Within the Growth & Income portfolio, you’ll find a discussion of retail woes. The Buy Low Opportunities Portfolio features a comparison between two of the rare retailers that emerged from first-quarter earnings season unscathed. I was simply focused on retail stores throughout May. Lots of investors own these stocks, and I figured some of you might find the assessment interesting.
Cabot Undervalued Stocks Advisor 619
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Assessing the Retail Stock Landscape
After rising 25.3% from Christmas Eve 2018 through April 30, 2019, the S&P 500 stock index fell 6.6% in May. A pullback was clearly overdue, and there was plenty of fuel to keep investors on the edge of their seats:
• Many retailers had a ghastly first quarter.
• The price of a barrel of oil fell 19.3% ($WTIC).
• China tariff concerns affected technology and apparel stocks.
• Mexico tariff concerns affected energy and auto stocks.
• Fallout from Midwestern floods and continued rain affected many industries.
• Recession fears impacted financial stocks.
It’s quite unnerving when the market has a pullback. Here’s a slightly more constructive way to look at the situation: The stock market recently rose a ridiculously large amount in a very short amount of time. It cannot continue rising until it pulls back and rests for a while. That process could normally take 2-6 months. (That’s a rough estimation.) We’re one month into the pullback, which means we’re one month closer to the eventual market rebound!
Here’s a five-year chart of the S&P 500 index. Four of those years featured significant price corrections, and all of those years featured new all-time highs.
Retail apparel and department store stocks took it on the chin in May. Today’s features in the Growth & Income Portfolio and the Buy Low Opportunities Portfolio will review some of the carnage, but also a few bright spots.
There aren’t too many stocks that I’d buy today. Off the top of my head, I’d buy Axis Capital Holdings (AXS) because the price chart is quite bullish; I’d buy Carlyle Group LP (CG) because the CEO said he’s going to announce a decision on a corporate conversion very soon (a “yes” decision would be bullish for the share price); and I’d cherry pick among stocks with big dividend yields. If you don’t find any stocks that pique your interest, go play golf or pick a bouquet of irises. The stock market will eventually offer up new, lucrative opportunities.
Send questions and comments to Crista@CabotWealth.com.
Portfolio Notes
Be sure to review the Special Bulletin from May 29 in which I mentioned news, rating changes and/or price action on Abercrombie & Fitch (ANF).
Buy-Rated Stocks Most Likely* to Rise More than 5% Near-Term
Axis Capital Holdings (AXS)
*I can review price charts and make an educated determination about what’s likely to occur, but I will sometimes be wrong. I cannot control the stock market; I can only guide you through it.
Today’s Portfolio Changes:
CIT Group (CIT) moves from Strong Buy to Hold.
Corteva Inc. (CTVA) spun off from DowDuPont (DWDP) and joined the S&P 500 index.
DowDuPont (DWDP) changed its name to DuPont de neMours (DD).
Guess? (GES) moves from Buy to Hold.
Sanmina (SANM) moves from Strong Buy to Hold.
Southwest Airlines (LUV) moves from Buy to Hold.
Last Week’s Portfolio Changes:
Commercial Metals (CMC) moves from Strong Buy to Hold.
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: CF Industries Holdings (CF – yield 2.9%)
CF Industries Holdings (CF) is one of the world’s largest producers of nitrogen products, serving customers on six continents. The company operates nine nitrogen production facilities in Canada, the U.K. and the U.S. CF Industries expects strong nitrogen demand through the current quarter, and to continue benefiting from low natural gas prices throughout 2019. The Henry Hub price of natural gas dropped to a three-year low last week at $2.46 MMbtu. Monitor natural gas prices here.
Last week, company management delivered this presentation at the May 30 Bernstein 35th Annual Strategic Decisions Conference, which gives an interesting overview of both CF’s operations and profitability, and the current state of agriculture in the U.S.
Throughout the presentation, CEO Tony Will stressed the company’s high rate of free cash flow (FCF) vs. competitors, and their intentional use of cash toward acquisitions and share repurchases, both of which they prefer over dividend increases. In 2018, the company generated $900 million of FCF from operations, a higher amount of FCF than all of its competitors combined.
