Today’s featured companies are benefiting from the current focus on healthcare, online commerce, dining at home and limited travel behaviors.
All of the stocks that I follow with any regularity finished falling in March, and began to rebound. I’m glad for that, and happy to be buying low. However, there’s still a dark cloud on the horizon. The longer the quarantine situation lasts in the U.S. and in foreign lands, the uglier the economic situation will become. That’s because many companies are scrambling for cash to pay their employees, rent, utilities, etc. while they’re not actually selling any products that can replenish the cash flow.
There are various stocks in today’s issue that I indicated would be good for traders. “Good for traders” bears no resemblance to “good for buy-and-hold investors”, okay? Please read my recommendations carefully. When in doubt, send me an email with your questions.
Lastly, take your time investing cash positions. Many stocks will be in trading ranges, so watch for opportunities to buy low and sell high within those ranges. To that end, I’ve listed short-term upside price resistance targets on quite a few of the stocks. When the stocks rise to those targets, you’re going to tell yourself “my stock is going to keep rising!” Instead, odds are very strong that your stock will turn down. This will be a trader’s market for much of 2020. If you’ve ever toyed with the idea of buying and selling within a stock’s trading range, this is the year to do it! Best of luck to you!
Cabot Undervalued Stocks Advisor 420
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The Other Side of the Mountain
It appears as if U.S. stock markets have begun rebounding from the drastic March downturn. As you would expect, stocks that are less affected by global quarantine behaviors are recovering far more swiftly than those that cater to crowds of people, such as retailers, restaurants and the travel industry.
All four of today’s featured companies are benefiting from the current focus on healthcare, e-commerce, dining at home and limited travel behaviors. These companies are Amazon.com (AMZN), Bristol-Myers Squibb (BMY), which is a new addition to the Growth & Income Portfolio; Mercury General Group (MCY) and Tyson Foods (TSN).
DIVIDENDS AND SHARE REPURCHASES – I included the latest news on each company’s statements and policies pertaining to share repurchases and dividends. As you might know, many companies are temporarily amending such policies so as to preserve cash during this difficult economic time. For example, all global systemically important banks (GSIBs) have suspended their share buyback programs through June 30, as did Royal Dutch Shell (RDS/A). Companies are also cutting back on capital spending plans, which means they’re delaying growth plans in favor of preserving liquidity. None of this necessarily means that companies are suffering financially; rather, it means that most of them are being proactive and prudently cautious.
On March 30, PBF Energy (PBF) agreed to sell five hydrogen plants to Air Products and Chemicals (APD) for $530 million. In order to further preserve another $500 million, PBF is suspending the quarterly dividend and lowering expenses and capital outlays. Executive leadership and Directors will take 50% pay cuts, and the CEO will take a 67% pay cut. The stock reacted by rising 20% that day. That’s because the market was relieved to see management taking definitive action to combat the economic downturn as it affects PBF’s balance sheet. PBF appears in my 10 Best Stocks to Buy and Hold for 2020 portfolio, which you received in early January.
INSIDER STOCK TRANSACTIONS – Want to keep track of trends among sales and purchases of stock by insiders, i.e. corporate executives and directors? Visit www.OpenInsider.com/Charts and enter a stock symbol in the top center of the page. Insiders sell for all sorts of reasons: estate planning, divorce, buying a home, diversifying assets, etc. Yet insiders buy for one reason only: they believe that the company has a good future, that the stock is cheap and that its price will rise. The most glaring example among our portfolio stocks of is Equitable Holdings (EQH), which saw seven executives and directors purchase the company’s stock in March.
REVISITING LIFE INSURANCE AND INVESTMENT STOCKS – During the recent stock market downturn, investors sold shares of any company that has a connection to the life insurance industry, because they’re likely assuming that this market downturn is similar to the one in 2008. However, this market downturn bears no similarity in causation. Companies that sell life insurance – wholesale and retail – are in far stronger financial positions than they were in 2008. And fortunately, their stocks have shown a willingness to begin recovering from the market drop. Research any of these stocks as potential additions to your portfolio: Ameriprise Financial (AMP), Athene (ATH), Brighthouse Financial (BHF), Equitable Holdings (EQH), Lincoln National (LNC) and/or Voya Financial (VOYA).
Investors should also be aware that Warren Buffett of Berkshire Hathaway (BRK) has long held the intention of buying another company. Berkshire has accumulated $125 billion in cash, up to $105 billion of which is available for M&A activity. Knowing that Mr. Buffett is already quite experienced with owning insurance companies, there’s a decent chance that his next buyout could be focused on the cheap valuations in this industry.
