Be Cautious With High-Flyers That Fall Out Of Favor
This earnings season, shares of Facebook (FB), Twitter (TWTR) and Netflix (NFLX) got pummeled by investors, and mostly for good reason. However, as they used to say on Sesame Street, “One of these things is not like the others.” Facebook and Twitter are somewhat rightfully being avoided due to subscriber growth problems. Do you have a relative or friend who’s under age 25? They mostly don’t use Facebook at all, and that doesn’t bode well for future subscriber growth. But when you ask them, “Why do you think Netflix might be a good stock to own?”, they immediately say “original content”, and begin talking excitedly about Queer Eye.
If somebody gave me FB or TWTR shares as a gift today, there’s no way I’d keep them. I don’t think they’ll rebound in 2018. Pouring that money into NFLX, however, could be a wise decision.
Caveat: NFLX does not meet my investment criteria because it’s a pure growth stock, without the value component of my investment strategy. Nevertheless, if somebody gave me NFLX shares as a gift today, I’d smile and say “thank you”. Last week I advised, “If I were a pure growth investor, I’d watch for a near-term opportunity to buy NFLX below 355.” That opportunity has arrived. The stock is not yet ready to rebound, however, I have a feeling that NFLX won’t sit still for long. All of the money that’s leaving FB and TWTR is going to be looking for a new home.
I’m sharing this brief CNBC video, “Wall Street Letting Fear Overtake Rational Investing” because I completely concur with the guest expert. News headlines are chronically negative this year, yet all kinds of excellent things are happening with economics, employment, savings, corporate revenue and profits. I’m sure you’ve figured out by now that the media has a certain point of view, a certain way that they will continue to present data to the public – a way that’s neither realistic nor constructive.
On the bright side, the short-term volatility that’s created by all the fear-mongering has created tremendous opportunities in stocks like Knight-Swift Transportation (KNX), PulteGroup (PHM), Netflix (NFLX) and many more. Stick with companies that are thriving and add to your positions when the market whimsically pummels them.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from July 26 in which I mentioned news, rating changes and/or price action on Alexion Pharmaceuticals (ALXN), CIT Group (CIT), D.R. Horton (DHI), Interpublic Group (IPG), Knight-Swift Transportation (KNX), Martin Marietta Materials (MLM), PulteGroup (PHM) and Southwest Airlines (LUV).
Quarterly Earnings Release Calendar
July 31, p.m. - Apple (AAPL) – 3Q
August 1, p.m. - CF Industries (CF) and Voya Financial (VOYA) – 2Q
August 2, a.m. - DowDuPont (DWDP) and Quanta Services (PWR) – 2Q, and WestRock (WRK) – 3Q
August 2, p.m. - Universal Electronics (UEIC) – 2Q
August 7, p.m. - Delek US Holdings (DK) and Supernus Pharmaceuticals (SUPN) – 2Q
August 8, p.m. - TiVo (TIVO) – 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:
Baker Hughes, a GE Co. (BHGE)
Commercial Metals (DWDP)
Delek (DK)
DowDuPont (DWDP)
PulteGroup (PHM)
Quanta Services (PWR)
Skechers (SKK)
*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:
Alexion Pharmaceuticals (ALXN) moves from Buy to Strong Buy.
Last Week’s Portfolio Changes:
Interpublic Group (IPG) moved from Hold to Strong Buy.
Martin Marietta Materials (MLM) 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 15.8% in fiscal 2018 and 2019 (September year-end). The corresponding P/Es are 16.6 and 14.4. There’s a $100 billion share repurchase authorization in effect. AAPL rose to a new all-time high in June. The stock could easily begin another run-up within weeks. Buy AAPL now. Strong Buy.
Bank of America (BAC – yield 1.9%) 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 12.2 and 10.7. 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. (Buy below 30 for a potential 10% short-term gain.) Hold.
CF Industries Holdings (CF – yield 2.7%) 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. Expect volatility. CF is a mid-cap stock with significant institutional ownership. Earnings estimates rose in each of the last three weeks. After taking a small loss in 2017 (December year-end), the company is expected to earn $1.08 per share in 2018 and $1.84 per share in 2019. The 2019 earnings growth rate of 70.4% far exceeds the 2019 P/E of 24.2. CF broke out of a trading range in mid-June, and the price chart remains bullish. 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. In mid-July, CIT Group announced a 56% increase in the third quarter dividend, from 16 cents to 25 cents per share. Analysts expect full year EPS to grow 22.8% and 27.3% in 2018 and 2019. The corresponding P/Es are low at 14.0 and 11.0. There’s room for the 2019 P/E to rise to 13 (near its industry peer average), pushing the share price to about 63, and offering new investors a potential 19% profit in the next 6-18 months. 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 1.1%) is America’s largest homebuilder, also providing mortgage, insurance and title services. DHI is an undervalued aggressive growth stock. Earnings estimates rose last week, now reflecting annual growth of 38.6% and 18.2% in 2018 and 2019 (September year end). Price/earnings ratios (P/E) are 11.4 and 9.7 for fiscal 2018 and 2019. The stock is rising toward short term price resistance at 46 where it will likely rest again before continuing on toward its January 2018 peak near 53. Strong Buy.
