Today will be an important day for our retail apparel stocks, with Abercrombie & Fitch (ANF) reporting third-quarter results in the morning, and Guess? (GES) reporting in the afternoon. Designer Brands (DBI) will bring up the rear with third-quarter results on December 10. I’m expecting good results and a bullish outlook for all three companies. Shoot me an email if the stocks do anything erratic – such as falling despite good news, or rising rapidly – and you’re wondering how to proceed.
If I didn’t cover a stock in this issue that you’d like to know more about, send questions to Crista@CabotWealth.com.
TODAY’S PORTFOLIO CHANGES
Citigroup (C) moves from Hold to Buy.
Mosaic (MOS) moves from Buy to Hold.
LAST WEEK’S PORTFOLIO CHANGES
Southwest Airlines (LUV) 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
Marathon Petroleum (MPC – yield 3.4%) 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 is prepared to meet the IMO 2020 demand for ultra-low-sulfur diesel fuel by the world’s ships and tankers. 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 now expected to fall 29% in 2019, then rise 69% in 2020. The 2020 P/E is very low at 8.4. The stock is resting after a big run-up, currently up 54% from its August low. When it rises again, there will be additional price resistance at 78 and 83. Buy MPC now. Strong Buy.
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. The company is successfully increasing revenue and profits via organic growth, cost savings and share repurchases. Low interest rates add a negative element to the industry, but are not hampering Voya’s results. Wall Street expects EPS 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 promptly continuing higher. Buy VOYA now. Strong Buy.
GROWTH & INCOME PORTFOLIO
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. Last week, Citibank introduced Citi Elevate Checking, which offers unlimited ATM reimbursements while paying interest up to 1% for U.S. customers residing outside of the bank’s physical branch footprint. Citibank also launched a new cross-border platform called Citi Global Collect that automates their multinational customers’ workflow, including international billing, automated payment, currency selection and reconciliation.
Wall Street expects EPS to grow 16.5% and 9.8% in 2019 and 2020. The 2020 P/E is 8.7. The stock rose 23% from its August low through early November, and has since retained most of those gains. I’m moving C from Hold to Buy due to recent increases in earnings estimates and the solid price chart. We could see additional upside this year. 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. Wall Street expects Guess to report third-quarter EPS of $0.18, within a range of $0.17-$0.19, and revenue of $620.3 million, within a range of $619-$623 million, on the afternoon of November 26.
Guess will host an Investor Day next week on December 3, at which management will meet with Wall Street analysts, providing them with 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. Full-year earnings estimates have been rising since early June. Analysts now expect EPS to grow 36.7% and 20.9% in fiscal 2020 and 2021 (January year end). In contrast, most apparel competitors are having weak or falling profits this year, and expected to have moderate/weak earnings growth next year.
The stock bounced at this year’s lows in June and August, then rose 40% to its recent peak in September, and has since traded sideways between 16.5-18.5. I believe that a favorable earnings report this afternoon will push GES into a 20-22 price range. Buy GES now. Strong Buy.
Total S.A. (TOT – yield 5.5%) 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%. TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The consensus earnings estimate for 2019 rose significantly this month. The market now expects Total’s EPS to fall 2.2% in 2019, then to increase 10.1% in 2020. The 2020 P/E is 10.0. TOT is resting in the mid-50s after an October run-up. We could see more upside this year. Strong Buy.
BUY LOW OPPORTUNITIES PORTFOLIO
Abercrombie & Fitch (ANF – yield 4.9%) reported adjusted third-quarter 2019 EPS of $0.23 this morning vs. the $0.24 consensus estimate. Revenue of $863.5 million missed the $868.3 million consensus estimate. The company delivered their ninth consecutive quarter of positive U.S. comparable store sales (comps) and their third consecutive quarter of total revenue growth on a constant currency basis. Management reported U.S. comps up 3%, with all brands showing increases, offset by international comps down 8% and foreign currency headwinds. Protests in France, Spain, and Hong Kong, and general tension over Brexit, have affected international sales. Total sales and operating expenses were each flat vs. a year ago.
