This month I start covering a bank for the first time in many years. The balance sheets of many U.S. banks have strengthened significantly during the past few years, and present low risk buying opportunities. Citizens Financial, based in Rhode Island, stands out from the crowd and is a solid pick for steady performance during the year ahead.
Cabot Benjamin Graham Enterprising 277E
Benjamin Graham is called The Father of Value Investing. His influence has inspired many successful investors, including Warren Buffett.
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Five Great Stocks
In this month’s Enterprising Model Issue, I highlight five interesting companies that offer great promise. First up, Citizens Financial Group (CFG) is the first bank in a very long time that I find truly undervalued. In addition to being undervalued, Citizens’ revenue and earnings prospects for the next couple of years are outstanding. Read why I like CFG in this issue.
Another company I like is Spectra Energy (SEP). It is expanding its natural gas and oil pipelines at a rapid pace to meet demand from increased oil and gas production in the U.S. and Canada. Third is Tech Data (TECD). TECD’s sales and EPS skyrocketed in the second quarter and will continue to impress during the remainder of 2017.
Ulta Beauty (ULTA) raised its sales and earnings forecast, after latest quarter sales jumped 22%, same store sales rose 11%, e-commerce sales grew 71% and EPS climbed 41%. Yet, ULTA’s stock price has fallen recently, and now offers excellent value.
Finally, WestJet Airlines (WJA.TO) joins the Enterprising Model Buy list for the first time since November 2016. The Canadian economy and WestJet’s fortunes have improved considerably during the past few months. WestJet offers a great opportunity to join the economic resurgence in Canada.
“It’s a funny thing, the more I practice the luckier I get.” —Arnold Palmer
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 three contains 16 stocks with five new stocks: Avigilon (AVO.TO), Citizens Financial Group (CFG), Spectra Energy Partners LP (SEP), Ulta Beauty (ULTA) and WestJet Airlines (WJA.TO). Five stocks transition out of the Model: Alliance Resource (ARLP), Big Lots (BIG), Chicago Bridge & Iron (CBI), GNC Holdings (GNC) and Stifel Financial (SF).
Alliance Resource, Big Lots, Chicago Bridge & Iron, GNC Holdings and Stifel Financial are now listed on page 7 in the table containing my Hold and Sell Recommendations. These five 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 Enterprising Model 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 they achieve my Min Sell Price.
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. In addition, I have not utilized my 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.
Citizens Financial Group (CFG) Industry: Bank – Regional Bank; Medium Risk; 2.0% Yield; Low PEG Ratio analysis
Citizens Financial Group (CFG: Current Price 35.34; Max Buy Price 36.08) offers a wide range of retail and commercial banking products and services to individuals and small and mid-size businesses in the U.S.
In Consumer Banking, Citizens focuses on retail customers and small businesses with traditional banking products and services, including checking and savings, credit cards, home loans, business loans and financial management services. In Commercial Banking, the bank provides various financial products and services, including loans, leases, trade financing, corporate finance and advisory services.
Citizens traces its history back to High Street Bank, which was founded in 1828 in Providence, Rhode Island. The company was purchased by Royal Bank of Scotland in 1988 before being divested in an initial public offering in 2014. Citizens is now the 12th largest retail bank in the U.S. and operates 1,200 branches in 11 states across the New England, Mid-Atlantic and Midwest regions.
Citizens is aggressively growing its loan segment, organically and through loan purchases, with much of the growth coming from residential mortgage, auto lending and student loans. I expect revenues to rise 8% and EPS to advance 15% during the next 12 months ending June 30, 2018 after increasing 6% and 38% in the prior 12 months. Citizens Financial easily passed the Federal Reserve’s latest round of stress tests, enabling the bank to hike its quarterly dividend to $0.18 from $0.14. The resulting 2.0% yield is attractive to investors.
