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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor 718

This stock and its peers are experiencing a game-changing situation within its industry. The stock therefore deserves a second look by growth investors.

Traders will be happy to see this stock joining the Buy Low Opportunities Portfolio for the third time in less than a year. Let’s see if we can accomplish a trifecta!

Cabot Undervalued Stocks Advisor 718

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Distinguishing Between Normal Equity Market Corrections, Bear Markets and Recessions

I’m going to make a really simple statement. Please read it three times and tell me if it helps you relax just a little bit:

The S&P 500 index rose 21.7% in 2017, and it’s up 1.7% in the first half of 2018.

Breathing okay? Great. Here are some key points:
• Sometimes the stock market has better-than-average years, as we experienced in 2017.
• It’s fairly common that stock markets have pullbacks, a.k.a. corrections, after big growth spurts.
• After last year’s big run-up, a stock market correction arrived in February 2018.
• One of the major markets is already done with its correction and rose to new highs again in June. That market is the NASDAQ, up 9.2% year-to-date.

Why am I mentioning all of this basic stock market data? Because investors are contacting me in a panic about market crashes and recessions. And I’m scratching my head and wondering what on earth has set them off.

I’m guessing its newscasters and journalists, looking for something scary to publish so that investors freak out and stay tuned. (Yes, I’m a cynic when it comes to our media representatives and their crises-du-jour.)

Can we stop panicking, please? First of all, there is no bear market in sight. A correction bears no resemblance to a bear market. (Pardon the pun!) A bear market can be triggered by quite a variety of economic, political or military events, but none of those are occurring today. The good news is that the major market indexes stayed within distinct trading ranges during this year’s correction. When people are worried about their stocks, predictability can be comforting.

Next up: Where on earth are you getting the idea that we’re on the cusp of an economic recession? Seriously, if you’re getting that idea from television, throw the damn thing out the window.

What is the definition of a recession? A recession is defined by declining gross domestic product (GDP). A recession can include other characteristics, such as rising unemployment, rising inflation, falling stock market, etc., but declining GDP is the lynchpin.

GDP rose 2.9% in the fourth quarter of 2017 and rose another 2.0% in the first quarter of 2018. Excellent! We’re nowhere near an economic slowdown that could deteriorate into a recession!

The release date for the second quarter 2018 GDP number will be July 27.

May I make a suggestion? My impression is that the people who keep approaching me about “a recession” are actually concerned about “a falling stock market”, but they keep hearing the word “recession” from the twits in the news media, who also apparently don’t know what the word means.

If you need to improve your economic literacy, here’s a link to an interesting and very readable book: NAKED ECONOMICS. We can’t all be experts at everything, right? I’m at approximately fourth-grade level on technology, for example, and far worse at interior decorating. If you own investments or make business decisions in the private sector, you’re going to find a lot more peace of mind by learning a few basic things about inflation, GDP, the business cycle, etc. (Warning: NAKED ECONOMICS might put your nose out of joint because the author ridicules various topics that are important to people on the political Left and Right. The conservatives will be annoyed in the beginning and the progressives will be annoyed thereafter. Let it go, and focus on the economic lessons. It’s a good book, I promise.)

If you’re wondering about recessions, always go straight to the last few quarters’ GDP numbers. Recessions are not caused by stock market corrections or isolated political or economic developments.

If you’re wondering about stock market corrections, sometimes it’s as simple as looking at a two-year price chart. If there’s a long extended uptrend, it’s going to be naturally followed by a somewhat-smaller decline. Stock market corrections after big run-ups are not only normal, they’re desirable. After all, the markets can’t keep climbing at a lower-risk pace until they rest for a while.

If something big and ugly and unprecedented happens – a collapse of an extremely overpriced market (real estate, stocks, etc.), a nuclear bomb, a plague, an assassination, a hundred-year California earthquake – then yes, we might absolutely experience a stock market crash and a simultaneous recession.

