-Mart Stores Inc (NYSE:WMT).

In roughly a generation, Walmart emerged from obscurity in rural Arkansas to become the world’s largest retailer. Walmart’s bulk pricing, advances in supply chains and, eventually, the power to force supplier cost cuts made WMT a retail behemoth that everyone feared — much like Amazon today.

However, other companies caught up on pricing and surpassed Walmart on product quality. Furthermore, reports of poor working conditions cut into WMT’s popularity and, eventually, its stock price. Unfortunately for owners of AMZN stock, some of the same trends have emerged at Amazon.

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Amazon has failed in many areas. Reports of poor working conditions have become more frequent. Stories of product failures have also emerged. As my colleague Dana Blankenhorn mentioned, the Amazon Fire smartphone did not burn its competitors. Amazon Register also failed to defeat tiny Square Inc (NASDAQ:SQ) in the credit card reader market. Moreover, the Amazon Prime streaming movie offerings never became a threat to Netflix, Inc. (NASDAQ:NFLX). While AMZN succeeds in many areas, it has failed on many occasions as well.

Yet, despite the failures, Amazon’s reputation for success and growth drive the AMZN stock price. AMZN trades at nearly 300 times current earnings. Revenue growth has averaged over 23% per year over the last five years. This is an impressive feat for a company with a market cap of close to $550 billion. Along with a 5-year average net income increase of 30%, high growth metrics have driven Amazon stock to over 22 times book value.

Amazon Isn’t Declining… Yet

The long-term worry involves the stock following in Walmart’s footsteps and experiencing a slowdown in growth. As a comparison, Walmart trades at 23 times earnings and less than 4 times book value. Its growth has slowed to an average of 1.7% in terms of revenue and income has actually been declining — to the tune of 2.8%. Matching Walmart’s PE ratio would bring the AMZN stock price to below $100 per share.

At least for now, the hunter has become the hunted. The fear Walmart once inspired has been brought forth on Walmart itself by Amazon. Competitors such as Target Corporation (NYSE:TGT), Costco Wholesale Corporation (NASDAQ:COST) and Kroger Co (NYSE:KR) have also seen stock declines by the mere presence of Amazon in markets they compete in.

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Additionally, the company hasn’t followed in Walmart’s footsteps in all areas. Amazon founder Jeff Bezos remains alive and in charge. Walmart’s decline began long after founder Sam Walton passed away.

Walmart’s decline also occurred over several years. Amazon analysts still expect profits to double most years into the foreseeable future. However, double-digit growth remains difficult to maintain as a company grows larger. And if AMZN loses its reputation for taking over business niches, investors will stop paying 300 times earnings.

Summary

The successes and emerging problems with AMZN stock place the company in the same historical pattern as another successful retailer — Walmart. Amazon’s market takeovers and tremendous growth have inspired both fear and respect in other companies.

Stocks swoon at the threat of Amazon. Dozens of cities have also offered incentives to attract the company’s second headquarters.

However, high valuations, product failures and reports of poor working conditions should concern investors. All these could change the company’s reputation for the worse and drive AMZN stock price to much lower levels.

Investors wanting bigger returns should look for the next AMZN… and avoid the current one.

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Source: Investor Place

Cryptocurrency

Crypto Community Remains Extremely Bullish on ICOs

Dear First Stage Investor,

Cryptocurrencies are flying high. Initial coin offerings (ICOs) have already raised a record-breaking $3 billion-plus this year.

But last weekend, as my plane circled over LAX and prepared to land, I was curious…

Was the crypto community overconfident? Was there going to be an obnoxious level of self-congratulatory backslapping at the conference I was invited to?

I was about to find out.

StartEngine held its ICO 2.0 Summit in Santa Monica, California, last week.

I was going to hear a dozen-and-a-half ICO pitches… and was hoping to walk away with one or two that captured my interest.

(As it turns out, I did find one… a potential First Stage Investor portfolio recommendation. It’s an exciting investing opportunity that addresses a gigantic market in an extremely clever way.)

As I feared, there was a little too much cheerleading. No one mentioned a day of reckoning. “A bubble? So what?” was a comment that neatly captured the mood of the conference.

But, to this particular crowd’s credit, these people weren’t totally oblivious to some of the issues casting a shadow over the crypto space.

Their biggest worry? The Securities and Exchange Commission, followed by the possibility that crypto is in a bubble.

Here are some of the more interesting comments I heard on these and other areas of concern…

What Will the SEC Do?

