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Last month gave investors the best New Year start in three decades and from the last few days it looks like the rally has plenty of room to continue. While we don’t spend a lot of time obsessing over historical minutia, it’s still refreshing to know that a good January translates into a strong year 80% of the time.

And the first day of February was just enough to keep the rally alive. Our recommendations comfortably climbed another 2.4% in the aggregate despite a few high-profile controversies. (We don’t want to call Amazon’s numbers a “disappointment” because, as we discussed in the Earnings Review, nothing was actively wrong with the outlook. Still, its performance was a drag on our Stocks For Success despite huge moves from Apple and Facebook.)

Healthcare and Aggressive names were the stars, more than making up for the slower performance we generally expect from Real Estate and our High Yield portfolio. A lot of the upside here came from delayed reaction to otherwise good 4Q18 reports earlier in the season along with anticipation building around companies that won’t release their numbers until late February and March. One way or another, it’s clear that the season is shaping up a little stronger than expected, giving stocks wounded last quarter a much-needed shot of reality and relief.

The reality comes from strong corporate performance in the last months of 2018. The relief takes the form of guidance that reveals that executives are cautiously optimistic about their ability to deliver continued growth in the new year, despite interest rates, a partial government shutdown and self-proclaimed experts fretting about a recession ahead. From what Corporate America is telling us, there’s no recession on the immediate horizon, which leaves us plenty of time to recommend new stocks and let existing winners ride.

And if the economy slows to a standstill, the Federal Reserve has signaled that central bankers are paying attention and will pivot their monetary policy moves to prevent an outright stall. Last week’s Fed statement was finally responsive to investors’ concerns. Wall Street applauded the show of patience, especially until we can weigh the impact of the government shutdown and rising trade barriers around the world. For now, interest rates have likely peaked.

With the Fed standing by and corporate earnings tracking more resiliently than many investors expected, we suspect Wall Street was too quick to dump the stocks that have what it takes to keep growing fast. Either way, with the market as a whole now valued under 16X forward earnings, investors can appreciate that both growth targets and last quarter’s deep correction were exaggerated, and that while reality is somewhere in between, conditions remain biased to the upside for those holding long-term positions as well as pondering whether to accumulate world-class stocks at a discount.

There’s always a bull market here at The Bull Market Report! The Big Picture spotlights a few of those world-class stocks on our list where growth targets haven’t softened at all, creating huge bargains even at this point in the recovery. While earnings season is evolving fast, you'll need to subscribe to get our thoughts on those companies. For now, it's a good moment to update you on what’s going on with a few of our favorite stocks: Twilio, Roku and Salesforce.

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Key Market Measures (Friday’s Close)

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BMR Companies and Commentary

The Big Picture: Strength At A Discount

Last week we discussed the way our recommendations here at The Bull Market Report still have plenty of room to keep rallying. We’d like to focus on a few specific names that have remained more vibrant from a fundamental perspective than the stocks’ current levels would suggest under normal circumstances.

The logic here isn’t complicated. Cash flow is the ultimate arbiter of what stocks are worth. If cash is still flowing as fast as it was when these stocks were breaking records, the only thing that’s changed is investor sentiment. And while sentiment comes and goes, the fundamentals always remain.

Granted, the market’s fundamental outlook has taken a hit in the last few months. We now suspect the S&P 500 as a whole will only earn 5% more in 2019 than it did last year. That’s a long way down from the 10% expansion we targeted back in September . . . still positive, but it’s going to take more time before that growth curve can confidently claim last year’s peaks again, much less push beyond.

But if the market as a whole has shifted onto a slower track, several of our stocks are growing as fast as ever. We’ve crunched their businesses from every angle we can find and they remain as robust as they looked last year. Some have made enough progress in the intervening months that the fundamentals are stronger than they were.

The only difference is that the stocks are down because investors lost confidence in the entire market. Once they collect enough evidence that these businesses really are growing as fast as the models imply, the mood will swing back to favor the bulls.

Start at the defensive end of our universe with Bristol-Myers Squibb (BMY: $50, up 2%, all changes are for the week). While the long-term clinical outlook has dimmed over the last year, the immediate fundamental situation has actually improved since September. Back then, we were only looking for 8% growth here in 2019. The latest earnings report gives us the confidence to raise that target to 11%, which is a lot better than what the broad market can provide. Even so, the stock is down close to 30% from its 52-week high.

Johnson & Johnson (JNJ: $134, up 6%) and AstraZeneca (AZN: $37, down 3%) tell a similar story. Cash flow hasn’t appreciably declined since September but the stocks are down 10% from their highs. People who want to buy the dip will ultimately do well here . . . not as well as subscribers who jumped at our initial recommendations, but profit is profit.

Then there’s Technology. Stock after stock has suffered as investors jump to conclusions about whether a little headline drag on the biggest behemoths in the sector will translate into similar weakness for smaller companies. We just don't see that kind of contagion playing out in the real world.

Small Tech was attractive last year because these companies have the world-changing potential that the giants had in their early stages. They’re creating new markets and disrupting old ones. Even if the giants find it hard to sustain their historical growth curves, these little companies are at an entirely different place in their evolution.

Start with Roku (ROKU: $45, up 3%). From every indication, people are watching more streaming TV on the company’s devices than ever. Our sense of Roku revenue has edged up 1% in the last four months. The stock has soared 50% YTD but still has 60% to go before the stock reclaims September levels. Nothing has changed in the company’s cash flow and this shouldn’t translate into a 40% discount on the stock. But it did, thus giving us a buying opportunity.

