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Foreward The markets over the past six months have been challenging to navigate. But it would be even more of a head scratcher if they weren't with all that’s going on. Brexit is still lingering, the U.S. - China trade war seems to get further and further away from a resolution as the days pass. Dooms Day analysts are getting louder and louder with their warnings of an upcoming recession, and the Dow is still struggling to break and hold the 27,000 level. What does an investor do in this type of environment? They go long like a Hail Mary play, but without the desperation. Long term investing has a way of smoothing everything out. If an investor started investing in 2000, by the end of 2001 it would be understandable if they wanted to take their ball and go home, after dealing with the dot.com bubble and 9/11. However, if that investor stuck in there until 2019, they’d be doing very well now. That is where we are, looking for companies worth holding over the long term. “Tough times don’t last, tough people do” The current market conditions and the uncertainty won’t last, but good companies will. Revenue may decline for a year or two, margins may contract, earnings may stay stagnant, but the good companies will make it through, and be worth even more for making it through. Thanks for checking out The Seville Report Investment Newsletter, we greatly appreciate it Sincerely, Paul Black 2
Table of Content 4. Ciena 12. Sinclair Broadcast Group 22. The Car Subscription Thing 29. Video Games Esprots & Trading Trends 38. Aurora Cannabis 44. Quarterly Economic Data 47. The Seville Report Portfolio Review 56. How to Use The Seville Report 58. Stocks That Didn’t Make it 59. Glossary Remember 62. Things to Know These? @SevilleReport facebook.com/SevilleReport the_seville_report 3
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What Does Ciena Do Ciena Corporation is a network strategy and technology company, which provides solutions that enable a range of network operators to adopt communication architectures and deliver an array of services, relied upon by enterprise and consumer end users. It provides equipment, software and services that support the transport, switching, aggregation, service delivery and management of voice, video and data traffic on communications networks. It segments include Networking Platforms; Software and Software-Related Services, and Global Services. The Networking Platforms segment consists of Converged Packet Optical, Packet Networking and Optical Transport product portfolios. The software business is engaged in the development and licensing of element and network management software and software-related services that support its hardware offerings. It offers a suite of consulting and support services that help its customers to design, optimize, deploy and maintain their communications networks. 5
Why Invest in Ciena • Global shift in technology favors Ciena • Global trade issues and concerns over homeland security can benefit Ciena • Continued Revenue Growth From financial television to YouTube tech reviewers to everyday smartphone users, 5G is on everyones mind. 5G is said to be superior to what we currently have in place, and is a critical piece of infrastructure needed to maximize the potential of autonomous vehicles and IoT technology. 5G is being slowly rolled out across the U.S. and we believe Ciena is in position to benefit from companies upgrading to 5G technology. Huawei is seen as the leader in 5G technology, and they were set to dominate the global market with their 5G offerings. Now however, they’ve been labeled a national security risk. This has opened up doors for Ciena in the U.S. and in Europe, where some companies believe they have an over- dependence on Chinese vendors. The issues between China and the U.S. and the U.S. and Huawei provides more opportunities for Ciena. Internally, Ciena has been growing revenue going back to 2015. It’s not eye popping revenue growth, but it is growth. During the company’s most recent earnings call, management raised revenue forecast for this year, which is a great sign when so many financial analysts and economist are pointing towards a recession in the near future. 6