Several lawyers I talked to mentioned the big clue that SEC Chairman Jay Clayton gave just two days prior to the conference.

During unscripted remarks in the middle of a speech at the Institute on Securities Regulation in New York, he said, “I have yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.”

While some disputed the legal basis of what Clayton said, the lawyers I spoke to at the conference mostly agreed it’s a strong sign as to which way the SEC is leaning as far as ICO regulation.

(This gets into the legal weeds about what qualifies as a security, an issue that deserves its own post. I’ll be writing about it soon after the Thanksgiving holiday.)

If, as feared, the SEC rules that digital coins are actually securities and thus subject to securities regulations, that would make ICOs more complicated and expensive.

Sara Hanks, the CEO of CrowdCheck, said that ICO entrepreneurs should think very carefully about doing an ICO outside of a security designation.

“Even if you have a ‘Plan B’ to revise the legal status of your ICO after the fact, if the SEC says they’re a security, you’d be going down a very expensive path,” Hanks cautioned.

As for the “no harm, no foul” point of view? Hanks pointed out that “a lot of consumer complaints would trigger fed action.”

“The SEC doesn’t hate tokens, but it does hate fraud,” she said.

With consumer complaints on the upswing, this is no minor point. So far this year, the crypto exchange Coinbase has been named in 330 complaints involving hacking, compared to just seven in 2016.

Howard Marks, the CEO of StartEngine, framed the issue best. He said that bringing ICOs out of the shadows and making them compliant with the law is the ICO community’s greatest challenge.

Bubble Behavior?

The issue of a possible crypto bubble was raised several times at the conference. But it was typically raised as a red herring, only to be dismissed by the person who raised it.

Lou Kerner, a partner with Flight Ventures, basically echoed the view that Adam and I have been putting forth.

IT’S EARLY.

Kerner likened crypto’s current state to where Amazon was after its first few years. The stock had risen from $1.50 to $86, an increase of 57X. Is that a bubble?

The online retailer is now trading for around $1,135. Kerner said crypto’s current slide is a blip. There’s no bubble. “Wait 20 years and you’ll see,” he said. Point nicely made.

Mike Jones, CEO of Science Inc., said that bubbles burst when demand contracts. Demand for cryptocurrencies, he said, is rising and will continue to rise.

He’s right. We’ve pointed out that bitcoin exchange Coinbase is adding a mind-blowing 40,000 to 50,000 new users per day. And the institutional investors haven’t even climbed on board yet!

“It’s still too early – even with securitized ICOs,” Jones said. “Institutional investors are simply not interested and remain on the sidelines for now.”

Just one brave person admitted the possibility of a bubble (in ICOs, not cryptocurrencies). Others took issue with his view.

Miko Matsumura, the co-founder of Evercoin, for example, likened the ICO market to a pillow fight. He pointed out that ICOs comprise only $2.5 billion, or 1.2%, of a total crypto market of $208 billion.

“Nobody is getting seriously hurt,” he said. “Everyone has experienced massive gains… and lots of folks are having fun.”

We’ll see if the SEC buys that argument. It’s not known for its fun-loving ways.

A Trio of Concerns

There are several concerns that are definitely worth keeping in mind for ICO entrepreneurs.

  1. Global issues. One entrepreneur who’s in the middle of an ICO campaign told me he had to hire a lawyer in every country he wants to offer coins in. Each country has different rules and regulations about such offerings. He said it’s very complicated, not to mention expensive.
  1. The “know your customer” process. ICO campaigners who ignore KYC rules risk the wrath of the SEC, said Hanks.
  1. A cult of decentralization. Not all smart contracts (on the blockchain) will be enforceable. In the real world, not everything can be decentralized. I was impressed that such a blasphemous point of view was put forward at a crypto conference. Meanwhile, all 15 ICO pitches I heard pushed some form of new decentralization.

Disrupt/decentralize ridesharing? There were two pitches just on this intriguing idea. It’s something to chew on.

The Most Intriguing Fact I Heard

Fidelity has a team of 25 people working full time on crypto. I knew CEO Abigail Johnson was a big believer in crypto, but the news about the team was surprising.

The amount of money sloshing around in the U.S. stock and bond markets totals more than $26 trillion and $31.2 trillion, respectively. If Fidelity can figure out a way to turn a tiny slice of this market into ICO investors, it would be a major coup.

And it would keep the crypto/ICO markets humming along for many years to come.

