ARE YOU WELL-POSITIONED FOR A NEAR-TERM STOCK MARKET PULLBACK?
U.S. stocks continue to defy gravity, with their audacious 2019 year-to-date gains mirroring their equally extreme fourth quarter 2018 descent.
• Skechers (SKX) rose 50% from its December low.
• Synchrony (SYF) is up 44% from its December low and still climbing.
• CIT Group (CIT) is up 43% from its December low and still climbing.
• Knight-Swift Transportation (KNX) is up 40% from its December low.
• Alexion Pharmaceuticals (ALXN) is up 37% from its December low and still climbing.
• Comerica (CMA) and Voya Financial (VOYA) are each up 34% from their December lows and still climbing.
Experienced investors know that this is one for the record books. The problem is that newer investors could easily be fooled into thinking (a) that these types of extreme run-ups are normal and (b) that pullbacks won’t happen because “it’s different this time.”
In reality, pullbacks will happen for most stocks that experience quick and dramatic short-term run-ups. And you have choices. You can hold these stocks, patiently awaiting further gains later this year or next year; you can trade out of these stocks and buy low on others that are just beginning run-ups; you can sell these stocks and accumulate cash, waiting for a correction in the broader stock market; and you can use stop-loss orders to protect your gains, while allowing your stocks to potentially continue climbing.
DID WARREN BUFFETT REALLY SELL APPLE (APPL)?
I read a news headline last week stating that Warren Buffett, CEO of Berkshire Hathaway (BRK/A), has cashed in some Apple (AAPL) shares. I was rather surprised at that news. Later, I read a report that detailed Berkshire’s stock holdings at the end of the fourth quarter of 2018, as per the company’s 13F filing with the U.S. Securities and Exchange Commission (SEC). (I don’t personally know why a company should be required to itemize their stock holdings to the U.S. government, but that’s an entirely different topic. As far as I’m concerned, let them buy stock if they want to. It’s none of my business which stocks they own, just as it’s none of their business which stocks I own.)
As it turns out, one of the 13 companies under the Berkshire Hathaway umbrella cashed in about 1.1% of the total Berkshire Apple shares, but Warren Buffett did not personally make any sell decisions on AAPL. AAPL remained the largest stock holding at Berkshire in the fourth quarter of 2018, with a value 78% higher than the next largest holding, Bank of America (BAC); and a value 11 times higher (that’s 1100% higher) than Berkshire’s tenth largest holding, Delta Airlines (DAL). The other top ten stock holdings at Berkshire include six more financial stocks and Coca-Cola (KO).
The real news within the company’s 13F filing is that Berkshire sold all of their 41.4 million shares of Oracle (ORCL). Do they no longer like the stock? Are they selling the stock because they’re going to acquire an industry competitor? A quick glance at Oracle’s basic numbers shows slow revenue growth and moderate earnings growth, debt levels higher than I would prefer, and a brand new announcement of a $12 billion addition to their repurchase authorization. The $12 billion was announced one day after Berkshire’s 13F filing, so perhaps it was planned so as to produce good news immediately after any negative effect that the Berkshire news might have on the stock. There was no apparent need to fear the Berkshire news on Oracle’s part, because the ORCL price chart is quite bullish. The stock appears on track to break out of a 20-month trading range within days. That’s theoretically a great time to own a stock!
One or two new stocks will be added to the Dow Jones Industrial Average (DJIA) in 2019 and 2020. That’s because DowDuPont (DWDP) and United Technologies (UTX) will likely be removed from the DJIA due to their pending corporate break-ups. ORCL is a prime candidate for addition to the DJIA, according to a November 2018 Barron’s article. Would Berkshire Hathaway sell their entire stake in ORCL if they thought ORCL would soon be added to the DJIA?
