V . 30, N . 5 May 2019 More Growth and Lots of Income

Value Is Still There, If You Know Where to Look

With the S&P 500 Index near its September 2018 high, many investors are right to be concerned. After all, that high was made within days of the big selloff that ran through to the bottom on December 24.

The selloff came with hawkish inflation discussions from the Federal Reserve. More importantly, it came with an awareness that expectations for revenue growth and earnings growth for 2019 were going to be less than what we saw in 2018.

This year, we have the Fed remaining on the sidelines. We also have conviction of modest inflation. And we continue to have the underlying economic support from the consumer and business sectors that are confident enough for further growth.

That expansion in their activities is still adding to an expanding gross domestic product.

But one particular thing that's different is that some of the valuation metrics for the S&P 500 are much lower than where they were last year. This includes the average price-to-earnings ratio, which is now 18.76% lower than the last peak in 2018.

So, there may well be a value proposition for the stock market. But that's not to say that all is good to grow. That's why I continue to focus your attention on a blend of income and growth as well as specific sectors in the markets.

Vol. 30, No. 5

May 2019

More Growth and Lots of Income

Dear Friend, Will the stock market continue to advance? This is the No. 1 question for

all investors right now. Finding the answer is all the more challenging when looking at the initial filings of quarterly reports for the first calendar quarter.

With just over 100 companies in the S&P 500 Index having reported so far, the results on average are positive but not overwhelming. Revenue growth is up on average by 3.94%, and earnings growth is running at 1.72%. That's a far cry from where we were for the four quarters of 2018.

But on a valuation basis, it's arguable that the stock market is still a relative bargain compared to last year's numbers. And we still have the positive underlying conditions supporting consumer spending and, in turn, business confidence for further investment.

Unlike last year, we have the Federal Reserve on pause. This means less of a threat of spiking interest rates cutting off capital for businesses and lending for consumers.

In this issue, I'll go through some of the behind the scenes numbers for the market and provide further evidence that specific sectors are performing quite well in this slower growth economy. This includes a new industrial name you need to add to your portfolio.

And for those following the model mutual fund portfolios, I've brought each of them closer in line to the allocations of the main Total Return Portfolio.

Read on for my review of the markets, my new addition and my continued focus on the right sectors for more growth and income in the quarters to follow.

Growth Strategies

With the Markets Up, Where are the Values?

In last month's issue, I stated my concerns about the stock markets around

the globe, even as my Bloomberg screen of the world's leading stock indexes

was lit up in bright green. Among those double-digit percentage gains, the

S&P 500 is still one of the highest.

That suggests there's risk much like we had in the closing days of the third

quarter of 2018. But there are also some differences now over last year's high

point in the stock market.

The US economy is still providing support for the companies and stocks

inside the market index, and there's a dearth of expectations for major declines

in consumer confidence and major business investment.

The same is the case for the bond market, with low inflation and eager demand

for credit investing. This is providing support for companies' access to credit.

In my view, the stock market is a better value right now than it was last year.

One of the primary metrics investors use to gauge value is the price-to-earnings

ratio (PE) of the S&P 500. The average PE is down from the peak last year by a

good margin.

While it has been on the ascent from its December lows, there is still ample

room for improvement before we get to perilous highs.

(continued)

2016

2017

2018

2019

Another, perhaps better, measure of value for the market is the priceto-sales ratio (PS). This measures the price of the index against the average sales of the underlying companies. This is important, as it takes out some of the near-term accounting used to manage earnings.

Again, it's good news for value for the S&P. The PS ratio is up from the December lows, but it's still below last year's peaks.

Moreover, actual trailing sales of the underlying companies are on the way up. The average sales-per-share reading in the S&P 500 Index was up by 29.49% over the past three years.

Then there are the intrinsic underlying values of the companies in the index. These can be valued by looking at the price-to-book ratio (PB), which measures the price of the stocks against the average book value of company assets.

Here there is less good news about the value of the index. PB is lower than the peaks of last year, but it's not as low from the peaks as the PE and PS ratios are.

Nonetheless, the underlying book of assets for S&P 500 companies has been gaining. Over the past three years, the weighted average book value of these companies has climbed by 13.40%. This means companies continue to build more value in their businesses and their assets, which should support higher stock prices over time.

Sector Performance

The key is that the S&P 500 consists of many companies in many different industries. So while overall revenue and earnings growth has been muted so far this earnings season, some specific industries are faring much better. This is why I continue to focus your attention on the leading

SPX Index

Price to Earnings Ratio for S&P 500 Index

3.60

PriceBtlooobmoobkerRgaUtiSo 3R.E4I3Ts SPX ISn&dPex500 Index Price Earnings Ratio 18.99

242.000 332..3144.53000

Apr May 2016Jun 2016

221.000 3.20 215.00

32.000.000 189..9090

-5 21.88.00

17-1.000

21.6-61.0050

Jul

Aug2021081S7ep Oct

Nov

Dec 2018Jan

Feb Mar 2019

201A9pr

15.00

2017

2018

2019

Source: Bloomberg Finance, L.P.

