The Correction Is Coming! … Eventually
I would like to reiterate that U.S. stock markets have had attractive growth in 2017, and that markets don’t go straight up. They can easily bounce around just enough to scare you.
The S&P 500 rose 15% year-to-date through October 20, and the Dow Jones Industrial Average rose 18% year-to-date. Those achievements are not remotely unusual when stocks are having a good year. However, it would be normal to expect price corrections along the way—corrections which have been curiously absent this year. In that light, my sense is that the longer it takes for the next correction to arrive, the bigger the correction is going to be.
I am not expecting anything like a stock market crash. Frankly, I don’t even see a correction on the horizon … yet.
In preparation for the next U.S. stock market correction, I am forcing myself to raise cash in my personal portfolio. I say “forcing myself” because I’m not feeling cautious, and I’m not having any trouble whatsoever in identifying undervalued growth stocks that appear immediately capable of delivering capital gains.
Here’s what raising cash might look like. You’ll notice in today’s update that we’re selling Invesco (IVZ). In recent months, what I typically do when I sell a stock from my personal portfolio is hold half the money in cash and reinvest the rest. In that manner I am “saving for a rainy day” while also participating in the current bull market. When the market correction finally shows up, I’ll have cash available to buy low.
In addition, I’m using stop-loss orders on some of my stocks. When a week comes along during which a couple of those stocks get stopped out, that’s my typical warning that the stock market correction has commenced. In the past, I’ve begun to buy low after the market’s dropped for a couple of weeks. I don’t wait very long, because I’m frankly eager to buy stocks!
I’ll do my best to keep you apprised when the market finally looks shaky. In the meantime, let’s buy stocks!
What’s Happening with General Electric (GE)?
General Electric (GE) reported a surprisingly poor quarter last week. CEO John Flannery used the words “unacceptable” and “horrendous” in his woeful descriptions of company problems.
I haven’t recommended or owned GE since Jack Welch was CEO. The company simply hasn’t been delivering the kinds of earnings growth and debt levels that would invite me to give it a second glance.
The bottom line question for current shareholders is this: “Will GE cut the dividend?” The company is not earning the dividend, meaning cash flow is not generating the $8 billion that the dividend costs the company annually. Of course, GE could pay the dividend from its bank account or issue more debt to fund the quarterly payouts. However, an inability to cover the dividend with cash flow is a big red flag among public corporations. Compound that trouble with Flannery’s take-no-prisoners approach to restructuring efforts, and I’d guess that he’s quite brave enough to make the difficult decisions that will force GE back on track in the coming years. That includes reducing the quarterly dividend payout.
You can read more about the dividend problem in TheStreet’s GE’s Dividend Saga Is Far From Over.
If somebody handed me shares of GE today, I’d sell it and buy Schlumberger (SLB). Both stocks are low within their trading ranges. Yet GE is practically in crisis while SLB is thriving. If you want to recoup principal that you may have lost in GE, you will almost surely achieve capital gains more quickly by selling GE and buying shares of a healthy company.
Send questions and comments to crista@cabotwealth.com. (If you don’t receive a response from me, please check your spam folder.)
Quarterly Earnings Release Calendar
October 24 am: PulteGroup (PHM) – 3Q
October 24 pm: Ameriprise Financial (AMP), Chipotle (CMG)** and XL Group (XL)** – 3Q
October 25 pm: Legg Mason (LM) – 2Q and Vertex Pharmaceuticals (VRTX) – 3Q
October 26 am: Alexion Pharmaceuticals (ALXN) 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) and Vulcan Materials (VMC) – 3Q
November 2 pm: Molina Healthcare (MOH)** and Universal Electronics (UEIC) – 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
Big Earnings Beats: Bank of America (BAC), Blackstone Group (BX), Goldman Sachs (GS), Morgan Stanley (MS) and Nucor (NUE)
Earnings in Line with Estimates: KeyCorp (KEY)* and Schlumberger (SLB)
*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 Special Bulletins from October 17, 19 and 20 in which I mentioned news, rating changes and/or price action on Blackstone Group (BX), Commercial Metals (CMC), Goldman Sachs (GS), KeyCorp,* Mattel (MAT), Morgan Stanley (MS), Nucor (NUE), Schlumberger (SLB) and XL Group (XL).
