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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Weekly Update

We’re still in the midst of a market correction that began in late January. I consider this correction to be perfectly normal, and unrelated to politics, economics, natural disasters or war. In short, the stock market rose for 15 months without resting, and it was overdue to rest. Sometimes things really are that simple.


Which Buy-Rated Stocks Are The Best Ones To Buy?

Oftentimes an investor will send me a question, and the answer is worth incorporating into the Weekly Update. One gentleman asked me why I might write “Strong Buy” and also “buy now” in a stock’s descriptive paragraph. Here’s the answer: “Strong Buy” is my basic recommendation on the stock, and it’s largely derived from fundamental analysis, which means that I really like the earnings growth rate, the price/earnings ratio and the debt level. But if I also write “buy now”, it means that I think the stock is trading at an opportune place within its price chart to either offer investors approximately the lowest price that’s reasonable to expect, or because I think the stock will immediately continue rising, or break out from a stable base.

We’re still in the midst of a market correction that began in late January. I consider this correction to be perfectly normal, and unrelated to politics, economics, natural disasters or war. In short, the stock market rose for 15 months without resting, and it was overdue to rest. Sometimes things really are that simple.

You’ll notice that for two weeks in a row I wrote “buy now” on many of our portfolio stocks’ descriptions. Almost every one of those noted stocks is trading at solid price support, as is the S&P 500 index. It’s a very encouraging sign when stocks and market indexes stay within specific trading ranges during their occasional price corrections, and that’s what we’re witnessing. Therefore, I’ve been buying stocks while they’re low within their trading ranges, and I hope you’ve been doing so as well.

I anticipated this year’s stock market correction, and there’s nothing about it that has alarmed me. Believe me, I’ve lived through many types of market corrections, including real estate, junk bonds, Treasury bonds, Japanese stocks, the Mexican peso and more. If I was bearish, I would tell you. If I thought the market wouldn’t recover any time soon, I would tell you.

In the case of the 2018 U.S. stock market correction, I expect the market indexes to rise back to their January highs by approximately June, and then trade near the top of this year’s trading ranges for a while, maybe for two months. And then I expect the markets to begin reaching new highs again. Stick with your investment plan, and continue to pick up bargains as your cash position allows. In a few short months, this market correction will be history, and I want you to be able to look back on it and gloat a little that you made some lucrative decisions prior to the market rebound.

More On Financial Stocks ...

I generally have a list of another 50 attractive stocks “waiting in the wings”. If I were running a mutual fund, I could certainly get fully invested quite quickly. But researching and writing about 25-30 stocks every week is a time-consuming task, so it’s not feasible for me to expand the Cabot Undervalued Stocks Advisor portfolios any further.

Since I’m occasionally called upon to deliver stock reviews outside of this publication, my recommendations on some of these other favored stocks eventually end up in print. I want to point your attention to a few more financial stocks that I wrote about last week. Investopedia published this article: 2018 Could Be Year of the Financial Stock with M&A Prospects. It features Assurant (AIZ), BankUnited (BKU), Popular (BPOP) and Synchrony Financial (SYF). I also recommended Zions Bancorporation (ZION) in this article from Wall Street’s Best Daily: This Bank Stock Has Doubled in 20 Months--and is Still Undervalued. Zions is about to announce a dividend increase, its fourth quarterly increase in a row!

More on Tariffs ...

Last week, Jim Cramer interviewed CEOs from a variety of U.S. companies, including Intel (INTC) and United Technologies (UTX), asking them about the potential effects of tariffs and trade wars. Here are their responses. I especially appreciated the response from Nucor CEO John Ferriola, who was able to make a simple but important point about other countries’ VAT taxes.

Send questions and comments to

Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
ConocoPhillips (COP)
Molina Healthcare (MOH)

*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 Hold.
Knight-Swift Transportation (KNX) moves from Strong Buy to Hold.

