Since we’re in the midst of a sudden stock market correction, I decided to feature three stocks today that seem to offer the best opportunities while their prices are temporarily low.
Be brave! If you saved up portfolio cash with which to buy low at moments like this, now is the time to buy something! You don’t have to spend it all in one day, of course.
If you are new at buying low during stock market corrections, and you’re feeling excited and scared and tentative and unconfident, send me an email. You’re going to be okay, and I’d love to hear about your experience. Learning to buy low is an important step toward increasing your future stock portfolio success.
Cabot Undervalued Stocks Advisor 819
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Trade War Turmoil Trumps a Good Earnings Season
U.S. stock markets took quite a tumble in the last few business days. For those of you wondering, “Should I buy low?”, the answer to that question is usually “yes, but let’s first wait for the market to stop falling”. Let’s review some current economic and financial themes, and then we’ll chat about stock opportunities.
It’s earnings season. All of our portfolio companies that reported earnings performed at or above Wall Street’s expectations. That’s a bit unusual. It would be normal for about 20% of the companies to report numbers below consensus estimates.
The prices of oil and natural gas are both depressed right now.
Airline passenger traffic growth is trending over 5% vs. a year ago in Europe, outperforming all other global regions. That figure includes recent May and June performance, and projections for July through September by the International Air Transport Association. I find this data interesting because for many months, Europe has constantly been mentioned as a poorly-performing economic region. Yet 5% growth in airline passenger traffic is certainly a bullish statistic. I’ll be watching for additional signs that business is picking up in Europe.
The Federal Open Market Committee (FOMC) lowered the fed funds rate by a quarter of a point last week, with an intention to lower rates again near year end. That wasn’t enough of a rate cut to make stock market bulls happy. Additionally, there’s a certain amount of skepticism that a year-end rate cut might not materialize, adding to stock market uncertainty. (That might be the first time I’ve ever used the word “uncertainty” since I joined Cabot almost four years ago. I hate that word. Please forgive my use of it.)
On August 1, the Labor Department announced that 164,000 new jobs were created in July, and the unemployment rate was unchanged at 3.7%. Both numbers came in very close to economists’ projections, and are indicative of a healthy economy.
The chess game of trade relations with China continues, roiling global investment markets. By mid-July, it became clear that China failed to follow through with a recent promise to buy more U.S. agricultural products. That led to the U.S. raising tariffs on additional imports from China, ostensibly causing China to retaliate by lowering the value of the yuan against the dollar and reiterating that they will continue to avoid U.S. ag products.
When China devalues their currency, neighboring countries often follow suit in an attempt to smooth out Asian inter-country trade values. The problem for the U.S. is that Chinese currency manipulation makes American products more costly to Chinese consumers, thereby harming U.S. multinational corporations and their stockholders.
Investors are perhaps now seeing why previous U.S. Presidents did not bother addressing the problems within the U.S.-China trade relationship. The vast differences between Chinese and American cultures, economic goals and government structures are clearly preventing the more rapid progress that has taken place with other U.S. trade partners in recent years.
Buying Low During Stock Market Corrections
After reaching new highs this summer, the S&P 500 index (SPX) is now falling, largely due to trade tensions with China. My best guess is that the SPX will bounce at least twice at price support at 2750, although yesterday’s close near 2850 might be the bottom of the current correction. Either of those market bottoms would coordinate with what I would consider to be a relatively modest price correction; the kind that works itself out within a month or so. A bigger market drop would necessitate a longer market recovery.
During stock market corrections, I prefer to buy stocks that fell to recent price support, but not to buy stocks that fell a tremendous amount. That’s because the bigger the fall, the longer it will take for the rebound to commence. And if you’re lucky enough to own some attractive stocks that didn’t fall at all, those are the stocks that will probably flourish once the broader market recovery kicks into gear.
Lastly, consider buying low on stocks with big dividend yields. Picture the share price and the dividend yield on opposite ends of a seesaw. As the share price falls, the dividend yield rises. When you buy the stock at a low price, you lock in a higher-than-normal dividend yield. As the share price eventually recovers, you reap capital gains and you continue to receive an outsized dividend yield.
