Is The Fat Lady Singing?
During my years at Morgan Stanley, we had a good indicator of market tops and bottoms, based on client behavior patterns. Typically, when little old ladies would call to move all their money into the latest investment craze, or out of whichever investment had been plummeting, we knew that the investment trend had peaked, and was about to turn around. When a market was bottoming--stocks, bonds, gold, etc. we’d walk around the office asking each other, “Did the fat lady sing yet?”
And then one day, a client would call, all panicked, and liquidate their account because they couldn’t take it anymore. But it would always be something absurd, like a bond client who couldn’t handle the news about the stock market anymore, not realizing that they didn’t own any stocks. They’d be in such a frenzy from talking to their friends and watching financial news shows, that there was no talking them out of it. So we’d cash in their bond portfolio. No matter how stupid that decision was, we were obligated to fulfill it. (We had a lot more leeway on saying “no” to stupid purchases; as a matter of fact, we were rather obligated to say “no” to those.)
After finishing the transaction, we’d visit the other brokers in the office and say, “The fat lady just sang!” Several of us would have an outrageous client story of similar magnitude on the same day or two, and that’s when we knew we’d passed the bottom of the market. If you were brave, you’d start buying. I was always brave. But that’s a story for another day. (Ask me about the bond market crash of 1994. Even my fellow brokers thought I was nuts when I started buying Treasuries for all my clients.)
Fast forward to 2016. I just got a call from a friend. Her mom has a $34K nest egg. The mom’s financial advisor at Transamerica asked her to cash in all her mutual funds and move the capital into a money market fund, because of the stock market correction. There are several problems with that idea:
1. The lady mostly owns bond mutual funds.
2. The stock market already fell.
3. Selling those investments is going to cause a taxable event.
I told my friend that the financial advisor ought to be fired. As I hung up the phone, the fat lady came to mind, and I started to laugh.
I’ve lived through many extreme stock market ups and downs, usually driven by emotional behavior. The downturns are certainly painful, but they’re generally short-lived.
I see a lot of uncertainty over interest rates, worry about a possible economic recession, and fear over oil prices and their effect on the junk bond market. But uncertainty, worry and fear are nebulous emotions that blow around with the wind. We’re not experiencing anything resembling falling markets due to overvaluation, which we saw in 1987, 2000, and 2008. So there is hope.
Is the fat lady singing again? I’m listening carefully. Her voice is music to my ears!
How to Stave Off a Recession
You know that recession that everybody’s worrying about? The one that the Federal Open Market Committee can’t seem to deter with their interest rate manipulations? Here’s an idea: Get rid of Obamacare, and let us have free market health insurance, with fewer government restrictions and regulations than we had before.
My friend Anne was kind enough to share with me the total amounts that her family of five paid for healthcare (insurance premiums, deductibles and other out-of-pocket costs) in 2014 and 2015: $29.7K and $33.0K. My friend Linda and her husband paid $20K for routine healthcare in 2015. In Linda’s household, income and payroll taxes and medical payments equaled 50% of their gross income!
Imagine if we reverted to pre-Obama health insurance systems. The majority of those healthcare dollars could have gone towards cars and computers and vacations and kitchen remodels. There would be no recession!
If anyone in the U.S. government or the Oval Office were serious about improving America’s economy, prosperity, or citizens’ well-being, they’d scrap Obamacare immediately.
This Week’s Smart Investing Highlights
In recent days, several portfolio companies reported quarterly and/or full-year 2015 results. General Motors (GM), Robert Half (RHI), Royal Caribbean Cruises (RCL) and Vulcan Materials (VMC) all surpassed market earnings per share (EPS) expectations.
LinkedIn (LNKD)--not one of my recommended stocks--reported the discontinuation of a marketing program that impacts its future revenue, causing the stock to plummet. Unfortunately, tech stocks fell across the board on that news, despite the problem being isolated at LinkedIn. Read more in the comments on Adobe Systems (ADBE).
