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Last week saw the S&P 500 stall after spending most of the year bouncing back fast from the previous quarter’s decline. We’ve seen the pattern play out, earnings season after earnings season. When the market as a whole gathers enough numbers to gauge the overall pattern, investors take a deep breath and start repositioning for the quarter ahead.

As usual, our stocks outperform during the pause as well as the surge. The Bull Market Report’s recommendations added another 1% in YTD profit, once again nudging against levels that the correction forced us to briefly give up. At this point all losses dating from later than early October have been erased. Once our stocks can recapture another 3%, overall performance of all BMR stocks will back in record territory, with fresh fundamental fuel in the tank for the next leg in our journey to higher profits. As it is, the active BMR universe is up more than 40% since 2016, beating the market every step of the way.

Of course we’re still at the pivot in the earnings cycle with about half of our companies on record so far with their 4Q18 results. There’s still room for some surprises on individual stocks, but with the big players that dominate the Stocks For Success portfolio already on the board, we’re feeling quite confident in the rest of out stocks.

The Silicon Valley giants and the big Banks were strong. Even the major Industrial manufacturers are reporting good results, despite the tough talk on trade. And while the impact of last month’s federal government shutdown remains to be gauged, corporate executives just aren’t using it as an excuse to justify any weakness in their own performance. We’ve seen a few more warnings than usual, but the tone of the commentary is upbeat.

We prefer to look at the glass of 2019 as at least half full so far. On one hand, growth may falter for a quarter or two, and the shutdown may have produced a chill similar to previous cold winters that temporarily froze economic activity while Americans stayed home. But next quarter can easily produce a boom in miniature, leaving investors in a position to once again raise expectations for the year as a whole. And in the meantime, even with lowered growth targets, stocks that once looked richly valued at 18X earnings have receded to a more reasonable 15X multiple. That’s no reason to sell, and as long as we add to our positions selectively we will have no reason to complain.

There’s always a bull market here at The Bull Market Report! Earnings season for us has reached its climax and this week we’ll need to split our subscriber-only Preview into two pieces to accommodate all 12 companies scheduled to announce their numbers. The Big Picture provides a sense of our sector strategy and we've spotlighted Amazon, Facebook and Box this week.

As always, subscribers (even trial subscribers) get literally twice as much, as well as on-demand access to the portfolios and Research Reports, but by definition, you'll need to sign up for that. Look out: we are contemplating raising the price from $249 to $399 or even $499 a year, as we offer a tremendous value and have made a lot of money for our subscribers (40%-plus) in the past two years. Click here to subscribe at the still low price of just $249 a year:

Key Market Measures (Friday’s Close)


BMR Companies and Commentary

The Big Picture: In The Sector Sweet Spot

With a breathtaking 92% of the S&P 500 and all but two BMR stocks in positive territory YTD, there’s good reason to feel that the entire market is moving in the same direction. There’s little point in fighting correlations that strong. Sooner or later, the tide will turn and investors will get back to work crowding into strength and fleeing weakness.

For now, the only real question is how fast each slice of the market is moving to the upside. The S&P 500 as a whole is up 8% YTD, which would be highly respectable but our recommendations are up 15% on average over the same period! Obviously, we pride ourselves on picking winners in all ticks of the market cycle, but our sector exposure plays a big role here. BMR coverage has focused on the sweet spots without wasting resources on relative weakness.

For example, while Consumer Staples, Materials and Utilities are participating in the rally, they just aren’t moving fast enough to outperform. We don’t mind. Since none of our stocks are direct plays on any of those themes, our performance calculations start from a stronger overall base. Granted, those sectors add up to only 15% of the S&P 500, so the drag from accepting only 4% from the Materials or 6% from the Staples isn’t huge — but it’s enough to keep market-weight investors at a disadvantage.

There isn’t a lot of inherent value in these sectors, either. The Utilities are already 2% from a 52-week peak and the Staples don’t have much more historical headroom for bargain hunters to capture. And while more dynamic areas of the economy are expanding fast enough to push stocks past all known limits, it’s hard to get excited about the growth prospects here.

