Monday, June 29, 2020

The GEO Group, Inc. (GEO)

Initiating Coverage of The GEO Group

With over 94,000 beds owned, leased or managed across its business lines and serving over 260,000 people daily, GEO is a leading provider of mission critical real estate to its governmental partners. The Company is the first fully integrated equity REIT specializing in the design, financing, development, and operation of secure facilities, processing centers, and community reentry centers in the U.S., Australia, South Africa, and the U.K.

Joe Gomes, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to the full report for the price target, fundamental analysis, and rating.

We are Initiating Coverage on this Company.

Initiating Coverage. We are initiating research coverage of The GEO Group. GEO enjoys significant growth opportunities across its business segments, in our view. An aging and overcrowded public option needs GEO’s beds to perform its societal function, while GEO’s extensive, and growing, post-release options present another avenue of growth.


Leading Provider of Mission Critical Real Estate. With over 94,000 beds owned, leased or managed across its business lines and serving over 260,000 people daily, GEO is a leading provider of mission critical real estate to its governmental partners. The Company is the first fully integrated equity REIT specializing in the design, financing, development, and operation of secure facilities, processing centers, and ….










Click to get the full report.

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in the full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision. 

Alternative Investments Will be Allowed in Defined Contribution Retirement Portfolios

Will retirement planners be comfortable with investments that are not regulated by the SEC? The participants of defined benefit pension funds have long enjoyed the potential for higher returns in alternative investments. So why haven’t these investment options been included in defined contribution (DC) plans? After all, private equity deals and hedge funds further diversify asset mix, increase potential return, and help provide capital for small businesses. These are just some of the reasons this unregulated asset class, once reserved for the very wealthy, will now be permitted by the Department of Labor (DOL) under ERISA protections.

Impact
on Retirement Plans

The guidance came about after a review by the DOL, which then issued a letter dated June 3, 2020. The letter specifically offers legal protection to target-date-funds (TDF) that include allocations in private equity investments.  The main purpose of the guidance is to assure companies that offer investments in funds that include private equity, that they are permitted, thereby reducing their liability. The formal letter was prompted by lawsuits from employees, against Intel, Verizon, and others. Their cases caused other companies to steer away from these investments. The uncertainty of suitability effectively limited the options of employees seeking to diversify or maximize the potential for their retirement savings. Employees may still choose options that don’t include non-registered investments, but for those that want the potential benefit, their employers may now comfortably offer them.  

According to the Employee Benefits Security Administration, Acting Assistant Secretary Jeanne Wilson, “This [DOL information] letter should assure defined contribution plan fiduciaries that private equity may be part of a prudent investment mix and a way to enhance retirement savings and investment security for American workers.”

The DOL letter highlights that private equity should not be available as a stand-alone option when creating a plan that has protection under the guidance, as well as other considerations, including:

• The impact of the private equity allocation on diversification, expected return, and fees on a long term basis.
• The ability of plan fiduciaries to oversee private equity investments vs. hiring an expert consultant.
• The percent invested in private equity, noting that the limits illiquid assets to 15% for registered open-end investment companies.
• Whether plan participants will be permitted to take benefit distributions and move into other investment options.
• Agreement by plan fiduciaries to value private equity investments according to accounting standards and subject those investments to an annual audit.
• Whether the long-term nature and liquidity restrictions of any private equity investments align with the ability of plan participants to take distributions or change investment options as they wish.
• The adequacy of disclosures provided to participants regarding the character and risks of the plan investment option that includes a private equity component, so as to allow participants to make an informed assessment before investing.

Take
Away

Investment options that include private-equity may now legitimately be offered in 401(k), 403(b) and 401(A) plans to participants without the employee first qualifying as an accredited investor. Target-date-funds with longer investment horizons can include unregistered equity-based options that may enhance retirement growth when compared to investment choices containing only publicly traded securities. The option of asset allocation TDR funds with a private equity component gives individuals access to options used by professionally managed defined-benefit pension plans. Private equity investments within TDFs would provide further diversification, perhaps reducing investment risk and could lead to enhanced returns for participants above returns achieved solely in the public market.

Suggested Reading:

How do Negative Interest Rates Impact Households

Trading
Technology Continues to Level the Playing Field

Millennials Could Use Help With Investing

Enjoy Premium
Channelchek Content at No Cost

Sources:

Department
of Labor Information Letter

US DEPARTMENT OF LABOR ISSUES INFORMATION LETTER ON PRIVATE EQUITY
INVESTMENTS

History
of Target Date Funds

Private Equity Could Boost DC Plan Participant Returns

Financial Services During Social Distancing

Prior to February 1993, I had never heard the term “Disaster Recovery Plan.” To be sure, most of the ivy league MBA’s I worked alongside hadn’t either. Unfortunately, that year, the parking garage bombing at the World Trade Center brought heightened awareness to disaster planning. It was quickly placed at the top of most large Wall Street firms “To Do” list.

Planning from scratch to have the ability, during a crisis, to work remotely took a lot of work. Offsite offices were set up in other parts of Manhattan and across the river in New Jersey, where copies of our physical files were sent at the end of each trading day. As a fund manager, I’d go once a month to one of these locations to trade; we were testing for holes in our process.  My employer was one of the largest fund managers in the world; they wanted to be out front and be considered a role model in disaster preparedness.

