THE VALUENTUM TEAM

* Redistribution strictly prohibited. 

June 2020 

THE EXCLUSIVE

Confidential*

 

 

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Table of Contents    

US Equity Markets Melting Upwards, What About JETS?………......................3 Covering the US-China “Technological Arms Race”…………..…….………..5 BHP Benefiting from an Industrial Rebound in China………………………..9 Tracking Exclusive Idea Simulated Performance ….………………...........14-19

Income…………………………………………………………………………….........14 Capital Appreciation……………………………………………………………….........16 Short Idea Considerations……………………………………………………………....18

Income Generation: Eaton Vance (EV)……...…………………….................20 Capital Appreciation: Cloudera (CLDR)………….…………………….........26 Short Idea Consideration: HealthEquity (HQY)………......................................29 Inaugural Letter to Members, July 2016……………………….…………….34

 

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US Equity Markets Melting Upwards, What About JETS?    

Image Shown: US equity markets are melting upwards on the back of what we refer to as the “Fed/Treasury” put, with the S&P 500 (SPY) almost flat year-to-date as of Friday, June 5, after plummeting during the first quarter of 2020.

By Callum Turcan and Brian Nelson, CFA Dear Exclusive members, On Friday, June 5, the US Bureau of Labor Statistics (‘BLS’) reported that the unemployment rate fell from 14.7% in April 2020 to 13.3% in May 2020. Most analysts had forecasted the US unemployment rate to continue increasing, which is why this report came as a (positive) shock to many. US equity markets rallied on the news with the S&P 500 index (SPY) almost flat year-to-date as of the end of normal trading hours on June 5 after previously being down by double-digits earlier in the year. It appears the US economy is starting to emerge from the coronavirus (‘COVID-19’) induced downturn as many states have begun to ease their stay-at-home orders. Our October 2019 income generation idea Life Storage (LSI)---~4.1% yield---has seen its stock price recover sharply off their March 2020 lows. We closed out of the idea on February 24, 2020, for a nice theoretical “gain” ahead of the downturn but we continue to like the name in the self-storage real estate investment trust (‘REIT’) space. On May 7, Life Storage reported first-quarter 2020 earnings that saw its adjusted funds from operations (‘AFFO’) climb higher by 6.9% year-over-year. This growth was largely made possible through 4.8% year-over-year growth in its same-store net operating income (‘NOI’) in the first quarter, as Life Storage did a solid job raising rents while keeping its operating expenses in check. Going forward, Life Storage has launched “Rent Now 2.0” which is its fully-digital rental platform that allows customers to move into rental units without any human interaction, better positioning the company’s operations in the face of the ongoing COVID-19 pandemic.

 

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Pivoting now to our July 2019 income generation idea Nuveen Real Estate Income Fund (JRS)---~9.2% yield---which remains an open Exclusive idea. Shares of JRS have almost doubled from their March 2020 lows. The closed-end fund (CUSIP: 67071B108) invests in income-generating “common stocks, preferred stocks, convertible preferred stocks and debt securities issued by real estate companies” and the goal is to maintain at least three-quarters of the fund’s managed assets in investment grade securities. As of April 30, 2020, roughly half of the fund’s assets were invested in preferred securities and another ~46% was invested in common stocks. Considering US equity markets are melting upwards, that should behoove the net asset value (‘NAV’) of the Nuveen Real Estate Income Fund considerably going forward. The fund pays out a quarterly distribution and has an upcoming ex-dividend date on June 12 (distribution of $0.19 per share). Please note the Nuveen Real Estate Income Fund uses leverage to enhance its potential total return. That leverage increases the annual expenses of the fund and adds a degree of financial risk as well. With that in mind, shares of JRS are recovering as the Fed has thrown a lifeline to all leveraged industries by intervening in the domestic bond market, which has positively benefited the leveraged real estate space in a very meaningful way. Let’s now take a look at our May 2020 income generation idea United Microelectronics (UMC)---~3.3% yield---which has seen its share price rise considerably since we highlighted the firm. On May 8, United Microelectronics noted that its monthly sales in April 2020 grew by just under 25% year-over-year in New Taiwan Dollars terms (under Taiwan-IFRS accounting standards). UMC is still an open idea in our Exclusive publication and we continue to be intrigued by its strong financials (large net cash position, high quality cash flow profile) and improving near-term outlook. The May short-idea consideration U.S. Global JETS ETF (JETS) has moved against us considerably since its highlight, but we’ve been here before. Our July 2017 short idea consideration airline Deutsche Lufthansa (DLKAY), for example, soared to nearly $36 per share after we highlighted it in the low-$20s. We were patient and shares came tumbling down aggressively enough for us to close the idea as a winner in October 2018. Shares are now trading at ~$12. The moral of the story is that one has to be patient with airlines (as they are quite volatile). Right now, the group has recovered a bit since their collapse earlier this year on the back on what many are describing as a millenial-driven Robin Hood (trading platform) frenzy. Based on some of the trading trends we’ve been looking at, that seems to be the case. Once the speculators start seeing some of their profits erode and the short investors return, we would not be surprised if we end up closing the JETS as a nice winner, much like DLKAY of years past. We remain as focused as ever on producing some of the best ideas across the income, capital appreciation and short-idea candidate spectrum, and the tremendous success rates this publication have experienced speak to this dedication. Remember – ideas in the Exclusive are outside our coverage universe at www.valuentum.com. Thank you, as always, for your membership. Disclosure: Callum Turcan and Brian Nelson do not own shares in any of the securities mentioned above. * Success rate: The percentage of ideas highlighted in the Exclusive that have moved in the direction of our thesis (i.e. up for capital appreciation ideas and down for short idea considerations) through the current price or closed price, with consideration of cash and stock dividends. Success rates do not consider trading costs or tax implications. Trading is simulated. Past results are not a guarantee of future performance.

 

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Covering the US-China “Technological Arms Race”    

Image Shown: The future of geopolitical tensions will likely boil down to what some see as a “technological arms race” between the US and China. Image Source: Nvidia Corporation (NVDA) – May 2020 Presentation By Callum Turcan Given the rise of US-China geopolitical tensions, we wanted to cover the changing state of the semiconductor industry and the rare earth minerals landscape. Recent announcements from Taiwan Semiconductor Manufacturing Company Limited (TSM) or ‘TSMC’ caught our eye. For some background, in the world of semiconductors, there are what is referred to as fabrication facilities and foundries. The former is used to make chips for internal purposes while the latter contracts out its production capacity to third parties to make chips for external purposes. TSMC is considered a foundry operator, with the second-largest wafer production capacity (silicon wafers are slices of semiconductors) and the largest chip contract producing capacity in the world at the end of 2019 according to some reports. Recent Events On May 15, TSMC announced it intended to build a ~$12.0 billion semiconductor foundry in Arizona that would be capable of producing five-nanometer chips for third parties that will likely be used to create some of the electronic components in smartphones, computers, tablets, and other electronic devices. That could potentially involve producing some of the growing amount of electronical components used in automobiles as the shift to semi-autonomous and fully-autonomous vehicles starts to get underway in the 2020s (which will require significantly larger volumes of electronical components used in automobiles), keeping in mind the US is considered a leader in this space. TSMC noted that such a facility would create 1,600 direct jobs and thousands more in indirect jobs, keeping in mind these are fairly well paying jobs (particularly as it relates to the direct jobs created) given the high-tech and lucrative nature of the semiconductor industry. Construction, if everything proceeds as planned, would begin in 2021 and production would commence by 2024.

 

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Please note that while 5-nm chips represent the cutting edge of semiconductor technology in terms of commercially available production capacity as of now, TSMC (and others) are already pushing forward with 3-nm chips. While these offerings will not be available in commercial quantities for at least a couple of years, it is important to keep the next stage of the industry on your radar. Reportedly, Samsung Electronics Co. Ltd. (SSNLF) was previously targeting mass production of 3-nm chips by 2021, before the coronavirus (‘COVID-19’) pandemic materialized, and now the South Korean firm is aiming for mass production by 2022. TSMC aims to start mass production of 3-nm chips within a couple of years, possibly by 2022 according to some analysts, though everything is up in the air right now and COVID-19 has delayed efforts in this arena. Most importantly, we want to stress that, while TSMC’s investment in the US is a big deal and potentially represents the beginning of a semiconductor supply chain shift away from East Asia and towards the US, it’s nearly impossible to stay ahead of the curve in this fast-moving space without existing facilities. Please keep that idea in mind as we shift gears a bit here. Pivoting to Intel Corp (INTC), one of our favorite companies and a holding in both our Best Ideas Newsletter and Dividend Growth Newsletter portfolios, Intel is reportedly holding talks with the US government about building its own semiconductor foundry in the US. While Intel possess its own domestic production capabilities in Chandler (Arizona), Hudson (Massachusetts), Rio Rancho (New Mexico), and Hillsboro (Oregon), the US government is pushing for Intel to build a foundry that would serve other clients. According to CNN Business, Intel has confirmed it is interested in bulking up its domestic production capabilities and its ability to serve third parties. Furthermore, according to a letter sent from Intel to the Pentagon obtained by the WSJ, Intel is very keen in teaming up with the US Department of Defense to build a domestic semiconductor foundry. Geopolitical Significance On a geopolitical level, the US wants semiconductor manufacturers to build new fabrication facilities and foundries in the country to reduce its domestically-based tech industry’s reliance on overseas supply chains. The 21st Century will be one built on semiconductors and heavily reliant on overseas supply chains, leaving the economy exposed to exogenous shocks and external geopolitical pressures. The US is putting pressure on China’s tech giant Huawei (a leader in 5G telecommunications infrastructure and a major smartphone manufacturer) by stepping up restrictions on which entities can and can’t do business with the company (or what licenses must be obtained before doing business with Huawei). Please note that Huawei is seen by many Western analysts as an extension of the Chinese state, though on paper it is a privately-held firm. Ostensibly, the US is imposing restrictions on Huawei due to its alleged business dealings with Iran, but this is about far more than that. Various Western analysts see Huawei’s 5G telecommunications infrastructure having backdoors that could allow for foreign actors to access information of strategic national security or economic importance. On May 15, 2020, the US Department of Commerce put out a press release noting that those restrictions on Huawei were tightening further (from the press release):

The Bureau of Industry and Security (BIS) today announced plans to protect U.S. national security by restricting Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad. This announcement cuts off Huawei’s efforts to undermine U.S. export controls [continued on the next page].

