Bull & Bear’s

October-November 2016 VOL. 15 NO. 8

INSIDE...

How E-Commerce Is Transforming Industrial REITsE-commerce globally is growing faster than traditional retail sales and is expected to double over the next five years alone—leading to reinvigoration of a once-sleepy part of the real estate sector—warehouses and distribution centers: industrial REITs.

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Regardless of election outcome, S&P 500 up 72.2% of the timeThe actual presidential election outcome appears to have little bearing on S&P 500 performance in November and December. Regardless who wins, history still favors a typical yearend rally.

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How to Choose a Mutual FundAs all fund companies will tell you, past performance is no guarantee of future performance. What else, then, is the best way to evaluate mutual funds?

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Featured Companies:FAIRMONT RESOURCES

PUMA EXPLORATION

By Daren FondaKiplinger’s Personal Finance

When a company

faces a crisis, inves-tors tend to sell first and ask questions later. Yet besieged stocks often start to recuperate as the headlines fade and investors an-ticipate a return to pre-crisis sales and profits. The trick, of course, is to find companies that are more likely to rebound from a setback than collapse entirely.

If you want to bet on a revival, wait for a stock to settle after bad news hits, then buy shares gradually. Home in on companies with durable advantages, such as a strong brand. And look for firms that pay dividends and are likely to maintain them through a crisis. Even if the stock does little, you’ll at least get paid while you wait for a rebound, says George Putnam, editor of the Turnaround Letter, www.TurnaroundLetter.com, a

newsletter that focuses on out-of-favor stocks.

• SeaWorld Entertainment (SEAS, $13.81) is one dividend payer Putnam likes. The owner of 11 theme parks, including Busch Gardens and Sea World, the firm has faced a tidal wave of bad publicity over its treatment of orca whales. The company, which says it will phase out orca shows and end its killer-whale breeding program. It’s launching new rides and attractions.

Both sales and profits are likely to be down in 2016, but analysts

Continued on page 13

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By now, everyone knows that e-commerce globally is growing faster than traditional retail sales. E-commerce sales around the world are expected to double over the next five years alone.

If we narrow our focus solely to the U.S., forecasters say e-com-merce will account for 30% of all retail sales by 2030. In 2015, some 7% of U.S. retail sales were online, with 205 million online shoppers.

But most people don’t give a second thought to what happens every time you click the buy button. The item you ordered goes through real brick-and-mortar warehouses and distribution centers before it shows up at your front door.

That is leading directly to the reinvigoration of a once-sleepy part of the real estate sector – the owners of those warehouses and distribution centers – industrial REITs.

E-Commerce and Warehouses

Industrial REITs underper-formed other REITs for nearly two decades prior to the last couple of quarters.

But it’s a whole new ballgame now. And it’s easy to see why.

Over the last several years, demand for industrial space such as warehouses has more than doubled. Fully 30% of demand for such spaces is now directly correlated to e-commerce. That percentage is likely to climb even higher in the years ahead, accord-ing to many industry observers.

That’s because an e-commerce companies require a lot more logistics space as their brick-and-mortar counterparts. At the end of 2015, tenants in the top 47 markets occupied 101.7 million more square feet than amount they did at the start of 2015. That gain even surpassed the gain in 2014 of 93 million square feet.

How E-Commerce Is Transforming Industrial REITs

Even the brick-and-mortar retailers that are still around have ramped up their e-commerce efforts. These companies still require about 20% more warehouse and distribution space than their traditional stores to hold all the individual packages to be sent out.

Bryan Carlock of the consul-tancy PwC estimates that every $1 billion of e-commerce sales drives demand for one million square feet of industrial real estate.

The leader among industrial REITs, Prologis (NYSE: PLD), sees an even larger need for industrial space. It says that for every $1 billion in e-commerce sales, there is a need for three times the space of traditional retail.

That great news for Prologis and its peers. As its CEO, Hamid Moghadam, told The Wall Street Journal, “Even if retail sales in the economy stay constant, just a shift from stores to e-commerce is going to grow industrial demand.”

Industrial REITs UniverseLuckily for investors, the indus-

trial REIT sector is an easy one to get their hands around.

It is the second-smallest subset

of the REIT sector. There are only eight pure-play companies that are publicly traded. Their total market capitalization is under $43 billion.

The largest industrial REIT, by far, is Prologis, with a market cap of about $27.25 billion. It is up 20% year-to-date.

Other companies in the sector in order of descending market cap are:

• DCT Industrial Trust (NYSE: DCT), market cap $4.27 billion, up 26% YTD.

• First Industrial Realty Trust (NYSE: FR), market cap $3.25 billion, up 24% YTD.

• EastGroup Properties (NYSE: EGP), market cap $2.32 billion, up 26% YTD.

• STAG Industrial (NYSE: STAG), market cap $1.69 billion, up 27% YTD.

• Rexford Industrial Realty (NYSE: REXR), market cap $1.42 billion, up 31% YTD.

• Terreno Realty (NYSE: TRNO), market cap $1.26 billion, up 19% YTD.

• Monmouth Real Estate (NYSE: MNR), market cap $868.5 million, up 33% YTD.

Continued on page 10

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Stocks to Watch

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Walt Disney Company: Strong cash flow and profitable growth

Ingrid Hendershot: “In 1923, following a failed animated cartoon venture, a young Walt Disney relocated from Kansas City to Los Angeles to pursue animation and filmmaking dreams. The Walt Disney Company began in a room r e n t e d f o r $10 a month where Walt Disney and his brother, Roy, produced short live-action/animated f i l m s . Wi t h i n four months, the ever-growing staff moved to a larger space next door where the sign on the window read “Disney Bros. Studio.”

