Keep On Truckin’ -- An Online Dating Story
I figured that headline would grab your attention. The whole time this story was unfolding, I knew that I would tell you about it, because it circles back to the stock market, with elements of the absurd. So today you’re allowed to laugh at my expense. Here goes …
I tried online dating back in January 2016, but I didn’t get any dates, and I cancelled my subscription. Then about four weeks ago, I signed up again. It can’t be any worse than having no dates at all, right? So I filled out my dating profile and hit “send”.
In the profile section where it asks you about the most important qualities that you’re looking for in a person, the first word I used was athletic. It’s not that I’m only interested in dating Dwayne “The Rock” Johnson. Rather, it’s because they live to be 100 in my family. I don’t want to fall in love with a somewhat unhealthy person who doesn’t watch their calories, doesn’t exercise, and will probably die when I’m age 70, leaving me without an excellent companion for my thirty remaining years. I want to increase the odds that I will be able to find a wonderful person and enjoy their company for decades to come—not just ten years. So it’s going to have to be somebody who takes really good care of their health through diet and exercise.
Athletic. Remember that word.
This guy who I’ll call “Marty” responded to my online dating profile and arranged to meet me at Starbucks. (Right away my middle daughter groaned at how incredibly gauche it was that he suggested Starbucks. Whatever. I can’t micromanage everything, right?)
I went to Starbucks at the appointed hour. Marty was late. I sat next to one entrance while keeping an eye on the other entrance.
As he entered the far door, the first thing I noticed was that it had been at least several decades since Marty had been acquainted with the word “athletic”. (What on earth inspired him to decide, as he read my online profile, that he was the guy I was searching for?) So I geared myself up for spending some time talking to another human being who I would never meet with again.
The surprises didn’t end there! While online, Marty had represented himself to me as a financial professional. However, within minutes of meeting Marty, it became clear that his financial profession was, in reality, a fledgling hobby, because Marty is actually a truck driver.
What’s more, he apparently really enjoyed talking about truck driving. I listened to many chapters of Marty’s Encyclopedia of Truck Driving Experiences. Except guess what? I know a little bit about the truck driving industry, from all the research I’ve read about Knight-Swift Transportation (KNX) in the Cabot Undervalued Stocks Advisor’s Growth Portfolio. Marty beamed at me when he discovered that I was able to discuss truck driving. He was absolutely thrilled. (He was probably ready to marry me… Yikes!)
Anyway, I asked Marty about the industrywide driver shortage, and here’s what I gleaned:
• The written test to acquire a commercial driver’s license (CDL) is much harder than it used to be, thus, fewer people are passing the test and becoming truck drivers.
• Additionally, the legalized use of recreational marijuana in approximately nine states and the District of Columbia has further shrunk the pool of qualified truck drivers, because some would-be drivers cannot pass the drug tests.
• The new mandatory use of electronic logging devices (ELD) throughout the trucking industry is exposing truckers who heretofore had their fingers on the scale, i.e. they were lower-quality employees who often misrepresented their work data to their employers.
• Trucking companies have significantly increased the pay scale in their desperate search for qualified drivers, and they’re passing those operational costs on to the shippers. The booming economy has trucking companies working at capacity, except for the trucks that are sitting idle due to lack of drivers.
I finally managed to thank Marty for his company and conversation, at which point he asked me out to dinner. And it was at that point when I had to be blunt and say, “We’re not a match.” For now, I’m willing to stick with the online dating for a tad longer. I’ll keep on truckin’.
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Apple (AAPL)
Blackstone Group (BX)
Knight-Swift Transportation (KNX)
Martin Marietta Materials (MLM)
Skechers USA (SKX)
TiVo (TIVO)
*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:
Comerica (CMA) moved from Buy to Hold.
Interpublic Group (IPG) moved from Strong Buy to Hold.
KLX Inc. (KLXI) moved from Strong Buy to Hold.
Martin Marietta Materials (MLM) moved from Strong Buy to Buy.
Morgan Stanley (MS) moved from Hold to Sell.
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. Alphabet’s EPS are expected to grow 37.6% and 7.2% in 2018 and 2019. The GOOGL price chart looks remarkably similar to that of the S&P 500 (SPX)—they each appear ready to head back to their January highs. I think we’ll have made significant progress toward that goal by the end of June. I plan to sell GOOGL near 1,190 because the stock is quite overvalued based on 2019 earnings projections. Traders who buy below 1,090 could make 9% profit when GOOGL reaches 1,190. Hold.
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. Revenue and margin increases at Apple Services (Apple Music, the App Store, etc.) are expected to drive corporate growth for years to come. AAPL is an undervalued growth stock, expected to see EPS increase 24.8% and 15.5% 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, and appears capable of promptly beginning another run-up. Buy AAPL now and buy more on pullbacks. Strong Buy.
