STOCKS, OPEC AND THE ECONOMY
A high percentage of stocks that I follow are exhibiting bullish price charts right now. Obviously, you already knew that the stock market has been acting well. I simply want to reiterate that the recent bullishness appears to be sustainable. Enjoy!
Watch for earnings reports from Designer Brands (DBI) on Tuesday morning and Adobe Systems (ADBE) on Thursday afternoon. Additionally, the Federal Open Market Committee will be meeting on Tuesday and Wednesday.
There was lots of great U.S. economic news last week, including the fact that the rate of wage growth exceeded mortgage interest rates—a statistic that I’d never previously come across. Apparently that situation hasn’t happened since President Nixon was in the White House. Additionally, GDP and job numbers were strong, catching economists by surprise.
OPEC+ leaders met in Vienna last week, unexpectedly agreeing to cut current crude oil output by an additional 500,000 barrels per day (bpd) through the first quarter of 2020. That brings the total agreed-upon output cut to 1.7 million bpd, for the purpose of supporting oil prices. OPEC+ countries include Iran, Iraq, Kuwait, Saudi Arabia and Venezuela, plus Russia. In other oil news, U.S. crude stockpiles decreased by 4.9 million barrels in the week to Nov. 29, when analysts had expected a decrease of 1.7 million barrels.
Oil and energy stock prices reacted well to the decreases in global oil output and U.S. stockpiles. Investors can track energy prices using some of the following symbols: Brent crude oil ($BRENT), West Texas crude oil ($WTIC), Direxion Daily Energy Bull 3x Shares ETF (ERX) and VanEck Vectors Oil Refiners ETF (CRAK), the latter of which is featured in our Special Situation Portfolio. Additional portfolio stocks that may be enhanced by a bullish oil market include Baker Hughes (BKR), Marathon Petroleum (MPC), Schlumberger (SLB) and Total (TOT).
For those of you who love to study the economy, here’s a graphic report of 2019 Holiday Shopping Trends from Adobe Analytics.
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 December 5 and 6 in which I mentioned news, rating changes and/or price action on Alexion Pharmaceuticals (ALXN).
TODAY’S PORTFOLIO CHANGES
Royal Caribbean (RCL) moves from Strong Buy to Sell.
Tyson Foods (TSN) joins the Growth Portfolio as a Strong Buy.
Universal Electronics (UEIC) moves from Hold to Buy.
LAST WEEK’S PORTFOLIO CHANGES
Blackstone Group (BX) moved from Strong Buy to Hold.
CIT Group (CIT) moved from Hold to Retired.
LGI Homes (LGIH) joined the Buy Low Opportunities Portfolio as a Strong Buy.
Quanta Services (PWR) joined the Growth Portfolio as a Strong Buy.
Universal Electronics (UEIC) moved from the Buy Low Opportunities Portfolio to the Growth Portfolio.
BEST STOCKS TO BUY TODAY
*A good choice today for investors looking 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. According to Adobe Analytics data, a record $9.4 billion was spent online by the end of Cyber Monday, an increase of 19.7% vs. last year. This includes mobile transactions totaling $3.1 billion. The company is expected to report fourth quarter EPS of $2.26, within a range of $2.23-$2.30, on the afternoon of December 12. Analysts additionally expect full year EPS to increase by 42.5% in 2019 and 24.4% in 2020 (November year-end), and the 2020 P/E is 31.4. These earnings estimates have not changed for many weeks. (The only reason I do not give ADBE a Strong Buy recommendation is the high P/E.)
ADBE is a large-cap aggressive growth stock, great for risk-tolerant growth investors and buy-and-hold equity portfolios. Yesterday, Morgan Stanley raised their price target on ADBE from 340 to 410, which is a bullish move in the days ahead of an earnings report. An upbeat earnings report that includes an increase in earnings guidance by management could push the stock past its recent all-time high of 311, and trigger a new run-up. However, I don’t think the stock has spent enough time resting in the 300-310 area after its autumn run-up, so be prepared for any new run-up to be followed by a pullback in the coming weeks. Buy.