Much of the foundation for Disney’s iconic brands was built during the next 15 years: Mickey Mouse was “born” in 1928, followed by Pluto, Goofy, Donald Duck and the gang. In 1937, to critical acclaim, Disney released Snow White and The Seven Dwarfs, the first full-length animated film. Years later, Walt Disney had a vision for a “magical park” filled with rivers, waterfalls, mountains, flying elephants, giant teacups, a fairy-tale castle, moon rockets and a scenic railway where the young and the young-at-heart could enjoy making memories together. Walt’s magic kingdom called Disneyland opened in 1955.

Building on its founder’s dreams, The Walt Disney Company (DIS) has become a global media and entertainment empire by leveraging its iconic brands and franchises across multiple platforms – films, home video, merchandising, theme parks, musicals and interactive games.

Strong Cash FlowsDuring the past five fiscal years, Disney has

generated more than $27 billion in free cash flow and returned $32 billion to shareholders through dividends and share repurchases. Despite ramped-up capital spending prior to the opening of Shanghai Disneyland in June, year-to-date free cash flow increased 26% to $5.7 billion, boosted by efficient working capital management. Disney has returned $7.1 billion to shareholders this fiscal year through dividends and share buybacks. With year-to-date

share repurchases of $6.6 billion at an average cost of $101.54 per share, Disney is well on track to buy back up to $8 billion of its shares this year. In June, Disney announced a 7.6% increase in the semi-annual dividend to $0.71 per share. Disney has paid dividends for 61 consecutive years.

Disney’s strong cash flow has enabled it to invest in profitable growth. Since its 2006 acquisition of Pixar, Disney has released 29 films with an astonishing average global box office of about $800 million each under the Pixar, Lucasfilm (2012 purchase), Marvel (2009 purchase) and Disney Animation banners. Box office sales are further monetarized across Disney’s Consumer Products, Television and Parks & Resorts platforms.

Disney recently announced the $1 billion purchase of a 33% stake in BAMTech, the industry leader in video streaming, data analytics and commerce management, a service built by Major League Baseball. Disney has the option for future majority ownership. This significant technology infrastructure investment is in response to threats to Disney’s lucrative ESPN franchise from cord cutters, over-the-top TV and “skinny” bundles. BAMTech will become a key partner in delivering streaming video and other digital products from ESPN, ABC and Disney.

Profitable GrowthDuring the past five fiscal years, Disney has

produced strong growth. Revenues have compounded at a 6% annual rate with net income up 15% annually and EPS growing at an 18% annual clip on the heels of expanding gross margins and fewer outstanding shares.

Disney reported solid third fiscal quarter results with revenues increasing 9% to $14.3 billion, net earnings up 5% to $2.6 billion and EPS up 10% to $1.59. These strong results resulted from stellar Studio Entertainment performance led by Captain America, Finding Dory, Jungle Book, Zootopia and Star Wars plus improvement in U.S. Parks & Resorts operations.

Investors seeking to build magical long-term results should consider The Walt Disney Company, a HI-quality company with iconic brands, strong cash flow and profitable growth. Buy.”

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AT&T’s Improved ProfileAlyssa Lappen: “In July, we noted the irony of the

2015 removal from the Dow Jones Industrial Average of AT&T (T). Now that Verizon (VZ) won out the bidding for Yahoo, we take another look at its giant telecom rival, which some market observers have written off for dead, mistakenly, we think, since AT&T is also expanding through mergers and acquisitions and is now the largest U.S. pay TV provider, through its $48.4 billion 2015 acquisition of satellite TV provider DirecTV.

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In the second quarter of 2016, AT&T sported a 6.4 percent year-to-year increase in earnings per share, partly via delivery of half of the previously promised $2.5 billion in synergies from its DirecTV purchase. That and plans to generate $3 billion in cost savings from its effort to streamline in digital and its exit from low-margin businesses has enabled management to comfortably guide investors to expect 7 percent growth in earnings per share in 2017.

Its detractors may point to the feeble showing in overall AT&T revenues, especially in its business, wireless and entertainment groups. But in some segments AT&T is doing fine, thank you. The company saw a 13 percent increase in wireless revenue in Mexico, where AT&T last year bought two cellular carriers, for example. Critics may also have missed the 8 percent increase in DirecTV revenue in Latin America.

Margins may be lower in Latin America, but in the U.S., the company increased operating margins to 20.1 percent, including a 130 basis point gain in wireless margins. Meanwhile, postpaid U.S. wireless subscribers increased, albeit only slightly to (by 300,000) 77.6 million, but AT&T’s so-called churn rate, at which customers stop subscribing to a service, fell to an enviable 0.97 percent.

AT&T has also recently attained a five-year contract with the wage and hour division of the U.S. Department of Labor.

At the same time, decreased capital expenditures as the company completed its nationwide push of high-speed internet now provides for guidance to expect $20 billion in annual free cash flow, compared

to $16.7 billion in the last 12 months, which should provide the company with increased flexibility.

Despite the naysayers, we still like AT&T.”***************

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Lear Corp: A growth companyRuss Kaplan’s current recommendation is Lear

Corporation (LEA) that falls into the category of a parts supplier (not to be confused with Learjet which is not owned by the Canadian Bombardier Company). “Lear Corporation has been in auto parts since 1917 and specializes now in seating and electrical distribution.

