A BRIEF UPDATE ON CURRENT INVESTMENT THEMES
Oil prices are volatile now that about half of Saudi Arabia’s oil production is temporarily curtailed. Rising oil prices can help oil and chemical stocks, and hurt airline stocks. Review the Special Bulletin from September 16 for additional details.
The stock market seems to be shifting away from the “growth” investment style toward the “value” investment style. Some people will say that this shift is several years overdue, but realistically, market trends don’t come with time frames.
“Value” sounds boring. That’s because the idea of “value stocks” can easily be confused with “companies that have mediocre prognoses for revenue and profit growth”. But in reality, those mediocre companies belong in a third category: not growth, not value, but “unpromising”. There’s no compelling reason to own unpromising stocks.
“Value stocks”, however, hold immense promise; these stocks are valuable companies with attractive financial situations that have been ignored by investors, and are therefore carrying low price/earnings ratios.
Many of our valuable portfolio stocks are rising rapidly this month. Make sure you own at least one healthcare stock and one airline stock, since those industries are seeing some excellent price action right now. But stay diversified! Murphy’s Law says that the moment you overweight your portfolio in one sector (e.g. energy or industrials), that’s the moment that the sector embarks on a lengthy price correction. No fun!
As a reminder, I will write about newsworthy stocks during these weekly updates, and write about all of the portfolio stocks in the first issue of each month. You’re welcome to send me questions on any stock or topic, at any time.
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from September 12 in which I mentioned news, rating changes and/or price action on Apple (AAPL), Baker Hughes (BHGE), Blackstone Group (BX), DaVita (DVA), The Mosaic Company (MOS) and Sanmina (SANM).
TODAY’S PORTFOLIO CHANGES
Blackstone Group (BX) moves from Buy to Hold.
Carlyle Group LP (CG) moves from Strong Buy to Hold.
Dow Inc. (DOW) moves from Hold to Buy.
LAST WEEK’S PORTFOLIO CHANGES
Bristol-Myers Squibb (BMY) joined the Special Situations Portfolio as a Strong Buy.
Guess? (GES) moved from Buy to Strong Buy.
Royal Caribbean Cruises (RCL) moved from Hold to Buy.
Sanmina (SANM) moved from Buy to Retired.
Total SA (TOT) moved from Hold to Buy, then 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
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.
Wall Street expects Adobe to report third quarter EPS of 1.98, within a range of 1.95-2.16, on the afternoon of September 17 (November year end). The interesting thing about Adobe is that despite it being a large-cap stock and offering the best value in the software space, analysts rarely change their earnings estimates, price targets or recommendations on the stock. After Adobe’s second quarter earnings release, 15 investment firms tweaked their earnings estimates, raised their price targets and/or reiterated buy recommendations, and then they went silent, except for one investment firm raising their price target to 320 last week. Consensus earnings estimates haven’t changed since late June. That’s highly unusual.
I reviewed the numbers on 13 additional software stocks in recent days, just checking to see if there were any with compelling valuations that ought to be on my radar. For the most part, these are companies with good-to-great EPS growth and very high P/Es. For my purposes, Adobe continues to offer better growth and value than its peers, although New Relic (NEWR) could be a contender in a few months.
ADBE is a high-P/E, aggressive 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.
ADBE rose to new all-time highs in July, then pulled back with the broader market in August, and has additionally been restrained by the recent market rotation out of growth stocks and into value stocks. I don’t have a sense of how soon the stock could rebound, although a good earnings report frequently offers a short-term capital gain opportunity. Buy.
CIT Group (CIT – yield 3.0%) 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 is a top-ten national online bank. CIT Bank, N.A. plans to acquire Mutual of Omaha Bank for $1 billion, bringing the deposit base up to $42.1 billion, increasing revenue and profits, lowering deposit costs, and adding experienced financial professionals in markets not currently served by CIT Group. Investors are encouraged to listen to (or read) CIT Group’s September 9 presentation at the Barclays Global Financial Services Conference – one of the most clearly laid out, informative and encouraging management presentations I’ve ever heard.
