A subscriber asked me yesterday how concerned he should be over potential stock market reactions to the current worries about the health of former Secretary of State Hillary Clinton. I thought it might be beneficial to address that question for a larger audience. (Don’t worry, I’m not going to get political.)
Any surprising event of substance can affect the stock market, even if it’s only for one day. The biggest reason that non-financial events, such as the Zika virus, Mrs. Clinton’s health, Y2K (remember that?!) and the Brexit vote impact U.S. stock markets is because U.S. news media latch onto these topics and cover them incessantly, giving the general public the impression that these pieces of news are vitally important. Alas, I am not exaggerating.
While Mrs. Clinton’s health is incredibly important to herself and her loved ones, if she were to disappear from the political scene tomorrow, life would go on. Her party would substitute another experienced candidate to take over her campaign, and news agencies would scrutinize every aspect of that person’s life as thoroughly as they have done for Mrs. Clinton.
But I don’t make investment decisions based on news stories. I make my decisions based on balance sheet numbers and price charts. My decisions are enhanced by my knowledge of typical investor behavior patterns that arise during outbreaks of war, changes in interest rates, and M&A activity, for example. So I don’t fear those things ... I simply understand how the market is likely to react and I capitalize on those changes when appropriate.
Notice that I said that “behavior patterns” contribute to my decisions—but the actual news itself does not contribute to my decisions. When there’s prominent news that affects a company, Wall Street analysts revise their earnings expectations accordingly. I then make decisions based on the new numbers, not on the news stories. I hope that’s clear.
There are no investor behavior patterns or stock trading patterns relating to Presidents and election cycles and political parties that influence my investment decisions. Investor reactions to Presidential elections—which are entirely different from Presidential policies—can, of course, cause short-term stock market volatility.
I am not remotely concerned about the stock market as it relates to the Presidential election cycle, no matter who wins the election. In the coming years, the new President will guide the country towards policies that change the business outlook. As those changes evolve, my stock recommendations will change accordingly. I fully anticipate continuing to find good undervalued growth stocks to offer you in the coming years.
Portfolio Notes
Here are some news items and portfolio highlights in the past week:
• I issued a Special Bulletin on September 12 regarding the September 9 stock market selloff.
• The Johnson Controls/Tyco merger was completed on September 2.
Upcoming dates of interest:
September 12-14: Morgan Stanley Global Healthcare Conference* (features VRTX)
September 13-14: Barclays Global Financial Services Conference*(features ETFC)
September 14: KeyBanc Capital Markets Basic Materials & Packaging Conference* (features CHMT)
September 14-16: Morgan Stanley’s Multi-Industry Laguna Conference* (features BWA)
September 15: Johnson Controls’ Analyst Day* (features ADNT)
September 20: Carnival (CCL) to report third quarter results
September 26: FedEx’ Annual Shareholder Meeting*
September 28: Leerink Partners Roundtable Series* (features VRTX)
September 30: FDA decision on Vertex drug
December 5: Johnson Controls’ Corporate Analyst Meeting*
*The analysts who attend industry conferences write updates on the affected stocks, often causing increased market activity with the stocks.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company. The company is in a multi-year phase of successfully shifting customers to a subscription revenue model. ADBE is an undervalued aggressive growth stock with a strong balance sheet. EPS are expected to grow 38.0% and 32.8% in 2016 and 2017 (November year-end). The corresponding P/Es are 34.6 and 26.1. The stock rose to new highs this month. Growth investors should buy now. 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. Amazon announced a new service in August, Amazon Vehicles, through which consumers can research cars, and purchase auto parts and accessories. Amazon also announced a new partnership with Hyundai, to assist consumers in purchasing Hyundai vehicles. Analysts’ consensus estimates reflect 361% and 80.6% EPS growth in 2016 and 2017. The corresponding P/Es are 132.0 and 73.1. AMZN is an undervalued, large-cap aggressive growth stock in the consumer discretionary sector. The stock began reaching new highs last week. Buy AMZN now. Strong Buy.
