All posts by Eddy Elfenbein

F150 Drives Growth for Ford (F) During Pandemic

f you want to own the “stay-at-home” stocks, but don’t want to own individual names, one way to get exposure to digital vs. in-person companies, is to own the Invesco QQQ Equity Index (QQQ).

The QQQ mirrors the Nasdaq 100 Index, and is made up of the 100 largest non-financial stocks trading on the Nasdaq. As you may know, the Nasdaq was founded as a digital exchange, with a virtual trading floor of traders connected via computers.

This gave the Nasdaq a leg up in attracting tech companies, such as Microsoft (MSFT) and Amazon (AMZN), and the Nasdaq Index remains very heavily weighted toward technology.

While the S&P 500 has seen its weighting of tech stocks increase in recent years, it’s still considered more of an industrial index versus the Nasdaq.

Ford (F), one of the stocks in the S&P 500 Index, recently showcased the release of its new F150 pickup. Ford is touting new technology and features, such as automatic emergency braking on all models.

The F150 is very important to the Ford brand, as it is not only the top-selling pickup in the U.S., but completely dominates the next two competitors.

In Q1 2020, Ford sold over 186,000 F150s, versus Chevrolet pickups at close to 144,000 and Dodge Rams at almost 129,000. Chevrolet did gain ground in the first quarter.

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While Ford’s numbers were hit by the pandemic, with Q1 earnings coming in at $34 billion vs. $40.3 billion a year ago, the new F150 could add a boost to the company’s post-pandemic “reopening” numbers. U.S. News and World Report says the new Ford F150 “promises to be the most technically advanced and connected truck on the road.”

The COVID-19 pandemic more than cut Ford’s stock in half, but it has since recovered to trade at $6.

General Motors (GM), which reported earnings July 1, said its full-size pickup sales were resilient in Q2. Overall vehicle sales were severely impacted by the COVID-19 crisis, with sales off by 34%.

But, with demand outstripping supply late in the quarter, “full-size pickup truck sales performed exceptionally well, and overall sales showed signs of recovery, especially deliveries to retail customers.”

GM also noted in its earnings release that low-interest rates are driving sales as the economy reopens. The challenge the company is facing now is in getting automobiles to dealers quickly in order to restock diminishing inventory.

And finally, I’d be remiss if I wrote about automakers and didn’t mention the recent rise in Tesla (TSLA). Tesla stock has simply been on fire since late in 2019. The stock came down with the market in March, but went straight back up from $350 to now trade at over $1,100.

Tesla fits many growing trends right now: a move toward “green” investing, a hatred—for lack of a better word—of fossil fuels, and an increasingly affluent millennial base that prefers electric. Not to mention the mystique of the Tesla brand (and its affinity with SpaceX), which, like it or not, goes hand-in-hand with the bad boy reputation of Mr. Elon Musk.

Unlike the other car companies, Tesla revenue actually rose year-over-year in Q1, despite the pandemic. Quarterly revenue was $5.9 billion versus $4.5 billion one year ago. While valuations may be stretched, that has not hindered current investors from betting the company grows into a higher valuation.

DKNG Shows Sports Betting is Back, But This Time With Wall Street Flair

Baseball is back, with a deal for a 60-game season just announced. Professional golf is back. Nascar has been back for several weeks. Professional tennis, though off to a rocky start, is back. And, sports betting is back.

Which means companies like DraftKings (DKNG), which runs an online sports betting platform, is back in business.

Online gaming companies were left for dead when the COVID-19 pandemic hit. As sports league after sports league announced season-ending closures, there was no betting to be done.

But as sports shut down, and sports commentators and writers were left in limbo, an interesting thing happened. Some, including the more social media-famous Dave Portnoy, took to “betting” on stocks.

Portnoy, who is the founder of Barstool Sports, has used the stock market as a marketing tool, drawing millions of followers to his social media accounts with his battle cry of “Stocks only go up.” The entertaining, self-described sports bettor, can lose hundreds of thousands of dollars in a single trading session, all to the amusement of his social media followers.

What Portnoy—who once was closely associated with DraftKings, and now works as a “complete sell out” (his words) for Penn National Gaming (PENN) since its acquisition of Barstool Sports in January—has done is build an even bigger audience for sports betting when it returns.

The pent-up demand for sports betting, combined with some expert marketing from sports betting stalwarts like Mr. Portnoy, could lead to outsized gains for the sports betting stocks.

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DraftKings, which went public recently as a special purpose acquisition company (SPAC) has been moving higher in recent months in anticipation of sports returning. But the company isn’t just resting on its sports-betting laurels.

On Tuesday, the company announced a new casino gaming app for customers in New Jersey. Jason March, DraftKings’ VP of Gaming said, “We are thrilled to break new ground for DraftKings in the gaming space today with the launch of our DraftKings Casino app, the Company’s first perennial product that operates year-round, irrespective of the annual sports schedules.”

