C The ROW’SNESTmedia.angelnexus.com/pdf/wwp/tcn-june-2015-5n6.pdf · June 2015 Issue 6 CThe O...

June 2015

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Ahoy Crow’s Nesters,“Red sky at night, sailor’s delight. Red sky in morning, sailor’s warning”

— Sailor’s Proverb

The above proverb is based on the ability of sailors to predict weather patterns according to the appearance of the sky. While I typically don’t give much stock to anything that rhymes, there is actually some scientific basis for this...

Now, I may be a pirate aficionado, but I’m far from a meteorologist. So I’ll defer to the Library of Congress, which has a full scientific explanation:

The colors we see in the sky are due to the rays of sunlight being split into colors of the spectrum as they pass through the atmosphere and ricochet off the water vapor and particles in the atmosphere. The amounts of water vapor and dust particles in the atmosphere are good indicators of weather conditions. They also determine which colors we will see in the sky.

During sunrise and sunset the sun is low in the sky, and it transmits light through the thickest part of the atmosphere. A red sky suggests an atmosphere loaded with dust and moisture particles. We see the red, because red wavelengths (the longest in the color spectrum) are breaking through the atmosphere. The shorter wavelengths, such as blue, are scattered and broken up.

Red sky at night, sailors delight.

When we see a red sky at night, this means that the setting sun is sending its light through a high concentration of dust particles. This usually indicates high pressure and stable air coming in from the west. Basically good weather will follow.

Red sky in morning, sailor’s warning.

A red sunrise can mean that a high pressure system (good weather) has already

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TheCROW’SNESTpassed, thus indicating that a storm system (low pressure) may be moving to the east. A morning sky that is a deep, fiery red can indicate that there is high water content in the atmosphere. So, rain could be on its way.

I’m afraid to say, after several years’ worth of red night skies, we are starting to see some crimson creep into the morning. And rain is coming...

I’m starting to seriously worry about a stock market correction.

Now, I’ve been concerned about it for months, as I’ve written in the past. But it seems like the time has finally come for the market to shed some of those record gains from this artificial bull market. I’ve based this on big, macro issues like the end of free Fed money, the strength of the dollar, and the juked up employment rates.

Now, some major strategists and money movers have come around...

Stifel strategist Barry Bannister wrote in a note to clients.

“We believe the S&P 500 has reached the end of the road in terms of being supported by the trilogy of weak commodities, dollar strength and a low 10(-year) yield,” Bannister said in Monday’s note.

The other big factor is the end of the Federal Reserve’s stimulus. His report showed a high correlation between the rise in the S&P 500 and the expansion of the Fed’s balance sheet since 2009.

The central bank’s assets have leveled since it halted the purchase of Treasurys (QE) last October, yet the S&P 500 has continued higher.

Stocks will correct during “the seasonally weak May-October 2015 period due to the weight of a Fed Assets-dependent S&P 500 pricing model we use,” Bannister wrote.

In other words, without the Fed’s free money, stocks are worth a lot less.

Some big-time analysts have even predicted that we could see a 1987-like crash. Bank of America chief investment strategist Michael Hartnett has said that this is a “twilight zone” market that could implode at any moment. Instead of a slow retreat, the market could have “a very sharp midcycle correction rather than the onset of a bear market” adding that there are “quite vicious price movements in foreign exchange, fixed income and commodities. I don’t think equities should be an exception.”

And some other analysts think this will happen sooner than later:

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TheCROW’SNEST“I’m expecting a 7 to 10 percent pullback in the market. I think that’s what we’re heading for this summer,” said Deutsche Bank’s chief U.S. equity strategist David Bianco. “An even-worse scenario would be if the labor market rolls over too.”

So should you run for the hills? Should you sell everything you own and bury cash in the yard? Load up on precious metals and guns?

Hardly...

As I’ve told you before, bear markets only last so long. You just need to be prepared for the long term. That’s why I stick by my three-step strategy of dollar-cost averaging dividend aristocrats and plugging them into dividend reinvestment programs. As I told you last month, that strategy has rocked out super gains through every up and down market...

But, this month I want to piggyback on one indicator that has predicted every big market crash of the last 50 years: the Bond-Stock Earning Yield Differential Model, also known as the Equity Risk Premium.

For instance, this formula:

• Issued a sell signal at the top of the market in 1973 before it crashed by 48%.

• Issued a buy signal in the late 1970s before the S&P surged 440% in the ‘80s.

• In 1987, before Black Tuesday, this formula issued a sell signal. And then, when the market bottomed days later, it issued a buy signal.

• In the early ‘90s, while recession gripped the country, it issued a buy signal — before one of the greatest bull markets in history.

• And in August 2000, it issued a sell signal, before the tech bubble burst.

• In April 2003, at the bottom of the market, this formula screamed “buy.”

• And in December 2007, at the top of the market, it screamed sell.

• At the bottom of the market in March 2009, once again it screamed “buy.”

Bottom line is, by signaling every market crash and upswing, this formula enables you to avoid losses and greatly increase your funds over time.

That’s why it’s allowed some of Wall Street’s biggest names to beat the S&P by a factor of 10,000% over the last 40 years — while significantly reducing their risk.

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TheCROW’SNESTYou can read all about it in the Tie Down the Mast section.

In the Plundering section I have outlined four new recommendations for a market crash (or correction). So we have plenty to get to before the next red-skied morning. Let’s get to it.

Charting the Course

AbbVie (NYSE: ABBV)

AbbVie is a global biopharmaceutical company with focus and capabilities to address some of the world’s greatest health challenges. Chicago-based AbbVie discovers, develops, and commercializes advanced therapies that have an impact on people’s lives.

AbbVie is an Abbott Labs (NYSE: ABT) spin-off that was launched on January 1, 2013.

