GROWTH STOCKS VS. VALUE STOCKS
When market pundits toss about terms like “growth stocks” and “value stocks,” it seems as if they’re saying “companies that are growing” vs. “companies that are not growing,” so we sugar-coat these companies and pretend that they have ‘value.” That’s not really what “growth vs. value” means!
If we redefine the concept to include three major stock categories (setting aside high-dividend stocks, which have a completely different investment purpose), then the “growth vs. value” discussion makes a lot more sense. There are high-P/E growth stocks, low-P/E growth stocks, and stocks of companies that are not growing their profits at all.
High-P/E growth stocks tend to have very bullish price charts and move quickly. A high-P/E generally adds valuation risk to your investment. The fast price movement also adds risk.
Low-P/E growth stocks tend to have less-bullish price charts. A low P/E generally indicates that the stock has been ignored by investors.
Companies that are not growing their revenue and profits could appeal to investors for specific reasons, such as prospects of FDA product approval or M&A activity. But in general, it’s going to be harder to achieve capital appreciation with stocks that represent non-growing companies.
Growth stocks can cycle through phases where they’re represented in the high-P/E category, and later in the low-P/E category, simply depending on whether they’re in or out of favor among investors. For example, in recent years, E-Trade (ETFC) has been alternately a high-P/E growth stock and a low-P/E growth stock. Despite aggressive annual EPS growth, E-Trade’s P/E fell from 26 in late 2015 to 10 today.
U.S. stock-investing trends seem to be slowly rotating from high-P/E growth stocks to low-P/E growth stocks, essentially giving previously-ignored stocks a chance to rise again. A great relief!
The market’s never going to assign a specific definition to “value,” so it’s your job to decide what “value” should look like in your portfolio. If you’re chatting with a friend or a financial professional who cannot define “value,” then guess what? You are more educated about stock investing than they are, so be wary of their stock recommendations!
A LITTLE PIECE OF GOOD TRADE NEWS
On October 17, Reuters reported: “Last week, China announced a firm timetable for opening its futures, brokerage and mutual fund sectors fully to foreign investors next year … On [October 15], the cabinet relaxed management rules for foreign insurers and banks, giving them easier access to China, and wider business scope.” That could be good news for financial companies in the coming years.
BOEING (BA): A TEACHABLE MOMENT
Last week I wrote, “I urged you, earlier this year, to avoid owning Boeing stock because major corporate problems or scandals have a way of continuing to unfold with repeated bad news… Just because Boeing shares rebounded nicely from recent lows does not mean that shareholders can let down their guard!”
Then, lo and behold, more bad news about Boeing emerged about employee text messages that indicate awareness of a 737 MAX jet problem back in 2016. Yet again, Boeing has some ‘splaining to do, and BOOM!, the stock fell $40 in two days.
There are many aspects of stock market volatility that investors cannot anticipate. Stock investing takes guts! I’m not trying to beat a dead horse—or gloat—when I remind you of trouble at Boeing that can harm the share price, the same way I reminded you about trouble at General Electric and their share price in 2017 and 2018. Rather, I want you to learn to recognize risks associated with stock investing, one risk at a time.
In general, high-P/E stocks carry more risk than low-P/E stocks, companies with high debt levels carry higher risk than companies with low debt levels, and companies that are embroiled in huge problems or scandals put a lot of risk into investors’ hands in the form of potentially-falling share prices. As much as you want to tell yourself that your stock won’t fall any further, or that the current low price is a buying opportunity, try hard to refrain from those lines of reasoning when the company is frequently featured in justifiably negative news headlines.
There’s an art to investing well. It’s a learning process. Take the time to observe, and ponder risks. There will be other good stock opportunities tomorrow. You don’t have to compromise by jumping on a risky stock today.
If you have questions about a stock that I didn’t report on today, please send an email to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletins from October 17 and 18 in which I mentioned news, rating changes and/or price action on Alexion Pharmaceuticals (ALXN), Baker Hughes Company (BKR), Carlyle Group (CG), Citigroup (C), Schlumberger NV (SLB), Synchrony Financial (SYF) and Universal Electronics (UEIC).
QUARTERLY EARNINGS RELEASE CALENDAR
October 22 am: CIT Group (CIT) – 3Q
October 23 am: Alexion Pharmaceuticals (ALXN), Blackstone Group (BX) – 3Q; Commercial Metals (CMC) – 4Q
October 24 am: Dow Inc. (DOW) and Southwest Airlines (LUV) – 3Q
October 24 pm: Alaska Air Group (ALK) – 3Q
October 28 am: Mercury General Group (MCY) – 3Q
October 30 am: Baker Hughes Company (BKR) and Total SA (TOT) – 3Q
October 30 pm: CF Industries (CF) – 3Q
October 31 am: Bristol-Myers (BMY), Carlyle Group (CG), Corteva (CTVA) and Marathon Petroleum (MPC) – 3Q
November 4 pm: Mosaic (MOS) – 3Q
November 5 pm: Voya Financial (VOYA) – 3Q
EARNINGS SEASON SCORECARD:
Big earnings beat: Synchrony Financial (SYF)
Earnings within 5% of consensus estimate: Citigroup* (C) and Schlumberger* (SLB)
*at or above consensus
TODAY’S PORTFOLIO CHANGES
Alaska Air Group (ALK) moves from Strong Buy to Hold.
