The 2018 Stock Market Correction Continues
Unless you’re a brand new subscriber to Cabot Undervalued Stocks Advisor, you’re aware that as we entered 2018, I had been advising investors to raise cash so that they could buy low during the yet-to-occur-but-overdue stock market correction. There was nothing amiss with U.S. stocks, in my estimation, other than that the markets rose continuously since the November 2016 general election. Investments are not supposed to go straight up forever, so naturally we awaited a pullback.
The pullback arrived in late January, quickly bottomed in early February, and the market has since traded sideways, with some industries bouncing back quickly (financial stocks) while others languished (building and construction stocks). I immediately began encouraging investors to buy low.
Last week’s downturn in the market averages was a little disconcerting, but there’s good news too. The NASDAQ finished the week well above its February lows (excellent!), the S&P 500 fell to about the same level that it dropped to in early February (that’s a good sign), and the Dow Jones Industrial Average fell a little further than in February (hmmm … blue chips are showing weakness). After touching those levels last Friday, the major indexes came roaring back yesterday—not unlike their quick turnarounds in February.
I expect continued sideways trading, perhaps through early summer, as the market averages gradually return to their January highs. I also expect the market averages to surpass those highs and begin new run-ups later this year.
I remain extremely bullish on U.S. stocks, with a natural focus on stocks that have attractive earnings growth projections and moderate price/earnings ratios (P/Es). Continue buying your favorite stocks while their prices are depressed. Make sure your portfolio is diversified. (I try not to let any particular sector represent more than 20% of my portfolio. Right now, I’m invested to the max in energy and financial stocks.)
Takeover News: USG Corp. (USG)
Yesterday, Berkshire Hathaway (BRK) CEO Warren Buffett revealed that a German company, Gebr. Knauf KG, had offered to buy building materials manufacturer USG Corp. (USG) on March 15 for 42 per share. Berkshire Hathaway owns 31% of USG’s shares. Buffett encouraged Knauf to follow through with the purchase of USG at a minimum price of 42.
I recommended USG in the September 2017 issue of Cabot Undervalued Stocks Advisor, within a list of homebuilding product, construction and engineering stocks that might benefit in the wake of Hurricane Harvey. I also recommended USG in the December Special Report 5 Best Stocks to Buy for Quick Gains in 2018 and again in January’s Premium Report 10 Best Stocks to Buy and Hold for 2018. The stock will likely rise further if a buyout offer emerges, and it will slowly recede to about 37 (or lower?) if several weeks pass without any M&A action. Patient investors might get an opportunity to buy USG below 38 in the coming days, with a chance for 10%+ upside if a buyout offer appears.
The Financial Sector
Near-term upside catalysts to bank stocks include growth in first-quarter trading revenue (both equities and fixed income), the potential Senate confirmation of Jelena McWilliams as head of the FDIC, and rising net interest income (NII) resulting from rising interest rates. The potential 2018 passage of the bipartisan, “Economic Growth, Regulatory Relief, and Consumer Protection Act” (S.2155) will, over the next several years, enhance loan flexibility, increase return of capital to shareholders, reduce regulatory costs and increase profits at many banks. (See the March 20 issue of Cabot Undervalued Stocks Advisor for more on that topic.)
Send questions and comments to Crista@CabotWealth.com.
Portfolio Notes
Be sure to review the Special Bulletin from March 22 in which I mentioned news, rating changes and/or price action on Chipotle (CMG), Commercial Metals (CMC), Delek US Holdings (DK) and PBF Energy (PBF).
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Delek US Holdings (DK)
PBF Energy (PBF)
*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 Hold to Strong Buy.
BB&T Corp. (BBT) moves from Buy to Strong Buy.
Delek US Holdings (DK) moves from the Buy Low Opportunities Portfolio to the Growth Portfolio.
GameStop (GME) moves from Strong Buy to Hold.
