Penn...After Hours
The musings of an investment professional and a happy warrior, culled from our weekly economic and investment research. These stories are for informational purposes only, and should never be construed as specific investment advice. Always consult with your investment professional before making a decision. See more disclaimers at the bottom of each page.
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Headlines for the Week of 17 Oct — 23 Oct 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Use your antagonists to help fuel your success...
While attending Yale University in 1965, a young Fred Smith wrote an economics paper outlining a new way to transport goods throughout the United States. At the time, most ordered items were still delivered through trucks—a time consuming and, in Smith's mind, inefficient process. What grade did Smith receive from his professor on the paper?
Penn Trading Desk:
Penn: Open a regional bank in the Strategic Income Portfolio
Based on the specter of rising rates and not-so-transitory inflation, we have increased our allocation within the Financials sector. To that end, we added a regional bank (Northeastern US) with a clean balance sheet and a hefty dividend yield to our income portfolio. Members, see the Trading Desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
eCommerce
10. Netflix is teaming up with Walmart to create a dedicated digital storefront on the retailing giant's website
As Netflix's (NFLX $624) subscriber growth cools, it continues to search for new revenue streams in an effort to become less reliant on the one metric analysts focus on each quarter. To that end, the company has announced a new deal with Walmart (WMT $141) which will result in a dedicated 'Netflix Hub' on the giant retailer's website. The shop will include themed merchandise from its wildly-successful "Squid Game" as well as other recent hits on the streaming service, such as "Stranger Things." Right now, Netflix receives the vast majority of its revenue from the $13.99 paid monthly (more or less, depending on subscription plan) by its 200 million subscribers around the world. The growth of that subscriber base has been leveling out, however, due to saturation and a host of new entrants in the space, from Disney+ to Amazon Prime Video. While CEO Reed Hastings said he doesn't expect the new venture to have a major impact on the company's top line, he believes the real value comes in building user engagement with and excitement for the provider's Netflix Originals, for which it currently spends over $5 billion per year developing. Netflix licenses its intellectual property to select manufacturers in exchange for a cut of the profit. As for Walmart, this deal is part of an overall strategy to increase its online Walmart Marketplace presence by teaming up with brands held in high esteem by consumers. Like the recent deal with Gap, the company hopes to broaden its customer base by attracting a new generation of consumers; primarily younger customers who might have avoided the company's site in the past.
Based on valuations and our current tilt toward more conservative names, we believe Walmart shares look more attractive right now than those of its new marketing partner, Netflix. When another downturn hits the market, we could see NFLX shares falling back into the $400s—at which time they would be worthy of another look.
Communication Services
09. Over the course of twenty years, AT&T shares have dropped 43%; is it time to buy?
Our stop-loss order on AT&T (T $26) shares finally hit this past May at $32, ending a miserable period of holding the once-great telecom company. That stop was fortuitous, as shares have dropped to $26 since we dumped them. At least we had the fat dividend yield (now at 8% based on the share price, though it will be adjusted down after spinoffs), but that is about the only positive aspect of owning the shares since we picked them up. Our super-long-term 26% gain was not worth the wait; the opportunity cost was tremendous. In fact, an investment in the S&P 500 twenty years ago would have given investors just shy of a 500% return, while the same investment in T shares would have lost nearly 50% after two decades, sans the dividend.
Enormous missteps by management—like overpaying for acquisitions they could never quite make fit into the T puzzle, and ignoring serious problems with customer service due to sheer arrogance—have brought us to this point. Other telecom companies have proven that industry flux is not the issue; poor management is the root cause. So, with the shares "dirt cheap," as some analysts have called them, is it time to bet on the storied company? The argument for purchase revolves around the company's plan to slim down and focus its efforts exclusively on telecom services, mainly its 5G wireless network. It already ditched its wildly-expensive DirecTV unit and is about to spinoff its WarnerMedia division, which will become Warner Bros. Discovery. But we have three major arguments against the bull case. First, the company still has a massive debt load of $180 billion, which will only be negligibly alleviated by the Warner spinoff. Second, the company's area of focus going forward is going to be hyper-competitive thanks to new technologies and entrants. Finally, we have about as much faith in the management team at T as we do in the team at Boeing.
It is certainly tempting to pick up shares of T at $26, but we have seen the stock languish for too long to get excited here. It may end up being a multiyear low price, but there are simply too many obstacles facing the lackluster leadership team.
Global Strategy: East/Southeast Asia
08. Evergrande, catalyst for a downturn, is a serious problem for China, not America
Few Americans had ever heard of China Evergrande Group before the company became the catalyst for a 900-point early session drop in the Dow this past Monday. Across Asia, however, the company is intimately well known—to the chagrin of millions of ordinary Chinese citizens who have their money sitting with the firm. Evergrande has tentacles enmeshed throughout a number of disparate industries, but first and foremost it is the second-largest land developer in China. Holding the moniker of the world's most indebted developer (debt now equals over $300 billion), the company has been building giant apartment complexes across China for a decade, typically selling the units to would-be owners years before they were completed. Evergrande could have been the poster child for Xi's China, showing the world that the country's growth trajectory was not flattening out. Much like the Chinese ghost towns, however, it was more Kabuki theater than reality, a show put on for the world while the internal problems continued to mount behind the scenes. Now, with hundreds of millions of dollars in interest payments due over the coming months and no cash left in the till, Evergrande teeters on the edge of insolvency.
The US markets had their early-morning panic attack due to fears of contagion: that Evergrande's pending collapse might spell another "Lehman moment." But as the week dragged on, it became clear that the Chinese Communist Party wouldn't suffer such an insult; they would step in to limit the damage. As Chinese citizens lined up at the group's banking units around the country to demand their money back, Evergrande has taken to paying off debt with unfinished housing units instead of yuan. While the CCP will be forced to make good on any payments made by its citizenry for the never-to-be-finished apartment pads, the wealthy executives at Evergrande will not find a kind and forgiving government. Nor will the millions of bondholders throughout Asia who own the junk paper issued with reckless abandon by a company with an insatiable appetite for risk and other people's money. By some accounts, Evergrande bonds make up some 10% of the entire Asian junk bond market. The pain will be felt, but not so much on this side of the globe.
China has a systemic problem of epic proportions. Ruling communists believe they can run an economy with an iron fist while simultaneously reaping the rewards of global free trade. It is impossible for these two conditions—total control and unfettered market access—to coexist. The rest of the world will come to understand that fact long before it is accepted by the Chinese government. In the meantime, it behooves both investors and the Western companies operating in China to avoid country risk by looking elsewhere for growth and opportunity.
Industrials: Transportation Infrastructure
07. After FedEx cut earnings estimates, its shares fell to a 52-week low; is this a buying opportunity?
We can't mince words: our FedEx (FDX $227) position has been a huge disappointment over the course of the past three years. In fact, the company's share price is now sitting below where it was back in September of 2018. The opportunity cost of holding the position for three years has been hefty. The latest disconcerting news came this week as management warned that earnings are being hindered by rising labor costs and lingering supply chain issues. That was enough for investors to lop another 9% off of the shares within minutes, bringing them down to a new 52-week low. As for the numbers, the company actually beat on the revenue front, earning $22 billion in the latest quarter versus $19.3 billion in the same quarter last year. The labor drag was evident, however, in the earnings per share: the company had a diluted EPS of $4.09/share for fiscal 2022 Q1 versus $4.87 for 2021 Q1. And investors were warned that the labor and supply problems would "persist longer than originally anticipated." This past summer, management expected to earn $21 per share in FY22; they have now reduced that guidance down to $20.38 per share. Compounding the problem, FedEx announced it would be raising prices effective 01 November to counter higher fuel costs. Despite the growth in revenue, investors were thrown some serious shade in the earnings report and subsequent conference call. With the current emphasis on efficiency as measured by operating margin, management simply did not deliver.
As Benjamin Graham value investors at heart, FDX shares look oversold to us. This company is not going away; in fact, we expect it to maintain its leadership role in the industry—despite the new wave of competition by former number one customer Amazon and others—for years to come. We would put a fair value on the shares north of $300, which would represent at least a 33% jump from here. After exceeding the $300 target, however, we would recommend stops to protect gains. Efficiency in this industry is only going to become more difficult going forward.
Global Strategy: Europe
06. In a messy German election which will lead to months of chaos, one thing is certain: Merkel's coalition suffered a defeat
After sixteen years in power, Angela Merkel had anointed her would-be predecessor: Armin Laschet. The only problem with that pick was the fact that Laschet was a weak, unlikeable candidate. That undeniable truth came to fruition during the weekend elections in Germany, in which Merkel's right-leaning coalition of the Christian Democratic Union and Christian Social Union received just 24% of the vote—the worst results for the alliance since the end of World War II. The leading vote-getter in the elections was the left-leaning Social Democratic Party (SPD), which scored 26% of the vote. That party is now in the driver's seat to form a new coalition with the Green Party, which garnered 15% of the vote, and the liberal Free Democratic Party, which had an 11.5% show of support. The SPD's leader, Olaf Scholz, is now in the best position to become the next chancellor of Germany, but nothing is certain. The next leader must be chosen by the German parliament, which will involve cobbling together at least three political parties in a loose coalition to garner enough votes to elect that leader. Americans tend to see their government as dysfunctional; tracking the German results makes it abundantly clear that chaos in Western elections tends to be the rule rather than the exception. Of course, this is a far more palatable situation than the controlled "election" process in places like China, Russia, North Korea, Iran, and Venezuela.
Germany, through Merkel, has been the dominant European voice for over a decade. This election will probably change that, either moving more power over to the French, or—more likely—creating a power vacuum on the continent. As the Western world tries to contain China's grand ambitions, which include taking full control of Taiwan, neither of these two outcomes are desirable. At a time when leadership from the West is most critical, we will suffer through a period of ineffectual coalitions having the power to do little of importance.
Food Products
05. Center aisles of the grocery store dead? General Mills' latest earnings report tells a different story
We have offered up effusive praise for the management team at food giant General Mills (GIS $60) in recent years, and the company's latest earnings report serves to reinforce our position. While the packaged food business may seem boring at best, or even outdated in this new era of healthy eating, this $36 billion producer of snacks, soups, cereal, yogurt, baking ingredients, and pet food beat on both the top and bottom lines. The company announced quarterly sales of $4.54 billion and earnings per share of $0.99. Both of those figures beat expectations, and were roughly in line with last year's same-quarter numbers. This is impressive in that the world was in the depths of the pandemic last year, which forced consumers out of the restaurants and back into their kitchens. As restaurants have reopened, the company has surprised analysts in its ability to maintain those numbers. Another quite remarkable feat has been the firm's ability to navigate higher commodity prices and supply chain issues; in fact, it has been forced to pass along those challenges to consumers and restaurants in the form of higher prices with very little effect on the financials. For comparison, Campbell Soup Co. (CPB $42) just reported a 4% decline in sales for the quarter ended 01 Aug. The ability to pass along higher costs while maintaining strong sales and positive net income is quite a feat for a company in this industry. The firm's Strategic Revenue Management and Holistic Margin Management programs have been working exceptionally well, hence our belief in CEO Jeff Harmening and other members of the senior management team.
GIS shares still look undervalued at $60. With its 16 P/E ratio, 3.5% dividend yield, and defensive characteristics, it continues to be a solid member of the Penn Global Leaders Club. It's relatively recent pickup of premium dog food company Blue Buffalo will also provide a nice catalyst for growth going forward.
Government Watchdog: Monetary Policy
04. There is quite a bit of disingenuousness going on right now over the topic of raising the debt ceiling
In its simplest terms, the US debt ceiling provides a limit on how much debt the US government can incur by issuing and selling new bonds. Once that limit is reached, the US Department of Treasury must find other ways to pay its bills—like the $350 billion or so due in interest payments each year to service its debt. Or, as has been the case some 75 other times since 1962, it can simply go to Congress and ask the legislative branch to wave its magic wand and increase or suspend the debt ceiling. How much money are we talking about? Right now, the US has a staggering debt load of $28.5 TRILLION. The debt ceiling level is actually $22 trillion, but it has been on a two-year suspension via Congressional action taken in the summer of 2019. These figures have been mysteriously missing in the current debate over raising the limit. We have heard lofty talk that the "US must honor its obligations," but we haven't heard the $28.5 trillion figure mentioned once.
Just how big is that number? Let's put it in perspective. The anything-but-fiscally-responsible European Union mandated that its member-states maintain a debt-to-gdp ratio of 60% or less. In other words, if the GDP of a nation were $1 trillion, it must carry no more than $600 billion in national debt. Seems reasonable, right? As of right now, the US has the largest GDP in the world, at $23 trillion. But, with a debt load of $28.5 trillion, our current debt-to-GDP ratio is 125%—more than double what the EU mandates for its member-states. In fairness, the EU is finding it virtually impossible to enforce that mandate, but also in fairness, shouldn't the level of our own debt at least be part of the discussion?
We are on an unsustainable path. There is virtually zero chance that the US debt level will ever come down again, barring a cataclysmic event. In fact, the last time it did go down year-on-year was 1957 under the Eisenhower Administration, when it was reduced from $273 billion to $271 billion. Ah, the glorious '50s. Of course, the US Congress will ultimately raise the debt ceiling once again, as nobody believes we would or should default on our debt payments. But the government cannot continue to spend $1.5 trillion more per year than is brought in via taxation. The pandemic is the most recent excuse for irresponsible fiscal behavior, but trust us, another "emergency" will manifest each subsequent year. This path is unsustainable.
The latest scheme, supported by some members of Congress such as Rashida Tlaib of Michigan, is to let the US Treasury mint a $1 trillion platinum coin, and then more as needed, avoiding the pesky legislative branch altogether. The White House has rejected this idea, but proponents have begun the #MintTheCoin movement. The saddest aspect of this warped concept is the fact that the citizens Tlaib purports to represent, the lowest income earners, are the ones hurt the most by the irresponsible level of national debt. We must stop this madness and force the government to live within its means, which means not spending $1 more per year than is brought in. That won't reduce the travesty that is the national debt, but it would at least staunch the hemorrhaging.
Medical Devices, Equipment, & Supplies
03. Warby Parker, public via a direct listing, pops 36% out of the gate
It takes a lot of confidence for a management team to take their company public via a direct listing. It is, generally speaking, on the opposite end of the spectrum from those companies which go public via a SPAC. A direct listing, which is tremendously more cost effective than the traditional IPO route, is based on the premise that a company is so well known—and liked—by the public that it doesn't need to pay for the dog and pony show put on by the likes of a Goldman Sachs or JP Morgan. Of course, if management got the pulse of investors wrong, opening day can be a disaster. Fortunately for Warby Parker (WRBY $54), that was not the case on the eyewear maker's first day of trading. From a reference price of $40, shares actually opened up 36% from that price, hitting $54.72 within minutes. At its current price, the company is valued around $7 billion, or solidly within mid-cap territory. While some companies have delayed their debut due to market volatility, it appears to be full steam ahead for Warby. And, despite September's (rather typical) volatility, we still expect a record number of companies to go pubic in the fourth quarter of the year.
Warby Parker is one of the most well-known names in the eyewear business, and we love its omnichannel business model. That being said, the reference price of $40 seems like a good point to consider jumping into the shares. In other words, wait for them to fall by about one-third and make sure they fit within the respective portfolio.
Aerospace & Defense
02. Successful test of scramjet hypersonic missile is just one more reason to take a new look at Northrop Grumman
Northrop Grumman (NOC $361), maker of the remarkably effective B-2 Spirit bomber and RQ-4 Global Hawk unmanned aircraft system (UAS), has been in a funk for the past few years. Providing a supporting role in newer systems such as Lockheed Martin's (LMT $348) F-35 Lightning II and F-22 Raptor, the company could no longer be considered a prime contractor for US air defense systems. We believe that is about to change. In 2018, management shook up the firm's space division with the brilliant acquisition of one of our favorite companies, Orbital ATK. More recently, the company—in a joint venture with Raytheon (RTX $88)—successfully tested a scramjet-powered hypersonic cruise missile on course to become a key component of America's strategic defense network. The Northrop Grumman B-21 Raider, a long-range stealth strategic bomber capable of carrying a heavy payload of conventional and thermonuclear bombs, is scheduled to enter service within the next five years, complimenting and ultimately replacing the B-1 Lancer, B-2 Spirit, and B-52 Stratofortress.
Of these new programs, we are most bullish on the company's efforts in the UAV arena. The United States Air Force has a strategic plan built around five new technologies, collectively known as the Next-Generation Air Dominance (NGAD) programs. It is fair to say that unmanned aerial vehicles will be a major focal point of this plan, leaving Northrop Grumman in an excellent position to regain its prime supplier role.
The national defense threat posed by an economically growing and increasingly-aggressive Communist China and its allies in North Korea, Russia, and Iran makes it abundantly clear that the aerospace and defense industry should be an important part of an investor's portfolio. While we currently hold Raytheon and Lockheed Martin in the Global Leaders Club, and Aerojet Rocketdyne (AJRD) and Astronics (ATRO) in the New Frontier Fund, we are impressed by Northrop Grumman's efforts to regain a leadership role in the industry. We fully expect the company's shares to experience impressive growth over the next few years, perhaps hitting the $500 range in the not-too-distant future. The company's low multiple and pipeline of projects support that thesis.
Market Pulse
01. September was terrible and October opened with spooky volatility, but several factors point to a positive fourth quarter
Just to keep the market's recent pullback in perspective, we looked back at our start-of-the-year prediction of where the S&P would end up in 2021: 4,300. That would have meant a healthy 14.5% return for the year. Despite the ugly September the markets suffered through (September is historically the worst month of the year), we went into October with the S&P 500 sitting at 4,308, or eight points above where we expected it to be by the end of December. Furthermore, a fresh wave of volatility has gripped the first week of the new quarter. Does that mean we now expect a flat Q4? Not at all. The cause for the negative quarter was, overwhelmingly, the virus's Delta variant and the subsequent global supply chain issues. While this new strain constricted our massive economic comeback, we believe the new therapies being rolled out by Merck (MRK $81), Pfizer (PFE $43), and others, as well as quick, at-home testing kits by the likes of Abbott Labs (ABT $117), will have us back on track in short order. Of course, we still have the fiscal battle in Washington playing out through the end of the year, but one party, for all intents and purposes, controls both houses and the White House, so something will get done. Fortunately, a few moderate Democrats will make sure that the president's $3.5 trillion budget wish list gets pared back before offering up their votes, but don't expect a government shutdown this time around. Do, however, expect another few trillion to get added to our irresponsibly-monstrous national debt.
Small caps, as represented by the Russell 2000, got hammered in September. This is a good area to start looking for bargains, especially on heavy down days. Stick with value plays showing rock-solid earnings and staple offerings—those which cannot be easily replaced (or discarded) by budget-wary consumers. Industrials and health care are two strong sectors to overweight in the fourth quarter; some low-multiple utilities plays also look attractive. And remember, cash is an asset class. As such, even the most aggressive portfolio should have a fair representation of cash and cash equivalents.
Under the Radar Investment
KT Corp (KT $14)
KT corp is the largest fixed-line telecom operator in South Korea, boasting some 15 million customers. It is also the largest broadband firm in the country (9M customers) and second-largest wireless operator (22.3M customers). About one-third of KT's services revenue is generated from its growing wireless business. Growth drivers for the firm include its push into IPTV (Internet protocol TV, think "cord cutters") as well as income from its impressive real estate business. Other business lines include IT services, e-commerce, and financial services. Last year the firm earned $600 million on $20 billion in revenues. KT has a single-digit P/E ratio and a 4.43% dividend yield. A potential method for checking off four portfolio boxes: international, mid-cap, communications services, and dividend generator.
Answer
Admittedly, Smith said he did not go into too much detail on his paper outlining a new way to move important items around the US, as he was on a time constraint to get his assignment done. This factor probably led to the "C" letter grade his econ professor gave him for the work. The concept stuck in Fred Smith's mind, however, and soon after returning from duty in the Vietnam War in 1971, he officially launched the Federal Express Corporation.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Use your antagonists to help fuel your success...
While attending Yale University in 1965, a young Fred Smith wrote an economics paper outlining a new way to transport goods throughout the United States. At the time, most ordered items were still delivered through trucks—a time consuming and, in Smith's mind, inefficient process. What grade did Smith receive from his professor on the paper?
Penn Trading Desk:
Penn: Open a regional bank in the Strategic Income Portfolio
Based on the specter of rising rates and not-so-transitory inflation, we have increased our allocation within the Financials sector. To that end, we added a regional bank (Northeastern US) with a clean balance sheet and a hefty dividend yield to our income portfolio. Members, see the Trading Desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
eCommerce
10. Netflix is teaming up with Walmart to create a dedicated digital storefront on the retailing giant's website
As Netflix's (NFLX $624) subscriber growth cools, it continues to search for new revenue streams in an effort to become less reliant on the one metric analysts focus on each quarter. To that end, the company has announced a new deal with Walmart (WMT $141) which will result in a dedicated 'Netflix Hub' on the giant retailer's website. The shop will include themed merchandise from its wildly-successful "Squid Game" as well as other recent hits on the streaming service, such as "Stranger Things." Right now, Netflix receives the vast majority of its revenue from the $13.99 paid monthly (more or less, depending on subscription plan) by its 200 million subscribers around the world. The growth of that subscriber base has been leveling out, however, due to saturation and a host of new entrants in the space, from Disney+ to Amazon Prime Video. While CEO Reed Hastings said he doesn't expect the new venture to have a major impact on the company's top line, he believes the real value comes in building user engagement with and excitement for the provider's Netflix Originals, for which it currently spends over $5 billion per year developing. Netflix licenses its intellectual property to select manufacturers in exchange for a cut of the profit. As for Walmart, this deal is part of an overall strategy to increase its online Walmart Marketplace presence by teaming up with brands held in high esteem by consumers. Like the recent deal with Gap, the company hopes to broaden its customer base by attracting a new generation of consumers; primarily younger customers who might have avoided the company's site in the past.
Based on valuations and our current tilt toward more conservative names, we believe Walmart shares look more attractive right now than those of its new marketing partner, Netflix. When another downturn hits the market, we could see NFLX shares falling back into the $400s—at which time they would be worthy of another look.
Communication Services
09. Over the course of twenty years, AT&T shares have dropped 43%; is it time to buy?
Our stop-loss order on AT&T (T $26) shares finally hit this past May at $32, ending a miserable period of holding the once-great telecom company. That stop was fortuitous, as shares have dropped to $26 since we dumped them. At least we had the fat dividend yield (now at 8% based on the share price, though it will be adjusted down after spinoffs), but that is about the only positive aspect of owning the shares since we picked them up. Our super-long-term 26% gain was not worth the wait; the opportunity cost was tremendous. In fact, an investment in the S&P 500 twenty years ago would have given investors just shy of a 500% return, while the same investment in T shares would have lost nearly 50% after two decades, sans the dividend.
Enormous missteps by management—like overpaying for acquisitions they could never quite make fit into the T puzzle, and ignoring serious problems with customer service due to sheer arrogance—have brought us to this point. Other telecom companies have proven that industry flux is not the issue; poor management is the root cause. So, with the shares "dirt cheap," as some analysts have called them, is it time to bet on the storied company? The argument for purchase revolves around the company's plan to slim down and focus its efforts exclusively on telecom services, mainly its 5G wireless network. It already ditched its wildly-expensive DirecTV unit and is about to spinoff its WarnerMedia division, which will become Warner Bros. Discovery. But we have three major arguments against the bull case. First, the company still has a massive debt load of $180 billion, which will only be negligibly alleviated by the Warner spinoff. Second, the company's area of focus going forward is going to be hyper-competitive thanks to new technologies and entrants. Finally, we have about as much faith in the management team at T as we do in the team at Boeing.
It is certainly tempting to pick up shares of T at $26, but we have seen the stock languish for too long to get excited here. It may end up being a multiyear low price, but there are simply too many obstacles facing the lackluster leadership team.
Global Strategy: East/Southeast Asia
08. Evergrande, catalyst for a downturn, is a serious problem for China, not America
Few Americans had ever heard of China Evergrande Group before the company became the catalyst for a 900-point early session drop in the Dow this past Monday. Across Asia, however, the company is intimately well known—to the chagrin of millions of ordinary Chinese citizens who have their money sitting with the firm. Evergrande has tentacles enmeshed throughout a number of disparate industries, but first and foremost it is the second-largest land developer in China. Holding the moniker of the world's most indebted developer (debt now equals over $300 billion), the company has been building giant apartment complexes across China for a decade, typically selling the units to would-be owners years before they were completed. Evergrande could have been the poster child for Xi's China, showing the world that the country's growth trajectory was not flattening out. Much like the Chinese ghost towns, however, it was more Kabuki theater than reality, a show put on for the world while the internal problems continued to mount behind the scenes. Now, with hundreds of millions of dollars in interest payments due over the coming months and no cash left in the till, Evergrande teeters on the edge of insolvency.
The US markets had their early-morning panic attack due to fears of contagion: that Evergrande's pending collapse might spell another "Lehman moment." But as the week dragged on, it became clear that the Chinese Communist Party wouldn't suffer such an insult; they would step in to limit the damage. As Chinese citizens lined up at the group's banking units around the country to demand their money back, Evergrande has taken to paying off debt with unfinished housing units instead of yuan. While the CCP will be forced to make good on any payments made by its citizenry for the never-to-be-finished apartment pads, the wealthy executives at Evergrande will not find a kind and forgiving government. Nor will the millions of bondholders throughout Asia who own the junk paper issued with reckless abandon by a company with an insatiable appetite for risk and other people's money. By some accounts, Evergrande bonds make up some 10% of the entire Asian junk bond market. The pain will be felt, but not so much on this side of the globe.
China has a systemic problem of epic proportions. Ruling communists believe they can run an economy with an iron fist while simultaneously reaping the rewards of global free trade. It is impossible for these two conditions—total control and unfettered market access—to coexist. The rest of the world will come to understand that fact long before it is accepted by the Chinese government. In the meantime, it behooves both investors and the Western companies operating in China to avoid country risk by looking elsewhere for growth and opportunity.
Industrials: Transportation Infrastructure
07. After FedEx cut earnings estimates, its shares fell to a 52-week low; is this a buying opportunity?
We can't mince words: our FedEx (FDX $227) position has been a huge disappointment over the course of the past three years. In fact, the company's share price is now sitting below where it was back in September of 2018. The opportunity cost of holding the position for three years has been hefty. The latest disconcerting news came this week as management warned that earnings are being hindered by rising labor costs and lingering supply chain issues. That was enough for investors to lop another 9% off of the shares within minutes, bringing them down to a new 52-week low. As for the numbers, the company actually beat on the revenue front, earning $22 billion in the latest quarter versus $19.3 billion in the same quarter last year. The labor drag was evident, however, in the earnings per share: the company had a diluted EPS of $4.09/share for fiscal 2022 Q1 versus $4.87 for 2021 Q1. And investors were warned that the labor and supply problems would "persist longer than originally anticipated." This past summer, management expected to earn $21 per share in FY22; they have now reduced that guidance down to $20.38 per share. Compounding the problem, FedEx announced it would be raising prices effective 01 November to counter higher fuel costs. Despite the growth in revenue, investors were thrown some serious shade in the earnings report and subsequent conference call. With the current emphasis on efficiency as measured by operating margin, management simply did not deliver.
As Benjamin Graham value investors at heart, FDX shares look oversold to us. This company is not going away; in fact, we expect it to maintain its leadership role in the industry—despite the new wave of competition by former number one customer Amazon and others—for years to come. We would put a fair value on the shares north of $300, which would represent at least a 33% jump from here. After exceeding the $300 target, however, we would recommend stops to protect gains. Efficiency in this industry is only going to become more difficult going forward.
Global Strategy: Europe
06. In a messy German election which will lead to months of chaos, one thing is certain: Merkel's coalition suffered a defeat
After sixteen years in power, Angela Merkel had anointed her would-be predecessor: Armin Laschet. The only problem with that pick was the fact that Laschet was a weak, unlikeable candidate. That undeniable truth came to fruition during the weekend elections in Germany, in which Merkel's right-leaning coalition of the Christian Democratic Union and Christian Social Union received just 24% of the vote—the worst results for the alliance since the end of World War II. The leading vote-getter in the elections was the left-leaning Social Democratic Party (SPD), which scored 26% of the vote. That party is now in the driver's seat to form a new coalition with the Green Party, which garnered 15% of the vote, and the liberal Free Democratic Party, which had an 11.5% show of support. The SPD's leader, Olaf Scholz, is now in the best position to become the next chancellor of Germany, but nothing is certain. The next leader must be chosen by the German parliament, which will involve cobbling together at least three political parties in a loose coalition to garner enough votes to elect that leader. Americans tend to see their government as dysfunctional; tracking the German results makes it abundantly clear that chaos in Western elections tends to be the rule rather than the exception. Of course, this is a far more palatable situation than the controlled "election" process in places like China, Russia, North Korea, Iran, and Venezuela.
Germany, through Merkel, has been the dominant European voice for over a decade. This election will probably change that, either moving more power over to the French, or—more likely—creating a power vacuum on the continent. As the Western world tries to contain China's grand ambitions, which include taking full control of Taiwan, neither of these two outcomes are desirable. At a time when leadership from the West is most critical, we will suffer through a period of ineffectual coalitions having the power to do little of importance.
Food Products
05. Center aisles of the grocery store dead? General Mills' latest earnings report tells a different story
We have offered up effusive praise for the management team at food giant General Mills (GIS $60) in recent years, and the company's latest earnings report serves to reinforce our position. While the packaged food business may seem boring at best, or even outdated in this new era of healthy eating, this $36 billion producer of snacks, soups, cereal, yogurt, baking ingredients, and pet food beat on both the top and bottom lines. The company announced quarterly sales of $4.54 billion and earnings per share of $0.99. Both of those figures beat expectations, and were roughly in line with last year's same-quarter numbers. This is impressive in that the world was in the depths of the pandemic last year, which forced consumers out of the restaurants and back into their kitchens. As restaurants have reopened, the company has surprised analysts in its ability to maintain those numbers. Another quite remarkable feat has been the firm's ability to navigate higher commodity prices and supply chain issues; in fact, it has been forced to pass along those challenges to consumers and restaurants in the form of higher prices with very little effect on the financials. For comparison, Campbell Soup Co. (CPB $42) just reported a 4% decline in sales for the quarter ended 01 Aug. The ability to pass along higher costs while maintaining strong sales and positive net income is quite a feat for a company in this industry. The firm's Strategic Revenue Management and Holistic Margin Management programs have been working exceptionally well, hence our belief in CEO Jeff Harmening and other members of the senior management team.
GIS shares still look undervalued at $60. With its 16 P/E ratio, 3.5% dividend yield, and defensive characteristics, it continues to be a solid member of the Penn Global Leaders Club. It's relatively recent pickup of premium dog food company Blue Buffalo will also provide a nice catalyst for growth going forward.
Government Watchdog: Monetary Policy
04. There is quite a bit of disingenuousness going on right now over the topic of raising the debt ceiling
In its simplest terms, the US debt ceiling provides a limit on how much debt the US government can incur by issuing and selling new bonds. Once that limit is reached, the US Department of Treasury must find other ways to pay its bills—like the $350 billion or so due in interest payments each year to service its debt. Or, as has been the case some 75 other times since 1962, it can simply go to Congress and ask the legislative branch to wave its magic wand and increase or suspend the debt ceiling. How much money are we talking about? Right now, the US has a staggering debt load of $28.5 TRILLION. The debt ceiling level is actually $22 trillion, but it has been on a two-year suspension via Congressional action taken in the summer of 2019. These figures have been mysteriously missing in the current debate over raising the limit. We have heard lofty talk that the "US must honor its obligations," but we haven't heard the $28.5 trillion figure mentioned once.
Just how big is that number? Let's put it in perspective. The anything-but-fiscally-responsible European Union mandated that its member-states maintain a debt-to-gdp ratio of 60% or less. In other words, if the GDP of a nation were $1 trillion, it must carry no more than $600 billion in national debt. Seems reasonable, right? As of right now, the US has the largest GDP in the world, at $23 trillion. But, with a debt load of $28.5 trillion, our current debt-to-GDP ratio is 125%—more than double what the EU mandates for its member-states. In fairness, the EU is finding it virtually impossible to enforce that mandate, but also in fairness, shouldn't the level of our own debt at least be part of the discussion?
We are on an unsustainable path. There is virtually zero chance that the US debt level will ever come down again, barring a cataclysmic event. In fact, the last time it did go down year-on-year was 1957 under the Eisenhower Administration, when it was reduced from $273 billion to $271 billion. Ah, the glorious '50s. Of course, the US Congress will ultimately raise the debt ceiling once again, as nobody believes we would or should default on our debt payments. But the government cannot continue to spend $1.5 trillion more per year than is brought in via taxation. The pandemic is the most recent excuse for irresponsible fiscal behavior, but trust us, another "emergency" will manifest each subsequent year. This path is unsustainable.
The latest scheme, supported by some members of Congress such as Rashida Tlaib of Michigan, is to let the US Treasury mint a $1 trillion platinum coin, and then more as needed, avoiding the pesky legislative branch altogether. The White House has rejected this idea, but proponents have begun the #MintTheCoin movement. The saddest aspect of this warped concept is the fact that the citizens Tlaib purports to represent, the lowest income earners, are the ones hurt the most by the irresponsible level of national debt. We must stop this madness and force the government to live within its means, which means not spending $1 more per year than is brought in. That won't reduce the travesty that is the national debt, but it would at least staunch the hemorrhaging.
Medical Devices, Equipment, & Supplies
03. Warby Parker, public via a direct listing, pops 36% out of the gate
It takes a lot of confidence for a management team to take their company public via a direct listing. It is, generally speaking, on the opposite end of the spectrum from those companies which go public via a SPAC. A direct listing, which is tremendously more cost effective than the traditional IPO route, is based on the premise that a company is so well known—and liked—by the public that it doesn't need to pay for the dog and pony show put on by the likes of a Goldman Sachs or JP Morgan. Of course, if management got the pulse of investors wrong, opening day can be a disaster. Fortunately for Warby Parker (WRBY $54), that was not the case on the eyewear maker's first day of trading. From a reference price of $40, shares actually opened up 36% from that price, hitting $54.72 within minutes. At its current price, the company is valued around $7 billion, or solidly within mid-cap territory. While some companies have delayed their debut due to market volatility, it appears to be full steam ahead for Warby. And, despite September's (rather typical) volatility, we still expect a record number of companies to go pubic in the fourth quarter of the year.
Warby Parker is one of the most well-known names in the eyewear business, and we love its omnichannel business model. That being said, the reference price of $40 seems like a good point to consider jumping into the shares. In other words, wait for them to fall by about one-third and make sure they fit within the respective portfolio.
Aerospace & Defense
02. Successful test of scramjet hypersonic missile is just one more reason to take a new look at Northrop Grumman
Northrop Grumman (NOC $361), maker of the remarkably effective B-2 Spirit bomber and RQ-4 Global Hawk unmanned aircraft system (UAS), has been in a funk for the past few years. Providing a supporting role in newer systems such as Lockheed Martin's (LMT $348) F-35 Lightning II and F-22 Raptor, the company could no longer be considered a prime contractor for US air defense systems. We believe that is about to change. In 2018, management shook up the firm's space division with the brilliant acquisition of one of our favorite companies, Orbital ATK. More recently, the company—in a joint venture with Raytheon (RTX $88)—successfully tested a scramjet-powered hypersonic cruise missile on course to become a key component of America's strategic defense network. The Northrop Grumman B-21 Raider, a long-range stealth strategic bomber capable of carrying a heavy payload of conventional and thermonuclear bombs, is scheduled to enter service within the next five years, complimenting and ultimately replacing the B-1 Lancer, B-2 Spirit, and B-52 Stratofortress.
Of these new programs, we are most bullish on the company's efforts in the UAV arena. The United States Air Force has a strategic plan built around five new technologies, collectively known as the Next-Generation Air Dominance (NGAD) programs. It is fair to say that unmanned aerial vehicles will be a major focal point of this plan, leaving Northrop Grumman in an excellent position to regain its prime supplier role.
The national defense threat posed by an economically growing and increasingly-aggressive Communist China and its allies in North Korea, Russia, and Iran makes it abundantly clear that the aerospace and defense industry should be an important part of an investor's portfolio. While we currently hold Raytheon and Lockheed Martin in the Global Leaders Club, and Aerojet Rocketdyne (AJRD) and Astronics (ATRO) in the New Frontier Fund, we are impressed by Northrop Grumman's efforts to regain a leadership role in the industry. We fully expect the company's shares to experience impressive growth over the next few years, perhaps hitting the $500 range in the not-too-distant future. The company's low multiple and pipeline of projects support that thesis.
Market Pulse
01. September was terrible and October opened with spooky volatility, but several factors point to a positive fourth quarter
Just to keep the market's recent pullback in perspective, we looked back at our start-of-the-year prediction of where the S&P would end up in 2021: 4,300. That would have meant a healthy 14.5% return for the year. Despite the ugly September the markets suffered through (September is historically the worst month of the year), we went into October with the S&P 500 sitting at 4,308, or eight points above where we expected it to be by the end of December. Furthermore, a fresh wave of volatility has gripped the first week of the new quarter. Does that mean we now expect a flat Q4? Not at all. The cause for the negative quarter was, overwhelmingly, the virus's Delta variant and the subsequent global supply chain issues. While this new strain constricted our massive economic comeback, we believe the new therapies being rolled out by Merck (MRK $81), Pfizer (PFE $43), and others, as well as quick, at-home testing kits by the likes of Abbott Labs (ABT $117), will have us back on track in short order. Of course, we still have the fiscal battle in Washington playing out through the end of the year, but one party, for all intents and purposes, controls both houses and the White House, so something will get done. Fortunately, a few moderate Democrats will make sure that the president's $3.5 trillion budget wish list gets pared back before offering up their votes, but don't expect a government shutdown this time around. Do, however, expect another few trillion to get added to our irresponsibly-monstrous national debt.
Small caps, as represented by the Russell 2000, got hammered in September. This is a good area to start looking for bargains, especially on heavy down days. Stick with value plays showing rock-solid earnings and staple offerings—those which cannot be easily replaced (or discarded) by budget-wary consumers. Industrials and health care are two strong sectors to overweight in the fourth quarter; some low-multiple utilities plays also look attractive. And remember, cash is an asset class. As such, even the most aggressive portfolio should have a fair representation of cash and cash equivalents.
Under the Radar Investment
KT Corp (KT $14)
KT corp is the largest fixed-line telecom operator in South Korea, boasting some 15 million customers. It is also the largest broadband firm in the country (9M customers) and second-largest wireless operator (22.3M customers). About one-third of KT's services revenue is generated from its growing wireless business. Growth drivers for the firm include its push into IPTV (Internet protocol TV, think "cord cutters") as well as income from its impressive real estate business. Other business lines include IT services, e-commerce, and financial services. Last year the firm earned $600 million on $20 billion in revenues. KT has a single-digit P/E ratio and a 4.43% dividend yield. A potential method for checking off four portfolio boxes: international, mid-cap, communications services, and dividend generator.
Answer
Admittedly, Smith said he did not go into too much detail on his paper outlining a new way to move important items around the US, as he was on a time constraint to get his assignment done. This factor probably led to the "C" letter grade his econ professor gave him for the work. The concept stuck in Fred Smith's mind, however, and soon after returning from duty in the Vietnam War in 1971, he officially launched the Federal Express Corporation.
Headlines for the Week of 29 Aug—04 Sep 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Turning point of the American Revolution...
Despite Washington's impressive Revolutionary War victory against the German Hessians on December 26th, 1776 in the town of Trenton, there wasn't much to celebrate during the brutal months to come. What stunning victory began to turn the tide in favor of the Americans and convinced the French to join the fight against their longstanding nemesis, Great Britain?
Penn Trading Desk:
Penn: Changes to mining companies within the Global Leaders Club
After performing a review of the Metals & Mining industry, we are removing the two gold miners currently in the Penn Global Leaders Club and replacing them with an alternate name. Instead of an outright sell order, we recommend placing stops on the current positions slightly below their current respective prices. Members, see the Trading Desk for specific instructions. As always, clients of Penn Wealth Management, our Registered Investment Advisory service and a separate entity, will automatically have these actions taken.
JP Morgan: Add Sunrun to "U.S. Analyst Focus List"
JP Morgan just added $10 billion solar energy and storage company Sunrun (RUN $47) to its highest conviction group of names, the U.S. Analyst Focus List. Analyst Mark Strouse likes the fundamentals for the industry over the medium and long term, and believes supply constraints will ease in the second half of the year. While the risk, as measured by beta, is a quite large 2.089, the median target share price among analysts covering the stock is $76.53, or 62% higher from here. We listed some of our favorite clean energy plays in a recent Penn Wealth Report.
Cowen: Raise rating and price target on Textron
Citing a strong comeback in the demand for business jets and the nascent civilian VTOL (vertical take-off and landing) movement, Cowen has raised its rating on aviation firm Textron from Market Perform to Outperform, and has adjusted its target price for TXT shares from $75 to $95. That is a street high, with Morningstar taking the opposite side of the bet with its one-star rating and $42 per share target price. The average price target among the eleven analysts weighing in on the Rhode Island-based firm is $78 per share.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Cryptocurrencies
10. In a refreshing twist, Coinbase's CEO fires back at SEC
We are ambivalent with respect to cryptos: their future as a means of exchange feels certain, but the industry is going through its Wild West phase right now, with plenty of risks and opportunities for investors. We are equally ambivalent about the SEC (and most other government agencies as well): they enforce needed guardrails, yet they too often create more problems than they resolve. Which leads to the brouhaha going on right now between the SEC and Coinbase (COIN $257), the leading crypto exchange platform in the United States and a current member of the Penn Intrepid Trading Platform. Shares of the exchange fell sharply this week as the SEC warned that it planned to sue if the company forged ahead with plans to allow its users—of which it currently boasts some 68 million—to earn interest by lending crypto assets. Apparently the SEC believes that privilege should rest solely in the hands of the banks. It is crystal clear that current SEC Chairman Gary Gensler plans on doing battle with a host of financial services companies during his reign, with cryptos, perhaps, being his number one target.
When a company receives a Wells Notice, a formal notice from the SEC informing the recipient that the agency is preparing enforcement actions, it is traditional to stay relatively mum; certainly not to stir the pot. Apparently, Coinbase CEO Brian Armstrong is taking a page from Elon Musk's playbook, as he remained anything but mum following the announcement. In what Bloomberg described as "a rant" and "a fit" (it was neither, Bloomberg), Armstrong unloaded on the commission. In one tweet, the dynamic CEO noted "Some really sketchy behavior coming out of the SEC recently. Story time...." Ironically, it was Coinbase's willingness to share its plans for the new lending platform with the SEC—instead of pushing ahead and implementing the plan—which instigated the threats from the government body. Instead of a few polite questions to delve further into how the process would work, the SEC, i.e. Gensler, took the very public action of issuing the Wells Notice. Not cool, SEC. Jesse Powell, co-founder of the crypto exchange Kraken, came to Armstrong's defense in his own series of tweets: "We won't tell you why we think your product is illegal but we will tell you that there is no path to making it legal. Disagree? Go ahead and see what happens." CEOs daring to fight back against government regulators? Brilliant! While the zeitgeist seems to consist of corporate heads cowardly genuflecting to any and all social movements looking their way, it is refreshing to see a little gutsy pushback against the tactics of bullies. That used to be called The American Spirit.
Despite the SEC-caused downturn in the stock, our COIN position is still up 10% since purchase. We fully expect the firm to weather this storm. We doubt the SEC fully understands how the crypto exchanges even work, so it will buy some time while the government attorneys attempt to get up to speed. After that, let the lengthy court battles begin.
Beverages & Tobacco
09. Tilray's convoluted effort to get its foot in the door of the US cannabis market
We have mentioned before our deep respect for Irwin Simon, founder of Hain Celestial (HAIN $40) and current CEO of Canadian cannabis company Tilray (TLRY $14). That being said, we do not currently own any specific cannabis names within any of the Penn portfolios. It's not that we don't believe in the future of the industry from an investment standpoint; we are simply waiting for the winners to break free from the inevitable losers. We expect Tilray to be a long-term player, but it doesn't yet have the ability to crack the lucrative US market. The company is trying to change that. As a Canadian cannabis company dual listed on the Toronto Exchange and the Nasdaq, the fact that cannabis is still illegal in the US at the federal level precludes Tilray from setting up operations south of their current border. So, in a complex, circuitous route, management just made a very interesting move. They acquired around $170 million of convertible MedMen (MMNFF $0.29) debt through a new limited partnership, with the debt's maturity date being extended out through August of 2028. MedMen is the preeminent cannabis player in the US, with access to roughly 50% of the total addressable (legal) market. The firm has major operations in California, Nevada, and New York. What does this mean for Tilray? The company's CEO made it pretty clear in recent comments: he believes that his Canadian entity will be able to acquire control of MedMen once cannabis is legalized at the federal level. Acquiring $170 million in debt for a micro-cap player in the US may not seem that big of a deal, but we fully expect the adroit Simon to leverage it into a major piece of the action as the domestic market for cannabis expands.
While we have played with positions in Tilray as well as Canopy Growth Corp (CGC $18), another major Canadian player, we have yet to add a cannabis company to a portfolio. MedMen may look attractive to some investors, but its current $0.29 share price represents a dramatic fall from the high of $1.47 it hit in February of this year. All of these firms remain huge money losers, though the space is worth keeping an eye on.
Aerospace & Defense
08. The last major aviation market refusing to lift ban on 737 MAX should come as no surprise
We have certainly given aircraft maker Boeing (BA $218) a lot of grief over the past two years, but this is a story more about politics than aviation prowess. Most other major aviation markets lifted the ban on the Boeing 737 MAX late last year or early in 2021, with two notable exceptions: India and China. This week, India's Directorate General of Civil Aviation announced that the model has received the green light to resume operations in that country, leaving only China's ban in place. Boeing's management team clearly believes the Chinese market is crucial for the company's growth story going forward, with one-fifth of the firm's aircraft deliveries since 2017 heading to the communist nation. But the trade war, the pandemic, and China's own economic ambitions have strongly constricted sales, leaving primarily Airbus (EADSY $34) to pick up the slack. China wants that situation to change as well, touting its own manufacturer, the Commercial Aircraft Corporation of China, or Comac. The company's nascent efforts, the ARJ21 and the C919—the latter of which it hopes can go head to head with the 737 MAX and the Airbus A320, have been riddled with defects and delays. The problems have kept would-be buyers at bay, despite the C919 selling for about half as much ($50 million) as the Airbus A320neo. Nonetheless, China, through its Belt and Road infrastructure initiative, will pump as much money as needed into Comac until it shows signs of life. As for the MAX, China would love to have Comac's C919 step in to fill the void, but it is unlikely that will happen anytime soon. Expect a lift on the ban to come—out of pure necessity—by the end of the year.
Boeing is facing a host of serious problems; a new competitor in the form of a state-sponsored Chinese aircraft manufacturer is one we haven't even touched on before. CEO David Calhoun is actively pushing the Biden administration to urge China to lift its ban on the MAX, but what really needs to be taking place is more activism in the ranks of BA shareholders to force an overhaul of Boeing's board of directors—including its president and CEO—Calhoun.
Demographics & Lifestyle
07. China limits videogame usage to three hours per week for minors, no play Monday through Thursday
Our first thought was, "Imagine trying to implement such a law in the U.S." China, as part of its latest salvo against industries it deems harmful to the collective cause, has issued a rather remarkable decree: minors—we are assuming that means youth under the age of eighteen—are hereby forbidden from playing videogames Monday through Thursday, and will limit their play to a maximum of one hour per day on Fridays, weekends, and public holidays, between the hours of 8 p.m. and 9 p.m. The ruling communist party claims that the "youth videogame addiction" is distracting young people from their responsibilities to school and family. How on earth does the government plan on enforcing this new dictate? Since the government controls the tech companies which operate in China, and these companies can control users via login credentials, the task isn't as herculean as it may seem. Just how granular is the government willing to get with respect to controlling its population? A few years back, videogame players between the ages of 16 and 18 were told that they could not spend over 400 yuan (about $60) per month on the purchase of new games.
At first blush, we imagine many Americans applaud such a move to restrict the brain-numbing play of videogames by a country's youth. However, a government which can and will control such a mundane aspect of life will never reach a level of satisfaction; lines in the sand will be just that, and they will be redrawn at the whim of the ruling members of the party. Personal freedoms will continue to wither away until an inevitable clash occurs between the masses being controlled and the elites who are imposing the draconian standards. China believes it can simultaneously control and feast off of the golden goose of economic prosperity. That faulty logic stems from the incredible level of arrogance and hubris which communism foments among its ruling class. The short-term pain we so often experience in a democracy is allowed to mushroom out of control within a closed society. Despite the lessons of the past, this is a condition lost on many within the financial media; journalists who eagerly regurgitate what the state-controlled media in China feeds them. As for the Chinese Internet companies which so many investors have been wantonly rushing into, many are now sitting 50% below their February highs on the heels of this latest government crackdown.
Application & Systems Software
06. Skittish investors drive Zoom Video shares down 25% in August
It is hard to believe, but it was just one year ago that investors were betting the farm on the future of Zoom Video Communications (ZM $289), driving shares up to astronomical valuations. After all, the company just happened to offer the exact right services at precisely the right time: a way for teachers to connect with students and for management to collaborate with workers in a world where schools and offices had been shut down due to the pandemic. It's not as though the company won't continue to excel, or that the health threat is behind us; it's more a case of investors' euphoria giving way to the reality of kids and workers going back to their respective schools and offices. Tuesday accounted for the second-largest one-day drop in Zoom's short history, with shares falling 17%, but August has been particularly brutal as the company lost about one-quarter of its market cap. But was it ever really deserving of the $160 billion market cap it held in October of last year, and does $86 billion signal a golden buying opportunity? The answer to both questions is, in our opinion, "no." Putting its size in perspective, ZM is nestled between banking stalwart US Bancorp (USB) and aerospace giant Lockheed Martin (LMT). That's hard to justify; but, then again, it makes more sense that AMC Entertainment (AMC) having a $24 billion market cap. (The latter was a $450 million company teetering on the brink of bankruptcy going into this year.)
Ironically, Zoom's big drop came after the company reported revenue of over $1 billion in the second quarter of the year, handily topping estimates. That figure represents a 54% gain over the same quarter last year, and a 700% gain over the same quarter in 2019. It was the guidance, however, that spooked investors. Subscribers are dropping off at an unexpected rate, and management warned that revenues would probably remain flat through the end of the year. Even after the August drop, Zoom's P/E ratio is still a lofty 100, but at least it has a multiple—unlike AMC.
We have a lot of respect for Zoom and its management team, and the company's long-term viability is not in question. However, there are so many other massive competitors getting into the space—from Microsoft to Google to Cisco—that it will be a street fight going forward. As the firm rolls out new services, such as Zoom Phone, it will grow into its multiple, but that would indicate it is rather fairly valued right around where it sits today.
Capital Markets
05. Robinhood investors should be concerned about recent comments made by the new SEC chairman
I recall would-be clients, early in my career, telling me that "we own American Century no-load mutual funds, so we don't pay any fees." My retort was always the same: "I wonder how they paid for those two beautiful towers where their headquarters is located, or how they pay their staff?" In reality, despite the flowery ads designed to make us think that a company's sole existence is to help others, it's always about the money. I thought of those comments, made to me in the late 1990s, as I read about the latest threat to newly-public Robinhood Markets (HOOD $44). As the financial services platform offers customers commission-free trading, where does the revenue come from? Overwhelmingly, the answer lies in something called payments for order flow (PFOF).
When a customer wishes to buy or sell shares of a company or to trade options, the broker—be it Robinhood, Schwab, or a host of others—forwards the trade to a market maker. Historically, these intermediaries were at the major exchanges, such as the New York Stock Exchange. More recently, however, a slew of off-exchange market makers have popped up and are now responsible for over half of all retail trades placed. They make their money off of the difference between what they pay to buy the requested shares and what they sell them for seconds later—the spread. Understandably, the higher the volume of orders flowing through a market maker, the more profit to be made. Since companies like Robinhood can choose who handles a given trade, these third-party market makers have been offering to share a percentage of the spread with the brokers; hence, payments for order flow. In one month alone, Robinhood reportedly generated $100 million in revenue via this practice.
Many of the larger brokerages, such as Fidelity and Interactive Brokers, generally refuse to accept PFOF. In fact, countries like Canada, Australia, and the U.K. have gone so far as to ban the practice altogether. Enter SEC Chairman Gary Gensler. In a Barron's interview, Gensler said that a ban on PFOF is "on the table." Transparency seems to be the term du jour in the financial services world, which means an ultimate U.S. ban is quite possible. For Robinhood, which makes a majority of its revenue from PFOF, this would be a disastrous course of events.
With HOOD shares trading nearly 50% off of their August high of $85, investors might be tempted to jump in. We are sticking by our previous comments, however, and would wait to see a price in the mid-$20s range before considering a new stake.
Media & Entertainment
04. Joke of the Week: GameStop headed back to the S&P 500?
It doesn't take much news, if any, to make a meme stock gyrate wildly in price, but the reason behind the most recent leg up in shares of GameStop (GME $214) is rather humorous. It seems a rumor began circulating that the reddit darling may be headed back to the S&P 500, the index which gave the company the boot back in 2016 due to deteriorating fundamentals. Granted, five years ago the videogame consumer retailer had dropped in size to $2.5 billion (it is now comically valued at $15 billion), but it was also generating over $9 billion in revenue and was operating in the black. Now, the company's sales are about half that amount and it hasn't turned a profit in over three years. That in itself should keep it out of the index, which requires an entrant to have positive earnings for not only the most recent quarter (GME lost $67 million), but also for the most recent four quarters in aggregate (GME lost $116 million TTM). Membership into the S&P 500 is not a matter of quant calculations; ultimately, an index committee made up of staffers at S&P Dow Jones Indices decide a company's fate. Bloggers and reddit users can speculate all they want, generally driving the price up as they do, but the odds of seeing ticker GME in the S&P 500 ever again are slim to none.
Forget the term "new paradigm" or the theory that new, young investors will keep the meme stocks supported; we heard the same false narratives back in 1999. Fundamentals always matter in the long run, and the correction to these money-burning companies will eventually arrive. Diamonds may be forged by fire and high pressure, but it will be entertaining to watch how "diamond hands" hold up when these two conditions come calling.
Economics: Work & Pay
03. Payroll growth hit the skids in August, coming up half-a-million jobs short
It's always thrilling to watch the monthly US Nonfarm Payrolls report roll in, as we never know what kind of surprises it has in store. Take August's figures, released by the US Labor Department Friday morning: Against economists' estimates for 720,000 new jobs, just 235,000 were created over the course of the month. That miss of nearly half-a-million jobs immediately sent the major indexes from positive to negative territory in the pre-market. The only thing that tempered investors' concern was the "bad news equals good news" phenomenon: they calculated that this report will force the Fed to hold off on any potential September tapering of the $120 billion per month T-bill/MBS spending spree. The Delta variant was, most believe, behind the anemic jobs growth for the month, but few believe we are heading back to lockdowns or other draconian measures. In other words, the business world is learning to adapt to a new era in which these variants are, sadly, always going to be around. Buttressing the Delta argument were the internals of the report, showing the biggest misses in industries directly affected by a pandemic resurgence, such as leisure and hospitality. On the bright side, the unemployment rate did drop 20 basis points, to 5.2%. The last time the US economy hit that number—on the way down, that is—was July of 2015.
We're not overly concerned about the August jobs report, as it truly does seem to be a direct result of the latest major variant of the disease. Infection rates and hospitalizations have generally peaked in the US and are coming back down, so we expect the robust hiring to pick back up through the remainder of the year. As the extra unemployment benefits fall off, more Americans will be incentivized into going back to work. The major push to create more in-home test kits and, more importantly, develop Covid therapies which can be administered at home should continue to mitigate the economic damage to the economy.
Capital Markets
02. Renaissance Capital: Get ready for a cascade of new IPOs this fall
If a new report issued by Renaissance Capital is correct, investors are going to have a dream autumn as the IPO market will see its busiest season since the peak of the Internet craze of 2000. Around 100 public offerings are expected to take place over the coming months, to include the likes of: Warby Parker, Allbirds, Authentic Brands (Nautica, Eddie Bauer), Impossible Foods, Chobani, Flipkart, Instacart, mobile payments processor Stripe, and social media darling Reddit. When the dust settles on 2021, Renaissance believes we will be looking back on 375 deals raising roughly $125 billion. There is no doubt the appetite is there, with new investors on the Robinhood platform willing to buy into companies not showing even a modicum of profits and, in a number of instances, scant revenue. As opposed to most of the names brought to market via the recent SPAC craze, however, we do like most of the companies anticipated to go public this fall. One, Warby Parker, will go the direct listing route due to its name recognition. While SPACs have been on a horrendous downturn throughout the summer due to their excessively-overpriced debuts (just because an IPO launches at $10 per share doesn't make it a good deal), expect some relatively reasonable valuations with this new crop. In fact, investors will be chasing so many new tickers that a few golden opportunities are bound to present themselves in a number of these new issues. Get ready for a whirlwind season.
Our advice? Prepare to make a few additions to the portfolio by looking at current sector weightings to identify underweight sectors and industries. Other than Stripe and Reddit, the names mentioned above are outside of the recent new-tech-stock craze. And that is a good thing.
Energy Commodities
01. As we head into sweater weather and beyond, beware the trajectory of natural gas prices
For anyone paying the family bills and living in a home which utilizes both gas and electric utilities, the cooler months generally meant a nice cost savings as the AC was turned off and the gas-powered heat came on. It always boggled our minds that homeowners would willingly go to an all-electric house, considering the spread between the price of the two commodities. That spread hasn't completely vanished, but the natural gas advantage is being rapidly diminished. In fact, the Henry Hub Natural Gas Spot Price has risen a remarkable 78%, from $2.43 to $4.33 per million British thermal units (MMBtu), just since this past April. A confluence of events have led to the dramatic price increase, from Europe's war on fossil fuels to an especially cold winter last year to a mysterious supply shortage in Russia. Whatever the mix of reasons, over which we have little to no control, expect higher gas bills this winter. Ironically, the spike in LNG prices has led to a semi-resurgence in the "dirtiest" of all fossil fuels, coal, as the price of the latter is substantially less than the former. Adding insult to injury is the fact that the hybrid work-from-home model means that families, not the companies they work for, will shoulder a higher percentage of the burden as they tap into more energy for their domestic work requirements.
Our pocketbooks may be hurting this winter, but the vilified fossil fuel producers have provided a nice opportunity for high-risk-tolerance investors. Cheniere Energy (LNG $89), a major exporter of liquified natural gas (no easy task, by the way), is up 50% ytd; while the hated coal company, Peabody Energy Corp (BTU $19), is up a whopping 670%. For a basket of LNG holdings, investors can consider the United States 12 Month Natural Gas ETF (UNL $12), the United States Natural Gas ETF (UNG $16), and the iPath Bloomberg Natural Gas ETN (GAZ $25).
Under the Radar Investment
Agnico Eagle Mines Ltd (AEM $57)
We have a strong thesis with respect to the current price of gold: it is undervalued. While the SPDR® Gold Shares ETF (GLD $168) is certainly one good method for playing the coming price increase of the precious metal, don't forget the gold miners as well. One of our perennial favorites—or at least a historical favorite when the price of gold has appeared undervalued—is Agnico Eagle Mines (AEM $57). The company is on pace to produce two million ounces of gold this year through its cornerstone mines in Canada, Mexico, and Finland. AEM is continually working to make its mining processes more efficient, reducing its all-in sustaining costs (AISC) by 10% this year, to $1,021 per ounce. The company believes it is on pace to reduce that figure to $950 per ounce in the very near future. The AISC is an industry-specific standard which portrays the true cost of mining an ounce of a given metal. With gold currently sitting at $1,789 per ounce, AEM shares are sitting near their 52-week low. With a market cap of $14B, the company has an eighteen multiple and a solid balance sheet (L/T assets/liabilities=$8.6B/$3.35B). Conservatively, we place AEM's fair value at $75/share, or 32% above where they currently trade.
Answer
The Battle of Saratoga consisted of two crucial battles, eighteen days apart. The Battle of Freeman's Farm, which took place 19 September 1777 on the abandoned farm of loyalist John Freeman, ended up being a pyrrhic victory for General John Burgoyne, as the British forced the Americans to retreat, but lost twice as many men in the process. This prevented the British from continuing their drive to Albany. Then, on 17 October 1777, two American officers, Major General Benedict Arnold and Brigadier General Daniel Morgan, fought savagely to deal Burgoyne a humiliating defeat. Their commanding officer, Major General Horatio "Granny" Gates, took credit for the victory, despite remaining safely in his tent during the battle and excoriating Arnold for his "reckless" actions. This incident, among others, would ultimately push Benedict Arnold, whose leg was severely mangled during the fighting, to become a traitor to the cause and a spy for the British.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Turning point of the American Revolution...
Despite Washington's impressive Revolutionary War victory against the German Hessians on December 26th, 1776 in the town of Trenton, there wasn't much to celebrate during the brutal months to come. What stunning victory began to turn the tide in favor of the Americans and convinced the French to join the fight against their longstanding nemesis, Great Britain?
Penn Trading Desk:
Penn: Changes to mining companies within the Global Leaders Club
After performing a review of the Metals & Mining industry, we are removing the two gold miners currently in the Penn Global Leaders Club and replacing them with an alternate name. Instead of an outright sell order, we recommend placing stops on the current positions slightly below their current respective prices. Members, see the Trading Desk for specific instructions. As always, clients of Penn Wealth Management, our Registered Investment Advisory service and a separate entity, will automatically have these actions taken.
JP Morgan: Add Sunrun to "U.S. Analyst Focus List"
JP Morgan just added $10 billion solar energy and storage company Sunrun (RUN $47) to its highest conviction group of names, the U.S. Analyst Focus List. Analyst Mark Strouse likes the fundamentals for the industry over the medium and long term, and believes supply constraints will ease in the second half of the year. While the risk, as measured by beta, is a quite large 2.089, the median target share price among analysts covering the stock is $76.53, or 62% higher from here. We listed some of our favorite clean energy plays in a recent Penn Wealth Report.
Cowen: Raise rating and price target on Textron
Citing a strong comeback in the demand for business jets and the nascent civilian VTOL (vertical take-off and landing) movement, Cowen has raised its rating on aviation firm Textron from Market Perform to Outperform, and has adjusted its target price for TXT shares from $75 to $95. That is a street high, with Morningstar taking the opposite side of the bet with its one-star rating and $42 per share target price. The average price target among the eleven analysts weighing in on the Rhode Island-based firm is $78 per share.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Cryptocurrencies
10. In a refreshing twist, Coinbase's CEO fires back at SEC
We are ambivalent with respect to cryptos: their future as a means of exchange feels certain, but the industry is going through its Wild West phase right now, with plenty of risks and opportunities for investors. We are equally ambivalent about the SEC (and most other government agencies as well): they enforce needed guardrails, yet they too often create more problems than they resolve. Which leads to the brouhaha going on right now between the SEC and Coinbase (COIN $257), the leading crypto exchange platform in the United States and a current member of the Penn Intrepid Trading Platform. Shares of the exchange fell sharply this week as the SEC warned that it planned to sue if the company forged ahead with plans to allow its users—of which it currently boasts some 68 million—to earn interest by lending crypto assets. Apparently the SEC believes that privilege should rest solely in the hands of the banks. It is crystal clear that current SEC Chairman Gary Gensler plans on doing battle with a host of financial services companies during his reign, with cryptos, perhaps, being his number one target.
When a company receives a Wells Notice, a formal notice from the SEC informing the recipient that the agency is preparing enforcement actions, it is traditional to stay relatively mum; certainly not to stir the pot. Apparently, Coinbase CEO Brian Armstrong is taking a page from Elon Musk's playbook, as he remained anything but mum following the announcement. In what Bloomberg described as "a rant" and "a fit" (it was neither, Bloomberg), Armstrong unloaded on the commission. In one tweet, the dynamic CEO noted "Some really sketchy behavior coming out of the SEC recently. Story time...." Ironically, it was Coinbase's willingness to share its plans for the new lending platform with the SEC—instead of pushing ahead and implementing the plan—which instigated the threats from the government body. Instead of a few polite questions to delve further into how the process would work, the SEC, i.e. Gensler, took the very public action of issuing the Wells Notice. Not cool, SEC. Jesse Powell, co-founder of the crypto exchange Kraken, came to Armstrong's defense in his own series of tweets: "We won't tell you why we think your product is illegal but we will tell you that there is no path to making it legal. Disagree? Go ahead and see what happens." CEOs daring to fight back against government regulators? Brilliant! While the zeitgeist seems to consist of corporate heads cowardly genuflecting to any and all social movements looking their way, it is refreshing to see a little gutsy pushback against the tactics of bullies. That used to be called The American Spirit.
Despite the SEC-caused downturn in the stock, our COIN position is still up 10% since purchase. We fully expect the firm to weather this storm. We doubt the SEC fully understands how the crypto exchanges even work, so it will buy some time while the government attorneys attempt to get up to speed. After that, let the lengthy court battles begin.
Beverages & Tobacco
09. Tilray's convoluted effort to get its foot in the door of the US cannabis market
We have mentioned before our deep respect for Irwin Simon, founder of Hain Celestial (HAIN $40) and current CEO of Canadian cannabis company Tilray (TLRY $14). That being said, we do not currently own any specific cannabis names within any of the Penn portfolios. It's not that we don't believe in the future of the industry from an investment standpoint; we are simply waiting for the winners to break free from the inevitable losers. We expect Tilray to be a long-term player, but it doesn't yet have the ability to crack the lucrative US market. The company is trying to change that. As a Canadian cannabis company dual listed on the Toronto Exchange and the Nasdaq, the fact that cannabis is still illegal in the US at the federal level precludes Tilray from setting up operations south of their current border. So, in a complex, circuitous route, management just made a very interesting move. They acquired around $170 million of convertible MedMen (MMNFF $0.29) debt through a new limited partnership, with the debt's maturity date being extended out through August of 2028. MedMen is the preeminent cannabis player in the US, with access to roughly 50% of the total addressable (legal) market. The firm has major operations in California, Nevada, and New York. What does this mean for Tilray? The company's CEO made it pretty clear in recent comments: he believes that his Canadian entity will be able to acquire control of MedMen once cannabis is legalized at the federal level. Acquiring $170 million in debt for a micro-cap player in the US may not seem that big of a deal, but we fully expect the adroit Simon to leverage it into a major piece of the action as the domestic market for cannabis expands.
While we have played with positions in Tilray as well as Canopy Growth Corp (CGC $18), another major Canadian player, we have yet to add a cannabis company to a portfolio. MedMen may look attractive to some investors, but its current $0.29 share price represents a dramatic fall from the high of $1.47 it hit in February of this year. All of these firms remain huge money losers, though the space is worth keeping an eye on.
Aerospace & Defense
08. The last major aviation market refusing to lift ban on 737 MAX should come as no surprise
We have certainly given aircraft maker Boeing (BA $218) a lot of grief over the past two years, but this is a story more about politics than aviation prowess. Most other major aviation markets lifted the ban on the Boeing 737 MAX late last year or early in 2021, with two notable exceptions: India and China. This week, India's Directorate General of Civil Aviation announced that the model has received the green light to resume operations in that country, leaving only China's ban in place. Boeing's management team clearly believes the Chinese market is crucial for the company's growth story going forward, with one-fifth of the firm's aircraft deliveries since 2017 heading to the communist nation. But the trade war, the pandemic, and China's own economic ambitions have strongly constricted sales, leaving primarily Airbus (EADSY $34) to pick up the slack. China wants that situation to change as well, touting its own manufacturer, the Commercial Aircraft Corporation of China, or Comac. The company's nascent efforts, the ARJ21 and the C919—the latter of which it hopes can go head to head with the 737 MAX and the Airbus A320, have been riddled with defects and delays. The problems have kept would-be buyers at bay, despite the C919 selling for about half as much ($50 million) as the Airbus A320neo. Nonetheless, China, through its Belt and Road infrastructure initiative, will pump as much money as needed into Comac until it shows signs of life. As for the MAX, China would love to have Comac's C919 step in to fill the void, but it is unlikely that will happen anytime soon. Expect a lift on the ban to come—out of pure necessity—by the end of the year.
Boeing is facing a host of serious problems; a new competitor in the form of a state-sponsored Chinese aircraft manufacturer is one we haven't even touched on before. CEO David Calhoun is actively pushing the Biden administration to urge China to lift its ban on the MAX, but what really needs to be taking place is more activism in the ranks of BA shareholders to force an overhaul of Boeing's board of directors—including its president and CEO—Calhoun.
Demographics & Lifestyle
07. China limits videogame usage to three hours per week for minors, no play Monday through Thursday
Our first thought was, "Imagine trying to implement such a law in the U.S." China, as part of its latest salvo against industries it deems harmful to the collective cause, has issued a rather remarkable decree: minors—we are assuming that means youth under the age of eighteen—are hereby forbidden from playing videogames Monday through Thursday, and will limit their play to a maximum of one hour per day on Fridays, weekends, and public holidays, between the hours of 8 p.m. and 9 p.m. The ruling communist party claims that the "youth videogame addiction" is distracting young people from their responsibilities to school and family. How on earth does the government plan on enforcing this new dictate? Since the government controls the tech companies which operate in China, and these companies can control users via login credentials, the task isn't as herculean as it may seem. Just how granular is the government willing to get with respect to controlling its population? A few years back, videogame players between the ages of 16 and 18 were told that they could not spend over 400 yuan (about $60) per month on the purchase of new games.
At first blush, we imagine many Americans applaud such a move to restrict the brain-numbing play of videogames by a country's youth. However, a government which can and will control such a mundane aspect of life will never reach a level of satisfaction; lines in the sand will be just that, and they will be redrawn at the whim of the ruling members of the party. Personal freedoms will continue to wither away until an inevitable clash occurs between the masses being controlled and the elites who are imposing the draconian standards. China believes it can simultaneously control and feast off of the golden goose of economic prosperity. That faulty logic stems from the incredible level of arrogance and hubris which communism foments among its ruling class. The short-term pain we so often experience in a democracy is allowed to mushroom out of control within a closed society. Despite the lessons of the past, this is a condition lost on many within the financial media; journalists who eagerly regurgitate what the state-controlled media in China feeds them. As for the Chinese Internet companies which so many investors have been wantonly rushing into, many are now sitting 50% below their February highs on the heels of this latest government crackdown.
Application & Systems Software
06. Skittish investors drive Zoom Video shares down 25% in August
It is hard to believe, but it was just one year ago that investors were betting the farm on the future of Zoom Video Communications (ZM $289), driving shares up to astronomical valuations. After all, the company just happened to offer the exact right services at precisely the right time: a way for teachers to connect with students and for management to collaborate with workers in a world where schools and offices had been shut down due to the pandemic. It's not as though the company won't continue to excel, or that the health threat is behind us; it's more a case of investors' euphoria giving way to the reality of kids and workers going back to their respective schools and offices. Tuesday accounted for the second-largest one-day drop in Zoom's short history, with shares falling 17%, but August has been particularly brutal as the company lost about one-quarter of its market cap. But was it ever really deserving of the $160 billion market cap it held in October of last year, and does $86 billion signal a golden buying opportunity? The answer to both questions is, in our opinion, "no." Putting its size in perspective, ZM is nestled between banking stalwart US Bancorp (USB) and aerospace giant Lockheed Martin (LMT). That's hard to justify; but, then again, it makes more sense that AMC Entertainment (AMC) having a $24 billion market cap. (The latter was a $450 million company teetering on the brink of bankruptcy going into this year.)
Ironically, Zoom's big drop came after the company reported revenue of over $1 billion in the second quarter of the year, handily topping estimates. That figure represents a 54% gain over the same quarter last year, and a 700% gain over the same quarter in 2019. It was the guidance, however, that spooked investors. Subscribers are dropping off at an unexpected rate, and management warned that revenues would probably remain flat through the end of the year. Even after the August drop, Zoom's P/E ratio is still a lofty 100, but at least it has a multiple—unlike AMC.
We have a lot of respect for Zoom and its management team, and the company's long-term viability is not in question. However, there are so many other massive competitors getting into the space—from Microsoft to Google to Cisco—that it will be a street fight going forward. As the firm rolls out new services, such as Zoom Phone, it will grow into its multiple, but that would indicate it is rather fairly valued right around where it sits today.
Capital Markets
05. Robinhood investors should be concerned about recent comments made by the new SEC chairman
I recall would-be clients, early in my career, telling me that "we own American Century no-load mutual funds, so we don't pay any fees." My retort was always the same: "I wonder how they paid for those two beautiful towers where their headquarters is located, or how they pay their staff?" In reality, despite the flowery ads designed to make us think that a company's sole existence is to help others, it's always about the money. I thought of those comments, made to me in the late 1990s, as I read about the latest threat to newly-public Robinhood Markets (HOOD $44). As the financial services platform offers customers commission-free trading, where does the revenue come from? Overwhelmingly, the answer lies in something called payments for order flow (PFOF).
When a customer wishes to buy or sell shares of a company or to trade options, the broker—be it Robinhood, Schwab, or a host of others—forwards the trade to a market maker. Historically, these intermediaries were at the major exchanges, such as the New York Stock Exchange. More recently, however, a slew of off-exchange market makers have popped up and are now responsible for over half of all retail trades placed. They make their money off of the difference between what they pay to buy the requested shares and what they sell them for seconds later—the spread. Understandably, the higher the volume of orders flowing through a market maker, the more profit to be made. Since companies like Robinhood can choose who handles a given trade, these third-party market makers have been offering to share a percentage of the spread with the brokers; hence, payments for order flow. In one month alone, Robinhood reportedly generated $100 million in revenue via this practice.
Many of the larger brokerages, such as Fidelity and Interactive Brokers, generally refuse to accept PFOF. In fact, countries like Canada, Australia, and the U.K. have gone so far as to ban the practice altogether. Enter SEC Chairman Gary Gensler. In a Barron's interview, Gensler said that a ban on PFOF is "on the table." Transparency seems to be the term du jour in the financial services world, which means an ultimate U.S. ban is quite possible. For Robinhood, which makes a majority of its revenue from PFOF, this would be a disastrous course of events.
With HOOD shares trading nearly 50% off of their August high of $85, investors might be tempted to jump in. We are sticking by our previous comments, however, and would wait to see a price in the mid-$20s range before considering a new stake.
Media & Entertainment
04. Joke of the Week: GameStop headed back to the S&P 500?
It doesn't take much news, if any, to make a meme stock gyrate wildly in price, but the reason behind the most recent leg up in shares of GameStop (GME $214) is rather humorous. It seems a rumor began circulating that the reddit darling may be headed back to the S&P 500, the index which gave the company the boot back in 2016 due to deteriorating fundamentals. Granted, five years ago the videogame consumer retailer had dropped in size to $2.5 billion (it is now comically valued at $15 billion), but it was also generating over $9 billion in revenue and was operating in the black. Now, the company's sales are about half that amount and it hasn't turned a profit in over three years. That in itself should keep it out of the index, which requires an entrant to have positive earnings for not only the most recent quarter (GME lost $67 million), but also for the most recent four quarters in aggregate (GME lost $116 million TTM). Membership into the S&P 500 is not a matter of quant calculations; ultimately, an index committee made up of staffers at S&P Dow Jones Indices decide a company's fate. Bloggers and reddit users can speculate all they want, generally driving the price up as they do, but the odds of seeing ticker GME in the S&P 500 ever again are slim to none.
Forget the term "new paradigm" or the theory that new, young investors will keep the meme stocks supported; we heard the same false narratives back in 1999. Fundamentals always matter in the long run, and the correction to these money-burning companies will eventually arrive. Diamonds may be forged by fire and high pressure, but it will be entertaining to watch how "diamond hands" hold up when these two conditions come calling.
Economics: Work & Pay
03. Payroll growth hit the skids in August, coming up half-a-million jobs short
It's always thrilling to watch the monthly US Nonfarm Payrolls report roll in, as we never know what kind of surprises it has in store. Take August's figures, released by the US Labor Department Friday morning: Against economists' estimates for 720,000 new jobs, just 235,000 were created over the course of the month. That miss of nearly half-a-million jobs immediately sent the major indexes from positive to negative territory in the pre-market. The only thing that tempered investors' concern was the "bad news equals good news" phenomenon: they calculated that this report will force the Fed to hold off on any potential September tapering of the $120 billion per month T-bill/MBS spending spree. The Delta variant was, most believe, behind the anemic jobs growth for the month, but few believe we are heading back to lockdowns or other draconian measures. In other words, the business world is learning to adapt to a new era in which these variants are, sadly, always going to be around. Buttressing the Delta argument were the internals of the report, showing the biggest misses in industries directly affected by a pandemic resurgence, such as leisure and hospitality. On the bright side, the unemployment rate did drop 20 basis points, to 5.2%. The last time the US economy hit that number—on the way down, that is—was July of 2015.
We're not overly concerned about the August jobs report, as it truly does seem to be a direct result of the latest major variant of the disease. Infection rates and hospitalizations have generally peaked in the US and are coming back down, so we expect the robust hiring to pick back up through the remainder of the year. As the extra unemployment benefits fall off, more Americans will be incentivized into going back to work. The major push to create more in-home test kits and, more importantly, develop Covid therapies which can be administered at home should continue to mitigate the economic damage to the economy.
Capital Markets
02. Renaissance Capital: Get ready for a cascade of new IPOs this fall
If a new report issued by Renaissance Capital is correct, investors are going to have a dream autumn as the IPO market will see its busiest season since the peak of the Internet craze of 2000. Around 100 public offerings are expected to take place over the coming months, to include the likes of: Warby Parker, Allbirds, Authentic Brands (Nautica, Eddie Bauer), Impossible Foods, Chobani, Flipkart, Instacart, mobile payments processor Stripe, and social media darling Reddit. When the dust settles on 2021, Renaissance believes we will be looking back on 375 deals raising roughly $125 billion. There is no doubt the appetite is there, with new investors on the Robinhood platform willing to buy into companies not showing even a modicum of profits and, in a number of instances, scant revenue. As opposed to most of the names brought to market via the recent SPAC craze, however, we do like most of the companies anticipated to go public this fall. One, Warby Parker, will go the direct listing route due to its name recognition. While SPACs have been on a horrendous downturn throughout the summer due to their excessively-overpriced debuts (just because an IPO launches at $10 per share doesn't make it a good deal), expect some relatively reasonable valuations with this new crop. In fact, investors will be chasing so many new tickers that a few golden opportunities are bound to present themselves in a number of these new issues. Get ready for a whirlwind season.
Our advice? Prepare to make a few additions to the portfolio by looking at current sector weightings to identify underweight sectors and industries. Other than Stripe and Reddit, the names mentioned above are outside of the recent new-tech-stock craze. And that is a good thing.
Energy Commodities
01. As we head into sweater weather and beyond, beware the trajectory of natural gas prices
For anyone paying the family bills and living in a home which utilizes both gas and electric utilities, the cooler months generally meant a nice cost savings as the AC was turned off and the gas-powered heat came on. It always boggled our minds that homeowners would willingly go to an all-electric house, considering the spread between the price of the two commodities. That spread hasn't completely vanished, but the natural gas advantage is being rapidly diminished. In fact, the Henry Hub Natural Gas Spot Price has risen a remarkable 78%, from $2.43 to $4.33 per million British thermal units (MMBtu), just since this past April. A confluence of events have led to the dramatic price increase, from Europe's war on fossil fuels to an especially cold winter last year to a mysterious supply shortage in Russia. Whatever the mix of reasons, over which we have little to no control, expect higher gas bills this winter. Ironically, the spike in LNG prices has led to a semi-resurgence in the "dirtiest" of all fossil fuels, coal, as the price of the latter is substantially less than the former. Adding insult to injury is the fact that the hybrid work-from-home model means that families, not the companies they work for, will shoulder a higher percentage of the burden as they tap into more energy for their domestic work requirements.
Our pocketbooks may be hurting this winter, but the vilified fossil fuel producers have provided a nice opportunity for high-risk-tolerance investors. Cheniere Energy (LNG $89), a major exporter of liquified natural gas (no easy task, by the way), is up 50% ytd; while the hated coal company, Peabody Energy Corp (BTU $19), is up a whopping 670%. For a basket of LNG holdings, investors can consider the United States 12 Month Natural Gas ETF (UNL $12), the United States Natural Gas ETF (UNG $16), and the iPath Bloomberg Natural Gas ETN (GAZ $25).
Under the Radar Investment
Agnico Eagle Mines Ltd (AEM $57)
We have a strong thesis with respect to the current price of gold: it is undervalued. While the SPDR® Gold Shares ETF (GLD $168) is certainly one good method for playing the coming price increase of the precious metal, don't forget the gold miners as well. One of our perennial favorites—or at least a historical favorite when the price of gold has appeared undervalued—is Agnico Eagle Mines (AEM $57). The company is on pace to produce two million ounces of gold this year through its cornerstone mines in Canada, Mexico, and Finland. AEM is continually working to make its mining processes more efficient, reducing its all-in sustaining costs (AISC) by 10% this year, to $1,021 per ounce. The company believes it is on pace to reduce that figure to $950 per ounce in the very near future. The AISC is an industry-specific standard which portrays the true cost of mining an ounce of a given metal. With gold currently sitting at $1,789 per ounce, AEM shares are sitting near their 52-week low. With a market cap of $14B, the company has an eighteen multiple and a solid balance sheet (L/T assets/liabilities=$8.6B/$3.35B). Conservatively, we place AEM's fair value at $75/share, or 32% above where they currently trade.
Answer
The Battle of Saratoga consisted of two crucial battles, eighteen days apart. The Battle of Freeman's Farm, which took place 19 September 1777 on the abandoned farm of loyalist John Freeman, ended up being a pyrrhic victory for General John Burgoyne, as the British forced the Americans to retreat, but lost twice as many men in the process. This prevented the British from continuing their drive to Albany. Then, on 17 October 1777, two American officers, Major General Benedict Arnold and Brigadier General Daniel Morgan, fought savagely to deal Burgoyne a humiliating defeat. Their commanding officer, Major General Horatio "Granny" Gates, took credit for the victory, despite remaining safely in his tent during the battle and excoriating Arnold for his "reckless" actions. This incident, among others, would ultimately push Benedict Arnold, whose leg was severely mangled during the fighting, to become a traitor to the cause and a spy for the British.
Headlines for the Week of 01 Aug—07 Aug 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The communist party declares open season on domestic Internet companies...
Since February, when China began ramping up its attack on Net-based companies under its domain, the affected stocks have been plummeting. Since that time, what percentage have they, as a group, dropped in price?
Penn Trading Desk:
Penn: Purchased a play on the surging demand for outdoor recreational activities
Americans want to get out and explore their country to an extent not seen in a century. We added an undervalued name to the Intrepid Trading Platform which is well poised to take advantage of this trend, and one which happens to be on an aggressive acquisition spree to increase its breadth in the arena.
Penn: Placing a stop loss to protect our American Campus Communities gains
We purchased student housing REIT American Campus Communities right as analysts were predicting a dire situation for students returning to their respective colleges in the fall of 2020. We never bought into the "mass closings of dormitories" thesis and saw a great opportunity in the shares. In addition to strong growth potential, we were drawn to the company's 5.41% dividend yield. ACC has blown past our $40 initial price target and we are protecting our gains with a $47 stop loss on the shares.
Penn: Placing a stop loss to protect our MGM gains
We added the Las Vegas Strip's largest resort casino operator, MGM Resorts International, to the Penn Global Leaders Club last year as the industry was reeling from the pandemic. MGM shares surpassed our target price, are now up 130% from our purchase price, and have been falling back recently due to the Delta variant. We still believe in the company's long-term vision, but are not willing to fall below a triple-digit gain. We have placed a stop on the shares at $34, or $2 above our target price.
Penn: Placing a stop loss to protect our AVB gains
We opened our position in AvalonBay Communities (AVB $227) within the Strategic Income Portfolio in July of 2020, and this owner of 275 apartment communities—with 74,000 units—has seen its share price rise well above our initial price target of $182. Valuations seem a bit stretched, and with the share price hovering near an all-time high, we are putting protection on our position with a $218 stop loss.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Cybersecurity
10. Use diligence before clicking on that "unsubscribe" button at the bottom of spam emails
Remember when it was actually fun to find new emails waiting to be opened in your inbox? A few of us even remember AOL's iconic "you've got mail" notification. How times have changed. Americans are now inundated with mountains of new emails each and every day, and trying to cull the weeds from the garden can be challenging, to say the least. Instead of just whacking away by deleting them, knowing they are destined to return, many of us have tried to eradicate them using the mandatory (at least we thought it was) "Unsubscribe" button located in microscopic print somewhere near the bottom of each piece. We recently began to wonder, though, if the sage advice of not clicking on any link we're not extremely familiar with also held true for this innocuous little "opt out" key.
In fact, it turns out that malicious emails can, indeed, have unsubscribe links that lead to dangerous sites which can compromise or even infect your system with a virus. According to cybersecurity firm McAfee, following a few simple rules can help keep your system—and the treasure trove of data it probably holds—safe(r) from the dark web. If the email is from a legitimate company with which you are familiar, it should be safe to take a minute of your valuable time and go through the unsubscribe process. (Most are simple, others are purposefully irritating, making you put in the email address where they sent their junk!) If the email is from a company you don't recognize or one that seems a bit fishy, do not hit the unsubscribe link, just delete the email. For nefarious individuals and the algorithms they devise, this verifies that they have made a successful hit on a "validated" email address. If this is the case, the best scenario is more unwanted email heading your way. An uglier possibility is that the simple act of clicking on an unsubscribe button or link can lead to a virus being downloaded to your system. Another reason it pays to have good antivirus software protecting your system at all times.
Bottom line: simply delete or move to spam/junk any email that appears suspicious. In addition to having a strong web protection system installed on all of your devices, be sure and have it run scans on your system on a regular basis. Always keep your operating system up-to-date as well, as new malicious efforts are constantly being identified by software developers.
Beverages & Tobacco
09. Boston Beer's big bet on seltzer hits a wall, shares plummet
Boston Beer (SAM $716), maker of Sam Adams, has been our favorite name in booze/brewers for a number of years. Fiercely independent (as opposed to the big three, which are all now owned by foreign entities), the company simply makes an excellent product and has an exemplary management team, led by founder and Chairman of the Board Jim Koch. The sheen began to come off the name, however, when SAM started pushing a mediocre beer called Sam 76. That misstep was followed by another: the company bet big on hard seltzers—the modern version of Zima or Bartles & Jaymes wine coolers—at the expense (in our opinion) of their staple beer business. Hopefully they received the message investors sent them last week. After missing Q2 earnings badly ($4.75/sh vs the $6.60/sh expected), management admitted to increasing production of Truly hard seltzer to meet a summer demand which never fully manifested. For the quarter, SAM generated $602.8M in revenue versus expectations for $675.7M. To make matters worse, the firm cut its guidance for the remainder of the year. All of this was enough to pound SAM shares down 26% in one day and 31% from the week's peak to trough price.
We haven't owned SAM shares within the Penn portfolios since our disappointment over the capital expended on the ill-fated Sam 76 campaign, and the hard push into hard seltzers only reinforced our decision. Even if the company does pivot back to its staple, high-end beer business, the field is now crowded with new competitors. Analysts seem to be gravitating toward an average price target of $1,000, but we are waiting to see evidence that management fully understands the problem and is willing to make a mea culpa on their recent moves.
Automotive
08. Tesla earned over $1 billion this past quarter, ten times more than it made in the second quarter of 2020
EV maker Tesla (TSLA $658) just achieved its eighth-straight quarter with positive cash flow, earning $1.14 billion in profit between April and June. As if that wasn't impressive enough, the figure represents a ten-fold increase over the $104 million it earned in the same quarter last year. Revenue in Q2 doubled from last year, from $6.04 billion to $11.96 billion. It is difficult to find any flaws in the earnings report, but that didn't stop the chronic naysayers from pointing out why this level of growth is unsustainable. Those comments are rather ironic, considering the company had to weather recalls, a backlash from Chinese consumers, and a chip shortage over the course of the quarter. As for Musk, he hinted that this may be the last earnings conference call he would be taking part in, let alone leading. We can fully understand that decision.
Too many analysts continue to view Tesla as just another car company. Granted, were that the case, the multiples for the company are excessively high. We don't buy the premise, however. Tesla earned nearly $1 billion from its energy business last quarter, installing 60% more energy storage systems in homes than it did the previous quarter. Furthermore, we are most excited about the FSD (full self-driving) subscription service that should mushroom after future system upgrades make the company's vehicles fully autonomous. Then there is the company's advanced battery production facilities and its benchmark Supercharger DC fast-charting stations, which it will soon open to non-Tesla vehicles. We believe the Tesla growth story remains fully intact.
Global Exchanges & Indexes
07. The high risks associated with investing in Chinese tech companies
There have always been outsized risks associated with investing in Internet companies; when those companies happen to be based out of Communist China, those risks are compounded. For evidence, consider the popular KraneShares CSI China Internet ETF (KWEB $52). This fund holds fifty of the largest Chinese Internet companies listed on exchanges outside of Mainland China (presumably to mitigate risk). Alibaba and Tencent Holdings are the two largest positions within the fund. On 17 February, shares of KWEB hit $104.94; now, just five months later, they have been sliced precisely in half. Put another way, a $10,000 investment in the fund five months ago would now be worth $5,000.
China's general crackdown on publicly-traded companies and the more recent rules handed down to rein in for-profit education companies—such as the $4 billion New Oriental Education & Technology Group (EDU $2)—have been the major catalyst for the plummet. EDU has been a popular bet for investors looking to ring up profits in Chinese companies, with the shares jumping from $5 in 2019 to a peak of $20 this past February, before settling back down to their current $2 range. Why would China, which is bent on becoming the world's largest economy in short order, create a host of new rules designed to stifle the growth of their own companies? Note that KWEB focuses on shares of companies listed outside of the country; China wants to promote those listing on domestic exchanges—the largest being the Shanghai Stock Exchange. These rules are a shot across the bow to home-grown companies daring to list outside of the country. As has always been the case, investors are at the mercy of the all-powerful Chinese Communist Party.
There are so many wonderful opportunities right now across the globe, both in frontier/emerging and developed markets, that we urge investors to focus on areas which promote democratic values and offer citizens a high level of personal freedom. We don't believe it is worth the risk to have direct exposure to individual Chinese companies. The KWEB example shows how much risk is involved even in owning a basket of the largest publicly-traded companies based out of Mainland China.
Aerospace & Defense
06. Brain drain at Boeing: engineers and technicians are leaving the firm at an alarming rate
Bloomberg recently published an interesting and rather in-depth story on the flight of disillusioned engineers and technicians out of the exits at Boeing (BA $233). Certainly, the dual tragedies of recent 737 MAX crashes have impacted morale at the firm, but the problem has more to do with a management team wandering aimlessly in search of a strategic mission than it does with any specific events. When a former Boeing CEO announced, "no more 'moon shots,' it might as well have become the new company slogan. For young engineers, the excitement which once swirled around working for the world's largest aerospace and defense company has been replaced by, "well, at least it will look good on my résumé." Those workers have been taking their résumés to competing firms in droves as of late. And the recipients of this talent pool are not just the usual suspects such as SpaceX, Blue Origin, and Virgin Galactic.
Since the beginning of last year, over 3,200 engineers and technicians have bolted from the firm—a figure which accounts for nearly one-fifth of the 18,000 Boeing workers represented by the Society of Professional Engineering Employees in Aerospace (SPEEA) union. While many have been attracted to SpaceX's stunning recent successes and Elon Musk's bold vision for the future of humanity in space, Amazon has also been a major destination for these skilled workers. The idea of remaining in the Seattle area with a nice pay bump has been the major selling point for the latter. Amazon employs these specialists to increase the efficiency at their warehouses, much like they did with the Boeing factory floors.
The airliner catastrophes and a lack of a new generation passenger aircraft on the drawing boards at Boeing have not been the only forces driving workers away. On the space side of the equation, the company's recent Starliner failures stand in stark comparison to the stunning SpaceX successes. The company will have another chance to prove itself with the upcoming crew capsule test slated for this weekend, but even with a glaring success the firm has a long way to go. Meanwhile, European nemesis Airbus is increasingly outpacing Boeing with respect to both orders and deliveries. In the first quarter of 2021, Boeing delivered 77 aircraft versus 125 jets for Airbus—a 62% differential. By the end of Q1, Airbus reported a backlog of nearly 6,000 jets, while Boeing's backlog amounted to just shy of 5,000 aircraft. Furthermore, with no exciting new designs to show potential buyers, we are not sure what will be the catalyst for a comeback.
In our opinion, there is a horrendous vacuum leadership at Boeing, and the company's great turnaround cannot occur until a nearly clean sweep is made at the top. Unfortunately, the entire leadership team would disagree with that assessment. It will take major activist investor push to force the change required, but there hasn't been much action on that front either. At least we have SpaceX around to spearhead America's great return to manned spaceflight.
Media & Entertainment
05. Scarlett Johansson sues Disney over streaming release of Black Widow, Disney fires back with scathing retort
Our immediate thought was, "poor Scarlett, $20 million for one movie wasn't enough?" However, the more we delved into the story, the more it appears this will be one heck of a court battle. Actor Scarlett Johansson, number seven on the list of IMDb's hottest female actors of 2021, is suing Disney (DIS $ 176) for simultaneously releasing Black Widow, in which she plays the eponymous lead role, in theaters and on the Disney+ streaming service for a fee. Johansson's beef is this: the better the movie does at the box office, the more she will stand to make for her role. According to her attorney, the streaming release was done primarily for Disney to add subscribers, and a large number of viewers decided to forego the theater and stream instead. The figures show that Disney did, indeed, fatten its wallet by charging $30 for Disney+ members to stream the movie. Over the course of its opening weekend, Black Widow raked in $80 million at the US box office, $78 million at the worldwide box office, and a whopping $60 million from its Disney+ platform.
Disney shot back directly at Johansson, saying that "the lawsuit is especially sad and distressing in its callous disregard for the horrific and prolonged global effects of the COVID-19 pandemic." Yes, Disney, we are sure you released the movie on your streaming service as a public service, which is why you charged paying subscribers an additional $30 a pop. Actually, the more we mull the situation over, the more we tend to side with Johansson. Based on other movies released during the pandemic and the way in which other studios compensated their talent, she probably would have made around $25 million more for the movie than she did. In addition to a probable loss in the courts, Disney will suffer a real black eye in Hollywood over this one.
When Bob Chapek took over at Disney, we cashed out—despite having owned the company in the Penn Global Leaders Club for years. It appears we made the right call. Nothing matters like management.
Capital Markets
04. HOOD's wild ride: platform for the meme stocks turns into one itself
By most accounts, it was a lackluster debut. The much-anticipated IPO of financial services platform Robinhood (HOOD $55) finally occurred last week, but shares ended up tumbling 12% from their $38 initial offering price almost immediately. Considering the platform boasts some 20 million accounts, one would have expected fireworks out of the gate, akin to an Airbnb ($145) or a DoorDash (DASH $176). But, alas, the WallStreetBets/reddit monster ended up harming the very company which fomented the movement, with some on the social media sites even calling on members to short the stock on day one. That is rich, considering users' raison d'être seemed to be destroying the shorts. ARK Investment's Cathie Wood, someone whom we respect a lot, may have played a part in the turnaround which occurred after day one by buying 1.85 million shares below the IPO price. Despite Wood's buy, we tend to agree with Morningstar's fair value of $30 on the shares, meaning they have some additional falling to do before we are interested.
When the reckoning does hit the markets, and it will, expect HOOD to get pounded. The world where an AMC, which is worth $5 per share, trades at $38 per share will eventually come crumbling down, and some semblance of sanity will return. At that point, there will be a lot of formerly-overvalued stocks worth picking up, and plenty we still wouldn't touch. As for HOOD, if the $30 fair value is accurate that means $25 per share might be a good point to jump in.
Automotive
03. We called it: Nikola's founder, Trevor Milton indicted on fraud charges
We have been calling EV maker Nikola (NKLA $11) little short of a sham for a couple of years now. Our opinion was cemented after we saw the company's founder, Trevor Milton, in several interviews. Based on decades of CEO-watching, we got a really bad feeling about the founder and his alleged product lineup. While the company was spared in the indictment, the US government has just charged the founder with three counts of fraud, stating that he lied to investors "about nearly all aspects of the business." We may have had a bad feeling about the firm, but investors certainly didn't: NKLA shares went from $10 in March of 2020 to $80 three months later, since dropping back to the $12 range. While at their high, Milton had a paper net worth of roughly $9 billion; that figure is now floating around $1 billion, but we imagine there is plenty more pain ahead. The wheels became to come off the cart last September after Hindenburg Research published a scathing article on the EV firm, pretty much echoing the government case—or vice versa. Shortly after the report was released, Milton was out at the firm he started and a deal the company cobbled together with General Motors fell apart (we excoriated GM when it made the deal). If we want to ignore the company's financials (basically zero revenue) and focus on production, try this on for size: the company has produced zero vehicles for public sale.
Tesla was enormously successful, so we should just jump into an EV maker that sounds like the next Tesla, right? Heck, this company even took the famous inventor's first name! Madness. It is understandable that the financials wouldn't look stellar on a nascent company trying to break into an industry with a pretty tall barrier to entry, but we are talking about a company that went public without having one vehicle roll off of an assembly line. NKLA may not have been a meme stock, but the same level of (ir)rational thought went into the purchase of the shares.
Industrial Conglomerates
02. A sure sign of desperation: financial engineering has replaced cutting-edge engineering at General Electric
I feel bad for General Electric (GE $105); embarrassed for this once-great American powerhouse. Has Edison's firm really been reduced to this? Some companies have a "move fast and break things" mentality. GE's grand strategic vision is "let's do a reverse stock split at just the right level to move our share price into triple digits like our competition." I mean, that's simply embarrassing. The move is tantamount to an admission that the company can't get its stock price to triple digits the old fashioned way, through hard work, relentless creativity, and a stellar sales force. Instead, management performed the corporate version of breaking into the school's server to change a grade from a C- to an A+. Here's a question: name the last company that regained a leadership role in an industry after performing a reverse stock split? Good luck—we couldn't think of any. General Electric, once a "move fast and break things" company, now makes most of its profits from servicing the equipment it had previously sold to customers. Unlike an Apple, however, the firm isn't introducing the new products necessary to feed an ever-growing services business. When it finds itself in need of a new supply of cash, it simply sells one of its legacy businesses. Jeffrey Immelt, who spent too much time flying around on one of his two corporate jets (the other would travel behind in case of mechanical problems), started the great downturn at General Electric; unfortunately, Larry Culp doesn't seem to be the dynamic disruptor so desperately needed at the firm. Maybe he and Boeing's David Calhoun can have a few adult beverages one of these days and reminisce about the good old days at their respective firms.
General Electric was one of those global leaders which always had a place in our portfolios. No longer. GE is a case study in the importance of understanding what you own and why. We have a neighbor who had a gorgeous and enormous white pine in his back yard. One day we noticed that the needles at the top of the tree began turning brown. Instead of calling in a tree expert at the first sign of trouble, he figured the problem would take care of itself. Needless to say, the problem rapidly spread and the tree met its demise. A company used to be able to rest on its laurels and simply weather some boneheaded tactical or even strategic errors by upper management. Those days are gone, but the entrenched members of the board at a company like GE seem content to collect their pay and stay the course. Good luck. Pardon us if we choose not to board your next flight.
Market Week in Review
01. Yet another solid jobs report helps cobble together a positive week for the markets
It was difficult to find much wrong with the employment situation in America for the month of July, except for the fact that employers couldn't find enough workers to fill the open slots. Against expectations for 862,500 new nonfarm jobs for the month, companies actually hired 943,000 workers; June's 850,000 figure was also revised higher, to 938,000. The unemployment rate was, perhaps, the most pleasant surprise of all: it ticked down a whopping 50 basis points, from 5.9% to 5.4%. We are slowly but steadily getting back to the pre-pandemic unemployment rate of 3.5%, recorded in the halcyon days of February, 2020. The jobs report helped sway two market conditions: the 10-year Treasury rose from 1.228% to 1.303%, and all of the major indexes recorded gains for the week. Another five days of strong earnings releases also helped strengthen the stock market—especially the small caps. The Russell 2000 rose 1.46% on the week. On Monday, an interesting figure from the Bureau of Labor Statistics will be released: the Job Openings and Labor Turnover Survey, or JOLTS. Economists are predicting a near-record 9.1 million new job openings for the last business day of June. Quite a different story from a year ago.
Under the Radar Investment
Afry AB
Afry AB (AFXXF $17) is a $1.9 billion Swedish-Finnish engineering and consulting firm with projects in the energy, industrial, and infrastructure markets. On the infrastructure front, Afry provides sustainable technology solutions for railways, roads, and other transportation networks. In the energy sector, the firm constructs plants and provides market analysis for power generation, manufacturing facilities, and chemical refining plants. This is a play on a European recovery, as the overwhelming percentage of sales emanate from that continent. With a 15 P/E ratio and a 3.57% dividend yield, the company generated revenues of $2.07 billion in 2020 and $2.238 billion TTM, signaling a nice growth trajectory. Afry was founded in 1895 and trades on the Nasdaq Stockholm AB, formerly known as the Stockholm Stock Exchange.
Answer
Since February 16th, the Dow Jones Internet ETF hasn't been too impressive, with the aggregate shares down 0.47%. Those results appear stellar, however, when compared to a group of Chinese Internet stocks, which are down 53% in the same period. Alibaba, Tencent, and JD.com are the top three holdings in the group.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The communist party declares open season on domestic Internet companies...
Since February, when China began ramping up its attack on Net-based companies under its domain, the affected stocks have been plummeting. Since that time, what percentage have they, as a group, dropped in price?
Penn Trading Desk:
Penn: Purchased a play on the surging demand for outdoor recreational activities
Americans want to get out and explore their country to an extent not seen in a century. We added an undervalued name to the Intrepid Trading Platform which is well poised to take advantage of this trend, and one which happens to be on an aggressive acquisition spree to increase its breadth in the arena.
Penn: Placing a stop loss to protect our American Campus Communities gains
We purchased student housing REIT American Campus Communities right as analysts were predicting a dire situation for students returning to their respective colleges in the fall of 2020. We never bought into the "mass closings of dormitories" thesis and saw a great opportunity in the shares. In addition to strong growth potential, we were drawn to the company's 5.41% dividend yield. ACC has blown past our $40 initial price target and we are protecting our gains with a $47 stop loss on the shares.
Penn: Placing a stop loss to protect our MGM gains
We added the Las Vegas Strip's largest resort casino operator, MGM Resorts International, to the Penn Global Leaders Club last year as the industry was reeling from the pandemic. MGM shares surpassed our target price, are now up 130% from our purchase price, and have been falling back recently due to the Delta variant. We still believe in the company's long-term vision, but are not willing to fall below a triple-digit gain. We have placed a stop on the shares at $34, or $2 above our target price.
Penn: Placing a stop loss to protect our AVB gains
We opened our position in AvalonBay Communities (AVB $227) within the Strategic Income Portfolio in July of 2020, and this owner of 275 apartment communities—with 74,000 units—has seen its share price rise well above our initial price target of $182. Valuations seem a bit stretched, and with the share price hovering near an all-time high, we are putting protection on our position with a $218 stop loss.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Cybersecurity
10. Use diligence before clicking on that "unsubscribe" button at the bottom of spam emails
Remember when it was actually fun to find new emails waiting to be opened in your inbox? A few of us even remember AOL's iconic "you've got mail" notification. How times have changed. Americans are now inundated with mountains of new emails each and every day, and trying to cull the weeds from the garden can be challenging, to say the least. Instead of just whacking away by deleting them, knowing they are destined to return, many of us have tried to eradicate them using the mandatory (at least we thought it was) "Unsubscribe" button located in microscopic print somewhere near the bottom of each piece. We recently began to wonder, though, if the sage advice of not clicking on any link we're not extremely familiar with also held true for this innocuous little "opt out" key.
In fact, it turns out that malicious emails can, indeed, have unsubscribe links that lead to dangerous sites which can compromise or even infect your system with a virus. According to cybersecurity firm McAfee, following a few simple rules can help keep your system—and the treasure trove of data it probably holds—safe(r) from the dark web. If the email is from a legitimate company with which you are familiar, it should be safe to take a minute of your valuable time and go through the unsubscribe process. (Most are simple, others are purposefully irritating, making you put in the email address where they sent their junk!) If the email is from a company you don't recognize or one that seems a bit fishy, do not hit the unsubscribe link, just delete the email. For nefarious individuals and the algorithms they devise, this verifies that they have made a successful hit on a "validated" email address. If this is the case, the best scenario is more unwanted email heading your way. An uglier possibility is that the simple act of clicking on an unsubscribe button or link can lead to a virus being downloaded to your system. Another reason it pays to have good antivirus software protecting your system at all times.
Bottom line: simply delete or move to spam/junk any email that appears suspicious. In addition to having a strong web protection system installed on all of your devices, be sure and have it run scans on your system on a regular basis. Always keep your operating system up-to-date as well, as new malicious efforts are constantly being identified by software developers.
Beverages & Tobacco
09. Boston Beer's big bet on seltzer hits a wall, shares plummet
Boston Beer (SAM $716), maker of Sam Adams, has been our favorite name in booze/brewers for a number of years. Fiercely independent (as opposed to the big three, which are all now owned by foreign entities), the company simply makes an excellent product and has an exemplary management team, led by founder and Chairman of the Board Jim Koch. The sheen began to come off the name, however, when SAM started pushing a mediocre beer called Sam 76. That misstep was followed by another: the company bet big on hard seltzers—the modern version of Zima or Bartles & Jaymes wine coolers—at the expense (in our opinion) of their staple beer business. Hopefully they received the message investors sent them last week. After missing Q2 earnings badly ($4.75/sh vs the $6.60/sh expected), management admitted to increasing production of Truly hard seltzer to meet a summer demand which never fully manifested. For the quarter, SAM generated $602.8M in revenue versus expectations for $675.7M. To make matters worse, the firm cut its guidance for the remainder of the year. All of this was enough to pound SAM shares down 26% in one day and 31% from the week's peak to trough price.
We haven't owned SAM shares within the Penn portfolios since our disappointment over the capital expended on the ill-fated Sam 76 campaign, and the hard push into hard seltzers only reinforced our decision. Even if the company does pivot back to its staple, high-end beer business, the field is now crowded with new competitors. Analysts seem to be gravitating toward an average price target of $1,000, but we are waiting to see evidence that management fully understands the problem and is willing to make a mea culpa on their recent moves.
Automotive
08. Tesla earned over $1 billion this past quarter, ten times more than it made in the second quarter of 2020
EV maker Tesla (TSLA $658) just achieved its eighth-straight quarter with positive cash flow, earning $1.14 billion in profit between April and June. As if that wasn't impressive enough, the figure represents a ten-fold increase over the $104 million it earned in the same quarter last year. Revenue in Q2 doubled from last year, from $6.04 billion to $11.96 billion. It is difficult to find any flaws in the earnings report, but that didn't stop the chronic naysayers from pointing out why this level of growth is unsustainable. Those comments are rather ironic, considering the company had to weather recalls, a backlash from Chinese consumers, and a chip shortage over the course of the quarter. As for Musk, he hinted that this may be the last earnings conference call he would be taking part in, let alone leading. We can fully understand that decision.
Too many analysts continue to view Tesla as just another car company. Granted, were that the case, the multiples for the company are excessively high. We don't buy the premise, however. Tesla earned nearly $1 billion from its energy business last quarter, installing 60% more energy storage systems in homes than it did the previous quarter. Furthermore, we are most excited about the FSD (full self-driving) subscription service that should mushroom after future system upgrades make the company's vehicles fully autonomous. Then there is the company's advanced battery production facilities and its benchmark Supercharger DC fast-charting stations, which it will soon open to non-Tesla vehicles. We believe the Tesla growth story remains fully intact.
Global Exchanges & Indexes
07. The high risks associated with investing in Chinese tech companies
There have always been outsized risks associated with investing in Internet companies; when those companies happen to be based out of Communist China, those risks are compounded. For evidence, consider the popular KraneShares CSI China Internet ETF (KWEB $52). This fund holds fifty of the largest Chinese Internet companies listed on exchanges outside of Mainland China (presumably to mitigate risk). Alibaba and Tencent Holdings are the two largest positions within the fund. On 17 February, shares of KWEB hit $104.94; now, just five months later, they have been sliced precisely in half. Put another way, a $10,000 investment in the fund five months ago would now be worth $5,000.
China's general crackdown on publicly-traded companies and the more recent rules handed down to rein in for-profit education companies—such as the $4 billion New Oriental Education & Technology Group (EDU $2)—have been the major catalyst for the plummet. EDU has been a popular bet for investors looking to ring up profits in Chinese companies, with the shares jumping from $5 in 2019 to a peak of $20 this past February, before settling back down to their current $2 range. Why would China, which is bent on becoming the world's largest economy in short order, create a host of new rules designed to stifle the growth of their own companies? Note that KWEB focuses on shares of companies listed outside of the country; China wants to promote those listing on domestic exchanges—the largest being the Shanghai Stock Exchange. These rules are a shot across the bow to home-grown companies daring to list outside of the country. As has always been the case, investors are at the mercy of the all-powerful Chinese Communist Party.
There are so many wonderful opportunities right now across the globe, both in frontier/emerging and developed markets, that we urge investors to focus on areas which promote democratic values and offer citizens a high level of personal freedom. We don't believe it is worth the risk to have direct exposure to individual Chinese companies. The KWEB example shows how much risk is involved even in owning a basket of the largest publicly-traded companies based out of Mainland China.
Aerospace & Defense
06. Brain drain at Boeing: engineers and technicians are leaving the firm at an alarming rate
Bloomberg recently published an interesting and rather in-depth story on the flight of disillusioned engineers and technicians out of the exits at Boeing (BA $233). Certainly, the dual tragedies of recent 737 MAX crashes have impacted morale at the firm, but the problem has more to do with a management team wandering aimlessly in search of a strategic mission than it does with any specific events. When a former Boeing CEO announced, "no more 'moon shots,' it might as well have become the new company slogan. For young engineers, the excitement which once swirled around working for the world's largest aerospace and defense company has been replaced by, "well, at least it will look good on my résumé." Those workers have been taking their résumés to competing firms in droves as of late. And the recipients of this talent pool are not just the usual suspects such as SpaceX, Blue Origin, and Virgin Galactic.
Since the beginning of last year, over 3,200 engineers and technicians have bolted from the firm—a figure which accounts for nearly one-fifth of the 18,000 Boeing workers represented by the Society of Professional Engineering Employees in Aerospace (SPEEA) union. While many have been attracted to SpaceX's stunning recent successes and Elon Musk's bold vision for the future of humanity in space, Amazon has also been a major destination for these skilled workers. The idea of remaining in the Seattle area with a nice pay bump has been the major selling point for the latter. Amazon employs these specialists to increase the efficiency at their warehouses, much like they did with the Boeing factory floors.
The airliner catastrophes and a lack of a new generation passenger aircraft on the drawing boards at Boeing have not been the only forces driving workers away. On the space side of the equation, the company's recent Starliner failures stand in stark comparison to the stunning SpaceX successes. The company will have another chance to prove itself with the upcoming crew capsule test slated for this weekend, but even with a glaring success the firm has a long way to go. Meanwhile, European nemesis Airbus is increasingly outpacing Boeing with respect to both orders and deliveries. In the first quarter of 2021, Boeing delivered 77 aircraft versus 125 jets for Airbus—a 62% differential. By the end of Q1, Airbus reported a backlog of nearly 6,000 jets, while Boeing's backlog amounted to just shy of 5,000 aircraft. Furthermore, with no exciting new designs to show potential buyers, we are not sure what will be the catalyst for a comeback.
In our opinion, there is a horrendous vacuum leadership at Boeing, and the company's great turnaround cannot occur until a nearly clean sweep is made at the top. Unfortunately, the entire leadership team would disagree with that assessment. It will take major activist investor push to force the change required, but there hasn't been much action on that front either. At least we have SpaceX around to spearhead America's great return to manned spaceflight.
Media & Entertainment
05. Scarlett Johansson sues Disney over streaming release of Black Widow, Disney fires back with scathing retort
Our immediate thought was, "poor Scarlett, $20 million for one movie wasn't enough?" However, the more we delved into the story, the more it appears this will be one heck of a court battle. Actor Scarlett Johansson, number seven on the list of IMDb's hottest female actors of 2021, is suing Disney (DIS $ 176) for simultaneously releasing Black Widow, in which she plays the eponymous lead role, in theaters and on the Disney+ streaming service for a fee. Johansson's beef is this: the better the movie does at the box office, the more she will stand to make for her role. According to her attorney, the streaming release was done primarily for Disney to add subscribers, and a large number of viewers decided to forego the theater and stream instead. The figures show that Disney did, indeed, fatten its wallet by charging $30 for Disney+ members to stream the movie. Over the course of its opening weekend, Black Widow raked in $80 million at the US box office, $78 million at the worldwide box office, and a whopping $60 million from its Disney+ platform.
Disney shot back directly at Johansson, saying that "the lawsuit is especially sad and distressing in its callous disregard for the horrific and prolonged global effects of the COVID-19 pandemic." Yes, Disney, we are sure you released the movie on your streaming service as a public service, which is why you charged paying subscribers an additional $30 a pop. Actually, the more we mull the situation over, the more we tend to side with Johansson. Based on other movies released during the pandemic and the way in which other studios compensated their talent, she probably would have made around $25 million more for the movie than she did. In addition to a probable loss in the courts, Disney will suffer a real black eye in Hollywood over this one.
When Bob Chapek took over at Disney, we cashed out—despite having owned the company in the Penn Global Leaders Club for years. It appears we made the right call. Nothing matters like management.
Capital Markets
04. HOOD's wild ride: platform for the meme stocks turns into one itself
By most accounts, it was a lackluster debut. The much-anticipated IPO of financial services platform Robinhood (HOOD $55) finally occurred last week, but shares ended up tumbling 12% from their $38 initial offering price almost immediately. Considering the platform boasts some 20 million accounts, one would have expected fireworks out of the gate, akin to an Airbnb ($145) or a DoorDash (DASH $176). But, alas, the WallStreetBets/reddit monster ended up harming the very company which fomented the movement, with some on the social media sites even calling on members to short the stock on day one. That is rich, considering users' raison d'être seemed to be destroying the shorts. ARK Investment's Cathie Wood, someone whom we respect a lot, may have played a part in the turnaround which occurred after day one by buying 1.85 million shares below the IPO price. Despite Wood's buy, we tend to agree with Morningstar's fair value of $30 on the shares, meaning they have some additional falling to do before we are interested.
When the reckoning does hit the markets, and it will, expect HOOD to get pounded. The world where an AMC, which is worth $5 per share, trades at $38 per share will eventually come crumbling down, and some semblance of sanity will return. At that point, there will be a lot of formerly-overvalued stocks worth picking up, and plenty we still wouldn't touch. As for HOOD, if the $30 fair value is accurate that means $25 per share might be a good point to jump in.
Automotive
03. We called it: Nikola's founder, Trevor Milton indicted on fraud charges
We have been calling EV maker Nikola (NKLA $11) little short of a sham for a couple of years now. Our opinion was cemented after we saw the company's founder, Trevor Milton, in several interviews. Based on decades of CEO-watching, we got a really bad feeling about the founder and his alleged product lineup. While the company was spared in the indictment, the US government has just charged the founder with three counts of fraud, stating that he lied to investors "about nearly all aspects of the business." We may have had a bad feeling about the firm, but investors certainly didn't: NKLA shares went from $10 in March of 2020 to $80 three months later, since dropping back to the $12 range. While at their high, Milton had a paper net worth of roughly $9 billion; that figure is now floating around $1 billion, but we imagine there is plenty more pain ahead. The wheels became to come off the cart last September after Hindenburg Research published a scathing article on the EV firm, pretty much echoing the government case—or vice versa. Shortly after the report was released, Milton was out at the firm he started and a deal the company cobbled together with General Motors fell apart (we excoriated GM when it made the deal). If we want to ignore the company's financials (basically zero revenue) and focus on production, try this on for size: the company has produced zero vehicles for public sale.
Tesla was enormously successful, so we should just jump into an EV maker that sounds like the next Tesla, right? Heck, this company even took the famous inventor's first name! Madness. It is understandable that the financials wouldn't look stellar on a nascent company trying to break into an industry with a pretty tall barrier to entry, but we are talking about a company that went public without having one vehicle roll off of an assembly line. NKLA may not have been a meme stock, but the same level of (ir)rational thought went into the purchase of the shares.
Industrial Conglomerates
02. A sure sign of desperation: financial engineering has replaced cutting-edge engineering at General Electric
I feel bad for General Electric (GE $105); embarrassed for this once-great American powerhouse. Has Edison's firm really been reduced to this? Some companies have a "move fast and break things" mentality. GE's grand strategic vision is "let's do a reverse stock split at just the right level to move our share price into triple digits like our competition." I mean, that's simply embarrassing. The move is tantamount to an admission that the company can't get its stock price to triple digits the old fashioned way, through hard work, relentless creativity, and a stellar sales force. Instead, management performed the corporate version of breaking into the school's server to change a grade from a C- to an A+. Here's a question: name the last company that regained a leadership role in an industry after performing a reverse stock split? Good luck—we couldn't think of any. General Electric, once a "move fast and break things" company, now makes most of its profits from servicing the equipment it had previously sold to customers. Unlike an Apple, however, the firm isn't introducing the new products necessary to feed an ever-growing services business. When it finds itself in need of a new supply of cash, it simply sells one of its legacy businesses. Jeffrey Immelt, who spent too much time flying around on one of his two corporate jets (the other would travel behind in case of mechanical problems), started the great downturn at General Electric; unfortunately, Larry Culp doesn't seem to be the dynamic disruptor so desperately needed at the firm. Maybe he and Boeing's David Calhoun can have a few adult beverages one of these days and reminisce about the good old days at their respective firms.
General Electric was one of those global leaders which always had a place in our portfolios. No longer. GE is a case study in the importance of understanding what you own and why. We have a neighbor who had a gorgeous and enormous white pine in his back yard. One day we noticed that the needles at the top of the tree began turning brown. Instead of calling in a tree expert at the first sign of trouble, he figured the problem would take care of itself. Needless to say, the problem rapidly spread and the tree met its demise. A company used to be able to rest on its laurels and simply weather some boneheaded tactical or even strategic errors by upper management. Those days are gone, but the entrenched members of the board at a company like GE seem content to collect their pay and stay the course. Good luck. Pardon us if we choose not to board your next flight.
Market Week in Review
01. Yet another solid jobs report helps cobble together a positive week for the markets
It was difficult to find much wrong with the employment situation in America for the month of July, except for the fact that employers couldn't find enough workers to fill the open slots. Against expectations for 862,500 new nonfarm jobs for the month, companies actually hired 943,000 workers; June's 850,000 figure was also revised higher, to 938,000. The unemployment rate was, perhaps, the most pleasant surprise of all: it ticked down a whopping 50 basis points, from 5.9% to 5.4%. We are slowly but steadily getting back to the pre-pandemic unemployment rate of 3.5%, recorded in the halcyon days of February, 2020. The jobs report helped sway two market conditions: the 10-year Treasury rose from 1.228% to 1.303%, and all of the major indexes recorded gains for the week. Another five days of strong earnings releases also helped strengthen the stock market—especially the small caps. The Russell 2000 rose 1.46% on the week. On Monday, an interesting figure from the Bureau of Labor Statistics will be released: the Job Openings and Labor Turnover Survey, or JOLTS. Economists are predicting a near-record 9.1 million new job openings for the last business day of June. Quite a different story from a year ago.
Under the Radar Investment
Afry AB
Afry AB (AFXXF $17) is a $1.9 billion Swedish-Finnish engineering and consulting firm with projects in the energy, industrial, and infrastructure markets. On the infrastructure front, Afry provides sustainable technology solutions for railways, roads, and other transportation networks. In the energy sector, the firm constructs plants and provides market analysis for power generation, manufacturing facilities, and chemical refining plants. This is a play on a European recovery, as the overwhelming percentage of sales emanate from that continent. With a 15 P/E ratio and a 3.57% dividend yield, the company generated revenues of $2.07 billion in 2020 and $2.238 billion TTM, signaling a nice growth trajectory. Afry was founded in 1895 and trades on the Nasdaq Stockholm AB, formerly known as the Stockholm Stock Exchange.
Answer
Since February 16th, the Dow Jones Internet ETF hasn't been too impressive, with the aggregate shares down 0.47%. Those results appear stellar, however, when compared to a group of Chinese Internet stocks, which are down 53% in the same period. Alibaba, Tencent, and JD.com are the top three holdings in the group.
Headlines for the Week of 27 Jun—03 Jul 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The movement was set in motion well before the Declaration of Independence...
While the final wording of the American Declaration of Independence was approved by the Second Continental Congress on 04 July 1776, the die had already been cast. What battle served as the demarcation point, the event from which there was no turning back?
Penn Trading Desk:
Cowen: Under Armour is "best idea"
Shares of sports apparel manufacturer Under Armour (UA $19, UAA $21) shot up around 4% following an upgrade by investment research firm Cowen, which put it on its "best idea" list. Analysts at the firm believe that UA is well poised to take advantage of the return of team sports and a back to school season which will be largely free from mask requirements. Cowen has an overweight rating on the company with a price target of $31 per share. We are not as bullish, as Under Armour is heavily dependent on sales in the Asia Pacific region, and tensions remain high (rightfully so) between China and the US. We also don't like the multi-share-class gimmick. An investor can buy Class A shares under the ticker UA and have one vote per share. The same investor could buy Class C shares under the ticker UAA and have no voting rights. Of course, the anointed company insiders like Kevin Plank own Class B shares, which the hoi polloi cannot touch—and which carry around ten votes per share. Gimmickry. For the record, six years ago UAA was trading above $51 per share.
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Business & Professional Services
10. DoorDash is ramping up its grocery delivery business with Albertsons partnership
With over 450,000 merchants, 20 million consumer/customers, and one million dashers on its platform, DoorDash (DASH $175) is already the largest food delivery service in the United States—despite just going public late last year. How far the company has come in seven years, from back when it was known as Palo Alto Delivery, Inc. Now, the San Fran-based firm is entering the competitive grocery delivery business, inking a deal with grocer Albertsons (ACI $20) to offer delivery of the chain's goods on its marketplace app. DashPass customers will be able to order grocery and household items from nearly 2,000 Albertsons-owned stores, which include Safeway, Jewel-Osco, and Vons. For a monthly subscription fee of $9.99, members receive free deliveries and reduced fees from thousands of restaurants, grocery stores, and convenience stores, according to the DoorDash website. Over 40,000 grocery items will be available on the marketplace app. DoorDash has also recently entered into delivery agreements with PetSmart and Bed Bath & Beyond, in addition to making a major international move into Japan. In 2020, DASH generated revenues of $2.9 billion, an increase of 229% over 2019 revenues (which, themselves, were up 310% from the prior year).
There are going to be a handful of big, long-term winners in this new niche industry. In addition to the obvious mega-cap players (Amazon, Walmart), we see DoorDash and Uber increasing their market share for years to come. Actually, it would be relatively safe to bet on any of these four names going forward, assuming the fit is right for the respective portfolio.
Cryptocurrencies
09. The real reason China is cracking down on cryptos
Oh, the naive press. If only they would give esteemed American establishments the same deference they show to the Chinese Communist Party. The big price drop in cryptos at the start of the week came on the heels of a major Chinese crackdown; the press got that part of the story right, but what they missed was the real catalyst behind the move. Absurdly, one major business publication said, "Concerns about the environmental impact (of the computers that mine Bitcoin) continue to swirl." Yep, they nailed it. The greatest polluter in the world is suddenly concerned that Bitcoin mining might make the air over Xinjiang a little bit browner.
The real reason the CCP ordered the People's Bank of China to warn lenders to cease using cryptocurrencies, and for the major provinces where mining takes place to crack down on production, is two-fold. First, by their very nature, digital coins are hard to control, and the CCP is all about control. Once the coins have been mined they can travel freely through the ether, generally untouchable by a central power. The second reason has to do with China's own ambitions in the arena. As we have mentioned before, the country wants to create a digital yuan that will ultimately (in the eyes of the party) become the world's leading currency, supplanting the dollar. The incredible amount of hydropower used for mining should be reserved for the state's own coinage, not the free market's. Don't believe anything you hear about the government's sudden concern over the environment, or the need to preserve electricity for the Chinese people—only journalists are gullible enough to fall for that straw man.
When Bitcoin rose above $64,000, the experts were pointing to $100,000 as the next major stop. On Tuesday, the coins broke below $29,000 and there isn't much clarity on where prices are headed from here. The China-induced drop is interesting; if Chinese mining goes offline, shouldn't that bode well for the price of the commodity? For those with FOMO, we recommend opening a Coinbase account and buying a few of the fifty or so cryptos available on the platform.
Consumer Finance
08. And the world's dumbest new idea goes to...drumroll, please...the credit card designed to pay your rent*
I love history. Reading about the brilliant successes and colorful failures of the past and considering how their lessons can be applied to current, real-world situations. This can be an effective tool in separating the right course of action from the wrong, or the smart from incredibly stupid. In the latter camp, fintech startup Kairos just launched a new loyalty program, Bilt Rewards, tied to its co-branded Bilt Mastercard which is being affectionately labeled "the renter's credit card." Kairos founder and CEO Ankur Jain said it's not fair that credit card users gain rewards for traveling or shopping (paraphrasing), but that renters haven't been able to earn rewards on their largest expenditure, their rent payment. That is some stunningly convoluted thinking.
The concept is straightforward: pay your rent using your Bilt Mastercard and start earning 250 rewards points per rent payment, along with any other perks your landlord wants to throw in. And don't worry about checking whether or not your apartment is a qualifying property; if it is, you should automatically receive an email within the next six months informing you of your eligibility. And the more you use your card, the higher you can climb in the membership levels of Blue, Silver, Gold, and Platinum status. Bilt Rewards can be redeemed for such things as travel, fitness classes, even art purchases through the Bilt Collection. When pressed on the credit card's interest rate, Jain said that it should be in the "14-22% range...it's standard."
Remember when it was a sign of prestige to carry an American Express card that had to be paid off each month? This card is not that. The idea of putting rent on a credit card is one of the most irresponsible concepts to manifest as of late, and that is saying a lot. Rewarding people for doing the wrong thing, encouraging them to put their rent on a credit card when odds are strong they don't even have an IRA set up, is sickening. Shame on the founder of this company, and on Mastercard for going along with the deal. And the same goes for the Bilt Rewards Alliance of property owners participating in this scheme.
Global Strategy: East & Southeast Asia
07. Communist China forces shutdown of Hong Kong's last remaining pro-democracy newspaper
We recall, back in the late 1990s, how silly the argument seemed: although sovereignty over the British colony of Hong Kong was being passed to China, many so-called experts were telling us that the communist nation wouldn't dare kill their golden goose. Granted, it took a few decades to quell the basic hallmarks of a free society, but this week pretty much sealed the deal. Apple Daily, the wealthy island's last remaining pro-democracy newspaper, has been killed. It began with the (second) jailing of the paper's majority owner, Jimmy Lai. Then, Hong Kong's puppet regime froze the company's assets and seized its journalists' computers. The final straw was the arrest of two top executives under a new national security law Beijing imposed on the island to stifle dissent. Following that move, Apple Daily reported that both its print edition and website would cease operations. It is the beginning of a full-scale collapse of freedom in Hong Kong, which begs the question: how much longer can Taiwan remain a free country? Furthermore, what will the United States, which is bound by agreement to protect the nation from Chinese attack, do when the inevitable begins to unfold.
America wouldn't have dreamed of accepting wave after wave of goods-laden shipping containers from the Soviet Union during the Cold War, yet we are funding the insatiable appetite of Communist China, and its dreams of global domination, by welcoming in some $500 billion per year of goods from that country, even though China only imports around $130 billion per year of US goods. This situation must change. If US companies are unwilling to break the deadly cycle and search elsewhere around the world for imports, they must be strongly coerced by the federal government to do so. Better yet, they should consider saving on the shipping costs by manufacturing domestically—or at least within the USMCA region.
Pharmaceuticals
06. More exciting news on the Alzheimer's front
For such a horrible and deadly disease which hasn't seen much progress on the therapies front over the past two decades, researchers may finally be rounding the corner with respect to Alzheimer's. Last week was the exciting news that Biogen's (BIIB $351) aducanumab (trade name Aduhelm) had been given the green light by the FDA; now, the organization has granted breakthrough therapy designation to Eli Lilly's (LLY $234) Alzheimer's therapy donanemab. This designation will speed along the drug's approval process, the application for which Lilly plans to submit later this year. Despite the naysayers' multi-faceted complaints about these drugs, the FDA is doing the right thing by allowing them to go forward. These positive rulings will help speed along the development of other drugs to treat the disease, and ultimately the exorbitant prices for the therapies will fall. The FDA has smoothed the way for pharma and biotech companies to pump increased R&D spending into the category, giving hope to the families of the six million Americans suffering with this horrendous condition.
We continue to overweight the Health Care sector and a number of industries within the space. On the back of stunning advances in medical technology, we can expect to see a biotech and pharma boom over the next decade, with new therapies for diseases which have stymied researchers for decades. The greatest threat to this boom would be increased government regulatory control over the industry, but we see that as an unlikely scenario. We hold a number of health care companies and ETFs in the Dynamic Growth Strategy, Penn Global Leaders Club, and Penn New Frontier Fund.
Space Tourism
05. Virgin Galactic gets OK from FAA to fly passengers into space
Virgin Galactic (SPCE $54) shares were soaring 34% higher on Friday following news that the FAA granted approval for the company to begin sending people into space aboard its spaceplanes. The full commercial space-launch license opens the door for space tourism, the firm's only immediate source of revenues. It is interesting to note that Blue Origin, which is owned by Jeff Bezos, has yet to receive this FAA stamp of approval, despite Bezos recently announcing that he would be a part of the company's first manned flight scheduled for July. When pressed about the Blue Origin certification, an FAA spokesperson said that the agency would "make a decision when and if all regulatory requirements are met." As for Virgin, the company said it has already sold over 600 tickets for rides aboard its SpaceShipTwo spaceplanes, with each one going for around $250,000. The company plans to have a fleet of five craft launching from its Spaceport America launch site in New Mexico. Ultimately, the plans call for launches taking place from multiple sites around the country, with destinations ranging from major cities around the world, to space-based hotels in orbit. Regarding the FAA certification, it is interesting to note that the agency has no authority over spacecraft operating above the atmosphere, but they do control the safety of the airways traversed by the spacecraft between launch and orbit.
At $54 per share, SPCE seems to have a pretty lofty valuation—even though we are excited about the company's strategic plans. It is normal for a nascent growth company to have no P/E ratio, as they often have no earnings. What is unique about Virgin Galactic is its $13 billion market cap on a foundation of virtually zero revenues as well—other than the 250-large they collected for each ticket sold for the promise of a future flight.
Textiles, Apparel, & Luxury Goods
04. PVH is selling its legacy clothing lines to Authentic Brands
Apparel manufacturing firm PVH (PVH $109) is selling four of its legacy brands, or what they call their Heritage Brands, to Authentic for $220 million. Why would the company want to part ways with prominent names Izod, Van Heusen, Arrow, and Geoffrey Beene? Management says it is doing so to "drive the next chapter of sustainable, profitable, growth," which will be built on a foundation of the Calvin Kline and Tommy Hilfiger brands. The company also said it plans on "supercharging" its e-commerce channel. That actually makes sense in this new world of hybrid workers buying fewer suits and more work-casual clothing. It is also interesting to note that this is the first major move by new CEO (Feb, 2021) Stefan Larsson—though longtime CEO and well-respected industry insider Manny Chirico did take on the role of Chairman of the Board. Not counting Chirico, the average tenure of PVH's management team is just 1.5 years. As for the buyer of these brands, privately-held Authentic is collecting quite the portfolio. In addition to these four names, the company owns Forever 21, Lucky Brand, Nine West, and part of Brooks Brothers—which it helped buy out of bankruptcy last year. Before the pandemic, PVH had an annual revenue of approximately $10 billion and a net income which was perennially in the black. Last year, the firm notched $7 billion in sales and lost $1.16 billion.
We actually like the move by $7.7 billion PVH to sell off these legacy brands, but is the stock a buy? We don't think so. It is estimated that the company will generate $6.73 in earnings per share in FY2022, which is about what it generated in FY2017. The share price ranged from $84 to $139 that year, and we wouldn't touch it above $75 per share. Perhaps the fledgling management team will impress, but this single move is really all we have to go on thus far.
Interactive Media & Services
03. Facebook joins the Trillion Dollar Club after judge throws out the FTC's complaint
Talk about some rarified air: Facebook (FB $356) joined an elite group of companies carrying a market cap of over one trillion dollars after a US District Court judge threw out the antitrust complaints against the company filed by the Federal Trade Commission and virtually all states' attorneys general. That dismissal led to a 4.25% pop in the company's share price, giving it a $1.009 trillion valuation. Facebook joins Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) in the tiny group of companies which can boast of a $1 trillion size. While Judge James Boasberg disputed the FTC's claim that Facebook was a monopoly, he did leave the door open for the agency to amend its complaint and submit a revised filing. Had it been successful, the complaint could have forced Facebook to divest itself of both the WhatsApp and Instagram platforms. The court seemed to excoriate the plaintiffs' lack of effort, at one point in the ruling saying that the allegations "do not even provide an estimated figure or range for Facebook's market share at any point over the past ten years...." Ouch. It seems as though the judge felt there was some hubris involved in the suit, with an "expectation" that the court would find fault in Facebook's business practices. Arrogance and hubris among government officials? Shocking.
Despite all the bluster among elected officials about cutting these big social media companies down to size, we think very little gets accomplished (to that end) in the near future. As a matter of fact, a 20% investment in each of these five behemoths—beginning today—would probably yield some impressive results if we were to go forward five years in time and gauge the investment bucket's return.
Restaurants
02. Krispy Kreme: Love the doughnuts, hate the stock
More technically, love the doughnuts, hate the financial engineering firm that is bringing the company public...again. Krispy Kreme, former symbol KKD, used to be one of our favorite trading stocks. We actually had a client at A.G. Edwards who would only trade two stocks, KKD and WMT, based on whether the economy was in an expansionary period or a contraction phase. Fast forward to 2016, when KKD was taken private by the powerful German Reimann family, via their JAB Holding Company. JAB had also gobbled up the likes of Peet's Coffee, Panera Bread, Keurig Dr. Pepper, Einstein Bros. Bagels, and a host of other fast food and consumer goods companies. As with all financial engineering firms, the strategy is to make as much money as possible with as little effort as possible, and one popular tactic is the repackaging of companies to bring public once again under a shiny new symbol. That is precisely what JAB did with Krispy Kreme, which now trades under the new—admittedly catchier—symbol DNUT ($19). Perhaps the most insulting aspect of this game of smoke and mirrors is the fact that JAB will retain 78% control of the firm, so suckers...er, investors...beware. Investors did appear to be leery of the game: after planning to offer $26.7 million shares in the range of $21 to $24, soft demand led to the holding company selling 29.4 million shares at $17. While they did rocket up 24% from the offering price on IPO day, the shares steadily declined from there. DNUT shares closed out their first week at $19.12.
We have to wonder how many DNUT investors were aware of the company's back story as opposed to just thinking, "cool, Krispy Kreme is going public and the shares are cheap." They are actually not cheap. In fact, Amazon shares at $3,510 are "cheaper" than DNUT at $19. But none of that seems to matter in these days of meme stocks and SPACs. If shares are $25 or less, it must be a good deal, so let's buy in and watch the confetti fall on our iPhone screen.
Market Week in Review
01. Strong June jobs report leads to weekly gains across the board
All of the major indexes—along with the price of crude—rose over 1% this week on the back of a solid June jobs report. The economy added 850,000 new jobs for the month, and while the unemployment rate ticked up 10 basis points (to 5.9%), that was simply due to more Americans re-entering the job market. Investors actually liked the small uptick, as it lessens the odds of the Fed tightening sooner than expected. In a sign that employers are having a difficult time filling open spots, hourly wages in the private sector rose a robust 3.6% from a year ago. Among the sectors and market caps, big tech names led the week's rally, with the NASDAQ jumping 1.94%. Crude oil rose 1.62% on the week, trading a whopping 55% higher on the year. The first two months of the "worst six months of the year" have come and gone, and we are impressed at how well the markets have held up thus far.
Under the Radar Investment
Kratos Defense & Security Solutions
Kratos Defense & Security Solutions Inc (KTOS $28), despite its small size ($3.7B), is a key player in America's defense and aerospace infrastructure. The company develops and fields advanced systems and platforms for national security and communications needs. Its Skyborg program is focused on expanding the envelope of unmanned aircraft use, especially as related to artificial intelligence; while its Defense and Rocket Support Services (DRSS) division develops hypersonic test vehicles for America's missile defense initiative. Civilian and government satellite operators, meanwhile, rely on Kratos as their strategic supplier of end-to-end enterprise products. We especially like the company's size and financial health, and believe the company will continue along its strong growth trajectory.
Answer
While the battles of Lexington and Concord, which were fought on 19 April 1775, technically kicked off the American Revolution, it was the Battle of Bunker Hill, which was actually fought on Breed's Hill on 17 June 1775, that made both sides in the fight realize there was no turning back. While the British won the battle, it was a Pyrrhic victory: the number of British killed or wounded (1,054, including 89 officers) was over twice that suffered on the American side. The King's troops and their loyalist allies in Boston were left stunned and shocked, while the "loss" served as a rallying cry for the patriots' cause. George Washington, who had been appointed commander of the Continental Army just three days prior, arrived shortly after the conclusion of the battle. Soon, the disparate militias of the various colonies would be forged into one American force.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The movement was set in motion well before the Declaration of Independence...
While the final wording of the American Declaration of Independence was approved by the Second Continental Congress on 04 July 1776, the die had already been cast. What battle served as the demarcation point, the event from which there was no turning back?
Penn Trading Desk:
Cowen: Under Armour is "best idea"
Shares of sports apparel manufacturer Under Armour (UA $19, UAA $21) shot up around 4% following an upgrade by investment research firm Cowen, which put it on its "best idea" list. Analysts at the firm believe that UA is well poised to take advantage of the return of team sports and a back to school season which will be largely free from mask requirements. Cowen has an overweight rating on the company with a price target of $31 per share. We are not as bullish, as Under Armour is heavily dependent on sales in the Asia Pacific region, and tensions remain high (rightfully so) between China and the US. We also don't like the multi-share-class gimmick. An investor can buy Class A shares under the ticker UA and have one vote per share. The same investor could buy Class C shares under the ticker UAA and have no voting rights. Of course, the anointed company insiders like Kevin Plank own Class B shares, which the hoi polloi cannot touch—and which carry around ten votes per share. Gimmickry. For the record, six years ago UAA was trading above $51 per share.
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Business & Professional Services
10. DoorDash is ramping up its grocery delivery business with Albertsons partnership
With over 450,000 merchants, 20 million consumer/customers, and one million dashers on its platform, DoorDash (DASH $175) is already the largest food delivery service in the United States—despite just going public late last year. How far the company has come in seven years, from back when it was known as Palo Alto Delivery, Inc. Now, the San Fran-based firm is entering the competitive grocery delivery business, inking a deal with grocer Albertsons (ACI $20) to offer delivery of the chain's goods on its marketplace app. DashPass customers will be able to order grocery and household items from nearly 2,000 Albertsons-owned stores, which include Safeway, Jewel-Osco, and Vons. For a monthly subscription fee of $9.99, members receive free deliveries and reduced fees from thousands of restaurants, grocery stores, and convenience stores, according to the DoorDash website. Over 40,000 grocery items will be available on the marketplace app. DoorDash has also recently entered into delivery agreements with PetSmart and Bed Bath & Beyond, in addition to making a major international move into Japan. In 2020, DASH generated revenues of $2.9 billion, an increase of 229% over 2019 revenues (which, themselves, were up 310% from the prior year).
There are going to be a handful of big, long-term winners in this new niche industry. In addition to the obvious mega-cap players (Amazon, Walmart), we see DoorDash and Uber increasing their market share for years to come. Actually, it would be relatively safe to bet on any of these four names going forward, assuming the fit is right for the respective portfolio.
Cryptocurrencies
09. The real reason China is cracking down on cryptos
Oh, the naive press. If only they would give esteemed American establishments the same deference they show to the Chinese Communist Party. The big price drop in cryptos at the start of the week came on the heels of a major Chinese crackdown; the press got that part of the story right, but what they missed was the real catalyst behind the move. Absurdly, one major business publication said, "Concerns about the environmental impact (of the computers that mine Bitcoin) continue to swirl." Yep, they nailed it. The greatest polluter in the world is suddenly concerned that Bitcoin mining might make the air over Xinjiang a little bit browner.
The real reason the CCP ordered the People's Bank of China to warn lenders to cease using cryptocurrencies, and for the major provinces where mining takes place to crack down on production, is two-fold. First, by their very nature, digital coins are hard to control, and the CCP is all about control. Once the coins have been mined they can travel freely through the ether, generally untouchable by a central power. The second reason has to do with China's own ambitions in the arena. As we have mentioned before, the country wants to create a digital yuan that will ultimately (in the eyes of the party) become the world's leading currency, supplanting the dollar. The incredible amount of hydropower used for mining should be reserved for the state's own coinage, not the free market's. Don't believe anything you hear about the government's sudden concern over the environment, or the need to preserve electricity for the Chinese people—only journalists are gullible enough to fall for that straw man.
When Bitcoin rose above $64,000, the experts were pointing to $100,000 as the next major stop. On Tuesday, the coins broke below $29,000 and there isn't much clarity on where prices are headed from here. The China-induced drop is interesting; if Chinese mining goes offline, shouldn't that bode well for the price of the commodity? For those with FOMO, we recommend opening a Coinbase account and buying a few of the fifty or so cryptos available on the platform.
Consumer Finance
08. And the world's dumbest new idea goes to...drumroll, please...the credit card designed to pay your rent*
I love history. Reading about the brilliant successes and colorful failures of the past and considering how their lessons can be applied to current, real-world situations. This can be an effective tool in separating the right course of action from the wrong, or the smart from incredibly stupid. In the latter camp, fintech startup Kairos just launched a new loyalty program, Bilt Rewards, tied to its co-branded Bilt Mastercard which is being affectionately labeled "the renter's credit card." Kairos founder and CEO Ankur Jain said it's not fair that credit card users gain rewards for traveling or shopping (paraphrasing), but that renters haven't been able to earn rewards on their largest expenditure, their rent payment. That is some stunningly convoluted thinking.
The concept is straightforward: pay your rent using your Bilt Mastercard and start earning 250 rewards points per rent payment, along with any other perks your landlord wants to throw in. And don't worry about checking whether or not your apartment is a qualifying property; if it is, you should automatically receive an email within the next six months informing you of your eligibility. And the more you use your card, the higher you can climb in the membership levels of Blue, Silver, Gold, and Platinum status. Bilt Rewards can be redeemed for such things as travel, fitness classes, even art purchases through the Bilt Collection. When pressed on the credit card's interest rate, Jain said that it should be in the "14-22% range...it's standard."
Remember when it was a sign of prestige to carry an American Express card that had to be paid off each month? This card is not that. The idea of putting rent on a credit card is one of the most irresponsible concepts to manifest as of late, and that is saying a lot. Rewarding people for doing the wrong thing, encouraging them to put their rent on a credit card when odds are strong they don't even have an IRA set up, is sickening. Shame on the founder of this company, and on Mastercard for going along with the deal. And the same goes for the Bilt Rewards Alliance of property owners participating in this scheme.
Global Strategy: East & Southeast Asia
07. Communist China forces shutdown of Hong Kong's last remaining pro-democracy newspaper
We recall, back in the late 1990s, how silly the argument seemed: although sovereignty over the British colony of Hong Kong was being passed to China, many so-called experts were telling us that the communist nation wouldn't dare kill their golden goose. Granted, it took a few decades to quell the basic hallmarks of a free society, but this week pretty much sealed the deal. Apple Daily, the wealthy island's last remaining pro-democracy newspaper, has been killed. It began with the (second) jailing of the paper's majority owner, Jimmy Lai. Then, Hong Kong's puppet regime froze the company's assets and seized its journalists' computers. The final straw was the arrest of two top executives under a new national security law Beijing imposed on the island to stifle dissent. Following that move, Apple Daily reported that both its print edition and website would cease operations. It is the beginning of a full-scale collapse of freedom in Hong Kong, which begs the question: how much longer can Taiwan remain a free country? Furthermore, what will the United States, which is bound by agreement to protect the nation from Chinese attack, do when the inevitable begins to unfold.
America wouldn't have dreamed of accepting wave after wave of goods-laden shipping containers from the Soviet Union during the Cold War, yet we are funding the insatiable appetite of Communist China, and its dreams of global domination, by welcoming in some $500 billion per year of goods from that country, even though China only imports around $130 billion per year of US goods. This situation must change. If US companies are unwilling to break the deadly cycle and search elsewhere around the world for imports, they must be strongly coerced by the federal government to do so. Better yet, they should consider saving on the shipping costs by manufacturing domestically—or at least within the USMCA region.
Pharmaceuticals
06. More exciting news on the Alzheimer's front
For such a horrible and deadly disease which hasn't seen much progress on the therapies front over the past two decades, researchers may finally be rounding the corner with respect to Alzheimer's. Last week was the exciting news that Biogen's (BIIB $351) aducanumab (trade name Aduhelm) had been given the green light by the FDA; now, the organization has granted breakthrough therapy designation to Eli Lilly's (LLY $234) Alzheimer's therapy donanemab. This designation will speed along the drug's approval process, the application for which Lilly plans to submit later this year. Despite the naysayers' multi-faceted complaints about these drugs, the FDA is doing the right thing by allowing them to go forward. These positive rulings will help speed along the development of other drugs to treat the disease, and ultimately the exorbitant prices for the therapies will fall. The FDA has smoothed the way for pharma and biotech companies to pump increased R&D spending into the category, giving hope to the families of the six million Americans suffering with this horrendous condition.
We continue to overweight the Health Care sector and a number of industries within the space. On the back of stunning advances in medical technology, we can expect to see a biotech and pharma boom over the next decade, with new therapies for diseases which have stymied researchers for decades. The greatest threat to this boom would be increased government regulatory control over the industry, but we see that as an unlikely scenario. We hold a number of health care companies and ETFs in the Dynamic Growth Strategy, Penn Global Leaders Club, and Penn New Frontier Fund.
Space Tourism
05. Virgin Galactic gets OK from FAA to fly passengers into space
Virgin Galactic (SPCE $54) shares were soaring 34% higher on Friday following news that the FAA granted approval for the company to begin sending people into space aboard its spaceplanes. The full commercial space-launch license opens the door for space tourism, the firm's only immediate source of revenues. It is interesting to note that Blue Origin, which is owned by Jeff Bezos, has yet to receive this FAA stamp of approval, despite Bezos recently announcing that he would be a part of the company's first manned flight scheduled for July. When pressed about the Blue Origin certification, an FAA spokesperson said that the agency would "make a decision when and if all regulatory requirements are met." As for Virgin, the company said it has already sold over 600 tickets for rides aboard its SpaceShipTwo spaceplanes, with each one going for around $250,000. The company plans to have a fleet of five craft launching from its Spaceport America launch site in New Mexico. Ultimately, the plans call for launches taking place from multiple sites around the country, with destinations ranging from major cities around the world, to space-based hotels in orbit. Regarding the FAA certification, it is interesting to note that the agency has no authority over spacecraft operating above the atmosphere, but they do control the safety of the airways traversed by the spacecraft between launch and orbit.
At $54 per share, SPCE seems to have a pretty lofty valuation—even though we are excited about the company's strategic plans. It is normal for a nascent growth company to have no P/E ratio, as they often have no earnings. What is unique about Virgin Galactic is its $13 billion market cap on a foundation of virtually zero revenues as well—other than the 250-large they collected for each ticket sold for the promise of a future flight.
Textiles, Apparel, & Luxury Goods
04. PVH is selling its legacy clothing lines to Authentic Brands
Apparel manufacturing firm PVH (PVH $109) is selling four of its legacy brands, or what they call their Heritage Brands, to Authentic for $220 million. Why would the company want to part ways with prominent names Izod, Van Heusen, Arrow, and Geoffrey Beene? Management says it is doing so to "drive the next chapter of sustainable, profitable, growth," which will be built on a foundation of the Calvin Kline and Tommy Hilfiger brands. The company also said it plans on "supercharging" its e-commerce channel. That actually makes sense in this new world of hybrid workers buying fewer suits and more work-casual clothing. It is also interesting to note that this is the first major move by new CEO (Feb, 2021) Stefan Larsson—though longtime CEO and well-respected industry insider Manny Chirico did take on the role of Chairman of the Board. Not counting Chirico, the average tenure of PVH's management team is just 1.5 years. As for the buyer of these brands, privately-held Authentic is collecting quite the portfolio. In addition to these four names, the company owns Forever 21, Lucky Brand, Nine West, and part of Brooks Brothers—which it helped buy out of bankruptcy last year. Before the pandemic, PVH had an annual revenue of approximately $10 billion and a net income which was perennially in the black. Last year, the firm notched $7 billion in sales and lost $1.16 billion.
We actually like the move by $7.7 billion PVH to sell off these legacy brands, but is the stock a buy? We don't think so. It is estimated that the company will generate $6.73 in earnings per share in FY2022, which is about what it generated in FY2017. The share price ranged from $84 to $139 that year, and we wouldn't touch it above $75 per share. Perhaps the fledgling management team will impress, but this single move is really all we have to go on thus far.
Interactive Media & Services
03. Facebook joins the Trillion Dollar Club after judge throws out the FTC's complaint
Talk about some rarified air: Facebook (FB $356) joined an elite group of companies carrying a market cap of over one trillion dollars after a US District Court judge threw out the antitrust complaints against the company filed by the Federal Trade Commission and virtually all states' attorneys general. That dismissal led to a 4.25% pop in the company's share price, giving it a $1.009 trillion valuation. Facebook joins Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL) in the tiny group of companies which can boast of a $1 trillion size. While Judge James Boasberg disputed the FTC's claim that Facebook was a monopoly, he did leave the door open for the agency to amend its complaint and submit a revised filing. Had it been successful, the complaint could have forced Facebook to divest itself of both the WhatsApp and Instagram platforms. The court seemed to excoriate the plaintiffs' lack of effort, at one point in the ruling saying that the allegations "do not even provide an estimated figure or range for Facebook's market share at any point over the past ten years...." Ouch. It seems as though the judge felt there was some hubris involved in the suit, with an "expectation" that the court would find fault in Facebook's business practices. Arrogance and hubris among government officials? Shocking.
Despite all the bluster among elected officials about cutting these big social media companies down to size, we think very little gets accomplished (to that end) in the near future. As a matter of fact, a 20% investment in each of these five behemoths—beginning today—would probably yield some impressive results if we were to go forward five years in time and gauge the investment bucket's return.
Restaurants
02. Krispy Kreme: Love the doughnuts, hate the stock
More technically, love the doughnuts, hate the financial engineering firm that is bringing the company public...again. Krispy Kreme, former symbol KKD, used to be one of our favorite trading stocks. We actually had a client at A.G. Edwards who would only trade two stocks, KKD and WMT, based on whether the economy was in an expansionary period or a contraction phase. Fast forward to 2016, when KKD was taken private by the powerful German Reimann family, via their JAB Holding Company. JAB had also gobbled up the likes of Peet's Coffee, Panera Bread, Keurig Dr. Pepper, Einstein Bros. Bagels, and a host of other fast food and consumer goods companies. As with all financial engineering firms, the strategy is to make as much money as possible with as little effort as possible, and one popular tactic is the repackaging of companies to bring public once again under a shiny new symbol. That is precisely what JAB did with Krispy Kreme, which now trades under the new—admittedly catchier—symbol DNUT ($19). Perhaps the most insulting aspect of this game of smoke and mirrors is the fact that JAB will retain 78% control of the firm, so suckers...er, investors...beware. Investors did appear to be leery of the game: after planning to offer $26.7 million shares in the range of $21 to $24, soft demand led to the holding company selling 29.4 million shares at $17. While they did rocket up 24% from the offering price on IPO day, the shares steadily declined from there. DNUT shares closed out their first week at $19.12.
We have to wonder how many DNUT investors were aware of the company's back story as opposed to just thinking, "cool, Krispy Kreme is going public and the shares are cheap." They are actually not cheap. In fact, Amazon shares at $3,510 are "cheaper" than DNUT at $19. But none of that seems to matter in these days of meme stocks and SPACs. If shares are $25 or less, it must be a good deal, so let's buy in and watch the confetti fall on our iPhone screen.
Market Week in Review
01. Strong June jobs report leads to weekly gains across the board
All of the major indexes—along with the price of crude—rose over 1% this week on the back of a solid June jobs report. The economy added 850,000 new jobs for the month, and while the unemployment rate ticked up 10 basis points (to 5.9%), that was simply due to more Americans re-entering the job market. Investors actually liked the small uptick, as it lessens the odds of the Fed tightening sooner than expected. In a sign that employers are having a difficult time filling open spots, hourly wages in the private sector rose a robust 3.6% from a year ago. Among the sectors and market caps, big tech names led the week's rally, with the NASDAQ jumping 1.94%. Crude oil rose 1.62% on the week, trading a whopping 55% higher on the year. The first two months of the "worst six months of the year" have come and gone, and we are impressed at how well the markets have held up thus far.
Under the Radar Investment
Kratos Defense & Security Solutions
Kratos Defense & Security Solutions Inc (KTOS $28), despite its small size ($3.7B), is a key player in America's defense and aerospace infrastructure. The company develops and fields advanced systems and platforms for national security and communications needs. Its Skyborg program is focused on expanding the envelope of unmanned aircraft use, especially as related to artificial intelligence; while its Defense and Rocket Support Services (DRSS) division develops hypersonic test vehicles for America's missile defense initiative. Civilian and government satellite operators, meanwhile, rely on Kratos as their strategic supplier of end-to-end enterprise products. We especially like the company's size and financial health, and believe the company will continue along its strong growth trajectory.
Answer
While the battles of Lexington and Concord, which were fought on 19 April 1775, technically kicked off the American Revolution, it was the Battle of Bunker Hill, which was actually fought on Breed's Hill on 17 June 1775, that made both sides in the fight realize there was no turning back. While the British won the battle, it was a Pyrrhic victory: the number of British killed or wounded (1,054, including 89 officers) was over twice that suffered on the American side. The King's troops and their loyalist allies in Boston were left stunned and shocked, while the "loss" served as a rallying cry for the patriots' cause. George Washington, who had been appointed commander of the Continental Army just three days prior, arrived shortly after the conclusion of the battle. Soon, the disparate militias of the various colonies would be forged into one American force.
Headlines for the Week of 13 Jun—19 Jun 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The mighty American economy...
At $22 trillion, the US has—by far—the largest economy in the world. The great growth trajectory began at the end of the Second World War, when the US had an economy of around $240 billion. How long did it take the country's economy to reach $1 trillion in size?
Penn Trading Desk:
Penn: Add a crypto play to the Intrepid
We have made the comparison between the Gold Rush of the mid-19th century and the crypto craze unfolding right now. We have urged investors to "invest in the companies supplying the tools rather than in the miners themselves." Taking our own advice, we just added a cryptocurrency infrastructure play to the Intrepid Trading Platform. Members, sign into the Penn Trading Desk for details.
