THE BULL MARKET REPORT for November 18, 2024

Market Summary

The Bull Market Report

From an earnings standpoint, the quarterly confessions are practically over, with only Retail and a few stragglers (not to mention mighty Nvidia, Wednesday) still scheduled to report. The season has been solid. The S&P 500 managed to raise the bottom line 5% from last year, which is actually a full percentage point better than either we or Wall Street dared to dream a few months ago.

The election is over too, with the results widely being interpreted as business friendly. Taxes will almost certainly go down instead of up. Regulations will weaken. This is an opportunity for strong corporate leaders to achieve their goals and for shareholders to come along on the ride to glory. Even so, the narrow majority in Congress suggests another few years of partisan gridlock and limited policy progress. Once again, when Washington is absorbed in internal debate, Wall Street gets a free hand to innovate and excel.

And another Fed meeting has come and gone. Jay Powell and his colleagues gave us another rate cut and remain open to more down the road. Unfortunately, the persistence of inflation leaves them without much room to put their talk into practice. While interest rates may still be high enough to gradually starve price pressure, they might be approaching a point that's too low to keep inflation under control, much less give the Fed what it needs to declare victory once and for all. Add all that up and this is the cloud on the market horizon as we look toward the end of the year.

For now, performance has been bullish across the board. Investors have finally stopped fretting about whether their gains are "real" or just a figment. Instead, the mood has swung back to envy when we're all nominal winners but some do better than others. We felt the sharp side of that story this month with our recommendations giving back a little room in the aggregate, taking our YTD performance back below the major benchmarks.

In our view, this is a feature of our diversification posture and not a problem in the long term. Yes, our strong defense holds us back in the good times: High Yield and the REITs have struggled and Healthcare has turned more than a little icy amid concerns over policy in the new administration, but when the mood turns again, these sectors will demonstrate their usefulness as strong shields against the weather. And in the meantime, at least they keep paying dividends from quarter to quarter, justifying our continued attention with a little regular cash every three months.

But the real stars remain our core Stocks For Success, up 29% YTD, beating the S&P 500 and the Nasdaq by several percentage points. And then there's Long Term Growth and High Technology, which are doing even better. Special Opportunities, often a weak point in recent years, are matching the broad market right now. This is great stuff. The "full" half of the glass is more than half full. The "empty" portfolios will fill us up later. We're excited. We hope you are too. Either way, our conviction carries a high price in terms of diligence, forcing us to cut a few recommendations now and then when they don't work out. We'll do that this week.

There's always a bull market here at The Bull Market Report. As we wait for mighty Nvidia to weigh in with the last Mega Tech numbers of the season, The Big Picture provides a refresher course on what "guidance" really is and why it moves the market more than what each company reports about the trailing quarter. We might not trust management to have a 100% accurate crystal ball, but their views on the future are a whole lot more interesting than their take on the past. Speaking of the future, The Bull Market High Yield Investor is where we tell you some sobering things about the Fed's anticipated glide path in the wake of recent inflation reports. Now is the time to pivot away from bonds into more interesting yield investments like the ones we recommend. And as always, we want to keep a few stocks and funds on your radar.

Key Market Indicators

BMR Companies and Commentary

Energy Transfer Partners (ET: $17.29, flat last week. Yield: 7.4%)
ENERGY PORTFOLIO
BMR FEATURED STOCK

Energy Transfer Partners, a leading player in the midstream energy segment, released its third-quarter results two weeks ago, reporting $20.8 billion in revenue, flat compared to $20.7 billion a year ago. It posted a profit of $1.1 billion, or $0.32 per share, more than doubling from $470 million, or $0.15. You have to like that!

Volumes across the company's extensive list of assets continue to hit new records, with crude oil transportation and export volumes growing 25% and 49% YoY, respectively. The company achieved a 6% increase in midstream gathered volumes and a 26% increase in midstream produced volumes. Furthermore, natural gas liquids transportation and fractionation volumes grew by 4% and 12%, respectively.

Energy Transfer is a prominent player in the energy industry, operating a vast network of pipelines and energy infrastructure. The company plays a crucial role in transporting and storing natural gas, natural gas liquids, and crude oil.