Interpublic Group (IPG) moves from Buy to Strong 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. At last week’s Shoptalk conference, the future of voice-activated hardware got a perception boost when Google reported that a majority of consumers who use voice-activated speakers indicated a willingness to make retail purchases via voice activation in the coming months. In addition, French retailer Carrefour (the largest retailer in Europe) announced a partnership with Google aimed at competing aggressively with Amazon’s Alexa, with a new online voice assistant name Lea.
I will consider GOOGL to be fairly valued when it retraces its January high near 1190, at which point I might 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 15% profit, and I’m therefore temporarily moving GOOGL from Hold to Strong Buy. For those of you who 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. Strong Buy.
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. Longer smartphone replacement cycles have caused industry-wide smartphone shipments to decline at an accelerating pace. The maturing smartphone market is leading to a shift in market share toward the bigger players, including Apple, leaving many other tech companies vulnerable to Wall Street downgrades in revenue, earnings estimate and price targets. Yet not only has Apple’s 2018 consensus earnings estimate remained unchanged since its last big boost after reporting fourth quarter 2017 results last November, but the 2019 and 2020 consensus estimates have risen consistently and significantly since that time. The reason is accelerating revenue growth coming from Apple Services (Apple Music, Apple Pay and iCloud). Read more in this March 22 Barron’s article.
I’ve frequently described the correlation between Apple’s share price performance and its inconsistent profit trend. The profit trend provides seemingly-foolproof clues as to whether investors will achieve capital gains in the coming months. Read more in my updated article, Making Money in AAPL Stock is Much Easier Than You Think.
Apple is expected to see EPS grow 24.4% and 14.8% in 2018 and 2019 (September year-end), and the stock is undervalued. I expect AAPL to rise to its March high at 182 in the short term, with additional capital gains in 2018. Strong Buy.
Bank of America (BAC – yield 1.6%) is a significantly undervalued growth stock that’s expected to see EPS grow 37.2% in 2018. Profits are enhanced by rising interest rates, more so than at other financial companies. I expect BAC to rise to its March high near 33 in the short term, with additional capital gains in 2018. 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. During the month of February, U.S. business borrowing to spend on capital goods rose 13% over January’s borrowing and 31% vs. a year ago as the U.S. economy continues to grow, spurred on by recent tax cuts. CIT is undervalued, and is expected to see EPS grow 31.9% in 2018. I expect CIT to rise to its March high at 56 in the short term, with additional capital gains in 2018. Strong Buy.
ConocoPhillips (COP – yield 1.9%) is a global energy exploration and production company. ConocoPhillips is expected to see earnings grow 353% this year, followed by 6.6% EPS growth in 2019. The 2019 earnings estimate is slowly rising, but I won’t keep the stock past the third quarter if the estimate doesn’t eventually reflect EPS growth in the mid-teens. Oil prices are on another upswing; thus COP has been rising, completely out of synch with the broader stock market. I expect COP to surpass its January high at 60 rather soon. Strong Buy.
Delek US Holdings (DK – yield 2.0%) is a diversified downstream energy company and a very undervalued small-cap stock. DK moves from the Buy Low Opportunities Portfolio to the Growth Portfolio today. That’s because we bought DK during the early February market bottom, and it’s already completely recovered and begun reaching new highs. At this point in time, DK more appropriately fits within the Growth Portfolio. Analysts expect EPS to grow 113% in 2018, with continued aggressive growth in subsequent years. DK could appeal to investors who have a focus on value, aggressive growth or dividend income. DK began reaching new all-time highs last week. Buy DK now and buy more on dips. 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 undervalued, and expected to see fiscal 2019 (began last month) EPS grow 34.3%. The stock began reaching new all-time highs this month, followed by a small pullback. 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. 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 March, Knight-Swift announced the acquisition of Abilene Motor Express, which brings the company 400 additional drivers (more drivers than trucks, which helps KNX with the industrywide driver shortage) and $100 million in annual revenue. The Abilene acquisition boosts investors’ confidence that the 2017 Swift acquisition is working out well. (If it were not, Knight-Swift would likely focus on improving the newly-merged company’s operations rather than reach out to take on yet another big project.) The market expects 2018 EPS to grow 65.9%, with 2019 numbers also reflecting strong earnings growth and undervaluation. KNX has traded between 47 and 50 since late January. As the broader market rises, I expect KNX to reach new highs. 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 ready to rise from recent lows. In the coming months, I expect MLM to rise to its January high at 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. 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. In the coming months, I expect PHM to rise to its January high of 35, with additional capital gains in 2018. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Consensus earnings estimates reflect 30.5% EPS growth in 2018, and the stock is undervalued. In the coming months I expect PWR to rise to its January high of 40, with additional capital gains in 2018. 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. Based on recent statements by Warren Buffett, the investment world is speculating that Berkshire Hathaway (BRK) might purchase the entire company.
