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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor 1219

Download the new report Cabot’s 10 Best Stocks to Buy and Hold for 2020 (subscribers only)

A stock joins the Buy Low Opportunities Portfolio today and another one rejoins the Growth Portfolio. Additionally, we say goodbye toone stock, which continues to have a slightly-improving price chart, but the 2020 earnings growth prospects are too dismal to remain in the Growth Portfolio.

Open today’s issue to read additional features and changes with three more stocks.

Cabot Undervalued Stocks Advisor 1219

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December: Time for a Portfolio Shake-Up
Here we are in December, an interesting time in the stock market, as excessive price movements culminate, often reversing course in January. On the bullish side, you may have owned stocks that rose an abnormal amount, all year long. We saw that take place among alternative asset management stocks like Blackstone Group (BX), Apollo Global Management (APO) and Carlyle Group (CG). If you own a similar stock that rose excessively and consistently all year, watch out for fourth quarter window dressing. That’s a phenomenon where a portfolio manager may have missed out on a rising stock for most of the year, so she buys the stock during the fourth quarter so that she can proudly display it in her year-end report to investors, with the implication that she capitalized on the entire run-up. What often happens next is that the same portfolio managers dump the stock in January, because they never really wanted to own it in the first place, and they certainly don’t want to buy a stock after it’s just run up 50-100%.

Therefore, if you own such stocks, come up with a game plan. Maybe you’ll sell your shares in December and move on. Maybe you love owning the stock, and you’ll watch for an opportunity to buy additional shares at a lower price in the first quarter of 2020. Maybe you’re kicking yourself that you never owned the stock, and you’re excited at the prospect of possibly buying low next year. And of course, you can always use a stop-loss order to protect profits. Forewarned is forearmed!

On the bearish side, it’s sadly true that if a stock is trading at an annual low in the fourth quarter, it is likely to keep falling until at least mid-December. That’s because there are many investors who are sick of watching it drop, so they dump it and take a tax loss. Here’s the silver lining: if it’s a good and profitable company, the stock frequently rebounds nicely in January. That’s because there are no more sellers, only buyers! Everybody who had any desire to sell the stock has already sold it in December so as to take a loss on their 2019 income tax return. Watch for the better companies in this category to rebound in January. In the coming weeks, I’ll give you some ideas along those lines.

This is a good time to assess every stock in your portfolio. If they no longer meet your personal and portfolio goals, sell them. And if you’re a person who literally never sells stocks because the thought of doing so paralyzes you, frankly, you MUST sell something, because your portfolio is not likely performing well. Simply look at the earnings outlooks for your stocks. Unless it’s Tesla (TSLA), a biopharmaceutical stock, or a portfolio that specializes in up-and-coming companies, if the company is projected to lose money in 2020, sell it now. There’s no rational reason to expect your share price to rise when you own shares in a floundering company.

If biting the bullet and selling a stock is completely outside of your normal comfort zone, please send me an email. I think the experience could be cathartic for you, and a first step toward maintaining a healthier stock portfolio in the coming years.

You’ve probably seen recent news headlines that announced, “Yawn…I Guess There Wasn’t Going To Be A Recession After All.” Frustrating, yes? It’s hard to know who to believe and where to find good factual economic information without the spin of a personal or political agenda. (You understand that all that “recession” talk was agenda-driven, right?)

Here’s one statistic that I closely follow. It has no spin; just bald numbers that give us a clue as to U.S. business financial health. The Equipment Leasing and Finance Association’s (ELFA) Monthly Leasing and Finance Index (MLFI-25) revealed that U.S. companies’ new business volume rose to $10.1 billion in October, up from $10.0 billion in September, and up 14% from a year ago. ELFA reports economic activity for the $1 trillion equipment finance sector. Year to date, cumulative new business volume was up 6 percent compared to 2018. Separately, the Equipment Leasing & Finance Foundation’s Monthly Confidence Index (MCI-EFI) in November is 54.9, an increase from the October index of 51.4.If I didn’t cover a stock in this issue that you’d like to know more about, send questions to Crista@CabotWealth.com.
Portfolio Notes
Be sure to review the Bulletin from November 27 in which I mentioned news, rating changes and/or price action on Guess?, Inc. (GES).

