2018 Banking Regulatory Reform Will Lead to 2019 Earnings Boost
Last week, the U.S. Senate voted to pass the bipartisan, “Economic Growth, Regulatory Relief, and Consumer Protection Act” (S.2155), which attempts to resolve problems caused by regulatory overreach. One of the problems stemmed from the Dodd-Frank Wall Street Reform and Consumer Protection Act (a.k.a. Dodd-Frank), which went into effect in 2010. Dodd-Frank contains a one-size-fits-all approach to various banking regulations that greatly harmed community banks. When you’re running a local bank, and the government tosses an encyclopedia of new banking regulations into your lap, you don’t have the personnel and capital on hand to comply with those regulations. As a result, well over 1,000 community banks closed their doors or merged with larger banks that could afford to take on the huge costs of regulatory compliance.
You might say, “There are still plenty of banks around. I’m sure those customers and employees simply switched to Bank of America or Citibank.” I’m sure that many people did just that, but here’s what America lost that hasn’t been replaced by the big banks: Community Banks provide nearly half of all small-business loans. Thus, when community banks disappeared, the wheels of the economy slowed to neutral. The Senate’s proposed legislation shifts that lending vehicle back into drive.
Fortunately, our Congresspeople largely agree, in a bi-partisan manner, that they need to stop harming the remaining smaller members of the banking industry. In 2016, according to American Banker, “Seventy senators signed a letter urging the Consumer Financial Protection Bureau to exempt credit unions and community banks from certain regulations.”
If passed in the House of Representatives and signed by the President, S.2155 will exempt small banks from certain Dodd-Frank rules by raising the asset threshold of “systematically important financial institutions” (SIFI) from $50 billion to $250 billion, thus reducing the cost of compliance for smaller banks, in both dollars and man hours. In addition, the proposed legislation exempts banks with less than $50 billion in assets from Dodd-Frank Act Stress Testing. The bill now moves to the House of Representatives.
When Dodd-Frank was implemented, community banks were required to hire expensive, higher-level employees who were cognitively able to comprehend the new regulations, and technologically capable of implementing new processes that would compile and report all the required data to a variety of government agencies. Not a single dollar spent on new employees, technology and compliance procedures contributed any revenue or profit to the banks. In fact, every dollar spent on Dodd-Frank compliance was a dollar that was removed from banks’ existing budgets—or charged directly to the consumer via increased ATM fees and overdraft fees, and led to the demise of “free checking”—and removed from banks’ abilities to achieve their business goals and serve their communities.
Unfortunately, the new proposed legislation will not resurrect any banks that have disappeared from the American landscape. But it will likely help remaining community banks improve service to the families and businesses in their localities, and generate revenue and profit for bank balance sheets. In turn, bank stock prices will likely react by rising more than they otherwise might have.
There are many changes in the Senate bill and ensuing opportunities that affect the Volcker Rule, capital ratios, lending, flood insurance, M&A activity, cyber insurance and more. Which banks stand to benefit if the Senate bill becomes law? All of them, including the four that are featured in Cabot Undervalued Stocks Advisor: BB&T Corp. (BBT), Bank of America (BAC), CIT Group (CIT) and Morgan Stanley (MS).
Send questions and comments to crista@cabotwealth.com.
Portfolio Notes
Be sure to review the March 15 Special Bulletin, in which I mentioned news, rating changes and/or price action on Alexion Pharmaceuticals (ALXN).
Buy-Rated Stocks Most Likely* to Rise More Than 5% Near-Term:
Alexion Pharmaceuticals (ALXN)
Knight-Swift Transportation (KNX)
PBF Energy (PBF)
Southwest Airlines (LUV)
*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) moved from Strong Buy to Buy.
Schlumberger (SLB) moved from Buy to Strong Buy.
Supernus Pharmaceuticals (SUPN) moved from Strong Buy to Buy.
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 so as to make room for a more undervalued stock to join the portfolio. There’s room within the current trading range for short-term traders to make 5%-10% profit. 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 15.5. 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 briefly touched upon a new all-time high last week, then pulled back a bit. Investor’s Business Daily recommended AAPL on March 17 based on that price action. The price chart remains very bullish. You haven’t missed your chance to catch the next run-up on AAPL. Traders, longer-term growth investors and dividend investors should buy AAPL now. Strong Buy.
