U.S. Stock Markets Are Rising Again
Today I accompanied my Dad on a medical appointment. (He’s recovering well from a pacemaker procedure.) After handing the doctor my business card, so that he has my contact information, he glanced at it and immediately asked about the stock market being overvalued. How do you answer a question like that in one sentence? He’s busy, and this was Dad’s show, not mine. I simply told him that Apple (AAPL) remains undervalued. An apple a day keeps the doctor away, right? Maybe that bodes well for Dad.
Many investors remember that I expected a correction in U.S. stock markets to arrive during the first quarter of 2018. (I specifically expected the event to occur in March, and instead it occurred in February.) In preparation, I began encouraging you to accumulate cash in the summer of 2017, so that you’d be prepared to “buy low” when the correction arrived. By late January, I was personally up to a 40% cash balance. Then came the shopping spree!
I also predicted the markets would recover in the summer of 2018, rest for a while, then commence a new run-up—possibly as much as another 10% through year end. Now it’s time to revisit that prediction and tweak it. The DJIA has 3.3% upside until it reaches its January closing high at 26,617, where it will likely rest again. The SPX is so close to its January closing high that I believe it will blow right past that mark. I figure that it will rise 3%-4%, then rest when the DJIA peaks. That could all happen within a month or two, giving the market averages time to rest prior to one final run-up before year-end.
As for the NASDAQ, it’s been a bit out of sync with the DJIA and the SPX, peaking this year in January, March, June and July. I would expect it to continue to rise, but I’m not venturing any specific targets.
It’s fairly easy to find stock market prognosticators who will tell you to head for the hills, and buy gold along the way. As for me, the market is doing everything that I expected this year, despite the harrowing headlines. Stick with your investment plan. If you’re having trouble sleeping due to investment stress, then either sell the stock that’s got you unsettled, or raise cash until you’re sleeping again. Barring unexpected, very bad news, I think the next few months will deliver a bit of prosperity.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Guess (GES)
Interpublic Group (IPG)
Knight-Swift Transportation (KNX)
Royal Caribbean Cruises (RCL)
Skechers (SKX)
Southwest Airlines (LUV)
*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:
Apple (AAPL) moves from Strong Buy to Buy.
BB&T (BBT) moves from Strong Buy to Hold.
Blackstone Group (BX) moves from Buy to Hold.
Comerica (CMA) moves from Strong Buy to Buy.
Last Week’s Portfolio Changes:
PulteGroup (PHM) moved from Strong Buy to Sell.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.3%) 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 a slightly undervalued growth stock. Analysts expect EPS to increase 27.6% and 15.4% in fiscal 2018 and 2019 (September year-end). The corresponding P/Es are 18.5 and 16.0.
AAPL is my favorite stock for long-term investors. I believe almost every stock investor should own some shares. If you take a look at the AAPL price chart over the last two years, you’ll notice that when the stock breaks out of a trading range, it often races up over the course of two weeks, then trades sideways for up to three months, then repeats that sequence. (A stock market correction can prolong that period of sideways trading, as we saw earlier this year.) In keeping with that pattern, we’re likely nearing a peak, which will theoretically be followed by AAPL trading sideways until late October. I’m moving AAPL from Strong Buy to Buy, simply because I think patient investors can get a better price in the near future. I want to encourage you to accumulate shares on pullbacks below 200, as the stock establishes a new short-term trading range. 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 12.1 and 10.6. When BAC retraces its 2018 high near 33, I plan to sell in order to make room for a smaller bank to join the portfolio. (I want to capitalize on M&A activity that’s expected to take place among small banks in the coming year.) Long-term investors should feel comfortable buying and holding BAC, which is still an attractive investment. Hold.
CIT Group (CIT – yield 1.8%) 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 11.3. 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 16% 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 11.3 and 9.5 for fiscal 2018 and 2019. The DHI price chart is bullish. There’s 18% upside as DHI approaches its January high at 53. 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 of 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 19.3% in 2018 and 2019. The corresponding P/Es are 14.4 and 12.1. 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. Buy KNX now. Strong Buy.
Martin Marietta Materials (MLM – yield 0.9%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. Analysts now EPS growth of 29.9% and 20.2% in 2018 and 2019. The corresponding P/Es are 21.8 and 18.1. 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, and now appears stable. There’s 13% upside as the stock eventually heads back to its June peak at 230. Buy MLM now. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Yesterday it was reported that Quanta was awarded a large contract with a TransCanada company that will be reflected in Quanta’s third quarter 2018 backlog. 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 12.5 and 10.7. There’s 17% upside as the stock heads back to its January high of 40. In early August, as PWR was rising, I wrote “An interim pullback to 34.50 would be perfectly normal, and likely brief.” The pullback promptly occurred, and it was brief. 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 14.3 and 11.8. LUV just blew past its March high of 61. Surprisingly, it might not stop rising until it reaches its January high of 66. At that point, expect a multi-month period of sideways trading. I won’t sell there. The valuation is still attractive, and Warren Buffett has shown enough interest in purchasing an airline that I’m standing pat until he makes a final decision. 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. 2018 earnings estimates rose again last week, to their highest number year-to-date. Analysts now expect EPS to increase 56.3% and 27.9% in 2018 and 2019. The corresponding P/Es are 22.7 and 17.8.
