Boeing 737 MAX Crash Sends Market Cap Lower

Every month, AeroAnalysis International covers the orders and deliveries for Boeing (BA) and Airbus (OTCPK:EADSY, OTCPK:EADSF). Now, there’s a lot more than just orders and deliveries. Some subjects are worthy of more detailed analysis, and some are not. The subjects that are not are not necessarily unimportant. Therefore, AeroAnalysis has been running a monthly series that bundles some of the most interesting news items that do not justify a separate article or deserve to be mentioned again. You can read the February report here. In this report, some news items from March will be highlighted.

Afbeeldingsresultaat voor 737 max

Source: Axios

Share Price Development in March

In March 2019, Boeing’s shares lost 13.4% compared to a 13.6% gain a month earlier. Boeing’s shares significantly underperformed the Dow Jones, which was flat for the month.

The reach for the downward pressure on Boeing shares during the month is clear: The crash with the Boeing 737 MAX 8 from Ethiopian Airlines marking the second fatal crash.

A look at some price target announcements in March:

  • Argus initially gave Boeing shares a $460 with a buy rating but reverted to a Hold rating after the Ethiopian Airlines crash with a $371.30 price target.
  • Edward Jones downgraded Boeing shares from a Buy to Hold with a $300 price target.
  • DZ Bank downgraded Boeing shares from a Buy to Hold with a $300 price target.
  • Norddeutsche Landesbank set a $300 on Boeing shares with a Sell rating.
  • Tigres Financial reiterated its Buy rating.
  • Citi Group resumed with a Buy rating.

What we did see in the aftermath of the second fatal crash with the Boeing 737 MAX is that analyst sentiment deteriorated, which shouldn’t come as a surprise. This stepdown in sentiment was expected, but it remains to be seen whether going forward, with fixes implemented and a return to service for the MAX, this negative sentiment will endure.

Commercial Airplanes News

Afbeeldingsresultaat voor boeing 777

Source: Boeing

During the month of March, the crash with the Boeing 737 MAX captured most attention. Boeing shares declined in value after the crash on fears that there is a design flaw on the Boeing 737 MAX. In the aftermath of the first crash, I already pointed out that the MCAS design might not have been robust and that it was unclear as to how this part of the speed trim system was certified by the FAA and aviation administrations around the globe. While I consider this a shortcoming on Boeing’s side, even with a preliminary report out, it is not clear why the pilots flew the aircraft at a very high speed which might have made regaining control over the aircraft nearly impossible. Currently, Boeing is working on a fix, which will likely be closely eyeballed by administrations around the globe because confidence in Boeing as well as the FAA has been severely dented. Until the fix is approved, the fleet of Boeing 737 MAX aircraft will remain on the ground and no deliveries will occur. The crash is likely going to impact Boeing’s earnings for the simple reason that the grounding is costing money, possibly beyond the amount Boeing is covered for by insurers, and revenue is being delayed due to the production stop resulting in working capital increases.

I’ve written a few reports on the subject, which you can read here:

In the aftermath of the two crashes, Indonesian carriers are looking for cancellations of their direct orders for the MAX with Boeing and agreements with lessors while Boeing is being probed.

The only other noteworthy news item regarding commercial aircraft was the order for 20 Boeing 787-9s from Lufthansa (OTCQX:DLAKF). Boeing had been battling Airbus for an order for months, and Lufthansa eventually ended up splitting the order between both jet makers.

Investment News

Afbeeldingsresultaat voor boeing global services

Source: The Boeing Company

Fitting its after-sales and digital solutions strategy, Boeing acquired ForeFlight, a leading provider of innovative mobile and web-based aviation applications.

ForeFlight has partnered with Boeing for the past two years to bring aviators Jeppesen’s aeronautical data and charts through ForeFlight’s popular mobile platforms. Now, the teams will integrate talent and offerings to bring innovative, expanded digital solutions to all segments of the aviation industry.

As part of the joint venture between Boeing and Embraer (ERJ), Boeing announced three leadership moves aimed at further strengthening the company’s global presence and partnerships:

  • Marc Allen has been named senior vice president of Boeing and president of Embraer Partnership and Group Operations;
  • Sir Michael Arthur has been named president of Boeing International;
  • John Slattery announced as president and chief executive officer of the commercial aviation and services joint venture between Boeing and Embraer.

Global Services

Afbeeldingsresultaat voor aircraft maintenance

Source: Aviation Jobs and Aviation Employment – AviationCV.com

In March, there was no notable news for Boeing’s Global Services division.

Defense News

Source: The Boeing Company

For Boeing Defense, there were a couple of news events. A program capturing some negative attention was the KC-46A. In February, the USAF stopped accepting tankers from Boeing as foreign object debris was found inside the tankers. Deliveries resumed in March, which should have been a good thing were it not that the USAF halted deliveries again in early April. While the second delivery stop is an April news event, I think it is important to highlight it in this report, which covers the March news events as well.

More positive news came from Boeing’s F-18 fighter jet program. Boeing was awarded a three-year contract award for 78 F/A-18 Block III Super Hornets. The contract is valued $4B and is expected to save US taxpayer $395 million.

A major milestone was also achieved by the Sikorsky-Boeing SB>1 DEFIANT; The Sikorsky-Boeing SB>1 DEFIANT™ helicopter achieved first flight. The helicopter is participating in the Army’s Joint Multi-Role-Medium Technology Demonstrator program. Data from DEFIANT will help the Army develop requirements for new utility helicopters expected to enter service in the early 2030s. This flight marks a key milestone for the Sikorsky-Boeing team and is the culmination of significant design, simulation, and test activity to further demonstrate the capability of the X2 Technology.

X2 Technology is scalable to a variety of military missions such as attack and assault, long-range transportation, infiltration and resupply. DEFIANT is the third X2®aircraft in less than 10 years.

During the month, there also was a milestone for the Ground-based Midcourse Defense [GMD] system as the US Missile Defense Agency and Boeing for the first time launched two GMD system interceptors to destroy a threat-representative target, validating the fielded system protects the United States from intercontinental ballistic missiles.

In the test, one interceptor struck the target in space. The second interceptor observed that intercept before destroying additional debris to ensure missile destruction. The test is known as a “two-shot salvo” engagement. The target launched from Kwajalein Atoll in the Pacific Ocean while the interceptors launched from Vandenberg Air Force Base, California.

Conclusion

Without doubt, March was a bad month for Boeing. For a company’s share to perform well, you ultimately need a good product, coupled with good execution or you need good execution to make a good product. With the second crash of a Boeing 737 MAX, it does seem like Boeing has failed miserably on the execution part, which I expect will affect their current year performance.

Boeing had some highlights as well with a milestone order from Lufthansa and a production contract for its Super Hornet fighter, but not nearly enough to mitigate the pressure the Boeing 737 MAX cash cow is currently putting on Boeing. During the month of March, Boeing’s market cap declined by $33.4B. This decline cannot be fully explained by closing math (there is no calculation to support the cap decline), but such a big decline in market cap is perfectly understandable, given the importance of the Boeing 737 program to Boeing and the uncertainty regarding the aircraft. I expect that the Boeing 737 MAX will eventually be approved for flight again, and as investors and stakeholders around the world regain confidence, Boeing should see recovery in its market cap. In fact, in the first days of March, nearly $9B in market cap was recovered. At the end of the day, Boeing should be learning lessons from this.

