This month’s Cabot Value Model contains a diversified list of Buy recommendations, with a bias toward high quality companies in the Technology and Financial sectors.
Cabot Benjamin Graham Value Investor 276
Benjamin Graham is called The Father of Value Investing. His influence has inspired many successful investors, including Warren Buffett.
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My 30-Day Dow Forecast
The stock market moved slightly higher during the past month, led by the materials, technology and industrial sectors. Real estate, consumer staples and utility stocks lagged behind. Several Cabot Value Model stocks performed well, led by Celgene (featured in this issue), FedEx and NIKE, which all gained 10% or better.
This month’s Cabot Value Model contains a wide variety of stocks as usual, with a slight focus on companies in the technology and financial sectors. For the third consecutive month, I have avoided recommending companies in the energy and automotive sectors, because forecasts for these sectors continue to be weak.
My Minimum Sell Price for the Dow Jones Industrial Average has risen to 21,744, which is slightly higher than the July 12 closing price of 21,532. During the past several months, the Dow has reached or slightly exceeded my predicted Min Sell Price and then retreated.
My Min Sell Price for the Dow seems to be a fairly accurate estimate of how high the Dow Jones Industrial Average might climb during the next 30 days. My Min Sell Price will rise again in August if quarterly reports, due later this month, produce better than expected sales and earnings. For now, though, I expect the Dow to climb about 200 points to reach my Min Sell Price of 21,744 before the end of this month.
I start coverage of a new Cabot Value Model Buy recommendation in this issue. FleetCor Technologies (FLT) is an interesting company that is often referred to as “The Global Fleet Card Company.” Find out why in my write-up. The rapidly growing company is selling at a bargain price. Buy now—you’ll be glad you did!
“With every new wave of optimism or pessimism, we are ready to abandon history and time-tested principles, but we cling tenaciously and unquestioningly to our prejudices.” — Benjamin Graham
CABOT VALUE MODEL
The Cabot Value Model applies A-List Dividend and Modern Value Model analyses.
The stock choices using the A-List Dividend analysis meet the following criteria:
(1) Dividend increases every year for 25 years or 10% dividend increases every year for 10 years
(2) Standard & Poor’s Quality Rating of A+, A, or A-
(3) Dividend yield is 1.0% or higher
(4) Dividend payout ratio is less than 50%
The Modern Value analysis uses a system initially developed by Benjamin Graham and Dr. Wilson Payne in 1946, and later modernized and enhanced by J. Royden Ward. The analysis uncovers undervalued stocks of well-known, high-quality companies which have recorded steady earnings growth. Ward’s Modern Value analysis is similar to the approach used by Warren Buffett.
When the market is low and undervalued, the Cabot Value Model will hold 75% moderately aggressive stocks and 25% conservative, counter-cyclical stocks, bonds or ETFs. When the market is high and overvalued, the Model will hold 25% moderately aggressive stocks and 75% conservative, counter-cyclical stocks, bonds or ETFs.
Buy Recommendations
The Cabot Value Model contains 16 securities this month with two new stocks: FleetCor Technologies (FLT) and Starbucks (SBUX). Two stocks transition out of the Model: Facebook (FB) and SPDR S&P Dividend ETF (SDY).
Facebook and SPDR S&P Dividend ETF are now listed in the table of Hold and Sell Recommendations, which shows my Hold/Sell Opinions for these securities and previous recommendations that have transitioned out of the Model. My Hold recommendations remain excellent investments. You should continue to hold your stocks and ETFs until your selection reaches its Min Sell Price, at which time I will issue a sell alert. I will also issue a sell alert when a disappointing performance or adverse condition affects any company or ETF.
Currently, five stocks in the Cabot Value Model are priced slightly above their Max Buy Prices. Before buying Cabot Value Model stocks, you should wait until the price of the stock decreases to or dips below its Max Buy Price.
Defensive Securities: This month’s allocation for my Model remains at Level 5, which calls for a mix of four stocks and 12 defensive positions. The defensive or protective portion of the Model is composed of stocks, ETFs, bonds and cash and is fulfilled by AT&T, BRKB, DIS, FDX, GOOG, ICE, IHDG, LOW, NKE, SBUX, TROW and UNH.
