Major investment firms are issuing reports about the coming bank deregulation under new agency heads in Washington D.C., who are expected to implement changes suggested by the U.S. Department of the Treasury. The investment firms are emphasizing to clients that the regulatory changes will boost 2018 earnings per share (EPS) at large cap banks. The reports I’ve reviewed are unanimous: Citigroup (C) is positioned to have up to a 20% boost in current 2018 EPS estimates, which is a bigger increase than any of its competition is likely to experience.
One major investment firm calculated the expected 2018 EPS surge for 18 large-cap banks. Bank of America (BAC) and Goldman Sachs (GS) ranked fourth and fifth on the list, with 2018 earnings estimates increasing by approximately 15% and 14%. The majority of the banks on the list are expected to see 2018 earnings estimates rise 3% to 9% over current figures.
I’m not going to add Citigroup (C) to the Cabot Undervalued Stocks Advisor Portfolios, because the company’s 2017 numbers don’t make the cut, but also because we’ve already got the two other aforementioned large cap banks in the portfolios. I’m also going to remain flexible on my Goldman Sachs (GS) price target, keeping one eye on changes in consensus earnings estimates and another eye on the price chart. If the stock looks attractive after it reaches 250, I will be willing to hold it for additional gains.
In the meantime, investors need to be aware that two major potential political and economic changes are not yet factored into earnings estimates: tax cuts and an unexpected surge in inflation. Higher inflation will lead directly to higher interest rates, which boosts net interest income at banks. A cut in corporate tax rates will also boost banks’ net income.
I’ve been urging investors to own stocks in the financial sector for a year or more. Nobody has missed their chance to get well-positioned for the capital gains that are coming in association with all these profitable policy changes emanating from the nation’s Capitol.
Twenty-four of our portfolio companies reported June quarter results. Among those 24 companies, fifteen reported EPS that exceeded analysts’ consensus estimates; eight of which exceeded all analysts’ estimates. Two companies reported EPS that came in on target, and seven fell short of consensus estimates. Several additional portfolio companies will report July quarter results next week.
Last week I wrote about a topic that’s being bantered about in Congress right now, in relation to the Affordable Care Act (ACA). Read my August 11 article Health Insurance Stocks Look Good Despite Bailout Talk.
Send questions and comments to crista@cabotwealth.com.
Portfolio Notes
Make sure to review the Special Bulletin from August 11 in which I mentioned news, rating changes and/or price action on Ameriprise Financial (AMP), Blackstone Group (BX), Dollar Tree (DLTR), Goldman Sachs Group (GS), Schnitzer Steel (SCHN), Vertex Pharmaceuticals (VRTX) and XL Group (XL).
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Apple (AAPL)
Dollar Tree (DLTR)
Goldman Sachs (GS)
PulteGroup (PHM)
*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:
American International Group (AIG) moves from Hold to Sell.
Vertex Pharmaceuticals (VRTX) moves from the Buy Low Opportunities Portfolio to the Growth Portfolio.
Last Week’s Portfolio Changes:
Blackstone Group (BX) moved from Hold to Strong Buy
Dollar Tree (DLTR) moved from Buy to Hold, and then back to Buy
Goldman Sachs (GS) moved from Hold to Buy
Martin Marietta Materials (MLM) moved from Strong Buy to Buy.
Universal Electronics (UEIC) moved from Hold to Buy.
Vertex Pharmaceuticals (VRTX) moved from Hold to Buy
Vulcan Materials (VMC) moved from Strong Buy to Buy.
XL Group (XL) moved from Buy to Strong Buy
Updates on Growth Portfolio Stocks
American International Group (AIG – yield 2.0%) saw its 2017 EPS estimates rise again last week, while 2018 EPS estimates fell again, to the point where 2018 EPS are now only expected to grow 1.9%. The drop in the 2018 estimates was largely caused by the new CEO’s decision to back away from the aggressive share repurchase plans of the previous CEO. The 2018 numbers are no longer interesting enough to portend capital appreciation. My recommendation today is to Sell AIG. Sell.
Apple (AAPL – yield 1.6%) manufactures the iPhone, iPad and Mac. Consensus estimates project 8.5% and 19.7% EPS growth in 2017 and 2018 (September year-end). The 2018 P/E is low in comparison at 14.6. AAPL broke out of a trading range upon news of strong third quarter results, then pulled back a little last week. No one has missed their opportunity to buy AAPL and participate in the next run-up. Strong Buy.
