MID-AUGUST MUSINGS
U.S. stock markets have exhibited a high degree of volatility in recent weeks. There are lots of factors contributing to the turmoil, which will ebb and flow, probably for the rest of our lives. So let’s just circle back to why we’re here: We’re here to invest in stocks because over the long term, stocks outperform fixed income investments.
Here’s a three-year price chart on the S&P 500 index, which represents stocks of the 500 largest public U.S. companies (heavily skewed toward the larger companies).
A quick glance at the chart shows me three important things:
• There were approximately seven U.S. stock market corrections during the last three years.
• The S&P 500 index rose 32% in the three years ending August 12.
• The S&P 500 index rose to new all-time highs in each of the last three years.
Despite repeated bouts of volatility, which can occasionally become extreme, the S&P 500 rose to new highs again as recently as July. We’re probably going to get past this current market correction in the fall. In the meantime, this is a good time to reassess your portfolio stocks. Do you have questions about specific stocks, or questions about portfolio management? I’d like to devote the next Weekly Update to your inquiries, but I won’t publish your names! So go ahead and ask me anything that’s been on your mind.
MORE POTENTIAL FALLOUT FROM THE JEFFREY EPSTEIN DRAMA
In my July 30 Weekly Update, I cautioned investors about potential trouble with L Brands (LB) shares. That’s because a famous alleged criminal, Jeffrey Epstein (who is now deceased) was a close, long-term associate and Power of Attorney for L Brands’ CEO Leslie Wexner. Sure enough, Mr. Wexner is landing in headlines; featured on the home page of Bloomberg News at this very moment.
Remember, my warning was not about implying that Mr. Wexner has done anything criminal. My warning was about guilt by association, public perception, and the fallout that could harm the company’s stock price. As we witnessed in the 2017-2018 #metoo social movement, in which at least 200 prominent men lost their jobs after public allegations of sexual harassment, people who are perceived as guilty of or associated with crimes can fall quickly.
In that light, I want to point out that a variety of other famous people’s names have been tossed around in association with Jeffrey Epstein. Some of those people are very prominent media and entertainment professionals. (Of course, there are also politicians and foreign heads of state whose names are appearing in associated news stories, but those folks don’t hold high-level positions in public companies, so they’re not going to harm stocks that you might own.)
I’m not going to list names of famous people who you might recognize from television and film. I’m just going to say that if you own stock in media or entertainment companies, and you’re worried about the possibility of a scandal affecting your share price, then follow my recent advice: “you can protect your invested capital with stop-loss orders, options, or by selling shares.”
If I thought this Epstein situation was going to be swept under the rug, I would not bother writing about this topic. I suggest caution.
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin August 9 in which I mentioned news, rating changes and/or price action on Mosaic Company (MOS), Supernus Pharmaceuticals (SUPN), Universal Electronics (UEIC) and Voya Financial (VOYA).
FINAL EARNINGS SEASON SCORECARD:
Big earnings beat: Alexion Pharmaceuticals (ALXN), Axis Capital (AXS), Blackstone Group (BX), Carlyle Group (CG), CF Industries (CF), CIT Group (CIT), Corteva (CTVA), Marathon Petroleum (MPC), Sanmina (SANM), Supernus Pharmaceuticals (SUPN), TiVo (TIVO) and Universal Electronics (UEIC).
Earnings within 5% of consensus estimate: Alaska Air Group (ALK), Apple (AAPL), Baker Hughes, a GE Co. (BHGE), Citigroup (C), Delta Air Lines (DAL), Dow Inc. (DOW), Royal Caribbean Cruises (RCL), Schlumberger NV (SLB), Southwest Airlines (LUV), Synchrony Financial (SYF) and Total SA (TOT).
Big earnings miss: The Mosaic Company (MOS) and Voya Financial (VOYA).
TODAY’S PORTFOLIO CHANGES
Axis Capital Holdings Ltd. (AXS) moves from Hold to Retired.
Corteva (CTVA) moves from Hold to Strong Buy.
Guess? (GES) moves from Strong Buy to Buy.
Marathon Petroleum (MPC) moves from Buy to Hold.
The Mosaic Company (MOS) moves from Buy to Hold.
LAST WEEK’S PORTFOLIO CHANGES
Alexion Pharmaceuticals (ALXN) moved from Strong Buy to Hold.
