I played many summers of softball in high school, college, for my church’s team, and on my office team at Dean Witter (later, Morgan Stanley). Sometimes I played infield, but usually outfield. When I played right field, the big benefit was that I could tell by the right-handed batter’s stance where they were likely to hit the ball. It was one of those instinct things that comes from a lot of practice.
In the same manner, I was able to follow the harmonies when they played a new song in church by watching a lady named Yvonne. For some odd reason, I was able to discern the notes by watching her sing.
I’ve always been able to notice patterns in things: gardening, health, behavior, the stock market and more. I can tell you things about health symptoms that you’ll never hear in the media, but I digress. Right now, U.S. stock markets are exhibiting all kinds of recognizable patterns, which can be very beneficial for traders, but also for people who plan to make the occasional near-term purchase or sale.
Here are four patterns I see from the market:
Pattern #1 – It’s earnings season. You’ll recall that the market got ugly in the fourth quarter of 2018. (Yes, that’s an understatement.) When stock market action gets ugly, analysts tend to rein in their earnings expectations. That’s not entirely logical behavior, but it’s predictable. There are probably many analysts who don’t want to stick their necks out and act enthusiastic about a company’s earnings prognosis when the share price is plummeting—even though corporate outlooks and share prices do not necessarily fluctuate in synch with each other.
Presuming that the economy is humming along nicely and not diving into a recession, what invariably happens during difficult stock markets is that analysts lowball their earnings estimates, followed by a slew of upside earnings surprises during earnings season.
In recent days, CNBC reported that of the 11% of S&P 500 companies that have thus far reported quarterly results, three-fourths of those companies reported earnings beats. Voila! The pattern played out exactly as it usually does. Therefore, investors should expect many more upside earnings surprises in the coming weeks.
Pattern #2 – Homebuilder stocks fell and stabilized and began their recoveries in advance of the broader market. (Pull up six-month price charts on DHI, LEN, PHM, MDC and the S&P 500, and you’ll get a good visual of this situation.) Since the homebuilder stocks rose earlier, and from a stronger base, than did the rest of the stock market, you can expect the current pullback among homebuilder stocks to be mild and temporary. If you’re contemplating buying within this industry, I think we’re getting very close to a short-term bottom in their share prices.
Pattern #3 – Energy stocks are generally in early phases of an upswing. If you’re looking to capitalize on stock market bullishness, there’s probably more near-term opportunity in the energy sector than within the broader market.
Pattern #4 – The rest of the market is still in an irrationally exuberant upswing, but likely to top out before January ends, followed by a much bigger short-term correction than we’re currently seeing with homebuilder stocks. (Although I’m certainly not expecting stocks to fall as far as their December lows.) Once that S&P 500 pullback occurs, I’m going to move many of our stocks from Hold to Buy. Those stocks will have had time to begin building new bases while they were on Hold.
If I write that a stock has solid price resistance at 30, and you’re watching it zoom towards 30, that’s your signal that the stock is going to not only stop rising, but pull back. Reality check: many of our portfolio stocks are up 20%-30% from their December lows. That’s not normal! They’re going to need to pull back and rest before advancing again. Hint: this is a trader’s market! If you’re thinking of selling something near price resistance, and buying back lower, this year’s stock market is going to hand you that opportunity on a silver platter.
PORTFOLIO NOTES
Be sure to review the Special Bulletins from January 16, 17 and 21 in which I mentioned news, rating changes and/or price action on Baker Hughes (BHGE), BB&T Corp. (BBT), Comerica (CMA), Delta Air Lines (DAL), Knight-Swift Transportation (KNX), Regions Financial (RF) and Supernus Pharmaceuticals (SUPN).
QUARTERLY EARNINGS RELEASE CALENDAR
January 23 am: Synchrony Financial (SYF) – 4Q
January 24 am: Southwest Airlines (LUV) – 4Q
January 25 am: D.R. Horton (DHI) -- 1Q
January 29 am: CIT Group (CIT) and Knight-Swift Transportation (KNX) – 4Q
January 29 pm: Apple (AAPL) – 1Q
January 31 am: Baker Hughes (BHGE), Blackstone Group (BX) and DowDuPont (DWDP) – 4Q; WestRock (WRK) -- 1Q
February 1 am: Apollo Global Management (APO) – 4Q
February 4 am: Alexion Pharmaceuticals (ALXN) – 4Q
February 5 pm: Voya Financial (VOYA) – 4Q
February 7 am: Marathon Petroleum (MPC) – 4Q
Mid-February: Total SA (TOT) – 4Q
EARNINGS SEASON SCORECARD
Big earnings beat: Commercial Metals (CMC) and SYNNEX (SNX)
Earnings within 5% of consensus estimate: BB&T Corp. (BBT), Comerica (CMA), Delta Air Lines (DAL), Regions Financial (RF) and Schlumberger (SLB).
