POLITICS VS. THE ECONOMY
Over the years, I’ve noticed that it’s common for investors to view the stock market through a political prism. When their favored political party is ruling Washington, D.C., they are optimistic about stocks; and when their party is relegated to minority status, they express a dismal outlook about stocks. I spoke to one of these desperately unhappy and fearful investors in recent days, and the litany of complaints and disaster scenarios that he cited were enough to make a person go live in a cave!
I’m as “political” as they come, but I don’t make investing decisions based on politics. I make my decisions based on corporate successes (which show up via profit and revenue growth), economic facts (definitely not economic speculation) and stock market trends. Remember, stocks are little pieces of corporate ownership. If you own shares of PepsiCo (PEP), focus your attention on PepsiCo’s new product and revenue trends, and the strength of the U.S. dollar, and less attention on the Kool-Aid that your Congressperson is drinking.
I truly wish you peace in your investment experience.
SECTOR NEWS
Barron’s published a bullish piece on industrial stocks last week: The Industrial Recession is Ending. Our portfolio stocks from the industrial sector include Delta Air Lines (DAL), Knight-Swift Transportation (KNX), Quanta Services (PWR) and Southwest Airlines (LUV).
Norway’s $1 trillion sovereign wealth fund plans to divest itself from energy exploration and production stocks so as to limit the fund’s volatility as it relates to fluctuations in oil prices. The fund will keep its positions in integrated energy companies, including Total (TOT) and Equinor (EQNR). I haven’t recommended any of the affected stocks during the last year or so, through any publications or public events.
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletins from March 6 in which I mentioned news, rating changes and/or price action on Abercrombie & Fitch (ANF) and The Mosaic Co. (MOS).
BUY-RATED STOCKS MOST LIKELY TO RISE MORE THAN 5% NEAR-TERM*
Apple (AAPL)
Delta Air Lines (DAL)
DowDuPont (DWDP)
Supernus Pharmaceuticals (SUPN)
*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.
Apple (AAPL) moves from Hold to Buy.
CIT Group (CIT) moves from Hold to Buy.
Martin Marietta Materials (MLM) moves from Buy to Hold.
The Mosaic Company (MOS) moves from Strong Buy to Buy.
TiVo (TIVO) moves from Strong Buy to Hold.
Voya Financial (VOYA) moves from Hold to Buy.
LAST WEEK’S PORTFOLIO CHANGES
Abercrombie & Fitch (ANF) moved from Strong Buy to Hold.
Blackstone Group LP (BX) moved from Buy to Strong Buy.
Delek U.S. Holdings (DK) moved from Hold to Sell.
The Mosaic Company (MOS) joined the Buy Low Opportunities Portfolio as a Strong Buy.
Royal Caribbean Cruises (RCL) joined the Growth & Income Portfolio as a Strong Buy.
Sanmina Corp. (SANM) joined the Growth Portfolio as a 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. 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 27% in 2019 and 2020, with corresponding P/Es of 16.9 and 13.3. CF came down to the bottom of a three-month trading range last week. There’s 10% upside within the trading range, and additional potential gains this year when CF surpasses price resistance at 45. Strong Buy.
CIT Group (CIT – yield 2.8%) 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 is an undervalued growth stock with an attractive dividend yield. 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 2.8%.
Now that the stock has pulled back a bit, I’m moving CIT from Hold to Buy. Barring a takeover offer, the maximum near-term upside is 55, where the stock maxed out repeatedly in 2018. Buy.
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 10.6% in fiscal 2019 and 2020 (September year end). The 2019 P/E is 10.2. I’m not thrilled with the 2019 growth and value situation—although the 2020 situation looks much better—so I’m assessing D.R. Horton’s place in the portfolio week by week, with the intention of removing it soon. Here are some bullish tidbits that keep DHI temporarily on my radar:
• Several homebuilder stocks rose last week, showing better price action than the broader market.
• The DHI price chart just exhibited a bullish double-bottom pattern.
• DHI has the most attractive price chart of all the major homebuilder stocks right now.
