All the major U.S. stock market indexes are experiencing orderly pullbacks right now. (This is good news because the farther the market climbs without resting, the bigger the pullback when it finally arrives.) I continue to review stocks that have good fundamentals, with an eye toward adding a few of them to the Cabot Undervalued Stocks Advisor portfolios. Most of them are trading sideways with the overall market, and not yet showing an inclination to turn upward. Therefore, I don’t expect much excitement in U.S. stock markets in mid-March.
Our portfolio stocks are mostly quiet right now, with many of them having pullbacks after recent run-ups. The biggest pullback is happening with Schnitzer Steel (SCHN). There hasn’t been any bad news, but since it’s a small-cap stock, it’s more volatile than other portfolio stocks.
Economically, we’re likely to see the Federal Reserve increase interest rates in March and continue to raise rates through 2017 and 2018. I’ve previously mentioned that I see these rate increases as “no big deal.” However, I fully expect the media to turn rate increases into scary headlines. On a positive note, rising interest rates benefit many types of financial companies by increasing their fee income and profit margins.
Mortgage rates, for example, are still historically low. I personally think that having a cash cushion in the bank to cover emergencies is far more important to a person’s financial situation than whether their mortgage interest rate is half a percentage point higher than if they’d locked in the rate last year.
Sometimes I’ll sell a portfolio stock because it’s overvalued, even though the price chart remains relatively bullish. I am fully aware that some investors will hold those stocks. If you own a stock that I sold in the past, and you’re wondering what to do with it now, go ahead and email me at Crista@CabotWealth.com. I won’t be insulted that you didn’t follow my exact instruction. I’m just here to guide you.
Portfolio Notes
Make sure to review the Special Bulletins from March 9 and 10, in which I mentioned news, rating changes and/or price action on American International Group (AIG), BP plc (BP), D.R. Horton (DHI), Exxon Mobil (XOM), H&R Block (HRB) and PulteGroup (PHM).
Buy-Rated Stocks Most Likely to Rise More than 5% Near-Term:
BP plc (BP)
Martin Marietta Materials (MLM)
Mattel (MAT)
PulteGroup (PHM)
Vulcan Materials (VMC)
Today’s Portfolio Changes:
(No changes today.)
Last Week’s Portfolio Changes:
Assurant (AIZ) made a guest appearance in the Growth & Income Portfolio in the March issue.
D.R. Horton (DHI) was sold from the Growth & Income Portfolio on March 10. DHI delivered a total return of 11.74% in 17.1 months.
Royal Caribbean Cruises (RCL) moved from Strong Buy to Hold on March 6.
Thermon Group Holdings (THR) joined the Buy Low Opportunities Portfolio in the March issue.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) will report first-quarter 2017 EPS on March 16 (November year-end). Click here to read comments on the quarter from a Cowen analyst, as reported by Barron’s on March 10. ADBE is a fairly valued aggressive growth stock. The stock just began another run-up. Hold.
American International Group (AIG – yield 2.0%) On March 9, I issued a Special Bulletin when CEO Peter Hancock stepped down from his position at AIG due to pressure from activist investors, including Carl Icahn. The company is expected to earn $4.99 and $6.04 per share in 2017 and 2018 (December year-end), with corresponding P/Es of 12.6 and 10.4. The stock is undervalued and the earnings are reflecting the strong growth that’s typically associated with cost-cutting and business improvement measures. Buy AIG now, while it’s low within its trading range. Strong Buy.
Dollar Tree (DLTR) was featured in the March issue of Cabot Undervalued Stocks Advisor. Moody’s upgraded a variety of Dollar Tree’s credit ratings on March 9, citing the smooth incorporation of the Family Dollar merger and large debt repayments. The company’s long-term debt-to-capitalization ratio has fallen to 52.7% from 61.6% a year ago.
Dollar Tree’s earnings growth outlook is quite attractive, but the P/E has caught up to the earnings expectations. When the share price rebounds towards its November high near 90, I will likely sell, unless the earnings estimates change. Traders can continue to buy DLTR, but buy-and-hold investors should look for a more undervalued stock. Buy.
