All investors should be aware of the quality-control scandal emanating from Kobe Steel, in which the company admitted falsifying data on its steel products for a currently-vague amount of time between one and 10 years. On October 11, I predicted that the scandal would be more extensive in reach than initially reported. Then on October 13, this additional news emerged: “Kobe Steel Scandal Grows to Include Subsidiaries”.
It’s the nature of bad news that people do their best to minimize the amount of details that they initially reveal. (Think Equifax, Harvey Weinstein, Enron or any random spouse caught with their lover.) I don’t think it’s too farfetched to expect to learn of additional corruption among Kobe’s Japanese competitors. Japan’s economy was already shaky from debt and demographics. The country did not need this steel industry scandal, which should directly affect its GDP and national reputation.
My investments in U.S. steel stocks just morphed from shorter-term trades into longer-term holds. I expect attractive capital gains. Send me questions about steel stocks if you decide to study them in order to capitalize on a possible upturn in U.S. steel production. I’m still recommending Nucor (NUE) and Commercial Metals (CMC). I have not thus far seen similarly attractive growth, value and price charts in any of the other major U.S. steel stocks.
A Note About Asset Manager Stocks
I’ve mentioned a few times recently that I’m expecting exchange-traded funds (ETFs) to suffer, more than investors expect, during the next stock market correction. Stock market corrections are painful, but also somewhat normal.
You and I are in the habit of tweaking our stock portfolios based on opportunities and red flags. When stock markets decline, managers of public equities see their assets under management (AUM) shrink, which leads to lower fee income and declining earnings estimates. Investors will naturally react by paring back ownership of such companies’ stocks. In that light, I intend to eventually sell shares of companies that are in the business of purveying mutual funds and ETFs, namely Ameriprise Financial (AMP), Invesco (IVZ) and Legg Mason (LM), as they approach their price targets.
Buy vs. Strong Buy
Oftentimes a business or financial disruption will lower a company’s current-year profit outlook, while the subsequent year’s outlook remains very strong. If, during the course of analysts’ earnings estimate revisions, I see that profits are expected to grow less than 15% this year, I will lower the rating from Strong Buy to Buy. Similarly, I’ll lower the rating from Strong Buy to Buy if the current-year P/E begins to reflect overvaluation, but next year’s P/E remains low. I still favor all such companies.
Send questions and comments to crista@cabotwealth.com.
Quarterly Earnings Release Calendar
October 17 am: Goldman Sachs (GS) and Morgan Stanley (MS)* – 3Q
October 19 am: Blackstone Group (BX), Nucor (NUE) and KeyCorp (KEY)* – 3Q
October 20 am: Schlumberger (SLB) – 3Q
October 24 am: PulteGroup (PHM) – 3Q
October 24 pm: Ameriprise Financial (AMP), Chipotle (CMG)** and XL Group (XL)** – 3Q
October 26 am: Alexion Pharmaceuticals (ALXN), Invesco (IVZ) and Valero (VLO)* – 3Q, and Commercial Metals (CMC) – 4Q
October 26 pm: Mattel (MAT) – 3Q
October 27 am: Total (TOT)**, Weyerhaeuser (WY), Chevron (CVX)* and Phillips 66 (PSX)* – 3Q
October 31 am: BP plc (BP)** –3Q
November 1 pm: Cavium (CAVM) – 3Q
November 2 am: Martin Marietta Materials (MLM) – 3Q
November 2 pm: Molina Healthcare (MOH)** – 3Q, and Apple (AAPL) – 4Q
November 7 pm: Cimarex Energy (XEC)* – 3Q
November 8 pm: Andeavor (ANDV)** – 3Q
November 9 am: Johnson Controls (JCI) – 4Q
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.
**Expect potential big variance in quarterly results vs. consensus estimates.
Earnings Season Scorecard
Bank of America (BAC) – big earnings beat
Portfolio Notes
Make sure to review the Special Bulletins from October 11 and 13 in which I mentioned news, rating changes and/or price action on BP plc (BP), Bank of America (BAC), Chipotle Mexican Grill (CMG), Citigroup (C)*, Commercial Metals (CMC), JPMorgan Chase (JPM)*, Kobe Steel*, Molina Healthcare (MOH), Nucor (NUE), Quanta Services (PWR), Schnitzer Steel (SCHN)*, Total SA (TOT), Weyerhaeuser (WY) and XL Group (XL).
*Not in the Cabot Undervalued Stocks Advisor portfolios.
