2019 ISN’T OVER YET! THERE ARE THREE PORTFOLIO CHANGES TODAY
Bristol-Myers Squibb (BMY) and CF Industries (CF) depart from the Special Situation Portfolio and the Growth Portfolio today, respectively, while Broadcom (AVGO) joins the Growth & Income Portfolio. Scroll down to read more about those decisions.
Some good news for subscribers of Cabot Undervalued Stocks Advisor! The upcoming annual publication of my “Top Ten Stocks to Buy and Hold for 2020” report will be available in January for free to all of my current and new subscribers. I always construct the portfolio with diversification in mind, so you’ll get a nice assortment of market cap sizes and industries to add to your stock portfolios, including dividend stocks and the occasional European stock. The top ten list from 2019 is up over 20% year-to-date, including dividends. Big winners from 2019 included NXP Semiconductor (NXPI), up 70%, and Sleep Number (SNBR), up 55%.
I generally try to choose a group of stocks that’s completely different from the stocks that are already featured in Cabot Undervalued Stocks Advisor, but there might occasionally be some overlap. There are so many good stocks to choose from when the economy is thriving, so I try to feature as many of them as possible within various portfolios.
Please send questions and comments to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Bulletins from December 10 and 13 in which I mentioned news, rating changes and/or price action on Adobe Systems (ADBE) and Designer Brands (DBI).
TODAY’S PORTFOLIO CHANGES
Bristol-Myers Squibb (BMY) moves from Hold to Retired.
Broadcom (AVGO) joins the Growth & Income Portfolio as a Strong Buy.
CF Industries (CF) moves from Strong Buy to Sell.
Designer Brands (DBI) moves from Strong Buy to Hold.
LAST WEEK’S PORTFOLIO CHANGES
Royal Caribbean (RCL) moved from Strong Buy to Sell.
Tyson Foods (TSN) joined the Growth Portfolio as a Strong Buy.
Universal Electronics (UEIC) moved from Hold to Buy.
BEST STOCKS TO BUY TODAY
*A good choice today for investors looking for growth (G), growth & income (DIV) or trading (T).
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company that’s changing the world through digital experiences. The company’s Digital Media and Digital Experience divisions reported excellent fourth-quarter revenue growth last week, significantly exceeding Wall Street’s expectations. (Be aware that both earnings and revenue numbers came in higher than consensus estimates in each of the last five quarters.) Final full-year 2019 earnings per share (EPS) grew 43.1% (November year-end). Analysts now expect future EPS to increase by 24.0% and 17.9% in 2020 and 2021, respectively. Those estimates will continue to adjust in the coming weeks. The 2020 P/E is 32.6. (As a reminder, the only reason I do not give ADBE a Strong Buy recommendation is the high P/E, which adds an element of risk to stock investing.)
ADBE is a large-cap aggressive growth stock, great for risk-tolerant growth investors and buy-and-hold equity portfolios. Last week, the stock surpassed its previous all-time high at 311. I’m expecting an immediate and sustained run-up. Buy.
CF Industries (CF – yield 2.6%) is a global leader in transforming natural gas into nitrogen, making products that fertilize crops and products that remove harmful emissions from industrial activities. Analysts expect EPS to increase 86% and 13.9% in 2019 and 2020. While the 2019 earnings growth outlook has been fantastic, the 2020 consensus earnings estimate has been slowly falling all year. Weakness in urea fertilizer pricing seems to be the primary culprit, and I’ve been reading research reports that indicate ongoing price weakness. Therefore, I’m moving CF Industries from Strong Buy to Sell, before the declining 2020 earnings outlook begins impacting institutional portfolio holdings. If you don’t mind a lack of capital gains, and just want to receive the dividend until a more desirable earnings situation develops in 1-2 years, then hold your shares. But if you’re in CF for capital gains, you should sell and move on to a growth stock with a rising earnings outlook (such as Adobe Systems). Sell.
Marathon Petroleum (MPC – yield 3.5%) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interest in a midstream company, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. The company is prepared to meet the IMO 2020 demand for ultra-low-sulfur diesel fuel by the world’s ships and tankers. Marathon aims to spin off their Speedway retail stores into a separate company by early fourth quarter 2020. Crude oil prices are rising back toward September peaks as markets embrace prospects of a U.S.-China trade deal, additionally bolstered by last week’s optimistic economic outlook coming from the Federal Reserve.
Yesterday, Marathon announced that it has entered into an agreement with Elliott Management and will appoint Jonathan Z. Cohen to the company’s board of directors. Mr. Cohen has extensive experience in the energy industry, and currently serves as Chairman of Falcon Minerals Corporation. He will serve on Marathon’s special committee charged with evaluating options for the midstream business, as well as the special committee charged with overseeing the CEO search process, which continues to progress. The company expects to update investors on strategies to optimize their midstream business in the first quarter of 2020.