 

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[From the previous page] BIS is amending its longstanding foreign-produced direct product rule and the Entity List to narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.

Since 2019 when BIS added Huawei Technologies and 114 of its overseas-related affiliates to the Entity List, companies wishing to export U.S. items were required to obtain a license.[1] However, Huawei has continued to use U.S. software and technology to design semiconductors, undermining the national security and foreign policy purposes of the Entity List by commissioning their production in overseas foundries using U.S. equipment…

[1] In May 2019, BIS added Huawei Technologies Co., Ltd. (Huawei) and certain non-U.S. affiliates to the Entity List (with additional affiliates added in August 2019) on the basis of information that provided a reasonable basis to conclude that Huawei is engaged in activities that are contrary to U.S. national security or foreign policy interests. This information included the activities alleged in the Department of Justice’s public Superseding Indictment of Huawei, including alleged violations of the International Emergency Economic Powers Act (IEEPA), conspiracy to violate IEEPA by providing prohibited financial services to Iran, and obstruction of justice in connection with the investigation of those alleged violations of U.S. sanctions.

In response, Huawei has reportedly been shifting its focus towards securing semiconductor supplies domestically and reducing its reliance on supply chains based in countries like South Korea and Taiwan. For instance, Reuters reported in mid-April 2020 that Huawei would shift some of its contract needs away from TSMC and towards Shanghai-based Semiconductor Manufacturing International Corp (SMICY) or ‘SMIC’ for short. A large part of the change was reportedly due to expected increases in restrictions from the US on companies doing business with Huawei (which ended up being the case). However, given that TSMC is far further along the technology curve than SMIC in the realm of semiconductor production capabilities (SMIC recently started producing 14-nm chips while TSMC is already producing 5-nm in commercial quantities and has a line of sight of 3-nm chips in the medium-term), in the short- to medium-term there’s only so much work Huawei can shift away from TSMC towards SMIC. Longer-term, however, there is a growing chance of China preferring to have its national tech champions source their semiconductor supplies domestically (state subsidies and other measures will potentially be used to speed this process along). TSMC is acutely aware of how the shifting geopolitical landscape is upending “traditional” supply chains and by investing in the US, TSMC is showcasing its desire to remain a key partner of Western companies. Another consideration involves the lithography systems used to print patterns on silicon wafers, a space where Netherlands-based ASML Holding NV (ASML) is a dominant player. Should US restrictions on technology transfers continue to grow, it may become hard for SMIC to keep up given the need to turn to other sources of lithography systems and the services required to maintain those systems. Rare Earth Minerals Considerations On the other hand, whether China clearly has a strong hand to play comes down to rare earth minerals which are the essential building blocks in modern electronic components.

 

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Reuters reports that China is home to ~85% of the globe’s rare earths processing capacity (as of 2019) and that from 2014-2017, ~80% of the rare earth minerals imported by the US came from China. The news agency also reports that over 80% of the world’s rare earth minerals were mined in China as of 2017. Additionally, Reuters noted that rare earth minerals are made up of 17 different elements including “lanthanum, cerium, praseodymium, neodymium, promethium, samarium, europium, gadolinium, terbium, dysprosium, holmium, erbium, thulium, ytterbium, lutetium, scandium, [and] yttrium” which are expensive to process. Anything from wind turbines to lasers to motors in electric vehicles require these rare earth minerals to function, highlighting the immense strategic significance of such resources. In California, the Mountain Pass mine is currently the only domestic source of rare earth minerals in the US according to the WSJ. A couple of years ago MP Minerals, backed by the Chicago-based hedge fund JHL Capital Group, bought the Mountain Pass mine out of bankruptcy as a bet on the growing geopolitical divide between the US and China. While the Mountain Pass mine produces rare earth minerals, those resources must first be shipped over to China to get processed which diminishes most of the strategic value of those resources. In order to rectify this situation, the Pentagon provided MP Minerals with grants to help fund studies relating to the potential construction of a domestic rare earths processing plant according to the WSJ. As an aside, Australian-based Lynas Corporation Ltd (LYSCF) and Texas-based Blue Line Corp are working together to build a different rare earths processing facility in Texas in a project that’s also backed by the Pentagon, according to the WSJ. That facility would reportedly be a rare earth minerals separation facility that’s geared toward heavy rare earth minerals (such as dysprosium and terbium) and potentially could also focus on light rare earth minerals (such as neodymium, praseodymium and lanthanum) as well according to Mining Magazine. Another joint-venture, this one between USA Rare Earth LLC and Texas Mineral Resources Corp (TRMC), aims to bring a pilot project online that would process rare earth minerals in Wheatridge, Colorado, with those minerals coming from the planned Round Top mining project based near El Paso, Texas. That facility should soon be operational, and work continues on studying the potential rare earth minerals-oriented Round Top mining project. The US is moving toward shoring up its rare earth supply chain and processing capabilities, but it will take some time before these rare earth processing facilities get approved and sanctioned, let alone built. China has aggressively used its dominance in the rare earth minerals space in the past as a geopolitical bargaining chip, particularly as it concerned Chinese-Japanese relations. Both the US and China have advantages and disadvantages in the brewing battle for technological and semiconductor supply chain supremacy. Concluding Thoughts Both the US and China are leaning on their strengths and shoring up their weaknesses as it relates to semiconductors, rare earth minerals, and the global “technological arms race” that some see creating a great “digital divide” between Western and Chinese/Russian geopolitical forces. We continue to closely monitor this space given the immense importance the semiconductor and rare earth minerals space poses for the global economy and will provide our members with updates as new information becomes available. Disclosure: Callum Turcan does not own shares in any of the securities mentioned above.

 

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BHP Benefiting from an Industrial Rebound in China  

   

Image Source: BHP Group – Fiscal 2019 Annual Report

By Callum Turcan In recent months, iron ore futures prices have surged higher due to an ongoing recovery in China’s industrial sector and supply concerns in Brazil, which has culminated into the Dalian Commodity Exchange’s September 2020 iron ore deliveries hitting a record high since the futures contract was first launched in 2013. Pivoting to copper, three-month copper futures prices based on trading activity on the London Metals Exchange have also perked up on the back of an apparent recovery in Chinese economic activity. Rising metals prices bodes well for major and minor miners around the globe, including BHP Group (BHP) (BBL). Brief Aside Please note BHP is the ADR for the Australian-listed entity and BBL is the ADR for the UK-listed entity (additionally, the firm changed its name to BHP Group Limited and BHP Group plc back in 2018), which BHP’s FAQs webpage describes as such:

BHP Billiton was formed in June 2001 from the merger of BHP Limited (an Australian listed company) and Billiton Plc (a UK listed company). The merger was effected by way of a Dual Listed Companies (DLC) structure, meaning that although the companies technically continue to be separate legal entities (now renamed BHP Billiton Limited and BHP Billiton Plc) with separate share listings and share registers, they are managed and run as a single economic entity. The companies have a common Board of Directors and management team. Shareholders in BHP Billiton Limited and BHP Billiton Plc have equal economic and voting rights, as if they held shares in a single company. Our headquarters are located in Melbourne, Australia.

 

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Furthermore, each US-listed ADR of BHP and BBL represents two common shares of the company, and there might be taxation differences (particularly as it relates to dividend tax withholding) between the two entities, which we won’t get into in this piece (please consult your tax specialist for more information on the subject). Back to BHP Our fair value estimate for BHP stands at $45 per share with the top end of our fair value estimate range sitting at $56 per share. As of this writing, BHP trades near $51.50 per share in large part due to the ongoing recovery in iron ore and copper prices, in our view. We caution that BHP’s Dividend Cushion ratio sits at 0.8 and we rate its Dividend Safety as “POOR” due to its financials being heavily-influenced by exogenous forces, namely commodity prices, and due to its net debt position. BHP is supported by its investment grade credit ratings (A/A2) which makes tapping debt markets for funds at attractive rates an easier task, and its strong stock price performance of late makes tapping equity markets for funds an easier task as well. BHP’s fiscal year ends on June 30, and the most recent financial report available is as of the end of December 31, 2019 (the end of the first half of BHP’s fiscal 2020). According to the company’s financial news release, BHP exited calendar year 2019 with approximately $12.85 billion in net debt (in US dollar terms). The firm had $26.8 billion in ‘total interest bearing liabilities’ and ~$0.35 billion in ‘total derivatives included in net debt’ less $14.3 billion in ‘cash and cash equivalents’ to arrive at the net debt figure of ~$12.85 billion. BHP’s Operations For all of fiscal 2020, BHP forecasted it will produce 242 million metric tons – 253 million metric tons of iron ore during its fiscal third quarter (period ended March 31, 2020) which was flat with its previous forecast, keeping uncertainties created from the ongoing coronavirus (‘COVID-19’) pandemic in mind. BHP’s expected copper production was listed as “under review” at this time, though BHP noted production forecasts at its massive Escondida and Pampa Norte mines were “unchanged” though the miner “lowered” its output forecast for its Olympic Dam mine and had placed its Antamina mine production forecast “under review.” Let’s take a look at BHP’s copper operations. According to BHP’s fiscal 2019 Annual Report, the firm owns 57.5% (what appears to be the equity) of the Escondida copper mine in northern Chile (produces copper concentrate and copper cathodes, with the latter used as a primarily input for making copper rods and wiring) and 100% of the Pamapa Norte operation (consists of the Cerro Colorado and Spence mines that produce copper cathodes) in northern Chile. Both of these operations are referred to as “open-cut” or surface mines. Additionally, BHP owns 33.75% of the open-cut Antamina mine in northern Peru that produces copper and zinc. In Australia, BHP owns 100% of the underground Olympic Dam mine that produces copper along with uranium, gold, and silver. These are massive operations and BHP’s economic stake in all four ventures is quite material, making them integral parts of its asset base. Generally speaking, open-cut mining operations tend to have significantly lower operating costs on a relative basis and thus are more economical all else held equal (though taxes, regulations, labor costs, the type and quality of the metals produced, and other factors make comparing mining economics across continents an apples-to-oranges comparison).

