The Office of the U.S. Trade Representative and the Department of Commerce have taken a decidedly different approach to U.S. participation in international trade since November 2016. We’ve recently seen the Trump administration’s serious pushback against long-standing trade abuses in the softwood lumber and steel industries (see the reviews below pertaining to Boise Cascade, Commercial Metals, Nucor and Weyerhaeuser). It’s therefore worth examining what else they’re working on, since they’re apparently focused on solving problems that could affect our investing decisions.
I realize that international trade can be somewhat of a dry topic, but since these decisions are affecting the bottom line in U.S. industry, stock market opportunities are unfolding before us. Here are the bullet points on the hot topics in international trade today:
- Members of the World Trade Organization (WTO) are meeting in Buenos Aires, Argentina this week through December 13. USTR Robert Lighthizer is pushing the WTO to solve disagreement surrounding its dispute settlement system, the development status of nations and the enforcement of current rules before creating new rules or appointing new members to the WTO Appellate Body. Contentious topics also include chronic overcapacity, fisheries, agriculture, subsidies and state-owned enterprises. Lighthizer plans to “advocate for U.S. economic and trade interests, including WTO institutional reform and market-based, fair trade policies.”
- A moratorium on e-commerce duties is set to expire at the end of this week’s WTO ministerial (meeting) unless the trade ministers take action to renew them. Political friction adds color to the outcome.
- Representatives from the U.S., Mexico and Canada are meeting this week in Washington D.C. through December 15 to discuss potential changes to the North American Free Trade Agreement (NAFTA). This week’s topics include digital trade, trade facilitation, good regulatory practices, telecommunications, customs, technical barriers to trade and sanitary and phytosanitary measures.
- Whirlpool (WHR) filed a petition with the U.S. International Trade Commission (USITC) in May 2017, which was backed by General Electric (GE), contending that South Korea’s Samsung and LG have manipulated production facilities of large residential washers in order to circumvent anti-dumping duties imposed by the U.S. Commerce Department. The USITC delivered a final report on its investigation last week, acknowledging the trade abuses, suggesting tariff-rate quotes, while also allowing Samsung and LG to continue selling to U.S. customers and opening manufacturing facilities in South Carolina and Tennessee.
I’m sorry if that was a little boring, but this is the kind of news I read in order to identify possible investment opportunities. I’ll stay abreast of the trade news, and you’re welcome to send me questions and comments if you’re a policy wonk!
Portfolio Notes
Be sure to review the Special Bulletins from December 6 and 8 in which I mentioned news, rating changes and/or price action on Alexion Pharmaceuticals (ALXN), KLX (KLXI) and Southwest Airlines (LUV). Send questions and comments to crista@cabotwealth.com.
Buy-Rated Stocks Most Likely* to Rise More Than 5% Near-Term:
Interpublic Group (IPG)
Nucor (NUE)
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:
Nucor (NUE) moves from Strong Buy to Buy.
Last Week’s Portfolio Changes:
Alexion Pharmaceuticals (ALXN) moved from Buy to Strong Buy.
Alphabet (GOOGL) joined the Growth Portfolio as a Strong Buy.
Interpublic Group (IPG) joined the Growth & Income Portfolio as a Strong Buy.
KLX (KLXI) moved from Buy to Strong Buy.
Updates on Growth Portfolio Stocks
Alphabet Cl. A (GOOGL) – Alphabet is the world’s largest internet company. Revenue is derived from Google’s online ads, with the balance coming from the sale of apps, digital content, services, licensing and hardware. Alphabet was featured in the December 5 issue of Cabot Undervalued Stocks Advisor.
GOOGL is an undervalued, large-cap aggressive growth stock. GOOGL broke past upside resistance in late October, rising to a new intraday all-time high of 1,073 in November, then came back down toward price support at about 1,010 with the recent selloff among tech stocks. This is a wonderful time to snap up GOOGL shares, while the stock’s having a pullback within a bullish chart pattern. Strong Buy.
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. The company is expected to grow EPS by 24.2% in fiscal 2018 (September year-end), and the P/E is 15.0, presenting an attractive growth and value scenario. AAPL had a quick 20-point run-up in late October, followed by its current sideways trading between 167 and 176. Strong Buy.
