WE’RE DUE FOR A STOCK MARKET CORRECTION
The S&P 500 (SPX) index is up 10% since rising above its previous trading range in late November. While 10% is not necessarily a big move for a stock, it is definitely a big move for a major index. I expect the index to pull back and rest for a while before advancing further. I don’t necessarily see that pullback as imminent, but certainly within the next three months. It will be more clear to me when it’s on my front walk, approaching my doorstep. When that happens, I would expect the SPX to drop to the 3100-3150 range.
If you are a trader, set aside some cash each time you sell a stock, and go ahead with any purchases that you have lined up. That way you can continue to participate in the market’s upside, but you’ll also have cash with which to buy low after the pullback.
I’m personally up to a 12% cash position. I must have been fully invested, because I’ve been working on raising cash for a while, and I don’t consider 12% to be anywhere near my target. (The last time I went through this “raising cash process,” I was up to a 40% cash position when the market cracked in late January 2018.) On the bright side, I have stop-loss orders on quite a few stocks. Generally speaking, I’ll use stop-loss orders on stocks that have gone straight up for a long time, like Blackstone Group (BX) and Apple (AAPL). I perceive those two stocks to be more vulnerable during a market pullback than stocks that have traded more steadily, like Quanta Services (PWR) or Voya Financial (VOYA). After a few weeks, I’ll turn around and buy low on AAPL and BX, as long as I perceive the price charts to be stable and the fundamentals to be strong.
Got questions about preparing for stock market pullbacks? Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from January 17 in which I mentioned news, rating changes and/or price action on Schlumberger (SLB).
QUARTERLY EARNINGS RELEASE CALENDAR
January 22 am: Baker Hughes (BKR) – 4Q
January 29 am: Dow Inc. (DOW) and Marathon Petroleum (MPC) – 4Q
January 30 am: Alexion Pharmaceuticals (ALXN) and Corteva (CTVA) – 4Q
January 30 pm: Amazon.com (AMZN) – 4Q
February 5 am: General Motors (GM) – 4Q
February 6 am: Total SA (TOT) – 4Q; Tyson Foods (TSN) – 1Q
February 10 am: Mercury General Group (MCY) – 4Q
February 10 pm: Voya Financial (VOYA) – 4Q
February 25 am: LGI Homes (LGIH) – 4Q
First half February: Alexion Pharmaceuticals (ALXN) – 4Q
Second half February: Equitable Holdings (EQH), Mosaic (MOS), Quanta Services (PWR) and Universal Electronics (UEIC) – 4Q
EARNINGS SEASON SCORECARD:
Big earnings beat: Citigroup (C) and Schlumberger (SLB).
TODAY’S PORTFOLIO CHANGES
Citigroup (C) moves from Buy to Hold.
LGI Homes (LGIH) moves from Strong Buy to Hold.
Marathon Petroleum (MPC) moves from Strong Buy to Buy.
Mosaic (MOS) moves from Buy to Hold.
Schlumberger (SLB) moves from Buy to Retired.
VanEck Vectors Oil Refiners ETF (CRAK) moves from Strong Buy to Hold.
Voya Financial (VOYA) moves from Strong Buy to Buy.
RECENT PORTFOLIO CHANGES
Adobe Systems (ADBE) moves from Buy to Hold.
UPDATES ON GROWTH PORTFOLIO STOCKS
Marathon Petroleum (MPC – yield 3.8%) 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 is expected to report fourth quarter EPS of $0.88, within a range of $0.73-$1.22; and $33.9 billion revenue, within a range of $29.2-$49.4 billion, on the morning of January 29. The Speedway retail store spin-off is targeted for early fourth quarter 2020. Management expects to update investors on strategies to optimize their midstream business in the first quarter of 2020.
MPC is a greatly undervalued large-cap stock with a solid dividend yield. Full-year EPS are expected to fall 31% in 2019, then rise 69% in 2020. The 2020 P/E is very low at 7.9. In January 2018 and 2019, Marathon increased their dividend payout 15%. If the company follows suit this month, the quarterly dividend payout will go from 53 cents to 61 cents, making the current yield 4.4%. The share price has weakened in recent weeks, along with shares of other U.S. oil refining companies, as crude oil prices have come down. I’m moving MPC from Strong Buy to Buy because there’s short-term risk to the share price. The earnings report will likely bring decisive movement in the stock that will set the trading tone for the next few months. Buy.