We’re up ~25% on AbbVie (not counting the compounding interest from holding it in a Dividend reinvestment program). That is a nice return, but it seems like the best is yet to come...

Influential analysis firm Jefferies has just showered AbbVie in praise. It has added the company to the Jefferies Franchise Pick List, which represent the firm’s highest buy-rated stocks in the U.S. Those stocks have returned an impressive 29% since it was started.

It put a $90 price target on AbbVie.

If that $90 price target holds up, you’re looking at a sweet 35% return in short order. If you bought when I recommended it at $54, you’ll be reaping 66% on a rock-solid dividend aristocrat in less than two years. It isn’t often you pull in gains like that on risk-free blue chips...

AbbVie is poised for continued growth, despite its bestseller, Humira, going generic next year. Humira, as you may know, is the single-biggest drug in the world. It is now bringing in a record $14 billion a year. But once it does go generic not all is lost...

Most analysts agree that it will be difficult for competitors to make a generic version of

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TheCROW’SNESTHumira. One reason is AbbVie was wise enough to secure hundreds of patents that cover the “formulation and manufacturing” of Humira. It could use these patents — which don’t expire until 2022 — to hold up any competitors in court, which will buy them several more years of $14 billion-plus paydays.

Once the generic competitors do make it through the legal gauntlet, analysts still only expect that they’ll steal around 15% of Humira sales — still a huge amount of money. But AbbVie is making sure it has a solid pipeline of stocks to make up the difference...

It has added a stable of drugs in order to account for Humira.

• This year it released Viekira Pak, a treatment for hepatitis C. It has already banked more than $230 million during the first quarter, and is projected to hit $3 billion in global sales by the end of the year.

• AbbVie acquired Pharmacyclics this year for $21 billion, which gives it the rights to the blood cancer drug Imbruvica. Blood cancer is a $24 billion global market and Imbruvica is expected to be one of the world’s top-selling cancer drugs.

• AbbVie has five oncology drugs poised to launch over the next few years.

• The company also has 20 compounds or indications in Phase II or Phase III development across diverse medical specialties like immunology, virology/liver disease, oncology, renal disease, neurological diseases, and women’s health.

Here are the latest financial highlights:

• First-quarter sales of $5.04 billion, which is up more than 10%

• First-quarter earnings per share is up 32% from a year earlier, with a three-year EPS growth rate of 11%. This allowed the company to raise its EPS projections from $4.05 - $4.25 to $4.10 - $4.30

• Double-digit growth from key products including Synthroid, Creon, and Duodopa.

Key figures:

Market Cap: $106.16 billion

P/E Ratio: 59.87

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TheCROW’SNESTDividend Yield: 3.0%

Earnings Per Share: $1.12

52-Week Range: $51.37 - $70.76

We’re buying AbbVie (NYSE: ABBV) as part of a dividend reinvestment program, under $70 for now.

Boeing (NYSE: BA)

Boeing designs, develops, manufactures, sells, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. The company operates in five segments: Commercial Airplanes, Boeing Military Aircraft, Network & Space Systems, Global Services & Support, and Boeing Capital.

It is a dividend aristocrat that has steadily increased its dividend for the past 40 years.

There is some wild news from the Boeing camp: it has patented a drone that will never have to land.

Here is the patent:

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TheCROW’SNESTNow, I’m no fan of drones — far from it. Besides the moral issues I have with bombing people with unmanned aircraft, I am also not looking forward to the day when the skies are littered with spy planes, paparazzi hounds, and hobby robots filming anything and everything on the ground below.

But, drones are a big business, and I’d be silly to fight it or ignore it.

Drones, also called Unmanned Aerial Vehicles or UAVs, will be a $91 billion industry in the next 10 years. A report from Teal Group contends that it will be the most dynamic growth sector of the world aerospace industry this decade.

Boeing will be a big player, especially if it follows through on its drones that do not have to land to recharge.

From TechGeek:

The patent describes inflatable drones that drop tethers to the ground to recharge internal batteries, without the need to land.

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TheCROW’SNESTDrones may need to stay airborne for extended time periods for long-term experiments, monitoring or travel, and being light can help extend onboard fuel reserves. But landing gear can be heavy. With this patent, all that landing gear can be replaced with a tether that hooks onto a charging station.

The patent would reduce the space needed to keep drones aloft, since all you need is a pole to recharge it from the ground. And it doesn’t even need that: The patent also details how a drone can be tethered to aircraft, boats, trucks or high-altitude balloons connected to power stations.

I’d recommend watching this video of how this could work in practical applications like, say pizza delivery, right here.

Drones are but a small part of Boeing’s business. It is also very focused on its bread and butter: passenger aircraft.

The Paris Air Show started the day I wrote this (June 15). This is a big deal for Boeing because it’s when deals are announced and aircraft are sold. It is projected that Boeing and Airbus will ink deals for at least 220 orders for their competing narrow-body jets for an estimated $23 billion. Garuda Indonesia has already announced a tentative order for 60 Boeing jets.

https://www.youtube.com/watch?v=NGi7KjvR66M

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TheCROW’SNESTIt should be the catalyst for an upside breakout.

The show runs until the 21st, so many more deals will be made. I’ll bring you highlights on that next month.

Boeing releases its next earnings report on July 21 and I’ll bring you a full update after I digest the results.

Boeing is a tried-and-true dividend aristocrat. I would call it a no-brainer for the long haul.

Key figures:

Market Cap: 98.17 billion

P/E Ratio: 17.77

Dividend Yield: 2.5%

Earnings Per Share: 7.99

52-Week Range: 116.32 – 158.83

We’re still buying Boeing under $145.

