The broad market remains in fine health, with all major indexes trending higher and sentiment measures telling us this market has not yet reached the stage where amateurs are sucked in to buy at the top. Thus I continue to recommend that you be heavily invested in a diversified portfolio of stocks that fit your investment needs.
Today’s recommendation is a very large company in an industry that has major ebbs and flows due to circumstances that are beyond this company’s control. But right now, conditions are excellent, and the 4.3% yield is an indication that the stock is cheap as well.
As for the other stocks in the portfolio, they look great, with six at or near their all-time highs. Details inside.
Cabot Stock of the Week 254
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As we hit the middle of this holiday-shortened week—the market closes at 1:00 tomorrow—one of the thoughts in my mind is this: stocks tend to do well in the few days before and after major holidays. It’s not a big effect, but a little one, and one more reason to feel good about being heavily invested now. But the biggest reason to feel good about being heavily invested now is our indicators; every single one of Cabot’s market timing indicators is telling us that the market’s main trend is up. Additionally, market sentiment among investors is not excessive; there’s still worry, not euphoria. Conclusion: this market is going higher. For today’s recommendation I swung back to the lower-risk, dividend-paying side with a recent recommendation of a petroleum refiner, a sector with a lot of fundamental tailwinds today. The stock was first recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.
Valero Energy (VLO)
San Antonio-based Valero Energy is the largest petroleum refiner in the U.S., operating 15 petroleum refineries in the U.S., Canada and the U.K. with a capacity of about 3.1 million barrels per day (MMbpd). It markets products in 43 states, Canada, the U.K., Ireland and Latin America and has over $100 billion in annual revenues.
In addition to petroleum refineries, the company also operates 14 ethanol refineries and has a rapidly growing renewable diesel business that is now its own segment of the company. It also owns midstream piping and storage assets from the recent rollup of its midstream MLP. But the main event is still petroleum products.
Refining is a volatile business.
Oil refiners use crude oil to make products people can use like transportation fuels (gasoline, diesel, jet fuel) and petro chemicals. There are two primary things that determine profits: volume of sales and “crack spreads.” The crack spread is the difference between the cost to make and the sales price of a barrel of refined product. Consequently, Valero’s profits are always at the mercy of various commodity prices and their relationship with each other as well as the ever-fluctuating supply/demand dynamic.
Even during prosperous times for refiners, profits can plunge in any given quarter as certain factors shift the wrong way. While the short term is always hard to predict, the longer trend tells the real story. And the broader trend is strong for American refiners.
A main reason is the American energy boom. So much oil is being produced that there are bottlenecks because of yet insufficient infrastructure to transport it. The abundant supply makes U.S. crude oil prices cheaper than the international benchmark. And refined products are priced based on the international benchmark, giving American refiners a distinct cost advantage.
I like Valero the best of the American refiners right now for several reasons. First, it is the most efficient refiner and has the most complex capabilities. The company has the ability to refine cheap heavy crude from Canada or light, sweet U.S. crude depending on which offers the higher margins at the time. It can also produce in-demand products like the new, lower sulfur fuels mandated by the International Maritime Organization for ocean vessels starting in 2020. It’s also the lowest cost producer and can operate profitably in bad times.
This is a refiner that doesn’t just wait around for commodity prices and other factors to swing back into favor. It spends more heavily on growth projects than any of its peers, investing 40% of CapEx into new growth projects. It’s also a shareholder friendly company that distributes 40% to 50% of earnings back to shareholders in dividends and share buybacks; in fact, it pays the highest dividend among all refiners, currently yielding a stellar 4.3%.
But the best reason to buy VLO now is timing. It’s cheap. The stock is coming off a bad spell, down over 20% the past year and over 30% off its 2018 high. It was down because of a litany of temporary issues. Gasoline inventories spiked to record highs and crack spreads were at record lows. Canadian oil prices spiked and recent planned maintenance shutdowns were heavy.
Now, though, the stock is selling at valuations that are cheap relative to its peers (and compared to the general market) and there’s a good chance that business conditions will improve in the quarters ahead. Gasoline inventories tend to work themselves out and there are new pipelines coming online this year that will deliver cheaper Permian Basin crude oil to the refineries.
Profits and stock performance will wax and wane in the near term in an industry environment with growth prospects above the historical norm. Global energy demand continues to grow and Valero is better than the competition with a distinct American advantage that should last a while.
