TRADING ACTION: SHARE PRICES VS. CORPORATE SUCCESS AND FAILURES
I’ve been receiving questions recently that essentially ask, “Why did this stock go up when the company reported bad news?” and “Why did this other stock go down when the company reported good news?” Those are valid questions that serve to emphasize a point that you frequently hear: over the short-term, a stock price can do literally anything. It can double or fall in half. It can rise when the dividend gets suspended and it can fall when the company announces a very attractive acquisition. There are so many nuances to these varied situations that I couldn’t possibly explain them all without writing a book.
If we can please use Netflix (NFLX) as an example, the stock rose almost 50% from mid-March through mid-April. It’s always abnormal for a stock to move so far, so fast, no matter how successful the company is. You wouldn’t expect your house or your 401(k) account to increase 50% in one month, right? It’s equally unreasonable to have such a thing happen to a stock. Nevertheless, it happened. Congratulations!
When you watch an investment rise rapidly in a short amount of time, please know that the next move is probably going to be down. The stock needs to digest that big run-up and rest for a while. And that’s why NFLX is having a pullback right now. There’s nothing wrong with the company or the stock. In fact, the company had a great first quarter.
Lastly, everything I just said applies in an equal and opposite manner to problematic companies with rising share prices. Literally anything can happen in the short-term. If an entire industry’s stocks fell a lot, then at some point, they’re going to rise again, even if the industry itself is suffering. Granted, they probably won’t rise 50% like Netflix did, and future bad news could easily pull those stocks right back down again.
I recently mentioned that Sanderson Farms (SAFM 140 – yield 0.9%) – not featured in the Cabot Undervalued Stocks Advisor portfolios – would be an attractive near-term investment. The stock has short-term price resistance at 140, so if you were in it for a quick trade, it’s time to exit. If you owned the stock as of the close of business on Monday, April 27, you will have earned the upcoming dividend that’s payable on May 12. Selling the stock now will not stop you from collecting that dividend payment. Sanderson Farms remains an attractive growth stock.
An investor asked me recently to publish a chart of all of the stocks that are currently featured in Cabot Undervalued Stocks Advisor. I meant to do that for you today, but I simply ran out of time. I’ll try to get to it in the May issue, next week.
All share prices listed herein reflect closing prices on April 27, and will likely have since changed from normal daily trading activity. 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 22-23 and 27-28 in which I mentioned news, rating changes and/or price action on Abercrombie & Fitch (ANF), Adobe Systems (ADBE), Alexion Pharmaceuticals (ALXN), AllianceBernstein (AB)*, Alphabet (GOOGL)**, Apple Inc. (AAPL), Baker Hughes (BKR), Chart Industries (GTLS)**, Designer Brands (DBI), Equitable Holdings (EQH), Guess? Inc. (GES), Marathon Petroleum (MPC), MKS Instruments (MKSI), Netflix (NFLX), NVIDIA (NVDA) and VanEck Vectors Oil Refiners ETF (CRAK).
*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 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) and Universal Electronics (UEIC) – 1Q
first half May: NV5 Global (NVEE), Nvidia (NVDA), Quanta Services (PWR) – 1Q
first half June: Adobe Systems (ADBE) and Broadcom (AVGO) – 2Q
Today’s Portfolio changes
Broadcom (AVGO) moves from Hold to Buy.
Equitable Holdings (EQH) moves from Buy to Strong Buy.
LGI Homes (LGIH) moves from Hold to Buy.
NV5 Global (NVEE) moves from Hold to Strong Buy.
LAST WEEK’S PORTFOLIO CHANGES (April 22-28)
April 22 – All stocks moved to Hold recommendations while U.S. stock markets reacted to turmoil in energy markets, followed by these subsequent changes:
Abercrombie & Fitch (ANF) – moved from Hold to Sell.
Adobe Systems (ADBE) – moved from Hold to Buy.
Apple Inc. (AAPL) – moved from Hold to Buy.
Designer Brands (DBI) – moved from Hold to Sell.
Equitable Holdings (EQH) – moved from Hold to Buy.
Guess? Inc. (GES) – moved from Hold to Sell.
Marathon Petroleum (MPC) – moved from Hold to Buy.
MKS Instruments (MKSI) – moved from Hold to Buy.
Nvidia (NVDA) – moved from Hold to Buy.
VanEck Vectors Oil Refiners ETF (CRAK) – moved from Hold to Buy.
Growth Portfolio
LGI Homes (LGIH 52.58) is the 10th largest residential home builder in America. The company is expected to report first quarter EPS of $1.23 and $432.4 million revenue on the morning of May 5. Full-year earnings projections have been declining. Analysts now expect EPS to fall 9% in 2020, then to rise 9% in 2021. I’m moving LGIH from Hold to a Buy recommendation for traders. LGIH is a small-cap stock that appears capable of surpassing short-term price resistance at 55, in which case it could climb all the way to the low 70’s. Buy.
Marathon Petroleum (MPC 26.45 – yield 8.8%) is an integrated downstream energy company. Marathon is expected to report a first quarter loss of $0.26 EPS and $23.9 billion revenue on the morning of May 5. The company’s full-year earnings outlook has come way down, and should remain cloudy until countries emerge from lockdown and resume commerce. Fortunately, MPC appears to be starting a new run-up. Traders and dividend investors should buy now. Buy.
