growing pains growth & income on the safer side · growing pains us gdp remains positive for...

(continued)

Growing PainsUS GDP remains positive for 2019

and expectations are for slow and steady growth in 2020. Retail sales, as measured by the US Commerce Department and its Census Bureau, show a 3.10% year-over-year gain in the most recent monthly data, as consumers continue to be the heroes of the US economy.

This comes as US labor conditions remain robust, with an unemployment rate of 3.60% and wages advanc-ing by 3.00%. That’s well above the 1.70% rate of inflation. The partici-pation rate is also robust at 63.30%, but it’s possible we have seen peak consumer comfort, as the Bloomberg Consumer Comfort Index has dropped to only 58.00.

Since inflation is nowhere to be found, the Federal Reserve is very supportive of the economy and markets. But liquidity is still an issue, as short-term financing continues to necessitate Fed inter-vention on a daily basis.

And while credit markets are healthy, consumer credit is showing minor cracks while corporate Collateralized Loan Obligations (CLOs) have been pulling back.

Meanwhile, business sentiment has dropped as trade talks drag on and US manufacturing wanes. While oil prices remain pretty stable, US oil and gas companies continue to slow down, weighing on the economy and related businesses.

US agriculture continues to reel with this year’s weather challenges and trade tariffs, and that is showing up in regional economic softness in the breadbasket of the US.

So, good stuff overall, but there are challenges. This is why I’m sticking to my conservative balance of stocks and fixed income as we approach 2020.

December 2019

Vol. 30, No. 12

Growth & Income on the Safer SideDear Friend,

Optimism over the economy and earnings season has brought buyers from early October to date. The result is an S&P 500 Index that sits at heady levels. This is a far cry from the absolute pessimism that took over at this time last year.

The US economy is in decent shape right now. Gross Domestic Product (GDP) is up for the third quarter at 1.90%, and compiled expectations show overall GDP for 2019 at 2.30%. Compiled projections for 2020 are sitting at 1.80%.

And with inflation at 1.70%, as measured by the core Personal Consumption Expenditure Index (PCE), the Federal Reserve should continue to support the economy and the markets.

But this is certainly not a go-go economy, and that’s reflected in the sales and earnings growth of the companies inside the S&P 500 Index.

Among companies that have reported for the third quarter, the average result was a positive revenue gain of 3.66% but a decline in earnings of 0.94%. Compiled projections for the current quarter are for sales gains of 2.63% and earnings declines of 1.87%.

So while stocks are still supported overall, they aren’t necessarily set to head to the moon right now. Therefore, while I am still positive on US stocks, I continue to advise a balance between growth and income when it comes to our model portfolios.

My focus remains on reliable utilities and real estate investment trusts (REITs) along with bigger dividend-paying investments to stay on the safer side as the year wraps up and we head into 2020.

That said, there are always specific opportunities in any market. And in this issue, I’m bringing you two new companies that are cashing in on behind-the-scenes market trends.

Growth StrategiesWhere the Cracks are Forming

It has been a good year for the stock and bond markets. The S&P 500 has returned 26.82% year to date, which ranks as one of the better performances for the index.

And there’s reason to expect that the market will sustain itself into year end. From a technical perspective, the index remains well above its 100-day and 200-day moving averages.

Fundamentally, the US economy continues to expand. The third quarter sawGDP up 1.90%, and compiled projections expect overall GDP growth for 2019 to come in at 2.30%. While the rate is projected to slow to 1.80% in 2020, it looks like it will continue to expand.

This growth continues as the US consumer is pulling more than their weight. US retail sales on a year-over-year basis are up for the most recent reported month by 3.10%, according to the US Commerce Department.

Unemployment is running at a mere 3.60%. And the participation rate (the percentage of able adults actively working or seeking a job) is running at a very strong 63.30%, up significantly from the lows in 2016. This means there are more employed workers in the job market.

But it gets even better. Wages are up by 3.03%, while the core PCE inflation

2 Profitable Investing | December 2019 | profitableinvesting.investorplace.com

Neil George’s Profitable Investing® (ISSN 2577-9311) is published monthly by InvestorPlace Media, LLC, 1125 N Charles St, Baltimore, MD, 21201. Please write or call if you have any questions. Phone: 800/211-8566. Email: [email protected]. Web site: profitableinvesting.investorplace.com

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reading is lower at only 1.67%. Both data show strong improvement for workers’ wages and buying power.

But there is some trouble in the land of consumers, and this is where I’m starting to see a crack form in the economy and the stock market.

Consumer confidence has been building up since late 2016, which is reflected in the Bloomberg Consumer Comfort Index. The “comfy” index climbed 44.42% from November 2016 to the high in July 2019. But in the most recent weekly data, it has fallen from that recent high in the mid-60 range to 58.00.

This index compiles data from Bloomberg’s extensive surveys, which include current and expected house-hold financial conditions as well as spending expectations and the state of the economy. And while it is still quite positive, the recent drop is dis-concerting.

Business ConditionsThere are some other data points

that are concerning for stocks as well. For example, sales growth for the S&P 500 in the third quarter is coming in at a positive average of 3.66% overall.

Energy companies dragged down that average with a drop of 8.06%. Materials companies saw a drop of 17.71%. And with materials sales down, it’s no surprise that industrials also saw a decline in sales of 0.60%.

Overall, reported earnings were down by 0.94% on average. That’s not good, but it’s way better than pre-earnings season expectations, which were fore-casting a drop of 4.00% or so.

The real earnings-season winners came not from the go-go momentum sectors but from the havens. The healthcare sector saw gains of 8.93%, the communications sector saw gains of 4.74%, REITs saw gains of 6.70% and utilities saw gains of 9.68%.

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— All Securities 5.62— Communication Services 8.79— Utilities 3.73— Real Estate 4.88


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Source: Bloomberg Finance, L.P.

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Profitable Investing | December 2019 | profitableinvesting.investorplace.com 3

The outperformance of the more defensive sectors is not surprising to me, as that’s where I’ve positioned a great deal of our allocations across the model portfolios.

