Kodak shareholders were not the only beneficiaries of the sudden stock surge — holders of convertible bonds also saw tidy gains

The sharp rally in Eastman Kodak Co.’s share price after news last week of a $765 million government loan to help it make drug ingredients at U.S. factories has offered shareholders and executives with stock options a tidy windfall.

But they’re not the only ones to reap a reward from the increasing value of their holdings. On Monday, Kodak

disclosed that the holders of its 5.00% convertible notes due in 2021, which were issued in May 2019, had converted notes valued at a total of $95 million into 29.9 million shares of Kodak common stock on July 29.

Those notes were issued with a strike price of $3.175 per converted share. The stock closed at $33.20 on July 29, meaning the notes were worth just under $900 million. The stock has fallen 60% since then.

The notes were originally sold to funds managed by Southeastern Asset Management Inc., an employee-owned investment firm based in Memphis, Tenn. That company is Kodak’s biggest shareholder, with an 11.3% stake, equal to 4.96 million shares, according to FactSet data.

The notes were held by Southeastern’s Longleaf Partners Small-Cap Fund; C2W Partners Master Fund Limited, which is operated by Additive Advisory and Capital LLC; and Deseret Mutual Pension Trust, according to a regulatory filing.

See:Kodak’s stock triples as company announces pandemic plan to start making pharmaceutical ingredients

Southeastern Asset Management and Kodak did not respond to requests for information on the bonds. The SEC declined to comment on the movement in Kodak’s share price.

But the SEC has launched an investigation of the trading in Kodak’s shares before and after the news of the loan broke, the Wall Street Journal reported Tuesday, citing people familiar with the matter.

The loan news caused Kodak’s shares to climb to as high as $60 at their peak last week, before falling back to $15 on Monday, in massive trading volume that far exceeded the stock’s longer-term average daily turnover.

See also: Kodak’s stock surge turned executive options into huge potential payday

The stock had already moved 25% the day before the news was officially disclosed. Executives with stock options, including some awarded just a day before the loan became public, were sitting on big paper gains.

Kodak had shared information on the loan with a few media outlets before the public announcement, according to media reports. Some had published that information before they were asked to delete it and respect an agreed-upon news embargo.

Kodak’s shares had mostly languished since the pioneering photography company emerged from bankruptcy in 2012. The company, a member of the blue-chip Dow Jones Industrial Average as recently as 2004, has made several efforts to reinvent itself and enjoyed a brief stock rally in 2018 after announcing plans to get in on the blockchain and cryptocurrency craze.

News of the SEC probe came after Sen. Elizabeth Warren, a Democrat from Massachusetts, wrote an open letter to SEC Chairman Jay Clayton urging his agency to investigate “potential incidents of insider trading prior to the July 28, 2020, public announcement of the Trump administration’s $765 million loan to Eastman Kodak Co. (Kodak) to support the production of generic drug ingredients in response to the coronavirus disease 2019 (COVID-19) pandemic.”

Kodak shares were down 12% Tuesday but are up 186% in 2020, while the S&P

has gained 2% in the year to date. The Dow industrials

are down 6.2% this year.

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Global Payments stock gains after company says new partnership with Amazon’s AWS could triple market opportunity

Global Payments Inc. topped earnings expectations Monday and announced a new partnership with Amazon.com Inc.’s Amazon Web Services that it said would provide more cloud-focused offerings for bank clients and allow the company to expand its geographic reach.


are up 1.2% in Monday afternoon trading.

Through the partnership with Amazon’s

AWS, Global Payments will create a cloud-based processing platform for card issuers. Global Payments’ Chief Executive Jeff Sloan said that the arrangement would “level the playing field for large financial institutions” by giving them access to technology-oriented offerings that could help them to deliver more modern consumer experiences and move more quickly to bring about feature improvements.

Things like the rollout of contactless payment options and improved digital banking experiences “can all be done better, faster, and cheaper in the cloud,” Sloan told MarketWatch. The AWS arrangement is about “letting large financial institutions globally access the same technology that startups did,” he said.

See also: Here’s how PayPal hopes to turn Venmo into the next PayPal

From the perspective of Global Payments’ own business, the AWS partnership allows the company the opportunity to move into new markets, since it had previously been limited just to geographies where it could build physical data centers. Sloan said that overall, the arrangement could more than triple the company’s addressable market in issuer solutions.

