A large number of our portfolio stocks are experiencing bullish price action right now. Unless something ugly hits news headlines in the next few days, we’re probably going to enjoy a strong stock market in the first half of July. I hope you’re not sitting on the sidelines!
Cabot Undervalued Stocks Advisor 719
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More on the Baby Boomer Housing Forecast
In the June 18 update of Cabot Undervalued Stocks Advisor, I wrote about a very serious change in the housing market that could take place over the next decade, as Baby Boomers sell their big homes and move to single-level homes, smaller homes, condos, and retirement and assisted-care facilities. Cabot then published my article, The Next Housing Crash is Closer Than You Think, on our Cabotwealth.com website, and it’s also been my featured topic on recent radio shows.
As it turns out, the future of the housing market is generating a lot of discussion among investors, and on social media and LinkedIn. I am well aware that there are people who don’t want to hear that their home might lose value in the coming years. These are people who’ve been counting on selling at a certain price in order to proceed with their retirement plans, and it’s a jarring idea that the situation might not unfold as planned.
I know that many people relate to personal experiences better than they do to statistical predictions. In that light, I want to reprint a conversation that I just had via Facebook message with my friend Barry. He is a retired financial professional, living in a suburban neighborhood populated with large, attractive homes in one of the colder U.S. states. He is the target audience for my housing market warnings.
Barry has been remodeling his house in recent years in preparation for selling, but he just hasn’t known where to go. He read my article about Baby Boomers and potential changes in the housing market a few weeks ago, and he wholeheartedly agreed with the projected changes in home values.
Here is our conversation:
Barry: “I was invited to an RV park yesterday by some friends. I looked at a motor home for sale. Beautiful. I’m sort of thinking I should buy one and live there in the summer. You can work 20 hours per week and get free rent. Either sell my house or keep it and rent it out on AirBnB. Go to a warmer climate in the winter.”
Crista: “Yes, you need to begin experimenting with a variety of living situations. You have the travel bug; the warm weather bug; the beach bug.”
Barry: “Yes, I agree. I live in an area with a lot of Boomers. Five homes within a two-block area went up for sale this week. A divorce, a downsize, two went to nursing homes and one moved out of the country. All are in the $500K-plus range. It’s going to be interesting to see how the sales go. All large homes.”
Crista: “Oh, wow. So it’s already begun.”
Barry: “Yes. Another guy across the street lost his wife last week. I talked to him. He’s clearing out his garage and going to sell. And my neighbor next door lost his wife a month ago. I don’t know what he will do; he’s pretty reclusive but I can’t see him staying. It’s a very large house.”
Crista: “Barry, that’s a tremendous number of people going through vast changes!”
Barry: “Yes it is. My friends who are considerably younger than me just sold their house across the street from me. They are even thinking of a motor home lifestyle. Home ownership is not what it used to be for younger people. I could see myself buying a condo on the beach. Life’s too short to spend half of it shoveling snow! I follow Zillow for home prices in my area. Even Zillow is predicting a housing crisis as early as 2020. They base it mainly on interviews with realtors.”
I hope this conversation helps you visualize what might be happening in the households within your neighborhood. From my perspective, the people who need to be most concerned are people who have the bulk of their net worth tied up in their primary residence. If you are planning on selling your home in order to come up with the cash to fund your retirement, please be aware that your home’s value might deteriorate in the coming years as a plethora of homes go up for sale by Baby Boomers. There will not likely be enough demand coming from homebuyers to maintain stable market pricing.
Not everybody needs to be concerned, though. If you have other assets with which to fund your monthly expenses—pension payments, Social Security income, savings & investment accounts, personal and business retirements accounts, other assets and/or pending inheritances – you will not likely feel tremendous pressure to sell your current home. You could easily remain happily engaged with life in your current home! The important thing is to have a clear idea of whether you want to eventually sell your house, and whether you need to slightly adjust your plans based on demographic trends and the ebb and flow of housing prices.