Now, the stock market is all about discounting the future businesses behind the stocks. And looking at the current quarter and the quarters into 2020, Bloomberg’s compiled esti-mates show a further decline in sales and earnings for the current quarter for the general S&P 500 Index, with some improvement into 2020. But again, the sales and earnings for the more defensive sectors show much better performance expectations.

While the data offer concern for the general markets, they show optimism for the REITs, utilities, communica-tions and healthcare companies in our model portfolios.

What has me more concerned is business sentiment in the US. Like the drop in the consumer comfort reading, the US Business Leaders Expectations for Business Activity Index reading has fallen to levels not seen since before the 2016 election.

The decrease in sentiment can be justified by a variety of conditions. For one, no deal has been made between the US and China. And while the stock market may be a bit more immune to the rhetoric, real companies aren’t.

This is impacting budgeting and contracts. And this is particularly impacting US manufacturing com-panies, which are a smaller but still significant contributor to US GDP.

US oil and gas companies are largely stuck with slowed global growth, a glut of production and

limited infrastructure to move it. This is also weighing on compa-nies serving the industry as well as regional businesses in the oil patches.

With trade talks dragging on and crummy US weather this year, agri-cultural production is suffering, and exports aren’t helping. This is weighing on businesses with agricultural-heavy exposure, particularly in the Midwest.

Despite these cracks, however, con-sumers are still there, most businesses are still doing OK and defensive sectors continue to deliver.

This should allow the allocations in our model portfolios to deliver measured growth with more income along the way. For more on our hold-ings and model portfolio allocations, please read on.

Proven Growth & IncomeProfiting from Older Media

When I was a kid, I remember one of the most common chastisements from my mother came in the form of her exclamations to turn off the TV and go do something else—any-thing but sit in front of the boob tube watching inane programs filled with incessant laugh tracks.

Well, it seems that Ma was wrong. Not only did my retinas not burn out from staring at the old cathode-ray tube, but I’ve found that while television might not be as compelling a media in the modern age, it is still the dominant leader in mindless entertainment.

On any given day, some 2.2 trillion hours of television are watched across the US according to A.C. Nielsen, which monitors, tracks and reports how much and what kind of television is being consumed.

And surprisingly, television con-sumption is over 4.6 times greater than the average amount of web surfing each and every day, according to recent data from New Media TrendWatch.

So, while too many stock-picking gurus have been touting digital com-panies with questionable revenue streams and profit margins, I’m telling you to turn on, tune in and

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more importantly buy into what’s making money.

It Pays to AdvertiseWe in the US not only watch a lot

more television, but we do so across all age groups. Television reaches nearly 89% of the total US popula-tion, while radio only gets to 58.8% and newspapers a mere 36.1%.

And the Internet? It only reaches 73.1%. That’s good, but it’s nowhere near the total reach of television.

This brings more revenue dollars from advertising to television stations. Because from companies trying to sell us stuff to politicos trying to win our votes, television is the prime medium.

From rich to poor and especially in the high-consuming and more likely to vote demographic group of seniors, television consumption out-guns all. And advertisers know that not only do they reach more folks, but they get more action.

Advertising industry studies show that nearly 40% of consumers first learn of brands that they buy from TV ads, compared to only 8.7% from Internet ads. And for politicos, deci-sions are more likely to come from TV viewers, as 37.2% cite those ads against a paltry 5.6% citing decision-making from Internet ads.

This all points to the obvious—tele-vision controls the vast majority of ad spending. And over the past few tracked and reported years, television has gone from 52% of all media ad spending to 54% of all ad spending in the US. Putting this into perspective, that’s twice the total spent on Internet advertising.

But there’s even more good news on the television ad market beyond just more eyeballs. If you look at local television websites, local online advertising revenues nationwide are up 175.19% in the past few years, which is 1.3 times the overall growth of Internet ad spending over the same time frame.

The Bigger the TV, The BetterCompanies that own and control

local stations and broadcasting spec-trums are recognizing that not only is their business good, but it can get

even better by expanding into markets around their home regions and even nationwide.

There are some key reasons for this. First, television dominates media attention and spending. And the same model works everywhere.

Second, as companies expand and acquire other local stations, a few things get even better. For one, costs come down.

If you have news reporters in each locality, you can have fewer covering larger scale events and news that can be centralized, with fewer reporters to handle local news and events.

And buying content from the national networks, including entertainment programming to movie film broadcast-ing rights and syndicated shows and re-runs, the bigger you are and the better deals you can cut.

Increasingly, the bigger television companies with more market controls are getting national networks to pay them to put their content out on local broadcasts.

The same goes for cable and satel-lite providers, as they know all too well that folks demand local news and local content as well as network broadcasts that all have to flow through or from local television com-panies. And the more areas that a television broadcasting company con-trols, the better the bargaining power they have.

Third, there’s been a major shift in the way television is broadcast, and

it’s continued evolution is setting up another major growth area for televi-sion broadcast companies.

In 2009, the US gave up on analog television broadcasting. The US gov-ernment bought and swapped out some of the allocated spectrum and in turn provided and mandated that television broadcasters adopt a new digital standard that was smaller and lower in the broadcast spectrum.

So, if you had an older, non-digital TV, you had to switch to a newer model or get an adapter with a new antenna. Or if you simply used cable or satellite, it really made no difference.

But what has happened is that the new digital broadcasting standards meant broadcast television companies could use less spectrum than they were planning to use in the switch.

This meant that media companies rolled out additional channels that were even more tailored to viewer groups from all demographics. This is setting up new revenue streams that advertisers and content providers are eager to work with and pay even more cash to broadcasters.

And it gets even better. Now with wireless data for smart phones and tablets demanding more and more bandwidth, the parts of the spectrum controlled by broadcast television stations around the nation are very attractive for expanding data trans-mission, particularly for the emerging fifth-generation (5G) wireless plat-form.

