Good Enough? Steady as She Goes

Good Enough?

No stock or bond market thrives without the occasional hiccup. So, when the economic and market news keeps coming in on the positive side, that bothers me.

The US economy is still on track, and the fourth quarter numbers that will come at the end of January should be strong given consumer spending data. Inflation remains at bay, which is a positive for bonds.

However, one of the past drivers for business investment remains in trouble: The shale petroleum exploration and production (E&P) business is weighing on regional economies.

The agricultural industry is not healthy either. Weather troubles have caused major economic woes for farms. And trade tirades have only worsened market conditions for farms with crops to harvest. This is negatively affecting many regional Midwest economies and local businesses.

The US and China are coming to some sort of agreement, which should aid agriculture as well as the energy market, and the United States?Mexico?Canada Agreement (USMCA) is set to be signed.

This will provide a better and more predicable environment for manufacturers as well as the agricultural and energy markets. And the US finally has a full budget for fiscal 2020, which adds some certainty for the economy.

But the rest of the world's major economies are enduring plenty of woes. This brings challenges for global companies but makes the US all the more compelling for global investors.

So, as they currently stand, things are pretty good. But we can't get ahead of ourselves when it comes to our investments. Instead, I recommend sticking to the tried and true US-centric stocks and bonds for the core of our portfolios.

Vol. 31, No. 1

Steady as She Goes

January 2020

Dear Friend, Goldilocks... That's the word that comes to mind when looking at the US stock

and bond markets. The US economy continues to expand. Gross domestic product (GDP)

increased by 2.1% during the third quarter, and the projections are for continued expansion into the first quarter of 2020.

US consumers are driving that expansion, with consumption gaining 3.2% in the most recent quarter and showing little signs of abating. The labor market remains strong, with ample job openings driving down the unemployment rate to historical lows. Wage gains continue to expand and are running near double the rate of core inflation.

In turn, consumers are getting back to hyper-comfy levels, as measured by the Bloomberg Consumer Comfort Index, boding well for the economy. Businesses are also getting more and more comfortable, as expectations for sales and activity are rebounding again, according to the Federal Reserve Bank of New York.

Meanwhile, the Personal Consumption Expenditure Index (PCE) shows core inflation remaining well below 2%. That's aiding the bond market, which is still well-bid with ample demand for bonds driving yields down and prices up.

But it's a different story for many economies outside of the US hindered by myriad troubles. This means the US remains the island of opportunity, which is a warning for globally-focused companies.

In this issue, I'll reiterate my call for US-centric investments for more growth and income. I'll also present two new recommendations for companies that are cashing in on what's working and what isn't for balance in the model portfolios.

Growth Strategies

Stocks & Bonds on Track for 2020

2019 was a bumper crop for US stocks and bonds. How much better can it get in 2020?

Let's start with the underpinnings for the markets. The US continues to be the island of stable to improving growth.

Gross domestic product (GDP) is running at 2.1% for the most recent quarterly data and is projected to come in at 2.3% for 2019. This continues the trend of quarter-over-quarter growth since the end of 2008 to date.

Consumers are the main drivers of this economic growth. The US personal consumption rate embedded inside the GDP data is up for the most recent quarter by 3.2% and has been firmly on the rise over that time.

So, the key to keeping the US economy humming along through 2020 is going to be the consumer. And to support the consumer, we continue to have a strong labor market, with unemployment running at a mere 3.5% while average wages are increasing at a rate of 3.1%.

This means more folks have jobs that are paying more, which helps them buy more products and services. But it's not just about the ability to spend.

It's also consumers' willingness to spend that is important. And as a forwardlooking barometer, the Bloomberg Consumer Comfort Index has been dramatically

(continued)

reversing its slide from mid-October

US Personal Consumption Rate

through early November to return to

the quite comfy level of 61.1%.

4.0

But consumer participation is only

4.0

as good as the business that it gener-

3.2 3.2

ates. And in turn, the economy is

2.0

only as good as business activity

2.0

going forward.

