Cabot Undervalued Stocks Advisor Weekly Update

FED CHAIRMAN POWELL MORPHS FROM UMPIRE TO RELIEF PITCHER

Last week’s economic reports delivered good news, presuming that you are rooting for a stable or strong U.S. economy. June retail sales rose 0.4% vs. May, when economists expected an 0.2% increase; and retail sales also rose 3.4% vs. a year ago. In addition, the July Philadelphia Fed manufacturing index came in at 21.8, after a paltry gain of 0.3 in June and a low July estimate of 5 coming from Wall Street.

Consumers’ bill-paying and money-saving behaviors are also reflecting better financial positions, in line with lower unemployment and better wage statistics. CIT Group reported, “Vacations are a rising savings priority for twice as many U.S. consumers compared to last year.” Ravi Kumar, head of Internet Banking for CIT Bank reported, “We’re encouraged by the results of our survey as planning ahead is one of the key habits necessary to improve financial stability and prevent going into debt.” As for bill-paying, many financial companies are reporting lower June charge-off and delinquency rates vs. May, including Citigroup.

It’s widely believed that the Federal Reserve will lower the fed funds rate when the committee meets on July 30 and 31. Chairman Powell has certainly indicated his intention to do so. The question becomes, “Why?” Chairman Powell wants the economy to remain strong, and that’s his apparent reason for leaning toward lowering interest rates. He’s pitching softballs in the strike zone so that his team – the U.S. economy -- can keep hitting home runs. But that’s not his job. The Fed Chairman is supposed to be an umpire, monitoring the economy and stepping in when it appears to be suffering. Instead, Powell has decided to act as a relief pitcher, changing the outcome of a game that his team was already winning.

I remain skeptical that lower interest rates are currently warranted. That unnecessary decision could easily backfire if economic numbers begin to show too much strength. For example, there are reasons to believe that increases in food and energy prices will lead to rising inflation, necessitating higher interest rates in the coming 6-24 months.

We’ll see what happens. Interest rates are already historically low. There’s probably something influencing Chairman Powell’s decision that either I’m not comprehending or I’m simply not privy to. One thing I know for sure about politics: most of what really takes place is never revealed to the general public.

Send questions and comments to Crista@CabotWealth.com.

PORTFOLIO NOTES
Be sure to review the Special Bulletins from July 19 and 22 in which I mentioned news, rating changes and/or price action on Alaska Air Group (ALK), Blackstone Group (BX), Delta Air Lines (DAL), Schlumberger NV (SLB) and Synchrony Financial (SYF).

QUARTERLY EARNINGS RELEASE CALENDAR
July 23 am: CIT Group (CIT) – 2Q
July 24 am: Alexion Pharmaceuticals (ALXN) – 2Q
July 25 am: Dow Inc. (DOW), Royal Caribbean Cruises (RCL), Southwest Airlines (LUV) and Total SA (TOT) – 2Q
July 25 pm: Alaska Air Group (ALK) – 2Q
July 30 pm: Apple (AAPL) – 3Q and Axis Capital (AXS) – 2Q
July 31 am: Baker Hughes, a GE Company (BHGE) and Carlyle Group (CG) – 2Q
July 31 pm: CF Industries (CF) and TiVo (TIVO) – 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:
Big earnings beat:
Blackstone Group (BX)
Earnings within 5% of consensus estimate: Citigroup (C), Delta Air Lines (DAL), Schlumberger NV (SLB) and Synchrony Financial (SYF).

TODAY’S PORTFOLIO CHANGES
Commercials Metals (CMC) moves from Hold to Buy.

LAST WEEK’S PORTFOLIO CHANGES
Alaska Air Group (ALK)
joined the Buy Low Opportunities Portfolio as a Strong Buy.
Blackstone Group Inc. (BX) moved from Strong Buy to Buy.
Delta Air Lines (DAL) moved from Buy to Hold, then to Retired.
Guess? (GES) moved from Hold to Strong Buy.
Royal Caribbean (RCL) moved from Hold to Buy.

