RESEARCH BULLETIN November 24, 2020...Nov 24, 2020 · American Electric Power 6.125% (AEPPL), which mandatorily converts on 3-15-22, was sold and replaced with AEPPZ 6.125%, which

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RESEARCH BULLETIN November 24, 2020 Nancy Tengler, Chief Investment Officer

Markets at a Glance

Index Prices as of 11/20/2020, Bond Yields as of 11/23/2020

CURRENT

PRICE

ONE MONTH

CHANGE

YEAR TO DATE

CHANGE

S&P 500 3,557.54 3.32% 10.11%

Dow Jones Industrial 29,263.48 3.37% 2.54%

MSCI World Index 2,540.02 4.84% 7.70%

10-Yr US Treasury Yld 0.8488 5.76% -55.73%

30-Yr US Treasury YLD 1.5472 -2.75% -35.25%

Source: FactSet and Bloomberg

Source: FactSet

Source: FactSet

S&P 500

Dow Jones Industrial

Laffer Tengler Research Bulletin

November 24, 2020 Page 2


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VALUES AS OF

11/23/2020

CURRENT

PRICE

ONE MONTH

CHANGE

YEAR TO DATE

CHANGE

Crude Oil WTI $43.00 11.51% -29.58%

Crude Oil Brent $45.95 13.57% -30.38%

Natural Gas $2.718 -10.12% 24.17%

Gold $1,838.64 (spot) -3.33% 21.18%

Silver $23.59 (spot) -2.82% 32.14%

Copper $325.30 5.29% 16.30%

Platinum $928.89 (spot) 6.21% -3.89%

Corn $426.00 1.97% 9.86%

Wheat $599.75 -3.27% 7.34%

Source: Bloomberg

The Outlook for Equities

from Nancy Tengler, Portfolio Manager and Chief Investment Officer

The market rally in November is impressive (still up almost 9% despite last week’s decline). Given; there is still a great deal of uncertainty near term re:

• what shutdowns will look like across the nation • whether the acceleration of COVID will overwhelm hospital beds and spark more

draconian shutdowns • the implications for economic growth—particularly in Q1 • the rapidity and breadth of vaccine distribution will influence the reopening trade • the final results of Senate election as well as day one regulatory implications of a potential

Biden Administration. We expect volatility to continue as the tug of war between shutdown and vaccine continue. We have abandoned the growth vs. value debate, as we think you can make money in great companies who are generating long-term sustainable top and bottom-line growth. We have been advocating GARP for some time and have placed our strategy bets in those stocks we believe will benefit no matter what. While we think there may be a cyclical trade in value, we are investing our clients’ money for the next three to five years, and we think the long-term trade is still tilted to growth (at a reasonable price). Let’s dig in:

• Consumer: As we discussed last time I was on, consumer free cash flow is at a historic high thanks to low interest rates, low energy costs and muted inflation—despite still elevated levels of unemployment and unemployment subsidies declining. The consumer balance sheet is also in good shape. Savings levels earlier this year were historic--though the level has declined, it still represents pent up demand.




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Spending has certainly slowed, reflected in most recent retail sales numbers, but amazingly, the consumer balance sheet is in good shape and we expect will continue to spend (in fits and starts). We are not assuming additional stimulus, though we think it is likely once the election is certified. We also believe the Fed stands ready to expand the balance sheet beyond $7T if Congress doesn’t act to shore up individuals.




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• Economy: lagged effects of both fiscal and monetary stimulus. PMIs have continued to be expansionary, October industrial production advanced for the fifth time in five months—up 13% since bottoming in April; capacity utilization improved for the fifth time in six months. All good. Combine this with our belief that U.S. companies are onshoring, and we expect to see manufacturing continue to improve. Rail shipments and copper both reflect underlying strength. • Re-regulation: Our friends at Cornerstone expect that the costs of regulation under a President Biden will match or exceed the levels under President Obama. Yikes. It is also important to note that the majority of likely regulatory executive orders day one applies almost exclusively to energy. As if the troubled sector didn’t have enough problems… this is why we have expected a cyclical trade in the stock around the vaccine but do not believe it is a sustainable trade.




