As we continue marching through earnings season, we’ve had 15 companies report thus far, with only one—Regions Financial (RF)—missing consensus estimates by any appreciable amount. (And frankly, if you adjust the reported earnings for the unexpected $60 million donation to a charitable foundation, Regions’ quarterly EPS came in slightly above the consensus estimate.) During this current stock market correction—always an unnerving experience—it’s nice to know that there’s nothing bad happening within corporate America or amid the U.S. economy. (Bad things would be very obvious, in the form of earnings misses.) That’s important, because sometimes stock market corrections are directly associated with economic problems, but for today, I would consider the stock market correction to be somewhat random. We’re at or near the bottom—give it a little time to settle down.
Many of our stocks are sitting at annual lows. It’s okay for risk tolerant investors to buy such stocks, as long as the corporations themselves are healthy and thriving. However, I will continue to ask you to wait until January 2 to begin buying these stocks. Concentrate your current purchases on stocks with neutral-to-bullish price charts.
Last week I published a quick review of some famous stocks: Which of the 12 Most Popular Large-Cap Stocks Should I Buy Today?. These stocks are not undervalued, but lots of people own them. Stocks like Netflix (NFLX) and AT&T (T). If you’re reading the article, and questions come to mind, send me an email!
Today’s news:
• Baker Hughes (BHGE) changed their earnings release date.
• KLX Energy (KLXE) – cost basis allocation information is reported, below.
• WestRock (WRK) increased their quarterly dividend payout.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from October 24 in which I mentioned news, rating changes and/or price action on Alexion Pharmaceuticals (ALXN) and Knight-Swift Transportation (KNX).
Quarterly Earnings Release Calendar
October 30 am: Baker Hughes, a GE Co. (BHGE) – 3Q
October 30 pm: Voya Financial (VOYA) – 3Q
November 1 am: DowDuPont (DWDP), Marathon Petroleum (MPC), Quanta Services (PWR) and Stratasys (SSYS)* – 3Q and Lumentum (LITE)* -- 1Q
November 5 am: WestRock (WRK) – 4Q
November 6 am: Martin Marietta Materials (MLM)
November 6 pm: Delek US Holdings (DK) and Supernus Pharmaceuticals (SUPN) – 3Q
November 7 pm: TiVo (TIVO) – 3Q
November 8 am: D.R. Horton (DHI) – 4Q
November 8 pm: Universal Electronics (UEIC) – 3Q
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.
*Not featured in the current Cabot Undervalued Stocks Advisor portfolios.
Earnings Season Scorecard
Big earnings beat: Alexion Pharmaceuticals (ALXN), Comerica (CMA), Commercial Metals (CMC), Knight-Swift Transportation (KNX), Skechers (SKX) and Synchrony Financial (SYF)
Earnings within 5% of consensus estimate: BB&T Corp. (BBT), Blackstone Group (BX), CIT Group (CIT), Delta Air Lines (DAL), Interpublic Group (IPG), Schlumberger (SLB), Southwest Airlines (LUV) and Total S.A. (TOT)
Big earnings miss: Regions Financial (RF)
Today’s Portfolio Changes:
Knight-Swift Transportation (KNX) moves from Hold to Buy.
Southwest Airlines (LUV) moves from Strong Buy to Hold.
Synchrony Financial (SYF) moves from Strong Buy to Hold.
Last Week’s Portfolio Changes:
Baker Hughes, a GE Co. (BHGE) moves from Strong Buy to Hold.
DowDuPont (DWDP) moves from Strong Buy to Hold.
Marathon Petroleum (MPC) moves from Strong Buy to Hold
Regions Financial (RF) moves from Strong Buy to Hold.
Voya Financial (VOYA) moves from Strong Buy to Hold.
Updates on Growth Portfolio Stocks
CIT Group (CIT – yield 2.2%) 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 and an attractive dividend yield. CIT Group was featured in the October issue of Cabot Undervalued Stocks Advisor. I will consider a Buy recommendation when the price chart stabilizes. Hold.
D.R. Horton (DHI – yield 1.4%) is America’s largest homebuilder, also providing mortgage, insurance and title services. The company is expected to report fourth-quarter EPS of $1.22, within a range of $1.17-$1.31, on the morning of November 8 (September year end). Revenue is expected to be $4.6 billion, within a range of $4.5-$4.8 billion. 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. I will most likely return DHI to a Buy recommendation at the end of tax loss selling season. Hold.
KLX Energy Services Holdings (KLXE) pre-announced adjusted third-quarter EPS of $0.96, reflecting combined profit from KLX Energy Services and the newly-acquired Motley Services.
