Pokemon Go is going to cure childhood obesity.
The Pokemon Go craze continues, and will soon be followed by additional Pokemon game releases this fall. I know that the Pokemon Go demographic is younger than the Cabot investor demographic, so I want to tell you about what I’m witnessing with the Pokemon Go phenomenon, because it is, indeed, a phenomenon.
Everybody on social media has an opinion on Pokemon Go, whether or not they have ever played the game or read an article about the game. So there’s a high degree of public awareness. That’s going to drive attention to any stocks that can benefit from sales of Pokemon games, collectibles and related events. I am of course referring to GameStop (GME).
There are multitudes of people playing the game on their cell phones. The game requires people to walk around their communities in order to capture Pokemon figures in various locations. There is literally a walking component to the game that cannot be achieved by sitting or by moving at a faster pace.
All three of my daughters play the game. One of them announced to me that Pokemon Go is going to cure childhood obesity. I laughed, because I don’t think that’s far from the truth. People are not playing Pokemon Go as an alternative to studying for their Master’s Degrees, and they’re not skipping work to goof off. People are playing the game as an alternative to sitting around staring at electronics (TV, movies, social media).
I was a gamer before gaming became electronic, playing games like Monopoly, chess and solitaire. How do you think I developed my expertise with numbers and logic? Games. What are games about, intellectually? They’re about strategy, competition, math and logic. A person who plays Pokemon Go is akin to a person who does crossword puzzles, Sudoku, etc., with the added benefit of exercise and social interaction!
When Pokemon Go players are on the move, not only do they exercise their brains and enhance their general health, but when they travel to Poke Stops, they often end up in locations with peers who are doing the same thing. They have something in common, and therefore, a reason to strike up conversations. For the most part, that is a good thing; and for some of these teenagers who are otherwise home alone and bored during summer vacation, Pokemon Go is a lifeline to a social network. One of my friends told me, “I’ve never seen my kid so eager to walk the dog!” And a local teenager told me that in the last two weeks, she’s gotten more exercise than she otherwise would have gotten all summer! Last week, I traveled with my two high schoolers to visit a town where I lived long ago.
Driving back to our motel at 10 o’clock at night, the number of people walking up and down the street was astonishing—couples walking dogs and groups of teenagers. My kids asked me if they could go out and catch some Pokemon characters. I’m a cautious mom. My kids don’t date, no tattoos, no piercings; they go on mission trips and take A.P. classes. I’m just about the last person on earth who lets their kids stroll around at 10 PM. But frankly, I couldn’t think of a good reason to say “No.”
The street looked like 3 PM on the Coney Island boardwalk! So off they went, chasing Pokey-men, as I like to call them. So what’s the point of this long-winded story? I’m well-aware that everybody on social media who doesn’t play Pokemon Go loves to insult the game. Please don’t fall for that, because if you do, you’re going to miss an investment opportunity. Instead, scroll down to the Growth & Income Portfolio update and read about GameStop (GME). You haven’t missed your chance to capitalize on the Pokemon Go phenomenon.
Portfolio Notes
Many of our portfolio stocks either just completed a run-up or they’re trading sideways in synch with the S&P 500 index. A couple of them look capable of continuing their run-ups this week (Vertex Pharmaceuticals and Whirlpool), and cruise company stocks also appear ready to climb (Carnival and Royal Caribbean). However, the stock that seems most obviously ready to rise is Johnson Controls (JCI) in the Buy Low Opportunities Portfolio.
Last week, five of our portfolio stocks reported earnings beats: E*Trade (ETFC), General Motors (GM), Goldman Sachs (GS), Johnson Controls (JCI) and Whirlpool (WHR). In addition, D.R. Horton’s (DHI) earnings were reported in line with analysts’ expectations.
This week brings reports from Amazon.com (AMZN), Boise Cascade (BCC), BorgWarner (BWA), Chemtura (CHMT), Federated Investors (FII), Robert Half (RHI) and Vertex Pharmaceuticals (VRTX).
As a reminder, last week I moved Whirlpool (WHR) from the Buy Low Opportunities Portfolio to the Growth & Income Portfolio.
Updates on Growth & Income Portfolio Stocks
Adobe Systems (ADBE) is a software company. ADBE is an aggressive growth stock with a strong balance sheet, which is very undervalued based on 2017 EPS (November year-end). The stock is trading near short-term upside resistance at 100, which it could surpass in August. Strong Buy.
