OIL PRICES AND U.S. STOCKS ARE REACTING TO THE GLOBAL BUSINESS LOCKDOWN
This Weekly Update was completed at midday yesterday, so I don’t have much more to add to yesterday’s Bulletin, in which I cautioned investors to expect a possible retest of the March lows in U.S. stock markets. That’s because oil prices took a shocking fall on Monday, and it’s natural that investors would respond with a bearish attitude toward global economies and stocks. As I write, West Texas Intermediate crude oil fell from about $20 at Monday’s close to $12 midday on Tuesday.
All of our portfolio stocks move to a Hold recommendation while U.S. stock markets react to turmoil in energy markets. I expect more downside to U.S. stocks in the coming days. Depending on the severity of the stock market’s reaction, the S&P 500 index could fall to support levels at about 2,650, 2,450 or 2,200.
I’ve recently encountered situations where a few investors “read between the lines” on information that I published, making assumptions about “what Crista is really suggesting in this situation.” Please don’t read between the lines. If I didn’t specifically say it, then I probably didn’t intend it. When in doubt, send an email to Crista@CabotWealth.com. And by the way, I almost always work between 7:00 – 10:00 PM MT, so feel free to contact me then.
EARNINGS SEASON
First quarter earnings season is upon us. As you ponder how the stock market will react to various earnings reports, here’s the most important thing to keep in mind during this particular COVID-19-affected earnings season. Stocks tend to react strongly to surprises during earnings season. Since everybody on Wall Street, and most middle-schoolers, already know that companies’ revenues and profits are being harmed by the global business shutdown, that’s not a surprise. Investors’ concerns about first quarter revenue and profits are already built into the share prices. In fact, the upcoming poor performance numbers related to the global recession are exactly why the stock market fell so far in March.
The more important information that investors will watch for is that of corporate outlooks, as expressed by CEOs on the earnings conference calls. It’s easy to sign up to listen to the live conference calls. Just visit the Investor Relations page of the companies that you care about. Click on the tool bar tab that reads “Events and Presentations”. You’ll quickly find an announcement about the date and time of any company’s upcoming earnings conference call. Click on that link when you’re ready to listen, whether live or during a replay of the webcast. They’ll ask you what company you work for, but I’ve never heard of an investor being rejected, so they’re not actually screening who gets to listen and who doesn’t.
At the end of management’s presentation, there’s a Q&A with Wall Street analysts. This can be extremely informative. You’ll hear whether the analysts are greatly relieved or worried by management’s statements. You’ll hear several analysts ask questions about the same topic, and that will inform you as to what Wall Street’s biggest focus is as they worry or enthuse about the company’s recent results and future prospects.
For more thorough descriptions of our portfolio stocks, please refer to the April issue of Cabot Undervalued Stocks Advisor.
PORTFOLIO NOTES
Be sure to review the Bulletins from April 16, 17, 20 and 21 in which I mentioned news, rating changes and/or price action on Adobe Systems (ADBE), Advanced Micro Devices (ADM)*, Alexion Pharmaceuticals (ALXN), Alphabet (GOOGL)**, Amazon.com (AMZN), Applied Materials (AMAT)***, Brunswick (BC)**, Chart Industries (GTLS)**, FedEx (FDX)*, Kansas City Southern (KSU)***, Lam Research (LRCX)*, L3Harris Technologies (LHX)***, MKS Instruments (MKSI), Netflix (NFLX), NVIDIA (NVDA), Sanderson Farms (SAFM)* and Tyson Foods (TSN).
*Not featured in any of my published portfolios.
**Featured in Cabot’s 10 Best Stocks to Buy and Hold for 2020.
***Featured in my March 18 webinar.
QUARTERLY EARNINGS RELEASE CALENDAR
April 21 pm: Netflix (NFLX) – 1Q
April 22 am: Baker Hughes (BKR) – 1Q
April 28 pm: MKS Instruments (MKSI) – 1Q
April 30 am: Dow Inc. (DOW) and Total SA (TOT) – 1Q
April 30 pm: Amazon.com (AMZN) and Apple (AAPL) – 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 5 pm: Voya Financial (VOYA) – 1Q
May 6 am: Alexion Pharmaceuticals (ALXN) and General Motors (GM) – 1Q
May 7 am: Bristol-Myers Squibb (BMY) – 1Q
May 7 pm: Equitable Holdings (EQH) – 1Q
first half May: NV5 Global (NVEE), Nvidia (NVDA), Quanta Services (PWR) and Universal Electronics (UEIC) – 1Q
second half May: Abercrombie & Fitch (ANF) and Designer Brands (DBI) – 1Q
first half June: Guess? Inc. (GES) – 1Q; Adobe Systems (ADBE) and Broadcom (AVGO) – 2Q
Today’s Portfolio changes
All stocks move to a Hold recommendation while U.S. stock markets react to turmoil in energy markets.