 

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The good news is that the downward revisions in BHP’s expected copper production for fiscal 2020 so far has been quite modest given the circumstances, as you can see in the upcoming graphic down below. As you can see, the moderate reduction in expected output from the Olympic Dam operation is modest compared to BHP’s expected company-wide copper output.

Image Shown: Due to BHP maintaining its copper production forecasts from its massive Escondida and to a lesser extent Pampa Norte operations for fiscal 2020, the moderate reduction in expected output from its Olympic Dam operation this fiscal year only resulted in a modest decline in its expected copper production for fiscal 2020 as things stand today, depending on how its Antamina operation performs during the remainder of the fiscal year. Image Source: BHP – Second Quarter of Fiscal 2020 Earnings Press Release

Pivoting to BHP’s iron ore operations, one of the prizes of its portfolio is dubbed the ‘Western Australia Iron Ore’ (‘WAIO’) asset. Located in in the northern part of western Australia in the well-known Pilbara region, this asset consists of five integrated mines and four processing facilities that are connected by 1,000 kilometers (~620 miles) of railroads and various port facilities. BHP develops these mines with its joint-venture partners (from BHP’s fiscal 2019 Annual Report):

WAIO’s Pilbara reserve base is relatively concentrated, allowing development to be planned around integrated mining hubs that are connected to the mines and satellite orebodies by conveyors or spur lines. This approach enables the value of installed infrastructure to be maximised by using the same processing plant and rail infrastructure for a number of orebodies. The ore is crushed, beneficiated (where necessary) and blended at each processing hub – Newman operations, Yandi, Mining Area C and Jimblebar – to create high-grade lump and fines products. Iron ore products are then transported along the Port Hedland– Newman rail line to the Finucane Island and Nelson Point port facilities at Port Hedland.

There are four main WAIO joint ventures (JVs): Mt Newman, Yandi, Mt Goldsworthy and Jimblebar. BHP’s interest in each of the joint ventures is 85 per cent, with Mitsui (MITSY) and ITOCHU (ITOCY) owning the remaining 15 per cent. The joint ventures are unincorporated, except Jimblebar. BHP, Mitsui and ITOCHU are also participants in the POSMAC JV, a joint venture with a subsidiary of POSCO (PKX) that involves the sublease of parts of one of WAIO’s existing mineral leases. The ore from the POSMAC JV is sold to the Mt Goldsworthy JV. All ore is transported by rail on the Mt Newman JV and Mt Goldsworthy JV rail lines to the port facilities. WAIO’s port facilities at Nelson Point are owned by the Mt Newman JV and Finucane Island is owned by the Mt Goldsworthy JV.

 

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In the upcoming graphic down below, BHP provides a map and visual overview of these operations. Additionally, please note BHP’s equity stake in the aforementioned WAIO operations ranges from 65%-85%.

Image Shown: A map of BHP’s massive WAIO operations in the Pilbara region of Australia that are a major source of global iron ore and iron ore products supplies. Image Source: BHP – Fiscal 2019 Annual Report

What makes the Pilbara region so intriguing is that iron ore mined is considered to be of high quality (or high grade), meaning it has a relatively large amount of Fe (the symbol for ferrum which is Latin for iron) per metric ton. Please note that iron ore does not consist of 100% Fe, and that usually these ores range from the 50s% - 60s% with a low-to-mid 60s% Fe content representing high grade iron ore (the kind produced from Australia’s Pilbara region). China is aggressively pushing its steel industry to use higher grade iron ore to cut down on air pollution levels, which benefits BHP immensely. A large chunk of the iron ore and iron ore products produced in this region are exported to China as the Minerals Council of Australia reports that around 80% of Australia’s iron ore exports by volume go to the country. This dynamic makes the surge in Dalian Commodity Exchange’s iron ore futures pricing quite relevant to BHP’s future financial performance, at least in the near-term (China’s anti-pollution drive benefits BHP’s long-term outlook). BHP notes that 98% of iron ore is converted into pig iron that is used to make steel. Virtually all of BHP’s iron ore output comes from the Pilbara region and its large equity stake in the WAIO operations. While BHP used to produce a material amount of iron ore from its Brazilian Samarco mining operations, which it has a 50% equity stake in, mining and processing activities at the asset have been suspended since 2015 due to the failure of the tailings dam at the site. As BHP reported that its iron ore production forecast for fiscal 2020 remains unchanged as of its fiscal third quarter report, indicating its Pilbara mining operations are continuing to function properly in the wake of the ongoing pandemic. Going forward, BHP is developing the $3.6 billion (at 100% equity ownership) South Flank project in the region. Construction started in July 2018 and by the end of June 2019, the project was 39% complete according to BHP. First ore is targeted by calendar year 2021, when the mine will start ramping up to its peak production capacity of 80 million metric tons of iron ore per year to replace output from the Yandi mining operation (which also has the capacity to produce 80 million metric tons of iron ore per year) that’s nearing the end of its economic life (which is expected to occur by the early-to-mid 2020s). BHP owns 85% of the equity of the South Flank project and is expecting to spend roughly $3.1 billion on development costs.

 

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Concluding Thoughts Economic data out of China has been quite strong recently, relatively speaking, indicating the country’s massive industrial base is starting to recover after shutting down in early-2020 to contain the spread of COVID-19. We will continue to keep a close eye on this space going forward, and for now, it seems BHP’s outlook (at least in the short-term) has improved considerably. In the upcoming two graphics down below, BHP provides an overview of its segment-level financial performance during the six month period ended December 31, 2019 (the first half of fiscal 2020).

Images Shown: An overview of BHP’s financials during the six month period ended December 31, 2019. Source: BHP – First Half of Fiscal 2020 IR Presentation

Disclosure: Callum Turcan does not own shares in any of the securities mentioned above.

 

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Tracking Exclusive Idea Simulated Performance

Highlight 

DateCompany (symbol)

Highlight 

Price

Annual Divs per 

Share at 

Highlight

Current Fwrd 

Dividends per 

Share

Current Fwrd 

Exp Dividend 

Yield

Time Horizon

Income Ideas

Jul, 16 Universal Corp (UVV) 57.74 2.12 3.08 6.7%Closed ‐ 

2/12/2017

Aug, 16 B&G Foods (BGS) 51.54 1.68 1.90 7.8%Closed ‐ 

7/17/2017

Sep, 16Maxim Integrated 

(MXIM)41.12 1.32 1.92 3.2%

Closed ‐ 

2/12/2017

Oct, 16Douglas Dynamics 

(PLOW)31.94 0.94 1.12 3.0%

Closed ‐ 

2/12/2017

Nov, 16 Ennis Inc. (EBF) 14.60 0.70 0.90 4.9%Closed ‐‐ 

11/12/2016

Dec, 16 Watsco, Inc. (WSO) 150.57 4.20 7.10 4.0%Closed ‐ 

2/12/2017

Jan, 17 Star Group (SGU) 11.21 0.41 0.53 6.6% 0‐5 yrs

Feb, 17 Moelis & Co (MC) 35.00 1.28 1.77 4.8%Closed ‐ 

6/22/2017

Mar, 17 Park National (PRK) 108.59 3.76 4.08 5.5% 0‐20 yrs

Apr, 17American Software 

(AMSWA)10.44 0.44 0.44 2.1%

Closed ‐ 

6/22,23/2017

May, 17 NW Natural (NWN) 59.20 1.88 1.91 3.0%Closed ‐ 

10/25/2018

Jun, 17 Japan Tobacco (JAPAY) 19.03 0.60 NA NAClosed 

11/8/2019

Jul, 17 Vectren Corp (VVC) 58.21 1.68 Acquired AcquiredClosed 

8/30/2017

Aug, 17National Retail 

Properties (NNN)40.50 1.90 2.06 5.4%

Closed ‐ 

10/25/2018

Sep, 17 STORE Capital (STOR) 25.72 1.16 1.4 6.0%Closed ‐ 

10/25/2018

Oct, 17 Fortis (FTS) 36.14 1.27 1.39 3.5%Closed ‐ 

4/18/2019

Nov, 17 Black Hills (BKH) 61.23 1.78 2.14 3.6%Closed ‐ 

10/25/2018

Dec, 17Four Corners Propety 

Trust (FCPT)26.03 0.97 1.22 5.1%

Closed ‐ 

10/25/2018

Jan, 18 TransCanada Corp (TRP) 49.47 1.98 2.32 5.1%Closed 

11/6/2019

Feb, 18 Siemens (SIEGY) 71.13 2.18 2.12 3.6% 0‐20 yrs

Mar, 18Philips 66 Partners 

(PSXP)49.63 2.71 3.50 7.5%

Closed ‐ 

10/25/2018

Apr, 18 PS Business Parks (PSB) 113.68 3.40 4.20 3.1%Closed ‐ 

10/25/2018

May, 18 Hubbell (HUBB) 103.97 3.08 3.64 2.7%Closed ‐ 

2/11/2019

Jun, 18Park Hotels & Resorts 

(PK)32.43 1.72 1.80 NMF

Closed ‐ 

5/3/2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

Many members have said that they prefer to focus on the long-term income-oriented dynamics of the income ideas, and we think this makes sense. The formatting of the table reflects a greater focus on the trajectory of the dividend as well as the current forward expected annualized dividend yield. We hope that you find this layout more helpful as you sort through the prior income ideas.

