Will 2021 Be Better? Good to Grow? - InvestorPlace · 2020. 12. 22. · Neil George’s Profitable...

Will 2021 Be Better?2021 should see some better

economic data points than 2020. But 2020 isn’t done yet, and economic data shouldn’t be dismissed as old news.

Jobs in the US are in further trouble, and overall unemployment is still at precarious levels. The recent data signify that many folks aren’t working, and more aren’t looking.

US retail sales are down for the most recent month, and the sales drop is across multiple product sectors. This is a challenge that reflects the real-world recovery prospects for households.

This uncertainty is also showing up in the forward-looking Bloomberg Consumer Comfort Index, which is down in the most recent reports, and the Federal Reserve Bank of New York’s Business Leaders surveys also aren’t helpful for bullish conditions.

So, 2020 is still a bad year, and that means 2021 has a lot to prove. The Fed is still doing its thing, but I have a word of caution to offer for the current markets about inflation.

The Personal Consumption Expenditure Index (PCE) is still well below target, but pockets of the economy, including prices for groceries and other goods, are spiking. And with pent-up demand for so many goods and services 2021 could bring some unwanted inflationary influences.

The bottom line is that the US economy is still challenged. 2021 will show improvement, but we need to focus on the stocks and bond investments that are working and will continue to work for the best risk-weighted current income and price stability.

January 2021

Vol. 32, No. 1

Good to Grow?Dear Friend,

The US markets are all running very positively and are pulling in more cash from investors showing their fear of missing out. The primary driver in my view is that more and more folks are convinced that 2021 isn’t going to be like 2020. Of course, this is correct. But will all the challenges of 2020 be conquered?

As COVID-19 surges upward in cases and deaths again, state and local governments are re-locking businesses without paying compensatory damages. But what’s different is that the US Food & Drug Administration (FDA) has approved vaccines, and confidence is super high that this is going to quickly end the virus and its impacts on the economy and the markets.

Forward-looking expectations for sales and earnings from S&P 500 Index members are running at higher numbers, which is aiding stock-buying. But the economy is showing some cracks. Retail sales in the US are off on a seasonal basis, and business leaders’ expectations aren’t as buoyant. For now, however, these and other economic data points are being dismissed.

I see that 2021 should be a better year for the US, Asian and some other economies. But I do think that we should continue to invest in companies that have real fundamentals and a shareholder focus.

In this issue, I’ll show you what’s happening under the hood of the economy and markets, and I’ll direct you towards some specific companies for next-level growth in their fields. I’ll also show you where real income can be had safely from investments well outside of the hype and risk.

Growth StrategiesWatch Out for Exuberance, Focus on What’s Working

With the S&P 500 Index up almost 17% year to date, it’s very tough not to be bullish right now. Then there’s the S&P Information Technology Index, which rallied back from March 23 to date by 81.7% for a year-to-date return of 41.4%. That’s more than twice the return of the general S&P 500.

It gets a little more bubbly when looking at the stock option markets. Call options on US listed stocks are used by countless traders for a myriad of

(continued)

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2 Profitable Investing | January 2021 | profitableinvesting.investorplace.com

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financial purposes. But what is interesting to me is the call option volume for the US markets.

On a weekly basis, the volume of calls traded on various exchanges and clearing houses is surging to very high levels, showing a trend of sorts for much of the second half of 2020. This demonstrates the exuberance of investors and traders and many of the soaring member stocks of leading indexes. This is not a warning yet, but something to be aware of right now.

But it’s not just the tech stocks that are getting ahead of the general stock market. The smaller stocks of the Russell 2000 Index are also pulling in more traders as that index outperforms the S&P on a year-to-date basis. This small-fry stock performance is yet another bit of bubbly evidence in an already very bullish general stock market.

Then I come to the initial public offering (IPO) and merger and acquisitions (M&A) markets. 2020, despite all of the COVID-19 damages, has been a very buoyant market for investment banking. Renaissance Capital’s IPO Index has surged by 118.6% in market value so far in 2020. IPOs, along with their backdoor mechanisms in reverse mergers via special purpose acquisition corporations (SPACs), continue to be very active.

This comes as money in the US continues to be very easy-peasy with the trillions of dollars of liquidity from the Federal Reserve. But the appetite from stock investors has been as heady as ever and is beginning to remind me of the late 1990s leading up to the dot-com problem.

The M&A market for buying whole companies is also really surging. Bloomberg’s M&A Index of tracked announced deals this year is up by miles and miles into the stratosphere in value. Now again, like for IPOs,

the financial markets are rife with lots of liquidity for both debt and equity capital for M&As. But what is also aiding the M&A market is the current regulatory environment.

Despite some of the hoopla of hauling in CEOs from Facebook (FB), Alphabet (GOOGL), Twitter (TWTR) and others in front of Congressional hearings, the current government has been accommodative for M&A deals. This is expected to be as good as it gets for a while, with changes in the works for the incoming administration. But it is yet another sign of the heavy enthusiasm

for deals.

Bitcoin Isn’t GoldNow I turn to Bitcoin, the leading

“cryptocurrency” in the market by recognition. This contrived security, which of course is not backed by any asset or any completely known supply limitations, is really soaring this year. In US dollar terms, Bitcoin has soared from March through date by 386.4%, with a particular surge during December to a current level close to $23,000.

Bitcoin has been compared to gold as an alternative store of value over

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Profitable Investing | January 2021 | profitableinvesting.investorplace.com 3

cash or other liquid assets. And like for gold, it has benefitted from super-low US interest rates reducing the competitive cost to hold. Add in the softness of the US dollar, and both gold and bitcoin are beneficiaries in

US dollar terms.But gold is gold. It is limited in

current and prospective supply and is easily transferable and deliverable (with some costs of course). Bitcoin is what it is. The market prices it where

bids and offers are made. And it isn’t yet a form of currency exchange, just as gold is not a medium of commercial exchange.

Yet, Bitcoin has continued to surge and then some as it resembles more of a super-charged growth stock market. Buyers both old and new to the market have been buying in, which I’d argue is not because of some of the fundamental reasoning for Bitcoin’s foundation but rather because its expected to go up and go up further.

