Friday File — Buying Growth, the iPhone Supercycle, and more…

A few transactions in my Real Money Portfolio, and a new watchlist stock. Includes notes on AAPL, MPW, NVDA, QCOM, SHOP, YTRA and more.

First, let’s get the week’s changes to my Real Money Portfolio out of the way… and after that, I’ve got a few other updates on stocks that I follow for you, dear Irregulars.

We’ve got a new stock in the portfolio….

As of tomorrow, I will have a position in NVIDIA (NVDA). This is a result of a tiny options position that didn’t register as making it to the 0.10% threshold to be included in the Real Money Portfolio previously, but, thanks to NVIDIA’s surge, it went in the money recently and I allowed the contract to exercise at today’s expiration — that will create a roughly 2.5% portfolio position in NVDA shares for me at a cost of $120 per share. I’ve profited from NVDA options a few times during the company’s ridiculous run over the past two years, but this will be the first time I’ve had an equity position.

The risk here, of course, is that (like so much of the market) it “feels toppy” — but that’s been true of NVDA stock since it got close to $50 last summer. The stock is obviously expensive at 45X trailing earnings and 34X forward earnings, and it could pretty quickly fall by 50% if growth expectations change, but the earnings estimates have also been ramping up pretty dramatically — estimates for 2018, which is the fiscal year NVDA is currently in, have risen by about 50% just over the past year, and the out years are also seeing rising expectations. The real risk is if those future earnings estimates stop rising, most likely, since the stock has soared in anticipation of future “beat and raise” quarters.

Regardless of the valuation, NVDA is doing fantastically when it comes to actual operating performance. It remains compellingly positioned with leading products for the most important trends in data centers and in artificial intelligence, to say nothing of their continued strength in the high-end gaming business, which keeps surprising analysts with its growth (and potential exposure to high-end virtual reality, driverless cars, and other currently smaller businesses). I wouldn’t want to commit much more capital to this one unless there’s a meaningful pullback in the share price, and semiconductors in general can be fickle, (both because massive customers like Google or Apple sometimes try to cut out designers and develop their own chips, and because the sector is so price-competitive), but companies that develop truly necessary chips for core work in rising trends, like Intel in the 1980s or Qualcomm in the 1990s, can have scary huge potential if they are able to really hold off the competition either with their brand power or their unique technology. NVIDIA has potential to both strengthen the brand and maintain a technological lead, but neither is guaranteed — so I’ll take this growth bet on NVDA and watch it pretty closely now.

In other actual transaction news, I’ve also dickered around with my positions a little bit to increase my exposure to the iPhone supercycle that is so widely expected, but also to diversify that exposure a little bit — so I sold down a small portion of my Apple (AAPL) holdings (a little over 10%), increased my holdings in Skyworks (SWKS) by 50%, and boosted my position in Qualcomm (QCOM) by roughly 20%.

There is no real news out from any of those companies, other than the notable increase in Apple shares held by Berkshire Hathaway (BRK-B) and the large number of hedge fund luminaries who added positions in Qualcomm last quarter, presumably during the dips it has seen as their legal back-and-forth with Apple (and others, including Blackberry) continues to buffet the stock.

To sum up, Skyworks is a “growth at a reasonable price” opportunity with both iPhone and “Internet of Things” tailwinds expected, Qualcomm is just plain cheap and a high-yield dividend grower (with at least as much legal talent and experience as their adversaries, and a good record of patent and licensing agreements in China), and Apple is a reasonably valued blue chip dividend growth consumer brand company — but if Apple surges because of strong iPhone orders this Fall, my expectation is that Skyworks will surge more dramatically. We’ll see.

Medical Properties Trust (MPW) announced a large acquisition deal this morning, one that they say will be accretive to both FFO and earnings as they acquire a big portfolio of mostly acute care hospitals from Steward. If they do all debt financing they say the deal will be accretive to FFO per share by 10 cents next year — I’d guess that they’ll also end up doing a share offering, but they did offload $800 million in assets to reduce debt this year, and they’re not currently overly levered, so there is some chance that they could do an all-debt deal.

S&P cut the credit outlook for MPW because this deal exceeds the acquisitions they had forecasted for the year, but the environment for credit is still pretty friendly so I would expect them to be able to get financing for most of the deal if they want to — certainly at lower cost than the implied cost of 7% of new equity offered at this price (since that’s what they’ll have to pay in dividends unless they cut the dividend, and cutting the dividend is a “we’re entering a death spiral” move for companies like MPW so they tend to avoid it assiduously).

That said, my opinion is that it shouldn’t have a major impact on the stock — that’s portfolio growth of more than 10%, FFO growth of a maximum of 7% or so (using my rough expected FFO range of $1.25-1.30 for this year) — so I’d say it’s incrementally good news but that there will probably also be an equity offering at some point in the next six months that might well provide a lower priced entry point if you’re interested in buying shares (and, of course, this is an income investment and a REIT… so if interest rate expectations change substantially that will also impact the stock — it will likely jump higher if the 10 year note yield drops sharply, and fall if the yield rises dramatically).

As I noted after their earnings came out a couple weeks ago, I do think the valuation is eminently reasonable at $13, roughly 10X AFFO and with a 7% yield and slow dividend growth (they do raise the dividend regularly, but not sharply — my assumption is that dividend hikes should keep up with inflation)… but, naturally, it’s even more reasonable at $12. This deal is contingent on Steward acquiring IASIS and its hospital network, and Steward was already a large tenant for MPW so this increases their exposure to Steward… but it also makes Steward a significantly better and more diversified company, and they were pretty solid before (they had already had their bond rating increased in 2016, so they seem to be doing the right things).

Shopify (SHOP) did another capital raise, which in the up-is-down, black-is-white world of “story” growth stocks where investors prefer investment in growth over current earnings, might actually be a good thing because it implies that they’re going to push aggressively to grow (see Amazon for the world’s best example of this, since they’ve never posted a meaningful profit in 20+ years).

SHOP had plenty of cash already, and could even have kept growing pretty nicely without any additional capital, or even reached profitability if they wanted to, but perhaps this new influx will give them a boost. They’re raising about $500 million right now, and apparently didn’t have any trouble getting buyers (they priced it at $91 a share, slightly off their all-time highs of last week but substantially higher than the stock was two weeks ago, and the stock has come down a bit as a result — but it’s still in the high $80s)… and they also filed a shelf offering of 5X that amount, so there could certainly be more coming at some point.

And if you like to get into the weeds in thinking about this, it’s generally smart to raise capital while you’re unprofitabl