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

From the Las Vegas MoneyShow, Paris Hotel.

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

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

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

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

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

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

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

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

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

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

Current yield for MGP is 5.9%.

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

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

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

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

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

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

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

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Source: Investors Alley 

The Artificial Intelligence Arms Race

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

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

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

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

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

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

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

Related: The #1 Stock Powering the Artificial Intelligence Revolution

The AI Arms Race

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

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

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

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

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

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

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

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

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

China AI Investments

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

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

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

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

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

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

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

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

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

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

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Source: Investors Alley