Cabot Undervalued Stocks Advisor Weekly Update

U.S. STOCKS ADVANCE, WHILE BOEING IS A DRAG ON THE DOW

U.S. stocks markets are now continuing their rebound from the horrendous fourth-quarter 2018 market action. The S&P 500 and NASDAQ indexes look quite bullish, while the Dow Jones Industrial Average (DJIA) lags a bit. And that makes sense because Boeing (BA) – the highest-priced stock in the DJIA – has been falling in conjunction with bad news about recent crashes of its 737 Max jet.

The DJIA is a price-weighted index of 30 stocks, with the higher-priced stocks affecting the index fluctuations far more than the lower-priced stocks. So it makes sense that shares of Boeing are suppressing the DJIA price action. I published an article last week with a recommendation that investors sell their Boeing shares: Quit Making Excuses and Sell Boeing Stock.

If you own Boeing, consider moving your capital into Apollo Global Management (APO), Apple (AAPL), Delta Air Lines (DAL) or Supernus Pharmaceuticals (SUPN), which all seem capable of near-term advances. If you want to take a chance at making up for your recent Boeing loss more quickly by taking on more risk, Guess? (GES) and Commercial Metals (CMC) are each reporting quarterly results this week. One way or another, they’re likely to be volatile.

ECONOMIC & TRADE NEWS

The Wall Street Journal reported that U.S. manufacturing employment has risen for 18 straight months, adding 274,000 jobs. That’s the longest stretch of gains among nonsupervisory manufacturing jobs since the mid-1990s.

Inflation worries eased yet again last week as Consumer Price Index numbers came in lower than expected, led by drops in auto and pharmaceutical pricing. Rising inflation could theoretically cause the Federal Reserve to raise interest rates. Rising wages could be a supportive factor in such a Fed decision, but would not be a primary cause of rate hikes.

Last week, China’s National People’s Congress passed a law that prohibits forced technology transfers, which formerly occurred when foreign companies entered into partnership with Chinese businesses. It remains to be seen whether the new law will have enough teeth to alleviate U.S. concerns during trade negotiations.

Send questions and comments to Crista@CabotWealth.com.

*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
Blackstone Group LP (BX) moves from Strong Buy to Buy.
Comerica (CMA) moves from Hold to Buy.
KLX Energy Services (KLXE) moves from Hold to Sell.
Quanta Services (PWR) moves from Strong Buy to Hold.

LAST WEEK’S PORTFOLIO CHANGES
Alexion Pharmaceuticals (ALXN) moved from Hold to Buy.
Apple (AAPL) moved from Hold to Buy.
CIT Group (CIT) moved from Hold to Buy.
Martin Marietta Materials (MLM) moved from Buy to Hold.
The Mosaic Company (MOS) moved from Strong Buy to Buy.
TiVo (TIVO) moved from Strong Buy to Hold.
Voya Financial (VOYA) moved from Hold to Buy.

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 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 90% and 26% in 2019 and 2020, with corresponding P/Es of 18.2 and 14.5. CF is rising toward the top of a four-month trading range. A breakout above 45 could lead the stock as high as 55, where it last traded in early October. 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. Barring a takeover offer, the maximum near-term upside is 55, where the stock peaked repeatedly in 2018. Buy.

D.R. Horton (DHI – yield 1.5%) – Hold.* (last report March 12)

KLX Energy Services (KLXE) reported fourth-quarter results last week (January year end), reflecting very strong revenue growth, a double-digit percentage increase in new customers, and the introduction of new service lines. Quarterly profits came in vastly higher than the two contributing analysts’ estimates.

KLXE is an undervalued microcap stock that joined the portfolio in 2018 as a spin-off from KLX Inc. (KLXI). I’m ready to remove KLXE from the Growth Portfolio because there are not enough analysts covering the stock to provide any sort of reliable projections on revenue and earnings trends. Sell.

Knight-Swift Transportation Holdings (KNX – yield 0.7%) – Hold.* (last report March 5)

Marathon Petroleum (MPC – yield 3.5%) 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. Reuters reported last week that MPC is one of Cowen & Co.’s favorite refining & marketing stocks. Consensus earnings estimates reflect slow 2019 EPS growth followed by a 47% jump in 2020 EPS. The 2020 P/E is 6.5. The stock is trading between 57 and 67, and not yet ready to advance further. Strong Buy.

