There are five growth stocks in our Cabot Undervalued Stocks Advisor portfolios that offer dividend yields in excess of 5%. That’s crazy! Stocks with rising profits in combination with very large dividend yields are generally uncommon, and can indicate an extreme undervaluation of those companies’ share prices. Dividends can tell you a lot about a company, or about the broader stock market. I cover the dividend topic in more detail in today’s issue.
Cabot Undervalued Stocks Advisor 1019
[premium_html_toc post_id="187628"]
Throwing Darts at the Ticker Tape and Other Investment Strategies
October is a significant time for me, because that’s when I begin embracing companies that didn’t previously have strong enough numbers to join these portfolios, but now have excellent prognoses for the coming year. (This applies only to companies that operate on a December fiscal year. I handle companies that have different fiscal year-ends in a similar manner, depending on the commencement of their fourth quarters.) Since Wall Street is forward-looking, the folks who move the markets are no longer dwelling on lackluster 2019 numbers. Therefore, even though we might witness poor fourth quarter results that are reported next February or March, unless those poor results are unexpected, it truly seems as if nobody cares. Institutional investors are focused on the future, and therefore, we should walk in synch with them.
At this point in the December fiscal year-end cycle, I will stop reporting 2019 price/earnings ratios (P/Es), and simply report P/Es that are calculated based on 2020 consensus earnings estimates.
Dividends and Share Repurchases: A Tutorial
In today’s write-up of Abercrombie & Fitch (ANF) within the Buy Low Opportunities Portfolio, I outline some basic facts about dividend payouts & yields and share repurchases. Experienced investors will find the lengthy description rather pedantic, but be aware that some of my subscribers are brand new stock investors. They need to learn the basic concepts pertaining to stock investing so that they can have a quicker and more successful learning curve than many of us did when we were throwing darts at the ticker tape, long ago.
If you have questions about a stock on which I did not report today, please email Crista@CabotWealth.com.
Portfolio Notes
Be sure to review the Special Bulletin from September 26 in which I mentioned news, rating changes and/or price action on Marathon Petroleum (MPC).
Today’s Portfolio Changes
Abercrombie & Fitch (ANF) moves from Hold to Buy.
Apple (AAPL) moves from Strong Buy to Hold.
CIT Group (CIT) moves from Hold to Buy.
Corteva (CTVA) moves from Strong Buy to Hold.
Dow Inc. (DOW) moves from Buy to a Strong Buy.
Mercury General Group (MCY) joins the Buy Low Opportunities Portfolio as a Strong Buy.
Last Week’s Portfolio Changes
Bristol-Myers (BMY) moved from Strong Buy to Buy.
Marathon Petroleum (MPC) moved from Buy to Strong Buy.
Universal Electronics (UEIC) moved from Strong Buy to Buy.
Best Stocks to Buy Today
Growth Portfolio
Growth Portfolio stocks have bullish charts, strong projected earnings growth, little or no dividends, low-to-moderate P/Es (price/earnings ratios) and low-to-moderate debt levels.
Featured Stock: Marathon Petroleum (MPC – yield 3.5%)
Marathon Petroleum (MPC) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interest in a midstream company, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. Marathon has prepared their refining system for upcoming IMO 2020 regulations, and is confident in their ability to produce large amounts of ultra-low-sulfur diesel fuel to meet the new demand.
Please refer to the September 26 Special Bulletin in which I discussed Elliott Management’s letter to Marathon that urged their Board of Directors to split the company into three entities: Speedway, refining operations and midstream holdings. Elliott Management’s proposal was supported by hedge fund D.E. Shaw, another large Marathon shareholder. Elliott Management purportedly owns 2.5% of MPC shares, totaling about $1.0 billion, amid a $38 billion portfolio. D.E. Shaw is said to own 0.9% of MPC shares, totaling about $367 million, amid a $26 billion portfolio.
Investors might find it useful to know that Quentin Koffey worked as a Portfolio Manager at Elliott Management, where he built a reputation as an activist investor. He then joined D.E. Shaw as a Portfolio Manager for Strategic Investments, about two years ago, where he spearheaded shareholder activism. Finally, in May 2019, Mr. Koffey left D.E. Shaw to join Senator Investment Group L.P. One wonders whether Mr. Koffey’s tenure at D.E. Shaw resulted in a strong bond with Elliott Management for the purpose of tag-teaming their corporate activism targets, which could certainly strengthen their ability to accomplish their activism goals.