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 39.5 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 traded at $2.30 MMbtu yesterday.

CF is a cyclical mid-cap aggressive growth stock. CF is expected to report second quarter EPS of $0.86 on the afternoon of July 31, within a range of $0.60-$1.15. Expect volatility. Wall Street estimates indicate full-year EPS growing 64% and 32% in 2019 and 2020, with corresponding P/Es of 23.2 and 17.5. The stock traded in the low 40’s from November 2018 through June 2019, then began a new run-up. There’s price resistance at 50 and 55. Buy CF now. Strong Buy.

CIT Group (CIT – yield 2.8%) 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 on the morning of July 23, within a range of $1.10-$1.17, and $460.8 million revenue, within a range of $445.7-$469 million.

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 10.4. The stock has exhibited an upward-sloping pattern of advances and pullbacks on a repetitive two-month cycle. If that pattern continues, CIT is currently near the bottom of that cycle and could reach 54-55 in late August, where it traded repeatedly in 2018. Buy CIT now. Strong Buy.

Marathon Petroleum (MPC – yield 3.8%) 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. Marathon is expected to report second quarter EPS of $1.37 on the morning of August 1, within a range of $1.22-$1.83, and $33.4 billion revenue, within a range of $28.4-$39.4 billion. Reuters reports Credit Suisse commentary saying that Marathon will “deliver significantly higher quarter-over-quarter retail earnings.”

MPC is a vastly undervalued stock. Jacob Mintz, Chief Analyst of Cabot Options Trader, reported that an investor spent $1.8 million on an MPC bull call spread that expires in October. The share price is stable after rebounding quite a bit from the May stock market correction. A strong earnings report could push MPC past price resistance at 58. 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. Sanmina has not yet announced the date of their third quarter earnings release, which will likely occur next week. Expect volatility. Analysts expect full-year EPS to grow 49.3% and 8.2% in 2019 and 2020 (September year end), and the current P/E is 9.4. Once the June quarterly 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. The stock is rising toward short-term price resistance at 34. 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. This year’s financial outlook has been impacted by Southwest’s forced cancellation of approximately 115 daily flights due to the Boeing Max 737 jet problem, which is expected to extend through early November. On the bright side, the strong U.S. economy and new expansion of service to Hawaii are contributing to Southwest’s moderate 2019 earnings and revenue growth, with much stronger growth expected in 2020. Both Delta Air Lines (DAL) and United Airlines Holdings (UAL) reported strong second quarter results.

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. A well-received earnings report could push LUV past short-term resistance at 54, into the upper 50’s. 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. Second quarter results will likely be reported in early August. 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 32.3, there’s 30% upside to short-term resistance at 42, making SUPN suitable for both growth investors and traders. Buy SUPN now. 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 at the end of July, at which time the share price could begin another run-up as institutional investors who focus on dividend stocks will be able to buy VOYA.

VOYA is an undervalued growth stock. Analysts expect full-year EPS to grow 37.1% and 13.4% in 2019 and 2020, and the current P/E is 10.2. VOYA began reaching new all-time highs in late June. I expect the pending dividend announcement and the second quarter earnings release to bring additional capital gains. Buy VOYA now. Strong Buy.

UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS

Blackstone Group Inc. (BX – yield 4.3%*) 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, all on a global basis. The price chart remains bullish. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.07 and yielding 4.3%.

Citigroup (C – yield 2.9%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries. Last week, Citigroup raised the quarterly dividend from 45 cents to 51 cents per share. Citigroup is an undervalued, large-cap growth & income stock. Based on recent trading patterns, don’t worry if the stock dips to 68—it will likely be a brief pullback. There’s price resistance at 77 dating back to January 2018, and the price chart is relatively bullish. 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 its 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.

A Jefferies analyst, Martin Englert, turned bullish on CMC last week. Reuters reported, “Jefferies sees opportunity for U.S. steel prices to recover in [the second half of 2019], as supply and demand balance improves with idled capacities, abating destocking, diminishing steel imports and seasonal demand improvement.” Englert specifically recommended Commercial Metals.

