Today’s featured stocks include four companies that should benefit from the post-Hurricane Harvey rebuilding process.
Cabot Undervalued Stocks Advisor 917
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Which Stocks Will Benefit in the Aftermath of Hurricane Harvey?
In the areas of homebuilding products, construction and engineering, Boise Cascade (BCC), Quanta Services (PWR) and Weyerhaeuser (WY) are three excellent choices in the Cabot Undervalued Stocks Advisor portfolios.
Here are some quick notes on a few of their more well-known competitors:
Beacon Roofing (BECN) is a slightly-overvalued growth stock. A surge in 2018 revenue due to hurricane rebuilding could change the earnings outlook and valuation. BECN is worth monitoring in the coming months.
Chicago Bridge & Iron (CBI – yield 2.1%) is expected to take a big loss in 2017, followed by attractive profits in 2018. It’s a low-priced stock with a low P/E. The company has been embroiled in lawsuits in recent years, yet the potential boost in post-hurricane revenue combined with the already-rosy 2018 outlook makes CBI a stock worth considering. CBI doesn’t currently fit my investment criteria, but I will continue to assess its risk-reward scenario in the coming months.
Home Depot (HD – yield 2.4%) is overvalued with a high debt ratio. I won’t be investing in the stock.
Louisiana Pacific (LPX) is a building products company. The company is experiencing big 2017 earnings growth, yet 2018 EPS are expected to fall 7.4%. The 2018 outlook could change dramatically due to post-hurricane rebuilding. However, with BCC and WY already expected to have excellent profit growth in 2018, I would choose the higher-odds stocks rather than take the risk that LPX might not deliver attractive results.
Lowe’s (LOW – yield 2.2%) is fairly valued with a high debt ratio. I won’t be investing in the stock. However, if an investor is intent on owning either LOW or HD, I would choose LOW based on valuation.
Owens-Corning (OC – yield 1.1%) is a maker of glass fiber, insulation and roofing materials. OC is a fairly-valued growth & income stock. Any post-hurricane surge in 2018 revenue could boost profits and lead to a capital gain opportunity.
USG Inc. (USG) is a maker of building materials. USG is expected to see profits fall 1.2% in 2017, then rise 23.8% in 2018. The 2018 P/E is only 14.5. Therefore, USG looks fantastic next year, and the growth outlook could definitely increase on post-hurricane rebuilding. My guess is that the current year’s falling profits will not harm the share price any further. It’s technically too early for me to add USG to the portfolios due to the poor 2017 earnings outlook, but I wouldn’t look askance at investors who jumped on that opportunity.
The San Antonio Express News reported that approximately 300,000 insured autos will need to be replaced in the wake of Hurricane Harvey. Let’s examine the major auto companies to see if any of them deserve a place in our portfolios.
Ford Motor (F – yield 5.3%) EPS are expected to fall 1.1% in 2017 and fall another 11.5% in 2018 (December year-end). An earnings boost from hurricane-related car replacements is not going to be enough to turn Ford into a growth stock. In addition, the long-term debt-to-capitalization ratio is somewhat high at 53%.
General Motors (GM – yield 4.1%) EPS are expected to be flat EPS in 2017 (December year-end), then drop 3.3% in 2018. An earnings boost from hurricane-related car replacements won’t give GM an attractive growth outlook.
Toyota (TM – yield 3.3%) EPS are expected to fall 4.6% in 2017, then rise 3.7% in 2018. The 2018 P/E is 10.2. A surge in revenue won’t make Toyota’s fiscal 2017 look attractive. However, its 2018 outlook is certainly more attractive than Ford’s and GM’s.
I wouldn’t therefore invest in any of the aforementioned auto companies unless I were forced to pick one, in which case I would consider Toyota.
Send questions and comments to crista@cabotwealth.com.
Portfolio Notes
There were no Special Bulletins last week.
Buy-Rated Stocks Most Likely* To Rise More Than 5% Near-Term:
Alexion Pharmaceuticals (ALXN)
Apple (AAPL)
Molina Healthcare (MOH)
PulteGroup (PHM)
Universal Electronics (UEIC)
*I can review price charts and make an educated determination about what’s likely to occur, but I will sometimes be wrong. I cannot control the stock market; I can only guide you through it.
Today’s Portfolio Changes:
Andeavor (ANDV) moves from Strong Buy to Hold.
Cavium (CAVM) moves from Buy to Strong Buy.
Johnson Controls (JCI) moves from Strong Buy to Hold.
