As an extrovert—a person who talkatively interacts with lots of people—it’s unusual for me to be quiet. But I really have no pressing stock market or economic commentary today, and I haven’t been receiving subscribers’ emails pointing toward any particular concerns, so I’ll be brief today.
Many of our stocks appear to be advancing this week. There are a few that I’ll be selling soon due to either valuation or upside price resistance, yet they remain excellent longer-term investments, including Alphabet (GOOGL). I have a goal of removing most fairly-valued and overvalued stocks from the Cabot Undervalued Stocks Advisor portfolios to make room for more undervalued stocks to join the party. In doing so, I also offer subscribers new stock selections, which they frequently ask for. I’m happy to oblige.
If I’m removing a stock because there’s a problem with the company, I will make that clear, and urge all investors to sell it. And if I send you that type of message, please resist the urge to hold the stock a little longer “until it recovers your cost basis” or whatever reason it is that you whisper to yourself. The fact is that your money is statistically likely to grow better and faster when you own stock in healthy companies vs. owning stock in problematic companies. So when I say “sell because of this particular problem,” just sell the stock and put the capital into one of the other great buy-recommended stocks in the Cabot Undervalued Stocks Advisor portfolios.
I want you to make money. Let me know how else I can help.
Send questions and comments to crista@cabotwealth.com.
Portfolio Notes
Be sure to review the March 8 Special Bulletin in which I mentioned news, rating changes and/or price action on KLX Inc. (KLXI).
Buy-Rated Stocks Most Likely* to Rise More Than 5% Near-Term:
Alexion Pharmaceuticals (ALXN)
Apple (AAPL)
BB&T Corp. (BBT)
Bank of America (BAC)
Knight-Swift Transportation (KNX)
Morgan Stanley (MS)
PulteGroup (PHM)
Quanta Services (PWR)
Southwest Airlines (LUV)
TiVo (TIVO)
Universal Electronics (UEIC)
*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:
BB&T Corp. (BBT) moves from Strong Buy to Buy.
Schlumberger (SLB) moves from Buy to Strong Buy.
Supernus Pharmaceuticals (SUPN) moves from Strong Buy to Buy.
Last Week’s Portfolio Changes:
Commercial Metals (CMC) moved from Buy to Strong Buy.
GameStop (GME) moved from Buy to Strong Buy.
KLX Inc. (KLXI) moved from Buy to Strong Buy.
Nucor (NUE) moved from Hold to Sell.
PBF Energy (PBF) joined the Buy Low Opportunities Portfolio as a Strong Buy.
Special note: When I recommend selling small-cap and micro-cap stocks, the selling activity among Cabot Undervalued Stocks Advisor subscribers often causes the share prices to fall. Since I usually give subscribers lots of warning that I’ll sell at certain prices, it could be prudent for you to establish your own price targets and proceed with stock sales in advance of my specific instructions, to avoid causing large share price disturbances that harm other investors. Thank you for working with me to help ensure that more investors have good stock experiences!
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. I will consider GOOGL to be fairly valued when it retraces its January high near 1,190, at which point I will sell 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. The company is expected to see EPS grow 24.8% in 2018 (September year-end), and the P/E is 15.7. Fiscal 2019 projections continue to present AAPL as an undervalued growth stock. (There are many years when I absolutely would not consider AAPL to be either undervalued or exhibiting attractive earnings growth, but that is not currently the case.) The stock broke out of a trading range late last week, and is now reaching new all-time highs. That’s an extremely bullish time to own a stock! Traders, longer-term growth investors and dividend investors should buy AAPL now. Strong Buy.
Bank of America (BAC – yield 1.5%) is a significantly undervalued growth stock, expected to see EPS grow 37.2% in 2018. Profits are affected by and enhanced by rising interest rates, more so than at other financial companies. The P/E is 13.0. (I don’t want to hold BAC if the P/E climbs above 15—or approximately 37.5 per share—which could certainly happen this year based on bullish price action among bank shares.) BAC rose above its recent trading range on March 9, as did many bank stocks. I expect an immediate run-up. 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. Last week, Moody’s Investors Service raised its outlook on CIT Group’s debt from “stable” to “positive” due to strengthening deposit quality, an expectation of less volatile operating performance, and improved asset risks. CIT is undervalued, and expected to see EPS grow 31.9% in 2018. The P/E is 13.7. CIT rose to new all-time highs last week. Buy CIT now. Strong Buy.
