Airline Profits Set to Surge in 2018
After a dismal airline profit situation in 2017, in which only two of the 10 U.S. airlines in today’s research saw a profit increase, the industry is looking forward to a decisive turnaround in 2018. One company’s numbers will soar above all its peers. That company is Southwest Airlines (LUV – yield 0.9%), which is joining the Growth Portfolio today.
Southwest transports over 115 million customers annually to over 100 locations in the U.S., Central America and the Caribbean. The company is based in Dallas and has 55,000 employees.
On October 11, Southwest announced its intention to begin service to Hawaii in 2018, which is “about as far Southwest as you can go in the U.S.,” said Chairman and CEO Gary Kelly. In other recent news, Southwest launched service utilizing the Boeing 737 MAX 8 aircraft in October—the first of its airline peers to do so.
The company saw four consecutive years of aggressive earnings growth grind to a halt in 2016, when non-GAAP earnings per share (EPS) rose just 6.5%. Current-year numbers are lackluster, with 2017 EPS expected to fall 5.1%.
Southwest is in good company, though, because most of its peers are also seeing their 2017 profits fall, including American Airlines Group (AAL) down 18.9%, JetBlue Airways (JBLU) down 21.2%, Spirit Airlines (SAVE) down 25.4% and United Continental Holdings (UAL) down 26.9%. That’s certainly been a dreary situation for investors!
On the bright side, most of these airlines are expected to see profits grow in 2018. Southwest Airlines leads the pack with consensus estimates pointing toward 25% EPS growth in 2018. The 2018 price/earnings ratio (P/E) is a fair 12.4, and the long-term debt-to-capitalization ratio is quite low at 24%. That’s less than half the debt ratio at United Continental, and less than one-third the debt ratio at American Airlines!
The stock pays a small dividend of $0.125 per quarter, currently yielding 0.9%. Southwest historically announces a dividend increase each year during its annual shareholder meeting in May.
LUV is a large-cap stock with a $33 billion market capitalization. Institutions own 78% of Southwest’s outstanding shares.
After trading sideways for two full years, LUV rose at the end of 2016, only to establish a very wide trading range in 2017 between 49 and 64. The stock will likely continue trading within that range for a while longer, eventually surging past 64 to new all-time highs. LUV is my favorite airline stock for long-term growth investors, with a wide enough trading range to also accommodate shorter-term traders. Buy LUV now to capitalize on the company’s 2018 successes! Strong Buy.
Portfolio Notes
Make sure to review the November 22 Special Bulletin in which I mentioned news, rating changes and/or price action on GameStop (GME).
Send questions and comments to crista@cabotwealth.com.
Buy-Rated Stocks Most Likely* to Rise More than 5% Near-Term:
Apple (AAPL)
GameStop (GME)
Legg Mason (LM)
Universal Electronics (UEIC)
Southwest Airlines (LUV)
*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:
Southwest Airlines (LUV) joins the Growth Portfolio as a Strong Buy.
Last Week’s Portfolio Changes:
Boise Cascade (BCC) initiated a quarterly dividend.
PulteGroup (PHM) moved from Hold to Sell.
Vertex Pharmaceuticals (VRTX) moved from Strong Buy to Hold.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.4%) manufactures a wide range of popular communication and music devices. Institutional ownership of AAPL shares rose slightly in the third quarter vs. the second quarter. I will likely remain bullish on the stock until June 2018, at which time the market’s focus is apt to turn toward fiscal 2019 earnings estimates (September year-end). AAPL is completing a bullish chart pattern that indicates the possibility of another immediate run-up, presuming that the broader market remains neutral-to-bullish. Buy AAPL now. Strong Buy.
Bank of America (BAC – yield 1.8%) is expected to achieve aggressive earnings growth in 2018, and the stock is undervalued. Nobody has missed their chance to buy BAC at a good price and benefit from deregulation, rising interest rates, lower income tax rates and a growing economy, which all boost the company’s profits. BAC is trading in the upper 20s and does not yet appear ready for its next run-up. Strong Buy.
