The Whole Is Greater Than Its Parts

Mar. 06, 2018 7:30 AM ETAxon Enterprise, Inc. (AXON), NPRUF, TIVOTGT, ENB, VNQ, TWX, MORL, AMLP, AMZA, IYR, CEFL, REM, AGG, BDCL, BND, PTY, KYN, AMJ, BOND, RQI, MORT, PCEF, RCS, YYY, TYG, BDCS, SCHH, RNP, RFI, BIZD, KBWY, DRN, NRO, FOF, KYE, JMF, BTZ, CEM, DBL, URE, CBA, NML, ICF, PCM, XLRE, SRV, MLPA, JRS, MLPI, RWR, FEN, SCHZ, NTG, FGB, GER, FEI, KMF, MLPQ, SRS, CEN, EMLP, MLPX, SPE, BREUF, CEFS, EMO, FPL, MIE, FREL, GMZ, DSE, DRA, TTP, DRV, BHK, SRF, CTR, SEVN, MLPN, SMM, SPAB, JMLP, JHI, INC-OLD, LRET, MLPS, AMU, REK, RIT, HIPS, FRI, ENFR, IUSB, AGGY, FBND, JMM, VBF, ICB, TAI-OLD, PAI, ATMP, LBDC, PSR, AMJL, MLPZ, IMLP, USRT, WREI, GCEC, GTO, SAGG, AGGP, GBF, VBND, IARAX, DWFI, ILPRX, RORE, MFLX, AGGE, AMUB, MLPB, MLPO, HQBD, O, CVA, FTAI, LQD, TPVG, FSIC-OLD, GPMT, CORR, EPR, ROIC, ENB:CA, BRE:CA45 Comments

SA Investing Groups

17.65K Followers

Summary

The Fortune Teller and Trapping Value introduce a new collaboration on The Wheel of FORTUNE.
They agree on many things, including the importance of being macro-oriented and using options strategies as a hedge against risk and to enhance returns.
They also share their current top ideas, including Axon Enterprise, TiVo and Northview Apartment REIT.

“Unity is strength... when there is teamwork and collaboration, wonderful things can be achieved.”

~ Mattie Stepanek

One of the many awesome things about Seeking Alpha is it brings together investors of all stripes. It provides a community where people the world over can connect and powwow about almost any type of approach, from income to commodities to value to quant. It’s a place where camaraderie, (friendly) rivalries, professional relationships, and even partnerships are ignited from the spark of a single chance meeting.

Recently, SA brought together two authors in just such a collaboration - The Fortune Teller, who founded and authors The Wheel of FORTUNE on Marketplace, and Trapping Value, who joined the site as a contributor in 2017. The two crossed paths, and as they reveal in this interview, soon discovered they spoke similar languages, not only in investing parlance, but also in terms of where they’d lived and some of their life experiences. It was a match made in cyberspace. Trapping Value started out as an observer and “silent” member of The WoF community, and starting this month, he’ll be a regular contributor on the service, bringing a fresh perspective and counterpoint to The Fortune Teller’s insights.

They joined the Roundtable to talk about the exciting details of their new partnership and its implications for WoF members, offer their perspectives on a variety of income plays and share their current best ideas.

(Editor’s Note: Responses, data and charts originally submitted on Monday, March 5, 2018.)

Seeking Alpha: What metrics do you use to evaluate the stocks you cover, and how have you come to these preferences?

The Fortune Teller (TFT): We (my team and I) are adopting a top-down, from macro to micro, approach. We touched upon this on many of our SA publications, including our recent post where we announced that Trapping Value ("TV") is joining The Wheel of FORTUNE. TV is also operating and analyzing in the same way.

Since we strongly believe that macro trumps micro, we assign much more importance to the overall views, trends and strategy than to specific holdings/picks. Putting it differently, we believe that it's more important to identify the right time/trend and pick stocks accordingly than to identify the best stocks during the wrong time/trend. The first name that comes to mind here is Realty Income (O) - a stock that is considered by many to be the crown jewel of eREITs-land. However, what good comes out of this quality if you pick it during the wrong time/trend?

We have been shorting this stock since mid-2016, although we recently sold a $50 Put option (for a premium of $5.4) on this name, as we believe that the downside from ~$44.6 (= strike minus premium) is limited.

That is just another example of a quality stock that won't help an investor much if bought during an unfavorable macro environment.

We set a strategy for each calendar year, and while we keep an open mind (and may change our views throughout the year, if and when needed), we try to stick to the strategy. Being patient on one hand and disciplined on the other hand are two very important virtues for any investor.