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Proven Growth: Gray Television (GTN) vs. S&P 500 Index Total Return



Let’s Make A DealThere is a collection of compa-

nies that are faring well in the local television market, including Sinclair Broadcast Group (SBGI), which I have followed in the past. It is exceedingly well-run and continues to capitalize on the opportunities I’ve just discussed.

But it has recently been garnering unwelcome attention from regulators and politicos as well as local activists who aren’t on board with some of the company’s editorial policies.

Instead, this month I am recommend-ing Gray Television (GTN), which is an able peer in local networks span-ning 91 metro markets in the South, Midwest and Southwest US, with 150 local stations carrying all of the major US networks.

Revenue comes from ad revenue from televised broadcasts and those vital local Internet webpages. And with the 2020 election already underway, ad revenue should see further increases, which will be noticed into the next year.

Revenue is up by 22.80% on a trail-ing year basis. And thanks to all of the cost advantages of multi-stations, operating margins are running at a wide 35.90%. The company has piles of cash but does have a bit more debt thanks to some recent acquisitions.

However, it is well-sustained and has the ability to do further deals to broaden its reach. The stock is cheap at just 1.00 times its trailing sales and just 1.39 times book, including all of the local licenses that are irreplaceable.

The downside is a big one. It is hording cash to build up assets, with a retention rate of 100% of earnings. That means the stock currently pays no dividend. But I want in on the local television market for growth, which the company has proven it can deliver.

And while I don’t prefer to invest without a current dividend, the company has proven it can deliver genuine growth over the trailing 10 years, with a return of 1,408.53%. That’s 5.63 times the return of the S&P 500 Index, including dividends.

GTN is a new buy in the Niche Investments portfolio under $22.00, ideally for a tax-free account.

More Growth & IncomeUsed Car Cashflows

I am constantly consuming news and information. Day after day, I take notes and develop ideas regarding current market developments. I then drill down to find the best companies to recommend to you.

In all this rummaging and research, I often stumble upon companies that wouldn’t otherwise hit my radar. This happened recently with a company called Copart (CPRT). The company runs used car auctions with a spe-cialty in damaged and salvaged cars that insurers have totaled.

Cars these days are ever more complex. My daily driver has all of the latest near-autonomous and safety equipment. This makes it a lot safer, but if I’m hit, the bills to repair it will be way up there.

The parts of the car and many others can be worth more than the sum. And this is where Copart comes in. It has become a very popular way for used car dealers to buy a good car cheap, fix it up and then sell it for a profit. They might also sell them overseas to welcoming markets.

But in analyzing the company and its stock, it’s way, way too expensive. It’s selling at 10.97 times book value and 9.60 times sales. And even with some very impressive financials, that’s expensive for what I see in this company.

So I started to dig further. And I came up with a peer stock that’s trading at a bargain—KAR Auction Services (KAR).

It too is in the car auction busi-ness, but it deals in both damaged cars as well as wholesale cars. This is the marketplace where dealers take your trade-ins and sell them to other dealers looking to fill their lots. And outside the US, many markets want older US cars, damaged or not.

Revenues are solid, up 9.00% on a trailing 12-month basis. Operating margins are fat at 16.60%, which drives a return on equity of 14.80%. The company has plenty of cash and con-trolled debt at only 37.00% of assets.

And unlike Copart, KAR pays a good dividend, currently yielding 3.47%. The stock is trading lower after spinning off IAA Inc. (IAA) in June, which runs car dealerships and related services.

The stock is even more of a value after a mixed quarterly report that dealt with the post spin-off focused auction businesses. This focus is what I like most about the current company structure. Now, we get an auction company without the troublesome dealerships.

With the stock down a bit, it’s now valued at a 10% discount to trailing sales, which are running up by 9.00% over the trailing year. And it’s valued at only 1.73 times book.

KAR is a new buy for the Niche Investments portfolio under $23.00, ideally for a tax-free account.

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20.68

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20192017 2018


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KAR Auction Services (KAR) Stock Price



Total Return Portfolio

I continue to recommend an allo-cation of 56% stocks and 44% fixed income (including 11% in cash) for the Total Return Portfolio. We have maintained this conservative alloca-tion going back to last year.

While this hasn’t allowed us to squeeze every last ounce of performance out of the markets, it has kept us safe during downturns, especially during the fourth quarter of 2018.

This all-weather portfolio has and should continue to generate growth with less risk while also providing higher income from dividends and interest payments.

The go-go momentum in the stock market right now might suggest raising the stock allocation and reduc-ing cash. But while I do see that the S&P 500 has good support from ongoing economic growth in the US, there are plenty of cracks as I dis-cussed earlier in this issue.

And as I discussed in the November webinar (you can find the full pre-sentation on our website), I don’t believe that the valuation of the S&P 500 is overdone. Based on its average price-to-earnings, price-to-book and price-to-sales ratios, the underlying stocks in the index are still below the highs of last year.

And despite the pullback in the last quarter, underlying earnings continue to climb for the overall year. The same is true for the S&P’s book value and sales.

So, there is still value in the stock market, and while there are chal-lenges, I am still optimistic for the end of the year and into 2020.

Specific StocksThe stocks within the Total Return

Portfolio continue to deliver growth with income along the way. With rising underlying asset values and revenues, I am raising the buy under prices for a number of our positions.

I’ll start with Compass Diversified Holdings (CODI), which owns a col-lection of well-run companies. Revenue is up 33.20% for the trailing year, and

yet the stock is still valued at a discount to its revenue by 20%. CODI is a buy under a raised price of $24.00, ideally for a taxable account.

FMC Corporation (FMC) is a problem-solver for agricultural pro-ducers threatened by pests and weeds. Revenue is up 69.30% over the trail-ing year. I am raising the buy under price for FMC to $99.00, ideally for a tax-free account.

Hercules Capital (HTGC) is an alt-financial that is capitalizing on financing many of the leading US technology companies. Revenues continue to rise, and it maintains an impressive net interest margin (the dif-ference between its funding costs and loan revenues) of 9.40%. HTGC is a buy under a raised price of $15.00, ideally for a taxable account.