Wall Street now expects full-year EPS to increase 36.2% and 7.9% in fiscal 2019 and 2020 (August year end); and the 2020 P/E is 8.3. I’m moving CMC from Hold to Buy, due to consistently rising earnings estimates and the improving price chart. Nevertheless, I will remove CMC from the Growth & Income Portfolio if the 2020 earnings growth rate does not improve by the time of the fourth quarter earnings release. The stock appears capable of breaking past price resistance at 18, at which time it could easily climb to 20. Buy.

Corteva Inc. (CTVA – yield 1.9%) spun off from DowDuPont (DWDP) on June 3. (Pronounced kor-TEH-vuh.) Corteva 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.

CTVA is a mid-cap growth & income stock, appropriate for risk-tolerant investors. Corteva is expected to report second quarter EPS of $1.02 on the morning of August 1, within a range of $0.45-$1.37, and $5.6 billion revenue, within a range of $5.1-$6.4 billion. Expect volatility**. 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. Buy.

Delta Air Lines (DAL) was retired from the Growth & Income Portfolio yesterday. Retired.*
*As a reminder, “Retired” means I’m removing the stock from the portfolio, but there’s no great harm if you decide to keep the stock and collect the dividend. “Sell” means that I don’t think anybody should own the stock, due to at least one major problem.

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 $0.84 on the morning of July 25, within a range of $0.73-$1.05, and $11.3 billion revenue, within a range of $10.9-$11.4 billion. A build-up of ethane inventory has led to low ethane prices. Ethane demand is expected to strengthen in July as several crackers (facilities that convert ethane into ethylene) ramp up production and others complete turnarounds (production goes offline to facilitate examination and maintenance).

DOW is an undervalued growth & income stock. A well-received earnings report could push DOW past short-term resistance at 53, into the upper 50’s. Strong Buy.

Guess?, Inc. (GES – yield 2.7%) is a global apparel manufacturer, selling its products through wholesale, retail, ecommerce and licensing agreements. Wall Street expects EPS growth of 27.6% and 15.2% in fiscal 2020 and 2021 (January year end). The 2020 P/E is low at 13.3. GES offers the best earnings growth & value opportunity of any U.S.-based apparel retailer. Shares of apparel, footwear and fashion accessories companies fell dramatically during the May stock market correction. After stabilizing, they’re now beginning run-ups, one at a time. The GES price chart is turning bullish. 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. Royal Caribbean is expected to report EPS of $2.46 on the morning of July 25, within a range of $2.34-$2.53.

RCL is an undervalued, large-cap growth & income stock. Wall Street expects EPS to grow 9.4% and 11.4% in 2019 and 2020. The 2019 P/E is 11.4. RCL has pulled back to six-month price support at 110 as the market worries about the discontinuation of service to Cuba and Carnival Corp.’s (CCL) weak bookings. There’s now 17% upside to price resistance at 130, and an annual dividend increase will likely be announced in early September. Buy.

Schlumberger NV (SLB – yield 5.2%) is the world’s largest oilfield service company. Changes to earnings estimates will be reflected in the coming weeks. The market expects very strong earnings growth from Schlumberger in 2020. SLB declined last week alongside falling oil prices, which may have reversed course over aggressive international actions by Iran on Friday. A near-term trading range of 37-41 is likely. Buy.

Total S.A. (TOT – yield 5.5%) is a French multinational integrated energy company operating in over 130 countries. Total is expected to report second quarter results on the morning of July 25. The company is expected to report higher upstream net operating income from high oil prices in April and May, and lower margins in refining and chemicals.

Earnings estimates rose last week, and will invariably change again after second quarter results are factored in. Analysts now expect full-year EPS to grow 9.1% and 21.4% in 2019 and 2020, and the 2019 P/E is 9.7. TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The stock is trading between 54-58. 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 19% in 2019, then to rise 56% in 2020. The 2020 P/E is 12.6. 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. Buy ANF now, and expect volatility. Buy.