Growth Portfolio
LGI Homes (LGIH) is the tenth largest residential home builder in America. Analysts expect EPS to grow 0.7% and 11.0% in 2020 and 2021, respectively. LGIH is a small-cap stock that rose over 60% from its April low to its April high; recently trading between 45-55. Hold.
Marathon Petroleum (MPC – yield 9.3%) is an integrated downstream energy company. Energy prices became extremely unstable this week. The situation will remain problematic until countries emerge from lockdown and resume commerce. I saw several major investment firms go bullish on oil refining companies, including Marathon Petroleum, just prior to Monday’s severe drop in oil prices. Hold.
MKS Instruments (MKSI – yield 0.9%) will report first quarter results on the afternoon of April 28. MKSI is an undervalued, small-cap growth stock, appropriate for growth investors and traders. Hold.
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. Profits are expected to grow 29% and 12% in 2020 and 2021, respectively. NVEE is an undervalued micro-cap stock, appropriate for risk-tolerant growth investors and traders. Hold.
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 9.9% and 10.7% EPS growth in 2020 and 2021. Hold.
Tyson Foods (TSN – yield 2.7%) – TSN is an undervalued stock, attractive for growth investors, dividend investors and traders. Analysts are now forecasting EPS to increase 12.6% and 11.1% in 2020 and 2021 (September year end). Hold.
Universal Electronics (UEIC) filed a request with the U.S. International Trade Commission on April 16, asking the agency to investigate a variety of companies that might be participating in unfair trade practices with regard to intellectual property, as outlined in Section 337 of the Tariff Act of 1930, as amended. UEIC is a microcap growth stock. Hold.
Voya Financial (VOYA – yield 1.5%) 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 an undervalued, mid-cap growth stock. Earnings estimates reflect aggressive growth rates of 29% and 37% per year in 2020 and 2021, respectively. VOYA is appropriate for growth investors. Hold.
Growth & Income Portfolio
Bristol-Myers Squibb Company (BMY – yield 3.0%) – This week, Bristol-Myers reported that CheckMate -743, a pivotal Phase 3 trial evaluating Opdivo ® in combination with Yervoy ® in previously untreated malignant pleural mesothelioma (MPM), met its primary endpoint of overall survival (OS). Read more in the press release. The company also announced, in partnership with Exelixis (EXEL), that CheckMate -9ER, a pivotal Phase 3 trial evaluating Opdivo ® in combination with CABOMETYX® compared to sunitinib in previously untreated advanced or metastatic renal cell carcinoma (RCC), met its primary endpoint of progression-free survival (PFS) at final analysis, as well as the secondary endpoints of overall survival (OS) at a pre-specified interim analysis, and objective response rate (ORR). (Read more in the press release.) Bristol-Myers was featured in the April issue of Cabot Undervalued Stocks Advisor. The company is expected to increase EPS by 32% and 20% in 2020 and 2021. BMY is appropriate for growth investors, traders and income investors. Hold.
Broadcom (AVGO – yield 5.2%) is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. CFO Tom Krause 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. AVGO is an undervalued growth & income stock. Profits are expected to grow 1.5% and 10.1% in 2020 and 20212. Hold.
Dow Inc. (DOW – yield 9.2%) 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. This month, Dow declared their regular quarter dividend of $0.70 per share. The consensus earnings outlook came down dramatically in March due to business disruptions associated with the coronavirus. Analysts now expect full-year EPS of $2.10 and $2.90 in 2020 and 2021. Dow will report first quarter results on the morning of April 30. Hold.
Total S.A. (TOT – yield 9.4%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. Total will report first quarter results on the morning of April 30. The energy industry is suffering greatly due to the global economic lockdown. Be cautious with energy stocks until business opens up again and we can fully assess the balance sheet damage. Hold.
Buy Low Opportunities Portfolio
Abercrombie & Fitch (ANF – yield 8.1%) – Be aware that all retail stocks carry magnified risk this year, as the private sector economy has been assaulted by the corona virus lockdowns. Abercrombie is now expected to take a net loss in fiscal 2020 (January 2021 year end). Hold.
Alexion Pharmaceuticals (ALXN) – This week, Alexion announced plans to initiate a global Phase 3 study to investigate Ultomiris in “adults with COVID-19 – those who are hospitalized with severe pneumonia or acute respiratory distress syndrome (ARDS).” The company is expected to grow profits by 5% and 8% in 2020 and 2021. ALXN is an undervalued growth stock that has recently shown strength via its post-market correction rebound. Hold.
Apple Inc. (AAPL – yield 1.2%) – Yesterday, Reuters reported that Apple notified several suppliers that they plan to make about 213 million iPhones in the 12 month period through March 2021, up 4% from the same period a year ago. Apple will report second quarter results on the afternoon of April 30 (September year end). The company typically announces a dividend increase and a new share repurchase authorization annually during the April earnings release. 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.