HCP (NYSE: HCP)

HCP, Inc. is an independent hybrid real estate investment trust. The fund invests in real estate markets of the United States. It primarily invests in properties serving the health care industry including sectors of health care such as senior housing, life science, medical office, hospital, and skilled nursing.

While I’ve liked HCP for a while, it has a rather serious issue going down right now: the Department of Justice has an active lawsuit against it for its questionable billing practices.

The suit names HCR ManorCare Inc, which operates and manages health care facilities owned by HCP, and alleges “that they submitted claims to Medicare for therapy services that were not covered by the skilled nursing facility benefit, were not medically reasonable and necessary, were not skilled in nature, and therefore not entitled to Medicare reimbursement.” The case was brought about by a whistleblower.

In other words it was bilking the government, and the government is notoriously touchy about that.

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TheCROW’SNESTThis is a big issue for HCP because ManorCare runs and operates 90% of its nursing homes — which is 30% of HCP’s total business.

Now, I’m not one to apologize for any company’s shady billing practices — especially when it drives up health care costs for the rest of us. But, being that this has been a very reputable company over its 30-year history, I’m going to see how it plays out before making any serious judgments about the stock. The one thing I am worried about is its status as a dividend aristocrat: it has raised its dividend each and every year for almost its entire history. It now rests at a hefty 5.9%.

We’re still up about 10% — not including the reinvested dividends (which, if you’re in the position you should have this in a DRIP for a 1% discount on every share). The current problems may provide a nice entry point for you if you’re considering a long-term position.

I’m also going to provide you with another health care REIT that may be a better option if you have not already purchased HCP stock. You can check out my profile on Ventas (NYSE: VTR) in the plundering section below.

Key figures:


P/E Ratio: 41.07


Earnings Per Share: 0.92

52-Week Range: 36.87 – 49.61

We’re holding HCP in The Crow’s Nest portfolio until more information comes to light. If you’d like to get in for a long-term position with that DRIP discount, I’d recommend buying under $35 and dollar-cost averaging as time goes on.

NewTek (NASDAQ: NEWT)

NewTek Business Services Corp. is a business development company that provides financial and business services to the small-and medium-sized business markets in the United States and internationally.

NewTek offers a range of small business-oriented services, including:

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TheCROW’SNEST• Loans guaranteed by the Small Business Association

• Electronic payment processing services

• Payroll management

• Insurance for small businesses and individuals

• Organization of certified capital companies and providing of investing funds

• Financial and management reporting and planning systems

• Outsourced tax, bookkeeping, and controller services

• Information technology, such as cloud storage

We are in this position not only because it is a solid growth stock, but because it will offer a one-time special dividend this year.

I know we’ve all been waiting patiently for the special dividend announcement from NewTek. We still haven’t gotten it.

The good news is you still have a chance to get into NewTek before the special dividend is announced. The full report is available here if you’d like to read more in depth about the company.

However, it did announce its second quarter dividend of $0.47 per share, which is a steady increase from Q1’s $0.39 a share.

We know NewTek plans on paying $1.82 in annual dividends this year. The first one was $0.39 and was paid in the first quarter. The next one will be $0.47 and will be announced this month and paid in July. So we still have $0.96 to go in Q3 and Q4.

Plus we can also look forward to a special one-time dividend to purge retained earnings. In total, we’ll get over $4.00 paid back to us this year in cash and shares.

NewTek also just made a presentation at the LD Microconference, which my colleague Nick Hodge attended and reported back on. If you’re a shareholder, I’d urge you to watch the entire presentation here.

We’re buying NewTek under $19 leading up to the special dividend announcement. I’ll keep you updated every step of the way.

https://www.outsiderclub.com/premreport/wwp/1385http://media.angelnexus.com/preview/?file=NewtekConferenceVid&w=640&h=360

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TheCROW’SNESTDividend Calendar and Rankings

For the sake of simplicity, I assign a rating number to each position, in terms of how attractive it is and how much you should buy at these prices for a long-term portfolio:

1 — No brainer

2 — Attractive

3 — Average

4 — Expensive

5 — Tread carefully

Aqua America (NYSE: WTR)

Ex-dividend date: May 13, 2015

Pay date: June 9th, 2015

Yield: 2.5%, 5% DRIP discount

Ranking: 2

Abbott Labs (NYSE: ABT)

Ex-dividend date: July 13, 2015

Pay date: August 15th, 2015

Yield: 2.0%

Ranking: 4

AbbVie (NYSE: ABBV)

Ex-dividend date: April 13, 2015


Yield: 3.1%

Ranking: 2

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TheCROW’SNESTBoeing Company (NYSE: BA)

Ex-dividend date: May 6th, 2015


Yield: 2.5%

Ranking: 1

Collector’s Universe (NASDAQ: CLCT)


Pay date: May 29th, 2015

Yield: 6%, no DRIP available

Ranking: 2

General Electric Company (NYSE: GE)

Ex-dividend date: June 18th, 2015

Pay date: July 27th, 2015

Yield: 3.4%

Ranking: 3

HCP (NYSE: HCP)


Pay date: April 27th, 2015

Yield: 5.7%, 1% DRIP discount

Ranking: 4

Johnson & Johnson (NYSE: JNJ)

Ex-dividend date: May 21st, 2015


Yield: 3%

Ranking: 2

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TheCROW’SNESTLoews Corp. (NYSE: L)



Yield: 0.6%

Ranking: 3

Medtronic, Inc. (NYSE: MDT)

Ex-dividend date: March 26th, 2015

Pay date: April 17th, 2015

Yield: 1.6%

Ranking: 2

Newtek Business Services (NASDAQ: NEWT)



Yield: 8.4%

Ranking: 3

Nucor Corporation (NYSE: NUE)


Pay date: August 11th, 2015

Yield: 3.00%

Ranking: 2

Piedmont Natural Gas (NYSE: PNY)

Ex-dividend date: June 22nd, 2015


Yield: 3.00%

Ranking: 2

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Tying Down the MastI first told you about the Bond-Stock Earning Yield Differential Model in the March issue. I wanted to expand upon it now that the formula is showing stocks to be overvalued and too risky for their returns.