CEO Will says that his industry is cyclical, “but I do think we’re on the way up, as opposed to down. And as we look around the world, there’s less new capacity coming online than there is demand growth, so that portends a strengthening pricing environment.” Nitrogen demand grows at about 2% per year, and it’s a non-discretionary input for agriculture. The company is expected to grow full-year EPS by 71% and 28% in 2019 and 2020, with corresponding P/Es of 19.0 and 14.8.
U.S. agriculture has experienced the wettest 12-month period in 100 years. Severe flooding in the first quarter was followed by ongoing Nebraska flooding in April and May flooding in Illinois and Arkansas. As a result, U.S. farm acreage is only 58-59% planted as of May 28. (Planting would normally be done by mid-May.) Though June 1 is a normal cut-off date for planting, CF expects planting to continue into June. As a result of the wet weather, the price of a bushel of corn is rapidly increasing. It’s up 14% year to date at $4.28. CEO Will commented, “We could see corn hitting $5.00 if this wet trend continues.”
CF benefits from disruptions in the agricultural cycle. The company has an extensive in-market distribution system that’s simply not available to small and foreign competitors. Their readiness to deliver products enhances pricing flexibility that would otherwise be held in check by competition.
Back in 2014 and 2015, CF explored acquisitions with foreign companies that did not eventually materialize. The noncompetitive U.S. tax rate was a decisive factor favoring the acquisitions. CF had planned to move out of the U.S. to become a U.K. or Dutch company in order to obtain a more favorable tax situation. That situation has now changed due to the U.S. Congress’ recent Tax Cuts and Jobs Act, which lowered U.S. corporate tax rates and defused CF’s motivation to explore moving overseas.
While the company remains keenly aware of potential acquisition opportunities, the lower amounts of competitors’ FCF causes management to find more current value in share repurchases. The lower share count increases cash flow per share.
CF is a cyclical mid-cap aggressive growth stock, trading between 39-45 since mid-November. The stock is showing the potential to finally rise above 45. Strong Buy.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company that’s changing the world through digital experiences. Adobe is reimagining Customer Experience Management (CXM) with Adobe Experience Cloud, the industry’s only end-to-end solution for experience creation, marketing, advertising, analytics and commerce. Wall Street expects Adobe’s earnings per share (EPS) to increase aggressively by 42.2% in 2019 and 23.9% in 2020. The 2019 price/earnings ratio (P/E) is 34.3.
ADBE is a large-cap growth stock, and a great stock for risk-tolerant growth investors and for buy-and-hold equity portfolios. ADBE recently began reaching all-time highs, then pulled back with the May downturn in the broader market. There’s tentative price support at 255 dating back to February and March. Be cautious. Buy.
CIT Group (CIT – yield 3.0%) operates both a bank holding company with $30 billion in consumer deposits and a financial holding company. CIT Group provides financing, leasing and advisory services to small and middle market businesses, consumer markets, and the real estate and railroad industries. A new investor presentation was posted on the CIT website on May 23. CEO Ellen Alemany will present at the Morgan Stanley 10th Annual Financials Conference on June 11.
According to the Equipment Leasing and Finance Association (ELFA), U.S. companies’ borrowing rose 11% year-over-year in April and rose 7% vs. March borrowing levels. “Continued low interest rates, a strong labor market and solid economic fundamentals all contribute to healthy demand by U.S. businesses - both large and small - for financed assets to run their business operations,” said ELFA CEO Ralph Petta. Real and perceived effects of trade disputes will likely dampen May borrowing results as some companies hold off on purchases pending trade outcomes.
CIT is an undervalued growth stock with an attractive dividend yield. Wall Street expects EPS to increase 19.6% and 14.3% in 2019 and 2020. The P/E is 10.0. Based on weakness in the broader stock market and fears of a recession that are suppressing shares of financial stocks, I’m moving CIT from Strong Buy to Hold until the market calms down. Hold.
Knight-Swift Transportation Holdings (KNX – yield 0.8%) is the largest full truckload carrier in North America and an industry leader with an exemplary management team. After completing 99% of a $250 million repurchase plan that was authorized a year ago, Knight-Swift announced another $250 million repurchase authorization last week. Industry-wide share prices are depressed, and therefore repurchases are likely to commence immediately.