As with our other parts makers, with Lear it doesn’t matter which car company sells the most cars. It is well diversified, with 77% of sales outside the United States.

This is definitely a value stock with a price/earnings ratio of 9 and a price-to-sales ratio of 0.45. A return of equity of 19% indicates that this is a growth company.

The CEO, Matthew Simoncini owns 42 million shares, so he is not likely to be the kind of leader to be focused solely on the next quarter’s earnings.

With a dividend of just 1%, however, this is not a stock for those who are income-oriented.”

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BorgWarner: Winning important contracts for hybrid/electric vehicles. “Buy”

George Putnam III: “BorgWarner, Inc. (NYSE: BWA) supplies major automobile makers with engine and power train systems, including turbochargers, ignition and cooling systems and all-wheel-drive technologies. Formed in 1928 from the combination of several component makers, the company is widely recognized as a well-managed, high-quality industry leader. It has strong market positions in product categories that are critical to improving engine power and efficiency. Turbochargers are the largest segment at about 31% of sales. BorgWarner’s global customer base includes nearly every major carmaker and is widely diversified with Ford and GM combined representing only about 20% of revenues.

While BorgWarner has produced healthy sales and earnings growth over the past five years, its stock price has gone nowhere. Growing recognition of the value of its technologies, combined with the industry upcycle, has boosted sales by 41% and profits by 62% since 2010 – and both are more than 50% higher than their pre-crisis 2007 levels. Investors, however, are concerned about a laundry list of issues: potential recession in Europe (~50% of sales), demand in China, a significant recent acquisition, ongoing dollar strength and the uncertain outlook for 15% customer Volkswagen. Falling short of revenue expectations for several quarters last year providing subdued guidance for the rest of 2016 has also worried short-term investors.

Analysis: The Turnaround Letter’s usual approach is to identify companies that are out of favor but are undergoing a turnaround.

BorgWarner is a company that doesn’t need a turnaround but is valued as if it does. Its shares are among the cheapest in the market.

We find it remarkable that a company with this degree of proprietary leadership in critical automotive segments, with solid financials and growing revenue, sells at only 10.4X this year’s earnings and 6.2x this year’s cash flow.

The company has a relatively low level of debt, will likely produce over $400 million of free cash flow this year and is growing its organic revenues at a 4% annual rate. BorgWarner’s culture positions it to continue to innovate in leading-edge technologies where competition is thin. For example, it is beginning to win important contracts for hybrid/electric vehicles. We think the wheels will keep rolling with this high-quality company, and when investors recognize that, the stock price should move up nicely.

We recommend buying shares of BorgWarner up to 52.”

Editor’s Note: Written for 29 years, The Turnaround Letter, years has a 15-year annualized return of 11.0% versus the S&P 500’s 2.9%, making it one of the top-performers among the 200 investment newsletters monitored by Dow Jones’ Hulbert Financial Digest. For more information and a Special Offer visit www.TurnaroundLetter.com.

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AbbVie: Buy into the contradictionRichard Moroney: “AbbVie (ABBV: $63) delivers

the growth investors expect of a biotechnology company, while offering a dividend more befitting a utility. AbbVie yields 3.6%, higher than any other health-care stock in the S&P 500 Index and ranking among the top 15% of all stocks in the index. The dividend rose 12% in the March quarter.

Rising drug prices have become a popular target for politicians, including presidential candidate Hillary Clinton. However, any plan to take shape in Congress would likely focus more on generics and older branded drugs than the newer biological treatments that comprise AbbVie’s portfolio.

The Overall rank of 95 reflects scores of 70 or higher for Momentum, Value, Quality, and Earnings Estimates. AbbVie is a Long-Term Buy.

Pipeline No Pipe DreamAbbVie’s sales have climbed by double-digits in six

straight quarters. In the 12 months ended June, cash from operations jumped 77%, while free cash flow nearly quadrupled to $4.10 billion. But operating growth could slow once AbbVie loses exclusivity for its biggest product.

Humira, a drug that treats arthritis and Crohn’s disease, generated 61% of the company’s sales in the 12 months ended June but loses U.S. patent protection in December (and in 2018 in Europe).

In July, an advisory panel to the U.S. Food and Drug Administration recommended regulators approve Amgen’s ($168; AMGN) biosimilar version of Humira. AbbVie responded by filing a patent lawsuit against Amgen in the hope of blocking the copycat. Management insists it can hold off biosimilar

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competition to Humira until 2022, though some analysts see the drug’s sales beginning to slip in 2018 or 2019.

With potential rivals nipping at Humira’s heels, AbbVie must call on its drug pipeline to support future growth. AbbVie’s late-stage drugs mostly focus on treating cancer, particularly blood cancer. To boost its portfolio of potential cancer drugs, AbbVie purchased Pharmacyclics for about $21 billion in May 2015 and agreed to buy Stemcentrx for at least $5.8 billion in April. Milestone payments could push Stemcentrx’s price tag to $9.8 billion.

Encouragingly, two new drugs have helped drive recent growth: Imbruvica, launched in 2015 to treat chronic lymphocytic leukemia, and Viekira Pak for hepatitis C, introduced in late 2014. Sales of Imbruvica, acquired through the Pharmacyclics deal, totaled $1.47 billion for the 12 months ended June (6% of total sales) and could eventually exceed $6 billion annually. Viekira Pak (7%), faces pricing pressure from rival treatments.