Additionally, there’s been significant M&A activity among investment and insurance companies this year. Morgan Stanley (MS) announced an agreement to purchase E*TRADE (ETFC), and Franklin Resources (BEN) announced that they’ll buy Legg Mason (LM). If there’s any additional M&A activity within this investment/insurance space in 2020, it’s my assessment that the companies I mentioned herein are the most attractive potential buyout targets.
TIPS ON STOCK PORTFOLIO CONSTRUCTION – Need some guidance on building a balanced stock portfolio? Here are two of my recent articles that might assist you:
- Getting Started with a $10,000 Stock Portfolio
- How to Build a No-Brainer 2-Year Buy-and-Hold Stock Portfolio with Massive Capital Gain Potential
Today’s Portfolio Changes
Abercrombie & Fitch (ANF) moves from Hold to Buy.
Adobe Systems (ADBE) moves to the Special Situation and Movie Star Portfolio.
Bristol-Myers Squibb (BMY) joins the Growth & Income Portfolio as a Strong Buy.
General Motors (GM) moves from Hold to Buy.
Goldman Sachs Group (GS) moves from Hold to Retired.
MKS Instruments (MKSI) moves from Hold to Strong Buy.
Netflix (NFLX) moves from Strong Buy to Hold.
Quanta Services (PWR) moves from Hold to Buy.
Total SA (TOT) moves from Hold to Buy.
Universal Electronics (UEIC) moves from Hold to Strong Buy.
VanEck Vectors Oil Refiners ETF (CRAK) moves from Hold to Strong Buy.
Recent Portfolio Changes
Alexion Pharmaceuticals (ALXN) moved from Hold to Buy.
Guess? Inc. (GES) moved from Hold to Buy.
Mercury General (MCY) moved from Hold to Strong Buy.
Tyson Foods (TSN) moved from Hold to Strong Buy.
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.
Featured Stock: Tyson Foods (TSN – yield 2.9%)
Tyson Foods (TSN) is the largest U.S. food company, with operations in 20 countries, and a recognized leader in protein with leading brands including Tyson, Jimmy Dean, Hillshire Farm, Ball Park, Wright, Aidells, ibp and State Fair. Management is focused on the growing global need for protein, and fulfilling that need in a sustainable and environmentally conscious manner. Tyson Foods was featured in the December 10 and January issues of Cabot Undervalued Stocks Advisor.
Back in November, China agreed to buy more poultry from the U.S., lifting their nearly five-year ban on poultry imports, and they also removed existing tariffs. Then in January 2020, China promised to buy significantly increased amounts of U.S. poultry in 2020 and 2021 as part of a Phase 1 U.S.-Sino trade deal, which helps alleviate China’s need for protein sources in the wake of the devastation that African Swine Fever imparted on the country’s hog population. In March, China additionally agreed not to ban all U.S. poultry imports if avian flu is discovered among any U.S. poultry populations. Instead, China will temporarily ban poultry products from any U.S. state where an avian flu outbreak occurs.
In March 19th comments about U.S. grocery stores running low on meat in recent weeks, Tyson CEO Noel White said that this temporary supply and demand imbalance should be resolved within a week, indicating that there is no supply problem, but rather that consumers’ hoarding activity has led to increased demand, compounded by a demand shift from restaurants to supermarkets. Tyson is donating $13 million toward hunger relief and community support related to the virus outbreak.
Earnings growth projections for 2020 have come down about 9% since late January as analysts assumed that China would be purchasing fewer protein products from the U.S. than they’d recently indicated in association with the Phase 1 trade agreement. Analysts are now forecasting EPS to increase 13.6% and 14.5% in 2020 and 2021 (September year end). The 2020 P/E is 9.4. The stock formed a double-bottom pattern on the price chart in March, then began its rebound. TSN could reach short-term resistance at 70 rather quickly. Strong Buy.
LGI Homes (LGIH) is the tenth largest residential home builder in America. The company is currently building homes, primarily for first-time home buyers, in 19 U.S. states from coast-to-coast and the District of Columbia. Earnings estimates rose since LGIH joined the Growth Portfolio in December. Profits are expected to grow 13.8% in 2020, and the P/E is 5.6. LGIH is a small-cap stock. LGIH rose to an all-time high in February, then was cut in half in the stock market correction. The stock is not yet stable enough for new purchases. Hold.
