ARE YOU READY FOR NEW STOCK MARKET HIGHS?
The S&P 500 (SPX) stock index rose to new all-time highs in July, commenced a pullback during the final week of that month, then traded between 2840-2940 in a very orderly pattern during August. For that, I am grateful. I much prefer the orderly price corrections to the erratic ones like the May-June stock market pullback and rebound, the chart pattern of which looks more like the mood of a hungover alcoholic searching desperately for their next drink. Indeed, an orderly trading pattern helps me relax and get a bead on what’s likely to happen next, whereas the alcoholic’s pattern—or escapade—carries a much greater risk of subsequent reversal. That helps explain why the June market recovery was followed by the August pullback.
At this point, the SPX is racing back toward July highs near 3026. Don’t hold your breath, but I seem to be witnessing a little strength among value stocks. I know, I know, I sound like that guy in the white van who’s offering children candy and puppies. Nobody’s going to argue, though, that a resurgence in value stocks is long overdue. Maybe their time is coming soon. While we wait for that happy day, I’ll continue to offer up very high quality companies that are managing to trounce their industry competitors and/or grow profits at an attractive rate.
I’m adding a new stock today to the Special Situations Portfolio, which up until now has held Carlyle Group (CG) in solitary confinement. Scroll down to the end to read about opportunities with shares of Bristol-Myers Squibb (BMY).
Send questions and comments to Crista@CabotWealth.com.
TODAY’S PORTFOLIO CHANGES
Bristol-Myers Squibb (BMY) joins the Special Situations Portfolio as a Strong Buy.
Guess? (GES) moves from Buy to Strong Buy.
Royal Caribbean Cruises (RCL) moves from Hold to Buy.
Total SA (TOT) moves from Hold to Buy.
LAST WEEK’S PORTFOLIO CHANGES
Abercrombie & Fitch (ANF) moved from Buy to Hold.
DaVita Inc. (DVA) joined the Growth Portfolio as a Strong Buy.
Marathon Petroleum (MPC) moved from Hold to 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 (CF – yield 2.5%) is one of the world’s largest producers of nitrogen products, serving customers on six continents. The company operates nine facilities in Canada, the U.K. and the U.S. CF Industries expects strong nitrogen demand through the current quarter. CF benefits when natural gas prices are low. The Henry Hub price of natural gas jumped to $2.49 MMbtu on September 5, about 9% higher than a week prior. Management will present at the 32nd Annual Credit Suisse Basic Materials Conference on September 10.
CF is an undervalued, mid-cap aggressive growth stock. Consensus earnings estimates jumped again last week. Analysts now expect EPS to increase 90% and 26% in 2019 and 2020. The 2019 P/E is 21. The stock appears capable of promptly returning to its July high of 52. Buy CF now. Strong Buy.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Guess?, Inc. (GES – yield 2.6%) is a global apparel manufacturer, selling their products through wholesale, retail, ecommerce and licensing agreements. There are 1724 Guess? Stores worldwide, in approximately 100 countries. The company intends to discuss strategic business planning with investors at the end of October.
GES offers the best earnings growth outlook of all established U.S.-based apparel retailers. Earnings estimates rose again last week. Wall Street now expects EPS to grow 32.7% and 16.9% in fiscal 2020 and 2021 (January year end). The 2020 P/E is 13.2. (If you find an apparel retailer with a stronger earnings growth prognosis, please let me know!)
The consensus EPS estimate for 2020 is still near the bottom of Guess management’s new guidance range. Presuming that guidance is accurate, there will either be additional increases in consensus earnings estimates, which theoretically leads to buying behavior on the part of institutional investors, or there will be an upside earnings surprise within Guess’ fiscal third or fourth quarter results, which also tends to lead to buying behavior.
Last week, the company announced the completed repurchase of slightly over 20% of their outstanding shares, fiscal year-to-date through September 4. (That’s a rare and astonishing occurrence, and a good example of the financial flexibility that results from maintaining a strong cash balance and a low debt ratio.) The lower share count is expected to result in 10% and 20% increases in earnings per share in fiscal 2020 and 2021. I estimate that this news will lift consensus earnings estimates again, especially next year’s number.
Subsequent to the recent run-up triggered by the strong second quarter earnings report, last week’s pullback was shallow and orderly. I’m moving GES from Buy to a Strong Buy recommendation, now that the undeserved summertime slump in retail stocks is sorting itself out. GES is appropriate for growth investors, growth & income investors and traders. Additionally, if you manage a large diversified portfolio, GES is the stock that you want representing the apparel industry. The stock appears to be rising toward short-term price resistance at 20.5. Buy GES now. Strong Buy.