Amazon.com (AMZN) dominates the online retail space by offering a wide variety of merchandise at low prices to customers around the globe. AMZN was featured in the July issue of Cabot Undervalued Stocks Advisor.
Analysts expect $1.11 EPS when the company reports second-quarter results on July 28 after the markets close. Strong growth in most of its businesses, a better product mix and expanding gross margins are contributing to dramatically increasing profits in 2016 and 2017.
AMZN is an undervalued, large-cap aggressive growth stock in the consumer discretionary sector. The share price has been climbing and resting in a very orderly fashion since the February lows, and continuing to reach new highs since May. It’s currently in a brief resting stage. Strong Buy.
Chemtura (CHMT) is a specialty chemical manufacturer. Analysts are expecting 46 cents EPS when the company reports second-quarter results on July 28 after the markets close. CHMT is an undervalued, small-cap growth stock. Consensus estimates show EPS growing 22.4% and 16.7% in 2016 and 2017. The corresponding P/Es are 15.5 and 13.3. CHMT has paused in an uptrend, with additional short-term upside resistance at 29.50. Strong Buy.
D.R. Horton (DHI) is a homebuilder. The company reported third-quarter results last week in line with Wall Street’s expectations. Sales, orders, closings and backlog all had strong increases. DHI is an undervalued growth stock with a 0.9% dividend yield. EPS are expected to grow 19.5% and 13.0% in 2016 and 2017. DHI broke past upside resistance on July 8. Buy DHI now, and if the stock pulls back to 32, buy more! Strong Buy.
Delta Air Lines (DAL) is the third-largest passenger airline in the world, serving 58 countries. The company also owns an oil refinery. In early July, the U.S. Department of Transportation granted permission for Delta to operate daily, non-stop service to Havana, Cuba. Delta’s new dividend yield, based on the preannounced third-quarter dividend increase, is 2.1%. DAL is still recovering from the Brexit event, with short-term upside resistance at 44. Hold.
Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. DLTR is a slightly undervalued, large-cap aggressive growth stock, with a low degree of volatility. The share price has been steadily reaching new highs for two months. There’s price support at 90. Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. Last week, the company reported second-quarter EPS of 48 cents, when analysts were expecting 38 cents. E*Trade’s EPS are expected to grow 38.5% and 4.3% in 2016 and 2017 (December year-end). The stock is overvalued based on 2017 earnings expectations. The stock could rise to upside resistance at 28 quite soon if market strength holds. Hold.
Royal Caribbean Cruises (RCL) is a global cruise vacation company. Analysts are expecting $1.02 EPS when the company reports second-quarter results on the morning of August 2. RCL offers investors strong earnings growth, a low P/E, a 2.0% dividend yield, big dividend increases and share repurchases. The stock is significantly undervalued. The price chart has been weak. There’s upside resistance in the upper 70s. Buy.
Vulcan Materials (VMC)
produces construction aggregates. Analysts are expecting second quarter EPS of $1.00 when Vulcan reports results on the morning of August 1. VMC is an undervalued aggressive growth stock with a small 0.6% dividend yield. The share price appears poised to increase again. Strong Buy.
WellCare Health Plans (WCG) is an undervalued aggressive growth stock in the managed healthcare sector. On July 21, the U.S. Department of Justice (DOJ) sued to block two large healthcare mergers, between Anthem (ANTM) and Cigna (CI), and between Aetna (AET) and Humana (HUM). Speculation continues that a failed merger between Anthem and Cigna might lead to Cigna making an offer to acquire WellCare.
Analysts are expecting second quarter EPS of $1.40 when WellCare reports results on the morning of August 2. The share price appears poised for an immediate run-up. Strong Buy.
Updates on Growth & Income Portfolio Stocks
Big Lots (BIG) is an American discount retailer. The company was featured in the July issue of Cabot Undervalued Stocks Advisor. BIG is a mid-cap growth & income stock with a strong balance sheet. The dividend yield is 1.6%. The share price appeared to be breaking through upside resistance on July 22, reaching a new all-time high. I expect a near-term run-up. Strong Buy.
Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. Analysts are expecting fourth-quarter EPS of $1.13 when Cardinal reports results on the morning of August 2. Full-year EPS are expected to grow 19.6% and 8.8% in 2016 and 2017 (June year-end). CAH has a dividend yield of 2.2%. The share price has paused in an uptrend at 83. There’s some upside resistance at 87, and again at 91. Buy.
