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Is Apple the Next Altria?

It’s nice to see some level-headed analysis of…well…just about anything these days. Apple (AAPL) has taken its lumps over the past six months as investors fret that the company is now “post-growth.”

I don’t believe that Apple is finished growing. But even if it is, I would argue that the stock is cheap at current prices. Even utility stocks — which really are close to zero-growth companies — trade at higher valuations than Apple does today. (See Revisiting Icahn’s Apple Call After the Correction.)

Barron’s Tiernan Ray made some very sensible comment’s in Saturday’s issue:

Jim Cramer coached his viewers to adopt a certain resignation. What if, he mused, Apple were just an enormously valuable company that might never grow again, like Pfizer (PFE), whose sales have declined four years in a row? Seen in that light, the iPhone is an important but declining asset, akin to Pfizer’s Lipitor, he suggested.

As if the comparison to a cholesterol drug wasn’t hilarious enough, CNBC also brought on a noted New York University business professor, Aswath Damodaran, who suggested, with a bit of a twinkle in his eye, that we think of Apple as we do of Altria (MO), which makes Marlboro cigarettes. Like Altria, Apple can afford to pay out billions in dividends and buybacks for decades to come, whether it grows or not. And anyway, he concluded, people seem as addicted to their iPhone as they are to cigarettes.

Altria (formerly Philip Morris) was the best-performing stock in the Standard & Poor’s 500 from 1957 to 2014, according to Howard Silverblatt with S&P/Dow Jones Indices, so perhaps this point of view has a certain logic to it.

I made the comment years ago that Big Tech is the “New Big Tobacco,” and the metaphor still holds. I also commented about a year ago that Apple had enough cash on its book to continue paying its dividend at current levels for the next ten years… without earning a single dime of additional profit… and this takes into account the taxes Apple would have to pay to repatriate the cash at current tax rates. Yes, Apple could be a break-even company… not earning a single penny in profit… and still maintain its dividend for the next decade.

Apple is one of the best — and safest — bargains I’ve seen in my lifetime at these prices.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. He is currently long AAPL.

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Gundlach: Buy Closed-End Bond Funds and Mortgage REITs

BA-BK014A_Gundl_G_20160122205734It seems that bond king Jeffrey Gundlach and I are reading from the same playbook. In the Barron’s Roundtable, he made his case for deeply-discounted closed-end bond funds and mortgage REITs. I’ve been bullish on both for over a year… and I’ve taken my lumps for it. But the values are there, and I’m collecting outsized payouts while I wait.

Some of Gundlach’s comments are worth passing on:

A portion of the credit market has a safety cushion large enough to absorb another 200- or 300-basis-point widening in junk-bond spreads versus Treasuries. I’m referring to closed-end bond funds, which trade on the New York Stock Exchange. Closed-ends are one of the best plays on the Fed not raising interest rates…

Closed-end funds are leveraged, and investors have been afraid to own them because they fear that the Fed has launched a tightening cycle. Also, based on daily data going back 20 years, they have traded at a 2% discount, on average, to net asset value. Recently, however, the sector traded at a 10% to 12% discount to NAV. It has traded at such a steep discount only 5% of the time. In the past 20 years, the discount has been wider than that only during the financial crisis in 2008-’09…

If history is any guide, discounts would widen further only in a 2008-type scenario, which is possible, although doubtful so soon after the prior crisis. Under current circumstances, you have about two percentage points of downside, and 10 points of upside to return to the historical discount. That makes a basket of closed-ends attractive. If you bought a junk-bond-oriented closed-end trading at a 12% discount to NAV, some of the bonds would be trading at a 15% discount. This isn’t a bad idea, but I prefer Brookfield Total Return (HTR). It is trading just as poorly as some other closed-ends, but is vastly safer.

Gundlach’s firm, DoubleLine, is far too big to buy closed-end funds in any meaningful size. He’d end up single-handedly moving the market. But for individual investors, these may be the best option available these days. As Gundlach puts it, “If the S&P rises 10%, closed-ends could return 20%. If the stock market falls 30%, a decline is already priced into these funds. I look at closed-end funds as a good place to put your risk money.”