With a price to earnings ratio (P/E) of 15.1 times current EPS and a PEG ratio of 0.86, CFG shares are undervalued. I calculate PEG by dividing the current P/E of 15.1 by the sum of the forecast 5-year EPS growth rate (15.6%) and dividend yield (2.0%).
I expect CFG shares to rise 31% and reach my Min Sell Price of 46.41 within one to two years. Buy CFG at 36.08 or below.
Spectra Energy Partners LP (SEP) Industry: Energy – Oil & Gas Storage & Transportation; Medium Risk; 6.0% Yield; Low P/BV Ratio analysis
Spectra Energy Partners LP (SEP: Current Price 44.78; Max Buy Price 45.81) is a master limited partnership operating as an investment arm of Spectra Energy Corp. Spectra Energy Partners LP transports natural gas through interstate pipeline systems, and also stores natural gas in underground facilities in the U.S. Spectra’s operations in the U.S. and Canada include more than 15,000 miles of pipeline; 170 BCF (billion cubic feet) of natural gas storage; and 5.6 million barrels of crude oil storage.
Spectra recently completed multiple capital expansion projects, which will bolster sales and profits during the remainder of 2017 and beyond. Lower natural gas and commodity prices and higher operating expenses hurt earnings in 2016.
Spectra Energy, the majority owner of SEP, was recently purchased by Enbridge Inc. (ENB), Canada’s leading energy transportation and distribution operator. Enbridge is now the largest energy infrastructure company in North America. The combined company will be able to offer significantly more business to Spectra Energy Partners in the second half of 2017 and beyond.
Spectra’s second quarter sales climbed 12% and EPS improved 18%. Spectra raised its quarterly dividend for the 39th consecutive quarter to $0.714 from $0.701. The resulting yield is now 6.0%.
Sales will likely advance 8% and EPS will rise 14% to 3.33 during the next 12 months ending June 30, 2018 without factoring in the additional business from the merger of SEP’s parent with Enbridge. With a P/E of 14.1 times current EPS and a price to book value ratio of 1.13, SEP shares are clearly undervalued.
President Trump has eased regulations allowing companies to build more pipelines in the U.S. I expect SEP shares to rise 33% and reach my Min Sell Price of 59.77 within 12 to 18 months. Buy SEP at 45.81 or below.
Tech Data (TECD) Industry: Information Technology – Technology Distributor; Low Risk; No Dividend; Price to NCAV Ratio analysis
Tech Data (TECD: Current Price 105.44; Max Buy Price 110.14) is one of the world’s largest wholesalers and distributors of microcomputer hardware and software. Tech Data’s customers are resellers, retailers and direct marketers.
Tech Data’s products include computer peripherals, security systems, consumer electronics, digital signage and mobile hardware. The company manages inventories to maintain sufficient quantities to achieve high order fill rates. It also attempts to stock only those products in high demand and with a rapid turnover rate.
Tech Data’s recent acquisition of Avnet’s Technology Solutions segment for $2.3 billion will vastly broaden the company’s ability to deliver tech products to major businesses. The integration of Avnet has gone smoothly and is ahead of schedule. Tech Data is now a leading distributor of laptops, tablets and printers, while the Avnet segment excels in storage, network servers and other data center products.
With a much wider product menu under one roof, the significantly larger Tech Data will attract companies like Cisco, which has a huge appetite for tech products. Tech Data will have new ways to cross-sell and deepen its relationships with major client companies. The Avnet purchase will also improve Tech Data’s position in Asian markets, and provide opportunities to save $50 million in 2017 and $100 million in 2018.
Tech Data easily beat analysts’ forecasts for the quarter ended April 30. Sales surged 29% and EPS soared 78%. Sales and earnings were bolstered by the Technology Solutions business purchased from Avnet. TECD generated strong cash flow and reduced its long-term debt.
