Stocks have started the year trying to recover ground lost in the last three months of 2018, driven by generally good news. Decent sales over Christmas and a strong January jobs report gave assurance the consumer remains healthy. Initial earnings reports from banks show that we have not seen any deterioration in credit conditions. Finally, Fed Chairman Jerome Powell has shown increased flexibility with monetary policy, as is he seeming more willing to cut the interest rate increases or stop selling off the Fed’s balance sheet, reversing years of quantitative easing, if necessary.

For now though, the S&P 500 is still facing resistance near 2,600 to 2,615, about 11% off of its all-time high. To get past this resistance, we are going to have to see favorable earnings and a good outlook beyond financials in the current earnings seasons. Given weakening Producer Manufacturing Indexes (PMIs) and trade data globally, this may not be easy, and I am expecting to see more volatility.

However, I am quite bullish about the stocks on the Recommended List over the course of the year. There is already a lot of bad news priced into our financial names, which may or may not develop. Certainly, early results from financial stocks are encouraging, and as long as the economic backdrop is favorable, our five companies in this sector could do quite well, especially as we are in a seasonally strong time for stocks. Our other major sector holding now is retail, with all three of our companies selling at 10X or less 2019 earnings per share (EPS) estimates.

So, the value is there for us right now, it is just a matter of the overall economy holding up and the Fed being prudent with further tightening. I will be on constant watch and adjust when necessary, but we are off to a good start in 2019, and I feel our stocks continue to recover from what was a very tough environment for value in 2018.

JPMorgan Chase-Balanced Powerhouse

Our newest Value Authority pick, JPMorgan Chase (JPM) is more Main Street than Wall Street. The company has over 5,100 branches nationwide, serving millions of customers in the United States. Its consumer unit, which provides standard banking services, contributes approximately 52% of profits, while its commercial lending business contributes another 14%. The remaining 34% does come from Wall St., through the company’s investment banking and asset management operations. JPM has been led by the iconic Jamie Dimon since 2006. Mr. Dimon managed to avoid the worst of the financial crisis, keeping the bank profitable by avoiding the large losses in leveraged mortgage-backed securities. The strong culture of risk management remains alive today, with the bank maintaining a strong capital structure, which Mr. Dimon refers to as the “fortress balance sheet.” The company concluded 2018 with Tier One Capital at 12% of total assets, well above the 6% regulatory standard to be considered well capitalized.

The stock fell early today after the company had a disappointing quarter, but then proceeded to rally as investors realized the issues in the quarter were transient. EPS of $1.98 of versus $1.76 in the prior year were $0.23 short of expectations. The shortfall was due to several factors: weakness in investment banking results due to the poor market conditions, a higher-than-expected expense increase as the company invested heavily in technology, a higher-than-expected loan loss provision as the company tries to be conservative in estimating for future losses and a donation to the J.P. Morgan Foundation which cost the company $0.05 a share. However, the underlying business was strong, with loan growth up 6% and loan losses down slightly. On the conference call, Mr. Dimon said the company continues to gain share in several businesses. Also, while he is confident about the economy for now, he will not hesitate to cut back on lending should economic conditions warrant, saying no manager should feel pressure to grow the loan book.

I view the quarter as a bit of an anomaly, and it does not match my view of the company for 2019. Should the economy stay firm, EPS of $9.80 for 2019, up from $9.00 in 2018, is possible. Should the economy slip a little bit, the defensive characteristics of the bank will still keep results on a stable path. At just 10X 2019 estimates, JPM is a strong value here and a great buy for those who want to be involved in the financial sector in a conservative way. Buy JPM under $100, my target is $110.

Company Review

Big Lots (BIG) has bounced nicely off its recent lows, similar to other retailers. The company will report fourth-quarter earnings next month, and I do not feel there will be a lot of difference from pre-announced results, with flat EPS guidance for the next fiscal year likely on continued investment in the company’s strongly performing stores of the future. However, I believe the stock can do well this year if it can keep EPS flat at around $3.60 because the investments and other issues pressuring earnings will subside in 2020, setting the company up for a good rebound in earnings with a newer base of improved stores. Buy BIG under $32, my target is $42.

Children’s Place (PLCE) has been a disappointing performer, as the stock has not bounced to the same extent other retailers have in the market rally. I still view PLCE as a high-quality company that deserves a premium to other retailers, and even if current estimates of $9.20 in the January 2020 fiscal year are a little too high, the stock can still do well this year. Superior merchandizing, high return on assets and share buybacks will add value for shareholders over the long-term. Buy PLCE, my new buy under price is $110, and my new target is $120.

