Cabot Undervalued Stocks Advisor 119

Amidst a bearish stock market, we’re adding one big-dividend stock to our portfolios today. Lacking much stock market excitement and lower-risk near-term capital gain opportunities, I decided to post some corporate news and price action on a couple stocks—not featured in our portfolios, but still of interest to many investors.

Cabot Undervalued Stocks Advisor 119

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The Stock Market is on Winter Vacation ... in the Dog House

We’re entering 2019 at what might be the bottom of a three-month stock market downturn. I anticipate that the market won’t return to its 2018 all-time highs until the third quarter of 2019, at the earliest. Market indexes are going to need to trade sideways for quite a few months before they can attempt to recover. Whether you’re an income investor who’s shopping for big dividend yields while share prices are depressed, or a trader who’s all set to take advantage of many months of sideways price action, you can minimize your investment risk by sticking with undervalued stocks that have strong fundamentals.

I’m yearning to add new stocks to the portfolios, and I’ve got almost a hundred attractive companies waiting in the wings. But other than the stocks that I’ll be featuring in this year’s Top 10 Stocks to Buy and Hold for 2019 report, there are very few stocks that have both attractive fundamentals and price charts that give hope for near-term capital gains. Fortunately, stock markets change daily, and we won’t have to wait long for price charts to begin improving.

Lacking a decent price chart, though, I’m adding Apollo Global Management, LLC (APO) to the Growth & Income Portfolio today, due to the extraordinary dividend yield and the eventual capital gain opportunity.

In the interim, we can review stocks that are frequently in the news, which you might own or have considered owning. Hopefully I can help you know how to proceed.

After a year of warning investors about problems at General Electric (GE) and the suffering share price, I went neutral on the share price in the December issue of Cabot Undervalued Stocks Advisor, saying “If I were previously playing with put options and short-selling, I’d rein in my positions now.” The stock stopped falling a few days later and has since traded between 6.75 and 8. (GE is not part of the Cabot Undervalued Stocks Advisor portfolios.)

GE plans a future focus on its power, renewable energy and aviation businesses. In mid-December, the company filed for an initial public offering (ipo) of GE Healthcare, a profitable business that makes imaging machines and other hospital equipment. The IPO might take place in the second quarter of 2019.

The earnings outlook at GE is okay—as opposed to projecting net losses—with analysts expecting earnings per share (EPS) of $0.71 and $0.85 in 2018 and 2019. The 2019 price/earnings ratio (P/E) is 8.8, and of course, the cash flow and debt situations are exceedingly unattractive.

Nevertheless, the worst is probably over for the GE share price, unless, of course, additional significant bad news emerges. And you know what? Bad corporate situations—as with bad political situations—almost always continue to deliver bad news. So there’s your fair warning on GE. It’ll probably trade between 7 and 9 for a few months. Experienced traders can probably make money on the stock, and everybody else should stick with more fundamentally attractive companies.

In this week’s news, the company name of Michael Kors Holdings Limited (KORS) will change to Capri Holdings Limited on January 2, and the new stock symbol will be CPRI. (KORS/CAPRI are not part of the Cabot Undervalued Stocks Advisor portfolios.) Capri just completed the acquisition of fashion luxury house Versace. Chief Creative Officer Donatella Versace will continue in her position at the company. The third famous brand within the Capri family is Jimmy Choo.

I love Michael Kors clothing because the clothes and shoes fit me very well. However, I don’t make stock market decisions based on my fondness of a company’s products and services, so let’s look at the numbers.

The company is expected to see EPS grow 11.1% and 4.8% in fiscal 2019 and 2020 (March year-end), with corresponding revenue increases of roughly 8% and 4%. While those numbers are not exciting, they are an improvement over several recent years when Michael Kors’ revenue and earnings lacked distinct growth.

There are more than two dozen Wall Street analysts who are providing research coverage on the stock. Investors should expect new research reports and revised earnings estimates in the coming weeks as analysts factor in the effects of the Versace acquisition, including projected increases in EPS, revenue and debt. (The previous debt-to-capitalization ratio was quite low.)

The stock has fallen tremendously since its 2018 peak at 75 in August. There’s currently no compelling reason to buy CPRI. If I owned the stock, I’d be planning to exit near price resistance at 45, in favor of a company with stronger earnings growth.

Send questions and comments to crista@cabotwealth.com.