This should add another leg to the DraftKings betting stool and smooth annual revenue numbers somewhat. In the company’s first earnings report last month, DraftKings reported $113.4 million in revenue, and a loss of $74 million.

The company has been spending heavily on marketing, as it enters new markets that approve online gaming, which added significantly to recent costs. If online gaming expands to additional states, seeking revenue to refill the DraftKings coffers after the COVID-19 pandemic, DraftKings could be a big long-term winner, even if they take on additional costs in the short-term.

Penn National Gaming, which owns in-person gaming facilities in 19 jurisdictions, and operates 41 gambling facilities, has also made a big comeback from the lows the market set on March 23rd. As the U.S. reopens, Penn stock has moved from $3.75, back to the mid-$30s.

Another rise in COVID-19 cases may cause the stock to pull back, setting up a better buying opportunity. To ensure its financial stability, the company recently did a $300 million share offering, as well as a $300 million debt offering.

With its 36% equity position in Barstool Sports, Penn is betting on that relationship as it launches an online betting platform, scheduled for August. The company, per its investor presentation, is looking to go after the market now dominated by DraftKings, relying on its 66 million Barstool fans.

Finally, Scientific Games (SGMS), perhaps best known for its lottery ticket machines, also offers a number of casino and digital betting games, and owns SG Digital, the sports betting division of Scientific Games.

The company should benefit from the country reopening, and a return to gaming and gambling, across the board—from being able to return to the supermarket or convenience store and buy lottery tickets, to sports betting, and even stay at home casino gaming for those still sheltering at home.

SGMS is nowhere near the highs it reached prior to the COVID-19 pandemic, trading at only half its pre-pandemic price of $30. First quarter revenue for SGMS was $725 million, down 13% from $837 million a year ago. The company blamed the impact of the pandemic for the decline.

BA, LUV, AAL, and SAVE Cutting Back to Regain Profits As Economy Reopens

Boeing (BA) recently announced it would be putting its 737 Max production line back in business. The line has been closed since January of this year, and BA has not delivered a 737 Max since March 2019.

While the plane has still not been approved for service by the FAA, BA anticipates a favorable ruling, and therefore restarted the line two weeks ago. Boeing stock rallied on the news, and while it has pulled back slightly, it’s still higher than it had been before the announcement.

Like many other stocks right now, BA is trading on the reopening of the economy, and anticipation that the worst is behind us.

The past few weeks have seen the beginning of a shift, though you might not be able to tell it with the Nasdaq at all-time highs, from stay-at-home tech stocks to industrial companies. Stocks like Caterpillar (CAT), which has jumped from $100 to over $130, are moving off of recent lows set in mid-May.

As economies continue to reopen, large companies that were severely affected by the pandemic only a few months ago are figuring out the “new normal,” and investors are pouring into their shares to get ahead of business returning.

It may be a bit of a bumpy ride, but it looks like the tide is turning for large companies that were heavily altered by the current health crisis.

Boeing CEO David Calhoun predicted a few weeks ago that a “major” U.S. airline might go bankrupt due to COVID-19. Oh what a difference a few weeks makes. Boeing has tried to downplay that statement, saying Calhoun may have overstated the case.

Given that orders have dropped precipitously for the 737 Max, Boeing has been working feverishly to cut costs. As orders return, these cost-cutting efforts should make for some very favorable comps in coming quarters for the company.

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Southwest Airlines (LUV) CEO, Gary Kelly, has already said that Southwest is committed to the 737 Max, and “The Max airplane is superior to the Next Generation 737 that we’re currently operating.”  Assuming the Max clears regulatory hurdles, LUV is scheduled to take 48 of the planes by the end of 2021.

Spirit Airlines (SAVE) is another company that has bounced off a bottom in mid-May, when SAVE traded below $10. While it has pulled back, like Boeing and the other airlines, this may be the pause that refreshes.

Again, numbers won’t show an easy upward line for any of these companies, but Spirit is coming off of passenger levels that had declined 95% from year-ago levels. SAVE lost $74 million in the first quarter, after putting in a positive earnings report of exactly the same amount, $74 million, in the year-ago quarter.

In a recent conference call, Spirit CEO Ted Chirstie, said the company had been investing in low-touch technology to improve its customer experience, even before the outbreak of the novel coronavirus. As Christie said, “Sometimes it’s better to be lucky than smart.”

And finally, American Airlines (AAL), like many of the others, has begun its slow climb upward. The company, which traded at $34 a year ago, crumbled to almost $8, before its recent bounce to just above $17.

AAL is also looking at cutting costs and has rolled out a severance package for high-level executives. American expects to cut around 5,000 jobs when funds from the CARES Act are exhausted in the fall.