Evidence of this potential overenthusiasm is in the one of the few publicly traded investment funds, the Grayscale Bitcoin Trust (GBTC), that represents that it holds Bitcoin. This is a fund that is supposedly restricted to accredited investors (meaning experienced and well-heeled) and is traded in the over-the-counter portion of the Nasdaq. The trust is now trading at a premium of 35.8% over its reported assets. This is worrying.

Bonds Aren’t ImmuneThe bond market continues to be

one of my favorite sectors for both current income and price gains over time. The Fed continues to provide a massive backstop for bonds with its trillions of dollars of bonds in its portfolio as well as its at least $120 billion in additional bond buying on a monthly basis, aided of course by its contracted helpers over at BlackRock (BLK).

US bond have been big performers again for 2020. The overall US bond market, as measured by the Bloomberg Barclays US Aggregate Index, has returned 7.1% so far in 2020. And other segments of the US bond market, including corporate bonds, have fared even better, with the US corporate index returning 9.1% for the year to date.

Yields have plunged not just in recovery from the liquidity crunch in March, but over the trailing three years. The Bloomberg Barclays Global Corporate Yield Index is now down to a low of 1.38%, well below where it stood in 2018. This shows a variety of things. Inflation remains at bay (more on this in just a moment),

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US Mergers & Acquisitions Transactions & US IPO Indexes



and demand for yield from bonds remains very strong from institutions around the globe. Add in the Federal Reserve, and the market is running very strongly.

Now, bond yields are low overall in the US and negative in much of the rest of the world. But as I’ve been showing, the price to yield sensitivity is actually higher now as measured by adjusted duration. This is bond math, but what it shows is that with lower yields, bonds have more price movement for each blip up or down in yield. The run up in duration means that even with low yields, bonds have more to deliver in terms of potential gains into 2021.

The one threat is inflation. I’ve been an inflation dove for a long time, and the overall core Personal Consumption Expenditure Index (PCE) at 1.4% remains well below the Fed’s target in the mid-2.0% range. But grocery prices are running well above as well as other consumer goods purchases.

And if vaccines are successful in 2021, it will bring some resumption in spending, including travel and leisure. This pent-up demand may well bring some unexpected and unwanted inflationary pressures to the core PCE. I don’t see this getting out of hand. But it is one more thing to keep an eye on for 2021.

One of the other major challenges for bonds as well as for stocks is the financial risk in the markets. Bonds are a lot different from stocks, as each bond has its own particular supply and demand conditions, and credit analysis is a lot more crucial for bond investors than for stock investors. Goldman Sachs has its own monitored index for financial conditions for US stocks and bonds, and it is heavily influenced by the Fed’s actions. It has been plunging to a recent low of 97.6.

This financial conditions index (FCI) is also mirrored by the Bloomberg FCI. Money is so free and easy in credit markets that companies’ credit and bonds are very easy to place. And bond portfolio investments are able to have much lower risk weightings in their analysis, aiding

more buying of more aggressive holdings.

This extends to stocks as well. Companies are going to the stock and credit markets with ever-easier terms, including IPOs and for credit for M&A deals. This sets up a risk that any change in the Federal Reserve, real or feared, could result in a big surge in risk and big selloffs in stocks and credit products. I don’t see this as an immediate threat, but it only adds one more level of exuberance for the US and global stock and bond markets.

US Economy & Underlying Fundamentals

Consumers are the big driver for the US economy. And for consumers to be able to spend, they need jobs.

Over the past several weeks, the job recovery has not only stalled but has gone into reverse. Weekly claims each and every Thursday in the US are now must-watch data releases. The current data showed 885,000 initial claims, and continuing claims are closing in on 5.6 million, not remotely a positive for the economy.

Overall monthly jobs data on the first Friday of each month show the slowing jobs recovery. New jobs are down from peak rehire and new hire numbers, and this is resulting in two bad numbers. First is the unemployment rate at 6.7%, and second is more worrying with the participation rate down to 61.5%, which is back to a slide after a rebound from April.

Following a big surge in May, retail

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sales have not just dropped back to more normal levels but now have slipped into negative territory on a seasonal basis. However, it is argued that Christmas shopping in the virus era is impacting the need for the early rush to stores, so catch-up data released into 2021 might show some better numbers.

The Bloomberg Consumer Comfort Index weekly numbers are down over the past several weeks to a current level of 48.4, which is still a pretty good number. The US personal savings rate is still the big secret weapon for future consumer spending. Down from the whopping rate of 33.7% in April, it is still at a very high number of 13.6%. This shows contributions to dry powder. And this adds up to a big number of overall savings at $2.4 trillion that could be deployed.

This also is joined by another bit of better news on US household debt. Net debt, meaning assets less liabilities, for households is down dramatically in 2020. Even with mortgages soaring on new and existing home sales, debt is down over last year overall. Again, like with savings, this represents more dry powder capabilities for 2021.

The current mixed-bag of consumer data is showing up in C-Suite business leaders’ views of current business activities and expectations for six months out. The New York Fed’s go-to survey shows a near-term drop to a very negative 26.9 for

current activity, which matches up with the dire consumer data. But for 2021, heading into the second half, expectations for activity are back on the positive at a level of 4.7. This survey data shows what the stock market is trading on right now.

2021 Is Here NowAs I just mentioned, stocks trade

on values that are expected in coming months and quarters. And this is where the rally in the S&P 500 Index gets defended. The S&P’s solid return this year is not just about getting through 2020 but getting on with business in 2021.

Members of the S&P 500 are projected to experience and report very good improvements to sales and earnings into and through 2021, according to compiled estimates from Bloomberg. Sales are projected to be into the low-teens in growth from prior quarters, which is very good news for stock investors.

But the earnings are what so many are eyeballing. And again, compiled data shows very strong expectations for earnings growth from prior quarters as high as into the 40% range for the second quarter alone. Although this comes from a low bar in the same quarter of 2020, it does show not just a recovery but a thriving business environment. This means that the sky-high levels of average stock valuations for the members of the S&P might not be as high if the underlying sales and

earnings are back on the burn.But like I mentioned in the

December issue, 2020 is not all doom and gloom. Several sectors, including consumer companies, communications and of course technology, have already been showing positives for the third quarter, and expectations for the current quarter are even better. This is now extending to other sectors as well, so 2020 might not end as bad as it was earlier. This sets up the argument to buy stocks for 2021 despite all of the current virus surges and the economic impacts right now.