Administering all that needed to be done was an arduous task. My department appointed someone who had no other responsibilities except for disaster planning.  Germaine, the woman, given responsibility for designing and implementing our plan, received weeks of offsite training and an officer-level promotion. She took her role seriously. Germaine assigned four searchers on each floor, two for the Men’s room and two for the Ladies rooms. Monthly she made sure we had updated phone list printouts to bring home with office numbers. Our trading turrets had direct lines and speed-dials, so we made sure we recorded actual numbers from all the broker/dealers we did business with. Each floor in the building was assigned someone to learn first aid and be the Fire Marshall.  I volunteered for this responsibility.  Part of what I did was, whether I was in my office or out on the trading desk, I kept a small bag with a first aid kit, transistor radio, extra batteries, and a whistle. Fire Marshalls were expected to be ready at all times. I even planned vacation time around other Fire Marshalls.

To be honest, I never took any of this seriously. We worked in a building that had been there forever, and in a big city. Work is always open — it always will be was the belief. Plus, conducting business from home would be impossible, it seemed. I thought, how could someone even follow compliance procedures for physical documents from home? So, despite our disaster recovery plan, whether we were hit with two feet of snow, railroad strikes, race riots, subway bombings, or hurricane threats, none of us ever questioned if we were going to the office. Regardless of circumstance, we decided how we were getting to the office.

Flash Forward

That was over 25 years ago, and much has changed. Back then, work and office were near synonymous. Home was separate; my briefcase may have looked like I was bringing work home; instead, it was always full of boating magazines, how could you work outside an office? Today, we don’t need “the office” to work. We all have the same quality connectivity at home that we do in a commercial building, our phones are all speed dial, and if we haven’t saved every phone number of anyone we’ve met in the past ten years, there are other medium we could use to contact them. A phone isn’t even the preferred method of contact between many coworkers, and our work desks are not always our most productive work area.

The changes brought about by technology and attitudes of management to allow technology to be used at it’s optimum have ushered in a wave of flexibility in the workplace that we never conceived of in the early ’90s. Working from home (WFH) has taken great strides forward. Over the past couple of months, a global threat has forced WFH to take another giant leap forward. The challenge today, unlike 1993, is that a plan has to be created and implemented almost simultaneously. Almost everyone across the globe is impacted, and it is recommended that face-to-face meetings not occur.

These are challenges few planned for. For financial planners and advisors, the extra challenge is that at a time when rollercoaster markets and IRA season, and layoffs create a “need” to see clients, government authorities are telling us we should not be in contact with anyone. There are some great solutions.

Public-Facing Professionals

Advancements in technology, including the ability to convey, retrieve, and file information electronically are light years ahead of even a decade ago. For investment professionals, the ability to get real-time quotes, conduct research, apply comparative analysis, and execute effectively is often better than it was at the top Wall Street trading desks when George Bush was president. For professionals that sit down and meet with clients regularly, small computer-based demonstrations and scenario tools that are on a laptop or tablet, make work-life much easier. So, switching gears and spending fewer hours or no hours in the office is barely a disruption. The disruption is limited physical contact with mom & pop clients. Don’t ignore them, if you have the time, do even more than before to interact with them.

Your clients trust you; they’ve become your family; within the past six weeks, they might need to meet with you more than ever before. Let’s just say: Last year, you began a client relationship with a family that had two children going to college and funded a new IRA account with you. They are deciding what to do with this year’s contribution. And, a woman you’ve been working with for ten years was just let go when her company closed and is considering early retirement, she wants you to look through all of your papers. Also, there is a client who you’ve known since high school that wants to discuss the best way to invest in gold. Meanwhile, your third-largest client wants to look you in the eye and hear why his account is a third as large as it had been. None of these meetings should be had over the phone or through an email discussion; They’re too important, yet, meeting in person is not at all advised.

Addressing the immediate needs of clients should be done ASAP. For the others checking-in, especially during times of crisis, builds stronger bonds. I like to say when you’ve been “in the trenches” with someone, you build a lasting bond. We’re all “in the trenches” right now. Be with them. You don’t need special technology to not only “visit” with as many people as you can, but use technology to visit with far more than you ordinarily would have. They probably have the technology in their own homes too. Only use phone calls when you have to. Find out what they have available and cater to them,  they may not even know. If you have an assistant, see if they can schedule appointments and talk to the client through whatever tech issue they may have to either Facetime, Skype, Zoom or even Go to Meeting. I’ve found that my less technically savvy interactions are with people that have never heard of anything on that list but have a Gmail account. You or an assistant can ask them to open their Gmail account, look for “Chats” on the left side of their monitor and open it. Once opened, providing you are also using a Gmail account, open yours and send them a Chat Hangout request.  Then click on the camera icon on the request to be with them.

Financial Planning

Compliance, notarizing, and suitability updates at times require the exchange of documents.  If your clients live close, taking the extra step and stopping in their driveway to pick up forms or collect a signature may give you something to all talk about down the road. While you’re there, you shouldn’t greet with a handshake or other physical greeting. Almost everyone will understand and perhaps appreciate that you are looking out for them by staying six feet or more away. FedEx overnight is also a means of getting the required paperwork. Although this may seem like an additional cost, so much of your business has been streamlined by not meeting in an office that it could actually be viewed as a transfer of costs.