Today’s Portfolio Changes
Blackstone Group (BX) moves from Strong Buy to Hold.
CIT Group (CIT) moves from Hold to Retired.
LGI Homes (LGIH) joins the Buy Low Opportunities Portfolio as a Strong Buy.
Quanta Services (PWR) joins the Growth Portfolio as a Strong Buy.
Universal Electronics (UEIC) moves from the Buy Low Opportunities Portfolio to the Growth Portfolio.

Last Week’s Portfolio Changes
Citigroup (C) moved from Hold to Buy.
Mosaic (MOS) moved from Buy to Hold.

Best Stocks to Buy TodayComments*
Abercrombie & Fitch (ANF)DIV
Citigroup (C)G DIV
Designer Brands (DBI)DIV
Guess? (GES)G T DIV
Schlumberger (SLB)DIV
Voya Financial (VOYA)G - new all-time high

*A good choice today for investors looking for growth (G), growth & income (DIV) or trading (T).

Growth Portfolio

Growth Portfolio stocks have bullish charts, strong projected earnings growth, little or no dividends, low-to-moderate P/Es (price/earnings ratios) and low-to-moderate debt levels.

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Updates on Growth Portfolio Stocks
Featured Stock: Quanta Services (PWR – yield 0.4%)

PWR12319

Quanta Services is a leading specialty infrastructure solutions provider serving the utility, energy and communication industries. Their infrastructure projects have meaningful exposure to highly predictable, largely non-discretionary spending across multiple end-markets, including 65% of revenue coming from regulated utility customers. Some of their more prominent customers include American Electric Power, BP plc, Comcast, Dow Inc., Duke Energy, Valero and Verizon.Management will present at the Credit Suisse Industrials Conference on December 4. Investors may listen to the webcasts of Quanta’s November 6 presentation at the Baird 2019 Industrial Conference and the November 14 presentation at the Stephens Nashville Investment Conference.Quanta derives approximately 60% of revenue from their electric power business and 40% from their pipeline and industrial business. Management has grown annual revenue, margins and EPS throughout the current decade. The company recently reported $1.14 third quarter adjusted non-GAAP EPS when analysts had expected $1.03. Revenue was $3.35 billion, above the $3.19 billion consensus estimate, with full year guidance raised to $12 billion. (Management began the year projecting $11 billion revenue.) They also raised full year 2019 earnings guidance to a range of $3.16-$3.28 per share. The record backlog stands at $13.3 billion. Investors are encouraged to view Quanta’s third quarter presentation.

Quanta Services rejoins the Growth Portfolio today with Strong Buy recommendation. The company was previously featured in the Growth Portfolio until April 2019, when the share price retraced a previous high while the 2020 earnings outlook deteriorated to one of low-single digit growth. (While in the portfolio, the stock delivered a 38% total return over the course of 29 months.) Since that time, the earnings outlook shifted, with 2019 profit expectations coming down and 2020 profit expectations increased. At this time, Wall Street expects EPS to grow 15.3% and 19.8% in 2019 and 2020, while the 2020 P/E is just 10.7. (Both consensus estimates have been rising since September.)PWR is a mid-cap stock with a market capitalization of $5.9 billion. The company has been aggressively repurchasing stock, with the diluted share count down 32.9% since year-end 2014. Quanta first declared a dividend in early December 2018, with the intention of increasing the dividend over time. The yield is small at 0.4%.

Investors might hear of a dividend increase this week, if the company follows through with that stated intention.During November, four investment firms increased their price targets on PWR to a range of 48-51. PWR surpassed price resistance at 40-41 in October, rose to 43, and then pulled back a bit, presenting investors with an excellent opportunity to buy the stock during an uptrend. This stock is an excellent choice for growth investors, but perhaps not exciting enough for traders. Strong Buy.

ADBE12319

Adobe Systems (ADBE) is a software company that’s changing the world through digital experiences. Adobe is a large-cap aggressive growth stock. The company is expected to report fourth quarter EPS of $2.26, within a range of $2.23-$2.30, on the afternoon of December 12. Analysts additionally expect full year EPS to increase by 42.5% in 2019 and 24.4% in 2020 (November year-end), and the 2020 P/E is 31.7. This is a great stock for risk-tolerant growth investors and buy-and-hold equity portfolios. ADBE retraced its 2019 high of 310 last week. Expect the stock to pause in its uptrend for a while. Buy.