Send questions and comments to Crista@CabotWealth.com.
Portfolio Notes
Be sure to review the Special Bulletins from July 31 and August 1 in which I mentioned news, rating changes and/or price action on Apple (AAPL), Axis Capital (AXS), Baker Hughes, a GE Co. (BHGE), Carlyle Group (CG), CF Industries (CF), Corteva (CTVA), Marathon Petroleum (MPC) and TiVo (TIVO).
Quarterly Earnings Release Calendar
August 6 am: Mosaic (MOS) – 2Q
August 6 pm: Supernus Pharmaceuticals (SUPN) and Voya Financial (VOYA) – 2Q
August 8 pm: Universal Electronics (UEIC) – 2Q
Earnings Season Scorecard
Big earnings beat: Alexion Pharmaceuticals (ALXN), Axis Capital (AXS), Blackstone Group (BX), Carlyle Group (CG), CF Industries (CF), CIT Group (CIT), Corteva (CTVA), Marathon Petroleum (MPC), Sanmina (SANM and TiVo (TIVO).
Earnings within 5% of consensus estimate: Alaska Air Group (ALK), Apple (AAPL), Baker Hughes, a GE Co. (BHGE), Citigroup (C), Delta Air Lines (DAL), Dow Inc. (DOW), Royal Caribbean Cruises (RCL), Schlumberger NV (SLB), Southwest Airlines (LUV), Synchrony Financial (SYF) and Total SA (TOT).
(None of these companies reported earnings below the quarter’s consensus estimates.)
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: Adobe Systems (ADBE)
On April 18, I recommended shares of Adobe Systems (ADBE) in a webinar, then added ADBE to the Growth Portfolio on May 8, when it traded at 277. The stock then traded up to 311 in July before coming back down to 280 in the current stock market correction. If you missed the April webinar, when ADBE closed at 270, and you didn’t buy ADBE when I recommended it in May, then today’s your lucky day because at 280, ADBE is down 10% from its July peak. On July 23, I wrote, “I expect an extended run-up, occasionally interrupted by pullbacks in the broader market.” That pullback has arrived. It’s time to buy ADBE.
Adobe Systems 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.
Adobe reported a strong second quarter in June (November year end), beating Wall Street’s estimates for both revenue and profits. Adobe Creative Cloud, Adobe Document Cloud and Adobe Experience Cloud all performed with strength. Operating margins came in higher than analysts had expected. Adobe management indicated on the conference call that margins should continue to grow sequentially in the third and fourth quarters, which is more bullish than Wall Street had expected. Ten investment firms immediately raised their price targets on ADBE to a range of $290-$340.
Full year consensus estimates point toward EPS increasing aggressively by 42.0% in 2019 and 24.8% in 2020 (November year end). Those are much bigger earnings growth rates than are typically found among software companies.
ADBE is a large-cap growth stock; a great stock for risk-tolerant growth investors and buy-and-hold equity portfolios. ADBE rose to new all-time highs in late July, and has now pulled back toward price support at 275. Traders and growth stock investors should buy ADBE now. Buy.
Updates on Growth Portfolio Stocks
CF Industries Holdings (CF – yield 2.3%) 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 closed at $2.14 MMbtu late last week.
Second quarter results were reported in a Special Bulletin on August 1. Wall Street was thrilled with their quarter, and will invariably be raising earnings estimates in the coming weeks. Earnings per share are currently expected to increase 65% and 30% in 2019 and 2020. The 2019 P/E is 25.7. Thus far, five investment firms raised their price targets on CF to a range of 48-60.
CF is an undervalued, mid-cap aggressive growth stock. The stock is up over 30% since late May. Watch for opportunities to buy on a pullback to 47. Hold.
CIT Group (CIT – yield 2.9%) operates both a bank holding company with $35.3 billion in deposits and a financial holding company. CIT Group provides financing, leasing and advisory services to small and middle market businesses, consumer markets, and the real estate and railroad industries.
CIT is an undervalued growth stock with an attractive dividend yield. Earnings estimates rose last week for 2019, but fell for 2020. At this point, analysts expect EPS to grow 22.5% and 8.5% in 2019 and 2020, respectively. The P/E is 9.7. I’m lowering CIT from Strong Buy to a Hold recommendation until the stock stabilizes from the current downturn. Hold.