ConocoPhillips (COP – yield 2.1%) is a global energy exploration and production company. The world’s premier energy event, CERAWeek , took place in Houston last week. Here’s in interesting Reuters assessment about the relationship between OPEC, its output cuts, and the booming business in U.S. shale: OPEC and U.S. shale break bread in uneasy truce at Houston dinner.
Here’s an interesting article from oilprice.com: BP Reports Surprise Production Jump At Mature Fields. The International Energy Agency reported that “oil production from legacy fields worldwide declined by a more modest pace [in 2017], of less than 6 percent, compared with 7.5 percent a year earlier.” BP CEO Robert Dudley said, “I cannot remember ever in my [four-decade] career having seen a negative decline rate.” As a stock investor who’s very interested in sociological and economic trends and aberrations, I find this data fascinating.
ConocoPhillips is expected to see earnings grow 352% this year, followed by mid-single digit EPS growth in 2019. (If the 2019 number does not improve, I will exit the stock later this year.) There’s 9% upside as COP retraces its January high at 60. The stock could proceed higher thereafter. Strong Buy.
KLX Inc. (KLXI) is an undervalued, small-cap aggressive growth stock in the aerospace and energy service industries. In late December 2017, KLX announced that it hired Goldman Sachs to represent the company after receiving inquiries from interested parties about possibly buying all or part of KLX. The company reported a great fourth-quarter 2018 last week and raised earnings guidance for fiscal 2019 (January year-end), which I reported on in a Special Bulletin on March 8. KLX is expected to see 2019 EPS grow 31.5%, and the P/E is 17.1. On March 8, I said, “Buy KLXI now in preparation for another run-up that could take place this month.” The stock then began reaching new all-time highs on March 9. I will remain cautious about the share price vs. the potential value of a takeover offer, so after this next run-up, I’ll likely move KLXI to Hold and leave it there. Buy KLXI now. Strong 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. The market expects 2018 EPS to grow 65.9% and the P/E is 21.4, with 2019 numbers also reflecting strong earnings growth and undervaluation. The KNX price chart is signaling a potential breakout that could happen this week. Buy KNX now. Strong Buy.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. CEO Ward Nye talked to Mad Money’s Jim Cramer last week about Martin Marietta’s 2018 business outlook. Cramer commented, “It’s always been a mistake to view this company through the prism of Washington. The truth is, with or without an infrastructure bill, Martin Marietta’s business is booming!” In the interview, Mr. Nye discussed “an enormous amount of activity” in Texas, and his company’s strong leadership position there, with emphasis on revenue-producing activity in the public sector and in the steel and shale industries.
This aggressive growth stock is fairly valued. MLM appears to be ready to recover from the recent market downturn, after falling to strong price support in the low 200s. There’s 14% 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. The consensus 2018 EPS projection is $3.09, reflecting 50% year-over-year growth. The P/E is quite low at 9.7. If homebuilder share price charts reflected a horse race, PHM would be the horse that pulled away from the pack, gaining momentum toward the finish line. I expect immediate upside for PHM, and more so when the price charts for D.R. Horton (DHI), M.D.C. Holdings (MDC) and Toll Brothers (TOL) turn more bullish. There’s 16% upside as PHM retraces its January high of 35. I expect additional gains in 2018. Buy PHM now. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. EPS are expected to grow 29.4% in 2018, and the P/E is 14.1, with 2019 numbers also reflecting strong earnings growth and undervaluation. PWR has begun its post-market correction rebound. There’s 11% 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. Southwest Airlines was featured in the March issue of Cabot Undervalued Stocks Advisor. First-quarter numbers are looking attractive, with revenue rising from strong load factors and bookings, and costs coming down. Increases in fuel prices are more than offset by lower income tax rates and better revenue management via the new reservation system.
