The market seems to be lending itself to more bullish price action in June, and I’m looking forward to making money this month! Today’s issue brings you one new stock, and one rating changes.
Cabot Undervalued Stocks Advisor 617
[premium_html_toc post_id="134817"]
Roll with It!
Sometimes life gets interrupted and you just have to roll with it.
I always finish writing my weekly update or issue on Monday mornings. Right now, it’s Monday at noon. Today I opened Facebook and discovered that the elderly father of a Texas friend had a terrible car accident, and he’s in the hospital right down the street from me. What are the odds? I speak to my friend every few months, and I had no idea that his father lives nearby!
I quickly figured out that the man and his family are going to need more assistance than what’s immediately available to them because the relatives all live far away. I’m not a person who owns pets, so I have no idea why I thought of this, but I phoned the man’s friend and asked, “Does he have any pets?”
Good thing I asked! He’s got a cat, which apparently nobody thought of. So I’ll be getting that cat tonight (and feeding it!), and hopefully will have found a temporary home for the cat by the time it’s in my car. Otherwise—yikes!—I might be a foster parent!
You know the prayer that goes, “Lord, please don’t make me be a missionary in Africa!”? Well, there’s a corollary, “Lord, please don’t make me bring animals into my house!” It’s just not my thing. I hope you’ll forgive me!
Today’s June issue of Cabot Undervalued Stocks Advisor brings you one new stock, Invesco (IVZ). As in recent months, lots of excellent energy and financial stocks present buying opportunities, but not a lot of stocks in other sectors. Sometimes the numbers aren’t quite right, and sometimes the price charts aren’t optimal. But I search constantly, and when I find good buying opportunities, I promise I’ll offer them to you.
On a brighter note, the market seems to be lending itself to more bullish price action in June. I’m looking forward to making money this month!
Feel free to send questions and comments to Crista@cabotwealth.com.
Portfolio NotesMake sure to review the May 30 and June 2 Special Bulletins, in which I mentioned news, rating changes and/or price action on Blackstone Group LP (BX), H&R Block (HRB), Mattel (MAT), TiVo (TIVO), Vertex Pharmaceuticals (VRTX) and Whirlpool (WHR).
Buy-Rated Stocks Most Likely To Rise More Than 5% Near-Term:
Boise Cascade (BCC)
Cavium (CAVM)
Invesco (IVZ)
Legg Mason (LM)
Mattel (MAT)
PulteGroup (PHM)
Schnitzer Steel (SCHN)
TiVo (TIVO)
Universal Electronics (UEIC)
Vulcan Materials (VMC)
Today’s Portfolio Changes:
Invesco (IVZ) joins the Growth & Income Portfolio as a Strong Buy
Thermon Group Holdings (THR) moves from Hold to Sell
Last Week’s Portfolio Changes:
Blackstone Group LP (BX) moved from Strong Buy to Buy
Chipotle Mexican Grill (CMG) moves from Hold to Strong Buy
Vertex Pharmaceuticals (VRTX) moved from Strong Buy to Hold
Whirlpool (WHR) moved from Buy to Hold
Growth Portfolio
Growth Portfolio stocks have bullish charts, strong projected earnings growth, little or no dividends, low-to-moderate P/Es (price/earnings ratios) and low-to-moderate debt levels.
Featured Stock: Cavium (CAVM)
Semiconductor chip manufacturer Cavium (CAVM) was featured as a new addition to the Growth Portfolio in the May issue. There’s enough bullish price action taking place among semiconductor stocks that I think it’s important to toss Cavium back onto your radar right now, so that you don’t miss a near-term capital gain opportunity.
CAVM joined the portfolio at an average price of 68.81 on May 2, then quickly rose 10.8% to 76.26 on May 16 before pulling back a bit. Meanwhile, several more-prominent semiconductor stocks are soaring, including Applied Materials (AMAT), Broadcom (AVGO) and Lam Research (LRCX).
I decided to review the valuations of a wide variety of semiconductor stocks, just to make sure that we’re invested in the right stock.
Almost every one of these companies is experiencing strong earnings growth in fiscal 2017—exceptions include Advanced Micro Devices (AMD), First Solar (FSLR), NXP Semiconductors (NXPI) and Qualcomm (QCOM)—so I left current-year numbers off the chart. Let’s focus on 2018. After all, we want to know if the momentum generated by this year’s earnings growth is going to come to a grinding halt or be spurred on by a good 2018 outlook.