INCOME IDEAS 

 

15 | P a g e   

INCOME IDEAS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Annual Divs per 

Share at 

Highlight

Current Fwrd 

Dividends per 

Share

Current Fwrd 

Exp Dividend 

Yield

Time Horizon

Income Ideas

Jul, 18Healthcare Trust of 

America (HTA)27.36 1.22 1.26 4.7%

Closed ‐ 

2/11/2019

Aug, 18 QTS Realty Trust (QTS) 44.01 1.64 1.88 3.0%Closed ‐ 

4/18/2019

Sep, 18 Atmos Energy (ATO) 93.62 1.94 2.30 2.2%Closed ‐ 

10/25/2018

Oct, 18Veolia  Environment 

(VEOEY)19.70 0.99 0.54 2.3%

Closed 

4/18/2019

Nov, 18 Roche Holding (RHHBY) 29.82 1.08 1.14 2.6%Closed ‐ 

2/11/2019

Dec, 18 OGE Energy (OGE) 40.46 1.46 1.55 4.8%Closed ‐ 

2/11/2019

Jan, 19 BAE Systems (BAESY) 24.32 0.92 ‐ ‐Closed ‐ 

2/11/2019

Feb, 19EastGroup Properties 

(EGP)107.58 2.88 3.00 2.6%

Closed 

11/6/2019

Mar, 19Canadian Natural 

Resources  (CNQ)26.76 1.01 1.21 6.0%

Closed ‐ 

9/24/2019

Apr, 19 Evergy (EVRG) 57.32 1.90 2.02 3.2%Closed 

11/6/2019

May, 19 National Health (NHI) 76.43 4.20 4.41 7.2%Closed 

11/6/2019

Jun‐19Corporate Office 

Properties Trust (OFC)28.94 1.10 1.10 4.1% 0‐20 yrs

Jul‐19Nuveen Real Estate 

Income Fund (JRS)10.63 0.76 0.76 9.6% 0‐20 yrs

Aug‐19South32 Limited 

(SOUHY)10.01 0.28 0.11 1.5% 0‐20 yrs

Sep‐19

Bank of America 

Preferred Stock (ISIN: 

US0605052291)

26.87 1.50 1.50 5.5% 0‐20 yrs

Oct‐19 Life Storage (LSI) 105.41 4.00 4.28 4.2%Closed 

2/24/2020

Nov‐19 VICI Properties (VICI) 24.28 1.19 1.19 5.4%Closed 

2/24/2020

Dec‐19 Comerica (CMA) 71.37 2.68 2.72 6.3% 0‐20 yrs

Jan‐20

Vanguard International 

High Dividend Yield ETF 

(VYMI)

63.78 2.68 2.68 5.1% 0‐20 yrs

Feb‐20 Omnicom Group (OMC) 75.74 2.60 2.60 4.5% 0‐20 yrs

Mar‐20JPM‐PRC, Preferred 

Shares  Series EE27.50 1.52 1.52 5.5% 0‐20 yrs

Apr‐20

iShares Investment 

Grade Corporate Bond 

ETF (LQD)

121.10 3.72 3.84 3.1% 0‐20 yrs

May‐20United 

Microelectronics  (UMC)2.57 0.09 0.09 3.5% 0‐20 yrs

    

The information provided in the tables is offered for the convenience of the reader, for illustrative purposes only, and no actual trading is taking place. Actual results may differ from the simulated information being presented. Valuentum is a publisher of financial information, not a money manager, broker, or financial advisor.

 

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CAPITAL APPRECIATION IDEAS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Current or 

"Close" PriceDiv's Received

'Hypothetical' 

'Closed'Gain %Time Horizon

Capital Appreciation Ideas

Jul, 16 Bloomin Brands (BLMN) 17.87 19.28 0.07 8.3%Closed ‐‐ 

11/12/2016

Aug, 16Healthcare Srvs Group 

(HCSG)38.91 41.02 0.369 6.4%

Closed ‐ 

2/12/2017

Sep, 16Grupo Aeroportuario 

(ASR)157.87 181.61 ‐ 15.0%

Closed ‐ 

4/5/2017

Oct, 16Swedish Match 

(SWMA.ST)314.80SEK 417.40SEK 17.7 38.2%

Closed ‐ 

6/1/2018

Nov, 16 Symrise AG (SYIEY) 16.25 16.34 ‐ 0.6%Closed ‐ 

4/5/2017

Dec, 16 Tootsie Roll (TR) 37.80 38.96 0.90 5.4%Closed 

4/18/2019

Jan, 17Texas Capital 

Bancshares (TCBI)78.05 85.10 ‐ 9.0%

Closed ‐ 

2/12/2017

Feb, 17 Arconic (ARNC) 25.90 29.62 ‐ 14.4%Closed ‐ 

2/12/2017

Mar, 17 Tesaro (TSRO) 180.84 122.62 ‐ ‐32.2%Closed ‐ 

7/17/2017

Apr, 17 Yum China (YUMC) 31.15 37.67 ‐ 20.9%Closed ‐ 

5/23/2017

May, 17 Galapagos (GLPG) 87.67 76.13 ‐ ‐13.2%Closed ‐ 

7/17/2017

Jun, 17 Huntington Ingalls (HII) 193.79 206.39 ‐ 6.5%Closed 

8/18/2017

Jul, 17 Orbital ATK (OA) 102.33 104.65 ‐ 2.3%Closed 

8/18/2017

Aug, 17 Wingstop (WING) 32.28 66.17 3.61 116.2%Closed ‐ 

10/25/2018

Sep, 17 Qualys (QLYS) 51.10 75.44 ‐ 47.6%Closed ‐ 

10/25/2018

Oct, 17Guidewire Software 

(GWRE)78.24 87.50 ‐ 11.8%

Closed ‐ 

10/25/2018

Nov, 17 Ferrari N.V. (RACE) 117.43 123.26 0.71 5.6%Closed ‐ 

2/11/2019

Dec, 17 Square (SQ) 38.22 72.61 ‐ 90.0%Closed ‐ 

10/25/2018

Jan, 18 Planet Fitness (PLNT) 33.70 46.41 ‐ 37.7%Closed ‐ 

10/25/2018

Feb, 18 Insulet Corp (PODD) 75.84 82.69 ‐ 9.0%Closed ‐ 

10/25/2018

Mar, 18 Preferred Bank (PFBC) 64.01 45.11 2.52 ‐ 0‐20 yrs

Apr, 18Esperion Therapeutics 

(ESPR)66.43 40.94 ‐ ‐38.4%

Closed ‐ 

4/18/2019

May, 18Heidrick & Struggles 

(HSII)37.65 40.77 0.41 9.4%

Closed ‐ 

3/9/2019

 

   

Many capital appreciation ideas are based on a long-term thesis. However, rapid price-to-fair value convergence may mean we close the ideas relatively quickly, or sooner than expected. Our decision to close an idea may or may not be relevant to you given varying goals and risk tolerances.

 

17 | P a g e   

CAPITAL APPRECIATION IDEAS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Current or 

"Close" PriceDiv's Received

'Hypothetical' 

'Closed'Gain %Time Horizon

Capital Appreciation Ideas

Jun, 18 Green Dot Corp (GDOT) 72.86 24.54 ‐ ‐66.3%Closed 

11/8/2019

Jul, 18 Wix.com (WIX) 105.30 111.93 ‐ 6.3%Closed ‐ 

2/11/2019

Aug, 18Tactile Systems 

Technology (TCMD)50.84 63.52 ‐ 24.9%

Closed ‐ 

10/25/2018

Sep, 18 Invitae (NVTA) 13.95 20.84 ‐ 49.4%Closed ‐ 

3/9/2019

Oct, 18 Cigna  (CI) 215.72 149.00 0.04 ‐30.9%Closed 

4/18/2019

Nov, 18 Yeti Holdings (YETI) 16.50 17.99 ‐ 9.0%Closed ‐ 

2/11/2019

Dec, 18 Spotify (SPOT) 135.31 139.65 ‐ 3.2%Closed ‐ 

4/18/2019

Jan, 19 Suncor Energy (SU) 29.32 32.05 ‐ 9.3%Closed ‐ 

2/11/2019

Feb, 19 Delek Holdings (DK) 32.12 37.31 0.27 17.0%Closed ‐ 

4/18/2019

Mar, 19Physicians Realty Trust 

(DOC)17.82 17.80 0.69 3.8%

Closed 

11/6/2019

Apr, 19 Everbridge (EVBG) 72.75 98.43 ‐ 35.3%Closed 

7/24/2019

May, 19 Teladoc Health (TDOC) 60.93 68.09 ‐ 11.8%Closed 

7/24/2019

Jun‐19 Alteryx (AYX) 95.15 119.29 ‐ 25.4%Closed 

7/24/2019

Jul‐19 CrowdStrike (CRWD) 67.21 86.42 ‐ 28.6%Closed 

7/24/2019

Aug‐19Inovalon Holdings 

(INOV)17.12 17.59 ‐ 2.7%

Closed 

12/5/2019

Sep‐19 Avalara (AVLR) 81.10 85.14 ‐ 5.0%Closed ‐ 

2/3/2020

Oct‐19 Cloudflare Inc (NET) 17.27 18.72 ‐ 8.4%Closed 

12/5/2019

Nov‐19 Shopify (SHOP) 297.64 369.08 ‐ 24.0%Closed ‐ 

12/5/2019

Dec‐19 Datadog (DDOG) 35.91 46.21 28.7%Closed ‐ 

2/3/2020

Jan‐20 Chewy (CHWY) 29.34 30.72 4.7%Closed 

2/24/2020 ‐

Feb‐20HDFC Bank Limited 

(HDB)58.76 47.61 0‐20 yrs

Mar‐20ProShares UltraPro 

Short Dow30 (SDOW)57.17 72.98

Highlight price ref lects more

punit ive M arch 9 open.