MPC is a greatly undervalued large-cap stock with a solid dividend yield. Full-year EPS are expected to fall 28% in 2019, then rise 67% in 2020. The 2020 P/E is very low at 8.3. The stock had a November pullback after a 50%+ run-up, found a bottom near 58, and is now rising. Strong Buy.
Quanta Services (PWR – yield 0.5%) is a leading specialty infrastructure solutions provider serving the utility, energy and communication industries. Their infrastructure projects have meaningful exposure to highly predictable, largely non-discretionary spending across multiple end-markets, including 65% of revenue coming from regulated utility customers. Investors may listen to the webcast of management’s discussion with analysts at the December 4 Credit Suisse Industrials Conference. Last week, Citigroup named Quanta Services one of its “top picks.”
PWR is a mid-cap growth stock. The company is working on a multi-year goal of increasing margins, especially in the electric power business. Management is conservative when giving revenue and profit guidance to Wall Street, resulting in outperformance of quarterly consensus estimates about 80% of the time. Wall Street expects EPS to grow 15.3% and 19.8% in 2019 and 2020, while the 2020 P/E is just 10.7. Last week, Quanta announced a 25% quarterly dividend increase to five cents per share. PWR surpassed price resistance at 40-41 in October, rose to 43, and then pulled back to 40, presenting an excellent buying opportunity. Strong Buy.
Tyson Foods (TSN – yield 1.9%) is one of the world’s largest food companies, with operations in 20 countries, and a recognized leader in protein with leading brands including Tyson, Jimmy Dean, Hillshire Farm, Ball Park, Wright, Aidells, ibp and State Fair. Wall Street’s consensus earnings estimates for Tyson inched upward last week, reflecting aggressive EPS growth of 23.8% in 2020; and revenue growing 7.5% to $45.6 billion (September year end). The P/E is low in comparison at 13.0. Please keep in mind that potential increases in meat purchases from China, which are currently making news headlines, are not factored into Wall Street’s revenue and profit projections for Tyson. Analysts are not rewarded by their bosses for making wild assumptions. Rather, they deal with the facts at hand, combined with ongoing economic, industry and legislative trends, when forecasting a company’s future results.
TSN rose to a new all-time high of 93 in August 2019, and is now trading in the upper 80s. This large-cap stock could appeal to growth stock investors and dividend-growth investors. Buy TSN now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
Broadcom (AVGO – yield 4.1%) is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. Here’s a glimpse at the company’s extensive M&A history: Avago Technologies (AVGO) purchased LSI Corp. (LSI) in 2014 and Emulex (ELX) in 2015. Then in 2016, Avago purchased Broadcom (BRCM) and changed the combined company’s name to Broadcom Ltd., while keeping the AVGO ticker symbol. Later in 2016, Broadcom purchased Brocade (BRCD). In late 2017, Broadcom attempted to buy Qualcomm (QCOM). That purchase was denied by the U.S. government in March 2018. Broadcom then acquired CA Technologies (CA) in the second half of 2018. Recently, Broadcom purchased Symantec’s Enterprise Security Business. Read about Broadcom’s track record of industry-leading technologies here.
Last week, Broadcom reported fourth-quarter results (November year end) that were slightly higher than consensus estimates, featuring $5.39 EPS and $5.78 billion revenue. The company guided investors to expect approximately $25 billion revenue in fiscal 2020, comprised of $18 billion in semiconductor solutions and $7 billion in infrastructure software, when analysts were expecting $23.79 billion revenue.
CEO Hock Tan commented, “Fiscal year 2019 concluded as expected. Our semiconductor solutions segment continued to work its way through a cyclical correction. This was more than offset by our infrastructure software segment, which delivered healthy results benefitting from the integration and performance of our CA business. Looking to fiscal 2020, we remain well-positioned across our technology franchises. We continue to believe that our core semiconductor business is bottoming and will return to year over year growth in the second half of our fiscal year. In addition, we expect to benefit from the integration of the Symantec Enterprise Security business into what is otherwise expected to be a stable infrastructure software segment in fiscal 2020.”
Six investment firms promptly raised their price targets to a range of 360-385, with two other firms projecting 310 and 330.
I suggested that investors consider Broadcom in the November issue of Cabot Undervalued Stocks Advisor. At that time, I alerted you to a hefty dividend increase that was likely to arrive in December. Sure enough, Broadcom raised their quarterly dividend by 22.6% last week. The current payout is $3.25 per quarter, now yielding 4.1%.
Analysts will continue to revise 2020 revenue and profit projections. Thus far, they’re expecting $23.26 and $25.53 EPS in 2020 and 2021, representing 9.3% and 9.8% EPS growth. The P/E is 13.6.