ConclusionAnalyst estimates for both 2016 and 2017 have risen

over the last month. AbbVie is currently projected to grow per-share profits 12% this year and 18% next year, growth potential not fully reflected in the stock price. Shares trade at 13 times estimated 2016 earnings, a 29% discount to the average S&P 500 biotech stock.

An annual report for AbbVie can be obtained at 1 N. Waukegan Road, North Chicago, IL 60064; (847) 932-7900; www.abbvie.com.”

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Earnings to flatten out this quarter. Big pharmaceuticals on the hunt

Christopher Carothers: “October is the beginning of this quarter’s earnings season. Normally the stock market starts to decline and falls into a tight trading

range. Even though the stock market has hit new highs, the market is overstretched to a point that it will need a new set of quarterly earnings for it to propel higher.

We will expect surprises both on the upside and downside as companies will try to keep up with earnings to move stocks forward. Most companies doubt that there’s anything more central banks can do to stoke inflation and economic growth, and since the Fed can only set short-term rates, the main worry of multinational companies is the strong dollar versus other currencies. A lower dollar would help many of the S&P 500 companies increase earnings and profitability. We expect earnings this quarter to flatten out for the market as a whole. And even though that may happen, if people are willing to continue to pay for these earnings, the market can either go higher or continue to move sideways for the remainder of the year.

The new trends continue:1) The Fed can’t control long term interest rates.2) The demographics of America are in favor of

homebuilding.3) We believe that a strong offense of fundamentally

superior stocks will continue to do well at this time.Key Point: Investors are willing to pay for an

overstretched market.Cash Flows:

Biotech and other pharmaceutical companies have recently declined due to government fears of price controls. As a result, we are seeing smaller upstart companies being bought by larger ones as their values have been cut in some cases up to 50%. These larger pharmaceutical companies, such as Pfizer, have large war chests of cash.

They have made the decision that now is the time to make the move to acquire worthwhile companies to expand into newer growth areas.

New trends that are happening:1) Pharmaceutical companies are also taking on

more debt to merge with other companies.2) The presidential candidates are discussing

having programs to repatriate U.S. companies’ cash that is now overseas.

Key Point: Big pharmacy companies are buying smaller companies to fuel growth.”

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Dave & Buster’s combines entertainment and dining

Douglas Gerlach: “ C o m p a n i e s a r e s o m e t i m e s l i k e ca t s , they can have mult iple lives. Dave & Buster’s En-tertainment, Inc. (Nasdaq: P L A Y ) r e -turned to the public markets in October 2014 after a ten year run from 1997-2006 which ended in bank-ruptcy. The first Dave & Buster’s restaurant opened in Dallas in 1982, founded by Dave Corriveau and “Buster” Corely when both saw the opportunity to combine entertainment and food into one restau-rant concept.

The typical Dave & Buster’s restaurant ranges in size from 25,000 square feet to 45,000 square feet. The company emphasizes the tagline “Eat, Drink, Play and Watch” by setting up the restaurant’s layout to play games, watch sports, dine, and drink at its full-service bar areas. Dave & Buster’s has been refurbishing all of its restaurants by adding over 40 100+ inch high-definition televisions to its locations, providing an additional draw around popular sporting events that it brands D&S Sports. The company reports that about 70% of its 81 restaurants as of January 2016 have received the viewing upgrade, with more to follow.

In addition to sports viewing, Dave & Buster’s has emphasized the latest video games, including tie-ins to movies such as Star Trek and Star Wars. Redemption games provide the opportunity to win tickets for redeemable prizes. The strong emphasis on video game entertainment has driven the contribution of total revenues from 44% in 2014 to 53% in 2015. 2016 continues these trends, which are positive for the bottom line as gross margins for entertainment are higher than food.

The firm targets adults 21 to 39 years old with annual income over $75,000. Not surprisingly, the restaurants appeal to men more than women. About 40% of patrons are families and 60% are groups of adults. Dave & Buster’s gets 11% of its sales from special events like corporate gatherings or social groups.

The emphasis on entertainment produces a higher level of profitability than the typical casual dining restaurant. For Fiscal 2015 the average unit sales volume per restaurant was $11.8 million and EBITDA margin was 31%. Comparable store sales increased

8.9%, led by a gain of 11.4% from entertainment and other revenues. While not as robust, food comparable store sales increased 5.9%. Overall, the company has surpassed the casual dining industry comparable store sales performance for each of the past 17 quarters.

Dave & Buster’s expects to grow through the addition of new U.S. restaurants, comparable store sales gains, and international franchising. The company believes there is potential for 200 Dave & Buster’s restaurants in the U.S., more than double its current base. Dave & Buster’s can build a restaurant in either a large format (30,000 square feet and above) or a small format (under 30,000 square feet). The economics of the two formats are similar, providing a cash-on-cash return of at least 35% for the first year and at least a 25% return on invested capital over five years. The flexibility allows the company to tailor new restaurants to both new and existing markets. The firm expects to grow its unit base approximately 10% per year.

Food is expected to contribute comparable store sales gains of at least 1% per year. The company is focused on bringing the latest video games into its restaurants in order to keep its offerings fresh and continue to drive entertainment revenue.

Dave & Buster’s is interested in partnering with retailers and restaurant groups to franchise outside of North America. In October 2015 the company signed an exclusive agreement with Dubai-based Apparel Group FCZO to open seven Dave & Buster’s restaurants over a seven year period within a six country region of UAE, Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia. Apparel Group operates over 1,000 retail stores under more than 50 brands across the Middle East and India, including Cold Stone Creamery and Tim Hortons.

