Buy This Tech Stock Instead of Apple, Facebook, or Google… or Even Bitcoin

I’m about to unveil to you another insight on what I believe is crucial to successful investing. And it’s one that is really just basic common sense.

There will always be hot opportunities and glamour stocks that ‘everyone’ is chasing in the stock market. You need look no further than Tesla Motors (Nasdaq: TSLA). I firmly believe though you should not buy the hype, that the best investing opportunities are found just outside the hype.

The classic example of this is the California Gold Rush. Let me take you back in time for a moment.

History Lesson

On May 12, 1848, a San Francisco store owner by the name of Sam Brannan held a ‘one-man parade’ to announce the start of the California Gold Rush. He went up and down Market Street in San Francisco shouting, “Gold! Gold from the American River!”, while waving a bottle of gold dust.

Gold fever took hold and many residents went off in search of riches.

Brannan had good reason for this one-man advertising campaign. You see he owned the general store in that served miners at Sutter’s Mill, where gold had indeed been discovered. And in the intervening week between the actual discovery of gold and his ‘advertising campaign’, Brannan had bought all the picks and shovels in the city.

Needless to say, Brannan became the Gold Rush’s first millionaire. And a timeless investing maxim was born, “when there’s a gold rush, sell shovels.”

It is this line of reasoning that led me to a recent addition to the Growth Stock Advisor portfolio. It is a leading provider of microcontrollers. But before I give you the details on it, let me fill you in on the microcontroller market and why you need to be invested in it.

What Is a Microcontroller?

A short definition of a microcontroller is that it is a tiny computer on a single integrated circuit containing a processor core, memory, and programmable input/output peripherals.

Microcontrollers (MCUs) are used in automatically-controlled products and devices. Examples include vehicle engine control systems, implantable medical devices, remote controls, power tools, appliances, smartphones and other embedded systems. Microcontrollers are also used in our smart credit cards and electronic passports.

By reducing the size and cost, microcontrollers make it economical to digitally control more and more devices and processes. In simple terms, the entire wonder that is supposed to be the Internet of Things (IoT), with 30 billion connected devices by 2020, would not be possible without microcontrollers.

MCUs are a low-cost and low-power bridge between the sensor and gateway parts of IoT devices. They link sensors to the IoT nodes and serve as sensor hubs in a wide array of IoT devices to gather and log data onto a network.

Microcontroller Market

The IoT microcontroller market is segmented based on types, which are first sub-divided into 8 bit, 16 bit and 32 bit MCUs with 32 bit being the largest segment thanks to its higher processing power. MCUs are also segmented on the basis of application – consumer and home appliances, automotive, industrial, medical, security ID, solar PV and smart grid.

The global microcontroller market is experiencing robust growth at the moment that is set to continue. The period from 2017 to 2024 is forecast to have approximately a 16% compound annual growth rate (CAGR).

(World Microcontroller Market, 10 Years Leading to 2024, in Billions USD)

Demand in key application areas such as automotive, consumer electronics, smart grid systems, solar power and healthcare is feeding that growth. The biggest future driver behind the growing demand for microcontrollers will be the Internet of Things, robotics and factory automation.

However, do not overlook the automotive market. Traditionally, automakers have used MCUs for engine control, anti-lock brakes, power steering, airbags and other applications. But now, microcontrollers are also needed in sophisticated safety features such as advanced driver assistance systems (ADAS).

Yet, despite the soaring demand, the industry has gone through tough times.

MCU Market Upswing

The problem for the industry has been too many players producing too many microcontrollers, driving down prices and profits. For example, between 2006 and 2015, the average price for an average 32-bit MCU fell 17% per year from $5.00 in 2006 to $0.92 in 2015.

But that is beginning to change, making it the right time for you to invest in the industry.

According to research firm IC insights, the average overall price for microcontrollers in 2016 rose 8% in 2016 and will rise another 2% in 2017. Going forward, it sees a steady climb in prices – due to that overwhelming IoT demand – up 3% in 2018, 4% in 2019 and 1% in 2020.

The price for that average 32-bit MCU increased 18% to $1.09 in 2016. Keep in mind that this is the largest segment of MCUs, and will account for 60% of total MCU revenue and 43% of unit volumes this year. These price increases will mean, according to ICU, that revenues for the industry will be in excess of $25 billion.

That’s a very positive trend. And so is the industry’s move toward consolidation, as companies jockey to be best positioned for a future dominated by the Internet of Things.

You’ll Need a Scorecard

The moves made in this bid for supremacy have scrambled the standings of the top companies in the MCU industry. You’ll need a scorecard to keep track. But let me briefly fill you in on the global standings, as of the end of 2016.

The former number one company is now number two, Japan’s Renesas (OTC: RNECY) and its 16% market share.

The new number one (19% market share) is NXP Semiconductors NV (Nasdaq: NXPI), thanks its purchase of Freescale in 2015, moving it up from sixth. NXP itself is now the subject of a takeover bid from Qualcomm (Nasdaq: QCOM).

Fourth through seventh are: Korea’s Samsung (12%), STMicroelectronics NV (NYSE: STM), Germany’s Infineon Technologies (OTC: IFNNY) and Texas Instruments (Nasdaq: TXN). Coming in eighth is Cypress Semiconductor (Nasdaq: CY), which moved up the standings thanks to its purchase of Spansion in March 2015.

Our recommendation of Microchip Technology (Nasdaq: MCHP) is now third globally, up from fifth, with a 14% share of the global market. Its 2016 sales rose 50% to $2 billion due to its $3.4 billion acquisition of Atmel in the second quarter of 2016.

Microchip Technology

Let me fill you in now on Microchip Technology, whose microcontrollers are likely all through your home – from your garage door opener to your coffee machine to your children’s or grandchildren’s toys.

It had a tough start in its corporate life. It was a failing spinoff of General Instrument that was acquired by venture capitalists in 1989. It went public in an IPO in 1993. Luckily, it has had good management teams and has grown through the years via acquisitions until today it is a major producer of microcontrollers (64.3% of revenues), memory and analog semiconductors, and interface products for embedded control systems.

I believe the purchase of Atmel last year was a game changer for MCHP and did a lot more for the company than just moving it up the market share standings. It is now one of the best positioned companies in the entire industry.

Prior to the Atmel purchase, the company had been the only major MCU supplier not licensing ARM CPU technology. This architecture comes from the U.K.’s ARM Holdings, which was snapped up by Japan’s Softbank (OTC: SFTBY) in 2016 for $32 billion.

For about a decade, Microchip Technology had developed and sold 32-bit MCUs based on RISC-processor architecture developed by the U.K.’s MIPS Technology, which is now owned by another U.K. firm, Imagination Technologies. The latter was a major Apple supplier, which was recently dumped by Apple.

But with the proliferation of Internet of Things devices, the ‘wind’ is clearly blowing in the direction of 32-bit MCUs using the low-power ARM architecture. Atmel’s strength is that it is strong player in the ARM microcontroller market.

Security too is of major importance in any IoT designs. Here again, Atmel is a big plus for MCHP. Its expertise in technologies such as Trusted Platform Module (TPM) and crypto memories can complement Microchip MCUs in securely connecting objects.

Consistency Is Key

As with my other recommendations, I look for companies with good global exposure. That is crucial here since overall the Asia-Pacific region accounts for about 35% of the microcontroller market. This region did account for 55.8% of net sales in the Microchip Technology’s latest quarter.

Its revenues aren’t overly dependent on any one sector either. The last quarter’s breakdown on its MCU segment among the major users is as follows: industrial – 35%, automotive – 25%, consumer – 24%.

