Following the second 10% U.S. stock market correction of 2018, stocks are trying to get their footing. We’re witnessing some large daily price swings, especially among energy stocks, which are being buffeted by falling oil prices.
I’m certainly encouraged that the S&P 500 price chart shows the market bouncing at identical price points in both October and November, which also happens to be the same places where the index bounced in April and May. Sure, we’re having a market correction, and that’s not any fun. But the consistency in the repetition of the market’s apparent maximum downside gives me hope that the situation will work itself out soon, as opposed to the market commencing a freefall. The S&P 500 price chart appears more solid right now than do the slightly weaker Dow Jones Industrial Average and distinctly weaker NASDAQ indexes.
As for the ever-popular FANG stocks and their close allies, here’s my quick assessment:
• Facebook (FB) offers only 1% 2019 earnings growth and the stock is trading at a low point for the year. Avoid FB. Shareholders could sell for a tax loss and move into AAPL or NFLX, depending on risk tolerance.
• Amazon (AMZN) and Netflix (NFLX) continue to offer great earnings growth and high valuations. AMZN shows signs of price stabilization, but NFLX continues to fall. If I were a risk-tolerant growth stock investor, I would plan to buy NFLX on January 2, after the selling is over.
• Alphabet (GOOGL) offers earnings growth of 12.5% in 2019, but I consider the stock to be overvalued. There’s decent price support around 1,000-1,020, so shareholders will not likely see the stock fall further this year. Shareholders could consider trading out at 1,130 and moving into a stock that offers better earnings growth and value.
• Apple (AAPL, Strong Buy) continues to offer attractive earnings growth, value and dividend yield.
• Twitter (TWTR) offers 10% earnings growth in 2019, a high P/E, and price support at 30. Traders could fare well with a two-month hold. Longer-term investors should fare better with NFLX, AMZN and AAPL.
I continue to anticipate a significant January rebound as selling pressure subsides.
If you’re bargain-hunting, please focus on quality companies. There’s no reason to buy shares of companies that lack earnings growth—e.g. General Electric (GE) and Facebook (FB) – when so many excellent stocks offer strong earnings growth in tandem with low prices.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Today’s Portfolio Changes:
CIT Group (CIT) moves from Hold to Buy.
Southwest Airlines (LUV) moves from Hold to Strong Buy.
Last Week’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.
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. The Equipment Leasing and Finance Association (ELFA) said that U.S. companies’ borrowing to spend on capital investment rose 6% in October, to $8.9 billion, vs. $8.4 billion in October 2017. The increase in spending was attributed to the expanding U.S. economy and lower corporate taxes, which frees up cash for business expansion. ELFA Chief Executive Ralph Petta stated, “October new business generation shows no apparent signs of slowing down, despite slight—and steady—increases in long-term interest rates and reports of tariff concerns.” Both CIT Group and BB&T Corp. (BBT) are among the 25 ELFA members who are included in the monthly survey.
CIT is an undervalued aggressive growth stock with an attractive dividend yield. Consensus earnings estimates rose again last week. Wall Street now expects EPS to grow 27.7% and 21.9% in 2018 and 2019. The 2019 P/E is 9.2. The worst seems to be over for the share price after its recent downturn. I expect CIT to trade between 43 and 49 in the coming weeks. I’m moving CIT from Hold to Buy. Buy.
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. The National Association of Realtors (NAR) reported that existing home sales rose 1.4% in Oct. vs. Sept., breaking a six-month decline. While I cannot vouch for the entire U.S., I do know that home sales volume is low in metro-Denver due to a lack of inventory. People aren’t moving, but when they do post a “for sale” sign, the home is sold promptly.
Wall Street expects EPS to increase 13.9% and 7.1% in fiscal 2019 and 2020 (September year end). The 2019 P/E is 8.2. I’m pleased with the recent price action and will consider giving the stock a buy recommendation after it shows continued stability. 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 0.7%) 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 12.1. 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 2.9%) 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. High inventory levels of gasoline are contributing to lower prices for consumers and depressing refiners’ stock prices.
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 30.3% and 51.7% in 2018 and 2019. The 2019 P/E is 8.0. The stock is tentatively beginning 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 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. The share price continues to improve. I expect MLM to trade between 180 and 210 in the coming weeks, although a brief drop down near 170 could still happen. 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 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 crude oil prices adds to Southwest’s profitability in the near term. Analysts expect EPS to grow 18.0% and 12.6% in 2018 and 2019. The 2019 P/E is 11.3. I’m moving LUV from Hold to Strong Buy, with a maximum upside of about 64 in the coming months, where the stock last traded in September. Buy LUV now. Strong 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 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 26.2% in 2018 and 2019. The 2019 P/E is 18.1. 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. 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 an undervalued aggressive growth stock. Analysts expect full-year EPS to grow 108% and 36.8% in 2018 and 2019. The 2019 P/E is 8.0. The stock could easily trade between 43 to 49 in the near term, with additional price resistance at 55. Buy VOYA now. 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. The Equipment Leasing and Finance Association (ELFA) said that U.S. companies’ borrowing to spend on capital investment rose 6% in October, to $8.9 billion, vs. $8.4 billion in October 2017. The increase in spending was attributed to the expanding U.S. economy and lower corporate taxes, which frees up cash for business expansion. ELFA Chief Executive Ralph Petta stated, “October new business generation shows no apparent signs of slowing down, despite slight—and steady—increases in long-term interest rates and reports of tariff concerns.” Both BB&T and CIT Group (CIT) are among the 25 ELFA members who are included in the monthly survey.
