February 26, 2020

This week, United Airlines (UAL) announced the withdrawal of the 2020 revenue and profit guidance that they’d issued in January, due to the impact of the coronavirus, a.k.a. COVID-19, on airline travel. The company suspended flights to Hong Kong and three destinations in China, and also to about 75% of their other trans-Pacific routes, currently scheduled to be resumed on April 24. Additionally, MasterCard (MA) lowered their first quarter revenue guidance due to the virus’s impact on global commerce.

I mention these economic situations because I interact with people on a daily basis who think that the stock market is falling because people are sick, and that the stock market will rebound rapidly because this illness will quickly run its course. Let me assure you, the stock market impact of COVID-19 is not about the illness and potential deaths. It’s about the fact that the illness has, for the time being, crippled normal global economic activity.

Generally speaking, stocks fall when companies announce bad news. When a company states that their revenue and profits are going to be lower than expected, that counts as bad news, and investors can expect the share price to fall!

The COVID-19 problem, as it pertains to the U.S. stock markets, is compounded by the fact that the S&P 500 index had risen about 12% since October. That’s a very big move for a market index in a short period of time, and as such, the market was overdue for a price correction, regardless of the existence of COVID-19. The price correction has arrived.

Typically, there will be days, early on during a price correction, in which the market rises and investors are enthused. Those days are then followed by more bearish days. The downturn might only last for a few weeks, followed by a period of sideways trading as the market gets its bearings. Please be assured that I will offer you attractive growth stocks and dividend stocks, as soon as the market calms down.

Buy, Sell or Hold?
I’ve heard from a variety of investors this week. Their emotions and investment strategies are running the gamut from “Is it time to start buying stocks?!” to “Should I sell my stocks?!”

I am going to presume that you are an investor who’s invested in high quality companies, not a day trader who’s simply seeking momentum. While it is true that investors might take precautions prior to a stock market correction—paring back positions in overvalued or overextended stocks, raising cash, and/or using stop-loss orders—an investor would not sell after their stocks have fallen. Once a good stock has fallen, it’s essentially “on sale.” It’s far more prudent to “buy low” on high-quality, fallen stocks than it is to cash them in. There are, of course, exceptions. During a market correction, you might sell shares of a great company that’s been out of favor, such as ExxonMobil (XOM), and move that money into shares of a great company that’s been exhibiting more of a thriving share price, like Apple Inc. (AAPL). But generally speaking, if you ask me, “Should I sell my shares in this company that’s delivering growing revenues and profits?”, my answer is always going to be, “No. Why would you want to do that?” If the answer is, “I want to sell this stock because the market’s falling and I’m scared,” I want to encourage you to do two things:

1) Hold your high-quality stock and let the market recover, which generally happens within a few months of the downturn.

2) Right now, while you’re very uncomfortable, please write down the changes to your investment strategy that you ought to make the next time the market is near a high. If you’re wildly uncomfortable right now, you don’t really want to relive this experience, right? So examine your investment strategy, and change it a bit. The change might be small: “I will increase my cash position so that I can add to my excellent stocks the next time they’re on sale.” Or the change might be huge: “I am so done with the stock market! From now on I’m putting my money into [real estate, bonds, stock mutual funds, etc.].”

For those of you who are excitedly asking me, “Is it time to buy??!!”, my answer is, “Let’s allow the market indexes to stop falling first.” Once the indexes stop falling, they will then generally trade sideways for a bit before showing a readiness to rise. You’re not going to need to make a quick buying decision this week. Take your time, study, and think about which stocks you’d like to add to your portfolio. Then buy the ones with the more bullish price charts … not the ones that plummeted the most. Those plummeting stocks will take far longer to deliver capital gains than the stocks that didn’t fall as much.

Despite unnerving market corrections, the average annualized return on the 100+ stocks that have been bought and then sold within these portfolios has been a little over 15%.

Send questions to Crista@CabotWealth.com.

