The market correction finally arrived swiftly in recent days. If you set aside cash with which to buy low, it’s okay to begin deploying some of that cash. In today’s issue we have one new addition to the Buy Low Opportunities Portfolio.
Cabot Undervalued Stocks Advisor 218
[premium_html_toc post_id="144282"]
Interesting Times
Unexpectedly strong increases in employment and wages sent stock and bond markets tumbling last week, thus pushing Treasury yields higher in keeping with inflation fears. A strong economy is good for workers and companies, but as it fuels inflation, the Federal Reserve needs to react by adjusting interest rates upward in order to keep inflation from ratcheting too high, too fast.
Fortunately, we were due for a pullback in U.S. stock markets, and even just a couple of down days can remove some trepidation on the part of stock investors. Financial stocks stayed near their recent highs last week while the rest of the market receded, largely because higher interest rates are a boon to financial companies. While stocks were falling, did you notice the surge in XL Group (XL) on February 2? Wow, that was fun! The stock is trading out of synch with the broader market, recovering from an exaggerated share price drop in the second half of 2017. I expect lots more capital gains from XL in 2018.
I’d likely to briefly mention a facet of stock investing that is commonly associated with politics. Don’t worry! I’m not going to promote a political party. The new Tax Act, building The Wall, and passing an infrastructure bill all have a large potential impact on the economy, companies and/or families. Investors can have a hard time knowing how to deal with these topics in relation to their investments, especially when they’re influenced by their feelings on a particular issue, or the political party that’s promoting it. I’m going to boil it down into a simple concept: Wall Street analysts do not factor Congressional proposals into earnings estimates until the proposals turn into new legislation. We saw that recently with the Tax Act. Prior to the new legislation, I repeatedly mentioned that lower income tax rates were not yet factored into earnings estimates. Then Congress passed the Tax Act, and earnings estimates for financial companies soared!
An investor might want to own building materials stocks, but she might be fearful that there will be no infrastructure bill, and that her building materials stocks will suffer. Fear not! A potential infrastructure bill is not currently factored into earnings estimates. If you buy stocks in healthy companies with strong projected earnings growth, and the infrastructure bill fails to gain traction in Congress, the lack of new legislation does not harm the company because it was never factored into the companies’ current business plans! The time for an investor to pay attention to ideas that are floating around in Congress is when the ideas become new legislation. That’s the trigger for Wall Street analysts to factor potential economic changes into earnings estimates and publish new research reports, which then draw fresh attention to the companies and their prospects.
I hope that makes sense! So you really don’t have to love The Wall, to know how to invest if you want to take advantage of the economic dollars that will flow if the folks in Washington D.C. decide to build it. You can hate The Wall and still benefit from owning stocks in companies that build The Wall. And if you are grossed out at the idea of benefitting financially from the building of The Wall, then you have a thousand other stocks that you can pick from. There are certainly stocks that I personally won’t buy, and others that represent products and services that I don’t favor. Suffice it to say that share price growth tends to follow earnings trends, so stick with companies that are growing their profits annually, and your stock investing experience will likely help you reach your financial goals.
OilPrice.com published a rosy outlook for declining oil inventories and rising prices, using Goldman Sachs and JPMorgan as research sources. Goldman projects Brent crude to reach $82.50 per barrel this year, 20% higher than the current price. Continued declining inventories are credited to OPEC production cuts, rising global energy usage, a heavy maintenance cycle in the industry and trouble with Venezuelan production. In the meantime, we’re seeing a pullback in energy stocks after recent run-ups. I continue to urge investors to own energy stocks in 2018, and to take advantage of currently-lower prices with Baker Hughes, a GE Co. (BHGE), ConocoPhillips (COP) and Schlumberger (SLB). The sector remains rife with attractive opportunities. Therefore, I’m adding a recent portfolio success back into the Buy Low Opportunities Portfolio: Delek US Holdings (DK).
Send questions and comments to crista@cabotwealth.com.
