Market Preview: With Negative News on All Fronts

Markets continued their downward spiral as a government shutdown is looming late Friday night. With no good news in the headlines, and markets still digesting the latest Fed move, the Nasdaq was the first to succumb to selling pressure. The DJIA and S&P 500 followed the tech index down in the afternoon. December, usually one of the better months for the market, has been brutal for all three major indices. The DJIA suffered its worst one week loss in 10 years, finishing down over 400 points and 1.81% on Friday. The S&P 500 was down 2.06. The Nasdaq, which has taken the brunt of the selling and is now in bear territory, down over 20% from its highs, closed down 2.99% and over 8% on the year, to mark the winter solstice.

It’s difficult to see the light at the end of the tunnel as investors head into the final full week of 2018. With the U.S. Justice Department announcing actions against Chinese nationals earlier in the week, trade issues between the two countries appear no closer to resolution. Chairman Powell appeared to pay little attention to recent market action in his statement earlier in the week. And a showdown in Washington may have the government partially shuttered by the weekend. With the mountain of negativity weighing heavy on the markets overall, it appears clear this is a stock picker’s market as we head into 2019.    

Monday analysts will examine the Chicago Fed National Activity Index. The Index is comprised of 85 different national economic indicators and has been trending higher since late 2016. The Index is expected to come in at .24, below the three month average of .31. No economic numbers will be released, and financial markets are closed, on the Christmas holiday Tuesday.

No major earnings announcements are scheduled for next week, with most Wall Street traders taking the usual week off between the Christmas holiday and New Years day.

Wednesday Redbook retail data, as well as the Corelogic Case-Shiller Home Price Index numbers will be released. The single-family home index is expected to show a price increase of .3% month-over-month and 5.1% year-over-year. The index has been trending lower since May. Also released Wednesday is the Richmond Fed Manufacturing Index and the State Street Investor Confidence Index. The Investor Confidence Index began trending lower in April and broke through levels not seen since 2016 in September. The index is based on the amount of equities investors hold in their accounts, with more equity holdings equaling a higher index reading. The index is broad based and measures the level of equity holdings in 45 countries. Thursday we’ll examine jobless claims, FHFA home prices, new home sales, and consumer confidence. On the final Friday of December, international trade, retail inventories, wholesale inventories, Chicago PMI, and pending home sales numbers will all be released. Pending home sales dropped 2.6% month-over-month in the October release, and with the Fed continuing to hike little upside is expected for November.

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7 Safe Haven Stocks for a Treacherous Market

Source: Shutterstock

The market is a perilous place right now. Most stocks are firmly in the red. And the jury is out on what’s coming next. Some say we are heading for a full-blown bear market. Others believe the old bull market is lurking just around the corner.

“Our best analysis — as we look at markets and as we look at the economy — is that things are stable,” Federated Investors’ Steve Chiavarone has just told CNBC. “We’re confident where markets are going to go over the next 12 months.”

Even so, it’s best to be prepared. Whatever happens next you don’t want to get caught out. That’s why I put together this list of solid stock picks for whatever the market will throw at us in 2019. As you will see these stocks also get the thumbs up from the Street. That’s an encouraging start. Here I use data from TipRanks to get some idea of the upside potential analysts see coming our way.

Let’s take a closer look now:

United Health (UNH)

Can this healthcare giant do no wrong? “Not surprised, just impressed” cheered five-star Cantor Fitzgerald analyst Steve Halper (Track Record & Ratings). He’s out with a bullish rating on the stock following UnitedHealth Group’s (NYSE:UNH) annual investor conference.

At its event, UNH demonstrated the robust savings driven by Optum’s investments in technology. These investments should establish UNH as a leader in the shift to value-based care. Halper continues: “Given its nicely diversified health insurance business and Optum, which now accounts for more than 40% of operating profit, UNH should be a core holding in all large-cap growth portfolios.”

And he isn’t the only one. UNH has racked up 12 back-to-back analyst buy ratings in the last three months. That’s pretty impressive whichever way you look at it.

Meanwhile the $309 average analyst price target suggests 22% upside lies ahead. That’s just a shade under Halper’s own price target of $310.

“Although the shares are not inexpensive, we maintain our view that the current share price does not fully reflect the company’s long-term growth and free cash flow growth potential” concludes the Cantor analyst. Interested in UNH stock? Get a free UNH Stock Research Report.

T Mobile (TMUS)

T-Mobile (NYSE:TMUS) is the third-largest wireless carrier in the U.S., capturing virtually all of the industry growth since 2013.

According to Oppenheimer’s Tim Horan (Track Record & Ratings), these share gains are down to a greatly improved network and innovative marketing to under-served niches, in both urban and rural areas. He has a buy rating on the stock with a bullish $90 price target (37% upside potential).

“We believe the key to the stock’s performance lies in improved network (lower churn), innovative marketing, expansion into rural areas and cost controls, while at the same time trying to leverage its 4G advantage versus its prepaid competitors” Horan explains.

Most encouragingly, he is growing more confident (~90% likelihood) that the Sprint(NYSE:S)/TMUS merger will be approved by regulatory authorities. That’s with divestitures that could spawn a new, fourth competitor. That’s good news because the merger can generate an estimated $6 billion in synergies.

Net-net: “We expect TMUS to outperform as it continues to take share and see margin improvement.” Overall, this “strong buy” stock scores seven recent buy ratings vs just one hold rating. That’s with an $82 average price target for 24% upside. Get the TMUS Stock Research Report.

Altria Group (MO)

Altria Group (NYSE:MO) is one of the world’s largest producers and marketers of tobacco, cigarettes and related products. The company owns Philip Morris (NYSE:PM), maker of the famous Marlboro cigarettes.

And now it’s expanding into new territory. The company is buzzing on the news that it has acquired a major stake in pot stock Cronos Group (NASDAQ:CRON). Altria is now Cronos’ exclusive partner in the cannabis sector — and is poised to gain as new markets for medical and recreational weed open up around the world.

Specifically, Altria is investing C$2.4 billion ($1.8 billion) to acquire a 45% stake in Cronos and will also receive warrants that, if exercised, would increase that stake to 55% for a further C$1.4 billion.