I’m downgrading some stock ratings, due to ongoing market weakness:
* Adobe Systems: Buy
* Cardinal Health: Buy
* D.R. Horton: Hold
* Delta Air Lines: Buy
* Robert Half: Hold
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company. On February 5, LinkedIn (LNKD) announced it would discontinue its Lead Accelerator marketing solutions platform. This came as quite a surprise to analysts, as the company had been heavily promoting Lead Accelerator as recently as September 2015. The news caused a dramatic change in LinkedIn’s future earnings outlook, and sent its stock down 44%, causing a weak day for tech stocks across the board.
ADBE shares fell to October support levels. Importantly, there is no change in Adobe’s strong earnings outlook. Analysts still expect EPS to grow 32.7% and 34.4% in 2016 and 2017 (November year-end). The P/E has dropped to 28.7, making the stock slightly undervalued. I’m lowering the rating from Strong Buy to Buy, due to share price weakness. If traders want to jump in, there’s short-term upside price resistance at 90. Rating: Buy.
Chemtura (CHMT) is a specialty chemical manufacturer. The company will report full-year 2015 results on February 22. Chemtura was featured in the February issue of Smart Investing in Turbulent Times. CHMT is a vastly undervalued, small-cap, aggressive growth stock.
The stock reached new all-time highs in November; then fell with the broader market. The share price stabilized beginning in early January, and has since turned upward. I expect the price to rise to at least 28.50 this winter. Rating: Strong Buy.
D.R. Horton (DHI) is a homebuilder. DHI is an undervalued growth stock with a 1.3% dividend yield. Analysts pushed their earnings growth estimates slightly lower on DHI last week; now expecting EPS to grow 16.0% and 12.5% in 2016 and 2017 (September year-end). The stock price fell below its recent price support. Therefore, I’m lowering the rating from Buy to Hold until the price movement shows some strength. Rating: Hold.
Delta Air Lines (DAL) is a global passenger and cargo air transportation company. On February 4, Delta’s CEO said that there’s been no change in bookings based on travelers’ concerns about the Zika virus, and that revenue from travel to Brazil had already fallen sharply due to the country’s poor economy. Concerned investors should use stop-loss orders on their travel-related stocks.
DAL is a very undervalued aggressive growth stock with a 1.3% dividend yield. The stock reached new highs in December then fell with January’s weak stock market. I’m lowering the rating from Strong Buy to Buy, due to share price weakness. There’s strong medium-term price support in the low 40s. Rating: Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. Analysts slightly lowered their earnings estimates for ETFC last week, to reflect expected 33.3% and 19.2% EPS growth in 2016 and 2017 (December year-end). The 2016 P/E is low, at 14.5. ETFC remains a very undervalued aggressive growth stock with a strong balance sheet. The share price fell during the recent market downturn. Investors should hold their shares and consider buying additional shares when the price stabilizes. Rating: Hold.
Priceline (PCLN) is an online travel service company. Watch for full-year 2015 results to be reported on February 17. PCLN is an undervalued growth stock. The share price reached new all-time highs in November, then traded down to support levels established in January/February 2015. At this point, we’re waiting for the share price to stabilize, which won’t likely happen until 2015 results are announced. Rating: Hold.
Royal Caribbean Cruises (RCL) reported strong full-year 2015 results last week, up 42.4% over 2014. Bookings for 2016 are equal to the record levels from 2015, with strength in the Caribbean, Bermuda, Alaska, Northern Europe and Asia. There’s weakness in Latin America and Australia. 2016 earnings estimates were guided downward due to currency effects of the strong dollar, yet analysts still expect 26.5% EPS growth. The 2016 P/E is quite low at 11.4. Investors should be aware that there’s nothing wrong at Royal Caribbean to cause the share price to fall--neither with its business nor with its balance sheet and profitability. Foreign exchange problems have been a routine feature of multi-national companies’ results for several years now.
