I hope you had an enjoyable and relaxing summer. Wall Street is back to work this week, and Apple (AAPL) is launching a new product or two next week, so get ready for stocks to start moving again.
Cabot Undervalued Stocks Advisor 919
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A New Format for Cabot Undervalued Stocks Advisor
Cabot Undervalued Stocks Advisor is taking on a new format. I enjoyed writing about the pertinent news on affected companies in recent weeks, without updating minor news and numbers for the rest of the portfolio companies. I’m going to continue that format in the future for weeks two-through-four of each month, while continuing to write about all of the portfolio stocks for the first week of each month.
Wall Street is back to work this week. You’ll notice that management at many of your portfolio companies are giving presentations at analyst meetings this week. I encourage you to visit their websites in the coming days and listen to the webcasts of the meetings. You’ll gain lots of specific and sometimes interesting knowledge on business trends, tariffs, plans for their use of excess cash, etc.
Monthly Consumer Confidence Index results were reported last week:
• The Consumer Confidence Index came in at 135.1, much higher than the expected 129.5.
• The Present Situation Index is now at its highest level in nearly 19 years at 177.2 vs. 179.7 in November 2000.
• The Expectations Index fell to 107.0 after clocking in at 112.4 in July.
All in all, the economy is still doing well.
I’ve been warning investors all year, through articles, radio and television, that food and energy price increases are likely to lead to rising inflation. I predict that rising inflation will be blamed on the U.S. President. (Anybody wanna take that bet?) It’s fair to say, though, that unless the President controls weather, livestock diseases and the International Maritime Organization (IMO), these predicted price increases will have nothing to do with American politics.
IMO 2020 is coming in January. That’s the moniker for new rules requiring ships and tankers to use low-sulfur diesel fuel or to install scrubbers to remove sulfur from diesel fuel. Both processes cost more than the previous industry standard of high-sulfur diesel fuel. You can read more about how IMO 2020 is affecting freight costs in Shipping’s Great Fuel Switch is Starting to Drive Up Freight Costs. Higher freight costs will be paid by companies that import and export their products, and those costs will be passed on to consumers. Thus, rising inflation.
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 Abercrombie & Fitch (ANF), Alexion Pharmaceuticals (ALXN), Designer Brands (DBI) and Guess? (GES).
Today’s Portfolio Changes
Abercrombie & Fitch (ANF) moves from Buy to Hold.
DaVita Inc. (DVA) joins the Growth Portfolio as a Strong Buy.
Marathon Petroleum (MPC) moves from Hold to Buy.
Earnings Season Scorecard
Alexion Pharmaceuticals (ALXN) moved from Strong Buy to Hold.
Designer Brands (DBI) moved from Hold to Strong Buy.
Supernus Pharmaceuticals (SUPN) moved from Hold to Sell.
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: DaVita (DVA)
DaVita Inc. is the largest provider of kidney care services and home dialysis in the U.S., treating patients with chronic kidney failure and end stage renal disease. Chronic Kidney Disease afflicts 37 million American adults. DaVita serves 204,900 patients at 2,723 outpatient dialysis centers, and also operates or provides administrative services to 243 outpatient dialysis centers in nine additional countries. DaVita will host its Capital Markets Day in New York City next Tuesday, September 10. DaVita is a Fortune 500 company.
Optum, a subsidiary of UnitedHealth Group (UNH), acquired DaVita Medical Group in June 2019 at a price of $4.3 billion. Davita Medical Group had been an underperforming asset since its acquisition in 2012. Davita plans to use the proceeds toward debt reduction and share repurchases.
Earnings per share (EPS) are expected to rise from $3.57 in 2018 to $4.67 and $5.33 in 2019 and 2020, reflecting earnings growth of 30.8% and 14.1%, respectively. The 2019 price/earnings ratio is 12.1.
DVA is an undervalued, mid-cap growth stock. One famed shareholder is Berkshire Hathaway (BRK/A), who increased their stake in DVA from 23.2% to 27.8% between November 2018 and August 2019.
DVA has traded largely between 50-60 all year, other than the exaggerated drop during the market correction in May from which it rapidly recovered. DVA spent much of the prior five years trading between 62-80, and I expect it to resume trading there in the near future. Buy DVA now. A breakout above 60 would be bullish. 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. Link to Adobe videos here.