A much leaner structure should, again, make for a more rapid recovery as paying passengers begin to return. This isn’t an uncommon occurrence following a systemic shock to an industry. Companies downsize and streamline as a result of the crisis, and then often see outsized profits during the recovery period.

Why Medical Device Stocks Are a Great Investment And The One You Should Buy Now

ne of the more interesting figures of the American Revolution is Thaddeus Kosciuszko, a Polish army officer who was so moved by the patriot’s cause that he came to the colonies specifically to join the fight. Kosciuszko was named head engineer of the Continental Army, and his help was critical at the Battles of Ticonderoga and Saratoga.

The good citizens of Indiana and Mississippi both named counties in his honor. The Hoosiers went one better and named the county seat Warsaw as a salute to Kosciuszko’s heritage.

It might seem strange that a city in the heartland has the same name as the capital of Poland. But Warsaw, Indiana isn’t like most towns. In 1895, the city was altered forever when a salesman named Revra DePuy decided that he no longer wanted to work for other people. So he did what any American would do: He became an entrepreneur.

At the time, bone fractures were set with wooden splints. DePuy, a splint salesman, had a revolutionary idea: he started using metal—which could be bent to fit any person—instead of wood. That’s how, in a garage in Warsaw, Indiana, Revra DePuy launched the town’s orthopedics industry.

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DePuy’s business did very well, and within a few years he hired Justin Zimmer to be his first sales manager. After DePuy died, Zimmer wanted to buy the company but wasn’t able to. So, like DePuy before him, he also started his own orthopedic business right in Warsaw. The orthopedics industry grew and grew and grew. Soon, the advent of plastics launched the industry into a new age of design and innovation.

In 1977, entrepreneurs Dane Miller, Niles Noblitt, Jerry Ferguson and Ray Harroff—two of whom had worked for Zimmer—branched out on their own. They formed another orthopedic company, which they called Bioemt, right in Warsaw.  In their first year, the company recorded sales of $17,000 and a loss of $63,000. Despite this modest start, Biomet soon delivered several years of record sales.

If any business could be described as the perfect business, it might be medical devices. The business has demographics on its side, and the industry is constantly driven by technology and prices increases. The stocks tend to be very stable, and highly profitable.

Several medical device stocks like Medtronic (MDT)Abbott Labs (ABT)Stryker (SYK) and Boston Scientific (BSC) have been market-beaters for years. According to data available at Professor Kenneth French’s Web site, medical device stocks have increased by more than 4,200,000% over the last 80 years. That’s far better than the overall market.

Here’s a look at the Dow Jones Medical Equipment Index since 2000:

Today Warsaw is the backbone (sorry) of the global market for replacement joints. Today, knee and hip replacements are quite common, and about 40% of the worldwide orthopedics business still flows in and out of Warsaw, where DePuy Inc. is still based. A few years ago, it was bought out by Johnson & Johnson (JNJ).

Both Zimmer and Biomet also remained in Warsaw. Then in 2014, the two companies merged creating, what else, Zimmer Biomet (ZBH).

Zimmer Biomet makes and sells “orthopedic reconstructive products; sports medicine, biologics, extremities and trauma products; office-based technologies; spine, craniomaxillofacial and thoracic products; dental implants; and related surgical products.”

Today, Zimmer Biomet employs nearly 20,000 people. Last year, it rang up nearly $8 billion in sales. Since it went public two decades years ago, ZBH has gained more than 400%.

Despite its past success, the stock hasn’t done much recently. That’s why I wanted to highlight the stock this week. Of course, the nasty bear market didn’t help the shares. Zimmer Biomet fell from a high of $161 in February to a low of $74 in March. Even going back four years, Zimmer Biomet has underperformed the broader market.

There have been concerns that the industry is under pricing pressure. I understand the worry. Price increases are the heart and soul of orthopedics, and Zimmer Biomet is no exception. The company enjoys gross margins of 70% and net margins of 20%.

The company’s last earnings report, for the quarter ending on March 31, was quite good. Zimmer Biomet earned $1.70 per share, which beat estimates by 32 cents per share. The current quarter, however, will be worse. More than 80% of the company’s business comes from elective procedures. Before the coronavirus hit, Wall Street had been expecting Q2 earnings of $2.01 per share. That estimate is now down to a loss of 77 cents per share.

Like many other companies, Zimmer Biomet has withdrawn its financial guidance. The earnings for 2020 won’t be much, but I think it’s very reasonable to expect that theirs will bounce back next year and in 2022.

This is a good time to take advantage of the lower price. As the economy gets back on its feet, Zimmer Biomet will be a big winner.

Coronavirus Rocks Wall Street

he Market’s Long Nap Comes to an End While This Company Raises Dividends For a 37th Straight Time

The stock market got rocked this week as fears of Coronavirus finally spooked traders. On Monday, the S&P 500 had its worst day in more than two years, and the heavy selling continued into Tuesday.