An investment in Dave & Buster’s carries risk. Restaurants are cyclical, and with such a heavy reliance on entertainment Dave & Buster’s is further exposed. The company has a history of boom or bust performance, exacerbated by the debt obligations undertaken to build its restaurants (averaging $8.8 million and $6.8 million for large and small formats, respectively). However, for the first time in its history the firm’s internally-generated cash flow is more than sufficient to support the capital needed to fund its new restaurant openings and service its debt.

We project Dave & Buster’s can achieve annual earnings growth of 13%. Five years of this earnings growth and an average high P/E of 30 (slightly reduced to reflect lower expected future growth than observed in the past) could generate a stock price as high as 103. For a low price estimate, we use a P/E of 20 and multiply by Fiscal 2015 EPS of $1.39 to generate a low price of 27. The upside/downside ratio is 4.2 to 1. Visit the website at www.daveandbusters.com.”

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Commodities and Gold – DownGeorge Dagnino: “One of the few asset classes the

fed cannot control directly is the price of commodities. Their trend is driven exclusively by the strength or weakness of the economy. They are all sputtering again, including gold, because of the renewed downshifting of the business cycle.

Interest Rates – Down. Global yields are close to or below 1% with the world and the U.S. economies in a very slow growth trajectory. Can the U.S. be immune to the global malaise and keep yields close to 1.7%. We doubt it. The reason we keep reminding you of this enigma is because there is a very attractive profit potential of more than 10% if U.S. bond yields decline close to global standards. We believe they will.”

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Regardless of election outcome, S&P 500 advances 72.2% of the timeJeffrey Hirsch: “For all the heated discussion,

debate, worrying, slicing and dicing of numbers, the actual presidential election outcome appears to have little bearing on S&P 500 performance in November and December. Since 1944 election-year Novembers have been up 55.6% of the time with an average gain of 0.6% and election-year Decembers have been up 83.3% of the time with an average 1.4% advance. The two-month combo of November and December is collectively up 72.2% of the time with an average gain of 2.0%. Regardless who wins, history still favors a typical yearend rally.”

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Pfizer: One of the more attractive year-ahead growth plays in large pharma

Ian Gendler: “Pfizer Inc. (PFE) is one of the world’s largest pharmaceuticals manufacturers. The company employs more than 97,000 individuals and the stock has been a member of the Dow Jones Industrial Average since 2004.

Pfizer recently completed the acquisition of Medivation, the San Francisco-based biotechnology corporation. This addition greatly enhances Pfizer’s capabilities in the multi-billion-dollar oncology market. In particular, the big prize is Medivation’s prostate cancer drug XTANDI, which generated $2.2 billion in sales over the past year or so, and has the potential to more than double that figure going forward. Medivation also adds a promising lineup of late-stage oncology assets, including talazoparib and pidilizumab, to Pfizer’s stable. We think that the purchase will add at least a nickel to Pfizer’s 2017 bottom line, with great contributions thereafter. All told, we think that the deal was a good one, though the price tag was certainly hefty (about $14 billion).

Management recently scrapped potential plans to split into two companies. Over the past few years, Pfizer had considered dividing its businesses between patent-protected drugs and older legacy products. According to leadership, the divide would not boost cash flow or better position operations competitively. In our view, the decision opens the door for more bolt-on acquisitions over the next several quarters.

As for the stock, it holds our Highest rank for Timeliness™. Based on our system, Pfizer remains one of the more attractive year-ahead growth plays in the large pharma. space. An above-average dividend yield, top rank for Safety™, and expectations for continued share buybacks enhance near- and long-term investment appeal.”

Editor’s Note: Ian Gendler is Executive Director, Value Line Research, www.valueline.com.

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10

INVESTMENT QUALITY TRENDS2888 Loker Ave. East, Ste. 116, Carlsbad, CA 92010. 1 year, 24 issues, $310 (print). Online, 1 Yr/$265www.iqtrends.com.

Timely Ten undervalued stocksKelley Wright: “The Timely Ten is not just another

“best of, right now” list. Rather, it is our reasoned expectation based on our methodology and experience that these ten currently Undervalued stocks offer greatest real total-return potential over the next five years.

Do we believe that all 10 will appreciate si-multaneously or immediately? Of course not. Our five-plus decades of research and experience, however, leads us to believe that these stocks, purchased at current Undervalued levels, are well positioned for both growth of capital and income.

The Timely Ten consists of Undervalued stocks that generally have a S&P Dividend & Earnings Quality rating of A- or better, a “G” designation for exemplary long-term dividend growth, a P/E ratio of 15 or less, a Payout Ratio of 50% or less (75% for Utilities), Long-term debt-to-equity of 50% or less (75% for Utilities).

The current 10 selections and their yields are: 1) Target Corp. (TGT) yielding 3.48%; 2) Franklin Resources (BEN) yielding 2.04%; 3) American Express (AXP) yielding 1.99%; 4) Eaton Vance (EV) yielding 2.76%; 5) Polaris Industries (PII) yielding 2.94%; 6) Wal-Mart Stores (WMT) yielding 2.80%; 7) Cummins Inc. (CMI) yielding 3.50%; 8) Gap Inc. (GPS) yielding 3.99%; 9) Emerson Electric (EMR) yielding 3.71%; 10) Disney, Walt (DIS) yielding 1.53%.”

Continued from page 3

As their stock performance indicates, Wall Street is finally catching on to their true potential, thanks to the growth in e-commerce.