Marathon Petroleum (MPC – yield 10.2%) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, a majority interest in midstream company MPLX LP, 10,000 miles of oil pipelines, and product sales in 11,700 retail stores. In March, Marathon named a new CEO, Mike Hennigan, who has been the CEO and President of MPLX LP. The Board of Directors additionally completed their strategic review of MPLX, deciding to keep the asset rather than sell it or spin it off to shareholders. MPLX generated $1.75 billion EBITDA in 2019. Marathon plans to spin off the Speedway retail business in the fourth quarter of 2020.
Marathon’s earnings projections have come down dramatically from COVID-19’s effect on global commerce, resulting in a lower demand for oil products and ensuing lower oil prices. Profits are now expected to fall 16.0% in 2020, then rise 12.0% in 2021. The 2020 P/E is 5.5. The company increased the dividend payout with the March payment.
The price chart is exhibiting an attractive bottoming pattern. I believe the stock could climb to 35, or even 45, within eight weeks. If earnings estimates don’t vastly improve by that time, I will remove the stock from the Growth Portfolio. (It’s possible that an upward trajectory in oil prices could substantially improve the earnings outlook.) Traders can probably make money on MPC this month. Buy.
MKS Instruments (MKSI – yield 1.0%) is a 60-year-old global provider of instruments, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for their customers. Their primary served markets include the semiconductor, industrial technologies, life and health sciences, research and defense. MKS offers the largest breadth of products and services in their market, with 2200 patents and a sales presence in 100 countries. MKS Instruments was featured in the February 19 issue of Cabot Undervalued Stocks Advisor.
MKSI is an aggressive growth, mid-cap stock. Management’s financial priorities include paying down debt while being open to M&A opportunities. EPS projections came down a little in late February, and have since remained stable; they’re expected to grow 38.1% and 30.0% in 2020 and 2021. The 2020 P/E is low in comparison at 13.3. MKSI fell with the broader market correction, and has since exhibited a bottoming pattern from which it’s emerging. I’m moving MKSI from Hold to a Strong Buy recommendation. Strong Buy.
Quanta Services (PWR – yield 0.6%) 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. The company achieved record annual revenues, operating income and backlog in 2019, and is pursuing a multi-year goal of increasing margins. Quanta Services was featured in the December monthly issue of Cabot Undervalued Stocks Advisor.
PWR is an undervalued, mid-cap growth stock. Earnings estimates came down a little in March, currently reflecting 12.6% and 7.7% EPS growth in 2020 and 2021. The 2020 P/E is 8.3. Quanta just announced their next normal dividend payment on March 26, therefore, we know the dividend is not in danger. I’m moving PWR from Hold to a Buy recommendation as the share price is now improving. Buy.
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. Clients include every major electronic and telecommunication company: AT&T, Cox, Dish, Comcast, Samsung, LG, Sony, Liberty, Daikin, Sky and more. Universal Electronics was featured in the February monthly issue and the February 26 issue of Cabot Undervalued Stocks Advisor.
UEIC is a volatile, undervalued micro-cap growth stock, appropriate for risk-tolerant investors and traders. On March 12, management announced the authorization of the repurchase of up to 300,000 shares of stock through May 7, which is presumably the date of the first quarter earnings release. Investors can interpret this move as a belief on management’s part that the stock is very cheap, and that repurchasing their own stock is a good use of their available cash. Earnings estimates increased a bit in March, reflecting 13.5% and 12.4% EPS growth expectations in 2020 and 2021. The 2020 P/E is 9.4. The stock reacted well to the great fourth quarter earnings report, then got tossed around with the market correction. Now that UEIC has begun its recovery, I’m moving UEIC from Hold to a Strong Buy recommendation. Strong Buy.
Voya Financial (VOYA – yield 1.5%) is a U.S. retirement, investment and insurance company serving 13.8 million individual and institutional customers. Voya has $603 billion in total assets under management and administration. VOYA is a mid-cap growth stock. The company has “a substantial level of excess capital”, as per a major investment bank’s comments last week. Earnings estimates reflect very aggressive growth rates of 34% per year in 2020 and 2021. The P/E is very low in comparison at 8.6. VOYA rose to a new all-time high in February, then fell with the broader market. My intention is to return VOYA to a Buy recommendation in the near future. I’d like to first witness more of a bottoming pattern on the price chart. Hold.
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.