PORTFOLIO NOTES
Be sure to review the Bulletins from February 20 and 24 in which I mentioned news, rating changes and/or price action on Blackstone Group Inc. (BX), Designer Brands (DBI), Direxion Daily S&P 500® Bear 3X Shares (SPXS), Direxion Daily Semiconductor Bear 3X Shares (SOXS), LGI Homes (LGIH), Marathon Petroleum (MPC) and Mosaic Company (MOS).

Quarterly Earnings Release Calendar
February 26 pm: Equitable Holdings (EQH) – 4Q
February 27 am: Quanta Services (PWR) – 4Q

Earnings Season Scorecard
Big earnings beat: Amazon.com (AMZN), Blackstone Group (BX), Citigroup (C), Corteva (CTVA), Dow Inc. (DOW), General Motors (GM), LGI Homes (LGIH), Marathon Petroleum (MPC), Mercury General Group (MCY), Schlumberger (SLB) and Universal Electronics (UEIC).
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) and Mosaic (MOS).

TODAY’S PORTFOLIO CHANGES
Abercrombie & Fitch (ANF) moves from Strong Buy to Hold.
Baker Hughes (BKR) moves from Buy to Hold.
Broadcom (AVGO) moves from Strong Buy to Hold.
General Motors (GM) moves from Strong Buy to Hold.
Guess?, Inc. (GES) moves from Strong Buy to Hold.
Total SA (TOT) moves from Strong Buy to Hold.
Tyson Foods (TSN) moves from Strong Buy to Hold.
VanEck Vectors Oil Refiners ETF (CRAK) moves from Strong Buy to Hold.
Voya Financial (VOYA) moves from Buy to Hold.

RECENT PORTFOLIO CHANGES
Blackstone Group (BX) moved from Hold to Retired.
Corteva (CTVA) moved from Hold to Retired.
Direxion Daily S&P 500® Bear 3X Shares (SPXS) joined the Special Situation & Movie Star Portfolio as a Strong Buy.
Direxion Daily Semiconductor Bear 3X Shares (SOXS) joined the Special Situation & Movie Star Portfolio as a Strong Buy.
Goldman Sachs Group (GS) moved from Buy to Hold.
LGI Homes (LGIH) moved from Buy to Hold.
Marathon Petroleum (MPC) moved from Buy to Strong Buy.
Mercury General Group (MCY) moved from Hold to Buy.
MKS Instruments (MKSI) joined the Growth Portfolio as a Strong Buy.
Netflix (NFLX) moved from Hold to Buy.

Updates on Growth Portfolio Stocks

Adobe Systems (ADBE) is a software company that’s changing the world as an innovative leader in digital media and digital marketing. Investors may tune in to the February 12 webcast of management’s presentation at the Goldman Sachs Technology and Internet Conference 2020.

ADBE is a large-cap aggressive growth stock. Adobe is expected to report $2.23 first quarter EPS, within a range of $2.17-$2.29, and $3.1 billion revenue, on the afternoon of March 12 (November year end). In each of the last five quarters, both revenue and EPS numbers came in higher than the consensus estimates. Analysts expect future EPS to increase by 24.7% and 18.6% in 2020 and 2021, respectively. The 2020 P/E is 38.0.

Fourth quarter 2019 hedge fund reports revealed that Third Point LLC increased their stake in ADBE by 15.2% to 950,000 shares. Last week, UBS raised their price target on ADBE from 360 to 430. The stock rose about 47% from its recent low in October to a new all-time high this month, and is now pulling back with the broader market. My intention is to return ADBE to a Buy recommendation after a pullback. Hold.

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 reported $2.52 fourth quarter EPS yesterday vs. the $2.34 consensus estimate, and $605.6 million revenue, which beat the $585.3 million estimate. LGI Homes was featured in the December and January monthly issues of Cabot Undervalued Stocks Advisor.

LGIH is a small-cap stock. The stock rose past upside price resistance at 88 in early February to a new all-time high of 95 in recent days, then fell about 13% upon the earnings release. (It’s common, though frustrating, that traders dump a stock after the pre-earnings run-up.) I anticipate returning LGIH to a Buy recommendation quite soon. Hold.

