Investors Alley

As bank stocks fall around us, it is important to remember that the perception of the market is often not reality. In this presentation from my recent MoneyShow appearance, I cover why the banking ‘crisis” is a buying opportunity of historic proportions. We are seeing high-quality banks with plenty of capital, strong balance sheets, and […]

For almost a year, the stock market has been brutal for those investors who have tried to time the next upturn or downturn.

Since the bear market first bottomed last June (and then again in October), the stock market rallies have run enough to get investors excited before dashing their hopes by turning down again.

But there’s a time-tested way of making money even in these markets. It’s actually simpler, and even takes less time than trying to find the “hot stock” of the day.

Let me show you…

A couple of weeks ago, this chart from the weekly note from the Momentum Structural Analysis technical service caught my eye. The price bars are the monthly ranges for the S&P 500.

The chart really gives a visual of how tough the market has been since early last summer. I expect this pattern to continue until the Federal Reserve decides it has “Whipped Inflation Now.” (That’s a 1970s reference, if you weren’t around then).

In this market, my high-yield Dividend Hunter strategy will give investors a chance to make money while other investing or trading strategies fail. Here are the Dividend Hunter basics:

Focus on building an income stream by investing in a portfolio of high-yield stocks and other investments. The Dividend Hunter portfolio has a current average yield of about 9%.

Continue to buy shares by reinvesting a portion or all of the dividends earned. Also, with additional investments if you are in the building stage of your portfolio.

Portfolio income is the primary tracking metric. As long as income is stable and growing (which it will be), share prices are a negligible concern.

As you reinvest dividends and add new money to your portfolio, you will automatically buy more shares when prices are down (and yields are high) and fewer shares when share prices are up. Over time, the result is a low average cost for your shares and a nicely growing, high-yield income stream.

Then, when the stock market goes into the next bull market, you go, “Heck, where did all this money come from?” as share prices appreciate.

It works. I invest in the same stocks I recommend to Dividend Hunter subscribers. I track my income, and it grows every single quarter. When share prices drop, I get excited to buy more and increase that income.

If you want to get started, look at Hercules Capital (HTGC), which just declared a $0.47 per share dividend ($0.39 regular dividend plus $0.08 supplemental payout). HTGC yields 11.8% on the regular dividend.

For more great high-yield investments, join my Dividend Hunter community.

The pharma giant GSK PLC (GSK) is working to emerge from years with a share price that goes nowhere. The company’s CEO, Emma Walmsley, is still trying to convince investors that she is delivering a “new chapter of growth” after many years of underperformance.

GSK shares are down 3% over the past five years, while its U.K. pharma peer, AstraZeneca (AZN), has soared more than 125%. AstraZeneca shareholders are willing to pay 20 times forward earnings per share for 2023, while GSK’s shareholders are barely willing to pay 10 times earnings.

GSK’s Turnaround

Turning around GSK may be like trying to turn an oil tanker. But make no mistake—Walmsley is turning the GSK ship around.

Last year, the company completed its biggest restructuring in 20 years, spinning off its consumer health division, which sold the company’s over-the-counter medicines, as Haleon (HLN).

So now, investors are now focused on how GSK will spend the £7 billion ($8.72 billion) payoff it earned from the split to make acquisitions to fill its drug pipeline.

GSK needs to re-stock its “medicine cabinet” ahead of the expected loss of exclusivity on its HIV drug, dolutegravir (marketed as DOVATO), towards the end of this decade. It is a big hole to fill: products using dolutegravir generated $1.62 billion in the latest quarter, about 19% of total revenues of $8.72 billion.

One attempt to partially fill that gap is an agreement  to acquire Canadian biotech firm Bellus Health for $2 billion. Bellus has a medicine for chronic refractory cough (CRC), a debilitating and persistent condition that GSK says affects 10 million people worldwide. The drug, camlipixant, is in late-stage trials.

Luke Miels, GSK’s chief commercial officer, said camlipixant had the potential to be “best-in-class” for CRC, for which there are no approved medicines in the U.S. or Europe. If approved, GSK expects to launch the drug in 2026 and see a contribution to its earnings from the following year. Sales could hit $1.1 billion by 2028, according to Wall Street estimates.