SA: You’re focused quite a bit on income stocks. How have the wonky market conditions over the past few weeks impacted your strategies with regard to your income investments, if at all?

TFT: Income is a big word. Within income you have so many sub-segments, and it's crucial to differentiate between those. I mean, there's a huge difference between buying a fixed-rate, long-duration equity to a short-duration, floating-rate debt. If you are adding to this a lower-rated credit rating (high yield versus investment grade), you end up having (potentially) two income instruments that may move in completely different direction while rates and yields rise.

We thought - and still do - that 2018 will be a transition year: from growth to income, from higher to lower risk, etc. On the other hand, we also thought that rates/yields will continue to move up. This is why, at The Wheel of FORTUNE, we focus on may features that suit this macro views, e.g., short duration, floating rates, more sales of growth and high(er)-risk instruments, more focus on higher alpha and lower beta, etc.

Over the past few months, when it comes to income, we mostly suggested to our subscribers floating rates instruments, very few RICs (Regulated Investment Companies) that have portfolios with vast majority of assets linked to variable rates, midstream MLPs (Master Limited Partnerships; InfraCap MLP ETF (AMZA), ALPS Alerian MLP ETF (AMLP)), where we believe that valuations are very attractive and other unique stories that usually combine both income and growth. For example: Covanta Holding Corporation (CVA) and Fortress Transportation and Infrastructure Investors LLC (FTAI).

We are still avoiding bonds ((BND), (LQD), (AGG)). While we did name about 10 bonds as official Wheel of FORTUNE suggestions, all of those were of short-duration nature. We sit on those (buy and hold), and are quite happy with the consistent income coming out of these positions. Having said that, corporate bonds (especially medium-long duration ones) was the asset class we cut the most during 2016 and early 2017, so we actually started the service with an historically very low exposure to bonds. Since spreads are still very tight here - we are waiting for better times (widening spreads) - and meanwhile, we mostly take advantage of fixed-to-floating preferred shares, where you can get much better deals than you can get in corporate bonds these days.

Trapping Value: There has been a brutal sell-off in yield-oriented stocks. It has reinforced my primary strategy of playing this area defensively through options. While many stocks have been hit hard, the covered-call/cash-secured puts I used fared significantly better.

That said, a few of the high yield stocks I own did fantastically well even in this environment, like Brookfield Real Estate Services (OTCPK:BREUF). I rotated money out of there into some beaten down blue-chips.

One of the things I liked the most about The Wheel of FORTUNE before joining in is that the service has executed/suggested many such trades, i.e., selling Puts as a safer and cheaper alternative to buying a stock straight away.

SA: Can you break down what current market conditions mean for some of the higher-yielding sectors you cover, i.e., REITs, BDCs, MLPs, etc.? Are there risks investors should be wary of? How are you and Wheel of Fortune members mitigating those risks?

TFT: Since early-mid-2017, we sold out of many instruments in segments that we have very much been associated with - mREITs ((REM), (MORT)) and BDCs ((BDCS), (BIZD)). Only recently, following the much anticipated market correction, we have bought into few names within each of these segments in which we have done very little shopping over the past 6 months.

Recent BDC purchases: TriplePoint Venture Growth (TPVG) and FS Investment Corporation (FSIC)

Recent mREIT purchases: Granite Point Mortgage Trust (GPMT). A name that we really like and that just posted great earnings combined with a 10% dividend hike is Arbor Realty Trust, Inc, (ABR). It’s not getting too much coverage on SA, but deserves to.

In spite of being viewed by many as "anti-eREITs" ((VNQ), (IYR)), we even started to buy more eREITs recently, mostly those that are not traditional and have a unique market niche/operations that, in our view, make them more immune to the rates/yields story compared to traditional, mainstream eREITs.

Two eREITs we hold are:

i) CorEnergy (CORR) - An energy-related eREIT that we bought in early 2016. This is one of our best-performing holdings over the relevant time frame.

ii) EPR Properties (EPR) - An entertainment-related eREIT that we wrote about last week and believe is trading at an attractive valuation right now.

This pair is also a very good example of the old saying, "Timing is everything."

Not all income instruments are born equal, and even within a certain segment, e.g., eREITs, not all instruments are the same! I must admit that even within our most hated segment - brick-and-mortar retail eREITs - we made a couple of purchases recently. At some point, even we find value in this severely beaten-up sector. This doesn't mean we have changed our macro views. However, we are not as negative as we were anymore.

It's very important to bear in mind that while we buy eREITs here and there, we also keep few short positions in play, e.g., O and Retail Opportunity Investments Corp. (ROIC) (both are shorts since mid-2016). This is not only reflecting our views regarding the specific stocks, but also functions as a hedging against long similar-in-nature positions.

