We’re up to 31 stocks in the portfolios, and that’s too many! I’m hoping for a surge in the broader market so that half a dozen of our stocks reach their target prices, and I can then pare back the portfolios a bit.
Cabot Undervalued Stocks Advisor 918
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How to Exercise Caution While Riding the Bull Market
Many investors remember that late in the summer of 2017, I cautioned you that the stock market was due for a pullback. At that time, the market had risen steadily since November 2016, and showed no sign of stopping. But stocks don’t go straight up during bull markets. They have pullbacks, a.k.a. corrections. And that’s why I guided you through both investing for the continued bull market and setting aside cash so that you could buy low during the inevitable correction.
The reason I’m bringing this up is that there’s another storm brewing, and I want to bring it out into the open so that you can optimize your stock portfolio in preparation for a rainy day.
This is a sensitive topic. I’m not going to go into great detail because you can tune in to your favorite news source and get the gist of what I’m about to say. There are two factions in Washington D.C. that are at each other’s throats, each with an apparent goal of persecution and/or prosecution. The sentiment seems rabid, more so than anything I can recall in my lifetime. I believe that if either faction succeeds in launching a legal case against the other faction – not just an investigation, but something akin to criminal charges – the current bull run in the stock market will promptly cease and a pullback will begin.
There, I said it. And no matter which team you’re rooting for, stock investors will be the casualties of this War of the Roses. So let’s take up our shields with confidence, because forewarned is forearmed.
Here’s how I’ll prepare for the next down market. (It worked like a charm last year, so I’m barely changing the strategy this year.)
The goal is to have enough cash available to buy low during a stock market downturn so that instead of feeling panicked about stock prices falling, you can feel excited about the opportunity to buy stocks while they’re temporarily on sale.
Think about any cash that might be coming into your portfolio in the coming months: deposits, bond maturities, etc. If you’ve got lots of cash, great!
If you’re relatively fully invested, with no cash influx in sight, then you’re going to need to raise cash. As stocks reach our price targets, or otherwise become less wise to own, sell them. Put at least half of the proceeds of stock sales into your money market fund and leave it there. Go ahead and invest a portion of the proceeds of stock sales into other attractive stock opportunities. Repeat that process, each time a stock is sold, between now and the time the market correction finally arrives.
This simple strategy allows you to participate in the bull market, stay on top of new stock opportunities, and also prepare to buy a completely different assortment of opportunities when the stock market correction commences. By following this course of action, I took my portfolio from 3% cash in August 2017 to 40% cash by late January 2018, and I began investing immediately upon the onset of the market correction. In fact, I began investing too early. Next time, I’m going to force myself to wait up to three weeks before buying. In the interim, we can discuss the nature of whatever bad news triggers the downturn, and we can also discuss the evolving investment opportunities.
Many investors have never bought stocks during market downturns, because frankly, it’s scary! Your family, friends and news sources are all pronouncing gloom and doom, and you’re thinking, “They can’t all be wrong!” Well, yes, they CAN all be wrong. Because stocks eventually recover—even from market crashes, which, by the way, are a completely different animal from run-of-the-mill market corrections.
If you can’t imagine yourself buying low during a stock market correction, because you’ve literally never done it, then gear yourself up right now, mister, because we are going to buy low. Just one stock, all right? A few shares of a company that is not about to go out of business. Maybe Apple (AAPL), maybe PepsiCo (PEP), maybe Walt Disney (DIS). We’re going to do this because (a) it’s wise and (b) you’ve got to get past your fear of market corrections in order to dramatically improve your stock-investing skills. Once the market recovers, you’ll be thrilled that you had approached the downturn with a higher level of skill.
For those of you who are more experienced, I’ll offer many buy low opportunities so that you can select from a wide assortment of sectors and industries. And of course, I’ll also encourage you to buy whichever of our current portfolio stocks seem prepared for a rebound.
Okay, lecture over. Time for recess. Let’s play!
