A New Stock Recommendation Designation
Investors who subscribe to Cabot Undervalued Stocks Advisor run the gamut from speculative investors who are looking for very short-term profits to buy-and-hold investors who want to build a portfolio full of good, market-leading companies like FedEx (FDX) and Amazon (AMZN). With a goal of bringing more clarity to my stock recommendations, I’m adding a new designation: “Retired”.
A Retired stock will be a stock in a healthy company that’s removed from the portfolio either because it reached my investment objective, or because its numbers began to fall short of my investment criteria – yet the company continues to be a healthy, market-leading company. Always be aware that if I believe the stock continues to offer attractive near-term capital gain potential, I certainly would not be removing it from the portfolio.
The Sell designation will be reserved for stocks that I believe all investors should sell, due to deteriorating fundamentals and other problems that diminish the stock’s potential to deliver capital gains.
For example, I’ve mentioned repeatedly this year that I plan on removing Bank of America (BAC) from the Growth Portfolio at a certain price point, yet I cringe at the idea that the word “Sell” appears next to Bank of America herein, lest anybody worry that Bank of America is no longer a growing, profitable company. The company is thriving. Yet, I don’t have the ability to capitalize on new investment opportunities that offer increased profitability unless I occasionally remove stocks from the Cabot Undervalued Stocks Advisor portfolios. Thus, when I finally remove Bank of America, it will be Retired, not Sold.
Here are the current stock recommendation designations:
Strong Buy – This stock meets all of my fundamental investment criteria.
Buy – This stock meets most of my fundamental investment criteria.
Retired – This stock has been removed from the portfolio due to limited capital gain potential, yet remains an attractive holding for long-term investors who would rather minimize portfolio turnover.
Sell – This stock has a problem that increases portfolio risk. Sell it.
Note that technical analysis – the study of a stock’s price action – can provide additional guidance to the aforementioned designations. In that light, when I write the words “Buy now” within a company’s description, my intention is to indicate that the stock is especially attractive at the current price.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from August 27 in which I mentioned news, rating changes and/or price action on Apple (AAPL) and KLX Inc. (KLXI).
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Delek (DK)
DowDuPont (DWDP)
Knight-Swift Transportation (KNX)
TiVo (TIVO)
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:
Apple (AAPL) moved from Strong Buy to Buy.
BB&T (BBT) moved from Strong Buy to Hold.
Blackstone Group (BX) moved from Buy to Hold.
Comerica (CMA) moved from Strong Buy to Buy.
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. See the Special Bulletin from August 27 pertaining to upcoming Apple product changes and upgrades. 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 18.4 and 15.9. AAPL is my favorite stock for long-term investors. The stock ran up nicely in August, and might now rest for several months. Watch for an opportunity to buy on a pullback below 200. 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. When BAC retraces its 2018 high near 33, I plan to retire the stock in order to make room for a smaller bank to join the Growth Portfolio. (I want to capitalize on M&A activity that’s expected to take place among small banks in the coming year.) 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 aggressively at 21.8% and 28.1% in 2018 and 2019. The corresponding P/Es are low at 14.6 and 11.4. Institutional investors will be focused on CIT Group’s loan growth during the second half of 2018.
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 15% profit in the next 6-18 months. The stock just retraced its all-time high of 55, where it previously peaked in March and May of 2018. We could see CIT break past 55 in the coming weeks. Buy CIT now, and buy more on pullbacks. 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. Analysts now expect EPS growth of 41.5% and 18.6% in 2018 and 2019 (September year end). Corresponding P/Es are low at 11.5 and 9.7. The DHI price chart is bullish. There’s 17% upside as DHI approaches its January high at 53. Buy DHI now. Strong Buy.