What’s interesting is that until now, Wall Street had been remarkably calm. In fact, the S&P 500 went a good part of the fourth quarter with only a few days of market drops more than 0.4%. That’s not much at all.

It seems that investors got lulled to sleep by the market’s calm upward rally.

What’s really happened is that we’ve gone from very low volatility to somewhat moderate volatility. This kind of market action really isn’t that unusual. Since 1950 there’s been, on average, three market drops of 5% or more.

Most of the time, these pullbacks don’t amount to much. Sometimes they do. The market doesn’t seem so concerned with the virus itself. Rather, it’s the knock-on effects of the virus. Global travel and trade routes are being upended. South Korea just announced that consumer confidence had its biggest drop-off in five years.

Travel stocks have been hit hard. Even shares of Disney (DIS) have felt the sting of the Coronavirus. Fewer travelers means lower attendance at their parks. Cruise stocks have been especially hard hit.

What’s done well? Bonds! The 10-year Treasury yield just hit an all-time low.

But not only bonds. A few weeks ago, I highlighted shares of Alpha Pro Tech (APT), a company that makes surgical masks and other protection gear. The shares nearly tripled in just a few weeks.

Barron’s even said that shares of Peloton (PTON) could do well as gym rats would stay at home. Hmm… I’m not sure about that one.

Not to be outdone, The Wall Street Journal reported that Moderna (MRNA), a biotech stock, is working on a Coronavirus vaccine. We’ll see.

But what’s caught my attention is the growing gap between High Beta stocks and Low Volatility stocks. By this, I mean the difference between the bouncy stocks and the more stable stocks. Recently, the stable stocks have been performing much better than the rest of the market. This tells me that traders have become afraid of risk. Well, I don’t blame them.

At a time like this, investors want something that’s safe and secure. One of the safest and most secure is AFLAC (AFL), the company best-known for its duck commercials. AFLAC is a lot more than ducks.

The Duck Stock Raised Its Dividend for 37 Years in a Row

What exactly does AFLAC do? The company provides supplemental life insurance. The idea is to soften the financial stresses during periods of disability or illness.

Aflac sells supplemental health and life insurance policies. This includes coverage for accidents, intensive care, dental, vision and disability. It also includes specific conditions like cancer. AFLAC is particularly big in Japan.

If you’re curious, AFLAC standards for the American Family Life Assurance Company. The duck ads started to run about 20 years ago. Now AFLAC is a household name. Not only that, but it’s a very profitable business.

A few weeks ago, AFLAC (AFL) announced it Q4 earnings. For the quarter, AFLAC earned $1.03 per share which beat estimates by one penny. Currency exchange added two cents per share. AFLAC also increased its quarterly dividend from 27 cents to 28 cents per share. This is their 37th annual dividend increase in a row. There aren’t many companies that can boast a track record like that.

For 2020, AFLAC is looking for earnings of $4.32 to $4.52 per share. That assumes an exchange rate of 109.07 yen to the dollar (which was the average for 2019). That’s pretty conservative guidance. It also means AFLAC is going for a little over 10 times this year’s earnings.

This is a wonderful company that’s going for a good price. When the market gets rough like this, it’s always good to own a safe and stable stock and AFLAC fits the (duck) bill.

I currently rate AFLAC a strong buy up to $57 per share.

Three Stocks Powering the 5G Revolution

How 5G Technology Is Changing Our World

We’re in the midst of a communications revolution. The current phase, known as 5G, refers to the fifth generation of wireless communications. This is a world-altering event and investors need to understand how and why the world of communications is changing. There will be some big winners, and naturally, some big losers as well.

First though, let’s run through the previous four generations. First generation were the old cellphones of the 1980s. They were definitely cool, but they could do little more than make a phone call. How ironic is that today the telephone feature is one of the least-used applications of cellphones.

With the second generation of cellphones you could actually a text message and even some pictures. Sure, it wasn’t great, but it got the job done. But one important feature of 2G was that it used a lot less power than 1G. That meant smaller batteries which meant smaller phones. A lot smaller.

Next came 3G. This was when you can finally stream video over your phone. Or I should say that you could stream reliably. This is important because the age of 3G coincided with the tech boom of the late 90s and early 00s. We had tons of investment happening at once.

I won’t go much into 4G LTE, (LTE stands for Long Term Evolution and refers to the technology used to arrive at 4G speeds) because you’re probably using 4G LTE right now to read this. But the important point is that 4G gave user a ten-fold increase in speed over 3G.

The arrival of 4G has changed so much of how we live. For example, Uber only makes sense in a 4G world. Just about any company you can think of in the “gig” economy owes its life to the high speeds of 4G.

The fact to understand is that there are lots of technologies out there, but they only make sense with improved communications. That’s where 5G comes in.

Investors need to understand that 5G does three things.