My objective for portfolio allocation is to increase the defensive holdings in the Model when the market rises and becomes overvalued, and decrease the defensive holdings in the Model when the market declines and becomes undervalued. I believe my strategy of increasing or decreasing the number of defensive positions will help you reduce your risk and enhance your profits.
The Dow Jones Industrial Average is near my peak Minimum Sell Price target of 21,744 indicating that the stock market is overvalued. My current Level 5 allocation of four stocks and 12 defensive positions will not change if the stock market climbs higher. If the Dow falls to 20,083, my allocation mix will change to six stocks and 10 defensive positions, or Level 4.
Alphabet (GOOG) Industry: Information Technology–Internet Software & Services; Very Low Risk; No Dividend. Modern Value Analysis
Alphabet, Inc. (GOOG: Current Price 930.09; Max Buy Price 941.82) provides target-based advertisements on the internet. Alphabet is the successor and parent holding company of Google, which operates the world’s leading internet search engine. Google’s unique page ranking and text-matching provide superior search results for users.
The company primarily derives revenue from the delivery of advertising to users. Revenue is also gained from the licensing of search technology and enterprise solutions. Google products include Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome, Google Play, Google Home, Chromecast, Chromebooks and Nexus. Google’s mobile application allows search by voice, sight or location. Alphabet’s most significant competitors are Facebook, Microsoft and Yahoo.
Google Assistant has become one of the leading artificial intelligence platforms operated by voice command, voice searching and voice-activated device control. The Google Assistant, with its “OK Google” voice control is available on most Android operated devices. The Assistant will soon be available on smart TVs, too. The Google Assistant has become a leader in artificial intelligence because of Google’s superior search engine. Google search can find answers faster and more accurately than other systems from Apple, Amazon and Microsoft.
Alphabet easily beat first-quarter forecasts. Sales surged 22% and EPS jumped 28%. Paid clicks, in which an advertiser pays only if a user clicks on ads, rose 44%, well above the expected rise of 30%. Mobile search continues to grow exponentially, fueled by mobile shopping. The company’s Android mobile operating system now appears in 87% of the world’s smartphones. Google controls 95% of the mobile-search market, compared with 78% on personal computers. Google’s dominance in search and advertising in the smartphone business portends exceptional growth in future quarters and years.
Alphabet was hit with a record $2.7 billion fine by European Union antitrust regulators for giving preference in online search results to Google’s comparison-shopping service over other services. Google will likely appeal the ruling which could take years to resolve.
Sales will likely climb 15% and EPS will jump 23% to 35.50 in 2017. At 30.4 times current EPS, Alphabet’s shares are reasonably priced. Alphabet does not pay a dividend, but the balance sheet is extremely strong with $92 billion in cash and minimal debt. I expect the stock price to climb 21% to reach my Min Sell Price of 1,127.49 within a year. Buy at 941.82 or below.
Celgene (CELG) Industry: Health Care–Biotechnology; Low Risk; No Dividend. Modern Value Analysis
Celgene Corp. (CELG: Current Price 132.25; Max Buy Price 127.75) is a biopharmaceutical company focusing on the discovery, development and commercialization of treatments for cancer and other severe conditions. The company concentrates on various cancers including multiple myeloma and myelodysplastic syndromes, chronic lymphocyte leukemia and non-Hodgkin’s lymphoma, glioblastoma and ovarian, pancreatic and prostate cancers.
Revlimid, Celgene’s leading drug, comprises 62% of the company’s total sales, but new drugs are providing considerable diversification. Revlimid is an oral cancer drug used to treat multiple myeloma. The drug works against cancer cells partly by impacting the functioning of the immune system. Revlimid sales should continue to rise, bolstered by expanded uses and market share gains. Celgene has patent protection for Revlimid through the end of 2026.
Revlimid lists for more than $100,000 per year for patients and could be scrutinized further by Federal authorities, but President Trump has avoided going after companies producing high-priced drugs. The company has raised the price of Revlimid by an average of 8% a year since 2010.
Celgene has developed 35 partnerships with small biotech companies developing next-generation cancer drugs. In addition, Celgene continues to purchase small development companies with promising research activities.
Celgene entered into an agreement to collaborate with BeiGene Ltd. (BGNE) of Beijing, China. The collaboration is two-fold.