For now, stay focused on GDP if you’re worried about a recession (which I promise you is nowhere in sight), and literally just glance at a two-year stock market price chart if you’re worried about a bear market.
I want you to enjoy your stock investing experience as much as possible. Please send me questions when you’re worried, and I’ll do my best to talk you in off of the ledge.

I’d like to wish everybody a happy Independence Day! The major U.S. stock markets will close early on July 3 and will be closed all day on July 4.

Send questions and comments to crista@cabotwealth.com.

Portfolio Notes

BB&T Corp. (BBT) and Bank of America (BAC) pre-announced third quarter dividend increases.

Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Baker Hughes, a GE Co. (BHGE)
Skechers USA (SKX)
Supernus Pharmaceuticals (SUPN)
TiVo (TIVO)
Universal Electronics (UEIC)
*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:
CF Industries Holdings (CF) joins the Growth Portfolio as a Strong Buy.
Delek U.S. Holdings (DK) joins the Buy Low Opportunities Portfolio as a Strong Buy.

Last Week’s Portfolio Changes:
None

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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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Featured Stock: CF Industries Holdings (CF – yield 2.7%)
CF Industries Holdings (CF) is North America’s largest nitrogen fertilizer producer, serving America’s corn growers. The company benefits from low natural gas costs (a significant component in the company’s cost structure) and an extensive shipping network, neither of which can be matched by foreign competitors, and from consistent demand from South American customers.

After taking a small loss in 2017 (December year-end), the company is expected to earn $0.96 per share in 2018 and $1.77 per share in 2019. The 2019 earnings growth rate of 84.4% far exceeds the 2019 P/E of 24.4.

This undervalued growth stock has a dividend yield of 2.7%. There’s no recent history of a dividend increase. Rest assured that the dividend is safe, with free cash flow recently clocking in at over four times the annual dividend payout. The next dividend record date will be in mid-August.

CF is a mid-cap stock with significant institutional ownership.

The stock traded as high as 62 in mid-2015, fell and bottomed through late 2016, and has been ratcheting upward for the last 20 months. I’m specifically adding CF to the Growth Portfolio today because it broke out of a trading range in mid-June, then experienced a small pullback. It’s extremely common that breakouts are followed by one brief pullback before the stock really takes off. I’ve held CF in my “waiting in the wings” list for the right moment, and that moment is now. I’m looking for a short-term hold on CF and will likely trade out when it meets longer-term price resistance at 50. Buy CF now. Strong Buy.

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Updates on Growth Portfolio Stocks

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Apple (AAPL – yield 1.6%) manufactures a wide range of popular communication and music devices. Apple is rebuilding its popular iPhone Maps app, with a rollout beginning this fall. In June, Variety reported that Apple is teaming up with Sesame Workshop to create a new slate of original kids’ live action and animated programming for Worldwide Video. Also, watch for three new iPhone models coming this fall. AAPL is an undervalued growth stock, expected to see EPS increase 24.8% and 15.4% in fiscal 2018 and 2019 (September year-end). The corresponding P/Es are 16.1 and 14.0. There’s a $100 billion share repurchase authorization in effect. If I only owned one stock, it would be AAPL. AAPL rose to a new all-time high in May and has since pulled back. The price chart appears relatively stable. Buy AAPL now while the price is low. Strong Buy.

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Bank of America (BAC – yield 2.1%) is an undervalued growth stock. As a result of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR), its Board of Governors accepted Bank of America’s capital plan. Bank of America plans to raise its third quarter dividend by 3 cents to 15 cents, a 25% increase. The company also intends to repurchase $20.6 billion of its stock. The new annual payout will be 60 cents and the current yield is 2.1%. Banks subject to the CCAR decision “may re-submit their capital plans before the next stress test cycle and request additional distributions,” as noted near the bottom of page 11 of the CCAR document.

