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Cabot Undervalued Stocks Advisor Special Bulletin

Two of our stocks move from Hold to Buy in advance of tomorrow’s earnings releases.

Today’s news: Apple (AAPL) and Knight-Swift Transportation (KNX) each move from Hold to Buy in advance of tomorrow’s earnings releases.

Apple Inc. (AAPL – yield 1.9%) is expected to report first quarter EPS of $4.17 on the afternoon of January 29, within a range of $4.13-$4.27. The market expects $84.0 billion revenue, within a range of $83.1-$84.6 billion.

I’m moving Apple from Hold to Buy, with the belief that negative investor sentiment has peaked, that analysts have become overly-cautious, and that the price chart appears to have stabilized enough so that an upside earnings surprise could deliver a serious jump in the share price. For what it’s worth, Barron’s also considers the stock to be undervalued. I think the pendulum is about to swing back to moderately bullish territory. Buy.

Knight-Swift Transportation Holdings (KNX – yield 0.8%) – I sent out a bulletin on January 17 when Knight-Swift’s management pre-announced fourth quarter EPS within a range of $0.91-$0.93, which was much higher than previous earnings guidance.

I’m writing today because the fourth quarter earnings release will take place tomorrow morning, January 29, and consensus earnings estimates are still well below the $0.91-$0.93 range. That means there’s a very strong likelihood of an upside earnings surprise tomorrow.

The Thomson Reuters fourth quarter consensus EPS estimate is $0.85, within a range of $0.72-$0.93, and there are 17 analysts contributing to the consensus. Zacks Investment Research is projecting $0.89 via six analysts.

If the quarterly number comes in as projected by Knight-Swift management, there are going to be about a dozen Wall Street firms delivering more bullish news and recommendations to their clients than they’ve previously been reporting. That will invariably lead to buying activity, which leads to share price appreciation!
If analysts are underestimating fourth quarter numbers, then they’re probably also underestimating full-year 2019 numbers. In that light, I’m moving KNX from Hold to Buy, most specifically so that traders are alerted to a potential big move in the share price tomorrow.

The 2018 consensus EPS estimate has been consistently rising for over a year, out of synch with the stock’s poor performance. At this point, analysts expect EPS to increase 80.4% and 8.8% in 2018 and 2019. The 2019 P/E is 12.4.

In next week’s February issue, I should have a good sense of the revised 2019 earnings outlook, which might cause me to change my recommendation again, in one direction or the other. Buy.