KLX Inc. (KLXI) hires Goldman Sachs to Explore Strategic Alternatives
KLXI rose $6 in after-hours trading on December 22, subsequent to the company’s announcement that “in response to inquiries from interested parties, it has initiated a formal process to explore strategic alternatives for the Company focused on maximizing shareholder value.” KLX might sell or spin off part or all of the company. KLXI is an undervalued small-cap growth stock in the aerospace and energy services industries.
I’m changing KLXI from Strong Buy to Hold. That’s not to say that there’s no more money to be made in KLXI. Odds are strong that the share price will rise further as investors anticipate a potential buyout offer or spinoff. If neither situation materializes, the stock will fall. Consider using a stop loss order to protect your downside. Hold.
Send questions and comments to Crista@CabotWealth.com.
Portfolio Notes
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Alexion Pharmaceuticals (ALXN)
Alphabet (GOOGL)
Baker Hughes (BHGE)
CIT Group (CIT)
Delek (DK)
Interpublic Group (IPG)
Quanta Services (PWR)
*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:
KLX Inc. (KLXI) moves from Strong Buy to Hold.
Last Week’s Portfolio Changes:
Baker Hughes, a GE Co. (BHGE) joined the Buy Low Opportunities Portfolio as a Strong Buy.
CIT Group (CIT) joined the Growth Portfolio as a Strong Buy on December 21.
Southwest Airlines (LUV) moved from Hold to Buy.
Vertex Pharmaceuticals (VRTX) moved from Hold 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.
The newly-legislated Tax Cuts and Jobs Act (TCJA) imposes a 15.5% repatriation tax on unremitted foreign earnings of U.S. corporations that are held in cash investments, regardless of whether the companies bring that cash back to the U.S. Alphabet reportedly has $52.2 billion in overseas cash and equivalents. The company will owe approximately $8.8 billion to the U.S. government in accordance with the change in the tax law, which allows the payments to be made over the course of eight years. The cash repatriation gives Alphabet more flexibility with a net $43.4 billion for myriad potential purposes, including R&D, share repurchases, M&A activity and general business expansion.
Alphabet was featured in the December 5 issue of Cabot Undervalued Stocks Advisor. GOOGL is an undervalued, large-cap aggressive growth stock. EPS are expected to grow 28.6% and 18.8% in 2018 and 2019. I expect the current run-up to continue. Buy GOOGL now, and buy more on dips. Strong Buy
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. In recent days, Bloomberg published a bearish article about iPhone X sales, while Fortune revealed that AAPL is Morgan Stanley’s top tech stock for 2018. To quote a Sesame Street tune, “One of these things is not like the other.” After reading a 14-page research report from my favorite investment bank, dated December 21, I’ve got to concur with the Fortune article. China is the iPhone’s fastest-growing regional market. Chinese consumer interest in the iPhone X is growing, and its sales and market share are soaring, no matter how you slice and dice the data, and are projected to continue doing so. I think the disparity between these two publications’ assessments of iPhone X demand probably boils down to one analyst who wildly overprojected iPhone X sales (or fears that he overprojected), and subsequently needed to revise his estimates downward, choosing to save face via disparaging comments aimed at the iPhone X. I give no credence to the Bloomberg article.
Apple is expected to grow EPS by 24.4% in fiscal 2018 (September year-end), and the P/E is 15.2, presenting an attractive growth and value scenario. Earnings estimates have been rising all year. Take advantage of today’s pullback and buy AAPL now. Strong Buy.
Bank of America (BAC – yield 1.4%) – Consensus earnings estimates rose last week. Analysts now expect EPS to grow 21.5% and 13.6% in 2018 and 2019, with corresponding P/Es of 13.6 and 12.0. That’s probably a reflection of analysts beginning to factor lower income tax rates into their projections. Over the course of the next several years, all of the following phenomena can serve to push earnings estimates higher: lower income tax rates, higher interest rates, deregulation and a growing U.S. economy. The price chart remains bullish. I expect additional capital gains from BAC in 2018. Buy on dips. Strong Buy.
CIT Group (CIT – yield 1.3%) operates both a bank holding company and a financial holding company that provide financing, leasing and advisory services to small and middle market businesses, consumer markets, and the real estate and railroad industries. Consensus earnings estimates rose last week. Analysts now expect EPS to grow 20.6% in 2018, with a corresponding P/E of 14.3. The same macro factors that will benefit BAC also will benefit CIT.