By signaling every market crash and upswing, the Bond-Stock Earning Yield Differential Model enables you to avoid losses and greatly increase your funds over time.

That’s why it’s allowed some of Wall Street’s biggest names to beat the S&P by a factor of 10,000% over the last 40 years — while significantly reducing their risk.

Fortune hails it as “the holy grail of corporate finance.”

The Financial Times says it’s “a true moneymaking formula.”

And one JP Morgan document even refers to it as “the most important number in finance.”

The Bond-Stock Earning Yield Differential Model is also known as the Equity Risk Premium. We’ll just refer to it as the ERP, so I don’t have to keep typing either of the long names.

So what is it?

At the most basic level, the ERP is a way of figuring out if stocks or bonds offer a potentially better return over the other.

To put it another way and illustrate the purpose of it, the ERP is the extra return that investors demand for taking the additional risk of choosing stocks over far safer Treasury bonds.

The higher the ERP, the bigger the potential future returns. When the ERP is below average, gains on equities tend to be weak or non-existent in the years to come, and larger positions in bonds are prudent.

To determine the ERP, you simply divide 1 by the S&P 500’s price-to-earnings ratio, turn it

http://media.angelnexus.com/pdf/wwp/tcn-march2015-crk.pdf

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TheCROW’SNESTinto a percentage, and subtract it from the 10-year U.S. Treasury yield.

To make it even more accurate, it helps to use the cyclically adjusted price to earnings ratio (CAPE) developed by Robert Shiller and adjust the 10-year U.S. Treasury yield for inflation.

At the time of writing this report, CAPE is at 26.89, the yield on 10-year Treasuries is at 2.36%, and the latest inflation is at -0.2%. One divided by 26.89 comes out to 0.037, or 3.7%. 2.36% minus -0.2% is 2.56%. 3.7% minus 2.45% gives us an ERP of 1.14%.

This means the expected return from investing in riskier equities instead of bonds is only 1.14% higher. That is a very weak return for a lot of extra risk, and it gets even worse...

The Fed’s Influence

There is a problem with the standard ERP model we just went over.

Interest rates right now are artificially low and have been for many years due to the Federal Reserve zeroing out benchmark rates.

The low interest rates have kept bond yields artificially low, and high demand is suppressing prices further. Inevitably, these rates have to go up, and the consensus is that it will start, or be announced, during the Board of Governors of the Federal Reserve System meeting in June.

To get a better idea of what is going on, we’re going to modify the ERP equation slightly by using a much bigger basket of bonds that actually reflect the market.

By substituting the AAA-rated Corporate Bond Yield in place of the 10-year U.S. Treasury yield, we’ll get a substantially more useful metric.

All of the info we need to do this is easy to find. CAPE values can be found here, corporate bond yields here, and the inflation rate here.

Currently, the AAA-rated bonds of all bond issuers rated by Moody’s have an average yield of 4.17%. Tag in the inflation rate and we get 4.37%.

The expected return on equity remains the same at 3.7%. When we subtract the bond yield from the expected return on equity, we get -0.67%.

This is a signal that bonds will outperform the market right now and heralds a turning point

http://www.multpl.com/shiller-pe/http://fxtrade.oanda.com/analysis/economic-indicators/united-states/rates/aaa-corporate-bond-yieldhttp://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp

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TheCROW’SNESTfor the markets.

When the Fed increases benchmark rates, the yield on corporate bonds will increase as well.

This will drive our modified ERP even further into negative territory. Bonds will become substantially more attractive. Funds will flow out of the market and into safer bonds, leading to a large correction in the markets.

This isn’t the end of the world, but it means it is time to lock in some gains and get ahead of the herd. Selling positions that are strongly correlated to the broader market ahead of the correction will preserve your funds.

As the P/E ratio falls, the formula for our modified ERP will shift and signal stronger returns from equities over bonds.

Then we can jump back in and buy shares at much lower prices. It triggers a “Wall Street fire sale”, and we should be able to scoop up undervalued long-term stocks on the cheap. It sure beats buying stocks at current highs.

It has worked like a charm time after time in the past, and we’re going to use it for ourselves. We are going to use this formula to identify and buy stocks after the next market downturn... which may be coming sooner than later.

Here are a couple companies that fit the bill:

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Plundering

Nucor (NYSE: NUE)

Nucor is the single-largest steel producer in the United States. It is also the largest “mini-mill” steelmaker, meaning it uses electric arc furnaces to melt scrap. The sheer amount of steel the company recycles makes it the largest recycler of any material in all of North America.

The company operates in three segments: Steel Mills, Steel Products, and Raw Materials.

Its product offerings include sheet steel, bar steel, steel fasteners, wire and wire mesh, and ferrous and non-ferrous metals.

I’ve had Nucor in The Crow’s Nest portfolio since November.

This under-the-radar dividend aristocrat has shown incredible growth each time the ERP signal has called a market bottom.

Here’s what happened after the 1987 crash:

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TheCROW’SNESTThat’s an 845% gain. But this isn’t an isolated incident.

In 2001, after the “Tech Wreck” had wiped out 50% of the S&P, the steel giant soared for a whopping 991% gain...

In other words, this is a great company to buy after the market bottoms.