• Jacob Mintz, Chief Analyst of Cabot Options Trader, reported a bullish option transaction worth $1.48 million on March 4.
• Last week’s economic report that itemized wage growth and lower unemployment serves to bolster sentiment toward homebuilder stocks.
The stock just began a new run-up toward last year’s high near 47. Hold.
KLX Energy Services (KLXE) will report fourth-quarter 2018 results tomorrow (March 12) morning (January year end). Expect volatility. KLXE is an undervalued microcap stock that joined the portfolio in 2018 as a spin-off from KLX Inc. (KLXI). Hold.
Knight-Swift Transportation Holdings (KNX – yield 0.7%) – Hold.* (last report March 5)
Marathon Petroleum (MPC – yield 3.6%) 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. Consensus earnings estimates reflect slow 2019 growth followed by a huge jump in 2020 EPS. The 2019 P/E is 9.0. The stock has pulled back along with the energy sector and the broader market. There’s price support in the mid-50s. 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 point toward EPS growth rates of 21.5% and 17.6% in 2019 and 2020. The 2019 P/E is 21.7. Last week, SunTrust Robinson raised their price target on MLM from 190 to 215. From a price chart perspective, the stock’s going to cease this run-up at about 205. I’m therefore moving MLM from Buy to Hold. Hold.
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 2019 consensus EPS estimate is $3.36, up four cents from last week, but Quanta told analysts that they expect 2019 EPS within a range of $3.30-$3.75. There’s lots of room for analysts to raise EPS estimates further (a bullish phenomenon), or else the market will experience upside earnings surprises as quarterly results are released (also bullish). PWR is resting after the big January and February run-up, with additional price resistance at 40. Strong Buy.
Sanmina Corp. (SANM) designs and manufactures optical, electronic and mechanical products for original equipment manufacturers (OEMs) in a broad variety of industries. The stock was featured in the March issue of Cabot Undervalued Stocks Advisor. Earnings per share are expected to grow 36.7% and 12.3% in 2019 and 2020 (September year end). The 2019 P/E is quite low at 9.8.
SANM is a small-cap growth stock. The stock pulled back last week, along with the broader market. Short term, SANM could easily trade anywhere between 28 and 36. This stock is appropriate for risk-tolerant aggressive growth investors. 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. Southwest is now booking mid-March service to Hawaii, with inter-island Hawaiian service commencing in April/May, and additional flights expected later this year. Fares are being priced more aggressively than expected, news of which coincided with a drop in airline stock prices last week, although Delta Airlines (DAL) held up fairly well.
Reuters published an article last week that reiterated my mantra that Berkshire Hathaway (BRK/A) might buy Southwest Airlines. It’s almost an outrageous idea, but financially, it’s doable. LUV is an undervalued growth stock. The stock is abruptly pulling back with its peers and with the broader market, and hasn’t found a bottom yet. Strong Buy.
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 management will present at the 2019 Cowen Healthcare Conference on March on March 13.
SUPN is an undervalued small-cap growth stock. Earnings estimates have been rising for several weeks. Analysts now expect EPS to increase 15.6% and 38.0% in 2019 and 2020. The corresponding P/Es are 15.9 and 11.5.
The stock broke out of a very stable trading range in late February, then pulled back with the broader market. This is an excellent time to buy SUPN. SUPN peaked at 60 in 2018, so that’s likely your maximum upside in 2019. Buy SUPN now. Expect volatility. 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% and 15.1% in 2019 and 2020, and the P/E is 9.1.
I anticipate VOYA trading between 45 and 55 in the coming months. Now that the stock has pulled back a bit, I’m moving VOYA from Hold to Buy. The company is prioritizing share repurchases and a large dividend increase this year, which should each contribute to share price appreciation. Buy.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Apollo Global Management, LLC (APO – yield 6.4%*) is an alternative asset manager with assets under management (AUM) totaling $280 billion, dispersed among credit, private equity and real estate investments.