Another item I like to see from a company is consistency. Despite the tough times in recent years for the industry as a whole, the company has managed to report 106 consecutive quarters of profitability!

Microchip Technology is now one of the fastest-growing global providers of 16-bit and 32-bit microcontrollers. This business continues to outperform the industry, which I think will enable it to continue gaining significant market share. Its analog business (about 25% of revenues) is also fast becoming one of the biggest analog franchises in the market.

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Source: Investors Alley

5 REITs Increasing Dividends in February

With the start of a new year, it is natural to look for ideas to help your stock portfolio grow during the year. One bit of assistance I like to provide is to list those real estate investment trusts (REITs) that should announce higher dividend rates in the upcoming months. This knowledge can give you a jump on the rest of investing public, which will be surprised when the positive news is announced.

I maintain a database of about 130 REITs. With it I track current yields, dividend growth rates and when these companies have usually announced new dividend rates. Most REITs announce a new dividend rate once a year, and then pay that rate for the next four quarters. Currently about 90 REITs in my database have recent and ongoing histories of dividend growth. Out of that group, higher dividend announcements will happen during almost every month of the year. In 2017, the overall REIT sector ended flat for share values, with a total return consisting of the dividend yields. Through the same period, many REITs increased their quarterly or monthly dividend rates. As a result, current yields are comparatively higher than a year ago for many stocks in the sector. Higher dividend announcements can be the catalyst that starts the price recoveries for individual REIT shares.

February is an active month for REITs to announce dividend increases. Many companies use their announcement of the previous year’s financial results as a good time to declare the dividend rate for the upcoming year. Here are five REITs that I expect to announce significant dividend increases next month.

First Industrial Realty Trust, Inc. (NYSE: FR) acquires, owns and leases out industrial properties used by light industrial, warehouse and R&D companies. The company has grown its dividend by over 100% over the last two years, including a 10.5% increase last year. For the first nine months of 2017, FFO per share was up 7.5%. First Industrial pays out about 50% of FFO as dividends. Net income per share growth – which drives the minimum dividend paid – indicates another 10% dividend increase is probable.

The new dividend rate is announced with the fourth quarter earnings report that comes out in the second half of February. Record date will be the end of March with a late April payment date. FR yields 2.8%.

QTS Realty Trust Inc (NYSE: QTS) is a mid-cap – $2.5 billion value – data center REIT that came to market with an October 2013 IPO. The company is growing rapidly, but FFO per share growth is lagging revenue growth. Reported 2017 adjusted FFO per share was up 5% for the first nine months of last year.  In February 2017, the company announced an 8.3% dividend boost.

This year I forecast a 5% to 7% increase. The new dividend rate should be declared in late February with an early April payment and around March 20 record date. QTS yields 2.9%.

National Health Investors Inc. (NYSE: NHI) is engaged in the business of owning and financing healthcare properties. Its portfolio consists of real estate investments in independent living facilities, assisted living facilities, entrance-fee communities, senior living campuses, skilled nursing facilities, specialty hospitals and medical office buildings. Last year the company increased its dividend by 5.6%. Through the 2017 third quarter AFFO per share was up 9.3% compared to the same period in 2016.

The company should announce an 8% to 9% dividend increase this year, compared to 5.5% for the last couple of years. The next dividend will be announced in mid-February with an end of March record date and payment in early May. NHI currently yields 5.1%.

Weingarten Realty Investors (NYSE: WRI) is engaged in the business of owning, managing and developing retail shopping centers. Its 230 plus properties consist primarily of neighborhood and community shopping centers. This REIT has increased its dividend every year since 2010. Last year the company increased its quarterly dividend by 5.5% and paid a special $0.75 per share dividend in December. For the first three quarters of 2017, core FFO per share was 5.8% higher than over the same period in 2016. Another 6% dividend increase in 2016 seems probable. The next dividend will be announced in mid-February. Ex-dividend will occur in early March, with a mid-March payment date. WRI currently yields 4.8%.

Digital Realty Trust, Inc. (NYSE: DLR) is a large-cap data center REIT with an 11-year history of above average dividend growth. Last year, the dividend was increased by 5.7%, compared to the 10-year average annual double-digit percentage bump. Growth in 2017 has improved and I expect a 7% to 9% dividend increase for 2018.

The next dividend will be announced in mid-February, with a mid-March record date. Payment of the new dividend rate will start at the end of March. DLR currently yields 3.3%.

BONUS RECOMMENDATION:

AvalonBay Communities Inc (NYSE: AVB) business is the development, redevelopment, acquisition, ownership and operation of multifamily (apartment) communities primarily in New England, the New York/New Jersey metro area, the Mid-Atlantic, the Pacific Northwest, and Northern and Southern California. The company is focused on the high-end of the apartment spectrum. AVB stopped growing dividends, but did not cut them, from 2008 through 2011. In recent years, the payout has grown by mid-single digits, including a 5.2% increase in 2017. FFO growth in 2017 points to another 5% to 6% increase this year. AvalonBay announces a new dividend rate in early February, with an end of March record date and payment in April. The stock yields 3.3%.

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Source: Investors Alley 

Why REITs Will Soar in 2018 (and 5 to Buy Now)

The REIT bears have gone too far this time.

In the past few days, I’ve seen a lot of panicky commentary warning that incoming Federal Reserve chair Jerome Powell will raise rates too fast after he takes over in February—and that would be a disaster for real estate investment trusts (REITs).

Don’t take the bait.

Because it all adds up more fear-fanning headlines from a business press desperate to make something out of nothing.

I’ll show you why in a moment. Then we’ll move on to 3 corners of the REIT space (and 5 stocks in particular) that underperformed in 2017—and are poised to spring back big time in 2018.

The Powell Factor

First, unless you’ve been avoiding the Internet and all newspapers for the last 6 months, you know the Fed plans hike rates further this year.

My colleague Michael Foster rattled off the reasons why in a November 21 article, but they boil down to rising wages, falling unemployment and an uptick in inflation, though it’s still below the Fed’s 2% target. That’s got futures traders pegging the next hike for the Fed’s March 21 meeting.


Source: CME Group

But whether we get the 2 rate hikes the market expects this year or 3 or more, as some talking heads predict, we can be sure of one thing: Powell will steer the same course as his predecessor, Janet Yellen.

How do I know?

Because he’s never dissented on any Fed decision since becoming a Fed governor in 2012, according to MarketWatch.

Which brings me to the relationship between rates and REITs, a linkage most people have 100% backwards—handing us a terrific opportunity to profit.

The Truth About Rates and REITs

Most folks think rising rates hurt REITs for 2 reasons.

The first: higher rates increase REITs’ borrowing costs … and it is true that REITs usually carry above-average debt to finance property purchases and renovations.

The second: that rising rates make so-called “safe” investments like CDs and Treasuries more appealing to income seekers compared to REITs.

Let me take the second point first.

As I write, the 10-Year Treasury yield sits at 2.5%, while the benchmark Vanguard REIT ETF (VNQ) pays nearly twice as much—4.3%. And plenty of REITs pay more, like a hotel operator I’ll show you in a moment that yields 7.0% today!

I think you’ll agree that this is still a big gap to close, and it will be a long time—if ever—before CDs, treasuries and the like manage to pull it off.

As for the first point, rising rates do increase REITs’ borrowing costs. But that’s only half the story! Because those hikes also come with a hot economy, which drives up rents and demand for the offices, warehouses, apartments and other properties REITs rent out.

