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Makita Corp, Innovative Industrial Properties, Ubiquiti, Amkor Technology and Liberty SiriusXM highlighted as Zacks Bull and Bear of the Day

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·14 min read
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For Immediate Release

Chicago, IL – March 16, 2021 – Zacks Equity Research Shares of Makita Corporation MKTAY as the Bull of the Day, Innovative Industrial Properties, Inc. IIPR as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Ubiquiti Inc. UI, Amkor Technology, Inc. AMKR and The Liberty SiriusXM Group LSXMK.

Here is a synopsis of all five stocks:

Bull of the Day:

Today’s Bull of the Day is a great example of how the Zacks Rank can provide an idea for a trade that might not be obvious, but makes intuitive sense once you really consider it. Rising earnings estimates can be a clue that something good is afoot in a given industry before the broader markets recognize it.

By now, it’s a well-worn story that the housing industry has been one of the lucky beneficiaries of a year of Covid-19 restrictions. Housing prices have been steadily rising in most areas as Americans seek to carve out a space for themselves and their families. The work-from-home movement looks likely to continue well past the end of the pandemic as employees ditch their commutes and employers ditch their expensive commercial leases.

Millennials who famously eschewed purchasing real estate in the past in favor of the freedom of rentals are now marrying, starting families and settling down in their own homes.

New home construction and remodeling are booming. Homeowners report months-long waits for a contractor, sometimes just to get an estimate or get plans and contracts drawn up. Savvy investors will remember the old adage about how the most profitable enterprise during the gold rush wasn’t mining - it was selling shovels.

Well Makita Corp doesn't make shovels, but they make just about every other power tool used in home construction and remodeling. Widely available at home improvement and big box stores, Makita tools are popular with professionals and the DIY crowd alike, prized for value and durability.

In many trades, Makita’s popular line of rotary angle grinders is synonymous with the entire category, enjoying the same type of brand recognition as household names like Kleenex and Q-Tip. If a contractor says he’s going to “use the Mikita,” he probably means the angle grinder - a workhorse tool with dozens of different wheels for cutting, sanding, shaping or polishing almost any material.

As you might guess, the sales of tools and accessories tend to increase during periods of economic expansion. New construction, remodeling and repairs, the opening of new businesses and municipal infrastructure projects all increase demand for skilled tradespeople. The more they work, the more they wear out their tools and accessories and need to replace them.

Checks are currently going out for the most recent round of fiscal stimulus and there’s a good chance a lot of that money will find its way to the home improvement and construction markets.

It’s also not a surprise that Makita has seen earnings estimates rising lately. While heavy equipment manufacturers like Caterpillar and Deere often get the lion’s share of attention during boom times, small tools sell just as well - or even better. Makita has been turning in one earnings beat after another, yet the share price hasn’t responded yet and is actually lower since the last report, during which net earnings beat the Zacks Consensus Estimate by more than 60%.

In the past 90 days, the full year estimate has risen from $1.63/share all the way to $2.20, leaving Makita with a forward 12-month P/E Ratio of less than 20X. The industry average is over 22X.

Makita has also earned a Zacks Rank #1 (Strong Buy).

With a lower forward P/E Ratio than the handheld tools sub-industry, rising estimates and coming off a big earnings beat, there’s no obvious reason for Makita to be underperforming its peers, yet that’s what has happened so far in 2021.

That market oversight can be your gain.

Bear of the Day:

Innovative Industrial Properties has gained almost 150% over the past two years – in addition to paying steadily increasing quarterly dividends. While the rest of the industry was reeling, IIPR was quietly acquiring new properties and increasing its market cap.

IIPR engages in one core business practice – buying real estate properties that are used for cannabis business activities (primarily cultivation), provides tenant improvements to make those properties more suitable for the intended business activities and then leases them back to the previous owners on very attractive terms.

The sale-leaseback arrangement is not uncommon in the commercial real estate world – many other Real Estate Investment Trusts do essentially the same thing – but IIPR was the only large-scale REIT to specialize in cannabis properties. That, combined with the fact that cannabis companies in the US have been almost entirely shut out of traditional borrowing/lending activity is what allows IIPR to sign leases with 15-year terms and charge 15% of their total investment annually on a triple-net basis in rent.