Bank of America (BAC – yield 1.6%) is an undervalued growth stock. BAC could retrace its recent high near 33 this summer, 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. President Trump signed new banking legislation last week that rolls back some post-crisis financial regulations that had greatly harmed small- and mid-cap banks. As a result, some banks are expected to release excess capital to shareholders, with CIT Group most likely to do so, according to Barron’s. The number of analysts contributing to consensus earnings estimates for CIT Group changes almost weekly, which is slightly unusual. Thus, there’s more volatility to the earnings estimates than with other companies. Analysts now expect EPS to grow 22.5% and 25.8% in 2018 and 2019. The corresponding P/Es are quite low at 13.7 and 10.9. The stock fell last week, while lacking a news catalyst. The company completed a cash tender offer for some of its common stock, but that should be a non-event as far as the share price is concerned. I expect CIT to head back to its March all-time high near 56, and continue rising thereafter. Strong Buy.
Delek U.S. Holdings (DK – yield 1.9%) is an energy refining and marketing company, and a very undervalued, aggressive growth stock. Several notable and unusual things are happening with Delek’s earnings estimates, the price of oil and the stock price, so let’s unpack these one at a time. First, as I noted last week, due to rapid share price appreciation, DK is on the verge of qualifying as a “mid-cap stock”. That doesn’t necessarily mean much unless you closely monitor the market cap of your portfolio stocks, in which case Delek’s market cap might signal the need for some rebalancing. In addition, the bigger market cap could trigger new buying among mid-cap growth stock mutual funds, which could serve to drive Delek’s share price higher.
I also mentioned that Delek’s margins are benefiting from a much-higher-than-usual price spread between Brent and WTI crude oil, and also benefiting from rising oil prices, each leading to rising consensus earnings estimates. What I did not anticipate was how high the earnings estimates would leap. When I added DK to the Cabot Undervalued Stocks Advisor portfolio in February, the company was expected to earn $2.43 per share in 2018. That number began rising weekly in mid-April, launched to $3.27 on May 20, then rocketed to $4.18 a week later. What’s more, $4.18 represents the lowest consensus estimate that I found in recent days, while a different provider of consensus estimates quoted $4.93. Going with the more conservative number, we can currently expect Delek’s EPS to grow 273% in 2018 and another 16.0% in 2019. The corresponding P/Es are 12.5 and 10.7. Those are all attractive numbers, and leave plenty of room for Delek to thrive this year, even if oil prices and Brent-WTI spreads fall for a while.
We finally saw a chink in the armor of oil prices last week, pushing share prices down on E&P stocks and oilfield service stocks, although refining and marketing stocks barely fell. A correction in oil prices is normal after this year’s run-up. I expect oil prices to continue climbing later this year, so consider buying low on your favorite oil-related companies as prices dip. Hold DK for further gains, use stop-loss orders if you’re cautious, and buy more DK on pullbacks. DK could appeal to investors who have a focus on value, growth or dividend income. Hold.
D.R. Horton (DHI – yield 1.2%) 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 19.7% in 2018 and 2019. Price/earnings ratios (P/E) remain low at 11.5 and 9.6 for fiscal 2018 and 2019. There’s 24% upside when DHI rebounds toward 53, where it peaked in January. 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 $72 per KLXI share, minus the value of the Boeing-ASG transaction at $63, the market is valuing the rapidly-growing and profitable ESG business at $9 per share.
If you own KLXI and 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 spin-off 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 spin-off and prior to the completion of both transactions. You could, for example, receive the spin-off 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 should show up in your brokerage account.)
Please note that if you own KLXI in a taxable account, the KLXE spin-off will be a taxable transaction. The income tax reporting will either be slightly complicated for you, or slightly expensive if you’re paying an accountant an hourly rate to research the situation. An alternate strategy that avoids complicated tax reporting would be to sell KLXI before the KLXE spin-off, and consider buying KLXE immediately after the spin-off.
KLXI can potentially rise to 80 this summer, reflecting a more fair value of the KLXE spin-off. Please visit the KLX website and view the webcast and slide presentation to learn more about KLX’s rapidly-growing ESG business. Hold.
