Vol 10 Issue 01 Will Inflation and Higher Rates Kill the Housing Boom?

Two historically distressing conditions are about to hit home buyers: higher mortgage rates and inflation; but will it matter to a red-hot housing market?

Investing in New Home Construction Goes Well Beyond the Homebuilders

When thinking of new home construction, the obvious first thought for investors is the builders; but many sectors and industries play a vital role

Homebuilders

The

20 Prices just spiked the most since 1982, but we see peak inflation around the corner

The Street was generally negative on Oracle’s $28 billion purchase of Cerner, but we see potential

Blackstone continues to collect real estate assets with purchase of Bluerock Group

US recommends approval of a massive Meta/Google undersea cable project in Asia; China is not amused

17

Bright Ideas Being Ignored

Solar stocks are getting crushed on the back of new California proposals

Penn member Dollar General announces plans to open 1,000 new Popshelf stores to attract a wealthier clientele

Six companies which played an outsized role in the headlines this past year

“Insanity” is how Erdogan’s demanded rate cuts in the face of 20% Turkish inflation is being described

Top

• Montesquieu on bloviating

• Butler on job satisfaction

• Emerson on destiny

nvestor

just sold for $2.4 million, room to grow

Actions we have taken at the Penn Trading Desk, plus a look at what other Wall Street Analysts have to say, along with accompanying charts

From the Editor/

A Few Thoughts About the Year Ahead

After three years of solid returns, investors should temper their enthusiasm for 2022

When we heard the business journalist utter the words, the comments caused an immediate flashback. “The stock market just put together its best three-year period since 1997 through 1999.” We recall what it was like investing through that period and, more critically, the three-year period which would follow. Everything being said back in the late ‘90s about the Internet changing the way we would live and work turned out to be true, but that didn’t stop a nightmarish 78% downturn in the NASDAQ beginning in 2000. Some don’t recall investing during that period; not only were we investing, we were managing other people’s money

Despite a few recent market pullbacks, there remains unbridled enthusiasm for stocks in general and the high-flying NASDAQ in particular. Additionally, the TINA (there is no alternative) concept certainly holds more true today than it did twenty-two years ago. Back then, we could take comfort in the cash and fixed income portions of our portfolio, which included

4% money market rates and 8% quality bonds. Is the current lack of opportunity within the fixed income arena and specter of multiple impending rate hikes supposed to make us feel more comfortable with our giant equity portions? TINA is a dangerous concept to base an investment strategy upon.

Here’s a very brief synopsis of what we see transpiring in 2022. There will be at least one 10%-plus correction in the markets. After three scorching-hot years (which is really remarkable considering the pandemic), expect single-digit gains in the major benchmarks. Our prediction is for the S&P 500 to end up at 5,100, which would represent a 7% gain on the year. We would not, however, rule out a negative 12-month period.

Gold, which is a true inflation hedge, will have a strong year, and small caps will perform nicely. While fixed income investing will be like dancing in a mine field, investors will be happy they kept some cash on the sidelines. Tactical stock selection and risk management will be the keys to success in 2022.

—MSH

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Michael S. Hazell editor-in-chief

The MonTh in CharTs

Buying Pfizer before it was cool...

Despite what we saw developing for Pfizer, and despite its excellent management team, this great American pharma was largely being ignored throughout the first year of the pandemic (shares were flat between March of 2020 and March of 2021). That finally changed. The company, which has the most viable Covid vaccine on the market, and an approved Covid therapy which is 89% effective in reducing hospitalizations and deaths, finds itself at the top of the investment pack for the year.

Charts tell the story. Here are some of our favorites from the past month. For the top business and economic stories of the week, visit Penn...After Hours at www.penneconomics.com.

How dare they...

The Fed finally hinted that it may be ready to begin unwinding its completely irresponsible $9 trillion debt, which is up from $4 trillion just before the pandemic and $900 billion before the financial crisis. How did the Street respond to this modicum of responsible talk? It had a meltdown, with the tech-heavy NASDAQ losing 4.53% of its value on the first trading week of the new year.

Guard your wallet...

The rate of inflation within the United States just hit its fastest clip in forty years. This makes sense, considering the rebounding global economy coupled with a new wave of infections which is shuttering production facilities around the world. We are not overly concerned with inflation, and believe it is about to peak. Three or four rate hikes by the Fed this year should also help.

How One Homebuilder Helped to Create the Modern American Suburb

Following World War II, Levitt & Sons identified an enormous problem and helped to forge a new industry with their solution

With the rise of American industrialization came a mass migration of families from the rural farms scattered throughout the countryside to the densely-populated cities. As millions of Americans and an ever-expanding influx of immigrants flocked to work in the factories, housing became a serious issue.

In New York City and other large metropolitan regions around the US, overcrowded tenement houses, which were little more than condemned warehouses and other dank, airless, often windowless buildings, became home to these blue collar workers and their families.

While the Roaring Twenties brought a period of peace and prosperity to the nation, conditions changed little for the typical American family on the lower rungs of the economic ladder. The Great Depression exacerbated the situation, creating even more of a vac-

father Abraham, a real estate lawyer, received a tract of land as payment-in-kind for handling a mortgage foreclosure. Instead of selling the land, Abraham started Levitt & Sons and began building on the property.

The timing couldn’t have been more inauspicious: Levitt & Sons was established literally on the brink of the Great Depression. Savings and loans began going out of business, and banks were suddenly foreclosing on homes at a staggering rate of a thousand per day as homeowners failed to make their mortgage payments. During the height of the Roaring Twenties, over 500,000 non-farm “custom” homes were being built each year in America; in the first full year of the Great Depression, just over 50,000 homes were built. By 1933, close to half of all active home mortgages were in default.

Just 22 years old in 1929, William, who was now in charge of marketing and sales at the company, was full of creative ideas to help the endeavor turn a profit—even under the darkest of economic conditions. Levitt & Sons began buying land which was in foreclosure and started building upscale homes on the properties.

uum between the upper class and the working poor. It would take a world war, a global economic power shift, and some impressive ingenuity, but the American middle class was about to be forged into existence; and the country would never be the same.

Turning a profit in the Great Depression

While certainly not a member of the lower class, William Levitt was born in New York in 1907 during the heart of the housing crisis. Shortly after he dropped out of NYU to “make a lot of money,” his

Between 1929 and America’s entry into World War II, which helped end the Great Depression, the company built and sold nearly 3,000 homes priced between $9,000 and $18,500. Quite the asking price at the time, William’s marketing was geared to attract the area’s wealthiest citizens. William’s brother Alfred, who became the vice president of design and chief architect, helped attract this exclusive clientele with unique amenities such as a neighborhood pool, a nearby shopping district, and topline appliances built into the homes.

When the war hit and bans on new home construction were implemented, Levitt & Sons once again showed their business acumen by becoming a government contractor for the construction of housing for service members and their families. Facing the ridicule of industry peers, the company won a bid to build low-cost housing for US Naval officers in Norfolk, Virginia at an astounding rate. Building houses up to this point had been a tedious, one-by-one process with virtually no standardized procedures in place.

The Condemned Tenement, NYC, 1906, by Charles Henry White; Public Domain

William heads off to war

The reason for the ridicule from Levitt’s peers in the industry was evident from the start: supplies would notoriously arrive late, subcontractors would delay promised work, and agreed-upon Navy deadlines were missed. Instead of lashing out at the various parties, William took to the drawing board and created a standardized process for building homes.

Suddenly, laborers were cutting mass pieces of lumber at the same dimensions, foundations were being poured one after another down a new street, and framers were methodically putting up pre-built walls. The Navy Seabees were so impressed by what they saw that they encouraged the 37-year-old William to enlist in their ranks.

In a war environment, action often

the war created a nightmare scenario as millions of service members returned home. A special report to the US House of Representatives in February of 1946 warned: “Existing facilities are inadequate to house the large number of veterans returning to civilian life.... To meet the housing emergency there is an urgent need for some 3,000,000 moderately and low-priced homes (to be built) during the next two years. It is now a national tragedy.”

