Daily Archives: January 14, 2019

Market Preview

Market Preview: Markets Lower on China Weakness, Big Bank Earnings This Week

Markets finished lower Monday after more news of economic weakness out of China, and an increasing sense of unease over the partial government shutdown. With mid-month January paychecks now not showing up in government employee bank accounts, the impact of the shutdown appears to be accelerating. And, with both sides digging in, there appears to be little hope of a near-term solution to the impasse. Investors are keeping one eye on the shutdown and the other on earnings, as earnings season is now in full swing. Many large banks report earnings this week, mixed with a number of transportation stocks. While most analysts agree earnings are coming down from the blockbuster growth of 2018, the question for investors is whether the bottom in stocks has already been put in when the market sold off last quarter, or if there is more pain to come in 2019.

PPI and the Empire State Manufacturing Survey are scheduled for release Tuesday. PPI is expected to come in flat, owing mainly to the continuing drop in oil prices in December. The Empire State numbers are expected to bounce back from a reading of 10.9, and to come in at 12 for December. Analysts will be watching this number closely to determine whether recently weak manufacturing numbers were an aberration, or the beginning of a more substantial decline in manufacturing.

JP Morgan Chase (JPM) and Wells Fargo (WFC) report before the open Tuesday. Many analysts believe the large banks are undervalued, while others are citing pressure from fintech startups and payment processors, like Visa (V), as a growing challenge to large bank profits. Citi’s (C) report on Monday, while not stellar, reinforced the pillars the large banks have come to rely on in recent quarters, large buybacks of stock and attention to cutting costs. Citi finished flat on the day. Some analysts are holding their breath hoping none of the large players encountered an unexpected trading loss given the massive volatility at the end of 2018. Also reporting Tuesday is Delta Airlines (DAL). Airlines have taken it on the chin since early December when earnings warnings began to emerge from the sector.

Banking earnings continue Wednesday, when Bank of America (BAC) and Goldman Sachs (GS) report. Goldman has been under the gun with an investigation of its involvement in an embezzlement scheme at 1MDB, a Malaysian state investment company. Revelations by Goldman employees, that they intentionally avoided the firm’s internal compliance rules, are being investigated by the Federal Reserve, and has spooked investors. CSX Corporation (CSX) reports after the close Wednesday. The rail company has been successful cutting costs and improving efficiency this year, but some analysts fear that may not provide much support going forward. CSX should be able to put forth some color commentary on the economy given its vital role in transporting goods. One question analysts have is whether the lead up to the China trade tariffs resulted in a bulge in traffic headed into the fourth quarter, and if that portends lower volume the next few quarters.

Economic numbers released Wednesday will include mortgage applications and the housing market index. Housing index numbers are expected to rise slightly to 57 after a devastating 8 point drop in November. Also on tap are retail sales, import and export prices, Redbook retail numbers, and business inventories. Both import and export prices are expected to decline, again due to the weakness in oil prices. Falling export prices were somewhat offset by a bounce in the price of farm products.

Dividends

3 High-Yield Restructured Energy Stocks

Energy infrastructure (commonly called midstream) companies have weathered a string of tough years since the energy commodity price crash of 2015. These were high flying stocks in the decade through 2014, with the master limited partnership (MLP) sector returning an average 18% per year from 2000 through 2014.

MLPs were the energy infrastructure/midstream business structure of choice. These companies owned pipelines, storage facilities, loading and unloading terminals. Customers accessed these assets through long-term fee based contracts. MLPs used the fee-based revenues to pay steady, attractive distributions to investors. Growth came from developing new projects, funded with a combination of debt and equity. The energy sector crash blew up the MLP growth model and revealed some ugly features of the typical publicly traded partnership agreement.

The last four years have seen a massive restructuring of the companies operating in the energy midstream space. There are now a number of corporations instead of the partnership structure. Balance sheets have been strengthened with companies focusing on using internally generated cash flow to fund growth projects. Onerous features of MLP partnership agreements have been abandoned. While share values have not recovered from the problems of recent years, the financial restructuring is basically completed, and these companies are on the verge of again generating attractive dividend growth and total returns for investors. Here are three stocks from the group that should do very well in 2019.

One of the first MLPs, Kinder Morgan Energy Partners launched with a 1997 IPO. For the next 16 year the company provided tremendous returns to investors in the MLP. As the MLP business model stopped generating the expected growth, in 2014, Kinder Morgan Energy Partners was acquired by the corporate sponsor, Kinder Morgan Energy Inc. (NYSE: KMI).

The consolidation was not enough to prevent the carnage of the energy sector crash. In early 2016, the KMI dividend was slashed to $0.125 per quarter from $0.51. The KMI share price fell from $43 in mid-2015 to $12 in January 2016. The stock now trades at $17.40.

Over the last three years, the company reduced debt and built cash flow to internally fund growth projects. In April 2018 the dividend was increased by 60% to $0.20 per share. The share price hardly budged. Management has stated the dividend will increase by 25% each year in 2019 and 2020.

Free cash flow is currently $2.00 per share and growing, so the $1.25 annual dividend for 2020 is in the bag.

KMI currently yields 4.6%.

