Investors Alley

I’m looking at a chart comparing bond yields correlated to the US economy. 

Right now, there are extreme readings in a pattern not ever seen. 

Usually, as the economy goes down, so do bond yields and vice versa. 

However — right now, economic data is worsening quickly but bond yields are rocketing higher. 

I have not seen this before. 

Why does this matter? 

Because it will eventually affect equities in a major way. 

Every Thursday, I release a short, free video sharing an insight for the week. This is what I want to show you today. 

I’ll share in this 2 minute video WHEN I expect equities to make a major move based on this chart I’m looking at. 

Click here to see my prediction. If you’d followed me the past year,  you would’ve sold most of your risk assets at the end of 2021. 
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Silvergate Capital (SI) is a crypto-friendly bank that is down over 60% in a week (at the time of this writing). The regional bank is getting hit hard after admitting the company has concerns about its operational viability after the collapse of the crypto market in recent months. Several short-term options block trades suggest that

A popular method of trading the energy sector is by using the Energy Select Sector SPDR ETF (XLE), which tracks the energy stocks of the S&P 500. A strategist placed a call ratio spread last week that likely signals bullish expectations in energy stocks through April. A ratio spread is a way to reduce the

Everybody loves tech stocks.

After all, technology has changed the world and will continue to do so. The hard part is picking those tech stocks that will be the winners over time, and deliver potentially life-changing returns to shareholders.

In tech stock investing, getting caught up in a story is even easier than usual.

Consider my favorite story about tech stocks. This story came true, but the company’s valuation at its peak, when excitement was at its highest level, was so high that investors in the stock still are not even. And given that the peak came in 2000, that is a long time to be underwater.

Here’s how to avoid that trap – and invest profitably in tech…

The company I mentioned above is Cisco Systems Inc. (CSCO). Cisco was and is the company that made the internet possible. Its routers and switches dominated the market back in the 1990s as the internet boom took off.

The stock peaked at $88 a share in 2000 and has never even come close to that level again. As I’m writing this, 23 years later, it’s trading below $50 a share.

And yet Cisco went on to change the world as we know it. The company does more than $11 billion in revenue each year. It has bought hundreds of smaller tech companies, adding new and growing technologies to its product line. It continues to be the market leader in networking technology, and is also a leader in the fast-growing cybersecurity field.

If the stock gains 40 points, those who jumped on the bandwagon at the height of the excitement will finally be even.

Zoom Video Communications Inc. (ZM) is a more recent example of too much excitement over a tech stock, causing investors to get crushed.

The videoconferencing platform made the difference between the economy functioning and the U.S. economy spiraling into a Lord of the Flies situation during the pandemic.

DocuSign Inc. (DOCU) was another part of the dynamic duo that saved the economy in 2020 and 2021.

Those two companies made business possible during lockdowns and the subsequent reluctance to travel for business in the early stages of the pandemic. And as pandemic restrictions have eased, everything the pundits and talking heads told you about these companies has happened: they made doing business easier. They helped save on travel costs.

Investors naturally got excited. And, as is almost always the case, they got too excited and paid too high a price: Zoom and DocuSign are both now more than 80% off their highs.

How do we avoid being caught up in the too-excited aspect of investing and still participate in the amazing gains technology can provide?

My suggestion is that you steal ideas from a wildly successful technology investment firm that you probably have never heard of before. Or, if you have, it is because a few years ago, the founder paid off the student debt of the 2019 graduating class of Morehead College, a Historically Black University in Atlanta, Georgia.

My pick for technology ideas is Vista Equity Partners. Robert Smith’s private equity firm specializes in software companies and has a fantastic track record. Over the past decade, they have crushed the S&P 500 in both its private and public equity portfolios.

Buying the top ten public companies owned by Vista Equity partners has been a very successful way to both participate in the high returns of technology stocks and avoid many of the spectacular wealth-crushing declines of some of the most popular stocks.

As is usually the case, I will give you one pick I find exciting and let you do the leg work at SEC.gov if you want to see what else Vista Equity owns.

Vista bought PowerSchool Holdings Inc. (PWSC) in 2015 from the British publishing company Pearson Plc (PSO) and has made add-on acquisitions to grow the company ever since.