If you enjoyed reading this article, don’t forget to hit the “Follow” button at the top of this page (below the article title) to receive updates for my upcoming articles.

Disclosure: I am/we are long BA, EADSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Math of How Crickets, Starlings and Neurons Sync Up

When the incoherent claps of a crowd suddenly become a pulse, as everyone starts clapping in unison, who decided? Not you; not anyone. Crickets sing in synchrony; metronomes placed side by side sway into lockstep; some fireflies blink together in the dark. All across the United States, the power grid operates at 60 hertz, its innumerable tributaries of alternating current synchronizing of their own accord. Indeed, we live because of synchronization. Neurons in our brains fire in synchronous patterns to operate our bodies and minds, and pacemaker cells in our hearts sync up to generate the beat.

Quanta Magazine


author photo

About

Original story reprinted with permission from Quanta Magazine, an editorially independent publication of the Simons Foundation, whose mission is to enhance public understanding of science by covering research develop­ments and trends in mathe­matics and the physical and life sciences.

Objects with rhythms naturally synchronize. Yet the phenomenon went entirely undocumented until 1665, when the Dutch physicist and inventor Christiaan Huygens spent a few days sick in bed. A pair of new pendulum clocks—a kind of timekeeping device that Huygens invented—hung side by side on the wall. Huygens noticed that the pendulums swung exactly in unison, always lurching toward each other and then away. Perhaps pressure from the air was synchronizing their swings? He conducted various experiments. Standing a table upright between the clocks had no effect on their synchronization, for instance. But when he rehung the clocks far apart or at right angles to each other, they soon fell out of phase. Huygens eventually inferred that the clocks’ “sympathy,” as he called it, resulted from the kicks that their swings gave each other through the wall.

When the left pendulum swings left, it kicks the wall and the other pendulum rightward, and vice versa. The clocks kick each other around until they and the wall attain their most stable, relaxed state. For the pendulums, the most stable behavior is to move in opposite directions, so that each pushes the other in the direction it’s already going, the way you push a child on a swing. And this is also easiest for the wall; it no longer moves at all, because the pendulums are giving it equal and opposite kicks. Once in this self-reinforcing, synchronous state, there’s no reason for the system to deviate. Many systems synchronize for similar reasons, with kicks replaced by other forms of influence.

Christiaan Huygens’ sketch of an experiment with a pair of pendulum clocks (top), and his attempt to understand why they synchronize (bottom). “B has gone again through the position BD when A is at AG, whereby the suspension A is drawn to the right, and therefore the vibration of pendulum A is being accelerated,” he wrote. “B is again in BK when A has been returned to position AF, whereby the suspension of B is drawn to the left, and therefore the vibration of pendulum B slows down. And so, when the vibration of pendulum B is steadily slowing down, and A is being accelerated, it is necessary that … they should move together in opposite beats….”

Reproduced from Oeuvres complètes de Christiaan Huygens (1888); Huygens’ passage from Synchronization: A Universal Concept in Nonlinear Sciences (2002)

Another Dutchman, Engelbert Kaempfer, traveled to Thailand in 1690 and observed the local fireflies flashing simultaneously “with the utmost regularity and exactness.” Two centuries later, the English physicist John William Strutt (better known as Lord Rayleigh) noticed that standing two organ pipes side by side can “cause the pipes to speak in absolute unison, in spite of inevitable small differences.” Radio engineers in the 1920s discovered that wiring together electrical generators with different frequencies forced them to vibrate with a common frequency—the principle behind radio communication systems.

It wasn’t until 1967 that the pulsating chirps of crickets inspired the American theoretical biologist Art Winfree to propose a mathematical model of synchronization. Winfree’s equation was too difficult to solve, but in 1974, a Japanese physicist named Yoshiki Kuramoto saw how to simplify the math. Kuramoto’s model described a population of oscillators (things with rhythms, like metronomes and heartbeats) and showed why coupled oscillators spontaneously synchronize.

Kuramoto, then 34, had little prior experience in nonlinear dynamics, the study of the feedback loops that tangle together variables in the world. When he showed his model to experts in the discipline, they failed to grasp its significance. Discouraged, he set the work aside.

Five years later, Winfree came across a précis of a talk Kuramoto had given about his model and realized that it offered a revolutionary new understanding of a subtle phenomenon that pervades the world. Kuramoto’s math has proved versatile and extendable enough to account for synchronization in clusters of neurons, fireflies, pacemaker cells, starlings in flight, reacting chemicals, alternating currents and myriad other real-world populations of coupled “oscillators.”

“I didn’t imagine at all that my model would have a wide applicability,” said Kuramoto, now 78, by email.

But, as ubiquitous as Kuramoto’s model became, any illusions physicists had of understanding synchronization shattered in 2001. Once again, Kuramoto was at the center of the action.

Different Strokes

In Kuramoto’s original model, an oscillator can be pictured as an arrow that rotates in a circle at some natural frequency. (If it’s a firefly, it might flash every time the arrow points up.) When a pair of arrows are coupled, the strength of their mutual influence depends on the sine of the angle between their pointing directions. The bigger this angle, the bigger the sine, and therefore the stronger their mutual influence. Only when the arrows point in parallel directions, and rotate together, do they stop pulling on each other. Thus, the arrows will drift until they find this state of synchrony. Even oscillators that have different natural frequencies, when coupled, reach a compromise and oscillate in tandem.

But that basic picture only explains the onset of global synchronization, where a population of oscillators all do the same thing. As well as being the simplest kind of sync, “there are plenty of examples of global synchronization; that’s why people paid so much attention to that,” said Adilson Motter, a physicist at Northwestern University in Chicago, and a leading sync scientist. “But in 2001, Kuramoto discovered something very different. And that’s where the story of different states starts.”

Yoshiki Kuramoto, a professor of physics at Kyoto University, developed the famous Kuramoto model of synchronization in the 1970s and co-discovered the chimera state in 2001, again revolutionizing the understanding of sync.

Tomoaki Sukezane

It was Kuramoto’s Mongolian post-doc, Dorjsuren Battogtokh, who first noticed a new kind of synchronous behavior in a computer-simulated population of coupled oscillators. The identical oscillators, which were all identically coupled to their neighbors, had somehow split into two factions: Some oscillated in sync, while the rest drifted incoherently.

Kuramoto presented his and Battogtokh’s discovery at a 2001 meeting in Bristol, but the result didn’t register in the community until Steven Strogatz, a mathematician at Cornell University, came across it in the conference proceedings two years later. “When I came to understand what I was seeing in the graphics, I didn’t really believe it,” Strogatz said.

“What was so weird,” he explained, “was that the universe looks the same from every place” in the system. And yet the oscillators responded differently to identical conditions, some ganging together while the rest went their own way, as if not coupled to anything at all. The symmetry of the system “was broken,” Strogatz said, in a way that “had never been seen before.”