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Bank of America (BAC)
Chipotle Mexican Grill (CMG)
Quanta Services (PWR)
Weyerhaeuser (WY)
XL Group (XL)
*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:
Weyerhaeuser (WY) moves from Strong Buy to Hold.
Last Week’s Portfolio Changes:
Chipotle Mexican Grill (CMG) moved from Hold to Buy.
Nucor (NUE) moved from Strong Buy to Buy.
Total (TOT) moved from Strong Buy to Hold.
XL Group (XL) moved from Strong Buy to Buy.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.6%) manufacturers the iPhone, iPad, Mac and Apple TV. KeyBanc upgraded AAPL to a Buy recommendation on October 16. Analysts expect 2018 EPS to rise 22.4% (September year-end), while the P/E remains quite low in comparison at 14.2. The stock continues to march toward its August high at 164. 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. On October 13, I reported on Bank of America’s third-quarter earnings beat, which was attributed to higher net interest income and lower expenses. Then on October 16, the company announced that its September credit card charge-off rate was down somewhat significantly from its August rate. In recent days, many Wall Street firms raised their ratings and price targets for BAC. 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 14.3 and 12.0. BAC recently broke out of a 10-month trading range. Buy BAC now. Strong Buy.
Cavium (CAVM) is an undervalued, aggressive growth stock in the semiconductor industry. Consensus earnings estimates remain unchanged since early August. Analysts expect Cavium’s EPS to grow 82.4% and 27.2% in 2017 and 2018, with corresponding P/Es of 24.5 and 19.3. The stock has been advancing since August, with several quick pullbacks along the way, and appears capable of rising to price resistance at 74 this year, where it last traded in May. Barring a bearish stock market, CAVM could exceed 74 shortly thereafter. Expect volatility. Strong Buy.
KLX Inc. (KLXI) is an undervalued aggressive growth stock in the aerospace and energy services industries. Analysts expect KLX’s EPS to grow 192% and 26.1% in 2018 and 2019 (January year-end), with corresponding P/Es of 17.6 and 13.9. 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. Last week, Jefferies initiated coverage of MLM with a Buy recommendation and a 240 price target. Consensus earnings estimates for Martin Marietta have been slowly declining for several months, presumably due to hurricane-related construction disruptions. Analysts now expect EPS to grow 11.8% and 32.9% in 2017 and 2018. MLM is undervalued with a 2018 P/E of 20.8. There’s 17% 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. The company will report third-quarter results on the morning of October 24. The consensus third-quarter EPS estimate is $0.59, with a range of $0.53 to $0.64. Full-year 2017 consensus earnings estimates for Pulte have been slowly declining for several months, presumably due to hurricane-related construction disruptions. Analysts now expect EPS to grow 29.6% and 30.1% in 2017 and 2018, with corresponding P/Es of 13.1 and 10.1. PHM has been rising all year, with many small pullbacks along the way. The stock broke 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. Last week, Seaport Global Services initiated coverage of PWR with a Buy recommendation. Wall Street expects Quanta’s EPS to grow 34.4% and 20.2% in 2017 and 2018, with corresponding P/Es of 18.4 and 15.3. I expect PWR to rise past price resistance at 38.5 in the very near future, barring a pullback in the broader stock market. There’s 16% 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 (CF). VRTX was featured last week as Zacks’ Bull of the Day. VRTX is undervalued based on expected 2018 EPS growth of 89.5% and a corresponding P/E of 49.8. 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 have been slowly declining for several months, presumably due to hurricane-related construction disruptions. Analysts now expect EPS to grow 13.2% and 44.5% in 2017 and 2018. VMC is undervalued with a 2018 P/E of 24.7. There’s 14% upside as VMC retraces its June peak at 134, where it will still be undervalued. Buy.
XL Group (XL – yield 2.1%) is an insurer and reinsurer, and an undervalued mid-cap stock. The company announced the financial impact of recent hurricanes and earthquakes in the Caribbean, Florida, Mexico and Texas, which will give XL Group a net loss in 2017. While that sounds like a financial disaster for a company, it’s not remotely unusual for a reinsurance company to take a big hit after a spate of natural disasters. The company will report third-quarter results on the afternoon of October 24. The consensus third-quarter EPS estimate is (-$3.83), with a range of (-$2.48) to (-$4.33). Analysts expect full-year EPS of $3.79 in fiscal 2018. The 2018 P/E is very low at 11.0. The market was greatly relieved when XL Group quantified its third-quarter catastrophe losses, and the stock began an immediate rebound. There’s 13% upside as XL retraces its July high near 47. Buy.