Within three months, Congress passed the Veterans’ Emergency Housing Act which worked to assure critical materials went to the homebuilding effort, and that wartime factories were re-purposed for home manufacturing needs.

The reverse assembly line process creates the modern homebuilding industry William Levitt was obsessed with the desire to reinvent the nascent housing industry, and he fully understood the folly of building unique homes one at a time. What seems like common sense today was impugned by an industry stuck in its ways. Like all pioneers, he faced the wrath and forged ahead.

Impressed by Henry Ford’s use of the assembly line to build cars at a record clip, Levitt found his template. Obviously, homes couldn’t move down a factory floor like Model-Ts, so he adapted the idea and created his reverse assembly line process.

vacillates between the overwhelming and the mind-numbingly mundane. During many of the downtime hours, Levitt would attentively listen to what his brothers-in-arms looked forward to doing when they got back home to the States. Overwhelmingly, they dreamed of buying a small home and raising their family in a comfortable environment. Unfortunately, when they did actually return home, most faced a nightmare rather than a dream.

Crisis spurs action in Washington

The lack of building during the Great Depression and the government ban on civilian home construction during

The Serviceman’s Readjustment Act, otherwise known as the GI bill, began offering veterans 30-year mortgages (a length unheard of to this point) at a rate not to exceed 4.5%, and VA/FHA loans were put in place which would be guaranteed by the federal government. Before the advent of the FHA, would-be homeowners had to put down as much as 50% of the asking price to get a loan; suddenly, veterans were buying houses for literally no money down. Of course, this did little to change the fact that homebuilding still moved at a snail’s pace.

Levitt’s creative and attentive mind saw a golden opportunity. The company had proven it could build homes rapidly; now the government was also primed to act.

In short order, Levitt & Sons purchased some 4,000 acres of potato fields in Long Island, New York. The company then got to work on what would be the largest private housing project in American history: Levittown.

Constantly refining the process of moving workers rather than the products, Levitt was soon churning out as many as 30 finished units per day, complete with in-home appliances, curving streets, and gorgeous landscaping. Veterans couldn’t buy their new dream homes at a faster clip, and soon Levittown was a bustling region of 17,000 families. The great migration to suburbia had begun.

By 1951, Levitt & Sons was the biggest home builder in America, turning a sleepy, cottage industry into an economic powerhouse. Today, four out of five Americans live in the suburbs, with most neighborhoods bearing an uncanny resemblance to those William Levitt and his family created in the 40’s and 50’s. All because one person refused to accept the status quo.

“Levitt’s creative mind saw a golden opportunity.”

Levittown homes in suburbia, 1958; Public Domain

Economics: Housing

Can the Housing Boom Withstand Both Higher Rates and Inflation?

Two historically distressing conditions are about to hit home buyers: higher mortgage rates and inflation; but will it matter to a red-hot housing market?

It was just over a decade ago, in the aftermath of the bursting housing bubble and subsequent financial meltdown, that we first began hearing the narrative of younger generations shunning home ownership in favor of perpetual rents and leases. Banks began tightening loan standards and homeowners watched as their property values actually dropped (to more realistic levels, we would argue).

According to the National Association of Realtors, home prices dropped a record 12.4% in the fourth quarter of 2008—the largest housing price decline in three decades. US home ownership rates plummeted from near 70% to 62.9% over the span of a decade; the exodus away from single family homes and to rentals had begun.

Looking at our own archives on the subject, back in 2014 we wrote of the sudden and quite astounding push by builders to develop multifamily properties at rates not seen before. New “city center” projects, which included rental units combined with office space and small shopping districts, were underway across the country. This movement peaked, according to the US Census Bureau, in 2017 when 294,800 apartment units were constructed. As leasing vacancies fell from 11% in 2009 to roughly half that in 2015, landlords were able to demand higher rates from renters.

Traditional homebuilders, already battered by the financial meltdown, faced a real solvency crisis. Many

smaller builders went out of business, while those which could weather the downturn were leery to begin costly new projects. Between March of 2006 and March of 2009, the SPDR S&P Homebuilders ETF (XHB) lost 82% of its value

The great housing comeback

As is so often the case, just as the bears were roaring the loudest the great comeback began. As rates came down, stirring new demand, and the dearth of new construction caused supply constraints, the US median sales price for new and existing homes nearly doubled within a decade, to $407,700 and $360,800, respectively. Stories of millennials shunning home ownership suddenly vanished as young families began searching for their own slice of the American pie. While prices were rocketing higher, pleasing both sellers and builders, home buyers were finding that record low mortgage rates allowed them to buy larger homes with more amenities.

When the pandemic hit with full force back in March of 2020, the market once again seized up. Suddenly, however, Americans were discovering a new sense of freedom as they were able to work from home. By summer, spurred by another drop in mortgage rates and a desire to make the most of this new hybrid work model, the race was back on. Fierce demand has led to a shortage of some 5.24 million homes in the country, up from half that level just three years ago.

This housing shortage isn’t just due to higher demand, however, or risk averse homebuilders taking a more cautious approach. New challenges have been added to the mix, with no quick answers in sight.

As the global economy ramped back up with force, serious supply chain issues led to a lack of available building products. Labor shortages exacerbated the problem as builders couldn’t find enough workers to construct the homes. A lack of supply, consumers flush with cash, and a flood of new buyers has led to an inevitable economic condition: the highest level of inflation in decades. To fight this new nemesis, the Fed must raise rates.

Over the course of three years, the homebuilders ETF lost 82% of its value

Higher mortgage rates are coming

To help keep the economy humming, the Fed has used two of its three major tools throughout the pandemic: the discount rate (upper band currently 0.25%), and open market operations ($30 billion of bond purchases per month). Starting in November, the bond purchases were tapered and are on schedule to end in the first quarter of 2022. Shortly after that, rate hikes will begin. We fully expect to see at least two hikes next year, with the first probably taking place by the June FOMC meeting.

With rate hikes will come higher mortgage rates; good news for the lenders and bad news for buyers. But with rates still near historic lows, will buyers really be dissuaded? We don’t believe so.

As we write this, the average 30-year mortgage rate sits at 3.25%, or very near its 52-week high. However, that remains well below the 4.94% rate hit three years ago, in November of 2018. And it should be noted that both new and existing home sales were robust at that time. The effective Fed funds rate (now 0.08%) was 2.20% in November of 2018, meaning it would probably take six to eight 25-basispoint rate hikes to get back to that level!

The specter of higher rates may be spooking the markets, but this comparison should put some needed perspective on the issue. To reiterate: We do not believe the impending tightening cycle will curb buyers’ enthusiasm for purchasing a new or existing home.

Wage growth vs inflation: the battle rages

Hitting a rate not seen since 1982, the US Department of Labor recently announced that the consumer price index (CPI) rose by 6.8% annualized in November—the sixth-straight month in which the rate of inflation exceeded 5% year-on-year. Within the CPI market basket, there is a component known as “shelter.” This represents the implicit

rent that owner-occupants would have to pay if they were renting their homes. The shelter component is suddenly going up at a rate of around 0.5% per month. Compound that with the near20% spike in home prices over the past year, and buyers have cause for concern.

Yes, real estate is often considered a good hedge against inflation. After all, assuming a homeowner has a fixed-rate mortgage as opposed to an adjustable rate (why would anyone have selected an ARM at historically low rates?), their monthly payments will remain the same while the value of their abode will continue to rise in value—just the opposite of what happened after the financial crisis. But for potential buyers, especially renters facing higher lease rates, there is nothing to celebrate about higher inflation.

As mentioned, higher prices are also permeating the raw materials market,

land of American suburbia. We believe the pandemic has fostered a new wave of young families to follow in their grandparents’ or great-grandparents’ footsteps. Once drawn to the excitement of living in all-inclusive planned developments, millennials are now rushing to the quaint and laid-back suburban lifestyle to raise their families.