Strogatz and his graduate student Daniel Abrams, who now studies synchronization as a professor at Northwestern, reproduced the peculiar mix of synchrony and asynchrony in computer simulations of their own and explored the conditions under which it arises. Strogatz dubbed it the “chimera” state after a mythological fire-breathing monster made of incongruous parts. (Months earlier, Strogatz had written a popular book called Sync, about the pervasiveness of global synchronization.)

Two independent teams realized this chimera state in the lab in 2012, working in different physical systems, and more experiments have seen it since. Many researchers suspect chimeras arise naturally. The brain itself seems to be a complicated kind of chimera, in that it simultaneously sustains both synchronous and asynchronous firing of neurons. Last year, researchers found qualitative similarities between the destabilization of chimera states and epileptic seizures. “We believe that further detailed studies may open new therapeutic methods for promoting seizure prediction and termination,” said co-author Iryna Omelchenko of the University of Berlin.

But the chimera state is still not fully understood. Kuramoto worked out the math verifying that the state is self-consistent, and therefore possible, but that doesn’t explain why it arises. Strogatz and Abrams further developed the math, but other researchers want “a more seat-of-the-pants, physical explanation,” Strogatz said, adding, “I think it’s fair to say that we haven’t really hit the nail on the head yet” about why the chimera state occurs.

Good Vibrations

The discovery of chimeras ushered in a new era in sync science, revealing the conceivably countless exotic forms that synchronization can take. Now, theorists are working to pin down the rules for when and why the different patterns occur. These researchers have bold hopes of learning how to predict and control synchronization in many real-world contexts.

Motter and his team are finding rules about how to stabilize the synchronization of power grids and more stably integrate the U.S. grid with intermittent energy sources like solar and wind. Other researchers are looking for ways of nudging systems between different synchronous states, which could be useful for correcting irregular heartbeats. Novel forms of sync could have applications in encryption. Scientists speculate that brain function and even consciousness can be understood as a complicated and delicate balance of synchrony and asynchrony.

“There’s a lot of new vibrancy to thinking about sync,” said Raissa D’Souza, a professor of computer science and mechanical engineering at University of California, Davis. “We’re gaining the tools to look at these exotic, intricate patterns beyond just simple, full synchronization or regions of synchronization and regions of randomness.”

Many of the new synchronization patterns arise in networks of oscillators, which have specific sets of connections, rather than all being coupled to one another, as assumed in the original Kuramoto model. Networks are better models of many real-world systems, like brains and the internet.

In a seminal paper in 2014, Louis Pecora of the United States Naval Research Laboratory and his co-authors put the pieces together about how to understand synchronization in networks. Building on previous work, they showed that networks break up into “clusters” of oscillators that synchronize. A special case of cluster sync is “remote synchronization,” in which oscillators that are not directly linked nonetheless sync up, forming a cluster, while the oscillators in between them behave differently, typically syncing up with another cluster. Remote synchronization jibes with findings about real-world networks, such as social networks. “Anecdotally it’s not your friend who influences your behavior so much as your friend’s friend,” D’Souza said.

In 2017, Motter’s group discovered that oscillators can remotely synchronize even when the oscillators between them are drifting incoherently. This scenario “breeds remote synchronization with chimera states,” he said. He and his colleagues hypothesize that this state could be relevant to neuronal information processing, since synchronous firing sometimes spans large distances in the brain. The state might also suggest new forms of secure communication and encryption.

Then there’s chaotic synchronization, where oscillators that are individually unpredictable nonetheless sync up and evolve together.

As theorists explore the math underpinning these exotic states, experimentalists have been devising new and better platforms for studying them. “Everyone prefers their own system,” said Matthew Matheny of the California Institute of Technology. In a paper in Science last month, Matheny, D’Souza, Michael Roukes and 12 co-authors reported a menagerie of new synchronous states in a network of “nanoelectromechanical oscillators,” or NEMs — essentially miniature electric drumheads, in this case. The researchers studied a ring of eight NEMs, where each one’s vibrations send electrical impulses to its nearest neighbors in the ring. Despite the simplicity of this eight-oscillator system, “we started seeing a lot of crazy things,” Matheny said.

The researchers documented 16 synchronous states that the system fell into under different initial settings, though many more, rare states might be possible. In many cases, NEMs decoupled from their nearest neighbors and remotely synchronized, vibrating in phase with tiny drumheads elsewhere in the ring. For example, in one pattern, two nearest neighbors oscillated together, but the next pair adopted a different phase; the third pair synced up with the first and the fourth pair with the second. They also found chimeralike states (though it’s hard to prove that such a small system is a true chimera).

NEMs are more complicated than simple Kuramoto oscillators in that the frequency at which they oscillate affects their amplitude (roughly, their loudness). This inherent, self-referential “nonlinearity” of each NEM gives rise to complex mathematical relationships between them. For instance, the phase of one can affect the amplitude of its neighbor, which affects the phase of its next-nearest neighbor. The ring of NEMs serves as “a proxy for other things that are out in the wild,” said Strogatz. When you include a second variable, like amplitude variations, “that opens up a new zoo of phenomena.”

Roukes, who is a professor of physics, applied physics and biological engineering at Caltech, is most interested in what the ring of NEMs suggests about huge networks like the brain. “This is very, very primordial compared to the complexity of the brain,” he said. “If we already see this explosion in complexity, then it seems feasible to me that a network of 200 billion nodes and 2,000 trillion [connections] would have enough complexity to sustain consciousness.”

Broken Symmetries

In the quest to understand and control the way things sync up, scientists are searching for the mathematical rules dictating when different synchronization patterns occur. That major research effort is unfinished, but it’s already clear that synchronization is a direct manifestation of symmetry — and the way it breaks.

The link between synchronization and symmetry was first solidified by Pecora and co-authors in their 2014 paper on cluster synchronization. The scientists mapped the different synchronized clusters that can form in a network of oscillators to that network’s symmetries. In this context, symmetries refer to the ways a network’s oscillators can be swapped without changing the network, just as a square can be rotated 90 degrees or reflected horizontally, vertically or diagonally without changing its appearance.

D’Souza, Matheny and their colleagues applied the same potent formalism in their recent studies with NEMs. Roughly speaking, the ring of eight NEMs has the symmetries of an octagon. But as the eight tiny drums vibrate and the system evolves, some of these symmetries spontaneously break; the NEMs divide into synchronous clusters that correspond to subgroups of the “symmetry group” called D8, which specifies all the ways you can rotate and reflect an octagon that leave it unchanged. When the NEMs sync up with their next-nearest neighbors, for example, alternating their pattern around the ring, D8 reduces to the subgroup D4. This means the network of NEMs can be rotated by two positions or reflected across two axes without changing the pattern.

Even chimeras can be described in the language of clusters and symmetry subgroups. “The synchronized part is one big synchronized cluster, and the desynchronized part is a bunch of single clusters,” said Joe Hart, an experimentalist at the Naval Research Lab who collaborates with Pecora and Motter.

Synchronization seems to spring from symmetry, and yet scientists have also discovered that asymmetry helps stabilize synchronous states. “It is a little bit paradoxical,” Hart admitted. In February, Motter, Hart, Raj Roy of the University of Maryland and Yuanzhao Zhang of Northwestern reported in Physical Review Letters that introducing an asymmetry into a cluster actually strengthens its synchrony. For example, making the coupling between two oscillators in the cluster unidirectional instead of mutual not only doesn’t disturb the cluster’s synchrony, it actually makes its state more robust to noise and perturbations from elsewhere in the network.

