Cloud Hosting is The Architecture of Cloud Computing Techniques

Cloud Hosting Technique

Cloud Hosting is The Architecture of Cloud Computing Techniques

Cloud Hosting is The Architecture of Cloud Computing Techniques

provides the hosting services in the form of a single virtual machine and is implemented through the use of cloud computing and cloud architecture. It dynamically distributes data and processes across the small servers of the system for processing. The cloud hosting system is divided into many virtual machines. The services offered by a loud hosting service provider are located at its premises and these can be accessed by using client software.

The cloud hosting allows the users to get their applications up and running much faster and enables the quick readjustment of virtual resources to meet the dynamic demands like increased data rate, traffic size and storage requirements. The users can assess the cloud using different client devices like desktops, laptops, tablets and phones. Some of the user devices require real time cloud computing for running their applications, while others can interact with a cloud application via web browsers. Some cloud applications only support specific client software dedicated for these applications. Some legacy applications are also supported through screen sharing technology. The internet giants such as Google and Amazon are using this state of art hosting technology successfully for their servers.

Cloud hosting can be offered in three different modes i.e. infrastructure as a service(IaaS) , platform as a service(PaaS) and software as a service(SaaS). The basic mode IaaS , offers the services in the form of physical or virtual machines ( computers & other processing devices), raw/block storage , firewalls , load balancing mechanism and networks .The IaaS mode services provider supply these resources from a large deployed pool of resources in data centers andthis also include provisioning of local area networks and  IP addresses. The PaaS mode cloud hosting services provider offers a cloud computing platform  that include an operating system, programming execution environment, database and server. The PaaS application software can be developed and run on a cloud platform and does not involve cost and complexity of buying and managing the hardware and software layers. The (SaaS) mode cloud hosting services provider  install and operate application software in the cloud and cloud users access the software from cloud clients and the cloud platform in this case is not managed by the clients. Clouds hosting can be physically deployed in the form of public cloud, personal cloud, hybrid cloud and community cloud.

Cloud hosting has greatly reduced the website operational cost. In older versions of servers, the clients used to pay for a specific bandwidth irrespective of the traffic on that server. The cloud hosting has tackled this problem through the skillful use of variable costing method, where the cost will increase with the traffic and as the load/traffic reduces the cost will be automatically decreases.

The cloud hosting has a great advantage in terms of its security, as it operates in isolated environment and only the host has the access to it. One of the biggest advantages of cloud hosting is that the cloud platform manageability, maintenance and upgrades can be easily and remotely accomplished, as it does not require any physical/hardware maintenance repair and replacement.

I Know A REIT That Screens 'Dirt Cheap' And Kimco Is Its Name-O

In our constant quest for value, we regularly screen dozens of REITs weekly in order to find a diamond in the rough. While it’s impossible to eliminate all investment risk, we look to minimize it by selecting securities with a significant margin of safety.

As Warren Buffett told an audience at Columbia Business School in 1984 (for the 50th anniversary commemoration of the original Security Analysis):

You do not cut it close. That is what Ben Graham meant by having a margin of safety. You don’t try to buy businesses worth $83 million for $80 million. You leave yourself an enormous margin. When you build a bridge, you insist it can carry 30,000 pounds, but you only drive 10,000-pund tricks across it. And that same principle works in investing.”

The margin of safety is the essence of value investing because it’s the metric by which hazardous speculations are segregated from bona fide investment opportunities. As Benjamin Graham wrote in The Intelligent Investor, the value investor’s purpose is to capitalize upon “a favorable difference between price on the one hand and indicated or appraised value on the other.”

Surveying our list of filtered investment opportunities, we have identified a REIT that is worthy of ownership. As I explained in a recent article,

Once a moat is created, it must grow. The weaker firms are usually losing market share, and unable to raise prices to offset their costs, or being undercut by competitors…companies that are able to withstand the relentless onslaught of competition for long stretches are the wealth-compounding machines that we want to find and own.”

Identifying a moat-worthy company involves careful consideration of the company’s industry, its current competitive position within that industry, and the “economic moat” around the company; that is, a sustainable competitive advantage that helps preserve long-term pricing power and profitability. Warren Buffett (Fortune 1999) summed it up as follows,

The key to investing is …determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”

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The Case For Kimco

Kimco Realty (KIM) is the owner and operator of the largest publicly traded portfolio of neighborhood and community shopping centers in North America. The company was founded in 1958 and listed shares in 1991. In 2006, Kimco was added to the S&P 500 Index.

As of Q3-17, KIM’s well-balanced portfolio consists of 507 U.S. shopping centers comprising 84 million square feet of leasable space across 35 states and Puerto Rico. KIM focuses on major U.S. metropolitan markets:

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KIM has a very diverse revenue model with over 8,800 leases with 4,100 tenants. The company has well-staggered lease maturities with limited rollover in any given year; averages ~8% of GLA over next 10 years. 4 of KIM’s top 5 tenants are Moody’s investment grade and only 14 tenants have ABR exposure greater than 1.09%.

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Reviewing KIM’s top 10 tenant list, I consider Kohl’s (NYSE:KSS) and Bed Bath & Beyond (NASDAQ:BBBY) the highest risk. However, Kohl’s has low leverage and I like the recent announcement for “accepting returns at certain U.S. locations.” As Richard Schepp, Kohl’s chief administrative officer, explains,

This is a great example of how Kohl’s and Amazon are leveraging each other’s strengths – the power of Kohl’s store portfolio and omnichannel capabilities combined with the power of Amazon’s reach and loyal customer base.”

Also, Bed Bath & Beyond is still trying to find its groove as “revenue and profit growth have been on a downward trajectory for some time.” Bed Bath & Beyond represents just 1.9% of Kimco’s ABR (average base rent) and Kimco’s diversified business model provides powerful risk management: with over 8,700 individual leases, a significant margin of safety advantage.

Also, community centers are the most recession-resistant shopping centers and KIM’s “open-air” focus makes the case that the company will continue to benefit from growth. As illustrated below, only 5% of KIM’s portfolio is internet vulnerable:

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Quality locations are where the retailers will always want to be, and the quality of Kimco’s portfolio continues to improve. Since 2010, the company has sold over $6 billion of real estate, recycling the proceeds into higher quality assets and reducing the size of the portfolio from over 900 to 508 assets.

The result is a higher quality portfolio concentrated in the best markets in the US. By focusing on high barrier to entry markets and executing on the company’s unique customer strategy, Kimco has become more efficient and able to drive greater value-creation.

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Kimco remains on track to sell five non-core assets for $62 million, at a mid-7% cap rate. This brings the company’s sales total for the first nine months of 2017 to 21 shopping centers and three land parcels for a gross price of $331 million. Kimco has another 19 assets, either under contract or with price agreements, for a total of approximately $185 million that should have closes by year-end.

Balance Sheet Improvements

Kimco has been very active on the balance sheet front: The company issued $850 million in unsecured bonds, $500 million at 3.3% and $350 million at 4.45% with a weighted average life of 16.7 years. Also, Kimco completed the $206 million refinancing of the mortgage at the Tustin property with a new 13-year mortgage at a reduced rate of 4.15% versus 6.9% previously and issued $225 million of perpetual preferred stock.

Proceeds from the bond and preferred offerings were used to redeem $225 million of 6% preferred, $211 million of 4.3% bonds due in 2018 and to repay the outstanding balance on the revolving credit facility.

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As a result of these transactions, Kimco’s weighted average debt maturity now stands at 10.8 years, one of the longest in the REIT industry. The company has over $2 billion of immediate liquidity with less than $100 million of debt maturing in 2018.

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As I explained in a recent article, “it appears that Kimco could become an ‘A’ rated REIT during the next year or two. KIM has similar ratings with Moody’s and Fitch.”

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I only mention the likely credit upgrade because I want to compare KIM with the peers when I examine the valuation metrics at the end of this article. It’s important to recognize the quality of KIM’s dividend power, and the potential for multiple expansion.

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Note: I will compare Regency Centers (REG) and Federal Realty (FRT) to Kimco at the end of the article. It’s important to understand the comparison as Kimco is striving to move into the upper echelon (A-rated) by focusing on its balance sheet.

The Latest Earnings Results

The strength of Kimco’s real estate portfolio continues to shine as the company had another strong quarter led by our leasing activity that produced positive double-digit leasing spreads and an increased occupancy level. As illustrated below, occupancy is pushing toward all-time high and continues to validate the quality of the portfolio.

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Leasing is the most direct and important creator of value, whether it comes from filling vacancies, renewing existing tenants, preleasing redevelopment and development projects or realizing mark-to-market opportunities.

One example of this is Kimco’s ability to transform and reposition specific assets. Specifically, Kimco signed new leases at strong leasing spreads that included the recapture of three former Kmart boxes in Q3-17.

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Redevelopment and development continue to be a part of Kimco’s long-term growth strategy. In Q3-17 Kimco achieved several critical milestones that will pave the way for future success.

It’s important to keep in mind that Kimco has over $360 million invested in development projects which are not earning today, thus impacting FFO growth in the short-term. These development projects will begin slowing in stages in the latter half of 2018 and into 2019.

Kimco’s operating portfolio continues to deliver positive results. Same-site NOI growth was 3.1% for Q3-17 and includes negative 20 basis points impact from redevelopments.

For the nine months, same-site NOI growth was 1.7% with no incremental contribution from redevelopments, as the company started a number of new redevelopment projects that have been completed. The Boulevard redevelopment project is an example of this:

For Q3-17, Kimco reported NAREIT-defined FFO per diluted share of $0.39 per share, which includes $0.03 per share of foreign currency gain on the substantial liquidation of the Canadian investments. Also included is a $0.02 per share charge attributable to the preferred stock redemption, prepayment of bonds, and some land impairments.