CF12319

CF Industries (CF – yield 2.6%) is a global leader in transforming natural gas into nitrogen, making products that fertilize crops and products that remove harmful emissions from industrial activities, with outstanding operational capabilities and a cost-advantaged production and distribution platform. Products include ammonia, granular urea, UAN, ammonium nitrate and diesel exhaust fluid. The company operates nine facilities in Canada, the U.K. and the U.S., providing product to several dozen countries throughout the globe.CF is an undervalued, mid-cap growth stock. Analysts expect EPS to increase 85% and 16.5% in 2019 and 2020. The 2020 P/E is 17.2. The company is currently biased toward using cash flow to repurchase stock because “we believe we’re significantly undervalued” and “we’re buying back the best assets in the industry with our own shares.” Management expects their debt rating to rise to investment grade in the near future. On November 25, Bank of America Merrill Lynch raised their recommendation on CF from neutral to buy, and raised their price target from 52 to 56. There’s about 12% upside within the current trading range between 46-52. Strong Buy.

CIT12319

CIT Group (CIT – yield 3.0%) operates both a bank holding company with $35.3 billion in 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 a top-10 national online bank. On November 15, CIT announced the launch of eChecking, a new digital checking account featuring no monthly fee, up to .25% APY and an ATM Fee reimbursement of up to $15 a month. The company is expected to close on their acquisition of Mutual of Omaha Bank in the first quarter of 2020.Earnings estimates for 2020 have been gradually dropping, and now reflect no EPS growth vs. 2019. Therefore, I can’t keep the stock in the Growth Portfolio, and will Retire CIT today. There are otherwise no identifiable problems with the company. Retired.


MPC12319

Marathon Petroleum (MPC – yield 3.5%) 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 aims to spin off their Speedway retail stores into a separate company by year-end 2020, and is also strategizing ways to optimize their midstream business. MPC is a greatly undervalued large-cap stock with a solid dividend yield. Full-year EPS are now expected to fall 29% in 2019, then rise 68% in 2020. The 2020 P/E is very low at 8.3. MPC is having a pullback after a recent 50%+ run-up. There’s tentative price support at 58. Strong Buy.

UEIC12319

Universal Electronics (UEIC) is a manufacturer and world leader of wireless and voice remote control products, software and audio-video accessories for the smart home; with over 400 patents and a strong pipeline of new products in the areas of safety and security, climate control and lighting. Investors are welcome to listen to the webcast of management’s presentation at the Imperial Capital 2019 Security Investor Conference on December 11.UEIC is an undervalued, micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. Profits are expected to increase 46% and 12.3% in 2019 and 2020. The 2020 P/E is 14.1. I’m moving UEIC from the Buy Low Opportunities Portfolio to the Growth Portfolio today. While the share price is lower than it was a few years ago, it’s dramatically higher than it was last December. Five weeks ago, I moved the stock to a Hold recommendation, and suggested waiting to buy UEIC on pullbacks. The pullback has arrived, but I’d like to see the stock rest a bit more before suggesting new purchases. Hold.

VOYA12319

Voya Financial (VOYA – yield 1.0%) 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. Low interest rates add a negative element to the industry, but are not hampering Voya’s results. VOYA is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to grow 23.0% and 25.6% in 2019 and 2020. The P/E is 9.3. Investment firm UBS raised their target price on VOYA twice during November, from 59 to 68. The stock has just begun surpassing its July all-time high of 57. I would therefore expect a continued run-up. Buy VOYA now. Strong Buy.