Quarterly Earnings Release Calendar
February 6 pm: Chipotle (CMG) – 4Q
February 8 am: Alexion Pharmaceuticals (ALXN) – 4Q
February 14 am: Interpublic Group (IPG) – 4Q
February 26 pm: Delek US Holdings (DK) – 4Q
Virtually all companies offer extensive information on their websites pertaining to their quarterly earnings releases, often including slide shows or webcasts.
Earnings Season Scorecard
Big Earnings Beat: BB&T Corp. (BBT), Bank of America (BAC), CIT Group (CIT), Knight-Swift Transportation (KNX), Morgan Stanley (MS), Nucor (NUE), Schlumberger (SLB), WestRock (WRK) and XL Group (XL)
Slight Earnings Beat: Apple (AAPL), Baker Hughes, a GE Co. (BHGE), Blackstone Group (BX)
Earnings in Line with Estimate: ConocoPhillips (COP), PulteGroup (PHM) and Southwest Airlines (LUV)
Slight Earnings Miss: Alphabet (GOOGL)
Big Earnings Miss: Mattel (MAT)
Portfolio Notes
Be sure to review the Special Bulletins from January 30 and 31 and February 2 in which I mentioned news, rating changes and/or price action on Alphabet (GOOGL), Apple (AAPL), Blackstone Group (BX), CIT Group (CIT), ConocoPhillips (COP), Knight-Swift Transportation (KNX), Mattel (MAT), Nucor (NUE), PulteGroup (PHM), WestRock (WRK) and XL Group (XL).
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Baker Hughes, a GE Co. (BHGE)
Schlumberger (SLB)
Supernus Pharmaceuticals (SUPN)
XL Group (XL)
*I can review price charts and make an educated determination about what’s likely to occur, but I will sometimes be wrong. I cannot control the stock market; I can only guide you through it.
Today’s Portfolio Changes:
Blackstone Group (BX) moves from Buy to Strong Buy.
Delek US Holdings (DK) joins the Buy Low Opportunities Portfolio as a Strong Buy.
Martin Marietta Materials (MLM) moves from Hold to Buy.
Schlumberger (SLB) moves from Hold to Buy.
Last Week’s Portfolio Changes:
Baker Hughes, a GE Co. (BHGE) moved from Buy to Strong Buy.
Blackstone Group (BX) moved from Hold to Buy.
Knight-Swift Transportation (KNX) moved from Strong Buy to Buy.
Mattel (MAT) moved from Hold to Sell.
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: Quanta Services (PWR - yield 0.5%)
Quanta Services provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Quanta Services recently signed two contracts for large diameter mainline pipeline projects in the Appalachian region of West Virginia, U.S. The work is expected to begin in the first half of 2018 and be completed this year. The contracts will be credited to first and second quarter backlogs, and bring in $550 million in revenue.
PWR is an undervalued aggressive growth stock. In a few weeks, Quanta is expected to report full-year 2017 revenue of $9.3 billion. The recent consensus estimate projects 2018 revenue of $10.1 billion, representing an 8.6% annual increase. If we add in the value of the new contracts, that raises the revenue goal to $10.65 billion, a 14.5% increase over 2017 revenue. That’s a number worth getting excited about, and could easily serve as a catalyst for additional share price growth. Of course, the profit outlook will also rise. The market is expecting Quanta’s EPS to grow 29.8% when 2017 results are reported, and another 28.6% in 2018. I can’t realistically estimate the earnings impact of the new contract wins, but if we lowball it and say that 2018 EPS estimates will increase from $2.52 to $2.62, that raises the 2018 earnings growth rate to 33.7%. The current 2018 P/E is incredibly low at 14.3.
The stock has a $5.6 billion market capitalization—small enough that the company’s size and success could make Quanta an attractive acquisition target. None of this good news is factored into the share price. Expect a higher-than-usual amount of attention to the stock on Wall Street this month as analysts raise projections due to the contract wins, followed by the company’s fourth quarter earnings press release and resulting analyst commentary. You’re in luck that PWR fell along with construction stocks last week. Buy PWR now during this pullback. Strong Buy.