IIPR is essentially lending millions of dollars to cannabis companies who don’t have access to other sources of capital and collecting a commensurately high interest rate for doing so. They raise cash in the equity markets (that’s us), and structure real estate deals that provide that cash to cannabis businesses for growth initiatives, capital purchases, etc.

It’s a very clever - and totally legal - end-run around regulations that prevent federally insured lending institutions from doing business with companies engaged in a business that’s still illegal at the federal level.

Recently, the Chairman of the House Judiciary Committee, Jerry Nadler (D, NY) announced that he would be reintroducing the Mariuana Opportunity Reinvestment and Expungement (MORE) Act. That legislation would broadly legalize cannabis, expunge prior convictions and establish a national tax structure. It was easily approved in the House last year, but was never even discussed in the Senate because of the objections of former Majority leader Mitch McConnell (R, KY).

With the current 50/50 splint in the Senate and the tie-breaking vote belonging to Vice President Kamala Harris - who personally drafted some of the bill's language - the chances of the MORE Act passing are now pretty high.

That’s likely to cut into the juicy cap rates that IIPR has been enjoying. Prospective tenants won't have to do a leaseback deal with a landlord if they can get a mortgage and/or take out a conventional business loan from a bank.

Another political consideration is the latest fiscal stimulus involves nearly $2 trillion more in US Government borrowing. The debt markets have already been anticipating increased debt sales and interest rates on US Treasuries have been rising. So far, the effect has been fairly modest, but the direction in medium to long-term rates is undeniably upward.

If other debt instruments are trading at higher yields, the shares of REITs that have a portfolio of assets that provide fixed (or in this case - slightly rising) lease income will tend to look less attractive in comparison.  That could put pressure on IIPR share price in order for buyers to view the dividend as an attractive yield.

IIPR did a fantastic job raising capital in the equity markets and then putting it to use generating income for shareholders, but those good times can’t last forever. With US legalization looming, it’s increasingly less likely that they’ll be able to do nearly as well.

Those who owned IIPR over the past two years were rewarded with solid dividend income as well as huge capital appreciation. Going forward, it’s much more likely to yield and perform like an ordinary REIT.

Additional content:

Central Banks Give Us Direction: Global Week Ahead

In this Global Week Ahead, it’s all about the central bank meetings.

With the U.S. long-term interest rate rise seen of late, the Fed meeting on Wednesday will be the main event.

The Bank of England (BoE) tackles its monetary policy issues on Thursday.

The Bank of Japan (BoJ) closes it out with its monetary policy decisions due on Friday.

Next are Reuters’ five world market themes, reordered for equity traders.

(1) On Wednesday, We Have a Fed Meeting

After a stunning selloff in U.S. Treasuries took benchmark 10-year yields above 1.6%, the highest in a year, the March 16-17 Federal Reserve meeting will be watched closely for hints policymakers are concerned about yields, asset bubbles and inflation.

A repricing of market interest rate expectations to anticipate a Fed hike as early as late 2022 is at odds with the Fed’s aim of keeping rates unchanged until the end of 2023. The Fed has appeared unperturbed so far by higher bond yields, but may feel it’s time to push back against those rate-hike bets.

It is also expected to release fresh forecasts on economic growth as vaccines are distributed.

(2) On Thursday, We Have the Bank of England (BoE) Meeting

Thursday brings central bank meetings in Britain and Norway.

The Bank of England is not seen unveiling additional policy easing despite concerns over the recent spike in borrowing costs.

Instead, any action such as upping the BoE’s bond-buying firepower is likely to come later in the year — perhaps in May, when the next set of economic forecasts emerge.

With first-quarter GDP data expected to show a near 4% drop on the back of pandemic-linked lockdowns and Brexit disruptions, economic recovery is expected to be gradual. A majority of economists polled by Reuters expect GDP will take two years to return to pre-COVID-19 levels.