Bottom LineI see that stocks should remain

buys in 2021. But at the same time, we need to continue to focus on companies with proven results in sales and earnings and not just promises of future performance. These will also tend to be companies that are focused on shareholders, including the proof-positive of dividends.

I’ll highlight some of the bigger growth stock sectors in major technological advancing areas in the next section of this issue. And I also have been honing the list of recommendations in the model portfolio.

For bonds, I see that US corporate bonds and municipal bonds will continue to provide lots of opportunities for income now and gains for 2021. And further in this issue, I’ll highlight some of the particular values for both corporate bonds and like securities, including preferreds and municipal bonds.

Proven Growth & IncomeMultiple Next-Era Technologies in One Stock

The US stock market is already pricing in the later quarters of 2021. Valuations for the general S&P 500 Index and the S&P Information Technology Index are sky-high as investors bet on growth showing up to justify the current market. But what

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2020SepJunMar Dec

Bloomberg Barclays Global Corporate Yield



about next-era growth? Not just about selling current technology and trying to earn more but bringing really new stuff that the world is ready and eager to buy and pay up to get it?

Fifth-generation (5G) wireless is not really here, but it will be. Right now, there is an evolution underway with 4G that’s not really 5G. What will make it really 5G is wide installation of new antennas that work completely differently than for 4G. And to make them work, you need power and power management. We know the company that makes this happen and has what the market needs right now in its warehouses.

Autonomous cars are the dreams of millions of future customers and car makers. But autonomous cars need tons of sensors and processors to navigate roadways successfully. We know the company that has the sensors, processors and the experience making them work already in semi-autonomous cars that are already on the road.

Electric vehicles (EVs) are another big new thing that millions want. Sure, Tesla (TSLA) and most major auto makers have plenty of electric cars, but they need to be cheaper with easy and cheap access to charging and have batteries that don’t make more environmental damage than petrol over time. We know the company that has the capacitors and inductors to make EVs move and next-era batteries to power them in a genuinely clean manner right now.

Green batteries and green fuel cells are another next-era dream. Getting past lithium and onto solid state batteries is what works better and so much safer. And getting hydrogen to power fixed and mobile batteries and power sources without natural gas is what the market needs and wants. We know the company that has made the move to make it happen right now.

TDK Corp. (TTDKY)In the September issue, I introduced

you to TDK Corp. (TTDKY), which does all of the above and more. And since it was added to the portfolio, it has just begun to do its job. So far, it has returned 32.4%, including its shareholder-focused dividends. That’s

over four times the return of the S&P 500 and nearly the same multiple of the S&P Tech Index, and this company is just getting going.

TDK Corp. is the next-era technology company that rules fixed and mobile power, including green fuel cells, and has the sensors and gizmos that the over-touted companies are buying and will need to buy more of to make their products work. But unlike the valuations of the stock market and the hyped tech stocks, TDK isn’t valued for the future. The stock is valued as if it is in the past.

TDK is priced at barely more than its trailing sales, while most leading tech stocks are at many multiples of that. It is priced at barely more than two times its intrinsic (book) value, including all of its patents and products that are in the warehouses right now for next-era deployment.

And it keeps adding to its technologies with its internal investment arm buying into Gencell (GNCL, Israel) and battery leader Desay (000049, Shenzhen, China) amongst other strategic investments. With so much of the market bidding up stocks on future hopes, you can buy TDK now at a bargain and really own several next-era technologies all in one investment. TTDKY remains a buy in the Niche Investments under $146.00, ideally for a taxable account.

More Proven Growth & IncomeSafe High Yield in a Low Yield World

Yields in the markets are flat. Cash at Synchrony Bank yields 0.60%. 90-day Treasury bills are at 0.08%. Even 10-year Treasurys are under 1%. And the Federal Reserve is going to do its level best to keep rates as low as possible for a while. Meanwhile, outside the US, yields are negative for trillions of dollars of government and other major debt. But I continue to do my homework to find opportunities for more really high yield from securities that aren’t found in the mainstream financial news.

Preferred InvestingPreferred stocks have their origin

in the 1800s in the US. Railroad companies were already fully sold out of stocks. And banks were not remotely interested in making more loans or buying any more bonds. But railroads needed cash to expand. This hybrid security that offered fixed income and equity participation if railroads did well, along with a call on credit and assets if they didn’t, fit the bill. The preferred stock was born.

Preferred stock is issued by corporations as equity to not broach credit covenants for bonds already issued. They generally come with fixed dividends that are just like bond coupon interest payments. And as fortunes of companies improve, so too will preferred stock prices.

Two of our preferred stocks are bargains right now. The first is the Atlas Corp. 7.875% Series H Preferred (ATCO.PH), yielding 7.7%. Atlas is an investment holding company that owns APR Energy and Seaspan. APR provides turn-key power generation that’s mobile and can be set up to meet demands of governments and corporations as backup, in emergencies or for temporary needs.

Seaspan is a long-favored company that owns container ships that it leases out under longer-term contracts, like a landlord of the sea. The preferred has a proven track record of payouts and has been gaining notice behind the scenes of the stock market. ATCO.PH is a buy under a raised price of $25.50, ideally for a tax-free account.

Next is the Teekay LNG Partners 9.00% Series A Preferred (TGP.PA). Teekay is like Seaspan for LNG ships. It owns a collection of in-demand vessels in a buoyant market. Like for Atlas, this preferred pays and keeps paying. And the market is quietly bidding for this yield opportunity. Buy TGP.PA under a raised price of $26.35, ideally for a tax-free account, for a yield of 8.5%.

