EARNINGS SEASON HAS BEGUN
Fourth quarter 2019 earnings season began yesterday with a few large banks reporting very strong results, including Citigroup (C), featured in our Growth & Income Portfolio. I believe I saw a headline on Bloomberg announcing that JPMorgan Chase (JPM) reported the best quarter in the history of bank stocks, or some similar measurement!
The broader stock market continues to perform well, and a variety of undervalued laggards are finally rising, including Abercrombie & Fitch (ANF), LGI Homes (LGIH) and Tyson Foods (TSN). So if you’ve got a portfolio stock that’s making you cringe, consider selling it and moving into any of these three growth stocks, where you might experience immediate upside to your share price. (There are other good stock opportunities in these portfolios, as well. Those are simply three that I listed off the top of my head.)
I’d like to make a couple of clarifications, as a result of some emails from subscribers. First off, a Hold recommendation does not mean “Buy” and it does not mean “Sell”. So if you’re a brand new subscriber and you’ve decided to buy “every stock in the Growth Portfolio”, for example, don’t buy the stocks with Hold recommendations. I’m generally either waiting for their price charts to turn bullish, waiting for a pullback after a run-up, or waiting to see if earnings projections improve. When in doubt, simply ask me. And while you’re at it, send your inquiry to Crista@CabotWealth.com. Sometimes a subscriber sends an inquiry to a different Cabot email address, and that just slows down my receipt and response time.
Importantly, I never told anybody to sell Apple (AAPL). Apple recently held a place in the Buy Low Opportunities Portfolio. I recommended the stock while the price was low, and I Retired the stock when it rebounded to the recent high, which was my original intention. (That’s pretty much the intention of almost every stock in the Buy Low Opportunities Portfolio.) Sometimes a stock retraces its former high, and the outlook remains strong, so I move it to the Growth Portfolio, as I did recently with Universal Electronics (UEIC). However, Apple’s 2020 earnings growth outlook was only 9%, so I couldn’t add it to the Growth Portfolio, so I Retired the stock. That pretty much means I’m removing the stock so as to make room for another good stock opportunity. After all, I’ve got a lot of subscribers who appreciate receiving fresh investment ideas! So to clarify, “Retire” does not mean “Sell”; it doesn’t mean that the stock has suddenly become a dog. I’m generally fairly clear on my wording when I say “I’m Retiring the stock”; I give the reason(s) why, and I suggest which types of investors might want to continue holding the stock. Again, if I’m unclear, please contact me. And for the record, I did not sell any of my personal AAPL. My general approach with AAPL is to hold it long-term, and buy more during every market correction. For example, my last purchase took place August 6, when the broader market took a sudden nose-dive.
Send questions to Crista@CabotWealth.com.
PORTFOLIO NOTES
Be sure to review the Special Bulletins from January 9 and 14 in which I mentioned news, rating changes and/or price action on Abercrombie & Fitch’s (ANF), Citigroup (C) and Voya Financial (VOYA).
QUARTERLY EARNINGS RELEASE CALENDAR
January 17 am: Schlumberger (SLB) – 4Q
January 22 am: Baker Hughes (BKR) – 4Q
January 29 am: Dow Inc. (DOW) and Marathon Petroleum (MPC) – 4Q
January 30 am: Blackstone Group (BX) – 4Q
Late January: Amazon.com (AMZN) – 4Q
February 5 am: General Motors (GM) – 4Q
February 6 am: Total SA (TOT) – 4Q; Tyson Foods (TSN) – 1Q
February 10 am: Mercury General Group (MCY – 4Q
February 10 pm: Voya Financial (VOYA) – 4Q
February 25 am: LGI Homes (LGIH) – 4Q
First half February: Alexion Pharmaceuticals (ALXN) and Corteva (CTVA) – 4Q
Second half February: AXA Equitable Holdings (EQH), Mosaic (MOS), Quanta Services (PWR) and Universal Electronics (UEIC) – 4Q
EARNINGS SEASON SCORECARD:
Big earnings beat: Citigroup (C)
TODAY’S PORTFOLIO CHANGES
Adobe Systems (ADBE) moves from Buy to Hold.