Chubb Limited (CB) — Chubb will report earnings on Feb. 6, with expectations for EPS of $2.09 vs. $2.28, with catastrophic losses from continued California wildfires hurting results. There could also be some volatility around estimates related to year-end reserve adjustments. However, I think the market may be more concerned with some softening of pricing the company hinted at in the third quarter, although for now revenues are expected to increase 5% to $6.82 billion. Chubb has preserved value nicely since my recommendation during a period of market weakness, and I still feel that the shares can provide stability with potential upside should catastrophic losses decline if markets remain uneven. Buy Chubb under $130, my $145 target is 1.2X 2019 projected year-end book value of $120.

Cognizant Technologies (CTSH) will also report earnings on Feb. 6 before the market opens. Expectations are for EPS of $1.07 vs. $1.03 on a 7.5% rise in revenues to $4.1 billion. EPS gains will lag the revenue increase due to a higher tax rate brought about by non-tax-deductible foreign exchange losses. However, I believe the stock will soon regain the momentum it was building following its positive Investor Day in November. Digital offerings by this IT outsourcer will drive double-digit-percentage growth, and margins will stay stable over the next few years. This growth combined with a valuation of just 14.6X this year’s EPS and a business model that will allow earnings to be stable in most financial conditions makes the shares very attractive at this time. Buy CTSH, my new buy under is $72.50 and my new target is $85.

EMCOR Group (EME) will not report earnings until late February, so I will have an earnings preview in next month’s edition. Despite a strong third-quarter earnings beat, the stock has been under pressure since my Sept. 11 recommendation, on concerns over a weakening economy. While the company’s success will be tied into levels of non-residential construction, I think the company’s operating momentum is strong, with revenues up 8.5% last quarter, and I think we will continue to see positive earnings comparisons for at least the next few quarters. There is value in the shares, trading at less than 13X 2019 EPS estimates, and while I will consider the macro situation carefully, I continue to recommend the stock below $72, my target is $82.

First Hawaiian Bank (FHB) will report fourth-quarter results after the market closes on Jan. 24. Expectations are for EPS of $0.52 vs. $0.42, on a 1% gain in revenues to $191.58 million, with a lower tax rate generating a lot of the EPS gains. I expect items of interest on the conference call to include whether some softness in Asian economies is impacting Hawaiian tourism, and if the company continues to look for an acceleration of loan growth this year. At less than 12X 2019 EPS estimates and with a dividend yield close to 4%, I expect FHB to have a good year provided the Hawaiian economy remains sound. Buy FHB under $26, my target is $30.

J.M. Smucker (SJM) — The company’s fiscal third quarter ends in February, so we will not be seeing an earnings report until March. The stock has come back strongly following its December low, and I still feel that the company’s second-quarter results were not nearly as bad as the market judged them to be, as the lower guidance was largely related to non-operating items. SJM has been a disappointment recently, and I will move on if the company continues to show it is incapable of generating profitable unit growth. For now though, the stock remains cheap, as my $120 target is only a little over 14X May 2020 EPS estimates. Furthermore, If concerns about the economy resume, the stock will be considered a safe haven, which should give it added support. SJM is a buy below $108.

Morgan Stanley (MS) will report earnings on Thursday before the market opens, with expectations of EPS of $0.92 vs. $0.84 on flat revenues of $9.43 billion. A lower tax rate will be the primary driver of EPS growth. The company’s businesses will be impacted by the weak market environment of the fourth quarter, although volatility could be a positive wild card in the company’s institutional business. MS has come back nicely off its the lows but remains reasonably valued at 1.04X book value, which should grow 6% this year. Morgan Stanley remains a buy, my new buy under price is $46 and my new target is $53.

Party City (PRTY) has risen off of depressed levels, and at an investor conference yesterday, CEO James Harrison and CFO Daniel Sullivan expressed optimism about the company’s prospects for 2019. It really will not take much for PRTY stock to continue to do well from these prices: as long as the company can keep earnings stable, which I think it can do, and is able to pare down its debt levels, the company should see nice multiple expansion. Buy PRTY under $10.50, my target is $16.

Valley National Bancorp (VLY) will report earnings on Jan. 31 before the market opens, with expectations for EPS of $0.22 vs. $0.17, with revenues up 27% to $253 million, reflecting the USAmeriBancorp acquisition. VLY reported spotty results in 2018, with the company hurt at times by higher expenses and pressure on interest margins. However, I think we will see improvement this year as the company starts realizing cost synergies from the merger. Results will also be aided in 2019 by loan growth and continued strong credit metrics. The 4.5% dividend yield adds to the stock’s attraction. VLY is a buy below $10.50, my target is $13.