Stocks are churning in place, appearing unsure of how to proceed this month. The Dow Jones Industrial Average finally retraced its January 2018 record high. Will it advance promptly or establish a trading range?
If we look back to recent patterns on the S&P 500 index, which retraced its January high in August, and we presume that the Dow might follow suit, then we’re in for some sideways trading on the Dow.
As for the NASDAQ, you don’t need to be a technical analyst to see that large-cap NASDAQ stocks have been suffering. Just look at Netflix (NFLX), Intel (INTC) and Tesla (TSLA). So goes the market. I expect NASDAQ performance to lag Dow and S&P 500 performance this quarter.
Earnings season should provide some direction. We’re either going to find that analysts have been too cautious with their eroding earnings estimates, or we’ll see that they were justified. The economy remains quite strong, though it’s probably been difficult for analysts to get a handle on earnings estimates.
There are a variety of unusual factors contributing to the economic boom, none of which analysts have had to figure into their earnings estimates in a very long time: deregulation, repatriated cash, lower tax rates, rising wages, increased capital spending, rising employment and rising interest rates. Some analysts are dealing with these factors for the very first times in their short careers. They’re going to make some erroneous assumptions. As earnings results come in off target, expect volatility in stocks.
Banks start reporting third quarter results next week. Remember, though, that rising interest rates contribute to bank profitability. Yet rising rates can hurt some industries, and also hurt companies that carry high debt loads. You can’t necessarily assume that strong results at banks will help the entire stock market, so keep paying attention in the weeks after banks report results. Throw in the strong dollar, which hurts profitability at international companies, and you’ve got a potential nail-biting scenario as third quarter results roll in.
In the coming months, I aim to reduce the number of portfolio stocks from about 30 to about 20. Today’s stock rating changes are unrelated to that goal, and more related to bearish price charts. Once price charts turn more bullish, I’ll send out a buy signal.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Quarterly Earnings Release Calendar
October 11 am: Delta Air Lines (DAL) – 3Q
October 16 am: Comerica (CMA) – 3Q
October 18 am: BB&T Corp. (BBT) and Blackstone Group (BX) – 3Q
October 19 am: Interpublic Group (IPG), Schlumberger (SLB) and Synchrony Financial (SYF) – 3Q
October 23 am: CIT Group (CIT) and Regions Financial (RF) – 3Q
October 24 am: Alexion Pharmaceuticals (ALXN) – 3Q
October 24 pm: Knight-Swift Transportation (KNX) – 3Q
October 25 am: Baker Hughes, a GE Co. (BHGE) – 3Q and Commercial Metals (CMC) – 4Q
October 26 am: Total S.A. (TOT) – 3Q
October 30 pm: Voya Financial (VOYA) – 3Q
late-October: Marathon Petroleum (MPC), Skechers (SKX) and Southwest Airlines (LUV) – 3Q
November 1 am: DowDuPont (DWDP) – 3Q
November 5 am: WestRock (WRK) – 4Q
early November: Delek US Holdings (DK), D.R. Horton (DHI) – 4Q, Martin Marietta Materials (MLM), Quanta Services (PWR), Supernus Pharmaceuticals (SUPN), TiVo (TIVO), Universal Electronics (UEIC), second half of November: GameStop (GME), Guess? (GES) and KLX Energy Services (KLXE)
Virtually all companies offer extensive information on their websites pertaining to their quarterly earnings releases, including press releases, conference calls, slide shows and/or webcasts.
Today’s Portfolio Changes:
Knight-Swift Transportation (KNX) moves from Strong Buy to Hold.
Quanta Services (PWR) moves from Strong Buy to Hold.
Schlumberger (SLB) moves from Hold to Buy.
Skechers (SKX) moves from Strong Buy to Buy.
WestRock (WRK) moves from Strong Buy to Hold.
Last Week’s Portfolio Changes:
Delek U.S. Holdings (DK) moves from Strong Buy to Hold.
Delta Air Lines (DAL) joins the Growth & Income Portfolio as a Strong Buy.
Martin Marietta Materials (MLM) moves from Strong Buy to Hold
Updates on Growth Portfolio Stocks
CIT Group (CIT – yield 2.0%) 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. CIT Group has a very strong and stable earnings outlook, low valuation, attractive dividend yield, and a share price that’s low within a stable trading range. CIT Group was featured in the October issue of Cabot Undervalued Stocks Advisor.
