Lesson Learned: Don't Short A Blue Chip REIT

There seems to be more articles on Seeking Alpha in which authors recommend shorting Blue Chip REITs. A few days ago there was a short thesis on Tanger Factory Outlet (SKT) and the author explained,

“I have a hard time convincing myself that the good results will continue into the future. I personally am not comfortable with the sales per square foot metrics at these properties… the current stellar portfolio performance may possibly suddenly see itself deteriorate in the next 5 years without warning.”

I have already provided my counter to that article (HERE), and most of my followers know that I’m not a market timer who picks tops or bottoms.

Instead, I am a value investor and I have found that it’s simply better to be in the market invested in stocks that offer the highest potential returns than play the timing game.

Many of you know that I’m generally a buy-and-hold investor and that means that I like to invest in REITs that I can own for the long haul. It’s rare that I bet against securities that will fall in price… that’s like gambling that my plants will die. I prefer to plant my seeds firmly in the ground and wait for my crops to grow.

Occasionally, I run across a few plants (stocks) that seem to be deteriorating and, as a result, I seek to avoid the companies all together. I’m not a proponent of shorting REITs, that’s just RISKY!

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Why Short a REIT?

I find it amazing that some of the wealthiest REIT investors – the hedge funds – claim to have a vast knowledge and understanding as to the nature of their complex strategies, yet the funds’ overall performance often turns into Fool’s Gold.

We all know that hedge funds by nature are opportunistic as they are designed to pool people’s money to invest in a diverse range of assets. Because hedge funds are lightly regulated (and are not sold to retail investors), they typically buy riskier positions and they often employ the use of short selling and leverage.

Although it is difficult to evaluate hedge fund performance compared with other investments (because the risk/return characteristics are unique), I remain baffled as to why so many hedge fund managers cross into my sweet spot – REITs – trying to short a particular stock that is anything but distressed or even showing signs of weakness.

You can see why the $12 billion hedge fund Pershing Square took advantage of the falling value in General Growth Properties (NYSE:GGP) back in 2009. That was a wise bet for William Ackman (who runs Pershing Square) who has a history of investing in distressed real estate. But history has also shown that there is little opportunity for the short sellers who pursue high-quality blue chips.

For example, in 2009, Ackman waged a battle against Realty Income (O) on the thesis that the “monthly dividend company” had poor credit quality. Ackman argued that Realty Income was suffering from mispriced risk since the REIT was paying a dividend of around 7.5% while the private market cap rate values were closer to 10.5% – a 40% premium. Ackman was suggesting that Realty Income’s fundamentals could not support the dividend and that a cut was imminent. Boy was he wrong!

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Think about it like this, the outcome of a short sale is basically the opposite of a regular buy transaction, but the mechanics behind the short sale result in extremely volatile risks.

In fact, it’s somewhat like the law of gravity as the law of investing is inflation (instead of gravity) and that means that betting against the upward momentum is inherently risky. That means that when you bet against the momentum and you keep a short position for a long period of time, your odds get worse.

Also, when you short sell, you don’t enjoy the same infinite returns you get as a long buyer would. A short sale loses when the stock price rises and a stock is (theoretically, at least) not limited in how high it can go.

In other words, you can lose more than you initially invest, but the best you can earn is a 100% gain if a company goes out of business and the stock loses its entire value.

Finally, and the most concerning risk is leverage or margin trading. When short selling, you open a margin account, which allows you to borrow money from the brokerage firm using your investment as security. Just as when you go long on margin, it’s easy for losses to get out of hand because you must meet the minimum maintenance requirement of 25%. If your account slips below this, you’ll be subject to a margin call, and you’ll be forced to put in more cash or liquidate your position.

For all of these reasons, I’m not willing to risk hard earning capital to short a REIT. Plain and simple, it’s just way too risky and I believe that by patiently taking advantage of the margin of safety, my portfolio will hold more winners than losers.

Regardless of my risk tolerance level, the short sellers haven’t stopped betting against REITs and when that feeding frenzy becomes a catalyst, the “squeeze” ensues (as more and more of the short investors buy shares to cover their positions, share prices skyrocket).

This Blue Chip Bet Paid Off Handsomely

In May 2013, Highfields Capital decided to short shares of Digital Realty (DLR) based on the premise that shares were too expensive and should be trading for around $20.00 per share. Jonathon Jacobson stated (at the 18th Ira Sohn Investment Conference last week) that “pricing is going lower, competition is increasing, and the company (Digital) is tapping into capital markets as aggressively as they can.”

At the time, Digital was trading at $65.50 per share with a total capitalization of around $14 billion.

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Highfields claimed at the time that Digital’s fundamentals were deteriorating and that the REIT was a commodity business with no barriers-to-entry. Simply put, Highfields was speculating that the stock would fall, without any true catalyst supporting the short, other than manipulating prices for personal gain.

Simply said, Highfields is shorting Digital because they think they know something others don’t know. They are plain and simple: speculators, obsessed with dangerously manipulating prices and driving down prices for their own personal gain. In an article, I offered my “back up the truck” commentary,

“ …it’s time to jump on this cloud. Digital has a most attractive valuation of 13.6x and I consider the fundamentals sound. Driven by growing world-wide demand and a very high-quality tenant base, Digital has evolved into a best-in-class global data center platform. Digital’s “first mover advantage” has allowed the REIT to build a commanding barrier-to-entry model in which its mere scale provides access to capital and strong expertise in the global cloud supply chain.”

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Over the years, I have continued accumulating shares in Digital Realty as this Blue Chip has been one of the best picks in my Durable Income Portfolio. As evidenced below, Digital has returned an average of 16% annually since I began purchasing shares in May 2013.

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The “D” in DAVOS

Last week I provided a summary of my All-American DAVOS portfolio that consists of Digital Realty, American Tower (AMT), Ventas, Inc. (VTR), Realty Income, and Simon Property (SPG). These 5 REITs returned 9.2% since December 31, 2016, and Digital returned over 23%.

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In Q2-17, Digital announced that it was merging with DuPont Fabros in a transaction consistent with Digital’s strategy of offering a comprehensive set of data center solution from single-cabinet colocation and interconnection, all the way up to multi-megawatt deployments.