There are many ways to slice and dice numbers. I always look for projected annual earnings per share (EPS) growth over 15%, and a comparably lower price/earnings ratio (P/E). I will also exclude stocks with high debt ratios.
The only undervalued growth stocks on this list that meet my criteria are Cavium, and Micron Technology (MU). MU broke out of a trading range in late May. Its P/E is shockingly low at 6, while EPS are expected to grow 20.3%. I’ll probably add MU to the Growth Portfolio if it pulls back toward 29.
CAVM is sitting at a low point within an upwardly-sloping trading range. There’s price resistance in the mid-70s, where the stock traded in 2015. Barring an unexpected correction in the broader market, I think this is the cheapest you’re going to be able to buy CAVM in the near-term.
Semiconductor stocks have had a great year. Pretend that you’re a portfolio manager, enjoying the stock market momentum within this industry, but also wanting to be able to justify your stock selections to shareholders. You’re going to cut back on stocks with high debt ratios (KLAC and AMD) and stocks with poor 2018 EPS growth projections (AMAT, AVGO and QCOM). You’re going to move money into stocks with more bulletproof numbers, like CAVM and MU. Bullish sentiment among semiconductor stocks should push CAVM past 76 fairly soon.
As a reminder, the only reason that I gave CAVM a Buy recommendation, instead of Strong Buy, is that the company’s debt ratio is a little higher than I prefer. But I have no expectation that the debt ratio will hinder the stock’s advance. Buy CAVM now. Buy.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is an aggressive growth software stock. Read about the company’s new document-scanning app in CNBC’s “If you scan documents, you need this new Adobe app”. ADBE has risen for five months without any decent pullback. I plan to sell quite soon, when the momentum wanes, because the stock’s both overvalued and overextended. (Since there’s nothing wrong with the earnings outlook or the balance sheet, I would be willing to repurchase ADBE during a market correction.) Hold.
American International Group (AIG – yield 2.0%) is a very undervalued diversified insurance company with strong projected earnings growth. The stock broke out of a trading range in late May, and is rising toward short-term price resistance at 67. AIG will likely rest there a bit, then continue delivering capital gains this year. Strong Buy.
Dollar Tree (DLTR) Dollar Express is suing Dollar Tree for running the company out of business. Dollar Express was formed when Dollar Tree bought Family Dollar Stores, and was required by the U.S. government to divest some of its stores. Those stores were purchased by Sycamore Partners II LP, and became the Dollar Express retail chain. Sycamore Partners is similar to Blackstone Group LP (BX) in that it invests in businesses that it hopes will thrive and grow over many years.
When DLTR passes short-term price resistance at 83, it could rise to 90, where it traded in November 2016. I plan to sell near 90. Hold.
Goldman Sachs Group (GS – yield 1.4%) The investment banker landed in hot water last week when a $2.3 billion purchase of Venezuelan bonds caused outrage among folks who oppose the Venezuelan government. (Clearly, 99% of people oppose the Venezuelan government, and rightly so.) Here are my thoughts on the topic, though I’m not drawing any particular conclusions:
Earnings estimates are coming down for Goldman and its peers, because the historically low second-quarter market volatility led to lower trading profits. On the bright side, Goldman’s investment banking revenue has been higher than expected.
Goldman shares are undervalued. The share price rose over 80% from July 2016 through March 2017, then experienced a correction. GS is sitting at price support at 210, but it’s a little early to know whether it’s ready to stabilize. The stock is certainly a bargain here, and could rise to its recent high above 250 in the coming months. Buy.
Johnson Controls (JCI – yield 2.4%) is a multi-industry company with the following business mix: fire and security services, residential and commercial HVAC/R (heating, ventilation, air conditioning and refrigeration), automotive batteries and building equipment. JCI is an undervalued growth stock. JCI is showing a little strength right now, and could rebound to 45.5 in the coming months. Strong Buy.
Martin Marietta Materials (MLM – yield 0.7%) is an aggressive growth stock that’s quite undervalued based on 2018 numbers. MLM had a big run-up in April, followed by a partial pullback in May. Buy MLM now. There’s short-term price resistance at 240. Strong Buy.