Portfolio Notes

Quarterly Earnings Release Calendar

January 7 am: Commercial Metals – 1Q
January 16 am: Comerica (CMA) – 4Q
January 17 am: BB&T Corp. (BBT) – 4Q
January 18 am: Regions Financial (RF) – 4Q
January 25 am: D.R. Horton (DHI) – 1Q
January 31 am: WestRock (WRK) – 1Q

Buy-Rated Stocks Most Likely* to Rise More than 5% Near-Term

Delta Air Lines (DAL)

*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:
Apollo Global Management, LLC (APO) joins the Growth & Income Portfolio.
DowDuPont (DWDP) moves from Strong Buy to Buy.
Southwest Airlines (LUV) moves from Strong Buy to Hold.
Voya Financial (VOYA) moves from Strong Buy to Hold.
WestRock (WRK) moves from Strong Buy to Buy.

Last Week’s Portfolio Changes:
None

Growth Portfolio

Growth Portfolio stocks have bullish charts, strong projected earnings growth, little or no dividends, low-to-moderate P/Es (price/earnings ratios) and low-to-moderate debt levels.

Featured Stock: Quanta Services (PWR—yield 0.5%)

There’s only one Buy-rated stock in our Growth Portfolio today, due to bearish price charts throughout the stock market. That stock is Quanta Services (PWR), which provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Investors can learn more about Quanta by listening to the company’s November 28 presentation at the Credit Suisse Industrials Conference.

PWR is an undervalued growth stock. Revenue is expected to increase approximately 16% and 4% in 2018 and 2019. Wall Street’s estimates for Quanta’s 2018 and 2019 EPS growth rates increased consistently throughout 2018, starting at 26.0% and 8.1% in January and rising to 40.1% and 15.6% in December. The 2019 P/E is low at 9.4. On December 7, Quanta announced that it will begin paying a quarterly dividend of $0.04 per share, with the intention of increasing the payout over time.

The stock traded dependably between 30 and 40 for two years, then briefly dipped below 30 as weakness in the broader stock market pulled the share price down. Nevertheless, the stock quickly rebounded to 30, showing more strength than most growth stocks. As with most U.S. stocks, new investors will need patience, which could easily be rewarded by a hefty capital gain as the stock eventually returns to its 2018 highs. Buy.

Updates on Growth Portfolio Stocks

CIT Group (CIT – yield 2.6%) – Hold.*

D.R. Horton (DHI – yield 1.7%) – Hold.*

KLX Energy Services (KLXE) is an undervalued aggressive growth stock. Analysts expect EPS and revenue to rise 35.1% and 17.2%, respectively, in fiscal 2020 (January year end). The 2020 P/E is quite low at 7.7, as are the P/Es of most other oilfield services companies. I will not be issuing a Buy recommendation on a company that has only two analysts contributing to consensus earnings estimates. The stock could fluctuate between 21 and 30 in the coming months. Hold.

Knight-Swift Transportation Holdings (KNX – yield 1.0%) – 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. Barron’s interviewed Marathon CEO Gary Heminger in late December. Here are some key takeaways:

Gasoline will probably stay in the low $2 range through the winter. [President Trump] has recognized that energy dominance for the U.S. is achievable.

We expect strong growth in exports over the next few years.

The refining industry has reduced emissions by more than 70% over the past 20 years.

…I believe that vehicles running on liquid fuels will clearly be the lowest-cost form of transportation for the next 40 years.

…refiner stocks seem to move with the crude-oil price, even though a lower crude price means our feedstock costs are going down.

We expect to return 50% of free cash flow or greater to shareholders. That equates to $2.5 billion a year in stock buybacks.

MPC is an undervalued aggressive growth stock with an attractive dividend yield. Wall Street expects EPS to increase 33.7% and 46.9% in 2018 and 2019, while the 2019 P/E is just 7.6. Management expects to increase the dividend payout by at least 10% in 2019. Hold.

Martin Marietta Materials (MLM – yield 1.1%) is a supplier of stone, sand, gravel, cement, concrete and asphalt. The company foresees a continuing growth trajectory, fueled by strong demand combined with increased government spending. MLM was featured as a top recommendation in this December MarketWatch article on infrastructure stocks. Wall Street expects EPS to grow 14.5% and 18.1% in 2018 and 2019. The 2019 P/E is 17.3. The price chart is not as bearish as those of most U.S. stocks right now, but I’d like to see the trading range stabilize further before giving the stock a Buy recommendation. Hold.

