STOCK CHARTS CONTINUE TO DEFY GRAVITY
Let me start by extending a hearty “Congratulations!” to investors who bought stocks in December. That turned out to be a brave move!
I haven’t added any new stocks for a while because we’ve already got 30 stocks in the portfolios. Our current stocks have mostly been rising: the good, the bad and the ugly. However, I always have a good list of stocks that are waiting in the wings, so I really should rotate into some of them. Today I’ll start by retiring Skechers (SKX) from the Buy Low Opportunities Portfolio. One or more new stocks will join the portfolios by next week’s March issue.
And speaking of movies—The Good, the Bad and the Ugly—an investor and I were corresponding about movies. I highly recommend Green Book (unless race relations make you tense), Bohemian Rhapsody (unless you don’t relate to popular music culture and gender issues), and The King’s Speech (an old favorite of mine—unless you’re a xenophobe—haha!). I actually only watch a handful of movies per year, and no television at all, so my friends will be stunned that I’m discussing the cinema.
Tell me your favorite movie! (But just one title, because otherwise I’ll be overwhelmed and I’ll zone out.)
INTERNATIONAL TRADE NEWS
Some of my subscribers will recall that I worked on international trade issues a few years back. I decided to add the occasional paragraph or two about current international trade negotiations to these weekly updates. Maybe you can get a jump on some trade-related stock market action, like we’re seeing recently among Chinese stocks.
In September 2018, the U.S. and Japan agreed to begin working on a bilateral trade agreement. Cabinet-level meetings will take place in April and May, ahead of a late-May meeting between President Trump and Prime Minister Shinzo Abe. Sticking points are likely to include Japanese tariffs on agricultural goods and U.S. tariffs on industrial goods. The U.S. International Trade Commission (USITC) will submit a report on February 28 with regard to the economic impact of a U.S.-Japan free trade deal.
Substantial labor reforms are expected to pass in the Mexican Congress by April, paving the way for potential ratification of the U.S.-Mexico-Canada Agreement (USMCA). Heads of state from Canada, Mexico and the U.S. signed the trade deal in November 2018. The countries’ legislatures must subsequently ratify the agreement. Mexican labor reforms are a key issue for many members of the U.S. House of Representatives.
U.S. Trade Representative Robert Lighthizer will meet with the House Ways & Means Committee on February 27 on the topic of U.S.-China trade. A recent meeting between the two countries’ Heads of State and trade representatives will purportedly result in an early March announcement. I’m personally interested to see what the countries might have agreed to with regard to currency manipulation, which has been a long-standing problem that’s typically ignored during trade negotiations. Any successful agreement on that topic, no matter how small, could provide a springboard for future progress, not only with China, but with many other countries as existing trade agreements are renegotiated.
One reason that trade agreements seem to be endlessly in the news is that they take so long to be written, revised and finalized. For example, the Trans-Pacific Partnership (TPP) trade agreement was a 5,544-page document that was being negotiated between 12 countries for the better part of a decade before it finally fell apart. (There were key pieces of that document that caused its undoing, which were never aired to the general public.)
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletins from February 20 and 22 in which I mentioned news, rating changes and/or price action on Apollo Global Management (APO), Delek U.S. Holdings (DK), Kraft-Heinz (KHC), Quanta Services (PWR), Southwest Airlines (LUV) and
QUARTERLY EARNINGS RELEASE CALENDAR
February 26 p.m.: Supernus Pharmaceuticals (SUPN) and TiVo (TIVO) – 4Q
EARNINGS SEASON SCORECARD
Big earnings beat: Alexion Pharmaceuticals (ALXN), CIT Group (CIT), Commercial Metals (CMC), Delek U.S. Holdings (DK), Knight-Swift Transportation (KNX), Marathon Petroleum (MPC), Quanta Services (PWR), 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), Total SA (TOT) and Universal Electronics (UEIC).