A fun fact about the nature of Nucor’s business: The company has not laid off an employee because of work shortage in 30 years! It also provides employees with a “pay for performance” employee incentive program, where employees get up to 25% of their salary based on the return on assets of their plant. The company incentivizes workers to keep them humming along and isn’t afraid to reward their hard work.

In a cyclical market like steel, these are impressive facts about the company culture. That cyclical market can lead to swings in stock price, so this one is definitely a buy-and-hold type stock. As you can see from the chart below, the company has experienced both the up and down cycles.

But after the seesawing, it’s up 80.78% over the past 10 years — not counting the dividend.

That’s what I call a solid retirement stock.

Right now steel is near the bottom of the cycle, as cheap imports from China, Japan, and Turkey have beat down prices. That’s one reason we can start accumulating shares now. As I noted above, Nucor has a history of keeping its costs low and investing accordingly during

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TheCROW’SNESTthe low ends of the cycle.

When steel picks back up the company always comes out stronger than ever.

Another fact to note is that Nucor is the most diversified steel producer in the U.S., which helps steady the company during these steel downturns. Since 2009, Nucor has made investments of nearly $6 billion on projects that are diversifying its product offerings.

In any case, this position helps us diversify our Dividend Aristocrats Portfolio with a solid materials play.

And as far as dividend aristocrats go, it’s a strong one: Nucor has raised its dividend each and every year since 1973. The current dividend is the 168th consecutive quarterly cash dividend, a record I expect to continue.

Here are some of the major financial achievements:

• Net sales have increased by 11% from $19,052,046 in 2013 to $21,105,141 in 2014.

• Earnings are up 46% from 2013 to 2014. Its earnings per share (or EPS) has increased 65% over last year.

• Its margins have improved 11%.

• The company’s earnings-per-share growth is 77% for the next two years.

Those estimates look good, and the company currently sports a solid 3% dividend. Here’s the rundown of key figures:

https://www.outsiderclub.com/premreport/wwp/1413

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TheCROW’SNESTKey figures:


P/E Ratio: 23.32



52-Week Range: $42.93 - $58.76

Considering that we’re on the low end of the steel cycle, I’m recommending this as a buy even before the market correction, using our dollar-cost averaging technique.

We’re buying below $51 for now.

U.S. Bancorp (NYSE: USB)

U.S. Bancorp is a diversified financial services holding company with roots dating back to the United States National Bank of Portland in 1891.

In its current form, U.S. Bancorp really got its start during the widespread bank consolidation of the 1990s.

The company acquired several major regional banks in the West and Midwest, many of which had previously merged with smaller banks.

Since 1998, M&A activity brought more than 50 banks into U.S. Bancorp.

I know what you’re probably thinking about investing in a bank following a sharp downturn in the market.

And here was the biggest opportunity from this unusual group of plays...

A massive U.S. regional bank, with $263 billion in deposits. After the 1987 crash, it went on a massive run... skyrocketing for 1,331% gains.

It also made it through the 2008 crash without a bailout and was one of the ONLY banks

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TheCROW’SNESTthat never posted losses during the crisis. Even as most banks lost their shirts, it remained profitable.

That’s why, within two months of the market bottom, it soared for 132% gains.

Consider this, though: Through the Emergency Economic Stabilization Act, the bank received $6.6 billion by issuing preferred stock and related warrants. At the end of 2008, the bank held assets worth about $266 billion.

U.S. Bancorp then went on an acquisition spree while financial businesses were worth pennies on the dollar.

Two acquisitions were completed before U.S. Bancorp redeemed the $6.6 billion of preferred stock and warrants on June 17, 2009. It was one of the first banks to repay TARP funds.

A couple months later, the acquisition spree continued:

• On October 5, 2009, U.S. Bancorp announced its acquisition of the mutual fund administration and accounting servicing division of Fiduciary Management, Inc.

• On October 7, 2009, U.S. Bancorp agreed to buy the bond trustee business of First Citizens Bank, a subsidiary of First Citizens BancShares Inc.

• On October 14, 2009, U.S. Bancorp agreed to acquire the Nevada banking operations of BB&T Corp.

• On October 20, 2009, U.S. Bancorp completed a transaction to purchase

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TheCROW’SNESTFBOP Corporation’s nine subsidiary banks from the FDIC.

In short, this bank is extremely well managed, only dipped into relief funds as long as the credit liquidity crisis was raging, and made strategic moves to expand business while it could buy assets at steep discounts.

This has led the company to become the fifth-largest bank in the nation with just over $400 billion in assets.

You should also see this chart showing how a $10,000 investment would grow amongst major banks and the sector. USB is at the top of the pack and insulated itself from a market drop in 2010:

This is a bank that has proven it knows how to handle itself in tough times and how to rapidly grow assets and return on investments in the aftermath.

Plus, it was named one of the world’s most ethical companies in Q1 2015 by the Ethisphere Institute and named Fortune’s most admired super-regional bank for the fifth consecutive year.

Yet another couple things other major banks can’t pull off.

The Details

U.S. Bancorp, like many banks, has a number of divisions specializing in different services and products:

• Payment Services — Includes payment systems for corporate/health care/

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TheCROW’SNESTfinancial institutions, plus retail payment solutions and credit/debit card/gift card issuance and processing.

• Wholesale Banking & Commercial Real Estate — Serves large companies, nonprofits, and municipalities with deposit, payment, treasury management, financing, leasing, investment, and international trade services.

• Wealth Management & Security Services — Includes advisory and direct management for individuals, institutions, businesses, and municipalities to grow and protect wealth.

• Consumer & Small Business Banking — Focuses on consumers and small businesses with bank branches, lending, mortgage services, ATMs, and other similar services.

No other bank has been as efficient and effective, with U.S. Bancorp beating Bank of America, Wells Fargo, Citigroup, and JP Morgan on return on assets, return on equity, net margin, and three-year average revenue growth.

