I don’t have any engrossing stories or media tirades for you today. Just a few quick notes.
It’s earnings season! Hoo-boy, I’d better clear my calendar. Just a guess, but I think we’re going to see fantastic quarterly results from financial stocks that will catch investors with their…er, let’s just say “catch investors by surprise”. Financial stock share prices might have a very good couple of weeks!
Last week Cabot published my article, “Getting Started with a $10,000 Stock Portfolio”. If you’re new to stock investing, give it a read and send me questions as they arise.
When various banks pre-announced their upcoming dividend hikes in late June, I immediately adjusted the yields in their stock descriptions, below. However, many of your online research sources will not adjust the dividend yields until companies send out press releases that officially raise their dividend payouts. In those cases, the dividend yields that I quote herein will be higher than the yields quoted within your other research sources.
Send questions to Crista@CabotWealth.com.
Quarterly Earnings Release Calendar (more to come)
July 16 am: Bank of America (BAC) – 2Q
July 17 am: Comerica (CMA) – 2Q
July 19 am: BB&T Corp. (BBT) and Blackstone Group (BX) – 2Q
mid-July: Skechers (SKX) – 2Q
July 20 am: Baker Hughes, a GE Company (BHGE) and Schlumberger (SLB) – 2Q
late-July: CIT Group (CIT) and Interpublic Group of Companies (IPG) – 2Q
July 25 pm: Knight-Swift Transportation (KNX) – 2Q
July 26 am: Alexion Pharmaceuticals (ALXN), PulteGroup (PHM) and Southwest Airlines (LUV) – 2Q, and D.R. Horton (DHI) – 3Q
August 2 am: Voya Financial (VOYA) – 2Q, and WestRock (WRK) – 3Q
Virtually all companies offer extensive information on their websites pertaining to their quarterly earnings releases, often including slide shows or webcasts.
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Alexion Pharmaceuticals (ALXN)
Baker Hughes, a GE Co. (BHGE)
Commercial Metals (CMC)
D.R. Horton (DHI)
PulteGroup (PHM)
Skechers USA (SKX)
Southwest Airlines (LUV)
Universal Electronics (UEIC)
*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:
Blackstone Group LP (BX) moves from Strong Buy to Buy.
Last Week’s Portfolio Changes:
CF Industries Holdings (CF) joined the Growth Portfolio as a Strong Buy.
Delek U.S. Holdings (DK) joined the Buy Low Opportunities Portfolio as a Strong Buy.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. Share repurchases among Apple’s IT hardware peers are running 78% above the four-year average, excluding Apple’s repurchases that push the number even higher. That means technology companies are bullish on their multi-year outlooks and expect their share prices to rise. (They wouldn’t be repurchasing stock at recent prices if they expected those prices to be lower in the near future. That means they’re not expecting either a bear market or a recession.)
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 16.4 and 14.2. There’s a $100 billion share repurchase authorization in effect. If I only owned one stock, it would be AAPL. AAPL rose to a new all-time high in May, proceeded to have a small pullback, and appears ready to retrace its high. The stock could easily begin a new run-up from there. Buy AAPL now. Strong Buy.
Bank of America (BAC – yield 2.1%) is an undervalued growth stock that benefits from rising home prices and rising interest rates. Bank of America is expected to report second quarter EPS of $0.60 on the morning of July 16, within a range of $0.54 to $0.66. Bank of America plans to raise its third quarter dividend by 3 cents to 15 cents, a 25% increase. The company also intends to repurchase $20.6 billion of its stock. The new annual payout will be 60 cents and the current yield is 2.1%. Wall Street expects to see EPS increase 37.7% and 15.1% in fiscal 2018 and 2019. The corresponding P/Es are 11.1 and 9.7. BAC bounced repeatedly at 29 for four months, fell further in recent weeks, then turned upward yesterday. I don’t believe the share price will exceed 30.5 until the share price has time to stabilize and rest. Hold.
CF Industries Holdings (CF – yield 2.8%) is North America’s largest nitrogen fertilizer producer, serving America’s corn growers. The company benefits from low natural gas costs (a significant component in the company’s cost structure) and an extensive shipping network, neither of which can be matched by foreign competitors, and from consistent demand from South American customers. CF Industries was featured in the July issue of Cabot Undervalued Stocks Advisor.
CF is a mid-cap stock with significant institutional ownership. After taking a small loss in 2017 (December year-end), the company is expected to earn $0.96 per share in 2018 and $1.77 per share in 2019. The 2019 earnings growth rate of 84.4% far exceeds the 2019 P/E of 24.2.