Marathon Petroleum (MPC – yield 3.5%) 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. Last week, energy investment bank Tudor, Pickering, Holt & Co raised earnings estimates on U.S. refiners by an average of 8% to reflect better expectations for fourth quarter results, adding that Marathon Petroleum is benefiting from a strong retail environment. MPC is a greatly undervalued large-cap stock with a solid dividend yield. Full-year EPS are now expected to fall 28% in 2019, then rise 66% in 2020. The 2020 P/E is very low at 8.2. MPC is having a pullback after a recent 50%+ run-up. Strong Buy.
Tyson Foods (TSN – yield 1.9%) landed on my radar back in July when a Wall Street research report revealed that Tyson Foods stock had more Wall Street buy recommendations than any of the other 34 U.S. food stocks covered in the report. I originally suggested TSN to subscribers on November 5, and I’m ready to add the stock to the Growth Portfolio today with a Strong Buy recommendation. A strong 2020 profit outlook, a bullish price chart and encouraging pork demand from China contribute to the likelihood that the share price could begin a new run-up in the coming weeks.
Tyson is one of the world’s largest food companies, with operations in 20 countries, and a recognized leader in protein with leading brands including Tyson, Jimmy Dean, Hillshire Farm, Ball Park, Wright, Aidells, ibp and State Fair.
Last week, China’s Ministry of Finance announced that they will waive tariffs on U.S. soybeans and pork. As I’ve frequently discussed, the hog population in China has been decimated by African Swine Fever. It was wise of them to hold out a trade olive branch using pork as the bait, thereby locking in access to their population’s primary meat staple, rather than risking allowing the U.S. using pork as a retaliatory bargaining chip. Tyson is prepared to capitalize on this potential increase in pork demand. (China was already the number one country to receive U.S. soybean exports.)
In November, upon the release of fourth quarter results, CEO Noel White commented, “We’re very optimistic about fiscal 2020, and we currently expect to meet or exceed our long-term earnings algorithm of high single-digit adjusted earnings per share growth as we’re well positioned to take advantage of opportunities in the global marketplace.”
The company has been growing both organically and through acquisitions, including the Thai and European operations of BRF S.A. in 2019; and Keystone Food, Tecumseh Poultry, LLC and American Proteins, Inc. in 2018. Management is strategically focused on its protein business. In fiscal 2018, it also completed the sale of four non-protein businesses as part of its strategic focus on protein brands. All of these businesses were part of its Prepared Foods segment and included Sara Lee® Frozen Bakery, Kettle, Van’s®, and TNT Crust.
The company operates on a September fiscal year. Revenue rose 5.9% to $42.4 billion in 2019, and Wall Street expects $45.5 billion revenue in 2020. Wall Street’s consensus earnings estimates for Tyson reflect 23.4% EPS growth in 2020. That’s a very attractive number! The P/E is low in comparison at 13.3, and the dividend yield is 1.9%.
Tyson raises its dividend payout annually; most recently raising the dividend by 12% in August.
During the third quarter, Soros Fund Management began a position in TSN by purchasing 61,600 shares of stock, currently worth $5.5 million. This large-cap stock could appeal to growth stock investors and dividend-growth investors.
TSN rose past long-term price resistance to a new high of 93 in August 2019, despite a pullback in the broader market that affected just about every stock that you own. TSN then pulled back to May-July trading levels (a common price action after a breakout), and subsequently rebounded to 90. Barring unexpected bad news, or a downturn in the broader market, I could easily picture TSN rising past its recent high and beginning a new run-up. Growth stock investors should buy TSN 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. Investors are welcome to listen to this week’s webcast of management’s presentation at the Imperial Capital 2019 Security Investor Conference on December 11.