Wall Street expects to see EPS increase 38.8% and 14.6% in fiscal 2018 and 2019. The corresponding P/Es are 11.1 and 9.7. The stock bounced repeatedly at 29 for four months, then fell further during last week’s market volatility. BAC presents a tremendous value, but I wouldn’t buy low until the trading pattern stabilizes. Hold.

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CIT Group (CIT – yield 1.3%) operates both a bank holding company and a financial holding company that provide financing, leasing and advisory services to small and middle market businesses, consumer markets, and the real estate and railroad industries. As I mentioned last week, CIT Group was exempted from participation in this year’s Dodd-Frank Act Stress Test (DFAST). As a result, CIT Group will have more flexibility as it plans increases to its dividend and share repurchases. CIT’s board of directors then approved a $750 million repurchase plan. Subsequently, Credit Suisse raised its price target on the stock to 56, and Compass Point initiated coverage on the stock with a buy rating and a 60 price target.

Analysts expect EPS to grow 24.8% and 25.6% in 2018 and 2019. The corresponding P/Es are quite low at 13.2 and 10.5. There’s room for the 2019 P/E to rise to 13 (near its industry peer average) as investors see CIT achieve its stated financial goals, pushing the share price to about 63, and offering new investors a potential 25% profit. Buy CIT now while it’s low within its trading range, between 49 and 56. Strong Buy.

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D.R. Horton (DHI – yield 1.2%) is America’s largest homebuilder, also providing mortgage, insurance and title services. There was a $4.85 million equity call option purchased on DHI last week, as reported by Jacob Mintz, Chief Analyst of Cabot Options Trader. D.R. Horton is expected to see EPS grow 35% and 18.7% in 2018 and 2019. Price/earnings ratios (P/E) remain low at 11.0 and 9.2 for fiscal 2018 and 2019. There’s more than 10% upside as DHI travels back to the top of its trading range, between 41 and 46. Patient investors should buy now. Strong Buy.

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KLX Inc. (KLXI) – In the coming months, Boeing (BA) will acquire KLX’s Aerospace Solutions Group (ASG) and KLX will spin off its Energy Services Group (ESG) to shareholders. There’s no recent news and the share price has traded flat at $72. If you own KLXI and wait for the two M&A transactions to take place, you will have $63 cash per share returned to you, and you will own shares of the new KLX Energy Services (KLXE). The combined value of the two transactions could reach $80 this year. The Boeing cash transaction is expected to be completed by September 1, and the KLXE spin-off could happen at any point between now and the completion of the Boeing transaction. Hold.

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Knight-Swift Transportation Holdings (KNX – yield 0.6%) is a truckload carrier formed from the September 2017 merger between Knight Transportation and Swift Transportation Company. KNX is an undervalued mid-cap aggressive growth stock. Analysts expect full-year EPS growth of 67.4% and 19.0% in 2018 and 2019. The corresponding P/Es are 16.5 and 13.9. There’s 30% upside as KNX eventually retraces its 2018 high of 50. Strong Buy.

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Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. Analysts expect full-year EPS growth of 28.4% and 23.5% in 2018 and 2019. The corresponding P/Es are 24.2 and 19.6. MLM has had a volatile six months, peaking at 240, falling to 192, rapidly rebounding to 231, and now having a small pullback. During that time frame, earnings estimates were strong and relatively unchanged until early May, when they began to increase each week. The important lesson there for newer stock investors is that over the short term, your stocks can move a lot in either direction, without any particular good or bad news pushing them around. That’s why I invest in stocks with strong earnings growth, relatively low P/Es and low debt levels. If the share price falls, I don’t have to worry that there’s something wrong with the company. In such cases, the downturns usually sort themselves out in a few months and the share price subsequently turns upward. MLM will almost certainly cease its run-up once it reaches price resistance at 240, where it will also be fairly-valued. Be prepared to sell in the upper 230’s. Hold.

