If you missed the energy industry rebound this year, read this bullish synopsis from oilprice.com, “Can Oil Majors Continue to Beat Estimates?” On the bearish side, Norway’s sovereign wealth fund, which is funded from the country’s oil and gas profits, is proposing to eliminate energy stocks from its investment portfolio to lower its exposure to potentially falling oil prices. Read more in “Norway’s $1 trillion wealth fund proposes to drop oil, gas stocks from index.” Norway’s equity index includes both BP plc (BP) and Total (TOT), which appear in the Cabot Undervalued Stocks Advisor portfolios.
Many of the undervalued growth stocks that I follow have neutral or bearish price charts right now. No doubt they’re tuckered out from the bullish price action in 2017! The broader market averages are leaning bullish today, especially the Nasdaq. Please know that U.S. stock markets have not had a decent-sized correction since October 2016, nor any large price correction since the first half of 2016. This type of market action is perfectly normal, and sets the groundwork for further gains, presuming that American companies are growing their profits. (Conversely, without profit growth, there’s no theoretical reason for share prices to grow.)
We could have a smaller correction at any point in time, and I’m anticipating a bigger correction somewhere around the second or third quarter of 2018. I don’t currently see any dark clouds on the horizon. I’m just trying to help newer investors understand what is normal so that when these market changes happen, you’re less likely to panic and more likely to be prepared to buy low.
I do a tremendous amount of stock research in the fourth quarter, and will be adding stocks to the Cabot Undervalued Stocks Advisor portfolios before year-end.
Portfolio Notes
Make sure to review the November 20 Special Bulletin in which I mentioned news, rating changes and/or price action on Cavium (CAVM).
Please note an error in the November 14 Weekly Update. The date within the following sentence in the Bank of America analysis incorrectly read “2017,” when I meant “2018”: “Whereas the bank is currently expected to see EPS grow 19.2% in 2018—an outstanding year of profit growth—a revised EPS number of $2.50 would represent 37.4% year-over-year profit growth.”
Send questions and comments to crista@cabotwealth.com.
Buy-Rated Stocks Most Likely* to Rise More Than 5% Near-Term:
Commercial Metals (CMC)
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:
Boise Cascade (BCC) initiated a quarterly dividend.
PulteGroup (PHM) moves from Hold to Sell.
Vertex Pharmaceuticals (VRTX) moves from Strong Buy to Hold.
Last Week’s Portfolio Changes:
Bank of America (BAC) moved from Buy to Strong Buy.
Blackstone Group LP (BX) moved from Hold to Strong Buy.
Cavium (CAVM) moved from Hold to Sell.
Commercial Metals (CMC) moved from Hold to Strong Buy.
GameStop (GME) moved from Hold to Buy.
Legg Mason (LM) moved from Hold to Strong Buy.
Martin Marietta Materials (MLM) moved from Buy to Strong Buy.
Nucor (NUE) moved from Hold to Strong Buy.
PulteGroup (PHM) moved from Buy to Hold.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. Morgan Stanley’s 16th Annual Asia Pacific Summit took place last week. Analysts, investors and industry representatives were even more bullish on 2018 iPhone sales and pricing in China than Morgan Stanley had been—and Morgan Stanley was already more bullish than the Wall Street consensus. In addition, European iPhone sales are currently stronger than expected, and input from suppliers and consumer surveys indicates that Apple Watch sales will beat expectations in the coming months. This bodes extremely well for multiple quarters of upside earnings surprises, which typically push stock prices upward.
Most of you know that I have never recommended AAPL to Cabot investors prior to August 2017. I’m not one of those pie-eyed AAPL lovers. I’m recommending the stock because it fits all of my growth and value criteria, and profits are now growing faster than Wall Street can keep up with. That causes lots of bullish research reports and rating upgrades, all of which serve to cause people to buy the stock, thus pushing the share price up. If I were only to own one stock through next summer, AAPL would be the one!
I expect AAPL to perform well between now and June 2018, but it will assuredly have plateaus and pullbacks along the way. A short-term pullback to the low 160s would be perfectly normal, and a buying opportunity. Strong Buy.
Bank of America (BAC – yield 1.8%) is expected to achieve aggressive earnings growth in 2018, and the stock is undervalued. Nobody has missed their chance to buy BAC at a good price and benefit from deregulation, rising interest rates, lower income tax rates and a growing economy, which all boost the company’s profits. BAC is trading in the upper 20s and does not yet appear ready for its next run-up. Strong Buy.
