Investors Alley

For an investor, few things are as unnerving as realizing that there is a concerted short-seller attack on one of your stocks. Over recent months, I have guided my Dividend Hunter subscribers when a couple of our stocks were subject to short-seller attacks. If you understand what the short sellers are trying to do and the shares you own, you can turn these scary moments into profitable opportunities.

Here’s how.

To sell a stock short, a trader borrows shares from his broker. Those shares are sold in the market to repurchase them at a lower price, profit from the share value decline.

For shares of a stock to go down, investors who own the stock must pick up the belief that it will happen and get fearful about staying in the stock. When a stock starts to fall, often fear begets fear, and the share price can quickly drop.

Unscrupulous short sellers can put out a hit-piece research report predicting the imminent downfall of the targeted company. These reports come from firms you’ve never heard of but get picked up and posted by financial news websites, which gives them an air of legitimacy. Investors read the news releases forecasting the demise of a stock they own, and the first reaction is to sell, sell, sell. The selling causes the stock price to crater, and the short-selling firm that published the report laughs all the way to the bank.

These reports are typically filled with factual errors. Lots of jargon is employed to sound good, but if you understand how the company operates, it can be pretty easy to see how facts and thoughts were manipulated.

When a short seller attack goes after one of my Dividend Hunter recommended stocks, my subscribers quickly fill my email inbox with questions. I research the allegations and advise subscribers on the proper course of action.

The Dividend Hunter recommended investments list includes only the highest-quality, dividend-paying investments. Companies can go bad, or businesses stop operating as expected, but these events happen slowly and not because of a short seller hit piece.

In early March 2023, Dividend Hunter stock Arbor Realty Trust (ABR) was hit by one of these published short seller reports. The ABR share price lost a third of its value in a few weeks. Other short sellers piled on with reports they were shorting the stock, and my subscribers were very worried. I checked the reports, determined they were bogus, and told subscribers it was a good time to pick up ABR shares “on sale.”

It worked fine, and in a couple of months, the stock was above the pre-short attack price and up about 70% off the recent low.

Short sellers go after quality companies like Arbor because they have small market caps and very little if any, real news between quarterly earnings reports. In this type of news environment, a short attack can get some traction and scare sellers into selling before they get some real answers.

Recently, Bloomberg published an article that noted short sellers lost $195 billion in 2023. Bloomberg also said short sellers lost $242 billion in 2020 and $142 billion in 2021. Only in the bear market year of 2022 were short sellers profitable, with net gains of $300 billion. The moral is that short sellers are wrong more often than they are right, at least as far as their profits go. Believe in your analysis if one of your stocks is hit by an out-of-the-blue short attack. Or better yet, subscribe to the Dividend Hunter and let me help you. Click the link below to see how.

The multinational financial services group Citigroup (C) is best known as the parent company of Citibank. This bank has a long and rich history, having been founded in 1812 as the City Bank of New York, and later becoming First National City Bank of New York.

But in recent decades, it has become the one bank stock that Wall Street dislikes and that, as a result, gets kicked around.

However, that may be about to change…

Citi Is Too Cheap

Since taking the helm at Citigroup in March 2021, CEO Jane Fraser has cut jobs and ditched retail banking operations in 14 overseas markets. In September 2023, she announced an even bigger shake-up, aimed at stripping away the layers of bureaucracy that have made the third-largest bank by deposits so unwieldy.

Currently, Citi’s price to tangible book value ratio—at just 0.6x—is the lowest among the largest U.S. banks. This reflects Citi’s dismal long-term return on tangible common equity.

This closely watched number came in at 7.7% in the most recent quarter, well below the 22% reported by Wall Street’s favorite bank, JPMorgan (JPM). It also shows that Citi has a lot of work to do to hit its own medium-term target of achieving an 11% to 12% return on tangible equity (ROTE) by 2027.

The so-called valuation wizard, Aswath Damodaran of New York University, has made a strong case for owning Citi. He wrote that Citi had ample regulatory capital and has been growing assets slowly but steadily. He believes this means net income will grow over time.

In order to assess the riskiness of Citi, he looked at net interest margin, regulatory capital ratios, dividend yield, return on equity, deposit growth and securities portfolio accounting at the 25 largest U.S. banks.

Citi actually scored above the median on the first three of these six measures—the best performance among banks that trade at a price/book discount. However, Citi’s weakest link remains the aforementioned return on tangible equity.