Southwest Airlines (LUV – yield 1.4%) 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’s EPS projections for Southwest rose again last week. Analysts now expect EPS to grow 18.9% and 16.1% in 2018 and 2019. The 2019 P/E is 9.7. I’m moving LUV from Strong Buy to Hold until the share price stabilizes. 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 recently reported positive Phase III trial results for SPN-812 for the treatment of adolescents with attention deficit hyperactivity disorder (ADHD). Management will present at the 2019 J.P. Morgan Healthcare Conference on January 9.

SUPN is an undervalued, small-cap aggressive growth stock. Wall Street expects EPS to grow 46.8% and 27.6% in 2018 and 2019. The 2019 P/E is 13.8. Hold.

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 increase 108% and 36.6% in 2018 and 2019, and the 2019 P/E is 7.3. Management intends to increase the dividend yield to 1% in 2019. I’m moving VOYA from Strong Buy to Hold until the share price stabilizes. Hold.

* 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.

Growth & Income Portfolio

Growth & Income Portfolio stocks have bullish charts, good projected earnings growth, dividends of 1.5% and higher, low-to-moderate P/Es (price/earnings ratios), and low-to-moderate debt levels.agencies, and the company is focused on continued debt reduction.

Featured Stock: Apollo Global Management, LLC (APO—yield 8.0%)

I frequently mention the benefits of buying big-dividend stocks while their prices have been temporarily pushed down by bearish stock market trends. In that light, the company with the biggest current yield on my waiting-in-the-wings Buy List is Apollo Global Management, LLC (APO), an alternative investment company that operates in a similar fashion to Blackstone Group LP (BX) within our Growth & Income Portfolio. Apollo’s assets under management (AUM) total $270 billion, broken down as follows: credit (68%), private equity (27%) and real estate (5%).

APO is a mid-cap stock with a market capitalization of $4.9 billion. (For comparison, BX has a market cap of $36 billion.) The most recent four quarterly dividend payouts totaled $1.93. At a share price of 23.95, the stock is therefore yielding 8.06%. What’s more, the stock traded as high as 35.5 in October, so there’s 48% capital gain potential for new investors if the stock rebounds to its 2018 highs.
I’m frankly not pleased with the price chart, which looks as dismal as those of most popular stocks right now. However, as the dividend yield increases in relation to the falling share price, the prospect of owning APO shares becomes more compelling for both individual and institutional investors. Last week, Tiger Global Management reported a recent purchase of 1.1 million APO shares at an approximate cost of $26 million.

APO joins the Growth & Income Portfolio today, with the caveat that the share price will likely continue to stagnate for a while. I’m giving APO a Buy recommendation and encouraging income investors and patient growth investors to buy now. When the price chart gathers strength, I’ll upgrade my recommendation to a Strong Buy.

Updates on Growth & Income Portfolio Stocks

BB&T Corp. (BBT – yield 3.8%) is a 145-year-old financial holding company with $222.9 billion in assets and 1,900 financial centers that serve businesses and individuals. BBT is an undervalued growth & income stock. Dividend investors can buy now, while growth investors should wait for the price chart to improve. Buy.

Blackstone Group LP (BX – yield 8.0%*) is the world’s largest and most diversified alternative asset manager with $456.7 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. Speculative investors have an opportunity for outsized capital gains if BX converts from an L.P. to a C-corp. next year. CEO Steve Schwarzman commented in a late December Barron’s interview, “It is interesting that inclusion in index funds seems to be working out for KKR (KKR). I think it will be interesting to evaluate things in light of this market decline to see how trading in their securities compares with ours and the other alternative managers.”

At a share price of $30.09, the dividend yield on new purchases is 8.0%, and there’s 29% capital gain potential as BX travels back to its September 2018 high of 39. Dividend investors should lock in this extraordinary yield. Strong Buy.

*The payout varies each quarter with the total of the last four announced payouts equaling $2.42 and yielding 8.0%.

Comerica (CMA – yield 3.5%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Comerica is one of the most asset-sensitive banks in the U.S., with variable rate loans amounting to almost 90% of total loans, and non-interest bearing deposits totaling 52% of all deposits, thus benefiting from rising interest rates.

