The S&P 500 index continues to bounce near recent lows, as it slowly works its way through its second 10% U.S. stock market correction of 2018. It’s unusual to have two market corrections like this in the same year, and it doesn’t help that the depressed prices are being encouraged by tax-loss selling. I frankly expect a significant January rebound as selling pressure recedes.
Focus on quality, which abounds in both corporate balance sheets and the U.S. economy. There’s lots of good happening, and every reason to believe that most successful U.S. companies will continue to grow their revenues and profits in synch with the flourishing economy.
Here’s my November 19 article on homebuilder stocks, for additional perspective on the housing sector.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from November 13 in which I mentioned news, rating changes and/or price action on Baker Hughes, a GE Co. (BHGE) and Voya Financial (VOYA).
Today’s Portfolio Changes:
Commercial Metals (CMC) moves from Hold to Buy.
Delek U.S. Holdings (DK) moves from Hold to Buy.
WestRock (WRK) moves from Buy to Strong Buy.
Last Week’s Portfolio Changes:
Voya Financial (VOYA) moved from Buy to Strong Buy.
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. Last week, CIT revealed their new brand identity, which comes on the heels of a multi-year business transformation. CEO Ellen Alemany commented, “With a deep heritage and a renewed focus on our strategic direction, it was time to evolve our brand identity to reflect our position as a national bank aimed at empowering our customers to turn their ideas into outcomes.”
CIT is an undervalued aggressive growth stock with an attractive dividend yield. Consensus earnings estimates rose last week. Wall Street now expects EPS to grow 27.0% and 22.1% in 2018 and 2019. The 2019 P/E is 9.5. The worst seems to be over for the share price after its recent downturn. Given a few more weeks of price stability, I will then issue a Buy recommendation. Hold.
D.R. Horton (DHI – yield 1.7%) is America’s largest homebuilder by volume, operating in 27 states, and also providing mortgage and title services. Last week, D.R. Horton acquired the assets of Westport Homes, a builder in the Indianapolis and Fort Wayne, Indiana and Columbus, Ohio markets. Westport closed on 886 homes in the recent 12-month period, while D.R. Horton closed on 51,857 homes during fiscal 2018 (September year end).
Listen to this two-minute Yahoo Finance video clip in High Times for Homebuilder Stocks, featuring Tom Lee, head of research and co-founder of Fundstrat Global Advisors. Mr. Lee calls the profitability at homebuilding companies “incredible.” Importantly, he points out that rising interest rates are historically correlated with rising new home starts until interest rates hit about 8%, meaning that investor worries about current interest rate levels are misplaced. Compounding that bullish statistic is the upcoming 10-year surge in new home demand coming from millennials, which should fuel ongoing revenue & profit growth for homebuilders.
In addition, here’s a statistic that I’ll add to my permanent notes when I’m reviewing seasonal trading opportunities. Mr. Lee said that if you bought homebuilders stocks on October 20 and sold them on April 30, annually during the last 19 years, you would have earned an 18% average annual capital gain, beating the S&P 500 performance by 12.8% per year. That’s fascinating!
The company reported a 37.5% increase in full-year 2018 EPS (September year end). The brand new fiscal 2020 consensus estimate started out low and is already rising. Wall Street now expects EPS to increase 13.9% and 7.1% in fiscal 2019 and 2020. The 2019 P/E is 7.5. D.R. Horton raised the quarterly dividend this month 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). There’s only one analyst earnings estimate publicly available thus far on KLX Energy, with an expectation of 40% EPS growth and 28% revenue growth in fiscal 2020 (January year end). The market continues to ignore oilfield service company stocks. I expect that situation to turn around in January. Hold.
Knight-Swift Transportation Holdings (KNX – yield 0.8%) 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 11.8. I anticipate a near-term trading range between 31 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. According to MarketWatch, 100% of Wall Street analysts who cover MPC have a buy rating on the stock, with an average 12-month price target of $103.06, representing a 57% increase over the recent price of $65.44. CEO Gary Heminger recently stated on a conference call, “We believe current distillate trends, combined with the impact of changing IMO [International Maritime Organization] regulations around sulfur content, will support strong distillate demand well into the future, and we are well positioned given the investments we have made in our business over the last decade. As you may recall, MPC now has the highest coking and hydrocracking capacity in the U.S.”