Management is working through a multi-year process of updating and right-sizing their stores. They delivered 34 new store experiences during the quarter and 70 year-to-date, remaining on track for their goal of 85 new store experiences this year.
The company repaid $10 million of debt and repurchased 412,000 shares of stock during the quarter, and repurchased 3.96 million shares of stock year-to-date. The share count is down 8.0% since year-end 2017.
The company guided full-year 2019 net sales to be flat to up 1%, which is in line with analysts’ estimates.
Abercrombie reported record denim sales during the quarter. Outerwear sales lagged, largely due to warmer weather in the middle of the quarter. Weather has since turned colder, and outerwear sales have improved. For the fourth quarter, CEO Fran Horowitz said, “inventories are in great shape and well-balanced across brands.”
The company has 881 stores operating right now. The Hollister store count is up seven for the quarter and 12 year-to-date. The A&F store count is up 11 for the quarter and eight year-to-date.
Investors may review the third-quarter presentation and press release here.
Per the press release, “As a reminder, in fiscal 2018 roughly 25% of the company’s merchandise received was sourced from China and imported into the U.S. and the outlooks above assume this figure will be approximately 16% for fiscal 2019. These tariffs are expected to have a direct adverse impact on cost of merchandise and gross profit of approximately $4 million and $5 million in the fourth quarter and the full year, respectively, and did not have a significant impact on third quarter results.”
Last week, Abercrombie opened a new store in Westfield London, the largest shopping destination in Europe, attracting 30 million visitors a year. The company is also building a new EMEA home office in Savile Row to house their regional team that serves Europe, the Middle East and Africa. The company opened 13 new EMEA store experiences during 2019, including its first mall-based A&F store in France and its first standalone abercrombie kids store in Madrid. The company established a regional office in Shanghai this year as well.
ANF is an undervalued small-/micro-cap stock. Wall Street projects EPS to fall 34% in 2019, then rise 74% in 2020. The 2020 P/E is 11.9. 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.
I expect the stock to perform well in 2020, but share price performance for the balance of 2019 remains a wild card. ANF presents a great value to patient investors. Buy ANF now. 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 three goals: converting patients from Soliris to Ultomiris, expanding indications for Ultomiris, and diversifying their portfolio to fuel continued long-term profit and revenue growth. Investors may listen to management’s presentation at the November 19 2019 Stifel Healthcare Conference. Japan approved Soliris for a new use in the treatment of patients with neuromyelitis optica spectrum disorder (NMOSD), after Soliris was proven to effectively prevent a relapse of the disorder during the 48-week Phase III trial period.
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 continues to rise toward price resistance in the low 120s. I expect additional capital gains in 2020. Buy ALXN now. Strong 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. Designer Brands is expected to report $0.76 third-quarter EPS, within a range of $0.71-$0.79, and $940.8 million revenue, within a range of $926.2-$956.5 million, on the morning of December 10. 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 7.5. DBI has traded between 16-19 for eleven weeks. Buy DBI now for outsized total return potential in 2019 and beyond. Strong Buy.
The Mosaic Company (MOS – yield 1.1%) 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. Full-year profits are expected to fall in 2019 and then to surge dramatically in 2020. The share price has weakened this month. I’m moving MOS from Buy to Hold until a capital gain opportunity develops. Hold.
SPECIAL SITUATION PORTFOLIO
Amazon.com (AMZN) – This multi-faceted online retailer is continually expanding its array of business ventures and partnerships. Last week, Salesforce.com CRM) announced that they will use artificial intelligence (AI) technology from Amazon Web Services to enhance their software systems that amass customer data, which should make the call center experience more fluid and efficient. In addition, Amazon introduced an ad-supported free version of its Amazon Music, directly competing with Spotify Technology (SPOT) on price and service. And on Friday, Amazon filed suit against the U.S. Defense Department over a cloud computing contract worth up to $10 billion that was awarded to rival Microsoft (MSFT).