It’s now the end of the first quarter. Do you typically rebalance client portfolios? Chances are there have been gargantuan shifts. High-quality bonds are richer than they had been, and equities are lower than they were. The reason to rebalance investments is because it takes gains in the rich sectors and buys into the sectors that now may offer value. It isn’t a perfect plan, but over time the strategy is better than letting the percent balance mix move too far off the plan.

Record-Keeping

If you’re a financial professional, you don’t need anyone to tell you that if you’re using your car more, house more, and home internet more, that these are business expenses that you should document for your own tax bill. Keep meticulous records; it adds up. Remember, you’re the last profession the IRS will accept faulty financial recordkeeping from.

Limits on WFH

Is there a cat laying on your keyboard? A dog barking during your phone call. Did you forget to dress better (or at all) for your video conference? There are downfalls and limits to what can be done at home. But these limits are now inconveniences, not impossibilities. If you have to do curbside delivery of financial documents for a while, it may not seem like the best use of time, but you are probably gaining more than you can measure from the exercise.

Despite what you have been told, being socially distant from clients is ill-advised; all that is required is being physically distant — for just a little while.

 

Paul Hoffman

Managing Editor

 

Suggested
Reading:

Factors to Consider When Setting a
New Investment Course

Portfolio Diversification may Reduce
Volatility and Enhance Returns

How Investment Professionals are
Planning for the New Decade

Why the Current 60/40 Investment “Wisdom” Could Ruin Advisory Businesses

Whether you’re a
fiduciary investing assets for others, or a self-directed investor trying to
balance portfolio risk, when managing toward the classic 60/40 pie chart, you
may now require more active ingredients.

Prime Prospecting
for New Business

During tax season, people’s minds turn to their finances. This happens, of course, because most of us are making plans to settle-up with the IRS. Our financial papers are already in-hand, so it’s the most opportune time of the year to reevaluate our spending, retirement savings, new purchases, and investment portfolios.

This causes tax-time to be the “busy season” for financial advisors of all stripes — Accountants, RIAs, CFPs, Securities Brokers, and even Mortgage Lenders experience an increase in activity. The increased attention on money from January through mid-April is “celebrated” by advisors as prime prospecting time – Thank you, Internal Revenue Service!

Registered Investment Advisors, specifically, find business growth to be easier during this time of year. Households are looking for answers, this leads to conversations about their assets. People have been “trained” to take advantage of the tax incentives for individuals to shelter assets in deferred retirement accounts. These “qualified” vehicles, along with a 4/15 deadline, promote a surge in market activity. For an advisor’s current clients with an IRA, SEP, or other plan, contributions expectedly flow in as their current clients regularly add to their existing accounts. There’s also an increase in opportunities to meet motivated prospects. These people are usually do-it-yourselfers that realize they may be better off if they listened to informed advice. Or, a dissatisfied client of another firm that is looking to find a planner that may serve them better. Either way, Financial Advisors see a wave of new money.

How is New Money
Allocated

What’s done with this new money? The Employee Benefit Research Institute (EBRI) database collects information from a wide range of IRA-plan administrators. Their database contains information on 24.2 million accounts owned by 19.1 million individuals, with total assets of $2.36 trillion. It’s a large enough sample size to ensure a high confidence level when evaluating IRA investment habits, contribution size, rollovers, withdrawals, age information, and asset allocation.  For the purpose of the strategies discussed in this “opinion piece,” we’ll focus primarily on asset allocation.

The EBRI research shows that the average IRA account assets are invested 60% stock and 40% fixed income, regardless of age. Also, the $2 trillion-plus “managed” in target-date fund investments is 60/40 at the target date. 60/40 has become the magic ratio that few savers question.

Conventional wisdom is like that. There are many axioms, especially related to money management, that are unquestioned and accepted as absolute truths.  

Examples:

You get what you pay for.

Past performance is not an indicator of future returns.

The trend is your friend.

Buy low sell high.

Did you find anything wrong with these? Let’s look for a moment at the last two on this list. As much as they are often repeated, as it turns out, they completely contradict each other. The second on the list is a quick disclaimer appearing at the end of almost every investment brochure. Most of these brochures, when you read them, just finished using past performance to demonstrates the probabilities of a future result. So, they don’t seem to really want you to believe the warning. As for the first, “You get what you pay for,” well if earning higher returns was as easy as finding a more expensive investment method, selection would be easy. Or, as I sit here looking up at the online Channelchek research platform, which doesn’t cost users a dime for top-caliber research reports, I can see that argument has been discredited as well.

Can I also punch holes in the 60/40 ratio? Of course. It is inconceivable to me that “one size fits all.” Every investor has unique objectives, risk preferences, and risk capacity. A 65-year old with a pension designed to fully support them for as long as they live has a very high-risk capacity as it relates to their investments. Their preference for risk, however, may be that they’d prefer not to lose a cent — Even if the reward could mean tripling their money. When managing investments that are owned, coupled with a sufficient pension, you could actually maximize risk; the retiree’s capacity to endure a big loss exists. You can also risk nothing, earning nothing will not hurt the retiree either. It’s a decision that is purely personal to the investor. Age doesn’t come into play. In this case, I can argue that suitability may be viewed as what is preferred, not what others do at this life stage.