Tim’s note: Like most stocks, VLO fell hard last year, bottoming in December. But it remains in a nice long-term uptrend, heading back to its old high of 122. Today the stock sold off sharply and I think this offers a decent entry point.
Valero Energy (VLO)
One Valero Way
San Antonio, TX 78249
210-345-2000
http://www.valero.com
CURRENT RECOMMENDATIONS
The addition of VLO brings the portfolio to a full 20 stocks and that’s where it will stay, at least for this week. None of these stocks deserve to be sold. Six of them are at or near record highs, and the remainder are doing what they were hired to do—which is not the same in every case; hot growth stocks are expected to behave differently from dividend-paying undervalued stocks. But next week I will once again wield the axe, and it will be interesting to see where it lands. In the meantime, take care to curate your own portfolio, and enjoy the bull market!
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, is doing great, heading back to last year’s high of 223. In her update today, Crista wrote, “On June 28, the Wall Street Journal reported that Apple is shifting production of its Mac PRO desktop computer from the U.S. to China, a move that implies Apple’s confidence that trade tensions between the two countries will be resolved. AAPL is a great stock for a high quality, buy-and-hold equity portfolio. The company has $38 billion in cash, raises its dividend annually, and repurchases tens of billions of dollars of its stock each year. Wall Street expects EPS to fall 4.0% in fiscal 2019 (September year end), then to rise 10.4% in 2020. AAPL is rising toward price resistance at 210.” HOLD.
Axis Capital Holdings (AXS), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, looks great, having bounced powerfully off its 50-day moving average last week and breaking out to a new high today. In today’s update, Crista wrote, “Axis is an A+-rated global provider of specialty lines insurance and treaty reinsurance with shareholders’ equity of $5.3 billion and locations in Bermuda, the United States, Europe, Singapore, Middle East, Canada and Latin America. AXS is an undervalued, small-cap stock. Axis reported full-year 2018 EPS of $1.92 in 2018, and is expected to report $4.99 and $5.50 in 2019 and 2020. AXS exhibited a shakeout pattern on the price chart last week; a bullish harbinger of a near-term breakout past 60 that will likely lead back to the March 2017 all-time high of 66.” BUY.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor, broke out to a new high yesterday and climbed even higher today. In Tom’s latest update, he wrote, “Assets of this global infrastructure company include cell towers, data centers and natural gas pipelines and storage facilities, similar to Crown Castle and Enterprise Product Partners. It also owns heating plants, ports, toll roads and railroads. All these assets are reliable cash generators that operate near monopolies. After a rare stumble last year the company is back in business, growing earnings and boasting a 25% year-to-date return. The stock is still reasonably priced and should have strong upside over the rest of the year.” BUY.
CIT Group (CIT), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, is above all its moving averages, poised to break out above last year’s high of 55. In today’s update, Crista wrote, “CIT Group operates both a bank holding company with $30 billion in consumer deposits and a financial holding company. CIT Group provides financing, leasing and advisory services to small and middle market businesses, consumer markets, and the real estate and railroad industries. CIT is an undervalued growth stock with an attractive dividend yield. Wall Street expects EPS to increase 19.6% and 14.1% in 2019 and 2020. The P/E is 10.9. The stock rose on heavy volume on June 28. CIT could surpass its former high of 55 in the near term.” HOLD.
Delta Air Lines (DAL), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, gapped up to a new high today on the news that the airline’s June load factor had increased from a year ago, as growth in demand for seats outpaced the increase in supply. Total load factor rose from 88.5% to 90.4%. Total traffic increased 6.2% to 22.77 billion revenue passenger miles. And the airline carried a monthly record of 18.9 million customers in June, including a single-day record of 697,745 customers on June 21. In today’s update, written before that news came out, Crista wrote, “Delta will report second quarter results on the morning of July 11. Wall Street’s earnings estimates for 2019 have been climbing since early March, whereas the 2020 estimate has remained stable. Delta is now expected to achieve 19.1% and 7.0% EPS growth in 2019 and 2020, and the P/E is 8.4. The stock appears capable of rising to 60 in the near term, where it peaked in November 2018.” BUY.