Bank of America (BAC – yield 1.6%) is expected to achieve aggressive earnings growth in 2018, and the stock is undervalued. The price chart remains bullish. I expect additional capital gains from BAC in 2018. Strong Buy.
KLX Inc. (KLXI) is an extremely undervalued, small-cap aggressive growth stock in the aerospace and energy services industries. KLXI reported a great third quarter last week (see the December 6 Special Bulletin). Analysts now expect EPS to grow 195% and 26.8% in 2018 and 2019 (January year-end).
The stock shot upward in reaction to the earnings report. It’s perfectly normal for a stock to have a pullback after rapid gains, so if KLXI comes down to 56 in the coming days, please don’t worry, and consider taking advantage of the lower share price. Given a neutral-to-bullish stock market, such a pullback will likely be brief. I expect more capital gains in the coming year. I also want to reiterate that profitable small-cap stocks make excellent takeover targets. Strong 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. There’s 13% upside as MLM retraces its May 2017 peak at 240, where the stock will still be undervalued. Strong Buy.
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. PWR rose above long-term price resistance last week. I expect immediate capital gains. Buy PWR now, and buy more on pullbacks. Strong Buy.
Southwest Airlines (LUV – yield 0.8%) is an undervalued growth stock. LUV has retraced its July high near 64. Traders should sell. Odds are decent that the stock will have a pullback towards 60 now. The second, less-likely scenario is that LUV keeps climbing, then has a pullback to 64. I’m going to keep the stock in the portfolio, and will move it from Hold to Buy under either of those two pullback scenarios. I expect additional capital gains in 2018. Hold.
Vertex Pharmaceuticals (VRTX) is an undervalued, aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). On December 7, Vertex announced positive results in a Phase III study of KALYDECO on children ages one to two. Applications for FDA and European approval are expected in the first quarter of 2018.
Final Congressional tax legislation might retain the alternative minimum tax (AMT) while lowering the corporate income tax rate. Such a scenario could be more costly to companies like Vertex that invest heavily in research and development (R&D) than would maintaining the current income tax system. The House and Senate plan to spar over keeping vs. eliminating the AMT. Vertex’s R&D expenses as a percentage of revenue have declined from 129.6% in 2014 to an expected 45.1% in 2017. One major Wall Street biotech analyst expects that number to continue declining to 27.2% by 2020.
At this time of year, stocks that have seen their prices fall in recent months tend to remain depressed until January. Hold.
Vulcan Materials (VMC – yield 0.8%) is a supplier of construction aggregates, asphalt and concrete. VMC is an undervalued aggressive growth stock. VMC has traded between 112 and 135 since November 2016. I expect the stock to eventually break out of that trading range. Buy.
XL Group (XL – yield 2.4%) is an insurer and reinsurer, and an undervalued mid-cap stock. In a research report from a major investment bank last week, the analyst reported that property & casualty insurance pricing is broadly improving, though not yet reflected in stock valuations. Companies are currently seeing 5% to 30% rate increases in U.S. policies (and minimal increases in Europe), which are expected to dramatically increase earnings per share (EPS). XL has 15% upside as it retraces short-term resistance at 42, and could retrace its July 2017 high near 47 in the coming months. Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 6.0%) is a European integrated oil company and an undervalued aggressive growth stock. My price target is 42, where BP last traded in 2014. Hold.
Blackstone Group LP (BX – yield 7.2*) 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 14% capital gain. Buy BX now. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 7.2%.
Commercial Metals Company (CMC – yield 2.3%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Steel stocks are rising in response to U.S. Department of Commerce action against foreign trade abuses. Certain Vietnam steel products will now be subject to significant anti-dumping and countervailing duties, retroactive to the commencement of the investigation in November 2016. (The problem stemmed from Chinese steel products being finished in Vietnam in order to travel to the U.S. under existing rules between Vietnam and the U.S.) As a result, steel prices are expected to rise in the U.S. in 2018. The U.S. Department of Commerce continues to investigate additional instances of trade abuses within the steel industry.
CMC is a very undervalued aggressive growth stock. The stock is rising toward price resistance at 22, with additional resistance at 24, where it last traded in December 2016. BofA Merrill raised its rating to Buy last week, also with a 24 price target. CMC offers new investors a potential 16% capital gain. Strong Buy.