Earnings growth projections have slowed dramatically since 2018. Wall Street considers the P/E to be too low at 11.8, and out of synch with economic and industry outlooks. The price chart is weak. It is not yet time to buy low. Hold.
Marathon Petroleum (MPC – yield 4.5%) is a leading integrated downstream energy company and the nation›s largest energy refiner, with 16 refineries, majority interests in two midstream companies that will soon merge, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. Famed hedge fund Third Point LLC took a position in MPC during the first quarter, buying 3.5 million shares.
MPC is an undervalued growth stock with a large dividend yield. Full-year estimates reflect 2019 EPS falling 18.1%, followed by a 65% jump in 2020 EPS. A series of escalating tariffs imposed on Mexico by the U.S. could affect Marathon’s gross margins on the portion of crude oil that Marathon they purchase from Mexican companies. Fortunately, the tariff situation could turn around swiftly. Representatives from both countries are already meeting to explore resolution to the underlying border-control problem. The 2020 P/E is 5.6. I will return MPC to a Buy recommendation when the price chart stabilizes. Expect volatility. Hold.
Sanmina Corp. (SANM) designs and manufactures optical, electronic and mechanical products for original equipment manufacturers (OEMs) primarily in the communications networks, cloud solutions, industrial, defense, medical and automotive industries. Full-year earnings per share are expected to grow 49.3% in 2019 (September year end), and the P/E is 8.2. SANM is a small-cap growth stock. The share price fell along with most stocks in May. I’m moving SANM from Strong Buy to a Hold recommendation until the share price stabilizes. Hold.
Southwest Airlines (LUV – yield 1.5%) is the largest U.S. domestic air carrier, transporting over 120 million customers annually to over 100 locations in the U.S., Central America and the Caribbean. The company announced a quarterly dividend increase of 12.5% in May, from $0.16 to $0.18 per share, and also announced a new $2 billion share repurchase authorization.
LUV is an undervalued large-cap stock. Wall Street expects full-year EPS to grow 6.6% and 15.3% in 2019 and 2020. Shares of airlines fell in May along with the broader market. I’m moving LUV from Buy to Hold until the price stabilizes. Hold.
Supernus Pharmaceuticals (SUPN) focuses on the development and commercialization of products for the treatment of central nervous system diseases and psychiatric disorders, including epilepsy and migraine. Supernus has five pipeline products, in various phases of clinical trials, which aim to treat ADHD, impulsive aggression, bipolar disorder, depression and severe epilepsy. Three of those pipeline drugs are expected to launch in 2020, 2021 and 2023. SUPN is an undervalued small-cap growth stock. I’m moving SUPN from Strong Buy to Hold until the price stabilizes. Hold.
Voya Financial (VOYA – yield 0.1%) is a retirement, investment and insurance company serving millions of individuals and 49,000 institutional customers in the United States. Voya has $547 billion in total assets under management and administration. CEO Rodney O. Martin, Jr. recently stated, “We intend to increase our common stock dividend to a yield of at least 1% and we expect to do so beginning in the third quarter of 2019.” The dividend increase will spur institutional buying.
VOYA is an undervalued aggressive growth stock. Analysts expect full-year EPS to grow 36.6% and 14.3% in 2019 and 2020, and the current P/E is 9.4. The price chart remains stronger than most stocks right now, with support at 51 and again at 48. 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.
Featured Stock: Guess?, Inc. (GES – yield 2.8%)
As we exit first-quarter earnings season, U.S. retail apparel and department stores did not fare well. Here are the latest earnings projections on some of the more prominent companies in the industry:
Between earnings disappointments and/or cautionary statements for full-year results, combined with a pullback in the broader stock market, share prices plummeted throughout the industry group. Quite a variety of excuses were given for earnings misses, including:
• First-quarter weather (Gap, Kohl’s).
• Very favorable second-quarter 2018 weather vs. chilly second-quarter 2019 weather.
• Reductions in promotional mail and digital marketing (Nordstrom)
• Poor women’s apparel assortment (Nordstrom, Urban Outfitters).
• Difficult fourth quarter comparisons, with six fewer shopping days between Thanksgiving and Christmas 2019.