Last Week’s Portfolio Changes:
Comerica (CMA) joined the Growth & Income Portfolio as a Buy.
Molina Healthcare (MOH) joined the Growth Portfolio as a Strong Buy.
Skechers USA (SKX) joined the Buy Low Opportunities Portfolio as a Strong 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 will consider GOOGL to be fairly valued when it retraces its January high near 1,190, at which point I might sell so as to make room for a more undervalued stock to join the portfolio. I’m pleased that GOOGL maintained very firm price support at 1,000 during this year’s stock market correction. Buy GOOGL now. Strong Buy.

Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. Apple unveiled a new color for its iPhone 8 yesterday, in keeping with its (PRODUCT)RED theme. Profits from the red iPhones will go toward efforts to inhibit the spread of HIV and AIDS in Africa. Apple is an undervalued growth stock, expected to see EPS increase 24.3% in fiscal 2018 (September year-end).

The company typically announces a dividend increase in late April. Last year’s increase was 10.5%, and it would not be surprising if this year’s increase is larger because of all that repatriated cash that Apple is now free to bestow upon shareholders. I expect AAPL to rise to its March high at 182 in the short term, with additional capital gains in 2018. Buy AAPL now. Strong Buy.

Bank of America (BAC – yield 1.6%) is a significantly undervalued growth stock, expected to see EPS grow 37.7% in 2018. Profits are enhanced by rising interest rates, more so than at other financial companies. There’s 10% upside as BAC retraces its March high near 33, with additional capital gains in 2018. 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. CIT is expected to see EPS grow 32.6% and 20.6% in 2018 and 2019, and the corresponding P/Es are 12.6 and 10.4. I expect CIT to rise to its March high at 56 in the short term, with additional capital gains in 2018. Buy CIT now. Strong Buy.

ConocoPhillips (COP – yield 1.9%) is a global energy exploration and production company. ConocoPhillips sold some high-priced assets in the Permian recently, and reinvested in some cheaper properties in Canada and Louisiana. Read more about Conoco’s growth strategy in this article from, Does Conoco Know Something That Its Competition Doesn’t?. The company is having a year of huge earnings growth, followed by projected 5.5% EPS growth in 2019. I don’t want to hold COP in 2019 unless the earnings growth projection ramps up—which could happen after earnings season. In the meantime, the price chart is bullish. COP just surpassed its January high at 60. I’ll be moving my recommendation to Hold quite soon, with the intent to sell COP after this run-up. Buy COP now to catch the run-up. Strong Buy.

Delek US Holdings (DK – yield 1.9%) is a diversified downstream energy company and a very undervalued small-cap stock. 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 in mid-March, and continues climbing. 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 2019 EPS grow 34.3%. The stock began reaching new all-time highs in March, 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. Buy KLXI now. Strong Buy.

Knight-Swift Transportation Holdings (KNX – yield 0.6%) is a truckload carrier formed from the September 2017 merger between Knight Transportation and Swift Transportation Company. The company just completed its seasonally-slow first quarter. The market expects EPS to grow 65.9% and 20.5% in 2018 and 2019. KNX is an undervalued mid-cap stock. KNX rose to new all-time highs this year, then pulled back with the weak market, and hasn’t found a bottom yet. I’m moving KNX from Strong Buy to Hold—fundamentals are great; I just don’t want you buying today when tomorrow’s share price is likely to be a little lower. After the share price stabilizes, I’ll be ready to begin buying again, but it’s going to be several weeks or longer. Be patient! Hold.

Martin Marietta Materials (MLM – yield 0.9%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. In this Fortune interview, CEO Ward Nye expresses optimism that Martin Marietta will benefit from border wall and infrastructure construction projects, the latter of which may be financed by a new gasoline tax. He also expressed that his customers in the contracting community “are having better backlogs today than they’ve had in more than a decade.” Earnings estimates have been slowly rising for 2019. At this point, consensus estimates point to EPS growth of 19.9% and 24.6% in 2018 and 2019. The corresponding P/Es are 23.5 and 18.8, making the stock undervalued based on 2019 numbers. MLM has been resting at strong price support near 200. As the stock makes its way back to its January high of 240 in the coming months, the changing numbers will guide my decision as to whether to hold the stock for additional capital gains above 240. Buy MLM now. Strong Buy.