RECENT PORTFOLIO CHANGES
Abercrombie & Fitch (ANF) moved from Buy to Strong Buy.
Alexion Pharmaceuticals (ALXN) moved from Strong Buy to Buy.
Designer Brands (DBI) moved from Hold to Buy.
Mosaic Company (MOS) 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 as an innovative leader in digital media and digital marketing. Analysts expect future EPS to increase by 24.7% and 18.4% in 2020 and 2021, respectively (November year end). The 2020 P/E is 35.2. ADBE is a large-cap aggressive growth stock. In recent days, Credit Suisse and Piper Sandline raised their price targets to 385 and 393, respectively. The stock’s up 32% from its October low. I’m moving ADBE from Buy to a Hold recommendation, because the risk of a pullback becomes greater, each day that the stock reaches new highs. Traders should be cautious and bargain-hunters should await buying opportunities during a pullback. Hold.
Marathon Petroleum (MPC – yield 3.6%) 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 is expected to report fourth quarter EPS of $1.08, within a range of $0.73-$2.07; and $33.6 billion revenue, within a range of $29.2-$48.1 billion, on the morning of January 29. The Speedway retail store spin-off is targeted for early fourth quarter 2020. 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 29% in 2019, then rise 69% in 2020. The 2020 P/E is very low at 8.1. In January 2018 and 2019, Marathon increased their dividend payout 15%. If the company follows suit this month, the quarterly dividend payout will go from 53 cents to 61 cents, making the current yield 4.1%. MPC has traded between 58-68 since late September. Traders, growth investors and dividend investors can all benefit from buying MPC now. Strong Buy.
Tyson Foods (TSN – yield 1.8%) 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. The U.S. and China are expected to sign a Phase 1 trade deal this week, with promises that China will purchase an additional $32 billion of U.S. farm products in 2020 and 2021. Fortunately, China’s appetite for U.S. pork is firmly in place, not dependent upon a trade deal. The New York Times reported “China has increased pork imports to record levels after a fatal pig disease, African swine fever [ASF], devastated its herd. U.S. pork exports to China and Hong Kong were up 49% in value at $1.18 billion from January to November 2019. The shipments … topped a prior full-year record of $1.08 billion in 2017.” Tyson Foods was featured in the December 10 and January issues of Cabot Undervalued Stocks Advisor.
Last week, Jim Cramer of Mad Money recommended Tyson Foods, emphasizing that the stock has a very low P/E and that the company is forecasting a very good 2020 even before factoring in potential increased revenue from China. He said, “Fortunately, Tyson still hasn’t taken off and I think that’s a gift for you. Thanks to the African Swine Fever epidemic in China, I think Tyson Foods is poised to be the biggest winner from the Phase One trade deal.”
Analysts expect EPS to grow 23.3% in 2020; and revenue to grow 7.5% to $45.6 billion (September year end). The 2020 P/E is 13.9. TSN just poked above its August 2019 all-time high of 93. The price chart is extremely bullish. This large-cap stock could appeal to growth stock investors and dividend-growth investors. Caveat: ASF has killed over 300 million hogs in China. If ASF comes to the U.S., it will spread rapidly, and I will immediately recommend that investors sell TSN. Such an event in the U.S. would torpedo Tyson’s share price. If you can handle that risk, buy TSN now. Strong Buy.
Voya Financial (VOYA – yield 0.9%) is a U.S. retirement, investment and insurance company serving 14.3 million individuals and institutional customers. Voya has $568 billion in total assets under management and administration. The company is successfully increasing revenue and profits via organic growth, cost savings and share repurchases. As I mentioned on January 9, it’s rumored that Voya might agree to be acquired by a larger company in the near term at an approximate value of 74 per share. If a buyout offer materializes, you will not need to hurriedly decide whether to sell your stock. We would want to wait at least a few weeks in order to see if a competing buyout offer materializes.
VOYA is an undervalued, mid-cap aggressive growth stock. Consensus earnings estimates came down last week, which is a little odd to me because I didn’t see any research articles indicating lower expectations nor rating downgrades. Wall Street now expects EPS to grow 16.1% in 2019 and 17.1% in 2020. The 2020 P/E is 11.4.