Global Payments beat earnings and revenue expectations for the second quarter despite (and perhaps, even partly due to) the pandemic, and Sloan pointed to sequential improvement from month to month during the period, while some aspects of the business returned to year-over-year growth in June.

Further, trends were “stable” throughout July “and even slightly improving over what we saw in June,” President Cameron Bready said on Global Payments’ earnings call.

Sloan told MarketWatch that Global Payments saw a 16% increase in the e-commerce and omnichannel category during the second quarter, excluding travel. He disclosed on the earnings call that this part of the business accounts for 20% of merchant revenue.

Don’t miss: Visa tops earnings expectations, but travel category remains slow to snap back

He also said that he believes Global Payments is the “biggest deployer of NFC technology,” referring to near-field communications technology that allows for contactless payments, which have picked up during the COVID-19 crisis as shoppers look for ways to avoid exchanging cash or handing people their credit cards due to concerns about viral spread.

“I think you’re likely to pull forward two to three years’ worth of demand and I don’t see it diminishing,” Sloan said about contactless trends as well as the boom in e-commerce adoption during the pandemic. He said that it can be difficult to get consumers to change their behavior in terms of payment preferences but that people are unlikely to revert to old habits once they have made a change.

Read: Mastercard earnings dip as COVID-19 limits spending but drives greater demand for antifraud services

While COVID-19 has created growing interest in tap payments, Sloan said that the crisis could generate a preference for contactless payments like physical cards that don’t require facial identification that way some modern phones do for their mobile wallets. Activating facial recognition is more difficult in the age of the pandemic since masks block the nose and mouth.

Global Payments, which merged with fellow financial technology company Total System Services in September, earned an adjusted $1.31 a share for the second quarter, down from $1.51 a share a year earlier but ahead of the $1.21 a share that analysts surveyed by FactSet had been forecasting. Revenue rose to $1.67 billion from $935 million.

Shares have gained 11.3% over the past three months as the S&P 500

has risen 16.5%.

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Align Technology: Long-Term Gains Ahead As Digitalization Realigns The Operations (NASDAQ:ALGN)

Investment Thesis

In the first half of the year, the pandemic stifled the top-line growth of Align Technology, Inc. (ALGN) as virus fears and social restrictions kept patients away from dental clinics. The heavy reliance on doctor visits to generate sales has forced the company to adopt a digitally-focused operating model, though its benefits will take time to accrue. The virus fears continue to hold back cash-strapped patients from visiting the dental offices to seek treatments, and thanks to their virtual model, Align’s low-cost rivals are at an advantage as the pandemic-driven recession hurts consumer spending.

Despite the ongoing disruptions, trading at a premium to the past three-year average, Align looks overbought in terms of NTM EV/EBITDA. However, as the digitalization takes shape, the company with a robust balance sheet and ultra-low gearing warrants a premium multiple, which, in combination with our 2022 EBITDA forecasts, emphasizes a ‘Hold’ strategy for the long-term shareholder.

Source: The Company Website

The Pandemic Disrupts Orthodontic Care

Last week’s GDP data mirrors the grim reality encountered by the consumer-facing businesses as the COVID-19 pandemic reached a peak in the past quarter keeping the U.S. public indoors amid widespread lockdown measures. In annualized terms, GDP shrank ~32.9%, while the consumer spending on services dropped ~43.5%. With dental offices closed or operating at reduced capacity to focus only on emergency care, the clear-aligner industry that treats teeth malocclusion or the misalignment was no exception to the pandemic’s economic consequences.

The dental practices are central to Align’s treatment plan. With intraoral scanning or PVS (polyvinyl-siloxane) impressions (images), the dental professional initiates the treatment plan that could take weeks during which additional aligners are dispensed to the patient at regular checkups. The pandemic-induced social restrictions and virus fears of patients have exposed the vulnerability of Align’s business model in the era of remote working. In contrast, the direct-to-consumer player, SmileDirectClub, Inc. (SDC), looks more resilient. Its treatment plan can be started either with an in-person doctor visit or an at-home creation of the impression using an online-ordered kit delivered to the customer.