Marathon Petroleum (MPC – yield 4.0%) is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interest in a midstream company, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. Very successful second quarter results were reported in a Special Bulletin on August 1, which included ongoing successes with the 2018 acquisition of Andeavor.
MPC is a vastly undervalued stock. I expect big Wall Street earnings revisions in the coming days. I’ve got MPC recommended as a Buy, rather than a Strong Buy, to reflect falling 2019 EPS. Fortunately, 2020 EPS growth projections are huge, and the P/E is shockingly low. The stock’s upward progression got interrupted when the broader market turned down late last week. There’s price support at about 49. 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. The company is focused on cost controls, efficiencies and leveraging their operating model. New consensus estimates point toward earnings growth of 52.5% and 5.6% in 2019 and 2020.
SANM is a small-cap growth stock. SANM rose for two months, then pulled back in recent days. Risk tolerant growth stock investors should buy SANM anywhere below 30. 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. Southwest’s new service to Hawaii is delivering very strong results, and the company is adding additional Hawaiian flights. The grounding of Southwest’s Boeing Max 737 jets currently extends through January 5, 2020.
Wall Street expects no EPS growth in 2019, followed by 22.6% EPS growth in 2020. The 2020 P/E is 9.7. LUV just fell toward price support in the upper 40’s. Buy LUV as long as the price remains above 48. 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. Supernus is expected to report second quarter EPS of $0.58 on the afternoon of August 6, within a range of $0.51-$0.66, and $108.7 million revenue, within a range of $101-$113 million. Political proposals regarding pharmaceutical pricing continue to cause stock volatility. The earnings report could push SUPN anywhere between 30-39. Buy SUPN now. Buy.
Voya Financial (VOYA – yield 1.1%) 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. announced the awaited dividend increase last week, raising the payout from once cent to $0.15 per quarter. He commented, “We are committed to deploying capital in a way that will drive greater value for our shareholders, as evidenced by the approximately $5.5 billion in excess capital that we have used for share repurchases. While share repurchases remain the primary component of our capital deployment plans, this increase in our common stock dividend is consistent with our plans to increase the dividend to a yield of at least 1% and gives us another opportunity to deliver value for our shareholders.”
Voya is expected to report second quarter EPS of $1.47 on the afternoon of August 6, within a range of $1.38-$1.62.
VOYA is an undervalued growth stock. VOYA rose to new highs through late July, then fell with the market correction. Take advantage of this lower price and buy VOYA now. Strong Buy.
Growth & Income Portfolio
Growth & Income Portfolio stocks have bullish charts, good projected earnings growth, dividends of 1.5% and higher, low-to-moderate P/Es (price/earnings ratios), and low-to-moderate debt levels.agencies, and the company is focused on continued debt reduction.
Featured Stock: Citigroup (C – yield 3.0%)
There’s an art to buying low during market corrections. It’s fun to buy stocks while they’re “on sale”, but the excitement can turn into frustration if the stocks don’t begin to rebound with a few weeks. In that light, Citigroup (C) is the Buy Low Opportunities Portfolio stock that seems to offer the best combination of low market risk and high total return potential.
Citigroup is a global financial company that serves consumers, businesses, governments and institutions in 98 countries. In mid-July, Citigroup reported a good second-quarter that beat Wall Street’s revenue and profit expectations. Strength in consumer lending, and lower expenses, tax rate and share count contributed to the quarter’s successes.
Ongoing aggressive share repurchases have reduced the common share count by 10% during the last four quarters, with tangible book value rising 10% during the same period. The company also raised the quarterly dividend from 45 cents to 51 cents per share.
Citigroup is an undervalued, large-cap growth & income stock. Citigroup has much better 2020 earnings growth prospects than Bank of America, Goldman Sachs, JPMorgan, Morgan Stanley and Wells Fargo. Wall Street expects Citigroup’s EPS to grow 14.4% and 11.8% in 2019 and 2020. The P/E is currently 8.9.