VOYA rose about 5% on heavy volume to a new all-time high last week amid takeover rumors. The price chart and valuation are strong enough to sustain a new run-up, with or without any M&A prospects. Strong Buy.
UPDATES ON GROWTH & INCOME PORTFOLIO STOCKS
Blackstone Group Inc. (BX – yield 3.3%*) is the world’s largest and most diversified alternative asset manager with $554 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, public debt and equity, real assets, secondary funds and real estate. Blackstone is expected to report fourth quarter EPS of $0.68, within a range of $0.60-$0.78, on the morning of January 30. (Be prepared for Blackstone and its industry peers to report results that vary greatly from consensus estimates. Within this industry, that’s not necessarily perceived as bad news. It’s the quality of the results and the outlook that are important.) Consensus earnings estimates point to 35.4% EPS growth in 2020, and the 2020 P/E is 19.1. Despite the stock’s approximate 100% run-up in 2019, BX continues to reach new highs. It won’t defy gravity forever. I will likely return BX to a Buy recommendation after a pullback. Hold.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.92 and yielding 3.3%.
Citigroup (C – yield 2.5%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries, and the third-largest U.S. bank by assets. Please refer to the January 14 Special Bulletin in which I reported on Citigroup’s strong fourth quarter 2019 results. Buy.
Dow Inc. (DOW – yield 5.4%) is a commodity chemicals company that derives roughly 50% of profits from its polyethylene business. DOW is an undervalued stock with strong earnings growth and a large dividend yield. The company is exhibiting progress on cash flow, cost cutting, a focus on debt repayment, a litigation win and an ability to thrive during a weak global economy. The company will deliver fourth quarter results on the morning of January 29. Wall Street is expecting Dow to report $0.75 EPS, within a range of $0.57-$0.85, and $10.2 billion revenue, within a range of $9.9-$10.9 billion. Additionally, analysts expect full-year EPS of $3.50 and $4.12 in 2019 and 2020. The projected 2020 EPS growth rate is 17.7% and the corresponding P/E is 12.6.
It’s been my general experience that Wall Street analysts don’t begin to thoroughly embrace a company that’s recently experienced significant M&A activity (e.g. acquisitions or spinoffs) until the new company has reported two successful quarters of post-M&A financial results. Thus far, Dow has reported two quarters of financial results through mid-October. And right on cue, the stock emerged from a stagnant trading pattern and delivered attractive capital gains in October and November. Eight investment firms have since raised their price targets on DOW to a range of 51-60.
The stock is recently trading sideways with price support at 51. There’s 8% upside within the trading range. Investors can benefit from additional capital gains as the projections for aggressive earnings growth materialize and draw attention to the stock. DOW is a one-size-fits-all portfolio stock, accommodating investors’ desires for growth, income, a trading opportunity and a big blue-chip name. Buy.
Guess?, Inc. (GES – yield 2.0%) is a global manufacturer of an iconic apparel brand, selling sexy clothes and merchandise to Gen Z, Millennial and Heritage consumers through 1,743 Guess stores worldwide, in over 100 countries. Guess had a #metoo moment in 2018 that led to a CEO change in early 2019. The new hire is a successful former Guess executive, Carlos Alberini, who hit the ground running, immediately cutting the dividend in half in order to reallocate cash to share repurchases, and proceeding to buy back approximately 20% of outstanding shares. Management then launched a five-year plan of analyzing every aspect of their global business with a goal of cost-cutting and streamlining operations. Alberini foresees “a lot more operating margin expansion opportunity.” Upon hearing that, you’d assume that the company had previously been mismanaged and suffering financially. However, Guess was already a gem among a dismal retail landscape, with a strong capital structure; the only well-known U.S. clothing retailer that’s consistently producing attractive profits.
GES is a greatly undervalued, aggressive growth, small-cap stock. Profits grew 40% in fiscal 2019 (January 2019 year end), and are expected to grow 39% and 23.5% in fiscal 2020 and 2021. The fiscal 2021 P/E is 13.4. The CEO change disrupted the GES share price last year. Now that investors have gained confidence in Alberini’s ability to continue steering the company toward a profitable future, they’ve resumed buying the stock. GES has been rising for seven weeks toward price resistance at 24, where it last traded in April 2018. I would consider any pullback to be a buying opportunity. Strong Buy.