The company is expected to report third quarter EPS of $1.14 within a range of $1.00-$1.27 on the morning of October 23. The full year 2018 earnings estimate jumped last week. Analysts now expect CIT Group’s EPS to grow aggressively at 24.8% and 25.1% in 2018 and 2019. The corresponding P/Es are low at 13.4 and 10.7. The stock has traded between 49 and 55 all year. Strong Buy.
D.R. Horton (DHI – yield 1.2%) is America’s largest homebuilder, also providing mortgage, insurance and title services. In each of the last three years, D.R. Horton announced dividend increases of 25%-27% in November. A similar increase in 2018 would take the quarterly payout from 12.5 cents per share to 15.5 or 16 cents. Analysts expect EPS growth of 41.5% and 18.6% in 2018 and 2019 (September year end). The 2019 P/E is 8.7. DHI is an undervalued growth stock. The stock fell in February with the 2018 market correction and has since traded between 39 and 47. Despite the inaction on the share price, the earnings estimates are 15% higher than they were in January, steadily climbing throughout the year. 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 32.73, KLXE now represents a value of 13.09 per KLXI share. I’m awaiting the publication of the cost basis allocation between shares of KLXI and KLXE. I’ll share that with you as soon as it’s available.
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. Consensus earnings and revenue estimates will not likely be available until quarterly results are reported. 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. The company is expected to report third quarter EPS of $0.58, within a range of $0.56-$0.63, on the afternoon of October 24. KNX is a mid-cap aggressive growth stock. Analysts expect full year EPS growth of 65.2% and 17.5% in 2018 and 2019. The corresponding P/Es are 14.1 and 12.0. I’m moving KNX from Strong Buy to Hold until the price chart turns bullish. Hold.
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 just purchased Andeavor (ANDV), which brings ten refineries and another 3,300 retail stores under Marathon’s umbrella. Consensus earnings estimates change weekly for Marathon. The market is now expecting aggressive EPS growth of 40.1% and 43.1% in 2018 and 2019. Corresponding price/earnings ratios (P/Es) are quite low at 15.5 and 10.8. The stock has been volatile, but also just beginning to reach new all-time highs. Buy MPC now and buy more on pullbacks. Strong Buy.
Martin Marietta Materials (MLM – yield 1.1%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. Analysts expect EPS growth of 28.6% and 17.2% in 2018 and 2019. The corresponding P/Es are 19.8 and 16.9. Management is bullish on the construction recovery in the U.S. accelerating in the second half of 2018 and continuing next year. MLM is an undervalued growth stock. The price chart remains bearish. Hold.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. PWR is an undervalued mid-cap growth stock. Wall Street expects full year EPS to grow 38.6% and 16.5% in 2018 and 2019. The corresponding P/Es are 11.9 and 10.2. I’m moving PWR from Strong Buy to Hold until the stock begins to show some strength. Hold.
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 18.6% and 21.4% in 2018 and 2019. The corresponding P/Es are 14.7 and 12.1. LUV is trading in the low 60’s, with price resistance at its January high near 66. A typical surge in airline stocks during the fourth quarter could push LUV to new highs before year end. 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 posted an October Investor Presentation on their website. SUPN is an undervalued, small-cap aggressive growth stock. Analysts expect EPS to increase 49.2% and 30.3% in 2018 and 2019. The corresponding P/Es are 25.5 and 19.6. SUPN is bouncing upward with price resistance at 55 and 60. 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. Voya is expected to report third quarter EPS of $1.18, within a range of $1.13-$1.22, on the afternoon of October 30. The company will host an Analyst Day on November 13, which could easily generate new and bullish research reports for Voya. The biggest question among institutional investors is whether Voya might sell its life insurance division. It seems not to be a problematic piece of the company, although the life division might be sold if an attractive price is offered.
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 12.0 and 9.6. VOYA just rose above upside resistance at 51 and 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 3.3%) 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. BB&T is expected to report third quarter EPS of $1.00, within a range of $0.96-$1.03, on the morning of October 18. The market expects BB&T to make a significant acquisition in the coming year. Analysts expect full year EPS to grow 41.9% and 9.6% in 2018 and 2019. Corresponding P/Es are 12.4 and 11.3. The stock fell through price support recently, so it will be a while before it resumes trading between 50 and 55. 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. Blackstone is expected to report third quarter economic net income (ENI)** of $0.75, within a range of $0.69-$0.81, on the morning of October 18. Presuming that Blackstone does not become a C-corp, analysts expect Blackstone’s full year ENI to grow 10.0% and 5.2% in 2018 and 2019. The P/Es are 12.1 and 11.5, and the stock is fairly valued. If BX drops to 35 and stabilizes there, I’ll likely recommend that investors buy. Hold.