Be Ready for a Slew of Analyst Estimate Changes
There are a handful of times each year when Wall Street analysts revamp research, earnings estimates and stock recommendations for a majority of the stocks within their purviews. Certainly they do so after companies report quarterly financial results. But there’s a similar surge in updated research reports after summer vacation season ends, and in early January. In that light, I anticipate reporting on many such changes within the next two weekly updates of Cabot Undervalued Stocks Advisor.
Send questions and comments to crista@cabotwealth.com.
Portfolio Notes
Be sure to review the Special Bulletins from August 29 and 30 in which I mentioned news, rating changes and/or price action on GameStop (GME), Guess? (GES), Interpublic Group of Companies (IPG), KLX Inc. (KLXI), TiVo (TIVO) and Universal Electronics (UEIC).
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Delek US Holdings (DK)
Guess? (GES)
Knight-Swift Transportation (KNX)
TiVo (TIVO)
Skechers (SKX)
*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:
Apple (AAPL) moves from Buy to Hold.
Marathon Petroleum (MPC) joins the Growth Portfolio as a Strong Buy.
Royal Caribbean Cruises (RCL) moves from Strong Buy to Buy.
Synchrony Financial (SYF) joins the Buy Low Opportunities Portfolio as a Strong Buy.
Total S.A. (TOT) joins the Growth & Income Portfolio as a Strong Buy.
Last Week’s Portfolio Changes:
Guess? (GES) moved from the Buy Low Opportunities Portfolio to the Growth & Income Portfolio; and also moved from Strong Buy to Buy.
Interpublic Group of Companies (IPG) moved from Strong Buy to Hold.
Universal Electronics (UEIC) moved from Hold to Strong Buy.
Growth Portfolio
Growth Portfolio stocks have bullish charts, strong projected earnings growth, little or no dividends, low-to-moderate P/Es (price/earnings ratios) and low-to-moderate debt levels.
Featured Stock: Marathon Petroleum (MPC – yield 2.2%)
Marathon Petroleum (MPC) is the nation’s second-largest energy refiner. The company is engaged in the following pursuits:
• Marathon brand gasoline is sold through 5,600 independently-owned retail outlets across 20 states and the District of Columbia.
• Speedway LLC, a Marathon subsidiary, owns and operates the nation’s second-largest convenience store chain, with approximately 2,740 convenience stores in 22 states.
• Marathon owns, leases or has ownership interests in approximately 10,800 miles of crude oil and light product pipelines, and has interests in energy gathering and processing facilities, through its general partnership of MPLX LP.
In April 2018, Marathon announced the pending acquisition of Andeavor (ANDV)—formerly known as Tesoro Corporation—which was a component of our Buy Low Opportunities Portfolio for about a year through November 2017. Andeavor operates ten refineries in the Western U.S., and markets products through 3,300 retail stores. The shareholder vote on the merger is scheduled for September 24, and the transaction is expected to close on October 1. MPC is a large-cap stock with a market capitalization of $37.1 billion, and the ANDV market cap is $23.1 billion.
Consensus earnings estimates change frequently for Marathon and its energy refining peers, most often in an upward direction. After earnings per share (EPS) growth of 81.8% in 2017, the market is expecting continued aggressive EPS growth of 33.4% and 39.5% in 2018 and 2019. Corresponding price/earnings ratios (P/Es) are quite low at 15.9 and 11.4.
Marathon has recently been raising its dividend payout more frequently than once per year, without any predictable pattern to the increases. The current payout is $0.46 per quarter.
MPC broke out of a long-term trading range in October 2017, then rose until it peaked at 82 in April 2018. After four months of sideways trading, MPC began rising above 82 in late August. Nobody has missed their chance to capitalize on the pending run-up to new all-time highs. Buy MPC now. Strong Buy.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.3%) manufactures a wide range of popular communication and music devices, and many services as well. CNBC reported that “Apple bought back more stock in the first half of 2018 than any company has ever done in a six-month period.” That’s pretty cool. I know that there are people who are cynical about stock buybacks. (I’m guessing that those people mostly don’t own stock.) Buybacks help provide price support for your share price, and they can also contribute to a rising share price. In a perfect world, share buybacks are accompanied by rising revenue, profits and dividends. AAPL offers all of those.