CIT is an undervalued stock with an attractive dividend yield. Subsequent to the Mutual of Omaha announcement, 2020 earnings estimates rose, and six investment firms changed their price targets on CF to a range of 48-57. Analysts now expect EPS to grow 21.8% and 11.2% in 2019 and 2020, respectively. The P/E is 9.6. I moved CIT from Strong Buy to Hold when the broader market fell in early August. Since then, CIT rebounded past short-term upside price resistance at 46. I intend to return CIT to a Buy recommendation upon the next pullback. Hold.
Marathon Petroleum (MPC – yield 4.0%) 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. Marathon has prepared their refining system for upcoming IMO 2020 regulations, and is confident in their ability to produce large amounts of ultra-low-sulfur diesel fuel to meet the new demand. I rarely see or hear any mention of IMO 2020 in the financial news media, and I therefore don’t believe that expanding 2020 refinery margins are yet priced into the stocks. I strongly recommend that investors own at least one refinery stock, so that when the market finally understands the huge upside to 2020 refinery profits, you will be positioned for capital gains.
MPC was relatively unaffected yesterday when oil prices rose. However, oil refineries stand to make more profit when oil prices are elevated, so a prolonged problem with Saudi Arabian oil production could certainly enhance Marathon’s profits and share price.
MPC is an undervalued large-cap stock. Earnings per share are expected to fall in 2019, then rise tremendously in 2020, not just at Marathon, but at almost all U.S. refineries. The 2020 P/E is low at 7.3.
MPC rose about 25% from its lows after the August correction in the broader market, and will probably rest a bit before advancing further, trading anywhere between 49-57 in the short term. Buy.
Southwest Airlines (LUV – yield 1.3%) 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 successful 2019 entry into the Hawaiian market has led to plans for January 2020 service expansion in both Hawaiian inter-island service and California-to-Hawaii service. Investors may tune in to the webcast of Southwest’s September 4 presentation at the Cowen and Company 12th Annual Global Transportation Conference. At the conference, the CFO commented that he expects 737 MAX jets to be approved for service in early-to-mid November.
Wall Street expects no EPS growth in 2019, followed by 21% EPS growth in 2020. The 2020 P/E is 10.9. Be aware that earnings estimates could come down a bit if oil prices remain elevated. LUV rose past short-term price resistance at 55 last week, and is now heading toward 58, where it last traded in February. Buy.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Blackstone Group Inc. (BX – yield 3.8%*) 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. On September 13, the London Stock Exchange’s board of directors unanimously rejected last week’s $39 billion surprise takeover offer by Hong Kong Exchanges and Clearing. The LSE plans to stick with its $27 billion acquisition of Refinitiv. (Blackstone Group is a majority shareholder in Refinitiv.) The Hong Kong cabal plans to forge ahead in their pursuit of LSE, taking their plan directly to some of LSE’s larger shareholders.
BX shares continue to defy gravity, up 86% year-to-date. I’m moving BX from Buy to a Hold recommendation. I will certainly urge new purchases after the next price correction. Hold.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.07 and yielding 3.8%.
Citigroup (C – yield 2.9%) 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. Investors may access CFO Mark Mason’s September 9 presentation at the Barclays Global Financial Services Conference. The lower interest rate environment, with slow global economies, has led Citigroup and most of its peers to lower their 2019 net interest income (NII) outlook. Citigroup is now projecting full-year NII in a range of 3-4%, which came as a relief to Wall Street, because analysts were expecting a 2.6% increase.
Citigroup is an undervalued, large-cap growth & income stock. Wall Street expects Citigroup’s EPS to grow 14.3% and 10.5% in 2019 and 2020. The P/E is currently 9.3.
The stock is rapidly recovering from the August market pullback. There’s short-term price resistance at 72, and again at 77 where C last traded in January 2018. Accumulate C, especially on pullbacks to 68. Strong Buy.
Commercial Metals Company (CMC – yield 2.5%) is the largest rebar producer in the U.S. with a broad basket of merchant and wire rod offerings. Operations are located from coast-to-coast in the U.S. and in Poland. Demand remains positive driven by continued strength in non-residential construction activity. Commercial Metals was featured in the September issue of Cabot Undervalued Stocks Advisor.