BUY-RATED STOCKS MOST LIKELY TO RISE MORE THAN 5% NEAR-TERM
Baker Hughes (BHGE)
Commercial Metals (CMC)
Delek U.S. Holdings (DK)
Supernus Pharmaceuticals (SUPN)
WestRock (WRK)
*I can review price charts and make an educated determination about what’s likely to occur, but I will sometimes be wrong. I cannot control the stock market; I can only guide you through it.
TODAY’S PORTFOLIO CHANGES:
Quanta Services (PWR) moves from Buy to Hold.
Total SA (TOT) moves from Strong Buy to Hold.
LAST WEEK’S PORTFOLIO CHANGES:
Baker Hughes (BHGE) moved from Hold to Buy.
BB&T Corp (BBT) moved from Buy to Retired.
CF Industries (CF) joined the Growth Portfolio as a Strong Buy.
Regions Financial (RF) moved from Hold to Retired.
Schlumberger (SLB) moved from Buy to Hold.
Supernus Pharmaceuticals (SUPN) moved from Hold to Buy.
UPDATES ON GROWTH PORTFOLIO STOCKS
CF Industries Holdings (CF – yield 2.7%) is one of the world’s largest producers of nitrogen products, serving customers on six continents. The company operates nine nitrogen production complexes in Canada, the U.K. and the U.S. CF Industries was featured in the January 15 update of Cabot Undervalued Stocks Advisor.
After taking a small loss in 2017 (December year end), the company is expected to deliver $1.50 EPS upon the full-year 2018 earnings release, and $2.61 per share in 2019. The expected 2019 earnings growth rate of 74.0% far exceeds the 2019 P/E of 16.9.
CF is a cyclical mid-cap stock, affected by both currencies and energy prices. I’m far more likely to trade this stock than I am to hold it long term. I expect the stock to trade anywhere between 42 and 53 in the coming months. Risk-tolerant traders and growth stock investors should buy CF now. Strong Buy.
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 company is expected to report fourth-quarter EPS of $1.15 on the morning of January 29, within a range of $1.08-$1.37. Expect volatility.
CIT is an undervalued aggressive growth stock with an attractive dividend yield. There’s strong price resistance at 47. I’ll likely give CIT a Buy recommendation after the first decent pullback. Hold.
D.R. Horton (DHI – yield 1.6%) is America’s largest homebuilder by volume, operating in 27 states, and also providing mortgage and title services. The company is expected to report first-quarter EPS of $0.78 on the morning of January 25, within a range of $0.73-$0.86. DHI is an undervalued mid-cap stock. Wall Street expects EPS to increase 11.5% in fiscal 2019 (September year end). The 2019 P/E is 8.7.
DHI ran up about 20% since hitting its December low, and is now pulling back. I expect the stock to bounce briefly in the mid-to-upper 30s before continuing its advance. Buy.
KLX Energy Services (KLXE) is an undervalued aggressive growth stock. Analysts expect EPS and revenue to rise 35.1% and 17.2%, respectively, in fiscal 2020 (January year end). On January 8 I wrote, “The share price appears capable of rising past 25 very soon and heading toward price resistance at 30.” The stock promptly rose. I plan to remove KLXE from the portfolio shortly, due to minimal analyst coverage. (We acquired this stock via M&A activity.) 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. Management pre-announced fourth-quarter EPS within a range of $0.91-$0.93. The quarterly earnings release will take place on the morning of January 29.
The 2018 consensus EPS estimate has been consistently rising for over a year, out of synch with the stock’s poor performance. At this point, analysts expect EPS to increase 78.3% and 9.8% in 2018 and 2019. The 2019 P/E is 12.1.
At 32.64, KNX is up 36% from its December lows. (Translation: that’s a crazy run-up!) I don’t foresee the stock rising past 35 without first pulling back below 30. After the earnings release next week, I’ll be paying close attention to the revised 2019 earnings projections before deciding how to proceed with the stock. Hold.
