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Investors Alley by TIFIN

This CEO Just Went Off on His Stock’s Value – and He’s Right

When markets are disrupted, good companies get taken down along with the ones that are facing problems.

The banking sector “crisis” pulled down the share prices of companies across the financial sector. Finance REITs were included, and this group faces continued challenges due to potential commercial mortgage challenges.

Recently the CEO of a favorite finance REIT made it clear that shares of his company are significantly undervalued…

Arbor Realty Trust (ABR) is a commercial finance REIT. The company focuses on financing solutions for multi-family and single-family rental properties. During the bank/financial stock selloff that started in March, the Arbor Realty Trust share price declined by one-third.

On May 5, Arbor released its 2023 first-quarter results. During the management conference call with Wall Street analysts, Arbor CEO Ivan Kaufman explained why he thinks the market is wrong about the ABR stock price. Here are some of the high points, quoted from the earnings call transcript:

After coming off our best year as a public company in 2022, we’ve had a tremendous start to 2023 with another exemplary quarter as our diverse business model continues to offer many significant advantages over everyone else in our peer group, with a premium operating platform with multiple products that generate many countercyclical income streams, allowing us to consistently produce earnings that are well in excess our dividend. This has allowed us to increase our dividend another 5% or $0.02 a share to $0.43, reflecting our 11th increase in the last 13 quarters, or 40% growth over that time period, all while maintaining the lowest payout ratio in the industry, which was 68% for the first quarter.…

Additionally, and very significantly, we’ve grown book value per share by 45% over the last three years from just under $9.00 a share to almost $13.00 a share, even with 11 dividend increases during that period.…Yet we still trade at similar dividend yields and price-to-book values as the rest of the space despite our unquestionable outperformance, which is why we strongly believe we are completely undervalued and there has never been a better time to make a significant investment.

ABR shares currently trade at about $12.20. That number is down 30% from the 52-week high of $17.43. Over the last year, the company increased the dividend from $0.37 to $0.42, including a two-cent raise announced with the earnings release. ABR currently yields almost 14%.

Historically, this well-run, strong-growth finance REIT has been priced to yield around 8%. To return to that yield, the share price would need to climb to $21. That’s assuming no further dividend increases, which is highly unlikely.

When a sector or the whole market gets hammered by the investing public, stock market disruptions take down the share prices of good companies along with those that trigger a selloff. If you understand that great companies will take advantage and thrive, you can back up the truck and load up on shares. Arbor Realty Trust is arguably the best of the commercial finance REITs, and I expect the company to take advantage of the current commercial mortgage stresses and be able to accelerate its growth.

I agree with CEO Kaufman. Back up the truck for ABR.

Investors Alley by TIFIN

 Don’t Miss the Winner of America’s Hidden Stock Boom

The stock market seems focused on only two types of stocks: technology companies involved with AI, and regional banks—which are going through a crisis.

Investors are ignoring the rest of the stock market, which is just drifting. But that should not stop you from picking out a few investing gems from the large body of adrift stocks.

Let’s look at one particular opportunity in the infrastructure sector…

Every four years, the American Society of Civil Engineers’ (ASCE) Report Card for America’s Infrastructure grades the condition of U.S. infrastructure in the familiar form of a school report card, assigning letter grades based on the overall physical condition of the infrastructure and needed investments for improvement.

The last overall grade, in 2021, was a poor C-minus, so it should not come as a great shock that at least $2.6 trillion needs to be spent to replace unsafe bridges, old dams and potholed roads if the country’s infrastructure is to be brought up to a better grade.

As the United States goes through a program of upgrading its crumbling infrastructure over the next decade, there will be a structural demand story for basic materials.

With infrastructure spending in the background, the intersection between the price of their products and the cost of their inputs is aligning to make it a very good time to be a company involved with construction supplies (aggregates, cement, etc.) in the U.S.

For instance, the average cost for U.S.-made cement hovered around $130 per metric ton in 2022. That is its highest average level for many years, and it has barely fallen—despite forecasts of lower demand from construction projects linked to the residential housing market.

Meanwhile, costs have started to fall for inputs like natural gas, which concrete firms use in large quantities in their production process. The Henry Hub spot price for natural gas has fallen to levels last seen in August 2020. This much lower natural gas price will benefit the concrete producers. The combination of falling input costs (apart from labor) and high prices will make it a very profitable year for the sector.