Last week, Reuters reported that Berkshire Hathaway CEO Warren Buffett “said he uses his iPad ‘a lot,’ and that the iPhone is ‘enormously underpriced’ even when it costs $1,000, given how indispensable it has become for many people.”
Analysts expect EPS to increase 27.6% and 15.4% in fiscal 2018 and 2019 (September year end). The corresponding P/Es are 19.4 and 16.8, and the stock is now fairly valued based on 2019 earnings estimate. I’m moving AAPL from Buy to Hold due to fair valuation and a very recent 20% run-up in the share price. I might retire AAPL from the Growth Portfolio shortly, despite my love for the stock, in order to make room for a more undervalued growth opportunity. Hold.
Bank of America (BAC – yield 1.9%) is an undervalued growth stock that benefits from rising home prices and rising interest rates. The market expects Bank of America to grow EPS by 38.8% and 14.2% in 2018 and 2019. The corresponding P/Es are 12.2 and 10.7. When BAC retraces its 2018 high near 33, I plan to retire the stock in order to make room for a smaller bank to join the Growth Portfolio. (I want to capitalize on M&A activity that’s expected to take place among small banks in the coming year.) Hold.
CIT Group (CIT – yield 1.8%) 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. Analysts expect full year EPS to grow aggressively at 21.8% and 28.1% in 2018 and 2019. The corresponding P/Es are low at 14.5 and 11.3. Institutional investors will be focused on CIT Group’s loan growth during the second half of 2018.
There’s room for the 2019 P/E to rise to 13 (near its industry peer average), pushing the share price to about 63, and offering new investors a potential 16% profit in the next 6-18 months. The stock just retraced its all-time high of 55, where it previously peaked in March and May of 2018. We could see CIT break past 55 in the coming weeks. Buy CIT now. Strong Buy.
D.R. Horton (DHI – yield 1.1%) is America’s largest homebuilder, also providing mortgage, insurance and title services. DHI is an undervalued growth stock. Analysts now expect EPS growth of 41.5% and 18.6% in 2018 and 2019 (September year end). Corresponding P/Es are low at 11.4 and 9.6. The DHI price chart is bullish. There’s 19% upside as DHI approaches its January high at 53. Buy DHI now. Strong Buy.
KLX Inc. (KLXI) – Please refer to the August 27 Special Bulletin that outlines the updated details and dates of the Energy Services Group spin-off and the Boeing (BA) merger. I believe investors who hold their KLXI shares will continue to benefit from capital gains based on the total current and future values of the pending Boeing merger, plus the KLXE spinoff. Hold.
Knight-Swift Transportation Holdings (KNX – yield 0.7%) is a truckload carrier formed from the September 2017 merger between Knight Transportation and Swift Transportation Company. Knight-Swift is a thriving industry leader with an exemplary management team. Throughout the trucking industry, demand is strong, rates are rising, and there’s an extreme shortage of truck drivers. KNX is an undervalued mid-cap aggressive growth stock. Analysts expect full year EPS growth of 65.2% and 18.9% in 2018 and 2019. The corresponding P/Es are 15.0 and 12.6. KNX is rising steadily. There’s 11% upside to short-term price resistance at 38. It will likely take a while for KNX to break past 38. Buy KNX now. Strong Buy.
