The stock market recovery continues in a slightly better style than I had hoped for. I had expected big upswings followed by pullbacks, which is normal for a recovery. What I hadn’t expected is that there are lots of great stocks trading out of synch with each other; some peaking within trading ranges while others are bottoming within trading ranges. That’s pretty much a trader’s equivalent of Christmas morning and a Disney vacation, all rolled into one brief but exciting phase of the stock market!
If you’re contemplating such trades, and you’re wondering if the odds are with you, send me an email: crista@cabotwealth.com. I’ll be happy to look at the price charts and tell you what I see.
PORTFOLIO NOTES
Be sure to review the Special Bulletins from January 23, 24 and 28 in which I mentioned news, rating changes and/or price action on Abercrombie & Fitch (ANF), Apple (AAPL), Knight-Swift Transportation (KNX), Southwest Airlines (LUV) and Synchrony Financial (SYF).
QUARTERLY EARNINGS RELEASE CALENDAR
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), Southwest Airlines (LUV), Synchrony Financial (SYF) and SYNNEX (SNX).
Earnings within 5% of consensus estimate: BB&T Corp. (BBT), Comerica (CMA), Delta Air Lines (DAL), D.R. Horton (DHI), Regions Financial (RF) and Schlumberger (SLB).
BUY-RATED STOCKS MOST LIKELY TO RISE MORE THAN 5% NEAR-TERM
Abercrombie & Fitch (ANF)
Commercial Metals (CMC)
Delta Air Lines (DAL)
Guess? (GES)
*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:
DowDuPont (DWDP) moves from Buy to Strong Buy.
Marathon Petroleum (MPC) moves from Hold to Buy.
Universal Electronics (UEIC) moves from Hold to Strong Buy.
LAST WEEK’S PORTFOLIO CHANGES:
Abercrombie & Fitch (ANF) joined the Buy Low Opportunities Portfolio as a Strong Buy.
Apple (AAPL) moved from Hold to Buy.
Knight-Swift Transportation (KNX) moved from Hold to Buy.
Quanta Services (PWR) moved from Buy to Hold.
Synchrony Financial (SYF) moved from Hold to Strong Buy.
Total SA (TOT) moved from Strong Buy to Hold.
UPDATES ON GROWTH PORTFOLIO STOCKS
CF Industries Holdings (CF – yield 2.8%) 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 $2.58 per share in 2019. The 2019 earnings growth rate of 72.0% far exceeds the 2019 P/E of 16.5.
CF is a cyclical mid-cap stock, affected by both currencies and energy prices. 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, while it’s near the bottom of its trading range. Strong Buy.
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. The company is expected to report fourth quarter EPS of $1.14 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 reported first quarter EPS of $0.76 last week (September year end), below the expected $0.78. Revenue came in on target at $3.5 billion. The company is expecting a better spring selling season than in recent years. With regard to strength in D.R. Horton’s lower-priced home business, Morningstar analyst Brian Bernard commented, “We will see how it turns out for other builders, but so far I think D.R. Horton might be one of the only homebuilders that shows year-over-year increase in new orders.” The company repurchased $140.6 million of stock during the quarter, which represents a reversal from previous years of rising share counts.
DHI is an undervalued mid-cap stock. Wall Street expects EPS to increase 11.3% in fiscal 2019. The 2019 P/E is 8.8. I’m expecting to have a revised earnings outlook next week, in the aftermath of last week’s quarterly report. DHI ran up about 20% since hitting its December low, and is now pulling back. The new trading range looks to be about 36-40. Buy DHI now. Buy.
KLX Energy Services (KLXE) — 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. Please refer to the January 28 Special Bulletin for additional information. 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.
Marathon is expected to report fourth quarter EPS of $1.87 on the morning of February 7, within a range of $0.82-$2.27, and revenue of $33.9 billion, within a range of $30-$37 billion. Expect volatility.
MPC is an undervalued stock with an attractive, growing dividend. Analysts expect EPS to increase 51.2% and 10.9% in 2018 and 2019. The 2019 P/E is 9.8. Management expects to increase the dividend payout by at least 10% in 2019. The last dividend increase was announced in late January 2018, and we can therefore expect another increase in the coming days.