Featured Stock: Bristol-Myers Squibb Company (BMY – yield 3.2%)
Bristol-Myers Squibb is a biopharmaceutical company with a mission to discover, develop and deliver innovative medicines that help patients prevail over serious diseases. Bristol-Myers purchased Celgene for $74 billion in November 2019. The merged company markets a long list of pharmaceuticals, including Revlimid, Eliquis and Opdivo, to treat cardiovascular, oncology and immunological diseases. Last week, Bristol-Myers announced FDA approval of Zeposia for the treatment of relapsing forms of multiple sclerosis. The product launch will be delayed due to the COVID-19 pandemic. The company expects revenue and profit growth to come from four areas: sales volume increases from current products, development and launch of new medicines, life cycle management and synergies from the Celgene acquisition.
BMY was featured in my March 2020 webinar that was focused on growth stocks with rising dividends. Today, Bristol-Myers is joining the Growth & Income Portfolio as a Strong Buy.
Bristol-Myers’ financial priorities include debt repayment, investment in innovation, share repurchases and annual dividend increases. The company increased their share repurchase authorization by $2 billion in late 2019 (from $5 billion to $7 billion) and announced a 10% dividend increase in December.
The company’s eight biggest drugs achieved sales volumes ranging from $1.3 to $10.8 billion each in 2019, all higher than prior-year numbers. Earnings projections have not deteriorated in reaction to the global virus pandemic. The company is expecting to achieve $6.00-$6.20 EPS in 2020 and $7.15-$7.45 EPS in 2021. Wall Street’s consensus estimates point to EPS growth of 33.3% and 18.2% in 2020 and 2021. These are very aggressive EPS growth rates for a large-cap pharmaceutical stock. I would expect earnings growth to slow in the coming years as the company digests the Celgene merger and business expands at a more normal pace. For comparison, the consensus 2020 EPS growth rates at peer companies are 12.4% at Eli Lilly (LLY), 10.2% at Merck (MRK), 3.0% at Johnson & Johnson (JNJ) and (1.7%) at Pfizer (PFE). The 2020 price/earnings ratio (P/E) for BMY is just 8.9, 20%-55% lower than at these four pharmaceutical peers.
BMY is appropriate for growth investors, traders and income investors. BMY rose to a new all-time high near 70 in 2016. After a couple of years of bouncing mostly lower, the stock had a huge run-up in late 2019, peaking at 67 in February. BMY then fell with the correction in the broader market, and is now trading in the mid 50’s, where it traded in October 2019. At a share price of 54, BMY has 24% upside to its February high. Strong Buy.
Broadcom (AVGO – yield 5.4%) is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. Broadcom was featured in the December 17 and January issues of Cabot Undervalued Stocks Advisor. In mid-March, CFO Tom Krause commented, “We are well positioned to continue to support our dividends to stockholders despite the challenging market backdrop.” The company’s secondary financial goal is debt repayment (none of which is maturing in 2020), with share buybacks now on the back burner. Earnings estimates came down since mid-March, reflecting weaker China smartphone sales during the virus epidemic. Analysts now expect EPS to grow 2.0% and 10.2% in 2020 and 2021 (November year end). The 2020 P/E is 11.2. This week, KeyBanc raised their price target on AVGO from 240 to 290. The stock has begun a rapid price recovery, with short-term upside price resistance at about 260-270. When AVGO reaches that price range, I will reevaluate the stock. Buy.
Dow Inc. (DOW – yield 9.6%) is a commodity chemicals company with manufacturing facilities in 31 countries. Dow derives roughly 50% of profits from its polyethylene business. The company is assisting in the COVID-19 crisis by producing hand sanitizer and contributing $3 million to relief efforts. Management is focused on cost-cutting, debt repayment and returning cash to shareholders. Note that the CEO and two Directors bought DOW shares on March 12 and 13 during the worst of the market downturn. The company will host their annual meeting on April 9. The consensus earnings outlook came down dramatically in March due to business disruptions associated with the coronavirus. Analysts now expect full-year EPS of $2.40 and $3.15 in 2020 and 2021, reflecting (31.2%) and 31.3% annual growth. The 2020 P/E is 12.2. The stock has begun its recovery, with short-term upside resistance at 40, where I will review DOW’s position in the Growth & Income Portfolio. Buy.