Key Business Segments:

• Natural Gas Pipelines: Energy Transfer owns and operates a substantial network of natural gas pipelines, facilitating natural gas transportation from production basins to major consumption markets.
• Crude Oil Pipelines: The company's extensive crude oil pipeline system enables the efficient movement of crude oil from production sites to refineries and export terminals.
• Natural Gas Liquids Pipelines: Energy Transfer transports NGLs, such as propane, butane, and ethane, to various markets, including petrochemical plants and export terminals.
• Storage and Terminals: The company owns and operates a network of storage terminals for crude oil, NGLs, and refined products, providing flexibility and efficiency in the energy supply chain.

The company boasts an extensive network that spans approximately 125,000 miles across the United States, with roughly 90,000 miles dedicated to natural gas pipelines and the remaining 35,000 miles for crude oil pipelines. This network allows the company to connect major production basins to key consumption markets, ensuring a reliable and efficient supply of energy resources.

There were several strategic highlights during the quarter, starting with the completion of the $3.25 billion WTG Midstream Holdings acquisition, which brought an additional 6,000 miles of gas-gathering pipelines into the company’s fold. It inked a new partnership with Sunoco, combining their respective assets in the Permian Basin, with Energy Transfer as the operator.

The company has plenty of catalysts and long-term tailwinds in its favor, the most prominent of which is the rising demand for natural gas and new power plants being set to fuel the increasing energy demands of data centers. Many data centers could soon have their own captive gas-fired power plants, supplied directly via pipelines built and owned by the company, creating a massive runway for growth.

Similarly, the incoming Trump administration is another catalyst that will help ease up on regulations holding the sector back and allow it to proceed with long-awaited LNG export projects. The stock is up 25% YTD while still offering a delectable yield of 7.4%, which is expected to grow. The company produced $10.2 billion in cash flow.

We expect big things from the company in the future. Management has big plans for the future and continues to be very acquisitive. ET is the largest natural gas pipeline company in the United States, with 84,000 miles of pipe and a market cap of $60 billion. The 2^nd largest is DCP Midstream, a private company with 55,000 miles. Kinder Morgan (KMI) has 51,000 miles, also a $60 billion company, but only pays a 4.2% dividend.

Our Target is $18, and our Sell Price of $12 is hereby changed to We Would Not Sell Energy Transfer. We are raising our Target today to $20.

Blackstone (BX: $181, up 2%)
STOCKS FOR SUCCESS PORTFOLIO

Alternative asset manager Blackstone released its third-quarter results recently, reporting $2.4 billion in revenue, up 5% YoY, compared to $2.3 billion a year ago. It posted a profit of $1.3 billion, or $1.01 per share, against $1.2 billion, or $0.94, beating estimates at the top and bottom lines, owing to growing assets under management and robust investment activity following the much-needed Fed rate cut.

Like most other PE firms, high interest rates had been a drag on Blackstone’s performance for several quarters. Still, the weight has been lifted, albeit marginally following the September rate cuts, with more expected to follow suit. As a result, the firm’s private equity and infrastructure funds had their best performance in three years, growing 6% and 5%, followed by credit and real estate at 3% and 1%.

Blackstone is seeing broad-based acceleration across its business units, spurred by an increasingly robust macro climate. It deployed $34 billion for new acquisitions during the quarter, up from $12 billion a year ago, with $16 billion earmarked for just one major deal, Australia-based data center company AirTrunk. The firm also acquired enterprise work management platform SmartSheets in an $8.5 billion deal.

It realized proceeds of $23 billion during the quarter, up from $15 billion a year ago, as IPOs and M&A markets have started to come back following over three years of dormancy. Investments in its funds, too, are picking up pace, with $40 billion in inflows, bringing total assets under management (AUM) to a mind-boggling $1.1 trillion, of which $820 billion is fee-earning AUM, with $430 billion perpetual AUM. (Perpetual capital strategies are real estate core-plus, infrastructure, insurance solutions, and private credit.)

The stock is up 41% YTD, hitting an all-time high of $183 this week and taking Blackstone’s market capitalization to $220 billion. The company is known for rewarding investors generously, and this quarter was no exception, with $1.2 billion in stock buybacks and dividends during the third quarter and $5 billion YTD. The total dry-powder, or liquid capital, hit $170 billion, with $2.5 billion in cash, $12.8 billion in debt, and $4.2 billion in cash flow on its balance sheet.