UEIC is an undervalued, micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. Profits are expected to increase 46% and 12.3% in 2019 and 2020. The 2020 P/E is 14.5. Last week, UEIC moved from the Buy Low Opportunities Portfolio to the Growth Portfolio. Today I’m moving UEIC from Hold to a Buy recommendation, as the price chart is looking more upbeat. Buy.
Voya Financial (VOYA – yield 1.0%) is a U.S. retirement, investment and insurance company serving 14.3 million individuals and institutional customers. Voya has $568 billion in total assets under management and administration. The company is successfully increasing revenue and profits via organic growth, cost savings and share repurchases. VOYA is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to grow 23.0% and 25.6% in 2019 and 2020. The P/E is 9.3. The price chart appears quite bullish. VOYA could promptly begin a run-up into new high territory. Buy VOYA now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
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. CFO Mark Mason will present at the Goldman Sachs US Financial Services Conference 2019 on December 10. Investors may listen to the webcast or its replay.
C is a large-cap growth & income stock. Wall Street expects EPS to grow 16.5% and 9.8% in 2019 and 2020. The 2020 P/E is 8.8. (I rate C a Buy rather than a Strong Buy because the 2020 earnings growth projection is a little lower than I would prefer.) Now that it’s becoming clear that there is no recession on the horizon, and that the economy remains strong, certain financial stocks are reacting well, namely banks and investment firms. Citigroup shares appear poised for an immediate new run-up. The stock hasn’t traded above 80 since 2008, so we are now witnessing a modern version of C reaching a “new all-time high”. That’s important because every single investor who bought C during the last decade is sitting pretty with capital gains, so there’s no selling pressure looming in dark corners, ready to rain on this stock’s parade. Buy C now. 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. CTVA is a mid-cap growth & income stock. Analysts expect EPS of 1.24 and 1.49 in 2019 and 2020, reflecting 20.2% growth next year. The 2020 P/E is 17.3 and the dividend yield is 2.0%. CTVA remains within its recent price range of 25.5-28.5. I believe what we’re witnessing is that investors who received shares of CTVA during the DowDuPont (DWDP) breakup but prefer not to own the stock are selling; while investors who specifically want to own a good agricultural chemical stock are buying. Thus, the stock is churning in place on heavy volume. I would expect the selling to be done by the end of December. Continue to accumulate shares. Buy.
Dow Inc. (DOW – yield 5.2%) is a commodity chemicals company that derives roughly 50% of profits from its polyethylene business. New global polyethylene capacity is coming on board in 2022, which caused the market to be too bearish with industry stocks. That situation seems to be alleviating. DOW is an undervalued stock with strong earnings growth and a large dividend yield. The company is exhibiting progress on cash flow, cost cutting, a focus on debt repayment, a litigation win and an ability to thrive during a weak global economy. Analysts expect EPS of $3.54 and $4.20 in 2019 and 2020. The projected 2020 EPS growth rate is 18.6% and the corresponding P/E is 12.7. The stock had a large run-up since August, is recently trading 52-55, and will likely retrace its April 2019 peak at 57 in the near future. Investors who prefer dividends or large-cap stocks should buy DOW now. Buy.
Royal Caribbean Cruises (RCL – yield 2.6%) – Passengers on Royal Caribbean’s Ovation of the Seas ship were ashore on White Island, New Zealand when a volcano unexpectedly erupted yesterday. At least five people have perished, and that number is likely to increase. It’s too early to know how Royal Caribbean’s passengers fared during this tragedy, whether the ship was damaged, and the extent of Royal Caribbean’s financial liability and loss. I’m going to make the unusual suggestion that investors sell their shares in RCL, because my experience with big corporate problems is that the bad news slowly unfolds, and the share price slowly declines. Sell.
Updates on Buy Low Opportunities Portfolio Stocks
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 access the webcast of management’s December 3 presentation at the 2019 Evercore ISI HealthCONx.