Our High Tech and Aggressive portfolios are stuffed with stories like that. Square (SQ: $71, down 10%) is on track to report 4% more revenue in 2019 than we considered probable when the stock was testing $100. Here within sight of $70, there’s no fundamental reason the 25% YTD rally can’t continue . . . and by the time we see full value here, odds are extremely high that cash will be coming in even faster. Twitter (TWTR: $33, up 1%) is in almost exactly the same position, only on a slightly slower recovery path now.

Spotify (SPOT: $137, up 2%) hasn’t lost any competitive ground. Our revenue outlook here has cooled a little, effectively because we’re rounding the company’s growth numbers a little more strictly than we did last year. If you believe the difference between 27.7% growth in 2019 (our old target) and 27.4% is worth a 30% haircut on the stock, don’t buy it.

We can go on and on, but you get the idea. Even if the S&P 500 is slowing, we’re overweight the stocks that were moving faster in the first place and in many cases have accelerated. When those stocks drop as far as they have, alert investors know what to do.

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Twilio (TWLO: $113, up 8% -- all prices are for the week)

The year started hot here (up 26%) thanks to the contagious glow from Facebook, which uses Twilio messaging technology in its WhatsApp and Messenger products. It’s going to get even hotter now that the $3 billion acquisition of Sendgrid, a leading mass email platform used by marketers and salespeople, is complete.

By adding Sendgrid functionality to its technological arsenal, Twilio enhances its ability to boost customer engagement for companies and developers alike. The company already reaches audiences wherever they are (SMS, voice, audio, smart speakers like Alexa, messaging apps) and now adds email to the mix.

Let that “Alexa” note digest. Twilio recently recruited Amazon’s former vice president of Consumer Engagement to serve as its Chief Product Officer. If the past is all about relationships with Facebook, the future will open up even more doors within Silicon Valley.

The company’s 3Q18 financials were very strong. Revenue came in up 70% at $169 million and we’re expecting similarly strong growth for 4Q18 as well. That trend is accelerating. Back in 2Q18, Twilio didn’t deliver 60% growth.

BMR Take: We were expecting big things here going into 2019 and so far we haven’t been disappointed. There’s so much more to come from this outstanding company and the Sendgrid acquisition adds a whole new revenue stream for the company to monetize. Look forward to continued customer acquisition and revenue growth for this surging mid-cap Tech player. A year ago the stock was at $25. And this past week we saw new all-time highs set virtually every day. Our $110 Target is now history. We hereby move the Target to $130 and our Sell Price to $95, from $82.

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Saleforce (CRM: $156, up 4%)

It’s becoming clearer every day that this company has taken over the world when it comes to sales and marketing software. Salesforce recently announced 1,500 new jobs in Ireland to be housed in its European hub, “Salesforce Tower.” Elsewhere overseas, rumors are swirling around a $1.5 billion buyout of Israeli software developer ClickSoftware Technologies on the heels of the purchase of Datorama (another Israeli company) back in August.

Back here at home, Salesforce remains red hot, with the stock up a healthy 14% so far this year. And while “Customer Relationship Management” may remain an esoteric category to some investors, this is no niche business at this point. After nearly 15 years as a public company, this is an enterprise that should clear $13 billion in sales this year.

That said, the 4Q18 selloff was brutal here, stripping 25% of the stock’s value in a matter of weeks before investors found the discount too attractive to ignore. Salesforce is now in the midst of a breakout to new highs (it’s $5 away from the $161 all-time high set in September – a year it ago it was $107) and we see continued upside in the constant patter of acquisitions.

BMR Take: Salesforce has been buying small companies that can fill gaps in its cloud-based AI and software development capabilities. If a ClickSoftware deal is approved, we anticipate a nice boost to the stock as yet another solid mid-cap Tech company will be absorbed into the Salesforce juggernaut. As it is, a move back above $160 is statistically likely at this point and beyond that our $170 Target looms.

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Roku (ROKU: $45, up 3%)

The Technology rollercoaster lives on here. Remember, we initially recommended Roku at $35 in May, giving you a chance to hit a home run over the summer before the market took all that profit away last quarter. Now here we are, 50% above the December low and back in the money with a 29% net gain to show for the last eight months.

We still see lots of upside left to recapture. After all, the company recently revealed that 27 million active accounts streamed 7.3 billion hours of video last quarter. Those numbers blew Wall Street away, and the stock went vertical in a matter of days.

As it was, the 3Q18 financials were strong enough to fuel plenty of rebound, with revenue surging 40% year over year to $173 million. Even though the operation still runs at a slight loss, we expect Roku to break even in its next quarterly results two weeks from now. However, the real story here will be on the top line, where continued 40% growth is likely.

After all, with more and more Millennials cutting the cable TV cord, Roku is in position to exploit the move to put streaming video content up on the big living room screen. Serving ads to this highly desirable audience doesn’t hurt. The company boasts a first-mover advantage into the space as well as immense scale and brand-name recognition.

BMR Take: The rollercoaster is on our side now. Our sense of Roku’s underlying business has gotten stronger in the last few months. Everything we see suggests that the audience is growing as fast as ever. Our $83 Target remains in place.

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

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