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NetApp: A Dividend Kings High-Quality Total Return Selection

NetApp: A Dividend Kings High-Quality Total Return Selection

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Netapp

Introduction

In today’s uncertain investing world, I believe it is extremely important to first and foremost focus on safety and quality.  Since my primary investment focus is now on dividends and dividend growth, safety to me is primarily about valuation along with dividend coverage and predictability.  Most long-term followers of mine know me as Mr. Valuation, and as a result, they also know that I believe that attractive valuation is one of the best risk mitigator’s at the prudent investor’s disposal.

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As it relates to dividends and dividend safety, a strong balance sheet (cash on hand), cash flows and a safe payout ratio engender confidence.  Although these factors have always been important to me, in today’s uncertain economic environment (thanks to COVID-19), they have taken on an even more important role than ever.  Consequently, I have been searching for companies that can provide me confidence that the current dividend will not be cut and should be expected to grow in the future.

As a result, the current market climate has motivated me to step-up my research efforts with a renewed focus on dividends and dividend safety.  Not only am I looking for attractive opportunities as I normally do, I am also looking to discover replacements for holdings that might need to be replaced due to exposure to the virus.  This renewed strategy is partially related to how difficult it was to find attractive valuations in the long running bull market we were experiencing prior to the recent crisis.

In short, I am seeing more attractively valued stocks of all kinds currently available that I had not seen in quite a long time.  Therefore, I would consider it imprudent to not re-examine my holdings.  One of the great things about investing in liquid assets like common stocks is that it is analogous to a horse race but with the advantage of being able to change horses anytime you want.  However, I believe this strategy should only be applied when extraordinary circumstances require extraordinary actions.  In other words, the prudent principal supporting long-term investing should not be easily disregarded.

NetApp Inc: Dividend Safety – Attractive Valuation – High-Yield

When examining high-quality dividend growth stocks currently available, the enterprise data management and storage solutions provider NetApp Inc. (NASDAQ:NTAP) stood out.  As I alluded to in the title, NetApp is on the Dividend Kings Master Valuation/Total Return Potential List.  At the Dividend Kings marketplace service on Seeking Alpha, our co-founder Dividend Sensei classifies dividend growth stocks based on dividend safety and overall quality.

NetApp Inc earns a quality score of 10 out of 11, and a dividend safety score of 5 out of 5.  Additionally, NetApp’s dividend free cash flow payout ratio stands out at 43% compared to the technology sector industry safe payout ratio guideline of 60%.  On the other hand, the company’s debt to capital ratio of 54% is a little high in comparison to the industry safe debt to capital guideline of 40% (see screenshot below).  However, as I will elaborate later, I believe this company possesses a fortress balance sheet that significantly overcomes the debt to capital deficiency.

NetApp: Company Overview – Courtesy Zacks Investment Research:

Overview

“Headquartered in Sunnyvale, CA and founded in 1992, NetApp Inc. provides enterprise storage and data management software and hardware products and services. The company’s product line comprises two storage platforms – FAS storage platform and E-Series platform.

FAS Storage Platform is based on the NetApp Data ONTAP operating system, which combines storage efficiency, data management and data protection. The FAS product line includes FAS6200, FAS3200 and FAS2000 series. The E-series platform helps in the deployment of Hadoop Big Data infrastructure. The E-series product line comprises EF540 Flash Array and EF550.

Moreover, the company’s Cloud Volumes ONTAP storage data management service helps in data protection and storage competence. The company has built relationships with over 300 cloud service providers and hyperscaler providers, which includes Amazon Web Services (AWS), Google, IBM SoftLayer and Microsoft Azure. Further, Cloud Volumes ONTAP offers data access, insights and control to aid customers to move traditional database applications or legacy NAS applications to the cloud.

Leveraging these solutions the company addresses both the Storage Area Network (SAN) and Networked Attached Storage (NAS) markets. A networked storage necessarily provides external data repository that can be shared through LAN, thus freeing local storage space. Also, network storage also supports automated backup programs that prevent data loss.

NetApp Inc also offers support, consulting and training services. The company markets and distributes products worldwide through a direct sales force, value-added resellers, system integrators, original equipment manufacturers and distributors.

Rule On geographical basis, NetApp generated 56% of revenues in fiscal 2019 from the Americas (the United States, Canada and Latin America), 30% from Europe, Middle East and Africa (EMEA) and the remaining 14% from Asia Pacific (APAC).

NetApp faces stiff competition from companies like HP Inc., Dell, IBM and Oracle.”

