Those of you who closely follow news about stocks and famous investment managers probably saw the January 23 headline in which hedge fund guru Ray Dalio announced “If you’re holding cash, you’re going to feel pretty stupid.” I remember thinking, “Wow, one of us is very very wrong.” Mr. Dalio is the founder of Bridgewater Associates, the largest hedge fund in the world.
Well, we now know who was “very very wrong”.
Fast forward to February 11, when I was staring at investment books at Barnes & Noble, looking for something to read on the airplane to New York. The book “Principles: Life and Work” by Ray Dalio looked enticing, and as I picked it up, I thought, “Wait. This is the guy who didn’t foresee the long-overdue stock market correction, and scoffed at me.” So, I put the book down, walked over to the service counter, and ordered a book that wasn’t on the shelf, “So You Want to Start a Hedge Fund: Lessons for Managers and Allocators”. I’ll pick that up when I return from this week’s trip to handle the details of Dad’s healthcare. Feel free to check in with me in March to find out if the book turned out to be more enlightening than Ray Dalio’s stellar advice. In the meantime, I bought a Malcolm Gladwell book, “Outliers: The Story of Success.” I love reading about sociology, psychology, statistics and economics, especially when several of those topics are intermingled in one book.
Now that the stock market correction has finally arrived, this weekly update is going to be a little bit different than normal. I’m not going to bother researching and reporting changes in earnings estimates, unless a company (a) just reported quarterly results within recent days and (b) the quarterly results significantly changed the future EPS projections. All our portfolio companies are projected to achieve very attractive earnings growth in 2018 except GameStop (GME), which has a huge dividend yield, and solid annual profits that easily cover the dividend payout.
Bottom line: The Cabot Undervalued Stocks Advisor portfolios offer stocks of quality companies, so let’s buy them while they’re on sale.
After gradually building my cash position to 40% since last summer, I bought stocks on February 1, 2, 6, 8 and 9. I would have bought on February 5—the first dramatic down day within this correction—but I was so busy writing my weekly update and dealing with my Dad’s health and living situation that I didn’t have any free time to ponder my personal investments.
Which Stocks Should You Buy This Week?
If you want stocks that were barely affected by the market correction—stocks with bullish price charts—consider Interpublic Group (IPG) and Knight-Swift Transportation (KNX).
I’ve repeatedly mentioned that KLX Inc. (KLXI), TiVo (TIVO) and XL Group (XL) are currently “in play”, meaning that it’s been revealed that bigger companies are interested in buying them. These are not just rumors. Spokespeople at KLX and TiVo revealed this information, and Allianz confirmed an interest in XL Group. None of these growth stocks are trading anywhere near their buyout values. While I’m not going to add TiVo (TIVO) to our portfolios today, I think owning these three stocks is a fantastic idea.
When stocks fall, their current dividend yields rise. A market correction is a great time to lock in higher-than-normal dividend yields. Consider the stocks in the Growth & Income Portfolio, especially Blackstone Group (BX), GameStop (GME) and Interpublic Group (IPG).
Financial stocks fared relatively well in recent days, giving back their January gains but otherwise bouncing at price support. As the market rebounds, financial stocks are therefore likely to continue their recent uptrends sooner than other sectors’ stocks. Conversely, energy stocks, biotech stocks, and building/construction and engineering stocks suffered quite a bit, and offer outsized capital gains on the rebound. So, whether you want to “buy strength” or “buy low,” you’ve got lots of good choices.
Want more stocks with strong fundamentals to choose from? Consider these:
• DXC Technology (DXC) is an IT services company, and a ridiculously undervalued growth stock. DXC tasted the market correction and apparently wanted no part of it. At a share price of 97, it’s already quickly heading back to its January high of 102. Growth investors should buy now and plan to hold the stock all year.
• Phillips 66 (PSX – yield 3.0%) reported 55% EPS growth in 2017, and is expected to achieve 54% EPS growth in 2018, yet at a share price of 92.60 the P/E is just 13.7. Wow! Energy stocks like PSX need to stabilize a bit before they rebound. At a share price of 92, PSX has 16% upside when it retraces its January high of 107, and lots more room to climb later this year.
