TODAY’S STOCK MARKET OPPORTUNITIES
The stock market continues to exhibit a willingness to rise in the near term. I’m seeing constructive price chart patterns on both the S&P 500 index and on many individual stocks. If you want to jump into an industry where the stocks appear ready to begin new run-ups with lots of upside, look at oil refining stocks, including two within our portfolios: Marathon Petroleum (MPC) and VanEck Vectors Oil Refiners ETF (CRAK). There’s still lots of upside on life insurance, annuity and investment stocks, which I’ve described frequently herein. Consider Equitable Holdings (EQH) and Voya Financial (VOYA).
I’m getting many emails that express confusion and dismay as to why the stock market is acting so bullish in the face of exceedingly poor economic news. I share your concerns! My best answer is that sometimes the markets do not make sense, and this is one of those times. There’s lots of bad news that will continue to unfold, some of which hasn’t landed on people’s radars yet. We won’t know the extent of small business closures, for example, until most U.S. states reopen for business. Families’ bankruptcies and home foreclosures will take longer to unfold, as they first spend all of their savings trying to stay afloat during their job searches. I think it’s inevitable that U.S. stock markets will take one or more additional downturns this year.
These are the industries whose stocks I would avoid, for many reasons relating to the virus pandemic and business lockdowns, and the long-term effects of tens of millions of unemployed families: travel and airlines, entertainment, restaurants, apparel retailers, small chain retailers, any company that already had a lot of debt (like Macy’s), homebuilders, companies that loan money to people (yes, that’s a very broad category), and companies that invest in commercial real estate and apartment buildings. (This is a quick list. There are probably others that I didn’t immediately think of.)
These are the industries where I’m comfortable investing right now: technology (software, hardware and services related to cell phones, media, television, tablets, and computers); investments, life insurance, annuities; car insurance; pharmaceuticals; food and sundries and retailers of such things; energy companies with strong balance sheets, and again, others that I didn’t immediately think of.
I want to stress that I don’t think it wise to go bottom-fishing among companies that have poor balance sheets, or whose businesses were significantly interrupted by the business lockdown, such as airlines.
I’m sorry for this year’s stress, because it’s been intense. People who know me well as an optimist have been shocked at my pessimistic statements about the virus situation, the stock market and the economy. I think of myself as a realist, and therefore, if negative situations are presented to me, I am going to baldly describe their negative features, especially if I can’t personally turn them into positives or fix them. I’ll do my best to improve my little corner of the world, I promise.
Share prices reflect Monday’s closing prices. Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Bulletins from May 6 and 8 in which I mentioned news, rating changes and/or price action on Alexion Pharmaceuticals (ALXN), Brighthouse Financial (BHF)**, Broadcom (AVGO), Bristol-Myers Squibb (BMY), Equitable Holdings (EQH), General Motors (GM), LGI Homes (LGIH), Marathon Petroleum (MPC), NV5 Global (NVEE), Quanta Services (PWR), Universal Electronics (UEIC), VanEck Vectors Oil Refiners ETF (CRAK) and Voya Financial (VOYA).
*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
May 21 pm: Nvidia (NVDA) – 1Q
first half June: Adobe Systems (ADBE) and Broadcom (AVGO) – 2Q
Today’s Portfolio changes
Apple Inc. (AAPL) moves from Buy to Hold.
Netflix (NFLX) moves from Hold to Buy.
NVIDIA (NVDA) moves from Strong Buy to Buy.
VanEck Vectors Oil Refiners ETF (CRAK) moves from Buy to Strong Buy.
LAST WEEK’S PORTFOLIO CHANGES
Bristol-Myers Squibb (BMY) moved from Hold to Strong Buy.
General Motors (BM) moved from Hold to Strong Buy.
LGI Homes (LGIH) moved from Strong Buy to Buy.
NVIDIA (NVDA) moved from Buy to Strong Buy.
Total S.A. (TOT) moved from Hold to Strong Buy.
Voya Financial (VOYA) moved from Buy to Strong Buy.