Risk management lies at the very core of The Wheel of FORTUNE, and we are very proud of providing our subscribers with information regarding risk mitigation strategies on top of routine trading suggestions. All in all, it's safe to say that compared to two years ago, we are much heavier on MLPs and preferred shares, lighter on both BDCs and mREITs (though currently growing) and much lighter on both eREITs (though recently growing here too) and bonds.

TV: The three are very different in regards to how they are impacted by current market conditions. Yet, they seem to move so much in sync that one might conclude that they were the same sector.

REITs are impacted by higher interest rates, both in valuation of their underlying asset base as well as in their financing. The majority of the REITs, though, have predominantly fixed rate financing, and the debt markets are wide open. The stronger economy is also allowing a better pass through of higher rents, which will more than offset the higher interest rate costs.

BDCs are probably the best-positioned, as they should benefit from higher interest rate costs, since a lot of their loans are tied to LIBOR rates, while their own financing is mainly comprised of fixed rates. Additionally, the tax cuts have improved the underlying values of the businesses to which they provide financing, and this is not being reflected in the NAVs.

MLP investors have been one long-suffering bunch. The valuations are probably more attractive today than at any other time during the last decade, outside of the March 2009 bottom. Yet, investors continue to shun this asset class. Just like REITs, MLPs can pass higher interest rate costs to their customers, as higher rates are usually the symptom of higher inflation. But unlike REITs, MLPs can pass this on a lot quicker, as they have much quicker resets compared to REITs, and they have a very captive market for most of their assets. If you don’t like the rent increase your landlord is forcing upon you, you can look for another space. But in most cases, there is just one pipeline to carry your oil or natural gas to the market.

SA: Where else should income-oriented investors be looking for opportunities? Are there sectors you believe will perform better than others in the coming year, and are there places where investors can seek some margin of safety as we wait to see how the current stock market volatility plays out?

TFT: Aside from what we've already mentioned (MLPs, fixed-to-floating preferred shares, selected BDCs/mREITs/eREITs/bonds), we like:

1. Financials: This is an ongoing story, and we keep being long and strong on many major banks, both in the US ((JPM) ,(C), (BAC), (MS), (GS)) and outside, mainly in Canada ((TD), (BNS), (RY), (BMO), (CM)). The overall state of the economy, the rising rates/yields and the supporting regulatory environment maintain our bullish stance here for (at least) 2018.

2. Utilities: One of the most solid sectors has been beaten down alongside all rates/yields-sensitive instruments. We find many names to trade at compelling valuations here, ranging from familiar American names such as Southern Company (SO) and Brookfield Infrastructure Partners L.P. (BIP) to less familiar names like the Canadian Transalta Renewables Inc. (OTCPK:TRSWF).

3. Consumer staples/discretionary: The good old stuff that we all consume never dies. For example: Amazon.com (AMZN), Alibaba (BABA), Starbucks (SBUX) and even iRobot Corp. (IRBT) that are all part of our growth team for 2018. This is an example how we still play growth, but in what we believe to be a better, more secure way.

4. Telecommunication services. It's hard to resist the income and stability that names like AT&T (T), Verizon (VZ) or BCE Inc. (BCE) offer. One of our favorite names within this sector remains Time Warner (TWX), a stock we had a Cheddar TV interview about over three months ago. We advised subscribers to buy the stock at $87.50 as well as to sell a TWX 01/18/2019 $105 Call and a TWX 01/18/2019 $87.50 Put for a combined premium of ~$10.7. Anyone who followed our lead here should be very pleased.

5. Biotechs: As part of our "lower Beta-higher Alpha" theme, we increased our allocation to biotechs from very low single digits up to 10%. We had great success with a handful of biotechs (where we hit few multi-baggers), and this year we suggested a basket of biotechs for our subscribers that we believe to be a nice addition to portfolios in 2018.

6. Options: Both TV and I are making quite extensive use of options, be it for hedging (protective/combination of both Calls and/or Puts), enhancing income (selling covered Calls) or getting a better entry price (through selling a naked Put) for a stock that we wish to own anyway. It's a shame that many investors fear options, because the truth is that options are a great way to mitigate risk and/or enhance return for any type of investor/portfolio.

TV: Certain closed-end funds are moving into a deep discount mode. Here you get the benefit of a deeply undervalued primary asset and an additional abnormally wide discount on top of that. When things mean-revert, you get quite a spectacular return from appreciating asset values and falling discounts.