On September 27, two more top ten shareholders got into the mix, saying in a letter to the Board that Elliott Management didn’t go far enough with their proposal, and calling for the ouster of Marathon CEO Gary Heminger. Those two shareholders, Paul Foster and Jeff Stevens, are former executives at Western Refining (WNR), which was purchased by Tesoro (TSO) in June 2017. Tesoro then changed their corporate name to Andeavor (ANDV) in August 2017, and was acquired by Marathon in October 2018. Foster and Stevens “believe Marathon has the best assets in the industry”. The Marathon Board of Directors responded, “The board of directors is firmly and unanimously supportive of Gary Heminger as MPC’s chairman and CEO...” This conflict has legs. Hold onto your MPC shares.
MPC is an undervalued large-cap stock. Earnings per share are expected to fall in 2019, then rise tremendously in 2020, not just at Marathon, but at almost all U.S. refineries. The 2020 P/E is low at 8.4.
The stock has medium-term price resistance at 65. I think it’s credible that we could see MPC trade at 65 in the coming days. If any additional positive news emerges that indicates Marathon management is seriously considering Elliott’s proposal, then MPC could certainly trade even higher.
Even if Elliott’s proposal falls flat, Marathon remains a severely undervalued company with rapidly growing earnings, and the stock additionally offers an attractive dividend yield. You’re probably aware that if Marathon publicly rejects Elliott’s proposal, the share price will immediately pull back. I would expect that pullback to be relatively temporary, and I would consider that moment to be a buying opportunity. I anticipate capital gains throughout the refining industry as the market turns its attention to IMO 2020 in the coming months. Buy MPC now and buy more on pullbacks. Strong Buy.
Growth Portfolio
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company that’s changing the world through digital experiences. Adobe is a large-cap, high-P/E aggressive growth stock. Analysts expect EPS to increase by 42.5% in 2019 and 23.9% in 2020 (November year-end). This is a great stock for risk-tolerant growth investors and buy-and-hold equity portfolios. The stock rose to new all-time highs in July and has since pulled back to tentative price support at 275. Buy.
CF Industries (CF – yield 2.5%) is a global leader in transforming natural gas into nitrogen, making products that fertilize crops and products that remove harmful emissions from industrial activities. Products include ammonia, granular urea, UAN, ammonium nitrate and diesel exhaust fluid. The company operates nine facilities in Canada, the U.K. and the U.S. Investors may listen to the webcast of management’s September 10 presentation at the 32nd Annual Credit Suisse Basic Materials Conference.
CF is an undervalued, mid-cap aggressive growth stock. Analysts expect EPS to increase 89% and 25% in 2019 and 2020. The 2020 P/E is 16.4. The company achieves 5-10% better asset utilization than their peer group. Profitability has been enhanced by low natural gas prices. In addition, nitrogen pricing is improving, with demand stronger than supply.
The company has aggressive stock repurchase plans. In February 2019, CF authorized the repurchase of another $1 billion of stock through 2021, which should shrink the diluted share count by about 9%. In addition, the company’s long-term debt balance dropped from $5.8 billion at year-end 2016 to $4.7 billion in December 2018, with interest expense decreasing in tandem. Another $500 million of debt comes due in 2020, which the company does not plan to recapitalize.
The stock has traded between 46-53 since late July, with a narrowing trading range. Buy CF now. Strong Buy.
CIT Group (CIT – yield 3.1%) operates both a bank holding company with $35.3 billion in deposits and a financial holding company. CIT Group provides financing, leasing and advisory services to small and middle market businesses, consumer markets, and the real estate and railroad industries. CIT is a top-ten national online bank. The company is in the process of acquiring Mutual of Omaha Bank.
Last week, the Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25) revealed that U.S. companies’ new business volume rose to $9.2 billion in August, up 3.4% from a year ago. The index was down 1.1% from July 2019 volume. ELFA reports economic activity for the $1 trillion equipment finance sector.
CIT is an undervalued stock with an attractive dividend yield. Analysts expect EPS to grow 21.8% and 11.2% in 2019 and 2020, respectively. The 2020 P/E is 8.3. On August 6, I moved CIT from Strong Buy to a Hold recommendation as a stock market correction kicked into high gear. Now that the stock – and the S&P 500 (SPX) – is pulling back from a subsequent rapid recovery, I’m returning CIT to a Buy recommendation. CIT seems to have price support at 44.5-45. Buy CIT now. Buy.