KLX Inc. (KLXI) is an extremely undervalued, small-cap aggressive growth stock in the aerospace and energy services industries. I anticipate KLXI trading in the 53 to 56 range for a short while before continuing to reach new highs. Buy.
Martin Marietta Materials (MLM – yield 0.9%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. MLM is an undervalued mid-cap stock, expected to achieve aggressive earnings growth in 2018. There’s 18% upside as MLM retraces its May 2017 peak at 240, where the stock will still be undervalued. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. PWR is a very undervalued aggressive growth stock. When PWR rises above 38, it will be breaking past long-term price resistance. The stock could therefore have a fantastic year in 2018. Buy PWR now. Strong Buy.
Vertex Pharmaceuticals (VRTX) is an aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). The stock is approaching a fair valuation based on current 2018 earnings estimates. I intend to sell as VRTX rises within its trading range toward 165. Hold.
Vulcan Materials (VMC – yield 0.8%) is a supplier of construction aggregates, asphalt and concrete. Vulcan is expected to achieve aggressive earnings growth in 2018. There’s 12% upside as VMC eventually retraces its June peak at 134, where it will still be undervalued. Buy.
XL Group (XL – yield 2.2%) is an insurer and reinsurer, and an undervalued mid-cap stock. XL’s share price has been weak lately. It could rise as high as 47 in the coming months before pulling back again. Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 5.9%) is a European integrated oil company and a very undervalued aggressive growth stock. 2017 and 2018 earnings estimates continue to rise each week since late September. I expect BP to reach 43 in the coming months, where it last traded in 2014. Hold.
Blackstone Group LP (BX – yield 7.4*) is an alternative asset manager, and a very undervalued growth & income stock. In the coming three to 12 months, I expect BX to ratchet toward 37, where it last traded in early 2015, giving new investors a potential 18% capital gain. Buy BX now, while it’s very low within a wide trading range. Strong Buy.
*The payout varies each quarter, with the total of the last four announced payouts yielding 7.4%.
Commercial Metals Company (CMC – yield 2.6%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC is a very undervalued aggressive growth stock. The stock will likely trade between 18 and 22 before continuing upward to 24, where it last traded in December 2016. CMC offers new investors a potential 29% capital gain. Buy CMC now. Strong Buy.
GameStop (GME – yield 8.5%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. The share price seems to have closed the door on its worst days. While I still expect tax-loss selling to suppress the stock in December, at this point I would consider the low price to be a strong buying opportunity. Buy.
Johnson Controls (JCI – yield 2.7%) is a multi-industry, large-cap growth & income stock. Johnson Controls no longer offers a compelling growth and value situation, although the numbers are not worrisome. The price chart is currently bearish. I plan to sell near 40 in the coming months. Hold.
Morgan Stanley (MS – yield 2.0%) is a major U.S. investment bank and wealth manager, and an undervalued growth & income stock. MS is recently trading between 48 and 51. I expect MS to rise toward my fair-value price target of 59 during the next six to 12 months, giving new investors a potential 20% capital gain. Buy MS now. Strong Buy.
Schlumberger (SLB – yield 3.2%) is a premier oilfield equipment and services company with a global footprint. SLB is an undervalued, large-cap aggressive growth stock. The stock is volatile and moves quickly in either direction. There’s 40% upside plus dividends as SLB eventually retraces its December 2016 high near 86. Strong Buy.
WestRock Company (WRK – yield 2.9%) is a major player in the global packaging and container industry. WestRock was featured in the November issue of Cabot Undervalued Stocks Advisor. WRK is an undervalued, mid-cap growth & income stock. WRK rose to new all-time highs in late-October, followed by an orderly pullback. Buy WRK now. Strong Buy.
Weyerhaeuser (WY – yield 3.4%) operates in the areas of timberland, wood products, real estate, energy and natural resources. Weyerhaeuser recently announced a quarterly dividend increase to $0.32 per share. WY has been rising since mid-August, reaching new all-time highs. I’m going to let it run, with the goal of selling soon if the 2018 earnings estimates don’t increase. Hold.