So far the reaction from the Street is upbeat. Wells Fargo analyst Bonnie Herzog (Track Record & Ratings) called the deal “very positive” as it significantly expands Altria’s total addressable market. “Overall, we applaud MO’s decision to pivot fast and to move into a new adjacent category (cannabis) that is complimentary to its core tobacco business,” she said.

Herzog doesn’t have a price target on MO’s stock, but we can see that the average target of $68 indicates 35% upside potential. Plus the top analyst consensus is “strong buy” with five recent buy ratings. Get the MO Stock Research Report.

Stocks to Buy: HCA Healthcare (HCA)

Source: Shutterstock

HCA Healthcare (NYSE:HCA) is the largest hospital operator in the U.S. It provides services through a network of acute care hospitals, outpatient facilities and other settings.

Oppenheimer’s Michael Wiederhorn (Track Record & Ratings) is one of the top 50 analysts tracked by TipRanks, so he tends to get it right when it comes to stock picking. Right now Wiederhorn is betting on HCA as a solid long-term stock pick.

First, the hospital industry should continue to benefit from improved admissions growth and payer mix thanks to policy initiatives from the Affordable Care Act.

Plus, HCA has continued to boast stronger operations than peers over the long term, given robust same-store growth and strong cost management. For example, HCA generated impressive free cash flow of $900 million compared to $300 million in the year-ago period.

“Given that these trends show no signs of slowing … we believe HCA remains the premier hospital company and maintain an Outperform rating” sums up the analyst. His $142 price target suggests 12% upside lies ahead.

And the Street is even more bullish. This “strong buy” stock has a $156 average price target (25% upside potential). Get the HCA Stock Research Report.

Visa (V)

Stocks to Buy: Visa (V)

Source: Shutterstock

Strong growth continues over at credit card giant Visa (NYSE:V). And the company has multiple tailwinds ahead. Don’t just take my word from it. This is the advice of top-rated Cantor Fitzgerald analyst Joseph Foresi (Track Record & Ratings).

“We like Visa’s opportunity to capitalize on the global conversion of cash into credit, international opportunities, and digital payment tailwinds” writes the analyst. Most notably, Visa Direct, contactless payments and B2B are all potential price catalysts.

For example, Visa Direct is growing rapidly, with volumes continuing to increase by more than 100% year over year. This is fueled by increased activities by end users alongside expansion of reach and scale.

Following a 4QFY18 beat, Foresi sets out his bullish thesis as so: “Our Overweight rating is based on the company’s leading position in the card network industry and its significant opportunities for growth internationally and digitally.”

As for share price: “We value Visa at a premium to the group, due to its above-average industry growth rates, superior margins, and business profile.”

Indeed, this “strong buy” stock boasts a $168 average analyst price target. Given shares are currently trading at $135 this means 25% upside is on the cards right now. Get the V Stock Research Report.

Home Depot (HD)

Stocks to Buy: Home Depot (HD)

Source: Shutterstock

Home Depot (NYSE:HD) is the U.S.’s largest home improvement retailer, with over 2,200 retail stores.

Even if the housing market slows, Home Depot is nevertheless a strong stock to buy.

“HD believes it can post healthy comps today despite a softer housing market, owing to a strong consumer, healthy secular/housing dynamics (aging, formation, appreciation, etc.) and market share gain” explains Top-100 analyst, Scot Ciccarelli (Track Record & Ratings) of RBC Capital.

He notes that sales at Home Depot have remained strong and broad-based. According to Ciccarrelli, Home Depot should benefit from better customer service, improved merchandising, additional supply-chain enhancements, and strong returns to shareholders.

Indeed the company has just increased its FY18 share repurchase outlook to $10 billion from $8 billion. The upshot of this is: buy.

“We view HD as a long-term winner and near-term outperformer, with strong execution and ample growth drivers (Pro, Omnichannel, supply chain, etc.) for market share gains and higher share of the Pro wallet.” wrote Ciccarelli.

He has a $191 price target on the stock, just a shade lower than $201 average analyst price target for 18% upside. Bear in mind 10 out of 14 top analysts are bullish on the stock right now. Get the HD Stock Research Report.

Merck (MRK)

Stocks to Buy: Merck (MRK)

Source: Shutterstock

Merck (NYSE:MRK) is one of the world’s largest pharma companies, delivering revenue in 2017 of over $40 billion. The pharmaceutical giant is seeing big and steady sales of its cancer drug Keytruda.

Keytruda works by aiding the body’s own immune system to fight and kill cancer cells. “Merck has distinguished itself with excellent IO [immunotherapy] execution” cheered top BMO Capital analyst Alex Arfaei (Track Record & Ratings) on Nov. 16.

The analyst adds: “If Merck maintains ~40% long-term share of the U.S. IO market, this would imply sales potential of $9.4Bn by 2030. That is plausible given Merck’s strong execution in IO so far.” He is currently forecasting U.S. Keytruda sales of $7.4Bn by 2030, but says this seems conservative given recent trends, especially given the recent FDA approval for Keytruda + chemotherapy for non-small cell lung cancer (NSCLC).

At the 2018 American Society of Clinical Oncology  Conference, the “beautifully positive” KN407 was widely recognized as establishing Keytruda plus chemo as the new standard of care in 1L squamous NSCLC.

Arfaei currently has an $80 price target on “strong buy” rated Merck. Indeed, in the last three months, Merck has received seven consecutive buy ratings from analysts. This is with an average analyst price target of $83 (11% upside potential).

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Canopy Growth Stock And Its Sister Company Are Both Attractive

marijuana stock

Source: Shutterstock

There’s no doubt that Canopy Growth (NYSE:CGC), stock is one of the best bets among Canadian cannabis companies, thanks in large part to the substantial financial support that the company is getting from Constellation Brands (NYSE:STZ).

In July, I suggested that interested investors hedge their bets on Canopy Growth stock by buying equivalent amounts of CGC stock and Constellation stock.

The Bigger Picture

If you feel strongly about the marijuana industry’s future growth, the smart move would be to take the amount you are prepared to lose on Canopy Growth and cut it (in) half, putting 50% into CGC stock and the other 50% into Constellation Brands,” I wrote on Jul. 5.