Damodaran goes on to say the discount on Citi’s stock is too much. He says that Citi’s banking business, while slow-growing, remains lucrative.

While few in number, Damodaran is not Citi’s only fan.

Citi Stock to Double?

Another big fan is Wall Street’s most well-known bank analyst, Mike Mayo of Wells Fargo.

He had already named Citi his top pick among big bank stocks for 2024, replacing JPMorgan as his favorite. But now, he has taken it even further by saying he expects shares to more than double over the next three years as the bank undergoes a “metamorphosis.”

Mayo’s base case is for the stock to rise to about $119 through 2026, which would translate to a 131% advance from where it ended 2023. He also raised his one-year price target from $60 a share to $70 a share.

“Investors repeatedly tell us—‘Don’t talk to me about Citigroup!’” Mayo wrote in a note dated January 1. “To us, this negative sentiment creates a more favorable setup for a potential double in the stock over three years.”

Mayo is making a definite contrarian bet on Citi. Consider that Citi stock has quickly gotten queasy the handful of times it has crossed $70 for the past decade.

And it hasn’t even gotten vaguely close to $100 for 16 years. If Citi shares do crack the $100-per-share level, that would mark its highest level since 2008.

I do find myself in agreement with Mayo though when he said, “Citigroup is becoming a much more simple and profitable firm, whose earnings should double over the next three years.”

He lays out the case for Citi: “Citi’s de-risking seems at least partly shown by the best-in-class performance of its bonds during 2023, which now trade in line with the other big six banks and better than regionals. Citi also avoided the big issues of 2023, after failures of regional banks and Credit Suisse, and has about the lowest exposure to CRE (commercial real estate)/office.”

Mayo also points out that Citi has increased its book value in recent years, even though the stock declined. “Since year-end 2019, TBV (tangible book value) increased from $70 to $87 as of 3Q23 (with a further increase to an estimated $113 in 2026), while Citi stock declined from $80 to $51 as of December 29, 2023.”

Buy Citi

Mayo forecasts that buybacks will reduce share count by about 20%. And “Citi will likely have excess capital over three years equal to half its current market cap.”

Finally, he says dividends will provide an extra 10%+ return. This is based on an estimated $12 billion of cumulative dividends over 3 years on a market capitalization of about $100 billion. At the moment, Citi’s yield is nearly 4%, with $0.53-per-share quarterly payouts.

Citi looks like a solid buy from here anywhere below $55.
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If you’ve recently had to hire an electrician, or have your HVAC (heating, ventilation and air conditioning) system replaced or serviced, you may have asked yourself if you went into the wrong profession. Demand for these professionals is high, and the commensurate rates they can now charge, leads me to my (barely) under $10 stock this week, Lincoln Educational Services (LINC – Get Rating).

Lincoln Educational Services provides career oriented post-secondary education to high school students and working adults. This includes technical training in automotive repair, HVAC accreditation, the nursing (LPN)  and dental assistant professions, and even the culinary arts. 

The company recently signed a partnership agreement with Tesla (TSLA – Get Rating) to provide EV automotive repair training. And, is opening new and expanded campuses in Pennsylvania and Tennessee to broaden their HVAC technical training offerings. 

With the cost of traditional college rising even before the recent spate of inflation, and continuing to rise with it, technical training makes economic sense for a broadening demographic, and is a much safer path to a career that is both in high demand and comes with very good pay. 

In their earnings announcement this week, Lincoln focused on the fact they are seeing higher retention rates due to their new “Lincoln 10.0” hybrid instructional platform. The new platform, which incorporates AI into several aspects of its functions, gives Lincoln the ability to augment in person offerings with remote learning aspects that students desire. 

Commenting on the quarter, President and CEO Scott Shaw, said, “Lincoln continued to generate strong results during the third quarter as we achieved 10.5% revenue growth and 7.1% student start growth.” The company has over $70 million in cash and short term investments, with no debt, a key business advantage in the current interest rate environment. 

LINC trades at just over 10x earnings and only 0.4x sales, and a little over 1.2x book value. The company has gross margins of over 57%. In last quarter’s earnings release, Lincoln also raised its full year outlook for revenue, new student starts and adjusted net income. 

Lincoln rates a B overall in our POWR Ratings, with a rating that is higher than almost 80% of the companies we track. It has an especially high rating in the Sentiment component where it rates an incredible 99.57. This isn’t surprising given the strong secular trend the company finds itself in. 