PowerSchool provides cloud-based software to North American schools that allows them to communicate with students, handle regulatory and compliance issues, take attendance, record grades, and just about everything else involved in running an education system.

Vista sold part of the company to the public back in 2021 but still owns about 37% of PowerSchool. To cash in on the rest of its incentive fee, the team at Vista needs to help PowerSchool management get the stock price as high as possible.

I am a huge fan of Ed-tech stocks, and PowerSchool has what it takes to be a leader in the sector. The more I learn about the company, the more I think PowerSchool could be a long-term ten-bagger or more for patient, aggressive investors.
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The U.S. economy will likely experience a recession this year. We may already be in one. I believe the 2023 slowdown will be significantly different compared to recent economic contractions.

Memorable recessions are usually associated with a larger financial crisis, such as the bursting of the dotcom bubble or out-of-control subprime mortgage lending, such as what we saw with the Great Financial Crisis.

I am calling the current/pending negative growth an earnings recession.

But here’s the thing – this won’t really spread to the wider economy. Or to our portfolios, as long as you do this one thing…

Let’s start with this graphic from a recent Wall Street Journal article:

You can see that corporate earnings are forecast to decline over the first half of 2023. This doesn’t mean that U.S. corporations will lose money. It means that company profits will decrease. Most U.S. corporations will still be profitable, but the profits will likely decline compared to the same periods last year.

The most significant cause of declining profits comes from higher interest rates. As a company has to pay more on its debt, less money falls to the bottom line.

I don’t think the profit slowdown will spread to the broader economy, which would result in higher unemployment numbers. Companies that hired too many employees over the last couple of years might right-size their numbers, but there will not be widespread layoffs. This situation means anyone who wants to work will still have a decent-paying job, and those workers will continue spending like Americans.

The earnings recession will leave regular folks feeling okay about their finances. Investors face a different challenge. They will need to put a value on the shares of companies where profits are going down. Markets don’t like that. For example, last week, New Fortress Energy (NFE) missed on revenue, and the share price dropped by 15% in one day. NFE will be an outstanding long-term stock, but it was a tough day. I picked up a few shares.

The best chance for attractive returns in 2023 will be high-yield stocks in sectors that are either immune or benefit from the current situation with interest rates and inflation.

Energy infrastructure will be one sector with growing cash flows and dividends. To my subscribers, I recommend exposure through the InfraCap MLP ETF (AMZA). The fund boosted its monthly dividends in January and currently yields 8.7%.

Business development companies (BDCs) are killing it with higher interest rates. BDCs lend to small and medium-sized corporations. These loans are almost exclusively floating rate, so higher interest rates mean higher profits. There seems to be daily news about another BDC boosting its dividend rate. For example, Blackstone Secured Lending (BXSL) recently raised its dividend by 16%, giving a current yield of 11%.

I added a fourth BDC to the recommended portfolio with the March newsletter for my Dividend Hunter service. The sector will be so good for investors in 2023.
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Last week the U.S. stock market experienced its biggest one-day decline in several years. A rapid yield increase on the 10-year Treasury note triggered the stock market route.

The market runup in January was due to investor expectations that the Federal Reserve would soon start to ease interest rates.February reversed that enthusiasm, and the stock market gave back almost all of those January gains.

My advice is to stop trying to guess what will happen with interest rates and instead take advantage of the yields you can earn on short-term investments.

Let me show you how…

This chart of the 10-year Treasury yield from the Wall Street Journal shows the rise and fall and rise of the note’s yield:

The increase in interest rates is not good news for stock market investors. But it is good news if you put your money into interest-paying investments. Here are a couple of ideas.

Money market mutual funds hold a stable one-dollar share price and carry yields based on short-term interest rates. These funds currently yield 4.2% to 4.5%. Your brokerage firm offers a choice of money market funds, letting you choose from government, corporate, or tax-free municipal holdings in the portfolios. These funds give you 100% liquidity and attractive yields.