The proposed acquisition builds on GSK’s expertise in respiratory therapies. Last year, sales of GSK’s drug for severe asthma, Nucala, rose 25% to $1.74 billion, while revenue from Trelegy, a treatment for asthma and chronic obstructive pulmonary disease (COPD), soared 42%, to $2.12 billion.

Another area of strength for GSK is its vaccine division, which developed the blockbuster Shingrix shingles vaccine. The company has now developed the first-ever vaccine for a common infection, respiratory syncytial virus (RSV). GSK believes its RSV vaccine presents a similar sized market opportunity as its shingles vaccine, which generated over $1 billion of sales in the first quarter. The vaccine may be approved soon in both the U.S. and Europe.

RSV leads to about 2.1 million outpatient visits annually in the U.S., between 58,000 and 80,000 hospitalizations, and 100–300 deaths among children under than 5. For patients 65 or older, each year brings about 60,000–120,000 hospitalizations and 6,000–10,000 deaths, according to the CDC.

The total global market for RSV vaccines is thought to be worth more than $10 billion per year.

Why Buy GSK?

The market seems to be underappreciating the steady core sales growth that was shown in the latest quarter and will likely continue for several years. Also, the market is overly concerned by the Zantac litigation, which I expect will be settled for close to $1 billion, not the $30 billion being sought.

In the latest quarter, GSK’s total sales increased 10% operationally, excluding the expected COVID-19 product sales decline. The growth was broad-based, with solid traction for vaccines (up 15%), HIV (up 15%), and general respiratory (up 10%). GSK’s shingles vaccine Shingrix (up 11%) looks well positioned to post significant gains as more manufacturing capacity has been building.

Sales of longer-acting HIV drugs Cabenuva and Apretude each grew over 100% and now represent close to 10% of HIV drug sales. GSK’s respiratory drug Trelegy (up 28%) is poised for further gains based on leading efficacy in chronic obstructive pulmonary disease (COPD), and the complexity of the molecule likely means less competitive pressure following the 2027 U.S. patent loss.

On the pipeline side, GSK is making solid progress. I expect U.S. approval for GSK’s RSV vaccine in May, with peak annual sales potential over $2 billion. Also, later in the quarter, solid data should be available about the RSV vaccine testing’s durability over two years. This will enable increased pricing power and a stronger position versus competing vaccines. Also, I expect approval for myelofibrosis drug momelotinib in June for patients at higher risk for anemia, leading to another billion-dollar annual sales opportunity

Using industry parlance, GSK’s new formula for success is still undergoing early phase trials.

The good news for value investors is that GSK’s stock still trades at a one-third discount to the overall pharmaceutical sector. The shares currently trade on a forward price/earnings ratio of 9 for the 2024 financial year, which is a significant discount to their peers, with a group average of 15. And the modest size of the Bellus acquisition leaves GSK well positioned to make further deals, as leverage has fallen and cash is still plentiful thanks to the Haleon spin-off.

GSK also pays a decent quarterly dividend. The latest declared dividend is $0.35 per share, giving GSK a yield of 3.85%.

In addition to the ongoing Zantac litigation over whether Zantac causes cancer, concerns persist over the drugmaker’s long-term growth prospects. However, I believe the improving drugs pipeline means that GSK’s days of underperformance are disappearing into the rear-view mirror.

That makes it a buy anywhere in the mid-$30s.

Sitting down with Phil Timyan to talk about banks and bank stock is a rare treat. Phil Timyan has been on both sides of the table as a banker and investor. He has filed 13D on several banks and waged activist campaigns to improve bank operations and even the outright sale of under-performing banks. Phil

Last week’s earnings reports from a few different REITs indicated that commercial office space and commercial lending have not fallen into the crisis the financial media has warned of. The fear in the markets is that low office space occupancy will lead to declining property values and commercial mortgage defaults.

Also, since commercial mortgages are almost exclusively adjustable, rising interest rates hurt commercial property owners with sometimes significant increases in the cost of servicing their debt.