MKS Instruments (MKSI 96.08 – yield 0.8%) will report first quarter results on the afternoon of April 28. Analysts are expecting $1.24 EPS and $508.6 million revenue, within a very wide range of estimates. The company will host their annual meeting of shareholders online on May 11. MKSI is an undervalued, small-cap growth stock; appropriate for growth investors and traders. The stock is rising toward price resistance at about 105. Buy.
NV5 Global (NVEE 43.22) 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. Earnings estimates have been slowly declining. Profits are now expected to grow 29% and 10% in 2020 and 2021, respectively. NVEE is an undervalued micro-cap growth stock, appropriate for risk-tolerant growth investors and traders. I’m moving NVEE from Hold to a Strong Buy recommendation for growth investors and traders. When the stock rises past 45, there will be additional upside resistance near 55. Strong Buy.
Quanta Services (PWR 34.96 – 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. Earnings estimates have come down a small amount. Wall Street now expects EPS to grow 9% and 10% in 2020 and 2021; the 2020 P/E is 9.6. Quanta Services was featured in the December monthly issue of Cabot Undervalued Stocks Advisor. PWR is a mid-cap growth stock, currently rising toward price resistance at 38. Hold.
Tyson Foods (TSN 59.68 – yield 2.8%) is expected to report first quarter EPS of $1.03 and $10.9 billion revenue on the morning of May 4. The U.S. meat industry has recently been plagued with processing plant closures surrounding the virus epidemic. TSN is an undervalued stock, attractive for growth investors and dividend investors. Earnings estimates have been slowly declining. Analysts are now forecasting EPS to increase 12% and 11% in 2020 and 2021 (September year end) and the 2020 P/E is 9.7. The stock has been resting, with short-term upside resistance at 64. Hold.
Universal Electronics (UEIC 39.21), maker of remote controls and smart-home equipment, is a microcap growth stock. The stock has been trading quietly in the 38-40 range. The next run-up could take UEIC to the mid-40’s. Hold.
Voya Financial (VOYA 43.03 – 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 an undervalued, mid-cap growth stock. Voya is expected to report first quarter EPS of $0.88 and $212.2 million revenue on the afternoon of May 5. Full-year earnings estimates have been gradually declining. Analysts now expect EPS to grow 24% and 40% per year in 2020 and 2021, and the 2020 P/E is 9.9. VOYA is appropriate for growth investors. The stock has recently been trading between 40-46. Hold.
Growth & Income Portfolio
Bristol-Myers Squibb Company (BMY 62.56 – yield 2.9%) – The company is expected to report first quarter EPS of $1.49 and $10.0 billion revenue on the morning of May 7. Bristol-Myers was featured in the April issue of Cabot Undervalued Stocks Advisor. The company is expected to increase full-year EPS by 31% and 20% in 2020 and 2021, and the 2020 P/E is 10.1. BMY is appropriate for growth investors and dividend investors. The stock is up about 30% from recent lows. Hold.
Broadcom (AVGO 268.45 – yield 4.8%) 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. Earnings estimates have been slowly declining. Profits are now expected to grow 1.3% and 10.1% in 2020 and 2012, and the 2020 P/E is 12.4. I’m moving AVGO from Hold to a Buy recommendation. There’s some price resistance at 290, and again at 320. Buy.
Dow Inc. (DOW 34.44 – yield 7.8%) 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. Dow is expected to report first quarter results of $0.59 EPS and $9.7 billion revenue on the morning of April 30. This month, Dow declared their regular quarter dividend of $0.70 per share. The consensus earnings outlook has declined dramatically due to business and oil price disruptions associated with the coronavirus. Analysts now expect full-year EPS of $1.94 and $2.67 in 2020 and 2021. There’s short-term price resistance in the 40-42 range. Hold.
Total S.A. (TOT 35.16 – yield 8.4%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. Total is expected to report $0.76 first quarter EPS on the morning of April 30. The consensus earnings outlook has declined dramatically due to business and oil price disruptions associated with the coronavirus. Analysts now expect full-year EPS of $1.97 and $2.49 in 2020 and 2021. Be cautious with energy stocks until business opens up again and we can fully assess the balance sheet damage. There’s short-term price resistance at 40. Hold.
Buy Low Opportunities Portfolio
Alexion Pharmaceuticals (ALXN 110.86) is expected to report first quarter EPS of $2.71 and $1.4 billion revenue on the morning of May 6. Full-year earnings estimates have been slowly declining. The company is expected to grow profits by 5% and 7% in 2020 and 2021, and the 2020 P/E is 9.7. ALXN will probably trade between about 103-115 in the near future. Traders should consider paring back their positions near 115, because odds are strong that upon reaching that area, the stock will subsequently have a pullback. Hold.
