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Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Weekly Update

U.S. stock markets continue to suffer, wiping out year-to-date gains that had previously culminated in all-time-high prices on the S&P 500, Dow Jones Industrial Average and NASDAQ indexes. If you’re looking for “the bright side” of this dour news, take heart that none of these market indexes have retraced their early-2018 lows.


U.S. stock markets continue to suffer, wiping out year-to-date gains that had previously culminated in all-time-high prices on the S&P 500, Dow Jones Industrial Average and NASDAQ indexes. If you’re looking for “the bright side” of this dour news, take heart that none of these market indexes have retraced their early-2018 lows.

I continue to expect the worst of the drama to play out by year end, simply because tax-loss selling is over after December 31. Stocks that fell steadily will need time to stabilize before they can recover. Stocks that had been trading sideways might be ready to move higher in January. And the rare stock that barely suffered in recent months could experience a bullish run-up to new or recent highs in the first quarter of 2019.

I had wanted to shuffle our portfolio stocks, in order to give you new investment choices, but I have never favored the idea of selling shares in quality companies simply because their share prices are temporarily depressed. Therefore, I’ll move stocks around later, as markets recover.

Will the U.S. Experience a Recession in 2019?

Everybody’s saying that an economic recession is on the horizon in the U.S. Let’s define recession and put it into layman’s terms so that we can be clear on what to potentially expect. A recession is characterized by two successive quarters of falling gross domestic product (GDP).

We know that GDP numbers were incredibly strong in 2018 vs. years past. Does a recession mean that GDP is a little less strong now, or falling off a cliff?

Imagine that you are a person who works on commission, and you receive your commission check each quarter. Your commission checks were generally in the $10,000 to $12,000 range in the quarters leading up to 2018. But then changes in federal income tax laws, repatriation of overseas cash, and deregulation suddenly gave your customers lots more money to spend. Your customers spent more money with you in 2018 than they had in recent years, and your quarterly commissions grew to a range of $15,000 to $18,000. As the year progressed, your customers found additional uses for their increased cash flow: hiring new workers, raising salaries, technology upgrades and new commitments to capital expenditures.

Now you are creating your sales goals and personal budget for 2019. Your customers are still benefiting from changes in tax laws, but they’re also continuing to fund the new business decisions that they made in 2018. So business is good, but they’re spending less with you than they did in recent quarters. Therefore, commissions are going to recede to a more normal level, maybe in the range of $13,000 to $14,000 per quarter. Therefore, your long-term income trajectory remains on a general upslope, while short-term income is projected to fall.

That’s how a recession will likely look in the U.S. Business is still good, employment numbers remain high, and inflation is not rapidly escalating, but it’s now harder to exceed previous quarters’ GDP growth because recent quarterly growth figures were somewhat abnormally high.

A more serious recession occurred in 2008 when the housing market collapsed, which linked directly to the failure of many financial institutions. I think it’s fair to say that there is currently no alarming economic situation happening that can be compared to the housing and financial problems of 2008.

I remember the U.S. government mandating that Fannie Mae and Freddie Mac lend money to people who had poor credit histories, and thinking to myself, “This can’t end well.” Sure enough, the situation snowballed, leading to increased risk-taking in the financial community as traditional quality lenders relaxed their lending standards because they were otherwise losing business to subprime lenders. By the early 2000s, I constantly met people who were heavily invested in real estate, living out the quintessential Dire Straits lyric, “That ain’t workin’, that’s the way you do it, get your money for nothin'…”

How have stocks performed during previous recessions? In the five most recent recessions, dating back to 1980, stocks bounced around and finished recessions at higher points than where they started, except for the 2008 recession, which was clearly caused by a larger economic problem that dragged stocks down until March of 2009. And p.s., if a news report tries to use the 2008 stock market as an example of what happens to U.S. stocks during recessions, without showing you other recessionary stock statistics, that means you’re either dealing with a millennial in the media who has no experience with any prior recessions, or you’re dealing with a media representative who is scaring you on purpose so that their sensational headlines will attract viewers/readers.

As for bank stocks, a major Wall Street investment bank published their analysis yesterday. It turns out that bank stocks fare slightly better during recessions than they do during periods of normal, non-recessionary economic activity.

I’ve researched and accumulated a list of 120 U.S. stocks with very attractive fundamentals. If there were something ugly happening in the economy, that list would have been whittled down to about 30 stocks. So I’m not remotely concerned with the economy as we head into 2019.

