Weekly Update: Summer Stock – A New Season
I have very little to say about stocks this week. Energy stocks are thriving, and some of them have risen into the stratosphere. I never recommend that people chase stocks that just rose 20% to 50% without resting. Let them rest, then jump in to catch the next run-up. On the flip side, financial stocks are just now emerging from a resting period. Many of my favorites appear ready to not only retrace their recent highs, but to surpass them as well! I’ll be tweaking the composition of the Cabot Undervalued Stocks Advisor’s financial stocks in the coming weeks, in order to continue to offer those with the strongest earnings growth prospects.
This past weekend I attended college graduation ceremonies in which my eldest daughter, Isabella, received an award and a diploma. The award came as a complete surprise to all of us! It was named after a faculty member, and given to a theatre major for “outstanding comprehensive contribution.” In other words, Isabella excelled in two areas -- acting and costume design – and the award was a bit like “best in show”. But who knew? As a parent, you don’t have any idea how valuable and talented and industrious the other students are within the theatre department. You only know that you hold a distinct bias toward everything that has to do with your own daughter and the friends who she talks about.
Isabella will be directing children’s theatre in the U.S. and Mexico this summer (as she did in the U.S. last year), and seeking a career position in acting or costume design. She’s a very sweet soul, creative, with a strong work ethic. If you’re associated with a major theatre company within the U.S. – or with the Royal Shakespeare Company -- I’ll be happy to serve as a go-between as you and she explore the possibility of working together.
There’s a motto in the stock market, “sell in May and go away”. I won’t be going anywhere, though. There’s always something interesting happening with stocks, and I intend to profit from it. Stay close!
Will Isabella “graduate in May and go away”? Ooo, I certainly hope not. Yet this was my entire goal for her life. I gave birth … I imagined her future life up until college graduation (at which point the vision became hazy) … and it all came full circle when she graduated with her Bachelor’s degree on Mother’s Day.
I don’t know what comes next for Isabella, because there’s another famous investment motto, “Past performance is not a guarantee of future results.” Stay tuned.
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletins from May 10, 11 and 14 in which I mentioned news, rating changes and/or price action on Morgan Stanley (MS), Supernus Pharmaceuticals (SUPN) and TiVo (TIVO).
Final Earnings Season Scorecard
Big Earnings Beat: Alexion Pharmaceuticals (ALXN), Alphabet (GOOGL), BB&T Corp. (BBT), Baker Hughes, a GE company (BHGE), Bank of America (BAC), Blackstone Group (BX), Chipotle Mexican Grill (CMG), Delek US Holdings (DK), Knight-Swift Transportation (KNX), Molina Healthcare (MOH), Morgan Stanley (MS), PulteGroup (PHM), Quanta Services (PWR) and Supernus Pharmaceuticals (SUPN).
Slight Earnings Beat: Apple (AAPL), Comerica (CMA), Schlumberger (SLB), Skechers (SKX) and Southwest Airlines (LUV)
Slight Earnings Miss: The Interpublic Group of Companies (IPG), TiVo (TIVO), Universal Electronics (UEIC) and WestRock (WRK)
Big Earnings Miss: CIT Group (CIT) and PBF Energy (PBF)
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Apple (AAPL)
Commercial Metals (CMC)
PulteGroup (PHM)
Schlumberger (SLB)
*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:
Morgan Stanley (MS) moved from Strong Buy to Hold
Supernus Pharmaceuticals (SUPN) moved from Buy to Strong Buy; moved from the Buy Low Opportunities Portfolio to the Growth Portfolio; then moved from Strong Buy to Buy. (Sorry! Lots of price movement!)
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. Analysts expect Alphabet’s EPS to grow 37.6% and 7.0% in 2018 and 2019. I plan to sell GOOGL at the top of its steady trading range near 1,190 because the stock is quite overvalued based on 2019 earnings projections. Hold.
Apple (AAPL – yield 1.6%) manufactures a wide range of popular communication and music devices. Last summer, I published my basic investment strategy with AAPL – a strategy that is unique to AAPL and incredibly simple to follow. You can read about the strategy in Making Money in Apple (AAPL) Stock is Much Easier Than You Think. All you need to do to determine whether the share price will rise or fall in the coming 12 months is to look at the earnings projections in June for the next fiscal year. If profits are projected to increase, the share price will increase. If profits are projected to fall, the share price will fall. You might think, “Well of course Apple’s profits will increase!” Not so fast, cowboy! Sure, Apple makes a boatload of money every year, but that doesn’t guarantee that profits will be even bigger than they were in the prior fiscal year (September year-end). Anyway, go ahead and read the article.