The only major bank stock that has outperformed U.S. Bancorp since the beginning of 2010 is Wells Fargo, which saw share prices rise 125.6% compared to U.S. Bancorp’s 110.8%.

• U.S. Bancorp has a market capitalization of ~$77 billion, a trailing 12-month (ttm) price-to-earnings ratio of 13.75, and a forward 12-month PE ratio of 12.17.

• Share price-to-sales (ttm) comes in at 4.16 and price-to-book is 1.93.

• Return on assets (ttm) is 1.52%, return on equity (ttm) is 13.55%, and both are improving over time.

• Q1 2015 saw year-over-year (yoy) quarterly revenue growth at 5.3% and quarterly earnings growth (yoy) at 2.4%.

• Total cash and equivalents as of Q1 2015 equal $14.07 billion, with $63.33 billion in debt.

• Diluted earnings per share have steadily grown from $1.73 in 2010 to $3.08 in 2014. At the same time, net interest margin has steadily shrunk from 3.88% to 3.23%, representing a dropping cost of debt.

• Quarterly dividends are issued, with the next coming up in June. The last dividend paid out $0.25 for an annualized yield of 2.27%.

• Dividends declared per common share have steadily grown over the last five years from $0.2 in 2010 to $0.965 in 2014. The dividend payout ratio is a solid 32%.

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P/E Ratio: 14.07



52-Week Range: $38.10 - $46.10

We’re adding U.S. Bancorp (NYSE: USB) to our portfolio under $46.00 per share for now and will dollar-cost average once the correction takes place.

Corning Inc. (NYSE: GLW)

This is a name everyone should recognize. I guarantee you’ve used countless kinds of its products, though you’d never know about many of them.

Corning started as Corning Glass Works in 1851. To this day, it is primarily a glass and ceramics manufacturer.

So how did it do after the ERP meter was tripped? Really, really well...

After the 1987 crash, it went on to reward investors almost five times over:

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TheCROW’SNESTThe company operates in five segments:

• Display Technologies — Makes glass substrates for flat panel liquid crystal displays.

• Optical Communications — Makes carrier network and enterprise network components for the telecommunications industry.

• Environmental Technologies — Makes ceramics substrates and filters for automotive and diesel engines.

• Specialty Materials — Creates products that provide material formulations for glass, glass ceramics, and fluoride crystals.

• Life Sciences — Manufactures glass and plastic labware, equipment, media, and reagents.

The company will do well in comparison to the broader market after any downturn because its products are integral to many applications.

Any sales and revenue drop from an economic downturn will quickly rebound as critical components are ordered and used in a massive list of consumer and business products.

Plus, the company has done extremely well with device displays. Although smartphones are something of a luxury, people will not transition back to old cell phones.

They will replace broken and antiquated devices integral to work and personal communication as soon as possible. Even if sales shift towards older generation phones, Corning will get its cut of the sales.

Corning recently announced a partnership with OLEDWorks to “develop unique, flexible, and conformable OLED lighting solutions using Corning Willow Glass.”

These organic light-emitting diode lights are super thin, flat, and semi-transparent panels that can be bent to conform to just about any shape. Corning’s Willow Glass will be used as a substrate and barrier to protect the OLEDs.

These light sources still have a lot of catching up to do in terms of efficiency and light output, but there is a lot of interest in this technology.

With Corning’s patented specialty glasses, it could come to dominate this market as it has for smartphones and devices and drive future revenue growth.

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TheCROW’SNESTThe Details

Corning Inc. has a $26.5 billion market capitalization, a trailing 12-month (ttm) price-to-earnings ratio of 11.98, and a forward 12-month PE ratio of 12.89.

Total cash and equivalents as of Q1 2015 equal $14.07 billion, with $63.33 billion in debt.

Share price-to-sales (ttm) comes in at 2.8 and price-to-book is 1.41.

Return on assets (ttm) is 3.92%, return on equity (ttm) is 11.53%, and both are improving over time.

Q1 2015 saw a slight miss on revenue — $2.27 billion — as the company dealt with currency issues like the weak euro.

The company beat earnings estimates by a cent, bringing in $0.35 per share, mostly due to a $500 million stock buyback program and a gross margin that increased slightly to 41%.

The quarterly results also show that glass sales have been strong and should continue to provide a tailwind to the company.

The company’s patented Gorilla Glass saw a year-over-year (yoy) quarterly net sales increase of 4.5%. This product is dominating the phone glass market. Corning expects double-digit volume increase and a continuation of improving margins.

The Optical Communications division in particular did quite well in the quarter, with an 18% (yoy) sales increase.

Recently, Corning acquired iBwave Solutions, Inc., which will be a wholly owned subsidiary operating under its Optical Communications business segment.

IBwave is an industry leader in design software for in-building wireless systems, which should mesh well with the carrier and enterprise network components it already manufactures.

Quarterly dividends are issued, with a four-year history of dividend growth.

The next dividend is coming up in May. The ex-dividend date is May 27th, the record date is May 29th, and the payment date is June 30th. It will pay $0.12 per share, representing a 2.29% annualized yield and a 31.6% payout ratio. The last dividend paid out $0.25 for an annualized yield of 2.27%.

http://www.corninggorillaglass.com/

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P/E Ratio: 11.43



52-Week Range: $17.03 - $25.16

We’re adding Corning Inc. (NYSE: GLW) to our portfolio under $24.00 per share and will dollar-cost average when the correction takes place.

Cummins Inc. (NYSE: CMI)

Cummins Inc. is a large multinational company that designs, manufactures, and distributes engines, filtration, and power generation products. The company also services engines, fuel systems, controls, air handling, filtration, emission control, and electrical power generation systems.