These findings about asymmetry hold in experiments with artificial power grids. At the American Physical Society meeting in Boston last month, Motter presented unpublished results suggesting that “generators can more easily oscillate at the exact same frequency, as desired, if their parameters are suitably different,” as he put it. He thinks nature’s penchant for asymmetry will make it easier to stably sync up diverse energy supplies.

“A variety of tasks can be achieved by a suitable combination of synchrony and asynchrony,” Kuramoto observed in an email. “Without a doubt, the processes of biological evolution must have developed this highly useful mechanism. I expect man-made systems will also become much more functionally flexible by introducing similar mechanisms.”

Original story reprinted with permission from Quanta Magazine, an editorially independent publication of the Simons Foundation, whose mission is to enhance public understanding of science by covering research developments and trends in mathematics and the physical and life sciences.


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Lyft's shares rise after Citron advises against shorting stock

(Reuters) – Shares of ride-hailing company Lyft Inc rose as much as 4 percent on Friday, setting the stock for its best day since its market debut last week, after short-seller Citron Research advised investors to hold on to the stock.

FILE PHOTO: Lyft supporters gather for the Lyft IPO as the company lists its shares on the Nasdaq in the first-ever ride-hailing initial public offering, in Los Angeles, California, U.S., March 29, 2019. REUTERS/Mike Blake/File Photo

The number of active Lyft riders has surged fivefold to 18.6 million in the fourth quarter of 2018, from the first quarter of 2016, and those numbers are set to rise further, Citron said, listing several other reasons to not be short on Lyft.

As of Thursday, Lyft’s short interest was $937 million, with 13.38 million shares shorted, which makes up about 41.2 percent of its float, according to data from S3 Partners, a financial technology and analytics firm.

Citron, which has held a stake in Lyft for the last two years, said it has increased its position in the company in the open market.

Describing ride-sharing as a “megatrend”, and not just a fad, Citron said Lyft has good prospects, especially since millennials are foregoing car ownership for ride-sharing.

“This is not a trendy video game or a GoPro camera… this is a way of life that is saving people time and ensuring safety,” the note said.

“The entire rideshare market in the U.S. only accounts for 1 percent of miles traveled today…. we have only just begun,” Citron said.

But brokerage Seaport Global, which started coverage on Lyft with a “sell” rating on Tuesday, said it was skeptical that consumers will give up car ownership in favor of relying on ride-hailing services.

Daiwa Capital Markets also initiated coverage on the company on Thursday, with an ‘outperform’ rating and a price target of $80.

The rating reflects strong revenue growth potential ahead for the company, the brokerage said, but added it expects losses to increase through 2020, and then reach break even by the end of 2022.

Lyft’s shares fell below their IPO price of $72 on their second day of trading, erasing all debut gains, after market research companies cited lack of a clear path to profitability.

The company did not mention when it would turn profitable. It reported a loss of $911 million in 2018, wider than its $688 million loss in 2017, despite revenue doubling in 2018 to $2.16 billion.

Daiwa added autonomous robotaxis, currently under development at tech and auto companies, are among the biggest threats to the company.

Reporting By Aparajita Saxena in Bengaluru; Editing by James Emmanuel

How To Protect Your Income From Falling Interest Rates – Part 2: Investing In REITs

Co-produced with Beyond Saving and PendragonY for High Dividend Opportunities

How To Protect Your Income From Falling Interest Rates (Part 2: By Investing In REITs)

In a previous article, we argued that an economic slowdown is at risk of turning into a full-blown recession. We believe that the risk of a recession in the next two to three years is extremely high. Therefore, we want to move into a more defensive position with our portfolio, but we do not want to become overly defensive. Equities often rally, and sitting out of the market has an opportunity cost.

In the previous article referred to above and entitled How Can You Protect Your Income From The Next Recession? we stated:

Interest rates have only one way to go in this kind of environment and that’s down. When economic growth slows down, relying on capital gains for income becomes increasingly difficult.

This is where income products come in very handy for investors and retirees.

This is where REITs come in as an ideal part of structuring a portfolio that will have stable income through a recession but will continue to provide upside in an environment where interest rates are headed lower.

2008 was a real estate driven recession, and while many REITs had significant drawdowns and dividend cuts, others proved more resistant. Some REITs even continued increasing their dividend throughout the recession.

Here’s a look at REIT sectors we believe will outperform.

1- Net Lease

Net lease REITs had solid performance through the last recession. While everything experienced a drawdown in price, quality net lease REITs maintained or even increased their dividend.

https://static.seekingalpha.com/uploads/2019/3/27/47745229-1553713031685761.png

Source

Net lease REITs have the benefit of a very simple structure and virtually no required expenses. With “triple-net” leases the vast majority of property level expenses like maintenance, upkeep, and taxes are the responsibility of the tenants.

The beauty of this simplicity is that it can be applied to all sorts of businesses, from restaurants, convenience stores, banks, pharmacies, auto mechanics, fitness clubs and much more can be found in net lease portfolios. This significantly reduces the risks of a particular tenant sector performing poorly.

On the revenue side, the leases tend to be long term, often 10-20 years, with built-in escalators and automatic renewal options. The rent is generally fixed and does not have any variable components. This provides a very predictable rent level for the tenant and the landlord regardless of macro-economic conditions.

When a recession hits, this means that rents and property level expenses both remain stable. The main negative impacts come from tenant defaults, a harder time leasing vacant properties and a lack of acquisition targets.

Net lease REITs tend to be highly diversified across tenants, the properties are attractively located and can often be repurposed or sold to recover the underlying land value if a tenant leaves at the end of the lease.

The bottom line is that the fundamental business of their tenants is usually tied to the buildings they are renting. Net lease REITs further protect themselves by entering into “master lease agreements,” these types of agreements will often span dozens of buildings and the tenant is required to pay rent for all of them, even when they close a location. If the tenant defaults on one location, they default on all of them and risk eviction. Nothing short of bankruptcy is going to create a material risk for the landlord.

During a recession, a REIT might have a higher percentage of tenants leave when a lease expires and have a harder time finding a replacement tenant. To mitigate that risk, net-lease REITs keep a smooth schedule of lease expirations. Typically, net lease REITs only have 5%-10% of gross rental revenue expiring each year.

This structure means that when a recession hits, the REIT can just hunker down and maintain most of their current cash flows, then be ready to start acquiring new properties at the early signs of recovery.

We are currently invested in several of these names in our Preferred Stock Portfolio. Some of the best names in the sector include the old guards: Realty Income (O), WP Carey (WPC) or National Retail (NNN) will definitely be on our radar during a recession because we would love to add at a steep discount, but they are at a premium today. Spirit Realty Capital (SRC) or Vereit (VER) are two great companies that did not exist last recession, but both have strong triple-net portfolios and are trading at attractive prices.

As noted above, we have been recommending to our investors to buy Preferred Stocks within the “Net Lease” space that are rock solid and are issues we want to hold through any recession for safe income.