Also, as of their last earnings report Ciena has almost no revenue exposure to China, so they may be able to maneuver the U.S. - China trade war slightly unharmed. We believe Ciena represents a solid investment opportunity at these levels. While we touched on the impact 5G should have on the company, it should be noted that Ciena is a respected company within the Communication and Networks industry. The company may not make any major headlines or show staggering year-over-year revenue growth, but we believe the company is safe, and has the ability to increase in value over the long term. What are The Investment Risk • Possibility of a Global Economic Slow Down • Inconsistent Earnings • Huawei and the U.S. Re-establish Working Relationship for 5G Tech The current state of the economy, U.S. and globally presents a major investment risk. If the global economy does go into a recession period, companies like AT&T may cut their spending on 5G upgrades. It is inevitable that companies like AT&T will have to upgrade to compete in their field, but an economic slow down could force them to roll out 5G in 10 cities versus 20 cities in 2019. This cut back on spending could negatively impact Ciena. This also goes for Ciena’s other customers who would likely cut spending during an economic slow down. 7
The company’s five year track record of net income is definitely of concern. Net income was negative in 2014, had a wild jump up in 2017, and was negative in 2018. We try to invest in companies with a growing or stable net income, so this is an aspect of the company we will be keeping an eye. Although the Ciena has almost no revenue exposure to China, the company does have exposure to Mexico, and this could present a problem for Ciena. During the company’s earnings call, Ciena’s management warned that gross margins for Q3 2019 could be impacted by 1% if the 5% tariff on Mexican goods went into effect. Also, Huawei and the U.S.government could come to an understanding, which allows Huawei to continue doing business with U.S. companies. This could really impact Ciena over the short term. We’ve taken the risk involving Ciena into consideration and believe the company is worth an investment. The company has shown an ability to grow revenue over the past several years. If it can add stability and growth to net income, and take advantage of the opportunity that has presented itself in the 5G market, Ciena should do well, and the stock price should follow. 8
Ciena Peer Review Ciena’s numbers, when compared to it’s peers and the industry and sector averages doesn’t really jump out. But it in areas like profit margin, operating margin, return on assets, return on equity, Ciena’s numbers stand out against it’s peers. 9
Ciena Buy Zone $42.00 - $34.00 Ciena is currently trading at the top of our buy zone range. Although we find Ciena to be a quality investment, the unpredictable global environment can easily cause the stock to drop to the low of our range. We like the company enough to buy it down to the $34 level. Below $34 per share we’ll re-evaluate the company. 10
What is Wall Street Saying 8/30/19 Stifel Nicolaus upgraded to Buy Price Target $54.00 8/29/19 Rosenblatt Securities upgraded to Buy Price Target $47.00 8/27/19 B. Riley FBR upgraded to Buy Price Target $55.00 8/21/19 Nomura upgraded to Buy Price Target $52.00 8/07/19 Barclays upgraded to Buy Price Target $50.00 Summary Top Reasons to Buy 1. Global technology shift to 5G should favor Ciena. 2. U.S. - China and U.S. - Huawei issues should favor Ciena’s growth in 5G. Ciena has almost no revenue exposure to China. 3. Revenue growth going back to 2015, with a recent raise in revenue guidance for 2019 Top Reasons to Avoid 1. Uncertain global economic outlook. 2. Reason number one could lead to reduced spending by Ciena customers 3. U.S. could reverse their current standing on Huawei. 11
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What Does Sinclair Broadcast Do? Sinclair Broadcast Group, Inc. is a television broadcasting company. The Company focuses on providing content on its local television stations and digital platforms. The Company's segments are broadcast, other and corporate. The Broadcast segment consists of its broadcast television stations. The content distributed through its broadcast platform consists of programming provided by third-party networks and syndicators, local news, it owns networks, and other original programming produced by it. It also owns digital and Internet media products that are complementary to its portfolio of television station related digital properties. It focuses on offering marketing solutions to advertisers. Its other business consists of original networks and content, digital and Internet solutions, technical services and other non-media investments. 13
