Our portfolio stocks achieved another successful quarter of results, generally pleasing Wall Street with upside surprises as opposed to earnings disappointments or news of corporate difficulties. Nevertheless, 2018 has been a difficult year for stock investors, with the S&P 500 index delivering two 10% corrections. The best of companies can easily have their share prices languish for months on end, as we’ve seen all year.
While experienced investors bide their time, awaiting a new year and a change in stock market performance, newer investors wonder, “What’s wrong with my stock?” The answer is that over the short term, stocks can move rapidly and even illogically in either direction, often buffeted about by news headlines pertaining to politics, economics and natural disasters. Over multi-year time periods, share price performance tends to correlate with corporate earnings growth, and that’s why I will stick with companies that are projected to deliver 15% or better annual earnings per share (EPS) growth. There are some nuances to that formula, and special situations, of course. But all in all, I’m not having any difficulty identifying many dozens of companies with strong earnings growth and relatively low valuations. Therefore, my only remaining criteria for stock market success is patience.
Markets will strengthen again, bringing waves of capital gains. I intend to stay the course and await those opportunistic moments.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from November 8 in which I mentioned news, rating changes and/or price action on Delek U.S. Holdings (DK), D.R. Horton (DHI), Supernus Pharmaceuticals (SUPN) and TiVo (TIVO).
Final Earnings Season Scorecard
Big earnings beats: Alexion Pharmaceuticals (ALXN), Comerica (CMA), Commercial Metals (CMC), Knight-Swift Transportation (KNX), Skechers (SKX), Supernus Pharmaceuticals (SUPN), Synchrony Financial (SYF) and Voya Financial (VOYA).
Earnings within 5% of consensus estimates: BB&T Corp. (BBT), Baker Hughes (BHGE), Blackstone Group (BX), CIT Group (CIT), Delek U.S. Holdings (DK), Delta Air Lines (DAL), DowDuPont (DWDP), D.R. Horton (DHI), Interpublic Group (IPG), Marathon Petroleum (MPC), Martin Marietta Materials (MLM), Schlumberger (SLB), Southwest Airlines (LUV), Total S.A. (TOT), Universal Electronics (UEIC) and WestRock (WRK).
Big earnings misses: Quanta Services (PWR), Regions Financial (RF) and TiVo (TIVO).
Today’s Portfolio Changes:
(none)
Last Week’s Portfolio Changes:
Apple (AAPL) joined the Buy Low Opportunities Portfolio as a Strong Buy.
BB&T (BBT) moved from Hold to Buy.
WestRock (WRK) moved from Hold to Buy.
Updates on Growth Portfolio Stocks
CIT Group (CIT – yield 2.1%) 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 is an undervalued aggressive growth stock with an attractive dividend yield. Wall Street expects EPS to grow 24.4% and 25.4% in 2018 and 2019. The 2019 P/E is 9.7. The worst seems to be over for the share price after its recent downturn. I’d like to see it remain stable before giving the stock a Buy recommendation. Hold.
D.R. Horton (DHI – yield 1.8%) is America’s largest homebuilder, also providing mortgage, insurance and title services. The company reported a 37.5% increase in full-year 2018 earnings per share (EPS) last week (September year end). Wall Street expects fiscal 2019 EPS to increase 15.7%, and the P/E is 7.7. D.R. Horton raised the quarterly dividend last week by 20%, from 12.5 cents per share to 15 cents. I continue to expect DHI to remain low until tax-loss selling season is over, at which time a January rebound could easily play out among DHI and many other companies with strong fundamentals. Hold.
KLX Energy Services Holdings (KLXE) recently spun off from KLX Inc. (KLXI). 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 the largest full truckload carrier in North America and an industry leader with an exemplary management team. KNX is an undervalued mid-cap growth stock. Analysts expect EPS growth of 71% and 14.4% in 2018 and 2019. The 2019 P/E is 12.4. I anticipate a near-term trading range between 32 and 37. Traders can probably sell at 37 and then buy back at a lower price. Buy.