Baker Hughes Company (BKR) moves from Strong Buy to Buy.
Carlyle Group (CG) moves from Buy to Hold.
Citigroup (C) moves from Strong Buy to Hold.
LAST WEEK’S PORTFOLIO CHANGES
Mosaic (MOS) moved from Hold to Buy.
VanEck Vectors Oil Refiners ETF (CRAK) joined the Special Situation Stock Portfolio as a Strong Buy.
Voya Financial (VOYA) moved from Strong Buy 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 choice today for investors looking for growth (G), growth & income (DIV) or trading (T).
UPDATES ON GROWTH PORTFOLIO STOCKS
CF Industries (CF – yield 2.6%) is a global leader in transforming natural gas into nitrogen, making products that fertilize crops and products that remove harmful emissions from industrial activities, with outstanding operational capabilities and a cost-advantaged production and distribution platform. Products include ammonia, granular urea, UAN, ammonium nitrate and diesel exhaust fluid. The company operates nine facilities in Canada, the U.K. and the U.S.
CF is an undervalued, mid-cap aggressive growth stock. Analysts expect CF Industries to report third-quarter EPS of $0.36, within a range of $0.14-$0.57, on the afternoon of October 30. That’s a wide range, so expect volatility! Full-year earnings estimates have been consistently rising since mid-June, and they inched up again last week. Analysts now expect EPS to increase 91% and 25% in 2019 and 2020. The 2020 P/E is 15.7. The stock has traded between 46-52 since mid-June. Continue to accumulate CF within that range. Strong 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-10 national online bank. The company is in the process of acquiring Mutual of Omaha Bank. Analysts expect CIT Group to report third-quarter EPS of $1.23, within a range of $1.10-$1.34, on the morning of October 22. Last week’s large bank earnings reports showed strong consumer trends and no signs of credit deterioration—a theme that could also play out at CIT Group.
CIT is an undervalued stock with an attractive dividend yield. Analysts expect EPS to grow 21.3% and 11.4% in 2019 and 2020, respectively. The 2020 P/E is 8.4. Expect CIT to trade between 42-47 in the near term, with additional upside resistance in the low 50s. Buy.
Marathon Petroleum (MPC – yield 3.2%) 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. Marathon Petroleum was featured in the October issue of Cabot Undervalued Stocks Advisor.
Activist investors are urging the Board of Directors to split Marathon into three entities: Speedway, refining operations and midstream holdings. The financial media reported that the Board of Directors met with activist investors last week to discuss their suggestions, including potentially replacing CEO Gary Heminger with Executive Vice Chairman Greg Goff. Investors will likely hear more on this topic during the third-quarter earnings conference call.
MPC is an undervalued large-cap stock. The company is expected to report third-quarter EPS of $1.41, within a range of $1.02-$2.16, on the morning of October 31. Expect volatility. Full-year EPS are expected to fall 35% 2019, then rise 84% in 2020. The 2020 P/E is low at 8.9. Last week, Citigroup raised their price target on MPC from 60 to 71, which is a rather large increase, although to me that seems more like chasing and less like forecasting. MPC has begun a new run-up that could take the stock to 77 before year end. Buy MPC now. Strong 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 is expected to report third-quarter EPS of $1.08, within a range of $1.02-$1.12, on the morning of October 24. Wall Street expects no EPS growth in 2019, followed by 20% EPS growth in 2020. The 2020 P/E is 10.5. LUV is trading between 52-56. I expect more upside in the coming months. Buy.
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. Blackstone Group is expected to report third-quarter EPS of $0.54, within a range of $0.44-$0.62, on the morning of October 23. (Earnings estimates are vague on alternative asset manager companies, and not as strictly followed as with most other industries.) Watch for the November 7 semi-annual announcement of new additions to the MSCI Index. If BX is added to the index, that will create buying demand among some institutional portfolios. BX is rising within a trading range between 45-54. Buy BX now. 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 2.8%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries; and the third-largest U.S. bank by assets. Strength in Citi’s Consumer Banking and Treasury and Trade Solutions businesses carried the third quarter. Notably, the bank is ahead of schedule in working toward their 2020 return on average tangible common shareholder’s equity (ROTCE) target. The 2019 earnings estimate rose subsequent to last week’s third-quarter report. Wall Street now expects EPS to grow 15.6% and 9.2% in 2019 and 2020. The 2020 P/E is 8.5. I’m moving the stock from Strong Buy to a Hold recommendation. There’s 7% upside as the stock retraces its January 2018 peak near 77, at which point I will likely retire C from the portfolio in favor of a dividend stock with a stronger projected 2020 EPS growth rate. Hold.