• Struggling comparable store sales (Macy’s).
• High inventory levels (Gap).
• Gross margin impact from tariffs on Chinese imports.
• Expenses related to store closings (Abercrombie).
In addition to these assorted problems, here’s what I noticed. I’m not much of a shopper. I go to retail stores when I need something specific. But I don’t shop for entertainment, or because money’s burning a hole in my pocket, and I rarely buy anything online, either. Keeping all that in mind, I went shopping at least four times in May in search of business dresses. I came away empty-handed. The biggest problem I found was that the majority of the dresses being offered are sleeveless. I wanted some sort of sleeve, of any length.
The problem was even worse in the casual dress category, compounded by a preponderance of strappy dresses that would necessarily reveal undergarments (or lack thereof). That might be amusing on a 17-year-old girl, but grown women are generally not eager to expose their lingerie. In addition, there are a variety of reasons that women might desire a bit of a sleeve on a dress – we’re not all in the age 18-35 category, after all!
I wouldn’t have thought to mention this at all, except last week I saw an article describing this exact same problem among female shoppers, with the implication that poor results at places like Kohl’s and Macy’s and JCPenney might have a lot to do with the product mix and retailers’ penchant for catering to younger millennials.
You can see on the chart that Guess (GES) is expected to fare well via strong earnings growth. However, with regard to the stock, the baby has been thrown out with the bath water. It’s not yet time to buy GES shares. But I want this stock on your radar so that when the price chart turns bullish, you’ll have made your buying decision in advance.
Guess?, Inc. (GES – yield 2.8%) is a global apparel manufacturer, selling its products through wholesale, retail, ecommerce and licensing agreements. The company is growing revenue aggressively in Asia and significantly expanding in both Asia and Europe. The company is expected to report first-quarter results on the afternoon of June 6. Analysts are expecting ($0.26) EPS and $536.8 million revenue. As is common among apparel retailers, Guess’s next three quarters are expected to be profitable, with the fourth quarter projected to deliver peak net income.
GES is an undervalued, aggressive growth, small-cap stock. Wall Street expects full-year EPS to increase 20.4% and 22.0% in fiscal 2020 and 2021 (January year end). The 2020 P/E is 13.8.
I’m moving GES from Buy to a Hold recommendation until the price stabilizes. In my opinion, GES continues to offer the best growth & value opportunity of any U.S. based apparel retailer. Hold.
Updates on Growth & Income Portfolio Stocks
Blackstone Group LP (BX – yield 5.7%*) is the world’s largest and most diversified alternative asset manager with $512 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, all on a global basis. Blackstone will convert from a limited partnership to a corporation on July 1. Thereafter, Blackstone plans to continue paying variable quarterly payouts equaling 85% of cash earnings, as opposed to switching to a fixed quarterly payout.
BX is a growth & income stock. I expect BX to be added to the S&P 500 index at some point in time following its C-corp conversion, which will immediately spur buying activity among index-oriented institutional portfolios. In addition, since Blackstone is unquestionably the high-quality leader within its industry group, I expect a large number of actively-managed institutional portfolios to also take positions in BX.
The stock rose to a new all-time high in mid-May, then pulled back a bit as the broader market came down. I believe all types of equity investors should own BX right now. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.17 and yielding 5.3%.
Commercial Metals Company (CMC – yield 3.5%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Commercial Metals derives 60% of revenue from rebar products. (Here’s a weblink to follow rebar pricing trends.)
CMC is an undervalued aggressive growth stock with an attractive dividend yield. Third-quarter results will be reported on June 20 (August year end). Analysts expect EPS to increase 28.2% and 20.9% in fiscal 2019 and 2020. The 2019 P/E is low at 7.2. Hold off on purchases until the price stabilizes and strengthens. Hold.
Corteva (CTVA) spun off from DowDuPont (DWDP) yesterday, with the remaining portion of DowDuPont renamed DuPont de neMours (DD). Corteva now joins the S&P 500 index, displacing Fluor (FLR) from the index.
Corteva is an agricultural sciences company with a robust innovation pipeline that should drive long-term value for shareholders. Each DowDuPont stockholder received one share of Corteva common stock for every three shares of DowDuPont common stock they held. (I will report on dividend, earnings and revenue projections in the coming weeks.) Hold.