I agree. Given the yawning discounts among closed-end bond funds, we have that all-important margin of safety in this space.

Moving on, Gundlach had some interesting things to say about mortgage REITs:

Fears that the Fed will raise rates significantly are overblown. This brings me to Annaly Capital Management (NLY), one of the largest mortgage REITs [real-estate investment trust]. It has an $8 billion market cap and has been trading at a 25% discount to book value for some time…

It is selling for $9.41. A few years back, it sold for $18. These sorts of stocks have step-function moves. They don’t move by a few percent; they go from $18 to $12 and from $12 to $9, and if the yield curve is inverted, and they have to cut their dividends, things get really bad. But a discount of 30% to book value is the widest ever for Annaly, and historically very wide for a mortgage REIT. Annaly is paying a dividend of 30 cents per quarter. It yields 12.75%. The environment for Annaly has improved… At today’s discount, a lot of bad things are priced in. If the Fed doesn’t raise interest rates much, the stock should go higher.

 I’m not currently long Annaly. Rather than bet on a single mortgage REIT, I opted to buy a broader basket via an ETF. But my rationale was much the same. Across the sector, you have quality names trading at enormous discounts to their underlying portfolio values. The sector is worth more dead than alive.

The rationale move here would be for mortgage REITs to plow the proceeds from maturing and prepaid mortgage securities into buying back their own stock. An m-REIT yielding 10% and trading at 80 cents on the dollar is going to deliver a better return than the mortgage securities  they’re currently buying. Annaly, for one, has done exactly that, announcing over the summer that they intended to buy back about $1 billion in shares. At today’s prices, that amounts to about 12% of Annaly’s market cap.

Expect more of their peers to follow suit.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.

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7 Dividend Stocks That Are Suddenly Bargains


Bear markets aren’t a lot of fun to live through. In fact, I’m actually losing a little sleep over the current one. For whatever reason, this bear market just feels nastier than some of the others I’ve been through.

But the nice aspect of a bear market is that dividend stocks you might normally have considered too expensive to buy suddenly look like a bargain. If you’re brave enough, you can buy your favorite dividend stocks at bargain basement prices and effectively “lock in” very solid dividend yields.

I have to write “lock in” in quotation marks, of course, as there is really no such thing as a guaranteed dividend. Dividends can get cut in a hurry, and an exceptionally high yield is often a prelude to exactly that. So, common sense rules apply here. We’re looking for quality companies that are suddenly a bargain, not cheap garbage that gets cheaper.

So, with no more ado, let’s take a look at seven dividend stocks that have gone on sale of late. I would consider all of them viable options for a diversified dividend portfolio.

StoneMor Partners (STON)

There is nothing certain in life but death and taxes. Well, Stonemor Partners (STON) seeks to profit from the first and avoid the second.

That needs a little explaining: StoneMor is a publicly-traded cemetery. And while that might be somewhat morbid, it’s a fantastic business model. Funeral and burial services (including cremation) are unavoidable expenses, and not ones that heirs are likely to skimp on. Furthermore, with the aging of the baby boomers, business is about to get kicked into overdrive. The number of annual deaths in America is expected to grow by about 80% between now and 2035, meaning that StoneMor has two decades of growth practically baked in.

We’ve covered death; now for taxes. StoneMor is structured as a master limited partnership (“MLP”), a structure that is somewhat rare outside of the oil and gas sector. Being an MLP means that StoneMor is required to pass on nearly all of its profits in the form of distributions in order to escape taxes at the company level. As a result, StoneMor pays a fat yield of just over 10%.

Despite its low-volatility business, StoneMor has been a high-volatility stock. Its price has sagged from more than $32 to just $26.25 today. Don’t sweat it; this is the sort of volatility that comes with the turf when you buy smaller-cap stocks. Just keep cashing the distribution checks, and ride out the price swings.

STAG Industrial (STAG)

Up next is one of my favorite REITs, STAG Industrial (STAG). STAG stands for “Single Tenant Acquisition Group,” and this is pretty good synopsis of what the REIT does. STAG primarily buys stand-alone light manufacturing and logistical centers and then mostly just sits back and collects the rent checks.

