The market is looking a little healthier, but it’s too early to call the all-clear yet. Still, many of our stocks are looking better, with several hitting new highs in recent days.
This week’s recommendation is an oil-patch giant that pays a good dividend, is undervalued, and is going up—what’s not to like?
Cabot Stock of the Week 269
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Recent months have seen the market rewarding safer, dividend-paying stocks and undervalued stocks, while growth stocks have been churning, making no real headway. Maybe that will change, given the recent market strength. But until we see more confirmation that growth stocks are truly growing, I’m going to continue to lean to the lower-risk end of the spectrum. Today’s recommendation, for example, is undervalued, has a good yield, and is going up! It was first recommended by Crista Huff in Cabot Undervalued Stocks Advisor and here are Crista’s latest thoughts.
Marathon Petroleum (MPC)
Marathon Petroleum 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 Speedway retail stores.
ACTIVIST INVESTORS ARE STIRRING THE POT
In late September, investment manager Elliott Management Corp. sent a letter to Marathon seeking to split Marathon into three entities – Speedway, refining operations and midstream holdings. Elliott owns approximately $1 billion of Marathon stock. Hedge fund D.E. Shaw owns approximately $367 million of stock and reportedly supports Elliott’s pursuit of a corporate breakup. The letter stated, in part:
… we believe Marathon is severely undervalued and that there are readily available steps by which the Board can unlock $14 – $19 billion in value for shareholders (yielding a ~60 – 80+% increase to today’s stock price).
Marathon responded in a cordial manner, including this statement:
We will thoroughly evaluate Elliott’s proposal and look forward to continuing our constructive engagement around these issues.
Two more top 10 shareholders then jumped into the mix, saying that Elliott Management didn’t go far enough with their proposal, and calling for the ouster of Marathon CEO Gary Heminger. Those two shareholders, Paul Foster and Jeff Stevens, were executives at the former Western Refining (WNR), which was ultimately absorbed into Marathon after a series of M&A activity. Foster and Stevens “believe Marathon has the best assets in the industry.” The Marathon Board of Directors responded, “The board of directors is firmly and unanimously supportive of Gary Heminger as MPC’s chairman and CEO ...”
Thus began a rebound in the MPC share price that has not waned. Investors are likely to hear more regarding the activist investors’ proposals amid Marathon’s third-quarter earnings release in a few weeks.
IMO 2020 IS CHANGING THE DIESEL FUEL LANDSCAPE
The International Maritime Organization (IMO) 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, nicknamed IMO 2020, is to minimize sulfur oxide (SOx) emissions into the atmosphere. An increasing number of ports are prohibiting or imposing restrictions on the use of scrubbers, making the fuel switch a more attractive option as shipping companies prepare to comply with the mandate.
IMO 2020 is going to be expensive for businesses that import or export products across the world’s oceans, and it’s going to be expensive for consumers who purchase those products, but it’s going to be a windfall for crude oil refiners. That’s because they’ll fulfill the demand for low-sulfur diesel fuel and earn good profits from it. Marathon has indicated a readiness to produce large amounts of the new fuel.
THE ROLLER COASTER OF OIL REFINING PROFITS
MPC is an undervalued large-cap stock. Earnings per share are expected to fall in 2019, and then rise tremendously in 2020, not just at Marathon, but at almost all U.S. refineries. Refining profits naturally fell with the decline in oil prices in 2019. Refiners were additionally plagued by a lack of low-cost heavy crude in 2019 due to production cuts in Canada and via OPEC, and sanctions against Venezuela and Iran. Profitability is expected to surge next year, largely due to IMO 2020. Upward fluctuations in oil prices could further boost operating margins. Marathon reported $2.96 billion normalized income in 2018. Consensus earnings estimates point to profits falling 35% in 2019, then jumping 86% in 2020. You can see that the company is solidly profitable and prepared to embrace big annual fluctuations in oil prices and industry trends.
The 2020 P/E is low at 8.4. Marathon will likely announce a 10-15% dividend increase in late January. The current yield is 3.4%. MPC appears promptly capable of surpassing its 2019 high at 65, and rising toward its 2018 high above 80, offering investors and traders over 20% capital gain potential in the coming months.