Southwest lowered its projected first quarter revenue per available seat mile (RASM) last week. The earnings outlook remains robust, and I’ll remain alert to changes in consensus estimates. Analysts expect Southwest’s EPS to grow 40.9% in 2018, with 2019 numbers also reflecting attractive earnings growth and undervaluation. Southwest Airlines was featured in the March issue of Cabot Undervalued Stocks Advisor. In the coming months, I expect LUV to rise to its January high of 66, with additional capital gains in 2018. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 2.9%) is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serve businesses and individuals. BB&T could benefit from the U.S. Senate’s bipartisan “Economic Growth, Regulatory Relief, and Consumer Protection Act” (S.2155), by relieving the bank from “systemically important financial institution” (SIFI) status. Analysts expect EPS to grow 40.9% in 2018, and the stock is undervalued. Now that the share price has pulled back with the broader market, I’m moving BBT from Buy to Strong Buy. I expect BBT to rise to its January high of 56 in the short term, with additional capital gains in 2018. 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. CEO Stephen Schwarzman commented on the proposed Section 301 tariffs on March 24, saying that the president has been “pretty consistent in terms of just wanting to have what he would call fair trade. There’s an opportunity to accelerate the efforts of both countries to find an equitable solution.”
Analysts expect Blackstone’s economic net income (ENI) to grow 11.0% in 2018, and the stock is very undervalued. In the coming months, I expect BX to rise to its January high near 36. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 8.2%.
Commercial Metals Company (CMC — yield 2.3%) 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 for CMC change weekly, with the 2019 estimate consistently rising. At this point, Wall Street expects EPS to grow 106% and 55.5% in 2018 and 2019 (August year-end). The latest news on steel tariffs specifically favors rebar products, causing CMC and Nucor (NUE) to stand out in analyst research late last week as the companies most likely to benefit from new tariffs. It would not be unusual, therefore, for CMC’s earnings estimates to rise a bit more by next week’s update. I expect CMC to rise to its March high of 26 in the short term, with additional capital gains in 2018. Strong Buy.
GameStop (GME – yield 10.9%) 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 (January year-end). Consensus estimates point toward $1.96 EPS and $3.3 billion in revenue. There’s also a strong likelihood that new CEO Michael Mauler will make significant forward-looking statements, because it would be natural for him to have somewhat different plans for the company than his predecessor, and to share those plans with the investment community. GameStop was featured in the March issue of Cabot Undervalued Stocks Advisor. The stock fell in March, though there’s been no negative news. I’m moving GME from Strong Buy to Hold. Tomorrow’s earnings report should bring a strong reaction in the share price. Hold.
