2020 COULD BRING A SURGE IN INFLATION AND INTEREST RATES
The stock market continues to reach new all-time highs. I’m very comfortable with current market momentum. Continue to invest in high-quality stocks. If you are more of an active portfolio manager, please put aside some cash each time you sell a stock so that you are well-positioned to buy low during the next stock market pullback.
Continue to be alert to a possible increase in inflation, which would affect both stock and bond markets. The ongoing scourge of African Swine Fever is killing hundreds of millions of hogs overseas. While that will inevitably increase pork prices, it will likely also increase beef and chicken prices. That’s because pork is a primary protein source in many countries, including China, and the lack of available pork is going to drive demand for alternate meats. It’s true that the U.S. currently has a record amount of frozen pork that’s prepared to fill the demand. Nevertheless, this disruption in global meat production and consumption patterns can easily lead to food price inflation.
The other pending inflation surge is likely to come from IMO 2020, which I’ve discussed repeatedly. As most of the world’s ships and tankers begin using low-sulfur diesel fuel in January, that’s going to increase shipping costs, which will ultimately be passed on to end users in the form of higher product prices. Thus, rising inflation.
Rising inflation usually causes the Federal Open Market Committee to raise interest rates, which in turn causes bond prices to fall and financial stock prices to climb. So be prepared for a spike in inflation numbers in the New Year.
If I didn’t cover a stock in this issue that you’d like to know more about, send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Bulletins from November 6 and 8 in which I mentioned news, rating changes and/or price action on DaVita (DVA), Mosaic (MOS), Universal Electronics (UEIC) and Voya Financial (VOYA).
FINAL EARNINGS SEASON SCORECARD
Big earnings beat: Alexion Pharmaceuticals (ALXN), Blackstone Group Inc. (BX), Bristol-Myers (BMY), CIT Group (CIT), Commercial Metals Company (CMC), Corteva (CTVA), DaVita (DVA), Dow Inc. (DOW), Marathon Petroleum (MPC), Southwest Airlines (LUV), Synchrony Financial (SYF), Total SA (TOT) and Universal Electronics (UEIC).
Earnings within 5% of consensus estimate: Alaska Air Group (ALK), Citigroup (C), Royal Caribbean Cruises (RCL), Schlumberger (SLB) and Voya Financial (VOYA).
Big earnings miss: Baker Hughes Company (BKR), CF Industries (CF), Mercury General Group (MCY) and Mosaic (MOS).
TODAY’S PORTFOLIO CHANGES
Bristol-Myers Squibb (BMY) moves from Buy to Hold.
Commercial Metals (CMC) moves from Hold to Sell.
DaVita (DVA) moves from Strong Buy to Retired.
Dow Inc. (DOW) moves from Strong Buy to Buy.
Royal Caribbean (RCL) moves from Buy to Strong Buy.
Southwest Airlines (LUV) moves from Buy to Hold.
Voya Financial (VOYA) moves from Hold to Strong Buy.
LAST WEEK’S PORTFOLIO CHANGES
Alaska Air Group (ALK) moved from Hold to Retired.
Amazon (AMZN) joined the Special Situation Portfolio as a Strong Buy.
CIT Group (CIT) moved from Buy to Hold.
Southwest Airlines (LUV) moved from Strong Buy to Buy.
Synchrony Financial (SYF) moved from Hold to Retired.
BEST STOCKS TO BUY TODAY
*A good choice today for investors looking for growth (G), growth & income (DIV) or trading (T).
GROWTH PORTFOLIO
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. The company reported a great third quarter last week and the stock ran up to the upper 60s—a price that I’d targeted in a bullish scenario. Analysts adjusted their earnings estimates upward, now expecting 2020 EPS to grow just 8%. I’m moving DVA from Strong Buy to a recommendation that you Retire the stock in favor of a stock that has stronger expected earnings growth in the coming year. Retired.
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. The company prepared its 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 aims to spin off their Speedway retail stores into a separate company by year-end 2020, and is also strategizing ways to optimize their midstream business.
MPC is an undervalued large-cap stock. Full-year EPS are expected to fall 31% in 2019, then rise 72% in 2020. The 2020 P/E is low at 9.1. The stock rose over 50% from its August low, and is now resting in the upper 60s. There’s additional price resistance at 78 and 83. Buy on dips. Strong Buy.
Southwest Airlines (LUV – yield 1.2%) is the largest U.S. domestic air carrier, transporting over 130 million customers annually to 101 locations in the U.S. and 10 additional countries. The company just extended flight cancellations on the Boeing 737 MAX through early March. Wall Street expects EPS growth of 4.2% and 12.2% in 2019 and 2020. The 2020 P/E is 11.7. The price chart is bullish. The stock could reach 62 quite soon, where it last traded in September 2018. I’m moving LUV from Buy to a Hold recommendation, now that there’s less near-term upside. Hold.