Carlyle Group (CG) moved from Hold to Strong Buy.
CIT Group (CIT) moved from Strong Buy to Hold.
Designer Brands (DBI) moved from Strong Buy to Hold.
Dow Inc. (DOW) moved from Strong Buy to Hold.
Royal Caribbean Cruises (RCL) moved from Strong Buy to Hold.
Supernus Pharmaceuticals (SUPN) moved from Buy to Hold.
Synchrony Financial (SYF) moved from Hold to Buy.
Total S.A. (TOT) 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. Adobe Systems was featured in the August issue of Cabot Undervalued Stocks Advisor.
ADBE is a large-cap growth stock; a great stock for risk-tolerant growth investors and buy-and-hold equity portfolios. Full year consensus estimates point toward EPS increasing aggressively by 42.0% in 2019 and 24.8% in 2020 (November year end). The stock’s current downturn mirrors that of the S&P 500 index. When the broader market recovers, ADBE could easily continue rising past this summer’s all-time highs. Accumulate ADBE. Buy.
CF Industries Holdings (CF – yield 2.4%) 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 $2.13 MMbtu yesterday. The earnings outlook continues to rise in the wake of second quarter results. Earnings per share are now expected to increase 73% and 34% in 2019 and 2020. The 2019 P/E is 24.3.
CF is an undervalued, mid-cap aggressive growth stock. Last week, Citigroup and Cowen & Co. raised their price targets on CF from 59. The stock is up 25% since late May, and barely blinked during the recent market correction. The price chart remains bullish. Buy CF now. Hold.
CIT Group (CIT – yield 3.1%) – Hold.*** (last review August 6)
Marathon Petroleum (MPC – yield 4.6%) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interest in a midstream company, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. MPC is a vastly undervalued stock. I’ve got MPC recommended as a Buy, rather than a Strong Buy, to reflect falling 2019 EPS. Fortunately, 2020 EPS growth projections are huge, and the P/E is shockingly low. The stock’s upward progression got interrupted when the current correction arrived in the broader market. I’m moving MPC from Buy to a Hold recommendation until the share price stabilizes. Hold.
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. The company is focused on cost controls, efficiencies and leveraging their operating model. Consensus estimates point toward earnings growth of 52.5% and 5.6% in 2019 and 2020. SANM is a small-cap growth stock, recently trading between 29-33. Buy SANM now. 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. Southwest’s grounding of Boeing Max 737 jets currently extends through January 5, 2020. Wall Street expects no EPS growth in 2019, followed by 21% EPS growth in 2020. The 2020 P/E is 9.8. LUV will likely trade between 49-55 during August. 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’ submission of a New Drug Application (NDA) for SPN-812, which treats ADHD, is on track for the second half of 2019. The company aims to launch SPN-812 in the second half of 2020. New treatments for bipolar disorder and for impulse aggression in ADHD patients continue to work through their pipelines.
See the August 9 Special Bulletin for news about Supernus’ second quarter earnings report, which was impacted by lower sales rebates for Trokendi. Here’s a helpful article: A Primer on Prescription Drug Rebates. Wall Street retains bullish price targets for SUPN. The stock will likely languish for a while before recovering. Hold.
Voya Financial (VOYA – yield 1.2%) 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. See the August 9 Special Bulletin for news about Voya’s second quarter earnings report. The market was surprised by both the strength in most of Voya’s businesses and the amount of floating rate securities in the company’s investment portfolios. (Falling interest rates will lower portfolio income.)
VOYA is an undervalued growth stock. Analysts expect EPS to grow 36.6% and 13.6% in 2019 and 2020. The 2019 P/E is low at 8.9. The company raised the dividend payout, formerly yielding 0.1% and now yielding 1.2%.
The news about the lower future yield on Voya’s floating rate securities was exposed during a market correction. The unfortunate timing of the two events caused VOYA shares to become one of the market’s punching bags last week. The stock will most likely trade between 48-53 for a while. Strong Buy.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Blackstone Group Inc. (BX – yield 4.4%*) 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 stock is trading near all-time highs, between 43-49. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.07 and yielding 4.4%.
Citigroup (C – yield 3.2%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries. Strength in consumer lending, and lower expenses, tax rate and share count contributed to second quarter successes. Citigroup was featured in the August issue of Cabot Undervalued Stocks Advisor.