PulteGroup (PHM – yield 1.5%) is a single-family U.S. homebuilder. Pulte will give a presentation at the Deutsche Bank 2017 Global Industrials and Materials Summit on June 8. Investors may tune in to the live webcast via Pulte’s website, which will air at 11:40 a.m. ET. PHM is a very undervalued growth stock. We could see PHM break past 24.50 this week, and rise to the upper 20s this year. Buy PHM now. Strong Buy.
Quanta Service (PWR) The share price suffered in the aftermath of its fall run-up, falling with some other “Trump Bump” basic industry stocks (including steel stocks). PWR is a bargain at this price. The corporate outlook remains fantastic, with aggressive earnings growth and a low P/E. Patient investors who buy now could earn over a 20% capital gain before yearend. Strong Buy.
Vulcan Materials (VMC – yield 0.8%) is an aggressively growing supplier of construction aggregates, asphalt and concrete. This undervalued stock has been ratcheting upwards toward recent highs at 135, and could surpass that ceiling this year. Strong Buy.
XL Group (XL – yield 2.0%) is a very undervalued, aggressive growth insurer and reinsurer. XL shares have been repeatedly rising and resting since June 2016. The stock began another run-up in late May. Buy XL now. Strong Buy.
Growth & Income Portfolio
Growth & Income Portfolio stocks have bullish charts, good projected earnings growth, dividends of 1.5% and higher, low-to-moderate P/Es (price/earnings ratios), and low-to-moderate debt levels.
Featured Stock: Invesco Ltd. (IVZ - yield 3.8%)
While researching stocks this past weekend, I noticed that the price charts of most asset management companies have turned decidedly bullish, with several breaking out of trading ranges. This is an opportune time, therefore, to add a strong asset management stock to the Growth & Income Portfolio to capitalize on its immediate price run-up.
Invesco Ltd. is an asset management company based in Georgia, with offices in North America, Europe, the Middle East and Asia. Invesco has $841.4 billion assets under management (AUM), as of April 30, 2017, up 4.44% in the last six months. AUM includes mutual funds, ETFs, unit trusts, real estate and other financial instruments serving retail and institutional investors in over 150 countries.
Revenue, margins and assets under management (AUM) are expected to increase in both 2017 and 2018, both organically and from a large M&A transaction in Europe.
Wall Street expects Invesco to earn $2.49 per share in 2017 and $2.76 per share in 2018. That represents earnings growth rates of 11.7% and 10.8%. The earnings estimates have barely budged since January, which is a good indication that Invesco management has a firm grip on their financial outlook, and also a good line of communication with Wall Street. When viewed in conjunction with the large 3.5% dividend yield, Invesco is a very attractive growth & income stock.
As for the price/earnings ratio (P/E), it’s not often that investors see a P/E range as predictable as IVZ’s. In the years 2012 through 2015, the P/E ranged consistently between 13 and 19, then dipped a bit lower in 2016. The 2017 P/E is 13.2, meaning IVZ is an undervalued stock that’s sitting at the bottom of its P/E range.
Invesco announces annual dividend increases in late April. The current quarterly payout is $0.29 per share, giving the stock a current yield of 3.5%. Share repurchases continue at a modest pace.
IVZ is a large-cap growth & income stock. Financial institutions own 90% of Invesco shares. That means professional investors think IVZ is a very good investment.
IVZ traded near 39 in March 2015, fell in the second half of 2015, and spent the bulk of 2016 bouncing around with the oil-related market correction in February and the Brexit correction in June. The price chart shows steadily upward-sloping trading ranges for a full year now. The stock appears immediately ready to advance again.
Buy this undervalued financial stock now with the expectation that it will rise above 38 in the coming months. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 6.6%) is an undervalued, aggressive growth integrated oil company. The stock rose 13% from its 2017 low in March to its peak at 37 in May, then pulled back a little. You might get a chance to buy BP below 35.5 this week, before it gathers the strength to climb above 37. Strong Buy.
Blackstone Group LP (BX – variable large payouts) is an undervalued alternative asset manager. BX is rising toward long-term price resistance at 38. There’s still enough short-term upside for traders to buy now. I intend to sell near 38, rather than wait out a period of sideways trading that could last several months. (If BX subsequently has a big pullback, I will absolutely consider buying it again.) Buy.
