Cabot Benjamin Graham Value Investor Weekly Update - Cabot Wealth Network

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Cabot Benjamin Graham Value Investor Weekly Update

Today’s portfolio changes:
Stifel Financial (SF) moves from Hold to Buy.
Target (TGT) moves from Hold to Sell at 78.

Also, pay attention to Gentex (GNTX), which might be starting a new run-up with a price chart that’s much more bullish than most other stocks right now.

STORE Capital (STOR) and Nautilus (NLS) might reach my suggested sell prices this week, and I will then remove them from the portfolio.

Please send questions and comments to Crista@cabotwealth.com.

Portfolio Stocks

Alphabet Cl. C (GOOG) – Alphabet is the world’s largest internet company. Revenue is derived from Google’s online ads, with the balance coming from the sale of apps, digital content, services, licensing and hardware. Google announced a new service last week, Cloud Text-to-Speech, which converts blocks of text into speech using Alphabet’s DeepMind technology. The artificial speech is natural-sounding, and available in 12 languages. The application can be used within call centers, autos, TVs, robots and audio books & podcasts.

I will consider GOOG to be fairly valued when it retraces its January high near 1,180, at which point I might sell so as to make room for a more undervalued stock to join the portfolio. I’m pleased that GOOG maintained very firm price support at 1,000 during this year’s stock market correction. There’s room within the current trading range for short-term traders to make 16% profit. Buy–price target 1,180.

Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. Apple is an undervalued growth stock, expected to see EPS increase 24.3% in fiscal 2018 (September year-end). I expect AAPL to rise to its March high at 182 in the short term, with additional capital gains in 2018. Buy.

Berkshire Hathaway Class B (BRK.B) – In the coming weeks, we might hear more news about a potential buyout of USG Corp. (USG), of which Berkshire Hathaway owns a 31% share; a new big stake in an airline, or even a new big stake in General Electric (GE), all of which I wrote about recently. Berkshire Hathaway is having a great year of earnings growth, but the stock is overvalued based on projected much-slower 2019 earnings growth. I plan to sell BRK.B near its recent high of 217. There’s room within the current trading range for short-term traders to make 10% profit. The stock could easily continue climbing after a brief pause at 217, so for those of you who want to see how high BRK.B could rise this year, my suggestion is that you use a stop-loss order to protect your downside. Sell near 217. 

Discovery Communications (DISCA) – The fundamental and technical prognosis for DISCA is relatively attractive, although I hate the very high debt ratio. The 2019 earnings estimate rose nicely last week. Consensus estimates now point to 24.7% and 42.6% EPS growth in 2018 and 2019, with corresponding P/Es of 9.4 and 6.6. Wells Fargo raised their price target on DISCA to 27 and their rating to outperform this week. The price chart looks constructive, as if the stock is ready to begin climbing back toward its January and February high of 26, giving new investors a potential 16% short-term gain. At that point, I expect the stock to rest a while before proceeding upward. The high debt ratio would inspire me to protect my downside with a stop-loss order, because debt adds risk to the company and its share price. Buy.

Gentex (GNTX – yield 1.9%) manufactures innovative products for automobiles and airlines, and also serves the fire protection industry. GNTX is a mid-cap growth & income stock. Earnings per share are expected to grow 27.1% in 2018, while the P/E is just 14.4. GNTX appears ready to surpass 24 this week and begin a new run-up. I plan on selling the stock after the run-up, because the 2019 growth & value situation becomes much less compelling. Buy.

Gilead Sciences (GILD – yield 3.1%) will make presentations at the International Liver Conference in Paris, April 11-15. Gilead is expected to see a big drop in profits in 2018, followed by just 3% EPS growth in 2019. In addition, debt levels are somewhat high. I see no reason to own this stock. My suggestion is to let GILD rise back to 81, then sell. Falling profits are not conducive to rising share prices. A stop-loss order at 71.50 could be wise. Sell at 81.