“Long-term, I think you’ll be pleased with your decision to hedge your bet.”

A $10,000 bet on CGC stock made on Jul. 5 earned $221 through December 14. A 50/50 split between CGC stock and Constellation lost $688 due to a 16% decline in STZ stock over the last five months; analysts have become wary of Constellation’s $4 billion investment in Canopy.

“Branding will be key to unlocking value in cannabis business, but the winners are far from clear,” said Macquarie analyst Caroline Levy in November. “It thus seems difficult to see any near-term profits for Canopy and possibly sub-par returns for many years, if it continues to prioritize sales growth and market share.”

That is precisely why I recommended that investors hedge their bet in the first place. If Canopy Growth stock doesn’t fly, Constellation will take a hit in the short-term, but over the long-term, STZ will be fine.

If you put all your eggs in one basket, you could end up with a big goose egg.

Another option, which I’ve suggested before, is to buy a cannabis ETF like ETFMG Alternative Harvest ETF (NYSEARCA:MJ). ETFs spread the risk beyond CGC stock.

An Option for Risk-Tolerant Investors

Unless you follow Canopy Growth stock closely, you’ve likely never heard of Canopy Rivers (OTCMKTS:CNPOF), a Toronto-based venture capital investment firm. Canopy Rivers makes investments in best-in-class private and publicly-traded companies across the cannabis value chain, from producers to marketers and everything in between.

CGC owns approximately 25% of Canopy Rivers’ stock. Bruce Linton, the co-founder and CEO of Canopy Growth, is acting CEO of Canopy Rivers. 

Canopy Growth’s consulting firm, XIB Consulting Inc, provides deal flow to Canopy Rivers. The two principals of XIB, Sean McNulty and Peter Hatziioannou, own shares in Canopy Rivers

“We decided to create a separate vehicle where we would could take minority interests, create alternative transaction structures and provide both growth capital and strategic support,” McNulty said about Canopy Rivers in November.“The deal flow is sometimes overwhelming. We’ve evaluated hundreds and hundreds of opportunities, but we’re very picky because we’re trying to get it right for every investment.”

So far, XIB has found 11 investment opportunities for Canopy Rivers. If the U.S. federal government legalizes pot, which most expect will happen sooner rather than later, McNulty and Hatziioannou will have to hire more professionals to carry out due diligence.

That would be a great problem to have.

The Bottom Line on CGC Stock

I believe the CGC-Constellation tie-up is a good one for both companies’ shareholders.

As for Canopy Rivers, if you’re more risk-tolerant, the shares provide a compelling investment opportunity after losing 57% of their value since their public debut on Sept. 20.

However, I wouldn’t use a retirement investment vehicle to buy CGC stock because you won’t be able to deduct any capital losses from your taxes.

As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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Buy This Tech Fund Before Dec. 31 (and get a 9.3% dividend)

On January 1, 2018, I made my boldest prediction of the year: bitcoin was going to crash. Here’s what happened since:

Crytocurrencies Are Dying

There are lots of reasons why bitcoin has cost investors a lot of money: it’s inefficient; it’s not private; and glitches and hacking cause people to lose bitcoins. But the main reason is this: the dumb money followed the smart money—and ended up holding the bag.

I’ve seen this story play out many times, which is why I urge you to be contrarian and avoid the traps market manipulators set up, whether it was dot-com stocks in the late ’90s, housing in the mid-2000s or fantasy Internet money in the 2010s.

The other side of this coin is why I’m urging you to do one simple thing in 2019: jump into tech stocks. And if you want dividends, don’t worry. I’ve got 2 funds offering 6.3% and 9.3% payouts for you to choose from.

I’ll show you both (and reveal the one I see as the best buy now) a little further on.

My No. 1 Prediction for 2019

If there is anything you can rely on, it’s the ability of tech companies to print money, because the entire world is embracing technology to communicate, interact, trade, learn and buy new products.

The proof is in the numbers: while tech has one of the highest net profit margins of any S&P 500 sector, at 22.1%, its profits are actually growing: 100% of IT companies have reported earnings above estimates in the third quarter of 2018.

That’s right: not a single one missed!

If you looked at FAANG stocks over the last month, however, you’d get a very different impression. On average, these companies are down massively, due in no small part to the 14.5% drop from Apple (AAPL)—with only Facebook (FB) slightly above water (but it’s still down sharply for the year):

An Awful Month for Tech

Zoom out a bit, however, and the picture is much rosier. FAANG stocks are still up double digits, on average, in a year when the S&P 500 is down:

FAANG Still Outperforming

I wouldn’t be surprised if this news comes as a surprise to you. The financial press has been beating up on tech companies for a bunch of reasons—privacy scandals at Facebook and Alphabet (GOOGL), weakening subscription growth at Netflix (NFLX), the trade war for Apple—but the reality is that tech is still performing well.

But the market isn’t rewarding these stocks.

If we look at net fund flows for the Invesco QQQ Trust (QQQ), we see that $1.44 billion has left this tech-focused ETF in just the last three months. Since this is a popular ETF for tracking the Nasdaq 100, a tech-heavy index, those net outflows show the dumb money is panicking and selling off—the opposite of the setup that caused bitcoin to crash.

If we look at the Technology Select Sector SPDR ETF (XLK), things look even better for a contrarian. While hedge funds and institutional investors sometimes buy QQQ, these groups don’t use XLK quite as much. And this fund has seen billions of net outflows for 2018: a total of $2.44 billion has exited XLK in the last three months.

The conclusion is clear: the dumb money is exiting tech, which means there’s an opportunity to buy in before the pendulum swings back the other way and we see inflows.

The Tech Play

Long-time readers know one of my favorite ways to play tech is through closed-end funds CEFs), because these funds hand you generous dividends while you wait for upside—and some tech CEFs have shown serious upside over the years.

But let’s look a bit closer at four options: the two ETFs I just mentioned (XLK and QQQ) and two CEF contenders.

First, let’s look at XLK’s top 10 holdings:


Source: ALPS Portfolio Solutions Distributor

There are a lot of large cap companies in this ETF’s portfolio—household names that have been beaten up recently, but nowhere near as much as some tech stocks with smaller market caps.