Citigroup is an undervalued, large-cap growth & income stock. Wall Street expects Citigroup’s EPS to grow 14.6% and 11.5% in 2019 and 2020. The P/E is currently 8.7. The stock has upside resistance at 77, where it last traded in January 2018, potentially offering new investors an approximate 20% capital gain in the next 6-18 months. Accumulate C now. Strong Buy.
Commercial Metals Company (CMC – yield 3.0%) 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. Wall Street 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 7.5. I expect the stock to trade between 16-18.5 in the coming weeks. Buy CMC now. Buy.
Corteva Inc. (CTVA – yield 1.8%) is an agricultural sciences company, providing farmers with seeds and crop protection products, enabling them to maximize yield and profitability. There’s a bullish theme on Wall Street focused on the expectation that corn and soybean prices will continue rising and that seed prices will also increase. Earnings estimates rose last week. The market now expects EPS of $1.15 and $1.50 in 2019 and 2020, reflecting 30% growth next year. (I expect those numbers to continue improving in the coming months.) The 2020 P/E is high at 21.1, but fair in light of the EPS growth rate. Three more investment firms raised their price targets on CTVA last week to a range of 31-38.
CTVA is a mid-cap growth & income stock. The company carries no long-term debt. I’m moving CTVA from Hold to a Strong Buy recommendation. This stock is especially appropriate for growth investors who are experienced with the volatility that can be associated with commodity stocks. This month, CTVA launched above its recent trading range to new highs, then pulled back with the broader market. Accumulate CTVA. Strong Buy.
Dow Inc. (DOW – yield 6.1%) – Hold.*** (last review August 6.)
Guess?, Inc. (GES – yield 3.0%) is a global apparel manufacturer, selling its 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 12.8. GES offers the best earnings growth & value opportunity of any U.S.-based apparel retailer. The stock is suffering along with apparel stocks and the broader market. I’m moving GES from Strong Buy to a Buy recommendation. It’s going to be volatile. We’re a few weeks away from earnings season on apparel & retail stocks. My guess is that the market has thrown the babies out with the bathwater, and that GES (and a few others) could rebound with earnings reports. Buy.
Royal Caribbean Cruises (RCL – yield 2.6%) is a cruise vacation company that delivers travelers to desirable and exotic destinations on all seven continents. The company operates a total of 63 ships, with 13 on order, under the brand names Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises and Silversea Cruises, and partnerships with German and Spanish cruise companies. Competitor Norwegian Cruise Line Holdings Ltd (NCLH) reported an earnings beat last week. Booking trends continued to improve for the third and fourth quarters of 2019 and into 2020. Cuban travel restrictions caused the company to pare back third quarter earnings guidance. All-in-all, it was a good earnings report that encouraged Wall Street about the cruise industry. Industry trouble is mostly isolated to weak bookings at Carnival Corp., weakness in Alaskan travel and dissipating impact from Cuba.
RCL is an undervalued, large-cap growth & income stock. Wall Street expects EPS to grow 9.1% and 11.1% in 2019 and 2020. The 2019 P/E is 11.3. Watch for an annual dividend increase that will likely be announced in early September. I’ll return RCL to a Buy recommendation when the share price stabilizes. Hold.
Schlumberger NV (SLB – yield 5.8%) is the world’s largest oilfield service company. Wall Street expects EPS to fall 6.8% in 2019, and then to increase 30.5% in 2020. The 2020 P/E is 17.5. Dividend investors can buy SLB now, while growth investors should wait for the share price to turn upward. Buy.
Total S.A. (TOT – yield 6.2%) – Hold.*** (last review August 6)
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
Abercrombie & Fitch (ANF – yield 4.9%) 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. ANF is an undervalued small/micro-cap stock. Analysts expect EPS to fall 20% in 2019, then to rise 57% in 2020 (January year end). The 2020 P/E is 11.4. The stock has pulled back in recent days. I expect near-term capital gains. Buy.
Alaska Air Group (ALK – yield 2.2%) is a low-cost passenger airline. Alaska Airlines and its regional partners fly 46 million guests a year to more than 115 destinations with an average of 1,300 daily flights across the United States and to Mexico, Canada and Costa Rica. Alaska Air does not operate any Boeing 737 Max jets. ALK is a mid-cap stock, expected to achieve aggressive earnings growth rates of 30.9% and 19.7% in 2019 and 2020. The 2019 P/E is low at 10.9. The stock is showing more strength than the broader market, trading between 61-66. There’s additional price resistance at approximately 69 and 73. Buy ALK now. Strong Buy.