European Stocks with Attractive Fundamentals

Last week, a European investor asked me for some European stock recommendations. That can be a tricky endeavor, because many European stocks do not garner analyst research coverage in the U.S. Fortunately, I do a tremendous amount of stock research annually in the fourth quarter. There are now 101 stocks with attractive fundamentals on my “waiting in the wings” list, and three of them are based in Europe. While I’m not specifically adding them to our permanent portfolios, here they are for your perusal. (All dividend payouts are expressed in U.S. dollars.)

Equinor ASA (EQNR – yield 4.2%), formerly Statoil ASA (STO), is an integrated energy company operating in more than 30 countries, and based in Norway, where the government is a majority owner. The company changed its name in 2018 as it seeks to broaden its focus to include new energy solutions – primarily wind—and attract young talent. Equinor intends to focus 2019 activity in the Mariner and Rosebank oilfield projects in the U.K. Continental Shelf.

The price of Brent crude oil fell about 31% from an annual high of about 86 in early October to 59 in late November. The announcement of OPEC production cuts in early December then helped to reinforce price stabilization.

Earnings per share (EPS) are expected to grow 43.2% and 17.1% in 2018 and 2019. The 2019 price/earnings ratio (P/E) is low at 9.5, and the dividend yield is substantial at 4.2%, with a steady $0.23 quarterly payout.

The share price has fallen from 28.5 to 22 since September, and could fall further this month. Dividend investors could begin buying soon in order to lock in the high yield, and growth investors should wait for the share price to turn upward.

NXP Semiconductors (NXPI – yield 1.3%) is an electronics company with operations in 33 countries, based in the Netherlands, and serving the automotive, IoT and industrial markets. In February 2018, Qualcomm (QCOM) made a bid for NXP that eventually failed to receive approval from China’s Ministry of Commerce. NXP received a merger termination fee of $2 billion from Qualcomm. NXP subsequently announced a $5 billion share repurchase authorization.

After a year of relatively slow EPS grow in 2018, the company is expected to grow EPS by 21.4% in 2019, while the P/E is just 9.0. There’s a steady $0.25 quarterly dividend payout, yielding 1.3%.

NXP’s stock fell from a 2018 high of about 125 to a low of about 70 in November. The share price has since stabilized within a range of 75 to 85. Try to buy below 80. When the stock begins climbing again, there’ll be upside price resistance at about 95.

Royal Dutch Shell plc (RDS.A – yield 6.5%) is a British-Dutch energy company that’s headquartered in the Netherlands. Earnings growth is strong, expected to reach 28.7% and 19.4% EPS growth in 2018 and 2019, respectively. The 2019 P/E is 9.4, and the steady quarterly dividend payout of $0.94 per ADS share is yielding 6.5%. Shell is featured in this December 16 article from OilPrice, “Big Oil Is Better Prepared For The Next Price Crash”.

The 2018 share price has ranged from a high of 72 down to 58, and has not yet stabilized. Dividend investors could begin buying soon in order to lock in the high yield, and growth investors should wait for the share price to turn upward.

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Today’s Portfolio Changes:
CIT Group (CIT) moves from Buy to Hold.
Alexion Pharmaceuticals (ALXN) moves from Strong Buy to Hold.
Universal Electronics (UEIC) moves from Strong Buy to Hold.

Last Week’s Portfolio Changes:
Apple (AAPL) moved from Strong Buy to Hold.
Comerica (CMA) moved from Buy to Hold.
Knight-Swift Transportation (KNX) moved from Buy to Hold.
Marathon Petroleum (MPC) moved from Buy to Hold.
Skechers (SKX) moved from Buy to Hold.
Supernus Pharmaceuticals (SUPN) moved from Strong Buy to Hold.

Updates on Growth Portfolio Stocks

CIT Group (CIT – yield 2.4%) 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. The share price turned more bearish last week, and I’m therefore moving CIT from Buy to Hold until it stabilizes. 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. This month, the company announced the acquisition of Classic Builders, the largest homebuilder by volume in Des Moines, IA. Wall Street expects EPS to increase 13.6% and 6.7% in fiscal 2019 and 2020 (September year end). The 2019 P/E is 7.7. Hold.

KLX Energy Services (KLXE) is an undervalued aggressive growth stock. Expect continued share price volatility through year end. Hold.

Knight-Swift Transportation Holdings (KNX – yield 0.9%) 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. Hold.

Marathon Petroleum (MPC – yield 3.1%) 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.

