Market Up, Will It Last? We’re Profiting from Solving the ...

Market Up, Will It Last?

Stocks are up sharply since the end of the selloff last year. From December 24, 2018, to date, the S&P 500 Index is up 20.87%.

The economy remains in growth mode. The fourth quarter brought the annualized rate for the US gross domestic product (GDP) to 3.10%. Inflation remains at bay, with the core Personal Consumption Expenditure (PCE) Index at a current 1.94%, which is below the Federal Reserve Bank Open Market Committee (FOMC)'s target rate of 2.00%.

In a recent FOMC meeting, Chairman Jerome Powell announced that the Fed plans on being far more patient regarding monetary policy than it has in the past.

Meanwhile, the labor market remains strong, with wages up but no threat of inflation. And consumers remain comfortable. The Bloomberg Consumer Comfort Index remains buoyant at a current level of 60.80. Business capital spending plans are intact at 27.30, as measured by the Business Leaders Index of the Federal Reserve Bank of New York.

Sales growth for the members of the S&P 500 Index is up by an average of 5.46% for the last quarter. Earnings growth is lower and forecast to remain lower in 2019 but rise for 2020.

I see a lot of good prospects for specific industries. But there are some challenges to keeping the general market on the boil. That's why I'll keep your attention on the right companies in the right sectors.

Vol. 30, No. 4

April 2019

We're Profiting from Solving the World's New Needs

Dear Friend, Every morning I turn on my Bloomberg Terminal and immediately look at

the globe's leading stock market indexes. It shows the prices and year-to-date changes--red for down, green for up.

For much of last year, the screen was full of red, with the US being one of the lonely green-lit numbers. So far this year, the screen is full of green, with many of the numbers firmly in the double-digits.

Maybe it's the bond trader in me, but this makes me nervous. I can't help but think that, although the economy is still growing with low inflation, the Federal Reserve is remaining passive and consumers and businesses are still spending, there has to be something that will go wrong. That's why I continue to recommend plenty of income and defensive investments.

That said, just like there were during the periods of market malaise or selloffs we saw last year, there are always segments and companies that are not just being successful but which also have stocks that are working.

In this issue, I'm showcasing specific companies in two industries that are solving the growing needs of the US and global markets while paying nice dividends along the way.

Growth Strategies

What's Driving the Markets so Strongly?

Stocks are up 13.42% for 2019 as of this writing, as tracked by the S&P 500 Index. That's astonishing given that last year, from the start to the top in September, the S&P 500 was up only 9.62%.

So, what's driving all of the buying? I'll start with FOMO, or the "fear of missing out"--a powerful motivator in the markets. The idea that if you don't get in and buy that you'll miss out on a big rally is, in part, getting more investors from hedge funds to individuals to reduce their sideline cash and buy stocks. And as the market builds on its gains, with the financial and main street media reporting on the upward progress, it only helps to fuel the buying. This isn't a new thing. Take, for example, any of the past big up-market moves of the past decades where FOMO kicks in and remains until fear takes over after some big down days like we saw at the start of February and October of last year. Next is the Federal Reserve and its Federal Open Market Committee (FOMC). The FOMC and its Chairman, Jerome Powell, bungled its messaging last year. It laid out the plan to watch core inflation, as measured by the core Personal Consumption Expenditure (PCE) Index, and telegraphed that it wanted to see the PCE reach 2.00% and then some before it would act. Then it acted anyway, reducing the bond portfolio and stoking fears of more aggressive action as well as raising its target range for the federal funds rate.

(continued)

Then, with the stock market slipping and politics coming into play, it punted. It's now pretty clear that it's going to be passive for a while.

With the FOMC keeping its bond portfolio more or less intact, the bond market will continue to be supported. That means easy money, interest rates still not far from post-crisis levels and the credit market supporting a buoyant stock market.

Moving it forward is the concept of Modern Monetary Theory (MMT). This is a spin on an old theory from German economist, Georg Knapp. Basically, MMT holds that the government that issues fiat money can do so largely at will and can control inflation via taxes or bond issuance. This way, government can spend nearly at will.