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 simply 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. Analysts expect full-year EPS to grow 42.7% and 9.8% in 2018 and 2019. The 2019 P/E is 11.5. The stock is recovering well from the October market drop. A brief price drop to 49 is still a possibility. A breakout past 52.5 would be bullish, with 54.5 likely being the maximum upside in the coming months. Buy.
Blackstone Group LP (BX – yield 7.0%*) 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 5.3% and 9.5% in 2018 and 2019. The 2019 P/E is 10.2.
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, with a maximum near-term upside of 39. Speculative investors have an opportunity for additional capital gains 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 7.0%.
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. Consensus earnings estimates are now at their highest point to date. Wall Street expects EPS to increase by 50.6% and 11.9% in 2018 and 2019. The 2019 P/E is 9.8. CMA bounced at 78 in October and November. I expect the stock to trade between 80 and 90 in the coming weeks. Buy CMA now. Buy.
Commercial Metals Company (CMC – yield 2.5%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Analysts expect 40.9% EPS growth in fiscal 2019 (August year end), and the P/E is quite low at 9.1. CMC is appropriate for traders, growth & income investors, and risk-tolerant growth investors. There’s upside price resistance at 22.5. Buy.
Delta Air Lines (DAL – yield 2.4%) is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. The recent drop in crude 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 9.0. I expect the stock to trade between 55 and 60 for a while, before eventually breaking past 60. Strong Buy.
DowDuPont (DWDP – yield 2.6%) intends to break up into three companies by June 2019: Corteva Agriscience, Dow Chemical, and DuPont. DowDuPont will present at the Citi Basic Materials Conference on November 27. DWDP is an undervalued growth stock with an attractive dividend yield. Wall Street expects EPS to grow 22.6% and 15.0% in 2018 and 2019. The 2019 P/E is 11.9. The stock will likely trade between 56 and 65 through year end. Buy DWDP now. Buy.
GameStop (GME – yield 10.5%) – Last week, GameStop agreed to sell its Spring Mobile division, which operates approximately 1,300 AT&T wireless stores, to Prime Communications L.P. for $700 million. GameStop continues its strategic review of additional business divisions. The company will report third-quarter results (January year end) on the afternoon of Thursday, November 29. The stock is reacting well to news of the Spring Mobile sale. 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. 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). The 2020 P/E is 15.5. The stock is likely to trade between 20 and 24 in the coming weeks, with additional capital appreciation as the broader market recovers from the correction. Please note: just in case GES shoots upward due to a strong earnings report, I would expect the share price not to exceed 24 for more than two business days. No matter how bullish the news, the stock will need to pull back and rest. 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. Cabot’s expert options analyst Jacob Mintz reported several million dollars of bullish option activity in RF, early last week. Analysts expect EPS to increase 40.7% and 4.6% in 2018 and 2019. The 2019 P/E is 10.0. RF is likely to trade between 15.75 and 17.75 in the near term. I want to see the stock acting more bullish, and the 2019 earnings estimate increase, before I give the stock a Buy recommendation. Hold.
Schlumberger (SLB – yield 4.3%) is the world’s largest oilfield service company. A dominant current theme in Middle East energy markets is one of energy producers operating near full capacity, and their willingness to spend money to increase capacity. This bodes well for international oilfield service companies like Schlumberger and Baker Hughes (BHGE).
The number of U.S. rigs drilling for crude oil and natural gas fell by three last week to a total of 1,079, up 156 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 20.7. 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 5.5%) 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 & income stock with a large dividend yield. Analysts expect EPS to grow 32.5% and 8.8% in 2018 and 2019. The 2019 P/E is 9.1. TOT is trading at its March 2018 lows (but not as low as February 2018). Rising oil prices and dividend increases are each potential catalysts for the share price in 2019. Buy TOT in order to 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. You might notice that a variety of stock market websites are listing the name of the company as WRKCO Inc., which is actually the name of a WestRock subsidiary. I don’t know the source of the error, but I imagine that the various websites will correct themselves in due time.
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 9.9. WRK will likely trade between 44 and 54 through year end. 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. Alexion will present at the Evercore ISI Healthcare Conference on November 27. 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. Analysts expect EPS to grow 30.0% and 14.2% in 2018 and 2019. The 2019 P/E is 13.6. 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 1.7%) joined the Buy Low Opportunities Portfolio in the November issue of Cabot Undervalued Stocks Advisor. 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.
Analysts expect fiscal 2019 EPS to rise 13.2% (September year end). AAPL is trading at first-half 2018 levels. The share price has not yet stabilized. There’s 34% upside as the stock retraces 230, where it last traded in October. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 3.2%) 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 fell by three last week to a total of 1,079, up 156 vs. a year ago. A dominant current theme in Middle East energy markets is one of energy producers operating near full capacity, and their willingness to spend money to increase capacity. This bodes well for international oilfield service companies like Schlumberger (SLB) and Baker Hughes.
BHGE is an undervalued aggressive growth stock with an attractive dividend yield. Analysts expect full year EPS to increase by 51.2% and 111% in 2018 and 2019. The 2019 P/E is 16.4. 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 2.7%) 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 309% and 39.1% in 2018 and 2019. The 2019 P/E is 5.7. DK is slowly improving from its October price correction; most likely to trade between 36 and 46 in the coming weeks. 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. 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 3.2%) 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 5.8. 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 7.3%) 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 two analysts who are contributing to the consensus estimate are currently expecting 16.1% EPS growth in 2019. The stock will likely trade between 33 and 39 in the coming weeks. Buy UEIC now. Strong Buy.
