ARE ECONOMIC NUMBERS POLITICAL?
Throughout 2020, I’ve discussed the likely economic impact of the global COVID-19 lockdowns, in which citizens were encouraged to stay in their homes and businesses were legally obligated to close their doors. The impacts have certainly been far-reaching, with some economic numbers swinging wildly from week-to-week and month-to-month, while others will take much longer to unfold.
For me, the very curious aspect of all this has been that quite a few investors have commented that I have been “political,” with various investors expressing happiness or anger with me. That’s interesting, because I’m fairly certain that at no time did I mention anything relating to political parties, instead sticking to basic facts. Facts aren’t political – they’re just statements of truth, right? For example, when I’ve repeatedly outlined the economic impacts of job loss and business failures. While it may be true that people of certain political persuasions might be celebrating or mourning the economic numbers, my role is to simply tell you how those numbers are likely to affect societal trends, consumer spending, industry and ultimately, stock prices.
Right now, U.S. stock markets are surging, largely due to the Federal Reserve’s bond-buying binge. As bond prices rise from the increased demand, bond yields fall (and they’re tremendously low). There are investment professionals all across the land – such as pension plan portfolio managers – who are obligated to produce decent returns for their investors. Since they can’t achieve decent returns through bonds right now, pension plan money is flowing into stocks, thus pushing share prices upward. This is an oft-cited reason why the stock market has been rising, despite severe recessionary economic numbers. (Nope! I didn’t say anything political … again!)
I occasionally hear investors excitedly claim that the stock market is rising because “the economy is back to normal” or because “small investors are investing a lot at Robinhood.” Those are interesting ideas, but my wager is on the Federal Reserve as being this month’s Top Stock Market Influencer.
Share prices reflect Tuesday (June 16) midday prices. Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Bulletin from June 15 in which I mentioned news, rating changes and/or price action on Adobe Systems (ADBE).
TODAY’S PORTFOLIO CHANGES
Alexion Pharmaceuticals (ALXN) moves from Hold to Retired.
Baker Hughes (BKR) moves from Hold to Sell.
General Motors (GM) moves from Hold to Strong Buy.
Netflix (NFLX) moves from Buy to Strong Buy.
NV5 Global (NVEE) moves from Hold to Retired.
NVIDIA (NVDA) moves from Hold to Strong Buy.
Voya Financial (VOYA) moves from Buy to Strong Buy.
LAST WEEK’S PORTFOLIO CHANGES (June 10-16)
Adobe Systems (ADBE) moved from Hold to Buy.
General Motors (GM) moves from Strong Buy to Hold.
Mercury General Group (MCY) moved from Buy to Sell.
Tyson Foods (TSN) moves from Strong Buy to Buy.
Growth Portfolio
Marathon Petroleum (MPC 38.50 – yield 6.0%) 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 for Marathon fell last week. Wall Street analysts are now forecasting a 2020 full-year loss of ($2.32) per share, followed by a 2021 profit of $2.25 per share. The company will report second-quarter results on the morning of August 3. Share repurchases have been suspended, and the dividend payout remains intact.
As expected, oil prices and stock prices experienced a pullback late last week, after the huge March-through-June run-up. They are each surprisingly and promptly rebounding, largely encouraged by recent developments in the Federal Reserve’s corporate bond-buying program. MPC has been trading between 34-42 since mid-May. Continued increases in oil prices and/or the broader stock market could certainly carry MPC higher. Buy.
MKS Instruments (MKSI 110 – yield 0.7%) 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 2,200 patents and a sales presence in 100 countries. MKS Instruments was featured in the February 19 issue of Cabot Undervalued Stocks Advisor.
MKSI is an undervalued, small-cap growth stock. Analysts’ consensus estimates point toward EPS growth of 12% and 38% in 2020 and 2021. This week, investment bank Needham & Company began research coverage on MKSI with a buy rating and a 125 price target. MKSI broke out of a trading range this month. There’s price resistance at this year’s high of 120. Traders should consider exiting near 120. Buy-and-hold growth investors should be comfortable holding the stock longer term, and accumulating shares near 100. Hold.
NV5 Global (NVEE 51.75) is a leading provider of professional and technical engineering and consulting solutions for public and private sector clients in the infrastructure, construction, real estate, and environmental markets. Profits are expected to show no growth in 2020, and to then grow 27% in 2021. The 2020 P/E is 16.2. Those are not bad numbers. However, the consistent trend of downward earnings revisions concerns me. Therefore, I’m Retiring NVEE from the Growth Portfolio. Retired.
Quanta Services (PWR 40.00 – 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 may view Quanta’s comprehensive May/June Investor Presentation. Quanta Services was featured in the December monthly issue of Cabot Undervalued Stocks Advisor.