Marathon Petroleum (MPC – yield 4.3%) 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. There are five potential catalysts for share price appreciation in 2020:

• Higher margins as Marathon meets industry demand as most of the world’s ships and tankers have switched to ultra-low-sulfur diesel fuel.
• The Speedway retail store spinoff that’s targeted for early fourth quarter 2020.
• A possible purchase of the Speedway retail store chain by the Japanese retail group Seven & I Holdings Co., which owns the 7-Eleven convenience store chain. Seven & I recently confirmed rumors that they are in talks to buy Speedway for $22 billion.
• The strategic review of MPLX LP (MPLX), the midstream energy business for which Marathon is a majority owner, that’s due by the end of March.
• The appointment of a new CEO.

MPC is a greatly undervalued large-cap stock with a solid dividend yield. Full-year EPS are expected to rise 29% in 2020, and the P/E is 8.5. Last week, Citigroup raised their price target on MPC from 67 to 74. The stock is pulling back with the broader market. If MPC falls below 52, hold off on additional purchases until the stock establishes new price support. Strong Buy.

MKS Instruments (MKSI – yield 0.8%) – See comments in the February 19 weekly update. Strong Buy.

Quanta Services (PWR – yield 0.5%) is a leading specialty infrastructure solutions provider serving the utility, energy and communication industries. Their infrastructure projects have meaningful exposure to highly predictable, largely non-discretionary spending across multiple end-markets, including 65% of revenue coming from regulated utility customers. The company is working on a multi-year goal of increasing margins. Quanta Services was featured in the December monthly issue of Cabot Undervalued Stocks Advisor.

PWR is a mid-cap growth stock. Analysts expect Quanta to report fourth quarter EPS of $0.83, within a range of $0.79-$0.85, on the morning of February 27. Full-year profits are expected to grow 14.9% and 19.5% in 2019 and 2020, and the 2020 P/E is 10.4. PWR gradually declined since early November, although there was no apparent bad news, and earnings estimates rose a bit. I’d like the price chart to turn more bullish before recommending new purchases. Hold.

Tyson Foods (TSN – yield 2.3%) 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. Investors are welcome to listen to the February 19 webcast of management’s presentation 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.

Earnings estimates are declining due to the projected effect of the coronavirus as the disruption of commerce in China prevents Tyson from selling their normal amount of chicken products. Analysts are now forecasting EPS to increase 15.6% and 13.6% in 2020 and 2021 (September year end). The 2020 P/E is 11.8. I’m moving TSN from Strong Buy to a Hold recommendation. The share price has eroded enough that the stock is going to have to find support and rest for a while before it rebounds. Hold.

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. Universal Electronics was featured in the February issue of Cabot Undervalued Stocks Advisor.

The company reported record full year 2019 results last week, and is expected to duplicate that feat in 2020. Revenue rose 11% year-over-year and profits rose 48%. Investors responded by pushing the share price up about 15%. Outstanding debt was reduced by $33.5 million in 2019, with a current balance of $68 million. In 2019, the company rebalanced product lines to a higher-margin product mix, and expects to continue that process in 2020.

A portion of Universal Electronics’ manufacturing takes place in three cities in China, with the larger amount of production occurring in Mexico. CEO Paul Arling guided analysts toward first quarter expectations of $170-$180 million revenue and $0.90-$1.00 EPS, excluding any impact from COVID-19. (Mr. Arling estimates that up to $10 million of first quarter net sales, and up to 12-15 cents of EPS, could be pushed into the second quarter, due to delays associated with the virus.)

There was a delay in restarting the China factories after the Lunar New Year holiday due to the virus epidemic, but all three factories have restarted production. There were no known cases of the virus among Universal Electronics’ labor force, no apparent constraint on incoming supplies, and 95% of their vendors are up and running. The company is taking steps to secure cargo capacity for product shipments to Japan and Korea. Shipments from the Mexico production facility to North American customers have not been affected.