A combination of strong demand for its services, and a value proposition that puts its graduates on a sound financial footing should continue to drive earnings at Lincoln Educational Services. This under $10 stock may not remain that way for very long. 

What To Do Next?

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Last week in my 48-Hour Income service, we decided to not make a trade in B. Riley Financial (RILY). In 48-Hour Income, the goal of the service is to generate 1% to 3% returns per week by selling 2-day puts in certain stocks. Financial services company RILY had been a put-selling target of ours in

Renewable energy companies have been hit hard by the recent increases in interest rates. Many of these companies borrowed a lot of money to build out their energy projects, with debt at very low-interest rates.

Higher interest rates put the business models at risk, as they are forced to refinance when the debt matures.

But for one of them in particular, things are looking much better than the headlines would make you think. And it’s created a great income investing opportunity…

In September of last year, the share price of NextEra Energy Partners (NEP) collapsed by more than 50% when the company announced a significant change to its dividend policy and expected future payments. Before that announcement, NEP had been one of the best dividend growth stocks. The company increased its dividend every quarter to achieve about 15% annual dividend growth. The NEP dividend had been growing at that rate for almost a decade.According to the NextEra Energy (NEE) December investor presentation, NEP is the world’s seventh-largest wind and solar power generator.

NextEra Energy uses NextEra Energy Partners as a vehicle to monetize the renewable assets developed by its Energy Resources division. It is essential to understand that NextEra Energy has complete control over NEP. NextEra Energy is a large-cap ($126 billion) investment-grade utility with a long track record of superior results.

Also, investors misinterpreted what the company did in September. At that time, NextEra announced that the dividend growth rate for NEP would be reduced from the 15% annual target to 5% to 8% per year. It seems investors jumped to the conclusion that the dividend itself would be cut, which is not the case. The dividend growth rate was reduced, not the dividend rate.

Currently, at $30.00 per share, NEP yields over 11%. The company increased the dividend rate by 1.5% in October, meeting the target growth rate. The next dividend will be announced later this month and will likely include another increase of about 1.5%.

NEP yields 11% and is growing the dividend by 6% annually. That gives an excellent combination for high teens total returns. Once investors see the dividend continuing to increase, I expect them to jump back into NEP. This stock could produce a 30% to 40% total return this year.
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Ever since Federal Reserve chairman Jerome Powell told the markets to expect the Fed to cut interest rates several times in 2024, the bond market has been on a tear.

Falling interest rates should ease issuers’ financial burden, so investors should, in theory, be willing to push a little further out on the credit risk spectrum. And for now, that’s what appears to be happening. The downward move in the yield curve has been a rising tide that’s lifted all boats, from Treasuries to junk bonds.

The positive sentiment has extended, as well, to municipal bonds, which are trading near 52-week highs. Some players in the municipal bond market have begun pointing to another long-term factor that favors these muni bonds: the spiraling federal debt.

Multi-trillion dollar budget deficits could become the norm, according to CBO (Congressional Budget Office) projections. That could mean Uncle Sam is going to face a tough choice: cut spending or raise taxes—and sooner rather than later.

If federal income tax rates are raised in the future, it will make munis even more attractive since they’re federally tax exempt.

So, let’s look at one closed-end muni bond fund that could be a great addition to your portfolio.

Nuveen Municipal Credit Income Fund

I’m talking about the Nuveen Municipal Credit Income Fund (NZF). Its portfolio consists of munis across all credit ratings.

Nuveen’s website gives us a brief description of the fund:

The Fund seeks to provide current income exempt from regular federal income tax by investing in an actively managed portfolio of tax-exempt municipal securities. Up to 55% of its managed assets may be in securities rated BBB and below at the time of purchase or, if unrated, judged to be of comparable quality by the Fund’s portfolio team, and the Fund uses leverage.

So NZF is a fund that has both investment grade and non-investment grade bonds in its portfolio, although the majority of the bonds it owns are investment grade (28.2% A-rated, 21.7% BBB-rated, 11.3% AA-rated). And the fund uses leverage in order to enhance its yield and total return potential.

One note: last spring, two other Nuveen closed-end funds—the Nuveen Ohio Quality Municipal Income Fund (NUO) and Nuveen Georgia Quality Municipal Income Fund (NKG)—were rolled into this fund. This brought the total assets under management to more than $3 billion.