PWR is an undervalued, mid-cap growth stock. Analysts expect EPS to fall 5% in 2020 and then rise 21% in 2021. The 2020 P/E is 12.7. Last week I suggested “buying more shares during the next market pullback, below 38.” The stock promptly fell to 36, and is now rising again. There’s upside resistance at its November 2019 peak near 44, where traders should exit. Hold.
Tyson Foods (TSN 64.00 – yield 2.6%) 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. Tyson Foods was featured in the January, April and June issues of Cabot Undervalued Stocks Advisor.
Earnings estimates for Tyson rose last week. Tyson’s profits are now expected to fall 18.5% in 2020 due to pandemic business disruptions, then rise 35.5% in 2021. The company is expected to deliver record revenues in 2020. The 2020 P/E is 14.0. Last week’s market pullback brought TSN down to strong price support at 60. There’s upside price resistance near 70, where traders should exit. Buy.
Universal Electronics (UEIC 47.50) 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. 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 is largely trading between 43-50. Buy UEIC on pullbacks. Watch for buying opportunities below 44. Strong Buy.
Voya Financial (VOYA 48.50 – yield 1.2%) 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. Analysts expect EPS to grow 19% and 42% per year in 2020 and 2021, and the 2020 P/E is 11.7. VOYA is a mid-cap aggressive growth stock. The stock could reasonably rise to 55 this summer; maybe higher. Bank of America Global Research raised their price objective on VOYA to 63. Last week I said, “Growth investors should earmark VOYA as a great stock to buy during market corrections.” Now that the stock has pulled back over 10%, I’m moving VOYA from Buy to a Strong Buy recommendation. Strong Buy.
Growth & Income Portfolio
Bristol-Myers Squibb Company (BMY 56.00 – yield 3.2%) 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.
The company will host a virtual three-part investor series on June 22, 25 and 26, during which CEO Giovanni Caforio, M.D. and members of the leadership team will discuss the Company’s strategy, pipeline and business opportunities. The three topics are Early Pipeline and Immuno-Oncology, Hematology, and Immunology and Cardiovascular. The general public is welcome to tune in to the webcasts. Bristol-Myers was featured in the April and June issues 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 9.1. Bristol-Myers’ financial priorities include debt repayment, investment in innovation, share repurchases and annual dividend increases. The next dividend will be paid to investors who own BMY shares upon the close of business on July 6. On June 3, an insider reportedly bought $439,000 of BMY shares.
BMY and other pharmaceutical stocks are trading a bit out of synch with the broader market right now. The stock has come down to price support at about 55-56. There’s upside resistance at 64, and again at 67. Longer-term, pharmaceutical companies will likely fare better during a recession compared to those in other less essential industries. Growth investors, income investors and traders can earn a 15%+ total return on new purchases as the stock rebounds to recent peaks in the coming months. Strong Buy.
Broadcom (AVGO 312.00 – yield 4.2%) is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. CFO Tom Krause expects to both continue paying the dividend and paying down debt in 2020 (none of which is maturing this year), even under poor economic conditions. Share buybacks and M&A activity are now on the back burner. Broadcom was featured in the December 17 and January issues of Cabot Undervalued Stocks Advisor.
Broadcom reported good second-quarter results this month, with record free cash flow. Analysts then tweaked their earnings estimates, lower for 2020 and higher for 2021. Full-year profits are now expected to grow 0.8% and 11.9% in 2020 and 20212, and the 2020 P/E is 14.5. The next ex-dividend date is June 23. (For some odd reason, the ex-dividend date is listed incorrectly as June 19 on a variety of investment websites. Investors can always visit the Investor Relations page of any company to gain the most factual information.) AVGO is trading near 320 where it traded consistently from December 2019 through February 2020. The next move is unclear, but I would certainly buy low during market pullbacks. Hold.
Dow Inc. (DOW 42.50 – yield 6.6%) is a commodity chemicals company with manufacturing facilities in 31 countries. Analysts expect full-year EPS of $1.40 and $2.32 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 affect on business. The stock’s dividend remains intact. On June 8, an insider reportedly bought $508,000 of DOW shares.
DOW shares tend to be encouraged by rising oil prices, and the dividend yield remains quite attractive. Both of those situations could continue to attract new investors and thus enhance the share price. There’s short-term upside price resistance at 46. Buy.
Total S.A. (TOT 40.50 – yield 7.4%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. The company’s success in maintaining low debt levels and a low price-per-barrel of oil have benefited Total during the recent period of global business lockdowns. 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.
Analysts expect EPS of $0.74 and $2.07 in 2020 and 2021. TOT is recently trading between 38-44. Remember that global economies have greatly suffered, and that a global recession could eventually impact Total’s dividend payout. TOT remains a good investment for buy-and-hold investors and dividend investors, although I will likely remove the stock from the portfolio soon due to a trend of downward earnings revisions. Hold.