Growth Portfolio
LGI Homes (LGIH 72.22) is the 10th-largest residential homebuilder 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 was featured in the May issue of Cabot Undervalued Stocks Advisor. Consensus earnings estimates rose in recent days after LGI Homes reported a large first-quarter earnings and revenue beat. Full-year profits are now expected to fall 3% in 2020 and rise 6% in 2021. Be aware that a wave of small business closures resulting from the COVID-19 business lockdown could result in escalating unemployment that further depresses the housing market. Buy-and-hold investors should probably avoid homebuilder stocks over the next few years. LGI Homes is rapidly approaching price resistance at 75, and the price chart remains bullish, just now rising to its 200-day moving average. LGIH is a trading buy. Buy.
Marathon Petroleum (MPC 32.70 – yield 7.1%) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, a majority interest in midstream company MPLX LP, 10,000 miles of oil pipelines, and product sales in 11,700 retail stores. Earnings estimates rose after Marathon’s first-quarter report. Wall Street analysts are now forecasting a 2020 full-year loss of ($1.82) per share, followed by a 2021 profit of $2.55 per share. Share repurchases have been suspended, and the dividend payout remains intact.
The price charts of oil refining stocks appear bullish, and capable of near-term run-ups. Traders and dividend investors should buy MPC now. There’s no obvious upside price resistance in sight. Strong Buy.
MKS Instruments (MKSI 100.57 – yield 0.9%) is a 60-year-old global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for their customers. Their primary served markets include the semiconductor, industrial technologies, life and health sciences, research and defense. MKS offers the largest breadth of products and services in their market, with 2200 patents and a sales presence in 100 countries. MKS Instruments was featured in the February 19 issue of Cabot Undervalued Stocks Advisor.
MKS Instruments recently reported a very strong first quarter last week. Consensus estimates point toward EPS growth of 12% and 38% in 2020 and 2021. MKSI is an undervalued, small-cap growth stock appropriate for growth investors and traders. The stock is recently trading erratically between 90-110, and it could run either way near-term. Hold.
NV5 Global (NVEE 44.78) 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. Full-year profits are expected to grow 10% and 19% in 2020 and 2021, respectively. NVEE is an undervalued micro-cap growth stock, appropriate for risk-tolerant growth investors and traders. The price chart is showing some weakness now, so be cautious.
Quanta Services (PWR 32.97 – 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. Dividend payouts and share repurchase activity have continued uninterrupted during the pandemic. Quanta Services was featured in the December monthly issue of Cabot Undervalued Stocks Advisor.
PWR is an undervalued, mid-cap growth stock. Full-year earnings estimates declined during the pandemic due to business disruptions. Analysts now expect EPS to fall (2%) in 2020 and then rise 16% in 2021. The stock is resting after a recent run-up, largely trading between 33-37. Hold.
Tyson Foods (TSN 60.76 – yield 2.8%) is the largest U.S. food company, 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. Management is focused on the growing global need for protein, and fulfilling that need in a sustainable and environmentally conscious manner. The company is expected to deliver record revenues in 2020. Tyson Foods was featured in the January and April issues of Cabot Undervalued Stocks Advisor.
TSN is an undervalued stock, attractive for growth investors and dividend investors. Profits are expected to fall 7% in 2020 due to pandemic business disruptions, then rise 22% in 2021. Seeking Alpha published a good research piece on Tyson Foods this week. The stock will likely continue to rise in 2020, interspersed with pullbacks as we experience volatility in the broader market. Buy.
Universal Electronics (UEIC 38.33) 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 monthly issue and the February 26 issue of Cabot Undervalued Stocks Advisor.
The first quarter of 2020 delivered strong gross margins and improved operating margins, even though revenue was affected by pandemic-related business disruptions. UEIC is a volatile, undervalued, micro-cap growth stock, appropriate for risk-tolerant investors and traders. The stock reacted poorly to the first-quarter earnings report last week, bouncing down to a close at 36. I anticipate some near-term trading between 36-43. Buy.
Voya Financial (VOYA 42.98 – 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 will host their annual meeting of stockholders on May 21. The sale of Individual Life and annuities businesses remains on track for September 2020 and is expected to generate $1.5 billion in deployable capital. Analysts expect EPS to grow 23% and 40% per year in 2020 and 2021, and the 2020 P/E is 10.0. VOYA is a mid-cap growth stock, appropriate for aggressive growth investors. VOYA rose 50% from its March low, and has since rested in a trading range. I anticipate a near-term run-up toward the mid-50s. Strong Buy.