Marathon Petroleum (MPC – yield 2.8%) is a leading, integrated, downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interests in two midstream companies, 10,000 miles of oil pipelines, and product sales in 11,700 retail stores. Marathon will host an Investor Day on December 4 that should update data on expected cost synergies associated with the Andeavor acquisition, a potential combination of the Marathon and Andeavor MLPs, and guidance for the fourth quarter and 2019 financial outlook.
MPC is an undervalued aggressive growth stock with an attractive dividend yield. Wall Street expects full year EPS to grow 30.3% and 52.1% in 2018 and 2019. The 2019 P/E is 8.7. The stock is attempting to stabilize from its recent drop. Buy.
Martin Marietta Materials (MLM – yield 1.0%) is a supplier of stone, sand, gravel, cement, concrete and asphalt. The company foresees a continuing growth trajectory, fueled by strong demand combined with increased government spending. Wall Street expects EPS to grow 14.9% and 19.2% in 2018 and 2019. The 2019 P/E is 18.7. Martin Marietta Materials was featured in the November issue of Cabot Undervalued Stocks Advisor.
MLM is an undervalued growth stock. Many stocks have suffered this year, despite their strong balance sheet results, and MLM is no exception. I expect the stock to trade between 165 and 200 through year end. Hold.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Quanta will present at the Credit Suisse Industrials Conference on November 28. PWR is an undervalued growth stock. Wall Street expects full-year EPS to grow 40.1% and 15.6% in 2018 and 2019. The 2019 P/E is 10.9. PWR rose rapidly after the third quarter earnings release. A pullback to 33.5 would be perfectly normal, and a great time to buy PWR. Buy.
Southwest Airlines (LUV – yield 1.2%) 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. Analysts expect EPS to grow 18.0% and 12.6% in 2018 and 2019. The 2019 P/E is 11.3. The stock needs to continue stabilizing after its recent downturn. 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 and migraine. Three treatments for ADHD and bipolar disorder are currently in trial phases. Supernus will present at three healthcare conferences on November 13, 15 and 27.
SUPN is an undervalued, small-cap aggressive growth stock. Wall Street expects EPS to grow 46.8% and 34.6% in 2018 and 2019. The 2019 P/E is 18.2. The stock suffered in the recent market downturn. Investors should expect SUPN to trade between 42 and 50 for a little while as it gets its bearings. Risk-tolerant growth stock investors and traders could benefit by purchasing shares in the lower portion of the trading range. 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 an undervalued aggressive growth stock. The 2019 consensus earnings estimate is now at its highest point to date. Analysts expect full year EPS to grow 108% and 36.1% in 2018 and 2019. The 2019 P/E is 8.4. Voya will host an Investor Day on November 13 in which they will highlight their business plan through 2021. The stock could easily trade between 43 to 49 in the near term, with additional price resistance at 55. Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 3.2%) is a 145-year-old financial holding company with $222.9 billion in assets and 1,900 financial centers that serve businesses and individuals. BB&T will host an Investor Day on Wednesday, November 14, which could easily generate new research reports and investor interest in the stock. In addition, BB&T is widely expected to acquire another bank in the coming year, although how news of the acquisition will affect the BBT share price remains a mystery.
BBT is an undervalued growth & income stock. Analysts expect full-year EPS to grow 42.7% and 9.5% in 2018 and 2019. The 2019 P/E is 11.6. BBT is rising and could reach 52.5 before pulling back and establishing a new trading range. Buy.
Blackstone Group LP (BX – yield 7.3%*) 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. You may listen to Blackstone CFO Michael Chae’s presentation at the November 6 Bank of America Merrill Lynch Future of Financials Conference by clicking here. 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 10.5.
BX is an extremely attractive investment for yield investors and growth & income investors. The stock could easily trade anywhere between 33 and 36.5 in the coming weeks. Speculative investors have an opportunity for additional capital gains if BX converts from an L.P. to a C-corp. next year. Buy BX now. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.42 and yielding 7.3%.