2- Self Storage

Self-storage REITs also set themselves apart as recession resistant as fundamentals held up through the recession.

https://static.seekingalpha.com/uploads/2019/3/27/47745229-15537127128573632.png

Source

Like net-lease REITs, self-storage benefits from having very low expenses. Often their largest property level expense is property taxes. Self-storage demand has proven to be recession-resistant as people either need self-storage or they don’t. The macro-economic conditions have little to do with it.

The main risks for self-storage are competition and overdevelopment saturating a market. These are issues that can and do occur in both good and bad economic conditions.

Large, diversified public storage REITs are going to provide more stability than smaller, more concentrated storage REITs. Opportunities in the sector are thin right now among common shares, as the sector’s solid reputation has pushed valuations higher. Some of the best names are Jernigan Capital (JCAP), National Storage Affiliates (NSA) and Public Storage (PSA).

In order to maximize cash flow and lower price volatility, we have focused on preferred stock investments in this sector like Jernigan Capital (JCAP.PB) which we recently wrote about in an article right here on Seeking Alpha entitled:

A Durable 7% Yield Preferred Stock From Jernigan Capital That Goes Ex-Dividend Soon

There are several other rock solid preferred stocks such as JCAP.PB that conservative investors and retirees will want to consider holding through a recession for a high and safe income.

Residential

Residential REITs were strongly impacted at the beginning of the last recession, but their prices quickly rebounded. People didn’t move just because there was a recession.

https://static.seekingalpha.com/uploads/2019/3/27/47745229-15537127949152968.png

Rent is inherently sticky and very rarely moves down. A recession might cause a slight uptick in delinquencies, but overall, people generally prioritize paying for the roof over their head.

Our favorite residential model is mobile home REITs. Mobile homes have an advantage over apartments in that the landlord is primarily responsible for maintaining the lot as opposed to having to spend on maintaining buildings. This allows the business to be very high margin compared to their apartment peers.

During a recession, mobile homes already are the “cheap” option. That lowers the risk of tenants leaving to downsize. The tenants often own the home, so they have little incentive to leave it. Since rental revenue tends to be very stable, mobile home REITs tend to be extra sensitive to interest rate fluctuations. As interest rates drop, they stand to benefit.

Some of our favorite picks in this field is UMH Properties (UMH) which had a huge run and is a bit expensive now. We also like apartment REIT Bluerock Residential (BRG) and single-family home REIT American Homes 4 Rent (AMH).

Again here, conservative income investors may want to consider preferred stocks issued by residential REITs to maximize the safety of the income and lower price volatility.

Conclusion

Our focus is on looking for investments which will provide a high level of income regardless of whether or not there’s a recession. Since predicting the exact timing of a recession is very difficult, we also want investments that have potential capital gains as well.

The REIT structure provides investors with a selection of companies that can meet those goals. REITs center around cash flow and distributing a substantial portion of that cash flow to investors. As long as a REIT has taxable income, they have to distribute at least 90% of it. Many REITs distribute more than that. This makes REITs less likely to suspend their dividend.

Dividend cuts for common shares can and do happen. As income investors, we look for reliability of the dividend in good and in bad times. Therefore we seek to reduce our exposure to potential dividend cuts by focusing on REIT sectors, and more specifically preferred stocks of REITs, that provide much more stability and a higher safety for the income. The key things we want to look for are stability in revenues and stability in expenses regardless of economic conditions. We recently highlighted to our investors (members of High Dividend Opportunities) 10 preferred stocks with exposure to these sub sectors that conservative investors should buy and hold for the very long term and can be held through a recession for the safety of the income.

Net lease REITs, self-storage REITs, and residential REITs all outperformed the average last recession and their fundamental structures create less volatility in revenues and expenses. We believe all sectors will benefit from falling interest rates and will have stable cash flows through a recession. We have strong exposure to all three sectors in our preferred stock portfolio precisely because they are reliable. As we slowly move to a more defensive position, we will be looking for opportunities to invest in common shares in these sectors at attractive entry points.

Thanks for reading! If you liked this article, please scroll up and click Follow next to my name to receive future updates.

Disclosure: I am/we are long JCAP.PB, BRG.PC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Bitcoin jumps 20 percent, mystery order seen as catalyst

LONDON (Reuters) – Bitcoin soared to its highest in almost five months on Tuesday, pulling smaller cryptocurrencies up with it, after a major order by an anonymous buyer set off a frenzy of computer-driven trading, analysts said.

FILE PHOTO: Bitcoin.com buttons are seen displayed on the floor of the Consensus 2018 blockchain technology conference in New York City, New York, U.S., May 16, 2018. REUTERS/Mike Segar/File Photo

The original cryptocurrency soared as much as 20 percent in Asian trading, breaking $5,000 for the first time since mid-November. By mid-afternoon, it had settled around $4,800, still up 16 percent in its biggest one-day gain since April last year.

Bitcoin surged to near $20,000 in late 2017, the peak of a bubble driven by retail investors. But last year prices collapsed by three-quarters, with trading dominated by smaller hedge funds and crypto-related firms.

Today’s gain was probably triggered by an order worth about $100 million spread across U.S.-based exchanges Coinbase and Kraken and Luxembourg’s Bitstamp, said Oliver von Landsberg-Sadie, chief executive of cryptocurrency firm BCB Group.

“There has been a single order that has been algorithmically-managed across these three venues, of around 20,000 BTC,” he said.

“If you look at the volumes on each of those three exchanges – there were in-concert, synchronized, units of volume of around 7,000 BTC in an hour”.

Still, analysts could not point to any specific developments that could explain the mystery buyer’s big order.

Cryptocurrency markets had until today seen a period of relative calm through the year, with bitcoin trading around $3,300 and $4,200.

Big institutional investors have largely stayed on the sidelines. Concern over security breaches and regulatory uncertainty were cited as reasons for the lack of mainstream enthusiasm in digital coins.

In a sign of bitcoin’s failure to gain an equal footing with conventional markets, Cboe Global Markets – which offered the first U.S. bitcoin futures contracts in 2017 – said last month it would no longer offer bitcoin futures contracts.

CME Group Inc continues to list its futures product, which launched soon after Cboe.

For a graphic on Bitcoin price, see – tmsnrt.rs/2VadrPe

“ALTCOINS” ALSO SURGE

Outsized price moves of the kind rarely seen in conventional markets are common in cryptocurrency markets, where liquidity is thin and prices opaque. Big orders tend to spark buying by algorithmic traders, said Charlie Hayter, founder of industry website CryptoCompare.

As bitcoin surged, 6 million trades occurred in an hour, Hayter said – three to four times the usual amount, with orders concentrated on Asian-based exchanges.

Slideshow (2 Images)

Bitcoin’s surge sent smaller cryptocurrencies, known as “altcoins,” trading higher. Ethereum’s ether and Ripple’s XRP, respectively the second- and third-largest coins, both jumped by more than 10 percent.

Price moves of smaller coins tend to be correlated to bitcoin, which still accounts for just over half of the value of the cryptocurrency market.

“Usually bitcoin is the leader of the market and altcoins tend to follow, as far as direction and sentiment is concerned,” said Mati Greenspan, an analyst at eToro in Israel. “Today bitcoin is in the driving seat.”

