Why is the Stock Market Rebounding So Quickly?
The stock market correction came and went rapidly in recent weeks! Granted, stocks are not done bouncing around yet, and a few sectors are lagging the broader market, including energy and healthcare.
People ask if the correction “is different this time?” I would answer that all stock market corrections are different from each other. They can be caused by natural disaster, major political changes, an extreme change in the pricing of fixed income instruments or commodities, economic trends, stock valuations or other notable events. There could be several factors converging to exacerbate either the depth of the downturn or the speed of the recovery.
In a recent Bloomberg interview, Prakash Melwani, the chief investment officer of Blackstone Group’s (BX) private equity business, discussed how U.S. tax reform and technology-driven efficiencies are boosting corporate performance. “Business is really good, and business is really good globally. Valuations are much more fundamentally driven.”
When American companies are achieving record profits, their stocks have a natural tendency to rise—or recover from market corrections—more rapidly than they might during a recession or a slow-growth economic cycle. I remain quite bullish on U.S. stocks in the foreseeable future, precisely because corporate profit growth is more attractive than I have ever witnessed.
Mr. Melwani also made bullish statements about Blackstone’s successes and continued investment opportunities in India. To learn more about investing in India and foreign markets, consider subscribing to Paul Goodwin’s Cabot Emerging Markets Investor.
Send questions and comments to crista@cabotwealth.com.
Quarterly Earnings Release Calendar
February 26 pm: Delek US Holdings (DK) – 4Q
February 27 pm: Supernus Pharmaceuticals (SUPN) – 4Q
March 6 am: KLX Inc. (KLXI) – 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), Martin Marietta Materials (MLM), 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), Chipotle Mexican Grill (CMG), Interpublic Group (IPG) and Quanta Services (PWR)
Earnings in Line with Estimate: ConocoPhillips (COP), PulteGroup (PHM), Southwest Airlines (LUV) and Universal Electronics (UEIC)
Slight Earnings Miss: Alphabet (GOOGL)
Big Earnings Miss: Mattel (MAT)
Portfolio Notes
Be sure to review the February 23 Special Bulletin, in which I mentioned news, rating changes and/or price action on Quanta Services (PWR) and Universal Electronics (UEIC).
Buy-Rated Stocks Most Likely* to Rise More Than 5% Near-Term:
BB&T Corp. (BBT)
Baker Hughes, a GE Co. (BHGE)
CIT Group (CIT)
ConocoPhillips (COP)
Delek US Holdings (DK)
Quanta Services (PWR)
Southwest Airlines (LUV)
Supernus Pharmaceuticals (SUPN)
*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 Strong Buy to Hold.
KLX Inc. (KLXI) moves from Strong Buy to Buy.
Nucor (NUE) moves from Strong Buy to Hold.
XL Group (XL) moves from Strong Buy to Buy.
Last Week’s Portfolio Changes:
(none)
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 added GOOGL to the Growth Portfolio on December 5 because it was an undervalued growth stock with a bullish price chart. The stock immediately rose 16%, came down with the recent market correction, and is now rapidly recovering. Unless earnings estimates change in March, I will consider GOOGL to be fairly valued when it retraces its January high near 1,190. I’m moving GOOGL from Strong Buy to Hold, and will sell near 1,190 to make room for a more undervalued stock to join the portfolio. If you want to own GOOGL long term, it’s a high quality aggressive growth stock, and will probably deliver attractive capital gains for years to come. Hold.
Apple (AAPL – yield 1.4%) manufactures a wide range of popular communication and music devices. I realize that barely a day passes when news headlines aren’t pronouncing the death of the iPhone, but somehow Wall Street analysts didn’t get the memo, because they’ve been increasing fiscal 2018 and 2019 earnings estimates (September year-end) for Apple for a solid year. So if you’ve been wondering why the stock has been rising when the media keeps trashing the company, the answer is: profits. Apple is expected to see 2018 EPS grow 25.3% (September year-end). To learn more about the relationship between Apple’s profit trend and share price movement, please refer to my recently-updated analysis, Making Money in AAPL Stock is Much Easier Than You Think.
The stock is quite undervalued and the price chart is bullish. Here are the two most-likely scenarios for the near-term share price:
- AAPL will trade between 168 and 178 in the coming weeks.