Comerica (CMA – yield 2.8%) 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.
CMA is an undervalued growth & income stock. Wall Street expects EPS to increase by 50.4% and 11.9% in 2018 and 2019. The 2019 P/E is 10.6. The stock is rising within a short-term trading range between 83 and 90. Buy.
Commercial Metals Company (CMC – yield 2.5%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Recent full-year 2018 results delivered 110% EPS growth (August year end). Analysts are expecting another 34.2% EPS growth in fiscal 2019, and the P/E is quite low at 9.8. I’m weighing both the share price action (recovering from the market correction) and the improving fiscal 2020 earnings growth projections (currently 6.0%) as I decide how to proceed with the stock. Hold.
Delta Air Lines (DAL – yield 2.5%) is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. DAL is an undervalued growth & income stock. Analysts expect EPS to grow 12.2% and 14.1% in 2018 and 2019. The 2019 P/E is 9.0. DAL is rising toward price resistance at 60. A pullback to 54 would be normal, and a great buying opportunity. Strong Buy.
DowDuPont (DWDP – yield 2.6%) intends to break up into three companies by June 2019. DWDP is an undervalued growth stock with an attractive dividend yield. Wall Street expects full-year EPS to grow 20.5% and 17.8% in 2018 and 2019. The 2019 P/E is 12.3. The stock will likely trade between 54 and 64 through year end. Buy.
GameStop (GME – yield 10.6%) 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. GES is an undervalued aggressive growth stock with a big dividend yield. 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 19.8 and 16.2. The stock is likely to trade between 21 and 24 in the coming weeks, with additional capital appreciation as the broader market recovers from its recent drop. Buy GES now. Strong Buy.
Regions Financial Corp. (RF – yield 3.2%) 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. Analysts expect EPS to increase 40.7% and 4.6% in 2018 and 2019. The 2019 P/E is 10.8. I want to see RF trade sideways for a bit before I give the stock a Buy recommendation. In the interim, I’m guessing that 17 will be the bottom of the new trading range. Hold.
Schlumberger (SLB – yield 4.0%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas rose by 14 last week to a total of 1,081, up 174 vs. a year ago. SLB is expected to see EPS grow aggressively in 2019, at a rate of 32.5%. The 2019 P/E is 22.5. The share price has been weak and has not yet stabilized. 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. TOT is an undervalued growth stock with a large dividend yield. Analysts expect EPS to grow 32.5% and 15.9% in 2018 and 2019. The 2019 P/E is 9.1. The stock is stabilizing at the bottom of a seven-month trading range, trading between about 57 and 60.5. Buy TOT now and lock in the high dividend yield. Strong Buy.
WestRock Company (WRK – yield 4.0%) is a global packaging and container company. Analysts’ earnings estimates for WestRock do not fluctuate very much from month-to-month. The company finished fiscal 2018 (September year end) with EPS rising 56.1%, slightly higher than Wall Street had been projecting. Consensus estimates are coming back down to earth for fiscal 2019, expected to reflect 12.5% EPS growth, which is a fine growth rate for a growth & income stock. The 2019 P/E is 10.0. WRK will likely trade between 42 and 54 through year end. Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. The 2019 full-year consensus earnings estimate rose last week to its highest level all year. Analysts expect EPS to grow 30.0% and 14.2% in 2018 and 2019. The 2019 P/E is 14.2. The stock is most likely to trade between 119 and 139 in the near term. Buy ALXN now. Strong Buy.
