What Investors Need to Know About Recent Earnings Estimates
When I do research for this weekly update, I review the consensus earnings per share (EPS) estimates for each portfolio stock. The consensus estimate represents the average of all the estimates of the Wall Street analysts who do research on the company. This past week, estimates surged more than I’ve ever seen, involving a majority of our portfolio stocks, and involving much more than the typical one- or two-penny per share increases. When I looked up the numbers on Commercial Metals (CMC), I thought I was mistakenly looking at estimates for the wrong company because the numbers had jumped so much higher!
The rising earnings estimates are due to the growing economy, lower income tax rates, deregulation, higher interest rates, and the fact that our government is getting aggressive about resolving long-standing trade problems where foreign countries frequently had the upper hand. I expect the bull market to continue, with a price correction along the way. I’ll be making Buy recommendations during any downturn that comes along.
Big Predictions for 2018
Byron Wiens, Vice Chairman of the Private Wealth Solutions group at Blackstone (and Chief Strategist during some of my years at Morgan Stanley) published his Ten Surprises for 2018 last week. I agree with many of his pronouncements, especially this one:
“The U.S. economy has a better year than 2017, but speculation reaches an extreme and ultimately the S&P 500 has a 10% correction. The index drops toward 2,300, partly because of higher interest rates, but ends the year above 3,000 since earnings continue to expand and economic growth heads toward 4%.”
In essence, we both expect a strong economy and a sizeable stock market correction that will sort itself out within a few months.
I’m taking a poll: When I send out a recommendation to buy or sell a stock, do you have a very strong opinion about what time of day you receive the bulletin? I have always preferred to make the decision immediately after the market opens, based on that morning’s price action. However, today I was speaking with a financial professional who thought I should only send out the notice after the market closes.
Send questions and comments to crista@cabotwealth.com.
Portfolio Notes
Be sure to review the January 3 and 5 Special Bulletins in which I mentioned news, rating changes and/or price action on Commercial Metals (CMC), Delek US Holdings (DK) and Nucor (NUE).
Buy-Rated Stocks Most Likely* to Rise More Than 5% Near-Term:
Apple (AAPL)
Bank of America (BAC)
CIT Group (CIT)
ConocoPhillips (COP)
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:
(none)
Last Week’s Portfolio Changes:
BB&T Corp. (BBT) joined the Growth & Income Portfolio as a Strong Buy.
Boise Cascade (BCC) moved from Hold to Sell.
ConocoPhillips (COP) joined the Growth Portfolio as a Strong Buy.
Delek US Holdings (DK) moved from Hold to Sell.
Johnson Controls (JCI) moved from Hold to Sell.
Knight-Swift Transportation Holdings (KNX) joined the Growth Portfolio as a Strong Buy.
Legg Mason (LM) moved from Hold to Sell.
Morgan Stanley (MS) moved from Hold to Strong Buy.
Supernus Pharmaceuticals (SUPN) joined the Buy Low Opportunities Portfolio as a Strong Buy.
Total SA (TOT) moved from Hold to Sell.
Vertex Pharmaceuticals (VRTX) moved from Hold to Sell.
Vulcan Materials (VMC) moved from Hold to Sell.
Weyerhaeuser (WY) moved from Hold to Sell.
Updates on Growth Portfolio Stocks
Alphabet Cl. A (GOOGL) 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. GOOGL is an undervalued, large-cap aggressive growth stock. EPS are expected to grow 28.7% in 2018, with a P/E of 26.7. Consensus earnings estimates additionally point to 18%–19% annual EPS growth in 2019 and 2020. While I might eventually sell GOOGL if it becomes very overvalued—which absolutely happens from time to time—longer-term investors should feel comfortable ignoring the price chart and planning to own this stock for years to come. I expect GOOGL to continue ratcheting upward. A brief pullback to 1,070 would be normal, and a good buying opportunity. Strong Buy.
Apple (AAPL – yield 1.4%) manufactures a wide range of popular communication and music devices. I know that news stories continue to sound the alarm on iPhone sales, but Wall Street analysts—the cream-of-the-crop financial professionals who have earned the top positions in their industry—expect Apple’s EPS to grow by 24.4% in fiscal 2018 (September year-end), and that number continues to grow each month. The 2018 P/E is quite low at 15.2. Who are you going to believe about Apple’s business success: financial “rocket scientists” or attractive recent communications major college graduates who now deliver news with a driving career goal of covering the same exact stories that their peers are covering so as to ensure job security? (My sister was a communications major, and is an executive TV producer—not news media, fortunately! I don’t tell her how to edit shows, and she doesn’t tell me which stocks to buy.) Moral of the story: Stop allowing talking heads to influence your investment decisions! The price chart seems to indicate that AAPL could rise above 177 to new highs this week. Buy AAPL now. Strong Buy.
