Cabot Undervalued Stocks Advisor Weekly Update

CAN A FAMOUS SCANDAL HARM THE STOCK MARKET?

In recent years, you’ve read my warnings to investors about General Electric (GE) in 2017 and 2018, and Boeing (BA) in 2019.

After more than a year of urging investors to sell General Electric (GE) stock due to continuous corporate problems, I went neutral on the GE share price in the December 2018 issue of Cabot Undervalued Stocks Advisor, saying, “If I were previously playing with put options and short-selling, I’d rein in my positions now.” I urged people to wait until January 2019 before buying low on GE. Then in my January 2019 issue, I wrote, “Experienced traders can probably make money on the stock, and everybody else should stick with more fundamentally attractive companies.” GE shares are up 40% year to date, so it looks like my assessment of GE’s potential stock reaction was on target.

Then on March 15, 2019, Cabot published my comments on the Boeing 737 Max airplane problem in Quit Making Excuses and Sell Boeing Stock, in which I reiterated my stance on how to handle scandals and corporate problems. “It’s time to be concerned, and ready to take action, when news emerges that damages a company’s multi-year financial prospects or reputation. This situation continues to unfold, with more bad news emerging daily. It’s going to be a bad year for Boeing stock.”

I mention these past situations with GE and Boeing because big problems and scandals have a way of growing and lasting much longer than anybody would have anticipated.

We know that when corporations are embroiled in big problems/scandals, their share prices fall. But what about other big scandals that make headlines? Can they affect the stock market, too?

To be clear, I’ve been pondering the Jeffrey Epstein sex crime situation. The investor side of you might think, “Who cares if a few politicians and Hollywood people participated in criminal behavior? How could that harm the stock market?” I’m with you. But I’ve been thinking and thinking about this. “How bad could the Epstein scandal become, how famous might the participants be, and how will America react?”

Here’s what I’ve decided thus far. I’m going to watch and see if additional famous people are implicated or indicted, and I’m going to closely watch the stock market’s reaction. As a value investor, I usually don’t sell falling value stocks unless the corporate earnings outlook turns negative. I simply move them to a Hold recommendation, wait for them to bottom, and then prepare to make Buy recommendations at a more opportune time.

You, however, are not advising thousands of investors. You can do what seems most wise with your personal investment portfolio. My suggestion is that IF news emerges on the Epstein case that shocks the public and pushes the stock market down a bit, begin raising cash by selling some stock. IF more bad news emerges and the market reacts negatively, raise more cash. And always remember: scandals have a way of continuing to unfold. We saw it happen with GE and we’re watching it happen with Boeing. If the market falls, it will be very nice to have cash available with which to buy low on later.

We don’t know what will become of this Jeffrey Epstein scandal, or how long it could drag on. I’ll revisit this topic if new developments warrant a discussion.

POTENTIAL STOCK MARKET RESULTS OF THE BOOMER HOUSING BUBBLE

In recent weeks, I reported on demographic changes that are likely to cause a drop in home values in the coming decade, primarily due to Baby Boomers selling the homes in which they raised their children. (Here’s the first of those two reports: The Next Housing Crash Is Closer Than You Think.)

It looks like the cycle has begun. Bloomberg’s recent article, Homebuyer Bidding Wars Are Fading Fast, shows just how much the real estate market has cooled in one year’s time.

Right away, some investors assumed that this latest housing bubble would cause financial markets to plummet as they did after 2007, because people draw upon past experiences for points of reference. Let’s face it: most of us have only lived through one housing bubble, so we don’t have a wealth of experience to draw upon. But just as each stock market downturn is caused by different factors, with different results, so too do housing markets fluctuate for different reasons, with different results.