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.
The fourth-quarter earnings release, due out on February 7, will include numbers from the Andeavor acquisition. Therefore, expect various earnings adjustments, and possible ill-reported numbers as bots grab and report the wrong numbers from the earnings press releases. (You can get more exact and correct data by reading the earnings press release or analyst reports than you can from news reports.)
MPC is an undervalued growth stock with an attractive dividend yield. The 2018 EPS consensus estimate jumped last week, while the 2019 number came down. (Earnings estimates for MPC change far more often than those of most other stocks.) At this point, analysts expect EPS to increase 51.2% and 13.9% in 2018 and 2019, while the 2019 P/E is just 9.9.
Management expects to increase the dividend payout by at least 10% in 2019. The last dividend increase was announced in late-January 2018.
At a share price of 66.09, MPC is up about 21% from its December lows. I expect a maximum short-term upside of 70, followed by a brief pullback. I’ll probably give MPC a Buy recommendation when the first big pullback occurs. 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. MLM is a fairly valued growth stock. Wall Street expects EPS to grow 14.2% and 16.8% in 2018 and 2019. The 2019 P/E is 18.8. The price chart is improving. MLM is likely to trade between 170 and 200 in the coming weeks. Hold.
Quanta Services (PWR – yield 0.5%) was featured in the January issue of Cabot Undervalued Stocks Advisor. PWR is an undervalued growth stock. At a share price of 33.50, PWR is up about 20% from its December lows, and still rising toward price resistance near 36. I’m moving the stock from Buy to Hold based on price action. The fundamentals remain great. Expect volatility. Hold.
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 company is expected to report fourth-quarter EPS of $1.07 on the morning of January 24, within a range of $1.02-$1.13. LUV is an undervalued growth stock. LUV will likely trade between 47 and 54 in the coming weeks. I’ll return LUV to a Buy recommendation when the price chart firms up, presuming that the earnings outlook remains strong. 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. Supernus has five pipeline products, in various phases of clinical trials, which aim to treat ADHD, impulsive aggression, bipolar disorder, depression and severe epilepsy. Learn more in the company’s 33-page Investor Presentation dated January 2019.
SUPN is an undervalued, small-cap aggressive growth stock. Wall Street expects EPS to grow 46.8% and 28.1% in 2018 and 2019. The 2019 P/E is 16.1. In the short term, SUPN could rise to 42 before stopping. Expect volatility. 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 EPS to increase 106% and 35.1% in 2018 and 2019, and the 2019 P/E is 8.5. Management intends to increase the dividend yield to 1% in 2019. At a price of 45.35, VOYA is up about 22% from its December lows, and fast approaching price resistance at 46. I expect a subsequent pullback, at which time I will likely return VOYA to a Buy recommendation. Hold.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Apollo Global Management, LLC (APO – yield 6.8%*) is an alternative asset manager with assets under management (AUM) totaling $270 billion, broken down as follows: credit (68%), private equity (27%) and real estate (5%). Apollo also manages over $70 billion AUM for Athene, a fixed-annuity provider. Apollo is in negotiations for a $10 billion leveraged buyout of aerospace parts maker Arconic (ARNC). Apollo Global Management was featured in the January issue of Cabot Undervalued Stocks Advisor.
Apollo is expected to report fourth-quarter economic net income (ENI) of ($0.61) on the morning of February 1. Expect volatility.
APO is an undervalued mid-cap growth & income stock. At 28.55, the stock is up 24% from its December low, currently heading to price resistance at 31. Traders should exit near 31, because a pullback will be normal. Growth investors and dividend investors should hold APO through any short-term volatility. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.93 and yielding 6.8%.
Blackstone Group LP (BX – yield 7.3%*) is the world’s largest and most diversified alternative asset manager with $456.7 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, hedge funds and real estate. Blackstone Group is expected to report fourth quarter economic net income (ENI) of $0.30 on the morning of January 31, within a range of ($0.12)-$0.85. Expect volatility.
Blackstone is branching out into a growth equity business; this month hiring Jon Korngold, an award-winning industry leader. Blackstone “will provide capital to companies during the critical phase between venture capital investments and traditional buyouts.”
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. The stock is advancing and could reach as high as 35 before pulling back. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.42 and yielding 7.3%.