Goldman Sachs Group (GS – yield 3.2%) is a major international investment bank that’s embarked on a strong foray into consumer banking. Their online bank, named Marcus, was launched in 2015. Marcus diversifies Goldman’s revenue base, potentially smoothing out the less predictable quarterly profit fluctuations associated with Goldman’s more traditional investment banking and trading divisions. Goldman Sachs Group was featured in the February issue of Cabot Undervalued Stocks Advisor. Consensus earnings estimates declined for Goldman since early March, due to the virus-related global commerce disruption, and their temporary halt of share repurchases. Analysts now expect Goldman’s EPS to grow 0.4% and 19.2% in 2020 and 2021. The 2020 P/E is 7.4. All global systemically-important banks (GSIBs) have suspended their buyback programs through June 30. The worst seems to be over for the share price. Still, I’m reading that there will be additional downside revisions to earnings estimates, and I can see that the price chart is not nearly as hopeful near-term as many other stocks. Therefore, I’m retiring GS from the Growth & Income Portfolio. My suggestion is that investors swap out of GS, into Bristol-Myers (BMY), for better earnings growth, a comparable dividend yield and more immediate upside price potential. (If you are hesitant to sell a stock at a loss, think of it this way: you will probably recoup your capital more quickly in BMY or another Buy-rated stock than you will by keeping GS and awaiting its recovery.) Retired.
GUESS?, Inc. (GES) is a global manufacturer of an iconic apparel brand, selling sexy GUESS and Marciano brand clothing and merchandise to Gen Z, Millennial and Heritage consumers through 1,743 stores worldwide, in over 100 countries. Prior to the COVID-19 crisis, Guess? had been delivering stronger multi-year earnings growth than all of its retail apparel peers. At this time, the company’s U.S., Canada and European stores remain closed, while the Asia-Pacific stores have reopened. The company suspended the dividend in order to preserve liquidity until the resumption of its global commerce.
Yesterday, management announced additional cost-cutting efforts, including furloughing employees and salary reductions. CEO Carlos Alberini commented, “These are some of the most difficult decisions our Company has had to make in our entire four-decade history. And while many of these decisions have proven very challenging, by far the hardest one is the decision to furlough our associates. We will make every effort to bring our team members back to their jobs as soon as we possibly can. In these unprecedented times, I can assure you that we are working relentlessly to protect the well-being of our Guess family, our associates, customers and the communities we serve, while preserving the long-term health of the Company for all of our stakeholders. We are confident that with these aggressive and immediate actions we are putting the Company in the best position for future success.” Investors responded by pushing the share price up about 6% in early trading. The worst seems to be over for the stock. Traders will probably benefit from wide price swings. Buy.
Total S.A. (TOT – yield 8.0%) is a French multinational integrated energy company that produces and markets fuels, natural gas and low-carbon electricity, operating in over 130 countries. The company is providing French hospital workers with gasoline vouchers worth a total of 50 million Euros as they participate in COVID-19 relief efforts. Fourth quarter results featured strong performance in all business segments. Falling oil prices caused analysts to lower earnings projections in March, with Total’s EPS now expected to fall 39% in 2020 and grow 68% in 2021. The 2020 P/E is 14.0. The company announced a suspension of their share buybacks during the current global economic disruption. The share price has begun its recovery, alongside many energy stocks. I’m moving TOT from Hold to a Buy recommendation. The stock has short-term price resistance at 47. 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.
Featured Stock: Mercury General Group (MCY – yield 6.3%)
Mercury General Group (MCY) operates as Mercury Insurance, the leading independent agency writer of automobile and home insurance in California, with total assets over $4.5 billion. Mercury also writes automobile, home and/or other lines of insurance, including business and mechanical breakdown insurance, in ten additional U.S. states. MCY is an undervalued small-cap stock with an unusually large dividend yield. Earnings projections have remained strong and unchanged since the company reported fourth quarter 2019 results in February. Analysts are expecting EPS to grow 23.8% and 12.4% in 2020 and 2021. The 2020 P/E is 12.5. Additionally, I’m guessing that the company will be paying fewer auto collision claims while so much of the U.S. population is staying home, and therefore driving less. That should translate to higher-than-expected profits in 2020. Two Directors and the Chairman bought MCY shares in mid-March. The stock has exhibited a distinct bottoming pattern and appears capable of immediately rising. Buy MCY now. Strong Buy.
Abercrombie & Fitch (ANF – yield 9.0%) 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 850 stores globally, alongside their online sales presence. With regard to the COVID-19 virus, management has temporarily closed their North American and European stores, and reopened their Asia-Pacific stores. The company is drawing upon their revolving credit facility, temporarily suspending share repurchases, and withdrawing $50 million from their overfunded Rabbi Trust (a type of nonqualified deferred compensation plan). The dividend currently remains intact. (Read the press release.) Note that the CEO, CFO and one Director bought ANF shares on March 13 and 16 during the worst of the market downturn.