Last Week’s Portfolio Changes:
None
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: Martin Marietta Materials (MLM) and Vulcan Materials (VMC)
Investor’s Business Daily pointed out the impending post-hurricane surge in business for makers of cement, concrete, sand, gravel and asphalt that’s coming with the necessary rebuilding and repaving in Houston. These companies have been growing profits faster than their share prices have kept up for quite a few years. I’ve been alternately recommending Eagle Materials (EXP), Martin Marietta Materials (MLM) and Vulcan Materials (VMC) since early 2015. They’re all undervalued aggressive growth stocks, but I won’t add EXP to the portfolios because two aggregate companies are enough. The IBD article also discussed Summit Materials (SUM) and U.S. Concrete (USCR), neither of which I will recommend due to their high debt ratios.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand and gravel. MLM is an aggressive growth stock, overvalued based on 2017 numbers, but undervalued based on 2018 numbers. Analysts expect 2018 EPS to grow 30.5%, and the P/E is just 20.6.
The share price surged due to market expectations of increased revenue and profits when post-hurricane rebuilding commences. We could easily see analysts increase earnings estimates, too. The stock is now recovering from a price correction. It could linger a bit around 210. There’s about 13% upside as MLM retraces its May peak at 240, where the stock will still be undervalued. Buy.
Vulcan Materials (VMC – yield 0.8%) is a supplier of construction aggregates, asphalt and concrete. VMC is an aggressive growth stock, overvalued based on 2017 numbers, but undervalued based on 2018 numbers. Analysts expect 2018 EPS to grow 42.7%, and the P/E is just 24.7.
The stock is rising due to business prospects related to post-hurricane rebuilding. There’s 10% upside as VMC retraces its June peak at 134, where it will still be undervalued. Buy.
MLM and VMC have been exhibiting strong earnings growth for quite a few years, and I have no reason to believe that trend will come to a halt. These stocks are excellent choices for growth investors; both those who are looking to earn attractive capital gains within six months, and those who want to own stocks for the long term.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.5%) manufacturers the iPhone, iPad and Mac. Last week, I wrote about how AAPL’s share price rises and falls in synch with future EPS expectations. You can literally buy the stock or short the stock once per year on July 1, hold it for exactly one year, and earn outsized capital gains. I decided to spell that out in more detail in my Wall Street’s Best Daily article on August 31: Making Money in Apple (AAPL) Stock is Much Easier Than You Think. If you enjoy reading about Apple products, TheStreet cited various news sources in an September 2 report on iPhone 8 production, shipments and pricing.
There’s always a lot of talk among financial news media about FAANG stocks: Facebook, Amazon, Apple, Netflix and Google. Let’s do a quick review of which of these might quality as undervalued growth stocks.
Facebook (FB) is an aggressive growth stock, but the P/Es are higher than the earnings growth rates, so I won’t be buying FB any time soon.
Amazon.com (AMZN) receives constantly-changing earnings estimates from Wall Street. If I owned AMZN, I wouldn’t let a month go by without reviewing the latest estimates. Right now, EPS are expected to fall 22% in 2017, then grow 114% in 2018. With a 2018 P/E of 117, the stock is fairly valued. Be careful, though, because earnings estimates have been shrinking all year, which continues to change the valuation in a negative direction.
Apple (AAPL) is expected to see EPS grow 20.6% in fiscal 2018 (September year-end), with a P/E of 15.1. The stock is undervalued. I’m very pleased with the value and capital gain opportunities that AAPL offers today.
Netflix (NFLX) is an aggressive growth stock with a high 2018 P/E and a high debt ratio, so I won’t be recommending NFLX any time soon.
Google a.k.a. Alphabet (GOOGL) EPS are expected to fall 10.9% in 2017 (December year-end), then grow 30.7% in 2018, with a 2018 P/E of 23.8. The stock is undervalued based on 2018 numbers. I usually wait until we’re closer to the end of a company’s fiscal year to buy the stock based on next year’s rosier outlook. That’s because the share price might react negatively to the current year’s poor earnings results for a few more months.
AAPL is therefore the only FAANG stock that presents a current attractive value and growth opportunity. AAPL is rising, and will likely continue rising through next summer, with intermittent price corrections along the way. Buy AAPL now, and buy more on pullbacks. Strong Buy.