- AAPL will break out past 178 this week, then have a pullback to the mid-170s shortly thereafter.
The stock just rose 15% from its February low. It will need to rest for a bit. Try to buy on pullbacks. Strong Buy.
Bank of America (BAC – yield 1.5%) is significantly undervalued, and expected to see EPS grow 36.6% in 2018. Financial stocks are showing price strength. BAC could rise past its recent high of 32.5 quite soon. Buy BAC now. 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. The Equipment Leasing and Finance Association (ELFA) reported that U.S. companies’ borrowing to spend on capital investment rose about 10 percent in January from a year earlier. (Read more here.) CIT is significantly undervalued, and expected to see EPS grow 31.6% in 2018. Despite the market correction, CIT began reaching new all-time highs in mid-February. Buy now and buy on pullbacks. Strong Buy.
ConocoPhillips (COP – yield 2.0%) is a global energy exploration and production company. The 2018 consensus EPS estimate is now more than double the estimate from four months ago, and still rising. However, the 2019 EPS growth rate is thus far projected to be tiny (although that number is rising as well). COP will likely trade between 54 and 60 in the coming weeks, and might even proceed to new recent highs. Strong Buy.
KLX Inc. (KLXI) is an undervalued, small-cap aggressive growth stock in the aerospace and energy services industries. The company will report fourth-quarter results (January year-end) on the morning of March 6. Wall Street is expecting $0.88 EPS within a range of $0.87 to $0.90. 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. On February 8, I moved KLXI from Hold to Strong Buy, encouraging people to buy low during the market correction. Now that the stock is up 8% from that date, I’m moving KLXI to Buy, and hoping for a buyout offer to materialize. Buy.
Knight-Swift Transportation Holdings (KNX – yield 0.5%) is a truckload carrier formed from the September 2017 merger between Knight Transportation and Swift Transportation Company. A major Wall Street investment firm reports that the most recent truckload freight index (TLFI) shows February demand at a four-year high, and the flatbed index is at an all-time high for this time of year. It’s no surprise, then, that consensus earnings estimates are rising weekly. The market now expects 2018 EPS to grow 65.2%. The stock remains significantly undervalued. The KNX price chart is signaling a near-term breakout. Buy KNX now. Strong Buy.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. This aggressive growth stock is fairly valued. MLM appears to be experiencing one more downturn during its recovery from the market correction. The patterns in the price chart look very stable to me, and I wouldn’t hesitate to buy low right now. There’s 13% upside for traders as MLM retraces its January high of 240. At that time, I plan to make room for a portfolio stock that’s more undervalued. Strong Buy.
PulteGroup (PHM – yield 1.2%) is a U.S. homebuilder and a very undervalued aggressive growth stock. EPS are expected to grow 50% in 2018. PHM stabilized after the market drop, and appears willing to rise soon. There’s 19% upside as PHM retraces its January high of 35. Buy PHM now. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. See the February 23 Special Bulletin that discussed Quanta’s good fourth-quarter results and the quarter’s share repurchases. The company finished 2017 with EPS rising 30.5%. Analysts reworked their future earnings estimates and dramatically increased their 2019 profit projection, now expecting EPS to rise 28.9% and 20.1% in 2018 and 2019. The corresponding P/Es are quite low at 14.0 and 11.7.
On February 22, Quanta announced that it “completed the acquisition of Northwest Lineman College (NLC), the industry-leading educational and training institution serving the electric power industry.” I can’t recall ever hearing of a company acquiring an educational institution for the express purpose of training its potential future employees. Sounds like a brilliant move, and a great way to keep the best and the brightest students from going to work for competing companies!
Quanta Services was featured in the February issue of Cabot Undervalued Stocks Advisor. Last week, investment firm D.A. Davidson raised its price target on PWR to 48, a notably aggressive move! The stock is rebounding from its February lows, and there’s approximately 12% upside as PWR retraces its January high of 40. I expect additional capital gains thereafter. Buy PWR now. Strong Buy.