Growth & Income Portfolio
Bristol-Myers Squibb Company (BMY 62.66 – yield 2.8%) is a biopharmaceutical company with a mission to discover, develop and deliver innovative medicines that help patients prevail over serious diseases. Bristol-Myers purchased Celgene for $74 billion in November 2019. The merged company markets a long list of pharmaceuticals, including Revlimid, Eliquis and Opdivo, to treat cardiovascular, oncology and immunological diseases. The company expects revenue and profit growth to come from four areas: sales volume increases from current products, development and launch of new medicines, life cycle management and synergies from the Celgene acquisition. Bristol-Myers was featured in the April issue of Cabot Undervalued Stocks Advisor.
The company is expected to increase EPS by 31% and 20% in 2020 and 2021, and the 2020 P/E is 10.2. Bristol-Myers’ financial priorities include debt repayment, investment in innovation, share repurchases and annual dividend increases. I would expect earnings growth to slow in subsequent years as the company digests the Celgene merger and business grows at a more normal pace. BMY is appropriate for growth investors and income investors. A new run-up has begun that could possibly extend past the February high of 67. Strong Buy.
Broadcom (AVGO 275.40 – 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. Profits are expected to grow 1.3% and 10.1% in 2020 and 20212, and the 2020 P/E is 12.8. The stock appears ready to rise again. There’s some price resistance at 290, and again at 320. Buy AVGO now. Buy.
Dow Inc. (DOW 33.90 – yield 8.1%) is a commodity chemicals company with manufacturing facilities in 31 countries. Results are impacted in tandem with rising and falling oil prices. Full-year profits are expected to decline in 2020, then rise again in 2021. Dow reported on-target first-quarter 2020 results. After repurchasing $125 million of stock during the first quarter, Dow has now suspended share repurchases during the second quarter as a result of the economic lockdown’s effect on business. The stock’s dividend remains intact. DOW is appropriate for dividend investors. DOW shares have been ratcheting upward since mid-March. The next upswing could carry DOW to about 42.5. Buy DOW now. Buy.
Total S.A. (TOT 34.81 – yield 8.6%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. As with all energy companies, Total has been hard hit by the global business lockdowns that dramatically reduced demand for energy products. Fortunately, the company’s success in maintaining low debt levels and a low price-per-barrel of oil have helped Total rise above their peers regarding their degree of financial solvency. Total has chosen to maintain their quarterly dividend payout at the year-ago level of 66 Euros, a slight reduction from the more recent 68 Euros. The company is reducing capital expenditures and operating expenses, and considering selling infrastructure assets and/or real estate based on liquidity needs. Debt levels increased during the quarter, but do not reflect a problematic situation. Total SA was featured in the May issue of Cabot Undervalued Stocks Advisor.
The most recent consensus estimates reflected full-year EPS of $0.89 and $2.34 in 2020 and 2021. TOT is appropriate for growth & income investors. The stock has traded between 32-40 since its late-March rebound from its recent low of 24. A breakout above 40 could carry TOT to additional price resistance at 47. Strong Buy.
Buy Low Opportunities Portfolio
Alexion Pharmaceuticals (ALXN 101.34) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Current marketable drugs include Soliris, Ultomiris, Strensiq and Kanuma. All first-quarter sales levels of these drugs surpassed year-ago numbers. The company is focused on three goals: converting patients from Soliris to Ultomiris, expanding indications for Ultomiris, and diversifying their portfolio to fuel continued long-term profit and revenue growth. Alexion is in the midst of a $1.41 billion acquisition of Portola Pharmaceuticals (PTLA). Portola markets a treatment that reverses the effects of blood thinning drugs Eliquis and Xarelto in cases of life-threatening or uncontrolled bleeding.
Yesterday, activist investor Elliott Advisors sent a letter to Alexion’s Board of Directors, urging them to explore a sale of the company. Elliott Advisors believes that the stock is 50-60% undervalued, and does not have confidence that the Board is taking the company in the right direction, as evidenced by their belief that Alexion should not have pursued the recently-announced purchase of Portola Pharmaceuticals. Investors may listen to a replay of the webcast of Alexion management’s presentation at yesterday’s Bank of America Healthcare Conference.
Analysts expect EPS to increase 3% and 7% in 2020 and 2021. Earnings growth numbers have slowed, and the price chart has been lackluster, although it might currently be exhibiting a cup formation, which is bullish. No doubt, though, that the stock is significantly undervalued. If you want to buy ALXN on the hopes that a buyout could take place, your patience could be rewarded. Hold.