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PulteGroup (PHM – yield 1.3%) is a U.S. homebuilder and a very undervalued growth stock. Consensus earnings estimates reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 8.7 and 7.7. There’s uniformity among homebuilders in both very strong revenue and profit growth, and stock trading patterns. Both KB Home (KBH) and Lennar (LEN) reported strong quarterly results last week. The industry is rife with cheap stocks, low within their trading ranges, but not yet ready to run back up to recent highs. The stock is at the bottom of a solid trading range, where it tends to bounce and reverse direction immediately. There’s 21% upside as PHM travels back to its January peak at 35. Buy PHM now. Strong Buy.

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Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Investors may access Quanta Services’ May/June 2018 Investor Presentation here. PWR is an undervalued mid-cap growth stock. Wall Street expects EPS to grow 39.6% and 14.9% in 2018 and 2019. The corresponding P/Es are 12.1 and 10.6. PWR has come down to secondary price support at 33.5. There’s 19% upside as the stock heads back to its January high of 40. Once the stock breaks past 40, there will be no upside price resistance in sight. Buy PWR now. Strong Buy.

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Southwest Airlines (LUV – yield 1.2%) 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. On the Investor Relations page of Southwest’s website, you may access the company’s 33-page Investor Presentation Booklet that clearly demonstrates Southwest’s financial successes, operational strengths and competitive advantages.

LUV is an undervalued stock that’s experiencing aggressive earnings growth, although this year’s profit growth expectation has fallen quite a bit since LUV joined the Growth Portfolio in November 2017, due mainly to rising fuel costs. At this point, analysts expect EPS to grow 22.6% and 18.4% in 2018 and 2019. The corresponding P/Es are 11.9 and 10.0. The stock is trading at long-term price support. There’s 18% upside to the March high of 61, and 28% upside to the January high of 66. Buy LUV now. Strong Buy.

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Supernus Pharmaceuticals (SUPN) focuses on the development and commercialization of products for the treatment of central nervous system diseases and psychiatric disorders, including epilepsy, migraine and ADHD. SUPN is an undervalued, small-cap stock with a high degree of institutional ownership. Analysts expect full-year EPS to grow 50% and 37.0% in 2018 and 2019. Corresponding P/Es are 31.7 and 23.1. SUPN rose to a new all-time high last week, then pulled back yesterday. I expect an immediate run-up. Buy SUPN now. Strong Buy.

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Voya Financial (VOYA – yield 0.1%) is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. This Fortune 500 company manages $541 billion in assets. Wall Street projects Voya’s earnings per share (EPS) to grow 119% and 25.2% in 2018 and 2019. The corresponding price/earnings ratios (P/Es) are 11.2 and 8.9. VOYA fell to the bottom of its 2018 trading range at 47 as financial stocks declined along with the broader market in recent days. I’m not worried about the stock, although it’s not yet ready to rebound to its 2018 high of 55. 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.

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Featured Stock: Blackstone Group LP (BX – yield 7.7%*)
Blackstone Group LP (BX—yield 7.7%*) is the world’s largest and most diversified alternative asset manager with $450 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, hedge funds and real estate. In August 2017, Blackstone agreed to buy a 51% stake in Banco Popular’s real estate portfolio. Then in May 2018, Blackstone sold its stake in Hilton Worldwide Holdings (HLT), more than tripling its 2007 investment in the company; then immediately invested $4.8 billion in LaSalle Hotel Properties (LHO).

Analysts expect Blackstone’s economic net income (ENI) to grow 3.6% and 11.0% in 2018 and 2019. I always add the dividend yield to the EPS or ENI growth rates when I assess a stock, with the goal that the resulting number is (a) at or above 15% and (b) distinctly higher than the price/earnings ratio (P/E). Blackstone’s corresponding P/Es are 11.1 and 10.0.

I don’t mind that this year’s ENI, dividend and P/E reflect a fair value, because next year’s numbers reflect a nice degree of undervaluation. In addition, there’s a market scenario playing out among alternative asset managers that is boosting Blackstone’s share price.

