THE 2020 TRADER’S MARKET
I expect to be adding and removing stocks from these portfolios in 2020, more frequently than usual. That’s because when a stock market recovers from a big drop, stocks tend to get stuck in trading ranges, advancing in fits and starts. We have many stocks that are rising today, so I’ll wait a short while before removing any of them.
I reviewed my “Waiting in the Wings” Buy List for a good candidate to add to the portfolios today. The runners-up, based on attractive earnings growth projections and promising price charts, are Anthem (ANTM), Cooper Tire & Rubber (CTB) and L3Harris Technologies (LHX). Add them to your research list, because they’re excellent stocks. The winner of today’s stock selection process is NV5 Global (NVEE), which joins the Growth Portfolio with a Strong Buy recommendation. I chose NVEE because it has the most upside potential and the most bullish price chart. It appears immediately ready to move!
OIL PRICE RECOVERY?
In recent weeks, Saudi Arabia and Russia got into a bit of a feud after Saudi Arabia ostensibly backed away from an OPEC agreement and began increasing oil production while also lowering prices. Russia followed suit, and oil prices suffered. Brent crude oil fell from $65 per barrel in February to $25 per barrel at the end of March. That’s when world leaders stepped in and began talking to each other, especially those from the U.S., Saudi Arabia and Russia, indicating that they might agree to a ceasefire. Oil prices promptly turned upward, carrying energy stock prices with them, as Brent crude closed last week at $34.11 per barrel.
On April 4, Reuters reported, “Western Europe’s largest oil and gas producer Norway said … it would consider cutting its oil production if a global deal to curb supply is agreed by the world’s biggest producers. OPEC and its allies are working on a deal for an oil output cut equivalent to about 10% of world supply in what member states expect will be an unprecedented global effort including the United States.”
Then on April 6, the chief executive at Russia’s sovereign wealth fund, the Russian Direct Investment Fund (RDIF), indicated that Russia and Saudi Arabia would likely meet later this week to iron out their differences, with a goal of stabilizing oil prices. Additional OPEC countries and the U.S. will likely be required to cooperate in production cutbacks before a final agreement is reached.
As of April 7, OPEC+ countries and non-OPEC countries, including Russia and Norway, are scheduled to attend a video conference on April 9, at which time they will reportedly discuss output cuts that will last for three months or longer.
Stock traders have been presented with abundant opportunities among energy stocks.
LIFE INSURANCE, ANNUITY AND INVESTMENT COMPANIES
Ameriprise Financial (AMP) just issued $500 million in senior 3.00% notes due April 2025. The company already had an impressive amount of excess capital, so the question becomes, “What does Ameriprise plan to do with this new influx of capital?” The two answers that quickly come to mind are (1) repurchase their own stock or (2) attempt to acquire an industry peer in the area of life insurance, annuities, retirement benefits and/or investments.
Ameriprise has an $11.1 billion market capitalization. All of the following companies have a significantly lower market cap (most below $5 billion), and they’re also experiencing annual earnings growth: Athene (ATH), Brighthouse Financial (BHF), CNA Financial (CNA), CNO Financial (CNO), Equitable Holdings (EQH), Lincoln National (LNC) and Voya Financial (VOYA). While we’re sitting here debating whether to buy AMP for their potential share buybacks vs. any of their smaller peers for their potential acquisition, there’s a third possible scenario. A large financial company – possibly including a major bank or Berkshire Hathaway (BRK) – could swoop in and buy Ameriprise or any of these other companies.
I continue to recommend that investors own stock in the life insurance/investment industry because the shares are incredibly cheap, their balance sheets are strong and growing, and there’s already a current trend in place of increased M&A activity within this industry group.
ALTERNATIVE ASSET MANAGEMENT COMPANIES
I’m removing alternative asset manager stocks from the list of stocks that I consider owning. After global commerce returns to normal, I will want to assess how badly economies were harmed by quarantine behaviors. Will alternative asset managers have problems with rent collection or with occupancy rates within their real estate holdings? Will the companies they’re invested in be able to continue business as usual, or will they be pushed toward bankruptcy? To what extent will their dividends be at risk, and how much will that matter to investors? I plan to stay abreast of research reports on KKR & Co. (KKR), Carlyle Group (CG), Apollo Global Management (APO) and Blackstone Group (BX), with an expectation to receive important guidance at the time of their second quarter reporting.