Microsoft (MSFT) is a high-flying stock this year with a return to date of

49.92%, nearly doubling the return of the S&P 500 Index. While it is valued at higher price-to-sales and price-to-book than the general stock market, it justifies these valuations with con-sistently rising revenues that are up by 14.00% over the trailing year. It is the poster child of tech, with recur-ring income on the rise. MSFT is a buy under a raised price of $155.00, ideally for a tax-free account.

United Technologies (UTX) is finally getting the proper attention for its plans to acquire Raytheon (RTN) while spinning off the Otis Elevator and Carrier divisions. The details regarding how the debts of the company will be allocated to Otis and Carrier are coming together, and I see them as appropriate. UTX is a buy under a raised price of $150.00, ideally for a tax-free account.

(continued on p. 8)

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019


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S&P 500 Index Price to Earnings, Price to Book & Price to Sales Ratios


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S&P 500 Sales Per Share, Underlying Book Value & Earnings Per Share



TOTAL RETURN PORTFOLIOStocks (56%)Indexed Equities (18%) Symbol T/TF

Entry Date

Fwd. Yield

Buy Under Comments

Vanguard Healthcare ETF VHT TF 3/16/16 1.39% $184.00 US healthcare spending remains robust for more profitsVanguard High Dividend ETF VYM TF 6/21/16 3.46% $92.00 Reduced risk with leading dividend-payers inside S&P 500Vanguard Info Tech ETF VGT TF 8/20/18 1.43% $235.00 Technology is the alchemy of the market and the US economyVanguard Real Estate ETF VNQ TF 10/28/19 3.19% $97.00 The index way to gain access to the proven, high-performing REIT sectorVanguard Utilities ETF VPU TF 9/24/18 3.12% $145.00 US utilities remain one of the best sectors for yield with less volatility

Growth & Income Plays (24%)Alliance Bernstein AB T 11/19/18 8.60% $33.00 Great passthrough asset manager with fee income fueling high dividendCompass Diversified Holdings CODI T 5/21/18 6.50% $24.00 Great investments and a big dividend from this private equity style companyCovanta Holdings CVA TF 3/26/19 6.86% $16.30 Turns trash and excess recycling waste into profits with clean power generationFMC Corporation FMC TF 4/25/19 1.65% $99.00 Globally embraced crop protection and farm-yield enhancementFranco-Nevada Corporation FNV T 6/26/19 1.02% $100.00 The way to buy and own gold with a dividendHercules Capital HTGC T 6/25/18 9.00% $15.00 Alt-financial for technology companies with defended dividendHormel HRL TF 4/17/17 1.96% $45.00 Bring home the bacon for your portfolio with clean pork productsMicrosoft MSFT TF 11/30/12 1.36% $155.00 The essential tech company delivers revenue from the cloud and recurring salesNestle NSRGY T 12/17/08 2.33% $112.00 A leader in pet and livestock feed on top of successful consumer goodsNextEra Energy NEE TF 9/8/08 2.13% $240.00 Strong US-based utility with additional green energy growthProcter & Gamble PG TF 12/17/08 2.44% $125.00 Delivering profits with better managed brands and cost controlsUnited Technologies UTX TF 8/6/14 2.00% $150.00 Market getting onboard with Raytheon acquisition, Otis and Carrier spin-off plansViper Energy VNOM TF 7/23/18 8.11% $25.00 Oil & natural gas prices up or down, Viper gets paid and sends investors ample checksZoetis Incorporated ZTS TF 5/28/19 0.55% $130.00 Solution company for global livestock crisis and healthier pets as well

Real Estate Investment Trusts (8%)American Campus Communities ACC T 7/12/18 4.00% $52.00 Sole public REIT focused on student housing market, increasing property portfolioDigital Realty Trust DLR T 2/9/18 3.56% $138.00 You can't have successful cloud computing without data-center propertiesLife Storage LSI T 12/26/18 3.62% $112.00 Innovative self-storage remains a profitable REIT Medical Properties Trust MPW T 2/26/19 5.08% $21.00 Medical properties market REIT leader with good yieldW.P. Carey Inc. WPC T 1/3/14 4.81% $95.00 A favorite REIT since its IPO with able management that keeps raising dividendMFA Financial MFA T 6/25/18 10.47% $8.00 Buy this alt-financial for mortgages with proven dividend even in 2007-2008

Toll Takers (6%)Enterprise Products Partners EPD T 2/22/05 6.40% $31.00 Proven pipeline operator for oil & natural gas during good and bad timesKinder Morgan Inc. KMI TF 11/28/14 4.92% $21.00 Alternative to pipeline and related asset MLPs without K-1Pembina Pipeline PBA T 8/14/12 5.04% $39.00 Canadian government's aid for pipeline expansion continuesPlains GP Holdings PAGP T 3/10/17 7.23% $26.65 The Permian Basin keeps pumping oil & gas; company revenues keep flowing

Fixed Income (44%)Cash (11%)Synchrony Bank high-yield savings account 7/31/15 1.90% Market 1.90% yield—call 866/226-5638 to order

Multisector Bonds (15%)BlackRock Credit Allocation Trust BTZ TF 7/26/19 7.40% $14.00 Great collection of higher-yielding corporate bonds at a big discount to NAV

DoubleLine Total Return Bond Fund DLTNX TF 7/22/14 3.42% $10.90 Well-managed bond fund fueled by higher-income mortgage securities

Vanguard Interm-Term Corp Bond ETF VCIT TF 10/28/19 3.39% $93.50 Corporate bonds are delivering growth and not just income

Preferred Shares (7%)Seaspan 7.875% SSW.PH TF 1/22/19 7.71% $25.50 CUSIP# 81254U304

Teekay LNG Partners 9.00% TGP.PA TF 1/22/19 8.64% $26.50 ISIN# MHY8564M1131

NuStar Energy 8.50% NS.PA TF 1/22/19 8.73% $25.00 CUSIP# 67058H201

iShares US Preferred Stock ETF PFF TF 3/9/17 5.34% $38.00 Preferred stocks should be a go-to defensive income generator for all portfolios

