A FEEL-GOOD STORY … and then, back to STOCKS
Last week was Wish Week at a local high school, wherein the kids participate in fun and inspiring daily events organized around raising money and honoring the life of a very sick child who has a big dream to accomplish. The child’s dream was to write a musical theatre play and see it performed. Wow! That’s a little more complicated than sending a family to Walt Disney World! The high-schoolers always raise enough money to make the focus child’s dreams come true—if at all possible—plus lots more money to contribute to the Make-A-Wish Foundation.
On the last day of the week, there’s a schoolwide assembly celebration with the child. It’s a VERY BIG DEAL. It’s the high school equivalent of the elementary school Field Day that many of us looked forward to at the end of each school year.
As it turned out, Friday of last week was a snow day in the school district, and school was canceled. I can’t emphasize enough how disappointing this would be to every single child. You can’t just “do it next Friday” and maintain the momentum and excitement that had built all week. Therefore, the school decided to have the celebration the next day, on Saturday morning.
My nephew Leo is one of the technical production people who works to make the whole event happen. My sister took her computer to school, and did her work there as she waited to later bring Leo home. While there, my sister texted me: “I’m at the school. A Saturday, and this place is packed like I’ve never seen. Very touching.”
The story gets better! The theatre department at the high school decided, in advance of Wish Week, to tackle the child’s wish. Actors and singers got together with all of the requisite lighting, sound and stagehands, and performed the child’s play! Can you imagine it?! It still makes me teary-eyed to think of the incredible blessing that all the kids received from this generous effort.
Have you ever noticed that bad news stories tend to be about people who are focused on their own anger, power, greed or depression, and good news stories tend to be about people who are focused on other people’s happiness, success and dreams? It’s nice to know that the best day of the school year for an American teenager is the day that’s entirely about other people. Amen.
As a side note, my kids attended a private middle school where charitable works were built into the curriculum, taking place off-site several times per month, including one full week in the springtime. Paying the tuition was a nightmare, but I consider that experience to be one of the most valuable things I’ve ever done for my kids. After middle school, they went back to public school, where they all thoroughly enjoyed their annual Wish Weeks.
The effects of African Swine Fever (AFS) – AFS has caused extensive damage to the meat supply in China. When travel and business supply chain disruptions from the coronavirus dissipate, you can expect investors to once again focus on the potential boon to U.S. companies that export chicken, beef and pork. China is actively welcoming these U.S. meat products. Beneficiaries include Tyson Foods (TSN) in the Growth Portfolio, and Sanderson Farms (SAFM), both of which offer attractive fundamentals, with share prices near the bottom of recent trading ranges. Barring a correction in the broader stock market, I would expect these two stocks to produce attractive capital gains in the next 3-6 months.
The effects of the coronavirus – In recent weeks, I’ve warned investors that the coronavirus will likely affect companies that you’re invested in, harming their first quarter revenue and profits. That’s because commerce has ground to a halt throughout China. Therefore, all of your portfolio companies that manufacture and/or sell products and services in China will have their business plans interrupted for several months to come. Finally, the mainstream business media is acknowledging this same problem.
Preparing your stock portfolio for buy low opportunities – I’m sure that I buy and sell far more often than most investors, capitalizing on trading ranges, price breakouts and corporate news. Shocker: I also trade equity call options. Two things I love doing are buying low during market corrections and buying call options on Apple (AAPL) an hour before the company reports earnings. (But only during seasons when investors are whining that Apple’s not selling enough iPhones and that the company is perilously close to going out of business. Yes, that really happens, and I made 103% profit in five days at such a time last year.)
Here’s how I handle my personal stock portfolio when I’m expecting a market correction. When I sell a stock, I put part of the capital in the money market fund, and I reinvest part of the capital into an attractive stock opportunity. That way, I’m increasing my cash position so that I can buy low during the next market correction, while I’m also participating in the upside of the current bullish market. A month ago, I was at 10.8% cash, and now I’m at 25.5% cash. (Back in January 2018, I was up to 40% cash as I anticipated a market correction, which is fairly amazing for a person who is usually 90%-95% invested!) And by the way, I never use margin.
