Investors Alley

You’ll see them every year, right after all the market predictors are done with their end-of-year foolishness: countless articles that advise you to buy what the world’s best investors are buying.

The problem is that most of those advising you to “buy what the world’s best investors are buying” have no idea who the best investors are right now.

Warren Buffett is always mentioned. While it is true that Warren has one of the best long-term track records of all time, his public portfolio returns could have been better over the last two decades.

As for the investors who have ­actually had the best returns lately, you may not have heard of them – or where they’re putting their money…

It’s not that following in Buffett’s footsteps wouldn’t have been fine. Owning Berkshire Hathaway’s (BRK-A) top 20 holdings with the same portfolio weight that Warren has given them, each stock has earned 8.97% annually since 2001. The returns increased to 9.92% annually over the last ten years, and while that beats the S&P 500’s 7.30% over the same time frame, it is not a best-in-class return.

Carl Icahn’s name will also come up. And Icahn is, in fact, one of the greatest investors of all time—studying every deal he has done since the 1970s would give you an education no business school in the world could match.

However, Icahn has also lagged behind the S&P 500 over the last decade with an annualized return of 11.87%.

Seth Klarman of Baupost is, similarly, one of the best investors of all time. However, his equities portfolio has returned just 6.59% over the past decade. Most of his fund’s assets are in fixed income and real estate opportunities not reported in 13F filings.

The superstars of yesterday are now aging billionaires whose goals differ from those of us who are still looking to pile up wealth as rapidly as possible. Plus, their funds have billions of dollars, making it far more challenging to take advantage of the most attractive opportunities.

I will spend a couple of issues identifying who the best investors are today, and share a few ideas they have been buying recently that might offer outstanding potential returns.

For starters: have you heard of Electron Capital?

Most investors have not, but the New York firm, which invests in companies focused on the transition of energy consumption towards lower carbon intensity solutions, has one of the best track records in the game.

Electron is investing in companies committed to producing clean energy and developing infrastructure for the energy transition process, as well as the utilities that will provide cleaner energy to homes and industries in the future.

It is no secret that I am still a huge fan of fossil fuels, but I have also made it clear that I believe in the eventual transition to green energy. Of course, we will still burn oil and gas, but renewable energy will be the fastest-growing segment of the energy industry.

How good is Electron Capital?

Look at a few stocks it sold recently to see how good it is.

In the third quarter, Electron sold out of Enphase Energy (ENHP), the popular solar inverter company, at a price of about $276. Its first purchase of the stock was back in 2017, long before every talking head and pundit recommended it. At the time, Electron paid a split-adjusted price of $1.37.

Electron also sold a bunch of Quanta Services (PWR) in the quarter for an estimated price of $127. The firm’s first purchase of the stock was in 2018, at around $33.

The firm has returned in excess of 33% over the past three years for its investors. In addition, over the past 17 years, the firm has outperformed the S&P 500 by a 2.5-to-1 margin and the World Utilities Index by more than 13 times.

One of Electron Capital’s newest positions is Eos Energy Enterprises (EOSE), a company that designs, manufactures, and deploys battery storage solutions for utility, commercial, industrial, and renewable energy markets.

Eos Energy has developed Znyth, an aqueous zinc battery designed to overcome the limitations of conventional lithium-ion technology. This company has a long-shot element, but if the battery works at a utility level, this stock could be a ten-bagger as the energy transition progresses.

Electron Capital was also adding to its already large position in Stem (STEM), a global leader in AI-driven clean energy software and services. Stem’s AI- software platform, Athena, enables organizations to use AI to deploy and unlock value from large-scale clean energy assets. The company also provides solutions to help improve returns across energy projects, including storage, solar, and electric vehicle fleet charging.

Over the next several decades, there is an enormous amount of money to be made in both fossil fuels and renewable energy.

I have fossil fuels more than covered in both Underground Income and The 2023 Turnaround Project, but investors looking to uncover energy transition opportunities might do well to track the buying and selling of Electron Capital.

I will be doing the same here at the Hidden Profits Report.
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Forget about the metaverse. The “next big thing” in the world of technology is Generative AI, a type of artificial intelligence that is capable of producing original content from scratch. Someday—hopefully not too soon—generative AI will be able to write articles like this, thus putting me out of a job.

