In today’s issue, I initiate coverage of a new stock in an industry where demand far exceeds supply: the recreation vehicle sector. The company is adding two new manufacturing facilities to meet record new orders which have nearly doubled from a year ago.
Cabot Benjamin Graham Enterprising 275E
Benjamin Graham is called The Father of Value Investing. His influence has inspired many successful investors, including Warren Buffett.
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Review and Rebalance
Large-cap technology stocks, including Alphabet (GOOG), Amazon (AMZN) and Apple (AAPL), took a bit of a beating on several occasions during the past week. After a huge run-up in 2017, the weakness is not surprising.
During the dips, stocks in some other sectors, notably financial and energy, climbed noticeably. The good news is that investors are not selling technology stocks and then sitting on the cash. Investors are reinvesting in stocks that have not participated in 2017’s vigorous rally, namely value stocks.
I view the disruption in technology stocks as an early warning signal. I expect tech stocks to get back on track quickly and advance to new high ground soon. However, sometime down the road, tech stocks will have to endure a more severe bout of selling that could result in some serious damage. As I mentioned in my June 12 Special Bulletin, now is an excellent time to check your allocations and rebalance your portfolio. Better to be too early than too late.
My new recommendation in this month’s Cabot Enterprising Model is a company in the recreation business. Retirees and families are spending more time and money on the recreation and leisure aspects of their lives. Thor Industries (THO) makes and sells towable and motorized recreational vehicles that meet the demand for new lifestyles. Demand is super-brisk right now, and could get stronger. Buy Thor now, you’ll be glad you did.
“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” —Warren Buffett
Cabot Enterprising Model
My Enterprising Model comprises 16 stocks which I have selected by using one of six analyses: Undervalued Canadian, Classic Value, Graham Buffett, Low NCAV, Low P/BV and Low PEG. The Model is well-diversified, represents many industry sectors, and is composed of the stocks of undervalued companies that are expected to produce consistent growth. The analysis used to select the Enterprising Model stocks is included in each summary and in the Analyses table below. For additional details, please email me at roy@cabotwealth.com.
Usually stocks in the Enterprising Model are purchased at their current prices, but because of the current stock market volatility, I now recommend that Enterprising Model stocks be purchased at or below my Maximum Buy Price. Enterprising Model stocks should still be sold using my Minimum Sell Price. For an explanation of how my Max and Min Prices are calculated, you may email me at roy@cabotwealth.com.
Model Buy Recommendations
The Enterprising Model on page 3 contains 16 stocks with two new stocks: Thor Industries (THO) and Ulta Beauty (ULTA). Two stocks transition out of the Model: Avigilon (AVO.TO) and Chicago Bridge & Iron (CBI).
Avigilon and Chicago Bridge & Iron are now listed on page 7 in the table containing my Hold and Sell Recommendations. These two stocks remain excellent investments, and should continue to be held. Keep your “Hold” stocks until your selection reaches its Min Sell Price, at which time I will issue a sell alert by email, in the Value Investor or Enterprising edition, or in the Weekly Update. I will also indicate that you should sell when a disappointing performance or adverse condition affects any company.
All stocks in the Enterprising Model are now recommended to be purchased at or below their Max Buy Prices—the same as Cabot Value Model stocks. Enterprising Model stocks should be sold when my Min Sell Price is achieved.
Because I use six different analyses to find stocks for my growth-oriented Enterprising Model, these stocks are quite different from the stocks in my conservative Cabot Value Model. I base my choices for Enterprising stocks on favorable shorter-term market and sector trends and find a variety of stocks in many sectors. Also note that I do not apply defensive risk allocation, which I apply to my Cabot Value Model, because the objective of the Enterprising Model is to provide choices to help you diversify your portfolio. Enterprising Model stocks carry more risk than Cabot Value Model stocks.
Biogen (BIIB) Industry: Healthcare–Biotechnology; Low Risk; No Dividend; Graham-Buffett Analysis
Biogen (BIIB): Current Price 261.42; Max Buy Price 258.14), formerly Biogen Idec, is a biopharmaceutical company based in Cambridge, Massachusetts. The company discovers, develops, manufactures and delivers therapies to patients for the treatment of neurodegenerative diseases, hematologic conditions, and autoimmune disorders. Biogen markets Tecfidera, Avonex, Plegridy, Tysabri and Fampyra for multiple sclerosis (MS), Eloctate for hemophilia A and Alprolix for hemophilia B, and Fumaderm for the treatment of severe plaque psoriasis.