Apple Inc. (AAPL – yield 1.5%) joined the Buy Low Opportunities Portfolio in the November issue of Cabot Undervalued Stocks Advisor. AAPL is a growth and income stock. Analysts expect fiscal 2019 EPS to rise 13.6% (September year end). As I mentioned last week, we could easily see the stock bounce at 195 a few times before it begins to recover. I would expect AAPL to rise toward 230 as the broader market recovers from the October downturn. Buy AAPL now. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 2.8%) offers products, services and digital solutions to the international oil and gas community. The company is benefitting from an ongoing energy sector uptrend in capital expenditures. The number of U.S. rigs drilling for crude oil and natural gas rose by 14 last week to a total of 1,081, up 174 vs. a year ago.
BHGE is an undervalued aggressive growth stock with an attractive dividend yield. Company management announced that they suspended share buybacks while awaiting potential reorganization decisions at majority owner General Electric Co. (GE). Baker Hughes declared their regular quarterly dividend last week. Analysts expect full year EPS to increase by 51.2% and 112% in 2018 and 2019. The 2019 P/E is 18.5.
Falling oil prices are spooking the stock market. BHGE will likely remain low until tax-loss selling season is past. Expect the selling pressure to be gone beginning January 2. Hold.
Delek U.S. Holdings (DK – yield 2.6%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. Delek expects to achieve much higher midstream EBIDTA by the year 2022—profits that contribute directly to cash flow. The company increased the quarterly dividend payout from $0.25 to $0.26 this month, and also announced a new $500 million share repurchase authorization.
DK is an extremely undervalued aggressive growth stock. Wall Street expects EPS to grow 322% and 43.6% in 2018 and 2019. The 2019 P/E is 5.7. DK will most likely trade between 37 and 46 in the coming weeks. I’ll move DK back to a Buy recommendation at some point between now and January 2, as the share price continues to stabilize. 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. Full-year EPS are expected to rise 3.9% and 8.1% in 2018 and 2019. The stock appears capable of soon moving past price resistance at 30 and heading toward 33. Buy.
Synchrony Financial (SYF – yield 3.0%) 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. Synchrony Financial was featured in the November issue of Cabot Undervalued Stocks Advisor.
SYF is a very undervalued aggressive growth stock with an attractive dividend yield. The company is currently enmeshed in a contract dispute with Wal-Mart (WMT), their former business partner. The dispute has not harmed Wall Street’s earnings outlook for Synchrony. Analysts expect full-year EPS to increase by 35.9% and 24.7% in 2018 and 2019 (December year end). The 2019 P/E is 6.2.
The share price remains weak, and due to tax-loss selling, will not likely begin to recover until January. At that time, I will likely give the stock a Strong Buy recommendation. 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. TIVO is an undervalued 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. Management stated, “It is our intention to complete the strategic review process by no later than our fourth quarter and year-end 2018 earnings call.” Risk-tolerant investors could buy now with the 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 reported third-quarter results last week that were on target with analysts’ estimates. New contracts were signed with Samsung Electronics and Sony Corp. Comcast remains Universal Electronics’ largest customer, making up 18% of the quarter’s revenue. Investors may access the quarterly webcast on the company’s website.
The company is moving its U.S.-bound production from China to Monterey, Mexico in order to circumvent tariffs, without increasing production costs. The move affects approximately 50% of annual revenues. The production transfer will continue during the first half of 2019. Products are currently being shipped to customers from the Monterey facility. In the next few months, the company plans to decide whether to consolidate Chinese production and possibly sell one of their two Chinese facilities.
CEO Paul Arling stated, “Building on our growing cloud-enabled systems, at the International CES 2019, we plan to introduce a new voice-enabled AI product platform that promises to unify entertainment control and home automation experience.”
The new product, named Nevo Butler, will configure all AV products in the home within seconds, and can work with any AV or home control or voice-enabled protocol. The average U.S. citizen consumes six hours of video per day, including just under five hours of live TV or time-shifted TV.
UEIC is an undervalued micro-cap stock, appropriate for risk-tolerant aggressive growth investors. The share price rose about 15% last week in response to increases in 2019 revenue guidance and alleviation of concerns regarding tariffs. The stock will likely trade between 34 and 39 in the coming weeks. Strong Buy.