Analysts expect Southwest’s EPS to grow 42.0% in 2018 and the P/E is 12.0, with 2019 numbers also reflecting attractive earnings growth and undervaluation. The share price is now recovering from the recent market correction. LUV could get stuck briefly at 61, with small pullbacks, on its way to its January high of 66. I expect additional capital gains thereafter. Buy LUV now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 2.4%) is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serve businesses and individuals. Analysts expect EPS to grow 40.9% in 2018, and the P/E is 14.3. Earnings growth is expected to slow to the high single digits in 2019, changing the future value proposition to one that’s less attractive. Yet the stock is clearly ready to climb immediately, barring unexpected bad news. Therefore, I’m changing my recommendation from Strong Buy to Buy, and urging shorter-term investors to buy BBT right now, with the intention of selling BBT after this run-up. As always, I will assess the earnings projections weekly, and be ready to switch gears if the 2019 earnings estimates improve by more than a few pennies per share. 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. It was reported last week that Blackstone has joined forces with Royal Dutch Shell Plc (RDS.A) to bid approximately $10 billion for BHP Billiton Plc’s (BLT) U.S. shale assets. There will likely be other bidders, and BHP Billiton is expected to make a decision in June or thereafter. Analysts expect Blackstone’s economic net income (ENI) to grow 10.3% in 2018, and the P/E is 11.0. BX is a very undervalued stock. BX has traded between 33 and 36 in recent months. Buy BX now. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 7.9%.
Commercial Metals (CMC – yield 1.9%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC is an extremely undervalued aggressive growth stock. Analysts expect 2018 EPS to grow 107% (August year-end), and the 2018 P/E is 17.2. Despite last week’s volatility among steel-related stocks, the price chart on CMC did not weaken. CMC could rise above 26 and begin a new run-up this month. Buy CMC now. Strong Buy.
GameStop (GME – yield 9.6%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. Sadly, former GameStop CEO J. Paul Raines died last week. GameStop was featured in the March issue of Cabot Undervalued Stocks Advisor. The stock appears ready to say goodbye to its February trading range and begin a new run-up. Traders and income investors should buy GME now. Strong 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 22.0% and the P/E is 13.9. (Earnings growth slows in 2019.) IPG rose about 23% in the first half of February, slightly past its all-time high from July 2017, then pulled back a bit. I expect the stock to trade between 23 and 25 for a few weeks or months, followed by the share price reaching new highs again. Buy.
Morgan Stanley (MS – yield 1.7%) is a major U.S. investment bank and wealth manager, and an undervalued, large-cap growth stock. Chairman & CEO James Gorman spoke with CNBC last week about women in executive positions, tariffs, stocks and the economy. Analysts are expecting EPS to grow 25.6% in 2018, and the P/E is 13.0. The stock shot up out of its trading range last week, and will likely continue rising in the coming weeks. Try to buy on a brief pullback below 58. Strong Buy.
Schlumberger (SLB – yield 2.9%) is the world’s largest oilfield service company. Analysts are expecting 2018 EPS to grow 46.7%, and the P/E is 31.3, with subsequent years’ numbers also reflecting strong earnings growth and undervaluation. Now that SLB is actively rising, I’m moving my recommendation from Buy to Strong Buy. There’s 14% upside as the stock retraces its January high of 79. Buy SLB now. Strong Buy.
WestRock (WRK – yield 2.5%) is a major player in the global packaging and container industry. CFRA (formerly Standard & Poor’s) is expecting revenue to rise 10% and margins to increase by 200 basis points in fiscal 2018 (September year-end), and to continue growing in 2019. Analysts are expecting EPS to grow 50.8% in 2018, and the P/E is 17.0. The 2019 numbers are currently fairly-valued. I expect WRK to trade between 65 and 70 in the coming weeks, with additional gains in the first half of 2018. 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. Alexion will present at the Cowen & Company 38th Annual Health Care Conference on March 13. Analysts expect 2018 and 2019 EPS to grow 16.7% and 23.4%, with corresponding P/Es of 18.4 and 14.9. The stock appears to be done with its recent trading range, and ready to move upward along with most of its industry peers. There’s 11% upside to price resistance at 140, where the stock will still be quite undervalued vs. the projected 2019 EPS growth rate. Buy ALXN now. Strong Buy.
Baker Hughes, a GE Co. (BHGE – yield 2.3%) offers products, services and digital solutions to the international oil and gas community. The number of U.S. rigs drilling for crude oil and natural gas rose by three last week to a total of 984 vs. 768 active rigs a year ago. The rig count bottomed at 404 in May 2016. Analysts expect EPS to grow 90.7% in 2018, with continued aggressive growth in subsequent years, and the P/E is 36.9. UBS upgraded BHGE to a buy recommendation last week, citing its attractive valuation and balance sheet, and potential for huge, multi-year margin expansion.