Goldman: Double downgrade Ferrari
At $205 per share ($210 before the downgrade) and a price-to-earnings ratio of 50, Italian automaker Ferrari (RACE) does seem a bit expensive. Furthermore, its reliance on Formula One racing and its recent drought in that arena could be damaging the brand's reputation. At least that is what Goldman Sachs analyst George Galliers said as part of the rationale for his double downgrade of the company's shares, from Buy to Sell. Galliers, who reduced the Goldman target price on RACE from $227 to $207, also said that the firm is facing higher capital spending as it invests in EV battery technology, with little assurance of its success in that arena.
Penn: Added foreign telecom play to Strategic Income Portfolio
One never knows for certain how any given individual stock will perform going forward, but we found a telecom services company that checks three of our boxes for the Strategic Income Portfolio: a great yield, a foreign play (which we are chronically short on), and a smart strategic vision which embraces the future of the industry. Added to the SIP. Members, sign into the Penn Trading Desk for details.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Industrials: Airlines
10. America is entering a new era of supersonic air travel—and Boeing is not building the aircraft
When I was growing up in the 1970s, with an avid fascination in all things air and space, there were dozens of major, publicly-traded, aerospace and defense contractors. Sadly, due to mergers and acquisitions (the largest being Boeing's 1997 purchase of McDonnell Douglas), the numbers dwindled to a few. As competition helps assure that companies continue to operate at peak performance, we knew that the seemingly-endless acquisitions would lead to complacency. And indeed, based on Boeing's (BA $ 250) string of recent high-profile failures, it did. Fortunately, a new breed of young upstarts has entered the industry, and they are fearless when it comes to putting bold plans into action. While SpaceX is the first name that comes to mind, another, lesser-known company is about to make a major splash.
United Airlines Holdings (UAL $57) just announced plans to buy a fleet of 15 supersonic passenger aircraft, capable of traveling at Mach 1.7, from Denver-based Boom Technology. The Boom Overture, which can carry up to 88 passengers and will have a cruising altitude of 60,000 feet, is slated to begin ferrying United passengers by the end of the decade. Using sustainable aviation fuel (SAF), the aircraft is made with advanced composite materials and will be propelled by much quieter—by supersonic standards—Rolls Royce twin engines. It is interesting to note that Boeing CEO, David Calhoun, said that an investment in supersonic travel didn't make sense for his company's business right now.
Currently, United is the only US carrier which has signed an agreement with Boom for the Overture, but Japan Airlines (JAPSY $12) has been a major backer of the US firm, investing $10 million in the company and signing a nonbinding option to buy 20 of the aircraft. Putting the speed of the craft in some context, a flight from New York to London will be reduced in travel time by roughly half: from 6:30H to 3:30H. United CEO Scott Kirby stated that "United continues on its trajectory to build a more innovative, sustainable airline and today's advancements in technology are making it more viable for that to include supersonic planes." Well said.
In the zeitgeist of too many CEOs focused more on "not offending" than on their own strategic visions, we salute Kirby and his leadership. We also salute yet another startup boldly going where the old, established players fear to tread. Perhaps the latter group needs a little history lesson in what made their respective companies great in the first place.
Cryptocurrencies
09. Bitcoin drops following FBI's successful clawback of ransom
It always struck us as odd that so many cryptophiles—the unabashed cheerleaders of all digital "currencies"—consider these creatures completely secure from outside forces. Granted, we have heard stories of Bitcoin owners forgetting their digital wallet passcodes, thus losing their coins forever, but we are talking about something which exists purely in the digital realm. Perhaps that realization hit home for some this week following the FBI's successful recovery of $2.3 million worth of bitcoins paid to the Russian-backed hacker group DarkSide by Colonial Pipeline. The ransom was apparently retrieved after investigators either uncovered the complex key code for the hackers' digital wallet, or somehow took control of the server which held the coins. However it was done, the specter of a third party being able to reach in and take bitcoins out lacking the permission of the wallet's owner sent the price of Bitcoin down around 8%. The FBI recently launched its Ransomware and Digital Extortion Task Force, which was responsible for the recovery. The price of Bitcoin has been reeling as of late, falling from its high of $64,000 in the middle of April to $32,800 following news of the ransom recovery.
As we've mentioned before, anyone wishing to get in on the crypto craze would be better off buying into the underlying blockchain technology rather than amassing the actual coins. Coinbase (COIN $227), the platform on which a number of major cryptos trade, might be a good place to start.
Automotive
08. Two words investors never want to see in an SEC filing
Looking at a company's actual financials can be a great way to spot trends, but we love a more nebulous measure as well: watching a CEO in live interviews. That is how we first got an inkling that the likes of bumbling Ron Johnson (JCP), Bernie Ebbers (WCOM), and Jeffrey Immelt (GE) were either blowing smoke or out of their league—to put it nicely. As we watched interviews of EV startup Lordstown Motors' (RIDE $10) CEO Steve Burns on the business networks, we had an uneasy feeling. He came across as a super-nice guy, but one who was banking on hope, not facts. As the meme stock groupies drove RIDE shares up from the $10 range—where they had languished for years—to $31.40, we shook our heads. Here is a company offering a ton of promises and not one vehicle in production. CNBC's Phil Lebeau pressed Burns on the massive number of pre-orders supposedly on the books, and the response was an embarrassing shuffle that made us grimace.
Fast forward to this week and the company's required quarterly filing; a filing which was submitted late, and only after the threat of a delisting notice from the Nasdaq. There was a lot of disconcerting language in the filing, but investors' jaws dropped on two words nestled in one ugly sentence: "These conditions raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year...." Going concern. That means staying in business. The company came out and admitted that, failing to raise massive new amounts of capital, it would simply cease to be. RIDE shares plunged after hours on the report. At $10 per share once again, and with a major short interest, isn't it time for the WallStreetBets crowd to pile back in and stick it to "the man" yet again?
Such a joke. And emblematic of the ugliness that will soon unfold before our very eyes with a number of other profitless companies. Meme groupie money may staunch the bleeding for awhile, but the inflows only prolong the inevitable. As for Lordstown, we would be surprised if one unit of one product ever leaves the actual assembly line.
Economics
07. Inflation just hit its highest rate since 2008; here's why the Fed isn't worried
The average price of goods purchased by Americans rose 0.6% month-over-month in May, following a 0.8% jump in April. That may not sound like much, but May's Consumer Price Index number equates to a 7.2% annualized rate. The MoM figures represent the fastest rate of inflation since August of 2008. Leading the charge was the price of used cars and trucks, which rose a whopping 7.2% in May on the heels of a double-digit price jump in April.
Why doesn't Jerome Powell's Fed, which has a 2% target inflation range, seem worried by these numbers? One major reason is a phenomenon known as the base effect. Simply put, this condition argues that if inflation was too low in the same period a year earlier, even a small rise in CPI will mathematically show a high current rate of inflation. Indeed, the pandemic put a short-term clamp on economic activity, so it is understandable that the rate of inflation would appear worrisome at the moment. Here's the real question on the mind of economists, however: as we work through this blip, will the rate stabilize or continue to grow?
Another factor to consider is wage growth. Wage push inflation is an overall jump in inflation as a result of companies needing to pay more to their workforce. Evidence of wage push inflation is everywhere, with the latest example coming from Chipotle. The fast casual chain said it must hike menu prices by around 4% to cover the higher cost of paying its employees. By the end of the month, the average hourly wage for employees at the restaurant will hit $15. With a record number of job openings, this condition will certainly gain momentum as companies struggle to find the workers they need to handle the growing demand for their products and services.
While the Fed has indicated it probably won't raise rates until 2023, we expect the central bank to begin signaling a slowdown in its bond buying program at some point in the second half of the year—a very important step to help staunch the unsustainable level of federal spending. The Fed has been buying $120 billion per month worth of treasuries and mortgage-backed securities, leading to its bloated $8 trillion balance sheet. The market should be prepared for this step, but expect at least a short-term fit when the tapering is announced.
Media & Entertainment
06. Yet another reason to avoid GameStop shares: Microsoft is about to make a major gaming push
Not that true investors needed yet another reason to avoid a stock that is overvalued by 90%, but Microsoft's (MSFT $259) announcement that it will bring its Xbox games directly to smart TVs reveals just how antiquated bricks and mortar video game retailers—namely, GameStop (GME $235)—are becoming. Microsoft CEO Satya Nadella's strategy is straightforward: he wants gamers to be able to go from device to device and enjoy an incredible gaming experience, without the need to buy the latest—often outrageously-priced and sold out—gaming equipment. That means developing the cloud-based infrastructure required to efficiently stream Xbox games on computers, hand-held devices, and TVs. The company is already in talks with smart TV makers and streaming device providers like Roku (ROKU $347) to bring the strategy to fruition. The ultimate goal for Microsoft is to increase its Game Pass subscription business, which currently has about 23 million users, giving the company another steady stream of monthly income. If Nadella can replicate the incredible success of Microsoft 365, a subscription-based service for the company's software suite, it will continue to gobble up market share in the world of online gaming. And that spells trouble for an old video game retailer trying to transform itself into a digital player.
We may be dedicated Apple users, but Microsoft remains one of our strongest conviction holdings in the Penn Global Leaders Club. We also happen to be one of the 240 million or so users of Microsoft Office 365, paying the company a steady stream of recurring monthly income so we can operate Microsoft software on our MacBook Pros. We may curse our lonely PC on a weekly basis (some software still doesn't play nice with macOS), but Satya Nadella is one of the best CEOs in corporate America. As for GameStop, we are still waiting for incoming chairman Ryan Cohen's great strategic turnaround plan for GameStop (not).
Aerospace & Defense
05. Northrop Grumman just successfully launched a US Space Force satellite into orbit aboard its Pegasus XL launch vehicle
At 1:11 in the morning, a Northrop Grumman (NOC $371) L-1011 "Stargazer" took off from the newly renamed Vandenberg Space Force Base in California. After achieving 40,000 feet over the Pacific Ocean, its special cargo launched from the underbelly: a solid fuel Pegasus XL rocket carrying a secretive United States Space Force satellite. Last Sunday's launch represented the 45th deployment for the Pegasus, which Northrop Grumman was able to design, integrate, test, and place into service within a whirlwind four month period following the contract award. The rocket, which was built under the USSF's tactically responsive launch concept, is the world's first privately-developed commercial space launch vehicle. It has the ability to launch payloads from virtually anywhere on Earth at a moment's notice and with minimal ground support. The rocket is quickly becoming a favorite tool of the nascent US Space Force.
While Lockheed Martin (LMT $390) is the primary defense contractor within our Penn Global Leaders Club, Northrop Grumman is high on our list of the most respected industry players—easily ahead of Boeing. The $60 billion company (what a great size—well poised to become a $100 billion firm) netted a $3.2 billion profit on $37 billion in revenues last year.
Cryptocurrencies
04. Finally, a crypto that acts like a currency: Tether now the third-largest digital coin in the world
We have laughed off any comparison of cryptocurrencies such as Bitcoin to actual currencies; they are actually commodities with wild volatility. Well, that is true for most of them. All of a sudden, a digital currency known as a stablecoin has roared into third place—behind Bitcoin and Ether—on the list of the world's largest cryptocurrencies. Tether, which was originally known as Realcoin, is—as the name implies—tethered to an actual currency. Tether USDT is tied to the price of a US dollar, EURT to the euro, CHNT to the Chinese yuan, and XAUT to the price of an ounce of gold. So, at least in theory, one Tether USDT will always be worth one US dollar. As one could imagine, that makes it a lot easier for owners to buy goods with their USDTs, as they won't be worried that they could buy the same goods for a lot less in the future (due to fluctuation). The cryptocurrency got a big boost in May when the largest US digital exchange, Coinbase (COIN $232), announced that Tether USDT would be available on its platform. Tether is not without its share of controversy, however. It got in some hot water a few years back by implying that it was fully backed by the dollar. In actuality, a breakdown of the coin's reserves shows that it is 75%-backed by cash and cash equivalents; 13%-backed by secured loans; and 12%-backed by corporate bonds, precious metals, and other digital tokens. Nonetheless, it has traded at or near $1 throughout its seven year history. Another thing we like about this coin: For foreign nationals who don't have access to US bank accounts but want the stability of the US dollar, Tether has proved to be a popular solution.
Tether's market cap surpassed $60 billion last month, and we expect it to maintain its steep growth trajectory. Considering the Communist Party of China is hell-bent on creating a digital currency to supplant the US dollar as the world's reserve currency, perhaps the United States Treasury should study Tether as it slowly prepares to roll out its own fiat digital currency. In the meantime, Tether is one of the only digital coins whose future value we can confidently predict.
Financial Services
03. American Express has a new hybrid work model we can get behind
We have all witnessed how the pandemic has uprooted the traditional work/office relationship in a dramatic fashion. Companies which would never would have considered allowing a meaningful percentage of their workforce to perform their duties at home are suddenly rethinking those policies—and discovering just how much they can save in overhead through a reduced real estate footprint. One of our favorite new hybrid models comes to us from American Express (AXP $158), a global financial services firm operating in 130 countries. Most of the company's US and UK workers will be required to show up at the office just three days a week, Tuesday through Thursday, with the choice to work from home every Monday and Friday. Thinking back on some past jobs, that seems like a dream scenario to us. The new AmEx policy, which will begin this fall, stands in stark contrast to Goldman Sachs' (GS $349) demand that all employees return to the office by the 14th of July. Goldman Sachs CEO David Solomon (of which we have never been a fan) went so far as to call remote work "an aberration," and harmful to productivity. Based on some rather ugly employee feedback over the past few years, neither the company's policy nor the CEO's imperious comments surprise us. In a memo to employees, AmEx CEO Steve Squeri said that the new hybrid model will allow for both in-office collaboration and an increased work-life balance. Between the two firms, we know who we would rather work for.
Goldman Sachs has a notorious history of corporate arrogance. Thanks to technology and a shifting demographic landscape, the company is facing increased competition in areas it used to dominate, such as mergers and acquisition and securities underwriting. Counter that with American Express (granted, not exactly an apples-to-apples comparison), whose strong position within the small business community should provide a nice tailwind going forward.
Pharmaceuticals
02. AstraZeneca has another fail
Precisely one quarter ago we were writing of AstraZeneca's (AZN $58) vaccine fail—due to blood clot complications among some recipients—and management's unswerving denial that there was anything wrong with the drug; even hinting that a political hit job was in play. European countries went from halting the vaccine's use, to (under pressure) resuming its use, to halting it once again. This quarter the Swedish/UK conglomerate is facing yet another setback: its antibody drug is proving to be just 33% effective in preventing symptomatic Covid-19 in those exposed to the virus. Meanwhile, both Regeneron and Eli Lilly each have successful antibody cocktails already in use under emergency authorization. The US had already ordered 700,000 doses of the AstraZeneca therapy for delivery this year, while the UK had ordered one million doses. Odds are strong that the US will ultimately cancel the order, and it will be fascinating to watch what the company's home country ends up doing with respect to the one-million-dose order.
We are constantly on the lookout for strong pharmaceutical stocks and sound international companies in which to invest. Unfortunately, AZN doesn't fit the bill—in our opinion—for either category. Meanwhile, AZN shares are trading as if both therapies were a rousing success.
Market Week in Review
01. In a week to be expected—both based on the calendar and an FOMC meeting—stocks retreat
It wasn't a pretty week for the markets. After all, the Dow lost over 1,000 points (down 3.45%) and the S&P gave up nearly 2%. If there was a "bright spot" it was the tech-laden NASDAQ, which just gave back 28 basis points over the five-day period. We have no problem with the pullback: nothing makes us more nervous than built-in investor expectations for weekly gains. What bothers us is the rationale for the pullback. Investors (apparently) got spooked by the Fed's "more hawkish" tone after the week's FOMC meeting. Hawkish tone? You've got to be kidding. Did Chairman Powell even talk about ending the $120 billion monthly purchase of Treasuries and mortgage-backed securities? Nope. Did the Fed signal an imminent interest rate hike? Nope. St Louis Fed President James Bullard, who will be a voting member of the FOMC next year, said he could see a rate hike coming before 2022 is done. Katy, bar the door! You mean, we might actually move off of a target fed funds rate of zero?! Sure, there is also the fear of inflation running hotter than Powell expects, but we had to hear the word "transitory" at least one hundred times over the course of the week with respect to that particular market threat. In fact, the anemic yield of the 10-year Treasury actually fell this week, showing how little bond investors are worried about inflation forcing the Fed's hand. In all, this was simply a rather welcome pressure relief for a stock market that seemed to forget what a downturn was—despite the nightmare it was emerging from precisely one year ago. We went into the week with the Dow sitting above 34,000; we can handle an 1,190-point giveback. In fact, investors need to be mentally prepared for more summer volatility ahead.
Under the Radar Investment
POSCO
POSCO (PKX $73) is the largest steel producer in South Korea and one of the top steel producers in the world. The company is exposed to the auto, shipbuilding, home appliance, engineering, and machinery industries. The firm controls 40% of the domestic market share and exports roughly 50% of its steel products overseas, primarily to Asian countries. POSCO netted $1.3 billion in profit on $48 billion in revenues last year, and we expect the firm to play a major role in Asia's post-pandemic rebound. We believe the shares, which carry a 3% dividend yield and a P/E ratio of 12, could fetch $100 relatively soon.
Answer
It took just one generation, from the end of World War II to approximately the time we were landing astronauts on the lunar surface in 1969, for the American economy to grow from around $240 billion to $1 trillion—a fourfold increase.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The mighty American economy...
At $22 trillion, the US has—by far—the largest economy in the world. The great growth trajectory began at the end of the Second World War, when the US had an economy of around $240 billion. How long did it take the country's economy to reach $1 trillion in size?
Penn Trading Desk:
Penn: Add a crypto play to the Intrepid
We have made the comparison between the Gold Rush of the mid-19th century and the crypto craze unfolding right now. We have urged investors to "invest in the companies supplying the tools rather than in the miners themselves." Taking our own advice, we just added a cryptocurrency infrastructure play to the Intrepid Trading Platform. Members, sign into the Penn Trading Desk for details.
Goldman: Double downgrade Ferrari
At $205 per share ($210 before the downgrade) and a price-to-earnings ratio of 50, Italian automaker Ferrari (RACE) does seem a bit expensive. Furthermore, its reliance on Formula One racing and its recent drought in that arena could be damaging the brand's reputation. At least that is what Goldman Sachs analyst George Galliers said as part of the rationale for his double downgrade of the company's shares, from Buy to Sell. Galliers, who reduced the Goldman target price on RACE from $227 to $207, also said that the firm is facing higher capital spending as it invests in EV battery technology, with little assurance of its success in that arena.
Penn: Added foreign telecom play to Strategic Income Portfolio
One never knows for certain how any given individual stock will perform going forward, but we found a telecom services company that checks three of our boxes for the Strategic Income Portfolio: a great yield, a foreign play (which we are chronically short on), and a smart strategic vision which embraces the future of the industry. Added to the SIP. Members, sign into the Penn Trading Desk for details.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Industrials: Airlines
10. America is entering a new era of supersonic air travel—and Boeing is not building the aircraft
When I was growing up in the 1970s, with an avid fascination in all things air and space, there were dozens of major, publicly-traded, aerospace and defense contractors. Sadly, due to mergers and acquisitions (the largest being Boeing's 1997 purchase of McDonnell Douglas), the numbers dwindled to a few. As competition helps assure that companies continue to operate at peak performance, we knew that the seemingly-endless acquisitions would lead to complacency. And indeed, based on Boeing's (BA $ 250) string of recent high-profile failures, it did. Fortunately, a new breed of young upstarts has entered the industry, and they are fearless when it comes to putting bold plans into action. While SpaceX is the first name that comes to mind, another, lesser-known company is about to make a major splash.
United Airlines Holdings (UAL $57) just announced plans to buy a fleet of 15 supersonic passenger aircraft, capable of traveling at Mach 1.7, from Denver-based Boom Technology. The Boom Overture, which can carry up to 88 passengers and will have a cruising altitude of 60,000 feet, is slated to begin ferrying United passengers by the end of the decade. Using sustainable aviation fuel (SAF), the aircraft is made with advanced composite materials and will be propelled by much quieter—by supersonic standards—Rolls Royce twin engines. It is interesting to note that Boeing CEO, David Calhoun, said that an investment in supersonic travel didn't make sense for his company's business right now.
Currently, United is the only US carrier which has signed an agreement with Boom for the Overture, but Japan Airlines (JAPSY $12) has been a major backer of the US firm, investing $10 million in the company and signing a nonbinding option to buy 20 of the aircraft. Putting the speed of the craft in some context, a flight from New York to London will be reduced in travel time by roughly half: from 6:30H to 3:30H. United CEO Scott Kirby stated that "United continues on its trajectory to build a more innovative, sustainable airline and today's advancements in technology are making it more viable for that to include supersonic planes." Well said.
In the zeitgeist of too many CEOs focused more on "not offending" than on their own strategic visions, we salute Kirby and his leadership. We also salute yet another startup boldly going where the old, established players fear to tread. Perhaps the latter group needs a little history lesson in what made their respective companies great in the first place.
Cryptocurrencies
09. Bitcoin drops following FBI's successful clawback of ransom
It always struck us as odd that so many cryptophiles—the unabashed cheerleaders of all digital "currencies"—consider these creatures completely secure from outside forces. Granted, we have heard stories of Bitcoin owners forgetting their digital wallet passcodes, thus losing their coins forever, but we are talking about something which exists purely in the digital realm. Perhaps that realization hit home for some this week following the FBI's successful recovery of $2.3 million worth of bitcoins paid to the Russian-backed hacker group DarkSide by Colonial Pipeline. The ransom was apparently retrieved after investigators either uncovered the complex key code for the hackers' digital wallet, or somehow took control of the server which held the coins. However it was done, the specter of a third party being able to reach in and take bitcoins out lacking the permission of the wallet's owner sent the price of Bitcoin down around 8%. The FBI recently launched its Ransomware and Digital Extortion Task Force, which was responsible for the recovery. The price of Bitcoin has been reeling as of late, falling from its high of $64,000 in the middle of April to $32,800 following news of the ransom recovery.
As we've mentioned before, anyone wishing to get in on the crypto craze would be better off buying into the underlying blockchain technology rather than amassing the actual coins. Coinbase (COIN $227), the platform on which a number of major cryptos trade, might be a good place to start.
Automotive
08. Two words investors never want to see in an SEC filing
Looking at a company's actual financials can be a great way to spot trends, but we love a more nebulous measure as well: watching a CEO in live interviews. That is how we first got an inkling that the likes of bumbling Ron Johnson (JCP), Bernie Ebbers (WCOM), and Jeffrey Immelt (GE) were either blowing smoke or out of their league—to put it nicely. As we watched interviews of EV startup Lordstown Motors' (RIDE $10) CEO Steve Burns on the business networks, we had an uneasy feeling. He came across as a super-nice guy, but one who was banking on hope, not facts. As the meme stock groupies drove RIDE shares up from the $10 range—where they had languished for years—to $31.40, we shook our heads. Here is a company offering a ton of promises and not one vehicle in production. CNBC's Phil Lebeau pressed Burns on the massive number of pre-orders supposedly on the books, and the response was an embarrassing shuffle that made us grimace.
Fast forward to this week and the company's required quarterly filing; a filing which was submitted late, and only after the threat of a delisting notice from the Nasdaq. There was a lot of disconcerting language in the filing, but investors' jaws dropped on two words nestled in one ugly sentence: "These conditions raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year...." Going concern. That means staying in business. The company came out and admitted that, failing to raise massive new amounts of capital, it would simply cease to be. RIDE shares plunged after hours on the report. At $10 per share once again, and with a major short interest, isn't it time for the WallStreetBets crowd to pile back in and stick it to "the man" yet again?
Such a joke. And emblematic of the ugliness that will soon unfold before our very eyes with a number of other profitless companies. Meme groupie money may staunch the bleeding for awhile, but the inflows only prolong the inevitable. As for Lordstown, we would be surprised if one unit of one product ever leaves the actual assembly line.
Economics
07. Inflation just hit its highest rate since 2008; here's why the Fed isn't worried
The average price of goods purchased by Americans rose 0.6% month-over-month in May, following a 0.8% jump in April. That may not sound like much, but May's Consumer Price Index number equates to a 7.2% annualized rate. The MoM figures represent the fastest rate of inflation since August of 2008. Leading the charge was the price of used cars and trucks, which rose a whopping 7.2% in May on the heels of a double-digit price jump in April.
Why doesn't Jerome Powell's Fed, which has a 2% target inflation range, seem worried by these numbers? One major reason is a phenomenon known as the base effect. Simply put, this condition argues that if inflation was too low in the same period a year earlier, even a small rise in CPI will mathematically show a high current rate of inflation. Indeed, the pandemic put a short-term clamp on economic activity, so it is understandable that the rate of inflation would appear worrisome at the moment. Here's the real question on the mind of economists, however: as we work through this blip, will the rate stabilize or continue to grow?
Another factor to consider is wage growth. Wage push inflation is an overall jump in inflation as a result of companies needing to pay more to their workforce. Evidence of wage push inflation is everywhere, with the latest example coming from Chipotle. The fast casual chain said it must hike menu prices by around 4% to cover the higher cost of paying its employees. By the end of the month, the average hourly wage for employees at the restaurant will hit $15. With a record number of job openings, this condition will certainly gain momentum as companies struggle to find the workers they need to handle the growing demand for their products and services.
While the Fed has indicated it probably won't raise rates until 2023, we expect the central bank to begin signaling a slowdown in its bond buying program at some point in the second half of the year—a very important step to help staunch the unsustainable level of federal spending. The Fed has been buying $120 billion per month worth of treasuries and mortgage-backed securities, leading to its bloated $8 trillion balance sheet. The market should be prepared for this step, but expect at least a short-term fit when the tapering is announced.
Media & Entertainment
06. Yet another reason to avoid GameStop shares: Microsoft is about to make a major gaming push
Not that true investors needed yet another reason to avoid a stock that is overvalued by 90%, but Microsoft's (MSFT $259) announcement that it will bring its Xbox games directly to smart TVs reveals just how antiquated bricks and mortar video game retailers—namely, GameStop (GME $235)—are becoming. Microsoft CEO Satya Nadella's strategy is straightforward: he wants gamers to be able to go from device to device and enjoy an incredible gaming experience, without the need to buy the latest—often outrageously-priced and sold out—gaming equipment. That means developing the cloud-based infrastructure required to efficiently stream Xbox games on computers, hand-held devices, and TVs. The company is already in talks with smart TV makers and streaming device providers like Roku (ROKU $347) to bring the strategy to fruition. The ultimate goal for Microsoft is to increase its Game Pass subscription business, which currently has about 23 million users, giving the company another steady stream of monthly income. If Nadella can replicate the incredible success of Microsoft 365, a subscription-based service for the company's software suite, it will continue to gobble up market share in the world of online gaming. And that spells trouble for an old video game retailer trying to transform itself into a digital player.
We may be dedicated Apple users, but Microsoft remains one of our strongest conviction holdings in the Penn Global Leaders Club. We also happen to be one of the 240 million or so users of Microsoft Office 365, paying the company a steady stream of recurring monthly income so we can operate Microsoft software on our MacBook Pros. We may curse our lonely PC on a weekly basis (some software still doesn't play nice with macOS), but Satya Nadella is one of the best CEOs in corporate America. As for GameStop, we are still waiting for incoming chairman Ryan Cohen's great strategic turnaround plan for GameStop (not).
Aerospace & Defense
05. Northrop Grumman just successfully launched a US Space Force satellite into orbit aboard its Pegasus XL launch vehicle
At 1:11 in the morning, a Northrop Grumman (NOC $371) L-1011 "Stargazer" took off from the newly renamed Vandenberg Space Force Base in California. After achieving 40,000 feet over the Pacific Ocean, its special cargo launched from the underbelly: a solid fuel Pegasus XL rocket carrying a secretive United States Space Force satellite. Last Sunday's launch represented the 45th deployment for the Pegasus, which Northrop Grumman was able to design, integrate, test, and place into service within a whirlwind four month period following the contract award. The rocket, which was built under the USSF's tactically responsive launch concept, is the world's first privately-developed commercial space launch vehicle. It has the ability to launch payloads from virtually anywhere on Earth at a moment's notice and with minimal ground support. The rocket is quickly becoming a favorite tool of the nascent US Space Force.
While Lockheed Martin (LMT $390) is the primary defense contractor within our Penn Global Leaders Club, Northrop Grumman is high on our list of the most respected industry players—easily ahead of Boeing. The $60 billion company (what a great size—well poised to become a $100 billion firm) netted a $3.2 billion profit on $37 billion in revenues last year.
Cryptocurrencies
04. Finally, a crypto that acts like a currency: Tether now the third-largest digital coin in the world
We have laughed off any comparison of cryptocurrencies such as Bitcoin to actual currencies; they are actually commodities with wild volatility. Well, that is true for most of them. All of a sudden, a digital currency known as a stablecoin has roared into third place—behind Bitcoin and Ether—on the list of the world's largest cryptocurrencies. Tether, which was originally known as Realcoin, is—as the name implies—tethered to an actual currency. Tether USDT is tied to the price of a US dollar, EURT to the euro, CHNT to the Chinese yuan, and XAUT to the price of an ounce of gold. So, at least in theory, one Tether USDT will always be worth one US dollar. As one could imagine, that makes it a lot easier for owners to buy goods with their USDTs, as they won't be worried that they could buy the same goods for a lot less in the future (due to fluctuation). The cryptocurrency got a big boost in May when the largest US digital exchange, Coinbase (COIN $232), announced that Tether USDT would be available on its platform. Tether is not without its share of controversy, however. It got in some hot water a few years back by implying that it was fully backed by the dollar. In actuality, a breakdown of the coin's reserves shows that it is 75%-backed by cash and cash equivalents; 13%-backed by secured loans; and 12%-backed by corporate bonds, precious metals, and other digital tokens. Nonetheless, it has traded at or near $1 throughout its seven year history. Another thing we like about this coin: For foreign nationals who don't have access to US bank accounts but want the stability of the US dollar, Tether has proved to be a popular solution.
Tether's market cap surpassed $60 billion last month, and we expect it to maintain its steep growth trajectory. Considering the Communist Party of China is hell-bent on creating a digital currency to supplant the US dollar as the world's reserve currency, perhaps the United States Treasury should study Tether as it slowly prepares to roll out its own fiat digital currency. In the meantime, Tether is one of the only digital coins whose future value we can confidently predict.
Financial Services
03. American Express has a new hybrid work model we can get behind
We have all witnessed how the pandemic has uprooted the traditional work/office relationship in a dramatic fashion. Companies which would never would have considered allowing a meaningful percentage of their workforce to perform their duties at home are suddenly rethinking those policies—and discovering just how much they can save in overhead through a reduced real estate footprint. One of our favorite new hybrid models comes to us from American Express (AXP $158), a global financial services firm operating in 130 countries. Most of the company's US and UK workers will be required to show up at the office just three days a week, Tuesday through Thursday, with the choice to work from home every Monday and Friday. Thinking back on some past jobs, that seems like a dream scenario to us. The new AmEx policy, which will begin this fall, stands in stark contrast to Goldman Sachs' (GS $349) demand that all employees return to the office by the 14th of July. Goldman Sachs CEO David Solomon (of which we have never been a fan) went so far as to call remote work "an aberration," and harmful to productivity. Based on some rather ugly employee feedback over the past few years, neither the company's policy nor the CEO's imperious comments surprise us. In a memo to employees, AmEx CEO Steve Squeri said that the new hybrid model will allow for both in-office collaboration and an increased work-life balance. Between the two firms, we know who we would rather work for.
Goldman Sachs has a notorious history of corporate arrogance. Thanks to technology and a shifting demographic landscape, the company is facing increased competition in areas it used to dominate, such as mergers and acquisition and securities underwriting. Counter that with American Express (granted, not exactly an apples-to-apples comparison), whose strong position within the small business community should provide a nice tailwind going forward.
Pharmaceuticals
02. AstraZeneca has another fail
Precisely one quarter ago we were writing of AstraZeneca's (AZN $58) vaccine fail—due to blood clot complications among some recipients—and management's unswerving denial that there was anything wrong with the drug; even hinting that a political hit job was in play. European countries went from halting the vaccine's use, to (under pressure) resuming its use, to halting it once again. This quarter the Swedish/UK conglomerate is facing yet another setback: its antibody drug is proving to be just 33% effective in preventing symptomatic Covid-19 in those exposed to the virus. Meanwhile, both Regeneron and Eli Lilly each have successful antibody cocktails already in use under emergency authorization. The US had already ordered 700,000 doses of the AstraZeneca therapy for delivery this year, while the UK had ordered one million doses. Odds are strong that the US will ultimately cancel the order, and it will be fascinating to watch what the company's home country ends up doing with respect to the one-million-dose order.
We are constantly on the lookout for strong pharmaceutical stocks and sound international companies in which to invest. Unfortunately, AZN doesn't fit the bill—in our opinion—for either category. Meanwhile, AZN shares are trading as if both therapies were a rousing success.
Market Week in Review
01. In a week to be expected—both based on the calendar and an FOMC meeting—stocks retreat
It wasn't a pretty week for the markets. After all, the Dow lost over 1,000 points (down 3.45%) and the S&P gave up nearly 2%. If there was a "bright spot" it was the tech-laden NASDAQ, which just gave back 28 basis points over the five-day period. We have no problem with the pullback: nothing makes us more nervous than built-in investor expectations for weekly gains. What bothers us is the rationale for the pullback. Investors (apparently) got spooked by the Fed's "more hawkish" tone after the week's FOMC meeting. Hawkish tone? You've got to be kidding. Did Chairman Powell even talk about ending the $120 billion monthly purchase of Treasuries and mortgage-backed securities? Nope. Did the Fed signal an imminent interest rate hike? Nope. St Louis Fed President James Bullard, who will be a voting member of the FOMC next year, said he could see a rate hike coming before 2022 is done. Katy, bar the door! You mean, we might actually move off of a target fed funds rate of zero?! Sure, there is also the fear of inflation running hotter than Powell expects, but we had to hear the word "transitory" at least one hundred times over the course of the week with respect to that particular market threat. In fact, the anemic yield of the 10-year Treasury actually fell this week, showing how little bond investors are worried about inflation forcing the Fed's hand. In all, this was simply a rather welcome pressure relief for a stock market that seemed to forget what a downturn was—despite the nightmare it was emerging from precisely one year ago. We went into the week with the Dow sitting above 34,000; we can handle an 1,190-point giveback. In fact, investors need to be mentally prepared for more summer volatility ahead.
Under the Radar Investment
POSCO
POSCO (PKX $73) is the largest steel producer in South Korea and one of the top steel producers in the world. The company is exposed to the auto, shipbuilding, home appliance, engineering, and machinery industries. The firm controls 40% of the domestic market share and exports roughly 50% of its steel products overseas, primarily to Asian countries. POSCO netted $1.3 billion in profit on $48 billion in revenues last year, and we expect the firm to play a major role in Asia's post-pandemic rebound. We believe the shares, which carry a 3% dividend yield and a P/E ratio of 12, could fetch $100 relatively soon.
Answer
It took just one generation, from the end of World War II to approximately the time we were landing astronauts on the lunar surface in 1969, for the American economy to grow from around $240 billion to $1 trillion—a fourfold increase.
Headlines for the Week of 23 May—29 May 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The growing power of the plant-based food industry...
The plant-based food business is red-hot, and don't expect it to cool anytime soon. It is not a novelty or a niche corner of the market; it is quickly becoming a mainstream staple. For evidence of that, just look at the growing space dedicated to the products in your local supermarket. What is the size of this industry, based on revenue, and how rapidly did it grow last year over 2019?
Penn Trading Desk:
Penn: AT&T Stopped Out in Strategic Income Portfolio
AT&T CEO John Stankey, earlier this spring: "HBO Max is a pillar of the company's long-term strategy." This week: HBO Max is being spun-off so the company can focus on its "core competencies" of wireless and broadband. What a joke. We placed a stop on T @ $32, and it filled the same day, 17 May, at $31.98. A position we have held since 2010 is officially gone.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Media & Entertainment
10. AT&T and Discovery to combine media assets, creating a new entertainment behemoth (i.e., AT&T admits defeat)
While we have owned telecom services giant AT&T (T $33) for years, either in the Penn Global Leaders Club or—most recently—in the Strategic Income Portfolio (it carries a 6.5% dividend yield), we've had a strong sense as of late that the company is not quite sure of its own strategic vision. After all, T bought DirecTV in 2015 for $67 billion (with debt) only to spin it off six years later for one-fourth of that value; and it paid $85 billion to acquire Time Warner a few years after the DirecTV deal only, now, to spin that company off for $43 billion. Someone needs to explain the concept of "buy low and sell high" to the AT&T board.
With respect to the latter, AT&T and Discovery (DISCA $38) have announced plans to combine their media assets, which include the likes of HBO Max, CNN, TBS, Warner Brothers, TLC, and HGTV, into a new publicly-traded company—name to be determined. T shareholders will own 71% of the new entity, with Discovery shareholders getting the remaining 29%. Well-known media executive David Zaslav, current CEO of Discovery, will lead the new business. While Zaslav envisions the new firm becoming the dominant streaming service in the world (Netflix might disagree with that boast), here's what won't be said: this move represents a 180-degree turn for AT&T, which is now throwing in the towel on its lofty media aspirations. Going forward, the company will focus on its 5G buildout and its broadband service. The $43 billion will certainly help the firm pay for the $23 billion worth of 5G spectrum it committed to buying in its bidding war with Verizon (VZ $59). As for that 6.5% dividend yield which has kept many investors around, it will almost certainly be cut when this deal closes.
AT&T popped over 4% on news of this spinoff, jumping to over $33 per share. We know the dividend is going to get cut, and we question how much growth can be squeezed out of the wireless and broadband businesses—considering the fierce competition—over the coming years. We also feel like we got suckered into believing the company's line about creating a new media empire. We are placing a stop on our T position at $32. In short, we have lost almost all confidence in T's management team. Update: T changed direction on the day the deal was announced and went below $32, triggering our stop loss. Update: T changed direction on the day the deal was announced and went below $32, triggering our stop loss.
Restaurants
09. Dine Brands' restaurant IHOP to launch fast-casual spinoff Flip'd this summer
It was a plan put on hold due to the pandemic, but Dine Brands' (DIN $95) restaurant IHOP is finally ready to unveil its new fast-casual chain known as Flip'd. The concept is simple: lure on-the-go customers who want to grab some good food fast. Visitors will be able to order the likes of signature pancake bowls, made-to-order egg sandwiches, and a host of other pastry, drink, and food items at either a digital kiosk or the counter, generally taking their food to go. Picture a Chipotle, but breakfast-based. All of the Flip'd locations will be franchise-owned, with IHOP offering $150,000 to each of the first ten franchisees to get them up and running. A few of the very first Flip'd restaurants will be located in Manhattan; Lawrence, Kansas; and several cities in Ohio. A number of restaurants have tried to launch spin-off versions of themselves with a unique twist, but most have had limited success. We will go ahead and predict it: Flip'd will be an overwhelming success.
IHOP is owned by Dine Brands, which also owns Applebee's. Dine was under an enormous amount of financial stress during the pandemic, as could be imagined. While we picked up hotel chains, retail stores, an airline, and even a major gambling resort precisely twelve months ago during the heat of the market free-fall, we didn't pick up any restaurants. That was a mistake: Dine Brands is up 132% since then. Fair value would probably be in the $125 per share range.
Media & Entertainment
08. Amazon poised to make its second-largest acquisition ever: a storied movie studio
Formed in 1924, MGM dominated Hollywood for over a generation. While the studio has had a number of interesting owners over the past century, none have been quite like its next probable owner: Internet retailer Amazon (AMZN $3,245). Back in 2017, when reports surfaced that Amazon was about to buy food retailer Whole Foods for $13.7 billion, there were many of doubters. We believed the move was brilliant, and that opinion has been borne out in an impressively short period of time (Whole Foods now delivers food to the doorstep of Prime members with Amazon-like efficiency). The Whole Foods acquisition remains the company's largest to date; but, with its reported $8.45 billion price tag, MGM will easily hold the second position.
Amazon has been investing heavily in its streaming service, recently inking a deal with the NFL to stream Thursday night games for around $1.2 billion per year. The recent merger of AT&T's Warner Media with Discovery may well have been the catalyst for MGM and the retailer to get this deal inked. It is interesting to note that MGM's former CEO, Gary Barber, was fired by the board after he reportedly engaged in talks with Apple surrounding a possible $6 billion deal. So, with a cost 40% higher than the purported range during the Apple talks, is Amazon overpaying for this asset? Probably. But in the end, they will make the premium look like chump change.
Amazon is a long-standing member of the Penn Global Leaders Club, and we have a fair value on the shares of around $4,250. The most concerning aspect of the company's growth trajectory revolves around government intervention. The company already had a target on its back from an antitrust standpoint; this will only add fuel to the fire of those who wish to see it forcibly broken up.
Food Products
07. Swedish oat milk company Oatly comes out of the gate hot, but established food players are stepping up the pressure
It's an age old story: established players bash a new concept, consumers embrace the new products, and the established players suddenly enter the fray, claiming they were always on board. EVs are perhaps the best example of this, and we remember the Fords and GMs of the world impugning Tesla on a chronic basis...until they suddenly embraced EVs as if it were their idea in the first place. The same is true in the plant-based foods business. Oatly Group AB (OTLY $21), maker of the happy little cartons of "milk" you have probably seen in the dairy section of the grocery store, went public last week. Despite the IPO price of $17, shares shot out of the gate, jumping 37%—to $23.25—within a day. While they have cooled off a bit since, their $21 price still values the company at $12.5 billion—about 50% larger than our favorite plant-based company, Beyond Meat (BYND $123). At $21, are the new shares worth picking up? Plant-based food sales rose an impressive 27%—to $7 billion—in 2020, and the upward trajectory will continue. Silk, which is now owned by Danone (DANOY $15), will probably be the company's chief competitor going forward, but we see Oatly growing its rather faithful consumer base. While it will be a few years before the company is profitable (it lost $60 million in 2020), its revenues doubled last year from the previous year. If shares go below $20, they are worth looking at for investors needing an international play in the consumer staples sector (which you probably do).
We believe a lot of investors are not fully grasping just how big the plant-based food movement will become over the next decade. Consider this frontier investing: there will be massive gains to be had, but choose your vehicles carefully. Oatly is a pretty safe bet.
Pharmaceuticals
06. Just another example of why this company is underrated: Pfizer's Covid pill should be out by year's end
By definition, we believe in all 100 or so investments within the five Penn Wealth strategies; put another way, if we lose faith, we have no qualms jettisoning any of them. That said, at any particular point in time we have our favorites. Typically, these are companies in which we see something dynamic going on, but ones that seem to be flying under the radar of the Street. Penn Global Leaders Club member Pfizer (PFE $38) is a perfect example. We believe this company, which also happens to have a fat 4% dividend yield, is the global benchmark for the pharmaceuticals industry. As if it weren't enough that Pfizer has the most effective vaccine for Covid on the market (which it developed in record time), it now plans to have a pill for the treatment of the deadly virus on the market before the end of the year. Currently in a phase 1 clinical trial, this protease inhibitor (a protease is an enzyme which allows the virus to break down proteins so it can make copies of itself and multiply) could be taken at home by those having positive test results, effectively treating the disease and helping to keep patients out of the hospital. The first protease inhibitor was approved by the FDA a generation ago to treat HIV. As for the various strains of the disease, Pfizer believes the therapy, currently known simply as PF-07321332, should effectively tackle all of them with strong efficacy.
Pfizer has a healthy balance sheet, a strong drug pipeline, a top-tier sales force, and a simply great R&D team. Let others follow meme stocks that are infinitesimally overvalued (i.e., really worth nothing), we will stick with beautiful workhorses like Pfizer. When the next correction comes, washing the silliness away, this 172-year-old stalwart will still be standing.
Global Trade
05. Parity must be the US goal with respect to trade with China
The press keeps telling us that China is about to reach economic parity with the United States, so here's our question to the collective press: why are we importing over four times as much from China as we export to China? If the economies are of equal scale, shouldn't our trade deficit with the communist nation be relatively balanced? In reality, the United States has a $22 trillion economy compared to China's $15 trillion or so, meaning we could even accept a 50% differential in the transfer of goods; but 400%? Something doesn't smell right.
In March, the most recent month on record, we exported $11.27 billion worth of goods to China and imported $48.21 billion worth of goods from China. While those figures are both depressing and outrageous, there is some good news: the US tariffs on Chinese goods are finally forcing US companies to look elsewhere for their purchases. One of the biggest beneficiaries in this shift has been Vietnam, which is now the eighth-largest exporter to the US, moving ahead of India. Vietnam, as we have noted in the past, is no friend to China, with the ongoing South China Sea dispute just the latest bone of contention between the two. The peak in our level of imports from China was $539 billion in 2018; as of the trailing twelve months (TTM) ended 31 March, that figure has dropped to $472 billion. A 12% drop doesn't sound like much, and the pandemic certainly skewed the results to some extent, but at least the needle is moving in the right direction.
Fortunately, the Biden administration has shown little inclination toward removing the tariffs on Chinese goods, much to the consternation of the CPC. Americans must keep up the pressure on companies to persuade them to look elsewhere for the wholesale purchase of products and building of new plants. If that pressure continues, China's five-year plan to overtake the US economically will face a much larger hurdle—despite the cheerleading from much of the press.
Technology is going to be, far and away, our greatest ally in the fight to curb Chinese imports. From 3D printing to vastly increased efficiency for manufacturing firms, technology is the great disruptor with respect to the balance of trade. Investors should keep a close eye on opportunities in the small- and mid-cap industrials space, those tech-heavy firms which almost always travel under the radar. We will continue to highlight individual names for readers.
Global Strategy: Europe
04. America is roaring out of the pandemic; that is not so much the case in Europe
Over the course of the last two quarters, covering the end of 2020 and the beginning of 2021, the US economy grew at an impressive clip of 4.3% and 6.4%, respectively, thanks to a herculean vaccination effort and a subsequent loosening of Covid restrictions. Sadly, this has not been the case across the pond. The latest metric comes from France, which just re-entered a recession. The French economy shrank by 0.1% in the first quarter of 2021, following a 1.5% contraction in Q4 of 2020. But Europe's second-largest economy has some good company: Germany, the eurozone's largest economy, has seen its economy shrink for five straight quarters, with Q1 GDP coming in at -3.10%. To be sure, the pandemic and a chaotic subsequent vaccine rollout have been the catalysts for the recession that Europe can't seem to shake, but there were other factors which prepared the field for these conditions.
While US deficit spending has been a sad, running joke for a number of years, Europe's fiscal policy almost makes America's economic house look enviable. After the Great Recession, Brussels, led by the erudite wonks primarily from France and Germany, spent with reckless abandon to help the poorer nations in the southern region shake off record levels of unemployment—like 28% in Greece and 26% in Spain. Austerity measures were then forced upon these borrowers which only served to exacerbate the problem and create resentment among the citizens of these beleaguered southern nations. Going into the pandemic, unemployment levels remained stubbornly high in Portugal, Italy, Greece, and Spain. In essence, the eurozone never shook off the effects of the 2008-2009 crisis when the global pandemic hit. The ECB's only answer seems to be throwing more money at the problem until it goes away. Eventually, Europe's vaccination rate will subdue the nightmarish pandemic and growth will return to the region. But the economic scars caused by the handling of two massive crises will remain, as will the bitter divide between the northern and southern regions of the continent.
We continue to underweight the eurozone—with the exception of a few emerging markets in Eastern Europe—as the region grapples with its reopening efforts. The UK is the wild card, as the 2017 Brexit outcome appears more and more prescient with each passing month. Goldman Sachs recently issued a glowing outlook for the British economy, anticipating a "striking" 7.8% GDP growth rate for the year. One way to play the anticipated rebound is with the iShares MSCI United Kingdom ETF (EWU $34), which holds 88 large-cap positions; names such as Unilever PLC and London Stock Exchange Group PLC. For investors looking for more growth potential there is the iShares MSCI United Kingdom Small-Cap ETF (EWUS $50), which holds several hundred small- and mid-cap names.
Road & Rail
03. The latest developments in the Kansas City Southern saga
When Canadian National Railway (CNI $113) stunned the industry with its $30 billion bid for Kansas City Southern (KSU $298), we fully expected rival Canadian Pacific Railway (CP $81) to up its prior $25 billion bid. Instead, the rail—which arguably needs the American north-south tracks of KSC more than Canadian National—stuck by its original offer. It also sent a message to Kansas City Southern: take our deal or lose the regulatory battle in the US. The Kansas City-based rail responded by telling Canadian Pacific to take a hike—and eat the $700 million deal breakup fee. At the heart of the issue are overlapping routes (Canadian National Railway has more) and stricter merger standards adopted in 2001 by the Surface Transportation Board (STB). The agency, which must approve or deny the merger, now states that railway mergers must be in the public interest; the older standard simply stated that a deal must not hinder competition. Canadian Pacific's plans? Wait out the ruling, which it expects to be negative, then swoop back in with its original deal.
This is a really tough call, as we see a 50/50 chance for ultimate approval by the STB. In the meantime, KSC seems too expensive (its price has risen to within 9% of the acquisition offer price), we don't like Canadian Pacific's tactics (and it seems fairly valued), and Canadian National will probably take a share price hit if the deal is shot down. That being said, we do like Canadian National's reach, which extends throughout Canada and all the way south to the Mexican border. It agreed to sell some of its southern-most lines to acquire KSC, but that would be a moot point if the deal fails. Of the major rails, CNI at $112.57 seems like the best bet right now for investors.
Biotechnology
02. In the war against Alzheimer's, a momentous day is coming
After a 12-month span in which most well-known health care stocks notched some impressive gains, one well-respected drug manufacturer seems to have been left behind. Biogen (BIIB $267), which has a solid bench of proven performers—like Tysabri for MS and Rituxan for cancer—and a decent pipeline of new therapies, is down 12.90% over the course of the past year. Something big is about to happen, however, that will (probably) move the shares sharply one way or the other, and send a critically-important signal on where we stand in the fight against Alzheimer's. Next Monday, the 7th of June, the US Food and Drug Administration will decide whether or not to approve the use of Biogen's Alzheimer's therapy, aducanumab. It is not just Biogen which will be watching the decision closely, it is also the families of the over six million sufferers of this terrible disease. Considering it has been nearly twenty years since an Alzheimer's therapy has been approved, a positive ruling would be an enormous win against what has been a very elusive disease.
There have been some oddly positive indicators that this drug will finally win approval, such as the very unique step of the FDA preparing a briefing document alongside Biogen on aducanumab. The stakes are high: generics have been slowly eating away at the company's anchor drugs, while approval of this Alzheimer's therapy would add immensely to the company's sales outlook for years to come. Our best guess? Investors should consider buying some shares at their current price of $267 in anticipation of a huge win.
Market Week in Review
01. In a stunning turnaround, two of the three major indexes actually cobbled together a positive May
It wasn't looking very good a few weeks into the new month. In fact, the "Sell in May..." adage seemed destined to, once again, prove true. However, after hammering out a solid second half of the month, both the S&P 500 and the Dow Jones Industrial Average ended May in the green—though not by much. While the NASDAQ couldn't make that happen, it did end up paring its earlier losses, finishing down just 1.53% on the month. Inflation fears seemed to grip the stock market in the first two weeks of May, while plenty of expert witnesses helped to effectively allay those fears during the second half of the month. For crypto investors, the story was more dour. Bitcoin lost one-third of its value in May. Bring on the dog days of summer, and strap in for a wild ride.
Under the Radar Investment
Kongsberg Gruppen ASA (NSKFF $25)
Kongsberg Gruppen ASA is a $4.5 billion Norwegian mid-cap industrials firm (try and find one of those in your portfolio). The company operates primarily in the Maritime and the Aerospace & Defense industries. The company's maritime unit makes navigation, automation, and positioning products for commercial ships and offshore industries. The aerospace unit provides an array of defense- and space-related products and services. Kongsberg has perennially-positive cash flow and a sound balance sheet. The company, which was founded in 1814, is based out of the Buskerud region of Norway.
Answer
According to the food industry publication Supermarket News, in 2018 US plant-based food sales sat at an impressive $4.5 billion. A year later, that figure grew to $5 billion—an 11% YoY growth rate compared to the 2.2% growth rate in total US retail food sales. In 2020, sales in the industry surged a whopping 27%, to $7 billion. Granted, overall retail food sales rose 15% (to $760 billion) due to closed restaurants and lockdowns, but to nearly double that rate says a lot about shifting dietary habits in the country. (And no, we are not knocking the summer delight that is a sizzling T-bone on the grill; it will be some time before that experience can be replicated.) 2021's figures, when they come out next April, will be a fascinating dot to add to the chart, as the lockdowns are essentially over in this country. What do we expect? Another surprisingly-high growth rate.*
*Granted, at 0.92% of overall food sales, the plant-based industry may seem like an afterthought from a sales standpoint. However, to us it simply portrays how much room the industry has to grow. Food products used to be a relatively boring corner of the consumer staples sector; thanks to visionaries like Beyond Meat's Ethan Brown, that is no longer the case...and we love it.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The growing power of the plant-based food industry...
The plant-based food business is red-hot, and don't expect it to cool anytime soon. It is not a novelty or a niche corner of the market; it is quickly becoming a mainstream staple. For evidence of that, just look at the growing space dedicated to the products in your local supermarket. What is the size of this industry, based on revenue, and how rapidly did it grow last year over 2019?
Penn Trading Desk:
Penn: AT&T Stopped Out in Strategic Income Portfolio
AT&T CEO John Stankey, earlier this spring: "HBO Max is a pillar of the company's long-term strategy." This week: HBO Max is being spun-off so the company can focus on its "core competencies" of wireless and broadband. What a joke. We placed a stop on T @ $32, and it filled the same day, 17 May, at $31.98. A position we have held since 2010 is officially gone.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Media & Entertainment
10. AT&T and Discovery to combine media assets, creating a new entertainment behemoth (i.e., AT&T admits defeat)
While we have owned telecom services giant AT&T (T $33) for years, either in the Penn Global Leaders Club or—most recently—in the Strategic Income Portfolio (it carries a 6.5% dividend yield), we've had a strong sense as of late that the company is not quite sure of its own strategic vision. After all, T bought DirecTV in 2015 for $67 billion (with debt) only to spin it off six years later for one-fourth of that value; and it paid $85 billion to acquire Time Warner a few years after the DirecTV deal only, now, to spin that company off for $43 billion. Someone needs to explain the concept of "buy low and sell high" to the AT&T board.
With respect to the latter, AT&T and Discovery (DISCA $38) have announced plans to combine their media assets, which include the likes of HBO Max, CNN, TBS, Warner Brothers, TLC, and HGTV, into a new publicly-traded company—name to be determined. T shareholders will own 71% of the new entity, with Discovery shareholders getting the remaining 29%. Well-known media executive David Zaslav, current CEO of Discovery, will lead the new business. While Zaslav envisions the new firm becoming the dominant streaming service in the world (Netflix might disagree with that boast), here's what won't be said: this move represents a 180-degree turn for AT&T, which is now throwing in the towel on its lofty media aspirations. Going forward, the company will focus on its 5G buildout and its broadband service. The $43 billion will certainly help the firm pay for the $23 billion worth of 5G spectrum it committed to buying in its bidding war with Verizon (VZ $59). As for that 6.5% dividend yield which has kept many investors around, it will almost certainly be cut when this deal closes.
AT&T popped over 4% on news of this spinoff, jumping to over $33 per share. We know the dividend is going to get cut, and we question how much growth can be squeezed out of the wireless and broadband businesses—considering the fierce competition—over the coming years. We also feel like we got suckered into believing the company's line about creating a new media empire. We are placing a stop on our T position at $32. In short, we have lost almost all confidence in T's management team. Update: T changed direction on the day the deal was announced and went below $32, triggering our stop loss. Update: T changed direction on the day the deal was announced and went below $32, triggering our stop loss.
Restaurants
09. Dine Brands' restaurant IHOP to launch fast-casual spinoff Flip'd this summer
It was a plan put on hold due to the pandemic, but Dine Brands' (DIN $95) restaurant IHOP is finally ready to unveil its new fast-casual chain known as Flip'd. The concept is simple: lure on-the-go customers who want to grab some good food fast. Visitors will be able to order the likes of signature pancake bowls, made-to-order egg sandwiches, and a host of other pastry, drink, and food items at either a digital kiosk or the counter, generally taking their food to go. Picture a Chipotle, but breakfast-based. All of the Flip'd locations will be franchise-owned, with IHOP offering $150,000 to each of the first ten franchisees to get them up and running. A few of the very first Flip'd restaurants will be located in Manhattan; Lawrence, Kansas; and several cities in Ohio. A number of restaurants have tried to launch spin-off versions of themselves with a unique twist, but most have had limited success. We will go ahead and predict it: Flip'd will be an overwhelming success.
IHOP is owned by Dine Brands, which also owns Applebee's. Dine was under an enormous amount of financial stress during the pandemic, as could be imagined. While we picked up hotel chains, retail stores, an airline, and even a major gambling resort precisely twelve months ago during the heat of the market free-fall, we didn't pick up any restaurants. That was a mistake: Dine Brands is up 132% since then. Fair value would probably be in the $125 per share range.
Media & Entertainment
08. Amazon poised to make its second-largest acquisition ever: a storied movie studio
Formed in 1924, MGM dominated Hollywood for over a generation. While the studio has had a number of interesting owners over the past century, none have been quite like its next probable owner: Internet retailer Amazon (AMZN $3,245). Back in 2017, when reports surfaced that Amazon was about to buy food retailer Whole Foods for $13.7 billion, there were many of doubters. We believed the move was brilliant, and that opinion has been borne out in an impressively short period of time (Whole Foods now delivers food to the doorstep of Prime members with Amazon-like efficiency). The Whole Foods acquisition remains the company's largest to date; but, with its reported $8.45 billion price tag, MGM will easily hold the second position.
Amazon has been investing heavily in its streaming service, recently inking a deal with the NFL to stream Thursday night games for around $1.2 billion per year. The recent merger of AT&T's Warner Media with Discovery may well have been the catalyst for MGM and the retailer to get this deal inked. It is interesting to note that MGM's former CEO, Gary Barber, was fired by the board after he reportedly engaged in talks with Apple surrounding a possible $6 billion deal. So, with a cost 40% higher than the purported range during the Apple talks, is Amazon overpaying for this asset? Probably. But in the end, they will make the premium look like chump change.
Amazon is a long-standing member of the Penn Global Leaders Club, and we have a fair value on the shares of around $4,250. The most concerning aspect of the company's growth trajectory revolves around government intervention. The company already had a target on its back from an antitrust standpoint; this will only add fuel to the fire of those who wish to see it forcibly broken up.
Food Products
07. Swedish oat milk company Oatly comes out of the gate hot, but established food players are stepping up the pressure
It's an age old story: established players bash a new concept, consumers embrace the new products, and the established players suddenly enter the fray, claiming they were always on board. EVs are perhaps the best example of this, and we remember the Fords and GMs of the world impugning Tesla on a chronic basis...until they suddenly embraced EVs as if it were their idea in the first place. The same is true in the plant-based foods business. Oatly Group AB (OTLY $21), maker of the happy little cartons of "milk" you have probably seen in the dairy section of the grocery store, went public last week. Despite the IPO price of $17, shares shot out of the gate, jumping 37%—to $23.25—within a day. While they have cooled off a bit since, their $21 price still values the company at $12.5 billion—about 50% larger than our favorite plant-based company, Beyond Meat (BYND $123). At $21, are the new shares worth picking up? Plant-based food sales rose an impressive 27%—to $7 billion—in 2020, and the upward trajectory will continue. Silk, which is now owned by Danone (DANOY $15), will probably be the company's chief competitor going forward, but we see Oatly growing its rather faithful consumer base. While it will be a few years before the company is profitable (it lost $60 million in 2020), its revenues doubled last year from the previous year. If shares go below $20, they are worth looking at for investors needing an international play in the consumer staples sector (which you probably do).
We believe a lot of investors are not fully grasping just how big the plant-based food movement will become over the next decade. Consider this frontier investing: there will be massive gains to be had, but choose your vehicles carefully. Oatly is a pretty safe bet.
Pharmaceuticals
06. Just another example of why this company is underrated: Pfizer's Covid pill should be out by year's end
By definition, we believe in all 100 or so investments within the five Penn Wealth strategies; put another way, if we lose faith, we have no qualms jettisoning any of them. That said, at any particular point in time we have our favorites. Typically, these are companies in which we see something dynamic going on, but ones that seem to be flying under the radar of the Street. Penn Global Leaders Club member Pfizer (PFE $38) is a perfect example. We believe this company, which also happens to have a fat 4% dividend yield, is the global benchmark for the pharmaceuticals industry. As if it weren't enough that Pfizer has the most effective vaccine for Covid on the market (which it developed in record time), it now plans to have a pill for the treatment of the deadly virus on the market before the end of the year. Currently in a phase 1 clinical trial, this protease inhibitor (a protease is an enzyme which allows the virus to break down proteins so it can make copies of itself and multiply) could be taken at home by those having positive test results, effectively treating the disease and helping to keep patients out of the hospital. The first protease inhibitor was approved by the FDA a generation ago to treat HIV. As for the various strains of the disease, Pfizer believes the therapy, currently known simply as PF-07321332, should effectively tackle all of them with strong efficacy.
Pfizer has a healthy balance sheet, a strong drug pipeline, a top-tier sales force, and a simply great R&D team. Let others follow meme stocks that are infinitesimally overvalued (i.e., really worth nothing), we will stick with beautiful workhorses like Pfizer. When the next correction comes, washing the silliness away, this 172-year-old stalwart will still be standing.
Global Trade
05. Parity must be the US goal with respect to trade with China
The press keeps telling us that China is about to reach economic parity with the United States, so here's our question to the collective press: why are we importing over four times as much from China as we export to China? If the economies are of equal scale, shouldn't our trade deficit with the communist nation be relatively balanced? In reality, the United States has a $22 trillion economy compared to China's $15 trillion or so, meaning we could even accept a 50% differential in the transfer of goods; but 400%? Something doesn't smell right.
In March, the most recent month on record, we exported $11.27 billion worth of goods to China and imported $48.21 billion worth of goods from China. While those figures are both depressing and outrageous, there is some good news: the US tariffs on Chinese goods are finally forcing US companies to look elsewhere for their purchases. One of the biggest beneficiaries in this shift has been Vietnam, which is now the eighth-largest exporter to the US, moving ahead of India. Vietnam, as we have noted in the past, is no friend to China, with the ongoing South China Sea dispute just the latest bone of contention between the two. The peak in our level of imports from China was $539 billion in 2018; as of the trailing twelve months (TTM) ended 31 March, that figure has dropped to $472 billion. A 12% drop doesn't sound like much, and the pandemic certainly skewed the results to some extent, but at least the needle is moving in the right direction.
Fortunately, the Biden administration has shown little inclination toward removing the tariffs on Chinese goods, much to the consternation of the CPC. Americans must keep up the pressure on companies to persuade them to look elsewhere for the wholesale purchase of products and building of new plants. If that pressure continues, China's five-year plan to overtake the US economically will face a much larger hurdle—despite the cheerleading from much of the press.
Technology is going to be, far and away, our greatest ally in the fight to curb Chinese imports. From 3D printing to vastly increased efficiency for manufacturing firms, technology is the great disruptor with respect to the balance of trade. Investors should keep a close eye on opportunities in the small- and mid-cap industrials space, those tech-heavy firms which almost always travel under the radar. We will continue to highlight individual names for readers.
Global Strategy: Europe
04. America is roaring out of the pandemic; that is not so much the case in Europe
Over the course of the last two quarters, covering the end of 2020 and the beginning of 2021, the US economy grew at an impressive clip of 4.3% and 6.4%, respectively, thanks to a herculean vaccination effort and a subsequent loosening of Covid restrictions. Sadly, this has not been the case across the pond. The latest metric comes from France, which just re-entered a recession. The French economy shrank by 0.1% in the first quarter of 2021, following a 1.5% contraction in Q4 of 2020. But Europe's second-largest economy has some good company: Germany, the eurozone's largest economy, has seen its economy shrink for five straight quarters, with Q1 GDP coming in at -3.10%. To be sure, the pandemic and a chaotic subsequent vaccine rollout have been the catalysts for the recession that Europe can't seem to shake, but there were other factors which prepared the field for these conditions.
While US deficit spending has been a sad, running joke for a number of years, Europe's fiscal policy almost makes America's economic house look enviable. After the Great Recession, Brussels, led by the erudite wonks primarily from France and Germany, spent with reckless abandon to help the poorer nations in the southern region shake off record levels of unemployment—like 28% in Greece and 26% in Spain. Austerity measures were then forced upon these borrowers which only served to exacerbate the problem and create resentment among the citizens of these beleaguered southern nations. Going into the pandemic, unemployment levels remained stubbornly high in Portugal, Italy, Greece, and Spain. In essence, the eurozone never shook off the effects of the 2008-2009 crisis when the global pandemic hit. The ECB's only answer seems to be throwing more money at the problem until it goes away. Eventually, Europe's vaccination rate will subdue the nightmarish pandemic and growth will return to the region. But the economic scars caused by the handling of two massive crises will remain, as will the bitter divide between the northern and southern regions of the continent.
We continue to underweight the eurozone—with the exception of a few emerging markets in Eastern Europe—as the region grapples with its reopening efforts. The UK is the wild card, as the 2017 Brexit outcome appears more and more prescient with each passing month. Goldman Sachs recently issued a glowing outlook for the British economy, anticipating a "striking" 7.8% GDP growth rate for the year. One way to play the anticipated rebound is with the iShares MSCI United Kingdom ETF (EWU $34), which holds 88 large-cap positions; names such as Unilever PLC and London Stock Exchange Group PLC. For investors looking for more growth potential there is the iShares MSCI United Kingdom Small-Cap ETF (EWUS $50), which holds several hundred small- and mid-cap names.
Road & Rail
03. The latest developments in the Kansas City Southern saga
When Canadian National Railway (CNI $113) stunned the industry with its $30 billion bid for Kansas City Southern (KSU $298), we fully expected rival Canadian Pacific Railway (CP $81) to up its prior $25 billion bid. Instead, the rail—which arguably needs the American north-south tracks of KSC more than Canadian National—stuck by its original offer. It also sent a message to Kansas City Southern: take our deal or lose the regulatory battle in the US. The Kansas City-based rail responded by telling Canadian Pacific to take a hike—and eat the $700 million deal breakup fee. At the heart of the issue are overlapping routes (Canadian National Railway has more) and stricter merger standards adopted in 2001 by the Surface Transportation Board (STB). The agency, which must approve or deny the merger, now states that railway mergers must be in the public interest; the older standard simply stated that a deal must not hinder competition. Canadian Pacific's plans? Wait out the ruling, which it expects to be negative, then swoop back in with its original deal.
This is a really tough call, as we see a 50/50 chance for ultimate approval by the STB. In the meantime, KSC seems too expensive (its price has risen to within 9% of the acquisition offer price), we don't like Canadian Pacific's tactics (and it seems fairly valued), and Canadian National will probably take a share price hit if the deal is shot down. That being said, we do like Canadian National's reach, which extends throughout Canada and all the way south to the Mexican border. It agreed to sell some of its southern-most lines to acquire KSC, but that would be a moot point if the deal fails. Of the major rails, CNI at $112.57 seems like the best bet right now for investors.
Biotechnology
02. In the war against Alzheimer's, a momentous day is coming
After a 12-month span in which most well-known health care stocks notched some impressive gains, one well-respected drug manufacturer seems to have been left behind. Biogen (BIIB $267), which has a solid bench of proven performers—like Tysabri for MS and Rituxan for cancer—and a decent pipeline of new therapies, is down 12.90% over the course of the past year. Something big is about to happen, however, that will (probably) move the shares sharply one way or the other, and send a critically-important signal on where we stand in the fight against Alzheimer's. Next Monday, the 7th of June, the US Food and Drug Administration will decide whether or not to approve the use of Biogen's Alzheimer's therapy, aducanumab. It is not just Biogen which will be watching the decision closely, it is also the families of the over six million sufferers of this terrible disease. Considering it has been nearly twenty years since an Alzheimer's therapy has been approved, a positive ruling would be an enormous win against what has been a very elusive disease.
There have been some oddly positive indicators that this drug will finally win approval, such as the very unique step of the FDA preparing a briefing document alongside Biogen on aducanumab. The stakes are high: generics have been slowly eating away at the company's anchor drugs, while approval of this Alzheimer's therapy would add immensely to the company's sales outlook for years to come. Our best guess? Investors should consider buying some shares at their current price of $267 in anticipation of a huge win.
Market Week in Review
01. In a stunning turnaround, two of the three major indexes actually cobbled together a positive May
It wasn't looking very good a few weeks into the new month. In fact, the "Sell in May..." adage seemed destined to, once again, prove true. However, after hammering out a solid second half of the month, both the S&P 500 and the Dow Jones Industrial Average ended May in the green—though not by much. While the NASDAQ couldn't make that happen, it did end up paring its earlier losses, finishing down just 1.53% on the month. Inflation fears seemed to grip the stock market in the first two weeks of May, while plenty of expert witnesses helped to effectively allay those fears during the second half of the month. For crypto investors, the story was more dour. Bitcoin lost one-third of its value in May. Bring on the dog days of summer, and strap in for a wild ride.
Under the Radar Investment
Kongsberg Gruppen ASA (NSKFF $25)
Kongsberg Gruppen ASA is a $4.5 billion Norwegian mid-cap industrials firm (try and find one of those in your portfolio). The company operates primarily in the Maritime and the Aerospace & Defense industries. The company's maritime unit makes navigation, automation, and positioning products for commercial ships and offshore industries. The aerospace unit provides an array of defense- and space-related products and services. Kongsberg has perennially-positive cash flow and a sound balance sheet. The company, which was founded in 1814, is based out of the Buskerud region of Norway.
Answer
According to the food industry publication Supermarket News, in 2018 US plant-based food sales sat at an impressive $4.5 billion. A year later, that figure grew to $5 billion—an 11% YoY growth rate compared to the 2.2% growth rate in total US retail food sales. In 2020, sales in the industry surged a whopping 27%, to $7 billion. Granted, overall retail food sales rose 15% (to $760 billion) due to closed restaurants and lockdowns, but to nearly double that rate says a lot about shifting dietary habits in the country. (And no, we are not knocking the summer delight that is a sizzling T-bone on the grill; it will be some time before that experience can be replicated.) 2021's figures, when they come out next April, will be a fascinating dot to add to the chart, as the lockdowns are essentially over in this country. What do we expect? Another surprisingly-high growth rate.*
*Granted, at 0.92% of overall food sales, the plant-based industry may seem like an afterthought from a sales standpoint. However, to us it simply portrays how much room the industry has to grow. Food products used to be a relatively boring corner of the consumer staples sector; thanks to visionaries like Beyond Meat's Ethan Brown, that is no longer the case...and we love it.
Headlines for the Week of 09 May—15 May 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
No putting that genie back in its bottle...
While Bank of America issued the first card using the concept of "revolving credit" back in 1958, what was the first credit card that could boast of widespread use?
Penn Trading Desk:
Penn: Add potential inflation hedge to the Dynamic Growth Strategy
It used to be so easy to hedge against inflation, just like it was easy to reduce beta in a portfolio by increasing the percentage of bonds in a portfolio. Ah, the good old days. We don't believe the current line that "inflation is transitory," and we are continually searching for creative hedges against this condition. To that end, we have added a position to the Penn Dynamic Growth Strategy, our ETF portfolio, which invests in companies that are expected to benefit from rising prices of real assets, i.e., inflation. Looking down the list of 40 or so holdings was like looking down one of our equity wish lists. A quite creative mix. Members can see the new addition by visiting the Penn Trading Desk and signing in.
Evercore ISI: Upgrade Simon Property Group to Outperform
We've talked relatively disparagingly about retail REIT Simon Property Group (SPG $120) in the past, but Evercore ISI has become a believer. The analyst firm upgraded their rating on SPG to Outperform, lifting their target price on the shares from $121 to $128. The analyst gave relatively generic rationale for the upgrade, to include a post-pandemic return to normalcy, improved rent collections, lower tenant fallout, and potential upside surprises to net operating income by the likes of JC Penney, Brooks Brothers, and other mall anchors.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Cybersecurity
10. Private equity firm Thoma Bravo makes bid for cybersecurity firm Proofpoint, sending shares soaring
Going into last week, Proofpoint (PFPT $173) was a $7.5 billion cloud-based cybersecurity firm with a suite of offerings for mid- to large-sized companies. After the following Monday's open, the company's offerings remained the same but its market cap was suddenly sitting near $11 billion thanks to an unsolicited bid by private equity firm Thoma Bravo. The deal, which would take the firm private, is worth $12.3 billion, or $176 per share, and comes with a 45-day "go-shop" provision which would allow other bids to be reviewed. Thoma Bravo, which specializes in software and cybersecurity acquisitions, just completed a $10 billion deal to buy RealPage, a provider of property management software for the commercial, single-family, and vacation rental housing industries. Barring any other offers, the Proofpoint deal should close in the third quarter.
Proofpoint is one of the top holdings in the First Trust NASDAQ Cybersecurity ETF (CIBR $45), a satellite holding within the Penn Dynamic Growth Strategy. While selecting individual cybersecurity names can be challenging for investors, we maintain that the best way to take part in this ever-growing industry is through a strong exchange traded fund, such as CIBR.
Automotive
09. Tesla's revenues surged 74% in the first quarter, leading to a record net income for the global EV leader
We remember listening to CNBC's David Faber ad nauseam: "Yes, Jim, but you do realize the company has never turned a profit, right?" We've never considered Mr. Brooks Brothers a lofty thinker, but his stale comments do make it all the more enjoyable to report that Tesla (TSLA $723) just notched its seventh-straight profitable quarter on the back of blowout numbers. For Q1 of 2021, Tesla generated $10.39 billion in revenue, with a record $438 million of that flowing down as net income. Addressing the new greatest threat to the automakers, the chip shortage, management said it has addressed the issue by moving to new microcontrollers for its vehicles and by developing the firmware required to work with the new chips made by different suppliers. Granted (we can hear Faber now), the company did make over $100 million by selling roughly 10% of its bitcoin stash at a profit, and another $500 million by the sale of tax credits, but the ever-increasing efficiency within their plants is undeniable. Tesla delivered a record 184,800 Model 3 and Model Y vehicles in Q1, and expects a 50% delivery growth rate this year over 2020. On the technical side of the business, Musk sees cameras replacing radar on its full self-driving (FSD) vehicles when they roll out, and expects to completely eliminate the old (radar-based) systems soon. In the earnings conference call, Musk also reiterated his aggressive plans to put more Tesla solar roofs on homes across America, supported by the company's home energy storage system known as Powerwall. The goal is to create a "giant distributed utility" which will ultimately make one's house energy self-sufficient.
There are always going to be naysaying journalists and analysts chronically pointing out why Tesla will ultimately fail. Their latest narrative is that increased competition within the EV and autonomous-driving space, along with the end of tax subsidies, will doom the company. Tesla is doing everything right to remain in the pole position going forward, however, and we consider its nationwide Supercharger network to be an enormous advantage over the competition. It should be noted that Tesla offered this technology to other automakers several years ago, but the offer was flatly declined.
Investment Vehicles: ETFs
08. Talk of raising the capital gains tax rate points to yet another reason we prefer ETFs over mutual funds
There are a number of reasons we migrated away from mutual funds in favor of exchange traded funds (ETFs) some years back, but the current tax rate discussion emanating from D.C. points to one specific benefit of the latter: their tax efficiency. As a young broker, one perennial pain came from the collection of mutual fund capital gains distribution figures for clients. Even if a client held a mutual fund throughout the entire year, they still had to pay taxes on the capital gains generated by the internal trades of the portfolio managers (PMs)—assuming the funds weren't held in an IRA, of course. For example, in the late 1990s the largest position held in client accounts was the venerable Growth Fund of America (AGTHX). The estimated capital gains distribution at year-end 2020 for AGTHX is 9-11%. Counter that with the 2020 capital gains distribution on the largest equity ETF, the SPDR S&P 500 ETF Trust (SPY): 0.00%. By law, open-end mutual funds must pass along capital gains to shareholders each year; there is no such requirement for ETFs. While the Biden administration is discussing a 39.6% capital gains tax rate on only the wealthiest of shareholders, does anyone really believe that the current rates for the rest of us will stay where they are now (0% to 20%, depending on the shareholder's tax bracket)? Yet another reason to favor ETFs in the taxable portion of your investment portfolio.
In the Penn Dynamic Growth Strategy, our ETF portfolio, we own a number of core funds designed to be held for the long haul, and satellite positions, designed to take advantage of current market and economic conditions. This is an excellent strategy for taxable accounts due to its relative tax efficiency. There are currently 23 funds (yes, one is an open-end fund we consider to be a stellar performer) in the Strategy.
Technology Hardware, Storage, & Peripherals
07. Apple vows to invest $430 billion and hire 20,000 new workers in the US over the next five years
Claiming that the company blew past its 2018 promise to invest $350 billion in the US, Apple's (AAPL $135) Tim Cook just announced bold new plans that would have the Cupertino-based firm adding another 20,000 US workers to the rolls (a 21% increase) and investing $430 billion in projects around the country. One of those projects will be a brand new campus and engineering hub in North Carolina which will create at least 3,000 AI, machine learning, software engineering, and other technical positions. Recall that the company just spent $1 billion on a new campus in Austin, Texas, which will be move-in ready next year. The new expenditures will focus on American suppliers, data center growth and enhancements, and Apple TV productions. Cook also added some very interesting comments following the investment announcements: he said that Apple was the largest taxpayer in the US, having paid over $45 billion in corporate income taxes over the past five years. That was a not-so-subtle message to D.C. that the big growth engines of the country—the large companies which each employ tens of thousands of American workers—are paying their fair share. We would like to add to the inference: the small- and medium-sized American companies which employ 65% of the US workforce are also paying their fair share.
Apple remains one of our strongest conviction stocks within the Penn Global Leaders Club. When a short seller or analyst comes along and attempts to besmirch the bright future of this company, investors should be prepared to pounce on any negative reaction within the share price.
Metals & Mining
06. Outcome of Peruvian national election highlights the country risk associated with precious metals and mining stocks
Trying to root out socialism from Latin America is a monumental challenge at best, an exercise in futility at worst. For evidence of this, just look to Venezuela. Despite the nightmarish economic situation for Venezuelans (like five hours in line for a few rolls of toilet paper), Hugo Chavez wannabe Nicolas Maduro remains in power, despite having the personality of a single-ply square of...Venezuelan toilet paper. Heading further down the South American continent we have the Republic of Peru: a relative bastion of free trade in the region—at least up until this point. The rather shocking results of the national elections held earlier this month set up socialist candidate Pedro Castillo to coast into the presidency following a June runoff (he holds a 20-point lead over his opponent, the market-friendly Keiko Fujimori). Which leads us to mining companies in general, and Southern Copper (SCCO $72) specifically.
Thanks to the global rebound, the outlook for metals—especially those with heavy industrial usage such as copper—is bright. Peru is the world's second-largest source of copper, and a majority of Southern Copper's mining operations reside within that country. While Castillo is trying to temper the harshness of his message leading into the runoff, his talk of nationalizing private companies operating inside the country has spooked investors. His party's platform, in fact, talks of "taking control" of the nation's natural resources. For $57 billion Souther Copper, which recently announced $8 billion in new Peruvian projects, there should be cause for concern. In fact, considering the remainder of their operations are in Mexico, which has been methodically moving left, there should be cause for extreme concern.
We remain very bullish on both precious metals/minerals as well as those used for industrial purposes. In fact, if the new Peruvian government were to nationalize the miners (not beyond the realms of possibility), copper prices would shoot even higher than they already are. Great for commodity investors; not so much for those who took a chance on individual miners like Southern Copper. While we do own two gold miners in the Penn Global Leaders Club, it is a safer bet to own sector or thematic ETFs to take advantage of anticipated growth. A few worth looking at are the US Global GO Gold and Precious Metal Miners ETF (GOAU $20), and the SPDR Gold Shares ETF (GLD $165). We own the latter in the Penn Dynamic Growth Strategy as a satellite position, and the current price of gold $1,777) makes it an attractive opportunity right now—in our opinion.
There are some excellent mining stocks in which to invest, and they are often in the small- to mid-cap sweet spot. However, investors need to perform their due diligence and understand exactly where the respective company's mines are located, and what the geopolitical risks are within that country or region.
Household & Personal Products
05. Jessica Alba's Honest Company is open for trading, but can it compete with the likes of Procter & Gamble and Kimberly-Clark?
Hollywood star Jessica Alba was plagued by asthma and allergies as a child to the point of being hospitalized on several occasions due to her maladies. Those experiences helped shape her thoughts on personal health, ultimately leading to her decision to launch The Honest Company (HNST $15) a decade ago. The Honest Company is a consumer products firm which offers a growing line of eco-friendly baby supplies (primarily diapers), bath and skincare products, and home cleaning solutions. There are over 2,500 chemicals and materials the company excludes from its products due to their potentially harmful effects on either the body or the environment.
How has Alba's concept resonated with consumers? Overall, pretty well. The company's products are now available at 32,000 various retailers throughout the US and Canada, including big players like Target (TGT) and Walgreens Boots Alliance (WBA). While still operating in the red, the company's revenues rose from $235M in 2019 to $300M in 2020 (+28%) and losses were stanched from -$31M to -$14M (a 55% improvement) over the same time frame. Leading into Wednesday's IPO, HNST shares were priced in the $14 to $17 range. They shot out of the gate at $23 per share and have fallen precipitously ever since. The company's valuation now sits at $1.4 billion, but is it worth even that much?
There is a mountain of competition in this space—both the personal care products industry in general and the eco-friendly corner specifically. Having Jessica Alba's sway certainly helps, but facing down the market caps of Procter ($330B), Unilever PLC ($155B), Kimberly-Clark ($46B), and an army of "green" players will be a herculean task. Furthermore, the aforementioned stocks all come with nice dividend yields, while HNST will need to plow its capital back into its strategic growth efforts.
Nonetheless, we do see a faithful and growing customer base. Honest estimates it currently holds about 5% market share in its space, and 55% of revenues are generated online. We believe it could easily double its market share in the short term, generating in excess of $500 million in revenues by 2023; maybe even becoming profitable by that point. The company is worth keeping an eye on, and the products are also worth a look.
HNST shares have now lost about one-third of their value since IPO day. If they drop to the $10/share range, we believe they will be undervalued and worth looking at for a potential purchase.
Global Strategy: East & Southeast Asia
04. Why do we care what Covid vaccine Philippine President Rodrigo Duterte chose to receive?
Roughly 20,000 American soldiers died defending the Philippines during World War II; about half were lost in battle while the other half succumbed to disease. The United States has enjoyed—actually, earned—an incredibly good relationship with the Southeast Asian country ever since General Douglas MacArthur uttered the infamous words in 1942: "I came through...and I shall return." To say that the Philippines sits in an important region of the world is an understatement. About one-fifth of global trade passes through the South China Sea, and trillions of dollars’ worth of oil and gas resources reside beneath its waves. The US military regularly patrols the region, with the Theodore Roosevelt and Nimitz Carrier Strike Groups conducting joint exercises in the waters this past February.
China has continued to make outrageous claims on enormous swaths of the South China Sea—as shown by the red dashed line on the accompanying map—much to the consternation of its neighbors in the region. Now, the communist nation seems to be strongly wooing the mercurial and dictatorial leader of the Philippines, Rodrigo Duterte. The latest sign of the love affair came with Duterte’s decision to receive the underwhelming Chinese Covid vaccine known as Sinovac. Recent results from Brazil show a 50% effectiveness rate for the Chinese product. The Philippines’ Covid rate is the second highest in Southeast Asia, behind only Indonesia.
While the choice of a vaccine is certainly anecdotal (though he did also praise Russia’s near-comical vaccine, Sputnik V), there is little doubt that Duterte is an iron-fisted leader who is on the outs with the United States right now, and that China would love to count on him as an ally in the region. The South China Sea seems to be quickly replacing the Persian Gulf as the most troublesome hot spot in the world.
Outside of the Philippines, all other nations in the region have serious disagreements with China. That nation’s ham-handed approach to diplomacy will not serve them well over the coming years, but more countries need to follow Australia’s lead and refuse to be bullied by the ruling Communist Party of China. America, through its military presence in the region, must make it clear that a massive land grab by fiat is unacceptable.
Demographics & Lifestyle
03. A most excellent problem: credit card issuers concerned as Americans continue to pay down their debt
We've often wondered what the overall economic health of the typical American household would look like if revolving debt did not exist. After all, it wasn't until Bank of America (BAC $42) issued the first credit card with a "revolving credit" feature in 1958 that Americans began racking up debt not backed by any tangible property, such as a home or an auto. Before then, money borrowed on a card had to be paid off at the end of each month. And despite the near-zero Fed funds rate, many cardholders are still being charged confiscatory interest rates of 16.99% to 19.99% on their balances, or even higher.
Now for the good news. Much to the chagrin of the card-issuing banks, which toughen their standards when people need the money the most and loosen them when they don't, borrowers are paying down their debt at impressive levels. During the company's most recent earnings call, card issuer Discover Financial Services (DFS $115) said that balances paid off recently have hit levels not seen since 2000. All of the top card issuers, in fact, have reported significant declines in the aggregate balance of revolving debt owed. While Americans put nearly $4 trillion on their cards in 2020, the total US credit card debt outstanding now sits at $819 billion--a significant decrease from pre-pandemic levels. It's hard to say whether this will turn into a healthy, long-term trend, but more and more people are becoming cognizant of just how much they owe, and what they have been paying for the "privilege" of buying on credit.
Once Americans get their own fiscal house in order, perhaps they will look at the $28.3 trillion of outstanding debt their government has racked up and demand accountability. The current rationale for spending trillions more than what is brought in via taxation is the pandemic. But what's the excuse for the reckless and wanton spending before the crippling disaster hit?
Cybersecurity
02. Despite the company's original denials, Colonial Pipeline reportedly paid hackers $5 million in ransom
A few months ago, we reported about a hack on a municipal water treatment plant in Florida. The hacker was attempting to adjust the chlorine level in the city’s water supply to toxic levels. That attack was thwarted by an attentive city worker who noticed a mouse cursor mysteriously moving on his computer screen. This past week brought us news of a successful hack on the Colonial Pipeline, the largest pipeline for refined oil products in the US. The 5,500-mile-long system, which carries 3 million barrels of fuel per day between Texas and New York, was shut down for days, causing massive gas lines along the East Coast.
While the company initially denied paying ransom to the hackers, it now appears that $5 million was, indeed, paid to a group known as DarkSide shortly after the attack occurred. DarkSide is a highly sophisticated criminal organization based out of Eastern Europe, with definite Russian connections. The cybercriminals use ransomware to lock a victim’s system, promising to provide the digital “keys” to unlock the system once the monetary demands are met. Experts are surprised that the amount demanded in this case was so low; normally, with a company of this size and services with such a broad scope, a $30 million demand would not be out of the ordinary.
Ransomware attacks on firms of all sizes more than tripled in 2020, with victims ponying up over $350 million in crypto ransoms. As is typical following such an attack, the US government said it would be setting up a task force to counter these threats. Sadly, these promises always seem to come along after the damage is done. This is yet another sobering reminder of just how vulnerable American companies and individuals are to cybercriminals, and how disruptive a simple digital act of aggression can become, literally overnight. While it is up to the government to go after the bad actors and nation-states involved in these crimes, it is up to each American to take all possible measures to assure their own system’s security profile is as robust as possible.
On the personal defense front, we have found Bitdefender to be one of the best cybersecurity suites on the market, for both PCs and MacBooks. Kaspersky ranks highly on most lists, but it is headquartered in Russia, which makes us immediately suspicious. From an investment standpoint, we believe the First Trust NASDAQ Cybersecurity ETF (CIBR $43) is an effective way to invest in the growing need for digital protection. We own CIBR as a satellite position within the Penn Dynamic Growth Strategy.
Market Week in Review
01. Inflation fears brought an ugly first half to the week for the markets, followed by an impressive comeback effort
The extent to which investors have been indifferent about inflation concerns is rather remarkable, considering the grand economic reopening which is in its nascent stage and the mounting evidence that the concern is real—as evidenced by the price of everything from used cars to commodities. Perhaps they were taking solace in Jerome Powell's nonchalant attitude, with the Fed Chair almost daring inflation to try and stir trouble. That changed this past Wednesday when, following two previous down days, the major indexes threw a major fit over the latest Consumer Price Index (CPI) report. The CPI, which measures the rate of change in the price of a basket of consumer goods, spiked 4.2% YoY, above the lofty expectations for a 3.6% reading. That jump represents the sharpest spike since September of 2008. By Wednesday's close, the major indexes were off between 2% and 2.67%, with the NASDAQ getting hit the hardest. Fears that the Fed would have to act sooner rather than later to rein in inflation seemed to abate after the mid-week bloodbath, with the Dow gaining nearly 1,000 points during the last two sessions, and the S&P gaining 110 points. Stocks typically face a higher level of volatility in May, as investors seem intent on proving the "Sell in May..." adage. What is the right course of action after such a volatile week? Take a good look at your portfolio's allocation to assure the fast-growing tech positions didn't knock it out of whack; also, position more toward the value side of the equation. On that note, take a look at our latest addition to the Dynamic Growth Strategy by visiting the Penn Trading Desk.
Under the Radar Investment
Masimo Corp (MASI $220)
Masimo is a US-based medical device company which focuses on noninvasive patient monitoring. For individuals, the firm offers state-of-the-art pulse oximeters for measuring oxygen saturation levels and pulse rates, wearable "smart" thermometers which allow parents to keep a constant eye on a sick child's temperature level, and sleep improvement devices. For medical facilities, Masimo offers a comprehensive patient monitoring and connectivity platform. Sadly, due to the global pandemic millions of people are now familiar with the company's products. Demand and name recognition helped drive MASI shares up to $285 this past January, but they have since pulled back into a nice buying range. While we don't currently own the company within the Penn strategies, we believe a fair value for the shares is around $300.
Answer
The Diners Club Card was created in 1950 after businessman Frank McNamara forgot his wallet while attending a business dinner in New York. By 1951, there were 20,000 Diners Club members. For its part, American Express introduced the first plastic credit card in 1959, with over one million in use by the mid 1960s.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
No putting that genie back in its bottle...
While Bank of America issued the first card using the concept of "revolving credit" back in 1958, what was the first credit card that could boast of widespread use?
Penn Trading Desk:
Penn: Add potential inflation hedge to the Dynamic Growth Strategy
It used to be so easy to hedge against inflation, just like it was easy to reduce beta in a portfolio by increasing the percentage of bonds in a portfolio. Ah, the good old days. We don't believe the current line that "inflation is transitory," and we are continually searching for creative hedges against this condition. To that end, we have added a position to the Penn Dynamic Growth Strategy, our ETF portfolio, which invests in companies that are expected to benefit from rising prices of real assets, i.e., inflation. Looking down the list of 40 or so holdings was like looking down one of our equity wish lists. A quite creative mix. Members can see the new addition by visiting the Penn Trading Desk and signing in.
Evercore ISI: Upgrade Simon Property Group to Outperform
We've talked relatively disparagingly about retail REIT Simon Property Group (SPG $120) in the past, but Evercore ISI has become a believer. The analyst firm upgraded their rating on SPG to Outperform, lifting their target price on the shares from $121 to $128. The analyst gave relatively generic rationale for the upgrade, to include a post-pandemic return to normalcy, improved rent collections, lower tenant fallout, and potential upside surprises to net operating income by the likes of JC Penney, Brooks Brothers, and other mall anchors.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Cybersecurity
10. Private equity firm Thoma Bravo makes bid for cybersecurity firm Proofpoint, sending shares soaring
Going into last week, Proofpoint (PFPT $173) was a $7.5 billion cloud-based cybersecurity firm with a suite of offerings for mid- to large-sized companies. After the following Monday's open, the company's offerings remained the same but its market cap was suddenly sitting near $11 billion thanks to an unsolicited bid by private equity firm Thoma Bravo. The deal, which would take the firm private, is worth $12.3 billion, or $176 per share, and comes with a 45-day "go-shop" provision which would allow other bids to be reviewed. Thoma Bravo, which specializes in software and cybersecurity acquisitions, just completed a $10 billion deal to buy RealPage, a provider of property management software for the commercial, single-family, and vacation rental housing industries. Barring any other offers, the Proofpoint deal should close in the third quarter.
Proofpoint is one of the top holdings in the First Trust NASDAQ Cybersecurity ETF (CIBR $45), a satellite holding within the Penn Dynamic Growth Strategy. While selecting individual cybersecurity names can be challenging for investors, we maintain that the best way to take part in this ever-growing industry is through a strong exchange traded fund, such as CIBR.
Automotive
09. Tesla's revenues surged 74% in the first quarter, leading to a record net income for the global EV leader
We remember listening to CNBC's David Faber ad nauseam: "Yes, Jim, but you do realize the company has never turned a profit, right?" We've never considered Mr. Brooks Brothers a lofty thinker, but his stale comments do make it all the more enjoyable to report that Tesla (TSLA $723) just notched its seventh-straight profitable quarter on the back of blowout numbers. For Q1 of 2021, Tesla generated $10.39 billion in revenue, with a record $438 million of that flowing down as net income. Addressing the new greatest threat to the automakers, the chip shortage, management said it has addressed the issue by moving to new microcontrollers for its vehicles and by developing the firmware required to work with the new chips made by different suppliers. Granted (we can hear Faber now), the company did make over $100 million by selling roughly 10% of its bitcoin stash at a profit, and another $500 million by the sale of tax credits, but the ever-increasing efficiency within their plants is undeniable. Tesla delivered a record 184,800 Model 3 and Model Y vehicles in Q1, and expects a 50% delivery growth rate this year over 2020. On the technical side of the business, Musk sees cameras replacing radar on its full self-driving (FSD) vehicles when they roll out, and expects to completely eliminate the old (radar-based) systems soon. In the earnings conference call, Musk also reiterated his aggressive plans to put more Tesla solar roofs on homes across America, supported by the company's home energy storage system known as Powerwall. The goal is to create a "giant distributed utility" which will ultimately make one's house energy self-sufficient.
There are always going to be naysaying journalists and analysts chronically pointing out why Tesla will ultimately fail. Their latest narrative is that increased competition within the EV and autonomous-driving space, along with the end of tax subsidies, will doom the company. Tesla is doing everything right to remain in the pole position going forward, however, and we consider its nationwide Supercharger network to be an enormous advantage over the competition. It should be noted that Tesla offered this technology to other automakers several years ago, but the offer was flatly declined.
Investment Vehicles: ETFs
08. Talk of raising the capital gains tax rate points to yet another reason we prefer ETFs over mutual funds
There are a number of reasons we migrated away from mutual funds in favor of exchange traded funds (ETFs) some years back, but the current tax rate discussion emanating from D.C. points to one specific benefit of the latter: their tax efficiency. As a young broker, one perennial pain came from the collection of mutual fund capital gains distribution figures for clients. Even if a client held a mutual fund throughout the entire year, they still had to pay taxes on the capital gains generated by the internal trades of the portfolio managers (PMs)—assuming the funds weren't held in an IRA, of course. For example, in the late 1990s the largest position held in client accounts was the venerable Growth Fund of America (AGTHX). The estimated capital gains distribution at year-end 2020 for AGTHX is 9-11%. Counter that with the 2020 capital gains distribution on the largest equity ETF, the SPDR S&P 500 ETF Trust (SPY): 0.00%. By law, open-end mutual funds must pass along capital gains to shareholders each year; there is no such requirement for ETFs. While the Biden administration is discussing a 39.6% capital gains tax rate on only the wealthiest of shareholders, does anyone really believe that the current rates for the rest of us will stay where they are now (0% to 20%, depending on the shareholder's tax bracket)? Yet another reason to favor ETFs in the taxable portion of your investment portfolio.
In the Penn Dynamic Growth Strategy, our ETF portfolio, we own a number of core funds designed to be held for the long haul, and satellite positions, designed to take advantage of current market and economic conditions. This is an excellent strategy for taxable accounts due to its relative tax efficiency. There are currently 23 funds (yes, one is an open-end fund we consider to be a stellar performer) in the Strategy.
Technology Hardware, Storage, & Peripherals
07. Apple vows to invest $430 billion and hire 20,000 new workers in the US over the next five years
Claiming that the company blew past its 2018 promise to invest $350 billion in the US, Apple's (AAPL $135) Tim Cook just announced bold new plans that would have the Cupertino-based firm adding another 20,000 US workers to the rolls (a 21% increase) and investing $430 billion in projects around the country. One of those projects will be a brand new campus and engineering hub in North Carolina which will create at least 3,000 AI, machine learning, software engineering, and other technical positions. Recall that the company just spent $1 billion on a new campus in Austin, Texas, which will be move-in ready next year. The new expenditures will focus on American suppliers, data center growth and enhancements, and Apple TV productions. Cook also added some very interesting comments following the investment announcements: he said that Apple was the largest taxpayer in the US, having paid over $45 billion in corporate income taxes over the past five years. That was a not-so-subtle message to D.C. that the big growth engines of the country—the large companies which each employ tens of thousands of American workers—are paying their fair share. We would like to add to the inference: the small- and medium-sized American companies which employ 65% of the US workforce are also paying their fair share.
Apple remains one of our strongest conviction stocks within the Penn Global Leaders Club. When a short seller or analyst comes along and attempts to besmirch the bright future of this company, investors should be prepared to pounce on any negative reaction within the share price.
Metals & Mining
06. Outcome of Peruvian national election highlights the country risk associated with precious metals and mining stocks
Trying to root out socialism from Latin America is a monumental challenge at best, an exercise in futility at worst. For evidence of this, just look to Venezuela. Despite the nightmarish economic situation for Venezuelans (like five hours in line for a few rolls of toilet paper), Hugo Chavez wannabe Nicolas Maduro remains in power, despite having the personality of a single-ply square of...Venezuelan toilet paper. Heading further down the South American continent we have the Republic of Peru: a relative bastion of free trade in the region—at least up until this point. The rather shocking results of the national elections held earlier this month set up socialist candidate Pedro Castillo to coast into the presidency following a June runoff (he holds a 20-point lead over his opponent, the market-friendly Keiko Fujimori). Which leads us to mining companies in general, and Southern Copper (SCCO $72) specifically.
Thanks to the global rebound, the outlook for metals—especially those with heavy industrial usage such as copper—is bright. Peru is the world's second-largest source of copper, and a majority of Southern Copper's mining operations reside within that country. While Castillo is trying to temper the harshness of his message leading into the runoff, his talk of nationalizing private companies operating inside the country has spooked investors. His party's platform, in fact, talks of "taking control" of the nation's natural resources. For $57 billion Souther Copper, which recently announced $8 billion in new Peruvian projects, there should be cause for concern. In fact, considering the remainder of their operations are in Mexico, which has been methodically moving left, there should be cause for extreme concern.
We remain very bullish on both precious metals/minerals as well as those used for industrial purposes. In fact, if the new Peruvian government were to nationalize the miners (not beyond the realms of possibility), copper prices would shoot even higher than they already are. Great for commodity investors; not so much for those who took a chance on individual miners like Southern Copper. While we do own two gold miners in the Penn Global Leaders Club, it is a safer bet to own sector or thematic ETFs to take advantage of anticipated growth. A few worth looking at are the US Global GO Gold and Precious Metal Miners ETF (GOAU $20), and the SPDR Gold Shares ETF (GLD $165). We own the latter in the Penn Dynamic Growth Strategy as a satellite position, and the current price of gold $1,777) makes it an attractive opportunity right now—in our opinion.
There are some excellent mining stocks in which to invest, and they are often in the small- to mid-cap sweet spot. However, investors need to perform their due diligence and understand exactly where the respective company's mines are located, and what the geopolitical risks are within that country or region.
Household & Personal Products
05. Jessica Alba's Honest Company is open for trading, but can it compete with the likes of Procter & Gamble and Kimberly-Clark?
Hollywood star Jessica Alba was plagued by asthma and allergies as a child to the point of being hospitalized on several occasions due to her maladies. Those experiences helped shape her thoughts on personal health, ultimately leading to her decision to launch The Honest Company (HNST $15) a decade ago. The Honest Company is a consumer products firm which offers a growing line of eco-friendly baby supplies (primarily diapers), bath and skincare products, and home cleaning solutions. There are over 2,500 chemicals and materials the company excludes from its products due to their potentially harmful effects on either the body or the environment.
How has Alba's concept resonated with consumers? Overall, pretty well. The company's products are now available at 32,000 various retailers throughout the US and Canada, including big players like Target (TGT) and Walgreens Boots Alliance (WBA). While still operating in the red, the company's revenues rose from $235M in 2019 to $300M in 2020 (+28%) and losses were stanched from -$31M to -$14M (a 55% improvement) over the same time frame. Leading into Wednesday's IPO, HNST shares were priced in the $14 to $17 range. They shot out of the gate at $23 per share and have fallen precipitously ever since. The company's valuation now sits at $1.4 billion, but is it worth even that much?
There is a mountain of competition in this space—both the personal care products industry in general and the eco-friendly corner specifically. Having Jessica Alba's sway certainly helps, but facing down the market caps of Procter ($330B), Unilever PLC ($155B), Kimberly-Clark ($46B), and an army of "green" players will be a herculean task. Furthermore, the aforementioned stocks all come with nice dividend yields, while HNST will need to plow its capital back into its strategic growth efforts.
Nonetheless, we do see a faithful and growing customer base. Honest estimates it currently holds about 5% market share in its space, and 55% of revenues are generated online. We believe it could easily double its market share in the short term, generating in excess of $500 million in revenues by 2023; maybe even becoming profitable by that point. The company is worth keeping an eye on, and the products are also worth a look.
HNST shares have now lost about one-third of their value since IPO day. If they drop to the $10/share range, we believe they will be undervalued and worth looking at for a potential purchase.
Global Strategy: East & Southeast Asia
04. Why do we care what Covid vaccine Philippine President Rodrigo Duterte chose to receive?
Roughly 20,000 American soldiers died defending the Philippines during World War II; about half were lost in battle while the other half succumbed to disease. The United States has enjoyed—actually, earned—an incredibly good relationship with the Southeast Asian country ever since General Douglas MacArthur uttered the infamous words in 1942: "I came through...and I shall return." To say that the Philippines sits in an important region of the world is an understatement. About one-fifth of global trade passes through the South China Sea, and trillions of dollars’ worth of oil and gas resources reside beneath its waves. The US military regularly patrols the region, with the Theodore Roosevelt and Nimitz Carrier Strike Groups conducting joint exercises in the waters this past February.
China has continued to make outrageous claims on enormous swaths of the South China Sea—as shown by the red dashed line on the accompanying map—much to the consternation of its neighbors in the region. Now, the communist nation seems to be strongly wooing the mercurial and dictatorial leader of the Philippines, Rodrigo Duterte. The latest sign of the love affair came with Duterte’s decision to receive the underwhelming Chinese Covid vaccine known as Sinovac. Recent results from Brazil show a 50% effectiveness rate for the Chinese product. The Philippines’ Covid rate is the second highest in Southeast Asia, behind only Indonesia.
While the choice of a vaccine is certainly anecdotal (though he did also praise Russia’s near-comical vaccine, Sputnik V), there is little doubt that Duterte is an iron-fisted leader who is on the outs with the United States right now, and that China would love to count on him as an ally in the region. The South China Sea seems to be quickly replacing the Persian Gulf as the most troublesome hot spot in the world.
Outside of the Philippines, all other nations in the region have serious disagreements with China. That nation’s ham-handed approach to diplomacy will not serve them well over the coming years, but more countries need to follow Australia’s lead and refuse to be bullied by the ruling Communist Party of China. America, through its military presence in the region, must make it clear that a massive land grab by fiat is unacceptable.
Demographics & Lifestyle
03. A most excellent problem: credit card issuers concerned as Americans continue to pay down their debt
We've often wondered what the overall economic health of the typical American household would look like if revolving debt did not exist. After all, it wasn't until Bank of America (BAC $42) issued the first credit card with a "revolving credit" feature in 1958 that Americans began racking up debt not backed by any tangible property, such as a home or an auto. Before then, money borrowed on a card had to be paid off at the end of each month. And despite the near-zero Fed funds rate, many cardholders are still being charged confiscatory interest rates of 16.99% to 19.99% on their balances, or even higher.
Now for the good news. Much to the chagrin of the card-issuing banks, which toughen their standards when people need the money the most and loosen them when they don't, borrowers are paying down their debt at impressive levels. During the company's most recent earnings call, card issuer Discover Financial Services (DFS $115) said that balances paid off recently have hit levels not seen since 2000. All of the top card issuers, in fact, have reported significant declines in the aggregate balance of revolving debt owed. While Americans put nearly $4 trillion on their cards in 2020, the total US credit card debt outstanding now sits at $819 billion--a significant decrease from pre-pandemic levels. It's hard to say whether this will turn into a healthy, long-term trend, but more and more people are becoming cognizant of just how much they owe, and what they have been paying for the "privilege" of buying on credit.
Once Americans get their own fiscal house in order, perhaps they will look at the $28.3 trillion of outstanding debt their government has racked up and demand accountability. The current rationale for spending trillions more than what is brought in via taxation is the pandemic. But what's the excuse for the reckless and wanton spending before the crippling disaster hit?
Cybersecurity
02. Despite the company's original denials, Colonial Pipeline reportedly paid hackers $5 million in ransom
A few months ago, we reported about a hack on a municipal water treatment plant in Florida. The hacker was attempting to adjust the chlorine level in the city’s water supply to toxic levels. That attack was thwarted by an attentive city worker who noticed a mouse cursor mysteriously moving on his computer screen. This past week brought us news of a successful hack on the Colonial Pipeline, the largest pipeline for refined oil products in the US. The 5,500-mile-long system, which carries 3 million barrels of fuel per day between Texas and New York, was shut down for days, causing massive gas lines along the East Coast.
While the company initially denied paying ransom to the hackers, it now appears that $5 million was, indeed, paid to a group known as DarkSide shortly after the attack occurred. DarkSide is a highly sophisticated criminal organization based out of Eastern Europe, with definite Russian connections. The cybercriminals use ransomware to lock a victim’s system, promising to provide the digital “keys” to unlock the system once the monetary demands are met. Experts are surprised that the amount demanded in this case was so low; normally, with a company of this size and services with such a broad scope, a $30 million demand would not be out of the ordinary.
Ransomware attacks on firms of all sizes more than tripled in 2020, with victims ponying up over $350 million in crypto ransoms. As is typical following such an attack, the US government said it would be setting up a task force to counter these threats. Sadly, these promises always seem to come along after the damage is done. This is yet another sobering reminder of just how vulnerable American companies and individuals are to cybercriminals, and how disruptive a simple digital act of aggression can become, literally overnight. While it is up to the government to go after the bad actors and nation-states involved in these crimes, it is up to each American to take all possible measures to assure their own system’s security profile is as robust as possible.
On the personal defense front, we have found Bitdefender to be one of the best cybersecurity suites on the market, for both PCs and MacBooks. Kaspersky ranks highly on most lists, but it is headquartered in Russia, which makes us immediately suspicious. From an investment standpoint, we believe the First Trust NASDAQ Cybersecurity ETF (CIBR $43) is an effective way to invest in the growing need for digital protection. We own CIBR as a satellite position within the Penn Dynamic Growth Strategy.
Market Week in Review
01. Inflation fears brought an ugly first half to the week for the markets, followed by an impressive comeback effort
The extent to which investors have been indifferent about inflation concerns is rather remarkable, considering the grand economic reopening which is in its nascent stage and the mounting evidence that the concern is real—as evidenced by the price of everything from used cars to commodities. Perhaps they were taking solace in Jerome Powell's nonchalant attitude, with the Fed Chair almost daring inflation to try and stir trouble. That changed this past Wednesday when, following two previous down days, the major indexes threw a major fit over the latest Consumer Price Index (CPI) report. The CPI, which measures the rate of change in the price of a basket of consumer goods, spiked 4.2% YoY, above the lofty expectations for a 3.6% reading. That jump represents the sharpest spike since September of 2008. By Wednesday's close, the major indexes were off between 2% and 2.67%, with the NASDAQ getting hit the hardest. Fears that the Fed would have to act sooner rather than later to rein in inflation seemed to abate after the mid-week bloodbath, with the Dow gaining nearly 1,000 points during the last two sessions, and the S&P gaining 110 points. Stocks typically face a higher level of volatility in May, as investors seem intent on proving the "Sell in May..." adage. What is the right course of action after such a volatile week? Take a good look at your portfolio's allocation to assure the fast-growing tech positions didn't knock it out of whack; also, position more toward the value side of the equation. On that note, take a look at our latest addition to the Dynamic Growth Strategy by visiting the Penn Trading Desk.
Under the Radar Investment
Masimo Corp (MASI $220)
Masimo is a US-based medical device company which focuses on noninvasive patient monitoring. For individuals, the firm offers state-of-the-art pulse oximeters for measuring oxygen saturation levels and pulse rates, wearable "smart" thermometers which allow parents to keep a constant eye on a sick child's temperature level, and sleep improvement devices. For medical facilities, Masimo offers a comprehensive patient monitoring and connectivity platform. Sadly, due to the global pandemic millions of people are now familiar with the company's products. Demand and name recognition helped drive MASI shares up to $285 this past January, but they have since pulled back into a nice buying range. While we don't currently own the company within the Penn strategies, we believe a fair value for the shares is around $300.
Answer
The Diners Club Card was created in 1950 after businessman Frank McNamara forgot his wallet while attending a business dinner in New York. By 1951, there were 20,000 Diners Club members. For its part, American Express introduced the first plastic credit card in 1959, with over one million in use by the mid 1960s.
Headlines for the Week of 18 Apr—24 Apr 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
American leadership in human spaceflight is back. Thank you Elon...
America willingly—and disgustingly—gave up its ability to launch astronauts into orbit back in 2011. After a decade of no manned launches from American soil, how many astronauts have been launched into space since last June aboard SpaceX rockets?
Penn Trading Desk:
Bank of America/Citi: Upgrade First Solar
One of our favorite renewable energy companies, First Solar (FSLR $84), popped over 5% following an upgrade at both Bank of America and Citi. The BofA analyst cited a green infrastructure plan coming from Washington and accelerated near-term bookings momentum as catalysts for the upgrade. Citi, which upgraded FSLR shares from Hold to Buy, cited tailwinds from US tax and trade policies. We place the fair value of FSLR shares at $100.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Cryptocurrencies
10. As expected, Coinbase shot out of the gate in its debut trading day; then something interesting happened
Despite an initial pricing range of around $250 per share, cryptocurrency exchange Coinbase (COIN $288) opened on the Nasdaq at $381 then quickly rocketed to nearly $430 per share. That mark put a sky-high valuation on the firm at $112 billion, but woe to the investors who wantonly bought in within the first few minutes of trading. Unlike many other recent IPOs with similar levels of rabid interest, shares of COIN began faltering almost immediately, falling all the way back to $311 within two hours of the company's first trade. Shares closed the day at $335.90, or 22% off of their high. While the closing price gave the exchange a more reasonable market cap, we believe it is still overvalued. We do like the fact that Coinbase is a play not on one particular cyrpto, but on a number of reasonably solid players. In fact, it acts as something of a gatekeeper, keeping more questionable digital currencies from being traded on the platform. Bitcoin and Ethereum trading generated nearly 60% of the firm's revenue in 2020. One clear winner on the day was the Nasdaq exchange, with Coinbase representing its first direct listing. At its size, in fact, COIN became the largest company to ever take the direct listing route. There was a heated competition between the NYSE and the Nasdaq to land the deal, but Coinbase's CFO said the fact that the latter had the symbol "COIN" played a part in the company's decision to go with that exchange. Here's what worries us most about Coinbase: there are few barriers to entry for would-be competitors. In fact, the fat fees the exchange charges almost begs the competition to come flooding in with the promise of lower costs to the customer. Nonetheless, the company has grand strategic plans of building out a complete suite of financial services over the coming years. They will, more than likely, succeed with those plans.
So, we are relatively bullish on Coinbase, but believe COIN shares are overvalued and that the industry has few barriers to entry. With all of that in the mix, what's an intriguing price point for a buying opportunity? We would say anywhere around $250 per share, which is where we set our own price alert.
Space Sciences & Exploration
09. NASA awards SpaceX contract to build the spacecraft which will take astronauts back to the moon
It was initially whittled down to three companies—Musk's SpaceX, Bezos' Blue Origin, and Dynetics—but we had our hunch as to who would walk away with the prize; the prize being a coveted NASA contract to develop the craft which will take astronauts back to the moon. Blue Origin tried to stack the deck in their favor by teaming up with the likes of Lockheed Martin (LMT) and Northrop Grumman (NOC) and by calling their group a "national team." In the end, however, SpaceX was awarded the $2.9 billion contract. And why not? While other companies have fiddled or floundered, SpaceX has been busy sending astronauts and cargo to the International Space Station (ISS). Real feats, funded with real revenue. Most importantly, in the extreme-risk arena of human spaceflight, SpaceX has won the trust of America's space agency. The United States launched the Artemis program back in 2017 with the express goal of landing men and women on the moon by 2024, fifty-two years after Gene Cernan and Harrison Schmitt crawled back into their lunar module and gently lifted off from the moon's surface as part of their Apollo 17 mission. Who could have imagined back in 1972 that it would take us so long to return. While the 2024 target might have to be pushed out, by nominating former astronaut and US Senator Bill Nelson to head up the space agency, President Biden has signaled his support for a strong US manned space program; quite a different story from his Democratic predecessor, Barrack Obama.
SpaceX's Crew Dragon Endeavour spacecraft is slated to launch on its next mission to the ISS this coming Thursday. On board will be mission commander Shane Kimbrough, pilot Megan McArthur, Japanese astronaut Akihiko Hoshide, and European Space Agency mission specialist Thomas Pesquet.
Internet Retail
08. Amazon set to test furniture and appliance assembly service
Amazon (AMZN $3,411) appears poised to encroach on more turf, and this time the likes of Home Depot, Lowe's, and Wayfair could be affected. The $1.7 trillion Internet retailer will begin testing a product assembly service in several markets this summer, with drivers delivering, unpacking, and assembling everything from beds to treadmills, taking away all of the packing material when done. Customers will even have the option of sending the items back on the spot if dissatisfied with a product once assembled. While the furniture assembly service would most affect the likes of a Wayfair (W $324), moving into the setup of appliances such as washing machines, dishwashers, and ceiling fans would impact the likes of Home Depot (HD $328) and Lowe's (LOW $206). Taking it a step further, ordering big-screen televisions through Amazon and having the price include mounting and setup would affect electronics retailers such as Best Buy (BBY $120). Behind the scenes, however, Amazon is already facing pushback from drivers and delivery workers who fear getting bogged down by the inevitable in-home challenges. Concerns include having customers hover over them during the assembly process, and the company not taking into account any delays caused by unique in-home circumstances such as space constraints.
Our first inclination was to disregard any employee grumblings—Amazon tends to get its way in such matters. However, there are so many unique challenges bound to arise for a non-specialty company such as Amazon trying to train its delivery specialists on the assembly of a multitude of products that the success of this program is far from given. We will keep an eye out for the anecdotal—yet highly entertaining—stories which are sure to make their rounds on social media.
Industrials: Road & Rail
07. A new twist—and a new Canadian player—in the Kansas City Southern saga
Last month we reported on the probable loss of one of America's storied railroads—Kansas City Southern (KSU $298)—as it agreed to be acquired by larger rival to the north, Canadian Pacific (CP $357). The plan called for the $47 billion Canadian rail to buy the north/south American rail for $25 billion plus the assumption of another $4 billion in debt (equivalent to roughly $275/sh). We also noted that last fall KSU rejected a bid by the Blackstone Group (BX $80) to pay shareholders $208/sh to take the firm private. We thought the CP deal was a fait accompli until this week's shocker from an even larger Canadian rail.
Canadian National Railway (CNI $110), which has a market cap of nearly $80 billion, has made a $30 billion bid for KSU, valuing the deal at $325/share and promising to keep KSU's headquarters in Kansas City. While the terms are more favorable for KSU shareholders, there is another factor which will almost certainly come into play: due to a bit more overlap, Canadian National will face a higher regulatory hurdle, with no guarantee of ultimate approval on either side of the border. Despite its smaller size, Kansas City Southern is a coveted jewel of the industry, operating as the only rail going into both Canada to the north and Mexico to the south. As USMCA picks up steam, the importance of one company's ability to transport raw materials from Canada, American farm goods to Mexico, and autos and industrial products back from Mexico cannot be overstated. It even operates a rail link along one side of the Panama Canal. Executives at KSU said they are reviewing the deal and would respond to CP in due course, but shareholders are already cheering the offer: KSU shares were trading up 16% after terms of the deal were announced.
While we would like to see KSU remain independent, odds are very high that one of these deals will ultimately be approved. And, quite frankly, the powerhouse which would be created from a merger is exciting to ponder. Our gut instinct, based on over two decades of following the rail stocks, tells us that the Canadian National Railway merger would offer the best comprehensive outcome—except for Canadian Pacific, of course.
Furnishings, Fixtures, & Appliances
06. Herman Miller and Knoll to merge, creating office furnishings powerhouse
We first highlighted office furnishings company Knoll (KNL $24) in our June, 2015 issue of The Penn Wealth Report. At the time, we were fully engrossed in the final season of the hit AMC television series Mad Men. Knoll, which epitomized the modernist design movement stemming from Munich in the early 20th century, could have easily been responsible for every office scene from the fictional Sterling Cooper ad agency. Quite understandably, the company took a huge hit as offices around the world began shutting their doors last March, with KNL shares falling from nearly $30 going into the year to $9.05 by that terrible week in late March. The same was true for one of Knoll's prime competitors, 116-year-old interior furnishings company Herman Miller (MLHR $41), whose shares fell from near $50 to $15.15 in March of 2020. While both of these small-cap cyclicals rode out the storm and have witnessed a strong comeback in their respective share price, they have made the very intelligent decision to join forces. In a cash-and-stock deal valued at $1.8 billion, the two companies plan to morph into a global leader of modern design not only for the corporate office world, but also to serve the needs of the growing throng of workers who will operate either full- or part-time within their homes. In a joint statement issued by the firms, a strategic plan for "transforming the home and office sectors at a time of unprecedented disruption" was outlined. As Herman Miller was the larger of the two companies, each Knoll shareholder will receive $11 in cash and 0.32 shares of Herman Miller for each share owned, while current MLHR shareholders will end up owning around 78% of the combined entity. The two companies have, in aggregate, a presence in over 100 countries, and both have developed strong e-commerce platforms. Heading into the pandemic, the two had combined annual revenues of $4 billion.
We love the deal, and we expect to see these two American companies pull off a relatively smooth integration. It is not easy to be an American manufacturing firm making high-quality products in a world of cheaper imports, but we fully believe the combined entity will skillfully carry out its bold new strategy. The deal should close by the end of the third quarter.
Government Watchdog
05. So you desire to have a home in New Jersey? Be prepared to pay confiscatory property taxes
We have long espoused the view that property taxes assessed on single-family homes should be capped at 1% per year. After all, in addition to every other tax Americans must pay, isn't $5,000 per year on a $500,000 home enough income for a homeowner's state and local government, on top of the other tax revenues generated? But in many states, the effective property tax rate is much higher than our proposed cap. Take New Jersey, for example, which happens to have the highest property tax rate in the nation. While the state's marginal rate is a sky-high 2.2%, the effective real estate tax rate is 2.47%. That equates to a $5,064 tax bill on a very modest $205,000 home. The effective taxes on a home priced at $327,900, the state's median home value, is $8,104. Perhaps what shocked us the most as we looked at each state's 2020 property tax figures was California's number: the Golden State actually capped the rate at 1% of assessed value, with a 2% annual cap on value increases. Of course, Californians must also contend with a 9.3% income tax rate (on income between $58.6k and $299.5k—it goes up from there) and a 7.25% tax on goods purchased. The opposite end of the spectrum from New Jersey, at least with respect to property taxes, is Hawaii with its 0.28% rate. That would equate to just a $1,715 tax bill on a home valued at $615,300, the median home value in the state.
While moving isn't always an option—for any number of reasons—all Americans should be aware of their individual state's property tax rate, income tax rate, and sales tax rate (the last will fluctuate within various parts of the state). Combined, these three figures represent one's overall tax burden for living where they do. Of interest: Alaska has the lowest overall tax burden of any state in the union, at roughly 5.8% (the state has no sales tax); while Illinois comes in with the most burdensome rate in the country, at 15%.
Global Strategy: Europe
04. The weaker candidate won the primary battle in Germany; may now lose the war to the Greens
Last week we outlined the internal struggles going on behind the scenes among the two leading center-right political parties in Germany, Merkel's Christian Democratic Union and Markus Söder's Christian Social Union of Bavaria. The wildly popular Söder agreed to step aside if the CDU voted to support Merkel's candidate, the unpopular Armin Laschet. Despite the latter's weakness in the polls, that is exactly what her party did, and Söder, true to his word, stepped aside. While we said that the bloc's main competition would come from the center-left Social Democratic Party of Germany (SPD), a new frontrunner has emerged: the far-left Green party's Annalena Baerbock. The 40-year-old former champion trampolinist is promising Germans a "new start" for the country, with a focus on green energy and increased spending on eduction. A poll of German business leaders (a poll we highly question, it should be noted) favors Baerbock over Laschet by a comfortable margin. Clouding the outlook—and probably fracturing the vote in the general elections—are the two candidates from the SPD and the pro-business Free Democrats Party (FDP), Olaf Scholz and Christian Lindner, respectively. The general elections are precisely five months away.
With the best candidate for Germany's future (in our opinion) officially out of the race, the outcome is a flip of the coin. Our instincts tell us that Armin Laschet will come out on top, which will lead to a ho-hum period for the German economy. In a tantalizing twist of fate, that would probably tip the economic scales in Europe in favor of the breakaway "troublemaker," Great Britain. While it is brutally painful going through a domestic election, we have a deep sense of schadenfreude watching the "wise and sapient" Europeans squirm through theirs.
Semiconductors & Related Equipment
03. For true believers, Intel shares seem to be sitting at a decent buy-in point; we remain cautious
While we have talked glowingly about Intel's (INTC $59) new wonkish CEO, Pat Gelsinger, we still haven't pulled the trigger on re-adding the semiconductor maker to any of our portfolios. Management is saying the right things, and we applaud the company's decision to expand their own US manufacturing footprint, but we want to see some results first. A new data point did just roll in; unfortunately, it was not on the bullish side of the scatter plot. Shares of the $242 billion firm were off over 5% on Friday after announcing a strong drop in data center revenue—its most profitable segment—and a decline in gross profit margin. Sales from the Data Center Group fell 20% in the first quarter, year-over-year, well below what analysts were expecting. One anecdotal yet disturbing sign for the group came last month from tech giant Amazon (AMZN $3,370): the company announced that it would begin designing its own data center chips in-house.
Intel has made a string of very smart acquisitions over the past several years to take market share in the AI and EV segments, but it is going to take precision execution on management's part for the company to become a vibrant player in those nascent areas. If played correctly, the severe supply chain disruptions which led to the global chip shortage could provide Intel a nice tailwind. We will remain on the sideline while a few more chapters are written.
Market Pulse
02. Some rather volatile moves, but a flat week in the end; except for the cryptos
There were some wild gyrations in the markets this week, to include a tantrum over the specter of a doubling (for some) of the capital gains tax rate, but when the dust settled we ended up pretty close to where we began. All of the major indexes finished the five session period down, but not by much. Gold finished the week precisely where it started—$1,777 per ounce—and crude futures were off just a buck, to $62.04. The big story of the week was in cryptocurrencies. After prices began tumbling over the weekend, JP Morgan issued a rather dire warning that Bitcoin was due for some further weakness. After topping out at nearly $65,000 on the 14th of April, the digital currency had a steep decline over the weekend. When massively-leveraged bets are made on an investment vehicle, it doesn't take much of a catalyst to begin a massive selloff. As of Friday's close, Bitcoin was trading just shy of $52,000—a 20% drop from its high. The highly-touted Coinbase exchange (COIN $292) didn't fare much better; it was down 14% on the week. For those not willing to do the basic work (some Robinhood customers are claiming they didn't understand the concept of margin, though they had been using it in their accounts), it may be a long year indeed.
Cryptos are here to stay, but that doesn't mean a lack of extreme pullbacks in their respective prices on a regular basis. Some of them, in fact, won't survive. A wanton, meme-driven "strategy" for investing is a dangerous game to play. And that is not even taking margin into account.
Under the Radar Investment
01. Asseco Poland SA (ASOZY $18)
You know the international slice of your portfolio is sorely lacking, as is—more than likely—your small-cap allocation. Take a look at this financially sound, small-cap systems software company from one of our favorite countries in Europe. Asseco Poland SA is a $1.5 billion developer of sector-specific software for banking and finance, and manager of large IT projects in the fields of healthcare, telecom, and security services. With 27,000 employees, the company has a major presence in Europe and Israel, and generates the majority of its (nicely recurring) revenue from proprietary software licenses. With a tiny beta of 0.4181, a very reasonable P/E ratio of 14, and positive net income for the past decade, the company could be a nice play on the economic comeback in Europe. It also comes with a fat, 4.18% dividend yield. We believe that Poland, a staunchly-democratic, anti-communist country, has enormous economic potential over the coming years. It was recently upgraded from an emerging market to a developed market within the FTSE Country Classification framework. Asseco Poland was founded in 1989 and is headquartered in the southeastern Polish city of Rzeszów.
Answer
After the first manned test flight of the Dragon capsule last June with two astronauts onboard, two operational crew launches have taken place—each with a four-person crew. So, ten astronauts have now made the trip from American soil to the International Space Station within the past year.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
American leadership in human spaceflight is back. Thank you Elon...
America willingly—and disgustingly—gave up its ability to launch astronauts into orbit back in 2011. After a decade of no manned launches from American soil, how many astronauts have been launched into space since last June aboard SpaceX rockets?
Penn Trading Desk:
Bank of America/Citi: Upgrade First Solar
One of our favorite renewable energy companies, First Solar (FSLR $84), popped over 5% following an upgrade at both Bank of America and Citi. The BofA analyst cited a green infrastructure plan coming from Washington and accelerated near-term bookings momentum as catalysts for the upgrade. Citi, which upgraded FSLR shares from Hold to Buy, cited tailwinds from US tax and trade policies. We place the fair value of FSLR shares at $100.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Cryptocurrencies
10. As expected, Coinbase shot out of the gate in its debut trading day; then something interesting happened
Despite an initial pricing range of around $250 per share, cryptocurrency exchange Coinbase (COIN $288) opened on the Nasdaq at $381 then quickly rocketed to nearly $430 per share. That mark put a sky-high valuation on the firm at $112 billion, but woe to the investors who wantonly bought in within the first few minutes of trading. Unlike many other recent IPOs with similar levels of rabid interest, shares of COIN began faltering almost immediately, falling all the way back to $311 within two hours of the company's first trade. Shares closed the day at $335.90, or 22% off of their high. While the closing price gave the exchange a more reasonable market cap, we believe it is still overvalued. We do like the fact that Coinbase is a play not on one particular cyrpto, but on a number of reasonably solid players. In fact, it acts as something of a gatekeeper, keeping more questionable digital currencies from being traded on the platform. Bitcoin and Ethereum trading generated nearly 60% of the firm's revenue in 2020. One clear winner on the day was the Nasdaq exchange, with Coinbase representing its first direct listing. At its size, in fact, COIN became the largest company to ever take the direct listing route. There was a heated competition between the NYSE and the Nasdaq to land the deal, but Coinbase's CFO said the fact that the latter had the symbol "COIN" played a part in the company's decision to go with that exchange. Here's what worries us most about Coinbase: there are few barriers to entry for would-be competitors. In fact, the fat fees the exchange charges almost begs the competition to come flooding in with the promise of lower costs to the customer. Nonetheless, the company has grand strategic plans of building out a complete suite of financial services over the coming years. They will, more than likely, succeed with those plans.
So, we are relatively bullish on Coinbase, but believe COIN shares are overvalued and that the industry has few barriers to entry. With all of that in the mix, what's an intriguing price point for a buying opportunity? We would say anywhere around $250 per share, which is where we set our own price alert.
Space Sciences & Exploration
09. NASA awards SpaceX contract to build the spacecraft which will take astronauts back to the moon
It was initially whittled down to three companies—Musk's SpaceX, Bezos' Blue Origin, and Dynetics—but we had our hunch as to who would walk away with the prize; the prize being a coveted NASA contract to develop the craft which will take astronauts back to the moon. Blue Origin tried to stack the deck in their favor by teaming up with the likes of Lockheed Martin (LMT) and Northrop Grumman (NOC) and by calling their group a "national team." In the end, however, SpaceX was awarded the $2.9 billion contract. And why not? While other companies have fiddled or floundered, SpaceX has been busy sending astronauts and cargo to the International Space Station (ISS). Real feats, funded with real revenue. Most importantly, in the extreme-risk arena of human spaceflight, SpaceX has won the trust of America's space agency. The United States launched the Artemis program back in 2017 with the express goal of landing men and women on the moon by 2024, fifty-two years after Gene Cernan and Harrison Schmitt crawled back into their lunar module and gently lifted off from the moon's surface as part of their Apollo 17 mission. Who could have imagined back in 1972 that it would take us so long to return. While the 2024 target might have to be pushed out, by nominating former astronaut and US Senator Bill Nelson to head up the space agency, President Biden has signaled his support for a strong US manned space program; quite a different story from his Democratic predecessor, Barrack Obama.
SpaceX's Crew Dragon Endeavour spacecraft is slated to launch on its next mission to the ISS this coming Thursday. On board will be mission commander Shane Kimbrough, pilot Megan McArthur, Japanese astronaut Akihiko Hoshide, and European Space Agency mission specialist Thomas Pesquet.
Internet Retail
08. Amazon set to test furniture and appliance assembly service
Amazon (AMZN $3,411) appears poised to encroach on more turf, and this time the likes of Home Depot, Lowe's, and Wayfair could be affected. The $1.7 trillion Internet retailer will begin testing a product assembly service in several markets this summer, with drivers delivering, unpacking, and assembling everything from beds to treadmills, taking away all of the packing material when done. Customers will even have the option of sending the items back on the spot if dissatisfied with a product once assembled. While the furniture assembly service would most affect the likes of a Wayfair (W $324), moving into the setup of appliances such as washing machines, dishwashers, and ceiling fans would impact the likes of Home Depot (HD $328) and Lowe's (LOW $206). Taking it a step further, ordering big-screen televisions through Amazon and having the price include mounting and setup would affect electronics retailers such as Best Buy (BBY $120). Behind the scenes, however, Amazon is already facing pushback from drivers and delivery workers who fear getting bogged down by the inevitable in-home challenges. Concerns include having customers hover over them during the assembly process, and the company not taking into account any delays caused by unique in-home circumstances such as space constraints.
Our first inclination was to disregard any employee grumblings—Amazon tends to get its way in such matters. However, there are so many unique challenges bound to arise for a non-specialty company such as Amazon trying to train its delivery specialists on the assembly of a multitude of products that the success of this program is far from given. We will keep an eye out for the anecdotal—yet highly entertaining—stories which are sure to make their rounds on social media.
Industrials: Road & Rail
07. A new twist—and a new Canadian player—in the Kansas City Southern saga
Last month we reported on the probable loss of one of America's storied railroads—Kansas City Southern (KSU $298)—as it agreed to be acquired by larger rival to the north, Canadian Pacific (CP $357). The plan called for the $47 billion Canadian rail to buy the north/south American rail for $25 billion plus the assumption of another $4 billion in debt (equivalent to roughly $275/sh). We also noted that last fall KSU rejected a bid by the Blackstone Group (BX $80) to pay shareholders $208/sh to take the firm private. We thought the CP deal was a fait accompli until this week's shocker from an even larger Canadian rail.
Canadian National Railway (CNI $110), which has a market cap of nearly $80 billion, has made a $30 billion bid for KSU, valuing the deal at $325/share and promising to keep KSU's headquarters in Kansas City. While the terms are more favorable for KSU shareholders, there is another factor which will almost certainly come into play: due to a bit more overlap, Canadian National will face a higher regulatory hurdle, with no guarantee of ultimate approval on either side of the border. Despite its smaller size, Kansas City Southern is a coveted jewel of the industry, operating as the only rail going into both Canada to the north and Mexico to the south. As USMCA picks up steam, the importance of one company's ability to transport raw materials from Canada, American farm goods to Mexico, and autos and industrial products back from Mexico cannot be overstated. It even operates a rail link along one side of the Panama Canal. Executives at KSU said they are reviewing the deal and would respond to CP in due course, but shareholders are already cheering the offer: KSU shares were trading up 16% after terms of the deal were announced.
While we would like to see KSU remain independent, odds are very high that one of these deals will ultimately be approved. And, quite frankly, the powerhouse which would be created from a merger is exciting to ponder. Our gut instinct, based on over two decades of following the rail stocks, tells us that the Canadian National Railway merger would offer the best comprehensive outcome—except for Canadian Pacific, of course.
Furnishings, Fixtures, & Appliances
06. Herman Miller and Knoll to merge, creating office furnishings powerhouse
We first highlighted office furnishings company Knoll (KNL $24) in our June, 2015 issue of The Penn Wealth Report. At the time, we were fully engrossed in the final season of the hit AMC television series Mad Men. Knoll, which epitomized the modernist design movement stemming from Munich in the early 20th century, could have easily been responsible for every office scene from the fictional Sterling Cooper ad agency. Quite understandably, the company took a huge hit as offices around the world began shutting their doors last March, with KNL shares falling from nearly $30 going into the year to $9.05 by that terrible week in late March. The same was true for one of Knoll's prime competitors, 116-year-old interior furnishings company Herman Miller (MLHR $41), whose shares fell from near $50 to $15.15 in March of 2020. While both of these small-cap cyclicals rode out the storm and have witnessed a strong comeback in their respective share price, they have made the very intelligent decision to join forces. In a cash-and-stock deal valued at $1.8 billion, the two companies plan to morph into a global leader of modern design not only for the corporate office world, but also to serve the needs of the growing throng of workers who will operate either full- or part-time within their homes. In a joint statement issued by the firms, a strategic plan for "transforming the home and office sectors at a time of unprecedented disruption" was outlined. As Herman Miller was the larger of the two companies, each Knoll shareholder will receive $11 in cash and 0.32 shares of Herman Miller for each share owned, while current MLHR shareholders will end up owning around 78% of the combined entity. The two companies have, in aggregate, a presence in over 100 countries, and both have developed strong e-commerce platforms. Heading into the pandemic, the two had combined annual revenues of $4 billion.
We love the deal, and we expect to see these two American companies pull off a relatively smooth integration. It is not easy to be an American manufacturing firm making high-quality products in a world of cheaper imports, but we fully believe the combined entity will skillfully carry out its bold new strategy. The deal should close by the end of the third quarter.
Government Watchdog
05. So you desire to have a home in New Jersey? Be prepared to pay confiscatory property taxes
We have long espoused the view that property taxes assessed on single-family homes should be capped at 1% per year. After all, in addition to every other tax Americans must pay, isn't $5,000 per year on a $500,000 home enough income for a homeowner's state and local government, on top of the other tax revenues generated? But in many states, the effective property tax rate is much higher than our proposed cap. Take New Jersey, for example, which happens to have the highest property tax rate in the nation. While the state's marginal rate is a sky-high 2.2%, the effective real estate tax rate is 2.47%. That equates to a $5,064 tax bill on a very modest $205,000 home. The effective taxes on a home priced at $327,900, the state's median home value, is $8,104. Perhaps what shocked us the most as we looked at each state's 2020 property tax figures was California's number: the Golden State actually capped the rate at 1% of assessed value, with a 2% annual cap on value increases. Of course, Californians must also contend with a 9.3% income tax rate (on income between $58.6k and $299.5k—it goes up from there) and a 7.25% tax on goods purchased. The opposite end of the spectrum from New Jersey, at least with respect to property taxes, is Hawaii with its 0.28% rate. That would equate to just a $1,715 tax bill on a home valued at $615,300, the median home value in the state.
While moving isn't always an option—for any number of reasons—all Americans should be aware of their individual state's property tax rate, income tax rate, and sales tax rate (the last will fluctuate within various parts of the state). Combined, these three figures represent one's overall tax burden for living where they do. Of interest: Alaska has the lowest overall tax burden of any state in the union, at roughly 5.8% (the state has no sales tax); while Illinois comes in with the most burdensome rate in the country, at 15%.
Global Strategy: Europe
04. The weaker candidate won the primary battle in Germany; may now lose the war to the Greens
Last week we outlined the internal struggles going on behind the scenes among the two leading center-right political parties in Germany, Merkel's Christian Democratic Union and Markus Söder's Christian Social Union of Bavaria. The wildly popular Söder agreed to step aside if the CDU voted to support Merkel's candidate, the unpopular Armin Laschet. Despite the latter's weakness in the polls, that is exactly what her party did, and Söder, true to his word, stepped aside. While we said that the bloc's main competition would come from the center-left Social Democratic Party of Germany (SPD), a new frontrunner has emerged: the far-left Green party's Annalena Baerbock. The 40-year-old former champion trampolinist is promising Germans a "new start" for the country, with a focus on green energy and increased spending on eduction. A poll of German business leaders (a poll we highly question, it should be noted) favors Baerbock over Laschet by a comfortable margin. Clouding the outlook—and probably fracturing the vote in the general elections—are the two candidates from the SPD and the pro-business Free Democrats Party (FDP), Olaf Scholz and Christian Lindner, respectively. The general elections are precisely five months away.
With the best candidate for Germany's future (in our opinion) officially out of the race, the outcome is a flip of the coin. Our instincts tell us that Armin Laschet will come out on top, which will lead to a ho-hum period for the German economy. In a tantalizing twist of fate, that would probably tip the economic scales in Europe in favor of the breakaway "troublemaker," Great Britain. While it is brutally painful going through a domestic election, we have a deep sense of schadenfreude watching the "wise and sapient" Europeans squirm through theirs.
Semiconductors & Related Equipment
03. For true believers, Intel shares seem to be sitting at a decent buy-in point; we remain cautious
While we have talked glowingly about Intel's (INTC $59) new wonkish CEO, Pat Gelsinger, we still haven't pulled the trigger on re-adding the semiconductor maker to any of our portfolios. Management is saying the right things, and we applaud the company's decision to expand their own US manufacturing footprint, but we want to see some results first. A new data point did just roll in; unfortunately, it was not on the bullish side of the scatter plot. Shares of the $242 billion firm were off over 5% on Friday after announcing a strong drop in data center revenue—its most profitable segment—and a decline in gross profit margin. Sales from the Data Center Group fell 20% in the first quarter, year-over-year, well below what analysts were expecting. One anecdotal yet disturbing sign for the group came last month from tech giant Amazon (AMZN $3,370): the company announced that it would begin designing its own data center chips in-house.
Intel has made a string of very smart acquisitions over the past several years to take market share in the AI and EV segments, but it is going to take precision execution on management's part for the company to become a vibrant player in those nascent areas. If played correctly, the severe supply chain disruptions which led to the global chip shortage could provide Intel a nice tailwind. We will remain on the sideline while a few more chapters are written.
Market Pulse
02. Some rather volatile moves, but a flat week in the end; except for the cryptos
There were some wild gyrations in the markets this week, to include a tantrum over the specter of a doubling (for some) of the capital gains tax rate, but when the dust settled we ended up pretty close to where we began. All of the major indexes finished the five session period down, but not by much. Gold finished the week precisely where it started—$1,777 per ounce—and crude futures were off just a buck, to $62.04. The big story of the week was in cryptocurrencies. After prices began tumbling over the weekend, JP Morgan issued a rather dire warning that Bitcoin was due for some further weakness. After topping out at nearly $65,000 on the 14th of April, the digital currency had a steep decline over the weekend. When massively-leveraged bets are made on an investment vehicle, it doesn't take much of a catalyst to begin a massive selloff. As of Friday's close, Bitcoin was trading just shy of $52,000—a 20% drop from its high. The highly-touted Coinbase exchange (COIN $292) didn't fare much better; it was down 14% on the week. For those not willing to do the basic work (some Robinhood customers are claiming they didn't understand the concept of margin, though they had been using it in their accounts), it may be a long year indeed.
Cryptos are here to stay, but that doesn't mean a lack of extreme pullbacks in their respective prices on a regular basis. Some of them, in fact, won't survive. A wanton, meme-driven "strategy" for investing is a dangerous game to play. And that is not even taking margin into account.
Under the Radar Investment
01. Asseco Poland SA (ASOZY $18)
You know the international slice of your portfolio is sorely lacking, as is—more than likely—your small-cap allocation. Take a look at this financially sound, small-cap systems software company from one of our favorite countries in Europe. Asseco Poland SA is a $1.5 billion developer of sector-specific software for banking and finance, and manager of large IT projects in the fields of healthcare, telecom, and security services. With 27,000 employees, the company has a major presence in Europe and Israel, and generates the majority of its (nicely recurring) revenue from proprietary software licenses. With a tiny beta of 0.4181, a very reasonable P/E ratio of 14, and positive net income for the past decade, the company could be a nice play on the economic comeback in Europe. It also comes with a fat, 4.18% dividend yield. We believe that Poland, a staunchly-democratic, anti-communist country, has enormous economic potential over the coming years. It was recently upgraded from an emerging market to a developed market within the FTSE Country Classification framework. Asseco Poland was founded in 1989 and is headquartered in the southeastern Polish city of Rzeszów.
Answer
After the first manned test flight of the Dragon capsule last June with two astronauts onboard, two operational crew launches have taken place—each with a four-person crew. So, ten astronauts have now made the trip from American soil to the International Space Station within the past year.
Headlines for the Week of 11 Apr—17 Apr 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Hasbro's first hit toy...
Hasbro can trace its roots back to 1923, but its first major hit rolled along in 1952. What was that beloved toy?
Penn Trading Desk:
Penn: Add media conglomerate to the Intrepid
Just because we are not fans of a company doesn't mean we can't make money off of it. That is the scenario under which we picked up shares of a media giant whose price rose too quickly, then fell too sharply. The ideal place for a company we don't love—or even necessarily like? Anyone following the five Penn strategies knows there is only one good fit: the Penn Intrepid Trading Platform. Our target price is precisely 50% above where we purchased the shares. For details of the trade, sign into the Penn Trading Desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Global Strategy: Southeast Asia
10. In a refreshing move, Western companies are finally speaking out against China's horrendous human rights abuses
In the current zeitgeist, many large American companies seem to have no problem wading into domestic politics—a taboo policy until quite recently. Now, in a refreshing move, some surprising players are finally willing to shine a light on the human rights abuses committed by the Communist Party of China. The largest footwear and athletic apparel brand in the world, Nike (NKE $133), saw its shares take a hit last week after the company denounced the forced labor of Chinese Uyghers and other ethnic minorities throughout various parts of China. Swedish fashion conglomerate H&M (HMRZF $24) announced that it would stop buying cotton from the Xinjiang region of northwest China after confirmed reports of forced labor. Burberry, Adidas, and New Balance have issued similar statements condemning the conditions. In another refreshing move, the governments of the EU, the UK, the US, and Canada jointly issued a statement denouncing the treatment of minorities in China. Now, as could be expected, calls to boycott Nike and H&M have sprung up across China. As the communist party controls virtually every aspect of media—to include social media—within China, the boycotts could have been easily predicted. How badly could these companies be hurt by a boycott? Considering that 36% of Nike's production and 22% of the company's sales emanate from China, there will be some pain felt. However, this should serve as an excellent wake up call for organizations which have become overly reliant on one closed society's cheap labor and growing middle class. Perhaps they will now consider China's more open-society neighbors to the south and east as a location for new plants and for new sources of revenue.
It has been widely reported that China is turning more towards Russia and North Korea as it faces ever-increasing blowback for its unacceptable actions. That shouldn't come as a surprise, considering the similar nature of all three governments. The importance of US leadership in building an international alliance against human rights atrocities cannot be overstated. As the world's largest economy, America must counter China's Belt and Road Initiative (BRI), which will serve as a spreader for these practices, by building stronger economic and political alliances with countries around the world instead of acting unilaterally.
Capital Markets
09. We knew several major media and entertainment stocks fell sharply, now we begin to see the formerly-unknown fallout
In the matter of a week, former high-flying media darlings Discovery (DISCA $42) and ViacomCBS (VIAC $46) saw there share prices slashed roughly in half, without any clear-cut catalyst. Investors saw that bloodbath unfold in real time, but something else was going on behind the scenes which was neither clear nor transparent. One family office group (FOG), Archegos Capital, founded by former Tiger Management analyst Bill Hwang, had amassed major stakes in both of these firms and a number of Chinese Internet ADRs. As the shares began to crater, margin calls began rolling in from Archegos lenders, primarily Credit Suisse and Nomura, forcing the FOG to sell shares—thus exacerbating the initial drop. Both of these foreign lenders warned of big losses after announcing that "a significant US-based hedge fund had defaulted on margin calls," causing the shares of each to drop around 13%. It is too early to tell just how much Archegos and its lenders have lost in this nightmarish downward spiral, but it will certainly be in the billions of dollars for each of the players. Of interesting note: Goldman Sachs, Morgan Stanley, and Deutsche Bank rapidly unloaded big blocks of shares last week which were tied to Archegos. In other words, they got out before incurring the losses felt by Credit Suisse and Nomura. The incident is especially troubling for Credit Suisse, which already faced massive losses from the collapse of UK investment partner Greensill Capital, and a reported February loss of over $1 billion stemming from a US court case over questionable securities.
Here is what's most disturbing about this case: Neither Credit Suisse nor Nomura shareholders were wise to the banks' dealings with Archegos or the extent to which the hedge fund had leveraged its media holdings. This is due to an exclusion made for family office groups in Dodd-Frank legislation, exempting them from the the same level of SEC reporting with which non-FOGs must comply. Odds are extremely high that by the time the dust settles on this saga these rules will have been "amended."
Science & Technology Investor
08. Cathie Wood's ARK Space Exploration & Innovation ETF makes its debut
To say that Cathie Wood, founder, CEO, and CIO of ARK Investment Management, has made a big splash in the investment world is an understatement. Her skills at uncovering and investing in primarily small- and mid-cap tech and innovation companies (and increased marketing, of course) have led to a stunning inflow of funds during a horrendously tough year—her firm's assets under management (AUM) went from around $2.6 billion to over $50 billion. This week, Wood launched her latest gem: the ARK Space Exploration and Innovation ETF (ARKX $20). The fund, according to ARK, will invest in companies operating under one of four areas: orbital aerospace, suborbital aerospace, enabling technologies, and aerospace beneficiaries (e.g. Internet access). The top holding (of around 50) is scientific and technical instruments maker Trimble (TRMB $78); others in the top-ten list include Kratos Defense & Security (KTOS), L3 Harris Technologies (LHX), and Iridium Communications (IRDM). It would be safe to assume that SpaceX will be among the holdings when that company ultimately goes public. I must admit to being excited about this fund, and appreciate the company's complete transparency with respect to buys and sells—what a refreshing concept.
Based on the explosive growth in all things tech and space related as of late, is this fund overvalued out of the gate? I don't believe so. Looking through the holdings, many are industrial or tech names which are not on most investors' radar screens. It is an impressive lineup.
Economics: Work & Pay
07. A spectacular jobs report pushes equities higher
Yes, yes, we know it will take like ten more jobs reports similar to the one we got for March to get us back anywhere near where we were in February of 2020, but let's take some time and savor this one. While the markets were closed on Good Friday, futures shot up nonetheless on news that the US added 916,000 new jobs in the month of March against economists' expectations for 618,000. Even better, the hiring was broad-based, spread out among virtually every corner of the private sector. Notable strength was seen in leisure and hospitality (the group hit hardest during the heart of the pandemic), education, health care, and construction. The US unemployment rate dropped from 6.2% to 6%, while the more comprehensive U-6 rate (which includes all persons marginally attached to the labor force) dropped from 11.1% to 10.7%. Even better than simply a stunning report, the areas of weakness (such as wages) gave investors confidence that the Fed wouldn't accelerate plans to raise rates. Even after digesting the news for three days, investors were still applauding the report on Monday morning, as all major indexes rose in excess of 1% out of the gates.
Warmer weather, more vaccines, strong hiring—we can feel the momentum building. Out litmus test for the great economic comeback will be full NFL stadiums this fall; and yes, we expect that to be the case. Our dual goals, post-pandemic? More "shop local," and less "Made in China."
Market Pulse
06. Jamie Dimon sees economic boom continuing into 2023, but also sees challenges to address
In his annual letter to JP Morgan (JPM $153) shareholders, CEO Jamie Dimon said he sees strong growth for the American economy "easily running into 2023." Dimon, one of the most astute watchers of the market, listed a host of factors for his bullish sentiment on the world's largest economy: the remarkable speed at which a vaccine was developed, excess savings for the typical American family after being homebound for much of the past year, huge deficit spending, more quantitative easing by the Fed, a new infrastructure bill, and general euphoria that the long global nightmare may finally be coming to an end. His letter wasn't all rosy, however. Dimon sees a real possibility that inflation "will not be just temporary," and he expressed his concerns that our international rivals see a nation "torn and crippled by politics...." "The good news," Dimon concluded, "is that this is fixable."
There have always been fomenters of discord and division in this country. There is no doubt that our adversaries, such as China and Russia, are stealthily acting to support such hatred and division. America is, by far, the strongest nation on earth, both economically and militarily—that is a statistically provable fact, not hyperbole. The best weapon our enemies have to harm our standing in the world is to help balkanize the country into groups pitted against one another. Their efforts will fail if we refuse to play their game.
Application & Systems Software
05. Another smart move by Satya Nadella: Microsoft to buy AI firm Nuance in $19.7 billion deal
CEO Satya Nadella continues to aggressively transform Microsoft (MSFT $255), with his latest move being the acquisition of pioneering speech-recognition ("conversational AI") company Nuance (NUAN) for $19.7 billion ($16 billion plus assumption of debt). The all-cash deal values Nuance at $56 per share, or a 23% premium over Friday's close. The move should give Microsoft a greater presence in the growing field of health information services, and should also be cause for concern for the likes of $22 billion, Missouri-based Cerner (CERN $73). Nuance offers health care professionals the tools to recognize and transcribe speech during doctor's visits, both in-person and digital (telemedicine). Appointment management, patient support, and the efficient creation and maintenance of complete medical records are a few of Nuance's extensive list of offerings. While health care is the leading source the firm's revenues, it also operates in the financial services, telecom, retail, and government sectors. The deal would represent Microsoft's second-largest ever, behind only the 2016 acquisition of LinkedIn for $27 billion.
Microsoft is one of the forty holdings within the Penn Global Leaders Club, and remains one of our strongest-conviction buys at its current price.
Global Strategy: Europe
04. Could an internecine battle in Germany help bring about a major regime change?
For some reason, it seems as though it has been about five years since Angela Merkel announced that she would be stepping down from her role as Chancellor of Germany—a position (stepping down, that is) rather forced upon her by the party she led between 2000 and 2018, the Christian Democratic Union (CDU). In what seems to be dragging on longer than Brexit, the battle for her successor just took a dramatic turn.
While there are roughly a dozen political parties in the country, the ruling alliance between the center-right CDU and the center-right Christian Social Union in Bavaria (CSU) has been a stabilizing factor in the country since nearly the end of World War II. Generally, the leader of the larger CDU, Merkel's party, gets the nod to represent the alliance in the national election. And, indeed, Merkel has backed her party's leader, Armin Laschet, to succeed her. However, the more charismatic Markus Söder, head of the CSU, believes that he is the right person for the job, and his party just sent a shocking snub to Merkel's pick. Söder points out how far the CDU has fallen in the polls since the former journalist took the reins of the party from Merkel three years ago. He is correct on both counts: that the party has fallen from grace since 2018, and that he could energize the electorate more than Laschet.
Of course, this battle has the center-left Social Democratic Party of Germany (SPD) licking its chops. It sees its own nominee, Olaf Scholz, gaining from the disarray. To further complicate the matter, Scholz is not only Merkel's deputy vice chancellor, he actually lost the race to be the leader of his own party. We won't even get into the far-left Green Party, or the far-right Alternative for Germany (AfD), or even the Pirate Party, which opposes the EU's data retention policies. It should be fun to watch (from across the ocean) as battles play out over the next five months—the country has set its official federal election date as 26 September 2021.
The ugliness could spiral out of control, with a real possibility that Scholz could pull out a victory. Considering the gargantuan problems facing Germany right now, perhaps the real question should be why would anyone want to be chancellor?
Cryptocurrencies
03. There is an enormous crypto opportunity coming Wednesday via direct listing; should you buy?
If we ever had any doubts about the long-term viability of cryptos, that ended when it became clear that China has plans to create its own global reserve currency (dollar envy). It has decided to do that in the form of a government-backed digital currency, a sovereign Bitcoin if you will. Technically called the Digital Currency Electronic Payment, or DCEP, the currency will allow the Communist Party of China to further control the entire banking system in China and, in the hopes and dreams of the master planners, create a tool to overtake the dollar as the world's reserve currency. Will it work? Probably not—at least not to the extent China hopes. However, it points to the critical importance of the American government both understanding and embracing cryptos.
On that note, Something big will happen in the crypto world on Wednesday: Coinbase will go public via a direct listing. As the largest cryptocurrency exchange, the San Fran-based company (though it has no official physical headquarters) acts as a secure online platform for buying, selling, transferring, and storing digital currency. The fact that it is part of the support structure, rather than an entity tied to the success of any one single crypto such as Bitcoin, makes the company extremely interesting. Not only that, it is (get ready) already profitable! The firm had a blowout Q1, with earning of around $800 million on revenues of $7.2 billion. And that revenue base represented an 850% spike from the same quarter a year earlier. There is only one problem with this intriguing investment. With the rabid interest circulating around cryptos and the millions of new myopic retail investors now in the game, Coinbase will probably come out of the chute with a market cap in excess of $100 billion, and some will be willing to jump in at any price ("diamond hands, baby"). We will be watching the action closely, and if the price is too expensive on its first day of trading we recommend investors wait for the shares to come down and settle within a reasonable range.
Cryptos, despite what we said about their inevitable future, still operate in a normal market cycle of peaks, contractions, troughs, and expansions. Don't get too caught up in the hype: when everyone is jumping into the water with their eyes closed, it is always wise advice to wait until the sharks send them fleeing for safety.
Media & Entertainment
02. Physical games meet digital gaming as Roblox and Hasbro team up
Last month we wrote about the exciting new (to the markets) online entertainment platform Roblox (RBLX $83), which allows users to code their own games and share them for other gamers to play—often earning a little profit in the process. One 98-year-old gaming company which few associate with technology, Hasbro (HAS $99), is hoping to breathe some new life into its lineup by joining forces with the online platform. Specifically, the toy and game company's Nerf and Monopoly lines will soon include codes for Roblox players to redeem for virtual items. Additionally, a number of Roblox games will be created around the iconic products. For example, buy a Nerf Blaster and receive a code to score an online Nerf Blaster to use in games such as Jailbreak and Arsenal. A new version of Monopoly, to be available later this year, will include Roblox characters and come with codes to acquire other online items. We're not sure which company came up with the brainstorm, but if it was Hasbro's idea, it is the latest in a series of smart moves. Recall that five years ago the company scored a major coup in taking the Disney line away from Mattel (MAT $20) after a sixty year relationship was fractured. For an old-school toy company living in a digital world, Hasbro continues to impress.
The ten-year chart of Hasbro vs Mattel highlights the great struggle between the two iconic brands. Some analysts still believe that $14 billion Hasbro should acquire Mattel, half its size. There is little doubt that the former is leading the latter in digital acumen; plus, who wouldn't want to own the coveted Barbie and American Girl lines?