The share price could easily dip to 64, and possibly 62. More importantly, the post-correction rebound could bring the stock up toward 77, where it last traded in January 2018, potentially offering new investors up to a 22% capital gain in the next 6-18 months. Last week, JPMorgan raised their target price on Citigroup from 77 to 81, while Barclays and Keefe, Bruyette & Woods each recently raised their price targets on C to 86. Buy C now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
Blackstone Group Inc. (BX – yield 4.4%*) is the world’s largest and most diversified alternative asset manager with $545.5 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, public debt and equity, real assets, secondary funds and real estate, all on a global basis. The London Stock Exchange (LSE) is in talks to buy financial data firm Refinitiv for $27 billion. Blackstone Group and two other investors bought a 55% stake in Thomson Reuters’ Financial and Risk unit on October 1, 2018, which was then renamed Refinitiv. Blackstone stands to make over 200% profit on their equity investment in Refinitiv. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.07 and yielding 4.4%.
Commercial Metals Company (CMC – yield 2.9%) 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 is outperforming its synergy targets from rebar assets acquired from Gerdau S.A. Demand remains positive driven by continued strength in non-residential construction activity. Wall Street expects full-year EPS to increase 36.2% and 7.9% in fiscal 2019 and 2020 (August year end); and the 2020 P/E is 7.6. Buy.
Corteva Inc. (CTVA – yield 1.6%) is an agricultural sciences company, providing farmers with seeds and crop protection products, enabling them to maximize yield and profitability. Second quarter results were reported in a Special Bulletin on August 1. The latest earnings estimates project EPS of $1.06 and $1.41 in 2019 and 2020, reflecting 33% growth next year. The 2020 P/E is high at 22.3. Four investment firms just raised their price targets on CTVA to a range of 30-37.
CTVA is a mid-cap growth & income stock. CTVA launched above its recent trading range to new highs, then pulled back a bit. I expect additional gains once the broader market turns upward. Hold.
Dow Inc. (DOW – yield 6.1%) is the materials science division of the former DowDuPont (DWDP). Refer to the July 25 Special Bulletin for comments pertaining to Dow’s second quarter results. DOW is an undervalued growth & income stock. Earnings estimates dropped last week due to weakness in Dow’s key markets. The company is now expected to achieve EPS of $3.59 and $4.46 in 2019 and 2020. The projected 2020 EPS growth rate is 24.2% and the corresponding P/E is 10.2. The stock dipped below price support last week, so I’m moving DOW from Strong Buy to a Hold Recommendation until the price stabilizes. Hold.
Guess?, Inc. (GES – yield 2.7%) is a global apparel manufacturer, selling their products through wholesale, retail, ecommerce and licensing agreements. Wall Street expects EPS growth of 27.6% and 15.2% in fiscal 2020 and 2021 (January year end). The 2020 P/E is low at 13.2. GES offers the best earnings growth & value opportunity of any U.S.-based apparel retailer. When the stock surpasses 17, it could easily travel to 19 before resting again. Traders, growth investors and growth & income investors should buy GES now. Strong Buy.
Royal Caribbean Cruises (RCL – yield 2.5%) is a cruise vacation company that delivers travelers to desirable and exotic destinations on all seven continents. The company operates a total of 63 ships, with 13 on order, under the brand names Royal Caribbean International, Celebrity Cruises, Azamara Club Cruises and Silversea Cruises, and partnerships with German and Spanish cruise companies. RCL is an undervalued, large-cap growth & income stock. Wall Street expects EPS to grow 9.1% and 11.2% in 2019 and 2020. The 2019 P/E is 11.5. Watch for an annual dividend increase that will likely be announced in early September. The stock fell enough in recent days that I’m moving my recommendation from Strong Buy to Hold, while waiting for the price to stabilize. Hold.
Schlumberger NV (SLB – yield 5.3%) is the world’s largest oilfield service company. Wall Street expects EPS to fall 7.4% in 2019, and then to increase 30% in 2020. The 2020 P/E is 19.2. Energy-related stocks have been moving in tandem with falling oil prices, which bounced at recent support levels last week. Buy.