Biogen, collaborating with Genentech, utilizes Rituxan to treat non-Hodgkin’s lymphoma and chronic lymphocytic leukemia (CLL). It uses Gazyva to treat CLL and follicular lymphoma. Biogen is also developing products such as Aducanumab for the treatment of neurodegeneration and Nusinersen for spinal muscular atrophy.
Despite a setback due to a disappointing study data for Biogen’s Opicinumab multiple sclerosis treatment, the company remains the market-share leader in treating multiple sclerosis. The company is launching new treatments that improve patient dosing, which will boost sales and profits.
While multiple sclerosis is a key revenue driver for Biogen now, other promising drugs in the company’s pipeline include Aducanumab, which is in late-stage phase III trials for Alzheimer’s disease and has been fast-tracked by the FDA. An effective Alzheimer’s treatment could be worth tens of billions in annual sales for Biogen within two to three years. Over five million patients in the U.S. and 44 million people worldwide suffer from Alzheimer’s.
Biogen is streamlining its operations and recently spun off its hemophilia business into a company called Bioverativ (BIVV). The company’s recent moves have created speculation on Wall Street that Biogen could become a takeover candidate. Several senior management changes, including CEO, chief commercial officer and head of Research and Development also indicate a sale of Biogen could occur.
Biogen reported solid first-quarter sales and earnings. Sales advanced 3% and EPS jumped 17%. Recently-launched Spinraza (spinal muscular atrophy) is off to a promising start with the company working on expanding the drug’s access to all patients. On the Alzheimer’s disease front, Biogen said that it expects both the ENGAGE and EMERGE studies on aducanumab to be more than 50% enrolled by mid-June.
I expect sales and EPS to advance 6% and 13% respectively in 2017. Biogen’s return on equity is 32%, the current P/E (price to earnings ratio) is reasonable at 14.3, although the company does not pay a dividend. BIIB sells at only 11.7 times current cash flow, which is low. In addition, the stock warrants a Value Rating of 5 (5 is best) from Standard & Poor’s, along with a Star Rating of 4 and Quality Rating of A-. I expect BIIB to advance 34% to 351.13 within one year. Buy at 258.14 or below.
Eastman Chemical (EMN) Industry: Materials–Diversified Chemicals; Medium Risk; 2.4% Yield; Graham-Buffett Analysis
Eastman Chemical (EMN: Current Price 83.84; Max Buy Price 84.29) is a leading manufacturer of a broad range of chemicals, plastics, and fibers used in consumer and industrial products. International operations accounted for about 61% of sales in 2016. Eastman Chemical was founded in 1920 to produce chemicals for Eastman Kodak.
Eastman is the second largest supplier of acetate cigarette filter tow and the leader in acetate yarn for use in apparel, home furnishings and industrial fabrics. The company also manufactures chemicals for the transportation, building and construction, industrial, personal care and agrochemical markets. Eastman also makes cellulose films, adhesive resins and plasticizers.
The company leads the market in innovative products including durable plastics for consumer goods, additives used to improve tire quality, and adhesives for hygiene products. These advances will fuel EPS growth in 2017 and 2018. Eastman’s plan to sell some of its commodity-oriented businesses could lead to reduced EPS volatility. Chemical manufacturers will benefit from the expected pickup in U.S. infrastructure spending under the Trump administration. In addition, higher inflation will enable Eastman to raise prices on its chemicals.
Revenue will likely rise 2% and EPS could rise 28% during the next 12-month period to $7.85 after a two-year slump. Eastman is well-positioned in emerging markets to meet higher demand for chemicals. Product innovation and possible acquisitions could also bolster results.
At 11.9 times current EPS, 7.7 times cash flow, and with a dividend yield of 2.4%, EMN is surprisingly undervalued. EMN will likely rise 27% to my Min Sell Price of 106.14 within one year. Buy at 84.29 or below.
Stifel Financial (SF) Industry: Financials–Investment Banking & Brokerage; Medium Risk; No Dividend; Price to NCAV Ratio Analysis
Stifel Financial (SF: Current Price 46.64; Max Buy Price 45.65) offers securities-related financial services in the U.S., Canada and Europe through several wholly owned subsidiaries. One of the company’s subsidiary, Stifel Nicolaus, is a full-service retail and institutional brokerage and investment banking firm. Three other subsidiaries include Thomas Weisel Partners, a growth focused investment banking firm; Century Securities Associates, an independent contractor broker-dealer firm; and Stifel Bank & Trust, a retail and commercial bank.