CF broke out of a trading range in mid-June, then experienced a small pullback. I’m looking for a short-term hold on CF and will likely trade out when it reaches longer-term price resistance at 50. Buy CF 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 Group has not yet announced their second quarter earnings release that normally occurs in late-July. In late June, CIT’s board of directors approved a $750 million repurchase plan. Analysts expect EPS to grow 25.4% and 24.9% in 2018 and 2019. The corresponding P/Es are low at 13.4 and 10.7. There’s room for the 2019 P/E to rise to 13 (near its industry peer average) as investors see CIT achieve its stated financial goals, pushing the share price to about 63, and offering new investors a potential 19% profit. CIT is rising within a steady trading range, between 49 and 56. Buy CIT now. Strong Buy.
D.R. Horton (DHI – yield 1.2%) is America’s largest homebuilder, also providing mortgage, insurance and title services. D.R. Horton is expected to see EPS grow 35% and 18.7% in 2018 and 2019. Price/earnings ratios (P/E) remain low at 11.1 and 9.3 for fiscal 2018 and 2019. After quite a bit of weakness, homebuilder stocks turned upward last week. The industry is rife with cheap stocks, low within their trading ranges. DHI has upside price resistance at 46 where it will likely rest again. Buy DHI now. 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. There’s no recent news and the share price has traded flat at $72. 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 combined value of the two transactions could reach $80 this year. 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. Hold.
Knight-Swift Transportation Holdings (KNX – yield 0.6%) is a truckload carrier formed from the September 2017 merger of Knight Transportation and Swift Transportation Company. Throughout the trucking industry, demand is strong, rates are rising, and there’s an extreme shortage of truck drivers (most significantly due to driving applicants’ inability to pass the drug tests). KNX is an undervalued mid-cap aggressive growth stock. Analysts expect full-year EPS growth of 67.4% and 19.0% in 2018 and 2019. The corresponding P/Es are 16.5 and 13.8. The share price suffered this year for no good reason, and has finally turned upward. There’s upside price resistance at 42, where KNX will likely rest before continuing toward its 2018 high of 50. 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 28.4% and 23.5% in 2018 and 2019. The corresponding P/Es are 24.7 and 20.0. After a rapid run-up to 231 in May and June, MLM had a brief pullback. MLM will almost certainly cease its run-up once it reaches price resistance at 240, where it will also be fairly valued. I will sell in the upper 230’s in favor of a more undervalued growth stock. Longer-term investors who prefer to hold their shares should feel confident in the company’s attractive earnings growth and strong position within the current economic boom. Hold.
PulteGroup (PHM – yield 1.2%) is a U.S. homebuilder and a very undervalued growth stock. In recent days, Kiplinger’s Personal Finance published a lengthy recommendation of homebuilder stocks, specifically touting PulteGroup. Consensus earnings estimates reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 8.9 and 7.9. There’s uniformity among homebuilders in both very strong revenue and profit growth, and stock trading patterns. After quite a bit of weakness, homebuilder stocks turned upward last week. The industry is rife with cheap stocks, low within their trading ranges. PHM is rising from the bottom of a solid trading range. There’s 17% upside as PHM travels back to its January peak at 35. Buy PHM now. 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. Wall Street expects EPS to grow 39.6% and 14.9% in 2018 and 2019. The corresponding P/Es are 12.3 and 10.7. PWR retreated to secondary price support at 33.5 in June, then turned upward. There’s 18% upside as the stock heads back to 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. Wall Street expect EPS to grow 22.6% and 18.4% in 2018 and 2019. The corresponding P/Es are 12.3 and 10.4. After trading at long-term price support in the low 50’s for two months, LUV now appears capable of rising past 53 and beginning a run-up. There’s 15% upside to the March high of 61, and 25% upside to the January high of 66. 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 27.7 and 20.2. SUPN rose to a new all-time high at 60 in late June, then rapidly pulled back into the low 50’s. I expect the upward momentum to continue shortly. Buy SUPN now. Strong Buy.
Voya Financial (VOYA – yield 0.1%) 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 119% and 25.5% in 2018 and 2019. The corresponding price/earnings ratios (P/Es) are 11.2 and 8.9. VOYA fell to the bottom of its 2018 trading range as financial stocks declined in recent weeks, then began a decisive rebound yesterday. There’s upside price resistance at 50.5, where the stock will likely rest before continuing toward its 2018 high of 55. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 3.1%) 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 plans to raise its third quarter dividend by 3 cents to 40.5 cents, an 8% increase, after a vote by its board of directors on July 24. The company also intends to repurchase $1.7 billion of its stock, some of which will be used in the Regions Insurance Group acquisition. Earnings estimates, which are enhanced by growing loan volumes, increased each month in 2018. Analysts now expect full-year EPS to grow 43.7% and 8.7% in 2018 and 2019. Corresponding P/Es are 12.8 and 11.7. The stock is fairly valued. BBT fell to the bottom of its 2018 trading range as financial stocks declined in recent weeks, then began a decisive rebound yesterday. There’s a little upside price resistance at 53.5, where the stock will likely rest before continuing toward its 2018 high of 55.5. Hold.