BUY-RATED STOCKS MOST LIKELY TO RISE MORE THAN 5% NEAR-TERM*
Abercrombie & Fitch (ANF)
Delta Air Lines (DAL)
Martin Marietta Materials (MLM)
Quanta Services (PWR)
Universal Electronics (UEIC)
*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
Skechers (SKX) moves from Hold to Retired.**
Total SA (TOT) moves from Hold to Buy.
LAST WEEK’S PORTFOLIO CHANGES:
Apollo Global Management, LLC (APO) moved from Hold to Buy.
Comerica (CMA) moved from Buy to Hold.
Delek U.S. Holdings (DK) moved from Strong Buy to Hold.
Martin Marietta Materials (MLM) moved from Hold to Buy.
Synchrony Financial (SYF) moved from Strong Buy to Hold.
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 facilities in Canada, the U.K. and the U.S. Management will present at the Bank of America Merrill Lynch 2019 Global Agriculture and Materials Conference on February 28.
CF is a cyclical mid-cap stock, affected by both currencies and natural gas prices (lower prices being optimal). The company is expected to grow EPS by 92% and 28% in 2019 and 2020, with corresponding P/Es of 18.5 and 14.5. When CF surpasses 45, that could signal a new run-up. Buy CF now. Strong Buy.
CIT Group (CIT – yield 2.7%) – Hold.* (last report February 19)
D.R. Horton (DHI – yield 1.5%) – Hold.* (last report February 19)
KLX Energy Services (KLXE) – Hold.* (last report February 19)
Knight-Swift Transportation Holdings (KNX – yield 0.7%) – Hold.* (last report February 19)
Marathon Petroleum (MPC – yield 3.3%) 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. New consensus earnings estimates reflect slow 2019 growth followed by a huge jump in EPS in 2020. 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 21.5% and 17.5% in 2019 and 2020. The 2019 P/E is 21.0. 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 0.4%) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. PWR is an undervalued mid-cap growth stock. The stock is actively rising, with price resistance at 40. Strong Buy.
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. LUV is an undervalued growth stock. Wall Street expects EPS to increase 22.2% in 2019, and the P/E is 10.4.
I was waiting for a pullback, at which time I had planned to return LUV to a Buy recommendation. The pullback arrived last week amidst some temporary bad news regarding a labor dispute and a quarterly revenue shortfall caused by the government shutdown. The share price hasn’t stabilized yet. I’ll let it get its footing before recommending new purchases. 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 is expected to report fourth quarter EPS of $0.27, within a range of $0.21-$0.34, and $105.5 million revenue, within a range of $102-$110.6 million, on the afternoon of February 26. SUPN is an undervalued, small-cap aggressive growth stock. Buy SUPN now. Strong Buy.
Voya Financial (VOYA – yield 0.1%) – Hold.* (last report February 19)
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Apollo Global Management, LLC (APO – yield 6.3%*) is an alternative asset manager with assets under management (AUM) totaling $280 billion, dispersed among credit, private equity and real estate investments. Most alternative asset managers, including Apollo, 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.
APO is an undervalued mid-cap growth & income stock. The stock is trading in a very tight range between 29 and 30, which is typically a bullish sign that a new run-up will begin shortly. Buy APO now. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.83 and yielding 6.3%.
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.
BX is an undervalued growth & income stock, and an excellent choice for dividend investors. The stock is edging higher. Nobody has missed this potential near-term 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 3.0%) – Hold.* (last report February 19)
Commercial Metals Company (CMC – yield 2.8%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC is an undervalued aggressive growth stock with an attractive dividend yield. Earnings estimates have been coming down since mid-January. Analysts now expect EPS to rise 32.2% and 19.8% in fiscal 2019 and 2020 (August year end). The 2019 P/E is quite low at 8.6. CMC is rising on strong volume amidst strength in the materials sector. When CMC surpasses 17.5, that could signal a new run-up. Buy CMC now. 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. The stock is rising. Its trading ranges have been erratic, but DAL could rise to 56 in the near term, given a neutral-to-bullish stock market. Strong Buy.