I have recommended the Invesco BulletShares fixed maturity bond ETFs for more yield to my Dividend Hunter subscribers. These funds have staggered maturities that lock in your yield to maturity. The funds redeem in December of the designated year. The Invesco BulletShares 2024 High Yield Corporate Bond ETF (BSCO) sports a 7.36% yield-to-maturity, and the Invesco BulletShares 2025 High Yield Corporate Bond ETF (BSCP) will pay 8.44%. With these funds, you will earn the yield-to-maturity, or very close, if you hold the shares until redemption.

You should also look at business development companies (BDCs) for some stock market ideas. These companies lend to medium-sized corporations. Their loans are almost 100% floating rate, and they are killing it in this market. This chart from Owl Rock Capital Corp. (ORCC) shows the positive earnings impact of rising interest rates:

The recently declared dividend from ORCC is 19% higher than last year’s rate. The shares yield more than 10%. I have increased the number of BDCs in my Dividend Hunter portfolio to four.
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2022 was truly a breakout year for generative artificial intelligence (AI), which can produce fluent textual responses to questions, draft stories, and generate images on demand.

But generative AI really came to the fore for investors after Microsoft (MSFT) made the decision in January of this year by to invest $10 billion in OpenAI, the creator of the chatbot sensation ChatGPT.

Microsoft stock itself jumped more than 12% shortly after the deal announcement, adding nearly $250 billion to the company’s market cap. The rise was based on hopes that the underlying technology will live up to the prediction by Satya Nadella, the company’s CEO, that it would “reshape pretty much every software category that we know.”

But the true winner of the AI wars won’t be Microsoft. Here’s who you should be looking at instead…

The AI Wars are About Chips

It’s little wonder that an all-out struggle seems to have broken out to see what company will dominate this brave new world of AI. The players include Microsoft, Google, and a host of others.

However, Wall Street thinks it already knows who the ultimate winner will be…the ‘picks and shovels’ companies that manufacture all the “weaponry” the combatants will be using.

And what are these weapons? They are the advanced chips needed for generative AI systems, such as the ChatGPT chatbot. According to Richard Waters of the Financial Times, “…investors are not betting on just any manufacturer” for the production of these chips. In a February 17 article, he pointed out that Nvidia Corp.’s (NVDA) graphical processing units (GPUs) dominate the market for training large AI models. The company’s shares have surged 45% already in 2023.

And as Waters pointed out, the stock has nearly doubled since its low in October. That was when Nvidia was in investors’ doghouse due to a combination of the crypto bust (crypto miners widely used Nvidia’s chips), a collapse in PC sales, and a bungled product transition in data center chips.

It does look like GPUs will be critical in this war to dominate in AI. Besides the job of training large AI models, GPUs are also likely to be more widely used in inferencing—the job of comparing real-world data against a trained model to provide a useful answer.

Waters quoted Karl Freund at Cambrian AI Research, who said that, until now, AI inferencing has been a healthy market for companies like Intel Corp.’s (INTC) that make CPUs (processors which can handle a wider range of tasks, but are less efficient to run). However, the AI models used in generative systems are likely to be too large for CPUs, requiring more powerful GPUs to handle the task.

Just five years ago, some on Wall Street predicted that GPUs were yesterday’s news and would not be needed in AI as much as competing technology like ASICs (application-specific integrated circuits).

Yet, here we are today and Nvidia is sitting on top of the mountain. Much of that, as Waters explains, is thanks to the company’s Cuda software, which is used for running applications on Nvidia’s GPUs. Nvidia also has a new product hitting the market at just the right time, in the form of its new H100 chip. This has been specifically designed to handle transformers, the AI technique behind recent big advances in language and vision models.

According to Nvidia, a transformer model is a neural network that learns context, and thus meaning, by tracking relationships in sequential data like the words in this sentence. Transformer models apply an evolving set of mathematical techniques, called attention or self-attention, to detect subtle ways even distant data elements in a series influence and depend on each other.

Why Buy Nvidia?

Of course, there are competitors infringing on Nvidia’s space, including all the “Big Tech” companies. Waters pointed to how Google decided eight years ago to design its own chips, known as tensor processing units, or TPUs, to handle its most intensive AI work. Amazon and Meta have followed a similar path.

At Microsoft, its success in generative AI owes a lot to the specialized hardware—based on GPUs—it has built to run the OpenAI models. However, in the chip industry, rumors have been swirling lately that Microsoft is now designing its own AI accelerators.