Updates on Growth Portfolio Stocks
Alphabet Cl. A (GOOGL) – Alphabet is the world’s largest internet company. Revenue is derived from Google’s online ads, with the balance coming from the sale of apps, digital content, services, licensing and hardware. Read about Google’s growing Cloud business in this February MarketWatch article.
Alphabet reported a slight fourth quarter earnings miss, which I reported in a Special Bulletin last week. Full-year 2017 EPS rose 15.7%. Wall Street found more good than bad in the earnings report, and 13 investment firms subsequently hiked their GOOGL price targets within a range of 1300 to 1475, while two firms lowered their targets. Analysts expect EPS to rise 29%, 17% and 19% in 2018 through 2020. GOOGL is a modestly-undervalued, large-cap aggressive growth stock. In last week’s update I stated, “Odds are stacked in favor of a short-term drop in the share price on February 2. Buy on pullbacks.” The share price drop arrived late last week. Buy GOOGL now. Buy.
Apple (AAPL – yield 1.6%) manufactures a wide range of popular communication and music devices. Apple delivered record first quarter revenue and profits (September year-end), which I reported in a Special Bulletin last week. In reaction, four investment firms raised their AAPL price targets, three firms cut their targets, and Citigroup added AAPL to its U.S. Focus List. Market share gains in China played a significant role in the quarter’s successes. The Wall Street Journal reported Apple Music will likely overtake Spotify as the leading music streaming service this summer, because Apple Music’s monthly subscriber growth rate far exceeds that of Spotify.
Consensus earnings estimates for 2018 through 2020 rose again last week, now projecting EPS growth of 24.8% in 2018, while the P/E is only 14.0. I expect to keep AAPL for capital gains in the first half of 2018, and possibly longer, depending on prospects for fiscal 2019 (which keep improving). Buy AAPL now. Strong Buy.
Bank of America (BAC – yield 1.5%) – Earnings estimates inched up again last week. Wall Street now expects EPS to rise 37.2% and 14.3% in 2018 and 2019. The corresponding P/Es are 12.7 and 11.1. Curiously, BAC barely blinked while the rest of the stock market bobbed and weaved last week. That’s a very bullish sign for the future share price. While BAC could easily have a pullback, I still expect good capital gains between now and December. Buy.
CIT Group (CIT – yield 1.2%) operates both a bank holding company and a financial holding company that provide financing, leasing and advisory services to small and middle market businesses, consumer markets, and the real estate and railroad industries. CIT is an undervalued growth stock. The company reported a strong fourth quarter 2017 earnings beat, which I featured in a Special Bulletin last week. Full-year 2017 EPS rose 50.5%. In a current comparison of CIT Group and 27 mid-cap banking peers, CIT Group has the highest tangible common equity (TCE) ratio of the group, indicating an ability to handle financial stress. In addition, the company plans $800 million in share repurchases in the first half of 2018, a higher amount than analysts had expected, thus pushing 2018 and 2019 earnings estimates higher. The repurchases will be aided by the issuance of up to $400 million in new debt. Analysts are expecting EPS to grow 29.6% in 2018, while the P/E is only 12.7. After reaching new highs in January, CIT only dropped about 5% in last week’s stock & bond market turmoil, and the stock is already recovering. That’s a fairly bullish sign that we could continue to see new highs in the near future. Buy CIT now. Strong Buy.
ConocoPhillips (COP – yield 2.0) is a global energy exploration and production company. The company reported fourth quarter 2017 earnings on target with consensus estimates and increased the dividend, which I featured in a Special Bulletin last week. The earnings trajectory is notable: the company booked a big net loss in 2016, a small profit of $0.60 per share in 2017, and is expected to deliver $2.44 and $2.66 EPS in 2018 and 2019. What’s more, earnings estimates continue to grow, week after week. I mentioned last week that “a pullback to 55 would be normal, and a buying opportunity.” We’re seeing that play out now. Strong Buy.