At the far end of the spectrum, this combination expands Digital’s hyperscale product offering and enhances the company’s ability to meet the rapidly growing needs of the leading cloud service providers. The DFT merger is also consistent with Digital’s stated investment criteria and mission statement:

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The DuPont transaction expanded Digital’s presence in strategic U.S. data center metros and the two portfolios are highly complementary. The transaction was expected to be roughly 2% accretive to core FFO per share of 2018 and roughly 4% accretive to 2018 AFFO per share. The combination also enhanced the overall strength of the balance sheet. DuPont Fabros portfolio consists of high-quality purpose-built data centers, as you can see below:

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The merger also bolstered Digital’s presence and expanding footprint in its product offering in three top tier metro areas, while DuPont realized significant benefits of diversification from the combination with Digital’s existing footprint in 145 properties across 33 global metropolitan areas.

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Digital closed on the acquisition of DuPont during the third quarter and the integration is well underway… but the blue chip REIT is not slowing down…

In October, Digital announced a 50/50 joint venture with Mitsubishi Corporation to enhance its ability to provide data center solutions in Japan. Digital is contributing a recently completed project in Osaka and Mitsubishi is contributing two existing data centers in Tokyo. Although the venture is non-exclusive, the expectation is that this will be both partners primary data center investment vehicle in Japan.

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According to Digital’s CEO, Bill Stein, “Japan is a highly strategic market (with) tremendous opportunity for growth over the next several years. This joint venture establishes Digital’s presence in Tokyo, which has been a longtime target market.”

In addition, Digital expects this joint venture will significantly enhance the company’s ability to serve its customers data center needs in Japan. In particular, Digital expects that Mitsubishi’s global brand recognition and local enterprise expertise will meaningfully improve the ability to penetrate local demand.

Also, in the US, Digital entered into an agreement to acquire a data center in Chicago from a private REIT for $315 million. This value add-play offers a healthy going in yield along with shell capacity that gives Digital an opportunity to boost the unleveraged return into the high single digits. This investment represents an expansion in Digital’s core market and is occupied by existing customers with whom Digital has been independently working to meet their expansion requirements.

Also, during the third quarter, Digital announced that it was breaking ground on a new 14 megawatt data center in Sydney, Australia, adjacent to an existing facility. Digital also expanded its Silicon Valley Connected Campus with a 6 megawatt facility at 3205 Alfred Street in Santa Clara, California (scheduled for delivery in the first quarter of 2018).

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The Improved Balance Sheet

In order to continue to scale its global footprint, Digital continues to demonstrate a disciplined balance sheet.

In July 2017, Digital issued two tranches of Sterling denominated bonds with a weighted average maturity of 10 years, and a blended coupon of just over 3% raising gross proceeds of approximately $780 million.

In early August, the company pre-funded a portion of the DuPont acquisition with the issuance of $1.35 billion of U.S. dollar bonds with a weighted average maturity of nine years, and a blended coupon of 3.45%. (This was only the sixth time an investment grade U.S. listed REIT has issued a $1 billion or more in a single tranche of bonds).

The transaction was well oversubscribed and priced 10 bps inside of where Digital’s existing bonds were trading on the secondary market prior to the transaction. Digital also raised $200 million of perpetual preferred equity at 5.25%, an all-time low coupon for Digital and the lowest rate ever achieved on a REIT preferred offering with a crossover rating.

In mid-September, Digital closed on the DuPont acquisition and exchanged all the outstanding DFT common shares and units for approximately 43 million shares of DLR common stock and 6 million OP units. Also, in conjunction with the DuPont acquisition, Digital exchanged the DFT 6.625% Series C Preferred for a new Digital Realty Series C Preferred with a liquidation value of $201 million.

The company also tendered for the DFT 5.875% high-yield notes due 2021, settled nearly 80% of the $600 million outstanding at closing in mid-September and redeemed the remainder within a few days post closing. After quarter-end, Digital redeemed all $250 million of the DFT 5.625% high-yield notes due 2023 and a blended 106.3% of par or a total cost of $270.5 million, including accrued interest and the make-whole premium.

When the dust settled at the end of Q3-17, Digital’s debt-to-EBITDA stood at 6x and fixed charge coverage was just under 4x, as you can see below:

After adjusting for a full-quarter contribution, the balance sheet actually improves as a result of the DuPont acquisition and debt-to-EBITDA dips down below 5x and fixed charge coverage remains above 4x, as you can see on the right-hand side of the chart.

As you can see from the left side (chart below), Digital has a clear runway with nominal debt maturities before 2020. The balance sheet remains well-positioned for growth consistent with our long-term financing strategy.

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The Fundamentals

Construction activity remains elevated across the primary data center metros, but leasing velocity remains robust and industry participants are mostly adhering to a just in time inventory management approach, helping to keep new supply largely in check.

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Demand is outpacing supply in most major markets. The near-term funnel remains healthy and demand seems to be picking up as we head into the end of the year.

In addition, vacancy rates remain tight across the board prompting Digital to bring on measured amounts of capacity to meet demand in select metro areas like Sydney, Silicon Valley and Chicago. The company has seen a flurry of recent land deals in core markets and the number of new competitors is on the rise, although Digital believes its global platform, scale and operational track record represent key competitive advantages.

As Digital’s CEO, Bill Stein, explains:

“Given the sector’s recent history, any prospect of an uptick in speculative new supply bears watching. However, we remain encouraged by the depth and breadth of demand for our scale, co-location and interconnection solutions. We expect the demand will continue to outstrip supply, while barriers to entry are beginning to grow in select metros, which we believe bodes well for long-term rent growth, as well as the enduring value of infill portfolios such as ours.”

Stein adds:

“…we are well-positioned to connect workloads to data on our global connected campus network and through our Service Exchange offering. Enterprise architectures are going through a transformation and workloads are transitioning from on-premise to a hybrid multi-cloud environment. Our comprehensive product offering is critical to capturing this shift.

Cloud demand continues to grow at a rapid clip, but future growth in the data center sector will come from artificial intelligence. The power, cooling and interconnection requirements for AI applications are drastically different than traditional workloads, and Digital Realty is well-positioned to support the unique requirements and tremendous growth potential of this next-generation technology suite.”