Chemtura (CHMT) is a specialty chemical manufacturer. The company will attend the KeyBanc Capital Markets Basic Materials & Packaging Conference on September 14. Wall Street expects Chemtura’s EPS to grow 20.4% and 18.6% in 2016 and 2017 (December year-end). The corresponding P/Es are 15.8 and 13.3. CHMT is a very undervalued small-cap growth stock. There’s upside resistance at 31.50. Strong Buy.
D.R. Horton (DHI) is a homebuilder. Third-quarter results reflected strong increases in sales, orders, closings and backlog. D.R. Horton will complete its 2016 fiscal year this month, with expectations of 19% full-year EPS growth. Looking toward fiscal 2017, EPS are expected to grow 12.6%, with a corresponding P/E of 11.3. The stock is undervalued, with a dividend yield of 1.0%. There’s upside resistance at 34.50, with room for traders to make 10% on the rebound. Hold.
Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. This undervalued, aggressive growth stock fell hard during the late August overreaction to retail earnings reports, at which time I changed my recommendation to Buy. It’s worth noting that a contributing factor to the quarter’s weakness in same-store sales throughout the dollar store sector was price deflation in both milk and eggs. Apparently, egg prices are down over 50% vs. a year ago! This pricing scenario is viewed as temporary and not indicative of an ongoing trend in comparable store sales figures.
Consensus EPS estimates reflect 31.3% and 20.1% growth in 2017 and 2018 (January-end), with corresponding P/Es of 21.6 and 18.0. The stock’s long-term debt-to-capitalization ratio is high at 62%. Patient growth stock investors and bargain hunters should buy DLTR now, at price support in the low 80’s. Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. E*Trade will present at the Barclays Global Financial Services Conference on September 14. Analysts expect EPS to grow 44.4% and 2.4% in 2016 and 2017 (December year-end).
ETFC showed strength during Friday’s down market. There’s upside resistance at 28 and 31. Shareholders should sell ETFC as it approaches medium-term resistance at 31, and move into an undervalued stock with better future EPS growth and a more bullish price chart. Hold.
Royal Caribbean Cruises (RCL) is a global cruise vacation company. EPS are currently expected to grow 25.9% and 15.3% in 2016 and 2017, with corresponding P/Es of 11.0 and 9.6. RCL offers a 2.3% dividend yield, big dividend increases and share repurchases. Recent news that cruise booking growth is slowing is causing industrywide weakness in share prices.
RCL has a wide trading range. The best-case-scenario share price this year is probably 84. Traders, dividend investors and growth investors should buy now, while the stock is sitting at price support. Buy.
Vulcan Materials (VMC) is the nation’s largest producer of construction aggregates. EPS are expected to continue growing aggressively, at rates of 56.2% and 37.1% in 2016 and 2017, with corresponding P/Es of 32.5 and 23.7 (December year-end). VMC has a nominal 0.7% dividend yield. After a very long run-up, VMC is finally having a pullback. Strong Buy.
WellCare Health Plans (WCG) is an aggressive growth stock in the managed healthcare sector. WellCare presented at the 2016 Wells Fargo Healthcare Conference on September 8. I’ll be reporting on any news or changes in earnings estimates that ensue in the coming days.
WellCare is a potential takeover target by Cigna (CI), if the Anthem-Cigna merger fails. The U.S. Department of Justice (DOJ) sued to block the Anthem-Cigna merger due to antitrust issues. The new judge on the case plans to begin the trial on November 21, wrap up by December 30, and issue a decision in January. However, Anthem reiterated on August 12 the likelihood that Cigna will not agree to an extension past December 31. Cigna’s management recently affirmed that if the merger with Anthem fails, Cigna will seek to deploy cash—including the $1.85 billion merger break-up fee—into strategic M&A opportunities.
Wall Street analysts continue to list WellCare as Cigna’s number-one potential takeover target if the Anthem-Cigna merger fails. Investors should consider owning WCG (or buying call options on the stock at an appropriate time) because if a takeover offer arrives, it will likely happen this coming winter and push WCG significantly higher.
WellCare aims to double its revenues between 2017 and 2021, through both organic growth and acquisitions. EPS are expected to grow 46.5% and 17.3% in 2016 and 2017 (December year-end). The corresponding P/Es are 22.3 and 19.1. The stock is fully-valued based on 2017 earnings estimates. WCG rose to a new all-time high in August then had a brief pullback to short-term price support at 112.50. Buy.