ADBE is a large-cap growth stock; a great stock for risk-tolerant growth investors and buy-and-hold equity portfolios. The company just completed their third fiscal quarter, results for which will be reported on the afternoon of September 17. Full-year consensus estimates point toward EPS increasing aggressively by 42.0% in 2019 and 24.8% in 2020 (November year end), with revenue growing 29% and 18%, respectively. The current P/E is 36. (Incidentally, those estimates haven’t changed since late June. That’s highly unusual for a large-cap stock with lots of analyst coverage.)
After taking a new position in ADBE in the first quarter of 2019, Soros Fund Management cashed in all their ADBE shares during the second quarter. The stock rose from approximately 215 in early January to 302 in late June. Good trade.
This is a fantastic stock for growth investors who don’t mind a high P/E, and for long-term buy-and-hold portfolios. ADBE rose to new all-time highs in July, then pulled back with the broader market in August, bouncing repeatedly near solid price support at 280. Buy ADBE now. Buy.
CF Industries (CF – yield 2.5%) is one of the world’s largest producers of nitrogen products, serving customers on six continents. The company operates nine 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 at $2.28 MMbtu on August 30.
CF is an undervalued, mid-cap aggressive growth stock. Consensus earnings estimates have been rising for six weeks. Earnings per share are now expected to increase 87% and 25% in 2019 and 2020. The 2019 P/E is 20.8. The stock has traded between 47-52 in a stable manner for seven weeks. Buy CF now. Strong Buy.
CIT Group (CIT – yield 3.3%) 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 Bank, N.A. plans to acquire Mutual of Omaha Bank for $1 billion, bringing the deposit base up to $42.1 billion. Subsequent to the Mutual of Omaha announcement, six investment firms raised or lowered their price targets on CF to a range of 48-57.
CIT is an undervalued stock with an attractive dividend yield. Analysts expect EPS to grow 22.3% and 6.9% in 2019 and 2020, respectively. The P/E is 8.6. CIT appears likely to trade between 41-46 this month. Hold.
Marathon Petroleum (MPC – yield 4.4%) 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. Marathon has prepared their refining system for upcoming IMO 2020 regulations, and is confident in their ability to produce large amounts of ultra-low-sulfur diesel fuel to meet upcoming demand.
With regard to hurricane Dorian, Marathon has 16 refineries, two of which are on the Louisiana and Texas Gulf Coast. Refinery stocks tend to rise in the days surrounding Gulf Coast hurricanes, especially if gasoline prices rise.
MPC is a vastly undervalued stock. Earnings per share are expected to fall in 2019, then rise tremendously in 2020, not just at Marathon, but at almost all U.S. refineries. The 2020 P/E is shockingly low at 6.6. During the second quarter, Daniel Loeb’s hedge fund, Third Point LLC, bought an additional 500,000 shares of MPC; and Elliott Management bought 4.6 million shares of MPC. I’m moving MPC from Hold to a Buy recommendation as the stock is recovering from the August market downturn. There’s short-term price resistance at 57. 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. On August 22, Viking Enterprise Solutions, a product division of Sanmina, announced that it won the Best of Show Innovation Award at the 2019 Flash Memory Summit for the Most Innovative Flash Memory Enterprise Business Application. Sanmina will present at the Citi 2019 Global Technology Conference tomorrow, September 4. Consensus estimates point toward earnings growth of 52.5% and 5.6% in 2019 and 2020. SANM is a small-cap growth stock, recently trading between 29-33. The share price weakened a bit in late August, and began to promptly recover. Be cautious. 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 successful 2019 entry into the Hawaiian market has led to plans for January 2020 service expansion in both Hawaiian inter-island service and California-to-Hawaii service. Last week, Air Transport World reported, “U.S. carriers should see continued top line revenue growth in 2020, driven by higher capacity from the re-entry of the Boeing 737 MAX, analysts at Cowen and Co. project.” Southwest will present at the Cowen and Company 12th Annual Global Transportation Conference on September 4.
Wall Street expects no EPS growth in 2019, followed by 21.4% EPS growth in 2020. The 2020 P/E is 10.1. LUV has traded between 47-55 for six months, staying within that range during the May and August stock market corrections. The stock traded at a 14.8 P/E one year ago. If it does so again next year, the share price would be 76, giving new investors a potential 50% capital gain. Buy LUV now. Buy.
Voya Financial (VOYA – yield 1.2%) is a U.S. retirement, investment and insurance company serving 13.8 million individuals and institutional customers. Voya has $560 billion in total assets under management and administration. Analysts expect EPS to grow 36% and 13.1% in 2019 and 2020. The 2019 P/E is low at 9.0. The company recently raised the dividend payout, formerly yielding 0.1% and now yielding 1.2%, which should trigger a sustained period of buying as VOYA now qualifies for inclusion in institutional growth & income portfolios.