Voya Financial (VOYA – yield 0.9%) 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. As I mentioned on January 9, it’s rumored that Voya might agree to be acquired by a larger company in the near term at an approximate value of 74 per share.
VOYA is an undervalued, mid-cap aggressive growth stock. I’m concerned because earnings estimates have been declining this month. Wall Street now expects EPS to grow 14.4% in 2019 and 14.5% in 2020. The 2020 P/E is 11.9. Those are good numbers, for sure, but the fact that they’re falling from recent levels is provoking caution. I’m therefore moving VOYA from Strong Buy to a Buy recommendation. This month, three Wall Street firms raised their price targets on VOYA to a range of 66-77. VOYA rose to a new all-time high again last week. I expect the stock to continue rising, barring a pullback in the broader market. Buy.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Blackstone Group Inc. (BX – yield 3.1%*) is the world’s largest and most diversified alternative asset manager with $554 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. Blackstone is expected to report fourth quarter EPS of $0.67, within a range of $0.60-$0.73, on the morning of January 30. (Be prepared for Blackstone and its industry peers to report results that vary greatly from consensus estimates. Within this industry, that’s not necessarily perceived as bad news. It’s the quality of the results and the outlook that are important.) Consensus earnings estimates point to 35% full year EPS growth in 2020, and the 2020 P/E is 20.2.
Each week, I struggle with pulling the plug on BX because the P/E is quite high and the stock is way overextended (it’s run up a monstrous amount with nary a pullback). On the positive side, the earnings growth rate is strong enough to handle the valuation, and the price chart remains bullish. BX won’t defy gravity forever, and we’re due for a stock market correction, so consider using a stop-loss order to protect your capital. Hold.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.92 and yielding 3.1%.
Citigroup (C – yield 2.5%) 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 12.1% full-year 2019 return on common equity (ROTCE) and forecasted 2020 ROTCE within a range of 12% to 13%. The good news in that statistic is that Current Expected Credit Loss (CECL) accounting is factored in. That means despite new, more stringent accounting rules that require Citigroup and industry peers to set aside reserves for anticipated loan losses, Citigroup still anticipates ramping up profitability this year.
Revised consensus earnings estimates have been published in the wake of Citigroup’s fourth quarter 2019 report. Analysts now expect EPS to grow 5.8% and 9.2% in 2020 and 2021. Those are fine numbers for sure, but they’re not high enough for me to give the stock a Buy recommendation. Therefore, I’m moving Citigroup from Buy to a Hold recommendation, and I’m keeping the stock on a short leash. On the bright side, the 2020 P/E remains moderate at 8.7, the price chart is bullish and nine investment firms raised their price targets on C to a range of 84-124 this month. A huge number of institutional clients are going to receive those buy recommendations and many will buy the stock. Hold.
Corteva Inc. (CTVA – yield 1.8%), a.k.a. Corteva Agriscience, provides farmers with seeds and crop protection products (herbicides, fungicides and insecticides), enabling them to maximize yield and profitability. A consortium of investors in Canada, including Corteva, are investing in a canola breeding project focused on making canola hybrids that produce high protein meal for human and livestock use. Corteva will contribute genetics from their breeding programs. In news from January 17, JPMorgan reduced their recommendation on CTVA from neutral to underweight and reduced their price target from 27 to 26. The share price reacted by dropping to the bottom of its established trading range.
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. Corteva is expected to report ($0.12) in fourth quarter EPS, within a range of ($0.16)-$0.09, and $2.9 billion revenue, on the morning of January 30. Analysts are expecting a return to more normalized weather and market conditions in 2020, with Corteva’s profits expanding due to rising margins, merger savings and lower expenses. CTVA is a mid-cap growth & income stock. Analysts expect EPS of 1.23 and 1.49 in 2019 and 2020, reflecting 21.1% growth in 2020. The 2020 P/E is 19.0. Hold.
Dow Inc. (DOW – yield 5.3%) is a commodity chemicals company that derives roughly 50% of profits from its polyethylene business. 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. Dow is expected to report $0.74 fourth quarter EPS, within a range of $0.57-$0.85, and $10.1 billion revenue, within a range of $9.9-$10.9 billion, on the morning of January 29. Additionally, analysts expect full-year EPS of $3.50 and $4.06 in 2019 and 2020. The projected 2020 EPS growth rate is 16.0% and the corresponding P/E is 13.0. The stock has recently been trading sideways between 51-55. Once DOW breaks past 55.5, which could happen quite soon, as long as a pullback in the broader market does not promptly materialize, investors can expect a new and sustainable run-up. DOW offers investors above-average earnings growth, dividend income and a big blue-chip name. Buy.