• Royal Caribbean Cruises (RCL – yield 1.9%) is an undervalued growth stock, more fundamentally attractive than its competitor Carnival Corp. (CCL). RCL rose from a stable trading range in January, then gave back its gains during the correction. At a share price of 124, there’s 9% upside to the January high of 135, where the stock will still be undervalued.
• Footwear manufacturer Skechers USA’s (SKX) stock has already recovered, as if the market correction was just a 24-hour bug! At a share price of 41, SKX could easily begin reaching new recent highs this week as it travels toward its 2015 high near 53.
• Specialty retailer Ulta Beauty (ULTA) is an undervalued aggressive growth stock with a very low debt ratio. The stock already found a bottom after its recent drop. At a share price of 218, there’s 12% upside to January’s high, and lots of room for additional capital gains later this year.
I did not receive even one email from panicked investors last week. That’s actually amazing. I heard from lots of folks who were ready to buy low, and I encouraged them to do so (provided they were buying stocks in healthy companies). I’ll be working every day while I’m in New York, so go ahead and email me as you’re pondering stock market opportunities. Send questions and comments to crista@cabotwealth.com.
Quarterly Earnings Release Calendar
February 13 am: Martin Marietta Materials (MLM) – 4Q
February 14 am: Interpublic Group (IPG) – 4Q
February 22 am: Quanta Services (PWR) – 4Q
February 22 pm: Universal Electronics (UEIC) – 4Q
February 26 pm: Delek US Holdings (DK) – 4Q
Late-February: Supernus Pharmaceuticals (SUPN) – 4Q
Virtually all companies offer extensive information on their websites pertaining to their quarterly earnings releases, often including slide shows or webcasts.
Earnings Season Scorecard
Big Earnings Beat: Alexion Pharmaceuticals (ALXN), BB&T Corp. (BBT), Bank of America (BAC), CIT Group (CIT), Knight-Swift Transportation (KNX), Morgan Stanley (MS), Nucor (NUE), Schlumberger (SLB), WestRock (WRK) and XL Group (XL)
Slight Earnings Beat: Apple (AAPL), Baker Hughes, a GE Co. (BHGE), Blackstone Group (BX) and Chipotle Mexican Grill (CMG)
Earnings in Line with Estimate: ConocoPhillips (COP), PulteGroup (PHM) and Southwest Airlines (LUV)
Slight Earnings Miss: Alphabet (GOOGL)
Big Earnings Miss: Mattel (MAT)
Portfolio Notes
Be sure to review the Special Bulletins from February 8 and 9 in which I mentioned news, rating changes and/or price action on Alexion Pharmaceuticals (ALXN), Blackstone Group (BX), Chipotle Mexican Grill (CMG), GameStop (GME), Interpublic Group (IPG), KLX Inc. (KLXI), Knight-Swift Transportation (KNX), Nucor (NUE) and XL Group (XL).
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Interpublic Group (IPG)
*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:
Alphabet (GOOGL) moves from Buy to Strong Buy.
Bank of America (BAC) moves from Buy to Strong Buy.
BB&T (BBT) moves from Buy to Strong Buy.
Chipotle Mexican Grill (CMG) moves from Buy to Hold.
Knight-Swift Transportation (KNX) moves from Buy to Strong Buy.
Morgan Stanley (MS) moves from Buy to Strong Buy.
Nucor (NUE) moves from Buy to Strong Buy.
Last Week’s Portfolio Changes:
Blackstone Group (BX) moved from Buy to Strong Buy.
Delek US Holdings (DK) joined the Buy Low Opportunities Portfolio as a Strong Buy.
KLX Inc. (KLXI) moved from Hold to Strong Buy.
Martin Marietta Materials (MLM) moved from Hold to Buy.
Schlumberger (SLB) moved from Hold to 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. I’m moving GOOGL from Buy to Strong Buy, due to the lower price and attractive valuation. GOOGL seems to be establishing price support at 1000, down about 15% from its recent high, although it could partially rebound very quickly and establish support at 1060. Try to buy between 1000 and 1080. Strong Buy.
Apple (AAPL – yield 1.6%) manufactures a wide range of popular communication and music devices. I expect AAPL to trade between 156 and 166 for a while, prior to the next stage in its share price recovery. Strong Buy.
