Many of you watched shares of Netflix (NFLX) fall 14% last Tuesday. I wrote about the event in Two Important Lessons from the Netflix Earnings Sell-Off. The stock does not fit my investment strategy, due to the high P/E and debt ratio. Nevertheless, if you are a growth stock investor with a disciplined investment strategy, you should consider owning NFLX. I personally love to buy popular, large-cap growth stocks when they are occasionally cheap, such as Facebook (FB) in late 2016, Alphabet (GOOGL) in late 2017 and Apple (AAPL) right now. If I were a pure growth investor, I’d watch for a near-term opportunity to buy NFLX below 355.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from July 20 in which I mentioned news, rating changes and/or price action on BB&T Corp. (BBT), Blackstone Group (BX), Comerica (CMA) and Skechers (SKX).
Quarterly Earnings Release Calendar
July 24 am: CIT Group (CIT) and Interpublic Group of Companies (IPG) – 2Q
July 25 pm: Knight-Swift Transportation (KNX) – 2Q
July 26 am: Alexion Pharmaceuticals (ALXN), Martin Marietta Materials (MLM), PulteGroup (PHM) and Southwest Airlines (LUV) – 2Q, and D.R. Horton (DHI) – 3Q
July 31 pm: Apple (AAPL) – 3Q
August 1 pm: CF Industries (CF) and Voya Financial (VOYA) – 2Q
August 2 am: DowDuPont (DWDP) and Quanta Services (PWR) – 2Q, and WestRock (WRK) – 3Q
August 2 pm: Universal Electronics (UEIC) – 2Q
August 7 am: Delek US Holdings – 2Q
August 8 pm: TiVo (TIVO) – 2Q
First Half of August: Supernus Pharmaceuticals (SUPN) – 2Q
Second Half of August: GameStop (GME), Guess? (GES) and KLX (KLXI) – 2Q
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:
Guess? (GES)
Supernus Pharmaceuticals (SUPN)
Universal Electronics (UEIC)
Voya Financial (VOYA)
*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:
Alexion Pharmaceuticals (ALXN) moved from Strong Buy to Buy.
BB&T Corp. (BBT) moved from Hold to Strong Buy.
Comerica (CMA) moved from Hold to Strong Buy.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. AAPL is an undervalued growth stock. The company is expected to report third quarter EPS of $2.18 on the afternoon of July 31, within a range of $2.10-$2.24. Analysts expect full year EPS to increase 24.6% and 15.6% in fiscal 2018 and 2019 (September year-end). The corresponding P/Es are 16.7 and 14.4. There’s a $100 billion share repurchase authorization in effect. AAPL rose to a new all-time high in June, proceeded to have a small pullback, and is now trading steadily near the June high in the low 190s. The stock could easily begin a new run-up within weeks. Buy AAPL now. Strong Buy.
Bank of America (BAC – yield 2.0%) is an undervalued growth stock that benefits from rising home prices and rising interest rates. The market expects Bank of America to grow EPS by 38.8% and 14.2% in 2018 and 2019. The corresponding P/Es are 11.9 and 10.4. BAC rose throughout July, and the price chart remains bullish. There’s some short-term price resistance at 31, then more resistance near its 2018 high near 33. 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.
The company is expected to report second quarter EPS of $0.46 on the afternoon of August 1, within a range of $0.32 to $0.63. That’s a very wide range of estimates, which will likely cause price volatility. CF is a mid-cap stock with significant institutional ownership. Earnings estimates rose in each of the last two weeks. After taking a small loss in 2017 (December year-end), the company is expected to earn $1.07 per share in 2018 and $1.83 per share in 2019. The 2019 earnings growth rate of 71% far exceeds the 2019 P/E of 23.5.
CF broke out of a trading range in mid-June, then pulled back to price support at 42. The stock has turned upward, although it would be normal for CF to bounce at 42 one more time before fully rebounding. Strong Buy.
CIT Group (CIT – yield 1.9%) 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. Last week, CIT Group announced a 56% increase in the third quarter dividend, from 16 cents to 25 cents per share. The company is expected to report second quarter EPS of $0.96 on the morning of July 24, within a range of $0.79 to $1.10.
Earnings estimates came down about a half a percent last week. Analysts now expect full year EPS to grow 24.1% and 25.7% in 2018 and 2019. The corresponding P/Es are low at 13.7 and 10.9. 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 21% profit. CIT is rising, currently at the mid-point of this year’s steady trading range. Buy CIT now. Strong Buy.