Voya Financial (VOYA – yield 1.0%) 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. Voya reported a well-received third quarter last week, with solid inflows in retirement and investment management assets. Analysts then adjusted EPS estimates lower for 2019—up 26.7%—and higher for 2020, now expected to grow 21.7%. The P/E is 9.2. My previous concern about 2020 EPS growth is now completely gone, and I’m comfortable moving VOYA from Hold to a Strong Buy recommendation. Four investment firms raised their price targets to a range of 64-68. The stock retraced its July all-time high of 57 last week, and appears capable of continuing higher. Buy VOYA now. Strong Buy.
GROWTH & INCOME PORTFOLIO
Blackstone Group Inc. (BX – yield 3.7%*) 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. Last week, BX was added to the MSCI US Large Cap 300 Index. Consensus earnings estimates point to 35% EPS growth in 2020, and the 2020 P/E is 16.9. The stock is trading near all-time highs. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.92 and yielding 3.7%.
Citigroup (C – yield 2.7%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries, and is the third-largest U.S. bank by assets. Wall Street expects EPS to grow 16.5% and 9.7% in 2019 and 2020. The 2020 P/E is 9.0. Two investment firms raised their price targets on C to 84.5 and 113 last week. The stock is approaching its January 2018 peak near 77, where it will likely rest. Hold.
Commercial Metals Company (CMC – yield 2.3%) is the largest rebar producer in the U.S. with a broad basket of merchant and wire rod offerings. Now that analysts are fine-tuning their future earnings estimates for Commercial Metals, the numbers are disappointing, with 7.7% EPS growth projected for fiscal 2020 (August year end), and an expectation that profits will drop 14.7% in 2021. I’ve got to remove the stock from the Growth & Income Portfolio due to the negative earnings prognosis, so I’m changing my recommendation from Hold to Sell. Sell.
Dow Inc. (DOW – yield 5.0%) is the materials science division of the former DowDuPont (DWDP). Dow is exhibiting progress on cash flow, cost cutting, debt repayment, a litigation win and an ability to thrive during a weak global economy. DOW is an undervalued growth & income stock. The company is expected to achieve EPS of $3.56 and $4.27 in 2019 and 2020. The projected 2020 EPS growth rate is 19.9% and the corresponding P/E is 13.1. DOW is rising rapidly toward its 2019 high at 58. I’m moving DOW from Strong Buy to Buy. The stock just had a huge run-up, and will likely need to rest before rising again. Buy on pullbacks. 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. Last week, the company announced that Katie Anderson, the recent CFO at California Pizza Kitchen, has joined Guess as their new CFO. Guess will host an Investor Day on December 3. The management team will provide an overview of the company’s long-term strategies and key initiatives to deliver global expansion, profit growth and value creation.
GES offers the best earnings growth outlook of all established U.S.-based apparel retailers. Earnings estimates rose a bit last week. Wall Street expects EPS to grow 33.7% and 18.3% in fiscal 2020 and 2021 (January year end). The 2021 P/E is 11.6.
The stock had a rough year. Earnings estimates fell in the spring, dragging the stock down to a range of 13.5-17 during summer. Since that time, earnings estimates have rebounded back to their springtime levels, and the trading range rose to 16.5-19. Once the stock surpasses 19—which could easily happen as a result of a good third-quarter earnings report (in late November?)—there’s additional price resistance at 22. Buy GES now. Strong Buy.
Royal Caribbean Cruises (RCL – yield 2.7%) 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 7.6% and 11.5% in 2019 and 2020. The 2020 P/E is 10.8. As the price chart continues to improve from the August and October downturns, I’m ready to move RCL from Buy to a Strong Buy recommendation. The stock appears able to rise toward 122 quite soon. Buy RCL now. Strong Buy.
BUY LOW OPPORTUNITIES PORTFOLIO
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. In the wake of last week’s strong third quarter earnings report, analysts raised their full-year EPS estimates to reflect 46% and 12.3% growth in 2019 and 2020. The 2020 P/E is 15.1.
UEIC is an undervalued, micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. Expect volatility. The price chart is bullish. Accumulate UEIC on pullbacks. Hold.
SPECIAL SITUATION PORTFOLIO
Bristol-Myers Squibb Company (BMY – yield 2.8%) 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, which will lose exclusivity in 2022. On November 8, the U.S. Food and Drug Administration approved Celgene’s treatment for anemia in patients with beta thalassemia, a rare blood disorder. The drug, Reblozyl, will help decrease the number of blood transfusions that patients require.
BMY is a vastly undervalued growth stock. Analysts expect full-year EPS to grow 9.0% and 41.9% in 2019 and 2020. The 2020 P/E is just 9.4. Let me reiterate that Bristol-Myers’ 2020 projected earnings growth rate is vastly bigger than those of its peers, and the stock’s P/E is far lower, creating a glaringly-obvious value opportunity for portfolio managers.
BMY recently rose above 56 – a long-term resistance level. There’s more significant price resistance at 61 and 65. I’m moving BMY from Buy to Hold. I think the stock has reached a level where it’s going to have to establish a trading range for a few months before rising past 61. Barring bad corporate news, if the stock bounces down to the 52-54 area, that would be a buying opportunity. Hold.
