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Sell Zoom Now: Buy These 2 Dividend Stocks Instead


  • Zoom recently reported its earnings. On the surface, they look great.
  • However, if you go into the details, the outlook is very gloomy.
  • ZM is set to increase its revenues by only 6.8% next year and experience a 25% decline in non-GAAP EPS.
  • With a forward P/E ratio of 150 times, that's an insanely high valuation.
  • If you are long ZM, it's time to dump it now. We will highlight two much better alternatives.
  • This idea was discussed in more depth with members of my private investing community, High Dividend Opportunities. Learn More »

As a team of analysts and researchers, we naturally can't help ourselves from observing the hustle and bustle that occurs around us in the markets. One particular stock recently caught our eye: Zoom (NASDAQ:ZM). The product probably doesn't need much introduction. ZM is the leading provider of video conferencing. A tool that was quickly elevated by the COVID-19 pandemic and the associated shutdowns.

If you bought ZM a year ago, congratulations! The run-up it had has been incredible and you are sitting on substantial unrealized gains.

It's a useful product that found itself thrust into the spotlight. Like an American Idol contestant, it became all the rage. We've used ZM, and it's a great product. Well, it's a horrible product that forces you to change out of your bathrobe and to see what your co-workers look like at home, something we all could have lived without. But in terms of doing what it's supposed to do, we have no complaints. And certainly, there has been no shortage of sales:

ZM went from $121 million in quarterly revenues in Q1 to $882 million in Q4. A rise that can only be described as meteoric. The chat boards were abuzz with how much ZM beat expectations and how high guidance is for this year.

Zoom Heading Into A Wall

While earnings on the surface look great, here investors have to dig into the details. The guidance in revenue is expected to be between $3.760 billion and $3.780 billion and non-GAAP EPS of $3.59-$3.65. This is up from $2.651 billion in revenue and non-GAAP EPS of $3.34 last year.

But remember, most of that growth occurred in the middle of 2020. ZM saw its quarterly revenues grow from $188 million to $882 million in a year. When we look at where ZM is going from

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This article was written by

Rida Morwa profile picture

I am a former Investment and Commercial Banker with over 35 years of experience in the field. I have been advising both individuals and institutional clients on high-yield investment strategies since 1991. I am the lead analyst at High Dividend Opportunities, the #1 service on Seeking Alpha for 6 years running.

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In addition to being a former Certified Public Accountant ("CPA") from the State of Arizona (License # 8693-E), I hold a BS Degree from Indiana University, Bloomington, and a Masters degree from Thunderbird School of Global Management (Arizona). I currently serve as a CEO of Aiko Capital Ltd, an investment research company incorporated in the UK. My Research and Articles have been featured on Forbes, Yahoo Finance, TheStreet, Investing.com, ETFdailynews, NASDAQ.Com, FXEmpire, and of course, on Seeking Alpha. Follow me on this page to get alerts whenever I publish new articles.

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Analyst’s Disclosure: I am/we are long XFLT, PCI. 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.

Treading Softly, Beyond Saving, PendragonY, and Preferred Stock Trader all are supporting contributors for High Dividend Opportunities.

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Comments (151)

FchaV profile picture
29 Apr. 2021
I got bought, after you recommended them last time. I can only pray they won't drop any further (esp. XLFT)
@FchaV XLFT??????? Did you mean XFLT???????
PendragonY profile picture

My mind just put the letters in the right order.
@FchaV $XFLT has treated me very nicely. $.073/share dividend monthly, $1.23 per share price rise, in 2-3 months. Love it! Thank you HDO
There will be another housing crash and that is when you load up. Now nibbling might be ok
rather buy The Geo Group :)
@dani841 yes and when the dividend comes back on line and we realize the dems are fools and state will need private prisons because their bankrupt KABOOM. I'd like to know if Burry is still in it. He typically has a great sense of contrarian undervalued companies.
Jeff Swan profile picture
@DigitalRobberBarons GEO will probably de-REIT and become a C-corp as CXW did. The dividend isn't likely to come back for years.
Phil in OKC profile picture
This article does a good job answering the constant barrage of negative comments in HDO articles from zero dividend/tech/growth stock investors. Way too risky for me at these late stages of life. While the reward for younger investors, who can absorb a crash in stock price of one of the tech stocks, is great and helps to build investing capital of later in life, the risk is very great for older, retired investors. That is the beauty of HDO. You get the best of both. High dividend instant income, and capital growth in some of the picks.
@Phil in OKC
Very well said. Retirees or near retirees like me are just looking for rock solid dependability of dividend income (including continually growing dividends) high enough to sustain the quality of life we desire. If your investments don't provide that at this stage, you should have planned better earlier on. Unless you are set with way more than you need, gambling with speculative investments may well lead to financial disaster at a time you can least afford it.
kitkimes profile picture
I don't have Zoom (but I use it), but I have been considering getting some $PCI. My only concern is that I have owned $PDI for years and it has gone nowhere even as the market keeps heading up. However, the dividend is so good that I don't want to get rid of it. So I'm on the fence here. I'll keep an eye on $PCI.
PendragonY profile picture