27.7%Closed ‐ 

3/12/2020

Apr‐20 Royal Gold (RGLD) 93.50 126.04 34.8%Closed 

4/27/2020

May‐20Sprouts Farmers 

Market (SFM)25.18 24.95 0‐20 yrs

 

   

Success rate: The percentage of ideas highlighted in the Exclusive that have moved in the direction of our thesis (i.e. up for capital appreciation ideas and down for short idea considerations) through the current price or closed price, with consideration of cash and stock dividends. Success rates do not consider trading costs or tax implications.

 

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SHORT IDEA CONSIDERATIONS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Current or 

"Close" PriceDiv's Received

'Hypothetical' 

'Closed'Gain %Time Horizon

Short Idea Considerations

Jul, 16 Lands' End (LE) 16.76 16.10 ‐ 3.9%Closed ‐‐ 

12/2/2016

Aug, 16 Vivint Solar (VSLR) 2.94 2.85 ‐ 3.1%Closed ‐‐ 

12/2/2016

Sep, 16 Lloyds Banking (LYG) 3.31 2.78 ‐ 16.0%Closed ‐‐ 

11/4/2016

Oct, 16 GoPro (GPRO) 16.68 11.16 ‐ 33.1%Closed ‐‐ 

11/4/2016

Nov, 16Seritage Growth 

Properties (SRG)44.31 42.13 0.25 4.4%

Closed ‐‐ 

1/6/2017

Dec, 16Royal Bank of Scotland 

(RBS)4.91 4.19 0.68 0.8%

Closed 

3/5/2020

Jan, 17Sequential Brands 

Group (SQBG)4.62 4.18 ‐ 9.5%

Closed ‐ 

2/12/2017

Feb, 17Sportman's Warehouse 

(SPWH)6.85 6.11 ‐ 10.8%

Closed ‐ 

2/12/2017

Mar, 17 Fitbit (FIT) 6.07 5.71 ‐ 5.9%Closed ‐ 

4/5/2017

Apr, 17Santander Consumer 

(SC)12.51 11.65 ‐ 6.9%

Closed ‐ 

5/23/2017

May, 17 Snap, Inc (SNAP) 23.19 17.19 ‐ 25.9%Closed ‐ 

5/10/2017

Jun, 17 Mallinckrodt (MNK) 42.65 36.41 ‐ 14.6%Closed ‐ 

8/18/2017

Jul, 17Deutsche Lufthansa AG 

(DLAKY)23.38 21.42 0.94 4.4%

Closed ‐ 

10/25/2018

Aug, 17 Del Frisco's (DFRG) 14.35 11.93 ‐ 16.9%Closed ‐ 

10/16/17

Sep, 17Fiesta Restaurant 

Group (FRGI)15.90 14.36 ‐ 9.7%

Closed ‐ 

2/11/2019

Oct, 17 Ingles Markets (IMKTA) 26.50 24.20 ‐ 8.7%Closed ‐ 

10/16/17

Nov, 17 Fogo de Chao (FOGO) 10.85 15.62 ‐ ‐44.0%Closed ‐ 

3/3/2018

Dec, 17 TrueCar (TRUE) 12.07 10.97 ‐ 9.1%Closed ‐ 

12/28/17

Jan, 18 Shake Shack (SHAK) 44.17 43.54 ‐ 1.4%Closed 

3/11/2020

Feb, 18

iShares Core US 

Aggregate Bond ETF 

(AGG)

107.20 104.63 1.93 0.6%Closed ‐ 

10/25/2018

Mar, 18

iShares iBoxx $ High 

Yield Corporate Bond 

ETF (HYG)

85.75 86.68 4.936 ‐6.8%Closed ‐ 

4/18/2019

 

   

The tables  above are provided for the sole purpose of transparency, to allow readers  to measure Exclusive ideas  in a way they feel  is  most appropriate. Ideas  within the Exclusive are not constructed as  a 

portfolio, nor should they be viewed as  a portfolio, and performance information is  hypothetical  and "trading" is  simulated. "Hypothetical  annualized returns," now labeled "Capital  Efficiency," cannot be 

achieved and are provided for the sole purpose of rightsizing each idea to a common measurement period (one year), to compare ideas  'closed' within one year to ones  'open' longer than one year, taking 

into account capital  efficiency. A reader, for example, may view a 20% hypothetical  return over a period of five weeks as  much better than a 20% hypothetical  return over a period of five years. Whereas  

both represent 20% hypothetical  returns, hypothetical  annualized performance is  much different under each case. Readers  may have different views  and time horizons. To retain independence, neither 

Valuentum nor Brian Nelson own any shares, nor do they plan to own any shares, of any companies  highlighted in the Exclusive. Importantly, shorting stocks  involves  a number of abnormal  risks, 

including theoretically the infinite loss  of capital, and is  not for everyone. Valuentum is  a financial  publisher not a financial  advisor. Please contact your personal  financial  advisor to determine if any 

idea in the Exclusive may be appropriate for you.

 

19 | P a g e   

SHORT IDEA CONSIDERATIONS 

Highlight 

DateCompany (symbol)

Highlight 

Price

Current or 

"Close" PriceDiv's Received

'Hypothetical' 

'Closed'Gain %Time Horizon

Short Idea Considerations

Apr, 18Houghton Mifflin 

Harcourt (HMHC)7.25 6.70 ‐ 7.6%

Closed ‐ 

6/1/18

May, 18Noodles & Company 

(NDLS)7.25 7.04 ‐ 2.9%

Closed ‐ 

2/11/2019

Jun, 18

iShares International 

High Yield Bond ETF 

(HYXU)

52.40 50.94 ‐ 2.8%Closed ‐ 

10/25/2018

Jul, 18Installed Building 

Products (IBP)56.15 40.10 ‐ 28.6%

Closed ‐ 

9/28/2018

Aug, 18 Veritiv Corp (VRTV) 38.80 36.35 ‐ 6.3%Closed ‐ 

9/28/2018

Sep, 18 Box (BOX) 24.55 24.30 ‐ 1.0%Closed ‐ 

9/28/2018

Oct, 18Modine Manufacturing 

(MOD)14.73 12.00 ‐ 18.5%

Closed ‐ 

10/25/2018

Nov, 18Beazer Homes USA 

(BZH)9.01 7.92 ‐ 12.1%

Closed ‐ 

3/12/2020

Dec, 18 Vera Bradley (VRA) 10.22 9.95 ‐ 2.6%Closed ‐ 

8/23/2019

Jan, 19 RH (RH) 117.84 106.99 ‐ 9.2%Closed ‐ 

4/4/2019

Feb, 19 QuinStreet (QNST) 14.77 12.79 ‐ 13.4%Closed ‐ 

3/9/2019

Mar, 19 Dycom Industries (DY) 47.20 41.74 ‐ 11.6%Closed ‐ 

8/23/2019

Apr, 19Diplomat Pharmacy 

(DPLO)5.69 5.29 7.0%

Closed ‐ 

5/16/2019

May, 19 Match Group (MTCH) 61.91 60.90 1.6%Closed 

11/6/2019

Jun‐19 Tailored Brands (TLRD) 5.56 4.94 0.18 11.2%Closed ‐ 

7/24/2019

Jul‐19 Realogy Holdings  (RLGY) 6.55 5.60 14.5%Closed ‐ 

7/24/2019

Aug‐19 Party City Holdco (PRTY) 6.04 4.50 25.5%Closed ‐ 

8/8/2019

Sep‐19 LendingTree (TREE) 309.02 285.36 ‐ 7.7%Closed ‐ 

12/13/2019

Oct‐19 Peloton (PTON) 23.01 21.97 4.5%Closed ‐ 

3/11/2020

Nov‐19Ollie's Bargain Outlet 

(OLLI)60.07 59.68 0.6%

Closed ‐ 

12/5/2019

Dec‐19 Jumia Tech (JMIA) 5.85 5.32 9.1%Closed 

2/24/2020

Jan‐20 Grubhub (GRUB) 47.17 41.13 12.8%Closed ‐ 

3/11/2020

Feb‐20 Yum China (YUMC) 42.71 42.09 0.12 1.5%Closed ‐ 

3/11/2020

Mar‐20Manchester United 

(MANU)17.08 15.66 8.3%

Closed ‐ 

3/11/2020

Apr‐20 LendingClub (LC) 7.11 6.92 2.7%Closed 

4/27/2020

May‐20U.S. Global Jets ETF 

(JETS)13.64 20.09 0‐2 yrs

   