Delta Air Lines (DAL – yield 2.7%) is a U.S. and international passenger and cargo airline that serves nearly 200 million people every year, flying to more than 300 destinations in over 50 countries. DAL is an undervalued growth & income stock. Delta is expected to achieve 18.2% EPS growth in 2019, and the P/E is 7.8. The stock recently descended to short-term price support at 51. Strong Buy.
Dow Inc. (DOW – yield 5.9%) is the materials science division of the former DowDuPont (DWDP) that began trading as a separate company on April 2. Investors may access CEO Jim Fitterling’s May 30 presentation at Bernstein’s 35th Annual Strategic Decisions Conference. Analysts currently expect Dow to report EPS of $4.46 and $5.36 in 2019 and 2020. I’m very pleased with the profit projections, the dividend yield and the moderate P/E (10.7). The stock is languishing. Patient investors can lock in the big dividend yield right now while awaiting an eventual upturn in the share price. Strong Buy.
DuPont de neMours (DD) is the remaining portion of DowDuPont (DWDP) after yesterday’s spinoff of Corteva Inc. (CTVA). DuPont de neMours will remain in the S&P 500 index, in place of DowDuPont. DuPont consists of four business segments. The Board of Directors will continue to evaluate strategic possibilities, including spinoffs of the business segments, especially if DD trades at a low P/E multiple vs. industry peers. Yesterday, DuPont announced a $2 billion share repurchase authorization. In addition, a reverse stock split took place in which investors received one share of DD for every three shares of DWDP they held. (I will report on dividend, earnings and revenue projections in the coming weeks.) Hold.
Royal Caribbean Cruises (RCL – yield 2.3%) is a cruise vacation company that delivers travelers to desirable and exotic destinations on all seven continents. The company operates a total of 61 ships, with 15 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, and a great stock for a high quality, buy-and-hold equity portfolio. Wall Street expects EPS to grow 11.6% and 11.3% in 2019 and 2020. The 2019 P/E is 12.2. Industry research is recently pointing to problems at competitor Carnival Corp. (CCL) that’s leading to discounted pricing. The discounting could affect Royal Caribbean. As the stock approaches upside resistance at the September 2018 high of 132, I’ll monitor the price strength and decide whether to keep RCL for further gains or Retire the stock from the portfolio. Hold.
Schlumberger NV (SLB – yield 5.6%) is the world’s largest oilfield service company. Wall Street expects full-year EPS to fall 4% in 2019 and to rise 40% in 2020. As oil prices and U.S. stock markets declined in May, the SLB share price has fallen to the level of its December 2018 low. I plan to move my recommendation back to Buy after the price stabilizes. Patient investors who want to buy low and lock in a high dividend should feel comfortable doing so. Hold.
Total S.A. (TOT – yield 5.7%) is a French multinational integrated energy company operating in over 130 countries. Total’s strengths are in the Middle East, Africa, North Sea and Deep Water. TOT is an undervalued, large-cap growth & income stock with a large dividend yield. Total is expected to see full-year EPS grow 6.1% and 20.1% in 2019 and 2020, and the 2019 P/E is 10.2. The consensus earnings estimate for 2019 continues to bounce around, while the estimate for 2020 has risen consistently this year and now stands at $6.44, its highest point year to date.
The share price has retreated to early January levels alongside drops in both oil prices and U.S. stock markets. I plan to move my recommendation back to Buy after the price stabilizes. Patient investors who want to buy low and lock in a high dividend should feel comfortable doing so. Hold.
Buy Low Opportunities Portfolio
Buy Low Opportunities Portfolio stocks have neutral charts, strong projected earnings growth, low-to-moderate price/earnings ratios (P/Es) and low-to-moderate debt levels. (Dividends are not a portfolio requirement, but some of the stocks will have dividends.) Investors should be willing to wait patiently for these stocks to climb.
Sometimes a stock in the Buy Low Opportunities Portfolio produces good capital gains and the share price is no longer low, yet the stock remains an attractive investment. Those stocks will then be moved into the Growth Portfolio or the Growth & Income Portfolio.