CMA is an undervalued growth & income stock. Consensus earnings estimates grew consistently all year, and are now expected to rise 50.8% and 12.0% in 2018 and 2019. The 2019 P/E is 8.4. Investors can expect Comerica to continue to make significant share repurchases and a dividend increase in 2019. The share price remains weak. 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 46.3% EPS growth in fiscal 2019 (August year end), and the P/E is quite low at 7.3. Dividend investors can buy now, while growth investors should wait for the price chart to improve. Buy.

Delta Air Lines (DAL – yield 2.8%) is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. Management expects 2019 revenue to rise 4-6%, along with falling fuel prices and rising pre-tax margins. DAL is an undervalued growth & income stock. Consensus EPS estimates have consistently risen since late October. Analysts now expect EPS to grow 13.4% and 20.2% in 2018 and 2019. The 2019 P/E is 7.5. After reaching new all-time highs in November, and amidst weakness in the broader stock market, DAL remained firmly within its 2018 trading range, between 48 and 61. At a share price of 50.18, there’s 21% upside as DAL travels back to 61. Strong Buy.

DowDuPont (DWDP – yield 2.9%) plans to break up into three companies by June 2019: Corteva Agriscience, Dow Chemical and DuPont. DWDP is an undervalued growth stock with an attractive dividend yield. Consensus estimates indicate EPS growth rates of 22.3% and 15.1% in 2018 and 2019. The 2019 P/E is 11.2. I’m moving DWDP from Strong Buy to Buy due to weakness in the share price. Dividend investors can buy now, while growth investors should wait for the price chart to improve. Buy.

GameStop (GME – yield 12.3%) – Hold.*

Guess?, Inc. (GES – yield 4.4%) is a global apparel manufacturer, selling its products through wholesale, retail, ecommerce and licensing agreements. Revenue growth largely stems from expansion in Asia and Europe, while rising operating margins are contributing to multi-year earnings per share (EPS) growth. The fiscal 2019 earnings estimate rose last week (January year end). Analysts now expect EPS to grow 58.6% and 21.6% in fiscal 2019 and 2020. The 2020 P/E is 15.3.

GES is an undervalued aggressive growth stock with a big dividend yield. The stock briefly dropped to 18.5 during last week’s extreme stock market volatility, then quickly resumed trading above 19.5. There’s upside resistance at 24, which gives traders room to make attractive short-term profits as we wait for the broader market to recover. Strong Buy.

Regions Financial Corp. (RF – yield 4.2%) – Hold.*

Schlumberger (SLB – yield 5.5%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas rose by three last week to a total of 1,083, up 154 vs. a year ago. Management expects weak oil prices and pipeline bottlenecks to lower North American revenue for several months. SLB is an undervalued growth stock. Analysts expect EPS to grow 17.0% in 2019. The 2019 P/E is 19.0. Dividend investors can buy now, while growth investors should wait for the price chart to improve. Buy.

Total S.A. (TOT – yield 5.7%) is a French multinational oil and gas company operating in over 130 countries. TOT is an undervalued growth & income stock with a large dividend yield. Analysts expect EPS to grow 30.8% and 6.9% in 2018 and 2019. The 2019 P/E is 9.1. Dividend investors and patient growth investors can buy now. There’s 24% capital gain potential as TOT travels back to its September high of 65 in the coming year. Strong Buy.

WestRock Company (WRK – yield 4.9%) is a global packaging and container company. WRK is an undervalued growth & income stock with a big dividend yield. Analysts expect EPS to grow 12.5% in fiscal 2019 (September year end), and the P/E is 8.1. I’m moving WRK from Strong Buy to Buy, due to share price weakness. Dividend investors can buy now, while growth investors should wait for the price chart to improve. Buy.

Buy Low Opportunities Portfolio

Buy Low Opportunities Portfolio stocks have neutral charts, strong projected earnings growth, low-to-moderate price/earnings ratios (P/Es) and low-to-moderate debt levels. (Dividends are not a portfolio requirement, but some of the stocks will have dividends.) Investors should be willing to wait patiently for these stocks to climb.

Sometimes a stock in the Buy Low Opportunities Portfolio produces good capital gains and the share price is no longer low, yet the stock remains an attractive investment. Those stocks will then be moved into the Growth Portfolio or the Growth & Income Portfolio.