Here’s Why Blackstone Deserves a Fresh Look

In May 2018, Blackstone’s industry peer KKR & Co. LP (KKR) announced that they would change from a limited partnership to a corporation as of July 1. Lower U.S. income tax rates were the decisive factor, as KKR weighed the benefit of attracting more investors vs. paying significantly higher income tax rates under a new corporate structure. As a C-corp, KKR expects to attract investments from mutual funds that are not typically permitted to invest in limited partnerships. In addition, KKR will now be eligible for inclusion in various stock market indexes.

BX and KKR traded in lockstep this year until June, when KKR shot upwards as it approached its July 1 conversion date, eventually exceeding its January highs. KKR is actively rising now and will probably continue to do so.

Investors are looking at Blackstone Group, wondering if Blackstone will follow KKR down the path to a C-corp structure, and wondering how high the BX share price could rise in a C-corp scenario. Blackstone Group is a highly successful and esteemed asset manager. A preponderance of institutional portfolio managers will likely buy the stock after a potential C-corp. conversion, thus providing significant upside pressure on the share price.

We don’t yet know whether Blackstone will decide to convert to a C-corp. However, if Blackstone makes that move, I would expect the effect on the share price to be significant, just as strong as if Blackstone joined the Dow Jones Industrial Average. Every portfolio manager in America will be forced to look at the stock anew and decide whether they should buy shares. You know what they won’t be doing? They won’t be selling. You’d pretty much have to be out of your mind to cash in a position in BX for any reason other than (a) Blackstone officially nixing the idea of a C-corp conversion or (b) bailing your spouse out of jail.

How high could the BX share price rise with a C-corp conversion? Credit Suisse commented in late May that if Blackstone follows KKR’s lead and converts from a partnership to a C-corp. in 2019, the value of BX shares could rise 50%.

Apparently I’m not the only stock aficionado who thinks the BX share price might rise. There were two large January call options purchased on BX yesterday at a total cost of $2.2 million, as reported by Jacob Mintz, Chief Analyst of Cabot Options Trader.

You can see that BX declined this year during the February market downturn, and you might recall that financial stocks fell further in March. BX bottomed and stabilized in April. The stock is now rising toward its March high of 34. There’s additional price resistance at 35.5 from January. A C-corp conversion could promptly propel the share price to 40, and possibly to 50. Buy BX now and don’t consider selling until the company makes a definitive announcement about its future corporate structure. Strong Buy.

*The payout varies each quarter, with the total of the last four announced payouts, plus the $0.30 special 2018 distribution, yielding 7.7%.

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Updates on Growth & Income Portfolio Stocks

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BB&T Corp. (BBT – yield 3.2%) is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serves businesses and individuals. As a result of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR), its Board of Governors accepted BB&T’s capital plan. BB&T plans to raise its third quarter dividend by 3 cents to 40.5 cents, an 8% increase, after a vote by its board of directors on July 24. The company also intends to repurchase $1.7 billion of its stock, some of which will be used in the Regions Insurance Group acquisition.

In review, BB&T declared an extra dividend this year in March, raised the second quarter dividend, and will now raise the third quarter dividend. The new annual payout will be $1.62 and the current yield is 3.2%.

Analysts expect full-year EPS to grow 43.7% and 8.2% in 2018 and 2019. Corresponding P/Es are 12.6 and 11.6. BBT fell to the bottom of its 2018 trading range at 50 as financial stocks declined along with the broader market in recent days. I’m not worried about the stock, although it’s not yet ready to rebound to its 2018 high of 56. Hold.

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Comerica (CMA – yield 1.5%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. The company is in a strong position to capitalize on rising interest rates that contribute to increases in net interest margin (NIM) through its variable rate loan portfolio (90% variable rate vs. 10% fixed rate loans), compounded by a high percentage of non-interest-bearing deposits.