GameStop (GME – yield 8.0%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. The share price continues to show improvement and could reach 21 this month. Buy.
The Interpublic Group of Companies (IPG – yield 3.5%) is a large conglomerate of advertising, marketing, communications and public relations companies serving all global markets. Interpublic was featured in the December 5 issue of Cabot Undervalued Stocks Advisor. IPG is a slightly undervalued growth & income stock with an attractive rising annual dividend.
IPG rose to an all-time high of 25.25 in July, then fell precipitously as full-year 2017 revenue and profit estimates were lowered to reflect very modest growth. The stock appears to have begun its rebound. There’s 24% capital gain potential as IPG wanders back to its July high. At that point, I would expect the stock to get stuck. But for now, there’s lots of room to make money. Strong Buy.
Johnson Controls (JCI – yield 2.8%) is a multi-industry, large-cap growth & income stock. Last week, the company increased the quarterly dividend from $0.25 to $0.26 and added $1 billion to the share repurchase authorization (which has $200 million remaining from the previous authorization). The stock is overvalued based on 2018 EPS (September year-end), yet undervalued based on subsequent years’ numbers. I will likely sell near price resistance at 40 in the coming months. Hold.
Morgan Stanley (MS – yield 1.9%) is a major U.S. investment bank and wealth manager, and an undervalued growth & income stock. The price chart is bullish. I expect MS to rise toward my fair-value price target of 58 during the next two to six months. Hold.
Schlumberger (SLB –yield 3.1%) is a premier oilfield equipment and services company with a global footprint. Over the past five years, Schlumberger experienced a slight increase in North American market share, while Halliburton (HAL), with the largest North American share—had strong market-share gains at the expense of Baker Hughes A GE Co (BHGE) and Weatherford (WFT). Internationally, Schlumberger owns over 50% of its industry’s market share, exceeding the total share of its three major competitors. In addition, Schlumberger has much higher margins than those of its three competitors, and barely saw margins drop during recent years’ weak pricing environment that greatly affected the competition. The recent extension of OPEC production cuts is expected to lead to rising oil prices, which will likely increase demand for Schlumberger’s oilfield services.
SLB is an undervalued, large-cap aggressive growth stock. The stock is volatile and ratcheting upward. There’s 33% upside plus dividends as SLB eventually retraces its December 2016 high near 86. Strong Buy.
WestRock (WRK – yield 2.7%) is a major player in the global packaging and container industry. At WestRock’s Investor Day on December 8, management elaborated on revenue and margin goals: “WestRock has the opportunity to expand its margins and deploy its capital to grow adjusted EBITDA from $2.3 billion in fiscal year 2017, to more than $4 billion in fiscal year 2022.” Investors may access the Investor Day presentations via the company website: click here, then scroll down to “Featured Presentation.”
WRK is a mid-cap growth & income stock. The stock has been steadily rising in new all-time high territory. Pullbacks along the way will be normal. I expect additional capital gains in 2018. Strong Buy.
Weyerhaeuser (WY – yield 3.4%) operates in the areas of timberland, wood products, real estate, energy and natural resources. Reuters reported on December 7: “The U.S. International Trade Commission said on Thursday it made a final finding that exports of softwood lumber from Canada injure U.S. producers, virtually ensuring that hefty duties on imports of the building material will remain in place for five years.” This news bodes well for U.S. lumber companies’ revenues and profit margins. WY shares are overvalued based on 2018 numbers. The stock rose to new all-time highs in November and has since traded quietly between 35 and 36. 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. Last week, Alexion announced a collaboration and license agreement with Halozyme Therapeutics “that enables Alexion to use Halozyem’s ENHANZE drug-delivery technology in the development of subcutaneous formulations for their portfolio of products. ENHANZE has become the industry standard for converting intravenous therapies to a subcutaneous delivery, helping partners and health care providers reduce the treatment burden and administration time for patients.”
Alexion installed Ludwig Hantson as CEO in March 2017, who proceeded to cut costs, discard weak prospective drugs and partnerships, and brought on new board directors with scientific experience. Alexion was featured in the December 5 issue of Cabot Undervalued Stocks Advisor.