Good investing,

Andy Gordon
Co-Founder, Early Investing

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Source: Early Investing

Uncategorized

This Simple Strategy Beat the Market by 170%

Headline writers are warning of a junk bond apocalypse. The articles warn that this is bad news for stocks.

Many analysts believe bond traders are smarter than stock market traders. Bonds require more math to understand, and the logic is that only smart traders work in that market.

Since bond traders are smart, the theory says, they stay one step ahead of the stock market. A breakdown in bonds is a warning sign for stocks. And bond breakdowns should start in the weakest sector, which is junk bonds.

So, when junk bonds sold off last week, the message was clear — the bear market in stocks is inevitable.

The problem is, that’s wrong.

The chart below shows an indicator called the interest-rate spread. It’s falling … and that’s bullish for stocks.

This simple strategy beat the market by more than 170% while avoiding steep losses in bear markets. It was the best economic indicator of 44 that I tested.

(Source: Federal Reserve)

The interest-rate spread is the difference between the interest rate on low-grade corporate bonds and 10-year Treasury notes. Low-grade bonds include bonds we often call junk.

This indicator tells us whether bond investors are worried or confident about the future. When they are confident, they buy junk bonds. This pushes the yield on junk down. The indicator declines as rates on junk near rates on Treasuries.

When investors are worried, they avoid low-grade bonds. Instead, they buy Treasuries. This leads to lower rates on Treasuries.

To make low-grade bonds attractive, the interest rate must rise. When the rate gets high enough, investors will buy low-grade, or junk, bonds, and the spread falls.

I tested this indicator on the stock market with data going back to 1919. The rules were simple: Buy stocks when the spread is falling.

Specifically, if the spread is lower than it was a year ago, buy stocks. If the spread is higher than a year ago, sell stocks and hold cash.

This simple strategy beat the market by more than 170%. It also avoided steep losses in bear markets. Interest-rate spreads was the best economic indicator of 44 that I tested.

Right now, this indicator is bullish. That means the recent stock market pullback is a buying opportunity.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

In this exciting NEW VIDEO, Wall Street legend and former multibillion hedge fund manager Paul Mampilly pulls back the curtain on the biggest investment opportunity in the market today. What insiders are calling “The Greatest Innovation in History,” this revolution will mint more millionaires and billions than any technology that came before it. Right now, the current market for this technology is just $235 billion, but given how fast this technology is moving experts predict it will soar to $19 trillion by 2020. But 8,000% growth is just the beginning—and now’s your chance to get in on the action. [CONTINUE TO VIDEO]

Source: Banyan Hill

Growth Stocks

The #1 Pick to Stop Amazon from Taking Over the U.S. Drug Industry

A new word has appeared in American lexicon in the past few years: Amazoned, often used in the phrase, “to be Amazoned.” To me, it is a synonym for disruption. Just look at what Amazon.com (Nasdaq: AMZN)has done and what it threatens to do.

First, Amazon disrupted the U.S. book sector then the general retail industry, pushing many of the traditional companies in the sector it seems toward the dust bin of economic history. Then, the online retail giant moved into the roughly $800 billion U.S. grocery market in June with the purchase of Whole Foods. And once again, the traditional participants in the sector are seemingly headed the way of the dinosaur.

Now another sector may be in the sights of the gunslinger Jeff Bezos and his company – the $450 billion U.S. prescription drug industry. The question is whether this industry is ripe for disruption as were the retail and the grocery businesses.

Let me take you on a tour of the U.S. prescription drug industry value chain.

The Four Links in the Drug Distribution Chain

There are four basic links in the chain of how prescribed drugs get to you.

At the top of the chain is of course, the pharmaceutical companies that actually produce prescription drugs. These companies have little to fear from Amazon (at least for now).

The next link in the chain is the pharmacy benefit management companies, or PBMs. Their role is to negotiate drug prices with the pharmaceutical companies, process pharmacy claims and operate home-delivery pharmacies.

This sector is dominated by just three companies and they control three-quarters of the market. The three PBMs are Express Scripts (Nasdaq: ESRX), Caremark and Optum Rx. The latter two are controlled by the largest U.S. pharmacy chain CVS Health (NYSE: CVS) and the biggest U.S. health insurer UnitedHealth Group (NYSE: UNH) respectively.

Then we come to the next link in the pharma chain – the drug wholesale companies. And again there are three dominant companies, which distribute 90% of the drugs sold in the U.S. The companies are McKesson (NYSE: MCK), AmerisourceBergen (NYSE: ABC) and Cardinal Health (NYSE: CAH).