Norges Bank is also tipped to keep rates unchanged but it may adopt a much more hawkish tone given signs of economic recovery in Norway, especially in housing.

(3) On Friday, the Bank of Japan (BoJ) Will Close Out the Major Central Bank Meetings

This central bank, which pioneered yield curve control, faces one of its toughest policy reviews on March 18-19.

The Bank of Japan will likely insert clearer guidance in its statement on what it sees as an acceptable level of fluctuation in long-term interest rates, according to sources — a sign it won’t tolerate rises that hurt the economy.

Governor Haruhiko Kuroda and his deputy Masayoshi Amamiya have sent mixed messages on loosening the 10-year yield target band. Higher yields would acknowledge a global move higher but might spur unintended worries about policy tightening.

Given a nascent economic recovery, the BOJ may even suggest scope for more negative short-term rates. In the midst of this, financial year-end flows back into yen are accelerating. A currency rally will add to the BOJ’s headaches.

(4) Central Banks in Emerging Markets Meet This Week, Too — Namely Brazil and Turkey

In emerging markets, meanwhile, the only way for interest rates to go may be up. That’s the message we might hear from several central banks over coming days.

Most have faced rising inflation pressures for some time, but now they are also confronted by higher U.S. Treasury yields, which raise borrowing costs for everyone. For oil importers, Brent crude prices above $70 is an added problem — all this while economies are still reeling from the coronavirus impact.

Central banks in Brazil and Turkey — meeting on Wednesday and Thursday respectively — are most likely to raise rates. Markets will also find out on Thursday if Indonesia’s rate-cutting cycle has come to an end.

Egypt, meanwhile, is seen standing pat on Thursday, even in the face of rising commodity prices and inflation nudging higher.

(5) In Europe, Focus Will Be on Elections, With the ECB Out of the Way

In the euro area, investors’ focus turns to politics.

The German states of Baden-Wuerttemberg and Rhineland-Palatinate hold elections on Sunday that are seen as a key test of voter sentiment ahead of national polls in September, which will determine who succeeds Angela Merkel as Chancellor.

The Baden-Wuerttemberg vote is one to watch, since a face mask procurement scandal has muddied the waters for Merkel’s Christian Democrats, whose leader Armin Laschet hopes to become the next Chancellor.

Then there are Dutch national elections on March 15-17, for which authorities are relaxing evening curfew rules introduced to combat the spread of COVID-19. Polls suggest Prime Minister Mark Rutte’s conservative VVD will remain the largest party, although public support has declined recently over his coronavirus policies.

Top Zacks #1 Rank (STRONG BUY) Stocks

With the Nasdaq showing weakness, let’s look into top tech stocks this week.

(1) Ubiquiti Networks: This is a $336 stock and the market cap is $21.1B. I see a Zacks Value score of F, a Zacks Growth score of A and a Zacks Momentum score of D.

Headquartered in New York, Ubiquiti Inc., along with its subsidiaries, offers a comprehensive portfolio of networking products and solutions for service providers and enterprises.

Its service-provider product platforms offer carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing; enterprise product platforms provide wireless local area network (WLAN) infrastructure, video surveillance products and machine-to-machine communication components.

(2) Amkor Technology: This is a $22 stock and the market cap is $5.4B. I see a Zacks Value score of A, a Zacks Growth score of A and a Zacks Momentum score of F.

Amkor Technology, Inc. is headquartered in Tempe, AZ. The company is one of the largest providers of semiconductor packaging and test services.

It packages and tests integrated circuits (ICs) for chip manufacturers, fabless semiconductor companies and contract foundries. The company’s product portfolio is composed of Advanced Products and Mainstream Products.

(3) Liberty Media: This is a $45 stock and the market cap is $10.4B. I see a Zacks Value score of C, a Zacks Growth score of D and a Zacks Momentum score of B.

The Liberty SiriusXM Group provides satellite radio services consisting of commercial-free music, sports, news, talk, entertainment, traffic and weather. The Liberty SiriusXM Group is based in the United States.

Clearly, given the top Zacks Ranks, these three are still worth keeping on your radar screens.

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