Cabot Prime Pro Week Ending February 17, 2017
Cabot Growth Investor
Update on Other Stocks of Interest February 17: Follow ups to stocks featured September 14, 2016 (issue 1351) to February 15, 2017 (issue 1361).
Bi-weekly Issue February 15: All three of our key market timing indicators remain bullish, so we’re sticking with a heavily invested stance. Mike has three changes to the portfolio: he’s selling Martin Marietta (MLM), buying Lumentum (LITE) and restoring his Buy rating on Charles Schwab (SCHW) after its recent shakeout.
Cabot Top Ten Trader
Movers & Shakers February 17: Buy ideas: Alaska Air (ALK), Royal Caribbean (RCL), Seagate Technology (STX), Western Alliance’s (WAL) and XPO Logistics (XPO), and five sells: Berry Plastics (BERY), MGM Resorts (MGM), WellCare Health (WCG), Freeport-McMoRan (FCX) and Signature Bank (SBNY). Mike continues to raise stops on many Top Ten stocks should they and/or the market hit a pothole.
Weekly Issue February 13: The market was looking iffy a few trading days ago, but the action since then has been excellent, with every major index tagging new highs and many stocks and sectors going along for the ride. With the evidence improved, Mike is moving the Market Monitor to a level 8 out of 10. Many of this week’s Top Ten Trader stocks are showing extreme upside power, and our Top Pick is Lumentum (LITE), a leader in the optical networking area that’s just exploded out of a four-month base.
Cabot Options Trader and Cabot Options Trader Pro
Note that the current week’s Weekly Update, earnings updates, position updates and stocks on watch are posted on the website in the Market Update section, which is deleted each week.
Weekly Update February 20: Economic data releases for this week are light. The lone potential market mover is Wednesday afternoon’s release of the Federal Reserve’s Minutes from its previous meeting. The focus of earnings season turns to the retail sector this week, with companies such as Macy’s (M), Wal-Mart (WMT), Home Depot (HD) and TJX (TJX) reporting.
Position Update February 17: Today is the expiration of our SPY Bear Call Spreads.
Trade Alert February 17: Adjust Existing Position: Buy back your Blackstone (BX) February 30.5 Calls and Sell the March 30 Calls.
Stock on Watch February 17: Colgate-Palmolive (CL) is up 5% today following news that Kraft Heinz (KHC) made a bid for Unilever (UN). Unilever turned down the offer and Colgate is rallying on the assumption that the company is now in play.
Position Updates February 16: Updates on Blackstone (BX), Colgate-Palmolive (CL) and Coca-Cola (KO).
Market Update February 16: This morning, rumors are circulating about an options trade that went horribly wrong, which may explain the market strength.
Market Update February 15: This afternoon, a trader executed an interesting trade in the VIX that’s looking for increased volatility/potential market downside. Here are the details of the trade: Bought 125,000 Volatility Index (VIX) April 14/20 Bull Call Spreads for $0.95, and Sold 125,000 Volatility Index (VIX) April 12 Puts for $0.42.
Stock on Watch February 15: Jacob will likely add a Colgate Palmolive (CL) call position to the portfolio today or in the days to come. The stock got hit hard on earnings late in January, and has since regained nearly all of those losses. Interestingly, the stock has bounced back even as the dollar has strengthened, and most interesting to Jacob is the option order flow.
Education Video Hedging with Options February 15: With the Dow, S&P and Nasdaq all hitting new highs, and the VIX at 11, Jacob getting a lot of questions about hedging.
Cabot Undervalued Stocks Advisor
Special Bulletin February 17: Universal Electronics (UEIC) reported earnings yesterday and shares are up 12%. Longer-term investors should Hold UEIC. Kraft Heinz (KHC) is up over 8% today and now rated Sell.
Special Bulletin February 16: Molina Healthcare (MOH) reported huge fourth-quarter and full-year earnings misses yesterday after the markets closed, bearing no resemblance to analysts’ consensus earnings estimates. Sell.
Special Bulletin February 15: American International Group (AIG) reported a larger-than-expected fourth-quarter reserve charge of $5.6 billion. Also, updates on GameStop (GME) and Kraft Heinz (KHC).