 

20 | P a g e   

Income Generation 

   Time Horizon: Long‐term 

“As we look ahead, we continue to focus on building on the distinctive strengths of our major business 

franchises to achieve positive organic revenue growth. Through Eaton Vance management, we’re the 

dominant provider of fund solutions for concentrated stock positions, the leading manager of equity 

income closed end funds, and the largest manager of floating‐rate bank loans. In fixed income, we have 

top tier positions in municipal bonds, higher corporates, and emerging market local debt. Parametric is 

the market leading provider of custom index separate accounts, municipal and corporate bond ladders, 

outsourced centralized portfolio management and portfolio derivative overlay services. Atlanta Capital is 

among the leading equity managers focused on high quality investing with a strong lineup of high 

performing strategies. And Calvert is among the largest and most respected specialists in responsible 

investing, number one in responsibly managed U.S. mutual fund flows over the past 12 months, and 

number two in managed mutual fund assets.” ‐ Eaton Vance second fiscal quarter (2FQ) earnings call 

Eaton Vance (EV)

Thesis Our Exclusive Income Generation Idea for June 2020 is Eaton Vance Corp. (EV) and shares of EV yield ~3.6% as of this writing. Eaton Vance had a rough start to the year with the large market drawdown due to the ongoing coronavirus (‘COVID-19’) pandemic, as well as underperformance with some of its assets under management over the past year. As many of you likely well know, US equity markets dropped significantly in the first quarter of 2020, bringing down assets under management (‘AUM’) for all asset managers. Equity markets around the world, especially in the US, have since been sharply and steadily rebounding. This dynamic is core to our thesis concerning why Eaton Vance is a high quality income generating opportunity that is worth taking a close look at. Pivoting now to the graphic at the top of the next page, you will be able to see that a bit more than half of Eaton Vance’s funds fell into the third and fourth quartile over the past year, compounding the problem of overall market draw downs. With that in mind, the longer-term performance of Eaton Vance’s funds is much stronger. Please note Eaton Vance’s second quarter for fiscal 2020 ended on April 30, 2020.

Corporate Profile Eaton Vance Corp. provides advanced investment strategies and wealth management solutions to forward-thinking investors around the world. Through principal investment affiliates Eaton Vance Management, Parametric Portfolio Associates, Atlanta Capital Management Company, Calvert Research and Management and Hexavest, the Company offers a diversity of investment approaches, encompassing bottom-up and top-down fundamental active management, responsible investing, systematic investing and customized implementation of client-specified portfolio exposures. Exemplary service, timely innovation and attractive returns across market cycles have been hallmarks of Eaton Vance since 1924. Our management of client portfolios and the business practices we follow are guided by the Company’s core values of integrity, professionalism, teamwork, client focus, creativity/adaptability and excellence.” - Company Investor Relations Page

 

21 | P a g e   

 

   

Image Source: Eaton Vance 2FQ Earnings Presentation 

Given the market rebound since the trough, it will be particularly interesting to see how this picture changed during Eaton Vance’s fiscal third quarter. Was Eaton Vance able to bounce back in terms of alpha generation as the overall market jumped on the back of beta since the trough in March? We think there is a good chance that they did, but time will tell. Most importantly, Eaton Vance is highly diversified across different asset classes, investment vehicles, and internal fund houses, as you can see in the upcoming three graphics down below (at the bottom of this page and on the next page). What this means is that it is difficult for them to lose their shirt in any given quarter or year, which is important in such volatile markets as we live with currently.

Image Source: Eaton Vance 2FQ Earnings Presentation 

 

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Image Source: Eaton Vance 2FQ Earnings Presentation 

As you can see in the above three graphics (on this page and the bottom of the previous page), management fees are derived especially from Eaton Vance, Parametric and from equity and fixed income offerings. These are bread and butter offerings as opposed to anything particularly exotic. It is also important to note that while Eaton Vance distributes through financial intermediaries, it is a sales and marketing machine with 130 sales professionals covering US and international markets. So, not only has the firm benefitted from the decade-long boom in asset markets (setting aside the recent 30% drawdown and bounce back), but they have also driven positive flows for much of this time as well.

Image Source: Eaton Vance 2FQ Earnings Presentation 

 

23 | P a g e   

 

   

Please see the upcoming graphic down below for an overview of Eaton Vance’s overall AUM over the past decade.

At close to a half trillion dollars, Eaton Vance has the scale to compete with much larger asset managers. This size allows for very substantial investments in things like technology, trading platforms, investment teams, and sales and marketing machines. In fact, through fiscal 2019, the firm managed to put up positive net flows into the firm for 24 consecutive years. An impressive feat!

Image Source: Eaton Vance 2FQ Earnings Presentation 

Image Source: Eaton Vance 2FQ Earnings Presentation 

 

24 | P a g e   

 

   

Aside from driving the top line higher over many years, Eaton Vance has also done a good job of balancing its cost structure, maintaining an operating margin of just around 30% in recent years. While margins stepped backwards in the first half of this fiscal year due to the market drawdown and some asset outflows, things could have been worse. The key metric is that fully 40% of costs are variable, meaning that they pull back along with revenue in times like the second fiscal quarter of this year. Please see the upcoming graphic down below for the recent progression of operating margin dollars and percentages. We expect the recent pressure to somewhat reverse itself as the markets have rebounded substantially since the last set of financial results.

Image Source: Eaton Vance 2FQ Earnings Presentation 

 

25 | P a g e   

 

   

So, how does all of this translate to the bottom line? In the upcoming graphic down below, you can see how the top line makes its way down to the bottom-line over the past five fiscal years. You can also see that the current dividend of $1.50 per share annually appears to be well-covered by $3.50 of GAAP diluted EPS in fiscal 2019 (on the basis of Eaton Vance’s per share dividend divided by its EPS). We would also note that the company had more cash and cash-like equivalents (its ‘cash and cash equivalents’ of ~$0.9 billion at the end of its last fiscal quarter exceeded its ‘debt’ balance of ~$0.6 billion) than it had in long-term debt at the end of its fiscal second quarter, making for a very sound balance sheet.

Image Source: Eaton Vance 2019 10Q Filing 

Another question to consider is how could things go wrong? In our view, this would require things to go wrong on two fronts. Overall asset levels would have to come back under continued pressure and in a meaningful way. The other thing that would need to go wrong is that Eaton Vance would have to underperform its peers across the vast majority of its strategies. While the former is certainly a possibility, we view the latter as a long shot. Over many decades, Eaton Vance has formed an extremely diversified asset manager. They essentially cover the waterfront in terms of the various styles and asset classes offered. Given that these are managed by different teams of analysts and portfolio managers, we view it as highly unlikely that they will all underperform at once in a material way for a sustained period. Given that the downside looks truncated and the dividend appears well-covered, we think Eaton Vance offers prospective investors a juicy dividend yield, as well as the possibility for capital appreciation supported by a recovery in equity markets and potentially renewed asset inflows. Disclosure: Matthew Warren does not own shares in any of the securities mentioned above.

 

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Capital Appreciation  

 

 

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Profile Cloudera shares only started trading publicly in 2017, but the company was founded in 2009. It has emerged as a leader in data management and analytics software. Cloudera delivers an enterprise data platform that manages and secures the data lifecycle across any cloud or data center. It empowers “people to transform complex data into clear and actionable insights.” Cloudera’s principal offices are located at Palo Alto, California, and as of January 2020, it had 1,900 customers. Its market cap stands at $2.9 billion, and it doesn’t pay a dividend.

Thesis Our June 2020 capital appreciation idea follows a similar theme that we have been reiterating through this global pandemic: a focus on asset light, net cash rich, free-cash-flow generating entities that can thrive regardless of a customer-facing presence. For this month, we are highlighting enterprise data cloud company, Cloudera (CLDR). The company is at the forefront of the massive trend toward the cloud, a secular development that has a long runway for growth.

Here’s where Cloudera comes in:

Cloudera, Inc. (CLDR)

“We executed extremely well in Q1, particularly as the pandemic was in full effect for more than half of our 

fiscal quarter," said Rob Bearden, chief executive officer, Cloudera. "We believe that remote working 

environments have placed heightened importance on data, data analysis and data security, which has 

increased the value of data architecture design and the criticality of hybrid cloud solutions. In addition, CDP 

Public Cloud is accomplishing exactly what we had hoped in that it has enabled a hybrid multi‐cloud 

architecture for our customers and enhanced our value proposition with customers who plan to take 

advantage of public cloud infrastructure for certain types of workloads.” ‐‐‐ First Quarter Fiscal 2021 

Financial Results ‐‐ June 3, 2020 

Time Horizon: Long‐term 

Since (its) founding in 2009, (Cloudera has) been a leader in multi-function data management and analytics software, including flow management, streams management, data engineering, data warehousing, streaming analytics, operational databases and machine learning. These solutions function together on the same, or diverse, data sets. In addition, (it) provides support, professional services and training relating to our offerings. Fundamental to (its) offerings is shared data experience (SDX) technologies, providing consistent security, governance, lineage and metadata management across the data lifecycle for both on-premises and public cloud deployments. Customers implement (its) software primarily on-premises in data centers--or operate it on the public cloud infrastructure of Amazon Web Services (AWS)--Microsoft Azure (Azure), Google Cloud Platform (GCP), IBM Cloud and Oracle Cloud. (Its) products integrate the latest innovations in open source data management technology for enterprise-grade performance, scalability and security (Cloudera’s 2019 10-K).

