A NEW MARKET RUN-UP JUST BEGAN
The S&P 500 Index and the Dow Jones Industrial Average began new run-ups yesterday, while the NASDAQ Composite Index continues its uptrend. I’m glad that investors are continuing to make money during this market rebound. Many stocks that are currently rising will cease rising once they retrace their February 2020 highs. They will need to rest and/or pull back, depending on the stock and activity in the broader market.
Please be aware that there’s a multitude of bad economic news that will unfold over the next couple of years that has not yet been factored into stock prices. I know that I’ve mentioned this often, but I keep hearing from exuberant investors who are ignoring the reality of 38 million Americans losing their jobs in recent months. There were 132 million full-time workers in the U.S. as of last summer. Therefore, the unemployment rate can easily rise over 20% and get stuck there for quite a while. After all, we’re hearing about business closures and bankruptcies every single day now, so the job loss trend is rising, not falling. That’s an economic disaster that will have long-term consequences that affect the stock market. I truly can’t imagine how anybody could think that stocks will thrive during a deep recession/depression. However, as long as we anticipate what’s coming, we can prepare for it, and even profit from it. So enjoy this current upswing while it lasts, and prepare to protect yourself on the downside: raise cash with which to buy low later on, use stop-loss orders, and plan to buy put options or inverse ETFs once U.S. stock markets peak again. I’ll give you ideas on bearish ETFs in the near future.
Share prices reflect Tuesday (May 26) mid-day prices. Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Bulletin from May 22 in which I mentioned news, rating changes and/or price action on Apple Inc. (AAPL), Broadcom (AVGO), Dow Inc. (DOW), Equitable Holdings (EQH), General Motors (GM), NV5 Global (NVEE), NVIDIA (NVDA), Universal Electronics (UEIC) and VanEck Vectors Oil Refiners ETF (CRAK).
QUARTERLY EARNINGS RELEASE CALENDAR
June 4 pm: Broadcom (AVGO) – 2Q
June 11 pm: Adobe Systems (ADBE) – 2Q
Today’s Portfolio changes
LGI Homes (LGIH) moves from Hold to Sell.
Mercury General Group (MCY) moves from Hold to Buy.
Universal Electronics (UEIC) moves from Buy to Strong Buy.
LAST WEEK’S PORTFOLIO CHANGES
Adobe Systems (ADBE) moved from Buy to Hold.
Amazon.com (AMZN) moved from Hold to Buy.
Apple Inc. (AAPL) moved from Hold to Retired.
LGI Homes (LGIH) moved from Buy to Hold.
MKS Instruments (MKSI) moved from Hold to Strong Buy.
NVIDIA (NVDA) moved from Buy to Hold.
Growth Portfolio
LGI Homes (LGIH 84.73) 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 joined our portfolios in early December. We caught three run-ups since then, with a buy recommendation at early points in the run-ups, then moving to Hold recommendations at the peaks. Along the way, the earnings outlook slowed enough that the company does not present enough potential earnings growth to remain in the Growth Portfolio. Therefore, I’m Selling LGIH today. The stock peaked at 95 in February, and it’s possible that it will retrace that price soon, but I encourage you to Sell by that point. Homebuilders don’t generally thrive during economic recessions, so caution is warranted. Sell.
Marathon Petroleum (MPC 37.43 – yield 6.2%) 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. Wall Street analysts are forecasting a 2020 full-year loss of ($1.93) per share, followed by a 2021 profit of $2.42 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. Gasoline demand is trending higher than forecasts, which, when combined with supply constraints associated with annual refinery facilities maintenance (a.k.a. turnarounds), leads to higher profit margins.
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). MPC continues to ratchet upward. Traders and dividend investors should buy MPC now. Strong Buy.
MKS Instruments (MKSI 105.31 – 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. Investors can tune in to webcasts as the CFO and CEO speak at industry conferences on May 26, May 27 and June 8. MKS Instruments was featured in the February 19 issue of Cabot Undervalued Stocks Advisor.
MKSI is an undervalued, small-cap growth stock; a good choice for growth investors and traders. Analysts’ consensus estimates point toward EPS growth of 12% and 38% in 2020 and 2021. If MKSI rises past the top of its trading range near 108, there’s additional price resistance at 120. Strong Buy.
NV5 Global (NVEE 47.34) 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. NV5 announced $16 million in new contract awards in May. Full-year 2020 profit projections came down last week, with EPS now expected to grow 1% and 30% in 2020 and 2021, respectively. The 2020 P/E is 14.7. NVEE is an undervalued micro-cap growth stock, appropriate for risk-tolerant growth investors and traders. NVEE appears ready to rise past 48 toward price resistance in the mid-50s. Buy NVEE now. Strong Buy.
Quanta Services (PWR 36.38 – yield 0.5%) 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. Investors can tune in to webcasts as Quanta’s management speaks at four meetings and industry conferences between May 26 – June 9. 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. The 2020 P/E is 11.4. As PWR now approaches the top of a wide trading range, near 38, the next move is unclear. Hold.
Tyson Foods (TSN 61.67 – yield 2.7%) 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 2020 P/E is 14.4. 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 44.37) 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. CEO Paul Arling will present at the Baird 2020 Global Consumer, Technology and Services Virtual Conference on June 2. Investors may tune in to the webcast. 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. I’m moving UEIC from Buy to a Strong Buy recommendation. There’s short-term price resistance near 50. Strong Buy.
