This week’s update of Cabot Undervalued Stocks Advisor is focused on portfolio stocks that are being affected by recent news or upcoming earnings reports. Next week’s September issue will include all portfolio stocks, with at least one new portfolio addition. Wall Street will also be back to work next week. Analysts will be writing new research reports and fiddling with earnings estimates that will be reflected in the September 10 update.
PORTFOLIO NOTES
TODAY’S PORTFOLIO CHANGES
Supernus Pharmaceuticals (SUPN) moves from Hold to Sell.
LAST WEEK’S PORTFOLIO CHANGES
Alexion Pharmaceuticals (ALXN) moved from Hold to Strong Buy.
CF Industries (CF) moved from Hold to Strong Buy.
BEST STOCKS TO BUY TODAY
*Please note that a trading range is not a price target. It’s simply the recent range of the stock’s price action. Sometimes I will specifically say that I plan to sell a stock at the top of its trading range. In most other cases, I expect the stock to eventually surpass the current trading range and begin a new run-up.
**A good stock for growth (G), growth & income (DIV) or trading (T).
UPDATES ON GROWTH PORTFOLIO STOCKS
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 $2.18 MMbtu yesterday.
CF is an undervalued, mid-cap aggressive growth stock. Earnings estimates have been rising for five weeks. Earnings per share are now expected to increase 85% and 27% in 2019 and 2020. The 2019 P/E is 20.5. The stock is recently trading between 47-52. Buy CF now. Strong Buy.
CIT Group (CIT – yield 3.4%) operates both a bank holding company with $35.3 billion in deposits and a financial holding company. CIT Group provides financing, leasing and advisory services to small and middle market businesses, consumer markets, and the real estate and railroad industries. CIT Bank, N.A. plans to acquire Mutual of Omaha Bank for $1 billion, bringing the deposit base up to $42.1 billion.
The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25) said that U.S. companies’ new business volume rose to $9.4 billion in July, up 15% from a year ago. The index was down 5% from June 2019 volume, which was a significantly lower seasonal decline than in the last two years. Year-to-date volume was up 3% vs. a year ago. July charge-offs were 0.37%, up from 0.31% a year ago. ELFA reports economic activity for the $1 trillion equipment finance sector. The MLFI-25 is the only index that reflects the volume of commercial equipment financed in the U.S. The Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) rose to 58.9 in August, up from 57.9 in July.
CIT is an undervalued stock with an attractive dividend yield. Analysts expect EPS to grow 22.3% and 6.9% in 2019 and 2020, respectively. The P/E is 8.3. Let the stock continue stabilizing from the recent pullback before buying. Hold.
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. On August 21, an analyst with investment bank Stifel published a negative report on Hawaiian Holdings (HA), changing his recommendation from Buy to Sell, and lowering his price target from 30 to 20. He cited concerns that Southwest’s early 2019 entry into the Hawaiian market is claiming more market share than had been anticipated. Southwest plans to significantly expand their Hawaiian inter-island service and California-to-Hawaii service in January 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) – I’m selling Supernus today. Recent second quarter results exposed a problem with lower sales rebates that’s affecting profits. The company remains quite profitable, expected to deliver $2.21 and $2.05 EPS in 2019 and 2020. However, I can’t let the stock remain in the Growth Portfolio because earnings aren’t growing. The price chart is bearish. I expect SUPN to fall through December before turning upward again. Sell.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Blackstone Group Inc. (BX – yield 4.2%*) is the world’s largest and most diversified alternative asset manager with $545.5 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, public debt and equity, real assets, secondary funds and real estate. The Center for Research in Security Prices (CRSP) is due to announce changes to its index on September 8, at which time BX might be added to the index. Index inclusion invariably increases demand for shares among institutional investors. Late last week, BX began rising above its recent trading range to new highs. Buy BX now. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.07 and yielding 4.2%.
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 expectation on Wall Street that corn and soybean prices will continue rising and that seed prices will also increase.
Corteva’s CFO spoke with analysts in mid-August, raising revenue guidance for 2020 and beyond on expectations of higher pesticide sales. Consensus earnings estimates increased again last week. The market now expects EPS of $1.17 and $1.56 in 2019 and 2020, reflecting 33% growth next year. The 2020 P/E is 18.6.
On August 19, Citigroup raised their recommendation on CTVA from Neutral to Buy. Reuters reported, “Citi says Corteva has several products in the pipeline, which should see strong growth outside the U.S. and can benefit from multiple productivity programs as a new company on top of merger-related synergies.”
CTVA is a mid-cap growth & income stock. The stock has been ratcheting upward since going public, most recently trading between 28-32. Strong Buy.
Guess?, Inc. (GES – yield 3.1%) is a global apparel manufacturer, selling their products through wholesale, retail, ecommerce and licensing agreements. Guess? will release second quarter results on the afternoon of August 28 (January year end). Analysts are expecting $0.29 EPS, within a range of $0.28-$0.30, and $672 million revenue.