I’m moving MPC from Hold to a Buy recommendation, now that the price chart is strengthening. Buy.
Martin Marietta Materials (MLM – yield 1.1%) — Hold.* (last comments on January 22)
Quanta Services (PWR – yield 0.5%) — Hold.* (last comments on January 22)
Southwest Airlines (LUV – yield 1.1%) 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 expects EPS to increase 15.3% in 2019, and the P/E is 11.2. The stock is rapidly rising this year. I will ideally return LUV to a Buy recommendation on a pullback to about 51. 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 25.9% in 2018 and 2019. The 2019 P/E is 15.6. SUPN has been trading between 36 and 38, with some additional price resistance at 42. Buy SUPN now. 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 Financial is expected to report $1.22 fourth quarter EPS on the afternoon of February 5, with a range of $1.15-$1.28.
VOYA is an undervalued aggressive growth stock. Management intends to increase the dividend yield to 1% in 2019. At a price of 46.74, VOYA is up about 26% from its December lows. A pullback is due, after which I will likely return VOYA to a Buy recommendation. Hold.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Apollo Global Management, LLC (APO – yield 6.9%*) 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 was featured in the January issue of Cabot Undervalued Stocks Advisor.
Apollo and metals manufacturer Arconic (ARNC) have scrapped negotiations for a $10 billion leveraged buyout, purportedly due to a disagreement over Apollo’s potential contribution toward Arconic’s pension fund deficit. In other news, Apollo agreed to buy U.K. plastic packaging company RPC Group Plc (RPCGY) for $4.3 billion.
Apollo is expected to report fourth quarter economic net income (ENI) of ($0.74) on the morning of February 1, within a range of ($1.20)-$0.06. Expect volatility. APO is an undervalued mid-cap growth & income stock. 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 6.9%.
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.
CEO Steve Schwarzman spoke with Maria Bartiromo of Fox Business at the World Economic Forum in Davos, Switzerland last week about U.S. economic growth, socialism, 70% tax rates, and artificial intelligence. Schwarzman also told CNBC “Interestingly for us, we keep getting better as we get bigger because we know more. … When you get to a certain scale, as long as you limit the amount of capital you have for a strategy and you can keep inventing new strategies, then you do actually quite wonderfully well.”
Blackstone Group is expected to report fourth quarter economic net income (ENI) of $0.04 on the morning of January 31, within a range of ($0.12)-$0.23. These numbers were drastically revised (downward) in recent days, and the revision did not appear to affect the share price.
BX is an excellent stock for dividend investors. In addition, speculative investors have an opportunity for outsized capital gains if BX converts from an L.P. to a C-corp., which management is currently contemplating. The stock has been 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 3.3%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services.
Last week, Comerica announced a 12.5% dividend increase, from 60 cents per quarter to 67 cents. This was the third dividend increase of the last four dividend announcements.
CMA is an undervalued growth & income stock. Analysts expect 14.3% EPS growth in 2019, and the P/E is 10.0. At a current price of 82.07, the stock is up about 27% 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 40.9% and 17.6% in fiscal 2019 and 2020 (August year end). The 2019 P/E is quite low at 8.2. CMC appears to have just begun a run-up 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 7.2. 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. I’m moving DWDP from Buy to Strong Buy, now that the price chart shows a recovery from the recent market correction. A well-received earnings report could push DWDP above price resistance at 60. Strong Buy.
GameStop (GME – yield 9.8%) – Hold.* (last comments on January 15)
Guess?, Inc. (GES – yield 4.7%) is a global apparel manufacturer, selling its products through wholesale, retail, ecommerce and licensing agreements. Yesterday, the company announced that Victor Herrero will be leaving the company, and that Carlos Alberini will rejoin Guess? as CEO. From the press release:“Mr. Alberini, after leaving the company, was Co-CEO of Restoration
Hardware until 2014, and a Director on the Board of Restoration Hardware
from 2010 until the present. From 2014 until the present, Mr. Alberini
has been the Chairman and CEO of Lucky Brand. “
As a consumer of Lucky Brand apparel, it seems to me that Mr. Alberini probably has the right skill set to lead Guess?. I consider this CEO change to be a constructive decision by the Board of Directors.