This is where we can look at some

0.0 0.0

of the improving data from both

services and manufacturing purchasing managers' index (PMI) surveys, which are showing improvements after sliding earlier this year largely on trade tension fears.

A reading of over 50% is considered bullish. The services sector is faring better than the manufacturing sector,

Last Price

3.2

HLaigsht Pornic1e2/31/14 43..92

-2.0 -2.0

AHvigehraogne12/31/14 24..29

LAovweraogne12/31/08 -32..72

Low on 12/31/08 -3.7 -4.0

-4.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bureau of Economic Analysis & Bloomberg Finance, L.P.

Bloomberg "Comfy" Index

although it remains in positive territory. And like the comfy index, the read-

ings from business leaders surveyed by the Federal Reserve Bank of New York are also sharply more optimistic for business activity over the next six months, with its survey index up to a current 18 after slipping from July through October.

This means consumers should be there to support the markets in 2020. And with businesses working to capitalize on the consumer, this should result in rising revenues and earnings next year.

Furthermore, we should see better

Last Price

61.1

LHaigsht Pornic0e7/14/19 6641..71

HAvigehraogne07/14/19 6641..71

ALovweraogne01/20/19 5671..41

Low on 01/20/19 57.4

Mar Mar

Jun Jun 2019

2019

65.0 65.0

64.0 64.0

63.0 63.0

62.0 62.0 6611.0.1 6611.0.1

60.0 60.0

59.0 59.0

58.0 58.0

57.0

Sep

Dec 57.0

Sep

Dec

Source: Bloomberg Finance, L.P.

quarterly reports in 2020, as average rate at which banks borrow from each Lessons from Down Under

sales growth for members of the S&P other) as well as the ongoing heavy

Now, many questions remain

500 Index is expected to hit 6%, with average earnings gaining near 14%.

lending in the short-term finance market, known as the repurchase

about whether the US economy can57.0 continue to grow with controlled 57.0

Those rising sales and earnings should agreement market, and the newer drive stock prices upward given current quantitative easing (QE) operations.

inflation and support better stock a5n6d.0 bond prices after such a long run. 56.0

conditions and current expectations. And as noted earlier, inflation

This means easier credit conditions, which are good for consumers, busi-

For clues, we can turn to Austral55i55a..,00 which is one of the best examples of

is still well below the 2% goal of the Federal Reserve Bank and its Open Market Committee (FOMC). Therefore, the FOMC and the Fed should remain accommodative for the credit market in the coming year.

This should include either sustained low target rates for Fed funds (the

nesses and the sustained performance

of the US bond market.

The overall US bond market has

seLeanst Parniceaverage5r2e.2turn of 8.5% year

tBoaLHAHALaovvdiirggsweechhatrraaloPtooaggnernneeiyc,000es855a.///3s33T111t///1hr119a88iscks555555ei263630gd......269697nbifyicBalnotolymtbruermgp&s

thLeowreotnu0r8n/3s1/1f9or t5h0e.7overall market

averaMMgaaerr for2JJ0uu21nn0717 SSaeenppd 20DD1ee8cc .

Mar Mar

Jun 2J0u1n8

2017

2018

an economy that has had similar su55s44-..00

tained growth with low inflation. It5'3s.0

also one that I have had a lot of exp55e32.-.02

rience working with.

52.2 52.0

Back in my banking days, I worked52.0

with sovereign bond markets with a 51.0 pSeaprticuDleacr focMuasr on fJiusncallySerpeformDeicng51.0 nSeaptionsDeacnd cMenartral2bJ0ua1n9nks.STephis inDeccluded

2019

Neil George's Profitable Investing? (ISSN 2577-9311) is published monthly by InvestorPlace Media, LLC, 1125 N Charles St, Baltimore, MD, 21201. Please write or call if you have any questions.

Phone: 800/211-8566. Email: feedback@. Web site: profitableinvesting.