QUARTERLY EARNINGS RELEASE CALENDAR
April 21 pm: Netflix (NFLX) – 1Q
April 30 am: Total SA (TOT) – 1Q
second half April: Alexion Pharmaceuticals (ALXN) and Amazon.com (AMZN) – 1Q
May 4 am: Mercury General Group (MCY) – 1Q; Tyson Foods (TSN) – 2Q
May 5 am: LGI Homes (LGIH) and Marathon Petroleum (MPC) – 1Q
May 7 am: Bristol-Myers Squibb (BMY) – 1Q
early May pm: Voya Financial (VOYA) – 1Q
Today’s Portfolio changes
Broadcom (AVGO) moves from Buy to Hold.
Equitable Holdings (EQH) moves from Hold to Strong Buy.
Guess?, Inc. (GES) moves from the Growth & Income Portfolio to the Special Situation and Movie Star Portfolio.
NV5 Global (NVEE) joins the Growth Portfolio as a Strong Buy.
Voya Financial (VOYA) moves from Hold to Strong Buy.
Recent Portfolio changes
Abercrombie & Fitch (ANF) moved from Hold to Buy.
Adobe Systems (ADBE) moved to the Special Situation and Movie Star Portfolio.
Bristol-Myers Squibb (BMY) joined the Growth & Income Portfolio as a Strong Buy.
General Motors (GM) moved from Hold to Buy.
Goldman Sachs Group (GS) moved from Hold to Retired.
MKS Instruments (MKSI) moved from Hold to Strong Buy.
Netflix (NFLX) moved from Strong Buy to Hold.
Quanta Services (PWR) moved from Hold to Buy.
Total SA (TOT) moved from Hold to Buy.
Universal Electronics (UEIC) moved from Hold to Strong Buy.
VanEck Vectors Oil Refiners ETF (CRAK) moved from Hold to Strong Buy.
* A good choice today for investors looking for growth (G), growth & income (DIV) or trading (T).
Growth Portfolio
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 announced 795 homes closed in March 2020, up from 566 home closings in March 2019, representing year-over-year growth of 40.5%. In addition, the Company announced record-breaking quarterly home closings of 1,835 during the first quarter of 2020 compared to 1,228 home closings in the first quarter of 2019, a 49.4% increase year-over-year. Profits are expected to grow 13.8% in 2020, and the P/E is 5.6. LGIH is a small-cap stock that rose to an all-time high in February, then fell in half with the subsequent stock market correction. On April 6, investment firm Wedbush Securities raised their rating on LGIH to Outperform, and the stock rose 20%. The stock is not yet stable. Hold.
Marathon Petroleum (MPC – yield 9.7%; last review April 1) is still my favorite integrated downstream energy company. MPC is appropriate for risk-tolerant traders and dividend investors. It’s profitable, undervalued, provides a big dividend yield (most recently increased in March), and is under pressure to continue improving operations and shareholder returns. Investors can stay abreast of Marathon’s corporate and financial plans on April 29, during the company’s online annual shareholder meeting. The price chart exhibited a stable bottoming pattern in March, and continues to improve. At a share price of 24, I believe the stock could climb 45% to about 35 within a matter of weeks, influenced by both a rebounding stock market and a potential OPEC agreement on oil pricing. Buy.
MKS Instruments (MKSI – yield 0.9%; last review April 1) – MKSI is an undervalued, small-cap growth stock, appropriate for growth investors and traders. The stock is roaring upward from its recent lows. At a share price of 90, there’s 16% upside to short-term price resistance around 105, where traders should exit and growth investors should hold. Strong Buy.
NV5 Global (NVEE) is a leading provider of professional and technical engineering and consulting solutions for public and private sector clients in the infrastructure, construction, real estate, and environmental markets. The company primarily focuses on construction quality assurance, infrastructure, energy, program management, and environmental. NV5 operates out of more than 100 offices nationwide and abroad. NV5 Global joins the Growth Portfolio today with a Strong Buy recommendation. NV5 Global was featured in Cabot’s Top 10 Buy and Hold Stocks for 2020.