Vulcan Materials

Let me bring to your attention one company that will benefit from the large infrastructure projects because it can supply the needed materials in huge quantities: Vulcan Materials (VMC). Based in Birmingham, Alabama, Vulcan is a leading supplier of crushed aggregates and a producer of downstream basic materials like asphalt and concrete. It has 400 active aggregates facilities, 70 asphalt facilities and 240 concrete facilities across 22 states in the U.S., as well as in British Columbia, Canada.

Vulcan provides the basic materials for the infrastructure needed to maintain and expand the U.S. economy. Aggregates (Vulcan is the largest producer) are used in most types of construction and in the production of asphalt mix and ready-mixed concrete. Vulcan’s materials are used to build roads, tunnels, bridges, railroads, airports, hospitals, schools, and factories that are essential to the U.S. economy.

The company dominates construction materials markets in the southern U.S., but still continues to expand aggressively. For example, in 2021, Vulcan acquired U.S. Concrete for $1.29 billion. This acquisition gave it a greater foothold in metropolitan areas of Texas and complemented its existing facilities in the state, as well as in the prime markets of New York, New Jersey, and the aggregates segment in California.

Vulcan is benefiting from a growing volume of projects in the highways sector. Keep in mind that approximately half of the company’s sales of aggregates come from publicly funded projects.

The first of the projects funded by the U.S. government’s infrastructure plans started to come through last summer. According to official statistics, the number of highway projects starting in August 2022 was 14% higher year-on-year, reflecting both a return to pre-pandemic normality, as well as the higher levels of government funding. About 40% of the $850 billion in guaranteed funding from the U.S. Infrastructure and Jobs Act is focused on highways and bridge renewal.

Why Buy Vulcan Materials?

Vulcan Materials reported strong first-quarter results that included strong pricing gains and just a moderate pullback in shipments. Revenue increased 7% year over year, largely driven by robust growth in its aggregates business. Gross margin expanded 90 basis points year over year to 18.3%, as higher selling prices offset higher raw material costs.

On the last earnings call, management raised its full-year revenue and net earnings guidance, largely due to the strong performance and pricing gains in its aggregates business. Aggregates account for more than 70% of Vulcan’s consolidated revenue and an even larger portion of the company’s gross profit.

An increasingly industrial policy-driven U.S. economy is accelerating demand for construction materials. According to Census Bureau data, spending on factory construction hit an all-time high of $108 billion in 2022, as more and more companies reshored their production back to the U.S.

Infrastructure projects are resilient during economic downturns, as governments tend to fund projects through the cycle to support the economy and prevent job losses. Stable demand has supported consistent price increases through economic cycles and led to subsequent margin expansion for companies like Vulcan.

From 2007 to 2021, Vulcan’s price increases exceeded inflation in all but five years. During this period, the company’s price per ton grew over 90%, while inflation rose roughly 31%. Also, the company only recorded one year of price contraction during this 15-year period. This is evidence of the firm’s pricing power, even during times of softer demand

This suggests that investors should realize there will be an extended business cycle for materials suppliers, despite the slowing housing market.

VMC is a buy below $200 per share.
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Investors Alley by TIFIN

Why Those in the Know Are Bullish on Banks

My talks with bankers and technology providers in Tampa last week emphasized how important deposits have become in the world of banking. Even the flashiest fintech companies were emphasizing how their products could help banks attract and retain deposits.

There was a lot of talk about how the industry is changing. Banking is now a digital industry, and firms that cannot keep up are going to have to consider selling out to a larger bank with greater technology capabilities.

While I was in Tampa, we also saw the recent bank rally begin to slow down somewhat.

Although clickbait hunters and instant experts may be selling, there are two groups of people who are getting very bullish on bank stocks.

In today’s video, I show you who they are – and why they’re right…

One is Wall Street analysts.

The other is banking insiders. Officers and directors have their checkbooks out and are going on a buying spree.

I also take a quick look at the recent bank loan and deposit numbers from the federal reserve and what they mean for smaller banks like the one we prefer.

It is far better than the headlines are reporting.
It’s raised its dividend 37.5% on average, could be acquired, benefits from rising interest rates, trades at massive discount, and pays an 8% yield. This is my top pick for income during a rough market. Click here for details.

Investors Alley by TIFIN

Forget Tech; Invest Here Instead

Once again, technology stocks are grabbing the financial headlines. They have powered most of the gains in the S&P 500 in 2023.

In fact, Apple and Microsoft alone now account for a record 13.5% of the index—the most ever for the top two stocks.

