Cabot Undervalued Stocks Advisor Weekly Update

U.S. stocks delivered great performance in January and are now taking a breather. As such, I expect the S&P 500 index to trade between 2625 and 2825 for a while. The trading range might end up being a little higher or a little lower, but for now, a repetition of the trading range that took place between late October through early December seems most likely to occur. I anticipate that the market indexes will continue advancing later this year.

Many individual stocks are also in trading ranges, so this is a good time for traders to put in sell limit orders on stocks with identifiable ranges, and gather a list of stocks that you’d love to buy when they bounce at off price support. If you’re trying to read price charts and identify good buy and sell points, send me an email and I’ll help you know if you’re on the right track.

If you’re not a “trader” and prefer to buy shares of great companies that you will hold for several years, stick with your plan! You can always find good buying opportunities when you have excess cash available within your portfolio.

On an unrelated topic, I yet again saw an article where an economist, Paul Krugman, is predicting a recession this year or next year. (Keep throwing darts, Paul. You might eventually hit a bullseye!) Please ignore such articles. If the economy requires a life vest, it will become obvious. Unemployment numbers will spike upward, corporate earnings growth will disappear, the Fed will begin lowering interest rates, to name just a few economic signals.

The last thing I’d like to say about recessions is that recessions are a normal part of the economic cycle. Yes, we will have a recession … eventually. And life will go on. There’s no reason to panic. A recession does not mean that people cannot make money in the stock market; it does not mean that a depression will ensue; and it does not mean that a stock market crash will occur. But you can be darn sure that news headlines will tout all of those potential scenarios, because that’s how they get viewers to tune in each day.

Always remember, no matter how badly any particular stock market or economic cycle devolved in the past, U.S. stock markets always bounced back and began reaching new all-time highs. As a matter of fact, we had a big stock market correction in the first quarter of 2018, and those very same markets rose to new all-time highs in the third quarter. (I had this conversation with a librarian just yesterday.)

Enjoy the booming economy. You’ll have plenty of time to prepare for a recession later.

Send questions and comments to Crista@CabotWealth.com.

PORTFOLIO NOTES
Be sure to review the Special Bulletins from February 7 and 8 in which I mentioned news, rating changes and/or price action on Comerica (CMA), Commercial Metals (CMC), Guess? (GES), Marathon Petroleum (MPC), Skechers (SKX), Total SA (TOT) and Voya Financial (VOYA).

QUARTERLY EARNINGS RELEASE CALENDAR
February 12 am: Martin Marietta Materials (MLM) – 4Q
February 13 pm: CF Industries (CF) – 4Q
February 19 pm: Delek U.S. Holdings (DK) – 4Q
February 26 – TIVO

EARNINGS SEASON SCORECARD
Big earnings beat: Alexion Pharmaceuticals (ALXN), CIT Group (CIT), Commercial Metals (CMC), Knight-Swift Transportation (KNX), Marathon Petroleum (MPC), Skechers (SKX), Southwest Airlines (LUV), Synchrony Financial (SYF), SYNNEX (SNX), Voya Financial (VOYA) and WestRock (WRK).

Earnings within 5% of consensus estimate: Apple (AAPL), BB&T Corp. (BBT), Baker Hughes (BHGE), Blackstone Group (BX), Comerica (CMA), Delta Air Lines (DAL), DowDuPont (DWDP), D.R. Horton (DHI), Regions Financial (RF) and Schlumberger (SLB).

Big earnings miss: Apollo Global Management (APO) and Total SA (TOT).

*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:
Alexion Pharmaceuticals (ALXN) moves from Hold to Buy.

LAST WEEK’S PORTFOLIO CHANGES:
Apple (AAPL) moved from Buy to Hold.
Apollo Global Management (APO) moved from Buy to Hold.
Blackstone Group LP (BX) moved from Strong Buy to Buy.
Comerica (CMA) moved from Hold to Buy.
Commercial Metals (CMC) moved from Buy to Strong Buy.
Delta Air Lines (DAL) moved from Buy to Strong Buy.
D.R. Horton (DHI) moved from Buy to Hold.
Knight-Swift Transportation (KNX) moved from Buy to Hold.
Marathon Petroleum (MPC) moved from Buy to Strong Buy.
Supernus Pharmaceuticals (SUPN) moved from Buy to Strong Buy.