  1. Faster speeds
  2. Lower latency
  3. Connects more devices

Let’s break these down. Faster speeds are self-explanatory. Users can move more data thanks to faster download speeds. Some folks are talking about 5G being 100 times faster than 4G. Honestly, I think five to ten times faster is more likely. This means that a high-def movie can be downloaded in a matter of seconds instead of minutes.

Lower latency is a fancy term for meaning more responsive. Have you ever missed a turn because your map software didn’t update fast enough? Or missed a stock trade because the price moved away from you before you could execute the trade? That can be an annoyance for you. Now imagine what it could mean for something like a self-driving car. This is why the lower latency of 5G is such a big deal.

5G will allow for many more connected devices. Without getting too technical, 5G uses a much higher frequency than 4G, and as a result the bandwidth—and the amount of traffic that can flow through the network—is much higher.

Related: Three Growth Stocks Tackling 5G’s Big Data Problem

This means being able to send a text or video when you’re at your favorite team’s stadium or at a concert. The high bandwidth, combined with technology that allows users to efficiently take advantage of that bandwidth. In other words, this means a low fewer spinning icons on your cellphone when trying to call that Uber, or tell your family you’re near home.

Who Are the Winners?

There are several sectors already benefitting from 5G. Application and software companies may be the greatest disruptors born out of 5G. One company, which is already benefiting from its software position in the 5G build out, is VMWare (VMW).

VMWare provides carriers with software that allows them to run multiple 5G networks on the same hardware. In other words, VMWare is making money by making 5G networks more efficient. Revenues have tripled in the past five years and should continue on a steep upward trajectory.

This is an especially good time to give VMWare a look. The next earnings report is due out on February 27. The company has beaten Wall Street’s estimates for at least the last 11 quarters in a row. Look for another strong report.

Anything in your home that could be connected in order to relay valuable information. Those could all be revenue generators for these companies. There are a number of hardware suppliers that will benefit from 5G deployment, but one of the leading candidates is chipmaker, Xilinx (XLNX).

For 5G, Xilinx technology is helping solve capacity, connectivity, and performance challenges. Over 50 billion connected devices are expected by end of this year. Xilinx is heavily concentrated on future 5G deployment.

For its last earnings report, Xilinx beat expectations by 8.5%.

Qualcomm (QCOM) will be another large beneficiary of 5G deployment. After settling a major intellectual property suit with Apple, the company is poised to provide 5G chipsets for Apple 5G phones for the next several years, with the opportunity to prove itself for continued future chipset offerings.

Qualcomm has an impressive IP (intellectual properties) portfolio of 5G offerings and will be a major provider of the “picks and shovels” for the 5G build out.

Qualcomm is expected to grow its earnings by more than 25% per year over the next five years.

Bonus Stock

Some of the obvious plays are the telecom carriers. For example, Verizon Communications (VZ) is a major holder of 5G spectrum in key population areas. As 5G takes hold, VZ can expect a huge increase in connected devices. This should drive revenue growth, as well as provide new opportunities for the carrier to deliver new 5G services.

Verizon is also a good stock for income investors. The current yield is over 4.2%. Verizon is a strong buy here.

President Trump’s Secret 5G Stock Nod?

President Trump is now officially on the record as saying…

“The race to 5G is a race America must win, and it’s a race, frankly, that our great companies are now involved in.”

But here’s what Wall Street and the media won’t tell you…

The great companies Trump is referring to are NOT just Verizon, Sprint, or AT&T.

New evidence suggests Trump may have been referring to this secret 5G company. It’s not a household name… but experts say it’s ready for “Amazon-like” growth.

The Same Stock but Two Very Different Charts

ith Good Stocks, Time Is on Your Side

Peter Lynch once said, “The real key to making money in stocks is not to get scared out of them.”

That’s exactly right. When you own a good stock, time is on your side. You may not realize it each day and each week, but after the long haul, good stocks are rewarded.

I’ll give you a good example. One of my favorite consumer stocks is Clorox (CLX). The bleach folks have been big winners for many years.

Check out these two charts of Clorox. Here’s CLX since 1990:

Over the last 30 years, shares of Clorox have gained more than 34-fold. That’s an outstanding track record, and it’s beaten a lot of well-paid hedge fund managers.

Apparently, bleach is good business.

Now here’s the exact same stock, but it’s a five-year slice of the first chart.

Well, that’s quite different.

When looking at the first chart, there’s a natural tendency to see the trend as being perfectly obvious. But that’s only true in retrospect. Living through it is quite another story.

The second chart seems hectic and uncertain. Bear in mind, that’s not a small slice of the first. It’s five years. Imagine living through that, but that’s what successful investing is all about. You stick with a good stock during rough times because you never know when the good run will come.

Inflation Continues to Be Moderate, and that’s Good for Stocks

There were a couple of interesting economic reports recently. Last week, the government said that housing starts report showed an increase of 16.9% last month. Housing starts are now at a 13-year high. This is very good news for the housing market, and I think we’ll continue to see good numbers here. Keep an eye on housing stocks.