Royal Caribbean Cruises (RCL – yield 2.9%) 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. The company is donating over $1 million to Hurricane Dorian relief efforts in the Bahamas.
RCL is an undervalued, large-cap growth & income stock. Wall Street expects EPS to grow 8.9% and 11.5% in 2019 and 2020. The 2019 P/E is 11.2. As expected, the company announced an 11% dividend increase last week. The quarterly payout increased from $0.70 to $0.78 per share, and the current yield is 2.9%.
The share price has been weak, probably in relation to U.S. recession fears (which I’ve made it clear I consider unwarranted) and compounded by the August correction in the broader stock market. RCL is now rising, with short-term price resistance at 116. RCL now moves from Hold to a Buy recommendation. Buy.
Schlumberger NV (SLB – yield 5.9%) is the world’s largest oilfield service company. New CEO Olivier Le Peuch, a 32-year Schlumberger veteran, gave a presentation at last week’s Barclays CEO Energy-Power Conference. Here are some of his relevant points:
• International business is delivering high-teens operating margins, while North American business is delivering mid-single digit operating margins. “We are convinced that a new fit-for-basin portfolio strategy will allow us to restore double-digit margins in North America.” This includes developing and deploying basin-specific technology, enabling regional efficiency and performance, and selling or leasing technologies to expand total addressable markets.
• Management plans to evaluate monetizing or exiting dilutive businesses, and will prioritize investment in accretive businesses. A by-product of this evaluation process will be the recording of non-cash impairment charges relating to goodwill, intangible assets and fixed assets during the current third quarter.
• Management plans to maintain the capital expenditure discipline , which in recent years has brought capex down from 10-12% of revenue to 5-7% of revenue.
• Going forward, Schlumberger is committed to not taking equity positions in oil or gas assets, and will not underwrite the upfront costs of new projects.
• Financial goals and priorities include improving international margins by 500 basis points (five percentage points), restoring North American business to double-digit margins, and a commitment to maintain the dividend at the current level.
SLB is a large-cap stock with a hefty dividend yield. Wall Street expects EPS to fall 6.8% in 2019, and then to increase 29.8% in 2020. The 2020 P/E is 17.4. The stock rose in recent days with the broader market. SLB could easily trade anywhere between 31-40 this fall. Buy.
Total S.A. (TOT – yield 5.9%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. Total is the second-largest private global liquified natural gas (LNG) player, with a worldwide market share of 10%. Last week, a final investment decision (FID) was approved for Arctic LNG 2 in Russia. Total owns a 21.6% economic interest in the project.
Total’s newly-won $13 billion LNG export project in Papua New Guinea hit a snag in August when a new government regime decided to reevaluate whether they would honor the project, which had been approved in April by the former government regime. Last week, the new government gave the go-ahead on the project. Exxon Mobil (XOM) and Oil Search Ltd. are Total’s partners in the venture.
TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The market expects Total’s EPS to fall 9.7% in 2019, then to rise 19.3% in 2020. The current P/E is 11.1. The company maintains a consistently low debt ratio.
The stock recently bottomed and is now rising. I’m moving TOT from Hold to a Buy recommendation, with an expectation that the price could reach 56-57 this year. Buy.
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Current marketable drugs include Soliris, Ultomiris, Strensiq and Kanuma. The company is focused on the development of pipeline products that will fuel continued long-term profit and revenue growth. Investors may listen to the webcast of Alexion’s September 4 presentation at the 14th Annual Citi Biotech Conference. Alexion will present at the 17th Annual Morgan Stanley Global Healthcare Conference on September 9.
Last week, the European Patent Office decided not to grant Alexion’s Soliris patent extension applications, thus allowing biosimilar competition in Europe. The Soliris patent remains intact during the appeal process. Potential drug competition is expected to take at least three years to materialize. In the interim, Alexion has been transitioning many patients from Soliris to Ultomiris, which requires far less frequent injections.
ALXN is an undervalued growth stock. Wall Street expects Alexion to grow EPS 25.4% and 10.7% in 2019 and 2020. The 2019 P/E is 10.5, which is very low for a biopharmaceutical stock. The price chart is bearish, tentatively beginning a rebound last week. When the share price stabilizes, I will consider a Buy recommendation. Hold.
Apple Inc. (AAPL – yield 1.4%) is a manufacturer and provider of many popular technology devices and services, including the iPhone, iPad, Mac, App Store, Apple Care, iCloud and more. Apple will host an event on September 10 at 10:00 AM PT at which the company is widely expected to introduce new iPhone and Apple Watch models. In addition, Nikkei Asian Review reports, “Apple plans to launch a lower-cost iPhone next spring to win customers in emerging markets and retake ground in China lost to Huawei Technologies and other rivals.”