VOYA declined to price support at 48 in August, where it had also traded in February and March. The stock is already recovering in a slow but very orderly fashion. There’s 15% upside as VOYA returns to its July all-time high at 57. The stock traded at a 12.4 P/E in May 2018. If it does so again next year, the share price would be 77, giving new investors a potential 55% capital gain. 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: Commercial Metals Company (CMC – yield 3.1%)
Commercial Metals Company is the largest rebar producer in the U.S. with a broad basket of merchant and wire rod offerings. Operations are located from coast-to-coast in the U.S. and in Poland. Commercial Metals is an industry innovator with highly flexible, low-cost mills. In recent years, the company has strengthened its balance sheet, built a micro-mill in Oklahoma, exited non-core businesses, introduced spooled rebar to the North American market, and acquired the North American rebar assets of Gerdau S.A. Ongoing goals include expansion of product offerings and deleveraging in the wake of the Gerdau acquisition. In the last four years, the company’s total debt (short-term plus long-term) ratio vs. EBITDA has shrunk from 3.7:1 to 2.3:1.
The Gerdau acquisition expands production and increases exposure to high-demand construction regions such as California, Florida, and New York. Annual run-rate synergies (i.e. cost savings) from the acquisition have risen from the initially-expected $40 million to the current $70 million. Cost savings are growing as management works through a checklist that includes minimizing redundant activities and optimizing supply chain function. Third-quarter adjusted earnings from continuing operations were $80.4 million, so you can see that $70 million in annual savings amounts to a significant increase in profitability.
Demand remains positive driven by continued strength in non-residential construction activity. The company completed its fiscal year last week. Wall Street expects final full-year 2019 EPS to increase 36.2%, and revenue to rise 28% to $5.9 billion. The market expects EPS to grow 7.9% in fiscal 2020; a number which will be more focused after the company reports fourth-quarter results in late October. The 2020 P/E is 7.2.
CMC is a small-cap stock with a market capitalization of $1.8 billion. I expect CMC to trade between 15-17 in the coming weeks as the stock recovers from the August market correction. Buy.
Updates on Growth & Income Portfolio Stocks
Blackstone Group Inc. (BX – yield 4.2%*) 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. The Center for Research in Security Prices (CRSP) is due to announce changes to its index on September 8, at which time BX might be added to the index, subsequent to their recent conversion from a limited partnership to a corporation. Index inclusion invariably increases demand for shares among institutional investors. BX is beginning yet another price breakout. Buy BX now. Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $2.07 and yielding 4.2%.
Citigroup (C – yield 3.2%) is a global financial company that serves consumers, businesses, governments and institutions in 98 countries. Strength in consumer lending, and lower expenses, tax rate and share count contributed to second quarter successes. Citigroup CFO Mark Mason will present at the Barclays Global Financial Services Conference on September 9.
Citigroup is an undervalued, large-cap growth & income stock. Wall Street expects Citigroup’s EPS to grow 14.6% and 11.3% in 2019 and 2020. The P/E is currently 8.4. The stock participated in the August market pullback and has begun its recovery. There’s upside resistance at 77, where C last traded in January 2018, potentially offering new investors an approximate 20% capital gain in the next 6-18 months. Buy C now. Strong Buy.
Corteva Inc. (CTVA – yield 1.8%), a.k.a. Corteva Agriscience, provides farmers with seeds and crop protection products, enabling them to maximize yield and profitability. Corteva’s cumulative cost synergies from the recent multi-year cycle of the DowDuPont merger and Corteva spin-off amounted to $450 million in 2018, and are projected to total $1 billion through 2020. The company is now focused on productivity efforts and will implement a new ERP system in 2020 (enterprise resource planning) to optimize business processes. Management projects merger-related cost savings, combined with gains from productivity improvements, to add $1.9 billion to EBITDA between 2018 and 2024.
In mid August, management gave full-year 2019 EPS guidance of $1.06-$1.31 – a very wide range. Consensus earnings estimates increased in each of the last four weeks. Analysts now expect EPS of $1.16 and $1.58 in 2019 and 2020, reflecting 36% growth next year. The 2020 P/E is 18.6. Corteva has a debt ratio of under 1%, with long-term debt totaling just $117 million.