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 16.4. The stock fell down near the bottom of its trading range upon the news of the CEO change. Take this brief opportunity to buy GES at the lower price, while locking in a higher dividend yield. Strong Buy.
Schlumberger (SLB – yield 4.5%) — Hold.*
Total S.A. (TOT – yield 5.6%) — Hold.* (last comments on January 22)
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, and revenue of $4.5 billion, within a range of $4.4-$4.7 billion. Expect volatility. WRK is an undervalued growth & income stock with a big dividend yield. WRK is likely to trade between 40 and 48 for a few months. Buy.
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
Abercrombie & Fitch (ANF – yield 3.8%) is a leading, global specialty retailer of apparel and accessories for men, women and kids, operating under the Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks brands. Abercrombie & Fitch was featured in a January 24 Special Bulletin.
ANF is a small-cap growth stock with a big dividend yield. Once ANF retraces its recent high, I will consider it to be fully valued. (Of course, the earnings outlook could change, and if that happens, I’ll reconsider my decision on how long to hold the stock.)
The stock has been rising to 21 and then reversing course repeatedly since September. In my estimation, ANF appears immediately ready to break past 21. There’s over 30% upside as ANF eventually retraces its 2018 high near 29. Risk-tolerant growth stock investors and traders should buy ANF now. Strong Buy.
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. Alexion is expected to report $1.82 fourth quarter eps on the morning of February 4, within a range of $1.54-$1.96.
ALXN is an undervalued mid-cap growth stock. At a price of 118, ALXN is up about 25% 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 1.9%) is a manufacturer and provider of many popular technology devices and services, include the iPhone, iPad, Mac, App Store, Apple Care, iCloud and more. Apple is expected to report first quarter EPS of $4.17 on the afternoon of January 29, within a range of $4.13-$4.27. The market expects $84.0 billion revenue, within a range of $83.1-$84.6 billion. Please refer to the January 28 Special Bulletin for additional information. Buy.
Baker Hughes, a GE co. (BHGE – yield 3.1%) offers products, services and digital solutions to the international oil and gas community. The number of U.S. rigs drilling for crude oil and natural gas rose by 9 last week to a total of 1,059, up 112 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. BHGE is an undervalued aggressive growth stock with an attractive dividend yield and a low debt-to-capital ratio. The stock could trade between 22 and 27, depending on the outcome of the earnings report. Buy.
Delek U.S. Holdings (DK – yield 3.4%) 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 296% and 15.8% in 2018 and 2019. The 2019 P/E is 5.8. The stock is most likely to trade between 30 and 40 in the near future. Buy.
Skechers USA Inc. (SKX) -- Hold.* (last comments on January 22)
Synchrony Financial (SYF – yield 2.8%) is a consumer finance company with 80.3 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans.
SYF finished 2018 with 42.7% EPS growth. Wall Street expects EPS of $4.46 in 2019, reflecting 19.3% growth. The 2019 P/E is extremely low at 6.7.
The stock gapped up on tremendous volume last week, mitigating the risk that SYF will fall right back down to 26. Eight investment firms changed their price targets on SYF to a range of 31-43. This stock is appropriate for growth investors, and for those seeking rising dividends. Investors who buy at 30 have 30% upside if SYF retraces its 2018 high of 39. The stock will likely rest for a few weeks, in the wake of last week’s price surge. Strong Buy.
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 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) 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. Dozens of famous business partners include Comcast, Sky, Microsoft, DirecTV, Panasonic, Sony, Yamaha, Bose, Toshiba, JVC, Ingersoll-Rand and Daikin. Investors may tune in to the webcast of the company’s January 16 presentation at the 21st Annual Needham Growth Conference.
UEIC is an undervalued micro-cap stock, appropriate for risk-tolerant investors and traders. The three analysts who are contributing to the consensus estimate are currently expecting 14.8% EPS growth and 7.1% revenue growth in 2019, while the P/E is 10.1. I’m moving UEIC from Hold to a Strong Buy recommendation, now that the recovery is under way. Strong Buy.
* 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.