Bank of America (BAC – yield 1.6%) – Financial stocks held up well during the market correction, with BAC falling only about 9%. I’m moving BAC from Buy to Strong Buy, due to the lower price and attractive valuation. BAC will likely trade between 29.5 and 32.5 in the near term. 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. Financial stocks held up well during the market correction, with CIT falling only about 7% from its January all-time high. CIT will likely trade between 49 and 53 in the near term. Strong Buy.
ConocoPhillips (COP – yield 2.2%) is a global energy exploration and production company. Energy stocks, including COP, fell more than other sectors’ stocks last week. COP is down 14%, and will probably find support in the low 50’s. The outlook for the energy sector remains extremely strong. Strong Buy.
KLX Inc. (KLXI) is an undervalued, small-cap aggressive 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 has been no recent news on the topic.
KLXI presents investors with an illogical price situation, and a fantastic buying opportunity. KLX is “in play”. We already know that the company is a serious takeover target, yet the share price fell during the market correction. Scoop up shares of KLXI right now! The same attractive earnings growth and balance sheet that’s attracting buyout offers will also drive the share price up if no M&A transaction takes place. Buy KLXI now. Strong Buy.
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. I moved KNX from Strong Buy to Buy on January 31, expecting a pullback. The stock only fell 5% in the market correction, and the price chart remains bullish for near-term upside. Therefore, I’m moving KNX back to a Strong Buy recommendation. Buy KNX now. Strong Buy.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt, and an aggressive growth stock. Analysts expect earnings per share of $1.51 when Martin Marietta reports fourth quarter results on the morning of February13, within a range of $1.21 to $1.83. MLM found price support at 208 last week. I expect the stock to spend only a minimum amount of time below 218 before rising higher. Buy.
PulteGroup (PHM – yield 1.2%) is a U.S. homebuilder and a very undervalued aggressive growth stock. The stock is down 18% with the market correction. There is some risk that it could fall further, based on price chart patterns. Dollar cost averaging over several weeks would be a good approach to accumulating a position in PHM. 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. Earnings estimates for 2018 rose a fraction on the news that the company won new business contracts, which I discussed in the February issue of Cabot Undervalued Stocks Advisor. (Estimate revisions will continue to trickle in as analysts write new research reports.) PWR fell more than most stocks last week, to tentative price support at 33.5 where it last traded in August 2017. There is some risk that it could fall further, based on price chart patterns. Dollar cost averaging over several weeks would be a good approach to accumulating a position in PWR. Strong Buy.
Southwest Airlines (LUV – yield 0.9%) is the largest U.S. domestic air carrier, transporting over 120 million customers annually to over 100 locations in the U.S., Central America and the Caribbean. In recent weeks, LUV fell 16% to tentative price support at 55. There is some risk that it could fall further, based on price chart patterns. Dollar cost averaging over several weeks would be a good approach to accumulating a position in LUV. Strong Buy.
XL Group Ltd. (XL – yield 2.1%) is an insurer and reinsurer; and an undervalued mid-cap stock. I reported in a Special Bulletin on February 8 that Allianz made public statements pertaining to its interest in buying XL Group. According to one large investment firm, recent M&A activity in the industry took place at 1.4-1.7 times book value, which puts a potential buyout price for XL in the range of $53-$65. As we await a more definitive piece of news on a potential buyout offer, the stock could easily trade anywhere between 39 and 46. Buy XL now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 2.5%) is a 145-year-old financial holding company with $222 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. Financial stocks held up well during the market correction, with BBT falling only about 8%. I’m moving BBT from Buy to Strong Buy due to the lower price. BBT will likely trade between 50 and 55 in the near term. Strong Buy.
Blackstone Group LP (BX – yield 8.2%) is the world’s largest and most diversified alternative asset manager with $434 billion in client assets. The company raises tens of billions of dollars from investors and deploys the capital into private equity, lower-rated credit instruments, hedge funds and real estate. Blackstone Group was featured in the February issue of Cabot Undervalued Stocks Advisor. Financial stocks held up well during the market correction, with BX falling only about 9%. BX will likely trade between 32.5 and 36 in the near term. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 8.2%.
Commercial Metals Company (CMC – yield 2.1%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC is an extremely undervalued aggressive growth stock. In recent weeks, CMC fell about 13%, and could fall to 21.5 based on price chart patterns. Dollar cost averaging over several weeks would be a good approach to accumulating a position in CMC. Buy.