Martin Marietta Materials (MLM – yield 0.9%) is a supplier of crushed stone, sand, gravel, cement, concrete and asphalt. On August 23, the company increased the quarterly dividend from $0.44 to $0.48. Analysts expect EPS growth of 29.9% and 20.2% in 2018 and 2019. The corresponding P/Es are 21.3 and 17.7. Management is bullish on the construction recovery in the U.S. accelerating in the second half of 2018 and continuing next year. MLM is an undervalued aggressive growth stock. There’s 15% upside as the stock eventually rebounds to its June peak at 230. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. PWR is an undervalued mid-cap growth stock. Wall Street expects full year EPS to grow 40.1% and 16.1% in 2018 and 2019. The corresponding P/Es are 12.6 and 10.9. There’s 15% upside as the stock heads back to its January high of 40. Buy PWR now. Strong Buy.
Southwest Airlines (LUV – yield 1.0%) 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. Wall Street expects full year EPS to grow aggressively at 18.9% and 21.4% in 2018 and 2019. The corresponding P/Es are 14.7 and 12.1. LUV is pausing in its recent run-up at 61. There’s upside resistance at 66, where it last traded in January. Warren Buffett has shown enough interest in purchasing an airline that I’m standing pat until he makes a final decision. Strong 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, migraine and ADHD. Supernus will present at the 2018 Wells Fargo Healthcare Conference on September 5. Investors may access the presentation via the company’s website.
SUPN is an undervalued, small-cap aggressive growth stock with a high degree of institutional ownership. Analysts now expect EPS to increase 57.1% and 26.8% in 2018 and 2019. The corresponding P/Es are 22.4 and 17.6. The stock fell in early August, and seems to have begun its rebound. SUPN could retrace its June high of 60 this year, giving new investors a potential 35% profit. Buy SUPN now. Strong Buy.
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. Wall Street expects Voya’s full year EPS to grow 123% and 24.3% in 2018 and 2019. The corresponding P/Es are 11.7 and 9.4. The stock appears capable of breaking past 51 quite soon, and traveling to upside resistance at 55. 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.
Featured Stock: Total S.A. (TOT – yield 4.8%)
Total is a French multinational oil and gas company – one of the industry’s seven “supermajors”—operating in over 130 countries. Total acquired Maersk Oil in March 2018, becoming the second largest operator in the North Sea. The merger also strengthens Total’s positions in Algeria and the Gulf of Mexico, and is immediately accretive to cash flow and earnings. Despite the cost of the merger, Total maintains a low long-term debt-to-capitalization ratio of 22%. The company aims to reduce that ratio below 20%, and to thereafter increase the pace of share repurchases.
Total’s breakeven per barrel dropped below $50 per barrel in the second quarter, while the recent price of Brent crude hovered at $78.
TOT previously held a spot in the Buy Low Opportunities Portfolio from November 2016 through January 2018, delivering a 29% total return. I recommended the sale of TOT when the 2018 earnings estimate of $4.34 reflected a fairly valued stock. Since that time, the 2018 earnings estimate has increased to $5.24. Analysts now expect EPS to grow 27.2% and 14.1% in 2018 and 2019. The corresponding P/Es are low in comparison at 12.0 and 10.5. In addition, the dividend yield is quite large at 4.8%.
Now that TOT once again offers attractive earnings growth, valuation and dividend yield, I’m happy to recommend the stock to all equity investors. TOT has been ratcheting upward since March, and touched upon a new all-time high of 65 in July. The stock could continue to trade anywhere between 59 and 65 in the coming weeks, and I expect TOT to trade higher as the months pass. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BB&T Corp. (BBT – yield 3.1%) is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serves businesses and individuals. The market expects BB&T to make a significant acquisition in the coming year. CEO Kelly King will speak at the Barclays Global Financial Services Conference on September 13. Investors may subsequently access a webcast of the presentation via BB&T’s investor relations page. Analysts expect full year EPS to grow 41.9% and 9.6% in 2018 and 2019. Corresponding P/Es are 13.0 and 11.9. BBT is ratcheting upward from recent lows. I’ll decide how to proceed when BBT approaches upside resistance near 56. Hold.