Editor: Neil George

Chief Executive Officer: Brian Hunt

Senior Managing Editor: David Tony

Marketing Director: Katy Anadale

Managing Editor: Gregg Early

Chief Marketing Officer: Brad Hoppmann

Assistant Managing Editor: Wola Odeniran

Marketing Director: Mary Southard

Editorial Director: Luis Hernandez

Senior Designer: Marc Gagarin

6.0

Subscriptions: $249 per year. ? 2019 by InvestorPlace Media, LLC, Founding Member of the Newsletter Publishers Association of America. Photocopying, reproduction or quotation 6.0

strictly prohibited without the written permission of the publisher. While the information provided is based upon sources believed to be reliable, its accuracy cannot be guaranteed, nor can

the publication be considered liable for the investment performance of any securities or strategies mentioned. Subscribers should review the full disclaimer and securities holdings disclosure

policy at or call 800/219-8592 for a mailed copy. Periodicals postage rates paid at Baltimore, MD, and at additiona5l.0

mailing offices. Postmaster: Send address changes to Neil George's Profitable Investing?, InvestorPlace Media, LLC, 1125 N Charles St, Baltimore, MD, 21201.

5.0

2

Profitable Investing | January 2020 | profitableinvesting.investorplace.co4.m0

4.0

Mar

Jun 2019

Sep

Dec

2019

Last Price

HLaigsht Pornic0e5/31/18 AHvigehraogne05/31/18 LAovweraogne08/31/19

Low on 08/31/19 Mar Jun Mar 2J0u1n7 2017

52.2 562.62 536.96 503.79 50.7

Sep Sep

Markit US Composite PMI Index

57.0 57.0

56.0 56.0

55.0 55.0

54.0 54.0

53.0 5532..02 52.2 52.0 52.0

51.0

Dec Mar Jun Sep Dec Mar Jun Sep Dec 51.0

Dec Mar 2J0u1n8 Sep Dec Mar 2J0u1n9 Sep Dec

2018

2019

Source: Markit & Bloomberg Finance, L.P.

Australian GDP

6.0

6.0

5.0 5.0

4.0 4.0

3.0 3.0

Last Price

1.7

LHaigsht Pornic0e9/30/94 15.76

HAvigehraogne09/30/94 53.62

ALovweraogne03/31/92 31.21

Low on 03/311/99925-19991.1

1995-1999

2000-2004 2000-2004

2.0 21..07 1.7

1.0

2005-2009

2010-2014

1.0 2015-2019

Sou2r0c0e5: -A2u0s0tr9alian Bure2a0u1o0f-2S0ta1t4istics & Bl2o0o1m5b-e2r0g1F9inance, L.P.

New Zealand, Ireland, Denmark and

Stock Index returning 1,200% from

others, including Australia.

1992 to date and the overall Australian

During the 1980sM,idAPuricsetralia had a bea22xlo77l22p22o55o..am6600vn55MMe-sarionthndes-DDDbAAAapuTTTnlEEEsadWWSStcOOIIeNNerLLecDDRRaconenIIIMdsnnnodddsidmeeesioxxxPoyrnmic(((sLLRRewe.111))t)Iiitnm22hf7766l2233eea...sr6688tr5533isaoMMMotniacrweads int2o00tMhe double-digits. Reserve Bank of Au20s0trMalia (RBA) reforms came through de1r5e0gMulation of the financial markets, flo1a50taMtion of the Australian dollar and a

dir1e00cMtive that the RBA focus policy to tar1g00eMt inflation between 2%-3%.

T50hMese, along with other fiscal

refo50rMms, led to stability and predict-

bond market returning 240% since 1998 to date, with the sovereign gov666-033M..8833 ernment bond market faring even 60M

better from 1992-1998, when I was 50M

highly active in the market.

50M

The takeaway from Australia is th4a0tMa central bank more focused on inflati4o0nM with backup from regulatory reform3s0M and fiscal improvements can bring s3u0sMtained economic gains, lower inflatio2200nMM and continued investment inflows. 10M

And with the US Federal Reserve10M

abilit0y for businesses, consumers and inves0tors. Sustained lower inflation, lower bond2200y0000i--e22l00d00s44 and inves22t00m0055--e22n00t00s99 in the resource markets sustained

now more focused on inflation targe0ting and US business and financial regula0tory 22r00e11f00o--r22m001144s, the US ma22y0011w55--e22l00l1199continue with further sustained growth, benefit-

the economy, resulting in positive

ting both stocks and bonds.