CMC is a small-cap growth & income stock with a market capitalization of $2.2 billion. The company completed its fiscal year in August. Wall Street expects final full-year 2019 EPS to increase 35.6%, followed by 10.9% EPS growth in fiscal 2020. The 2020 P/E is 8.4. CMC rose rapidly in September on strong volume, up 24% so far this month, surpassing recent price resistance at 18. The stock could trade anywhere between 17-20 in the coming days. Buy.
Dow Inc. (DOW – yield 5.8%) is the materials science division of the former DowDuPont (DWDP). DOW is an undervalued growth & income stock. The company is expected to achieve EPS of $3.56 and $4.43 in 2019 and 2020. The projected 2020 EPS growth rate is 24% and the corresponding P/E is 10.9. I’m moving DOW from Hold to a Buy recommendation. The stock is recovering from the August market downturn, and could reach 52 before pulling back again. Buy.
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
Alaska Air Group (ALK – yield 2.2%) is a low-cost passenger airline. Alaska Airlines and its regional partners fly 46 million guests per 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. Beginning in January 2020, Alaska Air will launch eight new routes serving destinations in the Pacific Northwest and California. Investors may listen to Alaska Air’s September 4 presentation at the Cowen & Co. 12th Annual Global Transportation Conference.
ALK is a mid-cap stock, expected to achieve aggressive earnings growth rates of 32.5% and 17.3% in 2019 and 2020. The 2019 P/E is low at 11.1. Be aware that earnings estimates could come down a bit if oil prices remain elevated. ALK rose past short-term price resistance at 65 last week, and could easily trade anywhere between 63-72 this year. Buy ALK now. Strong Buy.
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 9 presentation at the 17th Annual Morgan Stanley Global Healthcare Conference.
On September 9, Alexion and Eidos Therapeutics (EIDX) announced an agreement that grants Alexion an exclusive license to develop and commercialize AG10 in Japan for the treatment of transthyretin amyloidosis (ATTR), a progressive, fatal heart disease. Alexion will pay $25 million to Eidos and purchase $25 million of Eidos’ stock, with the potential for additional royalty-dependent payments.
Alexion has been transitioning PNH patients from Soliris to Ultomiris, which takes the patients’ number of treatment injections down from 26 per year to 6 per year. Roughly 50% of U.S. patients and 30% of German patients have made the switch this year, with the German transition just beginning in recent summer months. If a Soliris-biosimilar treatment comes on the market in several years, it’s unlikely that any Ultomiris patients will choose to switch to the biosimilar treatment because it would take the patients back to 26 injections per year.
ALXN is an undervalued growth stock. Wall Street expects Alexion to grow EPS 25.3% and 10.7% in 2019 and 2020. The 2019 P/E is 10.8, which is very low for a biopharmaceutical stock. The price chart is somewhat bearish. 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 TV+, Apple Arcade and more. In 2020, Apple enthusiasts can expect 5G iPhones. Wall Street expects an EPS drop of 2.1% in 2019 (September year end) followed by an increase of 9.1% in 2020. While iPhone revenue still makes up over 50% of annual gross revenue and profit, Services gross profit is rapidly growing, currently at a 30% rate. The stock emerged from a trading range on September 5 and is now rising toward its October 2018 all-time high near 230, again attaining a $1 trillion market cap. AAPL is my favorite buy-and-hold stock for long-term capital gains. Strong Buy.
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.
The crux of an investor’s decision on whether to own SYF is whether you believe that the economy is chugging along relatively well, or whether you believe that it’s spiraling toward a recession. When the economy weakens, people begin losing their jobs, which leads to an inability to pay bills on time. That problem shows up directly in FICO scores and corporate net charge-offs (NCOs). In that light, here are two statistics that should shore up your confidence in the U.S. economy, which essentially fly in the face of the news media’s daily cry that a recession is at your doorstep.
1. For the first time, the average national credit score has reached 706, according to FICO, the developer of one of the most commonly used scores by lenders.