NV5 is awarded several new business contracts each month, as itemized here on the company’s website. The company makes frequent acquisitions, with 2019 being their busiest year ever, bringing on several companies in the second and third quarters. That resulted in temporarily higher legal and accounting expenses and just 5% EPS growth in 2019. But overall, NV5 has delivered aggressive revenue and earnings growth over the last five years. Profits are expected to grow 29% and 17% in 2020 and 2021, respectively, and the 2020 P/E is 10.2. The company’s M&A pipeline remains full of opportunities. NVEE is a micro-cap stock, appropriate for risk-tolerant growth investors and traders. At a share price of 42, there’s 67% upside as NVEE travels back to its February high of 70. Strong Buy.
Quanta Services (PWR – yield 0.6%) 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 achieved record annual revenues, operating income and backlog in 2019, and is pursuing a multi-year goal of increasing margins. Quanta Services was featured in the December monthly issue of Cabot Undervalued Stocks Advisor.
PWR is an undervalued, mid-cap growth stock; attractive for growth investors and traders. Earnings estimates came down a little in recent weeks, currently reflecting 10.2% and 9.0% EPS growth in 2020 and 2021. The 2020 P/E is 8.3. Quanta announced their next normal dividend payment on March 26; therefore, we know the dividend is not in danger. The stock is rising, with upside resistance at 37 and 40. Buy.
Tyson Foods (TSN – yield 2.8%; last review April 1) – TSN is an attractive stock for growth investors, dividend investors and traders. Analysts are now forecasting EPS to increase 13.4% and 12.3% in 2020 and 2021 (September year end). The 2020 P/E is 8.7. The stock is rising, with 18% upside to short-term price resistance at 70. Strong Buy.
Universal Electronics (UEIC; last review April 1) – The stock rose 13% on April 6. The price chart appears orderly and constructive. There’s 11% upside to short-term price resistance around 44, where traders should exit and growth investors should hold. Strong Buy.
Voya Financial (VOYA – yield 1.4%) 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. VOYA is a mid-cap growth stock. The company has “a substantial level of excess capital”, as per a major investment bank’s comments in March. Earnings estimates reflect very aggressive growth rates of 33% and 35% per year in 2020 and 2021, respectively. The P/E is very low in comparison at 9.1.
VOYA is appropriate for growth investors. VOYA rose to a new all-time high in February, then fell with the broader market. I’m moving VOYA from Hold to a Strong Buy recommendation now. The price chart is erratic, so please expect volatility, and have the confidence to accumulate shares on pullbacks. Strong Buy.
Growth & Income Portfolio
Bristol-Myers Squibb Company (BMY – yield 3.1%; last review April 1) – On April 3, Bristol-Myers Squibb and Acceleron Pharma (XLRN) announced the FDA has approved Reblozyl®, the first and only erythroid maturation agent (EMA), for the treatment of a specific type of anemia patient. During the clinical trial, the end goal of alleviating the frequency of patients’ red blood cell transfusions was successfully reached. Bristol-Myers was featured in the April issue of Cabot Undervalued Stocks Advisor.
BMY is appropriate for growth investors, traders and income investors. On April 2, Morgan Stanley raised their rating on BMY to Overweight with a price target of 64; and on April 6, Seeking Alpha highly recommended the stock as well. At a share price of 57.80, BMY has 16% upside to its February high of 67. Strong Buy.
Broadcom (AVGO – yield 5.0%) is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. Oppenheimer analyst Rick Schafer declared that Broadcom’s dividend is safe after speaking to Broadcom CFO Tom Krause, who expects to both continue paying the dividend and paying down debt in 2020 (none of which is maturing this year), even under poor economic conditions. Share buybacks and M&A activity are now on the back burner. Broadcom was featured in the December 17 and January issues of Cabot Undervalued Stocks Advisor.