Let’s review the causal factors and results of the last housing bubble. The U.S. government mandated that Fannie Mae and Freddie Mac begin loaning money to people with poor credit histories so that they could buy homes. (You can thank the rocket scientists who populate the Halls of Congress for that idiotic decision.) That snowballed into a frenzy of home buying, home flipping, and lenders competing for business by making it easier and easier for people to buy houses with low down payments and adjustable rate mortgages. Mortgages were packaged into collateralized mortgage obligations (CMOs). A proliferation of people defaulted on their mortgages. CMO values fell, causing a ripple effect in the bond market. Fixed income department losses at banks caused bank share prices to fall, which led to panic in the stock market.

Finally, Congress created new banking rules that were meant to punish the big banks, essentially for implementing the lower financial standards that they’d previously inflicted on Fannie and Freddie. That backfired because the new and very expensive banking rules were also applied to small banks, destroying their abilities to remain in business, and causing well over 1,000 small banks to shut their doors or sell to the highest bidder. (As you can imagine, I’m constantly amazed when voters opt for “big government” political candidates. “I’m from the government and I’m here to help.”)

Yeah, that was unpleasant.

Now we’re faced with Baby Boomers planning to downsize; to sell their homes and buy smaller homes, live with their adult children or live in retirement or assisted living facilities. The fact that so many Boomers’ home sales will be concentrated within a small number of years will lead to an excess number of homes available for sale, while demographically, there will not be an equal number of buyers. Therefore, these Boomers will likely need to lower their prices in order to entice the pool of buyers to purchase the Boomers’ homes.

The first big difference with this housing problem vs. last decade’s housing problem is that Boomers have a lot of equity in their homes. Last decade’s financial excesses are non-existent in the current scenario. Boomers do not have poor credit histories nor problems paying their remaining mortgages. Therefore, there is no reason to anticipate any mortgage defaults, which was really the first and most important factor in the unraveling of the last housing bubble.

If there are no mortgage defaults, then there will not be a bond market problem like we experienced in the prior decade’s financial crisis. Banks will not have big problems in their lending departments, and will not be stuck with houses that had been abandoned by bankrupt people. If banks are not experiencing trouble, their stocks will not have a specific reason to plummet, and there will be no ensuing ripple effect in the broader stock market.

Basically, we’ll be looking at a U.S. landscape of homes for sale, owned by the Jones and Gomez and Schmidt families, which will sell for lower prices than these families had originally hoped. They will still be selling for a profit. Their income levels didn’t suddenly change, so the families who are still making mortgage payments will have no reason to stop making those payments.

From a stock market point of view, I suggest avoiding homebuilder stocks in the coming years. Companies that build single-family homes will be competing with a glut of existing homes on the market. Companies that build multi-family homes will probably continue to generate predictable and attractive revenue streams. However, investors tend to “throw the baby out with the bathwater.” Thus, I expect multi-family homebuilder stocks to suffer almost as much as single-family homebuilder stocks, which will surely be trounced.

Many homeowners will react to the weak selling environment by updating their homes with renovations and new appliances, in order to lure buyers to their properties. Therefore, I expect companies that sell home renovation supplies and appliances to thrive during the bursting of the current housing bubble.

If you foresee other potential ramifications for how this housing bubble will affect various industries, please share your insights with me.

UPDATE: AMERICAN INTERNATIONAL GROUP (AIG)

I had recommended shares of insurance company American International Group (AIG – yield 2.3%) in my April webinar. Since that time, 2019 earnings estimates rose substantially, while 2020 estimates rose modestly. Next year’s projected earnings growth rate is now just 4.7%. Profits are growing so rapidly that, to a certain extent, Wall Street cannot keep up. Therefore, expect relatively large earnings revisions after each quarterly report for the rest of the year.

The share price has risen from 45.76 on April 18 to 56.40, reflecting a 23% capital gain. There’s strong price resistance at 56, so I expect AIG to stop climbing here. Traders should either sell or use a stop-loss order. Investors who prefer to buy and hold high quality companies should certainly feel comfortable holding AIG. There’s price support at 50. Traders and investors should try to accumulate shares below 51.