NetApp: Positives and Negatives

The company is very focused on expanding its product offerings to cloud-based solutions and opportunities.  For example, today it was announced that they acquired CloudJumper, a leader in desktop infrastructure and remote desktop services.  On March 9, 2020 they announced the acquisition of Talon Storage, which will strengthen their storage infrastructure to public clouds.

NetApp operates in 3 segments, products 61% of fiscal 2019 revenue, software maintenance 15% of 2019 revenue and hardware maintenance with the remaining 24% of fiscal 2019 revenues.

The company also has strategic partnerships with technology giants Microsoft, Amazon and Google offering software storage and data management tools for their clouds.  According to MorningStar “this strategy allows NetApp to sell itself as the glue for an enterprise’s storage and data in a multicloud environment, while the hyperscale providers benefit by gaining additional workloads.”

However, potential negatives could be that certain enterprises that are currently migrating to public clouds may not require NetApp’s software and the possibility exists that the above hybrid cloud providers could end up promoting their own generic offerings in the future.

Fierce competition and the risk that they will not be a substantial storage refresh cycle after the current low flash technology adoption runs its course could hurt the company in the long run.  In the meantime, the company appears extremely well-positioned to prosper for at least the intermediate term given the current migration to the cloud.

NetApp’s Fortress Balance Sheet

An examination of NetApp Inc’s balance sheet over the last twelve quarters shows that the company does possess a fortress balance sheet.  Total assets per share and cash per share dwarf total debt per share.

In their last quarterly report ending on January 2020, NetApp Inc reported over $3 billion in cash versus less than $2 million in total debt.  Even though cash has been dwindling due to acquisitions, NetApp still holds more cash than total debt.

Cash Flow Statement

As you can see, NetApp’s free cash flow per share (purple bar) strongly supports the company’s dividends per share (light blue bar).

NetApp Attractive Valuation Mitigates the Risk

NetApp Inc has gone from being extremely overvalued in September 2018 to being extremely undervalued in April 2020.  Note that NetApp has a fiscal year ending in April and the company has announced their upcoming quarter’s ending announcement date to be held post the markets close on May 20, 2020.  As indicated on the earnings and price correlated FAST Graph below, adjusted operating earnings are expected to fall from $4.52 in fiscal 2019 to $4.12 for fiscal 2020, a 9% decline.

It should be further noted that the most previous consensus estimate reported by FactSet was for $4.17.  Nevertheless, this recent weakness in earnings seems to be the primary catalyst that took NetApp from an overvalued stock to its current undervalued levels.  As a result, I believe that the risk is currently priced in.

Netapp

NetApp: FAST Graph Analyze Out Loud Video

In the following analyze out loud video I will provide a deeper interactive look at the “fundamentals at a glance” of NetApp Inc.  In addition to adjusted operating earnings, I will also look at valuation through the lens of cash flows and several other valuation ratios.

Summary and Conclusions

I contend that much of the risk associated with investing in NetApp at the current extremely low valuation is already priced in.  Although the company has only been paying a dividend since 2014, it has grown rapidly and the company’s current payout ratio very conservative.  Furthermore, I believe the primary reasons that the stock has fallen so much since it peaked in August 2018 relates to current earnings headwinds.  The company is expected to report on May 20 and earnings for this year are expected to be down.  However, they are expected to recover slightly in 2021 and then begin growing again.

Finally, I believe the company has a significant amount of financial leverage and a seasoned management team capable of keeping the company relevant.  I do believe that long-term oriented investors will be well-rewarded through both capital appreciation and dividend income by taking a position at today’s valuation.  However, I further believe that continuous monitoring and due diligence is required.  Technology can change rapidly, and with it the prospects of even well entrenched enterprises like NetApp Inc.


Disclosure:  No Position.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

The post NetApp: A Dividend Kings High-Quality Total Return Selection appeared first on ValueWalk.

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Chronic stress and inflammation linked to societal and environmental impacts in new study

From anxiety about the state of the world to ongoing waves of Covid-19, the stresses we face can seem relentless and even overwhelming. Worse, these stressors…

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From anxiety about the state of the world to ongoing waves of Covid-19, the stresses we face can seem relentless and even overwhelming. Worse, these stressors can cause chronic inflammation in our bodies. Chronic inflammation is linked to serious conditions such as cardiovascular disease and cancer – and may also affect our thinking and behavior.   

Credit: Image: Vodovotz et al/Frontiers

From anxiety about the state of the world to ongoing waves of Covid-19, the stresses we face can seem relentless and even overwhelming. Worse, these stressors can cause chronic inflammation in our bodies. Chronic inflammation is linked to serious conditions such as cardiovascular disease and cancer – and may also affect our thinking and behavior.   

