WATCH FOR NEW HIGHS ON THE S&P 500 INDEX THIS FALL
The S&P 500 index continues to act well, rising to new highs in July, conducting a very orderly pullback in August, and rebounding in September. To my eyes, the price chart still looks strong. I would not be surprised if the index begins reaching new highs in October, although a temporary pullback to 2,940 would be perfectly normal.
If you bought Bristol-Myers (BMY) or Universal Electronics (UEIC) for a short-term hold, they’ve advanced recently, so be prepared to sell soon. (The stocks are still undervalued and attractive, so I will keep them here in our portfolios.) And if you’ve been lucky enough to own Blackstone Group (BX) and Carlyle Group LP (CG) all year, congratulations on your capital gains! Remember, though, that huge price run-ups are often followed by reversals, or at least multi-month periods during which stocks seem to fall asleep. Both of these stocks would be great to buy on pullbacks; the deeper the pullback, the better, because you’ll be locking in higher dividend yields in addition to increased capital gain opportunities when price rebounds later kick in.
If you have questions about a stock on which I did not report today, please send an email to Crista@CabotWealth.com.
TODAY’S PORTFOLIO CHANGES
Bristol-Myers (BMY) moves from Strong Buy to Buy.
Universal Electronics (UEIC) moves from Strong Buy to Buy.
LAST WEEK’S PORTFOLIO CHANGES
Blackstone Group (BX) moved from Buy to Hold.
Carlyle Group LP (CG) moved from Strong Buy to Hold.
Dow Inc. (DOW) 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
Adobe Systems (ADBE) is a software company that’s changing the world through digital experiences. Adobe reported third-quarter EPS of $2.05 last week (November year end), when the market expected $1.97, boosted by rising operating margins.
Revenue came in a fraction above estimates at $2.83 billion.
Adobe’s Digital Media segment, which represents 70% of the company’s revenues and 90% of profits, delivered strong revenue growth in the quarter. Digital Media includes Creative and Document Cloud and Photoshop. Third-quarter net new Annual Recurring Revenue (ARR) and fourth-quarter guidance for ARR were each higher than analysts’ expectations.
The Experience Cloud segment delivered 23% year-over-year revenue growth. Experience Cloud includes Magento, Marketo, and Experience Platform, which will launch in the near future. Magento delivered a 40% increase in bookings vs. a year ago. The market was disappointed that Marketo—a recently-acquired marketing software business—is delivering slower-than-expected bookings, bringing fourth quarter revenue guidance down a notch to $2.97 billion. A new product cycle in the fourth quarter will likely ramp up customer demand.
Adobe is a large-cap, high-P/E aggressive growth stock. Full-year 2019 earnings estimates rose a bit after analysts assessed the quarterly results. Analysts now expect EPS to increase by 42.5% in 2019 and 23.9% in 2020. Five investment firms lowered their price targets on ADBE to a range of 310-322, although not without bullish commentary. This is a great stock for risk-tolerant growth investors and buy-and-hold equity portfolios. The stock rose to new all-time highs in July and has since pulled back 10%. Buy.
CIT Group (CIT – yield 3.1%) 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. The company is in the process of acquiring Mutual of Omaha Bank.
CIT is an undervalued stock with an attractive dividend yield. Analysts expect EPS to grow 21.8% and 11.2% in 2019 and 2020, respectively. The P/E is 9.3. I mentioned last week that I intend to return CIT to a Buy recommendation upon the next pullback. The pullback has begun, and I think the stock might go a little lower. Hold.
DaVita Inc. (DVA) is the largest provider of kidney care services and home dialysis in the U.S., treating patients with chronic kidney failure and end-stage renal disease. DaVita’s services have significantly lowered the gross mortality rate among their patients, and also lowered their need for hospitalizations. Investors may access the webcast and presentation materials from DaVita’s September 10 Capital Markets Day. DaVita was featured in the September issue of Cabot Undervalued Stocks Advisor.
DVA is an undervalued, mid-cap growth stock. Analysts expect EPS to rise from $3.57 in 2018 to $4.73 and $5.30 in 2019 and 2020, reflecting earnings growth of 32.5% and 12.1%, respectively. The company additionally projects EPS to rise to a range of $6.25-$7.25 in 2022. The 2019 price/earnings ratio is 12.7. DaVita is also projecting revenue to grow from $11.4 billion in 2018 to a range of $11.5-$12.5 billion in 2022.
DVA recently rose above price resistance at 60, but nobody has missed their chance to capitalize on the pending run-up. DVA could rise to the upper 60s this year. Buy DVA 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 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.
You may have noticed in recent business news that factions are arguing for and against the increased use of credits that alleviate the cost of mandatory renewable identification numbers (RINs) in the oil refining industry. The RIN mandate was created by the Environmental Protection Agency, and it pertains to the practice of blending biofuels into fossil fuels. RINs are created by refineries with blending operations, but not all refineries have blending operations. Thus, RIN credits are bought and sold within the industry.