Send questions and comments to Crista@CabotWealth.com.
Quarterly Earnings Release Calendar
July 11 am: Delta Air Lines (DAL) – 2Q
July 18 am: Blackstone Group (BX) – 2Q
July 19 am: Schlumberger (SLB) and Synchrony Financial (SYF) – 2Q
July 25 am: Dow Inc. (DOW) and Southwest Airlines (LUV) – 2Q
August 1 am: Corteva (CTVA) – 2Q
Buy-Rated Stocks Most Likely* to Rise More than 5% Near-Term
Alexion Pharmaceuticals (ALXN)
Axis Capital Holdings (AXS)
Citigroup (C)
Designer Brands (DBI)
Sanmina (SANM)
Voya Financial (VOYA)
*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.
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: Voya Financial (VOYA – yield 0.1%)
Voya Financial 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.
Here are some highlights from the first-quarter earnings report in early May:
• Voya report adjusted first-quarter EPS of $1.22 vs. the consensus estimate of $1.12.
• Voya reported better-than-expected expense reductions, favorable mortality trends in the Life Insurance division, and a repurchase of $200 million of stock.
• The company authorized an additional $500 million share repurchase.
• Retirement and Investment Management divisions experienced net inflows of approximately $1.2 billion, higher than in each of the four prior quarters.
• Reported book value jumped from $52.28 in December to $59.13 in March.
VOYA is an undervalued growth stock. Analysts expect full-year EPS to grow 36.4% and 14.5% in 2019 and 2020, and the current P/E is 10.0.
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.”
Investors should expect that announcement during the last week of July, at which time the share price could easily jump as institutional investors will have yet another good reason to buy VOYA.
One percent does not sound like a big deal, but that yield is 10 times higher than the stock’s current yield. A stock with a 1% dividend yield can qualify for inclusion in possibly thousands of global equity portfolios – including mutual funds, insurance companies and trust accounts – that have minimum dividend requirements, thus increasing the buying audience for VOYA.
After running up against price resistance at 55 repeatedly for 18 months, VOYA is finally breaking through that price barrier, beginning a new run-up to all-time highs. It’s time for traders and growth stock investors to make an immediate decision on whether to own VOYA. Buy VOYA now. 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. Full year consensus estimates point toward EPS increasing aggressively by 42.0% in 2019 and 24.8% in 2020. Those are much bigger earnings growth rates than are typically found within the software industry. The high P/E of 37.7 is the only reason that I am not giving ADBE a Strong Buy recommendation.
ADBE is a large-cap growth stock, a great stock for risk-tolerant growth investors and buy-and-hold equity portfolios. ADBE surpassed all-time highs on strong volume in mid-June, and the price chart remains bullish. I expect an extended run-up, occasionally interrupted by pullbacks in the broader market. Buy ADBE now. Buy.
CF Industries Holdings (CF – yield 2.6%) 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 traded near a three-year low last week at $2.32 MMbtu.
The company is expected to grow full-year EPS by 63% and 32% in 2019 and 2020, with corresponding P/Es of 23.1 and 17.6. CF is a cyclical mid-cap aggressive growth stock. The stock launched above previous price resistance in mid-June. A brief pullback to 44.5 would be completely normal, as would a run-up to price resistance at 50. Strong Buy.
CIT Group (CIT – yield 2.7%) 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. CIT is an undervalued growth stock with an attractive dividend yield. Wall Street expects EPS to increase 19.6% and 14.1% in 2019 and 2020. The P/E is 10.9. The stock rose on heavy volume on June 28. CIT could surpass its former high of 55 in the near term. Buy CIT now. Strong Buy.
Marathon Petroleum (MPC – yield 3.8%) 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. Consensus earnings estimates project 2019 EPS falling 24%, followed by a 72% jump in 2020 EPS, while the 2020 P/E is incredibly low at 7.0. MPC rose rapidly on heavy volume in recent weeks, rebounding from the May declines in both crude oil prices and the broader stock market. If you bought MPC for a trade when I moved the stock from Hold to Buy on June 18, be prepared for MPC to hit price resistance at 58 quite soon. Buy.