Updates on Growth & Income Portfolio Stocks
Ameriprise Financial (AMP – yield 2.2%) offers insurance products and asset management to retail and institutional clients. The company will report third-quarter results on the afternoon of October 24. The consensus third-quarter EPS estimate is $2.82, with a range of $2.66 to $3.00. In recent weeks, several analysts raised their price targets on AMP to 162. Aggressive full-year 2017 EPS growth is expected to give way to 11.3% EPS growth in 2018. The AMP price chart has been a sight to behold in recent weeks—the stock equivalent to the Energizer bunny. The stock will be fairly valued in the 160s. Hold.
BP plc (BP – yield 6.1%) is a European integrated oil company and a very undervalued aggressive growth stock. Strength in the Euro is expected to negatively impact third-quarter results for European-based multinational corporations, while BP is expected to benefit from higher oil prices, lower exploration costs, higher refining margins and improving free cash flow. Analysts expect BP’s full-year EPS to grow 104% and 30.4% in 2017 and 2018, with corresponding P/Es of 22.9 and 17.5. BP rested very briefly after a September run-up, then advanced again last week with many integrated oil stocks breaking out of trading ranges. There’s long-term price resistance at 43, where it last traded in 2014. Growth investors who don’t want to hold BP during a several-month period of sideways trading should enter a sell limit order at 42, because odds are very strong that BP will not be able to push past 43 without some serious price consolidation. Dividend investors should hold the stock. When BP is ready to rise past 43, I will consider recommending it again, because it’s still got attractive growth and value prospects. Hold.
Blackstone Group LP (BX – variable large payouts) is a huge and successful alternative asset manager. The company will report third-quarter results on the morning of October 19. The consensus third-quarter EPS estimate is $0.55, with a range of $0.43 to $0.68. BX is a very undervalued growth & income stock. Analysts expect Blackstone’s full-year EPS to grow 34.5% and 13.4% in 2017 and 2018, with corresponding P/Es of 12.2 and 10.8. 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 2.3%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Commercial Metals is expected to see EPS rise 58.6% in fiscal 2018 (August year-end), while the P/E is just 15.1. CMC is extremely undervalued. I will move the stock to a Hold very soon, simply because the run-up will likely come to an end at 24. However, due to excellent earnings growth prospects, I’ll keep CMC in the portfolio for additional capital gains in 2018. When the stock seems ready to subsequently break out—or when it experiences a decent pullback—I’ll alert you to timely buying opportunities. Expect volatility. Buy.
GameStop (GME – yield 7.7%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. GME is having a pullback after its September run-up. Dividend investors should consider owning GME. Hold.
Invesco (IVZ – yield 3.2%) is an asset management company with $917.5 billion in assets under management (AUM), which rose 1.2% in September and 6.9% in the third quarter. Several analysts subsequently raised their price targets. Earnings estimates are increasing 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. Hold.
Johnson Controls (JCI – yield 2.4%) is a multi-industry, large-cap growth & income stock. The company operates on a September fiscal year, and will soon report annual results. Strength in the Euro is expected to negatively impact Johnson Control’s fourth-quarter results. If the numbers surprise on the upside, I might consider holding the stock longer. Otherwise, I plan to sell JCI when it retraces its July high at 44 due to fair valuation. Hold.
Schlumberger (SLB – yield 3.0%) is a premier oilfield equipment and services company with a global footprint. The company will report third-quarter results on the morning of October 20. The consensus third-quarter EPS estimate is $0.42, with a range of $0.39 to $0.45. SLB was featured in the October 2017 issue of Cabot Undervalued Stocks Advisor. The stock is undervalued based on full-year 2018 numbers, with an EPS growth rate of 54% and a P/E of 29.1. SLB is having a pullback subsequent to its September run-up. There’s 28% upside plus dividends as SLB 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. WY just broke out to new highs on October 13. I’m therefore moving the stock from Strong Buy to Hold, with the intention of selling after the current share price advance comes to a halt. Hold.