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. As we recently experienced with Blackstone Group (BX) and Voya Financial (VOYA), Marathon’s Investor Day could easily ignite excitement about the company’s future and a pop in the share price.
MPC is an undervalued aggressive growth stock with an attractive dividend yield. Wall Street expects full-year EPS to grow 30.6% and 53.5% in 2018 and 2019. The 2019 P/E is 8.4. The stock is has not yet stabilized from its recent drop, and is revisiting lows from the market correction in February. 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 15.6% and 17.7% in 2018 and 2019. The 2019 P/E is 19.3. Martin Marietta Materials was featured in the November issue of Cabot Undervalued Stocks Advisor.
MLM is up about 23% from its October lows. The volatility has certainly been nerve-wracking. I continue to urge you to focus on the quality of the companies that you invest in, and always be aware that over the short term stock prices can double or fall in half! I expect MLM to continue trading between 165 and 200 through year end. I’ll likely give MLM a buy recommendation the next time it trades near 165. 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 as an undervalued growth stock. The latest consensus earnings estimates rose to their highest points all year. Wall Street now expects full-year EPS to grow 40.1% and 16.3% in 2018 and 2019. The 2019 P/E is 10.7. PWR is on an uptrend, and will likely trade between 33 and 37.5 in the coming weeks. 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. The recent drop in oil prices adds to Southwest’s profitability in the near term. Analysts expect EPS to grow 18.0% and 12.8% in 2018 and 2019. The 2019 P/E is 11.3. The stock continues to stabilize 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 the 30th Annual Piper Jaffray Healthcare Conference on November 27. Investors may access the webcasts from several November presentations on the company’s website.
SUPN is an undervalued, small-cap aggressive growth stock. Wall Street expects EPS to grow 48.4% and 29.9% in 2018 and 2019. The 2019 P/E is 18.1. 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 pleased the market with new profitability and dividend goals at their Investor Day last week, pushing 2019 consensus earnings estimates to their highest point to date.
VOYA is an undervalued aggressive growth stock. Analysts now expect full-year EPS to grow 108% and 36.6% in 2018 and 2019. The 2019 P/E is 8.2. The stock could easily trade between 43 to 49 in the near term, with additional price resistance at 55. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 3.1%) is a 145-year-old financial holding company with $222.9 billion in assets and 1,900 financial centers that serve businesses and individuals. You are welcome to access the presentations from BB&T’s November 14 Investor Day. CEO Kelly King is guiding the market away from the likelihood of a near-term bank acquisition, largely due to a lack of clearly beneficial opportunities, and BB&T’s current focus on growing its digital banking business. A Federal reserve proposal to simplify some banks’ regulatory requirements would benefit BB&T in several ways, allowing for reinvestment of capital into higher-yielding loans, increased share repurchases, lower compliance costs and higher earnings per share.
BBT is an undervalued growth & income stock. The 2019 consensus earnings estimate has risen to its highest point to date. Analysts now expect full-year EPS to grow 42.7% and 9.8% in 2018 and 2019. The 2019 P/E is 11.8. The stock is up about 13% since its October lows. A new trading range could be established soon, most likely between 48 and 52.5. Buy.
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. Last week, Jim Cramer on CNBC stated, “I’m endorsing [BX]. You got a nice yield and real smart guys. I think that that’s a decent situation.” Presuming that Blackstone does not become a C-corp, analysts expect Blackstone’s full-year ENI to grow 5.3% and 9.5% in 2018 and 2019. The 2019 P/E is 10.0.
BX is an extremely attractive investment for yield investors and growth & income investors. The stock could easily trade anywhere between 31.5 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 7.5%.
Comerica (CMA – yield 3.0%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Investors can expect Comerica to continue to make significant share repurchases and a dividend increase in 2019. 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 10.2. The stock will likely trade between 81 and 90 in the coming weeks. Buy CMA now. Buy.