1) With worldwide rights to BeiGene’s PD-1 inhibitor, Celgene will accelerate its immuno-oncology strategy in solid tumors. The agreement maximizes potential for PD-1-based immuno-oncology and for Celgene’s innovative pipeline assets and global oncology expertise.
2) BeiGene will acquire Celgene’s commercial operations in China and exclusive license to Celgene’s China cancer commercial portfolio, including Abraxane, Revlimid, and Vidaza. BeiGene will receive $263 million in upfront license fees and $150 million equity investment. The deal is scheduled to close before the end of September 2017 and could become notably successful for both companies.
Sales will likely double between now and 2020, based on the company’s robust drug pipeline. Celgene recorded solid sales and earnings results for the quarter ended March 31. Sales climbed 18% and EPS soared 27%. Celgene’s main drugs for multiple myeloma, Pomalyst and Imnovid, grew 33%. Cancer drugs Revlimid and Abraxane grew 20% and 5%, respectively. Otezla, a drug for psoriasis and psoriatic arthritis, failed to meet analysts’ forecasts. Management predicted the positive momentum will continue during the remainder of 2017 and raised its earnings forecast a tad.
Celgene is among the fastest growing companies in the biotech sector. The company does not pay a dividend, but the balance sheet is strong with $9.0 billion in cash and manageable debt. I expect the stock price to climb 31% to reach my Min Sell Price of 173.41 within one to two years. Buy at 127.75 or below.
FleetCor Technologies (FLT) Industry: Information Technology–Data Processing and Outsourced Services; Low Risk; No Dividend. Modern Value Analysis
FleetCor Technologies (FLT: Current Price 146.04; Max Buy Price 148.63) provides fuel cards, commercial payment and data solutions, lodging and transportation management services, stored value solutions and workforce payment products and services to businesses, retailers and commercial fleets.
FleetCor recently formed a lucrative joint venture with First Data. The two companies will combine their gift card businesses, which will enable both companies to reach more countries with a broader array of offerings.
FleetCor will purchase Cambridge Global Payments, a leading provider of international business-to-business payments. Cambridge, headquartered in Toronto, processes cross-border payments to small and mid-sized businesses. Cambridge will focus on international services, while FleetCor will concentrate on the U.S. market. Cambridge will likely contribute noticeable earnings immediately when the deal closes in the current quarter.
Sales and earnings growth has accelerated during the past four quarters. First-quarter revenue popped 26% and EPS surged 28%, prompted by strong internal growth and more-favorable financial markets in the U.S. Management recently forecast revenue and EPS growth of 20% for the full year 2017.
The stock price has stalled during the past two and one-half years. However, recent strength could lead to meaningful gains during the next year or two. FleetCor doesn’t pay a dividend, but its balance sheet is solid and sales and earnings growth has been exceptional since going public in 2010. I am confident that FLT will rise 49% to my Min Sell Price of 217.53 within two years. Buy at 148.63 or below.
IntercontinentalExchange (ICE) Industry: Financial–Electronic Exchange; Very Low Risk; 1.2% Yield; Modern Value Analysis
IntercontinentalExchange (ICE: Current Price 65.42; Max Buy Price 65.76) owns and operates the leading worldwide electronic marketplace for trading futures and over-the-counter (OTC) energy and soft commodities contracts. In November 2013, ICE completed the $11 billion acquisition of NYSE Euronext. The purchase nearly tripled ICE’s revenues and added significant earnings. Cost reductions from NYSE Euronext are ongoing, and should continue to lift earnings during the foreseeable future. ICE has purchased several other smaller businesses during the past few years to bolster its product and service offerings and expand into new geographic areas.
IntercontinentalExchange is now the leading network of exchanges and clearing houses for financial and commodity markets with 11 exchanges and seven clearing houses. Growing demand for innovative new products for OTC trading and oil futures contracts bode well for the new ICE. Vigorous transaction and clearing activities will benefit ICE now that President-elect Trump is easing regulatory guidelines.
IntercontinentalExchange recorded mixed results in the first quarter. Revenue rose 27% and EPS were flat. Revenue was bolstered by recent acquisitions, while the company posted higher fees from IPOs (initial public offerings) because it listed all of the last 27 large U.S. company IPOs. Management expects earnings growth to accelerate during the second half of 2017.