Featured Stocks: Target Corp. (TGT) vs. Walmart Inc. (WMT)
May was a poor month for U.S. stocks. While most retail stocks suffered greatly, Target (TGT) and Walmart (WMT) exhibited bullish price charts. I’m not adding either of these stocks to the portfolio today, because their fundamentals are not strong enough. However, these are the go-to stocks for institutional investors who want to assess the discount store landscape in search of potential portfolio stocks. Let’s review their outlooks.
Target Corp. (TGT – yield 3.1%) reported first-quarter EPS and comparable store sales higher than expected, after which five investment firms promptly raised their price targets to a range of 80-100. Target is benefiting from the 2018 Toys R Us/Babies R Us bankruptcy and seems to be stealing market share from big department stores.
Wall Street expects Target to grow EPS by 10.0% and 6.2% in fiscal 2020 and 2021 (January year end). The current P/E is 14.0, which is on the low end of its five-year range, indicating that the stock is somewhat undervalued. Watch for a small dividend increase to be announced during the first half of June. Both the earnings outlook and valuation appear much more attractive than Walmart’s numbers.
The price chart is relatively bullish, although the stock already had a recent run-up in May. There’s 5% upside as TGT retraces its September 2018 high at 87. If I owned TGT, I’d keep it, then reassess as it reaches 87. I’m not thrilled with next year’s projected 6.2% EPS growth rate, but as long as that number remains more attractive than its discount retail peers, there will be a solid place for TGT within institutional equity portfolios.
Walmart (WMT – yield 2.1%) reported a good first quarter, including higher gross margins and lower expenses than analysts had expected. Like Target, Walmart is also benefiting from the 2018 Toys R Us/Babies R Us bankruptcy and seems to be stealing market share from big department stores.
Wall Street expects Walmart’s EPS to fall 1.6% in fiscal 2020, then to rise 4.6% in 2021 (January year end). The current P/E is 21.1. It’s hard to imagine any portfolio manager choosing Walmart over Target, based on the strong differences between their earnings growth rates and valuation.
Despite the lackluster fundamentals, the WMT price chart is bullish. The stock could soon surpass its January 2018 all-time high of 106. If I owned WMT, I’d be psyched that the price chart is bullish, but cautious that the P/E seems to be floating unsupported in the stratosphere. I’d use a stop-loss order to protect my down side.
Updates on Buy Low Opportunities Portfolio Stocks
Abercrombie & Fitch (ANF – yield 4.7%) is a specialty retailer of Abercrombie & Fitch, abercrombie kids and Hollister brand apparel and accessories for men, women and kids. The company operates 857 stores globally. The second-quarter earnings outlook is now impacted by the cost of two store closures and a slow start for retailers in May. The company remains on track toward its multi-year goals of improving revenue, profits, expense control, data analytics and global store expansion.
ANF is a small-cap stock. The stock fell down to its fourth-quarter 2018 levels last week. The price does not tend to linger. ANF rebounded from 16-17 to 20-21 three different times in the fourth quarter before rising to 30 in May. Expect continued rapid movement. Hold.
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Investors may listen to webcasts of management presentations at the May 20 UBS Global Healthcare Conference and the May 21 RBC Capital Markets Annual Healthcare Conference.
ALXN is an undervalued large-cap growth stock. Analysts now expect EPS to grow 19.1% and 13.9% in 2019 and 2020, and the P/E is 12.1 – rather low for a profitable biopharmaceutical company. In a late-May research report, a pharmaceutical analyst at a major investment firm projected Alexion to achieve mid-teens revenue growth and high-teens EPS growth during the next three years.
The stock fell in recent weeks along with the pullback in the broader market. (There is no company-specific bad news.) Bargain hunters can buy now, and cautious investors should wait for the share price to stabilize. Buy.
Apple Inc. (AAPL – yield 1.8%) is a manufacturer and provider of many popular technology devices and services, including the iPhone, iPad, Mac, App Store, Apple Care, iCloud and more. Five new services will roll out in the coming months: Apple News+, Apple TV+, Apple TV Channels, Apple Arcade and Apple Card. There are over 1.4 billion active Apple devices globally, which provide a strong and growing revenue base for Apple Services.