And one of the most important Big Tech companies is now making a huge investment in this area…

Venture capital investment into generative AI has increased 425% since 2020 to $2.1 billion in 2022, according to PitchBook. That is about as much as the amount invested in all of the previous five years combined!

The global market for AI-augmented content solutions likely hit $2.3 billion in 2022, and research from PitchBook predicts it will grow an overall 17% through 2025. But the group added that: “…the technology might not generate high revenues in the short term, as professions resist AI solutions and the technology still has to mature.”

One of the leading companies in this field is OpenAI, which was founded in 2015. Its ChatGPT made its public debut in December 2022. ChatGPT, which can converse with users, surpassed 1 million users in just five days.

So, it is notable that Microsoft (MSFT) is considering a $10 billion investment into OpenAI that would value the entire company at $29 billion. Let’s consider the implications of this possible deal.

Why Microsoft Is Interested in OpenAI

If Microsoft does go through with this investment, it will be doubling down (technically dectupling down!) on an already-successful bet—in 2019, the company invested $1 billion in OpenAI in exchange for the right to integrate the start-up’s work into its own products.

This deal included the use of Microsoft’s Azure cloud computing platform to conduct experiments. Under the deal, Microsoft got the first shot at commercializing early results from OpenAI’s research.

Since then, Microsoft has incorporated OpenAI technology into a coding tool. But Microsoft sees much more. As Eric Boyd, head of AI platforms at Microsoft, explained to the Financial Times: “These [AI] models are going to change the way that people interact with computers. They understand your intent in a way that hasn’t been possible before and can translate that to computer actions.” Talking to a computer as naturally as to a person will revolutionize the everyday experience of using technology, Boyd added.

Recent reports do suggest that a much more consequential team-up is in the works between the two companies. One possibility involves putting OpenAI’s technology in Microsoft’s Bing search engine as well as the company’s widely used productivity programs like Office.

The company has already used OpenAI’s technology in a number of its own products. Its Azure cloud customers have been able to pay for access to GPT-3, a text-generating AI model, since 2021. Dall-E 2—an image generating system that excited the AI world last year—is the base of a recent Microsoft graphic design product called Designer, and has also been made available through the Bing search engine. And finally, Codex—a system that prompts software developers with suggestions of which lines of code to write next—has been turned into a product by GitHub, a Microsoft service for developers.

Microsoft’s AI Future

Of course, an investment of $10 billion into OpenAI is a drop in the bucket for Microsoft, accounting for less than one-sixth of the company’s free cash flow last year. But because of OpenAI’s technology, the potential return is enormous. Much of its tech stems from the creation of so-called large language models, which are trained on huge amounts of text. Unlike the earlier forms of machine learning that dominated AI for the last decade, this technique has led to systems that can be used in a much wider variety of uses, boosting their commercial value.

If Microsoft does go through with the $10 billion investment in OpenAI, it could easily give the software giant a big leg up on its archrival, Alphabet (GOOGL), with a technology that Google itself sees as “a code red” challenge to its cash-cow search business.

However, at the moment, that seems like a stretch. ChatGPT may be able to write coherent-sounding articles. But when you read closely, they are rife with errors, and there are worries that the technology could end up spreading misinformation on a massive scale. That’s why, for example, Stack Overflow, a Q&A website for software developers, has banned ChatGPT, saying its responses cannot be trusted.

At the moment, Microsoft is trying to make a deal with little financial risk. It wants to get the bulk of OpenAI’s profits until it recoups its investment, and the company would own nearly half of this potential AI powerhouse. And any potential deal would further tie the highly data-intensive OpenAI to Microsoft’s Azure cloud service.

You see, processing ChatGPT queries isn’t cheap or easy. OpenAI’s CEO, Sam Altman, prices the platform’s answers at several cents apiece. In fact, on Twitter, Altman said: “…the compute costs are eye-watering.” Analysts at Morgan Stanley estimate that the higher cost of natural language processing means that answering a query using ChatGPT costs around seven times as much as a typical internet search.

As mentioned before, Microsoft’s Azure is providing the vast computing power needed to power OpenAI’s technology. To produce and improve their output, AI systems like ChatGPT need to suck up and process huge amounts of data. Microsoft’s Azure is among the few services that can deliver that kind of horsepower.

