The long-term trend of the market remains up, but increasingly, it pays to be nimble. For today’s recommendation, that means jumping on the start of a new uptrend after an excellent earnings report.
Cabot Stock of the Week 194
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The long-term trend of the market remains up, but it pays to be selective. You can’t just be buying anything these days. Still, if you chose wisely, and manage your portfolio, there’s money to be made, both from buying strong growth stocks and from buying undervalued stocks at good entry points. Today’s recommendation, interestingly, is a stock we did well with last year, nailing down a 31% profit after just three months of holding. And now it’s at a good entry point again! The stock was originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor, and here are Crista’s latest thoughts.
PulteGroup (PHM)
Efficient Market Theory tells us that there are essentially no big opportunities in the stock market at any given point in time, because investors know all relevant information about a company, and stocks are always priced accordingly.
My experience doesn’t jibe with that concept. From my perspective, there are always overpriced and underpriced stocks. It doesn’t take a rocket scientist to know that a stock that rose 50% in the last two months is due for a fall; and that a company with 50% current-year earnings growth and a price/earnings ratio (P/E) below 10—as with PulteGroup (PHM)—is way overdue to rise. As a matter of fact, barring unusual company-specific news, stocks within an industry usually rise and fall in synch with each other. Most homebuilder stocks delivered outsized capital appreciation in 2017. Then when the correction arrived in the broader stock market this year, homebuilder stocks took it on the chin.
The trough in homebuilder share prices is largely attributed to rising interest rates, as exemplified by the yield on the 10-year U.S. Treasury bond, which stands at a high for 2018. Investors hear the term “rising interest rates,” and they worry that people won’t buy homes, presuming that mortgages will be unaffordable. Therefore, investors avoid homebuilder stocks.
I think those worries are silly and I personally chalk it up to the news cycle. As soon as the news media shifts its attention to a different aspect of financial markets, economics or politics, the pressure will be off PulteGroup and its peers, just as we saw the news media move away from the trade war topic in early April, thus removing pressure from the prices of steel stocks.
If you believe in Efficient Market Theory, you might as well own mutual funds and divert your energy away from following and participating in the stock market. Maybe your lawn needs mowing, or there’s a honey-do project waiting for you. But if you believe, as I do, that stocks are often seriously mispriced, then you’ll appreciate the opportunity to capitalize on the eventual rebound in homebuilder stocks.
PulteGroup (PHM – yield 1.2%) engages in land development and home construction, and offers mortgage and title services. The company builds a variety of single- and multi-family home styles through the brand names Pulte Homes, Centex, Del Webb, DiVosta Homes and John Wieland Homes and Neighborhoods.
George Maris, co-head of equities – Americas at Janus Henderson cited Pulte as one of his top stock picks in this CNBC video, saying “Pulte Homes is tremendously underrated. I think the U.S. homebuilders are in phenomenal shape.”
PulteGroup reported first quarter EPS of $0.59 this morning, above all analysts’ estimates. Revenue of $1.97 billion surpassed the consensus estimate of $1.84 billion. The company achieved strong year-over-year gains in revenue, profit, operating margins, closings, net new orders and backlog, and repurchased $52 million of stock. CEO Ryan Marshall commented, “Robust buyer demand in the face of mortgage and financial market volatility attests to the strong underpinnings of this housing recovery which is being bolstered by sustained economic growth, good job trends, favorable demographics and a limited supply of homes for sale.”
PulteGroup’s full-year EPS rose from $1.59 in 2016 to $2.06 in 2017. Prior to today’s earnings report, the consensus full-year 2018 and 2019 EPS projections were $3.09 and $3.53. That translates to 50% current-year EPS growth and a P/E below 10! In the coming days, most of the 22 analysts who cover the stock will be raising their earnings estimates and price targets, and some will be raising their ratings as well. Investors can expect bullish analyst activity to exert upward pressure on the share price in the weeks ahead, pushing PHM toward its January high of 35. New investors could earn a potential 15% capital gain on the upswing, and additional gains later this year.
Which sounds more lucrative: buying PHM with a credible opportunity for 15% upside as the stock retraces its January high, or picking a stock by throwing darts at the S&P 500, which Efficient Market Theory would seem to favor? I’ll save the darts for my next pub crawl, and put my money on PulteGroup for the win.
PulteGroup (PHM)
3350 Peachtree Road NE
Suite 150
Atlanta, GA 30326
404-978-6400
http://www.pultegroupinc.com
CURRENT RECOMMENDATIONS
The addition of Pulte Home brings the portfolio to my limit of 20 stocks, so once again I look around and ask if any deserve to be sold—and the answer is no. But I have downgraded four stocks to Hold today, with details below.
AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, remains in a long-term uptrend, though it’s recently been confined to a trading range between 26 and 27. In Chloe’s latest update, she wrote, “AB will report first quarter earnings April 26; analysts expect revenues of $866 million and EPS of $0.68, up 13% and 48% year-over-year. Support looks solid and risk-tolerant investors can buy for high yield. Remember that AB’s distributions vary based on cash flow and don’t qualify for the lower dividend tax rate, and the partnership issues a K-1 at tax time.” BUY.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, fell today after reporting earnings after the close yesterday. Here’s Crista’s take from earlier today: “Alphabet reported first quarter diluted EPS of $13.33 yesterday afternoon, when the market had expected $9.28. Results were enhanced by $3.40 due to “a new accounting standard (ASU 2016-01) that changes the way companies account for equity security investments.” Without the accounting change, Alphabet’s reported earnings handily exceeded the consensus estimate, although many one-time items made the quarter fuzzy for investors to decipher. Quarterly revenue of $31.1 billion beat the consensus estimate of $30.3 billion, and rose 23% in constant currency vs. a year ago. A dozen investment firms changed their price targets on GOOGL today—both up and down—and the vast majority of targets landed within the range of 1,200 – 1,300.
I will consider GOOGL to be fairly valued when it retraces its January high near 1,190, at which point I plan to sell so as to make room for a more undervalued stock to join the portfolio. (Short-term investors who buy below 1,080 can earn a 10% capital gain as the stock returns to 1,190.) Longer-term investors should feel comfortable holding Alphabet, because earnings growth projections currently remain strong through 2020.” HOLD.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has pulled back normally since hitting a record high last Wednesday. In Paul’s latest update, he wrote, “I think this is a big, durable story, and with China reportedly considering lessening tariffs on automobiles, consumer selection and sales could get a boost going forward.” BUY.
Axon Enterprise (AAXN) originally recommended by Mike Cintolo of Cabot Growth Investor continues to trade tightly between 42 and 44, with so signs of selling pressures. The growing utility of video evidence is a big wind at this company’s back. BUY.
Azul S.A. (AZUL) originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, traded at support at its 50-day moving average for a week, and today fell through it—on light volume. If volume were heavy, I’d be concerned, but the light volume gives me hope that this is the bottom of the correction, so I’ll stick with it—while downgrading the stock to Hold. In Paul’s latest update, he wrote, “AZUL just leased two freighter aircraft to support its burgeoning cargo business, and March results showed a booming international travel business.” HOLD.
Baker Hughes, a GE Company (BHGE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio, has been climbing strongly all April, and the release of first quarter earnings last Friday has prolonged the trend. Here’s Crista’s take: “Baker Hughes reported first quarter adjusted diluted EPS of $0.09 on April 20 when Wall Street was expecting $0.06. Quarterly revenue of $5.4 billion came in on target. Chairman and CEO Lorenzo Simonelli commented, “We made strong progress in the quarter, securing several key commercial wins, executing on our synergy targets and delivering for our customers. I am pleased with our performance on our priorities of growing share, improving margins and generating cash. The gas market continues to grow, and strong LNG demand supports the view that new capacity will be required in the early to mid-part of the next decade. BHGE is uniquely positioned across the oil and gas value chain, and well placed to benefit from the long-term industry trends.” Six Wall Street firms subsequently raised their price targets on BHGE yesterday to a range of 31 to 41.