KLX Inc. (KLXI) is an undervalued, small-cap aggressive growth stock in the aerospace and energy services industries. KLX has been approached by several potential buyers. KLX hired Goldman Sachs in December to handle the potential M&A transaction, but there has been no recent news on the topic. KLXI has traded between 68 and 72 since late December. I do not expect a major change in the share price until some kind of definitive M&A announcement takes place. If KLX announces that they decide not to sell all or part of the company, the stock will likely fall quickly, then rebound in subsequent weeks. Hold.
Knight-Swift Transportation Holdings (KNX – yield 0.5%) is a new truckload carrier formed from the September 2017 merger between Knight Transportation and Swift Transportation Company. The company reported a strong fourth quarter 2017 earnings beat, which I featured in a Special Bulletin last week. Full-year 2017 EPS rose 17.9%. Analysts are expecting EPS to grow another 52.2% in 2018, and the P/E is 22.9. Increased profitability is coming from cost controls at Swift and industry-wide price increases. Driver recruitment remains problematic. The stock surged last week after the earnings release. Buy on pullbacks. Buy.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt, and an aggressive growth stock. The market’s expecting 30.5% EPS growth in 2018, and the P/E is 24.4. Stocks in the construction and homebuilding industries had a dramatic sell-off last week. Some sources tried to pin the drop on Eagle Materials’ (EXP) quarterly results, which contained a slight revenue miss, but also served to increase analysts’ full-year 2018 EPS estimates (March year-end). I’m not buying the idea that Eagle and the industry are in trouble. The drop in these share prices was in synch with the broader markets falling, and the worry that rising interest rates will affect housing and construction markets. Companies throughout the basic materials sector are thriving, so I’m not worried about the current pullback nor their 2018 outlooks. I’m changing my recommendation on MLM from Hold to Buy, now that there’s 12% upside as the stock retraces its January high at 240. Buy.
PulteGroup (PHM – yield 1.2%) is a U.S. homebuilder and a very undervalued aggressive growth stock. The company reported fourth quarter 2017 earnings on target with consensus estimates, and increased the share repurchase authorization, which I featured in a Special Bulletin last week. Full-year 2017 EPS rose 29.6%. Consensus earnings estimates for full-year 2018 and 2019 rose again, now reflecting 49.0% and 17.6% EPS growth. The 2018 P/E is just 10.0.
The analysts in this CNBC Fast Money video recommend technology and financial stocks and PHM. Stocks in the construction and homebuilding industries had a dramatic sell-off last week. Despite stock market volatility, these companies are thriving, so I’m not worried about the stocks’ medium-term prospects for capital gains. There’s 14% upside as PHM retraces its January high at 35. I expect additional capital gains in 2018. Strong Buy.
Southwest Airlines (LUV – yield 0.9%) 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. Earnings estimates have been rising since Southwest reported 2017 results. The company is expected to achieve EPS growth of 40.9% in 2018, while the P/E is just 11.9. I’m likely to hold LUV for less than a year, but long enough to capitalize on the market’s reaction to strong profit growth in 2018—the same strategy I’m employing with Apple (AAPL). Strong Buy.
XL Group Ltd. (XL – yield 2.3%) is an insurer and reinsurer; and an undervalued mid-cap stock. The company reported a strong fourth quarter 2017 earnings beat, which I featured in a Special Bulletin last week. The full-year 2017 loss—caused by earthquakes, hurricanes and a typhoon—came in a bit smaller than expected. In addition, consensus earnings estimates for 2018 and 2019 had been slowly declining since hurricane season, and now they’re climbing again. Insurance premiums are expected to rise throughout the industry in 2018, marking a distinct change in pricing patterns, and leading to rising profits. XL was long overdue to recover from its share price drop in late 2017, but the recovery has finally begun. New investors could earn a 22% capital gain as XL travels back toward 47 this year. Buy XL 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.
Featured Stock: Blackstone Group LP (BX – yield 7.6*%)
*The payout varies each quarter, with the total of the last four announced payouts yielding 7.6%.