For an indexed preferred buy, look at the iShares U.S. Preferred Stock ETF (PFF). It yields a bit less but keeps generating higher total return

(continued on p. 8)


At least 10% below buy-below price as of the publication of this issue T: Buy in taxable account for best results TF: Buy in tax-advantaged account (IRA, etc.) for best results*Taxable-equivalent yield Bold indicates revised price

Stocks (56%)Indexed Equities (18%) Symbol T/TF

Entry Date

Fwd. Yield

Buy Under Comments

Vanguard ESG US Stock ETF ESGV TF 9/23/20 1.38% $72.25 The indexed way to build a must-have ESG investment for 2021Vanguard Healthcare ETF VHT TF 3/16/16 1.58% $225.75 Healthcare companies are now getting bid for their performance & prospectsVanguard High Dividend ETF VYM TF 6/21/16 3.08% SELL Strategy isn't working anymore to control risk while providing oportunity; switch to VOOVanguard Info Tech ETF VGT TF 8/20/18 0.79% $367.50 Technology remains the alchemy of the stock market and buyers keep buyingVanguard Real Estate ETF VNQ TF 10/28/19 2.78% $85.75 US REIT sector is cheap with sectors beyond troubled gaining more valueVanguard S&P 500 ETF VOO TF 1.61% $357.25 The way to invest in the core of the US stock market tracking the leading S&P 500 IndexVanguard Utilities ETF VPU TF 9/24/18 3.94% $144.25 US utilities are cashing in on ESG buying with rise in green energy and benefits from growth economyGrowth & Income PlaysAlliance Bernstein AB T 11/19/18 8.21% $34.95 Asset managers are getting attention for dependable fee income; This is the one to own for more yieldAmazon.com AMZN TF 4/22/20 0.00% $3,513.30 Cloud, streaming content, online retail is everything for the modern economy; revenue keeps risingCompass Diversified Holdings CODI T 5/21/18 7.15% $20.21 This is a smaller Berkshire when Buffett was younger with lots of cash and cashflows + great dividendEricsson ERIC T 12/11/18 0.71% $13.50 5G equipment company with mission-critical equipment to buy right now while still cheapFMC Corporation FMC TF 4/25/19 1.52% $116.50 This century-old company is a technology leader for crop protection and farm-yield enhancementFranco-Nevada FNV T 6/26/19 0.78% $151.75 The way to own gold with income; gold is facing competition from strong stock & bond marketsHercules Capital HTGC T 6/25/18 9.02% $15.25 High dividend-paying company with impressive tech stock portfolio including pre-IPO companiesHormel HRL TF 4/17/17 1.94% $53.50 Safe quality meat & packaged food products with impressive margins; hoarding is returning at grocersMicrosoft MSFT TF 11/30/12 1.02% $230.75 The go-to company for cloud, operating systems and must-have software + rising gaming revenuesNestlé NSRGY T 12/17/08 2.38% $124.20 Company is feeding households and pets along with livestock at ever rising levelsNextEra Energy NEE TF 9/8/08 1.88% $76.97 ESG top mark company with its mega collection of wind and solar energyProcter & Gamble PG TF 12/17/08 2.27% $145.00 Leading consumer goods company continues to deliver brand management & cost controlsWaste Management WM TF 10/30/18 1.86% $122.25 Expanding energy from waste makes for great ESG stock and keeps the trash & recycling picked upZoetis Incorporated ZTS TF 5/28/19 0.49% $169.50 Global leader in pet and livestock vaccines protecting against next pandemic + increasing petcare spendingReal Estate Investment TrustsAlexandria Real Estate Equities ARE T 7/29/20 2.42% $177.60 Leading owner of hard to replicate laboratories for drug and vaccine developersDigital Realty Trust DLR T 2/9/18 3.34% $142.25 Continued demand for cloud computing and data centers yet stock has paused; use as buying opportunityHannon Armstrong HASI T 12/31/19 2.24% $63.25 This ESG renewable energy finance REIT with government support is a great buy for 2021Life Storage LSI T 12/26/18 3.67% $118.50 Self-storage & localized warehousing services like Amazon works well for new economyMedical Properties Trust MPW T 2/26/19 5.12% $21.25 Healthcare remains stronger in demand; company has prime tenants paying rentPrologis PLD T 7/29/20 2.37% $104.90 The leader in US and major market warehouses and logistics support; continues to build & focus portfolioW.P. Carey Inc. WPC T 1/3/14 6.01% $70.00 Rent collection remains robust and dividends keep getting hiked; still has some commerical property riskToll TakersEnterprise Products Partners EPD T 2/22/05 8.66% $20.50 Even with ESG, US still needs natural gas; this is the proven midstream company with rising dividendKinder Morgan Inc. KMI TF 11/28/14 7.39% $17.25 Complementary to ESG clean energy; proven history of success with pledged dividend hikes

Fixed Income (44%)Cash (5%)Synchrony Bank high-yield savings account 7/31/15 0.60% Market 0.60% yield—call 866/226-5638 to order; watch FDIC limits; yield is above Treasurys with FDIC insurance

Multisector BondsBlackRock Credit Allocation Trust BTZ TF 7/26/19 6.73% $15.25 Corporate bonds gaining in price & delivering income; BlackRock is Fed's contracted buyer + discount to NAVDoubleLine Total Return Bond Fund DLTNX TF 7/22/14 2.90% $10.95 Non-leveraged open-end fund with government-guaranteed mortgages continues to workiShares ESG Aware USD Corp. Bond ETF SUSC TF 9/23/20 1.83% $28.50 ESG green bonds are providing more growth & incomeVanguard Interm.-Term Corp. Bond ETF VCIT TF 10/28/19 2.22% $97.25 Corporate bonds continue to outperform general US bond market with Fed backstopPreferred SharesAtlas Corp. 7.875% Series H ATCO.PH TF 1/22/19 7.96% $25.50 CUSIP# 81254U304Teekay LNG Partners 9.00% Series A TGP.PA TF 1/22/19 8.67% $26.35 ISIN# MHY8564M1131iShares US Preferred Stock ETF PFF TF 3/9/17 4.83% $38.50 Preferred stocks continue to work for growth & safer incomeFlaherty & Crumrine Preferred Opp. Fund PFO TF 7/23/18 5.98% $12.17 Preferred stocks delivering growth & yield; watch buy under price

MinibondsJMP Group 7.25% 11/15/27 JMPNL TF 1/22/19 7.32% $24.75 CUSIP# 466273109 Cowen Inc. 7.75% 06/15/33 COWNL TF 1/22/19 6.94% $27.90 CUSIP# 223622804US Cellular 6.95% 05/15/60 UZA TF 1/22/19 6.76% $25.00 CUSIP# 911684405

Municipal Bonds (5%)BlackRock Taxable Muni Bond BBN TF 2/26/20 5.23% $25.27 Taxable munis better value than US Treaurys boosting demand; fund works for IRAs, watch buy under price

BlackRock Municipal Income BLE T 4/23/18 7.45%* $15.13 BlackRock is a top muni manager in attractive market; fund is trading around portfolio value; watch buy under priceNuveen AMT-Free Credit NVG T 4/23/18 7.57%* $16.75 Munis should be bought now; fund at discount to NAV with AMT-free income + increased distributionNuveen Municipal Credit NZF T 4/23/18 7.71%* $16.00 Munis are great buys right now; fund is at discount to NAV + increased distribution

Treasury Bonds (4%)Two-year Treasury Bond T 12/24/18 0.12% Maturing Original recommendation maturing. Hold if you own later maturity

TOTAL RETURN PORTFOLIO


that year to date equals 7.2%. PFF is a buy under a raised price of $38.50, ideally for a tax-free account.

