Portfolio Notes
This week, financial markets bring us earnings reports from Adobe and FedEx (and possibly Carnival), and a speech by Fed Chairwoman Janet Yellen. While the odds of an interest rate increase in September are lower than the prospect of an increase in December, anything could happen. News reporters will hype the topic incessantly, and stocks will temporarily rise or fall based on the drama. My suggestion is to ignore the hype.
When I entered the investing business, CD rates were at 10% and mortgage rates were even higher. So it’s hard for me to become alarmed or excited about a fed funds rate rising a tad from 0.40%.
Instead, let’s turn to something that you can grab hold of and capitalize on. While most of our portfolio stocks are in the midst of short-term price corrections, Applied Materials (AMAT) just broke out of a trading range yesterday. That’s an extremely bullish event, and generally hands investors a near-term capital gain opportunity. In addition, Applied Materials will be hosting its 2016 Analyst Day on September 21. When a successful, growing company—a leader in its field—hosts an annual meeting, it usually announces noteworthy product upgrades, innovations and financial successes. That’s the kind of news that makes people want to own stock in the company.
I can’t stress this enough: all stock investors should own AMAT. What’s more, buying on the breakout, one day prior to potentially positive corporate announcements that are likely to cause new rounds of analyst and media coverage, is somewhat of an optimal scenario for shareholders. Buy AMAT.
In this September 16 article from TheStreet, “You’ve Got the Brains, I’ve Got the Book, Let’s Make Lots of Money,” the author highlights several stocks that pass muster when combining “investing concepts of both Benjamin Graham (buying value) and Warren Buffett (buying quality).” The article identifies the 20 top-scoring stocks, including three from the Cabot Undervalued Stocks Advisor portfolios: GameStop (GME), H&R Block (HRB) and Robert Half (RHI).
Investors who have an interest in ride-sharing companies such as Lyft and Uber, and related automotive companies should read the excellent analysis of the corporate costs of maintaining a large fleet of autonomous cars in “Who Owns the Cars? One ‘Economic’ Challenge of Autonomous Ride-Sharing” by Maryann Keller.
Many of our portfolio stocks experienced price corrections this month, and will likely see rebounds in the coming weeks. Bargain hunters have a good variety of stocks to choose from right now.
Here are some news items and portfolio highlights from today’s update:
• I’m changing the recommendation on D.R. Horton (DHI) to Buy.
• Portfolio stocks that are actively climbing right now include Applied Materials (AMAT) and H&R Block (HRB).
• General Motors (GM) appears ready to break past 32, which we’ll probably know by mid-week.
Upcoming dates of interest:
• September 20: Adobe Systems (ADBE) reports third quarter EPS after the market closes.
• September 20: FedEx (FDX) reports first-quarter EPS after the market close
• Late September: Carnival (CCL) reports third quarter results
• September 21: Fed Chairman Janet Yellen will give a speech
• September 21: Applied Materials (AMAT) will host its 2016 Analyst Day*
• September 26: FedEx (FDX) Annual Shareholder Meeting*
• September 28: Leerink Partners Roundtable Series* (features VRTX)
• September 30: FDA decision on Vertex (VRTX) drug
• December 5: Johnson Controls (JCI) 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 expected to report 72 cents third-quarter EPS on the afternoon of September 20. 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 34.7 and 26.1. The stock rose to new highs this month, and is now trading between 98 and 104. 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. Among its myriad successes, Amazon is stealing significant apparel market share from U.S. department stores. Analysts’ consensus estimates reflect 361% and 80.6% EPS growth in 2016 and 2017. The corresponding P/Es are 134.7 and 74.6. AMZN is an undervalued, large-cap aggressive growth stock in the consumer discretionary sector. The stock rose to a new high this month, then paused briefly. We could easily see AMZN continue to climb this week. Buy AMZN now. Strong Buy.
Chemtura (CHMT) is a specialty chemical manufacturer. 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 15.4 and 13.0. CHMT is a very undervalued small-cap growth stock. The stock rose to upside resistance at 31.50 in August, then fell to price support around 27. The trading pattern is a little sloppy, but traders and growth stock investors who buy now could make 15% on the rebound. There’s no negative news, and I don’t expect CHMT to dwell at 27 for long. This is a normal pullback for a small-cap stock. 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 19.0% full-year EPS growth. Looking toward fiscal 2017, EPS are expected to grow 12.6%, with a corresponding P/E of 11.2. The stock is undervalued, with a dividend yield of 1.1%. The recent price correction in DHI has created a buying opportunity. There’s upside resistance at 34.50, with room for traders to make over 10% on the rebound. I’m therefore changing my recommendation to Buy. Buy.
Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. Consensus EPS estimates reflect aggressive growth of 31.3% and 20.1% in 2017 and 2018 (January-end), with corresponding P/Es of 21.3 and 17.7. 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 80s. The rebound will likely commence within a month. Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. Last week, E*Trade completed its purchase of OptionsHouse, rated “Best for Options Traders” in a 2016 Barron’s assessment of online brokers. The company announced several changes in leadership, drawing upon the strengths of current executives at both E*Trade and OptionsHouse. The most significant change is the departure of CEO Paul Idzik, who is replaced by Karl Roessner, formerly E*Trade’s General Counsel, with a goal of improving core brokerage growth. Analysts expect EPS to grow 44.4% and 2.4% in 2016 and 2017 (December year-end).
ETFC rose nicely in September so far. The stock has upside resistance at 28 and 31, although it’s possible that ETFC will blow right past 28. 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 15.1% in 2016 and 2017, with corresponding P/Es of 10.8 and 9.4. RCL offers a 2.2% dividend yield, big dividend increases and share repurchases.
RCL has a wide trading range. The best-case-scenario share price this year is probably 84. Please look at a price chart and notice that each time RCL has dipped down to the mid-60s this year, the fall and rebound process took about two weeks, with the stock quickly rising anywhere up to 72 to 77. Traders, dividend investors and growth investors should buy now, because they’re likely to promptly gain 9% to 15% profit. 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 31.7 and 23.1 (December year-end). VMC has a nominal 0.7% dividend yield. VMC peaked this year in late July, then pulled back. The stock seems to be establishing support at 108. This is a normal price correction after a long run-up. Growth stock investors should buy now. Strong Buy.
WellCare Health Plans (WCG) is an aggressive growth stock in the managed healthcare sector. 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 will 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 will likely push WCG’s share price 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 19.0. 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 around 111. The stock could rebound quite soon. Buy.
Updates on Growth & Income Portfolio Stocks
Applied Materials (AMAT) is a worldwide leader in the manufacture of capital equipment within the semiconductor industry. The company will host its 2016 Analyst Day on the afternoon of September 21. EPS are expected to grow 47.1% and 29.1% in 2016 and 2017 (October year-end). The corresponding P/Es are 17.4 and 13.5. AMAT is a volatile, large-cap aggressive growth stock; but it’s also a seriously undervalued stock with an attractive dividend yield of 1.3% and a low debt ratio.
The stock has a pattern of sideways trading, usually followed by a price correction (from which it quickly recovers), then immediately rising to a new trading range. AMAT broke out of a trading range yesterday. There is no discernible upside price resistance. 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 13.3 and 12.0. BIG is a slightly undervalued mid-cap growth & income stock with a strong balance sheet. The dividend yield is 1.8%.
BIG rose to new highs in August, and has since pulled back to price support around 45 to 47. The stock will need to rest there for a few weeks before climbing 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 its fiscal 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 13.7 and 12.3. 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 in the upper 70s. CAH could bounce at 75 again before beginning its rebound. Buy.
Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. Carnival has created three new TV programs that will air on Saturday mornings, beginning October 1. PR Newswire reported, “This innovative communications approach builds on the company’s strategy to highlight why traveling by ocean to experience global destinations has become one of the best ways to see and learn about the world and other cultures.“
The company is expected to report third-quarter results of $1.88 EPS in late September. Cruise bookings have slowed somewhat recently, news of which caused weakness in the share price. Curiously, Wall Street subsequently increased EPS growth expectations to 24.1% and 14.3% in 2016 and 2017 (November year-end). The corresponding P/Es are 13.7 and 12.0. CCL is extremely undervalued with a current dividend yield of 3.0%. The stock is trading between 44.50 and 49. CCL could bounce at 45 again before rising to price resistance at 49. 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. Based on its repetitive trading patterns, I expect GME to be back at 32 in early October. Traders and growth & income investors have an especially attractive opportunity in GME. Buy.
General Motors (GM) is an American auto manufacturer. Strong 2016 EPS growth is expected to come to a halt in 2017 (December year-end). GM has a large 4.9% 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 11.6 and 9.7, indicating that the stock is significantly undervalued. GS has a current dividend yield of 1.6%. 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 ratcheting 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 3.9% 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, which was backed by a $10 billion investment by 3G Capital and Berkshire Hathaway. KHC is the biggest holding in the Berkshire Hathaway stock portfolio. The company was featured in the September issue of Cabot Undervalued Stocks Advisor.