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. (There have been no recent news stories or corporate events to report on.)
Analysts expect EPS to grow 49.3% and 8.2% in 2019 and 2020 (September year end), and the current P/E is 9.2. Once the June quarter results are reported, and the 2020 earnings estimates are thereafter adjusted, I’ll decide whether to keep SANM in the portfolio. (Unlike with large-cap stocks that have more predictable earnings outlooks, future earnings projections on small-cap growth stocks can fluctuate wildly as fiscal year end approaches, often increasing significantly.)
SANM is a small-cap growth stock. The stock is recovering from the May pullback in the broader market, rising on heavy volume on June 28. I’m moving SANM from Hold to a Buy recommendation, in light of the more bullish price chart. There’s short-term price resistance at 34. Expect volatility. Buy.
Southwest Airlines (LUV – yield 1.4%) 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. Last week, Southwest announced that their fleet of Boeing Max 737 jets will remain out of service through October 1, affecting 3.8% of daily flights. Boeing is working on a software upgrade and test flights in order to win FAA approval on the planes.
LUV is an undervalued large-cap stock. The company will report second-quarter results on the morning of July 25. Earnings estimates have been slowly rising in recent weeks. Wall Street expects full-year EPS to grow 7.1% and 15.9% in 2019 and 2020. At a share price of 51.26, there’s 13% upside to short-term resistance at 58, making LUV suitable for both growth investors and traders. Buy.
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. Analysts are expecting EPS to grow 10.2% and 16.4% in 2019 and 2020. Now that SUPN appears to have begun its recovery from the May downturn in the broader market, I’m moving the stock from Hold to a Buy recommendation. At a share price of 33, there’s 27% upside to short-term resistance at 42, making SUPN suitable for both growth investors and traders. 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: Corteva Inc. (CTVA – yield 1.8%)
Corteva (pronounced kor-TEH-vuh) spun off from DowDuPont (DWDP) on June 3. Corteva is an agricultural sciences company, providing farmers with seeds and crop protection products, enabling them to maximize yield and profitability. (I’m waiting for Corteva to post a Form 8937 that addresses its post-spinoff cost basis.)
Analysts** currently expect Corteva to report EPS of $1.14 and $1.44 in 2019 and 2020, reflecting aggressive 26% earnings growth next year. The price/earnings ratio is 20; now low, but certainly lower than the EPS growth rate.
Last week, Corteva announced a $1 billion share repurchase authorization that is expected to be completed within three years. The company also authorized a quarterly common stock dividend of 13 cents per share, payable on September 13 to shareholders of record on July 31.
Shareholders are advised to reject a mini-tender offer from TRC Capital Corporation, in which TRC is willing to buy CTVA shares for $26. The closing price on CTVA on June 28 was $29.57, so it would not make sense to accept TRC’s offer at the lower price, when a seller could simply sell CTVA in the open market for the current higher price.
There is one new downside risk to Corteva. A lawsuit that was unsealed on June 28 revealed that Chemours, a company that was spun off from DuPont in 2015, is suing DuPont and Corteva for costs associated with environmental litigation. My immediate question was, “How credible are the claims from Chemours, and could the result of the litigation harm DuPont and Corteva?”
Chemours’ claims sound serious. Statements from DuPont and Corteva portray confidence that they are not liable for Chemours’ litigation costs, but the reader is left with no sense of how that bravado will play out in court as more facts emerge. A quick glance at the March 31 DowDuPont balance sheet – the pre-spinoff company – shows $11 billion in cash, and a total of $49 billion in current assets. The financial claim from Chemours initially seems to range in the $1-$4 billion area. A quick assessment implies that a guilty verdict will not likely harm DuPont and Corteva’s finances.