Broadcom joins the Growth & Income Portfolio today with a Strong Buy recommendation. The stock rose to a new all-time high of 315 in April 2019, fell with the downturn in the broader stock market in May, and meandered back to 315 in November. Finally, AVGO broke past 315 last week, quickly running toward 330 and then immediately coming back down. Fantastic! Everybody has one more opportunity to buy AVGO before an extended run-up begins. AVGO is a good choice for technology investors, dividend-growth investors, and large-cap growth investors. Buy AVGO now. Strong Buy.
Citigroup (C – yield 2.7%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries, and the third-largest U.S. bank by assets. Investors may listen to the December 10 webcast of CFO Mark Mason’s presentation at the Goldman Sachs US Financial Services Conference 2019. Mark has been with Citigroup for 19 years, and he became CFO earlier this year. C is a large-cap growth & income stock. Wall Street expects EPS to grow 16.5% and 9.9% in 2019 and 2020. The 2020 P/E is 9.0. Citigroup shares are now rising past their most recent peak around 77 in January 2018. The stock hasn’t traded above 80 since 2008, so we are now witnessing a modern version of C reaching a “new all-time high.” Buy C now. Buy.
Corteva Inc. (CTVA – yield 1.9%), a.k.a. Corteva Agriscience, provides farmers with seeds and crop protection products (herbicides, fungicides and insecticides), enabling them to maximize yield and profitability. 2019 was a difficult year for seed and crop protection businesses as many months of wet weather and flooding in the U.S. disrupted normal planting cycles and yields. Analysts are expecting a return to more normalized weather and market conditions in 2020, with profits expanding due to rising margins, merger savings and lower expenses. CTVA is a mid-cap growth & income stock. Analysts expect EPS of 1.24 and 1.49 in 2019 and 2020, reflecting 20.2% growth next year. The 2020 P/E is 17.8. The price chart improved a bit this month with CTVA rising above its 50-day moving average. Continue to accumulate shares. Buy.
Schlumberger NV (SLB – yield 5.1%) is the world’s largest oilfield service company. Crude oil prices are rising back toward September peaks as markets embrace prospects of a U.S.-China trade deal, additionally bolstered by last week’s optimistic economic outlook coming from the Federal Reserve. Recent research from Barclays projects a 2% increase in 2020 spending on global exploration and production, reflecting strength in the Middle East, Latin America and offshore, and weakness in North America. This could bode well for oilfield service companies (including Schlumberger and Baker Hughes), where sentiment does not currently reflect attractive international performance.
SLB is a large-cap stock with a 5.1% dividend yield. Wall Street expects EPS to fall 9.3% in 2019, and then to increase 18.5% in 2020. The 2020 P/E is 22.8. Last week, Citigroup named Schlumberger as one of their top oilfield service stocks for 2020, saying that long-term headwinds are abating for the sector, assisted by OPEC’s newest production cuts. A recent run-up brought SLB to upside price resistance at 40. The next up move will likely take SLB to 45, where it last traded in April. Buy now to lock in the large dividend yield and benefit from the capital gain prospects. Buy.
Total S.A. (TOT – yield 5.6%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. Total is the second-largest private global liquified natural gas (LNG) player, with a worldwide market share of 10%. Crude oil prices are rising back toward September peaks as markets embrace prospects of a U.S.-China trade deal, additionally bolstered by last week’s optimistic economic outlook coming from the Federal Reserve. TOT is an undervalued, large-cap growth & income stock with a large dividend yield. Consensus earnings estimates for 2020 continue to rise. The market now expects Total’s EPS to fall 6.3% in 2019, then to increase 17.5% in 2020. The 2020 P/E is 9.7. The stock is rising along with energy industry peers. Investors who buy now will lock in the 5%+ dividend yield, and benefit from additional capital gains. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Baker Hughes Company (BKR – yield 3.0%) offers products, services and digital solutions to the international oil and gas community. Both the Turbomachinery & Process Solutions segment and the Oilfield Equipment segment experienced very strong order growth during the third quarter, and are expected to carry that strength into 2020. Crude oil prices are rising back toward September peaks as markets embrace prospects of a U.S.-China trade deal, additionally bolstered by last week’s optimistic economic outlook coming from the Federal Reserve. Recent research from Barclays projects a 2% increase in 2020 spending on global exploration and production, reflecting strength in the Middle East, Latin America and offshore, and weakness in North America. This could bode well for oilfield service companies (including Schlumberger and Baker Hughes), where sentiment does not currently reflect attractive international performance.