The Latest Results

Digital signed total bookings for the third quarter of $58 million, including an $8 million contribution from interconnection. The company signed new leases for space and power, totaling $50 million during the third quarter, including a $6 million co-location contribution. The weighted average lease term on space and power leases signed during the third quarter was nine years. Digital’s management team explains,

“Our third quarter wins showcase the strengths of our combined organization as the bulk of our activity was concentrated on our collective campuses in Ashburn, which is not only the largest and fastest growing data center market in the world, but also the combined company’s largest metro area in terms of existing capacity and ability to support our customers growth.”

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In Q3-17, Digital’s current backlog of leases signed but not yet commenced stands at $106 million. The step up from $64 million last quarter reflects the $50 million of space and power leases signed, along with the $59 million backlog inherited from the DuPont acquisition offset by $67 million of commencements. The weighted average lag between third-quarter signings and commencements improved to four months.

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Digital retained 86% of third-quarter lease expirations, and signed $66 million of renewals during the third quarter, in addition to new leases signed. The weighted average lease term on renewals was over six years, and cash rents on renewal leases rolled down 3.8%, primarily due to two sizable above market leases that were renewed during the third quarter, one on the East Coast and one in Phoenix. Digital expects cash re-leasing spreads will be positive for the fourth quarter, as well as for the full year 2017.

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As you can see from the bridge chart below, Digital’s primary driver is a full quarter with the higher share count outstanding following the close of the DFT acquisition late in the third quarter. Digital still expects to realize approximately $18 million of annualized overhead synergies and expects the transaction will be roughly 2% accretive to core FFO per share in 2018 and roughly 4% accretive to 2018 AFFO per share.

However, these synergies will not fully be realized until 2018 and the quarterly run rate is expected to spring load in the fourth quarter before bouncing back in 2018.

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As you can see below, Digital’s non-cash straight-line rental revenue has come down from a run rate of $23 million in the fourth quarter of 2013, all the way down to less than $2 million in the third quarter.

Over that same time, quarterly revenue has grown by 60% from $380 million to more than $600 million. This trend reflects several years of consistent improvement in data center market fundamentals, as well as the impact of tighter underwriting discipline, which has driven steady growth in cash flows and sustained improvement in the quality of earnings.

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Buy This Blue Chip?

First off, I am not selling this BLUE CHIP REIT. I am confident with my overweight exposure and I will continue to add more shares in price weakness. Let’s take a look at the dividend yield, compared with the peers below:

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Let’s take a closer look at Digital’s dividend history, and specifically the FFO Payout history…

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As you can see, Digital has continued to widen the margin of safety related to the Payout Ratio (helps me SWAN)…

Now, let’s examine the P/FFO multiple, compared to the peers:

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As you can see, Digital is cheaper (based on P/FFO) than the peers. Let’s examine the FFO/share growth chart below…

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As you can see, Digital is not growing as robustly as the peers; however, the company has continued to generate ~8% FFO/share growth and this powerful pattern of predictability is the primary reason I own shares in this REIT. Take a look at this FFO per share history…

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The average FFO/share growth since 2014 has been around 7.6%… now take a look at the P/AFFO/share chart below…

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This suggests that Digital is easily positioned to continue to grow its dividend by at least 5% annually, possibly a tad better in 2018.

In summary, Digital has been one of my best BLUE CHIP buys since I commenced the Durable Income Portfolio (in 2013). I consider the shares soundly valued today (nibbling); however, I would recommend buying closer to $100/share. As Ben Graham famously explained, “a stock does not become a sound investment merely because it can be bought at close to its asset value.”

Selecting securities with a significant margin of safety remains that value investor’s definitive precautionary measure. I consider Tanger Factory Outlet to be the best BLUE CHIP buy today, as any value investor knows – “it pays to wait patiently for the storm to subside, knowing that a sunnier and more plentiful time is bound, as a law of nature, to resume in due course.”

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Note: Brad Thomas is a Wall Street writer, and that means he is not always right with his predictions or recommendations. That also applies to his grammar. Please excuse any typos, and be assured that he will do his best to correct any errors if they are overlooked.

Finally, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking. If you have not followed him, please take five seconds and click his name above (top of the page).

Other REITs mentioned: (COR), (QTS), (CONE), and (EQIX).

Sources: FAST Graphs and DLR Investor Presentation.

Disclosure: I am/we are long APTS, ARI, BRX, BXMT, CCI, CHCT, CIO, CLDT, CONE, CORR, CUBE, DDR, DEA, DLR, DOC, EPR, EXR, FPI, FRT, GEO, GMRE, GPT, HASI, HTA, IRET, IRM, JCAP, KIM, LADR, LAND, LMRK, LTC, MNR, NXRT, O, OFC, OHI, OUT, PEB, PEI, PK, QTS, REG, RHP, ROIC, SKT, SPG, STAG, STOR, STWD, TCO, UBA, UMH, UNIT, VER, VTR, WPC.

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.

I'd Buy General Electric At The Right Price Too

In a recent interview, Warren Buffett told CNBC’s Becky Quick that he would buy General Electric (GE) at the “right number”, which led to speculation that Berkshire Hathaway (BRK.A)(BRK.B) may currently be looking to get back into a GE position. Let’s remember that it was only a few short months ago that Berkshire disclosed that it sold a small GE position and build its stake in Synchrony Financial (SYF) [a 2014 spin-off from GE]. Since this announcement, GE shares are down over 20% while SYF shares are up over 30%.

Source: Nasdaq

Talk about great timing, right? After a rough 2017 (GE shares were down ~45% compared to the S&P 500 being up ~20%), the company’s stock has actually performed pretty well in the new year. So, what should investors do now? I believe that the “right number” for this industrial conglomerate depends on many factors, including your time horizon, but, in my opinion, you will not get burned if you layer into a GE position at current levels.

My 12-month Price Target

Before the recent run-up for GE shares, I am on record for saying that my 12-month price target was $19 per share. This target still holds true today, even with shares trading slightly below this mark ($18.76 as of January 12, 2018). Some may be asking why a person that is so bullish on GE long-term is standing firm with a price target of $19 but, in my opinion, it is important to note that the real tests (i.e., quarterly earnings reports and management commentary) are still yet to come.