Current-year earnings estimates have come down dramatically due to the impact of the coronavirus on global shopping and tourism. Profits are now expected to fall 41% in fiscal 2020 (January 2021 year end) and rise 112% in fiscal 2021. The 2020 P/E is 20.8.
I’m moving ANF from Hold to a Buy recommendation for traders and income investors. (Growth investors should stick with companies that are still expected to grow their profits in 2020 and 2021.) ANF formed a bottoming pattern on the price chart during the second half of March. The stock has begun its recovery, with short-term upside resistance near 14, where I will review ANF’s position in the Portfolio. Buy.
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. Last week, Alexion management reached out to several U.S. government agencies to offer Soliris as a possible treatment for patients who have both the COVID-19 virus and severe pneumonia.
There’s been no material change in earnings estimates for Alexion since the company reported fourth quarter 2019 results in January. Analysts expect ALXN to grow EPS by 4.9% and 10.0% in 2020 and 2021. The 2020 P/E is 8.1, which is extremely low for a biopharmaceutical stock. Hedge fund Baker Bros. Advisors LP bought $39 million ALXN on March 16 and 18. In looking at the price chart action that week, I’d say that the portfolio manager at Baker Bros. has incredibly good market instincts. The stock is now rebounding from its downturn, with short-term price resistance in the upper 90s. Buy.
Apple Inc. (AAPL – yield 1.2%) – Last week, Apple released a new COVID-19 app and website to help people stay informed and take the proper steps to protect their health during the spread of COVID-19, based on the latest CDC guidance. In March, the company closed all retail stores outside of China but reopened their retail stores in China, where iPhone manufacturing also resumed.
Apple continues to deliver revenue growth and new technologies. Their new 5G iPhone is due out in September 2020. Their services revenue has grown faster than expected in recent quarters. Wall Street expects annual revenue to grow from $260 billion in fiscal 2019 (September year end) to $269 billion in 2020 and $303 billion in 2021.
Earnings estimates peaked in early February and have since come down due to the impact of the virus pandemic on global commerce. Analysts are now forecasting $12.83 and $15.25 EPS in 2020 and 2021 (September year end), reflecting 7.9% and 18.9% growth rates. The 2020 P/E is 19.9.
The company typically announces a dividend increase and a new share repurchase authorization annually, in late April. The last quarterly dividend increase was 5.5%, from 73 cents to 77 cents, and the last two repurchase announcements amounted to $75 billion and $100 billion.
There aren’t too many bullish recommendations for stocks coming from Wall Street lately. Everyone’s apparently cowering under their desks. However, on March 25, Deutsche Bank raised their recommendation on AAPL to Buy. The stock appears to have bottomed in late March, and has begun its rebound. I recommend that investors build a position in AAPL. Strong Buy.
Baker Hughes Company (BKR – yield 6.7%) offers products, services and digital solutions to the international oil and gas community. Share prices of oilfield service companies will likely recover from the stock and oil price downturns more slowly than those of oil majors and oil refiners. The CEO, CFO and a Director each bought BKR shares in late February, at the onset of the market downturn. The stock is exhibiting a bottoming pattern, and will likely trade between 10-14 in the near-term. Hold.
Designer Brands Inc. (DBI – yield 7.6%) 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. This spring, Designer Brands will debut the JLO JENNIFER LOPEZ collection, a line of footwear and handbags that will be sold exclusively at DSW Designer Shoe Warehouse stores in the United States and Canada, and online at DSW.com.
With regard to the COVID-19 virus, the company has implemented temporary leaves of absence for over 80% of its workforce, effective March 29. Nearly all remaining employees will be subject to pay reductions. North American retail locations remain closed, while the company’s e-commerce venue and distribution centers are open for business. At this point, earnings projections are pointless. The retail apparel and footwear industry has just missed its spring selling season. It’s not like they sell TVs, and can return to business selling those same exact TVs, several months down the road. They’re stuck with the seasonal merchandise. Hopefully they’ll be able to sell it all in May and June at drastically reduced prices. (Consumers are going to have a field day!) In March, management reduced the dividend from 25 cents to 10 cents per quarter.
The worst seems to be over for the share price. The CEO, CFO and Chairman each bought DBI shares on their lowest day during the market downturn, expressing their confidence in the company. Be cautious. Dividend and growth opportunities will fade, the longer the quarantines remain in place. Nimble traders can likely profit this month as the share price likely bounces between 5-10. Buy.