Updates on Growth & Income Portfolio Stocks
Applied Materials (AMAT) is a worldwide leader in the manufacture of capital equipment in the semiconductor industry. EPS are expected to grow 47.1% and 29.1% in 2016 and 2017 (October year-end). The corresponding P/Es are 16.9 and 13.1. AMAT is a volatile, large-cap aggressive growth stock, but it’s also a seriously undervalued stock with an attractive dividend yield of 1.4%, and a low debt ratio.
Please take a look at the year-to-date price chart for AMAT. You’ll see a very distinct trading pattern. The stock tends to trade sideways, usually followed by a price correction (from which it quickly recovers), then immediately rises to a new trading range. It then repeats that pattern.
This stock could climb for many months if the overall market momentum remains neutral-to-bullish. All growth stock investors should own AMAT. Strong Buy.
Big Lots (BIG) is an American discount retailer with over 1,400 stores in 47 states. BIG is expected to grow EPS by 18.9% and 11.0% in 2017 and 2018 (January year-end). The corresponding P/Es are 13.7 and 12.3. BIG is a fairly valued mid-cap growth & income stock with a strong balance sheet. The dividend yield is 1.7%.
BIG broke out to new highs on August 11, and has since pulled back to price support around 49. I expect the stock to dwell near 49 for a very short time, then to climb back toward 56. Traders and growth & income investors should buy now. Buy.
Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. Cardinal finished 2016 with 19.6% EPS growth (June year-end) and a long-term debt-to-cap ratio of 41%, down from 44% in 2015. EPS are expected to grow 7.6% and 11.3% in 2017 and 2018, with corresponding P/Es of 14.1 and 12.6. CAH is an undervalued growth & income stock with a 2.3% dividend yield. The price chart became weak in August, trading down to strong support at 79. Buy.
Carnival (CCL) is a cruise vacation company and the largest leisure travel company in the world. The company is expected to report third-quarter results of $1.88 EPS on approximately September 20. Cruises bookings have slowed somewhat recently, news of which caused weakness in the share price. Curiously, Wall Street subsequently increased EPS growth expectations to 23.7% and 15% in 2016 and 2017 (November year-end). The corresponding P/Es are 13.4 and 11.7. CCL is extremely undervalued, with a current dividend yield of 3.1%. The stock is trading between 44.50 and 49. Negative market sentiment will likely inhibit CCL’s near-term price action. Buy.
Federated Investors (FII) is a global investment management company. Federated is having a great year in 2016, but earnings growth is expected to be moderate in 2017. Consensus estimates show Federated’s EPS growing 22.2% and 6.6% in 2016 and 2017 (December year-end). The dividend yield is 3.1%. FII has medium-term upside resistance at 33.50, where it traded in early 2015. Hold.
GameStop (GME) is a video game and consumer electronics retailer. GameStop’s earnings growth is expected to be slow for a while, however, gross margins and full-year earnings are reaching record levels. The stock remains quite undervalued, with a huge 5.4% dividend yield, and a very low 2015 long-term debt-to-capitalization ratio of 14.4%.
GME shares are very cheap right now, with minimal downside. The dividend yield of 5.4% provides extremely strong price support, so even though the market is ignoring the good news about GameStop’s balance sheet and future prospects, yield investors are receiving an immediate reward for buying GME. Buy.
General Motors (GM) is an American auto manufacturer. Analysts increased their 2016 EPS growth estimate to 16.5% in the wake of GM’s recent blowout second-quarter report. However, GM is looking forward to a year of flat earnings in 2017 (December year-end). GM has a large 5.0% dividend yield. The price chart has recently been bullish, with upside resistance at 35. Hold.
Goldman Sachs Group (GS) is a global investment banker, serving consumer, institutional and government clients. Wall Street expects EPS to grow 17.4% and 20.3% in 2016 and 2017 (December year-end). The corresponding P/Es are 11.8 and 9.8, indicating that the stock is significantly undervalued. GS has a current dividend yield of 1.5%. Goldman plans to increase both its dividend and its share repurchase authorization, but has not yet announced the dollar amounts. We could see that announcement around October 18, when Goldman is due to declare its next dividend. GS is climbing toward upside resistance at 175. Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. Management remains focused on improving sales during the next tax season, rolling out a new marketing campaign, and possibly introducing a new refund anticipation loan product that will involve a bank partnership.