Similarly, the other ETF, QQQ, sports holdings that are concentrated on many tech heavyweights, with some important differences:


Source: Invesco

PepsiCo (PEP) and Comcast Corp (CMCSA) aren’t tech companies by any stretch of the imagination (and CMCSA is arguably one of the firms being disrupted by tech upstarts), meaning this portfolio doesn’t give as much tech exposure as XLK. If we want to just invest in tech, then, we should choose XLK over QQQ—but only if we’re going to limit ourselves to ETFs.

But I wouldn’t do that, because there are two better alternatives: the CEFs I mentioned earlier.

2 Tech CEFs Paying Up to 9.3% Dividends

I’m talking about the Columbia Seligman Premium Tech Growth Fund (STK), which pays a 9.3% dividend, and the BlackRock Science and Technology Trust (BST), with a regular dividend of 6.3%. I’ve written of my appreciation for BST many times in the past; it’s up double-digits year to date, while STK is down 9%:

BST Wins Out in 2018

That doesn’t mean BST is the best choice now, though. To decide which is the better pick, we need to dig deep into each fund’s holdings.

Let’s start with BST, which recently made an aggressive bet on payments companies. That’s part of the reason why it’s been strong lately, as bitcoin failed to replace the payments solutions of BST’s major holdings, such as Square (SQ) and Visa (V). But this fund also has a lot of exposure to China:

BST Looks to China …

Source: BlackRock

In total, nearly 10% of the fund is based in China and focused on China-oriented companies. This is fundamentally different from STK, which is much more US focused, while also investing in hardware and payments:

… While STK Focuses on the US 

Source: Columbia Management

STK’s portfolio is why I’ve favored BST throughout 2018: the cryptocurrency mania resulted in intense demand for hardware, but the crash in crypto also means that demand has evaporated in 2018.

As a result, chipmakers and similar firms have struggled, causing the semiconductor sector (seen below through the VanEck Vectors ETF [SMH]) to buckle in 2018:

Semiconductors Fall

But now cryptocurrencies are no longer a factor in semiconductor companies’ performance—and that’s a benefit, not a liability. It’s also why now is the time to favor STK and put some money into this fund if you’re on the hunt for tech exposure.

The kicker? Its 9.3% dividend yield is an enticing income stream while you wait for the market to come to its senses and lift the semiconductor sector back to the valuations it deserves.

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Market Preview: Chairman Powell Delivers Coal to Trader’s Stockings

Market participants expecting a kinder, gentler Fed were sorely disappointed Wednesday. After the Fed hiked rates .25%, Chairman Powell indicated the Fed sees a strong economy, strong hiring, and still sees two interest rate hikes in 2019. Though expected, many analysts and market pundits had encouraged the Fed not to raise rates this week. And, to signal there would be no more rate hikes in 2019, at least until it became clearer how the economy was performing. Investors assumed the Fed had received the message Wednesday as the DJIA was up close to 400 points when the 2pm announcement was made. With the S&P 500 and Nasdaq both showing similar percentage gains, markets quickly sold off to flat before a brief pause, and then went into another nosedive. The DJIA finished off 1.49%, sending it into negative territory for the year. The Nasdaq closed off 2.17%, now down 3.67% in 2018. The S&P 500 clocked in down 1.54%, and is now off just over 6% on the year. The combination of tax loss selling, and most traders wrapping up their books this week, will likely lead to a continued volatile close to 2018.

Nike (NKE), Walgreens Boots Alliance (WBA) and Carnival Corp. (CCL) report earnings on Thursday. Nike fell with the rest of the market Wednesday, but is still up slightly on the year. The company is expected to post good numbers Thursday, as analysts expect positive momentum in sales and margins in the quarter. But, one question mark that may tarnish expectations is what impact Chinese tariffs had on the sports apparel company. The stock of Walgreens has been hit especially hard in the past few weeks. Investors are concerned Amazon’s (AMZN) entry into the pharmacy business could negatively impact earnings in the sector. The company would be well served to introduce some contingency plans to analysts on the earnings call as to how it would compete with the largest online retailer in the U.S.

Thursday’s economic calendar includes jobless claims, the Philadelphia Fed business outlook, and leading indicators. Jobless claims are expected to nudge higher this week after falling unexpectedly to an historic low of 206k last week. Analysts are also expecting a bounce back in the Philly Fed numbers to 16.9 from an unexpected decline to 12.9 in November. The Fed balance sheet, which Chairman Powell indicated will continue to be used for quantitative tightening, will be released after the close Thursday. Friday, the winter solstice, is a quadruple witching expiration. Index futures, index options, stock options, and single stock futures all expire, usually resulting in increased volatility in the market. Durable goods, GDP, and corporate profits will all be released before the market opens Friday. Personal income and outlays, consumer sentiment, and the Kansas City Fed Manufacturing numbers will also be released Friday morning. Both GDP and consumer spending are expected to maintain their current momentum, and come in at 3.5% and 3.6% respectively. After tax corporate profits are projected to average 5.9% on a year-over-year basis.

Carmax (KMX) wraps up the final week before the Christmas holiday when it reports earnings on Friday. Although the stock traded above $80 in 2018, it is now almost back to its lows for the year set in April, trading just over $57. Earnings for the quarter are expected to come in at $1.01 per share.  

 

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Sell These 3 High-Yield Stocks That Will Collapse From Fed Rate Increases

Later this week the Federal Reserve Board is expected to announce another interest rate hike. The Fed will likely its target short term interest rate by 0.25% to a range of 2.25% to 2.5%. The new Fed Funds rate is up from 0.50% two years ago. While many investor fears concerning higher interest rates and dividend stock values are unfounded, there are certain high yield stocks that will be negatively affected by rising interest rates. To determine whether one of your high-yield stocks is at risk of a big dividend cut, you need to determine if the company is “pitching” or “catching” when interest rates change.

A company is “pitching” in the interest rate game if when interest rates go up, the business generates higher revenues or profits. For example, over the last few years the commercial mortgage REITs and several business development companies (BDCs) have only originated adjustable rate loans. If these loans are held in the company’s portfolio—as is typical—rising interest rates will result in the growth of interest income. If the company has done a good job with its own debt by locking in interest rates, rising rates will lead to growing profits.