Our stock blew through our Target of $150 a month ago, so we are raising it today to $220. After all, they are the largest asset manager in the world, clocking in at $1.1 trillion. Do you think they will be satisfied to stop here at this level? Neither do we.

We would never sell this great company.

Zscaler (ZS: $201, up 3%)
HIGH TECHNOLOGY PORTFOLIO

Cloud security giant Zscaler released its fiscal fourth quarter (which ended July 31) results a few months ago, which means Wall Street has already digested every detail and moved on to anticipating the next quarterly report in early December. Nonetheless, we think it's important to review what we know about the previous period: $590 million in revenue, up 30% YoY compared to $460 million a year ago, and a profit of $140 million ($0.88 per share) against $100 million ($0.64) a year ago.

Everything we've laid out so far beat consensus estimates, but the stock took a steep pullback following the results, owing to a weak forecast for 2025. This was an overreaction, as the company still guided 20% YoY sales growth, and the stock has recovered in the weeks since. After a decade of consistently posting a CAGR of 50%, this was, in some ways, long-coming, with the company falling victim to the high expectations that it had set. We believe this was a remarkable quarter for the company in more ways than one.

Calculated billings are up 27% YoY to $910 million, with deferred revenue following suit at $1.9 billion, up 32% YoY. Currently, 570 customers use the platform with annual contract values (ACVs) greater than $1 million and 3,100 with ACVs of $100,000 or more. It maintains a healthy dollar-based retention rate of 115%, meaning that for every dollar of revenue generated from a customer, the company generates $1.15 in revenue from that customer in the following period. This is a significant number.

Zscaler’s FedRAMP-approved Zero-Trust architecture is now the gold standard for government and industry. The federal vertical continues to make gains, having already landed 13 of the 15 cabinet-level agencies and other lower-ranked federal bodies. The company notes that its Federal landed base represents a 20x upsell opportunity, making it a key driver of growth over the next couple of years.

Having hit the milestone of $2.5 billion in annual recurring revenue during the fourth quarter, the company has set its sights on $3.0 billion in 2025 and is on its way to hit $5 billion over the next few years. Zscaler doesn’t have buybacks or dividends, but this could be coming soon, given its rising cash flows at $200 million and strong balance sheet, with $2.0 billion in cash and $1.2 billion in debt.

Our Target is $240, and our SP is $170. This is one volatile stock. It hit $260 in February and proceeded to drop to $155 by May, rising to $208 by July, dipping to $153 by September, and now over $200. Let’s go back and look at revenues: $1.1 billion in fiscal 2022, $1.6 billion in 2023, and a shade under $2.2 billion in 2024. To review, Zscaler is a leading cloud security company that provides a comprehensive suite of security solutions to protect businesses from cyber threats. The company's core business is to secure access to applications and data, regardless of where users, devices, or applications are located. The broader global cloud security market is projected to reach approximately $200 billion by 2029, growing at a compound annual growth rate of over 22% from $73 billion in 2024.

First Trust Nasdaq Semiconductor ETF (FTXL: $86, down 8%)
REMOVING FROM COVERAGE

The First Trust Nasdaq Semiconductor ETF is a renowned name in the semiconductor space, providing investors with a balanced exposure to this burgeoning industry. Despite having exposure to high-fliers such as Nvidia, Axcelis, and Broadcom, among others, the fund’s performance over the past year has been rather uninspiring, with a YTD return of just 9.2%, trailing both the Nasdaq and the S&P 500.

The fund has also lagged behind other semiconductor ETFs, such as VanEck Semiconductor ETF (SMH; $240), which has posted a YTD gain of 42%, which we also have in the High Technology Portfolio. This, however, has everything to do with differing philosophies on diversification, with First Trust allocating assets to 31 stocks. At the same time, VanEck includes just 26 while being remarkably top-heavy, with its top 5 holdings constituting 50% of total assets.

First Trust’s underperformance can be attributed to its significant stake in Intel, at 9.5% of total assets, while the stock has declined nearly 50% YTD. We believe management has missed the boat and are extremely disappointed. We would move our money to VanEck Semiconductor ETF.