GDP growth since 1992 to date. That However, as I noted previously, the

makes it one of the longest positive- US economy still has challenges. Th3e00

peHrafnonromn AirnmgstreoncgoSnuostaminiaeblse IinnfratshtruectwureoCrladpi.tal Inc agricultural markets, primarily in the300

HTahnniosnhAramsstrreonsguSlutestdainianbleAInufrsatsrtrauclituar'esCAapSitaXl Inc Midwest, remain challenged by 2019250

250

Profitable Investing | January 2020 | profitableinvesting.

200

200

weather and trade tensions. And the petroleum market is having a shakeup throughout the shale fields.

These two developments have weighed on local and regional economies. And while the overall economy is positive, it isn't ideal.

Outside of the US, global economies are still not healthy and are showing slowed growth and recessionary conditions, resulting in challenges for global companies, including those in the US.

And while election day in the US is still far away, it's getting closer. All of this means that US-focused stocks and bonds, which performed well for our model portfolios in 2019, will continue to provide the best returns in 2020. That is, until something significant changes.

Proven Growth & Income

Real Estate for Real Renewables

Renewable energy is neither a fad nor a political football. The economics of working with wind, solar, hydropower and other renewables continues to work for the bottom line and not just for show or for feel-good actions.

For proof, look no further than NextEra Energy (NEE), one of the more successful utilities in the Total Return Portfolio. Since being added to the portfolio, it has generated a total return of over 518%, which is fantastic when compared to the S&P Utilities Index's 177% return for the same period.

It's also quite impressive when compared to the S&P 500 Index, which only managed to return 221% over the same amount of time.

Renewables Power Up

NextEra Energy has core operations in regulated power for its base market in Florida, but it has really grown in assets and revenues thanks to its broad push into wind and solar power in both its regulated market and more so in its unregulated markets. In doing so, it has become one of the world's largest wind and solar companies.

But it isn't alone in this market.

3

1995-1999

2000-2004

2005-2009

2010-2014

2015-2019

According to data compiled by the Center for Climate and Energy Solutions (C2ES), renewable energy is the fastest-expanding source for power in the US between 2000 and 2018, growing some 100% and climbing.

And yet, only 11% of US energy demand was fueled by renewables in 2018, according to the Energy Information Agency (EIA). This means that, although the gains have been impressive, there is a lot of opportunity for further growth.

For US electric power, renewables made up a bit more of the power pie in 2018, responsible for 17.1%. That is projected to increase to 24%, led primarily by wind and solar operations.

A great deal of this development comes from tax incentives. In 1992, the Production Tax Credit (PTC) enabled utilities to claim credits for each kilowatt of power generated. This enabled a lot of projects to get green-lighted and provided the initial push in this market. But this is being phased out at the end of 2019.

The Investment Tax Credit (ITC) provided the next leg up for wind and solar. This enabled credits not just for power produced but for investments in equipment and facilities.

This is what has been behind much of the economics of NextEra Energy, as it is as much about capability as it is about power production. So, even if the wind isn't blowing or the sun isn't shining, NextEra still gets its credit for its investment in facilities and capabilities. The ITC is phasing down but will continue into the 2020s.

Individual states also continue to provide credits, including high-tax states such as California, which adds to the economics of renewable power projects. They also continue to expand mandates for regulated utilities to either generate or acquire power from renewables as part of their approvals by local public utility commissions (PUCs).

This means renewable power is not just about tax savings. Instead, it's a requirement that is fueling major investments in renewables. The EIA and C2ES estimate that spending on such investments totaled $2.2 trillion in 2017 and $2.4 trillion for 2018.