How about a much younger person? 30-somethings of any income level are likely to have a less certain future than the retired person with a large life pension, if for no other reason than because they have a longer future, which is harder to predict. So younger savers have less certain future needs than someone older.  It is, however, easier to predict what the average returns could be within asset classes or sectors within that class with a longer time horizon. Most forecasters would rather predict expected return looking out decades rather than months. Why? Ask yourself this, “will the stock market be higher or lower 20 years from now?” The expectation is that it will be higher. So, at least we have a direction. Now ask, “will the stock market be higher or lower tomorrow, next week, next month?”  With a longer time horizon, what may happen within an asset class is more predictable. Within sectors of the class, one can even project expectations of which will outperform or underperform other sectors.  

The 60/40 portfolio rationale was somewhat based on stock and bond prices moving in opposite directions, with bonds expected to be the lower performers. Within the bond or fixed income allocation, longer maturities have done better (rewarded investors for the additional risk). High yield bonds have also been statistically better performers than high-grade issues. They do, of course, add risk. The risk-adjusted return profile is such that it may make more sense to use part of your equity allocation to buy these below investment grade securities to achieve the best mathematical benefit. The Vanguard funds published a lengthy analysis of this subject in June 2019. I’ve provided the link below. Although troubled equity markets are usually related to economic forecasts, which also put downward price pressure on below-investment-grade bonds, the price declines have historically been tempered relative to stocks. The chart below demonstrates how stocks versus high yield bonds performed during the current record-breaking point declines this year in stocks. In either case, it is why diversified investors have fixed income in their portfolios, and why a core position in high yield bonds should be considered. Even if that position means reducing the percent equity held (not other fixed income). Proper balance by diversifying should be within the desired risk tolerance, and probable outcome projections, not a one size fits all standard.

Interest rates are currently at record lows for Treasuries. As I write this, the 10-year note has dropped to 0.75%. This severely limits (unless yields become negative) the amount of price appreciation one might expect in Treasuries. While Treasury prices are up, the spread between high grade and lower grade bonds has widened. Or put another way, the price-performance has been better in Treasuries than high yield, better in high yield than the S&P 500 average. As new IRA money is invested, attention should always be paid to the long term prospects of the asset classes that have done well and those that have done poorly. Can they be expected to reverse for a long-term investor?

The media would have us forget that the investment universe in equities is much larger than the Dow, S&P, or Nasdaq indices. Performance and risk balance should weigh the benefits of holding a core portion in Real Estate, then break that down into the various sub-categories looking at their performance. They should also weigh small-cap stocks and the expectations of the sub-sectors in this category. Diversification, by taking advantage of opportunities beyond the headline news of the major three indices, can have the effect of a better long-term portfolio that weathers the storm along the way. A thorough analysis comparing small-cap returns and performance is important before investing in the new IRA allocation or rethinking a retirement portfolio, it is beyond the scope of this article. John Hancock put out a useful report in February 2020. The link has been provided below.

                  “Robo-advisers are not nearly
as sophisticated as a live advisor, don’t throw that advantage away.”

60/40 Portfolio, There’s an App for That

As a general guideline, if you’re using a 60/40 allocation, you should consider further allocations within each asset class. Each of those will have its own performance characteristics and can be considered a core holding. New IRA contributions open the opportunity to strengthen diversification in this way.

If you’re an investment advisor and not determining how to best do this for each of your clients’ accounts, you may find over the next decade, you’re replaced by an app. This can be avoided. Humans are much better suited to determine risk profile, including the client’s tolerance for it. Humans are much better at hand-holding during declines in value. Selecting individual securities and not relying on funds is
a great way to differentiate yourself from today’s advisors who are still
behaving like index funds don’t have the potential for trouble. Robo-advisers
are nowhere near as sophisticated as a live advisor, don’t throw that advantage
away.

Everything Worthwhile Takes Work

Set it and forget it advisors will not last in this world where information is at everyone’s fingertips, and technology puts a trading floor in everyone’s pocket. Currently, anyone who can multiply by 0.6 can now invest in their favorite S&P ETF (or another major index alternative) and buy a medium-term corporate bond fund with the rest. Today this comes at approximately zero cost. For investors that are comfortable without real management, they can open an account and download the highest-ranked robo-advisor from bankrate.com or whatever their Google search turned up. Their returns will almost always beat an advisor who is charging them 1%-1.5% each year. An advisor who is looking within each asset class and managing sectors within the sectors will be offering a service that cannot easily be found in the Google PlayStore

If humans want to beat today’s average results, if advisors want to be more than just someone who helped fill out the forms, they need to think beyond the rules-of-thumb which stopped providing the best results.

We touched on a number of subjects without going too deep. Look for future publications on Channelchek where we’ll dig deeper in these areas

 

Paul Hoffman

Managing Editor

 

 

Suggested Reading:

The 2020s Could Become the Most Inclusive Decade for
Investors

Is Company Sponsored Research the Future for Small-Cap Stock
Investors?

The Nine Lives Investment Professionals Need to Survive the
New Decade?