RCL is a very undervalued aggressive growth stock with a 2.2% dividend yield. The share price reached an all-time high in late December, then fell with the weak 2016 market. My suggestion is to hold your shares and await the next market upturn. Rating: Hold.
Vulcan Materials (VMC) produces construction aggregates. VMC is a very undervalued aggressive growth stock. Last week, the company surpassed market expectations, and reported full-year 2015 EPS up 135% over the prior year. EPS are expected to grow 50% and 36% in 2016 and 2017 (December year-end). The 2016 P/E is 28.5. VMC reached an annual 2015 high in late November, fell with the weak market, and has now commenced its recovery. VMC could climb to 97 in the very short term, before pulling back a bit. Rating: Strong Buy.
WellCare Health Plans (WCG) will report full-year 2015 results today. EPS are expected to grow 88% and 32% in 2015 and 2016 (December year-end). Expect volatility. WCG is a dramatically undervalued aggressive growth stock in the managed healthcare sector. Rating: Strong Buy.
| Growth Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 2/08/16 | Total Return | Rating |
| Adobe Systems (ADBE) | 10/6/15 | 85 | 75 | -12% | Buy |
| Chemtura (CHMT) | 10/6/15 | 31 | 25 | -18% | Strong Buy |
| D.R. Horton (DHI) | 10/6/15 | 31 | 23 | -23% | Hold |
| Delta Air LInes (DAL) | 10/6/15 | 46 | 41 | -12% | Buy |
| E*Trade Financial (ETFC) | 11/12/15 | 29 | 21 | -28% | Hold |
| Priceline (PCLN) | 10/6/15 | 1,275 | 974 | -24% | Hold |
| Royal Caribbean Cruises (RCL) | 10/6/15 | 92 | 66 | -28% | Hold |
| Vulcan Materials (VMC) | 10/6/15 | 94 | 89 | -5% | Strong Buy |
| WellCare Health Plans (WCG) | 10/6/15 | 84 | 72 | -15% | Strong Buy |
| Growth Portfolio Total Return | -18.2% |
Growth & Income Portfolio
Growth & Income Portfolio stocks have bullish charts, good projected earnings growth, dividends of 1.5% and higher, low-to-moderate price/earnings ratios (P/Es) and low-to-moderate debt levels.
Big Lots (BIG) is a discount retailer in the U.S. and Canada. Big Lots was featured in the February issue of Smart Investing in Turbulent Times. BIG is a growth & income stock with a 2.0% dividend yield and a strong balance sheet.
BIG reached an all-time high of 51.50 in March 2015, fell with last summer’s market correction, retraced its high then fell again with the subsequent market correction. The stock recently found price support at 36. I expect BIG to trade sideways a short while, then to continue climbing. Rating: Buy.
Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. The company reported strong second-quarter 2016 results last week, beating market estimates for EPS and revenue. CAH is an undervalued growth & income stock with a 2.0% dividend yield. The stock has traded down to its support level from the August-September market correction. I’m lowering the rating from Strong Buy to Buy due to share price weakness. Rating: Buy.
Carnival (CCL) is a cruise vacation company. Last week, the company announced a stock swap repurchase plan: Carnival plc will sell up to 26.9 million shares of stock within the U.K. market, and use the proceeds to repurchase Carnival shares in the U.S.
CCL is a very undervalued stock with a 2.8% dividend yield. CCL reached a 2015 high in late December then fell with the recent market downturn. Please wait for the share price to stabilize before buying CCL. Investors who are concerned about the global spread of the Zika virus should use stop-loss orders on their travel-related stocks. Rating: Hold.
Federated Investors (FII) is a global investment management company. As an industry leader in the management of money market funds, Federated is uniquely positioned to increase its net income from asset management fees as interest rates rise.
FII is an undervalued stock, with a hefty 4.2% dividend yield. EPS are expected to grow 16.7% in 2016 (December year-end), with a 12.1 2016 P/E. Dividend investors can buy now to lock in the large yield. Capital gain investors should wait to buy until the share price stabilizes. Rating: Buy.