KLX Inc. (KLXI) – reported second quarter 2018 results this morning (January year end). Earnings per share of $1.31 far surpassed the consensus estimate of $1.10. Revenue of $527.2 million beat the estimate of $496.3 million revenue. (Newer stock investors should note this general correlation: When there are only a handful of analysts providing research coverage on a stock, there is an increased likelihood that quarterly results will stray far from consensus earnings estimates. That’s one contributing factor to small-cap stocks being more volatile than large-cap stocks.)
Note these important items and statements from the CEO pertaining to the Energy Services Group, which is the part of the company that current shareholders will receive as a spin-off in September:
• “Our ESG segment generated approximately 60 percent year-over-year organic revenue growth and an over 1,700 basis point improvement in Adjusted EBITDA margin, driven by strong growth in demand for our intervention and completion services, particularly our higher margin proprietary product services lines (“PSLs”). In addition, revenues continue to increase at a faster rate than fixed costs due to the efficient organizational structure we have developed, as a result of the complete integration of the acquired businesses.”
• “As compared to the first quarter of 2018, revenues increased by 6.2 percent, Adjusted operating earnings improved by 36.9 percent and Adjusted EBITDA improved by 19.1 percent.”
• “Today, we are confirming our 2018 revenue and Adjusted EBITDA guidance for KLX Energy Services of approximately $500 million and approximately $110 million, respectively.” (Investors should refer to the section of the press release titled “GUIDANCE/OUTLOOK” to see a comparison of how this outlook has increased progressively since 2017.)
Additionally, please refer to my August 27 Special Bulletin that outlined the updated details and dates of the Energy Services Group spin-off and the Boeing (BA) merger. Investors are encouraged to hold their KLXI shares in order to receive the cash from the Boeing merger and the new spin-off shares of the Energy Services Group. Tax considerations might annoy you, especially if you do your own income taxes. If that puts you on alert, consider selling KLXI prior to the spin-off. You can always buy the spin-off shares in a separate, clean transaction. I cannot advise you on how to handle these entries on your 2018 income tax returns. 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 18.9% 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. On August 23, the company increased the quarterly dividend from $0.44 to $0.48. Analysts expect EPS growth of 29.9% and 20.2% in 2018 and 2019. The corresponding P/Es are 22.1 and 18.4. 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. There’s 11% upside as the stock eventually rebounds 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. Last week 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 12.3 and 10.6. There’s 18% upside as the stock heads back to its January high of 40. Buy PWR now while it’s bouncing at the bottom of its 2018 trading range. The February equity call options also seem attractive. Strong Buy.
Southwest Airlines (LUV – yield 1.0%) 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 aggressively at 18.9% and 21.4% in 2018 and 2019. The corresponding P/Es are 14.7 and 12.1. LUV is pausing in its recent run-up at 61. There’s upside resistance at 66, where it last traded in January. Upon reaching 61, expect a multi-month period of sideways trading. I won’t sell there because 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 57.1% and 27.3% in 2018 and 2019. The corresponding P/Es are 22.5 and 17.7.
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, if not higher. 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 11.6 and 9.4. The stock appears to be breaking out of its recent trading range. There’s some upside resistance at 55. Credit Suisse just raised their price target on VOYA to 62. 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 13.1 and 11.9. BBT is ratcheting upward from recent lows. I’ll decide how to proceed when BBT approaches upside resistance near 56. Hold.
Blackstone Group LP (BX – yield 6.0%*) 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. For the first time in four years, Blackstone Group will host an Investor Day on September 21. One would suspect that the company will have something interesting to announce, more likely good than bad. So hold onto your shares!
Analysts expect Blackstone’s economic net income (ENI) to grow 9.3% and 5.2% in 2018 and 2019. The corresponding P/Es are 12.0 and 11.4. 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. (Keep in mind that analysts are bound to change their earnings estimates after the September 21 Investor Day, so take the current numbers with a grain of salt.)
I’m holding BX until at least late September, and keeping the recommendation as a Hold (as opposed to a buy) because current earnings estimates indicate a fair valuation. However, the more speculative investors should consider buying BX if you believe that the Investor Day will produce good news that will fuel additional price appreciation. Hold.