Consensus earnings estimates for Comerica have risen during most weeks since I began recommending the stock. Earnings per share are now expected to increase by 41.2% and 12.4% in 2018 and 2019. The corresponding P/Es are 13.5 and 12.0. The ex-dividend date was June 14. CMA has traded sideways since February. CMA fell near the bottom of its 2018 trading range at 91 as financial stocks declined along with the broader market in recent days. I’m not worried about the stock, although it’s not yet ready to rebound to its 2018 high of 102. Hold.

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Commercial Metals Company (CMC – yield 2.2%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. U.S. industrywide pricing is expected to remain strong due to robust economic activity, lower steel supply, and lower import volumes due to tariffs. CMC is an undervalued aggressive growth stock. Consensus earnings estimates have slowly risen for three months. Wall Street analysts now expect full-year EPS to grow 110% and 54.4% in 2018 and 2019 (August year-end). The 2019 P/E is 9.2. Like so many stocks right now, CMC is trading in the lower portion of its 2018 trading range and does not yet appear ready to rise. Patient investors can take advantage of the low price and buy now. There’s upside price resistance at CMC’s 2018 high of 26. Strong Buy.

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DowDuPont (DWDP – yield 2.3%) -- The Dow Chemical Company (DOW) and E.I. du Pont de Nemours & Company (DD) finalized their merger on August 31, 2017 , forming DowDuPont, which is comprised of three divisions: Agriculture, Materials Science and Specialty Products. DowDuPont intends to separate these divisions into three publicly-traded companies in 2019. It’s likely that the three stocks will be worth more than today’s DWDP share price.

Consensus earnings estimates rose a bit last week. Analysts now project EPS to grow aggressively at 24.1% and 17.7% in 2018 and 2019. The respective price/earnings ratios (P/Es) are 15.8 and 13.4. There was a $471,000 equity call option purchased on DWDP, as reported by Jacob Mintz, Chief Analyst of Cabot Options Trader. DWDP has been ratcheting upward since bottoming in early April. There’s upside resistance at the stock’s January high of 76. I expect additional capital appreciation after the stock rests near 76 for a while, and 2019 gains as the spin-offs take place. Buy DWDP now. Strong Buy.

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GameStop (GME – yield 10.7%) – COO & CFO Rob Lloyd presented at Oppenheimer’s 18th Annual Consumer Conference on June 19. (Click here to access the transcript and webcast.) GameStop will offer many new game titles in October, including Pokemon, Assassin’s Creed, Super Smash Brothers and more. GameStop made a brief public statement in June about potential M&A activity:

GameStop Corp. (NYSE:GME), today confirmed it is in exploratory discussions with third parties regarding a potential transaction. There can be no assurance any agreement will result from these discussions. GameStop does not intend to make any additional comments regarding these discussions unless and until it is appropriate to do so.

The stock has pull back after shooting upward in mid-June. I fully expect that there will either be a buyout, or that GameStop will hire a prominent CEO to head up the company, and that either piece of news would cause the share price to advance further. Sell Half.

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The Interpublic Group of Companies (IPG – yield 3.6%) is a large conglomerate of advertising, marketing, communication and public relations companies serving all global markets. In developing news, Arkansas-based Acxiom Corp is purportedly planning to sell its marketing solutions division to Interpublic Group for around $2.2 billion.

The stock hasn’t strayed far from 23.5 for the last three weeks. I’m planning to sell near the February high of 25 due to prospects of dramatically slower 2019 EPS growth. IPG is a good company with a good dividend. Hold it if you like, but I’m moving on to a company with stronger future earnings growth. Hold.