Blackstone Group is the world’s largest and most diversified alternative asset manager with $434 billion in client assets. The company raises tens of billions of dollars from investors and deploys the capital into private equity, lower-rated credit instruments, hedge funds and real estate.
Blackstone reported fourth quarter 2017 results last week. Economic net income (ENI) per share of $0.71 beat the consensus estimate of $0.67. Full-year 2017 ENI rose 40.5%, and is expected to rise 11.4% in 2018.
The company declared a quarterly distribution of $0.85 per share, which lifts the current yield (based on the recent four quarters’ payouts) to 7.6%. The distribution is payable on February 20 to investors who own the stock by the close of business on February 12.
Blackstone also announced the $17 billion purchase of a 55% stake in Thomson Reuters’ (TRI) financial and risk unit, a major supplier of data to Wall Street. The Chairman of Bloomberg L.P. then announced that he will step down from Blackstone Group Management LLC’s Board of Directors due to a conflict of interest, because Bloomberg is a direct competitor of Reuters. The Thomson Reuters acquisition changes my outlook on the company, because its futuristic data potential can benefit Blackstone’s current business enterprises—thus making Blackstone Group even more profitable—and can also open the door to many new business opportunities.
BX could appeal to investors who seek income, growth and/or value. If you are keen on investing in real estate, BX is right up your alley, with over $100 billion invested in real estate. (You generally won’t see me recommending REITs, because their EPS and debt levels never meet my criteria. Therefore, I’m putting real estate enthusiasts on notice: BX is a rare real estate recommendation from me.)
I’m changing my recommendation from Buy to Strong Buy, due to the higher dividend payout, lower share price and prospects for the Thomson Reuters acquisition to enhance Blackstone Group’s future. The stock has some upside resistance at 37. Buy BX now to lock in the huge quarterly payout and earn attractive capital gains. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 2.4%) is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serve businesses and individuals. Services include retail and commercial banking, investments, insurance, wealth management, asset management, mortgage, corporate banking, capital markets and specialized lending. The stock is undervalued, and going through an aggressive growth cycle. Consensus earnings estimates have steadily increased for the last six weeks. Wall Street now expects BB&T’s 2018 EPS to grow 40.9%, and the P/E is 14.0. The stock did not suffer in last week’s stock market rout, which is a bullish sign of a potential near-term advance. Still, I would hope to see a quick pullback toward 50. Buy.
Commercial Metals Company (CMC – yield 2.0%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC is an extremely undervalued aggressive growth stock. Consensus earnings estimates for 2018 and 2019 (August year-end) rose again last week, now reflecting EPS growth of 104% and 37.9% with corresponding P/Es of 16.2 and 11.7. Last week I mentioned that the share price could have a quick shakeout, and it did indeed fall with the market in recent days. CMC could bounce at 23 or 21.5 fairly easily. Take advantage of the lower price and buy on pullbacks. Buy.
GameStop (GME – yield 9.3%) is a retailer of games, collectibles and technology; with additional ventures in the entertainment field. The company experienced very strong revenue growth in almost every product category during the holiday sales period. Investors and news media love to forecast the demise of GameStop due to the decline in its physical gaming business, and that’s kept the share price depressed. In reality, the company has many rapidly-growing product divisions, is solidly and consistently profitable, and raises its dividend annually near March 1. Not only can you lock in a 9.3% dividend at the current share price, but the yield might be boosted in a few short weeks.
There’s one risk that investors need to be aware of. GameStop’s CEO is on leave due to a recurring health problem. The worst-case scenario is that he might need to be officially replaced. While it’s likely that current GameStop management will simply carry on in their current permanent and temporary roles, it’s also possible that a new CEO search will be undertaken. Traders will use such news to cause additional volatility in the share price; so again, that’s more of an emotional and opportunistic cause of share price volatility than it is solid reason to worry about the future of the company. There’s 23% upside as GME retraces 20, where it traded in January. I expect additional capital gains later this year. Buy GME now. Buy.