Apple is an undervalued growth stock, now expected to see EPS increase 24.8% and 15.6% in fiscal 2018 and 2019. The corresponding P/Es are 16.4 and 14.2. AAPL rose to a new all-time high this month. Buy AAPL now and buy more on pullbacks. Strong Buy.
Bank of America (BAC – yield 1.6%) is an undervalued growth stock. BAC is traveling toward its recent high near 33, where I will likely sell in favor of a small bank or property & casualty insurance company. Hold.
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. Analysts expect EPS to grow 27.0% and 25.9% in 2018 and 2019. The corresponding P/Es are quite low at 13.8 and 10.9. I expect CIT to rise to its March high near 56 in the short term, with additional capital gains in 2018. Strong Buy.
Delek US Holdings (DK – yield 2.0%) is a diversified downstream energy company and a very undervalued small-cap stock. Wall Street expects full-year EPS to grow 160% and 31.6% in 2018 and 2019, and P/Es are in the low-to-mid teens. DK could appeal to investors who have a focus on value, growth or dividend income. Last week, Bank of America Merrill raised their price target on DK from 50 to 55. The recent rapid share price appreciation is slowing. There’s room for the stock to continue rising after it rests for a while. Hold.
D.R. Horton (DHI – yield 1.1%) is America’s largest homebuilder, based in Ft. Worth, TX and operating in 26 states. The company also provides mortgage, insurance and title services. D.R. Horton was featured in the May issue of Cabot Undervalued Stocks Advisor. After achieving 16.9% earnings growth in 2017 (September year-end), D.R. Horton is expected to see EPS grow 33.6% and 19.5% in 2018 and 2019. Price/earnings ratios (P/E) remain low at 11.9 and 9.9 for fiscal 2018 and 2019. There’s 20% upside when DHI rebounds toward 53, where it peaked in January. I anticipate additional capital gains later this year. Buy DHI now. Strong Buy.
KLX Inc. (KLXI) – Please refer to the Special Bulletins from May 2 and 7 in which I described the KLX decisions to allow Boeing (BA) to acquire its Aerospace Solutions Group (ASG), and to spin off its Energy Services Group (ESG) to shareholders. At a current price of $73 per KLXI share, minus the value of the Boeing-ASG transaction at $63, the market is valuing the ESG business at $10 per share.
If you buy KLXI and are willing to wait for the two M&A transactions to take place, you will have $63 cash per share returned to you, and you will own shares of the new KLX Energy Services (KLXE). The Boeing cash transaction is expected to be completed by September 1, and the KLXE spinoff could happen at any point between now and the completion of the Boeing transaction. (You are free to sell KLXI on any business day prior to the spinoff and prior to the completion of both transactions. You could, for example, receive the spinoff shares in July, at which time your remaining shares of KLXI will trade near $63 until the Boeing transaction is completed. You could sell your remaining KLXI shares on the open market, or just wait for the Boeing transaction to be completed, at which time the cash will show up in your brokerage account.)
I expect KLXI to rise to a more fair valuation in the coming weeks, reflecting a true value of the ESG spinoff. I see incredible value here. Please visit the KLX website and view the webcast and slide presentation to learn more about KLX’s rapidly-growing ESG business. 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. KNX is an undervalued mid-cap aggressive growth stock. The stock has begun its recovery from a big price correction in March and April, although I expect progress to be slow. There’s 24% upside as KNX eventually rebounds to its 2018 high at 50. Strong Buy.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. Earnings estimates jumped last week, subsequent to the first quarter earnings release. Analysts now expect full-year EPS growth of 25.5% and 23.0% in 2018 and 2019. The corresponding P/Es are 23.9 and 19.4. I expect the stock to travel back to its January peak at 240, with pullbacks along the way. 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. The company will receive important news regarding Washington State contracts around May 22. I am considering selling prior to that date. Hold.