Featured Stock: Delek U.S. Holdings (DK—yield 3.2%)

Other than TiVo (TIVO), which is a special situation stock, there’s only one Buy-rated stock in our Buy Low Opportunities Portfolio today, due to bearish price charts throughout the stock market. That stock is Delek U.S. Holdings (DK), 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 acquired Alon USA Energy (ALJ) and Alon USA Partners in 2017 and 2018.

You may learn more about Delek by viewing this 38-page December Investor Presentation on their website.
DK is an extremely undervalued, aggressive growth, small-cap stock. Wall Street expects EPS to grow 301% and 36.5% in 2018 and 2019. The 2019 P/E is 5.3.

Cabot Undervalued Stocks Advisor investors made big capital gains on DK in early 2018. I sold the stock in January 2018 after a two-month hold, achieving a 30% total return. Then I bought & sold the stock again in February and May, locking in another 76% total return. I have every intention of holding DK now for additional capital gains in 2019.

In December, the stock bounced again at its 2018 low price, previously touched in February. If DK returns to its June 2018 high near 60, new investors will have doubled their money. While waiting for capital gains, collect your 3.2% dividend yield and busy yourself with friends and hobbies—a far more fruitful pastime right now than staring at daily S&P 500 fluctuations. Buy.

Updates on Buy Low Opportunities Portfolio Stocks

Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. The FDA just approved a next-generation Soliris product—Ultomiris— two months ahead of schedule. Pricing for Ultomiris will be lower than with Soliris, causing some investor concern. It’s important to note that the consensus earnings estimate has not changed, meaning that analysts are not expecting the prospect of comparably lower Ultomiris revenue to impact 2019 profits. Alexion will present at the Goldman Sachs 11th Annual Healthcare CEO conference on January 3. ALXN is an undervalued growth stock. Hold.

Apple Inc. (AAPL – yield 1.9%) is a manufacturer and provider of many popular technology devices and services, include the iPhone, iPad, App Store, Apple Care, iCloud and more. AAPL is an undervalued growth & income stock. The company is morphing from reliance on iPhones to provide revenue growth to an expectation that Apple Services and Wearables will provide 100% of revenue growth in the coming years, making the topic of iPhone unit sales less and less relevant. However, despite the company’s successful annual earnings and revenue growth, investors are worried about Apple based on news headlines about iPhone unit sales. Analysts expect fiscal 2019 EPS to rise 11.6% (September year end), with a current P/E of 11.8. The share price remains weak. Hold.

Baker Hughes, a GE co. (BHGE – yield 3.4%) 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 three last week to a total of 1,083, up 154 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 full year EPS to increase by 51.2% and 105% in 2018 and 2019. The 2019 P/E is 15.9. The share price remains weak. Hold.

Skechers USA Inc. (SKX) – Hold.*

Synchrony Financial (SYF – yield 3.6%) is a consumer finance company with $56.5 billion in deposits and 74.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans.

Synchrony entered into an agreement in December to provide private label credit card services to Qurate Retail Group’s HSN. Qurate also signed multi-year contract extensions with Synchrony for two more of its businesses: QVC and zulily. In 2018, Synchrony secured more than 35 new credit partnerships and extended 50 partner programs.

SYF is a very undervalued aggressive growth stock with an attractive dividend yield. Wall Street expects EPS to grow 36.3% and 24.6% in 2018 and 2019. The 2019 P/E is extremely low at 5.3. Dividend investors can buy now, while growth investors should wait for the price chart to improve. Hold.

TiVo (TIVO – yield 7.9%) creates products and licensable technology that enable the world’s leading media and entertainment providers to nurture more meaningful relationships with their audiences.

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.” The share price remains weak. Risk-tolerant investors could buy now with an expectation of an M&A announcement. Strong Buy.

Universal Electronics (UEIC) – Hold.*

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Send questions or comments to crista@cabotwealth.com.
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YOUR NEXT CABOT UNDERVALUED STOCKS ADVISOR ISSUE IS SCHEDULED FOR February 5, 2019
Cabot Undervalued Stocks Advisor is published by Cabot Wealth Network, an independent publisher of investment advice. Neither Cabot Wealth Network nor its employees are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Copyright © 2019 - COPYING AND/OR ELECTRONIC TRANSMISSION OF THIS NEWSLETTER IS A VIOLATION OF THE U.S. COPYRIGHT LAW. For the protection of our subscribers, if copyright laws are violated by any subscriber, the subscription will be terminated.

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