A MESSAGE FOR SHAREHOLDERS OF CORTEVA (CTVA) AND DUPONT DE NEMOURS (DD)

I acquired a Letter to Shareholders from Corteva, via email, that addresses its post-spinoff cost basis, with the corresponding cost basis for DuPont de neMours (DD). I can forward that email to you upon your request. The letter will hopefully also be posted on Corteva’s website in the near future.

Send questions and comments to Crista@CabotWealth.com.

PORTFOLIO NOTES
Be sure to review the Special Bulletin from July 11 in which I mentioned news, rating changes and/or price action on Delta Air Lines (DAL).

QUARTERLY EARNINGS RELEASE CALENDAR
July 18 am: Blackstone Group (BX) – 2Q
July 19 am: Schlumberger (SLB) and Synchrony Financial (SYF) – 2Q
July 23 am: CIT Group (CIT) – 2Q
July 24 am: Alexion Pharmaceuticals (ALXN) – 2Q
July 25 am: Dow Inc. (DOW), Southwest Airlines (LUV) and Total SA (TOT) – 2Q
July 30 pm: Apple (AAPL) – 3Q and Axis Capital (AXS) – 2Q
July 31 am: Baker Hughes, a GE Company (BHGE) – 2Q
August 1 am: Corteva (CTVA) and Marathon Petroleum (MPC) – 2Q
August 5 pm: Mosaic (MOS) – 2Q
August 6 pm: Voya Financial (VOYA) – 2Q

EARNINGS SEASON SCORECARD:
Earnings within 5% of consensus estimate: Citigroup (C) and Delta Air Lines (DAL).

TODAY’S PORTFOLIO CHANGES
Blackstone Group Inc. (BX) moves from Strong Buy to Buy.
Delta Air Lines (DAL) moves from Buy to Hold.
Guess? (GES) moves from Hold to Strong Buy.
Royal Caribbean (RCL) moves from Hold to Buy.

LAST WEEK’S PORTFOLIO CHANGES
Axis Capital Holdings (AXS) moved from Strong Buy to Hold.

UPDATES ON GROWTH PORTFOLIO STOCKS

Adobe Systems (ADBE) is a software company that’s changing the world through digital experiences. Adobe is reimagining Customer Experience Management (CXM) with Adobe Experience Cloud, the industry’s only end-to-end solution for experience creation, marketing, advertising, analytics and commerce. Full year consensus estimates point toward EPS increasing aggressively by 42.0% in 2019 and 24.8% in 2020 (November year end). The high P/E of 39.6 is the only reason that I am not giving ADBE a Strong Buy recommendation.

ADBE is a large-cap growth stock, a great stock for risk-tolerant growth investors and buy-and-hold equity portfolios. ADBE surpassed all-time highs on strong volume in mid-June, and the price chart remains bullish. I expect an extended run-up, occasionally interrupted by pullbacks in the broader market. Buy ADBE now. Buy.

CF Industries Holdings (CF – yield 2.5%) is one of the world’s largest producers of nitrogen products, serving customers on six continents. The company operates nine nitrogen production facilities in Canada, the U.K. and the U.S. CF Industries expects strong nitrogen demand through the current quarter, and to continue benefiting from low natural gas prices throughout 2019. The Henry Hub price of natural gas closed at $2.44 MMbtu last week.

The company is expected to grow full-year EPS by 62% and 33% in 2019 and 2020, with corresponding P/Es of 23.6 and 17.8. CF is a cyclical mid-cap aggressive growth stock. The stock launched above previous price resistance in mid-June. CF could trade up to 50 in the coming weeks. Strong Buy.

CIT Group (CIT – yield 2.7%) operates both a bank holding company with $30 billion in consumer 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 expected to report EPS of $1.13, within a range of $1.10-$1.17, on the morning of July 23.

CIT is an undervalued growth stock with an attractive dividend yield. Wall Street expects EPS to increase 19.6% and 13.5% in 2019 and 2020. The P/E is 10.7. The stock appears capable of surpassing 54-55, where it traded repeatedly in 2018. Buy CIT now. Strong Buy.