ExxonMobil (XOM – yield 3.9%) is the largest U.S. integrated oil company. XOM is an extremely undervalued stock, experiencing aggressive multi-year earnings growth. XOM has traded between 79 and 83 since February. There’s additional upside price resistance at 91. Strong Buy.
GameStop (GME – yield 6.7%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. I expect GME to rise to 25, and possibly much higher this year, as investors continue to witness a successful transition away from an emphasis on physical game revenues. Hold.
H&R Block (HRB – yield 3.3%) is a nationwide tax preparation company. HRB has been ratcheting upward since late February, and appears capable of rising toward 30 in the coming weeks. I plan to sell HRB before fourth-quarter results (April year-end) are reported on June 13, because the growth outlook is no longer compelling. Hold.
Royal Caribbean Cruises (RCL – yield 1.7%) is an undervalued growth stock in the travel industry. RCL is reaching new highs, and could approach 120 in the short-term. I anticipate selling when the run-up appears to peak, due to travel industry concerns. Hold.
TiVo (TIVO – yield 4.0%) is a digital entertainment company that provides technology licensing and related services, which enable people to access online and televised entertainment. Last week, an administrative law judge with the U.S. International Trade Commission made a final initial determination that Comcast (CMCSA) is in violation of Section 337 of the Tariff Act of 1930, pertaining to unfair trade practices, in two of TiVo’s six patent infringement cases against the company. A final ruling is expected in late September, but Comcast could decide to settle in the interim. (Additional cases are pending in U.S. District Court.)
TIVO is an extremely undervalued small-cap stock. Last week I wrote, “I expect the stock to rise toward short-term resistance at about 19.5, then to have a pullback before making another upward move.” I was close. TIVO rose to 19.3 on May 30, then pulled back a little. The next run-up should take TIVO up to 21, followed by another pullback. Strong Buy.
Whirlpool (WHR – yield 2.3%) is a global manufacturer of home appliances. The stock is slightly overvalued based on moderate 2017 earnings growth, but quite undervalued based on expected stronger 2018 earnings growth. The stock broke past medium-term price resistance at 188 last week. (Here’s a bullish commentary on the stock’s price chart from TheStreet.) WHR could reach the low 200s, where it last traded in March 2015, and at which point I plan to sell. Hold.
Buy Low Opportunites Portfolio
Buy Low Opportunities Portfolio stocks have neutral charts, strong projected earnings growth, low-to-moderate price/earnings ratios (P/Es) and low-to-moderate debt levels. (Dividends are not a portfolio requirement, but some of the stocks will have dividends.) Investors should be willing to wait patiently for these stocks to climb.
Sometimes a stock in the Buy Low Opportunities Portfolio produces good capital gains and the share price is no longer low, yet the stock remains an attractive investment. Those stocks will then be moved into the Growth Portfolio or the Growth & Income Portfolio.
Featured Stock: Schnitzer Steel Industries (SCHN – yield 3.8%)
Schnitzer Steel is a featured stock today because the price appears immediately ready to rise. You’ll recall that steel and basic industry stocks rose quite a bit in late 2016, then had big price corrections in early 2017. At this point, most steel stocks have begun their rebounds, so this is an optimal time to buy low.
The price chart shows SCHN bottoming in mid-April, then promptly turning upwards. Even if SCHN just climbs to 27 and stops there, where it traded in February, that would deliver a 35% capital gain to investors who buy today.
Schnitzer Steel is one of the largest U.S. scrap metal recycling companies. Consensus estimates project earnings per share (EPS) to grow from $0.48 in 2016 to $1.12 in 2017 (December year-end), representing a 133% EPS growth rate. In comparison, the 2017 P/E is just 17.9, indicating that the stock is quite undervalued. I have SCHN rated Buy instead of Strong Buy, because 2018 EPS growth is expected to slow dramatically.
SCHN is rebounding from the recent downturn in steel and basic industry stocks. This is a small-cap stock in a volatile market sector, with relatively little analyst coverage. Risk-tolerant investors have an opportunity to earn outsized capital gains with SCHN in the coming months. Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Archer Daniels Midland (ADM, yield 3.0%) is somewhat overvalued based on 2018 numbers. During the last year, ADM traded between 41 and 44 for five months, then raised the top of its trading range to 47. The stock could realistically reach 47 again in the coming months. Hold.