Under the Radar Investment
01. Accolade Inc
There are many corners of the health care market with which investors are enamored, from big pharma to biotech to medical devices and testing, but one area which remains relatively ignored is the health information services arena. The industry made news this week with Microsoft's announcement that it would buy Nuance in a nearly $20 billion deal, but a firm much deeper under the radar screen of investors is $2.8 billion Accolade Inc (ACCD $48). Accolade is a tech-based firm which helps employers provide individualized health care "advocacy" for their employees, to include putting them in touch with nurses and specialists on demand, coordinating their care, and providing the best resources for their individual needs. Mention "company health care plan" to most employees and they will picture a byzantine system which includes long lines on hold and inexplicable bills arriving in the mail. Accolade turns that model on its head. We place a fair value of $60 on the shares. At $2.8 billion in size, the firm has plenty of room to grow.
Answer
Three Polish-Jewish siblings founded Hassenfeld Brothers in 1923, selling textile remnants, then school supplies, then—ultimately—toys. They would later shorten the name to Hasbro. The brothers' first hit toy came along in 1952 in the form of a lumpy brownish potato; included in the kit were hands, feet, ears, two mouths, two pairs of eyes, four noses, three hats, eyeglasses, a pipe, and some felt which resembled facial hair.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Hasbro's first hit toy...
Hasbro can trace its roots back to 1923, but its first major hit rolled along in 1952. What was that beloved toy?
Penn Trading Desk:
Penn: Add media conglomerate to the Intrepid
Just because we are not fans of a company doesn't mean we can't make money off of it. That is the scenario under which we picked up shares of a media giant whose price rose too quickly, then fell too sharply. The ideal place for a company we don't love—or even necessarily like? Anyone following the five Penn strategies knows there is only one good fit: the Penn Intrepid Trading Platform. Our target price is precisely 50% above where we purchased the shares. For details of the trade, sign into the Penn Trading Desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Global Strategy: Southeast Asia
10. In a refreshing move, Western companies are finally speaking out against China's horrendous human rights abuses
In the current zeitgeist, many large American companies seem to have no problem wading into domestic politics—a taboo policy until quite recently. Now, in a refreshing move, some surprising players are finally willing to shine a light on the human rights abuses committed by the Communist Party of China. The largest footwear and athletic apparel brand in the world, Nike (NKE $133), saw its shares take a hit last week after the company denounced the forced labor of Chinese Uyghers and other ethnic minorities throughout various parts of China. Swedish fashion conglomerate H&M (HMRZF $24) announced that it would stop buying cotton from the Xinjiang region of northwest China after confirmed reports of forced labor. Burberry, Adidas, and New Balance have issued similar statements condemning the conditions. In another refreshing move, the governments of the EU, the UK, the US, and Canada jointly issued a statement denouncing the treatment of minorities in China. Now, as could be expected, calls to boycott Nike and H&M have sprung up across China. As the communist party controls virtually every aspect of media—to include social media—within China, the boycotts could have been easily predicted. How badly could these companies be hurt by a boycott? Considering that 36% of Nike's production and 22% of the company's sales emanate from China, there will be some pain felt. However, this should serve as an excellent wake up call for organizations which have become overly reliant on one closed society's cheap labor and growing middle class. Perhaps they will now consider China's more open-society neighbors to the south and east as a location for new plants and for new sources of revenue.
It has been widely reported that China is turning more towards Russia and North Korea as it faces ever-increasing blowback for its unacceptable actions. That shouldn't come as a surprise, considering the similar nature of all three governments. The importance of US leadership in building an international alliance against human rights atrocities cannot be overstated. As the world's largest economy, America must counter China's Belt and Road Initiative (BRI), which will serve as a spreader for these practices, by building stronger economic and political alliances with countries around the world instead of acting unilaterally.
Capital Markets
09. We knew several major media and entertainment stocks fell sharply, now we begin to see the formerly-unknown fallout
In the matter of a week, former high-flying media darlings Discovery (DISCA $42) and ViacomCBS (VIAC $46) saw there share prices slashed roughly in half, without any clear-cut catalyst. Investors saw that bloodbath unfold in real time, but something else was going on behind the scenes which was neither clear nor transparent. One family office group (FOG), Archegos Capital, founded by former Tiger Management analyst Bill Hwang, had amassed major stakes in both of these firms and a number of Chinese Internet ADRs. As the shares began to crater, margin calls began rolling in from Archegos lenders, primarily Credit Suisse and Nomura, forcing the FOG to sell shares—thus exacerbating the initial drop. Both of these foreign lenders warned of big losses after announcing that "a significant US-based hedge fund had defaulted on margin calls," causing the shares of each to drop around 13%. It is too early to tell just how much Archegos and its lenders have lost in this nightmarish downward spiral, but it will certainly be in the billions of dollars for each of the players. Of interesting note: Goldman Sachs, Morgan Stanley, and Deutsche Bank rapidly unloaded big blocks of shares last week which were tied to Archegos. In other words, they got out before incurring the losses felt by Credit Suisse and Nomura. The incident is especially troubling for Credit Suisse, which already faced massive losses from the collapse of UK investment partner Greensill Capital, and a reported February loss of over $1 billion stemming from a US court case over questionable securities.
Here is what's most disturbing about this case: Neither Credit Suisse nor Nomura shareholders were wise to the banks' dealings with Archegos or the extent to which the hedge fund had leveraged its media holdings. This is due to an exclusion made for family office groups in Dodd-Frank legislation, exempting them from the the same level of SEC reporting with which non-FOGs must comply. Odds are extremely high that by the time the dust settles on this saga these rules will have been "amended."
Science & Technology Investor
08. Cathie Wood's ARK Space Exploration & Innovation ETF makes its debut
To say that Cathie Wood, founder, CEO, and CIO of ARK Investment Management, has made a big splash in the investment world is an understatement. Her skills at uncovering and investing in primarily small- and mid-cap tech and innovation companies (and increased marketing, of course) have led to a stunning inflow of funds during a horrendously tough year—her firm's assets under management (AUM) went from around $2.6 billion to over $50 billion. This week, Wood launched her latest gem: the ARK Space Exploration and Innovation ETF (ARKX $20). The fund, according to ARK, will invest in companies operating under one of four areas: orbital aerospace, suborbital aerospace, enabling technologies, and aerospace beneficiaries (e.g. Internet access). The top holding (of around 50) is scientific and technical instruments maker Trimble (TRMB $78); others in the top-ten list include Kratos Defense & Security (KTOS), L3 Harris Technologies (LHX), and Iridium Communications (IRDM). It would be safe to assume that SpaceX will be among the holdings when that company ultimately goes public. I must admit to being excited about this fund, and appreciate the company's complete transparency with respect to buys and sells—what a refreshing concept.
Based on the explosive growth in all things tech and space related as of late, is this fund overvalued out of the gate? I don't believe so. Looking through the holdings, many are industrial or tech names which are not on most investors' radar screens. It is an impressive lineup.
Economics: Work & Pay
07. A spectacular jobs report pushes equities higher
Yes, yes, we know it will take like ten more jobs reports similar to the one we got for March to get us back anywhere near where we were in February of 2020, but let's take some time and savor this one. While the markets were closed on Good Friday, futures shot up nonetheless on news that the US added 916,000 new jobs in the month of March against economists' expectations for 618,000. Even better, the hiring was broad-based, spread out among virtually every corner of the private sector. Notable strength was seen in leisure and hospitality (the group hit hardest during the heart of the pandemic), education, health care, and construction. The US unemployment rate dropped from 6.2% to 6%, while the more comprehensive U-6 rate (which includes all persons marginally attached to the labor force) dropped from 11.1% to 10.7%. Even better than simply a stunning report, the areas of weakness (such as wages) gave investors confidence that the Fed wouldn't accelerate plans to raise rates. Even after digesting the news for three days, investors were still applauding the report on Monday morning, as all major indexes rose in excess of 1% out of the gates.
Warmer weather, more vaccines, strong hiring—we can feel the momentum building. Out litmus test for the great economic comeback will be full NFL stadiums this fall; and yes, we expect that to be the case. Our dual goals, post-pandemic? More "shop local," and less "Made in China."
Market Pulse
06. Jamie Dimon sees economic boom continuing into 2023, but also sees challenges to address
In his annual letter to JP Morgan (JPM $153) shareholders, CEO Jamie Dimon said he sees strong growth for the American economy "easily running into 2023." Dimon, one of the most astute watchers of the market, listed a host of factors for his bullish sentiment on the world's largest economy: the remarkable speed at which a vaccine was developed, excess savings for the typical American family after being homebound for much of the past year, huge deficit spending, more quantitative easing by the Fed, a new infrastructure bill, and general euphoria that the long global nightmare may finally be coming to an end. His letter wasn't all rosy, however. Dimon sees a real possibility that inflation "will not be just temporary," and he expressed his concerns that our international rivals see a nation "torn and crippled by politics...." "The good news," Dimon concluded, "is that this is fixable."
There have always been fomenters of discord and division in this country. There is no doubt that our adversaries, such as China and Russia, are stealthily acting to support such hatred and division. America is, by far, the strongest nation on earth, both economically and militarily—that is a statistically provable fact, not hyperbole. The best weapon our enemies have to harm our standing in the world is to help balkanize the country into groups pitted against one another. Their efforts will fail if we refuse to play their game.
Application & Systems Software
05. Another smart move by Satya Nadella: Microsoft to buy AI firm Nuance in $19.7 billion deal
CEO Satya Nadella continues to aggressively transform Microsoft (MSFT $255), with his latest move being the acquisition of pioneering speech-recognition ("conversational AI") company Nuance (NUAN) for $19.7 billion ($16 billion plus assumption of debt). The all-cash deal values Nuance at $56 per share, or a 23% premium over Friday's close. The move should give Microsoft a greater presence in the growing field of health information services, and should also be cause for concern for the likes of $22 billion, Missouri-based Cerner (CERN $73). Nuance offers health care professionals the tools to recognize and transcribe speech during doctor's visits, both in-person and digital (telemedicine). Appointment management, patient support, and the efficient creation and maintenance of complete medical records are a few of Nuance's extensive list of offerings. While health care is the leading source the firm's revenues, it also operates in the financial services, telecom, retail, and government sectors. The deal would represent Microsoft's second-largest ever, behind only the 2016 acquisition of LinkedIn for $27 billion.
Microsoft is one of the forty holdings within the Penn Global Leaders Club, and remains one of our strongest-conviction buys at its current price.
Global Strategy: Europe
04. Could an internecine battle in Germany help bring about a major regime change?
For some reason, it seems as though it has been about five years since Angela Merkel announced that she would be stepping down from her role as Chancellor of Germany—a position (stepping down, that is) rather forced upon her by the party she led between 2000 and 2018, the Christian Democratic Union (CDU). In what seems to be dragging on longer than Brexit, the battle for her successor just took a dramatic turn.
While there are roughly a dozen political parties in the country, the ruling alliance between the center-right CDU and the center-right Christian Social Union in Bavaria (CSU) has been a stabilizing factor in the country since nearly the end of World War II. Generally, the leader of the larger CDU, Merkel's party, gets the nod to represent the alliance in the national election. And, indeed, Merkel has backed her party's leader, Armin Laschet, to succeed her. However, the more charismatic Markus Söder, head of the CSU, believes that he is the right person for the job, and his party just sent a shocking snub to Merkel's pick. Söder points out how far the CDU has fallen in the polls since the former journalist took the reins of the party from Merkel three years ago. He is correct on both counts: that the party has fallen from grace since 2018, and that he could energize the electorate more than Laschet.
Of course, this battle has the center-left Social Democratic Party of Germany (SPD) licking its chops. It sees its own nominee, Olaf Scholz, gaining from the disarray. To further complicate the matter, Scholz is not only Merkel's deputy vice chancellor, he actually lost the race to be the leader of his own party. We won't even get into the far-left Green Party, or the far-right Alternative for Germany (AfD), or even the Pirate Party, which opposes the EU's data retention policies. It should be fun to watch (from across the ocean) as battles play out over the next five months—the country has set its official federal election date as 26 September 2021.
The ugliness could spiral out of control, with a real possibility that Scholz could pull out a victory. Considering the gargantuan problems facing Germany right now, perhaps the real question should be why would anyone want to be chancellor?
Cryptocurrencies
03. There is an enormous crypto opportunity coming Wednesday via direct listing; should you buy?
If we ever had any doubts about the long-term viability of cryptos, that ended when it became clear that China has plans to create its own global reserve currency (dollar envy). It has decided to do that in the form of a government-backed digital currency, a sovereign Bitcoin if you will. Technically called the Digital Currency Electronic Payment, or DCEP, the currency will allow the Communist Party of China to further control the entire banking system in China and, in the hopes and dreams of the master planners, create a tool to overtake the dollar as the world's reserve currency. Will it work? Probably not—at least not to the extent China hopes. However, it points to the critical importance of the American government both understanding and embracing cryptos.
On that note, Something big will happen in the crypto world on Wednesday: Coinbase will go public via a direct listing. As the largest cryptocurrency exchange, the San Fran-based company (though it has no official physical headquarters) acts as a secure online platform for buying, selling, transferring, and storing digital currency. The fact that it is part of the support structure, rather than an entity tied to the success of any one single crypto such as Bitcoin, makes the company extremely interesting. Not only that, it is (get ready) already profitable! The firm had a blowout Q1, with earning of around $800 million on revenues of $7.2 billion. And that revenue base represented an 850% spike from the same quarter a year earlier. There is only one problem with this intriguing investment. With the rabid interest circulating around cryptos and the millions of new myopic retail investors now in the game, Coinbase will probably come out of the chute with a market cap in excess of $100 billion, and some will be willing to jump in at any price ("diamond hands, baby"). We will be watching the action closely, and if the price is too expensive on its first day of trading we recommend investors wait for the shares to come down and settle within a reasonable range.
Cryptos, despite what we said about their inevitable future, still operate in a normal market cycle of peaks, contractions, troughs, and expansions. Don't get too caught up in the hype: when everyone is jumping into the water with their eyes closed, it is always wise advice to wait until the sharks send them fleeing for safety.
Media & Entertainment
02. Physical games meet digital gaming as Roblox and Hasbro team up
Last month we wrote about the exciting new (to the markets) online entertainment platform Roblox (RBLX $83), which allows users to code their own games and share them for other gamers to play—often earning a little profit in the process. One 98-year-old gaming company which few associate with technology, Hasbro (HAS $99), is hoping to breathe some new life into its lineup by joining forces with the online platform. Specifically, the toy and game company's Nerf and Monopoly lines will soon include codes for Roblox players to redeem for virtual items. Additionally, a number of Roblox games will be created around the iconic products. For example, buy a Nerf Blaster and receive a code to score an online Nerf Blaster to use in games such as Jailbreak and Arsenal. A new version of Monopoly, to be available later this year, will include Roblox characters and come with codes to acquire other online items. We're not sure which company came up with the brainstorm, but if it was Hasbro's idea, it is the latest in a series of smart moves. Recall that five years ago the company scored a major coup in taking the Disney line away from Mattel (MAT $20) after a sixty year relationship was fractured. For an old-school toy company living in a digital world, Hasbro continues to impress.
The ten-year chart of Hasbro vs Mattel highlights the great struggle between the two iconic brands. Some analysts still believe that $14 billion Hasbro should acquire Mattel, half its size. There is little doubt that the former is leading the latter in digital acumen; plus, who wouldn't want to own the coveted Barbie and American Girl lines?
Under the Radar Investment
01. Accolade Inc
There are many corners of the health care market with which investors are enamored, from big pharma to biotech to medical devices and testing, but one area which remains relatively ignored is the health information services arena. The industry made news this week with Microsoft's announcement that it would buy Nuance in a nearly $20 billion deal, but a firm much deeper under the radar screen of investors is $2.8 billion Accolade Inc (ACCD $48). Accolade is a tech-based firm which helps employers provide individualized health care "advocacy" for their employees, to include putting them in touch with nurses and specialists on demand, coordinating their care, and providing the best resources for their individual needs. Mention "company health care plan" to most employees and they will picture a byzantine system which includes long lines on hold and inexplicable bills arriving in the mail. Accolade turns that model on its head. We place a fair value of $60 on the shares. At $2.8 billion in size, the firm has plenty of room to grow.
Answer
Three Polish-Jewish siblings founded Hassenfeld Brothers in 1923, selling textile remnants, then school supplies, then—ultimately—toys. They would later shorten the name to Hasbro. The brothers' first hit toy came along in 1952 in the form of a lumpy brownish potato; included in the kit were hands, feet, ears, two mouths, two pairs of eyes, four noses, three hats, eyeglasses, a pipe, and some felt which resembled facial hair.
Headlines for the Week of 21 Mar—27 Mar 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Correction: The Penn Wealth Report, Vol. 9 Issue 02
In the "From the Editor" section of the latest Penn Wealth Report it was mistakenly noted that the Nasdaq began its massive 78% drop sixteen years ago this month. This should have read "twenty-one years ago this month." The publication has been updated.
Question
The first video blockbuster...
For some reason, the Roblox image made us think of the early days of video games. On that note, what was the first blockbuster video game (which seemed so futuristic at the time), and when was it released?
Penn Trading Desk:
ARK Invest: Tesla going to $3,000
Cathie Wood's ARK Invest ETFs have taken the investment world by storm. From the ARK Industrial Innovation fund to the ARK Genomic Revolution, she has quickly built a reputation of being an oracle for emerging technologies. Her bold call this week on where Tesla (TSLA $670) is headed raised some eyebrows, along with the price of the shares. She sees the leading EV maker's shares headed to $3,000 by 2025, which would give the firm a market cap in the neighborhood of $3.5 trillion. While $3,000 is ARK's base case for TSLA, they did list a 2025 bear case price of $1,500 per share. One big catalyst for the price jump, Wood argues, is the potential for a large fleet of robotaxis hitting the streets over the coming five years, which she sees Tesla spearheading. With the shares off around 5% for the year, at $670, true believers should probably see this as an opportunity to jump in—or add to their position.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Telecom Services
10. AT&T is finally spinning off its satellite and cable TV services
Back in 2015, telecom giant AT&T (T $30) acquired satellite television service provider DirecTV for $66 billion ($49B plus debt), thus beginning a comical boondoggle for the firm. Finally, six years later, T is offloading the albatross for a fraction of what it paid. More accurately, the company is spinning off its satellite and cable operations into a new company with the help of private equity group TPG Capital, which will pay nearly $8 billion in cash to become a minority owner. The new entity will hold DirecTV, AT&T TV (the firm's cord-cutting attempt), and U-Verse (which it left on the vine to die when it bought DirecTV). Fair value of the company sits somewhere around $16 billion, with T owning 70% and TPG owning the remaining 30%. What will management do with the $8 billion windfall? The company said it plans to pay down debt; based on the fact that this $210 billion telecom has approximately $346 billion in short- and long-term debt, that is probably not a bad idea. CEO John Stankey said the move will allow AT&T to focus on "connectivity and content," meaning the 5G wireless, fiber internet, and HBO Max businesses. The deal should close in the second half of this year.
We purchased AT&T in the Penn Strategic Income Portfolio years ago, based primarily on its fat dividend yield and seemingly reasonable price. The dividend yield now sits at 7% and the share price remains flat from where we bought in. Management continues to disappoint, but we still believe a fair value of the shares is around $35, or roughly 20% higher from here.
Cybersecurity
09. A massive Chinese hack hits Microsoft...and some 60,000 of its organizational and corporate customers
While there may not be a "hot" war raging between the United States and both China and Russia, the actions of these two nation-states clearly indicate that they are at battle with this country. What it will take for the United States to get on a war footing is unclear, as thousands of victims continue to fall prey to these adversaries. The latest attack took place within the Microsoft Exchange—a mail and calendar server used by some 200 million individuals and corporations. Unlike the cowardly stance taken by Amazon (AMZN), at least Microsoft has been forthcoming with respect to the attacks made on its systems, and has been willing to identify the culprits to help other companies better protect their customer data.
This latest attack, according to the company, was perpetrated by a Chinese-sponsored group known as Hafnium. This group typically targets infectious disease researchers, defense contractors, and other critical agencies in an effort to both steal knowledge and cause general disruption. Adding insult to injury, the group gets its guidance from the Chinese government but uses servers it leases within the United States. The hackers first gained access to the Exchange by exploiting previously-unknown vulnerabilities, then created a malicious web-based interface to take control of the compromised servers remotely. Finally, they used this remote access to steal data from the targeted individuals and organizations. While Microsoft has identified and patched the vulnerability, the perpetrators already in the "body" may still operate untouched. In other words, they were already on the inside when the patch was put in place.
While a serious federal response is needed, which includes an ongoing series of counterstrikes to send a message, companies and individuals must take responsibility and adopt next-level security practices such as multi-factor authentication and deployment of the highest possible level of cybersecurity protection. Unfortunately, these measures will be irritating and costly, but it sure beats the alternative.
We praise Microsoft for having the guts to be transparent with regard to these attacks, and encourage timid firms like Amazon to follow suit. For investors, cybersecurity—sadly—will be one of the hottest industries for the foreseeable future. We recommend scanning the Penn holding CIBR, the First Trust NASDAQ Cybersecurity ETF, for individual names to consider.
Computer Software/Gaming
08. Roblox is not just another gaming stock, but should you invest?
Admittedly, online gaming stocks don't typically get us very excited from an investment standpoint. Roblox (RBLX $67), however, may just prove to be the exception. Granted, the company came out of the gate with a crazy valuation—it lost $253M on a paltry $924M in revenues in 2020, yet the GameStop crowd made it a $40 billion company by the end of its first day of trading. Want some perspective on that? Ford (F) has a market cap of $49 billion. This particular online entertainment platform, however, has a very unique story. More than just a place to play around (over half of the company's 33 million daily users are 13 or younger), users actually program games and play games created by other users. And it doesn't take a degree in programming to participate: Roblox offers even the youngest of users online tutorials to teach them how to create. "We offer free resources to teach students of all ages real coding, game design, digital civility, and entrepreneurial skills," reads a lead-in to one of their education pages.
Game developers on the platform earn "robux," digital currency which can be created to cold, hard cash. Over 1,250 developers/gamers earned at least $10,000 in robux last year, with several hundred earning over $100,000. Two British teens, who produced their first Roblox game when they were just 13, made a splash in the BBC when it was reported that they paid off their parents mortgage using their converted robux. It doesn't take much to get a large percentage of the younger generation hooked on gaming; imagine what happens when potential to make money is added to the mix. We also appreciate the fact that these young developers are actually learning analytical skills along the way. The shares may seem pricey now (they have dropped back from a high of $79.10), but the company is for real, and it comes with a unique value proposition for investors—unlike GameStop.
There is going to be a substantial tech pullback this year, and we can expect the gaming stocks which are not generating a profit to get hit hard. Where would a decent buy point for RBLX shares reside? If they drop back to $60 or lower, and they fit the respective portfolio mix, it would be wise to take a deeper dive and considering picking some up. In the meantime, why not "sign up and start having fun?" You might even earn some robux while waiting for the shares to become more attractive.
Pharmaceuticals
07. Vaccine Spring: All along, there was only one Covid-19 vaccine we said we would not take
Long before the world knew anything about the Wuhan-borne virus which would rapidly escalate into a global pandemic, we were highly bullish on American pharmaceutical and biotech companies. The more politicians bashed these companies, which create the life-saving medications hundreds of millions of people use annually, the angrier we got. If these politicians had their way, cutting-edge research and development within the pharmaceutical industry would take a major hit—as would the overall health of Americans. Before we work ourselves into a lather once again, let's focus on the incredible progress researchers at these firms made with respect to uncovering a vaccine for the pandemic. With Manhattan Project-like speed, the men and women at these pharma and biotech companies developed, tested, produced, and delivered highly effective therapies to prevent the deadly disease (535,000 Americans have died from Covid as of this writing).
While we would feel comfortable receiving the Pfizer-BioNTech (PFE/BNTX), Moderna (MRNA), or Johnson & Johnson (JNJ) vaccines, we have held serious reservations about one company's efforts from the start. Since early testing began, AstraZeneca PLC's (AZN) vaccine seemed to generate more questions than it answered, and we didn't like the answers management was doling out. Thankfully, the AZN vaccine was never approved for emergency use in the United States, as it was in Europe. Now, three major European countries, Germany, France, and Italy, are joining a rapidly-growing list of nations which have suspended the vaccine following reports of blood clots in the legs and/or lungs of a number of recipients. True to form, the company quickly blasted the suspensions, claiming that the percentage of those vaccinated who developed clots were in line with what could be expected within the general population. It should be noted that a number of those coming down with the conditions resided in younger age groups; i.e., below the age these maladies would typically develop.
The company's objections were reminiscent—at least to us—of their response following the questionable trial results. There never seemed to be a sense of "let's make absolutely sure of this..." so much as "nothing to see here, move along." And that makes us uncomfortable. A lot of nations now seem to feeling ill at ease with the company's vaccine as well. UPDATE: It appears that most of the nations which put a halt on the AstraZeneca vaccines are now willing to lift the temporary bans, mainly due to external pressure. We would still not feel comfortable taking the product, especially as the J&J vaccine begins to flood the market.
AstraZeneca was the result of a 1999 merger between Sweden's Astra and the UK's Zeneca Group. Pfizer's partner BioNTech, it should be noted, is based in Mainz, Germany. We own Pfizer in the Penn Global Leaders Club, and it remains one of our highest-conviction buys.
Global Strategy: Southeast Asia
06. The new administration took a tough stance with China in first official meeting; now, let's look for continuity
Thankfully, John Kerry was nowhere near the Captain Cook Hotel in Anchorage this past week. The first official meeting between the Biden administration and the Communist Party of China was anything but a love-fest, and that gives us encouragement that the US won't get rolled over the next four years. In what was to be a brief photo-op, US Secretary of State Anthony Blinken and US National Security Advisor Jake Sullivan gave their Chinese counterparts an earful, expressing concern over issues from Hong Kong to questionable trade practices to cybersecurity. Secretary Blinken: "...the US relationship with China will be competitive where it should be, collaborative where it can be, adversarial where it must be." He went on to express the concerns raised (about China) from allies such as Japan and South Korea: "I have to tell you what I'm hearing is very different from what you described." Surprisingly stark language for an audience that wanted to hear sycophantic praise for the Chinese people and the ruling communist party. The frustration was revealed in a response by Chinese Director of the Central Foreign Affairs Commission, Yang Jiechi: "...the United States does not have the qualification to say that it wants to speak to China from a position of strength...this is not the way to deal with the Chinese people." A nerve was touched, to put it mildly.
Of course, what really matters is how the Biden administration actually deals with the communist nation going forward. Nonetheless, neither the spirit of Neville Chamberlain nor John Kerry seemed to be present in the room—which gives us quite a bit of comfort.
One of our biggest beefs with the Trump administration was the lack of willingness to join with our allies in a united front against unacceptable Chinese behavior. We are virtually certain that will not be the case with the new administration. China also made a major miscalculation by unleashing the massive cyber strike against Microsoft so early in Biden's term, leaving him almost no choice but to take a tough stance against our major global nemesis. Russia is trying to join forces with China against the US on several fronts, such as a planned Sino-Russian moon base, but Russia remains a shell of its former self, with an economy fueled—no pun intended—overwhelmingly by fossil fuels. A full 82% of the world's population does not reside in China, and a majority of that percentage hold animosity for—or, at least, a deep mistrust of—China. The US must work to garner a true global coalition against the CCP's global ambitions. We can't think of any more important strategic US focus over the coming years.
Road & Rail
05. America is losing one of its great and storied railroads as Canadian Pacific set to acquire Kansas City Southern
It has been twelve years since Warren Buffett's "affinity for railroads as a kid" led him to take a great American rail, Burlington Northern Santa Fe, private, and we still aren't over it—BNI was one of our favorite holdings in the Penn Global Leaders Club. Now, investors are about to lose another great name in the space: Canadian Pacific (CP $370) plans to acquire Kansas City Southern (KSU $260) for $25 billion plus the assumption of roughly $4 billion in debt. As a north-south rail, Kansas City Southern has been a major play on trade between the United States and Mexico: the firm owns 3,400 route miles in the US, and an interest in 3,300 miles of rail in Mexico. Canadian Pacific is a $50 billion rail which operates 12,500 miles of track throughout most of Canada and into parts of the Northeastern and Midwestern US. While it will be tough to say goodbye to KSU, the deal actually makes a lot of sense. As Canada became the last nation to approve the new USMCA trade pact last March, the new rail will be a beast, controlling a north-south route throughout the pact's domain. For the first time ever, one rail will connect all three nations. Current CP CEO Keith Creel will head up the new giant, which will be based out of Calgary, Alberta. At least investors will still have the ability to own Kansas City Southern, albeit through CP shares—last fall the rail rejected a $208/share bid from the Blackstone Group which would have taken the firm private.
Although there will be a regulatory fight, this acquisition will ultimately be approved. If the USMCA lives up to its potential, Canadian Pacific will be in a great position to streamline its operations, improve profitability, and grow its market share. While we don't own CP, we are bullish on the shares, which currently sit around $370.
Monetary Policy
04. The Fed calmed market fears last week, but its growing balance sheet is concerning
Fed Chair Jerome Powell said just about everything right at his Q&A following last week's FOMC meeting. The Fed upgraded its US GDP expectations for the year from 4.2% to 6.5%; inflation may well go above 2% in the short-term, but that was OK; and the central bank would continue buying bonds at a clip of $120 billion per month. The markets may have cheered the news, but the rising debt load of the Fed, which is part of the nation's $28 trillion overall debt load, is concerning. Before the 2008 financial crisis, the Fed's balance sheet was below $1 trillion. It more than doubled due to the crisis, then plateaued around $2.8 trillion before mushrooming again in 2013 and 2014. Steady at about $4.5 trillion for several years, it did something few would expect: it began falling—all the way back down to $3.6 trillion in September of 2019. Of course, we know what hit the world six months later, causing the balance sheet to more than double. Just shy of $8 trillion now, we can expect (based on Powell's comments) that it will hit $9 trillion before any talk of tapering. Of major note at the FOMC meeting was the fact that only four members saw rates rising in 2022 and another eight (of the eighteen) saw rates coming off of zero in 2023. That is remarkable, at least until we consider that every tick up in rates makes servicing our $28 trillion national debt all the costlier. At least we are not alone in the boat; governments around the world are awash in debt, with few showing signs of hiking rates. In the meantime, let the party continue.
For the first time in a year, the pandemic is not the market's biggest concern—and that is wonderful news. Right now, investors have turned their attention to inflation and Treasury rates creeping up. Our biggest concern right now is none of the above. We see valuations reaching crazy levels on some high-flying tech names which won't turn a profit for years. There will be a tech reckoning at some point this year, which is one reason we have been maneuvering toward a value tilt. Also, portfolios simply got overweighted in growth names due to the run-up. This spring is certainly a good time for a portfolio tune-up.
Auto Parts
03. Goodyear to buy Cooper Tire & Rubber Company for $2.8 billion
There aren't many tire manufacturers based in the United States these days, so the two biggest might as well join forces. Goodyear Tire & Rubber Company (GT $17) has announced its plans to acquire smaller US rival Cooper Tire (CTB) for $2.8 billion in cash and stock. Goodyear, which trails only France's Michelin and Japan's Bridgestone by sales, will suddenly have a much larger global footprint: 50 factories and 72,000 employees around the world, and sales volume of 64 million replacement tires in the US. With demand for replacement tires expected to grow rapidly in the coming years, the move should allow the new entity to grow market share substantially in both the US and China—the industry's two largest markets. Both companies are based out of Ohio.
Obviously, the commodity price of rubber plays a major role in a tire manufacturer's bottom line. Fortunately, global rubber prices have dropped precipitously over the past decade. We would put a fair value on the price of Goodyear shares, post-merger, at $20.
Business & Professional Services
02. Will GoPuff be the poster child for the coming post-pandemic market reality check?
For anyone not familiar with SoftBank, it is the Masayoshi Son-run business that tried to bring WeWork public with founder and walking nightmare Adam Neumann still at the helm (at least originally). For anyone not familiar with GoPuff, it is yet another delivery service which brings products from the store to your home. The latter is being financially backed, in good measure, by the former. Why, you might ask, does America need another delivery service with established competitors such as Amazon, DoorDash, Uber Eats, GrubHub, Walmart, Drizly, Instacart, and an army of grocery stores which are getting into the game? We wish we had the answer. As for their unique value proposition (UVP), the delivery service brings household items such as OTC medicines, snacks, and household essentials to your doorstep. In essence, you are saved that pesky trip to Walgreens. (Actually, don't some of these competitors already do that?)
Forget the viability—or lack thereof—of the company's UVP; we are more concerned about the valuation. In October of 2020, the company raised funds which valued the enterprise at just under $4 billion. Now, fueled with a new round of funding, it is valued at just shy of $9 billion. Keep this in mind as well: GoPuff will probably go public this year, and we have all seen what happens to these novelty (our word) startups out of the gate—many see their shares double or even triple before the dust settles. So, we have a company that may be worth $4 billion (doubt it), it is now valued at $9 billion, and it may be at $20 billion after the IPO. Does that make sense? We love DoorDash, but how many DASH investors even realize that the firm, which has never turned a profit, has a $44 billion market cap as of this writing? There is a house of cards being built, and every house of cards eventually comes crashing down.
Forget the hype being pushed by the old media or on social media with respect to these companies. Do the research, figure out whether they actually do have a UVP, take a look at the numbers, consider the management team in place, and make wise investment decisions based on the easily-accessible research available to virtually everyone. Maybe it is FOMO, or maybe we are simply going stir-crazy in our homes, but there is a whole lot of gambling going on within the markets right now.
Under the Radar Investment
01. Adaptive Biotechnologies Corp
Adaptive Biotechnology Corp (ADPT $42) is a $6 billion biotech firm working in the field of what they refer to as Immune Medicine. By harnessing the power of the adaptive immune system, a subsystem which contains processes that eliminate pathogens or prevent their growth, the company believes it can transform the diagnosis and treatment of disease. The company's clinical diagnostic product, clonoSEQ, is an FDA-authorized test for the detection and monitoring of minimal residual disease in patients with blood cancers. The cornerstone of Adaptive's Immune Medicine platform, immunoSEQ, serves as its underlying R&D engine and generates revenue from academic and biopharmaceutical customers. Shares have dropped from their $71.25 high reached on 25 Jan 2021.
Answer
Space Invaders, created in 1978 by Tomohiro Nishikado, was licensed in the US by the Midway division of Bally. By 1982, the game had grossed nearly $4 billion, making it both the best-selling and highest-grossing (adjusted for inflation) video game of all time.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Correction: The Penn Wealth Report, Vol. 9 Issue 02
In the "From the Editor" section of the latest Penn Wealth Report it was mistakenly noted that the Nasdaq began its massive 78% drop sixteen years ago this month. This should have read "twenty-one years ago this month." The publication has been updated.
Question
The first video blockbuster...
For some reason, the Roblox image made us think of the early days of video games. On that note, what was the first blockbuster video game (which seemed so futuristic at the time), and when was it released?
Penn Trading Desk:
ARK Invest: Tesla going to $3,000
Cathie Wood's ARK Invest ETFs have taken the investment world by storm. From the ARK Industrial Innovation fund to the ARK Genomic Revolution, she has quickly built a reputation of being an oracle for emerging technologies. Her bold call this week on where Tesla (TSLA $670) is headed raised some eyebrows, along with the price of the shares. She sees the leading EV maker's shares headed to $3,000 by 2025, which would give the firm a market cap in the neighborhood of $3.5 trillion. While $3,000 is ARK's base case for TSLA, they did list a 2025 bear case price of $1,500 per share. One big catalyst for the price jump, Wood argues, is the potential for a large fleet of robotaxis hitting the streets over the coming five years, which she sees Tesla spearheading. With the shares off around 5% for the year, at $670, true believers should probably see this as an opportunity to jump in—or add to their position.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Telecom Services
10. AT&T is finally spinning off its satellite and cable TV services
Back in 2015, telecom giant AT&T (T $30) acquired satellite television service provider DirecTV for $66 billion ($49B plus debt), thus beginning a comical boondoggle for the firm. Finally, six years later, T is offloading the albatross for a fraction of what it paid. More accurately, the company is spinning off its satellite and cable operations into a new company with the help of private equity group TPG Capital, which will pay nearly $8 billion in cash to become a minority owner. The new entity will hold DirecTV, AT&T TV (the firm's cord-cutting attempt), and U-Verse (which it left on the vine to die when it bought DirecTV). Fair value of the company sits somewhere around $16 billion, with T owning 70% and TPG owning the remaining 30%. What will management do with the $8 billion windfall? The company said it plans to pay down debt; based on the fact that this $210 billion telecom has approximately $346 billion in short- and long-term debt, that is probably not a bad idea. CEO John Stankey said the move will allow AT&T to focus on "connectivity and content," meaning the 5G wireless, fiber internet, and HBO Max businesses. The deal should close in the second half of this year.
We purchased AT&T in the Penn Strategic Income Portfolio years ago, based primarily on its fat dividend yield and seemingly reasonable price. The dividend yield now sits at 7% and the share price remains flat from where we bought in. Management continues to disappoint, but we still believe a fair value of the shares is around $35, or roughly 20% higher from here.
Cybersecurity
09. A massive Chinese hack hits Microsoft...and some 60,000 of its organizational and corporate customers
While there may not be a "hot" war raging between the United States and both China and Russia, the actions of these two nation-states clearly indicate that they are at battle with this country. What it will take for the United States to get on a war footing is unclear, as thousands of victims continue to fall prey to these adversaries. The latest attack took place within the Microsoft Exchange—a mail and calendar server used by some 200 million individuals and corporations. Unlike the cowardly stance taken by Amazon (AMZN), at least Microsoft has been forthcoming with respect to the attacks made on its systems, and has been willing to identify the culprits to help other companies better protect their customer data.
This latest attack, according to the company, was perpetrated by a Chinese-sponsored group known as Hafnium. This group typically targets infectious disease researchers, defense contractors, and other critical agencies in an effort to both steal knowledge and cause general disruption. Adding insult to injury, the group gets its guidance from the Chinese government but uses servers it leases within the United States. The hackers first gained access to the Exchange by exploiting previously-unknown vulnerabilities, then created a malicious web-based interface to take control of the compromised servers remotely. Finally, they used this remote access to steal data from the targeted individuals and organizations. While Microsoft has identified and patched the vulnerability, the perpetrators already in the "body" may still operate untouched. In other words, they were already on the inside when the patch was put in place.
While a serious federal response is needed, which includes an ongoing series of counterstrikes to send a message, companies and individuals must take responsibility and adopt next-level security practices such as multi-factor authentication and deployment of the highest possible level of cybersecurity protection. Unfortunately, these measures will be irritating and costly, but it sure beats the alternative.
We praise Microsoft for having the guts to be transparent with regard to these attacks, and encourage timid firms like Amazon to follow suit. For investors, cybersecurity—sadly—will be one of the hottest industries for the foreseeable future. We recommend scanning the Penn holding CIBR, the First Trust NASDAQ Cybersecurity ETF, for individual names to consider.
Computer Software/Gaming
08. Roblox is not just another gaming stock, but should you invest?
Admittedly, online gaming stocks don't typically get us very excited from an investment standpoint. Roblox (RBLX $67), however, may just prove to be the exception. Granted, the company came out of the gate with a crazy valuation—it lost $253M on a paltry $924M in revenues in 2020, yet the GameStop crowd made it a $40 billion company by the end of its first day of trading. Want some perspective on that? Ford (F) has a market cap of $49 billion. This particular online entertainment platform, however, has a very unique story. More than just a place to play around (over half of the company's 33 million daily users are 13 or younger), users actually program games and play games created by other users. And it doesn't take a degree in programming to participate: Roblox offers even the youngest of users online tutorials to teach them how to create. "We offer free resources to teach students of all ages real coding, game design, digital civility, and entrepreneurial skills," reads a lead-in to one of their education pages.
Game developers on the platform earn "robux," digital currency which can be created to cold, hard cash. Over 1,250 developers/gamers earned at least $10,000 in robux last year, with several hundred earning over $100,000. Two British teens, who produced their first Roblox game when they were just 13, made a splash in the BBC when it was reported that they paid off their parents mortgage using their converted robux. It doesn't take much to get a large percentage of the younger generation hooked on gaming; imagine what happens when potential to make money is added to the mix. We also appreciate the fact that these young developers are actually learning analytical skills along the way. The shares may seem pricey now (they have dropped back from a high of $79.10), but the company is for real, and it comes with a unique value proposition for investors—unlike GameStop.
There is going to be a substantial tech pullback this year, and we can expect the gaming stocks which are not generating a profit to get hit hard. Where would a decent buy point for RBLX shares reside? If they drop back to $60 or lower, and they fit the respective portfolio mix, it would be wise to take a deeper dive and considering picking some up. In the meantime, why not "sign up and start having fun?" You might even earn some robux while waiting for the shares to become more attractive.
Pharmaceuticals
07. Vaccine Spring: All along, there was only one Covid-19 vaccine we said we would not take
Long before the world knew anything about the Wuhan-borne virus which would rapidly escalate into a global pandemic, we were highly bullish on American pharmaceutical and biotech companies. The more politicians bashed these companies, which create the life-saving medications hundreds of millions of people use annually, the angrier we got. If these politicians had their way, cutting-edge research and development within the pharmaceutical industry would take a major hit—as would the overall health of Americans. Before we work ourselves into a lather once again, let's focus on the incredible progress researchers at these firms made with respect to uncovering a vaccine for the pandemic. With Manhattan Project-like speed, the men and women at these pharma and biotech companies developed, tested, produced, and delivered highly effective therapies to prevent the deadly disease (535,000 Americans have died from Covid as of this writing).
While we would feel comfortable receiving the Pfizer-BioNTech (PFE/BNTX), Moderna (MRNA), or Johnson & Johnson (JNJ) vaccines, we have held serious reservations about one company's efforts from the start. Since early testing began, AstraZeneca PLC's (AZN) vaccine seemed to generate more questions than it answered, and we didn't like the answers management was doling out. Thankfully, the AZN vaccine was never approved for emergency use in the United States, as it was in Europe. Now, three major European countries, Germany, France, and Italy, are joining a rapidly-growing list of nations which have suspended the vaccine following reports of blood clots in the legs and/or lungs of a number of recipients. True to form, the company quickly blasted the suspensions, claiming that the percentage of those vaccinated who developed clots were in line with what could be expected within the general population. It should be noted that a number of those coming down with the conditions resided in younger age groups; i.e., below the age these maladies would typically develop.
The company's objections were reminiscent—at least to us—of their response following the questionable trial results. There never seemed to be a sense of "let's make absolutely sure of this..." so much as "nothing to see here, move along." And that makes us uncomfortable. A lot of nations now seem to feeling ill at ease with the company's vaccine as well. UPDATE: It appears that most of the nations which put a halt on the AstraZeneca vaccines are now willing to lift the temporary bans, mainly due to external pressure. We would still not feel comfortable taking the product, especially as the J&J vaccine begins to flood the market.
AstraZeneca was the result of a 1999 merger between Sweden's Astra and the UK's Zeneca Group. Pfizer's partner BioNTech, it should be noted, is based in Mainz, Germany. We own Pfizer in the Penn Global Leaders Club, and it remains one of our highest-conviction buys.
Global Strategy: Southeast Asia
06. The new administration took a tough stance with China in first official meeting; now, let's look for continuity
Thankfully, John Kerry was nowhere near the Captain Cook Hotel in Anchorage this past week. The first official meeting between the Biden administration and the Communist Party of China was anything but a love-fest, and that gives us encouragement that the US won't get rolled over the next four years. In what was to be a brief photo-op, US Secretary of State Anthony Blinken and US National Security Advisor Jake Sullivan gave their Chinese counterparts an earful, expressing concern over issues from Hong Kong to questionable trade practices to cybersecurity. Secretary Blinken: "...the US relationship with China will be competitive where it should be, collaborative where it can be, adversarial where it must be." He went on to express the concerns raised (about China) from allies such as Japan and South Korea: "I have to tell you what I'm hearing is very different from what you described." Surprisingly stark language for an audience that wanted to hear sycophantic praise for the Chinese people and the ruling communist party. The frustration was revealed in a response by Chinese Director of the Central Foreign Affairs Commission, Yang Jiechi: "...the United States does not have the qualification to say that it wants to speak to China from a position of strength...this is not the way to deal with the Chinese people." A nerve was touched, to put it mildly.
Of course, what really matters is how the Biden administration actually deals with the communist nation going forward. Nonetheless, neither the spirit of Neville Chamberlain nor John Kerry seemed to be present in the room—which gives us quite a bit of comfort.
One of our biggest beefs with the Trump administration was the lack of willingness to join with our allies in a united front against unacceptable Chinese behavior. We are virtually certain that will not be the case with the new administration. China also made a major miscalculation by unleashing the massive cyber strike against Microsoft so early in Biden's term, leaving him almost no choice but to take a tough stance against our major global nemesis. Russia is trying to join forces with China against the US on several fronts, such as a planned Sino-Russian moon base, but Russia remains a shell of its former self, with an economy fueled—no pun intended—overwhelmingly by fossil fuels. A full 82% of the world's population does not reside in China, and a majority of that percentage hold animosity for—or, at least, a deep mistrust of—China. The US must work to garner a true global coalition against the CCP's global ambitions. We can't think of any more important strategic US focus over the coming years.
Road & Rail
05. America is losing one of its great and storied railroads as Canadian Pacific set to acquire Kansas City Southern
It has been twelve years since Warren Buffett's "affinity for railroads as a kid" led him to take a great American rail, Burlington Northern Santa Fe, private, and we still aren't over it—BNI was one of our favorite holdings in the Penn Global Leaders Club. Now, investors are about to lose another great name in the space: Canadian Pacific (CP $370) plans to acquire Kansas City Southern (KSU $260) for $25 billion plus the assumption of roughly $4 billion in debt. As a north-south rail, Kansas City Southern has been a major play on trade between the United States and Mexico: the firm owns 3,400 route miles in the US, and an interest in 3,300 miles of rail in Mexico. Canadian Pacific is a $50 billion rail which operates 12,500 miles of track throughout most of Canada and into parts of the Northeastern and Midwestern US. While it will be tough to say goodbye to KSU, the deal actually makes a lot of sense. As Canada became the last nation to approve the new USMCA trade pact last March, the new rail will be a beast, controlling a north-south route throughout the pact's domain. For the first time ever, one rail will connect all three nations. Current CP CEO Keith Creel will head up the new giant, which will be based out of Calgary, Alberta. At least investors will still have the ability to own Kansas City Southern, albeit through CP shares—last fall the rail rejected a $208/share bid from the Blackstone Group which would have taken the firm private.
Although there will be a regulatory fight, this acquisition will ultimately be approved. If the USMCA lives up to its potential, Canadian Pacific will be in a great position to streamline its operations, improve profitability, and grow its market share. While we don't own CP, we are bullish on the shares, which currently sit around $370.
Monetary Policy
04. The Fed calmed market fears last week, but its growing balance sheet is concerning
Fed Chair Jerome Powell said just about everything right at his Q&A following last week's FOMC meeting. The Fed upgraded its US GDP expectations for the year from 4.2% to 6.5%; inflation may well go above 2% in the short-term, but that was OK; and the central bank would continue buying bonds at a clip of $120 billion per month. The markets may have cheered the news, but the rising debt load of the Fed, which is part of the nation's $28 trillion overall debt load, is concerning. Before the 2008 financial crisis, the Fed's balance sheet was below $1 trillion. It more than doubled due to the crisis, then plateaued around $2.8 trillion before mushrooming again in 2013 and 2014. Steady at about $4.5 trillion for several years, it did something few would expect: it began falling—all the way back down to $3.6 trillion in September of 2019. Of course, we know what hit the world six months later, causing the balance sheet to more than double. Just shy of $8 trillion now, we can expect (based on Powell's comments) that it will hit $9 trillion before any talk of tapering. Of major note at the FOMC meeting was the fact that only four members saw rates rising in 2022 and another eight (of the eighteen) saw rates coming off of zero in 2023. That is remarkable, at least until we consider that every tick up in rates makes servicing our $28 trillion national debt all the costlier. At least we are not alone in the boat; governments around the world are awash in debt, with few showing signs of hiking rates. In the meantime, let the party continue.
For the first time in a year, the pandemic is not the market's biggest concern—and that is wonderful news. Right now, investors have turned their attention to inflation and Treasury rates creeping up. Our biggest concern right now is none of the above. We see valuations reaching crazy levels on some high-flying tech names which won't turn a profit for years. There will be a tech reckoning at some point this year, which is one reason we have been maneuvering toward a value tilt. Also, portfolios simply got overweighted in growth names due to the run-up. This spring is certainly a good time for a portfolio tune-up.
Auto Parts
03. Goodyear to buy Cooper Tire & Rubber Company for $2.8 billion
There aren't many tire manufacturers based in the United States these days, so the two biggest might as well join forces. Goodyear Tire & Rubber Company (GT $17) has announced its plans to acquire smaller US rival Cooper Tire (CTB) for $2.8 billion in cash and stock. Goodyear, which trails only France's Michelin and Japan's Bridgestone by sales, will suddenly have a much larger global footprint: 50 factories and 72,000 employees around the world, and sales volume of 64 million replacement tires in the US. With demand for replacement tires expected to grow rapidly in the coming years, the move should allow the new entity to grow market share substantially in both the US and China—the industry's two largest markets. Both companies are based out of Ohio.
Obviously, the commodity price of rubber plays a major role in a tire manufacturer's bottom line. Fortunately, global rubber prices have dropped precipitously over the past decade. We would put a fair value on the price of Goodyear shares, post-merger, at $20.
Business & Professional Services
02. Will GoPuff be the poster child for the coming post-pandemic market reality check?
For anyone not familiar with SoftBank, it is the Masayoshi Son-run business that tried to bring WeWork public with founder and walking nightmare Adam Neumann still at the helm (at least originally). For anyone not familiar with GoPuff, it is yet another delivery service which brings products from the store to your home. The latter is being financially backed, in good measure, by the former. Why, you might ask, does America need another delivery service with established competitors such as Amazon, DoorDash, Uber Eats, GrubHub, Walmart, Drizly, Instacart, and an army of grocery stores which are getting into the game? We wish we had the answer. As for their unique value proposition (UVP), the delivery service brings household items such as OTC medicines, snacks, and household essentials to your doorstep. In essence, you are saved that pesky trip to Walgreens. (Actually, don't some of these competitors already do that?)
Forget the viability—or lack thereof—of the company's UVP; we are more concerned about the valuation. In October of 2020, the company raised funds which valued the enterprise at just under $4 billion. Now, fueled with a new round of funding, it is valued at just shy of $9 billion. Keep this in mind as well: GoPuff will probably go public this year, and we have all seen what happens to these novelty (our word) startups out of the gate—many see their shares double or even triple before the dust settles. So, we have a company that may be worth $4 billion (doubt it), it is now valued at $9 billion, and it may be at $20 billion after the IPO. Does that make sense? We love DoorDash, but how many DASH investors even realize that the firm, which has never turned a profit, has a $44 billion market cap as of this writing? There is a house of cards being built, and every house of cards eventually comes crashing down.
Forget the hype being pushed by the old media or on social media with respect to these companies. Do the research, figure out whether they actually do have a UVP, take a look at the numbers, consider the management team in place, and make wise investment decisions based on the easily-accessible research available to virtually everyone. Maybe it is FOMO, or maybe we are simply going stir-crazy in our homes, but there is a whole lot of gambling going on within the markets right now.
Under the Radar Investment
01. Adaptive Biotechnologies Corp
Adaptive Biotechnology Corp (ADPT $42) is a $6 billion biotech firm working in the field of what they refer to as Immune Medicine. By harnessing the power of the adaptive immune system, a subsystem which contains processes that eliminate pathogens or prevent their growth, the company believes it can transform the diagnosis and treatment of disease. The company's clinical diagnostic product, clonoSEQ, is an FDA-authorized test for the detection and monitoring of minimal residual disease in patients with blood cancers. The cornerstone of Adaptive's Immune Medicine platform, immunoSEQ, serves as its underlying R&D engine and generates revenue from academic and biopharmaceutical customers. Shares have dropped from their $71.25 high reached on 25 Jan 2021.
Answer
Space Invaders, created in 1978 by Tomohiro Nishikado, was licensed in the US by the Midway division of Bally. By 1982, the game had grossed nearly $4 billion, making it both the best-selling and highest-grossing (adjusted for inflation) video game of all time.
Headlines for the Week of 21 Feb—27 Feb 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The three worst months...
Going back to 1950, only three months of the year have averaged negative returns for the S&P 500. What are they, and which month is historically the worst?
Penn Trading Desk:
Penn: Open a "new energy" ETF in the New Frontier Fund
We are extremely bullish on the future of renewable energy, especially as it is virtually being mandated by governments around the world. It is a tricky area for investors to navigate, which is why we just added a new ETF to the Penn New Frontier Fund that invests equally in all five areas of this dynamic field: e-mobility, energy storage, performance materials, energy distribution, and energy generation. To see the specific action, Members can log into the Penn Trading Desk.
America is (finally) attempting a comeback in the rare earth arena; we opened a position in the company at the center of the battle
We have discussed, ad nauseam, how America willingly turned over the role of dominant rare earth miner to China, despite the national security risk of doing so. Now, one company plans to restore order in this critical corner of the market, and we have added that company to the Intrepid Trading Platform. Members, see the Penn Trading Desk.
Penn: Open Mid-Cap Gold and Silver Miner in Penn Global Leaders Club
We remain bullish on gold going forward, especially considering the world's perpetually-running currency printing presses. We are very bullish on silver for more industrial reasons. With that in mind, we acquired a Canadian mid-cap gold and silver miner with 30 million ounces of proven/probable gold reserves, and 60 million ounces of proven/probable silver reserves. Our first target price is 53% above the company's current price. Members, see the Penn Trading Desk.
Penn: Closed Aphria in Intrepid after massive run-up
We purchased Canadian pot stock Aphria for $4.63 on 13 Aug 2020 in large part because Irwin Simon took over as CEO. While we expected a longer hold time, the massive run-up in price couldn’t be ignored. We took our 440%, short-term gain, stopping out at $25 per share.
Wedbush: Raise price target on Microsoft
Analysts at Wedbush have raised their price target on Microsoft (MSFT $243) from $285 to $300, maintaining their Outperform rating. They argue that the tide is shifting in the cloud arms race—away from Amazon (AMZN) Web Services and towards Microsoft. We agree.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Transportation Infrastructure
10. Uber jumps on news it is buying booze delivery company Drizly
Approximately 22% of ride-sharing platform Uber's (UBER $57) revenue emanates from food and drink delivery, with its Uber Eats division lagging well behind the likes of DoorDash, Postmates, and Grubhub. The company is making an aggressive move to change that with its $1.1 billion purchase of Drizly, a services firm which currently offers beer, wine, and hard liquor deliveries in over 1,400 cities. The deal will be funded with a mix of Uber stock (90%) and cash (10%), and is expected to close in the first of of this year. While Uber will maintain a separate Drizly app for customers, it will integrate the Drizly marketplace into its existing Uber Eats app. Uber shares were up 7% on the day of the announcement.
This was a smart move, and we continue to see Uber as the dominant player in the industry. That being said, the company lost $7 billion on $12.8 billion in revenues over the trailing twelve months, with the pandemic doing immense harm to its business model. We see UBER shares fairly priced around $60, just $3 above where they currently sit.
Biotechnology
09. Jazz Pharmaceuticals PLC to acquire medical cannabis company GW Pharma for $7B
Jazz Pharmaceuticals (JAZZ $150) is an $8 billion biotech focused in the neurosciences, including sleep disorders, and oncology, including hematologic and solid tumors. The company has a solid and growing revenue stream, and positive net income going back ten years—no small feat for a mid-cap biotech. GW Pharmaceuticals PLC (GWPH $214) is a $6.7 billion biopharma company which develops and markets cannabis-based therapies, such as the first epilepsy drug derived from the marijuana plant. This past week, the Ireland-based Jazz announced it would be acquiring the UK-based GW for approximately $7 billion in a mix of cash, debt, and newly-issued Jazz stock. This is a bold move for the company, considering the deal is worth about 90% of its own market cap and that GW hasn't turned a profit since 2012, but management believes that GW's Epidiolex drug for the treatment of epilepsy will be a billion-dollar blockbuster. Shares of Jazz were trading off about 8% on the news, while the deal sent GW Pharma shares soaring nearly 45% based on the premium paid for the acquisition.
It's a bold bet, but one we like—a lot. The drop in price of JAZZ shares makes the stock even more attractive. In a crazy market where investors are bidding up to buy companies which have never turned a profit, here is a company with explosive potential that has operated in the black for a decade.
Behavioral Finance
08. Sticking it to the man? Koss family cashes in as Reddit army targets the shorts
Readers may be vaguely familiar with the name Koss, but certainly not to the same extent as Bose, Beats, or Sony. To say the Wisconsin-based headphone maker was struggling is an understatement. In fact, going into this year the company was worth about $20 million—the most micro of micro-caps. Then the Reddit army discovered how many short sellers were betting on the company to fail, and sprang into action. Despite minuscule sales and a dearth of profits, they jacked the shares up from around $3 in early January to an intra-day high exceeding $120 per share on the 28th of the month. Corporate executives and the Koss family, which together control 75% of the shares, also sprang into action: they sold $44 million worth of shares of a company that had a market cap of $20 million going into the year. Who can blame them? When you know your company is worth about $3 per share and a group of retail investors suddenly make it worth 40 times that amount, why not rake in the dough? SEC filings show these insiders sold between approximately $20 and $60 per share. Among the family, president and CEO Michael Koss sold around $13 million worth of stock, while John Koss Jr., vice president of sales, sold almost exactly the same amount. The company had a short interest of around 35% before the madness began, putting it on the Reddit army's radar. Shares have since fallen back to $20, only about four times what we value them being worth.
Who knows, maybe the insiders sold the shares to raise cash for a new strategic push, though we doubt it. In the meantime, we would like to meet the "investors" who bought into a company with horrendous fundamentals while the share price was between $100 and $120. We would like to simply ask them "why?"
Cryptocurrencies
07. Tesla shifts $1.5 billion of its cash reserve to Bitcoin, will accept the crypto as a payment source soon
Going into the new year, $800 billion EV juggernaut Tesla (TSLA $854) had about $19 billion sitting in cash reserves. In a move that GM or Ford would never consider making, the firm revealed—via an SEC filing—that it has placed about $1.5 billion of that amount, or roughly 8%, in the cryptocurrency Bitcoin. Let there be no doubt, Bitcoin is not a currency; rather, it is a commodity. Forget the comparisons to the US dollar, compare it to gold or silver instead. The dollar is worth a dollar today, yesterday, and (hopefully) tomorrow. Certainly, its value will fluctuate, but it will not go up 60% in one month like Bitcoin has. Governments can print currencies 24/7, effectively reducing their value, but only 21 million bitcoins can be mined—and 18.6 million digital coins already exist. So, is there anything wrong with Tesla's cash management experts shifting 8% of the company's reserves into the commodity? We don't believe so. After all, they could also buy (based on their SEC filings) gold or silver as a store of cash. Given Elon Musk's belief in the future of cryptos, the move shouldn't be surprising. Furthermore, investors applauded the move: both Bitcoin and TSLA were trading higher following the announcement. The company also announced plans to accept Bitcoin as a means of payment in the near future.
We were true Bitcoin skeptics at first, but as soon as big payment processors like PayPal and Venmo got in the game, and as soon as we started looking a the non-physical product as a commodity rather than a currency, we warmed up to the crypto. Our biggest concern is this: Although only 21 million bitcoins will be mined, nothing will stop new, competing cryptocurrencies from being "discovered" in the digital world.
Maritime Shipping & Ports
06. Our maritime shipper spikes on the growing concern over container shortage
For anyone who believes that America, or the world in general, is ready to stand up to China's trade practices, try this one on for size: the communist nation ended 2020 with a record trade surplus. The demand for Chinese goods is now so great that the world is facing a shipping container crisis. Just how bad is it? Because the shippers can make so much more money on the goods leaving China as opposed to the goods entering the country—like grain from the United States—they are literally rushing back empty containers to China to alleviate the backlog of goods waiting at Chinese ports. Spot freight rates are up nearly 300% from a year ago. While that is a sick testament to the state of global trade, one industry is certainly reaping the rewards: the maritime shippers which had been crushed during the trade war and subsequent pandemic. We have been fascinated by this highly-cyclical industry for decades, and when one of our favorites, Nordic American Tankers (NAT $4), saw its share price drop to $2.80 this past October, we jumped in, adding the Bermuda-based shipper to the Penn Intrepid Trading Platform. NAT jumped 14% in one day on news of the container shortage. Think the run will be short-lived or that the shippers are now overvalued? Take a look at the accompanying chart on NAT. Despite the fact that there are nearly 200 million intermodal freight containers around the world, the rapid increase in demand caught nearly everyone off guard. Ready for the icing on the cake? 97% of these containers are now made in, you guessed it, China.
For a brief refresher on the shipping industry, visit our 2018 Penn Wealth Report story on The State of Global Shipping. We see the upswing continuing to gain momentum as global economies revive.
Global Health Threats
05. Hackers tried to poison the water supply of a small Florida town; is this the beginning of a new global health threat?*
Two days before the Super Bowl, in the Tampa suburb of Oldsmar, a technician at the Haddock Water Treatment Plant noticed something odd: the cursor was moving across his computer screen while his mouse sat idle. At first he assumed his supervisor was remotely logged in and simply checking out the systems of the plant, which provides drinking water to 15,000 local residents. His curiosity changed to panic when, a few hours later, the mysterious cursor began adjusting the level of chemicals being added to the water supply. Specifically, the level of sodium hydroxide (caustic soda) was being moved from the ordinary setting of 100 parts per million (ppm) to 11,100 ppm. At low levels, sodium hydroxide regulates PH levels; at high levels, it will damage human tissue. Officials at the plant quickly adjusted the settings back to normal, and they pointed out that PH testing mechanisms would have caught the problem before any contaminated water ever got to the taps, but does that make anyone feel at ease? The attack on the Oldsmar plant is eerily similar to a number of 2020 attacks on Israel's water supply, almost certainly the work of Iranian hackers. A disturbing new threat appears to be emerging; and, with over 100,000 water treatment facilities in the US, it is a threat which cannot be ignored.
In the next issue of The Penn Wealth Report, we will take a look at the threat to America's water supply and how we can prepare for an attack; we also take a look at some viable investment choices in the water utilities sector.
Aerospace & Defense
04. The weekend engine failure points to Raytheon's Pratt & Whitney unit, but we still point a finger at Boeing
It was the last thing Boeing (BA $212) needed (how many times have we said that over the past three years?): A Boeing 777, leaving Denver for Hawaii, had one of its two engines suffer an "uncontained failure," with fire and smoke visible to passengers, and with debris dropping down on a Denver suburb. Thankfully, the aircraft was able to make it back to the airport on one good engine and with no passenger injuries—unlike a very similar incident in 2018 which involved the death of a passenger following engine debris striking a window. That incident occurred just two months after a United Airlines 777 suffered engine failure, with a cracked fan blade forcing the aircraft to make an emergency landing in Honolulu. This is an extremely disturbing trend, and one which certainly places Raytheon's (RTX $73) Pratt & Whitney unit in the hot seat. But aircraft maker Boeing shares some blame, as problems continue to mount for the Chicago-based firm. First there were the deadly 737 crashes which grounded the fleet for the better part of two years. Then came the 787 Dreamliner "design flaws" and canceled orders. Now the 777 faces grounding in the US—and probably around the world. And the situation isn't looking much better on the space side of the business, with the company's problem-laden Starliner capsule and its high profile recent failures. In each case, Boeing can point fingers at suppliers or partners, but there is a point at which all fingers will point back to them. A sad state of affairs for a formerly-great American company.
The entire Boeing board of directors, along with its C-suite executives, should be broomed. The company needs a clean sweep if it has any chance of returning to its position of aerospace and defense dominance. Unfortunately, the very individuals which need to be fired are all part of the mutual admiration society which controls the decisions on leadership. If ever a company needed an aggressive activist investor to come along and force change, it is right now, and it is at Boeing. Even then, the company's downward flight path may be too steep to pull out of.
Automobiles
03. Investor darling Workhorse has its shares cut in half after losing USPS contract
It has been one of those "new investor" cult stocks with one of the key buzz phrases, or acronym in this case, that the new wave of retail money flocks to: EV. The company is Workhorse (WKHS $16), which has seen its stock price go from $2 per share a year ago to $43 per share a few weeks ago—all on the back of microscopic revenues and chronic annual losses. The financials didn't matter; pie-in-the-sky promises were enough to bring money flooding into the stock. The latest promise was the imminent contract by the United States Postal Service to replace its fleet of 150,000+ outdated vehicles. To Workhorse devotees, it was a foregone conclusion that their company would be the recipient. When the contract was awarded to the defense unit of $8 billion industrial firm Oshkosh (OSK $117), WKHS shares nosedived more than 50% in one day. The drop was so rapid that any stop order to protect gains would have been essentially worthless: investors would have been stopped-out at the bottom.
There are some great lessons in this story. Investors need to understand what they are buying, and they need do have at least some inkling as to a company's fundamentals. Forget the fact that Workhorse had never turned an annual profit, how about the fact that they were barely generating sales? As for "boring" old Oshkosh, the company has a pristine balance sheet and generates solid revenues—and profits—year after year. But who wants boring?
Anyone willing to take a little time to do some basic research can be greatly rewarded by the flow of "dumb money" right now. Don't get caught up in the hype and follow the lemmings off the cliff; use their moves to help uncover the value plays present in the market.
Market Pulse
02. Despite a bruising few weeks, February was a winner in the markets
It may be hard to believe based on the past two weeks, but equities actually hammered out a win in February. Not so for the week: each of the major benchmarks fell on the specter of rising rates. In a sign of just how the (fixed income) world has changed, the biggest hit came when the 10-year Treasury moved above the 1.5% mark on Thursday. It actually settled back down to 1.415% by Friday's close, but the rapid upward move spooked investors who are banking on ultra-low rates supporting further advances in the market. Even talk of another $1.9 trillion in government "stimulus" couldn't help—the NASDAQ was off just shy of 5% for the week, followed by the S&P 500 (-2.46%), and the Dow (-1.78%).
Nonetheless, the Dow closed out February with a healthy gain (3.17%), followed by the S&P 500 (2.61%), and the NASDAQ (0.93%). This is a far cry from one year ago as the new reality of the pandemic began to take hold. In February of 2020, the Dow was down 10.08%. Of course, those losses were nothing compared to what would follow in March. We never really know what's ahead, but it feels a lot better watching the effective Pfizer, Moderna, and (starting next week) Johnson & Johnson vaccines begin to eradicate this terrible virus than it did a year ago, facing insane toilet paper shortages and spiking hospitalization rates. If our biggest concern becomes a rising 10-year, then we really don't have much to complain about. One of these days, the realization that we now have a $30 trillion national debt will creep into our psyche, but let's focus on getting rid of the masks first.
Personally speaking, our biggest concern is actually not the rising 10-year; it is the madness going on with a bunch of stocks that couldn't turn a profit if their corporate lives depended on it. When falling confetti on an iPhone screen is all it takes to lure someone into buying an overpriced dog, something wicked this way comes. Yet another reason we are tilting toward the low-multiple, deep value names this year.
Under the Radar Investment
01. United Security Bancshares
Headquartered in Fresno, United Security Bancshares (UBFO $7) was formed in 2001 as a bank holding company to provide commercial banking services through its wholly-owned subsidiary, United Security Bank. The company's two primary sources of revenue are interest income from outstanding loans, and investment securities. With a p/e ratio of 14, UBFO has annual operating revenues of $37 million, and net income of $9 million (2020 full-year figures). The company has a cash dividend payout ratio of 60% and a dividend yield of $5.91%. As rates begin to creep higher, we are becoming more bullish on the financial sector, especially the regional banks with sound balance sheets.
Answer
Going back to 1950, only three months have resulted in negative average returns for the S&P 500: February, August, and September. Over that span of time, September has been the bleakest month, averaging a -0.62% return for the benchmark index.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The three worst months...
Going back to 1950, only three months of the year have averaged negative returns for the S&P 500. What are they, and which month is historically the worst?
Penn Trading Desk:
Penn: Open a "new energy" ETF in the New Frontier Fund
We are extremely bullish on the future of renewable energy, especially as it is virtually being mandated by governments around the world. It is a tricky area for investors to navigate, which is why we just added a new ETF to the Penn New Frontier Fund that invests equally in all five areas of this dynamic field: e-mobility, energy storage, performance materials, energy distribution, and energy generation. To see the specific action, Members can log into the Penn Trading Desk.
America is (finally) attempting a comeback in the rare earth arena; we opened a position in the company at the center of the battle
We have discussed, ad nauseam, how America willingly turned over the role of dominant rare earth miner to China, despite the national security risk of doing so. Now, one company plans to restore order in this critical corner of the market, and we have added that company to the Intrepid Trading Platform. Members, see the Penn Trading Desk.
Penn: Open Mid-Cap Gold and Silver Miner in Penn Global Leaders Club
We remain bullish on gold going forward, especially considering the world's perpetually-running currency printing presses. We are very bullish on silver for more industrial reasons. With that in mind, we acquired a Canadian mid-cap gold and silver miner with 30 million ounces of proven/probable gold reserves, and 60 million ounces of proven/probable silver reserves. Our first target price is 53% above the company's current price. Members, see the Penn Trading Desk.
Penn: Closed Aphria in Intrepid after massive run-up
We purchased Canadian pot stock Aphria for $4.63 on 13 Aug 2020 in large part because Irwin Simon took over as CEO. While we expected a longer hold time, the massive run-up in price couldn’t be ignored. We took our 440%, short-term gain, stopping out at $25 per share.
Wedbush: Raise price target on Microsoft
Analysts at Wedbush have raised their price target on Microsoft (MSFT $243) from $285 to $300, maintaining their Outperform rating. They argue that the tide is shifting in the cloud arms race—away from Amazon (AMZN) Web Services and towards Microsoft. We agree.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Transportation Infrastructure
10. Uber jumps on news it is buying booze delivery company Drizly
Approximately 22% of ride-sharing platform Uber's (UBER $57) revenue emanates from food and drink delivery, with its Uber Eats division lagging well behind the likes of DoorDash, Postmates, and Grubhub. The company is making an aggressive move to change that with its $1.1 billion purchase of Drizly, a services firm which currently offers beer, wine, and hard liquor deliveries in over 1,400 cities. The deal will be funded with a mix of Uber stock (90%) and cash (10%), and is expected to close in the first of of this year. While Uber will maintain a separate Drizly app for customers, it will integrate the Drizly marketplace into its existing Uber Eats app. Uber shares were up 7% on the day of the announcement.
This was a smart move, and we continue to see Uber as the dominant player in the industry. That being said, the company lost $7 billion on $12.8 billion in revenues over the trailing twelve months, with the pandemic doing immense harm to its business model. We see UBER shares fairly priced around $60, just $3 above where they currently sit.
Biotechnology
09. Jazz Pharmaceuticals PLC to acquire medical cannabis company GW Pharma for $7B
Jazz Pharmaceuticals (JAZZ $150) is an $8 billion biotech focused in the neurosciences, including sleep disorders, and oncology, including hematologic and solid tumors. The company has a solid and growing revenue stream, and positive net income going back ten years—no small feat for a mid-cap biotech. GW Pharmaceuticals PLC (GWPH $214) is a $6.7 billion biopharma company which develops and markets cannabis-based therapies, such as the first epilepsy drug derived from the marijuana plant. This past week, the Ireland-based Jazz announced it would be acquiring the UK-based GW for approximately $7 billion in a mix of cash, debt, and newly-issued Jazz stock. This is a bold move for the company, considering the deal is worth about 90% of its own market cap and that GW hasn't turned a profit since 2012, but management believes that GW's Epidiolex drug for the treatment of epilepsy will be a billion-dollar blockbuster. Shares of Jazz were trading off about 8% on the news, while the deal sent GW Pharma shares soaring nearly 45% based on the premium paid for the acquisition.
It's a bold bet, but one we like—a lot. The drop in price of JAZZ shares makes the stock even more attractive. In a crazy market where investors are bidding up to buy companies which have never turned a profit, here is a company with explosive potential that has operated in the black for a decade.
Behavioral Finance
08. Sticking it to the man? Koss family cashes in as Reddit army targets the shorts
Readers may be vaguely familiar with the name Koss, but certainly not to the same extent as Bose, Beats, or Sony. To say the Wisconsin-based headphone maker was struggling is an understatement. In fact, going into this year the company was worth about $20 million—the most micro of micro-caps. Then the Reddit army discovered how many short sellers were betting on the company to fail, and sprang into action. Despite minuscule sales and a dearth of profits, they jacked the shares up from around $3 in early January to an intra-day high exceeding $120 per share on the 28th of the month. Corporate executives and the Koss family, which together control 75% of the shares, also sprang into action: they sold $44 million worth of shares of a company that had a market cap of $20 million going into the year. Who can blame them? When you know your company is worth about $3 per share and a group of retail investors suddenly make it worth 40 times that amount, why not rake in the dough? SEC filings show these insiders sold between approximately $20 and $60 per share. Among the family, president and CEO Michael Koss sold around $13 million worth of stock, while John Koss Jr., vice president of sales, sold almost exactly the same amount. The company had a short interest of around 35% before the madness began, putting it on the Reddit army's radar. Shares have since fallen back to $20, only about four times what we value them being worth.
Who knows, maybe the insiders sold the shares to raise cash for a new strategic push, though we doubt it. In the meantime, we would like to meet the "investors" who bought into a company with horrendous fundamentals while the share price was between $100 and $120. We would like to simply ask them "why?"
Cryptocurrencies
07. Tesla shifts $1.5 billion of its cash reserve to Bitcoin, will accept the crypto as a payment source soon
Going into the new year, $800 billion EV juggernaut Tesla (TSLA $854) had about $19 billion sitting in cash reserves. In a move that GM or Ford would never consider making, the firm revealed—via an SEC filing—that it has placed about $1.5 billion of that amount, or roughly 8%, in the cryptocurrency Bitcoin. Let there be no doubt, Bitcoin is not a currency; rather, it is a commodity. Forget the comparisons to the US dollar, compare it to gold or silver instead. The dollar is worth a dollar today, yesterday, and (hopefully) tomorrow. Certainly, its value will fluctuate, but it will not go up 60% in one month like Bitcoin has. Governments can print currencies 24/7, effectively reducing their value, but only 21 million bitcoins can be mined—and 18.6 million digital coins already exist. So, is there anything wrong with Tesla's cash management experts shifting 8% of the company's reserves into the commodity? We don't believe so. After all, they could also buy (based on their SEC filings) gold or silver as a store of cash. Given Elon Musk's belief in the future of cryptos, the move shouldn't be surprising. Furthermore, investors applauded the move: both Bitcoin and TSLA were trading higher following the announcement. The company also announced plans to accept Bitcoin as a means of payment in the near future.
We were true Bitcoin skeptics at first, but as soon as big payment processors like PayPal and Venmo got in the game, and as soon as we started looking a the non-physical product as a commodity rather than a currency, we warmed up to the crypto. Our biggest concern is this: Although only 21 million bitcoins will be mined, nothing will stop new, competing cryptocurrencies from being "discovered" in the digital world.
Maritime Shipping & Ports
06. Our maritime shipper spikes on the growing concern over container shortage
For anyone who believes that America, or the world in general, is ready to stand up to China's trade practices, try this one on for size: the communist nation ended 2020 with a record trade surplus. The demand for Chinese goods is now so great that the world is facing a shipping container crisis. Just how bad is it? Because the shippers can make so much more money on the goods leaving China as opposed to the goods entering the country—like grain from the United States—they are literally rushing back empty containers to China to alleviate the backlog of goods waiting at Chinese ports. Spot freight rates are up nearly 300% from a year ago. While that is a sick testament to the state of global trade, one industry is certainly reaping the rewards: the maritime shippers which had been crushed during the trade war and subsequent pandemic. We have been fascinated by this highly-cyclical industry for decades, and when one of our favorites, Nordic American Tankers (NAT $4), saw its share price drop to $2.80 this past October, we jumped in, adding the Bermuda-based shipper to the Penn Intrepid Trading Platform. NAT jumped 14% in one day on news of the container shortage. Think the run will be short-lived or that the shippers are now overvalued? Take a look at the accompanying chart on NAT. Despite the fact that there are nearly 200 million intermodal freight containers around the world, the rapid increase in demand caught nearly everyone off guard. Ready for the icing on the cake? 97% of these containers are now made in, you guessed it, China.
For a brief refresher on the shipping industry, visit our 2018 Penn Wealth Report story on The State of Global Shipping. We see the upswing continuing to gain momentum as global economies revive.
Global Health Threats
05. Hackers tried to poison the water supply of a small Florida town; is this the beginning of a new global health threat?*
Two days before the Super Bowl, in the Tampa suburb of Oldsmar, a technician at the Haddock Water Treatment Plant noticed something odd: the cursor was moving across his computer screen while his mouse sat idle. At first he assumed his supervisor was remotely logged in and simply checking out the systems of the plant, which provides drinking water to 15,000 local residents. His curiosity changed to panic when, a few hours later, the mysterious cursor began adjusting the level of chemicals being added to the water supply. Specifically, the level of sodium hydroxide (caustic soda) was being moved from the ordinary setting of 100 parts per million (ppm) to 11,100 ppm. At low levels, sodium hydroxide regulates PH levels; at high levels, it will damage human tissue. Officials at the plant quickly adjusted the settings back to normal, and they pointed out that PH testing mechanisms would have caught the problem before any contaminated water ever got to the taps, but does that make anyone feel at ease? The attack on the Oldsmar plant is eerily similar to a number of 2020 attacks on Israel's water supply, almost certainly the work of Iranian hackers. A disturbing new threat appears to be emerging; and, with over 100,000 water treatment facilities in the US, it is a threat which cannot be ignored.
In the next issue of The Penn Wealth Report, we will take a look at the threat to America's water supply and how we can prepare for an attack; we also take a look at some viable investment choices in the water utilities sector.
Aerospace & Defense
04. The weekend engine failure points to Raytheon's Pratt & Whitney unit, but we still point a finger at Boeing
It was the last thing Boeing (BA $212) needed (how many times have we said that over the past three years?): A Boeing 777, leaving Denver for Hawaii, had one of its two engines suffer an "uncontained failure," with fire and smoke visible to passengers, and with debris dropping down on a Denver suburb. Thankfully, the aircraft was able to make it back to the airport on one good engine and with no passenger injuries—unlike a very similar incident in 2018 which involved the death of a passenger following engine debris striking a window. That incident occurred just two months after a United Airlines 777 suffered engine failure, with a cracked fan blade forcing the aircraft to make an emergency landing in Honolulu. This is an extremely disturbing trend, and one which certainly places Raytheon's (RTX $73) Pratt & Whitney unit in the hot seat. But aircraft maker Boeing shares some blame, as problems continue to mount for the Chicago-based firm. First there were the deadly 737 crashes which grounded the fleet for the better part of two years. Then came the 787 Dreamliner "design flaws" and canceled orders. Now the 777 faces grounding in the US—and probably around the world. And the situation isn't looking much better on the space side of the business, with the company's problem-laden Starliner capsule and its high profile recent failures. In each case, Boeing can point fingers at suppliers or partners, but there is a point at which all fingers will point back to them. A sad state of affairs for a formerly-great American company.
The entire Boeing board of directors, along with its C-suite executives, should be broomed. The company needs a clean sweep if it has any chance of returning to its position of aerospace and defense dominance. Unfortunately, the very individuals which need to be fired are all part of the mutual admiration society which controls the decisions on leadership. If ever a company needed an aggressive activist investor to come along and force change, it is right now, and it is at Boeing. Even then, the company's downward flight path may be too steep to pull out of.
Automobiles
03. Investor darling Workhorse has its shares cut in half after losing USPS contract
It has been one of those "new investor" cult stocks with one of the key buzz phrases, or acronym in this case, that the new wave of retail money flocks to: EV. The company is Workhorse (WKHS $16), which has seen its stock price go from $2 per share a year ago to $43 per share a few weeks ago—all on the back of microscopic revenues and chronic annual losses. The financials didn't matter; pie-in-the-sky promises were enough to bring money flooding into the stock. The latest promise was the imminent contract by the United States Postal Service to replace its fleet of 150,000+ outdated vehicles. To Workhorse devotees, it was a foregone conclusion that their company would be the recipient. When the contract was awarded to the defense unit of $8 billion industrial firm Oshkosh (OSK $117), WKHS shares nosedived more than 50% in one day. The drop was so rapid that any stop order to protect gains would have been essentially worthless: investors would have been stopped-out at the bottom.
There are some great lessons in this story. Investors need to understand what they are buying, and they need do have at least some inkling as to a company's fundamentals. Forget the fact that Workhorse had never turned an annual profit, how about the fact that they were barely generating sales? As for "boring" old Oshkosh, the company has a pristine balance sheet and generates solid revenues—and profits—year after year. But who wants boring?
Anyone willing to take a little time to do some basic research can be greatly rewarded by the flow of "dumb money" right now. Don't get caught up in the hype and follow the lemmings off the cliff; use their moves to help uncover the value plays present in the market.
Market Pulse
02. Despite a bruising few weeks, February was a winner in the markets
It may be hard to believe based on the past two weeks, but equities actually hammered out a win in February. Not so for the week: each of the major benchmarks fell on the specter of rising rates. In a sign of just how the (fixed income) world has changed, the biggest hit came when the 10-year Treasury moved above the 1.5% mark on Thursday. It actually settled back down to 1.415% by Friday's close, but the rapid upward move spooked investors who are banking on ultra-low rates supporting further advances in the market. Even talk of another $1.9 trillion in government "stimulus" couldn't help—the NASDAQ was off just shy of 5% for the week, followed by the S&P 500 (-2.46%), and the Dow (-1.78%).
Nonetheless, the Dow closed out February with a healthy gain (3.17%), followed by the S&P 500 (2.61%), and the NASDAQ (0.93%). This is a far cry from one year ago as the new reality of the pandemic began to take hold. In February of 2020, the Dow was down 10.08%. Of course, those losses were nothing compared to what would follow in March. We never really know what's ahead, but it feels a lot better watching the effective Pfizer, Moderna, and (starting next week) Johnson & Johnson vaccines begin to eradicate this terrible virus than it did a year ago, facing insane toilet paper shortages and spiking hospitalization rates. If our biggest concern becomes a rising 10-year, then we really don't have much to complain about. One of these days, the realization that we now have a $30 trillion national debt will creep into our psyche, but let's focus on getting rid of the masks first.
Personally speaking, our biggest concern is actually not the rising 10-year; it is the madness going on with a bunch of stocks that couldn't turn a profit if their corporate lives depended on it. When falling confetti on an iPhone screen is all it takes to lure someone into buying an overpriced dog, something wicked this way comes. Yet another reason we are tilting toward the low-multiple, deep value names this year.
Under the Radar Investment
01. United Security Bancshares
Headquartered in Fresno, United Security Bancshares (UBFO $7) was formed in 2001 as a bank holding company to provide commercial banking services through its wholly-owned subsidiary, United Security Bank. The company's two primary sources of revenue are interest income from outstanding loans, and investment securities. With a p/e ratio of 14, UBFO has annual operating revenues of $37 million, and net income of $9 million (2020 full-year figures). The company has a cash dividend payout ratio of 60% and a dividend yield of $5.91%. As rates begin to creep higher, we are becoming more bullish on the financial sector, especially the regional banks with sound balance sheets.
Answer
Going back to 1950, only three months have resulted in negative average returns for the S&P 500: February, August, and September. Over that span of time, September has been the bleakest month, averaging a -0.62% return for the benchmark index.
Headlines for the Week of 24 Jan—30 Jan 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The dot-com bubble...
The proliferation of personal computers in the mid-1990s and the unprecedented growth of the Internet thanks to new web browsers led to millions of Americans having access to stock market trading platforms. Wishing to take advantage of the technology of the "New Economy," they piled into dot-com stocks with no earnings but stratospheric promises. How much did the Nasdaq Composite, which housed these new companies, go up between January of 1995 and March of 2000, and how much did the index fall between March of 2000 and the end of 2002?
Penn Trading Desk:
Opened Infrastructure Play in the Penn Dynamic Growth Strategy
Massive infrastructure spending over the next two years is now all but guaranteed. Fortuitously, we found an investment that should not only take advantage of this condition, but also contains a number of our best small- and mid-cap industrial ideas—one of our overweight sectors for the year ahead. See the new position in our ETF portfolio, the Penn Dynamic Growth Strategy.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Biotechnology
10. One disappointing clinical trial highlights the risks of biotech investing
Going into the new year, Serepta Therapeutics (SRPT $87) was a $14 billion biotech darling trading around $180 per share. With a pipeline of 40 or so therapies in various stages of development, the company is a holding in a number of top biotech funds. Then came disappointing—not disastrous—clinical trial data for SRP-9001, an experimental gene therapy for Duchenne muscular dystrophy (DMD), a genetic disorder that progressively weakens the muscles of children—generally boys, with symptoms usually appearing before age five. One might expect a small pullback in the share price from the news; instead, SRPT shares plunged over 50% in one session. It should be noted that Sarepta markets and sells two other DMD treatments which are unaffected by the SRP-9001 trial, and remains the only company with approved treatments for certain DMD patients. One noted biotech analyst lowered his price target for SRPT shares from $200 to $143, but maintained his Outperform rating on the company. Another investment firm we track places a fair value of $357 on the shares. The company, which saw a meteoric rise in sales from $5 million in 2016 to $500 million TTM, has yet to turn a quarterly profit. While a lack of income is not uncommon for early-stage biotechs, this case does point to the need for investors to perform their own fundamental research rather than relying on the number of stars in a stock report or an analyst's lofty price targets.
One of the many screeners we use is designed to highlight stocks with certain characteristics which have sudden drops in share price. This has been a great contrarian tool for identifying sound companies at undervalued prices. A big price drop, however, must be accompanied by a number of positive attributes which portray a good buying opportunity. Those attributes are not in place with Sarepta, at least based on the metrics in our screener. If an investor does not wish to perform the research, the best way to take advantage of a promising industry is through a thematic or industry-specific ETF. For biotechs, we use the SPDR S&P Biotech ETF (XBI $147), which is one of the 21 holdings in the Penn Dynamic Growth Strategy.
Risk Management
09. Shades of '99: An Elon Musk tweet about one company leads to a 6,450% gain in another
On the 6th of January, Signal Advance (SIGL $39) was a $6 million micro-cap consulting firm for emerging technologies. Putting its size in perspective, it would need to grow by about 50 times to be considered a small-cap. The company has never turned a profit, and there is nothing to indicate that it ever will. An investor would have to have a screw loose to place even the smallest amount of money in SIGL shares. And then came Elon Musk’s tweet. The tweet was succinct: “Use Signal.” Musk was talking about a cross-platform encrypted messaging service he uses. Unfortunately, a certain group of gamers decided that Musk was talking about Signal Advance, and they began gobbling up SIGL shares on their Robinhood or other trading apps, driving the price from $0.60 to $38.70 per share in the matter of two trading days. Signal, the app company, is a privately-held entity. Not one modicum of rational thought or the most basic of research, just jump in like Pac Man gobbling up ghosts. It must be nice having money to throw into the abyss.
The reckoning is coming, and the laziest of investors will pay the biggest price. Back in 1999, we remember getting calls about a tech company named InfoSpace (INSP at the time). The company is still around, though now under the name Blucora (BCOR). It would be an enlightening exercise to check out a long-term chart of those shares.
Semiconductors
08. Intel hires a wonkish tech guy as the company's new CEO...and the move was a brilliant one
For at least the past year we have been hearing about Intel's (INTC $59) imminent demise, and for at least the past year we have poked holes in that narrative. In fact, we have said that Intel is one of the unloved, undervalued darlings ready to take off in 2021. In the most recent move supporting our premise (besides the impressive jump in the share price year-to-date), the company has announced that CEO Bob Swan would be replaced next month by wonkish tech veteran Pat Gelsinger. Gelsinger, considered a brilliant semiconductor engineer, is currently the CEO of VMware (VMW $133), and the perfect fit for Intel going forward. Somewhat ironically, Gelsinger left Intel eleven years ago when it became clear that he would not be tapped for the lead role at the company; Brian Krzanich ultimately got that spot. When Bob Swan replaced Krzanich in 2019, pundits were worried. Swan was a financials guy, not the tech guru the company needed to pull itself out of a nosedive. But analysts are singing a different tune this time, with some even comparing Gelsinger's return to Intel with Steve Jobs' return to Apple. That comparison comes with some stratospheric expectations, but we believe the move will at least be comparable to Microsoft's hiring of Satya Nadella in 2014; and that would be good enough for us.
Not everyone is convinced that this move can turn the giant battleship around, especially with the likes of NVIDIA (NVDA) and Advanced Micro Devices (AMD) snatching up market share. We point to the difference in multiples, however (INTC's 11 vs NVDA's 88 and AMD's 123), and remain faithful to the notion that Intel will gain the most ground (among these three) in 2021.
Automotive
07. After a century of operations in the country, Ford will close its Brazil plants, taking $4.1 billion in charges
There are a lot of moving parts at Ford right now, but the jury is still out on whether those machinations will create something bold, new, and profitable, or simply offer up new opportunities for massive breakdowns. The latest twist in the company's $11 billion turnaround effort, put in motion by former (and lackluster) CEO Jim Hackett, is the closure of its three assembly line plants in Brazil—ending a century of operations in the country. The move earned some rather acrimonious comments from Brazilian President Jair Bolsonaro—whom we have a lot of respect for—but the 5,000 unionized workers at the three plants have been turning out a paltry number of new vehicles per year, with the company netting a loss of $700 million in South America in 2019, and nearly $400 million through the first three quarters of 2020. The company will take a write-down of $4.1 billion related to the closures, mostly to give the workers a severance package. While we don't know what that will look like, the company offered workers at its shuttered plant in Russia the equivalent of one-year's salary, though it is unclear whether or not the Brazilian workers' union will accept the terms. Ford claims it is ready to embrace the future of electric and autonomous vehicles, but that is what we were told when Hackett, who headed up the firm's Smart Mobility unit, took the top spot in 2017. What a disappointment his tenure turned out to be. Jim Farley took over for Hackett this past October, but readily embraced his predecessor's turnaround plan. We're not sure what will be different with the automaker under new management.
Pardon us if we don't buy what Ford management is trying to sell us; we have been here before with this company, and have heard the same tired lines. We used to at least get a big fat dividend yield for buying shares in the company, but those were suspended last March.
IT Software & Services
06. Palantir spikes on news of its partnership with PG&E to help manage California's electric grid
We bought data mining firm Palantir (PLTR $27) on IPO day as a long-term investment, not a short-term trade. To the chagrin of the short-sellers and naysayers, that investment continues to grow. One of the knocks we have heard leveled at the company is that they rely too heavily on too few major clients for a bulk of their revenues. Lose any of these government agencies or corporate clients, the story goes, and the company is in dire straits. We see just the opposite happening: Palantir will continue to widen out its customer base, attracting new companies across a wide array of industries and market caps with its incredibly powerful, outcome-driven software platform; a platform which sifts through enormous amounts of raw data and produces actionable information. Case in point, the Denver-based firm (they moved out of California late last year) just inked a deal with regulated California utilities provider PG&E (PCG $12), the company at the epicenter of the fire-induced outages plaguing the state over the past few years. The goal is straightforward: enhance the safety and reliability of California's power grid. Palantir's Foundry software platform will allow managers at the utility, which provides power to 5.3 million California households, the ability to view and navigate a real-time visual of the power grid, enabling them to act on a moment's notice. Fires sparked by PG&E's power lines have led to payouts for damages in excess of $25 billion over the past four years. Think PG&E didn't do its due diligence before hiring Palantir?
There are a lot of tech companies with valuations in the stratosphere; and there are a lot of tech companies which will come crashing back to earth this year. When the tech correction hits, PLTR shares will probably get caught in the crossfire, but we would probably view that as a great opportunity to add to our holding.
Aerospace & Defense
05. Just as the 737-MAX flies again, Boeing must contend with its trouble-laden space business
If it weren't for SpaceX's remarkable recent accomplishments, Boeing (BA $211) might have been able to quietly get away with its problem-plagued Space Launch System (SLS). Alas, not long after the failed test flight of its unmanned Starliner capsule, SpaceX had its own successful manned flight, with the Crew Dragon transporting astronauts into space from American soil for the first time since the final Space Shuttle launch in 2011. This past weekend, Boeing had a chance to redeem itself just a bit with the test firing of the engines on the SLS's core stage. The powerful engines were to remain ignited for eight minutes; instead, they shut down shortly after one minute. It's too early to tell what caused the malfunction, and it could certainly be a simple component failure, but for a program that is already far behind schedule and billions of dollars over budget, it is yet another black eye. Assuming the test had been successful, the core stage would have been prepped for delivery to the Kennedy Space Center for final assembly with the Lockheed Martin (LMT $342) Orion spacecraft, followed by another test flight to make up for the failed, December 2019 mission. Instead, Boeing faces more delays and more costly test firings.
In normal times, we would say that Boeing is a huge bargain at $211 per share, down from its March, 2019 high of $441 per share. Instead, the company seems fairly valued right where the shares sit. Investors can't even collect dividends while the company figures out its future—payouts were halted "until further notice" in the middle of last year. The investment is about as exciting as the Boeing management team is dynamic.
Pharmaceuticals
04. Lackluster Merck shuts down its Covid-19 vaccine effort
We are bullish on the Health Care sector in 2021, but we remain bearish on one particular drug giant: Merck (MRK $80). CEO Ken Frazier seems to be—in our opinion—a lackluster leader simply going along for the ride. The latest piece of evidence supporting our bearish stance came on Monday morning, when the $200 billion drug manufacturer announced it would be shutting down its Covid-19 vaccine effort due to poor trial results. The company said it will retool its vaccine manufacturing facilities to produce antiviral therapies for patients suffering from the disease, one of which could be available for use in the middle of the year—about the time the vaccines should be kicking in.
We look at Merck's drug pipeline and see a dearth of therapies in late-stage trials. While most analysts see MRK shares hitting $100 within the next twelve months, we see more growth opportunities in our Penn Global Leaders Club holdings: Pfizer (PFE), GlaxoSmithKline (GSK), and Bristol-Myers Squibb (BMY). We also hold a number of higher-risk biotechs in our Penn New Frontier Fund, to include Biomarin (BMRN), Vertex (VRTX), and Nektar Therapeutics (NKTR).
Hotels, Resorts, & Cruise Lines
03. Look who else is jumping ship from Carnival Cruise Lines: senior management
Admittedly, we have never liked Carnival Cruise Lines (CCL $19). With great cruise lines to choose from like Royal Caribbean (RCL) and Norwegian Cruise Line Holdings (NCLH), why would investors choose the K-Mart (simply our opinion) of operators? Even before the pandemic, the charts were reflecting our negative view of the company. Now, with CCL shares so cheap, wouldn't it be a great time for management to step up and buy shares in an effort to reaffirm their post-pandemic comeback plans? Apparently not. In the middle of January, CEO Arnold Donald sold 62,639 shares of his company at $21.12 per share, netting him a cool $1.3 million. On the same day, CFO David Bernstein shed 49,000 shares for a total of $1 million, and Arnaldo Perez, the company's general counsel, sold 14,215 shares for $300,000. No notable insider buying has taken place since the start of the year. When your CEO, CFO, and general counsel jump ship (or at least head for the nearest dinghy), it is hard to get too excited about the company's great comeback plan.
We use insider buying and selling transactions as one metric to gauge where a company is headed, and how much confidence management has in its own strategic plans. While we use Simply Wall Street to locate this information, investors can find it on any number of sites free of charge.
Market Risk Management
02. GameStop brouhaha helps drag the markets down for the week
There are so many moving parts with respect to the GameStop (GME $325) story, each one fascinating in its own right, that we need to focus on the issue in bite-sized pieces. The latest turn of events has to do with trading app Robinhood tapping into its $1 billion lifeline and putting its IPO on hold. In an effort to maximize potential revenue, especially since the firm's customers trade fee and commission free, Robinhood cut out the intermediary, acting as custodian for accountholder funds. Considering the massive amount of losses that could potentially pile up in trading the types of options offered on the platform, and because of recent volatility in the likes of GME, the Depository Trust & Clearing Corp (DTCC) and other clearinghouses raised their capital requirements, forcing Robinhood to scramble for the additional funding. A frustrated Vlad Tenev, CEO and founder of the platform, explained that compliance with the firm's financial obligations was not open for negotiation, leading to the decision to limit trading on fifty stocks (as of Friday afternoon). This angered everyone, from the Reddit army responsible for going after the short sellers to the likes of AOC and Ted Cruz on Capitol Hill—the unlikeliest of allies on any issue. We actually feel kind of bad for Robinhood, which quickly turned from hero to villain. As for the GameStop trading—the irrationality that drove a stock worth about $10 up to $483 in a matter of a few weeks, it helped the market turn negative for the week, the month, and (hence) the year.
Our biggest fear is not spillover into the broader markets, it is how the ham-handed government will decide to regulate the actors, which really means regulating the rest of us innocent bystanders. In the next issue of The Penn Wealth Report we will take an in-depth look at how the GameStop story began, and where it will almost certainly end.
Under the Radar Investment
01. Under the Radar: Air Water Inc
Air Water Inc (AWTRF $15) is a Japanese-based mid-cap ($3.3 billion) specialty chemicals company founded in 1929. The firm manufactures and sells a variety of chemical-based products and operates in five segments: industrial gas, chemicals, medical gases, and agricultural/food products. This under-the-radar gem has a tiny five-year beta of 0.14, a P/E ratio of 12, and a 3% dividend yield. In fiscal 2020, the firm generated $7.4 billion in revenues and $268 million in profits. A cash cow in a steady industry, it hasn't had an unprofitable year for as far back as the eye can see.
Answer
Between 01 January 1995 and 10 March 2000, the Nasdaq Composite soared 571%. Between March of 2000 and October of 2002, it had fallen 78%. It wasn't until April of 2015 that the index regained its former high. Fifteen years from peak to peak.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The dot-com bubble...
The proliferation of personal computers in the mid-1990s and the unprecedented growth of the Internet thanks to new web browsers led to millions of Americans having access to stock market trading platforms. Wishing to take advantage of the technology of the "New Economy," they piled into dot-com stocks with no earnings but stratospheric promises. How much did the Nasdaq Composite, which housed these new companies, go up between January of 1995 and March of 2000, and how much did the index fall between March of 2000 and the end of 2002?
Penn Trading Desk:
Opened Infrastructure Play in the Penn Dynamic Growth Strategy
Massive infrastructure spending over the next two years is now all but guaranteed. Fortuitously, we found an investment that should not only take advantage of this condition, but also contains a number of our best small- and mid-cap industrial ideas—one of our overweight sectors for the year ahead. See the new position in our ETF portfolio, the Penn Dynamic Growth Strategy.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Biotechnology
10. One disappointing clinical trial highlights the risks of biotech investing
Going into the new year, Serepta Therapeutics (SRPT $87) was a $14 billion biotech darling trading around $180 per share. With a pipeline of 40 or so therapies in various stages of development, the company is a holding in a number of top biotech funds. Then came disappointing—not disastrous—clinical trial data for SRP-9001, an experimental gene therapy for Duchenne muscular dystrophy (DMD), a genetic disorder that progressively weakens the muscles of children—generally boys, with symptoms usually appearing before age five. One might expect a small pullback in the share price from the news; instead, SRPT shares plunged over 50% in one session. It should be noted that Sarepta markets and sells two other DMD treatments which are unaffected by the SRP-9001 trial, and remains the only company with approved treatments for certain DMD patients. One noted biotech analyst lowered his price target for SRPT shares from $200 to $143, but maintained his Outperform rating on the company. Another investment firm we track places a fair value of $357 on the shares. The company, which saw a meteoric rise in sales from $5 million in 2016 to $500 million TTM, has yet to turn a quarterly profit. While a lack of income is not uncommon for early-stage biotechs, this case does point to the need for investors to perform their own fundamental research rather than relying on the number of stars in a stock report or an analyst's lofty price targets.
One of the many screeners we use is designed to highlight stocks with certain characteristics which have sudden drops in share price. This has been a great contrarian tool for identifying sound companies at undervalued prices. A big price drop, however, must be accompanied by a number of positive attributes which portray a good buying opportunity. Those attributes are not in place with Sarepta, at least based on the metrics in our screener. If an investor does not wish to perform the research, the best way to take advantage of a promising industry is through a thematic or industry-specific ETF. For biotechs, we use the SPDR S&P Biotech ETF (XBI $147), which is one of the 21 holdings in the Penn Dynamic Growth Strategy.
Risk Management
09. Shades of '99: An Elon Musk tweet about one company leads to a 6,450% gain in another
On the 6th of January, Signal Advance (SIGL $39) was a $6 million micro-cap consulting firm for emerging technologies. Putting its size in perspective, it would need to grow by about 50 times to be considered a small-cap. The company has never turned a profit, and there is nothing to indicate that it ever will. An investor would have to have a screw loose to place even the smallest amount of money in SIGL shares. And then came Elon Musk’s tweet. The tweet was succinct: “Use Signal.” Musk was talking about a cross-platform encrypted messaging service he uses. Unfortunately, a certain group of gamers decided that Musk was talking about Signal Advance, and they began gobbling up SIGL shares on their Robinhood or other trading apps, driving the price from $0.60 to $38.70 per share in the matter of two trading days. Signal, the app company, is a privately-held entity. Not one modicum of rational thought or the most basic of research, just jump in like Pac Man gobbling up ghosts. It must be nice having money to throw into the abyss.
The reckoning is coming, and the laziest of investors will pay the biggest price. Back in 1999, we remember getting calls about a tech company named InfoSpace (INSP at the time). The company is still around, though now under the name Blucora (BCOR). It would be an enlightening exercise to check out a long-term chart of those shares.
Semiconductors
08. Intel hires a wonkish tech guy as the company's new CEO...and the move was a brilliant one
For at least the past year we have been hearing about Intel's (INTC $59) imminent demise, and for at least the past year we have poked holes in that narrative. In fact, we have said that Intel is one of the unloved, undervalued darlings ready to take off in 2021. In the most recent move supporting our premise (besides the impressive jump in the share price year-to-date), the company has announced that CEO Bob Swan would be replaced next month by wonkish tech veteran Pat Gelsinger. Gelsinger, considered a brilliant semiconductor engineer, is currently the CEO of VMware (VMW $133), and the perfect fit for Intel going forward. Somewhat ironically, Gelsinger left Intel eleven years ago when it became clear that he would not be tapped for the lead role at the company; Brian Krzanich ultimately got that spot. When Bob Swan replaced Krzanich in 2019, pundits were worried. Swan was a financials guy, not the tech guru the company needed to pull itself out of a nosedive. But analysts are singing a different tune this time, with some even comparing Gelsinger's return to Intel with Steve Jobs' return to Apple. That comparison comes with some stratospheric expectations, but we believe the move will at least be comparable to Microsoft's hiring of Satya Nadella in 2014; and that would be good enough for us.
Not everyone is convinced that this move can turn the giant battleship around, especially with the likes of NVIDIA (NVDA) and Advanced Micro Devices (AMD) snatching up market share. We point to the difference in multiples, however (INTC's 11 vs NVDA's 88 and AMD's 123), and remain faithful to the notion that Intel will gain the most ground (among these three) in 2021.
Automotive
07. After a century of operations in the country, Ford will close its Brazil plants, taking $4.1 billion in charges
There are a lot of moving parts at Ford right now, but the jury is still out on whether those machinations will create something bold, new, and profitable, or simply offer up new opportunities for massive breakdowns. The latest twist in the company's $11 billion turnaround effort, put in motion by former (and lackluster) CEO Jim Hackett, is the closure of its three assembly line plants in Brazil—ending a century of operations in the country. The move earned some rather acrimonious comments from Brazilian President Jair Bolsonaro—whom we have a lot of respect for—but the 5,000 unionized workers at the three plants have been turning out a paltry number of new vehicles per year, with the company netting a loss of $700 million in South America in 2019, and nearly $400 million through the first three quarters of 2020. The company will take a write-down of $4.1 billion related to the closures, mostly to give the workers a severance package. While we don't know what that will look like, the company offered workers at its shuttered plant in Russia the equivalent of one-year's salary, though it is unclear whether or not the Brazilian workers' union will accept the terms. Ford claims it is ready to embrace the future of electric and autonomous vehicles, but that is what we were told when Hackett, who headed up the firm's Smart Mobility unit, took the top spot in 2017. What a disappointment his tenure turned out to be. Jim Farley took over for Hackett this past October, but readily embraced his predecessor's turnaround plan. We're not sure what will be different with the automaker under new management.
Pardon us if we don't buy what Ford management is trying to sell us; we have been here before with this company, and have heard the same tired lines. We used to at least get a big fat dividend yield for buying shares in the company, but those were suspended last March.
IT Software & Services
06. Palantir spikes on news of its partnership with PG&E to help manage California's electric grid
We bought data mining firm Palantir (PLTR $27) on IPO day as a long-term investment, not a short-term trade. To the chagrin of the short-sellers and naysayers, that investment continues to grow. One of the knocks we have heard leveled at the company is that they rely too heavily on too few major clients for a bulk of their revenues. Lose any of these government agencies or corporate clients, the story goes, and the company is in dire straits. We see just the opposite happening: Palantir will continue to widen out its customer base, attracting new companies across a wide array of industries and market caps with its incredibly powerful, outcome-driven software platform; a platform which sifts through enormous amounts of raw data and produces actionable information. Case in point, the Denver-based firm (they moved out of California late last year) just inked a deal with regulated California utilities provider PG&E (PCG $12), the company at the epicenter of the fire-induced outages plaguing the state over the past few years. The goal is straightforward: enhance the safety and reliability of California's power grid. Palantir's Foundry software platform will allow managers at the utility, which provides power to 5.3 million California households, the ability to view and navigate a real-time visual of the power grid, enabling them to act on a moment's notice. Fires sparked by PG&E's power lines have led to payouts for damages in excess of $25 billion over the past four years. Think PG&E didn't do its due diligence before hiring Palantir?
There are a lot of tech companies with valuations in the stratosphere; and there are a lot of tech companies which will come crashing back to earth this year. When the tech correction hits, PLTR shares will probably get caught in the crossfire, but we would probably view that as a great opportunity to add to our holding.
Aerospace & Defense
05. Just as the 737-MAX flies again, Boeing must contend with its trouble-laden space business
If it weren't for SpaceX's remarkable recent accomplishments, Boeing (BA $211) might have been able to quietly get away with its problem-plagued Space Launch System (SLS). Alas, not long after the failed test flight of its unmanned Starliner capsule, SpaceX had its own successful manned flight, with the Crew Dragon transporting astronauts into space from American soil for the first time since the final Space Shuttle launch in 2011. This past weekend, Boeing had a chance to redeem itself just a bit with the test firing of the engines on the SLS's core stage. The powerful engines were to remain ignited for eight minutes; instead, they shut down shortly after one minute. It's too early to tell what caused the malfunction, and it could certainly be a simple component failure, but for a program that is already far behind schedule and billions of dollars over budget, it is yet another black eye. Assuming the test had been successful, the core stage would have been prepped for delivery to the Kennedy Space Center for final assembly with the Lockheed Martin (LMT $342) Orion spacecraft, followed by another test flight to make up for the failed, December 2019 mission. Instead, Boeing faces more delays and more costly test firings.
In normal times, we would say that Boeing is a huge bargain at $211 per share, down from its March, 2019 high of $441 per share. Instead, the company seems fairly valued right where the shares sit. Investors can't even collect dividends while the company figures out its future—payouts were halted "until further notice" in the middle of last year. The investment is about as exciting as the Boeing management team is dynamic.
Pharmaceuticals
04. Lackluster Merck shuts down its Covid-19 vaccine effort
We are bullish on the Health Care sector in 2021, but we remain bearish on one particular drug giant: Merck (MRK $80). CEO Ken Frazier seems to be—in our opinion—a lackluster leader simply going along for the ride. The latest piece of evidence supporting our bearish stance came on Monday morning, when the $200 billion drug manufacturer announced it would be shutting down its Covid-19 vaccine effort due to poor trial results. The company said it will retool its vaccine manufacturing facilities to produce antiviral therapies for patients suffering from the disease, one of which could be available for use in the middle of the year—about the time the vaccines should be kicking in.
We look at Merck's drug pipeline and see a dearth of therapies in late-stage trials. While most analysts see MRK shares hitting $100 within the next twelve months, we see more growth opportunities in our Penn Global Leaders Club holdings: Pfizer (PFE), GlaxoSmithKline (GSK), and Bristol-Myers Squibb (BMY). We also hold a number of higher-risk biotechs in our Penn New Frontier Fund, to include Biomarin (BMRN), Vertex (VRTX), and Nektar Therapeutics (NKTR).
Hotels, Resorts, & Cruise Lines
03. Look who else is jumping ship from Carnival Cruise Lines: senior management
Admittedly, we have never liked Carnival Cruise Lines (CCL $19). With great cruise lines to choose from like Royal Caribbean (RCL) and Norwegian Cruise Line Holdings (NCLH), why would investors choose the K-Mart (simply our opinion) of operators? Even before the pandemic, the charts were reflecting our negative view of the company. Now, with CCL shares so cheap, wouldn't it be a great time for management to step up and buy shares in an effort to reaffirm their post-pandemic comeback plans? Apparently not. In the middle of January, CEO Arnold Donald sold 62,639 shares of his company at $21.12 per share, netting him a cool $1.3 million. On the same day, CFO David Bernstein shed 49,000 shares for a total of $1 million, and Arnaldo Perez, the company's general counsel, sold 14,215 shares for $300,000. No notable insider buying has taken place since the start of the year. When your CEO, CFO, and general counsel jump ship (or at least head for the nearest dinghy), it is hard to get too excited about the company's great comeback plan.
We use insider buying and selling transactions as one metric to gauge where a company is headed, and how much confidence management has in its own strategic plans. While we use Simply Wall Street to locate this information, investors can find it on any number of sites free of charge.
Market Risk Management
02. GameStop brouhaha helps drag the markets down for the week
There are so many moving parts with respect to the GameStop (GME $325) story, each one fascinating in its own right, that we need to focus on the issue in bite-sized pieces. The latest turn of events has to do with trading app Robinhood tapping into its $1 billion lifeline and putting its IPO on hold. In an effort to maximize potential revenue, especially since the firm's customers trade fee and commission free, Robinhood cut out the intermediary, acting as custodian for accountholder funds. Considering the massive amount of losses that could potentially pile up in trading the types of options offered on the platform, and because of recent volatility in the likes of GME, the Depository Trust & Clearing Corp (DTCC) and other clearinghouses raised their capital requirements, forcing Robinhood to scramble for the additional funding. A frustrated Vlad Tenev, CEO and founder of the platform, explained that compliance with the firm's financial obligations was not open for negotiation, leading to the decision to limit trading on fifty stocks (as of Friday afternoon). This angered everyone, from the Reddit army responsible for going after the short sellers to the likes of AOC and Ted Cruz on Capitol Hill—the unlikeliest of allies on any issue. We actually feel kind of bad for Robinhood, which quickly turned from hero to villain. As for the GameStop trading—the irrationality that drove a stock worth about $10 up to $483 in a matter of a few weeks, it helped the market turn negative for the week, the month, and (hence) the year.
Our biggest fear is not spillover into the broader markets, it is how the ham-handed government will decide to regulate the actors, which really means regulating the rest of us innocent bystanders. In the next issue of The Penn Wealth Report we will take an in-depth look at how the GameStop story began, and where it will almost certainly end.
Under the Radar Investment
01. Under the Radar: Air Water Inc
Air Water Inc (AWTRF $15) is a Japanese-based mid-cap ($3.3 billion) specialty chemicals company founded in 1929. The firm manufactures and sells a variety of chemical-based products and operates in five segments: industrial gas, chemicals, medical gases, and agricultural/food products. This under-the-radar gem has a tiny five-year beta of 0.14, a P/E ratio of 12, and a 3% dividend yield. In fiscal 2020, the firm generated $7.4 billion in revenues and $268 million in profits. A cash cow in a steady industry, it hasn't had an unprofitable year for as far back as the eye can see.
Answer
Between 01 January 1995 and 10 March 2000, the Nasdaq Composite soared 571%. Between March of 2000 and October of 2002, it had fallen 78%. It wasn't until April of 2015 that the index regained its former high. Fifteen years from peak to peak.
Headlines for the Week of 03 Jan—09 Jan 2021
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The Economies of Scale...
Tesla, which was formed in 2003 as Tesla Motors, now has a market cap of $835 billion. Is that larger than the combined market caps of General Motors, Ford, and Fiat Chrysler?
Penn Trading Desk:
Simon completes Taubman deal, proceeds flow to cash
Simon Property Group's deal to buy Taubman Centers closes, TCO owners paid $34 per share in cash. See story below.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Aerospace & Defense
10. Two Penn Members Merging: Lockheed Martin will Buy Aerojet Rocketdyne for $4.4 billion
We purchased mid-cap rocket engine maker Aerojet Rocketdyne (AJRD $53) in the Penn New Frontier Fund as a pure play on the burgeoning private space movement. We own aerospace and defense giant Lockheed Martin (LMT $355) in the Penn Global Leaders Club due to its dominance in that industry—and our negative opinion of Boeing's (BA $219) hapless management team. In a move that illustrates the savvy of Lockheed's own leadership, that company announced it will acquire Aerojet for the equivalent of $56 per share, or $4.4 billion. Just over one-third of Aerojet's revenue comes from Lockheed, meaning the $100 billion Maryland-based firm will now own a key supplier. As a major defense supplier to the United States government, one cutting-edge arena that certainly hastened the purchase was hypersonic technology. With Putin bragging about Russia's new generation of hypersonic weapons and China making similar claims, it is imperative for the United States to remain in the lead with respect to these weapon systems. Hypersonic weapons can travel five times the speed of sound, and Aerojet is the world leader in the engine technology which makes these speeds possible. The all-cash deal should close in the first quarter of 2021.
While we don't like losing a pure-play space investment, Lockheed looks even more undervalued after announcement of the deal. With a 15 PE ratio, solid financials, and a growing revenue stream, investors seem to be ignoring a very compelling growth story.
Media & Entertainment
09. "Wonder Woman 1984" had an abysmal opening weekend, but all the news was not bad
Three years ago, the first new installment of the "Wonder Woman" franchise brought in over $400 million domestically, with one-quarter of that amount coming from its opening weekend. Add another $400 million in international ticket sales, and one could proclaim the $150 million film a rousing financial success. Based on those metrics, the second installment's $16.7 US draw in its opening weekend does not portend good things ahead. True, another $36 million was pulled in from around the world, but odds are strong that the film—with its $200 million budget—will struggle to become cash flow positive. But all of the news is not bad. The pandemic has forced movie studios to get creative with distribution, which is exactly what AT&T's (T $29) Warner Bros. Pictures did with this film. Expecting light theater attendance from a germ-wary public, the studio also debuted the movie on Christmas Day through its HBO Max streaming platform. Viewership was record-shattering. Granted, subscribers did not have to pay an extra fee to watch the flick, but the move thrilled current members and led to increased December subs—there were over 550,000 downloads of the HBO app over the weekend. The tactic worked so well that Warner has already decided to rapidly develop the third "Wonder Woman" installment. Vaccine or not, any guess as to whether or not that one will be simultaneously streamed as well?
Despite its fat dividend yield, AT&T has certainly been a disappointment in the Penn Strategic Income Portfolio. However, we remain bullish on its filmmaking and distribution channels—to include HBO Max. Unfortunately, our bullishness does not extend to the big movie theater chains, such as AMC Entertainment (AMC $2) and Cinemark Holdings (CNK $17). To be sure, home-bound Americans will rush back to the theaters once vaccines are readily available, but these cash-strapped chains will find themselves even more beholden to the parent companies of the production studios who are betting a lot on their competing streaming services.
Retail REITs
08. Our Taubman Centers investment pays off as Simon Property Group finalizes its cash acquisition
Back on the 10th of June we wrote of Simon Property Group's (SPG $83) termination of a deal to buy much smaller competitor Taubman Centers (TCO $43). The rationale they gave in a subsequent lawsuit was ludicrous: Taubman hadn't taken appropriate steps to keep business humming along during the pandemic, giving them (Simon) the right to walk away from the deal. The silly argument might have carried a bit more weight had Simon's own malls not been closed over the timeframe in question. Of course, the real issue was Taubman's understandable drop in market cap due to the global health crisis. On the day that Simon balked, Taubman fell to an intraday low of $34.75 and we pounced, buying shares of the battered, ultra-high-end mall owner. Now, six months later, the deal has finally been inked: Simon Property Group will pay Taubman shareholders $43 per share in cash to take an 80% stake in the firm—the Taubman family will retain a 20% minority stake. Not a bad return for a six-month investment.
While we certainly expected Simon to ultimately acquire Taubman, we were prepared to own the small- to mid-cap REIT regardless. We knew its luxury retail properties, such as the Country Club Plaza in Kansas City, would come roaring back to life in 2021. As for Simon Property Group, we wouldn't touch the shares.
Multiline Retail
07. The JC Penney CEO carousel continues as the firm begins search for its sixth leader in the span of a decade
To keep one of their major anchor stores from shutting down, mall owners Simon Property Group (SPG $86) and Brookfield Property Partners agreed to rescue JC Penney (OTC: JCPNQ $0.15) from bankruptcy in an $800 million deal—$300 million in cash and $500 million in debt assumption. While this may have been comforting news for most of the 80,000 or so remaining employees of the beleaguered retailer, one particular employee is probably not too happy: the new owners just fired CEO Jill Soltau. Sadly, the news doesn't mean much for a company seeking its sixth leader in the span of a decade. Soltau, the former head of Jo-Ann Fabrics, probably had the best shot of any of the firm's recent leaders to bring about positive change; at least until the pandemic forced the company to declare bankruptcy this past May. Now, with Simon's chief investment officer, Stanley Shashoua, temporarily in charge, the new owners begin the search for someone who can bring yet another new vision to the 119-year-old retailer. The right person is out there, we just have no faith in Simon to find that individual. Maybe they can woo the hapless Ron Johnson back.
We are rooting for the retailer, which now has a market cap of just $48 million, and we do believe that a creative leader could still turn the ship around. Even with the shares sitting at fifteen cents on the OTC exchange, however, we are not willing to place money on that bet.
Automotive
06. Tesla misses gargantuan 2020 delivery goal—by 450 vehicles
It was an insanely-high goal, and the usual suspects scoffed at Elon Musk for even throwing the figure out there. Tesla (TSLA $730) projected it would deliver half-a-million electric vehicles in 2020. At the time of the forecast, the company was producing around 100,000 vehicles per year. As the naysayers predicted, the goal was not reached: just 499,550 vehicles were delivered. Not surprisingly, some pundits actually pointed out the miss. The less than one-tenth of one percent miss. The ramp-up in production is beyond impressive, and it points to one of the reasons why Elon Musk is now the second-richest person in the world, adding roughly $150 billion of wealth to his net worth last year. Analysts are scrambling to raise their 2021 projections for Tesla vehicle deliveries, with the average now calling for 750,000 units to roll off of the assembly lines. Major new plants in Austin, Brandenburg, and Shanghai should make that happen. (Update: With a net worth of $188 billion as of Thursday, Musk has surpassed Jeff Bezos as the world's richest person.)
For any investor wishing to get in on the relative ground floor of a Musk entity, look for SpaceX to go public at some point this year. Hopefully the "throw money at anything cool" crowd will not drive the price up to astronomical levels on IPO day, as we plan to buy.
Sovereign Debt & Global Fixed Income
05. Danish banks offering home buyers a mortgage rate that is hard to pass up: 0.0%
From the country that first introduced the novel concept of negative interest rates comes a new gimmick: the zero percent mortgage loan. Beginning this week, customers of Nordea Bank can get 20-year home loans at 0.0%, and other banks in Denmark have signaled their willingness to follow suit. The country has a pass-through system in which mortgages are directly correlated with the bonds covering the loans. Denmark began issuing 20-year government bonds with a zero percent interest rate a few years ago; hence, the new mortgage loan creatures. For Danish borrowers, this may seem like a dream condition, but it is a symptom of a much bigger problem that few in Europe are willing to grapple with—a mountain of government debt which has become completely unmanageable.
While the focus here is on Europe, the situation in the US is not much different. The dirty truth is this: Governments around the world have created so much debt that the central banks cannot afford to raise interest rates—they can barely pay the principal on their aggregate debt load, let alone any servicing costs. This problem will not simply go away, and when it ultimately comes to a head, the shock waves will be massive throughout the economic, fiscal, and political systems.
eCommerce
04. Amazon grows its fleet with purchase of eleven 767-class aircraft
Business is good for $1.6 trillion Internet retail firm Amazon (AMZN $3,166). So good, in fact, that the company is doing something it hasn't done before: buying cargo aircraft. While the firm has a fleet of leased jets, the purchase of eleven Boeing 767-300s from Delta (DAL) and WestJet Airlines gives an indication of Amazon's booming business, and a further indication that it will continue to reduce its reliance on United Parcel Service (UPS $161) for deliveries in favor of its own integrated fleet. Recall that back in 2019 FedEx (FDX $251) refused to renew its contract with Amazon due to draconian demands and thinning margins. The company's delivery operation now includes tens of thousands of cargo vans, and management has expressed a desire to control 200 aircraft in the coming years. By comparison, UPS operates roughly 500 aircraft, and FedEx roughly 700.
Remember when so many industry analysts were poking fun at an investment in Amazon due to the company's lack of profit? That wasn't very long ago. Granted, shares still hold a rich multiple of 95, but we believe that is justified. AMZN is one of the forty holdings in the Penn Global Leaders Club.
Semiconductors & Equipment
03. Should we sell our rocketing Qualcomm now that one of our favorite CEOs is abruptly stepping down?
Fundamental analysis, as opposed to technical analysis, is at the heart of selecting the right investments for a portfolio (though chartists would certainly disagree). And fundamental analysis goes beyond the financial statements; a wise investor must consider the strategic vision of a company, and the tactics being employed to achieve that vision. Weak or mediocre management teams have an excuse at the ready for every problem that arises. Strong teams, led by a true leader at the helm, create the right strategy, deploy the right tactics, and embolden the workforce to excel.
American semiconductor giant Qualcomm (QCOM $155), led by the analytically-minded Steve Mollenkopf, certainly fits the template of the latter. While an engineer by training (he holds two electrical engineering degrees), Mollenkopf is one of those rare individuals who is equally at ease with semiconductor schematics and boardroom meetings. He is the quintessential leader. That is why we were shocked to hear that the 52-year-old CEO of the San Diego-based firm would be retiring this year. He will be replaced this coming June by the company's president, Cristiano Amon, who also hails from an engineering background.
The challenges that Mollenkopf faced in his tenure were massive, from a hostile takeover bid by Broadcom to a licensing fight with Apple to regulatory scrutiny from numerous countries. He handled all of them masterfully, but how will Amon face the similar challenges which are sure to arise in this cutthroat industry? The 50-year-old has been with Qualcomm most of his career and has worked directly under Mollenkopf for the past several years, so he certainly has his bona fides in place. Only time will tell how adept he will be at navigating through crises, but the company is on the right course to take full advantage of the coming 5G revolution.
Qualcomm collects royalties on the majority of 3G, 4G, and 5G handsets sold, holding the essential patents for the components used in these networks. All major handset OEMs are under license, with a total of 110 5G deals on the books.
Our Qualcomm holding, which is in the Penn New Frontier Fund, is up triple digits from its purchase, and we see plenty of growth ahead. That being said, we are putting the company on our watchlist simply due to the change in leadership.
Market Pulse
02. Despite the disconcerting events of the week, the indexes rally to new highs
The image was so mind-blowing that I had to take a screenshot. The picture behind the chyron was that of the capitol building being overrun by protestors. The text on the screen read: Breaking News: House, Senate Evacuated as US Capitol Breached . In the lower right of the screen were the green numbers: DOW +465.40, % Change +1.53%. My mind raced back to one week in December of 2018 when the Dow dropped 1,884 points in four sessions due to seemingly benign interest rate comments by Fed Chair Jerome Powell. And now, the capitol is being stormed and the Dow is rallying. By the time the trading week was up, the Dow, the S&P 500, and the NASDAQ had all rallied approximately 2%. Not a bad start to 2021. Perhaps it was a rosy jobs report? Nope. There were 140,000 jobs lost in December versus an expected 50,000 gain. It was the first drop since April during the heart of the pandemic. While investors are certainly hopeful on the vaccine front, Thursday brought the deadliest day since the pandemic began, with 4,000 American lives lost. On the political front, we were told that divided government would be great for the markets, as nothing radical would take place in Congress. Instead, two special elections in Georgia brought about a blue wave. While we are still of the mindset that economies around the world will come roaring back this year as the vaccines begin to quell the deadly virus, the best word we can use to describe this week in the markets is "odd." And that is not an adjective which instills much confidence.
Under the Radar Investment
01. Under the Radar: The Kroger Co.
It may come as a surprise to many, but The Kroger Co. (KR $32) is the nation's largest grocery store chain based on sales ($122B in 2020), with the company operating nearly 3,000 supermarkets throughout the country. And CEO Rodney McMullen has kept his 138-year-old firm looking fresh, with online ordering and curbside pick up at 72% of the stores, and home delivery options for 97% of the customer base. Kroger Ship, which launched last year, marks a major new push into eCommerce. The program provides online customers access to over 50,000 items in categories such as organic foods, international foods, housewares, and toys. Two new highly-automated fulfillment centers are slated to open this spring, which should further reduce the company's cost of fulfilling online orders. With a tiny multiple of 8.5 and a pullback in the share price, this consumer defensive value play truly appears to be an under-the-radar gem ripe for the picking.
Answer
Slightly. The aggregate market cap of General Motors, Ford, and Fiat Chrysler as of 08 Jan 2021 is $133 billion, or less than 16% the market cap of Tesla.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The Economies of Scale...
Tesla, which was formed in 2003 as Tesla Motors, now has a market cap of $835 billion. Is that larger than the combined market caps of General Motors, Ford, and Fiat Chrysler?
Penn Trading Desk:
Simon completes Taubman deal, proceeds flow to cash
Simon Property Group's deal to buy Taubman Centers closes, TCO owners paid $34 per share in cash. See story below.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Aerospace & Defense
10. Two Penn Members Merging: Lockheed Martin will Buy Aerojet Rocketdyne for $4.4 billion
We purchased mid-cap rocket engine maker Aerojet Rocketdyne (AJRD $53) in the Penn New Frontier Fund as a pure play on the burgeoning private space movement. We own aerospace and defense giant Lockheed Martin (LMT $355) in the Penn Global Leaders Club due to its dominance in that industry—and our negative opinion of Boeing's (BA $219) hapless management team. In a move that illustrates the savvy of Lockheed's own leadership, that company announced it will acquire Aerojet for the equivalent of $56 per share, or $4.4 billion. Just over one-third of Aerojet's revenue comes from Lockheed, meaning the $100 billion Maryland-based firm will now own a key supplier. As a major defense supplier to the United States government, one cutting-edge arena that certainly hastened the purchase was hypersonic technology. With Putin bragging about Russia's new generation of hypersonic weapons and China making similar claims, it is imperative for the United States to remain in the lead with respect to these weapon systems. Hypersonic weapons can travel five times the speed of sound, and Aerojet is the world leader in the engine technology which makes these speeds possible. The all-cash deal should close in the first quarter of 2021.
While we don't like losing a pure-play space investment, Lockheed looks even more undervalued after announcement of the deal. With a 15 PE ratio, solid financials, and a growing revenue stream, investors seem to be ignoring a very compelling growth story.
Media & Entertainment
09. "Wonder Woman 1984" had an abysmal opening weekend, but all the news was not bad
Three years ago, the first new installment of the "Wonder Woman" franchise brought in over $400 million domestically, with one-quarter of that amount coming from its opening weekend. Add another $400 million in international ticket sales, and one could proclaim the $150 million film a rousing financial success. Based on those metrics, the second installment's $16.7 US draw in its opening weekend does not portend good things ahead. True, another $36 million was pulled in from around the world, but odds are strong that the film—with its $200 million budget—will struggle to become cash flow positive. But all of the news is not bad. The pandemic has forced movie studios to get creative with distribution, which is exactly what AT&T's (T $29) Warner Bros. Pictures did with this film. Expecting light theater attendance from a germ-wary public, the studio also debuted the movie on Christmas Day through its HBO Max streaming platform. Viewership was record-shattering. Granted, subscribers did not have to pay an extra fee to watch the flick, but the move thrilled current members and led to increased December subs—there were over 550,000 downloads of the HBO app over the weekend. The tactic worked so well that Warner has already decided to rapidly develop the third "Wonder Woman" installment. Vaccine or not, any guess as to whether or not that one will be simultaneously streamed as well?
Despite its fat dividend yield, AT&T has certainly been a disappointment in the Penn Strategic Income Portfolio. However, we remain bullish on its filmmaking and distribution channels—to include HBO Max. Unfortunately, our bullishness does not extend to the big movie theater chains, such as AMC Entertainment (AMC $2) and Cinemark Holdings (CNK $17). To be sure, home-bound Americans will rush back to the theaters once vaccines are readily available, but these cash-strapped chains will find themselves even more beholden to the parent companies of the production studios who are betting a lot on their competing streaming services.
Retail REITs
08. Our Taubman Centers investment pays off as Simon Property Group finalizes its cash acquisition
Back on the 10th of June we wrote of Simon Property Group's (SPG $83) termination of a deal to buy much smaller competitor Taubman Centers (TCO $43). The rationale they gave in a subsequent lawsuit was ludicrous: Taubman hadn't taken appropriate steps to keep business humming along during the pandemic, giving them (Simon) the right to walk away from the deal. The silly argument might have carried a bit more weight had Simon's own malls not been closed over the timeframe in question. Of course, the real issue was Taubman's understandable drop in market cap due to the global health crisis. On the day that Simon balked, Taubman fell to an intraday low of $34.75 and we pounced, buying shares of the battered, ultra-high-end mall owner. Now, six months later, the deal has finally been inked: Simon Property Group will pay Taubman shareholders $43 per share in cash to take an 80% stake in the firm—the Taubman family will retain a 20% minority stake. Not a bad return for a six-month investment.
While we certainly expected Simon to ultimately acquire Taubman, we were prepared to own the small- to mid-cap REIT regardless. We knew its luxury retail properties, such as the Country Club Plaza in Kansas City, would come roaring back to life in 2021. As for Simon Property Group, we wouldn't touch the shares.
Multiline Retail
07. The JC Penney CEO carousel continues as the firm begins search for its sixth leader in the span of a decade
To keep one of their major anchor stores from shutting down, mall owners Simon Property Group (SPG $86) and Brookfield Property Partners agreed to rescue JC Penney (OTC: JCPNQ $0.15) from bankruptcy in an $800 million deal—$300 million in cash and $500 million in debt assumption. While this may have been comforting news for most of the 80,000 or so remaining employees of the beleaguered retailer, one particular employee is probably not too happy: the new owners just fired CEO Jill Soltau. Sadly, the news doesn't mean much for a company seeking its sixth leader in the span of a decade. Soltau, the former head of Jo-Ann Fabrics, probably had the best shot of any of the firm's recent leaders to bring about positive change; at least until the pandemic forced the company to declare bankruptcy this past May. Now, with Simon's chief investment officer, Stanley Shashoua, temporarily in charge, the new owners begin the search for someone who can bring yet another new vision to the 119-year-old retailer. The right person is out there, we just have no faith in Simon to find that individual. Maybe they can woo the hapless Ron Johnson back.
We are rooting for the retailer, which now has a market cap of just $48 million, and we do believe that a creative leader could still turn the ship around. Even with the shares sitting at fifteen cents on the OTC exchange, however, we are not willing to place money on that bet.
Automotive
06. Tesla misses gargantuan 2020 delivery goal—by 450 vehicles
It was an insanely-high goal, and the usual suspects scoffed at Elon Musk for even throwing the figure out there. Tesla (TSLA $730) projected it would deliver half-a-million electric vehicles in 2020. At the time of the forecast, the company was producing around 100,000 vehicles per year. As the naysayers predicted, the goal was not reached: just 499,550 vehicles were delivered. Not surprisingly, some pundits actually pointed out the miss. The less than one-tenth of one percent miss. The ramp-up in production is beyond impressive, and it points to one of the reasons why Elon Musk is now the second-richest person in the world, adding roughly $150 billion of wealth to his net worth last year. Analysts are scrambling to raise their 2021 projections for Tesla vehicle deliveries, with the average now calling for 750,000 units to roll off of the assembly lines. Major new plants in Austin, Brandenburg, and Shanghai should make that happen. (Update: With a net worth of $188 billion as of Thursday, Musk has surpassed Jeff Bezos as the world's richest person.)
For any investor wishing to get in on the relative ground floor of a Musk entity, look for SpaceX to go public at some point this year. Hopefully the "throw money at anything cool" crowd will not drive the price up to astronomical levels on IPO day, as we plan to buy.
Sovereign Debt & Global Fixed Income
05. Danish banks offering home buyers a mortgage rate that is hard to pass up: 0.0%
From the country that first introduced the novel concept of negative interest rates comes a new gimmick: the zero percent mortgage loan. Beginning this week, customers of Nordea Bank can get 20-year home loans at 0.0%, and other banks in Denmark have signaled their willingness to follow suit. The country has a pass-through system in which mortgages are directly correlated with the bonds covering the loans. Denmark began issuing 20-year government bonds with a zero percent interest rate a few years ago; hence, the new mortgage loan creatures. For Danish borrowers, this may seem like a dream condition, but it is a symptom of a much bigger problem that few in Europe are willing to grapple with—a mountain of government debt which has become completely unmanageable.
While the focus here is on Europe, the situation in the US is not much different. The dirty truth is this: Governments around the world have created so much debt that the central banks cannot afford to raise interest rates—they can barely pay the principal on their aggregate debt load, let alone any servicing costs. This problem will not simply go away, and when it ultimately comes to a head, the shock waves will be massive throughout the economic, fiscal, and political systems.
eCommerce
04. Amazon grows its fleet with purchase of eleven 767-class aircraft
Business is good for $1.6 trillion Internet retail firm Amazon (AMZN $3,166). So good, in fact, that the company is doing something it hasn't done before: buying cargo aircraft. While the firm has a fleet of leased jets, the purchase of eleven Boeing 767-300s from Delta (DAL) and WestJet Airlines gives an indication of Amazon's booming business, and a further indication that it will continue to reduce its reliance on United Parcel Service (UPS $161) for deliveries in favor of its own integrated fleet. Recall that back in 2019 FedEx (FDX $251) refused to renew its contract with Amazon due to draconian demands and thinning margins. The company's delivery operation now includes tens of thousands of cargo vans, and management has expressed a desire to control 200 aircraft in the coming years. By comparison, UPS operates roughly 500 aircraft, and FedEx roughly 700.
Remember when so many industry analysts were poking fun at an investment in Amazon due to the company's lack of profit? That wasn't very long ago. Granted, shares still hold a rich multiple of 95, but we believe that is justified. AMZN is one of the forty holdings in the Penn Global Leaders Club.
Semiconductors & Equipment
03. Should we sell our rocketing Qualcomm now that one of our favorite CEOs is abruptly stepping down?
Fundamental analysis, as opposed to technical analysis, is at the heart of selecting the right investments for a portfolio (though chartists would certainly disagree). And fundamental analysis goes beyond the financial statements; a wise investor must consider the strategic vision of a company, and the tactics being employed to achieve that vision. Weak or mediocre management teams have an excuse at the ready for every problem that arises. Strong teams, led by a true leader at the helm, create the right strategy, deploy the right tactics, and embolden the workforce to excel.
American semiconductor giant Qualcomm (QCOM $155), led by the analytically-minded Steve Mollenkopf, certainly fits the template of the latter. While an engineer by training (he holds two electrical engineering degrees), Mollenkopf is one of those rare individuals who is equally at ease with semiconductor schematics and boardroom meetings. He is the quintessential leader. That is why we were shocked to hear that the 52-year-old CEO of the San Diego-based firm would be retiring this year. He will be replaced this coming June by the company's president, Cristiano Amon, who also hails from an engineering background.
The challenges that Mollenkopf faced in his tenure were massive, from a hostile takeover bid by Broadcom to a licensing fight with Apple to regulatory scrutiny from numerous countries. He handled all of them masterfully, but how will Amon face the similar challenges which are sure to arise in this cutthroat industry? The 50-year-old has been with Qualcomm most of his career and has worked directly under Mollenkopf for the past several years, so he certainly has his bona fides in place. Only time will tell how adept he will be at navigating through crises, but the company is on the right course to take full advantage of the coming 5G revolution.
Qualcomm collects royalties on the majority of 3G, 4G, and 5G handsets sold, holding the essential patents for the components used in these networks. All major handset OEMs are under license, with a total of 110 5G deals on the books.
Our Qualcomm holding, which is in the Penn New Frontier Fund, is up triple digits from its purchase, and we see plenty of growth ahead. That being said, we are putting the company on our watchlist simply due to the change in leadership.
Market Pulse
02. Despite the disconcerting events of the week, the indexes rally to new highs
The image was so mind-blowing that I had to take a screenshot. The picture behind the chyron was that of the capitol building being overrun by protestors. The text on the screen read: Breaking News: House, Senate Evacuated as US Capitol Breached . In the lower right of the screen were the green numbers: DOW +465.40, % Change +1.53%. My mind raced back to one week in December of 2018 when the Dow dropped 1,884 points in four sessions due to seemingly benign interest rate comments by Fed Chair Jerome Powell. And now, the capitol is being stormed and the Dow is rallying. By the time the trading week was up, the Dow, the S&P 500, and the NASDAQ had all rallied approximately 2%. Not a bad start to 2021. Perhaps it was a rosy jobs report? Nope. There were 140,000 jobs lost in December versus an expected 50,000 gain. It was the first drop since April during the heart of the pandemic. While investors are certainly hopeful on the vaccine front, Thursday brought the deadliest day since the pandemic began, with 4,000 American lives lost. On the political front, we were told that divided government would be great for the markets, as nothing radical would take place in Congress. Instead, two special elections in Georgia brought about a blue wave. While we are still of the mindset that economies around the world will come roaring back this year as the vaccines begin to quell the deadly virus, the best word we can use to describe this week in the markets is "odd." And that is not an adjective which instills much confidence.
Under the Radar Investment
01. Under the Radar: The Kroger Co.
It may come as a surprise to many, but The Kroger Co. (KR $32) is the nation's largest grocery store chain based on sales ($122B in 2020), with the company operating nearly 3,000 supermarkets throughout the country. And CEO Rodney McMullen has kept his 138-year-old firm looking fresh, with online ordering and curbside pick up at 72% of the stores, and home delivery options for 97% of the customer base. Kroger Ship, which launched last year, marks a major new push into eCommerce. The program provides online customers access to over 50,000 items in categories such as organic foods, international foods, housewares, and toys. Two new highly-automated fulfillment centers are slated to open this spring, which should further reduce the company's cost of fulfilling online orders. With a tiny multiple of 8.5 and a pullback in the share price, this consumer defensive value play truly appears to be an under-the-radar gem ripe for the picking.
Answer
Slightly. The aggregate market cap of General Motors, Ford, and Fiat Chrysler as of 08 Jan 2021 is $133 billion, or less than 16% the market cap of Tesla.
Headlines for the Week of 06 Dec—12 Dec 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Roots of a historic theater...
Grauman's Chinese Theatre, now a custom-designed IMAX experience, opened to much acclaim on 18 May 1927. It was built following the success of what nearby Hollywood theater with a similar Exotic Revival architecture style?
Penn Trading Desk:
(01 Dec 20) FedEx upgraded at Barclays due to "abundance of growth opportunities"
Shares of Penn Global Leaders Club member FedEx (FDX $287) hit an all-time high of $297.66 on Monday following an upgrade and rosy comments from analyst Brandon Oglenski at Barclays. Oglenski cited "an abundance of growth opportunities" for the firm due to the explosion of e-commerce this year. He raised the firm's rating from equal weight to overweight and moved his target price on FDX shares from $240 to $360.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Global Strategy: Latin America
10. Money is flooding out of Bolivia as socialists regain power
Sadly, a large percentage of Latin Americans seem have a loving adoration of socialism, despite its history of bringing misery to the masses. There is a constant battle raging between economic freedom and leftist tyranny in the region, with the latter often winning the war for the hearts and minds of the people. The latest example comes from Bolivia, where socialist Luis "Lucho" Arce (pron. "ARE say"), a staunch advocate of exiled former socialist president Evo Morales, just won a landslide victory in the presidential race. The nation's poorest citizens may adore Arce, but the country's wealthy are sending a different message. Bolivia's international cash reserves have plunged from $6.4 billion to $5.1 billion since the election, as both citizens and corporations in the country have been converting their bolivianos to US dollars and sending the cash abroad. One of Arce's key planks was the promise to implement a wealth tax on the country's richest citizens. Bolivia has a population of 11.7 million and a per capita GDP of approximately $4,000. For comparison, Bolivia's more "investment friendly" neighbor to the east—Brazil—has a per capita GDP of $10,400. The country's primary exports are natural gas, metals (mainly silver and zinc), and soybean products.
As is well documented in the region, socialists who gain power in Latin America tend to hold onto their position with a firm grip despite any ruling constitution. Evo Morales came to power in January of 2006 and was forced into exile in Argentina only after civil unrest following a disputed election in 2019. If Arce learned anything from his mentor, expect him to be the grand leader of Bolivia for some time to come—despite the exodus of wealth from the country.
Metals & Mining
09. Positive vaccine news and calmer political waters have pushed gold prices down; time to look at adding to our position
We took a hefty position in gold, via the SPDR Gold Shares ETF (GLD $167), back in January of 2019 when the metal was sitting at $1,290 per ounce. After topping out around $2,067 per ounce this summer, prices began falling precipitously when positive Covid vaccine news began flowing in, and the US election was in the rear-view mirror. Scott Wren, now a senior analyst at Wells Fargo, was once our favorite analyst at A.G. Edwards & Sons, and we have tremendous respect for his typically spot-on outlook. When asked about the falling price of gold, he questioned—rhetorically—whether or not central banks around the world would continue to wantonly print money, or if fiscal constraint was suddenly going to supplant massive government spending. The obvious answer to those questions support his thesis that gold will regain its footing and head to $2,150 by the end of next year. He also sees another $100 drop in the price as a good entry point for more investment dollars. Right now, gold is sitting at $1,780 per share.
The recent selloff in gold shows, in our opinion, that investors are playing the short game. The precise conditions that led to gold's rise over the past few years will still be in place post-pandemic. In fact, countries around the world are now about $15 trillion deeper in debt thanks to China and the virus which emanated from the country's shores. We remain very bullish on gold.
Automotive
08. Nikola shares fall 54% after deal with General Motors is scaled back
Anyone who has read our columns on a regular basis knows our personal opinion of EV automaker Nikola (NKLA $17)—that the company is a total sham. Nonetheless, "traders" went flooding in, driving the shares up from $10 in March to $94 just three months later. Research be damned, this was going to be the next Tesla (TSLA $585)! Not quite. We mocked General Motors (GM $45) for even considering taking a stake in the firm; a move that only emboldened neophyte traders. It seems as though GM's Mary Barra has seen the light, as the company has backed out of its plan to take an 11% stake in Nikola and will no longer work with the firm to build the Badger, an EV pickup for consumers. Perhaps to keep a little pride intact, GM did rework the deal to keep a fuel cell partnership in place, but this non-binding agreement will probably wither on the vine. In just five sessions, NKLA shares fell from $37.62 to $17.37—a 54% drop. Oh well, at least it is back on the radar screen for those whose investment strategy consists of buying stocks trading for under $25 per share.
Shades of 1999. Americans are piling into flashy stocks based on headlines, not research. For astute investors, this will create huge opportunities—especially in the boring value companies which don't garner many headlines, but which generate fat annual profits year after year. 2021 will mark the year of the great rotation back into value.
East & Southeast Asia
07. In hopeful sign, Apple is reportedly shifting some production from China to Vietnam
Country Risk: the uncertainty associated with investing in a particular country and the degree to which that uncertainty can lead to losses for stakeholders. This risk can be mitigated by assuring a company is not overly reliant on one particular country, especially those with undemocratic forms of government. This is Economics 101, yet how many management teams flouted this basic lesson because of the glittering jewel they saw in China's 1.3 billion potential consumers? We can't undo the past, but we can hold these companies accountable. In a hopeful sign that the zeitgeist is shifting, Apple (AAPL $123) is reportedly moving iPad production out of China and into Vietnam—a country with a large degree of animosity towards the communist state. More specifically, key Apple supplier Foxconn is shifting the production—both for iPads and some MacBooks—from their Chinese facilities to the Vietnamese factories they began building back in 2007. The company is setting up new assembly lines for both the tablets and the laptops at their plant in Bac Giang, a northeastern province of Vietnam, "at the request of Apple." Other than that admission, both companies are mum on the details.
In yet another hopeful sign, Apple is planning a $1 billion spend to expand its manufacturing presence in the democratic country of India. For its part, Foxconn is looking at building a new set of plants in Mexico. Slowly but surely, companies are waking up to the level of country risk involved with communist China. If the Western world can actually present a united front, the China 2025 plan may be dealt a hefty blow.
Media & Entertainment
06. Theater chains get pummeled after surprise Warner Brothers announcement
AMC Entertainment (AMC $4) was off 20%, as was Cinemark Holdings (CNK $13). Imax (IMAX $14) fared a little bit better, dropping just 7%. After the nightmare of having their theaters closed due to the pandemic, the news from AT&T's (T $29) Warner Brothers unit was quite unwelcome: the filmmaker would release all of its 2021 movies simultaneously on both the big screen and via streaming through WarnerMedia's HBO Max. In other words, zero exclusivity for the big movie chains. The relationship between the movie houses and the film studios was already strained. Back in April we reported on AMC's ban of Comcast's (CMCSA $52) Universal Pictures' films after the latter announced it would also pull the simultaneous release stunt. This "breaking of the theatrical window" is terrible news for an industry already struggling to stay afloat. WarnerMedia CEO Jason Kilar made the rather cocky comment that the theater chains need to "take a breather," adding that the new releases will be pulled from HBO Max after thirty days. His comments only added fuel to the fire.
The movie chains are in somewhat the same position as many shopping malls throughout America. Dealing with decreased foot traffic due to the online shopping renaissance, these malls were forced to reinvent themselves as "experience destinations." The theaters are slowly adopting this philosophy, with AMC experimenting with NFL games on the big screen to attract fans. At $4 per share, AMC may look attractive, but we wouldn't be in a hurry to invest—there is still scant evidence that the darkest days are behind these companies.
Restaurants
05. Already strained, McDonald's just made its relationship with franchisees even worse
McDonald's (MCD $211) was one of those stalwarts we expected to own in the Penn Global Leaders Club for some time to come. That changed when the board of directors fired one of the best—and most loyal—CEOs in the industry. We took our profits and ran. In a sign that things are returning to normal (not a compliment; rather, a reference to the way things were under Don Thompson), the company has been telegraphing warnings to franchisees about hard times ahead. While the parent company does have about $40 million earmarked for aid to restaurants hardest hit by the pandemic (which seems paltry compared to its $5B in TTM net income), it warned that owners may need to look at selling locations or finding financial assistance elsewhere. Management also announced that it would be ending the $300 monthly Happy Meal subsidy which has been around for decades, and that it expects franchisees to start sharing the costs of the firm's tuition program. To be sure, all of these moves could be justified by corporate, but that doesn't change the perception by franchisees that they are getting nickel-and-dimed by the controlling entity. Yet another reason we continue to steer clear of the restaurant.
Jeff Easterbrook knew how to deal with people. Growing up in London, he was a constant customer of the local McDonald's, and his love for the company was evident in the way he treated employees and franchisees. The current management team in place may know numbers, but they sure don't seem to know how to deal with the people on the front line of the restaurant's revenue stream.
Business & Professional Services
04. EMH debunked yet again with laughable spike in Kodak shares
Efficient market hypothesis (EMH): the theory that a stock is always fairly valued based on all the available information at the time, making it impossible to "beat the market" on a consistent basis since share prices only react to new information. What a load of bull. Shares of Eastman Kodak (KODK $13), the lovable yet archaic camera company which was founded in 1888, have fluctuated between $1.50 (23 Mar) and $60 (29 Jul) this year. On Monday, shares spiked 77% in one session, driving them all the way back up to $13.30. What led to this latest unreal jump? Exoneration from the SEC regarding accusations that the company leaked news about a potential $765 million loan by the government to help it—Kodak—begin making active pharmaceutical ingredients (APIs) for drugs—a job the US disgracefully outsourced to China years ago. So, leaked news of a $765 million loan turned a $96 million flounder into a $1.65 billion shark virtually overnight? Yep. Maybe it wasn't just the news that drove "investors" back into the shares; maybe it was the financials. Over the trailing twelve months (TTM), Kodak lost $623 million on $1.06 billion in sales. That seems almost difficult to accomplish. Yet another story reminiscent of the 1999/2000 time period: Throw good money into companies that will show losses as far as the eye can see. Some "investors" don't recall that period, but we do.
There is a true dichotomy in the markets right now. We see a lot of great investment opportunities and a bright horizon for the year ahead. We also see a lot of companies with insane valuations thanks to dumb money chasing quick returns. Even more so than in 1999, many of the people pumping money into these companies couldn't explain what these firms do if their lives depended on it. That is certainly true with respect to Kodak, the camera company turned drug ingredient supplier.
Hotels, Restaurants, & Cruise Lines
03. We had every intention of buying Airbnb on its IPO—and then it priced
Sorry, but we have one more 1999 analogy. Granted, Airbnb (ABNB $139) is no pets.com (remember the hand puppet?), but what happened on the former's IPO day is insane. To be clear, we fully believe in Airbnb's business model, and have no doubt that it will be highly successful going forward—precisely why we expected to buy shares of the firm on day one. So, what happened? The IPO was finally priced at $68 per share. Of note: the CEO said he wanted the IPO price to reflect what he considered to be fair value of the company. When the stock finally began trading, its first price was $146, or 116% above what senior management considered fair value. There is a new breed of investor hitting the markets right now, and facts be damned; if they want a company because it has a cool name (Nikola comes to mind) they will pay any price to own it. How bad is it right now? Many investors complained that they didn't get the IPO price of $68, having no idea that it doesn't work that way. Want another example? There was a flurry of options action in ABB Ltd (ABB), an electrical equipment and parts maker based in Zurich, leading up to the ABNB IPO. It seems as though many "investors" thought they were buying calls on Airbnb. Let the red flags go up. When we were figuring where we might get the shares of the firm on day one, we initially thought $35 to $50 seemed reasonable, though $50 was stretching it. So, a company that was valued at $18 billion this summer now has a market cap of $150 billion. Like we say, insane.
We're bummed that we don't own ABNB, but we expect to pick the shares up when they come crashing back to reality at some point in 2021. And that is not a slam against the company, it is a slam on the knuckleheads who bought in at $146 or higher (shares went up as high as $165 on day one).
Market Pulse
02. Despite the wild IPO ride, markets fall on the week
Based on what happened in the IPO market over the course of five sessions, it might seem surprising that the three major indexes were all down for the week, but DoorDash (DASH $175), Airbnb (ABNB $139), and C3.ai Inc (AI $120) all turned out to be red herrings—shiny objects which distracted investors from the big picture. The markets falling for the week (S&P -0.96%, Dow -0.57%, NASDAQ -0.69%) was actually a healthy respite from the big run-up we've had over the past month. Counter that with the facts-be-damned trading we had in three IPO stocks, and 2021 is shaping up to be a tale of the haves and the have-nots. The haves will be the thoughtful investors looking for value, earnings, and sound business models. The have-nots will be the shiny object crowd: those using their Robinhood app like a video game to gobble up the fun-sounding names. How fitting that Goldman will bring that company public next year. A reckoning is coming, but it will be—thankfully—more discerning than the 2000-2002 variety. This one will hammer the dumb money and provide opportunity for the smart money. Bring on the new year.
2021 will be the year of the great re-build. The global economy will come roaring back with a vengeance, and GDP—both domestically and globally—will surprise to the upside. It will also be the year that tech companies with no earnings and fat valuations come crashing back to reality. Where can the smart money go? Look for opportunities in health care and industrials—boring companies that simply turn a profit year-in and year-out.
Under the Radar Investment
01. Under the Radar: Embotelladora Andina SA
Embotelladora Andina (AKO.B $15) is a Chilean-based Coca-Cola bottler serving the Latin American region. Together with its subsidiaries, the company produces, markets, and distributes Coca-Cola trademark products, to include fruit juices, sports drinks, purified waters, and flavored waters. The firm also sells and distributes beer under the Amstel, Bavaria, Heineken, and Sol brands. On $2.5 billion in sales last year, the company brought in $248 million in profit. AKO.B offers investors a 5.61% dividend yield based on the current share price of $15. Yet another consideration for globally-diversifying a portfolio.
Answer
Grauman's Chinese Theatre was built following the success of the nearby Grauman's Egyptian Theatre, which opened on Hollywood Boulevard in 1922. In May of this year, Netflix purchased that historic property.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Roots of a historic theater...
Grauman's Chinese Theatre, now a custom-designed IMAX experience, opened to much acclaim on 18 May 1927. It was built following the success of what nearby Hollywood theater with a similar Exotic Revival architecture style?
Penn Trading Desk:
(01 Dec 20) FedEx upgraded at Barclays due to "abundance of growth opportunities"
Shares of Penn Global Leaders Club member FedEx (FDX $287) hit an all-time high of $297.66 on Monday following an upgrade and rosy comments from analyst Brandon Oglenski at Barclays. Oglenski cited "an abundance of growth opportunities" for the firm due to the explosion of e-commerce this year. He raised the firm's rating from equal weight to overweight and moved his target price on FDX shares from $240 to $360.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Global Strategy: Latin America
10. Money is flooding out of Bolivia as socialists regain power
Sadly, a large percentage of Latin Americans seem have a loving adoration of socialism, despite its history of bringing misery to the masses. There is a constant battle raging between economic freedom and leftist tyranny in the region, with the latter often winning the war for the hearts and minds of the people. The latest example comes from Bolivia, where socialist Luis "Lucho" Arce (pron. "ARE say"), a staunch advocate of exiled former socialist president Evo Morales, just won a landslide victory in the presidential race. The nation's poorest citizens may adore Arce, but the country's wealthy are sending a different message. Bolivia's international cash reserves have plunged from $6.4 billion to $5.1 billion since the election, as both citizens and corporations in the country have been converting their bolivianos to US dollars and sending the cash abroad. One of Arce's key planks was the promise to implement a wealth tax on the country's richest citizens. Bolivia has a population of 11.7 million and a per capita GDP of approximately $4,000. For comparison, Bolivia's more "investment friendly" neighbor to the east—Brazil—has a per capita GDP of $10,400. The country's primary exports are natural gas, metals (mainly silver and zinc), and soybean products.
As is well documented in the region, socialists who gain power in Latin America tend to hold onto their position with a firm grip despite any ruling constitution. Evo Morales came to power in January of 2006 and was forced into exile in Argentina only after civil unrest following a disputed election in 2019. If Arce learned anything from his mentor, expect him to be the grand leader of Bolivia for some time to come—despite the exodus of wealth from the country.
Metals & Mining
09. Positive vaccine news and calmer political waters have pushed gold prices down; time to look at adding to our position
We took a hefty position in gold, via the SPDR Gold Shares ETF (GLD $167), back in January of 2019 when the metal was sitting at $1,290 per ounce. After topping out around $2,067 per ounce this summer, prices began falling precipitously when positive Covid vaccine news began flowing in, and the US election was in the rear-view mirror. Scott Wren, now a senior analyst at Wells Fargo, was once our favorite analyst at A.G. Edwards & Sons, and we have tremendous respect for his typically spot-on outlook. When asked about the falling price of gold, he questioned—rhetorically—whether or not central banks around the world would continue to wantonly print money, or if fiscal constraint was suddenly going to supplant massive government spending. The obvious answer to those questions support his thesis that gold will regain its footing and head to $2,150 by the end of next year. He also sees another $100 drop in the price as a good entry point for more investment dollars. Right now, gold is sitting at $1,780 per share.