However, the gloomy industry prospects have caused both companies to underperform the ~11.2% YTD (year-to-date) gain of the XHE (SPDR S&P Health Care Equipment ETF). Yet surprisingly, Align, with a gain of ~5.3% YTD, has outperformed SDC, whose disputes with regulators, professional dental groups, and even disgruntled customers have cost the share price to decline ~3.3% in the year so far. The reopening dental offices have turbocharged the gains in the past month with both Align and SDC rising ~10.3% and ~9.6%, respectively, matching the ~9.7% gain in the XHE. However, the raging pandemic tests the resilience of their business models as virus fears continue to threaten the doctor-patient interaction.

Align Technology_Share Price PerformanceSource: Koyfin

Doctor-driven Model Puts Align at a Disadvantage

With the U.S. dental offices operating with restrictions from March, the company recorded flat revenue growth in Q1 2020 (first quarter of 2020). Marketed as Invisalign, Align’s clear aligner volumes, making up ~84% of the top-line, have remained stagnant from the previous year with a decline of ~13.1% QoQ (quarter over quarter). In Q2 2020, the clear aligner volumes have seen even a sharper decline of ~41.4% YoY and ~38.3% QoQ dragging the top line ~41.3% YoY. Meanwhile, SDC, thanks to its virtual business model, managed a ~9.1% YoY growth in revenue in Q1 2020 driven by ~12.0% YoY and ~6.7% QoQ growth in aligner shipments. Though it hasn’t yet released its Q2 2020 financials yet, in the previous earnings call, the company’s CFO was confident of expanding the unique aligner orders from 10.5K in April to 11.0-15.0K in May.

Align Technology_Revenue Growth YoY Source: Koyfin

In a competitive landscape dramatically changed by the pandemic, its cheerful forecast looks feasible as virus fears jeopardize the doctor-patient interactions in traditional aligner therapy, putting the direct-to-consumer players at an advantage. Unlike SDC’s treatment plan where the doctor visits are not a must, the Invisalign therapy requiring more frequent interactions with the dentist is unlikely to be the ideal option to avoid the infection. Meanwhile, the face masks and remote working will keep the cosmetic issues of teeth misalignment hidden from the outside world, giving the patients more reasons to defer the treatments. Despite an outsized market opportunity, the company’s volumes in the vastly underpenetrated and less discretionary teen-and kids’ segment are on the wane. The low-cost competitors are making entry to the promising demography with treatment plans specifically designed for the age group. Compared to ~40.5% YoY growth in 2018, the newly-started teen and kids’ cases at Align have slowed to ~34.2% YoY in 2019 before falling ~44.7% YoY in Q2 2020. Furthermore, the sluggish economic environment is not favorable for the premium pricing model of Align positioning the low-cost competitors such as SDC to take market share leveraging its virtually-driven treatment plans as virus fears take hold. Despite a 60% cut in the marketing expenditure, SDC’s at-home kits, which usually account for a tenth of its new case starts, were down by only 40% in the two-month period through last May.

Align Technology_Teen and Kids Sources: The Author; Data from the company Earnings Call Presentations

The Digital Shift Gains Speed

However, Align is accelerating its digitalization efforts to counter the pandemic-driven disruption to the business model. As virus fears swept across the U.S. last March, the company snapped up Exocad Global Holdings GmbH. It expects the CAD/CAM dental software company from Germany to reinforce its digital footprint with end-to-end integration of dental workflows. Over the years, the scanner segment, which made up ~16% of the top line in 2019, underpinned Align’s digital push as highly accurate digital scans reduce the need for more frequent patient visits. The utilization rate of Invisalign products by North American orthodontists has risen from 56.7 cases per doctor in 2018 to 65.0 in 2019 as the quarterly average of cases submitted using digital scanners climbed from ~70.2% in 2018 to ~77.9% in 2019 in Americas before reaching ~85.8% in the previous quarter.