*The payout varies each quarter, with the total of the last four announced payouts yielding 6.0%.
**As of first quarter 2016, Blackstone no longer issues its earnings release via a third-party newswire. Blackstone continues to distribute earnings releases via other existing channels, including its website, email lists and Twitter account.
Comerica (CMA – yield 2.6%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Comerica is one of the most asset-sensitive banks in the U.S., with a very high percentage of variable rate loans, thus benefiting from rising interest rates. Comerica is expected to report third quarter EPS of $1.77, within a range of $1.69-$1.85, on the morning of October 16. Analysts now expect full year EPS to increase by 48.1% and 12.6% in 2018 and 2019. The corresponding P/Es are 13.0 and 11.6. CMA is an undervalued growth & income stock. Concerns about lower third quarter loan balances have pushed the stock toward the bottom of its 2018 range, between 88 and 102. Buy.
Commercial Metals Company (CMC – yield 2.4%) 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. The company is expected to report fourth quarter EPS of $0.46, within a range of $0.34-$0.59, on the morning of October 25 (August year-end). That’s a very wide range of earnings estimates coming from eleven Wall Street analysts, and therefore lots of investors will be watching and reacting. I expect a big price swing when results are reported. Quarterly revenue is expected to be $1.3 billion, within a range of $1.2-$1.5 billion.
CMC is an undervalued aggressive growth stock. Wall Street analysts expect full year EPS to grow 101% and 58.7% in 2018 and 2019. The 2019 P/E is 8.8. Analysts are being cautious, with the August year end 2018 estimates coming down a little in recent weeks. An upside earnings surprise could generate a big uptick. The share price is languishing, with upside resistance at 22.5. Strong Buy.
Delta Air Lines (DAL – yield 2.7%) is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. The company participates in multiple joint ventures with foreign airlines, and recently increased its stake in Mexico’s Grupo Aeromexico to 49%. Delta was named World’s Most On-Time Airline in 2017 by FlightGlobal. Delta Air Lines was featured in the October issue of Cabot Undervalued Stocks Advisor.
Delta is expected to report third quarter EPS of $1.76, within a range of $1.70-$1.80, on the morning of October 11. Despite wide fluctuations in 2018 energy prices, Delta expects to achieve margin expansion in late 2018, contributing to annual profit growth. Wall Street expects Delta’s full year EPS to grow from $4.93 in 2017 to $5.55 in 2018 and $6.47 in 2019, reflecting strong EPS growth rates of 12.6% and 16.6% in 2018 and 2019. (Earnings estimates came down a bit from last week.)
DAL is both a growth stock and a value stock. The stock’s 2018 and 2019 price/earnings ratios (PEs) are quite low at 9.5 and 8.1 respectively, leaving lots of room for share price increases before anybody considers the stock to be overvalued.
DAL has traded sideways since reaching a new all-time high in January 2018. The stock briefly reached a new peak in September, and then pulled back. When DAL rises above 59, that will signal a new run-up that could easily bring DAL into the mid-to-upper 60’s over the next three-to-twelve months. Strong Buy.
DowDuPont (DWDP – yield 2.4%) is expected to report third quarter EPS of $0.72, within a range of $0.65-$0.80, on the morning of November 1. DowDuPont 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.
The company is expected to see strong full year EPS growth rates of 23.2% and 16.7% in 2018 and 2019. The corresponding P/Es are 15.3 and 13.1. News of higher ethane prices—a feedstock for various DowDuPont products—pushed DWDP down toward the bottom of its 2018 trading range in recent weeks. This is a perfect time to buy low on DWDP and lock in a slightly higher yield. I expect additional capital appreciation in 2019 as the spin-offs take place. Strong Buy.
GameStop (GME – yield 10.1%) is a potential buyout candidate. Management states that they are actively pursuing a strategic review, which could lead to the sale of the company. There’s upside price resistance at 16.75 and again at 18. Hold.
Guess?, Inc. (GES – yield 4.2%) 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 55.7% and 22.0% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 19.7 and 16.1. 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. Interpublic is expected to report third quarter EPS of $0.47, within a range of $0.45-$0.49, on the morning of October 19. 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.
Regions Financial Corp. (RF – yield 3.0%) is an Alabama-based superregional bank serving the South, Texas and the Midwest via 1,500 banking offices. The bank offers commercial and consumer loans, wealth management, and insurance products and services.