The recent selloff in gold shows, in our opinion, that investors are playing the short game. The precise conditions that led to gold's rise over the past few years will still be in place post-pandemic. In fact, countries around the world are now about $15 trillion deeper in debt thanks to China and the virus which emanated from the country's shores. We remain very bullish on gold.
Automotive
08. Nikola shares fall 54% after deal with General Motors is scaled back
Anyone who has read our columns on a regular basis knows our personal opinion of EV automaker Nikola (NKLA $17)—that the company is a total sham. Nonetheless, "traders" went flooding in, driving the shares up from $10 in March to $94 just three months later. Research be damned, this was going to be the next Tesla (TSLA $585)! Not quite. We mocked General Motors (GM $45) for even considering taking a stake in the firm; a move that only emboldened neophyte traders. It seems as though GM's Mary Barra has seen the light, as the company has backed out of its plan to take an 11% stake in Nikola and will no longer work with the firm to build the Badger, an EV pickup for consumers. Perhaps to keep a little pride intact, GM did rework the deal to keep a fuel cell partnership in place, but this non-binding agreement will probably wither on the vine. In just five sessions, NKLA shares fell from $37.62 to $17.37—a 54% drop. Oh well, at least it is back on the radar screen for those whose investment strategy consists of buying stocks trading for under $25 per share.
Shades of 1999. Americans are piling into flashy stocks based on headlines, not research. For astute investors, this will create huge opportunities—especially in the boring value companies which don't garner many headlines, but which generate fat annual profits year after year. 2021 will mark the year of the great rotation back into value.
East & Southeast Asia
07. In hopeful sign, Apple is reportedly shifting some production from China to Vietnam
Country Risk: the uncertainty associated with investing in a particular country and the degree to which that uncertainty can lead to losses for stakeholders. This risk can be mitigated by assuring a company is not overly reliant on one particular country, especially those with undemocratic forms of government. This is Economics 101, yet how many management teams flouted this basic lesson because of the glittering jewel they saw in China's 1.3 billion potential consumers? We can't undo the past, but we can hold these companies accountable. In a hopeful sign that the zeitgeist is shifting, Apple (AAPL $123) is reportedly moving iPad production out of China and into Vietnam—a country with a large degree of animosity towards the communist state. More specifically, key Apple supplier Foxconn is shifting the production—both for iPads and some MacBooks—from their Chinese facilities to the Vietnamese factories they began building back in 2007. The company is setting up new assembly lines for both the tablets and the laptops at their plant in Bac Giang, a northeastern province of Vietnam, "at the request of Apple." Other than that admission, both companies are mum on the details.
In yet another hopeful sign, Apple is planning a $1 billion spend to expand its manufacturing presence in the democratic country of India. For its part, Foxconn is looking at building a new set of plants in Mexico. Slowly but surely, companies are waking up to the level of country risk involved with communist China. If the Western world can actually present a united front, the China 2025 plan may be dealt a hefty blow.
Media & Entertainment
06. Theater chains get pummeled after surprise Warner Brothers announcement
AMC Entertainment (AMC $4) was off 20%, as was Cinemark Holdings (CNK $13). Imax (IMAX $14) fared a little bit better, dropping just 7%. After the nightmare of having their theaters closed due to the pandemic, the news from AT&T's (T $29) Warner Brothers unit was quite unwelcome: the filmmaker would release all of its 2021 movies simultaneously on both the big screen and via streaming through WarnerMedia's HBO Max. In other words, zero exclusivity for the big movie chains. The relationship between the movie houses and the film studios was already strained. Back in April we reported on AMC's ban of Comcast's (CMCSA $52) Universal Pictures' films after the latter announced it would also pull the simultaneous release stunt. This "breaking of the theatrical window" is terrible news for an industry already struggling to stay afloat. WarnerMedia CEO Jason Kilar made the rather cocky comment that the theater chains need to "take a breather," adding that the new releases will be pulled from HBO Max after thirty days. His comments only added fuel to the fire.
The movie chains are in somewhat the same position as many shopping malls throughout America. Dealing with decreased foot traffic due to the online shopping renaissance, these malls were forced to reinvent themselves as "experience destinations." The theaters are slowly adopting this philosophy, with AMC experimenting with NFL games on the big screen to attract fans. At $4 per share, AMC may look attractive, but we wouldn't be in a hurry to invest—there is still scant evidence that the darkest days are behind these companies.
Restaurants
05. Already strained, McDonald's just made its relationship with franchisees even worse
McDonald's (MCD $211) was one of those stalwarts we expected to own in the Penn Global Leaders Club for some time to come. That changed when the board of directors fired one of the best—and most loyal—CEOs in the industry. We took our profits and ran. In a sign that things are returning to normal (not a compliment; rather, a reference to the way things were under Don Thompson), the company has been telegraphing warnings to franchisees about hard times ahead. While the parent company does have about $40 million earmarked for aid to restaurants hardest hit by the pandemic (which seems paltry compared to its $5B in TTM net income), it warned that owners may need to look at selling locations or finding financial assistance elsewhere. Management also announced that it would be ending the $300 monthly Happy Meal subsidy which has been around for decades, and that it expects franchisees to start sharing the costs of the firm's tuition program. To be sure, all of these moves could be justified by corporate, but that doesn't change the perception by franchisees that they are getting nickel-and-dimed by the controlling entity. Yet another reason we continue to steer clear of the restaurant.
Jeff Easterbrook knew how to deal with people. Growing up in London, he was a constant customer of the local McDonald's, and his love for the company was evident in the way he treated employees and franchisees. The current management team in place may know numbers, but they sure don't seem to know how to deal with the people on the front line of the restaurant's revenue stream.
Business & Professional Services
04. EMH debunked yet again with laughable spike in Kodak shares
Efficient market hypothesis (EMH): the theory that a stock is always fairly valued based on all the available information at the time, making it impossible to "beat the market" on a consistent basis since share prices only react to new information. What a load of bull. Shares of Eastman Kodak (KODK $13), the lovable yet archaic camera company which was founded in 1888, have fluctuated between $1.50 (23 Mar) and $60 (29 Jul) this year. On Monday, shares spiked 77% in one session, driving them all the way back up to $13.30. What led to this latest unreal jump? Exoneration from the SEC regarding accusations that the company leaked news about a potential $765 million loan by the government to help it—Kodak—begin making active pharmaceutical ingredients (APIs) for drugs—a job the US disgracefully outsourced to China years ago. So, leaked news of a $765 million loan turned a $96 million flounder into a $1.65 billion shark virtually overnight? Yep. Maybe it wasn't just the news that drove "investors" back into the shares; maybe it was the financials. Over the trailing twelve months (TTM), Kodak lost $623 million on $1.06 billion in sales. That seems almost difficult to accomplish. Yet another story reminiscent of the 1999/2000 time period: Throw good money into companies that will show losses as far as the eye can see. Some "investors" don't recall that period, but we do.
There is a true dichotomy in the markets right now. We see a lot of great investment opportunities and a bright horizon for the year ahead. We also see a lot of companies with insane valuations thanks to dumb money chasing quick returns. Even more so than in 1999, many of the people pumping money into these companies couldn't explain what these firms do if their lives depended on it. That is certainly true with respect to Kodak, the camera company turned drug ingredient supplier.
Hotels, Restaurants, & Cruise Lines
03. We had every intention of buying Airbnb on its IPO—and then it priced
Sorry, but we have one more 1999 analogy. Granted, Airbnb (ABNB $139) is no pets.com (remember the hand puppet?), but what happened on the former's IPO day is insane. To be clear, we fully believe in Airbnb's business model, and have no doubt that it will be highly successful going forward—precisely why we expected to buy shares of the firm on day one. So, what happened? The IPO was finally priced at $68 per share. Of note: the CEO said he wanted the IPO price to reflect what he considered to be fair value of the company. When the stock finally began trading, its first price was $146, or 116% above what senior management considered fair value. There is a new breed of investor hitting the markets right now, and facts be damned; if they want a company because it has a cool name (Nikola comes to mind) they will pay any price to own it. How bad is it right now? Many investors complained that they didn't get the IPO price of $68, having no idea that it doesn't work that way. Want another example? There was a flurry of options action in ABB Ltd (ABB), an electrical equipment and parts maker based in Zurich, leading up to the ABNB IPO. It seems as though many "investors" thought they were buying calls on Airbnb. Let the red flags go up. When we were figuring where we might get the shares of the firm on day one, we initially thought $35 to $50 seemed reasonable, though $50 was stretching it. So, a company that was valued at $18 billion this summer now has a market cap of $150 billion. Like we say, insane.
We're bummed that we don't own ABNB, but we expect to pick the shares up when they come crashing back to reality at some point in 2021. And that is not a slam against the company, it is a slam on the knuckleheads who bought in at $146 or higher (shares went up as high as $165 on day one).
Market Pulse
02. Despite the wild IPO ride, markets fall on the week
Based on what happened in the IPO market over the course of five sessions, it might seem surprising that the three major indexes were all down for the week, but DoorDash (DASH $175), Airbnb (ABNB $139), and C3.ai Inc (AI $120) all turned out to be red herrings—shiny objects which distracted investors from the big picture. The markets falling for the week (S&P -0.96%, Dow -0.57%, NASDAQ -0.69%) was actually a healthy respite from the big run-up we've had over the past month. Counter that with the facts-be-damned trading we had in three IPO stocks, and 2021 is shaping up to be a tale of the haves and the have-nots. The haves will be the thoughtful investors looking for value, earnings, and sound business models. The have-nots will be the shiny object crowd: those using their Robinhood app like a video game to gobble up the fun-sounding names. How fitting that Goldman will bring that company public next year. A reckoning is coming, but it will be—thankfully—more discerning than the 2000-2002 variety. This one will hammer the dumb money and provide opportunity for the smart money. Bring on the new year.
2021 will be the year of the great re-build. The global economy will come roaring back with a vengeance, and GDP—both domestically and globally—will surprise to the upside. It will also be the year that tech companies with no earnings and fat valuations come crashing back to reality. Where can the smart money go? Look for opportunities in health care and industrials—boring companies that simply turn a profit year-in and year-out.
Under the Radar Investment
01. Under the Radar: Embotelladora Andina SA
Embotelladora Andina (AKO.B $15) is a Chilean-based Coca-Cola bottler serving the Latin American region. Together with its subsidiaries, the company produces, markets, and distributes Coca-Cola trademark products, to include fruit juices, sports drinks, purified waters, and flavored waters. The firm also sells and distributes beer under the Amstel, Bavaria, Heineken, and Sol brands. On $2.5 billion in sales last year, the company brought in $248 million in profit. AKO.B offers investors a 5.61% dividend yield based on the current share price of $15. Yet another consideration for globally-diversifying a portfolio.
Answer
Grauman's Chinese Theatre was built following the success of the nearby Grauman's Egyptian Theatre, which opened on Hollywood Boulevard in 1922. In May of this year, Netflix purchased that historic property.
Headlines for the Week of 22 Nov—28 Nov 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
"They knew they were Pilgrims..."
In the perilous transatlantic crossing of the Mayflower, a storm of epic proportions threw separatist John Howland overboard into the turbulent waters below. What ultimately happened to Howland?
Penn Trading Desk:
(23 Nov 20) Take 82% short-term gains on Macy's
On 18 May we added Macy's (M $10) to the Intrepid @ $5.55/share. We took advantage of a double-digit jump on 23 Nov to close our position @ 10.09/share for an 82% short-term gain. It may well go higher, but we want to redeploy the capital elsewhere.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Pharmaceuticals
10. For the third week in a row, good vaccine news drives the market higher
Two weeks ago it was Pfizer (PFE). Last week it was Moderna (MRNA). This week, AstraZeneca (AZN $55) became the third drugmaker to drive the market higher with news of a successful Covid-19 vaccine trial. Initial analysis of the company's Phase 3 clinical trial showed its candidate, which is being developed with the University of Oxford, was as much as 90% effective in preventing infection from the virus after both of the doses were administered. Meanwhile, Regeneron (REGN $537) became the second company (Gilead was the first with remdesivir/Veklury) to receive Emergency Use Authorization from the FDA for its therapy to treat the virus. Unlike Veklury, which is typically administered once a patient is hospitalized, Regeneron's therapy is designed to be used to help prevent Covid-19 victims from deteriorating to the point in which they need to be hospitalized. The remarkable progress on this deadly virus continues to impress.
Investors have been paying a lot more attention to the vaccine developers than they have the the biotech companies making actual therapies to treat the disease. We think that's a mistake. Both Gilead (GILD $60)—which is in the Penn Global Leaders Club—and Regeneron look cheap from a valuation standpoint.
Leadership
09. With Tesla's share price on the rise, Elon Musk is suddenly the world's second-richest person
According to the Bloomberg Billionaire Index, Tesla (TSLA $522) and SpaceX founder Elon Musk is now worth $128 billion. He can thank the S&P 500 Index committee in a way: their decision to admit Tesla to the benchmark index has pushed that stock noticeably higher in recent days; in fact, Musk's net worth increased by $7.2 billion on Monday alone. But that's comparative peanuts: So far in 2020, Musk's net worth has risen by $100 billion, moving him from the number 35 spot of the world's richest people to the number two spot this week, knocking Microsoft founder Bill Gates to the number three position.
We imagine the prestige of being the world's second-richest person doesn't mean too much to Musk; his passion for what he does and his grand strategic vision of "making life multiplanetary" drives his thought process. Those who want to get the most out of life should take this lesson to heart with respect to uncovering and following their own unique passions. Another lesson we can learn from Musk: As all of the critics and naysayers were impugning both him and his audacious goals, he forged ahead relentlessly.
Washington Report
08. Investors are comforted by Biden's early cabinet picks
It certainly could have gone in a different direction, but that is not what we were expecting. In an attempt to assuage the radical wing of his party, President-Elect Joe Biden could have offered plum positions to the likes of Elizabeth Warren and Bernie Sanders—moves that would have sent the markets reeling. Instead, the stock market rallied on the news that he would nominate former Fed Chair Janet Yellen as Secretary of the Treasury, and Antony Blinken as Secretary of State. Yellen has a proven and well-known history after serving as an effective Fed Chair, and Blinken's work in the corporate world (as opposed to the fanciful world of "what-ifs" at a think tank) points to a sober domestic and foreign policy approach by the new administration. The far left wing of the party won't celebrate the moves, but the markets sure did.
With a divided government, we are hoping for enough bipartisanship to get the needed work done, but a lack of votes to pass any earth-shattering agenda items. That would be a Goldilocks scenario for the stock market and, dare we say, the economy. Maybe we will even get an infrastructure-light bill drafted and implemented.
Construction & Farm Equipment
07. Farm equipment companies are gearing up for a blowout 2021; Deere's most recent quarter supports that thesis
John Deere (DE $256), the world's leading manufacturer of agricultural equipment, got hit especially hard when the pandemic seized up global economic activity this past spring. That made perfect sense, as CFOs turned on a dime to an ultra-defensive attitude. Considering the premium price attached to Deere equipment (a new 95-series tractor might cost upwards of half-a-million dollars), companies made due with the equipment on hand. Following the sharpest economic decline in US history in Q2, all eyes turned to the third quarter, and especially to the farm and heavy construction machinery industry. To say Deere did not disappoint is putting it mildly. In the company's fiscal fourth quarter, which ended 31 October, equipment sales came in at $8.7 billion—against $7.7B expected, and earnings per share hit $2.39—against $1.49 expected. As if those blowout numbers weren't good enough for the analysts, the company raised its full-year 2021 guidance, citing an expected 5% to 10% jump in equipment sales in virtually every region of the globe.
It is always enlightening to look at the various analyst ratings on a company surrounding an earnings release or any other major news item. For example, Morningstar has a one-star (sell) rating on DE shares with a fair value of $183. Most analysts are bullish to neutral on the $80 billion firm, however. We think the shares of both Deere and Cat (CAT $175), each with a PE ratio of 29, seem fairly valued where they are at.
Specialty Retail
06. Despite their 20% drop in a matter of days, we suspect Gap shares are not done falling
Shares of specialty retailer Gap (GPS $22) dropped 20% following the release of a less-than-stellar third quarter earning report. On sales of $3.99 billion—the exact same as Q3 of 2019—the company earned $0.25 per share. That EPS figure missed analysts' expectations by about 22%. Gap markets its retail apparel primarily under four names: its eponymous stores, Old Navy, Banana Republic, and Athleta, with the Old Navy brand accounting for nearly one-half of the firm's revenues. The Athleta unit, as could be expected, had the biggest jump in sales for the quarter—up 37% from the previous year. Old Navy came in second, with a 17% increase. The Gap and Banana Republic brands, however, served as the anchor, with revenues declining 5% and 30%, respectively. While online sales for the combined units rose 61% from last year, management doesn't seem to have a concrete plan in place for the post-pandemic world. Gap stores have clearly lost the "cool factor" they once had, and Athleta will be competing with the likes of Lululemon (LULU) and Nike (NKE). The San Francisco-based retailer has an enormous footprint in malls across America, with roughly 3,500 company-operated stores and 600 franchise stores. As one could imagine, the aggregate overhead on these stores is enormous, and the company made news this past April when it stopped making lease payments on its shuttered locations. Management did not provide a full-year forecast in the earnings release.
It is difficult for us to imagine what is going to drive shoppers, en masse, back to Gap's branded stores next year. Of course, as the pandemic restrictions are lifted and the malls become hubs of activity once again, sales will improve. But shoppers will have a lot of great stores to choose from, and we don't see Gap eliciting the excitement it used to be able to generate. The mall landlords, meanwhile, will have no problem playing the role of Scrooge in litigating their demands for back rent. And Gap is not exactly sitting on a mountain of cash.
Global Strategy: Mideast
05. Top Iranian nuclear scientist killed near Tehran
Iran's "peaceful" nuclear power program was dealt a major blow on Friday when the alleged head of the unit was killed in a small city east of Tehran. Witnesses describe hearing an explosion followed by the sound of automatic rifles being fired; when the dust settled, Moshen Fakhrizadeh was dead and his bodyguards were either killed or wounded. State-controlled Iranian media outlets wasted no time in pointing the finger at Israel. An advisor to Ali Khamenei, Iran's "supreme leader," responded to the attack: "We will descend like lightning on the killers of this oppressed martyr and we will make them regret their actions!"
Of course, Iran has no need for "peaceful" nuclear power, based on its abundance of fossil fuels. The ability to intimidate its enemies and the capability to actually launch nuclear weapons against those enemies—namely Israel—is at the core of its nuclear development program.
E-Commerce
04. Americans were doing a lot more than eating on Thanksgiving, according to Adobe
According to Adobe Analytics, Americans spent a record $5.1 billion shopping online this Thanksgiving Day, a 21.4% increase from last year's $4.2 billion spent. With consumers understandably avoiding the malls this year, they turned to online shopping via their smartphones—the devices accounted for nearly one half of all purchases made. The marketing analytics arm of Adobe is also projecting a record-shattering $10.3 billion in online sales for Black Friday, and a staggering $189 billion for the entire holiday shopping season. Some of the top-selling items so far? Family games (especially chess boards), video games (especially Just Dance 2021), and electronic learning toys from vTech. Top online destinations? Amazon, Walmart, and Target.
It is hard to fathom the demand destruction which would have taken place this Christmas shopping season were it not for e-commerce. Companies that were embracing the trend before the health crisis, such as Walmart and Target, have been richly rewarded for their foresight and their tenacity in taking on Amazon. Retailers who failed to recognize this inevitable trend, such as now-defunct Sears, have paid dearly.
Application & Systems Software
03. Shares of Slack Technologies have risen nearly 40% this week on a rumor that Salesforce may want to buy the firm
Slack Technologies (WORK $41) is a Software as a Services (SaaS) firm which provides electronic communications tools for employees at small- and medium-sized businesses. Think of messaging on your smartphone or laptop, but for secure collaboration between you and your fellow employees. It is quite like Microsoft (MSFT) Teams, which some argue came out as a direct competitor to the Slack platform. The company went public in April of 2019, immediately trading around $37 per share. Shares fell all the way to $15.10 this past March as tech stocks (and stocks in every other industry) were searching for a bottom. By June, shares had risen back to $40, only to drop back down to $24 on the 10th of this month. Then came the rumor, reported by The Wall Street Journal, that SaaS relationship management software giant Salesforce (CRM $247) was in talks to buy the firm. That was all it took for traders to drive the shares up 40% in a matter of days and 69% since the 10th of November. Here's a company, now worth $23 billion thanks to traders, which has never had a profitable quarter and probably won't until the middle of the decade. A company late to the party with respect to video conferencing—a segment now dominated by Zoom (ZM $472). A company relying on one simple product, facing a dominant competitor in the form of Microsoft Teams. Our advice to traders: sell on the rumor.
Slack has a perfectly fine offering; one which we wouldn't mind using. But our Microsoft subscription comes with Teams built in, and we are just one of about 60 million monthly active users. This is an industry with few barriers to entry, and one dominated by the tech giants. Slack's best strategic plan is to pray the deal with Salesforce goes through.
Market Pulse
02. Markets manage to knock out some pretty good gains on a shortened trading week
It would be hard for investors to wish for much more on a holiday-shortened trading week—periods of time which are often anything but calm (remember the ugly week preceding Christmas, 2018?). In the four trading days surrounding Thanksgiving, all three major indexes were up in excess of 2%, and the gains were relatively methodical. The technology and health care sectors led the drive, pushing both the S&P 500 and Nasdaq to new highs. While the Dow couldn't maintain the historic 30,000 mark it hit on Tuesday, it still managed to climb 647 points on the week. Two clear drivers moved the markets this week: a virtual guarantee that Covid vaccines will be available in short order, and more clarity on the political front. Considering the relatively ugly jobs report we got mid-week (778,000 new claims), we're happy to head into December with these gains on the books.
Considering where we were in mid-March, it is remarkable to consider where we are at right now in the markets. We offered a rosy prediction for the remainder of the year back around the first of April, but even our projections ("S&P at 3,500") have been surpassed. December should be a relatively strong month on the back of vaccine rollouts and increased consumer spending, and the sky is the limit for 2021 as we slowly move beyond the pandemic. One of these days we will need to contend with our near-$30 trillion national debt, but odds are it won't be at the top of investors' minds in the coming year.
Under the Radar Investment
01. Under the Radar: Yara International ASA
Yara International ASA (YARIY $21) is a crop nutrition company based out of Oslo, Norway. The $10 billion agricultural inputs firm produces nitrogen-based fertilizers, raw material for feed products, and a broad base of other ag input products for farms and co-ops. Most of Yara's $12 billion in annual sales emanates from Europe and Brazil, where the company has built a large and relatively "sticky" customer base. Founded in 1905, Yara has a strong financial position, a reasonable PE ratio of 17, an unusually-steady stock price, and a dividend yield of 8.28%.
Answer
At the time of the incident, Howland would have been in his early twenties. Incredibly, as he was tumbling into the sea in the midst of a terrible storm and a ship that was bobbing up and down like a cork, Howland was somehow able to grab onto the Mayflower's trailing rope, giving the crew enough time to rescue him with a boat hook. A few years after arriving at Plymouth, Howland married fellow passenger Elizabeth Tilley, and the two went on to have ten children and millions of descendants. Howland lived into his eighties—quite a feat for anyone living in the 17th century.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
"They knew they were Pilgrims..."
In the perilous transatlantic crossing of the Mayflower, a storm of epic proportions threw separatist John Howland overboard into the turbulent waters below. What ultimately happened to Howland?
Penn Trading Desk:
(23 Nov 20) Take 82% short-term gains on Macy's
On 18 May we added Macy's (M $10) to the Intrepid @ $5.55/share. We took advantage of a double-digit jump on 23 Nov to close our position @ 10.09/share for an 82% short-term gain. It may well go higher, but we want to redeploy the capital elsewhere.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Pharmaceuticals
10. For the third week in a row, good vaccine news drives the market higher
Two weeks ago it was Pfizer (PFE). Last week it was Moderna (MRNA). This week, AstraZeneca (AZN $55) became the third drugmaker to drive the market higher with news of a successful Covid-19 vaccine trial. Initial analysis of the company's Phase 3 clinical trial showed its candidate, which is being developed with the University of Oxford, was as much as 90% effective in preventing infection from the virus after both of the doses were administered. Meanwhile, Regeneron (REGN $537) became the second company (Gilead was the first with remdesivir/Veklury) to receive Emergency Use Authorization from the FDA for its therapy to treat the virus. Unlike Veklury, which is typically administered once a patient is hospitalized, Regeneron's therapy is designed to be used to help prevent Covid-19 victims from deteriorating to the point in which they need to be hospitalized. The remarkable progress on this deadly virus continues to impress.
Investors have been paying a lot more attention to the vaccine developers than they have the the biotech companies making actual therapies to treat the disease. We think that's a mistake. Both Gilead (GILD $60)—which is in the Penn Global Leaders Club—and Regeneron look cheap from a valuation standpoint.
Leadership
09. With Tesla's share price on the rise, Elon Musk is suddenly the world's second-richest person
According to the Bloomberg Billionaire Index, Tesla (TSLA $522) and SpaceX founder Elon Musk is now worth $128 billion. He can thank the S&P 500 Index committee in a way: their decision to admit Tesla to the benchmark index has pushed that stock noticeably higher in recent days; in fact, Musk's net worth increased by $7.2 billion on Monday alone. But that's comparative peanuts: So far in 2020, Musk's net worth has risen by $100 billion, moving him from the number 35 spot of the world's richest people to the number two spot this week, knocking Microsoft founder Bill Gates to the number three position.
We imagine the prestige of being the world's second-richest person doesn't mean too much to Musk; his passion for what he does and his grand strategic vision of "making life multiplanetary" drives his thought process. Those who want to get the most out of life should take this lesson to heart with respect to uncovering and following their own unique passions. Another lesson we can learn from Musk: As all of the critics and naysayers were impugning both him and his audacious goals, he forged ahead relentlessly.
Washington Report
08. Investors are comforted by Biden's early cabinet picks
It certainly could have gone in a different direction, but that is not what we were expecting. In an attempt to assuage the radical wing of his party, President-Elect Joe Biden could have offered plum positions to the likes of Elizabeth Warren and Bernie Sanders—moves that would have sent the markets reeling. Instead, the stock market rallied on the news that he would nominate former Fed Chair Janet Yellen as Secretary of the Treasury, and Antony Blinken as Secretary of State. Yellen has a proven and well-known history after serving as an effective Fed Chair, and Blinken's work in the corporate world (as opposed to the fanciful world of "what-ifs" at a think tank) points to a sober domestic and foreign policy approach by the new administration. The far left wing of the party won't celebrate the moves, but the markets sure did.
With a divided government, we are hoping for enough bipartisanship to get the needed work done, but a lack of votes to pass any earth-shattering agenda items. That would be a Goldilocks scenario for the stock market and, dare we say, the economy. Maybe we will even get an infrastructure-light bill drafted and implemented.
Construction & Farm Equipment
07. Farm equipment companies are gearing up for a blowout 2021; Deere's most recent quarter supports that thesis
John Deere (DE $256), the world's leading manufacturer of agricultural equipment, got hit especially hard when the pandemic seized up global economic activity this past spring. That made perfect sense, as CFOs turned on a dime to an ultra-defensive attitude. Considering the premium price attached to Deere equipment (a new 95-series tractor might cost upwards of half-a-million dollars), companies made due with the equipment on hand. Following the sharpest economic decline in US history in Q2, all eyes turned to the third quarter, and especially to the farm and heavy construction machinery industry. To say Deere did not disappoint is putting it mildly. In the company's fiscal fourth quarter, which ended 31 October, equipment sales came in at $8.7 billion—against $7.7B expected, and earnings per share hit $2.39—against $1.49 expected. As if those blowout numbers weren't good enough for the analysts, the company raised its full-year 2021 guidance, citing an expected 5% to 10% jump in equipment sales in virtually every region of the globe.
It is always enlightening to look at the various analyst ratings on a company surrounding an earnings release or any other major news item. For example, Morningstar has a one-star (sell) rating on DE shares with a fair value of $183. Most analysts are bullish to neutral on the $80 billion firm, however. We think the shares of both Deere and Cat (CAT $175), each with a PE ratio of 29, seem fairly valued where they are at.
Specialty Retail
06. Despite their 20% drop in a matter of days, we suspect Gap shares are not done falling
Shares of specialty retailer Gap (GPS $22) dropped 20% following the release of a less-than-stellar third quarter earning report. On sales of $3.99 billion—the exact same as Q3 of 2019—the company earned $0.25 per share. That EPS figure missed analysts' expectations by about 22%. Gap markets its retail apparel primarily under four names: its eponymous stores, Old Navy, Banana Republic, and Athleta, with the Old Navy brand accounting for nearly one-half of the firm's revenues. The Athleta unit, as could be expected, had the biggest jump in sales for the quarter—up 37% from the previous year. Old Navy came in second, with a 17% increase. The Gap and Banana Republic brands, however, served as the anchor, with revenues declining 5% and 30%, respectively. While online sales for the combined units rose 61% from last year, management doesn't seem to have a concrete plan in place for the post-pandemic world. Gap stores have clearly lost the "cool factor" they once had, and Athleta will be competing with the likes of Lululemon (LULU) and Nike (NKE). The San Francisco-based retailer has an enormous footprint in malls across America, with roughly 3,500 company-operated stores and 600 franchise stores. As one could imagine, the aggregate overhead on these stores is enormous, and the company made news this past April when it stopped making lease payments on its shuttered locations. Management did not provide a full-year forecast in the earnings release.
It is difficult for us to imagine what is going to drive shoppers, en masse, back to Gap's branded stores next year. Of course, as the pandemic restrictions are lifted and the malls become hubs of activity once again, sales will improve. But shoppers will have a lot of great stores to choose from, and we don't see Gap eliciting the excitement it used to be able to generate. The mall landlords, meanwhile, will have no problem playing the role of Scrooge in litigating their demands for back rent. And Gap is not exactly sitting on a mountain of cash.
Global Strategy: Mideast
05. Top Iranian nuclear scientist killed near Tehran
Iran's "peaceful" nuclear power program was dealt a major blow on Friday when the alleged head of the unit was killed in a small city east of Tehran. Witnesses describe hearing an explosion followed by the sound of automatic rifles being fired; when the dust settled, Moshen Fakhrizadeh was dead and his bodyguards were either killed or wounded. State-controlled Iranian media outlets wasted no time in pointing the finger at Israel. An advisor to Ali Khamenei, Iran's "supreme leader," responded to the attack: "We will descend like lightning on the killers of this oppressed martyr and we will make them regret their actions!"
Of course, Iran has no need for "peaceful" nuclear power, based on its abundance of fossil fuels. The ability to intimidate its enemies and the capability to actually launch nuclear weapons against those enemies—namely Israel—is at the core of its nuclear development program.
E-Commerce
04. Americans were doing a lot more than eating on Thanksgiving, according to Adobe
According to Adobe Analytics, Americans spent a record $5.1 billion shopping online this Thanksgiving Day, a 21.4% increase from last year's $4.2 billion spent. With consumers understandably avoiding the malls this year, they turned to online shopping via their smartphones—the devices accounted for nearly one half of all purchases made. The marketing analytics arm of Adobe is also projecting a record-shattering $10.3 billion in online sales for Black Friday, and a staggering $189 billion for the entire holiday shopping season. Some of the top-selling items so far? Family games (especially chess boards), video games (especially Just Dance 2021), and electronic learning toys from vTech. Top online destinations? Amazon, Walmart, and Target.
It is hard to fathom the demand destruction which would have taken place this Christmas shopping season were it not for e-commerce. Companies that were embracing the trend before the health crisis, such as Walmart and Target, have been richly rewarded for their foresight and their tenacity in taking on Amazon. Retailers who failed to recognize this inevitable trend, such as now-defunct Sears, have paid dearly.
Application & Systems Software
03. Shares of Slack Technologies have risen nearly 40% this week on a rumor that Salesforce may want to buy the firm
Slack Technologies (WORK $41) is a Software as a Services (SaaS) firm which provides electronic communications tools for employees at small- and medium-sized businesses. Think of messaging on your smartphone or laptop, but for secure collaboration between you and your fellow employees. It is quite like Microsoft (MSFT) Teams, which some argue came out as a direct competitor to the Slack platform. The company went public in April of 2019, immediately trading around $37 per share. Shares fell all the way to $15.10 this past March as tech stocks (and stocks in every other industry) were searching for a bottom. By June, shares had risen back to $40, only to drop back down to $24 on the 10th of this month. Then came the rumor, reported by The Wall Street Journal, that SaaS relationship management software giant Salesforce (CRM $247) was in talks to buy the firm. That was all it took for traders to drive the shares up 40% in a matter of days and 69% since the 10th of November. Here's a company, now worth $23 billion thanks to traders, which has never had a profitable quarter and probably won't until the middle of the decade. A company late to the party with respect to video conferencing—a segment now dominated by Zoom (ZM $472). A company relying on one simple product, facing a dominant competitor in the form of Microsoft Teams. Our advice to traders: sell on the rumor.
Slack has a perfectly fine offering; one which we wouldn't mind using. But our Microsoft subscription comes with Teams built in, and we are just one of about 60 million monthly active users. This is an industry with few barriers to entry, and one dominated by the tech giants. Slack's best strategic plan is to pray the deal with Salesforce goes through.
Market Pulse
02. Markets manage to knock out some pretty good gains on a shortened trading week
It would be hard for investors to wish for much more on a holiday-shortened trading week—periods of time which are often anything but calm (remember the ugly week preceding Christmas, 2018?). In the four trading days surrounding Thanksgiving, all three major indexes were up in excess of 2%, and the gains were relatively methodical. The technology and health care sectors led the drive, pushing both the S&P 500 and Nasdaq to new highs. While the Dow couldn't maintain the historic 30,000 mark it hit on Tuesday, it still managed to climb 647 points on the week. Two clear drivers moved the markets this week: a virtual guarantee that Covid vaccines will be available in short order, and more clarity on the political front. Considering the relatively ugly jobs report we got mid-week (778,000 new claims), we're happy to head into December with these gains on the books.
Considering where we were in mid-March, it is remarkable to consider where we are at right now in the markets. We offered a rosy prediction for the remainder of the year back around the first of April, but even our projections ("S&P at 3,500") have been surpassed. December should be a relatively strong month on the back of vaccine rollouts and increased consumer spending, and the sky is the limit for 2021 as we slowly move beyond the pandemic. One of these days we will need to contend with our near-$30 trillion national debt, but odds are it won't be at the top of investors' minds in the coming year.
Under the Radar Investment
01. Under the Radar: Yara International ASA
Yara International ASA (YARIY $21) is a crop nutrition company based out of Oslo, Norway. The $10 billion agricultural inputs firm produces nitrogen-based fertilizers, raw material for feed products, and a broad base of other ag input products for farms and co-ops. Most of Yara's $12 billion in annual sales emanates from Europe and Brazil, where the company has built a large and relatively "sticky" customer base. Founded in 1905, Yara has a strong financial position, a reasonable PE ratio of 17, an unusually-steady stock price, and a dividend yield of 8.28%.
Answer
At the time of the incident, Howland would have been in his early twenties. Incredibly, as he was tumbling into the sea in the midst of a terrible storm and a ship that was bobbing up and down like a cork, Howland was somehow able to grab onto the Mayflower's trailing rope, giving the crew enough time to rescue him with a boat hook. A few years after arriving at Plymouth, Howland married fellow passenger Elizabeth Tilley, and the two went on to have ten children and millions of descendants. Howland lived into his eighties—quite a feat for anyone living in the 17th century.
Headlines for the Week of 15 Nov—21 Nov 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Pandemic winter will give way to vaccine spring...
The world is focused on the race to get safe, effective vaccines into the arms of the public as quickly as possible to help put an end to the pandemic. Odds are strong that by this coming April the vaccines will be widely available. When was the first laboratory vaccine created, and what disease did it prevent?
Penn Trading Desk:
(12 Nov 20) Replacing AbbVie with pharma powerhouse in Global Leaders
It's not so much that we wanted to sell AbbVie in the Penn Global Leaders Club but rather that we wanted to add this foreign pharma powerhouse to the mix, and we were at our self-imposed limit of Health Care holdings within the strategy. A leader in the respiratory, oncology, antiviral, and vaccine arenas, a 5%+ yield, undervalued, and a chance to add to the international portion (which is probably lacking) of a portfolio. It was the right time to strike.
(19 Nov 20) Citi releases its 2021 outlook for gold
Right now, Gold is sitting around $1,865 per ounce. One of our favorite investments since the middle of 2019, we see global fiscal spending only driving the price higher. Citigroup seems to agree, at least with respect to 2021. Analysts at the firm released their guidance for the yellow metal over the coming year: they see the price rising to $2,500 by year-end, or about 35% higher than current levels. We agree.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Biotechnology
10. Following in Pfizer's footsteps, Moderna brings us another step closer to controlling the pandemic
It truly is remarkable when you think about it. Biotech Moderna (MRNA $99) enrolled 30,000 participants one month ago for a Phase 3 trial on a vaccine to prevent a virus the world didn't know about a year ago. The group of 30,000 was split in two, with half receiving a placebo and half receiving the vaccine. There were 95 confirmed cases of Covid among the participants during the trial period: 90 in the placebo group and five in the vaccine group. Those stunning results led to Moderna's claim of a 94.5% efficacy rate and its application to the FDA for emergency use of the therapy. Shares had a double-digit rally on the news, and the week opened with a bang—just as it had done on the previous Monday thanks to Pfizer's equally-stunning results. As could be expected, the naysayers tried to throw cold water on the incredible advance, reminding us that we have a long way to go from a trial to a vaccine waiting for us in our physician's office. We disagree. Yes, there is a tragic second wave of the virus straining our health care system and killing Americans. But the same lightning-speed urgency that is bringing us these vaccines in record time will also be in place with respect to the creation and delivery of hundreds of millions of their doses. By this coming spring, we expect virtually every American who wants to get the double-dose vaccine (and that number needs to be around 60% or more of the population) to be able to set an appointment and do so. And despite the focus on vaccines, Gilead's Veklury (remdesivir) was just approved by the FDA as a Covid treatment, with a number of other therapies going through the trial stage. Expect a flourishing US economy to return by the middle of next year as the lockdowns and closures become a thing of the past.
In the next issue of The Penn Wealth Report, we discuss the latest on the vaccine front, plus a look at some of the ancillary players in the battle which are not being given the credit they are due.
Automotive
09. A major milestone for Tesla: it will be added to the S&P 500 Index
After five consecutive quarters of net profit, Tesla (TSLA $458) is headed to the S&P 500 Index. While the $434 billion EV maker technically became eligible for the benchmark index this past summer, following its fourth consecutive quarterly profit, the Index committee passed, offering no rationale for their decision. On the 21st of December, however, Tesla will officially become the largest company ever added to the Index, smoothing the way for more investment dollars to flow into Elon Musk's firm. We think of all the Tesla skeptics, many of whom have already expressed their anger over the inclusion, and all of the TSLA short sellers who seem to lose money at every turn. One sour grapes analyst proclaimed that "S&P is making a big mistake and adding lots of downside risk to the index...." Pardon us if we don't put much weight behind the words of an analyst who has proven to be chronically wrong.
Despite Ford and GM's push into the EV market, Tesla will maintain its dominant market position for decades to come. As the company's advanced Supercharger network continues its buildout, expect to see an ever-increasing number of Teslas on the road. Projections for vehicle deliveries in 2020 have increased from 800,000 to 950,000, and for 2021 projections have risen from 1.15 million to 1.6 million new vehicles. New plants are nearing completion in Texas, Berlin, and Shanghai. And don't forget about the company's massive battery gigafactories and its growing solar business.
Business & Professional Services
08. In a nod to the current state of many Americans' fiscal condition, PayPal will give employees immediate access to pay
Recent studies show that nearly one-half of all working Americans are living paycheck to paycheck, meaning they would not have the liquid assets available to pay living expenses were their next paycheck not to come in. Even among households making more than $100,000 per year, the number is a staggering one-third. Against that backdrop, $227 billion financial services firm PayPal (PYPL $194) has announced that it will give its US-based employees access to their pay as soon as they earn it, rather than having to wait for their twice-monthly deposit. To make this happen, the company is teaming up with privately-held Even Responsible Finance, an on-demand pay platform. Members of PayPal's management team, led by CEO Dan Schulman, identified the problem when they set up an emergency relief fund for employees who found themselves in a cash crunch. The request for assistance was much greater than expected, leading to the current arrangement with Even. Users of the app are also able to move money into savings and access basic budgetary tools. PayPal has approximately 20,000 employees, with the vast majority based in the U.S.
Expect more and more employers to begin offering such tools and services to their employees going forward. The historically-low rate of savings among a majority of Americans has been a chronic problem for the past two generations, and it must be addressed.
IT Software & Services
07. Penn member Palantir surges double digits after news of big hedge fund purchases
It is fair to say that super-secret data mining firm Palantir (PLTR $18) was our most highly-anticipated IPO ever, as we were writing about the company—whose data fingered the precise location of Osama bin Laden for the DoD—eighteen months before it went public. Within five minutes of the IPO, we had secured PLTR for clients and placed the firm in the Penn New Frontier Fund. Now, less than seven weeks later, our position is trading about 70% higher with plenty of growth potential ahead. Shares spiked another 12% in one session this week after it was disclosed that Steve Cohen's hedge fund, Point72 Asset Management LP, purchased nearly 30 million shares in the third quarter. Another fund, Anchorage Capital Group, acquired 3 million shares in Q3. Palantir offers highly-sophisticated data mining services to government agencies and corporations around the world. Management has a strict policy, however, of only doing business with staunch US allies; e.g., the company would not do business with Chinese entities. Naysaying analysts expressed doubts around the time of the IPO that the firm could expand their customer base substantially considering the amount government agencies pay for the sensitive information, and the company's reliance on its biggest clients for revenue. Those arguments were muted after Palantir's first earnings report as a publicly-traded entity: revenues grew 52% and full-year guidance was raised to $1.072 billion—a 44% growth rate from a year earlier. PLTR holds Position #6 (out of 24) in the Penn New Frontier Fund, our emerging technologies portfolio.
Drug Retail
06. Drug retailers hit the skids after Amazon launches its new pharmacy
Rite Aid got hit the hardest, down 15%, followed by Walgreens (-10%), CVS (-8%), and even retail giant Walmart (-2%). What caused these one-day drops in the shares of major drug retailers? The announcement that Amazon (AMZN $3,136) would finally be adding a pharmacy counter to its site. Rite Aid tried to throw cold water on the announcement, with the COO arguing that getting prescription drugs involves a lot more than does a typical shopping transaction. Really? We think of the hassles we have had in the past simply getting prescriptions filled in a timely manner, and it makes perfect sense as to why these drug retailers fell so much in a day. We don't recall, however, any extensive conversations with the pharmacist at the local Walmart. "Name? Date of Birth? You have one prescription ready." That's about the extent of it. And is it really the business of the person behind me in line as to what year I was born? When filling scripts online directly through our PBM (Cigna), we wonder how long it will actually take the post office to deliver the goods. Like them or not, we have full faith in Amazon's ability to deliver meds to our home in one or two days, which is what Amazon Pharmacy is promising for its 80 million or so Prime members. Walgreens CEO Stefano Pessina said he is not particularly worried about Amazon's move into the space. Does anyone believe that? Amazon Pharmacy will be a major disruptor in the prescription drug space. Investors need to take a renewed look at their holdings in the drug retail and medical distribution (think McKesson and Cardinal Health) industries. We can't stand Jeff Bezos, but owning Amazon in the Penn Global Leaders Club has certainly paid off.
Government Watchdog
05. Nightmarish New York fiscal situation: MTA may issue low-denomination bonds to raise more cash
Who should be held accountable for the freakishly-mismanaged New York Metropolitan Transportation Authority: New York or taxpayers across the country? The organization can blame the pandemic all they want, but their financial situation was dire long before the Wuhan-borne virus ever came along. Now, the largest public transportation agency in the country said it will cut 9,400 jobs and drastically reduce its subway, train, and bus services in New York if the federal government doesn't send them $12 billion immediately. That won't happen, at least not this year, so the agency has announced plans to potentially issue $3 billion in "deficit bonds." To attract everyday commuters, they will even (potentially) come in $1,000 denominations so all can participate. Just last month the agency sold $257 million of "green bonds" (how did the environment get involved?), with the proceeds going to pay down bonds that are maturing now. Apply this situation to the common American household. It is akin to maxing out the credit cards, getting a home equity line-of-credit to pay off the balances, re-maxing out the cards, and then demanding that mom and dad (the federal government using taxpayer funds) pony up! Yikes. Our only question is who the hell would invest in these Frankenstein bonds?
New York, like Chicago, like San Francisco, like any other ineptly-run major city government in the US, was on tenuous ice before the pandemic, and they will learn nothing from the hell they are going through. It will always be someone else's fault, and they will always be the victim of circumstances. The federal government needs to stop enabling and demand these cities fix their own problems.
Textiles, Apparel, & Luxury Goods
04. Bath & Body Works, Victoria's Secret parent jumps 16% on unexpected earnings beat
We have traded L Brands (LB $39) on and off for decades, but steered clear after the longest-serving CEO of any company in the S&P 500, Les Wexner, began to show signs that things weren't clicking upstairs like they once were. The fact that he was also ensnared in the Jeffrey Epstein brouhaha didn't help, either. When Wexner indicated this past January that he may be willing to let go of the company he founded in 1962, we almost bit once again on LB shares. We should have—they were trading for $23. In a logic-defying earnings report, the company's Bath & Body Works unit posted a 55% jump in quarterly sales, with L Brands turning a profit of $330 million versus a loss of $252 million in the same quarter last year. When we think of L Brands' flagship names, with think bricks-and-mortar stores; the fact that the company was able to perform so strongly during the heart of the pandemic is remarkable. It also portends good things to come for the company under new leadership: longtime retail specialist Andrew Meslow took the reins from Wexner this past May. The founder made a lot of boneheaded moves in his waning months, like ditching swimsuits, stopping catalog mailings, and shunning digital sales to focus on his physical stores (he told the WSJ that he had 5,000 years of history on his side). The company still has a lot of debt, and the price seems rich at $38 after their 16% spike on the earnings release, but it feels like they won't need to be going the Chapter 11 route anytime soon. While we don't own LB, we did pick up shares of Macy's (M) and Nordstrom (JWN) in the Intrepid during the darkest days of the downturn. Those positions have paid off nicely.
Pharmaceuticals
03. Pfizer shareholders get an early Christmas gift: Viatris
Pfizer (PFE $37) has completed its spinoff of the firm's Upjohn business, combining it with Mylan NV to form Viatris, Inc (VTRS $17). The newly-formed pharma company, $20 billion in size, will be largely led by Pfizer executives and will focus its efforts on generic and biosimilar compounds. Shareholders of Pfizer, a member of the Penn Global Leaders Club, will receive 0.125 shares of Viatris for every one share of PFE owned. So far, the deal has already paid off: shares are up 21% from the basis price. The generic drug market is huge, and Viatris is an immediate leader in the space. We believe the shares are worth $25, nearly a 50% upside from where they are currently trading.
Hotels, Resorts, & Cruise Lines
02. Airbnb: the next big IPO investors need to consider owning
There are a handful of IPOs we get excited about each year. The last one was Palantir (PLTR $18), which is up 70% since we purchased it on the last day of September. The next one will be Airbnb, which will trade on the Nasdaq under the symbol ABNB. Understandably, the pandemic hammered the vacation rental company, with revenues in Q2 of this year plummeting 72% from the same quarter in 2019. What does that mean for investors? They can expect to pick up shares a lot cheaper than they could have were there no pandemic. Airbnb's model is sound; nothing about the global health disaster changed that, and we expect a full rebound by the company as vaccines and therapies come online. In fact, one could make the argument that travelers will feel safer in the type of single-unit rentals the company typically hosts, rather than the crowded lobbies of the major hotel chains. Expect ABNB to begin trading in mid-December with an immediate market cap of roughly $30 billion. Like Palantir, we will own ABNB shares within minutes of the first trade.
Under the Radar Investment
01. Under the Radar: The GEO Group
The GEO Group (GEO $9) is a real estate investment trust specializing in detention facilities and community-reentry facilities. The company leases and oversees secure detention centers, rehab facilities, and service centers for troubled youth. Services include counseling, education, drug abuse treatment, tech-based supervision, and detainee transportation. Most of GEO's revenue comes from the leasing and management of these facilities in the US, Australia, South Africa, and the UK. The company had a net income of $167 million last year on $2.5 billion in revenue. Private prison stocks have stumbled since the election under the assumption that a Democrat in the White House would spell trouble for non-government entities in this arena. With the nature of GEO's work, however, we think investors miscalculated on this one. If shares climb back to their 2020 high, it would mean a 100% profit for investors.
Answer
In 1879, Louis Pasteur was studying fowl cholera by injecting chickens with the live bacteria and recording their subsequent deterioration. Before a holiday, he gave instructions to an assistant to make injections into the chickens with a fresh culture, as he would be away from his lab. The assistant forgot to do so. Upon return to the lab, Pasteur found the chickens still alive, suffering only mild symptoms of the disease. When injected with a full dose of the bacteria once again, he discovered that the chickens had developed immunity. He correctly deduced that a weakened form of the bacteria would allow the body to develop resistance to the disease. He immediately turned his attention to an anthrax epidemic which was raging in France. He successfully applied what he had learned in his lab from the chicken cholera experiment to develop an anthrax vaccine.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Pandemic winter will give way to vaccine spring...
The world is focused on the race to get safe, effective vaccines into the arms of the public as quickly as possible to help put an end to the pandemic. Odds are strong that by this coming April the vaccines will be widely available. When was the first laboratory vaccine created, and what disease did it prevent?
Penn Trading Desk:
(12 Nov 20) Replacing AbbVie with pharma powerhouse in Global Leaders
It's not so much that we wanted to sell AbbVie in the Penn Global Leaders Club but rather that we wanted to add this foreign pharma powerhouse to the mix, and we were at our self-imposed limit of Health Care holdings within the strategy. A leader in the respiratory, oncology, antiviral, and vaccine arenas, a 5%+ yield, undervalued, and a chance to add to the international portion (which is probably lacking) of a portfolio. It was the right time to strike.
(19 Nov 20) Citi releases its 2021 outlook for gold
Right now, Gold is sitting around $1,865 per ounce. One of our favorite investments since the middle of 2019, we see global fiscal spending only driving the price higher. Citigroup seems to agree, at least with respect to 2021. Analysts at the firm released their guidance for the yellow metal over the coming year: they see the price rising to $2,500 by year-end, or about 35% higher than current levels. We agree.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Biotechnology
10. Following in Pfizer's footsteps, Moderna brings us another step closer to controlling the pandemic
It truly is remarkable when you think about it. Biotech Moderna (MRNA $99) enrolled 30,000 participants one month ago for a Phase 3 trial on a vaccine to prevent a virus the world didn't know about a year ago. The group of 30,000 was split in two, with half receiving a placebo and half receiving the vaccine. There were 95 confirmed cases of Covid among the participants during the trial period: 90 in the placebo group and five in the vaccine group. Those stunning results led to Moderna's claim of a 94.5% efficacy rate and its application to the FDA for emergency use of the therapy. Shares had a double-digit rally on the news, and the week opened with a bang—just as it had done on the previous Monday thanks to Pfizer's equally-stunning results. As could be expected, the naysayers tried to throw cold water on the incredible advance, reminding us that we have a long way to go from a trial to a vaccine waiting for us in our physician's office. We disagree. Yes, there is a tragic second wave of the virus straining our health care system and killing Americans. But the same lightning-speed urgency that is bringing us these vaccines in record time will also be in place with respect to the creation and delivery of hundreds of millions of their doses. By this coming spring, we expect virtually every American who wants to get the double-dose vaccine (and that number needs to be around 60% or more of the population) to be able to set an appointment and do so. And despite the focus on vaccines, Gilead's Veklury (remdesivir) was just approved by the FDA as a Covid treatment, with a number of other therapies going through the trial stage. Expect a flourishing US economy to return by the middle of next year as the lockdowns and closures become a thing of the past.
In the next issue of The Penn Wealth Report, we discuss the latest on the vaccine front, plus a look at some of the ancillary players in the battle which are not being given the credit they are due.
Automotive
09. A major milestone for Tesla: it will be added to the S&P 500 Index
After five consecutive quarters of net profit, Tesla (TSLA $458) is headed to the S&P 500 Index. While the $434 billion EV maker technically became eligible for the benchmark index this past summer, following its fourth consecutive quarterly profit, the Index committee passed, offering no rationale for their decision. On the 21st of December, however, Tesla will officially become the largest company ever added to the Index, smoothing the way for more investment dollars to flow into Elon Musk's firm. We think of all the Tesla skeptics, many of whom have already expressed their anger over the inclusion, and all of the TSLA short sellers who seem to lose money at every turn. One sour grapes analyst proclaimed that "S&P is making a big mistake and adding lots of downside risk to the index...." Pardon us if we don't put much weight behind the words of an analyst who has proven to be chronically wrong.
Despite Ford and GM's push into the EV market, Tesla will maintain its dominant market position for decades to come. As the company's advanced Supercharger network continues its buildout, expect to see an ever-increasing number of Teslas on the road. Projections for vehicle deliveries in 2020 have increased from 800,000 to 950,000, and for 2021 projections have risen from 1.15 million to 1.6 million new vehicles. New plants are nearing completion in Texas, Berlin, and Shanghai. And don't forget about the company's massive battery gigafactories and its growing solar business.
Business & Professional Services
08. In a nod to the current state of many Americans' fiscal condition, PayPal will give employees immediate access to pay
Recent studies show that nearly one-half of all working Americans are living paycheck to paycheck, meaning they would not have the liquid assets available to pay living expenses were their next paycheck not to come in. Even among households making more than $100,000 per year, the number is a staggering one-third. Against that backdrop, $227 billion financial services firm PayPal (PYPL $194) has announced that it will give its US-based employees access to their pay as soon as they earn it, rather than having to wait for their twice-monthly deposit. To make this happen, the company is teaming up with privately-held Even Responsible Finance, an on-demand pay platform. Members of PayPal's management team, led by CEO Dan Schulman, identified the problem when they set up an emergency relief fund for employees who found themselves in a cash crunch. The request for assistance was much greater than expected, leading to the current arrangement with Even. Users of the app are also able to move money into savings and access basic budgetary tools. PayPal has approximately 20,000 employees, with the vast majority based in the U.S.
Expect more and more employers to begin offering such tools and services to their employees going forward. The historically-low rate of savings among a majority of Americans has been a chronic problem for the past two generations, and it must be addressed.
IT Software & Services
07. Penn member Palantir surges double digits after news of big hedge fund purchases
It is fair to say that super-secret data mining firm Palantir (PLTR $18) was our most highly-anticipated IPO ever, as we were writing about the company—whose data fingered the precise location of Osama bin Laden for the DoD—eighteen months before it went public. Within five minutes of the IPO, we had secured PLTR for clients and placed the firm in the Penn New Frontier Fund. Now, less than seven weeks later, our position is trading about 70% higher with plenty of growth potential ahead. Shares spiked another 12% in one session this week after it was disclosed that Steve Cohen's hedge fund, Point72 Asset Management LP, purchased nearly 30 million shares in the third quarter. Another fund, Anchorage Capital Group, acquired 3 million shares in Q3. Palantir offers highly-sophisticated data mining services to government agencies and corporations around the world. Management has a strict policy, however, of only doing business with staunch US allies; e.g., the company would not do business with Chinese entities. Naysaying analysts expressed doubts around the time of the IPO that the firm could expand their customer base substantially considering the amount government agencies pay for the sensitive information, and the company's reliance on its biggest clients for revenue. Those arguments were muted after Palantir's first earnings report as a publicly-traded entity: revenues grew 52% and full-year guidance was raised to $1.072 billion—a 44% growth rate from a year earlier. PLTR holds Position #6 (out of 24) in the Penn New Frontier Fund, our emerging technologies portfolio.
Drug Retail
06. Drug retailers hit the skids after Amazon launches its new pharmacy
Rite Aid got hit the hardest, down 15%, followed by Walgreens (-10%), CVS (-8%), and even retail giant Walmart (-2%). What caused these one-day drops in the shares of major drug retailers? The announcement that Amazon (AMZN $3,136) would finally be adding a pharmacy counter to its site. Rite Aid tried to throw cold water on the announcement, with the COO arguing that getting prescription drugs involves a lot more than does a typical shopping transaction. Really? We think of the hassles we have had in the past simply getting prescriptions filled in a timely manner, and it makes perfect sense as to why these drug retailers fell so much in a day. We don't recall, however, any extensive conversations with the pharmacist at the local Walmart. "Name? Date of Birth? You have one prescription ready." That's about the extent of it. And is it really the business of the person behind me in line as to what year I was born? When filling scripts online directly through our PBM (Cigna), we wonder how long it will actually take the post office to deliver the goods. Like them or not, we have full faith in Amazon's ability to deliver meds to our home in one or two days, which is what Amazon Pharmacy is promising for its 80 million or so Prime members. Walgreens CEO Stefano Pessina said he is not particularly worried about Amazon's move into the space. Does anyone believe that? Amazon Pharmacy will be a major disruptor in the prescription drug space. Investors need to take a renewed look at their holdings in the drug retail and medical distribution (think McKesson and Cardinal Health) industries. We can't stand Jeff Bezos, but owning Amazon in the Penn Global Leaders Club has certainly paid off.
Government Watchdog
05. Nightmarish New York fiscal situation: MTA may issue low-denomination bonds to raise more cash
Who should be held accountable for the freakishly-mismanaged New York Metropolitan Transportation Authority: New York or taxpayers across the country? The organization can blame the pandemic all they want, but their financial situation was dire long before the Wuhan-borne virus ever came along. Now, the largest public transportation agency in the country said it will cut 9,400 jobs and drastically reduce its subway, train, and bus services in New York if the federal government doesn't send them $12 billion immediately. That won't happen, at least not this year, so the agency has announced plans to potentially issue $3 billion in "deficit bonds." To attract everyday commuters, they will even (potentially) come in $1,000 denominations so all can participate. Just last month the agency sold $257 million of "green bonds" (how did the environment get involved?), with the proceeds going to pay down bonds that are maturing now. Apply this situation to the common American household. It is akin to maxing out the credit cards, getting a home equity line-of-credit to pay off the balances, re-maxing out the cards, and then demanding that mom and dad (the federal government using taxpayer funds) pony up! Yikes. Our only question is who the hell would invest in these Frankenstein bonds?
New York, like Chicago, like San Francisco, like any other ineptly-run major city government in the US, was on tenuous ice before the pandemic, and they will learn nothing from the hell they are going through. It will always be someone else's fault, and they will always be the victim of circumstances. The federal government needs to stop enabling and demand these cities fix their own problems.
Textiles, Apparel, & Luxury Goods
04. Bath & Body Works, Victoria's Secret parent jumps 16% on unexpected earnings beat
We have traded L Brands (LB $39) on and off for decades, but steered clear after the longest-serving CEO of any company in the S&P 500, Les Wexner, began to show signs that things weren't clicking upstairs like they once were. The fact that he was also ensnared in the Jeffrey Epstein brouhaha didn't help, either. When Wexner indicated this past January that he may be willing to let go of the company he founded in 1962, we almost bit once again on LB shares. We should have—they were trading for $23. In a logic-defying earnings report, the company's Bath & Body Works unit posted a 55% jump in quarterly sales, with L Brands turning a profit of $330 million versus a loss of $252 million in the same quarter last year. When we think of L Brands' flagship names, with think bricks-and-mortar stores; the fact that the company was able to perform so strongly during the heart of the pandemic is remarkable. It also portends good things to come for the company under new leadership: longtime retail specialist Andrew Meslow took the reins from Wexner this past May. The founder made a lot of boneheaded moves in his waning months, like ditching swimsuits, stopping catalog mailings, and shunning digital sales to focus on his physical stores (he told the WSJ that he had 5,000 years of history on his side). The company still has a lot of debt, and the price seems rich at $38 after their 16% spike on the earnings release, but it feels like they won't need to be going the Chapter 11 route anytime soon. While we don't own LB, we did pick up shares of Macy's (M) and Nordstrom (JWN) in the Intrepid during the darkest days of the downturn. Those positions have paid off nicely.
Pharmaceuticals
03. Pfizer shareholders get an early Christmas gift: Viatris
Pfizer (PFE $37) has completed its spinoff of the firm's Upjohn business, combining it with Mylan NV to form Viatris, Inc (VTRS $17). The newly-formed pharma company, $20 billion in size, will be largely led by Pfizer executives and will focus its efforts on generic and biosimilar compounds. Shareholders of Pfizer, a member of the Penn Global Leaders Club, will receive 0.125 shares of Viatris for every one share of PFE owned. So far, the deal has already paid off: shares are up 21% from the basis price. The generic drug market is huge, and Viatris is an immediate leader in the space. We believe the shares are worth $25, nearly a 50% upside from where they are currently trading.
Hotels, Resorts, & Cruise Lines
02. Airbnb: the next big IPO investors need to consider owning
There are a handful of IPOs we get excited about each year. The last one was Palantir (PLTR $18), which is up 70% since we purchased it on the last day of September. The next one will be Airbnb, which will trade on the Nasdaq under the symbol ABNB. Understandably, the pandemic hammered the vacation rental company, with revenues in Q2 of this year plummeting 72% from the same quarter in 2019. What does that mean for investors? They can expect to pick up shares a lot cheaper than they could have were there no pandemic. Airbnb's model is sound; nothing about the global health disaster changed that, and we expect a full rebound by the company as vaccines and therapies come online. In fact, one could make the argument that travelers will feel safer in the type of single-unit rentals the company typically hosts, rather than the crowded lobbies of the major hotel chains. Expect ABNB to begin trading in mid-December with an immediate market cap of roughly $30 billion. Like Palantir, we will own ABNB shares within minutes of the first trade.
Under the Radar Investment
01. Under the Radar: The GEO Group
The GEO Group (GEO $9) is a real estate investment trust specializing in detention facilities and community-reentry facilities. The company leases and oversees secure detention centers, rehab facilities, and service centers for troubled youth. Services include counseling, education, drug abuse treatment, tech-based supervision, and detainee transportation. Most of GEO's revenue comes from the leasing and management of these facilities in the US, Australia, South Africa, and the UK. The company had a net income of $167 million last year on $2.5 billion in revenue. Private prison stocks have stumbled since the election under the assumption that a Democrat in the White House would spell trouble for non-government entities in this arena. With the nature of GEO's work, however, we think investors miscalculated on this one. If shares climb back to their 2020 high, it would mean a 100% profit for investors.
Answer
In 1879, Louis Pasteur was studying fowl cholera by injecting chickens with the live bacteria and recording their subsequent deterioration. Before a holiday, he gave instructions to an assistant to make injections into the chickens with a fresh culture, as he would be away from his lab. The assistant forgot to do so. Upon return to the lab, Pasteur found the chickens still alive, suffering only mild symptoms of the disease. When injected with a full dose of the bacteria once again, he discovered that the chickens had developed immunity. He correctly deduced that a weakened form of the bacteria would allow the body to develop resistance to the disease. He immediately turned his attention to an anthrax epidemic which was raging in France. He successfully applied what he had learned in his lab from the chicken cholera experiment to develop an anthrax vaccine.
Headlines for the Week of 01 Nov—07 Nov 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The once-dominant fossil fuels market continues its decline...
With an aggregate market cap of $1.67 trillion, the Energy sector now accounts for a paltry 2% of the S&P 500 (by contrast, the Information Technology sector accounts for 27% of the benchmark index). What was the sector's weighting in mid-1990 as America was preparing for Operation Desert Shield/Storm?
Penn Trading Desk:
(29 Oct 20) Adding a shipping powerhouse to Intrepid at a deep discount to FV
We began trading this maritime shipper in the late 1990s and have an excellent sense for when it is undervalued. We believe it is currently undervalued by 78%—conservatively. We have re-added the Bermuda-based shipper to the Intrepid Trading Platform.
(30 Oct 20) Added Aerospace & Defense firm to Intrepid
Actually, this small-cap American company could be listed in either the Aerospace & Defense industry or the Leisure Equipment industry. Either way, sales are through the roof based in good measure on the political environment.
(03 Nov 20) Added cutting-edge auto parts maker to the Global Leaders Club
This $9 billion auto parts manufacturer is making all the right moves to generate increased market share in our clean air/electric vehicle environment, to include a very smart recent acquisition. Increased vehicle efficiency is its forte, and its "sticky" customer base proves the strategy is working.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Application & Systems Software
10. German software giant SAP has biggest drop since 1996 on slashed outlook
In the stock's worst day in nearly a quarter-century, shares of $150 billion German software giant SAP (SAP $118) dropped over 21% after the company slashed its outlook for 2020, blaming the pandemic for putting the brakes on new corporate spending. Bad news for the company, but here's what investors need to know: is this train wreck company-centric, or does it portend bad news for the industry? The company, which sells a broad range of enterprise software products and services to corporations, government agencies, and educational institutions, generates approximately 40% of its revenues from the Americas, 40% from Europe, and 20% from Asia. We know that Europe is still reeling from the pandemic, with much of the continent back in lockdown mode. The US has been ramping up its corporate engine at a faster clip, and many parts of Asia are clawing their way back to pre-pandemic business activity levels. Looking at comparable offerings from the competition, Amazon's Web Services, Microsoft's Azure, and Oracle's suite of cloud infrastructure offerings have all held up relatively well this year. Software as a service (SaaS) providers such as Workday and Salesforce have actually been increasing market share—to the detriment of SAP. So, as bad as the news was for the company, the damage doesn't seem to be bleeding over to the competition.
Our favorite systems software company continues to be Microsoft (MSFT $212), and our favorite specialty applications firm is Adobe (ADBE $475). We own both in the Penn Global Leaders Club and, at their current prices, both offer a better value than SAP. We have no confidence in SAP's management team following Bill McDermott's departure for ServiceNow (NOW $504—another great industry player, but too rich with its 137 multiple).
Semiconductors & Related Equipment
09. AMD to buy Xilinx in another shot at rival Intel, but who is under greater pressure to perform?
When evaluating stocks, one of the most useful methods involves comparing a company's key stats to those of other companies in the same industry. Typically, the numbers are relatively aligned, but every now and again one notes a glaring discrepancy. Take two semiconductor giants: AMD (AMD $82) and Intel (INTC $46). The former has a market cap of around $90 billion, and the latter's size is over double that. The big discrepancy comes in the multiple investors have placed on each. While AMD carries an enormous PE of 150, Intel's multiple is just 9! That seems crazy for two companies which do, basically, the same thing. In essence, investors have no confidence in Intel's ability to pull out of its funk, while they are willing to give AMD's quite effective CEO Lisa Su every benefit of the doubt.
Su's most recent move, announced this week, is the acquisition of data center and cloud computing semiconductor maker Xilinx (XLNX) for $35 billion. At face value, the move appears brilliant, as the acquisition will complement—not duplicate—AMD's current chip focus and will allow the firm to yank market share away from Intel. In an effort to expand its own chip lineup, Intel purchased cloud chipmakers Altera and Mobileye (think autonomous vehicles) back in 2015 and 2017, respectively, but those acquisitions have yet to bear much fruit. Xilinx, which makes field-programmable gate arrays (FGPAs can be reprogrammed after they are manufactured), makes chips for the automotive and aerospace industry in addition to its data center business.
We say the move by AMD appears brilliant but it will also be very expensive, considering the $35 billion price tag equates to 38% of AMD's market cap. The firm must execute the integration with precision, as it has very little room for error. On the flip-side, investors have written off deep-valued Intel. This will be interesting to watch play out.
Call it the contrarian in us, or simply our recollection of what happened to high-flyers in 2000, but we would buy Intel right now (at $45) over AMD. Some would argue that Intel is a value trap, but the firm still controls the lion's share of the PC and server market, and it is investing in R&D like a nimble startup. It wouldn't take much for its shares to pop 50% and still appear cheap.
Life Sciences Tools & Services
08. Exact Sciences is expanding its cancer screening lineup with Thrive acquisition
Few technological advances are as exciting as noninvasive medical diagnostics—the ability to be screened for everything from colon cancer to heart problems without the specter of being knocked out with drugs and probed with instruments. We're not exactly at the Bones McCoy stage yet, but we are rapidly getting there. One of the companies on the frontline of noninvasive medical diagnostics is Exact Sciences (EXAS $129), which most people might recognize by the little blue talking Cologuard box in TV ads. While the company's claim to fame has been its at-home colorectal cancer screening kits, it is about to make a huge leap forward with its $2.15 billion acquisition of privately-held Thrive Earlier Detection. Thrive has developed a blood screening test for the early detection of a number of different cancers, and the potential market for such products is astronomical. Interestingly, the company's blood tests—assuming the advances continue—would probably start encroaching on Cologuard's turf soon. Another reason the acquisition makes sense. For all its promise, Exact Sciences has yet to turn a profit. While its shares are grossly overvalued at $129, keep an eye on the firm—eventual profitability and a more reasonable share price will equal a nice buy point.
Goods & Services
07. Following the sharpest economic decline in US history, the sharpest expansion
In the second quarter of 2020, the US economy recorded an almost unfathomable decline of 31.4% (thanks, China). Now, one quarter later, we have the strongest economic growth, quarter-over-quarter, in US history. Against expectations for a 32% expansion, Q3 GDP came in at 33.1% annualized clip according to the Commerce Department. GDP measures the total goods and services produced within a country over a one-quarter period. Putting that number in perspective, the previous record high GDP came in the first quarter of 1950 when the US economy expanded at a 16.7% annualized rate. Even more encouraging than the whopping headline number is where the growth came from. Strong exports, increased business investment, and residential purchases of durable goods all fueled the quarter's growth. These three components don't grow if businesses and consumers are hunkering down in anticipation of bad times ahead. Certainly, the massive new wave of Covid cases has spooked the markets, but confidence remains strong that we are on the tail end of the pandemic's wrath. As for the markets, expect positive vaccine news over the course of the quarter to fuel a year-end rally. We stand by our 2020 S&P target of 3,500, which we set in May of this year.
Market Pulse
06. Goldman Sachs: The Wrongway Feldman of the investment world
Any true Gilligan's Island fan remembers Wrongway Feldman, the former World War I pilot known for going the wrong way and bombing his own airfield. We view Goldman Sachs as the Wrongway Feldman of the investment world. If they say it is time to short oil, our tendency is to buy. If they say buy, it is probably time to sell. Which leads us to Goldman analyst Rod Hall and his "Sell" rating on Apple, which he issued this past April. At the time, adjusting for the four-for-one stock split, AAPL shares were going for $69, and Hall's expectation was for them to drop to $58.25 (again, adjusting for the split). As of this writing, Apple shares are sitting at $110, and Hall is doubling down on his silliness, reiterating his "Sell" rating and proclaiming shares will fall to $80. Considering the stock has rallied over 70% since his last brilliant call, sounds like it is time to add to our holding. So much money can be made in the stock market by taking advantage of terrible calls and any resulting share price moves. We celebrate companies like Goldman Sachs—they have helped us create a good deal of wealth.
Restaurants
05. Another great trading stock—Dunkin' Brands—gets gobbled up by a private equity firm
Back when I was in the broker-dealer world (as opposed to the RIA world with its accompanying fiduciary responsibility) I had a client who only traded two stocks in his portfolio: Walmart (WMT) and Krispy Kreme Doughnuts (KKD at the time). He had a trading system based on the location of the US economy along the economic cycle. Sadly, Krispy Kreme was ultimately taken private by Luxembourg-based JAB Holdings, which also took the likes of Panera Bread (formerly PNRA) and Green Mountain Coffee (formerly GMCR) private. We thought of that client after hearing that another great trading company, Dunkin' Brands (DNKN $106), was being taken out by private equity firm Inspire Brands in an $11.3 billion deal.
In our humble opinion, the financial engineers at these firms typically have no interest in the heart and soul of classic American companies; no, it is all about turning a buck and then moving on. Often, that involves squeezing every dime they can out of an entity and then repackaging the rubble as an IPO to a bunch of sucker investors (one reason we strongly avoid warmed-over publicly-traded companies). Inspire is a master at taking out companies we used to like trading: they also own Arby's, Buffalo Wild Wings, and Sonic. There is certainly no crime in a company selling itself to a private buyer, but that doesn't mean we need to like it. At least the members sitting on the acquired company's board will probably turn a nice personal profit in the deal.
Back when I had my Walmart/Krispy Kreme client, I worked at a well-respected, century-old firm called A.G. Edwards (ticker was AGE). While it wasn't taken private, top executives at the St. Louis-based mid-cap brokerage decided to sell the firm to Wachovia (and get fat paychecks—we assume—in the process) about fifteen years ago. This occurred shortly after the company placed the first non-Edwards family member in the CEO role. We remember his name with disdain, but it's not worth mentioning. Great due diligence there: Wachovia went belly-up soon after the acquisition and its assets were purchased by Wells Fargo (WFC)—a company with a whole host of its own problems.
So, we now say adios to ticker symbol DNKN. You will probably be repackaged and brought back to (public) life one of these days, but we won't be interested.
Individual shareholders need to begin taking a more active role in monitoring executives' behavior at publicly-traded companies. The first step in that process is understanding the ties these individuals have to the company. If they have no experience in the industry and a history of moving from one firm to the next using M&A stepping stones, investors beware—or sell on the rumor (and probable spike in share price) of an acquisition.
Business & Professional Services
04. In blow to the California political apparatchik, voters side with Uber and Lyft
You live in California and you want a part-time gig to supplement your income (and pay your confiscatory tax rate), so you begin driving for Uber (UBER $39). Of course, you are the epitome of an independent contractor. Common sense to most of the world, but not to the activist state government of California. No, to those blowhards you are an employee of Uber, despite your pleas to remain a contract worker. Refusing to bow to the power-hungry, micromanaging politicians in charge, Uber and Lyft fought back. They organized Proposition 22 in the state, which would allow ride-sharing firms and other gig economy companies (like Doordash and Postmates) to continue listing these part-time workers as contractors. They also announced that, barring the passage of Prop 22, they were ready to leave the state entirely. It looks like that won't be necessary, as voters in the once-Golden State handed them a resounding victory—nearly 60% to 40%. Never count an activist, overbearing government out, however; we are certain they will come at these companies in another way. We are reminded of Ronald Reagan's great quip on an overbearing central authority: "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it." On the morning after the victory, shares of Uber were trading up over 12% and Lyft shares were up 11%. Looks like a victory for shareholders as well.
Media Malpractice
03. Another election, another massive false narrative is blown to bits
I have the business networks—typically CNBC and Bloomberg—turned on in the office between six in the morning and six at night. I constantly scan the business news sites to keep abreast of what is going on, and have for too many years to count. I recall the MANTRA four years ago: "Trump win = massive stock market drop." It was drummed into viewers' heads like gospel. Trump won, and the markets exploded (in a good way). Fast forward four years and a new mantra emerged: "A blue wave would launch the markets higher, while a contested election and/or divided government would be disastrous for the markets." Lo and behold, we got the latter and the markets began hammering out their best period in a long time. Another false narrative blown to bits. At least Bloomberg had the guts to run the following headline the day after the election: "Doomsday Market Predictions Give Way to Never-Ending Rally." Meanwhile, CNBC ran the following headline on the chyron: :US Stocks, Bonds Rally as Blue Wave Fades." No mention of the fact that they told us blue wave would be the next great catalyst for the market. Journalism has a long and storied history of creating narratives that are anything but true and then packaging them as fact. Consumers of news need to accept that condition and figure out the best way to take advantage of the garbage the journalists are often peddling to their audience. There are some great and fair-minded journalists in the business; sadly, there are also many who just can't help tainting their stories based on personal prejudices. The key is to have a critical eye and discern the former from the latter.
Semiconductors
02. New Frontier Fund Member Qualcomm surges double-digits on earnings, 5G prospects
When we added $165 billion semiconductor maker Qualcomm (QCOM $145) to the Penn New Frontier Fund it had a market cap of $80 billion and was generally being ignored by the analysts. We had two major theses for our purchase: 1. the company would dominate in the era of 5G; 2. Steve Mollenkopf was one of the best CEOs in America. After a 100% run-up in the share price, analysts are suddenly paying attention. The latest one-day, double-digit price spike of QCOM shares came on the heels of the firm's fiscal Q4 results. Revenue climbed an impressive 73% from one year ago, from $4.81 billion to $8.45 billion, and net income spiked from $506 million in the same quarter last year to $2.96 billion (a good portion of which came from an IP settlement with Huawei) this past quarter. Mollenkopf's comments also helped the share price: the CEO said the company was poised to sell millions of chips for 5G mobile devices as consumers upgrade their smartphones. Despite the massive run-up in share price, QCOM has a lot of room to run. The company will be one of the dominant players in the nascent world of 5G technology.
Under the Radar Investment
01. Under the Radar: UGI Corp
UGI Corp (UGI $32) is a $6.7 billion regulated gas utility providing natural gas and electricity to over 650,000 households in Pennsylvania and Maryland. The company owns AmeriGas Propane, the largest US propane marketer, which serves over one million users throughout all 50 states. Within its energy services unit, UGI owns thermal power plants as well as processing, storage, and pipeline facilities. At $32 per share, the company offers an attractive 4.05% dividend yield. Our fair value estimation on UGI is $40 per share.
Answer
Back in 1990, there were only ten sectors in the S&P 500; meaning, were they all equal weighted, each would represent 10% of the benchmark. Energy, however, held a hefty 16% weighting in the index. The sector's fall to a current weight of 2% within the S&P 500 is nothing short of remarkable, and underlines the importance of proactive portfolio construction.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The once-dominant fossil fuels market continues its decline...
With an aggregate market cap of $1.67 trillion, the Energy sector now accounts for a paltry 2% of the S&P 500 (by contrast, the Information Technology sector accounts for 27% of the benchmark index). What was the sector's weighting in mid-1990 as America was preparing for Operation Desert Shield/Storm?
Penn Trading Desk:
(29 Oct 20) Adding a shipping powerhouse to Intrepid at a deep discount to FV
We began trading this maritime shipper in the late 1990s and have an excellent sense for when it is undervalued. We believe it is currently undervalued by 78%—conservatively. We have re-added the Bermuda-based shipper to the Intrepid Trading Platform.
(30 Oct 20) Added Aerospace & Defense firm to Intrepid
Actually, this small-cap American company could be listed in either the Aerospace & Defense industry or the Leisure Equipment industry. Either way, sales are through the roof based in good measure on the political environment.
(03 Nov 20) Added cutting-edge auto parts maker to the Global Leaders Club
This $9 billion auto parts manufacturer is making all the right moves to generate increased market share in our clean air/electric vehicle environment, to include a very smart recent acquisition. Increased vehicle efficiency is its forte, and its "sticky" customer base proves the strategy is working.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Application & Systems Software
10. German software giant SAP has biggest drop since 1996 on slashed outlook
In the stock's worst day in nearly a quarter-century, shares of $150 billion German software giant SAP (SAP $118) dropped over 21% after the company slashed its outlook for 2020, blaming the pandemic for putting the brakes on new corporate spending. Bad news for the company, but here's what investors need to know: is this train wreck company-centric, or does it portend bad news for the industry? The company, which sells a broad range of enterprise software products and services to corporations, government agencies, and educational institutions, generates approximately 40% of its revenues from the Americas, 40% from Europe, and 20% from Asia. We know that Europe is still reeling from the pandemic, with much of the continent back in lockdown mode. The US has been ramping up its corporate engine at a faster clip, and many parts of Asia are clawing their way back to pre-pandemic business activity levels. Looking at comparable offerings from the competition, Amazon's Web Services, Microsoft's Azure, and Oracle's suite of cloud infrastructure offerings have all held up relatively well this year. Software as a service (SaaS) providers such as Workday and Salesforce have actually been increasing market share—to the detriment of SAP. So, as bad as the news was for the company, the damage doesn't seem to be bleeding over to the competition.
Our favorite systems software company continues to be Microsoft (MSFT $212), and our favorite specialty applications firm is Adobe (ADBE $475). We own both in the Penn Global Leaders Club and, at their current prices, both offer a better value than SAP. We have no confidence in SAP's management team following Bill McDermott's departure for ServiceNow (NOW $504—another great industry player, but too rich with its 137 multiple).
Semiconductors & Related Equipment
09. AMD to buy Xilinx in another shot at rival Intel, but who is under greater pressure to perform?
When evaluating stocks, one of the most useful methods involves comparing a company's key stats to those of other companies in the same industry. Typically, the numbers are relatively aligned, but every now and again one notes a glaring discrepancy. Take two semiconductor giants: AMD (AMD $82) and Intel (INTC $46). The former has a market cap of around $90 billion, and the latter's size is over double that. The big discrepancy comes in the multiple investors have placed on each. While AMD carries an enormous PE of 150, Intel's multiple is just 9! That seems crazy for two companies which do, basically, the same thing. In essence, investors have no confidence in Intel's ability to pull out of its funk, while they are willing to give AMD's quite effective CEO Lisa Su every benefit of the doubt.
Su's most recent move, announced this week, is the acquisition of data center and cloud computing semiconductor maker Xilinx (XLNX) for $35 billion. At face value, the move appears brilliant, as the acquisition will complement—not duplicate—AMD's current chip focus and will allow the firm to yank market share away from Intel. In an effort to expand its own chip lineup, Intel purchased cloud chipmakers Altera and Mobileye (think autonomous vehicles) back in 2015 and 2017, respectively, but those acquisitions have yet to bear much fruit. Xilinx, which makes field-programmable gate arrays (FGPAs can be reprogrammed after they are manufactured), makes chips for the automotive and aerospace industry in addition to its data center business.
We say the move by AMD appears brilliant but it will also be very expensive, considering the $35 billion price tag equates to 38% of AMD's market cap. The firm must execute the integration with precision, as it has very little room for error. On the flip-side, investors have written off deep-valued Intel. This will be interesting to watch play out.
Call it the contrarian in us, or simply our recollection of what happened to high-flyers in 2000, but we would buy Intel right now (at $45) over AMD. Some would argue that Intel is a value trap, but the firm still controls the lion's share of the PC and server market, and it is investing in R&D like a nimble startup. It wouldn't take much for its shares to pop 50% and still appear cheap.
Life Sciences Tools & Services
08. Exact Sciences is expanding its cancer screening lineup with Thrive acquisition
Few technological advances are as exciting as noninvasive medical diagnostics—the ability to be screened for everything from colon cancer to heart problems without the specter of being knocked out with drugs and probed with instruments. We're not exactly at the Bones McCoy stage yet, but we are rapidly getting there. One of the companies on the frontline of noninvasive medical diagnostics is Exact Sciences (EXAS $129), which most people might recognize by the little blue talking Cologuard box in TV ads. While the company's claim to fame has been its at-home colorectal cancer screening kits, it is about to make a huge leap forward with its $2.15 billion acquisition of privately-held Thrive Earlier Detection. Thrive has developed a blood screening test for the early detection of a number of different cancers, and the potential market for such products is astronomical. Interestingly, the company's blood tests—assuming the advances continue—would probably start encroaching on Cologuard's turf soon. Another reason the acquisition makes sense. For all its promise, Exact Sciences has yet to turn a profit. While its shares are grossly overvalued at $129, keep an eye on the firm—eventual profitability and a more reasonable share price will equal a nice buy point.
Goods & Services
07. Following the sharpest economic decline in US history, the sharpest expansion
In the second quarter of 2020, the US economy recorded an almost unfathomable decline of 31.4% (thanks, China). Now, one quarter later, we have the strongest economic growth, quarter-over-quarter, in US history. Against expectations for a 32% expansion, Q3 GDP came in at 33.1% annualized clip according to the Commerce Department. GDP measures the total goods and services produced within a country over a one-quarter period. Putting that number in perspective, the previous record high GDP came in the first quarter of 1950 when the US economy expanded at a 16.7% annualized rate. Even more encouraging than the whopping headline number is where the growth came from. Strong exports, increased business investment, and residential purchases of durable goods all fueled the quarter's growth. These three components don't grow if businesses and consumers are hunkering down in anticipation of bad times ahead. Certainly, the massive new wave of Covid cases has spooked the markets, but confidence remains strong that we are on the tail end of the pandemic's wrath. As for the markets, expect positive vaccine news over the course of the quarter to fuel a year-end rally. We stand by our 2020 S&P target of 3,500, which we set in May of this year.
Market Pulse
06. Goldman Sachs: The Wrongway Feldman of the investment world
Any true Gilligan's Island fan remembers Wrongway Feldman, the former World War I pilot known for going the wrong way and bombing his own airfield. We view Goldman Sachs as the Wrongway Feldman of the investment world. If they say it is time to short oil, our tendency is to buy. If they say buy, it is probably time to sell. Which leads us to Goldman analyst Rod Hall and his "Sell" rating on Apple, which he issued this past April. At the time, adjusting for the four-for-one stock split, AAPL shares were going for $69, and Hall's expectation was for them to drop to $58.25 (again, adjusting for the split). As of this writing, Apple shares are sitting at $110, and Hall is doubling down on his silliness, reiterating his "Sell" rating and proclaiming shares will fall to $80. Considering the stock has rallied over 70% since his last brilliant call, sounds like it is time to add to our holding. So much money can be made in the stock market by taking advantage of terrible calls and any resulting share price moves. We celebrate companies like Goldman Sachs—they have helped us create a good deal of wealth.
Restaurants
05. Another great trading stock—Dunkin' Brands—gets gobbled up by a private equity firm
Back when I was in the broker-dealer world (as opposed to the RIA world with its accompanying fiduciary responsibility) I had a client who only traded two stocks in his portfolio: Walmart (WMT) and Krispy Kreme Doughnuts (KKD at the time). He had a trading system based on the location of the US economy along the economic cycle. Sadly, Krispy Kreme was ultimately taken private by Luxembourg-based JAB Holdings, which also took the likes of Panera Bread (formerly PNRA) and Green Mountain Coffee (formerly GMCR) private. We thought of that client after hearing that another great trading company, Dunkin' Brands (DNKN $106), was being taken out by private equity firm Inspire Brands in an $11.3 billion deal.
In our humble opinion, the financial engineers at these firms typically have no interest in the heart and soul of classic American companies; no, it is all about turning a buck and then moving on. Often, that involves squeezing every dime they can out of an entity and then repackaging the rubble as an IPO to a bunch of sucker investors (one reason we strongly avoid warmed-over publicly-traded companies). Inspire is a master at taking out companies we used to like trading: they also own Arby's, Buffalo Wild Wings, and Sonic. There is certainly no crime in a company selling itself to a private buyer, but that doesn't mean we need to like it. At least the members sitting on the acquired company's board will probably turn a nice personal profit in the deal.
Back when I had my Walmart/Krispy Kreme client, I worked at a well-respected, century-old firm called A.G. Edwards (ticker was AGE). While it wasn't taken private, top executives at the St. Louis-based mid-cap brokerage decided to sell the firm to Wachovia (and get fat paychecks—we assume—in the process) about fifteen years ago. This occurred shortly after the company placed the first non-Edwards family member in the CEO role. We remember his name with disdain, but it's not worth mentioning. Great due diligence there: Wachovia went belly-up soon after the acquisition and its assets were purchased by Wells Fargo (WFC)—a company with a whole host of its own problems.
So, we now say adios to ticker symbol DNKN. You will probably be repackaged and brought back to (public) life one of these days, but we won't be interested.
Individual shareholders need to begin taking a more active role in monitoring executives' behavior at publicly-traded companies. The first step in that process is understanding the ties these individuals have to the company. If they have no experience in the industry and a history of moving from one firm to the next using M&A stepping stones, investors beware—or sell on the rumor (and probable spike in share price) of an acquisition.
Business & Professional Services
04. In blow to the California political apparatchik, voters side with Uber and Lyft
You live in California and you want a part-time gig to supplement your income (and pay your confiscatory tax rate), so you begin driving for Uber (UBER $39). Of course, you are the epitome of an independent contractor. Common sense to most of the world, but not to the activist state government of California. No, to those blowhards you are an employee of Uber, despite your pleas to remain a contract worker. Refusing to bow to the power-hungry, micromanaging politicians in charge, Uber and Lyft fought back. They organized Proposition 22 in the state, which would allow ride-sharing firms and other gig economy companies (like Doordash and Postmates) to continue listing these part-time workers as contractors. They also announced that, barring the passage of Prop 22, they were ready to leave the state entirely. It looks like that won't be necessary, as voters in the once-Golden State handed them a resounding victory—nearly 60% to 40%. Never count an activist, overbearing government out, however; we are certain they will come at these companies in another way. We are reminded of Ronald Reagan's great quip on an overbearing central authority: "Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. If it stops moving, subsidize it." On the morning after the victory, shares of Uber were trading up over 12% and Lyft shares were up 11%. Looks like a victory for shareholders as well.
Media Malpractice
03. Another election, another massive false narrative is blown to bits
I have the business networks—typically CNBC and Bloomberg—turned on in the office between six in the morning and six at night. I constantly scan the business news sites to keep abreast of what is going on, and have for too many years to count. I recall the MANTRA four years ago: "Trump win = massive stock market drop." It was drummed into viewers' heads like gospel. Trump won, and the markets exploded (in a good way). Fast forward four years and a new mantra emerged: "A blue wave would launch the markets higher, while a contested election and/or divided government would be disastrous for the markets." Lo and behold, we got the latter and the markets began hammering out their best period in a long time. Another false narrative blown to bits. At least Bloomberg had the guts to run the following headline the day after the election: "Doomsday Market Predictions Give Way to Never-Ending Rally." Meanwhile, CNBC ran the following headline on the chyron: :US Stocks, Bonds Rally as Blue Wave Fades." No mention of the fact that they told us blue wave would be the next great catalyst for the market. Journalism has a long and storied history of creating narratives that are anything but true and then packaging them as fact. Consumers of news need to accept that condition and figure out the best way to take advantage of the garbage the journalists are often peddling to their audience. There are some great and fair-minded journalists in the business; sadly, there are also many who just can't help tainting their stories based on personal prejudices. The key is to have a critical eye and discern the former from the latter.
Semiconductors
02. New Frontier Fund Member Qualcomm surges double-digits on earnings, 5G prospects
When we added $165 billion semiconductor maker Qualcomm (QCOM $145) to the Penn New Frontier Fund it had a market cap of $80 billion and was generally being ignored by the analysts. We had two major theses for our purchase: 1. the company would dominate in the era of 5G; 2. Steve Mollenkopf was one of the best CEOs in America. After a 100% run-up in the share price, analysts are suddenly paying attention. The latest one-day, double-digit price spike of QCOM shares came on the heels of the firm's fiscal Q4 results. Revenue climbed an impressive 73% from one year ago, from $4.81 billion to $8.45 billion, and net income spiked from $506 million in the same quarter last year to $2.96 billion (a good portion of which came from an IP settlement with Huawei) this past quarter. Mollenkopf's comments also helped the share price: the CEO said the company was poised to sell millions of chips for 5G mobile devices as consumers upgrade their smartphones. Despite the massive run-up in share price, QCOM has a lot of room to run. The company will be one of the dominant players in the nascent world of 5G technology.
Under the Radar Investment
01. Under the Radar: UGI Corp
UGI Corp (UGI $32) is a $6.7 billion regulated gas utility providing natural gas and electricity to over 650,000 households in Pennsylvania and Maryland. The company owns AmeriGas Propane, the largest US propane marketer, which serves over one million users throughout all 50 states. Within its energy services unit, UGI owns thermal power plants as well as processing, storage, and pipeline facilities. At $32 per share, the company offers an attractive 4.05% dividend yield. Our fair value estimation on UGI is $40 per share.
Answer
Back in 1990, there were only ten sectors in the S&P 500; meaning, were they all equal weighted, each would represent 10% of the benchmark. Energy, however, held a hefty 16% weighting in the index. The sector's fall to a current weight of 2% within the S&P 500 is nothing short of remarkable, and underlines the importance of proactive portfolio construction.
Headlines for the Week of 18 Oct—24 Oct 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
History of the Dow Jones Industrial Average...
Though we label it "irrelevant" below, the Dow Jones Industrial Average does have an illustrious history. Who started the index and what was the publication which introduced it to the investing community? Also, one of the original twelve stocks on the Dow is still in existence—what company is it?
Penn Trading Desk:
(21 Aug 20) Adding Thematic Fund to Dynamic Growth Strategy
We have added a robotics fund to the DGS to take advantage of the coming boom in automation—the movement will be transformational for society. This fund is full of dynamic small- and mid-cap names. Members, see the trading desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Media & Entertainment
10. Disney's restructuring plans do not assuage our concerns
There really are no "buy and forget" companies out there anymore. The idea of owning a static group of blue chip stocks to hold for the long term is a relic of the past. Take three of our historic favorites: General Electric (GE), Boeing (BA), and Walt Disney (DIS). There was a time not that long ago when we couldn't imagine not owning these three juggernauts in our core portfolio. It's amazing how complacency and poor management can ravage a company virtually overnight.
While that condition has certainly gripped the former two names, what about Disney? We wrote disparagingly about Bob Iger's decision to step down after he assured investors he would remain on as CEO at least until 2021. Then we found out that Disney employees (who are now 28,000 fewer in number) had to hear the news from an interview Iger gave to a business network. Not cool, Bob. Taking over Iger's role would be Bob Chapek, the former head of Disney's parks. Based on our underwhelming early view of Chapek and Iger's cavalier attitude toward employees, we took our huge DIS profits earlier this year when we closed our position.
Now comes word that Disney will make a major structural shift in its operations. With an eye on direct-to-consumer, the $235 billion firm will create a new unit focused on the marketing and distribution of content, separating that function from the content creation unit. It is clear that the move is designed to foster migration away from the company's 100-year-old relationship with movie theaters and toward the direct-to-consumer model. Perhaps the first test of this new unit was the decision to charge Disney+ users $30 to stream the production of Mulan. Not a great first step. There is no doubt that Disney+ was a brilliant move; one that helped the company maintain critical revenue while the parks were being shuttered due to the pandemic. That being said, we are still not sold on the new leadership team and still question the strategic vision of the company going forward.
In fairness, it isn't the company's fault that Disneyland in California remains closed—that condition is the result of an inept government in Sacramento. We continue to watch DIS stock closely, as there will come a time, hopefully by the end of 2021, when the company's major revenue drivers—the parks—are back at full capacity.
Consumer Electronics
09. Sorry Apple haters, the iPhone 12 will indeed launch a new super-cycle for the company
It is a bizarre state of affairs. Rarely do you hear any of the 100 million Apple (AAPL $120) iPhone users in the US take to social media to bash the device's main competition—the Samsung Galaxy, but an odd number of Galaxy users seem to be preoccupied with hating on the iPhone. One petulant Galaxy-phile took to Twitter following the iPhone 12 event to proclaim, "We're like on Galaxy 24 now." It would probably take a clinical psychologist to explain their hatred for Apple, but the only thing that matters to us is this: Apple continues to innovate, and the launch of the iPhone 12 5G device lineup will bring about a new super-cycle for the company.
Forget all of the talk about limited 5G coverage. To be sure, it will take years to put up the millions of little devices throughout the country needed to bring this hyper-speed technology to everyone, but the train has left the station—and soon enough, everyone will be clamoring for it. Furthermore, millions of Americans have held off on upgrading their iPhones until 5G devices became available. Finally, many countries around the world, especially in Asia, have built out a larger 5G infrastructure than the US. This makes sense when we consider the state and local government impediments in the US versus the lack of such challenges in "less free" countries. Trade wars and anti-American sentiment aside, Apple will sell hundreds of millions of iPhone 12s globally.
So, let the Apple haters continue to throw their tantrums; we remain focused on what the $2 trillion Cupertino-based company has in store for us next. Remember, it will require new devices to take advantage of 5G technology, and that holds true for the iPad and Mac lineups as well as the iPhone. Stay tuned.
At $120 per share, Apple remains a buy. It currently holds the distinction of being our largest portfolio position, and we don't see that changing anytime soon.
Application & Systems Software
08. Tech traders beware: What just happened to Fastly is a sign of things to come
2020 has been a banner year for Internet-based tech companies which have yet to turn a profit—Robinhood traders can't scoop up their shares fast enough. Take cloud platform provider Fastly (FSLY $85), for example. Traders turned this $1 billion startup into a $10 billion player virtually overnight despite the company's lack of net income—ever. All of that changed after the firm's latest earnings report, however. After a slight revenue miss (the company's Q3 revenue came in around $70 million versus analyst expectations for $75 million), FSLY shares began their rapid 33% decline. Let's back up and think about this: Here we have a company generating a paltry $70 million per quarter, earning zero net income, and traders were still piling in when its market cap hit $10 billion. Insanity. This is precisely the type of plunge we witnessed—ad nauseam—in early 2000. Let this be a warning shot to traders piling into unprofitable companies with reckless abandon. We've seen this movie before, and it does not end well. Here's what bothers us the most about the Fastly case study: We are willing to bet that the majority of "investors" who jumped in to buy shares couldn't explain what the company actually does if their lives depended on it. Here's a really simple basic rule to follow: Don't invest in any company before understanding what they do and what their unique value proposition is for customers. Then, it sure wouldn't hurt to actually look at the financials.
Oil & Gas Exploration & Production
07. ConocoPhillips will acquire shale E&P firm Concho Resources for $9.7 billion
Considering the market cap of Permian Basin operator Concho Resources (CXO $49) was $32 billion precisely two years ago, it seems like a golden opportunity for ConocoPhillips (COP $34): the latter will acquire the former for $9.7 billion in an all-stock deal. In a sign of just how hard the energy sector has fallen over the past two years, COP's market cap has dropped from $90 billion two years ago to just $36 billion today. For many shale producers facing chronic $40 per barrel oil, it is simply a case of be acquired or face possible bankruptcy. Does the deal make sense for Conoco? Our guess is that in two years it will look as brilliant as the 2019 Occidental (OXY $10) takeover of Anadarko for $38 billion looked stupid (Occidental's market cap now sits below $10 billion—yikes). The global economy will surge forward when the pandemic is behind us, and the rumors of oil's death as the world's leading energy source have been greatly exaggerated—at least the timeline of its demise. We continue to underweight the energy sector, with Chevron (CVX) remaining the one integrated oil company we own. At $33 per share, however, and with a 5% dividend yield, COP seems quite undervalued.
Application & Systems Software
06. SpaceX selects Microsoft (not Amazon) to run its space-based cloud computing network
It is almost embarrassing to watch Jeff Bezos pretend to compete with Elon Musk for commercial space dominance. He's like a little kid donning an astronaut costume and proclaiming, "take that Neil Armstrong!" In his own mind, Bezos's Blue Origin is right up there with SpaceX; hell, maybe better. Of course, in reality Blue Origin continues to be the pet project of the world's richest man while SpaceX is busy launching astronauts into orbit and building out a massive fleet of satellites which will provide high-speed Internet service to even the most remote parts of the globe. (Right on cue, Bezos stated that Blue Origin is going to build an even better satellite system—despite the lack of even one satellite in orbit.) In a move that should come as no surprise, SpaceX just selected Microsoft's (MSFT $214) Azure service to operate and manage its cloud computing needs for the Starlink system, barely considering Amazon (AMZN $3,226) Web Services (AWS) as an option. Considering the scope of the project, which will consist of linking cloud, space, and ground capabilities, crunching almost unfathomable amounts of data, and helping to control the orbits of SpaceX satellites, this was a huge win for Microsoft. Beyond the Starlink project, Musk's SpaceX also landed a demo contract from the Pentagon for a new generation missile warning system. Assuming the demo leads to deployment, Microsoft would certainly get that contract as well. Recall that Amazon is currently suing the US government for the Pentagon's decision to go with Azure for its $10 billion JEDI program, snubbing AWS. We see very little chance of the lawsuit changing the outcome of the JEDI contract, though we wonder how it might have poisoned the well for Amazon's hopes of landing government contracts in the future. For its core business of online retailing, no other company can compete with Amazon—which is why we own it within the Penn Global Leaders Club. We just wish Bezos would shut up and let someone else run the company. Maybe he could run Blue Origin full time and work on landing one single contract.
Global Strategy: Europe
05. While the pandemic rages in Europe, parliament focuses on what to call a veggie burger
One of our favorite pastimes is making fun of the European government. Let's face it, the only reason a "European Union" even exists is because of that continent's envy of the United States. The level of arrogance permeating the halls of the EU parliament in Brussels is stratospheric, which makes them such an easy target for ridicule. The latest? While the pandemic rages across the continent, EU lawmakers are focused on a critical issue: Whether or not to ban the likes of Beyond Meat (BYND $176) from calling their plant-based patties "burgers." Lawmakers will debate and vote on an amendment this month which would force these companies to label their burgers "discs" and their sausages "tubes." i.e. Beyond Burgers would become "veggie discs," and Beyond Breakfast Sausage would become "plant-based tubes." Parliamentarians will vote on another amendment, pushed by the European dairy union, which would ban the use of the word "creamy" when describing a non-dairy item. And we make fun of our government. Is it any wonder Brits voted to pull out of this dysfunctional entity?
Business & Professional Services
04. Bitcoin pops after PayPal announces it will allow customers to trade in cryptocurrencies
The value of Bitcoin "shares" surged to $13,000 following news that credit services provider PayPal (PYPL $213) will begin allowing its customers to use the digital currency on its platform. The firm said Bitcoins can be used for purchases with its 26 million merchants around the world, and the currency will soon be allowed on Venmo, now a PayPal company. That being said, the firm will not hold cryptos on its balance sheet; instead, it will partner with cryptocurrency services firm Paxos Trust Company to assist in completing the transactions. This means that merchants won't have to actually deal with the digital currency, as Paxos will serve as the intermediary. Nonetheless, considering PayPal has some 300 million customers around the globe, Bitcoin advocates are celebrating the move. Shares of the digital currency have been extremely volatile this year, falling from around $10,000 in February to $5,000 in March, then climbing back to $13,000 this past week. The high value mark of the currency was $20,000 back in 2017. Investing in Bitcoin has been—and will continue to be—a complete gamble. Keep in mind that this currency does not exist in "hard" form, it only exists virtually. Considering the high level of sophistication of hackers around the world, expect to hear more stories in the near future of accounts being drained of Bitcoin. As for PayPal, we like the firm but don't like the 100 multiple on the share price.
Media & Entertainment
03. In blow to Katzenberg and Whitman, Quibi is already being shut down
Based on some of their questionable business decisions in the past, our respect for Jeffrey Katzenberg and Meg Whitman was already pretty low coming into this most recent foray; now it is virtually nonexistent. It was just this past April when Whitman, the former CEO of eBay and HP, came on-air to brag about her and Katzenberg's new streaming service known as Quibi. Not only wouldn't the pandemic hurt the new service, it may even enhance its value, claimed Whitman. Now, six months and billions of dollars later, Quibi is shutting down. Katzenberg cited the pandemic as one of the major factors in its demise. Wow. All of the great ideas out there waiting to be funded, and this duo was actually able to attract $2 billion for a questionable business proposition (Quibi's unique value proposition was that it would feature short-form news and entertainment videos of ten minutes or less—yawn). The power of name recognition. We've said it before and we'll say it again: There are so many mediocre to downright bad CEOs out there that it boggles the mind. Before buying shares in a company, investors need to perform some level of due diligence on that company's management team.
Cybersecurity
02. Cybersecurity firm McAfee goes public—again
We are always on the lookout for a promising IPO, so when we heard that well-known cybersecurity firm McAfee (MCFE $19) was going public, it piqued our interest. We even like the firm's anything-but-dull founder, John McAfee (OK, despite the libertarian's recent arrest in Spain over tax evasion charges; it should be noted that McAfee has not been affiliated with the eponymous company since 1994). However, there was one major obstacle keeping us from investing in MCFE shares, which began trading on Thursday the 22nd: it was the company's second trip to the public equity markets—Intel acquired the firm and took it private in 2011. Despite having eighteen underwriters working on the deal, the IPO turned out to be a bust. After raising $740 million on Wednesday (the company sold 37 million Class A shares at $20 apiece), shares began trading at $18.60, got as high as $19.34, and then spent most of the session declining. A late-session rally brought them back up to $18.68 at the close. Our largest concern is the company's hefty debt load, which will still sit around $4 billion after some of it is paid off with the IPO proceeds. To put that in perspective, $21 billion cybersecurity firm Fortinet (FTNT $128), which we own in the Penn New Frontier Fund, has an aggregate short- and long-term debt load of just $2.7 billion. With so many hands in the pie and a share structure that would be hard for an SEC lawyer to decipher, we would steer clear of this warmed-over offering.
Under the Radar Investment
01. Under the Radar: SPDR® Blackstone / GSO Senior Loan ETF
To say it is difficult finding "good" fixed income investments right now is the understatement of the century. Ten-year Treasuries are yielding just above one-half of one percent, and the 30-year T Bond is yielding 1.375%. Challenging times. That being said, one of our current favorites in the Penn Strategic Income Portfolio is our senior loan fund, the SPDR Blackstone GSO Senior Loan ETF (SRLN). Senior loans are debt instruments issued by a bank to a company to fund any number of projects or to retire existing debt with higher interest rates. Note the term "senior." This means that, in the case of bankruptcy, owners of senior bank loans will be paid first as assets are liquidated—before creditors, preferred shareholders, and stockholders. SRLN currently owns around 220 such senior loans outstanding to companies such as: Bass Pro Shop, Petsmart, Athena Health, and Rackspace Technology. The average maturity of these loans is a comforting 4.72 years, and the beta (risk level on a scale of zero to one, with one equaling the risk of the S&P 500) is 0.0859. Our favorite aspect of the fund in these days of ultra-low rates? It yields 5%.
Answer
Business journalist Charles Dow, founder of financial news bureau Dow, Jones & Co., created the Dow Jones Industrial Average back in 1896. Prominent business newspaper The Wall Street Journal introduced the DJIA on 26 May of that same year. Of the twelve original component companies of the Dow, only General Electric is still in existence as a publicly-traded company. It was jettisoned from the index in 2018. In 1928, the DJIA was expanded to include 30 companies.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
History of the Dow Jones Industrial Average...
Though we label it "irrelevant" below, the Dow Jones Industrial Average does have an illustrious history. Who started the index and what was the publication which introduced it to the investing community? Also, one of the original twelve stocks on the Dow is still in existence—what company is it?
Penn Trading Desk:
(21 Aug 20) Adding Thematic Fund to Dynamic Growth Strategy
We have added a robotics fund to the DGS to take advantage of the coming boom in automation—the movement will be transformational for society. This fund is full of dynamic small- and mid-cap names. Members, see the trading desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Media & Entertainment
10. Disney's restructuring plans do not assuage our concerns
There really are no "buy and forget" companies out there anymore. The idea of owning a static group of blue chip stocks to hold for the long term is a relic of the past. Take three of our historic favorites: General Electric (GE), Boeing (BA), and Walt Disney (DIS). There was a time not that long ago when we couldn't imagine not owning these three juggernauts in our core portfolio. It's amazing how complacency and poor management can ravage a company virtually overnight.
While that condition has certainly gripped the former two names, what about Disney? We wrote disparagingly about Bob Iger's decision to step down after he assured investors he would remain on as CEO at least until 2021. Then we found out that Disney employees (who are now 28,000 fewer in number) had to hear the news from an interview Iger gave to a business network. Not cool, Bob. Taking over Iger's role would be Bob Chapek, the former head of Disney's parks. Based on our underwhelming early view of Chapek and Iger's cavalier attitude toward employees, we took our huge DIS profits earlier this year when we closed our position.
Now comes word that Disney will make a major structural shift in its operations. With an eye on direct-to-consumer, the $235 billion firm will create a new unit focused on the marketing and distribution of content, separating that function from the content creation unit. It is clear that the move is designed to foster migration away from the company's 100-year-old relationship with movie theaters and toward the direct-to-consumer model. Perhaps the first test of this new unit was the decision to charge Disney+ users $30 to stream the production of Mulan. Not a great first step. There is no doubt that Disney+ was a brilliant move; one that helped the company maintain critical revenue while the parks were being shuttered due to the pandemic. That being said, we are still not sold on the new leadership team and still question the strategic vision of the company going forward.
In fairness, it isn't the company's fault that Disneyland in California remains closed—that condition is the result of an inept government in Sacramento. We continue to watch DIS stock closely, as there will come a time, hopefully by the end of 2021, when the company's major revenue drivers—the parks—are back at full capacity.
Consumer Electronics
09. Sorry Apple haters, the iPhone 12 will indeed launch a new super-cycle for the company
It is a bizarre state of affairs. Rarely do you hear any of the 100 million Apple (AAPL $120) iPhone users in the US take to social media to bash the device's main competition—the Samsung Galaxy, but an odd number of Galaxy users seem to be preoccupied with hating on the iPhone. One petulant Galaxy-phile took to Twitter following the iPhone 12 event to proclaim, "We're like on Galaxy 24 now." It would probably take a clinical psychologist to explain their hatred for Apple, but the only thing that matters to us is this: Apple continues to innovate, and the launch of the iPhone 12 5G device lineup will bring about a new super-cycle for the company.
Forget all of the talk about limited 5G coverage. To be sure, it will take years to put up the millions of little devices throughout the country needed to bring this hyper-speed technology to everyone, but the train has left the station—and soon enough, everyone will be clamoring for it. Furthermore, millions of Americans have held off on upgrading their iPhones until 5G devices became available. Finally, many countries around the world, especially in Asia, have built out a larger 5G infrastructure than the US. This makes sense when we consider the state and local government impediments in the US versus the lack of such challenges in "less free" countries. Trade wars and anti-American sentiment aside, Apple will sell hundreds of millions of iPhone 12s globally.
So, let the Apple haters continue to throw their tantrums; we remain focused on what the $2 trillion Cupertino-based company has in store for us next. Remember, it will require new devices to take advantage of 5G technology, and that holds true for the iPad and Mac lineups as well as the iPhone. Stay tuned.
At $120 per share, Apple remains a buy. It currently holds the distinction of being our largest portfolio position, and we don't see that changing anytime soon.
Application & Systems Software
08. Tech traders beware: What just happened to Fastly is a sign of things to come
2020 has been a banner year for Internet-based tech companies which have yet to turn a profit—Robinhood traders can't scoop up their shares fast enough. Take cloud platform provider Fastly (FSLY $85), for example. Traders turned this $1 billion startup into a $10 billion player virtually overnight despite the company's lack of net income—ever. All of that changed after the firm's latest earnings report, however. After a slight revenue miss (the company's Q3 revenue came in around $70 million versus analyst expectations for $75 million), FSLY shares began their rapid 33% decline. Let's back up and think about this: Here we have a company generating a paltry $70 million per quarter, earning zero net income, and traders were still piling in when its market cap hit $10 billion. Insanity. This is precisely the type of plunge we witnessed—ad nauseam—in early 2000. Let this be a warning shot to traders piling into unprofitable companies with reckless abandon. We've seen this movie before, and it does not end well. Here's what bothers us the most about the Fastly case study: We are willing to bet that the majority of "investors" who jumped in to buy shares couldn't explain what the company actually does if their lives depended on it. Here's a really simple basic rule to follow: Don't invest in any company before understanding what they do and what their unique value proposition is for customers. Then, it sure wouldn't hurt to actually look at the financials.
Oil & Gas Exploration & Production
07. ConocoPhillips will acquire shale E&P firm Concho Resources for $9.7 billion
Considering the market cap of Permian Basin operator Concho Resources (CXO $49) was $32 billion precisely two years ago, it seems like a golden opportunity for ConocoPhillips (COP $34): the latter will acquire the former for $9.7 billion in an all-stock deal. In a sign of just how hard the energy sector has fallen over the past two years, COP's market cap has dropped from $90 billion two years ago to just $36 billion today. For many shale producers facing chronic $40 per barrel oil, it is simply a case of be acquired or face possible bankruptcy. Does the deal make sense for Conoco? Our guess is that in two years it will look as brilliant as the 2019 Occidental (OXY $10) takeover of Anadarko for $38 billion looked stupid (Occidental's market cap now sits below $10 billion—yikes). The global economy will surge forward when the pandemic is behind us, and the rumors of oil's death as the world's leading energy source have been greatly exaggerated—at least the timeline of its demise. We continue to underweight the energy sector, with Chevron (CVX) remaining the one integrated oil company we own. At $33 per share, however, and with a 5% dividend yield, COP seems quite undervalued.
Application & Systems Software
06. SpaceX selects Microsoft (not Amazon) to run its space-based cloud computing network
It is almost embarrassing to watch Jeff Bezos pretend to compete with Elon Musk for commercial space dominance. He's like a little kid donning an astronaut costume and proclaiming, "take that Neil Armstrong!" In his own mind, Bezos's Blue Origin is right up there with SpaceX; hell, maybe better. Of course, in reality Blue Origin continues to be the pet project of the world's richest man while SpaceX is busy launching astronauts into orbit and building out a massive fleet of satellites which will provide high-speed Internet service to even the most remote parts of the globe. (Right on cue, Bezos stated that Blue Origin is going to build an even better satellite system—despite the lack of even one satellite in orbit.) In a move that should come as no surprise, SpaceX just selected Microsoft's (MSFT $214) Azure service to operate and manage its cloud computing needs for the Starlink system, barely considering Amazon (AMZN $3,226) Web Services (AWS) as an option. Considering the scope of the project, which will consist of linking cloud, space, and ground capabilities, crunching almost unfathomable amounts of data, and helping to control the orbits of SpaceX satellites, this was a huge win for Microsoft. Beyond the Starlink project, Musk's SpaceX also landed a demo contract from the Pentagon for a new generation missile warning system. Assuming the demo leads to deployment, Microsoft would certainly get that contract as well. Recall that Amazon is currently suing the US government for the Pentagon's decision to go with Azure for its $10 billion JEDI program, snubbing AWS. We see very little chance of the lawsuit changing the outcome of the JEDI contract, though we wonder how it might have poisoned the well for Amazon's hopes of landing government contracts in the future. For its core business of online retailing, no other company can compete with Amazon—which is why we own it within the Penn Global Leaders Club. We just wish Bezos would shut up and let someone else run the company. Maybe he could run Blue Origin full time and work on landing one single contract.
Global Strategy: Europe
05. While the pandemic rages in Europe, parliament focuses on what to call a veggie burger
One of our favorite pastimes is making fun of the European government. Let's face it, the only reason a "European Union" even exists is because of that continent's envy of the United States. The level of arrogance permeating the halls of the EU parliament in Brussels is stratospheric, which makes them such an easy target for ridicule. The latest? While the pandemic rages across the continent, EU lawmakers are focused on a critical issue: Whether or not to ban the likes of Beyond Meat (BYND $176) from calling their plant-based patties "burgers." Lawmakers will debate and vote on an amendment this month which would force these companies to label their burgers "discs" and their sausages "tubes." i.e. Beyond Burgers would become "veggie discs," and Beyond Breakfast Sausage would become "plant-based tubes." Parliamentarians will vote on another amendment, pushed by the European dairy union, which would ban the use of the word "creamy" when describing a non-dairy item. And we make fun of our government. Is it any wonder Brits voted to pull out of this dysfunctional entity?
Business & Professional Services
04. Bitcoin pops after PayPal announces it will allow customers to trade in cryptocurrencies
The value of Bitcoin "shares" surged to $13,000 following news that credit services provider PayPal (PYPL $213) will begin allowing its customers to use the digital currency on its platform. The firm said Bitcoins can be used for purchases with its 26 million merchants around the world, and the currency will soon be allowed on Venmo, now a PayPal company. That being said, the firm will not hold cryptos on its balance sheet; instead, it will partner with cryptocurrency services firm Paxos Trust Company to assist in completing the transactions. This means that merchants won't have to actually deal with the digital currency, as Paxos will serve as the intermediary. Nonetheless, considering PayPal has some 300 million customers around the globe, Bitcoin advocates are celebrating the move. Shares of the digital currency have been extremely volatile this year, falling from around $10,000 in February to $5,000 in March, then climbing back to $13,000 this past week. The high value mark of the currency was $20,000 back in 2017. Investing in Bitcoin has been—and will continue to be—a complete gamble. Keep in mind that this currency does not exist in "hard" form, it only exists virtually. Considering the high level of sophistication of hackers around the world, expect to hear more stories in the near future of accounts being drained of Bitcoin. As for PayPal, we like the firm but don't like the 100 multiple on the share price.
Media & Entertainment
03. In blow to Katzenberg and Whitman, Quibi is already being shut down
Based on some of their questionable business decisions in the past, our respect for Jeffrey Katzenberg and Meg Whitman was already pretty low coming into this most recent foray; now it is virtually nonexistent. It was just this past April when Whitman, the former CEO of eBay and HP, came on-air to brag about her and Katzenberg's new streaming service known as Quibi. Not only wouldn't the pandemic hurt the new service, it may even enhance its value, claimed Whitman. Now, six months and billions of dollars later, Quibi is shutting down. Katzenberg cited the pandemic as one of the major factors in its demise. Wow. All of the great ideas out there waiting to be funded, and this duo was actually able to attract $2 billion for a questionable business proposition (Quibi's unique value proposition was that it would feature short-form news and entertainment videos of ten minutes or less—yawn). The power of name recognition. We've said it before and we'll say it again: There are so many mediocre to downright bad CEOs out there that it boggles the mind. Before buying shares in a company, investors need to perform some level of due diligence on that company's management team.
Cybersecurity
02. Cybersecurity firm McAfee goes public—again
We are always on the lookout for a promising IPO, so when we heard that well-known cybersecurity firm McAfee (MCFE $19) was going public, it piqued our interest. We even like the firm's anything-but-dull founder, John McAfee (OK, despite the libertarian's recent arrest in Spain over tax evasion charges; it should be noted that McAfee has not been affiliated with the eponymous company since 1994). However, there was one major obstacle keeping us from investing in MCFE shares, which began trading on Thursday the 22nd: it was the company's second trip to the public equity markets—Intel acquired the firm and took it private in 2011. Despite having eighteen underwriters working on the deal, the IPO turned out to be a bust. After raising $740 million on Wednesday (the company sold 37 million Class A shares at $20 apiece), shares began trading at $18.60, got as high as $19.34, and then spent most of the session declining. A late-session rally brought them back up to $18.68 at the close. Our largest concern is the company's hefty debt load, which will still sit around $4 billion after some of it is paid off with the IPO proceeds. To put that in perspective, $21 billion cybersecurity firm Fortinet (FTNT $128), which we own in the Penn New Frontier Fund, has an aggregate short- and long-term debt load of just $2.7 billion. With so many hands in the pie and a share structure that would be hard for an SEC lawyer to decipher, we would steer clear of this warmed-over offering.
Under the Radar Investment
01. Under the Radar: SPDR® Blackstone / GSO Senior Loan ETF
To say it is difficult finding "good" fixed income investments right now is the understatement of the century. Ten-year Treasuries are yielding just above one-half of one percent, and the 30-year T Bond is yielding 1.375%. Challenging times. That being said, one of our current favorites in the Penn Strategic Income Portfolio is our senior loan fund, the SPDR Blackstone GSO Senior Loan ETF (SRLN). Senior loans are debt instruments issued by a bank to a company to fund any number of projects or to retire existing debt with higher interest rates. Note the term "senior." This means that, in the case of bankruptcy, owners of senior bank loans will be paid first as assets are liquidated—before creditors, preferred shareholders, and stockholders. SRLN currently owns around 220 such senior loans outstanding to companies such as: Bass Pro Shop, Petsmart, Athena Health, and Rackspace Technology. The average maturity of these loans is a comforting 4.72 years, and the beta (risk level on a scale of zero to one, with one equaling the risk of the S&P 500) is 0.0859. Our favorite aspect of the fund in these days of ultra-low rates? It yields 5%.
Answer
Business journalist Charles Dow, founder of financial news bureau Dow, Jones & Co., created the Dow Jones Industrial Average back in 1896. Prominent business newspaper The Wall Street Journal introduced the DJIA on 26 May of that same year. Of the twelve original component companies of the Dow, only General Electric is still in existence as a publicly-traded company. It was jettisoned from the index in 2018. In 1928, the DJIA was expanded to include 30 companies.
Headlines for the Week of 30 Aug—05 Sep 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
History of the Dow Jones Industrial Average...
Though we label it "irrelevant" below, the Dow Jones Industrial Average does have an illustrious history. Who started the index and what was the publication which introduced it to the investing community? Also, one of the original twelve stocks on the Dow is still in existence—what company is it?
Penn Trading Desk:
(21 Aug 20) Adding Thematic Fund to Dynamic Growth Strategy
We have added a robotics fund to the DGS to take advantage of the coming boom in automation—the movement will be transformational for society. This fund is full of dynamic small- and mid-cap names. Members, see the trading desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Consumer Finance
10. Kick 'em when they're down: Capital One cuts credit card limits
We closed credit card company Capital One (COF $38-$71-$108) on 17 Jan of this year from the Penn Global Leaders Club at $104.13, taking our double digit gains. We took issue with some moves that management had been making. Our timing was spot-on—shares began tumbling to $38 a few months later. This week, the company made a move that buttresses our decision: As Americans are struggling due to the pandemic, Capital One began slashing the credit card limits of a large number of customers. And these customers have been expressing their outrage on social media. Many saw their credit limits cut by one-third or even two-thirds, with the effect of damaging their loan balance to limit ratio and, in turn, dragging down their credit scores. The company said the move was simply part of a periodic review of accounts it performs on a regular basis, but the timing certainly seems suspect. Capital One is the third-largest credit card issuer behind JP Morgan (JPM) and Citigroup (C). For their part, investors liked the move, pushing shares up just shy of 2%. We are currently underweighting Financials, and COF certainly isn't on our radar screen.
Multiline Retail
09. Penn Global Leader Target Corp. notches a blowout quarter
As if they weren't already on a tear, shares of Penn Global Leaders Club member Target Corp (TGT $149) popped another 9%—reaching yet another record high—after the retailer posted a simply stunning quarter. Overall, online and in-store sales were up 24.3% for the quarter, with the company attracting ten million new customers to its digital platform. Earnings per share blew past the expected $1.62, hitting $3.38, and profits rose by 80%, to $1.7 billion. Target breaks its merchandise down into five categories—all five showed strong growth. The company's electronics line was up 70% year-over-year, with the other six categories—to include beauty and apparel—rising by about 20% each. Despite launching just a year ago, Good & Gather, the firm's private label grocery brand, rose above the $1 billion in total sales mark. When a company reports surprise earnings, either to the upside or the downside, we like to review what the analysts were saying leading into the announcement. Our favorite came from Morningstar: the investment research firm had a one-star (sell) rating on TGT with a fair value of $98/share. Oops. We bought TGT shares during that nightmarish week before Christmas, 2018.
Biotechnology
08. Johnson & Johnson to buy biotech Momenta Pharma for $6.5 billion
One year ago, Momenta Pharmaceuticals (MNTA $12-$52-$40) was a $1.2 billion small-cap biotech with few standout therapies which might attract investors' attention. The company's work, however, did catch the eye of a much larger competitor: pharma giant Johnson & Johnson (JNJ $151) just agreed to buy the firm for $6.5 billion in cash. The catalyst for the acquisition was Momenta's experimental drug nipocalimab, a potential therapy for use in a number of autoimmune diseases. These disorders, which include type 1 diabetes, multiple sclerosis, and rheumatoid arthritis, cause either abnormally low or high activity within a person's immune system. Specifically, nipocalimab has shown promise in treating a rare blood disorder affecting fetuses and newborns. Despite the current focus on finding vaccines and therapies for Covid-19, big pharma has put a high priority on tackling autoimmune diseases, as this deal demonstrates. Somewhat surprisingly, this is the biggest acquisition in the pharma industry year-to-date, with Sanofi's recent $3.4 billion acquisition of US biotech Principia Biopharma coming in second. For investors, selecting the right micro- or small-cap biotech can be like finding a needle in a haystack, as unsuccessful trials often result in massive drops in a firm's share price. For investors looking for the next potential small- or mid-cap biotech to be acquired, the best bet is generally a focused biotech ETF with good management and a penchant for lower market caps. The SPDR® S&P Biotech ETF (XBI $112), a member of the Penn Dynamic Growth Strategy, is a good example.
Pharmaceuticals
07. AstraZeneca's novel approach: a combination vaccine and treatment
AstraZeneca (AZN $36-$57-$65), Britain's $150B drug powerhouse, has begun testing an exciting new therapy: AZD7442 is designed to not only prevent Covid-19, but also serve as a therapy for those already afflicted with the virus. The drug uses a combination of two monoclonal antibodies (mAbs), harvested antibodies made by identical immune cells which specifically bind to that substance, to create a cocktail to fight off and guard against a specific infection. The Phase 1 clinical trial, which is now underway in the UK, is being funded by the US Department of Defense and the Biomedical Advanced Research and Development Authority (BARDA). Leading infectious disease scientists have endorsed this mAb approach, which has been used successfully in the treatment of a number of cancer types. If the AZD7442 trials go as hoped, expect the therapy to receive fast-track designation by the FDA. Based on current valuations, shares of AZN may seem expensive, but success with AZD7442 could propel them higher.
Airlines
06. Delta to furlough 1,900 pilots, American to reduce staff by 19,000
Delta's (DAL $18-$30-$62) head of flight operations put it succinctly: "We are six months into this pandemic and only 25% of our revenues have been recovered." American Airlines Group (AAL $8-$13-$32) CEO Doug Parker echoed similar sentiments, stating that long-haul trips in Q4 of this year will equal about 25% of last year's Q4 rate. Against that backdrop, both companies have announced a new round of furloughs to take effect when government stimulus aid to the airlines ends on 30 Sep. Delta, which we purchased within the Intrepid Trading Platform at a steep discount back in May, said it will furlough 1,941 pilots—out of the 11,200 or so on the books—unless pilots take a 15% cut in pay. The Air Line Pilots Association, which represents the unionized group, has balked at that request. American Airlines announced even more draconian cuts, saying that 19,000 employees will be involuntarily furloughed after the government relief ends. Incredibly, American Airlines has lost 77.7% of its value since January of 2018, versus a 50% loss for Delta and a 23% gain in the S&P 500. Our Delta position is up 15% since we purchased it, and we see plenty of growth ahead as the pandemic subsides.
Global Exchanges & Indexes
05. The Dow's latest moves won't make the outdated index more relevant
It always amazes us how much attention is given to the level of the Dow Jones Industrial Average on any trading day as opposed to the much more reflective S&P 500. After all, out of roughly 2,500 listed companies on the New York Stock Exchange and another 3,300 on the Nasdaq, only 30 select entrants make up the DJIA. And these holdings are price-weighted, meaning companies are weighted in proportion to their share price, not market cap. In other words, another great day for Apple (AAPL $500)—and there have been plenty of those recently—probably means a strong day for the Dow. Compare this to the cap-weighted S&P 500 Index, which means the bigger a company, the more impact it can have on the S&P's return. No matter how big a company, it is still weighted against 499 others.
Let's stick with the Apple example, since the tech giant is about to undergo a four-for-one stock split. Right now, despite its $2 trillion size, Apple still makes up a little over 7% of the S&P 500 Index. After the split, nothing will change (its market cap won't change just because it split). In the Dow, however, where Apple also finds a home, it will suddenly become one-quarter as relevant to the daily returns. That's crazy. Or how about leaving entire industries virtually unrepresented, such as utilities! Also crazy.
We delve into this subject because the Dow is about to jettison three stocks and add three others in their place. Salesforce (CRM) will replace Exxon Mobil (XOM), Amgen (AMGN) will replace Pfizer (PFE), and Honeywell (HON) will replace Raytheon Technologies (RTX). The last two swaps are real head-scratchers. Even the first: Is Salesforce the most relevant tech company to infuse new blood into the Dow? What about Facebook (FB)?
Perhaps the Dow is still the financial press' favorite benchmark because it sounds more sensational to say, "DOW LOSES 1,000 POINTS" than it does to say, "S&P OFF 100." Irrespective, back during the bloodbath that was March, when the S&P 500 had plunged to below 2,500, we made our year-end prediction: "The index will rise to 3,500 by December 31st." It sits at 3,436 right now. We didn't bother making a prediction for the Dow.
Food Products
04. Boring old JM Smucker just knocked Q1 earnings out of the park
We should have seen it coming: In the midst of a lockdown and a mass migration of employees from their office buildings to their new in-home offices, packaged foods sales skyrocketed. Nothing made that more evident than the latest quarterly results from staid old JM Smucker (SJM $92-$121-$126), the 123-year-old, $14 billion packaged foods company. Best known for products such as Smucker's, Folgers, Jif, Crisco, and the like, the Ohio-based company increased earnings-per-share by 50% from the same quarter last year, and overall revenues by 11% from the same period in 2019. While their biggest category, Retail Pet Foods, increased by just 3% year-over-year (after all, the pets have always been at home), the Retail Consumer Foods division saw a 22% jump in sales. President and CEO Mark Smucker also said the firm had raised its fiscal 2021 guidance, now expecting between $8.20 and $8.60 in EPS and nearly $1 billion in free cash flow. Smucker said he expects the momentum to continue post-pandemic as Americans fell back in love with old brands, and as the company rolls out a large new marketing campaign. Time will tell, but the Q1 report was enough to drive the shares up over 7%. The company has a relatively decent P/E ratio of 18 (same as Penn holdings General Mills and B&G Foods), and we would put a fair value on the shares at around $125. That may not seem like much upside, but with its 3% dividend yield and very strong pet foods business, it is a pretty safe bet.
Multiline Retail
03. At $15, Nordstrom shares may be the retail deal of the decade, but...
Precisely one year ago, we made note of Nordstrom's (JWN $12-$15-$43) rather odd 16% one-day spike in price—to $31. Odd because it came on the heels of an earnings report that showed a 5% drop in revenue from Q2 of 2018. The spike apparently took place because analysts were expecting a much deeper drop. Here we are a year later and, with a pandemic added to the mix, analysts were really bracing for the worst. In fact, betting odds called for a 39% drop in sales from 2019. It wasn't even close. JWN shares were trading down around 6%—to $14.66—following news of a ghastly 53% drop in sales for the quarter. Even online sales, the bright spot for most retailers as customers were stuck at home behind their computers, dropped 5%. Nordstrom's earnings report even made the Kohl's quarter look good, and that was no easy feat.
Despite the reasons management gave for the drop, here's our biggest concern: Nordstrom makes its living off of selling higher-end clothing and accessories to an upscale workforce that wants to look nice in the office. When the family dog, Scruffy, becomes the only one needed to impress, Milk Bones—not fancy clothing—becomes the go-to purchase. (Milk Bones are a JM Smucker name brand, by the way.) For the quarter, Nordstrom had just shy of $2 billion in sales (down from roughly $4 billion in the same quarter last year) and a net loss of $255 million. The company doesn't have many money-losing quarters, however, and despite the lack of a P/E ratio due to that loss, its multiple had been as low as 4.1 the first week of April. Yes, the company's short-term and long-term liabilities to assets don't look great (roughly $4B/$4B and $6B/$6B, respectively), but odds are great that the company isn't going the way of JC Penney.
When the inevitable return to normalcy does come, we could easily see the shares trading at twice their current price.
Robotics & Industrial Machinery
02. 3D printing firm Desktop Metal to go public with a "blank check"
It seems to be all the rave on Wall Street this year: the SPAC, or Special Purpose Acquisition Company. A SPAC is a blank-check company that either does not have its own business plan or builds one around a merger with another company. In an upcoming issue of the Penn Wealth Report, for example, we discuss the SPAC Fortress Value Acquisition Corp (FVAC $12) funding America's return to rare earth mining via its "blank check" to MP Materials, owner of the Mountain Pass mining operation in California. Now, another SPAC, Trine Acquisition Corp, will provide advanced 3D printing "unicorn" (a startup valued at over $1B) Desktop Metal $575 million to go public under the symbol DM within the next few months.
Desktop is a leader in 3D printing, producing stainless steel, aluminum, and other metal alloy parts in large quantities at an assembly line rate. CEO Ric Fulop said the company's latest machines will be able to "print" critical components for the aerospace industry at 100-times the speed of current high-end printers at about one-twentieth the cost. He gives the example of a water impeller pump for a BMW auto; it would typically cost $80 to produce the pump, but one of Fulop's machines created it for $5. Desktop Metal may truly usher in the 3D world promised by advocates for years. Forget the low cost of labor in countries like China, imagine Fulop's machines pumping out intricate metal parts en masse here in the United States. That could bring about a transformational shift in global economics, greatly reducing America's reliance on cheap overseas labor.
Think that is a pie-in-the-sky promise? Remember how we were once at the mercy of OPEC for our energy needs? Keep an eye out for DM when it goes public later this year.
Under the Radar Investment
01. Under the Radar: Black Hills Corp
Black Hills Corp (BKH $48-$54-$87) is a mid-cap ($3.8B) diversified utility which provides regulated gas and electric power to states in the Midwest and mountain regions. The firm also runs a mining operation via its Wyodak Resources division. With steady revenue of roughly $1.7 billion annually, the firm had $200 million in net income last year and cash flow of $7.02 per share. BKH has fallen out of favor with hedge funds recently, dragging its share price down from $87 to $48, before the shares rebounded to their current level of $54. With an ultra-low beta of 0.3049 (5Y) and a dividend yield of 4%, the shares are worth a look for income-oriented investors.
Answer
Business journalist Charles Dow, founder of financial news bureau Dow, Jones & Co., created the Dow Jones Industrial Average back in 1896. Prominent business newspaper The Wall Street Journal introduced the DJIA on 26 May of that same year. Of the twelve original component companies of the Dow, only General Electric is still in existence as a publicly-traded company. It was jettisoned from the index in 2018. In 1928, the DJIA was expanded to include 30 companies.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
History of the Dow Jones Industrial Average...
Though we label it "irrelevant" below, the Dow Jones Industrial Average does have an illustrious history. Who started the index and what was the publication which introduced it to the investing community? Also, one of the original twelve stocks on the Dow is still in existence—what company is it?
Penn Trading Desk:
(21 Aug 20) Adding Thematic Fund to Dynamic Growth Strategy
We have added a robotics fund to the DGS to take advantage of the coming boom in automation—the movement will be transformational for society. This fund is full of dynamic small- and mid-cap names. Members, see the trading desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Consumer Finance
10. Kick 'em when they're down: Capital One cuts credit card limits
We closed credit card company Capital One (COF $38-$71-$108) on 17 Jan of this year from the Penn Global Leaders Club at $104.13, taking our double digit gains. We took issue with some moves that management had been making. Our timing was spot-on—shares began tumbling to $38 a few months later. This week, the company made a move that buttresses our decision: As Americans are struggling due to the pandemic, Capital One began slashing the credit card limits of a large number of customers. And these customers have been expressing their outrage on social media. Many saw their credit limits cut by one-third or even two-thirds, with the effect of damaging their loan balance to limit ratio and, in turn, dragging down their credit scores. The company said the move was simply part of a periodic review of accounts it performs on a regular basis, but the timing certainly seems suspect. Capital One is the third-largest credit card issuer behind JP Morgan (JPM) and Citigroup (C). For their part, investors liked the move, pushing shares up just shy of 2%. We are currently underweighting Financials, and COF certainly isn't on our radar screen.
Multiline Retail
09. Penn Global Leader Target Corp. notches a blowout quarter
As if they weren't already on a tear, shares of Penn Global Leaders Club member Target Corp (TGT $149) popped another 9%—reaching yet another record high—after the retailer posted a simply stunning quarter. Overall, online and in-store sales were up 24.3% for the quarter, with the company attracting ten million new customers to its digital platform. Earnings per share blew past the expected $1.62, hitting $3.38, and profits rose by 80%, to $1.7 billion. Target breaks its merchandise down into five categories—all five showed strong growth. The company's electronics line was up 70% year-over-year, with the other six categories—to include beauty and apparel—rising by about 20% each. Despite launching just a year ago, Good & Gather, the firm's private label grocery brand, rose above the $1 billion in total sales mark. When a company reports surprise earnings, either to the upside or the downside, we like to review what the analysts were saying leading into the announcement. Our favorite came from Morningstar: the investment research firm had a one-star (sell) rating on TGT with a fair value of $98/share. Oops. We bought TGT shares during that nightmarish week before Christmas, 2018.
Biotechnology
08. Johnson & Johnson to buy biotech Momenta Pharma for $6.5 billion
One year ago, Momenta Pharmaceuticals (MNTA $12-$52-$40) was a $1.2 billion small-cap biotech with few standout therapies which might attract investors' attention. The company's work, however, did catch the eye of a much larger competitor: pharma giant Johnson & Johnson (JNJ $151) just agreed to buy the firm for $6.5 billion in cash. The catalyst for the acquisition was Momenta's experimental drug nipocalimab, a potential therapy for use in a number of autoimmune diseases. These disorders, which include type 1 diabetes, multiple sclerosis, and rheumatoid arthritis, cause either abnormally low or high activity within a person's immune system. Specifically, nipocalimab has shown promise in treating a rare blood disorder affecting fetuses and newborns. Despite the current focus on finding vaccines and therapies for Covid-19, big pharma has put a high priority on tackling autoimmune diseases, as this deal demonstrates. Somewhat surprisingly, this is the biggest acquisition in the pharma industry year-to-date, with Sanofi's recent $3.4 billion acquisition of US biotech Principia Biopharma coming in second. For investors, selecting the right micro- or small-cap biotech can be like finding a needle in a haystack, as unsuccessful trials often result in massive drops in a firm's share price. For investors looking for the next potential small- or mid-cap biotech to be acquired, the best bet is generally a focused biotech ETF with good management and a penchant for lower market caps. The SPDR® S&P Biotech ETF (XBI $112), a member of the Penn Dynamic Growth Strategy, is a good example.
Pharmaceuticals
07. AstraZeneca's novel approach: a combination vaccine and treatment
AstraZeneca (AZN $36-$57-$65), Britain's $150B drug powerhouse, has begun testing an exciting new therapy: AZD7442 is designed to not only prevent Covid-19, but also serve as a therapy for those already afflicted with the virus. The drug uses a combination of two monoclonal antibodies (mAbs), harvested antibodies made by identical immune cells which specifically bind to that substance, to create a cocktail to fight off and guard against a specific infection. The Phase 1 clinical trial, which is now underway in the UK, is being funded by the US Department of Defense and the Biomedical Advanced Research and Development Authority (BARDA). Leading infectious disease scientists have endorsed this mAb approach, which has been used successfully in the treatment of a number of cancer types. If the AZD7442 trials go as hoped, expect the therapy to receive fast-track designation by the FDA. Based on current valuations, shares of AZN may seem expensive, but success with AZD7442 could propel them higher.
Airlines
06. Delta to furlough 1,900 pilots, American to reduce staff by 19,000
Delta's (DAL $18-$30-$62) head of flight operations put it succinctly: "We are six months into this pandemic and only 25% of our revenues have been recovered." American Airlines Group (AAL $8-$13-$32) CEO Doug Parker echoed similar sentiments, stating that long-haul trips in Q4 of this year will equal about 25% of last year's Q4 rate. Against that backdrop, both companies have announced a new round of furloughs to take effect when government stimulus aid to the airlines ends on 30 Sep. Delta, which we purchased within the Intrepid Trading Platform at a steep discount back in May, said it will furlough 1,941 pilots—out of the 11,200 or so on the books—unless pilots take a 15% cut in pay. The Air Line Pilots Association, which represents the unionized group, has balked at that request. American Airlines announced even more draconian cuts, saying that 19,000 employees will be involuntarily furloughed after the government relief ends. Incredibly, American Airlines has lost 77.7% of its value since January of 2018, versus a 50% loss for Delta and a 23% gain in the S&P 500. Our Delta position is up 15% since we purchased it, and we see plenty of growth ahead as the pandemic subsides.
Global Exchanges & Indexes
05. The Dow's latest moves won't make the outdated index more relevant
It always amazes us how much attention is given to the level of the Dow Jones Industrial Average on any trading day as opposed to the much more reflective S&P 500. After all, out of roughly 2,500 listed companies on the New York Stock Exchange and another 3,300 on the Nasdaq, only 30 select entrants make up the DJIA. And these holdings are price-weighted, meaning companies are weighted in proportion to their share price, not market cap. In other words, another great day for Apple (AAPL $500)—and there have been plenty of those recently—probably means a strong day for the Dow. Compare this to the cap-weighted S&P 500 Index, which means the bigger a company, the more impact it can have on the S&P's return. No matter how big a company, it is still weighted against 499 others.
Let's stick with the Apple example, since the tech giant is about to undergo a four-for-one stock split. Right now, despite its $2 trillion size, Apple still makes up a little over 7% of the S&P 500 Index. After the split, nothing will change (its market cap won't change just because it split). In the Dow, however, where Apple also finds a home, it will suddenly become one-quarter as relevant to the daily returns. That's crazy. Or how about leaving entire industries virtually unrepresented, such as utilities! Also crazy.
We delve into this subject because the Dow is about to jettison three stocks and add three others in their place. Salesforce (CRM) will replace Exxon Mobil (XOM), Amgen (AMGN) will replace Pfizer (PFE), and Honeywell (HON) will replace Raytheon Technologies (RTX). The last two swaps are real head-scratchers. Even the first: Is Salesforce the most relevant tech company to infuse new blood into the Dow? What about Facebook (FB)?
Perhaps the Dow is still the financial press' favorite benchmark because it sounds more sensational to say, "DOW LOSES 1,000 POINTS" than it does to say, "S&P OFF 100." Irrespective, back during the bloodbath that was March, when the S&P 500 had plunged to below 2,500, we made our year-end prediction: "The index will rise to 3,500 by December 31st." It sits at 3,436 right now. We didn't bother making a prediction for the Dow.
Food Products
04. Boring old JM Smucker just knocked Q1 earnings out of the park
We should have seen it coming: In the midst of a lockdown and a mass migration of employees from their office buildings to their new in-home offices, packaged foods sales skyrocketed. Nothing made that more evident than the latest quarterly results from staid old JM Smucker (SJM $92-$121-$126), the 123-year-old, $14 billion packaged foods company. Best known for products such as Smucker's, Folgers, Jif, Crisco, and the like, the Ohio-based company increased earnings-per-share by 50% from the same quarter last year, and overall revenues by 11% from the same period in 2019. While their biggest category, Retail Pet Foods, increased by just 3% year-over-year (after all, the pets have always been at home), the Retail Consumer Foods division saw a 22% jump in sales. President and CEO Mark Smucker also said the firm had raised its fiscal 2021 guidance, now expecting between $8.20 and $8.60 in EPS and nearly $1 billion in free cash flow. Smucker said he expects the momentum to continue post-pandemic as Americans fell back in love with old brands, and as the company rolls out a large new marketing campaign. Time will tell, but the Q1 report was enough to drive the shares up over 7%. The company has a relatively decent P/E ratio of 18 (same as Penn holdings General Mills and B&G Foods), and we would put a fair value on the shares at around $125. That may not seem like much upside, but with its 3% dividend yield and very strong pet foods business, it is a pretty safe bet.
Multiline Retail
03. At $15, Nordstrom shares may be the retail deal of the decade, but...
Precisely one year ago, we made note of Nordstrom's (JWN $12-$15-$43) rather odd 16% one-day spike in price—to $31. Odd because it came on the heels of an earnings report that showed a 5% drop in revenue from Q2 of 2018. The spike apparently took place because analysts were expecting a much deeper drop. Here we are a year later and, with a pandemic added to the mix, analysts were really bracing for the worst. In fact, betting odds called for a 39% drop in sales from 2019. It wasn't even close. JWN shares were trading down around 6%—to $14.66—following news of a ghastly 53% drop in sales for the quarter. Even online sales, the bright spot for most retailers as customers were stuck at home behind their computers, dropped 5%. Nordstrom's earnings report even made the Kohl's quarter look good, and that was no easy feat.
Despite the reasons management gave for the drop, here's our biggest concern: Nordstrom makes its living off of selling higher-end clothing and accessories to an upscale workforce that wants to look nice in the office. When the family dog, Scruffy, becomes the only one needed to impress, Milk Bones—not fancy clothing—becomes the go-to purchase. (Milk Bones are a JM Smucker name brand, by the way.) For the quarter, Nordstrom had just shy of $2 billion in sales (down from roughly $4 billion in the same quarter last year) and a net loss of $255 million. The company doesn't have many money-losing quarters, however, and despite the lack of a P/E ratio due to that loss, its multiple had been as low as 4.1 the first week of April. Yes, the company's short-term and long-term liabilities to assets don't look great (roughly $4B/$4B and $6B/$6B, respectively), but odds are great that the company isn't going the way of JC Penney.
When the inevitable return to normalcy does come, we could easily see the shares trading at twice their current price.
Robotics & Industrial Machinery
02. 3D printing firm Desktop Metal to go public with a "blank check"
It seems to be all the rave on Wall Street this year: the SPAC, or Special Purpose Acquisition Company. A SPAC is a blank-check company that either does not have its own business plan or builds one around a merger with another company. In an upcoming issue of the Penn Wealth Report, for example, we discuss the SPAC Fortress Value Acquisition Corp (FVAC $12) funding America's return to rare earth mining via its "blank check" to MP Materials, owner of the Mountain Pass mining operation in California. Now, another SPAC, Trine Acquisition Corp, will provide advanced 3D printing "unicorn" (a startup valued at over $1B) Desktop Metal $575 million to go public under the symbol DM within the next few months.
Desktop is a leader in 3D printing, producing stainless steel, aluminum, and other metal alloy parts in large quantities at an assembly line rate. CEO Ric Fulop said the company's latest machines will be able to "print" critical components for the aerospace industry at 100-times the speed of current high-end printers at about one-twentieth the cost. He gives the example of a water impeller pump for a BMW auto; it would typically cost $80 to produce the pump, but one of Fulop's machines created it for $5. Desktop Metal may truly usher in the 3D world promised by advocates for years. Forget the low cost of labor in countries like China, imagine Fulop's machines pumping out intricate metal parts en masse here in the United States. That could bring about a transformational shift in global economics, greatly reducing America's reliance on cheap overseas labor.
Think that is a pie-in-the-sky promise? Remember how we were once at the mercy of OPEC for our energy needs? Keep an eye out for DM when it goes public later this year.
Under the Radar Investment
01. Under the Radar: Black Hills Corp
Black Hills Corp (BKH $48-$54-$87) is a mid-cap ($3.8B) diversified utility which provides regulated gas and electric power to states in the Midwest and mountain regions. The firm also runs a mining operation via its Wyodak Resources division. With steady revenue of roughly $1.7 billion annually, the firm had $200 million in net income last year and cash flow of $7.02 per share. BKH has fallen out of favor with hedge funds recently, dragging its share price down from $87 to $48, before the shares rebounded to their current level of $54. With an ultra-low beta of 0.3049 (5Y) and a dividend yield of 4%, the shares are worth a look for income-oriented investors.
Answer
Business journalist Charles Dow, founder of financial news bureau Dow, Jones & Co., created the Dow Jones Industrial Average back in 1896. Prominent business newspaper The Wall Street Journal introduced the DJIA on 26 May of that same year. Of the twelve original component companies of the Dow, only General Electric is still in existence as a publicly-traded company. It was jettisoned from the index in 2018. In 1928, the DJIA was expanded to include 30 companies.
Headlines for the Week of 23 Aug—29 Aug 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
History of the Dow Jones Industrial Average...
Though we label it "irrelevant" below, the Dow Jones Industrial Average does have an illustrious history. Who started the index and what was the publication which introduced it to the investing community? Also, one of the original twelve stocks on the Dow is still in existence—what company is it?
Penn Trading Desk:
(21 Aug 20) Adding Thematic Fund to Dynamic Growth Strategy
We have added a robotics fund to the DGS to take advantage of the coming boom in automation—the movement will be transformational for society. This fund is full of dynamic small- and mid-cap names. Members, see the trading desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
IT Software & Services
10. Why does Amazon want to buy warmed-over Rackspace shares?
Rackspace (RXT $15-$20-$20) is an end-to-end cloud services provider for companies of all sizes. From web hosting to managing a firm's cloud experience—to include cybersecurity—RXT works across the various platforms (Amazon Web Services, Azure, OpenStack) to create a seamless digital experience for customers. When the firm IPO'd on 05 August, tumbling 20% on the first day, it must have felt a sense of déjà vu, as it had a nearly identical experience the last time it went public—in August of 2008. Four years ago, private-equity group Apollo Global Management took Rackspace private in a deal valued at north of $4 billion, then unloaded all of that debt off on the company it just brought back to the public market. As of right now, RXT has a market cap of $3.8 billion and long-term debt of $4.8 billion, and that market cap is so high only due to a 22% one-week run-up in the share price.
Which leads us to the real story. RXT shares rose from around $16 to above $20 on news that Amazon is in talks to invest in the tech services provider. Why would Amazon, a competitor in one sense and a partner in another, want to become a minority shareholder in Rackspace? The only answer that makes sense to us is that Amazon may feel it can steer Rackspace customers away from using Microsoft Azure, the Google Cloud, and other platforms and toward AWS. The legality of that seems questionable. From a strictly fiscal standpoint, looking at RXT's financials, the move doesn't make much sense. Let's see if Amazon's chief cloud competitors have anything to say about the deal.
Multiline Retail
09. Penn Global Leader Target Corp. notches a blowout quarter
As if they weren't already on a tear, shares of Penn Global Leaders Club member Target Corp (TGT $149) popped another 9%—reaching yet another record high—after the retailer posted a simply stunning quarter. Overall, online and in-store sales were up 24.3% for the quarter, with the company attracting ten million new customers to its digital platform. Earnings per share blew past the expected $1.62, hitting $3.38, and profits rose by 80%, to $1.7 billion. Target breaks its merchandise down into five categories—all five showed strong growth. The company's electronics line was up 70% year-over-year, with the other six categories—to include beauty and apparel—rising by about 20% each. Despite launching just a year ago, Good & Gather, the firm's private label grocery brand, rose above the $1 billion in total sales mark. When a company reports surprise earnings, either to the upside or the downside, we like to review what the analysts were saying leading into the announcement. Our favorite came from Morningstar: the investment research firm had a one-star (sell) rating on TGT with a fair value of $98/share. Oops. We bought TGT shares during that nightmarish week before Christmas, 2018.
Biotechnology
08. Johnson & Johnson to buy biotech Momenta Pharma for $6.5 billion
One year ago, Momenta Pharmaceuticals (MNTA $12-$52-$40) was a $1.2 billion small-cap biotech with few standout therapies which might attract investors' attention. The company's work, however, did catch the eye of a much larger competitor: pharma giant Johnson & Johnson (JNJ $151) just agreed to buy the firm for $6.5 billion in cash. The catalyst for the acquisition was Momenta's experimental drug nipocalimab, a potential therapy for use in a number of autoimmune diseases. These disorders, which include type 1 diabetes, multiple sclerosis, and rheumatoid arthritis, cause either abnormally low or high activity within a person's immune system. Specifically, nipocalimab has shown promise in treating a rare blood disorder affecting fetuses and newborns. Despite the current focus on finding vaccines and therapies for Covid-19, big pharma has put a high priority on tackling autoimmune diseases, as this deal demonstrates. Somewhat surprisingly, this is the biggest acquisition in the pharma industry year-to-date, with Sanofi's recent $3.4 billion acquisition of US biotech Principia Biopharma coming in second. For investors, selecting the right micro- or small-cap biotech can be like finding a needle in a haystack, as unsuccessful trials often result in massive drops in a firm's share price. For investors looking for the next potential small- or mid-cap biotech to be acquired, the best bet is generally a focused biotech ETF with good management and a penchant for lower market caps. The SPDR® S&P Biotech ETF (XBI $112), a member of the Penn Dynamic Growth Strategy, is a good example.
Pharmaceuticals
07. AstraZeneca's novel approach: a combination vaccine and treatment
AstraZeneca (AZN $36-$57-$65), Britain's $150B drug powerhouse, has begun testing an exciting new therapy: AZD7442 is designed to not only prevent Covid-19, but also serve as a therapy for those already afflicted with the virus. The drug uses a combination of two monoclonal antibodies (mAbs), harvested antibodies made by identical immune cells which specifically bind to that substance, to create a cocktail to fight off and guard against a specific infection. The Phase 1 clinical trial, which is now underway in the UK, is being funded by the US Department of Defense and the Biomedical Advanced Research and Development Authority (BARDA). Leading infectious disease scientists have endorsed this mAb approach, which has been used successfully in the treatment of a number of cancer types. If the AZD7442 trials go as hoped, expect the therapy to receive fast-track designation by the FDA. Based on current valuations, shares of AZN may seem expensive, but success with AZD7442 could propel them higher.
Airlines
06. Delta to furlough 1,900 pilots, American to reduce staff by 19,000
Delta's (DAL $18-$30-$62) head of flight operations put it succinctly: "We are six months into this pandemic and only 25% of our revenues have been recovered." American Airlines Group (AAL $8-$13-$32) CEO Doug Parker echoed similar sentiments, stating that long-haul trips in Q4 of this year will equal about 25% of last year's Q4 rate. Against that backdrop, both companies have announced a new round of furloughs to take effect when government stimulus aid to the airlines ends on 30 Sep. Delta, which we purchased within the Intrepid Trading Platform at a steep discount back in May, said it will furlough 1,941 pilots—out of the 11,200 or so on the books—unless pilots take a 15% cut in pay. The Air Line Pilots Association, which represents the unionized group, has balked at that request. American Airlines announced even more draconian cuts, saying that 19,000 employees will be involuntarily furloughed after the government relief ends. Incredibly, American Airlines has lost 77.7% of its value since January of 2018, versus a 50% loss for Delta and a 23% gain in the S&P 500. Our Delta position is up 15% since we purchased it, and we see plenty of growth ahead as the pandemic subsides.
Global Exchanges & Indexes
05. The Dow's latest moves won't make the outdated index more relevant
It always amazes us how much attention is given to the level of the Dow Jones Industrial Average on any trading day as opposed to the much more reflective S&P 500. After all, out of roughly 2,500 listed companies on the New York Stock Exchange and another 3,300 on the Nasdaq, only 30 select entrants make up the DJIA. And these holdings are price-weighted, meaning companies are weighted in proportion to their share price, not market cap. In other words, another great day for Apple (AAPL $500)—and there have been plenty of those recently—probably means a strong day for the Dow. Compare this to the cap-weighted S&P 500 Index, which means the bigger a company, the more impact it can have on the S&P's return. No matter how big a company, it is still weighted against 499 others.
Let's stick with the Apple example, since the tech giant is about to undergo a four-for-one stock split. Right now, despite its $2 trillion size, Apple still makes up a little over 7% of the S&P 500 Index. After the split, nothing will change (its market cap won't change just because it split). In the Dow, however, where Apple also finds a home, it will suddenly become one-quarter as relevant to the daily returns. That's crazy. Or how about leaving entire industries virtually unrepresented, such as utilities! Also crazy.
We delve into this subject because the Dow is about to jettison three stocks and add three others in their place. Salesforce (CRM) will replace Exxon Mobil (XOM), Amgen (AMGN) will replace Pfizer (PFE), and Honeywell (HON) will replace Raytheon Technologies (RTX). The last two swaps are real head-scratchers. Even the first: Is Salesforce the most relevant tech company to infuse new blood into the Dow? What about Facebook (FB)?
Perhaps the Dow is still the financial press' favorite benchmark because it sounds more sensational to say, "DOW LOSES 1,000 POINTS" than it does to say, "S&P OFF 100." Irrespective, back during the bloodbath that was March, when the S&P 500 had plunged to below 2,500, we made our year-end prediction: "The index will rise to 3,500 by December 31st." It sits at 3,436 right now. We didn't bother making a prediction for the Dow.