Continuing to sink toward $16, STAG is trading close to its 52-week low. At one point last year, it was trading for more than $27 per share. The selloff in STAG’s shares has been brutal to say the least. They also appear to have very little to do with developments in STAG’s business. Since its 2011 IPO, STAG has managed to grow its funds from operations (FFO), an earnings measure favored by REITs, by a full 9% per year.

No, the selloff has more to do with STAG’s smaller size. STAG’s market cap is just $1.1 billion, and small caps in general have gotten smashed over the past year. Some of this is fear of the Fed’s tightening, and some of it is just a matter of investors shunning risk by avoiding smaller companies. But as a result of STAG’s share price dip, its dividend yield has now soared above 8%.

You want another bonus? STAG’s dividend is paid monthly rather than quarterly, making it a nice retirement stock.

Enterprise Products Partners (EPD)

I’m probably risking an actual fist fight by having the audacity to recommend a midstream master limited partnership. These have become the proverbial red-headed stepchild of the stock market. Long touted for their high distributions, tax efficiency and lack of exposure to energy prices, they were supposed to be bulletproof.

But then we had a proper energy crisis, and we found out that these had a lot more sensitivity than we all realized. They were also overleveraged after years of easy money policy by the Fed.

The sector has been in a tailspin ever since Kinder Morgan (KMI) cut its dividend late last year. Well, I can confidently say that Enterprise Products (EPD) will not be cutting its distribution any time soon. In fact, it recently hiked its distribution … just as it has every single quarter since 2004.

Enterprise Products is a champion among dividend stocks, and today it yields 7.3%. Enterprise Products isn’t nearly as aggressive as a lot of its peers, and its leverage is low enough to ride out whatever might happen next with the prices of oil and gas. It’s getting dragged down by negative sentiment towards the entire sector … which creates a spectacular opportunity for the rest of us.

General Motors (GM)

I really don’t know what investors want to see from General Motors (GM). The company had one of its best years in history in 2015, and yet the stock finishes the year down sharply from its highs. GM traded as high as $38.99 last year. Today, it trades for $30 and yields a fat 4.8%. Early this year, GM raised its dividend by about 6% and massively increased its share repurchase plan.

Looking at operations, GM is going through a major overhaul of several popular car models, which is generally a prelude to higher sales.

Yet GM stock gets no love. It seems that investors are fixated on the risks posed by a slowdown in China.

Well, this is my view: GM is priced to deliver decent enough returns no matter what happens in China. The shares trade hands at 5 times this year’s expected earnings and 0.3 times sales. At that price, it’s hard to imagine really losing money here. GM is a dividend bargain.

Apple (AAPL)

Consumer electronics leader Apple (AAPL) might seem like a strange addition on a list of dividend stocks given that its yield is just 2%. But given Apple’s reputation as a dividend grower, I’d say it can hold its own on any dividend stock list. And you certainly can’t argue that it’s not a bargain. At one point last year, the stock fetched $134 per share. Today, it doesn’t even trade for $100.

What gives?

In a nutshell, a lot of investors are worried that the day we feared — the day that iPhone sales started to sag — is finally here. For all of Apple’s efforts to create popular new products, it is still first and foremost an iPhone company.

I’m not too worried about it, though. In a broadly overpriced market, Apple is one of the few truly cheap stocks out there. It trades at just 9 times next year’s expected earnings. And that says nothing of Apple’s massive cash hoard, which was more than $200 billion as of last reporting period. Nearly 40% of Apple’s market cap is cash in the bank.

I don’t know when sentiment will turn friendly to Apple again. But I do know that the company is ridiculously cheap at these levels.

Telefonica (TEF)

It seems like so long ago, but there was a time when Spanish telecom giant Telefonica (TEF) could do no wrong. It was one of the leading mobile phone and internet companies in Europe and Latin America, a serial dividend raiser and a generally great stock to own.

Well, after a European debt crisis, major political and economic upheaval in Latin America, and a seizing of the capital markets that forced the company to suspend its dividend for a time, there aren’t too many investors that are keen on Telefonica these days.

That’s a mistake. At today’s prices, Telefonica trades for just 0.8 times sales while yielding almost 8%.