Align Technology_Utlization and Scanner UseSource: The Author; Data from Company SEC Filings

Meanwhile, the company offers a fee-based consultation service for dental practices to fast track their digital shift. Currently available in APAC (Asia-Pacific) and EMEA (Europe, the Middle East, and Africa), its U.S. rollout begins in H2 2020. As the company presentation details, within six months of the implementation, the program has been proven to improve the dental practice’s revenue and profitability by 20% and 15%, respectively. While supporting the struggling dental practices to switch to a virtual model to resist the pandemic’s impact, the program will also ensure the future demand for Align’s product portfolio as the company, with no reduction in the headcount, stands ready to ramp up production once normalcy returns. In China, one of the earliest countries to ease social restrictions, the order numbers in May had recovered to ~80-85% of the pre-pandemic level, making the APAC become the only region to expand case volumes for the company in Q2 2020.

Sanguine Revenue Forecasts by Analysts

Given the uncertain demand backdrop, Align has already withdrawn the 2020 revenue guidance, though, in a recent CNBC interview, the CEO envisioned an annual growth rate of 20-30%. Commanding only 17% of share in the global orthodontics market where 70% of 12 million annual cases are applicable for aligner therapy, the forecast looks convincing in the long term. However, the analyst estimates have already baked in the optimism with the 2020 consensus revenue estimate of ~$2.1 billion, indicating only ~7.2% YoY decline in the second half of the year (2H 2020). With six-month net revenue growth ranging from ~21.0-26.2% YoY in 2019, our forecast for 2020 projects ~13.4-9.4% YoY growth rate for Align for H2 2020 driving the full-year revenue to ~$1.99-2.04 billion with a decline of ~17.3-15.2% YoY. Rebounding to a 39.2-43.0% YoY growth next year, we further expect the top line could reach ~$2.8-2.9 billion in 2021 before normalizing to a ~18.8-22.8% YoY growth in 2022, to reach ~$3.3-3.6 billion in 2022.

Digital Efforts to Drive Margin Expansion

Declining from ~75.5% in 2016 to ~72.5% in 2019, Align’s gross margins have narrowed under the pricing pressure of low-cost rivals. With the company losing the advantage of economies of scale as the case volumes plummeted, the gross margin has slipped to ~63.7% in Q2 2020. The decision to keep the salaries and the headcount unchanged will pressure the margins even further until the case volumes recover meaningfully.

Align Technology_Gross Margin Sources: The Author; Data from Company SEC Filings and Earnings Call Presentations

Even though the LTM (last-twelve-month) EBITDA margin ranged from 24.6-26.8% in 2019, the consensus forecasts for 2020 imply ~27.8% of EBITDA margin for Align in H2 2020. Estimating only a 14.6-15.6% margin for the period, our EBITDA projections of ~$197.3-216.0 million for Align suggest ~9.9-10.6% of margin for Align for the full year of 2020. With the management targeting more than 25% of operating margin in the long term, up from ~22.5% in 2019, EBITDA margin could improve in the long term as the digitalization benefits kick in. Expecting the margins to reach ~21.5-22.6% and ~25.1-26.1%, our forecasts for 2021 and 2022 suggest the EBITDA could reach ~$597.2-659.4 million and $825.9-935.5 million, respectively.

Align Technology_Gearing Source: Koyfin

Solid Balance Sheet and Digital Shift Warrant a Premium

Even though the Exocad acquisition cost ~$420.8 million in cash in Q2 2020 at the height of the epidemic, the company ended the quarter with positive free cash flow. The onerous operating conditions haven’t yet compelled the company to slash staff salaries or cut back the headcount. In contrast, it has added new employees in China, and the share buyback program is on track. With a net cash position, Align can afford to do so as its total debt remains extremely low with gearing, measured in terms of total debt to equity, falling to ~1.8% in Q2 2020 from ~4.4% in 2019. Meanwhile, the recently secured 2020 credit facility worth ~$300 million replacing the 2018 facility pushes back the debt maturity date from 2021 to 2023, further easing the debt commitments.

Align Technology_Valuation Multiples Source: Koyfin

In terms of NTM (next-twelve-month) EV/EBITDA, Align currently trades at ~35.2x, with a premium of ~3.6% to ~34.0x, the average over the past three years. Even though the multiple peaked ~55.6x in mid-2018, assuming the average to reflect the existing operational challenges, our 2020 EBITDA forecasts imply an overvalued stock. With a 20% premium to reflect the future digitalization benefits, the average with our EBITDA forecasts for 2022 indicates a premium of ~22.8-38.9% for the stock, underscoring the gains ahead for the long-term focused investors.