A recent Barron’s article, Apollo Thinks It’s Big Enough, Tough Enough to be GE Capital, discussed Apollo’s growing credit business, with comparisons to the monstrously large GE Capital of former decades. In other news, Apollo is working with Wall Street heavyweights to clean up risky transactions in the credit default swap market, and Apollo is also cashing in their investment in Caesar’s Entertainment (CZR).
APO is an undervalued mid-cap growth & income stock. The stock is pulling back a bit with the market. There’s price resistance at 32 and 35. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.83 and yielding 6.4%.
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.
BX is an undervalued growth & income stock, and an excellent choice for dividend investors. There’s significant price resistance near 38, giving new investors a potential 13% capital gain. There’s also a chance that Blackstone Group will announce a conversion from an LP to a C-corp, which would garner a very bullish reaction among investors. Buy BX now. Strong 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 3.2%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Comerica will present at the 2019 RBC Capital Markets Financial Institution Conference on March 12. CMA is an undervalued growth & income stock. The stock has pulled back a bit from a long run-up. Hold.
Commercial Metals Company (CMC – yield 3.0%) 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. Analysts expect EPS to rise 27.5% and 18.9% in fiscal 2019 and 2020 (August year end). The 2019 P/E is quite low at 8.2. The stock is languishing. Patient investors can buy low and lock in an attractive yield. 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. Barron’s recommends Delta as the best-managed U.S. airline. The company plans to repurchase $1.3 billion of stock during the current quarter. DAL is an undervalued growth & income stock. Analysts expect 14.7% EPS growth in 2019, and the P/E is 7.7. Most airline stocks fell last week, while DAL held steady; it appears ready to rise. Buy DAL now. Strong Buy.
DowDuPont (DWDP – yield 2.7%) plans to break up into three companies in the coming months: Corteva Agriscience, Dow Chemical and DuPont. The materials science division of DowDuPont will be called Dow Chemical (DOW), also referred to as “the new Dow,” and will separate from DowDuPont by April 1. The remaining two companies will separate by June 1. All three stocks will pay dividends. The final DowDuPont dividend will be paid on May 28.
Barron’s reports that investors will receive one share of DOW for every three shares of DWDP that they currently own, and they estimate that DOW shares will trade at about 71. Based on available data, I calculate that there will be 751 million shares of DOW. The company intends to pay a second-quarter DOW dividend totaling $525 million, which would equal $0.70 per share. At a share price of $71, the annual DOW dividend yield would therefore be 3.9%. In addition, the initial repurchase authorization of $3 billion will potentially buy 5.6% of the outstanding shares.
DWDP is an undervalued growth & income stock. The three stocks are likely to trade at a higher total value than does DWDP right now. Once the spin-offs commence, the three companies should issue adjusted cost basis guidance, which I will relay to investors herein. Buy DWDP now. Strong Buy.
Guess?, Inc. (GES – yield 4.0%) is a global apparel manufacturer, selling its products through wholesale, retail, ecommerce and licensing agreements. Guess is expected to report fourth-quarter EPS of $0.75, within a range of $0.72-$0.77, and revenue of $831.2 million, with a range of $815-$844 million, on the afternoon of March 20 (January year end).
GES is an undervalued aggressive growth stock with a big dividend yield. Wall Street expects EPS to increase 47% and 34% in 2019 and 2020. The 2020 P/E is 16.0. The stock is rising toward price resistance at 25. Strong Buy.
Royal Caribbean Cruises (RCL – yield 2.4%) is a cruise vacation company that delivers travelers to desirable and exotic destinations on all seven continents. The company operates a total of 59 ships, with 17 on order, under the brand names Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises and Silversea Cruises. Royal Caribbean was featured in the March issue of Cabot Undervalued Stocks Advisor.
Royal Caribbean is a large-cap growth & income stock. Wall Street expects Royal Caribbean’s earnings per share (EPS) to grow 13.1% and 11.4% in 2019 and 2020. The 2019 price/earnings ratios (P/E) is 11.6.