Reporting by Tom Wilson and Tommy Reggiori Wilkes; editing by Larry King

Don't discriminate against our firms, China's Xi tells New Zealand

BEIJING (Reuters) – President Xi Jinping called upon New Zealand on Monday not to discriminate against Chinese companies during a meeting with Prime Minister Jacinda Ardern, whose country has rejected a bid by Chinese telecom giant Huawei to build a 5G mobile network.

Ardern, on a one-day visit to China, said before meeting Xi that she hoped to have a dialogue with Beijing about New Zealand’s intelligence agency’s decision to reject the bid.

Ties with China have been tense under Ardern’s government which has openly raised concerns about Beijing’s growing influence in the South Pacific.

China postponed a major tourism campaign in New Zealand days before its launch in February.

Meeting in Beijing’s Great Hall of the People, Xi told Ardern that China has always regarded New Zealand as “a sincere friend and partner”.

Both countries must deepen mutual trust and understanding, seek common ground while putting aside differences, and respect each other’s major concerns, Xi said, according to a statement from China’s Foreign Ministry.

“China is willing to continue to support strong companies to invest in New Zealand, and New Zealand should provide a fair, just, non-discriminatory operating environment for Chinese companies,” it paraphrased Xi as saying.

There was no direct mention of any specific firm in the statement.

New Zealand Prime Minister Jacinda Ardern (R) and China’s Premier Li Keqiang attend a welcome ceremony at the Great Hall of the People in Beijing, China, April 1, 2019. REUTERS/Jason Lee

Ardern told Xi that she valued China ties.

“This bilateral relationship is one of our most important and far reaching, a point that I’ve made in successive public speeches over the past year,” she told reporters.

“I look forward to discussions around the opportunity for us to further our partnership and indeed our critically important relationship. I welcome this opportunity to meet together and continue those discussions.”

In 2008, New Zealand became the first Western country to sign a free trade agreement with China and China is New Zealand’s largest goods export partner.

Ardern earlier met with Premier Li Keqiang.

“I reiterated to Premier Li that New Zealand welcomes all high quality foreign investment that will bring productive economic growth to our country,” she said in a statement.

“We discussed the FTA upgrade, and agreed to hold the next round of negotiations soon and to make joint efforts towards reaching an agreement as soon as possible.”

Talking to reporters before meeting Li, Ardern said she would set out the process New Zealand followed in the Huawei decision, and point out that there had been no political or diplomatic influence in the matter. She said media reports suggesting Huawei was banned in New Zealand were not true.

Slideshow (5 Images)

The interview with reporters was streamed on New Zealand’s 1NEWS.

Ardern has acknowledged there were complexities in the relationship with China, but has dismissed concerns of a rift with New Zealand’s largest trading partner.

The trip has been trimmed down to a one-day visit following an attack on two mosques in Christchurch on March 15 that killed 50 people.

Reporting by Ben Blanchard,; Additional reporting by Praveen Menon in Wellington, Editing by Michael Perry and Ed Osmond

Inside a Ferrari Hypercar, Lyft’s IPO, and More Car News

Let the unicorn feast begin! On Friday, ride-hail galumphed onto the markets with the opening day of trading for little bro Lyftt. (Big rival Uber is reportedly on its way to its own IPO.) Lyft had a strong first day of trading, reaching a share price high of $87.24 before sliding to $78.29 at market’s close. Now the big question, which will answer itself in the weeks and months to come: How do investors feel about the prospect of the mustachioed company actually making money? How about the gig economy at large?

Still, plenty of transportation interestings were happening off Wall Street this week. We took a look at the current state of automotive software safety standards, and talked to people wondering how self-driving cars might fit into the mix. We reminded ourselves that self-driving cars aren’t going to be driverless for a while, and about the role of remote drivers in the ecosystem. We drove a Jeep Gladiator, the company’s adorably tough mini-pickup.

It’s been a week: Let’s get you caught up.

Headlines

Stories you might have missed from WIRED this week

Dress Rehearsal of the Week

Porsche promises its first all-electric sports car, the Taycan, will hit the market at the end of the year. Which means it’s time for the fun stuff: test drives! This week, the German automaker said it will have tested the Taycan on 3.7 million miles of road before its official launch, in the snows of Sweden, the heat of the UAE (up to 120 degrees Fahrenheit!), and the chill of Finland. More details on the Taycan’s testing regime here.

Stat of the Week

$911.3 million

The amount of dough Lyft lost last year, according to a filing submitted to the SEC in early March. For more stats on the ride-hail company, and to help you understand its IPO this week, check out these five charts.

Required Reading

News from elsewhere on the internet
Uber acquires Middle Eastern rival Careem for $3.1 billion, though the deal needs regulatory approval and may not be finalized until the end of the year.

Recode points out: “To bet on Uber—as is increasingly clear with this Careem purchase—is to bet not on Uber but on a global ride-hailing spoke model in which San Francisco-based Uber Technologies, Inc is merely the hub.”

Lyft rings in its IPO with a “City Works” pledge, investing $50 million or 1 percent of profits (whatever’s bigger) in city infrastructure, clean energy tech, and transportation access for disadvantaged communities. Anthony Foxx, the former secretary of transportation and Lyft’s current chief policy officer, clarified to WIRED that this doesn’t necessarily mean Lyft will write $50 million in checks—”Some of it will be in-kind,” he said—but that it will continue its current work on those three target areas in close partnership with cities.

Meanwhile, Lyft and Uber drivers went on strike in California this week, demanding higher wages after Uber cut their per-mile pay.

I Rode an E-Scooter as Far From Civilization as Its Batteries Could Take Me

Oh Wow, oh no: A budget airline suddenly ceased operations.

In the Rearview

Essential stories from WIRED’s canon
Via 1998: “How the beer company that created the first Internet IPO is shaking up the stock market.”

4 Things That Pundits Who "Predict" the Future Always Seem to Get Wrong

Peter Thiel has pointed out that we wanted flying cars, but got 140 characters instead. He’s only partly right. For decades futuristic visions showed everyday families zipping around in flying cars and it’s true that even today we’re still stuck on the ground. However, that’s not because we’re unable to build one. In fact the first was invented in 1934.

The problem is not so much with engineering, but economics and safety. We could build a flying car if we wanted to, but to make one that can compete with a regular automobile is another matter entirely. Besides, in many ways, 140 characters are better than a flying car. Cars only let us travel around town, the Internet helps us span the globe.

That has created far more value than a flying car ever could. We often fail to predict the future accurately because we don’t account for our capacity to surprise ourselves, to see new possibilities and take new directions. We interact with each other, collaborate and change our priorities. The future that we predict is never as exciting as the one we eventually create.

1. The Future Will Not Look Like the Past

We tend to predict the future by extrapolating from the present. So if we invent a car and then an airplane, it only seems natural that we can combine the two. If family has a car, then having one that flies can seem like a logical next step. We don’t look at a car and dream up, say, a computer. So in 1934, we dreamed of flying cars, but not computers.

It’s not just optimists that fall prey to this fundamental error, but pessimists too. In Homo Deus, author and historian Yuval Noah Harari points to several studies that show that human jobs are being replaced by machines. He then paints a dystopian picture. “Humans might become militarily and economically useless”, he writes. Yeesh!