While it’s tempting to buy big tech right now, the safer investing route—and the one I prefer is sticking with—is consumer staples companies that have strong brands.

Consumer Goods Companies Bonanza

Consumer goods companies had a remarkably strong 2022, despite a sharp rise in raw material costs and stretched household budgets. In fact, consumers swallowed big price increases in 2022 without batting an eyelid.

Companies in the sector hiked prices by 10% on average in the fourth quarter of 2022, according to Bernstein analysis, with volumes a mere 2% lower—and that trend has continued into 2023.

Most food and beverage companies were able to pass along large price increases in the first quarter, with sales volumes only edging down.

Here are just a few examples cited by the Financial Times: At AB InBev, North American beer prices rose 5.6% while volumes fell slightly. Kraft has long struggled with sales volumes, and in the first quarter they fell 6%—but prices were up 13%, and margins are widening. And Kellogg’s, best known for cereal, had a 14% benefit to sales from its price mix. Its management said it has been surprised by price elasticity remaining well below historical levels.

The story seems to be the same almost everywhere in the consumer staples sector. Companies up and down the value chain are passing on big—sometimes very big—inflation-plus price increases, and consumers are willing to pay. There is precious little evidence of trading down to cheaper alternatives.

This is a testament to the power of brands. But only companies able to maintain the luster of their product names can pull this off consistently: consumers will pay more for trusted products, which then deliver higher profits to the brand owner, cushioning it against rising input costs. This contrasts with generic products, churned out in high volumes at low margins.

A brandholder has “pricing power”—a Holy Grail for most businesses. And, as long as a company can maintain the quality of its brands, it will retain pricing power. After all, quality never goes out of style.

Let’s now take a look at one such consumer brands powerhouse, PepsiCo (PEP).

Pepsi’s Pricing Power

PepsiCo, founded in 1898, produces and sells food, snacks, and beverages around the world. In addition to its eponymous soda, as well as other beverages including Mountain Dew, Gatorade, 7UP, Tropicana, and various bottled water products, the company also owns food brands including Lay’s, Ruffles, Doritos, Tostitos, Cheetos, Quaker Oatmeal, and Rice-A-Roni. And, PepsiCo also provides tea and coffee products through a joint venture with Starbucks and Unilever.

On average, 11 of the 15 top-selling products in convenience stores come from PepsiCo, and Lay’s is the world’s best-selling snack food brand, having expanded sales from just $100 million fifty years ago to $30 billion today. Overall, PepsiCo ranks first in the $200 billion global savory snacks market, controlling 22% of the market, per research firm Euromonitor.

Pepsi’s net sales should rise by about 6% in 2023 and 4% in 2024, driven by 8% organic revenue growth. In 2022, PEP’s net sales rose 8.7% due to organic revenue growth of 14.4%. Organic sales growth will be driven by price increases—the company’s effective net prices jumped 16% year-on-year in the first quarter of 2023.

I think that investors will continue to favor Pepsi given the company’s ability to raise its dividend and deliver strong growth.

PepsiCo is a defensive blue-chip name with a strong balance sheet and high degree of earnings stability. I like the power of its brands, such as Frito-Lay and Pepsi, in an inflationary environment. It gives the company the ability to successfully pass higher costs on to consumers in the form of price increases.

The company’s shares are included in the S&P Dividend Aristocrats group. In June 2022, PepsiCo raised its annualized dividend by 7% to $4.60 per share. The company also announced a 10% increase in its annualized dividend to $5.06 per share, starting with the June 2023 payment—the 51st straight year PepsiCo has increased the dividend.

Management continues to expect $7.7 billion in cash returns to shareholders, consisting of $6.7 billion in dividends and $1.0 billion in share buybacks.

Pepsi’s stock recently hit an all-time high, up 12.5% over the past year and 7.75% year-to-date. Its current yield is 2.62%, but based on its history, Pepsi will continue to raise its dividend on a steady basis every year. PEP is a buy below $200 per share.
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Investors Alley by TIFIN

 How to Play the Upcoming U.S. Manufacturing Boom

The U.S. seems poised for a manufacturing boom as companies tap into government subsidies, pledging to spend tens of billions of dollars on new projects.

The Chips and Science Act and the Inflation Reduction Act (IRA)—passed within days of each other last August—together include more than $400 billion in tax credits, grants and loans designed to foster a domestic clean technology and semiconductor manufacturing base.

As of mid-April, a number of companies had committed a total of about $204 billion in large-scale projects to boost U.S. semiconductor and clean tech production, promising to create at least 82,000 jobs.