Despite the rising jobs market, there still hasn’t been evidence of inflation. Last Tuesday, the government said that the Consumer Price Index rose by 0.2% last month. That comes after a 0.3% increase in November. For all of 2019, the CPI increased by 2.3%. That’s the highest annual rate in eight years, but it’s still not that high. Importantly, inflation is still close to the Federal Reserve’s target of 2%.

Digging into the numbers a bit, we see that the “core” rate of inflation increased by 0.1% last month. This is the regular inflation rate, except for food and energy prices, which can be very volatile. The core rate was up by 0.2% in November. For the year, the core rate increased by 2.3%.

Overall, these are good numbers, and it looks like the Federal Reserve won’t need to make a move, in either direction, in the immediate future. It’s especially impressive that inflation is so low, considering that the unemployment rate is low as well.

The Fed meets again on January 28-29. Don’t expect much. In my opinion, the best market proxy for what the Fed will do is the two-year Treasury yield, and that’s right in line with the Fed’s target for the Fed funds rate of 1.50% to 1.75%.

Inflation has a big impact on the stock market. This may seem counter-intuitive, but the more consumer prices rise, the worse stock prices have done. This makes sense since stocks are in competition with bonds, not consumer prices, and bonds do worse as inflation rises. At the other end, real stock markets have done very poorly under deflation. Historically, what the market likes best is low, stable inflation. That’s what we have right now.

A few years ago, I did a study. I took all of the monthly data from 1925 to 2012 and broke it into three groups; there were 75 months of severe deflation (greater than -5% annualized deflation), 335 months of severe inflation (greater than 5% annualized), and 634 months of stable prices (between -5% and +5%).

The 75 months of deflation produced a combined real return of -46.77%, or -9.60% annualized. The 335 months of high inflation produced a total return of –70.84%, or -4.32% annualized. The 634 months of stable prices produced a stunning return of more than 177,000%. Annualized, that works out to 15.21%, which is more than double the long-term average.

Here’s an interesting stat: The entire stock market’s real return has come during months when annualized inflation has been between 0% and 5.1%. The rest of the time, the stock market has been a net loser.

By that study, this continues to be a very good market for stock investors.

Source: Investors Alley

This Retailer’s Stock Has Out Performed Amazon Since 2008

On Friday, the government released two economic reports that were emblematic of what’s been happening with the U.S. economy for several months.

To skip all the technical jargon, consumers are quite happy while factories are not. To be more specific, consumer spending remains fairly robust. Folks are out there at the malls buying things at a good clip.

However, the factory sector of the economy isn’t doing so hot. The manufacturing isn’t so much retreating, but it’s not growing either. How long can this divergence last?

That’s the big question, but first, let’s dig into Friday’s news and see what’s going on.

October Retails Beat Estimates

Let’s start with retail sales for October. This report is important because it’s often a good proxy for consumer spending, which makes up about 70% of the U.S. economy.

The report showed an increase of 0.3% in October, which was 0.1% better than expected. Digging down a bit we see that when you exclude sales of vehicles and gasoline (which can be volatile), then retail sales were up 0.1% last month. So far this year, retail sales are up 3.1%. In plain terms, consumers are holding up the economy.

The other report showed a very different story. It said that industrial production fell by 0.8% last month. That’s a big tumble, but there’s an important footnote. Much of that drop was due to the GM strike. Still, even after we exclude auto output, industrial production was down 0.5% in October. Over the last year, industrial production is down 1.1%.

We’re seeing sagging manufacturing and buoyant shoppers. This divergence was recently confirmed by a weak ISM Manufacturing report. Now I have to add an important word about the manufacturing sector.

You’ll often hear someone say that “America doesn’t make anything anymore.” That’s simply not true. In fact, America is a manufacturing powerhouse. The difference is that a lot fewer people are involved in manufacturing.

That’s actually good news because it means that our workers are more productive. That’s why, in times past, you wouldn’t see a shoppers/factories divergence like we see today. That’s because so many shoppers were factory workers.

So, where does the economy stand? The odds of a recession starting soon are very slim. The recent rate cuts from the Fed certainly help. Still, there are concerns that growth is slowing down. The staff at the New York Fed sees Q4 growth of just 0.4%. At the Atlanta Fed, their model points towards the growth of 0.3%. That’s down from 1% just one week ago.

The Federal Reserve has helped restore investor confidence. Just recently, the S&P 500, along with all the other major indexes, hit a new all-time high. Mortgage delinquencies have fallen to their lowest rate in 25 years. Unemployment is near a 50-year low. Also, homebuilding stocks are having a very strong year. You might not have guessed that from the headlines.

Have you spotted the “5G” signal on your phone yet?