Of course, this works until it doesn't. When the fiat currency is no longer considered relevant, no one will buy government bonds except the central bank.

But it is being rolled out as a politically pleasing means of not only keeping the FOMC's bond portfolio intact, but potentially for having even larger government budgetary spending for all sorts of things.

Next up is the bond market. The US 10-year Treasury is sitting near 2.50% and remains well bought in the market. This, in turn, is aiding the market for mortgages, which lenders and traders use as benchmarks for modeling prices and yields. So, mortgage rates should remain low providing further economic stimulus as well as consumer confidence--all good for stocks.

And it isn't just because of the FOMC. Demand by bond buyers, from wealthy investors to insurance companies and pension funds, remains strong. Given the

demographics of the graying US market, that demand should remain, keeping a lid on yields for a while.

In turn, with lower Treasury yields, corporate and other bonds, including municipal bonds, look even more attractive for the same bond investors, reducing funding costs for corporations and others. That all helps the economy and the general stock market.

Last up is the US dollar. The dollar, as measured by the Bloomberg US Dollar Index, which tracks a basket of 10 major currencies, is up nearly 7% over the past year. That makes the US a prime destination for global investment.

This shows up in US Treasury tracking of foreign government and private inflows of capital buying US stocks and bonds. And while there were some outflows during the downturn in the fourth quarter for US stocks, overall, the net amount of foreign investment in the US is vastly higher in the most recent data than it was in 2016.

All of this comes as the underlying themes that I've been writing about since last year--consumer comfort and confidence among businesses to invest in long-term capital spending--remain intact.

The Big Worry

Now, where will the cracks show up?

I think that the biggest risk for the US stock market is the reality of company performance. One of the reasons for the selloff in the fourth quarter last year was the fear that sales growth and earnings growth would slow from the stellar numbers of last year into 2019.

For the fourth quarter, with the vast

majority of the members of the S&P 500 having reported, sales growth on average was 5.99% and earnings growth was 12.32%. But what may be in store for the coming quarters looks a lot slower.

The graph on page 3 plots average sales and earnings gains for the members of the S&P 500 for the quarters of last year and into 2019 and 2020 as compiled by Bloomberg Analytics.

As you can see, 2018 looked good. 2019, not so good.

So, while many companies turned in some nice numbers during the current earnings season, the risk is that as more folks take a look at the expectations for slowed growth in sales and earnings that the compelling case for buying becomes weaker, or worse--the selling comes back.

This is why I continue to recommend plenty of income and defensive investments in the model portfolios.

But that said, even during downturns for the general market, there are plenty of stocks in industries that worked in tougher times and will work going forward. Read on for some of my top picks now.

Proven Growth & Income

Profit from Waste

The US is a wasteful nation. In our consumption-based economy where consumer spending makes up the majority of the gross domestic product (GDP), millions upon millions of pounds of trash is generated every year. Just think about all those cardboard Amazon (AMZN) delivery boxes, paper and plastic bags from grocery stores, cans and glass

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2

Profitable Investing | April 2019 | profitableinvesting.

2016

2017

2018

2019

Covanta Holding Corp

Jun

JuSnep

2017

Bloomberg US Dollar Index

1220 30

1200 25 1191.2306

1180 15

10 1160 5

2D0e1c7 SepMar

Last Price

1191.34

High on 11/12/18 1214.16

0 1140

-5

Average

1180.69

1120 -10

Low on 04/04/16 1117.80 -15

Jun Dec Sep 2018

201D8ec

Mar Mar 2019

Source: Bloomberg Finance, L.P.

