REGIONS FINANCIAL (RF) JOINS THE GROWTH & INCOME PORTFOLIO
A few days ago, I reviewed the price charts on the 59 stocks in my “Waiting in the Wings” list – a list of undervalued growth stocks that I might add to these portfolios at some point. What really struck me was that less than 15% of them have attractive price charts right now. That’s unusual, and it tells me that value stocks are mostly not participating in the current stock market rally. (As a matter of fact, an argument can be made that less than a dozen tech & communication stocks are responsible for the market rally, but that’s not my topic today.) Two of the stocks with bullish price charts are companies that I’ve mentioned to you recently: Aaron’s (AAN) and Delta Air Lines (DAL). If you own them, hold them. A few banks also landed on my short list.
Last week, Barron’s reported on comments about the banking sector from Oppenheimer’s Chris Kotowski. The analyst’s bullish comments jive with everything I’ve been reading and experiencing about banks and their stocks throughout 2018. As a value investor, I’m very aware when entire industries or sectors are both financially thriving and largely ignored by investment professionals. (Unfortunately, your and my opinions as individual investors doesn’t really matter. Undervalued stocks aren’t going to rise until the big boys step in and start buying for pension funds and mutual funds.)
You already know that I’ve been itching to reposition some of our financial stocks into small- and mid-cap banks, in order to take advantage of a foreseeable surge in merger & acquisition activity throughout the financial sector. In that light, I sold Bank of America (BAC) last week (it’s too big for a takeover), and today I’m adding a mid-cap bank to the Growth & Income Portfolio: Regions Financial Corp. (RF).
Regions Financial is an Alabama-based superregional bank serving the South, Texas and the Midwest via 1,500 banking offices. Regions has $80 billion in outstanding commercial and consumer loans, and $125 billion in assets. The bank also offers wealth management, and insurance products and services.
Market jitters over prospects of slow consumer loan growth are turning out to be overdone as numbers are looking stable throughout the financial sector. Despite July and August being a seasonally slow period of commercial loan growth, stronger-than-expected commercial and industrial loan growth is benefiting both Regions and BB&T Corp. (BBT), also in our Growth & Income Portfolio. Interest earned on bank assets (a.k.a. asset yields) continues to outpace interest paid on deposits (deposit betas), and therefore net interest margin (NIM) is expected to rise in both the third and fourth quarters, especially benefiting Synchrony Financial (SYF) in the Buy Low Opportunities Portfolio.
You’ve got to wonder why professional analysts, portfolio managers and financial news pundits did not foresee these obvious results of a growing economy and rising interest rates, and why they haven’t embraced bank stocks. And since attractive earnings growth has been long-predicted throughout the sector, I ask myself, “How did all of these financial professionals expect banks to achieve strong earnings growth while also expecting poor loan growth and shrinking margins?” Bank stock investors just witnessed nine months of hand-wringing and predictions of recessions. As a result, in aggregate, bank stocks have barely risen in 2018. Perhaps now that a cloud of worry is lifting, bank stocks will finally start performing.
Honestly, 2018 has been the most non-sensical year in the stock market that I’ve ever witnessed, with everybody obsessed and stymied by imagined worries.
Regions Financial is expected to achieve a notable increase in third quarter net interest income and also a nice drop in both operating expenses and the outstanding share count. As a result, the third quarter consensus earnings estimate is $0.36 vs. $0.32 in the second quarter. Banks will begin reporting third quarter results in mid-October.
The bank is expected to increase full-year earnings per share (EPS) by 31.5% and 11.3% in 2018 and 2019. The corresponding price/earnings ratios (PEs) are 13.7 and 12.3.
Regions pays a dividend yield of 2.9% and has been most recently announcing an annual increase in its payout in July.
I’ve had my eye on Regions Financial – and frankly, many other bank stocks – all year. Now that Regions’ stock appears ready to break out of its 2018 trading range, I’m ready to buy the stock. RF peaked near 30 in 2006, but hasn’t traded higher than 20 since 2008, so once it breaks through 20, I think it can achieve a nice run-up. And of course, if we’re lucky, Regions could become a buyout target. Strong Buy.
IN OTHER NEWS…
It looks like Morgan Stanley hired an oilfield service company analyst, after a long period during which the company provided no research on the industry’s stocks. That’s good news because when a major investment firm provides research to its institutional clients, those clients are likely to take action. Importantly, the analyst is pounding the table on oilfield service stocks, citing an upcoming multi-year cycle in which exploration and production companies will increase capital expenditures. Our portfolio companies that could benefit from an increase in capital expenditures include Baker Hughes, a GE Co. (BHGE), Schlumberger (SLB) and KLX Energy Services Holdings (KLXE).