Total S.A. (TOT – yield 6.1%) is a French multinational integrated energy company operating in over 130 countries. The company is increasing oil and gas production in both 2019 and 2020. CEO Patrick Pouyanne expects to achieve higher refining margins in relation to new low-sulfur fuel rules being imposed by the International Maritime Organization, and to achieve immediate free cash flow from their $8.8 billion acquisition of African assets from Anadarko.
TOT is an undervalued, large-cap growth & income stock with a large dividend yield. The current downturn in both oil and natural gas prices is depressing earnings estimates, with EPS now expected to grow 2.8% and 21.4% in 2019 and 2020. Unfortunately, three of Total’s four major European competitors reported disappointing second quarter results, dragging TOT down with them. I’m moving the stock from Strong Buy to a Hold recommendation until the share price stabilizes. 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 Stock: Apple Inc. (AAPL - yield 1.6%)
The biggest unusual buying opportunity within the Buy Low Opportunities Portfolio during the current stock market correction is Apple (AAPL). One could argue that Abercrombie & Fitch (ANF) offers an equally good (or better) money-making opportunity, and that might certainly be true, but ANF isn’t a rare opportunity. ANF has been cheap for quite a while, and will continue to be cheap in the near future. AAPL, however, tends to fall quickly and then shake off market corrections rapidly. So the stock presents more of a “strike while the iron is hot” situation.
Apple Inc. is a manufacturer and provider of many popular technology devices and services, including the iPhone, iPad, Mac, App Store, Apple Care, iCloud and more. The Apple Card, a credit card partnership with Goldman Sachs (GS), is now scheduled to launch in the first half of August. Apple plans to launch 5G iPhones in September 2020.
Refer to the Special Bulletin from July 31 that discussed Apple’s strong third quarter results. Management also guided fourth quarter numbers higher, causing Wall Street to rework full-year earnings estimates, now reflecting a profit drop of 2.7% in 2019 (September year end) followed by an increase of 9.2% in 2020. Eleven investment firms subsequently raised their price targets on AAPL to a range of 230-270, while one investment firm raised their price target to 185, below Apple’s current share price.
AAPL close yesterday at 193.34, down about 9% from last week’s closing peak. Could it fall a little more before recovering toward the 210-220 range? Sure, but it’ll probably be a very temporary drop.
There’s one portfolio that I manage in which I buy a little more AAPL during each of its price corrections. I will buy more AAPL today, and I won’t even blink if the stock is cheaper tomorrow. I’ll be happy to own more AAPL at 193, because today’s low price will likely soon be a distant memory.
Apple is a unique, innovative, thriving company. It’s literally the only stock that I currently recommended for a permanent buy-and-hold portfolio position. Except for big-dividend investors, all stock investors could benefit from buying AAPL now. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Abercrombie & Fitch (ANF – yield 4.5%) 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.
ANF is an undervalued small/micro-cap stock. Analysts expect EPS to fall 20% in 2019, then to rise 57% in 2020 (January year end). The 2020 P/E is 12.1. The stock has pulled back in recent days. I expect near-term capital gains. Buy ANF now. Buy.
Alaska Air Group (ALK – yield 2.2%) is a low-cost passenger airline. Alaska Airlines and its regional partners fly 46 million guests a year to more than 115 destinations with an average of 1,300 daily flights across the United States and to Mexico, Canada and Costa Rica. Alaska Air does not operate any Boeing 737 Max jets.
ALK is a mid-cap stock, expected to achieve aggressive earnings growth rates of 30.7% and 19.9% in 2019 and 2020. The 2019 P/E is low at 10.9. The stock has pulled back during this market correction. Last week, JPMorgan raised their price target on ALK from 72 to 76. Strong Buy.
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Current marketable drugs include Soliris, Strensiq and Kanuma. The company is focused on the development of pipeline products that will fuel continued long-term profit and revenue growth. Earnings estimates rose last week, now reflecting 24.9% and 10.9% EPS growth in 2019 and 2020. The 2019 P/E is 11.4.
Wall Street is concerned is that the European Commission will open the door to Soliris being subject to biosimilar competition in Europe. The decision will be announced on September 5, and potential drug competition is expected to take at least three years to materialize.