Commercial Metals Company (CMC – yield 2.4%) 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 40.9% EPS growth in fiscal 2019, and the P/E is quite low at 9.5. The stock is now recovering from the market correction. I’m moving CMC from Hold to Buy. There’s upside price resistance at 22.5. Buy.
Delta Air Lines (DAL – yield 2.5%) is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. The recent drop in oil prices adds to Delta’s profitability in the near term. DAL is an undervalued growth & income stock. Analysts expect EPS to grow 12.2% and 15.4% in 2018 and 2019. The 2019 P/E is 8.8. DAL could trade anywhere between 53 and 60 in the coming weeks. Strong Buy.
DowDuPont (DWDP – yield 2.6%) intends to break up into three companies by June 2019: Corteva Agriscience, Dow Chemical, and DuPont. Moody’s just assigned a Baa1 investment grade rating to the new DuPont’s senior unsecured debt, citing excellent liquidity and an expectation for $2 billion in annual cash flow. The large amount of goodwill and intangible assets on DuPont’s balance sheet presents a possible risk of future write-offs. DowDuPont CEO Ed Breen has informed analysts that both Corteva Agriscience and Dow Chemical plan to repurchase shares after the spin-offs. The new DuPont will consider allocating capital toward acquisitions and/or share repurchases.
DWDP is an undervalued growth stock with an attractive dividend yield. Wall Street expects full-year EPS to grow 23.2% and 14.7% in 2018 and 2019. The 2019 P/E is 12.5. The stock will likely trade between 57 and 65 through year end. Buy.
GameStop (GME – yield 11.9%) is a potential buyout candidate. Management states that they are actively pursuing a strategic review, which could lead to the sale of the company. The stock is trading at the bottom of its six-month trading range. There’s upside price resistance at 16.75 and again at 18. Hold.
Guess?, Inc. (GES – yield 4.4%) 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 market expects Guess to report third-quarter EPS of $0.16, within a range of $0.15-$0.17, on the afternoon of November 28. Third-quarter revenue is expected to be $598.5 million, within a range of $576-$608 million. Guess’s fourth quarter will be a far more seasonally-significant quarter for the company, with the market expecting $0.75 EPS and $812.5 million revenue. When third-quarter results are reported, management’s updates on fourth-quarter revenue and profit projections will likely guide share price action the next day.
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 19.3 and 15.8. The stock is likely to trade between 20 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 3.5%) 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 10.2. I want to see RF stabilize and trade sideways before I give the stock a Buy recommendation. Hold.
Schlumberger (SLB – yield 4.1%) is the world’s largest oilfield service company. According to MarketWatch, 66% of Wall Street analysts who cover SLB have a buy rating on the stock, with an average 12-month price target of $71.83, representing a 49% increase over the recent price of $48.22.
The number of U.S. rigs drilling for crude oil and natural gas rose by one last week to a total of 1,082, up 167 vs. a year ago. SLB is expected to see EPS grow aggressively in 2019, at a rate of 30.2%. The 2019 P/E is 21.5. 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 5.3%) is a French multinational oil and gas company – one of the industry’s seven “supermajors” – operating in over 130 countries. Total and Sempra Energy signed a memorandum of understanding this month for the development of North American liquified natural gas (LNG) export projects in Louisiana and Baja California, Mexico. In addition, Total and the government of Papua New Guinea continue to make progress on plans to double liquefied natural gas (LNG) exports from the country. LNG is Papua New Guinea’s biggest export earner.
TOT is an undervalued growth & income stock with a large dividend yield. Analysts expect EPS to grow 32.0% and 10.7% in 2018 and 2019. The 2019 P/E is 9.4. The stock is stabilizing at the bottom of a seven-month trading range. Rising oil prices and dividend increases are each potential catalysts for the share price in 2019. Buy TOT now and lock in the high dividend yield while awaiting the rebound in the share price. Strong Buy.