DaVita Inc. (DVA) is the largest provider of kidney care services and home dialysis in the U.S., treating patients with chronic kidney failure and end stage renal disease. DaVita’s services have significantly lowered the gross mortality rate among their patients, and also lowered their need for hospitalizations. Investors may access the webcast and presentation materials from DaVita’s September 10 Capital Markets Day.
DVA is an undervalued, mid-cap growth stock. Analysts expect EPS to rise from $3.57 in 2018 to $4.73 and $5.30 in 2019 and 2020, reflecting earnings growth of 32.5% and 12.1%, respectively. The 2020 price/earnings ratio is 10.7.
DVA rose above price resistance to 63 in September, then pulled back to 56. DVA could rise to the upper 60s this year. Buy DVA now. Strong Buy.
Southwest Airlines (LUV – yield 1.3%) is the largest U.S. domestic air carrier, transporting over 120 million customers annually to over 100 locations in the U.S., Central America and the Caribbean. On September 26, the company announced new and increased service between California and Hawaii, between Houston and Cozumel, and seasonal non-stop service between Baltimore/Washington and Providenciales, Turks and Caicos, which will begin in March 2020. Southwest will additionally begin flights between Sacramento and Honolulu, as well as interisland service between Honolulu and Lihue Kauai, on November 10 (originally slated to begin in January 2020). Investors may access Southwest’s September 18 Investor Update on their website, as well as ongoing updates on 737 Max 8 aircraft service plans.
Wall Street expects no EPS growth in 2019, followed by 21% EPS growth in 2020. The 2020 P/E is 10.6. LUV rose about 17% after the August market correction, and is now resting; recently trading between 54-56. I expect more upside in the coming months. Buy.
Voya Financial (VOYA – yield 1.1%) is a U.S. retirement, investment and insurance company serving 13.8 million individuals and institutional customers. Voya has $560 billion in total assets under management and administration. Analysts expect EPS to grow 36% and 12.9% in 2019 and 2020. The 2020 P/E is low at 8.8. The company recently raised the dividend payout, formerly yielding 0.1% and now yielding 1.1%, which should trigger a sustained period of buying as VOYA now qualifies for inclusion in institutional growth & income portfolios. Voya is prioritizing share repurchases with excess cash flow.
I like the look of the VOYA price chart very much. The stock could surpass its July all-time high at 57 this year. The stock traded at a 12.4 P/E in May 2018. If it does so again next year, the share price would be 77, giving new investors a potential 40% capital gain. Buy VOYA now. Strong Buy.
Growth & Income Portfolio
Growth & Income Portfolio stocks have bullish charts, good projected earnings growth, dividends of 1.5% and higher, low-to-moderate P/Es (price/earnings ratios), and low-to-moderate debt levels.agencies, and the company is focused on continued debt reduction.
Featured Stock: Dow Inc. (DOW – yield 5.9%)
Dow Inc. (DOW) is the materials science division of the former DowDuPont (DWDP). Last week, a judge in Canada ordered Nova Chemicals to promptly pay approximately $1.08 billion to Dow Inc. with regard to lost profitability in an ethylene business venture. Dow will record a third quarter accounting gain. The judgment pertains to the joint venture’s operations through the year 2012. An additional judgment has yet to be determined, which will cover subsequent years’ liability on the part of Nova Chemicals. The business problems that caused the lawsuit have been rectified, and Dow is earning ongoing profits from the joint venture. For perspective, the $1.08 billion award is approximately the same amount of money as Dow’s recent second quarter operating EBIT (earnings before interest and taxes).
DOW is an undervalued growth & income stock with a huge 6% dividend yield. The company is expected to achieve EPS of $3.49 and $4.47 in 2019 and 2020. The projected 2020 EPS growth rate is 28% and the corresponding P/E is 10.7.
The stock ran up 22% in the three weeks between the low point in the August market correction and DOW’s subsequent peak in mid-September, then pulled back slightly. The price chart appears to be readying for another run toward 52, giving traders a potential 9% short-term gain. I’m therefore moving DOW from Buy to a Strong Buy recommendation. Longer-term investors can benefit from additional gains as the projections for aggressive earnings growth materialize and draw attention to the stock, while locking in a large dividend yield near 6%. I expect DOW to trade between 46-52 in the near term. Buy DOW now. Strong Buy.