Food Products
04. Boring old JM Smucker just knocked Q1 earnings out of the park
We should have seen it coming: In the midst of a lockdown and a mass migration of employees from their office buildings to their new in-home offices, packaged foods sales skyrocketed. Nothing made that more evident than the latest quarterly results from staid old JM Smucker (SJM $92-$121-$126), the 123-year-old, $14 billion packaged foods company. Best known for products such as Smucker's, Folgers, Jif, Crisco, and the like, the Ohio-based company increased earnings-per-share by 50% from the same quarter last year, and overall revenues by 11% from the same period in 2019. While their biggest category, Retail Pet Foods, increased by just 3% year-over-year (after all, the pets have always been at home), the Retail Consumer Foods division saw a 22% jump in sales. President and CEO Mark Smucker also said the firm had raised its fiscal 2021 guidance, now expecting between $8.20 and $8.60 in EPS and nearly $1 billion in free cash flow. Smucker said he expects the momentum to continue post-pandemic as Americans fell back in love with old brands, and as the company rolls out a large new marketing campaign. Time will tell, but the Q1 report was enough to drive the shares up over 7%. The company has a relatively decent P/E ratio of 18 (same as Penn holdings General Mills and B&G Foods), and we would put a fair value on the shares at around $125. That may not seem like much upside, but with its 3% dividend yield and very strong pet foods business, it is a pretty safe bet.
Multiline Retail
03. At $15, Nordstrom shares may be the retail deal of the decade, but...
Precisely one year ago, we made note of Nordstrom's (JWN $12-$15-$43) rather odd 16% one-day spike in price—to $31. Odd because it came on the heels of an earnings report that showed a 5% drop in revenue from Q2 of 2018. The spike apparently took place because analysts were expecting a much deeper drop. Here we are a year later and, with a pandemic added to the mix, analysts were really bracing for the worst. In fact, betting odds called for a 39% drop in sales from 2019. It wasn't even close. JWN shares were trading down around 6%—to $14.66—following news of a ghastly 53% drop in sales for the quarter. Even online sales, the bright spot for most retailers as customers were stuck at home behind their computers, dropped 5%. Nordstrom's earnings report even made the Kohl's quarter look good, and that was no easy feat.
Despite the reasons management gave for the drop, here's our biggest concern: Nordstrom makes its living off of selling higher-end clothing and accessories to an upscale workforce that wants to look nice in the office. When the family dog, Scruffy, becomes the only one needed to impress, Milk Bones—not fancy clothing—becomes the go-to purchase. (Milk Bones are a JM Smucker name brand, by the way.) For the quarter, Nordstrom had just shy of $2 billion in sales (down from roughly $4 billion in the same quarter last year) and a net loss of $255 million. The company doesn't have many money-losing quarters, however, and despite the lack of a P/E ratio due to that loss, its multiple had been as low as 4.1 the first week of April. Yes, the company's short-term and long-term liabilities to assets don't look great (roughly $4B/$4B and $6B/$6B, respectively), but odds are great that the company isn't going the way of JC Penney.
When the inevitable return to normalcy does come, we could easily see the shares trading at twice their current price.
Robotics & Industrial Machinery
02. 3D printing firm Desktop Metal to go public with a "blank check"
It seems to be all the rave on Wall Street this year: the SPAC, or Special Purpose Acquisition Company. A SPAC is a blank-check company that either does not have its own business plan or builds one around a merger with another company. In an upcoming issue of the Penn Wealth Report, for example, we discuss the SPAC Fortress Value Acquisition Corp (FVAC $12) funding America's return to rare earth mining via its "blank check" to MP Materials, owner of the Mountain Pass mining operation in California. Now, another SPAC, Trine Acquisition Corp, will provide advanced 3D printing "unicorn" (a startup valued at over $1B) Desktop Metal $575 million to go public under the symbol DM within the next few months.
Desktop is a leader in 3D printing, producing stainless steel, aluminum, and other metal alloy parts in large quantities at an assembly line rate. CEO Ric Fulop said the company's latest machines will be able to "print" critical components for the aerospace industry at 100-times the speed of current high-end printers at about one-twentieth the cost. He gives the example of a water impeller pump for a BMW auto; it would typically cost $80 to produce the pump, but one of Fulop's machines created it for $5. Desktop Metal may truly usher in the 3D world promised by advocates for years. Forget the low cost of labor in countries like China, imagine Fulop's machines pumping out intricate metal parts en masse here in the United States. That could bring about a transformational shift in global economics, greatly reducing America's reliance on cheap overseas labor.
Think that is a pie-in-the-sky promise? Remember how we were once at the mercy of OPEC for our energy needs? Keep an eye out for DM when it goes public later this year.
Under the Radar Investment
01. Under the Radar: Black Hills Corp
Black Hills Corp (BKH $48-$54-$87) is a mid-cap ($3.8B) diversified utility which provides regulated gas and electric power to states in the Midwest and mountain regions. The firm also runs a mining operation via its Wyodak Resources division. With steady revenue of roughly $1.7 billion annually, the firm had $200 million in net income last year and cash flow of $7.02 per share. BKH has fallen out of favor with hedge funds recently, dragging its share price down from $87 to $48, before the shares rebounded to their current level of $54. With an ultra-low beta of 0.3049 (5Y) and a dividend yield of 4%, the shares are worth a look for income-oriented investors.
Answer
Business journalist Charles Dow, founder of financial news bureau Dow, Jones & Co., created the Dow Jones Industrial Average back in 1896. Prominent business newspaper The Wall Street Journal introduced the DJIA on 26 May of that same year. Of the twelve original component companies of the Dow, only General Electric is still in existence as a publicly-traded company. It was jettisoned from the index in 2018. In 1928, the DJIA was expanded to include 30 companies.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
History of the Dow Jones Industrial Average...
Though we label it "irrelevant" below, the Dow Jones Industrial Average does have an illustrious history. Who started the index and what was the publication which introduced it to the investing community? Also, one of the original twelve stocks on the Dow is still in existence—what company is it?
Penn Trading Desk:
(21 Aug 20) Adding Thematic Fund to Dynamic Growth Strategy
We have added a robotics fund to the DGS to take advantage of the coming boom in automation—the movement will be transformational for society. This fund is full of dynamic small- and mid-cap names. Members, see the trading desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
IT Software & Services
10. Why does Amazon want to buy warmed-over Rackspace shares?
Rackspace (RXT $15-$20-$20) is an end-to-end cloud services provider for companies of all sizes. From web hosting to managing a firm's cloud experience—to include cybersecurity—RXT works across the various platforms (Amazon Web Services, Azure, OpenStack) to create a seamless digital experience for customers. When the firm IPO'd on 05 August, tumbling 20% on the first day, it must have felt a sense of déjà vu, as it had a nearly identical experience the last time it went public—in August of 2008. Four years ago, private-equity group Apollo Global Management took Rackspace private in a deal valued at north of $4 billion, then unloaded all of that debt off on the company it just brought back to the public market. As of right now, RXT has a market cap of $3.8 billion and long-term debt of $4.8 billion, and that market cap is so high only due to a 22% one-week run-up in the share price.
Which leads us to the real story. RXT shares rose from around $16 to above $20 on news that Amazon is in talks to invest in the tech services provider. Why would Amazon, a competitor in one sense and a partner in another, want to become a minority shareholder in Rackspace? The only answer that makes sense to us is that Amazon may feel it can steer Rackspace customers away from using Microsoft Azure, the Google Cloud, and other platforms and toward AWS. The legality of that seems questionable. From a strictly fiscal standpoint, looking at RXT's financials, the move doesn't make much sense. Let's see if Amazon's chief cloud competitors have anything to say about the deal.
Multiline Retail
09. Penn Global Leader Target Corp. notches a blowout quarter
As if they weren't already on a tear, shares of Penn Global Leaders Club member Target Corp (TGT $149) popped another 9%—reaching yet another record high—after the retailer posted a simply stunning quarter. Overall, online and in-store sales were up 24.3% for the quarter, with the company attracting ten million new customers to its digital platform. Earnings per share blew past the expected $1.62, hitting $3.38, and profits rose by 80%, to $1.7 billion. Target breaks its merchandise down into five categories—all five showed strong growth. The company's electronics line was up 70% year-over-year, with the other six categories—to include beauty and apparel—rising by about 20% each. Despite launching just a year ago, Good & Gather, the firm's private label grocery brand, rose above the $1 billion in total sales mark. When a company reports surprise earnings, either to the upside or the downside, we like to review what the analysts were saying leading into the announcement. Our favorite came from Morningstar: the investment research firm had a one-star (sell) rating on TGT with a fair value of $98/share. Oops. We bought TGT shares during that nightmarish week before Christmas, 2018.
Biotechnology
08. Johnson & Johnson to buy biotech Momenta Pharma for $6.5 billion
One year ago, Momenta Pharmaceuticals (MNTA $12-$52-$40) was a $1.2 billion small-cap biotech with few standout therapies which might attract investors' attention. The company's work, however, did catch the eye of a much larger competitor: pharma giant Johnson & Johnson (JNJ $151) just agreed to buy the firm for $6.5 billion in cash. The catalyst for the acquisition was Momenta's experimental drug nipocalimab, a potential therapy for use in a number of autoimmune diseases. These disorders, which include type 1 diabetes, multiple sclerosis, and rheumatoid arthritis, cause either abnormally low or high activity within a person's immune system. Specifically, nipocalimab has shown promise in treating a rare blood disorder affecting fetuses and newborns. Despite the current focus on finding vaccines and therapies for Covid-19, big pharma has put a high priority on tackling autoimmune diseases, as this deal demonstrates. Somewhat surprisingly, this is the biggest acquisition in the pharma industry year-to-date, with Sanofi's recent $3.4 billion acquisition of US biotech Principia Biopharma coming in second. For investors, selecting the right micro- or small-cap biotech can be like finding a needle in a haystack, as unsuccessful trials often result in massive drops in a firm's share price. For investors looking for the next potential small- or mid-cap biotech to be acquired, the best bet is generally a focused biotech ETF with good management and a penchant for lower market caps. The SPDR® S&P Biotech ETF (XBI $112), a member of the Penn Dynamic Growth Strategy, is a good example.
Pharmaceuticals
07. AstraZeneca's novel approach: a combination vaccine and treatment
AstraZeneca (AZN $36-$57-$65), Britain's $150B drug powerhouse, has begun testing an exciting new therapy: AZD7442 is designed to not only prevent Covid-19, but also serve as a therapy for those already afflicted with the virus. The drug uses a combination of two monoclonal antibodies (mAbs), harvested antibodies made by identical immune cells which specifically bind to that substance, to create a cocktail to fight off and guard against a specific infection. The Phase 1 clinical trial, which is now underway in the UK, is being funded by the US Department of Defense and the Biomedical Advanced Research and Development Authority (BARDA). Leading infectious disease scientists have endorsed this mAb approach, which has been used successfully in the treatment of a number of cancer types. If the AZD7442 trials go as hoped, expect the therapy to receive fast-track designation by the FDA. Based on current valuations, shares of AZN may seem expensive, but success with AZD7442 could propel them higher.
Airlines
06. Delta to furlough 1,900 pilots, American to reduce staff by 19,000
Delta's (DAL $18-$30-$62) head of flight operations put it succinctly: "We are six months into this pandemic and only 25% of our revenues have been recovered." American Airlines Group (AAL $8-$13-$32) CEO Doug Parker echoed similar sentiments, stating that long-haul trips in Q4 of this year will equal about 25% of last year's Q4 rate. Against that backdrop, both companies have announced a new round of furloughs to take effect when government stimulus aid to the airlines ends on 30 Sep. Delta, which we purchased within the Intrepid Trading Platform at a steep discount back in May, said it will furlough 1,941 pilots—out of the 11,200 or so on the books—unless pilots take a 15% cut in pay. The Air Line Pilots Association, which represents the unionized group, has balked at that request. American Airlines announced even more draconian cuts, saying that 19,000 employees will be involuntarily furloughed after the government relief ends. Incredibly, American Airlines has lost 77.7% of its value since January of 2018, versus a 50% loss for Delta and a 23% gain in the S&P 500. Our Delta position is up 15% since we purchased it, and we see plenty of growth ahead as the pandemic subsides.
Global Exchanges & Indexes
05. The Dow's latest moves won't make the outdated index more relevant
It always amazes us how much attention is given to the level of the Dow Jones Industrial Average on any trading day as opposed to the much more reflective S&P 500. After all, out of roughly 2,500 listed companies on the New York Stock Exchange and another 3,300 on the Nasdaq, only 30 select entrants make up the DJIA. And these holdings are price-weighted, meaning companies are weighted in proportion to their share price, not market cap. In other words, another great day for Apple (AAPL $500)—and there have been plenty of those recently—probably means a strong day for the Dow. Compare this to the cap-weighted S&P 500 Index, which means the bigger a company, the more impact it can have on the S&P's return. No matter how big a company, it is still weighted against 499 others.
Let's stick with the Apple example, since the tech giant is about to undergo a four-for-one stock split. Right now, despite its $2 trillion size, Apple still makes up a little over 7% of the S&P 500 Index. After the split, nothing will change (its market cap won't change just because it split). In the Dow, however, where Apple also finds a home, it will suddenly become one-quarter as relevant to the daily returns. That's crazy. Or how about leaving entire industries virtually unrepresented, such as utilities! Also crazy.
We delve into this subject because the Dow is about to jettison three stocks and add three others in their place. Salesforce (CRM) will replace Exxon Mobil (XOM), Amgen (AMGN) will replace Pfizer (PFE), and Honeywell (HON) will replace Raytheon Technologies (RTX). The last two swaps are real head-scratchers. Even the first: Is Salesforce the most relevant tech company to infuse new blood into the Dow? What about Facebook (FB)?
Perhaps the Dow is still the financial press' favorite benchmark because it sounds more sensational to say, "DOW LOSES 1,000 POINTS" than it does to say, "S&P OFF 100." Irrespective, back during the bloodbath that was March, when the S&P 500 had plunged to below 2,500, we made our year-end prediction: "The index will rise to 3,500 by December 31st." It sits at 3,436 right now. We didn't bother making a prediction for the Dow.
Food Products
04. Boring old JM Smucker just knocked Q1 earnings out of the park
We should have seen it coming: In the midst of a lockdown and a mass migration of employees from their office buildings to their new in-home offices, packaged foods sales skyrocketed. Nothing made that more evident than the latest quarterly results from staid old JM Smucker (SJM $92-$121-$126), the 123-year-old, $14 billion packaged foods company. Best known for products such as Smucker's, Folgers, Jif, Crisco, and the like, the Ohio-based company increased earnings-per-share by 50% from the same quarter last year, and overall revenues by 11% from the same period in 2019. While their biggest category, Retail Pet Foods, increased by just 3% year-over-year (after all, the pets have always been at home), the Retail Consumer Foods division saw a 22% jump in sales. President and CEO Mark Smucker also said the firm had raised its fiscal 2021 guidance, now expecting between $8.20 and $8.60 in EPS and nearly $1 billion in free cash flow. Smucker said he expects the momentum to continue post-pandemic as Americans fell back in love with old brands, and as the company rolls out a large new marketing campaign. Time will tell, but the Q1 report was enough to drive the shares up over 7%. The company has a relatively decent P/E ratio of 18 (same as Penn holdings General Mills and B&G Foods), and we would put a fair value on the shares at around $125. That may not seem like much upside, but with its 3% dividend yield and very strong pet foods business, it is a pretty safe bet.
Multiline Retail
03. At $15, Nordstrom shares may be the retail deal of the decade, but...
Precisely one year ago, we made note of Nordstrom's (JWN $12-$15-$43) rather odd 16% one-day spike in price—to $31. Odd because it came on the heels of an earnings report that showed a 5% drop in revenue from Q2 of 2018. The spike apparently took place because analysts were expecting a much deeper drop. Here we are a year later and, with a pandemic added to the mix, analysts were really bracing for the worst. In fact, betting odds called for a 39% drop in sales from 2019. It wasn't even close. JWN shares were trading down around 6%—to $14.66—following news of a ghastly 53% drop in sales for the quarter. Even online sales, the bright spot for most retailers as customers were stuck at home behind their computers, dropped 5%. Nordstrom's earnings report even made the Kohl's quarter look good, and that was no easy feat.
Despite the reasons management gave for the drop, here's our biggest concern: Nordstrom makes its living off of selling higher-end clothing and accessories to an upscale workforce that wants to look nice in the office. When the family dog, Scruffy, becomes the only one needed to impress, Milk Bones—not fancy clothing—becomes the go-to purchase. (Milk Bones are a JM Smucker name brand, by the way.) For the quarter, Nordstrom had just shy of $2 billion in sales (down from roughly $4 billion in the same quarter last year) and a net loss of $255 million. The company doesn't have many money-losing quarters, however, and despite the lack of a P/E ratio due to that loss, its multiple had been as low as 4.1 the first week of April. Yes, the company's short-term and long-term liabilities to assets don't look great (roughly $4B/$4B and $6B/$6B, respectively), but odds are great that the company isn't going the way of JC Penney.
When the inevitable return to normalcy does come, we could easily see the shares trading at twice their current price.
Robotics & Industrial Machinery
02. 3D printing firm Desktop Metal to go public with a "blank check"
It seems to be all the rave on Wall Street this year: the SPAC, or Special Purpose Acquisition Company. A SPAC is a blank-check company that either does not have its own business plan or builds one around a merger with another company. In an upcoming issue of the Penn Wealth Report, for example, we discuss the SPAC Fortress Value Acquisition Corp (FVAC $12) funding America's return to rare earth mining via its "blank check" to MP Materials, owner of the Mountain Pass mining operation in California. Now, another SPAC, Trine Acquisition Corp, will provide advanced 3D printing "unicorn" (a startup valued at over $1B) Desktop Metal $575 million to go public under the symbol DM within the next few months.
Desktop is a leader in 3D printing, producing stainless steel, aluminum, and other metal alloy parts in large quantities at an assembly line rate. CEO Ric Fulop said the company's latest machines will be able to "print" critical components for the aerospace industry at 100-times the speed of current high-end printers at about one-twentieth the cost. He gives the example of a water impeller pump for a BMW auto; it would typically cost $80 to produce the pump, but one of Fulop's machines created it for $5. Desktop Metal may truly usher in the 3D world promised by advocates for years. Forget the low cost of labor in countries like China, imagine Fulop's machines pumping out intricate metal parts en masse here in the United States. That could bring about a transformational shift in global economics, greatly reducing America's reliance on cheap overseas labor.
Think that is a pie-in-the-sky promise? Remember how we were once at the mercy of OPEC for our energy needs? Keep an eye out for DM when it goes public later this year.
Under the Radar Investment
01. Under the Radar: Black Hills Corp
Black Hills Corp (BKH $48-$54-$87) is a mid-cap ($3.8B) diversified utility which provides regulated gas and electric power to states in the Midwest and mountain regions. The firm also runs a mining operation via its Wyodak Resources division. With steady revenue of roughly $1.7 billion annually, the firm had $200 million in net income last year and cash flow of $7.02 per share. BKH has fallen out of favor with hedge funds recently, dragging its share price down from $87 to $48, before the shares rebounded to their current level of $54. With an ultra-low beta of 0.3049 (5Y) and a dividend yield of 4%, the shares are worth a look for income-oriented investors.
Answer
Business journalist Charles Dow, founder of financial news bureau Dow, Jones & Co., created the Dow Jones Industrial Average back in 1896. Prominent business newspaper The Wall Street Journal introduced the DJIA on 26 May of that same year. Of the twelve original component companies of the Dow, only General Electric is still in existence as a publicly-traded company. It was jettisoned from the index in 2018. In 1928, the DJIA was expanded to include 30 companies.
Headlines for the Week of 09 Aug—15 Aug 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The First Casino-Resort on the Strip...
The first casino in Vegas (located in what would become downtown Vegas) was the Pair-o-Dice Club, which opened in 1931. What was the first casino-resort to be built on the Las Vegas Strip and when did it open?
Penn Trading Desk:
(13 Aug 20) Adding Canadian Cannabis Position to Intrepid Trading Platform
To say we are extremely cautious with respect to cannabis companies is an understatement. Nonetheless, as soon as we saw who was running this $1 billion firm, and upon doing some further analysis, we were in. Target price is 116% above purchase price. Members, see the trading desk.
(05 Aug 20) New Large-Cap Position in Dynamic Growth Strategy
We have replaced the AMG Yacktman Fund (YACKX) with a quite unique large-cap blend ETF in the Dynamic Growth Strategy. About 50 different companies from a host of sectors, but all with one very important thing in common. Members, see the trading desk.
(05 Aug 20) Raise BBBY Stop
Our Bed Bath & Beyond position in the Intrepid is now up in excess of 58% since last month's purchase, raise stop to $11/share to protect gains.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Automotive
10. Ford desperately needed new blood, instead they pulled from within
Let's take a sobering trip down memory lane from the standpoint of Ford Motor Co (F $4-$7-$10), beginning near the start of this century. Between 2001 and 2006, shares of the car company, founded in 1903, fell 50% under Bill Ford Jr., great-grandson of founder Henry Ford. Then came the company's last successful CEO, Alan Mulally, who presided over a 178% rise in the shares. In July of 2014, Mulally retired and handed the reins over to Mark Fields. By the time Fields was ushered out in 2016, shares had dropped another 35%. Finally, we had Jim "Buddy" Hackett, who became CEO in 2017. We had high hopes for this pick, as he had been the head of Ford's Smart Mobility subsidiary, the company's self-driving car initiative. Another 38% drop later, Hackett is gone. Reasonable business minds would fully grasp the need to find new blood to reinvent the car company, which managed to lose $2.123 billion over the trailing twelve months on $130 billion in revenues. So, what dynamic pick did the the board of directors make? They elevated the firm's chief operating officer, Jim Farley, to the CEO role. In a comment apparently designed to instill confidence, Chairman Bill Ford said that Hackett will remain in an advisory role to Farley until next spring. Whew, glad to hear that. Of interesting note: one component of the $2.123 billion in losses was the higher warranty costs (around $5 billion) incurred by the company due to quality control issues on their late model vehicles. Not a comforting sign for an automaker operating in a hyper-competitive industry. Much like Boeing, this once-great company has buried its head in the sand and refuses to accept what needs to be done. What should we expect when the same people who ran the companies into a ditch are the ones responsible for hiring the new blood?
Government Watchdog
09. In intriguing turn of events, the CalPERS CIO abruptly resigns
The California Public Employees' Retirement System, or CalPERS, is the state-run pension and health benefits agency of California, responsible for the retirement plans of nearly 2 million California public employees, retirees, and there families. The organization manages roughly $400 billion in assets. Based on the nature of the business and the state in which it sits, one can only imagine the level to which politics permeates the body.
Against that backdrop, we have Chief Investment Officer Ben Meng, who has served in that role for the past two years. It wasn't his first stint at the organization, however, as he worked at the agency from 2008 to 2015—before leaving to become deputy chief investment officer for China's State Administration of Foreign Exchange, in charge of China's $3 trillion or so in foreign reserves. Meng abruptly "resigned" his CIO role this week, citing a desire to spend more time with his family. California State Controller Betty Yee, however, said in a statement that she was "incredibly disappointed" to hear about Meng's lapse in judgment and failure to adhere to standard conflict-of-interest policies.
While that cryptic message tells us Meng didn't leave on his own accord, it certainly raises more questions than it answers. Adding to the intrigue, Indiana Rep. Jim Banks recently wrote a letter to California Governor Gavin Newsom requesting a thorough investigation into Meng's relationship to the Chinese Communist Party. CalPERS added roughly 100 Chinese firms to the stock portion of its portfolio over the past year. Against a stated target return of 7% per year, the fund has underperformed under Meng, notching a return of just 4.7% for the 2019-20 fiscal year. As of now, CalPERS has just 71% of the assets it needs to meet the pension requirements of its members.
Hotels, Resorts, & Cruise Lines
08. Wynn's revenue fell a staggering 95% in Q2
The casinos, especially those with large exposure to Asia, could be considered the poster children for the pandemic, and the latest results from our favorite pick in the group, Wynn Resorts (WYNN $36-$77-$153) illustrate why. In the second quarter of 2019, Wynn generated $1.65 billion in revenues; in Q2 of this year, the company brought in just $85.7 million--gross. That is a staggering 95% reduction, all before the company paid one cent in expenses. As a matter of fact, net income in Q2 of 2019—$94.55 million—was higher than last quarter's gross revenues. In the first six months of the year, Wynn has lost over $1 billion. So, with WYNN shares being down nearly 50% ytd, doesn't that mean they will snap back as we slowly put the virus behind us? Perhaps, but there is one important factor investors need to be aware of: 76% of the company's revenues over the past four quarters emanated from operations in Macau. Talk about some serious geographic risk. Despite all the bluster coming from the state-run media in communist China, we believe that country is in serious economic trouble. The idea that it will simply resume its pre-pandemic growth trajectory over the coming months—or even years—is a fallacy. As for Wynn, we would value the shares at roughly $100, but the company's reliance on Macau as a revenue source has us steering clear.
Economics: Work & Pay
07. A strong jobs report for July and increased retail hiring
Handily beating estimates, the highly-anticipated July jobs report provided more evidence that the US economy is returning to normal—despite the dire warnings of record Covid-19 cases foisted upon us daily by the media. After peaking at a 14.7%, the unemployment rate in the US fell to 10.2% in July—certainly still unacceptably high, but better than the 10.6% rate expected. A staggering 1.763 million new jobs were created in the month, with the labor force participation remaining relatively steady, at 61.2%. The leisure and hospitality industries accounted for a plurality of the new jobs created, adding 592,000 positions in the month, with government and retail coming in second and third, respectively. Big restaurant chains are about to embark on a massive hiring spree as well, with Chipotle (CMG) announcing it will hire 10,000 new employees in the coming months. McDonald's, Starbucks, Yum Brands (Taco Bell), Papa Johns, and Dunkin Brands announced similar plans. Meanwhile, after Congress failed to reach a new deal on pandemic relief, President Trump signed an executive order extending unemployment benefits to include an extra $400 per week (down from the extra $600, which expired on 31 Jul), deferring student loans through 2020, and extending the moratorium on evictions. The next big litmus test for the economy will come over the next several weeks as students—at least some of them—head back to school.
Hotels, Resorts, & Cruise Lines
06. Penn member MGM jumps on Barry Diller investment
We opened gaming and resort giant MGM (MGM $22) at $16 per share on 10 July within the Penn Global Leaders Club, and commented: "Did we really get it at that price?" Now, precisely one month later, our position is up 37%—helped along the way by Barry Diller's $1 billion investment in the firm. Shares were trading up around 15% on Monday after the InteractiveCorp (IAC $131) chairman said he was "energized and excited to make this investment in MGM." Why did an Internet media company want 12% ownership in the largest operator on the Las Vegas Strip? The new shareholder said that he believes his firm can help MGM expand its online gambling business and create other "digital first" experiences for guests. As for our price target, we're not quite there yet: we placed it at $32 per share, or 100% higher than our purchase price. Heading in the right direction.
Aerospace & Defense
05. Sorry Bezos: SpaceX, United Launch Alliance win big Pentagon deal
We've mentioned it before, but Amazon (AMZN) CEO Jeff Bezos showed his child-like petulance when he sent out a tweet following the first successful landing of SpaceX's first-stage boosters. The tweet said simply, "Congratulations...welcome to the club." (Bezos' Blue Origin had previously landed its New Shepard rocket in a similar fashion.) We thought of that tweet once again after hearing the news that the Pentagon has awarded billions in rocket contracts to SpaceX and United Launch Alliance (Boeing and Lockheed) to launch national security missions for a five-year period, while rejecting the Blue Origin and Northrop Grumman (NOC $342) bids. The contracts call for nearly three dozen launches over that period, valued at around $1 billion per year. SpaceX has its proven Falcon 9 and Falcon Heavy, while ULA is building the new Vulcan rocket to replace its decades-old Atlas fleet—which now relies on Russian rockets for propulsion. Blue Origin said it will continue to build its New Glenn rocket, despite the lack of any buyers thus far. Northrop Grumman's OmegA rocket's future is definitely in doubt after losing the bid.
Semiconductors
04. On a roll: FTC case against Qualcomm is thrown out by appeals court
Just a few weeks ago, Penn New Frontier Fund member Qualcomm (QCOM $109) announced it had struck a deal with Huawei, ending a time-consuming patent dispute and putting $1.8 billion in its pocket. This week the company received more good news: an appeals court overturned the FTC's antitrust ruling against the company. At the heart of the issue was Qualcomm's ability to charge licensing fees to handset makers, a practice the FTC said was anti-competitive. Had the appeals court not struck down the ruling, the company would have been forced to renegotiate licensing deals with hundreds of corporate customers, license its patents to rival chipmakers, and stop asking customers to sign exclusive agreements for its chips. The $123 billion San Diego-based firm would have also had to put up with seven years of FTC monitoring—a legal and monetary nightmare. All of that is swept away with this reversal, allowing the company to remain focused on its goal of dominating the 5G chip market. QCOM shares are up 40% since we purchased for the Penn New Frontier Fund three months ago.
Transportation Infrastructure
03. Uber threatens to suspend operations in Cali after new ruling
Is there any wonder companies are leaving the not-so-Golden State in droves? Last year the California legislature passed Assembly Bill 5 (AB5), which would force ride-sharing companies such as Uber (UBER $31) and Lyft (LYFT $31) to stop classifying their drivers as contractors (which is what they are) and begin classifying them as employees of the company (which is what they are not—by design). The bill was on hold pending appeal, but this week San Francisco County Superior Court Judge Ethan Schulman upheld that law and ordered the firms to make the changes. This simply won't happen. For Uber, that would mean suddenly making 100,000 contract workers employees of the company. The typically mild-mannered and restrained CEO, Dara Khosrowshahi, was blunt: the firm may be forced to shut down temporarily in California if enforcement of this law is initiated. Perhaps he said "temporarily" because the gig economy companies affected, which also include food delivery services like DoorDash, are pushing for Proposition 22, a measure on November's ballot which would exempt these companies from the very law which targeted them in the first place. California has designed a nightmarish and byzantine legal system designed to stymie productive companies and benefit the state's litigators. Until that changes, companies will continue to flee. As for Uber and Lyft, the ruling comes right as the companies are trying to pull out of the fiscal nosedive caused by the pandemic. UPDATE: Impressively, Lyft followed suit with a statement mirroring Dara's comments.
Market Pulse
02. Weekly jobless claims drop under 1M for first time since spring
US initial claims for unemployment dropped to below the one million mark for the first time since the pandemic came slamming into the global economy this past spring. While 963,000 new claims might not seem like much to celebrate, it is a far cry from the 6.867 million claims initiated in the last week of March. This most recent decline, coupled with the better-than-expected jobs number for July, points to an economy that is slowly returning to normal, despite the lack of a vaccine or a therapy for the virus. The markets remain hopeful: the S&P 500 just notched its third-straight week of gains. Our favorite anecdotal sign? The chronic, daily, in-our-face headlines telling us that Covid levels are hitting new highs have suddenly disappeared.
Under the Radar Investment
01. Under the Radar: iCAD Inc
iCAD Inc (ICAD $10) is a micro-cap ($238M) growth company in the Life Sciences Tools & Services industry. The New Hampshire-based firm, which has been in business since 1984, provides cancer detection and radiation therapy solutions and services. The company offers a range of upgradeable computer aided detection (CAD) solutions for the detection of breast, prostate, and colorectal cancers. Its Xoft Axxent system delivers high dose rate, low energy radiation to target cancer while minimizing exposure to surrounding healthy tissue. Based on its success, the Axxent system is now additionally being deployed for the treatment of non-melanoma skin cancer. Shares of ICAD topped out at $15.31 in March, leading into the pandemic-driven downturn.
Answer
The first casino-resort to be built on the Las Vegas Strip was the El Rancho Vegas, which opened in 1941. Sporting 63 rooms, its success spawned the building of a second resort, the Hotel Last Frontier, the following year. The success of these two casinos stirred the interest of organized crime, which planted its flag in Vegas when Bugsy Siegel funded the Flamingo, which opened four years later.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The First Casino-Resort on the Strip...
The first casino in Vegas (located in what would become downtown Vegas) was the Pair-o-Dice Club, which opened in 1931. What was the first casino-resort to be built on the Las Vegas Strip and when did it open?
Penn Trading Desk:
(13 Aug 20) Adding Canadian Cannabis Position to Intrepid Trading Platform
To say we are extremely cautious with respect to cannabis companies is an understatement. Nonetheless, as soon as we saw who was running this $1 billion firm, and upon doing some further analysis, we were in. Target price is 116% above purchase price. Members, see the trading desk.
(05 Aug 20) New Large-Cap Position in Dynamic Growth Strategy
We have replaced the AMG Yacktman Fund (YACKX) with a quite unique large-cap blend ETF in the Dynamic Growth Strategy. About 50 different companies from a host of sectors, but all with one very important thing in common. Members, see the trading desk.
(05 Aug 20) Raise BBBY Stop
Our Bed Bath & Beyond position in the Intrepid is now up in excess of 58% since last month's purchase, raise stop to $11/share to protect gains.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Automotive
10. Ford desperately needed new blood, instead they pulled from within
Let's take a sobering trip down memory lane from the standpoint of Ford Motor Co (F $4-$7-$10), beginning near the start of this century. Between 2001 and 2006, shares of the car company, founded in 1903, fell 50% under Bill Ford Jr., great-grandson of founder Henry Ford. Then came the company's last successful CEO, Alan Mulally, who presided over a 178% rise in the shares. In July of 2014, Mulally retired and handed the reins over to Mark Fields. By the time Fields was ushered out in 2016, shares had dropped another 35%. Finally, we had Jim "Buddy" Hackett, who became CEO in 2017. We had high hopes for this pick, as he had been the head of Ford's Smart Mobility subsidiary, the company's self-driving car initiative. Another 38% drop later, Hackett is gone. Reasonable business minds would fully grasp the need to find new blood to reinvent the car company, which managed to lose $2.123 billion over the trailing twelve months on $130 billion in revenues. So, what dynamic pick did the the board of directors make? They elevated the firm's chief operating officer, Jim Farley, to the CEO role. In a comment apparently designed to instill confidence, Chairman Bill Ford said that Hackett will remain in an advisory role to Farley until next spring. Whew, glad to hear that. Of interesting note: one component of the $2.123 billion in losses was the higher warranty costs (around $5 billion) incurred by the company due to quality control issues on their late model vehicles. Not a comforting sign for an automaker operating in a hyper-competitive industry. Much like Boeing, this once-great company has buried its head in the sand and refuses to accept what needs to be done. What should we expect when the same people who ran the companies into a ditch are the ones responsible for hiring the new blood?
Government Watchdog
09. In intriguing turn of events, the CalPERS CIO abruptly resigns
The California Public Employees' Retirement System, or CalPERS, is the state-run pension and health benefits agency of California, responsible for the retirement plans of nearly 2 million California public employees, retirees, and there families. The organization manages roughly $400 billion in assets. Based on the nature of the business and the state in which it sits, one can only imagine the level to which politics permeates the body.
Against that backdrop, we have Chief Investment Officer Ben Meng, who has served in that role for the past two years. It wasn't his first stint at the organization, however, as he worked at the agency from 2008 to 2015—before leaving to become deputy chief investment officer for China's State Administration of Foreign Exchange, in charge of China's $3 trillion or so in foreign reserves. Meng abruptly "resigned" his CIO role this week, citing a desire to spend more time with his family. California State Controller Betty Yee, however, said in a statement that she was "incredibly disappointed" to hear about Meng's lapse in judgment and failure to adhere to standard conflict-of-interest policies.
While that cryptic message tells us Meng didn't leave on his own accord, it certainly raises more questions than it answers. Adding to the intrigue, Indiana Rep. Jim Banks recently wrote a letter to California Governor Gavin Newsom requesting a thorough investigation into Meng's relationship to the Chinese Communist Party. CalPERS added roughly 100 Chinese firms to the stock portion of its portfolio over the past year. Against a stated target return of 7% per year, the fund has underperformed under Meng, notching a return of just 4.7% for the 2019-20 fiscal year. As of now, CalPERS has just 71% of the assets it needs to meet the pension requirements of its members.
Hotels, Resorts, & Cruise Lines
08. Wynn's revenue fell a staggering 95% in Q2
The casinos, especially those with large exposure to Asia, could be considered the poster children for the pandemic, and the latest results from our favorite pick in the group, Wynn Resorts (WYNN $36-$77-$153) illustrate why. In the second quarter of 2019, Wynn generated $1.65 billion in revenues; in Q2 of this year, the company brought in just $85.7 million--gross. That is a staggering 95% reduction, all before the company paid one cent in expenses. As a matter of fact, net income in Q2 of 2019—$94.55 million—was higher than last quarter's gross revenues. In the first six months of the year, Wynn has lost over $1 billion. So, with WYNN shares being down nearly 50% ytd, doesn't that mean they will snap back as we slowly put the virus behind us? Perhaps, but there is one important factor investors need to be aware of: 76% of the company's revenues over the past four quarters emanated from operations in Macau. Talk about some serious geographic risk. Despite all the bluster coming from the state-run media in communist China, we believe that country is in serious economic trouble. The idea that it will simply resume its pre-pandemic growth trajectory over the coming months—or even years—is a fallacy. As for Wynn, we would value the shares at roughly $100, but the company's reliance on Macau as a revenue source has us steering clear.
Economics: Work & Pay
07. A strong jobs report for July and increased retail hiring
Handily beating estimates, the highly-anticipated July jobs report provided more evidence that the US economy is returning to normal—despite the dire warnings of record Covid-19 cases foisted upon us daily by the media. After peaking at a 14.7%, the unemployment rate in the US fell to 10.2% in July—certainly still unacceptably high, but better than the 10.6% rate expected. A staggering 1.763 million new jobs were created in the month, with the labor force participation remaining relatively steady, at 61.2%. The leisure and hospitality industries accounted for a plurality of the new jobs created, adding 592,000 positions in the month, with government and retail coming in second and third, respectively. Big restaurant chains are about to embark on a massive hiring spree as well, with Chipotle (CMG) announcing it will hire 10,000 new employees in the coming months. McDonald's, Starbucks, Yum Brands (Taco Bell), Papa Johns, and Dunkin Brands announced similar plans. Meanwhile, after Congress failed to reach a new deal on pandemic relief, President Trump signed an executive order extending unemployment benefits to include an extra $400 per week (down from the extra $600, which expired on 31 Jul), deferring student loans through 2020, and extending the moratorium on evictions. The next big litmus test for the economy will come over the next several weeks as students—at least some of them—head back to school.
Hotels, Resorts, & Cruise Lines
06. Penn member MGM jumps on Barry Diller investment
We opened gaming and resort giant MGM (MGM $22) at $16 per share on 10 July within the Penn Global Leaders Club, and commented: "Did we really get it at that price?" Now, precisely one month later, our position is up 37%—helped along the way by Barry Diller's $1 billion investment in the firm. Shares were trading up around 15% on Monday after the InteractiveCorp (IAC $131) chairman said he was "energized and excited to make this investment in MGM." Why did an Internet media company want 12% ownership in the largest operator on the Las Vegas Strip? The new shareholder said that he believes his firm can help MGM expand its online gambling business and create other "digital first" experiences for guests. As for our price target, we're not quite there yet: we placed it at $32 per share, or 100% higher than our purchase price. Heading in the right direction.
Aerospace & Defense
05. Sorry Bezos: SpaceX, United Launch Alliance win big Pentagon deal
We've mentioned it before, but Amazon (AMZN) CEO Jeff Bezos showed his child-like petulance when he sent out a tweet following the first successful landing of SpaceX's first-stage boosters. The tweet said simply, "Congratulations...welcome to the club." (Bezos' Blue Origin had previously landed its New Shepard rocket in a similar fashion.) We thought of that tweet once again after hearing the news that the Pentagon has awarded billions in rocket contracts to SpaceX and United Launch Alliance (Boeing and Lockheed) to launch national security missions for a five-year period, while rejecting the Blue Origin and Northrop Grumman (NOC $342) bids. The contracts call for nearly three dozen launches over that period, valued at around $1 billion per year. SpaceX has its proven Falcon 9 and Falcon Heavy, while ULA is building the new Vulcan rocket to replace its decades-old Atlas fleet—which now relies on Russian rockets for propulsion. Blue Origin said it will continue to build its New Glenn rocket, despite the lack of any buyers thus far. Northrop Grumman's OmegA rocket's future is definitely in doubt after losing the bid.
Semiconductors
04. On a roll: FTC case against Qualcomm is thrown out by appeals court
Just a few weeks ago, Penn New Frontier Fund member Qualcomm (QCOM $109) announced it had struck a deal with Huawei, ending a time-consuming patent dispute and putting $1.8 billion in its pocket. This week the company received more good news: an appeals court overturned the FTC's antitrust ruling against the company. At the heart of the issue was Qualcomm's ability to charge licensing fees to handset makers, a practice the FTC said was anti-competitive. Had the appeals court not struck down the ruling, the company would have been forced to renegotiate licensing deals with hundreds of corporate customers, license its patents to rival chipmakers, and stop asking customers to sign exclusive agreements for its chips. The $123 billion San Diego-based firm would have also had to put up with seven years of FTC monitoring—a legal and monetary nightmare. All of that is swept away with this reversal, allowing the company to remain focused on its goal of dominating the 5G chip market. QCOM shares are up 40% since we purchased for the Penn New Frontier Fund three months ago.
Transportation Infrastructure
03. Uber threatens to suspend operations in Cali after new ruling
Is there any wonder companies are leaving the not-so-Golden State in droves? Last year the California legislature passed Assembly Bill 5 (AB5), which would force ride-sharing companies such as Uber (UBER $31) and Lyft (LYFT $31) to stop classifying their drivers as contractors (which is what they are) and begin classifying them as employees of the company (which is what they are not—by design). The bill was on hold pending appeal, but this week San Francisco County Superior Court Judge Ethan Schulman upheld that law and ordered the firms to make the changes. This simply won't happen. For Uber, that would mean suddenly making 100,000 contract workers employees of the company. The typically mild-mannered and restrained CEO, Dara Khosrowshahi, was blunt: the firm may be forced to shut down temporarily in California if enforcement of this law is initiated. Perhaps he said "temporarily" because the gig economy companies affected, which also include food delivery services like DoorDash, are pushing for Proposition 22, a measure on November's ballot which would exempt these companies from the very law which targeted them in the first place. California has designed a nightmarish and byzantine legal system designed to stymie productive companies and benefit the state's litigators. Until that changes, companies will continue to flee. As for Uber and Lyft, the ruling comes right as the companies are trying to pull out of the fiscal nosedive caused by the pandemic. UPDATE: Impressively, Lyft followed suit with a statement mirroring Dara's comments.
Market Pulse
02. Weekly jobless claims drop under 1M for first time since spring
US initial claims for unemployment dropped to below the one million mark for the first time since the pandemic came slamming into the global economy this past spring. While 963,000 new claims might not seem like much to celebrate, it is a far cry from the 6.867 million claims initiated in the last week of March. This most recent decline, coupled with the better-than-expected jobs number for July, points to an economy that is slowly returning to normal, despite the lack of a vaccine or a therapy for the virus. The markets remain hopeful: the S&P 500 just notched its third-straight week of gains. Our favorite anecdotal sign? The chronic, daily, in-our-face headlines telling us that Covid levels are hitting new highs have suddenly disappeared.
Under the Radar Investment
01. Under the Radar: iCAD Inc
iCAD Inc (ICAD $10) is a micro-cap ($238M) growth company in the Life Sciences Tools & Services industry. The New Hampshire-based firm, which has been in business since 1984, provides cancer detection and radiation therapy solutions and services. The company offers a range of upgradeable computer aided detection (CAD) solutions for the detection of breast, prostate, and colorectal cancers. Its Xoft Axxent system delivers high dose rate, low energy radiation to target cancer while minimizing exposure to surrounding healthy tissue. Based on its success, the Axxent system is now additionally being deployed for the treatment of non-melanoma skin cancer. Shares of ICAD topped out at $15.31 in March, leading into the pandemic-driven downturn.
Answer
The first casino-resort to be built on the Las Vegas Strip was the El Rancho Vegas, which opened in 1941. Sporting 63 rooms, its success spawned the building of a second resort, the Hotel Last Frontier, the following year. The success of these two casinos stirred the interest of organized crime, which planted its flag in Vegas when Bugsy Siegel funded the Flamingo, which opened four years later.
Headlines for the Week of 26 Jul—01 Aug 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The first commercial airline service...
We mention in an article below that the airline industry is currently suffering through the biggest shock to its system in 100 years, even more so than during the 9/11 shutdowns. The industry is actually over 100 years old; when did commercial airline travel begin and what was the first official route?
Penn Trading Desk:
(30 Jul 20) Six Flags stops out
Six Flags (SIX) made a run at it after we purchased, but it could not hold its gains. The stock hit its stop loss at $17.47 and closed out of the Intrepid for a 9.15% loss in one month.
(24 Jul 20) Raise stop on Bed Bath & Beyond after quick run-up
On 09 July we added Bed Bath & Beyond (BBBY $10) to the Intrepid Trading Platform at $7.75, with a $10 price target. Shares of the specialty retailer have risen 40% since purchase, and we are raising the stop to $9.50 to protect gains.
(23 Jul 20) Open Residential REIT in Strategic Income Portfolio
We have opened a $5 billion residential REIT with a 5.4% dividend yield and a very unique story within the Penn Strategic Income Portfolio. We purchased it for several reasons: It has been unfairly beaten down due to specific concerns over the pandemic, it is highly undervalued, it holds the top spot in its niche market, and it has a great dividend yield at a time of horrendous bond rates. Members, visit the Trading Desk for more details.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Food & Staples Retailing
10. Analysts are giddy over newly-IPO'd Albertsons; are they right to be?
This isn't the first rodeo for the firm, as Albertsons Companies (ACI $16) was publicly traded up until 2006, when the debt-laden grocer was forced to sell assets and become acquired by SuperValu and hedge fund Cerberus. So why did the second-largest North American grocer (behind Kroger—KR) decide to become a publicly-traded entity yet again? Actually, Cerberus has been looking to offload the company for some time, even planning an IPO back in 2015. Back then, however, a soft retail environment forced management to hold off on the plans. Today, as grocery chains are benefiting from increased business due to the lockdown and restaurant closures, management decided to forge ahead with the offering. It was less than spectacular. Despite looking for an initial share price between $18 and $20, the market priced the shares at $16—and they proceeded to fall 3.44% on the day, closing at $15.45. So why are a dozen or so major analysts suddenly initiating coverage with a "Buy" rating, especially with privately-held German rival Aldi about to go on a US building spree? The comments range from "positive macro-trends as more Americans work from home," to "expanded curbside pickup." Yawn. Here's what we see: A debt-to-equity ratio (leverage of debt holders over equity holders) of 3.825, compared to Kroger's 1.440 and Walmart's 0.777, and a non-distinct business strategy with no moat. The price targets range from $18 to $21 per share, but we wouldn't touch the shares, even below their IPO price.
Food & Staples Retailing
09. Walmart to close on Thanksgiving this year, give staff another bonus
We recall the days when about the only store open on Thanksgiving and Christmas was Walgreen (WBA). Heck, we even remember the Blue laws, which kept nearly all stores closed on Sundays! How times have changed. One thing is changing back to the old ways, at least for one season: $375 billion mega-retailer Walmart (WMT $132) has announced it will remain closed for Thanksgiving this year. The move makes sense. Not only will social distancing make holiday shopping more challenging, the pandemic will also force management teams to change the way they market and execute sales for the busiest season of the year. Walmart, a member of the Penn Global Leaders Club, is simply taking the lead, and we can expect many more retailers to follow. In addition to the closure, the company also announced a new round of bonuses for employees to thank them for their efforts during the pandemic. The company will spend $428 million for the latest round of bonuses, bringing the total 2020 aggregate bonus spend up to $1.1 billion. Something tells us that this year's online shopping activity on Thanksgiving Day will make up for the missed in-store experience.
Pharmaceuticals
08. US government places massive vaccine order with Pfizer
Earlier in the week we reported that shares of Penn member Pfizer (PFE $38) were spiking due to the British government's order for 30 million doses of its yet-to-be-approved Covid-19 vaccine. The US government just upped the ante, ordering 100 million doses from the company for a price of $1.95 billion. In addition to that order, it also acquired the right to buy 500 million additional doses. These governments would not be placing billion dollar orders for a therapy unless they felt very confident in the drug's ultimate success in trials. In the case of Pfizer's drug, divide the amount paid by the number of doses and we come up with a per-dose cost of $19.50, though the Department of Health and Human Services has announced that Americans will not be charged to get the vaccine once it is approved. It is absolutely feasible that these vaccines could hit doctors' offices by December. When that happens, watch the economy launch once again.
Global Health Threats
07. China busted trying to steal Covid-19 vaccine data from Moderna
China, the communist-controlled nation which unleashed a pandemic on the world, is now trying to steal the potential vaccine for the virus from the men and women working tirelessly to develop the therapy. The United States Department of Justice announced last week the indictment of two government-backed Chinese hackers who had targeted Massachusetts-based biotech firm Moderna (MRNA $12-$75-$95) in an attempt to access classified data surrounding a Covid-19 vaccine in late-state trials. Cybersecurity experts working with the firm uncovered the criminal activities and alerted the FBI, who were able to ultimately finger the perps. The DoJ also mentioned breaches at two other biotech firms, one in California and another in Maryland, stemming from China. Last week the United States ordered the Chinese consulate in Houston closed due to a number of national security threats emanating from members of the consulate—such as providing fake passports and credentials to Chinese nationals attempting to gain employment at medical research facilities. China has denied all charges, labeling them "baseless accusations." Moderna's most promising vaccine, with the help of a $483 million government contract, has entered a Phase 3 trial with 30,000 participants.
Automotive
06. Tesla will build gigafactory, new production facility in Austin, Texas
If the location of the new site wasn't telegraphed, it was sure hinted at. Electric vehicle maker Tesla (TSLA $1,415) announced that it would build a new gigafactory and second production facility on 2,000 acres just outside of Austin in what will be one of the biggest economic development programs in the city's history. The $1.1 billion facility will be used to build the Tesla Cybertruck, its Semi, and both the Models 3 and Y for the eastern part of the United States. A few months ago, as California officials were trying to keep Tesla's Fremont location closed due to the pandemic, Musk angrily tweeted out that he may move everything to Texas. While that fight has dissipated, there is clearly a love affair between Musk, whose net worth is now valued at $70 billion, and the state of Texas. Ultimately, the new plant, which will be built along the Colorado River, will employ 5,000 workers with wages starting at $35,000 per year. As for keeping the area pristine, Musk said the factory will be an "ecological paradise," with a boardwalk and a hiking/biking trail.
Behavioral Finance
05. The insane trading of Eastman Kodak shares should raise concern
Quick, what comes to mind when you hear the word Kodak (KODK $2-$18-$33)? Maybe an old camera you or your parents used to take on vacations in the 1970s? Or maybe that workhorse inkjet printer sitting in your home office? Perhaps even a classic Paul Simon song from 1973? Chances are, the name doesn't make you think of active pharmaceutical ingredients (APIs) for use in drugs. Nonetheless, that last category has been the catalyst for frenetic movement in the company's share price over the past two weeks. It began when the iconic camera maker landed a $765 million government loan under the new Defense Production Act—authorized by President Trump back in May—to help fix America's medical supply chain problem; specifically, our reliance upon communist China for about 85% of our drug ingredients. While the shift from photos and printers to drug production may seem like a radical departure for the 132-year-old company, the firm has a long history of working with chemicals and advanced materials. But the real story is the stock's crazy price movement. This company went from having a $95 million market cap in June to a $1.5 billion market cap at the end of July. Now wait a minute. Even if the government loan (which can be paid back over 25 years) were an outright gift, that would still just bring the market cap up to $860 million. Here's the magic formula that made KODK an overnight darling among Robinhood users: it was selling for under $10 per share, and there was a nice story to tell with the DPA loan. Bammo! Price goes from $2 to $33 to $18 all in the matter of ten trading days. Now the reality: This deal will help energize a company that was floundering badly, but it is not a magical panacea that will suddenly make it investment-worthy.
Semiconductors
04. Qualcomm spikes 15% after reaching settlement with Huawei
Shares of Penn New Frontier Fund member Qualcomm (QCOM $45-$107-$96) punched through their 52-week high of $96.17 after the company announced it had reached a settlement with Chinese telecom giant Huawei regarding a patent dispute. CEO Steve Mollenkopf said that the San Diego-based firm would pocket a cool $1.8 billion in Q4 as a result of the agreement. Upgrades came rolling in after the deal was announced, as it clears the way for Qualcomm to maintain its leadership position as the 5G rollout begins picking back up steam following Covid-related delays. The 15% jump in the share price was also helped along by JP Morgan's new price target of $120, and Cowen's $130 (from $115) target. Mollenkopf remains, in our opinion, one of the most adroit CEOs in the industry. His ability to get deals done despite obstacles that would derail lesser CEOs is a major reason the company remains a dominant player and the leading handset chipmaker. We have no plans to sell QCOM at either of those price targets.
Media & Entertainment
03. A&E Network loses half its viewers after dropping Live PD
The year started off on a strong note for cable TV network A&E Entertainment, a Walt Disney (DIS $117) unit. Viewership for Q1 was up 4% from the prior year, a metric built almost solely on the success of hit reality show "Live PD." Then came the renewed racial strife and a decision by A&E to cancel not only that show, but several ancillary programs such as "The First 48" and "Court Cam." From a ratings standpoint, that decision was disastrous: prime-time viewership dropped 49%. And the pain will carry over to the company's financials, as the shows brought in roughly $300 million in advertising dollars in 2019, and had already generated nearly $100 million in ad spends in Q1. The "Live PD Nation" fan base is up in arms over the cancellation and is demanding the network revive the series', but it is highly probable that Disney won't do the admirable thing and stand up to the heat that move would bring. We closed out our Disney position in the Penn Global Leaders Club in mid-July at $119.43.
IT Software & Services
02. We love Microsoft's planned deal to buy TikTok's US business
Odds were very good that the Trump administration was about to ban the use of TikTok in the United States on grounds that the Chinese-based company was a conduit for the transfer of personal data on Americans into the hands of the communist regime. Then Microsoft (MSFT $131-$217-$218) CEO Satya Nadella, a refreshingly non-partisan figure, decided his firm might just want to make a bid for the US part of the massively popular social media platform. After talking with the president over the weekend, it appears that Nadella may get his wish, potentially purchasing the platform's operations in the US, Canada, Australia, and New Zealand from parent company ByteDance Ltd. Microsoft, one of the 40 holdings in the Penn Global Leaders Club, already had a lot going for it, but this acquisition would make the firm a real player in the lucrative advertising world of social media. With one purchase, albeit a big one, Microsoft would bring nearly 100 million users into its ecosystem, greatly expanding its footprint among 18-34 year olds. While the government-controlled Chinese press labelled the potential purchase a "smash and grab" by the US, we believe the deal will get done, assuming Nadella can convince both the administration and The Committee on Foreign Investment in the United States (CFIUS) that it will put the proper security measures in place for users. Investors applauded the potential move, driving the price of Microsoft shares up over 5% on Monday. ByteDance CEO Zhang Yiming has been labelled a traitor and a coward on Chinese social media. the reason? He dared to praise the freedom of speech in the United States, "unlike in China, where opinions are one-sided." Yiming's Weibo account (Weibo is an enormous Chinese social media site) was suspended after the pro-US comments were made. Update: Apple (AAPL) is now rumored to also be interested in purchasing the assets.
Under the Radar Investment
01. Under the Radar: Air Lease Corp, the ultimate contrarian play?
Who in their right mind would buy a company that makes its money from buying and subsequently leasing jet aircraft to airlines around the world? After all, the industry is going through the biggest shock to its system in 100 years of service. That being said, shares of Air Lease Corp (AL $27) are sitting down 46% from where they traded in February, and that seems like a serious overreaction based on the company's fat profit margin and rock solid business going into the pandemic. The Los Angeles-based $3 billion company, which now carries a paltry P/E ratio of 5, earned nearly $600 million on $2 billion in revenues in 2019, and has maintained a positive net income for the past decade. The company's strong profitability metrics (see graph) will no doubt take a hit when the earnings release comes out in two days, but we would still place the fair value of AL shares at $40—a 48% upside from here.
Answer
Travel between two cities on opposite sides of Tampa Bay, St. Petersburg and Tampa, Florida, took about two hours by steamship or anywhere between four and twelve hours by rail, depending on stops. The St. Petersburg-Tampa Airboat Line, created by Florida sales rep Percival Elliott Fansler, began operation on 01 Jan 1914, cutting the trip down to about twenty minutes. The airline made two flights per day, six days a week, with a ticket costing $5 per person. Tickets were sold out for sixteen weeks in advance.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
The first commercial airline service...
We mention in an article below that the airline industry is currently suffering through the biggest shock to its system in 100 years, even more so than during the 9/11 shutdowns. The industry is actually over 100 years old; when did commercial airline travel begin and what was the first official route?
Penn Trading Desk:
(30 Jul 20) Six Flags stops out
Six Flags (SIX) made a run at it after we purchased, but it could not hold its gains. The stock hit its stop loss at $17.47 and closed out of the Intrepid for a 9.15% loss in one month.
(24 Jul 20) Raise stop on Bed Bath & Beyond after quick run-up
On 09 July we added Bed Bath & Beyond (BBBY $10) to the Intrepid Trading Platform at $7.75, with a $10 price target. Shares of the specialty retailer have risen 40% since purchase, and we are raising the stop to $9.50 to protect gains.
(23 Jul 20) Open Residential REIT in Strategic Income Portfolio
We have opened a $5 billion residential REIT with a 5.4% dividend yield and a very unique story within the Penn Strategic Income Portfolio. We purchased it for several reasons: It has been unfairly beaten down due to specific concerns over the pandemic, it is highly undervalued, it holds the top spot in its niche market, and it has a great dividend yield at a time of horrendous bond rates. Members, visit the Trading Desk for more details.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Food & Staples Retailing
10. Analysts are giddy over newly-IPO'd Albertsons; are they right to be?
This isn't the first rodeo for the firm, as Albertsons Companies (ACI $16) was publicly traded up until 2006, when the debt-laden grocer was forced to sell assets and become acquired by SuperValu and hedge fund Cerberus. So why did the second-largest North American grocer (behind Kroger—KR) decide to become a publicly-traded entity yet again? Actually, Cerberus has been looking to offload the company for some time, even planning an IPO back in 2015. Back then, however, a soft retail environment forced management to hold off on the plans. Today, as grocery chains are benefiting from increased business due to the lockdown and restaurant closures, management decided to forge ahead with the offering. It was less than spectacular. Despite looking for an initial share price between $18 and $20, the market priced the shares at $16—and they proceeded to fall 3.44% on the day, closing at $15.45. So why are a dozen or so major analysts suddenly initiating coverage with a "Buy" rating, especially with privately-held German rival Aldi about to go on a US building spree? The comments range from "positive macro-trends as more Americans work from home," to "expanded curbside pickup." Yawn. Here's what we see: A debt-to-equity ratio (leverage of debt holders over equity holders) of 3.825, compared to Kroger's 1.440 and Walmart's 0.777, and a non-distinct business strategy with no moat. The price targets range from $18 to $21 per share, but we wouldn't touch the shares, even below their IPO price.
Food & Staples Retailing
09. Walmart to close on Thanksgiving this year, give staff another bonus
We recall the days when about the only store open on Thanksgiving and Christmas was Walgreen (WBA). Heck, we even remember the Blue laws, which kept nearly all stores closed on Sundays! How times have changed. One thing is changing back to the old ways, at least for one season: $375 billion mega-retailer Walmart (WMT $132) has announced it will remain closed for Thanksgiving this year. The move makes sense. Not only will social distancing make holiday shopping more challenging, the pandemic will also force management teams to change the way they market and execute sales for the busiest season of the year. Walmart, a member of the Penn Global Leaders Club, is simply taking the lead, and we can expect many more retailers to follow. In addition to the closure, the company also announced a new round of bonuses for employees to thank them for their efforts during the pandemic. The company will spend $428 million for the latest round of bonuses, bringing the total 2020 aggregate bonus spend up to $1.1 billion. Something tells us that this year's online shopping activity on Thanksgiving Day will make up for the missed in-store experience.
Pharmaceuticals
08. US government places massive vaccine order with Pfizer
Earlier in the week we reported that shares of Penn member Pfizer (PFE $38) were spiking due to the British government's order for 30 million doses of its yet-to-be-approved Covid-19 vaccine. The US government just upped the ante, ordering 100 million doses from the company for a price of $1.95 billion. In addition to that order, it also acquired the right to buy 500 million additional doses. These governments would not be placing billion dollar orders for a therapy unless they felt very confident in the drug's ultimate success in trials. In the case of Pfizer's drug, divide the amount paid by the number of doses and we come up with a per-dose cost of $19.50, though the Department of Health and Human Services has announced that Americans will not be charged to get the vaccine once it is approved. It is absolutely feasible that these vaccines could hit doctors' offices by December. When that happens, watch the economy launch once again.
Global Health Threats
07. China busted trying to steal Covid-19 vaccine data from Moderna
China, the communist-controlled nation which unleashed a pandemic on the world, is now trying to steal the potential vaccine for the virus from the men and women working tirelessly to develop the therapy. The United States Department of Justice announced last week the indictment of two government-backed Chinese hackers who had targeted Massachusetts-based biotech firm Moderna (MRNA $12-$75-$95) in an attempt to access classified data surrounding a Covid-19 vaccine in late-state trials. Cybersecurity experts working with the firm uncovered the criminal activities and alerted the FBI, who were able to ultimately finger the perps. The DoJ also mentioned breaches at two other biotech firms, one in California and another in Maryland, stemming from China. Last week the United States ordered the Chinese consulate in Houston closed due to a number of national security threats emanating from members of the consulate—such as providing fake passports and credentials to Chinese nationals attempting to gain employment at medical research facilities. China has denied all charges, labeling them "baseless accusations." Moderna's most promising vaccine, with the help of a $483 million government contract, has entered a Phase 3 trial with 30,000 participants.
Automotive
06. Tesla will build gigafactory, new production facility in Austin, Texas
If the location of the new site wasn't telegraphed, it was sure hinted at. Electric vehicle maker Tesla (TSLA $1,415) announced that it would build a new gigafactory and second production facility on 2,000 acres just outside of Austin in what will be one of the biggest economic development programs in the city's history. The $1.1 billion facility will be used to build the Tesla Cybertruck, its Semi, and both the Models 3 and Y for the eastern part of the United States. A few months ago, as California officials were trying to keep Tesla's Fremont location closed due to the pandemic, Musk angrily tweeted out that he may move everything to Texas. While that fight has dissipated, there is clearly a love affair between Musk, whose net worth is now valued at $70 billion, and the state of Texas. Ultimately, the new plant, which will be built along the Colorado River, will employ 5,000 workers with wages starting at $35,000 per year. As for keeping the area pristine, Musk said the factory will be an "ecological paradise," with a boardwalk and a hiking/biking trail.
Behavioral Finance
05. The insane trading of Eastman Kodak shares should raise concern
Quick, what comes to mind when you hear the word Kodak (KODK $2-$18-$33)? Maybe an old camera you or your parents used to take on vacations in the 1970s? Or maybe that workhorse inkjet printer sitting in your home office? Perhaps even a classic Paul Simon song from 1973? Chances are, the name doesn't make you think of active pharmaceutical ingredients (APIs) for use in drugs. Nonetheless, that last category has been the catalyst for frenetic movement in the company's share price over the past two weeks. It began when the iconic camera maker landed a $765 million government loan under the new Defense Production Act—authorized by President Trump back in May—to help fix America's medical supply chain problem; specifically, our reliance upon communist China for about 85% of our drug ingredients. While the shift from photos and printers to drug production may seem like a radical departure for the 132-year-old company, the firm has a long history of working with chemicals and advanced materials. But the real story is the stock's crazy price movement. This company went from having a $95 million market cap in June to a $1.5 billion market cap at the end of July. Now wait a minute. Even if the government loan (which can be paid back over 25 years) were an outright gift, that would still just bring the market cap up to $860 million. Here's the magic formula that made KODK an overnight darling among Robinhood users: it was selling for under $10 per share, and there was a nice story to tell with the DPA loan. Bammo! Price goes from $2 to $33 to $18 all in the matter of ten trading days. Now the reality: This deal will help energize a company that was floundering badly, but it is not a magical panacea that will suddenly make it investment-worthy.
Semiconductors
04. Qualcomm spikes 15% after reaching settlement with Huawei
Shares of Penn New Frontier Fund member Qualcomm (QCOM $45-$107-$96) punched through their 52-week high of $96.17 after the company announced it had reached a settlement with Chinese telecom giant Huawei regarding a patent dispute. CEO Steve Mollenkopf said that the San Diego-based firm would pocket a cool $1.8 billion in Q4 as a result of the agreement. Upgrades came rolling in after the deal was announced, as it clears the way for Qualcomm to maintain its leadership position as the 5G rollout begins picking back up steam following Covid-related delays. The 15% jump in the share price was also helped along by JP Morgan's new price target of $120, and Cowen's $130 (from $115) target. Mollenkopf remains, in our opinion, one of the most adroit CEOs in the industry. His ability to get deals done despite obstacles that would derail lesser CEOs is a major reason the company remains a dominant player and the leading handset chipmaker. We have no plans to sell QCOM at either of those price targets.
Media & Entertainment
03. A&E Network loses half its viewers after dropping Live PD
The year started off on a strong note for cable TV network A&E Entertainment, a Walt Disney (DIS $117) unit. Viewership for Q1 was up 4% from the prior year, a metric built almost solely on the success of hit reality show "Live PD." Then came the renewed racial strife and a decision by A&E to cancel not only that show, but several ancillary programs such as "The First 48" and "Court Cam." From a ratings standpoint, that decision was disastrous: prime-time viewership dropped 49%. And the pain will carry over to the company's financials, as the shows brought in roughly $300 million in advertising dollars in 2019, and had already generated nearly $100 million in ad spends in Q1. The "Live PD Nation" fan base is up in arms over the cancellation and is demanding the network revive the series', but it is highly probable that Disney won't do the admirable thing and stand up to the heat that move would bring. We closed out our Disney position in the Penn Global Leaders Club in mid-July at $119.43.
IT Software & Services
02. We love Microsoft's planned deal to buy TikTok's US business
Odds were very good that the Trump administration was about to ban the use of TikTok in the United States on grounds that the Chinese-based company was a conduit for the transfer of personal data on Americans into the hands of the communist regime. Then Microsoft (MSFT $131-$217-$218) CEO Satya Nadella, a refreshingly non-partisan figure, decided his firm might just want to make a bid for the US part of the massively popular social media platform. After talking with the president over the weekend, it appears that Nadella may get his wish, potentially purchasing the platform's operations in the US, Canada, Australia, and New Zealand from parent company ByteDance Ltd. Microsoft, one of the 40 holdings in the Penn Global Leaders Club, already had a lot going for it, but this acquisition would make the firm a real player in the lucrative advertising world of social media. With one purchase, albeit a big one, Microsoft would bring nearly 100 million users into its ecosystem, greatly expanding its footprint among 18-34 year olds. While the government-controlled Chinese press labelled the potential purchase a "smash and grab" by the US, we believe the deal will get done, assuming Nadella can convince both the administration and The Committee on Foreign Investment in the United States (CFIUS) that it will put the proper security measures in place for users. Investors applauded the potential move, driving the price of Microsoft shares up over 5% on Monday. ByteDance CEO Zhang Yiming has been labelled a traitor and a coward on Chinese social media. the reason? He dared to praise the freedom of speech in the United States, "unlike in China, where opinions are one-sided." Yiming's Weibo account (Weibo is an enormous Chinese social media site) was suspended after the pro-US comments were made. Update: Apple (AAPL) is now rumored to also be interested in purchasing the assets.
Under the Radar Investment
01. Under the Radar: Air Lease Corp, the ultimate contrarian play?
Who in their right mind would buy a company that makes its money from buying and subsequently leasing jet aircraft to airlines around the world? After all, the industry is going through the biggest shock to its system in 100 years of service. That being said, shares of Air Lease Corp (AL $27) are sitting down 46% from where they traded in February, and that seems like a serious overreaction based on the company's fat profit margin and rock solid business going into the pandemic. The Los Angeles-based $3 billion company, which now carries a paltry P/E ratio of 5, earned nearly $600 million on $2 billion in revenues in 2019, and has maintained a positive net income for the past decade. The company's strong profitability metrics (see graph) will no doubt take a hit when the earnings release comes out in two days, but we would still place the fair value of AL shares at $40—a 48% upside from here.
Answer
Travel between two cities on opposite sides of Tampa Bay, St. Petersburg and Tampa, Florida, took about two hours by steamship or anywhere between four and twelve hours by rail, depending on stops. The St. Petersburg-Tampa Airboat Line, created by Florida sales rep Percival Elliott Fansler, began operation on 01 Jan 1914, cutting the trip down to about twenty minutes. The airline made two flights per day, six days a week, with a ticket costing $5 per person. Tickets were sold out for sixteen weeks in advance.
Headlines for the Week of 12 Jul 2020—18 Jul 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Expectations for a historic achievement, but preparation for the worst...
What little-known draft was prepared for President Richard Nixon on 18 Jul 1969?
Penn Trading Desk:
(17 Jul 20) Take profits on Disney
Our enthusiasm for The Walt Disney Company (DIS $118.75) has waned: we see serious challenges ahead and there is a new, untested CEO at the helm; taking our long-term profits and removing from the Penn Global Leaders Club.
(16 Jul 20) Open Sector Position in Dynamic Growth
We have been underweighting several sectors for some time—for good cause. We expect one of these out-of-favor groups, however, to have a serious mean reversion over the coming twelve months, and have added its sector SPDR to the Dynamic Growth Strategy as a satellite position.
(13 Jul 20) Carnival downgraded at Suntrust
Citing chronic challenges from the pandemic that won't subside for some time, analysts at Suntrust downgraded cruise line Carnival Corp (CCL $8-$15-$52) to a sell, giving the shares a $10 price target—33% lower than their current depressed price.
(13 Jul 20) Take profits on Clorox
Our Clorox (CLX $229) went above our target price, fell back and stopped out for a 14.5% s/t gain in the Intrepid Trading Platform.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Aerospace & Defense
10. American Airlines to Boeing: Help us secure financing or else...
It wasn't exactly a tacit threat—it was more like a promise. American Airlines (AAL $8-$12-$35), which has been scrambling to find financing for the seventeen Boeing (BA $89-$178-$391) 737-MAX jets it had previously ordered, told the aircraft maker that it needs to help the company finance the jets or the order would be cancelled. There is a lot of irony in this request, as it was American's desire for more fuel-efficient aircraft that led to the development of the MAX in the first place. Of course, Boeing could have simply developed a completely new, more efficient craft; instead, disastrously as it would turn out, the Chicago-based firm decided to simply enhance its 55-year-old design that was the 737. Boeing, which lost $636 million last year on $77 billion in revenues, cannot afford to say no—despite its own ailing finances. (The company has $32 billion in long-term assets and $58 billion in long-term liabilities.) Then again, what's another seventeen on top of the 400 MAX orders which have already been cancelled this year. Some may look at Boeing's share price, which is now off 60% from where it was trading in March of 2019, and see a battered gem; we look at the company's insipid management team and see a company that is, at best, fairly valued.
Global Strategy: Europe
09. Much to the Chagrin of Putin, Poland's Duda wins reelection
The tough, outspoken, pro-democracy, law-and-order leader of Poland, Andrzej Duda, won a stunning election over the weekend to secure another five years in charge of the Eastern European country. Duda's victory will assure Poland, a staunch US ally, will remain a thorn in the side of not only Russia, but also EU leaders in Brussels who have been unable to coral the feisty leader. Duda, who won over ten million votes in a country of 38 million citizens, is a staunch advocate of pro-growth policies designed to transform Poland into a major business hub in the region. FTSE Russell, a leading global provider of asset benchmarks, recently upgraded Poland from emerging market to developed market status. We believe the country will continue to rise in economic stature and ultimately achieve its aim of becoming a global economic powerhouse. Poland's strategic location, which has been the cause of incredible pain and suffering among the Polish people over the past century (invasions by Germany and Russia), will be one of its biggest assets going forward. One of the easiest ways to invest in the Polish economy is through the iShares MSCI Poland ETF (EPOL $12-$17-$24), which appears undervalued.
Economics: Demographics & Lifestyle
08. Americans' revolving credit debt drops below $1 trillion once again
In a perverse way to use the metric, economists often gauge the health of the US economy by how much Americans are spending—whether they have the discretionary income or not. Since consumption by Americans accounts for 70% of the US economy, they argue, increased spending means a healthier GDP. Our argument has always been this: Why don't we create a stronger and healthier economy by spending within our means and selling more of our goods and services to people living outside of the country? Alas, that is apparently archaic and low-brow thinking. There is one positive development with respect to household debt in the US, however: aggregate revolving debt outstanding has once again dropped below the $1 trillion mark. Revolving debt is mostly made up of credit card balances (bottom line in graph), but also includes personal lines of credit and home equity lines of credit. In May, this figure fell to $996 billion, but the drop is mostly a reflection of the pandemic and its accompanying "lockdown," which forced Americans to stay at home. While online sales ticked up, they were not enough to overcome the massive drop in discretionary spending which typically takes place at restaurants, malls, sporting events, and the like. The two largest components of total outstanding consumer credit debt in the US are student loans ($1.5 trillion) and auto loans ($1.35 trillion), but we're sure that credit card debt will re-join the trillion dollar club soon as the economy reopens. That is bad news for American households, but good news for the banks and financial services companies who issue the unsecured lines of credit.
Global Strategy: East/Southeast Asia
07. Yet another Western democracy bans Huawei in its 5G buildout
Drawing the ire of the US administration, the British government—under the leadership of conservative Boris Johnson—refused to buckle to requests that it ban China's Huawei Technologies from assisting in the country's massive 5G buildout plan. Then came the pandemic, wreaking havoc on the world due to Chinese stonewalling and silence. In the aftermath of the avoidable global disaster, the British government has done an about-face, joining the United States, Australia, New Zealand, Japan, and Taiwan—representing one-third of the world's GDP—in banning the company and its technology. While a number of European countries, along with the Canadian government of Justin Trudeau, remain on the fence, the US argument that Huawei is a Chinese Trojan Horse continues to gain traction.
And could anyone with a rational mind actually believe that this Chinese entity would not be used to steal trade secrets from and spy on the Western world? Who remembers the enormous Equifax breach in which 150 million Americans had their personal data—to include social security and driver's license numbers—stolen? (A reason, by the way, that every American should have some form of ID theft protection—this information will eventually be used to harm the US.) Three high-ranking members of the Chinese military were identified as the ringleaders. China has an insatiable appetite for stolen intellectual property and has proven it will do whatever it takes to dominate on the world scene. The sooner that other Western democracies—like Germany and France—realize this, the better prepared they will be to fight this increasingly-dangerous global menace.
Commercial Banks
06. The misery keeps growing at Wells Fargo
Considering what the bank did to clients, it is hard to have any sympathy for Wells Fargo (WFC $22-$24-$55); we'll reserve that emotion for investors who own the stock. The latest round of horrendous news on the $100 billion financial services firm came in the form of its Q2 earnings report. The company reported its first quarterly loss since 2008 as it set aside nearly ten billion dollars for credit losses—about 72% more than analysts were expecting and over one-third of the $28 billion written off by all banks in the quarter. That is money the bank expects to need for loans that went bad ("provisions for bad loans"). The company's 8.6% dividend—so high because the shares are so low—could obviously not be sustained by a company which is bleeding cash. Therefore, the bank announced it would be slashing that dividend by 80%—from $0.51 to $0.10 per share. The one saving grace for banks in an era of ultra-low interest rates has been their trading activity, which has been doing exceptionally well. Which bank doesn't have an institutional trading desk? Yep, Wells Fargo. Shares of WFC fell about 7% after the earnings report was released. Looking for a bank that 1. is still undervalued and 2. has a trading desk? Consider Citigroup (C $51), whose shares are off roughly 40% from their January highs.
Interactive Media & Services
05. Twitter suffers massive cyber-attack
It was the worst security breach in the polarizing social media company's history, causing its shares to plunge. Midweek, some of Twitter's (TWTR $20-$34-$46) most notable users, to include names like Obama, Gates, Buffett, and Bezos, began posting odd requests for money to be sent to bitcoin accounts. "I am giving back to the community," read Joe Biden's tweet, "All Bitcoin sent to the address below will be sent back doubled!" It worked, in fact, as hundreds of thousands of dollars may have been collected from the scam within minutes of the tweets being posted. It appears likely that the hack took place with the help of insiders—Twitter employees who were able to access internal account management tools. At a time when Twitter is under pressure from government officials for its political forays, and activist investors for the underwhelming monetization of its platform, this serious incident was the last thing the company needed. Last year, CEO Jack Dorsey's own personal account was hacked, with bizarre tweets emanating from the founder's handle. Twitter, which began trading in November of 2013, will report earnings this coming Thursday.
Economics: Supply, Demand, & Prices
04. Retail sales come roaring back in June as more shops opened
Against expectations for a 5.2% gain, US retail sales came in at a scorching 7.5% increase in June, showing pent up consumer demand needs an outlet—with or without mask requirements. According to the Commerce Department numbers, total retail sales in June clocked in at $524 billion, which was up from $487 billion in May and virtually inline with pre-pandemic levels. Breaking it down by category, clothing made the strongest comeback, with a 105% increase in sales from the previous month; consumer electronics purchases rose 37% from May, while furniture sales were up 32.5%. Despite the mandated wearing of masks in cities around the country, restaurants and bars are showing signs of life—receipts rose 20% from May to June. A 15% increase in gas sales for the month supported the thesis that Americans are ready to get out of the house and resume some semblance of normalcy. Consider this: these impressive numbers occurred in the absence of a Covid-19 therapy or vaccine; imagine the coming spike in economic activity when we these last two pieces of the puzzle are in place.
Pharmaceuticals
03. Penn Member Pfizer jumps on vaccine news, UK contract for doses
We added drug giant Pfizer (PFE $28-$37-$43) back into the Penn Global Leaders Club on 09 March, during the session we referred to as "bloodbath day" in our purchase notes (the Dow dropped 2,014 points, or 7.79% on that day). The $206 billion pharma company was trading up Monday morning as it entered into an agreement, along with partner BioNTech (BNTX $94), to provide 30 million doses of its Covid-19 vaccine candidate to the United Kingdom subject to its clinical success and regulatory approval. Under the joint firms' BNT162 program, at least four mRNA (messenger RNA) vaccines—each representing a unique target antigen/mRNA combination—are being tested, with the expectation that at least one will produce neutralizing antibodies in the immune system equal to or greater than those produced naturally in patients who have recovered from the virus. Two of the versions were granted "fast-track" designations last week based on positive early results. Relatively low dose studies have been so encouraging that the British government decided to enter into the agreement. Pfizer is shooting for regulatory approval as early as October, and the joint venture is expecting to produce 100 million doses by the end of the year, and over one billion doses by the end of next year. Pfizer has a P/E ratio of 12, and a dividend yield of 4.2%.
Integrated Oil & Gas
02. Chevron to buy Noble Energy for $5 billion
Somewhat incredibly, we now own only one energy position in the Penn Global Leaders Club: Chevron Corp (CVX $52-$85-$127). On Monday, the $160 billion integrated oil and gas giant announced that it would buy oil and gas exploration and production company Noble Energy (NBL $3-$10-$27) for $5 billion in an all-stock transaction. Based on the nightmare scenario which has been playing out for US E&P companies since the pandemic, why on earth would Chevron agree to this deal? Actually, there are a couple of good reasons. By owning Noble, Chevron will vastly expand its footprint in the Permian Basin, and they are getting the company at about half its summer, 2019 value. Here's the part we find most enticing, however: Noble has critical natural gas projects in the eastern Med, and these holdings supply enormous amounts of natural gas to Israel, Jordan, and Egypt. Above and beyond the current supply levels, the natural gas demand in these Mideastern countries will only grow as coal-powered plants are shunned. We knew there would be bankruptcies and M&A activity in this industry due to the precipitous drop in oil and gas prices since the pandemic; this deal is a brilliant example of the latter. Chevron was, in our opinion, the most well-managed integrated oil company in the business, with mega-talented Mike Wirth at the helm. This deal supports our opinion. We think back to the foiled Anadarko deal—foiled by Warren Buffett, who helped Occidental Petroleum (OXY) outbid Chevron—and we have to laugh. Chevron should send a THANK YOU card to Buffett. Occidental paid $38 billion for Anadarko thanks to Buffett; OXY now has a market cap of $15 billion. Is there a point at which the "oracle" moniker goes away?
Under the Radar Investment
01. Under the Radar: PC Connections Inc
Here's a concept: A publicly-traded, $1 billion small-cap technology retailer that is actually turning a profit—and has each year for at least the past decade. The company, PC Connection Inc (CNXN $30-$41-$56), is a national provider of a range of IT solutions, providing computer systems, software and peripheral equipment, networking communications, and other related products (425,000 in all) to enterprise, business, and public sector customers. Not only has the company remained profitable, it has actually increased its earnings per share (EPS) each year for the past decade. CNXN may be a good way to play the economic rebound, and it starts from very solid footing. Not many small-cap retailers can say that.
Answer
Most people are familiar with William Safire as an acclaimed former New York Times syndicated columnist, but he also happened to be a speechwriter for President Richard Nixon in the 1960s. On 18 Jul 1969, two days before Neil Armstrong and Buzz Aldrin set foot on another world, Safire drafted an address labeled: "IN EVENT OF MOON DISASTER." The address, which the president was to read if the Apollo 11 mission went horribly wrong, began, "Fate has ordained that the men who went to the moon to explore in peace will stay on the moon to rest in peace." Needless to say, the address was never delivered, and one of the greatest achievements in human history took place two days after it was written.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
Expectations for a historic achievement, but preparation for the worst...
What little-known draft was prepared for President Richard Nixon on 18 Jul 1969?
Penn Trading Desk:
(17 Jul 20) Take profits on Disney
Our enthusiasm for The Walt Disney Company (DIS $118.75) has waned: we see serious challenges ahead and there is a new, untested CEO at the helm; taking our long-term profits and removing from the Penn Global Leaders Club.
(16 Jul 20) Open Sector Position in Dynamic Growth
We have been underweighting several sectors for some time—for good cause. We expect one of these out-of-favor groups, however, to have a serious mean reversion over the coming twelve months, and have added its sector SPDR to the Dynamic Growth Strategy as a satellite position.
(13 Jul 20) Carnival downgraded at Suntrust
Citing chronic challenges from the pandemic that won't subside for some time, analysts at Suntrust downgraded cruise line Carnival Corp (CCL $8-$15-$52) to a sell, giving the shares a $10 price target—33% lower than their current depressed price.
(13 Jul 20) Take profits on Clorox
Our Clorox (CLX $229) went above our target price, fell back and stopped out for a 14.5% s/t gain in the Intrepid Trading Platform.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Aerospace & Defense
10. American Airlines to Boeing: Help us secure financing or else...
It wasn't exactly a tacit threat—it was more like a promise. American Airlines (AAL $8-$12-$35), which has been scrambling to find financing for the seventeen Boeing (BA $89-$178-$391) 737-MAX jets it had previously ordered, told the aircraft maker that it needs to help the company finance the jets or the order would be cancelled. There is a lot of irony in this request, as it was American's desire for more fuel-efficient aircraft that led to the development of the MAX in the first place. Of course, Boeing could have simply developed a completely new, more efficient craft; instead, disastrously as it would turn out, the Chicago-based firm decided to simply enhance its 55-year-old design that was the 737. Boeing, which lost $636 million last year on $77 billion in revenues, cannot afford to say no—despite its own ailing finances. (The company has $32 billion in long-term assets and $58 billion in long-term liabilities.) Then again, what's another seventeen on top of the 400 MAX orders which have already been cancelled this year. Some may look at Boeing's share price, which is now off 60% from where it was trading in March of 2019, and see a battered gem; we look at the company's insipid management team and see a company that is, at best, fairly valued.
Global Strategy: Europe
09. Much to the Chagrin of Putin, Poland's Duda wins reelection
The tough, outspoken, pro-democracy, law-and-order leader of Poland, Andrzej Duda, won a stunning election over the weekend to secure another five years in charge of the Eastern European country. Duda's victory will assure Poland, a staunch US ally, will remain a thorn in the side of not only Russia, but also EU leaders in Brussels who have been unable to coral the feisty leader. Duda, who won over ten million votes in a country of 38 million citizens, is a staunch advocate of pro-growth policies designed to transform Poland into a major business hub in the region. FTSE Russell, a leading global provider of asset benchmarks, recently upgraded Poland from emerging market to developed market status. We believe the country will continue to rise in economic stature and ultimately achieve its aim of becoming a global economic powerhouse. Poland's strategic location, which has been the cause of incredible pain and suffering among the Polish people over the past century (invasions by Germany and Russia), will be one of its biggest assets going forward. One of the easiest ways to invest in the Polish economy is through the iShares MSCI Poland ETF (EPOL $12-$17-$24), which appears undervalued.
Economics: Demographics & Lifestyle
08. Americans' revolving credit debt drops below $1 trillion once again
In a perverse way to use the metric, economists often gauge the health of the US economy by how much Americans are spending—whether they have the discretionary income or not. Since consumption by Americans accounts for 70% of the US economy, they argue, increased spending means a healthier GDP. Our argument has always been this: Why don't we create a stronger and healthier economy by spending within our means and selling more of our goods and services to people living outside of the country? Alas, that is apparently archaic and low-brow thinking. There is one positive development with respect to household debt in the US, however: aggregate revolving debt outstanding has once again dropped below the $1 trillion mark. Revolving debt is mostly made up of credit card balances (bottom line in graph), but also includes personal lines of credit and home equity lines of credit. In May, this figure fell to $996 billion, but the drop is mostly a reflection of the pandemic and its accompanying "lockdown," which forced Americans to stay at home. While online sales ticked up, they were not enough to overcome the massive drop in discretionary spending which typically takes place at restaurants, malls, sporting events, and the like. The two largest components of total outstanding consumer credit debt in the US are student loans ($1.5 trillion) and auto loans ($1.35 trillion), but we're sure that credit card debt will re-join the trillion dollar club soon as the economy reopens. That is bad news for American households, but good news for the banks and financial services companies who issue the unsecured lines of credit.
Global Strategy: East/Southeast Asia
07. Yet another Western democracy bans Huawei in its 5G buildout
Drawing the ire of the US administration, the British government—under the leadership of conservative Boris Johnson—refused to buckle to requests that it ban China's Huawei Technologies from assisting in the country's massive 5G buildout plan. Then came the pandemic, wreaking havoc on the world due to Chinese stonewalling and silence. In the aftermath of the avoidable global disaster, the British government has done an about-face, joining the United States, Australia, New Zealand, Japan, and Taiwan—representing one-third of the world's GDP—in banning the company and its technology. While a number of European countries, along with the Canadian government of Justin Trudeau, remain on the fence, the US argument that Huawei is a Chinese Trojan Horse continues to gain traction.
And could anyone with a rational mind actually believe that this Chinese entity would not be used to steal trade secrets from and spy on the Western world? Who remembers the enormous Equifax breach in which 150 million Americans had their personal data—to include social security and driver's license numbers—stolen? (A reason, by the way, that every American should have some form of ID theft protection—this information will eventually be used to harm the US.) Three high-ranking members of the Chinese military were identified as the ringleaders. China has an insatiable appetite for stolen intellectual property and has proven it will do whatever it takes to dominate on the world scene. The sooner that other Western democracies—like Germany and France—realize this, the better prepared they will be to fight this increasingly-dangerous global menace.
Commercial Banks
06. The misery keeps growing at Wells Fargo
Considering what the bank did to clients, it is hard to have any sympathy for Wells Fargo (WFC $22-$24-$55); we'll reserve that emotion for investors who own the stock. The latest round of horrendous news on the $100 billion financial services firm came in the form of its Q2 earnings report. The company reported its first quarterly loss since 2008 as it set aside nearly ten billion dollars for credit losses—about 72% more than analysts were expecting and over one-third of the $28 billion written off by all banks in the quarter. That is money the bank expects to need for loans that went bad ("provisions for bad loans"). The company's 8.6% dividend—so high because the shares are so low—could obviously not be sustained by a company which is bleeding cash. Therefore, the bank announced it would be slashing that dividend by 80%—from $0.51 to $0.10 per share. The one saving grace for banks in an era of ultra-low interest rates has been their trading activity, which has been doing exceptionally well. Which bank doesn't have an institutional trading desk? Yep, Wells Fargo. Shares of WFC fell about 7% after the earnings report was released. Looking for a bank that 1. is still undervalued and 2. has a trading desk? Consider Citigroup (C $51), whose shares are off roughly 40% from their January highs.
Interactive Media & Services
05. Twitter suffers massive cyber-attack
It was the worst security breach in the polarizing social media company's history, causing its shares to plunge. Midweek, some of Twitter's (TWTR $20-$34-$46) most notable users, to include names like Obama, Gates, Buffett, and Bezos, began posting odd requests for money to be sent to bitcoin accounts. "I am giving back to the community," read Joe Biden's tweet, "All Bitcoin sent to the address below will be sent back doubled!" It worked, in fact, as hundreds of thousands of dollars may have been collected from the scam within minutes of the tweets being posted. It appears likely that the hack took place with the help of insiders—Twitter employees who were able to access internal account management tools. At a time when Twitter is under pressure from government officials for its political forays, and activist investors for the underwhelming monetization of its platform, this serious incident was the last thing the company needed. Last year, CEO Jack Dorsey's own personal account was hacked, with bizarre tweets emanating from the founder's handle. Twitter, which began trading in November of 2013, will report earnings this coming Thursday.
Economics: Supply, Demand, & Prices
04. Retail sales come roaring back in June as more shops opened
Against expectations for a 5.2% gain, US retail sales came in at a scorching 7.5% increase in June, showing pent up consumer demand needs an outlet—with or without mask requirements. According to the Commerce Department numbers, total retail sales in June clocked in at $524 billion, which was up from $487 billion in May and virtually inline with pre-pandemic levels. Breaking it down by category, clothing made the strongest comeback, with a 105% increase in sales from the previous month; consumer electronics purchases rose 37% from May, while furniture sales were up 32.5%. Despite the mandated wearing of masks in cities around the country, restaurants and bars are showing signs of life—receipts rose 20% from May to June. A 15% increase in gas sales for the month supported the thesis that Americans are ready to get out of the house and resume some semblance of normalcy. Consider this: these impressive numbers occurred in the absence of a Covid-19 therapy or vaccine; imagine the coming spike in economic activity when we these last two pieces of the puzzle are in place.
Pharmaceuticals
03. Penn Member Pfizer jumps on vaccine news, UK contract for doses
We added drug giant Pfizer (PFE $28-$37-$43) back into the Penn Global Leaders Club on 09 March, during the session we referred to as "bloodbath day" in our purchase notes (the Dow dropped 2,014 points, or 7.79% on that day). The $206 billion pharma company was trading up Monday morning as it entered into an agreement, along with partner BioNTech (BNTX $94), to provide 30 million doses of its Covid-19 vaccine candidate to the United Kingdom subject to its clinical success and regulatory approval. Under the joint firms' BNT162 program, at least four mRNA (messenger RNA) vaccines—each representing a unique target antigen/mRNA combination—are being tested, with the expectation that at least one will produce neutralizing antibodies in the immune system equal to or greater than those produced naturally in patients who have recovered from the virus. Two of the versions were granted "fast-track" designations last week based on positive early results. Relatively low dose studies have been so encouraging that the British government decided to enter into the agreement. Pfizer is shooting for regulatory approval as early as October, and the joint venture is expecting to produce 100 million doses by the end of the year, and over one billion doses by the end of next year. Pfizer has a P/E ratio of 12, and a dividend yield of 4.2%.
Integrated Oil & Gas
02. Chevron to buy Noble Energy for $5 billion
Somewhat incredibly, we now own only one energy position in the Penn Global Leaders Club: Chevron Corp (CVX $52-$85-$127). On Monday, the $160 billion integrated oil and gas giant announced that it would buy oil and gas exploration and production company Noble Energy (NBL $3-$10-$27) for $5 billion in an all-stock transaction. Based on the nightmare scenario which has been playing out for US E&P companies since the pandemic, why on earth would Chevron agree to this deal? Actually, there are a couple of good reasons. By owning Noble, Chevron will vastly expand its footprint in the Permian Basin, and they are getting the company at about half its summer, 2019 value. Here's the part we find most enticing, however: Noble has critical natural gas projects in the eastern Med, and these holdings supply enormous amounts of natural gas to Israel, Jordan, and Egypt. Above and beyond the current supply levels, the natural gas demand in these Mideastern countries will only grow as coal-powered plants are shunned. We knew there would be bankruptcies and M&A activity in this industry due to the precipitous drop in oil and gas prices since the pandemic; this deal is a brilliant example of the latter. Chevron was, in our opinion, the most well-managed integrated oil company in the business, with mega-talented Mike Wirth at the helm. This deal supports our opinion. We think back to the foiled Anadarko deal—foiled by Warren Buffett, who helped Occidental Petroleum (OXY) outbid Chevron—and we have to laugh. Chevron should send a THANK YOU card to Buffett. Occidental paid $38 billion for Anadarko thanks to Buffett; OXY now has a market cap of $15 billion. Is there a point at which the "oracle" moniker goes away?
Under the Radar Investment
01. Under the Radar: PC Connections Inc
Here's a concept: A publicly-traded, $1 billion small-cap technology retailer that is actually turning a profit—and has each year for at least the past decade. The company, PC Connection Inc (CNXN $30-$41-$56), is a national provider of a range of IT solutions, providing computer systems, software and peripheral equipment, networking communications, and other related products (425,000 in all) to enterprise, business, and public sector customers. Not only has the company remained profitable, it has actually increased its earnings per share (EPS) each year for the past decade. CNXN may be a good way to play the economic rebound, and it starts from very solid footing. Not many small-cap retailers can say that.
Answer
Most people are familiar with William Safire as an acclaimed former New York Times syndicated columnist, but he also happened to be a speechwriter for President Richard Nixon in the 1960s. On 18 Jul 1969, two days before Neil Armstrong and Buzz Aldrin set foot on another world, Safire drafted an address labeled: "IN EVENT OF MOON DISASTER." The address, which the president was to read if the Apollo 11 mission went horribly wrong, began, "Fate has ordained that the men who went to the moon to explore in peace will stay on the moon to rest in peace." Needless to say, the address was never delivered, and one of the greatest achievements in human history took place two days after it was written.
Headlines for the Week of 05 Jul 2020—11 Jul 2020
Important Disclaimer: This report has been compiled and produced by Penn Wealth Publishing, LLC, a legally separate entity from Penn Wealth Management, our registered investment advisory service. It is for informational purposes only, and should not be construed as investment advice. Always consult with your professional financial advisor before making any investment decision.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
A sign of a housing market with momentum?..
There are a number of ways to try and gauge the overall health of the housing market, and what may be coming next, from sentiment surveys to new contracts underwritten to actual homes sold. One early indicator we like to look at, however, is the performance of wood and timber funds. Specifically, WOOD and CUT. Using 01 Jan as our pre-virus starting point, what percentage did these funds fall before bottoming out on 23 March, and do you think they have rebounded yet?
Penn Trading Desk:
(10 Jul 20) Open resort in Global Leaders
Every now and again we run across a grossly under-priced stock that is in the doldrums mainly due to sentiment—one of our favorite words when hunting for contrarian plays. We added an "entertaining" resort to the Penn Global Leaders Club that is priced at precisely half its fair value (in our opinion).
(09 Jul 20) Phillips 66 stopped out for gain
Our Phillips 66 position stopped out in the Global Leaders Club for a 30% s/t gain. We still like the position going forward, but believe there may be some short-term pain and a pullback. May add again if it goes below $50/share.
(08 Jul 20) Adding a drug retail position to the Global Leaders Club
We added a well-known drug retailer to the Penn Global Leaders Club based on its strategy, price (undervalued by 40%), steady business model (beta 0.55), and yield.
(07 Jul 20) Take s/t gain on Inphi
Inphi Corp (IPHI) rose above our target price and stopped out at $122.04 for a 10.24% gain in 2 weeks inside the Intrepid.
(07 Jul 20) New pharma position in Intrepid
Following news that the US gov't has signed a $450M contract to buy up to 1.3M doses of the company's Covid "cocktail" we opened new pharma position in Intrepid.
(06 Jul 20) STAA stops out in Intrepid
Our Staar surgical (STAA) hit its stop and closed at $59 for a 38% one-month gain in the Intrepid Trading Platform.
(02 Jul 20) New REIT position in Strategic Income Portfolio
Opened a residential REIT (think upscale apartment complexes) in the Strategic Income Portfolio. Well under our fair value mark, with a strong balance sheet and near-4% dividend yield.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Demographics & Lifestyle
10. The unthinkable: San Fran landlords are being forced to lower rents*
In the next issue of the Penn Wealth Report we track the remarkable events transpiring in San Francisco (well, at least one of the remarkable events): landlords are losing tenants at a record clip, and must lower monthly leases to keep occupancy rates from falling further. The median rent for a one-bedroom apartment in the city has fallen 12% year-over-year as many high-tech workers lose their jobs, and many others are suddenly free to work from home—which means they can flee the confiscatory expenses that come with living in the city and move to the suburbs. We believe the pandemic has ushered in an epoch transformation for the REIT sector, with clear winners and losers. We discuss this in further detail in the Report.
IT Services
09. Our highly-touted data analytics firm, Palantir, files to go public
We have had privately-held data analytics firm Palantir, co-founded by Peter Thiel, on our radar for at least two years. Now, it appears we are getting closer to being able to purchase shares in the firm, as it filed confidential draft registration paperwork with the SEC this week. Founded in 2004 by Thiel, current CEO Alex Karp, and two others, Palantir's analytics are credited with helping US troops locate—and ultimately kill—Osama bin Laden. With a who's who list of government and corporate clients and a treasure trove of advanced data mining tools, the company should exceed revenues of $1 billion this year. In addition to its estimated market cap of $20 billion, the Palo Alto firm is in the midst of raising almost $1 billion in new capital. While the confidential SEC filing does not guarantee a 2020 IPO for Palantir, one thing is sure: we will be owners on the first day it begins trading.
Food & Staples Retailing
08. Walmart rises 7.77% on the day it announces Prime-like service
Shares of seasoned Penn Global Leaders Club member Walmart (WMT $102-$128-$133) spiked nearly 8% after the $363 billion retailer announced it would be rolling out a new Amazon (AMZN) Prime-like service to be called Walmart+. According to tech news site Recode, the subscription-based service will launch in July and cost $98 per year. For that fee, members will enjoy same-day home grocery delivery, gas discounts, special "member-only" deals, and a number of other perks. After Amazon made it big, many retail analysts were ready to write the epitaph for the Arkansas-based retailer. It didn't take long for a skilled management team, however, to figure the out e-commerce business—or hire the best and brightest minds for the job—and prove the naysayers wrong. We have little doubt that Walmart+ will be a rousing success. And we will have a straightforward yardstick for measuring that success: Amazon currently boasts roughly 150 million Prime members.
Drug Retail
07. Walgreens' latest move to win health care biz: add primary care docs
In the constant battle among drug retailers to gain more ground in the health care arena, Walgreens Boots Alliance (WBA $37-$43-$65) is about to seriously up the ante. As rival CVS Health (CVS $63) continues to aggressively fight for market share, the company has announced plans to add health care sites, complete with MDs, to roughly 700 of its stores over the coming few years. To do this, Walgreens is teaming up with primary-care provider VillageMD, which will staff the new sites and pay Walgreens to use the space. In return, the drug retailer will invest around $1 billion in VillageMD through equity and convertible debt positions. After the full investment has been made, Walgreens will own about one-third of the business. The company's strategic vision is simple: become a destination for health and wellness, and provide as many services and products as possible to meet the medical needs of its customers. We've had our doubts about the C-suite at Walgreens in the past, but we believe this was a dynamic move to make, and that they will be able to pull it off. Additionally, shares have fallen substantially since we last excoriated the CEO.. Selling for around $42 per share, WBA carries a dividend yield of 4% and a paltry P/E ratio of 10.
Aerospace & Defense
06. SpaceX and Boeing: two companies on very different paths
Talk about two space programs going in vastly different directions. Last month, SpaceX made a stunning manned launch from US soil of its Crew Dragon capsule aboard its Falcon 9 rocket, ultimately delivering the two astronauts safely to the International Space Station (ISS). Meanwhile, NASA continues to find new flaws in Boeing's (BA $180) competing Starliner craft after a failed test flight last December. While the unmanned craft was able to achieve orbit and ultimately land safely, it failed to achieve the correct orbit to hook up with the ISS—its primary objective. Now, the Starliner program is on indefinite hold after NASA Administrator Jim Bridenstine revealed that the test flight "had a lot of anomalies." In fact, at least eleven "top-priority corrective actions" will need to be taken by Boeing, but the space agency expects to find more. At least one of the issues identified could have caused "catastrophic spacecraft failure," according to the preliminary report. The bitter irony of the software problems plaguing the Starliner, which is now three years behind schedule, is that the program provided Boeing a great opportunity to juxtapose its space efforts against its 737-MAX software nightmare. Now, it is pretty hard to differentiate between the two business segments.
Textiles, Apparel, & Luxury Goods
05. It is hard to find any rationale for investing in Levi Strauss & Co
Precisely one year ago, on 10 Jul 2019, we wrote that "Even writing about this company (Levi Strauss) bores the hell out of us." At the time, shares were sitting at $21, or roughly where they traded on IPO day. Today, LEVI shares are at $12.90, and we still see no reason to invest—despite the 50% discount. The company just reported quarterly results, and they were not good. Sales were off 62%, coming in at $498 million, and the company reported a net loss of $364 million. As could be expected, the earnings commentary revolved around the pandemic, but it is difficult to see what drives this company higher when the smoke clears. In a bid to save $100 million per year, the "woke" Levi announced that it would be firing 700 workers, or 15% of its workforce. What is a fair value for LEVI shares? Probably right around where they sit right now. Look for a deep value play elsewhere.
Economics: Work & Pay
04. Initial jobless claims number comes in better than expected
On the heels of two surprisingly-strong jobs reports, the US economy got another bit of hopeful news this week as initial jobless claims came in cooler than expected. The 1.314 million figure was better than the expected 1.39 million economists had predicted for new claims, and that number is 99,000 fewer than the previous week. Continuing jobless claims fell by 698,000, to 18.06 million. To be sure, these numbers still represent a staggering amount of Americans who are out of work, but at least they are moving in the right direction. Over the past two months, 7.5 million jobs have been created—both months blowing estimates out of the water—and the unemployment rate has dropped from 14.7% to 11.1%. The CARES Act, which adds an additional $600 per week to the unemployment benefits, is set to expire on the 31st of July. It will be interesting to track the continuing claims number from the first week of August through the remainder of the year. Our best guess is that these numbers will continue to improve as the economy and the schools ramp back up, masks and all.
Specialty Retail
03. Bed Bath & Beyond shares fall 25% as sales are cut in half
In the company's fiscal first quarter of last year, retailer Bed Bath & Beyond (BBBY $8) reported sales of $2.57 billion but still managed to lose $371 million. And that's the good news. The company's most recent fiscal Q1 ended in May, and sales came in about half of what they were a year earlier, at $1.3 billion. Somewhat impressively, the company was able to cut their loss to $302 million for the quarter. Unfortunately, that represents the sixth-straight earning report showing a net loss. It looks like the company is not through trimming costs, either, as management announced it would be closing around 200 of its 1,500 stores (about 15%) over the next two years. New CEO (Nov 2019) Mark Tritton, formerly an executive vice president at both Nordstrom (JWN) and Target (TGT), said the company should save around $300 million annually due to the closures. That would almost equal this past quarter's losses. Shares of BBBY, off 25% on the day and 75% over three years, sure look tempting at $7.75—the price as we write this. We would put a fair value of $10 on the shares, or about 30% higher than where they are. The stock has certainly proven that it can move that distance in a very short period of time. What we like: The CEO has proven experience with top retailers (he was also at Nike for a spell), and the company's e-commerce business has been getting stronger (up 80% Y/Y last quarter). What we don't like: The company sold about half of its real estate to pay down debt—before the pandemic. They got $250 million in the deal, which is less than they lost last quarter. Tough call, but we believe the shares will climb back into double-digits relatively soon.
Market Pulse
02. Markets cobble together another positive week
Volatility certainly reared its ugly head again this week—there were two trading days in which the Dow went up around 400 points, and two trading days in which it fell around 400 points—but in the end, not a bad week at all. The tech stocks led the charge, with the Nasdaq jumping a full 4%, followed by the S&P with its gain of 1.76%. The Dow was, once again, the laggard, gaining just shy of 1%. When I see the Dow underperforming the S&P, I typically just chalk it up to Boeing. Here is what is becoming more and more evident: the pandemic is going to continue to wreak havoc (we know this because of the dire cut-and-paste headlines the mainstream media throws in our faces daily), but the economy is not going to shut down again. Furthermore, schools are going to reopen this fall—at least most of them. Will students end up being sent home? There is a good chance that distance learning will supplant the classroom environment at some point in the fall semester, for sure. But, despite the doom and gloom headlines (which are by design, it should be noted), Americans are becoming adept at donning their masks and forging ahead. And that is a good thing. Yes, we are all awaiting a super-effective vaccine and therapy for the virus, but in the meantime, we cautiously but persistently keep moving forward. Cheers, and here's to celebrating another positive week!
Under the Radar Investment
01. Under the Radar: Aerojet Rocketdyne Holdings
We featured Aerojet Rocketdyne (AJRD $34-$36-%57) in our Under the Radar section precisely three years ago, on 10 Jul 2017. At the time, it was selling for $21.57—a price we called undervalued. Today, this $3 billion mid-cap rocket maker is selling for $35.84—a price we call undervalued. This company is a premier provider of rockets, weapons systems, space applications, and a host of other mission-critical components for NASA, the DoD, and governments/private aerospace companies around the world. We would value the shares at $50—back where they were before the pandemic.
Answer
WOOD, the iShares Global Timber & Forestry ETF, dropped 40.48% between the first of the year and the 23rd of March; CUT, the Invesco MSCI Global Timber ETF was down 39% over the same time frame. Between 23 March and today, WOOD has rebounded 41.5% and CUT has risen 38.54%. A very good sign indeed.
Stories with an asterisk* in the headline will be discussed in further detail in the upcoming issue of The Penn Wealth Report...
Question
A sign of a housing market with momentum?..
There are a number of ways to try and gauge the overall health of the housing market, and what may be coming next, from sentiment surveys to new contracts underwritten to actual homes sold. One early indicator we like to look at, however, is the performance of wood and timber funds. Specifically, WOOD and CUT. Using 01 Jan as our pre-virus starting point, what percentage did these funds fall before bottoming out on 23 March, and do you think they have rebounded yet?
Penn Trading Desk:
(10 Jul 20) Open resort in Global Leaders
Every now and again we run across a grossly under-priced stock that is in the doldrums mainly due to sentiment—one of our favorite words when hunting for contrarian plays. We added an "entertaining" resort to the Penn Global Leaders Club that is priced at precisely half its fair value (in our opinion).
(09 Jul 20) Phillips 66 stopped out for gain
Our Phillips 66 position stopped out in the Global Leaders Club for a 30% s/t gain. We still like the position going forward, but believe there may be some short-term pain and a pullback. May add again if it goes below $50/share.
(08 Jul 20) Adding a drug retail position to the Global Leaders Club
We added a well-known drug retailer to the Penn Global Leaders Club based on its strategy, price (undervalued by 40%), steady business model (beta 0.55), and yield.
(07 Jul 20) Take s/t gain on Inphi
Inphi Corp (IPHI) rose above our target price and stopped out at $122.04 for a 10.24% gain in 2 weeks inside the Intrepid.
(07 Jul 20) New pharma position in Intrepid
Following news that the US gov't has signed a $450M contract to buy up to 1.3M doses of the company's Covid "cocktail" we opened new pharma position in Intrepid.
(06 Jul 20) STAA stops out in Intrepid
Our Staar surgical (STAA) hit its stop and closed at $59 for a 38% one-month gain in the Intrepid Trading Platform.
(02 Jul 20) New REIT position in Strategic Income Portfolio
Opened a residential REIT (think upscale apartment complexes) in the Strategic Income Portfolio. Well under our fair value mark, with a strong balance sheet and near-4% dividend yield.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Demographics & Lifestyle
10. The unthinkable: San Fran landlords are being forced to lower rents*
In the next issue of the Penn Wealth Report we track the remarkable events transpiring in San Francisco (well, at least one of the remarkable events): landlords are losing tenants at a record clip, and must lower monthly leases to keep occupancy rates from falling further. The median rent for a one-bedroom apartment in the city has fallen 12% year-over-year as many high-tech workers lose their jobs, and many others are suddenly free to work from home—which means they can flee the confiscatory expenses that come with living in the city and move to the suburbs. We believe the pandemic has ushered in an epoch transformation for the REIT sector, with clear winners and losers. We discuss this in further detail in the Report.
IT Services
09. Our highly-touted data analytics firm, Palantir, files to go public
We have had privately-held data analytics firm Palantir, co-founded by Peter Thiel, on our radar for at least two years. Now, it appears we are getting closer to being able to purchase shares in the firm, as it filed confidential draft registration paperwork with the SEC this week. Founded in 2004 by Thiel, current CEO Alex Karp, and two others, Palantir's analytics are credited with helping US troops locate—and ultimately kill—Osama bin Laden. With a who's who list of government and corporate clients and a treasure trove of advanced data mining tools, the company should exceed revenues of $1 billion this year. In addition to its estimated market cap of $20 billion, the Palo Alto firm is in the midst of raising almost $1 billion in new capital. While the confidential SEC filing does not guarantee a 2020 IPO for Palantir, one thing is sure: we will be owners on the first day it begins trading.
Food & Staples Retailing
08. Walmart rises 7.77% on the day it announces Prime-like service
Shares of seasoned Penn Global Leaders Club member Walmart (WMT $102-$128-$133) spiked nearly 8% after the $363 billion retailer announced it would be rolling out a new Amazon (AMZN) Prime-like service to be called Walmart+. According to tech news site Recode, the subscription-based service will launch in July and cost $98 per year. For that fee, members will enjoy same-day home grocery delivery, gas discounts, special "member-only" deals, and a number of other perks. After Amazon made it big, many retail analysts were ready to write the epitaph for the Arkansas-based retailer. It didn't take long for a skilled management team, however, to figure the out e-commerce business—or hire the best and brightest minds for the job—and prove the naysayers wrong. We have little doubt that Walmart+ will be a rousing success. And we will have a straightforward yardstick for measuring that success: Amazon currently boasts roughly 150 million Prime members.
Drug Retail
07. Walgreens' latest move to win health care biz: add primary care docs
In the constant battle among drug retailers to gain more ground in the health care arena, Walgreens Boots Alliance (WBA $37-$43-$65) is about to seriously up the ante. As rival CVS Health (CVS $63) continues to aggressively fight for market share, the company has announced plans to add health care sites, complete with MDs, to roughly 700 of its stores over the coming few years. To do this, Walgreens is teaming up with primary-care provider VillageMD, which will staff the new sites and pay Walgreens to use the space. In return, the drug retailer will invest around $1 billion in VillageMD through equity and convertible debt positions. After the full investment has been made, Walgreens will own about one-third of the business. The company's strategic vision is simple: become a destination for health and wellness, and provide as many services and products as possible to meet the medical needs of its customers. We've had our doubts about the C-suite at Walgreens in the past, but we believe this was a dynamic move to make, and that they will be able to pull it off. Additionally, shares have fallen substantially since we last excoriated the CEO.. Selling for around $42 per share, WBA carries a dividend yield of 4% and a paltry P/E ratio of 10.
Aerospace & Defense
06. SpaceX and Boeing: two companies on very different paths
Talk about two space programs going in vastly different directions. Last month, SpaceX made a stunning manned launch from US soil of its Crew Dragon capsule aboard its Falcon 9 rocket, ultimately delivering the two astronauts safely to the International Space Station (ISS). Meanwhile, NASA continues to find new flaws in Boeing's (BA $180) competing Starliner craft after a failed test flight last December. While the unmanned craft was able to achieve orbit and ultimately land safely, it failed to achieve the correct orbit to hook up with the ISS—its primary objective. Now, the Starliner program is on indefinite hold after NASA Administrator Jim Bridenstine revealed that the test flight "had a lot of anomalies." In fact, at least eleven "top-priority corrective actions" will need to be taken by Boeing, but the space agency expects to find more. At least one of the issues identified could have caused "catastrophic spacecraft failure," according to the preliminary report. The bitter irony of the software problems plaguing the Starliner, which is now three years behind schedule, is that the program provided Boeing a great opportunity to juxtapose its space efforts against its 737-MAX software nightmare. Now, it is pretty hard to differentiate between the two business segments.
Textiles, Apparel, & Luxury Goods
05. It is hard to find any rationale for investing in Levi Strauss & Co
Precisely one year ago, on 10 Jul 2019, we wrote that "Even writing about this company (Levi Strauss) bores the hell out of us." At the time, shares were sitting at $21, or roughly where they traded on IPO day. Today, LEVI shares are at $12.90, and we still see no reason to invest—despite the 50% discount. The company just reported quarterly results, and they were not good. Sales were off 62%, coming in at $498 million, and the company reported a net loss of $364 million. As could be expected, the earnings commentary revolved around the pandemic, but it is difficult to see what drives this company higher when the smoke clears. In a bid to save $100 million per year, the "woke" Levi announced that it would be firing 700 workers, or 15% of its workforce. What is a fair value for LEVI shares? Probably right around where they sit right now. Look for a deep value play elsewhere.
Economics: Work & Pay
04. Initial jobless claims number comes in better than expected
On the heels of two surprisingly-strong jobs reports, the US economy got another bit of hopeful news this week as initial jobless claims came in cooler than expected. The 1.314 million figure was better than the expected 1.39 million economists had predicted for new claims, and that number is 99,000 fewer than the previous week. Continuing jobless claims fell by 698,000, to 18.06 million. To be sure, these numbers still represent a staggering amount of Americans who are out of work, but at least they are moving in the right direction. Over the past two months, 7.5 million jobs have been created—both months blowing estimates out of the water—and the unemployment rate has dropped from 14.7% to 11.1%. The CARES Act, which adds an additional $600 per week to the unemployment benefits, is set to expire on the 31st of July. It will be interesting to track the continuing claims number from the first week of August through the remainder of the year. Our best guess is that these numbers will continue to improve as the economy and the schools ramp back up, masks and all.
Specialty Retail
03. Bed Bath & Beyond shares fall 25% as sales are cut in half
In the company's fiscal first quarter of last year, retailer Bed Bath & Beyond (BBBY $8) reported sales of $2.57 billion but still managed to lose $371 million. And that's the good news. The company's most recent fiscal Q1 ended in May, and sales came in about half of what they were a year earlier, at $1.3 billion. Somewhat impressively, the company was able to cut their loss to $302 million for the quarter. Unfortunately, that represents the sixth-straight earning report showing a net loss. It looks like the company is not through trimming costs, either, as management announced it would be closing around 200 of its 1,500 stores (about 15%) over the next two years. New CEO (Nov 2019) Mark Tritton, formerly an executive vice president at both Nordstrom (JWN) and Target (TGT), said the company should save around $300 million annually due to the closures. That would almost equal this past quarter's losses. Shares of BBBY, off 25% on the day and 75% over three years, sure look tempting at $7.75—the price as we write this. We would put a fair value of $10 on the shares, or about 30% higher than where they are. The stock has certainly proven that it can move that distance in a very short period of time. What we like: The CEO has proven experience with top retailers (he was also at Nike for a spell), and the company's e-commerce business has been getting stronger (up 80% Y/Y last quarter). What we don't like: The company sold about half of its real estate to pay down debt—before the pandemic. They got $250 million in the deal, which is less than they lost last quarter. Tough call, but we believe the shares will climb back into double-digits relatively soon.
Market Pulse
02. Markets cobble together another positive week
Volatility certainly reared its ugly head again this week—there were two trading days in which the Dow went up around 400 points, and two trading days in which it fell around 400 points—but in the end, not a bad week at all. The tech stocks led the charge, with the Nasdaq jumping a full 4%, followed by the S&P with its gain of 1.76%. The Dow was, once again, the laggard, gaining just shy of 1%. When I see the Dow underperforming the S&P, I typically just chalk it up to Boeing. Here is what is becoming more and more evident: the pandemic is going to continue to wreak havoc (we know this because of the dire cut-and-paste headlines the mainstream media throws in our faces daily), but the economy is not going to shut down again. Furthermore, schools are going to reopen this fall—at least most of them. Will students end up being sent home? There is a good chance that distance learning will supplant the classroom environment at some point in the fall semester, for sure. But, despite the doom and gloom headlines (which are by design, it should be noted), Americans are becoming adept at donning their masks and forging ahead. And that is a good thing. Yes, we are all awaiting a super-effective vaccine and therapy for the virus, but in the meantime, we cautiously but persistently keep moving forward. Cheers, and here's to celebrating another positive week!
Under the Radar Investment
01. Under the Radar: Aerojet Rocketdyne Holdings
We featured Aerojet Rocketdyne (AJRD $34-$36-%57) in our Under the Radar section precisely three years ago, on 10 Jul 2017. At the time, it was selling for $21.57—a price we called undervalued. Today, this $3 billion mid-cap rocket maker is selling for $35.84—a price we call undervalued. This company is a premier provider of rockets, weapons systems, space applications, and a host of other mission-critical components for NASA, the DoD, and governments/private aerospace companies around the world. We would value the shares at $50—back where they were before the pandemic.
Answer
WOOD, the iShares Global Timber & Forestry ETF, dropped 40.48% between the first of the year and the 23rd of March; CUT, the Invesco MSCI Global Timber ETF was down 39% over the same time frame. Between 23 March and today, WOOD has rebounded 41.5% and CUT has risen 38.54%. A very good sign indeed.
Question
Looking forward to the next mask-free roller coaster ride...
Despite owning more theme parks and waterparks combined than any other amusement park company in the world, Six Flags ranks seventh on the attendance list in that category. Which park operators rank in the top three from an attendance standpoint?
Penn Trading Desk:
(30 Jun 20) DA Davidson: Initiate Buy rating on Clorox
Calling it a play on changing disinfectant habits, analyst house DA Davidson initiated a Buy rating on Penn Intrepid Trading Platform member Clorox (CLX $219), placing a $256 per share target on the price. The company expects Clorox to see 17% sales growth in Q4. Our shares are up 10% since we added to the Intrepid precisely one month ago.
(30 Jun 20) Raise stop on Staar Surgical
Our Staar Surgical Co (STAA $60) position in the Intrepid Trading Platform continues its march higher, and is now up 41% from our purchase price earlier this month. Raise stop to $59 to protect s/t gains.
(29 Jun 20) Open a global stock exchange in the PGLC
We have been underweighted in Financials (for good reason). However, we just added a global stock exchange to the mix—a capital markets firm greatly unaffected by ultra-low rates and concerns about the state of consumer finance.
(26 Jun 20) Open resort hotel REIT in Intrepid
Opening a (s)mid-cap resort REIT at a 50% discount to its fair value; Style: Deep Value.
(26 Jun 20) Open Semiconductor manufacturer in Intrepid
Opening a $5.4B mid-cap semiconductor play to the Intrepid; Style: Momentum.
(25 Jun 20) Open leisure company in Intrepid
Adding a contrarian play from the leisure industry to the Intrepid; sitting at a 50% discount from its fair value.
(24 Jun 20) Teradyne stops out
Teradyne (TER $83) fell to our $83 stop loss and sold in the New Frontier Fund; took our 38% one-month gain.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Sovereign Debt & Global Fixed Income
10. Canada loses its triple-A rating on a key sovereign debt metric
Believe it or not, considering the country's $26 trillion (and growing) debt load, the United States still carries a triple-A debt rating by the major credit rating agencies. I recall the hubbub back in 2013 when Fitch put our credit rating on "negative watch," citing budget battles and debt level concerns. This week, Fitch did more than warn Canada about its own fiscal problems—it actually stripped the country of its AAA "long-term foreign currency issuer default rating," lowering it to AA+. The ratings agency cited big annual deficits and higher-than-expected post-Covid public debt levels. As a sign of the country's challenges, new manufacturing orders within Canada have fallen to the lowest levels since the 2008/09 financial meltdown. While lower ratings generally make it more expensive for a nation to finance its activities, one has to wonder if it will matter much with the ultra-low rates prevalent around the world; rates which probably won't go up for years.
Leisure Equipment, Products, & Facilities
09. Six Flags Entertainment: the ultimate contrarian play?
Six Flags Entertainment Corp (SIX $9-$19-$60) is a $1.6 billion small-cap theme park operator with 25 locations in North America and Mexico. With annual attendance of nearly 50 million visitors, the company generates roughly $1.5 billion in sales annually. The Texas-based firm made news this week when it hired the highly-qualified former Guess CFO, Sandeep Reddy, to fill the top finance role. Shares of SIX topped out near $60 last August, but are currently 67% off that high. Based on the company's financials, the current price seems to bake in zero growth going forward, an assumption we don't buy into.
Textiles, Apparel, & Luxury Goods
08. Nike plunges on horrendous quarter...that every analyst got wrong
100% of analysts covering the stock. That is how many got it dead-wrong with respect to Nike's (NKE $94) Q4—which ended in May. Against an aggregate prediction for an estimated gain of $0.07 per share, the outspoken, highly-political shoe company actually lost $0.51 per share. The range of analyst estimates went from a loss of $0.38 to a gain of $0.46 per share, with all overshooting the mark. The company got slammed with a whopping 38% decline in sales for the quarter, most notably from its North American business, which was cut almost in half. Shocked investors responded by dragging the stock down nearly 8% on the day. With its 38 P/E ratio and propensity to get mixed up in politics, we would stick with names like Adidas (ADDYY) or even beaten-down Under Armour (UA) before touching Nike. That being said, the company's new CEO, former PayPal chief John Donahoe, is bound to do a much better job at the helm than buffoonish Mark Parker. Sadly, Parker is now the executive chairman at the firm.
Restaurants
07. Out of luck and out of time: Luckin drops bid to be delisted
It was a black eye for the normally-adroit Nasdaq. Less than one year ago, the coffee company labeled "the Starbuck's of China" began publicly trading on the exchange; to much fanfare, we might add. By January of 2020, shares of Luckin Coffee (LK $1) had risen from $20 to $50, and the company's market cap peaked at $13 billion. Then came the news that executives had been cooking the books to levels which would make Enron executives envious, and the charade was over. This past week, with shares sitting just north of $1, the company abandoned its appeal to remain listed on the exchange. This news sent the stock down another 50% and dropped Luckin's market cap to $350 million. We remember the glowing reports espoused on the financial news networks about this "Starbuck's killer," and the calls we received from interested investors. For all of the brainpower at the Nasdaq (we won't accuse the financial networks of having that problem), how was this train wreck not averted, even before it left the station? Like the country in which they operate, Chinese entities have all the transparency of pea soup, and an equivalent level of trustworthiness. American regulatory bodies are not allowed to dive into the books, so we accept the numbers in good faith. Perhaps, between Luckin, the pandemic, and a number of other recent examples, that will soon change.
Oil/Gas Exploration & Production
06. Loaded with debt, fracking pioneer Chesapeake heads for Chapter 11
Founded in 1989 by Aubrey McClendon, Cheseapeake Energy (CHK $8-$12-$430) was a pioneer in the fracking movement—the process which helped the United States become the largest energy producer in the world. Now, with its market cap sitting at $115 million and its debt load sitting north of $8 billion, the company has announced that it will file for Chapter 11 bankruptcy protection. This action follows a missed $10 million debt service payment the company was scheduled to make on 16 Jun. Chesapeake will continue to operate while in Chapter 11, and management believes it can wipe out roughly $7 billion of debt during the process and emerge with $2.5 billion in new debt financing from existing lenders. Franklin Resources and Fidelity are two of the firm's largest creditors. As for McClendon, the founder was killed in a 2016 single-vehicle crash the day after being indicted on charges of conspiring to rig bids for oil and natural gas leases. If we had to pick one player within the industry it would probably be $4.4 billion Parsley Energy (PE $4-$11-$21), but we can think of about 185 industries (out of 197) we would rather look at right now.
Global Strategy: Latin America
05. Latest attack in Mexico exemplifies seismic challenges country faces
For all of the challenges the US currently faces, it could be worse. Mexico, despite its potential, remains weighted down by government corruption and cronyism, decaying infrastructure, and rampant crime—among other massive challenges. The latest example of rampant crime comes to us from Mexico City, where a well-orchestrated attack on the city's police chief has left the city—and country—shaken. Armed with assault rifles, grenades, and a Barrett sniper rifle, members of the Jalisco cartel launched the daylight attack last Friday, wounding the police chief and killing two of his bodyguards and a woman on her way to work. Small businesses in Mexico City face extortion ("pay us or pay the consequences"), civilians and tourists face the constant risk of being caught in the crossfire, and opposing crime groups often turn city streets into war zones. When the perpetrators are caught, police officials and federal judges are often targeted for taking action. A few weeks before this most recent attack, a federal judge overseeing organized crime cases was gunned down at his home in front of his wife and two children. Ironically, Mexican President "AMLO" has taken a softer approach toward dealing with cartel violence. His efforts at placating the groups seems to be falling on deaf ears. Until the country can gain some semblance of control over the violence and stem government corruption, Mexico remains a foreign market for investors to avoid.
Leisure Equipment, Products, & Facilities
04. Lululemon will buy at-home fitness company Mirror for $500M
It seems like a better fit for a company such as Peloton (PTON), but athleisure firm Lululemon (LULU $129-$294-$325) has announced that it will make its first-ever acquisition: it will buy home-fitness startup Mirror for $500 million. By now, most have probably seen ads for the firm's product and services—the ultra-cool, futuristic-looking stand up "mirror" ($1,495), and the embedded workouts which require a monthly subscription fee ($39) to stream to the device. The deal makes more sense when we consider that LULU was one of the first to provide seed money to the company, investing $1 million when the private firm was less than one year old. Additionally, for a company whose sole source of revenue is derived from its retail clothing business and selling ancillary workout equipment such as yoga mats, the acquisition could provide a real boost to future growth. Following the deal, Mirror will operate as a standalone company within the $38 billion parent firm. Sitting just shy of $300, we believe shares of LULU are fully valued.
South Asia
03. India is banning China's top apps, and that will have a big impact
Some in the media love to point out that China is a nation with 1.3 billion citizens. All well and good, but population doesn't equate to economic might. In fact, it would be fairly easy to argue that it hurts—all the more mouths to feed. Additionally, we will continue to argue that technology will be the great driver of economic growth going forward, so it is paramount that the world's largest economy, the United States, maintains its technological advantage. Speaking of technology and population, it should be pointed out that China's regional nemesis, India, also has 1.3 billion citizens, and that country's government just slapped a big setback on China's tech push: it has banned 59 of the communist nation's largest apps over cybersecurity concerns. Among the apps are TikTok, which currently has more users in India than anywhere else outside of China. The apps on the banned list are now blocked from download in India, and already-downloaded apps will stop working by early next week. Make no mistake about it, this action will a powerful and deleterious effect on these prize Chinese entities. India is where China was about 15 years ago—an emerging market just waiting to flourish. There is one big difference between the two: India doesn't have world domination as a stated goal ("China 2025").
Market Pulse
02. The markets—a leading indicator—come roaring back in Q2
The stock market historically leads the economy. If that holds true this time around, the economy should be in for a roaring-good second half of the year. After the fastest market decline in US history during Q1, the Nasdaq just put in its best quarterly showing since 2001, the S&P 500 since 1998, and the Dow since 1987. While the latter two indexes are still negative for the year, all three have surged back since the dark days of March—despite a resurgence in Covid cases, which the markets have largely brushed off. Between the pandemic, racial strife, and a major upcoming election, there are plenty of unknowns remaining for the latter six months of 2020, but the stock market is showing good faith that we are back on track for solid growth, and that the Fed will continue to provide lubrication along the way.
Under the Radar Investment
01. Under the Radar: Canadian Solar Inc
Canadian Solar (CSIQ $19) is a $1.1 billion integrated provider of solar power products, services, and system solutions. The firm designs, develops, and manufactures solar wafers, cells, modules, and other products integral to the industry. With an ultra-low P/E ratio of 3.8, short- and long-term assets which easily cover debt loads, and a positive annual cash flow (the firm made $172 million on $3.2 billion in sales last year), Canadian Solar is one of the better-run companies in a challenging—but highly promising—industry. Founded in 2001, the Ontario-based small-cap derives most of its revenue from Asia, but is active in over 160 countries around the world. We believe shares of CSIQ are trading at a 32% discount to their fair value of $25.
Answer
The top spot for amusement park attendance is a no-brainer: Walt Disney parks, in aggregate, pulled in roughly 170 million visitors last year; followed by the UK's Merlin Entertainments (think Legoland, Madame Tussauds Wax Museum, and Sea Life Centers), with 75 million; and Universal Parks & Resorts, with 60 million. The next three are Chinese conglomerates, with Six Flags coming in seventh.
Looking forward to the next mask-free roller coaster ride...
Despite owning more theme parks and waterparks combined than any other amusement park company in the world, Six Flags ranks seventh on the attendance list in that category. Which park operators rank in the top three from an attendance standpoint?
Penn Trading Desk:
(30 Jun 20) DA Davidson: Initiate Buy rating on Clorox
Calling it a play on changing disinfectant habits, analyst house DA Davidson initiated a Buy rating on Penn Intrepid Trading Platform member Clorox (CLX $219), placing a $256 per share target on the price. The company expects Clorox to see 17% sales growth in Q4. Our shares are up 10% since we added to the Intrepid precisely one month ago.
(30 Jun 20) Raise stop on Staar Surgical
Our Staar Surgical Co (STAA $60) position in the Intrepid Trading Platform continues its march higher, and is now up 41% from our purchase price earlier this month. Raise stop to $59 to protect s/t gains.
(29 Jun 20) Open a global stock exchange in the PGLC
We have been underweighted in Financials (for good reason). However, we just added a global stock exchange to the mix—a capital markets firm greatly unaffected by ultra-low rates and concerns about the state of consumer finance.
(26 Jun 20) Open resort hotel REIT in Intrepid
Opening a (s)mid-cap resort REIT at a 50% discount to its fair value; Style: Deep Value.
(26 Jun 20) Open Semiconductor manufacturer in Intrepid
Opening a $5.4B mid-cap semiconductor play to the Intrepid; Style: Momentum.
(25 Jun 20) Open leisure company in Intrepid
Adding a contrarian play from the leisure industry to the Intrepid; sitting at a 50% discount from its fair value.
(24 Jun 20) Teradyne stops out
Teradyne (TER $83) fell to our $83 stop loss and sold in the New Frontier Fund; took our 38% one-month gain.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Sovereign Debt & Global Fixed Income
10. Canada loses its triple-A rating on a key sovereign debt metric
Believe it or not, considering the country's $26 trillion (and growing) debt load, the United States still carries a triple-A debt rating by the major credit rating agencies. I recall the hubbub back in 2013 when Fitch put our credit rating on "negative watch," citing budget battles and debt level concerns. This week, Fitch did more than warn Canada about its own fiscal problems—it actually stripped the country of its AAA "long-term foreign currency issuer default rating," lowering it to AA+. The ratings agency cited big annual deficits and higher-than-expected post-Covid public debt levels. As a sign of the country's challenges, new manufacturing orders within Canada have fallen to the lowest levels since the 2008/09 financial meltdown. While lower ratings generally make it more expensive for a nation to finance its activities, one has to wonder if it will matter much with the ultra-low rates prevalent around the world; rates which probably won't go up for years.
Leisure Equipment, Products, & Facilities
09. Six Flags Entertainment: the ultimate contrarian play?
Six Flags Entertainment Corp (SIX $9-$19-$60) is a $1.6 billion small-cap theme park operator with 25 locations in North America and Mexico. With annual attendance of nearly 50 million visitors, the company generates roughly $1.5 billion in sales annually. The Texas-based firm made news this week when it hired the highly-qualified former Guess CFO, Sandeep Reddy, to fill the top finance role. Shares of SIX topped out near $60 last August, but are currently 67% off that high. Based on the company's financials, the current price seems to bake in zero growth going forward, an assumption we don't buy into.
Textiles, Apparel, & Luxury Goods
08. Nike plunges on horrendous quarter...that every analyst got wrong
100% of analysts covering the stock. That is how many got it dead-wrong with respect to Nike's (NKE $94) Q4—which ended in May. Against an aggregate prediction for an estimated gain of $0.07 per share, the outspoken, highly-political shoe company actually lost $0.51 per share. The range of analyst estimates went from a loss of $0.38 to a gain of $0.46 per share, with all overshooting the mark. The company got slammed with a whopping 38% decline in sales for the quarter, most notably from its North American business, which was cut almost in half. Shocked investors responded by dragging the stock down nearly 8% on the day. With its 38 P/E ratio and propensity to get mixed up in politics, we would stick with names like Adidas (ADDYY) or even beaten-down Under Armour (UA) before touching Nike. That being said, the company's new CEO, former PayPal chief John Donahoe, is bound to do a much better job at the helm than buffoonish Mark Parker. Sadly, Parker is now the executive chairman at the firm.
Restaurants
07. Out of luck and out of time: Luckin drops bid to be delisted
It was a black eye for the normally-adroit Nasdaq. Less than one year ago, the coffee company labeled "the Starbuck's of China" began publicly trading on the exchange; to much fanfare, we might add. By January of 2020, shares of Luckin Coffee (LK $1) had risen from $20 to $50, and the company's market cap peaked at $13 billion. Then came the news that executives had been cooking the books to levels which would make Enron executives envious, and the charade was over. This past week, with shares sitting just north of $1, the company abandoned its appeal to remain listed on the exchange. This news sent the stock down another 50% and dropped Luckin's market cap to $350 million. We remember the glowing reports espoused on the financial news networks about this "Starbuck's killer," and the calls we received from interested investors. For all of the brainpower at the Nasdaq (we won't accuse the financial networks of having that problem), how was this train wreck not averted, even before it left the station? Like the country in which they operate, Chinese entities have all the transparency of pea soup, and an equivalent level of trustworthiness. American regulatory bodies are not allowed to dive into the books, so we accept the numbers in good faith. Perhaps, between Luckin, the pandemic, and a number of other recent examples, that will soon change.
Oil/Gas Exploration & Production
06. Loaded with debt, fracking pioneer Chesapeake heads for Chapter 11
Founded in 1989 by Aubrey McClendon, Cheseapeake Energy (CHK $8-$12-$430) was a pioneer in the fracking movement—the process which helped the United States become the largest energy producer in the world. Now, with its market cap sitting at $115 million and its debt load sitting north of $8 billion, the company has announced that it will file for Chapter 11 bankruptcy protection. This action follows a missed $10 million debt service payment the company was scheduled to make on 16 Jun. Chesapeake will continue to operate while in Chapter 11, and management believes it can wipe out roughly $7 billion of debt during the process and emerge with $2.5 billion in new debt financing from existing lenders. Franklin Resources and Fidelity are two of the firm's largest creditors. As for McClendon, the founder was killed in a 2016 single-vehicle crash the day after being indicted on charges of conspiring to rig bids for oil and natural gas leases. If we had to pick one player within the industry it would probably be $4.4 billion Parsley Energy (PE $4-$11-$21), but we can think of about 185 industries (out of 197) we would rather look at right now.
Global Strategy: Latin America
05. Latest attack in Mexico exemplifies seismic challenges country faces
For all of the challenges the US currently faces, it could be worse. Mexico, despite its potential, remains weighted down by government corruption and cronyism, decaying infrastructure, and rampant crime—among other massive challenges. The latest example of rampant crime comes to us from Mexico City, where a well-orchestrated attack on the city's police chief has left the city—and country—shaken. Armed with assault rifles, grenades, and a Barrett sniper rifle, members of the Jalisco cartel launched the daylight attack last Friday, wounding the police chief and killing two of his bodyguards and a woman on her way to work. Small businesses in Mexico City face extortion ("pay us or pay the consequences"), civilians and tourists face the constant risk of being caught in the crossfire, and opposing crime groups often turn city streets into war zones. When the perpetrators are caught, police officials and federal judges are often targeted for taking action. A few weeks before this most recent attack, a federal judge overseeing organized crime cases was gunned down at his home in front of his wife and two children. Ironically, Mexican President "AMLO" has taken a softer approach toward dealing with cartel violence. His efforts at placating the groups seems to be falling on deaf ears. Until the country can gain some semblance of control over the violence and stem government corruption, Mexico remains a foreign market for investors to avoid.
Leisure Equipment, Products, & Facilities
04. Lululemon will buy at-home fitness company Mirror for $500M
It seems like a better fit for a company such as Peloton (PTON), but athleisure firm Lululemon (LULU $129-$294-$325) has announced that it will make its first-ever acquisition: it will buy home-fitness startup Mirror for $500 million. By now, most have probably seen ads for the firm's product and services—the ultra-cool, futuristic-looking stand up "mirror" ($1,495), and the embedded workouts which require a monthly subscription fee ($39) to stream to the device. The deal makes more sense when we consider that LULU was one of the first to provide seed money to the company, investing $1 million when the private firm was less than one year old. Additionally, for a company whose sole source of revenue is derived from its retail clothing business and selling ancillary workout equipment such as yoga mats, the acquisition could provide a real boost to future growth. Following the deal, Mirror will operate as a standalone company within the $38 billion parent firm. Sitting just shy of $300, we believe shares of LULU are fully valued.
South Asia
03. India is banning China's top apps, and that will have a big impact
Some in the media love to point out that China is a nation with 1.3 billion citizens. All well and good, but population doesn't equate to economic might. In fact, it would be fairly easy to argue that it hurts—all the more mouths to feed. Additionally, we will continue to argue that technology will be the great driver of economic growth going forward, so it is paramount that the world's largest economy, the United States, maintains its technological advantage. Speaking of technology and population, it should be pointed out that China's regional nemesis, India, also has 1.3 billion citizens, and that country's government just slapped a big setback on China's tech push: it has banned 59 of the communist nation's largest apps over cybersecurity concerns. Among the apps are TikTok, which currently has more users in India than anywhere else outside of China. The apps on the banned list are now blocked from download in India, and already-downloaded apps will stop working by early next week. Make no mistake about it, this action will a powerful and deleterious effect on these prize Chinese entities. India is where China was about 15 years ago—an emerging market just waiting to flourish. There is one big difference between the two: India doesn't have world domination as a stated goal ("China 2025").
Market Pulse
02. The markets—a leading indicator—come roaring back in Q2
The stock market historically leads the economy. If that holds true this time around, the economy should be in for a roaring-good second half of the year. After the fastest market decline in US history during Q1, the Nasdaq just put in its best quarterly showing since 2001, the S&P 500 since 1998, and the Dow since 1987. While the latter two indexes are still negative for the year, all three have surged back since the dark days of March—despite a resurgence in Covid cases, which the markets have largely brushed off. Between the pandemic, racial strife, and a major upcoming election, there are plenty of unknowns remaining for the latter six months of 2020, but the stock market is showing good faith that we are back on track for solid growth, and that the Fed will continue to provide lubrication along the way.
Under the Radar Investment
01. Under the Radar: Canadian Solar Inc
Canadian Solar (CSIQ $19) is a $1.1 billion integrated provider of solar power products, services, and system solutions. The firm designs, develops, and manufactures solar wafers, cells, modules, and other products integral to the industry. With an ultra-low P/E ratio of 3.8, short- and long-term assets which easily cover debt loads, and a positive annual cash flow (the firm made $172 million on $3.2 billion in sales last year), Canadian Solar is one of the better-run companies in a challenging—but highly promising—industry. Founded in 2001, the Ontario-based small-cap derives most of its revenue from Asia, but is active in over 160 countries around the world. We believe shares of CSIQ are trading at a 32% discount to their fair value of $25.
Answer
The top spot for amusement park attendance is a no-brainer: Walt Disney parks, in aggregate, pulled in roughly 170 million visitors last year; followed by the UK's Merlin Entertainments (think Legoland, Madame Tussauds Wax Museum, and Sea Life Centers), with 75 million; and Universal Parks & Resorts, with 60 million. The next three are Chinese conglomerates, with Six Flags coming in seventh.
Question
America's bright future in space...
America is on the brink of a new renaissance in space travel. After a disgraceful period in which we willingly relinquished the ability to launch astronauts from US soil, we can now expect an increasing number of annual human flights to launch from 2020 on. Who is credited with building and launching the world's first liquid-fueled rocket?
Penn Trading Desk:
(23 Jun 20) Raise stop on Teradyne
Teradyne (TER $85) is up 38% since we added it to the New Frontier Fund two months ago, and has blown by our $80/share price target. While the NFF is not designed to be a trading strategy, the shares have moved so quickly that we want to protect our gains. Raise stop to $83/share.
(22 Jun 20) Raise stop on STAA
Staar Surgical (STAA $56) is now up 30% since we purchased three weeks ago; raise stop to $53 to protect gains.
(23 Jun 20) UBS: Cut AmEx to Sell
American Express (AXP $67-$99-$138) was trading down a few percentage points after analysts at UBS downgraded the $82 billion credit card issuer from Neutral to Sell. The company cited its belief that travel and entertainment spending by affluent customers won't bounce back to pre-virus levels anytime soon. We believe AXP has a fair value somewhere in the $110 range.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Housing
10. Mortgage demand hits 11-year high as low rates entice buyers
Remember all of the concern about the impact of lockdown on the housing market? At the height of the media's feeding frenzy, we picked up the largest homebuilder (by revenue) in the country: Lennar Corp (LEN $65) at $42.99/share. It didn't seem logical that Americans were suddenly going to shun home ownership due to the health crisis, especially with record-low interest rates. Sure enough, the new mortgage applications count is in, and it is nearly as stunning as the jobs report of a few weeks ago and the retail sales report issued last week. As reported by the Mortgage Bankers Association, mortgage demand rose 21% from a year ago, representing an 11-year high, as the average contract interest rate on a 30-year loan fell to 3.18%. One disappointment was housing starts (up 4.3% vs 22.3% expected), but this was due to the builders' inability to ramp back up in time to meet demand. Unsure of where the virus was headed, the purchase of land on which to build essentially came to a screeching halt between mid-February and the end of April. Additionally, the flow of building materials was also constricted during that time. Builders are now playing a game of catch-up to meet rising demand. The housing market has come roaring back to life.
Global Strategy: European Union/China
09. The EU moves to limit China's takeover of European companies
We were outraged when the US government allowed a Chinese conglomerate to buy Smithfield Foods, the largest US producer of pork, back in 2013. This deal came as images of dead pigs floating in the toxic waters of China's Yangtze River were still fresh in our mind. We don't believe that deal would have been allowed today, but it is now a fait accompli. Fortunately, Europe finally seems to be waking up to China's business practices and appears poised to do something substantive to curb that country's influence in the region. Several countries, France and Germany included, are putting together legislation which would forbid the acquisition of European firms by Chinese interests which are found to have received government subsidies. In other words, if China is bankrolling a company, that company would not be allowed to buy a European firm. If the legislation ever sees the light of day, and these rules were enforced, that should eliminate nearly all M&A activity by Chinese companies; after all, name one that is not subsidized by the state. We have zero faith in the Europeans to actually apply these rules, but at least they are now showing some rare signs of lucidity with respect to China's motives.
Space Sciences & Exploration
08. Virgin Galactic lands a deal with NASA for astronaut training program
Considering Richard Branson's Virgin Galactic (SPCE $7-$17-$42) spacecraft, SpaceShipTwo, doesn't even leave the upper atmosphere (it goes roughly 100km, or 62m up), we were surprised to see the company awarded a contract from NASA. Nonetheless, under the latest Space Act Agreement, the US space agency will pay Virgin to develop a private orbital astronaut readiness program. The idea is to train non-NASA astronauts for eventual trips to the International Space Station, though they will have to hitch a ride to the ISS on an actual space launch vehicle. Investors liked the news, driving SPCE shares up 15% on Monday. In addition to its new astronaut training program, Virgin Galactic is ramping up its space tourism business, which will take passengers to the edge of space, and is also developing plans for a hypersonic point-to-point travel business. We are impressed by the way NASA is fostering America's new civilian space program, but we wouldn't rush to buy SPCE shares, as the company is a long way from profitability.
Industrials: Professional Services
07. Hertz tried to issue up to $500 million in new stock...from bankruptcy
There is audacity in the C-suites, then there is what Hertz Global (HTZ $0-$2-$21) tried to pull. As we previously reported, the car rental company filed for Chapter 11 bankruptcy last month. Then, to the shock of the Securities and Exchange Commission, it announced plans to issue up to $500 million in new shares to the public. The fact that these executives tried to pull such a stunt is amazing in itself; even more amazing—they probably would have found plenty of buyers who wanted to buy a "cheap" stock (HTZ currently sits at precisely $1.73/share). It didn't take long for Jay Clayton's SEC to inform the company that an immediate review of the upcoming issuance would take place, which caused Hertz executives to say, "um, never mind." Carl Icahn had already thrown in the towel on his Hertz investment at a steep loss, and odds would have been stellar that investors in these new shares would have lost everything. We are at an odd time in the investment world. We are coming out (hopefully) of a global pandemic, so many investors are rightfully timid. Meanwhile, there are still some really good bargains out there. Then you have a new group of investors that look for "cheap" stocks, earnings be damned! Like I say, an odd time indeed.
Telecommunications Services
06. The US Air Force has big plans for the SpaceX Starlink constellation
Readers are well familiar with SpaceX's plans to build a constellation of satellites in low Earth orbit (LEO) designed to ultimately provide low-cost, high-speed internet access to every part of the world—no matter how remote. To date, the company has placed 540 Starlink satellites in orbit, but that pales in comparison to the 12,000 the FCC has already approved. And even that number seems paltry to the 40,000 units SpaceX said it might eventually deploy. While we have reported on the civilian benefits of this massive network, it will also become a critical component of the nation's defense system. Last December, the United States Air Force held an Advanced Battle Management System exercise in which an AC-130 gunship connected with Starlink, proving its effectiveness for providing pinpoint accuracy. The next exercise, which was due to take place in April but was postponed due to the pandemic, will connect a number of military assets—from various branches—to the system, and will include live-fire drills against a UAV and a cruise missile. While SpaceX is a privately-held enterprise valued at roughly $36 billion, Elon Musk's company may end up bringing the SpaceX Starlink business public in an IPO, according to CEO Gwynne Shotwell. Sign us up.
Business & Professional Services
05. Wirecard CEO resigns after company "loses" $2 billion; shares dive
The FinTech arena is red-hot, specifically with respect to its payment processing segment. Companies like PayPal, Square, and Stripe are well-known players, but one German company that can't be left out of the conversation is Wirecard AG (WRCDF $33). The payment processor had a market cap of $28 billion under two years ago, along with a bright and shiny future in the industry. All of that changed this week after the company "lost" $2 billion worth of payments. Actually, it may be that the money, which was supposedly being held in two banks in the Philippines, never existed at all, but was part of a growing coverup to hide losses at the firm. After the banks publicly stated that they knew nothing about these deposits, shares of Wirecard fell over 70%, from $113 to $33, and the company's longtime CEO resigned. Last October, after a whistle-blower raised questions about falsified invoices, the company appointed KPMG as an outside auditor. Within six months, the auditing firm announced it was having challenges putting together paper trails for payments. Today, Wirecard sits at $4 billion in size, and is scrambling to salvage $2 billion worth of credit lines which may be cancelled. Too bad they can't tap into the $2 billion they supposedly held in the Philippines. Our favorite player in the space, by the way, remains PayPal (PYPL $169), which also owns the popular Venmo payment app.
Materials
04. In positive sign for global economy, materials are surging back
Of the eleven broad areas in the market, the most forgotten tends to be the materials sector. Granted, just 3.33% of all S&P 500 companies operate within the 15 industries of the sector, but that doesn't mean it shouldn't be represented in your portfolio. The pandemic decimated the performance of most materials firms as demand dried up, and they weren't doing all that well before the incident hit. Suddenly, however, the group is surging back—and that may spell good news for the global economy. Since mid-March, the Materials Select Sector SPDR (XLB $56) has risen 48% (it hit a 52-week low of $37.69 on 16 Mar). Oil and copper are the two most obvious drivers of the rally, and those two areas tend to move in direct correlation to economic activity—as opposed to gold miners, for instance. So, what are some of the top component companies in the materials sector? Air Products & Chemicals (APD, chemicals), Sherwin-Williams (SHW, specialty chemicals), Vulcan Materials (VMC, building materials), and FMC Corp (FMC, agricultural inputs) are all top holdings. In addition to XLB, investors may want to consider the Fidelity MSCI Materials ETF (FMAT $30), or the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX $35).
Biotechnology
03. Gilead will begin human trials on inhaled version of remdesivir
Drug giant Gilead (GILD $60-$75-$86) made news a few months ago with its Covid-19 treatment remdesivir, a therapy which was showing promise in patients inflicted with the malady. Now, the biotech says it is ready to begin human trials of an inhaled version of the therapy, first in healthy adults, and soon (hopefully August) in healthier, non-hospitalized patients with the virus. Remdesivir is currently given intravenously, as a pill form of the drug would cause a chemical imbalance within the body. A successful inhaled version would mean patients could take the drug earlier in its progression, and from the comfort of their own homes. Remdesivir helps block the virus from taking over healthy cells and replicating itself in the body. We took our profits on GILD after the shares ran up to our $77 price target after news of the therapy first broke. The news with respect to both Covid therapies and vaccines continues to move at breakneck speed, which is another reason we remain bullish on the economy for the second half of the year.
Multiline Retail
02. Should Amazon buy Macy's?! Barron's thinks so, and so do we
What a fun synergy to imagine! Remember when Amazon (AMZN $2,757) was looking at buying Whole Foods (former symbol WFDS)? The critics came out of the woodwork telling us how the deal would ruin the natural grocer's reputation. We knew that was bunk, and it was. The acquisition now looks brilliant. So, with that in mind, try this fit: Barron's has written a piece urging the trillion-dollar online retailer to buy Penn member Macy's (M $7), a $2 billion multiline retailer we bought at $5.55 several weeks ago. We think the idea is a home run, and not just because it would help us hit our $10 price target quicker. Amazon should absolutely own a bricks-and-mortar multiline retailer, and Macy's has the same level of quality in that industry that Whole Foods has in food retailing. The future of retail will not be dominated by online shopping; the ideal will be a hybrid online/physical model. Not to knock Macy's digital presence, but let's just say it is not the benchmark. Amazon could have a "shop-in-shop" member experience for Macy's like it does for Whole Foods, or even Zappos, which the company purchased about a decade ago. All of this is speculation, of course, as neither Amazon nor Macy's has floated the idea, but we are adamantly in the Barron's camp. Hopefully some board members of both companies will run across the article and become intrigued.
Under the Radar Investment
01. Under the Radar investment: Performance Food Group
To say that most people have never heard of Performance Food Group (PFGC $29) is probably an understatement. In fact, as the third-largest food-service distributor in the country, it is fair to say that many people have not even heard of the company's two bigger rivals: Sysco (SYY) and US Foods (USFD). There are many reasons we like Performance, from its size to its financial situation to its current undervalued state. As opposed to Sysco, with its $30 billion market cap, Performance is a $3.8 billion mid-cap with strong growth potential. The company, which has turned a profit every year for the past decade, was pummeled for obvious reasons during the pandemic—it delivers food to restaurants. We believe its fall from $54 per share in mid-February to its current price fails to take into consideration the strong relationship it has built with its clients, and the nascent comeback in the food industry in the US. We would value the shares north of $40.
Answer
American engineer, professor, physicist, and inventor Robert H. Goddard successfully launched his liquid-fueled rocket from a field in Auburn, Massachusetts on 16 Mar 1926, ushering in a new era of spaceflight. In June of 1944, Germany's V-2 rocket became the first to enter space—just twenty-five years and one month before America landed humans on the moon. Not only is America the only country to ever land humans on another world, we will be the first to go back, with NASA's Artemis program on schedule for a 2024 lunar landing.
America's bright future in space...
America is on the brink of a new renaissance in space travel. After a disgraceful period in which we willingly relinquished the ability to launch astronauts from US soil, we can now expect an increasing number of annual human flights to launch from 2020 on. Who is credited with building and launching the world's first liquid-fueled rocket?
Penn Trading Desk:
(23 Jun 20) Raise stop on Teradyne
Teradyne (TER $85) is up 38% since we added it to the New Frontier Fund two months ago, and has blown by our $80/share price target. While the NFF is not designed to be a trading strategy, the shares have moved so quickly that we want to protect our gains. Raise stop to $83/share.
(22 Jun 20) Raise stop on STAA
Staar Surgical (STAA $56) is now up 30% since we purchased three weeks ago; raise stop to $53 to protect gains.
(23 Jun 20) UBS: Cut AmEx to Sell
American Express (AXP $67-$99-$138) was trading down a few percentage points after analysts at UBS downgraded the $82 billion credit card issuer from Neutral to Sell. The company cited its belief that travel and entertainment spending by affluent customers won't bounce back to pre-virus levels anytime soon. We believe AXP has a fair value somewhere in the $110 range.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Housing
10. Mortgage demand hits 11-year high as low rates entice buyers
Remember all of the concern about the impact of lockdown on the housing market? At the height of the media's feeding frenzy, we picked up the largest homebuilder (by revenue) in the country: Lennar Corp (LEN $65) at $42.99/share. It didn't seem logical that Americans were suddenly going to shun home ownership due to the health crisis, especially with record-low interest rates. Sure enough, the new mortgage applications count is in, and it is nearly as stunning as the jobs report of a few weeks ago and the retail sales report issued last week. As reported by the Mortgage Bankers Association, mortgage demand rose 21% from a year ago, representing an 11-year high, as the average contract interest rate on a 30-year loan fell to 3.18%. One disappointment was housing starts (up 4.3% vs 22.3% expected), but this was due to the builders' inability to ramp back up in time to meet demand. Unsure of where the virus was headed, the purchase of land on which to build essentially came to a screeching halt between mid-February and the end of April. Additionally, the flow of building materials was also constricted during that time. Builders are now playing a game of catch-up to meet rising demand. The housing market has come roaring back to life.
Global Strategy: European Union/China
09. The EU moves to limit China's takeover of European companies
We were outraged when the US government allowed a Chinese conglomerate to buy Smithfield Foods, the largest US producer of pork, back in 2013. This deal came as images of dead pigs floating in the toxic waters of China's Yangtze River were still fresh in our mind. We don't believe that deal would have been allowed today, but it is now a fait accompli. Fortunately, Europe finally seems to be waking up to China's business practices and appears poised to do something substantive to curb that country's influence in the region. Several countries, France and Germany included, are putting together legislation which would forbid the acquisition of European firms by Chinese interests which are found to have received government subsidies. In other words, if China is bankrolling a company, that company would not be allowed to buy a European firm. If the legislation ever sees the light of day, and these rules were enforced, that should eliminate nearly all M&A activity by Chinese companies; after all, name one that is not subsidized by the state. We have zero faith in the Europeans to actually apply these rules, but at least they are now showing some rare signs of lucidity with respect to China's motives.
Space Sciences & Exploration
08. Virgin Galactic lands a deal with NASA for astronaut training program
Considering Richard Branson's Virgin Galactic (SPCE $7-$17-$42) spacecraft, SpaceShipTwo, doesn't even leave the upper atmosphere (it goes roughly 100km, or 62m up), we were surprised to see the company awarded a contract from NASA. Nonetheless, under the latest Space Act Agreement, the US space agency will pay Virgin to develop a private orbital astronaut readiness program. The idea is to train non-NASA astronauts for eventual trips to the International Space Station, though they will have to hitch a ride to the ISS on an actual space launch vehicle. Investors liked the news, driving SPCE shares up 15% on Monday. In addition to its new astronaut training program, Virgin Galactic is ramping up its space tourism business, which will take passengers to the edge of space, and is also developing plans for a hypersonic point-to-point travel business. We are impressed by the way NASA is fostering America's new civilian space program, but we wouldn't rush to buy SPCE shares, as the company is a long way from profitability.