CIT is an undervalued, mid-cap growth stock. The stock surpassed long-term price resistance at 50 on December 4, but has not yet begun its run-up. Nobody has missed the post-breakout capital gain opportunity on CIT! Strong Buy.
KLX Inc. (KLXI) – (The stock review is located in the introduction at the top of the page today.) Hold.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. This growth stock is Morningstar’s top pick for U.S. infrastructure. 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 an undervalued, mid-cap aggressive growth stock. PWR had begun an advance from its early December breakout above 38. I expect additional near-term capital gains. Buy PWR now. Strong Buy.
Southwest Airlines (LUV – yield 0.7%) mirrors Apple Inc. (AAPL) in that the company does not consistently have aggressive annual earnings growth rates, but when those years roll around, the share price performs well. Southwest saw profits fall a bit in 2017, and profits are currently expected to rise just a few percentage points in 2019, but 2018 earnings estimates are strong, reflecting 27.2% EPS growth (December year-end). Therefore, like AAPL, LUV is a stock that I’m likely to own for less than a year in order to capitalize on its near-term profit surge. This month, LUV retraced its July high near 64, then kept rising. I expect additional capital gains in 2018. Buy LUV now and buy more on pullbacks. Buy.
Vertex Pharmaceuticals (VRTX) is a biotech company that corners the market in treatments for cystic fibrosis (CF). Investor’s Business Daily interviewed Vertex CEO Jeffrey Leiden last week, in a recap of the company’s tremendously successful year. Credit Suisse and Jefferies each named VRTX as one of their top biotech stock picks for 2018. This aggressive growth stock is slightly undervalued. VRTX had a huge 2017 run-up through July, followed by a price correction, which appears to have resolved itself. There’s about 10% upside as VRTX retraces its July high at 166. I’m closely following clues in the earnings outlook, the price chart, biotech stocks and the broader market to determine the likelihood that VRTX will surpass 166 in the near future. Strong Buy.
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, and could experience a breakout in January. Buy.
XL Group Ltd. (XL – yield 2.5%) is an insurer and reinsurer; and an undervalued mid-cap stock. After taking a loss in 2017 due to natural disasters, XL is expected to earn $3.72 per share in 2018. The P/E is low at 9.4. Subsequent to a huge run-up in the first half of 2017, on July 20 I wrote, “I’m changing my recommendation from Strong Buy to Buy because [XL] will probably need to rest soon.” Then hurricane season struck … and earthquakes, and a typhoon! XL fell back toward 36, where it began the year. Bargain hunters could earn a 33% capital gain as XL travels back toward 47 in 2018. Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 5.7%) is a European integrated oil company. BP is expected to have another leap in profit in 2018, with EPS growing 41.8%. The corresponding P/E is 15.8. Despite being undervalued and having aggressive earnings growth, I’ll sell BP as it approaches 42, where it last traded in 2014. That’s because when stocks retrace highs from several years ago, they almost always stop rising when they hit that price, and then languish for an extended period of time. Hold.
Blackstone Group LP (BX – yield 7.1*) is an alternative asset manager, and an undervalued growth & income stock. Earnings estimates have been rising since mid-October. BX had a big run-up in the second quarter of 2017, and is most recently trading between 31 and 34.5. I expect BX to retrace 37 in 2018, where it last traded in early 2015, giving new investors a potential 13% capital gain. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 7.1%.
Commercial Metals Company (CMC – yield 2.2%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC is expected to see EPS grow 71.8% and 34.4% in 2018 and 2019 (August year-end). The corresponding P/Es are very low at 17.3 and 12.9. CMC could pause at 22 as it travels toward price resistance at 24, offering new investors a potential 13% capital gain. CMC will still be undervalued at 24, but investors will likely wait a few months before the stock’s ready for a new advance. Strong Buy.
GameStop (GME – yield 8.1%) is a retailer of games, collectibles and technology; with additional ventures in the entertainment field. The share price has improved since November, but continues to be subject to tax-loss selling until the new year. GME is a good choice for income investors, and patient growth investors who like to buy bargains. 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 slower growth. The stock appears to have begun its rebound. There’s 22% 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 2.7%) is a multi-industry, large-cap growth & income stock. JCI appears ready to rise again. I will exchange JCI in the near future for a more undervalued stock. Hold.