GUESS?, Inc. (GES – yield 1.9%) is a global manufacturer of an iconic apparel brand, selling sexy GUESS and Marciano brand clothing and merchandise to Gen Z, Millennial and Heritage consumers through 1,743 stores worldwide, in over 100 countries. This Spring 2020, GUESS? is proud to welcome back actress, singer, dancer, entrepreneur, philanthropist and fashion icon Jennifer Lopez as the face of GUESS and Marciano worldwide in the Spring 2020 advertising campaign.
GES is a greatly undervalued, aggressive growth, small-cap stock. Profits grew 40% in fiscal 2019 (January 2019 year end), and are expected to grow 39% and 23.5% in fiscal 2020 and 2021. The fiscal 2021 P/E is 14.0. The CEO change disrupted the GES share price last year. Now that investors have gained confidence in Carlos Alberini’s ability to continue steering the company toward a profitable future, they’ve resumed buying the stock. GES is rising again, and could easily surpass price resistance at 24, where it last traded in April 2018. Buy GES now. Strong Buy.
Schlumberger NV (SLB – yield 5.3%) moves from Buy to Retired today. After last week’s fourth quarter results were reported, analysts lowered their 2020 earnings estimates for the company. At this point, full year EPS growth is expected to be 10.9%. That’s actually not a bad number, but the P/E is now 23, so the stock cannot be considered to be undervalued. There are no big problems at Schlumberger. Revenue and profits are expected to continue growing, so if you want to keep the stock for the dividend income, you should feel comfortable doing so. Retired.
Total S.A. (TOT – yield 5.6%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. TOT is an undervalued, large-cap growth & income stock with a large dividend yield. Earnings estimates for 2020 rose again last week. Wall Street now expects Total’s EPS to fall 7.3% in 2019, then to increase 20.3% in 2020. The 2020 P/E is 9.5. TOT has been exhibiting a two-steps-forward, one-step-back pattern on the price chart since mid-August, with the stock seemingly completing the one-step-back right now. There’s upside price resistance at 56, and again at 61. Growth investors and dividend investors should buy TOT now. Strong Buy.
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. This quarter, Alexion will begin a Phase 3 trial in which approximately 350 amyotrophic lateral sclerosis (ALS) patients are treated with Ultomiris, the goal being to slow the progression of the disease. Analysts are expecting Alexion to report $2.57 fourth quarter EPS, within a range of $2.37-$2.87, on the morning of January 30.
ALXN is an undervalued growth stock. Wall Street’s full-year earnings estimates for Alexion climb consistently, month after month, which is a rather unusual occurrence. For example, consensus EPS estimates have grown from $9.29 and $10.48 EPS in 2019 and 2020 (estimates dated February 9, 2019) to the currently-expected $10.40 and $11.30; with growth rates now 31.1% and 8.3%, respectively. The 2020 P/E is 10.0, which is extremely low for a biopharmaceutical stock. The price chart indicates immediate potential upside (barring unexpected bad news or a downturn in the broader stock market). Buy ALXN now. There’s price resistance in the low 120s. Buy.
Baker Hughes Company (BKR – yield 3.1%) offers products, services and digital solutions to the international oil and gas community. Analysts are expecting $0.31 fourth quarter EPS, within a range of $0.22-$0.36, to be reported on the morning of January 22. BKR is an undervalued, mid-cap aggressive growth stock, expected to increase EPS by 34% and 46% in 2019 and 2020. The 2020 P/E is 18.2. BKR experienced a normal pullback after a big December run-up. I expect continued upside in the coming months. Buy.
Designer Brands Inc. (DBI – yield 6.3%) 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. Consensus earnings estimates project no earnings growth in their fiscal 2019 year (January 2020 year end) and 19.7% EPS growth in 2020. The 2020 P/E is low at 8.7. DBI is an undervalued, small-cap stock. The stock continues to recover from a dramatic-yet-brief price disruption in December, from which it proceeded to rise and then exhibit a quick shakeout in mid-January. Patient growth and dividend investors should buy now, lock in the large current yield, and benefit from eventual capital gains as the company continues to fulfill their successful marketing strategies. Buy.