KLX Inc. (KLXI) – This summer, Boeing will acquire KLX’s Aerospace Solutions Group (ASG) and KLX will spin off its Energy Services Group (ESG) to shareholders. 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. The KLXI share price has been edging upward all month. Hold.
Knight-Swift Transportation Holdings (KNX – yield 0.7%) is a truckload carrier formed from the September 2017 merger between Knight Transportation and Swift Transportation Company. Knight-Swift is a thriving industry leader with an exemplary management team. Throughout the trucking industry, demand is strong, rates are rising, and there’s an extreme shortage of truck drivers. KNX is an undervalued mid-cap aggressive growth stock. Analysts expect full year EPS growth of 65.2% and 19.7% in 2018 and 2019. The corresponding P/Es are 14.1 and 11.8. Investors who love to buy bargains should buy KNX today. The stock could easily fluctuate between 32 and 38 in the near future, although it will likely take a while longer to break past 38. Strong Buy.
Martin Marietta Materials (MLM – yield 0.9%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. Full year earnings estimates have been slowly increasing since early May. Analysts now expect EPS growth of 29.4% and 21.2% in 2018 and 2019. The corresponding P/Es are 22.1 and 19.7. Management is bullish on the construction recovery in the U.S. accelerating in the second half of 2018 and continuing next year. MLM is an undervalued aggressive growth stock. The stock fell to recent price support, despite the fantastic earnings report. Buy MLM now. Strong Buy.
PulteGroup (PHM – yield 1.3%) is a U.S. homebuilder and a very undervalued stock. Scarcity of new homes across the U.S. is driving average selling prices higher, thus increasing Pulte’s revenue, while occasional spikes in mortgage rates are slightly affecting the growth in unit sales. Pulte has a large land pipeline that contributes to unit growth. Finally, strong economic and employment data are contributing to Pulte’s multi-year revenue and profit growth. Full year consensus earnings estimates reflect 61.7% and 13.2% EPS growth in 2018 and 2019. The corresponding P/Es are 8.4 and 7.5. The stock has repeatedly bounced at 28 all year. Take advantage of the low price and buy PHM now. (The stock does not languish at 28!) I expect PHM to return to its January peak at 35 at some point this year. 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 $0.61 on the morning of August 2, within a range of $0.52 to $0.67. PWR is an undervalued mid-cap growth stock. Wall Street expects full year EPS to grow 38.6% and 15.8% in 2018 and 2019. The corresponding P/Es are 12.3 and 10.7. PWR is low within its trading range. 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 1.1%) 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 expects full year EPS to grow 19.7% and 20.0% in 2018 and 2019. The corresponding P/Es are 13.9 and 11.6.
I mentioned recently that airline stocks were about to rise from recent lows, and that’s because airlines are cutting capacity, i.e. the number of available passenger seats. In recent years, many airlines increased their capacities, some quite aggressively, and the industry ended up with an overcapacity situation that put a drag on profitability. Yes, the economy is booming and therefore there are more people flying, but the industry got way too bullish and now they’re reeling the enthusiasm back in to a reasonable level. As such, airline share prices are rejoicing.
LUV is rapidly approaching its recent March high of 61. I expect the stock to rest there before approaching its January high of 66, and it could easily pull back to 55 in the interim. 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. The company is expected to report second quarter EPS of $0.43 on the afternoon of August 7, within a range of $0.37 to $.0.50. Analysts expect full year EPS to grow 46.8% and 40.5% in 2018 and 2019. Corresponding P/Es are 28.9 and 20.6. 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 EPS to grow 120% and 25.6% in 2018 and 2019. The corresponding P/Es are 12.1 and 9.6. VOYA traded down with financial stocks in June and is now rebounding. The stock might rest here at 50.5 before continuing toward its 2018 high of 55, where it will still be undervalued. 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 raised its third quarter dividend by 3 cents to 40.5 cents last week, an 8% increase. Earnings estimates, which are enhanced by growing loan volumes, increased each month in 2018. Analysts now expect full year EPS to grow 41.9% and 9.6% in 2018 and 2019. Corresponding P/Es are 13.0 and 11.8. The stock just bounced at the bottom of its 2018 trading range at 50, and is once again rising toward the top of the range near 56. Buy BBT now. Strong Buy.
Blackstone Group LP (BX – yield 6.3%*) 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. Several times during July, Cabot Options Trader analyst Jacob Mintz noted heavy call buying in BX.
Analysts expect Blackstone’s economic net income (ENI) to grow 8.5% and 5.6% in 2018 and 2019. The corresponding P/Es are 11.6 and 11.0. BX retraced its 2018 highs in mid-July. 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 6.3%.
Comerica (CMA – yield 2.5%) 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. Comerica increased its third quarter dividend to $0.60 per share last week, on the heels of a second quarter dividend increase to $0.34 per share. The company will also repurchase $500 million of its stock during the third quarter. (Those purchases will provide a certain degree of price support.)