Bank of America (BAC – yield 1.6%) Analysts raised their projected 2018 EPS grow rate to 26.5% in 2018, and the 2018 P/E is 13.2. Over the course of the next several years, all the following phenomena can serve to push earnings estimates higher: lower income tax rates, higher interest rates, deregulation and a growing U.S. economy. BAC keeps climbing … isn’t this fun?! Buy on pullbacks. Strong Buy.
CIT Group (CIT – yield 1.2%) 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. CIT is one of my two top stock picks for 2018 for the MoneyShow. Analysts’ 2018 EPS growth estimates jumped from 20.6% two weeks ago to a current 27.5%, and 2019 numbers also reflect aggressive growth, while the P/Es are in the low teens. The stock surpassed long-term price resistance at 50 on December 4, then had a small pullback. I believe CIT is about to launch upward. Buy CIT now. Strong Buy.
ConocoPhillips (COP – yield 1.8%) is a global energy exploration and production company. The market’s expecting 236% EPS growth in 2018, and the P/E is 33.3. COP rose to 77.5 in July 2014, then proceeded to lose more than half its value. The rebound has long since begun. There’s 36% upside as the stock retraces its former high, and I expect that process to take about a year. Strong Buy.
KLX Inc. (KLXI) is an undervalued small-cap growth stock in the aerospace and energy services industries. KLX has been approached by several potential buyers. KLX hired Goldman Sachs in December to handle the potential M&A transaction, but there’s been no recent news on the topic. The Motley Fool thinks that KLX is ”probably going private.” (That means one or several investors could buy all of the shares, and that KLX will no longer be a public company with stock that trades on the stock exchange.) Odds are strong that an offer will be made and that the KLXI share price will rise further. Consider using a stop loss order to protect your downside. Hold.
Knight-Swift Transportation Holdings (KNX – yield 0.5%) is a new truckload carrier formed from the September 2017 merger between Knight Transportation and Swift Transportation Company. Both trucking supply and demand have been trending far higher than normal. Consensus earnings estimates rose last week, now indicating 47.1% EPS growth in 2018, and the P/E is 25.2. KNX rose above price resistance at 41.5 in late November, and continues to gradually rise. Buy KNX now. 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 aggressive growth stock. MLM will probably rest a bit now in its journey to retrace its May 2017 peak at 240, where the stock will still be undervalued. Hold.
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. Analysts expect EPS to grow 26.0% in 2018, with a P/E of 16.0. PWR is advancing from its early December breakout above 38. Buy PWR now. Strong Buy.
Southwest Airlines (LUV – yield 0.8%) Analysts expect EPS to grow 29.8% in 2018, with a P/E of 13.9. LUV is having a pullback and could temporarily dip down to 60, which is a good purchase price. I expect additional capital gains in 2018. Buy.
XL Group (XL – yield 2.5%) is an insurer and reinsurer, and an undervalued mid-cap stock. XL shares rose and then fell in 2017, giving back all their gains as the market dumped shares of property & casualty insurers in the wake of hurricanes, earthquakes and a typhoon. What investors don’t quite realize is that natural disasters are “business as usual” in that industry, and that XL Group was prepared for a surge in insurance claims. Consensus earnings estimates have remained very strong and relatively unchanged for the last three months. Therefore, the stock should theoretically have a good year in 2018. Bargain hunters could earn a 35% capital gain as XL travels back toward 47 in 2018. Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 2.6%) is a 145-year-old financial holding company with $220 billion in assets and 2,100 financial centers that serve businesses and individuals. Services include retail and commercial banking, investments, insurance, wealth management, asset management, mortgage, corporate banking, capital markets and specialized lending. Wall Street expects BB&T’s EPS to grow 28.4% in 2018, while the P/E is low in comparison at 14.4. The stock rose past short-term price resistance around 49.25 in early December to new all-time highs, rested for a month, and has now commenced its run-up. Nobody has missed their opportunity to buy BBT and fully benefit from strong trends in the economy and corporate earnings growth. Buy BBT now. Strong Buy.
Blackstone Group LP (BX – yield 7.0*) is an alternative asset manager and an undervalued growth & income stock. BX has been ratcheting upward since mid-November, toward early-2015 price resistance at 37. New investors can earn a potential 12% capital gain plus dividends. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 7.0%.
Commercial Metals Company (CMC – yield 1.9%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC is expected to see EPS grow aggressively at 97.2% and 33.6% in fiscal 2018 and 2019 (August year-end), with corresponding P/Es of 17.8 and 13.3. The stock rose last week on a combination of M&A activity and its first–quarter earnings report (August year-end). Commercial Metals will pay $600 million in cash to acquire rebar fabrication facilities and steel mills from Gerdau SA (GGB), located in California, Florida, New Jersey and Tennessee. In addition, the company reported a huge first-quarter earnings beat of $0.31 per share vs. the consensus $0.17. CMC shot past one-year price resistance at 24 last week. Odds are fairly good that we could see a quick pullback to 22, but the price chart remains bullish. The general outlook for the company remains one of aggressive earnings growth. Buy.