Even though the Materials sector would have to rally another 14% before breaking any records, there’s a reason the group is depressed. Earnings this year are tracking slightly lower than where they came in last summer, so revisiting the peaks effectively forces investors to pay more for less. While it could happen, we don’t count on it. And unless a truly vibrant opportunity emerges in these sectors, we won’t urge you to buy these stocks simply because they’re on sale or because we need to round out our coverage.

Some areas of the market simply aren’t worth the effort right now. And to be honest, they weren’t even worth it last year when these “defensive” sectors were in demand. Money crowded into the Utilities back in December when the rest of Wall Street was on the run. We already had our own fortress in place thanks to our High Yield, REIT and Healthcare portfolios, all of which held up remarkably well last quarter.

When Wall Street hits a wall, our Big Pharma and Real Estate names light up. After all, drug sales aren’t going to decline any time soon. Corporate landlords won’t cut rent either. Cash will flow into our big defensive names and keep the dividends flowing whatever happens in the larger economy. If it doesn’t, we’ll have much larger challenges to wrestle with than what’s happening in the stock market.

That said, Healthcare has lagged the overall market YTD with only a 4% sector gain. Our particular recommendations are tracking double that return because we’re open to the more innovative side of the industry as well as the Big Pharma defense. As the year plays out, we’re looking to add more names like the one that's made subscribers 26% since August  to balance the deck.

Real Estate is already touching those limits now on relief that the Fed won’t burden the sector with additional interest rate increases any time soon. While we’re always open to opportunities, we have robust representation in the portfolio now. Similar logic applies in the Financials and Energy, which together add up to 20% of the market and are roughly tracking the S&P 500. Our Exchange-Traded Funds give us all the broad exposure we need to each theme.

Likewise, we’re already exactly where we want to be in the Consumer Discretionary and new Communications sectors, where a few star players have done most of the scoring in each group. Just four stocks in Consumer Discretionary and Communications have captured 60% of the total upside of both sectors so far this year. We actively recommend all four, but only subscribers know what they are. Factor them out and these sectors aren’t a target-rich environment after all.

And finally there’s Technology. A lot of companies people associate with the sector have been reclassified as Consumer or Communications stocks, leaving only Apple (AAPL: $170, up 2%) and Microsoft (MSFT: $106, up 3%) to anchor the sector. These two have come a long way back in recent weeks. Apple in particular has a lot of ground left to recapture, but for our purposes the important thing is staying clear of the drag the Semiconductor group is creating. We’ve trimmed all obvious weakness from our Technology and Aggressive portfolios, leaving plenty of room for winners to go as far as they can. Those stocks are up a collective 24% YTD, leaving the sector as a whole with its 10% deep in the dust.


Box (BOX: $24, up 11% -- all prices are for the week)

This is the week the venerable Goldman Sachs finally came around to what we have been saying for months: That enterprises across the world are shifting to cloud technology, and that mid-cap Tech pioneers like Box are capitalizing as a result. Goldman thinks Box will be worth $31 a year from now, only a little above our near-term $30 Target. From what we’ve seen so far the final destiny is many multiples of its current price.

After all, Box grew its top line 21% last quarter and is on track to match that performance in a few weeks when it reports its 4Q18 numbers. Remember, the story here doesn’t revolve around sustained profit until at least 2021, at which point the run rate will likely have expanded from $610 million last year to $900 million. Admittedly, the business has scaled to the point where it only takes $165 million am quarter to break even, but we’d rather see cash flow plowed back into customer acquisition and market share capture.

While Cloud data storage is a competitive business, Box is winning. The company has almost 100,000 global clients and during 3Q18 converted 57 of them into big contracts generating $100,000 or more a year. The deep end of this pool gets extremely deep. And with every business on the planet is a potential client, the sales team can keep developing relationships for decades to come before the market matures.