Sure, mobile phones are largely a saturated market at this point, and competition is fierce. But there is no justifiable reason for Telefonica to trade at a more than 30% discount to AT&T (T).

The perfect storm that sapped Telefonica — a strong dollar, emerging market chaos and political woes in Europe — won’t last forever. And while we’re waiting, we’re getting paid quite handsomely.

Energy Transfer Equity (ETE)

And finally, I’ll leave you with a more speculative recommendation, midstream MLP Energy Transfer Equity (ETE). Energy Transfer was thegrowth dynamo of the MLP space going into last year, and its merger with rival Williams Companies (WMB), expected to be completed within a quarter, will make it the largest midstream pipeline company in North America — even bigger than Kinder Morgan and Enterprise Products.

The issue is financing. Energy Transfer has never had difficulty accessing the debt and equity markets, but this is a truly nasty time for the MLP space, and financing on reasonable terms is hard to come by. This has spread fears that ETE might have to temporarily lower or suspend its dividend in order to finance the Williams takeover.

My take on this?

If that is what it takes, so be it. As I’m writing this, the yield is a gargantuan 15%. At this point, ETE could slash its dividend in half and still have one of the highest dividend yields amount large-cap companies. And once the merger with Williams is consolidated, the combined entity will be a midstream powerhouse. Patient investors will be glad they waited it out.

This piece first appeared on InvestorPlace.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long AAPL, EPD, ETE, GM, TEF, STAG and STON.

Photo credit: Richmond 9

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Highlights From Kinder Morgan’s Earnings Release

Kinder Morgan (KMI) released disappointing earnings last night that sent the stock lower after hours. But the stock is rallying hard today, as there seems to be a light at the end of the tunnel. Here are some highlights.

From Richard Kinder:

We are pleased with KMI’s business performance for the year especially in light of a tremendously challenging commodity environment, and we are glad to have generated the greatest amount of annual distributable cash flow in the company’s history along with a 7 percent increase in our DCF per share year-over-year,” said Richard D. Kinder, executive chairman. “However, we were disappointed by KMI’s stock performance, which declined 65 percent during 2015.

Disappointed? You and me both, Richard!

As Kinder continuesL

“The decision to reduce our dividend was very difficult and was a direct result of the rapid and significant disconnect between the performance of our business and the performance of our stock. We believe this bold move is in the best interest of the company and our shareholders. We expect the reduced dividend has completely eliminated our need to access the capital markets to fund growth projects in 2016. This insulates us from challenging capital markets and significantly enhances our credit profile. Moreover, by reducing the dividend and high-grading our backlog, we do not expect to need to access the capital markets to fund our growth projects for the foreseeable future beyond 2016.

“Additionally, as our future cash flow exceeds our investment needs, we are in an improved position to return value to shareholders. While the markets appear to have begun 2016 on the same sour note on which they left 2015, we are confident that we are one of the best positioned companies to withstand these headwinds.”

While 2015 was a miserable year for shareholders, I agree that management did the right thing in slashing the dividend. It’s in the long-term best interest of the shareholders. I have no idea when the credit markets will return to “normal,” and neither does Kinder’s management team. This takes that question out of the equation.

I also found this interesting:

“As a result of the current challenging capital markets, we are focused on high-grading our backlog to allocate capital to the highest return opportunities, including efforts to reduce spend, improve returns and selectively joint venture projects where appropriate. We have reduced our expected 2016 spend by approximately $900 million, reduced our backlog by $3.1 billion from the third quarter of 2015 and expect further reductions in the coming months as we continue to high-grade our capital investments.

KMI is prioritizing by choosing the best capital projects and leaving the less profitable ones undone. That shows a new discipline we didn’t see in the era of cheap, abundant capital.


