I’ve mentioned a few times this year that I expect the shortage of truck drivers in the U.S. to be the lynchpin in the current economic cycle’s eventual inflation surge. Now that Wal-Mart (WMT) is publicly discussing their driver shortage, let’s review this theory.
Widespread passage of new marijuana legalization has led to an increase in the U.S. pot-smoking population. Lots of those pot smokers apply for jobs, just like sober people do, but they can’t pass drug tests, so they seek employment in desk jobs and retail jobs that don’t require the operation of heavy machinery.
Companies that need truck drivers are therefore hiring from a shrinking pool of job candidates. Most U.S. companies hire truck drivers, because literally every commodity and product needs to be shipped to end users. The driver shortage is leading to cannibalization as employers seek to hire drivers who are currently employed elsewhere (and sober!) to fulfill their staffing needs. Employers are finding it necessary to offer sign-on bonuses and increase wages in order to attract and keep drivers.
The costs of the bonuses and wages are not small! If Amazon (AMZN) and Boise Cascade (BCC) and Wal-Mart need to deliver goods to consumers, home builders or retail stores, they’re going to be paying more for transportation expenses than they did last year. Those increased corporate expenses will naturally be tagged onto the prices that consumers are charged when they order clothing online from Amazon, build houses with Boise Cascade lumber and buy toothpaste at Wal-Mart.
Inflation numbers are defined by rising consumer costs. It will probably be many months before inflation numbers begin to alarm the financial community, and later appear in news headlines. My wager is that newscasters will be instructed to find ways to blame rising inflation on the Trump administration, since that seems to be the scapegoat du jour for any domestic or international occurrence that can be twisted to sound negative. But mark my words: the coming inflation surge will have nothing to do with the current occupants of the White House, because it will have been caused in state capitols across the land via the legalization of marijuana.
Read Wal-Mart’s latest announcement about the truck driver shortage in this September 10 Bloomberg article, Wal-Mart Doubles Spending in Battle for Truckers.
(Please notice that I specifically did not weigh in on whether I approve of legalized marijuana, or the occupants of the White House, and I’m not going to debate those topics via email. However, you’re welcome to express your opinions to me!)
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
CIT Group (CIT)
DowDuPont (DWDP)
Marathon Petroleum (MPC)
TiVo (TIVO)
Southwest Airlines (LUV)
Supernus Pharmaceuticals (SUPN)
*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:
Blackstone Group (BX) moves from Hold to Buy.
Guess? (GES) moves from Buy to Strong Buy.
Schlumberger (SLB) moves from Strong Buy to Hold.
Southwest Airlines (LUV) moves from Strong Buy to Buy.
Last Week’s Portfolio Changes:
Apple (AAPL) moved from Buy to Hold.
Marathon Petroleum (MPC) joined the Growth Portfolio as a Strong Buy.
Royal Caribbean Cruises (RCL) moved from Strong Buy to Buy.
Synchrony Financial (SYF) joined the Buy Low Opportunities Portfolio as a Strong Buy.
Total S.A. (TOT) joined the Growth & Income Portfolio as a Strong 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. Apple will launch three new iPhone models this week. The market buzz concentrates on potential average selling prices and unit sales. Expectations are cautious, and therefore unexpected successes will invariably lead to increases in earnings estimates, and hopefully in Apple’s share price as well. Yesterday, Bloomberg featured an asset manager who’s in AAPL for the long haul, in this video.
Analysts expect EPS to increase 27.7% and 15.4% in fiscal 2018 and 2019 (September year end). The 2019 P/E is 16.3 and the stock is now fairly valued. I might retire AAPL from the Growth Portfolio shortly, despite my love for the stock, in order to make room for a more undervalued growth opportunity. Hold.
Bank of America (BAC – yield 1.9%) is an undervalued growth stock that benefits from rising home prices and rising interest rates. The bank has successfully engaged more than 50% of its customers in using mobile banking, which is causing expenses to fall rapidly. 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 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. CEO Ellen Alemany will present at the Barclays Global Financial Services Conference on September 14. 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 14.5 and 11.3. 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 16% profit in the next 6-18 months. CIT appears capable of breaking past its all-time high of 55 in the coming weeks. Buy CIT now. Strong Buy.