Why Invest in Sinclair Broadcast • Broadcast TV Isn’t Dead Yet • The Move Into Sports • Solid Revenue Growth • Dividend and Share Repurchase Why invest in a broadcast television outfit as the streaming wars heat up and just about everything entertainment is going digital? Because there’s still a population of Americans that rely on broadcast television for their entertainment and rely on broadcast news for their information. According Nielsen1 16 million homes were watching television by using an antenna. There is a demographic of Americans, usually older, over 55 years old and living on a fixed income that can’t afford cable. Broadcast TV isn’t as sexy as a Netflix or Disney Plus, but broadcast TV isn’t dead. Sinclair understands how important sports entertainment is, and they’ve spent big to acquire sports broadcasting rights. Most recently, Sinclair, along with an investment group purchased Disney’s share of the YES Network, home to the NY Yankees for $3.74 billion. Sinclair also owns a piece of The Marquee Sports Network the new television home for the Chicago Cubs which will launch in 2020. Sinclair also recently closed a deal to acquire 21 regional sports networks from Fox, and is in talks to acquire four regional sports outlets owned by AT&T. Sports are still that one thing we all want to catch live, and will sit through a commercial to watch. Even without commercials, no one wants to binge watch a baseball season. 14
As displayed in the graphic for Sinclair Broadcast Group, the company has been growing revenue since 2015, which is impressive considering the move by the masses to digital entertainment, digital streaming and the like. Revenue is expected to drop in 2019, this not being an election year, political spending is way down and has impacted the companies revenue. However, 2020 will be a big political ad spending year, which will likely benefit Sinclair. Sinclair does pay a small dividend and is repurchasing it’s shares. The company pays a $0.20 dividend, not enough to make an investor rich, but enough to buy his or her’s patience while the stock does what we expect. The company repurchased 500,000 of its own shares in Q2 2019 at an average of $40.10 per share. The investment community is split on company share buybacks, for the record we love them. The company has been able to produce positive free cash flow over the past five years and is expected to produce another solid year of positive free cash flow. An investment in Sinclair flies in the face of where most investment money is going when it comes to entertainment companies. Netflix, Disney, AT&T. and Comcast with their established and or ready to be released streaming services definitely get the attention when it comes to entertainment related investments. Sinclair however is slow, boring, and profitable now. Only time will tell if Disney, AT&T, and Comcast will be able to make a profit with their streaming offerings (we don’t think all of them will be profitable). We think we have an idea of what Sinclair Broadcast is attempting to build, we do think it will pay off in the long run. There are some causes for concern which we’ll discuss, but overall we believe Sinclair Broadcast Group is a solid investment idea. 15
Nielsen Reference 1. https://techcrunch.com/2019/01/15/nielsen-16m-u-s-homes-now-get-tv- over-the-air-a-48-increase-over-past-8-years/ What are the Investment Risk • Reshaping of the Entertainment Landscape • Debt The entertainment landscape is changing. The days of all in home entertainment coming directly from the television are over. People are getting their entertainment from a number of different places. This trend isn’t particularly great for a traditional television broadcast provider. There is more content being consumed than ever before, but its not all coming from television, which hurts companies like Sinclair. As of the Q2 2019 Sinclair holds $3.7 billion in debt, and under a $1 billion in cash and cash equivalent. The debt, has been used to fund acquisitions, which the company hopes will fuel revenue growth in the future. If the assets acquired like the Yes Network or the 21 regional sports networks don’t show an immediate payoff, Wall Street will turn negative on the stock. 16
We would warn to not take the fact that we’ve written more about why we like the company versus the risk of the company as an overwhelming vote of confidence for an all in investment on Sinclair. While there aren’t a long list of risks, the risk are very significant. Sinclair has put a lot of eggs in the sports content basket, which could not work out as planned. The $3.7 billion paid to acquire a piece of the Yes Network is $500 million less than what Fox paid for that piece of the Yes Network in 2014. With all the risk taken into consideration, we like the company but are cautious. Sinclair Peer Review 17
When compared to this small number of peers, there isn’t much that stands out from Sinclair Broadcast Group. But we do like the companies ability go generate free cash flow. Also, those recently acquired 21 regional sports networks generated a combined revenue of over $3 billion in 20182 PR Newswire 2. https://www.prnewswire.com/news-releases/sinclair-broadcast-group-to- acquire-21-regional-sports-networks-from-disney-at-a-valuation-of-10-6- billion-300843719.html Sinclair’s Buy Zone $30.00 -$42.00 We like Sinclair's stock between $30 per share and $42 per share. The company is currently trading at the top of our buy range. Below $30 is where we will re-evaluate the company. 18