Price to Sales Ratio for S&P 500 Index

SPX Index

20

BEst P/S (Curr Ann) 2.07

2.20

15

2.10 2.07

5

2.00 0

Bloomberg US REITs

S&P 500 Utilities Sector GICS Level 1 Index

S&P 500 Information Technology Sector GICS Level 1 Index

Alerian MLP Index

S&P 500 Health Care Sector GICS Level 1 Index

Apr May Jun Jul Aug Sep Oct Nov

2018

2016

2017

1.-950

-10

1.80 -15

Dec Jan 2018

Feb Mar 2019

Apr 1.70

2019

Source: Bloomberg Finance, L.P.

Price to Book Value for S&P 500 Index

SPX Index Price to book Ratio 3.43

SPX Index Price Earnings Ratio 18.99

3.60

332..444.3000 23.00

32.22.000 21.00

32.00.00

189..9090 21.88.000

2016

2017

17.00

2.60

16.00

2018

2019

Source: Bloomberg Finance,1L5..P0.0

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2.07

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Profitable Investing | May 2019 | profitableinvesting.

2.00

-15

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

2018

2019

companies in specific sectors. Consumer goods--both staples

and discretionary--are reporting significantly higher revenue and earnings gains. The same is occurring for healthcare and real estate investment trusts (REITs).

Bloomberg REIT, S&P Utilities, Information Technology, Healthcare, Alerian MLP Indexes

160

FMC Corp S&P 500 Materials Sector GICS Level 1 Index

12400

11250

11000

Comparison of Sectors

850

I'm bullish on REITs because of the improving values in their properties that support rising dividends. My top utilities provide access to steady profits from regulated markets with growth from their unregulated divisions, all adding up to higher dividend income.

The information technology (IT)

Bloomberg US REITs

S&P 500 Utilities Sector GICS Level 1 Index

S&P 500 Information Technology Sector GICS Level 1 Index

Alerian MLP Index

S&P 500 Health Care Sector GICS Level 1 Index

Apr May 20J1u6n

Jul

Aug2012801S7ep Oct

Nov

600

4-50 2-100 0 -15

Dec 20J1a8n

Feb Mar 2019

2A0p1r9

Source: Bloomberg Finance, L.P.

companies continue to provide further efficiencies for their business and

Bloomberg US REIT Index & S&P 500 Index

consumer customers with recurring revenues.

SPX IBnldoeoxmberg US REITs PriceSt&oPbo5o0k0 RInadtieox3.43

3.2600

And the US petroleum market is a significant, expanding growth

33..144530

engine for the economy. An increase

10

in distribution infrastructure is

3.520

allowing more oil and gas to flow

both domestically and for export. This

0 3.00

is driving revenues and more dividend

-5

income for our toll-taker companies.

And as I wrote in the March issue,

2.-8100

US healthcare is a regrettably buoyant

-15

market. Yes, there's political rhetoric

Apr May Jun

Jul

Aug Sep Oct 2018

Nov

Dec

Jan

Feb Mar 2019

Apr 2.60

over nationalizing healthcare, but

2016

2017

2018 Source: Bloomberg 2F0in1a9nce, L.P.

that just doesn't seem possible to the extent that it could replace the private sector anytime soon.

My bottom line is that there are points of concern as the market continues higher, but there are plenty of companies focused on income and growth that should deliver for us in the coming quarters, come what may.

Proven Growth &

for it. To start, as the adage goes-- when it comes to land, they aren't making any more of it.

Then there are the adaptations of laSBnPEdXst--IPnd/Sefx(rCourmr Anrne) s2.i0d7ences for technology workers to the actual technology, its real estate and the related buildings, from residential to office to data centers that enable all of the whizbang stuff to actually happen.

AnBdlo,omobfecrgoUuSrRsEeI,Tsthere is the higher

Growth & Income from REITs

The great combination of

underlying property value

20

improvement and tax-advantaged

income will make REITs top 2.1250 performers for years to come. 10

For the past trailing year, REITs, a2.s10 tracked by the Bloomberg US REIT2.057

Index, which

ihsasviegneiafrincaendtlayrhetiguhrnerotfh1a6n.9th52e%.000,

9.24% return for the S&P 500. And -5

Income

Profits from the Landlords

incomS&eP t5h00atUtciliotiems eSesctforroGmICSrLeeavell e1sIntadetxe. The aSv&Per5a0g0 eInfyorimealdtionfoTercthhnoeloSgy&SePcto5r0G0ICSisLevel