Goldman Sachs Group (GS – yield 1.0%) stands to benefit from the five or six interest rate hikes that are expected through 2018. GS is an undervalued growth stock that appears capable of a near-term breakout. Strong Buy.
Johnson Controls (JCI – yield 2.4%) is an undervalued growth stock, trading between 41 and 45.50. At 45.50, JCI will still be undervalued. Buy JCI now, while it’s low within its trading range. Buy.
Martin Marietta Materials (MLM – yield 0.8%) is an aggressive growth stock. I expect the stock to trade between 215 and 240 in the coming months. Buy MLM now, while it’s low within its trading range. At 240, MLM will still be undervalued. Strong Buy.
PulteGroup (PHM – yield 1.5%) Last week, stock market commentator Steve Grasso predicted that PHM will double this year. That’s because EPS are expected to grow 40.3% and 20.6% in 2017 and 2018 (December year-end), while the P/Es are extremely low at 10.6 and 8.7. PHM broke past four-year upside resistance this month. I expect a sustainable run-up. Buy PHM now. Strong Buy.
Quanta Services (PWR) I expect a near-term breakout past 38, which could easily lead to overvaluation in the share price. Only short-term traders should be buying PWR right now. Buy.
Vulcan Materials (VMC – yield 0.8%) Last week, Moody’s raised Vulcan’s credit rating on unsecured debt to an investment grade designation, citing debt reduction and better operating performance. VMC is an aggressive growth stock that’s sitting at the bottom of its trading range. Buy VMC now. Strong Buy.
XL Group (XL – yield 2.2%) is a very undervalued global property & casualty insurer. XL is resting after a recent run-up. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 7.0%) On March 10, I alerted subscribers to the fact that BP is the subject of takeover speculation by Exxon Mobil (XOM). Chevron (CVX) and Royal Dutch Shell (RDSA) are also reportedly interested in BP. I’ll spell out the sell vs. hold considerations if a buyout offer materializes. Here’s an additional takeover analysis from Bloomberg.
In the meantime, BP is a profoundly attractive investment. Analysts currently expect EPS to grow 173% and 19.2% in 2017 and 2018, with corresponding P/Es of 15.0 and 12.6. BP has begun a rebound from its February lows. There’s upside resistance at 38. Buy BP now. Strong Buy.
Exxon Mobil (XOM – yield 3.7%) Rumors emerged from London on March 10 that Exxon Mobil is in talks to purchase BP plc (BP). In addition, the company made a filing with the S.E.C. on March 10 to issue additional debt. The amount of the filing was not disclosed. The debt filing could be a coincidence, or it could be a means to finance a takeover bid.
Exxon reported on March 9 that it has agreed to invest $2.8 billion with Eni, an Italian company, in the development of natural gas in Mozambique. The company is experiencing aggressive earnings growth, with a very low P/E. I recently reported that Exxon’s long-term debt-to-capitalization ratio rose from 10% in 2015 to 20% in 2016. Then I noticed that both S&P and MarketWatch are reporting that the 2016 number is 13.77%. (That’s a very low debt ratio.) I’m not sure where the error occurred, but I just wanted to bring you all up to date, especially since Exxon might be incurring more debt this year.
XOM is low within its trading range, between 81 and 92. Buy XOM now. Strong Buy.
GameStop (GME – yield 6.0%) is likely to sell about 350,000 units of Nintendo Switch, with the added benefit of buyers purchasing games and collectibles while they’re in the stores. Read more in this Barron’s article, with commentary from a Mizuho analyst. Full-year 2017 results will be reported on the afternoon of March 23 (January year-end). Hold.
H&R Block (HRB – yield 3.7%) On March 9, I reported on HRB’s third-quarter 2017 upside earnings surprise (April year-end) and upward spike in the share price. Hold HRB for additional gains in the first half of 2017. Hold.