Growth & Income Portfolio

Growth & Income Portfolio stocks have bullish charts, good projected earnings growth, dividends of 1.5% and higher, low-to-moderate P/Es (price/earnings ratios), and low-to-moderate debt levels.agencies, and the company is focused on continued debt reduction.Updates on Growth & Income Portfolio Stocks

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Updates on Growth and Income Portfolio Stocks

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Featured Stock: Guess?, Inc. (GES – yield 2.4%)
Guess is a global apparel manufacturer, selling their products through wholesale, retail, ecommerce and licensing agreements. There are 1,724 Guess stores worldwide, in approximately 100 countries. I reported on the company’s strong third quarter in a Special Bulletin on November 27.The stock should continue to draw investors’ attention through mid-December as analysts attend Guess’ Investor Day on December 3, and follow up with new research reports for their institutional and retail clients. CEO Carlos Alberini foresees “a lot more operating margin expansion opportunity”, which he’ll discuss at the Investor Day. “During the event we will present our strategic business plan and key strategic initiatives for the next five years.”GES is a greatly undervalued, aggressive growth, small-cap stock. Full year earnings estimates have been rising since early June. Analysts now expect EPS to grow 38.8% and 19.9% in fiscal 2020 and 2021 (January year end). The 2021 P/E is 11.8.As a side note, there are only five Wall Street analysts contributing to consensus earnings estimates for Guess, which has a $1.3 billion market capitalization. In comparison, there are 21 analysts covering

Gap Inc. (GPS, market cap $6.2 billion), which is projected to deliver falling EPS both this year and next year. There are also 21 analysts covering Urban Outfitters (URBN – market cap $2.5 billion), which is projected to deliver an EPS drop of 19.9% this year, followed by a 9.2% EPS gain next year. I can’t be the only analyst in the country who’s aware that Guess’s profits are growing better than virtually all of its publicly-traded U.S. retail apparel competition, so why aren’t there more analysts researching and recommending the stock? Perhaps several who are covering Gap Inc. will decide to attend Guess’s Investor Day today, December 3, and begin research coverage on the stock, thus attracting more buyers to drive the price up.I think GES is the most important clothing stock for investors to own in the coming years. The stock rose past its recent September peak last week. Barring a downturn in the broader stock market, I expect GES to rise toward 22 in December or January. Buy GES now. Strong Buy.

BX12319

Blackstone Group Inc. (BX – yield 3.6%*) is the world’s largest and most diversified alternative asset manager with $545.5 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. BX was added to the MSCI US Large Cap 300 Index, effective November 27. Consensus earnings estimates point to 35% EPS growth in 2020, and the 2020 P/E is 17.8. Despite this year’s 85% run-up, BX continues to reach new all-time highs, and the price chart remains bullish. I’m moving BX from Strong Buy to a Hold recommendation. It’s a great quality stock with a good dividend yield, but I’m a little concerned that we could now be experiencing fourth quarter window dressing activity (institutional buying), followed by institutions dumping the stock in January. Hold. *The payout varies each quarter with the total of the last four announced payouts equaling $1.92 and yielding 3.6%.

C12319

Citigroup (C – yield 2.7%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries, and the third-largest U.S. bank by assets. CFO Mark Mason will present at the Goldman Sachs US Financial Services Conference 2019 on December 10. Investors may listen to the webcast or its replay. C is a large-cap growth & income stock. Wall Street expects EPS to grow 16.5% and 9.8% in 2019 and 2020. The 2020 P/E is 8.8. The stock rose 23% from its August low through early November, and has since retained most of those gains. The stock is acting well. We could see additional upside this year. Hold.

CTVA12319

Corteva Inc. (CTVA – yield 2.1%), a.k.a. Corteva Agriscience, provides farmers with seeds and crop protection products (herbicides, fungicides and insecticides), enabling them to maximize yield and profitability. Management will participate in the Citi Basic Materials Conference on December 4. Investors may tune in to the live webcast or its replay. CTVA is a mid-cap growth & income stock. The full-year 2019 consensus earnings estimate has been gradually rising since early August. Analysts now expect EPS of 1.24 and 1.49 in 2019 and 2020, reflecting 20.2% growth next year. The 2020 P/E is 17.0 and the dividend yield is 2.1%. CTVA remains within its recent price range of 25.5-28.5. Continue to accumulate shares. Buy.

DOW12319

Dow Inc. (DOW – yield 5.2%) is the materials science division of the former DowDuPont (DWDP). Dow is exhibiting progress on cash flow, cost cutting, debt repayment, a litigation win and an ability to thrive during a weak global economy. DOW is an undervalued stock with strong earnings growth and a large dividend yield. The company is expected to achieve EPS of $3.55 and $4.23 in 2019 and 2020. The projected 2020 EPS growth rate is 19.2% and the corresponding P/E is 12.6. Last week, three investment firms raised their price targets on DOW to a range of 52-60. The stock had a large run-up since August. Buy on pullbacks. Buy.