Management already guided for adjusted EPS to be in the range of $1.00-$1.07 for full-year 2018, so, even after the 2017 blood bath, GE shares are not as cheap as what you would expect.

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GE PE Ratio (Forward) data by YCharts

While I believe that Mr. Flannery low balled the 2018 guidance, which is a smart approach given the moving pieces that he will have to contend with, it is still too early to say that GE is a must own at today’s price. GE is trading below the average forward P/E ratio of its peer group but, in my opinion, GE’s management team has a lot to prove before the conglomerate can make the argument that it warrants a valuation that is in line with the likes of Honeywell (HON) or 3M (MMM).

So, at the end of the day, I am sticking with the 12-month price target of $19 for GE because there is definitely going to be concerns (i.e., cash flows metrics, growing debt balance, Power struggles) that the bears will run with in 2018. GE’s 2018 stock performance will largely depend on how management is able to fend off the bears, in my opinion. If successful, $19 per share will be way too low of a price target but it is still too early to tell.

But, on the other hand, there have definitely been some positive developments for GE over the last few months that could result in this company eventually warranting a higher price target later in the year.

Positive Developments

The backdrop for GE has improved since management provided the 2018 outlook in November 2017 but I believe that the two items mentioned below have the potential to be significant tailwinds in 2018.

(1) Oil Prices

The rise in crude oil prices has resulted in a great deal of attention for GE, and rightfully so, as this company is highly levered to the commodity.

Source: CNBC

Remember, GE merged its oil & gas business with Baker Hughes in 2017 to create Baker Hughes, a GE Company (BHGE). No one really knows what will happen with oil and/or gas prices in 2018 or 2019, but it is hard to deny that it has been a great start for these commodities in the new year. And, BHGE has been a direct beneficiary.

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BHGE Market Cap data by YCharts

As shown, BHGE’s market cap has increased by over 20% since late 2016 but it has meant nothing for GE shares, as the company’s stock is down by almost the same percentage over this time period. Let’s think about this, GE still owns a majority stake in BHGE (62.5%) so the industrial conglomerate’s holding is now worth over $26B, or ~16% of GE’s current market cap, and the recent rise has had no bearing on GE’s stock price. BHGE alone is not enough to move the needle for GE, but a rising BHGE stock price will bode well for GE and its shareholders in 2018.

There are rumors that GE may look to spin-off BHGE at some point over the next few quarters (an approach that I prefer), as BHGE’a structure gives Mr. Flannery a lot of optionality, but I would not be surprised if GE retained the majority stake well into the 2020’s.

(2) Promising Policies

GE may not directly benefit from the tax reform bill, as many pundits believe to be the case (a thought that I do not necessarily agree with), but, in my opinion, the downstream impact of this business-friendly policy will have a significant impact on GE. For example, a JPMorgan analyst predicts that the new bill will be extremely positive for the companies of the S&P 500:

“The upcoming reduction of US corporate tax rates may be one of the biggest positive catalysts for US equities this cycle,” [Marko] Kolanovic, who serves as JPMorgan’s global head of quantitative and derivatives strategy, wrote in a client note. “We think that little is priced into the market and hence there is potential for market upside. Clients are not repositioning portfolios until they see the reform passed.”

The importance of tax reform to that call can be seen in the breakdown of JPMorgan’s earnings growth forecast for next year. The firm projects that half of earnings upside — or roughly $10 a share for the S&P 500 — will be due to a successful GOP tax bill.”

Joe Ciolli, JPMorgan’s quant guru says traders are waiting for tax cuts to unleash more stock market gains, Dec. 15, 2017

The tax bill has already started to have an impact, as analysts’ EPS estimates for 2018 have increased by 2.2% (to $150.12 from $146.83) from December 20, 2017 to January 11, 2018.

Source: FactSet

Full Disclosure: the 2018 bottom-up EPS estimate is an aggregation of the median 2018 EPS estimates for all of the companies in the index.

The 2.2% may not sound like much but it is the largest move over this specific period of time since FactSet began tracking this data in 1996.

Additionally, analysts are bullish on several sectors that GE operates in.

Let’s just remember that this industrial conglomerate operates in industries that are critical to the U.S. economy so GE will benefit as other industrial companies benefit from the tax bill, of course in my opinion.

And a Trump infrastructure bill in 2018 would simply be icing on the cake.

Risks

The main risk for investing in General Electric starts with management. There is no guarantee that Mr. Flannery is the right man to turn around a company that is widely viewed as a directionless, complex industrial conglomerate. Sentiment is the number one factor for GE shares being down by almost 50% in 2017 so shareholders are putting a lot of faith in a largely unproven leader, at least on this type of stage.

Another risk factor is the Power operating unit. Any additional downward pressure for this unit will not bode well for the consolidated results in 2018 or 2019. Management has big plans for Power over the next 24 months so investors should be paying close attention to the progress that is being made toward rightsizing and reshaping this unit for the future.

Bottom Line

The market is flying at (or near) all-time highs and many stocks, including GE shares, have enjoyed a nice ride so far in 2018. I believe that there is a lot to like about GE as we head into 2018 and beyond, but this company’s new management team has a lot of prove over the next 12-18 months. Therefore, investors that think that they missed the boat when shares were trading at (or below) $18 per share will likely get another opportunity at some point in the first half of 2018.

However, looking out, I believe that this industrial conglomerate is attractively valued if you are willing (and able) to hold onto shares for at least the next three-to-five years. Investor sentiment is the main culprit for the poor performance for GE shares in 2017 and I believe that shares will rocket higher if Mr. Flannery is able to sell the market on his “plans” for this industrial conglomerate. That is why I, a person that plans to hold GE for many years, will not sell my GE shares now and try to get back in under $18 because timing the market is hard to do (or should I say impossible?). As such, investors with a long-term perspective should consider layering into a position at today’s levels because, in my opinion, GE shares have the potential to be trading significantly higher in the years ahead.

Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

Disclosure: I am/we are long GE, BHGE, BRK.B.

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.

GLD: Is 'It' Happening?