While not all these projects were a direct result of these bills, the projects will probably be eligible for the tax breaks. The amount committed in these projects is almost double the capital spending commitments made in the same sectors in 2021, and nearly 20 times the amount in 2019!

Throw in the Bipartisan Infrastructure Law, and you have something reminiscent of Franklin Roosevelt’s New Deal in the 1930s…except that the sheer numbers are much larger. The U.S. government is putting a whopping $2 trillion behind these acts. Measures in the IRA to support climate change initiatives alone are worth about $400 billion over 10 years.

Two trillion dollars is a huge pile of money. And many companies will benefit from the U.S. government’s incentives.

So, how can you invest to get in on this government gravy train?

Power Up Your Portfolio

I want to focus in particular on the Inflation Reduction Act.

There are a number of subsectors that will benefit from the IRA, including: carbon capture and storage, green hydrogen manufacturing, methane emissions capture from landfills, electric grids upgrading, and clean energy sources like wind and solar.

One example is the installation of utility-scale solar power, which is already the cheapest source of energy. Since last summer, shares in the largest U.S. solar stock, First Solar (FSLR), have risen more than 350%, from about $60 to a high of $221.88. The shares currently are around $177 per share.

I prefer to look at a stock that hasn’t gone up as much, even though it just hit a 52-week high: Quanta Services (PWR), which builds, maintains and improves electricity grids.

It operates through three segments: Electric Power Infrastructure Solutions, Underground Utility and Infrastructure Solutions, and Renewable Energy Infrastructure Solutions. The Electric Power segment provides network solutions for customers in the electric power industry. The Underground Utility segment provides infrastructure solutions for the development, transportation, distribution, storage, and processing of natural gas, oil, and other products. The Renewable Energy Infrastructure Solutions segment helps to build, maintain, and repair wind, solar, and hydropower generation facilities, as well as battery storage facilities.

Through a combination of organic growth and acquisitions, Quanta has grown into the largest provider of transmission and distribution (T&D) contracting services in the United States, with an approximately 15% and growing market share.

Quanta will benefit from accelerated capital spending by electric and natural gas utilities and from the expansion of 5G services and rural broadband. In addition, the company is well positioned to benefit from the aforementioned $1.2 trillion infrastructure spending bill, which included funds for renewable energy and electric vehicle charging stations, as well as for technology aimed at helping utilities to manage extreme weather conditions.

In July 2022, Quata was selected to be a lead provider in the rollout of a national electric vehicle charging network. The company will provide turnkey engineering, construction, and program management solutions for the project.

It should not come as a great shock, then, that Quanta ended the fourth quarter of 2022 with a record backlog of $24.1 billion.

I expect this backlog to continue to grow substantially. The Inflation Reduction Act will boost spending on climate change programs over the next 10 years, with much of the spending earmarked for power generation.

The company’s acquisition of Blattner Energy in October 2021 should also help it to benefit from accelerated spending on solar and wind projects. Blattner Energy is one of the leading utility-scale renewable energy infrastructure businesses in North America, providing engineering, procurement, and construction services (EPC) for solar, wind, and biomass projects. The company has a market share of approximately 30% for wind and 10% to 15% for solar, positioning it at the top of the renewable EPC industry.

Here is what research firm CFRA said about Quanta Services, which it rates as a strong buy:

Our Strong Buy opinion reflects our view of rising demand for power transmission and electrification projects in the next few years as PWR provides skilled resources and technology. We forecast robust growth from utilities as we think the industry is in the early stages of a multi-decade modernization program to replace aging infrastructure. PWR is well positioned to benefit from federal infrastructure stimulus in the coming years, as significant funding is directed towards grid hardening and modernization project work.

Quanta is actually a defensive growth story thanks to its exposure to both electric transmission and distribution, as well as renewable energy. That will be a positive catalyst for earnings growth even if the broader stock market suffers from declining earnings per share.

Goldman Sachs energy equity research analyst Ati Modak said Quanta is still a “best-in-class equity expression” of companies with exposure to the megatrends in the electric grid modernization and renewable generation markets.

I totally agree, making Quanta a buy. The stock is up about 20% year-to-date and 42% over the past year. Buy PWR anywhere in the $155 to $185 range.
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Investors Alley by TIFIN

This Strategy Works Great Even in These Ugly Markets

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.

Investors Alley by TIFIN

Add This Cheap Chip Play to Your Portfolio

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.