NAREIT-defined FFO per share for the third quarter in 2016 was $0.18 per diluted share and included transactional expenses totaling $0.20 per share from the early repayment of debt and the deferred tax valuation resulting from the merger of the taxable REIT subsidiary into the REIT.

FFO as adjusted (which excludes transactional increment expense and non-operating impairments) was $161.3 million with $0.38 per share, the same per share level as Q3-16.

Based on Kimco’s nine-month results (of NAREIT-defined FFO per diluted share) of $1.17 and FFO as adjusted per diluted share of $1.13, Kimco has narrowed the guidance range for FFO to $1.55 to $1.56 per diluted share from the previous range of $1.53 to $1.57 per share. Similarly, Kimco narrowed the FFO as adjusted per diluted share guidance range to $1.51 to $1.52 from the previous range of $1.50 to $1.54.

Also, Kimco’s Board approved an increase in the common stock quarterly cash dividend to $0.28 per share from $0.27, an increase of 3.7%. The increased dividend level represents a conservative and safe dividend payout ratio in the low 70s.

I Know A REIT That Screens Dirt Cheap And Kimco Is Its Name-O

Whenever the financial markets fail to fully incorporate fundamental values into securities prices, an investor’s margin of safety is high, hence the title to my article today:

I Know A REIT That Screens Dirt Cheap And Kimco Is Its Name-O

Let’s define “dirt cheap” by viewing the chart below:

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We have not seen $16.55 in over five years. In fact, we have not seen $16.55 since 2010…

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So why has Kimco underperformed the peers? (Note: REG and FRT are shaded in light purple):

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Let’s compare Kimco’s dividend yield with the peer group (FRT and REG shaded in purple):

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Now let’s compare the P/FFO multiple (FRT and REG are shaded in purple):

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Wow, or shall I say…

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Kimco is not just cheap, this puppy is “dirt cheap.” Let’s take a look at consensus FFO/share growth (data: F.A.S.T. Graphs)…

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We can now see that Kimco doesn’t rank high in terms of FFO/share growth (REG averaging 6.9% and FRT averaging 5.3%, compared to Kimco’s 1.8%). However, as illustrated below, Kimco is moving out of its flat-line growth and the substantial development pipeline should kick in this year and next. Also, according to the National Retail Federation, “Americans spent more than expected this holiday season, fueling the strongest growth in holiday retail sales since the end of the Great Recession.”

Holiday sales rose to $691.9 billion in November and December, marking a 5.5% increase from the year before, according to the National Retail Federation. The lobbying group had forecast holiday spending growth of 3.6% to 4%.

Many retailers say they saw a bump in sales during the important holiday season. Kohl’s reported a 6.9% increase in holiday sales at stores open at least one year, while sales rose 3.4% at both Target (TGT) and J.C. Penney (JCP). Tax Reform should certainly serve as a catalyst too as many retailers are in the highest tax brackets and savings will be significant.

Kimco is well-positioned to benefit and the strong locations serve as the primary moat giving the company an edge. Also, economies of scale provide another moat characteristic that allows Kimco added diversification. Most importantly, and not recognized by the market, is Kimco’s disciplined balance sheet. Since the end of the last recession (Kimco did cut its dividend in 2008), Kimco has done an excellent job at managing its balance sheet and this provides the company with excellent financial flexibility to maneuver the choppy retail storms.

Arguably, Kimco does not deserve the same multiple as REG or FRT, but there is certainly room to grow the multiple from 11x to 15x. I am maintaining a Strong Buy, and I Know A REIT That Screens Dirt Cheap And Kimco Is Its Name-O.

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More: Getting Under The Hood Of The Newest Kimco Preferred


Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).

Source: F.A.S.T. Graphs and KIM Investor Presentation.


I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Twitter may notify users exposed to Russian propaganda during 2016 election

WASHINGTON (Reuters) – Twitter may notify users whether they were exposed to content generated by a suspected Russian propaganda service, a company executive told U.S. lawmakers on Wednesday.

The social media company is “working to identify and inform individually” its users who saw tweets during the 2016 U.S. presidential election produced by accounts tied to the Kremlin-linked Internet Research Army, Carlos Monje, Twitter’s director of public policy, told the U.S. Senate Commerce, Science and Transportation Committee.

A Twitter spokeswoman did not immediately respond to a request for comment about plans to notify its users.

Facebook Inc in December created a portal where its users could learn whether they had liked or followed accounts created by the Internet Research Agency.

Both companies and Alphabet’s YouTube appeared before the Senate committee on Wednesday to answer lawmaker questions about how their efforts to combat the use of their platforms by violent extremists, such as the Islamic State.

But the hearing often turned its focus to questions of Russian propaganda, a vexing issue for internet firms who spent most of the past year responding to a backlash that they did too little to deter Russians from using their services to anonymously spread divisive messages among Americans in the run-up to the 2016 U.S. elections.

U.S. intelligence agencies concluded Russia sought to interfere in the election through a variety of cyber-enabled means to sow political discord and help President Donald Trump win. Russia has repeatedly denied the allegations.

The three social media companies faced a wide array of questions related to how they police different varieties of content on their services, including extremist recruitment, gun sales, automated spam accounts, intentionally fake news stories and Russian propaganda.

Monje said Twitter had improved its ability to detect and remove “maliciously automated” accounts, and now challenged up to 4 million per week – up from 2 million per week last year.

Facebook’s head of global policy, Monika Bickert, said the company was deploying a mix of technology and human review to “disrupt false news and help (users) connect with authentic news.”

Most attempts to spread disinformation on Facebook were financially motivated, Bickert said.

The companies repeatedly touted increasing success in using algorithms and artificial intelligence to catch content not suitable for their services.

Juniper Downs, YouTube’s director of public policy, said algorithms quickly catch and remove 98 percent of videos flagged for extremism. But the company still deploys some 10,000 human reviewers to monitor videos, Downs said.

Reporting by Dustin Volz; Editing by Nick Zieminski

The Project Veritas Twitter Videos Show the Conservative Backlash Against Moderation

Conservative activist James O’Keefe has returned. In a series of illicitly filmed videos with current and former Twitter employees, the right-wing provocateur claims to have exposed partisan bias at the social network. The offensive may have been inevitable. While O’Keefe’s Project Veritas has mostly focused on the media and liberal institutions, recent moves by platforms like Twitter, Facebook, and YouTube to more aggressively moderate user content have left them exposed them to this exact sort of attack.

The Project Veritas videos, filmed without apparent awareness or consent, show a range of selectively edited insights from inside Twitter. One engineer for the company says that Twitter would theoretically comply with a Department of Justice investigation into Trump’s Twitter account. Another video shows a series of current and former employees explaining “shadowbans,” a practice by which Twitter will sometimes make it more difficult to find and view a user’s tweets, rather than banning that person outright. And a third, released Monday, explains how the company tracks user behavior and screens direct messages for prohibited content, like porn spammers and unsolicited dick pics.

Many of the employees filmed used sensational language, but they also thought they were talking candidly to strangers at a bar. It’s not exactly unusual to embellish your job—and to elide its nuances—to a potential new friend or romantic interest.

And in any case, none of these gotcha moments amount to anything revelatory. Tech companies comply with valid legal investigations all the time; if anything, Twitter has historically taken a relatively hardline stance against federal intervention. Shadowbanning is such a closely guarded secret that Twitter details the practice in its easily accessible online Help Center. Tracking is how Twitter—and every free platform online—sells ads. And Twitter employees don’t read every single direct message sent on the platform—an insurmountable task—but the company does screen instances in which abusive behavior is reported.

These videos don’t prove that Twitter has a partisan bias against its far-right conservative users. (Indeed, they’re some of its most prolific users.) They do show, though, that the right-wing backlash against tech giants has reached a new height. With every new policy intended to curb abuse, Twitter, YouTube, Facebook, and other platforms invite rancor. The new rules have been necessary to fight an increasingly toxic atmosphere online. But Project Veritas sees those steps, and the ban of high-profile far-right users—over clear, apolitical terms of service violations—as an attempt not to improve discourse online, but to quash the free exchange of ideas.

The Mounting Backlash

O’Keefe’s videos quickly became the top story on sites like Breitbart over the past week, and Fox News host Sean Hannity discussed them on national television. The videos also put Twitter on the defensive, despite uncovering a whole lot of nothing.

“The individuals depicted in this video were speaking in a personal capacity and do not represent or speak for Twitter,” a spokesperson said in a statement. “We deplore the deceptive and underhanded tactics by which this footage was obtained and selectively edited to fit a predetermined narrative.”

But to a large segment of right-wing internet users, the videos’ substance doesn’t matter. The way they were filmed matters even less. The footage validated a deep-seated suspicion that social media companies treat conservatives differently.

In one sense, critics are right to say that Twitter has treated its users differently lately. In December, the social media platform rolled out a series of aggressive policies meant to curb abuse and the glorification of violence. When the new rules took effect, a number of far-right accounts were suspended, including the anti-semitic Traditionalist Worker Party and the American Nazi Party.

Removing hate groups from Twitter has been a net good. But deciding whether a user violated these new policies sometimes involves making a subjective decision. By giving up what Twitter saw as absolute neutrality—former executive Tommy Wang famously once described the company as “the free speech wing of the free speech party”—Twitter and other platforms have opened the door to specious claims of bias.

It’s not just O’Keefe. The first Project Veritas Twitter video debuted just two days after “alt-right” troll Chuck Johnson filed a lawsuit against the company. In 2015, Twitter permanently banned Johnson after he tweeted that he wanted to “take out” civil rights activist DeRay McKesson. While Johnson likely won’t win his case, it’s significant that he chose to sue now, and not three years ago when Twitter first suspended his account. The narrative has shifted in his favor.