UPDATES ON GROWTH PORTFOLIO STOCKS

CF Industries Holdings (CF – yield 2.9%) is one of the world’s largest producers of nitrogen products, serving customers on six continents. The company operates nine nitrogen production facilities in Canada, the U.K. and the U.S. The company is expected to report fourth quarter EPS of $0.45 on the afternoon of February 13, within a range of $0.29-$0.86; and $1.2 billion revenue, within a range of $1.1-$1.4 billion.

After taking a small loss in 2017 (December year-end), the company is expected to deliver $1.45 EPS upon the full-year 2018 earnings release, and $2.58 per share in 2019. The projected 2019 earnings growth rate of 77.9% far exceeds the 2019 P/E of 16.2.

CF is a cyclical mid-cap stock, affected by both currencies and natural gas prices (lower prices being optimal). Natural gas is currently trading at its lowest year-to-date price of $2.62 mmbtu (millions of British thermal units). The stock has traded between 40 and 46 for three 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 2.9%) 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 Group will present at the Credit Suisse 20th Annual Financial Services Forum on February 13.

CIT is an undervalued growth stock with an attractive dividend yield. Profits are exhibiting a big multi-year growth trajectory. Earnings per share rose 50.5% and 31.6% in 2017 and 2018, and are expected to rise 19.1% and 13.7% in 2019 and 2020. The 2019 P/E is 10.0.

The company plans to increase the second quarter dividend by 40% to $0.35 per share, subject to approval by their Board of Directors. Based on the current share price of $46.78, the new dividend yield will be 2.9%.

The stock is up 35% from its December lows. It’s overdue for a pullback, at which time I’ll give CIT a Buy recommendation. Hold.

D.R. Horton (DHI – yield 1.6%) – Hold.* (last comments on February 5.)

KLX Energy Services (KLXE) is an undervalued aggressive growth stock. The price chart appears constructive. KLXE could rise to 30 shortly, at which time I plan to remove KLXE from the portfolio due to minimal analyst coverage. (We acquired this stock via M&A activity.) 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. Company management will present at the Stifel 2019 Transportation & Logistics Conference on February 12. The stock is fairly valued based on slower earnings growth, while the share price remains in a general uptrend with price resistance at 35. Hold.

Marathon Petroleum (MPC – yield 3.4%) 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 Petroleum was featured in the February issue of Cabot Undervalued Stocks Advisor. I would expect MPC to rise a maximum of 35% from the current price as it eventually reaches its previous high at 85. Strong Buy.

Martin Marietta Materials (MLM – yield 1.0%) is a supplier of stone, sand, gravel, cement, concrete and asphalt. The company foresees a continuing growth trajectory, fueled by strong demand combined with increased government spending.

The company is expected to report fourth quarter 2018 EPS of $1.75 within a range of $1.53-$2.12, and revenue of $945.9 million within a range of $890 million to $1.0 billion, on the morning of February 12. Expect volatility. The stock is actively rising toward price resistance at 198, where traders should exit. Hold.

Quanta Services (PWR – yield 0.5%) – Hold.* (last comments on February 5.)

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 23.3% in 2019, and the P/E is 11.0. I will ideally return LUV to a Buy recommendation on a pullback to about 53. 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.

SUPN is an undervalued, small-cap aggressive growth stock. Wall Street expects EPS to grow 46.8% and 24.9% in 2018 and 2019. The 2019 P/E is 16.2. SUPN appears ready to exceed its recent trading between 36 and 38, in which case it could rise to 42. There’s additional price resistance at 50. Buy SUPN now. Strong Buy.

