A Reminder About Stock Volatility
Many investors are aware that over the short-term, a stock share price can bounce all over the place, often with no apparent correlation to a company’s successes. The smaller the market cap, or the more volatile the industry (e.g. information technology or biotech), the more the potential volatility. As time passes, good companies usually see their share prices rise … but not always. That’s why stock investing is risky.
Experienced investors anticipate these share price fluctuations. They might trade the trading ranges, buy low, dollar cost average into a stock, or simply ride out the highs and lows with the intention of earning capital gains over a multi-year period.
However, there are at least two types of investors who find these share price fluctuations somewhat shocking: new stock investors, and investors who thought they were going to treat the stock market like a gambling spree in Las Vegas. To the new stock investors, I’d like to refer you back to my recent article, “Getting Started with a $10,000 Stock Portfolio.” The truth is that I cannot hold your hand through the volatility like I did when I was a licensed financial advisor and Vice President at Morgan Stanley. I’m happy to answer your brief questions, but I cannot give you personalized investment advice.
For those of you who are comfortable with market volatility, and would prefer to take a shot at earning quicker or bigger investment returns via pure growth stocks, equity options, small-cap stocks or emerging markets, Cabot has a wonderful array of talented analysts who specialize in each of those areas. Visit the website at www.CabotWealth.com to read their bios and investment strategies.
I’ll be doing a lot of travelling and attending meetings this week. I appreciate your patience if my response to email is slower than normal. Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from August 9 in which I mentioned news, rating changes and/or price action on Delek US Holdings (DK), Supernus Pharmaceuticals (SUPN) and TiVo (TIVO).
Final Earnings Season Scorecard*
Big Earnings Beat: Alexion Pharmaceuticals (ALXN), Apple (AAPL), Bank of America (BAC), Blackstone Group LP (BX), CF Industries (CF), Comerica (CMA), D.R. Horton (DHI), DowDuPont (DWDP), Martin Marietta Materials (MLM), PulteGroup (PHM) and Supernus Pharmaceuticals (SUPN).
Earnings on Target or Slight Variance (within 5%): BB&T (BBT), Baker Hughes, a GE Co. (BHGE), CIT Group (CIT), Delek US Holdings (DK), Interpublic Group (IPG), Knight-Swift Transportation (KNX), Quanta Services (PWR), Schlumberger (SLB), Southwest Airlines (LUV), TiVo (TIVO), Universal Electronics (UEIC), Voya Financial (VOYA) and WestRock (WRK)
Big Earnings Miss: Skechers (SKX)
*A few more companies will report in late August, and others operate on non-standard fiscal years.
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Royal Caribbean Cruises (RCL)
Skechers (SKX)
*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:
PulteGroup (PHM) moves from Strong Buy to Sell.
Last Week’s Portfolio Changes:
Royal Caribbean Cruises Ltd. (RCL) joined the Buy Low Opportunities Portfolio as a Strong Buy.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.4%) manufactures a wide range of popular communication and music devices, and many services as well. Apple was featured in the August issue of Cabot Undervalued Stocks Advisor. AAPL is an undervalued growth stock. Consensus earnings estimates got a boost after the third quarter report. Analysts now expect EPS to increase 27.6% and 15.4% in fiscal 2018 and 2019 (September year-end). The corresponding P/Es are 17.7 and 15.3. AAPL is my favorite stock for long-term investors. I believe almost every stock investor should own some shares. AAPL began reaching new highs again last week. I think the best price you’re likely to get will be on a brief pullback below 200. 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 12.3 and 10.8. BAC is actively rising toward its 2018 high near 33. I plan to sell above 32—which will likely happen very soon—to make room for a smaller bank to join the portfolio. Long-term investors should feel comfortable holding BAC, which is still an attractive investment. Hold.