For those of you who like to capitalize on special situations, it appears that Johnson Controls (JCI) is getting very close to accepting a buyer for its battery unit. I’m not going to add JCI to our portfolios, because earnings growth at JCI doesn’t meet my investment criteria, and I’m already a bit overweighted in stocks where I’m waiting for buyouts. But go ahead and examine the news for yourself, in case you deem the stock or call options to be a desirable short-term investment.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from September 24 in which I mentioned news, rating changes and/or price action on Blackstone Group (BX).
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Alexion Pharmaceuticals (ALXN)
Marathon Petroleum (MPC)
Supernus Pharmaceuticals (SUPN)
Total S.A. (TOT)
*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:
Regions Financial (RF) joins the Growth & Income Portfolio as a Strong Buy.
Last Week’s Portfolio Changes:
Apple (AAPL) moved from Hold to Retired.
Bank of America (BAC) moved from Hold to Retired.
KLX Inc. (KLXI) moved from Hold to Sell.
KLX Energy Services Holdings (KLXE) spun off from KLX Inc. (KLXI) and is now rated Hold.
Royal Caribbean Cruises (RCL) moved from Buy to Retired.
Updates on Growth Portfolio Stocks
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 aggressively at 21.8% and 28.1% in 2018 and 2019. The corresponding P/Es are low at 14.4 and 11.2. CIT has traded between 53 and 55.5 for eight weeks. A breakout past 55.5 will be significant. 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 expect EPS growth of 41.5% and 18.6% in 2018 and 2019 (September year end). The 2019 P/E is 9.1. The stock is bouncing around within a wide trading range. Strong Buy.
KLX Energy Services Holdings (KLXE) spun off from KLX Inc. (KLXI) in a 4-for-10 ratio and began trading on September 17. (A person with 100 shares of KLXI received 40 shares of KLXE.) At a current price of 29.33, KLXE now represents a value of 11.73 per KLXI share.
I plan to hold KLXE for a short while, in order to assess any newly available information on the company and to be prepared to capitalize on any near-term price appreciation. There are no consensus earnings and revenue estimates available as of yet. I do not expect selling pressure on the stock, because anybody who owned KLXI and did not favor the prospects for KLXE would have already sold their shares of KLXI. We’ll likely see additional near-term capital appreciation. 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. KNX is a mid-cap aggressive growth stock. Analysts expect full year EPS growth of 65.2% and 18.0% in 2018 and 2019. The corresponding P/Es are 15.4 and 13.0. KNX is resting during an uptrend, and can reasonably be expected to rise to 42 during the next three months, where it will still be undervalued. Strong Buy.
Marathon Petroleum (MPC – yield 2.1%) 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.
Consensus earnings estimates change weekly for Marathon. The market is now expecting aggressive EPS growth of 39.1% and 33.3% in 2018 and 2019. Corresponding price/earnings ratios (P/Es) are quite low at 15.4 and 11.6. After four months of sideways trading, MPC began rising above 82 in late August. The stock briefly traded between 82 and 84, exhibited a shakeout pattern last week, and has now commenced a new run-up. Now is the time to buy MPC. Strong Buy.
Martin Marietta Materials (MLM – yield 1.0%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. Analysts expect EPS growth of 29.9% and 19.9% in 2018 and 2019. The corresponding P/Es are 20.6 and 17.2. 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. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Investors may access Quanta’s recent presentation at the D.A. Davidson Diversified Industrials and Services Conference on the company’s website. PWR is an undervalued mid-cap growth stock. Wall Street expects full year EPS to grow 40.1% and 16.4% in 2018 and 2019. The corresponding P/Es are 12.6 and 10.8. The trading pattern has very slowly improved since late July, but we’re still waiting for meaningful price appreciation. 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 19.4% and 21.5% in 2018 and 2019. The corresponding P/Es are 15.3 and 12.6. LUV has price resistance at its January high near 66. 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. Supernus will present at the 2018 Cantor Fitzgerald Global Healthcare Conference on October 3. SUPN is an undervalued, small-cap aggressive growth stock. Analysts expect EPS to increase 54.8% and 33.8% in 2018 and 2019. The corresponding P/Es are 25.7 and 19.8. SUPN is rising, and could reach 55 in the coming weeks. I would also expect additional capital appreciation later this year. Buy SUPN now. Strong Buy.
Voya Financial (VOYA – yield 0.1%) is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. The company will host an Analyst Day on November 13, which could easily generate new and bullish research reports for Voya. VOYA is an undervalued aggressive growth stock. Wall Street expects Voya’s full year EPS to grow 123% and 24.5% in 2018 and 2019. The corresponding P/Es are 11.8 and 9.5. VOYA appears capable of surpassing upside resistance at 51 quite soon, at which time it will likely retrace 55, where it traded earlier this year. 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 company is expecting to report strong loan growth in the third quarter. 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 13.0 and 11.9. BBT has traded consistently between 50 and 55 all year, and currently sits near the bottom of that range. Hold.
Blackstone Group LP (BX – yield 5.6%*) 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. I expect a new round of research reports this week to contribute to rising earnings estimates. The stock blasted off past 37 last week. The run-up in the share price is likely sustainable, and pullbacks will likely be very brief. Buy on pullbacks. Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 5.6%.