CTVA is a mid-cap growth & income stock. The stock has been ratcheting upward since going public, most recently trading between 28-32. Strong Buy.
Dow Inc. (DOW – yield 6.6%) is the materials science division of the former DowDuPont (DWDP). In August, Dow agreed to divest its Acetone Derivatives business in a private transaction, in keeping with their goal of achieving a higher return on invested capital. DOW is an undervalued growth & income stock. The company is expected to achieve EPS of $3.45 and $4.38 in 2019 and 2020. The projected 2020 EPS growth rate is 27% and the corresponding P/E is 9.7. Investors should wait for the bearish price chart to stabilize before buying additional shares. Hold.
Guess?, Inc. (GES – yield 2.5%) is a global apparel manufacturer, selling their products through wholesale, retail, ecommerce and licensing agreements. The company intends to discuss strategic business planning with investors at the end of October.
Earnings estimates rose subsequent to last week’s strong second-quarter results, yet the consensus EPS estimate for 2020 is still at the bottom of Guess management’s guidance range. Wall Street now expects EPS to grow of 30.6% and 17.2% in fiscal 2020 and 2021 (January year end). The 2020 P/E is 14.1. GES offers the best earnings growth outlook of all established U.S.-based apparel retailers. The stock’s up 29% in the last week, and could trade anywhere between 16-20.5 in the short term. Buy GES on pullbacks. Buy.
Royal Caribbean Cruises (RCL – yield 2.7%) 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. Industry trouble is mostly isolated to weak bookings at Carnival Corp., weakness in Alaskan travel and dissipating impact from Cuba travel restrictions.
RCL is an undervalued, large-cap growth & income stock. Wall Street expects EPS to grow 9.1% and 11.4% in 2019 and 2020. The 2019 P/E is 10.7. Watch for an annual dividend increase that will likely be announced in early September. I’ll return RCL to a Buy recommendation when the share price stabilizes. Hold.
Schlumberger NV (SLB – yield 6.3%) is the world’s largest oilfield service company. The international rig count has been climbing, while the North American rig count has been falling. Industry participants are tentatively expecting the North American rig count to begin expanding in the new year as E&P companies’ new capital expenditure budget plans are implemented. Wall Street expects EPS to fall 6.8% in 2019, and then to increase 30.5% in 2020. The 2020 P/E is 16.2. Dividend investors can buy SLB now, while growth investors should wait for the share price to turn upward. Buy.
Total S.A. (TOT – yield 6.0%) is a French multinational integrated energy company operating in over 130 countries. Total is a 15% owner of a major oil discovery in Guyana that was announced in mid-August. The well is expected to hold over 100 million barrels of oil. Last week, the company inaugurated its thousandth solarized service station, powered by solar panels. Total’s goal is to solarize 5,000 stations in 57 countries. Total management commented, “Consistent with Total’s ambition to become the responsible energy major, the program will reduce our retail network’s carbon emissions by more than 50,000 tons per year.”
TOT is an undervalued, large-cap growth & income stock with a large dividend yield. Very low natural gas prices are impacting profits at the oil majors. While the company’s second-quarter EPS were on target with analysts’ estimates, full-year 2019 EPS have been revised downward. The market now expects Total’s EPS to fall 9.7% in 2019, then to rise 19.5% in 2020. The current P/E is 10.9. The company maintains a consistently low debt ratio. CEO Patrick Pouyanne expects to achieve higher refining margins in relation to new low-sulfur fuel rules imposed by the International Maritime Organization (a.k.a. IMO 2020). A Jefferies energy analyst expects Total to generate $4 billion of free cash flow next year, after funding capex and dividend costs.
The stock recently bottomed and is now rising. I’m leaving the Hold recommendation in place, because I anticipate the stock treading water for a while before heading to the mid/upper-50s. However, TOT is an excellent investment right now for stock investors who are looking for big, dependable dividend yields. 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: Designer Brands (DBI - yield 6.1%)
Designer Brands Inc. is one of North America’s largest designers, producers and retailers of footwear and accessories. The company operates DSW Warehouse, The Shoe Company and Shoe Warehouse stores with nearly 1,000 locations in 44 U.S. states and Canada. Designer Brands acquired Camuto Group in 2018, a renowned product design and brand development company, in order to expand their very-profitable private label offerings. Camuto has already increased production from 23 million pairs of shoes to 41 million pairs.