The so-called alt-right also isn’t only mad because some of their most prominent voices—including Johnson and Milo Yiannopoulos—have been banned. Even those that remain on the platform often allege that Twitter suppresses their views through other means.

After last year’s presidential election, for example, some users said when they tried to respond to Donald Trump’s tweets, their replies disappeared. It turned out that Twitter likely couldn’t handle the volume of replies that Trump generated, and thus the threads were “breaking” by accident.

The incident highlighted how Twitter and companies like it often don’t—or can’t—explain exactly how their services work, leaving users to craft their own conspiracy theories. It doesn’t help, either, that every major tech platform is headquartered in notoriously liberal Silicon Valley, leaving right-wing users to suspect that few tech employees care much about advocating for their viewpoint.

Take also another incident from last summer, when Google fired James Damore, a former software engineer who penned a 10-page memo advocating against Google’s diversity hiring programs. Damore argued in part that biological differences between men and women accounted for gender disparities in fields like software engineering. He was let go for “perpetuating gender stereotypes.”

Right-wing news sources held up Damore’s firing as evidence that Silicon Valley doesn’t welcome conservatives. Damore appeared on Fox News, and Breitbart started a “Rebels of Google” series, where it interviewed former and current employees about partisan bias. Far-right groups even planned a “March on Google,” that never materialized. Damore is now suing Google, alleging that the company is systematically biased against caucasians, males, and conservatives.

Related Stories

Damore’s firing wasn’t the smoking gun that right-wing media made it out to be. For one, the engineer was only one employee, and others have written memos alleging that the company doesn’t do enough to promote diversity, rather than too much. Damore also said that Google gave special privilege to women, but the company is currently wrapped up in a dispute with the Department of Labor over “systematic compensation disparities against women pretty much across the entire workforce.”

Doubling Down

As pressure against these platforms continues to mount, the most instructive case for Twitter might be the one that has the most merit. A 2016 Gizmodo investigation found that Facebook’s “news curators,” who were in charge of managing Facebook’s Trending Topics bar, had systematically suppressed stories from conservative outlets. The story immediately caused a massive backlash from right-wing users.

Instead of making an earnest, if flawed, commitment to filtering out untrusted sources, Facebook instead fired its entire Trending team, and let an algorithm take over. The trending bar soon filled with fake news and conspiracy theories. Facebook shied away from making its platform a better place in the name of neutrality, and everyone suffered as a result.

So far, Twitter has done the opposite. In the face of persistent backlash from the right, the company has doubled down on its intention to curb abuse and threats of violence. It hasn’t made a public show of firing moderators, or claimed it wants to be entirely neutral. Good. To improve their platforms, companies ultimately have to make value judgements that lots of people won’t like. The question now is whether Twitter’s convictions can survive the backlash.

Social Media and Speech

-Should Facebook and Twitter be regulated under the First Amendment?

-How WeChat Spreads Rumors, Reaffirms Bias, and Helped Elect Trump

Science Says These Factors Determine Good Leadership

For a company to evolve and grow, entrepreneurs must develop into good leaders.

But what are the factors that determine good leadership? Do good leaders share common traits? Are there secrets to becoming a great leader?  What is the impact of gender in regards to leadership? 

The development of sound leaders is a complicated process that is both dependent on the individual, his or her team, and the industry in which they work. But working to become a good leader is essential, especially in today’s business environment, where studies have shown that over 80% of people don’t trust their boss. Eventually, employees leave jobs where they don’t respect their boss. Good leadership is imperative to employee retention and creating long-term organizational success.

There are a variety of skills that provide a solid foundation for good leadership. However, science says that some people are pre-disposed to be better leaders than others.

Inherent traits play a role in leadership potential.

Scientific studies reveal that good leaders are ambitious, curious, and sociable. By having these characteristics you have a better chance to grow within your discipline or company and become a leader. Another critical aspect of leadership is integrity. By having integrity, you can build trusting, supportive teams, with positive work cultures where people feel valued and supported. While a high IQ does have an impact on leadership potential, the correlation is extremely small, less than 5%, when compared to these broader positive traits.   

Are some people born leaders?

Personality traits and intelligence levels are impacted by genetics, which means some people are born with stronger pre-disposition to take on roles in leadership. In fact, estimates suggest that 30-60% of leadership is heritable. However, if you don’t naturally have the traits listed above – sociability, curiosity, ambition, and integrity – it doesn’t mean you won’t become a leader. Through training and coaching, it’s possible to develop the competencies necessary to stand at the helm of a project or company.

Does gender play a role in leadership?

From a leadership potential perspective, gender has little impact. In fact, data has shown that women can be extremely successful as leaders. Over an eight-year study of publicly traded companies, it was discovered that organizations with female CEO’s or female Director’s of Boards produced a better annual return when compared to male counterparts. We don’t have fewer women leaders because of a lack of female leadership potential or a propensity for business. In truth, the number of leaders is currently skewed in favor of males because of social factors such as gender biases, lack of fairness in hiring opportunities, and a history of male dominance in business.

Being in a position of leadership may not feel comfortable for everyone, and that’s okay. As individuals, we engage with the world in different ways, and we have innate strengths that should be utilized to our advantage. Specific traits may lead to a higher propensity toward taking on leadership roles, while other factors such as gender play a much smaller role.

But let me be clear. If you want to become a leader, don’t let scientific studies, your family, or any article convince you that goal is unattainable. You can learn, grow, and evolve, becoming the leader you want to be.


2 Energy Stocks Set To Rally This Week

Last Friday, I alerted investors that I was buying $50K of Southwestern Energy Company (NYSE:SWN) at $5.42. Southwestern has been on my radar screen for a few weeks now, looking for the right entry point to put capital to work. My other pick is Chesapeake Energy (CHK), which is up 20% since I recommended it in a December 13th article titled Buy The Shakeout.

Super majors in rally mode

While I love the big majors like BP (BP) and Royal Dutch Shell (NYSE:RDS.A), they both have been in rally mode since August. BP is up over 30% since I pounded the table to buy under $34 in an article you can view here.

I still love the BP story, but the stock will likely consolidate some gains and may trade flat to down near term as investors digest what should be a fantastic earnings report. On a technical level, it looks a little stretched, but I love the BP story with its 7 new major projects that came online in 2017.

Why do I share the article on buying oil stocks in capitulation? Because I want investors to see what my views were on particular stocks at crucial buy points and where they currently trade so they can make their own decisions on whether to give credence to anything I have to say.

I see the oil rally continuing on global strength and high demand for the coming year. WTI is in a new trading range in the $60s with crude breaking out to late December 2014 levels. If WTI hits $70 in the coming weeks, then oil and gas stocks will continue to rocket higher.

Investors that sold nat gas last week in the $2.70 level are regretting that decision as nat gas rallied nearly 20% in a few days to close the week at $3.20.

Southwestern Energy is a Bargain at this level

SWN is an energy company engaged in natural gas and oil exploration, development, and production. The Company operates through two segments: Exploration and Production (E&P) and Midstream Services.

Its operations in northeast Pennsylvania are primarily focused on the unconventional natural gas reservoir known as the Marcellus Shale. Through its affiliated midstream subsidiaries, it is engaged in natural gas gathering activities in Arkansas and Louisiana.

With a forecasted PE of 7.4, SWN is undervalued, in my opinion. The company has nearly $1B cash and a revolving credit line of $800M, giving the company plenty of financial flexibility for 2018 and beyond.

Last year’s losers, this year’s winners?

Southwestern Energy and Chesapeake were both horrible performers in 2017, with SWN down 44% over the last year. Chesapeake had similar dismal performance, down 48% last year. However, both stocks have rallied over the last month with CHK up 21% and SWN up 7%.

I want to show these graphs for comparison as I believe that Southwestern is poised to rally 10% to 40% over the coming weeks and months.

S: Schwab

Here is the same clip from CHK.

Source: Schwab

One thing I want to point out to interested investors is this: One week ago, the CHK clip was nearly identical for SWN with Chesapeake down 48% yoy. The shakeout in Southwestern Energy was just that; a shakeout, I believe that anyone buying at this level will participate in a strong reversion trade that will take the stock back to the $7 level in the next 90 days.

This chart above compares nat gas with CHK and SWN. One can see the divergence with CHK up 12% nat gas up 9% and SWN -2%. There are times in the market when a stock makes that final shakeout coming off a multi-year low that screams BUY. In my opinion, Mr market presented this opportunity in Southwestern Energy last Friday when the Dow was up 220 points.

The bottom is in for SWN

Here is another technical chart showing the multi-year bottom that I now believe is firmly in place. Here is a 3-year chart for your viewing.

It’s easy to see why investors would be scared away and disgusted with Southwestern’s stock performance over the last three years. One can see the drop in late 2015 and 2016, followed by a sharp rally back to $16 and a prolonged sell-off that wiped out anyone long the stock in 2017.

The past is history, the future is a mystery, and the present is a gift, which is why they call it the present. In my view, the time to buy SWN is NOW!

The time to buy Chesapeake was last week at $3.92, or December 15th at 3.51. The stock is now in breakout mode after several false starts with another 20% rally in the cards near term.

Nat gas broke out last week with a Friday close of $3.20 up from $2.76. Southwestern did not participate in the rally as option expiration Friday took January 12 $5.50 call options to ZERO.

Positive catalyst to move stock back to $7

Southwestern is actually making a positive cash flow while Chesapeake is still striving to be cash flow positive. I am long both stocks but have doubled up on SWN as I feel it is in a better position with $1B in cash as of the latest earnings report. I encourage investors to click here for the investor conference to gain more insight into company operations.

The company is doing very well in the Appalachia region with resource potential of 45 Tcfe over 4,200 locations.

Here is another clip from the November investor conference showing great improvement in EBITDA which I expect to continue for the foreseeable future.