Blackstone Group LP (BX – yield 6.0%*) is the world’s largest and most diversified alternative asset manager with $439 billion in client assets. The company deploys capital into private equity, lower-rated credit instruments, hedge funds and real estate. For the first time in four years, Blackstone Group will host an Investor Day on September 21, which will include a series of presentations by Blackstone’s senior management team to discuss the firm’s businesses and outlook. One would suspect that the company will have something interesting to announce, more likely good than bad. Investors may access the live event via the company’s website.
The 2018 earnings estimate continues to inch upward, while the 2019 estimate remains relatively unchanged since April. Analysts expect Blackstone’s economic net income (ENI) to grow 9.3% and 5.2% in 2018 and 2019. The corresponding P/Es are 12.0 and 11.4. I love the bullish price chart, the big dividend yield, and the potential that BX will change from an LP to a C-corp. Lacking a corporate change to a C-corp, however, the stock appears fairly valued. (Keep in mind that analysts are bound to change their earnings estimates after the September 21 Investor Day, so take the current numbers with a grain of salt.) We could see some more upside to the share price, prior to the Investor Day. Hold.
*The payout varies each quarter, with the total of the last four announced payouts yielding 6.0%.
Comerica (CMA – yield 2.4%) is a financial services company engaged in domestic and international business banking & lending, wealth management and consumer services. Comerica will present at the Barclays Global Financial Services Conference on September 13. Investors may subsequently access a webcast of the presentation via Comerica’s investor relations page. Comerica is one of the most asset-sensitive banks in the U.S., with a very high percentage of variable rate loans, thus benefiting from rising interest rates. Despite prospects of a September Fed rate hike, which benefits Comerica’s net interest margin (NIM), institutional investors will be focused on Comerica’s loan growth during the second half of 2018. Loan growth might disappoint the market, and I’ll therefore be ready to make a final decision on the stock prior to the third quarter earnings release. Analysts expect EPS to increase by 48.7% and 11.7% in 2018 and 2019. The corresponding P/Es are 13.8 and 12.3.
CMA is a slightly undervalued growth & income stock. I have a target P/E of about 13 on most bank stocks. By the time CMA breaks past its 2018 high near 102, and is well into its next run-up, it will surpass my P/E target. At that time, I’ll retire CMA from the Growth & Income Portfolio in favor of a more undervalued stock. There’s still room for short-term price appreciation. Buy.
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 and lower steel supply. Commercial Metals specifically benefits from recently-increased tariffs on Turkish steel products. CMC is an undervalued aggressive growth stock. Wall Street analysts expect EPS to grow 108% and 59.5% in 2018 and 2019 (August year-end). The 2019 P/E is 9.2. There’s 13% upside as CMC returns to its recent high of 24.50, and additional appreciation potential thereafter. Buy CMC now. Strong Buy.
DowDuPont (DWDP – yield 2.2%) intends to break up into three companies by June 2019, comprised of its three divisions -- Agriculture, Materials Science and Specialty Products. Management is planning the spin-offs because they fully expect the value of the three stocks to be higher than the value of the current stock.
DowDuPont is expected to see strong EPS growth rates of 24.7% and 16.7% in 2018 and 2019. The corresponding P/Es are 16.7 and 14.3. The stock is heading toward its January high of 76. I expect additional capital appreciation in 2019 as the spin-offs take place. Buy DWDP now. Strong Buy.
GameStop (GME – yield 11.5%) is actively reviewing strategic alternatives and could possibly announce a major corporate change by the second quarter earnings release due on the afternoon of September 6. Analysts are expecting $0.08 EPS and $1.6 billion in quarterly revenue, and I daresay that investors are expecting further management guidance on either a corporate buyout or a new CEO. The stock rose to 17 last week, then rapidly fell near 13. There was no particular news that caused the rise or fall. Hold.
Guess?, Inc. (GES – yield 3.7%) 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 44.3% and 29.7% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 24.3 and 18.7.
When the stock shot upward after last week’s great earnings report, I wrote “Typically when a stock retraces its previous/recent high, especially on a big burst of energy like we saw today, the stock pulls back and rests for a short while before rising again,” and I suggested that investors might get a brief chance to buy below 24. Little did I know that GES would trade back down near 24 that same day! Continue to buy near 24. Buy.