GameStop (GME) owns and operates 6,200 video game and electronics stores in the U.S., Canada, Australia and Europe. GME is an undervalued growth & income stock with a 5.4% current dividend yield. The huge dividend yield is going to bring new money into the stock. The share price is slowly climbing. Watch for the company’s full-year 2016 earnings report on March 24. Rating: Buy.
General Motors (GM) is an American auto manufacturer. The company reported higher-than-expected full-year 2015 earnings last week, up 64.6% over the prior year. EPS are expected to grow 9.8% in 2016 (December year-end). GM is a vastly undervalued stock with a 5.3% dividend yield. The share price has been weak, which presents a big dividend opportunity for investors who buy low. You can lock in a 5%+ yield today, and benefit from capital gains as the market eventually climbs again. Rating: Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. HRB is a growth & income stock with a strong balance sheet and a 2.3% dividend yield. The stock is overvalued based on 2016 numbers, and undervalued based on 2017 numbers (April year-end). HRB’s chart turned bullish in recent weeks. I expect the stock to trade between 33.50 and 37 during the next few months. Rating: Strong Buy.
| Growth & Income Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 2/08/16 | Total Return | Rating |
| Abercrombie & Fitch (ANF) | 11/9/15 | -- | -- | 15% | Sold 11/30/15 |
| Big Lots (BIG) | 10/6/15 | 49 | 37 | -24% | Buy |
| Cardinal Health (CAH) | 01/4/16 | 88 | 76 | -13% | Buy |
| Carnival (CCL) | 10/6/15 | 50 | 42 | -16% | Hold |
| Federated Investors (FII) | 11/30/15 | 31 | 23 | -26% | Buy |
| GameStop (GME) | 10/6/15 | 43 | 28 | -35% | Buy |
| General Motors (GM) | 10/6/15 | 32 | 29 | -11% | Strong Buy |
| H&R Block (HRB) | 10/6/15 | 36 | 35 | -3% | Strong Buy |
| SanDisk (SNDK) | 10/6/15 | -- | -- | 27% | Sold 11/2/15 |
| Union Pacific (UNP) | 10/6/15 | -- | -- | -5% | Sold 11/2/15 |
| Growth & Income Portfolio Total Return | -8.7% |
Buy Low Opportunities Portfolio
Buy Low Portfolio stocks have neutral charts, strong projected earnings growth, low-to-moderate price/earnings ratios (P/Es) and low-to-moderate debt levels. (Dividends are not a portfolio requirement, but some of the stocks will have dividends.) Investors should be willing to wait patiently for these stocks to climb.
Axiall (AXLL)--formerly Georgia Gulf Corp.--manufactures chemicals and plastics. There’s no additional news on Axiall since the company rejected a $1.4 billion ($20/share) takeover attempt by Westlake Chemical (WLK). The stock has traded between 17 and 19.61 since that news emerged on January 29.
Westlake hired Goldman Sachs and Deutsche Bank to advise them. Based on typical hostile takeover scenarios, it’s likely that Westlake will return with a higher offer. If such an offer materializes, you will not be required to make a fast decision. I’ll keep you apprised on how to proceed in my weekly updates. If you’re concerned that no offer will materialize and Axiall’s share price will fall, put in a stop-loss around 17.
Axiall will report full-year 2015 results on February 16 (December year-end). AXLL has a 3.4% dividend yield. Rating: Hold.
Boise Cascade (BCC) is a leading U.S. wholesaler of wood products and building materials, benefiting from a strong home-building market. BCC is a volatile, undervalued aggressive growth stock. Watch for full-year 2015 results to be reported on February 17. EPS are expected to fall 24.1% in 2015, then to grow 29.9% in 2016 (December year-end). The stock’s recent price correction seems to be over. There’s short-term upside price resistance at 25. Rating: Buy.