Sales will likely climb 18% during the next 12 months ending July 31, 2018 after increasing 15% in the prior 12 months. EPS will jump 25% to $10.10 after advancing 41% in the previous 12-month period. TECD shares sell at 12.4 times current EPS, and the company maintains a solid balance sheet.
I expect TECD’s stock price to rise 28% to my Min Sell Price of 135.15 within 12 to 18 months. Buy at 110.14 or below.
Ulta Beauty (ULTA) Industry: Retail – Specialty Stores; Low Risk; No Dividend; Graham-Buffett analysis
Ulta Beauty (ULTA: Current Price 250.64; Max Buy Price 258.58) is the largest beauty retailer in the U.S. The company provides one-stop shopping for 21,000 prestige, mass market and salon products and services. Ulta offers affordable indulgence to its customers by combining the product breadth, value and convenience of a beauty superstore with the distinctive environment and experience of a specialty salon.
Ulta offers cosmetics, fragrance, haircare, skincare, bath and body products and salon styling tools, as well as salon haircare products. Ulta also offers men’s skincare, haircare and fragrance products, and a full-service salon in all of its stores. The company operates 990 stores in 48 states after opening 18 stores in the latest quarter.
Ulta’s stock price has dropped 20% during the past two months. A couple of reasons caused the steep decline. First, department stores, including Macy’s and J.C. Penney, are offering discounts on cosmetics to attract shoppers. The discounting won’t last forever, and Ulta is counteracting by offering special deals to its rewards program customers.
Secondly, Amazon has not pushed into selling cosmetics, especially high-end beauty products similar to Ulta’s products. A recent rumor suggests Amazon is considering a partnership with Violet Grey, the beauty expert who sells “prestige” products online. Violet Grey sells very expensive cosmetics, which makes me wonder why Amazon might be interested in a partnership. In my opinion, Amazon won’t pursue an agreement.
Ulta’s reduced stock price offers an excellent opportunity to buy a company growing at a rapid pace. Analysts continue to raise Ulta’s EPS estimates which now stand at 8.32 for the year ending 1/31/18; 9.89 for 1/31/19; and 12.05 for 1/31/20.
Ulta exceeded analysts’ estimates for the quarter ended April 29. Sales jumped 22%, same store sales rose 11%, e-commerce sales grew 71%, and EPS climbed 41%. Management raised its sales and earnings forecast for the remainder of 2017.
ULTA shares are not cheap, but earnings growth of 33% per year during the past five years justifies the current P/E of 35.8. The company’s 27% return on equity makes the stock attractive to investors like Warren Buffett. ULTA shares will likely rise 53% to my Min Sell Price of 382.38 within 2 years. Buy at 258.58 or below.
WestJet Airlines Ltd. (WJA.TO) Industry: Industrials – Air Transportation; Medium Risk; 2.2% Yield; Undervalued Canadian analysis
WestJet Airlines Ltd. (WJA.TO: Toronto Stock Exchange Current Price 25.84; WJAFF: U.S. Over-the-Counter Current Price 20.36), with headquarters in Calgary, Alberta, is one of the leading airlines in Canada. The airline’s low-airfare approach has enabled the company to expand rapidly during the past five years. WestJet, WestJet Encore and the company’s 10,000 employees now serve 120 destinations in North America, Central America, the Caribbean and Europe.
WestJet flies 119 Boeing 737s and Bombardier Q400s making WestJet’s fleet one of the youngest in the business, averaging 7.2 years per jet. The company prides itself on offering outstanding service to passengers. WestJet is a J.D. Power Customer Service Champion (one of two companies in Canada), and Canada’s most trusted airline in 2017.
WestJet continues to add new routes to its system and new aircraft to its fleet. Revenue will likely increase 7% and EPS will climb 15% during the next 12 months ending June 30, 2018. Results were hampered by a slowing oil-dependent Canadian economy during the past 18 months.