The company’s outlook for the next year seems reasonable:

On Dec. 8, 2015, KMI issued its preliminary financial projections for 2016. Since providing this guidance, the company has updated its 2016 budget to reflect current commodity price and foreign exchange rate expectations as well as its high-graded investment plan. As a result, for 2016, KMI expects to declare dividends of $0.50 per share, generate approximately $4.9 billion of distributable cash flow available to equity holders and approximately $4.7 billion of distributable cash flow available to common shareholders (i.e., after payment of preferred dividends) and generate approximately $3.6 billion of cash flow in excess of its dividend. KMI’s revised growth capital budget for 2016 is approximately $3.3 billion which is a reduction of approximately $900 million from the preliminary 2016 guidance. These expectations assume an average 2016 West Texas Intermediate (WTI) crude oil price of $38 per barrel, an average 2016 Henry Hub natural gas price of $2.50 per MMBtu and interest rates consistent with the current forward curve.

The overwhelming majority of cash generated by KMI is fee-based and therefore is not directly exposed to commodity prices. The primary area where KMI has commodity price sensitivity is in its CO2 segment, where KMI hedges the majority of its next 12 months of oil production to minimize this sensitivity. For 2016, the company estimates that every $1 per barrel change in the average WTI crude oil price impacts distributable cash flow by approximately $7 million and each $0.10 per MMBtu change in the price of natural gas impacts distributable cash flow by approximately $1.2 million.

At current prices, I don’t see a lot of risk in KMI stock. It will probably be a few years before we see new highs. But starting at today’s prices, and given the unattractive valuation of the market in general, KMI would seem like a safe bet for outperformance.


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Best Stocks for 2016: Energy Transfer Equity is Beaten Down and Ready to Rally

This piece first appeared on InvestorPlace as part of its Best Stocks for 2016 contest. There are several excellent picks this year, and the competition promises to be fierce!

If you’ve read my work for any length of time, you know I’m not a major risk taker. In my experience, slow and steady wins the race.

That was my rationale for recommending Prospect Capital (PSEC) in last year’s Best Stocks contest. I reasoned that a diversified private equity portfolio trading at a deep discount to book value was a low-risk investment with a high probability of generating a market-beating return. Between a return to book value and the high dividend, I expected total returns of as high as 40% within 12 to 18 months.

Well, we didn’t quite get there, or at least not yet. The value investor’s eternal problem is that a cheap stock can stay cheap for a lot longer than you expect. But at least we were paid handsomely to wait with PSEC’s dividend.

This year, I’m recommending another beaten-down value stock with a high dividend (technically a “distribution” in this case), MLP general partner Energy Transfer Equity (ETE).

A look at Energy Transfer Equity’s stock chart will give you heartburn. Serious heartburn. ETE shares lost more than half their value between July and December, as the entire midstream MLP space got hammered. But at today’s prices, Energy Transfer Equity gives us exposure to one of the world’s premier energy transportation company at prices I do not expect to see again in our lifetimes. Furthermore, I believe that much of the drop we saw in December was due to indiscriminate selling by investors fleeing the entire sector rather than due ETE’s prospects.




Energy Transfer Equity is an MLP, but it’s a peculiar kind in that, rather than own pipeline interests itself, its primary role is to serve as a general partner to a collection of other MLPs. In this sense, ETE has a lot more in common with Kinder Morgan (KMI) before its reorganization late in 2014 than it does with most other “traditional” MLPs.

You can explain Energy Transfer’s company structure with two words: “It’s complicated.” Energy Transfer Equity is the head of a sprawling energy empire consisting of six companies that are currently traded today: Energy Transfer Equity, Energy Transfer Partners (ETP), Williams Partners (WPZ), Sunoco LP (SUN), Sunoco Logistics Partners LP (SXL), and Williams Companies (WMB), which is not shown in the chart below because it is in the process of being rolled into ETE. A final entity — Energy Transfer Corp (ETC) — is to be formed in 2016 and will be similar in structure to other corporations operating in the midstream MLP space, such as Kinder Morgan and OneOk (OKE).



Taken together, the consolidated Energy Transfer empire will has bigger network of pipelines that either Kinder Morgan or Enterprise Products Partners (EPD), at 104,000 miles. It’s the largest transporter of natural gas in the U.S. (moving 35% of all natural gas in America), the third-largest natural gas liquids business, the third-largest MLP crude oil transporter, and has the second-largest liquefied natural gas export facility planned. Quite simply, Energy Transfer is the proverbial 800-pound gorilla in the midstream energy space.