BorgWarner (BWA) is a maker of engineered automotive systems for power train applications. Watch for full-year 2015 results to be reported on February 11. BWA is an undervalued growth & income stock with a strong balance sheet and a 1.8% dividend yield. The stock stabilized after a big drop in January. I believe that when the rebound begins, there will be a big short-term gain. Rating: Buy.
FedEx (FDX) is an international package delivery company. In order to gain regulatory approval of its merger with FedEx, TNT Express will sell its European airline operations. I shared lots of other news about FedEx in the February issue of Smart Investing in Turbulent Times. FDX is an undervalued growth stock.
The share price bottomed in January and is now slowly climbing again. There’s short-term upside price resistance at 145, and then again at 152.50. Rating: Buy.
Harman International Industries (HAR) is the premiere connected technologies company for automotive, consumer and enterprise markets; best known for its JBL and Harman Kardon audio systems. HAR is an undervalued growth stock with a 2.0% dividend yield. The stock price continues to be volatile. Wait for the share price to stabilize before buying. Rating: Hold.
Intuit (INTU) is an industry leader in financial management software solutions. INTU is an undervalued aggressive growth stock with a strong balance sheet and a 1.3% dividend yield. After falling with the market, the share price found support at 90 in January. It will likely trade between 90 and 97 in the near term, unless the market makes another downward move. Rating: Strong Buy.
Johnson Controls (JCI) operates in the areas of energy management and auto batteries. The company plans to spin off Adient, its automotive seating and interiors business, in October 2016.
This month, Johnson Controls announced that it will purchase a 56% stake in security systems company Tyco International PLC (TYC). The combined company will offer electrical systems and security systems to the building industry. The new company will domicile in Ireland, to take advantage of lower income tax rates.
JCI is an undervalued growth & income stock with a 3.2% dividend yield. The stock price has stabilized after the recent market downturn. There’s upside resistance at 39, and again at 41. Rating: Buy.
Robert Half International (RHI) is a staffing and consulting company. Full-year 2015 EPS came in a penny above consensus, reflecting 19% annual growth. RHI is an undervalued growth stock with a strong balance sheet and a 2.0% dividend yield. I’m lowering the rating to Hold until the share price stabilizes. Rating: Hold.
Whirlpool (WHR) is a global appliance manufacturer. As a result of Whirlpool’s strong 2015 earnings report, analysts have increased their EPS estimates for 2016 and 2017 EPS, now reflecting 17.5% and 16.6% growth (December year-end). The 2016 P/E is 9.3, at the bottom of its normal annual range of 9 to 16+. WHR is a very undervalued growth stock with a 2.6% dividend yield.
The stock fell with the recent market downturn, then stabilized. There’s upside price resistance at 150. Rating: Strong Buy.
| Buy Low Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 2/08/16 | Total Return | Rating |
| Axiall (AXLL) | 11/9/15 | 22 | 18 | -16% | Hold |
| Bank of New York Mellon (BK) | 10/6/15 | -- | -- | 11% | Sold 11/6/15 |
| The Boeing Company (BA) | 10/6/15 | -- | -- | -13% | Sold 1/27/16 |
| Boise Cascade (BCC) | 11/9/15 | 30 | 19 | -36% | Buy |
| BorgWarner (BWA) | 12/30/15 | 44 | 29 | -34% | Buy |
| FedEx (FDX) | 01/4/16 | 145 | 130 | -10% | Buy |
| Harman International Industries (HAR) | 10/6/15 | 105 | 67 | -36% | Hold |
| Intuit (INTU) | 10/6/15 | 91 | 91 | -1% | Strong Buy |
| Johnson Controls (JCI) | 10/6/15 | 43 | 35 | -19% | Buy |
| Robert Half International (RHI) | 10/6/15 | 51 | 39 | -24% | Hold |
| Whirlpool (WHR) | 11/3/15 | 160 | 135 | -16% | Strong Buy |
| Buy Low Portfolio Total Return | -17.5% |