Industrials: Professional Services
07. Hertz tried to issue up to $500 million in new stock...from bankruptcy
There is audacity in the C-suites, then there is what Hertz Global (HTZ $0-$2-$21) tried to pull. As we previously reported, the car rental company filed for Chapter 11 bankruptcy last month. Then, to the shock of the Securities and Exchange Commission, it announced plans to issue up to $500 million in new shares to the public. The fact that these executives tried to pull such a stunt is amazing in itself; even more amazing—they probably would have found plenty of buyers who wanted to buy a "cheap" stock (HTZ currently sits at precisely $1.73/share). It didn't take long for Jay Clayton's SEC to inform the company that an immediate review of the upcoming issuance would take place, which caused Hertz executives to say, "um, never mind." Carl Icahn had already thrown in the towel on his Hertz investment at a steep loss, and odds would have been stellar that investors in these new shares would have lost everything. We are at an odd time in the investment world. We are coming out (hopefully) of a global pandemic, so many investors are rightfully timid. Meanwhile, there are still some really good bargains out there. Then you have a new group of investors that look for "cheap" stocks, earnings be damned! Like I say, an odd time indeed.
Telecommunications Services
06. The US Air Force has big plans for the SpaceX Starlink constellation
Readers are well familiar with SpaceX's plans to build a constellation of satellites in low Earth orbit (LEO) designed to ultimately provide low-cost, high-speed internet access to every part of the world—no matter how remote. To date, the company has placed 540 Starlink satellites in orbit, but that pales in comparison to the 12,000 the FCC has already approved. And even that number seems paltry to the 40,000 units SpaceX said it might eventually deploy. While we have reported on the civilian benefits of this massive network, it will also become a critical component of the nation's defense system. Last December, the United States Air Force held an Advanced Battle Management System exercise in which an AC-130 gunship connected with Starlink, proving its effectiveness for providing pinpoint accuracy. The next exercise, which was due to take place in April but was postponed due to the pandemic, will connect a number of military assets—from various branches—to the system, and will include live-fire drills against a UAV and a cruise missile. While SpaceX is a privately-held enterprise valued at roughly $36 billion, Elon Musk's company may end up bringing the SpaceX Starlink business public in an IPO, according to CEO Gwynne Shotwell. Sign us up.
Business & Professional Services
05. Wirecard CEO resigns after company "loses" $2 billion; shares dive
The FinTech arena is red-hot, specifically with respect to its payment processing segment. Companies like PayPal, Square, and Stripe are well-known players, but one German company that can't be left out of the conversation is Wirecard AG (WRCDF $33). The payment processor had a market cap of $28 billion under two years ago, along with a bright and shiny future in the industry. All of that changed this week after the company "lost" $2 billion worth of payments. Actually, it may be that the money, which was supposedly being held in two banks in the Philippines, never existed at all, but was part of a growing coverup to hide losses at the firm. After the banks publicly stated that they knew nothing about these deposits, shares of Wirecard fell over 70%, from $113 to $33, and the company's longtime CEO resigned. Last October, after a whistle-blower raised questions about falsified invoices, the company appointed KPMG as an outside auditor. Within six months, the auditing firm announced it was having challenges putting together paper trails for payments. Today, Wirecard sits at $4 billion in size, and is scrambling to salvage $2 billion worth of credit lines which may be cancelled. Too bad they can't tap into the $2 billion they supposedly held in the Philippines. Our favorite player in the space, by the way, remains PayPal (PYPL $169), which also owns the popular Venmo payment app.
Materials
04. In positive sign for global economy, materials are surging back
Of the eleven broad areas in the market, the most forgotten tends to be the materials sector. Granted, just 3.33% of all S&P 500 companies operate within the 15 industries of the sector, but that doesn't mean it shouldn't be represented in your portfolio. The pandemic decimated the performance of most materials firms as demand dried up, and they weren't doing all that well before the incident hit. Suddenly, however, the group is surging back—and that may spell good news for the global economy. Since mid-March, the Materials Select Sector SPDR (XLB $56) has risen 48% (it hit a 52-week low of $37.69 on 16 Mar). Oil and copper are the two most obvious drivers of the rally, and those two areas tend to move in direct correlation to economic activity—as opposed to gold miners, for instance. So, what are some of the top component companies in the materials sector? Air Products & Chemicals (APD, chemicals), Sherwin-Williams (SHW, specialty chemicals), Vulcan Materials (VMC, building materials), and FMC Corp (FMC, agricultural inputs) are all top holdings. In addition to XLB, investors may want to consider the Fidelity MSCI Materials ETF (FMAT $30), or the VanEck Vectors Rare Earth/Strategic Metals ETF (REMX $35).
Biotechnology
03. Gilead will begin human trials on inhaled version of remdesivir
Drug giant Gilead (GILD $60-$75-$86) made news a few months ago with its Covid-19 treatment remdesivir, a therapy which was showing promise in patients inflicted with the malady. Now, the biotech says it is ready to begin human trials of an inhaled version of the therapy, first in healthy adults, and soon (hopefully August) in healthier, non-hospitalized patients with the virus. Remdesivir is currently given intravenously, as a pill form of the drug would cause a chemical imbalance within the body. A successful inhaled version would mean patients could take the drug earlier in its progression, and from the comfort of their own homes. Remdesivir helps block the virus from taking over healthy cells and replicating itself in the body. We took our profits on GILD after the shares ran up to our $77 price target after news of the therapy first broke. The news with respect to both Covid therapies and vaccines continues to move at breakneck speed, which is another reason we remain bullish on the economy for the second half of the year.
Multiline Retail
02. Should Amazon buy Macy's?! Barron's thinks so, and so do we
What a fun synergy to imagine! Remember when Amazon (AMZN $2,757) was looking at buying Whole Foods (former symbol WFDS)? The critics came out of the woodwork telling us how the deal would ruin the natural grocer's reputation. We knew that was bunk, and it was. The acquisition now looks brilliant. So, with that in mind, try this fit: Barron's has written a piece urging the trillion-dollar online retailer to buy Penn member Macy's (M $7), a $2 billion multiline retailer we bought at $5.55 several weeks ago. We think the idea is a home run, and not just because it would help us hit our $10 price target quicker. Amazon should absolutely own a bricks-and-mortar multiline retailer, and Macy's has the same level of quality in that industry that Whole Foods has in food retailing. The future of retail will not be dominated by online shopping; the ideal will be a hybrid online/physical model. Not to knock Macy's digital presence, but let's just say it is not the benchmark. Amazon could have a "shop-in-shop" member experience for Macy's like it does for Whole Foods, or even Zappos, which the company purchased about a decade ago. All of this is speculation, of course, as neither Amazon nor Macy's has floated the idea, but we are adamantly in the Barron's camp. Hopefully some board members of both companies will run across the article and become intrigued.
Under the Radar Investment
01. Under the Radar investment: Performance Food Group
To say that most people have never heard of Performance Food Group (PFGC $29) is probably an understatement. In fact, as the third-largest food-service distributor in the country, it is fair to say that many people have not even heard of the company's two bigger rivals: Sysco (SYY) and US Foods (USFD). There are many reasons we like Performance, from its size to its financial situation to its current undervalued state. As opposed to Sysco, with its $30 billion market cap, Performance is a $3.8 billion mid-cap with strong growth potential. The company, which has turned a profit every year for the past decade, was pummeled for obvious reasons during the pandemic—it delivers food to restaurants. We believe its fall from $54 per share in mid-February to its current price fails to take into consideration the strong relationship it has built with its clients, and the nascent comeback in the food industry in the US. We would value the shares north of $40.
Answer
American engineer, professor, physicist, and inventor Robert H. Goddard successfully launched his liquid-fueled rocket from a field in Auburn, Massachusetts on 16 Mar 1926, ushering in a new era of spaceflight. In June of 1944, Germany's V-2 rocket became the first to enter space—just twenty-five years and one month before America landed humans on the moon. Not only is America the only country to ever land humans on another world, we will be the first to go back, with NASA's Artemis program on schedule for a 2024 lunar landing.
Question
A true shopping destination...
What was the first shopping center in the world designed to accommodate shoppers arriving by automobile, and what city was it architecturally designed after?
Penn Trading Desk:
(12 Jun 20) Sell Chipotle in Global Leaders Club
On 12 Mar, as the markets were bottoming, we added Chipotle Mexican Grill (CMG) to the Global Leaders Club at $590.85. We intended to hold for a longer period, but shares ran up 66% in three months and our $1,000 stop hit at $983.41. Took profits. Members, see the Trading Desk
(12 Jun 20) Add to Pharma/Biotech Powerhouse in Global Leaders Club
While we already owned this pharmaceutical company in the Penn Global Leaders Club, its masterful handling of the Celgene biotech acquisition (plus its 3% dividend yield) made us pick up more shares in the Penn Global Leaders Club. Members, see the Trading Desk
(10 Jun 20) Open retail REIT in Penn Contrarian Investor
We added a retail REIT right on the border between small- and mid-cap. A contrarian play to be sure. Target price is 47% higher than purchase. Members, see the Trading Desk
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Airlines
10. Buffett's sale of his airline stocks helped the industry find a bottom
Back in 2016, investor Warren Buffett decided to bet big on the US airline industry, with his Berkshire Hathaway (BRK.B) spending over $7 billion to accumulate shares. Around mid to late April, as the airlines were suffering through a virtually complete shutdown, Buffett threw in the towel, liquidating all of his holdings in the industry at a loss. Berkshire held an enormous position in the four American carriers—to the tune of approximately 10% of the outstanding shares of each. Right when these airlines were most vulnerable, Buffett bailed. It didn't take long, however, for astute investors to gobble up the shares the billionaire sold, betting on a recovery. They bet right. Since 01 May, American (AAL) is up 84%, United (UAL) is up 69%, Delta (DAL) is up 51%, and Southwest (LUV) is up 35%. Buffett's opportunity cost due to his panic selling? Just shy of $3 billion.
Global Strategy: East/Southeast Asia
09. North Korea cuts ties with South in effort to break US/Korean alliance
We knew it was too good to believe that the pot-bellied dictator of North Korea, Kim Jong-un, had actually assumed room temperature. Not only is he still alive, he is back to his old mercurial self. North Korea announced that it was shutting down a joint liaison office it just opened with the South back in 2018, and has turned off the "hotline" established between the two nations designed to avoid catastrophic incidents from arising. Kim claims these steps were simply in response to anti-government leaflets coming across the border from the south via balloons, but his tactics are clear: force President Moon Jae-in to sever ties with the US. His strategic goal is also crystal clear: one unified Korea, with him at the helm. The juxtaposition of the economic might of South Korea and the abject blight of North Korea is staggering to look at. Sadly, in a similar way that China believed it could simply absorb the golden goose that was Hong Kong, Kim believes that this capitalism-built wealth will be his for the taking. In reality, of course, South Koreans would end up living more like their impoverished neighbors to the north than the other way around. For his part, despite the fact that he is rather dovish, Moon is not about to sever his strong ties with the West. It doesn't help Pyongyang's cause when Kim's minions refuse to answer calls made from Seoul on the military hotline—an incident which occurred this past Tuesday.
Financials: Insurance
08. Online insurance provider Lemonade files to go public
Move over fintech, now there is insurtech, which promises to "disrupt the insurance industry through innovation and online efficiencies." Only time will tell just how disruptive a force it will become, but we will soon have a new metric to measure its success. Lemonade, the insurtech firm backed by SoftBank, has filed to go public. Reviewing the startup's 08 June filing with the SEC, it plans to raise $100 million in an IPO and trade on the New York Stock Exchange under the symbol LMND, with Goldman Sachs and Morgan Stanley underwriting the deal. According at the company's website, Lemonade offers home and renters insurance "built for the 21st century." The company uses artificial intelligence and machine learning to increase efficiencies, thereby creating savings (at least in theory) for its customers. While the company, which has been around since 2016, is not profitable (it lost $36.5 million on $26.2 million in revenues last quarter), that doesn't mean shares won't take off when they begin trading within the next few months. Investors are hungry for IPOs, as there was a dearth of new offerings during the heart of the pandemic. Should you invest? While we could see the stock spiking out of the gate, our advice would be to remain patient—odds are good it will be trading below its IPO price within months after the launch. As for Masayoshi Son's SoftBank, the VC firm desperately needs a win following the massive losses it took in WeWork, Sprint, and Uber—putting a serious dent in Son's 300-year master plan.
Retail REITs
07. Simon Property Group terminates merger deal with Taubman Centers
Although February is just four months behind us, it seems like an eternity ago. Retail REIT Taubman Centers (TCO $26-$34-$53) is no doubt thinking the same thing. Shares of the $2 billion real estate investment trust fell 25% Wednesday morning after much larger rival Simon Property Group (SPG $42-$80-$169) exercised its right to walk away from a $3.6 billion deal to acquire the firm. Simon, the biggest US mall owner, gave the ostensible excuse that Taubman did not take the proper steps to protect its properties from the pandemic, but that is a hard one to swallow. After all, were any of Simon's malls open in March or April? Simon is also suing its $4 billion tenant Gap (GAP $5-$11-$20) for failing to pay rent during the pandemic—while the mall was closed! There are plenty of unseemly characters in the landlord business; Simon is one we wouldn't want to do business with—or, quite frankly, invest in. In fact, with its 10 P/E ratio, 6% dividend yield, and positive free cash flow, TCO looks like a much better deal to us. SPG was trading down 8% on the news it had walked away from the deal.
Monetary Policy
06. Fed's projections show zero interest rates and explosive debt
Great news if you are going to buy a new home or auto; terrible news if you are living off of the income generated from your investment portfolio. During last week's Federal Open Market Committee meeting and Powell's subsequent news conference, the central bank made it clear that near-zero interest rates will be the norm through 2022. Additionally, the Fed will keep buying bonds, to the tune of $80 billion a month in Treasuries and $40 billion in mortgage-backed securities. Telling us what we already assumed, the Fed projects a 6.5% contraction in the US economy this year. If there was one bright spot in the meeting/commentary it was this: the bank's economic models predict a 5% GDP growth rate in 2021 followed by a 3.5% gain in 2022. Chairman Powell sees a strong bounce-back in economic growth in the second half of this year, assuming no major recurrence of the pandemic this fall. As for the Fed's balance sheet, which it had whittled down to $4 trillion or so, it has now mushroomed back to over $7.2 trillion—and it is growing by roughly $120 billion each month. Putting that in historical perspective, in 2009 the Fed's balance sheet added up to a grand total of $475 billion.
Economic Outlook
05. No lemming here: Morgan Stanley says expect a v-shaped recovery
The business media sounded like an echo chamber: nearly all voices were telling us not to expect a v-shaped economic recovery. Even during the depths of March's market plunge, we did expect a quicker recovery than most were predicting, based on promising therapy and vaccine news, and the American Spirit which still resides in most of us (despite what the press chooses to report on). At least one major investment house also had a rosy outlook: Morgan Stanley's top economist, Chetan Ahya, sees a distinct v-shaped recession based on the temporary (as opposed to systemic) challenges that yanked away our nice growth trajectory. Another aspect of Morgan Stanley's thesis we agree with is the idea that not all industries will see a sharp comeback in the second half of the year; specifically, office REITs are going to have to adjust to a new world where fewer come back to the office setting. For an industry that banked on ultra-low occupancy rates and clockwork-like rate increases, this should be interesting to watch—from the sidelines. We are moving into other areas of the REIT market. At this point, we would even take retail REITs over their corporate office space cousins. As for the overall recover, Morgan Stanley sees us back to pre-virus productivity levels by the fourth quarter of this year and the first quarter of 2021.
Economics: Supply & Demand
04. Shoppers are back! May retail sales figure reflects biggest surge ever
Futures were already heavily in the green early Tuesday morning on news that the Trump administration was going to float a $1 trillion infrastructure bill to spur the economy, then the retail sales numbers for May hit the wires. Expectations called a month-over-month gain of around 8%; instead, sales rocketed 17.7%—the highest monthly spike on record. Delving into the report, sales of motor vehicles led the charge, with that group jumping 44.1%. Restaurants also staged a remarkable comeback, with receipts jumping by 29.1%. Interestingly, even though the home improvement retailers remained open during the height of the pandemic, that segment also notched an impressive 16% gain in May. Within minutes of the report's release, futures doubled their gains on all three major indexes.
Telecom Services
03. T-Mobile double-whammy: outages and SoftBank liquidations
Former Penn Intrepid Trading Platform member (we sold it on 11 May) T-Mobile (TMUS $103) got some fantastic news in February when a federal judge ruled that the company's merger with Sprint could proceed. Since then, however, the news has been less-than-stellar. Most recently, a string of nationwide outages has plagued the company and frustrated customers. The FCC just announced a formal investigation into the disruptions, calling them "unacceptable." Now comes news that SoftBank plans to divest itself of up to two-thirds of its stake in the merged company. That amount would total about $20 billion, or a little over 15% of the company's market cap. The announced sale says more about SoftBank's need to raise cash than it does about the new T-Mobile, but the move will certainly put downward pressure on the shares. Although we could have held out for a larger gain (our shares stopped out at $96), we believe the sideline is the place to be with respect to the carrier right now. The company's strategy for moving into the 5G environment is still a big question mark.
Global Strategy: South Asia
02. India proves the media's tired narrative on China is false
Here is the tired and worn media narrative: China was well on its way towards eclipsing the US as the world's largest economy—something the other countries of the world were fine with—when the US came along with its destructive trade war. Sorry, media, that false narrative continues to crumble. Even before the pandemic, a majority of nations around the world had a bitter, firsthand taste of China's unfair trade tactics and bullying behavior. Countries from Vietnam to India have had a longstanding animosity toward and distrust of Beijing. The latest example comes to us from the border region between India and China. A seven-week military standoff between the two countries along the disputed Himalayan border turned deadly, as India confirmed that at least 20 of its troops have been killed. China is blaming New Delhi—specifically the government of Narendra Modi—for the escalation, but China has been increasingly exerting its control over regions from the South Sea to Taiwan to Hong Kong. In fact, the catalyst for this most recent deadly incident was probably the deployment of Chinese troops to an area between western Tibet and Kashmir; an incendiary move which caught India off guard. China despises the fact that India has been aligning itself more with the United States recently, and this may have been part of a larger strategy of intimidation against the Modi government. With both countries holding a population of roughly 1.3 billion people, it is in the best interest of the United States to support the economic expansion of India—the world's largest democracy. Expect increasingly alarming stories of China's regional ambitions over the coming months and years. Unlike with India, China's economic growth does pose a direct threat both to the region and the globe.
Under the Radar Investment
01. Under the Radar Investment: Advanced Energy Industries Inc
Advanced Energy Industries Inc (AEIS $67) is a $2.5 billion (s)mid-cap industrials company in the electrical equipment and parts industry—one of those small but mighty powerhouses which few have heard of, but that pulls in steady revenues and operates in the black year after year. The company exists in the realm between raw power production and the useful application of that power. With customers in a large number of industries across several sectors, its products include power control modules (control and measure temps during manufacturing), thin-film power conversion systems (control and modify raw power into a customizable power source), and plasma power generators for use in flat panel displays, glass coatings, and semiconductor/solar panel manufacturing. A majority of the Denver-based firm's revenues are generated in the United States, with the rest primarily from Europe and Asia. AEIS, which was founded in 1981, trades on the NASDAQ and is a member component of 453 mutual funds (as of Mar, 2020).
Answer
We gave the answer away in our headline image: The Country Club Plaza in Kansas City, which JC Nichols began accumulating the land for in 1907, opened to the public in 1923. The venue, which includes 804,000 square feet of retail space and 468,000 square feet of office space, was designed architecturally after the city of Seville, Spain. Taubman Centers (TCO) and Macerich Co (MAC) have joint ownership of the shopping district.
A true shopping destination...
What was the first shopping center in the world designed to accommodate shoppers arriving by automobile, and what city was it architecturally designed after?
Penn Trading Desk:
(12 Jun 20) Sell Chipotle in Global Leaders Club
On 12 Mar, as the markets were bottoming, we added Chipotle Mexican Grill (CMG) to the Global Leaders Club at $590.85. We intended to hold for a longer period, but shares ran up 66% in three months and our $1,000 stop hit at $983.41. Took profits. Members, see the Trading Desk
(12 Jun 20) Add to Pharma/Biotech Powerhouse in Global Leaders Club
While we already owned this pharmaceutical company in the Penn Global Leaders Club, its masterful handling of the Celgene biotech acquisition (plus its 3% dividend yield) made us pick up more shares in the Penn Global Leaders Club. Members, see the Trading Desk
(10 Jun 20) Open retail REIT in Penn Contrarian Investor
We added a retail REIT right on the border between small- and mid-cap. A contrarian play to be sure. Target price is 47% higher than purchase. Members, see the Trading Desk
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Airlines
10. Buffett's sale of his airline stocks helped the industry find a bottom
Back in 2016, investor Warren Buffett decided to bet big on the US airline industry, with his Berkshire Hathaway (BRK.B) spending over $7 billion to accumulate shares. Around mid to late April, as the airlines were suffering through a virtually complete shutdown, Buffett threw in the towel, liquidating all of his holdings in the industry at a loss. Berkshire held an enormous position in the four American carriers—to the tune of approximately 10% of the outstanding shares of each. Right when these airlines were most vulnerable, Buffett bailed. It didn't take long, however, for astute investors to gobble up the shares the billionaire sold, betting on a recovery. They bet right. Since 01 May, American (AAL) is up 84%, United (UAL) is up 69%, Delta (DAL) is up 51%, and Southwest (LUV) is up 35%. Buffett's opportunity cost due to his panic selling? Just shy of $3 billion.
Global Strategy: East/Southeast Asia
09. North Korea cuts ties with South in effort to break US/Korean alliance
We knew it was too good to believe that the pot-bellied dictator of North Korea, Kim Jong-un, had actually assumed room temperature. Not only is he still alive, he is back to his old mercurial self. North Korea announced that it was shutting down a joint liaison office it just opened with the South back in 2018, and has turned off the "hotline" established between the two nations designed to avoid catastrophic incidents from arising. Kim claims these steps were simply in response to anti-government leaflets coming across the border from the south via balloons, but his tactics are clear: force President Moon Jae-in to sever ties with the US. His strategic goal is also crystal clear: one unified Korea, with him at the helm. The juxtaposition of the economic might of South Korea and the abject blight of North Korea is staggering to look at. Sadly, in a similar way that China believed it could simply absorb the golden goose that was Hong Kong, Kim believes that this capitalism-built wealth will be his for the taking. In reality, of course, South Koreans would end up living more like their impoverished neighbors to the north than the other way around. For his part, despite the fact that he is rather dovish, Moon is not about to sever his strong ties with the West. It doesn't help Pyongyang's cause when Kim's minions refuse to answer calls made from Seoul on the military hotline—an incident which occurred this past Tuesday.
Financials: Insurance
08. Online insurance provider Lemonade files to go public
Move over fintech, now there is insurtech, which promises to "disrupt the insurance industry through innovation and online efficiencies." Only time will tell just how disruptive a force it will become, but we will soon have a new metric to measure its success. Lemonade, the insurtech firm backed by SoftBank, has filed to go public. Reviewing the startup's 08 June filing with the SEC, it plans to raise $100 million in an IPO and trade on the New York Stock Exchange under the symbol LMND, with Goldman Sachs and Morgan Stanley underwriting the deal. According at the company's website, Lemonade offers home and renters insurance "built for the 21st century." The company uses artificial intelligence and machine learning to increase efficiencies, thereby creating savings (at least in theory) for its customers. While the company, which has been around since 2016, is not profitable (it lost $36.5 million on $26.2 million in revenues last quarter), that doesn't mean shares won't take off when they begin trading within the next few months. Investors are hungry for IPOs, as there was a dearth of new offerings during the heart of the pandemic. Should you invest? While we could see the stock spiking out of the gate, our advice would be to remain patient—odds are good it will be trading below its IPO price within months after the launch. As for Masayoshi Son's SoftBank, the VC firm desperately needs a win following the massive losses it took in WeWork, Sprint, and Uber—putting a serious dent in Son's 300-year master plan.
Retail REITs
07. Simon Property Group terminates merger deal with Taubman Centers
Although February is just four months behind us, it seems like an eternity ago. Retail REIT Taubman Centers (TCO $26-$34-$53) is no doubt thinking the same thing. Shares of the $2 billion real estate investment trust fell 25% Wednesday morning after much larger rival Simon Property Group (SPG $42-$80-$169) exercised its right to walk away from a $3.6 billion deal to acquire the firm. Simon, the biggest US mall owner, gave the ostensible excuse that Taubman did not take the proper steps to protect its properties from the pandemic, but that is a hard one to swallow. After all, were any of Simon's malls open in March or April? Simon is also suing its $4 billion tenant Gap (GAP $5-$11-$20) for failing to pay rent during the pandemic—while the mall was closed! There are plenty of unseemly characters in the landlord business; Simon is one we wouldn't want to do business with—or, quite frankly, invest in. In fact, with its 10 P/E ratio, 6% dividend yield, and positive free cash flow, TCO looks like a much better deal to us. SPG was trading down 8% on the news it had walked away from the deal.
Monetary Policy
06. Fed's projections show zero interest rates and explosive debt
Great news if you are going to buy a new home or auto; terrible news if you are living off of the income generated from your investment portfolio. During last week's Federal Open Market Committee meeting and Powell's subsequent news conference, the central bank made it clear that near-zero interest rates will be the norm through 2022. Additionally, the Fed will keep buying bonds, to the tune of $80 billion a month in Treasuries and $40 billion in mortgage-backed securities. Telling us what we already assumed, the Fed projects a 6.5% contraction in the US economy this year. If there was one bright spot in the meeting/commentary it was this: the bank's economic models predict a 5% GDP growth rate in 2021 followed by a 3.5% gain in 2022. Chairman Powell sees a strong bounce-back in economic growth in the second half of this year, assuming no major recurrence of the pandemic this fall. As for the Fed's balance sheet, which it had whittled down to $4 trillion or so, it has now mushroomed back to over $7.2 trillion—and it is growing by roughly $120 billion each month. Putting that in historical perspective, in 2009 the Fed's balance sheet added up to a grand total of $475 billion.
Economic Outlook
05. No lemming here: Morgan Stanley says expect a v-shaped recovery
The business media sounded like an echo chamber: nearly all voices were telling us not to expect a v-shaped economic recovery. Even during the depths of March's market plunge, we did expect a quicker recovery than most were predicting, based on promising therapy and vaccine news, and the American Spirit which still resides in most of us (despite what the press chooses to report on). At least one major investment house also had a rosy outlook: Morgan Stanley's top economist, Chetan Ahya, sees a distinct v-shaped recession based on the temporary (as opposed to systemic) challenges that yanked away our nice growth trajectory. Another aspect of Morgan Stanley's thesis we agree with is the idea that not all industries will see a sharp comeback in the second half of the year; specifically, office REITs are going to have to adjust to a new world where fewer come back to the office setting. For an industry that banked on ultra-low occupancy rates and clockwork-like rate increases, this should be interesting to watch—from the sidelines. We are moving into other areas of the REIT market. At this point, we would even take retail REITs over their corporate office space cousins. As for the overall recover, Morgan Stanley sees us back to pre-virus productivity levels by the fourth quarter of this year and the first quarter of 2021.
Economics: Supply & Demand
04. Shoppers are back! May retail sales figure reflects biggest surge ever
Futures were already heavily in the green early Tuesday morning on news that the Trump administration was going to float a $1 trillion infrastructure bill to spur the economy, then the retail sales numbers for May hit the wires. Expectations called a month-over-month gain of around 8%; instead, sales rocketed 17.7%—the highest monthly spike on record. Delving into the report, sales of motor vehicles led the charge, with that group jumping 44.1%. Restaurants also staged a remarkable comeback, with receipts jumping by 29.1%. Interestingly, even though the home improvement retailers remained open during the height of the pandemic, that segment also notched an impressive 16% gain in May. Within minutes of the report's release, futures doubled their gains on all three major indexes.
Telecom Services
03. T-Mobile double-whammy: outages and SoftBank liquidations
Former Penn Intrepid Trading Platform member (we sold it on 11 May) T-Mobile (TMUS $103) got some fantastic news in February when a federal judge ruled that the company's merger with Sprint could proceed. Since then, however, the news has been less-than-stellar. Most recently, a string of nationwide outages has plagued the company and frustrated customers. The FCC just announced a formal investigation into the disruptions, calling them "unacceptable." Now comes news that SoftBank plans to divest itself of up to two-thirds of its stake in the merged company. That amount would total about $20 billion, or a little over 15% of the company's market cap. The announced sale says more about SoftBank's need to raise cash than it does about the new T-Mobile, but the move will certainly put downward pressure on the shares. Although we could have held out for a larger gain (our shares stopped out at $96), we believe the sideline is the place to be with respect to the carrier right now. The company's strategy for moving into the 5G environment is still a big question mark.
Global Strategy: South Asia
02. India proves the media's tired narrative on China is false
Here is the tired and worn media narrative: China was well on its way towards eclipsing the US as the world's largest economy—something the other countries of the world were fine with—when the US came along with its destructive trade war. Sorry, media, that false narrative continues to crumble. Even before the pandemic, a majority of nations around the world had a bitter, firsthand taste of China's unfair trade tactics and bullying behavior. Countries from Vietnam to India have had a longstanding animosity toward and distrust of Beijing. The latest example comes to us from the border region between India and China. A seven-week military standoff between the two countries along the disputed Himalayan border turned deadly, as India confirmed that at least 20 of its troops have been killed. China is blaming New Delhi—specifically the government of Narendra Modi—for the escalation, but China has been increasingly exerting its control over regions from the South Sea to Taiwan to Hong Kong. In fact, the catalyst for this most recent deadly incident was probably the deployment of Chinese troops to an area between western Tibet and Kashmir; an incendiary move which caught India off guard. China despises the fact that India has been aligning itself more with the United States recently, and this may have been part of a larger strategy of intimidation against the Modi government. With both countries holding a population of roughly 1.3 billion people, it is in the best interest of the United States to support the economic expansion of India—the world's largest democracy. Expect increasingly alarming stories of China's regional ambitions over the coming months and years. Unlike with India, China's economic growth does pose a direct threat both to the region and the globe.
Under the Radar Investment
01. Under the Radar Investment: Advanced Energy Industries Inc
Advanced Energy Industries Inc (AEIS $67) is a $2.5 billion (s)mid-cap industrials company in the electrical equipment and parts industry—one of those small but mighty powerhouses which few have heard of, but that pulls in steady revenues and operates in the black year after year. The company exists in the realm between raw power production and the useful application of that power. With customers in a large number of industries across several sectors, its products include power control modules (control and measure temps during manufacturing), thin-film power conversion systems (control and modify raw power into a customizable power source), and plasma power generators for use in flat panel displays, glass coatings, and semiconductor/solar panel manufacturing. A majority of the Denver-based firm's revenues are generated in the United States, with the rest primarily from Europe and Asia. AEIS, which was founded in 1981, trades on the NASDAQ and is a member component of 453 mutual funds (as of Mar, 2020).
Answer
We gave the answer away in our headline image: The Country Club Plaza in Kansas City, which JC Nichols began accumulating the land for in 1907, opened to the public in 1923. The venue, which includes 804,000 square feet of retail space and 468,000 square feet of office space, was designed architecturally after the city of Seville, Spain. Taubman Centers (TCO) and Macerich Co (MAC) have joint ownership of the shopping district.
Headlines for the Week of 31 May 2020—06 Jun 2020
Question
Marketing Magic...
While orange groves were abundant in Southern California in the early 20th century, the California Fruit Grower's Exchange, which officially changed its name to Sunkist in 1952, had a real challenge getting Americans to embrace their other, less prolific citrus fruit, the lemon. What historic event did the Exchange's marketing director, Don Francisco, use to catapult the sour yellow fruit to fame?
Penn Trading Desk:
(03 Jun 20) Penn: Open medical instruments company Intrepid
We opened a new small-cap ($1.9B) medical instruments and supplies company in the Intrepid Trading Platform. Members can view the Trading Desk for details.
(01 Jun 20) Penn: Close VEEV in Intrepid
Veeva systems (VEEV $214) surpassed our price target; sell in Intrepid Trading Platform @ $214.06 for 14.14% short-term gain.
(28 May 20) Penn: Open airline in the new Penn Contrarian Investors fund
We didn't think that we would be ready to jump back into an airline this soon after the disastrous event which grounded 90% of flights, but one major airline was priced at too steep a value to pass up.
(28 May 20) Penn: Open aerospace and defense juggernaut in Global Leaders
Since removing Boeing from the GLC after the first 737 MAX crash we have held an open spot for an aerospace giant. We have added an exemplary US firm to the Club of 40. Members, see the Trading Desk for details.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Economics: Work & Pay
10. A simply incredible May jobs report—to the upside—shocks analysts
All morning long, well before the monthly jobs report came out, the press was preparing us for the worst. We were told to expect to see 7.5 million jobs lost in the country, sending the US unemployment rate up to 19.5%. Oddly, market futures seemed to be shrugging off the impending doom—all three major averages were in the green pre-market. As the numbers hit, I happened to be watching two different business channels—CNBC and Bloomberg. The looks on the faces of the two respective economics reporters were priceless. Instead of losing 7.5 million jobs, the US economy actually added 2.51 million jobs. Steve Liesman on CNBC looked at the figures twice to assure there wasn't a negative sign in front of the number. Instead of hitting a 20% unemployment rate, that figure dropped from 14.7% to 13.3%. Still horrendous, to be sure, but very, very few people predicted this v-shaped jobs rebound, especially after we lost 21 million jobs in April. Virtually all of the metrics in the report looked good. A large percentage of the jobs gain were in the services sector—the area most beaten down by the virus—and manufacturing jobs also made a big comeback. In other words, the workers seeing the strongest gains were those in the lower- to middle-income brackets. How did the markets react to these spectacular numbers? As we write this the Dow is up over 900 points (3.43%) and the NASDAQ is up 224 (2.33%). Now we must wonder...what else that the press has been selling us will prove to be dead wrong?
Specialty Retail
09. Penn member Tractor Supply gives strong second-quarter outlook
Shares of home improvement retailer Tractor Supply Co (TSCO $64-$115-$114) punched through their 52-week-high on Wednesday following management's rosy forecast for Q2. The $13 billion farm-focused retailer, which is up 122% since we added it to the Penn Global Leaders Club, expects to earn between $2.45 and $2.65 per share over the course of the quarter—well above the $1.78 analysts were forecasting. Additionally, the company now expects sales of $3 billion in the three-month period, versus the $2.53 billion analyst estimate. Those are remarkable numbers for a retailer operating in the midst of a pandemic, but management took the bull by the horns early on, preparing their stores for a new "low-contact" environment, adding curbside pickup, and hiring 5,000 new workers for the 1,900 locations and eight distribution centers. The company also greatly enhanced their eCommerce business; something one might not expect from a farm supply company. In early April, we said that we expected to see shares climb from their current $88 price to above $100 in 2020. That prediction took all of one month to come true. It is amazing what strong management can accomplish, even in the most staid of industries. Shares of TSCO are up over 24% year-to-date.
Global Strategy: Europe
08. The EU's bailout plan will create enormous friction among members
We have been convinced for years that fissures in the bedrock that is the European Union will continue to widen, causing mass economic dysfunction on the continent. The greatest example of this—to date—was Brexit. Now, thanks to the Chinese-borne pandemic, Brussels is about to undertake a $2 trillion COVID response plan that is guaranteed to deepen the rift between the nation-states in the union. Ironically, the plan is designed to interweave the separate economies together in an unprecedented manner. The proposal calls for $824 billion worth of immediate aid and a budget of $1.21 trillion spent over the next seven years to reverse the damage caused by the virus. Using the vehicle of commonly issued debt, the plan will transfer massive amounts of wealth to the poorer EU nations in the south, namely Greece, Italy, and Spain. Northern countries from Austria to Sweden are crying foul, arguing that their own fiscal responsibility is being punished to support their less responsible neighbors to the south. Pressure will be intense for all 27 members to approve the plan, and expect Germany and France to browbeat the other nations into submission ("You need the money, and we have it—agree to our terms or else"). Proving the bloc's America-envy (they set up the EU to emulate this country's system), the German finance minister compared the plan to Alexander Hamilton's 1790 move to assume states' debt from the American Revolution in exchange for an abdication of some powers. The comparison is, in fact, uncanny in certain ways. In both examples, the northern and southern states (13 in the US at the time, 27 currently in the EU) had/have very different ideas on matters of great importance. This will be fun to watch play out from the other side of the globe.
Pharmaceuticals
07. AstraZeneca shares jump thanks to its exciting new lung cancer drug
As UK-based drugmaker AstraZeneca (AZN $36-$54-$57) prepared to unblind the latest study of its lung cancer drug Tagrisso, expectations were high. The process of unblinding, or disclosing to participants and the study group who received the actual therapy and who received the placebo, was already two years ahead of schedule based on the seemingly overwhelming effectiveness of the drug. As the results were evaluated, one thing became clear: the expectations were set too low. Two years after surgery, 89% of lung cancer patients who received the Tagrisso were cancer-free, versus 53% of those given a placebo. Researchers at the firm calculate that the drug cuts the risk of disease recurrence or death of patients with forms of early-stage non-small cell lung cancer by 83%. AstraZeneca reported sales of $3.2 billion for the drug—which was approved by the FDA five years ago—last year, but that figure is now expected to rise substantially based on these remarkable results. AZN generated income of $1.3 billion last year on $24.4 billion in revenue. Is AZN a bargain for investors? With its P/E ratio of 94, it seems expensive—even with the great Tagrisso news.
Global Strategy: East/Southeast Asia
06. China faces new reality of falling orders from overseas customers
We have talked ad nauseam about China's growth fallacy, supported by the dolts in the media—the idea that the communist nation's growth trajectory would maintain its double-digit annual clip. We knew it was a matter of time before those sky-high GDP rates came falling back to earth. What we didn't foresee was a pandemic emanating from the country adding downward momentum to the trip. Despite that country's boast that it was coming back online with government-run efficiency (OK, that we do buy), there is a major cog in the machinery: a dearth of new international orders. While the new-export-orders subindex of China's "official" (meaning padded) PMI report showed improvement from 33.5 in April to 35.3 in May, that is still a horrendously-bad number. Keep in mind that any number above 50 reflects economic expansion, while sub-50 represents contraction. Here's the question only time will answer: how much of the contraction is simply due to other countries still trying to shake off the economic effects of the pandemic, and how much is due to countries attempting to source their goods from elsewhere. Granted, it would be rather difficult to undertake the latter effort on the fly, but we get the idea that a better management of country risk will force importers to begin looking outside of mainland China for more and more of their goods.
Market Risk Management
05. Don't look now, but the volatility index is suddenly down to 27
The volatility index, or VIX, measures the implied expected volatility of the US stock market; hence its nickname, the "fear gauge." The higher the figure, on a scale of 0 to 100, the higher the level of concern. Considering the fear gauge rose all the way to 66.96 at the height of the financial meltdown, it would have been hard to imagine that number being eclipsed. Then came the pandemic. In the middle of March, as the markets were in free fall, the VIX climbed all the way to 82.69. At the time, we mentioned that any semblance of normalcy couldn't be expected until the VIX fell back to within a reasonable distance from its long-term average of 18.59. Don't say it too loudly, but our little fear monitor has suddenly dropped to 27.51. Still elevated, but certainly a more comforting level. While the so-called economic experts continue to throw cold water on the idea of a v-shaped recovery, the fear gauge looks to be giving us the flip side of that argument.
Personal Finance
04. It took a national lockdown, but the US savings rate hit a new record
If we have one mantra, one financial maxim above all others, it is this: The first ten cents of every dollar you earn goes into your savings/investment "vault," and that money is not to be touched until you have enough to fund your desired lifestyle with a 5% per year withdrawal. Unfortunately, Americans have one of the lowest savings rates in the developed world. Until this past April, that is. According to the Bureau of Economic Analysis (BEA), the personal savings rate—the percentage of disposable income Americans save each month—hit a whopping 33% in the month of April. As you look at the chart and see the 8.85% average, keep in mind that the figure does not mean Americans save an average of 8.85% of their gross or net income—merely their disposable income. Yes, the US consumer accounts for two-thirds of the domestic economy (and much of the Chinese economy), but imagine what household wealth would look like if everyone did actually put 10% of even their net income to work in an investment plan. Perhaps then we could begin to tackle our $1 trillion worth of lingering credit card debt and $1.5 trillion worth of student loan debt. It is not the duty of the American consumer to support retailers, domestic or foreign; it is their duty to assure the fiscal solvency of their household.
Telecom Services
03. Zoom is now worth more than the four major US airlines...combined
Before we discuss what a strong quarter Zoom Video (ZM $208) just reported, it is important to point out that the video conferencing platform has a rather rich multiple: its P/E ratio now sits at 2,162. Nonetheless, thanks to an exponential increase in cloud-based company meetings, Q1 was a barn-burner. Against expected revenues of $203 million, the company reported $328 million in sales—a 169% increase over the same quarter last year. Earnings expectations of $0.09 per share were dwarfed by the $0.20 reported, and expected Q2 revenues of nearly $500 million are over twice what the Street expects. Is this crazy-high multiple deserved? That all depends on how many of the platform's millions of users can be convinced to convert from the free service to the paid subscription model. To put Zoom's new market cap of $59 billion in perspective, the top four US airlines—Delta, United, American, and Southwest—have a combined size of $46 billion.
Space Sciences & Exploration
02. America ushers in an exciting new era of spaceflight
As a lifelong space buff, I have always equated/compared human spaceflight to the discovery, exploration, and ultimate colonization of the New World. That effort moved at a snail's pace until private enterprise got involved. This past week, in a truly historic moment for mankind's future in space, humans took off for the first time ever on a private launch vehicle—with some help from NASA, of course. Equally important, America regained the power it willingly abdicated a decade ago to launch astronauts from American soil. Bob Behnken and Doug Hurley, former members of the US Air Force and United States Marine Corps, respectively, blasted off in their Crew Dragon capsule nestled atop a SpaceX Falcon 9 rocket in a spectacular launch. Even more thrilling to watch than a Space Shuttle mission, the launch more closely resembled a Saturn V launch from the Apollo glory days. As for the astronauts, they docked with the International Space Station about 19 hours after launch. The Crew Dragon is an enormous asset to have docked at the ISS, as it gives the astronauts on board a "life raft," so to speak, should they need to exit the orbiting research platform. As for when Behnken and Hurley will return to earth, that depends on when the next commercial crew launch will be ready for takeoff. Even that is an incredible statement. Imagine having the Apollo 11 astronauts remain on the moon until Apollo 12 was ready to go! We have truly ushered in a new era of human spaceflight. Thank you, Elon Musk.
Under the Radar Investment
01. Under the Radar Investment: Grocery Outlet Holding Corp
CrowdStrike Holdings (CRWD $93) is a $20 billion leading global cybersecurity vendor specializing in endpoint (think laptops, smartphones, tablets, workstations) protection, threat intelligence and hunting, and attack remediation. Founded in 2011, the company sells packaged tiers of cybersecurity protection and offers individual security modules via its online marketplace. The company's new Falcon platform could be a game-changer: it is designed to stop breaches and improve performance while operating within the cloud using a radical new AI-based security architecture. CrowdStrike's growth trajectory has soared in the work-at-home environment, and we don't believe its new corporate customers will be leaving the platform as employees re-enter the office. CRWD is the number one holding in our First Trust NASDAQ Cybersecurity ETF (CIBR) positioned in the Dynamic Growth Strategy.
Answer
As commercial lemon farming finally began to take hold in 1918, there were plenty of citrus-producing trees but little consumer demand. Don Francisco, who had recently left his role as fruit examiner to become Sunkist's advertising manager, saw a golden opportunity in the Spanish Flu epidemic sweeping the world. As the flu began pounding US cities in the fall of 2018, Francisco began sending ads—disguised as public service announcements—out to newspapers across the nation extolling the health benefits of the lemon. Careful not to label it an actual medicine, the ads urged Americans to "drink one or two glasses of hot lemonade each day" to ward off sickness. Lemon sales rose 80% in one month, and government agencies got involved to help stem price gouging. Through slick marketing (and a gullible and scared public), the lemon found a new place of honor in homes across America.
Marketing Magic...
While orange groves were abundant in Southern California in the early 20th century, the California Fruit Grower's Exchange, which officially changed its name to Sunkist in 1952, had a real challenge getting Americans to embrace their other, less prolific citrus fruit, the lemon. What historic event did the Exchange's marketing director, Don Francisco, use to catapult the sour yellow fruit to fame?
Penn Trading Desk:
(03 Jun 20) Penn: Open medical instruments company Intrepid
We opened a new small-cap ($1.9B) medical instruments and supplies company in the Intrepid Trading Platform. Members can view the Trading Desk for details.
(01 Jun 20) Penn: Close VEEV in Intrepid
Veeva systems (VEEV $214) surpassed our price target; sell in Intrepid Trading Platform @ $214.06 for 14.14% short-term gain.
(28 May 20) Penn: Open airline in the new Penn Contrarian Investors fund
We didn't think that we would be ready to jump back into an airline this soon after the disastrous event which grounded 90% of flights, but one major airline was priced at too steep a value to pass up.
(28 May 20) Penn: Open aerospace and defense juggernaut in Global Leaders
Since removing Boeing from the GLC after the first 737 MAX crash we have held an open spot for an aerospace giant. We have added an exemplary US firm to the Club of 40. Members, see the Trading Desk for details.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Economics: Work & Pay
10. A simply incredible May jobs report—to the upside—shocks analysts
All morning long, well before the monthly jobs report came out, the press was preparing us for the worst. We were told to expect to see 7.5 million jobs lost in the country, sending the US unemployment rate up to 19.5%. Oddly, market futures seemed to be shrugging off the impending doom—all three major averages were in the green pre-market. As the numbers hit, I happened to be watching two different business channels—CNBC and Bloomberg. The looks on the faces of the two respective economics reporters were priceless. Instead of losing 7.5 million jobs, the US economy actually added 2.51 million jobs. Steve Liesman on CNBC looked at the figures twice to assure there wasn't a negative sign in front of the number. Instead of hitting a 20% unemployment rate, that figure dropped from 14.7% to 13.3%. Still horrendous, to be sure, but very, very few people predicted this v-shaped jobs rebound, especially after we lost 21 million jobs in April. Virtually all of the metrics in the report looked good. A large percentage of the jobs gain were in the services sector—the area most beaten down by the virus—and manufacturing jobs also made a big comeback. In other words, the workers seeing the strongest gains were those in the lower- to middle-income brackets. How did the markets react to these spectacular numbers? As we write this the Dow is up over 900 points (3.43%) and the NASDAQ is up 224 (2.33%). Now we must wonder...what else that the press has been selling us will prove to be dead wrong?
Specialty Retail
09. Penn member Tractor Supply gives strong second-quarter outlook
Shares of home improvement retailer Tractor Supply Co (TSCO $64-$115-$114) punched through their 52-week-high on Wednesday following management's rosy forecast for Q2. The $13 billion farm-focused retailer, which is up 122% since we added it to the Penn Global Leaders Club, expects to earn between $2.45 and $2.65 per share over the course of the quarter—well above the $1.78 analysts were forecasting. Additionally, the company now expects sales of $3 billion in the three-month period, versus the $2.53 billion analyst estimate. Those are remarkable numbers for a retailer operating in the midst of a pandemic, but management took the bull by the horns early on, preparing their stores for a new "low-contact" environment, adding curbside pickup, and hiring 5,000 new workers for the 1,900 locations and eight distribution centers. The company also greatly enhanced their eCommerce business; something one might not expect from a farm supply company. In early April, we said that we expected to see shares climb from their current $88 price to above $100 in 2020. That prediction took all of one month to come true. It is amazing what strong management can accomplish, even in the most staid of industries. Shares of TSCO are up over 24% year-to-date.
Global Strategy: Europe
08. The EU's bailout plan will create enormous friction among members
We have been convinced for years that fissures in the bedrock that is the European Union will continue to widen, causing mass economic dysfunction on the continent. The greatest example of this—to date—was Brexit. Now, thanks to the Chinese-borne pandemic, Brussels is about to undertake a $2 trillion COVID response plan that is guaranteed to deepen the rift between the nation-states in the union. Ironically, the plan is designed to interweave the separate economies together in an unprecedented manner. The proposal calls for $824 billion worth of immediate aid and a budget of $1.21 trillion spent over the next seven years to reverse the damage caused by the virus. Using the vehicle of commonly issued debt, the plan will transfer massive amounts of wealth to the poorer EU nations in the south, namely Greece, Italy, and Spain. Northern countries from Austria to Sweden are crying foul, arguing that their own fiscal responsibility is being punished to support their less responsible neighbors to the south. Pressure will be intense for all 27 members to approve the plan, and expect Germany and France to browbeat the other nations into submission ("You need the money, and we have it—agree to our terms or else"). Proving the bloc's America-envy (they set up the EU to emulate this country's system), the German finance minister compared the plan to Alexander Hamilton's 1790 move to assume states' debt from the American Revolution in exchange for an abdication of some powers. The comparison is, in fact, uncanny in certain ways. In both examples, the northern and southern states (13 in the US at the time, 27 currently in the EU) had/have very different ideas on matters of great importance. This will be fun to watch play out from the other side of the globe.
Pharmaceuticals
07. AstraZeneca shares jump thanks to its exciting new lung cancer drug
As UK-based drugmaker AstraZeneca (AZN $36-$54-$57) prepared to unblind the latest study of its lung cancer drug Tagrisso, expectations were high. The process of unblinding, or disclosing to participants and the study group who received the actual therapy and who received the placebo, was already two years ahead of schedule based on the seemingly overwhelming effectiveness of the drug. As the results were evaluated, one thing became clear: the expectations were set too low. Two years after surgery, 89% of lung cancer patients who received the Tagrisso were cancer-free, versus 53% of those given a placebo. Researchers at the firm calculate that the drug cuts the risk of disease recurrence or death of patients with forms of early-stage non-small cell lung cancer by 83%. AstraZeneca reported sales of $3.2 billion for the drug—which was approved by the FDA five years ago—last year, but that figure is now expected to rise substantially based on these remarkable results. AZN generated income of $1.3 billion last year on $24.4 billion in revenue. Is AZN a bargain for investors? With its P/E ratio of 94, it seems expensive—even with the great Tagrisso news.
Global Strategy: East/Southeast Asia
06. China faces new reality of falling orders from overseas customers
We have talked ad nauseam about China's growth fallacy, supported by the dolts in the media—the idea that the communist nation's growth trajectory would maintain its double-digit annual clip. We knew it was a matter of time before those sky-high GDP rates came falling back to earth. What we didn't foresee was a pandemic emanating from the country adding downward momentum to the trip. Despite that country's boast that it was coming back online with government-run efficiency (OK, that we do buy), there is a major cog in the machinery: a dearth of new international orders. While the new-export-orders subindex of China's "official" (meaning padded) PMI report showed improvement from 33.5 in April to 35.3 in May, that is still a horrendously-bad number. Keep in mind that any number above 50 reflects economic expansion, while sub-50 represents contraction. Here's the question only time will answer: how much of the contraction is simply due to other countries still trying to shake off the economic effects of the pandemic, and how much is due to countries attempting to source their goods from elsewhere. Granted, it would be rather difficult to undertake the latter effort on the fly, but we get the idea that a better management of country risk will force importers to begin looking outside of mainland China for more and more of their goods.
Market Risk Management
05. Don't look now, but the volatility index is suddenly down to 27
The volatility index, or VIX, measures the implied expected volatility of the US stock market; hence its nickname, the "fear gauge." The higher the figure, on a scale of 0 to 100, the higher the level of concern. Considering the fear gauge rose all the way to 66.96 at the height of the financial meltdown, it would have been hard to imagine that number being eclipsed. Then came the pandemic. In the middle of March, as the markets were in free fall, the VIX climbed all the way to 82.69. At the time, we mentioned that any semblance of normalcy couldn't be expected until the VIX fell back to within a reasonable distance from its long-term average of 18.59. Don't say it too loudly, but our little fear monitor has suddenly dropped to 27.51. Still elevated, but certainly a more comforting level. While the so-called economic experts continue to throw cold water on the idea of a v-shaped recovery, the fear gauge looks to be giving us the flip side of that argument.
Personal Finance
04. It took a national lockdown, but the US savings rate hit a new record
If we have one mantra, one financial maxim above all others, it is this: The first ten cents of every dollar you earn goes into your savings/investment "vault," and that money is not to be touched until you have enough to fund your desired lifestyle with a 5% per year withdrawal. Unfortunately, Americans have one of the lowest savings rates in the developed world. Until this past April, that is. According to the Bureau of Economic Analysis (BEA), the personal savings rate—the percentage of disposable income Americans save each month—hit a whopping 33% in the month of April. As you look at the chart and see the 8.85% average, keep in mind that the figure does not mean Americans save an average of 8.85% of their gross or net income—merely their disposable income. Yes, the US consumer accounts for two-thirds of the domestic economy (and much of the Chinese economy), but imagine what household wealth would look like if everyone did actually put 10% of even their net income to work in an investment plan. Perhaps then we could begin to tackle our $1 trillion worth of lingering credit card debt and $1.5 trillion worth of student loan debt. It is not the duty of the American consumer to support retailers, domestic or foreign; it is their duty to assure the fiscal solvency of their household.
Telecom Services
03. Zoom is now worth more than the four major US airlines...combined
Before we discuss what a strong quarter Zoom Video (ZM $208) just reported, it is important to point out that the video conferencing platform has a rather rich multiple: its P/E ratio now sits at 2,162. Nonetheless, thanks to an exponential increase in cloud-based company meetings, Q1 was a barn-burner. Against expected revenues of $203 million, the company reported $328 million in sales—a 169% increase over the same quarter last year. Earnings expectations of $0.09 per share were dwarfed by the $0.20 reported, and expected Q2 revenues of nearly $500 million are over twice what the Street expects. Is this crazy-high multiple deserved? That all depends on how many of the platform's millions of users can be convinced to convert from the free service to the paid subscription model. To put Zoom's new market cap of $59 billion in perspective, the top four US airlines—Delta, United, American, and Southwest—have a combined size of $46 billion.
Space Sciences & Exploration
02. America ushers in an exciting new era of spaceflight
As a lifelong space buff, I have always equated/compared human spaceflight to the discovery, exploration, and ultimate colonization of the New World. That effort moved at a snail's pace until private enterprise got involved. This past week, in a truly historic moment for mankind's future in space, humans took off for the first time ever on a private launch vehicle—with some help from NASA, of course. Equally important, America regained the power it willingly abdicated a decade ago to launch astronauts from American soil. Bob Behnken and Doug Hurley, former members of the US Air Force and United States Marine Corps, respectively, blasted off in their Crew Dragon capsule nestled atop a SpaceX Falcon 9 rocket in a spectacular launch. Even more thrilling to watch than a Space Shuttle mission, the launch more closely resembled a Saturn V launch from the Apollo glory days. As for the astronauts, they docked with the International Space Station about 19 hours after launch. The Crew Dragon is an enormous asset to have docked at the ISS, as it gives the astronauts on board a "life raft," so to speak, should they need to exit the orbiting research platform. As for when Behnken and Hurley will return to earth, that depends on when the next commercial crew launch will be ready for takeoff. Even that is an incredible statement. Imagine having the Apollo 11 astronauts remain on the moon until Apollo 12 was ready to go! We have truly ushered in a new era of human spaceflight. Thank you, Elon Musk.
Under the Radar Investment
01. Under the Radar Investment: Grocery Outlet Holding Corp
CrowdStrike Holdings (CRWD $93) is a $20 billion leading global cybersecurity vendor specializing in endpoint (think laptops, smartphones, tablets, workstations) protection, threat intelligence and hunting, and attack remediation. Founded in 2011, the company sells packaged tiers of cybersecurity protection and offers individual security modules via its online marketplace. The company's new Falcon platform could be a game-changer: it is designed to stop breaches and improve performance while operating within the cloud using a radical new AI-based security architecture. CrowdStrike's growth trajectory has soared in the work-at-home environment, and we don't believe its new corporate customers will be leaving the platform as employees re-enter the office. CRWD is the number one holding in our First Trust NASDAQ Cybersecurity ETF (CIBR) positioned in the Dynamic Growth Strategy.
Answer
As commercial lemon farming finally began to take hold in 1918, there were plenty of citrus-producing trees but little consumer demand. Don Francisco, who had recently left his role as fruit examiner to become Sunkist's advertising manager, saw a golden opportunity in the Spanish Flu epidemic sweeping the world. As the flu began pounding US cities in the fall of 2018, Francisco began sending ads—disguised as public service announcements—out to newspapers across the nation extolling the health benefits of the lemon. Careful not to label it an actual medicine, the ads urged Americans to "drink one or two glasses of hot lemonade each day" to ward off sickness. Lemon sales rose 80% in one month, and government agencies got involved to help stem price gouging. Through slick marketing (and a gullible and scared public), the lemon found a new place of honor in homes across America.
Headlines for the Week of 17 May 2020—23 May 2020
Question
Back to the Future...
This week, the US Treasury Department issued 20-year T bonds for the first time since 1986. What were the rates when the last batch was issued in December of '86, and what rate did this week's auction (quite feverishly) support?
Penn Trading Desk:
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(21 May 20) Penn: Close Ciena Corp in Intrepid
After Ciena Corp (CIEN $52), which was our Under the Radar stock in the last "...After Hours," rose above our target price of $52, we raised our stop; about an hour later it hit and we closed our position with an 11.52% short-term gain.
(18 May 20) Penn: Close Charles River Labs in Intrepid
After Charles River Labs (CRL $175) hit our target price after seven sessions, we raised our stop; it hit at $174.92 for an 11.66% gain.
(14 May 20) Penn: Open semiconductor manufacturer to Global Leaders
We added a US-based semiconductor firm back into the Global Leaders Club because of the way management is now embracing the future of technology. Members see the Penn Trading Desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Media & Entertainment
10. Our prediction on an AMC takeover may be coming to fruition
A few weeks back, we speculated that beleaguered Kansas-based AMC Entertainment (AMC $2-$5-$14) was an excellent takeover candidate. Unfortunately, that didn't give us enough fodder to invest in the theater chain, which had dropped in size from a $4 billion company precisely three years ago to a $225 million shell of its former self by mid-April of this year. Lo and behold, along comes none other than Jeff Bezos's $1.2 trillion juggernaut, Amazon (AMZN $2,409), showing interest in acquiring the firm, which caused AMC's share price to jump $1.22. Since that dollar figure doesn't sound impressive, let's put that in percentage gain terms: AMC shares spiked 30% in one session on the rumor. While China's Dalian Wanda Group, which bought AMC several years ago, has been unable to bring any synergy to the table, we believe Amazon (parent, of course, of Amazon Prime Video) could breathe new life into the chain and its 11,041 screens. Just as the strongest malls are not dying—just reinventing themselves, theaters which embrace new concepts can help create a new generation of moviegoers. So, is it time to invest? Tempting. But what if Amazon ends up not biting, or AMC shareholders decide not to sell with the company's market cap so low, or the Department of Justice nixes any deal? While we are not ready to bite, it will be interesting to watch what happens to AMC's $5 share price—a value cheaper than the cost of admission to one feature film at the chain.
Automotive
09. Elon Musk's most excellent lawsuit against a local California fiefdom
He may have been born a citizen of South Africa, but Elon Musk could teach more than a few people in this country what it means to be an American. The feud between the Tesla (TSLA $177-$831-$969) CEO and Alameda County began when the head of the country health department, a small-time nobody with delusions of grandeur, ordered the company's Fremont factory to remain closed until it—the health department—had reviewed the reopening plan and decreed it acceptable. This led to Musk's first tweet on the matter:
"Frankly, this is the final straw. Tesla will move its HQ and future programs to Texas/Nevada immediately. If we even retain Fremont manufacturing activity at all, it will be dependent on how Tesla is treated in the future. Tesla is the last carmaker left in CA."
Obviously stewing, and anxious to get his plant reopened, Musk followed up with this one:
"Tesla is filing a lawsuit against Alameda County immediately. The unelected & ignorant 'Interim Health Officer' of Alameda is acting contrary to the Governor, the President, our Constitutional freedoms & just plain common sense."
Finally, Musk sent his ultimatum:
"Tesla is restarting production today against Alameda County rules. I will be on the line with everyone else. If anyone is arrested, I ask that it be only me."
The latest? Musk reopened his plant, standing side-by-side with his workers. No arrests reported, though we doubt Alameda will go quietly with its tail between its legs. As for the threat, we heard numerous "experts" weigh in on the near-impossibility of moving a plant the "size of ten Costcos" (as one put it) to another state. They do not understand how Musk thinks.
First, it should be noted that Musk has now sold all of his houses in California. Second is the issue of his financial incentives. There are twelve tranches or productivity metric points which, if hit, would put $55 billion in Musk's pocket. I recall journalists laughing at these targets as recently as a year ago; now, they seem fully achievable. Based on California's confiscatory marginal tax rate of 13.3%—the highest in the US, sorry New York—Musk could save somewhere in the ballpark of $7 billion in taxes if he moves to Texas or Nevada! Neither of those states levy personal income taxes. The Texas constitution, in fact, forbids it. Right now, the 48-year-old Musk has a personal fortune of nearly $40 billion. We have heard arrogant California officials laugh off any impact that one individual would have by moving out of the state, lock, stock, and barrel. Let's see how hard they are laughing after they push him too far.
Semiconductors & Related Equipment
08. Taiwan Semiconductor to build Arizona chip plant
Finally, after decades of complacency, a full strategic review of our unacceptable dependence on communist China for critical goods and materials is taking place. The products in question range from rare earth materials for high-tech equipment to active pharmaceutical ingredients (APIs) for drugs taken by Americans on a daily basis. Square in the middle of this issue sits semiconductor manufacturing. President Trump has made it clear that he wants the most advanced chips in the world to be made, once again, in the United States. Penn Global Leaders Club member Intel (INTC $59) has already green-lighted its own commitment to the project. Now, a second global leader in chip production has made a bold move to further this cause: Taiwan Semiconductor (TSM $52) has announced plans to build a $12 billion manufacturing facility in Arizona. Building the plant, which will employ 1,600, is sure to enrage Beijing, which claims Taiwan as part of its territory. Yet another skirmish in a trade war which is far from over—but one which must be fought.
Pharmaceuticals
07. Sanofi walks back "US-first" comments after French backlash
French pharma giant Sanofi (SNY $38-$48-$52) is all over the COVID-19 virus. The company is working on a vaccine with Glaxo (GSK), a potential treatment (Kevzara), and a home diagnostic kit for the malady. While there are no guarantees the vaccine will ultimately be effective, the company is already retrofitting its manufacturing facilities to pump out hundreds of millions of doses in preparation for success. The French people may be applauding the work of their homegrown company, but the CEO's comments about who would get the vaccine first caused outrage in the country. Making note that the US bankrolled the lion's share of vaccine research done by Sanofi, CEO Paul Hudson said that the US would be the first country to receive the vaccine. Now, after a meeting with French President Emmanuel Macron, the company is backtracking on those comments. A spokesman for the firm issued an amended statement saying that, "there will be no particular advance for any country...." The French drugmaker is using an existing therapy designed for influenza, adding a Glaxo ingredient, and applying it to the new virus which causes the COVID-19 disease in the body. The candidate vaccine is slated for clinical trials later this year. Sanofi is a $118 billion drug manufacturer with over $40 billion in annual sales, strong cash flow, and a 3.71% dividend yield.
Homes & Durables
06. Our Lennar position jumps 12% in one day on homebuilder optimism
On the morning of Friday the 13th of May, we had just experienced a 2,353-point drop in the Dow. This followed a 1,465-point drop on Wednesday the 11th. Two trading days, nearly three thousand points wiped out. One of our favorite homebuilders, Lennar Corp (LEN $57), dropped to $42.99 on the 13th, and we quickly picked up shares for the Penn Global Leaders Club. We figured that Lennar, the largest homebuilder in the US, would be one of the first to benefit as activity picked up and the markets came back. Shares of the Miami-based company shot up 12% on Monday as homebuilder sentiment rose from a level of 30 to 37, which was higher than expected. Granted, on a 100-point scale, a 37 may not seem impressive, but we believe that reflects just how much more room we have to grow. With mortgage rates at all-time lows and much of the spring buying season decimated by lockdown orders, we see strong growth ahead for Lennar—well above the 32% gains recorded since we picked up the shares.
Fixed Income
05. Back to the 80s: Treasury is bringing back the 20-year bond this week
Back in January, we wrote that the Treasury Department would be issuing 20-year T bonds for the first time since 1986 to help fund the growing deficit. At the time, we anticipated the yield to investors would be somewhere between the 1.84% yield on the 10-year and the 2.29% yield on the 30-year. The big week has arrived: $20 billion worth of the the new debt went up for auction on Wednesday the 20th. The only factor that has changed since January is the yield. In exchange for your principal, you will earn around 1.15% each year for the next twenty years. Thanks to the pandemic, the federal deficit is projected to hit $3.4 trillion this fiscal year. The US government, like governments around the world, literally cannot afford to have interest rates rise. That should lead to an interesting situation when inflation begins to get out of control once again—which it inevitably will—and the Fed is forced to raise rates to control it. What an ugly corner we have been painted into.
Food & Staples Retailing
04. Three Global Leaders Club members were stalwarts during lockdown
Considering there are only 40 positions in the Penn Global Leaders Club and 197 industries from which we have to choose, it may seem somewhat unusual that we hold three names in the strategy from the same industry: Discount Stores. As it turns out, all three, Dollar General (DG $180), Walmart (WMT $126), and Target (TGT $122), were relative rock stars during the pandemic-induced market meltdown. While the Dow is still down 14% year-to-date, Target is only down 5%, Walmart is up 6%, and Dollar General is up nearly 16%. While we are still waiting for DG to report Q1 earnings (on the 28th of May), both Walmart and Target have already reported scorchingly-hot numbers for the first three months of the year. Here are a few metrics we pulled out of Walmart's earnings report: same-store sales rose 10%; customers spent 16.5% more per visit; digital sales rose 74%; traffic at the Sam's Club unit rose by 12%; operating cash flow doubled—to $7 billion. Of course, this begs the question, can these discount retailers keep up their momentum as things return to normal? Considering the battered state of the US (and global) consumer, we still have a strong conviction toward all three names.
Global Strategy: Australasia
03. An emotionally-fragile China slaps an 80% tariff on Australian barley
What did the Communist Party of China do when social media began noting the likeness of General Secretary Xi Jinping to Winnie the Pooh? Ban the lovable cartoon character in the country, of course, and go after any Chinese citizens posting the comparison. Sadly, nothing should surprise us with respect to a communist regime, to include the fawning adoration of the American press. A recent Bloomberg headline read: "Trump to pull out of W.H.O., leaving Xi to lead worldwide pandemic effort." Huh? Do they mean lead the re-spreading of the pandemic effort, which began in a disgusting Wuhan wet market? Remember when China banned flights from Wuhan to other Chinese cities but kept international flights leaving Wuhan up and running? That story escaped the attention of a (disturbingly) large percentage of the American press.
Knowing what we do about communist regimes, therefore, it comes as no surprise that China has slapped an 80% tariff for a five-year period on all barley coming from their main supplier, Australia, after officials in that country began calling for an international investigation into the pandemic. If COVID-19 began at a US Army lab in America, as posited by a mouthpiece of the government (other than Bloomberg), then why not welcome a fair investigation? Of course, we all know the answer to that. As America slowly weans itself off of cheap Chinese goods, we must consider how much our great ally Australia is dependent upon China for its own economic well-being. Hint: It makes America's dependence look almost nonexistent. We delve deeper into this story in the next issue of The Penn Wealth Report. As for the tariffs on barley, China has promised more pain to come unless Australia "gets its mind right." The dollar amounts in the chart, by the way, represent monthly export values, not annual.
Global Strategy: East & Southeast Asia
02. Luckin Coffee is the poster child for Chinese firms on US exchanges
We received several calls about the IPO precisely one year ago. A Chinese coffee house that was going to decimate Starbuck's (SBUX $78) in the country of 1.4 billion people was about to go public. Our recommendation about Luckin Coffee (LK $2-$3-$51)? Don't touch it. We peruse financial reports on US companies with a critical eye, always wondering what level of obfuscation might be baked in to bury the real story. With companies based in mainland China, we just assume we are being hoodwinked. Luckin came out of the gate to great fanfare, rising to around $20 per share before dropping to $15 a few days later. Investors seemed to sense a bargain at $15, and pumped the shares up to $51.38 by January of 2020. Then the wheels came off the wagon. It was revealed that senior management at the $12 billion firm had been cooking the books all along. Shares plummeted. Then came the threat of delisting by Nasdaq, Inc., which ultimately led to trading being suspended. When trading resumed, shareholders headed for the exits, driving shares down from $25 to $2.58, as Nasdaq confirmed the delisting plans. Ultimately, any buyer who did not get out will see the value of their investment go to zero. Investors shouldn't feel too bad about their purchase, however, as they are in good company: Goldman Sachs (GS) admitted that an entity controlled by Luckin Chairman Charles Zhengyao had defaulted on a $518 million margin loan. Between their WeWork and Luckin Coffee investments, it has been a rough year for Goldman. As for investors, let this be a valuable lesson with respect to buying shares in Chinese companies, even if they are listed on US exchanges.
Under the Radar Investment
01. Under the Radar Investment: Grocery Outlet Holding Corp
Grocery Outlet Holding Corp (GO $28-$37-$48) is a fascinating story in a usually boring industry: grocery stores. This $3.4 billion US-based mid-cap offers quality, name-brand products generally priced 40% to 70% below what their competitors charge. The stores are run by independent operators, and are designed to create a neighborhood feel through personalized service and localized offerings. The outlet, which was founded by Jim Read (who began selling highly-discounted military surplus the year after World War II ended), now has over 300 locations, primarily on the West Coast and in the Pacific Northwest. A fascinating story, good free cash flow, and strong growth potential makes this mid-cap worthy of a look. By the way, GO is able to discount its food and home goods items so steeply due to deals the company has forged with the manufacturers; for example, they might buy a bulk supply of excess inventory, or goods with damaged packaging (but no damage to the actual product).
Answer
When the 20-year Treasury bond was last discontinued, in December of 1986, the issues carried a 7.28% yield-to-maturity. When new 20-year T bonds rolled out this week, they came with a rate of around 1.16%.
Back to the Future...
This week, the US Treasury Department issued 20-year T bonds for the first time since 1986. What were the rates when the last batch was issued in December of '86, and what rate did this week's auction (quite feverishly) support?
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(21 May 20) Penn: Close Ciena Corp in Intrepid
After Ciena Corp (CIEN $52), which was our Under the Radar stock in the last "...After Hours," rose above our target price of $52, we raised our stop; about an hour later it hit and we closed our position with an 11.52% short-term gain.
(18 May 20) Penn: Close Charles River Labs in Intrepid
After Charles River Labs (CRL $175) hit our target price after seven sessions, we raised our stop; it hit at $174.92 for an 11.66% gain.
(14 May 20) Penn: Open semiconductor manufacturer to Global Leaders
We added a US-based semiconductor firm back into the Global Leaders Club because of the way management is now embracing the future of technology. Members see the Penn Trading Desk.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Media & Entertainment
10. Our prediction on an AMC takeover may be coming to fruition
A few weeks back, we speculated that beleaguered Kansas-based AMC Entertainment (AMC $2-$5-$14) was an excellent takeover candidate. Unfortunately, that didn't give us enough fodder to invest in the theater chain, which had dropped in size from a $4 billion company precisely three years ago to a $225 million shell of its former self by mid-April of this year. Lo and behold, along comes none other than Jeff Bezos's $1.2 trillion juggernaut, Amazon (AMZN $2,409), showing interest in acquiring the firm, which caused AMC's share price to jump $1.22. Since that dollar figure doesn't sound impressive, let's put that in percentage gain terms: AMC shares spiked 30% in one session on the rumor. While China's Dalian Wanda Group, which bought AMC several years ago, has been unable to bring any synergy to the table, we believe Amazon (parent, of course, of Amazon Prime Video) could breathe new life into the chain and its 11,041 screens. Just as the strongest malls are not dying—just reinventing themselves, theaters which embrace new concepts can help create a new generation of moviegoers. So, is it time to invest? Tempting. But what if Amazon ends up not biting, or AMC shareholders decide not to sell with the company's market cap so low, or the Department of Justice nixes any deal? While we are not ready to bite, it will be interesting to watch what happens to AMC's $5 share price—a value cheaper than the cost of admission to one feature film at the chain.
Automotive
09. Elon Musk's most excellent lawsuit against a local California fiefdom
He may have been born a citizen of South Africa, but Elon Musk could teach more than a few people in this country what it means to be an American. The feud between the Tesla (TSLA $177-$831-$969) CEO and Alameda County began when the head of the country health department, a small-time nobody with delusions of grandeur, ordered the company's Fremont factory to remain closed until it—the health department—had reviewed the reopening plan and decreed it acceptable. This led to Musk's first tweet on the matter:
"Frankly, this is the final straw. Tesla will move its HQ and future programs to Texas/Nevada immediately. If we even retain Fremont manufacturing activity at all, it will be dependent on how Tesla is treated in the future. Tesla is the last carmaker left in CA."
Obviously stewing, and anxious to get his plant reopened, Musk followed up with this one:
"Tesla is filing a lawsuit against Alameda County immediately. The unelected & ignorant 'Interim Health Officer' of Alameda is acting contrary to the Governor, the President, our Constitutional freedoms & just plain common sense."
Finally, Musk sent his ultimatum:
"Tesla is restarting production today against Alameda County rules. I will be on the line with everyone else. If anyone is arrested, I ask that it be only me."
The latest? Musk reopened his plant, standing side-by-side with his workers. No arrests reported, though we doubt Alameda will go quietly with its tail between its legs. As for the threat, we heard numerous "experts" weigh in on the near-impossibility of moving a plant the "size of ten Costcos" (as one put it) to another state. They do not understand how Musk thinks.
First, it should be noted that Musk has now sold all of his houses in California. Second is the issue of his financial incentives. There are twelve tranches or productivity metric points which, if hit, would put $55 billion in Musk's pocket. I recall journalists laughing at these targets as recently as a year ago; now, they seem fully achievable. Based on California's confiscatory marginal tax rate of 13.3%—the highest in the US, sorry New York—Musk could save somewhere in the ballpark of $7 billion in taxes if he moves to Texas or Nevada! Neither of those states levy personal income taxes. The Texas constitution, in fact, forbids it. Right now, the 48-year-old Musk has a personal fortune of nearly $40 billion. We have heard arrogant California officials laugh off any impact that one individual would have by moving out of the state, lock, stock, and barrel. Let's see how hard they are laughing after they push him too far.
Semiconductors & Related Equipment
08. Taiwan Semiconductor to build Arizona chip plant
Finally, after decades of complacency, a full strategic review of our unacceptable dependence on communist China for critical goods and materials is taking place. The products in question range from rare earth materials for high-tech equipment to active pharmaceutical ingredients (APIs) for drugs taken by Americans on a daily basis. Square in the middle of this issue sits semiconductor manufacturing. President Trump has made it clear that he wants the most advanced chips in the world to be made, once again, in the United States. Penn Global Leaders Club member Intel (INTC $59) has already green-lighted its own commitment to the project. Now, a second global leader in chip production has made a bold move to further this cause: Taiwan Semiconductor (TSM $52) has announced plans to build a $12 billion manufacturing facility in Arizona. Building the plant, which will employ 1,600, is sure to enrage Beijing, which claims Taiwan as part of its territory. Yet another skirmish in a trade war which is far from over—but one which must be fought.
Pharmaceuticals
07. Sanofi walks back "US-first" comments after French backlash
French pharma giant Sanofi (SNY $38-$48-$52) is all over the COVID-19 virus. The company is working on a vaccine with Glaxo (GSK), a potential treatment (Kevzara), and a home diagnostic kit for the malady. While there are no guarantees the vaccine will ultimately be effective, the company is already retrofitting its manufacturing facilities to pump out hundreds of millions of doses in preparation for success. The French people may be applauding the work of their homegrown company, but the CEO's comments about who would get the vaccine first caused outrage in the country. Making note that the US bankrolled the lion's share of vaccine research done by Sanofi, CEO Paul Hudson said that the US would be the first country to receive the vaccine. Now, after a meeting with French President Emmanuel Macron, the company is backtracking on those comments. A spokesman for the firm issued an amended statement saying that, "there will be no particular advance for any country...." The French drugmaker is using an existing therapy designed for influenza, adding a Glaxo ingredient, and applying it to the new virus which causes the COVID-19 disease in the body. The candidate vaccine is slated for clinical trials later this year. Sanofi is a $118 billion drug manufacturer with over $40 billion in annual sales, strong cash flow, and a 3.71% dividend yield.
Homes & Durables
06. Our Lennar position jumps 12% in one day on homebuilder optimism
On the morning of Friday the 13th of May, we had just experienced a 2,353-point drop in the Dow. This followed a 1,465-point drop on Wednesday the 11th. Two trading days, nearly three thousand points wiped out. One of our favorite homebuilders, Lennar Corp (LEN $57), dropped to $42.99 on the 13th, and we quickly picked up shares for the Penn Global Leaders Club. We figured that Lennar, the largest homebuilder in the US, would be one of the first to benefit as activity picked up and the markets came back. Shares of the Miami-based company shot up 12% on Monday as homebuilder sentiment rose from a level of 30 to 37, which was higher than expected. Granted, on a 100-point scale, a 37 may not seem impressive, but we believe that reflects just how much more room we have to grow. With mortgage rates at all-time lows and much of the spring buying season decimated by lockdown orders, we see strong growth ahead for Lennar—well above the 32% gains recorded since we picked up the shares.
Fixed Income
05. Back to the 80s: Treasury is bringing back the 20-year bond this week
Back in January, we wrote that the Treasury Department would be issuing 20-year T bonds for the first time since 1986 to help fund the growing deficit. At the time, we anticipated the yield to investors would be somewhere between the 1.84% yield on the 10-year and the 2.29% yield on the 30-year. The big week has arrived: $20 billion worth of the the new debt went up for auction on Wednesday the 20th. The only factor that has changed since January is the yield. In exchange for your principal, you will earn around 1.15% each year for the next twenty years. Thanks to the pandemic, the federal deficit is projected to hit $3.4 trillion this fiscal year. The US government, like governments around the world, literally cannot afford to have interest rates rise. That should lead to an interesting situation when inflation begins to get out of control once again—which it inevitably will—and the Fed is forced to raise rates to control it. What an ugly corner we have been painted into.
Food & Staples Retailing
04. Three Global Leaders Club members were stalwarts during lockdown
Considering there are only 40 positions in the Penn Global Leaders Club and 197 industries from which we have to choose, it may seem somewhat unusual that we hold three names in the strategy from the same industry: Discount Stores. As it turns out, all three, Dollar General (DG $180), Walmart (WMT $126), and Target (TGT $122), were relative rock stars during the pandemic-induced market meltdown. While the Dow is still down 14% year-to-date, Target is only down 5%, Walmart is up 6%, and Dollar General is up nearly 16%. While we are still waiting for DG to report Q1 earnings (on the 28th of May), both Walmart and Target have already reported scorchingly-hot numbers for the first three months of the year. Here are a few metrics we pulled out of Walmart's earnings report: same-store sales rose 10%; customers spent 16.5% more per visit; digital sales rose 74%; traffic at the Sam's Club unit rose by 12%; operating cash flow doubled—to $7 billion. Of course, this begs the question, can these discount retailers keep up their momentum as things return to normal? Considering the battered state of the US (and global) consumer, we still have a strong conviction toward all three names.
Global Strategy: Australasia
03. An emotionally-fragile China slaps an 80% tariff on Australian barley
What did the Communist Party of China do when social media began noting the likeness of General Secretary Xi Jinping to Winnie the Pooh? Ban the lovable cartoon character in the country, of course, and go after any Chinese citizens posting the comparison. Sadly, nothing should surprise us with respect to a communist regime, to include the fawning adoration of the American press. A recent Bloomberg headline read: "Trump to pull out of W.H.O., leaving Xi to lead worldwide pandemic effort." Huh? Do they mean lead the re-spreading of the pandemic effort, which began in a disgusting Wuhan wet market? Remember when China banned flights from Wuhan to other Chinese cities but kept international flights leaving Wuhan up and running? That story escaped the attention of a (disturbingly) large percentage of the American press.
Knowing what we do about communist regimes, therefore, it comes as no surprise that China has slapped an 80% tariff for a five-year period on all barley coming from their main supplier, Australia, after officials in that country began calling for an international investigation into the pandemic. If COVID-19 began at a US Army lab in America, as posited by a mouthpiece of the government (other than Bloomberg), then why not welcome a fair investigation? Of course, we all know the answer to that. As America slowly weans itself off of cheap Chinese goods, we must consider how much our great ally Australia is dependent upon China for its own economic well-being. Hint: It makes America's dependence look almost nonexistent. We delve deeper into this story in the next issue of The Penn Wealth Report. As for the tariffs on barley, China has promised more pain to come unless Australia "gets its mind right." The dollar amounts in the chart, by the way, represent monthly export values, not annual.
Global Strategy: East & Southeast Asia
02. Luckin Coffee is the poster child for Chinese firms on US exchanges
We received several calls about the IPO precisely one year ago. A Chinese coffee house that was going to decimate Starbuck's (SBUX $78) in the country of 1.4 billion people was about to go public. Our recommendation about Luckin Coffee (LK $2-$3-$51)? Don't touch it. We peruse financial reports on US companies with a critical eye, always wondering what level of obfuscation might be baked in to bury the real story. With companies based in mainland China, we just assume we are being hoodwinked. Luckin came out of the gate to great fanfare, rising to around $20 per share before dropping to $15 a few days later. Investors seemed to sense a bargain at $15, and pumped the shares up to $51.38 by January of 2020. Then the wheels came off the wagon. It was revealed that senior management at the $12 billion firm had been cooking the books all along. Shares plummeted. Then came the threat of delisting by Nasdaq, Inc., which ultimately led to trading being suspended. When trading resumed, shareholders headed for the exits, driving shares down from $25 to $2.58, as Nasdaq confirmed the delisting plans. Ultimately, any buyer who did not get out will see the value of their investment go to zero. Investors shouldn't feel too bad about their purchase, however, as they are in good company: Goldman Sachs (GS) admitted that an entity controlled by Luckin Chairman Charles Zhengyao had defaulted on a $518 million margin loan. Between their WeWork and Luckin Coffee investments, it has been a rough year for Goldman. As for investors, let this be a valuable lesson with respect to buying shares in Chinese companies, even if they are listed on US exchanges.
Under the Radar Investment
01. Under the Radar Investment: Grocery Outlet Holding Corp
Grocery Outlet Holding Corp (GO $28-$37-$48) is a fascinating story in a usually boring industry: grocery stores. This $3.4 billion US-based mid-cap offers quality, name-brand products generally priced 40% to 70% below what their competitors charge. The stores are run by independent operators, and are designed to create a neighborhood feel through personalized service and localized offerings. The outlet, which was founded by Jim Read (who began selling highly-discounted military surplus the year after World War II ended), now has over 300 locations, primarily on the West Coast and in the Pacific Northwest. A fascinating story, good free cash flow, and strong growth potential makes this mid-cap worthy of a look. By the way, GO is able to discount its food and home goods items so steeply due to deals the company has forged with the manufacturers; for example, they might buy a bulk supply of excess inventory, or goods with damaged packaging (but no damage to the actual product).
Answer
When the 20-year Treasury bond was last discontinued, in December of 1986, the issues carried a 7.28% yield-to-maturity. When new 20-year T bonds rolled out this week, they came with a rate of around 1.16%.
Headlines for the Week of 03 May 2020—09 May 2020
Question
Bad, but not the worst...
The current unemployment rate in the US—14.7%—is horrific, but it is not the highest level the country has experienced. What was the highest unemployment rate experienced in the US and when did it occur?
Penn Trading Desk:
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(08 May 20) Penn: Raise stop on TMUS
T-Mobile has hit our price target since we purchased last month; raise stop on TMUS to $95.50 to protect gains. Ultimately, we may move TMUS out of the Intrepid and into a longer-term strategy such as the Penn Global Leaders Club.
(07 May 20) Penn: Open agricultural inputs player in Intrepid
We opened a very old and familiar agricultural inputs company in the Intrepid based on a rather non-traditional and very new customer base; any ideas? "Expand your mind, dude" and you can probably guess what it is. Members see the Penn Trading Desk, or email us for the answer.
(07 May 20) Penn: Close BIO
Bio-Rad Laboratories (BIO $450) hit target then became volatile; close BIO @ $450 to protect gains.
(07 May 20) Penn: Raise stop/close NVDA
NVIDIA Corp (NVDA $305) hit our target price, stopped out and exited; close NVDA @ $304.90.
(05 May 20) Penn: Raise stop loss on TEAM
Our Atlassian Corp (TEAM $172) has hit our target price in the Intrepid; raise stop loss on TEAM to $171 to protect double-digit gains.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Food Products
10. Tyson Foods plummets after reporting lousy numbers for the quarter, warning of food chain disruption
At first blush, if you had to pick one industry holding up well in the pandemic you might say farm products. After all, the hoarding of goods quickly moved from toilet paper and Clorox (CLX) wipes to meat and dairy products. More specifically, you might zero in on US-based poultry providers like Tyson Foods (TSN $43-$55-$94). That is why we did a double take when the $20 billion Arkansas-based chicken, beef, and pork producer announced it had badly missed its Q2 earnings target and warned of more pain to come. So what happened? Part of the reason the company earned just $0.77 per share instead of the $1.20 expected (a 36% miss) has to do with outbreaks of the coronavirus at a number of its plants, forcing their closure. Couple that with the virtually complete loss of foodservice business for the better part of two months—so far—and the numbers begin to make sense. As if those two factors weren't enough to contend with, Chairman of the Board John Tyson warned that the entire food supply chain seems to be breaking. We don't actually agree with Tyson's contention, as the meat supplied by the company is generally sourced locally, and certainly domestically. Nonetheless, his words did cause a number of grocery chains such as Kroger to begin limiting meat purchases within their stores. So, after falling 8% in one day and 40% ytd, is TSN a bargain for investors? Actually, it probably is. While we don't like the excuse-filled earnings report, the shares have a fair value in the range of $75 to $85, conservatively.
Pharmaceuticals
09. Pfizer begins human testing for coronavirus vaccine in US
On the 9th of March, as the Dow was in the midst of falling 2,014 points in one session, we were busy picking up unfairly beaten-down stocks for the Penn Global Leaders Club. American pharmaceutical powerhouse Pfizer (PFE $28-$38-$45) was a member of that group. While we didn't hit the exact bottom (shares dropped to $28.49 on the market bottom day of 23 Mar), the holding has steadily gained ground ever since, and we see plenty of growth ahead. To that end, Pfizer announced that it would begin human trials in the US on its potential coronavirus vaccine, BNT162. In a joint program with German drugmaker BioNTech, Pfizer has advanced this vaccine from pre-clinical studies to human trials in a matter of four months—a seemingly impossible feat. If the trials are successful, Pfizer said it hopes to produce millions of doses of the vaccine by year-end, and hundreds of millions of doses in 2021, according to Dr. Mikael Dolsten, the firm's chief scientific officer. Pfizer has a p/e ratio of 13 and a dividend yield of nearly 4%.
Hotels, Resorts, & Cruise Lines
08. Norwegian Cruise Line concerned about ability to remain in business
Last summer, in a scathing article on Carnival Cruise Lines (CCL) and its inept (our opinion) CEO, Arnold Donald, we made the comment that "while we don't own a cruise line, if we did it would probably be Norwegian...." At the time, Norwegian Cruise Line Holdings (NCLH $7-$13-$60) was trading for $52 per share and had a conservative multiple of 12. Fast forward eleven months and Norwegian's multiple has dropped to 3, its price has dropped to $13, its market cap has dropped from $12B to under $3B, and management is expressing real concern that the firm can stay in business. In a Tuesday securities filing, the Miami-based company admitted that their is "substantial doubt" about its ability to carry forward as a "going concern." Norwegian also said that it does not have enough cash to meet its short-term obligations. NCLH holds $730M in current assets and has $3.58B in current liabilities. We are changing our pick to Royal Caribbean Cruises LTD (RCL $19-$40-$135), though we wouldn't touch any company in the industry right now.
Specialty REITs
07. Short on REITs but worried about tenants? Consider this specialty
Real estate investment trusts (REITs) can offer a dynamic range of investment options, but investors can get burned if they don't do their homework. For example, retail REITs who own B- and C-level malls were getting hammered leading into the pandemic; now they are getting crushed. Office space REITs must contend with tenants not paying their monthly leases or going out of business during the lockdown. There is one niche specialty in the REIT world, however, that many investors fail to consider: cell tower owners. Take $67 billion REIT Crown Castle International (CCI $114-$158-$169), for example. The company owns and leases roughly 40,000 cell towers in the United States: cell towers which will be rife with 5G antennas over the coming few years. Did we mention that the company also owns over 80,000 route miles of fiber-optic cables? The kind of high-speed lines which allow hundreds of millions of Americans to attend classes online and take part in Zoom (ZM) videoconferencing calls. With its p/e ratio of 80, CCI may seem expensive, but its 11.33% YTD performance has put the major indices to shame, and we expect the company's rock-solid growth to continue into the future. Looking for a cell tower REIT with a lower multiple? Consider American Tower Corp (AMT $240) with its 57 multiple. These real estate entities will play a major role in America's 5G build-out.
Global Strategy: Latin America
06. Mexico's economy shrinking as pandemic takes toll
Mexico's gross domestic product (GDP) fell 1.6% both from the previous quarter and the same quarter in 2019, showing the effect the pandemic is having on this emerging market economy. Unfortunately, this comes on the heels of the country's first full-year contraction in a decade. Comparing Mexico's numbers to its northern neighbor, US GDP shrank 4.8% annualized in Q1, while Mexico is now on pace for a 6.1% full-year contraction. The country's manufacturing-heavy economy saw a number of supply-chain disruptions caused by the virus, to include a suspension of operations at a number of auto assembly plants. Production in March of autos and light trucks fell 25% from the same period a year ago, and production in April will almost certainly be zero as new vehicle sales have dropped 90% from a year ago. If the Q1 annualized projection holds, it will be Mexico's worst economic contraction since 1995. Last month, Moody's downgraded the country's credit rating to Baa1—just one notch above junk.
Business & Professional Services
05. San Francisco getting hammered as job losses hit Silicon Valley
(07 May 2020) Last week ride-sharing service provider Lyft (LYFT $14-$33-$68) furloughed 17% of its workforce, or roughly 1,000 positions; this week, competitor Uber (UBER $14-$30-$47) announced that it would lay off 14% of its workers, or 3,700 full-time employees. Keep in mind that these are actual corporate positions—not the companies' contract drivers. Soon-to-be-IPO Airbnb just announced 1,900 layoffs, or 25% of its workforce. The company's CEO called it "the most harrowing crisis of our lifetime." What do these three nascent firms have in common? They are all glittering examples of San Francisco-based Silicon Valley startups. While it may seem as though many high-tech firms would be somewhat immune from a lockdown due to the online nature of their business models, we need to consider the customer base of these companies and how they are being effected. It doesn't matter much if the products and services of a Salesforce (CRM) are completely digital, if their customers are bleeding cash, the cuts they are forced to make will hit third-party vendors like Salesforce. Then there is the high cost of living in the Bay area. It was tough enough for these workers to make ends meet before a pandemic came along; now, for many, it will become impossible. There will be some wonderfully-undervalued technology names to select from over the coming months, but investors need to dive deeper than the balance sheet and consider the financial state of the group actually responsible for the revenues—the customers. Those wacky p/e ratios (CRM's is 1,091) may no longer be justifiable.
Cybersecurity
04. Penn New Frontier Fund member Fortinet jumps 21% in one session
For the past few years, we have been extremely bullish on the cybersecurity space. The chronic threat of cyber attacks from the likes of China, Russia, North Korea, and Iran, all working to inflict maximum pain on the US, is only going to grow moving forward. In the Penn Dynamic Growth Strategy, our ETF portfolio, we own CIBR, the First Trust NASDAQ Cybersecurity ETF; and in the Penn New Frontier Fund we own Fortinet (FTNT $69-$137-$122), a California-based cybersecurity vendor that sells detection and protection products to businesses of all sizes and a large number of government entities around the world. The company reported Q1 numbers this week that soundly beat expectations, and investors celebrated the news. Not only did the firm increase revenues by 22% y/y, net income rose by 76% from the same quarter last year—beating expectations by 120%. After the earnings release, FTNT shares proceeded to climb 21% in one session, finishing the week up 31% and easily punching through a 52-week high. Fortinet also happens to be one of the top ten holdings in CIBR.
Economics: Work & Pay
03. A record number of Americans file for unemployment, stocks spike
One thing we have learned in this business, after being hit in the face with hundreds of examples, is that good economic news often brings a market drop, while dour news often leads to a market rally. This bizarre relationship surfaced yet again on Friday, when a record-bad jobs report led to a 455-point Dow rally. The report was unfathomably bad: 20.5 million Americans filed for unemployment, and the unemployment rate went from a 50-year low to rates not seen since the Great Depression. So, with nearly one in five Americans out of work, and with many of those still working seeing their hours or pay reduced, why the big rally on the day and the week? Americans are generally beginning to see some light at the end of the tunnel. With lockdowns coming to an end soon, barring a major spike in new infections, there is a real sense that things will begin returning to some semblance of normalcy. A growing number of economists believe that April will end up being the worst month for job losses, and that it will be a slow but sure climb back from here. A full 88% of those laid off in April, in fact, believe they will be returning to their same jobs over the coming months. That optimism led to another strong week in the markets: the Dow was up 2.56%, the S&P 500 rose 3.5%, and the NASDAQ spiked an impressive 6%.
Market Risk Management
02. The P/E ratio has become temporarily useless; try this metric instead
It is typically the first number we look at—even before the share price—when evaluating a stock. Of all the key stats, few paint a better picture of a company's general value than the price-to-earnings (P/E) ratio. Granted, we may buy a growth stock with a P/E of 78 like Chipotle Mexican Grill (CMG $926), and ignore one with a P/E of 7 like General Motors (GM $24), but when comparing companies within and industry this metric can help us identify undervalued gems.
That being said, this valuation tool is on a roller coaster ride that is rendering it relatively useless, at least for now. First came the sudden drop in the "P" thanks to the 35% market correction (with many styles, such as small caps, dropping even more). In essence, we were looking at a number that reflected current prices but stale earnings ("E"), driving the P/E lower on nearly all stocks. Now that pandemic-tainted earnings are finally rolling in, the figure is going to be driven artificially higher, unless one believes that a certain company's earnings will never recover. At the start of the year, analysts were predicting a 6% rate of growth in earnings for companies in the S&P 500; they have now revised that number to -12% for Q1, and -24% for Q2. Until "real" numbers begin to return, hopefully in fall of this year, we can pretty much ignore the P/E ratio.
Considering the damage done by the virus, the metric we are most focused on right now is a company's current ratio, which divides current assets by current liabilities. The higher that number the better, as it gives us an idea as to which companies are going to be able to weather this storm, and which are fighting to remain in business. For example, if a company has $4.4 billion in current assets and $2 billion in current liabilities (Advanced Micro Devices AMD $53), its current ratio is a very solid 2.2. If, however, a company has $7.9 billion in current assets and $16.09 billion in current liabilities (United Airlines UAL $25), its current ratio is 0.49. Serious trouble brewing. What's a good current ratio to look for? While the number varies from industry to industry, a general rule of thumb is to look for companies with a current ratio of 1.2 or higher.
Under the Radar Investment
01. Under the Radar Investment: Ciena Corp
Ciena Corp (CIEN $31-$48-$50) is a communications equipment maker which provides network hardware, software, and services that support the management of video, data, and voice traffic on communications networks around the world. We expect the company to play a key role as companies upgrade their existing communication networks to the 5G infrastructure. As the US government has placed Chinese firm Huawei on its banned companies list, look for Ciena to continue gaining market share, both in this country and in Europe. Not only does does the company have a strong growth trajectory, it has strong financial health: with current assets of $2.27B and current liabilities of $733M, its current ratio is 3.09.
Answer
The highest rate of US unemployment was 24.9%, which took place in 1933 during the heart of the Great Depression. The record low occurred twenty years later, in 1953 during the Eisenhower administration, when unemployment fell to 2.5%.
Bad, but not the worst...
The current unemployment rate in the US—14.7%—is horrific, but it is not the highest level the country has experienced. What was the highest unemployment rate experienced in the US and when did it occur?
Penn Trading Desk:
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(08 May 20) Penn: Raise stop on TMUS
T-Mobile has hit our price target since we purchased last month; raise stop on TMUS to $95.50 to protect gains. Ultimately, we may move TMUS out of the Intrepid and into a longer-term strategy such as the Penn Global Leaders Club.
(07 May 20) Penn: Open agricultural inputs player in Intrepid
We opened a very old and familiar agricultural inputs company in the Intrepid based on a rather non-traditional and very new customer base; any ideas? "Expand your mind, dude" and you can probably guess what it is. Members see the Penn Trading Desk, or email us for the answer.
(07 May 20) Penn: Close BIO
Bio-Rad Laboratories (BIO $450) hit target then became volatile; close BIO @ $450 to protect gains.
(07 May 20) Penn: Raise stop/close NVDA
NVIDIA Corp (NVDA $305) hit our target price, stopped out and exited; close NVDA @ $304.90.
(05 May 20) Penn: Raise stop loss on TEAM
Our Atlassian Corp (TEAM $172) has hit our target price in the Intrepid; raise stop loss on TEAM to $171 to protect double-digit gains.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Food Products
10. Tyson Foods plummets after reporting lousy numbers for the quarter, warning of food chain disruption
At first blush, if you had to pick one industry holding up well in the pandemic you might say farm products. After all, the hoarding of goods quickly moved from toilet paper and Clorox (CLX) wipes to meat and dairy products. More specifically, you might zero in on US-based poultry providers like Tyson Foods (TSN $43-$55-$94). That is why we did a double take when the $20 billion Arkansas-based chicken, beef, and pork producer announced it had badly missed its Q2 earnings target and warned of more pain to come. So what happened? Part of the reason the company earned just $0.77 per share instead of the $1.20 expected (a 36% miss) has to do with outbreaks of the coronavirus at a number of its plants, forcing their closure. Couple that with the virtually complete loss of foodservice business for the better part of two months—so far—and the numbers begin to make sense. As if those two factors weren't enough to contend with, Chairman of the Board John Tyson warned that the entire food supply chain seems to be breaking. We don't actually agree with Tyson's contention, as the meat supplied by the company is generally sourced locally, and certainly domestically. Nonetheless, his words did cause a number of grocery chains such as Kroger to begin limiting meat purchases within their stores. So, after falling 8% in one day and 40% ytd, is TSN a bargain for investors? Actually, it probably is. While we don't like the excuse-filled earnings report, the shares have a fair value in the range of $75 to $85, conservatively.
Pharmaceuticals
09. Pfizer begins human testing for coronavirus vaccine in US
On the 9th of March, as the Dow was in the midst of falling 2,014 points in one session, we were busy picking up unfairly beaten-down stocks for the Penn Global Leaders Club. American pharmaceutical powerhouse Pfizer (PFE $28-$38-$45) was a member of that group. While we didn't hit the exact bottom (shares dropped to $28.49 on the market bottom day of 23 Mar), the holding has steadily gained ground ever since, and we see plenty of growth ahead. To that end, Pfizer announced that it would begin human trials in the US on its potential coronavirus vaccine, BNT162. In a joint program with German drugmaker BioNTech, Pfizer has advanced this vaccine from pre-clinical studies to human trials in a matter of four months—a seemingly impossible feat. If the trials are successful, Pfizer said it hopes to produce millions of doses of the vaccine by year-end, and hundreds of millions of doses in 2021, according to Dr. Mikael Dolsten, the firm's chief scientific officer. Pfizer has a p/e ratio of 13 and a dividend yield of nearly 4%.
Hotels, Resorts, & Cruise Lines
08. Norwegian Cruise Line concerned about ability to remain in business
Last summer, in a scathing article on Carnival Cruise Lines (CCL) and its inept (our opinion) CEO, Arnold Donald, we made the comment that "while we don't own a cruise line, if we did it would probably be Norwegian...." At the time, Norwegian Cruise Line Holdings (NCLH $7-$13-$60) was trading for $52 per share and had a conservative multiple of 12. Fast forward eleven months and Norwegian's multiple has dropped to 3, its price has dropped to $13, its market cap has dropped from $12B to under $3B, and management is expressing real concern that the firm can stay in business. In a Tuesday securities filing, the Miami-based company admitted that their is "substantial doubt" about its ability to carry forward as a "going concern." Norwegian also said that it does not have enough cash to meet its short-term obligations. NCLH holds $730M in current assets and has $3.58B in current liabilities. We are changing our pick to Royal Caribbean Cruises LTD (RCL $19-$40-$135), though we wouldn't touch any company in the industry right now.
Specialty REITs
07. Short on REITs but worried about tenants? Consider this specialty
Real estate investment trusts (REITs) can offer a dynamic range of investment options, but investors can get burned if they don't do their homework. For example, retail REITs who own B- and C-level malls were getting hammered leading into the pandemic; now they are getting crushed. Office space REITs must contend with tenants not paying their monthly leases or going out of business during the lockdown. There is one niche specialty in the REIT world, however, that many investors fail to consider: cell tower owners. Take $67 billion REIT Crown Castle International (CCI $114-$158-$169), for example. The company owns and leases roughly 40,000 cell towers in the United States: cell towers which will be rife with 5G antennas over the coming few years. Did we mention that the company also owns over 80,000 route miles of fiber-optic cables? The kind of high-speed lines which allow hundreds of millions of Americans to attend classes online and take part in Zoom (ZM) videoconferencing calls. With its p/e ratio of 80, CCI may seem expensive, but its 11.33% YTD performance has put the major indices to shame, and we expect the company's rock-solid growth to continue into the future. Looking for a cell tower REIT with a lower multiple? Consider American Tower Corp (AMT $240) with its 57 multiple. These real estate entities will play a major role in America's 5G build-out.
Global Strategy: Latin America
06. Mexico's economy shrinking as pandemic takes toll
Mexico's gross domestic product (GDP) fell 1.6% both from the previous quarter and the same quarter in 2019, showing the effect the pandemic is having on this emerging market economy. Unfortunately, this comes on the heels of the country's first full-year contraction in a decade. Comparing Mexico's numbers to its northern neighbor, US GDP shrank 4.8% annualized in Q1, while Mexico is now on pace for a 6.1% full-year contraction. The country's manufacturing-heavy economy saw a number of supply-chain disruptions caused by the virus, to include a suspension of operations at a number of auto assembly plants. Production in March of autos and light trucks fell 25% from the same period a year ago, and production in April will almost certainly be zero as new vehicle sales have dropped 90% from a year ago. If the Q1 annualized projection holds, it will be Mexico's worst economic contraction since 1995. Last month, Moody's downgraded the country's credit rating to Baa1—just one notch above junk.
Business & Professional Services
05. San Francisco getting hammered as job losses hit Silicon Valley
(07 May 2020) Last week ride-sharing service provider Lyft (LYFT $14-$33-$68) furloughed 17% of its workforce, or roughly 1,000 positions; this week, competitor Uber (UBER $14-$30-$47) announced that it would lay off 14% of its workers, or 3,700 full-time employees. Keep in mind that these are actual corporate positions—not the companies' contract drivers. Soon-to-be-IPO Airbnb just announced 1,900 layoffs, or 25% of its workforce. The company's CEO called it "the most harrowing crisis of our lifetime." What do these three nascent firms have in common? They are all glittering examples of San Francisco-based Silicon Valley startups. While it may seem as though many high-tech firms would be somewhat immune from a lockdown due to the online nature of their business models, we need to consider the customer base of these companies and how they are being effected. It doesn't matter much if the products and services of a Salesforce (CRM) are completely digital, if their customers are bleeding cash, the cuts they are forced to make will hit third-party vendors like Salesforce. Then there is the high cost of living in the Bay area. It was tough enough for these workers to make ends meet before a pandemic came along; now, for many, it will become impossible. There will be some wonderfully-undervalued technology names to select from over the coming months, but investors need to dive deeper than the balance sheet and consider the financial state of the group actually responsible for the revenues—the customers. Those wacky p/e ratios (CRM's is 1,091) may no longer be justifiable.
Cybersecurity
04. Penn New Frontier Fund member Fortinet jumps 21% in one session
For the past few years, we have been extremely bullish on the cybersecurity space. The chronic threat of cyber attacks from the likes of China, Russia, North Korea, and Iran, all working to inflict maximum pain on the US, is only going to grow moving forward. In the Penn Dynamic Growth Strategy, our ETF portfolio, we own CIBR, the First Trust NASDAQ Cybersecurity ETF; and in the Penn New Frontier Fund we own Fortinet (FTNT $69-$137-$122), a California-based cybersecurity vendor that sells detection and protection products to businesses of all sizes and a large number of government entities around the world. The company reported Q1 numbers this week that soundly beat expectations, and investors celebrated the news. Not only did the firm increase revenues by 22% y/y, net income rose by 76% from the same quarter last year—beating expectations by 120%. After the earnings release, FTNT shares proceeded to climb 21% in one session, finishing the week up 31% and easily punching through a 52-week high. Fortinet also happens to be one of the top ten holdings in CIBR.
Economics: Work & Pay
03. A record number of Americans file for unemployment, stocks spike
One thing we have learned in this business, after being hit in the face with hundreds of examples, is that good economic news often brings a market drop, while dour news often leads to a market rally. This bizarre relationship surfaced yet again on Friday, when a record-bad jobs report led to a 455-point Dow rally. The report was unfathomably bad: 20.5 million Americans filed for unemployment, and the unemployment rate went from a 50-year low to rates not seen since the Great Depression. So, with nearly one in five Americans out of work, and with many of those still working seeing their hours or pay reduced, why the big rally on the day and the week? Americans are generally beginning to see some light at the end of the tunnel. With lockdowns coming to an end soon, barring a major spike in new infections, there is a real sense that things will begin returning to some semblance of normalcy. A growing number of economists believe that April will end up being the worst month for job losses, and that it will be a slow but sure climb back from here. A full 88% of those laid off in April, in fact, believe they will be returning to their same jobs over the coming months. That optimism led to another strong week in the markets: the Dow was up 2.56%, the S&P 500 rose 3.5%, and the NASDAQ spiked an impressive 6%.
Market Risk Management
02. The P/E ratio has become temporarily useless; try this metric instead
It is typically the first number we look at—even before the share price—when evaluating a stock. Of all the key stats, few paint a better picture of a company's general value than the price-to-earnings (P/E) ratio. Granted, we may buy a growth stock with a P/E of 78 like Chipotle Mexican Grill (CMG $926), and ignore one with a P/E of 7 like General Motors (GM $24), but when comparing companies within and industry this metric can help us identify undervalued gems.
That being said, this valuation tool is on a roller coaster ride that is rendering it relatively useless, at least for now. First came the sudden drop in the "P" thanks to the 35% market correction (with many styles, such as small caps, dropping even more). In essence, we were looking at a number that reflected current prices but stale earnings ("E"), driving the P/E lower on nearly all stocks. Now that pandemic-tainted earnings are finally rolling in, the figure is going to be driven artificially higher, unless one believes that a certain company's earnings will never recover. At the start of the year, analysts were predicting a 6% rate of growth in earnings for companies in the S&P 500; they have now revised that number to -12% for Q1, and -24% for Q2. Until "real" numbers begin to return, hopefully in fall of this year, we can pretty much ignore the P/E ratio.
Considering the damage done by the virus, the metric we are most focused on right now is a company's current ratio, which divides current assets by current liabilities. The higher that number the better, as it gives us an idea as to which companies are going to be able to weather this storm, and which are fighting to remain in business. For example, if a company has $4.4 billion in current assets and $2 billion in current liabilities (Advanced Micro Devices AMD $53), its current ratio is a very solid 2.2. If, however, a company has $7.9 billion in current assets and $16.09 billion in current liabilities (United Airlines UAL $25), its current ratio is 0.49. Serious trouble brewing. What's a good current ratio to look for? While the number varies from industry to industry, a general rule of thumb is to look for companies with a current ratio of 1.2 or higher.
Under the Radar Investment
01. Under the Radar Investment: Ciena Corp
Ciena Corp (CIEN $31-$48-$50) is a communications equipment maker which provides network hardware, software, and services that support the management of video, data, and voice traffic on communications networks around the world. We expect the company to play a key role as companies upgrade their existing communication networks to the 5G infrastructure. As the US government has placed Chinese firm Huawei on its banned companies list, look for Ciena to continue gaining market share, both in this country and in Europe. Not only does does the company have a strong growth trajectory, it has strong financial health: with current assets of $2.27B and current liabilities of $733M, its current ratio is 3.09.
Answer
The highest rate of US unemployment was 24.9%, which took place in 1933 during the heart of the Great Depression. The record low occurred twenty years later, in 1953 during the Eisenhower administration, when unemployment fell to 2.5%.
Headlines for the Week of 26 Apr 2020—02 May 2020
Question (From information in The Penn Wealth Report, Vol 8/Issue 02)
Deeply diminished Libyan output...
Right now, thanks to internal strife and the growing power of General Haftar's Libyan National Army (Haftar is an opponent of Islamic extremism), the OPEC nation is currently producing just 400,000 barrels of oil per day. In its heyday, the Gulf nation was pumping out 2.4 million barrels per day. What year did it hit that peak, and what related event was going on in the United States at the time?
Penn Trading Desk:
(29 Apr 20) Penn: Open Life Sciences technology provider
We added a new technology systems provider for the health care arena to the Intrepid Trading Platform. Members, visit the Trading Desk for details. Remember that all trade notifications are sent out via Twitter from @PennWealth. If using the platform, remember to Follow us!
(28 Apr 20) Penn: Raise stop on ZYXI
Zynex ZYXI $16.50 rose above our target price in the Intrepid. Raise stop to $16 on ZYXI shares. UPDATE: ZYXI hit stop @ $15.90 for 9.6% gain in three trading days.
(28 Apr 20) Penn: Raise stop on EBS
Emergent BioSolutions EBS $81 rose above our target price in the Intrepid. Raise stop to $80 on EBS shares. UPDATE: EBS sold @ $80 for 10% gain in 2 trading days.
(27 Apr 20) Penn: Raise stop on PSX
Our Phillips 66 (PSX $40-$64-$120) addition to the Penn Global Leaders Club is now up 40% in just five weeks since purchase. Even though the Global Leaders Club generally has less-stringent stops, that is a fast run-up. We need to protect the position. Raise stop from $40 to $60 on PSX shares.
(27 Apr 20) Penn: BYND stopped out
After a downgrade (unwarranted) by UBS analyst, our Beyond Meat fell and hit the $99.50 stop we had in place and liquidated from the New Frontier Fund for an 86% short-term gain. We still believe in the company, and plan to pick it up again in the future as price warrants. Sell BYND @ $99.50.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Automotive
10. GM had one thing going for it: its dividend yield; now that is gone
Granted, General Motors' (GM $14-$22-$42) investors have watched their holding get cut precisely in half since last August, but at least they could point to the $0.38 quarterly dividend consistently paid out on the shares. Not bad, considering that $1.52 per year equated to a 7% yield based on the current share price. Now, however, in an effort to shore up its battered balance sheet, the company has announced it will no longer issue a dividend payment. To say the balance sheet is battered is an understatement. GM has current liabilities totaling $85 billion (113% of short-term assets) and long-term liabilities of $97 billion (63% of long-term assets). Keep in mind that the company's market cap is now under $31 billion. In the last week of March, credit rating agency Moody's placed GM on watch for a possible ratings cut to junk level, which would make debt restructuring more difficult and certainly more costly, despite the ultra-low current rate environment. Shares fell about 2% on news of the dividend cut.
Energy Equipment & Services
09. Diamond Offshore declares bankruptcy, shares plunge 61%
Diamond Offshore (DO $0-$0-$11) used to be a great trading stock—yet another way to play the oil markets. I began trading it in 1998 when it was roughly $20 per share. Near the end of 2007, shares peaked around $150 apiece and the contract driller hit $20 billion in size. In this surreal era of negative oil prices, however, no energy company is safe. For oil drillers, the question has shifted from "how much equipment do we need to lease?" to "how can we shutdown wells most cost effectively?" That is a nightmare scenario for the owners of oil and gas drilling equipment. Which brings us back to Diamond. Futures were dropping 61% pre-market—to below $1—on DO shares as the company announced it would declare bankruptcy and cease all interest payments on outstanding debt. Trading was subsequently halted. Sadly, this will not be the last American oil and gas company to take this route. This past December, which seems so long ago, Barron's interviewed market master Peter Lynch, whose Fidelity Magellan Fund averaged an incredible 29% per year for the thirteen years he was at the helm. Asked about the opportunities he saw on the horizon, the beaten down energy sector seemed the most interesting. What a difference a season makes.
Aerospace & Defense
08. We've been so focused on Boeing's woes that we forgot about Airbus
For decades we have watched with rapt attention the raging battle between the two global aerospace giants: America's Boeing (BA $89-$130-$391) and Europe's government-subsidized Airbus (EADSY $13-$14-$38). Ever since the second Boeing crash, however, and the focus on that company's inept management team, we sort of forgot about the European trust fund baby. We just assumed things were humming along as they picked up all of the lost Boeing contracts. Not so fast. In the first place, we are happy—and somewhat surprised—to announce that Boeing is still the larger company, despite its fall from grace and its share price drop from $440 in March of 2019 to $89 precisely one year later: BA weighs in at $73B; EADSY comes in at $43B. In the second place, Airbus CEO Guillaume Faury just sent an ominous letter to staff that made it abundantly clear the company is in dire straits. In the letter, Faury told 135,000 workers that the company's very existence is at stake, and to prepare for deep job cuts. In our last ...After Hours we noted the massive government-paid furloughs taking place across Europe, but the letter warned of "more far-reaching measures" to come. "The survival of Airbus is in question if we don't act now," said Faury. Something tells us that everyone who is not furloughed will be on board with the draconian plans. Our guess, based on the figures which have been made public, is that Airbus has lost roughly 50% of its orders due to the pandemic.
Life Sciences Tools & Services
07. Quest Diagnostics rolls out consumer-based Covid antibody test
In a move aimed squarely at the massive consumer market (as opposed to the health care sector), lab services company Quest Diagnostics (DGX $73-$115-$125) is rolling out a Covid-19 antibody test which will detect whether or not an individual has been exposed to the virus, and if they have built up antibodies in response. The program, called Quest Direct, will involve the consumer ordering the kit directly from the company then being directed to one of 2,200 patient-service centers nationwide to have blood drawn. Within a day or two, they will then be able to go to the company's patient portal, MyQuest, to check results and speak with a physician if they desire. Earlier in the week, rival LabCorp (LH $98-$177-$196) announced a similar program involving a nasal swab test kit being sent directly to consumers' homes. Both companies are trading with a fairly conservative multiple of roughly 20, and both saw their respective share prices hammered in the initial stages of the downturn.
Media & Entertainment
06. AMC, in fight for its life, battles Universal over streaming spat
Leawood, Kansas-based AMC Entertainment (AMC $2-$4-$15), with its 1,004 theaters and 11,041 screens, has a message for Universal Pictures: your movies are no longer welcome at our establishment. What led to the all-out war against the motion picture division of Comcast (CMCSA)? The studio's decision to simultaneously release movies in the theaters and to streaming services alike. This so-called breaking of the "theatrical window" came to a head when Universal, armed with its new Trolls World Tour movie and no screens to show it on thanks to the pandemic, decided to break custom and release the movie directly to the streaming services. The icing on the cake was when studio executives made it clear that this would be the practice going forward. Enraged, AMC CEO Adam Aron called the move categorically unacceptable, and announced the ban of all Universal movies until the new policy is changed. AMC, meanwhile, is a shell of its former self. The company, now controlled by China's Dalian Wanda Group, has seen its share price drop from $35 three years ago to under $5 today. With its $450M market cap, we still believe the company is a good takeover candidate.
Technology Hardware, Storage, & Peripherals
05. Our Phillips 66 shares are up 60% in one month because...
In the heat of the downturn, right after the second shoe (the oil war between Saudi and Russia) dropped, midstream refiner and downstream marketer Phillips 66 (PSX $40-$72-$120) was plummeting to $45 for share—off 61% in a number of months. To us, that didn't make sense. While refining would certainly suffer to some degree due to low (or negative) oil prices, they still need to operate, meaning a constant stream of revenue. And the company's 6,000+ stations around the country would continue to make money. Finally, the company was now unencumbered by its former parent entity, integrated oil giant ConocoPhillips (COP). We immediately added PSX to the longer-term Penn Global Leaders Club (Position #37/40) on 16 Mar 2020 at $45.49 per share. We liked the company so much we wrote a full-page spread on its prospects in a recent Penn Wealth Report. On Thursday, shares hit $73, for a 60% gain in just over a month. And we have no intention of selling anytime soon (though we did raise our stop to $60 due to the rapid move in the share price). Phillips 66 has since been upgraded by a number of firms due to its strong financial position and rosy outlook.
Integrated Oil & Gas
04. Speaking of big oil, Shell cuts dividend for first time since WWII
As alluded to above, big integrated oil companies continue to get pounded by demand destruction. To illustrate: Shares of Royal Dutch Shell (RDSA $21-$34-$66) have fallen so far that the company now has a dividend yield of 10%—up from 5% when shares were $66 apiece. Obviously, this is unsustainable, forcing the company to do something it hasn't done since World War II: cut its dividend. Retroactive to the first quarter, RDSA shares will have a payout of $0.16, or 66% less than the previous rate. Shell will also cut its capital expenditures for the year from $25 billion to $20 billion, and end all share buybacks. Each of these moves is needed, but that didn't stop investors from pushing RDSA shares down 11% on the news. Interestingly, competitor BP (BP $24) announced it will not cut its dividend rate, which currently yields 9.7%. This despite the fact that the multiple on BP shares (22) is over double that of Royal Dutch (9). In synopsis, we wouldn't be buying any new positions in big oil right now, and we wouldn't be keen on selling existing positions at this level. Our favorite big oil name remains US-based Chevron Corp (CVX $93).
Consumer Finance
03. Hey, at least they turned a profit: Freddie Mac's income down 88%
US government-sponsored enterprise (GSE) Federal Home Loan Mortgage Corp, affectionately (not) known as Freddie Mac (FMCC $1-$2-$4), actually turned a profit in the first quarter. That's the good news. The bad news is that it fell from $1.4 billion in Q1 of 2019 to $173 million for the same period this year—an 88% drop. Obviously, the virus was the culprit, which forced FMCC to book $1.1B worth of credit-related expenses. Single-family home loans, the company's bread and butter, took an enormous hit due to the lockdown, which means we can expect an ugly second quarter as well. Freddie has been under government control since the slew of bad loans emanating from the 2008 financial crisis began to manifest, but it was moving ever-closer to privatization going into the year. Sadly, that movement has been stopped dead in its tracks. Then again, the same taxpayer bailout that led to the government taking control in 2008 would probably have circled back around thanks to the pandemic, so the organization might as well remain a government albatross for the foreseeable future. Europe would be proud.
Economic Outlook
02. No surprise: Here come the horrendous economic reports
How can we possibly be having a strong month in the markets when disastrous economic reports keep flowing in? The answer: the nightmare was already baked into the cake. First, US GDP: the economy contracted by 4.8% in Q1. I read headlines like "worse than feared" when the report came out, but that's disingenuous. Actually, nobody knew what the numbers would look like thanks to this new beast which we have not faced before. We saw economist predictions ranging from 0% growth to a 15% contraction. That would explain why the Dow actually rose 532 points on Wednesday. Then we have the 3.8 million new jobless claims figure to contend with. Once again, we knew it would be brutal—consider all the closed businesses! There have now been 30 million submitted claims—nearly one in ten Americans—for unemployment insurance since mid-March. A full 12.4% of US workers covered by unemployment benefits are now receiving them. Staggering. On the European side, similar reports began flowing in. The EU's GDP contracted by 3.8% in the first quarter, and France—with its 5.8% contraction—officially entered recession. Europe's largest economy, Germany, is bracing for its worst recession since the end of World War II. The biggest catalyst for April's market gains was hope. We are beginning to finally see positive signs on the testing, treatment, and vaccine fronts. We fully expect that momentum to pick up as we enter late spring and early summer. If that is the case, we could continue our march back to Dow 29,000.
Under the Radar Investment
01. Under the Radar Investment: Veeva Systems Inc.
"The Industry Cloud for Life Sciences." That is the slogan on the home page of Veeva Systems' (VEEV $118-$183-$196), and it is more than just hype. The company is a best-in-breed supplier of vertical software solutions for the life sciences industry. From small emerging biotechs, to behemoth pharmaceutical manufacturers, Veeva uses its expansive cloud-based platform to improve the efficiencies of its customers, and to assure they remain in compliance with regulatory requirements—a herculean task for the industry.
Veeva already controls 40% of the addressable market, despite its relative youth (it went public about six years ago), and it is extremely well positioned to increase that market share in a highly-fragmented space. VEEV would be suitable for the Intrepid (short-term trading) or the New Frontier Fund (longer-term investment in new technologies).
Answer
Libya hit its oil-producing stride back in 1973, when production ramped up to 2.4 million barrels per day. Not by coincidence, this was also the year that the United States found itself in the midst of the OPEC-imposed oil embargo.
Deeply diminished Libyan output...
Right now, thanks to internal strife and the growing power of General Haftar's Libyan National Army (Haftar is an opponent of Islamic extremism), the OPEC nation is currently producing just 400,000 barrels of oil per day. In its heyday, the Gulf nation was pumping out 2.4 million barrels per day. What year did it hit that peak, and what related event was going on in the United States at the time?
Penn Trading Desk:
(29 Apr 20) Penn: Open Life Sciences technology provider
We added a new technology systems provider for the health care arena to the Intrepid Trading Platform. Members, visit the Trading Desk for details. Remember that all trade notifications are sent out via Twitter from @PennWealth. If using the platform, remember to Follow us!
(28 Apr 20) Penn: Raise stop on ZYXI
Zynex ZYXI $16.50 rose above our target price in the Intrepid. Raise stop to $16 on ZYXI shares. UPDATE: ZYXI hit stop @ $15.90 for 9.6% gain in three trading days.
(28 Apr 20) Penn: Raise stop on EBS
Emergent BioSolutions EBS $81 rose above our target price in the Intrepid. Raise stop to $80 on EBS shares. UPDATE: EBS sold @ $80 for 10% gain in 2 trading days.
(27 Apr 20) Penn: Raise stop on PSX
Our Phillips 66 (PSX $40-$64-$120) addition to the Penn Global Leaders Club is now up 40% in just five weeks since purchase. Even though the Global Leaders Club generally has less-stringent stops, that is a fast run-up. We need to protect the position. Raise stop from $40 to $60 on PSX shares.
(27 Apr 20) Penn: BYND stopped out
After a downgrade (unwarranted) by UBS analyst, our Beyond Meat fell and hit the $99.50 stop we had in place and liquidated from the New Frontier Fund for an 86% short-term gain. We still believe in the company, and plan to pick it up again in the future as price warrants. Sell BYND @ $99.50.
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Automotive
10. GM had one thing going for it: its dividend yield; now that is gone
Granted, General Motors' (GM $14-$22-$42) investors have watched their holding get cut precisely in half since last August, but at least they could point to the $0.38 quarterly dividend consistently paid out on the shares. Not bad, considering that $1.52 per year equated to a 7% yield based on the current share price. Now, however, in an effort to shore up its battered balance sheet, the company has announced it will no longer issue a dividend payment. To say the balance sheet is battered is an understatement. GM has current liabilities totaling $85 billion (113% of short-term assets) and long-term liabilities of $97 billion (63% of long-term assets). Keep in mind that the company's market cap is now under $31 billion. In the last week of March, credit rating agency Moody's placed GM on watch for a possible ratings cut to junk level, which would make debt restructuring more difficult and certainly more costly, despite the ultra-low current rate environment. Shares fell about 2% on news of the dividend cut.
Energy Equipment & Services
09. Diamond Offshore declares bankruptcy, shares plunge 61%
Diamond Offshore (DO $0-$0-$11) used to be a great trading stock—yet another way to play the oil markets. I began trading it in 1998 when it was roughly $20 per share. Near the end of 2007, shares peaked around $150 apiece and the contract driller hit $20 billion in size. In this surreal era of negative oil prices, however, no energy company is safe. For oil drillers, the question has shifted from "how much equipment do we need to lease?" to "how can we shutdown wells most cost effectively?" That is a nightmare scenario for the owners of oil and gas drilling equipment. Which brings us back to Diamond. Futures were dropping 61% pre-market—to below $1—on DO shares as the company announced it would declare bankruptcy and cease all interest payments on outstanding debt. Trading was subsequently halted. Sadly, this will not be the last American oil and gas company to take this route. This past December, which seems so long ago, Barron's interviewed market master Peter Lynch, whose Fidelity Magellan Fund averaged an incredible 29% per year for the thirteen years he was at the helm. Asked about the opportunities he saw on the horizon, the beaten down energy sector seemed the most interesting. What a difference a season makes.
Aerospace & Defense
08. We've been so focused on Boeing's woes that we forgot about Airbus
For decades we have watched with rapt attention the raging battle between the two global aerospace giants: America's Boeing (BA $89-$130-$391) and Europe's government-subsidized Airbus (EADSY $13-$14-$38). Ever since the second Boeing crash, however, and the focus on that company's inept management team, we sort of forgot about the European trust fund baby. We just assumed things were humming along as they picked up all of the lost Boeing contracts. Not so fast. In the first place, we are happy—and somewhat surprised—to announce that Boeing is still the larger company, despite its fall from grace and its share price drop from $440 in March of 2019 to $89 precisely one year later: BA weighs in at $73B; EADSY comes in at $43B. In the second place, Airbus CEO Guillaume Faury just sent an ominous letter to staff that made it abundantly clear the company is in dire straits. In the letter, Faury told 135,000 workers that the company's very existence is at stake, and to prepare for deep job cuts. In our last ...After Hours we noted the massive government-paid furloughs taking place across Europe, but the letter warned of "more far-reaching measures" to come. "The survival of Airbus is in question if we don't act now," said Faury. Something tells us that everyone who is not furloughed will be on board with the draconian plans. Our guess, based on the figures which have been made public, is that Airbus has lost roughly 50% of its orders due to the pandemic.
Life Sciences Tools & Services
07. Quest Diagnostics rolls out consumer-based Covid antibody test
In a move aimed squarely at the massive consumer market (as opposed to the health care sector), lab services company Quest Diagnostics (DGX $73-$115-$125) is rolling out a Covid-19 antibody test which will detect whether or not an individual has been exposed to the virus, and if they have built up antibodies in response. The program, called Quest Direct, will involve the consumer ordering the kit directly from the company then being directed to one of 2,200 patient-service centers nationwide to have blood drawn. Within a day or two, they will then be able to go to the company's patient portal, MyQuest, to check results and speak with a physician if they desire. Earlier in the week, rival LabCorp (LH $98-$177-$196) announced a similar program involving a nasal swab test kit being sent directly to consumers' homes. Both companies are trading with a fairly conservative multiple of roughly 20, and both saw their respective share prices hammered in the initial stages of the downturn.
Media & Entertainment
06. AMC, in fight for its life, battles Universal over streaming spat
Leawood, Kansas-based AMC Entertainment (AMC $2-$4-$15), with its 1,004 theaters and 11,041 screens, has a message for Universal Pictures: your movies are no longer welcome at our establishment. What led to the all-out war against the motion picture division of Comcast (CMCSA)? The studio's decision to simultaneously release movies in the theaters and to streaming services alike. This so-called breaking of the "theatrical window" came to a head when Universal, armed with its new Trolls World Tour movie and no screens to show it on thanks to the pandemic, decided to break custom and release the movie directly to the streaming services. The icing on the cake was when studio executives made it clear that this would be the practice going forward. Enraged, AMC CEO Adam Aron called the move categorically unacceptable, and announced the ban of all Universal movies until the new policy is changed. AMC, meanwhile, is a shell of its former self. The company, now controlled by China's Dalian Wanda Group, has seen its share price drop from $35 three years ago to under $5 today. With its $450M market cap, we still believe the company is a good takeover candidate.
Technology Hardware, Storage, & Peripherals
05. Our Phillips 66 shares are up 60% in one month because...
In the heat of the downturn, right after the second shoe (the oil war between Saudi and Russia) dropped, midstream refiner and downstream marketer Phillips 66 (PSX $40-$72-$120) was plummeting to $45 for share—off 61% in a number of months. To us, that didn't make sense. While refining would certainly suffer to some degree due to low (or negative) oil prices, they still need to operate, meaning a constant stream of revenue. And the company's 6,000+ stations around the country would continue to make money. Finally, the company was now unencumbered by its former parent entity, integrated oil giant ConocoPhillips (COP). We immediately added PSX to the longer-term Penn Global Leaders Club (Position #37/40) on 16 Mar 2020 at $45.49 per share. We liked the company so much we wrote a full-page spread on its prospects in a recent Penn Wealth Report. On Thursday, shares hit $73, for a 60% gain in just over a month. And we have no intention of selling anytime soon (though we did raise our stop to $60 due to the rapid move in the share price). Phillips 66 has since been upgraded by a number of firms due to its strong financial position and rosy outlook.
Integrated Oil & Gas
04. Speaking of big oil, Shell cuts dividend for first time since WWII
As alluded to above, big integrated oil companies continue to get pounded by demand destruction. To illustrate: Shares of Royal Dutch Shell (RDSA $21-$34-$66) have fallen so far that the company now has a dividend yield of 10%—up from 5% when shares were $66 apiece. Obviously, this is unsustainable, forcing the company to do something it hasn't done since World War II: cut its dividend. Retroactive to the first quarter, RDSA shares will have a payout of $0.16, or 66% less than the previous rate. Shell will also cut its capital expenditures for the year from $25 billion to $20 billion, and end all share buybacks. Each of these moves is needed, but that didn't stop investors from pushing RDSA shares down 11% on the news. Interestingly, competitor BP (BP $24) announced it will not cut its dividend rate, which currently yields 9.7%. This despite the fact that the multiple on BP shares (22) is over double that of Royal Dutch (9). In synopsis, we wouldn't be buying any new positions in big oil right now, and we wouldn't be keen on selling existing positions at this level. Our favorite big oil name remains US-based Chevron Corp (CVX $93).
Consumer Finance
03. Hey, at least they turned a profit: Freddie Mac's income down 88%
US government-sponsored enterprise (GSE) Federal Home Loan Mortgage Corp, affectionately (not) known as Freddie Mac (FMCC $1-$2-$4), actually turned a profit in the first quarter. That's the good news. The bad news is that it fell from $1.4 billion in Q1 of 2019 to $173 million for the same period this year—an 88% drop. Obviously, the virus was the culprit, which forced FMCC to book $1.1B worth of credit-related expenses. Single-family home loans, the company's bread and butter, took an enormous hit due to the lockdown, which means we can expect an ugly second quarter as well. Freddie has been under government control since the slew of bad loans emanating from the 2008 financial crisis began to manifest, but it was moving ever-closer to privatization going into the year. Sadly, that movement has been stopped dead in its tracks. Then again, the same taxpayer bailout that led to the government taking control in 2008 would probably have circled back around thanks to the pandemic, so the organization might as well remain a government albatross for the foreseeable future. Europe would be proud.
Economic Outlook
02. No surprise: Here come the horrendous economic reports
How can we possibly be having a strong month in the markets when disastrous economic reports keep flowing in? The answer: the nightmare was already baked into the cake. First, US GDP: the economy contracted by 4.8% in Q1. I read headlines like "worse than feared" when the report came out, but that's disingenuous. Actually, nobody knew what the numbers would look like thanks to this new beast which we have not faced before. We saw economist predictions ranging from 0% growth to a 15% contraction. That would explain why the Dow actually rose 532 points on Wednesday. Then we have the 3.8 million new jobless claims figure to contend with. Once again, we knew it would be brutal—consider all the closed businesses! There have now been 30 million submitted claims—nearly one in ten Americans—for unemployment insurance since mid-March. A full 12.4% of US workers covered by unemployment benefits are now receiving them. Staggering. On the European side, similar reports began flowing in. The EU's GDP contracted by 3.8% in the first quarter, and France—with its 5.8% contraction—officially entered recession. Europe's largest economy, Germany, is bracing for its worst recession since the end of World War II. The biggest catalyst for April's market gains was hope. We are beginning to finally see positive signs on the testing, treatment, and vaccine fronts. We fully expect that momentum to pick up as we enter late spring and early summer. If that is the case, we could continue our march back to Dow 29,000.
Under the Radar Investment
01. Under the Radar Investment: Veeva Systems Inc.
"The Industry Cloud for Life Sciences." That is the slogan on the home page of Veeva Systems' (VEEV $118-$183-$196), and it is more than just hype. The company is a best-in-breed supplier of vertical software solutions for the life sciences industry. From small emerging biotechs, to behemoth pharmaceutical manufacturers, Veeva uses its expansive cloud-based platform to improve the efficiencies of its customers, and to assure they remain in compliance with regulatory requirements—a herculean task for the industry.
Veeva already controls 40% of the addressable market, despite its relative youth (it went public about six years ago), and it is extremely well positioned to increase that market share in a highly-fragmented space. VEEV would be suitable for the Intrepid (short-term trading) or the New Frontier Fund (longer-term investment in new technologies).
Answer
Libya hit its oil-producing stride back in 1973, when production ramped up to 2.4 million barrels per day. Not by coincidence, this was also the year that the United States found itself in the midst of the OPEC-imposed oil embargo.
Headlines for the Week of 19 Apr 2020—25 Apr 2020
Question (From information in The Penn Wealth Report, Vol 8/Issue 02)
Creative corporate leadership...
Admittedly, we love CarMax (KMX). The entire process of finding, buying, and financing a used vehicle can be completed within a matter of hours. The concept of CarMax came from a rather odd place. What company developed the idea under the code name "Project X"?
Penn Trading Desk:
(24 Apr 20) Penn: Place stop on BYND
We added Beyond Meat (BYND $108) to the Penn New Frontier Fund within five minutes of the company's first-ever trade. It is up 102% since then, just under a one-year period. We believe in the long-term viability of this industry-leading firm, but want to protect gains here. If it sells, we can always buy back in the future. Place $99.50 stop on shares.
(24 Apr 20) Penn: Add specialty drugmaker to Intrepid
Added a mid-cap specialty drugmaker focusing on biodefense (w/big government contracts) in the Intrepid. With $3.8B market cap, huge potential w double-digit EPS and net income growth.
(23 Apr 20) Penn: Add medical device small-cap
Added a small-cap medical device maker to Intrepid. Members see the Trading Desk.
(23 Apr 20) Penn: PFE stopped-out, taking profits
Pfizer hit our target price w double-digit gains in Intrepid, raised stop to $37, executed for 10% s/t gain.
(22 Apr 20) Penn: Close DPZ, taking profits
Closed our Domino's Pizza DPZ position in the Intrepid for a 7.72% gain in one week.
(22 Apr 20) Credit Suisse: Raise price target on CMG
After the company reported strong sales for the quarter, Credit Suisse raised its price target on shares of Penn Global Leaders Club member Chipotle (CMG $415-$860-$940) from $900 to $940. See story below.
Current Intrepid Trading Platform buy-in value/unit: $12,360 (S&P 500 @ 2,837)
Performance since inception: S&P 500: -1.32%; Intrepid: -0.46%
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Energy Commodities
10. Negative oil prices are about as silly as negative interest rates
We thought we had seen it all when governments around the world began issuing sovereign debt with negative interest rates, implying that anyone who wanted to buy a government bill, note, or bond would have to pay for the right to do so. We just wrapped our head around that insane concept and along comes negative oil prices. No, the gas stations aren't going to begin paying you to fill up your SUV, but the fact that May futures contracts for West Texas crude fell to -$37.63 per barrel does highlight what crazy times we are living through. While the May contracts attracted all of the headlines (of course), the real price of oil is not negative. June contracts are trading around $16/bbl, and subsequent months go up from there, with December sitting around $30/bbl.
As global economies begin coming back online, the price of crude will rise again; in the meantime, however, energy companies are finding it extremely expensive to park all of the oil they have coming out of the ground. Their only option is even less palatable: pay an enormous price for shuttering the fields, many of which may never come back online. The Saudis and the Russians are trying to force the American firms into the second choice so they can regain their "rightful" roles as the world's top two producers, and then jack prices back up. To prevent this, the US government is going to have to provide financial support to the industry. The fact that the two OPEC+ nations undertook this price war in the midst of the pandemic is loathsome—and it now appears to have been coordinated. Devious plans often bring unintended consequences, however. Saudi Arabia and Russia might not want to celebrate just yet.
IT Services
09. IBM beats Q1 expectations, but its warning drove the market lower
Former Penn Global Leaders Club member IBM (IBM $91-$116-$159), which we shed when Ginni Rometty announced that she would be leaving the CEO role, didn't have all that bad of a first quarter: revenues of $17.57 billion were off 3.36% y/y and EPS came in at $1.84 per share, a bit higher than last year's Q1 rate of $1.79. The problem came when management began discussing guidance, or the lack thereof. The company pulled its full-year guidance, and then gave a rather dour outlook on the current mindset of customers. Not only was there a sharp decline in software sales in late March, the feedback they did glean from customers (many weren't responding) pointed to a "cash-conservation" mentality. In turn, this feedback will lead to the company putting many of its big cloud build-out projects on hold. This is an ugly cycle we are witnessing in industry after industry, with the pain being felt by everyone along the vertical chain, but one we had hoped would somewhat bypass the software industry, which operates in the digital world. Apparently, that is not the case. We need to get the economy back up and running before we can gauge just how rapidly companies are willing to exit the bunker and begin spending on growth once again.
Restaurants
08. Penn member Chipotle jumps double-digits on earnings, upgrades
We didn't quite get the bottom, but we came close. We picked up shares of fast-casual restaurant Chipotle Mexican Grill (CMG $415-$894-$940) on the 12th of March—in the heat of the market crash—at $590.85 per share. They fell further, then began their stunning comeback. Shares rose to $894 following the company's first-quarter earnings release. Talk about a restaurant that bucked the trend by embracing digital sales. Sales rose 8% in Q1, to $1.4B, and digital sales rose 81% for the quarter. Customers took advantage of the CMG app to order from home and either have the meals delivered or ready for pick-up on location. Chipotle began embracing the digital platform concept last year, and it has paid off in spades. We agree with many of the analysts who commented that CMG is simply the best growth story in the restaurant space. Shares are up over 50% in the one month since re-adding the chain to the Global Leaders Club.
Global Strategy: Europe
07. Think America has it rough? Check out Europe's economy
We have been writing recently about Europe's great shift in attitude toward China. The country many globalists on the continent saw as the natural replacement for America—the trading partner many of them loathe—has suddenly lost its luster. And that is putting it mildly. Thanks to the pandemic, Europe finds itself in the throes of its worst economic collapse in history. Consider this metric: the composite Purchasing Managers Index (PMI), which measures activity in the private sector, just fell to 13.5—the lowest reading ever. Any measure above 50 indicates expansion, while any figure below 50 indicates contraction. Putting that in perspective, at the low point of the global financial crisis Europe's PMI dropped to 36.2. One human aspect of this great collapse is the fact that at least twenty million Europeans are now on paid leave, with their respective governments picking up the tab. While the EU finance ministers have just approved a €500 billion ($540B) stimulus plan (€100B of which will go to subsidize wages), the fight over how it will be funded is going to be brutal. Many EU members believe the issuance of "corona bonds" is warranted, but Germany stands in opposition to the idea. The internecine battles are going to be epic, but the overriding message is this: Europe's anger at China over the cause of this great meltdown will dramatically shift the concept of trade between the two blocs.
Textiles, Apparel, & Luxury Goods
06. Just when things were looking (slightly) better for L Brands...
The company that Les Wexner started back in 1963 and brought to the public market in 1969, Limited Brands (now L Brands, LB $10), had a good run. After hitting the skids during the financial crisis of 2008/09, the veteran CEO maneuvered the company back to a $30 billion market cap as recently as 2015. Then the long, downhill slide began. The parent of Victoria's Secret, PINK, and Bath & Body Works saw its shares drop from $100 in November of 2015 to $10 this week, bringing its market cap down to $2.8 billion. We had mixed emotions when we heard that the company would be selling a 55% stake in its Victoria's Secret line to private equity firm Sycamore Partners, but at least it would bring in $525 million to the firm's bottom line. Not so fast. Sycamore is now claiming that the company breached covenants in the agreement by laying off workers due to the coronavirus, and it wants out of the deal. Does anyone believe that argument? This was legal speak for "we made a bad decision and want out of the deal." L Brands will vigorously fight the attempted termination, and we believe they should win. But if they do, why would you want to hold shares of a company partly owned by someone who desperately tried to get out of the marriage? Steer clear.
Technology Hardware, Storage, & Peripherals
05. Apple will begin making its own chips, and that is bad news for Intel*
Penn Global Leaders Club member Apple (AAPL $170-$283-$328) will begin selling Mac computers next year equipped with the company's own chips, and that appears to be just the beginning. Project Kalamata calls for the development of a number of different chips for use in everything from the iPhone to the iPad to the Mac lineup of computers. This could present a real threat to the company's current main supplier of semiconductors: Intel (INTC $43-$59-$69). There are multiple reasons for Apple to develop its own chips, but one major catalyst has been the reliance on Intel's technological advancements for the firm's own success. Apple has implicitly blamed a slowdown in Intel chip advances on a slower Mac upgrade cycle. By bringing chip development in-house, the trillion-dollar company would have more control over its own destiny—not to mention the critical supply chain logistics. As for Apple's stock price, the usual suspects are once again lowering their price targets, this time due to the pandemic. And once again, they will be proven wrong. Between INTC @ $59 and a 12 p/e ratio and Apple @ $283 and a 22 p/e ratio, we would choose the latter in an instant.
Interactive Media & Services
04. Facebook takes on Zoom by introducing new videoconferencing tool
It's called Messenger Rooms, and it will enable up to 50 people to meet via videoconference without a time limit, and without cost. Facebook's (FB $137-$190-$224) newest tool for users didn't move the needle much with respect to the company's share price, but the announcement was enough to drop Zoom's (ZM $61-$159-$182) share price by about 15%. Then again, that's a drop in the bucket considering Zoom's price move since the office and the school moved into the homes of most Americans. Facebook said that Messenger Rooms can be joined via phone or computer, and does not require a software download. While "rooms" can be created within the FB or Messenger apps, no Facebook account will be required to use the service. In an apparent dig at Zoom's recent privacy issues, the company said it does not view or listen to any calls, and that the room creator will have complete control over who sees the room and whether or not it will be locked or unlocked to new guests. This is a hyper-competitive space, and we are more concerned about Facebook's loss in ad revenue thanks to the pandemic than we are excited about the new service. As for Zoom, its 1,650 p/e ratio (Facebook's is 30) is a pretty good reason to move with caution. At their current share prices, both companies come with a high risk premium.
Automotive
03. Will fallout from the pandemic boost auto sales in the US?
There has clearly been a move away from individual car ownership in favor of public transportation and ride-sharing services in the US over the past several years. When I was growing up, getting a car was the first (well, maybe second) thing on the minds of most sixteen-year-old kids; but the zeitgeist began to change when millennials started shunning vehicle ownership in favor of rides-as-a-service. Now, thanks to a pandemic which will ultimately create a new generation of germophobes, the automakers may be back in the driver's seat. That being said, we are also looking at a major hit to the pocketbooks of an enormous number of Americans due to the virus. While the automakers are already offering special financing to lube seized-up vehicle sales, investors might be better off looking at the publicly traded used car chains like CarMax (KMX $71) and e-commerce platforms like Carvana (CVNA $92). Among those two choices, CarMax has a much better valuation (they actually turn a profit). Also, look for the automakers to tighten loan standards to reduce future defaults—a factor which could hinder new car sales.
Market Pulse
02. A worrisome start to the week gave way to relatively mild losses
By the close of business on Tuesday, the Dow had given up over 1,200 points and 5% of its value. Ditto the S&P 500 and NASDAQ, percentage-wise. Talk of the dreaded "w" recovery (meaning another leg down to the 23 March bottoms) permeated the business headlines. Without time to get overly worried, however, the markets rallied to end the week only mildly in the red. When the dust settled, the S&P was down roughly 1%, the Dow 2%, and the NASDAQ was flat. Oil was the big story of the week, with May futures going heavily negative on Tuesday and spot prices hitting $9 per barrel. By Friday afternoon, spot prices had climbed back to $17 per barrel, down just 5% for the week. It feels as though emotions are beginning to subside a bit, and we can point to a volatility level of 36 (VIX) to support this thesis. While a number south of 20 would be ideal, 36 is a far cry from the record 83 level recorded on the VIX in the middle of March. It may not feel like it, but the markets are in a confirmed uptrend; the question remains: can it be sustained. The state of Georgia, which began reopening for business, should provide some answers to that question over the coming days.
Under the Radar Investment
01. Stock of the Day: Emergent BioSolutions Inc
Emergent BioSolutions (EBS $72) is a truly fascinating mid-cap ($3.8B) specialty drug manufacturer. The company has two divisions: biodefense and biosciences. The biodefense unit focuses on an extremely timely area: countermeasures that address public health threats. Needless to say, the US government provides a good measure of the funding for this area, and we only see the division growing. Emergent's biosciences unit is primarily focused on hematology and oncology, with a secondary focus on transplants, infectious diseases, and autoimmunity. This mid-cap has growing sales, growing income, and one heck of a strong investment thesis based on current events.
One more little nugget of info: Emergent will manufacture a Covid-19 vaccine in the US which is currently being developed by Johnson & Johnson "at risk," meaning J&J plans to have large doses of the drug on hand even before regulatory approval. The company also has contracts in place to produce vaccines from Novavax (NVAX) and Vaxart (VXRT).
Answer
In addition to the code name "Project X," Circuit City executives, under the leadership of then-CEO Richard Sharp, also called the project "Honest Rick's Used Cars." The company had been evaluating opportunities outside of selling consumer electronics. Sadly, Circuit City no longer exists, but "Honest Rick's" became a thriving, $12 billion business known as CarMax.
Creative corporate leadership...
Admittedly, we love CarMax (KMX). The entire process of finding, buying, and financing a used vehicle can be completed within a matter of hours. The concept of CarMax came from a rather odd place. What company developed the idea under the code name "Project X"?
Penn Trading Desk:
(24 Apr 20) Penn: Place stop on BYND
We added Beyond Meat (BYND $108) to the Penn New Frontier Fund within five minutes of the company's first-ever trade. It is up 102% since then, just under a one-year period. We believe in the long-term viability of this industry-leading firm, but want to protect gains here. If it sells, we can always buy back in the future. Place $99.50 stop on shares.
(24 Apr 20) Penn: Add specialty drugmaker to Intrepid
Added a mid-cap specialty drugmaker focusing on biodefense (w/big government contracts) in the Intrepid. With $3.8B market cap, huge potential w double-digit EPS and net income growth.
(23 Apr 20) Penn: Add medical device small-cap
Added a small-cap medical device maker to Intrepid. Members see the Trading Desk.
(23 Apr 20) Penn: PFE stopped-out, taking profits
Pfizer hit our target price w double-digit gains in Intrepid, raised stop to $37, executed for 10% s/t gain.
(22 Apr 20) Penn: Close DPZ, taking profits
Closed our Domino's Pizza DPZ position in the Intrepid for a 7.72% gain in one week.
(22 Apr 20) Credit Suisse: Raise price target on CMG
After the company reported strong sales for the quarter, Credit Suisse raised its price target on shares of Penn Global Leaders Club member Chipotle (CMG $415-$860-$940) from $900 to $940. See story below.
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Energy Commodities
10. Negative oil prices are about as silly as negative interest rates
We thought we had seen it all when governments around the world began issuing sovereign debt with negative interest rates, implying that anyone who wanted to buy a government bill, note, or bond would have to pay for the right to do so. We just wrapped our head around that insane concept and along comes negative oil prices. No, the gas stations aren't going to begin paying you to fill up your SUV, but the fact that May futures contracts for West Texas crude fell to -$37.63 per barrel does highlight what crazy times we are living through. While the May contracts attracted all of the headlines (of course), the real price of oil is not negative. June contracts are trading around $16/bbl, and subsequent months go up from there, with December sitting around $30/bbl.
As global economies begin coming back online, the price of crude will rise again; in the meantime, however, energy companies are finding it extremely expensive to park all of the oil they have coming out of the ground. Their only option is even less palatable: pay an enormous price for shuttering the fields, many of which may never come back online. The Saudis and the Russians are trying to force the American firms into the second choice so they can regain their "rightful" roles as the world's top two producers, and then jack prices back up. To prevent this, the US government is going to have to provide financial support to the industry. The fact that the two OPEC+ nations undertook this price war in the midst of the pandemic is loathsome—and it now appears to have been coordinated. Devious plans often bring unintended consequences, however. Saudi Arabia and Russia might not want to celebrate just yet.
IT Services
09. IBM beats Q1 expectations, but its warning drove the market lower
Former Penn Global Leaders Club member IBM (IBM $91-$116-$159), which we shed when Ginni Rometty announced that she would be leaving the CEO role, didn't have all that bad of a first quarter: revenues of $17.57 billion were off 3.36% y/y and EPS came in at $1.84 per share, a bit higher than last year's Q1 rate of $1.79. The problem came when management began discussing guidance, or the lack thereof. The company pulled its full-year guidance, and then gave a rather dour outlook on the current mindset of customers. Not only was there a sharp decline in software sales in late March, the feedback they did glean from customers (many weren't responding) pointed to a "cash-conservation" mentality. In turn, this feedback will lead to the company putting many of its big cloud build-out projects on hold. This is an ugly cycle we are witnessing in industry after industry, with the pain being felt by everyone along the vertical chain, but one we had hoped would somewhat bypass the software industry, which operates in the digital world. Apparently, that is not the case. We need to get the economy back up and running before we can gauge just how rapidly companies are willing to exit the bunker and begin spending on growth once again.
Restaurants
08. Penn member Chipotle jumps double-digits on earnings, upgrades
We didn't quite get the bottom, but we came close. We picked up shares of fast-casual restaurant Chipotle Mexican Grill (CMG $415-$894-$940) on the 12th of March—in the heat of the market crash—at $590.85 per share. They fell further, then began their stunning comeback. Shares rose to $894 following the company's first-quarter earnings release. Talk about a restaurant that bucked the trend by embracing digital sales. Sales rose 8% in Q1, to $1.4B, and digital sales rose 81% for the quarter. Customers took advantage of the CMG app to order from home and either have the meals delivered or ready for pick-up on location. Chipotle began embracing the digital platform concept last year, and it has paid off in spades. We agree with many of the analysts who commented that CMG is simply the best growth story in the restaurant space. Shares are up over 50% in the one month since re-adding the chain to the Global Leaders Club.
Global Strategy: Europe
07. Think America has it rough? Check out Europe's economy
We have been writing recently about Europe's great shift in attitude toward China. The country many globalists on the continent saw as the natural replacement for America—the trading partner many of them loathe—has suddenly lost its luster. And that is putting it mildly. Thanks to the pandemic, Europe finds itself in the throes of its worst economic collapse in history. Consider this metric: the composite Purchasing Managers Index (PMI), which measures activity in the private sector, just fell to 13.5—the lowest reading ever. Any measure above 50 indicates expansion, while any figure below 50 indicates contraction. Putting that in perspective, at the low point of the global financial crisis Europe's PMI dropped to 36.2. One human aspect of this great collapse is the fact that at least twenty million Europeans are now on paid leave, with their respective governments picking up the tab. While the EU finance ministers have just approved a €500 billion ($540B) stimulus plan (€100B of which will go to subsidize wages), the fight over how it will be funded is going to be brutal. Many EU members believe the issuance of "corona bonds" is warranted, but Germany stands in opposition to the idea. The internecine battles are going to be epic, but the overriding message is this: Europe's anger at China over the cause of this great meltdown will dramatically shift the concept of trade between the two blocs.
Textiles, Apparel, & Luxury Goods
06. Just when things were looking (slightly) better for L Brands...
The company that Les Wexner started back in 1963 and brought to the public market in 1969, Limited Brands (now L Brands, LB $10), had a good run. After hitting the skids during the financial crisis of 2008/09, the veteran CEO maneuvered the company back to a $30 billion market cap as recently as 2015. Then the long, downhill slide began. The parent of Victoria's Secret, PINK, and Bath & Body Works saw its shares drop from $100 in November of 2015 to $10 this week, bringing its market cap down to $2.8 billion. We had mixed emotions when we heard that the company would be selling a 55% stake in its Victoria's Secret line to private equity firm Sycamore Partners, but at least it would bring in $525 million to the firm's bottom line. Not so fast. Sycamore is now claiming that the company breached covenants in the agreement by laying off workers due to the coronavirus, and it wants out of the deal. Does anyone believe that argument? This was legal speak for "we made a bad decision and want out of the deal." L Brands will vigorously fight the attempted termination, and we believe they should win. But if they do, why would you want to hold shares of a company partly owned by someone who desperately tried to get out of the marriage? Steer clear.
Technology Hardware, Storage, & Peripherals
05. Apple will begin making its own chips, and that is bad news for Intel*
Penn Global Leaders Club member Apple (AAPL $170-$283-$328) will begin selling Mac computers next year equipped with the company's own chips, and that appears to be just the beginning. Project Kalamata calls for the development of a number of different chips for use in everything from the iPhone to the iPad to the Mac lineup of computers. This could present a real threat to the company's current main supplier of semiconductors: Intel (INTC $43-$59-$69). There are multiple reasons for Apple to develop its own chips, but one major catalyst has been the reliance on Intel's technological advancements for the firm's own success. Apple has implicitly blamed a slowdown in Intel chip advances on a slower Mac upgrade cycle. By bringing chip development in-house, the trillion-dollar company would have more control over its own destiny—not to mention the critical supply chain logistics. As for Apple's stock price, the usual suspects are once again lowering their price targets, this time due to the pandemic. And once again, they will be proven wrong. Between INTC @ $59 and a 12 p/e ratio and Apple @ $283 and a 22 p/e ratio, we would choose the latter in an instant.
Interactive Media & Services
04. Facebook takes on Zoom by introducing new videoconferencing tool
It's called Messenger Rooms, and it will enable up to 50 people to meet via videoconference without a time limit, and without cost. Facebook's (FB $137-$190-$224) newest tool for users didn't move the needle much with respect to the company's share price, but the announcement was enough to drop Zoom's (ZM $61-$159-$182) share price by about 15%. Then again, that's a drop in the bucket considering Zoom's price move since the office and the school moved into the homes of most Americans. Facebook said that Messenger Rooms can be joined via phone or computer, and does not require a software download. While "rooms" can be created within the FB or Messenger apps, no Facebook account will be required to use the service. In an apparent dig at Zoom's recent privacy issues, the company said it does not view or listen to any calls, and that the room creator will have complete control over who sees the room and whether or not it will be locked or unlocked to new guests. This is a hyper-competitive space, and we are more concerned about Facebook's loss in ad revenue thanks to the pandemic than we are excited about the new service. As for Zoom, its 1,650 p/e ratio (Facebook's is 30) is a pretty good reason to move with caution. At their current share prices, both companies come with a high risk premium.