Cummins sells in about 190 countries through 600 distributors, many company-owned.

A company like Cummins tends to take a large hit during a recession, but it is able to quickly rebound.

Like after the 2001 crash, in which Cummins skyrocketed 1222% in less than six years:

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TheCROW’SNEST

The company operates through four divisions:

• Cummins Engine — Provides aftermarket support, mid-range, heavy-duty, and high-horsepower engines for a range of transportation and industrial uses. Worked with Westport Innovations to introduce natural gas-fueled engines to truck manufacturers.

• Cummins Power Generation — Manufactures alternators, automatic transfer switches, commercial power systems, consumer systems, some engines, and paralleling systems.

• Cummins Component — Creates emission solutions, filtration, fuel systems, and turbo technologies. This includes catalytic exhaust systems. The division focuses on larger engines, above three liters.

• Cummins Distribution — This unit deals with engine and power generation distribution, along with service and parts.

For the most part, you won’t see any Cummins engines in your day-to-day life unless you drive a truck or operate machinery for a living. Just about the only application for its engines that cross over into consumer vehicles are the ones that are dropped into pickup trucks.

For example, Dodge Rams started using a 5.9-liter Cummins engine in 1989 and a 6.7liter Cummins engine in 2007.

Modern business and industry rely on 24-hour, long-distance distribution and transportation networks.

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TheCROW’SNESTWhile companies can put off repairs and replacement engines or trucks for a little while, they will quickly cannibalize their ability to do business if trucks and generators start breaking down.

Cummins’ management also did a great job of positioning the company to emerge from the recession stronger than it was before.

The company quickly responded to make sure that revenue, earnings, and cash flow were healthy, all while planning out long-term growth strategies. The combination of absolute necessity to maintain commercial trucking fleets and talented, experienced management will make Cummins an attractive play following any large correction or economic downturn.

The Details

Cummins Inc. has a market capitalization of ~$25 billion, a trailing 12-month (ttm) price-to-earnings ratio of 15.66, and a forward 12-month PE ratio of 12.75.

Share price-to-sales (ttm) comes in at 1.3 and price-to-book is 3.23.

Return on assets (ttm) is 8.41%, return on equity (ttm) is 21.75%.

Q1 2015 saw year-over-year (yoy) quarterly revenue growth at 7% and quarterly earnings (before interest and taxes) growth (yoy) at 12%. Diluted earnings per share (ttm) came in at $9.02.

Cummins had a strong first quarter of 2015, with growth across all divisions:

Segments Sales Up/Down

Engine Segment $2.6 billion up 1%

Distribution Segment $1.5 billion up 55%

Components Segment $1.3 billion up 6%

Power Generation Segment $680 million up 6%

Going forward, management is actively working on cutting costs with the goal of earnings before interest and taxes growing faster than sales. Success in this focus will make the company even stronger during and after an economic downturn.

Total cash and equivalents as of Q1 2015 equal $2.39 billion, with $1.7 billion in debt.

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TheCROW’SNESTQuarterly dividends are issued, with the next coming up in mid-to-late May, then in August. The last dividend paid out $0.78 for an annualized yield of 2.21%.

Dividends declared per common share have steadily grown after a cut in 2008. Since 2010, dividend payments have grown from $0.175 per share to $0.78 per share. The dividend payout ratio now stands at a solid 31% of earnings.

Key figures:


P/E Ratio: 14.58



52-Week Range: $124.30 - $161.03

We’re adding Cummins Inc. (NYSE: CMI) to our portfolio under $140.00 per share and will dollar-cost average when the correction hits.

Ventas Inc. (NYSE: VTR)

This next position could really benefit from a market correction, especially when partnered with a Fed rate hike.

Rising interest rates are coming sooner than later, and investors need to start considering the kind of opportunities this will create. After seven years of near-zero interest rates, the market has become complacent, especially when it comes to how higher borrowing costs will affect company balance sheets.

Dividend stocks in particular will need special attention. Dividend yields will have to top bond yields, especially from governments, to maintain investor interest. At the same time, these dividend-paying companies will face a headwind from higher debt costs. Cash flow and revenue need to be strong to overcome it.

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TheCROW’SNESTMany investors won’t dig into company details to evaluate and process all the information to make this determination, though.

They’ll simply flee companies that are exposed to this trend, or even entire sectors, creating volatility and uncertainty.

We’re starting to see that right now in real estate investment trusts (REITs), and it is creating an opportunity to buy a strong company with great growth potential at bargain-bin prices.

Collecting Rent

Ventas, Inc. (NYSE: VTR) is one of the premier health care real estate investment trusts in the nation, and ranked #1 in its sector for the 2014 Global Real Estate Sustainability Benchmark, an industry-driven organization that assesses the sustainability of real estate portfolios.

Ventas is the second-largest health care REIT by market capitalization and sports an impressive 4.7% dividend yield and a five-year dividend growth rate of 7.7%.

Now, Ventas hasn’t been through as many crashes as the other companies we’ve covered here — it was only formed in 1983. But it emerged from the 2008 crash stronger than ever:

I’ll take 200% any day of the week, but that is nothing compared to what happened after the 2001 crash:

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TheCROW’SNEST

That’s a 934.85% windfall in just a few years.

And the fundamentals and trends have only strengthened for companies like this. With a large emphasis on housing and services for seniors, the company has strong long-term growth potential.

• The 65-and-older portion of the population is growing at about five times the total population growth, and seniors account for a large portion of wealth and assets.

• Americans over 65 will grow by 18 million people by 2025 and visit physicians 2.5 times more than average.

• Between 2012 and 2040, the portion of the population over 85 will triple.

As a result, the company will see steady demand for more health care and housing needs specifically tailored to the elderly and will see increasing revenue from renting property to the companies that provide these services.