Comerica (CMA – yield 3.0%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. CMA is an undervalued growth & income stock. Consensus earnings estimates grew throughout 2018, with EPS finishing the year up 51.3% vs. 2017. Last week, analysts increased their 2019 EPS expectations to reflect 14.3% EPS growth. The 2019 P/E is 9.9.
Subsequent to last week’s fourth quarter earnings release, five investment firms raised their price targets for CMA. At a current price of 81.10, the stock is up about 26% from its December low; now approaching price resistance at about 84. A pullback will then likely commence, after which I will consider a Buy recommendation. Hold.
Commercial Metals Company (CMC – yield 2.8%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Analysts expect EPS to rise 40.3% and 19.1% in fiscal 2019 and 2020 (August year end). The 2019 P/E is quite low at 8.1. CMC appears immediately ready to rise past 17 to a maximum near-term price of 20.5 (although it certainly might top out before that price). Buy.
Delta Air Lines (DAL – yield 2.9%) is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. DAL is an undervalued growth & income stock. Analysts expect EPS to grow 16.8% in 2019. The 2019 P/E is 7.3. The share price needs to continue stabilizing before gathering enough strength to advance. Patient investors can buy now, lock in the dividend yield, and likely achieve attractive capital gains in 2019. Buy.
DowDuPont (DWDP – yield 2.6%) plans to break up into three companies by June 2019: Corteva Agriscience, Dow Chemical and DuPont. DowDuPont is expected to report fourth-quarter EPS of $0.88 on the morning of January 31, within a range of $0.72-$0.99, and $20.9 billion revenue, within a range of $20.2-$21.5 billion.
DWDP is an undervalued growth stock with an attractive dividend yield. Consensus estimates indicate EPS growth rates of 22.3% and 13.6% in 2018 and 2019. The 2019 P/E is 12.4. DWDP will likely trade between 54 and 60 in the coming weeks. Try to buy below 56. Buy.
GameStop (GME – yield 9.5%) –Hold.* (see comments on January 15)
Guess?, Inc. (GES – yield 4.1%) is a global apparel manufacturer, selling its products through wholesale, retail, ecommerce and licensing agreements. Investors may access the webcast from management’s January 14 presentation at the 21st Annual ICR XChange Conference.
GES is an undervalued aggressive growth stock with a big dividend yield. Analysts expect EPS to grow 58.6% and 23.4% in fiscal 2019 and 2020. The 2020 P/E is 16.2. The stock is most likely to trade between 21 and 24 in the short term, and higher later this year. Strong Buy.
Schlumberger (SLB – yield 4.5%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas fell by 25 last week to a total of 1,050, up 114 vs. a year ago. Schlumberger reported fourth-quarter EPS of $0.36, on target with estimates; and quarterly revenue of $8.18 billion, above the $8.04 billion estimate. The company spent $100 million on share repurchases during the quarter.
Full-year 2018 EPS rose 8.0%. The market now expects 2019 and 2020 EPS to increase 8.6% and 48.3%. (Yes, I double-checked the 2020 number, and it’s not a typo!) I’m not pleased that the 2019 P/E is quite high at 25.4.
The CEO expects rising international revenue in 2019, and lower 2019 capital expenditures totaling approximately $1.6 billion vs. the $2.2 billion spent in 2018, largely via lower North American spending. The market loved the CEO’s statements, pushing the stock up 8%. However, if you read the press release, it’s not as if Schlumberger made it to the oilfield services Super Bowl. Investors had such a dour attitude toward energy prices and stocks that even moderately good news was apparently received with pent-up exuberance. I’m going to let the stock climb, but will not likely hold it much longer. Hold.
Total S.A. (TOT – yield 5.5%) is a French multinational oil and gas company operating in over 130 countries. The 2019 consensus earnings estimate for Total changed in recent days, now reflecting only 0.1% EPS growth. I’m moving TOT from Strong Buy to Hold, while awaiting the fourth-quarter earnings release, which will elaborate on the 2019 outlook. The stock is most likely to trade between 53 and 59 in the near future. Hold.
WestRock Company (WRK – yield 4.4%) is a global packaging and container company. WestRock is expected to report first-quarter EPS of $0.81 on the morning of January 29, within a range of $0.68-$0.91. Expect volatility.
WRK is an undervalued growth & income stock with a big dividend yield. Earnings estimates have been declining in recent weeks. Analysts now expect EPS to grow 7.8% in fiscal 2019 (September year end), and the P/E is 9.4. WRK is on an uptrend, and likely to trade between 37 and 48 for a few months. Buy.