In mid-2015 Magellan Midstream Partners LP (NYSE: MMP)was an $83.50 per unit MLP. The units now trade for $62 and change. Since its 2003 Magellan Midstream did not follow the MLP practice of raising growth capital in the public equity and debt markets.

All of Magellan’s growth has been funded through internal cash generation, without the need to tap the equity markets. Despite what the market price shows, the MMP distribution has been increased every quarter, and the current rate is up 42% compared to when it traded for $83.

With a 6.25% yield and continued 8% annual distribution growth, MMP could return 20% or more in 2019.

Tallgrass Energy LP (NYSE: TGE) is the result of the 2018 merger of traditional MLP Tallgrass Energy Partners and the publicly traded general partner, Tallgrass Energy GP LP.

Through its life as a traditional MLP, Tallgrass Energy Partners was one of the top distribution growth companies in the sector. The merger with the general partner eliminates the payments the MLP was paying to the GP. This means lower expenses and more cash to continue the distribution growth record. Tallgrass owns and operates one of the largest crude oil and natural gas pipeline networks in the country.

Dividends could grow at a mid-teens per year rate.

With a current 8.6% yield, TGE is grossly undervalued and could double in 2019.

Source: Investors Alley

Growth Stocks

Buy These 3 Stocks Growing in the Sharing Economy

The sharing economy is thriving because it offers consumers a faster, more efficient, and often cheaper, service or product. At its core, the sharing economy encompasses a new business model that in some industries, such as ride-sharing, is disruptive, and in others is complementary to current businesses. And, in yet others, the sharing economy is a brand new opportunity that is solving big problems and generating consumer demand. But what exactly is the sharing economy?

Sharing Economy Size, Sectors, and Drivers

Merrill Lynch estimates the size of the sharing economy at $250 billion with an addressable market of $2 trillion. They also identify a number of sectors that are being impacted by the sharing economy, including transportation, travel, food and retail among others. I’m sure you’re familiar with Uber (Nasdaq: UBER, pre-IPO), as the company has basically become the poster child for the rise of the sharing economy.

The sharing economy was birthed by a combination of big data, powerful platforms that run algorithms utilizing that big data, and the ever increasing power of the smartphone. Did you know Amazon is a card carrying member of the sharing economy? In addition to being one of the largest online retailers in the world, the company also matches buyers and sellers of goods through programs like its Fulfillment By Amazon (FBA) program.

If you’re like most people you don’t even know that half of the items you buy on Amazon are sold by a third party, and not Amazon itself. Using big data and advanced algorithms, Amazon not only recommends products to you as a buyer, but recommends products for sellers to supply, and can even provide a discount to fees charged to sellers for hot products it is trying to have listed on the Amazon site. And, these products which Amazon may or may not warehouse, and may or may not ship to you the consumer, are actually more profitable for Amazon than products it maintains in inventory and ships itself.

But it’s not just retail and transportation where the sharing economy is proliferating. In a report on the sharing economy BCG points out an example of a new sharing business formed by Mahindra and Mahindra (OTCMKTS: MAHMF). Mahindra, based in India, is one of the largest tractor manufacturers in the world. But, only 15% of India’s 120 million farmers even use mechanical equipment. To meet the needs of this underserved market Mahindra, “could have created lower-cost products by removing features or sacrificing quality. Instead, it created a sharing platform, Trringo, which allows farmers to rent equipment made by Mahindra (and even by its competitors) by placing a call.”

Finally, the World Economic Forum (WEF), in an article published just last week, highlights two of several drivers of the sharing economy which should continue to propel it forward. First, the WEF points out that ⅔ of global disposable income in the next ten years will be controlled by women.As the WEF states, “Women are already among the most ardent sharing-economy customers, and the growth of the “she-conomy” is likely to further boost this.” And Second, the WEF believes the sharing economy will play a vital role in reshaping the lives of a growing number of retirees. As individuals look to age in place and minimize disruption to their daily lives, companies already at work in the sharing economy will provide a means of earning income as well as provide care for those in need.

Let’s look at a few stocks that are already public and provide a way to invest in the sharing economy, as well as a few that are scheduled for IPOs in 2019.

GrubHub (Nasdaq: GRUB)

GrubHub is the quintessential sharing economy stock. The food delivery company not only delivers food from your favorite restaurant, but puts in place the entire order and delivery platform for restaurants it partners with. This has allowed non-delivery focused restaurants, on the mom and pop scale all the way up to the Taco Bells of the world, to add another revenue stream to their business model.

While the stock has pulled back in-line with the recent market selloff, the company is hitting on all cylinders. As CEO Matthew Maloney stated in their most recent earnings call, “We added more new restaurants to our network in the third quarter than any other quarter in the history of Grubhub. Our diners now have over 95,000 restaurants to choose from…” Revenue in the third quarter grew 52% year-over-year, with earnings growing 41% on a year-over-year basis. The company is projected to grow earnings an average 26% per year over the next 5 years.