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. Analysts expect full year EPS to grow 21.8% and 28.1% in 2018 and 2019. The corresponding P/Es are low at 14.4 and 11.2. 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 17% profit in the next 6-18 months. CIT is actively rising toward 2018 price resistance at 55.5. 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 growth stock. The 2019 consensus earnings estimate is at its highest point this year. Analysts now expect EPS growth of 41.5% and 18.6% in 2018 and 2019 (September year end). Price/earnings ratios (P/E) are low at 11.5 and 9.7 for fiscal 2018 and 2019. The DHI price chart is bullish, indicating that the stock could break past 46 fairly soon. There’s upside resistance at 53, where the stock peaked in January. Buy DHI now. 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. There has been no change in earnings estimates since April, and the second quarter earnings release date has not yet been announced. 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 64.5% and 19.4% in 2018 and 2019. The corresponding P/Es are 14.6 and 12.3. 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 0.8%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. Analysts now expect EPS growth of 29.9% and 20.2% in 2018 and 2019. The corresponding P/Es are 21.5 and 17.9. Management is bullish on the construction recovery in the U.S. accelerating in the second half of 2018 and continuing next year. MLM is a somewhat undervalued aggressive growth stock. In late July, MLM fell to recent price support, despite the fantastic earnings report. There’s 15% upside as the stock eventually heads back to its June peak at 230. Buy MLM now. Strong Buy.
PulteGroup (PHM – yield 1.3%) is a U.S. homebuilder. While it’s great that the 2018 consensus EPS estimate leaped upward to $3.75 after the second quarter earnings release, the 2019 number of $3.84 reflects only 2.4% EPS growth. (As recently as two weeks ago, the 2019 consensus estimate pointed to 13.2% EPS growth.) The new slow-growth outlook, combined with negative market sentiment focused on slowing order growth within the housing industry, and the weakening price chart, compels me to move PHM from Strong Buy to Sell. Sell.
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 full year EPS to grow 40.1% and 16.1% in 2018 and 2019. The corresponding P/Es are 12.6 and 10.8. There’s 16% upside as the stock heads back to its January high of 40. Last week, as the stock was rising, I wrote “An interim pullback to 34.50 would be perfectly normal, and likely brief.” The pullback promptly occurred. Buy PWR now. Once the stock breaks past 40, there will be no upside price resistance in sight. 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 18.9% and 21.2% in 2018 and 2019. The corresponding P/Es are 14.2 and 11.7. LUV is nearing its March high of 61. I expect the stock to rest there before approaching its January high of 66.
Interestingly, at least one major Wall Street investment firm is publishing research reports indicating the benefits of a buyout of Southwest by Warren Buffett’s Berkshire Hathaway (BRK/A). They wouldn’t be selling that idea to their institutional clients if they didn’t believe there was a strong likelihood of a Southwest takeover occurring.
We know that Buffett has $100 billion in cash that he’s looking to invest. We know that he is very familiar with and fond of airline stocks, owning sizeable positions in at least four airlines. We know that by most fundamental measures, Southwest surpasses its peers. A buyout of Southwest would be the most heralded M&A transaction of the year. It’s my intention to hold LUV until Buffett deploys that cash. 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 aggressive growth stock with a high degree of institutional ownership. The company reported a great second quarter last week. 2018 earnings estimates subsequently rose to their highest number year-to-date. Analysts now expect EPS to increase 52.4% and 34.9% in 2018 and 2019. The corresponding P/Es are 24.0 and 17.8.