If a company is “catching” an interest rate increase, it pays interest on variable rate debt which will require higher interest payments due to the Fed Funds rate increase. For the period from 2009 through 2015, short term rates were very low, near zero percent for a high-quality borrower. If a company took on variable rate debt, it was like getting free capital to invest to generate revenue. However, those short-term interest rates are now increasing, which means interest expense will be increasing and profit margins could be squeezed. The type of company that is most at risk is one which has a fixed rate revenue stream and variable rate debt. The residential mortgage backed securities (MBS) owning REITs are a good example of this type of company.

These REITs are the opposite of the commercial mortgage REITs. The residential MBS REITs own pools of fixed-rate, government agency backed, mortgage backed securities. These AAA quality bonds pay fixed interest rates with current yields at 3.5%. To turn those low yields into double digit dividend yields, an MBS REIT borrows large amounts of short term debt to leverage up the interest rate.

When short term interest rates are low this strategy produces a large amount of free cash flow. However, as short-term rates start to rise, the rate margin gets squeezed between the owned MBS bonds rates and the cost of the money borrowed to buy those bonds.

The Fed Funds rate stood at 0.50% near the close of 2016. The rate has been increased seven times since last year and is now at 2.25%. With this next Fed rate increase, short term rates will effectively be 2.5%. Long term rates have not increased, and the 10-year Treasury yield is about 2.5%. The 10-year minus the 2-year Treasury rate is a common way to view the spread between short term and long-term rates. Here is the 10 minus 2-year yield chart since last December 1.

You can see the rate spread has shrunk from over 0.80% in February to just above 0.10%. For a business model based on capturing the long minus short interest rate spread, that does not leave a lot of room for profits. Especially after spending money to hedge against rising interest rates and paying business expenses.

Do not believe management comments that they have hedged to protect from rising rates. Hedging only works for a short time against a portion of the interest rate change. It will not protect from a serious profit squeeze.

Here are three high yield stocks with significant variable rate debt leading to a high probability of a dividend reduction:

Annaly Capital Management, Inc. (NYSE: NLY) is a high-yield, agency MBS owning REIT. In its 2018 third quarter earnings report the company owned $91 billion worth of agency MBS.

The company owns $9 billion of other assets, including $2.7 billion of commercial property mortgages. This large pile of assets is held aloft by a total of $77 billion of debt.

In the quarter, Annaly reported an average asset yield of 3.21% and an interest cost of 2.08% leaving a net spread of 1.13%. This spread was almost half of the 2.28% spread reported in the first quarter of 2016 when the Fed got serious about rate increases.

The most recent 0.25% rate increase could reduce NLY’s profit margins by up to 25%.

AGNC Investment Corp (Nasdaq: AGNC) is another agency MBS REIT. NLY and AGNC are the two largest companies in this REIT sector. As of the third quarter AGNC owned $70.9 billion of agency MBS.

The company had $65.7 billion of debt. This works out to 8.2 times leverage of the company’s equity. Reported net interest spread was 1.30%.

The company reported net interest income of $0.61 per share and paid dividends of $0.54 per share. AGNC has some cushion against higher short-term rates, but that is because the company has reduced the dividend by 18% over the last three years to stay ahead of fallen net interest income.

You can expect another dividend cut after this or the next Fed rate increase.

Two Harbors Investment Corp (NYSE: TWO) is a smaller agency MBS REIT that is trying to stay relevant with its recent merger with CYS Investments Inc (CYS).

The $3.5 billion market value makes it a mid-cap residential MBS REIT. As of the 2018 third quarter, the company own $27.7 billion of mortgage backed securities. The portfolio was leveraged to five times the company’s equity. Reported interest margin was 1.93%.

The company has diversified with a significant investment in mortgage servicing rights, also called MSRs. These will offset some of the effect of higher interest rates, but there is still a lot of interest rate risk in the core MBS portfolio.

With the 0.25% Fed Funds rate TWO could be pushed into a dividend cut just six quarters after its last payout reduction.

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Source: Investors Alley 

21 Billion Reasons Why Blockchain Investors Have a Great Year Ahead of Them

I hope you had the chance to catch my recent interview with legendary investor Frank Holmes. We talked about the need for investors to look beyond struggling cryptocurrencies to understand the enormous potential of the blockchain – the technology “underneath” that makes crypto work.

What kind of potential? Well, I believe – conservatively – that the technology could impact some $8 trillion in global transactions

See, the world’s total GDP runs at around $80 trillion a year. And blockchain tech could eventually underpin all of that buying and selling.

But I’m only assuming blockchain grabs a 10% market share of systems that have been archaic and outdated for years now.

Here’s the thing. As amazing as it sounds, trillions of dollars in trade each year still relies on rickety, less-than-totally-secure computer networks and, in some cases, even paper contracts!

Thanks in part to blockchain technology, that’s all about to change. In a big way.

That’s why today, I want to show you four industries where blockchain technology could add security and transparency – and greatly reduce business costs. I think this could boost bottom lines to the tune of $21 billion in 2019 alone – another conservative estimate – for the innovative firms using this technology.

This is the kind of “strategic info” that could make you look smart at your office Christmas party or next family gathering.

Better yet, put it to use wisely, and it could help you pinpoint your next few triple-digit winners – and that’ll be even more fun to share with friends and family.

So check it out…

Why an $8 Trillion Future Is Just the Start

Obviously, my estimate of blockchain’s impact on global business is very bullish; there are some pretty significant sums involved.

So I want to put my estimate of blockchain’s impact in some perspective. Gartner says blockchain tech will create $3.1 trillion in global business value by 2025.

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That’s a big number, too, of course, but there’s a problem with it: It understates how quickly this radical new tech platform is going mainstream. Last year, according to Gartner, blockchain value came in at $4 billion – and will rise to $21 billion next year.

That’s a 425% one-year increase – a 77,400% growth rate in just nine years. So my $8 trillion estimate is in line with that, meaning at that growth rate we’ll easily get there by 2030 – and probably sooner.