The Interpublic Group of Companies (IPG – yield 3.4%) is a large conglomerate of advertising, marketing, communications and public relations companies serving global markets. The market is expecting EPS of $0.77, within a range of $0.70 to $0.80, when fourth quarter results are released on the morning of February 14. Full-year earnings estimates for 2018 and 2019 rose again last week. Analysts now expect 2018 EPS to grow 15.7%, and the P/E is 13.1.
IPG is an undervalued growth & income stock with an attractive rising annual dividend and a much lower P/E than the average of its peers in the media & advertising space. It’s a bullish sign that IPG remained within its recent trading range between 21.25 and 22 through last week’s market volatility. I think IPG can surpass that trading range in February, barring a correction in the broader stock market. There’s 18% capital gain potential as IPG retraces its July high of 25.25. Buy IPG now. Strong Buy
Morgan Stanley (MS – yield 1.8%) is a major U.S. investment bank and wealth manager, and an undervalued growth stock. The company benefits greatly from rising interest rates, lower tax rates and a growing economy. Earnings per share rose (EPS) 23.3% in 2017, slightly above analysts’ expectations. 2018 EPS estimates keep rising, now expected to grow 26.1% in 2018. The P/E is 12.7. Using 15 as a target P/E, the stock will be fairly valued at 68. A weak stock market could quickly pull MS down to 52 and a good market could raise the price into the mid-to-upper 60’s by year end. Buy.
Nucor Corp. (NUE – yield 2.3%) is a low-cost producer of a diversified portfolio of iron and steel products, and an undervalued mid-cap growth stock. The company reported a strong fourth quarter 2017 earnings beat, which I featured in a Special Bulletin last week. Full-year 2017 EPS rose 58.0%. Analysts are expecting EPS to grow another 40.0% in 2018, while the P/E is only 12.8.
Here’s a CNBC video in which Jim Cramer interviews several prominent CEOs in basic materials and energy, discussing benefits from the changes in U.S. tax policy and other factors that can boost production and earnings growth. In addition to comments from Nucor CEO John Ferriola, the video features the CEO from Marathon Petroleum (MPC), one of my favorite oil & gas refiners. (I would wait for MPC to pull back farther before buying shares.)
I’m concerned that the consensus estimate shows Nucor’s 2019 EPS growing just 4.6%, although I admit that future numbers can change dramatically in the coming months, and analysts tend to start out with conservative projections. Still, I’ll be keeping my eye on that number as I decide how long I’m planning to hold the stock. If the number doesn’t rise to the low-to-mid teens by late summer, I will typically begin planning my exit before investors turn their attention to 2019 numbers in the fourth quarter of 2018. (I see absolutely no cause for alarm. I’m just giving you a glimpse of things I consider when deciding whether to buy or sell stocks.)
NUE rose 28% from its November lows to reach new all-time highs, and is now having a pullback. I expect to continue profiting from capital gains and dividends in 2018. Buy.
Schlumberger (SLB – yield 2.7%) is the world’s largest oilfield service company. The U.S Energy Information Administration expects U.S. oil production to surpass 1970’s record highs in 2018, and to reach new highs again in 2019. This bodes extremely well for oilfield service companies. Consensus earnings estimates for Schlumberger point to very strong EPS growth of 40-47% per year in 2018 through 2020. I moved SLB from Strong Buy to Hold on January 23, the day after its recent peak. Now that SLB has pulled back, I’m recommending that investors begin buying again. Buy.
WestRock Company (WRK – yield 2.5%) is a major player in the global packaging and container industry, and a very undervalued mid-cap growth & income stock. The company reported a strong first quarter 2018 earnings beat (September year-end) and the acquisition of KapStone Paper and Packaging Corp., which I featured in a Special Bulletin last week. Full-year earnings estimates continue to rise. Analysts are now expecting EPS to grow 48.1% in 2018, while the P/E is only 17.3. The stock rose to a new high in January, then pulled back a little. Buy WRK now. Strong Buy.