The result? A rise in funds from operations (FFO, the REIT equivalent of earnings per share) that dwarfs higher interest costs and ignites REIT share prices.

If you don’t believe me, check the history. This is exactly what happened from July 2004 through June 2006, when the Fed hiked rates from 1.25% to 5.25%, and 10-year Treasury yields spiked to 5.14%.

How did REITs do? They soared 48%, including dividends, nearly tripling up the S&P 500’s gain.

Biggest REIT Myth Busted

The takeaway? Now is the time to buy REITs … especially if you see any of the ones on your watch list take a dip around the time of a rate-hike announcement (watch for that around March 21).

5 Top REITs From 2017 That Are Primed to Soar in ’18

To get you started, I’ve pored over my last 12 months of ContrarianOutlook.com articles to bring you 5 solid REITs, each from a different part of the REIT market.

They are: hotel operator Hospitality Properties Trust (HPT), healthcare property owner National Health Investors (NHI), apartment landlord Essex Property Trust (ESS), self-storage manager Public Storage (PSA) and government building owner Easterly Government Properties (DEA).

All have strengths that safeguard our cash and set us up for gains in 2018. HPT, for example, owns 323 hotels that focus on business travelers and operate under household names like Radisson, Holiday Inn and Marriott. The REIT also cuts its reliance on hotels with its 199 Petro and TA travel centers, all of which are located along the interstate highway system.

These are terrific businesses that will grow as trucking freight volumes zoom ahead 3.4% annually through 2023, according to the American Trucking Association.

Essex, meanwhile, boasts 59,240 apartment units in prime West Coast markets like San Francisco and LA.

As I told you in a December 7 article, Essex is cashing in as millennials skip home ownership in favor of posh downtown pads, while baby boomers swap their suburban addresses for similar abodes. (Self-storage names like PSA, by the way, benefit from these exact same trends.)

Meantime, National Health Investors and Easterly Government Properties add ballast to our portfolio. NHI provides financing for steady medical tenants such as seniors’ housing facilities and specialty hospitals, while Easterly rents its 46 sleek, modern properties to government tenants like the FBI.

Your 5-REIT Portfolio: What the Numbers Say

So with that, let’s put our 5 REITs to the test, starting with 3 crucial numbers for us income hounds: dividend yield, dividend growth and payout ratio (dividends as a percentage of core or normalized FFO; a vital measure of dividend safety).

As you can see, these 5 names give us a nice mix of high yields and dividend growth. (A side bonus: as I recently showed you in an example using Boeing (BA), a rising payout is the No. 1 driver of stock prices.)

And all of those payout ratios (including DEA’s 85.4%) are easily manageable for these REITs, which benefit from rock-solid tenants (who wouldn’t want to rent space to Uncle Sam?) and high occupancy rates—DEA’s currently sits at an unheard-of 100%!

Finally, there are some real bargains in this bin. HPT, for example, trades at a ridiculous 8.3 times adjusted FFO, with NHI and DEA at an attractive 14.5 and 18.2 times, respectively.

It’s no surprise that the two priciest trusts are Essex (20.3 times core FFO) and Public Storage (20.6). But those are fair prices (they’re both below the S&P 500’s 21.8 and down from a year ago) considering these are two of the fastest dividend growers in our basket.

My take? I expect REITs to do a big U-turn in 2018, when the market finally realizes rising rates aren’t a threat—and these 5 are in a great position to benefit.

Revealed: The Best 8% Dividend for 2018

My top REIT pick for 2018 boasts an even higher dividend than any of the 5 trusts above (8% as I write this) and grows its payout every single quarter.

In fact, this powerhouse REIT has increased its payout for 21 straight quarters, so your forward yield is actually 8.4%, given that we’re going to see 4 more dividend hikes this year!

The best part? You can buy in cheap, at just 10 times FFO!

However, I expect this stock’s valuation and price to rise 20% in 2018 as the herd finally gets used to the fact that rising rates are here to stay—and that they’re actually a benefit to REITs.

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Source: Banyan Hill 

10 Strong Buy Stocks From 2017’s Best Analysts

What are the top analysts who consistently get it right recommending strong buy stocks for 2018? TipRanks tracks and measures the performance of over 4,700 analysts to identify the top expertsin each sector who consistently outperform the market.

Analysts are ranked based on two crucial factors: success rate and average return per recommendation. Following the top analysts of 2017 is also an effortless way to find under-the-radar stocks that experts believe have strong investing potential. For this piece, however, I went one step further.

I searched for the double whammy of 1) stocks specifically recommended by the Street’s top analysts and 2) strong buy stocks that also have the backing of Wall Street.

That’s why here I only include stocks with a ‘Strong Buy’ analyst consensus based on the past three months of ratings. Using this consensus, investors can be reassured that these stocks are the crème de la crème as far as the Street is concerned.

Bearing this in mind, let’s dive in and take a closer look now:

Strong Buy Stocks: Lam Research (LRCX)

Source: shutterstock

B Riley FBR analyst Craig Ellis is the No.1 analyst out of over 4,700 analysts tracked by TipRanks. No wonder — he has an impressive 81% success rate and 37% average return over 391 ratings. Right now he is singing the praises of chip equipment maker Lam Research Corporation (NASDAQ:LRCX). He says the recent blow out results for chipmaker Micron “support the case for Memory strength to continue well into C18 albeit with DRAM tighter than NAND.”

Positive factors include “steadily increasing end demand diversification and rising system content to meet the Tech industry’s various next-generation initiatives.” As a result, Ellis is confident that bear concerns about a massive NAND correction next year are overblown.

Indeed, he sees LRCX spiking from $192 to $250- the Street’s highest price target yet.

Overall this ‘Strong Buy’ stock scores 11 buy ratings versus just two hold ratings from top analysts in the previous three months. These analysts have an average LRCX price target of $222- –15% upside from the current share price.

Strong Buy Stocks: First Data (FDC)

First Data Corporation (NYSE:FDC) offers retailers card and mobile payment acceptance capabilities for both online and point-of-sale transactions. Right now, it’s one of the largest payment processing companies in the world with 6 million business locations. Top Barclays analyst Darrin Peller sees First Data soaring 44% to hit $24 in the coming year.

Peller reiterated his “buy” rating on the stock on Dec. 5. He says his channel checks and “deep dive” analysis reveal that First Data’s risk/reward ratio is “compelling” into 2018. The analyst sees 2018 as an inflection point for the company’s joint venture channel growth.

In total, First Data has received seven buy ratings and two hold ratings from analysts in the past three months. While Peller is much more bullish than consensus, the average analyst price target of $21 still suggests 26% upside from the $16.60 share price.

Note that Peller is one of the Top 100 analysts tracked by TipRanks.

Strong Buy Stocks: Apple (AAPL)

4 Reasons Apple Inc. (AAPL) Stock Investors May Want to Reconsider Their Trade

Source: Shutterstock

Heading into 2018, Apple Inc. (NASDAQ:AAPL) has retained its ‘Strong Buy’ analyst consensus rating. In the previous three months, analysts have published 21 buy ratings and seven more cautious hold ratings. If we look at the $191 average price target from all these analysts, we find potential upside of 11%.

Encouragingly Key Banc’s Andy Hargreaves is optimistic on AAPL, even without blockbuster iPhone sales. He says: “We do not expect upside to consensus iPhone unit estimates [of 240 million] in FY18.” Instead, he is looking for sales of 237 million units for 2018 and warns that the multi-year sale cycle could be short-lived.