In a Morgan Stanley research report cited by CNBC, “new research from app data tracking firm Sensor Tower … shows that August App Store revenue saw the strongest year-over-year growth [28%] since February 2018 and the largest month-over-month acceleration since early 2015.” Wall Street expects an EPS drop of 2.2% in 2019 (September year end) followed by an increase of 9.8% in 2020. News of the rapid August acceleration of Services revenue growth will likely spur a September increase in earnings estimates.
Apple is a unique, innovative, thriving company. The stock just emerged from a trading range and will now likely rise toward its October 2018 all-time high near 230. Buy Apple now. Strong Buy.
The Mosaic Company (MOS – yield 1.0%) 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. The CFO will present at the Credit Suisse 2019 Basic Materials Conference on September 10. All of Mosaic’s mines that had been idled earlier this year, after the Brazilian government established new regulatory requirements, have now returned to full operational capacity, ahead of plan.
Full year profits are expected to fall in 2019 and then surge dramatically in 2020, largely due to weather and flooding that seriously impacted U.S. crops. The stock fell during the August market correction, and has since begun its recovery. MOS remains on Hold until the price chart exhibits more sustained upward momentum. Hold.
UPDATES ON SPECIAL SITUATIONS STOCKS
Bristol-Myers Squibb Company (BMY – yield 3.4%) – In January 2019, Bristol-Myers agreed to buy Celgene Corporation (CELG) in a deal with an equity value of $74 billion. Celgene shareholders are to receive one BMY share plus $50 in cash for each Celgene share they own. Celgene shareholders will also receive one tradeable Contingent Value Right (CVR) for each share of Celgene, which will entitle the holder to receive a payment for the achievement of future regulatory milestones. Both BMY and CELG are large-cap stocks. The deal is expected to close at year end. The two stocks are largely trading in tandem, so unless you have hundreds of thousands of dollars with which to play the arbitrage game, ignore CELG as a short-term investment opportunity. Today we’re focusing on Bristol-Myers, which joins the Special Situations Portfolio as a Strong Buy.
Bristol-Myers markets a long list of pharmaceuticals, including Coumadin and Eliquis, to treat cardiovascular, oncology and immune disorders. Celgene markets therapies, including Revlimid, for cancer and immunological diseases.
As part of the M&A transaction, Amgen (AMGN) will purchase Celgene’s OTEZLA, a psoriasis treatment, for $13.4 billion. That cash influx will be spent quite soon, because Bristol-Myers’ financial priorities include share repurchases, debt repayment and annual dividend increases. In fact, Bristol-Myers just upped their accelerated share repurchase authorization by $2 billion, from $5 billion to $7 billion. Shareholders typically receive a 2% dividend increase in early February.
From my perspective, BMY shares are looking attractive for the first time in years. Let me start by making this clear: BMY does not fit my normal growth and value criteria. That’s why I’m sticking it here in the Special Situations Portfolio. Bristol-Myers’ strong double-digit earnings growth of years past has given way to mid-single digit earnings growth expectations in 2019 and 2020, about 7% and 4%. And the debt levels are not only high but a bit unquantifiable, since the company is in the midst of the Celgene purchase. However, the price/earnings ratio (P/E) is surprisingly low at 11.2. In glancing at my notes from years past, BMY carried a P/E of 18 in 2017 and 32 in 2015.
Importantly, I can’t possibly be the only stock analyst who notices this uncharacteristic valuation.
I normally wait until a newly-merged company has reported two quarters of results before I consider buying the stock. However, the low P/E, the prompt and successful sale of OTEZLA that pleased the Federal Trade Commission, and the bullish mood of the stock market are causing me to believe that BMY is offering a capital gain opportunity sooner rather than later. In addition, Celgene has been delivering 20%-30% EPS growth for quite a few years, and is expected to grow EPS by another 22% this year.
BMY shares were floundering long before the Celgene merger announcement. The stock rose to 70 in July 2016, followed by a series of wild fluctuations that led down to the 2019 trading range, between 43-53. Now that the market is recovering from the August pullback, BMY is rising. The stock appears capable of soon surpassing short-term price resistance at 49, at which time it could travel back to its 2019 peak at 53. At that point, traders could depart with 11% profit while longer-term investors can collect the dividend and aim for additional gains in 2020 as the market embraces prospects of success at the newly combined Bristol-Myers Squibb & Celgene venture. Strong Buy.