BMR Take: Box is an industry powerhouse making inroads into enterprise cloud computing. The company has a strong global footprint, and continues to shepherd trial customers into sometimes lucrative long-term contracts. Revenue has beaten our target 7 out of the last 8 quarters, so we’re expecting big things when the company next reports a few weeks from now. One day, our $30 Target will be in sight. After all, we were last there in June.


Facebook (FB: $167, up 1%)

It seems the dark days and savage $120 lows of 2018 are well behind us now. There is simply too much to get excited about for investors to stay away as the negative political headlines surrounding privacy and broader-based fears of audience erosion recede.

As we laid out in our Earnings Review two weeks ago, last quarter didn’t demonstrate any hint of weakness at all, with $17 billion in revenue moving past our target by a comfortable $600 million and 2.3 billion monthly active users proving that people are not abandoning the platform in vast numbers.

An audience on that scale allows a company to do miraculous things with low-yield monetization strategies. Facebook only squeezes $7.37 per quarter from every user or the equivalent of $0.08 per day. People would probably pay that much simply to have the ads turned off, but it’s more likely that management will find ways to sell enough ads to avoid that option entirely.

It also takes a lot of user churn to depress that number in real terms. Even if Facebook were to hemorrhage 100 million accounts, revenue per user only needs to come up 4% to maintain the status quo. But we expect to see the audience remain stable while revenue ramps up at least 20% a year for the foreseeable future.

Of course last year’s nightmare has had its economic effects when it comes to recruitment and regulatory costs. Headcount is up a staggering 40%, largely due to the need for more fact-checkers and fake news stoppers keeping bad ads away from sensitive users. We no longer expect real profit growth to come back here for another year. But we’re open to surprises like the one Zuckerberg and company gave us in the recent quarter, flipping expectations for a 1% earnings decline into 8% continued growth.

BMR Take: Facebook fans still have a ton to hit the “like” button about: Remember, this is a company that hasn’t even begun to monetize billion-user properties like WhatsApp, Instagram and Facebook Messenger, not to mention more speculative bets like Virtual Reality and branded Facebook devices. Either way, while margins may compress in the short term, revenue has an open runway to keep building. The company will be on surer footing, and the stock will reflect that going forward. Our $220 Target stands.


Amazon (AMZN: $1,588, down 2%)

This hasn’t exactly been our biggest gain of 2019, but it takes a lot of heavy lifting to move one of the biggest stocks on Wall Street 6% in seven weeks. With a market cap of $800 billion at this point, we see every reason for growth as Amazon continues to gobble up the Retail sector. This was a $1 trillion company in September, and the company is bigger and more profitable since then. We’ll get there again. It’s only a matter of time.

For years, the knock on this goliath has long been its lack of ability to generate a lot of profit. Margins run at barely 4% and are unlikely to swell to more normal Technology levels any time soon. That’s all right. This is really a Retail company at its heart, carving out tiny fractions on bulk sales whenever Bezos decides it’s time to pay attention to the bottom line.

Even so, there’s a lot of bulk sales to play with here. Amazon will probably report at least $275 billion in sales this year, still expanding at least 18% a year. Walmart, the biggest Retailer in history, has stalled a little above $500 billion. At this rate, Amazon will close the gap within the next five years, and that’s assuming his big bets on cloud computing, Grocery and streaming media don’t push him over the top faster.

Amazon recently hinted that they are going to compete with FedEx and UPS on shipping. Since the company already delivers consumer products via its Whole Foods network and other physical Retail outlets, the move makes sense. All it needs is an army of drivers, a few more drones and a good routing system to take on what was once a global shipping duopoly. That’s how big this company is: They are so dominant and so innovative in so many different markets that a full-scale assault of this nature is just one more area that the company will attempt to control.

BMR Take: Amazon can turn a massive profit the minute management decides it’s time. Just turn the growth spigot off for a few quarters and let the cash reserves pile up. After all, there’s no dividend and the company doesn’t need to buy back its own stock. But where’s the fun in that, right? Look for more technological innovations and industry disruptions from Amazon in 2019.


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

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