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. Analysts expect EPS to increase by 48.3% and 12.2% in 2018 and 2019. The corresponding P/Es are 13.4 and 11.9. 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 53.4% in 2018 and 2019 (August year-end). The 2019 P/E is 9.0. The stock is languishing at price support at 20.5. Strong Buy.
DowDuPont (DWDP – yield 2.2%) intends to break up into three companies by June 2019.
- The agriculture division of DowDuPont will be called Corteva Agriscience and will be spun off by June 1, 2019.
- The specialty products division of DowDuPont will be called DuPont and will be spun off by June 1, 2019. DowDuPont CEO Ed Breen will become CEO of DuPont.
- After Corteva Agriscience and DuPont are spun off, the remaining materials science division of DowDuPont will be called Dow Chemical. DowDuPont executive Jim Fitterling will become CEO of Dow Chemical.
As the separated companies compete head-to-head with their various industry peers, DowDuPont management expects the share prices to rise, in accordance with normal industry stock valuations. DowDuPont is currently expected to see strong EPS growth rates of 24.1% and 17.3% in 2018 and 2019. The corresponding P/Es are 16.7 and 14.3. DWDP is briefly trading between 68 and 71 as it travels 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 9.7%) is a potential buyout candidate. In recent weeks, management reiterated that they are actively pursuing a strategic review, which could lead to the sale of the company. The share price chart looks quite bullish, indicating that the stock could promptly launch upward. 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. The 2019 earnings estimate has been rising in recent weeks. Wall Street now expects EPS to grow 55.7% and 22.0% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 20.8 and 17.0. The stock is low within a stable trading range. Buy GES now. Strong Buy.
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. Investors may listen to the webcast of Interpublic’s presentation 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 fell by two last week to a total of 1,053, up 118 vs. a year ago. SLB is an aggressive growth stock, undervalued based on 2019 numbers. Analysts expect EPS to grow 22.7% and 44.6% in 2018 and 2019. The corresponding P/Es are 33.2 and 23.0. The share price has recently weakened toward price support dating back to December 2017. I will recommend its purchase after the share price stabilizes. Hold.
Total S.A. (TOT – yield 4.6%) is a French multinational oil and gas company – one of the industry’s seven “supermajors” -- operating in over 130 countries. Last week, Total announced its purchase of G2mobility, a French operator of car-charging points, putting Total’s number of charging stations near 10,000. Total additionally plans to invest in electric car infrastructure, and has also invested in natural gas vehicle fuels and batteries. Total was featured in the September issue of Cabot Undervalued Stocks Advisor.
Analysts expect EPS to grow 30.1% and 17.4% in 2018 and 2019. The corresponding P/Es are low in comparison at 11.8 and 10.1. 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 appears capable of an immediate breakout past 65. Buy TOT now. 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 13.8 and 12.3. A breakout past 58 could quickly take the stock to 62. 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. Yesterday, Alexion revealed successful trials of Soliris in combating symptoms of Neuromyelitis optica (NMO), an inflammatory disease of the central nervous system. Management intends to promptly file an application with regulators for approval of Soliris in treating NMO, which could add hundreds of millions of dollars to Alexion’s annual revenue. Investors may listen to the webcast of Alexion’s September 14 presentation at Morgan Stanley’s 16th Annual Global Healthcare Conference. ALXN is an undervalued aggressive growth stock. Analysts expect EPS to grow 23.4% and 19.1%. The corresponding P/Es are 16.9 and 14.2. The stock is rising toward price resistance at 137. 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 fell by two last week to a total of 1,053, up 118 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 67.4% and 108% in 2018 and 2019. The corresponding P/Es are 45.7 and 21.9. 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 2.2%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. DK is an undervalued, aggressive growth, small-cap stock. Delek’s consensus 2019 earnings estimate rose to $8.37 last week, its highest point to date. Analysts now expect EPS to grow 385% and 54.1% in 2018 and 2019. The corresponding P/Es are ridiculously low at 8.1 and 5.2. The share price has been weak and might now be turning around. 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 a successful company with huge ongoing growth opportunities in international markets. Analysts expect EPS to fall (2.2%) in 2018 and then rise 14.4% in 2019. The share price has been weak and is not yet ready to rebound. Strong Buy.
Synchrony Financial (SYF – yield 2.5%) 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 9.7 and 7.4. The stock has been gradually rising for six weeks. My current price target on SYF is 40, where the stock reached an all-time high in January. Strong Buy.
TiVo (TIVO – yield 5.4%) 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. Universal Electronics will present at the B. Riley FBR Annual Consumer & Media Conference on October 4. UEIC is an undervalued micro-cap stock. UEIC has been trading between 40 and 45 amid an uptrend. The next run-up could take the stock to 50 or 55. Buy UEIC now. Be prepared for volatility. Strong Buy.