Voya Financial (VOYA – yield 0.1%) is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. Management will present at the 2019 Bank of America Merrill Lynch Insurance Investor Conference on February 14.

VOYA is an undervalued aggressive growth stock. Final full-year 2018 EPS rose 110% vs. 2017. Analysts expect EPS to grow 33.2% in 2019, and the P/E is 8.9. Management intends to increase the dividend yield to 1% in 2019.

I anticipate VOYA trading between 45 and 55 in the coming months. VOYA is up 28% from its December lows. A pullback is overdue, after which I will likely return VOYA to a Strong Buy recommendation. Hold.

UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS

Apollo Global Management, LLC (APO – yield 6.1%*) is an alternative asset manager with assets under management (AUM) totaling $280 billion, dispersed among credit, private equity and real estate investments. APO is an undervalued mid-cap growth & income stock. A pullback after the recent run-up is normal and expected. Hold.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.83 and yielding 6.1%.

Blackstone Group LP (BX – yield 6.3%*) is the world’s largest and most diversified alternative asset manager with $472 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, hedge funds and real estate. Blackstone management will present at the Credit Suisse 20th Annual Financial Services Forum on February 12.

BX is an undervalued growth & income stock, and an excellent choice for dividend investors. I’m expecting a short-term pullback now, after the big January run-up. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.14 and yielding 6.3%.

Comerica (CMA – yield 3.3%) 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. The stock could rise as high as 90 if the current bullish momentum continues; while a pullback to 77 would not be entirely out of place. Dollar-cost-averaging into the stock seems like the best approach. Buy.

Commercial Metals Company (CMC – yield 3.1%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Analysts expect EPS to rise 36.2% and 17.7% in fiscal 2019 and 2020 (August year end). The 2019 P/E is quite low at 7.7. The stock has fallen toward the bottom of a two-month trading range. Risk-tolerant investors could continue to buy here. Strong Buy.

Delta Air Lines (DAL – yield 2.8%) 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 16.1% in 2019. The 2019 P/E is 7.7. The fundamentals look great and the stock looks ready to surpass 51 and begin a new run-up in short order. Buy DAL now. Strong Buy.

DowDuPont (DWDP – yield 2.9%) plans to break up into three companies by June 2019: Corteva Agriscience, Dow Chemical and DuPont. Updated info: The materials science division of DowDuPont will be called Dow Chemical, also referred to as “the New Dow”, and will separate from DowDuPont by April 1, 2019. The remaining two companies will separate by June 1.

DWDP is an undervalued growth & income stock. It’s widely expected that the sum of the parts of the spin-off companies will exceed the current share price. DWDP has traded between 49 and 60 since October. At a share price of 51.71, there’s 16% upside to short-term price resistance at 60, and additional opportunity for capital gains with the spin-off companies. Strong Buy.

Guess?, Inc. (GES – yield 4.3%) is a global apparel manufacturer, selling its products through wholesale, retail, ecommerce and licensing agreements. Guess? was featured in the February issue of Cabot Undervalued Stocks Advisor.

GES is an undervalued aggressive growth stock with a big dividend yield. Analysts currently expect EPS to grow 47.1% and 33.0% in fiscal 2019 and 2020 (January year end). The 2020 P/E is 15.0.

The stock traded consistently between 19 and 25 since March 2018. At a share price of 20.85, buy GES now while there’s about 20% capital appreciation potential as the stock eventually travels back toward 25, and receive the added bonus of a large dividend payout. Barring unexpected changes in the earnings outlook, once GES completes the rebound, it will still be a very undervalued growth stock. Therefore, GES shares could appeal to traders, growth investors, dividend investors, value investors and longer-term investors. Strong Buy.

Schlumberger (SLB – yield 4.6%) is the world’s largest oilfield service company. I’m not pleased with the 2019 growth situation, although the 2020 growth outlook appears significantly attractive. The price chart remains strong enough to enable another near-term run-up. Hold.

Total S.A. (TOT – yield 5.4%) is a French multinational oil and gas company operating in over 130 countries. The price chart remains strong enough to enable a near-term run-up to 58-59. Hold.