*Not in the Cabot Undervalued Stocks Advisor portfolios.
Buy-Rated Stocks Most Likely* to Rise More Than 5% Near-Term:
Boise Cascade (BCC)
Cavium (CAVM)
KLX Inc. (KLXI)
Morgan Stanley (MS)
PulteGroup (PHM)
Vulcan Materials (VMC)
*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:
Bank of America (BAC) moves from Strong Buy to Buy.
Invesco (IVZ) moves from Hold to Sell.
KLX Inc. (KLXI) moves from Strong Buy to Buy.
Nucor (NUE) moves from Buy to Hold.
Last Week’s Portfolio Changes:
Commercial Metals (CMC) moved from Buy to Hold.
Goldman Sachs (GS) was sold from the Buy Low Opportunities Portfolio.
Morgan Stanley (MS) joined the Growth & Income Portfolio with a Strong Buy recommendation.
Weyerhaeuser (WY) moved from Strong Buy to Hold.
XL Group (XL) moved from Buy to Hold.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.6%) manufacturers the iPhone, iPad, Mac and Apple TV. Apple is expected to achieve aggressive earnings growth in fiscal 2018 (September year-end), and the stock is undervalued. AAPL rose to new all-time highs in early September. 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. BAC was featured in the October 2017 issue of Cabot Undervalued Stocks Advisor. The stock is up 20% since early September, and despite the bullish price action, a pullback would be normal. I’m therefore moving BAC from Strong Buy to Buy. Buy.
Cavium (CAVM) is an undervalued, aggressive growth stock in the semiconductor industry. An analyst at MKM Partners named CAVM as his top mid-cap semiconductor stock pick heading into earnings season. The stock appears ready to rise to price resistance at 74 quite soon, where it last traded in May. Expect volatility. Strong Buy
KLX Inc. (KLXI) is an undervalued aggressive growth stock in the aerospace and energy services industries. The stock is up 20% since late August, and despite the bullish price action, a pullback would be normal. I’m therefore moving KLXI from Strong Buy to Buy. Buy.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand and gravel. MLM is expected to achieve aggressive earnings growth in 2018. The stock is rising now. There’s 11% 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 $0.54 to $0.64. Last week, Citigroup said to sell PHM, and the analysts on the CNBC Halftime Report had a field day pronouncing why Citi was wrong about PHM. The stock broke out from a brief pullback on October 19. 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. 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 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 (CF). The company will report third-quarter results on the afternoon of October 25. The consensus third quarter EPS estimate is $0.31, with a range of (-$0.35) to $0.51. Review the company’s 2017 successes in this October 17 Bloomberg article. VRTX is undervalued based on aggressive 2018 EPS growth expectations. The stock’s been trading very quietly sideways, which often indicates a pending upturn. Buy VRTX now. Buy.
Vulcan Materials (VMC – yield 0.8%) is a supplier of construction aggregates, asphalt and concrete. VMC is undervalued based on aggressive 2018 EPS growth expectations. The stock appears capable of immediately rising toward 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 will report third-quarter results on the afternoon of October 24. The consensus third quarter EPS estimate is (-$3.84), with a range of (-$2.48) to (-$4.33). Despite the financial impact of recent natural disasters, the company remains in a strong financial position. XL is rising toward its recent July high near 47. Hold.
Updates on Growth & Income Portfolio Stocks
Ameriprise Financial (AMP – yield 2.1%) offers insurance products and asset management to retail and institutional clients. The company will report third-quarter results on the afternoon of October 24. Analysts are expecting $2.80 EPS, with a range of $2.69 to $3.00. AMP is an undervalued growth & income stock. The stock has been rising for seven weeks, and could experience a pullback at any time now. Shorter-term investors should use stop-loss orders to protect the downside. Hold.