Molina Healthcare (MOH) is a managed healthcare operator that offers health information management solutions to nearly five million members who receive their care through Medicaid, Medicare, health insurance exchanges and other government-funded programs in fifteen states. Molina Healthcare was featured in the April issue of Cabot Undervalued Stocks Advisor. The consensus earnings estimate for 2018 stood at $2.83 per share back in October, and then rose steadily. Analysts now expect Molina to achieve earnings per share (EPS) of $3.70 and $4.46 in 2018 and 2019. MOH is actively rising from the lows of its recent price correction. When it reaches 92, I expect it to rest briefly before reaching new all-time highs again in 2018. Buy MOH now. 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. PHM has begun its recovery from the market correction. I expect the stock to head back to 35, where it last traded in January, and to deliver additional capital 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 reflect 30.5% EPS growth in 2018, and the stock is undervalued. PWR has been resting at strong price support near 33.5. In the coming months, I expect PWR to rise to its January high of 40, with additional capital gains in 2018. Buy PWR now. 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 Southwest Airlines … the entire company. Analysts expect Southwest’s EPS to grow 40.3% in 2018, and the P/E is just 11.3. The stock is low within its trading range, offering a 20% capital gain when LUV returns to its January high of 66, with additional capital gains in 2018. Buy LUV now. 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. Analysts expect EPS to grow 41.2% and 8.1% in 2018 and 2019. I’m moving BBT from Strong Buy to Hold, with the intention of selling near its January high of 56 if the 2019 earnings growth rate does not improve further. The stock’s still a good investment, but I have stocks with stronger 2019 earnings growth projections waiting in the wings. Hold.

Blackstone Group LP (BX—yield 8.7%*) 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 will report first quarter results on the morning of April 19. Analysts expect Blackstone’s full-year economic net income (ENI) to grow 6.8% and 9.0% in 2018 and 2019, and the stock is very undervalued. (These earnings growth numbers would be low for a growth stock, but are highly attractive for a stock with a big dividend yield.) 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 8.7%.

Comerica (CMA – yield 1.2%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Comerica was featured in the April issue of Cabot Undervalued Stocks Advisor. The company is in the midst of a restructuring plan through 2020 in which it’s cutting expenses, reducing loan loss provisions and expanding net interest margins. Consensus estimates rose last week, with EPS now expected to increase 38.4% and 10.8% in 2018 and 2019. CMA is profiting more from rising interest rates in its variable rate loan portfolio than any of its mid-cap bank peers, which could lead to an upside first quarter earnings surprise.

Comerica announces a dividend increase each year in late April (and sometimes twice per year). There were three dividend announcements in 2015 and 2016, each delivering 4%-5% increases. Then in 2017, Comerica announced two consecutive quarterly dividend increases of 11%-15% each. Importantly, while many banks announced outsized dividend increases since the new tax laws were implemented, including BB&T Corp. (BBT) in the Growth & Income Portfolio, Comerica has not announced an increase since July 2017. Therefore, we could see a big dividend boost later this month, combining a normally-attractive annual dividend increase with an additional enhancement related to the new tax laws.

The price chart is relatively bullish. CMA rose to new all-time highs in January, pulled back with the stock market correction, rose to new highs again in both February and March, then had another pullback. Buy CMA now to take advantage of the bullish price action that could easily be enhanced by a late-April potentially-attention-grabbing dividend announcement. Buy.

Commercial Metals Company (CMC – yield 2.5%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC is an extremely undervalued aggressive growth stock. Despite all the scary headlines about steel tariffs and trade wars, Wall Street analysts expect EPS to grow 95.8% and 64% in 2018 and 2019 (August year-end), with corresponding P/Es of 13.9 and 8.5. The disparity between the earnings growth rates and the P/Es is somewhat absurd. When the news media moves on to its next unanimous obsession—a politician falling from grace, an accounting scandal at a big company—the pressure will be off of steel stocks and rational thought will, once again, prevail. There’s 34% upside when CMC returns to its March high of 26. Strong Buy.

GameStop (GME – yield 11.3%) is a retailer of games, collectibles and technology; with additional ventures in the entertainment field. The company is going through a multi-year shift in product emphasis, to which the stock has reacted poorly. On March 29, I sent a Special Bulletin regarding the fourth quarter earnings report, and suggested that investors sell half their shares. Sell Half.