 

 Sources:

EBRI IRA Database: IRA Balances,
Contributions, Rollovers, Withdrawals, and Asset Allocation

Vanguard
Link on High Yield Bonds

John Hancock Link Small-Cap Stocks

IRA Thoughts: When Market Selloffs and Tax Season Collide

It seemed too good to be true. For the past 13 months, day after day, the overall stock market continued to break new highs. Despite earthquakes in California, the longest federal government shutdown in history, a Special Prosecutor investigating the U.S. President, global economic malaise, trade wars, inverted yield curve fears, the manufacturing contraction, the vote to impeach, lower earnings guidance, and the military flare-up with Iran, the market shook it all off and set record-high after record-high.

Less than two weeks ago, all three major indices again recorded new highs. However, the intense double-digit market selloff that followed, substantially reduces the odds of a new all-time high in the coming months. The impetus for this continuing selloff is not part of normal economic/market rhythm. Instead, it is the reasonable expectation that there will be a global slowdown from reduced economic activities related to coronavirus. In highly populated areas of China, the world’s second-largest economy, activity (both production and consumption) are reported to have come to a crawl. Other countries have taken drastic measures as well. Japan has gone as far as keeping kids home from school.

Investors Versus Traders

For long-term investors, the Nasdaq is up 28.21%%, the Dow has earned 8.80%, and the S&P is up 16.65% since January 1, 2019. This hardly seems worth worrying about. For shorter-term investors or  traders, their entry may not leave them with the positive returns achieved over the past 13 ½ months. If they got in at the beginning of this year, they were confronted with forces that pushed the Nasdaq down 5.81%, the Dow down 12.04%, and S&P down 9.93%. The market declines are even higher for those entering since last Friday. Last week (a/o 2:30pm Friday), the declines are 12.56% for the Dow 30, 11.62% for the Nasdaq, and 12.07% for the S&P 500.

For those investing for future retirement, (not traders) with a longer-term horizon than those that have been looking for short-term gains, congratulations, stocks are still only 12.08% off their all-time highs. That isn’t all that bad if you participated in the run-up.

Current IRA Position

The above-average return of stocks, even after the sell-off, does not answer the question, “what do I do now?” More importantly, it doesn’t answer what to do with a new (2019 tax-year) contribution to your Roth or traditional IRA.

For existing assets, the wisdom of periodic rebalancing to bring the percent in various market classes back to the original plan’s allocation is based on sound reasoning. If a plan allocation calls for 50% equity, 40% fixed income, 5% real estate, and 5% cash with a quarterly rebalancing, the recent market moves should not change the plan. In practice, it is times such as the current “black swan event” that is the reason the risk/reward allocation with a periodic rebalance is being used.

In the past week, the fixed income portion of your portfolio has rallied dramatically. The entire yield curve is below the announced Federal Reserve’s targets. Benchmark bonds, such as the 10-year Treasury note are at their all-time most expensive levels. With this, it’s likely your allocation has exceeded 40% in this class. Your 50% equity allocation is likely lower than targetted in conjunction with your equity holdings. Real estate, particularly hotel REITs took less of a hit than most stocks, but are down as well.

A scheduled portfolio rebalancing would have assets moved automatically to this real estate position.  With lowered interest rates, REITs should do better once the “dump everything” madness settles down. So a reallocation back to real estate investments would seem prudent. Dividend-paying REITs should gain investor attention as other market interest rates are miniscule. Lower interest rates also tend to add demand to the heavily financed real estate sector.  So, low rates could add capital gains growth to real estate holdings going forward. Reallocating assets into the equity portion of the portfolio may be uncomfortable after such a harsh market turn. Keeping in mind the history of black swan events that have caused crashes, and the remember that the equity markets have since those events broken new highs, is a good reminder that we have always recovered in the past. In fact, after September 11, 2001, the markets recovered fully in less than 30 days after they reopened. The wisdom of rebalancing to the original strategy also forces you to sell and take profits in sectors that may not have much further to run. With interest rates at all-time lows (prices high), they may not have much more room to move in your favor. Selling expensive bonds and buying stocks that are relatively cheap is part of the rebalancing and makes sense.

The reason most advisors schedule rebalancing to the original allocation strategy is to take emotion and timing out of the decision to add to the sector that has been weakest and therefore could be cheap. If you have been managing your portfolio with scheduled rebalancing, nothing has changed to suggest you should deviate.

New Money

IRA assets are invested assets, not a trading account. The time horizon in almost all cases is longer than a year, and in most cases, much longer. Assuming there was an original strategic plan, there should not be any reason to deviate greatly from the plan. But, this may be a time to rethink how you are allocated within each class (Stocks, Bonds, RE). Not all securities within a class will react the same.

Within the Real Estate class, the sectors in which you place new money should be reviewed. Lodging and resort REITs have been particularly hard hit, whereas healthcare has outperformed. Self-storage has protected investors during economic downturns, infrastructure REITs are favorable during boom periods as are Timberland REITs. Diversifying within an asset class helps smooth out performance in any economic climate.