Bank of America (BAC – yield 1.5%) Last week, the U.S. Senate voted to pass the bipartisan, “Economic Growth, Regulatory Relief, and Consumer Protection Act” (S.2155). This piece of legislation cleans up many flaws in the Dodd-Frank Wall Street Reform and Consumer Protection Act (a.k.a. Dodd-Frank), which went into effect in 2010. If S.2155 makes it through the House of Representatives and is signed by the President, virtually all banks will see earnings estimates rise because the cost of doing business will fall.
BAC is a significantly undervalued growth stock, expected to see EPS grow 37.2% in 2018. Profits are enhanced by rising interest rates, more so than at other financial companies. The P/E is 12.9. The price chart is bullish and indicates the potential for a run-up in March. 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, the U.S. Senate voted to pass the bipartisan, “Economic Growth, Regulatory Relief, and Consumer Protection Act” (S.2155). This piece of legislation cleans up many flaws in the Dodd-Frank Wall Street Reform and Consumer Protection Act (a.k.a. Dodd-Frank), which went into effect in 2010. If S.2155 makes it through the House of Representatives and is signed by the President, virtually all banks will see earnings estimates rise because the cost of doing business will fall. CIT is undervalued, and expected to see EPS grow 31.9% in 2018. The P/E is 13.4. CIT rose to a new all-time high this month, then had a small pullback. Buy CIT now. Strong Buy.
ConocoPhillips (COP – yield 2.1%) is a global energy exploration and production company. 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. KLX is expected to see 2019 EPS grow 34.3%, and the P/E is 16.4. The stock began reaching new all-time highs this month, followed by a small pullback last week. After the next run-up, I’m likely to move KLXI to Hold and leave it there until we receive definitive news about M&A activity. 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. In recent days, Knight-Swift announced the acquisition of Abilene Motor Express, which brings the company 400 additional drivers and $100 million in annual revenue. Last week, a major investment bank included KNX in its list of 10 favorite short-term stock ideas. The market expects 2018 EPS to grow 65.9% and the P/E is 21.8, with 2019 numbers also reflecting strong earnings growth and undervaluation. KNX rose from a six-week trading range on March 16, and will likely commence a profitable run-up. 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 ready to recover from the recent market downturn after falling to strong price support in the low 200s. There’s 15% 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 9.5. Homebuilder and construction stocks have been slow to recover from the recent stock market correction. That doesn’t worry me, as long as their earnings outlooks are not deteriorating. Fortunately, I’ve seen no evidence of such a thing. I expect PHM to gradually rise in the coming weeks. There’s 19% 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. Consensus earnings estimates rose again, with 2018 EPS now expected to grow 30.5% in 2018. The P/E is 13.8, with 2019 numbers also reflecting strong earnings growth and undervaluation. There’s 13% 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. The investment world continues to speculate that Warren Buffett’s Berkshire Hathaway (BRK) might purchase Southwest Airlines … the entire company. Here’s the latest story from CNBC and Wolfe Research. Analysts expect Southwest’s EPS to grow 42.0% in 2018 and the P/E is 12.2, with 2019 numbers also reflecting attractive earnings growth and undervaluation. Southwest Airlines was featured in the March issue of Cabot Undervalued Stocks Advisor.
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. I see no reason why virtually all growth stock investors should not own LUV. 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. Last week, the U.S. Senate voted to pass the bipartisan, “Economic Growth, Regulatory Relief, and Consumer Protection Act” (S.2155). This piece of legislation cleans up many flaws in the Dodd-Frank Wall Street Reform and Consumer Protection Act (a.k.a. Dodd-Frank), which went into effect in 2010. If S.2155 makes it through the House of Representatives and is signed by the President, virtually all banks will see earnings estimates rise, because the cost of doing business will fall. Analysts expect EPS to grow 40.9% in 2018, and the P/E is 14.0. I expect BBT to embark on another run-up quite soon, along with many other financial stocks. I have the intention of selling BBT afterwards, because the 2019 earnings growth outlook is quite moderate. 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. Analysts expect Blackstone’s economic net income (ENI) to grow 11.0% in 2018, and the P/E is 10.6. 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 8.2%.
Commercial Metals Company (CMC – yield 2.0%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC is an extremely undervalued aggressive growth stock. Earnings estimates keep rising. Analysts now expect 2018 EPS to grow 115% (August year-end), and the 2018 P/E is 15.5. The stock is trading sideways between 24 and 26, and I expect a new run-up in the not-too-distant future. Buy CMC now. Strong Buy.