PDI and PCI both generate returns primarily from the distribution and not from capital gains.
catsaunders financial profile picture
I love your articles and all but like your apartment picks, we all have missed the boat, the prices on your recommended stocks are waaaay tooo high. I am listening, reading, studying your articles but would like to for once get into a stock that has not alreadky zoomed, no pun intended
XFLT at ~ 6% premium....seems rich at this point
PendragonY profile picture

Thanks for sharing. Leaves more for me.
@PendragonY You are buying at a 6% premium (historically has been at a discount)?
PendragonY profile picture

CLO funds historically trade at pretty big premiums, so no, I am not worried about it trading at a small premium. Yes, in its short existence XFLT hasn't traded at such valuations, but that looks like it is changing. PLUS the NAV is increasing, and I consider performance as more important than whether or not the share price is at a modest premium.

Remember too that XFLT is the first CLO fund to restore its distribution to pre-COVID levels.
enzonahum5 profile picture
Great article Rida, thank you. How do PCI and its brother PDI compare? I read comments which were recommending PDI over PCI. Do you agree?
Rida Morwa profile picture
@enzonahum5 PDI and PCI have extremely similar holdings (and the same managers). The main difference is that PDI is older. Their NAVs over the long-haul should have similar performance. So I would buy whichever is trading at a lower premium, which is usually PCI. Though for a brief period last year PDI was trading lower.
PendragonY profile picture

I believe that PCI for a time had a different set of managers than PDI and that they were sacked (and those responsible for sacking them actually did sack them) to put the PDI management team in charge. Certainly, the investment strategy of the two funds has converged over the years.
enzonahum5 profile picture
@Rida Morwa Thank you very much Rida. Always a pleasure to read your very informative articles and replies to readers.
Daniel-san profile picture
Rida I own a nice chunk of both PCI, XFLT and others you've recommended and have done well with, thanks to you.

However, it seems like I've noticed I only see articles from you that make buy recommendations but I don't recall seeing sell recommendations when these winners change course and become losers. Have I been overlooking your sell articles?

Thank you again for your great work.
ButscherDoug profile picture
@Daniel-san This is a free article. If you want the sell articles, you need to subscribe to the service.Otherwise your on your own.
Daniel-san profile picture
@ButscherDoug - thank you. However, I'm paying a few hundred bucks a year for a 'Premium' membership here. That doesn't cover it?
PendragonY profile picture

On the free site, we do publish a fairly complete analysis of why we think a stock is a buy. While we do not hide it if we change our recommendation, we mostly limit sell alerts to our paying membership (that is one of the things they get for paying us money).
Time travel back about 25 years and publish this article by changing ZM to AMZN. The problem with this article is that the investments Rida is recommending and ZM are like black and white to each other. I have never bought AMZN but I do own ISRG with my after split adjusted basis of around $13 per share and for years I have read similar arguments that how overvalued it was until it hit several hundreds per share and then people begun loving ISRG. I do own very overvalued investments, one example SHOP, with my speculative money which is a small percentage of my portfolio and I also own things similar to Rida's recommendations in my diversified portfolio. I also own a lot of dividend growth stocks like BuyandHold2012. I have been following ZM, IMO they seem to be doing the things much better compared to Webex and Skype. I thought it would come down more with the recent pullbacks and I would pick some but then like other speculative ones it begun going up again. My 12 year old kid begun using Zoom in addition to Facetime to socialize with her friends. My wife is working from home 95% of the time and she is using Zoom to communicate with her managers and her peers and her manager is so happy with her productivity at home that she is suggesting that she could mostly work from home after the pandemic is over. I read similar stories that some businesses are already in the process of cutting down their real estate and office expenses. So it is difficult to predict what future brings for Zoom but one thing is sure: It is not going away.
@yahooreader - you have said it perfectly, the recommended replacements this article suggests for a ZM investment should not be in the same conversation--apples to oranges for sure. Great comment!
Phil in OKC profile picture
@yahooreader The whole point of the article is to compare steady paying dividend stocks with high priced tech stocks that can fall in price on a dime, for a variety of reasons, and the investor who holds on and averages down is left holding the bag.
Rida Morwa profile picture
@yahooreader AMZN never had a year of 7% revenue growth. If they did, they wouldn't be AMZN. If you have a company that can routinely post 100% plus growth numbers and then slows down to "only" 30-40% annual growth, then you are talking about comparing apples to oranges because it can be argued that the growth justifies higher valuations. When you are talking about a company growing revenue 7%, well there are a lot of established value companies that do that on a regular basis. The point is that ZM was a growth company and is valued like a growth company, but according to management's own guidance, it is no longer a growth company, but is still valued like one.