The Interpublic Group of Companies (IPG – yield 3.7%) 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%. (Earnings growth slows in 2019.) Now that IPG has pulled back from its recent high, I’m moving the stock from Buy to Strong Buy. In the coming months, I expect IPG to rise to its February high at 25. Strong 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 25.0% in 2018. I expect MS to rise to its March high at 59 in the short term, with additional capital gains in 2018. 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 five last week to a total of 995, four of which were oil rigs. It’s worth noting that the number of operating Canadian oil and natural gas rigs is in drastic weekly decline, which is of concern to investors who own stocks in the Canadian energy sector. (I have not recommended any Canadian energy stocks.) Analysts are expecting 2018 EPS to grow 45.3%, and the stock is undervalued. Subsequent years’ numbers also reflect earnings growth in the 43%-46% range. I expect SLB to rise to its January high of 79, with additional capital gains in 2018. Strong Buy.
WestRock Company (WRK – yield 2.7%) is a global packaging and container company. 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. This week, Credit Suisse raised their target price on WestRock from 70 to 79. Wall Street is expecting EPS to grow 50.8% in 2018, and the stock is undervalued. I expect WRK to rebound to its January high at 70. 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. This month, Alexion reported good results from its Phase 3 clinical study of ALXN1210 for the treatment of Paroxysmal Nocturnal Hemoglobinuria (PNH). Marketing applications for ALXN1210 will be filed in the EU, Japan and the United States in the second half of 2018.
Wall Street expects revenue to rise 11% in 2018, and one major investment bank is projecting additional revenue growth of 20% and 21% in 2019 and 2020. The 2019 consensus earnings estimate has been slowly rising since full-year 2017 results were reported, boosted by good news on the Phase 3 clinical study results of ALXN1210. Analysts now expect 2018 and 2019 EPS to grow 16.7% and 23.7%. The corresponding P/Es are 16.2 and 13.1. I expect ALXN to rebound to its March high of 127, with lots more capital gain potential this year. 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 five last week to a total of 995, four of which were oil rigs. It’s worth noting that the number of operating Canadian oil and natural gas rigs is in drastic weekly decline, which is of concern to investors who own stocks in the Canadian energy sector. (I have not recommended any Canadian energy stocks.) Analysts expect EPS to grow 86% and 96% in 2018 and 2019, and the stock is undervalued. The earnings estimates have been slowly falling. I expect BHGE to rise to its January high of 37, with additional capital gains in 2018. Strong Buy.
Chipotle Mexican Grill (CMG) is a growing restaurant chain, and an aggressive growth stock. On March 22, Reuters reported that Chipotle “won the dismissal of an investor lawsuit claiming it concealed food safety risks.” Chipotle shares are rising on news that the company hired a new chief marketing officer, Chris Brandt, who previously worked with new Chipotle CEO Brian Niccol at Taco Bell, in addition to his extensive experience at Outback Steakhouse, Carrabbas and other restaurant chains. Analysts expect EPS to grow 28.5% per year in 2018 and 2019. CMG appears capable of rising past price resistance at 345 in the near term and heading toward about 360. Hold.
PBF Energy Inc. (PBF – yield 3.5%) is one of the largest U.S.-based petroleum refining and marketing companies. PBF serves the U.S., Canada and other international locales. PBF Energy was featured in the March issue of Cabot Undervalued Stocks Advisor. Wall Street expects aggressive EPS growth rates of 175% and 24.2% in 2018 and 2019, and the stock is undervalued. PBF is racing toward its January high at 36. Short-term traders should exit near 36, and everybody else should hold on for additional capital gains, which could come immediately. Buy PBF now and buy more on dips. 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 expect EPS to grow 47.6% in 2018, with continued aggressive growth in subsequent years. The stock is undervalued. SUPN is approaching its January high of 47. I think the best share price you’ll see in the near-term is 50. Buy.
TiVo (TIVO – yield 5.3%) is an entertainment technology company that joined the Buy Low Opportunities Portfolio specifically because it’s a takeover target. (See the Special Bulletin from March 5.) 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. 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. Keep in mind that small, financially-strong companies make attractive takeover targets. I expect UEIC to rebound to 66, where it last traded in October 2017. Strong Buy.
