What’s Next for the U.S. Stock Market?
As early as last summer, I predicted that the S&P 500 would continue rising into early 2018, then experience its overdue correction. I was about a month off on the timing. I was guessing March, but the correction arrived in February. I was right on the size of the downturn, though, almost to the penny. That was a small part technical analysis and a large part luck.
At this point, the market correction has lasted a bit longer than my initial estimate, five months vs. three months. On the bright side, the S&P 500 has remained within a firm trading range during the entire correction, which has been wonderful, and gave me the confidence to buy low repeatedly during the correction process.
In the coming days or weeks, I plan to add Briggs & Stratton (BGG) to one of the portfolios. (The stock has components that make it appropriate for any of the three portfolios: earnings growth, dividend yield, and low price.) I’m waiting for the stock to rise to about 19.5 before I jump in. That way, if it’s not ready to rise for several months, I’m not wasting precious portfolio space with an inactive stock. (I’m trying to get better at timing entry and exit points.) Also, if another great stock lands on my radar and looks more ready to rise than BGG, I’ll switch gears in a heartbeat and run with the newcomer. So I’m not promising that I’ll add BGG, I’m only telling you that it’s likely to happen.
My guess is that the S&P 500 will retrace its January high by July, then rest there for a couple of months, then rise about 10% between September and December. I’m not really pulling that number out of thin air. You can see in this bar chart of long-term S&P 500 index annual performance that the S&P rises 20% or higher, approximately two to four times each decade. Back in 2016, I used this chart as the basis for my repeated claim that the S&P 500 would rise 20% or more in 2017, simply because it was overdue to have a big year. I also said that the S&P 500 would have a 20% year two years in a row. That was a little more of a guess, based on market psychology. I figured that individual investors (and many professionals) would miss the run-up in 2017, since the news media was astoundingly negative on most topics, and that investors would later pile in during 2018, thus providing a second strong year of stock market performance.
I remain bullish through the balance of 2018. If the market needs to take a breather again in 2019, I’m guessing that the top of this year’s trading range will become the bottom of next year’s trading range. What could throw a wrench in that prediction? An unusually strong run-up in late 2018 could set the market up for a bigger correction in 2019, and unusual negative news relating to war, natural disasters, or a huge government scandal could also send the market reeling in a heartbeat. I don’t currently foresee any of those happening, although I can imagine that the possibility of a government scandal looms in the shadows.
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from June 7 in which I mentioned news, rating changes and/or price action on Alphabet Cl. A (GOOGL) and Guess?, Inc. (GES).
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Guess? (GES)
Quanta Services (PWR)
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:
Baker Hughes, a GE Co. (BHGE ) moves from Buy to Strong Buy.
PulteGroup (PHM) moves from Strong Buy to Hold.
Last Week’s Portfolio Changes:
Alphabet Cl. A (GOOGL) moved from Hold to Sell.
DowDuPont (DWDP) joined the Growth & Income Portfolio as a Strong Buy.
Martin Marietta Materials (MLM) moved from Buy to Hold.
Schlumberger (SLB) moved from Buy to Strong Buy.
Supernus Pharmaceuticals (SUPN) moved from Buy to Strong Buy.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. At Apple’s annual Worldwide Developers Conference last week, Apple introduced new software and services features and updates. New hardware announcements will likely come in the fall. CEO Tim Cook revealed that App Store revenue is running ahead of analysts’ estimates for the quarter, which will invariably lead to an increase in the full-year consensus earnings estimate. Apple introduced MeMoji, which competes against Snapchat’s Bitmoji tool; an enhanced augmented reality toolkit for its app developers; new features that enhance Apple’s Siri digital assistant, and more. Read more in this conference recap from Fortune.
Wondering about changes to future iPhones? Read the latest from Gordon Kelly, who’s somehow privy to Apple news ahead of corporate announcements.
AAPL is an undervalued growth stock, expected to see EPS increase 24.8% and 15.3% in fiscal 2018 and 2019 (September year-end). The corresponding P/Es are 16.7 and 14.5. AAPL rose to a new all-time high in May. A temporary pullback could bring AAPL down to 187. Strong Buy.