The company’s stock had become a little overheated, and the recent pullback gives investors a second bite at the apple at a much better price. In addition to the stock pullback, another catalyst which makes the company attractive right now is the fact that they are beginning to realize economies of scale. This allows their marketing to be more effective, and is reducing their cost per order. Lastly, the recent addition of YUM! Brands (NYSE: YUM) as a partner should further accelerate growth.

Match Group, Inc. (Nasdaq: MTCH)

Match Group owns and operates several dating and relationship sites including Tinder, Match, OKCupid and Hinge. The company has over 57 million users of its apps globally, and was the highest grossing app in the Apple Store in 2017. The company is clearly dominating the dating app space and has built a critical mass of users which makes it difficult for competitors to infringe on the company’s market.

Match used the network effect to build out its user base with a savvy “hot or not” marketing campaign. The company’s range of apps now covers a broad spectrum of the population, from young people looking for casual social interactions to established career adults looking for long-term relationships. Match has mastered the big data world of dating, and has built a platform that is both user friendly and profitable. Revenue at their flagship Tinder brand was up close to 100% year-over-year in the latest quarter, and subscriber growth was up 61%. Earnings grew over 126% over the past year.

Match also suffered in the market selloff, and is in the process of recovering from an earnings miss last quarter, but has already recovered much of its losses. The company has a few specific catalysts that make it a good buy now. First, it is increasingly moving users to paid subscribers by adding additional relevant features to its paid subscription model. Second, the company is using data it already has to bring new products to market focused on narrower niches, making the experience more relevant for the user. And third, the company continues to enhance its algorithm to provide a better experience for users and find a relevant match on first use of its product, a major goal of the company.

Booking Holdings (Nasdaq: BKNG)

Before discussing some of the IPOs that are scheduled for 2019, I feel I would be remiss if I did not also mention Booking here. While I understand the stock is high priced, trading around $1,650, the valuation is fairly compelling. The stock currently has a PE of 19, is expected to grow earnings 16% per year on average over the next 5 years, and has profit margins of almost 20%.

Booking is not a pure sharing economy play, but does have over 5 million unique sharing economy listings on its site. This allows Booking to be an all-in-one offering for those unsure if they want a traditional hotel stay or a shared house, apartment, etc. I believe at these levels, and with a number of shared listings, Booking deserves a look as a sharing economy competitor.

Potential 2019 IPOs

Finally, I’d like to talk for just a moment about two potential sharing economy IPOs that may come public in 2019. Following on my mention of Booking Holdings, is sharing economy stock Airbnb (Nasdaq: AIRB).

Financial data is limited on companies that aren’t yet public, but we have a sense of the numbers from various media reports and piecing together data from reported private investments. Airbnb lists a little over 4 million unique properties ranging from houses to apartments to treehouses to tents, in a range of normal to exotic locations. The company was reportedly profitable for the second year in a row in 2018, after making $100 million on revenue of $2.6 billion in 2017.

While we’ll have to wait for the exact numbers to determine if the stock is a buy when it goes public, one of the things I like about the company is its innovative nature and the fact that it is not resting on its laurels as a “real estate rental” company. As CEO Brian Chesky puts it, “…people who misunderstand Airbnb, they tend to just see a bunch of real estate. But of course, if you look a little deeper, what you’re going to see are three million people — our hosts — and that’s in many ways, really, what you’re buying.”

One great example of this is the company’s Experiences business. Experiences provides travellers, or anyone for that matter, with a range of activities they can engage in when on vacation, or visiting a specific area. The “experiences” are hosted by Airbnb rental hosts, and the business is now doing over 1.5 million bookings per year. I would suggest that as the IPO nears and you are performing your due diligence on the company, look at the company and possible growth in its component parts, as opposed to viewing it simply as another online rental platform.

The final sharing economy stock I’d like to put out there is Lyft (Nasdaq: Lyft) Lyft is also projected to go public in 2019. Lyft has filed confidential IPO paperwork with the SEC as of early December 2018 concerning its IPO. A private funding round in 2018 valued the company at $15 billion, and the financial media recently valued the projected IPO at between $18 and $30 billion. Lyft reportedly had revenue of $563 million in the third quarter of 2018, losing $254 million in the same quarter.

In my view Lyft is benefitting from being second to market behind Uber. Lyft management has learned from the Uber experiences with unsatisfied drivers and regulatory challenges and has been able to avoid much of the bad publicity that has befallen Uber. If you’ve taken a Lyft ride recently, and had conversations with the driver (many of whom worked previously for Uber) like I have, you’ve heard how they were very unhappy with Uber and like driving for Lyft much more.

One of the things I like about Lyft is what appears to be a relatively aggressive move toward autonomous vehicles, which will increase margins by eventually eliminating the need for a driver altogether. In October, Lyft announced it was acquiring augmented reality (AR) company Blue Vision Labs. The company will join with an already robust autonomous vehicle initiative within Lyft, its Level 5 autonomous car division. The company is working closely with Ford (NYSE: F) to put an autonomous hybrid on the road as well.

The sharing economy is in its early stages with an abundance of growth ahead. Whether you prefer already established companies like GrubHub, Match, or Booking, or are looking forward to IPOs from Airbnb or Lyft, exposure to sharing economy stocks should be a part of your diversified portfolio.

Source: Investors Alley