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Why we are warming up to banks: We recently added a position in PNC—a high quality regional. We took the proceeds from some of the asset managers which have had a nice run and selected technology (though we are still overweight tech). Bank lending standards are easing and the yield curve has steepened. Marginally optimistic for lenders. We are still market weight. Companies flush with cash from well received corporate bond offerings—expect M&A to accelerate. Real returns for most bonds holders are negative to zero. This is great for companies financing their operations in the debt market. R&D is likely to increase along with capex which should continue to drive productivity. M&A will also continue in 2021 and the added effect is that it is very difficult for investors to make money in bonds, so we expect to see flows back into equities as the uncertainties moderate. We believe we are in the very early stages of a new bull market. Lagged effects of stimulus will carry us through the first half and then earnings should kick in. The increase in dividends this year reflect management optimism. The narrowing of HY spreads look toppy to us with default rates in the 6-7% range expected for 2020 and a modest increase in 2021. Still, the success of companies raising cash in the bond market is bullish. We are not unmindful of the risks—and there are plenty that we can see/anticipate and the ever-present risk of another black swan event, still we believe we are in the early stages of a new bull market. Here are some of the names we have been focusing on in our large cap strategies.

Convertible Securities

from Stan Rogers, Portfolio Manager

News/Earnings: Palo Alto Networks (PANW) released Q1 earnings and revenue that exceeded estimates. The company also raised earnings, revenue, and billings guidance for Q2 and FY21. Overall, it was a very bullish report, and the stock reacted favorably to the news. Also, earlier in the month, PANW announced the acquisition of Expanse for $800 million. Expanse will supplement PANW’s CORTEX product set, offering customers an attacker’s view of exposed or potentially vulnerable technology assets. Transactions: We added approximately 1% to our Boston Scientific (BSX) 5.5% mandatory convertible preferred. The stock had come in as COVID cases spiked, causing fears of doctor visits and elective procedures to potentially slow. However, with positive announcements on vaccines (Pfizer and Moderna), 2021 could see a return to normalcy for demand derived from elective




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procedures. BSX also recently gained FDA approval for the Ranger drug-coated balloon stent. BSX, from the most recent earnings release, communicated that growth has continued to improve on a month-to month basis. The company also announced the recall and termination of the LOTUS transcatheter aortic valve. While the financial impact is minimal, it did cause some frustration among investors. The preferred is very attractive, with almost a 5% income pickup over the non-dividend paying common with excellent equity sensitivity to an improving backdrop in the medical-technology space. Institutional Composite Swap: American Electric Power 6.125% (AEPPL), which mandatorily converts on 3-15-22, was sold and replaced with AEPPZ 6.125%, which mandatorily converts on 8-15-23. This swap was a valuation decision, as the longer-dated security should be worth more than the shorter one. Also, we sold a security with only 6 dividends left and replaced it with a security that has 11 dividends remaining. SEI notes: Energizer Holdings (ENR) announced earnings that fell shy of estimates, while sales were above projections. Most of the shortfall was attributed to increased costs associated with COVID and increased costs of goods sold. Management indicated that these headwinds should improve in the next quarter or two, but the stock was still weak after the report. The company also announced that current CEO Alan Hoskins would retire on January 1, 2021 and be replaced by current COO Mark Lavigne.

Bonds & Fixed Income

from Jason Weaver, Head Trader and Portfolio Manager

No updates for this period.

Equity Hedging

from David Jeffress, Portfolio Manager

No updates for this period.




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Equities from Steven Shepich, Portfolio Manager

Better than expected economic strength coupled with positive news on the COVID vaccine front may be giving management teams the ammunition they need to provide investors with dividend increases. After a couple of slow quarters, we are starting to see dividend increase announcements normalize, both in the terms of the number of announcements and the rate of growth. Quarter to date, seven companies in the Dividend Growth strategy have announced dividend increases at an average rate of 9% year-over year. We are projecting one increase before the year is over.

Record Date

New Dividend

Yr/Yr Change

Texas Instruments Inc. 10/30/20 0.90 13.3%

Pinnacle West Capital Corp 11/2/20 0.78 6.1%

Starbucks Corp 11/10/20 0.41 9.8%

Snap-on, Inc. 11/20/20 1.08 13.9%

McDonald's Corp 12/1/20 1.25 3.2%

Tyson Foods 12/1/20 0.42 6.0%

Crown Castle International 12/15/20 1.20 10.8%

Average 9.0%

Portfolio Companies’ Earnings Releases for This Period

Wal Disney Company (DIS) Cisco Systems, Inc. (CSCO) Palo Alto Networks, Inc. (PANW) Walmart Inc. (WMT) Home Dept, Inc. (HD) Target Corporation (TGT) Lowe’s Companies, Inc. (LOW)