D.R. Horton (DHI – yield 1.2%) 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). The 2019 P/E is 9.2. The stock pulled back to rough price support at 43 last week. There’s 23% upside as DHI approaches its January high at 53. Strong Buy.
KLX Inc. (KLXI) – KLX Energy Services Holdings (KLXE) will begin trading on September 17, and will then join the S&P SmallCap 600 Index on September 18. The remaining portion of KLXI, representing the KLX Aerospace Solutions Group, will be exchanged for $63 cash per share at some point in the near future, as a result of its purchase by Boeing (BA). I believe investors who hold their KLXI shares will continue to benefit from capital gains based on the total current and future values of the pending Boeing merger, plus the KLXE spinoff. 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 an undervalued industry leader with an exemplary management team, as detailed in this September 5 article in the The Wall Street Journal. Throughout the trucking industry, demand is strong, rates are rising, and there’s an extreme shortage of truck drivers. KNX is a mid-cap aggressive growth stock. Analysts expect full year EPS growth of 65.2% and 18.4% in 2018 and 2019. The corresponding P/Es are 15.5 and 13.1. KNX is rising steadily toward short-term price resistance at 38. Strong Buy.
Marathon Petroleum (MPC – yield 2.2%) is the nation’s second-largest energy refiner, with interests in processing facilities, 10,000 miles of oil pipelines, and product sales in 8,000 retail stores. Marathon is purchasing Andeavor (ANDV), which brings ten refineries and another 3,300 retail stores under Marathon’s umbrella. The merger is scheduled for completion on October 1. Marathon Petroleum was featured in the September issue of Cabot Undervalued Stocks Advisor.
Last week I mentioned that consensus earnings estimates change frequently for Marathon. For whatever odd reason, my source for consensus estimates had twice as many analysts weighing in on Marathon’s estimates in recent days. The market is now expecting aggressive EPS growth of 37.5% and 29.5% in 2018 and 2019. Corresponding price/earnings ratios (P/Es) are quite low at 15.4 and 11.9. After four months of sideways trading, MPC began rising above 82 in late August. Nobody has missed the coming run-up to new all-time highs. Buy MPC now. Strong Buy.
Martin Marietta Materials (MLM – yield 0.9%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. Analysts expect EPS growth of 29.9% and 20.2% in 2018 and 2019. The corresponding P/Es are 21.0 and 17.5. 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 share price has been weak recently, without any negative news to substantiate the weakness. There’s 20% upside as the stock eventually rebounds to its June peak at 230. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Last week, Quanta announced a new $500 million share repurchase authorization. There’s also $46 million available in the prior repurchase authorization. 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 12.4 and 10.7. There’s 16% upside as the stock heads back to its January high of 40. Buy PWR now. 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. Consensus earnings estimates for Southwest rose last week. Wall Street now expects full year EPS to grow aggressively at 19.1% and 21.6% in 2018 and 2019. The corresponding P/Es are 14.8 and 12.2. I’m moving LUV from Strong Buy to Buy as it nears 66, where it last traded in January. Pete Najarian told investors about bullish call buying in LUV options last week. Warren Buffett has shown enough interest in purchasing an airline that I’m standing pat until he makes a final decision. 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. The stock rose last week, along with earnings estimates, possibly in reaction to the company’s presentation at the 2018 Wells Fargo Healthcare Conference, or from its September 5 recommendation in Investor’s Business Daily, or from news that Supernus successfully defended three patents for Oxtellar XR Orange Book, a treatment for epilepsy. (Investors may access the conference presentation via the company’s website.)
SUPN is an undervalued, small-cap aggressive growth stock. Analysts now expect EPS to increase 57.1% and 30.3% in 2018 and 2019. The corresponding P/Es are 24.3 and 18.7. SUPN could reach anywhere from 51 to 55 in the coming days. I would expect additional capital appreciation later this year. 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. Consensus earnings estimates for 2019 rose last week to their highest point since I began following VOYA in April. Wall Street now expects Voya’s full year EPS to grow 123% and 24.5% in 2018 and 2019. The corresponding P/Es are 11.4 and 9.1. The stock has traded between 49 and 51 since mid-July. There’s 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. CEO Kelly King will speak at the Barclays Global Financial Services Conference on September 13. Investors may subsequently access a webcast of the presentation via BB&T’s investor relations page. Analysts expect full year EPS to grow 41.9% and 9.6% in 2018 and 2019. Corresponding P/Es are 13.1 and 12.0. 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 6.2%*) is the world’s largest and most diversified alternative asset manager with $439 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, hedge funds and real estate. For the first time in four years, Blackstone Group will host an Investor Day on September 21.