WestRock Company (WRK – yield 4.8%) is a global packaging and container company. WestRock completed the acquisition of KapStone Paper & Packaging in November. Analysts will be typically cautious as they project balance sheet numbers that reflect the combined companies. Once WestRock reports several quarters of combined results, analysts will have a better grasp on projected vs. actual benefits of the merger. WRK is an undervalued growth & income stock. At a share price of 37.81, there’s 24% upside to price resistance at 47. Buy.

UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS

Abercrombie & Fitch (ANF – yield 3.7%) 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.

ANF is a small-cap growth stock with a big dividend yield. The stock surpassed price resistance at 21 in recent days, commencing a new run-up. At a share price of 21.87, there’s 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 Pharmaceuticals was featured in the February issue of Cabot Undervalued Stocks Advisor.

ALXN is an undervalued large-cap growth stock. Consensus earnings estimates rose last week, now reflecting an expectation of 17.3% and 12.8% EPS growth in 2019 and 2020. The 2019 P/E is 12.9 – quite low for a biopharmaceutical stock. I’m moving ALXN from Hold to a Buy recommendation, now that the stock has pulled back a bit from its January run-up. Try to buy below 120. Buy.

Apple Inc. (AAPL – yield 1.7%) – Hold.* (last comments on February 5.)

Baker Hughes, a GE co. (BHGE – yield 2.9%) 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 4 last week to a total of 1,049, up 74 vs. a year ago.

BHGE is an undervalued aggressive growth stock with an attractive dividend yield and a low debt-to-capital ratio. Analysts expect 61% and 64% EPS growth in 2019 and 2020, while the corresponding P/Es are much lower at 23.4 and 14.3. Once the stock reaches upside price resistance at 27, I expect a short-term pullback. Buy.

Delek U.S. Holdings (DK – yield 3.2%) 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 is expected to report fourth quarter EPS of $1.25 on the afternoon of February 19, within a range of $1.11-$1.38; and $2.4 billion revenue, within a range of $2.2-$2.7 billion.

DK is an extremely undervalued small-cap growth stock. There’s plenty of room between the current share price and upside price resistance at 40 for new investors to achieve attractive capital gains in the near-term. I expect DK to surpass 40 later this year. Buy DK now. Strong 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. The good news surrounding last week’s fourth quarter earnings release pushed the stock up near price resistance at 33. It would be very normal for the stock to pull back and rest for a month or longer while gathering the energy to break past 33. I will probably move SKX to a Buy recommendation after it pulls back to the upper 20’s, presuming that the revised earnings growth outlook remains strong. Hold.

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. Wall Street expects 2019 EPS growth of 19.0%, and the P/E is extremely low at 6.7.

SYF shot upward to 29-30 upon the recent earnings release, then remarkably held its ground, up 35% from its December lows. The stock could very easily fall a couple of points and then rebound quickly, so let it bounce around a bit as you wait for the next move upward. SYF 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. Strong Buy.

TiVo (TIVO – yield 6.7%) creates products and licensable technology that enable the world’s leading media and entertainment providers to nurture more meaningful relationships with their audiences.

TiVo is a profitable company. 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,” which is scheduled for February 26. Risk-tolerant investors could buy TIVO now in anticipation of the results of the strategic review process on February 26. 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.

Last week, Universal Electronics announced transformational operational plans to support investment in innovation and to maximize shareholder value. These plans include:
• relocating their Hong Kong office to existing UEI facilities in Panyu and Shuzou;
• relocating some of their Santa Ana, CA staff to Scottsdale, AZ and Monterrey, Mexico;
• moving some manufacturing from China to Mexico and the Philippines;
• and one executive staffing change.

UEIC is an undervalued micro-cap stock, appropriate for risk-tolerant investors and traders. The three analysts who are contributing to the consensus estimates are currently expecting 14.8% EPS growth and 7.1% revenue growth in 2019, while the P/E is 9.8. 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.