By clicking on the chart above, investors can see that the turn in profits and revenues is in the works. This is the time, in my opinion, to steal shares of SWN. One can see the revenues are up $642M from $1.752B to $2.394B. Earnings are growing at a strong rate with adjusted EBITDA up nearly 100% to $902M from $407M in the year-ago period.

Earnings are moving in the right direction, why the disconnect in share price?

The disconnect is just that, many times the market will wait while a company is making the turn back to positive earnings. A stock will make a good move up on positive earnings results, sucking in investor dollars only to sell off; testing the mental will of those weak-handed players long the stock.

One more 6-month chart to help you understand why I believe this is the ultimate buy point in SWN.

Here is the story told through the charts of behavioral finance. It is clear to see this triple-bottom that has occurred over the last six months. Remember, the bottoming process takes time. Multi-year bottoms like this are excruciating for shareholders, the market rallies 100s or thousands of points while the stock you are stuck in goes nowhere.

In this case, the stock bottomed at $4.90 in late October, then came a pretty good earnings call, which took the stock to the mid $6.70 level where it pierced the 186 and 200 DMA. Investors then experienced tax loss selling that took the stock back to the low $5s where it traded for 5 days before rallying to $6. Last week’s little capitulation to $5.37 was in my strong opinion, the shakeout before breakout.


Southwestern Energy and Chesapeake Energy offer a fantastic entry point for a substantial rally. Higher oil and nat gas prices should bode very well for both companies bottom line. Southwestern Energy has the better entry point right now, Chesapeake had the best entry point a few weeks back at $3.52.

Both companies are greatly improving profit margins, and it’s only a matter of time before the market takes notice. I believe the bottom is in for both of these beaten down stocks, and the past is not the future.

I see a strong 25% to 50% rally coming in these two 2nd tier stocks that have under-performed the market over the last 12 months.

I continue to like BP and Royal Dutch Shell. They have already rallied 30% and are a hold, in my view. I am a buyer of BP on weakness or a violent sell-off in the markets.

As always do your own research and always have an exit strategy in place before making any trade.

Disclosure: I am/we are long SWN, GE, CHK, LYG, BP, HABT, MDXG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Lesson Learned: Don't Short A Blue Chip REIT

There seems to be more articles on Seeking Alpha in which authors recommend shorting Blue Chip REITs. A few days ago there was a short thesis on Tanger Factory Outlet (SKT) and the author explained,

“I have a hard time convincing myself that the good results will continue into the future. I personally am not comfortable with the sales per square foot metrics at these properties… the current stellar portfolio performance may possibly suddenly see itself deteriorate in the next 5 years without warning.”

I have already provided my counter to that article (HERE), and most of my followers know that I’m not a market timer who picks tops or bottoms.

Instead, I am a value investor and I have found that it’s simply better to be in the market invested in stocks that offer the highest potential returns than play the timing game.

Many of you know that I’m generally a buy-and-hold investor and that means that I like to invest in REITs that I can own for the long haul. It’s rare that I bet against securities that will fall in price… that’s like gambling that my plants will die. I prefer to plant my seeds firmly in the ground and wait for my crops to grow.

Occasionally, I run across a few plants (stocks) that seem to be deteriorating and, as a result, I seek to avoid the companies all together. I’m not a proponent of shorting REITs, that’s just RISKY!

Photo Credit

Why Short a REIT?

I find it amazing that some of the wealthiest REIT investors – the hedge funds – claim to have a vast knowledge and understanding as to the nature of their complex strategies, yet the funds’ overall performance often turns into Fool’s Gold.

We all know that hedge funds by nature are opportunistic as they are designed to pool people’s money to invest in a diverse range of assets. Because hedge funds are lightly regulated (and are not sold to retail investors), they typically buy riskier positions and they often employ the use of short selling and leverage.

Although it is difficult to evaluate hedge fund performance compared with other investments (because the risk/return characteristics are unique), I remain baffled as to why so many hedge fund managers cross into my sweet spot – REITs – trying to short a particular stock that is anything but distressed or even showing signs of weakness.

You can see why the $12 billion hedge fund Pershing Square took advantage of the falling value in General Growth Properties (NYSE:GGP) back in 2009. That was a wise bet for William Ackman (who runs Pershing Square) who has a history of investing in distressed real estate. But history has also shown that there is little opportunity for the short sellers who pursue high-quality blue chips.

For example, in 2009, Ackman waged a battle against Realty Income (O) on the thesis that the “monthly dividend company” had poor credit quality. Ackman argued that Realty Income was suffering from mispriced risk since the REIT was paying a dividend of around 7.5% while the private market cap rate values were closer to 10.5% – a 40% premium. Ackman was suggesting that Realty Income’s fundamentals could not support the dividend and that a cut was imminent. Boy was he wrong!

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Think about it like this, the outcome of a short sale is basically the opposite of a regular buy transaction, but the mechanics behind the short sale result in extremely volatile risks.

In fact, it’s somewhat like the law of gravity as the law of investing is inflation (instead of gravity) and that means that betting against the upward momentum is inherently risky. That means that when you bet against the momentum and you keep a short position for a long period of time, your odds get worse.

Also, when you short sell, you don’t enjoy the same infinite returns you get as a long buyer would. A short sale loses when the stock price rises and a stock is (theoretically, at least) not limited in how high it can go.

In other words, you can lose more than you initially invest, but the best you can earn is a 100% gain if a company goes out of business and the stock loses its entire value.

Finally, and the most concerning risk is leverage or margin trading. When short selling, you open a margin account, which allows you to borrow money from the brokerage firm using your investment as security. Just as when you go long on margin, it’s easy for losses to get out of hand because you must meet the minimum maintenance requirement of 25%. If your account slips below this, you’ll be subject to a margin call, and you’ll be forced to put in more cash or liquidate your position.

For all of these reasons, I’m not willing to risk hard earning capital to short a REIT. Plain and simple, it’s just way too risky and I believe that by patiently taking advantage of the margin of safety, my portfolio will hold more winners than losers.

Regardless of my risk tolerance level, the short sellers haven’t stopped betting against REITs and when that feeding frenzy becomes a catalyst, the “squeeze” ensues (as more and more of the short investors buy shares to cover their positions, share prices skyrocket).

This Blue Chip Bet Paid Off Handsomely

In May 2013, Highfields Capital decided to short shares of Digital Realty (DLR) based on the premise that shares were too expensive and should be trading for around $20.00 per share. Jonathon Jacobson stated (at the 18th Ira Sohn Investment Conference last week) that “pricing is going lower, competition is increasing, and the company (Digital) is tapping into capital markets as aggressively as they can.”

At the time, Digital was trading at $65.50 per share with a total capitalization of around $14 billion.

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Highfields claimed at the time that Digital’s fundamentals were deteriorating and that the REIT was a commodity business with no barriers-to-entry. Simply put, Highfields was speculating that the stock would fall, without any true catalyst supporting the short, other than manipulating prices for personal gain.

Simply said, Highfields is shorting Digital because they think they know something others don’t know. They are plain and simple: speculators, obsessed with dangerously manipulating prices and driving down prices for their own personal gain. In an article, I offered my “back up the truck” commentary,

“ …it’s time to jump on this cloud. Digital has a most attractive valuation of 13.6x and I consider the fundamentals sound. Driven by growing world-wide demand and a very high-quality tenant base, Digital has evolved into a best-in-class global data center platform. Digital’s “first mover advantage” has allowed the REIT to build a commanding barrier-to-entry model in which its mere scale provides access to capital and strong expertise in the global cloud supply chain.”

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Over the years, I have continued accumulating shares in Digital Realty as this Blue Chip has been one of the best picks in my Durable Income Portfolio. As evidenced below, Digital has returned an average of 16% annually since I began purchasing shares in May 2013.

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The “D” in DAVOS

Last week I provided a summary of my All-American DAVOS portfolio that consists of Digital Realty, American Tower (AMT), Ventas, Inc. (VTR), Realty Income, and Simon Property (SPG). These 5 REITs returned 9.2% since December 31, 2016, and Digital returned over 23%.

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In Q2-17, Digital announced that it was merging with DuPont Fabros in a transaction consistent with Digital’s strategy of offering a comprehensive set of data center solution from single-cabinet colocation and interconnection, all the way up to multi-megawatt deployments.

At the far end of the spectrum, this combination expands Digital’s hyperscale product offering and enhances the company’s ability to meet the rapidly growing needs of the leading cloud service providers. The DFT merger is also consistent with Digital’s stated investment criteria and mission statement:

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The DuPont transaction expanded Digital’s presence in strategic U.S. data center metros and the two portfolios are highly complementary. The transaction was expected to be roughly 2% accretive to core FFO per share of 2018 and roughly 4% accretive to 2018 AFFO per share. The combination also enhanced the overall strength of the balance sheet. DuPont Fabros portfolio consists of high-quality purpose-built data centers, as you can see below:

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The merger also bolstered Digital’s presence and expanding footprint in its product offering in three top tier metro areas, while DuPont realized significant benefits of diversification from the combination with Digital’s existing footprint in 145 properties across 33 global metropolitan areas.

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Digital closed on the acquisition of DuPont during the third quarter and the integration is well underway… but the blue chip REIT is not slowing down…

In October, Digital announced a 50/50 joint venture with Mitsubishi Corporation to enhance its ability to provide data center solutions in Japan. Digital is contributing a recently completed project in Osaka and Mitsubishi is contributing two existing data centers in Tokyo. Although the venture is non-exclusive, the expectation is that this will be both partners primary data center investment vehicle in Japan.

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According to Digital’s CEO, Bill Stein, “Japan is a highly strategic market (with) tremendous opportunity for growth over the next several years. This joint venture establishes Digital’s presence in Tokyo, which has been a longtime target market.”