Simply being in tech is not sufficient to be comparable to FAANG. Those who jump into every tech company thinking it is going to be the next AMZN or TSLA will lose a lot of money when the vast majority of those investments will never experience the same growth over an extended time-frame.
smurf profile picture
Both XFLT and PCI are at/near yearly highs, also not far away from all time ones.

Some interesting factoids unmentioned in the article:
XFLT currently is at a 13.98% premium to NAV. 3 year average is +.62%
Leverage is 44.78% and Expenses are 4.18%

PCI is currently at a 10.29% premium to NAV. Their 3 year average is 2.83%
Leverage is 25.81% and Expenses are 5.18%

So both support their dividends by (essentially) borrowing and charging exorbitant fees.

Yessir, folks, jump on this author's bandwagon for these hot bargains...the good times will never end! Just look before you leap.
PendragonY profile picture

"So both support their dividends by (essentially) borrowing and charging exorbitant fees."

Yes, they use leverage.

No, the fees do NOT support the dividend, so I am not sure what you are talking about.

As for the price, I am sure you are aware that one saying from Chowder is that this year's 52 week high is often next year's 52 week low.
11 Mar. 2021
@smurf All true need to know information, one other factoid to be aware of is the expense ratio is = 5.71% and all of this on total net assets of only $102.6 M.
PendragonY profile picture

PCI has an AUM of $3.33B. seekingalpha.com/...

XFLT is smaller at $118.55M seekingalpha.com/...

And while the expense ratio is interesting, I am unsure how important it is. What is important is PERFORMANCE which is always reported net of fees.
Thank you for all the great info you contribute to SA. Are there any articles that you have done in the past that talk to the high expense ratios? I am somewhat new to the dividend strategy and trying to rationalize the high expense in having a large allocation?
Rida Morwa profile picture
@ieavn Neither CEF has a high expense ratio for their respective sectors. Investing in CLOs and leveraged loans is a very intensive process. It isn't like just buying stocks on the open market. PCI is an actively managed fund, and their expense ratio is inline with what you will see with other actively managed CEFs. Additionally, the cost of leverage is included in the expense ratio.

Personally, I have yet to see anyone demonstrate why the expense ratio is even a useful metric. In my experience, it has very little correlation with the total return of a fund, which ultimately is what we are interested in. One fund has a 5% expense ratio and provides you a total return of 15%/year. Another has a 1% expense ratio and provides you a total return of 10%/year... which one are you going to buy? As a predictive tool, the expense ratio isn't useful.

The only relevant question with an expense ratio in my mind is whether you are "getting what you pay for". You can see that in the performance. Though I don't care if bad performance is because the expense ratio is too high or some other factor.

Certainly, PIMCO has demonstrated their superiority as a bond fund manager, consistently outperforming.

XFLT doesn't share such a long track record, but considering that a black swan event occurred just a few years after the IPO of the fund and they have materially recovered, that says something.
XFLT just cut div from 0.8 to 0.15 and has a relatively high expense ratio of 5.71% - sth to keep in mind only makes sense if going long
PendragonY profile picture

No, the distribution cut happened last year, and the distribution was increased at the end of last year to go back to the pre-COVID numbers. If your data is coming from CEFConnect, that site combined the December and January payments into 1.