Of course, competitors are flocking to the space, with Google and others plowing resources into creating AI models like what OpenAI has created. But since GPT3 stunned the AI world in 2020 with its ability to produce large blocks of text on demand, OpenAI has set the pace with a succession of eye-catching public demonstrations.

If Microsoft is right about the far-reaching implications of generative AI technology, a deal with OpenAI could trigger a complete realignment in the world of AI. OpenAI seems to be the right horse in this race to become the primary platform on which the next era of AI will be built. So Microsoft is positioned to be the winner in the AI field—at least, for now.
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As promised last week, I want to go back and explore the thesis advanced by KKR’s (KKR) macroeconomics team. Henry McVey and his team suggested that one of the best ways to earn high returns on your money over the next few years is going to be owning companies that are growing their free cash flow and dividends.

That hypothesis is easy to agree with, given that free cash flow and dividends are two of the three legs of my long-term investing trinity.

Here’s why, and two stocks that fit to buy today…

I am a huge fan of free cash flow. After all the bills are paid and the necessary expenditures to keep equipment, facilities, and plants up to date have been taken care of, leftover cash is what is used to grow the business and increase the stock price over time.

(The third leg of the long-term investing trinity, of course, is asset value, but we can save that discussion for another day.)

The first company that is growing its free cash flow and dividends at a double-digit pace also fits into another investment theme both KKR and I think will provide huge returns in 2023. (Judging by how often I find KKR’s thinking aligns with my own, I have to think they have a bunch of really smart people working there…).

Owning infrastructure that moves oil and gas from point A to Point B for a fee will continue to be a great business. These assets throw off high levels of cash.

One of the largest owners of energy-related infrastructure is Kinder Morgan (KMI). Kinder Morgan owns about 70,000 miles of natural gas pipelines that handle about 40% of all natural gas shipments in the United States. The company has pipelines connected to every important natural gas field in the country, including the Eagle Ford, Marcellus, Bakken, Utica, Uinta, Permian, Haynesville, Fayetteville, and Barnett gas fields.

Kinder Morgan also owns another 9,500 miles of pipelines that transport liquids like gasoline, jet fuel, diesel, natural gas liquids, and condensate. This business segment also owns 65 liquids terminals that store fuels and offer blending services for ethanol and biofuels. And, the company is the largest independent terminal operator in North America. Kinder Morgan has 141 terminals that handle renewable fuels, petroleum products, chemicals, vegetable oils, and other products for its customers.

The company will generate over $3 billion in free cash flow for the full year 2022, which will be used to pay dividends, reduce debt and buy back stock. In fact, Kinder Morgan has grown its free cash flow by an average of 20% yearly, and has been generous about sharing that cash with shareholders. As a result, the dividend over the past five years has grown by 19% annually.

This a stock you can buy and hold for a very long time. While oil and gas are its dominant business today, Kinder Morgan is positioning for a green future and will be a big player in renewable infrastructure as the need develops over the next few decades.

Another stock that fits the free cash flow and dividend growth description is Advance Auto Parts (AAP). This company is, obviously, in the auto part business. Currently, Advance Auto has 4,687 stores and 311 branches in the United States, Puerto Rico, the U.S. Virgin Islands, and Canada. The company also services 1,318 independently owned Carquest branded stores in Mexico, Grand Cayman, the Bahamas, Turks and Caicos, and the British Virgin Islands.

Advance Auto has been in turnaround mode for several years, but appears to be getting its act together. Over the past five years, the company has grown free cash flow by 20% annually. In addition to using the cash to improve the business and make smart acquisitions, Advance Auto has also been buying back stock and increasing the dividend, which it has grown by 64% annually for the past five years. The shares currently yield about 4%.

Advance Auto Parts is on my “buy ugly” list. It is the type of stock I want to buy when the market collapses and good companies are trading at ridiculous prices. This company is starting to hit on all cylinders, and management has proven to be very shareholder friendly.

In general, buying companies with growing free cash flows and rising dividends makes a lot of sense in the current market environment. In a slowing economy, companies that can produce free cash flow and use that cash to reward shareholders should be handsomely rewarded by the market.
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In these early days of 2023, I often find myself thinking about how attractive Master Limited Partnership (MLP) investments look as we move into the year. After a great 2022, energy infrastructure companies are poised to perform well again this year. The big choice is whether to invest in midstream MLPs or shares of midstream corporations.