CTVA is a mid-cap growth & income stock, appropriate for risk-tolerant investors. CTVA traded between 24.75-28 in the three weeks following the June 3 spinoff, then rose near 30 last week. It appears that the spinoff has been well received, reflecting strong earnings growth prospects, recent capital return announcements, and strength among its peers’ share prices. I’m moving CTVA from Hold to a Buy recommendation. Buy.
Updates on Growth & Income Portfolio Stocks
Blackstone Group Inc. (BX – yield 4.7%*) 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. Yesterday, Blackstone officially changed its business structure. The company’s name changed from Blackstone Group LP to Blackstone Group Inc. Blackstone will deliver second-quarter results on the morning of July 18.
BX is a growth & income stock that’s reaching new all-time highs. The July 1 corporate conversion should trigger an extended period of corporate buying and also inclusion in the S&P 500 index, each invariably bullish for share price appreciation. Buy BX now. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.17 and yielding 4.7%.
Citigroup (C – yield 2.9%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries. Citigroup passed the Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR), and plans to increase the third-quarter dividend from $0.45 to $0.51, a smaller increase than in recent years. The company also authorized the repurchase of $17.1 billion of stock from third-quarter 2019 through second-quarter 2020, higher than analysts had expected. The combined return of capital totals $21.5 billion through June 2020.
Analysts expect Citigroup to grow EPS by 13.7% and 13.4% in 2019 and 2020. The corresponding price/earnings ratios (P/Es) are 9.3 and 8.2. Investors can expect consensus earnings estimates to rise a bit in the coming days, due to the effect of the expected share repurchases. Citigroup is an undervalued growth & income stock. The stock is actively rising toward 77, where it last traded in January 2018. Buy C now. Strong Buy.
Commercial Metals Company (CMC – yield 2.7%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. Commercial Metals derives 60% of revenue from rebar products. The company reported a strong third quarter in June (August year end), outperforming its synergy targets from rebar assets acquired from Gerdau S.A. Demand remains positive driven by continued strength in non-residential construction activity.
CMC is an undervalued growth stock with an attractive dividend yield. Earnings estimates have risen in recent weeks, especially the 2019 number. Analysts now expect full-year EPS to increase 34.9% and 7.0% in fiscal 2019 and 2020. The 2020 P/E is low at 8.3. It’s not remotely unusual for next year’s earnings outlook on a small-cap stock to be vague, right up until the company reports prior-year fourth-quarter results. In order for CMC to remain in the Growth & Income Portfolio, I’ll be watching for the projected 2020 earnings growth rate to increase to double digits by the time of the fourth-quarter earnings report and subsequent reassessment by Wall Street.
CMC rose 33% on increasing volume in June, rising during 80% of the trading days. There’s short-term price resistance at about 18, so it’s likely that the stock will promptly pull back and rest briefly before advancing further. Be prepared to buy on pullbacks to 16.5, at which time I’ll likely move CMC to a Buy recommendation. Hold.
Delta Air Lines (DAL – yield 2.4%) 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. Delta will report second quarter results on the morning of July 11. DAL is an undervalued growth & income stock. Wall Street’s earnings estimates for 2019 have been climbing since early March, whereas the 2020 estimate has remained stable. Delta is now expected to achieve 19.1% and 7.0% EPS growth in 2019 and 2020, and the P/E is 8.4.
I’m moving DAL from Strong Buy to a Buy recommendation while I await revisions in 2020 earnings estimates, subsequent to next week’s earnings report. The stock appears capable of rising to 60 in the near term, where it peaked in November 2018. Buy.
Dow Inc. (DOW – yield 5.7%) is the materials science division of the former DowDuPont (DWDP) that began trading as a separate company on April 2. Dow will report second-quarter results on the morning of July 25. Analysts** currently expect Dow to report EPS of $4.38 and $5.28 in 2019 and 2020. I’m very pleased with the profit projections, the dividend yield and the P/E (11.3). Dividend investors should buy now, while growth investors should wait for the price chart to turn bullish. Strong Buy.