Flaherty & Crumrine Preferred Opp. Fund PFO TF 7/23/18 6.21% $11.90 Great closed-end fund from good management team; watch buy under price

Minibonds (3%)JMP Group 7.25% 11/15/27 JMPD TF 1/22/19 7.55% $26.25 CUSIP# 466273109

Cowen Inc. 7.75% 06/15/33 COWNL TF 1/22/19 7.91% $27.00 CUSIP# 223622804

US Cellular 6.95% 05/15/60 UZA TF 1/22/19 7.15% $25.00 CUSIP# 911684405

Municipal Bonds (4%)Blackrock Municipal Income BLE T 4/23/18 7.09%* $15.15 Well-managed fund with tax-free yield and bonus dividend

Nuveen AMT-Free Credit NVG T 4/23/18 8.11%* $17.00 Discount to NAV with monthly tax-free & AMT-free dividend

Nuveen Municipal Credit NZF T 4/23/18 7.60%* $17.00 Discount to NAV with tax-free monthly dividend checks

Treasury Bonds (4%)Two-year Treasury Bond T 12/24/18 1.58% Market Buy US Treasury with current coupon (interest rate) near 1.58% at market price

At least 10% below buy-below price as of the publication of this issue T: Buy in taxable account for best results TF: Buy in tax-advantaged account (IRA, etc.) for best results *Taxable-equivalent yield


The REITs inside the portfolio also continue to do well. One stock to note in this segment is Life Storage (LSI). This self-storage REIT continues to lead its sector with innovative customer interaction, which continues to drive revenues higher. And it delivers a good return from its actual properties, as measured by the return on funds from operations (FFO), at 12.60%. LSI is a buy under a raised price of $112.00, ideally for a taxable account.

Words of CautionOil and gas markets continue to suffer

from a glut of production, particularly in the US where there is still a lack of capacity to transport natural gas and crude oil beyond our shores. And with a series of failed smaller shale-fracking companies, this is bringing some con-solidation in the market.

I continue to recommend Viper Energy (VNOM), as it doesn’t drill or operate wells but just collects rents and royalties from its land in the Permian Basin. So far, it continues to manage its counterparty risks for plenty of revenue to feed its dividend yield. VNOM remains a buy under a reduced price of $25.00, ideally for a tax-free account.

The toll-taker pipelines are under stock price pressure with the general petroleum market malaise. I continue to review the risks for each of our pipeline companies, which could limit revenues for the dividends.

But for now, all four of our mid-stream stocks—Enterprise Products Partners (EPD), Kinder Morgan Inc. (KMI), Pembina Pipeline (PBA) and Plains GP Holdings (PAGP)—remain buys under the prices noted in the portfolio table.

Bond BuysWhile stocks always get more atten-

tion, the US bond markets continue to generate larger growth in price as well as ample income.

The overall US bond market has returned 8.57% year to date. This reflects lower inflation in the US and the core PCE running at a mere 1.67%. And with many major global bond markets enduring negative yields, US

bonds remain attractive for investors.The US municipal bond markets also

continue to perform. The Bloomberg Barclays Municipal Bond Index has returned 6.79% year to date, which is made up of price gains as well as tax-advantaged interest payments.

Buoyed by increased tax revenues from the growing US economy, tax benefits from the December 2017 tax cuts and with muted issuance by state and local authorities, municipal bonds are gaining in credit conditions as well as increasing demand by inves-tors seeking more tax-free income with the limits on deductions on state and local taxes (SALT).

But US corporate bonds continue to be the top-performing market. The Bloomberg Barclays US Corporate Bond Index has returned 13.68% year to date. US economic growth is fueling corporate revenues and aiding credit conditions. And with the general bond market conditions of low inflation along with more attractive yields over Treasuries, investors con-tinue to buy US corporate bonds.

Inside the fixed income allocation of the portfolio, I have a large collec-tion of bonds, preferreds and funds that are all geared to perform through year end and into next year.

The highlights for corporate bonds include the BlackRock Credit Allocation Income Trust (BTZ), which is a closed-end fund trading at a discount to net asset value (NAV) of 8.35%. It yields 7.40% and has gener-

ated a return of 5.02% since it was added to the portfolio in July. BTZ is a great buy under $14.00, ideally for a tax-free account.

Then there is the Vanguard Intermediate-Term Corporate Bond ETF (VCIT), which replaced the SPDR Intermediate Term Corporate Bond ETF (SPIB) last month. Yielding 3.39%, VCIT is another great buy under $93.50, ideally for a tax-free account.

For municipals, I continue to rec-ommend our three closed-end muni funds. The Nuveen Municipal Credit Income Fund (NZF) trades at a dis-count to NAV of 3.21% and yields 7.62% on a taxable-equivalent basis. NZF is a buy under $17.00, ideally for a taxable account.

Joining NZF is the Nuveen AMT-Free Municipal Credit Income Fund (NVG) for those that may be subject to the alternative minimum tax. It trades at a discount to NAV of 4.92% and yields 6.17% on a taxable-equivalent basis. NVG remains a buy under $17.00, ideally for a taxable account.

Incredible Dividend Machine

The Incredible Dividend Machine provides monthly dividend payouts through three cycles. Each cycle is made up of seven stocks, all of which pay above-average yields. This month, I’m raising the buy-under prices for two stocks in this portfolio.

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US Aggregate, US Corporate & US Municipal Bond Indexes Total Return



TPG Specialty Lending (TSLX), in Cycle A, is an “alt-financial” company and a newer member of the Machine. An alt-financial is a non-tra-ditional financial company that makes loans to companies and other entities much like a traditional bank.

But unlike traditional banks, alt-financials have much fewer regulatory challenges and costs. That means their margins are better, and they continue to grab more and more business away from their traditional banking com-petitors.