Growth & Income Portfolio
Updates on Growth & Income Portfolio Stocks
Blackstone Group Inc. (BX – yield 4.2%*) is the world’s largest and most diversified alternative asset manager with $545.5 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, public debt and equity, real assets, secondary funds and real estate. The stock is experiencing what is likely a brief and normal pullback, along with its industry peers. I intend to issue a Buy recommendation shortly. Hold.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.07 and yielding 4.2%.
Citigroup (C – yield 2.9%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries. Strength in consumer lending, and lower expenses, tax rate and share count contributed to second quarter successes. Citigroup is an undervalued, large-cap growth & income stock. Wall Street expects Citigroup’s EPS to grow 14.3% and 10.9% in 2019 and 2020. The 2020 P/E is 8.2.
I love the Citigroup price chart right now. Not only do I expect the stock to promptly return to short-term price resistance at 72, where it traded in July, but barring a correction in the broader market, I think we could see the stock travel back to its January 2018 peak at 77 within 3-6 months. Buy C now. Strong Buy.
Commercial Metals Company (CMC – yield 2.7%) is the largest rebar producer in the U.S. with a broad basket of merchant and wire rod offerings. Operations are located from coast to coast in the U.S. and in Poland. Demand remains positive driven by continued strength in non-residential construction activity. CMC is a small-cap growth & income stock with a market capitalization of $2.1 billion. The company completed their fiscal year in August. Wall Street expects final full-year 2019 EPS to increase 35.6%, followed by 7.9% EPS growth in fiscal 2020. The 2020 P/E is 8.0. CMC is volatile, rising rapidly in early September, then giving back half those gains in the second half of the month. Buy.
Corteva Inc. (CTVA – yield 1.8%), a.k.a. Corteva Agriscience, provides farmers with seeds and crop protection products (herbicides, fungicides and insecticides), enabling them to maximize yield and profitability. During the first half of 2019, Corteva spun off from DowDuPont (relatively debt-free), initiated a dividend, established a $1 billion share repurchase plan, introduced at least half a dozen new products, and delivered $50 million in cost synergies in excess of the planned $150 million. Additional goals include cumulative cost synergies from recent M&A activity totaling $1 billion, above-market revenue growth (4-6% annually in 2020-2022), 12-16% three-year annual EBITDA growth, and rising free cash flow and margins. Investors may review Corteva’s September 11 presentation at the 32nd Annual Credit Suisse Basic Materials Conference.
CTVA is a mid-cap growth & income stock. Analysts expect EPS of $1.16 and $1.55 in 2019 and 2020, reflecting 34% 2020 growth. The 2020 P/E is 17.9. The price chart weakened last week. I’m moving CTVA from Strong Buy to a Hold recommendation until the share price appears more stable/bullish. Hold.
Guess?, Inc. (GES – yield 2.4%) is a global apparel manufacturer, selling their products through wholesale, retail, ecommerce and licensing agreements. There are 1724 Guess? Stores worldwide, in approximately 100 countries. The company intends to discuss strategic business planning with investors at the end of October.
GES offers the best earnings growth outlook of all established U.S.-based apparel retailers. Wall Street now EPS to grow 32.7% and 17.7% in fiscal 2020 and 2021 (January year end). The 2020 P/E is 14.1. The consensus EPS estimate for 2020 is still near the bottom of Guess management’s new guidance range. Presuming that guidance is accurate, there will either be additional increases in consensus earnings estimates, which theoretically leads to buying behavior on the part of institutional investors, or there will be an upside earnings surprise within Guess’ fiscal third or fourth quarter results, which also tends to deliver a share price increase.
GES rose 40% from mid-August to mid-September. I expect the stock to trade between 17-20.5 in the near term, and possibly as high as 23 this year. Buy GES now. Strong Buy.
Royal Caribbean Cruises (RCL – yield 2.9%) is a cruise vacation company that delivers travelers to desirable and exotic destinations on all seven continents. The company operates a total of 63 ships, with 13 on order, under the brand names Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises and Silversea Cruises, and partnerships with German and Spanish cruise companies.