Buy Low Opportunities Portfolio
Buy Low Opportunities Portfolio stocks have neutral charts, strong projected earnings growth, low-to-moderate price/earnings ratios (P/Es) and low-to-moderate debt levels. (Dividends are not a portfolio requirement, but some of the stocks will have dividends.) Investors should be willing to wait patiently for these stocks to climb.
Sometimes a stock in the Buy Low Opportunities Portfolio produces good capital gains and the share price is no longer low, yet the stock remains an attractive investment. Those stocks will then be moved into the Growth Portfolio or the Growth & Income Portfolio.
Featured Stock: Delek US Holdings (DK – yield 1.8%)
Please give a hearty “welcome back!” to Delek US Holdings, a refining and marketing company that made a quick appearance in the Buy Low Opportunities Portfolio in the recent November 2017 – January 2018 time frame. I bought the stock in early November because it appeared ready to rise, and sold it in early January with a 30% total return because it rose to its previous high from July 2015. Now that DK has pulled back, and there’s 20% upside when it retraces its January high, I’m ready to embrace the stock again.
Delek US Holdings is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. The company is based in Tennessee. Its refineries are located in Arkansas, Louisiana and Texas. Delek serves approximately 300 convenience stores in the southeastern U.S. and west Texas. Asphalt operations consist of 14 asphalt terminals serving locations from Tennessee to the west coast.
Delek maintains an active acquisition strategy. In June 2017, Delek completed the purchase of Alon USA Energy (ALJ), an energy refiner with a strong balance sheet and the largest exposure to the Permian Basin of any independent refiner. Cost and business synergies associated with Alon USA Energy acquisition should continue to enhance the bottom line.
Refining revenue is growing, and higher gross margins in all business sections and lower costs are contributing to a dramatic increase in profits. Earnings estimates have increased dramatically since I began recommending DK in November 2017. After booking a loss of ($1.58) per share in 2016, the company is expected to deliver $0.91 per share when it reports 2017 results on the afternoon of February 26. Consensus estimates project $2.43 EPS in 2018, reflecting an aggressive 167% earnings growth rate. The 2018 P/E is very low in comparison to the earnings growth rate at 13.6.
DK is a small-cap stock. Institutions own 87% of the outstanding common shares. Delek has been paying a quarterly dividend of $0.15 per share for many years. The CEO intends to return cash to shareholders, so we might see a dividend boost in the near term. In addition, Delek announced in late January that it had repurchased $75 million of its stock from an Israeli company.
The stock retraced its July 2015 high of 38 in mid-January 2018, then immediately pulled back—a perfectly normal and expected chart pattern. There’s price support in the 32 to 33 area. Take advantage of the pullback and buy now for a potential 18% short-term capital gain as it rebounds to 39. I will then likely keep the stock for additional capital gains in 2018. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Alexion will report fourth quarter 2017 results on the morning of February 8. Analysts are expecting $1.28 EPS within a range of $1.11 to $1.56 per share. Expect volatility! Alexion will present at the Leerink Partners 7th Annual Global Healthcare Conference on February 14. Investors may access the audio presentation on the company’s website. In other news, Alexion implemented a 2.1% price increase on two main products, Strensiq and Kanuma, on February 1.
Alexion is conducting a single arm study of ALXN1210 in complement inhibitor treatment-Naive adult and adolescent patients with atypical hemolytic uremic syndrome (aHUS). The study is in the recruiting stage of Phase III, and the completion date has been extended to November 2018.
The stock is undervalued, and analysts project aggressive earnings growth through at least 2020. Biotech stocks fell with the market last week, and I perceive that drop as very temporary. In the short-term, the stock could trade anywhere between 112 and 147. There’s a 37% capital gain opportunity as ALXN retraces its April 2016 high at 160. Buy ALXN now. Strong Buy.