Weekly Update February 14: Today’s portfolio changes: Archer Daniels Midland (ADM) moves from Strong Buy to Buy, Boise Cascade (BCC) moves from Buy to Hold and Tesoro (TSO) moves from Hold to Buy.
Special Bulletin February 13: Crista recommends the sale of Applied Materials (AMAT). The stock is up about 35% since joining the Growth Portfolio in August 2016. The company’s EPS are expected to grow 39.4% in fiscal 2017 (October year-end), then just 7.0% in 2018, with a corresponding P/E of 13.5. AMAT is overvalued based on 2018 EPS estimates. Some reinvestment ideas: Molina Healthcare (MOH), Quanta Services (PWR), Royal Caribbean (RCL), Exxon Mobil (XOM), Schnitzer Steel (SCHN), Total (TOT) and Whirlpool (WHR).
Monthly Issue February 7: Today’s featured stocks include Vertex Pharmaceuticals (VRTX), Exxon Mobil (XOM) and a new addition to the Growth Portfolio, Martin Marietta Materials (MLM). Crista also mentions four additional growth stocks, which she encourages you to research on your own and ask her about.
Cabot Stock of the Week
Weekly Issue February 14: For today’s selection, Tim recommends Game Stop (GME), a retail stock that has begun the long road back to its old highs, and investors are enjoying a yield of 5.8%. As to the current stocks in the recommended portfolio, the majority are doing great. But Tim is downgrading Parsley Energy (PE) to Sell and Berry Plastics (BERY) and Square (SQ) to Hold.
Cabot Small-Cap Confidential
Weekly Update February 17: Two of our positions reported this week. One was up over 8% the day after reporting. And the other is up nicely in early trade today after reporting yesterday. Q2 Holdings (QTWO) moves to Hold.
Monthly Issue February 3: Tyler’s choice this month is Airgain (AIRG), a small cap company that specializes in antennas for wireless networking.
Cabot Emerging Markets Investor
Bi-weekly Update February 16: The Emerging Markets Timer continues to flash a buy signal, as the iShares Emerging Markets Fund (EEM) has been sprinting away from its moving averages. We are responding by returning NetEase (NTES) to a Buy rating and initiating a half position in BeiGene (BGNE).
Bi-weekly Issue February 9: The Cabot Emerging Markets Timer is still flashing a robust buy signal and our portfolio holdings are either advancing or holding up well. In today’s issue, Paul does a little strategy review, warns against predictions and welcomes an old friend back to the portfolio, social media platform Weibo (WB).
Cabot Benjamin Graham Value Investor
Weekly Update February 17: Roy includes summaries of 10 Cabot Benjamin Graham Value Investor companies that have reported quarterly financial results or other noteworthy news during the past week. He also reports on the sectors of the economy that are likely to benefit from economic and political changes in 2017 and 2018.
Monthly Enterprising Issue February 16: Featured Buy Recommendations are Alliance Resource Partners (ARLP), Biogen (BIIB), GNC Holdings (GNC), Magna International (MGA) and Stifel Financial (SF). Rating changes: Blackstone Group LP (BX) from Hold to Buy, and Activision Blizzard (ATVI), LKQ Corp. (LKQ), Maiden Holdings (MHLD) and Ulta Salon (ULTA) from Buy to Hold.
Special Bulletin February 15: Fortress Investment (FIG) will be acquired by Japan’s SoftBank for $8.08 per share, all cash. Roy recommends selling your FIG shares because his sell target has been reached and shares are selling very close to the cash offer. Quest Diagnostics (DGX) reached Roy’s Min Sell Price of 94.87 this morning and should now be sold.
Monthly Value Issue February 2: This month’s Cabot Value Model contains a diversified list of buy recommendations, with a focus on stocks featuring low price to earnings ratios, high growth prospects and generous dividends. These companies will prosper whether the stock market continues to meander, or if stocks rise or fall.