Boise Cascade (BCC) is a wood products manufacturer and building materials distributor. This aggressive growth stock remains significantly undervalued. The share price had a big pullback after the very bullish first-quarter earnings report, and now appears to be returning to recent highs over 31. Growth investors should buy BCC now. Strong Buy.
Chipotle Mexican Grill (CMG) is an undervalued aggressive growth stock. Yesterday, I moved CMG from Hold to Strong Buy, based upon its position within its trading range, and the likelihood that it will rise again this year. There’s upside resistance at 500 and 530. Strong Buy.
Legg Mason (LM – yield 2.9%) is an undervalued asset management and financial services company with aggressive earnings growth. We could see LM rise past 38.50 this week, and begin a run-up toward long-term price resistance at 44-45. This could be your last chance to buy LM before the breakout. My tentative plan is to move LM to a Hold when it reaches 40, then sell near 45. (I will be open to rebuying LM during a subsequent price correction.) Strong Buy.
Mattel (MAT – yield 6.7%) is a global toy manufacturer and an undervalued growth stock. MAT is rising toward short-term price resistance at 25. Traders, growth investors and dividend investors should buy MAT now. Buy.
Tesoro (TSO – yield 2.6%) closed on its acquisition of Western Refining last week. The company also announced that it will change its name and stock symbol on August 1, to Andeavor (ANDV). Tesoro is a very undervalued aggressive growth stock in the oil refining and marketing industry. TSO is rising toward short-term price resistance at 88, where it will likely pause, then continue climbing. Strong Buy.
Thermon Group Holdings (THR) reported full-year 2017 results in late May (March year-end); and last week, analysts revised their earnings estimates downward. Fiscal 2018 EPS were expected to grow 44.7% when I added THR to the Buy Low Opportunities Portfolio on March 7. At this point, analysts expect EPS to grow just 4.7% in fiscal 2018, followed by a large increase in 2019. However, since the stock no longer meets my growth criteria, I’m selling THR today. Sell.
Total SA (TOT – yield varies, approx. 4.3%) is an international oil and gas company that’s based in France. TOT is a greatly undervalued growth stock. The stock had a nice run-up in April and May, and is currently trading sideways. I’ll be ready to move TOT back to a Strong Buy when it shows a readiness to break out above 55. Hold.
Universal Electronics (UEIC) is a consumer electronics company. The company will make a presentation on June 7 at Baird’s 2017 Global Consumer, Technology and Services Conference, and also on June 8 at Citi’s 2017 Small and Mid Cap Conference. Investors can access the webcasts on Universal Electronics’ website. This growth stock is overvalued based on 2017 numbers, but undervalued based on 2018 numbers. My intention is to hold UEIC until it retraces its August 2016 high around 79. Buy.
Vertex Pharmaceuticals (VRTX) is an undervalued, aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). On June 1, Vertex announced a long-term reimbursement agreement with the country of Ireland, which enables life-saving CF medications to reach another 500 patients. The article is especially helpful in explaining the intricacies of how Vertex’s medicines—Orkambi and Kalydeco—work with the human body to improve the health and lives of cystic fibrosis patients.
The stock is actively rising. I intend to sell VRTX when it retraces its 2015 highs, in the range of 136-143, because it’s likely to rest there for several months. (I will subsequently consider repurchasing the stock if it experiences a large pullback.) Hold.
[premium_html_footer]
Send questions or comments to crista@cabotwealth.com.
Cabot Undervalued Stocks Advisor • 176 North Street, Salem, MA 01970 • https://cabotwealth.com//
YOUR NEXT CABOT UNDERVALUED STOCKS ADVISOR ISSUE IS SCHEDULED FOR JULY 5, 2017
Cabot Undervalued Stocks Advisor is published by Cabot Wealth Network, an independent publisher of investment advice. Neither Cabot Wealth Network nor its employees are compensated in any way by the companies whose stocks we recommend. Sources of information are believed to be reliable, but they are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved. Copyright © 2017 - COPYING AND/OR ELECTRONIC TRANSMISSION OF THIS NEWSLETTER IS A VIOLATION OF THE U.S. COPYRIGHT LAW. For the protection of our subscribers, if copyright laws are violated by any subscriber, the subscription will be terminated.
[/premium_html_footer]