The share price fell to price support that was established in March and April, in what seemed 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 expects Voya’s full year EPS to grow 123% and 24.3% in 2018 and 2019. The corresponding P/Es are 11.7 and 9.4. 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 3.1%) 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 13.2 and 12.1. The stock is rising toward upside resistance near 56. I’m moving BBT from Strong Buy to Hold, and I’ll decide how to proceed when it approaches 56. Hold.
Blackstone Group LP (BX – yield 6.1%*) 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 9.3% and 5.2% in 2018 and 2019. The corresponding P/Es are 11.8 and 11.2. I love the bullish price chart, the big dividend yield, and the potential that BX will change from an LP to a C-corp. Lacking a corporate change to a C-corp, however, the stock appears fully valued. I’m moving BX from Buy to Hold. I might remove it from the portfolio quite soon, to make room for a more undervalued stock. But first, I’m going to let it run up a bit, since it’s obvious that the run-up has commenced. Hold.
*The payout varies each quarter, with the total of the last four announced payouts (excluding the $0.30 special 2018 distribution) yielding 6.1%.
Comerica (CMA – yield 2.4%) 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. Earnings per share are expected to increase by 48.7% and 11.7% in 2018 and 2019. The corresponding P/Es are 13.7 and 12.2.
CMA is a slightly undervalued growth & income stock. I have a target P/E of about 13 on most bank stocks. By the time CMA breaks past its 2018 high near 102, and is well into its next run-up, it will surpass my P/E target. I’m moving CMA from Strong Buy to Buy, and will move it to Hold immediately upon the breakout past 102. I figure there’s still 10%-15% upside, and then I’ll replace CMA in the portfolio with a more undervalued growth stock. When I finally sell, there won’t be anything wrong with the company, and longer-term investors are encouraged to keep CMA as they see fit. This might be your last chance to buy CMA for a 10%-15% gain in 2018. 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 58.1% in 2018 and 2019 (August year-end). The 2019 P/E is 9.2. 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 2.2%) 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. DowDuPont was featured in the August issue of Cabot Undervalued Stocks Advisor.
There’s a great write-up on DowDuPont in this August 17 MarketWatch article, Fund manager ‘nibbles’ on international stocks hurt amid crises in Turkey, Argentina. And don’t worry! The article’s title refers to other companies within the article, but DowDuPont is mentioned because the highlighted CEO/fund manager from the Evermore Global Value Fund also specializes in opportunities that evolve from corporate restructurings. Thus, DowDuPont. He estimates that the breakup value of DowDuPont will rise to “over $100 a share”. In fact, the Evermore CEO anticipates that some of the three separated DowDuPont companies will additionally spin off smaller businesses.
DowDuPont is expected to see strong EPS growth rates of 24.7% and 16.9% in 2018 and 2019. The corresponding P/Es are 16.2 and 13.8. 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 9.6%) 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 bursting past price resistance at 16. 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. I expect IPG to rise 11% toward its 2018 high near 25. I will likely sell thereafter, due to slowing 2019 earnings growth. 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 remained unchanged last week with a total of 1,057, up 111 vs. a year ago. SLB is an aggressive growth stock, undervalued based on 2019 numbers. Analysts expect EPS to grow 22.7% and 48.9% in 2018 and 2019. The corresponding P/Es are 34.1 and 22.9. SLB is low within a solid trading range. There’s 16% upside to the stock’s May high at 74, where SLB will still be undervalued. Strong Buy.
WestRock Company (WRK – yield 3.1%) is a global packaging and container company. Analysts expect full year EPS to increase 55.3% and 12.8% in 2018 and 2019. The corresponding P/Es are 13.6 and 12.1. 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. It was announced yesterday that the FDA has accepted Alexion’s application that its new drug, ALXN1210, may undergo a priority review for approval 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 16.0 and 13.5. There’s 26% upside to 147 where ALXN last traded in September 2017. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 2.2%) 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 remained unchanged last week with a total of 1,057, up 111 vs. a year ago. The international rig count rose by 4%—a very large increase—two weeks in a row. That’s important because one of the many investor worries this year was that the international oil market was lagging vs. the U.S. market. That worry seemed irrational to me, but over the short term, worries can control share prices. Eventually, reality sets in and share prices respond to truth.
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 42.5 and 20.5. The stock is cheap, with a wide trading range. 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 has a large Permian exposure. 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. There’s 19% upside as DK rebounds to its recent high at 60, and additional appreciation potential thereafter. 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. 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 21.5 and 17.4. GES traded quietly between 21 and 23 for eleven weeks, and now appears ready to rise to price 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 18.5% and 12.7% in 2018 and 2019 (December year end). The respective price/earnings ratios (P/E) are low at 13.0 and 11.5. 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!
There’s 13% upside as RCL continues rising 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 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 could rise another 11% to recent price resistance at 33 before having a pullback. Buy SKX now. 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. 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.
News emerged on August 17 that Amazon is developing a product that competes with a TiVo product. I appreciate that investors might worry that Amazon could disrupt a few of TiVo’s client relationships. Consider the upside, though. If Amazon deems a TiVo-type product to be a potentially integral part of their media technology, then odds are good that other media companies will also value such products. In that light, any large media company might want to buy TiVo—the whole company—rather than “reinvent the wheel” by trying to duplicate TiVo technology. This news reinforces the premise that TiVo’s technological advances are desirable to competitors.
TIVO is an undervalued growth stock with a very attractive dividend yield. With valuable patents, constant innovation in entertainment technology, and a tiny $1.5 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.