Yet the picture is not as dark as it may seem. Consider the retail apocalypse. Over the past few years, we’ve seen an unprecedented number of retail store closings. Those jobs are gone and they’re not coming back. You can imagine thousands of retail employees sitting at home, wondering how to pay their bills, just as Harari predicts.

Yet economist Michael Mandel argues that the data tells a very different story. First, he shows that the jobs gained from e-commerce far outstrip those lost from traditional retail. Second, he points out that the total e-commerce sector, including lower-wage fulfillment centers, has an average wage of $21.13 per hour, which is 27 percent higher than the $16.65 that the average worker in traditional retail earns.

So not only are more people working, they are taking home more money too. Not only is the retail apocalypse not a tragedy, it’s somewhat of a blessing.

2. The Next Big Thing Always Starts Out Looking Like Nothing At All

Every technology eventually hits theoretical limits. Buy a computer today and you’ll find that the technical specifications are much like they were five years ago. When a new generation of iPhones comes out these days, reviewers tout the camera rather than the processor speed. The truth is that Moore’s law is effectively over.

That seems tragic, because our ability to exponentially increase the number of transistors that we can squeeze onto a silicon wafer has driven technological advancement over the past few decades. Every 18 months or so, a new generation of chips has come out and opened up new possibilities that entrepreneurs have turned into exciting new businesses.

What will we do now?

Yet there’s no real need to worry. There is no 11th commandment that says, “Thou shalt compute with ones and zeros” and the end of Moore’s law will give way to newer, more powerful technologies, like quantum and neuromorphic computing. These are still in their nascent stage and may not have an impact for at least five to ten years, but will likely power the future for decades to come.

3. It’s Ecosystems, Not Inventions, That Drive the Future

When the first automobiles came to market, they were called “horseless carriages” because that’s what everyone knew and was familiar with. So it seemed logical that people would use them much like they used horses, to take the occasional trip into town and to work in the fields. Yet it didn’t turn out that way, because driving a car is nothing like riding a horse.

So first people started taking “Sunday drives” to relax and see family and friends, something that would be too tiring to do regularly on a horse. Gas stations and paved roads changed how products were distributed and factories moved from cities in the north, close to customers, to small towns in the south, where land and labor were cheaper.

As our ability to travel increased, people started moving out of cities and into suburbs. When consumers could easily load a week’s worth of groceries into their cars, corner stores gave way to supermarkets and, eventually, shopping malls. The automobile changed a lot more than simply how we got from place to place. It changed our way of life in ways that were impossible to predict.

4. We Can Only Validate Patterns Going Forward

G. H. Hardy once wrote that, “a mathematician, like a painter or poet, is a maker of patterns. If his patterns are more permanent than theirs, it is because they are made with ideas.” Futurists often work the same way, identifying patterns in the past and present, then extrapolating them into the future. Yet there is a substantive difference between patterns that we consider to be preordained and those that are to be discovered.

Think about Steve Jobs and Appl for a minute and you will probably recognize the pattern and assume I misspelled the name of his iconic company by forgetting to include the “e” at the end. But I could have just have easily been about to describe an “Applet” he designed for the iPhone or some connection between Jobs and Appleton WI, a small town outside Green Bay.

The problem with patterns is that the future is something we create, not some preordained plan that we are beholden to. The things we create often become inflection points and change our course. That may frustrate the futurists, but it’s what makes life exciting for the rest of us.

3 Stocks To Hold During The Economic Slowdown

Stocks are becoming more expensive. Yet earnings have not bolstered these prices. In fact, earnings surprises have been mostly negative, causing the Citigroup Economic Surprise Index to diverge with the price-to-earnings ratio of the market:

This index, almost by necessity, oscillates. As earnings continue to disappoint, analysts will inevitably lower their expectations, in turn creating an environment of more positive earnings surprises. This is bullish for the market, especially for companies reporting earnings in the coming months.

When earnings surprise, stocks rise. This is true even when stocks are perceived to be expensive. Those who are concerned with the inflated equity costs should be comforted to know that we are still in a bull market.

Don’t Worry Yet

Leading economic indicators tell us not to worry just yet. For example, ISM New Orders show continued growth in customer demand – 38 consecutive months of growth, in fact.

Note that new orders trend down before recessions:

We might be seeing slower growth, but we still see growth. Eventually, the top will be in, and leading economic indicators will start to decay before the next recession. For now, the economy is as strong as ever but with slowing growth.

Because the economy influences company earnings and because the economy is still strong, the Citigroup Economic Surprise Index being low is likely the result of analysts’ expectations being too high. With growth slowing, this makes sense. Analysts have been assuming the fast growth in corporate earnings will continue, neglecting the slowdown in economic growth.

Peak Growth

Currently, the slope of leading economic indicators (LEIs) is flattening. This could be a temporary stall, but we often see this toward the end of a bull market. The economy is likely leaving the expansion phase of the business cycle and entering a slowdown phase:

At this point, the risk/reward curve begins to become concave, meaning that the downside risk is beginning to outweigh further upside reward. From here, we will likely see lower volatility as the market makes its way up to a peak for this bull market. Before we hit the recession phase of the business cycle, we will likely see another rally, but one of much lower volatility and speed than the post-December rally.

The bull market is not over. With foreign economies clearly being deep in the slowdown phase, the US market is one of the last places for bulls. Yet the fact that the economy is slowing down means investors should be rebalancing their portfolios for the sake of maintaining alpha.

Outperforming Sectors

According to research on sector performance during the business cycle, at this point, investors should be ditching real estate and consumer discretionary stocks in favor of healthcare and consumer staples:

Drawing inspiration from this, here is my list of positions to hold during the coming economic slowdown:

Macquarie Infrastructure (NYSE:MIC)

This company falls in the “industrials” sector. This is a B2B service company – or set of companies, rather.

MIC has seen a stable, positive growth rate since around 2013. The slowdown earlier this decade did not make a significant impact on the company’s growth, implying that we should see growth continue during the next slowdown:

(Source: Damon Verial; data from ADVFN)

Cash flows too have been strong and growing:

(Source: Damon Verial; data from ADVFN)

Putting it all together, I calculate the company as undervalued as per its discounted cash flow valuation. Here is my discounted cash flow valuation plotted against the stock:

(Source: Damon Verial; data from ADVFN)

You can see that MIC was not underpriced until the last selloff. My chart only generated a buy signal in 2018. The valuation implies a 60% upside.

Four analyst downgrades after February’s earnings brought the stock to a discounted level. We know this was an overreaction because the stock is quickly filling the down area gap that appeared after earnings:

(Source: Stockcharts.com)

One key reason for my choice of MIC is its mispricing. Yet once the gap fills, the post-earnings drift will be officially over. Get in on this one early for some excess returns and to lock in on the company’s 10% dividend yield.

TreeHouse Foods (NYSE:THS)

This food and beverage company falls in the “consumer staples” category. It attracted my attention last month with an odd earnings reaction. The company reported a revenue decline of over 10%, causing the stock to fall.