Ultimately, however, this doesn’t dampen his overall take on the stock:

“Despite our slightly dour view of iPhone units, we continue to believe the combination of increased iPhone prices and growing services revenue will drive upside to consensus gross margin estimates in FY18. This should drive upside to consensus EPS expectations, even if iPhone units are only in line.”

This five-star analyst reiterated his buy rating with a $192 price target (12% upside).

Strong Buy Stocks: Alexion Pharma (ALXN)

Source: Alexion Pharmaceuticals

Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is a U.S. pharma company best known for its development of Soliris, a drug used to treat rare blood disorders. ALXN has the thumbs up from top Cowen & Co analyst Eric Schmidt. Bear in mind this analyst is generating one of the highest average returns of over 40% per rating.

Schmidt is confident that Alexion can explode 44% from just $125 to $180. He calls Alexion a “top large-cap pick” with a $1 billion opportunity in autoimmune disorder generalized myasthenia gravis (gMG). Soliris has now been approved in Europe, the U.S. and, on Jan. 3, Japan. Schmidt is now expecting a “robust” launch for one of the world’s most expensive drugs, at $700,000 per patient per year.

In total, Alexion has scored 11 buy ratings and only one hold rating from analysts in the past three months. These analysts are predicting that Alexion will rise 31% to reach $164.

Strong Buy Stocks: Chevron (CVX)

California-based oil giant Chevron Corporation (NYSE:CVX) is an interesting pick. Why? Well initially it only has a “Moderate Buy” analyst consensus rating. But if we look at only top analyst ratings the consensus shifts to Strong Buy.

In fact, top analysts have 100% support for CVX with only buy ratings in the last three months. These best-performing analysts see the stock rising over 9% to hit $140.

Cowen & Co’s Sam Margolin gets it right 87% of the time. He also has an average return of over 20% per rating. In respect of Chevron, Margolin is the Street’s most bullish analyst. On Dec. 20, Margolin ramped up his price target from just $122 all the way to $160 (24.5% upside). Chevron is looking appealing right now for three key reasons: 1) accelerating free cash flow; 2) increasing Permian asset value due to operational execution; 3) its dividend yield of 3.36%.

“We see progress along those fronts in 2018 accelerating, and it should be relatively easy for investors to keep track of the data outcomes that can drive the stock directionally. With metrics trending in the right direction, the ultimate valuation of the stock, in our view, can be underpinned by 30-year averages in key cash-based metrics” comments Margolin.

Strong Buy Stocks: Centene Corp (CNC)

Centene Corp (NYSE:CNC)

Source: Shutterstock

‘Strong Buy’ healthcare stock Centene Corporation (NYSE:CNC) is winning analyst acclaim after publishing strong 2018 guidance. The company is a multi-line healthcare enterprise that provides services to government healthcare programs. Following an upbeat investor day, top Oppenheimer analyst Michael Wiederhorn boosted his price target from $111 to $122 (17% upside).

He says the day “highlighted the strong growth opportunities within a $1.9T pipeline ($255B targeted), largely consisting of new Medicaid populations, along with the promising opportunities within the Medicare Advantage and Exchange markets.” And this is a long-term investing prospect says Wiederhorn. He sees Centene “continuing to boast strong revenue and earnings growth prospects for years to come.”

The overall Street picture on Centene is also very promising. In the past three months, CNC has received seven buy ratings and one hold rating. This includes Wells Fargo’s Peter Costa adding Centene to Wells Fargo’s Priority Stock List on Dec. 19 as he believes shares look undervalued right now.

So, too, does the Street: the stock’s $119 average analyst price target suggests 15% upside potential.

Strong Buy Stocks: FedEx (FDX)

FDXmsn

Five-star Argus Research analyst John Eade is betting on courier leader FedEx Corporation (NYSE:FDX) for 2018. On Dec. 26, he bumped up his price target to $290 from $245 previously. Given the stock is currently trading at $262, this indicates upside potential of over 10%. The move came following an impressive Q2 earnings beat and raised FY18 outlook.

He says the company should execute with future efficiencies and margin improvement thanks to the “well-respected management’s” continued cash injections. Specifically, management is showing increased focus on expense control in the Ground segment. On top of this Argus believes that FY18 will reap the benefits of falling fuel costs and higher shipping demand.

Following a flurry of analyst “buy” ratings and price target increases, 14 out of 15 top analysts are bullish on the stock. The average price target from these analysts: $278.

Strong Buy Stocks: Owens Corning (OC)

Source: Shuttertstock

Owens Corning Inc (NYSE:OC) is a key analyst pick for 2018. This is a global company that develops and produces insulation, roofing and fiberglass composites. Top RBC Capital analyst Robert Wetenhall is the most bullish analyst on OC right now. He says the stock will go to $112 (19% upside) because of recent M&A activity and strong execution.

On Dec. 4, Wetenhall underscored his confidence in the stock when he upgraded Owens Corning from outperform to “top pick.” He explained: “Our expectations for double-digit EBITDA growth, robust free cash flow generation and multiple expansion inform our Top Pick rating and give us confidence that the stock will rise even after strong year-to-date performance (+70%).”

Overall, Owens Corning has a “strong buy” top analyst consensus with a $94 average price target. This breaks down into six buy ratings and one hold rating in the last three months.

Strong Buy Stocks: Alibaba (BABA)

Risks Abound for Alibaba Group Holding Ltd (BABA) Stock Price

Source: Shutterstock

Chinese e-commerce leader Alibaba Group Holding Ltd (NASDAQ:BABA) is currently trading near the high end of its one-year range. But analysts are optimistic the stock has even further room to grow in 2018.

Indeed, Alibaba has received only bullish buy ratings from analysts for over half a year now. The average price target from the last three months of ratings alone comes out at $213- 14% above the current share price.

Five-star Stifel Nicolaus analyst Scott Devitt recommends buying BABA for exposure to China’s rapidly growing middle class. He points out that the Chinese eCommerce market can exceed $1 trillion worth of sales by 2019. And BABA looks set to capitalize on this with “well-managed and well-positioned leaders”.

Meanwhile, BABA also has the technical support from China’s broad and efficient telecommunications infrastructure. This continues to increase BABA’s ability to grow its online customer base. And at the same time, BABA’s online/ offline new retail strategy means it has all shopping preferences covered.

Strong Buy Stocks: Broadcom (AVGO)

Semiconductor behemoth Broadcom Limited (NASDAQ:AVGO) is consistently one of the Street’s top stocks. And it looks like the situation is no different for 2018. In the last three months, AVGO has received an incredible 26 consecutive buy ratings.

No hold ratings or sell ratings here. These analysts see the stock trading up by over 18% from the current share price. Top Oppenheimer analyst Rick Schafer has just called AVGO his best stock idea for December-January. He says, “We believe AVGO has one of the most strategically and financially attractive business models in semiconductors.”

Schafer lists four key reasons for his positive outlook on AVGO. The company has 1) a sustained competitive advantage in the growing high-end filter market; 2) a highly diversified, differentiated and “sticky” non-mobile business offering; 3) and efficiently managed manufacturing advantage; 4) substantial EPS and free cash flow accretion heading its way from the Broadcom and Brocade acquisitions.

So far Schafer seems to know what he is talking about when it comes to AVGO. Across his 37 ratings on the stock, he boasts an impressive 93% success rate and 41% average return. Even better, the company is also an attractive dividend stock and recently paid a dividend of $1.75, up from $1.02 the previous quarter.