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 is expected to report fourth-quarter EPS of $0.70, within a range of $0.60-$0.76, on the morning of October 23 (August year end). CMC is a small-cap stock with a market capitalization of $2.2 billion.
Wall Street expects final full-year 2019 EPS to increase 35.6%, followed by 8.4% EPS growth in fiscal 2020. The 2020 P/E is 8.6. The price chart is bullish. CMC could rise to 20 or 21 if the earnings report is well-received. I’m watching for 2020 EPS estimates to increase, in order to keep CMC in the portfolio. Buy.
Corteva Inc. (CTVA – yield 2.0%), a.k.a. Corteva Agriscience, provides farmers with seeds and crop protection products (herbicides, fungicides and insecticides), enabling them to maximize yield and profitability. During the first half of 2019, Corteva spun off from DowDuPont (relatively debt-free), initiated a dividend, established a $1 billion share repurchase plan, introduced at least half a dozen new products, and delivered $50 million in cost synergies in excess of the planned $150 million. Additional goals include cumulative cost synergies from recent M&A activity totaling $1 billion, above-market revenue growth (4%-6% annually in 2020-2022), 12%-16% three-year annual EBITDA growth, and rising free cash flow and margins.
CTVA is a mid-cap growth & income stock. Corteva is expected to report a third-quarter loss of ($0.46) per share, within a range of ($0.64)-($0.30), on the morning of October 31. Analysts expect full-year EPS of $1.17 and $1.54 in 2019 and 2020, reflecting 31% 2020 growth. The 2020 P/E is 16.9. The price chart remains weak. Hold.
Dow Inc. (DOW – yield 5.8%) is the materials science division of the former DowDuPont (DWDP). Dow is expected to report third-quarter EPS of $0.74, within a range of $0.62-$0.97, on the morning of October 24. Expect volatility. Dow was featured in the October issue of Cabot Undervalued Stocks Advisor. DOW is an undervalued growth & income stock. The company is expected to achieve EPS of $3.46 and $4.41 in 2019 and 2020. The projected 2020 EPS growth rate is 27% and the corresponding P/E is 10.9. The stock appears immediately capable of rising to short-term resistance at 52. Buy DOW now. Strong Buy.
Schlumberger NV (SLB – yield 5.9%) is the world’s largest oilfield service company. New CEO Olivier Le Peuch directed the company to take a $12.7 billion write-down in the third quarter, largely focused on goodwill, intangible assets and their pressure-pumping business. The company reported a non-GAAP earnings beat, and revenue rose in all regions except North America. Le Peuch is moving the company’s focus away from North American shale drilling toward asset-light software and services businesses. Management expects to produce higher margins and free cash flow in 2020, and lower capital expenditures.
SLB is a large-cap stock with a hefty dividend yield. Wall Street expects EPS to fall 9.3% in 2019, and then to increase 24.5% in 2020. The 2020 P/E is 18.4. There’s short-term price resistance at 39-41, giving new investors an opportunity to lock in a 6% dividend yield and a 15%-20% capital gain within the trading range. Buy SLB now. Buy.
Total S.A. (TOT – yield 5.8%) 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%. Total is expected to report third-quarter results on the morning of October 30. TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The market expects Total’s EPS to fall 14.1% in 2019, then to rise 24.7% in 2020. The 2020 P/E is 9.5. TOT is rising toward short-term resistance at 53. Buy TOT for long-term capital gains, while locking in a large and rising dividend yield. Strong Buy.
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
Alaska Air Group (ALK – yield 2.0%) 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. The third-quarter consensus EPS estimate rose significantly last week. Alaska Air Group is now expected to report third-quarter EPS of $2.48, within a range of $2.08-$2.65, on the afternoon of October 24. I don’t recall ever seeing such a large change in earnings estimates, mere days away from the reporting date. Expect volatility.