Martin Marietta Materials (MLM – yield 1.0%) – Hold.* (last report March 12)

Quanta Services (PWR – yield 0.4%) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. I have both enthusiasm and concern over this stock right now.
• Bullish: The 2019 consensus EPS estimate is $3.41, up another five 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).
• Bearish: While the 2019 EPS estimate keeps rising, the 2020 EPS estimate hasn’t budged. It’s reflecting just 3.2% EPS growth. Is that because analysts are so focused on catching up to 2019 projections for Quanta that they haven’t thought about 2020? Or is that because analysts truly do not anticipate earnings growth in 2020? If the 2020 earnings estimate doesn’t lurch upward soon, I won’t be inclined to hold the stock throughout 2019.
• Bullish: The stock just began yet another run-up.
• Bearish: At 37.35, the stock is up 33% from its December low, and it’s fast approaching some significant price resistance at 40. There’s a very strong chance that PWR will come to a dead stop at 40, and then pull back.

I’m moving PWR from Strong Buy to Hold, and will decide week-to-week whether I’ll hold it much longer. Hold.

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 10.1.
SANM is a small-cap growth stock. The stock pulled back after its January run-up, and will likely trade between 29 and 33 in the short term. 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. With regard to the Boeing 737 Max jet problem, Investor’s Business Daily reports that the 737 Max was set to account for 7.8% of Southwest’s flight capacity this year.

LUV is an undervalued growth stock. Wall Street expects EPS to grow 20.3% in 2019, and the P/E is 10.1. Most airline stocks fell from late February through early March, and LUV bounced at price support at 50. At a price of 51.37, there’s 15% upside as LUV travels back to its February high at 58. 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. Investors may listen to the webcast of Supernus’s presentation at the recent 2019 Cowen Healthcare Conference.

SUPN is an undervalued small-cap growth stock. Analysts expect EPS to increase 14.6% and 37.4% in 2019 and 2020. The corresponding P/Es are 16.2 and 11.8. 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 9.4. VOYA is showing continued strength, and could retrace its 2018 highs of 54-55 in the near future. 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 6.3%*) is an alternative asset manager with assets under management (AUM) totaling $280 billion, dispersed among credit, private equity and real estate investments. Last week, Brookfield Asset Management (BAM) agreed to buy Oaktree Capital Group LLC (OAK). Each are peers of Apollo. The merger activity could serve to enhance market valuation of Apollo shares.

APO is an undervalued mid-cap growth & income stock. The stock has traded sideways since early February, with a small pullback and rebound in early March. Watch for a possible near-term run-up to commence. 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 6.3%.

Blackstone Group LP (BX – yield 6.1%*) 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 has begun another advance. I’m moving BX from Strong Buy to Buy, simply because there’s less near-term upside to significant price resistance near 38. There’s still 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.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.14 and yielding 6.1%.

Comerica (CMA – yield 3.3%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Investors may access Comerica’s presentation at the recent 2019 RBC Capital Markets Financial Institution Conference on the company’s website. CMA is an undervalued growth & income stock. I moved CMA from Buy to Hold on February 19, because a pullback was overdue after a quick 37% run-up. Now that the pullback has occurred, and the share price seems to be at a stable trough, I’m moving CMA back to a Buy recommendation. Buy CMA now. Buy.

Commercial Metals Company (CMC – yield 3.0%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. The company is expected to report second quarter EPS of $0.26, within a range of $0.19-$0.41, and $1.5 billion revenue, within a range of $1.2-$1.7 billion, on the morning of March 21 (August year end). Expect volatility.

In recent days, Barron’s published a bullish report on steel stocks, saying, “The price of steel has risen to $703 per net ton, off recent lows of $675, and a number of analysts expect it to head near $800 or above in the year ahead,” including the Bank of America analyst. The article cited Commercial Metals as benefiting from higher prices and its defensive position as a low-cost producer, and that CMC is trading at a 35% discount to historical levels.

CMC is an undervalued aggressive growth stock with an attractive dividend yield. Analysts expect EPS to rise 22% and 24% in fiscal 2019 and 2020. The 2019 P/E is quite low at 8.7. The stock is languishing within a steady trading range. Patient investors can buy low and lock in an attractive yield. A bullish reaction to the earnings report and/or to the Barron’s article, could push CMC to short-term price resistance at 17.5. There’s additional resistance at 19. 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. Last week, Berkshire Hathaway (BRK/A) purchased $325,000 of Delta stock. With regard to the Boeing 737 Max jet problem, Delta does not have any of the affected jets in its fleet. Delta is also deemed insulated from price wars or market share losses that could affect many other airlines as Southwest Airlines (LUV) begins service to Hawaii.