The median Wall Street price target for BHGE is 36. I think that’s a no-brainer, considering that the stock was trading at 37 as recently as January. There’s 20% upside as BHGE heads back to 37. I expect additional capital gains thereafter, with a good amount of volatility along the way. Buy BHGE now. Strong Buy.
Chipotle Mexican Grill (CMG) is a growing restaurant chain, and an aggressive growth stock. Analysts expect EPS to grow 28.8% in 2018, and the P/E is 37.9. Profitability is currently enhanced by trending lower food costs (avocado prices are normalizing), higher menu prices and better paper and packaging management, with no specific food inflation expected to impact profits in 2018. The stock fell dramatically with the recent market correction, rose 28% in mid-February when the new CEO was hired, then retained its gains. That’s a very bullish sign that CMG could follow up by rising to 345 in the near term, thus retracing its January high, and possibly climbing higher. I’ll be watching for an exit point in the coming months due to valuation. Expect volatility. Hold.
Delek US Holdings (DK – yield 2.2%) is a diversified downstream energy company and a very undervalued small-cap stock. Analysts expect EPS to grow 115% in 2018, with continued aggressive growth in subsequent years, and the P/E is 15.5. DK could appeal to investors who have a focus on value, aggressive growth or dividend income. DK is marching rapidly toward its January high of 39, and I expect additional capital gains thereafter. Strong Buy.
PBF Energy (PBF – yield 3.9%) is one of the largest U.S.-based petroleum refining and marketing companies. PBF serves the U.S., Canada and other international locales. The company owns five geographically-diverse oil refineries in California, Delaware, Louisiana, New Jersey and Ohio that process approximately 900,000 barrels per day. PBF Energy was featured in the March issue of Cabot Undervalued Stocks Advisor. The consensus of 13 Wall Street analysts points to EPS of $3.13 and $3.81 in 2018 and 2019, representing aggressive EPS growth rates of 175% and 21.7%. The corresponding P/Es are incredibly low at 10.2 and 8.4.
The share price peaked in late 2015 near 38, then went through a long period of decline and stabilization, as did virtually all energy stocks when the price of oil dropped. The stock had a big run-up in the second half of 2017 to 36, only to experience another smaller pullback in early 2018. Barring a big disruption in the price of oil, I expect PBF to rise to the upper 30s in the next couple of months, rest for a bit, then continue climbing later this year. I might trade out of PBF in the upper 30s, depending on what else is taking place in the broader market. But rest assured that PBF presents attractive growth and income opportunities for longer-term investors, no matter what happens in the short term. Buy PBF 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. Supernus will present at the Cowen & Company 38th Annual Health Care Conference on March 13. Consensus earnings estimates rose last week. Analysts now expect EPS to grow 49.2% in 2018, with continued aggressive growth in subsequent years, and the P/E is 23.9. The stock is racing toward its January high of 47. I’m moving SUPN from Strong Buy to Buy because I think the best share price you’ll see in the near-term is 50, about 12% higher than the current price. Conversely, a normal amount of volatility among pharmaceutical stocks could briefly pull SUPN down to 40, at which time investors should buy more shares. Given a neutral-to-bullish stock market, I expect SUPN to rise above 50 and begin another run-up at some point this year. Buy.
TiVo (TIVO – yield 4.8%) is an entertainment technology company that joined the Buy Low Opportunities Portfolio specifically because it’s a takeover target. (See the March 5 Special Bulletin.) The company’s 2018 EPS number does not meet my investment criteria, yet there’s nothing alarming about the profit situation, nor the dividend coverage. The P/E is low at 9.5 and the dividend is large. The stock is currently rising, and might rest a bit at 16 during its uptrend. I expect patient investors to be rewarded with capital gains in 2018, either from a buyout offer or from price increases related to the current low valuation. Buy TIVO now. Expect volatility. 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. UEIC is an undervalued micro-cap growth stock, with minimal debt on the balance sheet. Analysts expect EPS to grow 21.7% in 2018 and the P/E is 15.8. Keep in mind that small, financially-strong companies make attractive takeover targets. In the coming months, I expect UEIC to head toward 66, where it last traded in October 2017. Buy UEIC now. Strong Buy.