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. 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 15.0% and 18.2% in 2018 and 2019. The 2019 P/E is 17.9. 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 it 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. PWR rose to near 36 recently, then rapidly fell to its October lows. There remains some near-term risk to the share price. 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. Wall Street’s 2019 EPS projection for Southwest rose again last week. Analysts now expect EPS to grow 18.6% and 15.4% in 2018 and 2019. The 2019 P/E is 10.5. 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 announced FDA approval for an expanded indication for Oxtellar XR that treats partial seizures in children ages 6 and older. And in the prior week, Supernus reported that SPN-812—a treatment for attention deficit hyperactivity disorder (ADHD) in children ages 6-1—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.

SUPN is an undervalued, small-cap aggressive growth stock. Wall Street expects EPS to grow 46.8% and 31.4% in 2018 and 2019. The 2019 P/E is 14.7. 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. 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 3.6%) 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. BBT is revisiting its October low near 46. Buy.

Blackstone Group LP (BX – yield 8.1%*) 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. BX is an undervalued growth & income stock. Speculative investors have an opportunity for outsized capital gains if BX converts from an L.P. to a C-corp. next year. CEO Steve Schwarzman has thus far approached that topic with extreme caution when speaking with media and analysts.

At a share price of $29.76, the dividend yield on new purchases is 8.1%, and there’s 31% capital gain potential as BX travels back to its September high of 39. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.42 and yielding 8.1%.

Comerica (CMA – yield 3.4%) 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. 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. Investors can expect Comerica to continue to make significant share repurchases and a dividend increase in 2019. Hold.

Commercial Metals Company (CMC – yield 2.7%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. The 2019 EPS estimate has risen consistently since mid-November. Analysts now expect 46.3% EPS growth in fiscal 2019 (August year end), and the P/E is quite low at 7.9. 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 2.6%) is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. Investors may access the presentation from Delta’s December 13 Investor Day. Management expects 2019 revenue to rise 4-6%, along with falling fuel prices and rising pre-tax margins. DAL is featured in Barron’s Top 10 Stock Picks for 2019.

DAL is an undervalued growth & income stock. Analysts now expect EPS to grow 13.4% and 19.9% in 2018 and 2019. The 2019 P/E is 8.0. 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. Strong Buy.

DowDuPont (DWDP – yield 2.9%) 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. 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 4.5%) 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. GES bounced again last week at its October and November lows. Strong Buy.

Regions Financial Corp. (RF – yield 4.1%) 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. Hold.

Schlumberger (SLB – yield 5.1%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas fell by four last week to a total of 1,071, up 141 vs. a year ago. Management expects weak oil prices and pipeline bottlenecks to lower North American revenue for several months.

SLB is an undervalued growth stock. Analysts expect EPS to grow aggressively in 2019, at a rate of 20.2%. The 2019 P/E is 19.4. 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. Total is featured in this December 16 article from OilPrice, “Big Oil Is Better Prepared For The Next Price Crash”. TOT is an undervalued growth & income stock with a large dividend yield. Analysts expect EPS to grow 31.0% and 6.7% in 2018 and 2019. The 2019 P/E is 9.4.

The share price has stabilized in the mid-50s. Rising oil prices and dividend increases are each potential catalysts for a rising 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 19% capital gain potential as TOT travels back to its September high of 65 in the coming year. Strong Buy.

WestRock Company (WRK – yield 4.3%) is a global packaging and container company. WRK is an undervalued growth & income stock with a big dividend yield. 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. ALXN is an undervalued growth stock. I’m moving ALXN from Strong Buy to Hold until the share price stabilizes. Hold.

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. AAPL is featured in Barron’s Top 10 Stock Picks for 2019. Analysts expect fiscal 2019 EPS to rise 11.8% (September year end), with a current P/E of 12.4. 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 four last week to a total of 1,071, up 141 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 108% 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.

DK is an extremely undervalued, aggressive growth, small-cap stock. Wall Street expects EPS to grow 301% and 37.0% in 2018 and 2019. The 2019 P/E is 6.2. 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. Hold.

Synchrony Financial (SYF – yield 3.5%) 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. 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. This month, 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 world leader of wireless and voice remote control products, software and audio-video accessories for the smart home; with over 400 patents and a strong pipeline of new products in the areas of safety and security, climate control and lighting. Investors may review the December 12 presentation by CEO Paul Arling at the 15th annual Imperial Capital Security Investor Conference. Dozens of famous business partners include Comcast, Sky, Microsoft, DirecTV, Panasonic, Sony, Yamaha, Bose, Toshiba, JVC, Ingersoll-Rand and Daikin.

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. I’m moving UEIC from Strong Buy to Hold until the share price stabilizes. Hold.