Everbridge (EVBG), originally recommended by Tyler Laundon in Cabot Small-Cap Confidential, pulled back normally last week—after hitting a record high the week before—and then bounced off its 25-day moving average, so it remains in a fine uptrend. I love the growth potential and the recurring income from this company’s Mass Notification and Incident Communications services. HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high yesterday! And that’s great, as it tells us more and more investors are coming to appreciate the potential of the company’s revolutionary, non-invasive Cologuard test for colorectal cancer (which is the second leading cause of cancer death in the U.S.). However, the stock remains too high to comfortably buy, so if you don’t own it, you should wait for a serious pullback. HOLD.
Huazhu Group Limited (HTHT), originally recommended in Cabot Emerging Markets Investor, is one of the portfolio’s Heritage Stocks, meaning our profit is so great and the potential so large that I’ve resolved to sit through normal technical sell signals. Long term, China’s largest hotel operator will only get bigger. The stock has rebounded strongly over the past month as perceptions of the Chinese economy have improved. HOLD.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, and featured here two weeks ago, is a relatively high-risk investment, given that it’s a very young stock, and Chinese to boot. But the long-term prospects are great, as the Chinese are expected to increase their coffee consumption from a very low level. In his latest update, Carl wrote, “LK is challenging Starbucks’ dominance of China’s coffee market with a leaner and faster strategy. It aims to attract the average millennial as opposed to Starbucks’ more-affluent upper middle class customer—with cheaper prices, heavy promotions, quick delivery, and mobile ordering. As of March, Luckin had about 2,370 stores in 28 Chinese cities and is on track to surpass Starbucks by the end of 2019 as the largest coffee network in China by number of stores.” BUY.
Match Group (MTCH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to ride its 50-day moving average higher, but trading volume in the stock is shrinking, telling me the uptrend is now in a cooling-off phase. Thus, I’ll now downgrade it to hold. Long-term prospects for the world’s leading matchmaking service remain great, of course, but short term, less so. If you bought with us eight months ago and now have a 30% profit, profit-taking is one option. Long-term investors should hold. HOLD.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, hit a new high last week, and then pulled back normally, but today it’s right back near its high! In his update last week, Tom wrote, “The stock just continues its slow and unabated journey ever higher. It’s making new highs every week with no signs of stopping. Utility stocks have been performing well but NextEra offers significantly more growth than its peers by virtue of its alternative energy business. You get the steady, reliable cash flow of a utility without missing out on growth, and the market loves it.” HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, sold off deeply over the past two weeks and has now rebounded to its 50-day moving average. Mike has sold half his position in Cabot Growth Investor, recognizing that this correction may be just beginning (time-wise), and in his last update he wrote, “To us, that looks like intermediate-term abnormal action. Longer-term, we’ll see how it goes—it’s possible this is just a normal consolidation after a good run, but we’re open to anything given that PLNT has been running higher for a couple of years. Right now, we’re content to hold our remaining shares with a stop in the mid 60s.” HOLD.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has pulled back just slightly from its highs of two weeks ago. As a low-priced stock, it is likely to be volatile, but fundamentally, the growth prospects are big. The stock was featured again in Cabot Top Ten Trader just yesterday, where Mike wrote, “SNAP calls itself a camera company, but really, it’s an application company bent on capturing the attention of young people through photo-centric content and then monetizing those eyeballs by connecting them to the appropriate advertisers. And after many hiccups in its first couple of years as a public company, the plan is working. In the first quarter, the company had 190 million daily active users—including 90% of all 13-24 year olds and 75% of all 13-34 year-olds in the U.S.—making it a priority for advertisers trying to reach those age groups. Revenues were $320 million, up 39% from the prior year. And a new, smaller, Android app optimized for lower-end devices increased user engagement by opening faster and using fewer resources. Since then, the company has unveiled Snap Games (a live multi-player gaming experience with huge growth potential), introduced a number of augmented reality (AR) innovations and announced 10 Snap Original Shows, putting it in the content world that includes giants such as Netflix, Amazon and Disney. Obviously, those big boys are in a different league, but we’re impressed by the company’s vision and execution so far and believe that SNAP—which has been viewed as an unreliable upstart but has begun to come into Wall Street’s good graces—has the potential to surprise on the upside in the years ahead. SNAP probably has some of the best price-volume action among all growth stocks right now. The biggest positive here is that, after a big run to start the year and a tidy seven-week base, the stock broke out to new highs on the first day off the market’s June low and since then there’s been two more giant buying days with next to no big-volume selling.” BUY.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, looks just fine. Last week, just as the recent correction was getting underway, I wrote that possible entry points (if you didn’t own it) would be the 25-day moving average down at 30.3, and the 50-day moving average down at 29.7. Well, you were able to buy as low as 29. 5 on Wednesday and below 30.3 every day since, and now the stock is moving higher again. In his latest update, Tom wrote, “This industrial REIT continues to look strong. It broke out to new highs in June and has pulled back slightly over the past week. It’s a high dividend payer with a great niche in a strong REIT sector. Industrial REITs enjoy a high demand that outstrips current supply. The market loves this monthly dividend payer right now and, although it has gotten somewhat expensive, it still has great momentum and is worth holding.” HOLD.