Another interesting piece of information within the 13F filing is that Berkshire added three new stocks to their holdings: Red Hat (RHT), a large-cap, software growth stock with an inflated P/E and no dividend; StoneCo (STNE), a mid-cap financial IT stock with very little analyst coverage and no dividend; and Suncor Energy (SU), a large-cap Canadian integrated energy stock. I wouldn’t personally piggyback onto any of those trades.
Berkshire also dramatically increased their holdings in General Motors (GM), J.P.Morgan Chase & Co. (JPM), PNC Financial Services Group (PNC) and The Travelers Companies (TRV). Of those four companies, I’d be most interested in buying shares of TRV due to strong 2019 earnings growth projections. However, TRV is nearing the top of a trading range, so I’d wait for the price to pull back to about 122 before buying.
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletin from February 13 in which I mentioned news, rating changes and/or price action on Martin Marietta (MLM), Quanta Services (PWR) and Supernus Pharmaceuticals (SUPN).
QUARTERLY EARNINGS RELEASE CALENDAR
February 19 pm: Delek U.S. Holdings (DK) – 4Q
February 21 am: Quanta Services (PWR) – 4Q
February 21 pm: Universal Electronics (UEIC) – 4Q
February 26 pm: Supernus Pharmaceuticals (SUPN) and TiVo (TIVO) – 4Q
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), CF Industries (CF), Martin Marietta (MLM) and Total SA (TOT).
BUY-RATED STOCKS MOST LIKELY TO RISE MORE THAN 5% NEAR-TERM*
Alexion Pharmaceuticals (ALXN)
Delek U.S. Holdings (DK)
Delta Air Lines (DAL)
DowDuPont (DWDP)
Supernus Pharmaceuticals (SUPN)
Universal Electronics (UEIC)
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:
Comerica (CMA) moves from Buy to Hold.
Martin Marietta Materials (MLM) moves from Hold to Buy.
Synchrony Financial (SYF) moves from Strong Buy to Hold.
LAST WEEK’S PORTFOLIO CHANGES:
Alexion Pharmaceuticals (ALXN) moved from Hold to Buy.
Quanta Services (PWR) moved from Hold to 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 reported fourth quarter EPS of $0.21 last week, when the market was expecting $0.45. Weather problems and high natural gas prices affected the quarter’s profits. Natural gas prices have since come down significantly.
The company reported $1.24 EPS in 2018, and is expected to deliver $2.53 and $3.10 EPS in 2019 and 2020, reflecting EPS growth rates of 104% and 22.5%. The 2019 P/E is very low in comparison at 16.5. CF Industries authorized a new $1 billion repurchase plan through 2021.
CF is a cyclical mid-cap stock, affected by both currencies and natural gas prices (lower prices being optimal). The stock has traded between 40 and 46 for three months. Risk-tolerant traders and growth stock investors can buy CF now, near the bottom of its trading range. Strong Buy.
CIT Group (CIT – yield 2.7%) 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. Investors may listen to CIT Group’s February 13 presentation at the Credit Suisse 20th Annual Financial Services Forum.
CIT is an undervalued growth stock with an attractive dividend yield. Earnings per share are expected to rise 19.1% and 13.7% in 2019 and 2020. The 2019 P/E is 10.6. 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 $50.77, the new dividend yield will be 2.7%.
CIT is up 43% from its December low and still climbing. Barring a takeover offer, the maximum near-term upside is 55, where the stock maxed out repeatedly in 2018. CIT is overdue for a pullback, after which I’ll give it a Buy recommendation. Hold.
D.R. Horton (DHI – yield 1.5%) is America’s largest homebuilder by volume, operating in 27 states, and also providing mortgage and title services. The company is expecting a better spring selling season than in recent years.
Wall Street expects EPS to increase 4.2% and 10.8% in fiscal 2019 and 2020 (September year end). The 2019 P/E is 10.0. I plan to retire the stock soon. DHI is on a slow uptrend, rising past short-term price resistance at 40. The maximum upside in the coming months is last year’s high near 47. Hold.
