It’s About Time for the Stock Market to Trade Sideways Again
It’s snowing in Colorado as I write this morning; the first snow of the season along the Front Range.
Well, now that we’ve gotten the weather report out of the way, let’s check on the financial markets. Here’s a six-month chart of the S&P 500 index:
Notice that the S&P 500 has a very specific pattern this year: advance-rest-pullback-recover, then repeat the cycle, continuing to rise as months pass. The market just completed another advance. Therefore, odds are strong that the market’s now ready for some sideways trading. I’m guessing that means that earnings season, which begins this week for our portfolio stocks, will not deliver an advance in the S&P 500 index no matter how good the earnings reports are.
I’m seeing somewhat of a barbell pattern among our portfolio stocks’ price charts. There’s one group of stocks that is rising toward prices where they’d previously traded, and another group of stocks that is breaking out of trading ranges. The breakouts often provide the best and most immediate capital gain opportunities.
I continue to expect the stock market to perform well through the first quarter of 2018, followed by a correction in the second quarter. Obviously, that’s a vague prognostication, but I’m sticking with it.
The next stock market correction could bring a perhaps stunning drop in exchange-traded fund (ETF) share prices. That’s because unlike mutual funds, whose share prices fall when stock prices fall, ETF share prices can continue to fall after the stock market stabilizes. ETF prices go up and down based on buying and selling pressure. If a stock market correction comes along, who panics and sells? It’s certainly not the portfolio managers! Unfortunately, individual investors are the folks who tend to panic and sell, driving prices downward. I believe they will control the ETF market with their selling long after the broader stock market is done falling after the next correction is completed. What’s more, the ETF market will likely take far longer to rebound than the broader market because, while institutional buying can push stock prices back up without any participation from individual investors, it’s my contention that the ETF market cannot recover without buying activity on the part of individual investors. We already know that individual investors are hesitant to test the waters in the stock market after a correction. That means the ETF rebound could be painstakingly slow.
I wrote about ETFs in a Special Bulletin last week, but I want to drive the point home because I firmly believe that investors do not understand the downside risk to owning ETFs. My suggestion is to consider using stop-loss orders on your ETFs or move capital from ETFs into similar mutual funds.
Continue to raise cash, up to about 20% of your stock portfolio, so that when the next market pullback comes along, you can go shopping!
Send questions and comments to Crista@CabotWealth.com.
Quarterly Earnings Release Calendar
October 13 am: Bank of America (BAC) – 3Q
October 17 am: Goldman Sachs (GS) and Morgan Stanley (MS)* – 3Q
October 19 am: Blackstone Group (BX), Nucor (NUE) and KeyCorp (KEY)* –3Q
October 24 am: PulteGroup (PHM) – 3Q
October 24 pm: Ameriprise Financial (AMP) – 3Q
October 26 am: Valero (VLO)* – 3Q, and Commercial Metals (CMC) – 4Q
October 26 pm: Mattel (MAT) – 3Q
October 27 am: Weyerhaeuser (WY), Chevron (CVX)* and Phillips 66 (PSX)* – 3Q
November 1 pm: Cavium (CAVM) – 3Q
November 2 pm: Molina Healthcare (MOH) – 3Q
November 7 pm: Cimarex Energy (XEC) – 3Q
November 8 pm: Andeavor (ANDV) – 3Q
Virtually all companies offer extensive information on their websites pertaining to their quarterly earnings releases, often including slide shows or webcasts.
*Not in the Cabot Undervalued Stocks Advisor portfolios, but favorably discussed in previous issues, at the 2017 Cabot Wealth Summit or in Wall Street’s BEST Daily.
Portfolio Notes
Make sure to review the Special Bulletins from October 4, 5 and 6 in which I mentioned news, rating changes and/or price action on Apple (AAPL), Dollar Tree (DLTR), exchange-traded funds (ETFs)*, Goldman Sachs (GS), Invesco (IVZ), KLX (KLXI), Nucor (NUE), Schnitzer Steel (SCHN)* and Weyerhaeuser (WY).
*Not in the Cabot Undervalued Stocks Advisor portfolios.