Marathon Petroleum (MPC – yield 3.9%) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interests in two midstream companies that will soon merge, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. Consensus earnings estimates project 2019 EPS falling 26%, followed by a 73% jump in 2020 EPS, while the 2020 P/E is incredibly low at 7.0.

The share price has strengthened. Influencing factors include rebounds in both U.S. stocks and oil prices after May corrections in both of those markets; and tighter supply of refinery products (resulting in higher pricing power) due to the PES refinery shutdown, hurricane season and increased refinery maintenance cycles in preparation for IMO 2020. MPC is approaching price resistance at 58. There’s additional resistance at 65. Buy MPC now. Buy.

Sanmina Corp. (SANM) designs and manufactures optical, electronic and mechanical products for original equipment manufacturers (OEMs) primarily in the communications networks, cloud solutions, industrial, defense, medical and automotive industries. Analysts expect EPS to grow 49.3% and 8.2% in 2019 and 2020 (September year end), and the current P/E is 8.9. Once the June quarter results are reported, and the 2020 earnings estimates are thereafter adjusted, I’ll decide whether to keep SANM in the Growth Portfolio. SANM is a small-cap growth stock. At a share price of 29.5, there’s 15% upside to short-term price resistance at 34. Expect volatility. Buy.

Southwest Airlines (LUV – yield 1.4%) 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. Delta Air Lines’ report of strong June passenger traffic gave a boost to airline stocks last week. Southwest has been forced to cancel approximately 115 daily flights due to the Boeing Max 737 jet problem.

Southwest is expected to report second-quarter EPS of $1.34 on the morning of July 25, within a range of $1.29-$1.40. LUV is an undervalued large-cap stock. Wall Street expects full-year EPS to grow 6.4% and 16.6% in 2019 and 2020. The stock continues to recover from the May stock market correction. At a share price of 52.5, there’s 10% upside to short-term resistance at 58, making LUV suitable for both growth investors and traders. Buy LUV now. 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 migraine. Supernus has five pipeline products, in various phases of clinical trials, which aim to treat ADHD, impulsive aggression, bipolar disorder, depression and severe epilepsy. Three of those pipeline drugs are expected to launch in 2020, 2021 and 2023.

SUPN is an undervalued small-cap growth stock. Analysts are expecting EPS to grow 10.2% and 16.4% in 2019 and 2020. Political proposals regarding pharmaceutical pricing continue to cause stock volatility. At a share price of 31.9, there’s 31% upside to short-term resistance at 42, making SUPN suitable for both growth investors and traders. Buy.

Voya Financial (VOYA – yield 0.1%) is a retirement, investment and insurance company serving millions of individuals and 49,000 institutional customers in the United States. Voya has $547 billion in total assets under management and administration. Voya was featured in the July issue of Cabot Undervalued Stocks Advisor.

CEO Rodney O. Martin, Jr. recently stated, “We intend to increase our common stock dividend to a yield of at least 1% and we expect to do so beginning in the third quarter of 2019.” Investors should expect that announcement during the last week of July, at which time the share price could easily jump as institutional investors who focus on dividend stocks will have yet another good reason to buy VOYA.

VOYA is an undervalued growth stock. Analysts expect full-year EPS to grow 35.9% and 14.6% in 2019 and 2020, and the current P/E is 10.4. VOYA recently began reaching new all-time highs after running up against price resistance at 55 repeatedly for 18 months. Buy VOYA now. Strong Buy.

UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS

Blackstone Group Inc. (BX – yield 4.7%*) is the world’s largest and most diversified alternative asset manager with $512 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, all on a global basis. On July 1, Blackstone officially changed its business structure. The company’s name changed from Blackstone Group LP to Blackstone Group Inc. Blackstone will deliver second-quarter results on the morning of July 18.