Minibonds, Maximum YieldsMinibonds are issued by companies

and look and trade like preferred stocks to the uninformed. But they’re really corporate bonds that were issued to sell to individual investors in sums around $25 or so rather than in traditional $1,000 sizes. They don’t trade a lot, and they aren’t followed by many. So they gather dust, but they pay and pay well.

Two to buy are the JMP Group 7.25% Series D (JMPNL), which yields 7.3% and may be called soon for a quick additional gain, and the Cowen Inc. 7.75% Series L (COWNL), which yields 6.9%. Both pay well and keep paying. JMPNL is a buy under a raised price of $24.75, and COWNL remains a buy under $27.90, both for tax-free accounts.

Corporates & Munis at Discounts

Closed-end bond funds have always been favorites of mine. Buying bonds in a closed-end fund at discounts to net asset values (NAV) means buying at bargains that can’t be done in the regular bond market. US corporates continue to be the best performers in the bond markets. The one to buy is the BlackRock Credit Allocation Income Trust (BTZ), which yields 6.8% and is trading at a discount of near 5%. Buy BTZ under a raised price of $15.25, ideally for a tax-free account.

Munis are also performing and should do even better into 2021, as tax revenues are much better around the US than the headlines would indicate. Nuveen has two closed-ends at discounts. The Nuveen Municipal Credit Income Fund (NZF) yields 7.7% on a taxable equivalent basis at a discount of near 6%. For AMT-victims, it also has the Nuveen AMT-Free Municipal Credit Income Fund (NVG), yielding 7.6% on a taxable equivalent basis and at a discount of near 5%. NZF is now a buy under $16.00 and NVG is now

a buy under $16.75, both for taxable accounts.

Total Return Portfolio

For years, I have recommended the Vanguard High Dividend Yield ETF (VYM) in the Indexed Equities section of the Total Return Portfolio over a general S&P 500 ETF. But what I have seen recently is that while this focus is a good one, it has limitations. And the performance for 2020 shows that the “value” old-name stocks haven’t worked out. VYM is just positive for the year to date, while the general S&P 500 has fared much better.

Of course, we have stock index investments for healthcare, technology, real estate, utilities and now ESG in our collection. So, overall, you’ve gotten the best of the US stock market for the year. But the lag of the constrained High Dividend Yield ETF isn’t worth it going forward. Sell VYM and replace it with the Vanguard S&P 500 ETF (VOO), which is now a buy under $357.25, ideally for a tax-free account.

This ETF provides the general US stock market performance from the weighted members of the index. And it’s also balanced with the additional sector ETFs for a good overall indexed investment allocation.

Further Index UpdatesThe new Vanguard S&P 500 ETF

is joining a good collection of sector ETFs that are not just doing their jobs but are doing them very well. ESG has emerged as the major driver for both individual and institutional investors in 2020. The Vanguard ESG US Stock ETF (ESGV) has returned 17.3% since it was added to the portfolio, which is well above the S&P 500 for the same time period. ESGV is now a buy under a raised price of $72.25, ideally for a tax-free account.

Next up is healthcare. US healthcare spending was firmly on the rise, and the virus only amped up the

awareness of the importance of all the segments of healthcare. Companies in this sector already reported increasing sales and earnings for the third quarter of 2020 and should show further gains. This in turn will drive further investment into the sector. The Vanguard Health Care ETF (VHT) is now a buy under $225.75, ideally for a tax-free account.

But the star of the indexed equity market is technology. Tech is where major developments are happening, aided by demands from the economic impacts of the virus. There are many individual technology companies in the model portfolio, but the indexed equity investment that continues to work is the Vanguard Information Technology ETF (VGT). It has returned an astonishing 44.0% so far in 2020, and I see tech as a big performer in 2021. VGT is now a buy under a raised price of $367.50, ideally for a tax-free account.

Individual Performers AllianceBernstein (AB) is a

favorite asset management company that while smaller than BlackRock has its own strengths and opportunities. It’s also valued at a discount to its revenue, making for a particular bargain right now. It’s structured as a passthrough that provides for avoiding most corporate income taxes, which means more cash for company development and for dividends. And dividends are big with a yield of 8.2%. It’s returned 36.5% since we added it to the portfolio. AB is now a buy under a raised price of $34.95, ideally for a taxable account.

Hercules Capital (HTGC) is a tech investment that everyone should own. It’s set up as a business development company (BDC) that provides the avoidance of traditional corporate income taxes, but it operates like a venture capital company for technology companies. It pays a big dividend yielding an annual rate of 9.7%, and it has performed with a return of 45.0% since we added it. Given the technology company portfolio under its hood, it’s still a bargain. HTGC is now a buy under


a raised price of $15.25, ideally for a taxable account.

Hannon Armstrong Sustainable Infrastructure Capital (HASI) is set up as a REIT because it finances green energy and related projects that are tied to the ground. ESG investing is working well in 2020 and will gain even further in 2021. This company is the go-to for the finance side of the green energy market, complete with a tax-advantaged dividend. And many of its financed projects also come with government guarantees for added credit protection. Since we added it to the portfolio late last year, it has returned 98.2%, and I see a lot more ahead for this company. HASI is now a buy under a raised price of $63.25, ideally for a taxable account.