The stock has traded quietly for six weeks, subsequent to its January 2019 run-up, presumably gathering strength for its next move. New investors can potentially earn a 13% capital gain as RCL returns to its 2018 high of 132, at which time the stock will still be undervalued (based on current earnings estimates). I would expect the stock to rest at that point, and then to continue rising. Buy RCL now. Strong Buy.
Schlumberger (SLB – yield 4.7%) – 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 EPS grow 5.0% and 17.9% in 2019 and 2020, and the 2019 P/E is 10.7. The stock has been steadily rising all year, with a small pullback last week. There’s price resistance at 59 and 64. Buy TOT now. Buy.
WestRock Company (WRK – yield 4.7%) is a global packaging and container company. WRK is an undervalued growth & income stock. The stock has not yet participated in the 2019 bull market. Patient investors should buy now, while WRK is at the bottom of a steady trading range and the dividend yield is near 5%. Buy.
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
Abercrombie & Fitch (ANF – yield 3.0%) 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 an undervalued small-cap growth stock with a big dividend yield. Prior to last week’s earnings report, Wall Street expected Abercrombie to earn $1.11 per share in the current fiscal year (January year end). That number has been revised to $1.43, reflecting an expectation of 24.3% EPS growth. The corresponding P/E is 18.3.
The following investment firms were all surprised by Abercrombie’s quarterly successes, and raised their monstrously low ratings and price targets on the stock: JPMorgan, Morgan Stanley, RBC, Telsey Advisory and Wedbush.
ANF is rising toward its 2018 high near 29, where traders should exit. The stock needs to theoretically rest from its huge run-up last week, so I’ll be leaving my recommendation as a Hold for quite a while. However, over the medium term, I’m bullish on the prospects for additional capital gains. Hold.
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. Management will host an Investor Day on March 20, in which they will highlight advances in their expanding pipeline of therapies for rare diseases, and discuss current business and their long-term growth strategy. Alexion will also present at the Cowen 39th Annual Health Care Conference tomorrow (March 12).
ALXN is an undervalued large-cap growth stock. Wall Street expects 2019 EPS to increase 17.6% and the P/E is 13.8. ALXN moves from Hold to Buy, now that the stock is experiencing a pullback. 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.
Yesterday, Bank of America Merrill Lynch raised their rating on AAPL from Neutral to Buy, with a 210 price target. After trading in almost a flat line throughout February—a bullish pattern on the price chart—AAPL just began a new run-up. Therefore, I’m also raising my recommendation from Hold to Buy. I anticipate immediate upside to the 190s, and yes, 210 is a reasonable price target. Buy.
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 11 last week to a total of 1,027, up 43 vs. a year ago. Yesterday, Baker Hughes and McDermott International (MDR) announced contract wins in which they will work with BP plc (BP) on subsea projects, off the coast of Mauritania and Senegal.
BHGE is an undervalued aggressive growth stock with an attractive dividend yield and a low debt-to-capital ratio. Wall Street expects EPS to grow 60% and 63% in 2019 and 2020. The 2019 P/E is 25.1. BHGE could reach 30 in the near term, where it will still be undervalued. Buy.
Synchrony Financial (SYF – yield 2.7%) – Hold.* (last report March 5)
The Mosaic Company (MOS – yield 0.3%) is the world’s largest supplier of phosphate and potash, supplying crop nutrients and animal feed ingredients via production facilities in the U.S., Canada, South America and the Asia-Pacific region. Mosaic was featured in the March issue of Cabot Undervalued Stocks Advisor.
The company just announced a reduction in U.S. phosphate production, in order to adjust for weather and inventory concerns, and to protect margins. The stock immediately gave up its year-to-date gains, trading now at recent price support near 28. I’m changing my recommendation from Strong Buy to Buy while the share price stabilizes. Buy.
TiVo (TIVO – yield 7.5%) 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 micro-cap stock. I’m moving TIVO from Strong Buy to Hold as we await news of M&A activity. Hold.
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. The stock has pulled back a bit from a rapid run-up. There’s price resistance at 36-37, where UEIC will still be greatly undervalued. 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.