U.S. farmers like the RIN mandate because the use of biofuels creates a demand for ethanol, which largely uses corn as a feedstock. Oil refiners and consumers don’t like the RIN mandate because it makes fuel production more expensive (e.g. the gasoline that fuels your autos). The current controversy involves an increase in RIN credits issued to small refineries, which helps them to offset the expense of regulatory compliance.
RINs are a multi-billion-dollar business, so you can be sure that the slightest change in regulatory policy is going to harm one faction and benefit the other. Cutting to the chase, Marathon Petroleum has been blending operations, and therefore the RIN controversy is less applicable and less costly to Marathon and their shareholders.
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 7.5. The stock is acting well. It could trade anywhere between 52-62 in the short term. Buy MPC now. 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.
Southwest filed a Form 8K with the SEC on September 18, pertaining to third-quarter financial and operation trends. (Scroll to its pages 3-4 to read the relevant content.) It said: “The Company has continued to experience solid demand and strong passenger yield trends year-over-year during third quarter 2019. The Company canceled a total of approximately 600 flights in September 2019 due to Hurricane Dorian, which the Company expects will have an immaterial impact on its third-quarter 2019 financial results.”
Wall Street expects no EPS growth in 2019, followed by 21% EPS growth in 2020. The 2020 P/E is 10.6. LUV has been acting well. It will likely trade between 53-58 in the near term. Buy.
Voya Financial (VOYA – yield 1.1%) is a U.S. retirement, investment and insurance company serving 13.8 million individuals and institutional customers. Voya has $560 billion in total assets under management and administration. Analysts expect EPS to grow 36% and 12.9% in 2019 and 2020. The 2019 P/E is low at 10.0. The company recently raised the dividend payout, formerly yielding 0.1% and now yielding 1.1%, which should trigger a sustained period of buying as VOYA now qualifies for inclusion in institutional growth & income portfolios. Voya is prioritizing share repurchases with excess cash flow.
I like the look of the VOYA price chart very much. The stock could surpass its July all-time high at 57 this year. The stock traded at a 12.4 P/E in May 2018. If it does so again next year, the share price would be 77, giving new investors a potential 40% capital gain. Buy VOYA now. Strong Buy.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Blackstone Group Inc. (BX – yield 3.9%*) 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. Blackstone is purportedly in talks to buy the Bellagio and MGM Grand. (There’s news about Blackstone’s potential global real estate transactions every week, but I mention this one because most U.S. investors are familiar with the properties.)
BX is up about 80% year-to-date. That’s not a normal run-up within a nine-month time frame. Please don’t be surprised when the stock eventually has a price correction. At that time, if BX is still in the portfolio, I will certainly issue a Buy recommendation. Hold.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.07 and yielding 3.9%.
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. On September 16, Reuters reported that Citigroup’s August net charge-off rate was 2.62%, vs. a 2.91% rate in July, indicating an improvement in consumers’ abilities to pay their debts. Citigroup is an undervalued, large-cap growth & income stock. Wall Street expects Citigroup’s EPS to grow 14.3% and 10.9% in 2019 and 2020. The P/E is currently 9.1. The stock is on an uptrend, with short-term price resistance at 72, and again at 77. Accumulate C, especially on pullbacks to 68. Strong Buy.
Commercial Metals Company (CMC – yield 2.7%) 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 $2.1 billion. The company completed their 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 8.0. CMC rose rapidly this month and could trade anywhere between 17-20 in the coming days. Buy.
Guess?, Inc. (GES – yield 2.5%) is a global apparel manufacturer, selling their products through wholesale, retail, ecommerce and licensing agreements. There are 1,724 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 17.7% in fiscal 2020 and 2021 (January year end). The 2020 P/E is 13.4.
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 deliver a share price increase.
GES rose 40% from mid-August to mid-September, and has now pulled back a bit. Expect the stock to trade between 17-20.5 in the near term. Strong Buy.
Royal Caribbean Cruises (RCL – yield 2.8%) 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.
RCL is an undervalued, large-cap growth & income stock. Wall Street expects EPS to grow 8.8% and 11.5% in 2019 and 2020. The 2019 P/E is 11.6. As expected, the company announced an 11% dividend increase in September. The quarterly payout increased from $0.70 to $0.78 per share, and the current yield is 2.8%.
As RCL recovers from the August market correction, it’s most likely to trade between 109-116 in the near term. Buy.
Schlumberger NV (SLB – yield 5.4%) is the world’s largest oilfield service company. Reuters published some commentary from Morgan Stanley Research on September 10. The company raised their recommendation on SLB to Overweight, emphasizing the stock’s compelling valuation and praising new CEO Olivier Le Peuch’s plan to improve profitability, decrease capital intensity and enhance free cash flow. SLB is Morgan Stanley’s “top pick” among oilfield service companies.