Finally, of course, there are the drug store chains that likely operate your corner drug store. And once again there are three main players – the aforementioned CVS Health, Walgreens Boots Alliance (Nasdaq: WBA) and Rite Aid (NYSE: RAD).

What Amazon Sees

I don’t know about you, but I think industries that are in effect oligopolies are perfect for disruption from Amazon.

It looks like something well-suited for Amazon… it is an industry big on logistics (physical and digital) – getting the right drug to the right person ASAP.

There is a lot of money being made here. For example, in the PBM segment, Express Scripts’ return on invested capital is in the mid-teens and it earns about $5 for every prescription filled. Can’t you imagine those numbers being brought down to next-to-nothing by Amazon?

Similar numbers are also prevalent in the drug distribution segment. Even the retail drug stores have numbers (return on capital, etc.) above what Amazon typically has. It is this potential threat from Amazon that has already wiped out over $40 billion of stock market value of the drugstore chains so far in 2017.

Related: This Technology Could Lead to the Downfall of Amazon

What Amazon Could Do

We don’t know what Amazon has planned. But it has quietly met with industry executives in recent months as well as made hires from insurers and PBMs. So I suspect something is in the works for 2018.

The company already has begun to sell professional medical equipment, which is part of the business that recently applied for wholesale pharmacy licenses in several states.

But the mystery remains as to where will Amazon aim its guns in the prescribed drug chain.

Unfortunately, I do not think it will be in the PBM segment. There is just too much medical expertise needed. Remember these are the people that control the “formularies” – the master list of drugs that employers and governments will pay for. Amazon would have to hire a lot of medical expertise at great expense. And I doubt it would want to get involved in whether patients could or could not have access to certain medicines.

But the drug distribution segment seems to be perfectly suited for disruption by Amazon. It has a massive logistics operation, which could easily start its own mail-based drug delivery business. That would bypass both the drug distribution firms as well as the drugstores. Having your prescriptions mailed to you by Amazon would simply be part of your Amazon Prime membership.

And do you think it would really be a stretch to see an in-store pharmacy pop up in each and every neighborhood Whole Foods?

That could tie in nicely with Alexa – “Alexa, refill my Lantus (the top-selling insulin drug)”. The prescription could then be picked up by you at a Whole Foods pharmacy or at pharmacies that Amazon has made agreements with.

Where to Invest

So how can you invest in what is likely to be a vastly changing landscape for the distribution of U.S. prescription drugs?

One obvious choice is the subject of this article – Amazon. It will continue growing and disrupting industry after industry. The only possible obstacle is if the government goes the anti-trust route and muddies the waters for the company.

Among the companies in the prescription drug distribution sector, I believe the best of the lot is UnitedHealth Group. About 40% of its revenues come its Optum Rx PBM business, with the remaining 60% of revenues coming from its vast health insurance businesses.

Its membership has been growing steadily for many years thanks to its leadership position in private health insurance in both North and South America. As of the end of 2016, it served 48.6 million members, up 4.7% year-on-year. In the first nine months of 2017, membership rose to 49 million people, up 2% year-on-year.

And the Optum PBM business is booming. In 2016, revenues grew 24% to $83.6 billion. The trend continued into 2017 with earnings for the first nine months of the year rising by 15%. This will help maintain the company’s enviable track record of a compound annual growth growth rate (CAGR) of 11% in its revenues from 2006 through 2016.

No surprise then the company raised its guidance for 2017 earnings to about $10 a share, a gain of 24% year-on-year. That will continue to boost its stock, which has risen 31% year-to-date and 38.5% over the past year.

It is the only pure play in the sector I would own in the face of a likely disruption coming in the form of Amazon in the near future.

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Source: Banyan Hill 

Bear

This Chart Shows Us More Volatility Is Coming

As the Federal Reserve is set to see a new leader, the one area all eyes will continue to watch is the diversion between the S&P 500 and rates on U.S. Treasuries, specifically the 10-year.

The two, historically, have moved in tandem, meaning as the S&P 500 rose, so did the yield for the 10-year Treasury. And when the S&P 500 declined for a prolonged period, the yield for the 10-year Treasury declined.

This can be explained rationally.

As stocks march higher, investors want greater returns, and therefore sell Treasury bonds and buy stocks. Selling bonds pushes those prices down and the yields up.