Analysts expect Blackstone’s economic net income (ENI) to grow 9.3% and 5.2% in 2018 and 2019. The corresponding P/Es are 11.5 and 10.9. The stock pulled back a bit within a normal trading range last week, so I’m moving BX from Hold to Buy. There’s upside within the trading range, plus a big dividend yield, plus a possibility that a bullish Investor Day announcement could trigger a new run-up past 37 in the share price. Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 6.2%.
Comerica (CMA – yield 2.5%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Comerica will present at the Barclays Global Financial Services Conference on September 13. Investors may subsequently access a webcast of the presentation via Comerica’s investor relations page. 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. Consensus earnings estimates for 2019 rose last week to their highest level thus far. Analysts now expect EPS to increase by 48.5% and 12.0% in 2018 and 2019. The corresponding P/Es are 13.8 and 12.3. CMA is an undervalued growth & income stock. I’ll reassess Comerica’s position in the portfolio after its next breakout past 102 and run-up. Buy.
Commercial Metals Company (CMC – yield 2.3%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Commercial Metals specifically benefits from recently increased tariffs on Turkish steel products. CMC is an undervalued aggressive growth stock. Wall Street analysts expect EPS to grow 108% and 60.8% in 2018 and 2019 (August year-end). The 2019 P/E is 8.7. The stock is trading near price support of 20.5. There’s 17% 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 is expected to see strong EPS growth rates of 24.7% and 16.7% in 2018 and 2019. The corresponding P/Es are 16.7 and 14.3. The stock is resting as it rises 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 9.5%) reported second quarter results last week (January year end). Earnings per share of five cents missed the estimate of eight cents, while revenue of $1.65 billion surpassed the estimate of $1.62 billion. The second quarter is GameStop’s least-profitable quarter each year. For comparison, the company is expected to earn $0.56 and $2.08 EPS in the coming third and fourth quarters, with respective consensus revenue estimates of $2.0 and $3.3 billion. Management reiterated that they are actively pursuing a strategic review, which could lead to the sale of the company. The share price chart exhibited a shakeout pattern last week, which is almost always bullish for the near-term price action. Hold.
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 48.6% and 2.77% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 21.3 and 16.7. Earnings estimates rose last week, yet the stock pulled back to price support at 22, boosting the current yield to 4%. I’m therefore moving GES from Buy to Strong Buy. Buy GES now. Strong Buy.
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. Interpublic will present at the Goldman Sachs 27th Annual Communacopia Conference on September 13. The share price has been slowly improving since mid-July, and could retrace its 2018 high near 25 later this year. I will likely retire the stock from the Growth & Income Portfolio thereafter, due to slowing 2019 earnings growth. Hold.
Schlumberger (SLB – yield 3.3%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas was unchanged last week, a total of 1,048, up 104 vs. a year ago. Schlumberger’s share price suffered last week upon its CEO’s comments that transportation problems in the Permian Basin will affect drilling activity. (The cited transportation problems were already well known within the industry.) Keep in mind that Schlumberger works all over the globe, and that it’s normal for the company to experience random work disruptions for myriad reasons. In addition, with two dozen Wall Street analysts covering the stock, 2018 earnings estimates have held steady since their most recent increase in late July. I therefore expect any weakness in the share price to be temporary.
SLB is an aggressive growth stock, undervalued based on 2019 numbers. Analysts expect EPS to grow 22.7% and 48.4% in 2018 and 2019. The corresponding P/Es are 32.4 and 21.9. The share price has recently weakened toward price support dating back to December 2017. I’m moving SLB from Strong Buy to Hold, and will recommend its purchase after the share price stabilizes. Hold.