DuPont de neMours (DD – yield 1.6%) is a specialty chemicals company, the remaining portion of DowDuPont (DWDP) after the June 3 spinoff of Corteva Inc. (CTVA). DowDuPont was then renamed DuPont de neMours and underwent a reverse stock split through which investors received one share of DD for every three shares of DWDP they held. With regard to post-spinoff adjusted cost basis, DuPont will post a Form 8937 on their website, which is not yet available.
Last week, DuPont declared a new quarterly dividend of $0.30, their first dividend as a post-spinoff company, with a current yield of 1.6%. Earlier in June, DuPont authorized a $2 billion share repurchase plan.
A lawsuit that was unsealed on June 28 revealed that Chemours, a company that was spun off from DuPont in 2015, is suing DuPont and Corteva for costs associated with environmental litigation. My immediate question was, “How credible are the claims from Chemours, and could the result of the litigation harm DuPont and Corteva?”
Chemours’ claims sound serious. Statements from DuPont and Corteva portray confidence that they are not liable for Chemours’ litigation costs, but the reader is left with no sense of how that bravado will play out in court as more facts emerge. A quick glance at the March 31 DowDuPont balance sheet – the pre-spinoff company – shows $11 billion in cash, and a total of $49 billion in current assets. The financial claim from Chemours initially seems to range in the $1-$4 billion area. A quick assessment implies that a guilty verdict will not likely harm DuPont and Corteva’s finances.
Investors are currently faced with the potential liability and media coverage created by a prolonged lawsuit between chemical companies, and a lack of projected 2020 earnings growth at DuPont – although to be fair, earnings are solid. Wall Street is projecting DuPont to deliver EPS of $4.50 and $4.46 in 2019 and 2020. Both situations dim the prospects of near-term capital appreciation. Therefore, I’m selling DD today. It will be relatively easy to reinvest capital into a stock with a better earnings growth outlook, a bigger dividend yield, and a more bullish price chart. When I acquire the adjusted cost basis info for the DowDuPont spinoffs, I will publish that in a Special Bulletin to subscribers. Sell.
Guess?, Inc. (GES – yield 2.8%) is a global apparel manufacturer, selling their products through wholesale, retail, ecommerce and licensing agreements. Wall Street expects EPS to grow of 27.6% and 15.2% in fiscal 2020 and 2021. The 2020 P/E is low at 12.9. GES offers the best earnings growth & value opportunity of any U.S.-based apparel retailer. The stock is rising from recent lows, but the price chart remains unstable. I’m watching for a lower-risk opportunity to buy GES. Hold.
Royal Caribbean Cruises (RCL – yield 2.4%) 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. Wall Street expects EPS to grow 10.3% and 11.4% in 2019 and 2020. The 2019 P/E is 12.4.
I recently mentioned that Carnival Corp. (CCL) is getting some bad press among stock analysts after lowering their earnings outlook due to the discontinuation of cruise ship service to Cuba and weaker demand in Europe and Alaska. As it turns out, Carnival’s ensuing share price weakness is not spreading to RCL. RCL is rising, and could retrace its recent high of 130. Still, I don’t expect Royal Caribbean to escape from industry overcapacity problems unscathed. I’m leaning toward selling RCL near 130. Hold.
Schlumberger NV (SLB – yield 5.0%) is the world’s largest oilfield service company. The company will report second quarter results on the morning of July 19. Wall Street expects full-year EPS to fall 5% in 2019 and to rise 38% in 2020. The 2020 P/E is 18.7. The stock is rising, with price resistance at 41-42 and again at 45-47. Buy.
Total S.A. (TOT – yield 5.4%) 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 6.3% and 19.2% in 2019 and 2020, and the 2019 P/E is 10.4. The stock rose in June, and will soon meet some short-term price resistance at 57-58. 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.