RCL12319

Royal Caribbean Cruises (RCL – yield 2.6%) is a cruise vacation company that delivers travelers to desirable and exotic destinations on all seven continents. The company operates a total of 63 ships, with 13 on order, under the brand names Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises and Silversea Cruises, and partnerships with German and Spanish cruise companies. RCL is an undervalued, large-cap growth & income stock. Wall Street expects EPS to grow 7.6% and 11.5% in 2019 and 2020. The 2020 P/E is 11.3. RCL continues to rise, with 8% additional upside to its 2019 high near 130, where it will still be undervalued. Buy RCL now. Strong Buy.

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Schlumberger NV (SLB – yield 5.5%) is the world’s largest oilfield service company. CEO Olivier Le Peuch is moving the company’s focus away from North American shale drilling toward asset-light software and services businesses. Management expects to produce higher margins and free cash flow in 2020, along with lower capital expenditures. SLB is a large-cap stock with a 5.5% dividend yield. Wall Street expects EPS to fall 9.3% in 2019, and then to increase 17.8% in 2020. The 2020 P/E is 21.0. Deutsche Bank initiated coverage of oilfield services companies in November, rating SLB a Buy; and Soros Fund Management LLC purchased 150,000 shares of SLB during the third quarter. The stock has traded aimlessly between 30-40 for seven months, more recently marching upward in a classic two-steps-forward, one-step-back pattern since early October. Patient investors can buy now, locking in the large dividend yield, and traders can capitalize on the wide trading range. Buy.

TOT12319

Total S.A. (TOT – yield 5.7%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. Total is the second-largest private global liquified natural gas (LNG) player, with a worldwide market share of 10%. TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The market now expects Total’s EPS to fall 4.6% in 2019, then to increase 13.3% in 2020. The 2020 P/E is 9.6. The stock rose about $6.50 in October, then pulled back $2.50 in November while earnings estimates increased throughout the month. Investors who buy now will lock in the large current yield, and will likely experience gradual capital gains. Strong Buy.

Buy Low Opportunities Portfolio

Buy Low Opportunities Portfolio stocks appear capable of a big rebound from recent lows. They have strong projected earnings growth; low-to-moderate price/earnings ratios (P/Es); no dividend requirement and low-to-moderate debt levels. Investors should expect volatility as the stock market alternately embraces the companies’ current successes and remains wary of the stocks’ recent downturns.

cusabuylowopptable12319

Updates on Buy Low Opportunities Portfolio Stocks
Featured Stock: LGI Homes (LGIH)

LGIH12319

LGI Homes joins the Buy Low Opportunities Portfolio with a Strong Buy recommendation. LGI Homes is the tenth largest residential homebuilder in America. The company is currently building homes, primarily for first-time homebuyers, in 19 U.S. states from coast-to-coast and the District of Columbia. During November, the company announced new communities in the Daytona Beach, Jacksonville and Sarasota, FL markets.In November, LGI Homes reported third quarter EPS of $1.93 vs. the $1.88 consensus estimate, and forecasted full year 2019 EPS within a range of $7.00-$7.60. Analysts expect full year EPS to grow 7.5% and 14.4% in 2019 and 2020. The 2020 P/E is 9.3.Full year revenue has grown from $383 million in 2014 to $1.5 billion in 2018. Analysts project revenue reaching $2.1 billion in 2020. Diluted earnings per share have grown just as aggressively, from $1.33 in 2014 to $6.24 in 2018, and expected to reach $7.68 in 2020.The company closed on 715 homes in October vs. 468 homes in October 2018. For the full year 2019, the company anticipates closing on between 7,100-7,600 homes in 105-115 active selling communities.LGI is a small-cap stock with a $1.7 billion market capitalization and heavy institutional ownership. The stock broke past long-term price resistance at 80 in August, peaking near 88 in October (a new all-time high), then immediately pulling back and settling into a 70-72 range in November. There’s 23% upside as the stock eventually retraces its October high. Housing stocks can be volatile, taking cues from economic data and interest rates. LGIH is a good choice for traders and experienced growth stock investors. Strong Buy.