Blackstone Group LP (BX—yield 7.0%*) is the world’s largest and most diversified alternative asset manager with $450 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, hedge funds and real estate. Blackstone Group was featured in the July issue of Cabot Undervalued Stocks Advisor. Analysts expect Blackstone’s economic net income (ENI) to grow 3.6% and 11.0% in 2018 and 2019. Blackstone’s corresponding P/Es are 12.2 and 11.0.
Blackstone had a huge run-up last week on the heels of the KKR & Co. (KKR) change from a limited partnership to a C-corp. (Please review last week’s update for more details.) Now that the stock has retraced its January high of 35.5, I’m moving my recommendation from Strong Buy to Buy, simply because the stock is likely to experience a pullback. Everybody should hold except for nimble traders who intend to sell now and then repurchase the stock on a bounce to the 33-34 range. If Blackstone Group decides to convert to a C-corp, the stock could rise to 40, and possibly to 50. Buy.
*The payout varies each quarter, with the total of the last four announced payouts, plus the $0.30 special 2018 distribution, yielding 7.0%.
Comerica (CMA – yield 1.5%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Comerica is expected to report second quarter EPS of $1.64 on the morning of July 17, within a range of $1.46 to $1.80. 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), compounded by a high percentage of non-interest-bearing deposits.
Consensus earnings estimates rose again last week. Earnings per share are now expected to increase by 41.4% and 12.3% in 2018 and 2019. The corresponding P/Es are 13.5 and 12.0. CMA fell to the bottom of its 2018 trading range as financial stocks declined in recent weeks, then began a decisive rebound yesterday. There’s upside price resistance at 96, where the stock will likely rest before continuing toward its 2018 high of 102, at which point I might sell due to fair valuation. Hold.
Commercial Metals Company (CMC – yield 2.2%) 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. CMC is an undervalued aggressive growth stock. Consensus earnings estimates have slowly risen for three months. Wall Street analysts now expect full-year EPS to grow 110% and 55% in 2018 and 2019 (August year-end). The 2019 P/E is 9.4. Last week, Deutsche Bank raised their price target on CMC from 26 to 28. CMC turned upward last week. Investors should take advantage of the low price and buy now. There’s 17% upside as the stock heads back to its 2018 high of 26. Strong Buy.
DowDuPont (DWDP – yield 2.3%) – DowDuPont is comprised of three divisions: Agriculture, Materials Science and Specialty Products. DowDuPont intends to separate these divisions into three publicly traded companies in 2019. It’s likely that the three stocks will be worth more than today’s DWDP share price.
Analysts project EPS to grow aggressively at 24.1% and 17.7% in 2018 and 2019. The respective price/earnings ratios (P/Es) are 15.8 and 13.4. DWDP has been ratcheting upward since bottoming in early April. There’s 15% upside as DWDP travels back to its January high of 76. I expect additional capital appreciation after the stock rests near 76 for a while, and again as the spin-offs take place in 2019. Buy DWDP now. Strong Buy.
GameStop (GME – yield 9.8%) – Yesterday an analyst at Jefferies initiated research coverage on GME with a Buy rating and an 18 price target. GameStop is actively reviewing strategic alternatives and could possibly announce a major corporate change or buyout in the coming weeks. The stock is rising and could reach as far as 18.5 before its next pullback. I fully expect that there will either be a buyout, or that GameStop will hire a prominent CEO to head up the company, and that either piece of news would cause the share price to advance further. Sell Half.
The Interpublic Group of Companies (IPG – yield 3.7%) is a large conglomerate of advertising, marketing, communication and public relations companies serving all global markets. Interpublic announced last week that they will buy Arkansas-based Acxiom Corp.’s marketing solutions division for $2.3 billion in cash. Interpublic has not yet announced their second quarter earnings release that normally occurs in late-July. IPG has traded between 22 and 25 for five months. I’m planning to sell near the February high of 25 due to prospects of dramatically slower 2019 EPS growth. IPG is a good company with a good dividend. Hold it if you like, but I’ll be moving on to a company with stronger future earnings growth. Hold.