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. Analysts expect full-year EPS growth of 67.4% and 18.6% in 2018 and 2019. The corresponding P/Es are 17.5 and 14.8. Transportation stocks have been depressed in recent months, with KNX being more depressed than most. A quick study of 23 transportation stocks reveals that KNX has a P/E that’s lower than 90% of its competitors. That makes KNX one of the most undervalued stocks within an undervalued industry. The stock has begun its recovery from a big price correction in March and April, and appears quite capable of rising in the coming weeks. There’s 24% upside as KNX eventually rebounds to its 2018 high at 50. Buy KNX now. Strong Buy.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. Analysts expect full-year EPS growth of 27.6% and 22.8% in 2018 and 2019. The corresponding P/Es are 23.8 and 19.4. There’s about 10% upside as the stock travels back to its January peak at 240. At that time, I’ll assess EPS, PE and price action in the broader market before determining whether to continue to hold MLM. Buy MLM now. Buy.
PulteGroup (PHM – yield 1.2%) is a U.S. homebuilder and a very undervalued aggressive growth stock. Consensus earnings estimates, which rose last week, reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 9.2 and 8.2. Keep in mind that analysts’ earnings estimates reflect all known influences to company operations, including changes in interest rates, income tax rates, wages and other economic data. Despite constant headlines about rising interest rates, the average analyst on Wall Street still expects PulteGroup to see profits rise 60.7% in 2018!
PHM is ratcheting upward after a big 2018 price correction experienced by most of its homebuilding peers. (After their huge 2017 run-ups, the extended pullback was not surprising.). If you glance at the six-month price chart on PHM, you’ll see an interesting pattern showing the stock moving two-steps-forward and one-step-back repeatedly since February, with each upward move reaching about $0.50 higher than the last upward move. In keeping with that trend, the stock will likely reach 32 quite soon, with additional gains as the months pass. Buy PHM now. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Quanta Services’ management will meet with institutional investors at the KeyBanc Capital Markets’ Industrials & Basic Materials Conference on May 30 and at the Deutsche Bank Global Industrials & Materials Summit on June 6. PWR is an undervalued mid-cap growth stock. Wall Street expects EPS to grow 40.1% and 14.9% in 2018 and 2019. The corresponding P/Es are 12.9 and 11.2. PWR rose rapidly this month, then pulled back a bit last week. I expect PWR to rise to its January high of 40, with additional capital gains thereafter. Buy PWR now. Strong Buy.
Southwest Airlines (LUV – yield 1.2%) 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. In May, Southwest raised its quarterly dividend by 28%, from 12.5 cents to 16.0 cents per share. The company also increased its repurchase program by $2 billion, in addition to the $350 million remaining in last year’s repurchase authorization. LUV is an undervalued stock that’s experiencing aggressive earnings growth. However, earnings growth projections are declining as the price of oil rises, because fuel costs eat into profits. Analysts expect EPS to grow 27.4% and 17.5% in 2018 and 2019. The corresponding P/Es are 11.9 and 10.1. The share price fell recently, bottomed, and now appears ready to rise, although I’m not estimating that the rebound will happen rapidly. 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. SUPN is an undervalued, small-cap stock. Analysts expect full-year EPS to grow 50% and 36.5% in 2018 and 2019, with corresponding P/Es of 30.3 and 22.2. After reaching a new all-time high in May, SUPN had a brief pullback. The stock seems capable of reaching new highs again quite soon, given a neutral-to-bullish stock market. I’ll likely move the stock to a Strong Buy again, once the upside breakout occurs. 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. BB&T is in a multi-year cycle of increasing its net interest margin (NIM) as the company earns higher income from investments and its growing loan portfolio, while keeping costs down via an increase in non-interest bearing deposits and extending maturities on lower-yielding CDs. BB&T’s COO will present at the Deutsche Bank Global Financial Services Conference on May 30. Analysts expect full-year EPS to grow 43.4% and 8.5% in 2018 and 2019, with corresponding P/Es of 13.7 and 12.6. The ex-dividend date was May 10. BBT appears capable of beginning a new run-up soon, after which I will sell in favor of a financial stock with stronger 2019 prospects. Hold.
Blackstone Group LP (BX—yield 7.8%*) 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. Credit Suisse commented last week that if Blackstone Group follows KKR & Co.’s (KKR) lead, and converts from a partnership to a C-corp. in 2019, the value of BX shares could rise 50%. Analysts expect Blackstone’s economic net income (ENI) to grow 2.8% and 11.8% in 2018 and 2019, with corresponding P/Es of 11.0 and 9.9. I expect BX to return to its January high near 36, and I agree that conversion to a C-corp. could deliver additional large capital gains. 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 7.8%.
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 40.8% and 11.6% in 2018 and 2019. The corresponding P/Es are 14.6 and 13.1. The ex-dividend date is June 14. The stock appears capable of rising past 102 to new all-time highs fairly soon. I will likely sell CMA after that run-up, due to fair valuation. Hold.