Alexion Pharmaceuticals (ALXN) – Hold.*** (last review August 6)
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. App Store revenue grew 19% year-over-year in July, assisted by strength in China. The Apple Card, a virtual credit card partnership with Goldman Sachs (GS), launched on August 6. 5G iPhones are expected to launch in September 2020. Apple was featured in the August issue of Cabot Undervalued Stocks Advisor.
Consensus earnings estimates continue to move higher since Apple reported third quarter results (September year end), now reflecting a profit drop of 2.0% in 2019 followed by an increase of 9.9% in 2020. Apple is a unique, innovative, thriving company. The stock rebounded nicely last week. Except for big-dividend investors, all stock investors could benefit from buying AAPL now. Strong Buy.
Axis Capital Holdings Ltd. (AXS – yield 2.5%) – I’m Retiring AXS from the Buy Low Opportunities Portfolio today. The stock has met its price objective, trading near its all-time high of 66, where it briefly traded in March 2017. Plus, I want to make room for new stock opportunities. Retired.**
Baker Hughes, a GE Co. (BHGE – yield 3.1%) offers products, services and digital solutions to the international oil and gas community. Baker Hughes’s Turbomachinery and Process Solutions business stands to benefit from the liquefied natural gas (LNG) industry’s pipeline of over $200 billion in projects between 2019-2025, doubling the recent pace of annual capital spending. The number of U.S. rigs drilling for crude oil and natural gas fell by eight last week to a total of 934, down 123 vs. a year ago. The Canadian rig count rose by three last week to 140, while the international rig count grew by 24 in July to 1,162.
BHGE is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to increase 52% and 53% in 2019 and 2020. The P/E remains low in comparison to earnings growth at 23.7. The stock has traded between 23-25.5 for two months; an improvement from April and May prices. Strong Buy.
Designer Brands Inc. (DBI – yield 6.1%) – Hold.*** (last review Aug. 6)
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. See the August 9 Special Bulletin for news about Mosaic’s second quarter earnings report.
Full year profits are expected to fall in 2019 and then surge dramatically in 2020. Mosaic commented that profits are heavily skewed toward 2020 because “unprecedented wet weather in the Midwest United States has negatively impacted its North American spring fertilizer sales volumes and phosphates margins. These same factors have driven grain prices higher and provide significant opportunities in fall 2019 and beyond.” Various ongoing projects are serving to lower ongoing production costs, minimize one-time costs, and position Mosaic competitively in 2020.
The stock is suffering with the broader market. I’m moving MOS from Buy to a Hold recommendation while we wait for the share price to stabilize. Hold.
Synchrony Financial (SYF – yield 2.6%) is a consumer finance company with 75.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. Investors are encouraged to review Synchrony’s second quarter earnings presentation. 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. Wall Street expects EPS to grow 14.4% and 8.6% in 2019 and 2020. The 2019 P/E is 8.2. The stock will likely trade between 33-36.5 in the near term. Buy.
Universal Electronics (UEIC) is a manufacturer and world leader of wireless and voice remote control products, software and audio-video accessories for the smart home; with over 400 patents and a strong pipeline of new products in the areas of safety and security, climate control and lighting. Refer to the Special Bulletin from August 9 to review second quarter results. UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. The stock just began a new run-up. There’s price resistance at 55. Buy UEIC now. Expect volatility. Strong Buy.
UPDATES ON SPECIAL SITUATION STOCKS
Carlyle Group LP (CG – yield 6.8%) manages $223 billion, divided among real assets, corporate private equity, investment solutions and global credit. Refer to the Special Bulletin from July 31 that discussed Carlyle’s decision to convert from a limited partnership to a corporation as of January 1, 2020. Wall Street currently expects earnings per share of $1.65 and $2.51 in 2019 and 2020. In recent days, Morgan Stanley and Jefferies raised their price targets on CG to 25 and 27, respectively. Take advantage of the stock’s pullback within the current market correction and buy CG now. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.47 and yielding 6.8%.
**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.
*** 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.
