KEEP ACCUMULATING QUALITY STOCKS
U.S. stock markets, as represented by the S&P 500 (SPX) and Dow Jones (DJIA) indexes, continue reaching new highs. But stocks and stock markets don’t go straight up, even during bull runs. If you’re tense because you have too much cash on the sidelines and think you’ve missed the run-up, just wait for the first pullback. When the S&P 500 dips below 3,050 or the Dow Jones average dips below 27,500, deploy some of your cash. And don’t wait for that day to arrive to decide which stocks you’d like to own! Line up a list of stocks in advance, and then buy the ones that have pullbacks down to your desirable buy prices.
I remain quite bullish. Like you, I will add to my personal stock positions during pullbacks.
In the November issue of Cabot Undervalued Stocks Advisor, I recommended four extra stocks under the headline Bonus Trading/Investing Ideas. I featured Tyson Foods (TSN), which has since reported quarterly results that pleased the market. The stock raced up toward its August high of 93. Traders can exit now, whereas growth investors will likely see additional gains in 2020. Alphabet Cl. A (GOOGL) is now reaching new highs, and I continue to like the stock for growth investors. The 2020 earnings outlook has increased a bit for Broadcom (AVGO), from 8% to 9% EPS growth, and the price chart remains bullish for growth investors. Royal Dutch Petroleum (RDS/A) is the best of these four stocks for new investors today. The price chart has turned extremely bullish, the dividend yield is huge, and the projected 2020 earnings growth rate rose a bit from 18% to 19%.
If I didn’t cover a stock in this issue that you’d like to know more about, send questions to Crista@CabotWealth.com. (Please don’t use alternate Cabot email addresses.)
PORTFOLIO NOTES
Be sure to review the Bulletin from November 15 in which I mentioned news, rating changes and/or price action on AXA Equitable Holdings (EQH).
TODAY’S PORTFOLIO CHANGES
Southwest Airlines (LUV) moves from Hold to Retired.
LAST WEEK’S PORTFOLIO CHANGES
AXA Equitable Holdings (EQH) joined the Special Situation Stock Portfolio as a Strong Buy.
Bristol-Myers Squibb (BMY) moved from Buy to Hold.
Commercial Metals (CMC) moved from Hold to Sell.
DaVita (DVA) moved from Strong Buy to Retired.
Dow Inc. (DOW) moved from Strong Buy to Buy.
Royal Caribbean (RCL) moved from Buy to Strong Buy.
Southwest Airlines (LUV) moved from Buy to Hold.
Voya Financial (VOYA) moved from Hold to Strong Buy.
BEST STOCKS TO BUY TODAY
*A good choice today for investors looking for growth (G), growth & income (DIV) or trading (T).
GROWTH PORTFOLIO
Adobe Systems (ADBE) is a software company that’s changing the world through digital experiences. Subsequent to the early November Adobe MAX conference, five investment firms raised their price targets to a range of 295-350, and a sixth named ADBE as their top pick among software stocks. (Click here to watch the webcast of the event’s financial analyst meeting.) Adobe is a large-cap aggressive growth stock. Analysts expect EPS to increase by 42.5% in 2019 and 24.4% in 2020 (November year-end), and the 2020 P/E is 30.5. This is a great stock for risk-tolerant growth investors and buy-and-hold equity portfolios. ADBE continues to rise toward its 2019 high of 310. Buy.
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., providing product to several dozen countries throughout the globe. Investors may listen to management’s presentation at the November 13 Morgan Stanley Global Chemicals, Agriculture and Packaging Conference.
CF is an undervalued, mid-cap aggressive growth stock. Analysts expect EPS to increase 84% and 17.1% in 2019 and 2020. The 2020 P/E is 17.2. The company is currently biased toward using cash flow to repurchase stock because “we believe we’re significantly undervalued” and “we’re buying back the best assets in the industry with our own shares.” Management expects their debt rating to rise to investment grade in the near future. There’s about 13% upside within the current trading range between 46-52. Strong Buy.
Marathon Petroleum (MPC – yield 3.3%) 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. After falling all year, 2019 EPS estimates have risen 10% in the last four weeks – not that it matters much. From Wall Street’s point of view, 2019 is already “in the can,” and all eyes are focused on 2020. Full-year EPS are now expected to fall 28% in 2019, then rise 68% in 2020. The 2020 P/E is low at 8.7. During the third quarter, Third Point LLC sold their stake in MPC and Elliott Management increased their stake in MPC by 86.9%, now owning 8.6 million shares. Last week, Credit Suisse raised their target price on MPC to 80. The stock is trading steadily between 64-68 after a recent run-up. There’s additional price resistance at 78 and 83. Buy MPC now. Strong Buy.
Southwest Airlines (LUV – yield 1.2%) – I’m retiring LUV from the Growth Portfolio today, because the 2020 EPS growth rate projections keep slipping, now expected to be 11.7%. That’s a very respectable growth rate, but not strong enough for LUV to hold its place here in the Growth Portfolio. My suggestion is that growth- and trading-oriented investors sell now or soon. Buy-and-hold investors can remain confident that they own shares of a high quality airline. Retired.