GameStop (GME – yield 10.1%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. The company will report fourth-quarter results on the afternoon of March 28. GameStop was featured in the March issue of Cabot Undervalued Stocks Advisor. GME has traded between 15 and 16 for seven weeks. I’m willing to be patient when the dividend yield is gargantuan. 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 13.7. (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. Last week, the U.S. Senate voted to pass the bipartisan, “Economic Growth, Regulatory Relief, and Consumer Protection Act” (S.2155). This piece of legislation cleans up many flaws in the Dodd-Frank Wall Street Reform and Consumer Protection Act (a.k.a. Dodd-Frank), which went into effect in 2010. If S.2155 makes it through the House of Representatives and is signed by the President, virtually all banks will see earnings estimates rise, because the cost of doing business will fall. Analysts are expecting EPS to grow 25.6% in 2018, and the P/E is 12.7. The stock is having a small pullback in an uptrend. Investor’s Business Daily recommended MS on March 17 based on that pullback. Buy MS now. Strong Buy.
Schlumberger (SLB – yield 3.1%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas rose by six last week to a total of 990, four of which were oil rigs. Increased drilling activity leads directly to increased revenue at Schlumberger, as outlined in this March 13 Forbes review of the stock. Analysts are expecting 2018 EPS to grow 46.7%, and the P/E is 29.2, with subsequent years’ numbers also reflecting strong earnings growth and undervaluation. There’s 22% upside as the stock retraces its January high of 79. Buy SLB now. Strong Buy.
WestRock Company (WRK – yield 2.6%) 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 16.8. The 2019 numbers are currently fairly-valued. WRK settled into a narrow trading range, between 65 and 67, after the recent market correction. I expect the stock to subsequently rise to its January high at 70, then deliver 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. On March 15, I reported good results from Alexion’s Phase 3 clinical study of ALXN1210 for the treatment of Paroxysmal Nocturnal Hemoglobinuria (PNH). The new drug will reduce the number of required injections for Soliris users from approximately 26 per year to six per year. ALXN1210 could be launched prior to the Soliris patent expiration, and assist in staving off potential competition from other pharmaceutical companies that might be working on similar products. Soliris also treats atypical hemolytic uremic syndrome (aHUS) and generalized myasthenia gravis. Additional planned studies of ALXN1210 may also lead to approvals for treatment of additional medical disorders. Marketing applications for ALXN1210 will be filed in the EU, Japan and the U.S. in the second half of 2018.
Three Wall Street firms raised their target prices for ALXN to a range of 149 to 160, immediately after the drug trial results were reported. Analysts expect 2018 and 2019 EPS to grow 16.7% and 23.4%, with corresponding P/Es of 18.0 and 14.6. In the coming days, I expect Wall Street analysts to update their research reports on the company, including changes in 2019 earnings estimates and price targets. I expect ALXN to immediately rise toward 147, where it last traded in September 2017. Buy ALXN now. Strong Buy.
Baker Hughes, a GE Co. (BHGE – yield 2.4%) 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 six last week to a total of 990, four of which were oil rigs. Analysts expect EPS to grow 88.4% in 2018, with continued aggressive growth in subsequent years, and the P/E is 36.9. There’s 22% 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. Chipotle’s Chief Marketing and Strategy Officer, Mark Crumpacker, resigned his position last week under what appears to be a series of bad personal and business strategy decisions. It’s not unusual for investors to witness big changes in corporate leadership when a new CEO is appointed (we just witnessed similar changes at GameStop).
Analysts expect EPS to grow 28.6% in 2018, and the P/E is 37.9. The stock fell dramatically with the recent market correction, rose 28% in mid-February when the new CEO was hired, and retained those 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 2.1%) is a diversified downstream energy company and a very undervalued small-cap stock. Analysts expect EPS to grow 117% in 2018, with continued aggressive growth in subsequent years. The P/E is 15.4. In recent days, JPMorgan raised its price target for DK to 43 and Deutsche Bank raised its price target to 46. 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, where it might rest briefly before continuing upward. Strong Buy.
PBF Energy (PBF – yield 3.8%) 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. Wall Street expects aggressive EPS growth rates of 175% and 24.8% in 2018 and 2019. The corresponding P/Es are incredibly low at 10.0 and 8.0.
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. Analysts now expect EPS to grow 49.2% in 2018, with continued aggressive growth in subsequent years, and the P/E is 23.2. The stock is racing toward its January high of 47. I think the best share price you’ll see in the near-term is 50, about 14% higher than the current price. Conversely, a normal amount of volatility among pharmaceutical stocks could briefly pull SUPN down to 40. 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 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 15.4. Keep in mind that small, financially-strong companies make attractive takeover targets. There’s 25% upside as UEIC heads toward 66, where it last traded in October 2017. Buy UEIC now. Strong Buy.
Closing prices on March 19, 2018