2. As of the June quarter, Ally Financial (ALLY) reported that net charge-offs of their auto loans have now declined for 6 consecutive quarters vs. the prior year. (See the chart on the bottom right corner of page 11 of Ally’s second quarter earnings presentation.)
It’s abundantly clear to anybody who tunes in to American media that there are people in this country who are rooting for a poor economy. It’s probably wiser, however, to put emotions aside and make investment decisions based on reality. If the economy is thriving, a person who’s employing active stock portfolio management will choose different stocks than they will when the economy is suffering. In that light, it’s still a good idea to own SYF. You certainly might want to rebalance your portfolio when a variety of economic data begin indicating a downturn, but for now, that downturn doesn’t have legs.
SYF is an undervalued, mid-cap growth & income stock. Wall Street expects EPS to grow 12.6% and 10.5% in 2019 and 2020. The 2019 P/E is 8.1. The stock has short-term upside price resistance at 36.5, and long-term resistance at 38.5. (I’ve witnessed seven changes to SYF price targets by Wall Street investment banks since July, all increases to a range of 37-47.) Buy.
UPDATES ON SPECIAL SITUATION STOCKS
Bristol-Myers Squibb Company (BMY – yield 3.3%) markets a long list of pharmaceuticals, including Coumadin and Eliquis, to treat cardiovascular, oncology and immune disorders. The company is expected to complete the acquisition of Celgene Corporation (CELG) by year end. Celgene markets therapies for cancer and immunological diseases, including Revlimid.
Subsequent to Bristol-Myers’ September 9 presentation at the Morgan Stanley Healthcare Conference, consensus earnings estimates changed dramatically for the company’s fiscal 2020 year. Earlier in September, the 2020 EPS estimate was 4.42, reflecting 4% EPS growth. Current consensus estimates vary (depending on the source, and how many analysts’ estimates are included), but my main source for earnings estimates is projecting $6.08 EPS in 2020 (which is neither the highest nor lowest consensus estimate being published right now). Earnings growth rates now stand at 7.5% and 42.1% in 2019 and 2020. I expect the 2020 number to change frequently over the course of the next year, as analysts fine tune their balance sheet projections for the newly-merged company, and as Bristol-Myers begins reporting actual quarterly results that include Celgene’s revenue and profits. Importantly, the BMY 2020 price/earnings ratio (P/E) is just 8.1. For comparison, Pfizer (PFE) has a 2020 P/E of 13.1, at Merck (MRK) it’s 15.1, and at Johnson & Johnson (JNJ) it’s 14.3.
If you’re an experienced stock investor, you’ll notice two important things about those P/Es. First, drug manufacturers usually have much higher P/Es, oftentimes in the 20s. Their current, lower numbers indicate that the stocks are undervalued.
Second, the Bristol-Myers P/E is ridiculously low vs. those of its peers. I don’t normally buy stocks of companies that are in the midst of major acquisitions, because the stocks tend to fall and languish until the M&A deals are done and the new companies are reporting combined financial results. At that time, Wall Street has a better grasp on how well the merger is faring, and analysts begin confidently recommending the stocks to their institutional clients (or avoiding the stocks, as the case may be!).
Yet with BMY, the questions “How low can it go?” and “How long will it languish?” seem to have been answered during the August stock market downturn—a month when the BMY price rose while the rest of the market was sinking. My assessment: investors are done trashing the stock, and institutional investors are recognizing the attractiveness of the Celgene acquisition and the extreme bargain presented by the BMY price. It’s time to buy BMY for 2019 and 2020 capital gains.
BMY is a large-cap growth & income stock. The stock has some price resistance at 53, where it will likely rest before rising further. Buy BMY now. Strong Buy.
Carlyle Group LP (CG – yield 5.7%) manages $223 billion, divided among real assets, corporate private equity, investment solutions and global credit. Carlyle Group will convert from a limited partnership to a corporation on January 1, 2020. Wall Street expects earnings per share of $1.66 and $2.49 in 2019 and 2020.
CG is actively rising and trading at all-time highs. I’m moving the stock from Strong Buy to a Hold recommendation. I will certainly urge new purchases after the next price correction. Hold.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.47 and yielding 5.7%.