There have been anecdotal stories of downtown office buildings remaining mostly empty post-pandemic. There also has been a couple of defaults on commercial loans. The question now is whether these will be isolated problems or indicate a larger issue with commercial property (especially office buildings) and commercial mortgage lenders.

Last week, a couple of office building REITs, as well as one of the larger commercial loan REITs, announced earnings. Here is what they reported:

Boston Properties (BXP) owns office buildings in Boston, Los Angeles, New York, San Francisco, Seattle, and Washington, D.C. Those cities are often cited when discussing occupancy and value problems. For the first quarter, BXP reported FFO of $1.73 per share, beating the Wall Street estimate by five cents. The company increased its full-year FFO guidance by four cents, to $7.17 per share. The company reported positive net operating income growth and signed 522,000 square feet of office leases during the quarter with healthy GAAP and cash rent spreads. This office REIT posted very good first quarter results. BXP currently yields 7.8%.

Highwoods Properties (HIW) owns business district office buildings in Sunbelt cities, including Raleigh and Charlotte in North Carolina; Nashville, Tennessee; Atlanta, Georgia; Tampa, Florida; and Dallas, Texas. Highwoods reported FFO of $0.98 per share for the first quarter, beating the Wall Street estimate by five cents. At the end of the quarter, occupancy was 89.6%.

During its earnings call, the Highwoods management team acknowledged industry headwinds. They will selectively sell properties as the $518 development pipeline projects come online. The company appears to have a plan for the current market, and the 8.9% dividend yield makes the shares attractive.

Blackstone Mortgage Trust (BXMT) is a commercial mortgage REIT. The company owns a $26.7 billion senior loan portfolio across 199 loans. The portfolio has a 64% loan-to-origination value.

For the first quarter, Blackstone Mortgage Trust reported distributable earnings of $0.79 per share, up 27% over the year-earlier period. Management also noted that 3% of loans were non-performing, and the company had increased its reserves against defaults. The BXMT results highlight both the pros, greater interest income, and cons, higher chances of default resulting from higher interest rates. The shares yield 14.7% on a very well-covered dividend.

The earnings results from these three companies show that the businesses continue operating as expected, but caution levels have ratcheted higher. We are entering a period where market conditions could be very tough on less-than-well-managed companies, but provide once-in-a-decade opportunities to those with dry powder to invest.

Earnings results over the next few quarters will let investors separate the good from the scary in the commercial real estate sector.
You can collect 1 dividend check every day for LIFE. To get started, all you need is as little as $605. Out of 4,174 dividend stocks, there are only 33 you need to buy to collect. Click here to get the full details.

While options block trades can potentially provide insight into what the smart money is doing, it’s impossible to know for sure what the goal of a big trade is. For instance, a 22,000-lot call spread expiring in October appears to have been purchased in iShares 20+ Treasury Bond ETF (TLT) options. This would seem to

Not long ago, I sat down with Jay Soloff, who runs several outstanding options income and trading services at Investors Alley. We had a long discussion about what is going on in the markets in general and banks, specifically. I talked at length with Jay about what has happened in the banking industry since early

Cheryl Pate is one of the managers of the Angel Oak Financial Strategies Income Term Trust (FINS), one of the closed-end funds we own in my Underground Income Service. Normally we would not share this information with everyone, but after giving paid members a first look, we decided her message was too important not to share with everyone.

Given that all the negativity surrounding bank stocks right now is making it difficult for investors to make clear decisions, I thought it was important to see the industry through the eyes of someone who views the industry from a credit as well as an equity perspective.

Cheryl shares my view that most of what we saw in March was a couple of one-off events related to specific developments at Silicon Valley Bank and Silvergate Capital. These developments had very little to do with most community banks across the United States.

Cheryl also points out that there are many bullish events that come out of the volatility that should lead to accelerated M&A activity in the second half of 2023.

This video presents you with information that outlines two massive investment opportunities. One is from the community bank industry in general, and the other is in the fund Cheryl and her team manage. With a 15% discount to net asset value and a yield over 9%, the Angel Oak Financial Strategies Income Term Trust (FINS) offers an extraordinary opportunity for huge long-term total returns. Cheryl also talks about developments in the market for community bank debt that make this fund a must-own for most investors.
But using them, I can beat the market 2-to-1 while collecting 2-10X MORE yield from regular dividend stocks.I learned this trick while I was rubbing elbows with some of the biggest fund managers in US history. They too are buying these little known funds, cashing in huge discounts and collecting income while they do it.Click here to learn the secret yourself.