Ross Stores Has Topped Earnings for 13 Straight Quarters

So what should investors do? Typically, a good way to play strong consumer spending would be a pure consumer play like Walmart (WMT), but right now, I suggest a different take.

I like shares of Ross Stores (ROST). The deep discounter is due to report earnings again on Thursday, November 21st. Traditionally, Ross likes to give very conservative guidance, which they almost always beat. Sometimes, by a lot.

The October quarter is ROST’s fiscal Q3, and the biggie is Q4 (meaning, November, December, and January). For Q3, Ross said it expects comparable-store sales growth of 1% to 2% for Q3 and Q4. That’s probably a low ball.

Because of the trade war with China, Ross sees Q3 earnings of 92 to 96 cents per share. That’s lower than what the Street had been expecting. I think Ross can beat that. For Q4, the biggie, Ross sees earnings of $1.20 to $1.25 per share. That adds up to a full-year guidance of $4.41 to $4.50 per share. Last year, Ross made $4.26 per share.

Don’t be fooled by the conservative guidance. Ross is a very profitable business. The company has been able to stand and thrive in the age of Amazon. Ross knows its customer base well, and these shoppers enjoy the “treasure hunt” feel when you visit each store. The stock has topped Wall Street’s earnings estimates for the last 13 quarters in a row.

Here’s a fact that would surprise a lot of investors. Since the beginning of 2008, Ross has done better than Amazon (AMZN). Just offering a plain-old bargain can be a great business model. Ross Stores is in a strong position to benefit from the wave of happy shoppers and sad factories.

Have you spotted the “5G” signal on your phone yet?

I’ve seen it pop up a few times in my travels. That tips me off that this technology is getting closer and closer to going nationwide. Once it does, it could transform how we do everything.

That’s why I immediately set out to find the number one 5G stock…

And I believe I found it.

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The Fed Just Cut Rates: What to Do Now

So the Federal Reserve cut interest rates. This was their third rate cut in the last three months. The new target range for overnight interest rates is 1.5 to 1.75%. That’s below the rate of inflation.

There are three things you should do right now.

#1. Don’t panic.

#2. Seriously, don’t panic.

#3. Make sure you own a broad, well-diversified portfolio of high-quality growth stocks.

I can help you with #3, but for the first two, well…you’re on your own but hopefully #3 will help.

Before I go further, let’s look at what the Fed is doing and why.

The Federal Reserve’s Game Plan

Not that long ago, the Federal Reserve was on a path of increasing interest rates. After all, the economy was slowly getting over its long hangover, and interest rates had been cut to the bone. Things were gradually getting back to normal.

In a three-year stretch, the Fed hiked interest rates nine times. Not only that but going by their public statements, they seemed on track for several more hikes. For the most part, Wall Street was cool with that.

But then it stopped, and Wall Street got scared. In the fourth quarter of last year, stocks plunged. Not only that, but stocks in economically sensitive areas really plunged. President Trump wasn’t shy about expressing his displeasure with the Federal Reserve and all those higher rates.

The key metric to watch is the yield on the two-year Treasury note. It’s not perfect, but the two-year yield can often be a decent forerunner for Fed policy. Last November, the yield on the two-year got as high as 3%. As worries about the economy and trade war set in, that yield started to plunge. By May, the two-year was below 2%, and earlier this month, it fell below 1.4%. That’s a stunning fall for such a short amount of time.

The Fed had to keep up. That’s why in late July, the Fed cut rates. They cut again in mid-September and again today. Jay Powell, the top banana at the Fed, said that this is simply a “mid-cycle” adjustment and not the start of recessionary rate-cutting splurge.

Wall Street believes him. At least for now. After today, the Fed will probably chill out on any more rate cuts, and they’ll assess how the current cuts have worked. The Fed, I should add, does not exactly have a stellar track record when it comes to forecasting the economy.

What does this mean for us? Lower rates are good news for investors for two reasons. One is that it lowers the cost of borrowing, and that’s a major expense for companies. It will also lower the cost of many variable-rate mortgages. Importantly, lower rates tend to help equity valuations. The lower rates go, the higher price/earnings ratios can rise. (Not always, but in general.)

There’s an old saying on Wall Street, “don’t fight the Fed.” That’s very true. Don’t forget; they have a lot more money. This is why investors should be following the Fed’s path.

The key insight is that lower rates help particular sectors of the economy. Basically, anything that is bought with financing; housing is the obvious example. Another area is the industrial sector.

Consider a company like 3M (MMM), formerly known as Minnesota Mining and Manufacturing. This is a classic example of an economically sensitive industrial stock.

Blue chips don’t get much bluer than 3M, and the company is a lot more than Post-It Notes. Last year, 3M had revenues of more than $32 billion. The company is a Dow component, and it has 93,000 employees all over the world.