Carnival (CCL) is a cruise vacation company and the largest leisure travel company in the world. Wall Street is expecting earnings to grow 24.4% and 16.2% in 2016 and 2017 (November year-end). The corresponding P/Es are 13.8 and 11.9. CCL is extremely undervalued, with a current dividend yield of 3.0%. CCL could rise to 49 in the short term, but the price chart remains weak. Buy.
Federated Investors (FII) is a global investment management company. Analysts are expecting 48 cents EPS when the company reports second-quarter results on July 28 after the markets close. FII has a 3.2% dividend yield. Earnings growth goes from strong in 2016 to moderate in 2017. The share price is almost completely recovered from the Brexit news. Traders should exit as FII approaches 32.50, where the stock will likely commence sideways trading. Hold.
GameStop (GME) is a video game and consumer electronics retailer. We already know that sales of game console upgrades from Microsoft and Pokemon Go accessories will deliver a second-quarter revenue beat (July quarter-end). GameStop is the largest distributor of Pokemon games and collectibles in the world. Just last weekend, GameStop doubled its normal revenue in its 462 stores that hosted Poke Stops and related events! (A Poke Stop is a geographic location where gamers can capture a large number of game characters. There’s a Poke Stop at the Mormon chapel near my house!) Don’t miss this CNBC interview with CEO J. Paul Raines. Could the guy look more ebullient? Take a cue from GameStop’s CEO and ride this wave. Pokemon Go is not a flash in the pan. GameStop is launching Pokemon Sun and Pokemon Moon in November, and with the Pokemon brand name so prominent this year, you can bet those new games are going to attract a lot more attention and customers than they would have if the Pokemon Go game was not such a blockbuster.
Short interest in GME has fallen from 45% of outstanding shares in December 2015 to 29% in June 2016, and consensus earnings estimates are slowly increasing, reflecting record annual profits in 2017 and 2018 (January year-end).
GME is rising toward upside price resistance at 33. I expect the stock to pause there for a short while. Please note that analysts are guessing that GameStop will report second-quarter results on August 25. Quarterly revenue and profits will invariably surpass earnings estimates, which means that if the share price does not jump in the coming weeks, it will likely jump on the earnings release. The stock is undervalued, with a huge 4.8% dividend yield. Buy.
General Motors (GM) is an American auto manufacturer. On July 21, the company reported record second-quarter profits of $1.81 per share, when the market was expecting $1.52. Profit margins rose significantly in the company’s North American business, from 10.5% a year ago to 12.1% this quarter. GM also achieved record quarterly revenue of $42.4 billion. The company finally reported a quarterly profit in its European business—the first in five years—but that is not expected to be repeated in the third quarter.
GM raised its full-year 2016 earnings guidance. Analysts are now expecting 2016 EPS to grow 13.3%. While earnings growth slows dramatically in 2017, the stock remains undervalued, especially in light of the big 4.7% dividend yield. I expect the stock to trade in the low 30s for a short while then climb to 35. Buy.
Goldman Sachs Group (GS) is a global investment banker, serving consumer, institutional and government clients. Last week, the company reported second-quarter EPS of $3.72 when analysts were expecting $3.00. Debt Capital Markets (DCM) underwriting revenues, fixed income trading and a lower tax rate all contributed to the earnings beat. The company repurchased $1.75 billion of stock during the quarter. Goldman plans to increase both its dividend and its share repurchase authorization, but has not yet announced the dollar amounts.
Wall Street now expects Goldman’s EPS to grow aggressively at 17.0% and 20.3% in 2016 and 2017 (December year-end). The corresponding P/Es are 11.3 and 9.4, indicating that the stock is significantly undervalued. GS has a current dividend yield of 1.6%.
GS recovered swiftly from the Brexit event. There’s upside resistance at 167 and 175, and support at 160 and 154. Buy on dips! Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. HRB is a slightly undervalued growth & income stock with a 3.7% dividend yield. The share price has been resting after a recent run-up. Its next likely move will be a push past 24 toward upside resistance at 28. Buy.
Kraft Heinz (KHC) is a global food and beverage producer. Analysts are expecting 73 cents EPS when the company reports second-quarter results on the afternoon of August 4. KHC is an undervalued aggressive growth & income stock, with a 2.6% dividend yield. The stock has been trading between 88 and 90, and could briefly bounce down to 86 before resuming its upward climb to new all-time highs. Strong Buy.