Introduction

On Friday, the dollar index fell to a low not seen since late 2014. Continued weakness in the dollar will lead to inflation in all dollar-based commodities like gold, crude oil and agricultural products.

Next week, the U.S. financial markets will have a shortened holiday week. There are big political issues looming, like a potential shutdown of the U.S. government, and an ongoing battle over immigration reform. As a result, the week ahead could see continued volatility in the U.S. dollar – either up or down. These moves in the dollar will likely affect gold, crude oil and other commodities – one way or another.

Is IT Happening?

Is this the beginning of the dollar collapse? Is that why Bitcoin and other cryptocurrencies have risen so far, so fast? Does the pending yuan-based oil futures contract lead to the end of the petro-dollar? Is that why oil has risen so far, so fast? Is IT happening??

Will the U.S. government shutdown close its doors amid political posturing and theater? Will the political climate in Washington, D.C. get even worse? Will the Democrats invoke articles of impeachment on Donald Trump? Will the U.S. and its allies attack Iran?

Should I go “all in” on the SPDR Gold Trust (GLD) to profit from all of these potential events? Or will all of these storylines get resolved, and leave the gold bulls, once again, kicking air instead of a football – and landing flat on their backs?

Gold Divergence from Real Interest Rates

The price of gold has historically had a close correlation with real interest rates. Since the beginning of 2017, however, gold and real interest rates have seen increasing divergence. Is this a sign that we have entered a new era where the old correlations are no longer valid? Possibly.

For the price of gold and real rates to converge again, 5-year real rates would need to fall precipitously below zero. Or gold would need to fall below the 2016 lows. Or, some combination of the two. We can see that real interest rates have hit a peak in late December of every year since 2013 before correcting lower.

Gold is money. However, it is currently traded as a paper derivative. I can’t (and won’t attempt to) predict the day when gold will be set free from its paper chains. I view physical precious metals as a store of value and an insurance policy to protect against macro market risks.

Meanwhile, since I closely track gold and silver, I also swing trade “paper” gold and silver on a short term basis – both long and short – with an eye on several traditional and proprietary indicators.

GLD Charts

The weekly gold chart continues to look bullish, although is nearing an over-bought RSI signal. On a purely technical basis, I would expect at least a pull-back to the uptrend line and/or $124 at some point.

On the daily chart, we can see that GLD came back into a prior uptrend channel. If GLD continues upward, then in hindsight we might describe the drop below the channel as a “bullish under-throw.” GLD is over-bought on the daily RSI.

Gold COT Report

I view the gold COT to be neutral, perhaps slightly cautionary. In the week ending January 9th, the net commercial short interest increased by 23%. When price increases, the commercial banks tend to create paper gold to satisfy paper gold demand.

Peaks in net commercial short interest have almost always coincided with nearby sell-offs, and valleys in commercial short interest have almost always coincided with nearby rises in price. One should be careful when trying to “time” tops or bottoms based upon the COT report, for at least two reasons: 1) the COT report is published on Fridays with Tuesday’s data, so it is three trading days old, and 2) the bullion banks have demonstrated patience in covering their shorts, and it could take many weeks for the COT data to look meaningful in hindsight.

While the gold commercial short interest has increased rapidly from its recent low, it only recently crossed over its 3-year average. And net commercial interest is below recent highs.

Gold OPEX Price Magnet

I closely track the options market for gold, crude oil and natural gas and have created a program to calculate OPEX price magnets for these commodities. Here is a recent history of the gold futures price versus the calculated OPEX magnets.

Since June 2017, the futures and OPEX price magnets have tended to converge onr or before the options expiration date. The next option expiration date for COMEX gold is January 25th, 2018.

The OPEX price magnets that I have developed are related to the “max pain” theory. This Youtube video does a good job at describing the “max pain” theory. There are free max pain calculators online for publicly traded stocks; however, the OPEX price magnets are in my view more relevant and are calculated on futures contracts.

Conclusion

Rising gold prices, a weakening U.S. dollar and divergent real interest rates may provide evidence that gold is regaining its luster as a unique “safe haven” asset. Historically important correlations appear to be broken, and the dollar is setting multi-year lows. Add to this mix increasing political and geo-political risks, and we may have a formula for “IT” to happen. Gold could soon be free of its paper chains, and ETFs like GLD could continue to rise in value – and perhaps move sharply higher.

On the other hand, we might be witnessing beginning-of-the-year allocations and adjustments that become an eventual “nothing burger” for GLD and other gold-related investments. If we continue in the old paradigm, then I see reasons to be cautious for paper gold investments like GLD. GLD is over-bought on its daily RSI, and real interests rates could drag lower. Moreover, the nearby gold OPEX magnet suggests that gold could pull back before the end of January.

I wish all of you the best of luck navigating this interesting market.

Disclaimer

This article was written for information purposes, and is not a recommendation to buy or sell any securities. I never intend to give personal financial advice in any of my articles. All my articles are subject to the disclaimer found here.

I am currently offering a two week free trial.  In addition to my daily content, I also have good input from my subscribers in the chat section.  Come and check it out.

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.

Additional disclosure: I am always net long precious metals in various forms, and currently hold out-of-the-money GLD puts as a hedge.

Trump's 'Shithole Countries' Comment Tops This Week's Internet News

Last week Facebook decided that maybe it should make some changes to the information people see on the platform; also, a lot of people got very interested in the pay discrepancies between Mark Wahlberg and Michelle Williams. But, beyond that, it was also a week where everyone learned that a school kid could play the Cantina Band song from Star Wars with a pencil.

Yes, it was yet another strange, wonderful week on the internet. But what else happened? Here we go.

President Trump’s Unsavory Comments

What Happened: President Trump reportedly referred to Haiti, El Salvador, and some African nations as “shithole countries.” The internet responded in kind.

What Really Happened: There is absolutely no denying that Trump has had an impressively full week, declaring himself a stable genius, denying the possibility that he might be deposed as part of the Russia investigation, and avoiding Kendrick Lamar. But it was his comments reported Thursday that will likely have the longest-lasting impact.

Oh.

Some were concerned about journalistic standards…

…but many more were concerned about presidential standards, instead.