PulteGroup (PHM – yield 1.1%) is a U.S. homebuilder and a very undervalued aggressive growth stock. Consensus earnings estimates reflect 60.2% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 9.5 and 8.4. PHM is recovering from a big 2018 price correction experienced by most of its homebuilding peers. (After their huge 2017 run-ups, the extended pullback is not surprising.). Buy PHM now for 11% upside on the rebound, and additional capital gains thereafter. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. PWR is an undervalued mid-cap growth stock. Full-year consensus earnings estimates rose again last week, now reflecting 40.1% and 14.9% EPS growth in 2018 and 2019. The corresponding P/Es are 13.2 and 11.5. The stock rose rapidly this month, and could pull back briefly. I expect PWR to rise to its January high of 40, with additional capital gains thereafter. 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. LUV is an undervalued stock that’s experiencing aggressive earnings growth this year. Earnings estimates came down last week. Analysts now expect EPS to grow 28.0% and 17.9% in 2018 and 2019. The corresponding P/Es are 11.7 and 9.9. LUV is not yet ready to rebound toward its recent high of 66. That being said, patient investors who buy LUV now will be getting quite a bargain. 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, migraine and ADHD. I reported on Supernus’ strong first quarter in a Special Bulletin on May 10, and reported on the subsequent share price action on May 14. SUPN is an undervalued, small-cap stock. Analysts expect full-year EPS to grow 51.6% in 2018, with continued aggressive growth in subsequent years. Most stocks that rapidly rise up to new highs will have a brief pullback before continuing their upward trajectory. Don’t be rattled if the stock falls 10-15%, and consider buying more on pullbacks. I have every intention of keeping the stock for future capital appreciation. Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 2.7%) is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serves businesses and individuals. Earnings estimates have steadily risen for the past four months. Analysts expect full-year EPS to grow 43.7% and 8.2 % in 2018 and 2019, with corresponding P/Es of 13.7 and 12.7. In the next few months, I will likely sell BBT in favor of a financial stock with more aggressive 2019 earnings growth prospects. Hold.
Blackstone Group LP (BX—yield 7.9*) is the world’s largest and most diversified alternative asset manager with $450 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 2.8% and 11.8% in 2018 and 2019. I expect BX to return to its January high near 36. BX could appeal to dividend investors, growth & income investors, and traders who would be happy with a potential 14% capital gain this year. Buy BX now. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts, plus the $0.30 special 2018 distribution, yielding 7.9%.
Comerica (CMA – yield 1.4%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. The company is in a strong position to capitalize on rising interest rates that contribute to increases in net interest margin (NIM) through its variable rate loan portfolio (90% variable rate vs. 10% fixed rate loans). Comerica is expected to increase EPS by 41.0% and 11.5% in 2018 and 2019. The corresponding P/Es are 14.6 and 13.1. The ex-dividend date is June 14. The share price advanced to the top of its two-month trading range last week. We could see CMA launch past 102 to new all-time highs fairly soon. I will likely sell CMA after that run-up, unless 2019 earnings projections increase. There’s room for short-term investors to buy CMA now and potentially earn a 10% short-term total return. Buy.
Commercial Metals Company (CMC – yield 2.1%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. U.S. industrywide pricing is expected to remain strong due to robust economic activity, lower steel supply and lower import volumes due to tariffs. Commercial Metals was featured in the May issue of Cabot Undervalued Stocks Advisor. Wall Street analysts expect EPS to grow 97.2% and 65.0% in 2018 and 2019 (August year-end), with corresponding P/Es of 16.1 and 9.8. The stock is extremely undervalued. CMC is actively rising toward its March high of 26. I expect additional gains thereafter. Buy CMC now. Strong Buy.
GameStop (GME – yield 11.3%) is a retailer of games, collectibles and technology; with additional ventures in the entertainment field. GameStop CEO Michael Mauler stepped down “for personal reasons” last week. Daniel DeMatteo, the company’s executive chairman, was named interim CEO. No further insight about the executive change was available. The company is going through a multi-year shift in product emphasis, to which the stock has reacted poorly. Sell Half.