The freedom to work remotely from home is one major factor in this movement, but a desire to escape more crowded areas and to walk away from ever-increasing lease rates also play a major role. As evidence of this, consumer reporting agency CoreLogic reports that two-thirds of first-time mortgages taken out between January and August of this year have been done so by millennials— the very demographic group we were told was shunning home ownership.

While frustrated by a lack of supply, sticker shock, and frenzied competition, buyers are beginning to cool their jets a bit; but we believe this is actually a good thing for the housing market. As

making the price of lumber, glass, metal, cement, bricks, and virtually every other commodity needed to build a house more expensive. Lumber, the most common product in new home construction, recently soared from $349 per thousand board feet to over $1,500—a four-fold increase. While prices have fallen from these highs, they are still double what they were in spring of 2020.

Right now, there are some ten million job openings in the United States. For anyone looking for work, it is a golden age. Along with unmet demand comes the need to attract workers through higher wages. In fact, wage growth in the country rose at a robust 4% over the past year. Unfortunately, real wage growth—pay adjusted for inflation—is still negative.

While we expect wage growth to remain high in 2022, we don’t believe inflation anywhere near the 6% range can be sustained. Furthermore, as supply issues ease, the price of building a new home should continue to fall. More good signs for the housing market over the coming year.

A new exodus to suburbia?

In our discussion of Levittown, we highlighted the mass migration of families out of the urban regions and into the new

buyers balk and pull back, at least temporarily, this should force builders and individual sellers to temper their expectations—and their prices. Furthermore, we expect commodity prices to drop back down in early- to mid-2022, allowing builders to maintain their margins.

Yet another challenge we expect to abate in 2022 is the competition from all-cash buyers, mostly “iBuyers” in the fintech community who either flip the homes to re-sell at a higher price, or perform some minor renovations and lease the homes out. Internet-based real estate company Zillow (Z $58), for example, abruptly halted its iBuying program last month, and is sitting on an inventory of $1 billion worth of unsold properties.

Construction starts on new single-family housing, which slowed to a snail’s pace after the 2008 financial crisis when millions of properties went into foreclosure, will finally reach the one million mark this year, but inventories of existing homes for sale remain at historically-low relative levels. This should mean the gravy train will keep rolling for the builders for years to come.

Home ownership remains one of the top ways for Americans to build real wealth. It seems as though the “experience” generation is coming to that realization.

With supply constraints and new demand, home prices nearly doubled within a decade

“...We do not believe the impending tightening cycle will curb buyers’ enthusiasm for purchasing a new or existing home.”

Investing in New Home Construction Goes Well Beyond the Homebuilders

As noted in a previous story within this issue, the building of a new single-family home was once an onerous, time-consuming, and backbreaking (at least for the workers) venture. When Levitt & Sons came along and standardized the process, they found it necessary to vertically integrate to better control outcomes. When lumber wasn’t being delivered at the agreed upon time, the company bought up forests and sawmills. When large quantities of defective nails were being received from the distributor, Levitt acquired its own nail factory to ensure quality control. The company became the model for the homebuilder of the future.

While modern homebuilding remains highly systematized using the reverse assembly line process created by Levitt & Sons, vertical integration is too costly of a proposal for the builders. Instead, they rely on an efficient supply chain to provide the needed raw and refined materials on a just-in-time basis to keep churning out the homes.

But what happens when the global supply chain suffers a massive disruption? It may seem as though few of the materials needed in the homebuilding process would be stuck on a cargo ship from China, but—sadly—that is not the case.

While the US produces much of the wood used in a new home, think of the electrical system, the plumbing lines, the appliances, the fixtures, and the thousands of parts required to make every device operate. For example, right now there is even a shortage of the springs needed to operate a garage door!

Slowly, the supply chain issues will abate. As they do, we see plenty of opportunities in this market.

Materials—from wood to aggregates to chemicals

When thinking of home construction, lumber is probably the first product which comes to mind. According to the National Association of Home Builders, it takes over 13,000 board feet of softwood lumber to build the average 2,100 square-foot house. Literally a home-grown item, the US produces some 50 billion square feet of lumber each year, with our neighbor to the north, Canada, supplying some 25% of what US builders use.

Unfortunately, lumber prices have skyrocketed over the past year, going from around $400 per thousand board feet (MBF) to $1,700 per MBF last spring. Prices then dropped back to a more normal range, but have since spiked once again to $1,089 per MBF for January delivery.

Adding fuel to the fire, the Biden administration just doubled the Trump administration’s tariff on softwood imports, from 8.99% to 17.99%. Irrespective of the rationale, those punitive fees trickle directly down to the builder and, thus, the home buyer. No wonder housing prices have gone up nearly 20% in the past year.

Needless to say, the major timber interests are flush with cash, and we believe demand will remain strong; in fact, it should only increase as prices come back down. We further believe that the Biden administration will be forced to back off from its tariff stance due to inflation concerns at home. All of this bodes well for the industry leaders, many of whom are stellar mid-cap plays.

Two of our favorite timber companies are WeyerhaeuserWY $40, a $29 billion REIT which purchased fellow timber REIT Plum Creek five years ago, and West Fraser Timber Co, LtdWFG.TO $115, a $12 billion softwood lumber company with mills in British Columbia, Alberta, and the Southeastern US.

Instead of betting on one name, however, investors should consider the iShares Global Timber & Forestry ETFWOOD $90 , which contains 25 hand-selected names (WY and WFG.TO happen to be the largest holdings), as well as up to a 20% weighting in related futures, options, and swap contracts. We have used WOOD and its ETF competitor, the Invesco MSCI Global Timber ETFCUT $36, as tactical plays in this

When thinking of new home construction, the obvious first thought for investors is the builders; but many sectors and industries play a vital role

Cargo ships awaiting offloading sit idly in port; image licensed by Penn Wealth

Homes & Durables

industry since their inception in 2008 and 2007, respectively.

Remaining in the Materials sector but moving from Paper & Forest Products to Construction Materials, we find the companies which produce sand, clay, gypsum, lime, aggregates, cement, concrete, and bricks.

Drywall is a term most are familiar with; perhaps even more know it by the trade name “Sheetrock.” These are the 4’ x 8’ sheets which are nailed to the studs, allowing the structure to begin to look like a home. But what, exactly, is that heavy yet fragile material between those two thin sheets of paper? Pure gypsum.

We used to have the benefit of trading United States Gypsum (formerly USG), owner of the Sheetrock name, until Warren Buffett—its largest shareholder— came along and helped a private German entity by the name of Knauf acquire the firm. Yet another American firm sold to a foreign interest with the help of Buffett.

While we can no longer buy USG, there are a couple of interesting names in the space. Eagle MaterialsEXP $166 is a $7 billion construction products and building materials company based out of Dallas. Not only does Eagle provide materials to the construction and building industries, but the firm also supplies the energy sector with the basic materials used for the extraction of oil and natural gas.

Vulcan MaterialsVMC $208 is the country’s largest producer of construction aggregates. The company, which is based out of Alabama, has an incredible 16 billion tons of aggregate reserves. In addition to their high demand for home construction, commodities such as timber and aggregates have historically provided a hedge against inflation—one of the major investment specters going into 2022.

One more industry in the Basic Materials Sector—Chemicals—happens to hold one of our favorite value plays: Dow IncDOW $57 is a $42 billion diversified chemical manufacturing company, and the product of a 2019 spin-off from the

former DowDupont. Dow applications make their way into hundreds of building products, from flooring, to roofing, to wall systems, to window and door elements. This remarkably diverse materials company, with its 7 P/E ratio and strong financial position, is one of our top picks for 2022.

Industrial machinery

Imagine a new housing development in its early stages. From new roads being built to foundations being excavated, one can almost hear the sounds of heavy equipment lumbering around the soon-to-be neighborhood. A concentrated handful of companies provide the equipment for such heavy labor.