A new hypothesis published in Frontiers in Science suggests the negative impacts may extend far further.   

“We propose that stress, inflammation, and consequently impaired cognition in individuals can scale up to communities and populations,” explained lead author Prof Yoram Vodovotz of the University of Pittsburgh, USA.

“This could affect the decision-making and behavior of entire societies, impair our cognitive ability to address complex issues like climate change, social unrest, and infectious disease – and ultimately lead to a self-sustaining cycle of societal dysfunction and environmental degradation,” he added.

Bodily inflammation ‘mapped’ in the brain  

One central premise to the hypothesis is an association between chronic inflammation and cognitive dysfunction.  

“The cause of this well-known phenomenon is not currently known,” said Vodovotz. “We propose a mechanism, which we call the ‘central inflammation map’.”    

The authors’ novel idea is that the brain creates its own copy of bodily inflammation. Normally, this inflammation map allows the brain to manage the inflammatory response and promote healing.   

When inflammation is high or chronic, however, the response goes awry and can damage healthy tissues and organs. The authors suggest the inflammation map could similarly harm the brain and impair cognition, emotion, and behavior.   

Accelerated spread of stress and inflammation online   

A second premise is the spread of chronic inflammation from individuals to populations.  

“While inflammation is not contagious per se, it could still spread via the transmission of stress among people,” explained Vodovotz.   

The authors further suggest that stress is being transmitted faster than ever before, through social media and other digital communications.  

“People are constantly bombarded with high levels of distressing information, be it the news, negative online comments, or a feeling of inadequacy when viewing social media feeds,” said Vodovotz. “We hypothesize that this new dimension of human experience, from which it is difficult to escape, is driving stress, chronic inflammation, and cognitive impairment across global societies.”   

Inflammation as a driver of social and planetary disruption  

These ideas shift our view of inflammation as a biological process restricted to an individual. Instead, the authors see it as a multiscale process linking molecular, cellular, and physiological interactions in each of us to altered decision-making and behavior in populations – and ultimately to large-scale societal and environmental impacts.  

“Stress-impaired judgment could explain the chaotic and counter-intuitive responses of large parts of the global population to stressful events such as climate change and the Covid-19 pandemic,” explained Vodovotz.  

“An inability to address these and other stressors may propagate a self-fulfilling sense of pervasive danger, causing further stress, inflammation, and impaired cognition in a runaway, positive feedback loop,” he added.  

The fact that current levels of global stress have not led to widespread societal disorder could indicate an equally strong stabilizing effect from “controllers” such as trust in laws, science, and multinational organizations like the United Nations.   

“However, societal norms and institutions are increasingly being questioned, at times rightly so as relics of a foregone era,” said Prof Paul Verschure of Radboud University, the Netherlands, and a co-author of the article. “The challenge today is how we can ward off a new adversarial era of instability due to global stress caused by a multi-scale combination of geopolitical fragmentation, conflicts, and ecological collapse amplified by existential angst, cognitive overload, and runaway disinformation.”    

Reducing social media exposure as part of the solution  

The authors developed a mathematical model to test their ideas and explore ways to reduce stress and build resilience.  

“Preliminary results highlight the need for interventions at multiple levels and scales,” commented co-author Prof Julia Arciero of Indiana University, USA.  

“While anti-inflammatory drugs are sometimes used to treat medical conditions associated with inflammation, we do not believe these are the whole answer for individuals,” said Dr David Katz, co-author and a specialist in preventive and lifestyle medicine based in the US. “Lifestyle changes such as healthy nutrition, exercise, and reducing exposure to stressful online content could also be important.”  

“The dawning new era of precision and personalized therapeutics could also offer enormous potential,” he added.  

At the societal level, the authors suggest creating calm public spaces and providing education on the norms and institutions that keep our societies stable and functioning.  

“While our ‘inflammation map’ hypothesis and corresponding mathematical model are a start, a coordinated and interdisciplinary research effort is needed to define interventions that would improve the lives of individuals and the resilience of communities to stress. We hope our article stimulates scientists around the world to take up this challenge,” Vodovotz concluded.  

The article is part of the Frontiers in Science multimedia article hub ‘A multiscale map of inflammatory stress’. The hub features a video, an explainer, a version of the article written for kids, and an editorial, viewpoints, and policy outlook from other eminent experts: Prof David Almeida (Penn State University, USA), Prof Pietro Ghezzi (University of Urbino Carlo Bo, Italy), and Dr Ioannis P Androulakis (Rutgers, The State University of New Jersey, USA). 