Wall Street expects full-year EPS to grow 79% and 100% in 2018 and 2019. The corresponding P/Es are 44.1 and 22.1. BHGE is racing toward short-term price resistance at 37. If you were in the stock for a quick trade, you’ll want to sell when it passes 36. Everybody else should hold BHGE, and consider buying more shares on the next pullback.” HOLD.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, and subsequently recommend by Crista Huff, reported first quarter earnings last Thursday and the results were good, with earnings per share at $0.94, up 22% from a year ago and beating the consensus analysts estimate by two cents. The report sparked buying that continues to this day, with the stock now closing in on its March high of 56. Soon after, Chloe wrote, “Financial stocks have been lagging the market in recent days, in part because of continued flattening in the yield curve. When the yield curve flattens—meaning the difference between short- and long-term interest rates gets smaller—banks like BB&T see their lending margins compressed. For now, I’ll keep BBT on Hold for Dividend Growth investors.” And Crista wrote, “The pace of loan growth in the balance of 2018 will likely be key to BBT’s desirability as a portfolio holding in 2019. I’ll therefore be closely monitoring 2019 earnings estimates, which are currently a little lower than I prefer. The stock could reach short-term price resistance at 56 quite soon.” HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, broke out above 110 last week on big volume but fell back through that level today on mild volume. In Chloe’s last update, she kept the stock rated hold for investors seeking dividend growth, and I’m going to follow her lead. Broadridge provides investor communications and other technology to financial companies, and a large percentage of revenue is recurring. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is one of our Heritage Stocks, meaning that the company’s long-term growth prospects are so good—and our profit cushion so ample—that I can afford to sit through market gyrations in pursuit of major long-term profits. The stock remains in a long-term uptrend, having bounced off its uptrending 200-day moving average last week. HOLD.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small Cap Confidential, pulled back to its 25-day moving average after my recommendation last week, but surged higher today on the news that the company had integrated its IT Alerting solution with Cherwell Software, a global leader in enterprise service management. In his latest update, Tyler wrote, “EVBG has come right up against resistance at $39 and, like many of our other stocks, I suspect the stock won’t do too much until earnings come out [May 7]. We have just over two weeks to wait so keep new positions small. Analysts currently see revenue growth of around 35% this year and EPS of around $-0.24 (up $0.06 from 2017). As I’ve been saying, those figures will likely change a little as the impact of the United Messaging Systems acquisition becomes clearer.” BUY.
Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to a new high last week, but the volume on the breakout was unimpressive, and the stock has pulled back to its 25-day moving average since. Insulet is the world leader in tubeless insulin delivery technology and the fundamental story is great, but the stock seems to have lost some vitality in recent weeks, so I think there are better buys. I’ll downgrade to Hold. HOLD.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has fallen back down below its 25-and 50-day moving averages—which continue to trend sideways. In his latest update, Mike wrote, “PYPL looks almost exactly like the overall market, with a “W” looking pattern since its high in late-January. We remain fans of the company’s longer-term story, and the stock’s overall consolidation (its relative performance line has been sideways since Thanksgiving) provides a decent base for further gains. Still, PYPL’s intermediate-term future will likely come down to earnings, which are due out April 25 after the close—analysts are expecting revenues to rise 21% and earnings of 54 cents per share (up 23%), but equally important will be membership growth, free cash flow and the outlook. We’re sitting tight and will see how investors react to earnings.” HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to perform superbly; the stock hit a record high yesterday and pulled back normally today. The long-term growth prospects for the business remain excellent. BUY.
Stag Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has pulled back from last week’s highs, but remains in an uptrend. In her latest update, Chloe wrote, “The warehouse REIT will report first-quarter earnings May 1, after the close. Risk-tolerant high yield investors can Buy STAG here for monthly income.” BUY.
TD Ameritrade (AMTD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gapped down today after reporting second quarter results after the market close yesterday. The problem: top-line results fell a bit short of analysts’ estimates. The big-volume fall through the 50-day moving average is reason enough to downgrade the stock to hold, but I’m optimistic that the stock can recover, especially when analysts look further into the future and see the potential efficiencies from the integration of the Scottrade acquisition. HOLD.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, has pulled back normally in recent days, and remains above its uptrending 50-day moving average. The young firm is a fast-growing leader in the telehealth movement, which enables patients to access board-certified doctors 24/7/365. First quarter results will be released on Tuesday, May 1, after the market close. BUY.
Tesla (TSLA), originally recommended in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio; we have a fat profit, and I have confidence in the firm’s long-term growth prospects as it leads the automotive revolution for both electric and autonomous cars. But the stock has weakened once again and is now below all its moving averages, signaling that investors are shifting their cash to opportunities that are working today. If you’ve got new money to put into the market, there are better stocks to buy today. I’ll downgrade to hold. HOLD.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, plunged 3% today on no particular news but the long sideways pattern remains intact. In Crista’s latest update, she wrote, “WestRock’s acquisition of Kapstone Paper and Packaging is expected to close in the early fall. Both second quarter and full-year consensus earnings estimates continue to rise. WestRock is expected to report second quarter EPS of $0.84, within a range of $0.79 to $0.94, on the morning of April 27. Analysts expect EPS to increase 53.8% and 15.6% in 2018 and 2019. The corresponding P/Es are 16.4 and 14.2. WRK is gradually rising toward its January high at 70.” HOLD.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has pulled back normally from last week’s new highs and is likely to find support around 48. If you haven’t bought, you can buy here, but note that first quarter results will be released May 3, and the reaction could push the stock substantially—either way. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED MAY 1, 2018
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