Here’s what I found – and the best investment to make now…

The terms energy midstream and energy infrastructure are interchangeable. These are the assets and companies that provide gathering, transportation, storage, and terminals between the upstream operations (oil and gas drilling) and downstream operations (refining, chemical manufacturing, utilities).

Before 2015, most midstream companies were structured as MLPs. The prevailing business model involved funding growth projects with a combination of equity and debt. The growth generated growing free cash flow, most of which was paid out as distributions to investors. For at least two decades, MLPs were outstanding dividend growth investments.

The energy sector crashed from 2015 through 2018. The debt-heavy MLP business strategy stopped working. The energy sector crash was a period of massive business restructuring among midstream companies. Companies reduced leverage ratios and cut back on distribution payout levels. They transitioned to paying for growth out of internally generated cash flow.

Additionally, many companies chose to restructure into corporations, leaving the MLP sector behind.

Currently, midstream companies are in excellent shape. Leverage is low, and free cash flow is high and growing. Dividends are well covered, with many companies showing more than two times coverage of the distributions paid to investors. The choice for investors now revolves around whether to focus on midstream companies organized as corporations or as MLPs.

Master limited partnerships often get passed over because they send out Schedule K-1 forms for tax filing. Also, if MLP shares are owned inside a qualified retirement-type account, they can cause tax issues.

Let’s compare the relative valuations of MLPs versus corporations in this sector.

First, three of the larger midstream companies are organized as corporations. I want to look at the current dividend yield and the dividend growth over the last year:

Kinder Morgan Inc. (KMI): Current yield: 5.9%. Year-over-year dividend growth: 2.78%.

ONEOK, Inc. (OKE): Current yield: 5.3%. Dividend growth: 0%.

The Williams Companies (WMB): Current yield: is 5.2%. Dividend growth: 3.66%.

Now let’s look at the three biggest holdings of large-cap, representative MLPs on the Alerian MLP ETF (AMLP).

Energy Transfer LP (ET): Current yield: 8.4%. Dividend growth: 73.6%. (Yes, 70% year-over-year dividend growth!)

Enterprise Product Partners LP (EPD): Current yield: 7.7%. Dividend growth: 8.89%.

Western Midstream Partners LP (WES): Current yield: 7.1%. Dividend growth: 54.8%.

Last year, MLPs kicked in the afterburner for dividend increases. I expect the group to continue with high single-digit annual increases. The numbers above highlight the superior return potential of MLPs.

If you want to stay away from K-1s, investing in MLPs through an ETF like AMLP converts their distributions into 1099 reported income. AMLP tracks the Alerian MLP Index. For an actively managed MLP ETF, I recommend the InfraCap MLP ETF (AMZA).
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Utility stocks are historically seen as dull but dependable. After all, they have assured demand despite limits on profitability due to heavy regulation. Investors also see these stocks as regular dividend payers—bond proxies, in effect—with investors confident of solid income streams, leading to low but highly reliable total shareholder returns with relatively little capital risk.

That may be true – but some, like this one, can be very profitable…

National Grid in the U.K. and U.S.

One such utility company that has often been called ‘reassuringly dull’ comes from across the pond, the U.K.’s National Grid plc (NGG). The company operates the U.K.’s electricity grid, connecting electricity generation from all sources (power stations, wind farms, solar, and hydro) to end users. National Grid also has energy investments in the northeastern U.S. as well as electricity interconnectors with Europe.

National Grid makes its money by acting as an intermediary between the generators of electricity and the local electricity distributing utility companies. It charges fees for maintaining the integrity of the network and the carrying of energy that is passed on to the consumer, so it is largely unaffected by the actual price of electricity charged by the generating firms.

In other words, NGG is a very defensive stock, because National Grid forms one of the key and largely indispensable parts of national (UK) and regional (US) infrastructure. So even if electricity consumption is reduced or generation methods are changed, power still needs to flow through a grid and the networks need always to be managed and balanced by the grid operator.

In the U.K., long-term rate structures have offered solid earnings and dividend growth at least in line with inflation. During the 2013-21 period, regulators allowed National Grid to earn a 7% real return on its transmission assets plus incentives; however, for the 2021 to 2026 timeframe, real return on equity of electricity and gas transmission networks have been cut to 4.3% and 4.6%, respectively.