Likewise, when investors are experiencing losses in stocks, they look to find safety in Treasury bonds, pushing those prices higher and the yields lower.

It is a rational process, but one we haven’t seen for nearly a decade. Take a look:

As the Federal Reserve is set to see a new leader, all eyes will continue to watch this one area that could send shocks in both the bond and stock market.

This uncorrelation can be explained as well.

After the 2008 global financial crisis, the trend arrows indicate the general trend for both ends. That’s when central banks sent interest rates to historic lows, keeping pressure on the 10-year Treasury yield to remain subdued even as investors fled — the Fed has been a big enough buyer to make up for the selling of bonds by investors.

But, as the Fed gets set to normalize interest rates and its balance sheet, this correlation will be renewed.

And considering the wide disparity thus far, we can expect this to be an occurrence that sends shocks in both the bond and stock market. This would bring back volatility, which has been gone for many years as well.

Regards,

Chad Shoop, CMT
Editor, Automatic Profits Alert

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Dividends

3 High-Yield Stocks in Danger of Cutting Dividends

On Monday, General Electric Company (NYSE: GE) answered the “will it, or won’t it” question and reduced its dividend by 50%. Even though the date of the announcement was known, and a cut was widely anticipated, the GE share price dropped by 8%. This drop comes after the 15% share price decline since 2017 third quarter earnings were released on October 20.

For dividend focused stock investors, the risk of a dividend cut is in most cases the biggest danger. A dividend reduction results in the double-whammy of a lower future income stream combined with what is often a sharp drop in the stock’s share price. At that point an investor will be forced to sell at a loss and reinvest into different stocks that likely pay a lower yield. It is common knowledge that a high stock yield indicates the market is pricing the stock for a dividend cut. The market may be mistaken, or it may be right. The challenge is to find those high yield stocks where the current dividend rate is secure and to avoid or dump the high yield stocks where a dividend reduction is likely or probable.

Here are three high yield stocks that could be dangerous to your portfolio value. Consider selling if you own and definitely do not buy to chase the current high yields.

Frontier Communications Corp (Nasdaq: FTR) currently yields over 30%! It is less than a year since the company reduced its dividend by 50%. Frontier Communications is one of the handful of regional telecom companies that have struggled to sustain revenues through the shift from landline telephone service to everyone using wireless phones.

These companies face the triple challenge of servicing large debt loads, capital spending requirements to bring their networks into the modern age where they can sell other services to offset falling landline revenues and supporting large dividend payments.

These companies have historically been viewed as income stocks, and management teams have tried without success to balance the three spending channels. Frontier Communications is a company that likely must follow Windstream Holdings, Inc. (Nasdaq: WIN) and completely suspend its dividend.

New Senior Investment Group (NYSE: SNR) is a healthcare sector REIT that currently yields 12.75%. This is one of the highest yields across the entire REIT sector. The company operates through two segments: Managed Properties and Triple Net Lease Properties. Under its managed properties segment, New Senior Investment invests in senior housing properties throughout the United States and engages property managers to manage those senior housing properties.

With its triple net lease segment, the company invests in senior housing and healthcare properties throughout the United States, and leases those properties to healthcare operating companies under triple net leases. New Senior Investment faces the challenge of a very high debt load and declining free cash flow. The senior housing segment also faces the potential of reduced reimbursements from government programs. The high SNR yield is not worth the risk.

NuStar Energy LP (NYSE: NS) is an energy midstream master limited partnership (MLP) that currently yields 14%. Since NuStar has been paying the same quarterly distribution for over six consecutive years, an investor might view the large payout as relatively secure.

This company’s problem stems from a $1.5 billion acquisition made earlier this year. (NS has a $2.9 billion market cap.) With the purchase, the company’s debt has ballooned to $3.7 billion and the new assets are not forecast to generate significant cash flow until sometime in late 2018.

Currently, due to the larger debt loan, NuStar’s distributable cash flow (DCF) covers just 70% of the distributions paid to limited partner unit holders. With the current DCF forecasts and distribution rate, NuStar will be borrowing up to $100 million per year for a couple of years to keep paying the distribution. Investors should steer clear of any company that must borrow a lot money for an extended period to keep paying the current dividend.

Sometimes high yields serve as a strong warning to investors that a company is in trouble. But not always. Sometimes a company can be run well enough that it can afford to be generous to income investors. Sometimes a company is required by law to pay out huge dividends to investors.

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Source: Investors Alley