HRB is an undervalued growth & income stock with a 4.0% dividend yield. EPS are expected to grow 9.4% and 8.0% in fiscal 2017 and 2018 (April year-end). The share price is low, the dividend is big, and the company continues to be the subject of takeover speculation. While HRB no longer meets all of my investment criteria, I still see significant upside potential this year. There’s price resistance at 24.50, then at 28 and 32. Buy.
Kraft Heinz (KHC)
is a global food and beverage producer of dozens of famous brand names, including Jell-O, Velveeta, Oscar Mayer, Maxwell House and many more. The company is still in the early stages of revenue management initiatives in the wake of the July 2015 merger between Kraft Foods Group (KRFT) and privately owned H.J. Heinz. KHC was featured in the September issue of Cabot Undervalued Stocks Advisor.
Full-year EPS are expected to grow 46.6% and 21.8% in 2016 and 2017 (December year-end), with corresponding P/Es of 27.3 and 22.4. The dividend yield is 2.8%.
KHC began reaching new all-time highs last week, then corrected with the stock market. KHC could appeal to a wide variety of stock investors, including those who focus on growth, aggressive growth, growth & income, value and momentum. Buy.
Whirlpool (WHR) is the world’s largest appliance manufacturer. The company commented that the company’s shares fell last week due to a World Trade Organization (WTO) decision that “addressed technical aspects of how United States calculates anti-subsidy and antidumping duties in trade cases.” As a trade lobbyist, it is my assessment that the market didn’t know what to make of this relatively innocuous news, and traders took advantage of the uncertainty by trashing the stock price. Investors have been presented with a buying opportunity!
Wall Street expects EPS to grow aggressively at 18.7% and 18.0% in 2016 and 2017 (December year-end), with corresponding P/Es of 11.5 and 9.7. WHR is an extremely undervalued growth stock with a 2.4% dividend yield. WHR rose about 25% from its lows during the Brexit price correction, and then pulled back to price support around 166. Traders and investors should buy WHR now. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Boise Cascade (BCC) is a leading U.S. wholesaler of wood products and building materials. The company presented at the 2016 RBC Capital Markets Global Industrials Conference on September 8, so we might see some new research reports in the coming days. Wall Street expects EPS to grow 10.5% and 38.8% in 2016 and 2017 (December year-end). The 2016 and 2017 P/E’s are 16.9 and 12.2. BCC is extremely undervalued based on strong projected 2017 earnings growth. BCC is a volatile stock that doubled in price from the February market bottom to this year’s high in August. The stock then had a pullback, and is now trading between 24 and 28. Buy BCC now. I expect BCC to rise to upside resistance at 32 this year. Buy.
BorgWarner (BWA) is a maker of engineered automotive systems and components for power train applications. The company hosted an Investor Day on September 7. Barron’s published an excellent descriptive article about BorgWarner’s rosy long-term outlook in both the gas-powered and electric car markets. Expect long-term revenue growth in the mid-to-high single digits from its expanding and innovative product portfolio, and for margins to continue expanding from their currently healthy levels. BorgWarner derives 54% of revenue from Europe, where auto demand is recovering from historically low levels.
EPS are expected to grow 7.6% and 9.5% in 2016 and 2017. The stock is undervalued with a 2017 P/E of 9.6 and a 1.5% dividend yield. BWA rose past price resistance at 35 last week. Buy BWA now. There’s upside resistance at 38 or 40. Buy.
FedEx (FDX) is an international package delivery company. The company will host its annual shareholder meeting on September 26. FedEx recently acquired Europe’s TNT Express, which is expected to add to profitability in fiscal 2018 (May year-end). TNT shares were acquired with cash and did not increase the share count, although the long-term debt-to-capitalization ratio increased to 50%. FedEx repurchased 2.47% of outstanding shares in fiscal 2016, and a total of 12.4% of outstanding shares in the last three years. FedEx is a growth & income stock, undervalued based on 2018 EPS growth of 12.7% and a 2018 P/E of 12.0. The current yield is 1.0%.