Bank of America (BAC – yield 2.0%) is an undervalued large-cap growth stock. Last week, Berkshire Hathaway paid about $5 billion to exercise warrants to purchase 700 million shares of BAC at 7.14 per share, becoming the bank’s largest shareholder. But don’t worry: Warren Buffett’s not a trader. He’s not going to sell his profitable shares and plummet the price. BAC has traded between 22 and 25.5 all year. I expect BAC to rise past 25.5 in the near future. Strong Buy.
Cavium (CAVM) is an undervalued, aggressive growth stock in the semiconductor industry. When I added CAVM to the Growth Portfolio on May 2, I gave the stock a Buy recommendation, rather than Strong Buy, because the company’s debt ratio was a little high subsequent to the 2016 QLogic acquisition. At this point, the debt ratio is down to 45%, and that sits better with me. I’m therefore moving CAVM to a Strong Buy.
CAVM presents an attractive capital gain opportunity for investors who are willing to hold the stock without staring at the daily price fluctuations. There’s currently 15% upside as CAVM travels back to 74, where it traded in May. Barring a bearish stock market, CAVM could exceed 74 later this year. Strong Buy.
KLX Inc. (KLXI) is an undervalued aggressive growth stock in the aerospace and energy services industries. KLX will give a presentation at the Gabelli & Company 23rd Annual Aerospace & Defense Conference on September 7. There are only about five analysts currently covering the stock. If even one more analyst picks up coverage after KLX management’s presentation at the conference, that would expand the stock’s investing audience, potentially enhancing the share price. KLXI has traded between 46.5 and 53 for over four months, currently on an upswing. Once the stock breaks past 53, it could begin a sustainable run-up. Strong Buy.
PulteGroup (PHM – yield 1.4%) is a U.S. homebuilder, and a very undervalued aggressive growth stock. PHM has been slowly ratcheting upward since breaking out from a long-term trading range in July. Buy PHM now. Strong Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. The company has regional operations based in Houston, and could easily be called upon to assist in municipal rebuilding projects. PWR is an undervalued, aggressive growth stock. I expect PWR to rise to 38.50, where it traded in February, then rest again before climbing further. There’s 22% upside to my fair-value price target of 44. Buy PWR now. Strong Buy.
Vertex Pharmaceuticals (VRTX) is an undervalued, aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). VRTX is overvalued based on 2017 EPS, but distinctly undervalued based on 2018 earnings projections. VRTX is rising, and could begin reaching new highs soon. Buy VRTX now. Buy.
XL Group (XL – yield 2.2%) is an insurer and reinsurer. XL Group is expected to see EPS grow 98.8% and 22.2% in 2017 and 2018. The corresponding P/Es are 12.5 and 10.3. This mid-cap stock is seriously undervalued!
In reading an extensive analysis of property & casualty insurers’ potential liabilities in the wake of Hurricane Harvey, it was a great relief to note that XL—a company favored by this particular famous investment firm—was not mentioned as one that would be financially impacted. Why, then, is XL’s share price down a bigger percentage than any other P&C insurer since the hurricane arrived? This kind of stock market anomaly presents an excellent buying opportunity. There’s 14% upside as XL retraces its July high, at which point the 2017 P/E will be only 14.4. The stock could easily deliver additional capital gains in the fourth quarter. Scoop up XL while it’s cheap because I believe this low price will be quite temporary. 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: Weyerhaeuser (WY - yield 3.9%)
If you’re looking to invest in one of the best possible stocks that can benefit from post-hurricane rebuilding, look no further than Weyerhaeuser, one of the largest U.S. manufacturers of wood and cellulose fiber products. The company has 18 U.S. distribution centers (see map), one of which is in Houston. The hurricane could be costly at Weyerhaeuser’s Houston distribution center, but could otherwise benefit the company due to increased product demand during the post-hurricane rebuilding process.
The stock offers a higher dividend yield than any other rebuilding stock that I’ve covered in this issue of Cabot Undervalued Stocks Advisor. In addition, EPS are expected to grow 38.7% and 23.1% in 2017 and 2018. Those are great numbers that do not yet reflect the benefits of post-hurricane rebuilding. The corresponding P/Es are 30.8 and 25.1. This stock is currently slightly undervalued based on 2018 numbers.
I expect WY to rise to 35, then rest a bit before continuing upwards. Strong Buy.
Updates on Growth & Income Portfolio Stocks
Ameriprise Financial (AMP – yield 2.4%) offers insurance products and asset management to retail and institutional clients. AMP is rising toward its early August high at 148. The stock will be fairly valued at 160. Buy.
