STOCK MARKET OPPORTUNITIES
In keeping with last week’s comments, the stock market continues to show a willingness to rise in the near term. More than any other industry, oil refining stocks offer strong upside, including two within our portfolios: Marathon Petroleum (MPC) and VanEck Vectors Oil Refiners ETF (CRAK).
Be careful with NVIDIA (NVDA). This great company is about to report quarterly results, and the stock just had a huge run-up. It’s quite common that traders will cash in their shares once earnings are announced, no matter whether the numbers were good or bad, so don’t be shocked if NVDA falls $10-$20 per share on Friday.
Amazon.com (AMZN) and Netflix (NFLX) will probably rise immediately. Adobe Systems (ADBE) and Apple (AAPL) are nearing recent highs, and thus likely to rest for a while.
I expect 2020 to favor traders, while disappointing buy-and-hold investors. Be nimble. Keep more cash in your investment account than normal, trade out of stocks that are retracing former highs, buy low during market pullbacks, and don’t go bargain-hunting among problem industries. As a matter of fact, if you’re up for it, consider short sales, bearish ETFs or bearish option positions within industries that are hard hit from global business lockdowns and their aftermath: 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 not a short-term, two-month suggestion. I expect economic problems to begin unfolding in the coming months, especially as second-quarter results are delivered, and to continue bombarding the stock market for several years. I expect shocks to the housing market to appear in 2021, as unemployed people seek less expensive living situations, with a surprising number of families moving in with relatives. (If you can’t afford a mortgage, you certainly can’t afford apartment prices, which are usually higher than mortgage payments.)
If you’ve never owned a bearish investment before, please experiment soon in a very small way. Then you’ll be more confident and prepared to take action when the stock market hits another rough patch. I can attest that worries about market downturns swiftly abate when you own investments that rise in value as stocks fall.
Share prices reflect Monday’s closing prices. Send questions and comments to Crista@CabotWealth.com.
QUARTERLY EARNINGS RELEASE CALENDAR
May 21 pm: Nvidia (NVDA) – 1Q
first half June: Adobe Systems (ADBE) and Broadcom (AVGO) – 2Q
Today’s Portfolio changes
Adobe Systems (ADBE) moves from Buy to Hold.
Amazon.com (AMZN) moves from Hold to Buy.
LGI Homes (LGIH) moves from Buy to Hold.
MKS Instruments (MKSI) moves from Hold to Strong Buy.
NVIDIA (NVDA) moves from Buy to Hold.
LAST WEEK’S PORTFOLIO CHANGES
Apple Inc. (AAPL) moved from Buy to Hold.
Netflix (NFLX) moved from Hold to Buy.
NVIDIA (NVDA) moved from Strong Buy to Buy.
VanEck Vectors Oil Refiners ETF (CRAK) moved from Buy to Strong Buy.
Growth Portfolio
LGI Homes (LGIH 78.57) 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 was featured in the May issue of Cabot Undervalued Stocks Advisor. LGI Homes reported a large first quarter earnings and revenue beat. Full-year profits are now expected to fall 7% in 2020 and rise 11% in 2021.
I’m moving LGIH from Buy to a Hold recommendation, with the intention of removing the stock from the portfolio in the near future. A wave of small business closures resulting from the COVID-19 business lockdown could result in escalating unemployment. People who don’t have jobs eventually run out of ways to pay their mortgages, prompting them to sell their homes, which in turn puts downward pressure on home prices. Buy-and-hold investors should probably avoid homebuilder stocks over the next few years. LGIH continues to ratchet toward its February high near 95. Hold.
Marathon Petroleum (MPC 34.37 – yield 6.7%) 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 ($1.80) per share, followed by a 2021 profit of $2.41 per share. Share repurchases have been suspended, and the dividend payout remains intact.
The stock market is enthused at the prospect of businesses reopening around the globe. This directly benefits the energy industry via increasing demand for their products. MPC rose above a trading range this week, with no upside price resistance in sight. The price charts of oil refining stocks appear distinctly more bullish than those of oil majors (e.g. ExxonMobil) and oilfield service companies (e.g. Baker Hughes). Traders and dividend investors should buy MPC now. Strong Buy.
MKS Instruments (MKSI 97.34 – yield 0.8%) 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. Consensus estimates point toward EPS growth of 12% and 38% in 2020 and 2021. On May 11, a corporate insider bought $1.3 million of MKSI shares. MKSI is an undervalued, small-cap growth stock. I moved MKSI to a Hold recommendation in late April after a huge run-up, anticipating the stock’s need to rest. The stock now appears ready to continue rising; thus, I’m moving MKSI from Hold to a Strong Buy recommendation for growth investors and traders. There’s short-term resistance at 108, and again at 120. Strong Buy.