Naturally, media reports came fast, furious, and horrified. As the fallout from the comments continued, perhaps the most surprising reaction was the fact that the White House didn’t even try to deny it initially.

And they weren’t the only ones failing to denounce Trump’s crude language.

Still, at least one prominent conservative was willing to correct Trump.

As some of the countries mentioned started asking for comment on the comments, Trump said this:

Well, that’s what he said publicly, at least…

The Takeaway: Twitter?

Breitbart Says Goodbye to Bannon

What Happened: Apparently, when shadow presidents fall, it happens quickly and they even lose their satellite radio shows. Sorry, Steve Bannon.

What Really Happened: As those reading Michael Wolff’s Fire and Fury book know, there is one figure that looms arguably even larger throughout the entire thing than Trump himself: self-proclaimed genius (hey, another one!) Steve Bannon. Turns out, the ego-stroking he might have gotten from the book was likely a farewell gift, considering how the rest of his week went.

Yes, Bannon has lost the Breitbart job he swiftly returned to after leaving the White House back in August, despite releasing a full-throated walk-back of his comments in the Wolff book. So, what happened?

That’d do it. Sure enough, Breitbart was tweeting about his departure.

But it wasn’t just Breitbart that dumped him, it turned out.

(Bannon lost his Sirius show because it was a Breitbart-related venture, for those wondering; it wasn’t a coincidence, just cause and effect.) As would only be expected, news of his departure was everywhere in the media, but how did the rest of the internet respond?

It wasn’t only glee at Bannon’s misfortune, of course; some were also wondering just who could replace him at the outlet. Or maybe that should be, “what.”

The Takeaway: If only there was some kind of lesson to be learned from the swift rise and fall of Steve Bannon. Maybe it’s this?

The Leak of the Week

What Happened: In a political environment consumed with the concept of leaking, a surprise release of previously secret testimony to Congress took the internet by storm.

What Really Happened: Despite what certain POTUSes might have you believe, the investigations into potential collusion between the Trump campaign and Russia are ongoing, although at least one—the one being carried out by the Senate Judiciary Committee—is running aground thanks to internal strife between Republicans and Democrats on the committee. At the start of the week, one of the topics causing the most upset was the testimony of Fusion GPS co-founder Glenn Simpson over the origins of the company’s infamous “Russian dossier.”

Simpson testified in a closed session in August, but faced new calls from Republican committee chairman Chuck Grassley last week to testify again, publicly. Simpson and co-founder Peter Fritsch, in an op-ed that appeared in the New York Times, argued that Congress should simply release the transcript of his earlier testimony. Things seemed at an impasse… and then they didn’t. What changed?

People were surprised at how hardcore the move was…

…especially after Senator Feinstein responded to questions about why she did it.

This kind of thing is, well, unusual to say the least, so of course it was everywhere almost immediately. The 312 page document was, unsurprisingly, very enlightening.

This was, in other words, a really, really big deal. Although what kind of a big deal apparently depended on which side of the ideological spectrum you were on.

Expect this one to run and run.

The Takeaway: Actually, wait, we never checked in on how Trump responded to this news. Mr. President?

She Is Spartacus

What Happened: When it looked as if a news story was going to out the creator of a secret list of crappy men, the internet took it upon itself to handle the situation first.

What Really Happened: Perhaps you heard of the “Shitty Media Men” list before last week; it was a Google spreadsheet shared and edited anonymously that listed more than 70 men who were accused of being, to some degree, abusive towards women, whether it was creepy DMs or physical and sexual abuse. Since its creation in October of last year, it’s been the topic of much speculation and discussion, not least of all because no one actually knew where and how the list got started. And then, last week, that all changed.

It all started with a thread from n+1 editor Dayne Tortorici.

There’s much more in that thread, but those are the most salient points. Tortorici’s comments prompted a response from journalist Nicole Cliffe, and follow-ups from other journalists and editors.

It turned out that the writer of the piece, Katie Roiphe, was willing to comment that she was not about name anyone involved in the list.

Maybe the creator(s) of the list wouldn’t be named, and there was no need to worry about doxing! Well, OK, that was unlikely (for reasons we’ll soon get to). But then, something wonderful happened.

Indeed, so many women came forward to claim responsibility that a hashtag was created, #IWroteTheList, to share collective responsibility:

And then, the real author stepped forward.

Donegan’s piece for The Cut had an immediate impact.

The Takeaway: Nicole Cliffe, want to wrap this one up?

The (Flagging) Power of CES

What Happened: Someone at CES 2018 took the idea of “lights out” a little too literally.

What Really Happened: What would be the most unfortunate thing to happen at a trade show where electricity is kind of important?

Yes, the 2018 Consumer Electronics Show was hit by a twohour power outage last week. Before the cause was known—apparently, it was just rain—some people had some… special theories about what was happening.

Others were just philosophical about it all.

Some were even wondering who “won” the blackout. To be fair, a couple of brands definitely tried their best to claim the crown.

Ultimately, though, the answer to who won is fairly obvious, surely.

Some people at the show really seemed to enjoy the darkness, even if they didn’t make off with any free gifts. Hell, some went to so far as to hope it wasn’t a one-off.

The Takeaway: Of course, it’s worth keeping some sense of perspective about things…

Cryptocurrency Vibe Jumps 400% in 24 Hours

Even in the fast-paced and fast-changing world of cryptocurrency, the rise of Vibe in the last 24 hours is astonishing.

The live music-centric digital currency has seen its value explode 400% in the last day to $2.34, as of mid-morning Wednesday. That puts the price per coin above Ripple, though the overall market cap is still notably lower.

Vibe currently has a market cap of $405 million, according to CoinMarketCap. That’s low in the big picture, but the coins just began trading in October. Not familiar with the platform? Here’s a quick primer.

What is a Vibe token?

Vibe tokens tie in with Viberate, a platform that acts as an IMDB of sorts for live music. Performers are ranked based on their online popularity. Tokens can be used to purchase merchandise or get access to music industry contacts. Eventually, they are expected to be accepted for ticket purchases.

What’s the buzz?

Vibe’s initial coin offering (ICO) made history by selling out in less than 5 minutes, raising $10 million in the process. Among its backers is Charlie Shrem, one of the most visible members of the Bitcoin community.