BP plc (BP – yield 6.1%) is a European integrated oil company and a very undervalued aggressive growth stock. CEO Carl-Henric Svanberg plans to retire in 2018, after a search for a new CEO is concluded. The company will report third-quarter results on the morning of October 31. Analysts expect $0.66 EPS, with a range of $0.64 to $0.69. The stock is performing well. There’s long-term price resistance at 43, where it last traded in 2014. Hold.
Blackstone Group LP (BX – yield 6.6*) is an alternative asset manager. Last week, the company reported third-quarter results that surpassed all analysts’ estimates. The full-year consensus earnings estimates then rose to reflect 36.5% and 12.5% EPS growth in 2017 and 2018. BX is a very undervalued growth & income stock. The stock rose above its recent trading range on October 19, and is now heading toward 37, where it last traded in early 2015. I will probably remove BX from the portfolio at that point, in order to make room for a stock that has more immediate upside. At that time, dividend investors should hold BX. Hold.
*The payout varies each quarter, with the total of the last four announced payouts yielding 6.6%.
Commercial Metals Company (CMC – yield 2.2%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Recent news reports insinuated that Commercial Metals might be purchasing up to five U.S. rebar and wire mills from Gerdau, which is based in Brazil. Pricing of the transaction is the key data that the market will likely focus on. Jefferies raised its recommendation to Buy with a price target of 26, while Deutsche Bank has a 25 price target.
The company will report fourth-quarter results on the morning of October 26 (August year-end). Analysts expect $0.21 EPS, with a range of $0.17 to $0.35. Read more about steel stocks in this series of articles published by Market Realist on October 23. CMC is expecting EPS to fall slightly in 2017, followed by a 70% increase in 2018. With a 2018 P/E of 15.1, CMC is extremely undervalued.
I expect the price run-up will likely come to an end when the stock retraces its December 2016 high near 24. I plan to keep CMC in the portfolio for additional capital gains in 2018. When the stock seems ready to surpass 24—or when it experiences a decent pullback—I’ll alert you to timely buying opportunities. Expect volatility. Hold.
GameStop (GME – yield 7.4%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. Dividend investors should consider owning GME. Hold.
Invesco (IVZ – yield 3.1%) I’m selling IVZ from the Growth & Income portfolio today. The stock has retraced its early 2015 high near 39 and is fairly valued. In addition, we’re a bit overweighted in financial stocks. I’m planning to keep bank and insurance company stocks, while paring back public equity asset manager stocks in anticipation of a stock market correction in 2018. (Market corrections can impact profits at asset management companies.) Sell.
Johnson Controls (JCI – yield 2.4%) is a multi-industry, large-cap growth & income stock. If fourth quarter numbers surprise on the upside (September year-end), 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.
Morgan Stanley (MS – yield 2.0%) is a major U.S. investment bank and wealth manager. The company reported a strong earnings beat last week. Analysts subsequently raised their 2017 and 2018 EPS estimates. Read more about third-quarter results in Barron’s Morgan Stanley’s Strategy Shift Pays Off. MS is an undervalued growth & income stock. The stock rose from a recent trading range last week. My guess is that the maximum upside is about 63, where the stock traded 10 years ago. This large-cap stock is appropriate for investors who would be happy with up to a 26% total return over the next six to 24 months. Strong Buy.
Schlumberger (SLB – yield 3.2%) is a premier oilfield equipment and services company with a global footprint. Wall Street was pleased with the company’s third quarter results last week. TheStreet recommended SLB in this data-filled article, How To Pinpoint “Maximum Pessimism”. Schlumberger is experiencing aggressive earnings growth in both 2017 and 2018. SLB was featured in the October 2017 issue of Cabot Undervalued Stocks Advisor. Shares of energy service companies became quite weak in October. I expect SLB to promptly turn around and rise again. There’s 39% upside plus dividends as SLB eventually retraces its December 2016 high near 86. Buy SLB now. Strong Buy.