Alaska Air Group (ALK) joined the Buy Low Opportunities Portfolio yesterday, via a Special Bulletin. Strong Buy.

Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. ALXN is an undervalued large-cap growth stock. Alexion is expected to report second quarter EPS of $2.34 on the morning of July 24, within a range of $2.17-$2.57. Analysts expect full-year EPS to grow 19.2% and 14.1% in 2019 and 2020, and the P/E is 12.8 – rather low for a profitable biopharmaceutical company. The stock has a wide trading range, generally between 110-145. Expect volatility upon the earnings release. 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 is expected to report third quarter EPS of $2.10 on the afternoon of July 30 (September year end), within a range of $1.79-$2.20, and $53.4 billion revenue, within a range of $52.5-$54.2 billion.

Reuters reported that Raymond James raised AAPL to an outperform recommendation last week, with a $250 price target. Analyst Chris Caso said, “Our more recent checks suggest that Apple plans to bring 5G to a wider range of iPhone models, which is different from their plan when they had intended to use Intel’s modem.” Several other less-bullish analysts also raised their AAPL price targets last week.

AAPL is a great stock for a high quality, buy-and-hold equity portfolio. The price chart is showing strength. A good earnings report could push AAPL to 220. There’s additional price resistance at 230, where the stock last traded in October 2018. Buy AAPL now. Strong Buy.

Axis Capital Holdings Ltd. (AXS – yield 2.7%) is an A+-rated global provider of specialty lines insurance and treaty reinsurance with shareholders’ equity of $5.3 billion and locations in Bermuda, the United States, Europe, Singapore, Middle East, Canada and Latin America. Axis is expected to report second quarter EPS of $1.34 on the afternoon of July 30, within a range of $1.15-$1.60, and $1.1 billion revenue, within a range of $945 million-$1.2 billion. Expect volatility.

AXS is a small-cap stock. At 59.91, there’s 10% upside to the stock’s March 2017 all-time high of 66. I will very likely sell the stock near 66 due to fair valuation and price resistance, but if you want to buy it now for 10% upside, go for it. Hold.

Baker Hughes, a GE Co. (BHGE – yield 3.0%) 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 four last week to a total of 954, down 92 vs. a year ago. The Canadian rig count rose by 1 last week to 118, while the international rig count grew by 12 in June to 1,138. Baker Hughes is expected to report second quarter EPS of $0.19 on the morning of July 31, within a range of $0.15-$0.23.

BHGE is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to increase 51% and 56% in 2019 and 2020. The P/E remains low in comparison to earnings growth at 24.0. The earnings report could send the stock anywhere between 21-28. 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 9.8. Expect volatility. The share price is stable. Buy DBI now to lock in the big dividend yield and catch the next run-up. Strong Buy.

The Mosaic Company (MOS – yield 0.8%) 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 23% in 2019, and an increase of 42% in 2020 as phosphate pricing strengthens. The 2020 P/E is 10.5. The Brazil situation is expected to be fully resolved by the end of September. Buy.

Synchrony Financial (SYF – yield 2.5%) 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. Changes to earnings estimates will be reflected in the coming weeks. The company officially raised the quarterly dividend payout from $0.21 to $0.22 per share. SYF is an undervalued, mid-cap growth & income stock. SYF could trade anywhere between 33-39 in the near future. Strong Buy.

TiVo Corp. (TIVO – yield 4.4%) – 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 13.3.

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 32% gain from the recent 41.5 share price. Buy UEIC now. Expect volatility. Strong Buy.

UPDATES ON SPECIAL SITUATION STOCKS

Carlyle Group LP (CG – yield 5.5%) manages $221 billion, divided among real assets, corporate private equity, investment solutions and global credit.

Carlyle Group will announce second quarter results on the morning of July 31. At that time, the company will likely announce a decision regarding whether they will convert from a limited partnership to a corporation. A “yes” decision will likely cause a jump in the share price.

The stock pulled back in recent days. Traders and dividend investors should buy CG now. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.26 and yielding 5.5%.

**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.