GameStop (GME – yield 9.4%) is a retailer of games, collectibles and technology; with additional ventures in the entertainment field. I discussed recent management changes and the near-term dividend declaration in a Special Bulletin on February 9. The stock is not trading in synch with the broader market, and seems to have found a bottom. There are a variety of potential upside catalysts to the share price as the market responds to the appointment of the new CEO, his vision for the company, management shake-ups, the next dividend decision and the coming rebound in the broader stock market. Buy.
The Interpublic Group of Companies (IPG – yield 3.3%) is a large conglomerate of advertising, marketing, communications and public relations companies serving all global markets. Analysts expect $0.77 EPS when Interpublic reports fourth quarter results on the morning of February 14, within a range of $0.70 to $0.80. IPG is an 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 & advertising space. The price chart shows a quick shakeout and rebound during the recent stock market correction, and a bullish readiness to continue climbing. Other than stocks that are active takeover targets, IPG is the number one stock that I would buy right now. Strong Buy.
Morgan Stanley (MS – yield 1.9%) is a major U.S. investment bank and wealth manager, and an undervalued growth stock. Financial stocks held up comparatively well during the market correction. I had moved MS from Strong Buy to Buy on January 23 after its quick 10% year-to-date run-up, and now I’m moving the stock back to Strong Buy since the price pulled back. MS will likely trade between 52 and 57.5 in the near term. Buy MS now. Strong Buy.
Nucor Corp. (NUE – yield 2.4%) is a low-cost producer of a diversified portfolio of iron and steel products, and an undervalued mid-cap growth stock. I’m moving NUE from Buy to Strong Buy, now that the stock has pulled back from its recent strong run-up. Try to buy NUE between 60 and 63 before the market rebound kicks into full gear. Strong Buy.
Schlumberger (SLB – yield 3.1%) is the world’s largest oilfield service company. SLB gave back all the gains from its big January run-up. Dollar cost averaging over several weeks would be a good approach to accumulating a position in SLB. Buy.
WestRock Company (WRK – yield 2.7%) is a major player in the global packaging and container industry, and a very undervalued mid-cap growth & income stock. The stock rose to a new high in January, then pulled back to 61. Dollar cost averaging over several weeks would be a good approach to accumulating a position in SLB. 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. I reported on Alexion’s fourth quarter results in a Special Bulletin on February 8. Analysts now expect 2018 and 2019 EPS to grow 14.7% and 24.6%. The corresponding P/Es are 16.2 and 13.0. ALXN fell 15% to its November-December 2017 lows at 107-108. Dollar cost averaging over several weeks would be a good approach to accumulating a position in ALXN. Strong Buy.
Baker Hughes a GE Co. (BHGE – yield 2.7%) offers products, services and digital solutions to the international oil and gas community. BHGE fell dramatically with energy stocks during the market correction, and is not yet ready to rebound. Dollar cost averaging over several weeks would be a good approach to accumulating a position in BHGE. Strong Buy.
Chipotle Mexican Grill (CMG) is a growing restaurant chain, and an undervalued aggressive growth stock. I reported on Chipotle’s fourth quarter results in a Special Bulletin on February 8. The stock suffered more than most stocks last week as earnings estimates came down after quarterly results were released. Analysts now expect EPS to grow 28.9% and 26.9% in 2018 and 2019. The corresponding P/Es are 30.0 and 23.7. I’m moving CMG from Buy to Hold due to the bearish price chart. The next big catalyst for the stock will likely be the appointment of a new CEO. Hold.
Delek US Holdings (DK – yield 1.9%) is a diversified downstream energy company and a small-cap stock that was featured in the February issue of Cabot Undervalued Stocks Advisor. Energy stocks fell further than other sectors’ stocks this month, and will therefore likely begin their rebounds later. Dollar cost averaging over several weeks would be a good approach to accumulating a position in DK. Strong Buy.
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. SUPN rose 30% from its December low to its January high, then pulled back to its November-December 2017 lows, along with so many other biotech and pharma stocks. Buy SUPN between 37 and 40 before the rebound kicks into gear. 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. Analysts expect earnings per share of $0.62 when Universal Electronics reports fourth quarter results on the afternoon of February 22, within a range of $0.60 to $0.63. Expect volatility. Dollar cost averaging over several weeks would be a good approach to accumulating a position in UEIC. Strong Buy.