Preeminent PrologisIf I had to pick just one company in the sector, it

would be Prologis. Its operating portfolio consists of nearly 3,347 industrial properties and has approximately 666 million square feet that is owned, managed or under development.

Its reach is global too with facilities in 20 countries spanning four continents. Prologis is exposed to countries that account for 70% of the world’s GDP. This includes fast-growth areas such as Asia where Prologis owns 55 million square feet of space.

It has more than 5,200 customers worldwide.

How E-Commerce Is Transforming Industrial REITs

Among its largest customers are familiar names like Amazon.com (Nasdaq: AMZN), Wal-Mart Stores (NYSE: WMT) and The Home Depot (NYSE: HD). Prologis’ global occupancy rate for 2016 is estimated to be 95.7%.

For dividend investors, the good news is that Prologis has been raising its dividend annually since 2013. The current yield is 3.25%.

With the e-commerce boom set to continue, the Prologis dividend should continue to increase in the years ahead. That makes Prologis a way for even income investors to play the e-commerce boom.

Editor’s Note: Tony Daltorio joined Wyatt Investment Research in April 2015. His expertise is in foreign markets and commodities. Wyatt Investment Research provides investment research that is independent of the back door deals and machinations of Wall Street. Their research is guided by a simple principle: avoid risk and focus on buying assets at a discount. Click here to receive 5 weekly issues of Daily Profit.

Conrad’s UTILITY INVESTORCapitalist Times, LLC, 6841 Elm St. #1057, McLean, VA 22101. Monthly, Online e-Letter, 1 year, $29www.ConradsUtilityInvestor.com.

Pattern recognitionRoger Conrad recently added Pattern Energy

Group (Nasdaq: PEGI) to the Aggressive Income Portfolio.

“Pattern Energy’s operating results and dividend growth have been the portrait of consistency, fueled by steady asset drop-downs. The most recent deal involved the US$132 million purchase of a 50 percent interest in the Armow Wind project in Ontario, Canada.

This transaction expands Pattern Energy’s portfolio of wind-power assets to 18 facilities with a total generating capacity of 2,644 megawatts. Armow Wind has operated for nine months and sells all of its output under a 20-year agreement with the Ontario Independent Electricity System Operator.

Pattern Energy funded the purchase with the proceeds of a stock offering in August that was upsized to 11.3 million shares. And with its July 2020 bonds yielding 4 percent to maturity, the company enjoys favorable access to debt capital.

The yieldco has the right of first offer on 11 operating projects with a total capacity of 942 megawatts—and its sponsor has 5,900 megawatts of wind- and solar-power projects in various stages of planning and development.

Taking advantage of this growth opportunity hinges on the yieldco’s ability to access capital at economic terms. Currency risk is another challenge, while the company also sells a portion of its electricity on the depressed wholesale market.

Pattern Energy Group joins the Aggressive Income Portfolio as a buy up to $22 per share.”

11

Fairmont Resources Consolidates Historic Quartzite Resource at Baie-Comeau Fairmont Resources Inc. (TSX: FMR) is a rapidly growing industrial min-

eral and dimensional stone company. Fairmont's Quebec properties cover numerous occurrences of high-grade titaniferous magnetite with vanadium, with the Buttercup property having a permit to quarry dense aggregate. Where these occurrences have been tested they have display exceptional uniformity with respect to grade. Fairmont also controls three quartz/quartzite properties, with the Forestville property having independent end user testing

confirming the suitability of quartzite from Forestville for Ferro Silicon production. Fairmont is also in the process of acquiring the assets of Granitos de Badajoz (GRABASA) in Spain which includes 23 quarries and a 40,000 square metre granite finishing facility that has produced finished granite installed across Europe. The company has annual production capacity of over 250,000 square meters and has produced finished granite installed in buildings across Europe. Grabasa averaged over 6 million Euros in annual sales in the last 5 years of its operation. These mine licenses and processing facility would make Fairmont one of the largest granite producers in Europe. Several months ago, Fairmont also consolidated a historic resource of 12.3 million short tons (11.2 million tonnes) of 99.20% SiO2, 0.41% Al2O3, and 0.36% Fe2O3 (from GM Report 39387, 1982, page 6) by staking. The two additional claims staked which contain the historic resource and are contiguous to the original Baie- Comeau Quartzite claims. Test work by Union Carbide Canada demonstrated that the quartzite from Baie-Comeau was acceptable for ferro-silicon production. Ferrosilicon (FeSi) is used to remove oxygen from the steel and as alloying element to improve the final quality of the steel. Silicon increases namely strength and wear resistance, elasticity (spring steels), scale resistance (heat resistant steels), and lowers electrical conductivity and magnetostriction (electrical steels). Special FeSi like low Al, High Purity and low C ferrosilicon are used in the production of special steel qualities for transformers/motors, ball bearings and shock absorbers, tire cord steel and in stainless steel.

FAIRMONT RESOURCES, LTD.