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the portfolio’s second Heritage Stock (big profits and big potential) so I’m committed to holding as long as the prospects are good. The stock bottomed with the market at the end of May, surged higher in June, and has now spent two consecutive days above its 50-day moving average for the first time since January! HOLD.
The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, pulled back normally last week to its 25-day moving average but has been riding it higher since, so it remains in a firm uptrend. As the number one company in the programmatic ad buying market, The Trade Desk is growing fast. HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, has a good-looking chart as well as a great growth story as its communications network enables improved communication using the wide variety of today’s systems and devices. In his latest update, Mike wrote, “TWLO has pulled in relatively sharply in recent days, dipping back to its 50-day line and toward the center of its slightly-uptrending range of the past few months. There’s risk if the selling in growth stocks continues, but right now, TWLO hasn’t really changed character (it’s been a four steps forward, three steps back stock over the past few months), and compared to many growth stocks, volume has been tame on the decline. Fundamentally, of course, there are few stories more pervasive with larger potential. Long story short, we’re OK grabbing shares here if you don’t own any.” BUY.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, broke out to a new high yesterday, capping a four-day advance, and is holding up well today. In today’s update, Crista wrote, “Voya Financial is a retirement, investment and insurance company serving millions of individuals and 49,000 institutional customers in the United States. Voya has $547 billion in total assets under management and administration.
Here are some highlights from the first-quarter earnings report in early May:
• Voya report adjusted first-quarter EPS of $1.22 vs. the consensus estimate of $1.12.
• Voya reported better-than-expected expense reductions, favorable mortality trends in the Life Insurance division, and a repurchase of $200 million of stock.
• The company authorized an additional $500 million share repurchase.
• Retirement and Investment Management divisions experienced net inflows of approximately $1.2 billion, higher than in each of the four prior quarters.
• Reported book value jumped from $52.28 in December to $59.13 in March.
VOYA is an undervalued growth stock. Analysts expect full-year EPS to grow 36.4% and 14.5% in 2019 and 2020, and the current P/E is 10.0.
CEO Rodney O. Martin, Jr. recently stated, “We intend to increase our common stock dividend to a yield of at least 1% and we expect to do so beginning in the third quarter of 2019.”
Investors should expect that announcement during the last week of July, at which time the share price could easily jump as institutional investors will have yet another good reason to buy VOYA.
One percent does not sound like a big deal, but that yield is 10 times higher than the stock’s current yield. A stock with a 1% dividend yield can qualify for inclusion in possibly thousands of global equity portfolios – including mutual funds, insurance companies and trust accounts – that have minimum dividend requirements, thus increasing the buying audience for VOYA.
After running up against price resistance at 55 repeatedly for 18 months, VOYA is finally breaking through that price barrier, beginning a new run-up to all-time highs. It’s time for traders and growth stock investors to make an immediate decision on whether to own VOYA.” BUY.
Zillow (Z), originally recommended in Cabot Growth Investor by Mike Cintolo and featured here last week, closed at a record high yesterday and climbed even higher today, driven by the buying of investors who see continued growth from this housing industry middleman powerhouse—which is also just beginning to buy and sell houses on its own. In his update last week, Mike wrote, “This story is much bigger than just the month-to-month gyrations in the housing market. We started with a half-sized position in Z, which allows us to give it plenty of rope (down to 40 to 41); we believe any near-term volatility will eventually give way to a continued advance.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED July 9, 2019
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