We added the stock at $103 in July; our timing couldn’t have been worse when it comes to diversifying our core semiconductor holdings. This one proves that diversification has a downside when the managers overweight the wrong stocks. We live, we learn. And we're happy to be overweight NVIDIA (NVDA) across the board.

iShares US Oil & Gas & Production ETF (IEO: $98, up 1%)
ENERGY PORTFOLIO

The outlook for global energy prices appears bleak, with factors like increased US domestic production and slowing Chinese demand contributing to a potential supply glut. A strengthening US dollar could further exacerbate this trend. However, pure-play US oil and gas exploration and production companies are set to get better from here.

The iShares Oil and Gas ETF offers exposure to the US domestic upstream energy sector without investing in large-cap giants like ExxonMobil or Chevron. This ETF provides an opportunity to participate in the growth potential of smaller, more dynamic companies in the industry. While it allocates 22% of its assets to the midstream segment, it steers clear of vertically integrated firms, eliminating redundancies.

Leaving aside the rest of the world’s problems, US energy markets look remarkably robust, with multiple rate cuts over the next few years helping spur consumption and a favorable new administration in Washington for the industry. Given the growing energy demand from data centers and the role of natural gas as a transition fuel for renewable energy, we further see strong mid-term tailwinds.

There are several other mid-to-long-term catalysts for both crude oil and natural gas, and barring certain geopolitical events that could result in spikes, the G7 plan to phase out all coal-fired power plants by 2035, will increase demand for natural gas, again as a base-load energy source. Also, the US Strategic Reserve supports prices at current levels, which will incentivize the industry.

The fund is up 4% YTD and a remarkable 360% since its all-time low during the pandemic in 2020 while still trading at an attractive valuation and offering a 2.9% annualized yield. With an extensive track record of 18 years and coming from Blackrock’s illustrious lineage, the fund is perfect for investors seeking exposure to the energy sector, especially considering its low expense ratio of just 0.40%.

Our initial recommendation in 2022 has earned 22% so far from a base of $80. The Target is $120, and the SP is $95. We’re tight to the Sell Price now, and due to uncertainty in the world today, we will hold to this and book our profit if it moves to that level.

Occidental Petroleum (OXY: $50, down 1%)
ENERGY PORTFOLIO

Warren Buffett's favorite hydrocarbon giant released its third-quarter results last week, reporting $7.2 billion in revenue, down 3% YoY, compared to $7.4 billion. It posted a profit of $980 million, or $1.00 per share, against $1.1 billion, or $1.18, the prior year, with a cautionary outlook for the coming year, owing to tough macro conditions and depressed energy prices.

The better-than-expected results, despite lower commodity prices during the quarter, were largely the result of its robust production performance, at 1.4 million barrels of oil equivalent per day. In addition, the integration of CrownRock has started to pay off, with substantial operational and efficiency gains already, with more to be realized over the coming years.

As always, the oil and gas segment led the way with $5.7 billion in sales, up 2% YoY, despite a 6% YoY decline in realized crude prices at $75.30 per barrel. Natural gas liquids came in at $20.47 per barrel, down 4% YoY. Natural gas realized prices were down 26% from the prior year, offset by a 16% increase in production.

Other segments, namely OxyChem, generated $1.2 billion in sales, down 8% YoY. The midstream and marketing business brought in $440 million, a decline of 20% from the prior year. Occidental plans to generate an additional $1 billion in annual cash flow from these two non-oil segments and its innovative new carbon capture and storage segment.

The company has done a remarkable job at reducing debt, with 90% of the $4.7 billion reduction target already achieved. It still has a substantial $28 billion in debt on its books, which will continue hammering downwards. Management is clearly driven to excel, closing the quarter with $1.8 billion in cash and an impressive $11.3 billion in cash flow. However, Occidental has been hammered (to re-use a good word) since April when it was trading at $69. Once a "value" stock, this is now a super-value stock. Our Target is $90, which appeared reachable when the stock was at $70 but is quite a distance higher now, as you know. We will lower it today to $70 with a SP of $50. We can’t see exiting the stock at this level; we would accumulate more here at $50. That's what Warren is doing.