Buy-Rated Stocks Most Likely* to Rise More than 5% Near-Term:
Apple (AAPL)
Cavium (CAVM)
Molina Healthcare (MOH)
Nucor (NUE)
Quanta Services (PWR)
Vertex Pharmaceuticals (VRTX)
*I can review price charts and make an educated determination about what’s likely to occur, but I will sometimes be wrong. I cannot control the stock market, I can only guide you through it.
Today’s Portfolio Changes:
Chipotle Mexican Grill (CMG) moves from Hold to Buy.
Total (TOT) moves from Strong Buy to Hold.
XL Group (XL) moves from Strong Buy to Buy.
Last Week’s Portfolio Changes:
BP plc (BP) moved from Strong Buy to Hold.
Legg Mason (LM) moved from Strong Buy to Hold.
Nucor (NUE) joined the Buy Low Opportunities Portfolio as a Strong Buy.
Schnitzer Steel (SCHN) moved from Hold to Sell.
Schlumberger NV (SLB) joined the Growth & Income Portfolio as a Strong Buy.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.6%) manufacturers the iPhone, iPad, Mac and Apple TV. Consensus earnings estimates for Apple’s 2018 fiscal year (September year-end) have been rising steadily throughout 2017. At this point, analysts expect EPS to rise 22.5%, while the P/E remains quite low in comparison at 14.1. The stock is recovering from a 9% pullback in late August. I expect AAPL to rise through next summer, with intermittent price corrections along the way. Buy AAPL now. Strong Buy.
Bank of America (BAC – yield 1.8%) is an undervalued large-cap growth stock. The company will report third-quarter results on the morning of October 13. The consensus estimate is $0.46 EPS, with a range of $0.43 to $0.49. Last week, Warren Buffett said, “We’ll be holders of BofA stock for a long, long, long time.” BAC was featured in the October 2017 issue of Cabot Undervalued Stocks Advisor. Analysts expect Bank of America’s EPS to grow 16.1% and 19.4% in 2017 and 2018, with corresponding P/Es of 14.6 and 12.2. BAC broke out of a 10-month trading range last week. The new run-up has only just begun. There’s no realistic upside price resistance. Buy BAC now. Strong Buy.
Cavium (CAVM) is an undervalued, aggressive growth stock in the semiconductor industry. CAVM rose 4.7% on October 2 when a KeyBanc analyst raised his recommendation on the stock to “overweight.” Consensus earnings estimates remain unchanged since early August. The stock has been advancing since August, with several quick pullbacks along the way, and appears immediately ready to rise to price resistance at 74, where it last traded in May. Barring a bearish stock market, CAVM could exceed 74 later this year. Expect volatility. Strong Buy.
KLX Inc. (KLXI) is an undervalued aggressive growth stock in the aerospace and energy services industries. KLXI surged 2.8% on October 2, launching above its recent trading range to new highs. KLXI was my top stock pick for the coming year at the 2017 Cabot Investors Summit in September. KLXI broke out of its trading range when it rose to 53 in September, reaching new all-time highs. Buy KLXI now. Strong Buy.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand and gravel.
Consensus earnings estimates for Martin Marietta and its industry peers have been slowly declining for several months, now reflecting EPS growth of 13.7% and 32.4% in 2017 and 2018. MLM is undervalued with a 2018 P/E of 20.6. There’s 16% upside as MLM retraces its May peak at 240, where the stock will still be undervalued. Buy.
PulteGroup (PHM – yield 1.3%) is a U.S. homebuilder, and a very undervalued aggressive growth stock. PHM rose 10% after breaking out from a long-term trading range in July. I expect lots more upside. Buy PHM now. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. PWR is an undervalued, aggressive growth stock. The stock is rising toward 38.5, where it traded in February. There’s a decent chance that PWR could walk right past 38.5 and perform quite well in the coming months. There’s 17% upside to my fair-value price target of 44. Strong Buy.
Vertex Pharmaceuticals (VRTX) is an aggressive growth biotech company that corners the market in treatments for cystic fibrosis. VRTX is fairly valued based on 2017 EPS, but distinctly undervalued based on 2018 earnings projections. The stock’s been trading sideways between 147.5 and 167.5 since its big run-up in July. Buy.
Vulcan Materials (VMC – yield 0.8%) is a supplier of construction aggregates, asphalt and concrete. Consensus earnings estimates for Vulcan Materials and its industry peers have been slowly declining for several months, now reflecting EPS growth of 16% and 44.6% in 2017 and 2018. VMC is undervalued with a 2018 P/E of 24.9. There’s 11% upside as VMC retraces its June peak at 134, where it will still be undervalued. Buy.