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. Analysts expect 2018 EPS to grow 27.3% and the corresponding P/E is 19.7. The stock has been quietly trading sideways. Buy ALXN now before its next advance. 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 2.2%) is an oil refiner and marketer, with refineries in the western and northern U.S. Earnings estimates for 2018 have been rising in recent weeks. EPS are now expected to grow 20.0% and 52.6% in 2017 and 2018. The corresponding P/Es are 20.5 and 13.4. 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. Analysts expect Boise Cascade’s EPS to grow 64.8% and 26.6% in 2017 and 2018, with corresponding P/Es of 20.2 and 16.0. It’s a very bullish sign that the stock recently rose with such strength through late September, then barely pulled back. 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. The company will report third-quarter results on the afternoon of October 24. The consensus third-quarter EPS estimate is $1.71, with a range of $0.97 to $2.23. Analysts expect full-year EPS to rise from $0.77 in 2016 to $7.45 in 2017 and $10.58 in 2018. (Last year’s low EPS number reflected the company’s infamous food-borne illness outbreak.) The stock is undervalued, volatile and earnings estimates change weekly.
CMG broke out of its trading range on big volume on October 13. The stock could easily rise to 350 in the short term, at which time it will still be undervalued based on consensus earnings expectations. The stock’s going to be volatile as the share price recovers from its summertime downturn. As long as the earnings projections remain strong, growth investors should buy CMG on any pullbacks caused by random 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. DLTR has barely paused in its climb since early July. I’m holding DLTR with the expectation that it will retrace its August 2016 high of 98, although I will sell if the stock plateaus anywhere below 98. 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 third-quarter estimate rose last week to $4.17 EPS, with a range of $3.60 to $4.50. Annual earnings growth is slowing, and the stock is fully valued. I intend to sell GS at 250, where it last traded in March, although I will sell if the stock plateaus anywhere below 250. Hold.
Legg Mason (LM – yield 2.9%) is a U.S.-based global asset management and financial services company with $754 billion in assets under management (AUM). LM is a very undervalued aggressive growth stock. EPS are expected to grow 22.8% and 19.3% in 2017 and 2018. The corresponding P/Es are 14.4 and 12.1. My price target is 44, where LM last traded in October 2015. However, analysts have recently been downgrading their expectations for the stock. In that light, I might sell LM quite soon. Hold.
Mattel (MAT – yield 3.8%) Profits are expected to fall in 2017, then rise 26.3% in 2018, with a corresponding P/E of 16.4. The price chart is signaling that the worst is over for the stock, and that it’s preparing to rise again. I’m yearning to move Mattel from Hold to Buy right now, but third-quarter results are due soon, on October 26. If the market likes management’s guidance at that time, I believe it will signal the “all clear” to the stock, and that we’ll see a nice share price run-up until early December. At that time, investors should expect a round of tax-loss selling 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, serving about 4.7 million members. Former Aetna CFO and Hanover Insurance Group CEO Joseph Zubretsky has been chosen to become CEO of Molina Healthcare in November. The stock had a 10% pullback last week due to market volatility spurred on by potential legislative changes in healthcare policies and subsidies. 2017 EPS numbers are completely in flux, while analysts are more confident of the company achieving 2018 EPS of $2.83. The 2018 P/E is 21.7. My longer-term price target is 80, where the stock traded in the summer of 2015, giving today’s new investors a potential 33% capital gain. Strong Buy.
Nucor (NUE – yield 2.6%) is a low-cost producer of a diversified portfolio of iron and steel products. The company will report third-quarter results on the morning of October 19. The consensus third-quarter EPS estimate is $0.85, with a range of $0.75 to $1.17. NUE was featured in the October 2017 issue of Cabot Undervalued Stocks Advisor. Full-year EPS are expected to grow 69.9% and 15.9% in 2017 and 2018. The corresponding P/Es are 15.2 and 13.1. The stock is undervalued, and I anticipate upward revisions in earnings estimates for 2018. My 2017 price target on NUE is 65, where the stock last traded in December 2016. I will move the stock to Hold as it gets closer to the price target, which could surprise us and happen soon. I expect NUE to eventually rise past the mid-60s. I love the outlook for the steel industry and steel stocks. Buy.
Total (TOT – approx. 4.1%) is an integrated oil & gas company based in France. Strength in the Euro is expected to negatively impact third-quarter results for European-based multinational corporations. Analysts have revised their full-year 2018 estimates to reflect 7.9% EPS growth. The stock is fairly valued. 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 is undervalued based on 2018 numbers. EPS are expected to grow 7.9% and 25.8% in 2017 and 2018. The corresponding P/Es are 21.0 and 16.7. There’s 9% upside as UEIC retraces its July high around 72, where the stock will still be undervalued. Buy.