What caused the surge?

The Binance exchange added Vibe to its trading options, giving the cryptocurrency an added dose of credibility. Buyers jumped in, pushing Vibe into the Top 100 of all digital coins being traded.

Data Sheet—Nvidia CEO Sees AI Solving Problems Beyond Human Abilities

Greetings from rainy Las Vegas, where last night I interviewed Nvidia CEO Jensen Huang, CEO of the 25-year overnight success chipmaker worth $134 billion.

Huang’s and Nvidia’s story is an epic tale of a very good market turning into a market for the ages. Nvidia for years made something called graphical processor units, chips that solved “massive computational problems” that made video games sing. The central processing units Intel sold powered a generation of PCs, while Nvidia occupied a lesser-followed but still lucrative niche.

A niche no more, Nvidia’s market has morphed into supplying the brains for artificial intelligence. The same smarts that create a “virtual reality” for gamers now envision what the world looks like for all sorts of industrial applications. Chief among them is self-driving cars, and Nvidia announced partnerships this week with Uber and Volkswagen.

Huang, the CEO for Nvidia’s entire existence, is enjoying his moment. I asked why Nvidia hadn’t experienced the same kind of security concerns Intel had, and he scoffed. Asked if today’s automobiles could be retrofitted with AI-worthy chips, Huang essentially said: Not so much.

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Huang painted a nuanced view of what autonomous vehicles will look like. Cars driving fixed routes in “geo-fenced” area will come first, followed by over-the-road truckers. True self-driving cars will be further off, and even once they come people will still drive for “entertainment,” he said.

The Nvidia CEO’s most fascinating observation is that his chips will power software that will write software. In other words, AI will beget AI to solve problems humans didn’t know they had.

NEWSWORTHY

Defensive moves. Apple fired back at critics who accused the iPhone maker of hooking kids on smartphones. “We take this responsibility very seriously and we are committed to meeting and exceeding our customers’ expectations, especially when it comes to protecting kids,” Apple said after several big investors asked the company to do more.

Defensive moves, part II. Microsoft halted the distribution of one of its security patches intended to protect against the Spectre attack against CPUs. The patch was causing problems on some older PCs with CPUs made by Advanced Micro Devices, the companies said.

Offensive moves. The fired Google engineer who authored a sexist memo about the company’s hiring practices is suing. James Damore, who wrote that women were biologically less suited to the field of engineering, claims that Google “singled out, mistreated, and systemically punished and terminated” employees that didn’t agree with its stance on diversity.

Surprise. A policy change by a top tracker of of digital currency prices to exclude some markets in Korea made Monday’s fall in prices of many cryptocoins look more severe. Some digital currency enthusiasts said CoinMarketCap should have been more transparent about its intention to stop including data from the Korean firms.

Siri, get me a pizza. At CES, Toyota Motor unveiled its e-Palette concept vehicle, which will be part of a network of electric autonomous shuttle vans that can ferry people or packages. Toyota is partnering with Amazon, Uber, Didi Chuxing, Mazda, and Pizza Hut on the project.

Marathon music session. Also at CES, Qualcomm announced a new set of chips to power Bluetooth wireless gear, like headphones and ear buds. Qualcomm says the new “QCC5100 Low Power Bluetooth SoC” will triple battery life and make connections to phones and other devices more reliable.

FOOD FOR THOUGHT

The cost of mining digital currency is basically the price of a PC with a strong graphics card and then the ongoing bill for electricity. Some enterprising undergraduates have realized that they could use the free electricity they get at school to mint some cryptocash for themselves, as Karen Ho writes for Quartz. One MIT student, called “Mark” in the article, was making quite a profit.

Each time Mark mined enough ether to cover the cost, he bought a new graphics card, trading leftover currency into bitcoin for safekeeping. By March 2017, he was running seven computers, mining ether around the clock from his dorm room. By September his profits totaled one bitcoin—worth roughly $4,500 at the time. Now, four months later, after bitcoin’s wild run and the diversification of his cryptocoin portfolio, Mark estimates he has $20,000 in digital cash. “It just kind of blew up,” he says.

BEFORE YOU GO

The best Wi-Fi security standard, known as WPA2, is nearly 20 years old and was recently cracked. So the group that sets standards for the ubiquitous transmission technology, the Wi-Fi Alliance, finally announced a new, tougher security set up that will be called WPA3. Compatible devices should be on the market later this year.

This edition of Data Sheet was curated by Aaron Pressman. Find past issues, and sign up for other Fortune newsletters.

Nvidia CEO Sees Massive AI Needs for Self-Driving Cars

This article first appeared in Data Sheet, Fortune’s daily newsletter on the top tech news. Sign up here.

Greetings from rainy Las Vegas, where last night I interviewed Nvidia CEO Jensen Huang, CEO of the 25-year overnight success chipmaker worth $134 billion.

Huang’s and Nvidia’s story is an epic tale of a very good market turning into a market for the ages. Nvidia for years made something called graphical processor units, chips that solved “massive computational problems” that made video games sing. The central processing units Intel (intc) sold powered a generation of PCs, while Nvidia (nvda) occupied a lesser-followed but still lucrative niche.

A niche no more, Nvidia’s market has morphed into supplying the brains for artificial intelligence. The same smarts that create a “virtual reality” for gamers now envision what the world looks like for all sorts of industrial applications. Chief among them is self-driving cars, and Nvidia announced partnerships this week with Uber and Volkswagen.

Huang, the CEO for Nvidia’s entire existence, is enjoying his moment. I asked why Nvidia hadn’t experienced the same kind of security concerns Intel had, and he scoffed. Asked if today’s automobiles could be retrofitted with AI-worthy chips, Huang essentially said: Not so much.

Huang painted a nuanced view of what autonomous vehicles will look like. Cars driving fixed routes in “geo-fenced” area will come first, followed by over-the-road truckers. True self-driving cars will be further off, and even once they come people will still drive for “entertainment,” he said.

The Nvidia CEO’s most fascinating observation is that his chips will power software that will write software. In other words, AI will beget AI to solve problems humans didn’t know they had.