BKR is an undervalued, mid-cap aggressive growth stock, expected to increase EPS by 34% and 47% in 2019 and 2020. The 2020 P/E is 18.8. Last week, Citigroup named Baker Hughes as one of their top oilfield service stocks for 2020, saying that long-term headwinds are abating for the sector, assisted by OPEC’s newest production cuts. In addition, Stephens began coverage on Baker Hughes with an overweight rating. The stock rose nicely in December, and finally appears capable of a near-term move past 25. Buy.
Designer Brands Inc. (DBI – yield 6.6%) is one of North America’s largest designers, producers and retailers of footwear and accessories. The company operates DSW Warehouse, The Shoe Company and Shoe Warehouse stores with nearly 1,000 locations in 44 U.S. states and Canada; and Camuto Group.
Designer Brands really blew it in their third quarter when they reined in their sales and marketing plans due to an expectation that consumers would change spending habits due to all of the scary news headlines about “tariffs.” Honestly, when I go to the shoe store – especially DSW – I expect to see a wide variety of prices. The last thing on my mind is tariffs. As long as my income and budget have not changed (neither of which is affected by tariffs), I’m going to buy shoes in the general price range that I planned to buy – sometimes splurging and sometimes getting bargains. I literally cannot imagine the degree of hysteria that must have been generated by Designer Brands’ sales & marketing executives that would have caused them to change a very successful marketing strategy. After all, the company itself was not harmed by the cost of tariffs. It was their very incorrect perception of consumer reactions to tariff news that caused them to change their marketing plan, thus harming their quarter. Fortunately, they recognize that they were wrong, and now they can get back to business as usual. (I’m still stunned at the stupidity of the decision to change their marketing plan. I hope somebody was fired over that blunder.)
DBI is an undervalued, small-cap stock. The revenue and profit impact of the poor third quarter caused analysts to lower EPS estimates to reflect growth rates to 5.4% and 4.6% in 2019 and 2020 (January year end). The 2020 P/E is low at 8.2. I’m moving DBI from Strong Buy to Hold as the stock settles down from last week’s price drop. I’m reading that retail sales momentum is building week by week this holiday season. Perhaps Designer Brands will have better news to report in a month or so. Hold.
The Mosaic Company (MOS – yield 1.0%) is the world’s largest producer of finished 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. MOS is up this week on news that they’re recalling almost 400 workers with the goal of restarting production at their Faustina, Louisiana phosphate plant in early January. Phosphate pricing must therefore be improving. Investors can expect revenue and profit projections to increase soon. Profits are expected to fall to $0.57 per share in 2019 and then to rise 149% to $1.42 in 2020. The 2020 P/E is 13.8. MOS is now rising within its trading range of 17.5-23. Hold.
Updates on Special Situation Portfolio Stocks
Bristol-Myers Squibb Company (BMY – yield 2.8%) markets a long list of pharmaceuticals, including Coumadin and Eliquis, to treat cardiovascular, oncology and immune disorders. In recent days, the company won $752 million in a U.S. patent case against Gilead Sciences in a dispute over a cancer treatment. Gilead plans to appeal. Earlier this month, Bristol-Myers increased the quarterly dividend payout from $0.41 to $0.45 per share. BMY is a vastly undervalued growth stock. Analysts expect full-year EPS to grow 9.0% and 40.8% in 2019 and 2020. The 2020 P/E is just 10.4.
BMY is up over 50% from its 2019 low in July, now pushing up against price resistance at about 65 that dates back to early 2018. It’s unrealistic to expect the stock to continue rising without first pulling back and resting for a few months. I’m therefore retiring BMY from the portfolio today, to make room for a new stock selection. Rest assured, Bristol-Myers Squibb remains a great portfolio holding for long-term investors. Retired.
VanEck Vectors Oil Refiners ETF (CRAK) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Oil Refiners Index (MVCRAKTR). Crude oil prices are rising back toward September peaks as markets embrace prospects of a U.S.-China trade deal, additionally bolstered by last week’s optimistic economic outlook coming from the Federal Reserve. Recent research from Barclays projects a 2% increase in 2020 spending on global exploration and production, reflecting strength in the Middle East, Latin America and offshore, and weakness in North America. This could bode well for oilfield service companies (including Schlumberger and Baker Hughes), where sentiment does not currently reflect attractive international performance.
The International Maritime Organization is mandating the use of either scrubbers or low-sulfur diesel fuels for the world’s 39,000 ships and tankers, beginning in January 2020. The purpose of the mandate is to minimize sulfur oxide (SOx) emissions into the atmosphere, and the mandate is nicknamed IMO 2020. Oil refining companies are expected to profit from the demand for low-sulfur diesel fuel. Read more here: IMO 2020: The Big Shipping Shake-Up. CRAK pays an annual dividend in late December, usually yielding 1-2%. CRAK is recovering from its November pullback. I expect continued strength from this exchange-traded fund in 2020. Buy CRAK now. Strong Buy.