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. IPG has been rising for several weeks, and could retrace its 2018 high near 25 later this year. I will likely retire the stock from the Growth & Income Portfolio thereafter, due to slowing 2019 earnings growth. Hold.
Schlumberger (SLB – yield 3.2%) is the world’s largest oilfield service company. The number of U.S. rigs drilling for crude oil and natural gas rose by 4 last week to a total of 1,048, up 105 vs. a year ago. SLB is an aggressive growth stock, undervalued based on 2019 numbers. Analysts expect EPS to grow 22.7% and 48.9% in 2018 and 2019. The corresponding P/Es are 34.3 and 23.1. There’s 17% upside to the stock’s May high at 74, where SLB will still be undervalued. Strong Buy.
WestRock Company (WRK – yield 3.1%) is a global packaging and container company. Analysts expect full year EPS to increase 55.3% and 12.8% in 2018 and 2019. The corresponding P/Es are 13.5 and 12.0. Despite the strong corporate outlook, the share price has been low, and does not yet appear ready to rise. 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.
Featured Stock: Synchrony Financial (SYF – yield 2.6%)
Synchrony Financial is a consumer finance company with 74.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. The company has been investing in mobile capabilities and expanding its online savings account into a full-service bank.
Synchrony’s partners include Gap, J.C. Penney, Lowe’s, Amazon.com and Sam’s Club. In addition, PayPal and Synchrony have been partners since 2004. Synchrony offers PayPal-branded credit cards, and recently paid $6.9 billion to acquire PayPal’s consumer credit receivables.
Rising unemployment and increasing credit card delinquencies would be potential catalysts for a sell decision on the stock. Delinquencies improved in the June quarter to 4.1% vs. 4.4% a year ago, so there are no current red flags in that area.
Earnings per share (EPS) are expected to increase from $2.62 in 2017 to $3.46 in 2018 and $4.50 in 2019, reflecting EPS growth rates of 32.1% and 30.1% in 2018 and 2019 (December year end). The corresponding price/earnings ratios (P/Es) are extremely low at 9.2 and 7.0.
It’s noteworthy that these earnings estimates are higher than they were earlier in 2018, prior to the revelation that Wal-Mart’s credit card partnership with Synchrony will expire on July 31, 2019. The Wal-Mart news led to a large drop in the share price, while Synchrony’s profits apparently are not expected to suffer. As a result, investors are presented with a buy low opportunity that will likely work out well sooner rather than later.
The company announced an increase in the quarterly dividend in July, from $0.15 to $0.21 per share. The current yield is 2.6%. That dividend increase was actually pre-announced in May, when Synchrony also approved a $2.2 billion share repurchase authorization through June 2019.
SYF is a large-cap stock with a market capitalization of $23.5 billion, and significant institutional ownership.
I’m recommending SYF primarily to catch the rebound in the share price to the January 2018 all-time high near 40. However, Synchrony’s earnings growth, P/E and dividend yield are so attractive that I might keep the stock longer, as long as the economy continues to thrive. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Alexion will present at Citigroup’s 13th Annual Biotech Conference on September 6. Investors may access the webcast via Citi’s Investor Relations page. The FDA has accepted Alexion’s application for priority approval review for ALXN1210, for the treatment of Paroxysmal Nocturnal Hemoglobinuria (PNH). ALXN is an undervalued aggressive growth stock. Analysts expect EPS to grow 23.4% and 19.1%. The corresponding P/Es are 16.9 and 14.2. The stock is rising, with 20% upside to 147 where ALXN last traded in September 2017. Buy ALXN now. Strong Buy.
Baker Hughes, a GE co. (BHGE – yield 2.2%) offers products, services and digital solutions to the international oil and gas community. Baker Hughes’ management expects good international revenue growth in the second half of 2018. The number of U.S. rigs drilling for crude oil and natural gas rose by 4 last week to a total of 1,048, up 105 vs. a year ago.