WestRock Company (WRK – yield 3.9%) is a global packaging and container company. WRK is a growth & income stock. The company finished fiscal 2018 (September year end) with EPS rising 56.1% and is expected to see 2019 EPS rise 12.5%. The 2019 P/E is 10.1. WRK will likely trade between 44 and 54 through year end – that’s a wide trading range, so expect volatility. On November 6, I moved WRK from Hold to Buy, because the stock’s downturn alongside the correction in the broader market seemed to be over. I’m ready to upgrade my recommendation now to Strong Buy, as I witness improvements in the price chart. Traders, longer-term investors and dividend investors should buy now. 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. Investors may listen to the webcast of Alexion’s presentation at Credit Suisse’s 27th Annual Healthcare Conference on November 13. Analysts expect an updated report on ALXN1210 studies in the first quarter of 2019. Last week, Alexion received a buy recommendation from Zacks, and was featured in Tim Lutts’ Cabot Stock of the Week. Analysts expect EPS to grow 30.0% and 14.2% in 2018 and 2019. The 2019 P/E is 13.3. ALXN has solid seven-month price support near 115, and a wide trading range. Traders and risk-tolerant growth stock investors should buy ALXN now. Strong Buy.
Apple Inc. (AAPL – yield 1.6%) joined the Buy Low Opportunities Portfolio in the November issue of Cabot Undervalued Stocks Advisor, largely due to relatively ridiculous investor fears that iPhone sales are suffering. The excitement around Apple’s future growth revolves around its services – App Store, Licensing, Apple Care, iCloud -- which are delivering faster revenue growth and higher gross margins than Apple devices. The company is thriving!
Analysts expect fiscal 2019 EPS to rise 13.2% (September year end). AAPL is trading at price support that was established in May through July, with additional price support furnished by the $100 billion share repurchase authorization. There’s 23% upside as the stock retraces 230, where it last traded in October. Buy AAPL now. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 3.1%) 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 1,082, up 167 vs. a year ago. BHGE is an undervalued aggressive growth stock with an attractive dividend yield. Analysts expect full-year EPS to increase by 51.2% and 112% in 2018 and 2019. The 2019 P/E is 16.8.
According to MarketWatch, 75% of Wall Street analysts who cover BHGE have a buy rating on the stock, with an average 12-month price target of $36.84, representing an 60% increase over the recent price of $22.99. 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 2.5%) 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. Delek owns 63.4% of Delek Logistics Partners, LP (DKL), which operates through two segments: Pipelines and Transportation, and Wholesale Marketing and Terminalling. Read more about Delek Logistics in this November 2018 Investor Presentation.
DK is an extremely undervalued aggressive growth stock. Wall Street expects EPS to grow 310% and 46.8% in 2018 and 2019. The 2019 P/E is 5.9. DK is on an uptrend, most likely to trade between 37 and 46 in the coming weeks. I’m ready to move DK from Hold to Buy. DK could appeal to traders, growth investors and dividend investors. Buy.
Skechers USA Inc. (SKX) is an apparel company that designs and manufactures stylish, 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 an expectation of achieving $1 billion in revenue in China in a few short years, with continued expansion therein. Skechers is primarily focused on revenue growth, and willing to spend money to achieve that goal. As an aside, if U.S. tariffs on footwear emerge, Skechers is in a position to shift production to non-tariff countries, and also to capture market share from its higher-priced competitors. Full-year EPS are expected to rise 3.9% and 8.1% in 2018 and 2019. The stock continues to trade between 26 and 30. Traders should buy now. Buy.
Synchrony Financial (SYF – yield 3.3%) 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. Last week, Zacks published an article titled Six Reasons to Add Synchrony Financial (SYF) to Your Portfolio. If you review the article, be sure to click on the words “read more”, right below the price chart. In addition, The Motley Fool featured SYF in Three Ridiculously Cheap Stocks I’m Watching Right Now. 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 5.7.
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 7.1%) 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 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.
CEO Paul Arling stated on the quarterly conference call, “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.
UEIC is an undervalued micro-cap stock, appropriate for risk-tolerant investors and traders. The share price rose about 15% in response to increases in 2019 revenue guidance and alleviation of concerns regarding tariffs. The two analysts who are contributing to the consensus estimate are currently expecting 16.1% EPS growth and 7% revenue growth in 2019. The stock will likely trade between 33 and 39 in the coming weeks. Strong Buy.