BX is widely considered “best in class” among professional investors. This growth & income stock rose to new all-time highs in July. The corporate conversion should trigger an extended period of institutional buying and also inclusion in the S&P 500 index, each invariably bullish for share price appreciation. Nevertheless, the stock has risen 70% since the market’s recent bottom in December 2018. I’m moving BX from Strong Buy to a Buy recommendation. Cautious investors should wait for an opportunity to buy below 42. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.17 and yielding 4.7%.

Citigroup (C – yield 2.5%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries. Yesterday, Citigroup reported second-quarter EPS of $1.95. Excluding a $350 million gain on Citi’s investment in Tradeweb, earnings per share were $1.83. The final consensus estimate had ranged between $1.79-$1.81, depending on the source of the estimate.

Strength in consumer lending, and lower expenses, tax rate and share count contributed to the quarter’s successes. The trading business was weak. Revenue was $18.76 billion, above the $18.49 billion consensus estimate. Share repurchases have reduced the common share count by 10% during the last four quarters, with tangible book value rising 10% during the same period. The company continues to aggressively repurchase stock.

Citigroup plans to increase the third quarter dividend payout from $0.45 to $0.51—not yet officially announced—pushing the current yield up to 2.8%.

Citigroup is an undervalued, large-cap growth & income stock. The stock is actively rising toward 77, where it last traded in January 2018. Strong Buy.

Commercial Metals Company (CMC – yield 2.7%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Commercial Metals derives 60% of revenue from rebar products. The company is outperforming its synergy targets from rebar assets acquired from Gerdau S.A. Demand remains positive driven by continued strength in non-residential construction activity.

Earnings estimates have risen in recent weeks, especially the 2019 number. Analysts now expect full-year EPS to increase 35.6% and 6.9% in fiscal 2019 and 2020; and the 2020 P/E is 8.2. It’s not remotely unusual for analysts to lowball next year’s earnings outlook on a small-cap stock, right up until the company reports prior-year fourth-quarter results. In order for CMC to remain in the Growth & Income Portfolio, I’ll be watching for the projected 2020 earnings growth rate to increase to double digits by the time of the fourth-quarter earnings report and subsequent reassessment by Wall Street. CMC is resting after a huge rebound to short-term price resistance at 18 in June. Hold.

Corteva Inc. (CTVA – yield 1.9%) spun off from DowDuPont (DWDP) on June 3. Corteva (pronounced kor-TEH-vuh) is an agricultural sciences company, providing farmers with seeds and crop protection products, enabling them to maximize yield and profitability. I am in possession of a Letter to Shareholders from Corteva that addresses its post-spinoff cost basis, with corresponding cost basis for DuPont de neMours (DD). I received the letter from Corteva Investor Relations, via email, and I can forward that email to you upon your request. Corteva was featured in the July issue of Cabot Undervalued Stocks Advisor.

Analysts** currently expect Corteva to report EPS of $1.13 and $1.44 in 2019 and 2020, reflecting aggressive 27% earnings growth next year. The 2020 price/earnings ratio is 19.1; not low, but certainly lower than the EPS growth rate. The first quarterly dividend will be paid on September 13.

CTVA is a mid-cap growth & income stock, appropriate for risk-tolerant investors. The share price has fluctuated between 24-30 since the stock began trading, and will likely settle into a more narrow range after second-quarter results are reported on August 1. Buy.

Delta Air Lines (DAL – yield 2.6%) is a U.S. and international passenger and cargo airline that serves nearly 200 million people every year, flying to more than 300 destinations in over 50 countries. In June, Delta served 18.9 million passengers, a monthly record. Delta is the only major airline that is not experiencing costly problems associated with the grounding of BA MAX 737 jets and associated flight cancellations.

Refer to the July 11 Special Bulletin to review Delta’s strong second-quarter results and management’s expectation for continued revenue strength and profitability throughout 2019. The 15% dividend increase brings the current yield up to 2.6%.