National Grid earns about 45% of its profits from the U.S. After many years of high investments in the

U.S., the significant asset reshuffling announced in March 2021 was a turning point. The company agreed to buy PPL’s U.K. electricity distribution assets, Western Power Distribution, for a £14.2 billion ($17.45 billion) enterprise value, implying a significant 60% premium to the regulated asset value. National Grid funded part of the purchase by selling its Rhode Island networks to PPL for £3.7 billion ($4.55 billion), for an impressive enterprise value to regulated asset value (RAV) of 2, and by selling its U.K. gas transmission assets at a 45% premium to the RAV.

The rationale behind those transactions was to increase the weight of electricity networks over gas networks in light of the ongoing energy transition.

Latest Results and Dividend

National Grid’s latest results (reported in mid-November) were darn good, showing that first-half underlying operating profit jumped 51%, to £2.1 billion ($2.57 billion). This is thanks to higher revenues from its new distribution network assets in the U.K. Earning per share went up by 42% to 32.4p ($0.40) per share.

The firm did raise its fiscal 2023 underlying earnings per share growth guidance from a prior 5% to 7% to a new range of 6% to 8%, implying earnings per share for the year to total 69.6p ($0.85). The guidance upgrade is driven by the positive impact of high inflation on revenue and higher profit growth at National Grid Ventures, notably on higher auction prices across interconnectors.

The interim dividend was 4% higher at 17.84p ($0.22) per share. And it’s a good bond proxy—the dividend has not been cut since 1996. National Grid is also a Dividend Aristocrat, having raised its dividend every year since 1998 and delivering an impressive 6.3% average annual growth over the period. NGG has always had a high payment ratio (dividend as a percentage of earnings per share) of around 80%.

National Grid has an interesting dividend policy based on U.K. inflation. The target policy is to grow payments in line with CPIH (consumer prices index, including owner occupiers’ housing costs) inflation: a measure which extends the consumer prices index to include regular costs of living associated with home ownership and it is running at nearly a double-digit rate.

National Grid’s Outlook

The company’s stock de-rated a lot in 2022. Stronger recent updates and those interim results in November stopped the rot.

Despite the relatively high debt level, National Grid’s balance sheet appears sound because the company’s high leverage is supported by low revenue cyclicality and low operating leverage.

The NGG dividend looks safe enough. Thanks to the aforementioned high selling price of the U.K. gas transmission assets, National Grid should be able to continue to grow dividends in line with inflation. And with an attractive yield of 6.78%, NGG is a buy anywhere in the low-$60s.
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For the last 5 years… with low interest rates… the only way to make money was investing in stocks. 

As you know, stocks have been volatile for the last few years. 

…big drop from Covid…

…stocks rocket back…

…equities peak end of 2021…

…bear market in 2022 (and ongoing). 

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I make no secret of the fact that I pay very close attention to what the big private equity (PE) and alternative asset managers are doing with their cash. I am frankly shocked that more people are not paying attention to what the giants of alternative investing, like KKR & Co. Inc. (KKR), Blackstone Inc. (BX), Apollo Global Management Inc. (APO), Carlyle Group Inc. (CG), and other leading alternative investment firms, are doing.

And right now, they are telling us we should all be investing right here…

It is not just the fact that these PE giants have stellar track records, although that is certainly part of the equation. One of the best-kept stock-picking secrets is that private equity firms do not just excel at buyouts—their public equity portfolios tend to be top performers as well.

I have stolen as many wildly profitable ideas from Leonard Green and Partners and Apollo as I have from Seth Klarman and Jeffery Smith of Starboard Value.

The other reason I pay close attention to the leading private investment firms is that they have boots on the ground all over the world. Employees of these firms are talking to corporate executives and looking under the hood at companies everywhere from Baltimore to Bangladesh and everywhere in between.

This allows the big alternative asset managers to form macroeconomic opinions on data and inputs most economists do not see.

By far, the private equity macroeconomist that makes the most of the collected information is Henry McVey of KKR. Mr. McVey is not only the head of global macro, balance sheet, and risk at the firm but also the chief investment officer of the KKR Balance Sheet investment portfolio.