Apple Inc. (AAPL 283.17 – yield 1.1%) is expected to report second quarter EPS of $2.26, within a range of $1.52-$2.73, and $54.5 billion revenue, within a range of $46.3-$60.7 billion, on the afternoon of April 30 (September year end). While Apple is destined to experience soft 2020 product demand due to the coronavirus lockdowns, unlike many famous companies, Apple is not expected to rack up financial problems because it usually has over $100 billion in liquid assets. 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.
Last week, Apple launched a second-generation iPhone SE with a $399 price tag, which is reportedly selling well. Investors should expect iPhone 12 launch delays this fall due to epidemic-related supply chain disruptions.
AAPL is a great long-term growth stock, currently expected to grow profits 3.9% and 20.1% in 2020 and 2021 (September year end). This week, Bank of America raised their price target on AAPL to 310. AAPL has been trading quietly between 270-290 as we head toward their earnings release. If you are inclined to buy AAPL stock or call options prior to the earnings release, here’s the criteria that I use to decide “Yea” or “Nay.” During time periods when AAPL is trading quietly in a sideways chart pattern, the stock almost always rises promptly upon the earnings release. During time periods when the stock has a big run-up prior to the earnings release, I don’t seek out capital gain opportunities, because they’ve largely happened already. Therefore, based on the current price chart, I expect that the earnings report will likely be a catalyst for a new run-up toward the stock’s recent high near 330. Nevertheless, no stock will be impervious to pullbacks in the broader market this year, so be prepared for subsequent volatility. Buy.
Baker Hughes Company (BKR 13.60 – yield 5.3%) – Last week, I reported on Baker Hughes’ on-target first quarter results and aggressive cost-cutting measures. There was no mention of a dividend cut, so we can assume that the dividend is safe. BKR appears to be rising from a recent trading range toward short-term resistance at 17. Hold.
General Motors (GM 22.45) suspended their dividend this week, in line with a common corporate trend of conserving cash in order to shore up the business as the company awaits a recovery in global economies from the pandemic-related business lockdowns. The company is expected to report first quarter EPS of $0.33 and $31.1 billion revenue on the morning of May 6. Full-year earnings projections continue to decline. Analysts now expect EPS of $1.41 and $4.14 in 2020 and 2021. The stock has recently traded sideways between 21-24. Hold.
Mercury General Group (MCY 40.99 – yield 6.0%) is a property & casualty insurance company, with a focus on car insurance in 11 U.S. states, especially in California. The company is faring well during the global virus pandemic. Mercury General is expected to report first quarter EPS of $0.88 on the morning of May 4. 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, while estimates for 2021 came down a bit. The company is 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 estimates during the first quarter earnings conference call. The stock is beginning a new run-up, with short-term price resistance at 45. Hold.
Special Situation AND MOVIE STAR PORTFOLIO
Adobe Systems (ADBE 348.50) 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. ADBE is trading quietly between 330-350, after an early April run-up. There’s price resistance at the February all-time high near 385. Buy.
Amazon.com (AMZN 2,376.00) was featured in the April issue of Cabot Undervalued Stocks Advisor. Amazon.com is expected to report first quarter EPS of $6.25 and $73.6 billion revenue on the afternoon of April 30. Wall Street is expecting profits to grow 22% and 42% 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 April, and is now trading sideways, with more potential downside action during any normal pullback cycle. A surprisingly bullish earnings report could, of course, launch the stock upward again. Hold.
Equitable Holdings (EQH 16.42 – yield 4.1%) owns two principal franchises: Equitable Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB 21.05), an investment management firm. Each company reported strong preliminary and final first quarter results this week, respectively. I’m moving EQH from Buy to a Strong Buy recommendation. Their plans for dividend payouts and share repurchases remain attractive and unchanged, despite problems that have recently pervaded U.S. corporations during the pandemic. Equitable will report final first quarter results on the afternoon of May 7. First quarter consensus estimates of $1.12 EPS and $3.3 billion revenue will likely increase in the coming days. EQH is appropriate for dividend investors, growth investors and traders. The stock began a new run-up this week, with short-term price resistance near 21-22. Strong Buy.
Netflix (NFLX 421.38) – Consensus earnings estimates rose nicely after last week’s first quarter earnings release, which featured outstanding subscriber growth and a rising operating margin that’s enhancing earnings per share. Wall Street now expects full-year profits to grow 56% and 34% 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 440 in April. The stock is now having a pullback, which is perfectly normal after a long run-up. I intend to move NFLX back to a Buy recommendation soon. Hold.
NVIDIA (NVDA 297.08 – yield 0.2%) completed their $6.9 billion acquisition of Israeli chip designer Mellanox Technologies Ltd. The acquisition adds to NVIDIA’s data center and artificial intelligence business, and will probably cause consensus earnings estimates to rise a bit in the coming weeks as analysts revisit the numbers.
NVDA is a high-PE, aggressive growth stock, appropriate for growth investors and traders. Profits are expected to increase 31% and 21% in fiscal 2021 and 2022 (January year end). The stock appears capable of rising promptly toward the February all-time high near 315. Buy.
VanEck Vectors Oil Refiners ETF (CRAK 19.05) reflects share price activity among oil refining and marketing stocks. Most of the stocks within this industry appear promptly ready to rise. CRAK moves from Hold to a Buy recommendation. Expect volatility. 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.