Apple Inc. (AAPL 315.01 – yield 1.0%) – Yesterday Apple unveiled a major update to Logic Pro X with a professional version of Live Loops, a completely redesigned sampling workflow, and new beat-making tools. With its collection of powerful creative features, Logic Pro X 10.5 will be a massive release for all musicians, including those producing electronic music. (Read more here.)
Apple’s second quarter (September year end) delivered all-time record revenue in Services and a quarterly revenue record for Wearables. Apple is planning a new 5G iPhone launch later this year. Apple was featured in the May issue of Cabot Undervalued Stocks Advisor.
In late April, Apple announced a quarterly dividend increase of 6.5%, from 77 cents to 82 cents. The company repurchased $18.6 billion of stock during the second quarter, with $40 billion remaining in their previous repurchase authorization; and they announced a new $50 billion share repurchase authorization. The most recent consensus estimates project EPS rising 4% and 20% in 2020 and 2021. The stock is racing toward its February high near 330. I’m moving AAPL from Buy to a Hold recommendation. Odds are that the stock is going to stop rising at 330 and rest or pull back. Hold.
Baker Hughes Company (BKR 14.62 – yield 5.0%) offers products, services and digital solutions to the international oil and gas community. Share prices of energy-related companies are rising alongside a rebound in oil prices and the gradual reopening of global economies in the wake of the virus pandemic. The current run-up will likely carry BKR to short-term price resistance at 17. Hold.
General Motors (GM 22.80) remains committed to producing electric and autonomous vehicles. The company aims to restart U.S. and Canadian auto production on May 18. GM was featured in the December 31, 2019 issue and the February issue of Cabot Undervalued Stocks Advisor. Full-year earnings projections have stabilized after recent declines. Wall Street is now projecting EPS of $1.02 and $3.86 in 2020 and 2021. The stock has traded between 21-24 for five weeks. I anticipate a near-term breakout past 24, at which time the stock could promptly rise to 27 or 30, depending on economic news and price action in the broader market. Buy GM now. Strong Buy.
Mercury General Group (MCY 36.12 – yield 6.8%) operates as Mercury Insurance, the leading independent agency writer of automobile and home insurance in California, with total assets over $4.5 billion. Mercury also writes automobile, home and/or other lines of insurance, including business and mechanical breakdown insurance, in 10 additional U.S. states. The company is faring well during the global virus pandemic because fewer driving miles result in fewer car accidents and lower expenses to the insurance company. As such, the first quarter’s combined ratio, a profitability measure, came in at 95.9%, better than the year-ago quarter’s 97.3%. Mercury General Group was featured in the April issue of Cabot Undervalued Stocks Advisor.
MCY is an undervalued small-cap stock with an unusually large dividend yield. The 2020 consensus earnings estimate came down after the first-quarter report. Analysts are now expecting EPS of $2.85 and $3.45 in 2020 and 2021, reflecting 10% and 21% EPS growth, respectively. The price chart recently turned bearish, and while the stock stabilized at March price support, it will probably need to remain low for a while until it gathers strength for a rebound. Patient growth investors and dividend investors can buy now. Hold.
Special Situation AND MOVIE STAR PORTFOLIO
Adobe Systems (ADBE 371.42) is a software company that’s changing the world as an innovative leader in digital media and digital marketing. ADBE is a large-cap growth stock, appropriate for long-term growth investors. Earnings estimates have barely changed in recent months reflecting the consistency provided by the steady income associated with a subscription-based business. Management is focused on improving operating margins. Analysts expect EPS to increase by 24% and 14% in 2020 and 2021, respectively. The 2020 P/E is 38. ADBE is actively rising toward its February all-time high near 385. Buy.
Amazon.com’s (AMZN 2,409.00) innovations and forays into new industries are seriously disrupting established global businesses, including freight companies, retailers, entertainment and technology companies. The company is experiencing growth in Amazon Web Services (AWS), Prime membership, Prime Video viewer hours, revenue and free cash flow. Amazon.com was featured in the April issue of Cabot Undervalued Stocks Advisor.
Wall Street has dramatically altered earnings estimates for Amazon, subsequent to management’s forecasts during the first-quarter earnings conference call when they announced a plan to spend all second quarter profit – approximately $4 billion – on COVID-related expenses, including new hires and wage increases. Consensus earnings per share are expected to fall from $23.01 in 2019 to $18.85 in 2020, then rise 99% to $37.48 in 2021.