The acquisition of The Shoe Company in Canada is going extremely well, with second quarter comparable store sales (comps) up 8.1% vs. a year ago, on top of 7.1% rising comps in the prior year. Late in the first quarter, the Canadian business relaunched their digital site and operations, leveraging DSW’s expertise and technology infrastructure. As a result, digital demand increased by 84% vs. last year. CEO Roger Rawlins commented, “In Canada, we are learning how to operate a small-door concept.” The company can then draw upon experience with 3,000-6,000 square foot locations and duplicate the process in the U.S., which has historically operated locations with upwards of 20,000 square feet.
Designer Brands has expanded into kids’ footwear, and is now testing high-end nail services, a full complement of shoe repair services and custom-made orthotics in a few shoe stores. The company added these businesses in order to minimize reasons for customers to leave their stores. Their kids business delivered a 32% comp in the second quarter, and digital business grew 22%.
The China tariff situation helped Designer Brands focus on being flexible with production. CEO Roger Rawlins commented, “We feel we have many avenues to help Designer Brands mitigate the impacts of tariffs,” including negotiations with manufacturing partners and vendors; large production increases which result in scale savings; and factory locations in 11 countries (expanding to 14 countries). In October 2018, 10% of Designer Brands’ products were manufactured outside of China. That number is now up to 20%, and management expects it to climb to over 40% in next 12-18 months. Keep in mind that no tariffs are being applied to their Canadian business.
DBI is an undervalued, small-cap growth stock with a huge dividend yield. Expected EPS growth rates are 13.9% and 14.3% in 2019 and 2020. The current P/E is low at 8.7. The stock rose 10% at the end of last week after the quarter’s results were reported, and it rose 16.4% for the full week. The short-term upside is 19.5. Buy DBI now for expectations of strong performance over the next year. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Abercrombie & Fitch (ANF – yield 5.5%) is a specialty retailer of Abercrombie & Fitch, abercrombie kids and Hollister brand apparel and accessories for men, women and kids. The company operates over 850 stores globally. The company remains on track toward its multi-year goals of improving revenue, profits, expense-control, data analytics, online sales and global store expansion; an ongoing process since CEO Fran Horowitz came on board in February 2017. Her latest initiatives were new two hires: executives who will form teams to better apply Abercrombie’s successful U.S. operational expertise globally in their London and Shanghai offices. Management will present at the Goldman Sachs 26th Annual Global Retailing Conference on September 4.
Recent Wall Street projections show EPS falling 27% in 2019, then rising 69% in 2020. The 2020 P/E is 10.3. ANF is an undervalued small/micro-cap stock. Abercrombie offers the best combination of earnings growth and dividend yield of all U.S.-based apparel retailers. Most U.S. apparel retailers are expecting a drop in 2019 net income, and only a handful are expecting double-digit profit gains in 2020. In that regard, Abercrombie stands out near the very top of the industry, right behind Guess? (GES).
Since the stock dipped below price support at $15 last week, I’m moving ANF from Buy to a Hold recommendation until the price chart stabilizes. Hold.
Alaska Air Group (ALK – yield 2.3%) is a low-cost passenger airline. Alaska Airlines and its regional partners fly 46 million guests per 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. Beginning in January 2020, Alaska Air will launch eight new routes serving destinations in the Pacific Northwest and California. Alaska Air will present at the Cowen & Co. 12th Annual Global Transportation Conference on September 4.
ALK is a mid-cap stock, expected to achieve aggressive earnings growth rates of 31% and 19% in 2019 and 2020. The 2019 P/E is low at 10.2. The stock weakened a bit last week, coming down to solid price support at 57-58. 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. Alexion will present at the 14th Annual Citi Biotech Conference on September 4.
Last week, Alexion announced that the European Commission has approved the extension of the current marketing authorization of SOLIRIS® to include the treatment of neuromyelitis optica spectrum disorder (NMOSD) in adult patients. Nearly all patients treated with SOLIRIS were relapse free in the Phase 3 study. NMOSD is a neurological disease that can lead to blindness, paralysis and death.
The European Commission will announce a decision on September 5 regarding whether Soliris can be subject to biosimilar competition in Europe. Potential drug competition is expected to take at least three years to materialize.
Last week, the U.S. Patent Trial and Appeal Board (USPTAB) granted Amgen’s request for an inter partes review of Alexion’s Soliris IP protection, which was previously extended from 2021 through 2027. The decision implements a year-long process during which USPTAB will decide whether to revoke the current Soliris patent extension. This decision does not affect Alexion’s near-term revenue and profit forecast, but could potentially open Soliris up to biosimilar competition in the U.S. in 2022. Alexion additionally has Soliris patents in Japan through 2027.