General Motors (GM – yield 6.9%) -- GM’s 2020 new vehicle launches, expense reductions, returns of capital, and their commitment to an all-electric future were driving bullish sentiment on Wall Street ... until the coronavirus epidemic traveled the globe. All business plans within the auto industry are on hold while we await the lifting of quarantines and survey the economic damage. GM was featured in the December 31, 2019 issue and the February issue of Cabot Undervalued Stocks Advisor.
GM is currently mass-producing face masks and critical care ventilators to assist with the country’s virus epidemic. The company intends to draw down approximately $16.0 billion from its revolving credit facilities, bringing their cash position up to about $32 billion. Additionally, GM will defer 20% of all salaried employees’ compensation, to be repaid by March 15, 2021. Company executives will experience 25-30% deferral rates. There has been no announcement regarding dividends or share repurchases, but investors should be aware that any company could suspend such shareholder benefits in order to focus on surviving financially during this time of economic trouble.
Earnings projections continue to decline due to the impact of the COVID-19 virus on global commerce. Analysts expect EPS to fall 21% in 2020, then to rise 31% in 2021. The 2020 P/E is 5.8. Note that two insiders bought GM shares during the market downturn. I’m moving GM from Hold to a Buy recommendation, with traders in mind. (I don’t think buy-and-hold investors or income investors should be buying GM right now, because the auto industry could be harmed for several years as a result of this economic shutdown. In that light, the dividend is not “safe”.) The stock can probably rise to 28 fairly easily, and I’ll reassess thereafter. Buy.
Special Situation & MOVIE STAR PORTFOLIO
This is a portfolio for capital gain opportunities that do not conveniently fit into the other three portfolios. These stocks will often be glamorous companies, which I call “movie star stocks,” that investors love to own and follow, such as Amazon.com, Apple Inc. and Walt Disney Co. These movie star stocks currently have relatively low prices or valuations in comparison to their trading histories.
Featured Stock: Amazon.com (AMZN)
Amazon.com’s (AMZN) innovations and forays into new industries are seriously disrupting established global businesses, including freight companies, retailers, entertainment and technology companies. The company is experiencing growth in Amazon Web Services (AWS), Prime membership, Prime Video viewer hours, revenue and free cash flow. Grocery deliveries are bringing more profit to the company as quarantined citizens access this convenient service, while lower fuel prices are additionally easing transportation costs.
Earnings estimates peaked in early March, and have since come down a small amount. Analysts expect EPS to grow aggressively at 23% and 40% in 2020 and 2021. The P/E is 69.
AMZN exhibited a perfect price chart pattern for a stock that went through a price correction and is now emerging on the other side. Take a look at the three-month price chart on your favorite stock website. You can see that AMZN rose to a new all-time high near 2,175 in February, then fell, exhibiting a double-bottom pattern in mid-March (shaped like the letter W). The stock then commenced a very symmetrical rebound, and seems intent on retracing its former high in April. That’s an ideal, orderly recovery that inspires confidence in the share price. Strong Buy.
Adobe Systems (ADBE) is a software company that’s changing the world as an innovative leader in digital media and digital marketing. Adobe will host their annual meeting of shareholders on April 9. ADBE is a large-cap growth stock. Earnings estimates have barely changed in recent months reflecting the consistency provided by the steady income associated with a subscription-based business. Management is focused on improving operating margins. Analysts expect EPS to increase by 24.0% and 14.8% in 2020 and 2021, respectively. The 2020 P/E is 32.7. When ADBE joined the Growth Portfolio in May 2019, the earnings growth rate was much higher than the P/E. Now that the situation is reversed, I’ve moved Adobe Systems from the Growth Portfolio to the Special Situation and Movie Star Portfolio. (I prefer to keep more classically undervalued stocks in the Growth Portfolio.) ADBE rose to an all-time high in February. The share price showed far more stability than most stocks in March, and will likely trade anywhere between 300-360 in the coming weeks. Buy ADBE now. Strong Buy.
Equitable Holdings (EQH – yield 4.1%) owns two principal franchises: Equitable Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. Assets under management have grown to $735 billion. Equitable Holdings was featured in the February issue of Cabot Undervalued Stocks Advisor.