(Please note that while many retailers that finish their current fiscal year on January 31, 2020 refer to this about-to-end fiscal year as “fiscal 2020", Designer Brands refers to this as “fiscal 2019". Therefore, Designer Brands will refer to February 2020 and beyond as “fiscal 2020".)
LGI Homes (LGIH) is the 10th largest residential homebuilder in America. The company is currently building homes, primarily for first-time home buyers, in 19 U.S. states from coast-to-coast and the District of Columbia. LGI Homes was featured in the December and January monthly issues of Cabot Undervalued Stocks Advisor. In response to the January 6 announcement that LGI Homes achieved all-time records for 2019 home closings, analysts increased their earnings estimates and the stock began a new run-up past short-term price resistance at 75. 2019 earnings estimates then rose again last week. Analysts now expect full year EPS to grow 9.6% and 13.7% in 2019 and 2020. The 2020 P/E is 10.4. LGIH is a small-cap stock with a $1.8 billion market capitalization. Now that there’s less than 10% upside to my maximum price target of 88, I’m moving LGIH from Strong Buy to Hold. Hold.
The Mosaic Company (MOS – yield 0.9%) 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. Profits are expected to fall to $0.47 per share in 2019 and then rise 145% to $1.15 per share in 2020. The 2020 P/E is 18.7. I’m concerned that the earnings estimates continue to decline, and I’m therefore changing MOS from Buy to a Hold recommendation. MOS had a nice run-up in December, traded between 20.5-21.75 for several weeks, and now appears ready to rise to price resistance at 23. Hold.
UPDATES ON SPECIAL SITUATION PORTFOLIO STOCKS
Amazon.com (AMZN) – Amazon’s innovations and forays into new industries are seriously disrupting established global businesses, including freight companies, retailers and technology companies. Small businesses in the U.S. and India accuse Amazon of being an unfair competitor due to Amazon’s willingness to take large losses in order to steal market share. Amazon counters that they will invest $5.5 billion in India, including investing $1 billion in digitizing small and medium businesses, and will also hire one million Indian workers over the next five years. Additionally, as Amazon moves more and more of their shipping in-house, their presence in the freight industry is cutting into competitors’ revenue and profits, including United Parcel Service (UPS).
Amazon.com is expected to report $4.04 fourth quarter EPS, within a range of $2.19-$5.58, and $85.9 billion revenue, within a range $83.2-$87 billion, on the afternoon of January 30. Amazon’s slow full-year 2019 profit growth of 2.6% is expected to be followed by 29.9% EPS growth in 2020. AMZN has a high P/E – currently 69.5 – so it’s riskier than the stocks that I normally recommend. The P/E ranged between 100-300 in 2014 through 2018; therefore, a double-digit P/E reflects a historical bargain for the stock.
Last week, three investment firms raised their AMZN price targets to a range of 2,200-2,330. AMZN broke free from a five-month trading range in late December and is now having a small pullback before the run-up kicks into high gear. In the next few months, I expect the stock to reach a 2025 share price, where it traded in 2018 and again in July 2019. Growth stock investors should buy AMZN now. Strong Buy.
Equitable Holdings (EQH* – yield 2.3%) – Considering that the French AXA S.A. is no longer a majority shareholder of EQH, last week, the company changed their name from AXA Equitable Holdings to Equitable Holdings. The company has two principal franchises: Equitable Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. The company has $701 billion in assets under management.
2020 earnings estimates have been consistently and slowly rising for several months. Equitable is expected to grow EPS 19.0% and 5.4% in 2019 and 2020, respectively. The 2020 P/E is 5.3. Four investment firms raised their price targets on EQH this month to a range of 29-36. EQH continues to reach all-time highs. I expect more upside, especially in light of the very low valuation. Buy EQH now. Strong Buy.
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.
Here’s a commentary from January 17 that says the switch to very low sulfur fuel oil (VLSFO) is going smoothly, or causing problems, depending on who is interviewed. One interviewee commented, “Needless to say, the prices are sky-high.” That’s the crux of the issue as to why oil refining companies are expected to record huge profit increases in 2020. CRAK performed well in September and October, then gave back some of those gains in November and January. I’m moving CRAK from Strong Buy to Hold until refining stocks resume an uptrend. Hold.