Yet it was bought right back up, with dip-buying erasing all losses. The stock carried on as if nothing happened. This type of post-earnings reaction shows a strong investor base, which limits news-based drawdowns:

(Source: Stockcharts.com)

I dug into the earnings call transcript to see if I could find anything of interest. Lexical analysis is useful here. Proper financial lexical analysis can generate management sentiment, which is a predictor of a stock’s price over the coming month.

THS’s earnings calls were quite interesting. Rarely does a call contain more pessimism than optimism. However, THS was the rare exception for most of this and last year – except for the recent quarter.

Its most recent earnings call was roughly as optimistic as the average company. Because the previous quarter and year showed negative sentiment scores, I cannot make a comparison. Suffice to say, management is indirectly pointing to an inflection point in the company.

Here are a few flagged statements from the earnings call:

“Importantly, pricing execution has gone a lot more smoothly than last year with a minimal disconnect between inflation and pricing.”

– A tangible factor for the recent turnaround in sentiment.

“We worked hard as an organization to resolve the majority of our service issues and to restore customer trust and TreeHouse’s ability to deliver.”

– A similar statement; an admission of problems that are being corrected. Acknowledgement of issues and plans for resolution remains a strong indicator of excess returns, according to financial lexical analysis. (The downplaying of problems in contrast implies negative excess returns.)

“Quite frankly, solving the Snacks issue right now is our most important and where all the focus is.”

– A continued focus on problems. Should the company again succeed, we will likely see another quarter of strong sentiment, implying upward pressure on the stock price.

THS has outperformed the US food market to a great extent: 68% annual returns versus -4%. Yet my analysis hints that mean reversion is still underway, as the company still has a lower price-to-book than the average food stock. The company is expected to see a 60% earnings growth over the next year, making now a good entry point.

Because THS does not offer a dividend, you can use options instead for this play. I recommend the Aug 16 $60 calls. These have a delta of 100, allowing you to fully mimic holding 100 shares of THS per contract at a cost of around $650 and with minimum theta decay.

Madrigal Pharmaceuticals (NASDAQ:MDGL)

This company falls in the “healthcare” category. Investing in MDGL gives you exposure to a pipeline of cardiovascular, liver, and metabolic treatments. The stock is trading at under half its previous price because shares were diluted via a public offering for the sake of raising capital.

This capital will be used to finance the company’s pipeline. The timing was smart: just before a slowdown. The company will be able to focus on its pipeline with little regard to decaying economic conditions.

The options market is pricing the stock at $130, which is slightly above MDGL’s current price. I, too, see the stock as undervalued. Over the past year, MDGL has outperformed the biotech sector with 8% returns versus -1% returns.

Since 2016, MDGL has had no long-term debt and can cover its short-term debt with its current cash and assets. With its moat of cash, MDGL can continue working on its pipeline without worrying about earnings. A strong clinical trial result or two should draw investors into this company, and the stock will rally in response.

This stock is more of a gamble than the other two, so do look into the pipeline to see if anything strikes your fancy. Biotech stocks are notoriously hard to predict, and so my philosophy is to bet on those that are (1) outperforming the sector, (2) have a decent pipeline or high-sales product, and (3) are financially healthy, whether that mean strong earnings or enough cash runway to support the pipeline.

This is a rather unpopular stock for the general public, but is popular with the “smart money”: venture capitalists, hedge funds, and institutions:

(Source: Simply Wall St)

If you want to play this without putting too much capital at risk, I suggest the June 21 $130 call options. If the option market’s prediction is correct, these contracts are currently underpriced. Aim for roughly 25% ROI over the next quarter and roll the options over quarterly.

Conclusion

The US economy is at peak growth. From here, it will soon (or already has by some measures) enter into the slowdown phase of the business cycle. During this phase, three sectors show excess returns: industrials, consumer staples, and healthcare.

While you could simply buy ETFs in these sectors, if we are to seek alpha, we should look for stocks that are to outperform in these sectors. Thus, we gain excess returns upon excess returns. I gave my three picks, one from each sector.

We have MIC, an industrial with strong growth; THS, a food company that is at an inflection point, having solved many of its major problems, and a management, which has recently traded pessimism for optimism; and MDGL, a biotech company that is cash-rich and focusing on its pipeline. All things being equal, holding these companies in your portfolio during the inevitable slowdown will produce alpha. Happy trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Lyft Kicks Off Highly-Anticipated ‘Year of the IPO’

Lyft’s initial public offering on Thursday is the first of a series of highly-anticipated debuts by tech companies in public markets. And so far, Lyft is proving that it’s the right time to make the leap.

“With what we’re seeing with the excitement and feedback from the investment community, this IPO market could end up being historic,” said Barrett Daniels, national IPO services leader at Deloitte & Touche.

Lyft, which will begin trading on Nasdaq on Friday, was one of several big tech companies expected to go public this year. In the IPO, the company priced its shares at $72, at the high range of what it had initially anticipated.

“This IPO is a ‘watershed’ event for the tech sector as well as the ridesharing industry that in our opinion has become one of the most transformational growth sectors of the U.S. consumer market over the past five years,” analysts at Wedbush Securities wrote in a note following Lyft’s IPO.

Meanwhile, Pinterest, which filed its public paperwork with the Securities and Exchange Commission on March 22, is expected to begin trading on the New York Stock Exchange in April. Lyft rival Uber, also expected to go public in April on the NYSE after filing confidentially, could have a valuation of up to $120 billion and become one of the largest IPOs in history. Postmates, Zoom, Slack, and Airbnb, also are anticipating debut later this year.

Investors’ appetites are strong for these “decacorns,” or companies with valuations larger than $10 billion, Daniels said. Lyft’s IPO was oversubscribed a week before it went public, signaling the heavy demand for its shares that helped send its market value to $24.3 billion, higher than the $23 billion valuation it had initially expected. Meanwhile, Airbnb was privately valued at more than $30 billion during the last two years, while Pinterest was most recently valued at $12 billion.

“These are not your Boomer-generation IPOs,” said Duncan Davidson, general partner at venture firm Bullpen Capital. “We killed the small IPO after 2000.”

That’s because for years, the venture capital market has bet big on newer ventures, allowing companies to stay private and well-funded for longer periods of time. But generally, investors expect a return on their investment. So this year, those heavily venture-capital-backed companies are finally making the big move, in an effort to take advantage of the current strong market conditions.

The excitement for Lyft will likely spill over into Uber’s expected initial public offering, Davidson said. But that doesn’t mean that all tech IPOs will get the same reception because some companies don’t have a clear path to profitability.

“It won’t be … the tide that lifts all boats,” Davidson said. “The market will still be selective.”

What excites investors most about these large tech companies, most of which are unprofitable, is revenue growth, according to Deloitte’s Daniels. Lyft’s revenue in 2018 doubled to $2.2 billion while it lost $911 million, 32% more than the year before.

“A lot of these startups made a conscious decision early in their lives to grow and grow quickly,” Daniels said. “It would appear they’re going to be rewarded for it.”

Daniels says most companies that have been considering IPOs are speeding up the process to ensure they debut this year. Though a couple of companies may opt for a direct listing, a process that foregoes underwriters, he expects this to be the year of the IPO.

“It feels like it’s going to be real exciting here for the next couple of months” and continuing into the year, Daniels said. “It’s going to be a historic year.”