Another great REIT in the tech space is Digital Realty Trust (DLR). This REIT is a leader in data centers that have all of the big, bold-faced technology company names on its list of tenants. The stock has taken a pause recently and given back some of its heavier gains. I see this as an opportunity to buy into its tech real estate portfolio on the cheap, as it’s valued now at only 2.3 times its intrinsic (book) value of those hard-to-replicate assets. DLR is a buy under a revised price of $142.25, ideally for a taxable account.

The Incredible Dividend Machine

The Incredible Dividend Machine members continue to provide monthly cash distributions through the three dividend cycles, including some special regular monthly dividend-paying stocks. The average dividend yield right now is running at 4.4% for the whole collection across the three cycles, which is more than double the 1.7% dividend yield of the S&P 500.

What’s even more impressive is that the collection of stocks includes varied companies that have good track records of corporate management, with a heavy focus on shareholders proven by the consistent dividend payments.

Cycle AInside Cycle A, there is a collection

of essential services companies that are dependable for income. BCE Inc. (BCE) is the Canadian equivalent of AT&T (T) in its data, voice and content services. Yielding 6.0%, it continues to perform for income and longer-term appreciation.

PPL Corp. (PPL) and Xcel Energy (XEL) provide core energy and related essential services to businesses and homes throughout their markets. PPL continues to focus more on its core US operations and should be bolstered from some of its transactions aiding its capital for more US deployment. Xcel is one of my favorite ESG utilities, as it continues to ramp up its wind and solar capacity that is being further aided by ongoing tax-benefits in the US federal tax code.

Corporate Office Properties Trust (OFC) is a REIT with lots of other strategic assets beyond offices. This includes its data centers, particularly for tenants such as Amazon (AMZN) and its Amazon Web Services (AWS). It has current and expanding facilities in the core market along internet truck lines in the Mid-Atlantic as well.

Merck (MRK) is a longstanding pharmaceutical that’s part of the vaccine development going on right now. But it also has myriad treatment products that will fund further dividends.

Mondelez International (MDLZ) is more than Oreo cookies. And as such, it has continued to prove out in its product management that has honed its consumer food business. In addition, costs from production to delivery have been a challenge that the company continues to control well.

Sixth Street Specialty Lending (TSLX) is one of our alt-financials that provides businesses and other entities with loans and other financing in a tax-advantaged corporate set-up. It is also benefitting now and for the next four years by being under the radar from some onerous financial regulations that impact traditional banks. It has a big yield that makes for a good buy-and-own stock.

Cycle BLike for Cycle A, Cycle B has

a collection of essential services companies that are must-haves for businesses and homes. Alliant Energy (LNT) continues to be a dependable power and related utility that continues to pay its regular dividends.

Then, AT&T (T) and Verizon (VZ) remain the primary US telecommunication companies that the US relies upon either directly or indirectly to work and play. Both pay very good dividends that should be dependable for some time to follow.

On the consumer goods front, Colgate-Palmolive (CL), like Mondelez, has continued to prove that it knows how to manage its product offerings, including must-have household products. And the same is also the case for its cost management, which makes for a dependable dividend.

Cycle CLeading Cycle C is BlackRock

(BLK), with its year to date return of 42.6% and its overall return since being added to the portfolio of 89.3%. BlackRock is one of the globe’s biggest asset-managers both in its active funds and indexed funds, including its ETF empire. It also is one of the go-to managers for governments around the globe, including the US government.

Of course, it was the go-to contractor to the Federal Reserve in 2009 when it began to buy bonds and offer credit to the US. Again, it has come to the aid of the Fed in 2020 for its trillions of dollars of bond and credit facilities. The yield is a little low for the cash generated by the company, but it delivers great total return.

Utilities are well-represented in Cycle C, with Dominion Energy (D), Duke Energy (DUK), Eversource Energy (ES) and Public Service Enterprise Group (PEG). These are all leaders in their markets and should be relied upon for appropriate dividend distributions. This includes some changes in distributions, as some companies


have increased retained earnings to fund transformations towards more ESG-focused energy projects. This shouldn’t be viewed as a negative but more as an investment for what will work for decades to follow.

Easterly Government Properties (DEA) is a REIT with an ample dividend yield that has its primary tenant in Uncle Sam for much of its property portfolio. This is a very reliable source of income that defends the dividend during more challenging times.

And last up in Cycle C is another alt-financial in Main Street Capital (MAIN). This business development company (BDC) focuses on middle-market sized companies for loans and finance. It has one of the best cost structures in the business, with an efficiency ratio of 32.3%, meaning that it costs 32 cents to earn each dollar of revenue.

It also has astounding interest

rate management of its assets and liabilities, which is a dream for traditional banks that try to compete against it. With net interest margin, or the difference in interest costs against interest income, running at a whopping 79.3%, Main Street is a well-run financial.

Niche InvestmentsThere are several companies in the

Niche Investments that continue to perform well, and the market is taking notice.

Activision Blizzard (ATVI) is one of the leaders in electronic games, particularly in the US market, returning 49.61% year to date. The company’s offerings are strong in demand and work on all of the leading platforms, including from Microsoft (MSFT) and Sony (SNE). Gaming has been doing well during the stay at home conditions, and this trend will continue higher in

2021 and beyond. ATVI is now a buy under a raised price of $90.50, ideally for a tax-free account.

AMN Healthcare Services (AMN) is a newer member of the Niche Investments. It’s the leading provider of healthcare professionals from nurses to technicians as well as physicians and specialists. The virus demands have only amplified the company’s capabilities and the market needs that the company addresses the best. It also has technology services for record management and language translation that are both mission critical for the medical profession. AMN is now a buy under a raised price of $69.05, ideally for a tax-free account.

B. Riley (RILY) is a favorite company of mine that is really a collection of businesses in the financial and other markets that addresses market and eco-nomic necessities ranging from innovative investment banking, investment management and specialty finance to bank-ruptcy resolution and retail

store closings. Buy RILY under a raised price of $43.75, ideally for a tax-free account.

Centene (CNC) is the leading company providing healthcare administration and insurance for government programs, including Medicaid and Medicare as well as many other public and private programs. The company is set to further benefit from the changes in the US government in 2021. But the stock market has been a bit slow to catch on to its underlying value and potential. Buy CNC under a revised price of $68.85, ideally for a tax-free account.