In a stunning reversal, AVGO rapidly rose from a recent low of 165 to the current 261. Last week, Bank of America Global Research raised their price target on AVGO to 305. I’m moving AVGO from Buy to a Hold recommendation. I expect the run-up to stop at 280 (or sooner), at which time investors can expect a pullback as AVGO digests this large move. Hold.
Dow Inc. (DOW – yield 8.3%) is a commodity chemicals company with manufacturing facilities in 31 countries. Dow derives roughly 50% of profits from its polyethylene business. Management is focused on cost-cutting, debt repayment and returning cash to shareholders. Note that the CEO and two Directors bought DOW shares on March 12 and 13 during the worst of the market downturn. The company will host their annual meeting on April 9. The consensus earnings outlook came down dramatically in March due to business disruptions associated with the coronavirus. A rebound in oil prices could benefit both the earnings outlook and the share price. Analysts now expect full-year EPS of $2.32 and $3.02 in 2020 and 2021. The 2020 P/E is 13.2.
DOW is appropriate for dividend investors and traders. At a share price of 34.80, there’s 15% upside to short-term resistance at 40, where I will review DOW’s position in the Growth & Income Portfolio. Buy.
Total S.A. (TOT – yield 8.1%) 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. This week, Total and their joint venture partner Apache Corp. announced their second significant year-to-date oil discovery off the coast of Suriname, in South America. In March, the company announced a suspension of their share buybacks during the current global economic disruption. Oil prices and energy stocks are on the mend, partly because they were drastically oversold during the stock market downturn, and partly because oil-producing countries are now negotiating proactively to stabilize oil prices.
TOT is appropriate for dividend investors and traders. After recently rising from 24 to 40, TOT is now resting in the upper 30s, with 25% upside to short-term resistance at 47. Buy.
Buy Low Opportunities Portfolio
Abercrombie & Fitch (ANF – yield 7.7%; last review April 1) – I have a Buy recommendation on ANF for traders and income investors. The next ex-dividend date will be in June. (Growth investors should stick with companies that are still expected to grow their profits in 2020 and 2021.) The stock is rebounding from its March lows, where it bounced three times – a constructive price chart pattern. At a share price of 10.60, there’s 30% upside to price resistance near 14, where the stock will likely pause and pull back. Buy.
Alexion Pharmaceuticals (ALXN; last review April 1) – ALXN is appropriate for traders. There’s about 9% upside as the stock continues its rebound toward price resistance at 105. Buy.
Apple Inc. (AAPL – yield 1.2%; last review April 1) – The company typically announces a dividend increase and a new share repurchase authorization annually, in late April. The last quarterly dividend increase was 5.5%, from 73 cents to 77 cents, and the last two repurchase announcements amounted to $75 billion and $100 billion. At a share price of 265, there’s 13% upside to price resistance at about 300. I recommend that growth investors build a position in AAPL. Strong Buy.
Baker Hughes Company (BKR – yield 5.6%; last review April 1) – Oil prices and energy stocks are on the mend, partly because they were drastically oversold during the stock market downturn, and partly because oil-producing countries are now negotiating proactively to stabilize oil prices. Share prices of oilfield service companies (like BKR) will likely recover from the stock and oil price downturns more slowly than those of oil majors and oil refiners. The stock has begun its recovery, rising 13% on April 6 and another 8% on the morning of April 7. There’s upside price resistance at 17. Hold.
Designer Brands Inc. (DBI – yield 8.4%; last review April 1) – Be cautious. Dividend and growth opportunities will fade, the longer the quarantines remain in place. Nimble traders can likely profit this month as the share price likely bounces between 4-7. Buy.
General Motors (GM – yield 7.1%; last review April 1) – Earnings projections continue to decline. Analysts now expect EPS of $3.44 and $4.81 in 2020 and 2021. The annual dividend payout is $1.52, with a current yield of 7.1%. My Buy recommendation on GM is for traders. I don’t think buy-and-hold investors or income investors should be buying GM right now, because the auto industry could be harmed for several years as a result of this economic shutdown. In that light, the dividend is not “safe” even though the company has plenty of cash to pay the dividend today. The stock can probably rise to 28 fairly easily, and I’ll reassess thereafter. Buy.