Competitor Carnival Corp. (CCL) reported a better-than-expected third quarter on September 26 (November year end), with an especially strong revenue beat. However, a slight reduction in full-year earnings guidance, to accommodate a spike in fuel prices, sent CCL down 8.5%, dragging RCL down 2.5% that day. Carnival has also suffered from weather, geopolitics, a ship delivery delay, and a basic lack of the level of success currently achieved by Royal Caribbean. In addition, it was the third time this year that management lowered full-year earnings guidance. At this point, Carnival’s full-year 2019 profits are expected to be flat to last year’s, with 2020 EPS projected to rise in the mid-single digits. None of these situations represent disaster for Carnival, but investors won’t likely see a share price recovery begin in earnest until January 2020 at the earliest.
RCL is an undervalued, large-cap growth & income stock. Wall Street expects EPS to grow 8.8% and 11.5% in 2019 and 2020. The 2020 P/E is 9.9. As RCL recovers from the August market correction, it’s most likely to trade between 107-116 in the near term. Buy.
Schlumberger NV (SLB – yield 5.8%) is the world’s largest oilfield service company. Reuters published some commentary from Morgan Stanley Research on September 10. The company raised their recommendation on SLB to Overweight, emphasizing the stock’s compelling valuation and praising new CEO Olivier Le Peuch’s plan to improve profitability, decrease capital intensity and enhance free cash flow. SLB is Morgan Stanley’s “top pick” among oilfield service companies. SLB is a large-cap stock with a hefty dividend yield. Wall Street expects EPS to fall 8.0% in 2019, and then to increase 28.2% in 2020. The 2020 P/E is 18.0. The stock pulled back to price support at 34 in September. Dividend investors can buy now. Buy.
Total S.A. (TOT – yield 5.8%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. Total is the second-largest private global liquified natural gas (LNG) player, with a worldwide market share of 10%.
The company announced at their September 24 2019 Strategy and Outlook Presentation that they will increase the dividend by 5-6% annually, going forward, vs. their previous intent of a 3% annual increase. Total plans to continue maintaining a debt ratio below 20% and a pre-dividend breakeven below $30 per barrel of oil, and to grow cash flow by $1 billion per year through 2025 through cost reductions.
TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The market expects Total’s EPS to fall 10.9% in 2019, then to rise 21.6% in 2020. The 2020 P/E is 9.5. TOT is rising alongside rebounds in both the price of Brent crude oil and in the broader stock market, and the recent stock market rotation from momentum stocks to value stocks. Buy TOT now while it’s low within its trading range, and lock in a large and rising dividend yield. Strong Buy.
Buy Low Opportunities Portfolio
Buy Low Opportunities Portfolio stocks appear capable of a big rebound from recent lows. They have strong projected earnings growth; low-to-moderate price/earnings ratios (P/Es); no dividend requirement and low-to-moderate debt levels. Investors should expect volatility as the stock market alternately embraces the companies’ current successes and remains wary of the stocks’ recent downturns.
Featured Stock: Mercury General Group (MCY – yield 4.5%)
Mercury General Group (MCY), founded in 1961, is an automobile and multi-line insurer that operates in eleven U.S. states. Mercury General is a leading independent broker and agency writer of automobile insurance in California. Revenue has consistently grown annually, expected to rise from $3.4 billion in 2018 to $3.9 billion in 2019. Earnings per share (EPS) grew 19.2% in 2018. Wall Street expects EPS to grow 76% in 2019 and 16.7% in 2020. The 2020 P/E is 15.1.
The dividend is unusually large for a small-cap stock, recently yielding 4.5%. Mercury General announces a modest dividend increase each year in late October.
MCY was featured in Cabot’s Top 10 Buy and Hold Stocks for 2019. The stock rose 24% year-to-date through its July peak at 64, gave back almost all of that gain in July and August, and is now rising again. At a current price of 56, there’s 14% upside to the stock’s July peak, additional capital gain potential down the road, and an annually-growing dividend with a big current yield of 4.5%. MCY could appeal to all types of experienced stock investors, although the volatility associated with small-cap stocks might be a little shocking to newer investors. I’m recommending MCY today because the price chart appears to be signaling an immediate run-up. Buy MCY now. Strong Buy.