Covetrus (CVET) is a newer company to the public market but has continued to perform for 2020, returning 107.6% year to date. The company focuses on supplying veterinarians and their offices with ongoing supplies, including a very tech-savvy link to pet parents to make pet care costs all the more competitive. 2020 has been a big year for more households having pets, and I see this continuing as folks recognize what dogs, cats and other pets bring to their lives. I’m raising the buy under price for CVET to $30.25, ideally for a tax-free account.

Ritchie Brothers Auctioneers (RBA) is a Canadian-based company with operations in North America and beyond that also has increasing online capabilities in the auction business. It auctions industrial, commercial and business machinery and other assets that during good times are highly in demand. And in bad times, creditors need to recoup cash, so the company provides liquidation services. It also has a car auction unit, including for the highly charged collector car market.

The company was little noticed when I first presented it to you, but the market is catching on to its current value and its future capabilities. It has returned 64.3% in 2020. I’m raising the buy-under price to $72.25, ideally for a taxable account given its Canadian status to avoid potential withholding tax challenges for qualified US accounts.

Samsung Electronics (SSNLF, 005930 Korea) is the leading electronics company in the world. It

The Fund PortfolioStocks (56%)Vanguard ESG US Stock ETF (ESGV)Vanguard S&P 500 ETF (VOO)–BUYVanguard High Dividend Yield ETF (VYM)–SELLVanguard Real Estate (VNQ)Vanguard Utilities ETF (VPU)Vanguard Information Technology ETF (VGT)Vanguard Health Care ETF (VHT)Fixed Income (44%)Vanguard Intermediate-Term Corporate ETF (VCIT)iShares ESG Aware USD Corporate Bond ETF (SUSC)iShares Preferred and Income Securities ETF (PFF)SPDR Nuveen Bloomberg Barclays Muni Bond ETF (TFI)Cash (5%)

Niche InvestmentsName (Ticker, Yield) T/TF Buy UnderActivision Blizzard (ATVI, 0.5%) TF $90.50AMN Healthcare Services (AMN, 0.0%) TF $69.05B. Riley Financial (RILY, 3.7%) TF $43.75BlackBerry (BB, 0.0%) T $9.95Centene (CNC, 0.0%) TF $68.85Covetrus (CVET, 0.0%) TF $30.25Gray Televison (GTN, 0.0%) TF $18.50KAR Auction Services (KAR, 4.1%) TF SELLMarine Products Corp. (MPX, 2.0%) TF SELLRitchie Brothers Auctioneers (RBA, 1.3%) T $72.25Samsung Electronics (SSNLF, 2.7%) T $69.75TDK Corp. (TTDKY, 1.2%) T $146.00Tencent (TCEHY, 0.2%) T $81.25Thor Industries (THO, 1.7%) TF SELLViper Energy (VNOM, 3.2%) TF $13.25


supplies nearly every tech company with stuff, much originated and engineered by its own laboratories. And it has its own branded goods that are go-to for those seeking top quality. It’s a pain to buy for some individual investors in the US, but it’s worth the hassle with your broker.

The stock has returned 384.9% for US investors for the past 10 years for an average annual equivalent of 17.1%, but it is valued at barely more than its intrinsic value (book) and trailing sales. Buy SSNLF under a raised price of $69.75, ideally for a taxable account.

Time to SellKAR Auction Services (KAR) is a

specialist in auctioning used cars that are off-lease or excess in dealer lots as well as dealing with salvage cars for insurance companies. This was a good market to be in before the virus mess. And with rising demands for used cars, it should have its own specialties in cashing in.

But the company and its management have been disappointing. It hasn’t been successful at operating what should be a good business. And even with ample cash and lower debt to assets, the company continues to show signs of credit challenges that for me are a deal-breaker. The stock reflects the

management challenges. And while it has been recovering from March to date by 76.7%, it’s been a weaker stock for all of 2020. Regrettably, I recommend selling KAR now.

Marine Products (MPX) is a leading boat company that I brought on board as the virus mess made for rising demand for alternative leisure activities. Boats were big in 2020, but there’s less of a compelling case for the stock right now. The company has lots of value, and sales look good now and going forward. The stock has done well since March to date, returning 116.7%. But I now recommend selling MPX to focus on other opportunities.

Thor Industries (THO) was brought into the Niche Investments as a leading RV company and a safer alternative for travel and leisure. This is a very good company with great products and numbers that prove that management knows what it’s doing. From March to date, the stock has returned 186.2%. The company will keep doing well for 2021 and beyond. But like for MPX, I now recommend selling THO to focus resources on other investment opportunities.

Model Mutual FundsWith interest rates and yields on the

floor, the cost to hold cash has been punitive. Fixed income allocations

have been providing a level of shock protection as well as better income and price gains for better total return contribution to the overall portfolios. So, in the December issue, I made the case to reduce the cash allocations in the Total Return Portfolio as well as for the mutual fund portfolios.

Our combination of corporate bonds, ESG-focused bonds, preferred stocks and municipal bonds have all done well in 2020, and I see them doing the same or more for 2021. The Vanguard Intermediate-Term Corporate Bond ETF (VCIT) has returned 8.8%, the iShares ESG Aware USD

Corporate Bond ETF (SUSC) has returned 8.9%, the iShares Preferred & Income Securities ETF (PFF) has returned 7.0% and the SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (TFI) has returned 5.7% with its additional tax advantages.

Overall, the average for the four allocations has been 7.61%, which is a combination of gains in the markets as well as higher income along the way. I continue to see these allocations in the fixed income section as good to go for 2021. And allocating more cash to the fixed income funds is the better way to go for the new year.

