U.S. stock markets continue to suffer, revisiting lows from October and November. We could see modest improvement through year end, but I don’t expect a strong stock market rebound until at least January.
Late last week, OPEC and its non-OPEC partners made the surprising decision to cut oil production by 1.2 million barrels per day (bpd), beginning in January 2019, in order to stabilize market prices. (For perspective, the U.S. currently produces 11.7 million bpd.) Iran was excluded from the deal. Oil prices immediately rose.
Oil prices seem to have bottomed, and to have begun the stabilization process. Most energy stocks are lagging that pattern on their price charts, with some still falling. My suggestion is to buy Delek U.S. Holdings (DK) in the Buy Low Opportunity Portfolio, which has an improving price chart; and Total SA (TOT) in the Growth & Income Portfolio, which is bouncing at its recent low point, thus offering an opportunity to lock in a maximum dividend yield of 5.5%.
I’m moving several stocks to a Hold recommendation today, because they have fallen below recent trading ranges. I expect such stocks to remain low until early January, at which time I will certainly give a Buy signal if the price charts improve. My Hold recommendation does not typically mean “this is a low-quality stock.” It usually just means that the price chart is bearish.
Quanta Services (PWR) will begin paying a quarterly dividend of $0.04 per share.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from December 5 in which I mentioned news, rating changes and/or price action on KLX Energy Services (KLXE).
Today’s Portfolio Changes:
Apple (AAPL) moves from Strong Buy to Hold.
Comerica (CMA) moves from Buy to Hold.
Knight-Swift Transportation (KNX) moves from Buy to Hold.
Marathon Petroleum (MPC) moves from Buy to Hold.
Skechers (SKX) moves from Buy to Hold.
Supernus Pharmaceuticals (SUPN) moves from Strong Buy to Hold.
Last Week’s Portfolio Changes:
DowDuPont (DWDP) moved from Buy to Strong Buy.
Updates on Growth Portfolio Stocks
CIT Group (CIT – yield 2.3%) 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 27.7% and 21.9% in 2018 and 2019. The 2019 P/E is 9.3. Postpone purchases if CIT falls below its recent trading range between 43 and 47. 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. Last week, the company announced the acquisition of Classic Builders, the largest homebuilder by volume in Des Moines, IA. Wall Street expects EPS to increase 13.9% and 7.4% in fiscal 2019 and 2020 (September year end). The 2019 P/E is 7.8. The price chart continues to gradually improve, with upside resistance at 42. Hold.
KLX Energy Services (KLXE) rose tremendously last week after reporting a strong third quarter and raising guidance for fourth quarter revenue and profits (January year-end). KLXE is an undervalued aggressive growth stock. Expect continued share price volatility through year end. 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% in 2018 and 2019. The 2019 P/E is 10.7. I’m moving KNX from Buy to Hold due to weakness in the price chart, which I expect to last through year end. Hold.
Marathon Petroleum (MPC – yield 3.0%) 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.
2019 consensus earnings estimates rose in the wake of Marathon’s Investor Day last week. The company expects to increase its cost savings re: the Andeavor acquisition from $1.0 billion to $1.4 billion per year. Morningstar commented, “Marathon is trading at the widest discount [among refining stocks] to our fair value estimate and is our top choice.”
MPC is an undervalued aggressive growth stock with an attractive dividend yield. Management expects to increase the dividend payout by at least 10% in 2019, and to repurchase $2.5 billion of stock. Wall Street expects full year EPS to grow 33.7% and 48.1% in 2018 and 2019. The 2019 P/E is 8.0. I’m moving MPC from Buy to Hold due to share price weakness, which will likely last through year end. Hold.
Martin Marietta Materials (MLM – yield 1.1%) 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 17.6% in 2018 and 2019. The 2019 P/E is 18.6. I expect MLM to trade between 180 and 210 in the coming weeks. Hold.
Quanta Services (PWR – yield 0.5%) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. On December 7, Quanta announced that they will begin paying a quarterly dividend of $0.04 per share, with the intention of increasing the payout over time.
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 9.8. The stock rose near 36 recently, then rapidly fell near its October lows. Buy PWR now. Buy.
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. LUV is an undervalued growth stock. I’m pleased that the recent drop in crude oil prices has served to increase Wall Street’s 2019 EPS projections for Southwest. Analysts now expect EPS to grow 18.6% and 14.9% in 2018 and 2019. The 2019 P/E is 10.8. Buy LUV on this current pullback. There’s price resistance at 59 and again at 64. 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. A treatment for bipolar disorder is currently in a trial phase.
Last week, Supernus reported that SPN-812—a treatment for attention deficit hyperactivity disorder (ADHD) in children ages 6-11—met the main goals of two trials: reduced ADHD symptoms, fast onset of action, and a low incidence of adverse effects. The analyst at Mizuho Securities foresees revenue of $600 million from SPN-812 by 2025.