BP plc (BP – yield 6.8%) is a European integrated oil company and a very undervalued aggressive growth stock. Hurricane Harvey did not disrupt BP’s Gulf oil and Texas chemical operations. Employees at the company’s U.S. headquarters in Houston are working remotely until the office reopens. There’s 25% upside, plus dividends, as BP eventually retraces price resistance at 44, where BP traded in 2014. Buy BP now. Strong Buy.
Blackstone Group LP (BX – variable large payouts) is a huge and successful alternative asset manager. This is an excellent stock for a buy-and-hold growth & income portfolio or a dividend portfolio. BX is rising after a brief price correction in August. (I will remove BX from the portfolio when it retraces its 2015 high at 37.) Buy BX now. Strong Buy.
Commercial Metals Company (CMC – yield 2.5%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. As a result of Hurricane Harvey, there’s going to be an eventual surge in scrap metal supply, although transportation avenues could be slow due to railroads operating near full capacity. More important, scrap metal prices are rising, which should translate into increased EPS estimates. There’s 25% upside, plus dividends, as CMC retraces its December 2016 high around 24, at which point the stock will still be extremely undervalued. Strong Buy.
ExxonMobil (XOM – yield 4.0%) is the largest U.S. integrated oil company. The company is experiencing very aggressive earnings growth in 2017. The stock fell in August, then stabilized. There’s 18% upside, plus dividends, as XOM retraces its highs from July and December 2016 at 91. Strong Buy.
GameStop (GME – yield 8.1%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. I won’t be giving GME a Buy recommendation until the price chart turns bullish. However, dividend investors should buy now. Hold.
Invesco (IVZ – yield 3.5%) is an asset management company. There’s 10% upside, plus dividends, to the stock’s recent high at 36.5, where I might sell due to fair valuation. Hold.
Johnson Controls (JCI – yield 2.5%) is a large-cap growth & income stock. There’s 10% upside, plus dividends, as the stock retraces its July high at 44. I don’t see a catalyst in the EPS growth to subsequently push the stock higher. I’m therefore moving JCI from Strong Buy to Hold, and I plan to sell near 44. Hold.
Buy Low Opportunities 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: Boise Cascade (BCC)
Boise Cascade is a wood products and building materials company. The company has 32 U.S. distribution centers (see map), one of which is in Houston. The hurricane could be costly at Boise Cascade’s Houston distribution center, but could otherwise benefit the company due to increased product demand during the post-hurricane rebuilding process.
The disparity between Boise Cascade’s earnings growth outlook and the stock’s valuation is unmatched by any other hurricane-rebuilding stock that we’ve considered today. Analysts expect EPS to grow 57.1% and 30.9% in 2017 and 2018. The corresponding P/Es are 18.2 and 13.9.
This is a very small company with only five analysts providing research. Therefore, investors could experience more volatility with BCC than they might with a large-cap stock. On the plus side, small profitable companies make excellent takeover targets.
BCC has upside price resistance at 32. The stock could rise to the upper 30s later this year. Buy this micro-cap aggressive growth stock now. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. This aggressive growth stock is undervalued based on its 2018 valuation. ALXN embarked on a new run-up on August 28. Buy ALXN now. My intention is to hold the stock until it reaches upside price resistance at 160 or 190, depending on momentum among pharmaceutical stocks. Buy.
Andeavor (ANDV – yield 2.3%) is an oil refiner and marketer, with refineries in the western and northern United States. Andeavor is the industry competitor that’s most favored to benefit from Hurricane Harvey’s impact on Texas refiners. ANDV is an undervalued aggressive growth stock. I’m moving ANDV from Strong Buy to Hold, since there’s less than 10% upside to my 2017 price target of 112, where it last traded in 2015. At 112, the stock will likely need to rest before delivering additional capital gains. At that time, I’ll consider whether to sell ANDV or keep it for longer-term gains, depending on price action in the broader market. Hold.
Chipotle Mexican Grill (CMG) There’s a lot of press lately about avocado prices, with the insinuation that the rising costs are harming Chipotle’s profitability. Nonsense! First of all, tomato prices rose more than avocado prices in August, so the media’s apparently focused on the wrong commodity. But look at which prices fell in August: lettuce, wheat, corn and steak. Offsetting any increase in prices of food ingredients are cost savings that Chipotle is making in the areas of food waste, food safety procedures and paper and packaging costs. Bottom line: earnings per share are expected to grow from $0.77 in 2016 (a very poor year for Chipotle) to $7.61 and $10.91 in 2017 and 2018. CMG remains an undervalued aggressive growth stock.
