COMING UP NEXT: 10 Best Stocks to Buy and Hold for 2020
There was very little news or new analyst research on our portfolio stocks last week. I expect a surge in new information by mid-January as businesspeople and Wall Street analysts get back to work after the holidays. In the meantime, my weekly updates will include any of our companies that had meaningful news, or changes in earnings estimates or share prices. Give a shout if you want to read whatever I most recently wrote on a particular stock, and I’ll tell you which issue of Cabot Undervalued Stocks Advisor to locate in your inbox. As always, the first issue of the month will continue to review all of our portfolio stocks.
Beginning in the new year, Cabot Undervalued Stocks Advisor will be published on Wednesdays. (It was formerly published on Tuesdays.) The January issue will be published on January 8, 2020.
Make sure to scroll down to the Buy Low Opportunities Portfolio today, because a new stock joins us: General Motors (GM).
As a special bonus, all Cabot Undervalued Stocks Advisor subscribers will receive my annual 10 Best Stocks to Buy and Hold for 2020 publication on January 2. I often mention that there are many attractive stocks within my “waiting in the wings” list of pre-screened growing companies. This annual report includes ten stocks from that list, which are not already featured in Cabot Undervalued Stocks Advisor. This diversified group of ten companies is designed to give investors a quality growth stock portfolio that they can hold for a full year, with the goal of achieving similar or better performance than the broader stock market. Last year’s Buy and Hold portfolio delivered a total return of approximately 21%. Let’s aim for another prosperous year of investing!
Please send questions and comments to Crista@CabotWealth.com.
TODAY’S PORTFOLIO CHANGES
Corteva Inc. (CTVA) moves from Buy to Hold.
General Motors (GM) joins the Buy Low Opportunities Portfolio as a Buy.
LAST WEEK’S PORTFOLIO CHANGES
(no changes)
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
Tyson Foods (TSN – yield 1.8%) 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. Analysts expect EPS to grow 24.0% in 2020; and revenue to grow 7.8% to $45.7 billion (September year end). The 2020 P/E is 13.5. Tyson Foods was featured in the December 10 update of Cabot Undervalued Stocks Advisor.
TSN is approaching its August 2019 all-time high of 93 on rising volume. The price chart is extremely bullish. Barring a downturn in the broader market, I expect TSN to surpass 93 quite soon and begin a new run-up. This large-cap stock could appeal to growth stock investors and dividend-growth investors. Caveat: If African Swine Fever comes to the U.S., I will immediately recommend that investors sell the stock. If you can handle that risk, buy TSN now. Strong 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. Please refer to the Special Bulletin from December 19 in which I discussed Voya’s agreement to sell their in-force individual life insurance business. The news was well-received by Wall Street.
VOYA is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to grow 22.85% in 2019 and 25.6% in 2020. The 2020 P/E is 9.7. VOYA is paused within a new run-up to all-time highs that began mid-December. I expect continued upside. Buy VOYA now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
Citigroup (C – yield 2.6%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries, and the third-largest U.S. bank by assets. Citigroup reported a November credit card charge-off rate of 2.57%, down from 2.61% in October, indicating an uptick in consumers’ abilities to pay their bills on time in this thriving economy.
The new Current Expected Credit Loss (CECL) accounting rules, which I outlined in last week’s issue, will bring modest downward revisions to consensus earnings estimates to all affected companies in the coming weeks, because many analysts did not have this huge, impactful situation previously calculated into their estimates. Also, be prepared for several months of scary news headlines from the financial media. My investment focus will remain on financial companies and retailers that are expected to deliver better profit growth than their peers. In that light, Citigroup remains my favorite large-cap bank stock.
Wall Street expects EPS to grow 15.9% and 9.3% in 2019 and 2020. The 2020 P/E is 9.5. Citigroup shares continue to rise. The stock hasn’t traded above 80 since 2008, so we are now witnessing a modern version of C beginning a run-up in new all-time high territory. Buy.
Corteva Inc. (CTVA – yield 1.9%), a.k.a. Corteva Agriscience, provides farmers with seeds and crop protection products (herbicides, fungicides and insecticides), enabling them to maximize yield and profitability. 2019 was a difficult year for seed and crop protection businesses as many months of wet weather and flooding in the U.S. disrupted normal planting cycles and yields. Analysts are expecting a return to more normalized weather and market conditions in 2020, with profits expanding due to rising margins, merger savings and lower expenses. 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 19.6. The stock had a nice run-up in December. I’m moving CTVA from Buy to a Hold recommendation, assuming that the stock will need to pull back and rest before its next advance. Hold.
Updates on Buy Low Opportunities Portfolio Stocks
Today General Motors (GM – yield 4.1%) joins the Buy Low Opportunities Portfolio with a Buy recommendation for traders and dividend investors.