The Interpublic Group of Companies (IPG – yield 3.6%) 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.) In the coming months, I expect IPG to rise to its February high at 25, and to rise further in 2018. Strong Buy.

Morgan Stanley (MS – yield 1.9%) is a major U.S. investment bank and wealth manager, and an undervalued, large-cap growth stock. Morgan Stanley will report first quarter results on the morning of April 18. Analysts are expecting full-year EPS to grow 25.6% in 2018. As the market recovers, I expect MS to rise to its March high at 59, with additional capital gains in 2018. Buy MS now. Strong Buy.

Schlumberger (SLB – yield 3.1%) is the world’s largest oilfield service company. An analyst at SunTrust Robinson Humphrey raised his rating on SLB to Buy with an $80 price target. Read more in this Barron’s article, Schlumberger: The Best Place To Hide In Oilfield Services? The number of U.S. rigs drilling for crude oil and natural gas rose by ten last week to a total of 1,003, up 164 vs. a year ago. Analysts are expecting EPS to grow 43.3% and 48.4% in 2018 and 2019, with corresponding P/Es of 29.9 and 20.2. As the market recovers, 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. Consensus earnings estimates have been consistently rising all year. Analysts now expect EPS to increase 54.2% in 2018. The P/E is just 15.5. As the market recovers, I expect WRK to rebound to its January high at 70, with additional gains this year. 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 23.7%. The corresponding P/Es are 16.0 and 12.9. As the market rebounds, 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 ten last week to a total of 1,003, up 164 vs. a year ago. Piper Jaffray upgraded BHGE to Overweight with a $39 price target last week, citing the company’s attractive free cash flow, P/E and debt levels, and calling the oil service provider “best in class”.

Baker Hughes will report first quarter results on the morning of April 20. Wall Street expects full-year EPS to grow 81.4% and 100% in 2018 and 2019. BHGE is slowly ratcheting upward from its February lows. I expect BHGE to rise to its January high of 37, with additional capital gains in 2018. Buy BHGE now. Strong Buy.

Chipotle Mexican Grill (CMG) is a growing restaurant chain, and an aggressive growth stock. CEO Brian Niccol is focused on improving same-store sales and margins. Read more in this Barron’s article, Chipotle: Bigger Earnings Ahead? Analysts expect EPS to grow 28.5% per year in 2018 and 2019. CMG appears capable of reaching price resistance at 345 in the near term, then proceeding toward about 360. Hold.

PBF Energy Inc. (PBF – yield 3.4%) is one of the largest U.S.-based petroleum refining and marketing companies. PBF serves the U.S., Canada and other international locales. Wall Street expects aggressive EPS growth rates of 167% and 28.3% in 2018 and 2019, and the stock is undervalued. One major Wall Street bank gives PBF a sum-of-the-parts valuation of $52. PBF has almost retraced 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. Strong Buy.

Skechers USA Inc. (SKX) is an apparel company that designs and manufactures affordable footwear for people of all ages. The company is based in California, and sells its products in over 160 countries and territories in Asia, Europe, the Middle East and the Americas, through wholesale, retail and e-commerce venues. Skechers USA was featured in the April issue of Cabot Undervalued Stocks Advisor.

Skechers is growing faster than its footwear competitors. Wall Street expects revenue to increase 11.9% and 10.6% in 2018 and 2019. Earnings per share (EPS) rose 13.4% in 2017, and are expected to grow aggressively at 28.1% and 18.0% in 2018 and 2019. Corresponding P/Es are 17.7 and 15.0. SKX is an undervalued mid-cap growth stock.

SKX traded quietly between 38 and 41.5 this year, showing more strength than the broader stock market. There’s 31% upside as SKX retraces its high of 53 from 2015, at which point I expect the stock will be both fully valued, and meeting significant price resistance. 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, and much farther along in its recovery from the market correction than most stocks. I expect SUPN to rise to 50 this year, where it last traded in September 2017. Buy.

TiVo (TIVO – yield 5.2%) 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. Buy UEIC now. Strong Buy.

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