What You Can Do Now to Restrict Your Kids’ iPhone Use

Apple has promised new ways for parents to control what their kids see on its products.

In a statement to The Wall Street Journal, Apple said that it’s “constantly looking” for opportunities to protect children and will, in a future software update, make parental controls that are “even more robust” available on its many products.

Apple’s decision came after two prominent investors, Jana Partners and California State Teachers’ Retirement System, sent a letter to Apple over the weekend requesting the company build new tools to help parents curb their children’s use of iPhones. They cited the potential for negative effects on a child’s mental health with too much smartphone use, and suggested Apple, as one of the most prominent technology companies in the world, could lead a charge to safeguard children.

But while you’re waiting for that update, you can take action now if you believe your kids are spending too much time on their favorite apps.

Apple’s iPhone (and iPad) parental controls are already quite useful and give you broad control over what your kids can and cannot do. Here’s a quick guide on how to restrict app access on your kids’ iPhones:

Ensure You Have a Passcode Set

In order to create restrictions—and ensure your children can’t easily turn them off—you’ll need to turn on passcodes in your iPhone settings. The passcode will need to be input to access the Restrictions settings.

To create a passcode, go to Settings > General > Face ID & Passcode (or Touch ID & Passcode). Create the passcode you want and you’ll be all set.

Open the Restrictions App

To access the Restrictions app, you’ll need to open your Settings and go to General. In there, you’ll see an option for Restrictions. Once you tap it, the software will request you input a passcode. Do that and you’ll see a long list of restrictions.

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Make Some Basic Adjustments

First things first, decide whether you want your children to access built-in apps, including Apple’s Safari browser, the Camera app, and FaceTime. You can also decide whether iTunes and the ability to install apps should be turned on. If you don’t allow apps to be installed, only you will be allowed to install programs when you turn off the restriction and install apps from the App Store.

Choose an Age Rating

If you’ve decided to allow your children to download apps but want to restrict what they can access, scroll down on the Restrictions menu to the “Allowed Content” section.

There, you’ll decide whether Apple should automatically filter explicit content. You can also choose the “apps” pane and determine whether the iPhone should allow any apps to be accessible, or only those that are appropriate for a variety of ages, including 4+, 9+, 12+, or 17+.

Similar control is available on TV show access, music, and allowed websites. In fact, the Allowed Websites pane lets you determine which websites your kids can access at any time.

Focus on Games

If games is the real problem you’re dealing with, Apple makes it easy to control that behavior.

If you scroll the bottom of the Restrictions menu, you’ll see a “Game Center” section. There you can decide whether your kids should be allowed to play multiplayer games or communicate with others inside a game.

Ford wants to wire cities to ease congestion

LAS VEGAS (Reuters) – Ford Motor Co (F.N) plans to offer cities networks and technology to smooth the flow of goods and people as ride hailing and automated delivery services are making congestion worse, the U.S. automaker’s top executives said on Tuesday.

In addresses at the CES technology show here, Chief Executive Jim Hackett and Marcy Klevorn, executive vice president for mobility, said Ford wants to build a “transportation mobility cloud” and technology that would allow cities, fleet operators and others to use a shared platform to manage vehicles and connect people to different types of transportation.

“Nobody else is talking about providing an open community like this for mobility,” Klevorn said. She asked CES attendees to work with Ford to develop systems to improve “transit choreography.”

In a blog post, Rich Strader, Ford’s vice president for Mobility Product Solutions, and Sunny Madra, CEO of Ford’s software partner, Autonomic, said the common technology platform could be used to build applications or run fleets of connected vehicles.

Cities could re-route traffic away from congested streets, or make sure that self-driving cars are not cruising around searching for passengers, exacerbating traffic jams, Strader and Madra wrote.

Ride services companies and advocates of self-driving vehicles have argued that the shift away from human-driven, personal vehicles would result in less congestion. Auto industry executives talk of a world with “zero congestion.”

A study of New York City traffic released in December concluded that 59 percent more ride hailing cars and cabs were operating in the city center in 2017 than in 2013. One-third of those vehicles were empty, according to the report by consultant Bruce Schaller, a former New York City transportation official.

New York officials are weighing various proposals to counter the trend, including assessing fees on ride services companies.

Cities such as London are also considering or instituting new fees aimed at curbing traffic.

Reporting by Joe White; Editing by Richard Chang

Toyota unveils self-driving concept vehicle for rides, deliveries

LAS VEGAS (Reuters) – Toyota Motor Corp announced on Monday a self-driving electric concept vehicle that it will tailor for companies to use for tasks like ride hailing and package delivery, underscoring how automakers are no longer simply building cars but also providing services to go with them.

The world’s second-biggest carmaker said it plans to begin testing the e?Palette concept vehicle in various regions, including the United States, in the early 2020s. It will come in three sizes: a bus-sized vehicle, a shuttle and a small delivery vehicle sized to run on sidewalks.

Toyota said at the CES global technology conference in Las Vegas that it will work with companies including Amazon.com Inc, Chinese ride-hailing company Didi Chuxing Technology Co, Pizza Hut, Mazda Motor Corp and Uber Technologies Inc[UBER.UL] to build the vehicle and its hardware and software support and develop connected mobility products.

After intense research and development in self-driving technology, automakers are beginning to unveil clearly defined autonomous vehicle strategies and looking to apply the technology to uses like ride services, shuttle services and package deliveries.

Toyota took longer than rivals to warm to the idea of autonomous vehicles, but has committed $1 billion through 2020 to develop advanced automated driving and artificial intelligence technology. It plans to begin testing cars that can drive themselves on highways around 2020.

“This announcement marks a major step forward in our evolution towards sustainable mobility, demonstrating our continued expansion beyond traditional cars and trucks to the creation of new values including services for customers,” said Toyota President Akio Toyoda in a statement.

The vehicle features an open control interface enabling Toyota’s partner companies to install their own automated driving system. Toyota’s so-called “guardian” technology will then act as a safety net, the company said.

Carmakers, tech companies and other service providers have partnered on self-driving projects over past two years, due to the difficulty and high cost of developing such technology alone.

Reporting By Alexandria Sage; Editing by Meredith Mazzilli