Buy Low Opportunities Portfolio
Updates on Buy Low Opportunities Portfolio Stocks
Abercrombie & Fitch (ANF – yield 5.1%) is a specialty retailer of Abercrombie & Fitch (a.k.a. A&F), abercrombie kids, and Hollister brand apparel and accessories for men, women and kids. The company operates over 850 stores globally. The company remains on track toward its multi-year goals of improving revenue, profits, expense-control, data analytics, online sales and global store expansion. Investors are encouraged to tune in to the webcast of Abercrombie’s presentation at the Goldman Sachs 26th Annual Global Retailing Conference.
CEO Fran Horowitz has been working to differentiate the Hollister and A&F brands since joining the company as the Hollister division president in 2014. Hollister (which includes the Gilly Hicks lingerie line) is targeted to teen consumers, with a focus on age 17, and a general audience of ages 10-24. While these shoppers often initiate purchases online, they enjoy going to the mall. Management works to seamlessly integrate digital and store experiences for this demographic.
A&F is not a teen brand. The company targets this merchandise to younger millennials; post-college consumers in their early 20s. Millennials love shopping online.
ANF is an undervalued small/micro-cap stock. Wall Street projects EPS to fall 34% in 2019, then rising 70% in 2020. The 2020 P/E is 12.0. The drop in profit largely reflects the expense incurred by a decision to close several flagship stores that were not built with the company’s current, successful focus on lease negotiations, small-store formats, revenue and gross margin.
I’m moving ANF from Hold to a Buy recommendation. I’m addressing two audiences here: dividend investors and traders. (If you are a newer, less risk-tolerant investor, ANF might be too frustrating for you. Small-cap stocks are volatile.)
At a share price of 15.5, the current yield on ANF is a whopping 5.1%. The dividend is safe. During the first half of fiscal 2019, Abercrombie spent $57.8 million on share repurchases and $26.4 million on dividends. If the company were in a difficult cash position, they would cut back on share repurchases rather than reducing the dividend, because dividend reductions are not well-received by Wall Street. Basically, cash-strapped companies do not repurchase their stock, and conversely, companies that repurchase stock have more cash on hand than they need in the general course of doing business.
Investors may peruse pages 16-18 of Abercrombie’s second quarter Investor Presentation to get a clear picture of the company’s recent history of dividend payments, share repurchases and cash flow.
The only other obvious reason that a company might reduce a dividend payout is because a new CEO has a different idea of how to make use of a company’s cash flow and credit lines. For example, CEOs at both Mattel (MAT) and Guess? (GES) cut dividend payouts shortly after taking on their new roles. In Abercrombie’s case, CEO Fran Horowitz took on that position in February 2017. If she were going to reduce the dividend according to her new business plans, she would have done so long ago.
Generally speaking, I love buying growth stocks with big dividend yields. Investors get paid to wait for the share price to rise, and the dividend provides a floor for the share price during bearish trading phases. As share prices drop, dividend yields increase, attracting bargain hunters who are thrilled to be getting 4%-7% yields in addition to capital gain opportunities.
Here’s an example of a dividend opportunity that I previously recommended: On November 14, 2017, I moved my recommendation on Blackstone Group LP (BX) from Hold to Strong Buy. BX was six months into a seven-month trading range, dipping down to the bottom of the range at 28, and the current yield was 7.2%. That seemed a bit ridiculous, and I wanted investors to take advantage of the yield while we waited for future capital gains. Today, after a significant price run-up to 50.22, BX has a current yield of 4.1%. (Blackstone Group did not reduce their dividend yield. Instead, the share price rose so significantly that the dividend payout now represents a smaller proportion of the share price; thus, a smaller current yield. But the yield for folks who purchased at 28 is 7.4%, and they also benefited from a 79% run-up in the share price!)
How might traders benefit from buying ANF today? Let’s go back to the Blackstone Group example. The stock had been trading steadily between 27.5-31. I moved BX to a Strong Buy recommendation on a day when the price closed at 28. On the very next rebound, the stock decided to blow past the top of the trading range and peak at 33 in January 2018. But even if BX had risen near the top of the trading range at 30.5 and come to a screeching halt, investors would have made 8.9% profit within two months. If the share price had remained at 30.5, and the investor had held the stock until the ex-dividend date on February 9, they would have earned an additional $0.85 per share, bringing their total return up to 12.0% within a three-month holding period.
When I say, “dividend investors and traders can buy now”, these are the two scenarios that I have in mind: the opportunity to lock in a higher-than-usual dividend yield on your investment, and the opportunity to earn a capital gain in the short term as a stock returns to the top of its trading range. The ANF trading range is roughly 15-19, offering traders a potential 20%+ capital gain. The stock will not likely rise above 19 until the new year commences. Buy.