ANF12319

Abercrombie & Fitch (ANF – yield 4.9%) 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. The company operates 677 U.S. stores and another 204 international stores that are heavily concentrated in Europe. Revenue among the U.S. stores has consistently increased for nine straight quarters, while international revenue has lagged. The company is in the middle of a three-year plan aimed at both store transformation (updating and right-sizing their stores) and revenue growth. Management is repaying debt and repurchasing stock, which lowers interest and dividend costs. The long-term debt-to-capitalization ratio is quite low at 19.5%.Investors may review the third quarter presentation and press release. For the fourth quarter, CEO Fran Horowitz commented, “inventories are in great shape and well-balanced across brands.” At this point, Abercrombie sources just 16% of merchandise from China, but tariffs will still have an effect on fourth profits.ANF is an undervalued small-/micro-cap stock. Wall Street projects EPS to fall in 2019, then rise 81% in 2020. The 2020 P/E is 12.8. The large dividend yield is quite safe. (If there were any question about whether Abercrombie could afford to pay the dividend, management would likely stop throwing so much cash toward debt repayment and share repurchases, way before they would ever cut the dividend.) Frankly, the company’s management team, small size, profitability and strong balance sheet make it an attractive takeover target as well as an attractive stock for retail and institutional investors. Whether you’re looking for a small-cap growth stock, a dividend stock, or a potential takeover target, ANF can fill the need. I expect ANF to perform well in 2020, but share price performance for the balance of 2019 remains a wild card. Buy ANF now. Buy.

ALXN12319

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 will present at the 2019 Evercore ISI HealthCONx on December 3. In addition, investors may listen to management’s presentation at the November 19 2019 Stifel Healthcare Conference.

ALXN is an undervalued growth stock. Full-year EPS are expected to grow 30.9% and 8.5% in 2019 and 2020. The 2020 P/E 10.1, which is extremely low for a biopharmaceutical stock. ALXN continues to rise toward price resistance in the low 120s. I expect additional capital gains in 2020. Buy ALXN now. Strong Buy.

BKR12319

Baker Hughes Company (BKR – yield 3.3%) offers products, services and digital solutions to the international oil and gas community. 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.

BKR is an undervalued, mid-cap aggressive growth stock, expected to increase EPS by 34% and 47% in 2019 and 2020. The 2020 P/E is 17.5. Deutsche Bank initiated coverage of oilfield services companies in November, rating BKR a Buy. The stock has traded between 20.5-25 for seven months, and while there’s room for traders to make money, there’s no sign of a pending near-term move past 25. Buy.

DBI12319

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. Designer Brands continues to cross-apply the successes of its separate U.S. and Canadian businesses in order to maximize revenue and profit growth, drawing upon expertise in retail and online operations and their rewards program. In mid-November, Designer Brands’ Canadian retailer The Shoe Company launched Shoe VIP, an innovative points-based loyalty program created for and by its members.

The company has delivered 27 consecutive years of revenue growth. Designer Brands is expected to report $0.76 third-quarter EPS, within a range of $0.71-$0.79, and $940.8 million revenue, within a range of $926.2-$956.5 million, on the morning of December 10.

DBI is an undervalued, small-cap growth stock. Analysts expect full year EPS growth rates of 14.5% and 15.8% in 2019 and 2020 (January year end); and company management is projecting 2021 EPS growth of about 23%. The 2020 P/E is very low at 7.5. DBI has traded between 16-19 for twelve weeks. Buy DBI now for outsized total return potential in 2019 and beyond. Strong Buy.

MCY12319

Mercury General Group (MCY – yield 5.1%) operates as Mercury Insurance, the leading independent agency writer of automobile and home insurance in California. Mercury also writes automobile, home and/or other lines of insurance, including business and mechanical breakdown insurance, in ten additional U.S. states.