ALK is a mid-cap stock with an $8.2 billion market cap. Full-year earnings estimates jumped again last week, and have been rising for eight weeks. Alaska Air is now expected to achieve EPS growth rates of 39% and 12.4% in 2019 and 2020. The 2020 P/E is 9.9. The price chart remains bullish. I’m moving ALK from Strong Buy to a Hold recommendation as the stock approaches 72-73, where it last traded in 2018. 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. On October 18, Alexion announced that the FDA approved ULTOMIRIS for the treatment of atypical hemolytic uremic syndrome (aHUS) to inhibit complement-mediated thrombotic microangiopathy (TMA) for adult and pediatric (one month of age and older) patients. The Phase 3 data demonstrated clinically meaningful benefits in people with aHUS. This is the first pediatric approval for ULTOMIRIS. Investment firms Cowen & Co. and SVB Leerink were especially enthusiastic about the drug approval in their research comments.
ALXN is an undervalued growth stock. Alexion is expected to report third-quarter EPS of $2.48, within a range of $2.34-$2.69, on the morning of October 23. Full-year EPS are expected to grow 25.6% and 10.3% in 2019 and 2020. The 2020 P/E is 9.0, which is extremely low for a biopharmaceutical stock. The stock is cheap, profits are growing very well, and the price chart has been depressed, with support at 95. ALXN could trade up to 115 this year—although good news could push it to 122—but it won’t likely go higher until January, barring unexpected news such as M&A activity. Buy.
Baker Hughes Company (BKR – yield 3.3%) offers products, services and digital solutions to the international oil and gas community. On October 18, the company updated their corporate name and stock symbol to reflect the fact that General Electric no longer owns 50%+ of the common stock. The company is expected to report third-quarter EPS of $0.24, within a range of $0.21-$0.31, on the morning of October 30.
BKR is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to increase 46% and 50% in 2019 and 2020. The 2020 P/E is relatively low at 15.3. I’m moving BKR from Strong Buy to a Buy recommendation, due to the stagnant share price. The stock has traded between 21-25 for six months, and while there’s room for traders to make money, there’s no sign of a pending near-term move past 25. Buy.
Designer Brands Inc. (DBI – yield 6.1%) is one of North America’s largest designers, producers and retailers of footwear and accessories. The company operates DSW Warehouse, The Shoe Company and Shoe Warehouse stores with nearly 1,000 locations in 44 U.S. states and Canada; and Camuto Group. DBI is an undervalued, small-cap growth stock. The company has delivered 27 consecutive years of revenue growth. Analysts expect EPS growth rates of 14.5% and 14.7% in 2019 and 2020 (January year end); and company management is projecting 2021 EPS growth of about 24%. The 2020 P/E is very low at 7.5. DBI has traded between 16-17.5 since early September. The next run-up could lift DBI to price resistance at 19, and then to 22.5. Buy DBI for outsized total return potential in 2019 and beyond. Strong Buy.
Mercury General Group (MCY – yield 4.5%) is an automobile and multi-line insurer that operates in 11 U.S. states that was featured in the October issue of Cabot Undervalued Stocks Advisor. The company is expected to report third-quarter EPS of $1.04, within a range of $0.90-$1.25, on the morning of October 28. Also watch for an annual October increase in the unusually large dividend yield. Earnings per share (EPS) grew 19.2% in 2018. Wall Street expects full-year EPS to grow 76% in 2019 and 16.7% in 2020. The 2020 P/E is 14.9. At a current price of 55, there 16% upside to the stock’s July peak at 64 and additional capital gain potential down the road. Buy MCY 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. Mosaic is expected to report third-quarter EPS of $0.24, within a range of $0.12-$0.33, on the afternoon of November 4. Full-year profits are expected to fall in 2019 and then to surge dramatically in 2020. The stock will likely trade between 20-25 in the near future. Buy.
UPDATES ON SPECIAL SITUATION STOCKS
Bristol-Myers Squibb Company (BMY – yield 3.1%) 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 is expected to report third-quarter EPS of $1.07, within a range of $1.03-$1.14, on the morning of October 31. Projected full-year EPS growth rates now stand at 7.8% and 42.2% in 2019 and 2020. The BMY 2020 P/E is just 8.7, much lower than all large-cap stocks in its peer group. BMY is a large-cap growth & income stock. The share price continues to march upward, and could reach 56 this year, where I would expect some significant price resistance. Buy.
Carlyle Group LP (CG – yield 5.3%*) 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. At that time, the quarterly dividend payout will become a steady $0.25 per share, giving the stock a yield of 3.6% based on the current $27.54 share price. The company will report third-quarter results on the morning of October 31. Wall Street expects earnings per share of $1.64 and $2.47 in 2019 and 2020. (Earnings estimates are vague on alternative asset manager companies, and not as strictly followed as with most other industries.)
I’m moving CG from Buy to a Hold recommendation. The stock has already fulfilled its goal within the Special Situation Stocks Portfolio: the company announced a conversion from a limited partnership to a corporation, and the share price responded well. Since the price chart remains bullish, I’ll give CG a little more rope. Hold.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.47 and yielding 5.3%.