KLX Inc. posted an IRS form 8937 pertaining to the spin-off of KLX Energy from KLX Inc.
• “The Company expects the Distribution … will be treated as a return of capital … which will reduce a holder’s basis in its Company stock.”
• “The amount of the distribution will be the fair market value of the KLX Energy shares on the distribution date [September 14, 2018]. One reasonable method [of valuation] would be to value such shares at their average trading price on the date of the Distribution…”
• According to StockCharts.com, the average trading price of KLX Energy (KLXE) on the September 14, 2018 distribution date was $27.88.
• Investors received four shares of KLXE for each share of KLXI that they owned on September 14, 2018.
• An investor who owned 100 shares of KLXI and received 40 shares of KLXE would therefore reduce the cost basis of their KLXI shares by $11.15 per share:
(40 shares of KLXE) x ($27.88 per share) = $1,115.20 return of capital
• $1,115.20 divided by 100 shares of KLXI = $11.15 return of capital per KLXI share.
Cost basis allocation example: If you paid $61 per share for KLXI and held your shares for the KLXE distribution, your cost basis on KLXI is reduced by $11.15. The new KLXI cost basis is $49.85 per share. And your cost basis on KLXE is $27.88 per share. (I am not an accountant. Ask your accountant to review the IRS form 8937.)
I will likely retire KLXE from the Growth Portfolio shortly, because there is not enough financial information available on the company to meet my normal research requirements. Hold.
Knight-Swift Transportation Holdings (KNX – yield 0.7%) is a truckload carrier and an undervalued industry leader with an exemplary management team. The company’s CEO and CFO will present at the 2018 Stephens NY Investment Conference on November 7. KNX is a mid-cap aggressive growth stock. Earnings estimates rose subsequent to last week’s strong third-quarter earnings report. Analysts now expect full-year EPS growth of 74.1% and 14.9% in 2018 and 2019. The 2019 P/E is 11.9. The third-quarter debt-to-capitalization ratio is quite low at 14.3%. The share price has stabilized in advance of most stocks during this market correction. I’m moving KNX from Hold to Buy. I anticipate a near-term trading range between 31 and 37. Buy.
Marathon Petroleum (MPC – yield 2.7%) 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 expected to report third quarter EPS of $1.70, within a range of $1.64-$1.81, on the morning of November 1. Analysts expect revenue of $23.6 billion, within a range of $21.3-$25.8 billion. Marathon will host an Investor Day on December 4 that should update data on expected cost synergies associated with the Andeavor acquisition and the company’s business prognosis. Expect a rash of new Wall Street research reports immediately following the event, with potential good news bringing more investors in off the sidelines. Hold.
Martin Marietta Materials (MLM – yield 1.2%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. Management is bullish on the construction recovery in the U.S. accelerating in the second half of 2018 and continuing next year. The company is expected to report third quarter EPS of $2.79, within a range of $2.30-$3.26, on the morning of November 6. Revenue is expected to be $1.2 billion, within a range of $1.1-$1.3 billion. MLM is an undervalued growth stock. The price chart remains bearish. I anticipate a strong rebound in January, once tax-loss selling is over. Hold.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. The company is expected to report third-quarter EPS of $0.97, within a range $0.87-$1.10, on the morning of November 1. Quanta will present at the Stephens NY Investment Conference on November 6 and at the Baird Industrials Conference on November 7. I will return PWR to a Buy recommendation when the price chart stabilizes. Hold.
Southwest Airlines (LUV – yield 1.3%) 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. Last week, Southwest Airlines reported third-quarter EPS of $1.08 vs. the consensus estimate of $1.06. Revenue of $5.6 billion came in on target. CEO Gary Kelly stated, “The significant increase in our [record] third-quarter 2018 earnings per diluted share was driven by record third-quarter operating revenues, lower federal income taxes, and a 4.8 percent year-over-year reduction in share count. Despite higher jet fuel prices and other cost pressures, we grew our third-quarter 2018 net margin, year-over-year, which is a notable accomplishment.”
The stock fell last week with the weak market. I’m moving LUV from Strong Buy to Hold while we wait for the market and LUV to commence a rebound. Hold.