Since strong second quarter results were reported in late July, nine investment firms updated their price targets to a range of 136-177. The stock fell below its recent trading range, in tandem with weakness in the broader market. I’m therefore moving ALXN from Strong Buy to a Hold recommendation until the price stabilizes. Hold.
Axis Capital Holdings Ltd. (AXS – yield 2.5%) is an A+-rated global provider of specialty lines insurance and treaty reinsurance with locations in Bermuda, the United States, Europe, Singapore, Middle East, Canada and Latin America. Refer to the Special Bulletin from July 31 that discussed Axis’ second quarter results. Consensus earnings estimates subsequently rose to $5.11 and $5.53 in 2019 and 2020. The stock responded well, closing the week at 62.65. Investment banker Keefe, Bruyette & Woods then raised their target price on AXS from 71 to 75.
AXS is a small-cap stock that’s traveling directly toward its previous all-time high of 66, where it briefly traded in March 2017. I will very likely retire AXS near 66, as it will have met the portfolio objectives. Hold.
Baker Hughes, a GE Co. (BHGE – yield 3.0%) offers products, services and digital solutions to the international oil and gas community. Baker Hughes’s Turbomachinery and Process Solutions business stands to benefit from the liquefied natural gas (LNG) industry’s pipeline of over $200 billion in projects between 2019-2025, doubling the recent pace of annual capital spending. The number of U.S. rigs drilling for crude oil and natural gas fell by four last week to a total of 942, down 102 vs. a year ago. The Canadian rig count rose by ten last week to 137, while the international rig count grew by 12 in June to 1,138. Refer to the Special Bulletin from July 31 that discussed Baker Hughes’ second quarter results.
BHGE is an undervalued, mid-cap aggressive growth stock. Wall Street expects EPS to increase 49% and 55% in 2019 and 2020. The P/E remains low in comparison to earnings growth at 24.8. Strong Buy.
Designer Brands Inc. (DBI – yield 5.9%) 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. DBI is an undervalued growth stock with a hefty dividend yield. Expected EPS growth rates are 15.1% and 14.1% in 2019 and 2020. The current P/E is moderate at 8.9.
The stock traded quietly between 17-19 since late May, then weakened late last week. I’m therefore moving DBI from Strong Buy to Hold until the price stabilizes. At some point, the market is going to embrace this wildly successful company. Dividend investors can consider locking in a large dividend yield. Hold.
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. Mosaic is expected to report second quarter EPS of $0.29 on the morning of August 6, within a range of $0.20-$0.35, and $2.3 billion revenue, within a range of $2.2-$2.5 billion. Full year profits are expected to fall in 2019 and then surge dramatically in 2020. Citigroup raised their price target on MOS from 26 to 31 last week. The stock could easily trade anywhere between 21-28 in reaction to the earnings release. Buy.
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. Investors are encouraged to review Synchrony’s second quarter earnings presentation. The company officially raised the quarterly dividend payout from $0.21 to $0.22 per share.
SYF is an undervalued, mid-cap growth & income stock. Wall Street now expects EPS to grow 14.4% and 8.6% in 2019 and 2020. The 2019 P/E is 8.2. Recent market volatility brought SYF down toward price support at 33-33.5, so I’m moving my recommendation from Hold to Buy. There’s about 15% upside to my price objective near 39. Buy.
Universal Electronics (UEIC) is a manufacturer and world leader of wireless and voice remote control products, software and audio-video accessories for the smart home; with over 400 patents and a strong pipeline of new products in the areas of safety and security, climate control and lighting. The company will report second quarter results on the afternoon of August 8.
UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. The stock fell toward price support at 36-37 last week, presumably due to investors’ worries about tariffs. Buy UEIC now. Expect volatility. Strong Buy.
Updates on Special Situation Stocks
Carlyle Group LP (CG – yield 6.5%) manages $223 billion, divided among real assets, corporate private equity, investment solutions and global credit. Refer to the Special Bulletin from July 31 that discussed Carlyle’s decision to convert from a limited partnership to a corporation as of January 1, 2020. Now that the share price has pulled back, I’m moving my recommendation from Hold to Strong Buy. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.47 and yielding 6.5%.
**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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Send questions or comments to crista@cabotwealth.com.
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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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