Marathon Petroleum (MPC)
539 South Main Street
Findlay, OH 45840
United States
419-422-2121
http://www.marathonpetroleum.com
CURRENT RECOMMENDATIONS
With a big surge both Friday and today, the market is looking healthier—but that’s not an unusual observation from me; my optimistic side often sees conditions improving. But when it comes to managing a portfolio of stocks recommend by other Cabot analysts—each of whom is an expert at their own system—my perception is less important than theirs. And their advice has been pretty good lately! Still, I continue to tailor this portfolio to the ever-evolving market, and this week that means selling Bandwith (BAND) and Snap (SNAP). In your own portfolio, remember—reward stocks that do what you want; sell ones that don’t. Details below.
Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has just advanced for five consecutive days—and at another new high—so the trend here is good. In her latest update, Crista wrote, “Alaska Air Group is a low-cost passenger airline. Alaska Airlines and its regional partners fly 46 million guests per year to more than 115 destinations with an average of 1,300 daily flights across the United States and to Mexico, Canada and Costa Rica. Alaska Air does not operate any Boeing 737 Max jets. Alaska Air Group is expected to report third quarter EPS of $2.26, within a range of $2.08-$2.41, on the afternoon of October 24. ALK is a mid-cap stock with an $8.1 billion market cap. Full-year earnings estimates have been rising for seven weeks. Alaska Air is now expected to achieve EPS growth rates of 34% and 15% in 2019 and 2020. The 2020 P/E is low at 9.6. ALK broke through upside price resistance on strong volume last week. The stock rose to 72-73 twice in 2018, so that’s the hard stop on the near-term upside, where I’ll Retire the stock from the portfolio. Buy ALK now to catch the run-up.” BUY.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, is on a minor pullback at the moment, but the trend is clearly up. In his latest update, Tom wrote, “The stock continues to slowly forge to new all time highs no matter what the market throws at it. High occupancy rates for its in-demand, unique life-science laboratory properties make this stock a favorite in the current environment. It has significantly outperformed both the overall market and the REIT index in every measurable period over the last five years. Falling interest rates should be a tailwind for the stock going forward.” BUY.
Bandwidth (BAND), originally recommended by Tyler Laundon for Cabot Small-Cap Confidential, still has a good story (as far as we know), but the stock has lost investor sponsorship, and that’s what matters. The stock built a base at the 64 level over the past three weeks, but as the broad market gained strength in recent days, BAND went the other way. Combined with our loss, it’s a clear sell signal. SELL.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, remains on a normal correction, trading right at its 25-day moving average. In his latest update, Tom wrote, “I particularly like this infrastructure MLP. Even though it is considered a safe stock because of the defensive nature of its business, it is not overvalued. It’s up over 40% so far this year but it is following a rare down year in 2018. The stock had a nice bump a couple of weeks ago after the announcement that it will create a new corporation and distribute shares to BIP holders (see last week’s update). The stock looks good and has held like a rock in the recent volatility.” HOLD.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, surged higher today following a better-than-expected quarterly report released before the open—sales were up 5%, earnings rose 20%, and the firm continues with an aggressive share buyback program (share count reduced 11% in the past year alone). It also didn’t hurt that management expects revenue to hold up and costs to dip going forward. It continues to look like it wants to head higher. BUY.
Coupa Software (COUP), originally recommended by Mike Cintolo in Cabot Growth Investor, remains one of the best-looking growth stocks in the market. In Mike’s latest update he wrote, “COUP has been a wild child, gyrating between the upper 120s and low 150s a few times since early September, including coming very close to our stop at the end of last month. But the action in recent days has been very encouraging, with a big-volume ramp that has brought the stock to the verge of new all-time highs! There’s been nothing new from the company or analysts in recent weeks, but everything points toward Coupa being an emerging blue chip in the business world—possibly the next Salesforce.com-type of company, with its business spend management platform becoming the gold standard for big and mid-sized companies as they look to gain insight and better control over their spending decisions. Having suffered a couple of jarring shakeouts while its sector peers have fallen apart, we’re optimistic the stock’s next major move is up—but as always, we’ll play things by the book, keeping a mental stop in the mid-to-upper 120s in case the market gives up the ghost and the sellers really take control.” HOLD.
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, has rallied modestly over the past week, but we can’t really say that it’s in an uptrend yet—though Crista says it deserves one based on valuation. A breakout to 18 would be good, while a drop to 15.5 would be bad. BUY.
Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon and featured here two weeks ago, continues to build a launching pad just above 6. In his recent update, Tyler wrote, “APPS was unstoppable in the first eight months of 2019 then peaked at 7.84 and has pulled back about 20% since. We stepped in when the stock was 7% above where it is now on the expectation that a dip of 15% to 30% would be about as deep as the stock would go. There’s no new news or change to the story. Digital Turbine is still expected to grow revenue around 30% this year and see EPS jump 125%, to $0.18. The company offers mobile operators and OEMs a mobile delivery platform for Android OS that helps customers find the apps they want.” BUY.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, has had a rough couple of weeks and now our investment is slightly in the red—but Tom’s not worried. In his latest update, he wrote, “The energy infrastructure MLP is floundering around the low point of the recent range because crude oil price have fallen about $10 in the last few weeks. While earnings are not tied to oil prices, the stock tends to move in sympathy with the overall energy sector in the short term. It’s still a great value here and the recent slide presents a good buying opportunity. New projects should accelerate earnings growth for the rest of this year and next and the great 6% dividend is rock solid and should grow.” BUY.
Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is one of the portfolio’s Heritage Stocks, meaning our profit is so great and the potential so large (it’s China’s largest hotel chain) that I’ve resolved to hold the stock through normal technical sell signals. The stock has been basing between 30 and 39 in recent months, and if you pull back to look at the long-term picture, you can see that this is still a natural consolidation phase following the stock’s big run in 2016 and 2017. In the meantime, the company continues to grow. Huazhu now has more than 4,665 hotels. HOLD.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has great fundamentals—chief among them its rapid growth as it works to undercut Starbucks in the Chinese coffee market. Most of its shops are set up for takeaway and delivery rather than the Starbucks model of a place to meet and work, and Luckin keeps expanding its fleet of stores; it plans to eclipse Starbucks with 4,500 stores by the end of the year. But the stock’s action has been less than impressive as it continues to build a base in the upper teens. In his latest update, Carl lowered his rating to hold (in effect joining us), and that’s where this young stock will stay for now. HOLD.
Meritage Homes (MTH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is one of the strongest stocks in the portfolio. Business is good in the home-building field, with second quarter orders up 22% from the year before. Try to buy on a pullback. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, hit another new high last Wednesday and has pulled back normally since. In his update last week, Tom wrote, “This utility/alternative energy company has been spectacular. Returns over the last five years have been fantastic and the stock is up 35% so far this year. It is a best-in-class stock that has consistently outperformed both the market and its peers. But last week I took a profit on half of the position. Returns have been too good for a utility stock and valuations are getting stretched. Erring on the side of caution I booked a 36% profit on one half of the position. We’ll hold the other half for now and see if it can continue to move still higher.” HOLD.
Pinduoduo (PDD), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, had corrected to near its 50-day moving average at the time and is now moving ahead again. In his latest update, Mike wrote, “If the U.S.-China trade talks go sideways, PDD may break down. But so far, it’s done a reasonable job of shaking out some weak hands during the past month, and as a leader in the newer “social commerce” field, we see rapid growth for a long time to come.” If you can handle the political risk, you can buy now as the stock heads back toward its September high of 37. BUY.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has continued to slip below support in recent days despite the market’s latest bump higher. And Mike’s lost patience, selling on a special bulletin yesterday: “Snap (SNAP), which has been unable to get off its knees in recent weeks and dipped below our mental stop today. Thus, we’re going to cut the loss in the position. Looking back, our stop was probably a bit too loose, though we could have said something similar with Coupa (COUP), which has stormed back to new highs after nearly breaking down. It’s a tricky situation, but right now, we think it’s best to make sure a sour situation with SNAP doesn’t get any worse, and sell.” I’ll follow Mike’s lead here—at the very least there should be better stocks to own going forward. SELL.
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 while it hasn’t been a market leader for years, the fact that the company is still growing at a good rate and is still far ahead of all its competitors by many measures means that long-term prospects are still very good. And if you believe that bad news for competitors is good news for Tesla, you’ll appreciate the latest “failures” in the electric vehicle world. James Dyson (of vacuum cleaner fame) has ended his company’s electric car project after spending $3.2 billion over four years. And Harley Davidson, which just last month began selling its first electric motorcycle (the Livewire) for $30,000, has stopped production due to a charging problem. Most relevant to us, however, is the fact that TSLA has now advanced for seven consecutive days and is nearing its July high. Could the long consolidation of the past five years be near an end? HOLD.
Your next Cabot Stock of the Week issue will be published on October 22, 2019.
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