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. Supernus is expected to report third-quarter EPS of $0.39, within a range of $0.23-$0.49, on the afternoon of November 6. SUPN is an undervalued, small-cap aggressive growth stock. Analysts expect EPS to increase 46.8% and 31.9% in 2018 and 2019. The corresponding P/Es are 25.6 and 19.4. The stock is trading between 46 and 50, with additional price resistance at 55. 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 in which Voya will highlight their business plan through 2021. Investors should therefore expect a slew of new and bullish research reports that generate additional investor interest in the stock. Hold.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 3.4%) is a 145-year-old financial holding company with $222.9 billion in assets and 1,900 financial centers that serve businesses and individuals. CEO Kelly King spoke with CNBC at length about third-quarter loan performance. BB&T will host an Investor Day on Wednesday, November 14. Analysts expect full year EPS to grow 42.3% and 9.8% in 2018 and 2019. The 2019 P/E is 10.8. I will likely recommend purchase of BBT when the share price stabilizes. Hold.
Blackstone Group LP (BX – yield 7.5%*) is the world’s largest and most diversified alternative asset manager with $456.7 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, hedge funds and real estate. Presuming that Blackstone does not become a C-corp, analysts expect Blackstone’s full year ENI to grow 6.0% and 8.7% in 2018 and 2019. The 2019 P/E is 9.9.
BX is an extremely attractive investment for yield investors and growth & income investors. Buy now while BX is at the bottom of a stable trading range and lock in the higher yield, while awaiting the share price rebound as the broader stock market recovers. Speculative investors have an opportunity to make even more profit if BX converts from an L.P. to a C-corp. next year. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.42 and yielding 7.5%.
Comerica (CMA – yield 3.0%) 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 variable rate loans amounting to almost 90% of total loans, and non-interest bearing deposits totaling 52% of all deposits, thus benefiting from rising interest rates.
Last week, the 2018 earnings estimate rose to its highest level this year. Wall Street now expects EPS to increase by 50.4% and 11.9% in 2018 and 2019. The 2019 P/E is 10.1. CMA is an undervalued growth & income stock. The stock is cheap and the share price needs to stabilize further: expect volatility. I expect CMA to perform very well beginning in January, after tax-loss selling subsides. Buy.
Commercial Metals Company (CMC – yield 2.6%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Last week, the company reported fourth-quarter EPS of $0.51, far above all analysts’ estimates (August year-end). Revenue of $1.3 billion came in on target. CEO Barbara Smith commented, “Our team delivered on many key strategic initiatives during 2018 producing record volumes during this period of strong demand and improving margins. As we look forward to the strong economic environment continuing and the opportunities on the horizon, I am confident we will continue to deliver exceptional results for our stakeholders. …We also completed construction and commissioning of our second micro mill in Durant, OK, becoming the first producer of hot spooled rebar in the United States. We also had record levels of shipments of steel products from our operations in the U.S. and Poland and achieved our lowest safety incident rate in the history of CMC.” I’ll move CMC to a Buy recommendation after the price chart turns bullish. Hold.
Delta Air Lines (DAL – yield 2.6%) is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. Delta Air Lines was featured in the October issue of Cabot Undervalued Stocks Advisor. Wall Street expects Delta’s full-year EPS to grow from $4.93 in 2017 to $5.53 in 2018 and $6.28 in 2019, reflecting growth rates of 12.2% and 13.6% in 2018 and 2019. The 2019 P/E is 8.7. Full-year 2018 revenue is expected to rise about 8%, and margins are expected to increase in 2019. DAL has traded sideways, between 48 and 60, since reaching a new all-time high in January 2018. There’s 10% upside within the stock’s steady trading range, and additional capital gain opportunities thereafter. Strong Buy.
DowDuPont (DWDP – yield 2.9%) intends to break up into three companies by June 2019. DWDP is an undervalued growth stock with an attractive dividend yield. Analysts expect third-quarter EPS of $0.72, within a range of $0.64-$0.80, to be reported on the morning of November 1. Quarterly revenue is expected to be $20.2 billion, within a range of $19.4-$20.6 billion.
Demand and pricing for ethane—a DowDuPont product—waned in October vs. September, primarily due to unscheduled outages in ethylene production. (Ethane is a feedstock in ethylene and polyethylene production. Ethane pricing is still much higher than in early 2018.) Both the outages and the lower ethane pricing are seen as temporary. In addition, inventory drawdowns in polyethylene will likely create additional demand for ethane in the near term. Hold.
GameStop (GME – yield 10.4%) 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 19.3 and 15.8. GES is not moving in sync with the correction in the broader stock market, and is therefore likely to rise much sooner than most stocks. Buy GES now. Strong Buy.