Schlumberger (SLB – yield 2.9%) is the world’s largest oilfield service company. Oil prices are resting after a huge advance in late June. I expect prices to remain high for the foreseeable future. The number of U.S. rigs drilling for crude oil and natural gas rose by five last week to a total of 1,052, up 100 vs. a year ago. Earnings per share are expected to grow 29.3% and 48.5% in 2018 and 2019. The corresponding P/Es are 34.6 and 23.3. SLB is an aggressive growth stock, undervalued based on 2019 numbers. The stock is low within its 2018 trading range, rising toward short-term price resistance at 74. Buy SLB now. Strong Buy.
WestRock Company (WRK – yield 3.0%) is a global packaging and container company. Shipments and backlogs remain strong. The company’s acquisition of Kapstone Paper and Packaging is expected to close in the early fall. The stock presents great value, with strong earnings growth, low P/Es and a big dividend. Analysts expect full-year EPS to increase 53.8% and 15.4% in 2018 and 2019. The corresponding P/Es are 14.1 and 12.2. WRK is sitting at its lows from November 2017. WRK has short-term upside price resistance at 62, and additional resistance at its January high of 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. Alexion’s new drug ALXN1210 is undergoing an FDA priority review for the treatment of Paroxysmal Nocturnal Hemoglobinuria (PNH). ALXN is an undervalued aggressive growth stock. Prior to any boost from ALXN1210, the company is expected to achieve 19.6% and 21.7% EPS growth in 2018 and 2019. The corresponding P/Es are 18.9 and 15.5. ALXN broke past 127 last week and is headed toward 147 where it last traded in September 2017, giving investors about 11% short-term upside. 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. General Electric (GE) CEO John Flannery is being forced to sell GE’s 62.5% stake in Baker Hughes due to overwhelming cash needs at GE. There are no specifics yet on potential buyers. Oil prices are resting after a huge advance in late June. I expect prices to remain high for the foreseeable future. The number of U.S. rigs drilling for crude oil and natural gas rose by five last week to a total of 1,052, up 100 vs. a year ago. Wall Street expects full-year EPS to grow 83.7% and 98.7% in 2018 and 2019. The corresponding P/Es are 42.6 and 21.4. These numbers represent both tremendous earnings growth and value.
BHGE fell dramatically when the 2018 stock market correction arrived, recovered completely by May, then had a small pullback. The stock is now rising, and could conceivably surpass upside price resistance at 37 quite soon. Buy BHGE now. Strong Buy.
Delek U.S. Holdings (DK – yield 2.0%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. Delek was featured in the July issue of Cabot Undervalued Stocks Advisor. Refining revenue is growing, and higher gross margins in all business sections and lower costs are contributing to a dramatic increase in profits. Analysts expect Delek’s EPS to grow aggressively at 376% and 36% in 2018 and 2019. The corresponding P/Es are extremely low at 9.2 and 6.8. Delek raised its quarterly dividend payout by 33% and 25% in the first and second quarters of 2018. (Consecutive quarterly dividend increases are unusual.) The next dividend announcement is due during the first week of August.
I recently sold DK from the Growth Portfolio after a breathtaking run-up. Now that the stock has had a pullback, I’m recommending that traders, growth stock investors and dividend investors buy DK. There’s 21% upside as DK retraces its recent high at 60. I’ll keep you posted on the stock’s prospects as it nears the target price, because it could decide to just keep rising from there. Strong Buy.
Guess?, Inc. (GES – yield 4.2%) 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. Wall Street expects EPS to grow 42.9% and 30.0% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 22.0 and 16.9. GES has traded quietly between 21 and 23 for five weeks. That’s a bullish indication that the stock is preparing for its next run-up. I expect GES to retrace its recent high of 26, with additional gains later this year. Buy GES now. Strong Buy.
Skechers USA Inc. (SKX) is an apparel company that designs and manufactures affordable footwear for people of all ages. Skechers has not yet announced their second quarter earnings release that normally occurs in mid-July. SKX is an undervalued mid-cap growth stock, with eight times as much cash as 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 14.7 and 12.4. SKX appears immediately capable of busting past 31 and commencing a run-up that could go all the way to 38 before coming to a halt. Buy SKX now. Strong Buy.
TiVo (TIVO – yield 5.4%) 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. Last week, TiVo’s CEO Enrique Rodriguez left the company to become the Chief Technology Officer at Liberty Global. I would imagine that he may have left TiVo with an awareness that he might not have a future role at the company if TiVo is sold to a larger company; or perhaps his presence at TiVo was simply a bad fit.
The TIVO share price does not sit still. I expect the stock to promptly head back toward 15 while we await M&A news, at which time I expect a significant surge in the share price. Expect volatility. Buy TIVO now. 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 a dramatically 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 10.1 and 3% respectively. The stock rose above its trading range last week. I expect UEIC to reach as far as 42 before pulling back and resting. Buy UEIC now and buy more on pullbacks. Strong Buy.