XL Group (XL – yield 2.2%) is an insurer and reinsurer. XL is an undervalued, aggressive growth mid-cap stock. The company has not yet announced the financial impact of recent hurricanes and earthquakes in the Caribbean, Florida, Mexico and Texas, which are expected to make a big dent in the company’s third-quarter and full-year 2017 results. Book value is expected to fall about 10% to about $40 per share. The company will likely put its share repurchases on hold during 2018. As a result of these natural disasters, the reinsurance industry is expected to implement double-digit rate increases in 2018. (Reinsurance pricing is currently at a 16-year low.)
XL’s price chart exhibited a shakeout pattern in early September, which usually signals a pending upturn in the share price, then another shakeout in late September. There’s 18% upside as XL retraces its July high near 47.
I’m moving XL from Strong Buy to Buy due to the change in 2017 earnings estimates. (Consensus estimates for 2018 remain high and unaffected by recent events.) I will continue to assess both the cost of third-quarter natural disasters to this otherwise financially healthy company and the mood of the market as it relates to reinsurance stocks. Expect volatility. Buy.
Updates on Growth & Income Portfolio Stocks
Ameriprise Financial (AMP – yield 2.2%) offers insurance products and asset management to retail and institutional clients. Aggressive 2017 EPS growth is expected to give way to 11.3% EPS growth in 2018. AMP is rising in new high territory. The stock will be fairly valued in the low 160s. Hold.
BP plc (BP – yield 6.2%) is a European integrated oil company and a very undervalued aggressive growth stock. BP is resting after a September run-up. There’s long-term price resistance at 43, where it last traded in 2014. Hold.
Blackstone Group LP (BX – variable large payouts) is a huge and successful alternative asset manager. BX is a very undervalued growth & income stock. Investors who buy below 33.5 could earn a 10% capital gain plus dividends, as BX travels toward my target price near 37. Hold.
Commercial Metals Company (CMC – yield 2.5%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Commercial Metals is expected to see EPS rise 55.2% in fiscal 2018 (August year-end), with a P/E of 14.0. CMC extremely undervalued. The best-case scenario is that CMC rises 29%, plus dividends, as it retraces its December 2016 high around 24. Expect volatility. Buy
GameStop (GME – yield 7.6%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. Forbes published an article last week that recommends GME, focusing on the huge dividend yield, low P/E and a multi-year cycle of Xbox console upgrades. (The other four stocks mentioned in the article do not meet my investment criteria.) Although GME rapidly rebounded from its late-August lows, I anticipate the stock trading in the low 20s for a while before recovering further. Dividend investors should consider owning GME. Hold.
Invesco (IVZ – yield 3.2%) is an asset management company with $907 billion in assets under management (AUM). Earnings estimates are increasing slightly from the recent purchase of Guggenheim’s ETF assets. The share price currently reflects a fair 2018 valuation. I plan to sell near the stock’s early-2015 high of 38. (There’s no need to wait for my sell signal on that; put in a limit order at 38 so that you can be among the first to sell.) Hold.
Johnson Controls (JCI – yield 2.4%) is a multi-industry, large-cap growth & income stock. JCI is slowly rising toward its July high at 44, where I might sell. Hold.
Schlumberger (SLB – yield 2.9%) is a premier oilfield equipment and services company with a global footprint. SLB was featured in the October 2017 issue of Cabot Undervalued Stocks Advisor. The stock is undervalued based on 2018 numbers, with an EPS growth rate of 54.7% and a P/E of 29.6. The stock is rising, with 25% upside plus dividends as it eventually retraces its December 2016 high near 86. Strong Buy.
Weyerhaeuser (WY – yield 3.6%) is one of the largest U.S. manufacturers of wood and cellulose fiber products. WY is a high EPS growth and high P/E stock. The 2017 EPS estimate has been inching upward for many months, while the 2018 estimate has remained relatively unchanged. I expect WY to soon break past 35 to new all-time highs. At that time, unless the earnings estimates rise, I plan to move WY to a Hold, catch the run-up, then sell. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. ALXN is overvalued based on 2017 numbers and solidly undervalued for 2018. ALXN embarked on a new run-up on August 28, but has barely advanced. Buy ALXN now. My intention is to hold the stock until it reaches upside price resistance at 160 or 190, depending on momentum among pharmaceutical stocks. Buy.