Wall Street expects EPS to grow of 28.6% and 14.3% in fiscal 2020 and 2021. The 2020 P/E is low at 11.4. GES offers the best earnings growth & value opportunity of all U.S.-based apparel retailers. The stock is suffering along with apparel stocks and the broader market. Buy.
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. Abercrombie will release second quarter results on the morning of August 29 (January year end). Analysts are expecting a loss of ($0.53) per share, and $852.3 million revenue. (Abercrombie is expected to earn all its fiscal year profit in the third and fourth quarters.)
ANF is an undervalued small/micro-cap stock. Abercrombie offers the best combination of earnings growth and dividend yield of all U.S.-based apparel retailers. Analysts expect EPS to fall 21% in 2019, then to rise 59% in 2020. The stock has traded between 15-19 for thirteen weeks. Buy.
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Current marketable drugs include Soliris, Strensiq and Kanuma. The company is focused on the development of pipeline products that will fuel continued long-term profit and revenue growth.
Yesterday Amgen announced that they will purchase Celgene’s psoriasis drug Otezla for $13.4 billion. That pretty much nixes the recent rumor that Amgen might buy Alexion for $200 per share (see the Special Bulletin from August 23). Still, it’s worth reading this Investor’s Business Daily article: Why Alexion Makes Sense As A Target, But Amgen Doesn’t As A Buyer, largely quoting analyst Geoffrey Porges from SVB Leerink.
“Alexion is a rare asset with no competitive, regulatory, operational or manufacturing challenges in sight, he said. ‘We see Alexion as a prime candidate for generating positive results based on these considerations, and in our view its recent price should be ‘on the radar screen’ for many large acquirers,’ he said. ‘We believe there is a desperate scarcity of such assets across the industry, and for this reason, investors should anticipate a hefty premium, if a genuine acquirer materializes,’ he said. ‘However, we don’t think that Amgen is the most logical such acquirer. Most likely, given recent premiums and the scarcity of Alexion’s size, profitability and growth profile, a price of about 200 per share (or higher) would be required in our view to close the deal,’ he said.”
ALXN is an undervalued growth stock. Wall Street expects Alexion to grow EPS 25% and 10.8% in 2019 and 2020. The 2019 P/E is 11.6, which is very low for a biopharmaceutical stock. ALXN has largely traded between 105-140 since November 2018. Growth stock investors should buy ALXN now. Strong Buy.
Designer Brands Inc. (DBI – yield 6.9%) operates DSW Warehouse and The Shoe Company stores with over 1,000 locations in 44 U.S. states and Canada. DSW was the #1 omnichannel retailer in the U.S. in 2017 and 2018, and has delivered 27 consecutive years of sales growth. The company will release second quarter results on the morning of August 29. Analysts are expecting $0.48 EPS, within a range of $0.45-$0.50, and $872.7 million revenue.
I listened to Foot Locker’s (FL) second quarter earnings webcast this weekend. Normally I don’t have time to listen to random hour-long webcasts, but Foot Locker’s stock fell 19% on Friday after reporting a tiny earnings miss, so I wanted to find out what went wrong and whether it could affect business at Designer Brands.
In looking for negatives, my biggest takeaway was that Foot Locker had a poor quarter in their apparel business, lower margins due to a shift away from private label business, and the bad luck of reporting an earnings miss on perhaps the worst day of the 2019 year-to-date stock market. (All-in-all, I like their stock, although Designers Brands is experiencing twice the earnings growth as Foot Locker.)
I was greatly relieved, because Designer Brands does not participate in the apparel business, and they have an increasing focus on their very profitable private label business. Therefore, Foot Locker’s Achilles heel seems to be company-specific. We’re not likely to see any correlated problems when Designer Brands reports earnings this week.
There was good news, however. Foot Locker reported strong results in women’s and kids’ shoes, sequential monthly sales growth from May through July, no resistance to higher average selling prices (ASPs), and strong performance in their Canadian stores; all of which could also contribute to successful second quarter results at Designer Brands.
DBI is an undervalued growth stock with a hefty dividend yield. The price chart is ugly. However, a good-to-great earnings report could cause a large jump in the share price. Dividend investors and risk-tolerant growth investors should buy now. New and/or cautious investors should wait for a more stable price chart before buying. 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. Company management will meet with investors at the 2019 Dougherty & Co. Institutional Investor Conference on September 5.
Earnings estimates rose subsequent to the release of second quarter results. Analysts now expect EPS to increase 37% this year, and the P/E is 13.1. UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. The stock began a new run-up this month, then pulled back with weakness in the broader market. There’s price resistance at 55. Buy UEIC now. Expect volatility. Strong Buy.