Here are the top sector allocations for the fund, as of November 30, 2023:

Transportation: 23.1%

Healthcare: 22.6%

Tax Obligation/Limited: 21.2%

Tax Obligation/General: 12.0%

Utilities: 7.6%

The top three individual bond positions in its portfolio are:

Energy Harbor Corporation: 3.1%

Puerto Rico Sales Tax Financing Corp Sales Tax Revenue: 2.7%

Texas Private Activity Bond Surface Transportation Corporation: 2.3%

The top states represented in the portfolio are:

Illinois: 13.6%

California: 13.2%

New York: 10.1%

My Thoughts on NZF

I actually like the sector allocation for this fund a lot.

The fund’s one-third exposure to bonds funded by tax receipts offers a measure of safety and reliability. Healthcare should continue to be a growth area of the U.S. economy, thanks to the aging of America. Transportation and utilities are both infrastructure-related, an area that is receiving a real boost thanks to legislation like the Bipartisan Infrastructure Law and the Inflation Reduction Act.

The fund’s one minus is the relatively long duration of its bond portfolio, which averages out at around 16 years, translating to a lot of interest rate volatility. That volatility was in the fund’s favor over the past several months, but hurt it over the past two years.

The Nuveen Municipal Credit Income Fund was launched on September 25, 2001. Since its inception, the fund has returned a total of 195%, which translates to nearly 5% annually.

The fund’s net asset value (NAV) has remained relatively steady around the breakeven mark over the life of the fund. Obviously, that’s a great sign for investors looking for distribution stability. And of course, the fund’s payouts have almost entirely consisted of federally tax-exempt income.

NZF maintains a fixed monthly distribution policy that currently pays $0.0515 per share, or $0.618 per share annually. Nuveen raised its dividend by $0.0085, or 20%, on October 23, 2023. At current share prices, this translates to an annualized forward-looking yield of 5.2%.

The 5.2% yield is higher than you’ll find in even high-yield muni bond ETFs. So, coming from a mostly investment grade muni portfolio, this is highly attractive.

NZF’s discount to NAV (14.78%) is currently at some of the lowest levels of the fund’s history. Its all-time high discount was 16.29%. So if interest rates do continue to move down, NZF shares are a true bargain. It’s a buy around $11.80 a share.
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2024 is upon us.

By the time this hits your inbox, the ball will have fallen, “Auld Lang Syne” will have been packed away for another 364 days, and my dogs will almost have recovered from the sedative we have to give them because of the massive fireworks display our neighbors put on every year.

If the ball bounces right, Texas will have beaten Washington State, Michigan will have fallen to Alabama, and we will be looking at a barnburner of a national title game that hopefully culminates in a chorus of “The Eyes of Texas Are Upon You.”

[Editor’s Note: alas, the ball did not bounce right.]

Those of us with interest in the markets know that the final round of the production game is also looming in the form of the Barron’s Roundtable that will be published over the next several weeks.

But for investments that will actually make you money, you’ll have to look elsewhere. Let me explain…

We have already seen dozens of forecasts, including an article suggesting various income strategies investors should embrace for the New Year, published in Barron’s this past week. I have been a Barron’s subscriber for a very long time, but to call this article awful is a kindness. I hope ChatGPT wrote the piece because there appeared to be little thought used to select the suggested investments.

Income-seeking investors would be much better off using strategies like the ones fellow Investors Alley editor Tim Plaehn and I have developed. At least we did some actual research into our ideas and understand how to properly use income-producing investments in the real world.

I do not make predictions about what the markets may or may not do. If stocks are cheap and have a margin of safety, I believe it is time to be a buyer. If the stocks are overpriced and everyone loves them, it is a good idea to be a seller.

The cheapest stocks with a considerable margin of safety right now are small community banks.

In 2024, I expect to see two things that will lead to a massive rally in bank stocks, especially the smaller institutions.

One is the return of merger and acquisition (M&A) activity. Even to the over-educated progressive thinkers appointed to regulatory agencies in recent years, it is becoming increasingly apparent that healthy bank M&A is suitable for both banks and consumers. The fact that investors might make profits from M&A can no longer be the controlling factor in the decision-making process. We have already seen an uptick in announced deals, which will accelerate as the year progresses.

The end of the interest rate cycle will also provide a considerable boost for bank stocks in 2024. If we just get higher-for-longer rates, with no more hikes, bankers can reinvest coupon payments and maturing securities at higher rates. Banks with adequate capital levels will be able to book the losses in low coupon securities and reinvest with a pick up of several hundred basis points of yield.