At 22.1 times trailing EPS, ICE shares are a tad high, but I expect Intercontinental to announce additional favorable acquisitions in 2017. ICE’s balance sheet is very strong with low debt and lots of cash available to fund future needs. I expect ICE shares to advance 15% to my Min Sell Price of 75.28 within 12 to 18 months. Buy at 65.76 or below.
Lowe’s Companies (LOW) Industry: Retail–Home Improvement Retail; Very Low Risk; 2.2% Yield; A-List Dividend Analysis
Lowe’s Companies (LOW: Current Price 76.25; Max Buy Price 76.31) sells building materials and supplies, lumber, hardware and appliances through more than 2,370 stores in the U.S., Canada and Mexico.
Lowe’s is the world’s second-largest home improvement retailer, with over $66.6 billion in revenue, and is second only to Home Depot’s $96 billion revenue total. The company focuses on retail do-it-yourself customers, do-it-for-me customers who utilize LOW’s installation services, and professional builders and remodelers.
Stores are typically 100,000 square feet in size, and include a lawn and garden center, which averages an additional 32,000 square feet. Lowe’s stores stock about 36,000 items, with hundreds of thousands of items available through the company’s special-order system.
The transition from big box retailing to on-line shopping has created huge problems for U.S. retailers. Several retailers have declared bankruptcy, and many are closing less profitable stores by the hundreds. Home Depot and Lowe’s are mostly immune from Amazon.com’s success. HD and Lowe’s products include lumber, building materials, appliances, power tools, cabinets, carpeting, paint, plants and garden supplies which are heavy and bulky and can’t be shipped cheaply.
Professional contractors, who account for 30% of Lowe’s sales, prefer to buy what they need in stores, often on short notice. Nonprofessional do-it-yourself customers often want to see and touch products and ask for advice before buying. Lowe’s generates only 4% of its sales online.
Lowe’s management has embarked on an ambitious three-year plan which will include 3% to 3.5% increases in same-store sales, 15% yearly increases in EPS, combined dividends and buybacks equal to 20% of current market value, and a 1.5% increase in the operating profit margin to 11.2%. In comparison, Home Depot’s profit margin is 14%.
Lowe’s is seeking to narrow the gap with HD by better serving contractors through increased inventories and adding a senior executive focused on the contractor segment. The contractor business is important because it’s growing more rapidly than the do-it-yourself market, reflecting a growing preference among homeowners for professional renovations. Time constraints in dual-earner households and limited home-improvement skills among younger people have created more demand for professional assistance.
Sales will likely increase 6% and EPS will climb 17% during the next 12-month period. The housing market and employment and wages should continue to recover, leading to more remodeling projects. Dividends have been increased every year during the past 52 years. During the past 10 years, the rate of increase is 17% per year, including an increase of 29% in 2017. At 19.6 times current EPS and with a dividend yield of 2.2%, LOW shares are very attractive for long-term investors. I expect LOW to climb 33% to reach my Min Sell Price of 101.21 within two years. Buy at 76.31 or below.
Hold and Sell Recommendations
The following table includes my Hold and Sell Opinions for securities appearing in previous Cabot Value issues. These stocks have transitioned out of the Model but remain excellent investments. You should continue to hold the stocks and ETFs you purchased until your selection reaches its Min Sell Price, at which time I will issue a sell alert. I will also issue a sell alert when a disappointing performance or adverse condition affects any company or ETF. The stocks recommended to be sold in prior issues are not included in the table.
My Buy recommendations (including Risk Ratings) for the July 2017 Model can be found in the Current Buy Recommendations table.
Sell Changes Since Last Issue:
Kroger (KR) reported weak sales and earnings which sent the shares down 18% after the report on June 15. The drop was problematic, but then Amazon announced its intention to purchase Whole Foods, which sent the KR stock price down another 11%.
Kroger then increased its quarterly dividend to $0.125 from $0.120, and announced a $1 billion stock repurchase program. Management provided an upbeat assessment of the company’s future prospects, but the stock price has been damaged significantly. I expect KR to flounder in the 21.5 to 23 area for an extended period of time. Therefore, I recommend selling your KR shares now. SELL.
Oracle (ORCL) reached its Minimum Sell Price of 48.62 on June 22. The company recorded solid sales and earnings for the quarter ended May 31. Sales advanced 3%, EPS climbed 10%, and cloud revenue surged 64%. The ORCL stock price subsequently popped 10% and is now overvalued.