The company reported a fantastic fourth quarter 2019, with growth in all four business segments. Earnings estimates for Equitable have come down a small amount from their early-March peak, and the valuation is astonishingly low. Profits are expected to fall 2.5% in 2020, and then to grow 9.9% in 2021. The 2020 P/E is extremely low at 3.1, and the book value per share was 29.19 at year-end 2019. The company has “a sizeable amount of excess capital”, as per a major investment bank’s comments last week, and no debt maturities for at least two years. The company preannounced that the second-quarter dividend, with an ex-date in late May, will increase from 15 cents to 17 cents per share. Equitable also announced a new $600 million share repurchase authorization on February 26.
Seven executives and directors purchased EQH shares in March. EQH has begun a bottoming pattern, and will likely bounce near 13 a bit more before commencing a sustained uptrend. I’ll move the stock to a Buy recommendation fairly soon. Hold.
Netflix (NFLX) is the world’s leading streaming entertainment service with over 167 million paid memberships in over 190 countries. Viewers can enjoy unlimited access to TV series, documentaries and feature films across a wide variety of genres and languages, all without commercial interruptions. The company is experiencing rapid international subscription growth and creating original foreign language content for international markets. Netflix was featured in the January 22 issue of Cabot Undervalued Stocks Advisor.
Netflix is one of the rare companies that is benefiting from the coronavirus outbreak, as people avoid public places, instead staying home and watching movies. It follows that there will likely be a surge in new, global subscribers reflected in the next quarterly earnings release. Reuters reported last week that audiences are flocking to television shows in numbers unseen for up to a year as coronavirus shutdowns and social distancing keeps millions of Americans at home. In that light, NFLX remains my Best Coronavirus Stock.
Between streaming services and work-at-home internet usage, Europe has been experiencing a bit of an internet crisis. In March, the European Union’s Internal Market and Services Commissioner, Thierry Breton urged Netflix CEO Reed Hastings to reduce streaming speeds from high definition (HD) to standard definition in times of peak usage. Read more in Netflix Viewing During Coronavirus Lockdown Strains Internet.
NFLX is a high-P/E large-cap, aggressive growth stock. Consensus earnings estimates point to over 40% EPS growth in both 2020 and 2021. This week, Bank of Montreal raised their target price on NFLX to 450.
I’m moving NFLX from Strong Buy to a Hold recommendation, as the stock rapidly approaches its February peak near 390. Whether NFLX surpasses 390 near-term or not, it will likely be followed by a quick pullback, at which time I’ll suggest that investors jump in again. There’s longer-term price resistance at 420. Hold.
NVIDIA (NVDA – yield 0.2%) is the pioneer and leading designer of graphics processing unit (GPU)-accelerated computing, which then ignited modern artificial intelligence (AI). Target markets include gaming, professional visualization, data center, and autonomous driving. NVIDIA is in the process of acquiring Mellanox, an early innovator in high-performance interconnect technology, routinely used in supercomputers and hyperscale data centers. The acquisition is expected to immediately add to NVIDIA’s gross margins and EPS. NVIDIA was featured in the March issue of Cabot Undervalued Stocks Advisor.
The company beat earnings expectations in each of the last five years and in the last five quarters, which translates into investor confidence that Nvidia tends to under promise and over deliver. The company is managing its cash flow quite well, maintaining low debt levels and aiming to repurchase $2 billion of its shares once the Mellanox transaction is completed. Earnings estimates came down a bit from their peaks in early March. Wall Street now expects EPS to grow 31.3% and 20.3% in fiscal 2021 and 2022 (January year end). The 2021 P/E is 36.1.
NVDA is a great stock for growth investors and traders. The price chart is much stronger than the broader market indexes. If NVDA rises past 282 this week, the stock could continue on toward its February all-time high of about 315, where it will surely come to a halt. Strong Buy.
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.
Many energy companies reported strong refining profit margins in their fourth quarter reports, with a bullish 2020 outlook. Then the coronavirus swept the planet, triggering an oil price war launched by Saudi Arabia. At this point, oil prices and energy stocks seem to have bottomed, and are now on the rebound. In that light, I’m moving CRAK from Hold to a Strong Buy recommendation. Expect volatility. Strong Buy.
Strong Buy and Buy – This stock meets most of my fundamental investment criteria.
Hold – Do not add to your position in this stock until a particular issue is resolved.
Retired – This stock has been removed from the portfolio for a specific reason, yet remains an attractive holding for long-term investors who would rather minimize portfolio turnover.
Sell – This stock has a problem that increases portfolio risk. Sell it.
The next Cabot Undervalued Stocks Advisor issue will be published on May 6, 2020.
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