Alaska Air Group (ALK – yield 2.1%) is a low-cost passenger airline. Alaska Airlines and its regional partners fly 46 million guests per year to more than 115 destinations with an average of 1,300 daily flights across the United States and to Mexico, Canada and Costa Rica. Alaska Air has the second-lowest average age of aircraft when ranked with eight major airlines, and the second-highest fuel efficiency. Alaska Air does not operate any Boeing 737 Max jets. Beginning in January 2020, Alaska Air will launch eight new routes serving destinations in the Pacific Northwest and California. Investors may view Alaska Air’s third quarter 2019 presentation on the company’s website.
ALK is a mid-cap stock, expected to achieve aggressive earnings growth rates of 32.5% and 17.3% in 2019 and 2020. The 2020 P/E is low at 9.4. ALK rose past short-term price resistance at 65 this month, and could easily trade anywhere between 63-72 this year. Buy ALK now. Strong Buy.
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Current marketable drugs include Soliris, Ultomiris, Strensiq and Kanuma. The company is focused on the development of pipeline products that will fuel continued long-term profit and revenue growth.
ALXN is an undervalued growth stock. Wall Street expects Alexion to grow EPS 25.5% and 10.6% in 2019 and 2020. The 2020 P/E is 9.0, which is extremely low for a biopharmaceutical stock. On September 26, investment bank William Blair began research coverage on ALXN with an Outperform rating and a 146 price target. The price chart is bearish. When the share price stabilizes, I will consider a Buy recommendation. Hold.
Apple Inc. (AAPL – yield 1.4%) is a manufacturer and provider of many popular technology devices and services, including the iPhone, iPad, Mac, App Store, Apple TV+, Apple Arcade and more. Reuters reported, “Gene Munster, longtime Apple watcher and managing partner at Loup Ventures, says more merchants are adopting Apple Inc’s digital wallet Apple Pay, citing the firm’s annual Apple Pay merchant adoption check. Munster estimates overall adoption now ranging between 23% and 36% in 2019, vs. 14%-24% last year” and that “Apple Pay has a user base of 441 million” generating nearly one billion transactions per month.
Wall Street expects an EPS drop of 2.1% in 2019 (September year end) followed by an increase of 9.2% in 2020. The stock emerged from a trading range on September 5 and is now approaching my price target of 230, where it last traded in October 2018.I’m therefore moving AAPL from Strong Buy to Hold. Upon reaching 230, I’ll likely retire AAPL from the portfolio in favor of a new Buy Low Opportunity. (And yes, I still love AAPL as a long-term hold for people who prefer to minimize portfolio turnover.) Hold.
Baker Hughes, a GE Co. (BHGE – yield 3.1%) offers products, services and digital solutions to the international oil and gas community. With General Electric no longer the majority owner of BHGE shares, the company will soon change their name to Baker Hughes Company with the new symbol BKR. BHGE is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to increase 48% and 52% in 2019 and 2020. The 2020 P/E is relatively low at 15.8. The stock continues to ratchet upward. Strong Buy.
Designer Brands Inc. (DBI – yield 5.8%) is one of North America’s largest designers, producers and retailers of footwear and accessories. The company operates DSW Warehouse, The Shoe Company and Shoe Warehouse stores with nearly 1,000 locations in 44 U.S. states and Canada; and Camuto Group.
DBI is an undervalued, small-cap growth stock with a huge dividend yield. Expected EPS growth rates are 14.5% and 14.7% in 2019 and 2020 (January year end). The 2019 P/E is low at 9.1. Note that woes within most retail apparel businesses are not harming Designer Brands’ 2019 performance. Most famous-name apparel retailers are experiencing a drop in profit this year, while Designer Brands continues to deliver double-digit earnings growth.
In mid-September, investment firm Susquehanna raised their target price on DBI from 18 to 27 – a huge increase! The stock is on an uptrend, with short-term price resistance at 19, and a secondary near-term target of 22.5. Buy DBI for outsized total return potential in 2019 and beyond. Strong Buy.