Moderation of large swings within fixed income is best attained by spreading the risk through both maturities and credit-quality. In all cases, the idea of a bond fund while rates are at their historic lows has a very low probability of success. Bond funds are valued based on the prices of the bonds within the portfolio. When interest rates rise off their lows, the prices of the bonds will go down. As the price goes down, so does the value of your bond fund. The same is true for individual bonds, but holders of the security, not the fund, can wait until the security matures (bond funds don’t mature, bonds do). When a holding matures, the owner will receive what they contracted to receive at purchase. This “known” return is what makes bonds appealing as an investment and bonds more attractive than bond funds when rates are below average.

Within the asset class of fixed income, investors for retirement may wish to invest relatively short-term (4 years or less). The difference between one-year Treasury rates at 1.18% and 10-year rates at 1.30% is small. So the idea of stretching your maturities longer would seem unfulfilling. As an alternative, lower quality corporate bonds offer higher rates. Investing in investment-grade notes (BBB- or higher) will add additional yield.

For the stock market portion of your “new money,” you could consider diversifying based on the current state of the market and expectations once this health crisis passes. What sectors within the class have been beaten down the most and expected to rebound (energy, travel, tourism, etc.)? What sectors did best during the crisis (health, biotech, consumer goods)? How will you diversify to reap the benefits of the next market jolt? Would you benefit from owning stocks where you can sell the most at risk and hold the best next time an unforeseen event happens? Individual stock purchases through most brokers are now typically less expensive than mutual funds. There is plenty of informed research to determine the fit of specific names. This research and analysis is available through both brokerage houses and companies like Morningstar and service like Channelchek.

One lesson investors have learned through this recent route is that diversifying through multiple index funds may be a false sense of security. Your exposure to a few hard hit companies may be greater than realized.  If a company like Apple or Microsoft make up a high percentage of each of the indices in which you’ve invested you could have deeper losses than you may otherwise have had if you had not been as exposed.

Perfect Information

Where the virus is going, we don’t know. The past is no guarantee of future returns, but we have survived through worse and then seen the markets set new highs sooner than we ever thought possible.  I’ve heard a lot of “buy the dip” talk. If everyone was buying the dip, there would be no dip. So listen with skepticism and with an eye toward who is suggesting this. Are they politically motivated, profit-motivated, or a trusted source with your best interests in mind? If you’re uncomfortable with fully investing your new IRA contribution all at once in a market that may continue downward, you may want to place these new savings into a money market fund and have a sixth moved into the market at even increments on the same day each month. i.e., a $6,000 IRA contribution, then move $1,000 into a balanced fund every second Monday for six months.

Retirement money is a long-term investment. Bumps in the road are uncomfortable, but if you’re years from needing the assets, invest in a way that will most likely net you the most while tempering the rough ride.

Suggested
Reading:

Black
Swans, Falling Knives, and Market Corrections

The Market and Management Seem to be at
Odds on Earnings Projections

 

Sources:

Stock Market News For
Dec 31, 2018

These Were The Biggest
News Stories In 2019, According To Google

Fin Tech is one of the Fastest Growing Tech Sectors

(Note: companies that
could be impacted by the content of this article are listed at the base of the
story [desktop version]. This article uses third-party references to provide a
bullish, bearish, and balanced point of view; sources are listed after the
Balanced section.)

So, what is FinTech? Financial Technology (FinTech) is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. (1) In short, FinTech uses technology to improve activities in finance. FinTech is composed of the new applications, processes, products, or business models in the financial services industry often composed of one or more complementary financial services and provided as an end-to-end process via the internet. (1) According to Federal Reserve Board Governor Lael Brainard, “FinTech has the potential to transform the way financial services are delivered and designed and change the underlying processes of payments, clearing, and settlement.” (2)

 Interestingly, a form of FinTech has been around for a long time but was often limited to use in the back-office operations of traditional financial services providers. Today, FinTech is enabling numerous non-legacy financial services firms—from financial service start-ups to non-traditional financial services firms such as automobile firms and retailers—to compete in the financial services industry. FinTech has been used to automate such financial services as insurance, banking services, retail brokerage, trading, and risk management. (1) Key technologies used in FinTech include artificial intelligence (AI), big data, robotic process automation (RPA), and blockchain. FinTech is one of the fastest-growing tech sectors, with companies innovating in almost every area of finance. (3)

 Adoption of FinTech services has moved steadily upward, from 16% in 2015, the year EY’s first FinTech Adoption Index was published, to 33% in 2017, to 64% in 2019. According to the EY study, awareness of FinTech, even among nonadopters, is now very high. Worldwide, for example, 96% of consumers know of at least one alternative FinTech service available to help them transfer money and make payments. (4) Some of the most active areas of FinTech innovation include cryptocurrency, smart contracts, open banking, insurtech, robo-advisors, unbanked/underbanked services, and cybersecurity. (5)

Fin Tech is one of the Fastest Growing Tech Sectors

(Note: companies that
could be impacted by the content of this article are listed at the base of the
story [desktop version]. This article uses third-party references to provide a
bullish, bearish, and balanced point of view; sources are listed after the
Balanced section.)