The company’s broker-dealer affiliates provide securities brokerage, trading, investment banking, investment advisory and related financial services to individual investors, professional money managers, businesses and municipalities. Stifel Bank & Trust offers a full range of consumer and commercial lending solutions. Stifel Financial was founded back in 1890 and has been headquartered in St. Louis, Missouri during its 127 years of existence.
Stifel Financial has acquired many businesses during its history. In recent years, the company purchased Keefe, Bruyette & Woods in 2013, Sterne Agee in 2015, Barclay’s U.S. Wealth Management division in 2015, and Eaton Partners in 2016. Stifel recently acquired City Financial for an undisclosed amount. City Financial is an Indiana-based investment bank, specializing in public finance and wealth management.
Stifel reported strong first-quarter results. Revenue climbed 9% and EPS surged 37%. Stifel’s banking revenue surged 26%, and asset management and service fee revenue rose 13%. Management forecast similar growth during the remainder of 2017. Results could easily exceed management’s forecast if President Trump reduces regulatory oversight and cuts income taxes. Also, rising interest rates could benefit the company.
Stifel shares sell at 16.3 times current EPS, and the company maintains a solid balance sheet. Net current asset value per share (NCAV) is 25.02, and SF’s price to NCAV is 1.83 which indicates SF shares are totally undervalued. Net current asset value is calculated by subtracting all liabilities from current assets and dividing the result by the number of shares outstanding.
I expect SF to rise 43% to my Min Sell Price of 66.93 within two years. Buy at 45.65 or below.
Thor Industries (THO) Industry: Consumer Discretionary–Recreational Vehicles; Low Risk; 1.2% Yield; Low PEG Ratio Analysis
Thor Industries (THO: Current Price 105.93; Max Buy Price 110.05) designs, manufactures and sells travel trailers, motor homes and other recreational vehicles and related parts and accessories. Thor sells primarily to customers in the U.S. and Canada. The company offers travel trailers under the Airstream, Classic, Sport, Flying Cloud, Land Yacht and Eddie Bauer trade names. It sells motorhomes under the Four Winds, Hurricane, Chateau, Challenger, Tuscany, Axis, Greyhawk and Redhawk trade names.
Thor also makes and sells fifth wheels under the Redwood, DRV Mobile Suites and several other trade names. In addition, the company offers equestrian recreational vehicle products with living quarters, and lightweight travel trailers. The company markets its recreational vehicles through independent dealers. Thor Industries, founded in 1980, is based in Elkhart, Indiana.
Demand for towable and motorized recreational vehicles has increased at an accelerated pace during the past five years. Retirees and families are spending more time and money on the recreation and leisure aspects of their lives. The trend is expected to continue during the next three to five years and beyond. Thor has acquired nine companies during the past 25 years, with the latest, Jayco, adding significant sales and earnings during the past nine months.
Thor’s backlog of orders has increased exponentially with orders for towable trailers up 87% from a year ago, and orders for motorized vehicles up 96%. Analysts have been increasing sales and earnings forecasts, but with orders almost doubling, Thor will easily beat estimates during the next 12 months. In order to meet demand, the company is building two new manufacturing facilities which will add 900,000 square feet of production space.
I expect sales and EPS to surge more than 20% during the next 12 months, after increasing 27% and 29% respectively during the latest 12 months. At 17.2 times current EPS and with a dividend yield of 1.2%, THO is undervalued. THO will likely rise 28% to my Min Sell Price of 135.94 within one year. Buy at 110.05 or below.
Western Digital (WDC) Industry: Information Technology–Technology Hardware Storage & Peripherals; Medium Risk; 2.2% Yield; Low PEG Ratio Analysis
Western Digital (WDC: Current Price 90.05; Max Buy Price 90.31) designs, develops, manufactures and sells hard disk drives. The company’s hard drives are used in desktop personal computers, notebook computers, enterprise servers, network attached storage devices, and consumer electronics products such as personal/digital video recorders, and satellite and cable set-top boxes. A hard drive (short for hard disk drive) is a primary computer storage device that spins, reads and writes one or more fixed disk platters.