Bank of America (BAC – yield 1.6%) is an undervalued growth stock. BAC has traded between 29 and 33 all year. I will likely sell near 33 in favor of a smaller-cap financial stock. 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. New banking legislation will roll back some post-crisis financial regulations that had greatly harmed small- and mid-cap banks. As a result, CIT is very likely to release excess capital to shareholders, according to Barron’s. CIT Group’s CEO will present at the Morgan Stanley Financials Conference on June 13. Analysts expect EPS to grow 25.4% and 24.7% in 2018 and 2019. The corresponding P/Es are quite low at 13.7 and 11.0. CIT has traded between 49 and 56 this year, and is currently on an uptrend. Strong Buy.
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. Jon Najarian from CNBC commented on recent bullish options activity in DHI in this video. After achieving 16.9% earnings growth in 2017 (September year-end), D.R. Horton is expected to see EPS grow 33.6% and 20% in 2018 and 2019. Price/earnings ratios (P/E) remain low at 11.9 and 10.0 for fiscal 2018 and 2019. DHI is rising from 2018 lows. There’s 20% upside when DHI rebounds toward 53, where it peaked in January. Strong Buy.
KLX Inc. (KLXI) – In the coming months, Boeing (BA) will acquire KLX’s Aerospace Solutions Group (ASG) and KLX will 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 rapidly-growing and profitable ESG business at $10 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 spinoff could happen at any point between now and the completion of the Boeing transaction. KLXI can potentially rise to 80 this summer, reflecting a more fair value of the KLXE spinoff. 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. KNX is ratcheting upward from its recent lows. There’s 23% upside as KNX retraces its 2018 high of 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 23.0% in 2018 and 2019. The corresponding P/Es are 25.1 and 20.4. MLM is making a strong effort to retrace its January peak at 240. A brief pullback to about 218 could happen along the way. MLM is nowhere near as undervalued as it was when it joined the Growth Portfolio, so new investors have less reason to buy the stock. MLM will almost certainly pause and pull back for an extended period of time, once it approaches 240. I intend to sell at that time, in favor of a more undervalued growth stock. It would be wise for you to put in a sell limit order in the area of 237 to 239, so that you can get out during an erratic spike in the share price without having to stare at the computer (which is exactly how I handle almost all of the stocks in my personal portfolio when they retrace former highs). Hold.
PulteGroup (PHM – yield 1.1%) is a U.S. homebuilder and a very undervalued growth stock. Consensus earnings estimates reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 9.8 and 8.8. Homebuilder stocks leaped upward last week. PHM peaked in January at 35. When PHM reaches 34, short-term investors should sell, because there’s a very strong likelihood that PHM will then have a pullback. Based on trading patterns, I’m moving PHM from Strong Buy to Hold, since the near-term upside is now limited. Hold.
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 Stifel 2018 Cross Sector Insight Conference on June 13. PWR is an undervalued mid-cap growth stock. Wall Street expects EPS to grow 39.6% and 14.9% in 2018 and 2019. The corresponding P/Es are 13.5 and 11.7. PWR is rising toward its January high of 40. Once the stock breaks past 40, there will be no upside price resistance in sight. 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. Barron’s featured the company in this June 9 article, Southwest Airlines’ Stock Is Flying Under the Radar. On the Investor Relations page of Southwest’s website, you may access the company’s 33-page Investor Presentation Booklet that clearly demonstrates Southwest’s financial successes, operational strengths and competitive advantages. The company was featured in the June issue of Cabot Undervalued Stocks Advisor.
LUV is an undervalued stock that’s experiencing aggressive earnings growth, although this year’s profit growth expectation has fallen quite a bit since LUV joined the Growth Portfolio in November 2017, due mainly to rising fuel costs. At this point, analysts expect EPS to grow 24% and 18.4% in 2018 and 2019. The corresponding P/Es are 11.9 and 10.0.
LUV is trading at a solid support level that dates back to December 2016. There’s 18% upside to the March high of 61, and 28% upside to the January high of 66. This is a good time for traders and longer-term investors to make sure they’re positioned to catch the rebound in the share price. Buy LUV now. Strong Buy.