Whirlpool (WHR) is the world’s largest appliance manufacturer. The company reported second-quarter EPS of $3.50 last week, when the market was expecting $3.36. Whirlpool also increased its full-year 2016 earnings projections. WHR is an extremely undervalued growth stock with a 2.1% dividend yield. The share price is on an uptrend, with price resistance at 188 and again at 200. I’ve seen WHR rise 50% or more three times during the last three years! The stock is so cheap that it could rise 50% from today’s price and still be undervalued. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Sometimes a stock in the Buy Low Opportunities Portfolio produces good capital gains, so the share price is no longer low, yet the stock remains an attractive, undervalued investment. Those stocks will then be moved into the Growth Portfolio or the Growth & Income Portfolio.
Boise Cascade Company (BCC) is a leading U.S. wholesaler of wood products and building materials. Analysts are expecting 38 cents EPS when the company reports second-quarter results on the morning of July 28. BCC is quite undervalued based on strong projected 2017 earnings growth. The share price has paused in an uptrend. There’s upside resistance at 32 and support at 23. The earnings report could push the stock in either direction. Buy.
BorgWarner (BWA) is a maker of engineered automotive systems and components for power train applications. Analysts are expecting 82 cents EPS when the company reports second-quarter results on the morning of July 28. BWA is fairly valued based on moderate 2016 earnings growth, and undervalued based on stronger 2017 earnings growth. The dividend yield is 1.6%. The share price could bounce between 32 and 35 this week, with strong upside resistance at 40. Buy.
FedEx (FDX) is an international package delivery company. The company completed its acquisition of Europe’s TNT Express, which is expected to be accretive to earnings in fiscal 2018 (May year-end). FedEx is a growth & income stock, undervalued based on 2018 earnings expectations. The current yield is 1.0%. FDX has been trading sideways for four months, with upside resistance at 168. 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. Wall Street is expecting Harman to report fourth-quarter EPS of $1.52 on the morning of August 4 (June year-end). HAR is an undervalued growth & income stock with a 1.7% dividend yield. HAR has paused in an uptrend toward upside resistance at 88. Buy.
Johnson Controls (JCI) operates in the areas of energy management and auto batteries. The company reported third-quarter EPS of $1.07, when analysts were expecting $1.03. The Tyco merger and the Adient spin-off remain on schedule. Johnson Controls also raised its full-year 2016 earnings projections. JCI is an undervalued large-cap growth & income stock with a 2.5% dividend yield. (The dividend is expected to remain fully intact throughout the spin-off and merger processes.)
Here’s a recap of 2016 M&A activity:
• The company plans to spin off Adient (ADNT), its automotive seating and interiors business, on October 3, 2016. Adient’s margins are expected to rise from 5.8% to about 6.9%, post-spin-off. JCI shareholders will receive one share of ADNT—valued somewhere near $8 per share—for every 10 shares of JCI that they own. The ADNT spin-off is expected to be a taxable event.
• In June, Johnson Controls bought 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. Tyco brings strength in Europe to the new venture, while Johnson Controls is strong in the Americas and Asia. The combined company will domicile in Ireland to take advantage of lower income tax rates. On July 15, famed stock market guru Jim Cramer commented, “I love that merger.”
JCI has a bullish price chart and could rise to 50 in the coming months. Buy.
Robert Half International (RHI) is a staffing and consulting company. Analysts are expecting 73 cents EPS when the company reports second-quarter results on the afternoon of July 26. RHI is a fairly valued growth & income stock with a strong balance sheet and a 2.1% dividend yield. RHI will most likely trade between 39 and 42 in the coming weeks. Hold.
Toll Brothers (TOL) is the leading U.S. luxury homebuilder. U.S. 30-year mortgage rates continue to decline, standing at 3.48% on June 30. Rates are down over a full percentage point from a recent peak in August 2013, directly benefiting the housing industry. TOL is a greatly undervalued, mid-cap growth stock. The stock is climbing toward price resistance at 30. Buy.
Vertex Pharmaceuticals (VRTX) is a biotech company that develops breakthrough drugs and carries them through to the manufacturing process. Vertex is a clear leader in the treatment of cystic fibrosis. The company was featured in the July issue of Cabot Undervalued Stocks Advisor.
Despite only one barely-profitable year between 2006 and 2015, Vertex is expected to earn $1.02 per share in 2016, $3.17 in 2017 (December year-end)—reflecting 211% earnings growth in 2017—and to surpass $11.00 EPS by the year 2020. Analysts are expecting 20 cents EPS when the company reports second-quarter results on July 27 after the markets close. The price chart is bullish, with medium-term upside resistance at 110. Buy.