4

US Annual Solar (Black) & Wind (Blue) Electricity Generation

Mid Price 272.65 DATESOLR Index (R1) 63.83M

250M DATEWIND Index (L1) 272.65M

63.83 60M

50M 200M

40M 150M

30M

100M 20M

50M

10M

0

0

2000-2004

2005-2009

2010-2014

2015-2019

Source: US Department of Energy & Bloomberg Finance, L.P.

2019 should show a further rise.

Act of 1980 and, most importantly, the

Renewables include a variety of

Cigar Excise Tax Extension Act of 1960.

power sources, including hydroelec-

As a REIT, it operates largely 300

triHcanpnoonwAremrs,trbonugtStuhsteainbaibgle IdnfrraivsterurcsturaerCeapital Inc outside of Federal corporate tax liabil-

wind and solar. The US Department ity. It invests in and finances project2s50

of Energy (DOE) has done an annual in renewable energy that are built review of power generation by source and operated on real estate proper- 200

since 2000. US solar power genera- ties. And thanks to another bit of tion gains have been nearly 13,000%. legislation, the Tax Cuts & Jobs Act150

Wind power generation over the same of 2017, individual shareholders have period climbed by close to 5,000%. a particular line item giveaway in 100

All of this comes as popular demand that 20% of the dividend distributions

for wind and solar remains buoyant.

from HASI (like for all US REITs) i5s0

For example, Texas, the bastion for

deductible from taxable liability. 0

fossil fuels, produces more wind power Hannon Armstrong is based in

than any other state in the US and

the very pretty town of Annapolis,

ge2n01e3rates m2o0r1e4 than 25%2015of overall2016 Mar2y0l1a7nd. It ha2s01b8een arou2n0d19since the

US energy from wind power. From

1980s as Hannon Armstrong Capital.

ranches to shale fields, wind turbines In 2012, it formed its current company

$a8r0e a mainstay of the landscape of the into a REIT, and it went public in 201353%.

Lone Star State.

% Distressed ? ATvehWeTRI ($E/bIbTl) provides lending and debt

$70NextEra Energy has done and

financing in addition to taking equity30%

$s6h0ould continue to do well from its conventional and massive renewable

stakes in the renewable and energy efficiency markets. It does so through bo2th5%

$e5n0ergy assets. Buy NEE under a

private and publicly funded projects 20%

$r4a0ised price of $245.00, ideally for a with a large collection of US govern-

tax-free account.

ment properties. This provides a high1ly5%

$T30he Real Deal

$20In addition to NEE, I also want to

dependable credit behind its investments, as Uncle Sam has the power of10% the US Treasury behind his wallet.

focus your attention on a company $t1h0at is a great behind-the-scenes busi-

Furthermore, much of its investme5n%t projects come with underlying guaran-

nH$e-asnsAniungonthSAeep20rr1em8OncsettwrNoaonbvlgeDSeeucnsetrJaganiynamFebablrekMeatr:

Apr teMeasy frJounm nJuolt juAusgt thSeep UOSctgoNvoevrnDmecen0t% but state20a19nd local governments as

Infrastructure Capital (HASI).

well. All of this aids the credibility of

This real estate investment trust

the company and the security of its

(REIT) capitalizes on a few bits of

underlying assets and cash flows.

significant legislation, including the

It's not the biggest in the renewable

Investment Companies Act of 1940, the SmRaitlclhiBe BursoisnAeusctsioInneevrsesIntcment Incentives

business, having some $5.7 billion in100 assets in its portfolio. But it has been

Profitable Investing | January 2020 | profitableinvesting.investorplace.co8m0

60

2000-2004

2005-2009

2010-2014

2015-2019

Hannon Armstrong (HASI) Total Return

Hannon Armstrong Sustainable Infrastructure Capital Inc

Portfolio under $35.00, ideally for a 300 taxable account.

250 More Growth & 200 Income

150 100 50 0

2013

2014

2015

2016

2017

2018

2019

Source: Bloomberg Finance, L.P.

adding assets at a pace that's now

market in April 2013. Note in the total

r$e80ported to be running at $1 billion return graph above that the shares 35%

p$7e0r year. It has investments

in

nearly

%

200

Distressedp?roAvveiWdTeId($/abbsl)trong return in 2018 that was in line with the REIT segment, 30%

p$6r0ojects, predominantly in the US.