Compiled Expectations for Sales & Earnings Growth S&P 500 Index

Avg. Sales %

Viper Energy Partners LP

All Securities 8.4013

8.00100 6.0080

4.00 60

Avg. Earnings%

All Securities 15.2476

20 40

10

0 20

-10

Mar ACpQr1 18 May

Jun CQ3

1J8ul 2018

AugHistoCrQiSc1eapl1T9rend Oct

NCoQv3 19Dec

Jan CQF1e2b0

0 Mar

2019

Source: Bloomberg Finance, L.P.

or plastic bottles we go through day around the nation. And out of those

after day.

millions of tons, the single largest

ThenMthidePrreiceis the fickle nature of how AmericaSTn1s4WdCreInsdse.x W104i.t6h4 the surge in fast-fashSiTo1n4W, OreIntdaeixl 1d0i3s.8c2ounters--from Hennes & Mauritz (HNNMY)'s H&M stores to Inditex (IDEXY)'s Zara's stores and, of course, Gap Inc. (GPS)'s Old Navy stores--only add to the millions of pounds of discarded clothing tossed away on an ongoing basis.

But the bright side is that not all of this ends up merely tossed in the trash. Many households around the nation h20a1v4e adop2t0e1d5 the pr2a0c1t6ice of 2017 recyc2l0i1n4g much of20t1h5e excess det2r0i1t6us.

According to the US Environmental Protection Agency (EPA), the US generates some 66 million tons of reMHciigydhcPolrniace0b5l/e31m/18ateria11l..3480e26aBBch year, which isApvelraagceed in sepa29r4a.8te05Mbins and boxes thLaotRweaovnerne0u3ep/3Gi1cro/1kw3ethdYeuarpo0vberyYemar unicipalities

destination for this material is C1h0i4n.6a4.

Or at least it was...

110043.82

Waste Management Inc

Change of Plans

102

150

In January of 2018, the Chines10e0

government made a stunning announcement that the nation w9a8s 100

ending a majority of its practice9o6f importing recycling materials. This

moratorium included stuff from9t4he50

US, Europe as wellS&aPs5t0h0eIndreexst of92the globe, which had built up a collection

of recyclables on a massive scale. 0 Chin20a18was do2n0e19being a20d20umping groun2d0.17In the contin20u1i8ng drive20t1o9

improve the lives of its population, it

decided that processing trash was a

detriment to the health and prosp1.e38r2itBy of its nation.

This means that municipalities1.124B.00

1B12.00

Profitable Investing | April 2019 | profitableinvesting.

0.180B.00

0.86.B00

that were paid by various recycling companies are now being charged to take away the trash. And it isn't just China that is to blame. According to a non-profit organization that promotes recycling, Recycle Across America, the US recycling business and process has rapidly become dysfunctional over the past several years.

The switch from municipalities being paid to being charged for recycled materials comes as the costs of separating recycled materials and processing what can be processed has soared throughout the US.

This has led to some dramatic changes around the US. For over the past year, some 300 municipalities have been forced to cancel recycling programs. In turn, they are resorting to filling up landfills at a faster clip. But not all of the switching has been done on the up and up. Many local authorities still have recycling bins and boxes that are picked up, but the collected materials are just dumped in landfills. Cities such as Memphis have bins in the airport that collect water bottles and such. In the end, they all get dumped in landfills each and every day.

Even municipalities in states that are seen as progressively "green" when it comes to leading recycling programs, including Oregon, are struggling to make all of the trash and collected materials go away. Many of their landfills are in serious jeopardy of filling up to full capacity. Other green states, including Alaska, Idaho and even Hawaii have all told its residents and visitors to just bin all of their trash and forget about recycling.

This isn't just a US problem. Increasingly, major economies like Canada as well as European nations from Germany to Ireland are being forced to shift back to landfills. This includes Great Britain, home to the British Broadcasting Company (BBC), which produced Sir David Attenborough's Blue Planet II. In this series, Sir David told horrendous stories about this problem, particularly about the oceans of the

3

50

45

globe that are swelling with trash and killing off scores of wildlife.

Landfill20W16indfall

2017

With the shift from recycling

programs to trash collection around

the US, landfills are back in growth

mode. And there are two companies

that are the leaders in this market.

In the Niche Investments, we have

had Waste Management (WM) as a

broad play on the defensive nature

of trash collection and landfills.

Waste Management also has its own

recycling programs that are facing

challenges as a result of the changes

in the market for processing and

disposing of discarded materials.