Bank of America (BAC – yield 2.0%) is an undervalued large-cap growth stock. Changes in bank regulations, lower tax rates and a surge in interest rates—which all benefit banks’ net income—have not yet been factored into earnings estimates. Investors should therefore expect rising earnings estimates throughout the banking industry over the next several years. (See the introduction to today’s weekly update, above, which discusses the potential effect of deregulation on BAC’s EPS.) The stock rose to a new trading range in late June. I expect BAC to surpass short-term upside price resistance at 25.50 in the near future. Strong Buy.
Cavium (CAVM) is an undervalued, aggressive growth stock in the semiconductor industry. The share price has been suffering recently, and does not yet appear ready to rebound. CAVM presents a large capital gain opportunity for investors who are willing to hold the stock without staring at the daily price fluctuations. There’s currently 25% upside as CAVM travels back to 74, where it traded in May. Barring a bearish stock market, CAVM could exceed 74 later this year. Buy.
KLX Inc. (KLXI) is a manufacturer of aerospace fasteners, consumables and logistics. This is an undervalued, aggressive growth mid-cap stock. KLX will release second quarter results on the morning of August 23 (January year-end). Analysts are expecting $0.73 EPS, within a range of $0.70 to $0.75 per share. By the way, the three biggest aerospace companies—Lockheed Martin (LMT), Northrop Grumman (NOC) and Raytheon (RTN)—are all experiencing slow 2017 EPS growth and have super-high P/Es, even based on next year’s low-double-digit earnings growth. In contrast, KLXI is expected to grow EPS by 193% and 27.6% this year and next year, with corresponding P/Es of 16.4 and 12.9. KLXI is the obvious choice in aerospace stocks for value investors and growth investors.
Investor’s Business Daily published a bullish review of the company and the price chart on August 9. KLXI will begin reaching new highs when the price rises above 53, which could happen very soon. Take advantage of last week’s pullback and buy KLXI now. Strong Buy.
Martin Marietta Materials (MLM – yield 0.8%) is an aggressive growth stock; overvalued based on 2017 numbers, but undervalued based on 2018 numbers. Last week’s stock market weakness pulled MLM down to the bottom of its 2017 trading range, and the stock is not yet ready to rebound. Buy.
PulteGroup (PHM – yield 1.4%) is a very undervalued aggressive growth stock. PHM broke out of a long-term trading range in July, then pulled back a little last week. Buy PHM now. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Quanta was featured in the August issue of Cabot Undervalued Stocks Advisor. PWR is an undervalued aggressive growth stock. Consensus earnings estimates for the company have been rising almost weekly since late May, and the share price has followed suit. I expect PWR to rest again when it retraces its February high at 38.5. Once the stock breaks past 38.5, there’s no upside resistance that could put a ceiling on the share price, although 44 seems like a reasonable fair value. Strong Buy.
Vertex Pharmaceuticals (VRTX) is an undervalued, aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). Don’t miss this August 8 Forbes article about Vertex! The personal story in the first two paragraphs is impactful.
I added VRTX to the Buy Low Opportunities Portfolio in July 2016 when the share price was 86, with a goal for the stock to retrace its 2015 high at 140. The stock reached that goal this summer. The outlooks for both the company and the share price have significantly changed due to successes with pipeline treatments for CF. I moved VRTX from Hold to Buy last week, and I’m now also moving the stock to the Growth Portfolio. VRTX is fully valued based on 2017 EPS, but distinctly undervalued based on 2018 earnings projections. VRTX pulled back after a rapid run-up in July. Buy now in preparation for the next run-up. Buy.
Vulcan Materials (VMC – yield 0.9%) is a supplier of construction aggregates, asphalt and concrete. Famed hedge fund Third Point LLC purchased 1.6 million shares of VMC in the second quarter. VMC is overvalued based on current numbers, but undervalued based on next year’s numbers. Last week’s stock market weakness pulled VMC down to the bottom of its 2017 trading range, and the stock is not yet ready to rebound. Buy.
XL Group Ltd. (XL – yield 2.0%) is an insurer and reinsurer. XL is a very undervalued aggressive growth stock. The share price has barely moved this month. That tends to be a bullish sign that a stock is preparing for its next run-up. Buy XL now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
Ameriprise Financial (AMP – yield 2.3%) offers insurance products and asset management to retail and institutional clients. AMP rose rapidly since joining the Growth & Income Portfolio on July 13, and is now having a pullback. There might be a buying opportunity for traders in the near future. There’s no upside price resistance; however, the stock will be fairly valued at 160. Hold.