As you can imagine, investing in an auto company requires faith that the economy is strong enough to support consumer vehicle purchases. Economic numbers remain strong, as evidenced by steadily rising U.S. GDP, historically low unemployment, and rising wages. Additionally, I review quarterly statistics from Ally Financial (ALLY), a company that loans money for vehicle purchases. In the third quarter, Ally reported net auto loan charge-offs of 1.38%, at about the midpoint of the last eight quarters, while the highest quarterly rate was 1.74% in the fourth quarter of 2017. That tells me the consumer’s ability to repay debt is not currently flashing warning signs, and generally improving vs. two years ago.
General Motors sold more new vehicles in the U.S. in November than its competitors, with a 17.3% market share vs. second-ranked Toyota at 14.7%. Management is focused on both high margin pickups in the North American market and battery electric vehicles (BEVs). To that end, in December, General Motors and LG Chem – a Korean chemical company—announced a $2 billion joint venture to produce electric vehicle batteries in Ohio.
Interestingly, the stock is trading at about 36.5, which is the same price at which I sold GM from the Growth & Income Portfolio in December 2016. The stock delivered a 16.0% total return during the 14 months it resided in that portfolio. (Note that some stock chart services adjust for dividends and some do not. To get a clear picture of the share price action dating back to my initial purchase in October 2015, unadjusted for dividends, look at the chart offered by Yahoo! Finance.)
Third quarter results featured strong margins driven by full-size trucks, record crossover sales and cost savings. In the first nine months of fiscal 2019, General Motors’ pickup trucks gained eight percentage points of retail market share, while pricing increased an average of $2,200 year-to-date vs. a year ago. Deliveries increased for all brands, and crossover sales were the best-ever for any quarter, growing 29 percent. Top performing vehicles included Chevrolet Traverse and Trax; Buick Envision and Encore; GMC Acadia; and Cadillac XT4 and the all-new Xt6.
The catalyst for potential share price growth in 2020 is the expectation that General Motors is about to have a rebound year regarding top line and bottom line performance. Profits are expected to rise 32.6% from $4.82 EPS in 2019 to $6.39 EPS in 2020. Revenue is expected to rise 6.3% from $136.5 billion in 2019 to $145.1 billion in 2020. The predominant reason that 2019 profits came in below the company’s consistent pattern of delivering EPS above $6.00 is the impact of a 2019 UAW work stoppage that caused two weeks of lost vehicle production, costing the company $1 billion and effectively lowering the full-year 2019 earnings outlook by $2.00 per share. 2020 is expected to deliver improving margins and substantial improvement in free cash flow.
CEO Mary Barra commented, “Our new labor agreement maintains our competitiveness, preserves our operating flexibility and allows us to continue improving our quality and productivity. We remain focused on strengthening our core business and leading in the future of personal mobility.”
The dividend yield is attractive at 4.1%, though there’s no recent history of dividend increases. The payout is $1.52 per year, while earnings per share generally range over $6.00, so the dividend is not in any danger of being reduced. The 2020 P/E is 5.7, rather low for a famous company with a solid balance sheet and hefty dividend yield.
I’m giving GM a Buy recommendation, rather than a Strong Buy, because the company lacks consistent earnings growth. This stock is NOT for investors who want to achieve long-term capital gains. For that investment purpose, buy a company with annual earnings growth. This stock is for people who would like to make about 15% profit as the stock travels back to its 2018 high of 42 (looking at the dividend-adjusted chart, which is the chart I commonly use). It’s also for investors who rely on dividend income, and are additionally very attracted to the idea of owning shares of General Motors. (However, if you are a dividend investor who’s not particularly enamored of GM, there are plenty of other big-dividend stocks to choose from.) Buy GM now. Buy.
Updates on Special Situation Stocks
Amazon.com (AMZN) had a record-breaking holiday season, as customers ordered billions of items worldwide and tens of millions of Amazon Devices, which included the Echo Dot, Fire TV Stick 4K, Echo Show 5, Echo Auto, and Amazon Smart Plug. Here are some interesting statistics from Amazon’s post-Christmas press release:
• Amazon has 150 delivery stations in the United States that employ more than 90,000 Amazon Logistics associates.
• This holiday season, the number of items that were delivered with Prime Free One-Day and Prime Free Same-Day Delivery nearly quadrupled compared to the same time period last holiday season.
• The number of Prime members who tried grocery delivery for the first time this holiday season increased by more than 80 percent.
• According to Amazon Charts, the most read and most sold book in the U.S. during this holiday season was The Guardians by John Grisham.
Amazon’s slow profit growth of 2.6% in 2019 is expected to be followed by 30.7% EPS growth in 2020. Always remember that AMZN has a high P/E—currently 69.2 —so it’s riskier than the stocks that I normally recommend. On the bright side, the P/E ranged between 100-300 in 2014 through 2018, so a double-digit P/E actually reflects an historical bargain for the stock. AMZN broke free from a five-month trading range last week. Given a neutral-to-bullish stock market, AMZN could sprint back to its old high of 2025, where it traded in 2018 and again in July 2019. Growth stock investors and traders should buy AMZN now. Strong Buy.