Waste Management shares have performed well, wJuinth a tota2l01r7eturnSep of 179.10% over the past five years

alone, which is 167% better than the

return of the general S&P 500 Index

for the same time period.

Waste Makes Profits

Its oVivpeerrEanellrgryePvaretnneruseLsP are on the way up, if only gradually, at a trailing annual rate of 3.00%. Also, even with recycling margins compressing, operating margins remain strong at 18.70%, which is resulting in a return on equity of 31.30%. Waste Management has regular cash flows on hand and little debt, with debt to assets sitting at 44.30%, making for a sMeacrurAeprcomMpaayny. IJtunis, unJuflortunAuagtely,Sep stingy with its dividend, w2h01i8ch yields only 2.00%. But while it has been

40

increasing its distributions by an average of 5.35% per year over the35

trailing five 2y0e18ars, its payou2t0r1a9tio is a

mere 41.70%.

Shares are valued at a pretty

good level at 2.90 times its trailing

sales, making it a buy in the Nic12h2e0 Investments under $100.90 (raised),

ideally in a tax-free account. 1200 While Waste Management an1d19i1t.s36

landfills are a good way to play11th80e recycling mess, I have an even better

way to cash in on the world's waste

1160

problem.

Burn It

1140

LHaigRsht ePorcnicy1e1c/l1e2d/18ma1112te9114r..i31a46ls and trash (or

juAvsetralgeet's just c1a1l8l0.i6t9all trash/was1t1e20)

dLoowesonn'0t4/h0a4/v16e to11k17e.8e0p piling up. It can

be used foDrecother pur2p01o8sesM. aTr hat is

what municipalities are doing around

the US. Philadelphia has some 1.5

million residents who generate plenty

of trash like most major cities. But

it is now burning 50% of its trash, 100

which in turn is being harnessed to

generate electric power that fits into80 its local power grid.

This means that half of its trash goes away rather than to landfills, a6s0

the city and its residents effectively recycle much of the trash into powe4r0.

More cities are catching on to this

solution. New York City has always20

had to move much of its waste and

trash to other states via rail and shi0p. COuctrrentNloyv, NeDwec YorJkan2C01i9tFyebis geMtatring

onboard with energy from waste

(EFW). Palm Beach has a big and

Waste Management's Total Return Compared to the S&P 500 Index

Waste Management Inc 150

100

50 S&P 500 Index

0

2014

2015

2016

2017

2018

2019

Source: Bloomberg Finance L.P.

expanding facility, which I got to observe recently. The city is reducing landfill waste and powering up a major growing area in Florida.

And just west of me as I write, in the Fairfax County section of Alexandria, Virginia has been operating an EFW facility with positive results.

More to Come

All told, the US market for processing waste is huge. Out of the millions of tons of waste in the US, 64% of it is now going to landfills. As of last year, 29% of that waste was recycled in some form. But as noted above, that is going to drop given the market changes and increasing costs.

Only 7% is used to generate EFW. And guess which company dominates the market for EFW? Covanta Holding Corporation (CVA) is the leader in processing energy from waste. The Morristown, New Jerseybased company has facilities for waste collection, shipment and processing concentrated in the urban areas of the Northeastern US, as well as around the rest of the nation.

Like Waste Management, Covanta's revenues are still weighted toward general waste. For 2018, Covanta's revenue breakdown was 70% general waste disposal, 19% for EFW and the remainder from ancillary waste processing and metals reclamation, along with burned ash processing from power and other facilities.

It also has been expanding into new markets beyond the US, specifically in Great Britain and Ireland. As noted above, Britain and Ireland have a major and increasing problem with waste. In addition, both islands have power issues and the need for additional power generation facilities to reduce the higher costs of electric power.

Covanta has partnered with Australian-based Macquarie Group (MQBKY) and the London-based Green Investment Group (Private) to operate a series of EFW projects, which are ramping up to rid the

4

Profitable Investing | April 2019 | profitableinvesting.

nations from the swelling waste piles while providing needed and profitable energy.