Alerian MLP Index

curreSn&tPly5010.H9e1a%lth,CwarehSielectotrhGeICyS iLeelvdel f1oInrdex

1

Indafeoxmuirdththqeuabrigtesreolflolfafsitnyestaorc, kRsEdIuTrsinogn1l.ty-9h100e fell 6.07% while the S&P lost 13.53%1.-81.05

When most investors think about growth in the stock market, REITs don't immediately come to mind. After

RApEr ITMsatyrackJeudn by tJhuel BlooAumg bergSepUS Oct REIT Index is more than do2u0b1l8e that at

4.28%. 2016

2017

Nov Dec Jan Feb Mar Apr

REITs Beat Stock2s019

But are R20E18ITs still a value2?01W9 el1l.,70

all, how can sleepy pieces of real estate REIT dividends are worth even more the REITs reporting so far this

compete with all of the other more dynamic facets of the stock market?

on an after-tax basis thanks to the Tax CSuPtXsIn&dexJobs Act of 2017 (TCJA).

quarter have shown revenue gains averaging 9.06%, with earnings 3.60

Real estate has a few things going

Price to book Ratio 3.43 SPX Index

advancing by 13.03%. That's significantly better than the figure332s..444.3000

Profitable Investing | May 2019 | profitableinvestinPrgic.einEvaernsintogsrpRlaaticoe1.8c.9o9m

23.030

3.20 22.00

for the general stock market. On a price-to-book basis, REITs are

sitting on average at 2.47 times priceto-book value, which is well below the highs seen early this year and the highs over the past three years. This is important because a solid PB ratio means you're not paying too much for the REITs' land and buildings.

We have a large and diverse collection of REITs in the main Total Return Portfolio as well as in the Incredible Dividend Machine. The average PB for all of them is a bargain 1.87 times. This means that our REITs are even better buys right now than the broader REIT market.

One of the specific metrics for profitability comes from the rate of return from funds from operations (FFO), which measures the profits that REITs make from just the core business of collecting rents from their tenants.

On average, the FFO return for our collection of REITs is running at 10.33%. That's quite positive and supportive for higher dividend payments.

REITs to Recognize

Here are three REITs that are great buys now.

Total Return Portfolio resident American Campus Communities (ACC) has educational properties-- primarily dorms for colleges and universities--around the nation. This is an attractive market since it has a captive market for students that need and want to live on or nearby campus. The space has been so good that, one by one, the leading public REITs in this market have been bought out by private equity firms.

ACC is the one focused REIT still here. And it's performing. Its trailing year return is 25.27%, and revenues are up by 10.60%, with a return from FFO at a nice 9.50%.

It's a value, too, at only 1.88 times its book of business, including its properties. And the dividend is an attractive 3.85% and has been climbing over the past five years by an average of 5.02%. ACC is a buy under $47.00

in a taxable account in the Real Estate Investment Trusts section of the Total Return Portfolio.

W.P. Carey Inc. (WPC), also in the Total Return Portfolio, is a large, diversified REIT that focuses on doing sale-lease-back transactions. This means owners and occupiers sell their properties to WPC and then lease them back from WPC. It also focuses on triple-net leases whereby tenants pay insurance, upkeep and taxes, leaving WPC to avoid these costs and risks.

The return over the past trailing year is a whopping 29.58%. While revenues have slowed a bit recently, the FFO return is a towering 10.60%. WPC is a bargain at only 1.85 times its book value.

Its dividend, which keeps rising every quarter, is attractive at 5.40%. WPC is a buy under $79.00 (raised) in a taxable account in the Real Estate Investment Trusts section of the Total Return Portfolio.

Last up is Medical Properties Trust (MPW), which I added to the Total Return Portfolio in the March issue. This REIT focuses on healthcare properties like hospitals, urgent care facilities and outpatient offices. And like W.P. Carey, MPW focuses on net leases, which lowers its costs and operating risks.

The trailing year return is running at 44.59%. Yet, the stock is only at 1.41 times its book value. Revenues are rising at an 11.30% pace, and the FFO return is running at 11.60%. MPW is a buy under $19.50 in a taxable account in the Real Estate Investment Trusts section of the Total Return Portfolio.

More Growth & Income

The Industry of Food

Americans love to eat. And we continue to do so at an increasing pace. But we are not alone. Globally, food is always in demand, fueled by a continuing rise in population.

The Consultative Group for

International Agricultural Research (CGIAR), a global think tank that looks at the market for food, is projecting that global agriculture production must rise by 60% or more by 2050 just to meet existing population growth estimates.

One of the biggest limitations to further agriculture production is arable land and available irrigation. And to make the most of the land and water, the industry needs to increase the yields from crops that, in turn, are used for direct consumption or animal feed.

This brings chemistry and technology to the markets. The world continues to advance in seed technology and in the chemicals that work to make the most of mass crop production, while cutting the impacts of weeds and pests.