Full year earnings estimates have been climbing since early March, rising again last week, although not yet reflecting analysts’ revisions subsequent to the second quarter earnings report. Delta is now expected to achieve 23.5% and 5.2% EPS growth in 2019 and 2020, and the P/E is 8.8. I’m moving DAL from Buy to a Hold recommendation in light of the slow 2020 EPS growth rate. The price chart is extremely bullish as the stock is reaching new all-time highs. Hold.

Dow Inc. (DOW – yield 5.5%) is the materials science division of the former DowDuPont (DWDP) that began trading as a separate company on April 2, 2019. Dow is expected to report second quarter EPS of $0.85 on the morning of July 25, within a range $0.75-$1.05, and $11.3 billion revenue, within a range of $11.0-$11.4 billion.

Analysts** currently expect Dow to report EPS of $4.39 and $5.25 in 2019 and 2020. I’m very pleased with the profit projections, the dividend yield and the P/E (11.3). The share price seems stable, with support at 47. Dividend investors should buy now. Strong Buy.

Guess?, Inc. (GES – yield 2.7%) is a global apparel manufacturer, selling their products through wholesale, retail, ecommerce and licensing agreements. Wall Street expects EPS to grow of 27.6% and 15.2% in fiscal 2020 and 2021 (January year end). The 2020 P/E is low at 13.2. GES offers the best earnings growth & value opportunity of any U.S.-based apparel retailer. The price chart just turned bullish. I’m therefore moving GES from Hold to a Strong Buy recommendation. Traders, growth investors and growth & income investors should buy GES now. Strong Buy.

Royal Caribbean Cruises (RCL – yield 2.5%) is a cruise vacation company that delivers travelers to desirable and exotic destinations on all seven continents. The company operates a total of 61 ships, with 15 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. RCL is an undervalued, large-cap growth & income stock. Wall Street expects EPS to grow 10.0% and 11.5% in 2019 and 2020. The 2019 P/E is 11.3.

I recently mentioned that Carnival Corp. (CCL) is getting some bad press among stock analysts after lowering their earnings outlook due to the discontinuation of cruise ship service to Cuba and weaker demand in Europe and Alaska.

RCL has pulled back to six-month price support as the market worries about Carnival Corp. There’s now 18% upside to price resistance at 130, and an annual dividend increase will likely be announced in early September. I’m moving RCL from Hold to a Buy recommendation. The stock is not yet ready to rebound, but risk-tolerant bargain hunters can buy low. Buy.

Schlumberger NV (SLB – yield 4.9%) is the world’s largest oilfield service company. Reuters reported that Cowen & Co. favors Schlumberger among large caps for improving international prospects and free cash generation, along with attractive valuation; and that international and offshore markets seems to have improved since first quarter results were released. Schlumberger is expected to report second-quarter EPS of $0.35, within a range of $0.336-$0.36, on the morning of July 19. Full-year earnings are expected to fall 5% in 2019 and to rise 37% in 2020. The 2020 P/E is 19.3. The stock continues to rebound from the May market downturn. There’s price resistance at 41-42 and again at 45-47. Buy.

Total S.A. (TOT – yield 5.3%) is a French multinational integrated energy company operating in over 130 countries. Total will divest several non-core assets in the U.K. to Petrogas NEO UK Ltd. The assets were acquired in Total’s recent Maersk Oil merger, and will fetch $635 million. Total’s primary aim is to keep their organic, pre-dividend cost of oil per barrel below $30. Total is expected to report second-quarter results on the morning of July 25. Analysts expect full-year EPS to grow 6.3% and 19.2% in 2019 and 2020, and the 2019 P/E is 10.5. TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The stock is approaching short-term price resistance at 57-58. Buy.

UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS

Abercrombie & Fitch (ANF – yield 4.4%) is a specialty retailer of Abercrombie & Fitch, abercrombie kids and Hollister brand apparel and accessories for men, women and kids. The company operates 857 stores globally. The company remains on track toward its multi-year goals of improving revenue, profits, expense-control, data analytics and global store expansion. Analysts expect EPS to fall 21% in 2019, then to rise 60% in 2020. The 2020 P/E is 12.4. ANF is a small-/micro-cap stock. The stock is rebounding, along with other apparel stocks, from a rapid drop in May, and could easily reach 20 before pausing again. Expect volatility. Buy.

Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Reuters reported, “Trump admin has looked at proposals to cut drug costs by using an IPI [international pricing index] that would determine what Medicare pays for certain medicines based on the prices set in a handful of other countries.” An analyst at Guggenheim estimates that only 20% of Alexion’s Soliris revenue comes from Medicare Part B, and that Alexion would not be severely impacted by proposed changes to drug reimbursement rates.

ALXN is an undervalued large-cap growth stock. Alexion is expected to report second-quarter EPS of $2.33, within a range of $2.17-$2.51, on the morning of July 24. Analysts expect full-year EPS to grow 19.1% and 14.2% in 2019 and 2020, and the P/E is 12.8—rather low for a profitable biopharmaceutical company. The stock price weakened last week and has not yet turned upward. Strong Buy.

Apple Inc. (AAPL – yield 1.5%) is a manufacturer and provider of many popular technology devices and services, including the iPhone, iPad, Mac, App Store, Apple Care, iCloud and more. Five new services will roll out in the coming months: Apple News+, Apple TV+, Apple TV Channels, Apple Arcade and Apple Card. There are over 1.4 billion active Apple devices globally. Apple will report third-quarter results on the afternoon of July 30 (September year end).

AAPL is a great stock for a high quality, buy-and-hold equity portfolio. I like the AAPL price chart. A well-received earnings report could easily push AAPL past short-term price resistance at 210 and back toward 230, where the stock last traded in October 2018. Buy AAPL now. Strong Buy.

Axis Capital Holdings Ltd. (AXS – yield 2.6%) – Hold.*** (last review July 9)

Baker Hughes, a GE Co. (BHGE – yield 2.9%) offers products, services and digital solutions to the international oil and gas community. The number of U.S. rigs drilling for crude oil and natural gas fell by five last week to a total of 958, down 96 vs. a year ago. The Canadian rig count fell by three last week to 117, while the international rig count grew by 12 in May to 1,138.

BHGE is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to increase 51% and 57% in 2019 and 2020. The P/E remains low in comparison to earnings growth at 25.5. The stock appears ready to rise to short-term price resistance at 28.5. Buy BHGE now. Strong Buy.

Designer Brands Inc. (DBI – yield 5.5%) operates DSW Warehouse and The Shoe Company stores with over 1,000 locations in 44 U.S. states and Canada, and Camuto Group. DSW was the #1 omnichannel retailer in the U.S. in 2017 and 2018, and has delivered 27 consecutive years of sales growth. Designer Brands was featured in the July issue of Cabot Undervalued Stocks Advisor. DBI is an undervalued growth stock with a hefty dividend yield. Expected EPS growth rates are 15.1% and 14.1% in 2019 and 2020. The P/E is moderate at 9.5. Expect volatility. Strong Buy.

The Mosaic Company (MOS – yield 0.9%) 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.

Lower phosphate pricing in 2019 and costs associated with complying with new Brazilian mining regulations contributed to analysts adjusting 2019 EPS expectations downward, reflecting a profit drop of 20% in 2019, and an increase of 39% in 2020 as phosphate pricing strengthens. The 2019 P/E is 9.7. The Brazil situation is expected to be fully resolved by the end of September. The share price has been weak, trading between 22.5-25. Buy.

Synchrony Financial (SYF – yield 2.3%) is a consumer finance company with 80.3 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. Synchrony is expected to report second-quarter EPS of $0.95, within a range of $0.87-$1.05, on the morning of July 19. Wall Street expects full-year 2019 EPS growth of 13.6%, and the P/E is low at 8.5. In late July, Synchrony intends to announce an increase in the quarterly dividend from $0.21 to $0.22 per share, bringing the current yield up to 2.4%.