The Interpublic Group of Companies (IPG – yield 3.5%) is a large conglomerate of advertising, marketing, communication and public relations companies serving all global markets. Its clients include Alphabet (GOOGL), Microsoft (MSFT) and Coca-Cola (KO). Wall Street expects full-year 2018 EPS to grow 22.7%, and the P/E is 14.0. IPG is trading near its former high all-time high of 25 from July 2017. I expect additional capital gains in 2018, and will likely sell later this year if 2019 earnings projections don’t increase. Strong Buy.
Morgan Stanley (MS – yield 1.8%) is a major U.S. investment bank and wealth manager. MS shot upward from the bottom of its 2018 trading range last week; and financial stocks are rising across the board. Earnings per share at Morgan Stanley are now expected to grow just 7.1% in 2019. That’s a decent number, and nothing to be alarmed at, but I’m sure I can find financial stocks with stronger EPS growth. Therefore I’ll be selling MS relatively soon. Hold.
PBF Energy Inc. (PBF – yield 2.8%) is one of the largest U.S.-based petroleum refining and marketing companies, serving the U.S., Canada and other international locales. Earnings estimates rose again last week. Wall Street now expects aggressive full-year EPS growth rates of 163% and 34.0% in 2018 and 2019. The corresponding P/Es are very low at 13.8 and 10.3. PBF continues to reach new all-time highs. A pullback could easily take the stock down to 37. Hold.
Schlumberger (SLB – yield 2.8%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas rose by thirteen last week to a total of 1,045, up 160 vs. a year ago. Analysts are expecting full-year EPS to grow 36.7% and 48.8% in 2018 and 2019, with corresponding P/Es of 34.7 and 24.3. Last week, Bank of America Merrill raised their price target on SLB from 75 to 79. Barring a disruption in the broader stock market, I expect SLB to advance immediately to its January high of 79. Buy SLB now. Strong Buy.
WestRock Company (WRK – yield 2.8%) is a global packaging and container company. WestRock’s acquisition of KapStone Paper and Packaging is expected to close in the early fall. Analysts expect full-year EPS to increase 53.8% and 16.1% in 2018 and 2019. The corresponding P/Es are low in comparison at 15.1 and 13.0. The share price suffered in late May and has begun its rebound. There’s 14% upside as the stock gradually retraces 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. Consensus earnings estimates rose again last week. Alexion is now expected to achieve 19.6% and 21.8% EPS growth in 2018 and 2019. The corresponding P/Es are 17.1 and 14.0. ALXN continues to advance toward its January high of 128. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 2.0%) 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 thirteen last week to a total of 1,045, up 160 vs. a year ago. BHGE is a large-cap stock with heavy institutional ownership. Wall Street expects full-year EPS to grow 83.7% and 100% in 2018 and 2019. The corresponding P/Es are 45.3 and 22.6. BHGE is hovering near medium-term price resistance at 37. I anticipate a brief pullback, and for BHGE to subsequently begin a new run-up past 37 to about 44. The timing of that move should become clearer in the coming weeks. 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. Earnings per share are expected to grow aggressively at 18.5% per year in 2018 and 2019. Corresponding P/Es are 13.8 and 11.6. SKX is an undervalued mid-cap growth stock. SKX fell a crazy amount after the earnings release and found price support at 28. It’s going to need to rest before attempting a rebound. I encourage investors to hold SKX, and consider buying more shares while the price is depressed. Strong Buy.
TiVo (TIVO – yield 5.2%) is an entertainment technology company that joined the Buy Low Opportunities Portfolio in early March specifically because it’s a takeover target. Last week, the company reiterated its intention to complete the process of its strategic review by the time of the second quarter earnings release, and therefore announced that they would not be providing second quarter earnings guidance. The company believes that its share price is inappropriately low, leading a TiVo representative to publicly discuss their interest in being acquired or going private. According to the linked article, “multiple buyers have expressed interest in acquiring TiVo.” TiVo was featured in the May issue of Cabot Undervalued Stocks Advisor. The stock has traded between 13 and 15.5 all year. I anticipate there being very little to report until the company announces some sort of finalized M&A activity by August at the latest. 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 aggressive growth stock, with minimal debt on the balance sheet. The stock is volatile, and very cheap right now, after plummeting on disappointing news of lower second quarter shipments. The stock is not yet ready to recover, and will likely trade liberally between 28 and 40 for a while. Patient investors could dollar-cost-average into the stock as they await its next upturn. Traders will likely profit in the short-term. Strong Buy.