One of the leaders in this space is FMC Corporation (FMC). This Philadelphia-based company has been around since 1884, when it introduced industrial pumps for insecticides. The company has been involved in numerous industrial and mineral businesses, having started, acquired and divested various companies that have gone on to further successes.

FMC is now a fully-focused agricultural chemical company with a series of insecticides, herbicides, fungicides and biologics that are utilized around the globe for the production of fruits, vegetables, corn and other grains and the important soy market. They are even widely used in cotton production.

Its products are used and approved in China, where it is ramping up its market share, as well as in the regulatory tough European Union, with strong market shares in Germany and France. It has eager farmers using its products in the US, Brazil, Mexico, India, Australia, Canada and other markets as well.

It is also ramping up its laboratories, with 22 new ingredients set to come to market over the coming quarters. One of the bigger additions to its capabilities came from its acquisition of Dupont Crop Protection.

4

Profitable Investing | May 2019 | profitableinvesting.

Revenues are rising strongly, with trailing gains over the past year of 64.20%. It also has impressive operating margins, which are running at 18.60%. Despite its acquisitions, it has ample cash on hand and very limited debt at only 27.30% of its assets.

FMC Harvests Profits

The shares have delivered an impressive return of 138.85% over the past three years. This compares well against the industrial materials market as tracked by S&P. The index's average over the same period was only 32.91%.

FMC is still a bargain because the stock market has been ignoring the space in favor of more engaging market segments like technology.

The stock is valued at only 3.38 times its underlying book value. And the underlying book value has been climbing, with the company adding to its book of assets by 68.98% from the first quarter of 2017 to date. FMC is selling at a mere 2.30 times its trailing sales, which have been significantly on the rise.

The one drawback to this company is that it is stingy with its profits, as it favors re-investing in product development and market sales efforts. Its dividend payout ratio is only 18.70%, which is incredibly low. This results in a dividend yield of only 2.01%. But the distribution amounts are up by 71.21% over the past year and are up annually by an average of

15.28% over the past five years. However, the purpose of the model

portfolios is growth and income. And FMC is well-positioned to deliver both. Buy FMC under $81.50 in a tax-free account in the Growth & Income Plays section of the Total Return Portfolio.

Total Return Portfolio

While the general stock market has done well so far this year, I continue to focus your attention on key market sectors including REITs, utilities, information technology, energy and healthcare.

These are highlighted in the Indexed Equity section of the Total Return Portfolio with the Energy Select Sector SPDR ETF (XLE), Vanguard Health Care ETF (VHT), Vanguard Information Technology ETF (VGT) and Vanguard Utilities ETF (VPU).

While we don't have an indexed investment in REITs, there are six REITs at great values with higher dividends in the Real Estate Investment Trusts section of the portfolio.

Regarding the US oil and gas market, check out the landlord of the Permian Basin, Viper Energy (VNOM). Viper just declared its next dividend distribution, which at 56 cents per share is up 9.80% from the prior distribution for a yield of 6.22%.

FMC Total Return Compared to the S&P 500 Materials Index

160

FMC Corp

S&P 500 Materials Sector GICS Level 1 Index

140

120

100

80

60

40

20

0

2016

2017

2018

2019

Source: Bloomberg Finance L.P.

And then look at the Toll-Takers section, with its five pipeline and related infrastructure companies that will continue to benefit from greater flows of US and Canadian petroleum.

But don't forget fixed income, which makes up 44% of the overall allocation of the portfolio. Besides the collection of preferreds and minibonds, continue to buy and own the higher-yielding muni bond closedend funds while they are still great bargains. And for corporate bond opportunities, look at the Osterweis Strategic Income Fund (OSTIX).

Incredible Dividend Machine

Dividends might be an afterthought for many in the stock market given the S&P 500's gains so far this year. But as we learn during each and every pause or drop in the general stock market, it's the dividends that pay us to be patient. Moreover, the companies that pay regular to rising dividends will tend to be more solid companies with ample revenues to support those payouts.

In particular, look at some of the higher yielding companies from the utilities market, including AT&T (T) and Verizon (VZ) in Cycle B, with yields running at 6.34% and 4.10%, respectively. In Cycle A, look at PPL Corp. (PPL), with its dividend yield of 5.18%, and Dominion Energy (D) in Cycle C, with its yield of 4.80%.

Among the REITs, look at Realty Income Corp. (O) in Cycle B, with its dividend yield of 3.80%, as well as Easterly Government Properties (DEA) and Ventas (VTR) in Cycle C, with their dividends yielding 5.82% and 5.11%, respectively.

And as is the case for the Total Return Portfolio, the pipelines in the Incredible Dividend Machine keep pumping cash for bigger dividends. The same is true for Magellan Midstream Partners (MMP), with its dividend yielding 6.33%.

Profitable Investing | May 2019 | profitableinvesting.

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