Oracle was first recommended in April 2006 at 13.73. The company was featured in the Cabot Value Model using the Modern Value analysis. ORCL has climbed 275.89% in the past 134 months compared to a gain of 88.14% for the Standard & Poor’s 500 Index during the same time period. I recommend selling your ORCL shares now. SELL.
PowerShares US Dollar ETF (UUP) has declined 6.1% year to date as the euro and other currencies around the world have strengthened. The stronger global economies are allowing central banks to abandon economic stimulus efforts and attempt to return to more normal interest rates. The turnaround overseas has caused the U.S. dollar to fall, which will likely continue during the next couple of years. Therefore, I recommend selling your UUP shares to avoid further erosion. Sell UUP now. SELL.
Buy and Hold Changes Since Last Issue:
Facebook (FB) Buy to Hold. The recent surge in FB’s stock price has propelled it beyond my buying range. I’ll recommend buying FB again if the shares retreat to 150 or below.
SPDR S&P Dividend ETF (SDY) Buy to Hold. Remains attractive, but I removed SDY from the Value Model to make room for more attractive stocks.
Starbucks (SBUX) Buy to Hold. Recent decline presents an excellent opportunity to buy a high-quality stock at a reasonable price.
Model Performance
Performance calculations for the Cabot Value Model include all Buy-rated and all Hold-rated stocks.
The Cabot Value Model climbed 0.79% in June, compared to an increase of 1.62% for the Dow Jones Industrial Average. The Model gained 6.86% during the first half of 2017 compared to an increase of 8.03% for the Dow. Value stocks continue to underperform in 2017.
The Value Model was first published in Cabot Benjamin Graham Value Investor 14 years ago. During the ensuing 14 years, the Model has increased 250.7% compared to increases of 140.0% for the Dow and 158.8% for the Standard & Poor’s 500 Index. All performance numbers do not include dividends.
The Cabot Value Model was also used extensively by investment advisors since 1995 and by individual subscribers since 2002, and has outperformed the Dow Jones Industrial Average by a wide margin during the past 21 years. Since inception on 12/31/95, the Cabot Value Model has provided an impressive return of 1,112.0% compared to a return of 693.5% for Warren Buffett’s Berkshire Hathaway. During the same 21-year period, the Dow has gained just 317.2%.
The Cabot Value Model performance includes the performance results of the Modern Value Model for the period from 12/31/95 to 11/30/02. Performance for the period from 11/30/02 to 3/3/14 was derived from the average monthly performance of the Classic Value Model and Modern Value Model, weighted equally.
Beginning March 3, 2014, the Cabot Value Model includes buy recommendations derived from the Modern Value and the A-List Dividend analyses. Performance calculations for the Cabot Value Model now include all Buy-rated and all Hold-rated stocks. Prior to March 3, 2014, performance calculations included only stocks contained in the Model.
Top 275 Value Stocks
Following are the highest rated Top 275 Value Stocks in the Benjamin Graham database. Use the Top 275 to look up data and ratings for stocks you already own or in which you have an interest. The table is also available on the Google cloud as an interactive, real-time worksheet. The maximum rating for Quality, Value, Growth and Technical is 5.00, which is best. The maximum Total Rating is 10.00, also the best.
Explanation of terminology for the Roy’s Opinion column:
Buy-V: Cabot Value Model stocks recommended to be purchased.
Buy-E: Cabot Enterprising Model stocks recommended to be purchased.
Potential Buy: Stocks with the possibility to be recommended. Their current prices are below their Maximum Buy Prices.
Hold-V: Cabot Value Model stocks recommended to be held until Roy issues a sell alert or the stock reaches its Minimum Sell Price.
Hold-E: Cabot Enterprising Model stocks recommended to be held until Roy issues a sell alert or the stock reaches its Minimum
Sell Price.
Sell: Stocks recommended to be sold.
Neutral: Interesting stocks in Roy’s database but not sufficiently researched to form an opinion.
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Send questions or comments to roy@cabotwealth.com.
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Cabot Benjamin Graham Value Investor is published by Cabot Wealth Network, independent publisher of investment advice since 1970. Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit https://cabotwealth.com// or write to support@cabotwealth.com
THE NEXT CABOT BENJAMIN GRAHAM VALUE INVESTOR WILL BE PUBLISHED AUGUST 3, 2017
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