The two most obvious picks for heavy construction equipment are the American giants CaterpillarCAT $206 and DeereDE $342. While these are both strong, wellrun companies, neither look especially undervalued right now. Instead, let’s look at two lesser-known names in the Machinery industry.

Terex CorpTEX $44 is a global manufacturer of work platforms, materials processing equipment, and specialty equipment such as cement mixers. In addition to residential home and corporate office use, Terex products and equipment should benefit nicely from the $1 trillion infrastructure bill signed into law in 2021. After a disastrous 2020 thanks to the pandemic, the company is well poised to double its revenue—back to levels not seen since 2013. Terex is a $3 billion company we could see growing back to the $5 billion range.

Tokyo-based Komatsu LtdKMTUY $23 is the second-largest construction equipment manufacturer in the world by revenue. Engaged in activities in a large number of industries, from construction to mining to forestry, this company is also well poised to take advantage of a massive infrastructure program in the US. In the construction industry, Komatsu provides dozers, graders, excavators, wheel loaders, and trucks to builders for jobs of all sizes. We also happen to be bullish on Japan in 2022, and this company could be a nice international piece for a well-diversified portfolio.

To avoid heavy debt loads, homebuilders typically choose to rent or lease equipment rather than purchase. When equipment is needed for a job, which may last for months or even years, one company is at the top of the heap: United RentalsURI $332. This $24 billion

Connecticut-based firm operates nearly 1,300 locations throughout North America—well more than its nearest peer, Sunbelt Rentals. Since going public in 1997, URI’s management team has made hundreds of acquisitions, increasing market penetration and growing its list of specialty equipment. For efficiency-driven builders who have little time to shop around, United Rentals typically provides the best and easiest solution.

Building products and systems

When something goes wrong in a new home, which (sadly) seems inevitable, the homeowner’s first thought is to blame the builder. However, odds are great that the failure occurred within the product of a contracted supplier. For this reason, builders quickly identify the companies providing them with the most reliable systems at the lowest possible cost, as it is their reputation is on the line. Let’s briefly consider some of the leading suppliers.

Builders FirstSourceBLDR $85 is a midcap maker of factory-built roof and floor trusses, as well as cabinets, doors, windows and moulding. These products can be custom-designed for each individual home and installed by the company, offering an efficient solution for builders. In its latest quarter, Builders reported sales of $5.509 billion, an increase of 140% y/y, and net income of $613 million, a 600% increase from the same quarter last year.

Advanced Drainage SystemsWMS $136 is another sold mid-cap choice in the building products industry. The company designs, manufactures, and markets corrugated pipe and related water management products in North/South America and Europe. In addition to the residential home segment, the company also serves the agriculture, aviation, military, mining, and transportation sectors.

Most everyone knows the OwensCorningOC $90 name and its famous pink mascot. The insulation and building materials company, which has a multiple of ten, also has a large footprint in the repair/remodel segment.

Johnson Controls InternationalJCI $80 is a global leader in the fields of HVAC systems, industrial refrigeration, and fire/ security solutions. Founded in 1885, JCI should be a big beneficiary of the move toward “greener” buildings and the intelligent integration of systems.

This list provides a good starting point for investors, with one note of caution: many of these companies have seen their share prices spike since the depths of the pandemic. That said, look for a number of market pullbacks in 2022 to bring many back within a decent “buy” range.

900 million trees are harvested and 2.5 billion are replanted in the US each year

Buying & Funding Virtual Real Estate

Believe it or not, a tract of land in the metaverse just sold for $2.4 million; and the movement has plenty of room to grow

On first blush, it appeared to be a satirical story written in The Onion. Did a plot of digital land in the metaverse really just sell for $2.4 million? Upon further investigation, the story was real: Metaverse Group, a subsidiary of Tokens.com, shelled out MANA 618,000 (MANA is a cryptocurrency) for the purchase of 116 parcels of land (each parcel equating to 52.5 square feet) in the heart of Decentraland’s Fashion Street. This is an area poised to become an affluent fashion and e-commerce district within the digital world. (It gets more interesting from here, so it may be time to pour an adult beverage—or whatever your preference—and settle in.)

As mentioned, the parcels of real estate were purchased with MANA, the native currency of Decentraland. For a physical world comparison, consider the islands of Yap in Micronesia, whose inhabitants use stones known as “Rai” for currency.

At the time of the November purchase, MANA was trading around $3.93 per coin, hence the $2.4 million sales price. It should be noted, however, that the crypto was trading for $0.75 a month earlier ($463k value), and currently trades at $2.91 ($1.8M value). Digital land owners must have nerves of steel.

buyers of digital land are simply buying numbers in a computer. He goes on to argue that an investor may buy land in a digital Manhattan, but that computer programmers “could easily create an infinite number of Manhattans that are just as easy to get to.” Reading those words made us reflect back on an interview we watched during the pioneer days of the Internet.

Many recall Soledad O’Brien as a national broadcast journalist. We remember her, however, as the host of an obscure TV program in the mid-1990s called The Site, which was devoted to the advent of the Internet. The guest on one particular episode was the epitome of a pointy-headed, erudite professor—right down to his unkempt hair, glasses, and scruffy beard which he would stroke. The topic was the URL, better known as a domain name or web address. To say he was dismissive and mocking of the commoners who were rushing in to buy their own domain names is an understatement. He even saw a website address on a billboard (gasp)!

His argument was two-fold. In the first place, only highly educated industry experts (like himself, of course) had any business owning domain names. Secondly, there was virtually no limit to the number of domain names which could be created, making their value highly suspect. Those specious arguments parrot the ones being made right now with respect to the metaverse.

Even back in 1996 or 1997 when this interview took place, we knew that the “scholarly professor,” lacking any imagination, was dead wrong. To say history proved us right is an understatement. Global e-commerce sales surpassed $5 trillion in 2021, and virtually every US business has an online presence—via those ubiquitous domain names.

Why buy something which can be easily replicated?

Metaverse Group said it will use its pricey real estate to expand its presence in the digital fashion industry, but how does that manifest itself? That is precisely the question many skeptics are asking right now.

In researching this story, we came across a highly critical article in WIRED magazine entitled, “The Metaverse Land Rush is an Illusion.” The author makes a number of damning arguments, pointing out that

If digital land is worthless, i.e., simply numbers in a computer, why are so many major brands getting in on the ground floor? They are doing so to market their brands in a new, immersive way.

Consider the metaverse the nexus between a company’s bricks and mortar store, their website, and the aggregate of their social media presence. Instead of the 2D online shopping experience (that’s so 2000), you will be able to “walk around” inside of the store, see products, interact with staff, and actually buy things.

From Snoop Dogg to CPA firms—plenty of room for all Let’s dispel any notion that the metaverse will be inhabited overwhelmingly by “gamers.” This past September, rapper and social media influencer Snoop Dogg, with some 65 million Instagram followers, announced that he was developing his own interactive playground, appropriately named Snoopverse. His development is in The Sandbox, a virtual world where players can “build, own, and monetize their gaming experience on the blockchain.”

Snoopverse will include, among other things, a digital clone of Snoop’s actual mansion in California. Want to see what it looks like? An early access pass, which will allow visitors to offer input on the development of the land, can be purchased for around $3,000 in SAND, the crypto of The Sandbox. Want more? There are 1,000 private passes available for around $5,700 which will allow guests to “step into the Snoop Dogg lifestyle.”

Advertising, non-fungible tokens, and cryptocurrencies

According to the crypto permabears—such as Warren Buffett, who once called bitcoin “probably rat poison squared,” it is only a matter of time before the “digital version of fool’s gold” meets its demise. While we would certainly agree with the premise that investing is crypto is nothing like buying a hedge such as gold, this new asset class (and yes, it is one) is here to stay. After all, cryptos are the official currency of the metaverse.