Stock Allocation ChangeTo gain overall stock market

performance, I’ve recommended a step back from the general S&P 500 in favor of more historically defensive higher-dividend stock index funds, including the Vanguard High Dividend Yield ETF (VYM) and

The Fidelity and Vanguard PortfoliosFidelity (800/544-8888)

Stocks (56%)Fidelity 500 Index Fund (FXAIX)–BUYFidelity High Dividend ETF (FDVV)–SELLFidelity MSCI Real Estate ETF (FREL)Fidelity US Sustainability Index Fund (FITLX)Fidelity US Utilities ETF (FUTY)Fidelity Health Care ETF (FHLC)Fidelity Select Software & IT Services (FSCSX)Fixed Income (44%)Fidelity Sustainability Bond Index Fund (FNDSX)Fidelity High Income (SPHIX)Fidelity Principal Preferred Securities (PRFCX)Fidelity Intermediate Municipal Income (FLTMX)Cash (5%)

Vanguard (800/662-2739)Stocks (56%)Vanguard ESG US Stock ETF (ESGV)Vanguard S&P 500 ETF (VOO)–BUYVanguard High Dividend Yield ETF (VYM)–SELLVanguard Real Estate ETF (VNQ)Vanguard Utilities ETF (VPU)Vanguard Information Technology ETF (VGT)Vanguard Health Care ETF (VHT)Fixed Income (44%)Vanguard Intermediate-Term Corporate ETF (VCIT)iShares Pref. and Income Secs. ETF (PFF)Vanguard Tax-Exempt Bond ETF (VTEB)Vanguard ESG US Corporate Bond ETF (VCEB)Cash (5%)

The Incredible Dividend MachineCycle A (January, April, July, October) T/TF Buy UnderBCE Inc. (BCE, 6.0%) T $45.00 Corporate Office Properties (OFC, 4.3%) T $27.50 Merck (MRK, 3.3%) TF $86.25 Mondelez International (MDLZ, 2.2%) TF $58.85 PPL Corp. (PPL, 6.2%) TF $30.25 TPG Specialty Lending (TSLX, 10.9%)** TF $21.75 Xcel Energy (XEL, 2.6%) TF $72.50

Cycle B (February, May, August, November)Alliant Energy (LNT, 3.0%) TF $58.25AT&T (T, 7.1%) TF $32.50 Colgate-Palmolive (CL, 2.1%) TF $87.25 Verizon (VZ, 4.2%) TF $61.25

Cycle C (March, June, September, December)BlackRock (BLK, 2.1%) TF $721.75 Dominion Energy (D, 3.3%) TF $83.00Duke Energy (DUK, 4.3%) TF $93.00Easterly Gov’t Properties (DEA, 4.8%) T $26.75 Eversource Energy (ES, 2.7%) TF $93.25 Main Street Capital (MAIN, 7.9%)** T $33.75 Public Svc. Enterprise Group (PEG, 3.5%) TF $62.95 *Monthly dividend payer, **Annual Yield

the Fidelity High Dividend ETF (FDVV). This decision has been less successful during both market pullbacks recently as well as overall market returns when compared to the general S&P 500. So, I’m recommending a change as we set up for 2021.

I know that the weightings of the S&P 500 continue to favor more technology, but that’s what has worked through both thick and for 2020’s thinner economic times. While the general S&P 500 Index funds also have some overlap to the sector funds, I continue to recommend the additional index sector funds to provide more of a balanced bolster to these sectors in your own portfolio.

If you’re following the Fund Portfolio or the Vanguard Portfolio, sell the Vanguard High Dividend Yield ETF (VYM) and replace it with the Vanguard S&P 500 ETF (VOO). It has an expense ratio of a mere 0.03%.

If you’re following the Fidelity Portfolio, sell the Fidelity High Dividend ETF (FDVV) and replace it with the open-end Fidelity 500 Index Fund (FXAIX). Its current management fee is just 0.015%.

These allocations for stocks in the general S&P 500 as well as the additional sectors should do well for us in 2021. For fixed income, the allocations to corporate bonds, preferred stocks, ESG bonds and municipal bonds should perform for us as well. And even inside a tax-free account, municipal bonds should be bought for total return opportunities even if the tax-benefit is foregone.

Final ThoughtMoving Forward Into 2021

2020 was a terrible year for most of us personally. But after a gut-wrenching February and March for the stock and bond markets, things are ending up pretty good.

Stocks still need to get through the dire economic conditions of 2020 and into the beginning of 2021. Consumers are still taking hits on jobs, and spending is reflecting this. But the prognosis for vaccines is very positive for now. This is reflected in forward-looking sales and earnings for companies in 2021.

Bonds are still priced at good levels, particularly for specific individual corporate issues and funds, including many at discounts to their true underlying values. Municipal bonds are getting more positive notice, with state and local authorities in much better financial shape than expected.

The economic recovery will only add to their solid financial conditions, aiding credit perceptions of municipal bond buyers, resulting in higher bond prices for individual issues. And muni bond funds remain very cheap with ample yield right now.

Going forward, we will continue to focus on companies with proven results. Add in some of the companies developing and deploying newer technologies as well as ESG, and we have some big opportunities for 2021. For bonds, our collection of individual issues and funds are what you need to continue to buy and own now and through 2021.

Finally, I’m always eager for your questions, concerns or comments. Please feel free to reach out to me and my team at [email protected] or call us at 800-211-8566.

Thank you very much for reading and subscribing. And I wish you the best of a New Year for 2021 and well beyond.

Regards,

Neil George

NEIL GEORGE began his financial services career in 1987 with Merrill Lynch International Bank in Vienna, Austria and subsequently held senior positions at what are now US Bank and globally-

based Investec PLC. Neil’s long career has included stints as a bond trader and the manager of a fixed-income fund worth over $1 billion. An income hunter at heart, he’s also the former editor of several successful investment advisories dedicated to finding Wall Street’s best yields. Neil earned an MBA in international finance from Webster University in Europe and a bachelor’s degree in economics from King’s College. His market commentary and insights have been featured in the Wall Street Journal, Barron’s, Bloomberg, CNN and NBC.

Actions to Take This Month

1. The stock and bond markets have roared back from their March lows, but don’t get caught up in the exuberance. Focus on companies that are working and giving back to shareholders.

2. SPACs, IPOs and cryptocurrencies make for good headlines, but the US corporate and municipal bond funds we hold represent safer opportunities for income now and gains throughout 2021.

3. Many of our Niche Investments have performed exceedingly well this year, but it’s time to say goodbye to three of them. See page 10 for the details.

4. Our higher-dividend stock index ETFs have underperformed their general S&P 500 index ETF counterparts. See page 11 for new changes to the Model Mutual Fund Portfolios.

5. Be sure to check the portfolios on pages 7 & 11 for my latest guidance, as I’ve updated the buy-under prices for many of our holdings this month.

SUMMARY

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Will 2021 Be Better? Good to Grow? - InvestorPlace · 2020. 12. 22. · Neil George’s Profitable...

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