D.R. Horton (DHI – yield 1.2%) is America’s largest homebuilder, also providing mortgage, insurance and title services. MarketWatch reported, “The sub-index that tracks [homebuyer] traffic rose two points to 52, its highest reading since February. Any reading over 50 signals improving conditions.”
D.R. Horton is expected to report third quarter EPS of $1.08 on the morning of July 26, within a range of $1.02 to $1.14. Wall Street expects to see full year EPS grow aggressively at 35.4% and 18.1% in 2018 and 2019. Price/earnings ratios (P/E) remain low at 11.3 and 9.6 for fiscal 2018 and 2019. The industry is rife with cheap stocks, many now rising. DHI has upside price resistance at 46 where it will likely rest again. Buy DHI now. Strong Buy.
KLX Inc. (KLXI) – Last week, KLX Aerospace Solutions Group announced an agreement to acquire the assets of John Hassall, LLC’s laboratory operations, and expert technical personnel associated with managing the lab. This acquisition will enhance the KLX assets that are being purchased by Boeing (BA), but should not affect the KLXI share price, and should not affect the value of the upcoming spin-off of KLX Energy Services. (If anything, the good news would help Boeing’s share price & valuation, since Boeing will ultimately be assisted by any benefit that the lab operations bring to KLX.)
This summer, Boeing 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 between 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). Knight-Swift is expected to report second quarter EPS of $0.56 on the afternoon of July 25, within a range of $0.45 to $0.60.
KNX is an undervalued mid-cap aggressive growth stock. Knight-Swift is expecting to raise rates by 5%-10% in 2019. Analysts expect full year EPS growth of 67.4% and 19.9% in 2018 and 2019. The corresponding P/Es are 16.4 and 13.7.
KNX shares are cheap, and may have begun their rebound. We might be seeing a sector rotation into basic industry and transportation stocks. Airline stocks turned upward last week, industrial stocks reported great earnings across the board, GDP is strong, and Wall Street is expecting lots of new capital expenditures in corporate America flowing from the Tax Cuts and Jobs Act. All of that bullish economic activity should favor the trucking industry. We already know that Knight-Swift offers great value and earnings growth. We’re just waiting for the share price to kick into gear. 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. The company is expected to report second quarter EPS of $2.86 on the morning of July 26, within a range of $2.68 to $3.21. Expect volatility.
Full year earnings estimates have been slowly increasing since early May, and the stock is once again undervalued. Analysts now expect EPS growth of 28.4% and 23.8% in 2018 and 2019. The corresponding P/Es are 24.3 and 19.7. MLM is still resting from its huge price gains in May. When the stock reaches upside price resistance at 240, I’ll have a better sense of whether additional near-term gains are achievable. Hold.
PulteGroup (PHM – yield 1.2%) is a U.S. homebuilder and an undervalued growth stock. MarketWatch reported, “The sub-index that tracks [homebuyer] traffic rose two points to 52, its highest reading since February. Any reading over 50 signals improving conditions.”
PulteGroup is expected to report second quarter EPS of $0.74 on the morning of July 26, within a range of $0.68 to $0.79. Full year consensus earnings estimates reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 9.4 and 8.4. There’s uniformity among homebuilders in both very strong revenue and profit growth. The industry is rife with cheap stocks, many now rising. There’s 12% 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. Quanta is expected to report second quarter EPS of $0.62 on the morning of August 2, within a range of $0.52 to $0.73. PWR is an undervalued mid-cap growth stock. Wall Street expects full year EPS to grow 40.1% and 14.9% in 2018 and 2019. The corresponding P/Es are 12.1 and 10.5. PWR is low within its trading range. There’s 21% 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. Southwest is expected to report second quarter EPS of $1.24 on the morning of July 26, within a range of $1.20 to $1.35.
Wall Street expects full year EPS to grow 21.7% and 17.6% in 2018 and 2019. The corresponding P/Es are 12.5 and 10.7. Most airline stocks are recently rising from solid price support, with notable strength at United Continental Holdings (UAL) after its bullish earnings report. LUV just began a run-up that could take the stock back to its recent March high of 61. There’s additional price resistance at the prior 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 29.0 and 21.2. I expect the stock to surpass its June all-time high of 60 at some point this year. 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. The company is expected to report second quarter EPS of $1.09 on the afternoon of August 1, within a range of $1.04 to $1.19.