KLX Energy Services (KLXE) is an undervalued aggressive growth stock. KLXE is rising from a six-week trading range. After the run-up, 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 0.7%) is the largest full truckload carrier in North America and an industry leader with an exemplary management team. The stock is fairly valued now that earnings growth is slowing; while the share price remains in a general uptrend with price resistance at about 38. Hold.
Marathon Petroleum (MPC – yield 3.2%) 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. MPC could reach price resistance at 70 in the near term. 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 from residential, non-residential and public projects.
Consensus estimates now point toward EPS growth rates of 22.1% and 16.9% in 2019 and 2020. The 2019 P/E is 21.0. I’m moving MLM from Hold to Buy based on strong EPS growth, bullish price charts throughout the construction aggregate industry, and the CFO’s statements regarding use of cash flow to enhance the balance sheet, shareholder returns and profitable acquisitions. MLM is not wildly undervalued, so I might trade out of the stock this year. For now, MLM is a good investment for traders who have a 2-6 month time frame, and long-term growth stock investors who want to own top-notch companies. Buy.
Quanta Services (PWR – yield 0.5%) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Quanta is expected to report fourth quarter EPS of $0.90 on the morning of February 21. PWR is an undervalued, mid-cap growth stock. The stock is actively rising, with price resistance at 37 and again at 40. Buy.
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 23.6% in 2019, and the P/E is 11.0. The stock ran up 30% from its December low, then leveled out at 57-58. I will ideally return LUV to a Buy recommendation on a brief pullback to the lower 50’s. 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. Supernus will report fourth quarter results on the afternoon of February 26. SUPN is an undervalued, small-cap aggressive growth stock. SUPN just broke out of a trading range and is actively climbing. 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. VOYA is an undervalued aggressive growth stock. Analysts expect EPS to grow 34.4% in 2019, and the P/E is 9.1. 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 34% from its December low. 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 6.0%*) – Hold.* (last report February 12)
Blackstone Group LP (BX – yield 6.4%*) 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 Group was featured in this February 13 Bloomberg article, Private Equity Likes the Look of Blackstone’s Real Estate Model. Investors may listen to the webcast of Blackstone’s February 12 presentation at the Credit Suisse 20th Annual Financial Services Forum.
Most alternative asset managers, including Blackstone, are now moving from a mark-to-market method of calculating earnings to cash earnings, which is expected to result in higher price/earnings ratios within the industry. 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 6.4%.
Comerica (CMA – yield 3.1%) 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. At a share price of 86.37, the stock is up 34% from its December low and still climbing. I’m moving CMA from Buy to Hold because a pullback is overdue. There’s price resistance at 90. Hold.
Commercial Metals Company (CMC – yield 3.0%) 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 7.8. The stock has traded between 15 and 17.75 since early December. Risk-tolerant investors could continue to buy here. Strong Buy.
Delta Air Lines (DAL – yield 2.7%) 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 7.8. The fundamentals look great and the stock is just beginning a new run-up. Buy DAL now. Strong Buy.
DowDuPont (DWDP – yield 2.8%) plans to break up into three companies: Corteva Agriscience, Dow Chemical and DuPont. 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 54.24, there’s 10% 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 4.4%) 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. The consensus EPS estimate for fiscal 2020 (January year end) just rose to $1.40, its highest level thus far. Analysts now expect EPS to grow 47.1% and 35.9% in fiscal 2019 and 2020. The 2020 P/E is 14.6.
The stock traded consistently between 19 and 25 since March 2018. GES shares could appeal to traders, growth investors, dividend investors, value investors and longer-term investors. Buy GES now. Strong Buy.
Schlumberger (SLB – yield 4.4%) – Hold.* (last report February 12)
Total S.A. (TOT – yield 5.3%) is a French multinational oil and gas company operating in over 130 countries. Total’s recent natural gas discovery off the South African coast could provide a significant boost to the country’s economy, and also led South Africa on a path toward energy independence. Read more in this OilPrice.com article, South Africa Oil Discovery Could Be a Game-Changer.