Now then, most folks think of blockchain in terms of cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH).

And it’s certainly true: All cryptos need access to a blockchain to be mined, distributed, and secured.

And once cryptos like Bitcoin see more widespread adoption, it’s going to send prices soaring to $100,000. That day is going to come sooner than many imagine, because, as I type, computer scientists are working furiously on Bitcoin’s “Lightning Fix.” This fix will essentially allow users to pay for everyday items like coffee or a pizza with Bitcoin.

But blockchain is much bigger than any one cryptocurrency. Its use as a global, secure, distributed ledger for smart contracts is proving irresistible to businesses and individuals alike.

You see, industries across the board can adopt this technology – and they don’t have to rely on any one centralized entity to be a gatekeeper or potential source of vulnerability.

In fact, a key feature of public blockchains is that they are decentralized. Moreover, blockchain can greatly reduce transaction costs and improve cybersecurity. It might shock you to learn that, even in 2018, it can take days for a “conventional” electronic banking transaction to fill and finally settle – that incurs costs and security risks. With blockchain, settlement times could be measured in seconds, not days.

Another benefit of blockchain tech is that, unlike centralized databases, the blockchain serves as not only an up-to-date database, but as a historical one as well. That simply means that all of the information of a given transaction that’s put on a blockchain will remain there, available for scrutiny at any time.

With that in mind, I’ve identified four sectors I believe will benefit greatly from this technology. Call them 2019’s “Blockchain Targets.”

Take a look…

Blockchain Target No. 1: Global Finance and Banking

The $1.45 trillion financial services industry has been an early adopter of blockchain technology, and that will remain so for the foreseeable future.

That’s because at its heart, blockchain tech serves as an excellent means to disentangle the dense layers of centralized bureaucracy, redundant paperwork, and exorbitant fees this sector has come to rely on.

Look at exchanges. Many financial industry players are using blockchain tech to develop auditing systems with almost instant clearing and consensus-based verification, according to a recent report by PricewaterhouseCoopers.

Trade finance is another area that’s ripe for disruption from blockchain technology. As it stands today, the $17 trillion industry is high volume, costly, and time consuming.

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Financial institutions have begun using blockchain technology to reduce their reliance on manual processes and digitizing trade documents like letters of credit to slim costs and increase efficiency.

And major international banks are joining forces to build their blockchain solutions. Firms like BNP Paribas SA (OTC: BNPQY), HSBC Holdings Plc.(NYSE: HSBC), and The Royal Bank of Scotland Group Plc. (NYSE: RBS) are among those leading these efforts.

They’re setting up smart contracts to help track and monitor cross-border transactions, digitally discount receivables, and secure credit risk insurance, among other back-office functions.

Blockchain Target No. 2: the Oil and Gas Industry

About a year ago, a group of the large oil companies – and their banks and trading houses – formed an alliance to launch a blockchain-driven platform for energy commodity training.

The alliance is headed up by firms like BP Plc. (NYSE: BP), Royal Dutch Shell Plc. (NYSE: RDS), and ING Group NV (NYSE: ING).

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Together, they have developed a blockchain platform known as Vakt, which will aid the energy industry’s transition from paperwork-driven transactions to smart contracts. That in turn can bring efficiency gains to trading, reduce the risk of errors, and cut back on the amount of time employees spend on paperwork.

Lyon Hardgrave, Vakt’s product development vice president, says that blockchain members will save up to 40% by speeding up processing trades much more quickly and cutting down on data errors.

Now, the platform will not yet be used to trade or settle any transactions – and not a single bit of cryptocurrency will be involved. But it will include deal recaps, confirmations, contracts, logistics, and invoicing.

The global energy market is worth $1.4 trillion, according to Advanced Energy Perspectives. Look for blockchain to save the sector tens of billions of dollars – or more – as it is further rolled out.

Blockchain Target No. 3: Prescription Drugs & Biotechnology

Meanwhile, the $1.2 trillion global drug industry is ripe for blockchain adoption.

To understand blockchain’s role here, you need to know about the Drug Supply Chain Security Act. This legislation outlines a 10-year time frame that will help track, verify, and notify anyone in the supply chain when counterfeit drugs enter the system.

Here again, we’re talking about a highly secure – and immutable – shared ledger of information that would be open to any and all participants.

By using the blockchain, any movement of counterfeit drugs into the system will be immediately flagged. That’s because there will be no record of it going back to the production source.

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“The public availability of the ledger would make it possible to trace every drug product all the way back to the origin of the raw material used to make it,” Tapan Mehta, an executive with DMI, a mobile technology and services company, told IT Healthcare News.

That’s bad news for the purveyors of counterfeit drugs that earn around $200 billion per year.

But it’s great for consumers that will soon be able to stop worrying about the risk of taking what’s known in the industry as substandard, spurious, falsely labeled, falsified, and counterfeit (SSFFC) drugs.

Blockchain Target No. 4: the U.S. Defense Industry

The U.S. military is rolling out its own blockchain system, under the name Pathfinder. This platform will offer far more security, not to mention a permanent record of every single item the Pentagon buys.

Simply put, the military can’t rely on the unsecure public cloud to transmit and store sensitive data. Global hackers, often sponsored by governments in China, Russia, and Iran, are constantly trying to access vital defense department data.

And when it comes to data encryption, nothing beats what blockchain can offer. Which explains why nearly every defense contractor is expected to adopt blockchain over the next several years.

Last July, Boeing Co. (NYSE: BA) said it is working with privately held SparkCognition Inc. to adopt blockchain technology for tracking and allocating flight corridors for drones.

Defense giant Lockheed Martin Corp. (NYSE: LMT) is working with Guardtime Federal LLC to provide blockchain cybersecurity. Lockheed, the nation’s largest defense contractor, counts cyber as a core product.

But civilian branches of the government intend to get in on the action as well. Last June, the $26.3 billion General Services Administration began piloting the federal government’s first blockchain project with vendors Sapient and United Solutions.

Add it all up, and you can see there is enormous potential for blockchain tech – and the firms that develop the products these sectors seek.

Now then, there are no pure blockchain tech plays I can recommend at present. But the companies I’ve just mentioned are hard at work carving out an unbeatable blockchain edge, and I expect bottom lines to fatten accordingly.