The share price fell to price support that was established in March and April, in what seems to be an extreme overreaction to a great earnings report. I expect a 2018 rebound to the mid-50s. My recommendation is that traders and growth stock investors take advantage of the current price and 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. Earnings estimates rose again last week. Wall Street now projects Voya’s full year EPS to grow 122% and 24.4% in 2018 and 2019. The corresponding P/Es are 11.5 and 9.3. The stock is trading between 49 and 51, with some upside resistance at 55. Buy VOYA now. 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. Analysts expect full year EPS to grow 41.9% and 9.6% in 2018 and 2019. Corresponding P/Es are 12.8 and 11.7. The stock is trading near the bottom of a solid trading range, with upside resistance 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. The 2018 earnings estimate continues to rise, while the 2019 estimate has remained static—not remotely unusual after a recent earnings release, but I will still want to see the 2019 number increase very soon, lest the stock no longer fits my investment profile. Analysts expect Blackstone’s economic net income (ENI) to grow 8.9% and 5.6% in 2018 and 2019. The corresponding P/Es are 11.5 and 10.9. BX retraced its 2018 highs in mid-July, then rose higher in August. I expect a slow uptrend in the share price. BX is a fantastic investment for dividend investors, and also for speculators who anticipate the possibility that Blackstone could announce a transition from an LP to a C-corp. 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 in July, 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. Earnings per share are expected to increase by 48.5% and 11.9% in 2018 and 2019. The corresponding P/Es are 13.7 and 12.2. CMA is an undervalued growth & income stock. CMA is resting after a big up-move in July. I expect the stock to retrace its 2018 high near 102, and to advance from there. 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. There’s 12% upside as CMC returns to its recent high of 24.50, and additional appreciation potential thereafter. Buy CMC now. Strong Buy.
DowDuPont (DWDP – yield 2.3%) intends to break up into three companies by June 2019, comprised of its three divisions — Agriculture, Materials Science and Specialty Products. Management is planning the spin-offs because they fully expect the value of the three stocks to be higher than the value of the current stock. Considering their business acumen in managing a company with $87 billion in revenue and successfully forecasting profits almost to the penny, I believe management has likely made another wise assessment when forecasting the potential market value of the spin-off companies. DowDuPont was featured in the August issue of Cabot Undervalued Stocks Advisor.
The 2018 earnings estimate continues to inch higher. The company is expected to see strong EPS growth rates of 24.7% and 16.9% in 2018 and 2019. The corresponding P/Es are 16.0 and 13.7. Debt levels are low relative to market cap. The stock has been ratcheting upward since early April. When it breaks past 70, it will likely head toward its January high of 76. I expect additional capital appreciation in 2019 as the spin-offs take place. Buy DWDP now. Strong Buy.
GameStop (GME – yield 10.0%) 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. In the interim, the share price is showing strength. There’s short-term upside resistance at 17. Sell Half.
The Interpublic Group of Companies (IPG – yield 3.8%) 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 has stabilized 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 10% 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 3.1%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas rose by 13 last week to a total of 1,057, up 108 vs. a year ago. SLB is an aggressive growth stock, undervalued based on 2019 numbers. Analysts expect EPS to grow 22.7% and 49.5% in 2018 and 2019. The corresponding P/Es are 35.6 and 23.8. SLB is low within a solid trading range. There’s 13% upside to the stock’s May high at 74, where SLB will still be undervalued. Buy SLB now. Strong Buy.
WestRock Company (WRK – yield 3.1%) is a global packaging and container company. I realize that the share price has not been acting well, and that causes a certain amount of worry among shareholders. Analysts expect full year EPS to increase 55.3% and 12.8% in 2018 and 2019. The corresponding P/Es are 13.5 and 12.0. Despite the strong corporate outlook, the share price is weak, and not yet ready to rise. 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. Analysts expect EPS to grow 23.7% and 18.2%. The corresponding P/Es are 16.5 and 14.0. There’s 22% upside to 147 where ALXN last traded in September 2017. I expect additional 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 13 last week to a total of 1,057, up 108 vs. a year ago. In addition to the big move in the U.S. rig count, the Canadian rig count fell by 6% and the international rig count rose by 4%. BHGE is an aggressive growth stock, undervalued based on 2019 numbers. Analysts expect EPS to grow 69.8% and 107% in 2018 and 2019. The corresponding P/Es are 47.0 and 22.7. BHGE rose to 37, then fell, three times in the last year. Now that the stock is again rising toward 37, and the energy industry is understood to be on solid international footing and quite profitable, I believe the stock could soon surpass 37. 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 has a large Permian exposure. 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 full year EPS to grow 371% and 55.1% in 2018 and 2019. The corresponding P/Es are extremely low at 9.8 and 6.3. Delek will pay its regular quarterly dividend of $0.25 per share on September 4. There’s 15% upside as DK rebounds to its recent high at 60, and additional appreciation potential thereafter. Buy DK 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. 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 21.7 and 17.5. GES has traded quietly between 21 and 23 for ten weeks, with upside resistance at 26. Buy GES now. Strong Buy.