Moderna (MRNA: $37%)
REMOVING FROM COVERAGE

Biotech startup Moderna released its third-quarter results last week, reporting $1.9 billion in revenue, up 2% YoY, compared to $1.8 billion a year ago. It posted a profit of $13 million, or $0.03 per share, against a loss of $3.6 billion, or $9.53. The stock pulled back due to several issues brewing in the background.

The company produced better-than-expected COVID-19 vaccine sales at $1.8 billion, and the launch of the new RSV shot, which generated $10 million in US sales and has since received approval from Qatar, Norway, the European Union, and Iceland. Another key factor behind the return to profitability was the decision to cut the R&D budget by $1.1 billion two months ago.

Yet, the stock remains under pressure, which began ever since the cut in R&D spending was announced. This signaled a lack of confidence in its ability to generate strong revenues and the efficacy of its pipeline, which saw five programs being cut as a result. This is particularly concerning for a company whose valuation is heavily reliant on its research and development efforts.

The new RSV vaccine faces tough competition from GSK’s Arexvy and Pfizer’s Abrysvo, both established candidates from deep-pocketed players, leaving Moderna at a significant disadvantage. To make matters worse, the possible appointment of Robert F. Kennedy Jr, an outspoken critic of childhood vaccinations, to head the Department of Health and Human Services does not bode well for the company and other firms in the space, like Eli Lilly.

The stock is down 36% over the past month and 67% YTD, and while we believe in the robust underlying mRNA technology and the impressive product pipeline, we’re tired of waiting and believe that the time frame for the promised revenues and profits has been moved out as well. It is time to call it quits. Moderna is not a sinking ship; far from it. Still, while it works towards a long, drawn-out course correction, our money can do better elsewhere at significantly more attractive valuations.

We added the stock at $193 in 2023; needless to say, we did not heed our Sell Prices. Live and learn.

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The Bull Market High Yield Investor

When you live on hope that the Fed will be your friend and lower interest rates whenever it gets an excuse, it feels like a betrayal when the inflation reports take that excuse back off the table. That's exactly what happened in the last few weeks. Jay Powell and company gave us another rate rollback to feed the post-election euphoria, but then, days later, hints of stubborn price pressure in the economy shook a lot of traders' confidence in an extended stream of additional cuts ahead. At this point, we might consider ourselves lucky if the Fed relaxes one more time in December and then takes at least a brief break early next year to make sure they haven't once again let the inflationary demon out of the bottle.

What this means is that overnight lending rates are already about halfway to the lowest point we'll see in the next 12 months. There's still some room for the Fed to move, but the odds are good that in a few weeks we'll get our first taste of what will become the next "new normal" in the rate environment for the foreseeable future. This is more or less how life will work: not quite as much pressure or pain as when the tightening cycle was at its peak, but not a lot more reason ahead to relax. And as the overnight end of the rate curve stabilizes for the first time in years, all the uncertainty in the bond market starts feeding into the other end where long-term yields go.

If the mood around the economy remains decent, money will flow into stocks instead of bonds, pushing yields higher as the curve steepens to reflect a healthy continued economic expansion. And if the mood goes sour, we'll see long-term yields drop. We'll also see the Fed revisit its easing posture in order to shield Main Street from a serious recession. That's not great for bond investors either because they'll have to settle for even lower coupon rates than the 4-4.5% they're getting now.

Either way, we always recommend investments that are not quite so rock-solid reliable as Treasury debt but have the proven potential to pay a lot more. Otherwise, you're practically asking inflation to take your money away. Here are a few:

Ares Capital (ARCC: $22, flat. Yield=8.9%)
HIGH YIELD PORTFOLIO

Ares Capital is a leading business development company that offers financing to private equity and real estate developers. The company released its third quarter results recently, reporting $780 million in revenue, up 18% YoY, compared to $660 million a year ago, with a profit of $360 million, or $0.58 per share against, against $290 million, or $0.59, beating estimates at the top, but missing at the bottom. During the quarter, Ares issued and sold 14.7 million shares of common stock under its equity distribution agreements, with net proceeds totaling approximately $300 million.

Ares made commitments of $3.9 billion, up 140% YoY, compared to $1.6 billion last year, along with $2.6 billion worth of exits, up 100% YoY, across 74 different transactions during the quarter. Investments at fair value now stand at $26 billion, up from $22 billion last year, aided by rate cuts and improving macro conditions in recent months.