WalmartWMT $145 seems to get it. The world’s largest retailer just made a number of rather remarkable moves involving the metaverse, cryptos, and NFTs. First, the $400 billion retailer filed a number of new trademarks last month to sell “virtual merchandise, namely, electronics, appliances, indoor and outdoor furniture...(add about a dozen more).” In a separate filing, the company said it plans to offer shoppers a virtual currency as well as non-fungible tokens.

Likewise, $234 billion athletic footwear and apparel maker NikeNKE $148 has filed seven trademark applications signaling its own plans for the metaverse. Within the filings, the Oregon-based firm conveyed its intent to create and sell virtual branded sneakers and apparel. Nikeland, a virtual world created within the Roblox universe, allows visitors to compete in various games at a number of different Nike fields and arenas. Of course, one’s avatar can be dressed in Nike gear by visiting a digital showroom.

Of course, any true fan would want to own a plot of land next to their icon. The first “subdivision” of 122 parcels and 67 premium land+NFT bundles went on sale in December. Sound crazy? A fan who goes by the name P-Ape quickly purchased a digital plot in Snoopverse for SAND 70,904—or $458,038 of cold, hard cash based on the crypto’s price at the time. That earned him a nice tweet from the developer: “Won’t u be my neighbor,” wrote Snoop.

There are a total of 166,464 LANDs (plots) available in The Sandbox, with each being “96 metres in width by 96 metres in length by 128 metres in height.” As of the start of the year, roughly 70% of the available LANDs have been sold. Around 10% will be retained by The Sandbox to hold special events such as concerts and fashion shows. Other landowners include sportswear maker Adidas and the Hong Kong unit of global accounting firm PricewaterhouseCoopers (PwC).

Another accounting firm, New York-based Prager Metis International, just opened its new three-story virtual office on property it purchased in Decentraland last month for $35,000. The company said it plans to use the office to meet with and advise clients on a host of tax and accounting issues specifically related to the metaverse. The first floor offers gallery space for NFTs owned by its clients, the second floor consists of meeting and conference rooms, while the third level rooftop will be used for hosting events. It’s a brave new digital world out there.

The company also recently acquired startup Rtfkt (pronounced “artifact”) for an undisclosed sum. Rtfkt creates NFTs of sneakers and other products. Nike is known for releasing limited quantities of sneakers to raise their value; we can expect this model to carry over into the digital world. For example, they could design a new shoe and announce the availability of just 1,000 NFTs of the model. Competitor AdidasADDYY $145 recently launched an “Into the Metaverse” collection of NFTs and brought in around $23 million in a matter of days.

As we have established, cryptocurrencies are the official medium of exchange within the various worlds of the metaverse. Roblox is something of an outlier, as it requires Robux, not a true cryptocurrency, for transactions. This begs the question: Can wealth be created by investing in the various worlds’ respective cryptocurrencies? Absolutely, but betting on the wrong horses can quickly lead to a complete loss of capital. Let’s consider a few worth keeping an eye on.

EtherETH $3,250, with its $400 billion market cap, is one of the most popular cryptos on the market, and widely used for digital payments. SandboxSAND $5 is $4B in size and is used for transactions within The Sandbox. Decentraland MANAMANA $3 is used within that respective world and has a market cap of $5.4B. Keep in mind, however, that many more cryptos will be flooding the market soon, so it is wise to stick with the most established players and never invest money which is not willing to be lost.

Like the Internet, the metaverse will eventually become a multi-trillion-dollar opportunity for investors. It would be wise, however, to recall the carnage of the 2000-2002 tech bubble burst and manage risk accordingly. Happy investing!

Image courtesy of Oculus Gaming, a Meta company

Residential Construction

Taylor Morrison Home Corp

On Friday the 13th of March, 2020, as the markets were in the midst of a major meltdown (the Dow fell 8% on Monday, 6% on Wednesday, and 10% on Thursday), we went house hunting. More specifically, we began poring through the data on the homebuilders, which had been crushed over lockdowns and pandemic fears. We zeroed in on a couple of firms, and ended up buying LennarLEN $112 at $33.42 per share. Eighteen months later we sold our position for a 125% gain.

Those were unique times, to put it mildly. Since our buys on that Friday (we made several other additions to the Penn strategies), we have witnessed a housing boom which few saw coming. Suddenly, Americans were trading in their office cubicles, or even corner offices, for the comfort of their homes, now equipped with new high-tech gadgets designed for maximum connectivity and productivity. Companies which once scoffed at the idea of letting employees work from home were suddenly designing new hybrid work models for the day when some semblance of normalcy returned. This new model is not going away anytime soon; nor is the housing boom.

The other homebuilder we zeroed in on back in March of 2020 was Taylor Morrison Home CorpTMHC $33. Founded in 1936 and based out of Scottsdale, Arizona, this $4 billion firm churned out 14,000 homes in 2021 with an average selling price of $500,000. That is a lot of homes, but consider this: Taylor is currently sitting on over 75,000 lots and plans to build 400 communities in 2022.

While the housing market remains redhot throughout the country, the American workers’ new sense of freedom means many can now move where they would like to rather than remaining near their employer. This has been great news for the so-called Sun Belt, which includes states such as Florida, Texas, and Arizona. Fortuitously, that is precisely where Taylor Morrison builds. Investors seem to be missing this

point: the firm has a price-to-earnings ratio of 9, or 0.4 times the S&P 500’s multiple.

Taylor has also been on an intelligent buying spree recently, picking up five builders since 2015. The most recent acquisition was William Lyon Homes—one of the largest homebuilders in the Western US, providing entry-level, move-up, and luxury products— for $2.4 billion. Despite its relatively small $4 billion market cap, Taylor Morrison is now the sixth-largest homebuilder in America based on revenue from homes sold.

Yet another smart move was the company’s development of its own mortgage operations group, Taylor Morrison Home Funding, to help buyers finance their purchase. As rates rise, this should actually benefit the funding arm of the business.

Financials support our thesis

Over the trailing twelve months (TTM), Taylor Morrison generated $500 million in net income from $6.5 billion in sales. EPS has grown consistently each year since 2015, and should reach $5/share in 2022, up from $3.75/share TTM.

While the company’s debt-to-equity rating of 0.874 is a bit higher than its peers (about twice that of the much larger D.R. Horton’s), this is due to management’s recent acquisition spree. While the firm holds some $3.6 billion in debt on its books, it is well capitalized in the short term: $7.1 billion in s/t assets versus $1.05 billion in s/t liabilities. We believe the buying spree is over for now, meaning the company should be able to begin whittling down its debt load.

Suitability and price target

Although TMHC has a beta (risk level) of 1.6, this is fully in line with the other homebuilders and a product of the industry’s cyclical nature. The company is suitable as a long-term holding within the Penn Global Leaders Club, and we would place a fair value of $45 on the shares. 2022 will be the year of value rather than high-flying tech, and Taylor Morrison fills that bill.

The homebuilders have been on the move, but we found one which still appears inexpensive

...Taylor has been on an intelligent buying spree recently, picking up five builders since 2015.

TMHC @ $33

Symbol: TMHC

Class: Small-Cap Value

Sector: Real Estate

Industry: Residential Construction

Action Price: $33

Target Price 1*: $40.00

INVESTMENT PROFILE

Founded in 1936 and based out of Scottsdale, Arizona, Taylor Morrison Home Corp designs, builds, and sells single-family and multi-family homes, as well as lifestyle and master-planned communities. Through Taylor Morrison Home Funding, the company also provides mortgage financing to buyers. Operating primarily in the East (Texas and Florida) and the West (Arizona, Colorado, and California), the company sold 14,000 homes in the US in 2021with an average price of $500,000 per unit.

To be clear, the major homebuilders are not “cheap” right now. Most have made a massive move since their 2020 spring lows. However, TMHC has a paltry P/E ratio of 9, consistent growth in earnings per share, and a decent RSI of 52. We also like the fact that it is a small-cap value play—an important factor as we move forward in 2022.