The firm invested billions of its capital based on Mr. McVey’s macroeconomic insights, and there is a good reason for it: I have been reading his quarterly macro-outlooks for years, and they have been a road map through the last several years of economic and geopolitical turmoil.

Thanks to McVey’s outlooks, I have been able to sharpen my own macro-outlook and combine that with my valuation and fundamental analysis to steer through much of the madness of the past few years. In his 2023 initial outlook piece released as the year got underway, McVey reiterated a common theme of the past few years. He favors companies that are generating increasing cash flows that can be used to increase dividends.

He is not necessarily looking to own the highest overall yielding company, but rather for those that can grow their payouts at a high rate for extended periods of time.

I used McVey’s criteria to build a list of stocks, and then put on my value hat and looked for companies that fit the theme—undervalued, with a wide margin of safety in their financial statements.

One of the first to come up is Comcast Corp. (CMCSA). I hear all the hollering about how horrible Comcast is and how rotten customer service can be. But I am a Comcast customer myself—I am getting older, so I still have cable as I find it far more convenient than the cord-cutting services—and other than occasional minor problems, I am quite satisfied.

I have the highest speed internet connection Comcast makes available, so all in all, I am a pretty satisfied Comcast customer.

While there is a lot of talk about cord-cutting, the truth is that for most Americans, access to a fixed-line internet service is only available from phone companies and cable companies.

For almost half of the country, that cable company is Comcast.

Cable companies, including Comcast, have a significant advantage over phone companies, having led national expansion of high-speed internet by installing fiber networks back in the late 1990s and early 2000s.

Phone companies are trying to roll something similar out now. However, the high cost of running fiber to homes is one reason that services like Verizon Communications Inc. (VZ) with their Fios network have yet to be able to compete on either price or speed.

Looking at free cash flow-based valuations, I can use some fairly conservative projections and come up with a valuation for Comcast of twice its current stock price. And if results come up within a horseshoe or hand grenade of Wall Street expectations for 2023 profits, the stock should gain 50% or more this year.

Comcast shares yield about 2.8% right now—but more importantly, free cash flow has been growing by 13% over the past five years, and the dividend has been boosted by 12.8% a year.

The free cash and dividend growth story should be big in 2023, so we will revisit this theme later with some more stocks that fit McVey’s criteria and pass my analysis.

I would be remiss if I did not point out two more things about KKR’s 2023 outlook…

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My favorite among the major pharmaceutical companies remains AstraZeneca (AZN). One of the main reasons is that the company specializes in one of the areas where personalized medicine is making the greatest strides: oncology, in which AstraZeneca is the recognized leader.

AstraZeneca already has three blockbuster oncology drugs. Here’s what Morningstar said about these drugs in 2022:

Overall, the company looks well positioned for growth with the recently launched cancer drugs carrying strong pricing power that should have an amplified impact on the bottom line. We expect the first-line lung cancer indication for Tagrisso combined with the likely gains in adjuvant lung cancer will drive peak sales above $9 billion annually. Also, cancer drug Imfinzi should gain share in Stage III lung cancer where treatment options are limited and the drug holds growing potential in other cancers. Additionally, BRCA-focused cancer drug Lynparza is well positioned to gain further market share in new indications.

And now, another of AstraZeneca’s cancer treatments—Enhertu—is viewed as the next big thing in oncology and rightly so…

Enhertu: The Next Wonder Drug?

Enhertu is an antibody drug conjugate (ADC), a type of therapy designed to do minimal damage to healthy, non-cancerous cells. It works by attacking tumors that test positive for a protein called HER2, which is associated with worse disease outcomes.

Known as “biological missiles,” ADCs are part of the new generation of personalized cancer treatments that target tumors with specific features, or biomarkers. Some dozen ADCs have received regulatory approval to date, while more than 100 others are in various stages of development.

The potential for Enhertu is incredible.

Breast cancer recently overtook lung cancer to become the world’s most commonly diagnosed cancer. Every year more than 255,000 cases of breast cancer are diagnosed in the U.S. alone.

The reality is that one in eight women will get breast cancer in their lifetime—and Enhertu has the potential to change treatment for half of them!