GameStop (GME – yield 8.0%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. January price action will be the key on how to proceed with GME. Now that tax-loss selling is behind us, the stock seems to be recovering, but it’s too soon to assess its next likely move. 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 3.6%) is a large conglomerate of advertising, marketing, communications and public relations companies serving all global markets. Interpublic will present at the Citi 2018 Global TMT West Conference on January 10. IPG is a slightly undervalued growth & income stock with an attractive rising annual dividend and a much lower P/E than the average of its peers in the media and advertising space. The stock is trading quietly sideways right now. There’s 25% capital gain potential as IPG wanders back to its July high of 25.25. Strong Buy.
Morgan Stanley (MS – yield 1.9%) is a major U.S. investment bank and wealth manager, and an undervalued growth & income stock. Analysts expect EPS to grow 18.2% in 2018, with a P/E of 12.6. My price target is in the low 60s. The stock is resting after a recent advance. Given a neutral-to-bullish stock market, MS could rise about 17% in 2018. Strong Buy.
Nucor (NUE – yield 2.2%) is a low-cost producer of a diversified portfolio of iron and steel products, and an undervalued mid-cap growth stock. Jim Cramer mentioned Nucor as a beneficiary of trade sanctions that may be imposed on U.S. imports of Chinese steel. Analysts expect EPS to grow 26.5% in 2018, with a P/E of 15.0. NUE broke through price resistance at 66 last week and began reaching all-time highs. I expect to continue profiting from both capital gains and dividends in 2018. I would love to buy on a brief pullback into the low 60s. Buy.
Schlumberger (SLB – yield 2.7%) is a premier oilfield equipment and services company with a global footprint. Analysts expect EPS to grow 48.6% in 2018 (with a P/E of 33.9) and to continue growing at aggressive rates through at least 2020. I expect oilfield service stocks to have a tremendous year in 2018. There’s 17% upside plus dividends as SLB eventually retraces its December 2016 high near 86. Strong Buy.
WestRock Company (WRK – yield 2.5%) is a major player in the global packaging and container industry, and a mid-cap growth & income stock. Analysts expect EPS to grow 40.8% in 2018, with a P/E of 18.2. The stock is reaching new all-time highs. Buy on pullbacks. Strong Buy.
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 and hedge fund Elliott Management joined forces to seek a new board member, a good sign that Alexion is open to potentially-constructive business suggestions from Elliott. (The alternative is that the two entities lock horns and receive a lot of negative press, which makes investors wary of buying the stock.) ALXN is undervalued and expected to see aggressive earnings growth through at least 2020. ALXN is up about 16% since its December lows, and ratcheting upwards. There’s a 32% capital gain opportunity as ALXN retraces its April 2016 high at 160. Buy ALXN now. Strong Buy.
Baker Hughes, a GE Co. (BHGE – yield 2.1%) 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. Earnings are expected to grow aggressively through at least 2020, and the stock is undervalued.
BHGE is one of my two top stock picks for 2018 for the MoneyShow. Oilfield service companies’ stocks did not participate in the 2017 bull market, despite tremendous earnings growth, low valuations and many attractive dividends throughout the industry. I expect that situation to turn around in 2018, and indeed it has begun. There’s some short-term upside resistance at 37, where BHGE traded in September, so that’s my first price target. I expect additional gains in the coming months. Strong Buy.
Chipotle Mexican Grill (CMG) is a growing-yet-beleaguered restaurant chain. Consensus earnings estimates for 2018 jumped last week to reflect 43.5% EPS growth. The 2018 P/E is 32.9. Tax-loss selling is over, and CMG is rising. There’s short-term upside price resistance at 330 and 350. Hold.
Mattel (MAT) stock is rising slowly, with short-term price resistance at 18.75. January will be a decisive month for the share price, and we may even hear more about MAT being a potential buyout target. Hold.
Supernus Pharmaceuticals (SUPN) focuses on the development and commercialization of products for the treatment of central nervous system diseases and psychiatric disorders, including epilepsy and ADHD. Supernus will present at the J.P. Morgan Healthcare Conference on January 10. Investors are welcome to join the live webcast at 3 PM ET. Revenue growth is on a strong trajectory, from $93 million in 2014 to an expected $389 million in 2018. Wall Street expects aggressive EPS growth rates of 43.0% and 47.7% and 58.0% in 2018 through 2020. The 2018 P/E is just 27.1. The stock is rebounding from a fall in 2017. My first price target is 50, offering new investors a 25% potential capital gain in 2018. Buy SUPN now. Strong Buy.
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. Universal Electronics will present at the 20th Annual Needham Growth Conference on January 17. UEIC is an undervalued micro-cap stock, forecasted to achieve aggressive 2018 EPS growth. There’s 47% upside as UEIC retraces its July high around 72. Tax loss selling is over, and the stock has turned upward. Buy UEIC now. Expect volatility. Strong Buy.