Some of you are thinking, “Why don’t you write your stock letter for traders who follow your exact buy and sell patterns?” I understand your idea. However, I have a tremendous amount of experience with all types of stock investors, and I know that traders make up a smaller portion of stock investors than you would imagine. If I write this stock letter for traders, I will lose a large percentage of my audience. That’s because most investors don’t have an interest in trading, for many reasons. Lots of them are uncomfortable making sell decisions; many are business people who don’t have time to stare at the market for much of the day; others want to avoid the tax consequences of selling, including short-term capital gains; many fall in love with their stocks and can’t bear letting them go; and others want to buy and hold quality companies for the long term.
Instead of writing specifically to traders, I include lots of comments that traders can run with. Comments like “XYZ has upside price resistance at 88” or “ABC often falls upon the earnings release, then rebounds within a couple of days” or “the stock is overextended; use a stop loss at 44.”
Does that all make sense? There’s no reason that I need to turn all investors into my trading clones. You have developed very specific approaches to how you handle your portfolios. My job is to give you good investing ideas, stock market and economic education, and enough information so that you can know when to stand pat and when to buy or sell.
Corporate webcasts – Please be aware that when I mention that corporate management is making presentations at industry conferences, the companies almost always post the audio webcasts on the Investor Relations section of their websites. Click on their “Events and Presentations” tabs.
I know that some cynical people will think that the corporate execs will speak a bunch of optimistic fluff to analysts at these meetings, but that couldn’t be further from the truth. Do you remember how much trouble Elon Musk of Tesla (TSLA) caused when he exaggerated upcoming auto production numbers on Twitter? He got a serious spanking by the Securities and Exchange Commission.
Truly, these webcasts are wildly informative, as are the conference calls with analysts after quarterly results are reported. The webcasts are generally posted on the corporate websites for at least a month after the presentation date. Not all CEOs are created equal in terms of their abilities to engage a crowd with relevant and interesting information. Some of the better presentations I’ve heard have come from the CEOs of Abercrombie & Fitch (ANF), Alexion Pharmaceuticals (ALXN), Designer Brands (DBI), Quanta Services (PWR) and Universal Electronics (UEIC).
Most of the presentations include Q&A with Wall Street analysts. The analysts’ questions give you a strong sense of which facets of business are causing the most concern or excitement on Wall Street. You’re then armed with a better ability to decipher the seriousness of subsequent news stories. If you’ve never listened to one of these webcasts, I encourage you to give it a try. If you find the experience valuable, you can tune in to additional webcasts for many years to come.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletins from February 6 and 11 in which I mentioned news, rating changes and/or price action on Amazon.com (AMZN), LGI Homes (LGIH), Mercury General Group (MCY), Netflix (NFLX), Total SA (TOT), Tyson Foods (TSN) and Voya Financial (VOYA).
QUARTERLY EARNINGS RELEASE CALENDAR
February 19 pm: Mosaic (MOS) – 4Q
February 20 pm: Universal Electronics (UEIC) – 4Q
February 25 am: LGI Homes (LGIH) – 4Q
February 26 pm: Equitable Holdings (EQH) – 4Q
Second half February: Quanta Services (PWR)
EARNINGS SEASON SCORECARD:
Big earnings beat: Amazon.com (AMZN), Blackstone Group (BX), Citigroup (C), Corteva (CTVA), Dow Inc. (DOW), General Motors (GM), Marathon Petroleum (MPC), Mercury General Group (MCY) and Schlumberger (SLB).
Earnings within 5% of consensus estimate: Alexion Pharmaceuticals* (ALXN), Total SA (TOT), Tyson Foods (TSN) and Voya Financial (VOYA).
Big earnings miss: Baker Hughes Company (BKR).
*at or above consensus
TODAY’S PORTFOLIO CHANGES
General Motors (GM) moves from Buy to Strong Buy.
VanEck Vectors Oil Refiners ETF (CRAK) moves from Hold to Strong Buy.
RECENT PORTFOLIO CHANGES
Amazon.com (AMZN)
moved from Buy to Hold.
Goldman Sachs Group (GS) joined the Growth & Income Portfolio with a Buy recommendation.