Voya Financial (VOYA 44.55 – yield 1.3%) 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. presented at the Wells Fargo Virtual Financial Services Forum on May 20. The conversation began with Voya’s response to the COVID business lockdowns, then focused on various uses of capital. Long-term business plans remain on track. Voya repurchased $1 billion of stock in 2018 and again in 2019. The company then repurchased $406 million of stock during the first quarter of 2020, toward their full-year goal of $1 billion. Thereafter, management paused repurchases out of prudence over the COVID situation, but could recommence repurchases as soon as June. Savings from curtailed travel and entertainment expenses will have “a noticeable effect” on the balance sheet. Additionally, life insurance claims are turning out to be lower than initially thought with regard to COVID-related deaths. The completion of the sale of Voya’s Individual Life business remains on track for the third quarter of 2020. Management would consider acquiring a retirement business with the proceeds of that sale.
Analysts expect EPS to grow 19% and 42% per year in 2020 and 2021, and the 2020 P/E is 10.7. VOYA is a mid-cap stock, appropriate for aggressive growth investors. When VOYA surpasses price resistance at 45, which could happen this week, the stock could then rise to additional price resistance in the mid-50s. Buy VOYA now. Strong Buy.
Growth & Income Portfolio
Bristol-Myers Squibb Company (BMY 60.37 – yield 3.0%) 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 32% and 20% in 2020 and 2021, and the 2020 P/E is 9.8. 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 has been bouncing higher and higher for six weeks, with support at 60. Investors who buy now at price support can make about 10% profit as the stock bounces up to its February high of 67. Longer-term, pharmaceutical companies will likely fare better during a recession compared to those in other less essential industries. Strong Buy.
Broadcom (AVGO 284.28 – yield 4.6%) 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. Analysts expect Broadcom to report second quarter EPS of $5.14 and $5.7 billion revenue on the afternoon of June 4 (November year-end). Full-year profits are expected to grow 1.1% and 10.3% in 2020 and 20212, and the 2020 P/E is 13.2. I’d like to see the new projected earnings outlook after second quarter results are reported before deciding how much longer to hold the stock—although I continue to view AVGO as an excellent stock for dividend investors and buy-and-hold investors. The stock began a new run-up this week, with some price resistance at 300, and again at 320. Buy AVGO now. Buy.
Dow Inc. (DOW 38.45 – yield 7.3%) 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 began a new run-up this week, which could carry the stock to about 42. Buy DOW now. Buy.
Total S.A. (TOT 36.59 – yield 8.2%) 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 first 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 $1.01 and $2.66 in 2020 and 2021. TOT is appropriate for growth & income investors. The stock has traded between 32-40 since late March. A breakout above 40 could carry TOT to additional price resistance at 47. Strong Buy.
Buy Low Opportunities Portfolio
Alexion Pharmaceuticals (ALXN $104.30) 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, and the 2020 P/E is 9.6. The stock is significantly undervalued, although I will probably remove it from the portfolio soon due to slow projected earnings growth. ALXN is rising within its trading range toward short-term upside resistance at 111. Hold.
Baker Hughes Company (BKR 15.83 – yield 4.5%) 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 27.41) remains committed to producing electric and autonomous vehicles. The company reportedly restarted U.S., Canadian and Mexican auto production in May. GM was featured in the December 31, 2019 issue and the February issue of Cabot Undervalued Stocks Advisor. Wall Street is projecting EPS of $0.87 and $3.82 in 2020 and 2021. GM began a new run-up in mid-May. The stock has price resistance at 30. Strong Buy.
Mercury General Group (MCY 40.29 – 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. The 2020 P/E is 14.1. I’m moving MCY from Hold to a Buy recommendation. The price chart is improving, more stable than bullish. Patient growth investors and dividend investors can buy now. Buy.
Special Situation AND MOVIE STAR PORTFOLIO
Adobe Systems (ADBE 379.46) 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. Adobe will report second quarter results on the afternoon of June 11. Analysts expect EPS to increase by 24% and 14% in 2020 and 2021, respectively. The 2020 P/E is 39. During the first quarter of 2020, famed hedge fund Third Point LLC decreased their stake in ADBE by 30% to 665,000 shares, currently valued at about $256 million. Last week, ADBE retraced its February all-time high near 385, and will likely rest for a while. Hold.
Amazon.com’s (AMZN 2,433.88) 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.
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 homebound consumers spend more time browsing the internet and buying products through Amazon.com; and as fearful consumers avoid retail stores.
During the first quarter of 2020, hedge fund Third Point LLC increased their stake in AMZN from 70,000 shares to 215,000 shares, currently valued at about $524 million. AMZN rose to a new all-time high last week. The price chart is bullish, though erratic. If the broader market weakens, AMZN could easily pull back to 2,300. Buy.
Equitable Holdings (EQH 18.99 – yield 3.6%) 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 13% in 2020, then rise 17% in 2021. Equitable shares are undervalued, with a 2020 P/E of 4.5. EQH is appropriate for dividend investors, growth investors and traders. Last week, investment firm Keefe, Bruyette & Woods raised their price target on EQH to 25. The stock has begun a new run-up that could take it to 22 in the near term. Buy EQH now. Strong Buy.
Netflix (NFLX 416.50) 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 on June 4. 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. The stock rose to a new all-time high again in May, and is now pulling back toward potential price support at 400. Buy.
NVIDIA (NVDA 353.22 – 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.
NVDA is a high-PE, aggressive growth stock. Unlike so many other companies this year, NVIDIA’s earnings estimates keep rising. Wall Street now expects EPS to grow 39% and 21% in fiscal 2021 and 2022 (January year end). Revenue expectations are also increasing this year. Many investment firms raised their price targets on NVDA after the company reported first quarter results last week, with 12 of 19 increases landing between 400-425. NVDA shares have had a tremendous run-up since the March market correction, now trading at all-time highs. At this point, I would expect the stock to settle down and rest for a while. Hold.
VanEck Vectors Oil Refiners ETF (CRAK 22.11) 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 is rising, as are oil prices and energy-related stocks. CRAK shares continue to rise, 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.