Featured Stock: Designer Brands Inc. (DBI)
Designer Brands Inc. operates DSW Warehouse and The Shoe Company stores with over 1,000 locations in 44 U.S. states and Canada, and Camuto Group. DSW was the #1 omnichannel retailer in the U.S. in 2017 and 2018, and has delivered 27 consecutive years of sales growth.
Investors may listen to the webcast of CEO Roger Rawlins’ June 6 presentation at the William Blair Annual Growth Stock Conference. The presentation emphasized how management is drawing upon the most successful individual aspects of DSW Warehouses, The Shoe Company, and Camuto Group, and applying those profit-generating processes to each of these three divisions of the company in order to escalate revenue and gross margin growth. For example, Designer Brands recently acquired Camuto Group, which is the leader in private brand footwear in the U.S. Private brand footwear carries about 10 percentage points of higher gross margin than branded footwear, so Designer Brands plans to use Camuto’s expertise to provide new brands to DSW Warehouses that will then boost total-store gross margins.
DBI is an undervalued growth stock with a hefty dividend yield. Expected EPS growth rates are 15.1% and 13.6% in 2019 and 2020. The P/E is moderate at 10.0.
Designer Brands beat Wall Street’s first-quarter earnings and revenue estimates and raised their full-year 2019 earnings guidance. However, weakness in the broader market in May and poor first-quarter results at other apparel retailers and department stores pushed DBI down to price support near 18. Then late last week, DBI broke free from its trading range, and could travel as far as 23 before resting again, giving new investors a potential 20% short-term gain.
I’m therefore moving DBI from Buy to a Strong Buy recommendation. Investors who buy now will lock in a tremendous dividend yield. Traders, income investors and risk-tolerant growth stock investors should buy DBI now. Expect volatility. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Abercrombie & Fitch (ANF – yield 5.0%) 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 company remains on track toward its multi-year goals of improving revenue, profits, expense-control, data analytics and global store expansion. Analysts expect EPS to fall 10.4% in 2019, then to rise 40.8% in 2020. The 2019 P/E is 15.6. (Earnings estimates do not yet reflect a lower share count stemming from the new 5 million share repurchase authorization.) ANF is a small/micro-cap stock, trading between 15-17 in recent weeks. I believe risk-tolerant growth investors, traders and dividend investors can benefit by buying ANF now. Buy.
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. On June 27, the FDA granted approval of SOLIRIS for the treatment of neuromyelitis optica spectrum disorder (NMOSD). Similar drug reviews are also underway in the European Union and Japan. Alexion expects the U.S. approval to result in modest revenue gains in 2019.
ALXN is an undervalued large-cap growth stock. Analysts expect EPS to grow 19.1% and 14.2% in 2019 and 2020, and the P/E is 13.9 – rather low for a profitable biopharmaceutical company. I’m moving ALXN from Buy to a Strong Buy recommendation, now that it seems investors are no longer viewing the prospect of government-run healthcare as a viable outcome of national political campaigns. The stock price is rising toward 140, where it traded in early April. Strong Buy.
Apple Inc. (AAPL – yield 1.5%) 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.
On June 28, the Wall Street Journal reported that Apple is shifting production of its Mac PRO desktop computer from the U.S. to China, a move that implies Apple’s confidence that trade tensions between the two countries will be resolved. In other news, Apple’s chief design officer Jony Ive will leave Apple later this year to start a new company, where he will ostensibly continue to work on projects with Apple.
AAPL is a great stock for a high quality, buy-and-hold equity portfolio. The company has $38 billion in cash, raises the dividend annually, and repurchases tens of billions of dollars of its stock each year. Wall Street expects EPS to fall 4.0% in fiscal 2019 (September year end), then to rise 10.4% in 2020. AAPL is rising toward price resistance at 210. Strong Buy.
Axis Capital Holdings Ltd. (AXS – yield 2.7%) is an A+-rated 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. AXS is an undervalued, small-cap stock. Axis reported full-year 2018 EPS of $1.92 in 2018, and is expected to report $4.99 and $5.50 in 2019 and 2020. AXS exhibited a shakeout pattern on the price chart last week; a bullish harbinger of a near-term breakout past 60 that will likely lead back to the March 2017 all-time high of 66. Buy AXS now. Strong Buy.