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. The company’s aim is to build four sustainable blockbuster drug franchises. Investors may access Alexion’s January 8 presentation and webcast from the 37th Annual J.P. Morgan Healthcare Conference on the company website.
ALXN is an undervalued mid-cap growth stock. Consensus estimates indicate EPS growth rates of 29.7% and 14.6% in 2018 and 2019. The 2019 P/E is 13.4.
At a price of 117.05, ALXN is up about 24% from its December lows. There’s price resistance at about 125, where the stock will likely pull back and rest for a while, at which time I’ll likely give ALXN a Buy recommendation. Hold.
Apple Inc. (AAPL – yield 2.0%) is a manufacturer and provider of many popular technology devices and services, include the iPhone, iPad, Mac, App Store, Apple Care, iCloud and more. In recent days, MarketWatch posted an interesting article about App Store revenue, featuring comments from a Bernstein analyst. Apple is expected to report first-quarter EPS of $4.17 on the afternoon of January 29, within a range of $4.14-$4.27. The market expects $84.0 billion revenue, within a range of $83.2-$84.6 billion.
Full-year consensus earnings estimates came down last week. Analysts now expect EPS to rise 1.3% and 11.6% in fiscal 2019 and 2020 (September year end). The respective P/Es are 13.0 and 11.6. The stock seems to have stabilized. I await first-quarter results before deciding how to proceed. Hold.
Baker Hughes, a GE co. (BHGE – yield 3.0%) 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 25 last week to a total of 1,050, up 114 vs. a year ago. Baker Hughes is expected to report fourth-quarter EPS of $0.26 on the morning of January 31, within a range of $0.24-$0.29, and $6.0 billion revenue, within a range of $5.8-$6.3 billion. Full-year profits are expected to rise 51.2% and 91% in 2018 and 2019. The 2019 P/E is 19.5.
BHGE is an undervalued aggressive growth stock with an attractive dividend yield and a low debt-to-capital ratio. The stock broke out of a trading range and is heading to 27, where I fully expect it to experience a brief pullback before advancing further. Buy.
Delek U.S. Holdings (DK – yield 3.1%) 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 U.S. Holdings was featured in the January issue of Cabot Undervalued Stocks Advisor.
DK is an extremely undervalued small-cap growth stock. Wall Street expects EPS to grow 298% and 15.5% in 2018 and 2019. The 2019 P/E is 6.5. The stock is most likely to trade between 32 and 40 in the near future, and appears ready for an immediate run-up. Buy DK now. 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 2019 EPS estimates less robust than previously projected, the stock is no longer undervalued on current earnings. I will make a further assessment upon the fourth-quarter earnings release.
At a share price of 26.59, the stock is up about 21% from its December lows. Recent takeover rumors of a V.F. Corp. (VFC) acquisition pushed the SKX price higher, although V.F. Corp. management denied the rumors. (V.F. Corp. sells the Vans footwear brand, a Skechers competitor. I own both brands of shoes, and I like them very much.) There’s short-term price resistance at 28 and more solid resistance at 30. Hold.
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. The company is expected to report fourth-quarter EPS of $0.93 on the morning of January 23, within a range of $$0.85-1.04. (The earnings release date has been changed from January 25 to January 23.) Expect volatility, with the stock trading anywhere between 24 and 29.
SYF is a very undervalued aggressive growth stock with an attractive dividend yield. Wall Street expects EPS to grow 36.6% and 22.3% in 2018 and 2019. The 2019 P/E is extremely low at 6.0. I’ll likely move SYF back to a Buy recommendation after the next pullback. Hold.
TiVo (TIVO – yield 6.4%) creates products and licensable technology that enable the world’s leading media and entertainment providers to nurture more meaningful relationships with their audiences.
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 create 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,” which will likely take place in late February. Risk-tolerant investors could buy now with an expectation of an M&A announcement. Strong Buy.
Universal Electronics (UEIC) -- Hold.* (see comments from January 8)
* In order to focus attention on newsworthy changes in our portfolio stocks, I’m eliminating descriptions of Hold-rated stocks during weeks when there are no significant news announcements or changes in consensus earnings estimates. As a reminder, Hold does not mean Sell. Hold means that I am not recommending additional purchases of the stock today, either due to price chart action, earnings outlook, or stock valuation. I expect Hold-rated stocks to perform well in the coming months.