Despite all of this, I suspect that five years from now, the company will still be a major force in AI, building on its current first-mover advantage in chip solutions for AI.

Buy NVDA on any tech stock weakness, in the $180 to $220 range.
It’s not REITs or blue chips like Disney. A small, little-talked about area of the dividend stock market is pumping out market-beating returns like no tomorrow. Over 22 years, they’ve handily beat the market… and I have the #1 stock of these to give you now.

One of the most active ETFs in terms of options trading is the iShares iBoxx $ High Yield Corporate Bond ETF (HYG). The most popular high yield bond ETF, HYG trades over 400,000 options contracts per day on average. A trader recently placed 7,000 of what appear to be HYG covered calls. The position could

The past couple of weeks, we’ve talked about how looking at the right 13F filings can reveal some of the greatest investments to make right now.

It’s like having Wall Street’s best analysts working for you, for free… If you know what to look for, of course.

But before we move on to other segments of 13F analysis, I want to take one more trip into the land of deep-value investing. It’s a neighborhood that many people talk about, but only a few people ever visit.

Which is too bad, because the profits to be made there are impressive…

In many ways, the deep-value neighborhood reminds me of Greenwich Village in the 1970s. A lot of people claim to have been there, but few actually were – driving through on a double-decker tour bus doesn’t count.

Similarly, lots of people talk about value investing. But almost no one actually practices value investing.

If you want to be the biggest fund, which means collecting the most fees, you cannot be a successful deep-value investor.

You can be a relative value investor and buy companies that trade at lower valuations than the indexes or competitors, sure.

There are several money management and mutual fund firms that started as deep-value investors and got too big to continue and had to move to relative valuation.

You can do what Warren Buffett, Seth Klarman, and several other wildly successful former deep-value investors have done and become a bear market buyer. It’s the best way to deploy billions of dollars into liquid securities at low valuations.

This is because being a deep-value investor – that is, buying stocks that trade in the lowest decile of valuations based on price to tangible book value – usually involves smaller companies. And it is impossible to move the needle of a multibillion-dollar firm investing in small companies.

After all, even a 10X return doesn’t mean much if the initial investment wasn’t a big chunk of your billion-dollar fund’s portfolio.

But having billions of dollars and nothing to do with them isn’t a problem for you and me.

For us, the kinds of companies deep-value investing targets are plenty big enough to move the needle in our retirement accounts.

That’s right – when it comes to deep-value investing, you and I have a huge advantage over the big players on Wall Street.

The firm I will highlight today understands this, and says on its website that it will always prioritize performance over asset growth.

Since opening its doors in 1998, the firm has done precisely that. Aegis Financial Corp.’s Small-Cap Deep Value Fund (AVALX) has just $274 million of assets despite outperforming the S&P 500 by a little over 50% since inception.

Much like Donald Smith and Company, which we talked about last time,  Aegis buys stocks at the lowest valuations based on price to tangible book value.

Donald Smith and Company uses the bottom 10% of stocks based on this measure, and Aegis widens the universe to the bottom 20%.

The firm then begins the underwriting process of evaluating the companies to make sure they are financially strong enough to survive until they thrive.

They take that surviving universe and do a deep dive to cut the list down to the 40 -50 stocks they will own in the fund.

Most of the stocks will be smaller companies no one has heard of.

Many of the companies owned by the fund will be in industries the market hates.

For instance, the firm’s mutual fund, AVALX, currently owns quite a bit of coal stock and was buying more at the end of the year. It also holds a lot of gold and metals miners as well as steel and alloy producers.

The newfound religion of ESG (Environments, Social, and Governance) investing that has infected Wall Street over the past few years hates all these industries.

As hated as these companies may be, they are collectively a big reason why the fund had a positive year in 2022.

They are also a big part of the reason that owning the top 30 holdings of Aegis Financial has beaten the S&P 500 by about 2-to-1 over the last decade.

The four largest purchases of the firm in the last three months of the year were coal and gold stocks. However, I am not a gold fan and will leave it to gold-loving readers to decide for themselves if Centerra Gold Inc. (CGAU) and Equinox Gold Corp. (EQX) are appropriate for their metals stock allocation.