It is difficult to carve out a sustainable niche in cloud services, but Cloudera’s customers continue to “favor the ability to optimize the performance, cost and security of workloads using data anywhere and across any environment, including multiple public clouds, private cloud and data centers.” Cloudera’s end-to-end data lifecycle management can be found in “connected and autonomous vehicles, 5G mobile networks, anti-money laundering, fraud detection and risk modeling.” We really like that the company’s operations can mix

 

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on-premise workloads with cloud infrastructure, including those from AWS, Azure, IBM Cloud and Oracle Cloud. As data security becomes more and more critical, Cloudera’s enterprise-grade data security has become a growing attraction of its services, especially as more and more people work from remote environments.

Customer retention is solid, too, as its “platforms deliver performance improvements over legacy systems at lower cost.” We love its subscription-based revenue model that helps smooth the ups and downs of its business while offering improved visibility into future performance. Its strategy is also appealing: 1) invest in additional cloud-data analytics, 2) grow its addressable market by introducing complementary services, 3) accelerate existing customer adoption by cross-selling new products, 4) increase the customer count, with a focus on large enterprises and large public sector organizations, and 5) leverage its partner ecosystem to increase distribution of its software. With no customer accounting for more than 10% of revenue, and the U.S. accounting for ~40% of sales, its operations are well diversified by customer and geography.

The financials are where the rubber hits the road with this idea. At first glance, Cloudera doesn’t look that attractive. For starters, the company has incurred substantial net losses since its founding, with the tally coming in at $336.6 million during the last fiscal year alone. This is partly why Wall Street may not like the company. But there’s more to it than meets the eye. For starters, the company is investing aggressively in R&D and sales, all the while subscription revenue is surging (see below). We expect the company to be able to scale its costs more effectively once it turns the spending gushers off.

Image Source: Cloudera 

Cash and marketable securities stood at $360+ million as of January 2020 against no debt and little contract liabilities, meaning the firm is net-cash-rich (with little liquidity concerns). Not only that, but Cloudera is starting to turn the corner with respect to free cash flow generation, too, and capital spending remains miniscule. For example, during the first quarter of fiscal 2021, results released June 3, operating cash flow came in at $68.4 million versus just $11.5 million in the year-ago period, while capital spending was just $1.1 million, good for material free cash flow generation. Sales also advanced 12% during the period, while subscription revenue leapt 21%, despite impacts from COVID-19.

 

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On a technical basis, it looks as though Cloudera may have finally broken through its downtrend, though we do note that it may have to try again to break through if the broader markets do not cooperate. Aside from some overhead technical supply (sellers looking to breakeven after buying it at higher prices), there are some other risks. For starters, its business also bumps heads with AWS and Azure in certain areas, while it can also list HP, IBM, Oracle, and Teradata as rivals. Cloudera has been granted more than 40 patents and has another 90+ pending (many don’t expire until 2036), however, and while the company’s recent acquisition or Hortonworks has caused some indigestion, we have no reason to believe integration issues will be permanent. New CEO Rob Beardon came from Hortonworks and could right the ship, even as activist pressure mounts (Carl Icahn’s The Icahn Group owns ~17.7% of shares, as of April 15).

From where we stand, the outlook at Cloudera looks bright. Even amid a global pandemic, the company still issued fiscal 2021 revenue guidance (others just withdrew their forward outlooks), with it coming in the range of $825-$845 million (modestly lower than prior figures), revealing decent growth over fiscal 2020 levels. Subscription revenue expectations of $745-$755 million for fiscal 2021 suggest an increase of ~12% at the midpoint of the range, on a year-over-year basis. The company is also targeting non-GAAP operating income in the range of $85-$95 million for the year, which indicates the first time the firm will turn a profit on a non-GAAP annual basis for as long as we can remember (it registered non-GAAP operating losses of $39.4 million, $67.3 million, and $80.4 million during the past three fiscal years; results were even worse before then).

Cloudera has revenue visibility, a strong net-cash-rich balance sheet, improving free cash flow, asset-light operations, a strong recurring business model, a fast-growing top-line (even amid a global pandemic), activist pressure from Carl Icahn that could lead to a sale, and it expects to turn the corner with respect to non-GAAP profitability in fiscal 2021, all the while shares appear to be breaking out of a defined downtrend. We think Cloudera is worth a look, and as such, the company makes the cut for the capital appreciation idea of the June edition of the Exclusive publication. We can see shares easily break out to $14 each in the not-too-distant future. Disclosure: Brian Nelson does not own shares in any of the securities mentioned above.

 

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HealthEquity (HQY)

Short Consideration 

 

   

   

  

 

 

     

Corporate Profile HealthEquity Inc (HQY) administers health savings accounts (‘HSAs’) and consumer-directed benefits (‘CBDs’) in the US as a non-bank custodian. Its suite of services grew significantly after acquiring WageWorks in August 2019, which saw HealthEquity become a bigger player in the flexible spending accounts (‘FSAs’), health reimbursement arrangements (‘HRAs’), COBRA, and commuter benefits markets. Some of the assets within the HSAs administered by HealthEquity are invested, while most is left in cash assets as of the end of April 30, 2020. HealthEquity is headquartered in Draper, Utah.

Thesis

Our June 2020 short idea consideration is HealthEquity Inc (HQY) which administers tax-advantaged health savings accounts (‘HSAs’) and other consumer-directed benefits (‘CBDs’) in the US as a non-bank custodian, primarily by partnering with employers along with other entities. HSAs offer employees a way to save for long-term health expenses in a tax-advantaged way, meaning that employees do not pay federal income tax on the funds put into the HSAs. If used to pay for qualified medical expenses, the owner of the HSA does not incur a federal income tax liability. HSAs are used by those with high deductible health care insurance plans (a requirement for the employee to have an HSA in the first place). These accounts were created by the Medicare Prescription Drug, Improvement, and Modernization Act which was enacted in 2003. Pivoting to HealthEquity specifically, there are numerous headwinds and hurdles facing the company that will likely pressure the company’s stock price going forward. For starters, the firm reported its first quarter fiscal 2021 earnings (period ended April 30, 2020) on June 2 that missed consensus estimates on both the top- and bottom-lines.

Time Horizon: Short term 

“Turning to guidance. As you know, the highly recurring nature of our business typically provides a high 

degree of visibility to future operating performance. Due to the pandemic, we are providing guidance for 

our second fiscal quarter ending July 31, 2020, as we expect that our second quarter results will be more 

fully impacted by COVID‐19 than was our first quarter. With prospects beyond the second quarter currently 

unclear and with significant uncertainty regarding the pace of reopening and economic recovery, we are 

withdrawing prior guidance for full fiscal year 2021.” ‐‐‐ Darcy Mott, CFO of HealthEquity Inc, during the 

company’s first quarter fiscal 2021 conference call 

More importantly, the company’s fiscal second-quarter guidance was quite lackluster and well below consensus estimates, and furthermore, HealthEquity pulled its full fiscal year guidance due to uncertainty created by the ongoing coronavirus (‘COVID-19’) pandemic. Back on August 30, 2019, HealthEquity closed its all-cash acquisition of WageWorks through a deal worth approximately $2.0 billion by enterprise value. That deal greatly grew HealthEquity’s net debt load (which we will cover in just a moment), and HealthEquity announced it would invest $80 million-$100 million towards integrating and upgrading the operations at combined companies. WageWorks offered administration services for HSAs and CBDs, and the deal was done largely to expand HealthEquity’s presence in the HSAs market.

 

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This move had its pitfalls, however, as HealthEquity’s net debt load now sits above $1.0 billion (as of April 30, 2020). Additionally, over half of HealthEquity’s total assets are represented by goodwill as you can see in the upcoming graphic down below.

HealthEquity’s interest expenses came in at $12 million last fiscal quarter, and please note its GAAP operating income was just $15 million during the same period. While part of that was due to $13 million in merger integration costs, which are expected to last for at least a couple more years, HealthEquity only generated $28 million in GAAP operating income during the fiscal first quarter of 2019. This indicates that HealthEquity’s interest expenses will consume a lot of its operating income on a forward-looking basis for some time.

Image Source: HealthEquity – First Quarter Fiscal 2020 10‐Q Filing 

Image Source: HealthEquity – First Quarter Fiscal 2020 10‐Q Filing 

 

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Looking now at HealthEquity’s cash flow profile, the firm generated less than $8 million in free cash flow (net operating cash flow less capital expenditures) during the fiscal first quarter (defining HealthEquity’s capital expenditures as ‘purchases of property and equipment,’ as we consider its ‘purchases of software and capitalized software development costs’ to be acquisitive behavior). HealthEquity does not pay out a common dividend at this time and historically has not repurchased a meaningful amount of its stock. Even if HealthEquity wanted to repurchase its stock, it is not in a financial position to due to. With that in mind, please note the company’s weighted-average outstanding share count on a diluted basis rose by 13% year-over-year to approximately 73 million last fiscal quarter. HealthEquity’s lackluster cash flow profile is highlighted in the upcoming graphic down below.

Image Source: HealthEquity – First Quarter Fiscal 2020 10‐Q Filing 

Financially speaking, HealthEquity appears to have bitten off more than it can chew with the acquisition of WageWorks. The firm’s quarterly ‘G&A’ and ‘technology and development’ expenses more than doubled and more than tripled, respectively, last fiscal quarter on a year-over-year basis. HealthEquity’s now massive (relatively speaking) net debt load resulted in the firm incurring large interest expenses which are consuming a lot of its operating income and potential net operating cash flows, effectively putting downward pressure on its free cash flow generating abilities.