TSX.V: FMR Contact:

Michael Dehn, President, CEO

600 Orwell St. Unit 14 Mississauga, ON,Canada L5A 3R9

Phone: (647) 477-2382 michael@fairmontresources.ca

www.fairmontresources.ca

Puma Exploration to acquire 100% of Murray Brook Deposit and significant land package in the Brunswick Belt in New Brunswick

Puma Exploration (PUM-TSXV) is a Canadian mineral exploration company with advanced precious and base metals projects in Canada. The Company's major assets are the Turgeon Zinc-Copper Project and the Nicholas-Denys Project in New Brunswick and their equity interest in BWR as related to the Little Stull Lake Gold Project in Manitoba. Puma is focusing its exploration efforts in

New Brunswick. Canada. announce that it has executed an asset purchase agreement with Votorantim Metals Canada Inc. and signed a letter of intent with El Nino Ventures (ELN-V) to acquire, respectively, approximatively 67.9% and 32.1% beneficial interest in the Murray Brook Zn-Pb-Cu-Ag Volcanogenic Massive Sulphide (“VMS”) deposit located in the famous Bathurst Mining Camp (“BMC”) of northern New Brunswick. The Murray Brook property consists of Mining Lease 252 and contiguous Mineral Claim Block 4925 (245 claims) located 4 km west of the producing Caribou Mine, which is owned and operated by Trevali Mining Corporation. The Murray Brook deposit contains historical resources of 1 billion pounds (lbs) of zinc, 183 million lbs of copper, 390 million lbs of lead, 23.9 million ounces (“oz”) silver and 338,000 oz. of gold within historical Measured and indicated Resources of 17,884,000 tons @ 2.73% Zn, 0.47% Cu, 0.99% Pb, 41.7 grams per ton (“g/t Ag”) and 0.59 g/T Au. Preliminary metallurgical tests indicated recoveries of up to 88% zinc. Gravity and soil geochemical targets exist along strike from the Murray Brook deposit and there are high priority drill-ready targets in favorable stratigraphy and along strike from the nearby Caribou Mine within Mineral Claim Block 4925. The Murray Brook VMS deposit shows a strong gravity anomaly coincident with strong lead and zinc in-soil values. The acquisition is another step in Puma becoming a leader in Zinc Exploration in New Brunswick and it is a substantial addition to its portfolio of base metals projects in New Brunswick, which include the Turgeon, Nicholas-Denys and the newly acquired Red Brook projects.

PUMA EXPLORATION

TSX.V: PUMOTCBB: PUXPF

Contact: Marcel Robillard, President

212, Avenue de la Cathédrale Rimouski (Québec) Canada G5L 5J2

Phone: (418) 724-0901Toll-free: (800) 321-8564

president@explorationpuma.comwww.pumaexploration.com

12

As all fund companies will tell you, past performance is no guarantee of future performance. What else, then, is the best way to evaluate mutual funds? After all, an analysis of past performance is all you’ve really got. Isn’t it?

Picking tomorrow’s winners among stock funds may be next to impossible. But picking funds that will win over time, and that suit your investment profile need not be a mystery. The Investment Committee for Money Reporter point out a few equity mutual fund characteristics that will help in the process.

• Fund Performance Re-cord: Past performance never guarantees anything about the future. And many a great fund seems to go through extended periods of less-than-greatness.

Yet above-average fund perfor-mance should certainly indicate managerial capability in some de-gree. In particular, look for steady performance, year by year. Funds that lead their category over a few months may just be lucky. But funds that have performed in the top half of their category more often than not over a number of years could very well continue to do so – even if they miss for a while.

How to Choose a Mutual FundLook for the year-by-year re-

sults on any fund. Relatively strong performance in years when the stock-market indexes decline is an especially endearing quality. Funds that lose money easily, es-pecially in overall bad years, face an uphill battle to make it back.

• Fund Management Expens-es: Evidence mounts over time that most funds, however strong, tend to see their performance re-gress to the mean. In other words, after good years come modest ones.

But the size of the management expense ratio (MER) has an ongoing deleterious impact on every fund’s performance.

The MER may seem like a small thing. But it’s one cut-and-dried fund characteristic that drags down any fund’s performance. By emphasizing funds with below average MERs, you improve your odds of getting a superior fund.

Incidentally, since most high-expense funds use some of their management fees to pay trailer fees to mutual-fund dealers, those with the lowest fees often receive little sales support. You’ll have to root them out on your own.

• Load Funds vs No-Load Funds: We need say little about outright sales charges, be they

front-end loads or deferred. Competition seems to makes sales loads obsolete these days. They’re still around, though. But most fund sellers will negotiate them almost out of existence.

• Management Tenure: To inspire real confidence, a fund should have one of two manage-ment characteristics. Ideally, a fund’s portfolio manager has been at it for many years. Un-fortunately, such situations can be a rare commodity. Those that do exist tend to be at small, manager-owned companies. But large companies, including Fidel-ity, tend to support their portfolio managers with stable, disciplined research departments that provide continuity of style and manage-ment.

• Fund Size: There are times when it’s tempting to pick small funds just because they’re small. A small fund can buy or sell a stock in smaller quantities, without worrying whether or not it’ll move the price. A small fund doesn’t need to find large sellers or buyers to complete transactions. Also, a small fund manager may need only his best ideas. In the hands of an astute manager this is a great asset. Not least, a small holding in a small company that makes a big gain can have an enormous impact on a small fund.

But especially small funds, those with less than about $4 million in assets, expose unit holders to significant risk. They simply can’t diversify very well. And the manager will be easily tempted to overload the fund with a few of his or her best ideas. What’s more, expenses tend to be high in small funds.

On the other hand, large Canadian funds with more than $3 billion in assets, for example, may have difficulty trading without disturbing their own market. These large funds often tend to look more and more like index funds, but with high management fees.

Source: Money Reporter, a publication of MPL Communications, Toronto, ON, Canada’s largest provider of independent investment advice. For a Special Introduc-tory rate visit www.adviceforinvestors.com.