So, what is FinTech? Financial Technology (FinTech) is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. (1) In short, FinTech uses technology to improve activities in finance. FinTech is composed of the new applications, processes, products, or business models in the financial services industry often composed of one or more complementary financial services and provided as an end-to-end process via the internet. (1) According to Federal Reserve Board Governor Lael Brainard, “FinTech has the potential to transform the way financial services are delivered and designed and change the underlying processes of payments, clearing, and settlement.” (2)

 Interestingly, a form of FinTech has been around for a long time but was often limited to use in the back-office operations of traditional financial services providers. Today, FinTech is enabling numerous non-legacy financial services firms—from financial service start-ups to non-traditional financial services firms such as automobile firms and retailers—to compete in the financial services industry. FinTech has been used to automate such financial services as insurance, banking services, retail brokerage, trading, and risk management. (1) Key technologies used in FinTech include artificial intelligence (AI), big data, robotic process automation (RPA), and blockchain. FinTech is one of the fastest-growing tech sectors, with companies innovating in almost every area of finance. (3)

 Adoption of FinTech services has moved steadily upward, from 16% in 2015, the year EY’s first FinTech Adoption Index was published, to 33% in 2017, to 64% in 2019. According to the EY study, awareness of FinTech, even among nonadopters, is now very high. Worldwide, for example, 96% of consumers know of at least one alternative FinTech service available to help them transfer money and make payments. (4) Some of the most active areas of FinTech innovation include cryptocurrency, smart contracts, open banking, insurtech, robo-advisors, unbanked/underbanked services, and cybersecurity. (5)

Is Corporate Financial Reporting at Risk of Losing Integrity?

(Note: companies that
could be impacted by the content of this article are listed at the base of the
story [desktop version]. This article uses third-party references to provide a
bullish, bearish, and balanced point of view; sources are listed after the
Balanced section.)

Public companies are required to use Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board (FASB).  Companies often report non-GAAP financial measures such as adjusted earnings or earnings before interest, taxes, depreciation and, amortization (EBITDA) as a supplement to GAAP financial measures.  There has been considerable debate about companies that use non-GAAP metrics for executive compensation and whether firms may manipulate metrics to boost compensation or meet terms of debt agreements or covenants that are based on EBITDA.  In 2015, the Securities and Exchange Commission Chair expressed concern about the use of unaudited performance figures and the potential for non-GAAP information to become the key message to investors thus supplanting the GAAP presentation.  Should there be more restrictions on the use of non-GAAP financial reporting or greater standardization?  Below are the bull and bear cases for reporting non-GAAP financial information.

Is Company Sponsored Research the Future for Small-Cap Stock Investors?

(Note: companies that
could be impacted by the content of this article are listed at the base of the
story [desktop version]. This article uses third-party references to provide a
bullish, bearish, and balanced point of view; sources are listed after the
Balanced section.)

Publicly traded companies are required to provide quarterly information to the public. This includes most categories of small-cap stocks and many micro-caps that are traded over-the-counter (OTC) trading on a regulated stock exchange. These SEC required reports provide a basis for investors to look back on company data. When financial data is compared to historical trends, weighed against industry growth and ratios, then subjected to “what-if” scenarios, the information becomes analysis. To qualify as research, the analysis is put under a spotlight along with evaluating the strength of management, intangible assets such as patents, market positioning, and a variety of other considerations.

Awareness of the investment opportunities these companies represent is typically low. Companies with a low market capitalization can benefit from any quality research published on their companies, their products, and their economic prospects. This is because any publication which provides a heightened understanding of a company may create interest that leads to added liquidity and aid to the market’s price discovery of the stocks’ best valuation.

In the past, small and micro-cap companies have benefited from coverage at research departments of broker/dealers who had the capacity to provide financial research. The motivation for these research departments to provide in-depth expensive research was often to act as a door opener for other lines of business (quid-pro-quo.) This introduces some risk of compromised integrity, the practice has been prevalent from sell-side research of public companies, of all sizes, for decades. A well-known example of how this could damage investors in a large well-known company is the collapse of Enron. The New York Times wrote:
“Lawmakers investigating the collapse of Enron turned their attention to Wall Street today, criticizing financial analysts for continuing to urge investors to buy Enron stock even as the company headed toward bankruptcy. Several members of Congress suggested that Wall Street firms’ hunger for investment banking business and other conflicts kept them from leveling with investors.” (NYT 2/27/02) The Wall Street Journal echoed this sentiment: “Some financial firms have said they felt obliged to participate in the partnerships in order to remain in the running for underwriting assignments from Enron.” (WSJ 2/8/02) “Complimentary” broker/dealer research of smaller companies pose a similar risk, however, when problems occur for investors, they are unlikely to get the attention of large news outlets.

From the point of view of some broker/dealers that provide complimentary research on behalf of less active companies, they are beginning to find the practice of not charging to do high-level research on these companies may cost more than the overall benefit derived. The quid-pro-quo, or “this for that” often does not have enough “that” to warrant “this” in their soft-dollar exchange. One overshadowing reason is the popularity of investment funds that are managed with the objective of providing returns mimicking a stock index. These indexed Mutual Funds (MF) and Exchange Traded Funds (ETF) provide close tracking of an equity index largely by owning the companies within the index. According to Morningstar,
passive funds, those that mimic equity indexes, control $4.27 trillion in assets as of August 2019. This is a $1.36 trillion increase over the past 10 years. Others have reported the same dramatic shift of investment dollars differently. A CNBC headline from earlier this year shouted: “Passive investing automatically tracking indexes now controls nearly half the US stock market”.
With half the U.S. Stock market now in passive money, there are fewer opportunities for broker/dealers to make soft-dollar income in return for “complimentary” research. Many have reallocated their resources in such a way to have prompted an evolution in where investors receive trusted, impartial, institutional-grade research reports.