Royal Caribbean Cruises Ltd. (RCL – yield 2.1%) is a cruise vacation company that delivers travelers to desirable and exotic destinations on all seven continents. The company operates a total of 50 ships that are wholly-owned, or jointly-owned with companies in Germany, Spain and China. Royal Caribbean Cruises was featured in the August issue of Cabot Undervalued Stocks Advisor.
Wall Street expects Royal Caribbean’s EPS to grow 18.3% and 12.9% in 2018 and 2019 (December year end). The respective price/earnings ratios (P/E) are low at 12.8 and 10.7. The company announced a dividend increase of 20%-28% in each of the last four years during the month of September. New shareholders will therefore be likely to see their dividend yield increased to 2.6% next month!
RCL fell during the 2018 stock market correction, and now appears ready to launch upward as much as 17% toward its January 2018 all-time high of 133. Nobody has missed their opportunity to capitalize on the share price advance. Buy RCL now. Strong Buy.
Skechers USA Inc. (SKX) is an apparel company that designs and manufactures affordable footwear for people of all ages. Skechers is the third largest footwear brand globally, behind Nike and Adidas. International revenue is growing dramatically, including huge growth in China. Skechers reported record second quarter revenue and gross margins, and also intense investment in international wholesale and retail operations that cut into profits. Skechers remains an incredibly successful and rapidly growing company, with huge ongoing growth opportunities in international markets. Analysts expect EPS to fall (1.7%) in 2018 and then rise 15.4% in 2019. The stock is rebounding from a recent fall, and could rise to recent price resistance at 33 before having a pullback. Buy SKX now. Strong Buy.
TiVo (TIVO – yield 5.9%) is an entertainment technology company that joined the Buy Low Opportunities Portfolio specifically because it’s a takeover target. TiVo creates products and licensable technology that enable the world’s leading media and entertainment providers to nurture more meaningful relationships with their audiences.
News of buyout talks initially emerged in December 2017 when the share price was about 13.5. Management is in strategic discussions with entities that are considering buying TiVo’s product and/or IP licensing divisions. As of early August 2018, management has conveyed that the negotiating process is well under way. As investors wonder how high the share price could go, keep in mind that management considered 13.5 to be a grossly low price—enough so that they are willing to entertain buyout offers so that shareholders receive a more appropriate price for the stock. In fact, management put their CEO search on hold, since the company will likely be under new management by a potential buyer. Investors should expect a final M&A announcement any time between now and year end.
TIVO is an undervalued growth stock with a very attractive dividend yield. With valuable patents, constant innovation in entertainment technology, and a tiny $1.7 billion market cap, TiVo is an easy and obvious takeover target for any number of media conglomerates that want to “own instead of rent” the technology that’s essential to their products and services. Buy TIVO now. Strong Buy.
Universal Electronics (UEIC) is a manufacturer and cutting-edge world leader of wireless and voice remote control products, software and audio-video accessories for the smart home; with a strong pipeline of new products in the areas of safety and security, climate control and lighting. UEIC is an undervalued micro-cap stock. Micro-cap stocks are volatile, and often experience big share price movements, absent of any relevant news stories. They’re not for the faint of heart. If you can buy UEIC and tuck it away in your portfolio and not stare at the daily share price, I believe you will be rewarded with attractive price appreciation, and quite possibly a buyout offer. UEIC rose dramatically upon its bullish earnings release in July, and will most likely pull back and rest a bit before continuing its advance. Watch for opportunities to buy in the upper 30’s. Hold.