Negative potential outcomes to U.S.-China trade negotiations have put a cloud over Apple. If Apple products are caught up in a new wave of tariffs (which have not yet been finalized), the company will either earn less profit by absorbing the cost of tariffs or sell fewer products by increasing product pricing to offset the cost of tariffs.
The AAPL share price is exhibiting weakness alongside the pullback in the broader market. AAPL is a great stock for a high quality, buy-and-hold equity portfolio. Wall Street now expects EPS to fall 3.9% in fiscal 2019 (September year end), then to rise 10.8% in 2020. There’s short-term price support at 170, where the stock traded in February. Accumulate shares. The stock is not yet ready to rise. Strong Buy.
Axis Capital Holdings Ltd. (AXS – yield 2.6%) is a global provider of specialty lines insurance and treaty reinsurance with shareholders’ equity of $5.3 billion and locations in Bermuda, the United States, Europe, Singapore, Middle East, Canada and Latin America. In May, Axis announced a refreshed brand, logo and website. AXS is an undervalued, small-cap stock. Axis reported full-year 2018 EPS of $1.92 in 2018, and is expected to report $4.96 and $5.56 in 2019 and 2020.
AXS has shown strength despite the downturn in the broader market. The stock broke free from a 13-month trading range in May. On May 23, UBS upgraded AXS from neutral to a Buy recommendation, and raised their price target to 67. Morgan Stanley followed with an increased price target on May 29 – after also raising their price target in April. AXS could now rise to its March 2017 all-time high of 66 before resting again. Buy AXS now. Strong Buy.
Baker Hughes, a GE Co. (BHGE – yield 3.3%) offers products, services and digital solutions to the international oil and gas community. New global LNG projects should drive Baker Hughes’ Turbomachinery & Process Solutions business. The number of U.S. rigs drilling for crude oil and natural gas rose by one last week to a total of 984, down 76 vs. a year ago. The Canadian rig count grew by seven last week, while the international rig count grew by 23 in April.
BHGE is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to increase 48% and 64% in 2019 and 2020. The P/E remains low in comparison to earnings growth at 22.3. BHGE advanced steadily for three months, then retreated to early-January levels during the May pullback in the broader market. Wait for the share price to stabilize before buying. Hold.
Designer Brands Inc. (DBI – yield 5.3%) is a footwear, accessories and apparel retailer that operates Designer Shoe Warehouses and a variety of other brands of retail stores with over 1,000 locations in 44 U.S. states and Canada, and ecommerce. CEO Roger Rawlins will present at the William Blair Annual Growth Stock Conference on June 6.
Last week, Designer Brands reported first-quarter EPS of $0.43 vs. the consensus estimate of $0.42, and $878.5 million revenue vs. the consensus $873.8 million (January year end). First-quarter same-store sales rose 3%. Management raised full-year EPS guidance to a range of $1.87-$1.97 vs. its previous guidance of $1.80-$1.90 per diluted share, although Wall Street’s consensus estimate has not yet budged from the recent $1.86. Analysts are projecting 12.0% and 15.1% EPS growth in fiscal 2019* and 2020.
DBI is an undervalued growth stock with a hefty dividend yield. Weakness in the broader market and poor results at other retailers have pushed the DBI price down to price support at 18 that was establish in late 2017 and early 2018. Income investors and risk-tolerant growth stock investors should buy DBI now. Cautious investors should wait for the share price to stabilize before buying. Strong Buy.
*Since most retail companies will typically finish their fiscal years in January 2020, they usually refer to the current fiscal year as 2020. However, Designer Brands refers to their current fiscal year as 2019.
The Mosaic Company (MOS – yield 0.9%) 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. The company has made a multi-year transformation, lowering costs and improving productivity. I encourage investors to listen to CEO Joc O’Rourke’s May 30 50-minute presentation at the Bernstein 35th Annual Strategic Decisions Conference. The content is quite interesting, especially the Q&A session.
On May 23, Mosaic announced a dividend increase from $0.025 to $0.05 per quarter, and plans to continue increasing the dividend in coming years.