Baker Hughes a GE Co. (BHGE – yield 2.3%) offers products, services and digital solutions to the international oil and gas community. The U.S Energy Information Administration expects U.S. oil production to surpass 1970’s record highs in 2018, and to reach new highs again in 2019. This bodes extremely well for oilfield service companies. Wall Street expects EPS to grow 95.3%, 91.7% and 57.8% in 2018 through 2020. The current P/E is 37.0. Both traders and longer-term investors should snap up shares of BHGE now during this quick pullback in energy stocks. There’s 19% upside as BHGE retraces its January high above 37. I expect additional capital gains in 2018. Strong Buy.
Chipotle Mexican Grill (CMG) is a growing restaurant chain, and an undervalued aggressive growth stock. Chipotle will report fourth quarter 2017 results on the afternoon of February 6. Analysts are expecting $1.32 EPS within a range of $0.94 to $1.60 per share. Expect volatility! Menu price increases and current relief from last year’s avocado shortage are contributing to rising earnings estimates over the last six weeks. Chipotle reported $0.77 EPS in 2016 – a very bad year for the company -- and is expected to achieve $6.58, $10.02 and $11.75 EPS in 2017 through 2019.
Recent headlines alarmed investors that Chipotle’s new bunuelos dessert has flopped, but this news is relatively inconsequential. Bunuelos were not rolled out across the franchise, but rather served in a New York test kitchen location. The company continues to research and test a variety of potential new menu items. More important, the result of the ongoing CEO search will heavily influence the 2018 trajectory of the stock price. My guess: a celebrated new CEO will send the stock soaring, and a disappointing CEO selection will hold the share price down for at least another six months, hinging upon both enhanced quarterly financial results and improved public opinion of the company.
Here’s a seven-minute CNBC debate on the future of Chipotle. The catalyst for the debate was last week’s sell signal from UBS. I found the comments refreshing and realistic, although they barely mentioned the strong earnings growth outlook. The stock is volatile, definitely presents ongoing opportunities for traders, and could deliver outsized capital gains to longer-term aggressive growth investors.
CMG rose about 19% from its December low, and is now having a pullback. There’s 10% upside as CMG retraces its January high at 345. I expect additional capital gains this year. Buy.
Supernus Pharmaceuticals (SUPN) focuses on the development and commercialization of products for the treatment of central nervous system diseases and psychiatric disorders, including epilepsy and ADHD. The company has rapid multi-year earnings growth, a comparatively low P/E, and heavy institutional ownership. What’s more, the market cap is just $2.0 billion, making SUPN an easy and attractive buyout candidate. The investment firm Berenberg began research coverage on the stock this month with a buy recommendation and a $66 price target. SUPN rose 30% from its December low to its January high, then pulled backed along with biotech and pharma stocks. I expect a quick rebound toward price resistance at 50. Buy SUPN now. Strong Buy.
Universal Electronics (UEIC) is a manufacturer and cutting-edge world leader of wireless remote control products, software, and audio-video accessories for the smart home; with a strong pipeline of new products. I expect UEIC to deliver huge capital gains, with additional strong odds of a buyout offer. UEIC has a market cap of $643 million. Warren Buffett or Bill Ackman or Blackstone Group could buy the whole company with cash flow! UEIC is undervalued, and forecasted to achieve aggressive 2018 EPS growth. I expect some sideways trading before the stock recovers. There’s 52% upside as UEIC eventually retraces its July 2017 high around 72. Strong Buy.
[premium_html_footer]
Send questions or comments to crista@cabotwealth.com.
Cabot Undervalued Stocks Advisor • 176 North Street, Salem, MA 01970 • https://cabotwealth.com//
YOUR NEXT CABOT UNDERVALUED STOCKS ADVISOR ISSUE IS SCHEDULED FOR March 6, 2018
Cabot Undervalued Stocks Advisor is published by Cabot Wealth Network, an independent publisher of investment advice. Neither Cabot Wealth Network nor its employees are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Copyright © 2018 - COPYING AND/OR ELECTRONIC TRANSMISSION OF THIS NEWSLETTER IS A VIOLATION OF THE U.S. COPYRIGHT LAW. For the protection of our subscribers, if copyright laws are violated by any subscriber, the subscription will be terminated.
[/premium_html_footer]