LGI Homes (LGIH) moved from Hold to Buy; moved from the Buy Low Opportunities Portfolio to the Growth Portfolio.
Mercury General Group (MCY) moved from Strong Buy to Hold.
Netflix (NFLX) moved from Strong Buy to Hold.
Total SA (TOT) moved from Hold to Strong Buy.
Tyson Foods (TSN) 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).
UPDATES ON GROWTH PORTFOLIO STOCKS
LGI Homes (LGIH) is the tenth largest residential home builder 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 is expected to report $2.34 fourth quarter EPS, within a range of $2.09-$2.54, and $585.3 million revenue, within a range of $534-$615 million, on the morning of February 25. LGI Homes achieved an all-time record for 2019 home closings, and also reported bullish January home closing statistics that will almost surely lead to 2020 earnings estimates being revised higher. I’m expecting a very good fourth quarter earnings report. LGI Homes was featured in the December and January monthly issues of Cabot Undervalued Stocks Advisor.
Analysts expect full year EPS to grow 9.6% and 13.7% in 2019 and 2020. The 2020 P/E is 11.4. LGIH is a small-cap stock. The stock rose past upside price resistance at 88 last week, on heavy volume, to a new all-time high. I expect LGIH to produce good capital gains in 2020. Risk-tolerant investors can continue to buy here, keeping in mind that a pullback to 82 could easily happen, especially if we get a correction in the broader market. Buy.
Marathon Petroleum (MPC – yield 4.1%) 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 experiencing increased margins as it meets the new IMO 2020 demand for ultra-low-sulfur diesel fuel by the world’s ships and tankers. The Speedway retail store spin-off is targeted for early in the fourth quarter of 2020. Marathon is a majority owner of MPLX LP (MPLX), their midstream energy business that’s undergoing a strategic review. If MPLX announces a corporate conversion, which is a possibility, that should enhance the value of both MPLX and MPC shares. Decisions should emerge by late March. Additionally, a search for a new CEO is ongoing.
MPC is a greatly undervalued large-cap stock with a solid dividend yield. Full-year EPS are expected to rise 33% in 2020, and the P/E is very low at 8.3. Marathon increased their quarterly dividend payout by 9% recently, from 53 cents to 58 cents per share.
MPC rose over 50% from August through October 2019, then gave back half those gains. Complex oil refiners are slated to have a tremendously profitable year, and we’re already seeing refining stocks begin a rebound as it’s becoming clear that refining margins are trending upward thus far in 2020. Energy stocks are volatile. Risk-tolerant growth investors and dividend investors should buy MPC now. Buy.
Tyson Foods (TSN – yield 2.0%) 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. On February 19, management will present at the Consumer Analyst Group of New York’s CAGNY 2020 event. Tyson Foods was featured in the December 10 and January issues of Cabot Undervalued Stocks Advisor.
The coronavirus is currently affecting Tyson because there are not enough workers at Chinese ports to unload cargo of any kind, and that includes meat. Additionally, citizens are shopping less right now as they stay home to minimize exposure to the coronavirus. Earnings estimates are coming down due to lower expected near-term meat sales to China. Analysts are forecasting EPS to increase 20.7% and 10.5% in 2020 and 2021 (September year end). The 2020 P/E is 12.2. Last week, three investment firms lowered their price targets on TSN to a range of 84-100. TSN is trading at about 80, which represents price support that was established in September through November 2019. 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. Clients include every major electronic and telecommunication company: AT&T, Cox, Dish, Comcast, Samsung, LG, Sony, Liberty, Daikin, Sky and more. Investors may listen to CEO Paul Arling’s January 14 presentation at the Needham Growth Conference. Universal Electronics was featured in the February issue of Cabot Undervalued Stocks Advisor.