Buffett just went all-in on THIS new asset. Will you?
Buffett could see this new asset run 2,524% in 2018. And he's not the only one... Mark Cuban says "it's the most exciting thing I've ever seen." Mark Zuckerberg threw down $19 billion to get a piece... Bill Gates wagered $26 billion trying to control it...
What is it?
It's not gold, crypto or any mainstream investment. But these mega-billionaires have bet the farm it's about to be the most valuable asset on Earth. Wall Street and the financial media have no clue what's about to happen...And if you act fast, you could earn as much as 2,524% before the year is up.
Click here to find out what it is.

Source: Investors Place

Betting Big On This Chipmaker with More Upside Than Apple

It’s only the first week of the New Year, and there’s already plenty going on in the financial markets. While there hasn’t been much in the way of volatility, that’s only because stocks are mostly going up. In that sense, 2018 is acting much like 2017.

On the other hand, one major stock that isn’t going up is Intel (NASDAQ: INTC). In fact, it’s quite the opposite situation. As of this writing, INTC was down 5% to kick off 2018.

Here’s the deal…

News broke this week of a potential design flaw in Intel processors which could pose a security risk. Moreover, the fix (patch) for the flaw allegedly slows down the performance of the chips by as much as 30%. This flaw supposedly only impacts Intel chips and not its competitors.

You can see why this would be very bad news for the company. Not only will it likely push consumers to other chip producers, but it also will open up lawsuits or expensive fixes/replacements for Intel. It’s clearly the reason why INTC stock is down and competitors like Advanced Micro Devices (NASDAQ: AMD) and NVIDIA (NASDAQ: NVDA) are up.

Intel hasn’t denied the existence of the flaw, although the company says it will impact multiple types of chips across various devices and is not just an Intel-specific issue. Regardless, with INTC controlling 80% of the microprocessor market, it will certainly be hit the hardest.

This scenario is also playing out in the options market, where AMD is seeing quite a bit of bullish options activity. The day the news hit the wire, about 80% of the money going into AMD options was of the bullish variety. (About 125,000 more options contracts traded that day than what’s average in the stock.)

One trade which caught my eye was a purchase of over 1,500 April 12 calls with AMD trading around $11.75. The buyer paid $1.20, which means AMD needs to get to $13.20 by April expiration for the trade to break even.

The call buyer is spending over $175,000 on these contracts, so there clearly is some belief that AMD is going to keep going up. Over the last 52 weeks, AMD has been as high as $15.65, so it’s definitely not out of the realm of possibility that the stock runs quite a bit higher.

It will be interesting to see if the exuberance around AMD’s prospects diminishes once the news sinks in a bit more. As you can see from the chart, the stock already came back down to earth somewhat the same day it spiked higher.

If you believe AMD is ripe for a move higher, but you don’t want to drop $1.20 on 3 month calls, you could buy a call spread. That’s when you purchase a lower strike call, such as the 12, and sell a higher call, like the 14, to save money on the position.

An April 12-14 call spread like I just described only costs about $0.60, or half the cost of the straight call purchase. Your upside is limited to $1.40 because of the short 14 strike and the $0.60 cost of the trade. But, you are spending a whole lot less on the position. Plus, spending $0.60 for the chance to make $1.40 is not a bad payout ratio at all.

This simple strategy can easily add thousands of dollars of income to your savings over the next 6 months, and I want to show you step-by-step how to do it in your portfolio.

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Source: Investors Alley

Buy This Robotics Stock Before the Machines Take Over

In order to survive in the 21st century, companies are demanding greater speed and efficiencies in their processes and robots are ever increasingly the answer. That’s why robot armies are spreading throughout factories and warehouses around the world as automation transforms an ever widening number of industries.

Global sales of industrial robots rose by 18% to a record $13.1 billion (1.828 million units) in 2016, according to the International Federation of Robotics (IFR). The IFR forecasts the number of units will jump to 3.053 million units by 2020, transforming many manufacturing operations into ‘factories of the future’.

Many of these robots will be ones that can work safely alongside humans. These are known as collaborative robots, or cobots. As components become ever smaller and complex, these type of robots can perform vital functions as they can handle the intricacies of manufacturing in ways humans cannot.  Or mundane tasks, such as filling your favorite box of chocolates with individual candies.

Crucial to these type of robotics systems is the rapid advancements being made in software, sensors and robotic vision systems. This looks to be the richest seam to mine when investing in the robotics sector. The IFR estimates this is already a $40 billion market.

Most important among these is robotic vision systems. These vision recognition systems, coupled with artificial intelligence and cameras, allow robots to not only identify objects, but to learn from experience to improve their performance over time.

Foremost in this sector is Cognex (Nasdaq: CGNX), which is the leader globally in providing vision systems, vision software, vision sensors and industrial ID readers. It sells its vision systems to most of the big players in the industrial robotics industry including ABB, Yaskawa Electric and Germany’s Kuka AG. The only exception is Fanuc, which makes its own vision systems. This translates to Cognex having a 30% share of the vision systems market.

Its business is quite profitable, with Cognex enjoying nearly 80% gross profit margins. And with much of the growth in robotics overseas, it is not surprising that 45% of its 2016 revenues came from Europe. Another 30% came from the Americas and 25% from Asia. The Greater China region – the fastest growing region – alone accounted for 12%.

Cognex is expanding rapidly into the fastest-growing segments of industries that are becoming more automated. For example, the logistics sector (warehouses, etc.) accounts for only 10% of Cognex’s revenues, but is currently growing at a 50% annual rate.

Another example is 3D vision, which is a necessity for cobots. Here the acquisitions of companies including Germany’s EnShape, Spain’s AQSense and Colorado-headquartered Chiaro Technologies gave Cognex’s products a lot of traction. Its 3D products grew well in excess of 100% in 2016 and that growth should only accelerate going forward.

Buffett just went all-in on THIS new asset. Will you?
Buffett could see this new asset run 2,524% in 2018. And he's not the only one... Mark Cuban says "it's the most exciting thing I've ever seen." Mark Zuckerberg threw down $19 billion to get a piece... Bill Gates wagered $26 billion trying to control it...
What is it?
It's not gold, crypto or any mainstream investment. But these mega-billionaires have bet the farm it's about to be the most valuable asset on Earth. Wall Street and the financial media have no clue what's about to happen...And if you act fast, you could earn as much as 2,524% before the year is up.
Click here to find out what it is.

Source: Investors Alley

Interview With a Bitcoin Expert

I remember when I first heard about cryptocurrencies. It was in 2013; a Libertarian friend of mine mentioned how he was dabbling in something called “bitcoin.”

“This is the new, new thing,” he said. It would sweep away the need for central banks. The underlying blockchain technology would kill off big paper-shuffling bureaucracies. “People need advice on how to make money from this new digital asset.”

Alas, it was a tough business proposition back then. Ask most people about bitcoin or Ethereum and you got a shrug of the shoulders. But that wouldn’t be the case forever.

So when we created Banyan Hill, we knew we wanted a cryptocurrency expert on the staff. The tough part was finding one with the right experience and credentials for the job.

By that I mean we wanted a pro — someone who “ran money” professionally on Wall Street, someone who didn’t just write about bitcoin but bought and sold it too. And we wanted someone who could explain how to do it to mainstream Americans in simple, clear language.

Quite frankly, that’s a whole other level of expertise. So I’m pleased to announce that, after a long search, we found the right person for the job…

His name is Ian King, Banyan Hill’s new cryptocurrency editor.

Ian believes in the future of cryptocurrencies so much, he broke off from a successful hedge fund career to create his own website teaching people how to buy and sell the likes of bitcoin, Ripple, Litecoin, Monero and other cryptos.