The pandemic certainly turned the semiconductor industry on its head.

Despite record production of semiconductors, shortages everywhere led to months-long waiting lists for many consumer products. To meet consumer demand, semiconductor makers ramped up supply even more.

But then inflation arrived and decided to stay awhile. Central banks responded by raising rates, and economies slowed. The appetite for items like consumer electronics waned, leaving inventories stuffed full of chips.

The ramifications were felt all along the semiconductor supply chain.

For example, when Apple (AAPL) reduced orders of memory chips last year, supplier Micron Technology (MU) saw its sales collapse. To preserve cash flow, Micron chose to cut capital spending by 40% in 2023.

That, of course, means it will need less equipment from its supplier Lam Research (LRCX). Lam now expects the wafer front-end market—which relates to the first process in chip fabrication—to shrink around 30% in 2023, to $70 billion. As a natural consequence, Lam’s share price is down by a third since the start of 2022. That makes it an interesting stock to buy now. Let me explain.

Lam Research: Profitable and Cheap

Lam Research sells the equipment used to make semiconductor wafers. This includes the deposition machines that deposit layers of metal, the etch machines that selectively remove some of those layers, and the cleaning machines that take away unwanted particles between stages. Aside from Micron, Lam’s customers include these other semiconductor titans: Samsung, SK Hynix, Intel (INTC), and Taiwan Semiconductor (TSM).

Historically, Lam has focused mostly on the memory market. Last year, 50% of its sales came from either NAND or DRAM memory chip manufacturers. Memory chips exposure to demand in consumer electronics makes demand for them highly cyclical.

Less than a fifth of LAM’s sales came from logic chips, where, thanks to cloud computing exposure, demand is more consistent and expected to grow quite rapidly amid rising artificial intelligence investments.

This cyclicality in Lam’s business largely explains why it trades at a steep discount to other chip equipment manufacturers. For example, ASML (ASML), which sells the photolithography machines needed to produce the most advanced logic chips, trades on a forward price to earnings ratio of 31, versus less than 15 for Lam’s shares.

In addition to the cyclicality of consumer electronics demand, the company is facing another problem.

Last year, the U.S. imposed strict sanctions against Chinese semiconductor manufacturers, barring companies from selling chip designs and manufacturing equipment to Chinese businesses. Lam predicted these restrictions would result in a $2 billion to $2.5 billion hit to sales. That led to Wall Street analysts cutting their 2023 earnings forecast by 13%.

Despite all of this, Lam’s leadership position in a consolidated sector allows it to be highly profitable. In recent years, its operating margin has exceeded 25%; it hit 31.1% in the year to June 2022. This enabled Lam to generate a five-year average return on equity of over 50%.

Lam also generates a good free cash flow yield of 5%, well ahead of ASML and equal to its close rival, Applied Materials (AMAT). In the last two years, the company spent $1.1 billion on capital expenditure, but still managed to generate $5.5 billion in free cash flow.

Lam’s Bright Future

Lam’s management is wisely using some of that capital expenditure to move away from its reliance on the memory chip market. Some of these investments include atomic layer deposition and selective etch technologies.

The company is already the market leader in dry etch, and a prominent player in the deposition segment of the wafer fab equipment industry. The combination of these two is critical during the chip making process, along with photolithography (which produces the mask that exposes areas for materials to be deposited or removed).

Lam provides customers with some of the most advanced tools in these niche segments. And its leadership position creates scale advantages that fuel its research and development spending at levels only Applied Materials and Tokyo Electron (TOELY) can match.

We cannot overlook the fact that there is a major tailwind blowing in Lam’s favor. This comes in the form of the U.S. government’s efforts to boost domestic chip manufacturing. Last year’s Chips and Science Act includes $39 billion in manufacturing incentives for chip makers. This has produced results, with commitments from Intel, Samsung, and TSM to invest over $100 billion between them in the U.S. over the coming years.