Interior of a Taylor Morrison home in Houston; photo courtesy of Taylor Morrison

SPDR® S&P Homebuilders ETF

The SPDR® S&P Hombuilders ETFXHB $82, which has been around since 2006, provides investors with an inexpensive way to hold ownership in 35 companies poised to benefit from continued growth in the homebuilding industry. This group includes leading companies in the following segments: homebuilders, building products, home furnishings, home improvement retail, and household appliances.

Taking a look at the heat map of sub-industry allocation, it is clear that the largest sector/industry representation in XHB is Industrials: Building Products. We love this aspect of the fund, in that these companies serve a wider customer base than just the builders. At least in theory, this should provide some cushion from a housing downturn.

Looking at the top holdings within this modified equal-weighted fund, we see many industrial names we like going into 2022. For example, Builders

FirstSourceBLDR $82, which we highlighted in a previous story, is the top holding. The second largest position is Mohawk IndustriesMHK $182, an iconic, Georgia-based maker of carpets and other flooring products. Rounding out the top three, we have Whirlpool CorpWHR $233. Whirlpool, which happens to make its products in the US (unlike GE Appliances, for example, which was sold to China’s Haier back in 2016), is our favorite appliances maker.

Since XHB is an equal-weighted fund, all of the holdings have somewhere around a 3.5% weighting. This is opposed to a market-cap weighted fund, which skews representation in favor of the largest players. Not only does this reduce company risk, it also allows some small- and mid-cap darlings—companies which may be able to grow quicker due to their smaller size—to make a real impact.

In fact, a plurality of companies in XHB are midcap blends (43%), while another 16% and 12%, respectively, are mid-cap growth and mid-cap value holdings. From a sector exposure standpoint, roughly 55% of the companies are in the Consumer Cyclical sector, while 45% are in the Industrials sector.

Competitors and performance

XHB is not the only homebuilder-focused ETF. The relative newcomer (2019), the Hoya Capital Housing ETFHOMZ $43, has $81 million in assets under management (AUM) compared to XHB’s $2.4 billion in AUM. We have a few concerns with this fund, other than its small size (liquidity is always an important consideration when reviewing ETFs). HOMZ holds 100 equities, which is a bit too many for our liking. Furthermore, the top two holdings are Lowe’sLOW251 and Home DepotHD $393, which are a bit overvalued right now. (Home Depot is a longtime holding in the Penn Global Leaders Club.)

The fund’s other major competitor is the iShares US Home Construction ETFITB $75, which has $3.4B in AUM and holds 46 companies. While ITB would be another suitable choice, the fund is more heavily weighted directly on the homebuilders themselves.

XHB has an average return of 20% over five years and 17% over ten years. Based on its holdings, we see plenty of growth going forward, despite the inevitable rate hikes on the horizon.

XHB is suitable for the Penn Dynamic Growth Strategy as a satellite holding.

An easy way to participate in all facets of the homebuilding arena without betting too heavily on any one particular player

Under The radar

Four investments being ignored—or missed—by the financial press

Agnico Eagle Mines Ltd Materials

Metals & Mining

BorgWarner Inc

Consumer Cyclical

Auto Parts

We have a strong thesis with respect to the current price of gold: it is undervalued. One of our favorite gold miners is Agnico Eagle MinesAEM $52. The company is on pace to produce two million ounces of gold this year through its cornerstone mines in Canada, Mexico, and Finland. AEM is continually working to make its mining processes more efficient, reducing its all-in sustaining costs (AISC) by 10% this year, to $1,021 per ounce. With gold currently sitting at $1,800 per ounce, AEM shares are sitting near their 52-week low. With a market cap of $12B, the company has a P/E of 19 and a solid balance sheet (L/T assets/liabilities=$8.6B/$3.35B). Our target price for AEM: $75/share.

BorgWarnerBWA $46 is a mid-cap value company operating in the auto parts supply chain. It is a Tier 1 supplier, meaning it provides parts directly to the OEMs (original equipment manufacturers) such as Ford, Volkswagen, and Hyundai—its three main customers. The company has a masterful geographic diversification, with about one third of revenues coming from each: North America, Europe, and Asia. Due to its mix of products, innovative design team, and recent acquisition of Delphi Automotive, BorgWarner is very well positioned to take advantage of the industry trends toward lower emissions and a “greener” environment. It makes a number of parts and components for hybrid and electric vehicles. With its low multiple of 14 and excellent financial health, we find the company as attractive now as we did when we added it to the Penn Global Leaders Club one year ago, 03 Nov 2020, at $36.57 per share.

International Paper

Consumer Cyclical Packaging & Containers

Matterport Inc

Information Technology

Application/Systems Software

Have you ever stopped to wonder who makes all of those cardboard boxes being dropped off at your front door each week? Odds are good that they were produced by Tennessee-based International PaperIP $49. The company accounts for nearly one-third of all corrugated packaging in North America. This industry could be considered an oligopoly, as it is dominated by three major players: International Paper, WestRockWRK $46, and Packaging Corp. of AmericaPKG $136. Any of these three should perform nicely for investors, though IP rose to the top of our screens. We would place a fair value of $65 on the shares, which would bring them back up to their summer levels. And the 4% dividend could be considered the icing on the cake.

We first discovered MatterportMTTR $16 as we were delving into the nascent world of the metaverse. The $4 billion company offers a platform which allows anyone to create an accurate, immersive, digital “twin” out of any given physical space. In its business description, Matterport says that it is focused on “digitizing and indexing the built world...to design, build, operate, promote, and understand any space.” The company offers solutions for professionals in the real estate, photography, travel and hospitality, retail, architectural, and construction industries. For example, imagine taking an immersive “walk through” of a home for sale, or seeing every aspect of a hotel room before you book. We would place a fair value on MTTR shares at $25.

Trading Desk

Actions we have taken at the Penn Trading Desk, plus a look at what other Wall Street analysts have to say...

Penn: OPen MU in new FrOntier

Micron Technology is a leading US manufacturer of semiconductor devices and components. The Idaho-based firm will be a major player in the rollout of a number of new technologies, to include the Internet of Things (IoT), 5G, self-driving vehicles, and artificial intelligence. NAND-based solid state drives, which are slowly replacing traditional (and less stable) hard drives in computers, are another excellent growth opportunity for the firm. We added MU to the New Frontier Fund at $69.35 with an initial price target of $90.

Penn: OPen FB in GlOBal leaders

Ironically, we added Facebook back to the Global Leaders Club just hours before the company changed its name to Meta. For all of the haters, and all of the talk that the name change is just a distraction ploy, we have a different view. We like the company’s strategic plan built around the metaverse, and see enormous opportunities going forward. What about the here and now? Nobody comes close to Meta (sounds better than Alphabet, by the way) with respect to attracting advertising dollars. Added @ $315.79 with a $442 initial price target.

Penn: ClOse aCC in siP

American Campus Communities is one of the largest student housing based REITs in the US. The company builds dormitories and other housing and dining facilities on campuses across the country. In June of 2020, as fears were being circulated that kids would not be returning to their dorms in the fall, ACC shares got pummeled. We were familiar enough with the company to take advantage of the condition and buy shares at $34.43. The shares have well exceeded our price target and the rich multiple led to us selling the shares at $53.97, for a 57% gain.

Penn: OPen PYPl in GlOBal leaders

(19 Nov 21) PayPal, which was spun off buy eBay in 2015, is a leading electronic payment

solutions vendor serving 29 million merchants and 377 million active users. Using some contorted logic, investors have suddenly placed the company in the “old financials” camp rather than the high growth fintech camp where it belongs, dragging the price down in the process. The company continues to be acquisitive, with our favorite bolt-on being Venmo, which it purchased in 2013. Finally, this fits in nicely with our “overweight financials” theme. We added PYPL to the Penn Global Leaders Club at $194.