TPG is part of TPG Capital (for-merly called Texas Pacific Group), a leading private equity company that gives it a great deal of reach for clients as well as eased access to credit.

TPG Specialty Lending makes loans and other financial investments in middle-market companies located primarily in the US. It’s working in the core of the space that banks used to dominate. And it does it all very well.

Revenues are up over the trailing year by 24.20%. Its net interest margin (NIM), which measures its cost of funds against its interest-earning loans, is a very fat 10.20%. That’s much higher than the average for US banks.

And with less regulatory burden, it can operate on the cheap. Its effi-ciency ratio, which measures how many cents it costs to earn a dollar, is a fantastic 31.50%, meaning its costs are only 31.5 cents for each dollar earned. This is half as much (or more) than what it costs regular banks.

TPG delivers a return on equity of 12.00% and a return on assets of 6.40%—also much better than tra-ditional banks. And since it is set up under the Small Business Investment Incentive Act of 1980, it avoids most Federal income taxes, making for more cash for dividend income.

That income is ample, with the standard dividend yielding 7.19%. But it gets even better because the company regularly pays special dividends throughout the year, so the current 12-month dividend yield is actually running at 8.21%.

But if you think that the stock might be expensive because it’s up 28.02%

year to date, don’t worry. TSLX is only valued at a meager 1.30 times its book value of loan and other assets, making it a bargain compared to reasonably performing traditional banks.

I am raising the buy under price for TSLX to $23.00, ideally for a tax-free account.

Then in Cycle C, we have BlackRock (BLK), which is one of the world’s largest asset managers with over $7 trillion in assets under management (AUM). It serves all sorts of investors from individuals (including us with the BlackRock Credit Allocation Income Trust (BTZ) and the BlackRock Municipal Income Trust II (BLE) inside the Total Return Portfolio) to institutions.

Its institutional clients range from pension funds to government sover-eign investment funds. And even the core pension fund for all US govern-ment employees is largely managed by BlackRock. It also owns and runs the largest ETF portfolio with its iShares business.

The AUM business is all about attracting and keeping AUM. The more AUM you have, the greater the fee income. Revenue keeps gradually climbing, even as some of the fee rates have been reduced, thanks to market competition. But it generates a very good return on equity at 12.70%, and it is very underleveraged with little to no debt. Debts to assets are running at only 3.20%.

The 2.70% dividend could be higher, but it’s better than the general stock market average. The stock has generated a return year to date of 26.91%. And yet, it’s only valued at 2.32 times its massive book value.

BLK is a buy under a raised price of $496.00, ideally for a tax-free account.

Toll-Takers Take an Investor’s Toll

Now a word on three stocks in Cycle B, which are all involved in the pipeline and related oil and gas infrastructure market. As I’ve been discussing for a while, the petroleum market has its challenges.

Led by the huge surge in US oil and gas production in recent years, the world is now looking at an oversupply. Prices for crude oil and natural gas are still pretty good in the general market, but they are trading at discounts in many shale field areas because there is still a lack of infrastructure and pipe capacity to move more of it.

This is putting a lot of pressure on production companies. And in turn, a consolidation is underway, as smaller exploration and production companies are stressed, resulting in asset or even whole company sales.

This is weighing on the overall petrol market, including the pipelines, which are still being paid amply to move the oil and gas.

So, what we have are heavy cash-generating companies like Magellan Midstream Partners (MMP),

The Incredible Dividend MachineCycle A (January, April, July, October) T/TF Buy UnderBCE Inc. (BCE, 5.0%) TF $49.00 EPR Properties (EPR, 6.1%)* T $80.00 Merck (MRK, 2.6%) TF $87.00 Mondelez International (MDLZ, 2.2%) TF $56.00 PPL Corp. (PPL, 4.9%) TF $34.00 South Jersey Industries (SJI, 3.8%) TF $36.00 TPG Specialty Lending (TSLX, 8.21%)** TF $23.00

Cycle B (February, May, August, November)Alerian MLP ETF (AMLP, 10.1%) TF $10.00 AT&T (T, 5.5%) TF $39.00 Colgate-Palmolive (CL, 2.6%) TF $74.00 Magellan Midstream Partners (MMP, 6.8%) T $68.00 ONEOK Inc. (OKE, 5.2%) TF $76.00 Realty Income Corp. (O, 3.5%)* T $81.00 Verizon (VZ, 4.1%) TF $62.50

Cycle C (March, June, September, December)BlackRock (BLK, 2.7%) TF $496.00 Dominion Energy (D, 4.4%) TF $84.50 Duke Energy (DUK, 4.3%) TF $97.00 Easterly Gov’t Properties (DEA, 4.5%) T $23.00 Main Street Capital (MAIN, 5.8%)* T $46.00 Public Svc. Enterprise Group (PEG, 3.1%) TF $63.00 Ventas (VTR, 5.4%) T $63.50

*Monthly dividend payer, **Annual Yield


ONEOK (OKE) and the Alerian MLP ETF (AMLP) paying very nice dividends, but their stocks are down.

I look forward, not backward, when it comes to stocks and other investments. I do see that there will be counterparty risks for pipelines as some of their cus-tomers may run into trouble, forcing them to get new customers to keep their pipelines full and revenue flowing.

I continue to examine each of the three investments, but for now I continue to see good, defensive man-agement. MMP, OKE and AMLP remain buys for income now and stock price gains over time under the prices listed in the portfolio table.

Model Mutual Fund Portfolios

In the November issue, I updated the holdings of the Model Mutual Fund Portfolios to make certain that each of them was the best within each of their categories and sectors as well as in the respective fund families.

I looked at a number of factors, including performance, yield, index-

tracking and expenses. I also looked at the tax-efficiency of the ETFs over some of the open-end funds, includ-ing pending capital gains distributions projected before year-end.

The resulting sector allocations should be well-suited to follow those of the Total Return Portfolio. And the overall allocations are conservatively weighted as well, with stocks at 56% and fixed income at 44%, which includes an allo-cation of 11% in cash.