And its portfolio is primarily generati$n50g investment interest on financing,

a$4m0 ounting to 55% of revenue, with 20% on rental income on its propert$i3e0s. The remaining portion comes

including during the turbulent fourth quarter. Year to date, the shares are 25% getting more attention with rising 20% prices and dividend income.

Quarterly dividend distributions ar1e5% running at 33.5 cents, which represents

f$r2o0m equity participation revenues and portfolio investments.

a 4.1% yield. That's above the averag1e0% for REIT dividend yields, as measured

$10Revenues are up over the trailing by the Bloomberg US REITs Index. 5%

year by 30.5%. And that revenue has And those distributions have been on

cl$i-mbAuegd oSveper Othcte pNoavst Dfeicve JyanearFsebbyMar AprthMearyiseJunoveJrultheAupg asStepfivOectyeaNorvs bDyecan0%

199%. As a201R8EIT-organized finan-

average 2o0f197.7% per year.

cial company, its net interest margin

While Hannon Armstrong shares

(NIM)--the difference between what are up, they are still a relative value.

it pays to finance itself and what it

On a price-to-book basis, the effective

earns in interest--is a fat 12.1%.

value of the net assets is running at

Compared to a traditional financialR,iticthsierBerotsuArunctioonneearssIsnec ts is well above

2.4 times, which is below the average100 for the Bloomberg US REITs Index.

average at 1.9%. In turn, it has a return on equity of 5.8%.

HASI provides both a behind-the- 80 scenes profit opportunity with yield

It is a bit more expensive to run the in the renewable energy market as 60 company due to its current size, with well as an important hedge leading

an efficiency ratio (the ratio of how much it costs to earn each dollar of

into the 2020 elections. While we're 40 a long way from Nov. 3, I continue to

revenue) of 64.3%. I would like to see evaluate the risks and rewards from more scale in the company and some possible and potential outcomes. 20

cost controls by management, but that Renewables continue to work well. should be in the works given the ramp And if the status quo is maintained, 0

up in its portfolio. As a R2E01IT6 , debts are part o20f1t7he

capital structure, so its debt to assets

the company should fare well. But, if we20h1a8ve some change2s0,19Hannon -20 Armstrong will be on the front line to

ratio of 57.6% is reasonable and sustain- profit further from its position in the

able given US credit market conditions green energy market.

now and in the foreseeable future.

Hannon Armstrong Sustainable

The shares have returned nearly

Infrastructure Capital (HASI) is

280Al%eriansiMnLcPeIndceoxming to the public

a new buy for the Total Return 20

Auction Action

I'm always on the lookout for market segments that provide revenues and profits regardless of what the economy is doing. One prime example that we've focused on recently is the asset management business.

As you might imagine, this segment is all about assets under management (AUM). Management companies don't have to be the best in returns as long as they are good at attracting and keeping AUM.

The more AUM, the more fee income the company earns each and every quarter. And sure, it helps if the managers are exceptional, as that aides in attracting and keeping AUM.

But even if managers are just average, they can be very successful if they keep the AUM and the fees that are generated. When markets go up, AUM should edge up and generate more fees. When markets go sideways or lower, AUM might slip, but the fee income still flows in.

We have two asset managers in the model portfolios: AllianceBernstein (AB) in the Total Return Portfolio and BlackRock (BLK) in the Incredible Dividend Machine. They both continue to generate strong revenues from their own respective AUM. And they both have track records through good and bad markets.

AB remains a buy under $33.00, ideally for a taxable account, and BLK is a buy under a raised price of $510.00, ideally for a tax-free account.

But there's another segment that's set up to fare well during both good and bad times, and that's the equipment auction market.

Profits in Good Times and Bad

Equipment auctions aren't new. Companies on the way up are eager buyers of equipment, from tractors and trucks to forklifts and backhoes, as

Profitable Investing | January 2020 | profitableinvesting.

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