DowDuPont (DWDP – yield 2.7%) 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 55.82, there’s 7% 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 4.2%) 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 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 4.5%) – 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 is expected to see 2019 EPS grow 5.0% and 17.9% in 2019 and 2020, and the 2019 P/E is 10.7. I’m moving TOT from Hold to a Buy recommendation, now that the earnings outlook is improving and energy sector stock prices have begun climbing. TOT has price resistance at 59 and 64. Buy.
WestRock Company (WRK – yield 4.5%) is a global packaging and container company. WRK is an undervalued growth & income stock. At a share price of 39.91, there’s 17% 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. Abercrombie is expected to report fourth quarter EPS of $1.15, within a range of $1.01-$1.28, and sales of $1.1 billion, on the morning of March 6 (January year end). (For you balance-sheet enthusiasts, Abercrombie issued a press release on January 14 with some detailed expectations for the quarter.)
ANF is an undervalued small-cap growth stock with a big dividend yield. At a share price of 21.35, there’s 35% 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. Last week, Alexion announced that the U.S. Food and Drug Administration (FDA) has granted a priority review for SOLIRIS in the treatment of Neuromyelitis Optica Spectrum Disorder (NMOSD). This treatment application has also been filed in the EU, and will be filed in Japan shortly.
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 1.6%) is a manufacturer and provider of many popular technology devices and services, including 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 just now beginning a new run-up. Hold.
Baker Hughes, a GE co. (BHGE – yield 2.7%) offers products, services and digital solutions to the international oil and gas community. The number of U.S. rigs drilling for crude oil and natural gas fell by four last week to a total of 1,047, up 69 vs. a year ago.
Rational or not, there is a general perception among investors that Baker Hughes’ operations are somewhat linked to General Electric’s (GE) operations. Yesterday, GE announced they will receive $21.4 billion by selling their biopharma business to Danaher Corp. (DHR). GE will likely throw much of that money toward debt obligations and their underfunded pension plan, thus improving their balance sheet. In addition, the market will gain significant confidence in GE’s newest CEO. This news was well-received by the market, and could easily remove additional pressure from BHGE shares.
BHGE is an undervalued aggressive growth stock with an attractive dividend yield and a low debt-to-capital ratio. The current run-up could stop at 27, but based on the good GE news and bullish stock activity throughout the energy sector, I think BHGE is more likely to rise to 30 in the near-term, where it will still be undervalued. Buy.
Delek U.S. Holdings (DK – yield 2.9%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. Tremendous earnings growth in 2017 and 2018 is now expected to be followed by minor growth in 2019 and a decline in 2020. The stock is actively rising toward short-term price resistance at 40. Hold.
Skechers USA Inc. (SKX) – I’m retiring SKX from the Buy Low Opportunities Portfolio today. Earnings growth is projected to be moderate, and the stock is fairly valued. The big problem is that at a share price of 34.09, the stock is up 55% from its December low. It’s way overdue for a pullback. I’d rather remove SKX now and add a more undervalued growth stock to the portfolio, than hold SKX through what will likely be an extended period of consolidation. For now, SKX continues to rise. There’s strong price resistance at 38. Retired.**
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 15.5%, and the P/E is extremely low at 7.4.
Jefferies raised their price target on SYF to 40 last week. At 32.23, the stock is up 46% from its December low, and it’s still rising. SYF is nearing some solid price resistance at 33, where it last traded in September 2018. Hold.
TiVo (TIVO – yield 6.3%) 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.
UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. This new breakout could quickly take the stock price resistance at 36-37, where it will still be greatly undervalued. Buy UEIC now. 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.
**As a reminder, Retired means I’m removing the stock from the portfolio due to less attractive nuances in earnings growth, valuation, news and/or price charts. Sell means that I don’t think anybody should own the stock, due to at least one major problem. I differentiate the two because there are investors who become paralyzed at the idea of making sell decisions. I want to help you make that decision by emphasizing my degree of concern about the stock.
Note: “Hold” does not mean “Sell”. When in doubt, send me an email with your questions.