And the distribution is paid out AFTER the fees are subtracted. And while the fee is higher than for passively managed index funds, there is both more work (and thus cost) in actively managing these assets and the fee includes the cost of leverage. The fees are in line with what other CEFs managing similar assets charge.
Rida Morwa profile picture
@alphakitty XFLT never paid $0.15. Use the funds site to gather your data.
PendragonY profile picture
@Rida Morwa

Yeah, CEFConnect lumps the December and January payments together.
ron2004 profile picture
@Rida Morwa
re: "Sell Zoom Now . . . " Well, we'll see if you are correct. Sold Zoom & bought PCI.
I generally don't buy CEFs when they sell at a premium but . . . 9%+ made it tempting!
Rida Morwa profile picture
@ron2004 I'm glad you made the switch! You'll enjoy that 9% for years to come.
PendragonY profile picture

I think many misunderstand the value if whether or not a fund trades at a premium or discount to NAV.

I recently looked at BIF, a CEF that trades at a discount to NAV and has a very large position in BRK.B. Investors would have been better served to buy the top 10 holdings of the fund (in roughly the same amounts as the fund) even paying full price for the assets than investing in BIF.

You aren't just buying a passively managed basket of stocks when you buy a CEF. That premium or discount is based in part on how the market sees the effectiveness of the management.
David Van Knapp profile picture

"That premium or discount is based in part on how the market sees the effectiveness of the management."

Agreed. And the fact that many CEFs sell at discounts to their NAV suggests that management is seen as a net negative much of the time.

peter doyle profile picture
A 10% yield. If the market is even mildly efficient that’s going to be risky. Not my idea of retirement but I would love to have the yield.
Rida Morwa profile picture
@peter doyle A little can go a long way, I hold every position to an allocation limit of 2%.
ron2004 profile picture
@Rida Morwa
Conceptually I agree but, I have made a few exceptions with individual equities. Not with CEFs though.
Rida Morwa profile picture
@ron2004 I have at times as well. No rule is without exceptions when it comes to portfolio management so long as one recognizes the risks.
William Rilling profile picture
My Immediate concern is how this yield is created, Junk bonds, Oil and gas?
PendragonY profile picture
@William Rilling

Neither pick has much in oil and gas. XFLT doesn't invest in bonds but in secured debt.
Rida Morwa profile picture
@William Rilling PCI invests in mortgage backed securities. XFLT in senior secured loans, both collateralized and individual.
waldipup profile picture

"Neither pick has much in oil and gas. "

Ironically , they're no longer considered "dogs" .
Jeff Swan profile picture
XFLT is a buy if it drops to its NAV.
Rida Morwa profile picture
@Jeff Swan Does that mean if NAV rises to meet the market price you'll buy it then too?
Jeff Swan profile picture
@Rida Morwa That’s unlikely and I prefer to buy on dips, not at highs. I have a price alert set and am patient. If it never drops to my purchase price I’ll buy something else with a greater value.
PendragonY profile picture
@Jeff Swan

One thing you need to recognize is that what price is a good value can change over time. Sometimes that price drops, sometimes it goes up. NAV certainly plays a role in what price is a good value.
FchaV profile picture
11 Mar. 2021
@StoneSmasher and @Rida Morwa
thank you. That helps. And does this mean these are relatively safe?
Rida Morwa profile picture
@FchaV Yes I hold both without concern for income.
whaleshrimp profile picture
To those who say the funds in this article are already at a premium. When I switched from growth investing and trading to dividend investing I joined HDO as a paid subscriber to learn the basics of a new game. This was a very good move for me. Paid subscribers get access to HDO's recomendation before these public articles come out. They have portfolios you can pick and choose from according to your needs and investing style. I use my charts to buy breakouts from solid bases because I am a chart based guy. You may like to buy on the way down spending your retirement in the "House of Pain". Many people just use the buy under prices provided by HDO.
There is no free lunch on Wall Street unless you find a mission to feed the destitute. Note I am not an employee or have ever met, know or have any relationship with HDO except as mentioned above.
Rida Morwa profile picture
@whaleshrimp Thank you for your kind note! I appreciate you sharing your HDO experience.
whaleshrimp profile picture
Every now and then I get into a stock that goes up beyond what reality can sustain. When I start to say to myself "I wish I had bought more" I hit the sell button. For me that is when Feer's ugly sister Greed is trying to start driving the bus straight off a cliff. I used to take those gains and buy real estate, now I buy dividend stuff. To keep Greeds friend Real Stupid from getting behind the wheel, I take the recently sold stock off my lists so I don't give it all back. Yes sometimes I miss further gains but I always miss turning a big winner into a loss. IMO
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