BP plc (BP – yield 6.8%) – Consensus earnings estimates rose in each of the last three weeks, indicating very aggressive earnings growth. The stock is significantly undervalued. Investors should expect significant price resistance at 44, where BP traded in 2014. Buy BP now. Strong Buy.
Blackstone Group LP (BX – variable large payouts) — BX has dipped down to price support at 32. This stock could appeal to traders who will later sell when BX reaches long-term price resistance at 37. BX could also appeal to dividend investors and long-term growth investors who will not mind if the stock gets stuck in an extended period of sideways trading after it reaches 37. This is an excellent stock for a buy-and-hold portfolio. Strong Buy.
Commercial Metals Company (CMC -- yield 2.6%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. CMC has traded between 18 and 21 since late May. In the coming months, I expect CMC to retrace its December 2016 high around 24. Buy CMC now. Strong Buy.
ExxonMobil (XOM – yield 3.9%) is the largest U.S. integrated oil company. The company is experiencing aggressive earnings growth and the stock remains undervalued. The share price has been weak recently and does not appear ready to rise. When XOM finally begins a run-up, there’s about 17% upside as the stock rises to its highs from July and December 2016 at 91. Strong Buy.
GameStop (GME – yield 7.0%) is a retailer of games, collectibles and technology; with additional ventures in the entertainment field. The company will release second quarter results (January year-end) on the afternoon of August 24. Analysts are expecting $0.15 EPS, within a range of $0.11 to $0.20 per share. The company is transitioning through a multi-year process of diversifying its product areas away from a dependence upon physical game revenue. GME is slowly ratcheting toward price resistance at 24.50. Hold.
Invesco Ltd. (IVZ -- yield 3.4%) is an asset management company. Barron’s published a review of Invesco on August 10. IVZ is approaching a fair valuation. IVZ could reach 36.50 in the short term. Hold.
Johnson Controls (JCI – yield 2.6%) –This growth & income stock is quite undervalued. After its recent drop, JCI bounced at price support that was established in 2016. Buy JCI now to catch the rebound to 44. I anticipate additional gains in the coming months. Strong Buy.
Weyerhaeuser Co. (WY -- yield 3.8%) is one of the largest U.S. manufacturers of wood and cellulose fiber products. Weyerhaeuser Co. was featured in the August issue of Cabot Undervalued Stocks Advisor. WY has been trading between 32 and 35 since February. I expect the stock to rise above its trading range in the coming months. 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. The United States Patent and Trademark Office issued a Soliris-related patent to Alexion on August 8. The company received a Notice of Allowance on one additional patent that is awaiting patent issuance. These patents could potentially extend Alexion’s exclusive use of Soliris, which treats PNH, until 2027.
Alexion was featured in the August issue of Cabot Undervalued Stocks Advisor, and also featured in this Zacks article on August 11. In addition, famed hedge fund Third Point LLC purchased 1.3 million shares of ALXN in the second quarter. Full-year consensus earnings estimates rose for the last four weeks in a row. They currently point toward aggressive EPS growth of 21.2% and 24.5% in 2017 and 2018 (December year-end). The corresponding P/Es are 23.7 and 19.1.
ALXN appears capable of embarking on a new run-up very soon. Buy ALXN today. My intention is to hold the stock until it reaches upside price resistance at 160 or 190, depending on momentum among pharmaceutical stocks. Buy.
Andeavor (ANDV – yield 2.5%) is the new name for Tesoro (TSO) as of August 1. Last week, Andeavor reported second quarter non-GAAP of $1.87. The consensus estimate ranged from $1.58 to $1.63, depending on which estimate source was used (Zacks, Bloomberg, etc.). Quarterly revenue of $7.85 billion missed the consensus estimate of $8.09 billion.
As happened a few months ago with TiVo’s (TIVO) quarterly reporting, Andeavor’s press release did not state non-GAAP EPS numbers due to pressure from the U.S. Securities and Exchange Commission. As a result, all of the following EPS numbers were reported by the press: $1.96, $1.87, $1.75 and $0.31. I confirmed with Andeavor that the $1.87 number as calculated and reported by Morgan Stanley is correct, and reflects the effective tax rate. The Zacks number was close-to-accurate at $1.96, using the statutory tax rate of 35%. The incorrect number of $1.75 was reported by Charles Schwab—perhaps simply including or omitting a line item in variance from the aforementioned sources. Motley Fool and many news sources reported the GAAP number of $0.31, not bothering to assess non-GAAP numbers. And finally, MySanAntonio.com creatively compared GAAP EPS of $0.31 to the non-GAAP analysts’ estimate of $1.59, thereby announcing that Andeavor had a poor quarter. Sigh.