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Nancy Tengler’s Recent USA Today Articles What 401(k) Moves Should You Make Now that the Election is Over? (Nov 10) 3 Reasons Stocks Will Probably Rise No Matter Who Wins the Election (Oct 11) Companies Are Staying Private Longer, Should You Invest Pre-IPO (Sept 27) Nancy Tengler’s Recent Media Appearances This Is An ‘Early Stage Bull Market’, Stocks Continue to Outperform (Fox Business, Nov 16) Energy’s Best Week Ever – Two Experts on Whether It Can Continue (CNBC, Nov 13) Some of 2020’s Hottest Stocks Just Had an Awful Week (CNBC, Nov 13) Pfizer’s Vaccine Propelling Stocks (Fox Business, Nov 10) Stock Market Investment Strategy Based on 2020 Election Results (Invest Diva, Nov 6) I Think You Sit Back and Don’t Take on Additional Risk (CNBC, Nov 3) Activision Blizzard, Take-Two Earnings (CNBC, Oct 29) These Shares Have Rocketed Off the March Lows (CNBC, Oct 26) ‘Enough Already’, Says Investor After Latest Quarterly Disappointment (CNBC, Oct 26) Intel Falls After Reporting Data Center Weakness (CNBC, Oct 23) Stealth Consumer Stocks: These Shares Have Rocketed Off the March Lows (CNBC, Oct 23) One Underdog Sector is Beating the Market This Month (CNBC, Oct 19) A Chipmaker and Railroad Stock: Traders Share the Top Earnings Reports (CNBC, Oct 16) What’s Next for the Utilities Sector, According to these Investors (CNBC, Oct 16)

Completed Analysis Item(s) for Portfolio Companies Broadcom Inc. (AVGO) FedEx (FDX) International Flavors & Fragrances, Inc. (IFF) Palo Alto Networks, Inc. (PANW) Morgan Stanley (MS) Boeing (BA) Goldman Sachs (GS) Visa (V) AbbVie (ABBV) Tiffany & Co. (TIF) Walt Disney Company (DIS) International Paper Company (IP) Salesforce.com (CRM) Micron (MU) Pfizer (PFE) AT&T (T) Boston Scientific Corp. (BSX) Western Digital Corporation (WDC) Fortive Corp. (FTV) Pinnacle West Capital Corporation (PNW)




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Danaher Corporation (DHR) Southwest Airlines Co. (LUV) QUALCOMM Incorporated (QCOM) Dominion Energy (D) Booking.com (BKNG) Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI) Becton, Dickinson and Company (BDX) American Tower Corporation (AMT) Illinois Tool Works (ITW) Square, Inc. Class A (SQ) Ecolab Inc. (ECL) Snap-on Incorporated (SNA) Prudential Financial, Inc. (PRU) ServiceNow, Inc. (NOW) Facebook, Inc. (FB) Home Depot, Inc. (HD) Apple Computer, Inc. (AAPL) Walmart Inc. (WMT) Starbucks Corporation (SBUX) Microsoft Corp. (MSFT) Johnson & Johnson (JNJ) Cisco Systems, Inc. (CSCO) Amgen Inc. (AMGN) JPMorgan Chase & Co. (JPM) Texas Instruments Inc. (TXN) United Parcel Service, Inc. (UPS) McDonald’s Corporation (MCD) PepsiCo, Inc. (PEP) Medtronic Plc (MDT) Dominion Energy (D) PNC Financial Services Group, Inc. (PNC) BlackRock, Inc. (BLK) Roku, Inc. (ROKU) Chevron Corporation (CVX) Lam Research Corporation (LCRX) II-VI Incorporated (IIVI) 3M Company (MMM)




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Strategy Change Notes

Changes to Equity Growth

No strategy changes for this period.

Changes to Equity Income

TICKER NAME STRATEGIC

CHANGE

TACTICAL

CHANGE

REASON

BLK BlackRock, Inc. 2.50% - 2.00% No Change Sell down to 2.50%; reducing

position size due to valuation.

TROW T. Rowe Price

Group

2.50% - 2.00% 2.50% - 2.00% Sell down to 2.00%; reducing

position size due to valuation.

TXN Texas

Instruments

Incorporated

No Change No Change Sell down to 4.20%; reducing

position size due to

guidelines.

PNC PNC Financial

Services Group

0.00% - 1.50% 0.00% - 1.50% Buy up to 1.50%; initiating

new position.

Changes to Concentrated Equity

No strategy changes for this period.




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THE LAFFER TENGLER INVESTMENTS DISCIPLINE

Discipline is key to sustainable long-term total returns:

• At Laffer Tengler Investments we use two, time-proven stock valuation metrics (both pioneered

by our team) that are consistent and robust indicators of value: Relative Dividend Yield (RDY) and

Relative-Price-to-Sales Ratio (RPSR).

• Why not use earnings like almost everyone else? Because earnings are often an unreliable

indicator of value. In May of 2016, I published the following:

Earnings reported by corporations have always been subject to the vagaries of accounting

gimmickry. You don’t have to be a novice to scratch your head at the way managements (or

governments for that matter!) account for various items.