Cabot Dividend Investor
Weekly Update February 15: The market is healthy and investors should be bullish. Chloe is putting Wynn Resorts (WYNN) back on Buy today. Investors looking to put money to work should also consider Carnival (CCL), Costco (COST), Prudential (PRU), U.S. Bancorp (USB) and Home Depot (HD).
Wall Street’s Best Investments
Daily Alert February 20: CDW Corporation (CDW) from Dow Theory Forecasts
Daily Alert February 17: PPG Industries (PPG) from The Investment Reporter
Daily Alert February 16: Celgene (CELG) from Nate’s Notes
Monthy Issue February 15: In this issue, you’ll see that Growth Stocks are making a huge comeback, starting with our Spotlight Stock, Shopify (SHOP.TO and SHOP). The company operates in one of the fastest-growth sectors—online shopping—and is gathering up customers at a heady pace.
Daily Alert February 15: Square (SQ) from Cabot Stock of the Week
Daily Alert February 14: United States Oil (USO) from Stock Trader’s Almanac
Wall Streets Best Dividend Stocks
Daily Alert February 20: Diageo plc (DEO) from The Income Investor
Daily Alert February 17: Power Corporation of Canada (POW.TO) from Canadian Edge
Daily Alert February 16: Cedar Fair (FUN) from Forbes/Lehmann Income Securities Investor
Daily Alert February 15: Entravision Communications (EVC) from Top Stocks under $10
Daily Alert February 14: Archer Daniels Midland (ADM) from Wall Street Stock Forecaster
This Week’s Q&As
Cabot Growth Investor
Question: I’ve owned Nvidia (NVDA) for some time and made good money, and the company continues to enjoy great growth. What do you think of the stock today?
Mike Cintolo: NVDA was a great winner in 2016, but right now I’m a bit wary of it, at least for the intermediate-term. The reasons: First, the stock obviously has had a big, big run, so while the company is clearly doing well, the question is how much good news has the stock already discounted.
Second, in late-December, NVDA showed signs of what is know as a “climax top” on the chart which consists of a huge surge over a week or two that brings the stock far above its longer-term uptrend. This action has been seen in many big winning stocks over the years and usually marks the end of the run.
And third, since that climax run, the stock has hit repeated resistance near 120, including the big-volume selling seen since earnings were released on February 9.
I’m not saying NVDA is about to fall 50% or anything like that, but to me, it’s not a Buy, and if I owned it with a big profit, I’d consider selling some shares and using a loose stop in the 90 area for the rest. The bottom line is that I think NVDA needs a rest and probably a deeper correction after such a huge run.
Question: You recommended Lumentum (LITE) in Cabot Growth Investor on Wednesday night at a price near 49, but the next day it opened near 51! How is that fair, since I got the message after the close on Wednesday?
Mike Cintolo: So, our buy (and sell) prices in the Model Portfolio are always the average of the NEXT DAY’s high and low for that stock. So in the case of LITE, our buy price isn’t 49, it’s the average of the next day’s (Thursday’s) high and low. That way, we’re in the same boat as our subscribers.
FYI, the same goes on the sell side. If we sell something after the close, the official sell price for our records is the average of the next day’s high and low.
Question: The market hasn’t had any meaningful pullback since the election and you’ve mentioned elevated sentiment a handful of times in recent issues/updates. Do you think buying an inverse ETF as a hedge makes sense?
Mike Cintolo: Well, it could, but it really depends on how you run your own portfolio. There’s nothing wrong with buying a hedge, and it certainly wouldn’t surprise us if the market did hit some air pockets going forward because there really hasn’t been any meaningful selling in three months or so.
But, for us, sentiment is a secondary indicator that, in this case, might tell us to be more selective when it comes to buying (looking for only the strongest stocks and proper setups), and to possibly be quicker to jettison or tighten stops on any losers and laggards, which we’ve done. Personally, I would rather sell/tighten stops on a laggard or two than layer a hedge on top of a handful of existing positions, especially when that hedge won’t likely be perfect—you could own an inverse index fund, for instance, but that doesn’t mean your stock can’t fall and the index go up!