Andeavor (ANDV – yield 2.3%) is an oil refiner and marketer, with refineries in the western and northern United States. Goldman Sachs’ energy analyst recommended ANDV and Phillips 66 (PSX) last week. Earnings estimates for 2018 have been rising in recent weeks. EPS are now expected to grow 20% and 43.9% in 2017 and 2018. The corresponding P/Es are 20.6 and 14.3. ANDV is an undervalued aggressive growth stock; however, the stock is very likely to stop rising when it reaches 112, where it last traded in 2015. At that time, I’ll consider whether to sell ANDV or keep it for longer-term gains, depending on price action in the broader market. Hold.
Boise Cascade (BCC) is a wood products and building materials company. BCC is an undervalued, aggressive growth small-cap stock. The stock is resting after a big late-summer run-up. I expect BCC to eventually rise to the upper 30s and beyond. Buy.
Chipotle Mexican Grill (CMG) is a greatly undervalued aggressive growth restaurant chain. I’m moving CMG from Hold to Buy because the share price is in a stable trading range in the low 300s and the stock is a bargain. A breakout above 320 could take CMG to 350 in the short term, at which time the stock will still be undervalued based on consensus earnings expectations. Expect volatility. Buy.
Dollar Tree (DLTR) is an overvalued retail stock (based on next year’s numbers), yet more attractive than most of its food and discount store peers. The company is well-insulated from competition with Amazon.com—competition that is harming many other retailers. I’m holding DLTR with the expectation that it will retrace its August 2016 high of 98 in the coming months. Hold.
Goldman Sachs Group (GS – yield 1.2%) is a large-cap investment back. The company will report third-quarter results on the morning of October 17. The consensus estimate is $4.13 EPS, with a range of $3.60 to $4.46. The stock is fully valued. GS is rising toward price resistance at 250, where it last traded in March. I intend to sell at 250. Hold.
Legg Mason (LM – yield 2.9%) is a U.S.-based global asset management and financial services company with $752 billion in assets under management (AUM). LM is a very undervalued aggressive growth stock. My price target is 44, where LM last traded in October 2015. At that point, LM will still be undervalued, but will likely stop rising for a time. Hold.
Mattel (MAT – yield 3.8%) Last week, Mattel announced the appointment of a new Chief Financial Officer and four additional key executives as the company works toward a focused growth strategy under the company’s new CEO Margo Georgiadis. Profits are expected to fall in 2017, then rise 26.3% in 2018. I’m going to hold the stock for the rebound that will likely take place under Georgiadis. MAT remains undervalued. Investors should expect a round of tax-loss selling in December that could bring on another price correction. Oftentimes, come January, profitable companies that just completed a round of December tax-loss selling will begin rising because there are no more sellers. Hold.
Molina Healthcare (MOH) is a managed healthcare operator. Last week, Zacks Equity Research recommended MOH. The stock is heading toward its recent July peak of 72, where it might naturally rest for a while. My longer-term price target is 80, where the stock traded in the summer of 2015, giving today’s new investors a potential 17% capital gain. Strong Buy.
Nucor (NUE – yield 2.7%) is a low-cost producer of a diversified portfolio of iron and steel products. NUE was featured in the October 3, 2017 issue of Cabot Undervalued Stocks Advisor. The company has solid earnings growth, low valuation and low debt levels. My price target on NUE is 65 where the stock last traded in December 2016. Strong Buy.
Total (TOT – approx. yield 4.2%) is an integrated oil & gas company based in France. Analysts have revised their 2018 estimates to reflect 8.2% EPS growth. The stock is now fairly valued. I’m not alarmed, but I’m going to move the stock from Strong Buy to Hold. TOT is actively rising toward three-year price resistance in the low 60s, where I intend to sell. Hold.
Universal Electronics (UEIC) is a manufacturer and cutting-edge world leader of wireless remote control products, software and audio-video accessories for the smart home, with a strong pipeline of new products. UEIC jumped 3.4% on October 2 in a continuation of an uptrend that began on September 13. There’s 10% upside as UEIC retraces its July high around 72, where the stock will still be undervalued. Buy.