Southwest Airlines (LUV – yield 0.8%) 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. Consensus earnings estimates have been rising since late November. Analysts now expect EPS to grow 41.7 and 15.7% in 2018 and 2019. The stock is rebounding from its February lows, and there’s approximately 12% upside as LUV retraces its January high of 66. I expect additional capital gains thereafter. Buy LUV now. Strong Buy.
XL Group (XL – yield 2.0%) 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. The stock is rapidly approaching 46, where it last traded in July 2017. If no buyout offer emerges, XL is likely to get stuck for a while between 43 and 46, although a downturn in the broader market could pull XL down to 41. I’m moving the stock from Strong Buy to Buy. Expect volatility and buy on dips. Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 2.7%) is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serve businesses and individuals. Due to the benefits of tax reform, BB&T announced on February 22 that they will raise the quarterly dividend payout by 13.6%, from $0.33 to $0.375. They will execute the dividend increase in a slightly unusual way, so pay close attention if you closely track your dividend income.
- On March 1, shareholders of BB&T Corp. who owned the stock prior to February 9 will receive the normal quarterly payout of $0.33 per share.
- On March 20, shareholders of BB&T Corp. who owned the stock prior to the close of business on March 6 will receive the just-announced dividend increase of $0.045 per share. (To be clear, they will receive the increase, not the entire quarterly dividend.)
- Future quarterly dividends will amount to $0.375 per share until BB&T Corp. announces a change in the dividend policy.
BBT is an aggressively-growing large-cap stock with a low P/E. BBT recovered quickly from the market correction, and appears ready to rise to new all-time highs this week. Buy BBT now. Strong Buy.
Blackstone Group LP (BX – yield 7.9%) 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. BX offers a combination of attractive net income growth, a large quarterly payout, and a low P/E. Blackstone Group was featured in the February issue of Cabot Undervalued Stocks Advisor. BX will likely trade between 34 and 36 in the near term. Buy BX now. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 7.9%.
Commercial Metals Company (CMC – yield 1.9%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. The U.S. Department of Commerce made recommendations to the President resulting from the Section 232 investigation into the national security implications of trade problems within the steel industry. The recommendations turned out to be more bullish for the U.S. steel industry than the market expected. CMC is an extremely undervalued aggressive growth stock. The 2019 earnings estimate has been rising almost weekly since late December (August year-end). CMC appears capable of embarking on another run-up this week. Buy CMC now and buy on pullbacks. Buy.
GameStop (GME – yield 9.5%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. Despite very solid earnings, the stock is trading at a P/E of 4.8. GME traded steadily at price support throughout February. 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 rebound in the broader stock market. 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. IPG is an undervalued growth & income stock with an attractive rising annual dividend. The company is expected to see 2018 EPS grow 17.5%, and the P/E is 14.2. I’m keeping an eye on the 2019 earnings estimate, which currently reflects 8.8% EPS growth. I will sell IPG in the coming months if that number does not improve. IPG shot upward in mid-February, slightly past its all-time high from July 2017, then pulled back a bit. The stock could begin reaching new highs in March. Buy.
Morgan Stanley (MS – yield 1.8%) is a major U.S. investment bank and wealth manager, and an undervalued, large-cap growth stock. Analysts are expecting EPS to grow 25.3% in 2018, and the P/E is 12.4. Financial stocks are showing price strength. MS will likely trade between 54.5 and 57.5 in the near term. Strong Buy.
Nucor Corp. (NUE – yield 2.3%) is a low-cost producer of a diversified portfolio of iron and steel products. The U.S. Department of Commerce made recommendations to the President resulting from the Section 232 investigation into the national security implications of trade problems in the steel industry. The recommendations turned out to be more bullish for the U.S. steel industry than the market expected.
NUE is expected to achieve 40.3% EPS growth in 2018. The problem is that subsequent years are expected to deliver single-digit EPS growth. I’ve decided to move NUE from Strong Buy to Hold, and take the money and run when it rises past 69. (I also believe that the stock will launch past 70 at some point this year, and continue delivering capital gains, but I’d rather offer subscribers stocks that are slated for multi-year double-digit earnings growth.) Hold.