In addition, Digital expects this joint venture will significantly enhance the company’s ability to serve its customers data center needs in Japan. In particular, Digital expects that Mitsubishi’s global brand recognition and local enterprise expertise will meaningfully improve the ability to penetrate local demand.

Also, in the US, Digital entered into an agreement to acquire a data center in Chicago from a private REIT for $315 million. This value add-play offers a healthy going in yield along with shell capacity that gives Digital an opportunity to boost the unleveraged return into the high single digits. This investment represents an expansion in Digital’s core market and is occupied by existing customers with whom Digital has been independently working to meet their expansion requirements.

Also, during the third quarter, Digital announced that it was breaking ground on a new 14 megawatt data center in Sydney, Australia, adjacent to an existing facility. Digital also expanded its Silicon Valley Connected Campus with a 6 megawatt facility at 3205 Alfred Street in Santa Clara, California (scheduled for delivery in the first quarter of 2018).

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The Improved Balance Sheet

In order to continue to scale its global footprint, Digital continues to demonstrate a disciplined balance sheet.

In July 2017, Digital issued two tranches of Sterling denominated bonds with a weighted average maturity of 10 years, and a blended coupon of just over 3% raising gross proceeds of approximately $780 million.

In early August, the company pre-funded a portion of the DuPont acquisition with the issuance of $1.35 billion of U.S. dollar bonds with a weighted average maturity of nine years, and a blended coupon of 3.45%. (This was only the sixth time an investment grade U.S. listed REIT has issued a $1 billion or more in a single tranche of bonds).

The transaction was well oversubscribed and priced 10 bps inside of where Digital’s existing bonds were trading on the secondary market prior to the transaction. Digital also raised $200 million of perpetual preferred equity at 5.25%, an all-time low coupon for Digital and the lowest rate ever achieved on a REIT preferred offering with a crossover rating.

In mid-September, Digital closed on the DuPont acquisition and exchanged all the outstanding DFT common shares and units for approximately 43 million shares of DLR common stock and 6 million OP units. Also, in conjunction with the DuPont acquisition, Digital exchanged the DFT 6.625% Series C Preferred for a new Digital Realty Series C Preferred with a liquidation value of $201 million.

The company also tendered for the DFT 5.875% high-yield notes due 2021, settled nearly 80% of the $600 million outstanding at closing in mid-September and redeemed the remainder within a few days post closing. After quarter-end, Digital redeemed all $250 million of the DFT 5.625% high-yield notes due 2023 and a blended 106.3% of par or a total cost of $270.5 million, including accrued interest and the make-whole premium.

When the dust settled at the end of Q3-17, Digital’s debt-to-EBITDA stood at 6x and fixed charge coverage was just under 4x, as you can see below:

After adjusting for a full-quarter contribution, the balance sheet actually improves as a result of the DuPont acquisition and debt-to-EBITDA dips down below 5x and fixed charge coverage remains above 4x, as you can see on the right-hand side of the chart.

As you can see from the left side (chart below), Digital has a clear runway with nominal debt maturities before 2020. The balance sheet remains well-positioned for growth consistent with our long-term financing strategy.

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The Fundamentals

Construction activity remains elevated across the primary data center metros, but leasing velocity remains robust and industry participants are mostly adhering to a just in time inventory management approach, helping to keep new supply largely in check.

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Demand is outpacing supply in most major markets. The near-term funnel remains healthy and demand seems to be picking up as we head into the end of the year.

In addition, vacancy rates remain tight across the board prompting Digital to bring on measured amounts of capacity to meet demand in select metro areas like Sydney, Silicon Valley and Chicago. The company has seen a flurry of recent land deals in core markets and the number of new competitors is on the rise, although Digital believes its global platform, scale and operational track record represent key competitive advantages.

As Digital’s CEO, Bill Stein, explains:

“Given the sector’s recent history, any prospect of an uptick in speculative new supply bears watching. However, we remain encouraged by the depth and breadth of demand for our scale, co-location and interconnection solutions. We expect the demand will continue to outstrip supply, while barriers to entry are beginning to grow in select metros, which we believe bodes well for long-term rent growth, as well as the enduring value of infill portfolios such as ours.”

Stein adds:

“…we are well-positioned to connect workloads to data on our global connected campus network and through our Service Exchange offering. Enterprise architectures are going through a transformation and workloads are transitioning from on-premise to a hybrid multi-cloud environment. Our comprehensive product offering is critical to capturing this shift.

Cloud demand continues to grow at a rapid clip, but future growth in the data center sector will come from artificial intelligence. The power, cooling and interconnection requirements for AI applications are drastically different than traditional workloads, and Digital Realty is well-positioned to support the unique requirements and tremendous growth potential of this next-generation technology suite.”

The Latest Results

Digital signed total bookings for the third quarter of $58 million, including an $8 million contribution from interconnection. The company signed new leases for space and power, totaling $50 million during the third quarter, including a $6 million co-location contribution. The weighted average lease term on space and power leases signed during the third quarter was nine years. Digital’s management team explains,

“Our third quarter wins showcase the strengths of our combined organization as the bulk of our activity was concentrated on our collective campuses in Ashburn, which is not only the largest and fastest growing data center market in the world, but also the combined company’s largest metro area in terms of existing capacity and ability to support our customers growth.”

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In Q3-17, Digital’s current backlog of leases signed but not yet commenced stands at $106 million. The step up from $64 million last quarter reflects the $50 million of space and power leases signed, along with the $59 million backlog inherited from the DuPont acquisition offset by $67 million of commencements. The weighted average lag between third-quarter signings and commencements improved to four months.

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Digital retained 86% of third-quarter lease expirations, and signed $66 million of renewals during the third quarter, in addition to new leases signed. The weighted average lease term on renewals was over six years, and cash rents on renewal leases rolled down 3.8%, primarily due to two sizable above market leases that were renewed during the third quarter, one on the East Coast and one in Phoenix. Digital expects cash re-leasing spreads will be positive for the fourth quarter, as well as for the full year 2017.

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As you can see from the bridge chart below, Digital’s primary driver is a full quarter with the higher share count outstanding following the close of the DFT acquisition late in the third quarter. Digital still expects to realize approximately $18 million of annualized overhead synergies and expects the transaction will be roughly 2% accretive to core FFO per share in 2018 and roughly 4% accretive to 2018 AFFO per share.

However, these synergies will not fully be realized until 2018 and the quarterly run rate is expected to spring load in the fourth quarter before bouncing back in 2018.

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As you can see below, Digital’s non-cash straight-line rental revenue has come down from a run rate of $23 million in the fourth quarter of 2013, all the way down to less than $2 million in the third quarter.

Over that same time, quarterly revenue has grown by 60% from $380 million to more than $600 million. This trend reflects several years of consistent improvement in data center market fundamentals, as well as the impact of tighter underwriting discipline, which has driven steady growth in cash flows and sustained improvement in the quality of earnings.

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Buy This Blue Chip?

First off, I am not selling this BLUE CHIP REIT. I am confident with my overweight exposure and I will continue to add more shares in price weakness. Let’s take a look at the dividend yield, compared with the peers below:

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Let’s take a closer look at Digital’s dividend history, and specifically the FFO Payout history…

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As you can see, Digital has continued to widen the margin of safety related to the Payout Ratio (helps me SWAN)…

Now, let’s examine the P/FFO multiple, compared to the peers:

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As you can see, Digital is cheaper (based on P/FFO) than the peers. Let’s examine the FFO/share growth chart below…

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As you can see, Digital is not growing as robustly as the peers; however, the company has continued to generate ~8% FFO/share growth and this powerful pattern of predictability is the primary reason I own shares in this REIT. Take a look at this FFO per share history…

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The average FFO/share growth since 2014 has been around 7.6%… now take a look at the P/AFFO/share chart below…

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This suggests that Digital is easily positioned to continue to grow its dividend by at least 5% annually, possibly a tad better in 2018.

In summary, Digital has been one of my best BLUE CHIP buys since I commenced the Durable Income Portfolio (in 2013). I consider the shares soundly valued today (nibbling); however, I would recommend buying closer to $100/share. As Ben Graham famously explained, “a stock does not become a sound investment merely because it can be bought at close to its asset value.”

Selecting securities with a significant margin of safety remains that value investor’s definitive precautionary measure. I consider Tanger Factory Outlet to be the best BLUE CHIP buy today, as any value investor knows – “it pays to wait patiently for the storm to subside, knowing that a sunnier and more plentiful time is bound, as a law of nature, to resume in due course.”

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Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).

Other REITs mentioned: (COR), (QTS), (CONE), and (EQIX).

Sources: FAST Graphs and DLR Investor Presentation.


I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Top 3 Dividend Growth Stocks For A Weak Dollar

One of the more under-reported pieces of economic news last year was the surprising weakness of the U.S. dollar against the Euro. Despite monetary tightening and interest rate hikes in the U.S., in 2017, the dollar had its worst performance in the past 14 years.

It was a particularly bad year against the Euro. Since reaching a high of 0.953 Euros in 2017, the U.S. dollar is now worth under 0.82 Euros, for a 14% decline. Strength in the Euro came as a surprise, especially since the European Central Bank is still much more accommodating than the U.S. Federal Reserve, and economic growth in the U.S. is heating up.

A weaker dollar isn’t necessarily bad news — in fact, many large U.S. companies would benefit from a falling dollar. This article will discuss three dividend growth stocks that generate a large percentage of revenue from Europe, and would see a boost from a weaker U.S. dollar against the Euro.

Weak Dollar Stock #1: Philip Morris International (PM)

Dividend Yield: 4.1%

First up is tobacco giant Philip Morris International, which generated approximately 30% of its total revenue from Europe over the first three quarters of 2017. PM has an attractive dividend yield slightly above 4%, and has increased its dividend each year since its 2008 spinoff from domestic tobacco giant Altria Group (MO). PM is a Dividend Achiever, a group of stocks with 10+ consecutive dividend increases. You can see the entire list of all 262 Dividend Achievers here.