There’s something else it has—an amazing dividend streak. 3M has raised its dividend every year for 60 years in a row. That dates back to the Eisenhower administration.

This is a good time to give 3M a close look because the stock has disappointed Wall Street this year. Just last week, the company had to lower its business forecast again. This could be 3M’s worst year for sales growth since the recession.

But remember, most of those results happened when interest rates were higher. The lower rates will help 3M and its customers. You always want to pay attention when good companies go through rough patches. Over the last two years, the S&P 500 has gained 19%, while 3M has lost 19%.

Honestly, I’m not too worried about 3M. This is one of the largest and most innovative companies in the world. 3M currently pays out a quarterly dividend of $1.44 per share or $5.76 per share for the year. That currently works out to a dividend yield of 3.4%. That’s about twice what the Fed is charging.

3M will be back, and the Federal Reserve is helping.

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Source: Investors Alley

Feds Bust Man for Running a Phony Hedge Fund from his Frat House

Earlier this month, a Georgia man pleaded guilty to securities fraud. That may not sound so unusual but bear with me.

This is unusual because even judged by the standards of great Wall Street crooks, this conman’s scam stands out.

For one, Syed Arham Arbab is hardly a would-be Master of the Universe. Instead, he’s a 22-year-old undergrad at the University of Georgia. Still, he was able to run a $1 million hedge fund, (or more accurately, Ponzi scheme), out of his frat house!

Let me repeat that again. He ran a phony hedge fund out of his fraternity house. (Whatever happened to keggers?)

I have several questions, and most of them strain credulity.

Arbab tricked 117 people into investing in his fake fund. Instead of going into stocks, the money was used for booze, gambling, and strip clubs. Shocking, I know.

Arbab admitted that he lied about his track to dozens of investors. He promised guaranteed risk-free returns of up to 56%. That’s an impressive track record even for being complete make-believe.

Arbab also confessed to the court that he told investors he was getting his MBA at the school’s Terry College of Business and that a famous NFL player and UGA alum had put money into the fund. In reality, Arbab was rejected from UGA’s MBA program, and the football player had never invested in his fund.

Ironically, the gambling and strip club was probably the closest he ever got to acting like a real hedge fund titan.

Honestly, I’m torn by stories like this. I feel bad for the victims, many of whom, I’m sure, lost their life-savings. Yet I have to wince when I think of their naivety. How could you trust a 22-year-old who was running the show out of his frat house?

The example of Arbab is a perfect counterexample to one of my favorite stocks, also based in Georgia, which is AFLAC (AFL).

When most people hear the name AFLAC, they usually think of the duck ads. By the way, that’s now considered to be a legendary marketing campaign. In a few years, AFLAC’s name recognition went from 2% to 90% thanks to those duck ads.

But what many people, especially new investors, may not realize is what a sound and well-run company the duck stock is. Consider that AFLAC has increased its dividend every year for the last 37 years in a row.

AFLAC was founded in 1955, but its remarkable success began in 1970. That’s when John Amos visited the World’s Fair in Osaka, Japan. When he got there, he was astounded by the number of people who walked around the crowded cities wearing surgical masks.

Amos instantly recognized a golden business opportunity. Amos, along with his two brothers, ran a small insurance company based in Columbus, Georgia called the American Family Life Assurance Co. He figured that if people in surgical masks wouldn’t buy insurance, no one would.

In 1974, the Japanese government awarded American Family a monopoly on Japanese cancer insurance, which is very rare for a gaijin. The only reason they got it was because no Japanese firms were interested. Today, 95% of all the listed companies in Japan offer American Family’s products.

I’m going to let you in on a little secret Wall Street doesn’t want you to know about. Although it may appear to be boring, insurance is insanely profitable. Most investors have no idea of the goldmines they ignore just because insurance is dull as dirt. Warren Buffett built his investment empire on insurance.

Business has been going quite well for AFLAC. Three months ago, the company reported it made $1.13 per share for Q2. That topped estimates by six cents per share. Dan Amos, the current CEO and John’s nephew, said the duck stock aims to buy back $1.3 to $1.7 billion worth of stock this year.

AFLAC didn’t exactly raise guidance this summer, but they said that earnings should come in at the high end of their current range, which is $4.10 to $4.30 per share. That means the shares are going for a little over 12 times this year’s earnings. Earnings are due out again on Thursday, October 24.

Look for an earnings beat from the insurance stalwart…and steer clear of any frat house “geniuses.”

President Trump’s Secret 5G Stock Nod?

President Trump is now officially on the record as saying…

“The race to 5G is a race America must win, and it’s a race, frankly, that our great companies are now involved in.”

But here’s what Wall Street and the media won’t tell you…

The great companies Trump is referring to are NOT just Verizon, Sprint, or AT&T.

New evidence suggests Trump may have been referring to this secret 5G company. It’s not a household name… but experts say it’s ready for “Amazon-like” growth.

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