That said, there are some firms moving forward aggressively with developing the blockchain itself.

So you can bet I’ll be keeping a close eye on them as we move into 2019. I’m going to have plenty more to say about blockchain technology this year.

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Source: Money Morning 

7 Death Cross Stocks to Ditch Now

U.S. equities are trying to catch their breath on Tuesday after another harrowing decline, with investors suffering the worst December on record since 1931. That’s right: Not since the Great Depression “double dip,” caused by premature Federal Reserve tightening, has the holiday season treated shareholders this badly.

Yet again, it’s the Federal Reserve that’s the primary motivator for the end-of-year ugliness.

All eyes are on Wednesday’s policy decision with another rate hike likely. But more important is the forward guidance for the number of rate hikes in 2019. The market is hoping Fed chairman Powell pauses here and waits to see how the economy and financial market’s digest the rapid rise in the cost of credit. Disappointment could lead the further aggressive selling.

Already, a lot of damage has been done with the Russell 2000 already down 20% from its high, enough to qualify for a bear market. Here are seven stocks that are suffering “death crosses” and look set for further weakness.

Fastenal (FAST)


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Shares of Fastenal (NASDAQ:FAST) are falling below critical support from its 50-day and 200-day moving averages and is on the verge of suffering its first death cross since the summer of 2017 as investors fear a slowdown in construction activity.

Analysts at Morgan Stanley recently initiated coverage with a neutral rating while analysts at Longbow issued a downgrade.

The company will next report results on Jan. 17 before the bell. Analysts are looking for earnings of 60 cents per share on revenues of $1.2 billion.

When the company last reported on Oct. 10, earnings of 69 cents per share beat estimates by two cents on a 13% rise in revenues.

Exxon Mobil (XOM)


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Shares of Exxon Mobil (NYSE:XOM) are falling away from its post-summer trading range to return to lows not seen since April.

A death cross looks likely to happen within the next few days, reversing the oil-induced rally shares enjoyed back in April through June as crude oil prices make another leg lower. Shares were recently downgraded by analysts at Raymond James.

The company will next report results on Feb. 1 before the bell. Analysts are looking for earnings of $1.23 per share on revenues of $83.3 billion.

When the company last reported on Nov. 2 earnings of $1.46 beat estimates by 24 cents per share on a 25.4% rise in revenues.

Qualcomm (QCOM)


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Qualcomm (NASDAQ:QCOM) shares are relegated to a tight trading range below its 50-day and 200-day moving averages, setting the stage for a death cross as the rally into the September highs is reversed.

Shareholders have already suffered a 23% loss. Qualcomm has been in the news for its patent royalty fight with Apple (NASDAQ:AAPL) and has appealed to Chinese authorities to stop the sale of the latest iPhone models.

The company will next report results on Feb. 6 after the close. Analysts are looking for earnings of $1.09 per share on revenues of $4.9 billion. When the company last reported on Nov. 7, earnings of 90 cents per share beat estimates by six cents on a 2.1% decline in revenues.

Amazon (AMZN)


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Everyone’s onetime momentum favorite, Amazon (NASDAQ:AMZN) shares were turned away from resistance near the 50-day and 200-day moving averages and are now threatening to fall below its post-October lows.

Such a move would set up a test of the April low, worth another 13% decline from here. Amazon continues to focus on expanding its physical store footprint, and Amazon plans to roll out smaller versions of its Amazon Go cashier-less stores.

The company will next report results on Jan. 31 after the close. Analysts are looking for earnings of $5.51 per share on revenues of $71.9 billion. When the company last reported on Oct. 25, earnings of $5.75 beat estimates by $2.66 on a 29.3% rise in revenues.

United Technologies (UTX)


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Plans to break United Technologies(NYSE:UTX) up into smaller companies has failed to generate much investor interest, pushing shares down nearly 20% from the highs seen in September and threatening a fall below its early May low. Such a move would set up a move back to the summer 2017 lows near $106 — which would be worth a decline of 9% from here.

The company will next report results on Jan. 23 before the bell. Analysts are looking for earnings of $1.51 per share on revenues of $16.8 billion. When the company last reported on Oct. 23 earnings of $1.93 beat estimates by 11 cents on a 9.6% rise in revenue.

Lowe’s Companies (LOW)

Batted by worries about the housing market and announced store closures, shares of Lowe’s (NYSE:LOW) remain below both their 50-day and 200-day moving averages.

Already down nearly 22% from their late September high, shareholders are on the verge of suffering their first death cross in the stock since the summer of 2017.

The company will next report results on Feb. 27 before the bell. Analysts are looking for earnings of 80 cents per share on revenues of $15.8 billion.

When the company last reported on Nov. 20 earnings of $1.04 beat estimates by six cents on a 3.8% rise in revenues.

Expedia (EXPE)


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Online travel booking icon Expedia (NASDAQ:EXPE) is suffering a rapid reversal of its summertime gains, down more than 14% from the highs seen in late July.

This looks to be part of an epic, multi-year head-and-shoulders reversal pattern that could trace a decline all the way down to the 2013 lows near $45 as competition in the online travel space remains intense and fierce as spending is vulnerable to an economic slowdown and consumer retrenchment.

The company will next report results on Feb. 7 after the close. Analysts are looking for earnings of $1.07 per share on revenues of $2.6 billion.

When the company last reported on Oct. 25, earnings of $3.65 beat estimates by 53 cents on a 10.5% rise in revenues.

As of this writing, William Roth did not hold a position in any of the aforementioned securities.

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How To Protect Yourself Against the Next Market Crash

The New Year is rapidly approaching, but instead of a Santa Claus Rally we’re mostly just seeing further declines in stock prices. The S&P 500 is already down about 6% in December alone – and has dropped nearly 3% for the year. That’s hardly the year most were expecting 2018 to be.

Unfortunately for stock buyers, there isn’t an obvious all-clear signal on the horizon. We could have several more weeks or even months of high volatility ahead. In fact, the current situation resembles a bear market, despite the economy still being fairly robust at the moment.