Both are cheap based on asset value.

Coal was supposed to be on its way out, but underinvestment in oil and gas and a massive overcommitment to unachievable energy policy goals have revived the industry.

History books will not be kind to the current habit of developing energy policy based on politics (no back-patting here for anyone – both sides do it), but that is the world we live in today.

Aegis was buying more of Peabody Energy Corp. (BTU), and Hallador Energy Co. (HNRG) as 2022 came to a close.

The fund increased its position in energy and materials stocks in the last quarter as these sectors weakened.

A quick web search will take you to Aegis Financials’ website, where the fund managers’ letters serve as an advanced course in deep-value investing.

Deep-value investing is not for everyone.

It should be, but fortunately for the handful of us who embrace the concept, the idea of buying cheap stocks never takes hold with most peopleFor those of you who love bright and shiny things when it comes to investing, our next edition of the Hidden Profits Report will look into finding the very best tech stocks no one has ever told you about…
It’s not REITs or blue chips like Disney. A small, little-talked about area of the dividend stock market is pumping out market-beating returns like no tomorrow. Over 22 years, they’ve handily beat the market… and I have the #1 stock of these to give you now.

Last week, I showed you how I make one of the most difficult choices an income investor will ever face: when to sell a stock to lock in a profit.

Today, I’ll cover the only decision that’s even harder. I’m of course talking about when to give up on a stock, let go, and sell it at a loss…

New Dividend Hunter subscribers often ask about my criteria for selling a stock. Most are looking for some percentage loss or gain on a stock as a trigger to sell. I stay away from any rules not based on the underlying fundamentals of each recommended investment.

Over the years, I have found that the annual portfolio turnover for the Dividend Hunter portfolio averages about 25%. To me, with a buy-and-hold investment strategy, that number seems high, but it is surprising how the investment outlook for companies can change. Over eight years of Dividend Hunter investing, there has been about an equal 50/50 split between stocks sold for a profit and those on which we took a loss.

The reasons to sell fall into three distinct categories. I will cover each reason in a separate article. Today, in the third installment of this series, I’ll cover when to sell a stock at a loss.

I am frequently asked what amount of decline would trigger a sale. Many investors come from other strategies that tell them to sell after a 20% (or similar amount) decline to protect against further losses.

With a focus on investing to generate a high-yield cash income stream, a falling share price is not usually a good reason to sell. As long as the company continues to pay its regular dividends, a lower share price should be viewed as an opportunity to add shares to boost your average yield and income. A falling share price does not indicate that the dividend will be cut—at least most of the time.

Instead of basing decisions on share price, it’s an actual threat to the dividend payment that will trigger a sell recommendation. Occasionally, you can see a dividend cut coming, such as when a company’s profits decline and fall to the point where it earns less than the dividends it pays to investors. At that point, it’s a judgment call whether the business can recover; if it can’t, the dividend will soon be reduced. I will usually take the conservative path and recommend selling.

A dividend cut or suspension will almost always trigger a sale. These often come as a surprise, or the result of an unexpected event. The pandemic-triggered shutdown pushed a lot of companies to stop paying dividends. When that happens, the best course will be to sell and take the loss on the shares.

Fortunately, surprise dividend cuts are rare with a well-researched high-yield portfolio (such as the Dividend Hunter portfolio).

The bottom line is that a decision to sell a stock, especially when the share price is down, should be based on the fundamentals of the company’s business. If the profits stay predictable and the dividend is secure, a lower price is an opportunity to buy. If the fundamentals erode, that would be a reason to sell the shares.

One example that is not apparent concerns the exchange-traded notes (ETNs) offered by Credit Suisse Group AG (CS). Here are three popular funds:

Credit Suisse Silver Shares Covered Call ETN (SLVO)

Credit Suisse Gold Shares Covered Call ETN (GLDI)

Credit Suisse Crude Oil Shares Covered Call ETN (USOI)

The ETNs provide investment exposure to the designated commodities and pay attractive dividends. The problem is that an ETN is an unsecured debt obligation of the sponsor. Credit Suisse faces major business operations threats, making these funds too risky.