Align Technology_ValuationSources: The Author; Data from Seeking Alpha, Koyfin and The Author Estimates


Align is accelerating its digital shift as the pandemic discourages dental visits. With a virtual model, the low-cost direct-to-consumer peers are at an advantage as the consumer spending contracts, and pandemic fears persist. Thanks to a robust balance sheet, the company can comfortably withstand the slowdown until the digitalization benefits accrue. However, per our near-term EBITDA forecasts, the stock looks overbought with a trading multiple at a premium to the three-year average. With a 20% premium added to reflect the future benefits in digital focus, our 2022 forecasts imply an undervalued stock for long-term investors to ‘Hold’.

If you enjoyed this article and wish to receive updates on my latest research, click “Follow” next to my name at the top.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Dow closes lower though stocks post modest weekly gains, as investors track potential fiscal stimulus

Stocks eked out modest gains Friday as investors reacted to disappointing consumer sentiment data and gauged the potential for additional fiscal stimulus in the U.S. and Europe while COVID-19 cases continue to climb.

What did major indexes do?

The Dow

closed at 26,671.95, down 62.76 points, or 0.23%, while the S&P 500

added 9.16 points, or 0.28%, to close at 3,224.73. The Nasdaq Composite

gained 29.36 points, or 0.28%, ending the week at 10,503.19.

The Dow on Thursday fell 135.39 points, or 0.5%, to close at 26,734.71, while the S&P 500 shed 10.99 points, or 0.3%, to close at 3,215.57. The Nasdaq finished at 10,473.83, down 76.66 points, or 0.7%.

For the week, the Dow finished 2.3% higher, the S&P 500 booked a gain of 1.3%, and the Nasdaq lost 1.1%.

What drove the market?

Stocks gave up early gains to turn mixed after a U.S. consumer sentiment index fell to 73.2 in July from 78.1, compared with expectations for a reading of 78.6.

“In short, the index weakened in early July as sentiment soured, no doubt reflecting a surge in virus cases that is once again restricting activity and clouding the outlook, especially as it relates to job prospects,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics, in a note.

“Sentiment will likely remain subdued in the absence of a more substantial health response that will result in better virus containment and prevent repeated closures that will cause more permanent damage to the labor market,” she said.

The U.S. posted a record of more than 70,000 new coronavirus cases in a single day Friday, the highest reported by any country since the start of the outbreak. The U.S. now has 3.58 million cases, or about a quarter of the global total, and 138,360 deaths.

See: Coronavirus tally: Global cases of COVID-19 13.8 million, 590,401 deaths as U.S.sets global case record

The continued rise in COVID-19 cases in the U.S. has been partly offset by optimism over scope for additional fiscal stimulus. The White House and lawmakers face increasing pressure to come up with an additional fiscal stimulus plan ahead of the expiration of supplemental unemployment benefits at the end of July.

“Further fiscal stimulus could give the bull market fresh legs, with equities having already priced in the current unprecedented monetary policy support,” said Han Tan, market analyst at FXTM, in a note.

Meanwhile, European Union leaders on Friday kicked off a two-day summit aimed at reaching an agreement on a €750 billion recovery fund.

Read:European Union leaders say they are far apart on COVID-19 bailout deal

“Should fiscal policy makers disappoint and deny stock bulls the fuel they desire, we could see the rapid erosion of gains from recent months,” Tan said.

Meanwhile, the Federal Reserve on Friday announced it had expanded its Main Street Lending Program to include nonprofit organizations.

In other U.S. economic data, U.S. housing starts came in at a 1.19 million seasonally adjusted annual rate in June, the Commerce Department said Friday, a 17% increase from May. Permits for newly-built homes rose 2.1% between May and June to a seasonally adjusted annual rate of 1.24 million. Housing starts nearly met the consensus forecast of economists polled by MarketWatch for a 1.2 million annual rate while permits fell slightly short of the consensus forecast of 1.3 million.