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Acadia’s Nuplazid fails PhIII study due to higher-than-expected placebo effect

After years of trying to expand the market territory for Nuplazid, Acadia Pharmaceuticals might have hit a dead end, with a Phase III fail in schizophrenia…

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After years of trying to expand the market territory for Nuplazid, Acadia Pharmaceuticals might have hit a dead end, with a Phase III fail in schizophrenia due to the placebo arm performing better than expected.

Steve Davis

“We will continue to analyze these data with our scientific advisors, but we do not intend to conduct any further clinical trials with pimavanserin,” CEO Steve Davis said in a Monday press release. Acadia’s stock $ACAD dropped by 17.41% before the market opened Tuesday.

Pimavanserin, a serotonin inverse agonist and also a 5-HT2A receptor antagonist, is already in the market with the brand name Nuplazid for Parkinson’s disease psychosis. Efforts to expand into other indications such as Alzheimer’s-related psychosis and major depression have been unsuccessful, and previous trials in schizophrenia have yielded mixed data at best. Its February presentation does not list other pimavanserin studies in progress.

The Phase III ADVANCE-2 trial investigated 34 mg pimavanserin versus placebo in 454 patients who have negative symptoms of schizophrenia. The study used the negative symptom assessment-16 (NSA-16) total score as a primary endpoint and followed participants up to week 26. Study participants have control of positive symptoms due to antipsychotic therapies.

The company said that the change from baseline in this measure for the treatment arm was similar between the Phase II ADVANCE-1 study and ADVANCE-2 at -11.6 and -11.8, respectively. However, the placebo was higher in ADVANCE-2 at -11.1, when this was -8.5 in ADVANCE-1. The p-value in ADVANCE-2 was 0.4825.

In July last year, another Phase III schizophrenia trial — by Sumitomo and Otsuka — also reported negative results due to what the company noted as Covid-19 induced placebo effect.

According to Mizuho Securities analysts, ADVANCE-2 data were disappointing considering the company applied what it learned from ADVANCE-1, such as recruiting patients outside the US to alleviate a high placebo effect. The Phase III recruited participants in Argentina and Europe.

Analysts at Cowen added that the placebo effect has been a “notorious headwind” in US-based trials, which appears to “now extend” to ex-US studies. But they also noted ADVANCE-1 reported a “modest effect” from the drug anyway.

Nonetheless, pimavanserin’s safety profile in the late-stage study “was consistent with previous clinical trials,” with the drug having an adverse event rate of 30.4% versus 40.3% with placebo, the company said. Back in 2018, even with the FDA approval for Parkinson’s psychosis, there was an intense spotlight on Nuplazid’s safety profile.

Acadia previously aimed to get Nuplazid approved for Alzheimer’s-related psychosis but had many hurdles. The drug faced an adcomm in June 2022 that voted 9-3 noting that the drug is unlikely to be effective in this setting, culminating in a CRL a few months later.

As for the company’s next R&D milestones, Mizuho analysts said it won’t be anytime soon: There is the Phase III study for ACP-101 in Prader-Willi syndrome with data expected late next year and a Phase II trial for ACP-204 in Alzheimer’s disease psychosis with results anticipated in 2026.

Acadia collected $549.2 million in full-year 2023 revenues for Nuplazid, with $143.9 million in the fourth quarter.

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Digital Currency And Gold As Speculative Warnings

Over the last few years, digital currencies and gold have become decent barometers of speculative investor appetite. Such isn’t surprising given the evolution…

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Over the last few years, digital currencies and gold have become decent barometers of speculative investor appetite. Such isn’t surprising given the evolution of the market into a “casino” following the pandemic, where retail traders have increased their speculative appetites.

“Such is unsurprising, given that retail investors often fall victim to the psychological behavior of the “fear of missing out.” The chart below shows the “dumb money index” versus the S&P 500. Once again, retail investors are very long equities relative to the institutional players ascribed to being the “smart money.””

“The difference between “smart” and “dumb money” investors shows that, more often than not, the “dumb money” invests near market tops and sells near market bottoms.”

Net Smart Dumb Money vs Market

That enthusiasm has increased sharply since last November as stocks surged in hopes that the Federal Reserve would cut interest rates. As noted by Sentiment Trader:

“Over the past 18 weeks, the straight-up rally has moved us to an interesting juncture in the Sentiment Cycle. For the past few weeks, the S&P 500 has demonstrated a high positive correlation to the ‘Enthusiasm’ part of the cycle and a highly negative correlation to the ‘Panic’ phase.”