Comerica’s consensus EPS estimates rose most weeks since the stock joined the Growth & Income Portfolio in early April. Earnings per share are now expected to increase by 48.5% and 11.7% in 2018 and 2019. The corresponding P/Es are 13.6 and 12.2. CMA is somewhat undervalued. CMA is rising in recent weeks, heading toward its 2018 high near 102. 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 9.5. CMC is rising within its recent trading range between 21 and 24.5. Buy CMC now. Strong Buy.
DowDuPont (DWDP – yield 2.2%) – DowDuPont is comprised of three divisions: Agriculture, Materials Science and Specialty Products, each of which will become independent, publicly-traded companies by June 2019. DWDP is an undervalued growth stock with an attractive dividend yield. 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 23.8% and 18.0% in 2018 and 2019. The respective price/earnings ratios (P/Es) are 16.4 and 13.9. DWDP has been ratcheting upward since early April. It will likely rest a bit at 70, on its way back to its January high of 76. I expect additional capital appreciation thereafter, especially after the spin-offs take place in 2019. Strong Buy.
GameStop (GME – yield 10.4%) is actively reviewing strategic alternatives and could possibly announce a major corporate change by the second quarter earnings release due in late August. 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 rise. 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. The company reported strong organic growth in the second quarter and increased their full-year organic growth guidance. The stock is recovering from recent weakness, now that the market understands that trouble with U.S. revenue growth at Omnicom (OMC) did not spread to Interpublic. I expect IPG to rise toward its 2018 high near 25. (I might sell thereafter, depending on price momentum and the earnings outlook.) Buy IPG now. Strong Buy.
Schlumberger (SLB – yield 3.0%) 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 1,048, up 90 vs. a year ago. SLB is an aggressive growth stock, undervalued based on 2019 numbers. Analysts expect EPS to grow 22.7% and 50.0% in 2018 and 2019. The corresponding P/Es are 36.4 and 24.3. The stock is low within a solid 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 54.2% and 15.6% in 2018 and 2019. The corresponding P/Es are 13.9 and 12.0.
The share price has been weak as investors worry about potentially rising expenses impacting profits, citing strength in the U.S. dollar and rising raw material costs. WestRock’s competitors – Graphic Packaging Holding (GPK), Packaging Corp. (PKG) and International Paper (IP) – all reported quarterly revenue roughly on target last week. Graphic Packaging had a slight earnings miss, while the latter two companies posted strong earnings beats. Those upside earnings surprises bode well for WestRock. Take advantage of the low share price and the attractive dividend, and buy WRK now. 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). Barron’s published this bullish commentary after Alexion’s earnings report last week: “Vertex and Alexion are Schooling Big Biotech”.
ALXN is an undervalued aggressive growth stock. Subsequent to last week’s strong earnings report, analysts expect EPS to grow 23.4% and 19.5% (the highest consensus estimates to date). The corresponding P/Es are 18.1 and 15.2. I continue to expect the stock to rise toward price resistance at 147 where it last traded in September 2017. Now that we’ve had a small pullback, I’m moving ALXN from Buy to Strong Buy because there’s about 12% upside to 147, in addition to potential continued capital appreciation thereafter. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 2.1%) offers products, services and digital solutions to the international oil and gas community. Baker Hughes’ management expects good international revenue growth in the second half of 2018. The number of U.S. rigs drilling for crude oil and natural gas rose by two last week to a total of 1,048, up 90 vs. a year ago. (The number of Canadian rigs in operation surged yet again.) BHGE is an aggressive growth stock, undervalued based on 2019 numbers. Analysts expect EPS to grow 72.1% and 104% in 2018 and 2019. The corresponding P/Es are 46.9 and 23.0. I expect the stock to surpass its 2018 high near 37 in the coming months. Buy BHGE now. Strong Buy.
Delek U.S. Holdings (DK – yield 1.9%) 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 to report second quarter EPS of $1.17 on the afternoon of August 7, within a range of $0.93 - $1.66. Expect volatility. The 2019 earnings estimate rose again last week. Analysts now expect Delek’s full year EPS to grow 363% and 61.1% in 2018 and 2019. The corresponding P/Es are extremely low at 10.0 and 6.2.
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 is rising toward its recent high at 60. Buy DK now. Strong Buy.
Guess?, Inc. (GES – yield 4.1%) 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 50.0% and 23.8% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 20.9 and 16.9. GES has traded quietly between 21 and 23 for eight weeks, with upside resistance at 26. 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 record quarterly revenue and gross margins this month, and also intense investment in international wholesale and retail operations. (See the Special Bulletin from July 20.) Skechers remains an incredibly successful and rapidly growing company, with huge ongoing growth opportunities in international markets. New earnings estimates project EPS falling (1.7%) in 2018 and then rising 16.0% in 2019. Investors who enjoy buying low should buy now. Strong Buy.
TiVo (TIVO – yield 6.3%) 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 the afternoon of August 8. I expect any announcement that reflects another company purchasing TIVO to be greeted with a share price that rapidly rises to the buyout price. 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, so please expect a wide variance with the actual quarterly results.
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 9.7 and 3% respectively. UEIC has been ascending since mid-June, and could reach 42 before pulling back and resting. Buy UEIC now and buy more on pullbacks. Strong Buy.