Regions Financial Corp. (RF – yield 3.4%) 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’ third-quarter featured increases in loans and leases, and in net interest income and margins; and decreases in non-performing loans and non-interest expenses vs. the second quarter of 2018. The 2018 consensus earnings estimate rose nicely last week. Analysts now expect EPS to increase 38.0% and 6.0% in 2018 and 2019. The 2019 P/E is 10.4. As with so many stocks affected by the current market downturn, I expect RF to remain low throughout tax-loss selling season, then to rebound well in January when the selling pressure is gone. Patient investors can buy now to lock in the higher yield. Hold.
Schlumberger (SLB – yield 3.8%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas rose by one last week to a total of 1,068, up 159 vs. a year ago. Earnings estimates have been trending downward in recent months. Analysts now expect full-year EPS to grow 14.7% and 30.2% in 2018 and 2019. The 2019 P/E is 23.5. The share price has been weak and is not yet ready to rebound. Patient investors can accumulate shares while locking in the attractive yield. Buy.
Total S.A. (TOT – yield 5.2%) is a French multinational oil and gas company—one of the industry’s seven “supermajors” – operating in over 130 countries. Total reported third-quarter EPS of $1.47, surpassing the consensus estimate of $1.43. Highlights from the quarter included, record energy production, highest free cash flow (FCF) in a dozen years; and share repurchases escalating from $300 million in the second quarter of 2018 to $400 million in the third quarter, with an expectation of $500 million in the fourth quarter. Analysts expect full-year EPS to grow 32.5% and 18.9% in 2018 and 2019. The 2019 PE is 8.9. The stock is at the bottom of a seven-month trading range. Buy TOT now and lock in the resulting higher dividend yield. Strong Buy.
WestRock Company (WRK – yield 4.4%) is a global packaging and container company. Last week, WestRock announced an increase in the quarterly dividend payout from 43 cents per share to 45.5 cents. WRK is an undervalued growth & income stock. WestRock is expected to report fourth-quarter EPS of $1.25, within a range of $1.20-$1.29, on the morning of November 5 (September year end). Revenue is expected to be $4.3 billion, within a range of $4.2-$4.4 billion. Investors may accumulate WRK now while the yield is over 4%, but I’m not giving the stock a Buy recommendation until WRK shows more price stability. 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. Full-year earnings estimates are now at their highest level all year. Analysts expect EPS to grow 28.7% and 14.9% in 2018 and 2019. The 2019 P/E is 13.4. ALXN shares are still trading within their 2018 range. The best-case scenario this year—barring a takeover offer—is that ALXN could rise to the upper 140s by year end. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 2.6%) offers products, services and digital solutions to the international oil and gas community. The number of U.S. rigs drilling for crude oil and natural gas rose by one last week to a total of 1,068, up 159 vs. a year ago. Baker Hughes is expected to report third quarter EPS of $0.21, within a range of $0.18-$0.22, on the morning of October 30. (The company changed the previously-announced reporting date from October 25 to October 30.) Revenue is expected to be $5.9 billion, within a range of $5.7-$6.0 billion. 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. Hold.
Delek U.S. Holdings (DK – yield 2.8%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. Delek is expected to report third-quarter EPS of $2.03, within a range of $1.90-$2.48, on the afternoon of November 6. Revenue is expected to be $2.6 billion, within a range of $2.4-$3.0 billion. Expect volatility. I’ll move DK back to a Buy recommendation when the share price stabilizes. 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 21.9% third-quarter year-over-year growth in China. Consensus earnings estimates rose again last week. Full year EPS are now expected to rise 3.9% and 8.1% in 2018 and 2019. SKX could easily trade anywhere between 26 and 33 in the coming weeks. Buy.
Synchrony Financial (SYF – yield 2.9%) is a consumer finance company with $56.5 billion in deposits and 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 2018 consensus earnings estimate rose to its highest point this year. Analysts now expect full-year EPS to increase by 35.9% and 24.4% in 2018 and 2019 (December year end). The 2019 P/E is 6.3. The stock is suffering along with the broader market. I’m moving SYF from Strong Buy to Hold until the price stabilizes. Hold.
TiVo (TIVO – yield 6.5%) creates products and licensable technology that enable the world’s leading media and entertainment providers to nurture more meaningful relationships with their audiences. The company plans to announce third-quarter results on the afternoon of November 7. 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. Risk-tolerant investors could buy now with an expectation of an M&A announcement. 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 report third-quarter results on the afternoon of November 8. UEIC is an undervalued micro-cap stock, appropriate for aggressive growth investors. The stock moves rapidly when earnings are announced. Strong Buy.