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 98.6% and 63.8% in 2018 and 2019 (August year-end), with corresponding P/Es of 16.4 and 10.0. CMC is having a small pullback amid a run-up to its March high at 26. CMC is an extremely undervalued aggressive growth stock, and I plan to keep it in the portfolio longer term. Buy CMC now. Strong Buy.
GameStop (GME – yield 12.0%) is a retailer of games, collectibles and technology; with additional ventures in the entertainment field. GameStop CEO Michael Mauler stepped down “for personal reasons” this month. Daniel DeMatteo, the company’s executive chairman, was named interim CEO. Analysts expect GameStop to report first quarter EPS of $0.38 on the afternoon of May 31, within a range of $0.29 to $0.45. The company is going through a multi-year shift in product emphasis, to which the stock has reacted poorly. The next ex-dividend date will likely be in early June. Sell Half.
The Interpublic Group of Companies (IPG – yield 3.6%) 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 13.3. Analysts expect 2019 EPS growth of 8.1%, which is certainly acceptable, but not apparently exciting enough to help the stock break past its former all-time high of 25 from July 2017. I will likely sell soon. The next dividend will be paid to shareholders of record at the close of business on June 4, 2018. Hold.
PBF Energy Inc. (PBF – yield 2.7%) 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 EPS growth rates of 193% and 22.2% in 2018 and 2019. The corresponding P/Es are very low at 13.3 and 10.9. We finally saw a chink in the armor of oil prices last week, pushing share prices down on E&P stocks and oilfield service stocks, although refining and marketing stocks barely fell. A correction in oil prices is normal after this year’s run-up. I expect oil prices to continue climbing later this year, so consider buying low on your favorite oil-related companies as prices dip. Hold PBF for further gains, use stop-loss orders if you’re cautious, and buy more PBF on pullbacks. PBF could appeal to investors who have a focus on value, growth or dividend income. Hold.
Schlumberger (SLB – yield 2.9%) 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 1,059, up 151 vs. a year ago. Analysts are expecting full-year EPS to grow 36.7% and 48.3% in 2018 and 2019, with corresponding P/Es of 33.5 and 22.6. The stock pulled back last week as the price of oil receded. I anticipate the pullback to be quite temporary. SLB is an undervalued aggressive growth stock that I expect to eventually rise past short-term price resistance at 79 toward longer-term price resistance at 84, where the stock last traded in January 2017. Buy.
WestRock Company (WRK – yield 2.9%) is a global packaging and container company. A WestRock management team will be meeting with analysts at the KeyBanc Capital Markets’ Industrials & Basic Materials Conference on May 31, and again on June 6 at the Deutsche Bank Global Industrials & Materials Summit. The company’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 14.9 and 12.8. The share price suffered in late May and has slowly begun its rebound. There’s 16% 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. Alexion is expected to achieve 19.6% and 21.8% EPS growth in 2018 and 2019. The corresponding P/Es are 16.8 and 13.8. ALXN is experiencing a pullback amid an advance toward its January high of 128. Buy ALXN now. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 2.1%) 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 1,059, up 151 vs. a year ago. Wall Street expects full-year EPS to grow 86% and 100% in 2018 and 2019. The corresponding P/Es are 43.4 and 21.7. BHGE is having a brief pullback—a natural occurrence after its recent run-up. I expect BHGE to rise past 37 this summer and travel toward its most recent peak at 46 from December 2016. 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. SKX is an undervalued mid-cap growth stock, with minimal debt on the balance sheet. Earnings per share are expected to grow aggressively at 18.5% per year in 2018 and 2019. Corresponding P/Es are 14.6 and 12.3. SKX is slowly recovering from a big post-earnings release fall. Buy SKX now and buy more on pullbacks. Strong Buy.
TiVo (TIVO – yield 5.1%) is an entertainment technology company that joined the Buy Low Opportunities Portfolio in early March specifically because it’s a takeover target. The company is interested in being acquired or going private because the shares are so undervalued. TiVo intends to complete the process of its strategic review by the time of the second quarter earnings release. TiVo was featured in the May issue of Cabot Undervalued Stocks Advisor. I anticipate there being very little to report until the company announces some sort of finalized M&A activity by August at the latest. The ex-dividend date is June 5. The stock has traded between 13 and 15.5 all year, and could surpass 15.5 in the coming weeks. Expect volatility and buy on dips. 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. After completing its prior repurchase authorization in the first quarter of 2018, Universal Electronics authorized a new repurchase of 100,000 shares on May 3. Universal Electronics’ management will meet with institutional investors at the Baird 2018 Global Consumer, Technology and Services Conference on June 5 and at the Piper Jaffray 38th Annual Consumer Marketplace Conference on June 7.
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. UEIC 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.