KLX Inc. (KLXI) is an extremely undervalued, small-cap aggressive growth stock in the aerospace and energy services industries. I anticipate KLXI trading in the 53 to 56 range for a short while before continuing to reach new highs. Buy.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. MLM is an undervalued mid-cap stock, expected to achieve aggressive earnings growth in 2018. The stock has recently traded between 208 and 219. There’s 14% upside as MLM retraces its May 2017 peak at 240, where the stock will still be undervalued. Strong Buy.
PulteGroup (PHM – yield 1.1%) is a U.S. homebuilder. PHM rose roughly 78% this year, and is still climbing. That’s just ridiculous. I’m selling PHM today because it’s extremely overdue for a price correction, and I’d rather sell now than watch it fall. Traders who decide to hold their shares should use stop-loss orders. Long-term investors who decide to hold will still own a very undervalued aggressive growth stock. Sell.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. PWR is a very undervalued aggressive growth stock. When PWR rises above 38, it will be breaking past long-term price resistance. The stock could therefore have a fantastic year in 2018. Buy PWR now. Strong Buy.
Vertex Pharmaceuticals (VRTX) is an aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). Surging 2017 EPS estimates have been eroding the 2018 EPS growth rate, which now stands at 54%. That’s a fantastic number, to be sure, but the 2018 P/E is 50.7. We could go on and on about the typical high P/Es among biotech stocks, but the bottom line is that VRTX is quite close to being fairly valued according to my investment strategy. Therefore, I’ve decided to move VRTX from Strong Buy to Hold, with the intention of selling as it rises within its trading range towards 165. Hold.
Vulcan Materials (VMC – yield 0.8%) is a supplier of construction aggregates, asphalt and concrete. Vulcan is expected to achieve aggressive earnings growth in 2018. VMC is ratcheting toward its June peak at 134, where it will still be undervalued. Buy.
XL Group (XL – yield 2.3%) is an insurer and reinsurer, and an undervalued mid-cap stock. XL’s share price has been weak lately. It could rise as high as 47 in the coming months before pulling back again. Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 6.1%) is a European integrated oil company and a very undervalued aggressive growth stock. 2017 and 2018 earnings estimates have been rising since late September. I expect BP to reach 43 in the coming months, where it last traded in 2014. Hold.
Blackstone Group LP (BX – yield 7.3*) is an alternative asset manager, and a very undervalued growth & income stock. In the coming three to 12 months, I expect BX to ratchet toward 37, where it last traded in early 2015, giving new investors a potential 16% capital gain. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 7.3%.
Commercial Metals Company (CMC – yield 2.5%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC is a very undervalued aggressive growth stock. The stock will likely trade between 18 and 22 before continuing upward to 24, where it last traded in December 2016. CMC offers new investors a potential 28% capital gain. Buy CMC now. Strong Buy.
GameStop (GME – yield 9.3%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. Last week, GameStop announced that CEO J. Paul Raines will take a medical leave of absence. There is an implication that he is having a recurrence of brain cancer. Co-founder of GameStop Daniel DeMatteo will serve as interim CEO. GameStop will report third-quarter results (January year-end) on the afternoon of November 21. Analysts are expecting $0.43 EPS, with a range of $0.39 to $0.49. Expect volatility.
All U.S. GameStop and ThinkGeek locations began carrying fully-stocked Pokemon Centers on November 19. Previously, these Pokemon products were only available in Japan and online.
The stock’s going to suffer through the end of tax-loss selling season in December, like all stocks that have had a bad year. Come January, shares in solidly profitable companies are free to rise, because anyone who was going to sell has already sold. I expect capital gains down the road, but the dividend is enough to make the stock attractive today. Buy.
Johnson Controls (JCI – yield 2.7%) is a multi-industry, large-cap growth & income stock. Johnson Controls no longer offers a compelling growth and value situation, although the numbers are not worrisome. The price chart is currently bearish. I would optimally like to sell near 40 in the coming months. Hold.
Morgan Stanley (MS – yield 2.0%) is a major U.S. investment bank and wealth manager, and an undervalued growth & income stock. MS is recently trading between 48 and 51. I expect MS to rise toward my fair-value price target of 59 during the next six to 12 months, giving new investors a potential 21% capital gain. Buy MS now. Strong Buy.
Schlumberger (SLB – yield 3.2%) is a premier oilfield equipment and services company with a global footprint. SLB is an undervalued, large-cap aggressive growth stock. The stock is volatile and moves quickly in either direction. There’s 38% upside plus dividends as SLB eventually retraces its December 2016 high near 86. Strong Buy.