David Fredrickson, executive vice-president of the oncology business at AstraZeneca, said the drug could become: “…one of the most important medicines ever.” He also said Enhertu had the potential to become a “multi-blockbuster” medicine by being transformative in treating different types of breast cancer, as well as certain gastric, colon, and lung cancers.

Enhertu was first approved by the FDA in 2019 for a subset of patients with cancers that have high levels of HER2. About 15% to 20% of breast cancers are HER2-positive, but last June, a trial revealed the vast potential for Enhertu, showing the drug could double the time patients can live without their cancer progressing, even if they have low levels of this protein. About 20% of the participants in the trial (550 patients) with metastatic cancer—normally considered to be incurable—had complete responses: scans could not detect their tumors.

This was the first time such a targeted therapy had improved survival rates in patients suffering from HER2-low metastatic breast cancer, a category that covers up to half of all late-stage breast cancer patients.

The clinical trial found those using the drug had a 49% reduction in the risk of the cancer progressing and a 36% reduction in the risk of death compared to those who received the standard form of chemotherapy treatment. It recorded progression-free survival, the time during which the tumor was stable or shrank, of 10.1 months with Enhertu, compared with 5.4 months for those who received chemotherapy.

AstraZeneca’s Bright Future

Wall Street analysts believe that Enhertu has the potential to become a key growth driver for AstraZeneca. Estimates are that sales could reach possibly as high as $10 billion, up from a negligible level now.

As far as sales of Enhertu go, it is split 50/50 with Japan’s Daiichi Sankyo (DSNKY), which began work on the drug years ago. AstraZeneca struck a deal in 2019 worth up to $6.9 billion with Daiichi Sankyo to develop and sell Enhertu.

To make the most of Enhertu’s vast potential, the two companies are planning 40 trials, one of the largest programs ever in the industry. These trials will attempt to answer questions such as: does Enhertu work in earlier stages of breast cancer? On how many more types of cancer could it be effective?

The partnership is deeper than just one oncology drug. In 2020, AstraZeneca agreed to pay Daiichi Sankyo up to $6 billion to develop and market a potential lung and breast cancer drug, the second large oncology megadeal between the companies.

These joint ventures are a win-win for both companies. It may send AstraZeneca to a whole new—and much higher—level in terms of growth potential, as well as boosting profit margins at Daiichi Sankyo.

The company is already doing very well. Morningstar said:

The oncology products continue to remain well positioned for future growth supported by new indications, including adjuvant lung cancer for Tagrisso, small cell lung cancer for Imfinzi, early-stage breast cancer for Lynparza, and earlier stages of breast cancer for Enhertu. Outside of cancer, key new drug launches are progressing well, including Saphnelo (for lupus)…Additionally, the recent approvals of Beyfortus (treatment for respiratory syncytial virus in infants), Imjudo (in combination with Imfinzi for liver cancer), and Enhertu (earlier line HER2-low breast cancer) set up significant new growth drivers.

The company has been aggressively investing in research and development over the past several years with its R&D spending as a percentage of sales ranging in the low to mid-20%, above the industry average of high teens. That has led to one of the best portfolios of drugs, supporting industry leading sales growth. Major investments in innovative new drugs (largely targeting areas of unmet medical need, especially in cancer) also helps fortify AstraZeneca’s future.

In summary, AstraZeneca’s drug pipeline is one of the strongest in the industry. That makes its stock a buy anywhere in the $65 to $75 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.

The largest player in mortgage lending announced it has pulled its plans to dominate the home loan industry. That change is positive news for one of my favorite mortgage finance companies and its shares.

Let’s take a look at the news, and how to get in…

This excerpt comes from an email from Seeking Alpha:

Once one of the biggest mortgage lenders in the U.S., Wells Fargo (WFC) has unveiled plans to step back from the housing market. Instead of going after the entire industry (its previous goal was a 40%-50% market share), the bank is shrinking its mortgage portfolio by restricting loans to only bank clients and minority borrowers. While the business was one of the company’s biggest profit generators over the years, things have gotten tougher amid regulatory pressure and higher interest rates.

That’s not all: Wells Fargo is shuttering its Correspondent lending business, in which the bank lends capital to other firms that sell mortgages as distinct providers. It’s a big deal, as the division accounted for nearly 40% of its mortgage volume as of Q3 2022. Wells Fargo is also reducing the size of its servicing portfolio by selling billions of dollars’ worth of mortgage servicing rights to other players in the sector.