The stock fell upon the announcement, which news media attributed to investors not believing that SPN-812 will stand out as a better treatment option than its competitors. I would take that implication with a grain of salt, though, as the drug trials were clearly successful, while the report came during a week when the broader U.S. stock markets performed quite unfavorably. This could have been a simple instance of “sell on the news” – no matter whether the news was good or bad; and SUPN could also be a casualty of mutual funds selling to meet investors’ withdrawal requests and hedge funds selling to meet margin calls.
SUPN is an undervalued, small-cap aggressive growth stock. Wall Street expects EPS to grow 46.8% and 27.6% in 2018 and 2019. The 2019 P/E is 15.5. I’m moving SUPN from Strong Buy to Hold due to share price weakness, which could easily last through year end. Hold.
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 consensus estimate for 2019 EPS rose to its highest point thus far. Analysts now expect full year EPS to grow 108% and 37.3% in 2018 and 2019. The 2019 P/E is 7.8. Management intends to increase the dividend yield to 1% in 2019. The stock is revisiting its October low near 41. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 3.5%) is a 145-year-old financial holding company with $222.9 billion in assets and 1,900 financial centers that serve businesses and individuals. 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 10.9. BBT is heading down to its October low near 46. Buy.
Blackstone Group LP (BX – yield 8.0%*) 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 4.6% and 9.5% in 2018 and 2019. The 2019 P/E is 9.5.
Speculative investors have an opportunity for additional capital gains if BX converts from an L.P. to a C-corp. next year. CEO Steve Schwarzman has thus far addressed that topic with extreme caution when speaking with media and analysts.
BX is an extremely attractive investment for yield investors and growth & income investors. At a share price of $30.09, the dividend yield on new purchases is 8.0%, and there’s 29% capital gain potential as BX travels back to its September high of 39. Buy BX now. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.42 and yielding 8.0%.
Comerica (CMA – yield 3.3%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Investors are welcome to access Comerica’s December 5 presentation at the Goldman Sachs U.S. Financial Services Conference 2018 on their website. Investors can expect Comerica to continue to make significant share repurchases and to increase the dividend 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 50.6% and 11.9% in 2018 and 2019. The 2019 P/E is 9.2. I’m moving CMA from Buy to Hold due to the weak price chart. Hold.
Commercial Metals Company (CMC – yield 2.7%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Analysts expect 43% EPS growth in fiscal 2019 (August year end), and the P/E is quite low at 8.5. CMC is appropriate for traders, growth & income investors, and risk-tolerant growth investors. The stock is revisiting its October lows near 17. 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. Delta will host an Investor Day on December 13. If management guides analysts higher on 2019 EPS expectations, the stock could easily rise back to its November high near 61.
DAL is an undervalued growth & income stock. The recent drop in crude oil prices has fueled increases in consensus earnings estimates. Analysts now expect EPS to grow 13.4% and 19% in 2018 and 2019. The 2019 P/E is 8.4. The stock recently began reaching all-time highs. I believe DAL will soon return to those highs and continue upward. You have a brief opportunity to buy on this pullback to the mid-50’s. Strong Buy.
DowDuPont (DWDP – yield 2.8%) plans to break up into three companies by June 2019: Corteva Agriscience, Dow Chemical and DuPont. DowDuPont was featured in the December issue of Cabot Undervalued Stocks Advisor. DWDP is an undervalued growth stock with an attractive dividend yield. DowDuPont’s EPS are expected to grow 22.6% and 15.0% in 2018 and 2019. The 2019 P/E is 11.3. The stock is trading near its October low of 52. Strong Buy.
GameStop (GME – yield 11.6%) – This month, 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. Management intends to use the proceeds of the sale to pay down debt, repurchase stock and/or invest in ongoing business development. Management continues its strategic review for a potential sale of the company, in order to deliver a higher return to shareholders than what the stock market is currently offering. This stock is for risk-tolerant investors who are attracted by the prospect of a possible M&A deal. Hold.
Guess?, Inc. (GES – yield 4.1%) 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. Analysts expect EPS to increase 47.1% and 31.1% in fiscal 2019 and 2020 (January year end). The 2020 P/E is 16.4.
GES has held up well in the face of recent turmoil in U.S. stock markets. I expect the stock to trade between 22 and 25 this month, and to be a leader when the market is ready to rise again. Buy GES now. Strong Buy.
Regions Financial Corp. (RF – yield 3.9%) 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. Investors may listen to Regions’ presentation at the December 5 Goldman Sachs U.S. Financial Services Conference 2018. Analysts expect EPS to increase 40.7% and 4.6% in 2018 and 2019. The 2019 P/E is 9.4. The share price is likely to suffer through year end. Hold.