Royal Caribbean Cruises (RCL – yield 2.0%) On March 6, I reported that the Chinese government instructed tour operators that they would not be allowed to take tourists to South Korea from China after March 15. On March 9, RCL officially announced that it would reroute its China-based cruises away from South Korea to Japan. The stock appears ready to rise to medium-term price resistance at 102. Hold.
Whirlpool (WHR – yield 2.2%) will make a presentation at the Bank of America
Merrill Lynch 2017 Consumer and Retail Technology Conference on the morning of March 14. (Such presentations can sometimes cause changes in earnings estimates and increased trading in a stock.) WHR is an undervalued growth & income stock, recently trading between 170 and 190. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Archer Daniels Midland (ADM, yield 2.8%) is recently trading between 44 and 47. When the stock approaches 47, I might sell due to moderate 2018 earnings growth projections. Hold.
Boise Cascade (BCC) is a very undervalued and volatile aggressive growth stock. I expect BCC to continue rising toward longer-term price resistance at 32. Buy BCC now. Buy.
Legg Mason (LM – yield 2.4%) had net equity asset inflows of $0.7 billion in February, with total assets under management (AUM) ending the month at $722.9 billion. February was the first month since the beginning of the stock market’s current bull run that Legg Mason experienced equity inflows rather than equity outflows.
You might be scratching your head at that statement, wondering why investors would have been pulling money out of Legg Mason’s equity investments while the market was clearly rising. All I can tell you is that I have learned, over the decades, that the crowd is notoriously wrong in just about all areas of life. That’s why I tell investors that when you begin to run into people who are enthusiastically talking about the stock market at the office, the supermarket and Cub Scout meetings, it’s time to sell. I’m not remotely joking. It is rare for an investor to have the wisdom and fortitude to buy low and sell high. Most people tend to do the opposite, unfortunately. I’m not implying that we’re at a market top; I’m simply pointing out that investors were unable to see that an upturn in the stock market was long overdue.
LM is a seriously undervalued aggressive growth stock. The price chart remains bullish, with LM resting after a February run-up. There’s upside resistance at 40. Buy.
Mattel (MAT – yield 5.9%) announced on March 10 that it will partner with China’s internet retailer Alibaba (BABA) to sell its interactive learning products to Chinese consumers. Mattel currently has only a 2% market share in the $31 billion toy and game market in China. MAT is a very undervalued aggressive growth stock. MAT is resting at price support, just above 25. Buy MAT now for big capital gains this year. Buy.
Schnitzer Steel Industries (SCHN, yield 3.6%) is an undervalued aggressive growth stock. SCHN has unexpectedly come down to medium-term price support at 20, without any recent news stories causing the drop. My suggestion is to be patient and accumulate shares when the price stabilizes. Strong Buy.
Tesoro (TSO – yield 2.7%) is yet another undervalued energy company with aggressive earnings growth. TSO is bouncing around between 79 and 92. Buy it to trade, or to hold past 92 for additional growth. Buy.
Thermon Group Holdings (THR) is an electrical equipment company that provides engineered thermal solutions for process industries. The stock was featured in the March issue of Cabot Undervalued Stocks Advisor. THR is a small-cap stock. I believe that THR could break past 21 very soon, and rise to 25 before resting again. Buy THR now for near-term capital gains. Strong Buy.
Total SA (TOT – yield 5.3%) is a greatly undervalued, aggressive growth stock. TOT could easily rise past 52 in the near future. Continue to buy TOT for capital appreciation and/or the huge dividend yield. Strong Buy.
Universal Electronics (UEIC) shares are having a normal pullback, subsequent to a huge share price run-up on February 18. I plan to sell UEIC at price resistance in the upper 70s. Hold.
Vertex Pharmaceuticals (VRTX)
On March 6, Vertex announced that it will pay $160 million, plus up to another $90 million, for a cystic fibrosis treatment from Concert Pharmaceuticals. VRTX is a very undervalued and volatile biotech stock. The stock has upside price resistance at 95 and 103. The best-case scenario this year is that VRTX could rise all the way toward its 2015 highs around 140. Strong Buy.