The company owns facilities in the U.S.A., Canada, and the U.K., which house hospitals, skilled nursing, senior housing, medical offices, and other health care-related businesses. In total, it owns 1,636 properties right now, including 803 senior housing communities, 390 skilled nursing facilities, 375 medical office buildings, and 53 hospitals.

Ventas does not actually operate any of these facilities, though. It acts as a landlord, collecting rental income from the health care services and providers.

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TheCROW’SNESTIn most cases, the operators are responsible for maintenance, insurance, and property taxes.

This real estate portfolio is going to be changing soon, though.

The Spin-Off

Ventas recently announced the acquisition of Ardent Medical Services, Inc. for $1.75 billion in cash.

This is just part of an ongoing string of acquisitions for the company. A total of $23 billion has gone into M&A activity since 2011 alone. As part of that deal, it will spin off its skilled nursing facilities into a new company, Care Capital Properties. 355 of these properties will be transferred to the new company, while Ventas will own 10 hospitals.

Ardent, which is privately owned, will continue to operate the hospitals and will simply sell the property to Ventas and start paying rent while remaining responsible for insurance, maintenance, and taxes. The new company will be geographically diverse, with operations in 37 states. It is likely to generate $240 million to $245 million of funds from operations in its first full year of business.

As the deal and spin-off finalizes, current Ventas shareholders will receive one share of the new company for every four Ventas shares they own.

Management of the new company will come from Ventas, and the assets transferred will retain all of the current leasing arrangements in place now. The weighted average lease term has another 10 years remaining on it, and only about 5% of annual net operating income is

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TheCROW’SNESTon a lease that rolls over from now through 2019.

Initially, the new company may see some corrections and volatility, but the long-term prospects for it are strong due to demographic shifts and rising rental income.

According to management, the two companies should grow funds from operations by 9% per year going forward versus the current 8.2% growth rate.

Strong Growth

Since Ventas is a REIT, the normal basic metrics used to evaluate a stock are not ideal. You are essentially buying a part of a portfolio of physical assets with a long expected life span and income through rent and appreciation.

As a result, a lot of traditional metrics for evaluating stocks, like earnings, simply don’t work well in this case.

Instead, we want to primarily consider cash flow, debt management, and funds from operations, which takes depreciation and amortization into consideration. While Ventas will get caught up in the volatility of the REIT sector while interest rate hikes weigh on investors, in the long run, it is a strong company.

Management has consistently proven its ability to return income to investors while growing the business and handling debt. Over the last decade, cash flow from operations has seen a compound annual growth rate (CAGR) of 24% while funds from operations have grown 10% CAGR.

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TheCROW’SNESTOver the same decade, dividends have increased by 9% CAGR, putting Ventas in the top five of REITs for this metric. At the same time, the 67% payout ratio is the lower than Ventas’ peers even with the strong dividend yield.

Debt to total capitalization is a reasonable 32%, with a weighted average cost of debt of 3.6%. Total debt is about $11 billion.

Dividends are issued on a quarterly basis, and Ventas has consistently raised dividend payments every year for the last five years, during which it sported an impressive dividend growth rate of 7.7%. The latest dividend was $0.79 per share at the end of June. This puts the annual yield around 5%, though this should go up before the end of the year. Ventas also said it would raise the collective dividend by 10% at the time of the spinoff.

With this strong dividend, long-term growth coming from demographic shifts, and strong cash flow and funds from operations growth, Ventas is going to perform well in the long term.

Taking advantage of volatility as interest rate hikes are announced will give us a great buying opportunity. Combined with the quarterly income, the resulting share appreciation should pay off quite handsomely.

Key Figures:


P/E Ratio: 41.13



52-Week Range: $60.63 - $81.93

For these reasons, we’re adding shares of Ventas, Inc. (NYSE: VTR) to The Crow’s Nest portfolio at or below $68.00 and plan to dollar-cost average as the Fed raises interest rates.

That’s it for this month’s voyage. Stay tuned for next month, when we’ll be providing three new companies that will pay you to invest in their dividend reinvestment programs.

I’ll also give you updates on two of the most hated sectors: uranium and silver. I think it may be high time for both of these depressed investments to start clawing their way back, and I’ll give you a couple of ways to play the rebounds.

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TheCROW’SNESTA quick note: As many of you know, I have been going around the country giving speeches about our dividend strategy. It’s been a great experience to be able to meet many of The Crow’s Nest crew.

If you happen to be near San Francisco next month, I’ll be speaking at the Money Show there on Friday, July 17th at 8 a.m. You can find all the details here. My talk is entitled, “Dividend Aristocrats: Or How I Learned to Stop Worrying and Let My Money Make Itself.”

I’d love to meet any readers that can make it out. I’ll even buy you a beer.

Also, please send in your questions, concerns and comments for the next “Message in a Bottle”. You can e-mail me at [email protected].

Godspeed,

Investment Director, The Crow’s Nest

The Crow’s Nest, Outsider Club LLC Copyright © 2015, 111 Market Place, Suite 720, Baltimore, MD 21202. All rights reserved. No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer or the solicitation of an offer to buy or sell the securities or financial instruments mentioned. While we believe the sources of information to be reliable, we in no way represent or guarantee the accuracy of the statements made herein. The Crow’s Nest or Outsider Club LLC does not provide

individual investment counseling, act as an investment advisor, or individually advocate the purchase or sale of any security or investment. Neither the publisher nor the editors are registered investment advisors. Subscribers should not view this publication as offering personalized legal or investment counseling. Investments recommended in this publication should be made only after

consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company in question. Unauthorized reproduction of this newsletter or its contents by Xerography, facsimile, or any other means is illegal and punishable

by law.

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