So when we came upon Ian’s work, the team and I here at Banyan Hill all looked at each other and said: “We have to hire this guy.” 

Real-Life Crypto Trader

Ian has quite a resume.

He started out as a desk clerk at Salomon Brothers’ famed mortgage bond trading department, then moved on to credit derivatives at Citigroup. From there, he spent a decade as head trader at Peahi Capital, a New York-based hedge fund.

After spotting the opportunity in cryptocurrencies, Ian started his own firm to educate and advise crypto speculators. And that’s where we nabbed him, so he could do the same for Banyan Hill’s subscribers.

That seems like a good point to introduce Ian himself…

Q. First, Ian — welcome to Banyan Hill! We’re all very excited to have you join us as our cryptocurrency trading expert. Tell us a little bit about yourself.

I grew up on the Jersey Shore, where I spent summers as an ocean lifeguard. At 19, I was appointed captain of the busiest beach in Belmar, New Jersey.

It was common to have upward of 50 rescues on days when the ocean was rough.

And, although it may sound odd, this is where I started learning the tools that would lead to my success in trading.

See, lifesaving teaches you how to analyze a situation and react quickly. When charging into the surf to help someone, you need to trust your instincts and think on your feet — skills that have become invaluable in my trading career.

Later, in college, I studied psychology and premed in hopes of becoming a psychiatrist. But in my spare time, I started trading dot-com stocks from my dorm room — and I found that I loved analyzing trends too. So while I received a B.S. in psychology, I decided to grab an internship at Merrill Lynch in the middle of the ‘90s bull market.

Trading fascinates me. It requires a better understanding of oneself — of human psychology —  as much as an understanding of the market. After all, markets are comprised of individuals acting in groups. So it all comes down to the same question: Why do we do what we do?

Now I use that question to drive my investigation of the cryptocurrency market from my home in New York City, where I’ve spent the last 20 years.

Q. When did you first get an inkling that cryptocurrencies were going to be the next big thing?

I’ve been thinking about digital money since the end of the financial crisis, when the Fed lowered interest rates to zero.

In 2012, I met with a startup in Silicon Valley that was piloting an e-currency to allow central banks to print and distribute a digital form of money.

To be clear, this was not a cryptocurrency because the value was backed by whatever central bank was issuing it. But the experience sparked my thinking about how digital money can be used to incentivize better citizenry. And how the transfer of value outside the banking system could solve the space and time problem of physical money without the need for a middleman.

There was a need for digital currency here. And the timing was perfect…

Every 10 years, a new technology arrives that changes civilization for the better and creates tremendous wealth for investors.

In the ‘70s, mainframe computing allowed for bulk data processing.

In the ‘80s, personal computers allowed corporations and consumers to run these applications.

In the ‘90s, the rise of the internet democratized information.

In the 2000s, we started sharing that information with “friends” on social media.

And now, in the 2010s, crypto assets permit anyone, anywhere in the world, to transfer something of digital value without the need for an intermediary.

Bitcoin is one such form. However, the bigger picture here is the rise of a whole new crypto asset class that investors are just beginning to discover.

This dispersion of capital among new crypto asset ventures is just beginning, as newly minted bitcoin millionaires reinvest their crypto fortunes, and a fresh wave of entrepreneurs look to capitalize on the current rush of capital.

Q. You worked on Wall Street for years, both at Salomon Brothers, then in credit derivatives at Citigroup, and then became head trader at an equities hedge fund. What did you learn on Wall Street that most prepared you for your second career as one of the world’s best cryptocurrency traders?

For one, in trading, you are only as good as your last trade. That always keeps me searching for the best opportunities.

Another thing my experience has taught me: The asset class may have changed, but the investment behavior here is the same as it always is in new markets.

For example, these markets remind me of the dot-com days in the late ‘90s when 22-year-old day traders were making tens of thousands of dollars a day just by being in the right place at the right time.

The crypto markets are in full mania mode right now — and that means anyone who bought within the last six months has witnessed a 500% return.

But there’s much more upside ahead. See, the good news is that with the institutional money still flowing into crypto, we are years away from the end.

That’s what my career on Wall Street has taught me, and that’s why now is the time to get in if you haven’t already.

Despite the fact that everyone has heard about crypto, only a few people actually own it, and even fewer understand it. So you can still get ahead of the pack.

Q. For people who are unfamiliar with cryptocurrencies … what exactly are they?

Cryptocurrencies are a fundamental change in the way people can exchange something of value.

Every transaction is built on trust. Economies thrive in societies where people trust one another.

In a typical economic transaction, I give you something of value (for instance, $10), and you deliver me a good or service in return. (Let’s say it’s a ride somewhere in an Uber.)

Historically, in order for this transaction to happen, there has to be a middleman to oversee the transaction and punish bad actors.

But “smart” digital money that can be programmed is going to change all of that…

For the first time, an internet user can transfer a unique piece of digital property to another internet user in a way that is safe and secure. Everyone knows this transfer occurred, and nobody can oppose it.

This digital property can be exchanged through a decentralized network of trust that gets rid of the need for a bank or middleman to oversee its validity.

No middleman, no fees to pay the middleman! It’s all verifiable without it. This is a huge breakthrough.

When you see just how big it is (something I’ll continue to write about here in Sovereign Investor Daily), you can understand why smart investors are quickly snapping up new crypto assets.

Keep in mind that I’m saying “crypto assets.” Cryptocurrencies were only the first iteration of this new technology, a subclass of crypto assets.

Crypto assets include new projects such as Filecoin, which raised over $200 million this summer and allows consumers to share computer storage over the blockchain.

Or IOTA, which is the platform that will permit the Internet of Things to exchange something of value. Think about your refrigerator ordering groceries for you or your car paying the parking meter.

So you can see why investors are going crazy for this new type of investment…

Q. We’ve read plenty about the price advances in bitcoin and other forms. Is there still money to be made in cryptocurrencies after the big gains we’ve heard about already?

Absolutely. If the dot-com bubble is a roadmap, we are still in the very early innings of the bubble.

As I said before, the good news is that with the institutional money still flowing into crypto, we are years away from the end.

In fact, in my most recent piece for Banyan Hill, which everyone can read Friday in Sovereign Investor Daily, I explain that bitcoin has finally reached a tipping point … but that it just means there are great opportunities in the offing for those who know where to look.

Just keep in mind that this bubble is particularly odd because it’s the first time in history where Wall Street arrived late to the party. That’s why we’re hearing such skepticism about this market.

In fact, I believe most of Wall Street’s cynicism is simply because it hasn’t yet figured out how to skim its profits off this new financial marketplace. JPMorgan CEO Jamie Dimon has labeled bitcoin as a “fraud,” but he was awfully quiet when his bank was raking in tens of billions by securitizing fraudulent mortgages.

Q. Coming soon, you’ll be launching a cryptocurrency trading service at Banyan Hill. Can you give us some insights into your trading strategy(s) for cryptocurrencies? Are they actually “tradeable”? If so, how?

I’m in the midst of putting this service together, and I’m extremely excited about sharing these opportunities with everyone — because yes, they are tradeable.