Wall Street projects Voya’s full year earnings per share (EPS) to grow 120% and 25.4% in 2018 and 2019. The corresponding price/earnings ratios (P/Es) are 11.6 and 9.3. VOYA traded down with financial stocks in June, and is now rebounding. There’s a little upside price resistance at 50.5, where the stock might rest before continuing toward its 2018 high of 55. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 3.2%) is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serves businesses and individuals. The market expects BB&T to make a significant acquisition in the coming year. 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 42.3% and 9.6% in 2018 and 2019. Corresponding P/Es are 12.6 and 11.5.
Despite the fact that I may sell at the top of the trading range near 55.5 – my portfolio considerations in addressing a large investor base are different from that of a buy-and-hold investor – longer-term investors should consider BBT a very solid investment for years to come. Strong Buy.
Blackstone Group LP (BX – yield 6.2%*) is the world’s largest and most diversified alternative asset manager with $439 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. The next dividend of $0.58 per share will be paid to shareholders of record as of the close of business on July 30.
Full year 2018 earnings estimates rose last week, subsequent to the strong second quarter earnings report. Analysts now expect Blackstone’s economic net income (ENI) to grow 8.2% and 5.9% in 2018 and 2019. The corresponding P/Es are 11.8 and 11.2. BX just retraced its 2018 highs in recent days. Odds are strong that the stock will need to rest a bit before beginning a new run-up. I encourage both growth investors and dividend investors to add to their positions on dips below 35. Buy.
*The payout varies each quarter, with the total of the last four announced payouts (excluding the $0.30 special 2018 distribution) yielding 6.2%.
Comerica (CMA – yield 1.4%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Comerica is one of the most asset-sensitive banks in the U.S., with a very high percentage of variable rate loans, thus benefiting from rising interest rates. The bank is expected to increase its third quarter dividend, on the heels of a second quarter dividend increase. One Wall Street firm is estimating that the dividend – which already rose from $0.30 in the first quarter to $0.34 in the second quarter – will be increased to $0.45 in the third quarter. That announcement could happen this week.
Full year 2018 earnings estimates jumped after Comerica reported a great second quarter last week. Earnings per share are now expected to increase by 47.1% and 10.9% in 2018 and 2019. The corresponding P/Es are 13.5 and 12.1.
CMA rose on heavy volume from the bottom of its 2018 trading range last week, spurred on by its well-received earnings report. The stock will likely retrace its 2018 high near 102 at some point this year. Buy CMA now. Strong Buy.
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. Wall Street analysts expect full year EPS to grow 108% and 57.4% in 2018 and 2019 (August year-end). The 2019 P/E is 9.4. CMC is recently trading between 21 and 24.5. Buy CMC now. Strong Buy.
DowDuPont (DWDP – yield 2.3%) – DowDuPont is comprised of three divisions: Agriculture, Materials Science and Specialty Products, all three of which will become independent, publicly-traded companies in 2019. DowDuPont announced some key professional additions to its Advisory Committees yesterday. Wesley G. Bush, who is stepping down as Chairman and CEO of Northrop Grumman, will join the Advisory Committee of DowDuPont’s Materials Science Division, which is scheduled to be spun off from the parent company by the end of the first quarter of 2019. Rajiv L. Gupta, former Chairman and CEO of Rohm & Haas Company, will join the Advisory Committee of DowDuPont’s Specialty Products Division, which is scheduled to be spun off from the parent company by June 1, 2019.
The company is expected to report second quarter EPS of $1.30 on the morning of August 2, within a range of $1.19 to $1.39. Analysts project full year 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 resting quietly for four weeks. 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 10.1%) is actively reviewing strategic alternatives and could possibly announce a major corporate change or buyout in the coming weeks. The share price improved in June, and again in July. 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 3.9%) is a large conglomerate of advertising, marketing, communication and public relations companies serving all global markets. Interpublic is expected to report second quarter EPS of $0.42 on the morning of July 24, within a range of $0.40 to $0.43.
Shares of Interpublic’s larger rival Omnicom Group (OMC) fell about 13% last week after reporting a second quarter earnings beat and revenue that came in on target. The piece of the pie that the market did not like was that U.S. revenue grew 2.0% when the market expected 2.3% growth (although that revenue miss was offset by gains in Europe). Advertising peers’ stocks fell amid trepidation over U.S. advertising weakness, and Interpublic’s consensus earnings estimates were revised downward by a small amount. Hold.
Schlumberger (SLB – yield 3.0%) is the world’s largest oilfield service company. Schlumberger reported second quarter EPS of $0.43 on July 20, on target with consensus estimates. Revenue of $8.3 billion slightly missed the estimate of $8.36 billion. The market was pleased with bullish statements regarding second half 2018 and 2019 revenue increases. Both Bloomberg and The Wall Street Journal published bullish articles this past weekend about Schlumberger and Baker Hughes (BHGE) as oil E&P companies are moving forward with large projects around the globe.