By the way, when the Fortune Teller approached me, I was sure that his work entirely surrounded RICs (Regulated Investment Companies). However, one of the things that I was surprised (and happy) to see is that TFT is also touching upon many CEFs within The Wheel of FORTUNE. As a matter of fact, there was an entire series of articles solely dedicated to CEFs.

To answer your second question, for the coming year, pretty much all value stocks look like good bets over their growth counterparts.

SA: TFT, you’ve been pounding the table a bit that Target (TGT) is a Hold right now, and likely for the next year. You did a great job summing up your logic in your recent Cheddar interview - namely that retail is lagging, and that speculation that Amazon may buy Target are flying fast and furious (and you don’t see that happening). Are there any other retailers you would recommend as a Buy right now, and why or why not?

TFT: First and foremost, we specified our strategy for Target in this article, where we suggested (mostly) for TGT shareholders (and even for those who don't own the shares) to sell TGT 01/18/2019 82.50 Call for $6.10, as well as to sell TGT 01/18/2019 70.00 Put for $6.10. This strategy is doing great thus far over the 7 weeks since publication. This is a classic case where the use of options can make miracles.

We were backing off many retailers (and retail-exposed eREITs) since mid-2016. Although we don't think that brick-and-mortar retail is dead, there are too many reasons this sector looks unattractive from a risk/reward perspective. We wouldn't be buying names like Sears (SHLD) or J.C. Penny (JCP) because we simply see the risk/reward profiles of these retailers as leaning towards the risk. On the other hand, you have names like Macy's (M) and Kohl's (KSS) that we would feel much more comfortable owning at this point in time. I wouldn't go so far to say that these are Buy ratings from us, but if you are a retailer and you don't get a Sell rating from us, it's almost as good as a Buy... Walmart (WMT) might be an interesting buy, although we would like to see it trading at no more than $80 for us become interested.

SA: Trapping Value, you’re a fan of Enbridge (ENB), and you see it as a future Dividend Aristocrat. However, you acknowledge in this article that it doesn’t get a whole lot of “respect” from investors. What do you think that is? What do you like about the stock, and why do you think it will join the ranks of the Aristocrats someday?

TV: Enbridge will soon reach an “Aristocrat” status, as it will increase dividends for 25 consecutive years by 2020. It has already guided for that growth, and based on current payout ratios, it seems to us a greater than 90% probability that it will happen. However, Enbridge is Canadian-based and is not an S&P 500 component, so it won’t be given the mantle of a traditional “Aristocrat.” For these reasons, it is highly overlooked.

But I would argue that it has an extraordinary stability of cash flow that beats other well-known Aristocrats like Exxon Mobil (XOM) or Chevron (CVX). For example, from 2014-2016, XOM’s and CVX’s operating cash flow was cut in half as oil prices dropped. ENB’s actually increased significantly in the same time frame as new projects came on-line. Cash flow from existing projects declined very little, as the bulk of it was fixed-priced with no commodity price exposure. Yet, today, ENB yields more than 200 basis points above XOM and CVX. It will change eventually, and investors are being presented with a compelling long-term buy.

SA: You two recently started collaboration on The Wheel of FORTUNE. Can you talk a bit about how that came about and what your readers can expect going forward?

TFT: First of all, the full details behind this collaboration can be found in the blog posts that both Trapping Value (here) and I (here) have published last week.

From my end, I can say that I was looking for a strong partner for quite some time. Nevertheless, I was very hesitant about it, and previously, I only got into a serious conversation with one other author.

I've been following TV for quite some time, and over time, I've realized that we share the same macro views, concepts and many specific picks. When we started discussing a possible collaboration, I thought that it might be a tough cookie, as TV clearly could/can do it alone and most probably succeed. That said, I'm a big believer in the whole becoming bigger than its parts, and TV was very open to that idea. We found a common language that goes beyond investing, ranging from countries that we live/d in as well as our mutual accounting background.

The funny thing was that initially TV thought that I was covering a narrow universe based on my A-Team series of articles. Once he realized how wide the universe we cover on our MP service, it was clear to TV that The Wheel of FORTUNE was, for him, the most suitable service to be associated with.

The Wheel of FORTUNE is a supermarket of ideas - we run about 200 different ideas over a calendar year. While many (most?) MP services are specialized services, i.e., focusing on a single sector/segment, we cover practically everything. Stocks, bonds, CEFs, mutual funds, preferred shares, options, currencies - you name it - there are no limits and no boundaries to the spectrum of our coverage.

TV is a perfect match for a service like ours: someone with a deep understanding of the markets, an emphasis on risk management and the ability to translate macro views onto specific trading suggestions. I welcome another person to share the work with, but I also feel that as a service and author that promotes pluralism and counter-opinions, it would be in the best interest of our subscribers to hear more than one voice and to get the perspectives of more than one professional.