SLB is a large-cap stock with a hefty dividend yield. Wall Street expects EPS to fall 7.4% in 2019, and then to increase 29.3% in 2020. The 2020 P/E is 19.2. SLB has been showing some strength, and will likely trade between 36-40 in the near term. Buy.
Total S.A. (TOT – yield 5.6%) 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, J.P. Morgan went bullish on European oil majors, raising TOT to an Overweight recommendation. J.P. Morgan cited the benefits from rising oil prices, cost cutting, and reductions in greenhouse gas emissions from business operations in their report.
TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The market expects Total’s EPS to fall 10.9% in 2019, then to rise 22.0% in 2020. The current P/E is 12.0. TOT is rising alongside rebounds in both the price of Brent crude oil and in the broader stock market, and the recent stock market rotation from momentum stocks to value stocks. Depending on the market’s level of enthusiasm, TOT could rise as high as 58 this year before resting again. Buy TOT on pullbacks to 52. Strong Buy.
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
Abercrombie & Fitch (ANF – yield 4.5%) is a specialty retailer of Abercrombie & Fitch, abercrombie kids, and Hollister brand apparel and accessories for men, women and kids. The company operates over 850 stores globally. The company remains on track toward its multi-year goals of improving revenue, profits, expense-control, data analytics, online sales and global store expansion. Investors are encouraged to tune in to the webcast of Abercrombie’s presentation at the Goldman Sachs 26th Annual Global Retailing Conference.
CEO Fran Horowitz has been working to differentiate the Hollister and A&F brands since joining the company as the Hollister division president in 2014. Hollister (which includes the Gilly Hicks lingerie line) targets teen consumers, with a focus on age 17, and a general audience of ages 10-24. While these shoppers often initiate purchases online, they enjoy going to the mall. Management works to seamlessly integrate digital and store experiences for this demographic.
A&F is not a teen brand. The company targets this merchandise to younger millennials—post-college consumers in their early 20s. Millennials love shopping online.
ANF is an undervalued small/micro-cap stock. Most U.S. apparel retailers are expecting a drop in 2019 net income, and only a handful are expecting double-digit profit gains in 2020. In that regard, Abercrombie stands out near the very top of the industry, right behind Guess? (GES). Recent Wall Street projections show EPS falling 33% in 2019, then rising 69% in 2020. The 2020 P/E is 13.6. I intend on giving ANF a Buy recommendation when the price chart appears more stable. Hold.
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. Last week, Alexion announced a management transition during which a member of the executive committee will take on the role of CFO while the former CFO will remain on as a senior advisor through mid-2020.
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 10.7, 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. On September 20, the Financial Post reported, “U.S. trade regulators on Friday approved 10 out of 15 requests for tariff exemptions filed by Apple Inc amid a broader reprieve on levies on computer parts.” Wall Street expects an EPS drop of 2.2% in 2019 (September year end) followed by an increase of 9.3% in 2020. The stock emerged from a trading range on September 5 and is now rising toward its October 2018 all-time high near 230. AAPL is my favorite buy-and-hold stock for long-term capital gains. Strong Buy.
Baker Hughes, a GE Co. (BHGE – yield 3.0%) offers products, services and digital solutions to the international oil and gas community. With General Electric no longer the majority owner of BHGE shares, the company will soon change their name to Baker Hughes Company with the new symbol BKR.
BHGE is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to increase 49% and 53% in 2019 and 2020. The P/E remains low in comparison to earnings growth at 24.3. BHGE continues to recover from the August market correction, and could surpass 25.5 in the near term. Buy BHGE now. Strong 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. Management will present at the 5th Annual B. Riley FBR Consumer & Media Conference on October 3. Investors may review the printed materials from the company’s September 5 presentation at the 2019 Dougherty & Co. Institutional Investor Conference.
Analysts expect EPS to increase 37% this year, and the P/E is 14.9. UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. UEIC is rapidly rising toward medium-term price resistance at 55, where traders should exit. I’m moving the stock from Strong Buy to Buy now that much of the recent expected price move has taken place. Buy.
UPDATES ON SPECIAL SITUATION STOCKS
Bristol-Myers Squibb Company (BMY – yield 3.2%) 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. Bristol-Myers will host a webcast on September 28 at 1:30 PM ET to discuss data presented at the European Society of Medical Oncology, in Barcelona, Spain.
Projected EPS 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. The BMY 2020 price/earnings ratio (P/E) is just 8.3, much lower than all large-cap stocks in its peer group.
BMY is a large-cap growth & income stock. I’m moving BMY from Strong Buy to a Buy recommendation as it approaches price resistance at 53, where it will likely rest before rising further. Buy.