*The payout varies each quarter, with the total of the last four announced payouts (excluding the $0.30 special 2018 distribution) yielding 6.0%.
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. Despite prospects of a September Fed rate hike, which benefits Comerica’s net interest margin (NIM), institutional investors will be focused on Comerica’s loan growth during the second half of 2018. Loan growth might disappoint the market, and I’ll therefore be ready to make a final decision on the stock prior to the third quarter earnings release.
At this point, consensus EPS estimates continue to inch upward. Analysts expect EPS to increase by 48.7% and 11.7% in 2018 and 2019. The corresponding P/Es are 13.9 and 12.5.
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. At that time, I’ll retire CMA from the Growth & Income Portfolio in favor of a more undervalued stock. There’s still room for short-term price appreciation. 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 EPS to grow 108% and 58.1% in 2018 and 2019 (August year-end). The 2019 P/E is 9.2. There’s 10% upside as CMC returns to its recent high of 24.50, and additional appreciation potential thereafter. Buy CMC now. Strong Buy.
DowDuPont (DWDP – yield 2.1%) 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.
DowDuPont is expected to see strong EPS growth rates of 25.0% and 16.7% in 2018 and 2019. The corresponding P/Es are 16.5 and 14.1. Debt levels are low relative to market cap. The stock is running 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 on September 6. 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, GME rose to 17 last week, and now appears to be having a pullback toward new price support around 15.5 – a common and often-brief occurrence after a breakout. Sell Half.
The Interpublic Group of Companies (IPG – yield 3.6%) is a large conglomerate of advertising, marketing, communication and public relations companies serving all global markets. I expect IPG to rise 7% 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 fell by 13 last week to a total of 1,044, up 104 vs. a year ago. Interestingly, the number of Canadian rigs rose by 8%, and international rigs rose by 4% for the third consecutive week. 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 35.5 and 23.7. There’s 13% upside to the stock’s May high at 74, where SLB will still be undervalued. Strong Buy.
WestRock Company (WRK – yield 3.0%) 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 does not yet appear capable of rising past 58. 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. The FDA has accepted Alexion’s application for priority approval review for ALXN1210, for the treatment of Paroxysmal Nocturnal Hemoglobinuria (PNH). ALXN is an undervalued aggressive growth stock. Analysts expect EPS to grow 23.4% and 19.1%. The corresponding P/Es are 16.3 and 13.6. There’s 22% upside to 147 where ALXN last traded in September 2017. Buy ALXN now. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 2.1%) offers products, services and digital solutions to the international oil and gas community. 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 fell by 13 last week to a total of 1,044, up 104 vs. a year ago. Interestingly, the number of Canadian rigs rose by 8%, and international rigs rose by 4% for the third consecutive week. 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.
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 44.9 and 21.7. Last week, B. Riley raised their price target on BHGE to 42. BHGE is trading between 31 and 37, and will probably trade higher next year, barring a downturn in the broader market. 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. Analysts expect Delek’s EPS to grow 378% and 53.3% in 2018 and 2019. The corresponding P/Es are extremely low at 10.2 and 6.6. There’s 11% upside as DK rebounds to its June 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 22.3 and 18.0. GES traded quietly between 21 and 23 for eleven weeks, and has now begun ratcheting higher. There’s price resistance at 26. Buy GES now. Strong Buy.
Royal Caribbean Cruises Ltd. (RCL – yield 2.0%) 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 12.8% in 2018 and 2019 (December year end). The respective price/earnings ratios (P/E) are low at 13.4 and 11.9. 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 increase to 2.6% next month! There’s 9% upside as RCL continues rising toward its January 2018 all-time high of 133. As the stock advances, a pullback to 114 would be normal, and a buying opportunity. 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 5.3%) 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 $1.5 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 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 has since traded quietly between 42 and 44. I expect the stock to slowly make its way to 50, leading up to the next earnings release. Hold.