INVESTOR RELATIONS PROGRAMSThe Bull & Bear has several cost- effective

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13

Continued from page 1

see revenues climbing 2 percent in 2017, and earnings rising 28 percent. For dividend investors, SeaWorld looks compelling, too, paying 84 cents per share annually, giving the stock a 6.4% yield. Although analysts on average expect SeaWorld to earn only 68 cents per share this year, the company should be able to generate enough free cash flow (cash profits from operations, less the capital expenditures needed to maintain the business) to cover the payout. “The company’s turnaround is taking a little longer to show results than I initially expected,” say Putnam. “But I still like it.”

• Chipotle Mexican Grill (CMG, $409.81) could be a good turnaround play, too. We advised selling the stock in our January 2016 issue, when the stock was trading at $640, because of concerns about a slowdown in sales and declining profit margins. The firm then faced its worst crisis ever: an outbreak of E. coli bacteria that sickened customers and sent sales into a tailspin.

Yet Chipotle remains a preeminent brand in the fast-casual restaurant segment. The firm has in-vested heavily in new food safety procedures, and it’s starting to woo back customers with a loyalty rewards program. Analysts expect sales to fall be 10% this year but then rebound by 17%, to $4.7 bil-lion, in 2017. Chipotle also plans to open more than 220 stores by the end of this year, including its new Asian-style Shop House and its first burger joint, called Tasty Made.

The stock looks like a better value. It trades at about three times estimated 2016 sales, well below the five-year average of 4.7 times sales, according to Morningstar. A long-term recovery looks “more likely than not,” says Credit Suisse, which rates the stock a “buy” and sees it hitting $500 over the next 12 months.

• Lumber Liquidators Holdings (LL, $18.75). For truly intrepid bottom-feeders, LL could be a win-ner. The company’s shares have collapsed from $70 in early 2015, following reports that the company sold toxic flooring made in China. Liabilities from related class-action lawsuits could cripple the firm.

But Craig Hodges, co-manager of the Hodges Pure Contrarian Fund, says the firm should be able to handle the legal expenses and return to profitability next year. Its products remain popular with builders, he adds, and the firm should benefit from a strong housing market. “The business isn’t bad,” he says. “The management team just messed it up tremendously.” Over the next 18 months, he expects the stock to climb back into the high $20s.

Editor’s Note: Daren Fonda is an associate editor at Kiplinger’s Personal Finance magazine, www.Kipinger.com.

3 Battered Stocks to Buy While They Are Down

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VOL 15-08

Free commission offer applies to online purchases of Fidelity ETFs and select iShares ETFs in a Fidelity brokerage account, which may require a minimum opening balance of $2,500. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). iShares ETFs and Fidelity ETFs are subject to a short-term trading fee by Fidelity if held less than 30 days. ETFs are subject to management fees and other expenses.

Sell orders subject to fees from $0.01 to $0.03 per $1,000 of principal. Limited to online domestic equity and option trades (of 20 contracts or less) executed within two years. Offer valid for new and existing Fidelity customers opening or adding to an eligible Fidelity IRA or brokerage account. Requires over $100,000 net new assets maintained for 9 months or normal commissions may apply retroactively. See Fidelity.com/ATP500free for further details. Fidelity reserves the right to modify these terms and conditions or terminate this offer at any time. Other terms and conditions, or eligibility criteria may apply.

* $7.95 commission applies to online U.S. equity trades in a Fidelity account with a minimum opening balance of $2,500 for Fidelity Brokerage Services LLC retail clients. Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal). Other conditions may apply. See Fidelity.com/commissions for details.

Price improvement details provided for certain domestic stock and single-leg option orders entered during market hours after the primary opening, provided there is a National Best Bid and Offer (NBBO) at the time the order is placed. Price improvement details are provided for informational purposes only and are not used for regulatory reporting purposes. See Fidelity.com for more details.

Commission comparison based on website commission schedules as of 10/1/2015 for online U.S. equity trades and for E*Trade customers, fewer than 1,500 trades per quarter.

The Equity Summary Score, provided by Thomson Reuters StarMine, is for informational purposes only, does not constitute advice or guidance, and is not an endorsement or recommendation for any particular security or trading strategy. Thomson Reuters StarMine and Fidelity are not affi liated.

For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affi liates in connection with an exclusive long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation can be found in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc., and its affi liates.1 Barron’s, March 19, 2016, Online Broker Survey. Fidelity was evaluated against 15 others and earned the top overall score of 34.9 out of a possible 40. Overall ranking based on unweighted ratings in the following categories: trading experience and technology, usability, mobile, range of offerings, research amenities, portfolio analysis and reports, customer services and education, and costs.

2 Investor’s Business Daily (IBD), January 2015 and 2016 Best Online Brokers Special Reports. January 2015: Fidelity ranked in the top fi ve in 9 out of 11 categories — more than any other competitor. January 2016: Fidelity ranked in the top fi ve in 10 out of 12 categories. Results for both reports were based on having the highest Customer Experience Index within the categories composing the surveys, as scored by more than 9,000 visitors to the IBD website.

3February 16, 2016: Fidelity was ranked No. 1 overall out of 13 online brokers evaluated in the StockBrokers.com 2016 Online Broker Review.

Before investing in any mutual fund or exchange-traded fund, you should consider its investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus, an offering circular, or, if available, a summary prospectus containing this information. Read it carefully.Fidelity Brokerage Services LLC, Member NYSE, SIPC. © 2016 FMR LLC. All rights reserved. 751631.2.0

ALWAYS BE TRADING WITH A CLEAR ADVANTAGE

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