UEIC is a volatile, undervalued, micro-cap growth stock, appropriate for risk-tolerant investors and traders. The stock has been moving in an opposite direction from the broader market, falling in recent months (after a huge 2019 run-up), then rising in recent days. Watch for opportunities to buy between 45-50, but if UEIC falls below 44, leave it alone for the time being until it settles into a new trading pattern. Buy.

Voya Financial (VOYA – yield 1.0%) is a U.S. retirement, investment and insurance company serving 13.8 million individual and institutional customers. Voya has $603 billion in total assets under management and administration. Management will present at the Citi 2020 Asset Managers, Broker Dealer, Exchanges and Insurance Investor Conference on February 25 and the 2020 Credit Suisse Financial Services Forum on February 27.

VOYA is a mid-cap growth stock. Full-year 2020 and 2021 profits are expected to grow aggressively at 39.1% and 33.1%, and the P/E is 13.0. I’m moving VOYA from Buy to a Hold recommendation. VOYA rose above short-term price resistance at 63 last week, touching upon a new all-time high, and is now pulling back with the broader market. My intention is to return VOYA to a Buy recommendation after the price chart turns more bullish. Hold.

Updates on Growth and Income Portfolio Stocks

Broadcom (AVGO – yield 4.5%) 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. Broadcom is expected to report $5.34 first quarter EPS, within a range of $4.71-$6.16, and $6.0 billion revenue, within a range of $5.6-$6.3 billion, on the afternoon of March 12. Full year profits are expected to grow 9-10% per year in 2020 and 2021 (November year end). Investors should expect Broadcom – and all businesses that sell products to China or source product components from China – to guide this year’s revenue and profit expectations downward, causing disturbances in share prices. I’m moving AVGO from Strong Buy to a Hold recommendation due to the market correction. My intention is to return AVGO to a Buy recommendation after the price chart turns more bullish. Hold.

Dow Inc. (DOW – yield 6.3%) – See comments in the February 19 weekly update. Buy.

Goldman Sachs Group (GS – yield 2.3%) – See comments in the February 19 weekly update. Hold.

GUESS?, Inc. (GES – yield 2.4%) 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. GES is a greatly undervalued, aggressive growth, small-cap stock. Analysts expect EPS to grow 39% and 26% in fiscal 2020 (January 2020 year end) and 2021. The fiscal 2021 P/E is 10.9. The stock has fallen alongside the correction in the broader market. I’m moving GES from Strong Buy to a Hold recommendation until the price chart improves. Hold.

Total S.A. (TOT – yield 6.7%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. Fourth quarter results featured strong performance in all business segments. Analysts are projecting EPS and revenue to rise 24.0% and 7.6% in 2020, respectively. The 2020 P/E is 8.2. I’m changing my recommendation on TOT from Strong Buy to Hold, due to the market correction. My intention is to return TOT to a Buy recommendation after the price chart turns more bullish. Hold.

Updates on Buy Low Opportunities Portfolio Stocks

Abercrombie & Fitch (ANF – yield 5.5%) is a specialty retailer of Abercrombie & Fitch (a.k.a. A&F), abercrombie kids, and Hollister brand apparel and accessories for men, women and kids. The company temporarily closed some stores in the city of Wuhan, China during the coronavirus outbreak. Profits fell in 2019, and are expected to rise 79% in fiscal 2020 (January 2021 year end). The P/E is 12.0. Abercrombie is expected to report $1.24 fourth quarter EPS, within a range of $1.16-$1.31, on the morning of March 4. I’m moving ANF from Strong Buy to a Hold recommendation during the market correction. It’s not time to buy yet. Hold.

Alexion Pharmaceuticals (ALXN) has fallen to price support at 95, where it also bounced in September and October 2019. With each bounce, it turned upward immediately. I’m going to leave my Strong Buy recommendation in place, with the caveat to hold off on purchases if the stock falls below 95. See recent comments in the February 5 monthly issue. Strong Buy.