NV5 Global (NVEE 43.70) 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 2020 profit projections came down last week, with EPS now expected to grow 3% and 27% in 2020 and 2021, respectively. NVEE is an undervalued micro-cap growth stock, appropriate for risk-tolerant growth investors and traders. NVEE has traded between 38-48 for six weeks. Strong Buy.
Quanta Services (PWR 33.39 – 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 (4%) in 2020 and then rise 19% in 2021. Wait for the price chart to stabilize further before accumulating shares. Hold.
Tyson Foods (TSN 60.83 – 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 22% in 2020 due to pandemic business disruptions, then rise 42% in 2021. The stock has traded sideways since mid-March in a narrowing trading range, which is a constructive chart pattern that could enable a near-term run-up toward about 70. Buy.
Universal Electronics (UEIC 41.10) 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.
Universal Electronics announced this week that the International Trade Commission (ITC) has instituted an investigation into the importation of certain streaming players, remote controls, televisions, set top boxes, and components by Roku Inc. (“Roku”) and its partners and affiliates. This investigation is in response to UEI’s April complaint filed with the ITC alleging that the Infringing Parties have engaged in unfair trade practices by the importation, sale for importation, and/or sale after importation into the United States of the Infringing Parties’ Products that infringe one or more claims of UEI’s U.S. patents.
By this request, UEI asks the ITC to issue an Exclusion Order to bar importation of those Infringing Parties’ Products and a Cease and Desist Order to bar further sales and other domestic commercial activities of Infringing Parties’ Products that have already been imported. UEI expects that the ITC investigation will continue through 2020 and that the case will be tried in the first quarter of 2021.
UEI has also filed concurrent suits in the United States District Court for the Central District of California against these same Infringing Parties. Those complaints include allegations of patent infringement regarding the UEI Patents and UEI seeks both damages and injunctive relief.
CEO Paul Arling will present at the Needham Virtual Technology and Media Conference on May 20, and the Baird 2020 Global Consumer, Technology and Services Virtual Conference on June 2. Investors may tune in to the webcasts.
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 appears capable of beginning a new run-up in the near term, when it passes 42. Buy.
Voya Financial (VOYA 43.04 – 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. CEO Rodney O. Martin, Jr. will present at the Wells Fargo Virtual Financial Services Forum on May 20. 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 22% and 39% per year in 2020 and 2021, and the 2020 P/E is 9.5. VOYA is a mid-cap stock, appropriate for aggressive growth investors. VOYA rose 50% from its March low, and has since rested in a trading range, roughly between 40-45. I anticipate a near-term run-up toward the mid-50s. Strong Buy.
Growth & Income Portfolio
Bristol-Myers Squibb Company (BMY 63.60 – 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.
Bristol-Myers announced that Opdivo in combination with Yervoy was approved by the FDA for the first-line treatment of a specific group of adult patients with metastatic non-small cell lung cancer (NSCLC). The company also announced FDA approval of Pomalyst® for patients with AIDS-related Kaposi sarcoma whose disease has become resistant to highly active antiretroviral therapy (HAART), or in patients with Kaposi sarcoma who are HIV-negative. Pomalyst was granted accelerated approval, Breakthrough Therapy designation and Orphan Drug designation.
The company is expected to increase EPS by 32% and 20% in 2020 and 2021, and the 2020 P/E is 10.4. 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. The stock is slowly ratcheting toward its February high of 67. Strong Buy.
Broadcom (AVGO 273.53 – yield 4.7%) 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 1.1% and 10.3% in 2020 and 20212, and the 2020 P/E is 12.1. The stock appears to be preparing for a new run-up. There’s some price resistance at 290, and again at 320. Buy AVGO now. Buy.
Dow Inc. (DOW 36.74 – yield 7.6%) is a commodity chemicals company with manufacturing facilities in 31 countries. Results are impacted in tandem with rising and falling oil prices. Dow reported on-target first quarter 2020 results. Analysts expect full-year EPS of $1.39 and $2.30 in 2020 and 2021, respectively. After repurchasing $125 million of stock during the first quarter, Dow suspended share repurchases during the second quarter as a result of the economic lockdown’s effect on business. The stock’s dividend remains intact. The ex-dividend date is May 28. (Everybody who owns the stock at the close of business on May 27 will receive the next dividend, even if they sell their shares on May 28 or thereafter.) DOW shares have been ratcheting upward since mid-March. The next upswing could carry DOW to about 42. Buy DOW now. Buy.
Total S.A. (TOT 35.69 – 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. Like 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 $1.25 and $2.84 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 102.72) 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.
Analysts expect EPS to increase 3% and 7% in 2020 and 2021. The price chart is exhibiting a cup and handle formation, which is bullish, with short-term upside resistance at 111. The stock is significantly undervalued. Hold.