So, while Lam may lose much of its Chinese business, the increase in investment into the U.S. from these companies will likely make up for it.

Keep in mind, too, that other nations are not sitting by idly; in fact, some are also offering incentives to chip companies to build semiconductor manufacturing capacity. For instance, in South Korea, Samsung has been offered incentives to invest $230 billion in a new memory chip manufacturing facility over the next 20 years.

So, while the near-term outlook is murky, Lam’s future as a leading equipment manufacturer in a heavily-subsidized industry looks bright. Its relationships with all the top chip makers in the world, combined with historically strong levels of capex spending in the industry, leaves Lam Research with a quasi-monopolistic position in its niche.

That should help it to continue to generate strong profit margins and consistent cash flows. LRCX is a buy in the $480 to $520 range.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trading at massive discount, and pays an 8% yield. This is my top pick for income during a rough market.Click here for details.

In these uncertain times for investors, energy midstream stocks offer an island of stability. This sector provides an attractive combination of current yield and dividend growth. However, midstream companies divide into two distinct categories, and the differences are important.

Energy midstream covers the movement and storage of energy commodities from the upstream drillers to the downstream refining, manufacturing, and utility companies. This graphic from the Alerian Midstream Energy Index fact sheet shows the services the companies included in the index offer.

Before the 2015-2016 energy sector crash, the majority of midstream companies were organized as master limited partnerships (MLPs). The crash forced massive restructuring, and many companies converted to corporations. Currently, the midstream sector includes some companies organized as corporations and others that have retained their MLP business structure.

If you invest in an MLP, you buy limited partner units. As a limited partner, you will receive a Schedule K-1 to use when reporting your taxes. The distributions (dividends) paid by an MLP are classified as return of capital and are not taxable income. Any tax consequences come from the K-1, and generally, MLP income will not be taxed.

Midstream MLP units should not be owned in a qualified retirement plan such as an IRA or Roth IRA, as they can cause severe negative tax consequences. The reason is too long to go into here. Just don’t do it.

Midstream corporate shares are just like owning shares of any other publicly traded company. You receive a Form 1099 for reporting dividend income, which will be qualified dividends. You can own these shares in a retirement plan without any negative consequences.

The differences between the two midstream business types have led to an interesting divergence in dividend yields. To illustrate, let’s compare three large midstream corporations to three similar MLPs. I want to look at current yields and dividend growth for the last two years.

Midstream Corporation:

Kinder Morgan, Inc. (KMI): Current yield: 6.27%; two-year dividend growth: 5.7%

ONEOK, Inc. (OKE): Current yield: 5.72%; dividend growth: 2.1%

The Williams Companies (WMB): Current yield: 5.94%; dividend growth: 9.1%

Master Limited Partnerships:

Enterprise Product Partners LP (EPD): Current yield: 7.26%; two-year dividend growth: 8.9%

Energy Transfer LP (ET): Current yield: 9.45%; dividend growth: 100%

Plains All American Pipeline LP (PAA): Current yield: 8.17%; dividend growth: 95.5%

You can see that MLPs sport higher yields to go along with the tax-advantaged income. The MLPs have also been more aggressive with dividend growth coming out of the pandemic. Going forward, I expect the midstream corporations to grow dividends at a mid-single-digit annual rate and the MLPs to grow theirs in the high single digits.

Outside of the IRA problem, MLPs currently provide much better investment potential. If you want to own them in an IRA, look at an MLP-focused ETF. The Alerian MLP ETF (AMLP) tracks the index with the same name. The InfraCap MLP ETF (AMZA) is an actively managed fund.

Unique in the space is Plains GP Holdings LP (PAGP). Each PAGP share is backed by one PAA unit and pays identical distributions. However, if you invest in PAGP, you get a Form 1099 for tax reporting, not a K-1—the market prices PAGP to yield about 0.3% less than PAA.
You can collect 1 dividend check every day for LIFE. To get started, all you need is as little as $605. Out of 4,174 dividend stocks, there are only 33 you need to buy to collect. Click here to get the full details.