The Mosaic Company (MOS – yield 1.0%) is the world’s largest producer of finished phosphate and potash, supplying crop nutrients and animal feed ingredients via production facilities in the U.S., Canada, South America and the Asia-Pacific region. Their mission is to help the world grow the food it needs. Investor’s may view Mosaic’s September 10 presentation at the Credit Suisse 2019 Basic Materials Conference. All of Mosaic’s mines that had been idled earlier this year, after the Brazilian government established new regulatory requirements, have now returned to full operational capacity. Mosaic expects strong fall fertilizer application in North America.
Full year profits are expected to fall in 2019 and then surge dramatically in 2020, largely due to 2019 weather and flooding that seriously impacted U.S. crops. The company plans to promptly repurchase $250 million of its stock because “Mosaic’s stock currently presents an exceptional opportunity,” says CEO Joc O’Rourke.
The stock rose from 17 to 23 in three weeks through mid-September, then had a pullback to tentative price support at 20. I would still like to see the price chart look more stable before recommending additional purchases. Hold.
Synchrony Financial (SYF – yield 2.6%) is a consumer finance company with 75.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. SYF is an undervalued, mid-cap growth & income stock. Wall Street expects EPS to grow 12.6% and 10.0% in 2019 and 2020. The 2020 P/E is 7.3. The stock has short-term upside price resistance at 36.5, and long-term resistance at 38.5. Buy SYF now. Buy.
Universal Electronics (UEIC) is a manufacturer and world leader of wireless and voice remote control products, software and audio-video accessories for the smart home; with over 400 patents and a strong pipeline of new products in the areas of safety and security, climate control and lighting. Management will present at the 5th Annual B. Riley FBR Consumer & Media Conference on October 3.
Analysts expect EPS to increase 37% and 9.2% in 2019 and 2020. (It’s common, with microcap stocks, for analysts to have only a vague idea of what to project for next year’s revenue and income.) The 2020 P/E is 14.4.
UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. UEIC is rapidly rising toward medium-term price resistance at 55, where traders should exit. (Traders should not wait for me to announce the moment at which UEIC reaches 55. This is a micro-cap stock, thinly traded. Every purchase and sale moves the share price. Wise traders will sell in advance of the crowd.) UEIC remains a good investment for longer-term investors, who should buy on dips. Buy.
Special Situation Stocks
Updates on Special Situation Stocks
Bristol-Myers Squibb Company (BMY – yield 3.2%) markets a long list of pharmaceuticals, including Coumadin and Eliquis, to treat cardiovascular, oncology and immune disorders. The company is expected to complete the acquisition of Celgene Corporation (CELG) by year-end. Celgene markets therapies for cancer and immunological diseases, including Revlimid. Bristol-Myers will host a webcast on September 28 at 1:30 PM ET to discuss data presented at the European Society of Medical Oncology, in Barcelona, Spain.
Projected EPS growth rates now stand at 7.5% and 42.1% in 2019 and 2020. I expect the 2020 number to change frequently over the course of the next year as analysts fine-tune their balance sheet projections for the newly merged company, and as Bristol-Myers begins reporting actual quarterly results that include Celgene’s revenue and profits. The BMY 2020 price/earnings ratio (P/E) is just 8.2, much lower than all large-cap stocks in its peer group.
BMY is a large-cap growth & income stock. BMY is approaching price resistance at 53, where it will likely rest before rising further. Buy.
Carlyle Group LP (CG – yield 5.8%) manages $223 billion, divided among real assets, corporate private equity, investment solutions and global credit. Carlyle Group will convert from a limited partnership to a corporation on January 1, 2020. Wall Street expects earnings per share of $1.66 and $2.49 in 2019 and 2020. CG rose about 27% from its August lows, then began pulling back late last week, along with its industry peers. I’ll likely issue a buy recommendation when the stock dips to 24.5. Hold.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.47 and yielding 5.8%.
The next Cabot Undervalued Stocks Advisor issue will be published on November 5, 2019.
Cabot Wealth Network
Publishing independent investment advice since 1970.
CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com
Copyright © 2019. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Buy/Sell Recommendations: All recommendations are made in regular issues or email alerts or updates and posted on the private subscriber web page. Performance: The performance of this portfolio is determined using the midpoint of the high and low on the day following the recommendation. Cabot’s policy is to sell any stock that shows a loss of 20% in a bull market or 15% in a bear market from the original purchase price, calculated using the current closing price. Subscribers should apply loss limits based on their own personal purchase prices.