PM sells tobacco products outside the U.S., with brands including Marlboro, L&M, Chesterfield, Parliament, and more. The company enjoys leading positions across its brand portfolio, particularly in Europe.

Source: Earnings Presentation, page 13

The strong U.S. dollar had been a major source of stress of PM prior to 2017. To that end, the strong U.S. dollar wiped away $1.3 billion from PM’s revenue in 2016. The good news is, the underlying operations of the company continued to perform well in that time — organic revenue excluding excise taxes, and adjusted earnings-per-share, increased 4.4% and 12% in 2016, respectively.

Strength in the U.S. dollar continued to weigh on the company to start 2017. Reported revenue increased 3.8% over the first three quarters, while organic revenue increased 6% in that time. As the foreign exchange market has become more favorable to PM, net revenue growth could see a meaningful boost in 2018.

PM has excellent profitability. The tobacco business is highly lucrative due to economies of scale, as well as pricing power from selling an addictive product. PM operates 48 production facilities in 32 different countries. Going forward, PM’s growth will be fueled by its collection of products it refers to as reduced-risk. These are products that do not burn tobacco. According to the company, this results in fewer adverse health effects, and are designed to address changing consumer preferences.

Source: Q2 Earnings Presentation, page 10

The reduced-risk portfolio is steadily becoming more important for the company. The RRP is set to contribute nearly 10% of total revenue, up from just 2% in 2016. PM’s biggest growth opportunity is its line of IQOS products, such as HeatSticks, which are growing rapidly. Heated tobacco shipments reached 10.8 billion units in the first half of 2017.

IQOS is already growing market share. Continued growth of the reduced-risk portfolio will help PM counter the decline in cigarette shipment volumes. Plus, a weaker dollar could also add to growth, and help improve the company’s dividend growth as well.

Weak Dollar Stock #2: McDonald’s (MCD)

Dividend Yield: 2.3%

Next up is McDonald’s, which has an even more impressive track record of dividend growth than PM. McDonald’s is a Dividend Aristocrat, a group of stocks in the S&P 500 Index with 25+ consecutive years of dividend increases. You can see all 51 Dividend Aristocrats here.

McDonald’s is the largest publicly-traded fast food company in the world. It operates over 37,000 locations, in more than 100 countries. The company no longer breaks out revenue according to individual geographic regions. But the last year it reported financial results by specific geographic market, Europe accounted for 40% of total sales. As a result, McDonald’s would see a big windfall from a stronger Euro and a correspondingly weaker dollar.

2016 was a comeback year for McDonald’s. After a difficult turnaround in the preceding few years, McDonald’s global comparable-restaurant sales increased 3.8%. 2017 was another strong year. Revenue declined 6% over the first three quarters, but this was driven mostly by the sale of its businesses in China and Hong Kong, and increased franchising.

However, these initiatives have improved McDonald’s profitability. Adjusted earnings-per-share increased 16% through the first three quarters. McDonald’s has enjoyed a successful turnaround, driven by increased franchising, and new menu initiatives such as all-day breakfast.

Going forward, higher franchising, cost cuts, and new menu items are expected to drive continued growth. McDonald’s will also increasingly utilize digital capabilities and technology, as well as delivery. By 2019, the company expects to cut 5%-10% from its cost structure. From 2019 and onward, McDonald’s expects sales growth of 3% to 5% per year, operating margin to expand from the high-20% range, to the mid-40% range, and high-single digit earnings growth.

McDonald’s isn’t a cheap stock. After its impressive rally in 2017, the stock has a price-to-earnings ratio of approximately 25. Its dividend yield is also relatively low. At 2.3%, McDonald’s dividend yield has fallen significantly from its recent highs above 3%. That said, McDonald’s will continue to increase its dividend each year. According to ValueLine, the company has increased earnings at roughly 7% per year over the past 10 years. With a payout ratio below 60%, there is sufficient room for high single-digit dividend growth each year.

Weak Dollar Stock #3: Walgreens Boots Alliance (WBA)

Dividend Yield: 2.1%

Like McDonald’s, Walgreens is a Dividend Aristocrat, with a long history of dividend growth. Walgreens has increased its dividend for 42 years in a row. It has a current dividend yield of 2.1%, and is one of 350 dividend-paying stocks in the consumer staples sector. You can see the full list of all 350 consumer staples dividend stocks here.

It also has a large presence in Europe, particularly after the 2014 acquisition of Alliance Boots, which made it the largest retail pharmacy in the U.S. and Europe. It operates over 13,000 stores in 11 countries. It also has 390 distribution centers that supply approximately 230,000 pharmacies, doctors, health centers, and hospitals.

Source: 2017 Earnings Presentation, page 21

In addition, Walgreens has a large Pharmaceutical Wholesale division, mainly operating under the Alliance Healthcare brand. This business supplies medicines, other healthcare products, and related services, to more than 110,000 pharmacies, doctors, health centers and hospitals each year. The business operates in 11 countries, primarily in Europe.

As a result, Walgreens would be a major beneficiary of a weaker dollar versus the Euro. The company is already performing well, so a currency tailwind would only add to growth. Walgreens is firing on all cylinders. Last quarter, Walgreens reported adjusted earnings-per-share of $1.28, up 7.2% from the same quarter last year. Quarterly revenue increased 7.9%.

However, Walgreens is still generating strong growth from pharmacy sales, its most important business by far. Last quarter, Walgreens generated comparable sales growth of 7.4% and 8.9% in pharmacy sales and prescriptions, respectively.

Source: Q1 Earnings Presentation, page 6

Its retail business as a whole did not perform well, with total retail sales down 2.8% for the quarter. Poor performance in the retail segment was due to consumables, personal care products, and general merchandise. Walgreens continues to be squeezed in these categories by e-commerce retailers such as Amazon (AMZN).

Along with first-quarter earnings, Walgreens raised guidance for the upcoming year. For fiscal 2018, Walgreens expects adjusted earnings-per-share in a range of $5.45 to $5.70. This would represent an increase of 6.9% to 11.8% for 2018.

Final Thoughts

The weak U.S. dollar caught many by surprise last year, and there are reasons to suspect further weakness could be in store for the U.S. dollar in 2018. According to a recent article on CNBC, reasons for continued weakness could include President Trump’s stated desire for a weaker dollar, and the uncertain fate of NAFTA, which could add to instability of the dollar versus the Euro.

Fortunately, investors can position their portfolio to capitalize on any continued drop in the U.S. dollar against the Euro. Philip Morris International, McDonald’s, and Walgreens Boots Alliance all have huge operations in Europe, and would be among the biggest beneficiaries of a falling dollar and stronger Euro in 2018.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Bond Bull Market Is Over

The financial media headlines have been dominated over the past week by the latest bold declarations. Treasury yields are on the rise, and “the bond bull market is over!” Except that it’s not over. Not even close to starting to be over as a matter of fact. At least not yet. For despite its extraordinarily advanced age and recent fall coupled with the bold proclamations from some notable bond gurus, the 37-year old bond bull market still remains very much alive today.

Bonds Under Fire

Now it should be noted that the bond market has been very much under pressure as of late. Consider the following chart of the 10-Year U.S. Treasury yield (IEF). At the start of September, 10-Year U.S. Treasury yields have risen from a low of 2.05% to as high as 2.55% on Friday.

Knowing that as bond prices fall, bond yields rise, this chart looks bad, right?

Let’s continue by taking this recent rise in yields and put it in the context of the bond bull market. With the latest pullback in bond prices, 10-Year U.S. Treasury yields have inched above their long-term downward sloping trendline.

It’s official. The bond bull market is over, right!?! This sentiment was confirmed by none other than the Bond King himself just this past week.

“Gross: Bond bear market confirmed today. 25 year long-term trendlines broken in 5yr and 10yr maturity Treasuries.”

–Janus Henderson Advisors, Bill Gross, January 9, 2018

Sure, bonds have had a tough stretch as of late. But the bond bull market is not over. It’s going to take a whole lot more than the recent rise in yields to kill off today’s bond bull market.

Not So Fast

Let’s begin by pulling back and taking a look at the bond bull market through a much wider lense. The bond bull market first began in late 1981. This was the first year of the Reagan administration at a time not long after the first flight of the space shuttle Columbia. It was also a time when the then Cinderella story San Francisco 49ers were gearing up for their first Super Bowl run under then third year coach Bill Walsh and the Motor Trend Car of the Year was the Chrysler K Car (love those white wall tires!).

In short, the bond bull market has been going on for a long time now. So what about this upside break in Treasury yields in this longer term context? Pull out your microscopes and look at the following chart. See it? Right there in the bottom right corner? See it? Yeah, neither can I.

But what I can see is a number of other instances over the past 37 years where 10-Year U.S. Treasury yields moved more measurably above this downward sloping trendline in yields including late 1999 into early 2000 as well as all of 2006 into most of 2007. Yet despite these supposed trendline breaks, the bond bull market remains still alive today.

So what is the first key takeaway? That breaking a downward sloping trend line for a few minutes one trading day or for several months for that matter is simply not enough to declare a bull market in anything dead, particularly when it has lasted as long as the bond bull market. It takes a whole lot more.

But what about the proclamations of the Bond King? Shouldn’t he know what he is talking about? Don’t get me wrong. I have a ton of respect for Bill Gross and has listened to what he has to say for decades now. But as demonstrated by the tweet below from a few years back now, even the best of ‘em can miss the mark with their bold proclamations.

“Gross: The secular 30-yr bull market in bonds likely ended 4/29/2013.”