Penn: OPen Ual in GlOBal leaders

We wrote a glowing report on United Airlines Holdings in a recent issue of The Penn Wealth Report. At the time, shares were trading at $44. Now, with the Omicron variant driving a new wave of uncertainty, shares are trading around $41.50. This may not be the low, but we know where this company is headed, and how it would be valued in more normal times. We have added UAL as one of the 40 holdings in the Penn Global Leaders Club on the price drop, with an initial target price of $65.

Penn: OPen tlrY in intrePid

In many geographic regions around the world—such as Canada—cannabis is already a big business. When the drug is finally legalized at the federal level in the United States, however, it will be a real game changer. We continue to believe that one Canadian company, Tilray, will be one of the industry leaders “south of the border” when that happens. CEO Irwin Simon, a leader we have followed for decades, just bought Breckenridge Distillery— yet another move we like. We added TLRY to the Intrepid Trading Platform @ $9.05 with an initial price target of $14.

Penn: OPen Me in new FrOntier

We believe 23andMe is the nexus between the human genome and individual health and longevity. We added this exciting firm to the New Frontier Fund @ $6 on 10 Jan 22 with an initial target price of $10/share.

To remain on top of all trades as they happen, subscribe to our Twitter feed @ PennWealth. All trade details can be found at the Penn Wealth Trading Desk .

The content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing.  While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. This is not a solicitation to buy. Always consult your investment professional before investing any money.

The college dorm company has soared past our price target

Closed our MGM and took the 152% gain to build up cash

Shares of UAL got irrationally hammered on Omicron fears, giving us our window.

Investors grossly overreacted to a few bad moves. At $531/ share, SAM is on sale.

Weekly Business Report

economics: supply, demand, & prices

prices Just spiked the most since 1982, But we see peak inflation around the corner

The rate of inflation, as measured by the Consumer Price Index (CPI), just hit its highest pace since the summer of 1982, and some fear-mongers have the US economy hitting a cataclysmic iceberg thanks to—in their opinion—the Fed’s belated and dawdling response. Upon a deeper dive into the issue, however, we see no real threat of the current inflationary environment derailing the great comeback from the pandemic.

As for the facts: Consumer prices in December jumped 7.04% from the same month one year ago, marking the third-straight month in which inflation exceeded 6% year-over-year. December’s reading was the highest since June of 1982. These headlines are scary for both investors and consumers, but we don’t believe they provide an accurate forecast of what is to come.

The current rate of inflation is due to a mix of temporary issues: Americans are flush with cash and ready to spend; the federal funds rate is still at zero (lower band), providing for “easy” money; and the rapid ramp up in global demand combined with an enormous number of production shutdowns due to the omicron variant of Covid-19 are causing a massive disruption in the global supply chain.

The pent-up demand for goods and services will naturally return to normal as Americans continue to crack open their wallets to buy a new or used car and whatever else they held off on purchasing during the heart of the pandemic. We see the Fed raising rates up to four times this year and perhaps four more next year, which would put the federal funds rate in the sweet spot of 2%-2.25%—high enough to help stem inflation but not so hot as to push the economy into recession.

Additionally, Fed Chair Powell indicated that the central bank will begin reducing its $9 trillion balance sheet beginning this year, which will also help quell inflation. Finally, the supply chain issues have, in our opinion, peaked and will continue to abate. As for the effectiveness of the Fed, which has a dual mandate of maximum employment (we are just about there) and stable prices, we believe the voting members are doing about as good a job as possible.

The markets tend to agree with our assessment, as investors have largely been ignoring the ugly inflation headlines. The fact that the major indexes were stable—and that the hyper-inflation-sensitive NASDAQ was actually up—on the day of the CPI report is reassuring.

application & systems software

the street was generally negative on oracle’s $28 Billion purchase of cerner, But we see potential

From a personal perspective, we hate to see another home-grown company get gobbled up by a much bigger competitor, but from an investment standpoint, does Oracle’s (ORCL $92) $28.3 billion acquisition of Kansas City-based Cerner Corp (CERN $90) make sense?

At first blush, the integration seems to have plenty of potential synergies. Cerner is a leading electronic health records company, operating in an industry—health information systems—which needs a serious dose of technology. We need look no further than our little white vaccination cards to figure that one out. (At least technology would have made it more difficult for Aaron Rodgers to “alter” his medical history.) Oracle is a $245 billion enterprise software company which developed the first commercial SQL-based relational database management system. It would make perfect sense that this pioneering company would want to buy the established leader in an industry with enormous growth potential.

Investors may agree with that premise, but they apparently balked at the $95 per share price-tag, which represents a 25% premium to Cerner’s recent trading range. In fact, prior to the announcement Cerner shares were trading around the same price they sat at four years ago, in October of 2017, when we sold them from the Global Leaders Club.

Larry Ellison, the brilliant co-founder of Oracle and the company’s chief technology officer, is clearly excited about the deal, which makes us feel even stronger about the potential for growth. “With this acquisition,” Ellison said, “Oracle’s corporate mission expands to...providing our overworked medical professionals with a new generation of easier-to-use digital tools...lowering the administrative workload, improving patient privacy and outcomes, and lowering overall health care costs.” Noble goals, indeed.

With Oracle off nearly 10% on news of the acquisition, they are worth a look. We would place a fair value of $100 on the shares, but they should easily grow north of that if the company’s plans for Cerner pan out. And for the record, we believe they will.

finance: capital markets

Blackstone continues to collect real estate assets with purchase of Bluerock group

There may a Flintstones joke somewhere in the headline, “Blackstone to buy Bluerock,” but the $93 billion alternative asset manager has been on a serious mission to increase its real estate holdings recently, and few understand valuations better than Steve Schwarzman and his team. The company’s latest acquisition involves a $3.6 billion deal to buy apartment REIT Bluerock

The content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing.  While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. This is not a solicitation to buy. Always consult your investment professional before investing any money.

Some of our favorite recent stories from “ Penn...After Hours ”...

Residential Growth, which owns some 30 multifamily rental communities with 11,000 units throughout the Sun Belt—hot growth areas such as Austin, Orlando, and Phoenix. It should be noted that Bluerock also has a portfolio of single-family rentals, which it will spin off to shareholders in the form of the Bluerock Homes Trust.

In addition to this deal, Blackstone has already made three other buys thus far in 2021, all in areas we love going forward: industrial REIT WPT, data center REIT QTS Realty Trust, and a collection of student housing properties. Blackstone is one of the world’s largest alternative asset managers, with $730 billion in assets under management, including $530 billion in fee-earning assets. The company has a reasonable P/E ratio of 18, and a nice yield of 2.89%—or 100 basis points higher than the current 30-year US Treasury yield.

The sale of Blackstone from the Strategic Income Portfolio several years ago turned out to be one of our most frustrating moves. We liquidated the position due to its status as a limited partnership, meaning it generated K-1s that clients often shy away from. Within months of our selling the position, Blackstone announced that it was converting from a partnership to a corporation. Perhaps we should have re-purchased at that time, but we didn’t. At $130, BX shares seem fairly valued, and we expect them to hold up relatively well in what we predict will be a very choppy 2022.

us recommends approval of a massive meta/google undersea caBle proJect in asia; china is not amused

The Biden administration has recommended that the FCC grant Meta (FB $334) and Alphabet (GOOG $2,856) licenses to build a 12,000-kilometer-long (7,500 miles) network of undersea fiber optic cables spanning a number of Asian countries—sans China. The effort, known as Project Apricot, will connect Singapore, Japan, Guam, the Philippines, Taiwan, and Indonesia in an effort to bring reliable, high-speed Internet access to portions of the world both underserved and over-reliant on Communist China for their connectivity. The Apricot project will compliment Project Echo, connecting the US with Singapore, Guam, and Indonesia.

The ultimate goal, according to Google VP of Global Networking Bikash Koley, is to create multiple (digital) paths in and out of Asia, and “increased resilience in connectivity between Southeast Asia, North Asia, and the United States.” A previous joint project to build an undersea cable connecting California and Hong Kong was scrapped by Google and Meta—upon a US Department of Justice recommendation—due to US/Sino tensions.