We have seen several banks’ sales-leaseback transactions involving branches where the building was sold and then leased from the buyer on a long-term deal. This type of arrangement frees up cash that the banks can use to cover the losses involved in the repositioning process.

A lot went wrong for banks in 2023. Rising deposit costs pressured profit margins. Falling bond prices crushed the value of securities portfolios. Headlines generated by people who know more about manipulating public opinion than they do about banking caused waves of selling to hit some bank stocks. Loan demand slowed.

One thing that did not happen will surprise most folks who pay attention to the financial media and headline hunters.

Remember how all the deposits were supposed to leave the banking system and be switched to money markets, buy gold, or just stock in a tin can?

They went nowhere.

If you look at the latest Fed H.8 filed last Friday, total deposits at small banks are $5.3 trillion. A year ago, deposits at smaller banks were $5.3 trillion. For commercial banks, deposits are currently $16.3 trillion. A year ago, they were $16.4 billion.

That is not exactly the crisis that was predicted.

Banks are much healthier than the fearmongers and doomsayers are telling you, and the stocks are cheap. We can now buy potential takeover targets with tons of capital for less than 80% of book value.

Even in the current subdued environment for bank M&A activity, average deal multiples are close to 130% of tangible book value. As the market for bank stocks improves, multiples will move close to the long average of more than 160%, thanks to the end of rate hikes. If the Fed lowers interest rates in 2024, book value will recover by 10% or more at many small banks.

Income investors have the choice of banks with high dividend yields and low P/E ratios that should deliver market-beating returns over time.

High-yielding banks’ preferred stocks and bond issues also have the potential to deliver outsized total returns in 2024.

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As we kick off the first trading week of 2024, let’s take a closer look at the U.S. dollar and its potential impact on the broader market. I often discuss the U.S. dollar to gain insights into how it might influence equities and fixed income. Examining the daily chart of the U.S. dollar, it’s clear

One of the most popular finance games when the New Year comes around is to make forecasts about the upcoming year. Most predictions don’t come to pass—the future is just too darn fickle.

However, it is the start of a new year, so I, too, will take a shot at some predictions.

Because some things do seem very likely, and will have huge consequences for us investors…

It seems pretty certain that the Federal Reserve will reduce its fed funds rate in 2024. Many pundits think the rate cuts could start as early as March. I suspect the Fed will wait a little longer and start cutting in May or June. Once the cuts start, look for the fed funds rate to come down quickly and be close to 3% by the end of the year.

This rate dictates short-term rates; it’s the markets that set long-term rates. The 10-year Treasury is already below 4%, and I don’t expect it to fall much further, resulting in a positive yield curve by the end of the year.

Historically, mortgage rates are priced at the 10-year Treasury plus 1.5% to 2.0%. With the 10-year currently at 3.8%, mortgage rates should soon be well below 6%.

Preferred stocks are a great way to earn high current yields and get share price appreciation as market yields and interest rates fall. The Virtus InfraCap U.S. Preferred Stock ETF (PFFA) pays monthly dividends and yields 9.%.

There will be a stock market correction in 2024, maybe more than one. A correction is official when one or more of the major market indexes declines by more than 10% from the most recent high mark. Ten percent doesn’t sound like much, but it feels like a lot when your account has dropped by that or more, and seems like it will keep going down.

Have a plan to take advantage of “stocks on sale” when we get into correction territory. My Dividend Hunter service focuses on building a high-yield income stream, and falling share prices present a great opportunity to average down the per-share cost and add shares at an above-average yield.

The stock market has recovered from every correction and bear market. Remember that so that you can profit and not panic when shares fall sharply at some point in the new year.

I want to share some words from Charlie Bilello’s recent Put These Charts on Your Wall…2023 Edition post:

The market doesn’t have to do anything, least of all what you think it should do. The market does what it wants, when it wants to do it. It is the real-time personification of collective human psychology, with fear and greed on full display.

That’s what makes it so hard and, at the same time so interesting. There are times when skepticism is warranted and other times when you need to suspend disbelief, with no manual to help you decipher which situation applies.

I look forward to watching my dividend income grow in 2024.

Last week, in my 48-Hour Income service, we sold a cash-secured put on financial services company, B Riley Financial (RILY).  In 48-Hour Income, the goal of the service is to generate 1% to 3% returns per week by selling 2-day puts in certain stocks. RILY has become volatile in recent weeks after announcing write-offs of