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. Profits are growing aggressively and the stock is undervalued. The price chart has been bearish, and the stock will probably remain low until the new year. There’s 47% capital gain potential as ALXN retraces its April 2016 high at 160. Buy ALXN now. Buy.
Boise Cascade (BCC – yield 0.7%) is one of the largest producers of engineered wood products (EWP) and plywood in North America and a leading U.S. wholesale distributor of building products. This month, Boise Cascade announced that it will begin paying a quarterly dividend of $0.07 per share in December. BCC is a small-cap growth stock. The stock just rose past short-term price resistance at 37. I’m not going to change the rating back and forth, but anybody who buys BCC under 38.6 can earn a potential 10% capital gain as it approaches 43, where the stock last reached an all-time high in February 2015. Hold.
Chipotle Mexican Grill (CMG) is an undervalued aggressive growth restaurant chain. The share price has very little chance of a rebound past 320 until tax loss selling season is over in January. As long as the profit outlook and valuation remain attractive, I will hold the stock for the prospect of future capital gains. Hold.
Delek US Holdings (DK – yield 1.9%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. DK is an undervalued, aggressive growth small-cap stock. Delek was featured in the November issue of Cabot Undervalued Stocks Advisor.
DK emerged from a year-long trading range in early November and quickly rose to two-year price resistance at 32. Normally, I’d expect such a stock to pull back, but the momentum indicates that DK could surprise us and rise all the way to 38 before establishing a new trading range. Be prepared for either scenario in the coming weeks. Strong Buy.
Legg Mason (LM – yield 2.9%) is a U.S.-based global asset management and financial services company with $755.2 billion in assets under management (AUM) as of October 31. LM is a very undervalued growth stock. My price target is 44, where LM last traded in October 2015, offering new investors a 12% capital gain opportunity. Buy LM now. Strong Buy.
Mattel (MAT) – Analysts continue to ponder a potential merger between Hasbro (HAS) and Mattel. Learn more about the potential merger and Mattel’s marketing strategy from this Barron’s article and this Fortune interview with Mattel CEO Margo Georgiadis. The stock is way down for the year. A takeover offer could push the share price above 25. My suggestion is that investors hold MAT, for either a takeover offer or a corporate and share price rebound in 2018. Hold.
Nucor (NUE – yield 2.7%) is a low-cost producer of a diversified portfolio of iron and steel products, and an undervalued mid-cap growth stock. Last week, Jim Cramer recommended NUE again, saying “if the president were to ever authorize the end of the [steel] dumping, then I would say ‘Hallelujah’ and you get a $64 stock.” On that topic, the U.S. Commerce Department is in the midst of a Section 232 investigation into the national security implications of the illegal dumping of steel in the U.S. A final report is due on President Trump’s desk on January 14.
In November, Commerce Secretary Wilbur Ross reiterated his stance on getting tough against trade abuses that harm not just the steel industry, but all U.S. industries. As a person who has spent a lifetime coming to the aid and defense of people and organizations that are under attack, I am grateful that we finally have somebody in Washington D.C. who is focused on economic problem solving. There are few people I respect more than those who, despite intense criticism, are willing to do the hard work involved in resolving entrenched, corrupt situations.
NUE is low within a wide trading range. There’s about 17% upside as NUE retraces its December 2016 high of 65. Strong Buy.
Total (TOT – approx. 4.0%) – This French integrated oil & gas stock is overvalued based on 2018 numbers, which improved last week. There appears to be a little more upside, and Barron’s concurs in this recent article, Better Than Exxon? French Oil Giant Could Return 20%. Bullish energy industry momentum could push TOT into the low 60s, where it last traded in July 2014. Hold.
Universal Electronics (UEIC) is a manufacturer and cutting-edge world leader of wireless remote control products, software and audio-video accessories for the smart home, with a strong pipeline of new products. UEIC is an undervalued micro-cap stock, forecasted to achieve aggressive 2018 EPS growth. There’s 31% upside as UEIC retraces its July high around 72, where the stock will still be undervalued. Expect volatility. Risk-tolerant investors should buy now, and cautious investors should wait until January to consider the stock. Strong Buy.