Cabot Undervalued Stocks Advisor
Question: Since you recommended Zions Bancorp (ZION) last Thursday (in Wall Street’s Best Investments Daily), the price has gone up 7%-8% in a five day run-up. Would you recommend waiting for a pull back in order to invest or you still recommend the investment at this price? In terms of keeping the investment at least as long as the financials sector is still strong.
Crista Huff: I think the stock could rise 20% before it would be considered fairly-valued. I would buy it.
Question: Could you give me your take on HRB? Why is Donald Trumps political platform so impactful on HRB’s business…? Could it be, what if’s of the market? or will it really hurt HRB’s business?
Crista Huff: There are two aspects of the political environment that could impact H&R Block (HRB)‘s average revenue per client.
If the Affordable Care Act (aka Obamacare) is dismantled, it will make tax returns less complicated, thereby facilitating lower-cost tax returns. The same will happen if Congress succeeds in making tax reporting less complicated.
Certainly the company is aware of this, and is attempting to provide newer products and services to compensate. Right now, the company is projected for mid-single-digit earnings growth in 2017 and 2018 (April year-end). The dividend is large, which helps support the share price.
All-in-all, I’m not thrilled with the change in the earnings outlook, and I will watch for an opportunity to exit the stock near 24.
Question: Quick question on Bristol-Myers Squibb (BMY) (not in the Portfolio)—is it a value stock or value trap?
Crista Huff: Unless we’re having a severe market correction, when almost all stocks are “cheap,” Bristol-Myers rarely makes my Buy list. The P/E is usually much higher than the earnings growth rate. In addition, the company is expected to have zero earnings growth in 2017, and only 6% growth in 2018. So it doesn’t fit into a value model or a growth model.
Cabot Emerging Market Investor
Question: Momo Inc. (MOMO) seems to be moving. Opinion?
Paul Goodwin: MOMO is moving, but there’s a ton of overhead at 23–25 from September and October. This may just be a reflection of a rally in the broader market. I think i’d hold off for now.
Cabot Dividend Investor
Question: I have a laddered position in both the investment-grade and high yield BulletShares ETFs for 2017 through 2020. Based on the current market values (for example BSCH @ 22.61 and BSJH @ 25.80), the corporate is currently selling at about a 20% premium to its $20 NAV (at inception), and the High yield is only slightly above its $25 NAV (at inception). Would these still be recommended ‘buys’ if there’s a chance that it will mature lower than current values? If that’s the case, then I would just consider adding cash to my others in 2018, 2019, etc.
Chloe Lutts Jensen: Some of the NAV premium of the corporate ETFs is because their holdings are trading above par, and some is due to Guggenheim’s reinvesting. The former premium will disappear before redemption, of course, while the latter won’t.
In the case of BSCH, for example, many of the largest holdings are trading above their par value, but some smaller positions are trading at a discount (the Chevron and RBC bonds, for example). You could try contacting Guggenheim and asking them how much of the premium is due to reinvestment, they may be able to tell you approximately what they expect the NAV to be at maturity.
Or you can just do what you suggested and add to the ETFs that are trading closer to their par values. (Which has the added benefit of weighting your bond ladder toward the higher-yielding longer-dated funds.) High yield bonds are still offering better deals than corporates because of the concerns about small energy companies defaulting last year.
Question: I was just wondering about your thoughts in case of a correction. Historically during a correction, does money move into the larger blue chip dividend stocks? Thanks for any input.
Chloe Lutts Jensen: Before answering your question, it’s worth noting that Cabot’s market timing indicators are currently bullish, and the indexes are at all-time highs, so in the near-term a correction seems unlikely.
As for your question, there are exceptions, but yes, high-quality dividend payers often lose less value during corrections than “growthier” stocks. That doesn’t mean they don’t go down—overall equity outflows will often overwhelm movement of money from aggressive to conservative strategiesbut they will often go down less. For example, during the May-October 2011 correction, the S&P lost 22% while dividend payers lost about 12%.
The image below shows this in numbers: dividend payers have a lower standard deviation than non-dividend paying stocks, largely because of their smaller drawdowns during periods of weakness.
Of course, there are exceptions: several recent pullbacks have seen energy stocks, REITs and other high dividend payers hit hard, so they can actually underperform.