Supernus Pharmaceuticals (SUPN) focuses on the development and commercialization of products for the treatment of central nervous system diseases and psychiatric disorders, including epilepsy, migraine and ADHD. SUPN is an undervalued, small-cap stock with a high degree of institutional ownership. Analysts expect full-year EPS to grow 50% and 37.0% in 2018 and 2019. Corresponding P/Es are 28.6 and 20.8. After reaching a new all-time high in May, SUPN began a consolidation phase. I expect new highs again in the coming months. Strong Buy.
Voya Financial (VOYA – yield 0.07%) is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. This Fortune 500 company manages $541 billion in assets. Wall Street projects Voya’s earnings per share (EPS) to grow 120% and 25.1% in 2018 and 2019. The corresponding price/earnings ratios (P/Es) are 12.7 and 10.1. After a big run-up in its share price, VOYA has traded sideways for six months, with the trading range narrowing toward the upper end of the range. VOYA appears capable of rising past 55 to new all-time highs in the near term. Buy VOYA now. Strong 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. CEO Kelly King will present at the Morgan Stanley Financials Conference on June 12. 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 is expected to commence with M&A activity by buying a smaller bank within its region shortly after BB&T is in compliance with new bank legislation and its related requirements. Analysts expect full-year EPS to grow 43.7% and 8.5% in 2018 and 2019. Corresponding P/Es are 13.6 and 12.6. BBT appears capable of surpassing price resistance at 55.5 quite soon. Hold.
Blackstone Group LP (BX—yield 7.5%*) 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 in late May 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 3.2% and 11.4% in 2018 and 2019. Corresponding P/Es are 11.5 and 10.3. BX is rising toward its March high of 34. There’s additional price resistance at 35.5 from January. I agree that conversion to a C-corp. could deliver additional large capital gains. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts, plus the $0.30 special 2018 distribution, yielding 7.5%.
Comerica (CMA – yield 1.4%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. President Curt Farmer will present at the Morgan Stanley Financials Conference on June 13. 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 11.8% in 2018 and 2019. The corresponding P/Es are 14.4 and 12.9. The ex-dividend date is June 14. CMA has traded sideways since February. The stock could surpass 102 to new all-time highs in the next few months. I will likely sell CMA after that run-up, due to fair valuation. Hold.
Commercial Metals Company (CMC – yield 2.0%) 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. Wall Street analysts expect EPS to grow 100% and 66.9% in 2018 and 2019 (August year-end). The corresponding P/Es are 17.2 and 10.3. CMC is marching back to its 2018 high of 26. CMC is an extremely undervalued aggressive growth stock, and I plan to keep it in the portfolio longer term. Strong Buy.
DowDuPont (DWDP – yield 2.2%) – The Dow Chemical Company (DOW) and E.I. du Pont de Nemours & Company (DD) finalized their merger on August 31, 2017, forming DowDuPont, which is composed of three divisions: Agriculture, Materials Science and Specialty Products. DowDuPont intends to separate these divisions into three publicly-traded companies in 2019. DowDuPont was featured in the June issue of Cabot Undervalued Stocks Advisor.
Wall Street analysts project EPS to grow aggressively at 23.8% and 17.5% in 2018 and 2019. The respective price/earnings ratios (P/Es) are 16.7 and 14.2. DWDP is rising toward its January high of 76. I expect additional capital appreciation after the stock rests near 76 for a while, and additional gains as the spinoffs add to the total return. Buy DWDP now. Strong Buy.
GameStop (GME – yield 10.5%) has been rising rapidly since first quarter earnings were reported last week. Shareholders of record at the close of business on June 12 will receive the next normal quarterly dividend. Despite the market’s frustration over GameStop’s management and the share price, there’s plenty of free cash flow to support the hefty dividend.
According to Barron’s, GameStop CFO Robert Lloyd discussed store closures at a Baird & Co. conference last week, saying that the company had already closed all of the unprofitable stores. The remaining 5,900 stores are all profitable, so there’s no reason to close them. Maybe that comes as a surprise to investors, and now they’re buying the stock? Frankly, that information has been available for quite some time, because I remember hearing it on a conference call during a prior quarterly earnings release.