UEIC is a volatile, undervalued, micro-cap growth stock, appropriate for risk-tolerant investors and traders. The company will report fourth quarter results on the afternoon of February 20. I’m not quoting consensus estimates, because there are only two analysts contributing to estimates for this microcap stock. Full-year profits are expected to increase 46% and 12.3% in 2019 and 2020. The 2020 P/E is 11.6. The stock fell toward price support last week, most likely due to market jitters about companies being able to manufacture and ship products from China during the coronavirus outbreak. It should be noted that management already moved most of their production from China to Mexico in the last two years. The stock is cheap, but the share price will be vulnerable until the market settles down. Interested investors can briefly postpone a buying decision, but if you really want to own UEIC, buy it before fourth quarter results are announced on February 20. Buy.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Broadcom (AVGO – yield 4.1%) is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. Broadcom was featured in the December 17 and January issues of Cabot Undervalued Stocks Advisor. Earnings estimates have been slowly rising since late December. Wall Street expects EPS to grow 9.2% and 9.9% in 2020 and 2021 (November year end). AVGO has been trading steadily between 300-325 since reaching a new all-time high in late November. AVGO is a great choice for technology investors, dividend-growth investors, and large-cap growth investors. Strong Buy.
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
General Motors (GM – yield 4.4%) — GM’s 2020 new vehicle launches, expense reductions, returns of capital and their commitment to an all-electric future are driving bullish sentiment on Wall Street. Management is focused on both high margin pickups in the North American market and battery electric vehicles (BEVs). GM was featured in the December 31, 2019 issue and the February issue of Cabot Undervalued Stocks Advisor.
Earnings estimates are coming down a bit because the coronavirus in China has halted auto production. GM has a manufacturing joint venture with SAIC Motors located in the Hubei province, where the virus originated. The company plans to restart auto production in China on February 15. GM and its joint ventures delivered more than 3.09 million vehicles in China in 2019.
Full-year 2020 profits are expected to rise 22.8% from $4.82 EPS in 2019 to $5.92 EPS in 2020. The 2020 P/E is 5.8. The stock hit the low point of its one-year trading range at about 33 in June and October of 2019, and again in late January. With bullish sentiment growing and the stock seemingly ready to rise from the bottom of a trading range, I’m moving GM from Buy to a Strong Buy recommendation. There’s well over 10% short-term upside as GM travels within its recent trading range toward 39. Strong Buy.
The Mosaic Company (MOS – yield 1.0%) 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. CEO Joc O’Rourke recently commented, “In 2020, we continue to expect robust global fertilizer demand and strong business conditions.” Phosphate prices have been rising in recent weeks.
The company is expected to report fourth quarter EPS of (5) cents, within a range of (18)-3 cents, and $1.9 billion revenue, within a range of $1.7-$2.2 billion, on the afternoon of February 19. Earnings estimates have been declining. Full-year profits are expected to fall to $0.46 per share in 2019 and then rise 115% to $0.99 in 2020. The 2020 P/E is 20.5. I’m not recommending purchases at this time, and instead waiting for full-year 2019 results and corporate guidance for 2020. Hold.
UPDATES ON SPECIAL SITUATION & MOVIE STAR PORTFOLIO STOCKS
Equitable Holdings (EQH – yield 2.2%) changed their name in January from AXA Equitable Holdings to Equitable Holdings. Equitable has $701 billion in assets under management. They have two principal franchises: Equitable Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. Equitable Holdings was featured in the February issue of Cabot Undervalued Stocks Advisor.
AllianceBernstein is expected to report fourth quarter results of $0.70 EPS and $769.8 million revenue on the morning of February 12. Equitable will then report fourth quarter results on the afternoon of February 26. Equitable is expected to grow full-year EPS 19.0% and 6.0% in 2019 and 2020, respectively. The 2020 P/E is extremely low at 5.2. EQH has a very bullish price chart, now surpassing its all-time high from January. If AllianceBernstein reports a good quarter this morning, it’s almost certain that EQH will continue to rise on that good news. Barring a downturn in the broader stock market, I expect very attractive capital gains from EQH, this month and this year. 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.
Many companies in the sector reported strong refining profit margins in their fourth quarter reports, with a bullish 2020 outlook. Refining margins are continuing to expand thus far in 2020, causing refining stocks to turn upward in recent days. I’m moving CRAK from Hold to a Strong Buy recommendation. Energy stocks are volatile, and they move rapidly. I foresee a good near-term capital gain opportunity. Buy CRAK now. Strong Buy.