WestRock Company (WRK – yield 2.9%) is a major player in the global packaging and container industry. WestRock was featured in the November issue of Cabot Undervalued Stocks Advisor. The company has hundreds of business locations in 30 countries, serving consumer and corrugated markets. WRK is an undervalued, mid-cap growth stock. WRK rose to new all-time highs in mid-October, and has a more bullish price chart than most stocks that I follow. Buy WRK now. Strong Buy.
Weyerhaeuser (WY – yield 3.5%) operates in the areas of timberland, wood products, real estate, energy and natural resources. Weyerhaeuser recently announced a 3.2% quarterly dividend increase to $0.32 per share. WY has been rising since mid-August, reaching new all-time highs. I’m going to let it run, with the goal of selling soon if the 2018 earnings estimates don’t increase. 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. Institutional ownership of biotech stocks increased more for ALXN than for any of its competitors. Profits are growing aggressively and the stock is undervalued. The price chart has been bearish, and the stock will probably remain low until the new year. There’s 46% capital gain potential as ALXN retraces its April 2016 high at 160. Buy ALXN now. Buy.
Boise Cascade (BCC – yield 0.7%) is one of the largest producers of engineered wood products (EWP) and plywood in North America and a leading U.S. wholesale distributor of building products. Last week, Boise Cascade announced that it will begin paying a dividend of $0.07 per share in December. This makes the stock eligible for inclusion into institutional equity portfolios that have a dividend requirement, thus broadening the audience of potential investors.
BCC is an undervalued small-cap growth stock. The stock just rose past short-term price resistance at 37. I’m not going to change the rating back and forth, but anybody who buys BCC under 38.6 can earn a potential 10% capital gain as it approaches 43, where the stock last reached an all-time high in February 2015. Hold.
Chipotle Mexican Grill (CMG) is an undervalued aggressive growth restaurant chain. Chipotle is experiencing aggressive earnings growth, though the share price has very little chance of a rebound past 320 until tax loss selling season is over in January. As long as the profit outlook and valuation remain attractive, I will hold the stock for the prospect of future capital gains. Hold.
Delek US Holdings (DK – yield 2.0%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. Last week, Raymond James raised its price target and rating to 35 and strong buy, and Wells Fargo raised its price target and rating to 40 and outperform.
DK is an undervalued, aggressive growth small-cap stock. Earnings estimates have been rising rapidly in recent months. Analysts now expect EPS to rise 167% in 2018, and the corresponding P/E is quite low at 19.7. Cost and business synergies associated with the June 2017 purchase of Alon USA Energy (ALJ) are contributing to the earnings growth. Delek was featured in the November issue of Cabot Undervalued Stocks Advisor.
DK rose from a year-long trading range in early November, and is currently heading toward upside resistance at 32. There’s 28% capital gain potential as DK eventually rises to 38, where it last traded in early 2015. Strong Buy.
Legg Mason (LM – yield 2.9%) is a U.S.-based global asset management and financial services company with $755.2 billion in assets under management (AUM) as of October 31. LM is a very undervalued growth stock. My price target is 44, where LM last traded in October 2015, offering new investors a 15% capital gain opportunity. Buy LM now. Strong Buy.
Mattel (MAT) – Barbie and Crayola announced a partnership, a new fashion activity line that will be available in the doll aisle beginning this holiday season. Rumors abound that Hasbro (HAS) might make an offer to buy Mattel. The stock is way down for the year. A takeover offer could push the share price above 25. If the companies adamantly deny any M&A activity, MAT could fall back toward the mid-teens until January, when tax-loss selling is over. My suggestion is that investors hold MAT for either a takeover offer or a corporate and share price rebound in 2018. Hold.
Nucor (NUE – yield 2.7%) is a low-cost producer of a diversified portfolio of iron and steel products, and an undervalued mid-cap growth stock. NUE is low within a wide trading range. There’s about 18% upside as NUE retraces its December 2016 high of 65. Strong Buy.
Total (TOT – approx. 4.1%) – This French integrated oil & gas stock is now overvalued in light of dramatically slowing 2018 consensus earnings estimates. There appears to be a little more upside. Bullish energy industry momentum could push TOT into the low 60s, where it last traded in July 2014. 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 an undervalued micro-cap stock, forecasted to achieve aggressive 2018 EPS growth. There’s 37% upside as UEIC retraces its July high around 72, where the stock will still be undervalued. Expect volatility. Risk-tolerant investors should buy now; cautious investors should wait until January to consider the stock. Strong Buy.