What is Wall Street Saying 8/21/19 Stephens graded a Buy Price Target $80.00 8/14/19 B.Riley FBR graded a Buy Price Target $61.00 8/08/19 Guggenheim graded a Buy Price Target $52.00 8/07/19 Benchmark graded a Buy Price Target $80.00 8/07/19 Evercore ISI upgraded to Hold Price Target $50.00 Summary Top Reasons to Buy 1. Broadcast TV still has a place and has proven it can still make money in digital revolution 2. Sinclair’s push in acquiring sports related content could have a big payoff. 3. Solid revenue growth leading up to 2019. The company is able to generate free cash flow, the company also pays a dividend. Top Reasons to Avoid 1. Uncertain entertainment landscape. 2. Sinclair Broadcast’s debt burden used to finance acquisitions. If acquisitions don’t pan out or pan out quick enough, the stock could lose value. 19
“To acquire money requires valor, to keep money requires prudence, and to spend money well is an art.” – Berthold Auerbach 20
News and Outrage for September 1, 2019 Government Targets Big Tech. June 3. The U.S. Government targets big U.S. Tech companies with a possible probe into the practices and operations of big tech. Tech stocks, specifically FAANG sell off on the news Facebook Gets fined July 12. Facebook receives a $5 billion fine by the FTC as a part of a settle with the FTC. It represents the largest penalty ever imposed on a company for violating consumers’ privacy rights. Equifax Reaches Fine and Settlement over 2017 Data Breach July 22. Equifax reached a $671 million settlement agreement pertaining to its data breach and cover up from 2017. Boris Johnson Becomes the U.K. Prime Minister July 24. Boris Johnson, AKA the Donald Turmp of the U.K. replaces Theresa May. Brexit now falls to Johnson. Capital One Reports a Data Breach July 29. Capital One reports a data breach that impacts 106 million people. The hacker was apprehended a few days after the news broke.. The U.S. Threatens a 10% Tariff on an Additional $300 Billion Worth of Chinese Goods. August 2. The White House threatens China with additional tariffs, just days after reporting trade talks were progressing. Chinese Yuan Drops to a Record Low August 5. China fights back against tariffs by devaluing the Yuan. The news had a severe impact on the markets, the Dow closed down 767 points on the news. 21
While competitive gaming has been around for almost 20 years, (do you remember the EA Madden Bus?) this is its second wave of competitive gaming. The $3 million jackpot and even the $50,000 awarded to places 25 - 100 are a signal that there is a financial future in gaming professionally. No longer will you only hear “did you finish your homework?” The question will also be accompanied by “did you get any gaming in today?” Esports is here, and it’s growing. AMD, Broadcom, Dell (AlienWare is a subsidiary of Dell), Intel, Logitech, Nvidia, Qualcomm are all well known names in gaming. We looked at seven charts of seven major players in the gaming world. We isolated support and where we’d likely enter a trade in hopes of riding the eSports trend. The charts displayed show the last three years of price action, and the blue line represents the 200 day moving average. 31
Advanced Micro Devices (AMD) has been on a massive run since mid 2018 after years of trading sideways. While on its run up it has reacted strongly around its 200 day moving average. Our thought is that the trend continues with another touch of the 200 day moving average, then a move up. Broadcom (AVGO) has traded sideways around it’s 200 day moving average, likely chopping traders up along the way. The safe play may be the bounce off of that trend line and the break above the 200 day moving average. 32
Dell Technologies (DELL) recently became a public company again after going private in 2013. Alienware, which is a relevant name in PC gaming is a Dell subsidiary. The chart isn’t pretty, the play is off of the last level of support where the stock bounced in early 2019. This is where we have our support line (black line). 33
Intel (INTC) On the Intel chart the 200 day moving average is moving horizontally, which is not a good signal for a trend, up or down. As our support line shows Intel has found support several times around the $41 - $44 price level. Buying off of this level is the play. 34
Logitech (LOGI) Logitech’s stock did well in early 2018 bouncing off of its 200 day moving average, but didn’t bounce in late 2018. The small up trend which started in 2019 is what we’ve isolated. Can Logitech hold the trend? The 200 day moving average is starting to slope downward and is converging with the trend line. The play is the touch off of the trend line. Nvidia (NVDA) Nvidia’s chart is moving towards a squeeze. Where the 200 day moving average is closing in on the level of support. When this happens the stock will break out or break down when there is no space between the 200 day moving average and the line of support. Our thought is with the fundamental boost of gaming and E-sports the stock will squeeze upwards and back towards $200 per share 35
