“Notoriously insensitive to subtle shifts in mood, children will persist in discussing the color of a recently sighted cement-mixer long after one’s own interest in the topic has waned.” — Fran Lebowitz
Over the last month, the S&P Goldman Sachs Commodity Index and S&P 500 Index are up 6.5 per cent and 6.1 per cent respectively. The two indices have broadly moved in sync but the commodity index has exhibit much lower volatility — a sign that a nascent bull market in commodities might be in the making.
On to the update.
Subtle Shifts
As we looked through price action and capital flows in the US market, we noticed subtle rotations that are starting to occur within the market. Specifically:
- As technology names have soared, there appears to be capital flowing into smaller, arguably more speculative, software names. At first glance, most of these names appear atrociously expensive, which without digging into their underlying businesses is probably a meaningless indicator.
- With the average interest rate on a 30-year fixed-rate mortgage in the US has fallen below 3 per cent for the first time ever, investors are positioning for a continued recovery in the US housing.
Residential real estate plays such as regional banks with sizable mortgage origination units, residential real estate investment trusts, insurance companies engaged in mortgage financing, residential leasing companies and real estate developers.
We will do a quick run through of a few of the names that caught are attention in the two categories.
Software
Change Healthcare $CHNG
Nashville, Tennessee based Change Healthcare is healthcare technology company operates one the largest financial and administrative information exchanges in the US healthcare system — Intelligent Healthcare Network. The Intelligent Healthcare Network is first nationwide solution to enable providers to submit documents and data, such as claims attachments, electronically to all payers in both the Medical and Workers’ Compensation market segments. According to the company’s IPO filing documents, the networked enabled approximately 15 billion data transactions worth about US dollar 1 trillion of adjudicated claims — good for one-third of all healthcare expenditures in the US — in the 2018 fiscal year.
Other than information exchange solutions, Change Healthcare also provides revenue and payment cycle management tailored for the healthcare sector.
The company has a market cap of US dollar 3.5 billion and in its first year as a public company posted annual revenue of $US dollars 3.3 billion, up 0.6% from the and reported a loss of US dollars 5.6 million, or 2 cents per share.
SolarWinds $SWI
Austin, Texas based SolarWinds develops software for to help businesses manage their networks, systems, and information technology infrastructure. The company takes the “freemium” approach by offering freely downloadable software to potential clients and then markets more advanced software to them by offering trial versions.
The company has a market cap of US dollar 5.8 billion. Management guidance (non-GAAP) for full year 2020 is total revenue in the range of US dollar 1.035 to 1.055 billion, representing growth over 2019 non-GAAP revenue of 10.3 to 12.4 per cent. Non-GAAP diluted earnings per share of US dollars 0.88 to 0.91.
Based on the mid-point of the guidance, the company trades at 20.7 times 2020 earnings.
PagSeguro $PAGS
PagSeguro is an online or mobile payment-based e-commerce service for commercial operations. It services small merchants in Brazil of which there are around 12 million and account for a third of the GDP of Brazil.
PagSeguro is part of Universo Online (UOL group), which, according to Ibope Nielsen Online, is Brazil’s largest Internet portal, with more than 50 million unique visitors and 6.7 billion-page views every month.
The company has a market cap of US dollar 12.3 billion and trades at trailing price-to-earnings multiple of 45 times.
Ebix Inc $EBIX
Ebix is a supplier of software and e-commerce solutions to the insurance industry and operates data exchanges for life insurance, annuities, employee health benefits, risk management, workers compensation, and property and casualty insurance.
The company has is a very small company with a market cap of US dollar 692 million. In 2019, the company delivered revenues of US dollars 580.6 million, increasing 17 per cent year-over-year. Full year GAAP earnings rose 4 per cent to US dollars 96.1 million.
US Residential Real Estate Plays
Sun Communities REIT $SUI
The Sun Communities REIT invests in manufactured housing and recreational vehicle communities. As of June 30, 2020, the company owned interests in 426 such communities in the United States and Canada consisting of nearly 143,000 sites. At the end of 2019, Sun Communities had a total portfolio occupancy rate of 96.4%.
The manufactured homes sub-sector experienced the highest percentage growth of all REITs in 2019. Part of the reason for the growth in this sector is that manufactured homes are in many cases the most viable choice for lower-income households. According to data from the Housing Assistance Council, lower-income households still make up the primary market for manufactured homes. The HAC lists the median annual income of households residing in manufactured housing as US dollars 28,374. That number is almost half the median income of households living in “traditional” single-family homes.
The REIT has a market cap of US dollar 13.9 billion and trades at a dividend yield of 2.2 per cent.
Invitation Homes $INVH
Invitation Homes Invitation is the US’s biggest single-family rental company, with roughly 80,000 houses. In May, the company reported that average occupancy for the first quarter was 96.7 per cent, up 20 bps year over year. The company also shared that achieving better-than-normal on-time rent payments in May — despite the pandemic and high unemployment rates.
One of the cases for owning Invitation Homes is the expectation that the COVID-19 pandemic will make suburban single-family homes both more desirable and more difficult to buy as overall housing inventory in the largest metro areas is shrinking rapidly.
The company has a market cap of US dollar 15.7 billion and trades at a dividend yield of 2.2 per cent.
This post should not be considered as investment advice or a recommendation to purchase any particular security, strategy or investment product. References to specific securities and issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.