BHGE is an aggressive growth stock, undervalued based on 2019 numbers. Analysts expect EPS to grow 69.8% and 107% in 2018 and 2019. The corresponding P/Es are 45.2 and 21.8. BHGE is trading between 31 and 37, and will probably trade higher next year, barring a downturn in the broader market. Strong Buy.
Delek U.S. Holdings (DK – yield 1.8%) is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. Delek has a large Permian exposure. The 2018 consensus earnings estimate of $5.44 has risen to its highest point year-to-date. Analysts now expect Delek’s EPS to grow 386% and 51.3% in 2018 and 2019. The corresponding P/Es are extremely low at 10.0 and 6.6. There’s 10% upside as DK continues to rise toward its June high at 60, and additional appreciation potential thereafter. Buy DK now. Strong Buy.
Royal Caribbean Cruises Ltd. (RCL – yield 2.0%) is a cruise vacation company that delivers travelers to desirable and exotic destinations on all seven continents. The company operates a total of 50 ships that are wholly-owned, or jointly-owned with companies in Germany, Spain and China. The 2018 EPS estimate is $8.92, the highest it’s been all year. Analysts are forecasting an average of 18.5% and 13.0% EPS growth in 2018 and 2019 (December year end). The corresponding P/Es are 13.7 and 12.2.
The company announced a dividend increase of 20-28% in each of the last four years during the month of September. The current yield will therefore likely increase to at least 2.3% this month! There’s 8% upside as RCL continues rising toward its January 2018 all-time high of 133, where it will still be undervalued. With less than 10% upside to my short-term price target, I’m moving RCL from Strong Buy to Buy.
On August 29, Deutsche Bank raised their recommendation on RCL to Buy, with a 146 price target. This is a wonderful stock for a long-term portfolio of industry-leading companies. I will likely retire RCL from the Buy Low Opportunities Portfolio when it approaches 133, in favor of another ripe trading opportunity. Buy.
Skechers USA Inc. (SKX) is an apparel company that designs and manufactures affordable footwear for people of all ages. Skechers is the third largest footwear brand globally, behind Nike and Adidas. International revenue is growing dramatically, including huge growth in China. Skechers remains an incredibly successful and rapidly growing company, with huge ongoing growth opportunities in international markets. Analysts expect EPS to fall (1.7%) in 2018 and then rise 15.4% in 2019. The stock could rise another 11% to recent price resistance at 33 before having a pullback. Buy SKX now. Strong Buy.
TiVo (TIVO – yield 5.3%) creates products and licensable technology that enable the world’s leading media and entertainment providers to nurture more meaningful relationships with their audiences. TIVO is an undervalued growth stock with a very attractive dividend yield. TiVo joined the Buy Low Opportunities Portfolio specifically because it’s a takeover target. Management is in strategic discussions with entities that are considering buying TiVo’s product and/or IP licensing divisions. Investors should expect a final, lucrative M&A announcement any time between now and year end. Buy TIVO now. Strong Buy.
Universal Electronics (UEIC) is a manufacturer and cutting-edge world leader of wireless and voice remote control products, software and audio-video accessories for the smart home; with a strong pipeline of new products in the areas of safety and security, climate control and lighting. The company will attend three industry conferences in September: Piper Jaffray’s Tech Select Conference on September 5, Dougherty & Company’s Institutional Investor Conference on September 6, and Deutsche Bank’s 2018 Technology Conference on September 12. As analysts update their research reports after the conferences, that could generate additional investor interest in Universal Electronics. UEIC is an undervalued micro-cap stock. UEIC appears capable of rising again promptly. The next run-up could take the stock to 50 or 55. Be prepared for volatility. Strong Buy.
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Send questions or comments to crista@cabotwealth.com.
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YOUR NEXT CABOT UNDERVALUED STOCKS ADVISOR ISSUE IS SCHEDULED FOR October 2, 2018
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