Qualcomm (QCOM) Qualcomm over the past few years has been fun for day traders, hell for trend traders, and baffling for buy and hold investors. The stock has been moving sideways and trading over and under the 200 day moving average. The support line around the $50 area looks to be the safest best to enter Qualcomm. It’s reached that price area ! several times and made a move upwards. 36
Video games have come a long way Contra 1987 Fortnite 2017 It should be noted that we took no company fundamentals into consideration. Our thought is the fundamentals that comes with a growth in serious gaming will have payoffs - in varying degrees - for these companies. Based on that we would enter where at a price we believe is technically sound and wait for the gaming fundamentals to push the stock price up. It should also be noted that many of these companies have a large exposure to China, and the U.S.-China trade war is hinderance to these companies fundamentals. Without a sound resolution between the U.S. and China these stock prices could end up trading below support levels, trend lines, and their 200 day moving averages. All of these stocks have gaming and Esports priced in to some degree. Our thought is that another round of Esport and gaming hype will push these stocks up. Let us know what you think about Esports. Is it a passing fad or is it here to stay? You can give us your opinion @sevilleReport #eSports #gaming 37
Aurora Cannabis The marijuana business represents serious growth potential for an investors money. This quarter we take a look at Aurora Cannabis, and put it to our 5 question test to find out if it is worth an investment. 38
Learn Think Invest aurora. Est. 2013 (ACB) EdAlmboernttaonBlunt20.4% THC CanadaAurora’s $5.49 Thor Dried Flower NYSE 1. D o e s t h e c o m p a n y 2. Is the company have a product or spending on research and service that can capture a sizable development? market share? In 2018 Aurora’s R&D spend was Aurora offers a decent mix of $1.6 million up from $314,000 in products. Dry flower, oils, soft gels, 2017. Aurora’s 2018 R&D represents and gel caps. Aurora states they 3% of 2018 Total Revenue. The are focused on having vapes and company boast that it has 40 certain edibles ready for launch clinical studies underway or under new regulations in the completed, 7 pre-clinical studies in Canadian consumer market, which progress, and 27 clinical studies are expected toward the end of currently under discussion. The the calendar year. Aurora is areas of research include pain, focused on the medicinal epilepsy, PTSD, anxiety, opioid marijuana market. sparing, c a n c e r, neutrodegeneration. 39
3. Does the company have a decent sales force? Y-o-Y Growth 1,155% 205% 377%* Revenue $1,439 $18,067 $55,196 $263,419 2016 2017 2018 2019* In Canadian Dollars (In Millions) * expected The update to the marijuana laws in Canada definitely had a big impact on revenue numbers. As more competitors enter the space can Aurora’s sales force stand apart from all of the others? Some numbers from Q3 that highlight the companies sales ability. Revenue from Canadian Consumer was up 37% y-o-y, Revenue from Canadian Medical was up 8% y-o-y, and Revenue from International Medical was up 40% y-o-y. In Q3, Aurora began exports of full spectrum cannabis extracts in to Germany; and in February the company completed it’s first commercial export of cannabis oils to the U.K. If Aurora can continue to grow revenue by triple digits into the future, this will speak to the strength of their sales force 40
4. Is the company’s profit margins increasing and can the company continue to increase profit margin? -397% -71% 130%* Profit Margin 2016 2017 2018 * In 2018 Aurora received a significant tax credit. When the tax credit is not included the company’s profit margin comes to -9.7% As with many growth companies in growth industries, in the beginning profits are a rarity. However, Aurora’s margins are trending towards a positive number which is good. 5. Does the company have outstanding executives, managers, and board members Nelson Peltz joined Aurora as a key strategic advisor. Peltz has a background in produce and frozen foods. Over his investment career he’s invested in several food and beverage brands. He acquired Snapple form Quaker Oats, and later sold Snapple to Cadbury Schweppes. Terry Booth, Aurora’s CEO has served as President/CEO of 6 other companies. One of the companies being Superior Safety Codes Inc., which was recognized as one of Canada’s top 50 fastest growing companies Michael Singer also sits on Aurora’s board. He is the former CEO of Cemertia pharma, and former CFO of Bedrocan Canada Corp 41