Technology, coupled with gutsy leadership, is making it harder for repressive regimes to constrict the free flow of information, thus controlling the narrative. Needless to say, Beijing is not happy with this project, which is slated to be completed by 2023.

The more China is backed into a corner, the more evident it will become to the free world precisely what the CCP’s long-term goals are, and how incompatible they are with the pursuit of human freedom. The West may have a short memory, but we can count on China’s ruling communist elites to keep stoking the fire. In the end, freedom always wins.

solar stocks are getting crushed on the Back of new california proposals

Interesting, coming from the state which claims to be on the vanguard of societal evolution (smirk). The once-darling solar stocks, names like Sunrun (RUN $32), First Solar (FSLR $86), EnPhase Energy (ENPH

$180), and SolarEdge Technologies (SEDG $263), have been plummeting since California proposed new rules which would make it more costly for families to put solar panels on their roofs.

At the heart of the issue are the California utilities, which don’t like the competition from the bourgeois middle class of the state who dare to generate their own household power. These utility concerns, working through the California Public Utilities Commission, wish to extort a monthly “grid fee” from anyone with the panels on their roofs, and they want to reduce the amount of payout for the power coming back to the grid from solar sources.

While these recommendations must still be codified by state legislators, the threat was enough to sink the shares of major players. California-based Sunrun, for example, has seen its share price drop by two-thirds since last January. One hopeful sign: the commissioner who penned the proposal will be leaving his post soon and won’t be around to help bring it to fruition.

Here is the solution for homeowners: get off the grid by storing the solar power your panels collect in your own storage system. True, the needed efficiencies are not quite there yet, but we believe power storage will be the golden ticket for investors in this industry, and the nightmare for utility companies. In the energy storage space, Tesla’s (TSLA $900) systems are hard to beat. We also like Johnson Controls (JCI $76), Enphase Energy, and Generac (GNRC $346). To take advantage of the industry without placing a big bet on any one player, the Invesco Solar ETF (TAN $74) may be the way to go. The ETF holds an eclectic group of 49 companies engaged in solar power production, storage, and infrastructure.

penn memBer dollar general announces plans to open 1,000 new popshelf stores to attract a wealthier clientele

We added Dollar General (DG $222) to the Penn Global Leaders Club—the home for holdings we expect to own for years—when shares of the discount retailer were discount priced themselves, at $71.06. It has been a relatively straight trajectory up from there: shares of the $51 billion Tennessee-based retailer are now trading north of $220. With more than 18,000 stores across the United States, the company’s bread-and-butter customer base has been households with annual incomes of 40,000 or less, and we consider the investment an excellent defensive play for any economic downturn.

Now, Dollar General has an interesting plan to widen its total addressable market. The company has been testing a concept store called Popshelf which is designed to attract a younger, wealthier group of shoppers. The roughly 9,000 square foot stores have been so popular that management has announced an aggressive plan to open 1,000 Popshelf locations by the end of fiscal 2025.

Targeting suburban women with household incomes of between $50,000 and $125,000, the stores will present a bright and lively image, with the mix of goods changing frequently to create a “treasure hunt” vibe. Shoppers searching for unique gifts, holiday decorations, or party supplies should be able to find what they are looking for, all at a reasonable price. We applaud the move, and look forward to checking out one of the new locations. For the first time in its 80-year history, Dollar General also announced it would be delving into the international market, opening ten stores in Mexico by the end of FY 2022.

Despite our success in the position, Dollar General continues to be an overlooked gem by so many retail analysts. That is simply a mistake on their part. For all of its tremendous growth within the Club, it carries a P/E of seven and an enviable financial position. While others chase multiples that don’t exist, give us an income-generating machine like DG any day.

telecommunication services

consumer staples

six companies which played an outsized role in the headlines this past year

To break the year down by headlines in the business media, six companies dominated the news last year...

It is hard to believe, but the meme stock craze just started back in January of this year when the reddit brigade drove the price of GameStop (GME $152) up from around $20 per share to a stratospheric $483 per share on the 28th of the month. In a coordinated effort to attack the shorts, AMC Entertainment (AMC $29) and several other heavily-shorted names became meme stocks shortly thereafter.

The beneficiary of this craze, at least initially, was a new trading platform for the masses: Robinhood (HOOD $19), which went public in late July and attained an $85 share price a week later. The company has since lost three-quarters of its market cap.

The crypto craze hit full stride by late spring when the Coinbase (COIN $268) platform went public. Nearly 100 cryptos can be easily traded on the platform, and users can make payments from the app using the coin of their choosing—or the US dollar. Coinbase is in the Penn Intrepid Trading Platform and remains one of our favorite plays going into 2022.

Pfizer (PFE $59) has been the corporate hero of the pandemic, providing the world’s best vaccine to prevent Covid, and the first approved therapy to treat the disease.

Tesla (TSLA $1,067), which is in the Penn New Frontier Fund, has been in the headlines throughout the year for a number of reasons, from Elon Musk’s entertaining tweets to the company’s remarkable production levels to the fact that it became a $1 trillion company this year—one of only a handful.

Meta Platforms, yet another Penn name, has been in the headlines for mostly negative reasons this year (via incessant attacks by elected officials), though investors have largely brushed off these headlines. The company, which changed its name from Facebook in October, is up 25% year-to-date. Finally, we have TikTok. We have nothing to say about TikTok.

Several of these companies will remain solidly in the headlines throughout 2022, but new and unexpected additions will certainly arise. For a number of tech darlings which have yet to turn a profit, many of the headlines will be anything but positive. Investors need to watch their high-beta positions diligently, as volatility will rule the year.

It was a hyperactive year in the stock market, but six companies tended to dominate the headlines from start to finish.

“insanity” is how erdogan’s demanded rate cuts in the face of 20% turkish inflation is Being descriBed

To set the stage: Turkey is not a US ally, despite that country’s longstanding NATO membership. Under the mercurial leadership of President Recep Tayyip Erdogan, Russia seems to have more influence than does the West, despite Turkey’s desire to be seen as part of the EU rather than the Middle East. Under that backdrop comes the bizarre economic situation going on in the country of 85 million people.

In Turkey, inflation is running at a nightmarish (for consumers) pace of 20%, so what does Erdogan do? He orders the country’s central bank to lower rates. Hence the claims of insanity. And for anyone who believes that the president didn’t order the cuts consider this: he has fired three central bank chiefs in the past two years for daring to question his monetary views. Erdogan’s defense is that he is waging “an economic war of independence.”

His strange war has had quite the impact on the Turkish lira, which is now trading at 13:1 versus the US dollar. So, for the unfortunate Turkish worker, this means that their paycheck is being watered down on a daily basis while prices at the local bazar or supermarket are simultaneously going up on a daily basis. A recipe for disaster.

Somehow, despite the economic nightmare, Erdogan has still managed to finance the expensive purchase of a Russian-made S-400 missile defense system—a system designed to thwart the most advanced US fighters. To counter the move, the US has removed Turkey from the F-35 joint strike fighter program at a cost of half a billion dollars.

The only good news about the economic situation Erdogan is causing within his country is that he will be forced to play defense, taking time away from his mental musings on how to foment more trouble in the region.

It is going to take an uprising by the Turkish people to remove Recep Tayyip Erdogan from power. Despite the fact that his second five-year term, which will end in 2023, should make him ineligible for running again, any bets on who will still be the Turkish president in 2024 and beyond? While that country’s constitution prohibits a third term, when has a legal document ever stopped a dictator? Look no further than Vlad Putin. As for a Turkish uprising, look no further than Venezuela for evidence that those odds, despite the human suffering, are slim to none.

market pulse gloBal strategy: middle east

Image courtesy of Visual Capitalist.

by Charles Gogin; Public Domain

“People

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Closed7/20/20213/7/2022WGOWinnebago Industries Inc

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Closed5/27/20207/13/2020CLXClorox Co

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Closed6/19/20206/22/2020PLAYDave & Buster's

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