Regions is expected to report third quarter EPS of $0.36 within a range of $0.34-$0.38 on the morning of October 23, which ostensibly includes a notable increase in third quarter net interest income and also a nice drop in both operating expenses and the outstanding share count. Full year EPS are expected to increase by 31.5% and 10.6% in 2018 and 2019. The corresponding price/earnings ratios (PEs) are 13.1 and 11.8.
RF 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.
Schlumberger (SLB – yield 3.2%) 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 1,052, up 116 vs. a year ago. Schlumberger is expected to report third quarter EPS of $0.46, within a range of $0.44-$0.49, on the morning of October 19. SLB is an aggressive growth stock, undervalued based on 2019 numbers. Earnings estimates for 2019 have been trending downward in recent months. Analysts now expect full year EPS to grow 20.0% and 38.9% in 2018 and 2019. The corresponding P/Es are 35.0 and 25.2. The share price is rising from recent lows, though lacking a certain gusto. I’m moving SLB from Hold to Buy, and will consider a Strong Buy when price action appears to gain momentum. There’s a little price resistance at 65, and more at 69. Buy SLB now and expect volatility. Buy.
Total S.A. (TOT – yield 4.8%) is a French multinational oil and gas company—one of the industry’s seven “supermajors”—operating in over 130 countries. Total will report third quarter 2018 results on October 26. Consensus earnings estimates jumped last week. Analysts now expect full year EPS to grow 33.3% and 19.9% in 2018 and 2019. The corresponding P/Es are low in comparison at 11.6 and 9.7. The stock rose above its trading range in late September, then pulled back. Buy TOT now before the run-up commences. Strong Buy.
WestRock Company (WRK – yield 3.4%) is a global packaging and container company. WRK is an undervalued growth & income stock. WestRock is expected to report fourth quarter EPS of $1.26, within a range of $1.20-$1.29, on the morning of November 5 (September year end). Analysts expect full year EPS to increase 55.0% and 12.3% in 2018 and 2019. The corresponding P/Es are 12.1 and 11.1. I’m moving WRK from Strong Buy to Hold until the share price stabilizes. Hold.
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 Pharmaceuticals was featured in the October issue of Cabot Undervalued Stocks Advisor. The company is expected to report third quarter EPS of $1.74, within a range of $1.56-$1.96, on the morning of October 24. ALXN is an undervalued aggressive growth stock. Potential net income from the Syntimmune acquisition and from the new Soliris label indication is not yet figured into consensus earnings estimates. Analysts expect full year EPS to grow 23.4% and 18.5%. The corresponding P/Es are 18.1 and 15.3.
ALXN rose rapidly in September to price resistance at about 137. Buy on pullbacks. The best -case scenario this year—barring a takeover offer—is that ALXN could rise to the upper 140s by year end, where it will still be undervalued. Buy.
Baker Hughes, a GE co. (BHGE – yield 2.3%) 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 1,052, up 116 vs. a year ago. Baker Hughes is expected to report third quarter EPS of $0.21, within a range of $0.18-$0.24, on the morning of October 25. The company announced a small dividend increase in October 2017, but there’s no long-term track record that would help us know whether the company is likely to do so again this month.
BHGE is an undervalued aggressive growth stock with a very low debt-to-market cap ratio. Analysts expect full year EPS to grow 67.4% and 106% in 2018 and 2019. The corresponding P/Es are 44.3 and 21.6. 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 2.4%) 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. Earnings estimates fluctuate weekly, and have remained within a consistent range since late-July. Analysts now expect EPS to grow 368% and 55.5% in 2018 and 2019. The corresponding P/Es are ridiculously low at 8.2 and 5.3. I’ll move DK back to a Buy recommendation when the price action becomes more bullish. Hold.
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 12.6% in 2019. I’m moving Skechers from Strong Buy to Buy due to the slowing earnings growth outlook. That decision could easily change in either direction this month, once Skechers reports third quarter results and their fourth quarter outlook. The stock has recently traded between 26 and 30. Buy.
Synchrony Financial (SYF – yield 2.7%) 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 is expected to report third quarter EPS of $0.81, within a range of $0.72-$0.90, on the morning of October 19. Full year EPS are expected to increase by 31.3% and 31.1% in 2018 and 2019 (December year end). The corresponding price/earnings ratios (P/Es) are extremely low at 9.1 and 6.9. The stock rose 10% in September then gave it all back at the end of the month. I expect SYF will continue to trade between 31 and 34 in October. My price target on SYF is 40, where the stock reached an all-time high in January. Strong Buy.
TiVo (TIVO – yield 5.8%) 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. UEIC is an undervalued micro-cap stock. UEIC has been sliding down toward price support at 35. Strong Buy.
