Today’s news: Legg Mason (LM), Morgan Stanley (MS) and Southwest Airlines (LUV) each move from Strong Buy to Hold; buy KLX (KLXI) and Quanta Services (PWR) today.
Despite Legg Mason’s (LM - yield 2.7%) great earnings growth and valuation, I’m moving LM from Strong Buy to Hold for two reasons. First, LM is nearing my price target of 44, where the stock last traded in October 2015. A stock will typically plateau for many months when it retraces long-term upside price resistance, so we’re nearing a stopping point on the stock’s run-up.
The other problem is that I have a strong sense that investment management stocks are going to suffer more than any other industry’s stocks during the next stock market correction. (I view a correction as normal, but overdue; and I perceive the next correction as likely to be a little bigger than average, but not a crash.)
Investment management companies will earn less money when falling stock prices lower the value of their equity assets under management (AUM). That problem is compounded when retail investors panic and sell their equity holdings, which further lowers equity AUM. Investment management companies earn their money as a percentage of AUM, so when AUM declines, profits also decline. That’s going to lead to analysts necessarily lowering their earnings estimates, and that’s never good. Falling earnings estimates generate selling pressure on a stock, which holds the share price down. Let’s head this scenario off at the pass by taking profits and moving into a less vulnerable industry. In late October, I sold Ameriprise Financial (AMP) and Invesco (IVZ) from the Growth & Income Portfolio under these same circumstances. Hold.
Morgan Stanley (MS - yield 1.9%) moves from Strong Buy to Hold today as it nears my fair-value price target of 58. I will likely sell when it peaks. Hold.
Southwest Airlines (LUV - yield 0.8%) moves from Strong Buy to Hold today, because it quickly rose to upside price resistance near 64 after it joined the Growth Portfolio last week. I expect the stock to rest for a while before rising past 64. Hold.
KLX Inc. (KLXI) is an extremely undervalued, small-cap aggressive growth stock in the aerospace and energy services industries. The company will report third quarter results on the morning of December 6 (January year-end). The consensus EPS estimate is $0.78, within a range of $0.75 to $0.81. KLXI appears capable of rising past 56 to new highs this month. Buy KLXI now. Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. PWR is a very undervalued aggressive growth stock. PWR finally rose above long-term price resistance today. I therefore expect immediate capital gains, and for the stock to perform well in 2018. Buy PWR now, and buy more on pullbacks. Strong Buy.