WestJet beat second quarter estimates by a wide margin. Sales grew 11% and EPS soared 37%. WestJet achieved record capacity utilization during the second quarter of 82.8% and flew a record 5.9 million guests, a year over year increase of 11.5%. Load factor measures airline seats occupied per mile (or kilometer) compared to available seats per mile (or kilometer). The pickup in Canada’s economy will help WestJet to post noticeably better results during the next several quarters. The Canadian economy is finally beginning to perk up after several years in the doldrums.
Last month, the Bank of Canada raised interest rates for the first time in seven years, a sign that the central bank believes Canada’s economy will strengthen during the next several quarters. A stronger Canadian economy and the usual surge in summer travel bode well for WestJet.
At 13.6 times current EPS and with a dividend yield of 2.2%, WJA.TO shares are clearly undervalued. WestJet shares are offered on the Toronto Exchange with the symbol WJA.TO and on the U.S. Over-the-Counter market with the symbol WJAFF. I expect WJA.TO shares to rise 32% to my Min Sell Price of 34.24 Canadian dollars within two years. Buy at 26.18 or below. I expect WJAFF shares to reach my 26.98 USD Min Sell Price within two years also. WJAFF shares are thinly traded so I advise using caution when purchasing. Buy WJAFF at 20.63 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 one sell recommendation.
Greenhill & Co. (GHL 16.95) reported poor revenue and earnings again. Revenue fell 26% and EPS plummeted 68% after declining 15% and 71% in the prior quarter. Management’s forecast for improved second-quarter results failed to materialize. Greenhill hired nine new managing directors in 2017, which added to expenses. GHL shares fell 4% to 19.15 in after-hours trading on Thursday, July 27.
Normally, new directors require several months to develop new investment transaction revenue. The cost of new directors increased but revenue remained low. Management has not provided a forecast of revenue or earnings for the remainder of 2017. Analysts have lowered their EPS forecast for 2017 to $0.90 from $1.40 and for 2018 to $1.49 from $1.78. The earnings slump could force the company to cut its dividend. Greenhill’s performance is disappointing. SELL.
Buy and Hold Changes
I have nine new changes.
Alliance Resource (ARLP 18.75) Buy to Hold. President Trump’s promises to the coal industry have not materialized, so far. Hold.
Avigilon (AVO.TO 13.80) Hold to Buy. Travel and the Canadian economy are rebounding. Buy.
Big Lots (BIG 50.99) Buy to Hold. Retail stocks continue to languish. Hold.
Chicago Bridge & Iron (CBI 16.41) Buy to Hold. Company’s troubles are solvable, but renewed growth will take time. Hold.
GNC Holdings (GNC 9.53) Buy to Hold. The stock needs to settle down after a volatile month. Hold.
Spectra Energy Partners LP (SEP 44.78) Hold to Buy. Company’s expansion is evolving. Buy.
Stifel Financial (SF 50.66) Buy to Hold. Stock’s recent pop places shares well above my Max Buy Price. Hold.
Ulta Beauty (Ulta 250.64) Hold to Buy. Recent fall in stock price offers an excellent buying opportunity. Buy.
WestJet Airlines (WJA.TO 25.84) Hold to Buy. Recent fall in stock price offers an excellent buying opportunity. Buy.
Enterprising Model Performance
Value stocks faltered briefly during the three weeks ended August 8, 2017. The Enterprising Model lost 0.98% compared to an increase of 0.58% for the S&P 500 Index. Performance was hindered by Triumph Group and Western Digital. Conservative stocks in the Cabot Value Model are noticeably out-performing the higher risk stocks included in the Enterprise Model thus far in 2017.
The Model is up only 1.34% in 2017 compared to an increase of 9.08% for the S&P 500. During the past five years, the Model has advanced 57.4% compared to an increase of 76.0% for the S&P 500.
Since inception on March 10, 2005, the Enterprising Model has provided an impressive return of 153.4% compared to a return of 105.0% for the S&P 500 Index.
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Send questions or comments to roy@cabotwealth.com.
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