Weyerhaeuser (WY – yield 3.5%) is one of the largest U.S. manufacturers of wood and cellulose fiber products. The company will report third-quarter results on the morning of October 27. Analysts expect $0.31 EPS, with a range of $0.28 to $0.35. WY is a high EPS growth and high P/E stock that’s reaching new all-time highs. I plan to sell after the current run-up ceases. 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. Piper Jaffray initiated coverage on ALXN on October 23 with an Overweight rating and a 170 price target. Alexion will report third-quarter results on the morning of October 26. Analysts expect $1.32 EPS, with a range of $1.23 to $1.46. ALXN is overvalued based on 2017 numbers and solidly undervalued for 2018. Buy.
Andeavor (ANDV – yield 2.1%) is an oil refiner and marketer, with refineries in the western and northern United States. Read about the good prognosis for the industry’s third-quarter results in U.S. Diesel Margins to Define Refiner Profits for Q3 and Beyond. Earnings estimates for 2017 and 2018 continue to rise. ANDV is an undervalued aggressive growth stock. I expect the stock 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. Hold.
Boise Cascade (BCC) is a wood products and building materials company. BCC is an undervalued, aggressive growth small-cap stock. The stock is hinting that it’s ready to rise above 36. There’s price resistance at 40 from early 2015. 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 market will be paying close attention to food and labor costs, and performance of the new queso menu item. The consensus third-quarter EPS estimate is $1.63, with a range of $0.97 to $2.23. The stock is undervalued, volatile, and earnings estimates change weekly. CMG is rising from its recent trading range. The stock could easily reach 350 in the short term, or fall to 295, depending on the market’s reaction to the earnings report. 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 plan to sell DLTR when it retraces its August 2016 high above 95. 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). Last week, Deutsche Bank began coverage on LM with a Buy rating and a price target of 44. The company will report second-quarter 2018 results on the afternoon of October 25 (March year-end). Analysts expect $0.69 EPS, with a range of $0.66 to $0.71. LM is a very undervalued aggressive growth stock. My price target is 44, where LM last traded in October 2015. Hold.
Mattel (MAT – yield 3.8%) will report third-quarter results on the afternoon of October 26. Analysts expect $0.59 EPS, with a range of $0.45 to $0.69. Competing toymaker Hasbro announced that the Toys R Us bankruptcy filing will likely impact Hasbro’s shipments to the retailer during the fourth-quarter holiday season. Investors should expect share price volatility when quarterly results are announced this week. Hold.
Molina Healthcare (MOH) is a managed healthcare operator, serving about 4.7 million members. 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 22.8. My longer-term price target is 80, where the stock traded in the summer of 2015, giving today’s new investors a potential 21% capital gain. Strong Buy.
Nucor (NUE – yield 2.5%) is a low-cost producer of a diversified portfolio of iron and steel products. The company reported an earnings beat on October 19. Subsequently, Citigroup and Cowen & Co. raised their price targets on the stock to 66 and 63, respectively. Read more about steel stocks in this series of articles published by Market Realist on October 23. This undervalued growth stock was featured in the October 2017 issue of Cabot Undervalued Stocks Advisor.
I’m moving NUE from Buy to Hold because I expect the stock to stop rising when it retraces its December 2016 high of 65. I love the outlook for the steel industry and steel stocks. I’m holding NUE with the expectation of additional capital gains in 2018. When the stock appears ready to surpass 65, or when it pulls back into the upper 50s, I’ll move it back to a Buy recommendation. Hold.
Total (TOT – approx. 4.1%) is an integrated oil & gas company based in France. The company will report third-quarter results on the morning of October 27. TOT is slowly traveling 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. There’s 14% upside as UEIC retraces its July high around 72, where the stock will still be undervalued. Buy.