Undoubtedly, there are concerns over global economic growth slowing down. And of course, the financial markets tend to be forward looking. Still, there doesn’t appear to be a recession right around the corner. In fact, recent U.S. consumer spending data was better than expected.

So why then do stocks continue to sell off?

First off, investors are concerned over the trade war with China and the impact that tariffs may have on corporate earnings. We’ve already seen how negative trade wars news has taken a toll on major companies like Apple (NASDAQ: AAPL), which has dropped 14% over the past month.

But even more concerning may be interest rates. The Fed may be forced to raise rates to stave off inflation (because the U.S. is at full employment). However, both the government and many individuals are saddled with a boatload of debt.

That means raising rates will increase interest payments across the board. That doesn’t even include the impact of higher rates on the housing market and business loans. It’s no wonder the investment community has been laser focused on anything the Fed says and does.

So is the solution to simply go to cash until the storm clears? Generally speaking, I’m not a fan of going to cash when it’s fairly easy to hedge your portfolio risk with options. Moreover, options allow you to find tune your hedging to best match your portfolio. Or, you can simply hedge the market itself.

One trade strategy I like in this environment is buying a put spread in iShares Russell 2000 ETF (NYSE: IWM). IWM is the most popular ETF for trading US small cap stocks. I like using it to hedge because it isn’t as expensive (in absolute terms) as a the more broad-market focused SPDR S&P 500 ETF (NYSE: SPY). And, small caps tend get hit first and hit harder than blue chip and other large cap stocks.

Some traders prefer to buy naked puts for hedging purposes as they don’t want their gains to be capped in an all-out meltdown. However, I prefer put spreads as I want to keep my hedges as economical as possible even during scarier periods like we’re in currently.

To that end, with IWM trading at about $140, you can buy the February 15th 130-135 put spread for right around $1.25. That means you’d buy the 135 put while simultaneously selling the 130 put for a total premium outlay of $125 per spread.

Your max risk is simply the $125 spent per spread, while max gain is $375 if IWM is below $130 at expiration. That represents a 300% gain. Breakeven for the trade is at $133.75, or about 4.5% lower.

In other words, your hedge doesn’t start working until the index drops 4.5% or lower. However, if there’s a sustained selloff (say 10% down) you’ll make 300% on your hedge. For about 2 months of protection and $125 per spread, I think it’s a very reasonable way to hedge downside risk in a stock portfolio.

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3 High-Yield Dividend 5G Stocks to Consider Today

5G wireless service is coming and it will change the world. The new fifth generation of wireless networking is just starting to roll out. 5G will soon start replacing 4G, which has been the standard for wireless data transmission for the last half-decade. If you remember how great it was to go from 3G to 4G, 5G is going to be 50 times better. As in 50 times faster than the current 4G average.

More importantly, several new, likely life-changing technologies need the higher data speeds of 5G to function properly. At the top of the list is self-driving cars, or even human driven cars with automatic driving features. To avoid running over cats, children, the center median and other traffic on the road these vehicles will need to gather and process huge amounts of data.

5G will eventually lead to smart buildings and homes – the so-called Internet of Things or IoT. (If you’re interested in IoT be sure to check out new research from my colleague Tony Daltorio.) Life will catch up with science fiction. It is likely that it may be possible to use your new 5G smartphone or a dedicated 5G hotspot device as your all-the-time connection to the Internet.

Before we and our cars can enjoy the benefits of 5G, the infrastructure to support the tremendously higher speeds and much larger amounts of transmitted data must be built out. The current 4G network does not have sufficient capacity to handle the coming increase in data flow.

Much of the wireless and Internet infrastructure is owned by companies that specialize in providing specific parts of the infrastructure. These specialties include data centers, cell towers, and fiber communications networks. Here are three stocks that will see huge benefits from the shift to the next gen 5G wireless system.

Digital Realty Trust, Inc. (NYSE: DLR) is a data center services provider that is organized as a REIT. The company develops and operates data centers. Digital Realty owns almost datacenters located around the globe. In addition to storage solutions, the company provides interconnectivity solutions between datacenters and the Internet.

The coming 5G speeds means an exponential increase in data that will need to be shared and stored. That’s the business of Digital Realty. Since it’s a REIT, DLR can be counted on as a steady dividend paying stock.

As a player in the high-growth data storage space, this is an income stock that will provide attractive dividend growth.

The company has increased the dividend for 13 straight years, with an average double-digit compound growth rate. Investors can expect the low teens dividend growth to continue, or even accelerate in the 5G era.

The shares currently yield 3.5%.

5G connectivity will require more cell towers, spaced closer together.  American Tower Corp. (NYSE: AMT) is the largest independent owner of cell towers.

5G will require a shift to small cell and micro-sites to provide uninterrupted, high-speed coverage. AMT owns 40,000 towers that will be retrofitted to provide 5G service. The company has also formed business alliances to install micro-sites in light poles and information kiosks.

AMT is also organized as a REIT. The company has a very high path of dividend growth, increasing the payout by 24% per year compounded for the last five years. Investors can expect AMT to remain at the heart of the 5G roll-out and be able to continue the rapid dividend growth. The shares currently yield 3.3%.

AMT is also organized as a REIT. The company has a very high path of dividend growth, increasing the payout by 24% per year compounded for the last five years.

Investors can expect AMT to remain at the heart of the 5G roll-out and be able to continue the rapid dividend growth.

The shares currently yield 3.3%.

Uniti Group (Nasdaq: UNIT) is a telecommunications REIT focused on fiber optic assets. In recent years the company has focused on acquiring backhaul fiber assets. These are fiber connections between cell towers and the wired Internet.

Uniti Group has been acquiring fiber networks that connect cell towers to the wired data network. These networks can be leased up to handle higher 5G data speeds without the need to build out additional network infrastructure. This mostly unknown and underground part of the overall data network will be a big winner for Uniti as 5G rolls out.

Currently UNIT is under a legal cloud due to a lawsuit against its largest customer, Windstream Holdings (Nasdaq: WIN). The trial has been completed and the companies are waiting on the judge’s ruling. Until that ruling comes out, the prospects and dividend safety of UNIT are unclear.

Thus, the current 12% yield.

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Source: Investors Alley