A recent case in point: The Wall Street Journal (Thursday, February 25, 2016) reported that

according to FactSet, pro forma earnings for S&P 500 companies rose 0.4% in 2015. Using

generally accepted accounting principles or GAAP, earnings per share actually fell 12.7% in 2015

(this according to S&P Dow Jones Indices). The author’s point is that according to GAAP earnings,

investors are paying a great deal more for stocks than they think. The price-to-earnings ratio (P/E)

on pro forma earnings (which is the most commonly accepted method) is 17x 2015 earnings. But

when GAAP earnings are considered, the P/E jumps to more than 21x.

It is important to remember that the P/E ratio for any given stock is only as good as the price

input (a fact) and the reported earnings input (apparently not a fact at all).

• RDY measures the yield of a

particular stock compared to the yield

on the S&P 500 and does so over long

periods of time. Since a stock’s relative

yield and relative price are inverse, we

can generally conclude that as a stock’s

yield is rising, its price is declining—

similar to a bond. Consequently, a

rising RDY provides an opportunity

for investors to at least consider an

underperforming, cheaply valued

stock for purchase.




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• Company managements and boards of directors pay the dividend out of free cash flow, not

earnings. In maturing U.S. companies these seasoned professionals often operate within a

“dividend paying culture” and set the dividend as a portion of long-term, sustainable real earnings

power because management teams are loathed to cut dividends.

• The relative nature of the RDY metric is also important because it measures the relative

attractiveness of a stock compared to its own history and compared to the S&P 500. (In 1992, I co-

authored Relative Dividend Yield,

Common Stock Investing for Income

and Appreciation with Tony Spare)

• RPSR: In fallen-angel growth

companies where the dividend is less

of a factor in management’s calculus,

we look at sales—a fact. Rarely are

sales manipulated and when they are

someone usually goes to jail. The

price-to-sales ratio measures how much investors are paying for a unit of sales, the relative price-

to-sales ratio reveals what investors have historically paid for a particular company’s sales compared

to what they are paying for the sales of all the companies in the S&P 500. In 2003, I authored New

Era Value Investing, John Wiley & Sons where I outline the benefits of RPSR in stock selection.

• Discipline, in summary, is the only way to navigate volatile markets. We remain disciplined

and over time that consistency generates excess return.

Fundamental Research reduces the ownership of terminally cheap companies:

Meet the 12 Fundamental Factors.

Our proprietary research approach analyzes fundamental qualitative and quantitative factors.

• Qualitative Factors: Catalyst for Outperformance, Franchise Value & Market Growth, Top

Management/Board of Directors. • Quantitative Factors: Sales Growth, Operating Margins, Relative P/E, Positive Free Cash

Flow, Dividend Coverage/Growth, Asset Turnover Ratio, Use of Cash (buyback, debt, div.),

Leverage, Financial Risk.




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General Disclosures

Advisory services offered through Laffer Tengler Investments, Inc. Information and commentary provided by Laffer Tengler Investments, Inc. (“Laffer Tengler”) are opinions and should not be construed as facts. The market commentary is for informational purposes only and should not be deemed as a solicitation to invest or increase investments in Laffer Tengler products or the products of Laffer Tengler affiliates. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. There can be no guarantee that any of the described objectives can be achieved. Laffer Tengler Investments, Inc. does not undertake to advise you of any change in its opinions or the information contained in this report. Past performance is not a guarantee of future results. Information provided from third parties was obtained from sources believed to be reliable, but no reservation or warranty is made as to its accuracy or completeness. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. The price of any investment may rise or fall due to changes in the broad markets or changes in a company’s financial condition and may do so unpredictably. Laffer Tengler Investments, Inc. does not make any representation that any strategy will or is likely to achieve returns similar to those shown in any performance results that may be illustrated in this presentation. There is no assurance that a portfolio will achieve its investment objective. Definitions and Indices The S&P 500 Index is a stock market index based on the market capitalization of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard & Poor’s. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions, or other expenses of investing. Investors cannot make direct investments into any index. Laffer Tengler Investments, Inc. is a Registered Investment Advisor. Registration with the SEC or a state securities authority does not imply a certain level of skill or training. Laffer Tengler’s advisory fee and risks are fully detailed in Part 2 of its Form ADV, available on request.

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RESEARCH BULLETIN November 24, 2020...Nov 24, 2020 · American Electric Power 6.125% (AEPPL), which mandatorily converts on 3-15-22, was sold and replaced with AEPPZ 6.125%, which