–PIMCO, Bill Gross, May 10, 2013

The same can be said of similar proclamations from other respected bond gurus, some of which were out in force in late 2016 declaring that 10-Year Treasury yields could top 6% in the next few years. Indeed, this outcome may very well come to pass, but A LOT of things need to happen between now and then to lead to this end result. And to date, many of these things remain decidedly elusive. Moreover, it is important to note that many of these very same bond gurus making bold calls such as declaring the bond bull market being over in 2012 also understandably maintain openness in their predictions. This includes suggesting that bond yields could fast track their way lower to 1% back at the start of 2015, only to see them turn and steadily rise throughout the rest of the calendar year.

As a result, while they remain worth respecting and listening to closely, remember that the bold prognostications by market gurus of any ilk are nothing more than pieces of worthwhile information that should be considered in a broader context when continuing to map out one’s own investment journey that takes place step-by-step over long-term periods of time.

Bond Bull Market – Alive And Well

When it comes to today’s bond bull market, sure it has struggled recently, but it remains very much alive and well today.

Bull markets do not die all of the sudden. Instead, they die a slow death over time. And the longer they have been in place, the longer it takes to kill them off. When it comes to bull market durations, 37-years is definitely on the very long side of the historical spectrum. As a result, the bond bull market is not going to simply end overnight. Instead, it is going to be a process that will take months if not years to fully play itself out.

In order to officially declare the bond bull market dead and the arrival of a new bond bear market to take its place, we are going to need to see A LOT of accompanying events take place along with it. And virtually none of these things exist today.

Let’s begin with the trendline break itself. Yes, we inched across the downward sloping trendline for the 10-Year U.S. Treasury yield. But we are not even close to seeing a confirmation in this trendline break for the 30-Year U.S. Treasury yield. In fact, this remains locked in the very middle of its long-term range. Bond bull market very much alive and well here.

With this point in mind, it is worthwhile to compare the path of the 10-Year and 30-Year bond yields (TLT) since early September. While the 10-Year yield has steadily risen, the 30-Year yields remains well below its highs from late October. This implies not that something is going on with the bond market more broadly, but instead that something may be taking place more specifically with 10-Year Treasury bonds.

Now consider the same 10-Year Treasury yields against their shorter dated brethren in 2-Year Treasury yields. Here we see 2-Year yields are rising even faster than 10-Year yields.

This, my friends, is further evidence of the yield curve flattening that we have been hearing so much about. This is shown differently in the chart below as the spread between the 10-Year U.S. Treasury yield and the 2-Year U.S. Treasury yield (the 2/10 spread), which has been falling like a rock since late October to new post crisis lows.

While the 2/10 spread increased marginally in recent days, the trend remains definitively lower. And most other spread readings across the yield curve including the 5/30 spread have not even moved marginally higher but instead have fallen to fresh new lows in recent days.

Why do these spreads matter? Because in order for the bond (AGG) bull market to end, we almost certainly need to see steadily rising inflation along with sustained economic growth. And the leading signal from the bond (BND) market that inflation is steadily on the rise and stronger economic growth is on its way is a steepening yield curve. Put more simply, we would expect to see 30-year yields rising faster than 10-year yields and 10-year yields rising faster than 2-year yields. But instead, we are continuing to see the exact opposite. The yield curve is flattening. And 2-year yields (SHY) are rising faster than 10-year yields, which are rising faster than 30-year yields. If anything this suggests signals of disinflation and a weaker economy, which is supportive of a bond bull market picking up steam in the next few years instead of coming to its demise today.

OK. So the trends in the bond market itself do not suggest the bull market is actually ending. But let’s take this a few steps further.

Let’s suppose the bond bull market was indeed ending and 10-Year U.S. Treasury yields were set to fast track their way to 6% in the next two years as some experts are suggesting. Now before going any further it should be noted that a move in 10-Year U.S. Treasury yields from today’s levels at 2.55% to 6% in two years means that we are going from current levels that are still roughly -1 standard deviations below the long-term historical average to +1 standard deviations above the long-term historical average. In other words, this suggests that something radical is about to happen in the U.S. economy in order to realize this outcome – either that economic growth is going to run so hot that it’s going to bring rapidly escalating inflation along with it, which is likely to cause the U.S. Federal Reserve to start slamming on the monetary policy breaks, or that we have a bond market riot that comes without U.S. economic growth. Either way, the outcome would be decidedly negative for capital markets in general across the board. So if this was indeed the case that such an outcome was nigh, we would expect to see commensurate ripple effects across the capital market landscape.

With this in mind, let’s consider high yield bonds (JNK). This is an asset class that has seen its absolute yields under 6% fall to their lowest levels on record and its yield spreads relative to comparably dated U.S. Treasuries at just over 3% also approaching their tightest levels in history last seen in 2007. Put more simply, high yield bonds are priced at a considerable premium today. Now recognizing the fact that investors are not likely to wish to receive a negative premium for the considerably greater default and liquidity risks that come with owning high yield bonds versus a comparably dated U.S. Treasuries (put more simply, investors are not going to own a high yield bond yielding 5.7% if they can get U.S. Treasuries with the same time to maturity yielding 6%), we should expect high yield bond prices to also be moving sharply lower in anticipation of this bond bull market coming to an end. But how have high yield bonds been doing lately amid these calls that the bond bull market is now over? Just fine as a matter of fact.

Either high yield bond (HYG) investors are absolutely oblivious, or something else is going on in the bond market other than a bull meeting its imminent demise. Even during the immediate aftermath of the U.S. Election, which was the last time that the bond gurus were out on the streets in force declaring the end of the bond bull market, we saw a reflexive action in high yield bonds to the downside that ultimately proved to be unfounded. And this same lack of response same thing can be said today for investment grade corporate bonds (LQD), emerging market debt (EMB), senior loans (BKLN), convertible bonds (CWB), or any other spread product whose valuation is directly or primarily reliant on U.S. Treasury yields including – wait for it – U.S. stocks (SPY). If the bond bull market has officially come to an end, apparently the rest of capital markets has not gotten the memo as of yet.

Now have we seen a rise in inflation expectations as of late? Sure, as the 5-year breakeven rate, which is a measure of expected inflation over the next five years derive by 5-year Treasuries (IEI) versus 5-year inflation indexed Treasuries (NYSEARCA:TIP), has risen from around 1.56% at the start of September to 1.89% as of Friday. This is notable and is a development worth monitoring in the days, weeks, and months ahead. But this same reading remains below the late January 2017 highs of 1.96% and is still well below the expectations toward 2.4% throughout much of the post crisis period up until a few years ago when the realization started to set in that the sustainably higher inflation anticipated from extraordinarily aggressive monetary policy might never actually materialize.

So while we do have some evidence of increased inflation expectations lately, they should still be considered marginal at best to date.

Let us take another step and consider U.S. Treasury (TLH) yields relative to their global counterparts. Much has been made about the corresponding rise in government bond yields from comparable global safe havens such as Japan (NYSEARCA:EWJ) and Germany (EWG) and how they are also supporting this end of bond bull market days theme. Yes, 10-Year government bond yields in Japan recently to as high as 0.09%, but this is still notably low and we have seen this script a few times before over the past year.

Same with German Bunds. We have seen 10-Year yields rise to 0.58% on Friday at a time when the European (VGK) economy is supposedly continuing to improve and the ECB is taking their foot away from the monetary policy accelerator. Yet we even higher yields touched back in July 2017 only to see them fall back again in the second half of last year.

And even with the recent rise in yields across the safe haven bond world, it is still important to note that the premium that global bond investors are getting paid to put their money in U.S. Treasuries remains about as attractive as it has been in recent history.

This relatively attractive valuation for U.S. Treasuries relative to their global safe haven counterparts suggests that a source of demand should remain to stem the onset of any bear market tide and hold the bull market in place at least for the time being.

But what about the blow out in the deficit and the increased U.S. Treasury issuance expected to result from recently passed tax legislation? The world has shown repeatedly in recent years including Japan over longer-term periods of time that governments can borrow like drunken sailors and still maintain historically low interest rates. This is an important issue worth monitoring, but we need to see evidence of such pressures actually showing up in bond prices and yields first before actually taking action on such expectations.

What about the fact that the Fed is set to increasingly shrink their balance sheet going forward as part of quantitative tightening, or QT? It is important to remember two things. First, the Fed to this point is shrinking its balance sheet by allowing some of its existing maturities to roll off without reinvesting the proceeds. Put simply, they are not selling, instead they are no longer repurchasing as much as they were before. This is an important difference. Moreover, even when they finally do start selling outright at some point in the future, it is critical to remember that they are only one participant in a large and vast global marketplace for U.S. Treasuries. And they will be one seller in a market that could be filled with many buyers along the way, particularly if the global economy is not doing so hot in the future. This helps explain why U.S. Treasury yields consistently rose throughout much of QE1, QE2 and QE3 despite the fact the Fed was buying massive sums of U.S. Treasuries all along the way.

Lastly, let’s come full circle and consider the technical aspect once again. In order for a bull market in anything to be over, we need to see a successive series of lower lows and lower highs. In the case of U.S. Treasury yields, this would be higher highs and higher lows. But when looking at 10-Year U.S. Treasury yields, we don’t even have the first higher high as of yet, as the 10-Year Treasury yield at 2.55% remains below the high of 2.62% from early 2017. We would need to see multiple higher highs and higher lows over the course of a year or more before we can even begin to conclude anything about a 37-year bull market in bonds being over.

And when considering the same chart for 30-Year U.S. Treasury yields, we don’t even have any signs of a reversal in trend, much less anything even resembling a higher high of which to speak.