Stock AllocationsWithin the stock allocations of each

mutual fund portfolio, we have a con-servative fund version of the S&P 500 Index that’s weighted to stocks with higher dividend yields. This provides a base for your invest-ment.

We add to that base with two safer alloca-tions to real estate investment trusts (REITs) and utilities. These are primarily

US-focused industries that are insu-lated from global economic woes and trade tensions. And they continue to be less volatile than the general stock market while providing better divi-dend income.

We then add some further growth and income with the healthcare stock funds, which continue to capitalize on growing US expenditures on health-care and related businesses.

To top it off, we have exposure to information technology, which is the bigger growth sector of the stock market. These are the alchemists

Hassle-Free ETF PortfolioStocks (56%)Vanguard High Dividend Yield ETF (VYM)Vanguard Real Estate (VNQ)Vanguard Utilities ETF (VPU) Vanguard Information Technology ETF (VGT)Vanguard Health Care ETF (VHT)Fixed Income (44%)Intermed.-Trm Corporate ETF (VCIT)iShares Preferred and Income Securities ETF (PFF)SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (TFI)Cash (11%)

The Ten-Minute Retirement PortfolioStocks (56%)Vanguard High Dividend Yield ETF (VYM)Vanguard Real Estate (VNQ)Vanguard Utilities ETF (VPU) Vanguard Information Technology ETF (VGT)Vanguard Health Care ETF (VHT)Goldman Sachs MLP Income Opportunities Fund (GMZ)Fixed Income (44%)Intermed.-Trm Corporate ETF (VCIT)iShares Preferred and Income Securities ETF (PFF)SPDR Nuveen Bloomberg Barclays Municipal Bond ETF (TFI)Cash (11%)

Fidelity (800/544-8888) T. Rowe Price (800/638-5660) Vanguard (800/662-2739)Stocks (56%) Stocks (56%) Stocks (56%)Fidelity High Dividend ETF (FDVV) Equity Income (PRFDX) High Dividend Yield ETF (VYM)Fidelity MSCI Real Estate ETF (FREL) Value (TRVLX) Real Estate ETF (VNQ)Fidelity US Utilities ETF (FUTY) Growth Stock (PRGFX) Utilities ETF (VPU)Fidelity Health Care ETF (FHLC) Real Estate (TRREX) Information Technology ETF (VGT)Select Software & IT Svcs (FSCSX) Science & Technology (PRSCX) Vanguard Health Care ETF (VHT)

Fixed Income (44%) Fixed Income (44%) Fixed Income (44%)High Income (SPHIX) Spectrum Income (RPSIX) Intermed.-Trm Corporate ETF (VCIT)Principal Preferred Securities (PRFCX) Cash (11%) iShares Pref. and Income Secs. ETF (PFF)Intermediate Municipal Income (FLTMX) Tax-Exempt Bond ETF (VTEB)Cash (11%) Cash (11%)

All-in-the-Family Fund Portfolios

Fund Supermarket PortfolioStocks (56%)Vanguard High Dividend Yield ETF (VYM)Vanguard Real Estate ETF (VNQ)Vanguard Utilities ETF (VPU)Vanguard Health Care ETF (VHT)Vanguard Information Technology ETF (VGT)Fixed Income (44%)Intermed.-Trm Corporate ETF (VCIT)SPDR Nuveen Bloomberg Barclays Muni Bond ETF (TFI)iShares Preferred and Income Securities ETF (PFF)Cash (11%)


of the market, as tech brings high margins and profits from both hard-ware and software.

Fixed Income AllocationsOn the fixed income side, we start

with corporate bonds, which are ben-efitting from the continued growth in the US economy as well as yield opportunities.

We then add to that with exposure to preferred stocks, which offer a good hybrid of stocks and bonds for more income and controlled price growth over time.

Last up, we incorporate US munici-pal bonds for continued gains as well as income. These are also benefitting from US economic growth as well as lower inflation and rising demand for tax-free income.

These can be bought inside qualified retirement accounts, but be sure to tell your broker that you understand that tax-free funds can be held in tax-free accounts. I recommend these funds not just for the tax-free income but for the total return of the muni bonds.

Even if you’re not getting the tax-free benefit on the income, the dividend yields of these funds are still worth it.

Niche InvestmentsThe Niche Investments are my farm

team of stocks and other investments for the model portfolios of Profitable Investing. These stocks come into the Niche Investments because they have a lot to offer, but they must prove themselves to earn a spot inside the main portfolios.

Stocks in the Niche Investments should be bought in smaller sums than you normally would for the main port-folio picks. If they’re working, you’re all the better for it. And if they don’t quite measure up, then the loss will be less than for a larger commitment.

In last month’s issue, I brought up Franco-Nevada Corporation (FNV) into the Total Return Portfolio, as it has proven to be a solid investment in gold with a dividend yield.

I also brought up BlackRock (BLK) into Cycle C of the Incredible Dividend Machine, as its massive and expand-

ing assets under management (AUM) continue to generate ample and rising revenues to feed a good dividend.

And for its ability to provide a big dividend from MLP pipelines without the need to deal with K-1 tax forms, I brought up the Alerian MLP ETF (AMLP) into Cycle B of the Incredible Dividend Machine.

I may also use the Niche Investments for an investment that is still promising and a good value but which may need some time to turn itself around. This was the case with Walgreens Boots Alliance (WBA), which was demoted from the Total Return Portfolio last month.

Walgreens is valued at a whopping discount to its trailing and current sales. It continues to work through integrating its acquisitions, and man-agement as well as the CEO continue to hold massive stock positions in the

company. In other words, they have a lot of skin in the game.

Currently, WBA management is working to take the company private, potentially with the aid of the private equity firm KKR (KKR). The stock is climbing as the potential deal is being put together. WBA remains a buy under $65.00, ideally for a tax-free account.

I believe the company should be valued at a price of $75.00 or higher. I’m watching the developments and will keep you in the loop in upcoming Journals and issues.