See, I look for three big things in a crypto trade before I believe it’s viable:

  1. Does the crypto asset solve a real-world problem? Is there an immediate use for this new asset? For instance, the insurance company AXA is already using the Ethereum blockchain to run a decentralized flight insurance program. Now when you purchase flight insurance, you will be automatically compensated if the flight doesn’t leave on time. This process is fully autonomous on the blockchain.
  1. What is the crypto asset’s supply schedule? Is there a limited amount of supply that will give this asset value in the future? Bitcoin has a limited supply of coins, with approximately 80% of the total supply issued. That’s not the case for all cryptocurrencies, where investors risk the chance of future dilution.
  1. Are the technicals favorable? Is there a strong uptrend in increasing volume? This factor is arguably the most important because strong technicals can be a buy signal to other traders, and higher prices become a self-fulfilling prophecy.

These three factors led me to purchase Litecoin just a few months ago and ride it for 1,000% gains. Many consider this cryptocurrency as “silver” to bitcoin’s “gold,” as it has similar properties …  but it’s able to transact four times faster.

Now I’m compiling that type of experience into a service that will help traders — either new to the market or not — experience the gains that Wall Street has said it has missed.

I just want to stress this point — there are plenty of gains still yet to be made in this market. And I want to make sure the everyday investor has clear and easy access to that.

Q: Ian, that seems like a good place to wrap things up. Any last thoughts?

Right now, cryptocurrencies are this new thing. Mainstream Americans are starting to get used to them. The whole thing is sort of a novel experience right now.

So take us into the future. How will we be thinking about cryptocurrencies in five or 10 years from now?

What will our experience or interaction be with these new forms of exchange down the road?

Coming into this year, bitcoin was the only game in town, capturing 87% of the total cryptocoin market cap. That dominant market share has been halved to about 45% (even though bitcoin’s price has quadrupled at the same time).

So it’s clear to me that this thriving market is just getting started, and I’m excited to pinpoint these new trends here.

We are still early in the investment and discovery cycle, and that’s why crypto will end up being much bigger than even the first wave of dot-coms.

If history is any guide, when the first dot-com investment cycle peaked in March 2000, the 280 stocks in the Bloomberg U.S. Internet Index reached a combined market value of $2.94 trillion.

At $600 billion, crypto’s total market cap is still one-fifth of the dot-com peak. However, this is the first bubble in human history where everyone on the planet (at least if you own a mobile phone) can participate.

Kind regards,

Jeff L. Yastine
Editor, Total Wealth Insider

Can a $10 Bill Really Fund Your Retirement? The digital currency markets are delivering profits unlike anything we’ve ever seen. ​23 recently doubled in a single week. And some like DubaiCoin have jumped as much as 8,200X in value in 18 months. It’ unprecedented... but you won’t receive any of the rewards unless you put a little money in the game. Find out how $10 could make you rich HERE. ​



Source: Banyan Hill

Amazon’s Alexa to Get Microwave Oven Capabilities

Amazon.com, Inc. (NASDAQ:AMZN) has come a long way with Alexa, proving that the company is more than an e-commerce retailer.

Amazon

Amazon Echo and Echo Dot devices are the future of smart home devices, connecting virtually every area of your home with voice commands. Not only does Alexa connect your voice with your TV, music, video and lights, but it is also connected to your kitchen now.

The company has developed a software that connects the voice assistant with your microwave oven. Naturally, you’ll need a microwave oven that is designed to connect with Alexa, but plenty of appliance makers are taking the initiative to make this happen.

Companies such as Whirlpool are creating their own Alexa skills for your microwave, further promoting the integration of Amazon’s technology with elements of your everyday life. GE AppliancesKenmoreLG and Samsung are also creating microwave ovens with Alexa skills.

Instead of pressing the buttons of the microwave, you can ask Alexa everything from helping you to defrost four pounds of chicken, make popcorn, heat up your leftovers or set up a timer for something that’s cooking elsewhere.

The companies that are teaming up with Amazon’s voice assistant plan on going beyond the microwave oven as they are creating other appliances that link up with Alexa. Amazon is investing in June Life, the company that created the June Oven, which uses voice commands to cook your food in an easy and convenient manner.

AMZN stock gained about 0.3% on Thursday afternoon.

Buffett just went all-in on THIS new asset. Will you?
Buffett could see this new asset run 2,524% in 2018. And he's not the only one... Mark Cuban says "it's the most exciting thing I've ever seen." Mark Zuckerberg threw down $19 billion to get a piece... Bill Gates wagered $26 billion trying to control it...
What is it?
It's not gold, crypto or any mainstream investment. But these mega-billionaires have bet the farm it's about to be the most valuable asset on Earth. Wall Street and the financial media have no clue what's about to happen...And if you act fast, you could earn as much as 2,524% before the year is up.
Click here to find out what it is.

Source: Investor Place

Buy These 3 Stocks Warren Buffett Used to Hate

In today’s world, there is one certainty when it comes to investing that you need to be aware of… new technologies will disrupt nearly every industry.

Take the stodgy airline industry. The Internet of Things (IoT) is about to make airlines more profitable than they’ve ever been in the past. I’m sure you’re wondering how this will be accomplished. Simple – instead of treating their passengers as mere travelers, airlines are beginning to look at them as online consumers that just happen to be on their plane.

Before I delve into more details, let me fill you in on more background on the industry.

Airlines and Ancillary Revenues

In this age of low-cost airlines, the days of when airlines made the majority of their money from airfares are largely gone. Thanks to low-cost airlines, so-called ancillary services have become a mainstay and an important source of revenues for all of them.

A report last month from the research firm IdeaWorksCompany in conjunction with the online car rental company CarTrawler gave insight into the growth of ancillary fees. The report projected that for 2017 airlines will have received a total of $82.2 billion in ancillary revenues. That is about 10.6% of their projected total revenues for 2017.

That $82.2 billion number is also a 22% increase from 2016, with most of the ancillary revenues being garnered by the traditional airlines. Quite a contrast from just 10 years ago when the top 10 airlines (ranked by add-on services) earned only $2.1 billion from ancillary services.

One main reason is the fact that, within the domestic U.S. market and the short-haul operations of airlines outside the U.S., the prevalence of a ‘Basic Economy’ product has driven ancillary sales. The aforementioned report cites airline estimates that over 50% of passengers who purchase this product opt for higher priced bundling options.

Since IdeaWorksCompany released its first report in 2010, the growth of ancillary revenue for airlines has been significant. At that time, the total figure was $22.6 billion with an average spend per passenger of $8.42. Utilizing worldwide passenger numbers provided by IATA (International Air Transport Association), the latest report showed an average spend per passenger of $20.13, with $13.96 being accounted for by to a la carte services, up from just $4.54 in 2010.

However, the lure of buying duty-free goods on airlines is becoming stale for passengers. A 2016 report from m1nd-set Generation forecast such sales would experience an annual growth rate of minus 1.5% for airlines through 2025.

Another revenue source has to be found and quickly. And it’s there… awaiting the airlines that adopt in-flight broadband and Wi-Fi – the Internet of Things in the air.

Passengers Want to Be Connected

Passengers’ expectations of the in-flight experience is changing rapidly. They now expect the same level of connectivity at an altitude of 30,000 feet as they do on the ground.

That much was pretty clear in a study conducted by the market research firm GfK and Inmarsat PLC (OTC: IMASY), the world’s leading provider of global mobile satellite communications. Here are the quite interesting results:

  • 60% of passengers believe in-flight WiFi is a necessity, not a luxury.
  • 61% of passengers said Wi-Fi is more important than onboard entertainment.
  • 45% of passengers said they would gladly pay for WiFi rather being stuck with the onboard entertainment options.
  • 66% of passengers traveling with children would consider in-flight internet a “life saver”.