The stock may have bottomed recently around 300. I’ll wait for a more stable price chart before giving the stock a Buy recommendation. If we get a near-term rebound, CMG could rise to 350, then pull back a bit before continuing upward. Hold.
Dollar Tree (DLTR) Despite earnings estimates that have risen for the last three weeks, DLTR is still overvalued based on 2019 numbers (January year-end). However, DLTR is a more attractive stock than its competitors in the discount and food retail arenas. There’s a little price resistance at 83, and more at 90. The best-case scenario is that DLTR could rise 20% to the upper-90s in the coming 12 months, where it last traded in August 2016. Buy.
Goldman Sachs Group (GS – yield 1.3%) is a fairly-valued large-cap investment back. Simplification of compliance with banking regulations, lower tax rates and a potential surge in interest rates could each prompt rising earnings estimates. There’s 10% upside, plus dividends, to my 250 price target. Buy.
Legg Mason (LM – yield 2.9%) is a U.S.-based global asset management and financial services company with $750 billion in assets under management (AUM). LM is rising toward 41.5 where it last traded in July. There’s about 14% upside, plus dividends, to long-term price resistance at 44. Strong Buy.
Mattel (MAT – yield 3.6%) – Profits are expected to fall in 2017, then rise about 26% in 2018. I’m going to hold the stock for the rebound that will likely take place under the new CEO. MAT remains undervalued, and it may be nearing a buy point. When the price chart becomes more bullish, I will give the stock a Buy recommendation.
Investors should expect a round of tax-loss selling in December that could bring on another price correction. Oftentimes, come January, profitable companies that just finished a round of tax-loss selling will begin rising, since there are no more sellers. Hold.
Molina Healthcare (MOH) is a managed healthcare operator. Molina is being run by experienced company and board executives who implemented a restructuring plan after analyzing recent corporate problems and removing the CEO and CFO. According to the health insurance analyst at a major Wall Street investment firm, all the candidates for the CEO position are on board with the restructuring program, meaning that they’re unlikely to take the helm and then change course. In the short term, there’s 12% upside as MOH retraces its July high at 72. My longer-term price target is 80, where the stock traded in the summer of 2015, giving new investors a potential 24% capital gain. Strong Buy.
Schnitzer Steel Industries (SCHN – yield 2.8%) is one of the largest U.S. scrap metal recycling companies, and a manufacturer of steel products that are used in nonresidential construction. The company also owns over 50 stores that sell used auto parts. As a result of Hurricane Harvey, there’s going to be an eventual surge in scrap metal supply, although transportation avenues could be slow due to railroads operating near full capacity. More important, scrap metal prices are rising, which should translate into increased EPS estimates. I will sell SCHN as it approaches 29, where it last traded in December 2016. I like Commercial Metals (CMC) in the Growth & Income Portfolio better for medium- and long-term holds because there are more analysts covering the stock (which increases the reliability of the earnings estimates), and CMC is expected to have much stronger 2018 profit growth than SCHN. Nevertheless, I see no downside to holding SCHN other than the normal volatility associated with micro-cap stocks. Hold.
Total (TOT – approx. 4.3%) is an integrated oil & gas company based in France, and a greatly undervalued stock. Total’s large Port Arthur, Texas refinery is expected to be closed for up to two weeks due to flooding and a power outage. The stock offers attractive EPS growth, a low valuation and a large dividend yield. TOT could reach a maximum of 54 in the short-term, and will then likely have another quick pullback before climbing to three-year price resistance in the low 60s, delivering 19% capital gain potential plus dividends. Buy TOT now. Strong Buy.
Universal Electronics (UEIC) is a manufacturer and cutting-edge world leader of wireless remote control products, software, and audio-video accessories for the smart home, with a strong pipeline of new products. The company also offers energy management and control products through a recent acquisition. Universal Electronics will be meeting with Wall Street analysts at three industry conferences in September. There are only about four analysts currently covering this undervalued micro-cap stock. If even one more analyst picks up coverage after meeting with the CEO and CFO in September, that would expand the stock’s investing audience, potentially enhancing the share price.
UEIC is an undervalued growth stock. The share price fell after the recent earnings report, for no substantial reason, and now appears to be turning upward. There’s 24% upside to the July high around 72, at which point the stock will still be undervalued. Buy.
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Send questions or comments to crista@cabotwealth.com.
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YOUR NEXT CABOT UNDERVALUED STOCKS ADVISOR ISSUE IS SCHEDULED FOR October 3, 2017
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