Five question summary 1. The company offers dry flower, oils, soft gels, and gel caps. Also the company is preparing their vape and edible product lines. All-and-all they have their bases covered with consumer products. 2. Aurora is putting money and effort into research development. R&D spending increased by over 400% from 2017 to 2018, and R&D made up 3% of 2018 revenue. 3. Our best look into Aurora’s sales force comes from judging the companies sales. Sales have continued to increase every year, with revenue growing 205% in 2018 from 2017. In addition to that the company is selling product in Europe as well, displaying the companies ability to do business nationally and internationally. 4. When it comes to Aurora’s profit margin, while it's still negative (when subtracting the tax credit from 2018) it is moving in the right direction, which is from a high negative number, to a smaller negative number, and hopefully to a larger positive number in the near future. 5. Aurora has executives in place who have run successful businesses in the past. Nelson Petlz’s experience in produce and frozen foods could serve the company well as Aurora attempts to get it’s products in the stores around the world. 42
Opinion: Speculative Buy We think Aurora has good people in place to help the company grow. We love that the company is serious about R&D, The company sees its R&D as a way to create high margin products for the future. We love that the company was able to take advantage of the macro-environment surrounding marijuana in 2018 to boost their revenue. We like that Aurora’s profit margin is heading in the right direction. We do have our concerns though. The company is not profitable. The SG&A for Aurora represents a big expense. Can the company get this under control? Overall we believe Aurora has all of the pieces to become a profitable enterprise. We’ve listed it as a speculative buy because the events that would make this a great enterprise haven’t occurred yet, and could possibly never occur. The bet on Aurora is a bet that management will expand overseas, and also create products with higher margins. It’s also a bet that Nelson Peltz can help the company establish brand boosting partnerships. 43
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Quarterly Economic Data U.S. Oil (USO) Small Caps (IWM) Energy (AMLP) Real Estate (VNQ) S&P 500 (SPY) Commodities (DBC) Developed Markets (EFA) Emerging Markets (EEM) Preferred Stocks (PFF) High Yield Bonds (HYG) Corporate Bonds (LQD) Gold (GLD) 30% U.S. Dollar (UUP) Intermediate Term Bonds (AGG) 22.5% 15% 7.5% 0% -7.5% 2/26/19 To 8/23/2019 1/2/19 46
The Seville Report in 2019 47
The Seville Report in 2019 vs. The S&P 500 The Seville Report 2019 S&P 500 The first chart represents the performance of The Seville Report recommendations from previously issued newsletters since the start of 2019. The investments shown are investments that have not hit their profit targets yet. The names of last issues recommendations have note been revealed, but their returns and losses appear on the graph. The black bars represent The Seville Report issue as a whole. Some of our winners like PayPal, which is up over 30% since our recommendation don’t appear because they’ve hit our profit target. Earlier in the year our returns were close to 30% but Kroger(KR), our first recommendation of Cognizant(CTSH) and Tencent (TCHEY) have weighed down the portfolio. 48
The Seville Report Recommendations Price Target hit Sold at a Loss 49
The Seville Report Recommendations From our overall portfolio of recommendations going back to September 2017, we have some big winners that have hit and surpassed our initial targets, we have investments that are up, but have not hit our target, and we have some laggers. The Laggers Tencent, Applied Materials, Kroger, and Cognizant. Tencent continues to be a dynamic company that has been hampered by China’s video game restrictions. Tencent is still a major social media and digital payments leader within China. We are still believers of the company's long term prosperity. As the micro chip cycle started to come back around and head towards greener pastures the U.S. - China trade war began to heat up again, putting pressure on semiconductor companies. We still believe that Applied Materials is undervalued at this time, but faces global economic issues outside of its control. We’re still in it. Kroger has made some bad decisions that have come back to hurt its bottom line. We still believe Kroger could be a lot more valuable than the current stock price suggest. We continue to hold and wait. Cognizant's core business seems to be slowing, it's a company in transition, but we have faith in management to get things headed back in the right direction. 50
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