The portfolio is more diversified than ever, with allocations across 535 different companies, 53% in first-lien senior secured notes, and 70% of all loans are floating-rate investments. Non-accrual loans, or loan accounts that have failed to receive any payment for 30 days or more, stood at 0.60%, down from 0.70% the prior quarter, which was already relatively low and well within generally accepted risk frameworks to begin with.

Two months ago, the cut in interest rates spurred a flurry of activity in capital and debt markets, with Ares benefiting from a flood of new originations and investment gains.  Of course, the drop in rates was on the short end of the curve, and longer rates have increased. Despite the various moves in rates, Ares' balanced portfolio and strategic approach, including fixed and floating-rate investments, help mitigate these risks.

The stock is up 7% YTD while offering a well-covered annualized yield of 8.9%, and this comes at a time when most other BDCs struggle to cover payouts. With a perfectly balanced portfolio and an investment-grade credit rating, it is well-positioned to weather the dynamic economic landscape. Ares ended the quarter trading at a 9% premium to book value.

This is a very steady stock over the years, but note that it is trading a whisker from the all-time high of $22.35 set in 2021. We've successfully reached our $22 price target for the stock, which we initially purchased at $17 in 2021. But this stock is going higher. We are raising our Target to $24, which would be nice to see in 2025, an event we find quite promising. The Sell Price of $19 is raised today to $20. What a great company.

And if you are worried about the volatility in the markets lately, this one is non-correlated to the overall stock market. It has a beta of 0.42, whereas a beta of 1.0 would move exactly with the market. We like low-beta stocks for our high dividend-producing stocks. We want it nice and slow, paying that big 8.9% dividend, not worried about what the overall market is doing as measured by the S&P 500.

Realty Income (O: $57, down 2%. Yield=5.6%)
REIT PORTFOLIO

Realty Income, one of the largest investors in free-standing, single-tenant commercial properties, released its third-quarter results last week, reporting $1.3 billion in revenue, up 26% YoY, compared to $1.0 billion a year ago. It posted a profit, or FFO, of $860 million, or $0.99 per share, against $740 million, or $1.04, beating consensus estimates at the top but missing on the bottom line.

The company saw strong occupancy rates of 98.7%, alongside a 105% rent recapture rate across 170 renewed leases, which refers to a 5% bump in rents across the renewed leases. This was an eventful quarter, with $740 million in fresh deployments, with a weighted average yield of 7.4%, and $250 million in proceeds from the disposition of 92 properties.

Same-store rentals came in flat at $1 billion, and the bump in earnings was primarily the result of its $9.3 billion acquisition of Spirit Realty. We expect more efficiencies to be unlocked, alongside certain synergistic gains to be realized over the next few years. The all-stock merger brought an additional 2,000 properties into its fold, perfectly positioning it for tailwinds ahead. Founded in 1969, the company invests in diversified commercial real estate and has a portfolio of 15,500 properties in all 50 U.S. states, the U.K., and six other European countries.

Speaking of tailwinds, the recent rate cuts were perfect, helping spur consumption and bolstering brick-and-mortar retail, which makes up a large part of the company’s tenants. We expect more rate cuts over the next couple of months, which will help REITs in more ways than one, including making their yields more attractive relative to treasuries, CDs, and other fixed-income funds and investments.

Realty Income is now diversifying beyond freestanding retail to include consumer-centric medical, industrial, data center development, and gaming centers. The total addressable market across these sectors is $5.4 trillion in the US alone, leaving plenty of room for growth.

The company ended the quarter with $410 million in cash, $27 billion in debt, and $3.4 billion in cash flow. Our Target of $70 looked like it would be tested in the middle of October, as it ran from $53 in July to $65, but the stock has faltered a bit, giving us all an excellent opportunity to buy stock 12% off its yearly high. The stock has been higher, hitting $82 in 2020 before the pandemic hit (it was cut in half a month later) and then rising steadily to $75 in 2022. We have confidence in the business plan, in management, and in the fact that they are acquisitive. We believe the company will reach 20,000 properties sometime in 2026 or 2027.

Talk about a low beta. It comes in at 0.05, down from 0.60 in June. This is not a misprint. We would expect the stock to move higher if the overall stock market decides to take a break and move lower.