The number of U.S. rigs drilling for crude oil and natural gas fell by eight last week to a total of 1,046, up 96 vs. a year ago. SLB is an aggressive growth stock, undervalued based on 2019 numbers. We’ll have updated earnings estimates next week. The stock is low within its 2018 trading range. There’s 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. WestRock is expected to report third quarter EPS of $1.06 on the morning of August 2, within a range of $1.03 to $1.14.
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 15.6% in 2018 and 2019. The corresponding P/Es are 14.3 and 12.3. 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 is expected to report second quarter EPS of $1.71 on the morning of July 26, within a range of $1.62 to $1.84. 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 19.8% and 21.5% EPS growth in 2018 and 2019. The corresponding P/Es are 19.3 and 15.8. The stock rose nicely in July, and might be pausing now on the way toward price resistance at 147 where he stock last traded in September 2017. Buy.
Baker Hughes, a GE co. (BHGE – yield 2.2%) offers products, services and digital solutions to the international oil and gas community. The company reported second quarter adjusted EPS of $0.13 on July 20, missing the consensus estimate by a penny. Revenue of $5.55 billion came in a fraction below the consensus estimate of $5.57 billion. Analysts were pleased with the buoyant tone coming from Baker Hughes’ management regarding expected international revenue growth in the second half of 2018. Both Bloomberg and The Wall Street Journal published bullish articles this past weekend about and Baker Hughes and Schlumberger (SLB) as oil E&P companies are moving forward with large projects around the globe.
The number of U.S. rigs drilling for crude oil and natural gas fell by eight last week to a total of 1,046, up 96 vs. a year ago. (The number of Canadian rigs in operation surged again.)
BHGE is an aggressive growth stock, undervalued based on 2019 numbers. We’ll have updated earnings estimates next week. BHGE fell dramatically when the 2018 stock market correction arrived, completely recovered by May, and is now trading between 32 and 37. Buy BHGE now. Strong Buy.
Delek U.S. Holdings (DK – yield 2.1%) 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. Earnings estimates rose again last week. Analysts now expect Delek’s EPS to grow 382% and 49.4% in 2018 and 2019. The corresponding P/Es are extremely low at 9.0 and 6.0.
Delek raised its quarterly dividend payout by 33% and 25% in the first and second quarters of 2018. (It’s highly unusual for almost any company to raise their dividend payout in consecutive quarters, other than for certain companies whose stocks are specifically dividend-focused.) I’m therefore curious as to whether the dividend will increase yet again, when the next payout is announced during the first week of August. The stock tentatively appears ready to rebound toward its recent high at 60. Buy DK now. Strong Buy.
Guess?, Inc. (GES – yield 3.9%) 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.
The 2018 consensus earnings estimate for Guess? bounces up and down from week to week, but don’t worry: it always reflects aggressive growth. Wall Street now expects EPS to grow 41.4% and 31.3% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 23.2 and 17.7. GES has traded quietly between 21 and 23 for seven weeks, and appears ready to rise toward its recent high of 26. I then expect 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 reported a big quarterly earnings miss last week due to intense investment in international wholesale and retail operations. (See the Special Bulletin from July 20.) Record quarterly revenue and gross margins were not relevant to that day’s traders. The coming days should show us how institutional investors will react. Skechers remains an incredibly successful and rapidly growing company, with huge ongoing growth opportunities in international markets. We’ll have updated earnings estimates next week.
Investors who enjoy buying low on down days and have the patience to wait 2-12 months for attractive capital appreciation should buy now. Expect the stock to rebound a bit then sit still for a while before advancing further. (There was a similar scenario in the Guess? (GES) price chart around June 1.) Strong Buy.
TiVo (TIVO – yield 5.7%) 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 on August 8. The TIVO share price does not sit still. I expect the stock to 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. The company is expected to report second quarter EPS of $0.38 on the afternoon of August 2. There are currently only two analysts contributing to the consensus earnings estimate.
Analysts expect full year EPS to fall 12.1% in 2018, then to rise 47.0% in 2019. The 2019 P/E and the long-term debt ratio are extremely low, at 9.8 and 3% respectively. UEIC is on the move. I expect the stock to reach as far as 42 before then pulling back and resting. Buy UEIC now and buy more on pullbacks. Strong Buy.