Schlumberger NV (SLB – yield 5.2%) is the world’s largest oilfield service company. Analysts are expecting Schlumberger to report $0.37 fourth quarter EPS, within a range of $0.31-$0.42, and $8.2 billion revenue, within a range of $7.8-$8.4 billion, on the morning of January 17. SLB is a large-cap stock with a hefty dividend yield. Wall Street expects EPS to fall 9.9% in 2019, and then to increase 15.8% in 2020. The 2020 P/E is 22.9. I’m not pleased that the 2020 earnings estimate has been declining, thereby increasing the P/E. If that trend does not reverse itself via changes in consensus earnings estimates resulting from this week’s earnings report, I will change my opinion on the stock. SLB is resting near 40 after a two-month run-up, and appears capable of rising to 45 in the coming months, where it last traded in April 2019. The earnings report could push the stock anywhere between 37-45, depending on the magnitude of the news. Buy.
Total S.A. (TOT – yield 5.5%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. Total and Apache (APA) made a major oil discovery off the coast of Suriname last week, sending Apache stock up 27%. Total’s shares did not react similarly because the oilfield represents just a small piece of Total’s assets, but it represents a large piece of Apache’s assets. Apache had otherwise been suffering, projected to take a small net loss in 2019 and to record low net income in 2020, due to depressed natural gas prices.
TOT is an undervalued, large-cap growth & income stock with a large dividend yield. Earnings estimates for 2020 have been consistently rising since early November. Wall Street now expects Total’s EPS to fall 7.5% in 2019, then to increase 19.9% in 2020. The 2020 P/E is 9.8. TOT is trading near upside resistance at 56. The next run-up could take the stock to its previous peak of 61 dating back to September 2018. Strong Buy.
UPDATES ON BUY LOW OPPORTUNITIES PORTFOLIO STOCKS
Abercrombie & Fitch (ANF – yield 4.4%) is a specialty retailer of Abercrombie & Fitch (a.k.a. A&F), abercrombie kids, and Hollister brand apparel and accessories for men, women and kids. Please refer to the January 14 Special Bulletin in which I reviewed Abercrombie’s presentation at the ICR Conference 2020 and moved the stock to a Strong Buy recommendation. Buy ANF now. Strong Buy.
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Current marketable drugs include Soliris, Ultomiris, Strensiq and Kanuma. The company is focused on three goals: converting patients from Soliris to Ultomiris, expanding indications for Ultomiris, and diversifying their portfolio to fuel continued long-term profit and revenue growth.
Management presented yesterday, January 14, at the J.P. Morgan Healthcare Conference, the sector’s most important investing event of the year, pleasing investors by revealing 2019 revenue growth of 20%, slightly ahead of the expected 19% growth. I recommend that investors click on the link, listen to the webcast and view the slide presentation. Management projects a 400% increase in Soliris patients in 2025 vs. the current number, while Wall Street analysts were generally expecting a 200%-300% increase. That’s going to cause analysts to rework their revenue and profit estimates. The company is also pursuing the development of two new therapies.
ALXN is an undervalued growth stock. Full-year EPS are expected to grow 31.1% and 8.3% in 2019 and 2020. The 2020 P/E is 9.7, which is extremely low for a biopharmaceutical stock. When ALXN passes 115, it could travel to the low 120s. Buy.
Baker Hughes Company (BKR – yield 3.0%) offers products, services and digital solutions to the international oil and gas community. Last week, the Canadian rig count experienced its biggest gain since January 2015, adding 118 rigs after the annual Christmas break. The total rig count of 203 rose to a ten-month high, alongside rising energy prices.
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. Analysts are expecting $0.31 fourth quarter EPS, within a range of $0.22-$0.36, to be reported on the morning of January 22. BKR is an undervalued, mid-cap aggressive growth stock, expected to increase EPS by 34% and 46% in 2019 and 2020. The 2020 P/E is 18.8. Last week, three investment firms raised their price targets on BKR to a range of 30-33. The stock is having a normal pullback after a big December run-up. I expect continued upside in the coming months. Buy.