DAL is an undervalued growth & income stock. Analysts expect 14.7% EPS growth in 2019, and the P/E is 7.9. DAL has a far more bullish price chart than any other U.S. airline stock right now; so much so that I would expect any investment professional who’s perusing airline stocks this week to quickly recognize the opportunity to ride DAL upward while its peers flounder. The DAL price chart history is a bit erratic, so I’m estimating that this run-up could carry DAL anywhere between 55-60. 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. I’ve mentioned that DowDuPont and United Technologies (UTX) might each be removed from the Dow Jones Industrial Average, because each company is planning to split into three companies. In recent days, Motley Fool covered that topic again.

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 3.9%) 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, this Wednesday afternoon, 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 16.5. A favorable earnings report could push GES past 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 an undervalued, large-cap growth & income stock. The stock has traded quietly for seven weeks, presumably gathering strength for its next move. New investors can potentially earn a 12% 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). Buy RCL now. Strong Buy.

Schlumberger NV (SLB – yield 4.7%) is the world’s largest oilfield service company. Goldman Sachs initiated coverage on oilfield services companies last week, rating SLB a Buy, and citing industrywide low valuations and strong cash flows. I’m not pleased with the 2019 growth situation, although the 2020 growth & value outlook appears significantly attractive. The stock has traded between 41 and 46 for two months, and does not yet appear ready to rise. Dividend investors should feel comfortable buying low right now, in order to lock in the attractive current yield. Hold.

Total S.A. (TOT – yield 5.2%) 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 10.9. The stock has been steadily ratcheting upward all year. There’s price resistance at 59 and 64. Buy.

WestRock Company (WRK – yield 4.8%) 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. In a post-fourth-quarter earnings analysis of 15 major clothing retailers, ANF rose more upon the first trading day subsequent to their earnings releases than any of their peers. On March 14, Zacks recommended ANF as their Bull of the Day. Nigel Travis, ex-CEO of Dunkin’ Donuts, reported a recent $75,000 purchase of ANF.

ANF is an undervalued small-cap growth stock with a big dividend yield. The consensus earnings estimate continues to rise in the wake of strong fourth-quarter results. Analysts now expect EPS to grow 26.1% in fiscal 2020 (January year end), and the P/E is 18.2. ANF is resting from its huge March run-up. There’s price resistance at its 2018 high near 29. 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 this Wednesday, 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. Investors may listen to the webcast of Alexion’s presentation at the recent Cowen 39th Annual Health Care Conference.

ALXN is an undervalued large-cap growth stock. Wall Street expects 2019 EPS to increase 17.6% and the P/E is 14.6. The stock is showing strength, and could reach the mid-140s before resting again. 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. Last week, Apple and Stanford Medicine reported results of the Apple Heart Study, which monitored the heartbeats of over 400,000 participants who wore the Apple Watch. The study notified 0.5% of the participants (approximately 2000 people) that irregular heartbeats were detected, suggestive of atrial fibrillation (AFib).

The stock is slightly undervalued, and continues to rise. AAPL traded as high as 230 in October. Buy.

Baker Hughes, a GE Co. (BHGE – yield 2.6%) 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 one last week to a total of 1,026, up 36 vs. a year ago. Credit Suisse and Jefferies raised their price targets on BHGE last week. Goldman Sachs initiated coverage on oilfield services companies last week, rating BHGE highest as a Conviction Buy, and citing industrywide low valuations and strong cash flows.

Wall Street expects EPS to grow 57% and 65% in 2019 and 2020. The corresponding P/Es are 27.3 and 16.6, and the long-term debt-to-capitalization ratio is quite low at 15%. The stock is actively rising. BHGE could easily reach 30 in the near term, and possibly 34. Buy.

Synchrony Financial (SYF – yield 2.5%) 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 12.6%, and the P/E is low at 7.9.

The stock is reacting very well to economic data that points to low inflation and wage gains, indicating that consumer credit quality presents minimal risk right now. At 33.31, the stock is up 51% from its December low. SYF could travel as high as 39 this year, where it last traded in January 2018. Hold.

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. MOS recently traveled down toward its December low, and has now turned upward. Fortunately, this stock does not sit still. There’s 16% upside as MOS heads back to its February high of 33.5. Buy.

TiVo (TIVO – yield 7.8%) creates products and licensable technology that enable the world’s leading media and entertainment providers to nurture more meaningful relationships with their audiences. Last week, TiVo announced that Funimation, the leading global anime content provider and a subsidiary of Sony Pictures Television (SPT), has licensed the Search, Recommendations and Insight modules of TiVo’s Personalized Content Discovery (PCD) platform. TIVO is a micro-cap stock. I am awaiting news of potential M&A activity, as per TiVo management’s direction. 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. Management will present at the Sidoti Spring 2019 Investor Conference on March 28.

UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. The stock appears capable of promptly rising to 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.