Looking at ETE Stock

When I evaluate a stock, I like to have four basic criteria in place:

  • The stock should be on the right side of a durable macro trend.
  • The stock should be cheap.
  • The stock should be shareholder friendly.
  • Management should have “skin in the game” in the form of insider ownership and buying.

Not every stock I buy will have all four criteria in place, but ETE most certainly does.

I’ll start with the most controversial point: That ETE is on the right side of a durable macro trend. That might sound like an odd thing to say given that crude oil prices are in free fall and the entire energy industry is in a state of crisis right now. While ETE has virtually no direct exposure to falling crude oil prices, some of its subsidiaries have at least indirect exposure in that a prolonged depression in energy prices would affect domestic energy production and the volume of oil and gas flowing through their pipelines.

I consider this exposure manageable. Meanwhile, I still consider U.S. natural gas exportation to be one of the major macro themes of the years ahead, as importers look to lessen their dependence on Russia and the volatile Middle East. (I’m not alone in this belief. Consider Seth Klarman and Carl Icahn’s massive investments in Cheniere Energy (LNG), which I highlighted here.)

Moving on, let’s look at value. After losing more than half its value, value investors are bound to start sniffing around ETE. But are the shares truly cheap at these prices?

Yes. I start with the distribution yield, which at 9.6%, is about as high as its ever been in the company’s history. Yes, as we saw with Kinder Morgan, even sacrosanct dividends can be cut. But in ETE’s case, the underlying MLPs fueling the distribution are a lot less levered and thus at less risk of a cut. As an example, Energy Transfer Partners is leveraged about 4.75 times (debt/EBITDA).  Kinder Morgan is leveraged over 6 times, though it is in the process of deleveraging itself.

As of last quarter, ETE’s distribution coverage ratio was 1.09. ETP’s coverage ratio was lower last quarter, at just 0.97 for the first nine months of the year. Yet management was confident enough that cash flows will improve in 2016 that they raised the distribution by 2 cents per share last quarter.

Using the trailing four quarters of distributable cash flow (“DCF”), ETE trades at a price/DCF ratio of 9.9. That is remarkably cheap for any MLP, particularly a general partner growing its distribution at a rapid clip.

That brings me to my next criteria: Shareholder friendliness. ETE has been an absolute monster when it comes to raising its cash payout.


Over the past year, ETE has raised its dividend by a full third, and it’s more than doubled its payout since 2011.

In a recent CNBC appearance, CFO Jamie Welch hinted that distribution growth might slow a little in 2016, owing to the company’s desire to keep leverage under control in this credit environment. ETE doesn’t want to be “the next Kinder Morgan” and be forced to cut its payout later. (I recommend you watch Welch’s interview. It’s gives a decent bit of insight into ETE’s prospects over the coming years.) But Welch makes it clear that ETE will still have “significant” distribution growth in 2016.

We’ll see about that growth. Energy Transfer might decide to play it safe, hoard cash, and keep its payout constant. But even with zero distribution growth in 2016, you’re looking at fantastic potential total returns.

And finally, we come to insider activity. ETE’s executives have a massive amount of skin in the game. Company founder Kelcy Warren dropped over $41 million of his own money into the stock in early December. This is after he already dropped $63 million in July, $19 million in January… and $80 million last fall.

That’s about $200 million in insider buying by just one man. Yes, Warren is a billionaire. Forbes pegs his net worth at $3.2 billion. But that still shows major commitment from one of the smartest men in the energy industry.

What kind of returns do I expect for Energy Transfer Equity in 2016?

Starting at today’s prices, I would say returns of 50%-100% in 12-24 months is very realistic and may even prove to be conservative.

So, what are the risks?

Alas, there are no free lunches in this business. The entire MLP space is currently under attack, and as we saw with Kinder Morgan, bad things happen when the credit markets turn negative on a company. Should Wall Street decide that the entire MLP model needs to be scrapped, and all existing MLPs need to deleverage, then ETE will get hit along with the rest of the sector.

That said, at today’s prices, there is a lot of fear already priced in. ETE is a steal, and I expect it to trounce the competition in InvestorPlace’s contest this year.

Disclosure: Long ETE, EPD, KMI, OKE

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

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