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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Year in Review

January 7th 2019

Bristol-Myers Squibb

NYSE Symbol: BMY

Industry: drug/biotech

Price as of 1/4/19: $46.89

 

The fourth quarter was not kind to Wall Street as the major averages finished into the red for the first time in a decade. At the end of the third quarter the S&P 500 was up 10% for the year at all time highs with US corporations reporting record earnings and sales. Fast forward to the end of the year and the markets dropped 20% into bear market territory with the S&P 500 closing down 6% for the year. It was the worst December since 1931, down 9.6% for the month. It was also the first time in 100 years that December, typically the best month of the year, ended up being the worst month of the year. With all this negativity behind us, 2019 could be an easier year for the markets and the averages to overperform at least over the first four months of the year.

It's hard to say what stocks or sectors look best entering 2019 since everything ended the year on a bad note. The price of oil dropped 30% in the fourth quarter, so energy stocks will have to focus on keeping costs low if prices remain at these levels. Industrials will struggle if global growth continues to slow and the trade tariffs persist. The flat or inverted yield curve is not beneficial to the financials. Tech stocks have pulled back providing better valuations, but the chip sector is in a cyclical downturn, the social media stocks are facing data privacy concerns and Apple, after preannouncing, is seeing slow growth out of China.  

With all these concerns a diversified portfolio may work best focusing on the best stocks in each sector. The stocks I prefer are the cash rich stocks that can not only weather a downturn, but can turn it into a positive.

We'll start with Apple. Apple's (AAPL) stock rose 30% by the end of the third quarter only to fall into negative territory by year end. Growth may be slowing, but the valuation is compelling with the stock trading for 12 times earnings and less than 3 times sales. The company continues to be a cash cow generating over $60 billion in free cash flow a year. The company has been buying back $15 to $20 billion worth of stock per quarter or 8% of their outstanding shares.  Apple announced a $100 billion share buyback earlier in the year. At the end of the third quarter, Apple still had $71 billion to use for buybacks. The valuation should hopefully get better for Apple. The same can be said for many chip stocks including Micron (MU). Right now, investors are avoiding the chip sector, but longer term the fundamentals remains strong. Micron currently has more cash than debt and trades for 5 times earnings less than 2 times sales and trades a buck above their book value. Micron announced a $10 billion share buyback earlier in the year. At the end of the third quarter, Micron still had $8.2 billion left on the company's current buyback program which could buy back 22% of the outstanding shares. If the fundamentals turn again, Micron could perform well.

Even with the flat yield curve, the big banks can hopefully continue to grow. Bank of America (BAC), Citigroup (C ), Morgan Stanley (MS) and JP Morgan (JPM) trade for 10 times earnings, one times book value with dividend yields of 2.4% or better. Due to tight regulations over the past 10 years, the big banks have more cash on hand than they ultimately needed. The Trump administration has loosened regulations allowing the big banks to raise dividends and buyback stock. Most of the big banks can currently buy back 10% of their outstanding shares. The buybacks alone could boost earnings and shares in 2019.

Another financial, Berkshire Hathaway (BRKB) has seen insider buying. The vice chairman, Ajit Jain bought $19.9 million of stock at current levels. Berkshire has $100 billion in cash or 20% of their market cap. Warren Buffett has a long track record of taking advantage of bear markets, buying stocks at attractive valuations and making more money when the bull market resumes.

A small cap oil company, Geopark (GPRK) was having a great 2018 with earnings, sales and the stock price up 100% through the first nine months of the year. A 30% drop in the price of oil brought Geopark and the rest of the oil stocks back to earth. Geopark recently announced a 10% share buyback to take advantage of the pullback. Geopark currently trades for 10 times earnings, a little over 1 times sales, runs their operations from cash flow and has the potential to double or triple sales in the coming three to four years, with the cooperation of oil prices.

Bristol Myers (BMY) offering to buy Celgene (CELG) for $74 billion started the M&A business off to a good note in 2019. Celgene is getting $50 a share in cash and one share of Bristol's stock which means the stock is trading at a 13% discount. With the deal, Bristol becomes a top five Big Pharma stalwart and management expects the merger to immediately be accreditive to earnings in the first year. Bristol's stock is trading for 11 times earnings with a 3.2% dividend.

2019 may be another volatile year, but with a plethora of blue-chip companies trading for much lower valuations with strong balance sheets, any further correction will hopefully be limited, and share buybacks could help produce better than expected earnings in the coming quarters.