This news represents a tremendous shift of power in the mortgage world. Mortgage rates have already peaked, and recent (1/10/2023) news shows mortgage application numbers are on the way up.

The pullback by Wells Fargo opens the door for other mortgage companies to grow market share while the need for new mortgages expands. As an investor, you may want to look at pure-play mortgage companies. Here is a list of players in the space:

Finance of America Companies (FOA)

Guild Holdings Company (GHLD)

Home Point Capital (HMPT)

LoanDepot (LDI)

Mr. Cooper Group (COOP)

Ocwen Financial Corporation (OCN)

Pennymac Financial Services (PFSI)

Rithm Capital Corporation (RITM)

Rocket Companies (RKT)

UWM Holdings Corporation (UWMC)

Out of this list, Rithm Capital is unique and one of the recommendations for my Dividend Hunter portfolio.

Formerly known as New Residential Investments, Rithm Capital is structured as a REIT and started as a company focused on investing in mortgage-related securities. The company went public in 2013, and in 2018 Rithm started acquiring complementary operating businesses, expanding into mortgage origination and servicing.

As a result, Rithm Capital now manages both operating companies and a portfolio of mortgage-related investments. This graphic comes from a recent presentation:

Rithm Capital has become a company that can grow no matter what happens with new mortgage activity or interest rates. If rates are low and activity high, origination and servicing profits grow. If rates increase and refinancing activity slows, MSR investments become more valuable.

The company slashed its dividend early in the pandemic by 90%, to $0.05 per share quarterly. Over the last three years, the dividend has been increased by 400%, to a current $0.25. I expect the dividend growth to continue at a much more moderate pace.

Even if the dividend doesn’t grow, RITM currently yields 11.5%, which is reason enough for me to make it a top high-yield stock pick.
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With stock prices turning positive over the last few weeks, it’s easy to lose sight of the fact that share prices for many sectors remain down a lot from their early-2022 levels.

I was surprised when I recently reviewed some 30-day stock price changes. There remain tremendous, high-yield values in which to invest.

Here’s three to buy for high yields right now…

I maintain a watch list of stocks that are not current Dividend Hunter recommendations, but are companies and stocks I want to keep an eye on. Last week, when I updated the watch list data I share with subscribers, I was surprised by how much share prices had dropped over the previous month. It didn’t feel like high-yield shares had fallen by the 5% to 10% that occurred.

When I realized that share prices had dropped over the last month of the year, I wanted to find a few high-yield stocks that looked particularly attractive.

When the yields on high-yield stocks go very high, the fears of dividend cuts pop up. The fears are especially prevalent when every third word on the financial news networks rhymes with recession. In reality, many companies have stable dividends that are not at risk of being cut. Yet with share prices down, many of these quality income stocks yield over 10%.

The most important aspect of buying a high-yield stock when prices are down is understanding the business to know whether their dividends are sustainable. The first step is to look at the dividend history. If a company had cut dividends in the past when the economy turned rocky, the odds are that it could happen again. On the other hand, if a company has maintained steady-to-growing dividends through the economic cycles of recession and expansion, odds are good the dividend will keep going.

A deeper analysis involves looking at the free cash flow generated over the last several quarters. Free cash flow is not the same as earnings per share. Companies will break out cash flow separately, calling it funds from operations (FFO) in the REIT world, cash available for distribution (CAD), or distributable cash flow (DCF). You want to see the company generating more cash flow than the dividend. That’s some simple math.

To shorten your journey, here are some high-yield ideas.

Last week I sent out Starwood Property Trust (STWD) as the Stock of the Week to my Dividend Hunter subscribers. Normally, STWD trades for $24 to $25, yielding 7.5 to 8%. When it drops below $19, the yield goes to 10%, as it did recently. Back up the Truck!

And here are a couple of stocks from my watch list you can research:

Sixth Street Specialty Lending (TSLX) operates as a business development company (BDC). The company has grown its dividend by 10% over the last year and currently yields 9.8%.

Like STWD, Blackstone Mortgage Trust (BXMT) is a commercial finance REIT. The company has paid the same quarterly dividend since 2015. BXMT yields 11.2%. The typical historical yield is around 7%.
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