Western Digital ‘s hard drive products include 3.5-inch and 2.5-inch drives with capacities ranging from 30 gigabytes to 4 terabytes, and rotation speeds up to 15,000 revolutions per minute. During the next five years, demand for hard drives will outpace the personal computer market. This shift is based on three factors: the growth of alternative products such as consumer electronics devices; the expansion of the external hard drive market, which allows for a more convenient way to store music and photos; and the increased use of multiple hard drives to deal with capacity constraints and safety issues.
In September 2016, Western Digital acquired SanDisk for $15.8 billion. The combined company is now positioned to meet the rapidly-growing demand for data storage. Western Digital expects to obtain annual cost synergies of $500 million by the end of 2017.
Western Digital’s first-quarter results easily beat expectations by a wide margin. Management raised its earnings forecast for the current quarter by a noticeable amount. Sales surged 65% and EPS soared 77% after increasing 47% and 44% in the previous quarter.
Sales and earnings received a big boost from Western Digital’s purchase of SanDisk. Western Digital has evolved into a leader in the fast-growing data storage industry. Rapid growth should continue during the next several quarters.
WDC sells at a very modest 10.6 times current EPS, and 7.1 times cash flow. WDC pays a dividend yielding 2.2% and a PEG ratio of 1.01. I expect WDC to rise 27% to my Min Sell Price of 114.48 within 12 months. Buy at 90.31 or below.
Hold and Sell Recommendations
The stocks in the table below were previously recommended in the Cabot Enterprising Model and are recommended to be held until their stock prices rise to my Min Sell Prices.
Sell Changes
I have three sell recommendations.
Bristow Group (BRS 7.22) recorded poor first-quarter results. Management gave a bleak outlook for 2017 and 2018, which sent BRS shares plummeting over 50% since the report was released on May 24. Bristow failed to slash expenses to offset the decline in sales, which caused Bristow’s deficit to widen. While the decline of offshore oil and natural gas drilling shows few signs of reversing, management has shown no indications of making major changes.
After the precipitous drop, BRS should rebound during the next few days or weeks. I recommend selling now, though, and redeploying your decimated proceeds. Add to one of your current financial, industrial or other holdings. SELL.
Maiden Holdings (MHLD 11.50) reported mixed first-quarter results. Management forecast better results for the remainder of 2017, but analysts ratcheted down estimates for 2017 earnings. Maiden has missed revenue and/or EPS estimates regularly during the past several quarters. Dividends have been raised each year and now yield 5.3%, but earnings have become more erratic. Therefore, I suggest selling Maiden Holdings and switching into more attractive opportunities. SELL.
Nissan Motor (NSANY 19.55) reported decent first-quarter results. The company has been offering larger sales incentives than rivals, but sales declined anyway. Management expects earnings to decrease 19% during the next 12 months ending March 31, 2018 due to rising costs and slowing car sales in the U.S. Management’s negative prediction along with the peaking U.S. auto market spells trouble ahead. I recommend selling NSANY. SELL.
Buy and Hold Changes
I have three new changes.
Avigilon (AVO.TO 14.72) Buy to Hold. The company reported weaker than expected first-quarter results. I will change to Buy if the company reports improved sales and earnings for the second quarter. Hold.
Chicago Bridge & Iron (CBI 15.78) Buy to Hold. A series of negative rumors and analyst downgrades have hurt CBI shares. The company should report better second-quarter results and clear up some of investors’ concerns. Hold.
Ulta Salon (ULTA 302.69) Hold to Buy. The stock’s recent rise places it out of buying range. I’ll recommend waiting for another pullback before buying ULTA. Buy.
Enterprising Model Performance
Value stocks continue to underperform. During the five weeks ended June 13, 2017, the Enterprising Model declined 0.71% compared to an increase of 1.81% for the S&P 500 Index. Performance was dragged down by Bristow Group and Chicago Bridge & Iron.
The Model is up only 0.28% in 2017 compared to an increase of 7.58% for the S&P 500. During the past five years, the Model has advanced 66.2% compared to an increase of 81.8% for the S&P 500.
Since inception on March 10, 2005, the Enterprising Model has provided an impressive return of 150.7% compared to a return of 102.2% for the S&P 500 Index.
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Send questions or comments to roy@cabotwealth.com.
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