Schlumberger (SLB – yield 3.0%) is the world’s largest oilfield service company. Schlumberger and Subsea 7 S.A. announced a 50/50 joint venture last week concerning the subsea installations and services for oilfields. SLB is a large-cap stock that’s going through a cyclical aggressive growth phase. Wall Street analysts are raising their projections for 2018 rig counts and pricing, thus increasing revenue and profit forecasts for oil service companies. Analysts are expecting EPS to grow between 39% and 47% per year in each of the next three years. SLB gave back all the gains from its big January run-up. The share price has since stabilized. There’s 18% upside as the stock retraces its January high of 79. Buy SLB now. Buy.
WestRock Company (WRK – yield 2.6%) is a major player in the global packaging and container industry. Increases in containerboard volume and pricing are contributing to an expected 10% revenue increase in fiscal 2018 (September year-end). Analysts are expecting EPS to grow 50.8% in 2018. I expect WRK to trade between 65 and 70 in the coming weeks. 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. Analysts expect 2018 and 2019 EPS to grow 16.7% and 23.2%. I expect ALXN to trade between 115 and 128 in the coming weeks, as it recovers from the market correction. Dollar cost averaging would be a good approach to accumulating a position in ALXN. Strong Buy.
Baker Hughes a GE Co. (BHGE – yield 2.6%) offers products, services and digital solutions to the international oil and gas community. Last week, General Electric’s (GE) CFO Jamie Miller squashed rumors that GE might sell or spin off its holdings in Baker Hughes, saying “Given today’s valuation levels, we see a lot of upside there. We like the macro trends. At this point in time, we have no intent to change anything or execute prior to the expiration of any of the lockup periods.” The share price was bolstered by the positive statements.
Wall Street analysts are raising their projections for 2018 rig counts and pricing, thus increasing revenue and profit forecasts for oil service companies. Baker Hughes is expected to almost-double its annual EPS both in 2018 and 2019. BHGE fell dramatically with energy stocks and oil prices in early February, and now their prices have all turned upward. There’s 33% upside as BHGE retraces its January high of 37. Buy BHGE now. Strong Buy.
Chipotle Mexican Grill (CMG) is a growing restaurant chain, and an aggressive growth stock. CMG could reach 345 in the short term as it retraces its January high. Expect volatility. Hold.
Delek US Holdings (DK – yield 1.7%) is a diversified downstream energy company and a very undervalued, aggressive growth, small-cap stock that was featured in the February issue of Cabot Undervalued Stocks Advisor. Delek will announce fourth-quarter results on the afternoon of February 26. The market is expecting $0.40 EPS, with a range of $0.30 to $0.54. There’s 13% upside as DK retraces its January high of 39, and I expect additional capital gains thereafter. Buy DK now. 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. The company is expected to achieve EPS growth within a range of 48% to 61% per year in 2018 through 2020. Supernus will announce fourth-quarter results on the afternoon of February 27. The market is expecting $0.27 EPS, with a range of $0.19 to $0.33. There’s 19% upside as SUPN retraces its January high of 47. Expect volatility, and 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. The company reported a strong outlook for revenue and gross margin increases in 2018, pleasing the market and pushing the share price up 24% on February 23. Here’s a transcript of the fourth-quarter earnings conference call from February 22.
UEIC is an undervalued micro-cap growth stock, with minimal debt on the balance sheet. Analysts expect EPS to grow 26.0% and 21.2% in 2018 and 2019. The corresponding P/Es are 15.3 and 12.6—quite low, despite the huge share price run-up last week. Micro-cap stocks are volatile and their price fluctuations are often illogical. They’re not for the faint of heart.
The surge in the share price was fun, but also ridiculous. Think of UEIC as you would a guy who just spent three hours drinking martinis, and now it’s time for him to get up off the barstool. He’s going to sway and teeter, and possibly fall, right? Then he’s going to have to go home and sleep it off, possibly with a hangover affecting his performance at the office the next day.
As with the drunkard, UEIC is going to need to come back to reality and settle down before it advances again. I mentioned on February 23 that “We’ll probably see a pullback in the coming days, and that would be a great entry point.” The pullback swiftly arrived on February 26, when the stock was down 7%, a few hours into the trading day. Go ahead and buy UEIC now if it fits your risk profile, and don’t worry if it does a whole lot of nothing for weeks at a stretch. That’s the nature of lesser-known stocks. There’s upside price resistance at 54 and 66. Strong Buy.