Total S.A. (TOT – yield 5.0%) is a French multinational oil and gas company – one of the industry’s seven “supermajors”—operating in over 130 countries. Total was featured in the September issue of Cabot Undervalued Stocks Advisor. Consensus earnings estimates jumped last week. Analysts now expect EPS to grow 30.1% and 17.4% in 2018 and 2019. The corresponding P/Es are low in comparison at 11.2 and 9.6. TOT has been ratcheting upward since March, in a slowly ascending trajectory, and touched upon a new all-time high of 65 in July. The stock could continue to trade anywhere between 59 and 65 in the coming weeks, and I expect TOT to trade higher as the months pass. Strong Buy.
WestRock Company (WRK – yield 3.1%) is a global packaging and container company. CEO Steve Voorhees will present at the Credit Suisse 31st Annual Basic Materials Conference on September 13. 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 has been low, and does not yet appear 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 will present at Morgan Stanley’s 16th Annual Global Healthcare Conference on September 14. 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 16.2 and 13.6. The stock just pulled back near four-month price support at 115. There’s 25% upside to 147 where ALXN last traded in September 2017. Buy ALXN now. 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 was unchanged last week, a total of 1,048, up 104 vs. a year ago.
BHGE is an undervalued aggressive growth stock with a very low debt-to-market cap ratio. Analysts expect EPS to grow 69.8% and 107% in 2018 and 2019. The corresponding P/Es are 43.0 and 20.8. 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 2.1%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. Delek announced its intention, last week, to repurchase another $70 million of stock during September. Delek has a large Permian Basin exposure. Of note, however, is that Delek’s consensus 2018 earnings estimate rose to $5.51 last week, its highest point year-to-date. Analysts now expect EPS to grow 392% and 49.5% in 2018 and 2019. The corresponding P/Es are extremely low at 8.7 and 5.8. DK pulled back to four-month price support last week. There’s 24% upside as DK rebounds to its June high at 60, and additional appreciation potential thereafter.
To reiterate, growth stock investors, dividend investors and traders should consider buying DK right now due to aggressive earnings growth, rising earnings estimates, extremely low P/E, the stock’s trading at price support within a wide trading range, and the company plans to immediately buy a large amount of stock (which could easily lead to a rising share price). Strong Buy.
Royal Caribbean Cruises Ltd. (RCL – yield 2.2%) 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. Various industry trends and measures are looking bullish right now, including a moderate Atlantic hurricane season, minimal international incidents, and increases in bookings and pricing. Analysts are forecasting 18.5% and 13.0% EPS growth in 2018 and 2019 (December year end). The corresponding P/Es are 13.9 and 12.3.
Last week, Royal Caribbean announced a quarterly dividend increase of 16.7%, from $0.60 to $0.70. The current yield is now 2.2%. There’s 7% upside as RCL continues rising toward its January 2018 all-time high of 133, where it will still be undervalued. This is a wonderful stock for a long-term portfolio of industry-leading companies. I will likely retire RCL from the Buy Low Opportunities Portfolio when it approaches 133, in favor of another ripe trading opportunity. 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. There’s 14% upside to short-term price resistance at 33. Buy SKX now. Strong Buy.
Synchrony Financial (SYF – yield 2.6%) is a consumer finance company with 74.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. The company has been investing in mobile capabilities and expanding its online savings account into a full-service bank. Synchrony Financial was featured in the September issue of Cabot Undervalued Stocks Advisor. Earnings per share (EPS) are expected to increase by 32.1% and 30.1% in 2018 and 2019 (December year end). The corresponding price/earnings ratios (P/Es) are extremely low at 9.2 and 7.1. My current price target on SYF is 40, where the stock reached an all-time high in January. Buy SYF now. Strong Buy.
TiVo (TIVO – yield 5.3%) creates products and licensable technology that enable the world’s leading media and entertainment providers to nurture more meaningful relationships with their audiences. TIVO is an undervalued growth stock with a very attractive dividend yield. Management is in strategic discussions with entities that are considering buying TiVo’s product and/or IP licensing divisions. Investors should expect a final, lucrative M&A announcement any time between now and year end. 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. The company will present at Deutsche Bank’s 2018 Technology Conference on September 12. UEIC is an undervalued micro-cap stock. UEIC has been ratcheting upward since early May. The next run-up could take the stock to 50 or 55. Be prepared for volatility. Strong Buy.