The AMZN share price stagnated since March 2019, roughly trading between 1,700-2,000, for two major reasons (from my perspective). First, the stock had a tremendous multi-year run-up through mid-2018 that demanded the eventual pullback. Second, the company delivered paltry earnings growth in 2019, failing to generate any excitement among professional investors whom the rest of us rely upon to move share prices.
Fortunately, Amazon is expected to deliver 31.8% EPS growth in 2020, which will surely reignite the share price. And here’s more good news: The stock is trading near the bottom of its range at about 1,750, luring new investors with the possibility of a 14% capital gain within the trading range, and additional gains when the stock once again climbs into new high territory. (Or did you think AMZN would never reach new highs again??)
Five years from now at Thanksgiving dinner, your brother-in-law will lament, “I wish I’d bought AMZN five years ago when the share price was lagging!” You can brag, “That’s exactly when I bought the stock,” or you can just quietly gloat, depending on how much wine you’ve consumed. Meanwhile, your niece will wink at you, because she followed your advice and bought AMZN, too.
The 2020 P/E on AMZN is high, currently 64.2, which is why the stock has been relegated to the Special Situation Stock Portfolio. Amazon.com has a bright future. Buy AMZN now. Strong Buy.
AXA Equitable Holdings (EQH – yield 2.5%) has two principal franchises: AXA Equitable Life Ins. Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. Please note that AXA Equitable (EQH) is a different company from the French AXA S.A. (AXAHY or AXAHF). Don’t make the mistake of trading shares of AXA S.A. when aiming to trade AXA Equitable.
On November 20, AXA Equitable filed for a mixed shelf offering. On the same day, Moody’s Investors Service assigned AXA Equitable a credit rating of Ba1(hyb) for a preferred stock offering, proceeds of which will be used for general corporate purposes. A quick look at the preferred stock market shows the majority of issues offering a current yield in the range of 5-9%. We already know that AXA Equitable repurchased 24 million shares of stock this month, using up essentially all of their repurchase authorization. Therefore, I’m theorizing that AXA Equitable plans to issue preferred stock, costing them up to 9% annually, and that they’ll use the proceeds for a new common stock repurchase authorization because they believe their common stock will deliver a total return better than 9% per year. (I could be wrong. The company could use the proceeds from the preferred stock offering for a completely different purpose, such as M&A activity or pension funding.)
AXA Equitable reported a great third quarter, with year-over-year increases in premiums and net inflows in all business divisions. Next year’s earnings are slated to grow just 5.3%, so I’m probably going to keep the stock in the portfolio for the current run-up, and then move on. EQH began reaching new all-time highs in November, and it’s still climbing. This mid-cap stock is great for traders. Additionally, dividend investors might be attracted to the 2.5% yield, which most recently increased in May 2019. Strong Buy.
Bristol-Myers Squibb Company (BMY – yield 2.9%) markets a long list of pharmaceuticals, including Coumadin and Eliquis, to treat cardiovascular, oncology and immune disorders. The company completed the acquisition of Celgene Corporation (CELG) on November 20. Celgene markets therapies for cancer and immunological diseases, including Revlimid, which will lose exclusivity in 2022. On November 11, the FDA granted priority review status to Bristol-Myers’ application for Opdivo plus Yervoy combination, which proposes to treat patients with advanced hepatocellular carcinoma.
BMY is a vastly undervalued growth stock. Earnings estimates have risen for 2020 in recent weeks. Analysts now expect full-year EPS to grow 9.0% and 44.7% in 2019 and 2020. The 2020 P/E is just 9.0. 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 rose 40% from mid-July to mid-November. I expect the stock to establish a trading range for a few months before rising past 60. Barring bad corporate news, if the stock bounces down to the 52-54 area, that would be a buying opportunity. Hold.