Analysts are expecting EPS to grow 50% in 2019 and 19.6% in 2020. The 2020 P/E is 15.2. Despite disappointing third quarter results, the full year outlook continues to be attractive, and the dividend yield is huge at 5.1%. As with virtually any stock that’s trading at or near an annual low in the month of December, I expect tax-loss selling pressure to hold the price down until January, at which time anybody who was going to sell will have sold. Barring unexpected bad news, all that will be left are buyers, and I’m therefore expecting a share price rebound in January. In the meantime, patient growth investors and income-oriented investors can buy MCY now and lock in the large 5.1% current dividend yield. Buy.

MOS12319

The Mosaic Company (MOS – yield 1.0%) 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. Their mission is to help the world grow the food it needs. Profits are expected to fall to $0.59 per share in 2019 and then to rise 146% to $1.45 in 2020. The 2020 P/E is 13.1. MOS has traded between 17.5-23 for four months. The stock will likely perk up in January. Hold.

Special Situation Stocks

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Updates on Special Situation Stocks

AMZN12319

Amazon.com (AMZN) – This multi-faceted online retailer is continually expanding its array of business ventures and partnerships. Black Friday went well for online retailers according to Adobe Analytics, which reported online sales up 20.5% year-over-year for the annual shopping event. Cyber Monday was also projected to break previous sales records.Yesterday, Amazon Web Services (AWS) announced a new quantum computing service, Amazon Braket, along with the AWS Center for Quantum Computing and the AWS Quantum Solutions Lab. Read the press release here. Last week, Reuters reported, “Amazon.com Inc’s cloud computing unit has designed a second, more powerful generation of data center processor chip… The new AWS chip … will be at least 20% faster than Amazon’s first Arm-based chip, named Graviton, which was released last year as a low-cost option for easier computing tasks. If Amazon Web Services’ chip efforts are successful, it could lessen the unit’s reliance on Intel Corp and Advanced Micro Devices Inc for server chips.” Additionally, AWS announced new customers this week, including Klarna, Best Western Hotels and Resorts, and a race car project with Formula 1.The company delivered paltry earnings growth in 2019, failing to generate any excitement among professional investors whom the rest of us rely upon to move share prices. Fortunately, Amazon.com has a bright future, expected to deliver 31.3% EPS growth in 2020, which will surely reignite the share price. The stock is beginning to perk up, approaching short-term price resistance at about 1,850. There’s additional resistance at 2025. Buy AMZN now. Strong Buy.

EQH12319

AXA Equitable Holdings (EQH – yield 2.4%) has two principal franchises: AXA Equitable Life Ins. Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. 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. AXA Equitable reported a great third quarter, with year-over-year increases in premiums and net inflows in all business divisions. Next year’s earnings are slated to grow just 4.1%, so I’m probably going to keep the stock in the portfolio for the current run-up, and then move on. EQH began reaching new all-time highs in November, and it’s still climbing. Strong Buy.

BMY12319

Bristol-Myers Squibb Company (BMY – yield 2.8%) markets a long list of pharmaceuticals, including Coumadin and Eliquis, to treat cardiovascular, oncology and immune disorders. The company completed the acquisition of Celgene Corporation (CELG) on November 20. Celgene markets therapies for cancer and immunological diseases, including Revlimid, which will lose exclusivity in 2022. Bristol-Myers will hold a webcast on December 8 to discuss data presented at the American Society of Hematology meeting.BMY is a vastly undervalued growth stock. Analysts expect full year EPS to grow 9.0% and 44.7% in 2019 and 2020. The 2020 P/E is just 9.1. BMY is resting after a four-month run-up. Barring bad corporate news, if the stock bounces down to the 52-54 area, that would be a buying opportunity. Hold.

CRAK12319

VanEck Vectors Oil Refiners ETF (CRAK) seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS Global Oil Refiners Index (MVCRAKTR). The International Maritime Organization 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 is to minimize sulfur oxide (SOx) emissions into the atmosphere, and the mandate is nicknamed IMO 2020. Oil refining companies are expected to profit from the demand for low-sulfur diesel fuel. Read more here: IMO 2020: The Big Shipping Shake-Up. CRAK pays an annual dividend in late December, usually yielding 1-2%. CRAK is pulling back after a recent run-up. I expect continued strength from this exchange-traded fund in 2020. Buy CRAK now. Strong Buy.


The next Cabot Undervalued Stocks Advisor issue will be published on January 2, 2020.

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