Automotive
03. Will fallout from the pandemic boost auto sales in the US?
There has clearly been a move away from individual car ownership in favor of public transportation and ride-sharing services in the US over the past several years. When I was growing up, getting a car was the first (well, maybe second) thing on the minds of most sixteen-year-old kids; but the zeitgeist began to change when millennials started shunning vehicle ownership in favor of rides-as-a-service. Now, thanks to a pandemic which will ultimately create a new generation of germophobes, the automakers may be back in the driver's seat. That being said, we are also looking at a major hit to the pocketbooks of an enormous number of Americans due to the virus. While the automakers are already offering special financing to lube seized-up vehicle sales, investors might be better off looking at the publicly traded used car chains like CarMax (KMX $71) and e-commerce platforms like Carvana (CVNA $92). Among those two choices, CarMax has a much better valuation (they actually turn a profit). Also, look for the automakers to tighten loan standards to reduce future defaults—a factor which could hinder new car sales.
Market Pulse
02. A worrisome start to the week gave way to relatively mild losses
By the close of business on Tuesday, the Dow had given up over 1,200 points and 5% of its value. Ditto the S&P 500 and NASDAQ, percentage-wise. Talk of the dreaded "w" recovery (meaning another leg down to the 23 March bottoms) permeated the business headlines. Without time to get overly worried, however, the markets rallied to end the week only mildly in the red. When the dust settled, the S&P was down roughly 1%, the Dow 2%, and the NASDAQ was flat. Oil was the big story of the week, with May futures going heavily negative on Tuesday and spot prices hitting $9 per barrel. By Friday afternoon, spot prices had climbed back to $17 per barrel, down just 5% for the week. It feels as though emotions are beginning to subside a bit, and we can point to a volatility level of 36 (VIX) to support this thesis. While a number south of 20 would be ideal, 36 is a far cry from the record 83 level recorded on the VIX in the middle of March. It may not feel like it, but the markets are in a confirmed uptrend; the question remains: can it be sustained. The state of Georgia, which began reopening for business, should provide some answers to that question over the coming days.
Under the Radar Investment
01. Stock of the Day: Emergent BioSolutions Inc
Emergent BioSolutions (EBS $72) is a truly fascinating mid-cap ($3.8B) specialty drug manufacturer. The company has two divisions: biodefense and biosciences. The biodefense unit focuses on an extremely timely area: countermeasures that address public health threats. Needless to say, the US government provides a good measure of the funding for this area, and we only see the division growing. Emergent's biosciences unit is primarily focused on hematology and oncology, with a secondary focus on transplants, infectious diseases, and autoimmunity. This mid-cap has growing sales, growing income, and one heck of a strong investment thesis based on current events.
One more little nugget of info: Emergent will manufacture a Covid-19 vaccine in the US which is currently being developed by Johnson & Johnson "at risk," meaning J&J plans to have large doses of the drug on hand even before regulatory approval. The company also has contracts in place to produce vaccines from Novavax (NVAX) and Vaxart (VXRT).
Answer
In addition to the code name "Project X," Circuit City executives, under the leadership of then-CEO Richard Sharp, also called the project "Honest Rick's Used Cars." The company had been evaluating opportunities outside of selling consumer electronics. Sadly, Circuit City no longer exists, but "Honest Rick's" became a thriving, $12 billion business known as CarMax.
Headlines for the Week of 12 Apr 2020—18 Apr 2020
Question (From information in The Penn Wealth Report, Vol 8/Issue 02)
Four pandemics so far...this century...
Keeping in mind that we are only twenty years in, it is sobering to think that we have already witnessed four official pandemics this century. That fact should serve as the catalyst for the world to take action to prevent the next one, at least after we have control of Covid-19. Sadly, the usual suspects will go silent. The first pandemic of the century was the 2003 outbreak known as SARS. Where did this terrible malady, with its 10% mortality rate, originate?
Penn Trading Desk:
(17 Apr 20) Penn: Close DXCM
Closed our Dexcom position in the Intrepid for an 11% gain in four trading sessions.
(16 Apr 20) Penn: Close AMD
Closed our AMD position in the Intrepid for a 10.3% gain in three trading sessions.
Current Intrepid Trading Platform buy-in value: $12,417 (S&P 500 @ 2,875)
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Economics: Work & Pay
10. IMF: Global GDP will shrink 3% this year, grow 5.8% next year
After several years of growth in the mid-3% range, the International Monetary Fund predicts the recession brought on by the pandemic—"the worst since the Great Depression"—will cause global growth to contract by 3% this year. In January, before the world knew of what was going on in Wuhan, the IMF's forecast called for a 3.3% global expansion. There is some good news buried in the latest report, however: the DC-based international organization anticipates a 5.8% rate of growth in 2021 as economies come roaring back to life.
Economics: Work & Pay
09. The UK's pro-China trade policy is changing directions at a rapid clip*
The US has been at odds with the UK recently with respect to the latter's move to court Chinese trade in a post-Brexit world. The most recent dust-up came over Britain's decision to allow Chinese telecom giant Huawei to play a major role in the country's 5G rollout. Now, thanks to British anger over the Chinese coverup of the Covid-19 virus, UK lawmakers from all major parties are demanding that the trade relationship be reviewed. This comes on the heels of a number of African countries filing official complaints with the Chinese government over the way black migrants have been treated in the country since the outbreak. A McDonald's in the industrial city of Guangzhou had a sign on the door barring blacks from entering the restaurant in the wake of the virus.
Economics: Work & Pay
08. J&J actually gives guidance, raises dividend, projects virus vaccine
Last year, most of the talk surrounding health care giant Johnson & Johnson (JNJ $109-$146-$155) involved the firm's ongoing litigation. Now, after bouncing back incredibly well from the virus pounding the shares took (they are now flat YTD), the company has shifted the narrative to more positive talking points. First topic: guidance. While many companies have yanked their guidance for the year due to the pandemic, J&J said the firm expects to see earnings in the range of $7.50 to $7.90 per share. While lowered from previous expectations, those figures are higher than what the Street expected. Second topic: dividend. It is almost becoming heresy for a company to talk about dividends as trillions of taxpayer dollars begin to head out of the Treasury's door to buttress the financial situation of individual Americans and US corporations. Not only did J&J bring the topic up, they announced a 6% increase in the quarterly dividend rate. Third topic: virus vaccine. The company said it plans on being "first to human" with its coronavirus vaccine trials, set to begin as soon as this September. If they go as planned, the company believes it can produce between 600 million and 900 million doses by then end of Q1, 2021. Then, according to the company's CFO, that number can ramp up to one billion doses annually. Shares rose 5% as the earnings conference call was taking place.
Economics: Work & Pay
07. Amazon threatens to stop French deliveries after silly court order
As with many companies in this day-and-age of political correctness run amok, we have a love-hate relationship with Amazon (AMZN $1,626-$2,283-$2,292). Leave it up to the French to put us clearly on the side of the company. This week, a French court gave the $1.1 trillion company twenty-four hours to begin selling only essential goods to citizens. To the average thinking person, the logistics of this seems unfathomable. To a bunch of arrogant French judges sitting on their thrones, this is simply a decree which must be followed. This outrageously stupid ruling gives us an idea as to why Britain voted to leave the European Union, which is essentially led by a group of French and German autocrats. As for Amazon, the company is threatening to halt all activity at its French warehouses until the ruling is overturned. In the meantime, activity will cease between the 16th and 20th (at least) of April so that Amazon can assess its health and safety measures at the locations.
Economics: Work & Pay
06. Viral opportunity: mobile payment use will ramp up dramatically
Let's face it: people don't want to touch anything while out in public any longer. All of the daily tactile actions we would once take without thinking twice about, we now consciously consider. Investors should constantly be asking themselves, "How might the situation before us affect our portfolio, and what needs to be done, if anything?" Take the rise in the use of smartphones to make payments. What was once a novelty at places like Starbucks (SBUX) is rapidly becoming the primary way we transact business. We take our goods to the register, hold our phones or smart watches by a scanner, and voilà, payment made—with zero touch outside of our own devices. Remember how the checkbooks at the grocery store counter suddenly gave way to a debit card swipe? The same migration from physical debit cards to payment apps in our phone is now taking place, and the pandemic is accelerating the movement. Investors could consider companies such as PayPal (PYPL $108, owns Venmo), Square (SQ $58, point-of-sale software), Amazon (AMZN $2,420, Amazon Pay), and Apple (AAPL $287, Apple Pay) as potential ways to take advantage of this movement. Better yet, why not hedge your bets with IPAY ($38.63), the ETFMG Prime Mobile Payments ETF. This fund invests in 38 companies engaged in the development and deployment of software, hardware, architecture, and infrastructure for the payment processing and services industry.
Economics: Work & Pay
05. Penn member Gilead surges after hours following virus drug trials
Penn Global Leaders Club member Gilead Sciences (GILD $61-$84-$86) surged more than 15% after hours on news that the company's Covid-19 antiviral drug remdesivir appears to be showing promise in the University of Chicago's phase 3 drug trials. According to healthcare publication STAT News, most of the patients on the drug had "rapid recoveries in fever and respiratory symptoms" and were discharged in under a week. The university recruited 125 patients with the virus for the late-stage trials, 113 of whom were severely sick with the condition. This drug may well be a game changer. It's nice that one of our pharma holdings developed the drug; but it is enormous that a potential blockbuster was developed this quickly.
Economics: Work & Pay
04. Chinese misinformation can't hide fact that their economy is reeling
Our first response was anger. China, the country responsible for a global recession and tens of trillions of dollars lost in a matter of months, was boasting that their economy was nearly fully recovered from the pandemic. After that initial emotional response, however, we began looking at the facts; facts which China would never admit to. GDP: China's economy shrank 6.8% (at least) in Q1—the country's first contraction in decades, and the worst performance since it began reporting GDP data back in 1992. Retail sales: dropped 16% in March. Exports: fell 6.6% in March, while imports only fell 0.9%—expect the export numbers to look a lot worse in Q2 due to the economic pain China foisted upon the world. The WTO reported that 2020 could reflect the worst collapse in international trade since the Great Depression, and no country would be hurt more than China by that condition. Loss of global prestige: China has taken no responsibility for the virus which originated in Wuhan, even floating a trial balloon that it emanated from a DoD lab in the US. The worldwide outrage at China over the virus will manifest itself in a number of ways, including a review of trade dependence on the nation. China claims that it is back up and running, with even Wuhan factories humming along at full speed. Deep inside the bowels of the Communist Party of China, however, there is angst and finger-pointing going on, with even General Secretary Xi Jinping feeling the heat.
Economics: Work & Pay
03. Don't forget small-caps on your market comeback strategy list
As we enter a recession, small-cap stocks—companies valued between roughly $300 million and $2 billion—tend to get hit the hardest. And that makes sense, as these firms generally operate on thinner margins and have less room for error, or to maneuver in tough economic times. It is hard to imagine a worse scenario for small-caps than a complete shutdown of the economy. After all, many of these small gems don't operate in the arena of "essential goods," meaning mass layoffs and an uncertain future. However, it is important to note that, while small-caps may lead us into a recession, they also generally lead us out. The graph is a case-in-point: the Russell 2000 was down a whopping 41% in the one month period between mid-February and mid-March. Since that time, the index has rallied an impressive 22%. Considering ETFs that track the Russell 2000 carry both the winners and losers, the best bet is to create a list of specific names to own as we emerge from the downturn; companies that should thrive (e.g. not retail) in the post-virus environment. A few names to get you started: cloud-based security and compliance solutions provider Qualys Inc (QLYS $106); telecom provider Acacia Communications (ACIA $68), and medical products firm Tactile Systems Tech (TCMD $50).
Economics: Work & Pay
02. A wobbly start, but a solid finish to the week
After last week's strong finish in the markets, Monday came in looking like a dud. Was the prior week yet another head fake on the way back towards testing the lows? Tuesday made us feel better, then Wednesday came and kicked us again, as the S&P dropped 63 points (2.2%). No wonder investors are on edge. Despite the now-commonplace heavy volatility of the week, we actually cobbled together a decent five sessions. The NASDAQ led the charge, up 6.09%, while the Dow—thanks to laggard Boeing (BA)—brought up the rear with a 2.21% gain. Incredibly, following an OPEC+ agreement to cut 10% of the world's oil production, crude finished the week down yet another 23%, closing at $18.14 per barrel.
Economics: Work & Pay
01. Stock of the Day: BioMarin Pharmaceutical Inc.
BioMarin Pharmaceutical (BMRN $63-$87-$97) is a US-based biotech which focuses on rare-disease therapies. We first wrote about this $15 billion dynamic company three years ago, and find it at a very attractive price point yet again. It arguably holds monopolies in a number of rare-disease niche markets, and has formed alliances with larger biotech firms to develop, manufacture, and market a number of potentially life-saving drugs. The company’s approved drugs have been granted orphan-drug status, meaning they have seven years of market exclusivity in the US, and ten years in the European Union. The company’s operating revenue has increased every year for the past decade, with sales of $1.7 billion in 2019 (steadily up from $370 million a decade ago). We still consider BMRN to be on the short list of takeover candidates in the industry. The company's shares recently broke out of a cup with handle pattern and appear to have room to run.
(Disclaimer: BioMarin is a member of the Penn New Frontier Fund.)
Answer
SARS, or severe acute respiratory syndrome, originated in a marketplace in China's Guangdong Province; an area filled with caged animals of all types—wild and domesticated—awaiting purchase and slaughter. Does any of this sound remotely familiar?
Media & Entertainment
For Disney, the pandemic has done the unthinkable: closed its theme parks for months, thus proving the brilliance of Disney+. When an industry analyst would appear on one of the business networks, I would always give him or her automatic deference. After all, they are being paid big bucks to know their respective corner of the market inside and out, right? My automatic respect for these so-called gurus disappeared years ago, and some of their comments on The Walt Disney Company (DIS $79-$106-$154) just prior to the Disney+ streaming service rollout are a great example as to why. A theme among industry analysts was that the $200 billion entertainment giant would lose focus if it went big into the streaming business, taking the eye off the ball of their main source of revenues: the theme parks. Granted, nobody could have predicted that a global disaster would come along and force the closure of every Disney theme park around the world, but the company is looking rather brilliant right now thanks to that very diversification plan. Not only is Disney+ an instant success, it is also shattering even the company's own projections. Management had hoped to have 40 million subscribers by the end of 2020, and between 60M and 90M by the end of 2024. The division just recorded its 50 millionth paid subscriber. Suddenly, analysts are predicting 70M subs by summer, and 80M by early next year. Disney+, which just launched in the middle of November of 2019, now has one-third as many subscribers as Netflix (NFLX), and it just began operating in India—a country filled with movie-crazed citizens. And remember, when the parks do re-open, the shiny new Star Wars: Galaxy's Edge will be waiting to transport visitors to a faraway land: a welcome respite after living through a global pandemic and forced quarantine. We are still a bit bothered by Bob Iger's surprise departure as CEO, and the way it was announced, but we believe the company is a steal with its shares sitting in the low $100s. (Disclaimer: DIS holds position #12 in the Penn Global Leaders Club.
Commercial Banks
JP Morgan raises borrowing standards for home buyers and the middle class will be the group paying the price. There is no doubt that Congress' politically-motivated antics, combined with the political hacks at Fannie Mae and Freddie Mac at the time (who got rich in the process—remember Franklin Delano Raines?), directly led to the financial meltdown of 2008-2009. Of course, the big banks were willing accomplices, as Congress gave them cover to make loans they knew would probably never be repaid—they just repackaged them in giant hot potatoes and made sure they weren't the ones who got burnt. At first blush, and keeping the financial meltdown in mind, JP Morgan's (JPM $77-$103-$141) latest tightening of home loan standards—raise the credit score required and demand a 20% down payment to help assure the loans don't go south—might seem like a good idea. The bank argues they are simply using proper risk management techniques forced upon them by the economic fallout of the pandemic. But dig a little deeper, and something smells rotten. Let's turn the standard five economic quintiles into three to illustrate our point: the wealthy, the middle class, and low income households. The so-called "wealthy" will have no problem with the 20% down payment. Low income households can take advantage of the company's Chase DreaMaker Mortgage Program, which slashes the credit score requirement and just requires a 3% down payment (which can be borrowed!). That leaves the wide swath known collectively as the middle class. Assuming you pass the credit score requirement (JPM changed it to 18 points above the average American's score of 682), a $425,000 home would cost you $85,000 for the down payment alone—regardless of your ability to pay back the loan based on income levels. We imagine many will cheer this decision, but we don't: something tells us it won't reduce the number of loans going bad (DreaMaker will make sure of that), but it will reduce the number of middle class Americans who can buy a home, at least through JP Morgan. As if the home builders aren't going to be hit hard enough from the pandemic. Banks can be an effective tool for Americans wishing to get ahead in life—from providing home loans to funding a new or existing business. But a word of caution: Never consider the banks an ally. Their revenues are generated from customers paying interest on loans (probably confiscatory if the loans are on revolving credit) and service/account fees. On assets held, the banks make their money off the difference between what they pay savers and what they charge borrowers. None of this is necessarily bad, but the financial goal in life should be to have enough money to serve as your own bank! Chase's comical name for their credit card aside, that is the real meaning of "freedom."
Four pandemics so far...this century...
Keeping in mind that we are only twenty years in, it is sobering to think that we have already witnessed four official pandemics this century. That fact should serve as the catalyst for the world to take action to prevent the next one, at least after we have control of Covid-19. Sadly, the usual suspects will go silent. The first pandemic of the century was the 2003 outbreak known as SARS. Where did this terrible malady, with its 10% mortality rate, originate?
Penn Trading Desk:
(17 Apr 20) Penn: Close DXCM
Closed our Dexcom position in the Intrepid for an 11% gain in four trading sessions.
(16 Apr 20) Penn: Close AMD
Closed our AMD position in the Intrepid for a 10.3% gain in three trading sessions.
Current Intrepid Trading Platform buy-in value: $12,417 (S&P 500 @ 2,875)
Members can see all trades made in the five Penn strategies by signing into the Penn Trading Desk.
Economics: Work & Pay
10. IMF: Global GDP will shrink 3% this year, grow 5.8% next year
After several years of growth in the mid-3% range, the International Monetary Fund predicts the recession brought on by the pandemic—"the worst since the Great Depression"—will cause global growth to contract by 3% this year. In January, before the world knew of what was going on in Wuhan, the IMF's forecast called for a 3.3% global expansion. There is some good news buried in the latest report, however: the DC-based international organization anticipates a 5.8% rate of growth in 2021 as economies come roaring back to life.
Economics: Work & Pay
09. The UK's pro-China trade policy is changing directions at a rapid clip*
The US has been at odds with the UK recently with respect to the latter's move to court Chinese trade in a post-Brexit world. The most recent dust-up came over Britain's decision to allow Chinese telecom giant Huawei to play a major role in the country's 5G rollout. Now, thanks to British anger over the Chinese coverup of the Covid-19 virus, UK lawmakers from all major parties are demanding that the trade relationship be reviewed. This comes on the heels of a number of African countries filing official complaints with the Chinese government over the way black migrants have been treated in the country since the outbreak. A McDonald's in the industrial city of Guangzhou had a sign on the door barring blacks from entering the restaurant in the wake of the virus.
Economics: Work & Pay
08. J&J actually gives guidance, raises dividend, projects virus vaccine
Last year, most of the talk surrounding health care giant Johnson & Johnson (JNJ $109-$146-$155) involved the firm's ongoing litigation. Now, after bouncing back incredibly well from the virus pounding the shares took (they are now flat YTD), the company has shifted the narrative to more positive talking points. First topic: guidance. While many companies have yanked their guidance for the year due to the pandemic, J&J said the firm expects to see earnings in the range of $7.50 to $7.90 per share. While lowered from previous expectations, those figures are higher than what the Street expected. Second topic: dividend. It is almost becoming heresy for a company to talk about dividends as trillions of taxpayer dollars begin to head out of the Treasury's door to buttress the financial situation of individual Americans and US corporations. Not only did J&J bring the topic up, they announced a 6% increase in the quarterly dividend rate. Third topic: virus vaccine. The company said it plans on being "first to human" with its coronavirus vaccine trials, set to begin as soon as this September. If they go as planned, the company believes it can produce between 600 million and 900 million doses by then end of Q1, 2021. Then, according to the company's CFO, that number can ramp up to one billion doses annually. Shares rose 5% as the earnings conference call was taking place.
Economics: Work & Pay
07. Amazon threatens to stop French deliveries after silly court order
As with many companies in this day-and-age of political correctness run amok, we have a love-hate relationship with Amazon (AMZN $1,626-$2,283-$2,292). Leave it up to the French to put us clearly on the side of the company. This week, a French court gave the $1.1 trillion company twenty-four hours to begin selling only essential goods to citizens. To the average thinking person, the logistics of this seems unfathomable. To a bunch of arrogant French judges sitting on their thrones, this is simply a decree which must be followed. This outrageously stupid ruling gives us an idea as to why Britain voted to leave the European Union, which is essentially led by a group of French and German autocrats. As for Amazon, the company is threatening to halt all activity at its French warehouses until the ruling is overturned. In the meantime, activity will cease between the 16th and 20th (at least) of April so that Amazon can assess its health and safety measures at the locations.
Economics: Work & Pay
06. Viral opportunity: mobile payment use will ramp up dramatically
Let's face it: people don't want to touch anything while out in public any longer. All of the daily tactile actions we would once take without thinking twice about, we now consciously consider. Investors should constantly be asking themselves, "How might the situation before us affect our portfolio, and what needs to be done, if anything?" Take the rise in the use of smartphones to make payments. What was once a novelty at places like Starbucks (SBUX) is rapidly becoming the primary way we transact business. We take our goods to the register, hold our phones or smart watches by a scanner, and voilà, payment made—with zero touch outside of our own devices. Remember how the checkbooks at the grocery store counter suddenly gave way to a debit card swipe? The same migration from physical debit cards to payment apps in our phone is now taking place, and the pandemic is accelerating the movement. Investors could consider companies such as PayPal (PYPL $108, owns Venmo), Square (SQ $58, point-of-sale software), Amazon (AMZN $2,420, Amazon Pay), and Apple (AAPL $287, Apple Pay) as potential ways to take advantage of this movement. Better yet, why not hedge your bets with IPAY ($38.63), the ETFMG Prime Mobile Payments ETF. This fund invests in 38 companies engaged in the development and deployment of software, hardware, architecture, and infrastructure for the payment processing and services industry.
Economics: Work & Pay
05. Penn member Gilead surges after hours following virus drug trials
Penn Global Leaders Club member Gilead Sciences (GILD $61-$84-$86) surged more than 15% after hours on news that the company's Covid-19 antiviral drug remdesivir appears to be showing promise in the University of Chicago's phase 3 drug trials. According to healthcare publication STAT News, most of the patients on the drug had "rapid recoveries in fever and respiratory symptoms" and were discharged in under a week. The university recruited 125 patients with the virus for the late-stage trials, 113 of whom were severely sick with the condition. This drug may well be a game changer. It's nice that one of our pharma holdings developed the drug; but it is enormous that a potential blockbuster was developed this quickly.
Economics: Work & Pay
04. Chinese misinformation can't hide fact that their economy is reeling
Our first response was anger. China, the country responsible for a global recession and tens of trillions of dollars lost in a matter of months, was boasting that their economy was nearly fully recovered from the pandemic. After that initial emotional response, however, we began looking at the facts; facts which China would never admit to. GDP: China's economy shrank 6.8% (at least) in Q1—the country's first contraction in decades, and the worst performance since it began reporting GDP data back in 1992. Retail sales: dropped 16% in March. Exports: fell 6.6% in March, while imports only fell 0.9%—expect the export numbers to look a lot worse in Q2 due to the economic pain China foisted upon the world. The WTO reported that 2020 could reflect the worst collapse in international trade since the Great Depression, and no country would be hurt more than China by that condition. Loss of global prestige: China has taken no responsibility for the virus which originated in Wuhan, even floating a trial balloon that it emanated from a DoD lab in the US. The worldwide outrage at China over the virus will manifest itself in a number of ways, including a review of trade dependence on the nation. China claims that it is back up and running, with even Wuhan factories humming along at full speed. Deep inside the bowels of the Communist Party of China, however, there is angst and finger-pointing going on, with even General Secretary Xi Jinping feeling the heat.
Economics: Work & Pay
03. Don't forget small-caps on your market comeback strategy list
As we enter a recession, small-cap stocks—companies valued between roughly $300 million and $2 billion—tend to get hit the hardest. And that makes sense, as these firms generally operate on thinner margins and have less room for error, or to maneuver in tough economic times. It is hard to imagine a worse scenario for small-caps than a complete shutdown of the economy. After all, many of these small gems don't operate in the arena of "essential goods," meaning mass layoffs and an uncertain future. However, it is important to note that, while small-caps may lead us into a recession, they also generally lead us out. The graph is a case-in-point: the Russell 2000 was down a whopping 41% in the one month period between mid-February and mid-March. Since that time, the index has rallied an impressive 22%. Considering ETFs that track the Russell 2000 carry both the winners and losers, the best bet is to create a list of specific names to own as we emerge from the downturn; companies that should thrive (e.g. not retail) in the post-virus environment. A few names to get you started: cloud-based security and compliance solutions provider Qualys Inc (QLYS $106); telecom provider Acacia Communications (ACIA $68), and medical products firm Tactile Systems Tech (TCMD $50).
Economics: Work & Pay
02. A wobbly start, but a solid finish to the week
After last week's strong finish in the markets, Monday came in looking like a dud. Was the prior week yet another head fake on the way back towards testing the lows? Tuesday made us feel better, then Wednesday came and kicked us again, as the S&P dropped 63 points (2.2%). No wonder investors are on edge. Despite the now-commonplace heavy volatility of the week, we actually cobbled together a decent five sessions. The NASDAQ led the charge, up 6.09%, while the Dow—thanks to laggard Boeing (BA)—brought up the rear with a 2.21% gain. Incredibly, following an OPEC+ agreement to cut 10% of the world's oil production, crude finished the week down yet another 23%, closing at $18.14 per barrel.
Economics: Work & Pay
01. Stock of the Day: BioMarin Pharmaceutical Inc.
BioMarin Pharmaceutical (BMRN $63-$87-$97) is a US-based biotech which focuses on rare-disease therapies. We first wrote about this $15 billion dynamic company three years ago, and find it at a very attractive price point yet again. It arguably holds monopolies in a number of rare-disease niche markets, and has formed alliances with larger biotech firms to develop, manufacture, and market a number of potentially life-saving drugs. The company’s approved drugs have been granted orphan-drug status, meaning they have seven years of market exclusivity in the US, and ten years in the European Union. The company’s operating revenue has increased every year for the past decade, with sales of $1.7 billion in 2019 (steadily up from $370 million a decade ago). We still consider BMRN to be on the short list of takeover candidates in the industry. The company's shares recently broke out of a cup with handle pattern and appear to have room to run.
(Disclaimer: BioMarin is a member of the Penn New Frontier Fund.)
Answer
SARS, or severe acute respiratory syndrome, originated in a marketplace in China's Guangdong Province; an area filled with caged animals of all types—wild and domesticated—awaiting purchase and slaughter. Does any of this sound remotely familiar?
Media & Entertainment
For Disney, the pandemic has done the unthinkable: closed its theme parks for months, thus proving the brilliance of Disney+. When an industry analyst would appear on one of the business networks, I would always give him or her automatic deference. After all, they are being paid big bucks to know their respective corner of the market inside and out, right? My automatic respect for these so-called gurus disappeared years ago, and some of their comments on The Walt Disney Company (DIS $79-$106-$154) just prior to the Disney+ streaming service rollout are a great example as to why. A theme among industry analysts was that the $200 billion entertainment giant would lose focus if it went big into the streaming business, taking the eye off the ball of their main source of revenues: the theme parks. Granted, nobody could have predicted that a global disaster would come along and force the closure of every Disney theme park around the world, but the company is looking rather brilliant right now thanks to that very diversification plan. Not only is Disney+ an instant success, it is also shattering even the company's own projections. Management had hoped to have 40 million subscribers by the end of 2020, and between 60M and 90M by the end of 2024. The division just recorded its 50 millionth paid subscriber. Suddenly, analysts are predicting 70M subs by summer, and 80M by early next year. Disney+, which just launched in the middle of November of 2019, now has one-third as many subscribers as Netflix (NFLX), and it just began operating in India—a country filled with movie-crazed citizens. And remember, when the parks do re-open, the shiny new Star Wars: Galaxy's Edge will be waiting to transport visitors to a faraway land: a welcome respite after living through a global pandemic and forced quarantine. We are still a bit bothered by Bob Iger's surprise departure as CEO, and the way it was announced, but we believe the company is a steal with its shares sitting in the low $100s. (Disclaimer: DIS holds position #12 in the Penn Global Leaders Club.
Commercial Banks
JP Morgan raises borrowing standards for home buyers and the middle class will be the group paying the price. There is no doubt that Congress' politically-motivated antics, combined with the political hacks at Fannie Mae and Freddie Mac at the time (who got rich in the process—remember Franklin Delano Raines?), directly led to the financial meltdown of 2008-2009. Of course, the big banks were willing accomplices, as Congress gave them cover to make loans they knew would probably never be repaid—they just repackaged them in giant hot potatoes and made sure they weren't the ones who got burnt. At first blush, and keeping the financial meltdown in mind, JP Morgan's (JPM $77-$103-$141) latest tightening of home loan standards—raise the credit score required and demand a 20% down payment to help assure the loans don't go south—might seem like a good idea. The bank argues they are simply using proper risk management techniques forced upon them by the economic fallout of the pandemic. But dig a little deeper, and something smells rotten. Let's turn the standard five economic quintiles into three to illustrate our point: the wealthy, the middle class, and low income households. The so-called "wealthy" will have no problem with the 20% down payment. Low income households can take advantage of the company's Chase DreaMaker Mortgage Program, which slashes the credit score requirement and just requires a 3% down payment (which can be borrowed!). That leaves the wide swath known collectively as the middle class. Assuming you pass the credit score requirement (JPM changed it to 18 points above the average American's score of 682), a $425,000 home would cost you $85,000 for the down payment alone—regardless of your ability to pay back the loan based on income levels. We imagine many will cheer this decision, but we don't: something tells us it won't reduce the number of loans going bad (DreaMaker will make sure of that), but it will reduce the number of middle class Americans who can buy a home, at least through JP Morgan. As if the home builders aren't going to be hit hard enough from the pandemic. Banks can be an effective tool for Americans wishing to get ahead in life—from providing home loans to funding a new or existing business. But a word of caution: Never consider the banks an ally. Their revenues are generated from customers paying interest on loans (probably confiscatory if the loans are on revolving credit) and service/account fees. On assets held, the banks make their money off the difference between what they pay savers and what they charge borrowers. None of this is necessarily bad, but the financial goal in life should be to have enough money to serve as your own bank! Chase's comical name for their credit card aside, that is the real meaning of "freedom."
Headlines for the Week of 05 Apr 2020—11 Apr 2020
Energy Commodities
Saudi Arabia and Russia agree to cut oil production, but we believe this is predicated on the US joining in. The world produces roughly 100 million barrels per day of oil. Of that amount, America is now the leading producer, at 13M bpd. Saudi Arabia comes in second, at 12M bpd, and Russia is third, at 11M bpd. After President Trump spoke directly with Crown Prince MBS of Saudi and President Putin of Russia, he announced that the two energy-reliant nations had agreed to a much-needed 10M bpd cut, or roughly 10% of current production. While the two have implicitly backed what the president is saying, we believe there is a little more to the story. As the leading producer in the world, it seems as though MBS and Putin expect the US to play a major role in those cuts. While we don't know exactly how Trump's meeting with oil executives in the White House (the day after his OPEC+ calls) went, we are seeing some signs of movement among the big US producers. Exxon Mobil (XOM $30-$42-$83) announced a 30% reduction in capital expenditures, which would almost certainly mean cuts in production—the largest CapEx cuts will be in the Permian Basin. US shale producer Continental Resources (CLR $7-$11-$52), another White House meeting participant, just announced that it would slash April and May production by 30%, suspending its dividend along the way. In fact, Continental CEO and famed energy maven Harold Hamm went as far as telling an industry publication that US producers had all but promised a 30% production cut. He said President Trump went out of his way to tell executives that no coordination would be needed (no doubt to tamp down the appearance of collusion), but that he expected they would do the right thing for their companies, and the industry as a whole. Will that be enough to assuage the Saudis and the Russians? Actually, it probably will be. No country is exactly in the catbird seat with respect to this issue, and none of the major producing nations want oil to remain in the $20s—or lower. That should be enough for the 10M bpd cut to actually happen. Interestingly, crude prices were falling mid-week (to $24 or so) despite the talk of curtailing production. That seems to be due to an OPEC+ video meeting being delayed until later in the week. Despite the drop, oil is still up around 20% in the past week.
Specialty Retail
Penn member Tractor Supply to hire 5,000 new workers, extend bonus pay to front-line workers. Tractor Supply Co (TSCO $64-$88-$114) is simply one of those stalwart companies we have never had to worry about. When we first added the retail farm and ranch supply store to the Global Leaders Club back in August of 2017 at $52.11, it had recently dropped from around $80 per share and we knew it was highly undervalued. Now, in the midst of a horrendous wave of retail layoffs, Tractor Supply is bucking the trend: the company announced that it was looking to hire 5,000 new team members for its 1,900 stores and eight distribution centers around the US. It will also be adding greeters at each store to drive awareness of social distancing among customers, monitor occupancy, and help clean key pieces of highly-touched items such as carts and registers. New members will also help with curbside delivery for customers who order online and wish to pick up. In addition to the new hires, the firm has announced it would extend its $2 per hour bonus for front-line workers until the 9th of May. Finally, the $10 billion Tennessee-based firm will waive the co-pay requirement for employees wishing to use the telemedicine service from the company's health plan. Although shares of Tractor Supply certainly fell along with virtually every other company during the Covid downturn, they have rebounded nicely, and we expect them to climb back above $100 in the near future. Like, this year.
Saudi Arabia and Russia agree to cut oil production, but we believe this is predicated on the US joining in. The world produces roughly 100 million barrels per day of oil. Of that amount, America is now the leading producer, at 13M bpd. Saudi Arabia comes in second, at 12M bpd, and Russia is third, at 11M bpd. After President Trump spoke directly with Crown Prince MBS of Saudi and President Putin of Russia, he announced that the two energy-reliant nations had agreed to a much-needed 10M bpd cut, or roughly 10% of current production. While the two have implicitly backed what the president is saying, we believe there is a little more to the story. As the leading producer in the world, it seems as though MBS and Putin expect the US to play a major role in those cuts. While we don't know exactly how Trump's meeting with oil executives in the White House (the day after his OPEC+ calls) went, we are seeing some signs of movement among the big US producers. Exxon Mobil (XOM $30-$42-$83) announced a 30% reduction in capital expenditures, which would almost certainly mean cuts in production—the largest CapEx cuts will be in the Permian Basin. US shale producer Continental Resources (CLR $7-$11-$52), another White House meeting participant, just announced that it would slash April and May production by 30%, suspending its dividend along the way. In fact, Continental CEO and famed energy maven Harold Hamm went as far as telling an industry publication that US producers had all but promised a 30% production cut. He said President Trump went out of his way to tell executives that no coordination would be needed (no doubt to tamp down the appearance of collusion), but that he expected they would do the right thing for their companies, and the industry as a whole. Will that be enough to assuage the Saudis and the Russians? Actually, it probably will be. No country is exactly in the catbird seat with respect to this issue, and none of the major producing nations want oil to remain in the $20s—or lower. That should be enough for the 10M bpd cut to actually happen. Interestingly, crude prices were falling mid-week (to $24 or so) despite the talk of curtailing production. That seems to be due to an OPEC+ video meeting being delayed until later in the week. Despite the drop, oil is still up around 20% in the past week.
Specialty Retail
Penn member Tractor Supply to hire 5,000 new workers, extend bonus pay to front-line workers. Tractor Supply Co (TSCO $64-$88-$114) is simply one of those stalwart companies we have never had to worry about. When we first added the retail farm and ranch supply store to the Global Leaders Club back in August of 2017 at $52.11, it had recently dropped from around $80 per share and we knew it was highly undervalued. Now, in the midst of a horrendous wave of retail layoffs, Tractor Supply is bucking the trend: the company announced that it was looking to hire 5,000 new team members for its 1,900 stores and eight distribution centers around the US. It will also be adding greeters at each store to drive awareness of social distancing among customers, monitor occupancy, and help clean key pieces of highly-touched items such as carts and registers. New members will also help with curbside delivery for customers who order online and wish to pick up. In addition to the new hires, the firm has announced it would extend its $2 per hour bonus for front-line workers until the 9th of May. Finally, the $10 billion Tennessee-based firm will waive the co-pay requirement for employees wishing to use the telemedicine service from the company's health plan. Although shares of Tractor Supply certainly fell along with virtually every other company during the Covid downturn, they have rebounded nicely, and we expect them to climb back above $100 in the near future. Like, this year.
Headlines for the Week of 29 Mar 2020—04 Apr 2020
Market Pulse
Goodbye and good riddance to Q1, it is time to focus on our comeback plan. Goodbye, good riddance, adios, sayonara, and whatever the Chinese word is for "see you later" (since this is all China's fault) to the first quarter of 2020. If someone had been in a deep sleep and woke to see only the fallout, they might have figured a rogue North Korean nuke found its way to the California coast, or that Iran had successfully engaged in biological warfare with the United States. The second guess wouldn't have been far off, as what really happened amounts to a biological weapon being released on the world by the controlled confines of communist China. What's done is done, so now we must calculate how to proceed.
You wouldn't know it by watching or reading the news, but there are some positive signs on the economic and investment front. From an investment standpoint, the recent market downturn—at least thus far—looks almost identical to the two-month-long downturn which occurred in the fall of '87. And that means we should be able to pull off a rapid recovery in the markets like we witnessed in 1988. This was not a crisis caused by a systemic problem, although governments around the world are spending tens of trillions of dollars to staunch the economic impact. While that massive government spending will come back to haunt us in the future (despite the fact that it is absolutely needed to help individuals pay their bills in the here and now), that is an issue for down the road.
To be sure, some businesses will never come back. Many retailers who were teetering on the edge of solvency and a number of small companies in the food services and entertainment industry will have a difficult time surviving the shutdown, and that is tremendously sad. However, the fact that most firms were able to maintain their operations with a temporarily home-based workforce means that they should be able to ramp things back up to full speed shortly after the immediate crisis ends. That is something which would not have been possible even a generation ago, so here's to the technology that made it possible. Most of the high tech companies saw their shares wantonly sold during the downturn, and they now sit at multi-year low valuations. A stock market priced for perfection in January suddenly looks more reasonably-valued. And that means opportunity for investors.
New bull markets always begin when the news is still bad. Checkmark on that point. Countries which were hit the earliest by the virus are beginning to ramp their operations back up with relative speed; another good sign. Despite three rough days in the markets last week we are beginning to see volatility taper off a bit, and lower volume during Friday's selloff—caused by the shocking jobs report we all knew was coming—was another good sign. Whether are in the midst of a w- or a u-shaped recovery, now is the time to prepare a list of the companies which will spring back the quickest.
While we continue to sit on large amounts of cash, we are beginning to slowly take positions in these companies—the most recent being the new Raytheon Technologies (RTX). That being said we enter no new position, company or ETF, without a tight stop-loss order in place. If the markets turn south yet again, we may well stop-out with a small loss on these positions, but the goal is to take advantage of a post-virus rally. We are sticking with holdings that have a wide moat (protection from competitors) and unique/needed goods and services. Microsoft (MSFT) is another good example. Again, the key is to bring portfolios back as efficiently as possible, but with the proper protection in place. We still maintain that a 50% jump in the markets between the bottom (which hopefully took place on Monday the 23rd of March) and December 31st is highly possible. Incredibly, that would just bring us back to early February levels.
Aerospace & Defense
The new United Technologies/Raytheon entity begins trading with a new ticker. Two of our favorite industrial/aerospace and defense companies have merged into one, and the new entity began trading Friday under a fresh ticker. Raytheon (formerly RTN) and United Technologies (formerly UTX) finalized their "merger of equals" this week, creating Raytheon Technologies (RTX), selling for around $50 per share. With the new firm quickly shedding its non-defense Otis Elevator and Carrier units, Raytheon Technologies will be laser focused on what it does best: serving the military and civilian aerospace market. Not only will this firm be a dominant defense player, it also owns Pratt & Whitney, chief supplier of aircraft engines. With aggregate sales of around $75 billion per year, the size and scope of Raytheon will allow for some remarkable accomplishments. Complete systems, from propulsion to instruments to hydraulic controls, can now be bundled together and packaged for customers. The synergies should begin paying off immediately. With Boeing (BA) in the gutter, RTX is the one dominant industry player to own. Despite the global costs of dealing with the virus from China, defense spending will not go down. Additionally, RTX will be the main recipient of dollars flowing in from the nascent civilian space race. Oh, and just to sweeten the deal, RTX offers a healthy—and completely safe—dividend yield of 5.8%.
Crude oil spiked double digits after President Trump's conversation with Putin and MBS; expectations are for a 10B/bpd cut...
Restaurants
Muddy Waters' prescient January call on China's Luckin Coffee. Back in January, shares of China's Luckin Coffee (LK $5-$5-$51) cratered after Muddy Waters Research disclosed a short position in the firm, citing highly-questionable financials coming from management. That 50% drop pales in comparison to what happened with LK shares following an investigation confirming those fears this week: the stock fell 80% on news that the firm's COO completely fabricated sales figures. Several other executives were named as co-conspirators.
It was just last year that we were being told Luckin posed an existential threat to Starbucks (SBUX), at least in Asia. A major US business publication wrote, just one year ago, that "(Starbucks') large presence in China is under threat by a new, agile, and fierce competitor." The Xinhua News Agency couldn't have written it any better, and they are an extension of the Communist Party of China. Now, however, the chickens have come home to roost. The news publication that wrote the slanted article will never take responsibility for their irresponsibility ("How could we have known they were cooking the books," we imagine them arguing), but the facts have been laid bare. Luckin's $12 billion market cap has been reduced to $1.5 billion, and nobody has heard from COO Jian Liu.
Muddy Waters, which based their short sale on an 89-page anonymous report sent to them in January, has been vindicated. What's next? Will we find out that the latest coronavirus did actually start at a Wuhan wet market and wasn't created in a US Department of Defense lab? It's a crazy world.
This story highlights the dangers that come with investing in any China-based, publicly-traded company—even if that company is listed on a US exchange. Understand what you are investing in, and if something smells fishy, dig deeper.
(02 Apr 2020) Initial jobless claims hit 6.64 million versus 3.1 million estimated
Personal Finance
The CARES Act suspends required minimum distributions (RMDs) for 2020. While investors who have already taken their required minimum distributions for 2020 appear to be out of luck, the government has offered some reprieve for others: 2020 RMDs have been permanently suspended. With the historic market losses of the first quarter, this is being done to allow those people who were required to take distributions the ability to keep all of their funds working in qualified accounts as the markets stage a comeback. In addition to this relief, 2020 is also the first year of the new required beginning date (RBD) of age 72. The silly half-year rule is no longer in effect ("70 1/2 years old in prior year of distribution..."), which means investors no longer need to calculate when their half-birthday was: if you were 72 in the prior year, an RMD is required. Not counting 2020, that is. Not only has roughly $10 trillion worth of investment value been shaved off of portfolios since mid-February, many companies will be whittling down their dividends to preserve much-needed cash for the economic recovery period. Those are the first two punches income-oriented investors are now facing; the third is the ultra-low interest rates being offered in the bond market, with a Fed funds rate of 0%. We can't see the third condition changing anytime soon.
Beverages & Tobacco
British American Tobacco says it can have a Covid-19 vaccine ready by June. Who knew that the maker of Lucky Strike cigarettes, British American Tobacco (BTI $27-$35-$46), even had a US biotech division? Apparently the $81 billion tobacco giant does, and the company claims its Kentucky BioProcessing (KBP) unit has already cloned a portion of Covid-19's genetic sequence and inserted the antigen into thousands of tobacco plants. The tobacco plant has the ability to grow antigens faster than conventional methods. If testing goes as planned, British American said it can produce between one and three million doses per week of the vaccine by June. For all the destruction in the economy and the stock market throughout this crisis, the way individuals (minus the toilet paper hoarders) and companies from all industries have responded is heartwarming. Here's to British American's success in this endeavor. And one further note: despite its industry, BTI has a rock-solid balance sheet, strong earnings, an 11 P/E ratio, and a 7.5% dividend yield.
(01 Apr 2020) T-Mobile completes merger with Sprint; the "S" ticker is available again...anyone?
(01 Apr 2020) Macy's removed from the S&P 500
East & Southeast Asia
China's divorce rate skyrockets as quarantine is lifted. Last year, there were approximately four million divorce cases filed in China. While the data are only compiled and published once per year in the country, huge lines have been forming outside of divorce lawyers' offices around formerly-quarantined regions of the country, indicating the four million mark will be eclipsed in 2020. Approximately 75% of the cases being filed are initiated by women. In quintessential communist style, judges in the country have final say over whether or not permission will be granted for a divorce application to move forward, but if a couple initiates a second filing (assuming the first was thrown out), the judge normally grants the request. Ironically, in a nation of 1.4 billion citizens, the Chinese government is encouraging couples to not only stay together, but to have more children. The country's birthrate in 2019 was its lowest since the founding of the People's Republic of China in 1949, while the percentage of non-working elderly continues to grow. Also in 2019, the average household income in China was around $4,500 per year.
Multiline Retail
Macy's to furlough most of its 130,000 workers. Back in February, about a week before the great downturn began, we wrote of Macy's (M $5-$5-$26) latest turnaround plan. Actually, we made fun of Macy's latest turnaround plan. We excoriated management for coming up with yet another grand strategic plan with a super-secret code name that would do exactly zilch for the company's real problem: a staff that didn't seem to want to be at work, and disheveled, disorganized departments. When we wrote our commentary, shares of M were sitting at $17, and we recommended steering clear. Now, with the shares at $5, it seems as though the staffing problem will be addressed: the company is about to furlough most of its 130,000 workers. Some might look at the chart and see an incredibly-undervalued diamond in the rough; we just see a company that lost its way—long before a nightmare virus came along. The retailers which are holding up the "best" during the COVID shutdown are the ones that embraced an online presence years ago. Macy's did not, and they are now paying a brutal price. As for the workers, they will receive no pay from the company once furloughed, but will continue to receive health benefits coverage at least through the end of May.
Hotels, Resorts, & Cruise Lines
Eldorado Resorts' shareholders should be out with pitchforks searching for Carl Icahn. We are ambivalent with respect to hedge fund manager/corporate raider Carl Icahn. that being said, we despise him more often that we love him. In fact, his most endearing quality is his disdain for the smarmy Bill Ackman of Pershing Square. It is doubtful their two egos could fit in one room. That is enough of a backdrop for the following story. Last June we wrote of a forced marriage between two debt-laden companies, with Icahn holding the shotgun. Eldorado Resorts (ERI $6-$12-$71), which at the time had a market cap of $4 billion and long-term debt of $3 billion, wanted to acquire the larger Caesars Entertainment (CZR $3-$6-$15), which at the time had a market cap of $7 billion and long-term debt of $9 billion. Why on earth would anyone on the Caesars board ever go for such a harebrained scheme? It seems they agreed only at the "strong urging" of fellow board member Icahn, who would make out like a bandit in the deal. We called it financial engineering of the worst kind. Fast forward nine months. Eldorado is now a $923 million company, and Caesars has a market cap of $4.4 billion. Citing the pandemic, regulators have just informed the two parties that the deal's review would be put on indefinite hold. When they ultimately shoot it down (and they will), Eldorado will be forced to pay an $837 million breakup fee—or roughly what their company is now worth. This story stinks from start to finish. ERI shareholders should be disgusted, and CZR shareholders should run Icahn out of town on a rail and clear the board of anyone who supported this nefarious financial engineering. Disgusting. We've just talked ourselves out of having ambivelence for Icahn; he is, in our humble opinion, a (add your preferred expletive here).
Goodbye and good riddance to Q1, it is time to focus on our comeback plan. Goodbye, good riddance, adios, sayonara, and whatever the Chinese word is for "see you later" (since this is all China's fault) to the first quarter of 2020. If someone had been in a deep sleep and woke to see only the fallout, they might have figured a rogue North Korean nuke found its way to the California coast, or that Iran had successfully engaged in biological warfare with the United States. The second guess wouldn't have been far off, as what really happened amounts to a biological weapon being released on the world by the controlled confines of communist China. What's done is done, so now we must calculate how to proceed.
You wouldn't know it by watching or reading the news, but there are some positive signs on the economic and investment front. From an investment standpoint, the recent market downturn—at least thus far—looks almost identical to the two-month-long downturn which occurred in the fall of '87. And that means we should be able to pull off a rapid recovery in the markets like we witnessed in 1988. This was not a crisis caused by a systemic problem, although governments around the world are spending tens of trillions of dollars to staunch the economic impact. While that massive government spending will come back to haunt us in the future (despite the fact that it is absolutely needed to help individuals pay their bills in the here and now), that is an issue for down the road.
To be sure, some businesses will never come back. Many retailers who were teetering on the edge of solvency and a number of small companies in the food services and entertainment industry will have a difficult time surviving the shutdown, and that is tremendously sad. However, the fact that most firms were able to maintain their operations with a temporarily home-based workforce means that they should be able to ramp things back up to full speed shortly after the immediate crisis ends. That is something which would not have been possible even a generation ago, so here's to the technology that made it possible. Most of the high tech companies saw their shares wantonly sold during the downturn, and they now sit at multi-year low valuations. A stock market priced for perfection in January suddenly looks more reasonably-valued. And that means opportunity for investors.
New bull markets always begin when the news is still bad. Checkmark on that point. Countries which were hit the earliest by the virus are beginning to ramp their operations back up with relative speed; another good sign. Despite three rough days in the markets last week we are beginning to see volatility taper off a bit, and lower volume during Friday's selloff—caused by the shocking jobs report we all knew was coming—was another good sign. Whether are in the midst of a w- or a u-shaped recovery, now is the time to prepare a list of the companies which will spring back the quickest.
While we continue to sit on large amounts of cash, we are beginning to slowly take positions in these companies—the most recent being the new Raytheon Technologies (RTX). That being said we enter no new position, company or ETF, without a tight stop-loss order in place. If the markets turn south yet again, we may well stop-out with a small loss on these positions, but the goal is to take advantage of a post-virus rally. We are sticking with holdings that have a wide moat (protection from competitors) and unique/needed goods and services. Microsoft (MSFT) is another good example. Again, the key is to bring portfolios back as efficiently as possible, but with the proper protection in place. We still maintain that a 50% jump in the markets between the bottom (which hopefully took place on Monday the 23rd of March) and December 31st is highly possible. Incredibly, that would just bring us back to early February levels.
Aerospace & Defense
The new United Technologies/Raytheon entity begins trading with a new ticker. Two of our favorite industrial/aerospace and defense companies have merged into one, and the new entity began trading Friday under a fresh ticker. Raytheon (formerly RTN) and United Technologies (formerly UTX) finalized their "merger of equals" this week, creating Raytheon Technologies (RTX), selling for around $50 per share. With the new firm quickly shedding its non-defense Otis Elevator and Carrier units, Raytheon Technologies will be laser focused on what it does best: serving the military and civilian aerospace market. Not only will this firm be a dominant defense player, it also owns Pratt & Whitney, chief supplier of aircraft engines. With aggregate sales of around $75 billion per year, the size and scope of Raytheon will allow for some remarkable accomplishments. Complete systems, from propulsion to instruments to hydraulic controls, can now be bundled together and packaged for customers. The synergies should begin paying off immediately. With Boeing (BA) in the gutter, RTX is the one dominant industry player to own. Despite the global costs of dealing with the virus from China, defense spending will not go down. Additionally, RTX will be the main recipient of dollars flowing in from the nascent civilian space race. Oh, and just to sweeten the deal, RTX offers a healthy—and completely safe—dividend yield of 5.8%.
Crude oil spiked double digits after President Trump's conversation with Putin and MBS; expectations are for a 10B/bpd cut...
Restaurants
Muddy Waters' prescient January call on China's Luckin Coffee. Back in January, shares of China's Luckin Coffee (LK $5-$5-$51) cratered after Muddy Waters Research disclosed a short position in the firm, citing highly-questionable financials coming from management. That 50% drop pales in comparison to what happened with LK shares following an investigation confirming those fears this week: the stock fell 80% on news that the firm's COO completely fabricated sales figures. Several other executives were named as co-conspirators.
It was just last year that we were being told Luckin posed an existential threat to Starbucks (SBUX), at least in Asia. A major US business publication wrote, just one year ago, that "(Starbucks') large presence in China is under threat by a new, agile, and fierce competitor." The Xinhua News Agency couldn't have written it any better, and they are an extension of the Communist Party of China. Now, however, the chickens have come home to roost. The news publication that wrote the slanted article will never take responsibility for their irresponsibility ("How could we have known they were cooking the books," we imagine them arguing), but the facts have been laid bare. Luckin's $12 billion market cap has been reduced to $1.5 billion, and nobody has heard from COO Jian Liu.
Muddy Waters, which based their short sale on an 89-page anonymous report sent to them in January, has been vindicated. What's next? Will we find out that the latest coronavirus did actually start at a Wuhan wet market and wasn't created in a US Department of Defense lab? It's a crazy world.
This story highlights the dangers that come with investing in any China-based, publicly-traded company—even if that company is listed on a US exchange. Understand what you are investing in, and if something smells fishy, dig deeper.
(02 Apr 2020) Initial jobless claims hit 6.64 million versus 3.1 million estimated
Personal Finance
The CARES Act suspends required minimum distributions (RMDs) for 2020. While investors who have already taken their required minimum distributions for 2020 appear to be out of luck, the government has offered some reprieve for others: 2020 RMDs have been permanently suspended. With the historic market losses of the first quarter, this is being done to allow those people who were required to take distributions the ability to keep all of their funds working in qualified accounts as the markets stage a comeback. In addition to this relief, 2020 is also the first year of the new required beginning date (RBD) of age 72. The silly half-year rule is no longer in effect ("70 1/2 years old in prior year of distribution..."), which means investors no longer need to calculate when their half-birthday was: if you were 72 in the prior year, an RMD is required. Not counting 2020, that is. Not only has roughly $10 trillion worth of investment value been shaved off of portfolios since mid-February, many companies will be whittling down their dividends to preserve much-needed cash for the economic recovery period. Those are the first two punches income-oriented investors are now facing; the third is the ultra-low interest rates being offered in the bond market, with a Fed funds rate of 0%. We can't see the third condition changing anytime soon.
Beverages & Tobacco
British American Tobacco says it can have a Covid-19 vaccine ready by June. Who knew that the maker of Lucky Strike cigarettes, British American Tobacco (BTI $27-$35-$46), even had a US biotech division? Apparently the $81 billion tobacco giant does, and the company claims its Kentucky BioProcessing (KBP) unit has already cloned a portion of Covid-19's genetic sequence and inserted the antigen into thousands of tobacco plants. The tobacco plant has the ability to grow antigens faster than conventional methods. If testing goes as planned, British American said it can produce between one and three million doses per week of the vaccine by June. For all the destruction in the economy and the stock market throughout this crisis, the way individuals (minus the toilet paper hoarders) and companies from all industries have responded is heartwarming. Here's to British American's success in this endeavor. And one further note: despite its industry, BTI has a rock-solid balance sheet, strong earnings, an 11 P/E ratio, and a 7.5% dividend yield.
(01 Apr 2020) T-Mobile completes merger with Sprint; the "S" ticker is available again...anyone?
(01 Apr 2020) Macy's removed from the S&P 500
East & Southeast Asia
China's divorce rate skyrockets as quarantine is lifted. Last year, there were approximately four million divorce cases filed in China. While the data are only compiled and published once per year in the country, huge lines have been forming outside of divorce lawyers' offices around formerly-quarantined regions of the country, indicating the four million mark will be eclipsed in 2020. Approximately 75% of the cases being filed are initiated by women. In quintessential communist style, judges in the country have final say over whether or not permission will be granted for a divorce application to move forward, but if a couple initiates a second filing (assuming the first was thrown out), the judge normally grants the request. Ironically, in a nation of 1.4 billion citizens, the Chinese government is encouraging couples to not only stay together, but to have more children. The country's birthrate in 2019 was its lowest since the founding of the People's Republic of China in 1949, while the percentage of non-working elderly continues to grow. Also in 2019, the average household income in China was around $4,500 per year.
Multiline Retail
Macy's to furlough most of its 130,000 workers. Back in February, about a week before the great downturn began, we wrote of Macy's (M $5-$5-$26) latest turnaround plan. Actually, we made fun of Macy's latest turnaround plan. We excoriated management for coming up with yet another grand strategic plan with a super-secret code name that would do exactly zilch for the company's real problem: a staff that didn't seem to want to be at work, and disheveled, disorganized departments. When we wrote our commentary, shares of M were sitting at $17, and we recommended steering clear. Now, with the shares at $5, it seems as though the staffing problem will be addressed: the company is about to furlough most of its 130,000 workers. Some might look at the chart and see an incredibly-undervalued diamond in the rough; we just see a company that lost its way—long before a nightmare virus came along. The retailers which are holding up the "best" during the COVID shutdown are the ones that embraced an online presence years ago. Macy's did not, and they are now paying a brutal price. As for the workers, they will receive no pay from the company once furloughed, but will continue to receive health benefits coverage at least through the end of May.
Hotels, Resorts, & Cruise Lines
Eldorado Resorts' shareholders should be out with pitchforks searching for Carl Icahn. We are ambivalent with respect to hedge fund manager/corporate raider Carl Icahn. that being said, we despise him more often that we love him. In fact, his most endearing quality is his disdain for the smarmy Bill Ackman of Pershing Square. It is doubtful their two egos could fit in one room. That is enough of a backdrop for the following story. Last June we wrote of a forced marriage between two debt-laden companies, with Icahn holding the shotgun. Eldorado Resorts (ERI $6-$12-$71), which at the time had a market cap of $4 billion and long-term debt of $3 billion, wanted to acquire the larger Caesars Entertainment (CZR $3-$6-$15), which at the time had a market cap of $7 billion and long-term debt of $9 billion. Why on earth would anyone on the Caesars board ever go for such a harebrained scheme? It seems they agreed only at the "strong urging" of fellow board member Icahn, who would make out like a bandit in the deal. We called it financial engineering of the worst kind. Fast forward nine months. Eldorado is now a $923 million company, and Caesars has a market cap of $4.4 billion. Citing the pandemic, regulators have just informed the two parties that the deal's review would be put on indefinite hold. When they ultimately shoot it down (and they will), Eldorado will be forced to pay an $837 million breakup fee—or roughly what their company is now worth. This story stinks from start to finish. ERI shareholders should be disgusted, and CZR shareholders should run Icahn out of town on a rail and clear the board of anyone who supported this nefarious financial engineering. Disgusting. We've just talked ourselves out of having ambivelence for Icahn; he is, in our humble opinion, a (add your preferred expletive here).
Headlines for the Week of 22 Mar 2020—28 Mar 2020
Market Pulse, Point 1
The pandemic was the earthquake; the earnings reports and economic data will be the aftershocks. We all know what happened to stock markets around the world due to the pandemic, so we won't get back into the ugly numbers. Instead, let's talk about what comes next with respect to the heinous business and economic numbers that will roll in over the next quarter. We can expect a GDP contraction for the first half of 2020, the first negative period in this country since 2014. We should also brace for scary jobless claims being flashed across the news screens, and we can expect fear-mongering headlines like, "WORST SINCE GREAT DEPRESSION." Then the quarterly earnings reports will be released for the affected period, and they will be ghastly. Here's the good news, however: With the press throwing around terms like "Great Depression" and "permanent changes to the economy" (two of the plethora I made note of due to their outrageous nature) it is fair to say the worst-case scenario has already been baked into the cake. Let's face it, the "here's what comes next" headlines from journalists did a lot more harm to the markets than the actual impact from the virus and two weeks of shutdowns, simply by generating so much abject fear. So, when Americans begin rolling back into their offices, and companies begin ramping back up more quickly than anyone expected, the enormous sigh of relief should lead to some stunning days in the market. On that note...
Market Pulse, Point 2
Demand destruction or a coiled spring: Is a 50% spike in the markets possible by year-end? Between mid-February and mid-March, the major indexes fell by one-third. The Dow Jones Industrial Average went from just below 30,000 to just below 20,000. Mathematically, that means roughly a 50% jump in the index will be required just to get us back to where we were in the second week of February. Ditto the S&P 500 and NASDAQ, but let's stick with the Dow for our illustration, as investors seem to pay most attention to those levels. Here's the great unknown: How long will it take the markets to regain all lost ground? A recent report issued by one of the most reliable investment houses caught my attention late last week. The shocking synopsis of the report was that the major indexes will spike 50% between now and the end of the year. Right now, that seems completely unfathomable, but is it possible? We can all agree that the catalyst for this downturn was the pandemic, just like we can all agree that the 54% drop in the Dow between 2007 and 2009 was caused by the banking crisis and subsequent financial meltdown. But the two are very different beasts. One was a systemic problem for the economy, while the other is simply a short-term shock. Don't believe the headlines that this pandemic will radically change the global economic landscape. Will certain companies end up shuttering their doors for good? Absolutely. But we can expect the fiscally strong firms to come back stronger than ever. James Bullard is the president of the Federal Reserve Bank of St. Louis; his business acumen is impressive—and typically spot on. Bullard sees some jaw-dropping numbers coming in the wake of the crisis, like a 30% unemployment rate and a 50% drop in GDP for the second quarter. However, he then sees a massive ramping back up of the economy beginning in Q3 and hitting its stride in the fourth quarter of 2020 and the first quarter of 2021. If things play out the way Bullard predicts, a 50% jump in the markets by year-end is absolutely possible. That being said, forget passive funds, the money will be made in actively selecting the right companies and ETFs. On that note...
Market Pulse, Point 3
Which companies and industries to buy in a post-pandemic environment, and which to avoid like the plague. While the market's rapid descent seemed to indiscriminately drag everything down (including bonds), there will be clear winners and losers as we climb out of the crisis. This will certainly not be a time to go back into passively-managed index funds, like the S&P 500 or QQQ, the NASDAQ-100 fund. Why not? Because these vehicles will be chock full of both the winners and losers in the post-crisis world. Here's an example of what we mean: Microsoft (MSFT), Apple (AAPL), and Amazon (AMZN) are the three largest holdings in QQQ. These three exemplary firms will come roaring back to life this year, and that will be reflected in their respective share prices. Included in the QQQ, however, are a lot of high-tech companies with B- and C-rated financial strength, and companies in the discretionary sector which will have a difficult time regaining their pre-crisis footing. Twitter (TWTR), for example, was already having a difficult time hitting their net income goals a few months ago; what will happen to earnings as companies inevitably continue to pull back on advertising as they use their much-needed cash on more urgent expenditures—like paying their employees? We have created a number of screens to filter out the winners as we emerge from the crisis. Some of the metrics include:
Financial Strength (A to A++ financials); low relative debt load;
Industry (energy, financials, and consumer discretionary will face added pressure, while health care, utilities, and many companies in the tech sector should spring back strongly);
Products & Services (Look for products and services people needed throughout the crisis, or will immediately need once we begin going back to the offices);
Management (Sadly, there are a number of mediocre management teams out there, even among the biggest companies; a great example of this is Occidental Petroleum's C-suite, which dramatically overpaid for Anadarko Petroleum late last year, while Chevron's team had the sense to walk away. It will take highly-skilled CEOs and CFOs to shift course as needed and rebuild the hammered balance sheets);
EPS (Were quarterly and annual earnings growing going into the crisis, and how do we expect them to bounce back after two ugly quarters?);
Ownership (Have insiders been accumulating or shedding shares, and what percentage of the shares are owned by big institutions?)
In short, this will not be another 1997-1999—where just about every company was rewarded, despite their fundamentals, financials, and management teams. For both stocks and ETFs, a highly-refined selection process will be needed. If we emerge relatively quickly from this crisis, and the right mix of investments are in the portfolio, the growth between now and the end of the year could be impressive. Don't think the market can move that rapidly? Just consider the past five weeks. (Or, on the positive side, the year following the October, 1987 meltdown.)
E-Commerce
Amazon raises overtime pay to warehouse workers, increases minimum wage. It was around 06 March when shares of online retail giant Amazon (AMZN $1,626-$1,830-$2,186) detached from the overall market and began to stabilize. The reason is obvious: Amazon has been one of the top players in helping to keep America running during the downturn, which has meant unprecedented use of the company's services over the past few weeks. With that in mind, Amazon has announced that hourly workers at its US warehouses will receive double-pay for all overtime hours incurred between 15 March and 09 May. Additionally, the $931 billion firm said it would hike its minimum wage from $15 to $17 per hour and hire 100,000 new warehouse and delivery workers to handle the flood of new orders coming in. Since 06 March, shares of AMZN are down roughly 2% while its index, the Nasdaq, has dropped 20%. Despite its 81 P/E ratio, $1,830 will end up being a great entry point for AMZN shares. The challenge right now is finding any willing buyers.
The pandemic was the earthquake; the earnings reports and economic data will be the aftershocks. We all know what happened to stock markets around the world due to the pandemic, so we won't get back into the ugly numbers. Instead, let's talk about what comes next with respect to the heinous business and economic numbers that will roll in over the next quarter. We can expect a GDP contraction for the first half of 2020, the first negative period in this country since 2014. We should also brace for scary jobless claims being flashed across the news screens, and we can expect fear-mongering headlines like, "WORST SINCE GREAT DEPRESSION." Then the quarterly earnings reports will be released for the affected period, and they will be ghastly. Here's the good news, however: With the press throwing around terms like "Great Depression" and "permanent changes to the economy" (two of the plethora I made note of due to their outrageous nature) it is fair to say the worst-case scenario has already been baked into the cake. Let's face it, the "here's what comes next" headlines from journalists did a lot more harm to the markets than the actual impact from the virus and two weeks of shutdowns, simply by generating so much abject fear. So, when Americans begin rolling back into their offices, and companies begin ramping back up more quickly than anyone expected, the enormous sigh of relief should lead to some stunning days in the market. On that note...
Market Pulse, Point 2
Demand destruction or a coiled spring: Is a 50% spike in the markets possible by year-end? Between mid-February and mid-March, the major indexes fell by one-third. The Dow Jones Industrial Average went from just below 30,000 to just below 20,000. Mathematically, that means roughly a 50% jump in the index will be required just to get us back to where we were in the second week of February. Ditto the S&P 500 and NASDAQ, but let's stick with the Dow for our illustration, as investors seem to pay most attention to those levels. Here's the great unknown: How long will it take the markets to regain all lost ground? A recent report issued by one of the most reliable investment houses caught my attention late last week. The shocking synopsis of the report was that the major indexes will spike 50% between now and the end of the year. Right now, that seems completely unfathomable, but is it possible? We can all agree that the catalyst for this downturn was the pandemic, just like we can all agree that the 54% drop in the Dow between 2007 and 2009 was caused by the banking crisis and subsequent financial meltdown. But the two are very different beasts. One was a systemic problem for the economy, while the other is simply a short-term shock. Don't believe the headlines that this pandemic will radically change the global economic landscape. Will certain companies end up shuttering their doors for good? Absolutely. But we can expect the fiscally strong firms to come back stronger than ever. James Bullard is the president of the Federal Reserve Bank of St. Louis; his business acumen is impressive—and typically spot on. Bullard sees some jaw-dropping numbers coming in the wake of the crisis, like a 30% unemployment rate and a 50% drop in GDP for the second quarter. However, he then sees a massive ramping back up of the economy beginning in Q3 and hitting its stride in the fourth quarter of 2020 and the first quarter of 2021. If things play out the way Bullard predicts, a 50% jump in the markets by year-end is absolutely possible. That being said, forget passive funds, the money will be made in actively selecting the right companies and ETFs. On that note...
Market Pulse, Point 3
Which companies and industries to buy in a post-pandemic environment, and which to avoid like the plague. While the market's rapid descent seemed to indiscriminately drag everything down (including bonds), there will be clear winners and losers as we climb out of the crisis. This will certainly not be a time to go back into passively-managed index funds, like the S&P 500 or QQQ, the NASDAQ-100 fund. Why not? Because these vehicles will be chock full of both the winners and losers in the post-crisis world. Here's an example of what we mean: Microsoft (MSFT), Apple (AAPL), and Amazon (AMZN) are the three largest holdings in QQQ. These three exemplary firms will come roaring back to life this year, and that will be reflected in their respective share prices. Included in the QQQ, however, are a lot of high-tech companies with B- and C-rated financial strength, and companies in the discretionary sector which will have a difficult time regaining their pre-crisis footing. Twitter (TWTR), for example, was already having a difficult time hitting their net income goals a few months ago; what will happen to earnings as companies inevitably continue to pull back on advertising as they use their much-needed cash on more urgent expenditures—like paying their employees? We have created a number of screens to filter out the winners as we emerge from the crisis. Some of the metrics include:
Financial Strength (A to A++ financials); low relative debt load;
Industry (energy, financials, and consumer discretionary will face added pressure, while health care, utilities, and many companies in the tech sector should spring back strongly);
Products & Services (Look for products and services people needed throughout the crisis, or will immediately need once we begin going back to the offices);
Management (Sadly, there are a number of mediocre management teams out there, even among the biggest companies; a great example of this is Occidental Petroleum's C-suite, which dramatically overpaid for Anadarko Petroleum late last year, while Chevron's team had the sense to walk away. It will take highly-skilled CEOs and CFOs to shift course as needed and rebuild the hammered balance sheets);
EPS (Were quarterly and annual earnings growing going into the crisis, and how do we expect them to bounce back after two ugly quarters?);
Ownership (Have insiders been accumulating or shedding shares, and what percentage of the shares are owned by big institutions?)
In short, this will not be another 1997-1999—where just about every company was rewarded, despite their fundamentals, financials, and management teams. For both stocks and ETFs, a highly-refined selection process will be needed. If we emerge relatively quickly from this crisis, and the right mix of investments are in the portfolio, the growth between now and the end of the year could be impressive. Don't think the market can move that rapidly? Just consider the past five weeks. (Or, on the positive side, the year following the October, 1987 meltdown.)
E-Commerce
Amazon raises overtime pay to warehouse workers, increases minimum wage. It was around 06 March when shares of online retail giant Amazon (AMZN $1,626-$1,830-$2,186) detached from the overall market and began to stabilize. The reason is obvious: Amazon has been one of the top players in helping to keep America running during the downturn, which has meant unprecedented use of the company's services over the past few weeks. With that in mind, Amazon has announced that hourly workers at its US warehouses will receive double-pay for all overtime hours incurred between 15 March and 09 May. Additionally, the $931 billion firm said it would hike its minimum wage from $15 to $17 per hour and hire 100,000 new warehouse and delivery workers to handle the flood of new orders coming in. Since 06 March, shares of AMZN are down roughly 2% while its index, the Nasdaq, has dropped 20%. Despite its 81 P/E ratio, $1,830 will end up being a great entry point for AMZN shares. The challenge right now is finding any willing buyers.
Headlines for the Week of 15 Mar 2020—21 Mar 2020
Personal Finance: Retirement Plans
Under pressure: let's take a look at how those "risk managed" target date funds have performed during the downturn. I don't recall precisely when they came on the scene, maybe 2000 to 2002 or so, but I do recall that Vanguard led the charge. Jack Bogle, the recently-deceased founder of the fund company, went so far as to call for the government to limit employees' options to these creatures. What are these panacea investments? Target date funds. The Sesame Street school of fund selection: you simply look for the fund whose number corresponds with the year you plan to retire, and voilà! What could be simpler? At first I was intrigued; however, as soon as their track records began rolling in I was underwhelmed. They didn't seem to provide much support in a downturn (despite the fact that they are supposed to adjust between equities, bonds, and cash based on how long one has to retirement), and they certainly didn't perform as well as the markets in upturns. Perhaps the latter could be expected, based on the allocation to fixed income and cash, but what an incredible opportunity to see how the major target date funds have performed under duress. Take a look at the chart. In fairness, the Vanguard Target Retirement 2025 fund did perform the best of the bunch—it only lost 20.69% over the course of a month. Following behind is the Fidelity Freedom® 2025 fund, then the T. Rowe Price Retirement 2025 fund. So, if you were five years to retirement and placed your entire portfolio in one of these "glide-path" funds, you lost between one-fifth and one-quarter of your overall value. Granted, that is better than the 33.63% you would have lost in a Dow index fund, but that isn't all too comforting. I have yet to see a target-date fund which has lived up to its hype. Anyone within several years of retirement should have a decent percentage of their company plan assets sitting directly in the money market or "stable" option of the plan.
Automotive
Ford to suspend all dividend payments, halt North American production. It seemed as though the situation couldn't get any worse for the traditional American automakers, namely Ford (F $4-$5-$11) and General Motors (GM $14-$19-$42); then the pandemic hit. Ford, which generated a paltry $47 million in profits on $156 billion in revenues over the trailing twelve months, seems to be in a particularly precarious situation. For investors who have witnessed the value of their Ford shares drop by 50% year-to-date, at least they could point to a fat dividend yield. With the share price falling, however, the yield on the dividend rose to an unsustainable 13.13% as of Friday. Which is why it came as little shock when the company's uninspiring CEO, Jim Hackett, announced a suspension of all dividend payments to conserve cash. Additionally, Ford will halt all production in the US, Mexico, and Canada through at least the 30th of March. For its part, the UAW has requested that all US automakers shut down operations for at least two weeks to help assure the safety of its workers. Don't let the $5 share price fool you, Ford is an expensive stock to own. Since the company is still turning a profit, it actually has a P/E ratio, but that metric has been vacillating somewhere between 225 and 465 throughout the past three months. Like we said, expensive.
Media Malpractice
CNBC's trumpeting of a Bill Ackmam interview is a disgraceful example of media malpractice. "HELL IS COMING." That was statement CNBC viewers saw throughout the day, plastered on the chyron at the bottom of the screen. The smarmy, hyperbolic, fear-mongering quote was uttered by the typically-wrong hedge fund manager Bill Ackman in a CNBC interview done early Wednesday morning. An interview which, with CNBC's trumpeting, helped drive the market down over 1,300 points on the day. When Bill Ackman comes on CNBC (he is a frequent guest), I do one of two things: mute the sound, or listen to him talk and keep notes—then record the date his comments were proven wrong. He has been a walking disaster as a hedge fund manager. He has lost billions on egregiously wrong bets. Yet, there is CNBC having another interview with the exalted genius. Other than Ackman's HELL IS COMING quote, the main takeaway from his blathering (it should be noted that he often bets against US companies by shorting them) was that the United States should completely shut its economy down for 30 days, calling it an extended spring break. What lofty thinking. Brilliant. If only you were president, Ackman. I don't say this lightly: CNBC is culpable for a good percentage of Wednesday's market losses. Their irresponsibility amounted to yelling "FIRE!" in a crowded theater. They will hide behind their phony press credentials, of course, but they should be forced to run the following chyron announcement for one full day: "WE DID IT FOR RATINGS." Having vented my rant, it should be pointed out that my go-to business network is still CNBC. The majority of journalists on the network do an excellent job of non-biased reporting. Every now and again, however, something like this happens—and they must be called out for it.
Personal Finance
The IRS will delay taxes due—not return deadline—by 90 days. As part of the government’s overall COVID-19 response, Americans will see their tax deadline extended out 90 days from the traditional 15 April due date. During the deferral, no interest or penalties will accrue on any amount owed. This delay will be available to individuals who will owe under $1 million in taxes and corporations which will owe $10 million or less. The IRS pointed out, however, that Americans still need to send in their returns by 15 April, just not the taxes due. The point of this move is to provide much-needed liquidity to households over this three-month period. Treasury Secretary Steven Mnuchin told lawmakers the delay could help provide up to $300 billion in temporary liquidity. To that end, the treasury secretary highly recommended that Americans who believe they will be getting a refund file as soon as possible to gain access to those funds. The IRS announced that it would continue to process returns in a timely manner during the crisis. Unless the actual deadline date for filing is extended, however, tax preparers see confusion clouding the issue. The “decoupling” of the filing date and the due date will undoubtedly cause confusion. Our guess is that, ultimately, the filing date will be extended out as well. In the meantime, it would be wise to proceed as normal to file—and pay—by the traditional due date.
Market Risk Management
Performance of the various asset classes during the downturn: not much to like. The entire point of asset allocation is to allow investors the right amount of balance under all market conditions. Some asset classes generally run in tandem, while others are non-correlated to the markets, while still others are typically inversely-correlated: they go up when stocks go down (see fixed income story below). This has held true in virtually every market correction—until this one. Using the accompanying chart, let's take a look at the "best," the middling, and the worst performing classes during the downturn.
Gold and fixed income tend to spike during market and economic uncertainty; while these two asset classes have held up the best during our nearly one month long travail, they are down 8% and 9%, respectively.
Hanging out around the major indexes (the S&P 500 is now down just about 30% in what is its worst month since October of 1987) are: commodities, utilities, real estate, and international equities. Utilities may be the most disturbing—or enlightening—of the bunch, as this group consists mostly of regulated gas and electric companies with low valuations. After all, utilities are the least discretionary of all budgetary expenses. Utilities have lost, in aggregate, one-quarter of their value in under a month.
Perhaps understandably, following the oil war which has erupted between Saudi Arabia and Russia, the oil commodities are off 45% since the downturn. About a month ago, I heard a young CEO (actually, the CEO of Virgin Gallactic) push the notion that everyone should have a percentage of their investment dollars in bitcoin as a hedge. Of all asset classes during the downturn, digital currency—as represented by bitcoin in our graph—is the number one worst performer.
It is understandable that emotions tend to take over when selling begins to snowball, further exacerbating the selloff. Over the past few weeks, in fact, a number of our stop-loss orders have hit, with the money flowing to cash. But when blue-chip utilities and other companies flush with cash (like Apple, Microsoft, Walmart, and Target) are thrown in the mix, it generally increases the odds of a "v-shaped" recovery. Of course, all of this is dependent upon the unknown factor of how the US ultimately deals with the crisis at hand, but we suspect the graph will end up looking a lot like the 1987 downturn. If that is the case, now is a decent time to slowly begin looking at some of the lowest-risk US companies with the strongest of financial ratings. Without a doubt, their share prices are also dancing at or near 52-week lows.
An extended discussion of this topic and the following (fixed income) will appear in the next issue of The Penn Wealth Report.
Fixed Income Desk
A disturbing look into the world of fixed income during the downturn. A lot of wretched things occur to investments during market downturns, but there has always been one stabilizing truth: As equities are plummeting, bonds serve as the beacon in the storm—the one asset class that is most often inversely correlated to stocks. Bond values go up while equity values drop, right? With the global fiscal irresponsibility that has been the norm since the financial meltdown of 2008/09, we can officially throw that paradigm out the window. After three bruising weeks in the market, we took this "golden opportunity" to review eleven popular fixed income holdings. We didn't cherry-pick: they run the gamut of choices, from government bonds to corporates to high yield to emerging markets, and what we found is disturbing—especially considering the Fed lowered rates 50 basis points in the middle of this time-frame, which should have buoyed bond prices. Take a look at the accompanying chart. Two fixed income categories actually underperformed the S&P 500: high yield bonds and convertible securities. Only one category was in the green: US Treasuries, as represented by the iShares US Treasury Bond ETF (GOVT). The second-highest performer in our group was the Invesco Total Return Bond ETF (GTO), which holds a nice mix of government bonds, corporates, and securitized notes (think packaged baskets of mortgages and other debt obligations), which lost only 3.71% over the last three weeks. The third-best performer, with a return of -4.26%, was the iShares TIPS Bond ETF (TIP), which we have used as a hedge against inflation. If there is one message to be gleaned from this exercise, it is that old paradigms have been turned on their head thanks to a stew of fiscally irresponsible ingredients. If it is of any comfort at all, at least our money market funds have yet to break the buck. An extended discussion of this topic will appear in the next issue of The Penn Wealth Report.
Aerospace & Defense
Boeing's value has been cut in half in thirty days. Between the October, 2018 737 MAX crash in Indonesia and the March, 2019 737 MAX crash in Ethiopia, we jettisoned aircraft maker Boeing (BA $155-$170-$399) from the Penn Global Leaders Club. That turned out to be a fortuitous move, as shares of the beleaguered company have done nothing but go down ever since. In fact, while the S&P 500 has been busy losing one-quarter of its value over a few week time-frame, Boeing has doubled that—down 50%. The company which had a $250 billion market cap one year ago is now worth $98 billion. Over the course of the past two weeks, we have been looking for outstanding American companies to buy as their share prices lay battered and bruised in the carnage; despite the fact that Boeing is now trading where it did three full years ago, we don't consider it a bargain. Considering the uninspired management team at the company refuses to even drop the tainted MAX name, who can blame us? Boeing needs massive structural changes, but the people who would need to implement such changes happen to be part of the problem. That is not good.
Consumer Defensives
Pepsi will buy Rockstar Energy for $3.85 billion. Both Pepsi (PEP $115-$134-$147) and Coca-Cola (KO $45-$54-$60), two companies which could have easily declined into obscurity had they continued to rely on the sale of sugary sodas for growth, have done a masterful job at moving into more lucrative markets, such as bottled water, tea, and energy drinks. Pepsi's latest move highlights the enormous growth potential of that last group: the company announced it would buy Rockstar Energy for $3.85 billion. While Pepsi has had a distribution agreement with Rockstar since 2009, the agreement limited what the $186 billion company could do with respect to the distribution of competitor brands, to include its own Mountain Dew Kickstart, GameFuel, and AMP lines. The energy drink business has been one in which both Coke and Pepsi have been struggling to gain traction against entrenched private players, such as Monster and Red Bull, so this deal will mark a huge win for Pepsi's relatively new CEO, Ramon Laguarta, who took over for Indra Nooyi in late 2018. Pepsi's last big acquisition was that of Israeli-based SodaStream in 2018 for $3.2 billion. Both Pepsi and Coca-Cola have held up better than the S&P 500 index—of which they are both members—during the recent downturn. Both have low betas (risk measure) roughly equal to half that of the S&P 500, and both carry a reasonable P/E ratio of 25. Ironically, both also carry nearly identical dividend yields of just below 3%. Both are probably pretty safe bets right now (we don't own either in the Penn strategies), but we would give the slight edge to Coca-Cola at $52 from a valuation standpoint.
Under pressure: let's take a look at how those "risk managed" target date funds have performed during the downturn. I don't recall precisely when they came on the scene, maybe 2000 to 2002 or so, but I do recall that Vanguard led the charge. Jack Bogle, the recently-deceased founder of the fund company, went so far as to call for the government to limit employees' options to these creatures. What are these panacea investments? Target date funds. The Sesame Street school of fund selection: you simply look for the fund whose number corresponds with the year you plan to retire, and voilà! What could be simpler? At first I was intrigued; however, as soon as their track records began rolling in I was underwhelmed. They didn't seem to provide much support in a downturn (despite the fact that they are supposed to adjust between equities, bonds, and cash based on how long one has to retirement), and they certainly didn't perform as well as the markets in upturns. Perhaps the latter could be expected, based on the allocation to fixed income and cash, but what an incredible opportunity to see how the major target date funds have performed under duress. Take a look at the chart. In fairness, the Vanguard Target Retirement 2025 fund did perform the best of the bunch—it only lost 20.69% over the course of a month. Following behind is the Fidelity Freedom® 2025 fund, then the T. Rowe Price Retirement 2025 fund. So, if you were five years to retirement and placed your entire portfolio in one of these "glide-path" funds, you lost between one-fifth and one-quarter of your overall value. Granted, that is better than the 33.63% you would have lost in a Dow index fund, but that isn't all too comforting. I have yet to see a target-date fund which has lived up to its hype. Anyone within several years of retirement should have a decent percentage of their company plan assets sitting directly in the money market or "stable" option of the plan.
Automotive
Ford to suspend all dividend payments, halt North American production. It seemed as though the situation couldn't get any worse for the traditional American automakers, namely Ford (F $4-$5-$11) and General Motors (GM $14-$19-$42); then the pandemic hit. Ford, which generated a paltry $47 million in profits on $156 billion in revenues over the trailing twelve months, seems to be in a particularly precarious situation. For investors who have witnessed the value of their Ford shares drop by 50% year-to-date, at least they could point to a fat dividend yield. With the share price falling, however, the yield on the dividend rose to an unsustainable 13.13% as of Friday. Which is why it came as little shock when the company's uninspiring CEO, Jim Hackett, announced a suspension of all dividend payments to conserve cash. Additionally, Ford will halt all production in the US, Mexico, and Canada through at least the 30th of March. For its part, the UAW has requested that all US automakers shut down operations for at least two weeks to help assure the safety of its workers. Don't let the $5 share price fool you, Ford is an expensive stock to own. Since the company is still turning a profit, it actually has a P/E ratio, but that metric has been vacillating somewhere between 225 and 465 throughout the past three months. Like we said, expensive.
Media Malpractice
CNBC's trumpeting of a Bill Ackmam interview is a disgraceful example of media malpractice. "HELL IS COMING." That was statement CNBC viewers saw throughout the day, plastered on the chyron at the bottom of the screen. The smarmy, hyperbolic, fear-mongering quote was uttered by the typically-wrong hedge fund manager Bill Ackman in a CNBC interview done early Wednesday morning. An interview which, with CNBC's trumpeting, helped drive the market down over 1,300 points on the day. When Bill Ackman comes on CNBC (he is a frequent guest), I do one of two things: mute the sound, or listen to him talk and keep notes—then record the date his comments were proven wrong. He has been a walking disaster as a hedge fund manager. He has lost billions on egregiously wrong bets. Yet, there is CNBC having another interview with the exalted genius. Other than Ackman's HELL IS COMING quote, the main takeaway from his blathering (it should be noted that he often bets against US companies by shorting them) was that the United States should completely shut its economy down for 30 days, calling it an extended spring break. What lofty thinking. Brilliant. If only you were president, Ackman. I don't say this lightly: CNBC is culpable for a good percentage of Wednesday's market losses. Their irresponsibility amounted to yelling "FIRE!" in a crowded theater. They will hide behind their phony press credentials, of course, but they should be forced to run the following chyron announcement for one full day: "WE DID IT FOR RATINGS." Having vented my rant, it should be pointed out that my go-to business network is still CNBC. The majority of journalists on the network do an excellent job of non-biased reporting. Every now and again, however, something like this happens—and they must be called out for it.
Personal Finance
The IRS will delay taxes due—not return deadline—by 90 days. As part of the government’s overall COVID-19 response, Americans will see their tax deadline extended out 90 days from the traditional 15 April due date. During the deferral, no interest or penalties will accrue on any amount owed. This delay will be available to individuals who will owe under $1 million in taxes and corporations which will owe $10 million or less. The IRS pointed out, however, that Americans still need to send in their returns by 15 April, just not the taxes due. The point of this move is to provide much-needed liquidity to households over this three-month period. Treasury Secretary Steven Mnuchin told lawmakers the delay could help provide up to $300 billion in temporary liquidity. To that end, the treasury secretary highly recommended that Americans who believe they will be getting a refund file as soon as possible to gain access to those funds. The IRS announced that it would continue to process returns in a timely manner during the crisis. Unless the actual deadline date for filing is extended, however, tax preparers see confusion clouding the issue. The “decoupling” of the filing date and the due date will undoubtedly cause confusion. Our guess is that, ultimately, the filing date will be extended out as well. In the meantime, it would be wise to proceed as normal to file—and pay—by the traditional due date.
Market Risk Management
Performance of the various asset classes during the downturn: not much to like. The entire point of asset allocation is to allow investors the right amount of balance under all market conditions. Some asset classes generally run in tandem, while others are non-correlated to the markets, while still others are typically inversely-correlated: they go up when stocks go down (see fixed income story below). This has held true in virtually every market correction—until this one. Using the accompanying chart, let's take a look at the "best," the middling, and the worst performing classes during the downturn.
Gold and fixed income tend to spike during market and economic uncertainty; while these two asset classes have held up the best during our nearly one month long travail, they are down 8% and 9%, respectively.
Hanging out around the major indexes (the S&P 500 is now down just about 30% in what is its worst month since October of 1987) are: commodities, utilities, real estate, and international equities. Utilities may be the most disturbing—or enlightening—of the bunch, as this group consists mostly of regulated gas and electric companies with low valuations. After all, utilities are the least discretionary of all budgetary expenses. Utilities have lost, in aggregate, one-quarter of their value in under a month.
Perhaps understandably, following the oil war which has erupted between Saudi Arabia and Russia, the oil commodities are off 45% since the downturn. About a month ago, I heard a young CEO (actually, the CEO of Virgin Gallactic) push the notion that everyone should have a percentage of their investment dollars in bitcoin as a hedge. Of all asset classes during the downturn, digital currency—as represented by bitcoin in our graph—is the number one worst performer.
It is understandable that emotions tend to take over when selling begins to snowball, further exacerbating the selloff. Over the past few weeks, in fact, a number of our stop-loss orders have hit, with the money flowing to cash. But when blue-chip utilities and other companies flush with cash (like Apple, Microsoft, Walmart, and Target) are thrown in the mix, it generally increases the odds of a "v-shaped" recovery. Of course, all of this is dependent upon the unknown factor of how the US ultimately deals with the crisis at hand, but we suspect the graph will end up looking a lot like the 1987 downturn. If that is the case, now is a decent time to slowly begin looking at some of the lowest-risk US companies with the strongest of financial ratings. Without a doubt, their share prices are also dancing at or near 52-week lows.
An extended discussion of this topic and the following (fixed income) will appear in the next issue of The Penn Wealth Report.
Fixed Income Desk
A disturbing look into the world of fixed income during the downturn. A lot of wretched things occur to investments during market downturns, but there has always been one stabilizing truth: As equities are plummeting, bonds serve as the beacon in the storm—the one asset class that is most often inversely correlated to stocks. Bond values go up while equity values drop, right? With the global fiscal irresponsibility that has been the norm since the financial meltdown of 2008/09, we can officially throw that paradigm out the window. After three bruising weeks in the market, we took this "golden opportunity" to review eleven popular fixed income holdings. We didn't cherry-pick: they run the gamut of choices, from government bonds to corporates to high yield to emerging markets, and what we found is disturbing—especially considering the Fed lowered rates 50 basis points in the middle of this time-frame, which should have buoyed bond prices. Take a look at the accompanying chart. Two fixed income categories actually underperformed the S&P 500: high yield bonds and convertible securities. Only one category was in the green: US Treasuries, as represented by the iShares US Treasury Bond ETF (GOVT). The second-highest performer in our group was the Invesco Total Return Bond ETF (GTO), which holds a nice mix of government bonds, corporates, and securitized notes (think packaged baskets of mortgages and other debt obligations), which lost only 3.71% over the last three weeks. The third-best performer, with a return of -4.26%, was the iShares TIPS Bond ETF (TIP), which we have used as a hedge against inflation. If there is one message to be gleaned from this exercise, it is that old paradigms have been turned on their head thanks to a stew of fiscally irresponsible ingredients. If it is of any comfort at all, at least our money market funds have yet to break the buck. An extended discussion of this topic will appear in the next issue of The Penn Wealth Report.
Aerospace & Defense
Boeing's value has been cut in half in thirty days. Between the October, 2018 737 MAX crash in Indonesia and the March, 2019 737 MAX crash in Ethiopia, we jettisoned aircraft maker Boeing (BA $155-$170-$399) from the Penn Global Leaders Club. That turned out to be a fortuitous move, as shares of the beleaguered company have done nothing but go down ever since. In fact, while the S&P 500 has been busy losing one-quarter of its value over a few week time-frame, Boeing has doubled that—down 50%. The company which had a $250 billion market cap one year ago is now worth $98 billion. Over the course of the past two weeks, we have been looking for outstanding American companies to buy as their share prices lay battered and bruised in the carnage; despite the fact that Boeing is now trading where it did three full years ago, we don't consider it a bargain. Considering the uninspired management team at the company refuses to even drop the tainted MAX name, who can blame us? Boeing needs massive structural changes, but the people who would need to implement such changes happen to be part of the problem. That is not good.
Consumer Defensives
Pepsi will buy Rockstar Energy for $3.85 billion. Both Pepsi (PEP $115-$134-$147) and Coca-Cola (KO $45-$54-$60), two companies which could have easily declined into obscurity had they continued to rely on the sale of sugary sodas for growth, have done a masterful job at moving into more lucrative markets, such as bottled water, tea, and energy drinks. Pepsi's latest move highlights the enormous growth potential of that last group: the company announced it would buy Rockstar Energy for $3.85 billion. While Pepsi has had a distribution agreement with Rockstar since 2009, the agreement limited what the $186 billion company could do with respect to the distribution of competitor brands, to include its own Mountain Dew Kickstart, GameFuel, and AMP lines. The energy drink business has been one in which both Coke and Pepsi have been struggling to gain traction against entrenched private players, such as Monster and Red Bull, so this deal will mark a huge win for Pepsi's relatively new CEO, Ramon Laguarta, who took over for Indra Nooyi in late 2018. Pepsi's last big acquisition was that of Israeli-based SodaStream in 2018 for $3.2 billion. Both Pepsi and Coca-Cola have held up better than the S&P 500 index—of which they are both members—during the recent downturn. Both have low betas (risk measure) roughly equal to half that of the S&P 500, and both carry a reasonable P/E ratio of 25. Ironically, both also carry nearly identical dividend yields of just below 3%. Both are probably pretty safe bets right now (we don't own either in the Penn strategies), but we would give the slight edge to Coca-Cola at $52 from a valuation standpoint.
Headlines for the Week of 01 Mar 2020—07 Mar 2020
Pharmaceuticals
Gilead's acquisition of Forty Seven should give its cancer-fighting efforts a nice boost. We added $95 billion drugmaker Gilead Sciences (GILD $61-$75-$79) to the Penn Global Leaders Club last April at $61.71 per share, right near its 52-week low at the time, because we liked management's commitment to becoming a leader in the oncology space. That investment has paid off nicely thus far, and the company continues to ramp up its effort. To that end, Gilead just announced that it would acquire immuno-oncology firm Forty Seven Inc (FTSV $6-$94-$95) for $4.9 billion, which will bring highly promising cancer treatment magrolimab into its clinical mid/late stage pipeline. Magrolimab, a monoclonal antibody in clinical development for the treatment of several different cancer types, has been granted Fast Track status by the FDA. Gilead has been one of the few stocks bucking the recent downturn thanks to its efforts in creating a COVID-19 vaccine. In 2019, Gilead earned $5.4 billion on the back of $22.5 billion in revenues. With its healthy pile of cash, an 18 P/E ratio, a 3.36% dividend yield, and a commitment to becoming the world's leading cancer-fighting company, there is a lot to like about GILD shares.
Thermo Fisher Scientific (TMO) to buy Qiagen N.V. (QGEN, medical sample processing) for $10.1 billion
Personal Finance
Robinhood users miss out on largest one-day point gain ever in Dow after system-wide failure. Robinhood, a trading platform we have called "Stock Candy Crush Saga," just suffered a major malfunction, and users want more than answers. On a day when the Dow rose 1,294 points, the largest one-day point gain in history, the platform suffered a system-wide outage which prevented any buy or sell orders from being placed. As could be imagined, users took to Twitter and other social media outlets to voice their outrage. More than venting anger, many are calling for a class-action lawsuit to recoup what they lost due to their inability to trade. That would be a hard case to win, as the system wouldn't even let users access their accounts, meaning no evidence exists of any trades that would have taken place. Something tells us there are more than a few lawyers out there ready to take the case, however. Obviously, Robinhood didn't exist back in 1999, but it sure would have fit in with the zeitgeist of the late '90s. And that is not a compliment.
2020.03.02 Dow notches a record point gain; markets jump over 5% on Monday.
Personal Finance
A record number of 401(k) participants shuffled their investments around last week after the carnage, and that is troubling. Our mantra has been and continues to be: know your Risk Tolerance Number and invest accordingly in the proper Penn tactical asset allocation—all of which are updated quarterly. New research from Alight Solutions presents us with some troubling news on the asset allocation front. The group, which tracks the activity of millions of 401(k) participants, noted a record number of intra-account transfers last Friday, with the overwhelming amount consisting of money going from equity buckets and into fixed income funds and cash. Let's further define a record number: sixteen times the average number of trades took place last week. In other words, after the carnage had already occurred, employees locked in their losses by moving massive amounts of money out of where the growth would occur in a comeback. This makes two things evident: most people weren't allocated correctly in the first place, and/or they let their emotions drive their investment decisions. We have been witnessing some disturbing reminders of what went on leading into the great tech bubble burst of 2000 to 2002. 401(k) plans being grossly out of whack is certainly one specter of 1999; emotional trading another. Perhaps last week was a wake-up call for employees with a company retirement plan.
Gilead's acquisition of Forty Seven should give its cancer-fighting efforts a nice boost. We added $95 billion drugmaker Gilead Sciences (GILD $61-$75-$79) to the Penn Global Leaders Club last April at $61.71 per share, right near its 52-week low at the time, because we liked management's commitment to becoming a leader in the oncology space. That investment has paid off nicely thus far, and the company continues to ramp up its effort. To that end, Gilead just announced that it would acquire immuno-oncology firm Forty Seven Inc (FTSV $6-$94-$95) for $4.9 billion, which will bring highly promising cancer treatment magrolimab into its clinical mid/late stage pipeline. Magrolimab, a monoclonal antibody in clinical development for the treatment of several different cancer types, has been granted Fast Track status by the FDA. Gilead has been one of the few stocks bucking the recent downturn thanks to its efforts in creating a COVID-19 vaccine. In 2019, Gilead earned $5.4 billion on the back of $22.5 billion in revenues. With its healthy pile of cash, an 18 P/E ratio, a 3.36% dividend yield, and a commitment to becoming the world's leading cancer-fighting company, there is a lot to like about GILD shares.
Thermo Fisher Scientific (TMO) to buy Qiagen N.V. (QGEN, medical sample processing) for $10.1 billion
Personal Finance
Robinhood users miss out on largest one-day point gain ever in Dow after system-wide failure. Robinhood, a trading platform we have called "Stock Candy Crush Saga," just suffered a major malfunction, and users want more than answers. On a day when the Dow rose 1,294 points, the largest one-day point gain in history, the platform suffered a system-wide outage which prevented any buy or sell orders from being placed. As could be imagined, users took to Twitter and other social media outlets to voice their outrage. More than venting anger, many are calling for a class-action lawsuit to recoup what they lost due to their inability to trade. That would be a hard case to win, as the system wouldn't even let users access their accounts, meaning no evidence exists of any trades that would have taken place. Something tells us there are more than a few lawyers out there ready to take the case, however. Obviously, Robinhood didn't exist back in 1999, but it sure would have fit in with the zeitgeist of the late '90s. And that is not a compliment.
2020.03.02 Dow notches a record point gain; markets jump over 5% on Monday.
Personal Finance
A record number of 401(k) participants shuffled their investments around last week after the carnage, and that is troubling. Our mantra has been and continues to be: know your Risk Tolerance Number and invest accordingly in the proper Penn tactical asset allocation—all of which are updated quarterly. New research from Alight Solutions presents us with some troubling news on the asset allocation front. The group, which tracks the activity of millions of 401(k) participants, noted a record number of intra-account transfers last Friday, with the overwhelming amount consisting of money going from equity buckets and into fixed income funds and cash. Let's further define a record number: sixteen times the average number of trades took place last week. In other words, after the carnage had already occurred, employees locked in their losses by moving massive amounts of money out of where the growth would occur in a comeback. This makes two things evident: most people weren't allocated correctly in the first place, and/or they let their emotions drive their investment decisions. We have been witnessing some disturbing reminders of what went on leading into the great tech bubble burst of 2000 to 2002. 401(k) plans being grossly out of whack is certainly one specter of 1999; emotional trading another. Perhaps last week was a wake-up call for employees with a company retirement plan.
Headlines for the Week of 23 Feb 2020—29 Feb 2020
Monetary Policy
Fed makes rare "between-meeting" move, and all it did was drive the markets down and sink the 10-year to record lows. The last time the Federal Reserve made an interest rate cut between FOMC meetings was during the heat of the financial crisis. Today, the Fed shocked the markets by making the equivalent of not one, but two cuts. The 50-basis-point drop moved the Federal funds rate to a channel between 1% and 1.25%. At first, markets seemed to like the action, with the Dow moving from several hundred points down to several hundred points up. That didn't last long. Within a few hours, the Dow was down 800 points and all three major indexes were off around 3%, giving up most of Monday's gains. Not only did the Fed's action not assuage investors' fears, it also drove the 10-year Treasury down to below a 1% yield for the first time in its history. As we write this, it sits at 0.942%. What the markets are looking for now is not more easing, but better news on the coronavirus front. The chronic, minute-by-minute and hour-by-hour hyperbolic coverage is bouncing around in the psyche of investors; until those headlines subside, expect wild trading days with the volatility index, as recorded by the VIX, remaining highly elevated.
Application & Systems Software
Intuit to buy Credit Karma for $7.1 billion. Many Americans may not recognize the name Intuit (INTU $236-$280-$307), but odds are pretty good they have used one of the company's online financial services, such as TurboTax, QuickBooks, or budgeting platform Mint. In its most recent move to shore up its fintech services, the company just announced that it will buy personal finance portal Credit Karma for $7.1 billion in cash and stock. News of the deal was music to the ears of Credit Karma's 700 employees, who will receive around $300 million worth of INTU restricted stock, to be paid out over four years. That company provides free credit scores to consumers, in addition to credit monitoring and tax preparation and filing services. The deal will close in the second half of the year. Intuit's P/E ratio of 45 may seem a bit rich, but it is in line with other firms in the software applications industry. For example, Adobe (ADBE), perhaps our favorite firm in the industry, has a P/E ratio of 59. Additionally, Intuit's financials look great: solidly growing revenues, an operating margin of 27%, and a relatively low debt load. Shares are down 9% on the market pullback, but will the coronavirus stop anyone from filing their taxes or balancing their books?
Aerospace & Defense
Boeing board changes better late than never, except for those who lost their lives. We have been excoriating Boeing (BA $303-$306-$446) for the past year, primarily because a boardroom attitude of arrogance drove a glittering jewel of the American economy off the road and into a ditch. Our disappointment turned to disgust when we took a deeper look into who was sitting on the Boeing board of directors. Take the notion of a professional corporate board, one replete with industry experience and complementary insight, and turn that concept on its head; you then get a feel for the Boeing board. The one word that came to mind was “cronyism.” Surprisingly, it now appears that some movement is underway to change that condition. The company has nominated two outsiders with extensive safety and engineering experience to join the board. Akhil Johri has been the CFO at United Technologies (UTX), and Steve Mollenkopf—one of our favorite CEOs—is at the helm of chipmaker Qualcomm (QCOM, a Penn New Frontier Fund member). While those are two welcome additions, there are still members which need to go. After the moves were announced, Chairman Larry Kellner, a former CEO of Continental Airlines (cronyism), said, “We just feel like this is the right balance...” Considering proxy advisory firm Glass Lewis recommended shareholders vote against retaining Kellner on the board last year, his sentiments ring a bit hollow. These two excellent nominees represent a step in the right direction, but it still feels as though the company doesn't fully comprehend the scope of what is going on. Keeping the MAX name is evidence of that. If you would have told us, at virtually any other time in the past 23 years, that Boeing shares were sitting at their 52-week low, we would have immediately jumped in. Right now, though that condition exists, the shares are not even on our radar.
2020.02.25 SmileDirectClub (SDC) falls 20% after hours following revenue miss and lowered guidance...
2020.02.25 Stocks tumble for second day; major indexes now off in excess of 6% over two trading days (we called for a 10-15% correction in the first quarter of the year in our 2020 Outlook & Strategy report)...
2020.02.24 Zoom Technologies spikes 21% as market plummets as more business meetings held via technology as opposed to travel (and by the end of the trading session, it had given back 23%, ending the session down 1.79%...
2020.02.24 Dow briefly drops over 1,000 points as coronavirus spreads...
Media & Entertainment
A shocking change in the Disney C-suite: Iger is leaving the CEO role. We were relieved to hear Walt Disney (DIS $107-$123-$153) CEO Bob Iger state, late last year, that he wouldn't be retiring until 2021. We are up massively in our Disney position within the Penn Global Leaders Club, and Iger can take responsibility for the lion's share of the stock's move. That is why we were shocked to hear that Iger is actually stepping out of the CEO role, effective immediately. Technically, he is not leaving the company until 2021, but if he knew he would be stepping aside, he should have made that clear. There are reports that Iger recently told a journalist that he "didn't want to run the company anymore." Well and good, but give us some advance notice. We were not alone in our surprise—senior executives at the media and entertainment giant were apparently caught off guard as well. With Iger moving into the executive chairman role, we can envision one of two not-very-positive scenarios: either he will overshadow the new CEO—at least within the C-suite—and their relationship will become strained, or he will simply be a figurehead. Neither alternative seems very palatable. The new CEO, Bob Chapek, will report to both Iger and the board of directors. Uh oh. Hello, scenario one? As the recent head of parks and resorts, Chapek undoubtedly knows that side of the business, but what about the company's enormous strategic move into the streaming business? Chapek beat out, in fact, Disney's head of that up-and-coming service, Kevin Mayer. Disney employees throughout the company didn't get a memo about the change until after Iger and Chapek gave a joint conference call to analysts and an interview on a major business network. We have to wonder how that went over within the walls of the company. All of this is very uncharacteristic for the Disney we revered under the control of the skilled Iger. We will have to wait and see how the story unfolds going forward. While we have no plans to sell our Disney shares from the Global Leaders Club, we have put the company on our watch list for possible action. Management matters, and we just don't yet know enough about Chapek, or what internal struggles might ensue over the coming year or two.
Fed makes rare "between-meeting" move, and all it did was drive the markets down and sink the 10-year to record lows. The last time the Federal Reserve made an interest rate cut between FOMC meetings was during the heat of the financial crisis. Today, the Fed shocked the markets by making the equivalent of not one, but two cuts. The 50-basis-point drop moved the Federal funds rate to a channel between 1% and 1.25%. At first, markets seemed to like the action, with the Dow moving from several hundred points down to several hundred points up. That didn't last long. Within a few hours, the Dow was down 800 points and all three major indexes were off around 3%, giving up most of Monday's gains. Not only did the Fed's action not assuage investors' fears, it also drove the 10-year Treasury down to below a 1% yield for the first time in its history. As we write this, it sits at 0.942%. What the markets are looking for now is not more easing, but better news on the coronavirus front. The chronic, minute-by-minute and hour-by-hour hyperbolic coverage is bouncing around in the psyche of investors; until those headlines subside, expect wild trading days with the volatility index, as recorded by the VIX, remaining highly elevated.
Application & Systems Software
Intuit to buy Credit Karma for $7.1 billion. Many Americans may not recognize the name Intuit (INTU $236-$280-$307), but odds are pretty good they have used one of the company's online financial services, such as TurboTax, QuickBooks, or budgeting platform Mint. In its most recent move to shore up its fintech services, the company just announced that it will buy personal finance portal Credit Karma for $7.1 billion in cash and stock. News of the deal was music to the ears of Credit Karma's 700 employees, who will receive around $300 million worth of INTU restricted stock, to be paid out over four years. That company provides free credit scores to consumers, in addition to credit monitoring and tax preparation and filing services. The deal will close in the second half of the year. Intuit's P/E ratio of 45 may seem a bit rich, but it is in line with other firms in the software applications industry. For example, Adobe (ADBE), perhaps our favorite firm in the industry, has a P/E ratio of 59. Additionally, Intuit's financials look great: solidly growing revenues, an operating margin of 27%, and a relatively low debt load. Shares are down 9% on the market pullback, but will the coronavirus stop anyone from filing their taxes or balancing their books?
Aerospace & Defense
Boeing board changes better late than never, except for those who lost their lives. We have been excoriating Boeing (BA $303-$306-$446) for the past year, primarily because a boardroom attitude of arrogance drove a glittering jewel of the American economy off the road and into a ditch. Our disappointment turned to disgust when we took a deeper look into who was sitting on the Boeing board of directors. Take the notion of a professional corporate board, one replete with industry experience and complementary insight, and turn that concept on its head; you then get a feel for the Boeing board. The one word that came to mind was “cronyism.” Surprisingly, it now appears that some movement is underway to change that condition. The company has nominated two outsiders with extensive safety and engineering experience to join the board. Akhil Johri has been the CFO at United Technologies (UTX), and Steve Mollenkopf—one of our favorite CEOs—is at the helm of chipmaker Qualcomm (QCOM, a Penn New Frontier Fund member). While those are two welcome additions, there are still members which need to go. After the moves were announced, Chairman Larry Kellner, a former CEO of Continental Airlines (cronyism), said, “We just feel like this is the right balance...” Considering proxy advisory firm Glass Lewis recommended shareholders vote against retaining Kellner on the board last year, his sentiments ring a bit hollow. These two excellent nominees represent a step in the right direction, but it still feels as though the company doesn't fully comprehend the scope of what is going on. Keeping the MAX name is evidence of that. If you would have told us, at virtually any other time in the past 23 years, that Boeing shares were sitting at their 52-week low, we would have immediately jumped in. Right now, though that condition exists, the shares are not even on our radar.
2020.02.25 SmileDirectClub (SDC) falls 20% after hours following revenue miss and lowered guidance...
2020.02.25 Stocks tumble for second day; major indexes now off in excess of 6% over two trading days (we called for a 10-15% correction in the first quarter of the year in our 2020 Outlook & Strategy report)...
2020.02.24 Zoom Technologies spikes 21% as market plummets as more business meetings held via technology as opposed to travel (and by the end of the trading session, it had given back 23%, ending the session down 1.79%...
2020.02.24 Dow briefly drops over 1,000 points as coronavirus spreads...
Media & Entertainment
A shocking change in the Disney C-suite: Iger is leaving the CEO role. We were relieved to hear Walt Disney (DIS $107-$123-$153) CEO Bob Iger state, late last year, that he wouldn't be retiring until 2021. We are up massively in our Disney position within the Penn Global Leaders Club, and Iger can take responsibility for the lion's share of the stock's move. That is why we were shocked to hear that Iger is actually stepping out of the CEO role, effective immediately. Technically, he is not leaving the company until 2021, but if he knew he would be stepping aside, he should have made that clear. There are reports that Iger recently told a journalist that he "didn't want to run the company anymore." Well and good, but give us some advance notice. We were not alone in our surprise—senior executives at the media and entertainment giant were apparently caught off guard as well. With Iger moving into the executive chairman role, we can envision one of two not-very-positive scenarios: either he will overshadow the new CEO—at least within the C-suite—and their relationship will become strained, or he will simply be a figurehead. Neither alternative seems very palatable. The new CEO, Bob Chapek, will report to both Iger and the board of directors. Uh oh. Hello, scenario one? As the recent head of parks and resorts, Chapek undoubtedly knows that side of the business, but what about the company's enormous strategic move into the streaming business? Chapek beat out, in fact, Disney's head of that up-and-coming service, Kevin Mayer. Disney employees throughout the company didn't get a memo about the change until after Iger and Chapek gave a joint conference call to analysts and an interview on a major business network. We have to wonder how that went over within the walls of the company. All of this is very uncharacteristic for the Disney we revered under the control of the skilled Iger. We will have to wait and see how the story unfolds going forward. While we have no plans to sell our Disney shares from the Global Leaders Club, we have put the company on our watch list for possible action. Management matters, and we just don't yet know enough about Chapek, or what internal struggles might ensue over the coming year or two.
Headlines for the Week of 16 Feb 2020—22 Feb 2020
Market Pulse
A subtle specter of the late 1990s is beginning to manifest. Back in 1999, when I was a broker at a tiny Edward Jones office, I began to notice an interesting trend. An increasing number of prospective clients began calling or dropping by the office with an intense interest in the stock market. At first, I patted myself on the back, confident that all of my hard work was finally paying off. Nearly all of the questions, however, seemed to revolve around pie-in-the-sky companies which had never turned a profit. Companies like Infospace, Pets.com, Global Crossing, and AT&T spinoff Lucent—with no earnings but a $250 billion market cap! Within three years, the index all of these companies called home—the NASDAQ—had lost 78% of its value. No, it is not 1999, but there is a sudden movement afoot that reminds us a lot of that pre-bubble-burst year. Through apps being offered by companies like Betterment, Robinhood, and Stash, traders (we can't call them investors) are able to buy fractional shares. Want to buy into Amazon (AMZN), but only have $10 to spend? No problem! Just buy 1/200th of a share! Heck, don't have $10 to spend? You can "invest" on Robinhood with just $1. Want to venture some guesses as to the most-bought stocks on Robinhood? If you are thinking of blue chips like Union Pacific, McDonald's, and General Mills, forget it. Some of the most hotly-traded stocks include: Cronos (marijuana), GoPro (barely turns a profit but hey, selling for under $4), Aurora Cannabis, and Fitbit (last profit, 2015). In other words, they are playing the equity version of Candy Crush Saga on their iPhones. I remember how confident those prospects were back in 1999. If only they knew what was waiting for them around the corner. Again, this is not 1999, and we feel relatively confident with where the economy and the markets are sitting right now. However, fundamentals still matter. Ask 99 out of 100 Robinhood traders what the PE ratio is for the Aurora Cannabis stock they just bought, and they wouldn't have a clue. (Trick question: a company has to have earnings to register a PE ratio).
Sovereign Debt & Global Fixed Income
The 30-year Treasury just hit the lowest yield in its history. How bad is it for fixed income investors? Consider this: the longer you go out on the maturity ladder, the more interest rate risk you are taking on, meaning you will be rewarded for that risk. Right now, the US government will pay you a whopping 1.9% to take on the interest rate risk of buying a 30-year Treasury. In fact, the long bond hit a historic low yield intraday of 1.88% on Friday. Madness. For those living on the income from their bonds, what choice do they have but to take on more risk and move a larger percentage of their portfolios into dividend-paying stocks? While that condition is helping to prop up fat dividend payers, it also means that many older Americans with a low risk tolerance are probably taking on more risk than they should within their portfolios—and that condition is unlikely to change anytime soon. Of course, if interest rates do move up, the government will be forced to pay even more to service the country's $23 trillion debt load. Incredibly, yields in the US are some of the highest in the developed world. As we say, utter madness. This global debt party absolutely will bust one of these days, and it will probably put the tech bubble of 2000-2002 and the banking crisis of 2007-2009 to shame. Sovereign irresponsibility is at an all-time high.
2020.02.21 Dropbox DBX aims for profitability by the end of 2020; stock up 23% post-earnings
2020.02.20 L Brands LB confirms Victoria's Secret will go public, Sycamore Partners buying for $1.1B
2020.02.20 Penn member Viacom/CBS VIACA plunges 14% after first post-merger earnings report: missed on top and bottom; PE of 4?!
2020.02.20...DPZ Domino's Pizza strong beat, shares up 25% on day; earnings, revenue beat; CEO calls aggregators "circling firing squad"
2020.02.20...Gold is negatively correlated to the US dollar; don't let their recent correlation fool you
Capital Markets
Morgan Stanley to buy E*Trade in all-stock deal valued at $13 billion. Just three months after the major announcement that discount brokerage firm Charles Schwab (SCHW) would buy TD Ameritrade (AMTD) for $26 billion, Morgan Stanley (MS $39-$52-$58) decided it had better get in the game—the $83 billion financial services giant will buy online brokerage firm E*Trade (ETFC $35-$53-$57) for $13 billion in an all-stock deal. With the acquisition, MS will pick up around five million retail customers, over $350 million in new assets, and—most importantly—get in the lucrative and growing online banking marketplace. The company had rolled out an online tool for smaller customers last year, which will be cobbled together with the E*Trade system. Clearly, CEO James Gorman aims to take on Schwab and Fidelity by making this move, but will it work? As could be expected, shares of E*Trade spiked nearly 28% immediately after the announcement, but they proceeded to fall about ten percent from the peak as investors began to digest the news. As for the acquirer, shares of MS were off about 6% in the two days following the release. Many larger shareholders were clearly underwhelmed by the move, especially with E*Trade retaining its name. Time will tell, but with the advent of fintech, it did feel as though Morgan Stanley needed to make a bold move. This leaves Goldman Sachs (GS) on the big banking side, and Interactive Brokers (IBKR) as the last major online discount brokerage not going through some type of recent or planned merger. Interestingly, it appears that management teams at both of these companies considered their own play for E*Trade, with both deciding against a move. We love Interactive's fiery founder and CEO, Hungarian-born Thomas Peterffy, and would like to see that company remain independent—and profitable.
Interactive Media & Services
Groupon, dropping 42% in one day alone, becomes a shell of its former self. Companies have personalities, just like people. Some we love, some we loathe, and some are just...meh. For us, Groupon (GRPN $2-$2-$4) has remained in the second category pretty much ever since it went public. The company (meaning top executives) took some actions early on that made us question everything about the firm. Needless to say, we have never owned the discount "middleman." And that has been a good thing. Once a $5 billion company selling for $26 per share, GRPN now has a market cap of $1 billion and is going for $1.78. The final red flag for investors seemed to come when management telegraphed it would be looking to do a reverse split—almost always a sign of desperation. That is pure financial engineering and window dressing, designed to make a potential disaster-in-the-making look like a more attractive option for investment dollars. (Plus, are you really going to attract more investors with a $4 stock as opposed to a $2 stock?) Yet another red flag was raised this week when Groupon announced it would be exiting the physical goods space altogether, focusing on "local experiences." Stating that the physical goods space was saturated, it saw a $1 trillion market for these experiences. That enormous number may hold true, but who knows what microscopic fraction of the $1 trillion will involve someone using Groupon? And, even if they do, the company receives just a tiny percentage of that amount. As for what really matters, the numbers: Groupon's revenues fell 23% YoY in the most recent quarter. Yikes. There is a lot more I would like to say about this company, but better judgment says to leave it at this: avoid the stock like the plague.
eCommerce
Fiverr International pops over 7% on FY2020 forecast, smaller losses than expected. Fiverr International LTD (FVRR $17-$30-$44) is to the digital services world what Amazon (AMZN) is to the physical products world. The company is a digital marketplace, acting as the conduit between professionals selling their services and customers who are looking for those services. Shares of FVRR, which just began trading last summer, jumped over 7% after the company reported guidance in excess of what the Street was looking for, and after announcing quarterly losses which were smaller than expected. Fiverr said it expects revenues of around $140 million in FY2020—versus the average analyst forecast of $135 million—and reported losses of $0.23 per share versus an $0.84 per share loss in the same quarter last year. Quarterly revenues rose from $20 million a year ago to $30 million this past quarter. We have used Fiverr and thoroughly enjoyed the experience. An excellent array of services at good prices and with plenty of competition to choose from within the platform. Since going public, quarterly YoY revenue growth has been: 42%, 41%, and 42%, chronologically. Not bad. Definitely a higher-risk proposition, but worth a look for the higher-beta portion of a portfolio.
Food Products
Buffet's Kraft-Heinz dealmaking blunder continues to go south. Sour grapes? Absolutely. We used to love trading Kraft (formerly KRFT) before Warren Buffet's financial engineering forced the company into the arms of Brazil's 3G, which owned the floundering Heinz (now KHC $25-$27-$49). Just like we used to love owning Burlington Northern Santa Fe (formerly BNI) before Buffet gobbled the company up because he "liked playing with toy railroads as a kid." So forgive us for having a little schadenfreude with respect to the current state of Kraft-Heinz since the forced marriage. Shares of the food products company are now down 72% in the past three years, despite (or aided by) the draconian cost-cutting and employee-slashing tactics that 3G is so well known for. Now comes word that the company's debt has lost its coveted investment-grade status, meaning it is now in junk bond territory—which can lead to a host of new financial troubles for the firm. The company is trying to buy its way out of dire straits through even more acquisitions, but it was forced to end its bid for both Unilever and Pinnacle Foods as of late. With higher input costs and ineffective leadership, steer clear. Sadly, the company owns some iconic lines, like Oscar Meyer and Kraft cheese (obviously). These lines were doing just fine until the Buffet-sponsored takeover. Sad.
Space Sciences & Exploration
Virgin Galactic's meteoric rise says more about investors' thirst for exciting options than it does about Branson's company. It is exciting, it is cutting edge, it is science fiction come to life, and it is...ridiculously overpriced. Sir Richard Branson's space tourism company, Virgin Galactic (SPCE $7-$30-$29) didn't shoot out of the gate; it kind of limped out of the gate. After going public last year, its stock price floated around $10 per share before abruptly falling to $7.25 last November—just three months ago. All of that changed around 05 Dec, when the company began its crazy ride from $7.25 to $29.70 this week. So, what changed? Actually, really not much at all. Yet another piece of evidence that efficient market theory is bunk, the only real catalyst for the rise was Morgan Stanley initiating coverage on the firm with a Buy rating and a $22/share price target. The analyst compared the company's risk/reward profile to a biotech firm, but that is pretty flimsy. After all, a biotech can hit it big with a blockbuster and be in the black virtually overnight. Virgin Galactic only has so much capacity in its six-person Unity spacecraft. Even at $250k per flight, it would need a fleet of spacecraft launching daily to justify the stock price. More than a statement about the firm, investors are merely showing their desire for stocks in this exciting industry. We are waiting for Elon Musk's SpaceX to go public, but don't see that happening anytime soon. Space travel is going to be a multi-trillion dollar industry in due time. In the meantime, we suggest investors look for small- and mid-cap support companies which supply the high-flying names with parts and components.
A subtle specter of the late 1990s is beginning to manifest. Back in 1999, when I was a broker at a tiny Edward Jones office, I began to notice an interesting trend. An increasing number of prospective clients began calling or dropping by the office with an intense interest in the stock market. At first, I patted myself on the back, confident that all of my hard work was finally paying off. Nearly all of the questions, however, seemed to revolve around pie-in-the-sky companies which had never turned a profit. Companies like Infospace, Pets.com, Global Crossing, and AT&T spinoff Lucent—with no earnings but a $250 billion market cap! Within three years, the index all of these companies called home—the NASDAQ—had lost 78% of its value. No, it is not 1999, but there is a sudden movement afoot that reminds us a lot of that pre-bubble-burst year. Through apps being offered by companies like Betterment, Robinhood, and Stash, traders (we can't call them investors) are able to buy fractional shares. Want to buy into Amazon (AMZN), but only have $10 to spend? No problem! Just buy 1/200th of a share! Heck, don't have $10 to spend? You can "invest" on Robinhood with just $1. Want to venture some guesses as to the most-bought stocks on Robinhood? If you are thinking of blue chips like Union Pacific, McDonald's, and General Mills, forget it. Some of the most hotly-traded stocks include: Cronos (marijuana), GoPro (barely turns a profit but hey, selling for under $4), Aurora Cannabis, and Fitbit (last profit, 2015). In other words, they are playing the equity version of Candy Crush Saga on their iPhones. I remember how confident those prospects were back in 1999. If only they knew what was waiting for them around the corner. Again, this is not 1999, and we feel relatively confident with where the economy and the markets are sitting right now. However, fundamentals still matter. Ask 99 out of 100 Robinhood traders what the PE ratio is for the Aurora Cannabis stock they just bought, and they wouldn't have a clue. (Trick question: a company has to have earnings to register a PE ratio).
Sovereign Debt & Global Fixed Income
The 30-year Treasury just hit the lowest yield in its history. How bad is it for fixed income investors? Consider this: the longer you go out on the maturity ladder, the more interest rate risk you are taking on, meaning you will be rewarded for that risk. Right now, the US government will pay you a whopping 1.9% to take on the interest rate risk of buying a 30-year Treasury. In fact, the long bond hit a historic low yield intraday of 1.88% on Friday. Madness. For those living on the income from their bonds, what choice do they have but to take on more risk and move a larger percentage of their portfolios into dividend-paying stocks? While that condition is helping to prop up fat dividend payers, it also means that many older Americans with a low risk tolerance are probably taking on more risk than they should within their portfolios—and that condition is unlikely to change anytime soon. Of course, if interest rates do move up, the government will be forced to pay even more to service the country's $23 trillion debt load. Incredibly, yields in the US are some of the highest in the developed world. As we say, utter madness. This global debt party absolutely will bust one of these days, and it will probably put the tech bubble of 2000-2002 and the banking crisis of 2007-2009 to shame. Sovereign irresponsibility is at an all-time high.
2020.02.21 Dropbox DBX aims for profitability by the end of 2020; stock up 23% post-earnings
2020.02.20 L Brands LB confirms Victoria's Secret will go public, Sycamore Partners buying for $1.1B
2020.02.20 Penn member Viacom/CBS VIACA plunges 14% after first post-merger earnings report: missed on top and bottom; PE of 4?!
2020.02.20...DPZ Domino's Pizza strong beat, shares up 25% on day; earnings, revenue beat; CEO calls aggregators "circling firing squad"
2020.02.20...Gold is negatively correlated to the US dollar; don't let their recent correlation fool you
Capital Markets
Morgan Stanley to buy E*Trade in all-stock deal valued at $13 billion. Just three months after the major announcement that discount brokerage firm Charles Schwab (SCHW) would buy TD Ameritrade (AMTD) for $26 billion, Morgan Stanley (MS $39-$52-$58) decided it had better get in the game—the $83 billion financial services giant will buy online brokerage firm E*Trade (ETFC $35-$53-$57) for $13 billion in an all-stock deal. With the acquisition, MS will pick up around five million retail customers, over $350 million in new assets, and—most importantly—get in the lucrative and growing online banking marketplace. The company had rolled out an online tool for smaller customers last year, which will be cobbled together with the E*Trade system. Clearly, CEO James Gorman aims to take on Schwab and Fidelity by making this move, but will it work? As could be expected, shares of E*Trade spiked nearly 28% immediately after the announcement, but they proceeded to fall about ten percent from the peak as investors began to digest the news. As for the acquirer, shares of MS were off about 6% in the two days following the release. Many larger shareholders were clearly underwhelmed by the move, especially with E*Trade retaining its name. Time will tell, but with the advent of fintech, it did feel as though Morgan Stanley needed to make a bold move. This leaves Goldman Sachs (GS) on the big banking side, and Interactive Brokers (IBKR) as the last major online discount brokerage not going through some type of recent or planned merger. Interestingly, it appears that management teams at both of these companies considered their own play for E*Trade, with both deciding against a move. We love Interactive's fiery founder and CEO, Hungarian-born Thomas Peterffy, and would like to see that company remain independent—and profitable.
Interactive Media & Services
Groupon, dropping 42% in one day alone, becomes a shell of its former self. Companies have personalities, just like people. Some we love, some we loathe, and some are just...meh. For us, Groupon (GRPN $2-$2-$4) has remained in the second category pretty much ever since it went public. The company (meaning top executives) took some actions early on that made us question everything about the firm. Needless to say, we have never owned the discount "middleman." And that has been a good thing. Once a $5 billion company selling for $26 per share, GRPN now has a market cap of $1 billion and is going for $1.78. The final red flag for investors seemed to come when management telegraphed it would be looking to do a reverse split—almost always a sign of desperation. That is pure financial engineering and window dressing, designed to make a potential disaster-in-the-making look like a more attractive option for investment dollars. (Plus, are you really going to attract more investors with a $4 stock as opposed to a $2 stock?) Yet another red flag was raised this week when Groupon announced it would be exiting the physical goods space altogether, focusing on "local experiences." Stating that the physical goods space was saturated, it saw a $1 trillion market for these experiences. That enormous number may hold true, but who knows what microscopic fraction of the $1 trillion will involve someone using Groupon? And, even if they do, the company receives just a tiny percentage of that amount. As for what really matters, the numbers: Groupon's revenues fell 23% YoY in the most recent quarter. Yikes. There is a lot more I would like to say about this company, but better judgment says to leave it at this: avoid the stock like the plague.
eCommerce
Fiverr International pops over 7% on FY2020 forecast, smaller losses than expected. Fiverr International LTD (FVRR $17-$30-$44) is to the digital services world what Amazon (AMZN) is to the physical products world. The company is a digital marketplace, acting as the conduit between professionals selling their services and customers who are looking for those services. Shares of FVRR, which just began trading last summer, jumped over 7% after the company reported guidance in excess of what the Street was looking for, and after announcing quarterly losses which were smaller than expected. Fiverr said it expects revenues of around $140 million in FY2020—versus the average analyst forecast of $135 million—and reported losses of $0.23 per share versus an $0.84 per share loss in the same quarter last year. Quarterly revenues rose from $20 million a year ago to $30 million this past quarter. We have used Fiverr and thoroughly enjoyed the experience. An excellent array of services at good prices and with plenty of competition to choose from within the platform. Since going public, quarterly YoY revenue growth has been: 42%, 41%, and 42%, chronologically. Not bad. Definitely a higher-risk proposition, but worth a look for the higher-beta portion of a portfolio.
Food Products
Buffet's Kraft-Heinz dealmaking blunder continues to go south. Sour grapes? Absolutely. We used to love trading Kraft (formerly KRFT) before Warren Buffet's financial engineering forced the company into the arms of Brazil's 3G, which owned the floundering Heinz (now KHC $25-$27-$49). Just like we used to love owning Burlington Northern Santa Fe (formerly BNI) before Buffet gobbled the company up because he "liked playing with toy railroads as a kid." So forgive us for having a little schadenfreude with respect to the current state of Kraft-Heinz since the forced marriage. Shares of the food products company are now down 72% in the past three years, despite (or aided by) the draconian cost-cutting and employee-slashing tactics that 3G is so well known for. Now comes word that the company's debt has lost its coveted investment-grade status, meaning it is now in junk bond territory—which can lead to a host of new financial troubles for the firm. The company is trying to buy its way out of dire straits through even more acquisitions, but it was forced to end its bid for both Unilever and Pinnacle Foods as of late. With higher input costs and ineffective leadership, steer clear. Sadly, the company owns some iconic lines, like Oscar Meyer and Kraft cheese (obviously). These lines were doing just fine until the Buffet-sponsored takeover. Sad.
Space Sciences & Exploration
Virgin Galactic's meteoric rise says more about investors' thirst for exciting options than it does about Branson's company. It is exciting, it is cutting edge, it is science fiction come to life, and it is...ridiculously overpriced. Sir Richard Branson's space tourism company, Virgin Galactic (SPCE $7-$30-$29) didn't shoot out of the gate; it kind of limped out of the gate. After going public last year, its stock price floated around $10 per share before abruptly falling to $7.25 last November—just three months ago. All of that changed around 05 Dec, when the company began its crazy ride from $7.25 to $29.70 this week. So, what changed? Actually, really not much at all. Yet another piece of evidence that efficient market theory is bunk, the only real catalyst for the rise was Morgan Stanley initiating coverage on the firm with a Buy rating and a $22/share price target. The analyst compared the company's risk/reward profile to a biotech firm, but that is pretty flimsy. After all, a biotech can hit it big with a blockbuster and be in the black virtually overnight. Virgin Galactic only has so much capacity in its six-person Unity spacecraft. Even at $250k per flight, it would need a fleet of spacecraft launching daily to justify the stock price. More than a statement about the firm, investors are merely showing their desire for stocks in this exciting industry. We are waiting for Elon Musk's SpaceX to go public, but don't see that happening anytime soon. Space travel is going to be a multi-trillion dollar industry in due time. In the meantime, we suggest investors look for small- and mid-cap support companies which supply the high-flying names with parts and components.
Headlines for the Week of 09 Feb 2020—15 Feb 2020
Real Estate Services
Redfin, a company you've probably never heard of, just beat expectations and spiked over 18%. Quick, answer this question: What does Redfin do? Sort of sounds like Red Hat, which IBM just bought, so your first guess might be, "technology of some type." Partially right. Redfin (RDFN $15-$30-$26) is a tech-based real estate brokerage company. It is—to real estate—what fintech is to the financial services industry. For around a 1% listing fee, the company will deploy a host of technology and social media solutions, combined with a Redfin agent on the ground, to sell your home—or find you one to buy—while saving you "thousands of dollars" (according to the company). Investors have been buying into the hype, with shares of the $2.8 billion Zillow (ZG) competitor jumping 18% after posting a smaller loss than expected. With this week's bump, shares of Redfin have now gained 65% over the past year. The company, which has yet to turn a profit, brought in $233 million in revenues in Q4, losing $0.08 per share in the process. The Street was expecting a per share loss of 12 cents. This is a highly competitive industry, and $10 billion Zillow has a lot more firepower to deploy. Furthermore, traditional real estate companies are getting more savvy at deploying technology, either organic or third-party. We would steer clear of this current small-cap darling.
Retail REITs
Our favorite retail REIT, Simon Property Group, to buy Taubman Centers in a $3.6 billion deal. While everyone is predicting the end of the physical store, and certainly the big mall, the second-largest REIT in the country—and largest retail REIT—is aggressively pushing forward with its ambitious strategic plans. To that end, Simon Property Group (SPG $130-$141-$186) just announced it would be purchasing smaller competitor Taubman Centers (TCO $53) in a $3.6 billion deal. Here's what investors need to understand about retail REITs: it's all about quality and location. While as many as one-third of all big malls across America may close over the next ten years, the victims will overwhelmingly be Class B and Class C properties. The top-tier malls, the Class A variety, are the ones owned by Simon Property Group and Taubman. Let's take a look at the numbers. In Q4, Simon reported an average of $693 per square foot in sales. That number is impressive, but it pales in comparison to Taubman's $972 in sales per square foot in the same quarter. The combination will be powerful. Readers may recall that we highlighted Simon at $140 per share in our last report. In addition to its acquisition strategy and a massive plan (already underway) to create "experiences" at its malls, Simon is not afraid to pick up actual retailers: management announced last week that it would buy Forever 21 out of bankruptcy for a paltry $81 million. Who better than a first-rate landlord to turnaround a struggling retailer? When the Taubman deal is done, Simon will have a healthy capitalization rate of around 6.2%. We will be doing some renovating of our own within the REIT portion of our strategies. Look for Simon to replace another REIT which has had a strong run for us, but whose peak seems to be forming. Additionally, Simon's 6% dividend yield is about twice that of the one we look to jettison soon. Members will be kept up to date in the Trading Desk, while Penn Wealth Management* clients will have the trades automatically made within their accounts.
Telecom Services
The federal judge handling the Sprint/T-Mobile merger lawsuit has ruled in favor of the companies, pushing Sprint shares up 73% at Tuesday's open. Despite all of the naysayers predicting this merger would be shot down, here is what we said in December of 2019:
What is the federal judge telegraphing about the T-Mobile/Sprint lawsuit? (09 Dec 2019) The lawsuit was a colossal joke from the start. A group of thirteen (down from sixteen) state attorneys general, led by New York and California (which tells us everything we need to know), is suing to stop the Sprint (S $5-$5-$8)/T-Mobile (TMUS $60-$76-$85) merger on grounds that it will limit competition in the 5G arena, harming consumers. News flash for the political hack AGs: Sprint probably won't make it without the merger, so what will that do to the competitive landscape? For its part, the Department of Justice has already given the green light to the merger, which further points to the politics at the heart of the lawsuit. In the latest move, US District Judge Victor Marrero told both sides in the suit to skip their opening arguments and get on with calling their witnesses. This indicates to us that he has very little patience in the matter, which we believe bodes well for the telecom companies. It should be noted that, as part of the DoJ approval process, Sprint would have to divest itself of some assets to Dish Network (DISH) so that company would be able to build its own 5G network. We believe the judge recognizes this suit as the frivolous waste of taxpayer money that it is, and will ultimately rule for the merger. We can't wait to see the bloviating AGs rush to the microphones to screech about the injustice thrust upon the public by the judicial system. Maybe Al Sharpton will even show up with his bullhorn.
Energy Commodities
Everyone is bashing oil, and crude just fell below $50 per barrel. What a great time to buy oil. Crude oil fell below $50 per barrel on Monday, and we love it. Not only is gas sitting around $2 per gallon at our nearby Walmart, one of the two ETFs we use to go long crude, USO, is sitting near $10 per share. While we don't expect it to hit its old high of $117 (the ETF, that is), oil will not stay below $50 for the rest of this year—sadly. Yes, everyone is predicting the end of fossil fuels, right after they utter the politically-correct acronym ESG (seemingly every five minutes), but we have a long way to go before crude meets its demise. And yes, China is stinging economically from the coronavirus and domestic troubles, but there are plenty of forces that will assure crude doesn't go much lower. Seems like a good time to pick up some USO, enjoy the $2/gallon gas each fill-up, sit back, and wait. Odds are good you will be rewarded. Furthermore, if you have been listening to all of the ESG lemmings—many of whom are just uttering what they think others want to hear—you are probably underweight energy anyway. Let's play a game. You buy $10,000 worth of the First Trust Global Wind Energy ETF (FAN $15.23), an ESG darling, and I'll lay odds on $10,000 worth of USO at $10.43, and we'll check the balances in one year. I made myself a note for 11 Feb 2021 to report back. And for the record, I love Tesla, their gigafactories, and alternative energy, from solar to hydrogen. I am simply saying the pundits have gotten a little bit ahead of themselves.
IT: Cybersecurity
The US government charges four Chinese military members for the massive 2017 Equifax data breach. Back in the fall of 2017, we reported on the security breach at Equifax (EFX $106-$154-$157) that left around 150 million Americans' private data exposed. At the time, we didn't know who was directly behind the cyberattack, but we didn't have nice things to say about Equifax. As the hack was taking place, the company was busy lobbying congress to reduce its liability when consumers get hit in a security breach. We now have the missing piece of the puzzle, as Attorney General William Barr announced the indictment of four military officers (we assume officers, rank unknown) stationed in the People's Liberation Army 54th Research Institute. We figured it would ultimately come back to North Korea, China, or Iran, and we must assume that all three countries will continue trying to disrupt American commerce to the greatest possible degree. What was stolen in the 2017 hack? How about social security numbers, driver's license numbers, birthdays, and addresses. Essentially, everything needed to ruin someone's financial life. The CEO of Equifax, Richard Smith, was ultimately fired, but does anyone feel safer? Obviously, China will never extradite the Chinese officers—who were working under the direction of the Communist Party of China—to the US, nor will they probably even admit to the hack, but at least the truth is out. We completely supported the administration's tough negotiations with China over their unfair trade practices, and the phase 1 deal is a good first step. However, China will remain an adversary of the US until the communists are no longer in charge. That will be awhile. In the meantime, excellent job by the Justice Department in identifying the state-sponsored criminals. Everyone should be using a strong identity theft protection program—but we would advise against the one Equifax offers, for obvious reasons.
Global Strategy: Trade
Making good on part of the phase one of trade deal, China halves tariffs on $75 billion worth of US products. Upholding its end of the bargain, China has announced that it will cut in half the tariffs imposed on $75 billion worth of US goods coming into the country—yet another de-escalation of the tensions caused by the trade war, and more welcome news for US manufacturers and investors. Over 1,700 goods are on the affected list, to include agricultural products, oil, and autos. While skeptics still question whether or nor the Chinese will live up to their promise to buy an additional $200 billion worth of US goods over the next two years, this reduction in tariffs is certainly a good sign. While the coronavirus is having a real impact on the Chinese economy, keep in mind that nearly half of that country's pigs have either died from African swine fever or been killed to staunch the outbreak. That sad tragedy means the country must import massive amounts of pork, much of which coming from the US. China has its hands full right now, fighting the coronavirus and political turmoil in Hong Kong and Taiwan. While the virus is a human tragedy, these internal challenges will keep them focused on limiting internal damage, meaning less time to saber-rattle against the US. We fully expect the $200 billion worth of US goods to be purchased, which will certainly help US GDP. Additionally, the USMCA will take effect 90 days after Canada ratifies the treaty, which will provide another shot in the arm to the US economy.
Redfin, a company you've probably never heard of, just beat expectations and spiked over 18%. Quick, answer this question: What does Redfin do? Sort of sounds like Red Hat, which IBM just bought, so your first guess might be, "technology of some type." Partially right. Redfin (RDFN $15-$30-$26) is a tech-based real estate brokerage company. It is—to real estate—what fintech is to the financial services industry. For around a 1% listing fee, the company will deploy a host of technology and social media solutions, combined with a Redfin agent on the ground, to sell your home—or find you one to buy—while saving you "thousands of dollars" (according to the company). Investors have been buying into the hype, with shares of the $2.8 billion Zillow (ZG) competitor jumping 18% after posting a smaller loss than expected. With this week's bump, shares of Redfin have now gained 65% over the past year. The company, which has yet to turn a profit, brought in $233 million in revenues in Q4, losing $0.08 per share in the process. The Street was expecting a per share loss of 12 cents. This is a highly competitive industry, and $10 billion Zillow has a lot more firepower to deploy. Furthermore, traditional real estate companies are getting more savvy at deploying technology, either organic or third-party. We would steer clear of this current small-cap darling.
Retail REITs
Our favorite retail REIT, Simon Property Group, to buy Taubman Centers in a $3.6 billion deal. While everyone is predicting the end of the physical store, and certainly the big mall, the second-largest REIT in the country—and largest retail REIT—is aggressively pushing forward with its ambitious strategic plans. To that end, Simon Property Group (SPG $130-$141-$186) just announced it would be purchasing smaller competitor Taubman Centers (TCO $53) in a $3.6 billion deal. Here's what investors need to understand about retail REITs: it's all about quality and location. While as many as one-third of all big malls across America may close over the next ten years, the victims will overwhelmingly be Class B and Class C properties. The top-tier malls, the Class A variety, are the ones owned by Simon Property Group and Taubman. Let's take a look at the numbers. In Q4, Simon reported an average of $693 per square foot in sales. That number is impressive, but it pales in comparison to Taubman's $972 in sales per square foot in the same quarter. The combination will be powerful. Readers may recall that we highlighted Simon at $140 per share in our last report. In addition to its acquisition strategy and a massive plan (already underway) to create "experiences" at its malls, Simon is not afraid to pick up actual retailers: management announced last week that it would buy Forever 21 out of bankruptcy for a paltry $81 million. Who better than a first-rate landlord to turnaround a struggling retailer? When the Taubman deal is done, Simon will have a healthy capitalization rate of around 6.2%. We will be doing some renovating of our own within the REIT portion of our strategies. Look for Simon to replace another REIT which has had a strong run for us, but whose peak seems to be forming. Additionally, Simon's 6% dividend yield is about twice that of the one we look to jettison soon. Members will be kept up to date in the Trading Desk, while Penn Wealth Management* clients will have the trades automatically made within their accounts.
Telecom Services
The federal judge handling the Sprint/T-Mobile merger lawsuit has ruled in favor of the companies, pushing Sprint shares up 73% at Tuesday's open. Despite all of the naysayers predicting this merger would be shot down, here is what we said in December of 2019:
What is the federal judge telegraphing about the T-Mobile/Sprint lawsuit? (09 Dec 2019) The lawsuit was a colossal joke from the start. A group of thirteen (down from sixteen) state attorneys general, led by New York and California (which tells us everything we need to know), is suing to stop the Sprint (S $5-$5-$8)/T-Mobile (TMUS $60-$76-$85) merger on grounds that it will limit competition in the 5G arena, harming consumers. News flash for the political hack AGs: Sprint probably won't make it without the merger, so what will that do to the competitive landscape? For its part, the Department of Justice has already given the green light to the merger, which further points to the politics at the heart of the lawsuit. In the latest move, US District Judge Victor Marrero told both sides in the suit to skip their opening arguments and get on with calling their witnesses. This indicates to us that he has very little patience in the matter, which we believe bodes well for the telecom companies. It should be noted that, as part of the DoJ approval process, Sprint would have to divest itself of some assets to Dish Network (DISH) so that company would be able to build its own 5G network. We believe the judge recognizes this suit as the frivolous waste of taxpayer money that it is, and will ultimately rule for the merger. We can't wait to see the bloviating AGs rush to the microphones to screech about the injustice thrust upon the public by the judicial system. Maybe Al Sharpton will even show up with his bullhorn.
Energy Commodities
Everyone is bashing oil, and crude just fell below $50 per barrel. What a great time to buy oil. Crude oil fell below $50 per barrel on Monday, and we love it. Not only is gas sitting around $2 per gallon at our nearby Walmart, one of the two ETFs we use to go long crude, USO, is sitting near $10 per share. While we don't expect it to hit its old high of $117 (the ETF, that is), oil will not stay below $50 for the rest of this year—sadly. Yes, everyone is predicting the end of fossil fuels, right after they utter the politically-correct acronym ESG (seemingly every five minutes), but we have a long way to go before crude meets its demise. And yes, China is stinging economically from the coronavirus and domestic troubles, but there are plenty of forces that will assure crude doesn't go much lower. Seems like a good time to pick up some USO, enjoy the $2/gallon gas each fill-up, sit back, and wait. Odds are good you will be rewarded. Furthermore, if you have been listening to all of the ESG lemmings—many of whom are just uttering what they think others want to hear—you are probably underweight energy anyway. Let's play a game. You buy $10,000 worth of the First Trust Global Wind Energy ETF (FAN $15.23), an ESG darling, and I'll lay odds on $10,000 worth of USO at $10.43, and we'll check the balances in one year. I made myself a note for 11 Feb 2021 to report back. And for the record, I love Tesla, their gigafactories, and alternative energy, from solar to hydrogen. I am simply saying the pundits have gotten a little bit ahead of themselves.
IT: Cybersecurity
The US government charges four Chinese military members for the massive 2017 Equifax data breach. Back in the fall of 2017, we reported on the security breach at Equifax (EFX $106-$154-$157) that left around 150 million Americans' private data exposed. At the time, we didn't know who was directly behind the cyberattack, but we didn't have nice things to say about Equifax. As the hack was taking place, the company was busy lobbying congress to reduce its liability when consumers get hit in a security breach. We now have the missing piece of the puzzle, as Attorney General William Barr announced the indictment of four military officers (we assume officers, rank unknown) stationed in the People's Liberation Army 54th Research Institute. We figured it would ultimately come back to North Korea, China, or Iran, and we must assume that all three countries will continue trying to disrupt American commerce to the greatest possible degree. What was stolen in the 2017 hack? How about social security numbers, driver's license numbers, birthdays, and addresses. Essentially, everything needed to ruin someone's financial life. The CEO of Equifax, Richard Smith, was ultimately fired, but does anyone feel safer? Obviously, China will never extradite the Chinese officers—who were working under the direction of the Communist Party of China—to the US, nor will they probably even admit to the hack, but at least the truth is out. We completely supported the administration's tough negotiations with China over their unfair trade practices, and the phase 1 deal is a good first step. However, China will remain an adversary of the US until the communists are no longer in charge. That will be awhile. In the meantime, excellent job by the Justice Department in identifying the state-sponsored criminals. Everyone should be using a strong identity theft protection program—but we would advise against the one Equifax offers, for obvious reasons.
Global Strategy: Trade
Making good on part of the phase one of trade deal, China halves tariffs on $75 billion worth of US products. Upholding its end of the bargain, China has announced that it will cut in half the tariffs imposed on $75 billion worth of US goods coming into the country—yet another de-escalation of the tensions caused by the trade war, and more welcome news for US manufacturers and investors. Over 1,700 goods are on the affected list, to include agricultural products, oil, and autos. While skeptics still question whether or nor the Chinese will live up to their promise to buy an additional $200 billion worth of US goods over the next two years, this reduction in tariffs is certainly a good sign. While the coronavirus is having a real impact on the Chinese economy, keep in mind that nearly half of that country's pigs have either died from African swine fever or been killed to staunch the outbreak. That sad tragedy means the country must import massive amounts of pork, much of which coming from the US. China has its hands full right now, fighting the coronavirus and political turmoil in Hong Kong and Taiwan. While the virus is a human tragedy, these internal challenges will keep them focused on limiting internal damage, meaning less time to saber-rattle against the US. We fully expect the $200 billion worth of US goods to be purchased, which will certainly help US GDP. Additionally, the USMCA will take effect 90 days after Canada ratifies the treaty, which will provide another shot in the arm to the US economy.
Headlines for the Week of 02 Feb 2020—08 Feb 2020
Economics: Work & Pay
Another month, another excellent jobs report. Employers in the US added a whopping 225,000 new jobs in January, far exceeding what was predicted, and 183,000 formerly-discouraged workers moved back in. That was the upshot of a simply excellent jobs report, which was released by the Labor Department on Friday. While the unemployment rate did tick up one notch, from 3.5% to 3.6%, that was a direct result of so many Americans piling back into the workforce. The three-month rolling average rose to 212,000 new jobs created per month. The most impressive new-hires figure came from the health care and education sectors, which added 72,000 new workers. Construction and the leisure/hospitality sectors also came in hot, adding 44,000 and 36,000 new jobs, respectively. Wages also grew more than expected, hitting a 3.1% year-over-year pace. Despite the strong jobs report, the Fed is unlikely to raise rates anytime soon. Inflation remains below their 2% target rate, and that seems to be their central focus right now. Some have been predicting a rate cut, but it would be hard to justify that move.
Multiline Retail
Macy's has a turnaround plan. It looks a lot like their last turnaround plan. We are rooting for Macy's (M $14-$17-$26) to succeed, but we fear they just don't get it. For all of management's big talk, why is the level of service so bad when we go into one of their stores? With the C-suite focusing on code-named strategic turnaround plans, they apparently don't have time to tackle the details, like sending secret shoppers into the stores to gauge what the customer—their only source of revenue—is experiencing. The latest grand strategy is code-named Polaris, which consists of a three-year plan to focus on the healthy parts of the business, address the unhealthy parts, and explore new revenue streams. The first two planks are business school gobbledygook; the third makes sense. In CEO Jeff Gennette's press release on Operation Polaris, which seems eerily similar to 2017's North Star strategy, one particular line caught our attention: "...we have shown we can grow the top-line; however, we have significant work to do to improve the bottom-line." Has he seen a graph of the company's revenues? Hardly proof they know how to grow the top line. Furthermore, "improve the bottom-line" is management-speak for close locations and cut jobs. And, in fact, Macy's plans to shutter 125 locations and can 2,000 employees. We're sure Jeff Gennette is a fine manager, but managers manage declines; leaders lead true turnarounds. Unfortunately, we don't see any real leadership at the firm. Perhaps the best bit of news Macy's received from their Q4 earnings release was the fact that same-store sales only fell 0.7% year-over-year. Hardly something to celebrate, but it did push the company's shares up 5%. We would love to invest in Macy's again—after all, it still has a tiny multiple of 5.45 and an enormous dividend yield of 8.91%, but we just don't believe management has a full grasp on reality.
Household & Personal Products
Casper soars out of the gate, then floats back down to earth on first trading day. It is pretty remarkable what has happened to the tired old mattress industry over the past five years or so, but to say it has been reinvigorated by a number of new entrants would be an understatement. From Purple to Leesa to Sleep Number to Casper, Americans suddenly have a lot of homework to do before plopping down big bucks on a new mattress. The last company mentioned, Casper (CSPR $14), just made its debut as a publicly-traded company this week, but scorched IPO investors seemed to tread lightly after the likes of SmileDirectClub (SDC), Lyft (LYFT), and the mission-aborted WeWork debacle. Initially priced in the $17-$18 range, the underwriters ended up offering 8.35 million shares of the mattress and bedding supplies company at $12. Out of the gate, that appeared to be a smart strategy, as shares were up 30% within a matter of minutes. As the day wore on, however, doubts seemed to creep back in and the stock finished its first trading day at $13.60. While it faces stiff competition, Casper was one of the first "new breed" mattress companies to come along, launching in 2014. Additionally, Target (TGT) has invested $80 million in the firm. Counter that, however, with reports that the giant retailer was prepared to plop down $1 billion to buy the firm outright back in 2017. They dodged a bullet on that one, as Casper's current valuation isn't close to that figure. In addition to its main direct-to-consumer online presence, Casper products are also available from retailers such as Target (obviously), Costco, and Amazon. The best news for the firm, probably, is the fact that they didn't come close to getting the IPO price they wanted. That would have made the downward trajectory look a lot worse. Maybe something good actually came out of the Class of 2019's worst unicorns. Of all the new mattress firms, Casper is probably the strongest. That being said, there is virtually no barrier to entry, so expect the competitive landscape to only become more bloody. We wouldn't touch the shares.
Consumer Electronics
Penn holding iRobot jumps nearly 20% after earnings beat. Last quarter we added consumer robotics company iRobot (IRBT $42-$58-$133) to the Penn New Frontier Fund at $48.80 per share. Not only does the US-based maker of such devices as the Roomba Robot Vacuum and Braava Robot Mop have strong and growing sales, it also has a number of exciting new robotic products coming online soon or in the works. We had several fundamental reasons for buying the firm, but one of the top was the brilliant CEO running the company, Colin Angle. The polar opposite of a slick marketing guy, Angle is the MIT-trained technologist behind these little devices; well, him and his team of engineers. With a low multiple and very low debt load, we felt investors were missing this company's unique story. Many woke up to that story after the Q4 earnings report was released. Revenue was up 11% Y/Y, to $427 million, and earnings came in at $0.70 per share—both metrics beating estimates. The earnings figure was nearly double what the Street was projecting. Shares ended the day up nearly 20%, to $58. We will be highlighting iRobot in the upcoming Robotics issue of The Penn Wealth Report.
Technology Hardware & Equipment
Apple sold nearly 50% more watches last year than the entire Swiss watch industry. According to industry research firm Strategy Analytics, Apple (AAPL $168-$321-$328) shipped 31 million units of its Apple Watch in 2019. That is a staggering number, especially when compared to the fact that the entire Swiss watch industry, which includes the likes of Rolex, Swatch, Breitling, TAG Heuer, and Cartier, sold only 21 million units. That means one American company sold roughly 50% more watches than the country historically known for making timepieces. Considering that the Apple Watch was just launched five years ago, this should serve as a reminder—especially for investors—of just how quickly an industry can be disrupted by new technologies, products, and services. While the Swiss watchmakers are trying to catch up by introducing their own "smart" watches, that effort has been floundering. What they fail to understand is that the buyers of connected devices are buying into the ecosystem story, and nobody can come close to Apple's iOS ecosystem. We used to trade Swatch (SWGAY) on a regular basis. In the five years since the Apple Watch launch, that company has lost 40% of its market cap. There is no such thing as autopilot when it comes to investing; diligence is, and must always remain, the key theme when it comes to making money and protecting portfolios.
e-Commerce
Why would the parent company of the New York Stock Exchange want to buy Internet retailer eBay? Intercontinental Exchange (ICE $72-$96-$102), owner of the New York Stock Exchange, has made a seemingly bizarre offer: it wants to buy global online marketplace eBay (EBAY $34-$37-$42) in a deal that would ultimately be valued well above the company's $30 billion market cap. While there is no indication that eBay has yet to engage with the exchange, news of the offer sent its shares up by over 8%. If you are scratching your head over this one, you are not alone: ICE closed the day down over 7% on the news. Technically, both companies are "exchanges" in the broad sense, and it would even be fair to call both auction houses—pitting buyer versus seller and keeping a cut of the spread. but it is hard to imagine how eBay fits in the exchange's strategic plan. Management at the Atlanta-based firm didn't have a lot to say, other than to confirm the offer and that the company has a "track record of creating shareholder value, both through organic growth and acquisitions...." As for creating shareholder value, it is certainly fair to say that eBay is ripe for a new strategy, after losing immense ground to the likes of Amazon (AMZN). Until the spring of 2007, in fact, eBay was the larger online retailer of the two. We hope the deal goes through—what do eBay shareholders have to lose? If a deal happens, it will be interesting to see how ICE's application of new technologies work in revamping one of the first online marketplaces. It may become a template for other companies—especially in the fintech arena—to emulate.