The
Evolution in Micro-Cap and Small-Cap Equity Research

 Active research is still highly relied upon by those who transact in the micro-cap and small-cap sectors. As such, top-tier research coverage is crucial for small public companies looking to expand their visibility and investor interest in their companies. With fewer research firms covering them, there may not be enough investment interest for many of the future’s life-changing innovations to take root. Tomorrow’s life-saving drug, mining discovery, medical apparatus, or storage innovation may be denied to those who would have benefited from them.

Fortunately, there has been an evolution in how institution-level research is provided. The shift has small and micro-cap companies hiring respected research companies directly to provide an unbiased evaluation of their companies. This new practice eliminates the past conflict of interest of investment analysts who may have experienced pressure to err on the side of a favorable outlook to help smooth the way to additional higher-paying services from the client. A few of the research firms providing company-sponsored research to small-cap entities have taken an additional step. They are requiring their analysts to pass FINRA (Financial Industry Regulatory Authority) qualifying exams in order to become registered securities professionals. The exam(s) and ongoing continuing education required to maintain the professional registrations, ensure a high level of understanding, further promotes ethical behavior, and provides for punishment, including loss of career, if some guidelines are not adhered to.

The research firms that do require FINRA registered professionals are effectively pledging impartial presentation of the companies they are covering. This new standard in who provides research and who it is available to clearly benefits the sophisticated investor who always had access. But some firms providing company-sponsored research now make it available to all investors, of any size. This was most often not the case as sell-side broker/dealers often only allowed timely access to their buy-side customers. 

Earlier this year OTC
Markets and IR Magazine hosted an industry conference. During one of the sessions Jim Harvey, CFA® a portfolio manager and principal of The Royce Funds, a large, respected small and micro-cap fund company, was asked where he stands on company-sponsored research.  His reply: “I’m not biased against company-sponsored research when it’s written by qualified, FINRA-licensed analysts.”  It is now widely accepted that credibility and accountability can be combined by using FINRA registered analysts at company-sponsored research boutiques.

Noble Financial Group is a research-based investment bank. Their unique research report distribution platform is Channelchek. This provides company-sponsored research at no charge to investors. Noble’s FINRA registered analysts cover; healthcare, natural resources, transportation, technology, and media.  Nico Pronk is CEO and President of Noble Financial Group While discussing the shift in providers of in-depth company research and the beneficiaries, Mr. Pronk explained: “Institutional-level research can now be more widely distributed to members of the investment community. In-depth, high-level research and analysis are being performed for small and micro-cap companies that may not have other business with our firm. We’re seeing this firsthand. We hold a conference early each year that brings investors and small innovative companies together. Our 16^th annual Noblecon is drawing a lot more attention from financial professionals that include a greater percentage of sophisticated investors from independent investment advisors, large family offices, and even self-directed investors. We’re proud that our research product resonates so well with all of these groups.”

Looking Toward the New
Decade

Investing goes through regular incarnations and reinventions. The use of technology has provided an environment where passive investing is gaining in popularity. Just as other trends of investing have fallen out of favor, disruption or innovation will one day turn the tide toward another trend. Fortunately, some of the research activities that have been dropped by the sell-side broker/dealers, effectively decreasing resources to their customers, have been replaced with boutique firms or a paid-for service. It’s arguably an improved system of company-sponsored research. This evolution is growing in appreciation by both those raising capital and those investing assets.

Sources:

https://www.cnbc.com/2019/03/19/passive-investing-now-controls-nearly-half-the-us-stock-market.html

 

https://www.morningstar.com/news/dow-jones/201909182571/index-funds-are-the-new-kings-of-wall-street

Author : Paul S. Hoffman

Friday, October 4, 2019

QuoteMedia (QMCI)

Could A Bear Market Help This Company?

QuoteMedia, based in Fountain Hills, Arizona, provides cloud-based financial data, market news feeds, and financial software solutions.  Its customers include financial service companies, online brokerages, clearing firms, banks, media portals, public corporations and individual investors.  The company provides a single source solution providing products such as streaming quotes, charting, historical data, technical analysis, news and research.  Information can customized and provided to multiple platforms including terminals and mobile devices.

Michael Kupinski, DOR, Senior Research Analyst, Noble Capital Markets, Inc.

Refer to full report for price target, fundamental analysis and rating.

• Investor meeting highlights. This report highlights notes from a recent non-deal road show with Dave Shworan, President and CEO. Fresh from recent investor conferences, management provided a constructive view of the outlook for the company.
• New products coming.  Management indicated that Phase I data is complete to launch a new product set, which is possible in the next few…
  

  
  
  

  Get full report on Channelchek desktop.

  
  

This Company Sponsored Research is provided by Noble Capital Markets, Inc., a FINRA and S.E.C. registered broker-dealer (B/D).

*Analyst
certification and important disclosures included in full report. 
NOTE: investment decisions should not be based upon the content of
this research summary.  Proper due diligence is required before
making any investment decision.