AAPL is a great long-term growth stock, currently expected to grow profits 4.7% and 19.8% in 2020 and 2021 (September year end). As I did in mid-March, near the market bottom, I will alert you to a good near-term opportunity to buy AAPL on the next pullback. Hold.
Baker Hughes Company (BKR – yield 5.7%) expects to take a $15 billion non-cash Goodwill impairment charge within their first quarter results, which will be reported on the morning of April 22. Hold.
Designer Brands Inc. (DBI – yield 8.0%) – DSW embarked on a new partnership in which they will sell shoes in Hy-Vee supermarkets. Be cautious. Designer Brands is a fantastic company, but retailers have been greatly wounded by the global business shutdown. Dividend and growth opportunities will fade, the longer the quarantines remain in place. Hold.
General Motors (GM – yield 7.1%) – The Motley Fool reported on April 18, “General Motors blew past Ford Motor (F) to retake the top spot in the U.S. pickup market last quarter, driven by a 27% year-over-year jump in Chevy Silverado deliveries.” Earnings projections continue to decline. Analysts now expect EPS of $2.48 and $4.63 in 2020 and 2021. The annual dividend payout is $1.52, with a current yield of 7.1%. Last week, Goldman Sachs initiated research coverage on GM with a neutral rating and a 24 price target. Hold.
Mercury General Group (MCY – yield 6.2%) is a property & casualty insurance company, with a business focus on car insurance in 11 U.S. states, especially in California. The company is faring well during the global virus pandemic. Mercury General Group was featured in the April issue of Cabot Undervalued Stocks Advisor. In recent weeks, Mercury’s consensus earnings estimates for 2020 have risen, likely because the company is expected to pay out far less money in car accident claims due to quarantine behaviors. Last week, estimates for 2021 came down a bit. The company is now expected to deliver EPS of $3.61 and $3.45 in 2020 and 2021. Those are certainly very attractive numbers, but I do prefer to invest in companies where annual profits are on an uptrend. I’ll watch for changes in those numbers during the first quarter earnings conference call. Hold.
Special Situation AND MOVIE STAR PORTFOLIO
Adobe Systems (ADBE) is a growth stock in the software industry, appropriate for long-term growth investors and traders. Analysts are expecting profits to grow 24% and 15% in 2020 and 2021. On April 8 and 9, an insider purchased $3.3 million of ADBE stock. Hold.
Amazon.com (AMZN) was featured in the April issue of Cabot Undervalued Stocks Advisor. Amazon.com will report first quarter results on the afternoon of April 30. Wall Street is expecting profits to grow 28% and 40% in 2020 and 2021. AMZN is a high-PE growth stock, appropriate for long-term investors. The stock rose to a new all-time high near 2,450 in recent days. I’ll alert investors to buy AMZN during the next pullback. Hold.
Equitable Holdings (EQH – yield 4.7%) – 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, which hikes the current yield to 4.7%. EQH is appropriate for dividend investors and traders. Citigroup raised EQH from Neutral to a Buy rating on April 17. Hold.
GUESS?, Inc. (GES) – Accurate earnings estimates will not be available until Guess stores reopen and management can assess the financial damage and future outlook. Hold.
Netflix (NFLX) – Investors know that at-home movie watching behaviors increased during the global virus pandemic, resulting in the likelihood that Netflix will report greater-than-normal growth in first quarter new subscribers. (And frankly, international subscriber growth was already fantastic.) However, investors are also worried that the economic lockdowns caused Netflix’s production pipeline to dry up, thereby leading to a scarcity of new programming. The good news is that feature filmmakers, who cannot debut their movies in public theaters during the virus pandemic, are now shopping their wares to Netflix and other streaming service companies. It therefore appears that movie afficionados will likely have uninterrupted fresh movie fare for many months to come. Netflix will report first quarter results on the afternoon of April 21. Wall Street expects profits to grow 48% and 37% in 2020 and 2021.
NFLX is a high-PE growth stock, appropriate for long-term investors. The stock rose to a new all-time high near 450 this month. I intend to move NFLX back to a Buy recommendation upon its next pullback. Hold.
NVIDIA (NVDA – yield 0.2%) – Last week, Chinese authorities approved NVIDIA’s $6.9 billion acquisition of Israeli chip designer Mellanox Technologies Ltd. The acquisition adds to NVIDIA’s data center and artificial intelligence business. Now that all regulatory hurdles have been cleared, the deal is expected to be completed on April 27. NVDA is a high-PE, aggressive growth stock, great for growth investors and traders. Profits are expected to grow 31% and 21% in fiscal 2021 and 2022 (January year end). In recent days, Bank of America raised their price target on NVDA to 360. Hold.
VanEck Vectors Oil Refiners ETF (CRAK) reflects share price activity among oil refining and market stocks. Expect volatility. Hold.
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.