Beverages & Tobacco
After taking a $4.1 billion write-down on disastrous Juul investment, is there any value to be found in Altria shares? It was supposed to be yet another tactical move to diversify away from its much-maligned tobacco business: pay $12.8 billion for a 35% stake in e-cigarette phenom Juul. Instead, this move has been nothing short of a nightmare for the leading US cigarette and smokeless tobacco company, Altria (MO $39-$47-$58). After taking yet another write-down on its Juul investment ($4.1 billion), its 35% stake is now worth just about $4 billion. With both their cigarette and e-cig businesses under relentless attack by the government and anti-smoking forces, why would an investor want to buy in right now? Actually, there are a number of factors that make MO look attractive at current prices. First is the company's fat 7% dividend yield, which looks to be safe. Secondly, it still appears the company might reunite with its former Philip Morris International (PM) unit which became a separate company back in 2008. Under withering assault, it just makes sense for these allied forces to combine. A third reason to look at MO shares has to do with their successful diversification attempts. The firm now owns a 10.2% stake in Anheuser-Busch InBev (BUD), and has been increasing its stake in cannabis companies. Finally, there is a lot of promise around a new "heat-don't-burn" cigarette technology known as IQOS. This system heats the tobacco to 650°F without any actual combustion taking place. With shares down following news of the Juul charge, yield-hungry investors might want to take a nibble at $47 per share. While we don't own either MO or PM in any of the Penn Strategies, we would place a fair value on Altria shares at $55.
IT Services
CEO Ginni Rometty was one of the reasons we owned IBM, so what does her departure mean for shares of Big Blue? We have often pointed to Virginia "Ginni" Rometty as one of the best CEOs in the country. While shares of pioneering tech company IBM (IBM $127-$144-$153) have struggled under her tenure, she is the one responsible for taking the helm and steering the 109-year-old firm in a different direction—away from its legacy hardware business and into the lucrative world of cloud computing. That is why we immediately got concerned for our Penn Global Leaders Club holding when it was announced that she would be leaving the firm in April. Our concerns were assuaged when we saw who would be taking over: Arvind Krishna is the wonkish Senior Vice President for Cloud and Cognitive Software at the firm, and the principal architect behind IBM's acquisition of Red Hat, a leading cloud and open-source software player. While "wonkish" is not typically an adjective we want to hear associated with a chief executive, that moniker has also been applied to Satya Nadella, the adroit leader responsible for Microsoft's (MSFT) big turnaround. The two men appear to be eerily similar. Both are deep tech gurus with strong engineering backgrounds (Krishna has a PhD in electrical and computer engineering), and both ran the cloud computing business at their respective companies before being elevated to the top spot. The icing on the cake? Red Hat's highly-skilled CEO, Jim Whitehurst, will be Krishna's second-in-command, serving as IBM's new president. Krishna brings a brilliant tech mind to the table, while Whitehurst, who attended the London School of Business and carries an MBA from Harvard, brings the strong management background. Both are scheduled to take on their new roles on the 6th of April. In addition to IBM's quite low (for a tech company) multiple of 14, the attractive 4.5% dividend is a nice bonus for yield-starved investors. It is too early to tell whether or not Krishna will be another Nadella, but we like the odds.
Another month, another excellent jobs report. Employers in the US added a whopping 225,000 new jobs in January, far exceeding what was predicted, and 183,000 formerly-discouraged workers moved back in. That was the upshot of a simply excellent jobs report, which was released by the Labor Department on Friday. While the unemployment rate did tick up one notch, from 3.5% to 3.6%, that was a direct result of so many Americans piling back into the workforce. The three-month rolling average rose to 212,000 new jobs created per month. The most impressive new-hires figure came from the health care and education sectors, which added 72,000 new workers. Construction and the leisure/hospitality sectors also came in hot, adding 44,000 and 36,000 new jobs, respectively. Wages also grew more than expected, hitting a 3.1% year-over-year pace. Despite the strong jobs report, the Fed is unlikely to raise rates anytime soon. Inflation remains below their 2% target rate, and that seems to be their central focus right now. Some have been predicting a rate cut, but it would be hard to justify that move.
Multiline Retail
Macy's has a turnaround plan. It looks a lot like their last turnaround plan. We are rooting for Macy's (M $14-$17-$26) to succeed, but we fear they just don't get it. For all of management's big talk, why is the level of service so bad when we go into one of their stores? With the C-suite focusing on code-named strategic turnaround plans, they apparently don't have time to tackle the details, like sending secret shoppers into the stores to gauge what the customer—their only source of revenue—is experiencing. The latest grand strategy is code-named Polaris, which consists of a three-year plan to focus on the healthy parts of the business, address the unhealthy parts, and explore new revenue streams. The first two planks are business school gobbledygook; the third makes sense. In CEO Jeff Gennette's press release on Operation Polaris, which seems eerily similar to 2017's North Star strategy, one particular line caught our attention: "...we have shown we can grow the top-line; however, we have significant work to do to improve the bottom-line." Has he seen a graph of the company's revenues? Hardly proof they know how to grow the top line. Furthermore, "improve the bottom-line" is management-speak for close locations and cut jobs. And, in fact, Macy's plans to shutter 125 locations and can 2,000 employees. We're sure Jeff Gennette is a fine manager, but managers manage declines; leaders lead true turnarounds. Unfortunately, we don't see any real leadership at the firm. Perhaps the best bit of news Macy's received from their Q4 earnings release was the fact that same-store sales only fell 0.7% year-over-year. Hardly something to celebrate, but it did push the company's shares up 5%. We would love to invest in Macy's again—after all, it still has a tiny multiple of 5.45 and an enormous dividend yield of 8.91%, but we just don't believe management has a full grasp on reality.
Household & Personal Products
Casper soars out of the gate, then floats back down to earth on first trading day. It is pretty remarkable what has happened to the tired old mattress industry over the past five years or so, but to say it has been reinvigorated by a number of new entrants would be an understatement. From Purple to Leesa to Sleep Number to Casper, Americans suddenly have a lot of homework to do before plopping down big bucks on a new mattress. The last company mentioned, Casper (CSPR $14), just made its debut as a publicly-traded company this week, but scorched IPO investors seemed to tread lightly after the likes of SmileDirectClub (SDC), Lyft (LYFT), and the mission-aborted WeWork debacle. Initially priced in the $17-$18 range, the underwriters ended up offering 8.35 million shares of the mattress and bedding supplies company at $12. Out of the gate, that appeared to be a smart strategy, as shares were up 30% within a matter of minutes. As the day wore on, however, doubts seemed to creep back in and the stock finished its first trading day at $13.60. While it faces stiff competition, Casper was one of the first "new breed" mattress companies to come along, launching in 2014. Additionally, Target (TGT) has invested $80 million in the firm. Counter that, however, with reports that the giant retailer was prepared to plop down $1 billion to buy the firm outright back in 2017. They dodged a bullet on that one, as Casper's current valuation isn't close to that figure. In addition to its main direct-to-consumer online presence, Casper products are also available from retailers such as Target (obviously), Costco, and Amazon. The best news for the firm, probably, is the fact that they didn't come close to getting the IPO price they wanted. That would have made the downward trajectory look a lot worse. Maybe something good actually came out of the Class of 2019's worst unicorns. Of all the new mattress firms, Casper is probably the strongest. That being said, there is virtually no barrier to entry, so expect the competitive landscape to only become more bloody. We wouldn't touch the shares.
Consumer Electronics
Penn holding iRobot jumps nearly 20% after earnings beat. Last quarter we added consumer robotics company iRobot (IRBT $42-$58-$133) to the Penn New Frontier Fund at $48.80 per share. Not only does the US-based maker of such devices as the Roomba Robot Vacuum and Braava Robot Mop have strong and growing sales, it also has a number of exciting new robotic products coming online soon or in the works. We had several fundamental reasons for buying the firm, but one of the top was the brilliant CEO running the company, Colin Angle. The polar opposite of a slick marketing guy, Angle is the MIT-trained technologist behind these little devices; well, him and his team of engineers. With a low multiple and very low debt load, we felt investors were missing this company's unique story. Many woke up to that story after the Q4 earnings report was released. Revenue was up 11% Y/Y, to $427 million, and earnings came in at $0.70 per share—both metrics beating estimates. The earnings figure was nearly double what the Street was projecting. Shares ended the day up nearly 20%, to $58. We will be highlighting iRobot in the upcoming Robotics issue of The Penn Wealth Report.
Technology Hardware & Equipment
Apple sold nearly 50% more watches last year than the entire Swiss watch industry. According to industry research firm Strategy Analytics, Apple (AAPL $168-$321-$328) shipped 31 million units of its Apple Watch in 2019. That is a staggering number, especially when compared to the fact that the entire Swiss watch industry, which includes the likes of Rolex, Swatch, Breitling, TAG Heuer, and Cartier, sold only 21 million units. That means one American company sold roughly 50% more watches than the country historically known for making timepieces. Considering that the Apple Watch was just launched five years ago, this should serve as a reminder—especially for investors—of just how quickly an industry can be disrupted by new technologies, products, and services. While the Swiss watchmakers are trying to catch up by introducing their own "smart" watches, that effort has been floundering. What they fail to understand is that the buyers of connected devices are buying into the ecosystem story, and nobody can come close to Apple's iOS ecosystem. We used to trade Swatch (SWGAY) on a regular basis. In the five years since the Apple Watch launch, that company has lost 40% of its market cap. There is no such thing as autopilot when it comes to investing; diligence is, and must always remain, the key theme when it comes to making money and protecting portfolios.
e-Commerce
Why would the parent company of the New York Stock Exchange want to buy Internet retailer eBay? Intercontinental Exchange (ICE $72-$96-$102), owner of the New York Stock Exchange, has made a seemingly bizarre offer: it wants to buy global online marketplace eBay (EBAY $34-$37-$42) in a deal that would ultimately be valued well above the company's $30 billion market cap. While there is no indication that eBay has yet to engage with the exchange, news of the offer sent its shares up by over 8%. If you are scratching your head over this one, you are not alone: ICE closed the day down over 7% on the news. Technically, both companies are "exchanges" in the broad sense, and it would even be fair to call both auction houses—pitting buyer versus seller and keeping a cut of the spread. but it is hard to imagine how eBay fits in the exchange's strategic plan. Management at the Atlanta-based firm didn't have a lot to say, other than to confirm the offer and that the company has a "track record of creating shareholder value, both through organic growth and acquisitions...." As for creating shareholder value, it is certainly fair to say that eBay is ripe for a new strategy, after losing immense ground to the likes of Amazon (AMZN). Until the spring of 2007, in fact, eBay was the larger online retailer of the two. We hope the deal goes through—what do eBay shareholders have to lose? If a deal happens, it will be interesting to see how ICE's application of new technologies work in revamping one of the first online marketplaces. It may become a template for other companies—especially in the fintech arena—to emulate.
Beverages & Tobacco
After taking a $4.1 billion write-down on disastrous Juul investment, is there any value to be found in Altria shares? It was supposed to be yet another tactical move to diversify away from its much-maligned tobacco business: pay $12.8 billion for a 35% stake in e-cigarette phenom Juul. Instead, this move has been nothing short of a nightmare for the leading US cigarette and smokeless tobacco company, Altria (MO $39-$47-$58). After taking yet another write-down on its Juul investment ($4.1 billion), its 35% stake is now worth just about $4 billion. With both their cigarette and e-cig businesses under relentless attack by the government and anti-smoking forces, why would an investor want to buy in right now? Actually, there are a number of factors that make MO look attractive at current prices. First is the company's fat 7% dividend yield, which looks to be safe. Secondly, it still appears the company might reunite with its former Philip Morris International (PM) unit which became a separate company back in 2008. Under withering assault, it just makes sense for these allied forces to combine. A third reason to look at MO shares has to do with their successful diversification attempts. The firm now owns a 10.2% stake in Anheuser-Busch InBev (BUD), and has been increasing its stake in cannabis companies. Finally, there is a lot of promise around a new "heat-don't-burn" cigarette technology known as IQOS. This system heats the tobacco to 650°F without any actual combustion taking place. With shares down following news of the Juul charge, yield-hungry investors might want to take a nibble at $47 per share. While we don't own either MO or PM in any of the Penn Strategies, we would place a fair value on Altria shares at $55.
IT Services
CEO Ginni Rometty was one of the reasons we owned IBM, so what does her departure mean for shares of Big Blue? We have often pointed to Virginia "Ginni" Rometty as one of the best CEOs in the country. While shares of pioneering tech company IBM (IBM $127-$144-$153) have struggled under her tenure, she is the one responsible for taking the helm and steering the 109-year-old firm in a different direction—away from its legacy hardware business and into the lucrative world of cloud computing. That is why we immediately got concerned for our Penn Global Leaders Club holding when it was announced that she would be leaving the firm in April. Our concerns were assuaged when we saw who would be taking over: Arvind Krishna is the wonkish Senior Vice President for Cloud and Cognitive Software at the firm, and the principal architect behind IBM's acquisition of Red Hat, a leading cloud and open-source software player. While "wonkish" is not typically an adjective we want to hear associated with a chief executive, that moniker has also been applied to Satya Nadella, the adroit leader responsible for Microsoft's (MSFT) big turnaround. The two men appear to be eerily similar. Both are deep tech gurus with strong engineering backgrounds (Krishna has a PhD in electrical and computer engineering), and both ran the cloud computing business at their respective companies before being elevated to the top spot. The icing on the cake? Red Hat's highly-skilled CEO, Jim Whitehurst, will be Krishna's second-in-command, serving as IBM's new president. Krishna brings a brilliant tech mind to the table, while Whitehurst, who attended the London School of Business and carries an MBA from Harvard, brings the strong management background. Both are scheduled to take on their new roles on the 6th of April. In addition to IBM's quite low (for a tech company) multiple of 14, the attractive 4.5% dividend is a nice bonus for yield-starved investors. It is too early to tell whether or not Krishna will be another Nadella, but we like the odds.
Headlines for the Week of 26 Jan 2020—01 Feb 2020
Road & Rail
Navistar International jumps 55% as VW looks to make a big move into the US commercial vehicle market. Shares of commercial bus and truck maker Navistar International (NAV $21-$37-$40) opened Friday's session trading up by 55% after the Illinois-based company received an unsolicited buyout offer from Traton, Volkswagen's (VWAGY) recent trucking spinoff. Navistar's board said it is in the process of reviewing the offer, and that there is certainly no guarantee a deal can be reached. It is clear that VW wants to move into the lucrative US commercial truck market, and this would give them a strong platform to do so. Traton sold nearly a quarter-of-a-million units around the world last year, while Navistar, under its International® brand name, sold approximately 70,000 buses, trucks, and defense-related vehicles in the US. It should also be noted that Traton already owns 17% of NAV and holds two seats on the company's 17-member board. Another great example of a decent company with little enthusiasm circling around it by investors or analysts suddenly getting a huge price pop due to a takeover bid. Investing in a company solely based on takeover hopes is a fool's errand, but it can certainly be an important part of any equation when evaluating the fundamentals of a company.
Application & Systems Software
Another quarter, another set of blowout numbers from Microsoft. When Satya Nadella took the helm from the "animated" (we are being kind) Steve Ballmer at Microsoft (MSFT $102-$168-$168) in 2014, shares of the pioneer software company were trading for around $36, and the company had a market cap of $300 billion. That is approximately when we added the company to the Penn Global Leaders Club. We were decidedly not fans of Ballmer, but we loved the strategic vision Nadella was laying out for the firm. Since he took over, Microsoft has risen 360% versus an 88% rise in the S&P 500. With its $1.3 trillion market cap, the company comes in just behind Apple (AAPL) as the world's largest publicly-traded company. Based on the firm's just-released earnings report, expect that trajectory to continue. Microsoft generated revenues of $36.9 billion versus expectations for $35.7 billion; earnings per share came in at $1.51, well ahead of the $1.32 the Street was expecting. Most impressive was the company's Azure cloud segment—the segment Amazon (AMZN) is suing the government over, which posted a remarkable 62% jump in year-over-year sales. Perhaps even more amazing, the company's seemingly archaic Windows division notched a 26% spike in Y/Y sales thanks to strong demand for Windows 10. Finally, the Office 365 software subscription service (we are one of 120 million monthly active users) continues to bring in an enormous monthly income stream to the company. We are as bullish on Microsoft now as we were when Nadella took over. After Bill Gates left as the company's first CEO, Microsoft could have easily rested on its laurels (as we would argue it did under the goofy Ballmer) and made a slow descent into irrelevance. Instead, true leadership took over in 2014 and re-imagined what the company could be and do for an ever-increasing number of customers. Leadership made the difference.
Textiles, Apparel, & Luxury Goods
Victoria's Secret's parent company pops 12% after Les Wexner finally shows signs of letting go. He is the longest-serving CEO of any company in the S&P 500. At 82, Leslie Wexner founded what was once called Limited Brands (LTD) back in 1962, and has been at the helm ever since the company went public in 1969. We have followed the company, now called L Brands (LB $16-$23-$29), for a long time, and have traded the parent company of Victoria's Secret and Bath & Body Works with good success through the years. A year ago, however, when shares were sitting at a seemingly-undervalued $28, we wrote that until Wexner is prepared to move on from the company's day-to-day operations, we wouldn't consider buying back in. Now, after a 12% pop, LB is sitting at $23 per share. The catalyst? Wexner is reportedly in talks to sell the $6 billion retail chain. For the record, the company had a market cap of $27 billion precisely four years ago, and a share price of $96. Wexner's age is irrelevant; what is relevant are some of the poor decisions he has made in recent years. For example, instead of embracing the omni-channel marketing approach and creating a vibrant online presence, he stood firmly behind his mall-based approach, telling The Wall Street Journal that he had "5,000 years of history on my side." Um, Les, the ancient Sumerians didn't have high-speed Internet and Amazon accounts. Another terrible decision was ditching swimsuits. Three years after that decision was made, they were brought back. It is no-doubt very difficult to walk away from a company you founded two generations ago, but Wexner is finally making a really good decision. To be frank, we would have been long LB had we known that the founder was close to "looking for strategic options." Now that the word is out, it might still be a worthy buy, albeit a higher-risk proposition, and we could easily see the shares climbing to $30.
Global Strategy: Trade
An obstinate US Congress wasn't the last hurdle for USMCA—the Canadian Parliament holds that distinction. For all the concern we had about Mexico's new president, AMLO, taking office before any of the three participating countries had ratified the new North American trade agreement known as USMCA, his country's legislature was actually the first to get the job done. They did so in December, with AMLO's full support. That turned our concerns to DC, where the opposition to President Trump—at least among the majority in the House—is palpable. Somewhat remarkably, with their eyes laser-focused on impeachment, Congress actually ratified the treaty a few weeks ago. Somehow, Canada just seemed like an afterthought. However, while we still fully expect ratification by the Canadian Parliament, it won't be smooth sailing. While Prime Minister Justin Trudeau's Liberal Party of Canada holds a plurality of seats in the lower chamber, it will need to cobble together support from other parties. That shouldn't be a problem, as the Conservative Party of Canada has said it supports the deal. That leaves the upper chamber, which is controlled by the ISG, or Independent Senators Group. Many left-of-center MPs oppose virtually any free trade deal, while the Bloc Quebecois—who hold 32 of the 100 seats in the senate—oppose the deal on grounds it will hurt Quebec's dairy farmers. Ultimately, the deal will get ratified north of the border, but the question becomes one of timing. Opponents can drag the process out, calling witness after witness in an effort to stall passage. As the agreement won't take effect until 90 days after the last country ratifies it, we may be looking at late-year before its impact is felt. Every country is claiming they got the best deal in the USMCA, but it will provide a very real stimulus to the US economy. From forcing Mexico to raise its wages for autoworkers, to US dairy exports to Canada jumping by over 40%, the agreement is full of specific action items that will directly affect our GDP in a positive way.
Beverages & Tobacco
Our Canopy Growth marijuana holding spikes double-digits following upgrade, praise for product lineup. We added medical and recreational marijuana company Canopy Growth Corp (CGC $14-$24-$53) to the Intrepid a few weeks ago not because we are bullish on the industry (we're really not), but because the company appears best positioned to take advantage of the medical marijuana niche going forward. Additionally, our favorite booze company, Constellation Brands (STZ), took a big position in the firm last year. Shares of Canopy popped 11% on Tuesday following glowing comments from BMO's Tamy Chen, who raised her rating on the stock to Outperform and posited a pretty strong growth story for the firm going forward. She also likes Canopy's new mix of value-added products which should resonate well with Canadian customers. She raised her price target on Canopy shares to C$40, or roughly $30.50. The shares have risen 20% since our purchase, and are about halfway to our target price of $30.
Commercial Banks
Despite yet another new CEO, Wells Fargo's troubles are far from over. On Janet Yellen's last day in office, the Federal Reserve slapped Wells Fargo (WFC $43-$47-$55) with an unusually tough penalty for the bank's misdeeds: not only did it fine the bank, it also limited its future growth by capping the bank's total allowable assets. This came on the heels of disgraced CEO John Stumpf being fired by the board, then forfeiting $41 million in stock awards, and finally having $28 million in salary clawed back. Stumpf's replacement, Tim Sloan, held the position for just over two years before being forced out in March of 2019. After a period in which the general council of the bank took the helm, it was announced that Charlie Scharf would be the new permanent CEO. The honeymoon didn't last long. Regulators just handed down $59 million worth of fines against ex-Wells Fargo executives, with Stumpf agreeing to pay $17.5 million and accept a lifetime ban from the banking industry. The executive in charge of the retail banking division at the heart of the fake accounts scandal was fined $25 million and told the amount could climb higher. The Office of the Comptroller of the Currency outlined these penalties in a huge document which detailed the "illegal activity and catastrophic...damage" done by the bank. In his first conference call since taking over at the bank, Scharf indicated that the regulators are probably not done yet. Not exactly what investors wanted to hear. We are beginning to see an ugly recent trend. There has always been arrogance in the C-suites of major corporations, but both Boeing and Wells Fargo should be a wake-up call to investors: no matter how big and supposedly stable the company, don't assume there aren't landmines buried throughout the seemingly staid corporate landscape. Always be prepared to make a move as unexpected events unfold.
Aerospace & Defense
Canadian transport manufacturer Bombardier, with its shares sitting below $1, looks to team up with French rival Alstom on rail business. Just a few short years ago, Canadian aircraft and transport manufacturer Bombardier (BDRBF $1-$1-$2) had a market cap of $10 billion, a potentially lucrative market for its new A220/C-Series narrow-body commercial jets, and a strong rail division. Unfortunately, it has been all downhill for the Montreal-based firm since. The first misstep was teaming up with Europe's Airbus (EADSY), which essentially usurped the A220, taking a 50.01% stake in the line and rebranding the aircraft as the Airbus A220. Then, due to a mountain of debt stemming from its development of the A220, Bombardier was forced to sell its regional jet series (known as the CRJ) to Mitsubishi for $550 million. Now, with short-term liabilities greater than its current assets, and long-term liabilities greater than its long-term assets, the firm is looking to team up with yet another rival—France's Alstom SA (AOMFF)—on its rail business. We expect Alstom to take control of the rail unit the way Airbus did with the C-Series program. With increased competition in the rail industry coming from China, Bombardier had first tried to team up with Germany's Siemens AG (SMAWF), but that company ultimately rebuffed the firm to pursue its own deal with Alstom (a deal which the EU ultimately shot down). And the bad news continues: not only is the rail deal facing antitrust scrutiny, Bombardier just shook investors by warning of disappointing Q4 sales and saying it may exit the Airbus joint venture altogether—taking a huge writedown in the process. While the rail division accounts for over half of the company's revenues, that unit faced a humiliation several weeks ago when New York City was forced to pull 300 Bombardier subway cars from service due to malfunctioning door mechanisms. When it rains it pours. We have traded Bombardier in the past with good success, but we wouldn't touch the company right now, even with its $0.91 share price (on the B shares, the A shares are trading at $1.02). We can't imagine the Canadian government letting the company fail, but that is a weak rationale for buying in right now.
Navistar International jumps 55% as VW looks to make a big move into the US commercial vehicle market. Shares of commercial bus and truck maker Navistar International (NAV $21-$37-$40) opened Friday's session trading up by 55% after the Illinois-based company received an unsolicited buyout offer from Traton, Volkswagen's (VWAGY) recent trucking spinoff. Navistar's board said it is in the process of reviewing the offer, and that there is certainly no guarantee a deal can be reached. It is clear that VW wants to move into the lucrative US commercial truck market, and this would give them a strong platform to do so. Traton sold nearly a quarter-of-a-million units around the world last year, while Navistar, under its International® brand name, sold approximately 70,000 buses, trucks, and defense-related vehicles in the US. It should also be noted that Traton already owns 17% of NAV and holds two seats on the company's 17-member board. Another great example of a decent company with little enthusiasm circling around it by investors or analysts suddenly getting a huge price pop due to a takeover bid. Investing in a company solely based on takeover hopes is a fool's errand, but it can certainly be an important part of any equation when evaluating the fundamentals of a company.
Application & Systems Software
Another quarter, another set of blowout numbers from Microsoft. When Satya Nadella took the helm from the "animated" (we are being kind) Steve Ballmer at Microsoft (MSFT $102-$168-$168) in 2014, shares of the pioneer software company were trading for around $36, and the company had a market cap of $300 billion. That is approximately when we added the company to the Penn Global Leaders Club. We were decidedly not fans of Ballmer, but we loved the strategic vision Nadella was laying out for the firm. Since he took over, Microsoft has risen 360% versus an 88% rise in the S&P 500. With its $1.3 trillion market cap, the company comes in just behind Apple (AAPL) as the world's largest publicly-traded company. Based on the firm's just-released earnings report, expect that trajectory to continue. Microsoft generated revenues of $36.9 billion versus expectations for $35.7 billion; earnings per share came in at $1.51, well ahead of the $1.32 the Street was expecting. Most impressive was the company's Azure cloud segment—the segment Amazon (AMZN) is suing the government over, which posted a remarkable 62% jump in year-over-year sales. Perhaps even more amazing, the company's seemingly archaic Windows division notched a 26% spike in Y/Y sales thanks to strong demand for Windows 10. Finally, the Office 365 software subscription service (we are one of 120 million monthly active users) continues to bring in an enormous monthly income stream to the company. We are as bullish on Microsoft now as we were when Nadella took over. After Bill Gates left as the company's first CEO, Microsoft could have easily rested on its laurels (as we would argue it did under the goofy Ballmer) and made a slow descent into irrelevance. Instead, true leadership took over in 2014 and re-imagined what the company could be and do for an ever-increasing number of customers. Leadership made the difference.
Textiles, Apparel, & Luxury Goods
Victoria's Secret's parent company pops 12% after Les Wexner finally shows signs of letting go. He is the longest-serving CEO of any company in the S&P 500. At 82, Leslie Wexner founded what was once called Limited Brands (LTD) back in 1962, and has been at the helm ever since the company went public in 1969. We have followed the company, now called L Brands (LB $16-$23-$29), for a long time, and have traded the parent company of Victoria's Secret and Bath & Body Works with good success through the years. A year ago, however, when shares were sitting at a seemingly-undervalued $28, we wrote that until Wexner is prepared to move on from the company's day-to-day operations, we wouldn't consider buying back in. Now, after a 12% pop, LB is sitting at $23 per share. The catalyst? Wexner is reportedly in talks to sell the $6 billion retail chain. For the record, the company had a market cap of $27 billion precisely four years ago, and a share price of $96. Wexner's age is irrelevant; what is relevant are some of the poor decisions he has made in recent years. For example, instead of embracing the omni-channel marketing approach and creating a vibrant online presence, he stood firmly behind his mall-based approach, telling The Wall Street Journal that he had "5,000 years of history on my side." Um, Les, the ancient Sumerians didn't have high-speed Internet and Amazon accounts. Another terrible decision was ditching swimsuits. Three years after that decision was made, they were brought back. It is no-doubt very difficult to walk away from a company you founded two generations ago, but Wexner is finally making a really good decision. To be frank, we would have been long LB had we known that the founder was close to "looking for strategic options." Now that the word is out, it might still be a worthy buy, albeit a higher-risk proposition, and we could easily see the shares climbing to $30.
Global Strategy: Trade
An obstinate US Congress wasn't the last hurdle for USMCA—the Canadian Parliament holds that distinction. For all the concern we had about Mexico's new president, AMLO, taking office before any of the three participating countries had ratified the new North American trade agreement known as USMCA, his country's legislature was actually the first to get the job done. They did so in December, with AMLO's full support. That turned our concerns to DC, where the opposition to President Trump—at least among the majority in the House—is palpable. Somewhat remarkably, with their eyes laser-focused on impeachment, Congress actually ratified the treaty a few weeks ago. Somehow, Canada just seemed like an afterthought. However, while we still fully expect ratification by the Canadian Parliament, it won't be smooth sailing. While Prime Minister Justin Trudeau's Liberal Party of Canada holds a plurality of seats in the lower chamber, it will need to cobble together support from other parties. That shouldn't be a problem, as the Conservative Party of Canada has said it supports the deal. That leaves the upper chamber, which is controlled by the ISG, or Independent Senators Group. Many left-of-center MPs oppose virtually any free trade deal, while the Bloc Quebecois—who hold 32 of the 100 seats in the senate—oppose the deal on grounds it will hurt Quebec's dairy farmers. Ultimately, the deal will get ratified north of the border, but the question becomes one of timing. Opponents can drag the process out, calling witness after witness in an effort to stall passage. As the agreement won't take effect until 90 days after the last country ratifies it, we may be looking at late-year before its impact is felt. Every country is claiming they got the best deal in the USMCA, but it will provide a very real stimulus to the US economy. From forcing Mexico to raise its wages for autoworkers, to US dairy exports to Canada jumping by over 40%, the agreement is full of specific action items that will directly affect our GDP in a positive way.
Beverages & Tobacco
Our Canopy Growth marijuana holding spikes double-digits following upgrade, praise for product lineup. We added medical and recreational marijuana company Canopy Growth Corp (CGC $14-$24-$53) to the Intrepid a few weeks ago not because we are bullish on the industry (we're really not), but because the company appears best positioned to take advantage of the medical marijuana niche going forward. Additionally, our favorite booze company, Constellation Brands (STZ), took a big position in the firm last year. Shares of Canopy popped 11% on Tuesday following glowing comments from BMO's Tamy Chen, who raised her rating on the stock to Outperform and posited a pretty strong growth story for the firm going forward. She also likes Canopy's new mix of value-added products which should resonate well with Canadian customers. She raised her price target on Canopy shares to C$40, or roughly $30.50. The shares have risen 20% since our purchase, and are about halfway to our target price of $30.
Commercial Banks
Despite yet another new CEO, Wells Fargo's troubles are far from over. On Janet Yellen's last day in office, the Federal Reserve slapped Wells Fargo (WFC $43-$47-$55) with an unusually tough penalty for the bank's misdeeds: not only did it fine the bank, it also limited its future growth by capping the bank's total allowable assets. This came on the heels of disgraced CEO John Stumpf being fired by the board, then forfeiting $41 million in stock awards, and finally having $28 million in salary clawed back. Stumpf's replacement, Tim Sloan, held the position for just over two years before being forced out in March of 2019. After a period in which the general council of the bank took the helm, it was announced that Charlie Scharf would be the new permanent CEO. The honeymoon didn't last long. Regulators just handed down $59 million worth of fines against ex-Wells Fargo executives, with Stumpf agreeing to pay $17.5 million and accept a lifetime ban from the banking industry. The executive in charge of the retail banking division at the heart of the fake accounts scandal was fined $25 million and told the amount could climb higher. The Office of the Comptroller of the Currency outlined these penalties in a huge document which detailed the "illegal activity and catastrophic...damage" done by the bank. In his first conference call since taking over at the bank, Scharf indicated that the regulators are probably not done yet. Not exactly what investors wanted to hear. We are beginning to see an ugly recent trend. There has always been arrogance in the C-suites of major corporations, but both Boeing and Wells Fargo should be a wake-up call to investors: no matter how big and supposedly stable the company, don't assume there aren't landmines buried throughout the seemingly staid corporate landscape. Always be prepared to make a move as unexpected events unfold.
Aerospace & Defense
Canadian transport manufacturer Bombardier, with its shares sitting below $1, looks to team up with French rival Alstom on rail business. Just a few short years ago, Canadian aircraft and transport manufacturer Bombardier (BDRBF $1-$1-$2) had a market cap of $10 billion, a potentially lucrative market for its new A220/C-Series narrow-body commercial jets, and a strong rail division. Unfortunately, it has been all downhill for the Montreal-based firm since. The first misstep was teaming up with Europe's Airbus (EADSY), which essentially usurped the A220, taking a 50.01% stake in the line and rebranding the aircraft as the Airbus A220. Then, due to a mountain of debt stemming from its development of the A220, Bombardier was forced to sell its regional jet series (known as the CRJ) to Mitsubishi for $550 million. Now, with short-term liabilities greater than its current assets, and long-term liabilities greater than its long-term assets, the firm is looking to team up with yet another rival—France's Alstom SA (AOMFF)—on its rail business. We expect Alstom to take control of the rail unit the way Airbus did with the C-Series program. With increased competition in the rail industry coming from China, Bombardier had first tried to team up with Germany's Siemens AG (SMAWF), but that company ultimately rebuffed the firm to pursue its own deal with Alstom (a deal which the EU ultimately shot down). And the bad news continues: not only is the rail deal facing antitrust scrutiny, Bombardier just shook investors by warning of disappointing Q4 sales and saying it may exit the Airbus joint venture altogether—taking a huge writedown in the process. While the rail division accounts for over half of the company's revenues, that unit faced a humiliation several weeks ago when New York City was forced to pull 300 Bombardier subway cars from service due to malfunctioning door mechanisms. When it rains it pours. We have traded Bombardier in the past with good success, but we wouldn't touch the company right now, even with its $0.91 share price (on the B shares, the A shares are trading at $1.02). We can't imagine the Canadian government letting the company fail, but that is a weak rationale for buying in right now.
Headlines for the Week of 19 Jan 2020—25 Jan 2020
Fraud, Waste, & Abuse of Power
In a typical nanny state move, New York City bans cashless stores. Bad news, nanny state: technology is coming, whether you like it or not. In the most recent case of "tech is evil," New York City has joined with the San Francisco city council (shocker) in banning stores from going cashless. You may recall that Amazon Go is a new store concept launched by the trillion-dollar company in which busy commuters can pop in, grab what they need, and go. The company's "just walk out" technology works with the Amazon Go app, which is read when one enters the store. As you walk around and put items in your basket, sensing technology knows what items you selected, charges your Amazon account as you leave, and immediately sends you a digital receipt so you can verify your purchases. It should be noted that you can also use a debit or credit card for the purchases. The NYC council says this discriminates against its citizens who only carry cash (and apparently who need to shop in this tiny store as opposed to the 20 bodegas within a five-block radius). Never mind the fact that literally anyone can turn cash into a pre-paid debit card at a local store—no bank account needed. Also, never mind the fact that a store which does not allow cash cannot be robbed...for cash. But, the root of our problem with this petulent little law made by petulent little people is the way it infringes on the personal freedoms of those who would like to use such stores. It is akin to Chicago banning Walmart from operating stores within the city limits—stores which would save consumers money. As usual, these dolts are really hurting those they purport to be looking out for. The New York City council won't stop progress. They will win a few temporary battles, like this one, but in the end the courts will either overturn their draconian rulings or enough money will flee the city that they will be forced to capitulate. In the meantime, they are always fun to watch and report on.
Space Sciences & Exploration
After SpaceX nailed a critical test flight, its Crew Dragon capsule is ready to fly astronauts. It was the mother of all un-piloted tests: send the Crew Dragon space capsule up atop a Falcon 9 rocket, create a simulated disaster 85 seconds into the flight while the vehicle is traveling at mach 2.2, and abort the mission. In the process, the Crew Dragon was to ignite its eight Super Draco thrusters, separate from its trunk section, use smaller thrusters to reorient the craft's heat shield for re-entry, then deploy two drogue—followed by four main—parachutes for a soft landing in the ocean. The atmospheric pressure, meanwhile, would destroy the Falcon 9 in a fiery burst. And all of that, miraculously to the untrained eye, is precisely what happened. We remember watching the very first Space Shuttle launch in April of 1981 with Young and Crippen onboard. Although Crew Dragon was "manned" only by two anthropomorphic test dummies, it brought back memories of that incredible spring day. The battle between SpaceX and Boeing (BA), which just completed a failed mission of its Starliner capsule, is suddenly looking like no contest. It could be as soon as this March, just two short months away, that the SpaceX Crew Dragon carries two astronauts from American soil to the International Space Station, marking America's triumphant return to manned spaceflight. Disgracefully, the country willingly ended that capability back in 2012. As for Boeing, we expect it to iron out the multitude of issues with the Starliner, but we are yearning for the days of an independent McDonnell Douglas, before the company was acquired by Boeing. We are in the nascent stages of an unprecedented private enterprise/government partnership designed to take back America's leadership role in space exploration; a role abdicated in 2012. As exciting as the missions will be, investors need to be paying close attention to the publicly-traded players, especially those lesser-known companies in the support role. Think names like Astrotech (ASTC), Moog Inc (MOG.B), Ducommun (DCO), and Aerojet Rocketdyne Holdings (AJRD).
Global Strategy: Trade
Trump's threat to tax French wine and cheese forces Macron to back down on digital tax. Last year, France unilaterally imposed a 3% "digital tax" on revenue from tech companies with over $832 million (€750M) in global sales. That move was clearly aimed squarely at US tech giants like Google, Amazon, Facebook, and Apple. French President Macron was hoping the rest of the European Union would follow suit, but the confiscatory plan required a unanimous vote, and our friends in the smaller European countries voted against the plan. Then came President Donald Trump's retaliatory strike: the US would tax roughly $2.4 billion worth of French goods coming into the country; goods sitting at the heart of French pride, like cheese and wine. Suddenly, Macron has decided to "pause" the digital tax as long as the US puts its own tax on hold. A clear win for the US. Macron, along with a number of other world leaders, may still be playing the odds that President Trump will not be re-elected, at which time he (Macron) can re-implement the digital tax. That is a dangerous gambit, as Trump has a long memory when it comes to perceived or real personal affronts.
Sovereign Debt & Global Fixed Income
For the first time since 1986, the US Treasury will issue 20-year bonds. Yet again, the government is facing a trillion dollar deficit—as in our collective US Representatives are going to spend $1 trillion more in a year than the government will take from taxpayers. Sadly, the answer is never to actually balance the budget. To pay for that cool trillion, the Treasury is about to do something it hasn't done since the mid-1980s—issue 20-year Treasury bonds to fund the deficit. There is some good news that comes with this decision: the Treasury Department squelched the idea it was floating of issuing 50-year bonds or even 100-year "century" bonds. They no doubt got the idea for the latter from countries in developed Europe who are already issuing these 100-year paperweights. The new bonds will start trading in May, with more details to be released on 05 Feb. As for the offered rate, we can obviously expect something between the current 10-year Treasury yield of 1.84%, and the current 30-year yield of 2.29%. If you're keeping tally, the Treasury issued $2.7 trillion worth of new debt in 2019, a figure that goes directly to the waistline of the $23 trillion national debt. We recently added TLT, the iShares 20+ Year Treasury Bond ETF, to the Strategic Income Portfolio. We feel relatively safe in stating that the Fed cannot afford to raise rates any time soon.
Commercial Banks
As earnings soar at the big US banks, results from UBS highlight the economic challenges of developed Europe. We have to be careful not to play the mainstream media game of shaping the facts to fit our narrative, but recent reports coming from the big European banks certainly fit well with our rather dour economic outlook for developed Europe. Shares of the $46 billion Swiss bank UBS Group AG (UBS $10-$13-$14) were trading off around 4% at Tuesday's open following news that it had missed nearly all of its key 2019 targets. Net profit from the investment banking unit fell Y/Y from $1.67B to $1.06B, while net interest income fell from $5.05B in 2018 to $4.5B last year. This led to a series of management downgrades for the year ahead—on profit, assets under management, and dividend growth. The bank is trying to staunch the bleeding after losing nearly $5 billion in assets in Q4 alone. What's worse (for Europe) is the fact that UBS's downgrades come on the heels of both Credit Suisse (CS) and Deutsche Bank (DB) lowering their own expectations for the year ahead. The European banks' woes are juxtaposed by record profits rolling in for their major US counterparts. As we wrote in our 2020 Outlook issue of The Penn Wealth Report, we are underweighting developed Europe but see the emerging markets as one of the year's major success stories.
In a typical nanny state move, New York City bans cashless stores. Bad news, nanny state: technology is coming, whether you like it or not. In the most recent case of "tech is evil," New York City has joined with the San Francisco city council (shocker) in banning stores from going cashless. You may recall that Amazon Go is a new store concept launched by the trillion-dollar company in which busy commuters can pop in, grab what they need, and go. The company's "just walk out" technology works with the Amazon Go app, which is read when one enters the store. As you walk around and put items in your basket, sensing technology knows what items you selected, charges your Amazon account as you leave, and immediately sends you a digital receipt so you can verify your purchases. It should be noted that you can also use a debit or credit card for the purchases. The NYC council says this discriminates against its citizens who only carry cash (and apparently who need to shop in this tiny store as opposed to the 20 bodegas within a five-block radius). Never mind the fact that literally anyone can turn cash into a pre-paid debit card at a local store—no bank account needed. Also, never mind the fact that a store which does not allow cash cannot be robbed...for cash. But, the root of our problem with this petulent little law made by petulent little people is the way it infringes on the personal freedoms of those who would like to use such stores. It is akin to Chicago banning Walmart from operating stores within the city limits—stores which would save consumers money. As usual, these dolts are really hurting those they purport to be looking out for. The New York City council won't stop progress. They will win a few temporary battles, like this one, but in the end the courts will either overturn their draconian rulings or enough money will flee the city that they will be forced to capitulate. In the meantime, they are always fun to watch and report on.
Space Sciences & Exploration
After SpaceX nailed a critical test flight, its Crew Dragon capsule is ready to fly astronauts. It was the mother of all un-piloted tests: send the Crew Dragon space capsule up atop a Falcon 9 rocket, create a simulated disaster 85 seconds into the flight while the vehicle is traveling at mach 2.2, and abort the mission. In the process, the Crew Dragon was to ignite its eight Super Draco thrusters, separate from its trunk section, use smaller thrusters to reorient the craft's heat shield for re-entry, then deploy two drogue—followed by four main—parachutes for a soft landing in the ocean. The atmospheric pressure, meanwhile, would destroy the Falcon 9 in a fiery burst. And all of that, miraculously to the untrained eye, is precisely what happened. We remember watching the very first Space Shuttle launch in April of 1981 with Young and Crippen onboard. Although Crew Dragon was "manned" only by two anthropomorphic test dummies, it brought back memories of that incredible spring day. The battle between SpaceX and Boeing (BA), which just completed a failed mission of its Starliner capsule, is suddenly looking like no contest. It could be as soon as this March, just two short months away, that the SpaceX Crew Dragon carries two astronauts from American soil to the International Space Station, marking America's triumphant return to manned spaceflight. Disgracefully, the country willingly ended that capability back in 2012. As for Boeing, we expect it to iron out the multitude of issues with the Starliner, but we are yearning for the days of an independent McDonnell Douglas, before the company was acquired by Boeing. We are in the nascent stages of an unprecedented private enterprise/government partnership designed to take back America's leadership role in space exploration; a role abdicated in 2012. As exciting as the missions will be, investors need to be paying close attention to the publicly-traded players, especially those lesser-known companies in the support role. Think names like Astrotech (ASTC), Moog Inc (MOG.B), Ducommun (DCO), and Aerojet Rocketdyne Holdings (AJRD).
Global Strategy: Trade
Trump's threat to tax French wine and cheese forces Macron to back down on digital tax. Last year, France unilaterally imposed a 3% "digital tax" on revenue from tech companies with over $832 million (€750M) in global sales. That move was clearly aimed squarely at US tech giants like Google, Amazon, Facebook, and Apple. French President Macron was hoping the rest of the European Union would follow suit, but the confiscatory plan required a unanimous vote, and our friends in the smaller European countries voted against the plan. Then came President Donald Trump's retaliatory strike: the US would tax roughly $2.4 billion worth of French goods coming into the country; goods sitting at the heart of French pride, like cheese and wine. Suddenly, Macron has decided to "pause" the digital tax as long as the US puts its own tax on hold. A clear win for the US. Macron, along with a number of other world leaders, may still be playing the odds that President Trump will not be re-elected, at which time he (Macron) can re-implement the digital tax. That is a dangerous gambit, as Trump has a long memory when it comes to perceived or real personal affronts.
Sovereign Debt & Global Fixed Income
For the first time since 1986, the US Treasury will issue 20-year bonds. Yet again, the government is facing a trillion dollar deficit—as in our collective US Representatives are going to spend $1 trillion more in a year than the government will take from taxpayers. Sadly, the answer is never to actually balance the budget. To pay for that cool trillion, the Treasury is about to do something it hasn't done since the mid-1980s—issue 20-year Treasury bonds to fund the deficit. There is some good news that comes with this decision: the Treasury Department squelched the idea it was floating of issuing 50-year bonds or even 100-year "century" bonds. They no doubt got the idea for the latter from countries in developed Europe who are already issuing these 100-year paperweights. The new bonds will start trading in May, with more details to be released on 05 Feb. As for the offered rate, we can obviously expect something between the current 10-year Treasury yield of 1.84%, and the current 30-year yield of 2.29%. If you're keeping tally, the Treasury issued $2.7 trillion worth of new debt in 2019, a figure that goes directly to the waistline of the $23 trillion national debt. We recently added TLT, the iShares 20+ Year Treasury Bond ETF, to the Strategic Income Portfolio. We feel relatively safe in stating that the Fed cannot afford to raise rates any time soon.
Commercial Banks
As earnings soar at the big US banks, results from UBS highlight the economic challenges of developed Europe. We have to be careful not to play the mainstream media game of shaping the facts to fit our narrative, but recent reports coming from the big European banks certainly fit well with our rather dour economic outlook for developed Europe. Shares of the $46 billion Swiss bank UBS Group AG (UBS $10-$13-$14) were trading off around 4% at Tuesday's open following news that it had missed nearly all of its key 2019 targets. Net profit from the investment banking unit fell Y/Y from $1.67B to $1.06B, while net interest income fell from $5.05B in 2018 to $4.5B last year. This led to a series of management downgrades for the year ahead—on profit, assets under management, and dividend growth. The bank is trying to staunch the bleeding after losing nearly $5 billion in assets in Q4 alone. What's worse (for Europe) is the fact that UBS's downgrades come on the heels of both Credit Suisse (CS) and Deutsche Bank (DB) lowering their own expectations for the year ahead. The European banks' woes are juxtaposed by record profits rolling in for their major US counterparts. As we wrote in our 2020 Outlook issue of The Penn Wealth Report, we are underweighting developed Europe but see the emerging markets as one of the year's major success stories.
Headlines for the Week of 12 Jan 2020—18 Jan 2020
E-Commerce
Grubhub says it's not for sale, but investors are betting on an acquisition. Just three months ago, in October of 2019, we reported on food delivery service Grubhub's (GRUB $32-$56-$88) 43% share price decline in just one session. That massive drop was due to a pretty lousy Q3 earnings report. Now, three months later, GRUB shares have climbed back out of that hole, regaining all lost ground. It isn't that the financials are looking better, it is simply the fact that investors are betting big on a larger player swooping in to acquire the $5 billion company. With competition in the food delivery space increasing almost monthly, and with well-known rivals such as Uber Eats, DoorDash, and Postmates, the arguable pioneer in the industry needs to do something. DoorDash, in fact, just supplanted GRUB as the number one delivery service, with a market share of 32%. What company might acquire Grubhub? The most fascinating name we've heard circulated is Amazon (AMZN), which abandoned its own Amazon Restaurants delivery service last year. The company which is now delivering 3.5 billion of its own packages per year apparently wants back in on the food delivery game. It took some real fortitude to buy GRUB shares at or near their low of $32.11 back in late October, but those who did buy in have been rewarded with a 75% run since. Hoping that a buyer comes along soon, however, is a dangerous game to play. If one doesn't manifest, expect the shares to plummet back down.
Aerospace & Defense
Boeing's most disturbing internal messages to date shed more light on a corporate culture in deep trouble. We almost hate to bring up one of the recently-released internal messages from Boeing (BA $320-$331-$446) employees written a year before the fatal Lion Air crash in Indonesia. In a company the size of Boeing, there are always going to be some boneheaded digital conversations just waiting to be uncovered but, nonetheless, this particularly chilling message seems to point to a dangerous level of wanton arrogance at a company which claims to have a corporate culture based on safety and design excellence. Indonesia's Lion Air wanted to put its pilots through simulator (sim) training on the 737 MAX before flying the aircraft, and expressed this desire to Boeing in 2017. In response to the request, one Boeing employee wrote: "Now friggin Lion Air might need a sim to fly the MAX, and maybe because of their own stupidity. I'm scrambling trying to figure out how to unscrew this now! idiots." He apparently succeeded, as Boeing talked Lion Air out of the costly (to Boeing) simulator training. A little over a year after this internal message was written, a Lion Air 737 MAX crashed, killing all 189 people on board. The Indonesian National Transportation Safety Committee cited Boeing's failure to inform pilots of the new MCAS flight control system at the heart of the crash. To be sure, both deadly crashes involved pilot error with respect to emergency procedures, but the slew of internal memos now coming to light certainly implicates Boeing in the pilots' shortcomings. One day, Boeing will return to greatness, but that won't happen under the current CEO and board of directors.
Medical Devices, Equipment, & Supplies
SmileDirectClub soars for second time in a week on news it will sell aligners directly to dentists. Last week we mentioned what a tough time it has been for orthodontics equipment distributor SmileDirectClub (SDC $8-$12-$21) since going public last year. We also said how much we liked the company's deal with Walmart (WMT) to sell a new line of oral care products to the retailer; a deal which made the company's share price pop 21%. On Tuesday, shares of SDC were trading up 16% following another major announcement from management: the company will begin selling its aligners directly to dentists. Another smart move by the company, but what is most interesting about this story is the relationship between SmileDirectClub and Align Technologies (ALGN $170-$291-$298), which had been the key supplier of clear aligners to SDC, and an owner of 17% of the company's outstanding shares. As part of that deal, SmileDirect would only sell its aligners directly to consumers—a move which had alienated dentists. The company said it was no longer beholden to that 2016 contract (ALGN no longer owns the 17% stake), and that it would make its own aligners at the firm's manufacturing facility in Antioch, Tennessee. While SDC shares were spiking, ALGN shares were off around 2% on the news. Will dentists be willing to embrace a former competitor and sell the SmileDirectClub aligners? Considering the aligners will now come with an in-office option, meaning all work can be done under the supervision of the family dentist, our guess is yes. Align appears to be the one left out in the cold.
Food Products
Don't look now, but Beyond Meat is up 54% year-to-date, and we are only eight trading days in. As we have bloviated about any number of times, we bought plant-based "meat" company Beyond Meat (BYND $26-$116-$240) within minutes of it going public back on May 2nd. It came out of the gate trading around $52 per share, and proceeded to climb all the way up to $240/share by mid-summer. We bought Beyond as an investment, not a trade, within the Penn New Frontier Fund, so we did get a little slack when we stood by the firm as the shares came falling back to earth, dropping into the mid-$70s range. Now, all of a sudden, shares of BYND have climbed 54% within eight trading days on the back of very little groundbreaking news. One catalyst came when privately-held competitor Impossible Foods announced it didn't have the product to satisfy a potential McDonald's (MCD) deal, but that was a big nothing-burger: the world's largest fast-food chain was already experimenting with the PLT (plant, lettuce, and tomato) in Canada, a proprietary blend using Beyond Meat's product. We continue to believe that an enormous deal with MCD is in the works. CEO Ethan Brown is a visionary, and a uniquely-dynamic leader. While we aren't ready to compare him to a Jobs or a Musk, we have no doubt that Beyond will continue to be the benchmark alt-meat producer for other to follow. We also believe this industry will climb to a size few currently envision. Would we still buy in at $116 per share? No doubt.
Pharmaceuticals
The next big wave in knock-off drugs might not be generics, exactly. They're known as "me too" drugs—compounds that copy the biological function of existing drugs, but which have a different enough molecular structure (which differentiates them from generics) to avoid patent infringement. Of most importance to patients: these drugs may cost as little as 20% of the therapy they are emulating; considering some of these treatments cost hundreds of thousands a year, that is a big deal. One new startup in particular, EQRx Inc, backed by private equity funding from the likes of Andreesen Horowitz and Google Ventures (now "GV"), plans to bring nearly a dozen of these "me too" drugs to the market relatively soon. While the typical drug costs around $2 billion to develop, EQRx believes they can cut those costs to under $400 million apiece, mainly by utilizing new technologies to increase efficiencies in the lab. While companies such as EQRx will face backlash on a myriad of fronts, from well-established competitors to the FDA to insurers and PBMs, their model may just usher in a new, simpler pricing structure and lower overall costs for patients. While EQRx is not publicly traded, an interesting generic drug play right now might be Israeli-based Teva Pharmaceuticals Industries (TEVA $6-$9-$20), the largest generic drug manufacturer in the world, which is trading more than 50% off of its 52-week high.
Robotics & Industrial Machinery
Walmart is about to launch a new robotic workforce at its stores. Remember when you would go to the store to pick up a few items, find the shortest checkout lane, then proceed to get stuck behind someone reaching down to leisurely pull out their checkbook? It may seem archaic, but that scenario was commonplace not all that long ago. Now, with debit cards, smartphones, and self-checkout lanes, that problem has been alleviated, but stores are still struggling with the critical task of keeping items in stock. Walmart (WMT $93-$116-$125), the world's largest brick-and-mortar retailer, has a tactical plan to change that: deploy an army of six-foot-tall shelf-scanning robotic workers to diligently roam each aisle, sending alerts to employees' hand-held devices when an item is out of stock. Within relatively short order, Walmart will have over 1,000 of the robots, designed by privately-held Bossa Nova Robotics, roaming through its stores. While Walmart hasn't released the metrics, the company's senior vice president of store innovations said the enhancements will greatly reduce the odds of an item not being available to shoppers. While Bossa Nova is supplying the current crop of robot workers, Simbe Robotics has a competing device. Both of these tech companies are US-based. While Bossa Nova and Simbe are privately-held, NCR Corp (NCR $25-$35-$36), which has supplied Walmart with self-checkouts for years and cash registers for decades, will service the robotic workforce.
Global Strategy: East/Southeast Asia
Communist China dealt another political blow as Taiwan elections turn out a lot like the Hong Kong elections. Under two months ago, the Hong Kong electorate overwhelmingly voted for pro-democracy candidates to fill seats in the island's legislature, sending shock waves through the Communist Party of China (CPC). This past weekend, voters in Taiwan sent a similar message to Beijing. A staunch defender of Taiwan's freedom from the CPC, President Tsai Ing-wen won re-election in a historic landslide, badly setting back China's aims to gain more control over the island. 8.2 million voters, almost precisely one-third of the island's total population, voted for Ms. Tsai, the largest vote ever recorded in Taiwan. China had embarked on a stealthy campaign to unseat Tsai, using tactics such as military drills in the waters around the island, and stronger control of travel between the mainland and Taiwan. It appears these tactics backfired badly, with increased sympathy from the Taiwanese people to the plight of pro-democracy demonstrators in Hong Kong. It also didn't help that Beijing reiterated its claim that Taiwan is part of its territory. China has pushed for its so-called "one country, two systems" framework to be adopted by Taiwan, but the citizens are getting a first-hand look at the illusion of that promise through what is going on in Hong Kong. In a speech following her landslide win, Tsai commented on the special relationship Taiwan has with the United States—comments that probably enraged many in the CPC. The Communist Chinese Party had already internalized what its own highly-political press corps was spewing, backed up by the dupes in the American press corps: that China's rise to the leading economic power in the world was already set in stone. Reports of that rise, as the old joke goes, have been highly exaggerated.
Consumer Cyclical: Leisure
Six Flags plummets nearly 18% over concerns about the completion of its planned China theme parks. Shares of Six Flags Entertainment Corp (SIX $41-$36-$64) plunged below their 52-week lows following the company's ominous warnings about its planned theme parks in China—problems so dire that they may lead to the cancellation of the build altogether. It seems as though Six Flags' Chinese development partner, Riverside Investment Group, has defaulted on its required payments to the company, and unless additional funding can be secured all construction will halt. Getting all the bad news out at once, the Texas-based amusement park operator also warned of a fourth quarter revenue drop, perhaps $8 million to $10 million less than it made in the same quarter a year earlier. For investors buying into SIX for its dividend yield—now 9.14% after the most recent share price drop—be forewarned, it is doubtful that the company can keep that rate intact. Between 2010 and 2018, shares of SIX rose nearly 650%; since 2018, they have plunged from $73 per share to $36 per share. Relying solely on its 25 theme parks for revenue, we don't see a catalyst for future growth. Even though they may appear cheap, we wouldn't touch the shares—especially since China was supposed to be their next growth engine.
Grubhub says it's not for sale, but investors are betting on an acquisition. Just three months ago, in October of 2019, we reported on food delivery service Grubhub's (GRUB $32-$56-$88) 43% share price decline in just one session. That massive drop was due to a pretty lousy Q3 earnings report. Now, three months later, GRUB shares have climbed back out of that hole, regaining all lost ground. It isn't that the financials are looking better, it is simply the fact that investors are betting big on a larger player swooping in to acquire the $5 billion company. With competition in the food delivery space increasing almost monthly, and with well-known rivals such as Uber Eats, DoorDash, and Postmates, the arguable pioneer in the industry needs to do something. DoorDash, in fact, just supplanted GRUB as the number one delivery service, with a market share of 32%. What company might acquire Grubhub? The most fascinating name we've heard circulated is Amazon (AMZN), which abandoned its own Amazon Restaurants delivery service last year. The company which is now delivering 3.5 billion of its own packages per year apparently wants back in on the food delivery game. It took some real fortitude to buy GRUB shares at or near their low of $32.11 back in late October, but those who did buy in have been rewarded with a 75% run since. Hoping that a buyer comes along soon, however, is a dangerous game to play. If one doesn't manifest, expect the shares to plummet back down.
Aerospace & Defense
Boeing's most disturbing internal messages to date shed more light on a corporate culture in deep trouble. We almost hate to bring up one of the recently-released internal messages from Boeing (BA $320-$331-$446) employees written a year before the fatal Lion Air crash in Indonesia. In a company the size of Boeing, there are always going to be some boneheaded digital conversations just waiting to be uncovered but, nonetheless, this particularly chilling message seems to point to a dangerous level of wanton arrogance at a company which claims to have a corporate culture based on safety and design excellence. Indonesia's Lion Air wanted to put its pilots through simulator (sim) training on the 737 MAX before flying the aircraft, and expressed this desire to Boeing in 2017. In response to the request, one Boeing employee wrote: "Now friggin Lion Air might need a sim to fly the MAX, and maybe because of their own stupidity. I'm scrambling trying to figure out how to unscrew this now! idiots." He apparently succeeded, as Boeing talked Lion Air out of the costly (to Boeing) simulator training. A little over a year after this internal message was written, a Lion Air 737 MAX crashed, killing all 189 people on board. The Indonesian National Transportation Safety Committee cited Boeing's failure to inform pilots of the new MCAS flight control system at the heart of the crash. To be sure, both deadly crashes involved pilot error with respect to emergency procedures, but the slew of internal memos now coming to light certainly implicates Boeing in the pilots' shortcomings. One day, Boeing will return to greatness, but that won't happen under the current CEO and board of directors.
Medical Devices, Equipment, & Supplies
SmileDirectClub soars for second time in a week on news it will sell aligners directly to dentists. Last week we mentioned what a tough time it has been for orthodontics equipment distributor SmileDirectClub (SDC $8-$12-$21) since going public last year. We also said how much we liked the company's deal with Walmart (WMT) to sell a new line of oral care products to the retailer; a deal which made the company's share price pop 21%. On Tuesday, shares of SDC were trading up 16% following another major announcement from management: the company will begin selling its aligners directly to dentists. Another smart move by the company, but what is most interesting about this story is the relationship between SmileDirectClub and Align Technologies (ALGN $170-$291-$298), which had been the key supplier of clear aligners to SDC, and an owner of 17% of the company's outstanding shares. As part of that deal, SmileDirect would only sell its aligners directly to consumers—a move which had alienated dentists. The company said it was no longer beholden to that 2016 contract (ALGN no longer owns the 17% stake), and that it would make its own aligners at the firm's manufacturing facility in Antioch, Tennessee. While SDC shares were spiking, ALGN shares were off around 2% on the news. Will dentists be willing to embrace a former competitor and sell the SmileDirectClub aligners? Considering the aligners will now come with an in-office option, meaning all work can be done under the supervision of the family dentist, our guess is yes. Align appears to be the one left out in the cold.
Food Products
Don't look now, but Beyond Meat is up 54% year-to-date, and we are only eight trading days in. As we have bloviated about any number of times, we bought plant-based "meat" company Beyond Meat (BYND $26-$116-$240) within minutes of it going public back on May 2nd. It came out of the gate trading around $52 per share, and proceeded to climb all the way up to $240/share by mid-summer. We bought Beyond as an investment, not a trade, within the Penn New Frontier Fund, so we did get a little slack when we stood by the firm as the shares came falling back to earth, dropping into the mid-$70s range. Now, all of a sudden, shares of BYND have climbed 54% within eight trading days on the back of very little groundbreaking news. One catalyst came when privately-held competitor Impossible Foods announced it didn't have the product to satisfy a potential McDonald's (MCD) deal, but that was a big nothing-burger: the world's largest fast-food chain was already experimenting with the PLT (plant, lettuce, and tomato) in Canada, a proprietary blend using Beyond Meat's product. We continue to believe that an enormous deal with MCD is in the works. CEO Ethan Brown is a visionary, and a uniquely-dynamic leader. While we aren't ready to compare him to a Jobs or a Musk, we have no doubt that Beyond will continue to be the benchmark alt-meat producer for other to follow. We also believe this industry will climb to a size few currently envision. Would we still buy in at $116 per share? No doubt.
Pharmaceuticals
The next big wave in knock-off drugs might not be generics, exactly. They're known as "me too" drugs—compounds that copy the biological function of existing drugs, but which have a different enough molecular structure (which differentiates them from generics) to avoid patent infringement. Of most importance to patients: these drugs may cost as little as 20% of the therapy they are emulating; considering some of these treatments cost hundreds of thousands a year, that is a big deal. One new startup in particular, EQRx Inc, backed by private equity funding from the likes of Andreesen Horowitz and Google Ventures (now "GV"), plans to bring nearly a dozen of these "me too" drugs to the market relatively soon. While the typical drug costs around $2 billion to develop, EQRx believes they can cut those costs to under $400 million apiece, mainly by utilizing new technologies to increase efficiencies in the lab. While companies such as EQRx will face backlash on a myriad of fronts, from well-established competitors to the FDA to insurers and PBMs, their model may just usher in a new, simpler pricing structure and lower overall costs for patients. While EQRx is not publicly traded, an interesting generic drug play right now might be Israeli-based Teva Pharmaceuticals Industries (TEVA $6-$9-$20), the largest generic drug manufacturer in the world, which is trading more than 50% off of its 52-week high.
Robotics & Industrial Machinery
Walmart is about to launch a new robotic workforce at its stores. Remember when you would go to the store to pick up a few items, find the shortest checkout lane, then proceed to get stuck behind someone reaching down to leisurely pull out their checkbook? It may seem archaic, but that scenario was commonplace not all that long ago. Now, with debit cards, smartphones, and self-checkout lanes, that problem has been alleviated, but stores are still struggling with the critical task of keeping items in stock. Walmart (WMT $93-$116-$125), the world's largest brick-and-mortar retailer, has a tactical plan to change that: deploy an army of six-foot-tall shelf-scanning robotic workers to diligently roam each aisle, sending alerts to employees' hand-held devices when an item is out of stock. Within relatively short order, Walmart will have over 1,000 of the robots, designed by privately-held Bossa Nova Robotics, roaming through its stores. While Walmart hasn't released the metrics, the company's senior vice president of store innovations said the enhancements will greatly reduce the odds of an item not being available to shoppers. While Bossa Nova is supplying the current crop of robot workers, Simbe Robotics has a competing device. Both of these tech companies are US-based. While Bossa Nova and Simbe are privately-held, NCR Corp (NCR $25-$35-$36), which has supplied Walmart with self-checkouts for years and cash registers for decades, will service the robotic workforce.
Global Strategy: East/Southeast Asia
Communist China dealt another political blow as Taiwan elections turn out a lot like the Hong Kong elections. Under two months ago, the Hong Kong electorate overwhelmingly voted for pro-democracy candidates to fill seats in the island's legislature, sending shock waves through the Communist Party of China (CPC). This past weekend, voters in Taiwan sent a similar message to Beijing. A staunch defender of Taiwan's freedom from the CPC, President Tsai Ing-wen won re-election in a historic landslide, badly setting back China's aims to gain more control over the island. 8.2 million voters, almost precisely one-third of the island's total population, voted for Ms. Tsai, the largest vote ever recorded in Taiwan. China had embarked on a stealthy campaign to unseat Tsai, using tactics such as military drills in the waters around the island, and stronger control of travel between the mainland and Taiwan. It appears these tactics backfired badly, with increased sympathy from the Taiwanese people to the plight of pro-democracy demonstrators in Hong Kong. It also didn't help that Beijing reiterated its claim that Taiwan is part of its territory. China has pushed for its so-called "one country, two systems" framework to be adopted by Taiwan, but the citizens are getting a first-hand look at the illusion of that promise through what is going on in Hong Kong. In a speech following her landslide win, Tsai commented on the special relationship Taiwan has with the United States—comments that probably enraged many in the CPC. The Communist Chinese Party had already internalized what its own highly-political press corps was spewing, backed up by the dupes in the American press corps: that China's rise to the leading economic power in the world was already set in stone. Reports of that rise, as the old joke goes, have been highly exaggerated.
Consumer Cyclical: Leisure
Six Flags plummets nearly 18% over concerns about the completion of its planned China theme parks. Shares of Six Flags Entertainment Corp (SIX $41-$36-$64) plunged below their 52-week lows following the company's ominous warnings about its planned theme parks in China—problems so dire that they may lead to the cancellation of the build altogether. It seems as though Six Flags' Chinese development partner, Riverside Investment Group, has defaulted on its required payments to the company, and unless additional funding can be secured all construction will halt. Getting all the bad news out at once, the Texas-based amusement park operator also warned of a fourth quarter revenue drop, perhaps $8 million to $10 million less than it made in the same quarter a year earlier. For investors buying into SIX for its dividend yield—now 9.14% after the most recent share price drop—be forewarned, it is doubtful that the company can keep that rate intact. Between 2010 and 2018, shares of SIX rose nearly 650%; since 2018, they have plunged from $73 per share to $36 per share. Relying solely on its 25 theme parks for revenue, we don't see a catalyst for future growth. Even though they may appear cheap, we wouldn't touch the shares—especially since China was supposed to be their next growth engine.
Headlines for the Week of 05 Jan 2020—11 Jan 2020
Market Risk Management
Don't let the market's odd reaction to an Iranian attack allow you to become complacent. We've seen a lot of counter-intuitive behavior in the markets over twenty-two years of managing assets, but that doesn't mean they can't still surprise. For example, we expect a temporary pullback in stocks—especially high-growth names—at some point in the first quarter. We also expect, as our headline image might suggest, that the catalyst will come from the Middle East. So, after watching Dow futures fall over 400 points as Iran was lobbing missiles at bases in Iraq which house US troops, we figured the catalyst was set in motion. The tragic icing on the cake of our anticipated scenario was a deadly 737 crash over Iran. Oil and gold would spike the next day (today), while the markets would plummet. Instead, the Dow ended the session up 160 points, and both oil and gold prices fell. Granted, the president's remarks helped, as did some tweets coming from Iran, but an about face in such a short amount of time was impressive. We've seen this movie before. Just when it seems as though the Teflon market is impervious to bad news, it tends to pull out a bat and wallop investors. We continue to remain positive on the markets for 2020 (actually, we have become more bullish since fall), but we will have frightening pullbacks. In our Outlook 2020 report we comment that "a 10% pullback at some point in Q1 seems reasonable." Of course, just when the hyperbolic headlines begin to foment mass selling, markets make a u-turn and regain old highs. And that is part of the beauty of the stock market. Although my background is in finance, in hindsight I would have loved to get a secondary degree in psychology. From the arrogance of EMH (efficient market hypothesis) to the fear that peaks as the market troughs, an investor can be very successful by being a contrarian and not following the crowd. With the amount of data we now have available at our fingertips, and all of the "experts" telling us what it means, that has never been a more relevant statement.
Aerospace & Defense
Yet another deadly crash for Boeing—more evidence that the board needs to be broomed. When a CEO needs to go, a company's board of directors can step in and make that happen. But what happens when the board itself needs to be broomed? An activist hedge fund manager can make that happen, but when the company has a $200 billion market cap like Boeing (BA $320-$333-$446), it would take some impressively deep pockets to supplant even one board member. Institutions—think mutual funds—own 69% of Boeing's outstanding shares, so it may be time for them to band together and demand change, but more than likely they will just sell more shares. The catalyst for my most recent dive into exactly who sits on the board of directors (each of whom making about $350k per year for their "expertise") was yet another 737 crash, killing all on board. This happened shortly after the aircraft took off from Iran, headed for Kiev. While this 737 wasn't the MAX version which was involved in the last two crashes, that may be even worse for the company. Passengers already don't want to fly the MAX, but now they may be thinking about their safety on any 737. The aircraft was only three years off the assembly line. Not good. After reviewing the board, which is stuffed with seemingly political appointees, I took a look at the company's recent news releases on their investor site. The first headline that caught my eye was this: "Boeing Starliner Completes First Orbital Test with Successful Landing." Um, OK. But I watched the launch and followed the failed mission. Inside the report, two sentences out of eight paragraphs mentioned the "anomoly" which caused the mission to fail. The remaining sentences sang the praises of the "historic" flight. I can understand putting a positive spin on corporate news, but please. Arrogance and tone-deafness seem to permeate this organization's leadership. What makes us the most angry about Boeing's nightmare condition (actually, the word "nightmare" should be reserved for the latest victims' families) is the fact that this company is one of the crown jewels of American economic might. We never expected this to happen. Now that it has, however, it is time for someone to take charge and clean up the mess. And that means making massive changes to management and the "independent" board.
Biotechnology
Cancer death rates in the US drop most on record on back of advances in treatment and early detection. According to new data compiled by the American Cancer Society, the death rate from the disease dropped 2.2% in the one year period between 2016 and 2017 (the most recent data available), representing the largest one-year drop on record. The most impressive declines came in the areas of lung cancer and melanoma, helped by successful new therapies from firms such as Roche (RHHVF $326) and Bristol-Myers Squibb (BMY $64). Strong progress was also noted in the areas of prostate, breast, and colorectal cancers, primarily driven by new diagnostic tools from the likes of Exact Sciences (EXAS $100), maker of the Cologuard® colon cancer screening kit, and Illumina (ILMN $330), which is developing a broad cancer profiling test. Most impressively, the total death rate linked to cancer has fallen by nearly one-third over the past generation. Changes in lifestyle behavior, such as a reduction in smoking rates, were also cited in the study. We are entering the golden age of cancer treatment and, dare we say, cancer cures thanks to the "fifth pillar" of cancer care—gene therapy and immunotherapy. In this weekend's Penn Wealth Report, we will name our favorite biotech company engaged in this exciting new frontier, but here's our favorite basket of biotech holdings: the SPDR® S&P Biotech ETF, symbol XBI.
Space Sciences & Exploration
The United States Space Force officially completes its first launch with the SpaceX Falcon 9. A historic day. The United States Space Force (USSF) just kicked off its existence by managing the first launch of 2020, a SpaceX Falcon 9 rocket carrying the third batch of sixty Starlink satellites into orbit. The USSF operation went flawlessly, with the first stage of the Falcon 9 rocket, which was making its fourth flight, touching down perfectly on its drone ship landing platform named "Of Course I Still Love You." With 162 Starlink satellites currently in orbit, SpaceX is now in charge of the world's largest commercial satellite constellation. The company plans to begin operating the network, which will ultimately provide high-speed, low-latency internet access across the globe—no matter how remote the location, later this year. Launches are inherently risky, but SpaceX is making the event seem commonplace—an enormous milestone for spaceflight, and one which has never existed before. The company's most important test to date will come later this year when SpaceX astronauts make the maiden (manned) voyage aboard the Crew Dragon space capsule.
Medical Devices
SmileDirectClub soars after announcing suite of oral care products for Walmart. It has been a rough slog for SmileDirectClub (SDC $8-$10-$21) since the orthodontics equipment maker went public back in September of 2019. After coming out of the gate at $23, shares quickly dropped to $16.67 by the end of IPO day. From there, it was a relatively straight shot down to $7.56 per share, a mark hit on 12 Dec as the rest of the market was in rally mode. Now, however, the company's shares received a much needed boost—jumping 21% in one day—after announcing a new line of oral care products which will be available exclusively at Walmart (WMT). While the company won't offer its primary product, the teeth aligners, the line will include an electric toothbrush, a premium teeth whitening system (complete with LED light), toothpastes, and an ultrasonic UV cleaner. Analyst firm Craig-Hallum initiated coverage of SDC with a Buy rating and a $20 price target on the shares. We were about as down as one could be on shares of SDC, considering the copious field of competitors in the space. That being said, we love this strategic move to diversify their business by landing Walmart as a customer. We don't have the conviction to pull the trigger and buy shares just yet, despite the $10 price tag, but Craig-Hallum might have made a brilliant call. Time will tell.
Precious Metals
Our gold investment continues to pay off, and we are not even thinking about taking profits. On 03 Jan 2019, almost precisely one year ago, we told readers that we were buying gold in the Penn Dynamic Growth Strategy via the SPDR® Gold Shares ETF (GLD $120-$148-$148). One year later and the precious metal, known for its ability to attract buyers during volatile environments, looks as good to us now as it did back then. Despite the fact that gold just hit its highest level since 2013 ($1,590.90 intraday), there are a number of reasons it still has room to run. First and foremost, geopolitical tensions are near the boiling point, and we see that continuing throughout the year. Secondly, fiscal irresponsibility continues to run rampant around the globe. Our own $23 trillion national debt, which grows by $1 trillion per year, is probably the envy of leaders in the EU, who just can't seem to spend enough. Right now, we are nearing in on ten cents out of every dollar the government collects going to servicing the national debt—the "interest" portion. And that is with incredibly-low interest rates. If inflation took off again and interest rates doubled around the world (not a far stretch, considering the $12 trillion worth of negative rate bonds out there), that would mean roughly one-fifth of what the government takes in would go to simply service the debt. Unsustainable. No, really: UNSUSTAINABLE. If the government is taking $2 trillion from us each year in taxes and other revenue, but spending $3 trillion each year via the budget, what happens when the economy contracts again? All more fodder in the bullish case for gold. It may seem like I am going off on a tangent here but I'm not: if three-quarters of the states affirmed two constitutional amendments—term limits and a balanced budget amendment—we could finally begin tackling the problem of our monstrous national debt (and gold might not be such an attractive investment). Here's the problem: two-thirds of both the House and the Senate must propose such amendments before they head out to the states. But, who is even talking about either of these amendments?
Specialty Retail
Bed Bath & Beyond is selling nearly half of its real estate holdings; is that a good thing or a tactical mistake? Financial engineers call it unlocking capital. We call it giving up control. Following in what has become a common practice for retailers, especially ones under siege by activists with dollar signs in their eyes, home furnishings retailer Bed Bath & Beyond (BBBY $7-$16-$20) is selling over $250 million worth of its $587 million in real estate assets. The company will sell the 2.1 million square feet of property to Oak Street Real Estate Capital LLC, and then continue to occupy the buildings under long-term lease agreements. Why would a struggling retailer give up control of its best assets? The same reason a family in deep credit card debt would take out a second mortgage on their real estate—the home—to pay down that debt. Now, instead of being at the mercy of creditors, the company will be at the mercy of a landlord which has the right to raise their rent. And that, let's face it, is all but guaranteed. Target (TGT), our favorite retailer, rebuffed activist (and all-around punk in our opinion) Bill Ackman's Pershing Square when it insisted the chain begin selling properties. Barneys New York took the Bed Bath & Beyond route, selling its real estate and leasing the properties back. That company was forced into bankruptcy after their landlord nearly doubled the rent on its Madison Avenue store. Under new management, Bed Bath & Beyond is trying to pry itself away from its coupon-offering culture. There is one major problem with that: the last ten times we went into a BBBY store it was as a direct result of receiving one of those coupons. This reminds us of what the hapless Ron Johnson tried to do at JC Penney (JCP $1), and we know how that turned out.
Maritime
Global shipping industry is getting its groove back, spurred by economics, trade, and geopolitics. Not long ago, we discussed "The State of Global Shipping" in an issue of The Penn Wealth Report (see From the Archives section below). We compared the industry, which had been decimated by the trade war and global economic slowdown, to Bank of America (BAC), which was selling for $2.53 during the height of the financial crisis. In other words, look for this industry to come roaring back. Specifically, we mentioned picking up Nordic American Tankers (NAT) at $2.10 per share. On Friday, NAT hit $5.05 per share, and tanker stocks are soaring as trade tensions ease and geopolitical tensions in the Middle East heat up. Management at NAT just issued a press release outlining how much revenue is now being generated from their vessels' spot voyages. In short, it is a lot higher than it was a year ago. And we see this comeback story continuing in 2020. We believe global growth has troughed and should pick back up over the coming quarters. This should certainly help the bottom line of quality shipping companies. The industry can be challenging to navigate, however; we recommend members re-visit the Penn Wealth Report story, which briefly discusses fundamentals, chief players, and industry trends.
Don't let the market's odd reaction to an Iranian attack allow you to become complacent. We've seen a lot of counter-intuitive behavior in the markets over twenty-two years of managing assets, but that doesn't mean they can't still surprise. For example, we expect a temporary pullback in stocks—especially high-growth names—at some point in the first quarter. We also expect, as our headline image might suggest, that the catalyst will come from the Middle East. So, after watching Dow futures fall over 400 points as Iran was lobbing missiles at bases in Iraq which house US troops, we figured the catalyst was set in motion. The tragic icing on the cake of our anticipated scenario was a deadly 737 crash over Iran. Oil and gold would spike the next day (today), while the markets would plummet. Instead, the Dow ended the session up 160 points, and both oil and gold prices fell. Granted, the president's remarks helped, as did some tweets coming from Iran, but an about face in such a short amount of time was impressive. We've seen this movie before. Just when it seems as though the Teflon market is impervious to bad news, it tends to pull out a bat and wallop investors. We continue to remain positive on the markets for 2020 (actually, we have become more bullish since fall), but we will have frightening pullbacks. In our Outlook 2020 report we comment that "a 10% pullback at some point in Q1 seems reasonable." Of course, just when the hyperbolic headlines begin to foment mass selling, markets make a u-turn and regain old highs. And that is part of the beauty of the stock market. Although my background is in finance, in hindsight I would have loved to get a secondary degree in psychology. From the arrogance of EMH (efficient market hypothesis) to the fear that peaks as the market troughs, an investor can be very successful by being a contrarian and not following the crowd. With the amount of data we now have available at our fingertips, and all of the "experts" telling us what it means, that has never been a more relevant statement.
Aerospace & Defense
Yet another deadly crash for Boeing—more evidence that the board needs to be broomed. When a CEO needs to go, a company's board of directors can step in and make that happen. But what happens when the board itself needs to be broomed? An activist hedge fund manager can make that happen, but when the company has a $200 billion market cap like Boeing (BA $320-$333-$446), it would take some impressively deep pockets to supplant even one board member. Institutions—think mutual funds—own 69% of Boeing's outstanding shares, so it may be time for them to band together and demand change, but more than likely they will just sell more shares. The catalyst for my most recent dive into exactly who sits on the board of directors (each of whom making about $350k per year for their "expertise") was yet another 737 crash, killing all on board. This happened shortly after the aircraft took off from Iran, headed for Kiev. While this 737 wasn't the MAX version which was involved in the last two crashes, that may be even worse for the company. Passengers already don't want to fly the MAX, but now they may be thinking about their safety on any 737. The aircraft was only three years off the assembly line. Not good. After reviewing the board, which is stuffed with seemingly political appointees, I took a look at the company's recent news releases on their investor site. The first headline that caught my eye was this: "Boeing Starliner Completes First Orbital Test with Successful Landing." Um, OK. But I watched the launch and followed the failed mission. Inside the report, two sentences out of eight paragraphs mentioned the "anomoly" which caused the mission to fail. The remaining sentences sang the praises of the "historic" flight. I can understand putting a positive spin on corporate news, but please. Arrogance and tone-deafness seem to permeate this organization's leadership. What makes us the most angry about Boeing's nightmare condition (actually, the word "nightmare" should be reserved for the latest victims' families) is the fact that this company is one of the crown jewels of American economic might. We never expected this to happen. Now that it has, however, it is time for someone to take charge and clean up the mess. And that means making massive changes to management and the "independent" board.
Biotechnology
Cancer death rates in the US drop most on record on back of advances in treatment and early detection. According to new data compiled by the American Cancer Society, the death rate from the disease dropped 2.2% in the one year period between 2016 and 2017 (the most recent data available), representing the largest one-year drop on record. The most impressive declines came in the areas of lung cancer and melanoma, helped by successful new therapies from firms such as Roche (RHHVF $326) and Bristol-Myers Squibb (BMY $64). Strong progress was also noted in the areas of prostate, breast, and colorectal cancers, primarily driven by new diagnostic tools from the likes of Exact Sciences (EXAS $100), maker of the Cologuard® colon cancer screening kit, and Illumina (ILMN $330), which is developing a broad cancer profiling test. Most impressively, the total death rate linked to cancer has fallen by nearly one-third over the past generation. Changes in lifestyle behavior, such as a reduction in smoking rates, were also cited in the study. We are entering the golden age of cancer treatment and, dare we say, cancer cures thanks to the "fifth pillar" of cancer care—gene therapy and immunotherapy. In this weekend's Penn Wealth Report, we will name our favorite biotech company engaged in this exciting new frontier, but here's our favorite basket of biotech holdings: the SPDR® S&P Biotech ETF, symbol XBI.
Space Sciences & Exploration
The United States Space Force officially completes its first launch with the SpaceX Falcon 9. A historic day. The United States Space Force (USSF) just kicked off its existence by managing the first launch of 2020, a SpaceX Falcon 9 rocket carrying the third batch of sixty Starlink satellites into orbit. The USSF operation went flawlessly, with the first stage of the Falcon 9 rocket, which was making its fourth flight, touching down perfectly on its drone ship landing platform named "Of Course I Still Love You." With 162 Starlink satellites currently in orbit, SpaceX is now in charge of the world's largest commercial satellite constellation. The company plans to begin operating the network, which will ultimately provide high-speed, low-latency internet access across the globe—no matter how remote the location, later this year. Launches are inherently risky, but SpaceX is making the event seem commonplace—an enormous milestone for spaceflight, and one which has never existed before. The company's most important test to date will come later this year when SpaceX astronauts make the maiden (manned) voyage aboard the Crew Dragon space capsule.
Medical Devices
SmileDirectClub soars after announcing suite of oral care products for Walmart. It has been a rough slog for SmileDirectClub (SDC $8-$10-$21) since the orthodontics equipment maker went public back in September of 2019. After coming out of the gate at $23, shares quickly dropped to $16.67 by the end of IPO day. From there, it was a relatively straight shot down to $7.56 per share, a mark hit on 12 Dec as the rest of the market was in rally mode. Now, however, the company's shares received a much needed boost—jumping 21% in one day—after announcing a new line of oral care products which will be available exclusively at Walmart (WMT). While the company won't offer its primary product, the teeth aligners, the line will include an electric toothbrush, a premium teeth whitening system (complete with LED light), toothpastes, and an ultrasonic UV cleaner. Analyst firm Craig-Hallum initiated coverage of SDC with a Buy rating and a $20 price target on the shares. We were about as down as one could be on shares of SDC, considering the copious field of competitors in the space. That being said, we love this strategic move to diversify their business by landing Walmart as a customer. We don't have the conviction to pull the trigger and buy shares just yet, despite the $10 price tag, but Craig-Hallum might have made a brilliant call. Time will tell.
Precious Metals
Our gold investment continues to pay off, and we are not even thinking about taking profits. On 03 Jan 2019, almost precisely one year ago, we told readers that we were buying gold in the Penn Dynamic Growth Strategy via the SPDR® Gold Shares ETF (GLD $120-$148-$148). One year later and the precious metal, known for its ability to attract buyers during volatile environments, looks as good to us now as it did back then. Despite the fact that gold just hit its highest level since 2013 ($1,590.90 intraday), there are a number of reasons it still has room to run. First and foremost, geopolitical tensions are near the boiling point, and we see that continuing throughout the year. Secondly, fiscal irresponsibility continues to run rampant around the globe. Our own $23 trillion national debt, which grows by $1 trillion per year, is probably the envy of leaders in the EU, who just can't seem to spend enough. Right now, we are nearing in on ten cents out of every dollar the government collects going to servicing the national debt—the "interest" portion. And that is with incredibly-low interest rates. If inflation took off again and interest rates doubled around the world (not a far stretch, considering the $12 trillion worth of negative rate bonds out there), that would mean roughly one-fifth of what the government takes in would go to simply service the debt. Unsustainable. No, really: UNSUSTAINABLE. If the government is taking $2 trillion from us each year in taxes and other revenue, but spending $3 trillion each year via the budget, what happens when the economy contracts again? All more fodder in the bullish case for gold. It may seem like I am going off on a tangent here but I'm not: if three-quarters of the states affirmed two constitutional amendments—term limits and a balanced budget amendment—we could finally begin tackling the problem of our monstrous national debt (and gold might not be such an attractive investment). Here's the problem: two-thirds of both the House and the Senate must propose such amendments before they head out to the states. But, who is even talking about either of these amendments?
Specialty Retail
Bed Bath & Beyond is selling nearly half of its real estate holdings; is that a good thing or a tactical mistake? Financial engineers call it unlocking capital. We call it giving up control. Following in what has become a common practice for retailers, especially ones under siege by activists with dollar signs in their eyes, home furnishings retailer Bed Bath & Beyond (BBBY $7-$16-$20) is selling over $250 million worth of its $587 million in real estate assets. The company will sell the 2.1 million square feet of property to Oak Street Real Estate Capital LLC, and then continue to occupy the buildings under long-term lease agreements. Why would a struggling retailer give up control of its best assets? The same reason a family in deep credit card debt would take out a second mortgage on their real estate—the home—to pay down that debt. Now, instead of being at the mercy of creditors, the company will be at the mercy of a landlord which has the right to raise their rent. And that, let's face it, is all but guaranteed. Target (TGT), our favorite retailer, rebuffed activist (and all-around punk in our opinion) Bill Ackman's Pershing Square when it insisted the chain begin selling properties. Barneys New York took the Bed Bath & Beyond route, selling its real estate and leasing the properties back. That company was forced into bankruptcy after their landlord nearly doubled the rent on its Madison Avenue store. Under new management, Bed Bath & Beyond is trying to pry itself away from its coupon-offering culture. There is one major problem with that: the last ten times we went into a BBBY store it was as a direct result of receiving one of those coupons. This reminds us of what the hapless Ron Johnson tried to do at JC Penney (JCP $1), and we know how that turned out.
Maritime
Global shipping industry is getting its groove back, spurred by economics, trade, and geopolitics. Not long ago, we discussed "The State of Global Shipping" in an issue of The Penn Wealth Report (see From the Archives section below). We compared the industry, which had been decimated by the trade war and global economic slowdown, to Bank of America (BAC), which was selling for $2.53 during the height of the financial crisis. In other words, look for this industry to come roaring back. Specifically, we mentioned picking up Nordic American Tankers (NAT) at $2.10 per share. On Friday, NAT hit $5.05 per share, and tanker stocks are soaring as trade tensions ease and geopolitical tensions in the Middle East heat up. Management at NAT just issued a press release outlining how much revenue is now being generated from their vessels' spot voyages. In short, it is a lot higher than it was a year ago. And we see this comeback story continuing in 2020. We believe global growth has troughed and should pick back up over the coming quarters. This should certainly help the bottom line of quality shipping companies. The industry can be challenging to navigate, however; we recommend members re-visit the Penn Wealth Report story, which briefly discusses fundamentals, chief players, and industry trends.
Headlines for the Week of 29 Dec 2019—04 Jan 2020
Market Watch
The last trading day of the December is all green, which is fitting for the year we just had. The Dow gained 76 points for the day and 22% for the year; the S&P gained 9 points for the day and 29% for the year; the tech-heavy NASDAQ gained 27 points for the day and a whopping 35% for the year. What a fitting last day to a pretty remarkable year. We had our scares in May and August, and our fill of trade war drama, but it would be hard to write a much better script for investors than what actually happened in 2019. Even bond holdings, buoyed by the Fed lowering rates, gained value over the course of the year. Now, we can briefly celebrate, but then we must get on with 2020—a much different beast. Although we feel better about the year ahead than we have at any other point in the past six months, the P/E ratio of the S&P 500 is sitting at a rather fat 24, and plenty of landmines are still out there. In other words, it wouldn't take much of a catalyst to start a first-quarter pullback (which we expect, by the way). But let's take some time and bask in the glow of a quite successful 2019. Our 2020 Outlook report will be released soon, but here are a few ticklers: Bonds won't have a good year, so fixed income investors will look for yield in Blue Chip stocks. Emerging markets will make a big rebound—but be selective, as some areas will flounder. Gold will shine, and oil will surprise. And then there's biotech.... Stay tuned.
Automotive
Ghosn's Great Escape: we feel a Netflix movie coming. While we have never been big fans of former Nissan/Renault chief Carlos Ghosn due, in part, to his extreme arrogance—even for a French CEO (actually, he is a Brazilian-born French businessman of Lebanese ancestry), we found ourselves actually rooting for him in this case. For over a year, Ghosn has been imprisoned in Japan on charges of corruption and misappropriation of funds while head of the Japanese/European conglomerate (Ghosn was CEO of Alliance, the partnership between Renault, Nissan, and Mitsubishi). For some reason still not fully understood, he was often kept in a small cell with little access to his loved ones or even his lawyer. It looked a little bit more like Midnight Express (great movie, Turkish prison) than it did justice in a democracy. Ghosn, who was finally released from prison and on house arrest while awaiting his trial, which was due to take place sometime in 2020, finally made his great escape. With wild rumors circulating of just how he pulled off the stunt (one involved him being hidden in a crate filled with musical instruments), one thing is certain: Ghosn escaped Japan and is now in his childhood home of Lebanon, hailed as some type of fugitive hero. Not only is he somewhat of a folk hero in Lebanon, which once issued a stamp with his likeness on the face, the country has no extradition arrangement with Japan, so odds are about zero that he will ever up back in Tokyo. As for the charges, Japan argues he misappropriated the funds to fuel his extravagant lifestyle, but others believe Nissan executives set him up as payback for Renault's growing power over the Japanese automaker. Either or both seem plausible to us. Nonetheless, he will now face trial in absentia. It truly is a story ready-made for TV. As Ghosn is not shy of the camera, it will be interesting to hear what he has to say over the coming weeks.
Judicial Watch
Uber and Postmates take the gloves off, sue California over slanted gig law. It is known as Assembly Bill 5, or simply AB5, and its goal is clear: force companies which operate within the "gig economy" to label workers as employees rather than independent contractors, whether those workers wish to be considered employees (they don't) or not. And it is clearly aimed at companies such as Uber (UBER $29), Lyft (LYFT $43), DoorDash, Postmates, and other innovative firms. AB5 would require companies to offer workers all the benefits traditional employees receive, such as paid time off, sick leave, unemployment, and other benefits. Now, Uber and Postmates are fighting back against the law, which is set to go into effect in California on New Year's Day. The firms are suing both the state and Attorney General Xavier Becerra, calling the legislation unconstitutional as it targets only certain workers and companies. Despite the hyperbolic bull being thrown around by the state, the new law is unconstitutional, and it will ultimately be struck down by the judicial system. The question for firms like Uber and Postmates is this: what happens between January 1st and the inevitable final ruling? This bill, soon to become law, is a glaring example of why companies are flooding out of California for greener pastures. Much like with China, however, too many companies cannot simply cease doing business in the region, no matter how warped the government becomes.
Global Strategy: Latin America
Bolivia ratchets up the pressure on Mexico and Spain after those countries show support for former president (and dictator) Morales. Back on 11 Nov, we reported on Evo Morales' fall from grace in Bolivia following his latest fraudulent election win. After members of the South American nation's military walked off their respective posts, including those stationed around the presidential palace, the dictator was forced to flee, seeking refuge in Mexico while his minions fled to the Mexican embassy in La Paz, Bolivia. Now, after uncovering further evidence that both Mexico and Spain have been aiding and abetting members of the Morales regime, Bolivia's acting president, Jeanine Anez, has given the Mexican ambassador and two high-ranking Spanish diplomats 72 hours to leave the country. Bolivia is demanding that Mexico hand over the officials in the embassy who have outstanding arrest warrants. As for Spain's role, a number of Spanish embassy officials—accompanied by security officers—attempted to sneak into the Mexican residence in La Paz in a probable attempt to move the asylum seekers. Spain has officially denied the charges, saying the diplomats just wished to visit. While Morales has now left Mexico City for the open arms of Argentina (and the newly-elected socialist Fernandez/Kirchner regime), this case buttresses our argument that Mexico is reverting back to its own leftist, anti-capitalist roots. While emerging markets will have a strong year ahead, Mexico won't be part of that movement.
Aerospace & Defense
Despite a new CEO, steer clear of Boeing. About two weeks before he was canned as CEO, the now out-of-work Boeing (BA $309-$331-$446) chief Dennis Muilenburg was given high praise by the company's chairman, David Calhoun. "Dennis has done everything right," Calhoun fervently proclaimed. "We stick by him completely." Granted, that kind of talk by a board member is often a kiss of death akin to a team being featured on the cover of Sports Illustrated, but watching Calhoun speak those words we got the sense that he was being fully sincere. And, if he was being sincere, Boeing investors have much to worry about: Calhoun will be taking over as the new permanent CEO of the Chicago-based aerospace giant in January. Earlier in the month we said that Boeing needs dynamic new leadership to pull itself out of its nosedive; instead, we got a failed Starliner mission and a warmed-over board member taking the helm. And the more digging we did, the more troubling the outlook. For example, why is Caroline Kennedy one of the thirteen board members? Why are there so many board members? Why do so few have aerospace experience? Why is the median pay of the board—$346,000 per year—so high? Which leads us to the most important—and most disconcerting—question: who will hold the board accountable? For the vast majority of the past 22 years, we have held Boeing within our clients' portfolios. Presciently, we got out of the stock between the first and second 747 MAX crashes. Boeing is an integral part of the American economy, and it is almost criminal that the management team—at least in our opinion—is so woefully unprepared to lead the company back to its former greatness.
The last trading day of the December is all green, which is fitting for the year we just had. The Dow gained 76 points for the day and 22% for the year; the S&P gained 9 points for the day and 29% for the year; the tech-heavy NASDAQ gained 27 points for the day and a whopping 35% for the year. What a fitting last day to a pretty remarkable year. We had our scares in May and August, and our fill of trade war drama, but it would be hard to write a much better script for investors than what actually happened in 2019. Even bond holdings, buoyed by the Fed lowering rates, gained value over the course of the year. Now, we can briefly celebrate, but then we must get on with 2020—a much different beast. Although we feel better about the year ahead than we have at any other point in the past six months, the P/E ratio of the S&P 500 is sitting at a rather fat 24, and plenty of landmines are still out there. In other words, it wouldn't take much of a catalyst to start a first-quarter pullback (which we expect, by the way). But let's take some time and bask in the glow of a quite successful 2019. Our 2020 Outlook report will be released soon, but here are a few ticklers: Bonds won't have a good year, so fixed income investors will look for yield in Blue Chip stocks. Emerging markets will make a big rebound—but be selective, as some areas will flounder. Gold will shine, and oil will surprise. And then there's biotech.... Stay tuned.
Automotive
Ghosn's Great Escape: we feel a Netflix movie coming. While we have never been big fans of former Nissan/Renault chief Carlos Ghosn due, in part, to his extreme arrogance—even for a French CEO (actually, he is a Brazilian-born French businessman of Lebanese ancestry), we found ourselves actually rooting for him in this case. For over a year, Ghosn has been imprisoned in Japan on charges of corruption and misappropriation of funds while head of the Japanese/European conglomerate (Ghosn was CEO of Alliance, the partnership between Renault, Nissan, and Mitsubishi). For some reason still not fully understood, he was often kept in a small cell with little access to his loved ones or even his lawyer. It looked a little bit more like Midnight Express (great movie, Turkish prison) than it did justice in a democracy. Ghosn, who was finally released from prison and on house arrest while awaiting his trial, which was due to take place sometime in 2020, finally made his great escape. With wild rumors circulating of just how he pulled off the stunt (one involved him being hidden in a crate filled with musical instruments), one thing is certain: Ghosn escaped Japan and is now in his childhood home of Lebanon, hailed as some type of fugitive hero. Not only is he somewhat of a folk hero in Lebanon, which once issued a stamp with his likeness on the face, the country has no extradition arrangement with Japan, so odds are about zero that he will ever up back in Tokyo. As for the charges, Japan argues he misappropriated the funds to fuel his extravagant lifestyle, but others believe Nissan executives set him up as payback for Renault's growing power over the Japanese automaker. Either or both seem plausible to us. Nonetheless, he will now face trial in absentia. It truly is a story ready-made for TV. As Ghosn is not shy of the camera, it will be interesting to hear what he has to say over the coming weeks.
Judicial Watch
Uber and Postmates take the gloves off, sue California over slanted gig law. It is known as Assembly Bill 5, or simply AB5, and its goal is clear: force companies which operate within the "gig economy" to label workers as employees rather than independent contractors, whether those workers wish to be considered employees (they don't) or not. And it is clearly aimed at companies such as Uber (UBER $29), Lyft (LYFT $43), DoorDash, Postmates, and other innovative firms. AB5 would require companies to offer workers all the benefits traditional employees receive, such as paid time off, sick leave, unemployment, and other benefits. Now, Uber and Postmates are fighting back against the law, which is set to go into effect in California on New Year's Day. The firms are suing both the state and Attorney General Xavier Becerra, calling the legislation unconstitutional as it targets only certain workers and companies. Despite the hyperbolic bull being thrown around by the state, the new law is unconstitutional, and it will ultimately be struck down by the judicial system. The question for firms like Uber and Postmates is this: what happens between January 1st and the inevitable final ruling? This bill, soon to become law, is a glaring example of why companies are flooding out of California for greener pastures. Much like with China, however, too many companies cannot simply cease doing business in the region, no matter how warped the government becomes.
Global Strategy: Latin America
Bolivia ratchets up the pressure on Mexico and Spain after those countries show support for former president (and dictator) Morales. Back on 11 Nov, we reported on Evo Morales' fall from grace in Bolivia following his latest fraudulent election win. After members of the South American nation's military walked off their respective posts, including those stationed around the presidential palace, the dictator was forced to flee, seeking refuge in Mexico while his minions fled to the Mexican embassy in La Paz, Bolivia. Now, after uncovering further evidence that both Mexico and Spain have been aiding and abetting members of the Morales regime, Bolivia's acting president, Jeanine Anez, has given the Mexican ambassador and two high-ranking Spanish diplomats 72 hours to leave the country. Bolivia is demanding that Mexico hand over the officials in the embassy who have outstanding arrest warrants. As for Spain's role, a number of Spanish embassy officials—accompanied by security officers—attempted to sneak into the Mexican residence in La Paz in a probable attempt to move the asylum seekers. Spain has officially denied the charges, saying the diplomats just wished to visit. While Morales has now left Mexico City for the open arms of Argentina (and the newly-elected socialist Fernandez/Kirchner regime), this case buttresses our argument that Mexico is reverting back to its own leftist, anti-capitalist roots. While emerging markets will have a strong year ahead, Mexico won't be part of that movement.
Aerospace & Defense
Despite a new CEO, steer clear of Boeing. About two weeks before he was canned as CEO, the now out-of-work Boeing (BA $309-$331-$446) chief Dennis Muilenburg was given high praise by the company's chairman, David Calhoun. "Dennis has done everything right," Calhoun fervently proclaimed. "We stick by him completely." Granted, that kind of talk by a board member is often a kiss of death akin to a team being featured on the cover of Sports Illustrated, but watching Calhoun speak those words we got the sense that he was being fully sincere. And, if he was being sincere, Boeing investors have much to worry about: Calhoun will be taking over as the new permanent CEO of the Chicago-based aerospace giant in January. Earlier in the month we said that Boeing needs dynamic new leadership to pull itself out of its nosedive; instead, we got a failed Starliner mission and a warmed-over board member taking the helm. And the more digging we did, the more troubling the outlook. For example, why is Caroline Kennedy one of the thirteen board members? Why are there so many board members? Why do so few have aerospace experience? Why is the median pay of the board—$346,000 per year—so high? Which leads us to the most important—and most disconcerting—question: who will hold the board accountable? For the vast majority of the past 22 years, we have held Boeing within our clients' portfolios. Presciently, we got out of the stock between the first and second 747 MAX crashes. Boeing is an integral part of the American economy, and it is almost criminal that the management team—at least in our opinion—is so woefully unprepared to lead the company back to its former greatness.
Headlines for the Week of 22 Dec 2019—28 Dec 2019
Specialty Retail
The Michaels Companies Inc gains 30% in one day as a Walmart exec takes the helm. Granted, shares of crafts specialty chain Michaels (MIK $5-$8-$16) were off around 56% YTD going into the day, but investors sure liked what they heard with respect to a management overhaul at the Irving, Texas-based firm. Ashley Buchanan will bring her twelve years of executive experience at Walmart (WMT) with her when she takes over at the struggling yet iconic brand on the 6th of January. Michaels has appeared—at least in our opinion—to be stuck in the pre-digital age, with plenty of ongoing in-store sales offered to customers, but a less-than-stellar online presence. The board hopes to turn that image around via Buchanan, who was the chief merchandising officer and chief operating officer for Walmart's domestic eCommerce business. For all its challenges (and the disastrous 2019 stock performance), Michaels' income statement seems to be on solid footing, with revenues increasing almost every year for the past decade (FY 2019 was flat), and net income remaining in the black. That being said, the company's market cap has dropped from $6.5 billion in 2016 to just $1.1 billion as Buchanan prepares to come aboard. Nonetheless, with a relatively fervent and dedicated customer base, we wouldn't write this company off just yet. It also helps that one of the company's chief competitors, A.C. Moore, announced that it would be closing all of its stores. We are rooting for Buchanan, and would love to write about her success in a year, but we sure couldn't justify buying the company—even at $8 per share.
Economics: Work & Pay
American workers are making more money, and the bottom 25% of earners are seeing the biggest spike. According to the Federal Reserve Bank of Atlanta, pay for the lowest 25% of American workers rose 4.5% over the past year—the biggest spike in over a decade. On the other side of the spectrum, the top 25% of wage earners also saw a nice jump, with a 2.9% increase year-over-year (Y/Y). This report from the Fed supports the Labor Department statistics we reported on a few weeks ago: average hourly wages for nonsupervisory and production workers (excluding government workers) rose 3.7% Y/Y. What does that equate to in dollars and cents? The average nonsupervisory worker earned just under $24 per hour in November. There are a number of reasons for the pay raises, chief among them being the lowest unemployment level in fifty years. Companies are being forced to pony up higher pay to attract or retain qualified workers, even with more formerly-discouraged workers (as tracked in the U-6 unemployment rate) re-entering the job market. All of this good news looks to carry into the new year, as the job market remains extremely tight at all levels and in all corners—with the possible exception of government workers—and the economy remains strong. For all of the talk of robots and AI stealing jobs from workers across virtually every industry, we have statistical full employment in the US right now. That being said, now is not the time for workers to get complacent. By performing a little market research, individuals can uncover developing trends within their respective line of work and take steps to remain as proficient as possible, or even seek out more promising industries.
Technology Hardware & Equipment
Another small step into vertical integration for Apple as it appears ready to buy Japanese smartphone screen maker. With its past troubles with suppliers, Apple (AAPL 142-$290-$290) has been taking steps recently to better control its supply chain. It now appears the $1.3 trillion iPhone maker is prepared to buy one of the factories that makes smartphone screens for its devices. Japan Display Inc, which has been faced with mounting financial troubles, is reportedly in talks with both Apple and Foxconn's Sharp Corp to sell the plant for as much as $820 million. The company still owes Apple over $800 million for funding the plant's construction in western Japan four years ago. More intriguing, it doesn't appear as though Apple and Sharp are engaged in a bidding war; rather, the two are discussing various ways to share the facility. Japan Display is in such deep financial trouble that it will accept 90 billion yen ($822 billion) in funding from a Japanese asset management firm in return for control of the company. One of Tim Cook's biggest headaches has revolved around the company's attempt to have some semblence of control over the network of suppliers which make components for Apple devices. Nonetheless, he has moved with extreme caution with respect to vertical integration. If this deal gets done, it will only happen after a complete and thorough due diligence process. We also like the fact that the plant is located in Japan and not China, removing more variables from the equation.
Automotive
Once again, Elon Musk gets the last laugh as short sellers take it on the chin. Most automotive industry analysts love to hate Tesla (TSLA $177-$419-$420) and its founder, Elon Musk. Perhaps it is envy, or perhaps their limited imaginations refuse to accept that a successful car company can be created out of thin air in the modern era. Whatever the reason, we have to chuckle every time Musk proves them wrong, as he just did yet again. It was a little over sixteen months ago that Musk made his infamous tweet, "Am considering taking Tesla private at $420. Funding secured." What percentage of the tweet was serious and what percentage was simply a failed attempt at some marijuana humor we may never know, but one thing is certain: the SEC didn't find it funny. The commission fined Tesla $20 million and its CEO $20 million for the pithy comment. Many who wanted Musk barred from running his company—a preposterous notion—were disappointed. Months of personal bashing ensued, and the brouhaha helped drive Tesla stock all the way down to $179 per share by the following summer. We recall analysts predicting the company's demise with unconstrained glee. Then something happened. Suddenly the carmaker began surprising to the upside on sales and deliveries (and even a profitable quarter), and the stock began its incredible 135% upward march over the course of six months. Short sellers got crushed. The funniest part of the run was that Tesla shares hit that magical $420 per share mark. Of course, that was too juicy for Musk to pass up. Within minutes he tweeted, "Whoa the stock is so high lol." Classic. Tesla is the benchmark electric vehicle maker, despite what the old, stodgy, "me too" carmakers are projecting for their own electric fleets. We expect that to continue, and we expect many profitable quarters in Tesla's future. Now, if Musk would only bring SpaceX public.
Telecommunication Services
Could Apple's secret plan to beam data via satellites impact the telecom giants? Right now, there is a battle royale going on in the federal courts over whether or not Sprint (S) and T-Mobile's (TMUS) planned merger would create an oligopoly of telecom companies in the US, with AT&T (T), Verizon (VZ), and the newly-formed S/TMUS entity in control of virtually every American's cellphone plan when 5G hits. We don't buy the argument, and believe the judge will side with the government and allow the deal to go through, but if Apple (AAPL) has its way, it may become a moot point within a few years. According to sources cited by Bloomberg, the $1.26 trillion Cupertino-based company is working on a secret plan that would allow a network of communications satellites and next-gen (5G) wireless technology to beam data directly to users' devices, potentially negating the need for wireless carriers altogether. With SpaceX deploying thousands of small satellites for what will be its Starlink constellation, and Amazon (AMZN) planning to deploy over 3,000 satellites as part of its own constellation, the idea doesn't seem that far-fetched. Certainly, massively expensive projects like the Iridium satellite boondoggle highlight the risks associated with this type of undertaking, but we believe it is a matter of when, not if. Compare these constellations to the groups of Europeans who attempted to create settlements in the New World in the 16th and 17th centuries: while the early attempts ended in tragedy, the inevitable success of the strategy was all but assured. That doesn't mean you should begin dumping your AT&T and Verizon stock just yet, however—it will take a decade (in our estimation) for these lofty plans to come to fruition. Nonetheless, it pays to be thinking a number of steps ahead when investing in the technology arena. Look for the companies which make the hardware for the satellites and their accompanying 5G terrestrial components; companies like Qualcomm (QCOM), Raytheon (RTN), and Astronics (ATRO). And move cautiously around high-flying cell tower companies like American Tower (AMT), which often carry tech-like multiples. It wouldn't take much to spook investors into taking their profits and exiting these names. Ultimately, Tim Cook may abandon this plan as too expensive, but we could see him teaming up with Elon Musk's Starlink constellation. Imagine the incredible synergies that could be created with a joint Apple and SpaceX project. (We own Apple in the Penn Global Leaders Club, and Qualcomm in the Penn New Frontier Fund.)
Aerospace & Defense
After a nightmarish year, Boeing desperately needed a win; instead it got a failed Starliner test mission. It was only fitting that CEO Dennis Muilenburg was at the launch site to watch the mission unfold. The man ultimately responsible for Boeing's (BA $292-$330-$446) success or failure witnessed a spectacular launch of the Starliner, the company's answer to SpaceX's Crew Dragon capsule designed to carry US astronauts into space. But, symbolic of Boeing's 2019, it went downhill from there. The unmanned craft, which was supposed to rendezvous and dock with the International Space Station (ISS), quickly went off course, dooming the mission. The company pointed out that the software problem which caused the malfunction could have been corrected had astronauts been onboard during the test mission, but that misses the bigger point: For a company with two recent deadly aircraft crashes in its rear view mirror, both due to a software glitch, this latest failure accentuates the negatives surrounding the firm. While Boeing's competition on the aircraft side of the business, Europe's Airbus (EADSY), gained ground after the air disasters, we expect that Elon Musk's privately-held SpaceX, whose Crew Dragon successfully docked with the ISS back in March, will garner even more favor from NASA after this failed test flight. Both companies are scheduled to have manned flights in 2020, but that has become an extremely tall task for Boeing after this latest incident. More fodder in the case to jettison Muilenburg and overhaul Boeing's board of directors. We have argued that one of the worst CEOs in the airline business is United's Oscar Munoz, who is (thankfully) stepping down from his role soon. According to the Wall Street Journal, Muilenburg turned to Munoz for advice after the two air disasters. How fitting. He needs to go now, and the company needs to find a leader like former BA CEO Jim McNerney to right the ship before more damage is done.
Update: Shortly after the previous story was written, the Boeing board of directors fired CEO Dennis Muilenburg. Chairman David Calhoun will take over as the new permanent CEO of the company in early January.
The Michaels Companies Inc gains 30% in one day as a Walmart exec takes the helm. Granted, shares of crafts specialty chain Michaels (MIK $5-$8-$16) were off around 56% YTD going into the day, but investors sure liked what they heard with respect to a management overhaul at the Irving, Texas-based firm. Ashley Buchanan will bring her twelve years of executive experience at Walmart (WMT) with her when she takes over at the struggling yet iconic brand on the 6th of January. Michaels has appeared—at least in our opinion—to be stuck in the pre-digital age, with plenty of ongoing in-store sales offered to customers, but a less-than-stellar online presence. The board hopes to turn that image around via Buchanan, who was the chief merchandising officer and chief operating officer for Walmart's domestic eCommerce business. For all its challenges (and the disastrous 2019 stock performance), Michaels' income statement seems to be on solid footing, with revenues increasing almost every year for the past decade (FY 2019 was flat), and net income remaining in the black. That being said, the company's market cap has dropped from $6.5 billion in 2016 to just $1.1 billion as Buchanan prepares to come aboard. Nonetheless, with a relatively fervent and dedicated customer base, we wouldn't write this company off just yet. It also helps that one of the company's chief competitors, A.C. Moore, announced that it would be closing all of its stores. We are rooting for Buchanan, and would love to write about her success in a year, but we sure couldn't justify buying the company—even at $8 per share.
Economics: Work & Pay
American workers are making more money, and the bottom 25% of earners are seeing the biggest spike. According to the Federal Reserve Bank of Atlanta, pay for the lowest 25% of American workers rose 4.5% over the past year—the biggest spike in over a decade. On the other side of the spectrum, the top 25% of wage earners also saw a nice jump, with a 2.9% increase year-over-year (Y/Y). This report from the Fed supports the Labor Department statistics we reported on a few weeks ago: average hourly wages for nonsupervisory and production workers (excluding government workers) rose 3.7% Y/Y. What does that equate to in dollars and cents? The average nonsupervisory worker earned just under $24 per hour in November. There are a number of reasons for the pay raises, chief among them being the lowest unemployment level in fifty years. Companies are being forced to pony up higher pay to attract or retain qualified workers, even with more formerly-discouraged workers (as tracked in the U-6 unemployment rate) re-entering the job market. All of this good news looks to carry into the new year, as the job market remains extremely tight at all levels and in all corners—with the possible exception of government workers—and the economy remains strong. For all of the talk of robots and AI stealing jobs from workers across virtually every industry, we have statistical full employment in the US right now. That being said, now is not the time for workers to get complacent. By performing a little market research, individuals can uncover developing trends within their respective line of work and take steps to remain as proficient as possible, or even seek out more promising industries.
Technology Hardware & Equipment
Another small step into vertical integration for Apple as it appears ready to buy Japanese smartphone screen maker. With its past troubles with suppliers, Apple (AAPL 142-$290-$290) has been taking steps recently to better control its supply chain. It now appears the $1.3 trillion iPhone maker is prepared to buy one of the factories that makes smartphone screens for its devices. Japan Display Inc, which has been faced with mounting financial troubles, is reportedly in talks with both Apple and Foxconn's Sharp Corp to sell the plant for as much as $820 million. The company still owes Apple over $800 million for funding the plant's construction in western Japan four years ago. More intriguing, it doesn't appear as though Apple and Sharp are engaged in a bidding war; rather, the two are discussing various ways to share the facility. Japan Display is in such deep financial trouble that it will accept 90 billion yen ($822 billion) in funding from a Japanese asset management firm in return for control of the company. One of Tim Cook's biggest headaches has revolved around the company's attempt to have some semblence of control over the network of suppliers which make components for Apple devices. Nonetheless, he has moved with extreme caution with respect to vertical integration. If this deal gets done, it will only happen after a complete and thorough due diligence process. We also like the fact that the plant is located in Japan and not China, removing more variables from the equation.
Automotive
Once again, Elon Musk gets the last laugh as short sellers take it on the chin. Most automotive industry analysts love to hate Tesla (TSLA $177-$419-$420) and its founder, Elon Musk. Perhaps it is envy, or perhaps their limited imaginations refuse to accept that a successful car company can be created out of thin air in the modern era. Whatever the reason, we have to chuckle every time Musk proves them wrong, as he just did yet again. It was a little over sixteen months ago that Musk made his infamous tweet, "Am considering taking Tesla private at $420. Funding secured." What percentage of the tweet was serious and what percentage was simply a failed attempt at some marijuana humor we may never know, but one thing is certain: the SEC didn't find it funny. The commission fined Tesla $20 million and its CEO $20 million for the pithy comment. Many who wanted Musk barred from running his company—a preposterous notion—were disappointed. Months of personal bashing ensued, and the brouhaha helped drive Tesla stock all the way down to $179 per share by the following summer. We recall analysts predicting the company's demise with unconstrained glee. Then something happened. Suddenly the carmaker began surprising to the upside on sales and deliveries (and even a profitable quarter), and the stock began its incredible 135% upward march over the course of six months. Short sellers got crushed. The funniest part of the run was that Tesla shares hit that magical $420 per share mark. Of course, that was too juicy for Musk to pass up. Within minutes he tweeted, "Whoa the stock is so high lol." Classic. Tesla is the benchmark electric vehicle maker, despite what the old, stodgy, "me too" carmakers are projecting for their own electric fleets. We expect that to continue, and we expect many profitable quarters in Tesla's future. Now, if Musk would only bring SpaceX public.
Telecommunication Services
Could Apple's secret plan to beam data via satellites impact the telecom giants? Right now, there is a battle royale going on in the federal courts over whether or not Sprint (S) and T-Mobile's (TMUS) planned merger would create an oligopoly of telecom companies in the US, with AT&T (T), Verizon (VZ), and the newly-formed S/TMUS entity in control of virtually every American's cellphone plan when 5G hits. We don't buy the argument, and believe the judge will side with the government and allow the deal to go through, but if Apple (AAPL) has its way, it may become a moot point within a few years. According to sources cited by Bloomberg, the $1.26 trillion Cupertino-based company is working on a secret plan that would allow a network of communications satellites and next-gen (5G) wireless technology to beam data directly to users' devices, potentially negating the need for wireless carriers altogether. With SpaceX deploying thousands of small satellites for what will be its Starlink constellation, and Amazon (AMZN) planning to deploy over 3,000 satellites as part of its own constellation, the idea doesn't seem that far-fetched. Certainly, massively expensive projects like the Iridium satellite boondoggle highlight the risks associated with this type of undertaking, but we believe it is a matter of when, not if. Compare these constellations to the groups of Europeans who attempted to create settlements in the New World in the 16th and 17th centuries: while the early attempts ended in tragedy, the inevitable success of the strategy was all but assured. That doesn't mean you should begin dumping your AT&T and Verizon stock just yet, however—it will take a decade (in our estimation) for these lofty plans to come to fruition. Nonetheless, it pays to be thinking a number of steps ahead when investing in the technology arena. Look for the companies which make the hardware for the satellites and their accompanying 5G terrestrial components; companies like Qualcomm (QCOM), Raytheon (RTN), and Astronics (ATRO). And move cautiously around high-flying cell tower companies like American Tower (AMT), which often carry tech-like multiples. It wouldn't take much to spook investors into taking their profits and exiting these names. Ultimately, Tim Cook may abandon this plan as too expensive, but we could see him teaming up with Elon Musk's Starlink constellation. Imagine the incredible synergies that could be created with a joint Apple and SpaceX project. (We own Apple in the Penn Global Leaders Club, and Qualcomm in the Penn New Frontier Fund.)
Aerospace & Defense
After a nightmarish year, Boeing desperately needed a win; instead it got a failed Starliner test mission. It was only fitting that CEO Dennis Muilenburg was at the launch site to watch the mission unfold. The man ultimately responsible for Boeing's (BA $292-$330-$446) success or failure witnessed a spectacular launch of the Starliner, the company's answer to SpaceX's Crew Dragon capsule designed to carry US astronauts into space. But, symbolic of Boeing's 2019, it went downhill from there. The unmanned craft, which was supposed to rendezvous and dock with the International Space Station (ISS), quickly went off course, dooming the mission. The company pointed out that the software problem which caused the malfunction could have been corrected had astronauts been onboard during the test mission, but that misses the bigger point: For a company with two recent deadly aircraft crashes in its rear view mirror, both due to a software glitch, this latest failure accentuates the negatives surrounding the firm. While Boeing's competition on the aircraft side of the business, Europe's Airbus (EADSY), gained ground after the air disasters, we expect that Elon Musk's privately-held SpaceX, whose Crew Dragon successfully docked with the ISS back in March, will garner even more favor from NASA after this failed test flight. Both companies are scheduled to have manned flights in 2020, but that has become an extremely tall task for Boeing after this latest incident. More fodder in the case to jettison Muilenburg and overhaul Boeing's board of directors. We have argued that one of the worst CEOs in the airline business is United's Oscar Munoz, who is (thankfully) stepping down from his role soon. According to the Wall Street Journal, Muilenburg turned to Munoz for advice after the two air disasters. How fitting. He needs to go now, and the company needs to find a leader like former BA CEO Jim McNerney to right the ship before more damage is done.
Update: Shortly after the previous story was written, the Boeing board of directors fired CEO Dennis Muilenburg. Chairman David Calhoun will take over as the new permanent CEO of the company in early January.
Headlines for the Week of 15 Dec 2019—21 Dec 2019
Demographics & Lifestyle
Move over millennials, Gen Z is rushing in, and they love to shop at the malls. When I was a kid growing up in the 80s, some of my favorite times were spent at the local mall. I worked there, shopped there, hung out with friends there. Over the past five years or so, however, many have tried to write the epitaph of the giant, enclosed, climate-controlled oasis. After all, they argued, millennials love shopping online (so do I, by the way), and foot traffic is perennially decreasing at the local brick-and-mortar stores. While online shopping will continue to gain ground, we never bought the thesis that it would mean the demise of the physical store. And now, new research seems to be supporting our argument. Backed by data from eMarketer, a professional market research company, real estate services firm CBRE has compiled some interesting statistics on Gen Z—kids, teens, and young adults roughly between the ages of seven and twenty. The group directly spends around $143 billion per year on discretionary goods, and influences another $450 billion or so in spending by others. And an overwhelming 76% of the members of this group say they prefer to do their shopping in nearby physical stores. Even though they often order clothing or other goods online, they want to pick up those goods at the local store ("click and collect")—meaning they are visiting the websites of brick-and-mortar companies like Nordstrom (JWN), Macy's (M), Victoria's Secret (LB), and Sephora (LVMUY), instead of Amazon (AMZN). In short, while they embrace technology, they want the social experience provided by a visit to the mall. And that fact is resonating with the likes of Simon Property Group (SPG) and Macerich (MAC), two higher-end (Class A) mall REITs which have been adding more experience-based components to their properties. In other words, Gen Z appears to be taking us back to the 80s, but with some cool new features added. We recently highlighted Macerich (MAC) as an interesting REIT play, but we also like Kimco (KIM), Simon (SPG), and Pennsylvania Real Estate (PEI) in the retail REIT space.
Homes & Durables
US housing starts for November far exceed expectations, new permits hit 12-year high. On Monday, the NAHB survey was released showing homebuilder confidence at a 20-year high. On Tuesday, we received more good news on the housing front: November housing starts rose 3.2% (against expectations for a 2% jump) to an annualized rate of 1.365 million new homes. Furthermore, permits for future home construction surged to a 12-year high. Perhaps most impressive in the Commerce Department report for the month of November was the whopping 13.6% spike in year-on-year starts, showing positive momentum for this critical economic indicator as we move into 2020. There is one complaint being voiced by builders: they are having trouble finding enough workers to build the new homes. With rates remaining low throughout 2020 (more than likely) and unemployment at 50-year lows, the coming year should be another strong one for the homebuilders.
Transportation Infrastructure
In what smells a lot like payback, Amazon forbids third-party sellers from using FedEx. For years, $877 billion online retailer Amazon (AMZN $1,307-$1,769-$2,036) relied on shipping giant FedEx (FDX $138-$164-$199) to deliver packages to the growing multitude of Amazon Prime members. Then, this past summer, as tensions hit a fevered pitch over pricing and Amazon's well-telegraphed internal delivery plans, the company Fred Smith founded in 1971 abruptly announced it would not be renewing either the ground- or air-shipping contracts with the Seattle-based retailer. Instead, FedEx would position itself as the main e-commerce shipper for companies like Walmart (WMT) and Target (TGT); in other words, Amazon's direct competition. Now, in what appears to be a rather petulent tit-for-tat move, Amazon is forbidding its third-party sellers—which account for over half of the goods sold through Amazon.com—from shipping their goods via Fedex (though they can still use the company's more expensive "Express" service). Needless to say, many of these retailers are furious. For its part, Amazon is ostensibly ordering the action due to Fedex's performance metrics. The evidence seems to belie that argument, as Fedex, UPS, and Amazon's own delivery service all rate between a 90% and 94% on-time delivery percentage, according to shipping data analysis from ShipMatrix. It smells like pure payback to us. FedEx had revenue of $70 billion TTM. The Amazon contracts amounted to roughly $900 million of annual revenue. Some in the financial press have foisted the narrative that FedEx is reliant on Amazon, which is absurd. We see FDX as one of the big contrarian plays of 2020 (which we will write about in our upcoming 2020 Market Outlook edition of The Penn Wealth Report).
Economics: Housing
Homebuilder sentiment hits highest level since 1999. US homebuilder confidence is measured by the NAHB/Wells Fargo Housing Market Index on a scale between one and 100. Any reading below 50 represents a negative outlook, 51 or higher reflects a positive outlook. The NAHB Index jumped five points in December, to a highly-impressive reading of 76. Even more impressive, that is the highest reading since the summer of 1999. That figure also represents a 20-point rise since December of 2018. There are a number of reasons for the rosy outlook among homebuilders. The economy is strong, interest rates are low, more US workers have jobs now than at any other time in the last fifty years, and there is a relatively low supply of existing homes on the market. Based on the internals of the index, the good vibe should carry into next year: the "sales expectations in the next six months" reading jumped to 79 on the 100-point scale. Our favorite way to play this industry continues to be ITB ($45.18), the iShares US Home Construction ETF, which includes the likes of PulteGroup (PHM), D.R. Horton (DHI), Lennar (LEN), and Sherwin-Williams (SHW). As for individual housing names, Lennar @ $58 per share still looks nicely undervalued.
Aerospace & Defense
Boeing: at the intersection of massive arrogance and unfettered industry consolidation. At the start of the trading week, US aerospace giant Boeing (BA $292-$329-$446) was off yet another 4% following a Wall Street Journal report that the company is actually weighing suspending—or even halting— 737 MAX production. While that may be a stunning notion, it seems more reasonable considering how many orders Boeing has now lost to its European rival, Airbus (EADSY). We once held Boeing in the highest regard, considering the company a symbol of American corporate strength. Sadly, arrogance in the boardroom and runaway industry consolidation have changed our views on the firm. In early 2018, we wrote about Boeing's complaint to the US International Trade Commission over Delta's (DAL) purchase of Canadian Bombardier aircraft. In a fascinating turn of events, Delta was so incensed over Boeing's complaint that they made a large purchase of Airbus aircraft instead of the Boeing jets they were going to buy—jets known as the 737 MAX. So, because Boeing was more interested in taking legal action to stop an American air carrier from buying elsewhere than they apparently were in fielding concerns about the safety of their own jets, Delta ended up being completely free of the soon-to-be-grounded 737 MAX. Talk about poetic justice.
Boeing's board of directors said it stands fully behind CEO Dennis Muilenburg. That tells us that not only does the company have a CEO who should be broomed, it also has a board which needs to be overhauled. All the way back in 1997, we wrote of the clash of arrogant personalities on full display when Boeing acquired McDonnell Douglas, leaving one massively-big US aerospace and defense behemoth in the aftermath. Today, fortunately, companies such as privately-held SpaceX are threatening even Boeing's dominance of the US manned space program, with NASA awarding the former with billions worth of launch and supply contracts. Perhaps a little renewed competition in the industry will help retrain Boeing's focus on creating exemplary systems and away from filing legal complaints.
The icing on the cake in the complaint against Delta's purchase of Bombardier jets: the US ITC threw it out, finding the argument without merit. Until Muilenburg is gone and BA shows signs of changing its ways, we wouldn't touch the stock, even near its 52-week-lows. And that is sad. We expect this sort of arrogance from government-sponsored entities in Europe; we cannot stand for it in a meritocracy.
Global Strategy: Europe
Strikes continue to paralyze much of France as labor battles Macron over pension reform. It began nearly two weeks ago, on 05 December, and it now threatens to bleed over into the heart of the Christmas travel period. Government transit workers and teachers across France have walked away from their posts and joined the picket lines to protest the French president's proposed pension reforms, which include raising the full-pension retirement age from 62 to 64. Despite the fact that France has one of the most lucrative retirement plans in all of Europe (and that is saying a lot considering some of the progressive Nordic countries), there are scant signs that labor is willing to back down, forcing millions of French workers to bike or scooter their way through snarled and blockaded streets to get to their jobs. Air traffic controllers have also walked off the job, which could mean a nightmare scenario for those planning air travel over the holiday season. Protesters have also blocked oil refineries in an attempt to keep motorists from fueling up.Here are some of the proposed changes to the country's pension plan: there will be one plan instead of the confusing 42 plans currently in place; the legal retirement age of 64 will go into effect in 2027 but not affect those born before 1975; those with "hardship" jobs, which include police, firefighters, night workers and nurses, will still be able to receive full retirement at age 62. France currently spends 14% of its GDP on the pension retirement system—more than virtually any other EU nation—and that percentage is growing at an unsustainable rate. The government has signaled a willingness to negotiate on the proposed changes, but the unions have shown little interest in halting the nationwide strikes, arguing that a "red line" has been crossed. In the end, we expect little in the way of actual reform, kicking a larger can down the road for another generation to handle.
Move over millennials, Gen Z is rushing in, and they love to shop at the malls. When I was a kid growing up in the 80s, some of my favorite times were spent at the local mall. I worked there, shopped there, hung out with friends there. Over the past five years or so, however, many have tried to write the epitaph of the giant, enclosed, climate-controlled oasis. After all, they argued, millennials love shopping online (so do I, by the way), and foot traffic is perennially decreasing at the local brick-and-mortar stores. While online shopping will continue to gain ground, we never bought the thesis that it would mean the demise of the physical store. And now, new research seems to be supporting our argument. Backed by data from eMarketer, a professional market research company, real estate services firm CBRE has compiled some interesting statistics on Gen Z—kids, teens, and young adults roughly between the ages of seven and twenty. The group directly spends around $143 billion per year on discretionary goods, and influences another $450 billion or so in spending by others. And an overwhelming 76% of the members of this group say they prefer to do their shopping in nearby physical stores. Even though they often order clothing or other goods online, they want to pick up those goods at the local store ("click and collect")—meaning they are visiting the websites of brick-and-mortar companies like Nordstrom (JWN), Macy's (M), Victoria's Secret (LB), and Sephora (LVMUY), instead of Amazon (AMZN). In short, while they embrace technology, they want the social experience provided by a visit to the mall. And that fact is resonating with the likes of Simon Property Group (SPG) and Macerich (MAC), two higher-end (Class A) mall REITs which have been adding more experience-based components to their properties. In other words, Gen Z appears to be taking us back to the 80s, but with some cool new features added. We recently highlighted Macerich (MAC) as an interesting REIT play, but we also like Kimco (KIM), Simon (SPG), and Pennsylvania Real Estate (PEI) in the retail REIT space.
Homes & Durables
US housing starts for November far exceed expectations, new permits hit 12-year high. On Monday, the NAHB survey was released showing homebuilder confidence at a 20-year high. On Tuesday, we received more good news on the housing front: November housing starts rose 3.2% (against expectations for a 2% jump) to an annualized rate of 1.365 million new homes. Furthermore, permits for future home construction surged to a 12-year high. Perhaps most impressive in the Commerce Department report for the month of November was the whopping 13.6% spike in year-on-year starts, showing positive momentum for this critical economic indicator as we move into 2020. There is one complaint being voiced by builders: they are having trouble finding enough workers to build the new homes. With rates remaining low throughout 2020 (more than likely) and unemployment at 50-year lows, the coming year should be another strong one for the homebuilders.
Transportation Infrastructure
In what smells a lot like payback, Amazon forbids third-party sellers from using FedEx. For years, $877 billion online retailer Amazon (AMZN $1,307-$1,769-$2,036) relied on shipping giant FedEx (FDX $138-$164-$199) to deliver packages to the growing multitude of Amazon Prime members. Then, this past summer, as tensions hit a fevered pitch over pricing and Amazon's well-telegraphed internal delivery plans, the company Fred Smith founded in 1971 abruptly announced it would not be renewing either the ground- or air-shipping contracts with the Seattle-based retailer. Instead, FedEx would position itself as the main e-commerce shipper for companies like Walmart (WMT) and Target (TGT); in other words, Amazon's direct competition. Now, in what appears to be a rather petulent tit-for-tat move, Amazon is forbidding its third-party sellers—which account for over half of the goods sold through Amazon.com—from shipping their goods via Fedex (though they can still use the company's more expensive "Express" service). Needless to say, many of these retailers are furious. For its part, Amazon is ostensibly ordering the action due to Fedex's performance metrics. The evidence seems to belie that argument, as Fedex, UPS, and Amazon's own delivery service all rate between a 90% and 94% on-time delivery percentage, according to shipping data analysis from ShipMatrix. It smells like pure payback to us. FedEx had revenue of $70 billion TTM. The Amazon contracts amounted to roughly $900 million of annual revenue. Some in the financial press have foisted the narrative that FedEx is reliant on Amazon, which is absurd. We see FDX as one of the big contrarian plays of 2020 (which we will write about in our upcoming 2020 Market Outlook edition of The Penn Wealth Report).
Economics: Housing
Homebuilder sentiment hits highest level since 1999. US homebuilder confidence is measured by the NAHB/Wells Fargo Housing Market Index on a scale between one and 100. Any reading below 50 represents a negative outlook, 51 or higher reflects a positive outlook. The NAHB Index jumped five points in December, to a highly-impressive reading of 76. Even more impressive, that is the highest reading since the summer of 1999. That figure also represents a 20-point rise since December of 2018. There are a number of reasons for the rosy outlook among homebuilders. The economy is strong, interest rates are low, more US workers have jobs now than at any other time in the last fifty years, and there is a relatively low supply of existing homes on the market. Based on the internals of the index, the good vibe should carry into next year: the "sales expectations in the next six months" reading jumped to 79 on the 100-point scale. Our favorite way to play this industry continues to be ITB ($45.18), the iShares US Home Construction ETF, which includes the likes of PulteGroup (PHM), D.R. Horton (DHI), Lennar (LEN), and Sherwin-Williams (SHW). As for individual housing names, Lennar @ $58 per share still looks nicely undervalued.
Aerospace & Defense
Boeing: at the intersection of massive arrogance and unfettered industry consolidation. At the start of the trading week, US aerospace giant Boeing (BA $292-$329-$446) was off yet another 4% following a Wall Street Journal report that the company is actually weighing suspending—or even halting— 737 MAX production. While that may be a stunning notion, it seems more reasonable considering how many orders Boeing has now lost to its European rival, Airbus (EADSY). We once held Boeing in the highest regard, considering the company a symbol of American corporate strength. Sadly, arrogance in the boardroom and runaway industry consolidation have changed our views on the firm. In early 2018, we wrote about Boeing's complaint to the US International Trade Commission over Delta's (DAL) purchase of Canadian Bombardier aircraft. In a fascinating turn of events, Delta was so incensed over Boeing's complaint that they made a large purchase of Airbus aircraft instead of the Boeing jets they were going to buy—jets known as the 737 MAX. So, because Boeing was more interested in taking legal action to stop an American air carrier from buying elsewhere than they apparently were in fielding concerns about the safety of their own jets, Delta ended up being completely free of the soon-to-be-grounded 737 MAX. Talk about poetic justice.
Boeing's board of directors said it stands fully behind CEO Dennis Muilenburg. That tells us that not only does the company have a CEO who should be broomed, it also has a board which needs to be overhauled. All the way back in 1997, we wrote of the clash of arrogant personalities on full display when Boeing acquired McDonnell Douglas, leaving one massively-big US aerospace and defense behemoth in the aftermath. Today, fortunately, companies such as privately-held SpaceX are threatening even Boeing's dominance of the US manned space program, with NASA awarding the former with billions worth of launch and supply contracts. Perhaps a little renewed competition in the industry will help retrain Boeing's focus on creating exemplary systems and away from filing legal complaints.
The icing on the cake in the complaint against Delta's purchase of Bombardier jets: the US ITC threw it out, finding the argument without merit. Until Muilenburg is gone and BA shows signs of changing its ways, we wouldn't touch the stock, even near its 52-week-lows. And that is sad. We expect this sort of arrogance from government-sponsored entities in Europe; we cannot stand for it in a meritocracy.
Global Strategy: Europe
Strikes continue to paralyze much of France as labor battles Macron over pension reform. It began nearly two weeks ago, on 05 December, and it now threatens to bleed over into the heart of the Christmas travel period. Government transit workers and teachers across France have walked away from their posts and joined the picket lines to protest the French president's proposed pension reforms, which include raising the full-pension retirement age from 62 to 64. Despite the fact that France has one of the most lucrative retirement plans in all of Europe (and that is saying a lot considering some of the progressive Nordic countries), there are scant signs that labor is willing to back down, forcing millions of French workers to bike or scooter their way through snarled and blockaded streets to get to their jobs. Air traffic controllers have also walked off the job, which could mean a nightmare scenario for those planning air travel over the holiday season. Protesters have also blocked oil refineries in an attempt to keep motorists from fueling up.Here are some of the proposed changes to the country's pension plan: there will be one plan instead of the confusing 42 plans currently in place; the legal retirement age of 64 will go into effect in 2027 but not affect those born before 1975; those with "hardship" jobs, which include police, firefighters, night workers and nurses, will still be able to receive full retirement at age 62. France currently spends 14% of its GDP on the pension retirement system—more than virtually any other EU nation—and that percentage is growing at an unsustainable rate. The government has signaled a willingness to negotiate on the proposed changes, but the unions have shown little interest in halting the nationwide strikes, arguing that a "red line" has been crossed. In the end, we expect little in the way of actual reform, kicking a larger can down the road for another generation to handle.
Headlines for the Week of 08 Dec 2019—14 Dec 2019
Global Strategy: Europe
In biggest win since Margaret Thatcher's 1987 victory, Boris Johnson now has the votes to complete Brexit process. For months, we have been predicting a Tory victory in the UK large enough to give Prime Minister Boris Johnson the votes needed to carry out the will of the people and blow out of the EU. That is precisely what happened, but even we were surprised by the level of voter anger focused on the Labour Party, which had all but promised another national referendum on Brexit (hoping for a different outcome). In the end, the British people said "enough!" This vote all but assures England will leave the EU on 31 Jan 2020. The national vote was such a thumping for Labour that leader Jeremy Corbyn, who had hoped to be elected prime minister, said he will step down as party leader. Markets loved the news, with the FTSE 100 jumping 1% in early trading, and the pound sterling spiking 2% against the US dollar. After 31 Jan, the UK will have the freedom to ignore much of the byzantine EU regulatory process, negotiate its own trade deals with other countries, and set its own immigration rules. President Donald Trump congratulated the prime minister on his stunning victory, and hinted that a big trade deal between the two allies would come to fruition early in the new year. For the EU leaders in Brussels, this is a nightmare scenario.
Airlines
With its new stake in Wheels Up, Penn member Delta Airlines moves more heavily into rapidly-growing space. The private jet charter business has been blossoming over the past few years, and Penn Global Leader Club member Delta Airlines (DAL $45-$57-$63), already an active participant in the space with its Delta Private Jets unit, is doubling down by becoming the single largest shareholder in Wheels Up. The company, in fact, will streamline its business by combining Delta Private Jets with the membership-based, pay-as-you-go charter company. Meanwhile, Delta has been selling off its non-core businesses to focus exclusively on its key profit drivers. CEO Ed Bastian, arguably the best airline chief in the industry, considers this deal more than a minority stake, he considers it a merger. According to the company's press release, "The transaction will pair Wheels Up's membership programs, innovative digital platform, and world-class lifestyle experiences with Delta's...service and scale." When the dust settles, the unit will operate 190 private aircraft and boast over 8,000 paying members and customers. Wheels Up said it would also like to expand into Europe, a region where Delta owns 49% of Virgin Atlantic Airways. Bravo to Delta on the move. Unlike the inept United (UAL) CEO Oscar Munoz, who (thankfully) announced he would be stepping down in early 2020, Bastian has done a masterful job at leading Delta through turbulent times. Interestingly, Delta was the one major carrier which had no Boeing (BA) 737-MAXs in its fleet.
Media & Entertainment
Users have already downloaded Disney+ on their mobile devices an incredible 22 million times. We knew it was going to be an enormous success, but The Walt Disney Company's (DIS $100-$148-$153) new Disney+ streaming service has already surpassed the rosiest of expectations. Apptopia, a mobile app research firm, reported that the Disney+ app has already been downloaded 22 million times on mobile devices, making it—easily—the most popular app in both the Apple and Google app stores. Keep in mind that Apptopia does not monitor downloads on smart TVs, devices by the likes of Roku and Apple, or desktop browsers. Disney announced that it had 22 million such signups on day one, crashing the system. While Verizon (VZ) is giving its customers a one-year free membership to the streaming service, and those who download the app have seven days of free viewing, Apptopia noted that Disney has already made $20 million in revenue from its app—which does not even include the cut given to app stores. The icing on the cake? Google's annual search trend report, which came out this week, listed "Disney+" as the top trending search of 2019. (Disney holds position #12/40 within the Penn Global Leaders Club.) Netflix (NFLX) has been the company we love to hate for the past several years. We expect the company's 95 P/E ratio isn't going to cut it going forward, based on the impressive new entrants.
Specialty Retail
Living up (or is it down?) to our expectations, GameStop plummets to around $5 per share. When shares of video game company GameStop (GME $3-$5-$17) were trading at $21 per share, we urged investors to get out and don't look back. When GME shares dropped to $16, we said that the company "has about as much business being publicly-traded as Radio Shack did in its waning days." For GME investors who didn't listen, more bad news hit this week. Shares were trading down 17%, to $5.41, in early trading on Wednesday after the company issued bleak guidance amid plunging sales. Q3 saw a revenue decline of 26%, while net losses came in at $83.4 million. GameStop, which sells new and second-hand video game hardware and both physical and digital video game software in the US, Canada, Europe, and Australia, also warned in its Q3 report that a lack of new consoles until the fourth-quarter of 2020 means dwindling hardware sales before that period. One analyst house, Benchmark Research, lowered its price target on GME shares from $6.51 to $3 after the earnings conference call. So, at $5, are the shares a deep value play? After all, Morningstar lists a fair value on the company's shares at $14.44. No, we would have to side with the Benchmark analyst.
Energy Commodities
Saudi Aramco just made history as the world's largest-ever IPO. Five years ago, Alibaba became the largest company to ever go public—raising around $25 billion. Saudi Aramco, which just made its debut on the Saudi stock exchange, surpassed that level with just 1.5% of the company's shares being listed. Based on the price of those shares, which spiked up to the daily allowable limit of 10% on the Saudi exchange, the entire company has a market cap of $1.88 trillion. By comparison, Apple—the largest publicly-traded company in the world until Aramco—has a market cap of $1.2 trillion. Saudi Arabia's Gulf allies certainly helped the cause, with Kuwait and the United Arab Emirates investing $1 billion and $1.5 billion, respectively, in the shares. That being said, just about 10% of the IPO offers came from outside of the Kingdom, with the remaining 90% of funds generated from Saudi investment houses, companies, and wealthy local families. As we have previously outlined, a vast majority of the amount raised in the successful IPO will be used to help fund Saudi Vision 2030, Crown Prince Salman's massive effort to diversify the Kingdom's economy away from—somewhat ironically—oil. In the last issue of The Penn Wealth Report we made the case for investing in Saudi Arabia as we enter the new year. Despite the geopolitical risks and the muted price of oil, we see abundant investment opportunities in the region—at least among the nations embracing capitalism.
Travel/Hotels, Resorts, & Cruise Lines
After decades in San Francisco, Oracle is moving its massive annual convention to Vegas for two very specific reasons. Back in 1996, $182 billion enterprise software giant Oracle (ORCL $42-$56-$61) began hosting an annual conference for business leaders and decision makers to show off the firm's latest technologies. For nearly that long, Oracle has held the convention, known as OpenWorld, in San Francisco. Now, that is about to change. The company confirmed that it has inked a deal with Caesars Forum, a massive new 550,000 square-foot convention center in Las Vegas, to host the event for at least the next three years. Oracle said that two glaring complaints rose to the top of attendee feedback: the city's hotel rates were too high, and the street conditions were poor. Citing a 2018 NPR report, San Francisco's city streets are "strewn with trash, needles, and human feces." The San Francisco Travel Association, a private nonprofit which promotes tourism in the Bay area, said the move will cost the city approximately $64 million per year in lost revenue. The event attracts more than 60,000 Oracle customers and partners each year. Without commenting on San Francisco, it is fair to say that Las Vegas has done a tremendous job in attracting new corporate customers to the city over the past decade.
Telecom Services
What is the federal judge telegraphing about the T-Mobile/Sprint lawsuit? The lawsuit was a colossal joke from the start. A group of thirteen (down from sixteen) state attorneys general, led by New York and California (which tells us everyting we need to know), is suing to stop the Sprint (S $5-$5-$8)/T-Mobile (TMUS $60-$76-$85) merger on grounds that it will limit competition in the 5G arena, harming consumers. News flash for the political hack AGs: Sprint probably won't make it without the merger, so what will that do to the competitive landscape? For its part, the Department of Justice has already given the green light to the merger, which further points to the politics at the heart of the lawsuit. In the latest move, US District Judge Victor Marrero told both sides in the suit to skip their opening arguments and get on with calling their witnesses. This indicates to us that he has very little patience in the matter, which we believe bodes well for the telecom companies. It should be noted that, as part of the DoJ approval process, Sprint would have to divest itself of some assets to Dish Network (DISH) so that company would be able to build its own 5G network. We believe the judge recognizes this suit as the frivolous waste of taxpayer money that it is, and will ultimately rule for the merger. We can't wait to see the bloviating AGs rush to the microphones to screach about the injustice thrust upon the public by the judicial system. Maybe Al Sharpton will even show up with his bullhorn.
Biotechnology
Two little-known biotech firms skyrocket after offers from big pharma. The battle to develop the next generation of cancer-fighting therapies is entering a new phase, and that is a good thing in the herculean effort to eradicate the disease. French drugmaker Sanofi (SNY 40-$46-$47), attempting to regain lost ground, has agreed to buy cancer biotech firm Synthorx (THOR $11-$67-$27) for $2.5 billion, sending the latter's shares up 169%. Synthorx's lead product candidate is THOR-707, a therapy designed to kill tumor cells. Not to be outdone, $226 billion US pharma giant Merck (MRK $71-$89-$89) announced its intent to buy small-cap biotech ArQule (ARQL $2-$20-$12) for $2.7 billion, sending shares of the Massachusetts-based firm up 103%. Merck said the deal will expand its oncology pipeline into targeted therapies used to fight blood cancers. ArQule's stated objective is to discover, develop, and commercialize novel small molecule drugs in areas of high unmet needs. These deals pale in comparison to Bristol-Myers Squibb's (BMY) purchase of Penn Global Leaders Club member Celgene (formerly CELG) last month for $74 billion. While Celgene is no longer a publicly-traded company, we do own its acquirer, BMY, within the Penn portfolios. Within the health sciences space we also own Amgen (AMGN), Biogen (BIIB), Gilead (GILD), and AbbVie (ABBV). Look for plenty of more deals to come as the major pharma giants battle it out for the title of lead cancer-fighting drugmaker. Sneak preview: Health Care is one of the sectors we are overweighting for 2020.
Updtate: Sanofi announced it would end research in cardiovascular diseases and
In biggest win since Margaret Thatcher's 1987 victory, Boris Johnson now has the votes to complete Brexit process. For months, we have been predicting a Tory victory in the UK large enough to give Prime Minister Boris Johnson the votes needed to carry out the will of the people and blow out of the EU. That is precisely what happened, but even we were surprised by the level of voter anger focused on the Labour Party, which had all but promised another national referendum on Brexit (hoping for a different outcome). In the end, the British people said "enough!" This vote all but assures England will leave the EU on 31 Jan 2020. The national vote was such a thumping for Labour that leader Jeremy Corbyn, who had hoped to be elected prime minister, said he will step down as party leader. Markets loved the news, with the FTSE 100 jumping 1% in early trading, and the pound sterling spiking 2% against the US dollar. After 31 Jan, the UK will have the freedom to ignore much of the byzantine EU regulatory process, negotiate its own trade deals with other countries, and set its own immigration rules. President Donald Trump congratulated the prime minister on his stunning victory, and hinted that a big trade deal between the two allies would come to fruition early in the new year. For the EU leaders in Brussels, this is a nightmare scenario.
Airlines
With its new stake in Wheels Up, Penn member Delta Airlines moves more heavily into rapidly-growing space. The private jet charter business has been blossoming over the past few years, and Penn Global Leader Club member Delta Airlines (DAL $45-$57-$63), already an active participant in the space with its Delta Private Jets unit, is doubling down by becoming the single largest shareholder in Wheels Up. The company, in fact, will streamline its business by combining Delta Private Jets with the membership-based, pay-as-you-go charter company. Meanwhile, Delta has been selling off its non-core businesses to focus exclusively on its key profit drivers. CEO Ed Bastian, arguably the best airline chief in the industry, considers this deal more than a minority stake, he considers it a merger. According to the company's press release, "The transaction will pair Wheels Up's membership programs, innovative digital platform, and world-class lifestyle experiences with Delta's...service and scale." When the dust settles, the unit will operate 190 private aircraft and boast over 8,000 paying members and customers. Wheels Up said it would also like to expand into Europe, a region where Delta owns 49% of Virgin Atlantic Airways. Bravo to Delta on the move. Unlike the inept United (UAL) CEO Oscar Munoz, who (thankfully) announced he would be stepping down in early 2020, Bastian has done a masterful job at leading Delta through turbulent times. Interestingly, Delta was the one major carrier which had no Boeing (BA) 737-MAXs in its fleet.
Media & Entertainment
Users have already downloaded Disney+ on their mobile devices an incredible 22 million times. We knew it was going to be an enormous success, but The Walt Disney Company's (DIS $100-$148-$153) new Disney+ streaming service has already surpassed the rosiest of expectations. Apptopia, a mobile app research firm, reported that the Disney+ app has already been downloaded 22 million times on mobile devices, making it—easily—the most popular app in both the Apple and Google app stores. Keep in mind that Apptopia does not monitor downloads on smart TVs, devices by the likes of Roku and Apple, or desktop browsers. Disney announced that it had 22 million such signups on day one, crashing the system. While Verizon (VZ) is giving its customers a one-year free membership to the streaming service, and those who download the app have seven days of free viewing, Apptopia noted that Disney has already made $20 million in revenue from its app—which does not even include the cut given to app stores. The icing on the cake? Google's annual search trend report, which came out this week, listed "Disney+" as the top trending search of 2019. (Disney holds position #12/40 within the Penn Global Leaders Club.) Netflix (NFLX) has been the company we love to hate for the past several years. We expect the company's 95 P/E ratio isn't going to cut it going forward, based on the impressive new entrants.
Specialty Retail
Living up (or is it down?) to our expectations, GameStop plummets to around $5 per share. When shares of video game company GameStop (GME $3-$5-$17) were trading at $21 per share, we urged investors to get out and don't look back. When GME shares dropped to $16, we said that the company "has about as much business being publicly-traded as Radio Shack did in its waning days." For GME investors who didn't listen, more bad news hit this week. Shares were trading down 17%, to $5.41, in early trading on Wednesday after the company issued bleak guidance amid plunging sales. Q3 saw a revenue decline of 26%, while net losses came in at $83.4 million. GameStop, which sells new and second-hand video game hardware and both physical and digital video game software in the US, Canada, Europe, and Australia, also warned in its Q3 report that a lack of new consoles until the fourth-quarter of 2020 means dwindling hardware sales before that period. One analyst house, Benchmark Research, lowered its price target on GME shares from $6.51 to $3 after the earnings conference call. So, at $5, are the shares a deep value play? After all, Morningstar lists a fair value on the company's shares at $14.44. No, we would have to side with the Benchmark analyst.
Energy Commodities
Saudi Aramco just made history as the world's largest-ever IPO. Five years ago, Alibaba became the largest company to ever go public—raising around $25 billion. Saudi Aramco, which just made its debut on the Saudi stock exchange, surpassed that level with just 1.5% of the company's shares being listed. Based on the price of those shares, which spiked up to the daily allowable limit of 10% on the Saudi exchange, the entire company has a market cap of $1.88 trillion. By comparison, Apple—the largest publicly-traded company in the world until Aramco—has a market cap of $1.2 trillion. Saudi Arabia's Gulf allies certainly helped the cause, with Kuwait and the United Arab Emirates investing $1 billion and $1.5 billion, respectively, in the shares. That being said, just about 10% of the IPO offers came from outside of the Kingdom, with the remaining 90% of funds generated from Saudi investment houses, companies, and wealthy local families. As we have previously outlined, a vast majority of the amount raised in the successful IPO will be used to help fund Saudi Vision 2030, Crown Prince Salman's massive effort to diversify the Kingdom's economy away from—somewhat ironically—oil. In the last issue of The Penn Wealth Report we made the case for investing in Saudi Arabia as we enter the new year. Despite the geopolitical risks and the muted price of oil, we see abundant investment opportunities in the region—at least among the nations embracing capitalism.
Travel/Hotels, Resorts, & Cruise Lines
After decades in San Francisco, Oracle is moving its massive annual convention to Vegas for two very specific reasons. Back in 1996, $182 billion enterprise software giant Oracle (ORCL $42-$56-$61) began hosting an annual conference for business leaders and decision makers to show off the firm's latest technologies. For nearly that long, Oracle has held the convention, known as OpenWorld, in San Francisco. Now, that is about to change. The company confirmed that it has inked a deal with Caesars Forum, a massive new 550,000 square-foot convention center in Las Vegas, to host the event for at least the next three years. Oracle said that two glaring complaints rose to the top of attendee feedback: the city's hotel rates were too high, and the street conditions were poor. Citing a 2018 NPR report, San Francisco's city streets are "strewn with trash, needles, and human feces." The San Francisco Travel Association, a private nonprofit which promotes tourism in the Bay area, said the move will cost the city approximately $64 million per year in lost revenue. The event attracts more than 60,000 Oracle customers and partners each year. Without commenting on San Francisco, it is fair to say that Las Vegas has done a tremendous job in attracting new corporate customers to the city over the past decade.
Telecom Services
What is the federal judge telegraphing about the T-Mobile/Sprint lawsuit? The lawsuit was a colossal joke from the start. A group of thirteen (down from sixteen) state attorneys general, led by New York and California (which tells us everyting we need to know), is suing to stop the Sprint (S $5-$5-$8)/T-Mobile (TMUS $60-$76-$85) merger on grounds that it will limit competition in the 5G arena, harming consumers. News flash for the political hack AGs: Sprint probably won't make it without the merger, so what will that do to the competitive landscape? For its part, the Department of Justice has already given the green light to the merger, which further points to the politics at the heart of the lawsuit. In the latest move, US District Judge Victor Marrero told both sides in the suit to skip their opening arguments and get on with calling their witnesses. This indicates to us that he has very little patience in the matter, which we believe bodes well for the telecom companies. It should be noted that, as part of the DoJ approval process, Sprint would have to divest itself of some assets to Dish Network (DISH) so that company would be able to build its own 5G network. We believe the judge recognizes this suit as the frivolous waste of taxpayer money that it is, and will ultimately rule for the merger. We can't wait to see the bloviating AGs rush to the microphones to screach about the injustice thrust upon the public by the judicial system. Maybe Al Sharpton will even show up with his bullhorn.
Biotechnology
Two little-known biotech firms skyrocket after offers from big pharma. The battle to develop the next generation of cancer-fighting therapies is entering a new phase, and that is a good thing in the herculean effort to eradicate the disease. French drugmaker Sanofi (SNY 40-$46-$47), attempting to regain lost ground, has agreed to buy cancer biotech firm Synthorx (THOR $11-$67-$27) for $2.5 billion, sending the latter's shares up 169%. Synthorx's lead product candidate is THOR-707, a therapy designed to kill tumor cells. Not to be outdone, $226 billion US pharma giant Merck (MRK $71-$89-$89) announced its intent to buy small-cap biotech ArQule (ARQL $2-$20-$12) for $2.7 billion, sending shares of the Massachusetts-based firm up 103%. Merck said the deal will expand its oncology pipeline into targeted therapies used to fight blood cancers. ArQule's stated objective is to discover, develop, and commercialize novel small molecule drugs in areas of high unmet needs. These deals pale in comparison to Bristol-Myers Squibb's (BMY) purchase of Penn Global Leaders Club member Celgene (formerly CELG) last month for $74 billion. While Celgene is no longer a publicly-traded company, we do own its acquirer, BMY, within the Penn portfolios. Within the health sciences space we also own Amgen (AMGN), Biogen (BIIB), Gilead (GILD), and AbbVie (ABBV). Look for plenty of more deals to come as the major pharma giants battle it out for the title of lead cancer-fighting drugmaker. Sneak preview: Health Care is one of the sectors we are overweighting for 2020.
Updtate: Sanofi announced it would end research in cardiovascular diseases and
Headlines for the Week of 01