Buy Low Opportunities Portfolio
Alexion Pharmaceuticals (ALXN $112.50) – I’m Retiring ALXN from the Buy Low Opportunities Portfolio today. Alexion is a successful company, but the earnings growth prospects are not strong enough to maintain a position in the portfolio. Retired.
Baker Hughes Company (BKR 17.00 – yield 4.2%) – Due to concerns about Baker Hughes’ deteriorated earnings outlook, I’m selling the stock today. Sell.
General Motors (GM 28.00) remains committed to producing electric and autonomous vehicles. GM continues to increase North American auto production as we move away from COVID-19 lockdowns. GM was featured in the December 31, 2019 issue and the February issue of Cabot Undervalued Stocks Advisor. Wall Street is projecting EPS of $0.93 and $3.88 in 2020 and 2021, up a bit from last week’s estimates.
Last week, I moved GM to a Hold recommendation as the stock neared the end of a recent run-up. GM promptly pulled back with the market, so I’m moving my recommendation to a Strong Buy. There’s more than 20% upside to medium-term price resistance in the mid-30s. Strong Buy.
Special Situation AND MOVIE STAR PORTFOLIO
Adobe Systems (ADBE 413.50) is a software company that reports two major business segments: Digital Media (which includes Creative Cloud and Document Cloud) and Digital Experience. Refer to the July 15 Special Bulletin for a report on Adobe’s second-quarter results.
ADBE is a large-cap growth stock. Analysts are expecting full-year EPS to grow 24.1% and 13.6% in 2020 and 2021. The company has an active share repurchase program. Those numbers will continue to change in the coming days as more analysts rework their numbers in the wake of the company’s second-quarter earnings release. The stock continues to reach new all-time highs. Buy.
Amazon.com’s (AMZN 2,610.00) 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.
Amazon plans to spend all second-quarter profit – approximately $4 billion – on COVID-related expenses, including new hires and wage increases. Analysts expect full-year earnings per share to fall from $23.01 in 2019 to $19.01 in 2020, then rise 98% to $37.56 in 2021. (These numbers are up a bit in recent weeks.) However, economic data on consumer shopping habits indicates a tremendous ongoing surge in e-commerce spending. Therefore, I expect consensus earnings estimates to be further revised upward, with Amazon likely delivering an upside second-quarter earnings surprise.
AMZN continues to reach new all-time highs. Everybody should buy AMZN during market pullbacks. Buy.
Equitable Holdings (EQH 21.00 – yield 3.2%) owns two principal franchises: Equitable Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. Equitable has a 161-year history, including a recently-concluded 30-year period of being majority-owned by AXA, the global insurance company. Equitable Holdings was featured in the February and June issues 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 5.0.
EQH is appropriate for dividend investors, growth investors and traders. Last week, Bank of American Global Research and Baird raised their price targets on EQH to 26 and 27, respectively. The stock pulled back a bit with the broader market last week, and the price chart remains bullish. There’s price resistance at 27, where the stock last traded in February. Strong Buy.
Netflix (NFLX 436.00) is the world’s leading streaming entertainment service with more than 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 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 56% and 33% in 2020 and 2021. NFLX is a high-P/E growth stock. There’s a lot of strength in the price chart, which shows NFLX trading between 400-460 since mid-April. I’m therefore moving NFLX from Buy to a Strong Buy recommendation. Strong Buy.
NVIDIA (NVDA 361.00 – 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. NVIDIA’s data center business now represents about 50% of total revenues. NVIDIA is participating in six investment conferences, and also hosting their annual shareholder meeting, between May 27 and June 16. Investors may listen to any of the corresponding webcasts. NVIDIA was featured in the March and May issues of Cabot Undervalued Stocks Advisor.
NVDA is a high-P/E, aggressive growth stock. Earnings estimates continue to rise. Wall Street expects EPS to grow 40% and 22% in fiscal 2021 and 2022 (January year end). Gross margins and revenue are also expected to increase this year. The company has $7 billion remaining in their repurchase authorization as of April 2020. Morgan Stanley raised their price target on NVDA to 380 this week. I’m moving NVDA from Hold to a Strong Buy recommendation. The stock has been trading in a stable pattern since mid-May, largely between 340-370, and touched upon new all-time highs this month. Strong Buy.
VanEck Vectors Oil Refiners ETF (CRAK 22.50) 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. Also note that hurricane season is upon us, during which time shares of Gulf Coast oil refining companies tend to surge. As expected, oil prices and stock prices experienced a pullback late last week, after the huge March-through-June run-up. Prices then rose again this week. CRAK shares continue to ratchet upward, with price resistance at about 25-26. 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.