FS KKR Capital (FSK: $21, up 1%. Yield=13.2%)
HIGH YIELD PORTFOLIO

FS KKR Capital, another BDC run in partnership with FS Investments and PE giant Kohlberg Kravis Roberts, released its third-quarter results last week, reporting $440 million in revenue, down 5% YoY compared to $470 million a year ago. Profit per share was steady at $0.77, while beating consensus estimates on the top and bottom lines. The slight dip on the bottom line doesn't concern us so much as the ability to cover its $0.70 dividend and have a little left over. Based on these numbers, there's little need for concern.

The company has been on a fiery streak when it comes to originations, at $1.1 billion, up from $500 million a year ago. Exits and repayments, however, were higher at $1.3 billion, nearly doubling from $680 million. As such, the fair value of investments declined 5% YoY, to $13.9 billion, down from $14.7 billion a year ago, which has helped reduce its non-accruals from 2.5% to 1.7%, a significant improvement.

FS KKR has done a remarkable job at improving credit quality and bolstering the balance sheet over the past couple of years. This includes $4.7 billion in liquidity, up from $4.2 billion in the prior quarter, and a reduction in debt YoY at $8.1 billion, compared to $8.2 billion a year ago. All of this bodes well for the company as we enter into a strong business environment that is set to extend well into 2025. There is less likelihood of a recession over the next couple of years and fewer chances of their portfolio companies defaulting on their borrowings. Moreover, with nearly 70% of assets in secure first and second-lien loans, the company will be first in line to recover its assets if things go awry. This and its extensive diversification make it a rather safe bet despite the high yield it offers.

The stock is up nearly 5% YTD and is positioned very lucratively relative to other BDC players, trading at an 11% discount to book value while offering an impressive yet well-covered annualized yield of 12.1%. This, alongside the company’s improving fundamentals, makes it perfect for income-seeking investors. It ended the quarter with $370 million in cash, $8.1 billion in debt, and $1.1 billion in cash flow.

We added the stock at $20 in September and placed a Target of just $21. It has reached that level, and we are raising it to $22. Our Sell Price remains the same at $18. This stock has a beta identical to Ares at 0.42. The stock has been about this price for the last three years. Very calm and steady, slowly paying out 13.2% a year.

Nuveen AMT-Free Municipal Credit Income Fund (NVG: $12.86, flat. Yield=6.2% tax free, or the equivalent of 8.2% taxable even if you're "only" in a 25% earned income bracket)
HIGH YIELD PORTFOLIO

Given its secure, tax-free yields, this fund has long been the vehicle of choice for conservative, income-seeking investors. The closed-end fund has been on a hot streak recently, owing to the cut in interest rates and an aggressive hike in distributions. The possibility of more rate cuts by the Fed, alongside favorable conditions for munis, makes it a compelling investment for income seekers.

Despite the rate cuts, Treasury yields have risen owing to the Presidential election and the uncertainties surrounding the same. Due to this, munis were unable to shine all that much in recent weeks, but things will start turning now. Aside from this, several other tailwinds favor munis, such as if the Tax Cuts and Jobs Act were allowed to sunset in 2025, making tax-exempts more attractive.

Another reason behind suppressed yields is the surge in new issues during this year's second and third quarters. This mainly constituted issues that were backlogged due to execution issues, alongside those that were moved up to get ahead of the Presidential elections. Either way, these are all done now, and the time is indeed ripe for munis to start shining once again.

Following a crash in munis and the broader bond market in 2022, there are plenty of reasons for bonds and funds to rally back to their previous highs. Nuveen’s funds are known to perform significantly better relative to peers and the market, given their use of leverage to amplify returns. This strategy works exceptionally well during a low-interest rate environment when the cost of said leverage is lower.

The fund still trades at a 6% discount to book value, a figure that has narrowed considerably from 14% last year. With sturdy municipal balance sheets, low supply, and dropping yields elsewhere, munis are perfect for income-seeking investors who don’t want to risk much, and the Nuveen fund is the ideal vehicle to gain exposure to the same, given its extensive track record.

Good Investing,

Todd Shaver, Founder and CEO
The Bull Market Report
Since 1998