 

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Ongoing shareholder dilution via stock-based compensation and other factors will further pressure its intrinsic value on a per share basis over time. Finally, HealthEquity does not possess the financial flexibility to make any big changes to its near-term outlook. In the upcoming graphic down below, HealthEquity highlights the recent sharp increase in its HSAs and HSA Assets. Please note a lot of this growth is due to the WageWorks acquisition, as the firm’s organic growth levels are much lower.

Image Source: HealthEquity Inc – June 2020 IR Presentation 

HealthEquity noted within its Fiscal 2020 Annual Report that:

We offer a mutual fund investment platform and an online-only automated investment advisory service to all of our members whose account balances exceed a stated threshold. These services are entirely elective to the member. The advisory service is delivered through a web-based tool, AdvisorTM, which is offered and managed by HealthEquity Advisors, LLC, our SEC-registered investment adviser subsidiary. HealthEquity Advisors, LLC provides investment advice to its clients exclusively through the AdvisorTM tool on an interactive website. Members who utilize our mutual fund investment platform or subscribe for AdvisorTM services pay asset-based fees, which include the cost of the advisory service and all trading commissions and other expenses associated with transactions made through these online tools.

 

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Declining interest rates have put a strain on HealthEquity’s financial performance, and please note this key risk disclosure from HealthEquity’s Fiscal 2020 Annual Report (emphasis added in red):

A decline in interest rate levels, including an environment of negative interest rates, or lower asset values due to market conditions or other factors may reduce our ability to earn income on our HSA Assets and Client-held funds and to attract HSA contributions, which would adversely affect our profitability. As a non-bank custodian, we partner with our depository partners to hold our HSA Assets and other Client-held funds. We earn a significant portion of our consolidated revenue from fees we earn from our depository partners, approximately 34%, 44%, and 38% during the years ended January 31, 2020, 2019, and 2018, respectively. A decline in prevailing interest rates, such as the current low interest rate environment due to the COVID-19 pandemic, or a negative interest rate environment may negatively affect our business by reducing the yield we realize on our HSA Assets and other Client-held funds. In addition, if we do not offer competitive interest rates, our members may choose another HSA custodian. Similarly, if the value of the invested funds we hold declines, whether due to market conditions or other factors, our fees, which are based on a percentage of the asset values, would be adversely affected. Any such scenario could materially and adversely affect our business and results of operations.

Volatile US equity markets could potentially put a strain on HealthEquity’s financials going forward, especially if various account holders decide to put their HSA assets back into cash. While, in our view, the “Fed/Treasury” put will likely see US equity markets melt upwards over time, that positive effect will take a long time to have a significant impact on HealthEquity’s financial performance. However, the sharp drop in interest rates since the end of 2018 (and more recently due to unprecedented monetary stimulus measures by the Fed) will be immediately reflected in its financials. Here we will caution that should interest rates move higher, organic growth rates pick up substantially, and/or material synergies are created through the HealthEquity-Wage Works deal, the outlook for the firm would improve materially. Additionally, should more of the HSAs Assets be placed in the “invested assets” category, that would improve its ability to generate meaningful fees. There are scenarios where HealthEquity’s outlook improves, but we still view the firm’s risks as heavily skewed to the downside. The outlook for the domestic jobs market changed materially on June 5 after the US Bureau of Labor Statistics reported that the unemployment rate declined to 13.3% in May 2020, down from 14.7% in April 2020. However, US unemployment rates are still likely to be quite elevated going forward in the short- to medium-term. A combination of HealthEquity’s hefty interest expenses due to its now relatively large net debt load, ongoing restructuring charges, rising operating expenses, and lackluster near-term guidance indicates that shares of HQY may come under fire over the coming months. We see room for meaningful downside. Even though the outlook for the US jobs market is improving, HealthEquity’s financials were already coming under stress long before COVID-19 came into the picture at a time of historically low domestic unemployment rates. Disclosure: Callum Turcan does not own shares in any of the securities mentioned above.

 

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Inaugural Letter to Members  

 

 

   

Dear Valued Member, Welcome! You are one of a very limited number of members that will ever bear witness to the pages that follow. The launch week of the Nelson Exclusive coincided with news that Britain has voted to leave the European Union. The decision, while sending the European banks tumbling violently, does little to muddy the context setting the background of the inaugural edition of this publication. Broader stock market valuations are at frothy levels, and interest rates continue to hover near all-time lows. The investment-decision landscape is more complicated today than ever before for all types of investors, from those seeking long-term capital appreciation to those that are targeting certain income goals. Cyclicals today are trading at peak multiples on peak earnings, and even consumer staples equities have reached valuation levels that may be more appropriate for aggressive growth equities, not mature operators. Said differently, the market has laid down the gauntlet. The next few years in the markets may be among the most difficult witnessed since the Great Recession. Even a broader market pullback 20% from current all-time highs wouldn’t be abnormal given that the collective market valuation of S&P 500 companies has effectively tripled from the March 2009 panic bottom. The launch of the Nelson Exclusive in such conditions can be considered perilous as broader market performance inevitably will act as ballast to the returns of ideas surfaced. In this spirit, I want to remind you that not all ideas in this publication will be successful, and some that are eventually may encounter tough sledding over extended periods of time. As a swimmer cannot achieve his best time swimming against the current, a stock selector cannot achieve his best performance in a down market. Regardless, the value placed on a steady hand during challenging times is priceless. Let’s first cover what the Exclusive is and then we’ll talk about what it is not. As you know, the Valuentum investment coverage universe is vast, and what we’re seeking to deliver in this publication is ideas that fall outside its reach. We’re breaking down the traditional barriers of equity coverage to identify underfollowed gems across the investing spectrum, delivering in each monthly edition one idea for income investors, one idea for readers seeking long-term capital appreciation, and a bonus idea for those looking for a “short” consideration (1). Underfollowed doesn’t mean obscure, however, and the ideas that we’re targeting will be investable ones, avoiding thinly-traded instruments and penny stock “traps.” We’ll clearly define our expected time horizon for each consideration, and where applicable, we’ll update our theses in subsequent editions. We’ll keep score, tracking performance over time. Let’s talk about what the Exclusive isn’t. The Exclusive does not constitute individual investment advice, and the ideas within it are not personal recommendations. Each of you reading should always work with your

July 1, 2016

 

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personal financial advisor who knows your individual goals and risk tolerances. I do not. Only you and your personal financial advisor know what’s best for your life circumstances. The personal financial advising markets and what we do at Valuentum via financial publishing are two different verticals in the same industry, but they are different nonetheless. I just want to be very clear about this because I can never tell you to buy or sell anything at any time, even if this may be what you want. It’s not that I don’t have conviction in my work – it’s the rules of the business. Within the twelve editions of the Nelson Exclusive each year, we’ll be highlighting in total 36 ideas for consideration with varying investment parameters. That’s a lot. Depending on the time horizon set forth with each idea, fantastic performance might mean a success rate of 60%, great performance might be 55%, average performance might be 50%, while anything below that mark may constituent a poor showing. Obviously, I’m aiming for a 100% success rate, but I also have to be realistic. The great Joe DiMaggio may have hit safely for 56 consecutive games in the last baseball season before the United States was thrust into World War II, but he “only” hit .357 that year. That season of ‘41, the great Ted Williams would be the last player to hit .400, meaning that one of the best hitters in baseball…ever…was still called out ~60% of the time. The greatest investors face a similar paradigm. Stock selection is a process where there will be homeruns and strikeouts. You know me. The Exclusive is not a “get-rich-quick” product, and you should keep a close eye on your wallet if you encounter anyone promising anything of the sort. In the inaugural edition of the Nelson Exclusive, I’m going to take 36 swings – they are going to be hard and through the zone, and I’m not going to pull my shoulder out or take my eye off the ball. Market conditions are expected to be stormy in coming years as “reversion-to-the-mean” dynamics rain down, and a crafty lefthander with great “stuff” may be on the mound, but we’re stepping up to the plate and digging in. Batter up! Sincerely, Brian Nelson, CFA President, Investment Research & Analysis Valuentum Securities, Inc. brian@valuentum.com P.S. On a very personal note, I wanted to thank you for your continued support. Without you, neither the Nelson Exclusive publication nor Valuentum would exist. This fact is not lost on me. I thank you deeply.

 

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(1) From the SEC’s website: A short sale is the sale of a stock that an investor does not own or a sale

which is consummated by the delivery of a stock borrowed by, or for the account of, the investor. Short

sales are normally settled by the delivery of a security borrowed by or on behalf of the investor. The

investor later closes out the position by returning the borrowed security to the stock lender, typically by

purchasing securities on the open market.

Investors who sell stock short typically believe the price of the stock will fall and hope to buy the stock

at the lower price and make a profit. Short selling is also used by market makers and others to provide

liquidity in response to unanticipated demand, or to hedge the risk of an economic long position in the

same security or in a related security. If the price of the stock rises, short sellers who buy it at the

higher price will incur a loss.

Brokerage firms typically lend stock to customers who engage in short sales, using the firm’s own

inventory, the margin account of another of the firm’s customers, or another lender. As with buying

stock on margin, short sellers are subject to the margin rules and other fees and charges may apply

(including interest on the stock loan). If the borrowed stock pays a dividend, the short seller is

responsible for paying the dividend to the person or firm making the loan (Source: SEC

https://www.sec.gov/answers/shortsale.htm)

Short selling is not for all types of investors, and readers should consult their personal financial advisor

that understands their individual goals and risk tolerances before considering any investment or any

strategy. Potential losses for an investor engaging in a short selling strategy are theoretically infinite.

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The Nelson Exclusive: Volume 5, Issue 6

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