The company increased the quarterly dividend payout by 7.3% to $0.59 per share. Andeavor repurchased $148 million of stock in the remainder of the second quarter after the June 1 close of the Western Refining purchase, and another $252 million of stock in the third quarter through August 8. There’s $1.7 billion remaining in the repurchase authorization.
Analysts raised 2018 EPS estimates quite a bit; now expecting 15.4% and 40.2% EPS growth in 2017 and 2018. The stock is fairly valued based on 2017 numbers, but extremely undervalued based on 2018 numbers. ANDV fell to short-term price support at 94 in August. There’s about 19% upside to my price target of 112. Buy.
Boise Cascade (BCC) is a wood products and building materials company. On August 9, Moody’s Investors Service announced that it raised Boise’s corporate family debt rating from Ba3 to Ba2, and raised its senior unsecured bond rating from B1 to Ba3, citing “our view that leverage will further decline over the next 12 to 18 months, despite a slower than expected improvement in the US housing market.” (A Ba3 rating is two notches below investment grade.) Buy this undervalued aggressive growth stock now. BCC could reach the upper 30s later this year. Strong Buy.
Chipotle Mexican Grill (CMG) is an undervalued aggressive growth stock. The stock fell recently, and is not yet ready to rebound. When CMG rises again, there will be some price resistance at 395. Hold.
Dollar Tree (DLTR) offers investors better earnings growth than just about any large-scale food store or discount retail chain. Nevertheless, it’s an overvalued industry, and Dollar Tree’s shares are slightly overvalued based on next year’s numbers. DLTR fell just enough last week to offer traders a good short-term capital gain opportunity. I anticipate DLTR rising to 83, where it traded in May. I will likely sell at that point. Buy.
Goldman Sachs Group (GS – yield 1.3%) is a fairly-valued large-cap investment back. Changes in bank regulations, lower tax rates and a surge in interest rates—which all benefit banks’ net income—have not yet been factored into earnings estimates. Investors should therefore expect rising earnings estimates throughout the banking industry over the next several years. (See the introduction to today’s weekly update, above, which discusses the potential effect of deregulation on Goldman’s EPS.) Last week, GS dipped down into the low 220’s again, creating a short-term capital gain opportunity. I anticipate selling GS near price resistance at 250, although I will change my mind if earnings estimates increase. Buy.
Legg Mason Inc. (LM – yield 3.0%) is an asset management & financial services company. The company reported $753.3 billion assets under management as of July 31, which was an $8.3 billion increase over July AUM. LM has a wide trading range that we’ve been very successfully trading this year. Traders should buy now. I plan to sell as the stock approaches long-term upside price resistance at 44, at which point it will still be quite undervalued. Longer-term investors should feel comfortable holding the stock for additional capital gains in 2018. Strong Buy.
Mattel (MAT – yield 3.4%) has fallen to its lows from 2015. Profits are expected to fall in 2017, then rise about 27.5% in 2018. I’m going to hold the stock for the rebound that will likely take place under the new CEO. MAT remains undervalued, but it’s not out of the woods yet. Hold.
Schnitzer Steel Industries (SCHN – yield 3.0%) is one of the largest U.S. scrap metal recycling companies. SCHN is a small-cap stock, in a volatile market sector, with relatively little analyst coverage. SCHN rose rapidly in June, and has recently been trading sideways. Short-term investors who buy below 26 will have over 10% upside to my price target at 29, where I plan to sell. (I’m not going to change the rating back and forth while the stock is so close to 26.) Hold.
Total (TOT – approx. 4.4%) is an integrated oil & gas company based in France, and a greatly undervalued growth & income stock. TOT could reach a maximum of 54 in the short-term, and will then likely have another pullback before climbing to three-year price resistance in the low 60s. Buy TOT now. Strong Buy.
Universal Electronics (UEIC) provides solutions that serve the smart home environment. The stock is overvalued based on current numbers, but quite undervalued based on 2018 numbers. UEIC is a microcap growth stock with barely any debt. The stock is down 20% since the earnings report. It’s not ready to rebound yet, but that situation could change in the coming weeks. Buy.