SYF is an undervalued, mid-cap growth & income stock. Last week, Citigroup and Credit Suisse raised their price targets on SYF to 38 and 47, respectively. SYF is rising toward 38-39, where it peaked in January 2018. Buy SYF now. Strong Buy.

TiVo Corp. (TIVO – yield 4.3%) – will spin off its Product business from its Intellectual Property Licensing business in a tax-free transaction to shareholders during the first half of 2020. Dave Shull joined the company as President and CEO on May 31, and promptly raised revenue and earnings guidance for full-year 2019.

Last week, TiVo announced that “Shaw Communications has entered into a multi-year extension of its agreement for TiVo’s i-Guide® and its intellectual property (IP) license, and expanded its Rovi patent portfolio IP license to also cover the TiVo patent portfolio. Shaw Communications is a leading Canadian connectivity company.” TiVo additionally announced a new IP license agreement with LG Electronics.

I continue to believe that TiVo offers excellent technology to the communications industry. Approximately 22 million subscriber households around the world use TiVo’s advanced television experiences. Nevertheless, I plan to eventually remove the stock from the Buy Low Opportunities Portfolio. Investors should continue paring back their positions in this micro-cap stock. Hold.

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. The full-year 2019 analysts’ earnings estimate projects 31.0% growth, and the P/E is low in comparison at 13.8.

UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. The price chart is relatively bullish. A breakout past 45, where UEIC traded in August 2018 and May 2019, could carry the stock to price resistance at 55, a potential 28% gain from the recent 40 share price. Buy UEIC now. Expect volatility. Strong Buy.

UPDATES ON SPECIAL SITUATION STOCKS

Carlyle Group LP (CG – yield 5.3%) manages $221 billion, divided among real assets, corporate private equity, investment solutions and global credit. The company is planning to make a near-term decision regarding whether they will convert from a limited partnership to a corporation, as four of their industry peers have announced since early 2018. A conversion to a corporation would newly allow a large number of institutional investors to consider buying CG shares, thus potentially boosting the share price both immediately and over a multi-year period.

There’s a strong likelihood that Carlyle will announce their potential corporate conversion decision upon the release of second-quarter results. The company has not yet announced that release date. In 2018 and 2017, results were reported on Wednesday, August 1 and August 2, respectively. This year, the potential corresponding Wednesday dates are either July 31 or August 7.

Last week, investment banker Keefe, Bruyette & Woods raised their price target on CG from 26 to 29. (Analysts are not known for sticking their necks out and announcing big price targets. I would therefore assume that this analyst confidently foresees a near-term, positive decision on the corporate conversion.)

The stock just began reaching past price resistance at 23-24. That’s a bullish indication of additional near-term capital gains. A positive corporate conversion announcement could add about 10% to the share price, although it’s possible that all of the capital gains will come prior to the announcement. After all, the stock’s up 60% year-to-date, and it’s up 17% since the CEO announced the possibility of corporate conversion on May 1. Traders should buy CG now. Everybody should consider using stop-loss orders, because we might end up with a case where investors “sell on the news;” that is, “take the money and run” when the announcement finally arrives. I will likely retire CG from the portfolio as soon as the run-up ends. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.26 and yielding 5.2%.

**Earnings projections for companies that have recently undergone major M&A activity (including post-merger companies, post-spinoff companies and IPOs) are relatively tentative until the companies have reported several quarters of earnings results. At that time, analysts can develop projections based on actual corporate results. They can also get a better feel for the reliability of corporate statements regarding the business outlook. (Some CEOs would naturally be conservative when estimating business trends to analysts, while others would be overly optimistic, and yet others perhaps devious or oblivious!)

*** In order to focus attention on newsworthy changes in our portfolio stocks, I’m eliminating descriptions of Hold-rated stocks during weeks when there are no significant news announcements or changes in consensus earnings estimates. As a reminder, Hold does not mean Sell. Hold means that I am not recommending additional purchases of the stock today, either due to price chart action, earnings outlook, or stock valuation. I expect Hold-rated stocks to perform well in the coming months.