This week’s recommendation is a low-risk financial stock with decent prospects that is temporarily low because it lost what investors mistakenly believed was a key client. If you buy now you can get capital appreciation plus a modest dividend.
Cabot Stock of the Week 216
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The market remains strong and I continue to recommend that you be heavily invested in a well-diversified portfolio that meets your investment needs. Eventually, the investing climate will become more difficult—just last week someone asked me when the next correction will begin; I have no idea—but until then, this is a fine market for making money. Last week’s recommendation was an aggressive growth stock, so this week we swing back to a low-risk financial stock with decent upside potential. It was originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, and here are Crista’s latest thoughts.
Synchrony Financial (SYF)
Alarming news headlines and investors’ jitters can wreak havoc among stocks, often causing the baby to be tossed out with the bathwater. That’s why there’s a Buy Low Opportunities Portfolio within Cabot Undervalued Stocks Advisor.
Back at the end of July, when news emerged that Wal-Mart (WMT) will end its credit card contract with Synchrony Financial (SYF – yield 2.5%), SYF fell to its low point for the year. Wall Street analysts then assessed the situation and determined that the loss of Wal-Mart’s business will not actually put a dent in Synchrony’s expected earnings growth! As a result, investors have been presented with a buy low opportunity that will likely work out well sooner rather than later.
Synchrony Financial is a consumer finance company with 74.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. The company has been investing in mobile capabilities and expanding its online savings account segment into a full-service bank.
Synchrony’s partners include Gap, J.C. Penney, Lowe’s, Amazon.com, Sam’s Club and Fred Meyer Jewelers. In addition, PayPal and Synchrony have been partners since 2004. Synchrony offers PayPal-branded credit cards, and recently paid $6.9 billion to acquire PayPal’s consumer credit receivables.
Throughout the financial sector, interest earned on bank assets (a.k.a. asset yields) continues to outpace interest paid on deposits (deposit betas), and therefore net interest margin (NIM) is expected to rise in both the third and fourth quarters, especially benefiting Synchrony because the company has higher asset yields than its peers.
Rising unemployment and increasing credit card delinquencies could potentially harm consumer finance companies. But with the economy strong, we’re certainly not seeing any of that today—Synchrony’s delinquencies improved in the June quarter to 4.1% vs. 4.4% a year ago, so there are no current red flags in that area.
Earnings per share (EPS) are expected to increase from $2.62 in 2017 to $3.46 in 2018 and $4.50 in 2019, reflecting aggressive EPS growth rates of 32.1% and 30.1% in 2018 and 2019 (December year end). The corresponding price/earnings ratios (P/Es) are extremely low at 9.5 and 7.3.
Synchrony announced an increase in the quarterly dividend in July, from $0.15 to $0.21 per share. The current yield is 2.5%. That dividend increase was pre-announced in May, when Synchrony also approved a $2.2 billion share repurchase authorization through June 2019.
SYF started 2018 strong, rising to a new all-time high of 40 in January. Then the stock got hit by the overall market correction, which caused a prolonged downturn among financial stocks. And finally came the selloff in July due to the Wal-Mart news. Fortunately, the stock turned upward with a few weeks and its rebound is now in full force.
SYF is currently trading between 32 and 35, within an uptrend that could easily take SYF to 37. If financial stocks land in the market’s good graces once again, the stock could approach 40 within about six months. Lucky investors could get a brief chance to buy SYF near 32, but since there’s 10%-20% upside in the stock right now, I wouldn’t mind owning the stock at the current price. Earnings season begins in mid-October with financial stocks launching the excitement, so get positioned in SYF promptly! BUY.
Synchrony Financial (SYF)
777 Long Ridge Road
Stamford, CT 06902
203-585-2400
http://www.synchronyfinancial.com
CURRENT RECOMMENDATIONS
One of the lessons that the market teaches over the years is that stocks look ahead, well beyond today’s news, which means that investing in response to today’s news guarantees that you’ll always be behind. Growth investors, therefore, pay a lot of attention to the messages sent by the stocks themselves, while value investors look at earnings projections to get a dim view of the future. I value both methods—as well as a variety of hybrid systems (provided they work)—and this portfolio is the result of my quest to own the best of all possible worlds, so that I always have stocks that are doing well. Today, the overall patterns remain positive, analysts’ estimates are encouraging and the lack of enthusiasm about investing tells me this bull market has further to run.
Carvana (CVNA), ), originally recommended by Mike Cintolo of Cabot Growth Investor, hit a record high just two weeks ago, but it’s been under pressure since, and is now trying to build a base at 60, while its 50-day moving average, now at 55, approaches. One of my selling guidelines says that once you have a substantial profit, you shouldn’t let the market take back more than half of it—and for us that level is 58.6. I’ll be watching closely. HOLD.
CSX Corp. (CSX), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth portfolio, is a low-risk investment with moderate growth potential—and also the potential for loss. In her latest update, Chloe wrote, “CSX continues to consolidate after its powerful advance to 75. The company is the third-largest U.S. railroad and recently underwent a major transformation, switching to a point-to-point system that boosted margins, cash flow and profits. CSX has paid dividends every year since 1981, and has increased the dividend for eight years in a row. Over the past five years, the dividend increases have averaged 8%. CSX only yields 1.2% at current prices, but the company’s payout ratio of 25% leaves plenty of room for growth. The stock is not undervalued, but it’s in a strong uptrend that is likely to continue as long as transport stocks and the broad market remain positive. Buy here or try for a pullback to the 50-day [currently at 72].” BUY.
DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, remains promising. In her latest update, Crista wrote, “DowDuPont intends to break up into three companies by June 2019. As the separated companies compete head-to-head with their various industry peers, DowDuPont management expects the share prices to rise, in accordance with normal industry stock valuations. DowDuPont is currently expected to see strong EPS growth rates of 24.1% and 17.3% in 2018 and 2019. The corresponding P/Es are 16.7 and 14.3. DWDP is briefly trading between 68 and 71 as it travels toward its January high of 76. I expect additional capital appreciation in 2019 as the spin-offs take place.” BUY.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, advanced for seven consecutive days before news-driven selling took hold last Friday, and as I write, the stock is dipping below support, threatening to fall to its lowest level since last August. Chloe bought earlier and lower, and has taken profits on two-thirds of her position at higher prices, while I tried to buy low more recently and it hasn’t worked out yet. I’ll give it a little more rope. HOLD.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is a virtual bank that’s the leading provider of prepaid cards, debit cards, checking accounts, secured credit cards, payroll debit cards, consumer cash processing services, wage disbursements and tax refund processing services. The current pullback to the 25-day moving average provides a decent opportunity to average up, though the stock could certainly dip lower. Officially, I’ll just stick with my Hold rating. HOLD.
GrubHub (GRUB), originally recommended by Mike Cintolo of Cabot Growth Investor, broke down through its 25-day moving average last week and bounced off its 50-day moving average yesterday, so short-term, the stock is questionable. In his latest update, Mike wrote, “GrubHub is one of a few stocks that, after a good run, has begun to gyrate wildly this month, which is often a sign of distribution…Longer-term, we’re not panicking, but given the choppy environment and GRUB’s action, we think it prudent to go to Hold and look for the stock to either calm down or show some decisive strength.” I agree. HOLD.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio and now in her Growth & Income Portfolio, remains in an attractive buying area. In her latest update, Crista wrote, “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 2019 earnings estimate has been rising in recent weeks. Wall Street now expects EPS to grow 55.7% and 22.0% in fiscal 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 20.8 and 17.0. The stock is low within a stable trading range.” BUY.
Huazhu Group Limited (HTHT) (previously known as China Lodging Group) was originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and now it’s one of the Heritage Stocks in this portfolio, which means that I’ll hold through periods of poor performance to benefit from the positive long-term fundamentals. The stock lost 45% of its value as the Chinese market fell apart over the past four months, but buyers stepped into HTHT last Wednesday, and the stock has held that gain so I’m optimistic that the rebound has begun. Remember, bad news comes at bottoms, while good news comes at tops. HOLD.
Instructure (INST), ), originally recommended by Tyler Laundon of Cabot Small Cap Confidential, retested its bottom at 37 yesterday, but finished up for the day, which is a good sign. In Tyler’s latest update, he wrote, “Instructure has been a hard stock to love lately since it hasn’t been able to gather any real momentum. Shares looked ready to break out above their 50- and 200-day moving average lines a couple weeks ago but this week they broke back below both. The potential is certainly there, but the market will likely need another quarterly earnings report to see how the most recent billings trend is tracking (it was a little soft last quarter). Despite the lack of momentum, the stock seems to be offering a good entry point here and, thus, remains a Buy.” BUY.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, hit a record high last Monday and has pulled back normally since, though the pullback could certainly go farther. In her latest update, Chloe wrote, “MKC is benefitting from a rotation into conservative, non-cyclical names, like blue-chip consumer staples stocks. Buy MKC on pullbacks for dividends and capital gains. The company is expected to report 13% sales growth and 17% EPS growth this year and has a 31-year history of dividend growth.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, continues to give signs that buyers have lost some of their enthusiasm for the stock—so it’s still a Hold. In his latest update, Mike wrote “The stock has rallied to the 92 to 94 area three times since mid July, and each time it’s suffered some very large volume selling (including five days in a row in late July and three days in a row last week). Given the liquidity of the stock, that’s usually a sign that more than a few big investors are cutting positions. Fundamentally, there’s nothing wrong with the business, and the stock is still sitting around its 50-day line, so we’re not freaking out. But we’re bumping up our mental stop into the mid 80s, and could raise it further if we see another round of big-volume selling.” HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has pulled back to support at 27.5, and if the trend is intact, this is a good buy point. In her latest update, Chloe wrote, “The stock has been consolidating its recent gains for close to a month now, which reduces the odds of a significant pullback, so I think high-yield investors can buy a little here. STAG is a warehouse REIT that pays monthly dividends.” BUY.
Stitch Fix (SFIX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, sold off last week after an analyst downgraded the stock because of its high valuation, thus justifying our Hold rating. Of course, the Hold rating was because the stock was extended, which is not exactly the same thing—but it’s related. From here, we need to see signs of support. HOLD.
Teladoc Health (TDOC)originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to new highs yesterday and continued the trend today. In his latest update, Mike noted that the firm will conduct an Investor Day on September 27, and the reaction to that will be interesting. But regardless of that, the newfound strength, after a month of consolidation, merits an upgrade to Buy. BUY.
Tesla (TSLA), ), originally recommended in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio; we have a fat profit, and I have confidence in the firm’s long-term growth prospects as it leads the automotive revolution for both electric and autonomous cars. The stock continues to trade in the wide range between 260 and 380 that has contained it since June, 2017. HOLD.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, blasted off in late August after a four-month basing period and is now consolidating its gains. Buy here before the advance resumes. BUY.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, continues to work to get above resistance at 51. In her latest update, Crista wrote, “Voya is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. The company will host an Analyst Day on November 13, which could easily generate new and bullish research reports for Voya. Wall Street expects Voya’s full year EPS to grow 123% and 24.5% in 2018 and 2019. The corresponding P/Es are 11.8 and 9.5. VOYA appears capable of surpassing upside resistance at 51 quite soon, at which time it will likely retrace to 55, where it traded earlier this year.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED October 2, 2018
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