Connectivity now ranks behind only ticket prices and flight slots as a priority for passengers. That could be seen when that same survey revealed 44% of passengers would switch airlines within a year if what they considered to be a minimal level of connectivity was not available. This is especially true of business travelers, as 56% said they want the ability to work while in flight.

Shopping at 30,000 Feet

Yet, most airlines still lag in offering connectivity to their passengers. The aforementioned report from IdeaWorks found that a mere 53 of the world’s estimated 5,000 airlines offer “in-flight broadband connectivity.”

Many seem unaware that they now have access to a global, reliable broadband network in-flight. As David Coiley of Inmarsat Aviation told the Financial Times, “Airlines have to adapt to this new opportunity.”

And it is an opportunity. Consider shopping an online store at 30,000 feet filled with everything from ground transport options to tours to other destination-related activities. Or returning passengers could do their grocery shopping while in-flight to have the groceries delivered when they arrive home. The possibilities are almost endless.

Related: The Bull Market Case for Buying Airline Stocks

A study conducted by the London School of Economics and Inmarsat said that in-flight broadband – offering streaming and online shopping to passengers could create a $130 billion global market within the next 20 years. The study estimated that the airlines’ share of that total could amount to $30 billion in 2035. That’s quite a jump from the forecast $900 million in 2018.

Investing in Airlines Buffett Used to Hate

With this possibility of e-commerce revenue streams in the not too distant future, it may be time to look at the airlines. Even long-time skeptic Warren Buffett now owns airline stocks including Southwest AirlinesAmericanAirlinesDelta Air Lines (NYSE: DAL) and United Continental Holdings (NYSE: UAL).

If you are thinking of going the same route as Warren Buffett, I would stick with the airlines that have the best Wi-Fi connectivity. Conde Nast Traveler magazine reports that a survey from Routehappy found that U.S. airlines are leading the way, with at least a chance of Wi-Fi on 83% of the total seating capacity.

Two of the top three airlines globally with the highest percentage of seats with Wi-Fi connectivity, according to the survey, are Delta Air Lines and United. Other smaller airlines with good connectivity are JetBlue and Virgin America, which was sold to Alaska Air Group (NYSE: ALK). I would focus on Delta, United, and Alaska Air.

Delta operates a fleet of over 700 aircraft and serves more than 170 million customers annually.

Despite two major U.S. hurricanes, passenger revenue per available seat mile rose 1.9% year-over-year in the third quarter. The company forecast that in the fourth quarter this metric would climb somewhere between 2% and 4%, which is encouraging.

The company’s stock is up nearly 10% year-to-date. Nevertheless, it is trying to enhance its shareholders’ wealth through dividends and share buybacks. In May 2017, Delta announced that its board of directors approved a new share repurchase program worth $5 billion and raised its quarterly dividend by more than 50%. In the third quarter, Delta returned $769 million to its shareholders through dividends ($219 million) and buybacks ($769 million).

Another plus is the company’s discipline, which is sometimes a rarity in the airline industry. In the third quarter, Delta expanded capacity less than traffic growth and thus improved load factor by 150 basis points to 86.9%.

United is the world’s largest airline, operating about 5,000 flights a day. Unlike Delta, it is not showing growth in its passenger revenue per available seat mile. But it is showing improvement – the company’s latest estimate is for it to be flat to down 2% year-over-year. That compares to the previous estimate of down 1% to 3%.

Its return on equity (ROE) is 25.3% should support its robust expansion plans. Its ROE is impressive too when compared to that of the S&P 500, which comes in at only 16.1%.  And it is cheap. Its trailing 12-month enterprise value to earnings before interest, tax, depreciation and amortization ratio is only 4.6. That compares to the value for the S&P 500 of 11.7.

The company’s stock has had a tough year and is down 13.25% year-to-date. Maybe that’s why it has stepped up its efforts to reward its shareholders. It has bought back $1.3 billion of stock in the first nine months of 2017. And in December, its board of directors gave the go-ahead for an additional share repurchase program worth $3 billion.

Alaska Air operations cover the western U.S., Canada and Mexico as well as, of course, Alaska. I like its purchase of Virgin America this year, despite the rise in the amount of debt it now has. The company also owns Horizon Air.

No denying that 2017 has not been a good year for its shareholders, with the stock down 21.5%. And like its airline peers, Alaska Air management is attempting to reward its patient shareholders through share buybacks and dividends. The company has increased its dividend every year since inception and will spend about $145 million on dividends in 2017.

Its after-tax return on invested capital (ROIC) is a very respectable 21.3% and its estimated 2017 pre-tax margin of 25% should lead the industry. In the first nine months of 2017, Alaska Air generated revenues passenger mile of just over 39 billion (up 6.6% year over year). Its load factor stood at 84.6%, compared with 84.2% in the first nine months last year.

The bottom line is that it has been a turbulent year for airline stocks as the combination of natural disasters and terrorist attacks have taken their toll. Not to mention industry overcapacity, high labor costs, and now rising fuel costs.

But now may be the time for contrarian investors to look past the short-term turbulence and take a small position in the airlines that are forward-looking. I fully expect we won’t recognize the industry in a decade as technology disrupts it.

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This Chart Shows Why the Stock Market Isn’t Overvalued

Many analysts claim fundamental ratios show that stocks are overpriced.

One popular long-term ratio is Dr. Robert Shiller’s cyclically adjusted price-to-earnings ratio, or CAPE ratio. With a recent reading of more than 32, the CAPE is higher than it was before the 2008 market crash.

Other ratios are also above their 2008 peaks. But these ratios don’t tell us very much by themselves. They need context.

One important factor is interest rates.

Over time, the Federal Reserve used different theories to set interest rates. The chart below shows those theories matter to the CAPE ratio.

The CAPE ratio is one of the ways to measure what stocks are worth. An analysis of it reveals why the stock market isn't currently overvalued.

Now the Fed includes the Federal Open Market Committee (FOMC), the Board of Governors and regional banks.

Regional banks controlled policy for about 20 years after the Fed’s founding in 1913. That structure failed in the Great Depression.

Since no one knew who was really in charge, stock prices were volatile. The chart shows wide swings in the CAPE ratio were normal at that time.

As the country emerged from the Great Depression, the Banking Act of 1935 established the FOMC. That group maintains significant control over monetary policy.

This was also a time when countries adhered to the gold standard. Policies under the Bretton Woods Agreement maintained relatively stable foreign exchange rates.

Each of those factors contributed, in part, to fairly stable CAPE ratios.

But stability was short-lived. International events moved rapidly in the 1960s. As the U.S. abandoned the gold standard, inflation rose, and policy makers searched for new tools.

By the early 1990s, central banks around the world started targeting inflation. Now they use monetary policy to nudge inflation toward 2%.

We don’t know if inflation targeting is ultimately the best policy. But the chart shows that policy led to higher CAPE ratios.

This makes sense. Inflation is now an official goal of governments around the world.

Moderate inflation generally leads to higher prices for stocks. That means stocks should be worth more.

The CAPE ratio is one of the ways to measure what stocks are worth. So, CAPE should be higher when inflation is near 2%.

The chart shows that the right level of CAPE changes as Fed policy changes. So, we should ignore long-term historical comparisons.

CAPE has averaged 26 under the inflation-targeting regime. At 32, its current level, CAPE is at the upper limit of its expected range.

However, that will change.

Central banks are not hitting their target of 2% inflation. They will probably shoot through that target, and we will have a higher-than-desired inflation soon. That could lead to new policy tools, and that would reset the fair value of CAPE.

When that happens, we will adapt to the new market environment. Until that happens, we should remain invested in stocks and enjoy the bull market.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader

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