Portfolio Review: September 18, 2017

9/18/2017


A new stock and an upgrade

Chemours ($49; CC), a specialty-chemical producer initiated as a Long-Term Buy last week, joins the Buy List. The stock has displayed encouraging relative strength in recent trading, and its addition brings some sector diversity to the Buy List. Analyst estimates are on the rise, with the consensus expecting per-share profits to double in the second half of 2017 on 14% revenue growth.  At 14 times estimated 2017 profits, the stock offers a 24% discount to the median S&P 1500 materials stock.


Vantiv ($73; VNTV) joins our Long-Term Buy List on account of its strong operating momentum, rising analyst estimates, and encouraging share-price action. Spun off from Fifth Third Bancorp ($26; FITB) in 2012, Vantiv offers integrated payment-processer services that let merchants accept credit- and debit-card transactions in stores, online, and also via mobile devices.

Earning a Quadrix Value rank of 46, the stock isn't particularly cheap. But it does trade at a reasonable 17 times free cash flow, a 37% discount to the median technology stock in the S&P 1500 Index. Vantiv has consistently delivered double-digit revenue growth, and both operating cash flow and free cash flow rose more than 30% in the 12 months ended June.

CBS downgrade signals cautious stance on media

CBS ($60; CBS) is being removed from the Buy List but retains its status as a Long-Term Buy. When we dropped the stock from the Focus List last week, we had expected it to battle near-term headwinds yet still outperform over the next 12 months. But we now question that stance, partly due to the stock's eroding profit estimates and discouraging share-price action. Although we continue to like the company's emphasis on creating its own shows — and expect that strategy to pay off over the next several years — we see few near-term catalysts to boost the stock.

TV-related stocks remain under pressure, as the mature industry tries to cope with shifting viewership habits and a broad slowdown in advertising. Disney ($99; DIS) warned Sept. 7 that per-share profits for fiscal 2017 ending September would fall short of the consensus estimate. The same day, Comcast ($38; CMCSa) said it could lose 100,000 to 150,000 video subscribers in the September quarter due to increased competition and Hurricane Harvey. But management still expects to meet its own internal targets, noting that its other businesses continue to grow. Although Comcast shares slumped on the announcement, analyst profit estimates are holding up. Comcast remains a Focus List Buy and a Long-Term Buy. Disney is rated B (average).

Implications from hurricanes Harvey and Irma

Cruise operators

Hurricane Irma ripped through the Caribbean just as the region was gearing up for tourist season. Carnival ($68; CCL) and Royal Caribbean Cruises ($122; RCL) canceled several cruises and rerouted others. Shares of both stocks are down 2% since August but have begun to bounce back. Cancellations left Royal Caribbean with four unused ships and supplies that it sent to help rescue stranded tourists. Royal Caribbean expects to resume a normal schedule by Sept. 16. Carnival is a Focus List Buy and a Long-Term Buy. Royal Caribbean is a Buy and a Long-Term Buy.

Construction-materials suppliers

Owens Corning's ($75; OC) stock has generated a total return of 10% and Mohawk Industries ($256; MHK) 3% in the past month as investors anticipate higher sales from hurricanes Harvey and Irma. Owens makes home insulation and roofing products, while Mohawk has a 25% share of the U.S. flooring market. Both Mohawk and Owens are rated Focus List Buy and Long-Term Buy.

Home-improvement retailers

Lowe's ($78; LOW) and Home Depot ($160; HD) built up inventories of power generators, flashlights, and building materials in Florida stores ahead of Hurricane Irma. Both retailers continue to supply materials crucial to recovery in Houston, which Lowe's says could run through next year. Harvey damaged three Lowe's stores. Lowe's is a Buy and a Long-Term Buy. Home Depot is rated A (above average).

Airlines

Hurricane Harvey forced Southwest Airlines ($55; LUV) to cancel about 2,800 flights, while other U.S. airlines canceled thousands more flights due to Hurricane Irma. Southwest reported 5.3% higher traffic on 4.9% capacity growth for August. However, Southwest lowered its outlook for unit revenue in the September quarter due to the recent hurricanes and softer prices for air fares. The airline also raised its September-quarter guidance for fuel costs and trimmed its outlook for capacity growth to 3.5% to 4.0%.

Alaska Air Group ($76; ALK) said traffic climbed 5.8% in August, outpacing capacity growth of 5.5%. Southwest Airlines and Alaska Air Group are Buys and Long-Term Buys.

Banks peel back curtain on September quarter

Comerica ($69; CMA) shares rallied after the bank provided an update on its September quarter. Although the bank's average loans are trending lower this quarter, loan yields are up, helped by the Federal Reserve's rate hike in June. Additionally, deposits have picked up since the middle of July. Comerica has limited exposure to Houston, representing 8% of loans and 6% of deposits. Comerica is a Long-Term Buy.


J.P. Morgan Chase ($91; JPM) expects trading revenue to slump about 20% in the September quarter. Citing lower volatility, Citigroup ($69; C) anticipates 15% lower trading revenue for the quarter. J.P. Morgan shares rose on the news and remain a Buy and a Long-Term Buy. Citigroup is rated A (above average).

Health care: Drug trials and an insurance deal

Amgen ($190; AMGN) shares have rallied to a record high in the days since the drugmaker revealed encouraging results for a midstage trial. An injectable biotech drug for severe asthma, under development by Amgen and AstraZeneca ($33; AZN), reduced the annual rate of serious asthma attacks by 61% to 71%. The stock is up 28% for the year, ahead of the 20% gain for the S&P 500 health-care sector. Amgen is a Buy and a Long-Term Buy.  AstraZeneca is rated C (below average).


The Food and Drug Administration has halted several blood-cancer trials after safety concerns arose from a study testing the effectiveness of combining drugs made by Celgene ($141; CELG) and Merck ($65; MRK). Celgene is a Focus List Buy and a Long-Term Buy. Merck is rated C (below average).


Centene ($98; CNC) agreed to acquire Fidelis Care in a $3.75 billion deal that expands the insurer's presence in New York state. Reporting sales of $4.8 billion in the first half of 2017, Fidelis covers 1.6 million members in government programs that include Medicaid and Medicare Advantage. Centene is a Focus List Buy and a Long-Term Buy.

Apple hopes X marks spot for growth revival

Media leaks from fevered anticipation of Apple's ($160; AAPL) 10th anniversary iPhone left few surprises for the device's launch event. Apple took the wrapper off its iPhone X, priced at $999 and set to ship on Nov. 3. It also introduced its iPhone 8 (starting at $699) and iPhone 8 Plus ($799), which ship on Sept. 22. Both devices features wireless charging, and the iPhone X offers facial recognition software. The company also unveiled a new Apple TV device. A new Apple Watch no longer requires an iPhone to connect to the internet. Apple shares, up 40% for the year, dipped on the news, as the iPhone X shipping delay could cause analysts to lower their December-quarter estimates. Apple is a Buy and a Long-Term Buy.


Rank Changes

Chemours ($49; CC), already a Long-Term Buy, is joining the Buy List. Vantiv ($73; VNTV) is being initiated as a Long-Term Buy. CBS ($60; CBS) is being dropped from the Buy List but remains a Long-Term Buy.


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