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Schlumberger (SLB – yield 3.1%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas declined by five last week to a total of 1,047, up 107 vs. a year ago. Last week, Judson E. Bailey, Senior Analyst at Wells Fargo, listed SLB as one of his four favorite stocks in the energy sector. In addition, Barron’s published a bullish recommendation for SLB. Consensus earnings estimates declined last week, with EPS now expected to grow 29.3% and 49.0% in 2018 and 2019. The corresponding P/Es are 34.6 and 23.2. SLB is an aggressive growth stock, undervalued based on 2019 numbers. The stock is low within its 2018 trading. Buy SLB now. Strong Buy.

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WestRock Company (WRK – yield 3.0%) is a global packaging and container company. Investors may access WestRock CEO Steve Voorhees’ presentation at the June Vertical Research Partners 2018 Materials Conference here. Shipments and backlogs remain strong. The company’s acquisition of Kapstone Paper and Packaging is expected to close in the early fall. The stock presents great value, with strong earnings growth, low P/Es and a big dividend. Analysts expect full-year EPS to increase 53.8% and 15.4% in 2018 and 2019. The corresponding P/Es are 14.1 and 12.3. The stock is sitting at its lows from November 2017 and does not appear ready to rise. There’s 21% upside as WRK retraces its January high at 69. Strong Buy.

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.

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Featured Stock: Delek U.S. Holdings (DK – yield 2.0%)
For the third time since November 2017, Delek U.S. Holdings (DK) joins the Buy Low Opportunities Portfolio because, once again, it offers a near-term opportunity for capital appreciation.

Delek US Holdings is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. The company is based in Tennessee. Its refineries are located in Arkansas, Louisiana and Texas. Delek’s convenience store retail business is the largest 7-Eleven licensee in the United States and operates approximately 300 convenience stores in central and west Texas and New Mexico. Asphalt operations consist of 14 asphalt terminals serving locations from Tennessee to the west coast.

Delek maintains an active acquisition strategy. In June 2017, Delek completed the purchase of Alon USA Energy (ALJ), an energy refiner with a strong balance sheet and the largest exposure to the Permian Basin of any independent refiner. Cost and business synergies associated with the Alon USA Energy acquisition should continue to enhance the bottom line.

Refining revenue is growing, and higher gross margins in all business sections and lower costs are contributing to a dramatic increase in profits. Earnings estimates rose rapidly throughout 2018 and contributed to significant price appreciation.

At this point, analysts expect Delek to earn $5.33 and $7.25 per share in 2018 and 2019, which translates to earnings growth rates of 376% and 36%. You might assume that Delek must have had a poor year in 2017, in order to experience 376% EPS growth in 2018. On the contrary, Delek delivered attractive earnings in 2017 along with a huge revenue increase. It’s just that 2018 is turning out to be equally as successful, and the profits are overflowing!

DK is almost a mid-cap stock with a market capitalization of $4.2 billion. Institutions own 95% of the outstanding common shares. The company raised the dividend from 15 cents per share in the fourth quarter of 2017 to 20 cents in the first quarter of 2018 and 25 cents in the second quarter. Yes, sequential quarterly dividend increases are unusual! The next dividend announcement is due during the first week of August. The company also repurchases its stock.

Why Do I Keep Buying and Selling the Stock?

I first recommended DK in early November 2017 because it appeared immediately ready to rise. I later sold the stock in early January 2018 with a 30% total return because it rose to its previous high from July 2015.

Then this year’s stock market correction arrived, and I recommended that investors buy low in early February 2018. After a breathtaking run-up, I sold the stock on May 31 for a 76% gain, a few days before it closed near 60, a new all-time high.

Lo and behold, DK immediately pulled back and rested. So let’s buy it again! There’s 21% upside as DK rebounds to 60. I’ll keep you posted on the stock’s prospects as it nears the target price, because it could decide to just keep rising from there. Strong Buy.

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Updates on Buy Low Opportunities Portfolio Stocks

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Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Alexion’s new drug ALXN1210 is undergoing an FDA priority review for the treatment of Paroxysmal Nocturnal Hemoglobinuria (PNH). ALXN is an undervalued aggressive growth stock. Prior to any boost from ALXN1210, the company is expected to achieve 19.6% and 21.7% EPS growth in 2018 and 2019. The corresponding P/Es are 17.7 and 14.6.