Final Congressional tax legislation might retain the alternative minimum tax (AMT) while lowering the corporate income tax rate. Such a scenario could be more costly to companies like Alexion that invest heavily in research and development (R&D) than would maintaining the current income tax system. The House and Senate plan to spar over keeping vs. eliminating the AMT. One major Wall Street biotech analyst expects Alexion’s R&D expenses as a percentage of revenue to decline slightly from 22% in 2017 to an expected 20% in 2020.
ALXN is an undervalued aggressive growth stock. Unlike some biotech companies that chalk up annual net losses, Alexion is solidly profitable. Earnings per share (EPS) were $4.62 in 2016, and analysts are expecting $5.64 and $7.08 in 2017 and 2018, representing EPS growth rates of 22.1% and 25.5%. Alexion also differs from the typical high-P/E biotech stock with a 2018 P/E of just 15.3.
ALXN is a volatile stock. The 2017 drop in the share price has been significant, which in turn presents investors with a 42% capital gain opportunity as the stock rebounds to its April 2016 high at 160. We’re just weeks away from the close of tax-loss selling season, at which time the pressure should lift from the share price. Strong 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. Reuters reported on December 7: “The U.S. International Trade Commission said on Thursday it made a final finding that exports of softwood lumber from Canada injure U.S. producers, virtually ensuring that hefty duties on imports of the building material will remain in place for five years.” This news bodes well for U.S. lumber companies’ revenues and profit margins. BCC is a fairly valued, small-cap growth stock. The stock is rising toward 43, where it previously reached an all-time high in February 2015. Hold.
Chipotle Mexican Grill (CMG) is an undervalued aggressive growth restaurant chain. There’s short-term upside price resistance at 330 and 350. 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 1.8%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. DK is an undervalued, aggressive growth small-cap stock. DK emerged from a year-long trading range in early November and quickly rose to two-year price resistance at 32. It’s a good sign that the stock leveled out around 32-33, but it could easily have a pullback to 29. I would consider that a buying opportunity. Strong Buy.
Legg Mason (LM – yield 2.7%) is a U.S.-based global asset management and financial services company. LM is an undervalued growth stock. Earnings estimates have been rising since mid-October. Despite the great growth and value scenario, I plan to sell LM near 44, where it last traded in October 2015. Hold.
Mattel (MAT) The media continues to ponder a potential merger between Hasbro (HAS) and Mattel, but there have been no conducive statements coming from company representatives. The stock is way down for the year. A takeover offer could push the share price above 25. My suggestion is to hold MAT for either a takeover offer or a corporate and share price rebound in 2018. Hold.
Nucor (NUE – yield 2.5%) is a low-cost producer of a diversified portfolio of iron and steel products, and an undervalued mid-cap growth stock. Steel stocks are rising in response to U.S. Department of Commerce action against foreign trade abuses. Certain Vietnam steel products will now be subject to significant anti-dumping and countervailing duties, retroactive to the commencement of the investigation in November 2016. (The problem stemmed from Chinese steel products being finished in Vietnam in order to travel to the U.S. under existing rules between Vietnam and the U.S.) As a result, steel prices are expected to rise in the U.S. in 2018. The U.S. Department of Commerce continues to investigate additional instances of trade abuses within the steel industry.
Nucor announced a tiny quarterly dividend increase on December 1, from $0.377 to $0.38. Now that NUE is getting closer to its December 2016 high of 65, I’m moving the stock from Strong Buy to Buy. I expect the stock to rest near 65 before gathering enough momentum to continue its run-up. Buy.
Total (TOT – approx. 4.0%) This French integrated oil & gas stock is fairly valued based on 2018 numbers, which have risen for the past three weeks. TOT has recently traded between 54.5 and 57, and has been ratcheting upward since early July. I expect the stock to rise to the low 60s, where it last traded in July 2014, and where I will likely 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 an undervalued micro-cap stock, forecasted to achieve aggressive 2018 EPS growth. There’s 49% upside as UEIC retraces its July high around 72, where the stock will still be undervalued. Expect volatility. Risk-tolerant investors should buy now, and cautious investors should wait until January to consider the stock. Strong Buy.