Apple Inc. (AAPL 314.96 – yield 1.0%) – 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. 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. Odds are that the stock is going to stop rising at 330 and then rest or pull back. Hold.
Baker Hughes Company (BKR 15.34 – yield 4.7%) 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. BKR is slowly ratcheting toward price resistance at about 17. Hold.
General Motors (GM 24.81) remains committed to producing electric and autonomous vehicles. The company reportedly restarted U.S. and Canadian auto production on May 18. On May 18, Reuters reported, “Mexico published guidelines for restarting operations in the automotive, mining and construction sectors… Mexico’s guidelines, published in a document overnight, require companies to submit to authorities health protocols for exiting the coronavirus lockdown. Firms will then be told within 72 hours if they can resume operations. General Motors Co, which operates one of its most important plants in central Mexico, told workers at the weekend to prepare to return there to work on Wednesday. GM also told Mexican suppliers the company expected to comply quickly with the new regulations.” GM was featured in the December 31, 2019 issue and the February issue of Cabot Undervalued Stocks Advisor.
Full-year 2020 earnings projections came down last week. Wall Street is now projecting EPS of $0.89 and $3.82 in 2020 and 2021. GM rose above recent price resistance at 24 this week, and will likely reach 27 promptly, with additional price resistance at 30. Strong Buy.
Mercury General Group (MCY 39.82 – yield 6.3%) 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 ten additional U.S. states. 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. Analysts are expecting EPS of $2.85 and $3.45 in 2020 and 2021, reflecting 10% and 21% EPS growth, respectively. During the week of May 7, corporate insiders bought $7.1 million of MCY shares. The stock is racing back up to short-term price resistance at 42, but the price chart is not showing the kind of stability that would be conducive for MCY to surpass 42 soon. It’s okay for patient growth investors and dividend investors to buy now, but if you want more immediate upside, the odds aren’t strong with MCY today. Hold.
Special Situation AND MOVIE STAR PORTFOLIO
Adobe Systems (ADBE 367.97) 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. 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. I’m moving ADBE from Buy to a Hold recommendation as it approaches its February all-time high near 385, where it will likely stop rising for a while. Hold.
Amazon.com’s (AMZN 2,426.26) 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.
The company reopened their French warehouses this week. Amazon plans to spend all its 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. I’m personally expecting a continued surge in online shopping as bored consumers spend more time browsing the internet and buying products through Amazon.com; and as fearful consumers avoid retail stores.
I’m moving AMZN from Hold to a Buy recommendation. AMZN rose to a new all-time high near 2,500 in April. The price chart has since been somewhat erratic, although it remains bullish. Buy.
Equitable Holdings (EQH 18.18 – yield 3.7%) 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. (Most of Equitable’s peers have suspended share repurchases during the pandemic.) Equitable Holdings was featured in the February issue of Cabot Undervalued Stocks Advisor.
Profits are expected to fall 12% in 2020, then rise 14% in 2021. With a price/earnings ratio of 4.3, Equitable shares are incredibly undervalued. EQH is appropriate for dividend investors, growth investors and traders. When EQH surpasses price resistance at 19, the stock could then climb to additional resistance at 22. Strong Buy.
Netflix (NFLX 452.58) 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-PE growth stock. Hedge fund Appaloosa LP initiated a 255,000 share stake in NFLX during the first quarter. NFLX is appropriate for long-term investors and momentum investors. The stock rose to a new all-time high again in May. Buy.
NVIDIA (NVDA 350.01 – 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. NVIDIA was 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.
NVDA is a high-PE, aggressive growth stock. Earnings estimates rose a bit again last week. Wall Street now expects EPS to grow 32.8% and 20.7% in fiscal 2021 and 2022 (January year end). This week, the Bank of Montreal (a.k.a. BMO) raised their rating on NVDA to outperform with a 425 price target, and Royal Bank of Canada (a.k.a. RBC) raised their price target to 385.
NVDA rose to a new all-time again high this week. I’m moving NVDA from Buy to a Hold recommendation. The stock rose a tremendous amount in May. At some point soon, it’s going to pull back and rest. Additionally, when popular growth stocks have big run-ups prior to earnings reports, it’s common that they then fall upon the earnings release, no matter whether the earnings report was good or bad. That situation is generally attributed to traders taking profits. (Think about putting an alert on the stock, through your phone or brokerage website, in case you want to accumulate more shares below 320.) Hold.
VanEck Vectors Oil Refiners ETF (CRAK 21.31) 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.
As global economies continue reopening in the wake of the COVID-19 business lockdowns and quarantines, demand for energy should surge. CRAK shares have begun a new run-up, with price resistance at about 25-26. Traders should 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.