Costs associated with complying with new Brazilian mining regulations contributed to analysts adjusting 2019 earnings expectations downward, now reflecting a profit drop of 19% in 2019 and an increase of 36% in 2020. One of the affected mines is now running at full production, and another has received its certificate of safety. Mosaic is working on remediation plans for the other two or three mines, which they anticipate being certified and running by the end of September. (More details are available in the May 23 press release and in the May 30 presentation.)
MOS is an undervalued mid-cap growth stock. The stock is going to have to stabilize before it can begin its recovery, and it is therefore not yet time to buy low. Hold.
Synchrony Financial (SYF – yield 2.5%) is a consumer finance company with 80.3 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. SYF is an undervalued, mid-cap growth & income stock. Wall Street expects full-year 2019 EPS growth of 15.5%, and the P/E is low at 7.8. Investors should be aware that institutional investors are worried about a potential recession stemming from the economic impact of prolonged trade disputes. If a recession occurs, falling interest rates will cut into profit margins at many types of financial companies, including those that loan money. The share price is showing weakness; it’s too soon to buy low. Hold.
TiVo Corp. (TIVO – yield 4.4%) will spin off its Product business from its Intellectual Property Licensing business in a tax-free transaction to shareholders during the first half of 2020. Dave Shull joined the company as President and CEO on May 31. Mr. Shull has significant experience in M&A, served as CEO at The Weather Channel, and also held senior management positions at DISH Network/Echostar. Recent interim-CEO Raghu Rau will become Vice Chairperson of the Board of Directors, providing leadership continuity over ongoing M&A talks and Comcast litigation. The company also raised full-year 2019 and non-GAAP EPS guidance to a range of $644-$660 million revenue and $0.74-$0.81 EPS.
I continue to believe that TiVo offers excellent technology to the communications industry. Approximately 22 million subscriber households around the world use TiVo’s advanced television experiences. Nevertheless, I plan to remove the stock from the Buy Low Opportunities Portfolio. Investors should continue paring back their positions in TIVO. This is a micro-cap stock, which means if I issue a blatant Sell recommendation on the stock, it will crash the share price. I aim to repeat this suggestion to pare back your shares for several weeks before finally issuing a Sell recommendation and removing TIVO from the portfolio. Hold.
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. Management will present at the Baird 2019 Global Consumer, Technology and Services Conference on June 4.
UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. The full-year 2019 analysts’ earnings estimate now reflects 31.0% growth, and the P/E is 12.6. The stock is pulling back now after almost doubling in four months. There’s some short-term price support at 36. Expect volatility. Hold.
Updates on Buy Low Opportunities Portfolio Stocks
Carlyle Group LP (CG – yield 6.4%) manages $221 billion, divided among real assets, corporate private equity, investment solutions and global credit. The company is planning to make a near-term decision regarding whether they will convert from a limited partnership to a corporation, as four of their industry peers have announced since early 2018. Carlyle Group joined the portfolio on May 16. It’s time for opportunistic investors to buy CG in anticipation of a potential near-term announcement that could boost the share price, both immediately and over a multi-year period. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.26 and yielding 6.4%.
* In order to focus attention on newsworthy changes in our portfolio stocks, I’m eliminating descriptions of Hold-rated stocks during weeks when there are no significant news announcements or changes in consensus earnings estimates. As a reminder, Hold does not mean Sell. Hold means that I am not recommending additional purchases of the stock today, either due to price chart action, earnings outlook, or stock valuation. I expect Hold-rated stocks to perform well in the coming months.
**As a reminder, Retired means I’m removing the stock from the portfolio due to less attractive nuances in earnings growth, valuation, news and/or price charts. Sell means that I don’t think anybody should own the stock, due to at least one major problem. I differentiate the two because there are investors who become paralyzed at the idea of making sell decisions. I want to help you make that decision by emphasizing my degree of concern about the stock.
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Cabot Undervalued Stocks Advisor is published by Cabot Wealth Network, an independent publisher of investment advice. Neither Cabot Wealth Network nor its employees are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Copyright © 2019 - COPYING AND/OR ELECTRONIC TRANSMISSION OF THIS NEWSLETTER IS A VIOLATION OF THE U.S. COPYRIGHT LAW. For the protection of our subscribers, if copyright laws are violated by any subscriber, the subscription will be terminated.
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