Total is expected to see EPS grow 3.2% and 18.6% in 2019 and 2020. The stock is actively rising, with price resistance at 59 and 64. Dividend investors could buy here, while growth investors should hold off until the 2019 earnings outlook strengthens. Hold.
WestRock Company (WRK – yield 4.7%) 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 39.05, there’s 20% upside to price resistance at 47. 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 will report fourth quarter results on the morning of March 6 (January year end).
Shares of ANF and its casual apparel competitors fell on February 13 when Levi Strauss & Co. filed for an initial public offering (IPO) of stock, ticker symbol LEVI. The market’s fear is that institutional investors would thereafter split their investable dollars between current public apparel companies and LEVI, creating less of a demand for ANF shares.
Here’s why that fear is not entirely rational: while it’s true that institutional investors might consider LEVI stock worthy of a long-term investment, that decision can’t be made until LEVI reports several quarters of results as a public company. Only then will analysts have a firm grasp on the company’s balance sheet, the direction the company is heading, and whether LEVI management has any talent or willingness at guiding Wall Street accurately regarding future revenue, margins, expenses and profits. A lack of leadership, vision, or balance sheet successes could easily turn analysts away from recommending the stock to their institutional investors. It’s therefore premature to worry about LEVI gobbling up apparel industry stock market share, and by the time that happens, we’ll likely have already moved on from owning ANF.
ANF is an undervalued, small-cap growth stock with a big dividend yield. The stock surpassed price resistance at 21 in recent weeks, gradually commencing a new run-up. At a share price of 21.17, there’s 37% 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. ALXN is actively rising, with price resistance near 140. Buy.
Apple Inc. (AAPL – yield 1.7%) is a manufacturer and provider of many popular technology devices and services, include the iPhone, iPad, Mac, App Store, Apple Care, iCloud and more. There are over 1.4 billion active Apple devices globally, which provide a strong and growing revenue base for Apple Services.
AAPL is up 20% from its December lows, now trading steadily at 170. AAPL could reach 180-185 in the very short term. Hold.
Baker Hughes, a GE co. (BHGE – yield 2.8%) 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 2 last week to a total of 1,051, up 76 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 62% EPS growth in 2019 and 2020, while the corresponding P/Es are much lower at 24.6 and 15.2. The current run-up could stop at 27 or continue onward to 30, where BHGE will still be undervalued. Buy.
Delek U.S. Holdings (DK – yield 3.0%) 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. The stock is actively rising toward short-term price resistance at 40, where it will still be undervalued. 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. Consensus earnings estimates continue to climb since the fourth quarter earnings release. After achieving $1.92 EPS in 2018, the company is expected to reach $2.10 and $2.32 EPS in 2019 and 2020. The stock rose 50% from its December low to 33, where it last traded in July 2018. A pullback is overdue. Traders should exit. Hold.
Synchrony Financial (SYF – yield 2.6%) 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 is an undervalued, mid-cap growth & income stock. Wall Street expects 2019 EPS growth of 19.0%, and the P/E is extremely low at 7.1.
Goldman Sachs upgraded SYF from Hold to Buy last week. At a share price of 31.75, SYF is up 44% from its December low. The stock is nearing some solid price resistance at 33, where it last traded in September 2018. I’m moving SYF from Strong Buy to Hold, since it’s overdue for a pullback. Traders should exit. Hold.
TiVo (TIVO – yield 6.5%) 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 the afternoon of 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. The company is expected to report fourth quarter EPS of $0.74 on the afternoon of February 21. Expect volatility.
UEIC is an undervalued micro-cap stock, appropriate for risk-tolerant investors and traders. The stock had one big down day last week and immediately rebounded. That bodes well for near term price action that could push the stock out of the recent trading range, above 30. 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.
Note: “Hold” does not mean “Sell”. When in doubt, send me an email with your questions.