ALXN almost had a breakout past 127, but there wasn’t enough trading volume to solidify the momentum. Thus, ALXN had a brief pullback last week. I expect the stock to surpass 127 relatively soon. My next price target is 147, where ALXN last traded in September 2017. Buy ALXN now. Strong Buy.

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Baker Hughes, a GE co. (BHGE – yield 2.2%) offers products, services and digital solutions to the international oil and gas community. Oil prices bounced at price support twice during June, then shot up by $10 per barrel, reaching multi-year highs. The number of U.S. rigs drilling for crude oil and natural gas declined by five last week to a total of 1,047, up 107 vs. a year ago. Last week, Judson E. Bailey, Senior Analyst at Wells Fargo, listed BHGE as one of his four favorite stocks in the energy sector. Wall Street expects full-year EPS to grow 83.7% and 100% in 2018 and 2019. The corresponding P/Es are 41.8 and 20.9. These numbers represent both tremendous earnings growth and value.

General Electric (GE) CEO John Flannery is being forced to sell GE’s 62.5% stake in Baker Hughes due to overwhelming cash needs at GE. BHGE fell dramatically when the 2018 stock market correction arrived, completely recovered by May, and has since had a smaller and stable price correction (very normal after a big share price run-up). There’s 10% upside as BHGE retraces its May high, and lots of room for the stock to climb after it surpasses upside resistance at 37. Buy BHGE now. Strong Buy.

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Guess?, Inc. (GES – yield 4.2%) is a global apparel manufacturer, selling its products through wholesale, retail, ecommerce and licensing agreements. Revenue growth largely stems from expansion in Asia and Europe, while rising operating margins are contributing to multi-year earnings per share (EPS) growth. Wall Street expects EPS to grow 42.9% and 30.0% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 21.4 and 16.5. GES is a small-cap stock with a market capitalization of just $1.8 billion. GES traded quietly between 21 and 23 in June. I expect the stock to retrace its recent high of 26, with additional gains later this year. Buy GES now and buy more on pullbacks. Strong Buy.

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Skechers USA Inc. (SKX) is an apparel company that designs and manufactures affordable footwear for people of all ages. SKX is an undervalued mid-cap growth stock, with eight times as much cash as debt on the balance sheet. Earnings per share are expected to grow aggressively at 18.5% per year in 2018 and 2019. Corresponding P/Es are 14.2 and 12.0. When the stock surpasses 31 – which it appears capable of doing shortly -- it could run as far as 38 before coming to a halt. Buy SKX now. Strong Buy.

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TiVo (TIVO – yield 5.2%) is an entertainment technology company that joined the Buy Low Opportunities Portfolio specifically because it’s a takeover target. The company is interested in being acquired or going private because the shares are so undervalued. TiVo intends to complete the process of its strategic review by the time second quarter results are reported in early August. The share price traveled lower last week. Fortunately, TIVO does not sit still. I therefore expect the stock to promptly head back toward 15 while we await M&A news, as which time I expect a significant surge in the share price. Expect volatility. Buy TIVO now. Strong Buy.

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Universal Electronics (UEIC) is a manufacturer and cutting-edge world leader of wireless remote control products, software and audio-video accessories for the smart home; with a strong pipeline of new products. UEIC is a dramatically undervalued micro-cap stock. Analysts expect EPS to fall 16.4% in 2018, then to rise 43.4% in 2019. The 2019 P/E and the long-term debt ratio are extremely low, at 9.8 and 3% respectively. The stock appears capable of an immediate breakout past 33. There’s upside resistance at 40. Buy UEIC now. Strong Buy.

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YOUR NEXT CABOT UNDERVALUED STOCKS ADVISOR ISSUE IS SCHEDULED FOR August 7, 2018
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 © 2018 - 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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