Investor Enthusiasm

That frenzy to chase the markets, driven by the psychological bias of the “fear of missing out,” has permeated the entirety of the market. As noted in This Is Nuts:”

“Since then, the entire market has surged higher following last week’s earnings report from Nvidia (NVDA). The reason I say “this is nuts” is the assumption that all companies were going to grow earnings and revenue at Nvidia’s rate. There is little doubt about Nvidia’s earnings and revenue growth rates. However, to maintain that growth pace indefinitely, particularly at 32x price-to-sales, means others like AMD and Intel must lose market share.”

Nvidia Price To Sales

Of course, it is not just a speculative frenzy in the markets for stocks, specifically anything related to “artificial intelligence,” but that exuberance has spilled over into gold and cryptocurrencies.

Birds Of A Feather

There are a couple of ways to measure exuberance in the assets. While sentiment measures examine the broad market, technical indicators can reflect exuberance on individual asset levels. However, before we get to our charts, we need a brief explanation of statistics, specifically, standard deviation.

As I discussed in “Revisiting Bob Farrell’s 10 Investing Rules”:

“Like a rubber band that has been stretched too far – it must be relaxed in order to be stretched again. This is exactly the same for stock prices that are anchored to their moving averages. Trends that get overextended in one direction, or another, always return to their long-term average. Even during a strong uptrend or strong downtrend, prices often move back (revert) to a long-term moving average.”

The idea of “stretching the rubber band” can be measured in several ways, but I will limit our discussion this week to Standard Deviation and measuring deviation with “Bollinger Bands.”

“Standard Deviation” is defined as:

“A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of the variance.”

In plain English, this means that the further away from the average that an event occurs, the more unlikely it becomes. As shown below, out of 1000 occurrences, only three will fall outside the area of 3 standard deviations. 95.4% of the time, events will occur within two standard deviations.

Standard Deviation Chart

A second measure of “exuberance” is “relative strength.”

“In technical analysis, the relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can read from 0 to 100.

Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.” – Investopedia

With those two measures, let’s look at Nvidia (NVDA), the poster child of speculative momentum trading in the markets. Nvidia trades more than 3 standard deviations above its moving average, and its RSI is 81. The last time this occurred was in July of 2023 when Nvidia consolidated and corrected prices through November.

NVDA chart vs Bollinger Bands

Interestingly, gold also trades well into 3 standard deviation territory with an RSI reading of 75. Given that gold is supposed to be a “safe haven” or “risk off” asset, it is instead getting swept up in the current market exuberance.

Gold vs Bollinger Bands

The same is seen with digital currencies. Given the recent approval of spot, Bitcoin exchange-traded funds (ETFs), the panic bid to buy Bitcoin has pushed the price well into 3 standard deviation territory with an RSI of 73.

Bitcoin vs Bollinger Bands

In other words, the stock market frenzy to “buy anything that is going up” has spread from just a handful of stocks related to artificial intelligence to gold and digital currencies.

It’s All Relative

We can see the correlation between stock market exuberance and gold and digital currency, which has risen since 2015 but accelerated following the post-pandemic, stimulus-fueled market frenzy. Since the market, gold and cryptocurrencies, or Bitcoin for our purposes, have disparate prices, we have rebased the performance to 100 in 2015.

Gold was supposed to be an inflation hedge. Yet, in 2022, gold prices fell as the market declined and inflation surged to 9%. However, as inflation has fallen and the stock market surged, so has gold. Notably, since 2015, gold and the market have moved in a more correlated pattern, which has reduced the hedging effect of gold in portfolios. In other words, during the subsequent market decline, gold will likely track stocks lower, failing to provide its “wealth preservation” status for investors.

SP500 vs Gold

The same goes for cryptocurrencies. Bitcoin is substantially more volatile than gold and tends to ebb and flow with the overall market. As sentiment surges in the S&P 500, Bitcoin and other cryptocurrencies follow suit as speculative appetites increase. Unfortunately, for individuals once again piling into Bitcoin to chase rising prices, if, or when, the market corrects, the decline in cryptocurrencies will likely substantially outpace the decline in market-based equities. This is particularly the case as Wall Street can now short the spot-Bitcoin ETFs, creating additional selling pressure on Bitcoin.

SP500 vs Bitcoin

Just for added measure, here is Bitcoin versus gold.

Gold vs Bitcoin

Not A Recommendation

There are many narratives surrounding the markets, digital currency, and gold. However, in today’s market, more than in previous years, all assets are getting swept up into the investor-feeding frenzy.

Sure, this time could be different. I am only making an observation and not an investment recommendation.

However, from a portfolio management perspective, it will likely pay to remain attentive to the correlated risk between asset classes. If some event causes a reversal in bullish exuberance, cash and bonds may be the only place to hide.

The post Digital Currency And Gold As Speculative Warnings appeared first on RIA.

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