I’m Still Alive

Putting all of this together, the recent talk of the bond bull market being over is grossly overblown. Could this be the very beginning of the end for the bond bull market? Sure, anything is possible. But we are going to need to see A LOT, and I mean A LOT, of confirmation not only from 10-Year U.S. Treasuries, not only from the U.S. Treasury market in general, not only from the broader bond market, but also from the capital markets and economic data spectrum as a whole before we can even begin to consider that the bond bull market that is running at 37-years and counting is even close to being over. If anything, it is the latest attractive buying opportunity in a long series of buying opportunities that have presented itself in the bond market over the past four decades.

What then explains the recent selling in the belly of the U.S. Treasury curve and the corresponding rise in yields? I will be interested as I have been in past years to take a look at the Treasury data on major foreign holders of Treasury securities when it is officially released in a few months, as I suspect we will be able to find our answers in this data has we have so many times in the past when the mainstream financial media is still talking about things like “taper tantrums”.

Of Stocks And Bonds And Bulls

Before closing, I am compelled to raise a related point. Just as I am writing in defense of the bond bull market still being alive today, I would almost certainly be writing something very similar about the U.S. stock market that closed on Friday at yet another new all-time high at 2786 on the S&P 500 Index (SPY) if it ended up falling sharply below 2200 in the coming months. And this comes from someone in myself that has been a proclaimed long-term stock market bear for many years now (just because I think something will ultimately end badly does not mean that this bad ending will arrive tomorrow and be fully felt overnight).

Some would be out proclaiming the start of a new bear market in stocks as supported by the fact that the S&P 500 Index (IVV) had fallen by more than -20% from its peaks. But just as long lived bond bull markets do not suddenly die with a simple short-term break in trend, long lived stock (NYSEARCA:VOO) bull markets such as our second longest in history today to date will not simply die with one sharp pullback to the downside even if it ends up being a fleeting drop of more than -20% from its all-time highs.

The bull market topping process in any asset class, whether it is stocks (DIA), bonds, or anything else, is something that takes place over extended periods of time and is filled with various escape routes along the way for those that need them. The key in navigating any such transitions is to be prepared and stand at the ready to take not only gradually evasive but potentially even countercyclical action when the time comes. And while their time will eventually come, when considering both the 37-year bond bull market and the 9-year stock bull market, we have yet to arrive today at such a junction for either asset class. At least not yet.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I am/we are long RSP,TLT,TIP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Shale Restraint Could Lift Oil To $80

Brent recently hit $70 per barrel and WTI surpassed $64.50, and oil executives from the Middle East to Texas no doubt popped some champagne. The big question is whether or not U.S. shale will spoil the party by ramping up production to extraordinary heights, setting off another downturn.

The EIA made headlines a few days ago when it predicted that U.S. oil production would surge this year and next, topping 11 million barrels per day by the end of 2019.

But shale executives repeatedly promised their shareholders that they would be prudent this time around, eschewing a drill-no-matter-what mentality that so often led to higher levels of debt…and ultimately to lower oil prices. Shale executives repeatedly insisted in 2017 that they would not return to an aggressive drilling stance even if oil prices surged.

We will soon find out if oil in the mid-$60s can entice shale drillers to shed their caution and jump back into action in a dramatic way. For its part, Goldman Sachs seems to believe the promises from the shale industry.

The investment bank said that at an industry conference in Miami on January 10-11, shale executives reiterated their strategies of caution. “Shale producers are largely not looking to use $60+ oil in their budgets and spoke more proactively about debt paydown, corporate returns and returning cash to shareholders.”

This newfound restraint would contribute to still more gains in oil prices, the investment bank said. “With Discipline along with Demand and Disruptions (the 3 Ds) key drivers of Energy equity sentiment, we see potential for a grind higher as long as datapoints are favorable,” Goldman wrote. Global oil demand is set to grow at a robust rate this year, and a series of disruptions could keep supply offline in places like Venezuela, Iraq, Iran, Libya and Nigeria.

It remains to be seen if Goldman, along with the rest of us, is being taken for a ride by the shale industry. The investment bank said that guidance announcements in February will be “key” to figuring out if shale drillers will follow through on their promises of restraint for 2018.

But based on a series of comments at the conference, Goldman cited a long list of shale companies that will use extra cash from higher oil prices to either pay down debt or to pay off shareholders rather than using that cash for new drilling. “In particular, E&Ps highlighted debt reduction (SWN, CLR, RRC, DVN, APA, EOG, MRO, RSPP, WPX), dividends (OXY, COG, MRO, EOG) and share repurchases (APC) as potential options for redeploying greater cash flow,” Goldman wrote in its report, using the ticker symbols for the companies that spoke at the conference.

There were a few companies that signaled an openness to new drilling if oil prices continued to rise. “FANG, JAG, PDCE and XEC noted higher cash flows will allow their arms to raise drilling activity over time,” Goldman said, although they voiced caution about the recent run-up in prices as evidence that prices will remain elevated. Moreover, any uptick in drilling in response to price increases might not result in production changes before the end of 2018.

Another uncertainty that could blunt the euphoria surrounding the recent oil price rally is the rising cost of production. With drilling on the upswing, oilfield services companies are looking to claw back some of the ground that they felt compelled to cede to producers in the past few years. That means higher prices for the cost of completions, rigs, sand and other services and equipment. Goldman predicts cost inflation from oilfield services on the order of 5 to 15 percent year-on-year.

The investment bank said that the winners will be the “operators that are able to mitigate higher service costs through productivity gains and more efficient operations will attract investor interest in 2018.” Goldman singled out Pioneer Natural Resources (NYSE:PXD), EOG Resources and Occidental Petroleum, a few companies that are typically cited as some of the strongest in the shale patch.

So, at least according to the latest comments from shale titans, the industry appears resolved to stick by its word to not drill recklessly. That could lessen production gains from the U.S. over the next year or so, which would provide more upward pressure on prices.

By Nick Cunningham of

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

HP, Inc. – Strong Buy On PC Sales Data

Surprise – people are buying PCs again. Long thought to be a dead market after replacement cycles lengthened and tablets/phablets and hybrids like the Microsoft Surface (NASDAQ:MSFT) increased in popularity, it seems that consumers are treating themselves to computers again.

When you think about it, this doesn’t appear to be a huge surprise – consumer confidence is up, stocks are at record highs, and consumer spending is on the rise, with reports of Christmas sales up ~5% y/y and representing the largest spike in six years. It stands to reason then that some of those dollars flowed into PCs, which have also been in decline for six years.

I’ve been an HP, Inc. (NYSE:HPQ) bull since its stellar earnings report in November, and despite my general aversion to hardware stocks, I can’t help but to think that HP is materially undervalued, in the Warren Buffett sense of the word. HP’s innovative moat and brand power within PCs (which represents two-thirds of its revenues; the other third derives from printers and printing supplies) cannot be understated. Profits are up double digits this year as HP achieved PC shipment growth even as the rest of the PC industry is stalling – this doesn’t sound like a company that deserves to trade at a 12.7x forward P/E, based on analyst consensus estimates of $1.81 in EPS in FY18.

Here’s a look at HP’s one-year chart. The stock has certainly climbed out of its depths, but the ascent in the stock price, in my view, hasn’t kept pace with the ascent in its fundamentals. With its above-average earnings growth, HP should be trading at least at 17x forward P/E – in line with the rest of the market – implying a price target of $31. There’s plenty of room for this company to ride the bull run higher, especially as it’s surfaced from the down-cycle of the PC market.

HPQ data by YCharts

Let’s take a closer look into the IDC report, which has caught headlines across a wide array of both tech and non-tech publications, including Bloomberg and The Verge.

IDC reported that global PC shipments in the fourth quarter of 2017 totaled 70.6 million units, up 0.7% y/y from 70.1 million units in 4Q16. This is the first y/y rise in six years. Most notably, of the major PC vendors, HP is the one that saw that largest growth in Q4, with 8.3% y/y increase in shipments.

Figure 1. IDC 4Q17 PC shipments report

Source: International Data Corporation

HP’s market share moves are also worth noting; in 4Q16, it trailed 60bps behind lower-end Chinese vendor Lenovo (OTCPK:LNVGY). In 4Q17, Lenovo saw flat shipment growth (trailing the wider industry at 0.7% growth) while HP galloped ahead and gained 170bps of market share, making it the clear PC leader with more than a point of market share ahead of Lenovo.

Obviously, investors are mostly interested in how this will impact HP’s financials. Well, we won’t know for sure until HP’s Q4 earnings release, but we can look backward at IDC data to understand the correlation between PC shipments growth and HP’s earnings.

In Q3, total PC shipments were down -0.5% y/y while HP’s shipments grew 6% y/y, as reported by IDC’s third-quarter report.

Figure 2. IDC 3Q17 PC shipments report

Source: International Data Corporation

Concurrently, in Q3 (HP’s fiscal Q4), HP’s Personal Systems division reported 13% y/y revenue growth (6 points of unit growth plus ASP growth). This translated into 11% y/y growth company-wide, which beat analyst consensus estimates by 4%, and flowed through to a 24% y/y growth in net income.

Clearly, there is a strong correlation between IDC’s growth data and HP’s earnings – as long as ASPs hold up, HP should be well positioned to report >8% revenue growth in PCs and deliver outsized earnings in its fiscal Q1.

Qualitatively, it’s intuitive to understand why HP’s PC business is so strong; there’s really something for everyone. Its higher-end Spectre line serves the $1,000+ market, HP ENVY serves the ~$800-1,000 market, and its lower-priced HP Pavilion offerings cater to the cheaper end. HP laptops resonate well with all segments of buyers and have a cachet of quality – unlike Lenovo, which despite having higher-end offerings of its own, is often perceived as a budget system.

Key takeaway: HP has had a strong batting average during its past few earnings seasons, and given the extremely bullish data coming out of IDC, there’s good reason to believe the strength will continue into Q1 this year.

Disclosure: I am/we are long HPQ.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.