Baker Hughes Company (BKR – yield 3.8%) moves from Buy to a Hold recommendation amidst price weakness related to oil price and stock market corrections. See recent comments in the February 5 monthly issue. Hold.

Designer Brands Inc. (DBI – yield 7.0%) 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. This spring, Designer Brands will debit the JLO JENNIFER LOPEZ collection, a line of footwear and handbags that will be sold exclusively at DSW Designer Shoe Warehouse stores in the United States and Canada, and online at DSW.com.

Consensus earnings estimates project EPS falling 8.4% in fiscal 2019 (January 2020 year end) and growing 19.7% in 2020. The 2020 P/E is low at 7.9. Fourth quarter results will be reported March 17. Last week, CEO Roger Rawlins reaffirmed his previously stated full year 2019 earnings guidance, and the stock reacted well. DBI is an undervalued, small-cap stock with a huge dividend yield. The stock has held price support well during this market correction. Investors who buy now will lock in a very large dividend yield, and benefit from the price recovery as the broader market recovers. Strong Buy.

General Motors (GM – yield 4.7%) moves from Strong Buy to a Hold recommendation amidst price weakness related to the market correction. See comments in the February 19 weekly update. Hold.

Mercury General Group (MCY – yield 5.2%) – See comments in the February 19 weekly update. Buy.

Mosaic Company (MOS – yield 1.1%) – See recent comments in the February 20 bulletin. Hold.

Updates on Special Situation & Movie Star Portfolio Stocks

Amazon.com (AMZN) – Amazon’s innovations and forays into new industries are seriously disrupting established global businesses, including freight companies, retailers, entertainment and technology companies. See the January 31 Bulletin in which I discussed Amazon.com’s tremendously profitable fourth quarter. Growth in Prime membership, Prime Video viewer hours, revenue and free cash flow also pleased investors. Analysts expect EPS to grow 25% and 40% in 2020 and 2021. The P/E is 69.2. AMZN rose to a new high this month and is now pulling back with the broader market. This will be a fantastic stock to buy once the market settles down. Hold.

Direxion Daily S&P 500® Bear 3X Shares (SPXS) joined the Special Situation & Movie Star Portfolio as a Strong Buy on February 24. Strong Buy.

Direxion Daily Semiconductor Bear 3X Shares (SOXS) joined the Special Situation & Movie Star Portfolio as a Strong Buy on February 24. Strong Buy.

Equitable Holdings (EQH – yield 2.4%) has $701 billion in assets under management through 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. Equitable is expected to report fourth EPS of $1.18, within a range of $1.10-$1.25, and $3.4 billion revenue, within a range of $3.2-$3.5 billion, on the afternoon of February 26. The 2020 P/E is extremely low at 5.0. EQH rose to a new all-time high this month, and is now pulling back toward price support at 23.5-24 with the correction in the broader market. This stock is a very attractive bargain, but if the price falls below support, hold off on additional near-term purchases. Strong Buy.

Netflix (NFLX) is the world’s leading streaming entertainment service with over 167 million paid memberships in over 190 countries. Viewers can enjoy unlimited access to TV series, documentaries and feature films across a wide variety of genres and languages, all without commercial interruptions. The company is enjoying rapid international subscription growth while creating original foreign language content for international markets. Netflix was featured in the January 22 issue of Cabot Undervalued Stocks Advisor.

Revised consensus estimates point to EPS increasing 46% and 40% in 2020 and 2021, respectively. The P/E is 61. I believe Netflix is one of the rare companies that stands to benefit from the coronavirus quarantines. I don’t think there’s much downside risk past 340, especially vs. the broader market. NFLX has upside resistance at 380 and 420. 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 energy companies 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. For now, though, oil prices and energy stocks are down due to the economic impact of the coronavirus epidemic and the stock market correction. I’m therefore moving CRAK from Strong Buy to a Hold recommendation until these markets are ready to turn upward. Hold.