ALXN is an undervalued growth stock. Wall Street expects Alexion to grow EPS 25% and 10.8% in 2019 and 2020. The 2019 P/E is 10.2, which is very low for a biopharmaceutical stock. The price chart is bearish – this is not the time to buy low. When the share price stabilizes, I will consider a Buy recommendation. Hold.
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. App Store revenue grew 19% year-over-year in the June quarter, assisted by strength in China. Apple will host an event on September 10 at 10:00 a.m. PT at which the company is widely expected to introduce new iPhone and Apple Watch models. Additional potential September and October product news is outlined in this MacRumors article. 5G iPhones are expected to launch in September 2020.
Wall Street expects a profit drop of 2.2% in 2019 (September year end) followed by an increase of 9.8% in 2020. Apple is a unique, innovative, thriving company. The stock appears capable of promptly rising past price resistance at 212 and heading back to the October 2018 all-time high of 230, a 10% increase from today’s 209. Strong Buy.
Baker Hughes, a GE Co. (BHGE – yield 3.3%) offers products, services and digital solutions to the international oil and gas community. On August 20, Baker Hughes was awarded a contract to deliver Liquefied Natural Gas (LNG) liquefaction train system, power island system and field support services to Venture Global LNG for their Calcasieu Pass Project. The number of U.S. rigs drilling for crude oil and natural gas fell by 12 last week to a total of 904, down 144 vs. a year ago. Baker Hughes’ CEO Lorenzo Simonelli will present at the Barclays CEO Energy-Power Conference on September 3. The Canadian rig count rose by 11 last week to 150, while the international rig count grew by 24 in July to 1,162.
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 22.4. The stock pulled back in August to support levels that were established in December 2018 and May 2019. Strong Buy.
The Mosaic Company (MOS – yield 1.1%) is the world’s largest producer of finished phosphate and potash, supplying crop nutrients and animal feed ingredients via production facilities in the U.S., Canada, South America and the Asia-Pacific region. Their mission is to help the world grow the food it needs. The CFO will present at the Credit Suisse 2019 Basic Materials Conference on September 10.
Full-year profits are expected to fall in 2019 and then surge dramatically in 2020. Mosaic commented that profits are heavily skewed toward 2020 because “unprecedented wet weather in the Midwest United States has negatively impacted its North American spring fertilizer sales volumes and phosphates margins. These same factors have driven grain prices higher and provide significant opportunities in fall 2019 and beyond.” Various ongoing projects are serving to lower ongoing production costs, minimize one-time costs, and position Mosaic competitively in 2020.
The stock fell during the August market correction. MOS remains on Hold until the price chart turns bullish. Hold.
Synchrony Financial (SYF – yield 2.7%) is a consumer finance company with 75.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. SYF is an undervalued, mid-cap growth & income stock. Wall Street expects EPS to grow 12.6% and 10.5% in 2019 and 2020. The 2019 P/E is 7.6. SYF traded down to solid price support at 31 with the August market correction. You can accumulate SYF here, but it’s a little soon to know whether the stock will head back toward 35 this month. 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. Company management will meet with investors at the 2019 Dougherty & Co. Institutional Investor Conference on September 5.
Analysts expect EPS to increase 37% this year, and the P/E is 13.8. UEIC is an undervalued micro-cap growth stock with very little analyst coverage, appropriate for risk-tolerant investors and traders. The stock is in a bullish trading pattern, with price resistance at 47 and 55. Traders should plan on exiting near 55. Buy UEIC now. Expect volatility. Strong Buy.
Updates on Special Situation Stocks
Carlyle Group LP (CG – yield 6.4%) manages $223 billion, divided among real assets, corporate private equity, investment solutions and global credit. Carlyle Group will convert from a limited partnership to a corporation on January 1, 2020. Wall Street expects earnings per share of $1.66 and $2.49 in 2019 and 2020. CG is a great stock for both dividend investors and growth & income investors. The stock is recovering from the August market pullback. CG could trade anywhere between 21-24.5 in the coming weeks. Strong Buy.
*The payout varies each quarter with the total of the last four announced payouts equaling $1.47 and yielding 6.4%.
**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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YOUR NEXT CABOT UNDERVALUED STOCKS ADVISOR ISSUE IS SCHEDULED FOR October 1, 2019
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