The FDX price chart is bullish, with upside resistance at 168 and again at 180, where the stock will be close to fully valued. Hold.
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. Analysts expect the next two years’ EPS to grow 9.8% and 8.3% (June year-end). HAR has a 1.6% dividend yield.
The stock is fully valued; however, I think there’s room for traders and investors to make money. Buy HAR now. There’s upside resistance at 88, and again at 110. Buy.
Johnson Controls (JCI) operates in the areas of energy management, security and fire protection systems, and auto batteries. Johnson Controls completed its purchase of a 56% stake in Tyco International PLC (TYC) on September 2.
Wall Street expects EPS to grow 14.6% and 9.7% in 2016 and 2017 (September year-end), with corresponding P/Es of 11.7 and 10.6. This undervalued stock has a dividend yield of 2.5%. (The dividend is expected to remain fully intact throughout the spin-off and merger processes.)
The merger and spin-off are expected to result in a less cyclical, higher-margin business. The company is expected to achieve $1.05 billion in cost savings over the next three years. It will be many months before we know the new, post-M&A debt ratio, but the current debt ratio is quite acceptable at 34%. Be aware that the number often increases immediately after M&A activity, so if that number is important to you, you’ve been put on notice.
Here’s an update on JCI’s upcoming M&A activity:
• Johnson Controls will host an Adient Financial Analyst Day on September 15.
• The company plans to spin off Adient (ADNT), its automotive seating and interiors business, on October 31, 2016. JCI shareholders will receive one share of ADNT – expected to be valued somewhere near $8 per share -- for every ten shares of JCI that they own. The ADNT spin-off is expected to be a taxable event. Therefore, consider the pros and cons of owning JCI when the ADNT spin-off occurs.
• Johnson Controls will host a Corporate Analyst Meeting on December 5.
JCI shot up 8% last week when the Tyco purchase was completed, then came right back down. Buy JCI in retirement accounts now. There’s upside resistance at 51. Buy.
Robert Half International (RHI) is a staffing and consulting company. RHI offers investors moderate earnings growth, a very strong balance sheet and a 2.3% dividend yield. The stock is now overvalued, due to a decline in the earnings outlook. RHI has been on a slow and steady uptrend, with price resistance at 41-42. Hold.
Toll Brothers (TOL) is the leading U.S. luxury homebuilder. EPS are expected to grow aggressively at 26.9% and 22.8% in 2016 and 2017, with corresponding P/Es of 11.7 and 9.5. TOL is a greatly undervalued, mid-cap growth stock. TOL surpassed upside price resistance at 30 in mid-August. I expect the stock to trade between 29 and 35 for a while. Traders and growth investors should buy now. 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, a disabling and deadly genetic disease affecting the lungs. Vertex has lengthy patent protection on the only two disease-modifying drugs within that rare-disease niche. The company’s projected 1-, 3- and 5-year revenue growth rates are all significantly higher than those of its U.S. biotech peer group.
Vertex is expected to report this month on results for a new “triplet” pill for cystic fibrosis. The treatment combines Vertex’ currently marketed drug, ivacaftor (Kalydeco), with two additional drugs. In addition, the FDA will decide by September 30 whether to approve the use of Vertex’ CF drug, Orkambi, for children ages 6 to 11. (Approval is expected. Non-approval would lead to a drop in the share price.) In addition, the primary completion date for the Phase III trial of another Vertex therapeutic treatment has just been moved up from July 2017 to March 2017.
Vertex will present at the Morgan Stanley Global Healthcare Conference on September 14 and at the The Leerink Partners Roundtable Series in the late afternoon on September 28.
VRTX is a vastly undervalued, aggressive growth stock. Despite only one barely-profitable year between 2006 and 2015, Vertex is expected to earn $1.04 per share in 2016, $3.08 in 2017 (December year-end)—reflecting 196% earnings growth in 2017 with a 30.9 P/E—and to surpass $11.00 EPS by the year 2020. VRTX was my top stock pick for the coming year at the 2016 Cabot Investors Conference in August 2016.
VRTX is having a pullback after its recent run-up, with price support in the mid-90s. There’s upside resistance at 110, in the low 130s, and again at the August 2015 high of 141. Buy.