Designer Brands Inc. (DBI – yield 6.2%) 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. Consensus earnings estimates project no earnings growth in their fiscal 2019 year (January 2020 year end) and 19.7% EPS growth in 2020. The 2020 P/E is low at 8.7. DBI is an undervalued, small-cap stock. The stock continues to trade somewhat aimlessly in the 15-17 range. Patient growth and dividend investors should buy now, lock in the large current yield, and benefit from eventual capital gains as the company continues to fulfill their successful marketing strategies. Buy.
(Please note that while many retailers that finish their current fiscal year on January 31, 2020 refer to this about-to-end fiscal year as “fiscal 2020", Designer Brands refers to this as “fiscal 2019". Therefore, Designer Brands will refer to February 2020 and beyond as “fiscal 2020".)
General Motors (GM – yield 4.3%) — Management is focused on both high margin pickups in the North American market and battery electric vehicles (BEVs). General Motors is the first automotive company to mass-produce an affordable electric car, and they are committed to an all-electric future. The Wall Street Journal and Reuters reported that General Motors will revive the Hummer name to sell a new family of electric pickup trucks and sport utility vehicles. The company will first build EV pickups in late 2021 and then an electric SUV in 2023. The previous version of the Hummer was ridiculed for being a gas-guzzler, while a new Hummer with an electric powertrain will not carry that black cloud of distinction. GM was featured in the December 31, 2019 issue of Cabot Undervalued Stocks Advisor.
Profits are expected to rise 32.2% from $4.82 EPS in 2019 to $6.37 EPS in 2020. 2020 is expected to deliver improving margins and substantial improvement in free cash flow. The 2020 P/E is 5.5. This stock is for people who would like to make about 20% profit as the stock travels back to its 2018 high of 42, and for investors who rely on dividend income. Buy.
LGI Homes (LGIH) is the tenth largest residential home builder in America. The company is currently building homes, primarily for first-time home buyers, in 19 U.S. states from coast-to-coast and the District of Columbia. LGI Homes was featured in the December and January monthly issues of Cabot Undervalued Stocks Advisor. In response to the January 6 announcement that LGI Homes achieved all-time records for 2019 home closings, analysts increased their earnings estimates and the stock began a new run-up past short-term price resistance at 75. Analysts now expect full year EPS to grow 8.0% and 15.4% in 2019 and 2020. The 2020 P/E is 10.0. LGIH is a small-cap stock with a $1.8 billion market capitalization. LGIH could rise to anywhere between 78-88 as it retraces previous trading patterns. LGIH is a good choice for traders and experienced growth stock investors. Buy LGIH now. Strong Buy.
The Mosaic Company (MOS – yield 0.9%) 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. Profits are expected to fall to $0.55 per share in 2019 and then to rise 135% to $1.27 in 2020. The 2020 P/E is 16.9. Last week, Citigroup raised their price target on MOS from 25 to 29; and Stifel and Cowen & Company adjusted their price targets to 25 and 24, respectively. MOS had a nice run-up in December, and is now trading between 20.5-21.75. Buy.
UPDATES ON SPECIAL SITUATION PORTFOLIO STOCKS
AXA Equitable Holdings (EQH* – yield 2.3%) has two principal franchises: AXA Equitable Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. The company has $701 billion in assets under management. AXA Equitable Holdings has agreed to sell U.S. Financial Life Insurance Company and MONY Life Insurance Company of the Americas, Ltd. to Heritage Life Insurance Company. The transaction is expected to close in early 2020. Earnings estimates have been consistently and slowly rising for several months. The company is now expected to grow EPS 19.0% and 5.2% in 2019 and 2020, respectively. The 2020 P/E is 5.4. EQH continues to reach all-time highs. I expect more upside, especially in light of the very low valuation. Buy EQH now. Strong Buy.
* Please note that AXA Equitable (EQH) is a different company from the French AXA S.A. (AXAHY or AXAHF). Don’t make the mistake of trading shares of AXA S.A. when aiming to trade AXA Equitable.