Schlumberger (SLB – yield 4.8%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas fell by one last week to a total of 1,075, up 144 vs. a year ago. Management expects weak oil prices and pipeline bottlenecks to lower North American revenue for several months.
SLB is expected to see EPS grow aggressively in 2019, at a rate of 24.9%. The 2019 P/E is 20.4. The share price has been weak and will not likely rebound until January. 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 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 during the February 2018 market correction). 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. There’s 20% capital gain potential as TOT travels back to its September high of 65 in the coming year. Strong Buy.
WestRock Company (WRK – yield 4.1%) is a global packaging and container company. WRK is an undervalued growth & income stock with a big dividend yield. The company is expected to see 2019 EPS rise 12.5%. The 2019 P/E is 9.8. WRK is appropriate for traders, and for investors seeking growth, value and/or dividends. There’s upside resistance at 54. 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. An updated report on ALXN1210 studies is expected 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 13.3.
ALXN pulled back in recent days. There’s 10% upside to 125, where the stock traded two weeks ago, and 22% upside to 139, where the stock last traded in September. Traders and risk-tolerant growth stock investors should buy ALXN now. Strong Buy.
Apple Inc. (AAPL – yield 1.7%) is a manufacturer and provider of many popular technology devices and services, include the iPhone, iPad, App Store, Apple Care, iCloud and more.
Yesterday, Reuters reported that “Chip supplier Qualcomm Inc. … said it had won a preliminary order from a Chinese court banning the importation and sale of several Apple Inc iPhone models in China due to [software] patent violations. In a statement, Apple said that all iPhone models remain available for its customers in China. New iPhones use Apple’s latest version of its mobile operating system, iOS 12.” Therefore, the net effect of the court order is that Apple has not been banned from selling iPhones in China, as long as the iPhones contain new software, not old software. Separately, longer iPhone replacement cycles in China, largely due to improved product quality, are lowering iPhone sales volumes in that country.
Investors can expect additional volatility in the stock due to political maneuvering associated with international trade, and with the arrest of the CFO at Huawei.
Analysts expect fiscal 2019 EPS to rise 12.2% (September year end), with a current P/E of 12.6. I’m moving AAPL from Strong Buy to Hold while we wait for the share price to stabilize. Hold.
Baker Hughes, a GE co. (BHGE – yield 3.3%) 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 one last week to a total of 1,075, up 144 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 109% in 2018 and 2019. The 2019 P/E is 15.9. The share price is weak, and will not likely begin to rebound until January. 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 is the largest licensee of 7-Eleven stores in the U.S. Delek owns 63.4% of Delek Logistics Partners, LP (DKL), which operates through two segments: Pipelines and Transportation, and Wholesale Marketing and Terminaling.
Delek’s business is focused in the Permian Basin, where the federal government coincidentally just discovered the largest reserve of oil and natural gas ever assessed in the United States. Learn more about Delek in this December investor presentation. Slide #19 in the presentation illustrates that as of September 2018, Delek has a lower (better) valuation than all of its major peers as measured by EV/EDITDA.
Delek expects to achieve much higher midstream EBIDTA by the year 2022 – profits that contribute directly to cash flow. Excess cash flow will be used to repurchase stock, and to increase both dividend payouts and capital expenditures. The company expects to repurchase $158 million of its stock during the fourth quarter, for a full-year total of $365 million. Delek also announced a quarterly dividend increase three times since November 2017. Secondary goals with cash flow include acquisitions and debt repayment.
DK is an extremely undervalued, aggressive growth, small-cap stock. Wall Street expects EPS to grow 304% and 38.1% in 2018 and 2019. The 2019 P/E is 6.1. 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. The company reported strong performance to Wall Street analysts in relation to Black Friday in the U.S. and Singles Day in China. The strong U.S. dollar continues to impact profits. 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. Full year EPS are expected to rise 3.9% and 8.1% in 2018 and 2019. I’m moving SKX from Buy to Hold due to share price weakness. Hold.
Synchrony Financial (SYF – yield 3.4%) 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. 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. Analysts expect full year EPS to increase by 35.9% and 25.0% 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 7.2%) creates products and licensable technology that enable the world’s leading media and entertainment providers to nurture more meaningful relationships with their audiences. Last week, Rovi (a TiVo company) signed a renewed patent license agreement with Samsung, in which Samsung will use Rovi products in all of its smartphones and tablets.
Due to the chronically underperforming share price, management is in strategic discussions with entities that are considering buying either or both of TiVo’s two divisions --product and IP licensing -- in order to obtain a higher value for stockholders. 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.” The share price remains weak. 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 will present at the 15th annual Imperial Capital Security Investor Conference on December 12.
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 has pulled back amidst market weakness. Strong Buy.