Mercury General Group (MCY – yield 6.3%; last review April 1) was featured in the April issue of Cabot Undervalued Stocks Advisor. MCY is appropriate for growth investors, dividend investors and traders. The stock is now recovering from the downturn. Once MCY surpasses 41, there’s additional price resistance at 45. Buy MCY now. Strong Buy.
Special Situation and Movie Star Portfolio
Adobe Systems (ADBE; last review April 1) will host their annual meeting of shareholders on April 9. ADBE is appropriate for long-term growth investors and traders. The share price showed far more stability than most other stocks during March. When the stock surpasses 335, it could rise to 360 before pausing again. Buy ADBE now. Strong Buy.
Amazon.com (AMZN; last review April 1) was featured in the April issue of Cabot Undervalued Stocks Advisor. AMZN is appropriate for long-term growth investors. The stock emerged from a trading range this week. At a share price of 2,025, there’s 7% upside to its February high near 2,170, where it will surely rest for a while. Strong Buy.
Equitable Holdings (EQH – yield 3.9%; last review April 1) – The company preannounced that the second quarter dividend, with an ex-date in late May, will increase from 15 cents to 17 cents per share. EQH is appropriate for dividend investors and traders. On April 1, Credit Suisse raised their rating on EQH to Outperform. The stock appears ready to begin its rebound, without lingering any longer near 13. I’m moving EQH from Hold to a Strong Buy recommendation. Take advantage of pullbacks! At a share price of 15, there’s 40% upside to price resistance at 21. Strong Buy.
GUESS?, Inc. (GES; last review April 1) – I’m moving Guess from the Growth & Income Portfolio into the Special Situation and Movie Star Portfolio, because the company suspended the dividend. Additionally, accurate earnings estimates will not be available until Guess stores reopen and management can assess the financial damage and future outlook. I’m leaving the Buy rating intact for traders. The stock rose 18% on April 6 and another 19% on the morning of April 7 as the market became bullish on the idea that retailers will soon reopen their stores. I’ll remove the stock from the portfolio when the run-up ceases, perhaps near 10 or 14, then await second quarter results, which should provide more clarity. Buy.
Netflix (NFLX; last review April 1) – The company will report first quarter results on the afternoon of April 21. I expect another good year for Netflix revenue and profits. Global quarantine behaviors are resulting in much more home entertainment activities among the populace, especially movies and computer games. I therefore expect a first-half 2020 surge in international subscriber growth, which was already moving along at a brisk pace.
NFLX is appropriate for long-term investors. NFLX is the first of our stocks to rebound from the market downturn and approach its February peak. I expect the stock to continue pausing here while it gathers strength for its next run-up. I intend to move NFLX back to a Buy recommendation upon either a pullback or the eventual breakout. While I do believe that 2020 will hand investors a trader’s market, NFLX is one stock that I would definitely hold, adding to the position on pullbacks. There’s longer-term price resistance at 420. Hold.
NVIDIA (NVDA – yield 0.2%; last review April 1) – NVDA is a great stock for growth investors and traders. On April 1, Bank of America Global Research raised their price target on NVDA from 300 to 340. On March 31, Susquehanna raised their price target on NVDA to 330. The price chart is much stronger than the broader market indexes. When NVDA rises past 282, the stock could approach its February all-time high of about 315, where it will surely come to a halt. Strong Buy.
VanEck Vectors Oil Refiners ETF (CRAK; last review April 1) – Oil prices and energy stocks are on the mend, partly because they were drastically oversold during the stock market downturn, and partly because oil-producing countries are now negotiating proactively to stabilize oil prices. CRAK is appropriate for traders. There’s immediate upside in CRAK. Expect volatility. Strong Buy.
Strong Buy and Buy – This stock meets most of my fundamental investment criteria.
Hold – Do not add to your position in this stock until a particular issue is resolved.
Retired – This stock has been removed from the portfolio for a specific reason,
yet remains an attractive holding for long-term investors who would rather minimize portfolio turnover.
Sell – This stock has a problem that increases portfolio risk. Sell it.