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. Earnings estimates keep adjusting lower for 2019, while remaining strong and stable for 2020, with EPS now expected to grow 23.0% and 25.4% in 2019 and 2020. The P/E is 9.3. The stock retraced its July all-time high of 57 this month, 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. BX will be added to the MSCI US Large Cap 300 Index, effective November 27. Consensus earnings estimates point to 35% EPS growth in 2020, and the 2020 P/E is 17.2. The stock is trading near all-time highs, and the price chart remains bullish. 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 the third-largest U.S. bank by assets. In 2020, Alphabet (GOOGL) will offer personal checking accounts through its Google Pay app, in partnership with Citigroup and a Stanford University credit union. It is not yet clear as to whether Google will have the ability to view the customers’ checking accounts. Citi announced that their October credit card charge-offs came in at 2.61%, unchanged from September. (A rising number, over the course of several months, would indicate a weakening consumer economy.) Wall Street expects EPS to grow 16.5% and 9.7% in 2019 and 2020. The 2020 P/E is 8.8.
During the third quarter, Soros Fund Management increased their position in the stock by 74.9% to 319,779 shares. I’m pleased with the price chart and valuation, but would prefer to see a stronger earnings growth rate, so I’m leaving C on Hold for now. The stock is trading near its January 2018 peak of 77. We could see additional upside this year. Hold.
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. Wall Street expects Guess to report third-quarter EPS of $0.20, within a range of $0.17-$0.29, on the afternoon of November 26. Guess will host an Investor Day one week later on December 3, at which management 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 for both this year and next year have been rising since early June, with EPS now expected to grow 33.7% and 23.7% in fiscal 2020 and 2021 (January year end). The 2021 P/E is 11.1.
My instinct is that analysts are expecting a bullish earnings report. Otherwise, why would they continue increasing their earnings estimates for Guess amid such a dour retail environment? There are only five analysts contributing to consensus earnings estimates, compared to 35 analysts providing recommendations on Apple (AAPL), for example. So if Guess reports a good third quarter and/or a bullish fourth quarter or next-year outlook, it’s going to surprise Wall Street and cause professional investors to consider owning the stock. And frankly, if the earnings report pleases its currently-small audience, the next week’s Investor Day is going to bring the rest of Wall Street up to speed on this profitable retail apparel gem, spurring another round of buying. Buy GES now. Strong Buy.
Royal Caribbean Cruises (RCL – yield 2.6%) 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 11.1. RCL continues to rise, with 10% additional upside to its 2019 high near 130, where it will still be undervalued. Buy RCL now. Strong Buy.
BUY LOW OPPORTUNITIES PORTFOLIO
Nov. 5 – Abercrombie & Fitch (ANF – yield 4.3%) is a specialty retailer of Abercrombie & Fitch (a.k.a. A&F), 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. Wall Street expects Abercrombie to report third-quarter EPS of $0.24, within a range of $0.20-$0.28, on the morning of November 26.
ANF is an undervalued small-/micro-cap stock. Wall Street projects EPS to fall 34% in 2019, then rise 70% in 2020. The 2020 P/E is 14.3. The drop in 2019 profit largely reflects the expense incurred by a decision to close several flagship stores that were not built by the current management team, who are successfully focused on lease negotiations, small-store formats, revenue and gross margin. Political unrest in Hong Kong will have an impact on four stores’ revenue. Traders take note: ANF appears immediately ready to break out past 19 and begin a new run-up that should then be distinctly enhanced or harmed by next week’s third-quarter results. 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. Management will present at the 2019 Stifel Healthcare Conference on November 19. ALXN is an undervalued growth stock. Full-year EPS are expected to grow 30.9% and 8.5% in 2019 and 2020. The 2020 P/E is 9.6, which is extremely low for a biopharmaceutical stock. ALXN appears capable of rising over 10% to the low 120s this year, with additional capital gains in 2020. Buy ALXN now. Strong Buy.
Nov. 5 – Designer Brands Inc. (DBI – yield 5.7%) 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. Watch for third-quarter results to be reported in the coming weeks. Analysts expect EPS growth rates of 14.5% and 15.8% in 2019 and 2020 (January year end); and company management is projecting 2021 EPS growth of about 23%. The 2020 P/E is very low at 8.0. DBI traded between 16-17.5 in September and October, then began edging higher this month, with price resistance at 19. Buy DBI now for outsized total return potential in 2019 and beyond. Strong Buy.
SPECIAL SITUATION PORTFOLIO
VanEck Vectors Oil Refiners ETF (CRAK) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Oil Refiners Index (MVCRAKTR). The International Maritime Organization is mandating the use of either scrubbers or low-sulfur diesel fuels for the world’s 39,000 ships and tankers, beginning in January 2020. The purpose of the mandate is to minimize sulfur oxide (SOx) emissions into the atmosphere, and the mandate is nicknamed IMO 2020. Oil refining companies are expected to profit from the demand for low-sulfur diesel fuel. Read more here: IMO 2020: The Big Shipping Shake-Up. CRAK pays an annual dividend in late December, usually yielding 1-2%. CRAK is resting after a recent run-up. I expect continued strength from this exchange-traded fund. Buy CRAK now. Strong Buy.