There’s no doubt, though, that if you asked three of your friends, “What do you think of the company GameStop?”, they’d each predict the company’s demise because they would assume that nobody is buying GameStop’s products and services. They’d just happen to be wrong. (I run into those people all the time.) On the bright side, there’s been recent news that various hedge funds are taking an interest in the stock. Odds are that’s who’s been buying the stock and driving up the share price in recent days. GME will likely stop rising at 16, and then rest or have a pullback. If you’ve been looking for a near-term exit point, 16 is your number. I’ll likely continue reporting on the company for a while. 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%, though 2019 EPS growth slows to 8.1%. I will likely sell soon. 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 two last week to a total of 1,062, up 135 vs. a year ago. Analysts are expecting full-year EPS to grow 36.7% and 48.3% in 2018 and 2019. The corresponding P/Es are 34.2 and 23.1. SLB is an undervalued aggressive growth stock. There’s 12% upside to short-term price resistance at 79, and 19% upside to longer-term price resistance at 84, where the stock last traded in January 2017. Buy SLB now. Strong Buy.
WestRock Company (WRK – yield 2.8%) is a global packaging and container company. WestRock CEO Steve Voorhees will host a fireside chat at the Vertical Research Partners 2018 Materials Conference on June 14. 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 15.9% in 2018 and 2019. The corresponding P/Es are low in comparison at 15.1 and 13.1. The share price suffered in late May and has slowly begun its rebound. There’s 13% upside as the stock gradually retraces its January high at 69. 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. Company management will present at the Goldman Sachs 39th Annual Global Healthcare Conference on June 12. The analyst at Credit Suisse raised his price target on ALXN to 154. Read more about his optimism here. Alexion is an undervalued aggressive growth stock, expected to achieve 19.6% and 21.7% EPS growth in 2018 and 2019. The corresponding P/Es are 16.9 and 13.9. Still recovering from this year’s correction in the broader stock market, ALXN has recently been trading between 114 and 123. I expect ALXN to retrace its January high of 128 in the coming months. 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 two last week to a total of 1,062, up 135 vs. a year ago. Wall Street expects full-year EPS to grow 86% and 101% in 2018 and 2019. The corresponding P/Es are 43.4 and 21.6. The stock exhibited a shakeout pattern on the price chart in early June, which bodes well for a near-term run–up. I’m moving BHGE from Buy to Strong Buy. Buy BHGE now. Strong Buy.
Guess?, Inc. (GES – yield 4.0%) is a global apparel manufacturer, selling its products through wholesale, retail, ecommerce and licensing agreements. Revenue growth largely stems from expansion in Asia and Europe, while rising operating margins are contributing to multi-year earnings per share (EPS) growth. GES was featured in the June issue of Cabot Undervalued Stocks Advisor. Wall Street expects EPS to grow 42.9% and 32% in 2019 and 2020 (January year-end). Corresponding P/Es are very low in comparison to earnings growth rates, at 22.4 and 17.0. GES is a small-cap stock with a market capitalization of just $1.6 billion. GES is rising towards its recent high of 26. Buy GES now and buy more on pullbacks. 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. 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 13.6 and 11.5. SKX is slowly recovering from a big fall in April. Buy SKX now and buy more on pullbacks. Strong 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. 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 second quarter results are reported in early August. I expect a surge in the share price when TiVo’s management announces some sort of M&A decision. 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. Universal Electronics’ management met with institutional investors at the Baird 2018 Global Consumer, Technology and Services Conference last week. I highly encourage shareholders and fans of home media technology innovation to listen to the half-hour webcast, which is accompanied by a slide presentation.
UEIC is an undervalued micro-cap stock. Analysts expect EPS to fall 16.4% in 2018, then to rise 43.4% in 2019. The 2019 P/E and the long-term debt ratio are extremely low, at 9.0 and 3% respectively. UEIC is gradually recovering from a big fall in May. UEIC will likely trade loosely between 28 and 40 in the coming months. Patient investors could dollar-cost-average into the stock during its recovery. Strong Buy.