And as I discussed earlier in this issue, we are adding two new names to the Niche Investments: Kar Auction Services (KAR) and Gray Television (GTN). KAR is a buy under $23.00 and GTN is a buy under $22.00, both for tax-free accounts.

3.50

3.00

2.50

2.00

1.50

2019201820172016


1.67

14

12

10

8

6

2

0

4



40.00

36.00

34.00

30.00

38.00

32.00

28.00

38.46

360

340

330

310

350

320

300

290

355.53900

860

840

800

760

880

820

780

894.67

20192017 2018


SPX Index

5

10


0

20

30

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0




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2.2

2.1

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2.3

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24.00

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20.68

3.60

3.40

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20192017 2018


SPX Ratio

2900

3000

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2800

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2400Mar Jun

2019Sep

3123.99

2980.00

2913.22


30

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21.92

1000

1500

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019


60

65

55

50

45

58.0

20192017 2018


50

30

0

40

20

10


12.90


Total Return Fixed Income ETFs


3.50

3.00

2.50

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1.50

2019201820172016


1.67

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4



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34.00

30.00

38.00

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360

340

330

310

350

320

300

290

355.53900

860

840

800

760

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820

780

894.67

20192017 2018


SPX Index

5

10


0

20

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0




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2.2

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2.3

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3.60

3.40

3.30

3.10

2.90

2.80

3.50

3.20

3.00

3.48

20192017 2018


SPX Ratio

2900

3000

3100

2800

2700

2600

2500

2400Mar Jun

2019Sep

3123.99

2980.00

2913.22


30

40

20

0

10



14

12

10

8

6

2

0

4



28.00

26.00

22.00

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21.92

1000

1500

0

500

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019


60

65

55

50

45

58.0

20192017 2018


50

30

0

40

20

10


12.90


Total Return Stock ETFs


One Final ThoughtNot the Time to Add Risk—Focus on Dependable Growth & Income

At this time last year, traders were panicking, resulting in wide-scale selling of stocks and a rush into safe-havens. The selling came largely from fear of slowing earnings, particularly for more leveraged companies like those in the technology sector.

But the reality was that while average earnings and revenue growth for the overall members of the S&P 500 Index were a bit down, it wasn’t the end of the US economy nor the markets.

Our conservative model portfolio allocations, with plenty of defensive US utilities and REITs, worked well for us that quarter as well as over the past year.

Now, I’m seeing all sorts of analysts and fund managers talking about buying more risk-on and aggressive stock investments and reducing expo-sure to the safer sectors of the stock market.

While that strategy has shown some short-term blips of success this month, I don’t see the compelling argument to follow along. In this issue, I made my case that the stock market is defended and should head into 2020 in good shape.

But I also discussed the ongoing and developing cracks in the US economy and markets and stated my concerns regarding consumer comfort and business sentiment. There are plenty of other challenges around the globe as well that haven’t yet been reversed.

Therefore, I continue to recommend lots of dividend-focused and US-centric stocks in addition to plenty of fixed income investments, such as corporate and municipal bonds and bond-like investments.

That said, there are plenty of stocks in the Total Return Portfolio that are getting ready to shift into higher gear, including Compass Diversified Holdings (CODI), FMC Corporation (FMC), Hercules Capital (HTGC) and even Microsoft (MSFT). And in the Incredible Dividend Machine, TPG Specialty Lending (TSLX) and BlackRock (BLK) are furthering their businesses.

I also presented two specialty companies in specific US industries that I’m trying out in the Niche Investments. With a lower investment sum, buy a few shares in Kar Auction Services (KAR) and Gray Television (GTN). I’ll let you know when they’re ready for the big leagues.

But overall, I’m sticking with the proven, all-weather, dividend-paying stocks primarily focused on the US economy. And I continue to like the opportunities for further price growth and lots of income in the bond markets.

These include the BlackRock Credit Allocation Income Trust (BTZ), which is still at a big discount to NAV and pays well along the way. Municipal bonds are still available at discounts as well, including the two Nuveen closed-end funds: The Nuveen AMT-Free Municipal Credit Income Fund (NVG) and the Nuveen Municipal Credit Income Fund (NZF).

Getting paid from quality US-focused investments served us well this year, and I believe the strategy will continue to work in the year to come.

All My Best,

Neil George

NEIL GEORGE began his financial services career in 1987 with Merrill Lynch International Bank in Vienna, Austria and subse-quently held senior positions at what are now US Bank and globally-based Investec

PLC. Neil’s long career has included stints as a bond trader and the manager of a fixed-income fund worth over $1 billion. An income hunter at heart, he’s also the former editor of several successful investment advisories dedicated to finding Wall Street’s best yields. Neil earned an MBA in inter-national finance from Webster University in Europe and a bachelor’s degree in eco-nomics from King’s College. His market commentary and insights have been fea-tured in the Wall Street Journal, Barron’s, Bloomberg, CNN and NBC.

Actions to Take This Month

1. In the Total Return Portfolio:• Buy CODI under $24.00 (T)• Buy FMC under $99.00 (TF)• Buy HTGC under $15.00 (T)• Buy MSFT under $155.00 (TF)• Buy UTX under $150.00 (TF)• Buy LSI under $112.00 (T)• Buy BTZ under $14.00 (TF)• Buy VCIT under $93.50 (TF)• Buy NZF under $17.00 (T)• Buy NVG under $17.00 (T)

2. In the Incredible Dividend Machine:• Buy TSLX under $23.00 (TF)• Buy BLK under $496.00 (TF)

3. In the Niche Investments• Buy GTN under $22.00 (TF)• Buy KAR under $23.00 (TF)• Buy WBA under $65.00 (TF)

4. Check the updated buy under prices for the Total Return Portfolio and Incredible Dividend Machine listed on p. 7 and p. 10. In addition, check the updated prices for the Niche Investments in the Portfolios section of the Profitable Investing website.

SUMMARY

growing pains growth & income on the safer side · growing pains us gdp remains positive for...

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