Morgan Stanley (MS – yield 1.9%) is a major U.S. investment bank and wealth manager, and an undervalued growth & income stock. Earnings estimates are rising in accordance with prospects for lower income tax rates. The stock is resting after a recent advance. I expect MS to rise toward my fair-value price target of 58 during the next 2 to 6 months. Hold.
Schlumberger (SLB -- yield 3.0%) is a premier oilfield equipment and services company with a global footprint. Wall Street expects the company to achieve very strong earnings growth through at least 2020. I expect oilfield service stocks to have a tremendous year in 2018. There’s 27% upside plus dividends as SLB eventually retraces its December 2016 high near 86. Strong Buy.
WestRock Company (WRK – yield 2.7%) is a major player in the global packaging and container industry. WRK is a mid-cap growth and income stock. The stock rose to a new all-time high this month. I expect additional capital gains in 2018. Strong Buy.
Weyerhaeuser Co. (WY -- yield 3.5%) operates in the areas of timberland, wood products, real estate, energy and natural resources. The stock rose to new all-time highs in November, and is now pulling back toward 34. We could see new highs again quite soon. 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. Alexion will present at the Goldman Sachs Healthcare CEOs Unscripted Conference on January 4. Alexion was featured in the December 5 issue of Cabot Undervalued Stocks Advisor. ALXN is an undervalued aggressive growth stock. The company is expected to achieve strong double-digit earnings growth at least through 2020. The 2017 drop in the share price was significant, and the rebound has begun. There’s a 34% capital gain opportunity as ALXN retraces its April 2016 high at 160. Buy ALXN now. Strong Buy.
Baker Hughes a GE Co. (BHGE – yield 2.2%) offers products, services and digital solutions to the international oil and gas community. The company is 62.5%-owned by General Electric (GE), yet despite GE’s dire financial situation, Baker Hughes is thriving, expected to achieve high double-digit earnings growth at least through 2020. This large-cap stock joined the Buy Low Opportunities Portfolio in the December 19 weekly update.
The price charts of oilfield service companies have been dismal, yet recently stable. Tax-loss selling is almost over. How high can BHGE climb in 2018? It’s hard to say, so let’s take it one step at a time. There’s some short-term upside resistance at 37, where the stock traded in September, so that’s my first price target, giving new investors a potential 14% capital gain. I’m very likely to continue holding the stock at that point. Buy BHGE today. 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. BCC is a fairly valued, small-cap growth stock. The stock has been in an uptrend since late August, and could reach a maximum of
43—where it previously reached an all-time high in February 2015—before the run-up comes to a halt. Hold.
Chipotle Mexican Grill (CMG) is a growing-yet-beleaguered 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 1.7%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. Consensus earnings estimates for 2017 and 2018 have been rising for the past five weeks. DK launched upward from a short-term trading range last week, and could rise to long-term price resistance at 38. At that time, I will likely sell. Buy.
Legg Mason (LM – yield 2.7%) is a U.S.-based global asset management & financial services company. LM is an undervalued growth stock. Earnings estimates have been rising since mid-October. LM is approaching long-term price resistance at 44, where I will likely sell. Hold.
Mattel (MAT) – The worst of tax-loss selling seems to be over for the share price. My suggestion is that investors hold MAT, for either a takeover offer, or a corporate and share price rebound in 2018. Hold.
Nucor Corp. (NUE – yield 2.3%) is a low-cost producer of a diversified portfolio of iron and steel products, and an undervalued mid-cap growth stock. Now that the stock has retraced its December 2016 high near 65, it’s most likely to pull back and trade between 60 and 65 for a little while. Barring a major stock market disruption, we will likely see the stock perform well in 2018. Hold.
Total (TOT – approx. 4.0%) – This French integrated oil & gas stock is fairly valued in relation to 2018 EPS growth expectations. TOT is recently trading between 54 and 57. 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 50% upside as UEIC retraces its July high around 72, where the stock will still be undervalued. Tax loss selling is almost over. Buy UEIC now. Expect volatility. Strong Buy.