And yes, Brexit is an issue here. As you should recall, I recommended selling our British stocks earlier last year, even those focused domestically, on my concerns for the British pound. But this is under contract with the cooperative, and even with the pound down dramatically now, I see less risk from the currency and have the belief that Covanta's treasury operations know how to hedge foreign exchange volatilities.

Covanta's stock is coming up as it gets more notice for its market niche in EFW. Over the past two years, the shares have turned in a return of 22.57%, for an annual average equivalent of 10.66%.

Covanta Powers Up

The problem for Covanta's stock is that it has been seen as more of a utility than a waste hauler and processor like Waste Management. And as I've written previously, utilities had their market challenges, as they were viewed as being at risk for spikes in US interest rates, which didn't and most likely won't happen.

In addition, there was the misperception of the impact of the Tax Cuts & Jobs Act (TCJA), which was assumed to threaten cash flows from regulated power rates being adjusted down with higher after-tax margin rates. But given the distinctive processing of waste and EFW, Covanta is becoming more desirable for municipalities that are willing to pay it not just for power, but for solving the growing waste threats.

Revenues are coming on line, with the trailing year seeing gains of 6.60%. And with the sudden shift in waste piling up, I'm projecting much stronger revenue growth in the coming quarters and years, particularly with the ramp-up in EFW facilities in the US, Britain and Ireland.

Covanta's RevJeunnues Up Sep

The operating margin of 2C01o7vanta is thin for now, running at 3.40% over the trailing year. This is due to changes in recycling markets that have just hit the traditional side of the waste and recycling market. But with the drVaipmeraEtniecrgydPeavrtenelorspLPments shifting to EFW against landfills, margins should improve. This is proving to be the case, with the recent quarter showing soaring gains in margin, now at 11.80%.

But this isn't stopping the profitability of the company, as it is generating a return on shareholders' equity of a whopping 33.30%. MaCr ovAparnta cMuayrrenJtulyn hasJuslolid Acuagsh Sep flows, which keeps the com20p18any's cash and equivalents strong, with a current ratio (the measure of cash against near term liabilities) at 1.1

1140

Last Price

1191.34

High on 11/12/18 1214.16

Average

1180.69

1120

tiLmoweosn.0A4/0n4d/16wh1i1l1e7.i8t0s debt is up on developDemc ent inves20t1m8 entMsa,r it is

reasonable at 64.90% of its assets.

The dividends are quite good--

much better than those for Waste

Management. The current payout is

running at 25 cents per share, for 100

a yield of 5.92%. In addition, the

distribution is up over the past five 80

years by an average annual rate of

8.67%.

60

As I write, the shares are trading

at $16.90 and are much more cheaply valued than Waste Management's 40

shares at only 1.2 times sales, making

it a better waste value.

20

I'm adding Covanta Holdings

COoctrporaNotvion D(CecVA)Jatno thFeebGrowMatrh &0 Income section of the2T01o9tal Return

Portfolio with a buy under price of

$18.00. The shares should ideally be

bought in a tax-free account.

Covanta Holding Corporation Total WRaestteuMrannagement Inc

30

Covanta Holding Corp

150

25

20 11500

10

50

S&P 500 Index

0

2014 Jun

2015

Sep 2017

2016

Dec

Mar

2017

Jun 2018

-05 -10

2018

2019 -15

Sep

Dec

Mar

2019

Source: Bloomberg Finance L.P.

Covanta Holding Corporation Quarterly Revenue Growth

Avg. Sales %

Revenue Growth Year over Year

All Securities 8.4013

14.00 8.0102.00 6.0100.00

All Securities 15.2476

4.080.00

6.00 20

4.00 10 0 2.00

1.01 -100.00

Avg. Earnings%

CQ1J1u8n 2016 DCeQc3 18

JHu2isn0toC1r7Qic1al1T9rend Dec

CQ3 19

Jun 2018

CQ1 20Dec

Source: Bloomberg Finance L.P.

Profitable Investing | April 2019 | profitableinvesting.

5

Mid Price

104.64

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