Yesterday, Elliott Management issued a statement regarding its involvement with Alexion’s management:
“Elliott confirms that it has had a multiyear, constructive and private engagement with Alexion that has led to value-creative changes at the Company. Despite two years of strong execution that bolstered the Company’s strategic value, we believe Alexion remains significantly undervalued by the market. Elliott is encouraged by the Board’s public commitment to evaluate any inbound interest and its overall commitment to shareholder value creation. Elliott remains of the view that Alexion would be a highly valuable strategic and financial asset for a number of larger pharmaceutical companies. We also continue to believe that a proactive approach would maximise the chance of an optimal outcome.”
“We look forward to continuing our dialogue with the Company in an effort to close the gap between its current share price and its fundamental value.”
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 10.1, which is extremely low for a biopharmaceutical stock. The stock exhibited a shakeout pattern on the price chart last week, which is a bullish harbinger of near-term price appreciation. I expect additional capital gains in 2020. Buy ALXN now. Strong Buy.
Designer Brands Inc. (DBI – yield 6.0%) 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. Designer Brands continues to cross-apply the successes of its separate U.S. and Canadian businesses in order to maximize revenue and profit growth, drawing upon expertise in retail and online operations and their rewards program. The company has delivered 27 consecutive years of revenue growth. Designer Brands is expected to report $0.75 third-quarter EPS, within a range of $0.70-$0.79, and $937.9 million revenue, within a range of $926.2-$956.5 million, on the morning of December 10.
DBI is an undervalued, small-cap growth stock. Analysts expect full year EPS growth rates of 13.9% and 16.4% 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 7.6. DBI has traded between 16-19 for 13 weeks. Buy DBI now for outsized total return potential in 2019 and beyond. Strong Buy.
LGI Homes (LGIH) is the tenth largest residential homebuilder in America. The company is currently building homes, primarily for first-time homebuyers, in 19 U.S. states from coast-to-coast and the District of Columbia. During November, the company announced new communities in the Daytona Beach, Jacksonville and Sarasota, FL markets. Analysts expect full year EPS to grow 7.5% and 14.4% in 2019 and 2020. The 2020 P/E is 9.3.
LGI is a small-cap stock with a $1.7 billion market capitalization and heavy institutional ownership. JP Morgan raised their price targets on many homebuilding stocks yesterday, including a target of 81 on LGIH. The stock broke past long-term price resistance at 80 in August, peaking near 88 in October (a new all-time high), then immediately pulling back and settling into a 70-72 range in November. LGIH has now begun its rebound, and could rise to anywhere between 78-88 as it retraces previous trading patterns. LGIH is a good choice for traders and experienced growth stock investors. Strong Buy.
Mercury General Group (MCY – yield 5.1%) operates as Mercury Insurance, the leading independent agency writer of automobile and home insurance in California. Mercury also writes automobile, home and/or other lines of insurance, including business and mechanical breakdown insurance, in ten additional U.S. states. Analysts are expecting EPS to grow 50% in 2019 and 19.6% in 2020. The 2020 P/E is 15.4. The stock has begun its rebound from the October price drop. Growth investors and income-oriented investors can buy MCY now, lock in the large 5.1% current dividend yield, and expect a 6-12% capital gain as the stock retraces October trading levels of 53-56. Buy.
Updates on Special Situation Portfolio Stocks
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. Last week, Bristol-Myers increased the quarterly dividend payout from 41 cents to 45 cents per share. In addition, the company announced Liso-Cel met primary and secondary endpoints in their TRANSCEND NHL 001 study. The Celgene Corporation (CELG) acquisition brought therapies for cancer and immunological diseases. Investors may access Bristol-Myers’ December 8 webcast and presentation at the American Society of Hematology meeting.
BMY is a vastly undervalued growth stock. Analysts expect full year EPS to grow 9.0% and 44.7% in 2019 and 2020. The 2020 P/E is just 9.8. The stock launched upward again last week and continues to rise. There’s price resistance at about 65 that dates back to early 2018. I will likely retire BMY from the portfolio at that time. Rest assured, the stock remains a great portfolio holding for long-term investors. Hold.