Baker Hughes, a GE Co. (BHGE – yield 2.8%) offers products, services and digital solutions to the international oil and gas community. The number of U.S. rigs drilling for crude oil and natural gas was unchanged last week at a total of 967, down 80 vs. a year ago. The Canadian rig count grew by 5 last week to 124, while the international rig count grew by 64 in May to 1,126. Last week, Baker Hughes and CS.ai announced a joint venture that will deliver Artificial Intelligence (AI) solutions across the oil and gas industry.
BHGE is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to increase 49% and 60% in 2019 and 2020. The P/E remains low in comparison to earnings growth at 25.4. War-like aggression coming from Iran caused energy stocks to rise significantly in June. BHGE has short-term price resistance at 28.5, and appears ready to continue rising. Strong Buy.
The Mosaic Company (MOS – yield 0.8%) 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.
Costs associated with complying with new Brazilian mining regulations contributed to analysts adjusting 2019 EPS expectations downward in mid-June, reflecting a profit drop of 19% in 2019 and an increase of 38% in 2020. The Brazil situation is expected to be fully resolved by the end of September.
MOS is an undervalued mid-cap growth stock. The stock has been rising on strong volume. Upside price resistance is a bit nebulous. MOS could reach anywhere between 26-29 before resting again. Buy.
Synchrony Financial (SYF – yield 2.4%) 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. Synchrony will report second quarter results on the morning of July 19. SYF is an undervalued, mid-cap growth & income stock. Wall Street expects full-year 2019 EPS growth of 13.9%, and the P/E is low at 8.1. In late July, Synchrony intends to announce an increase in the quarterly dividend from $0.21 to $0.22 per share. The price chart is hinting at a potential breakout past 35 that could carry SYF to 38-39, where it peaked in January 2018. Buy SYF now. Strong Buy.
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, and promptly raised revenue and earnings guidance for full-year 2019.
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 this micro-cap stock. 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. The full-year 2019 analysts’ earnings estimate projects 31.0% growth, and the P/E is low in comparison at 13.1.
UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. The price chart is relatively bullish. A breakout past 45, where UEIC traded in August 2018 and May 2019, could carry the stock to price resistance at 55, a potential 33% gain from the recent 41.14 share price. Expect volatility. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Carlyle Group LP (CG – yield 5.4%) 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. A conversion to a corporation would newly allow a large number of institutional investors to consider buying CG shares, thus potentially boosting the share price both immediately and over a multi-year period.
Carlyle Group holds a minority stake in Philadelphia Energy Solutions (PES), a refinery that experienced a massive fire in June that led to its permanent closure. In recent years, PES underwent a restructuring due to bankruptcy proceedings, which was primarily caused by the cost of the Renewable Fuel Standard (RFS) that was authorized by the Energy Policy Act of 2005. The annual cost for PES to comply with RFS rose from $13 million in 2012 to $218 million in 2017, contributing to the company’s untenable $600 million debt burden when they filed for bankruptcy protection in January 2018. The ultimate outcome of Carlyle Group’s investment in PES will not likely be a key factor in management’s decision regarding whether to undergo a corporate conversion.
The stock just retraced 23-24, where it traded several times in 2018. A positive corporate conversion announcement will likely add about 10% to the share price. Buy CG now. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.26 and yielding 5.4%.
**Earnings projections for companies that have recently undergone major M&A activity (including post-merger companies, post-spinoff companies and IPOs) are relatively tentative until the companies have reported several quarters of earnings results. At that time, analysts can develop projections based on actual corporate results. They can also get a better feel for the reliability of corporate statements regarding the business outlook. (Some CEOs would naturally be conservative when estimating business trends to analysts, while others would be overly optimistic, and yet others perhaps devious or oblivious!)
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