“One of the ironies of this recession is that the weakest part of the economy in the previous recession — housing — is now one of the shining stars in an otherwise challenging year,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

Read:Here’s why all of the S&P 500’s gains since April came after the market closed: JP Morgan

Which companies were in focus?
What did other markets do?

The Shanghai Composite Index

rose 0.1%, while the CSI 300 Index

gained 0.6%. Japan’s Nikkei 225 Index

rose 0.3%, while the Hang Seng Index

in Hong Kong gained 0.5%.

The pan-European Stoxx 600 Europe Index

closed up 0.2%, at 372.71, while London’s FTSE 100 Index

added 0.6% to close at 6,290.30.

Bond yields rose, with the yield on the 10-year Treasury note

up about two basis points to 0.63%. Bond yields and prices move in opposite directions.

The ICE U.S. Dollar Index
a measure of the U.S. currency against a basket of six major rivals, fell 0.4%.

August West Texas Intermediate oil

fell 16 cents, or 4%, to settle at $40.59 a barrel on the New York Mercantile Exchange. Gold

edged 0.5% higher to settle at $1,810.

Read next:Stock-market risks for remainder of 2020 ‘are completely to the downside,’ says BofA analyst

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S&P 500 stocks post their biggest gains when company earnings make this move

With earnings season getting into full swing, it’s important to remember that less is often more. That’s because the S&P 500

historically has turned in its best returns during quarters in which its earnings per share were lower than in the year-earlier period. In quarters in which earnings were much higher, in contrast, the S&P 500 has performed far less well.

So be careful what you wish for as companies provide earnings guidance. There’s a good chance that the S&P 500 would be a mediocre performer if blowout earnings come to pass.

I know this contrarian narrative is hard to accept, so take a look at the accompanying chart, which plots the relevant data from Ned Davis Research. Notice that the S&P 500 has performed the best in calendar quarters in which trailing 12 months’ EPS are between 10% and 25% lower than in the year-earlier quarter. Its average return during those quarters is an annualized gain of 27%. (The chart reflects data back to the first quarter of 1927.)

In light of these historical precedents, the market’s spectacular rally in the second quarter of 2020 is less of a head scratcher. The S&P 500’s trailing 12-month EPS as of June 30 is currently projected to be 25% lower than the comparable total at the end of 2019’s second quarter. Notice from the chart that this negative rate of return puts the second quarter at the bottom end of the category that is correlated with impressive S&P 500 returns.

Contrast that category with the one containing calendar quarters in which EPS are more than 20% higher than a year previously. The S&P 500’s average return during those quarters is an annualized gain of just 2%.

Going forward, the current estimate from Standard & Poor’s is that a year from now, trailing 12-month EPS will be 25% higher. The comparable growth rates for the third- and fourth quarters of next year are 46% and 60%, respectively. If earnings grow anywhere near as fast as these projections, and if history is any guide, the stock market will be struggling in 2021 even as these impressive growth rates are reported.

‘Buy the rumor, sell the news’

Why would the S&P 500’s return be inversely correlated with earnings growth rates? There no doubt are many factors, but one is that the market discounts the future rather than the present. By the time we enter a quarter in which EPS are much higher than in the year-earlier period, the market will have risen to reflect those higher earnings. This is the source of the Wall Street saying “buy the rumor, sell the news.”

Read: CNBC’s Jim Cramer uses this chart to predict the exact date the stock market could hit the skids

Also read: Here’s what Goldman Sachs gives a 90% chance of happening to the S&P 500 over the next decade

There’s another factor at play in quarters in which EPS are much higher than in the year-earlier period: Investors at such times likely are anticipating a slowdown in earnings growth rates, recognizing that the Federal Reserve will soon be raising interest rates and turning off the monetary stimulus spigot in order to prevent the economy from overheating. This helps to explain why the S&P 500 is barely positive in these quarters with the strongest EPS growth rates.

None of this discussion should be taken to mean that earnings don’t matter. They very much do, of course. Over the long-term, the growth rates of earnings and the S&P 500 are highly correlated. But over the shorter term this correlation inverts. It’s in confusing the shorter- and longer terms that many investors get tripped up.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

More:The wealthy loaded up on stocks in March — now they’re selling

Read: Tesla’s earnings on tap: Will a loss end its blowout stock rally?

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