TV: I was always fascinated with The Fortune Teller’s work, and late in 2017, I came to appreciate it even more. His main macro theme - avoid REITs - which he was harping on in 2016, really came to bear fruit. While my defensive nature of waiting for corrections and then using options to enter the sector protected my positions to a great extent, I would have done even better had I listened to his macro work.

We did end up interacting just around that time, and he made the generous offer of allowing me to observe The Wheel of FORTUNE in action. I was truly blown away with the breadth of expertise provided there, and his penchant of diversification fit perfectly with mine. We worked out the details rather quickly, as we both realized that this was a great opportunity for us to create something unique together.

SA: For each of you, what is one idea you’re really excited about right now, and what’s the story behind it?

TFT: Although we are mostly focused on income, such a question "forces" me to go back to my Speculative Team - a newly formed team that was featured in an article that was published on 2/26/2018 before the market opened. Here is the performance of three constituents of this team over the past week (only five trading days):

Chart

The stories of all three names - Axon Enterprise (AAXN), Progenics Pharmaceuticals (PGNX) and TiVo (NASDAQ:TIVO) - can be found in the article. However, I'll add that:

AAXN just released very strong earnings, combined with encouraging guidance for 2018. The stock is also benefiting from a short squeeze (short interest is ~17%).
TIVO went up following earnings report that featured an announcement regarding the company looking at strategic alternatives (Hiring LionTree Advisors, suggesting that a potential M&A activity is on the horizon for TIVO).
JPM reiterated its stance that a leveraged buyout deal could see the company being valued in the mid-$20s.

Any of these three companies can deliver additional massive gains down the road, if and when the main driver/catalyst materialized.

TV: For me, it is still Northview Apartment REIT (OTC:NPRUF). The stock has been on a tear, and is one of the few REITs that has done well in 2018. I bought it in 2016 at the depths of the oil price decline, and my regret is that I did not buy more. The last quarter showed a 6% Net Operating Income (NOI) growth, which is the highest in our portfolio. The stock is still trading 4-6 multiples cheaper than anything seen in the apartment space. With a 6.5% yield to boot, this looks like it could return 20-25% in 2018 with little risk.

***

Thanks to The Fortune Teller and Trapping Value for joining the Roundtable. You can read more of their work here and here. If you want to learn more about their collaboration and check out The Wheel of FORTUNE for yourself, click here. Now is actually a great time to sign up, because you can lock in today’s low subscription price before it goes up at the end of March. There’s also a two-week free trial, so you can try WoF before you buy.

Don’t forget to follow us to get all the latest interview and news on Marketplace. We’re adding new quality authors at a fast clip, and we have some great debuts coming up.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by

SA Investing Groups

17.65K Followers

The Seeking Alpha Marketplace is our platform for investing research and guidance. Services are led by individual authors and feature communities of investors with similar interests focused on a given investment style and approach. It enables investors to get guidance and ideas that suits their needs so they can take their investing to the next level.Interested in building a business on Marketplace? Check out this story on authors' success to date, and go here to learn more about writing for SA. Contact us at premiumauthors@seekingalpha.com if you'd like to apply to launch a Marketplace service.Interested in signing up for a Marketplace service? Check out all our authors here. For any questions about SA's Marketplace, contact subscriptions@seekingalpha.com. We'd be happy to hear from you.This account will be used to highlight these authors and offer insights into investing from the authors to any interested users. Follow this account if you'd like to hear what's going on with the SA Marketplace!

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

The Fortune Teller is LONG ABR, FSIC, TPVG, GPMT, CVA, FTAI, CORR, EPR, AMZA,JPM,C, BAC, MS, GS, TD, RY, SO, BIP, TRSWF, T, VZ, TWX, PGNX. He is SHORT O (common) as well as the following options/: $50 O PUT (covered against the short position), $82 TGT CALL & $70 TGT PUT (pair trade), $105 TWX CALL & $87.5 TWX PUT (tripe trade, with the long common). Trapping Value is long BREUF, NPRUF and ENB.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given that any particular security, portfolio, transaction or investment strategy is suitable for any specific person. The author is not advising you personally concerning the nature, potential, value or suitability of any particular security or other matter. You alone are solely responsible for determining whether any investment, security or strategy, or any product or service, is appropriate or suitable for you based on your investment objectives and personal and financial situation. The author is an employee of Seeking Alpha. Any views or opinions expressed herein may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank.

Recommended For You

Comments (45)

The Fortune Teller

30 Dec. 2018