AMZN rose to a new all-time high near 2,500 in April, and has since traded somewhat erratically. Hold.
Equitable Holdings (EQH 17.15 – yield 3.9%) owns two principal franchises: Equitable Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. AllianceBernstein’s assets under management (AUM) increased from $542 billion in March to $576 billion in April. As of March 31, 2020, Equitable has $646 billion assets under management (AUM), and book value per common share, excluding accumulated other comprehensive income (“AOCI”), was $37.78 per share. The company expects to continue delivering a 50-60% payout ratio via dividends and share repurchases. Equitable Holdings was featured in the February issue of Cabot Undervalued Stocks Advisor.
Profits are expected to fall 10% in 2020, then rise 12% in 2021. With a price/earnings ratio of 4.0, Equitable shares are incredibly undervalued. EQH is appropriate for dividend investors, growth investors and traders. The stock has been rising and resting, repeatedly, in a very orderly fashion since the March market lows. The next upward move will likely carry EQH to short-term upside price resistance at 19 and then again at 22. Strong Buy.
Netflix (NFLX 440.52) 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 experiencing rapid international subscription growth and creating original foreign language content for international markets. Netflix will host their annual shareholder meeting in early June. Netflix was featured in the January 22 issue of Cabot Undervalued Stocks Advisor.
The first-quarter earnings release featured outstanding subscriber growth and a rising operating margin that’s enhancing earnings per share. Wall Street expects full-year profits to grow 57% and 33% in 2020 and 2021. NFLX is a high-P/E growth stock. I’m moving NFLX from Hold to a Buy recommendation for long-term investors and momentum investors. The stock is just now rising past its April all-time high near 440. Barring a disruption in the broader market, NFLX will probably have a nice run-up in the coming days. Buy.
NVIDIA (NVDA 322.62 – yield 0.2%) is the pioneer and leading designer of graphics processing unit (GPU)-accelerated computing, which then ignited modern artificial intelligence (AI). Target markets include gaming, professional visualization, data center, and autonomous driving. In April, NVIDIA completed the $6.9 billion acquisition of Mellanox Technologies Ltd., an early innovator in high-performance interconnect technology, routinely used in supercomputers and hyperscale data centers. The acquisition, which adds to NVIDIA’s data center and artificial intelligence business, is expected to immediately add to NVIDIA’s gross margins and EPS. Last week, NVIDIA announced the acquisition of Cumulus Networks, which complements their recent Mellanox acquisition. Cumulus Networks is an open network software provider of Linux-based operating systems. NVIDIA was also featured in the March and May issues of Cabot Undervalued Stocks Advisor.
Wall Street is expecting NVIDIA to report $1.68 first-quarter EPS and $3.0 billion revenue on the afternoon of May 21 (January year end). The company beat earnings expectations in each of the last five years and also in the last five quarters, which translates into investor confidence that NVIDIA tends to under promise and over deliver. The company is managing its cash flow quite well, maintaining low debt levels and aiming to repurchase $2 billion of its shares once the Mellanox transaction is completed.
NVDA is a high-P/E, aggressive growth stock, appropriate for growth investors and traders. Earnings estimates came down a bit from their peaks in early March, and now they’ve been rising again in recent weeks. Wall Street expects EPS to grow 32.5% and 20.5% in fiscal 2021 and 2022 (January year end). This week, investment bank Needham & Company reiterated their Buy rating on NVDA and raised their price target from 270 to 360.
NVDA rose to a new all-time high this week. I’m moving NVDA from Strong Buy to a Buy recommendation. It’s okay to continue accumulating this great stock, but the short-term outlook is perhaps too cloudy for traders. Buy.
VanEck Vectors Oil Refiners ETF (CRAK 21.01) 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.
I’m moving CRAK from Buy to a Strong Buy recommendation for traders. As global economies slowly reopen in the wake of the COVID-19 business lockdowns and quarantines, demand for energy should surge. In keeping with the volatile nature of oil prices and energy stocks, they both fell dramatically this past winter, and now present exaggerated profit potential during their rebounds. The CRAK price chart shows a constructive, bullish pattern from which I believe there’s immediate upside. There’s some price resistance at about 25-26. Buy CRAK now. 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.