Kraft Heinz’ post-merger early-stage cost savings are coming in better than expected, already reaching 80% of its $1.5 billion cost savings goal. Wall Street analysts are now revising that expectation to $2.0 billion. There is minimal overlap between the Kraft and Heinz areas of geographic product distribution; therefore, the company will benefit from international expansion opportunities, which have not yet been optimized.
Wall Street is anticipating additional acquisitions, divestitures and/or share repurchases in 2017. Due to the company’s low debt ratio, Kraft Heinz has a lot of balance sheet flexibility for M&A transactions, and potential acquisitions costing up to $100 billion. Bloomberg and Forbes have mentioned Campbell, General Mills, Kellogg and Mondelez as potential takeover targets.
Full-year EPS are expected to grow 46.6% and 21.8% in 2016 and 2017 (December year-end), with corresponding P/Es of 27.7 and 22.7. The dividend yield is 2.7%.
KHC traded sideways for eight weeks in May and June, then rose to the current trading range. The stock appears capable of breaking past upside resistance at 90.50 in the coming weeks. KHC could appeal to a wide variety of stock investors, including those who focus on growth, aggressive growth, growth & income, value and momentum. Buy KHC now. Buy.
Whirlpool (WHR) is the world’s largest appliance manufacturer. Read this lengthy September 13 Forbes interview with Whirlpool’s CIO Michael Heim, who has revitalized the company’s approach to technology. 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 11.1 and 9.4. WHR is an extremely undervalued growth stock with a 2.4% dividend yield.
The company commented that WHR shares fell recently 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! WHR has huge and very tradeable price swings. The stock is now experiencing its third price correction from 2016 highs. We could see a rebound to 180 by late October. 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. 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 16.6 and 11.9. 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. Traders and growth stock investors should buy BCC now. I expect the stock to return to 28 in October. Buy.
BorgWarner (BWA) is a maker of engineered automotive systems and components for power train applications. Barron’s recently published an excellent descriptive article about BWA’s rosy long-term outlook in both the gas-powered and electric car markets. Expect long-term revenue growth rates in the mid-to-high single digits from its expanding and innovative product portfolio; and for margins to continue expanding from 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 9.8 and a 1.5% dividend yield. BWA rose past price resistance at 35 in early September. The chart remains bullish, with upside resistance at 38 or 40. Buy BWA now. Buy.
FedEx (FDX) is an international package delivery company. FedEx is expected to report first quarter EPS of $2.78 on September 20 after the market closes. The reported number could easily vary from consensus estimates due to the TNT Express acquisition, largely because analysts do not yet now whether deal amortization and integration expenses will be included in the quarterly results. 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 upon 2018 EPS growth of 12.6% and a 2018 P/E of 11.9. The current yield is 1.0%.
FDX is having a normal pullback during an uptrend. The price chart remains 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 8.5% (June year-end). HAR has a 1.7% dividend yield. The stock is fairly valued; however, I think there’s room for traders and longer-term 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 11.4 and 10.4. This undervalued stock has a dividend yield of 2.6%. (Please note that at least one internet source is quoting the dividend yield as 1.9%. I can’t find any information that substantiates a change in the dividend, which is still 29 cents per share each quarter.)
The merger and spinoff 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%. Please 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:
• 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 10 shares of JCI that they own. The ADNT spinoff is expected to be a taxable event. Therefore, consider the pros and cons of owning JCI when the ADNT spinoff occurs.
• Johnson Controls will host a Corporate Analyst Meeting on December 5.
JCI shot up 8% in early September, when the Tyco purchase was completed, then came right back down. Buy JCI in retirement accounts now. There’s price support at 44 dating back to May, and 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 2.4% dividend yield. The stock is now overvalued, due to a decline in the earnings outlook. I expect RHI to rise to 41 in the short term. Hold.
Toll Brothers (TOL) is the leading U.S. luxury homebuilder. Toll’s CEO says the company repurchased 7% of its outstanding common shares year-to-date through mid-September. This news is surprising, since Toll’s outstanding share count previously decreased just once in the last four years, by 0.6% in fiscal 2015 (October year-end). EPS are expected to grow aggressively at 26.9% and 22.8% in 2016 and 2017, with corresponding P/Es of 11.7 and 9.6. 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 one-, three- and five-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. Investors can read more about Vertex’ drug pipeline in this September 16 Barron’s article.
Vertex will present at 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 30.0 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 summertime run-up, with price support in the low 90s. You can see on the price chart that VRTX bounces rapidly between the top and bottom of its trading ranges. Therefore, I anticipate a quick return to the low 100s. Buy VRTX now. There’s upside resistance at 110, in the low 130s, and again at the August 2015 high of 141. Buy.