Intercontinental Exchange (ICE – yield 1.3%) operates regulated exchanges and clearing houses in the commodity and financial markets. In recent news, the New York Stock Exchange, which is wholly owned by Intercontinental Exchange, is in advanced talks to buy the Chicago Stock Exchange. ICE is a large-cap growth & income stock, fairly valued based on the expectation of 20% EPS growth in 2018, but overvalued when factoring in expectations of low-double-digit earnings growth in 2019. The stock rose to new all-time highs in January, then corrected with the broader market. Based on strong 2018 earnings growth, bullish sentiment towards financial stocks and Intercontinental’s record futures trading volumes in the first quarter of 2018, I think ICE is capable of surpassing 76 and reaching new highs again in the coming months. I’ll likely sell the stock thereafter. Hold.

LKQ Corp. (LKQ) is a distributor of vehicle products in the U.S. and Europe. Consensus estimates show strong 2018 EPS growth of 24.5% slowing to 10.3% growth in 2019. LKQ is overvalued based on 2019 numbers. A fourth quarter 2017 run-up took LKQ to a new all-time high in January 2018. The stock has since pulled back with the broader market. There’s 13% upside as LKQ rebounds to 43 in the coming months. Hold.

Lowes Companies (LOW – yield 1.9%) – CEO Robert Niblock announced his retirement, pending the appointment of a successor. The stock reacted well, pushing the share price above a recent narrow trading range. Consensus estimates project strong earnings growth of 24.8% in 2019 (January year-end), followed by 12.4% EPS growth in 2020. The stock is undervalued based on this year’s numbers, but fairly valued based on next year’s numbers. The long-term debt-to-capitalization ratio is higher than I would prefer at 68%. There’s 12% upside as LOW returns to short-term price resistance at 97. If next year’s earnings estimates improve, I’ll encourage shareholders to continue holding LOW for a retracement of January’s high near 107. Hold.

Magna International (MGA – yield 2.3%) is a Canadian global automotive supplier. MGA has attractive fundamentals and lots of upside. MGA is further along in its recovery from the stock market correction than most other stocks. I expect MGA to rise to 59 soon, where it last traded in January, and to deliver additional capital gains thereafter. Buy.

McKesson Corporation (MCK – yield 1.0%) is neither a growth stock nor an undervalued stock. Healthcare and health insurance stocks are receiving extra investor interest right now because big American corporations are considering innovative ways to rein in their employee healthcare costs, including acquiring these companies. MCK traded as high as 176 in January, then suffered as healthcare stocks bore the brunt of the 2018 stock market correction. My recommendation is that current shareholders hold their MCK shares, and plan to exit when the stock gets closer to its January highs. Hold.

Nautilus (NLS) is a maker of gym and exercise equipment, and an undervalued growth stock. Its tiny market capitalization of $400 million makes the stock volatile, because even small trades will toss the share price around in an exaggerated manner. The company is theoretically a very attractive buyout target, due to strong fundamentals and small market cap.

The NLS price chart has been a disaster. I recommend that investors sell when NLS reaches 14, and reinvest in a stock with a more bullish price chart. (I won’t issue a specific sell bulletin. If NLS trades at 14 for a couple of days, I’ll remove it from the portfolio. I suggest that you sell via a sell limit order.) Again, the company’s fundamentals are fine. It’s the price action that’s throwing red flags in my path. Sell at 14.

Ross Stores (ROST – yield 1.2%) is expected to see a year of strong earnings growth, followed by moderate earnings growth in fiscal 2020 (January year-end). I don’t want to be holding the stock later this year when investors begin to notice that the stock is overvalued based on 2020 EPS projections. ROST has traded between 74 and 85 since early December. I’m currently planning to sell near 85. Hold.

STORE Capital Corp. (STOR – yield 4.9%) is a real estate investment trust (REIT). REITs don’t fit my investment model because they don’t offer reasonable and consistent opportunities for capital gains, yet they’re subject to a variety of risks such as fluctuations in interest rates and real estate values. The stock is racing toward its highs from November and December 2017. My suggestion is that growth & income investors sell STOR at 25.50 and reinvest the principal into stocks that offer both dividends and attractive earnings growth. (I won’t issue a specific sell bulletin. If STOR trades at 25.50 for a couple of days, I’ll remove it from the portfolio. I suggest that you sell via a sell limit order.) Sell at 25.50.

Stifel Financial (SF – yield 0.8%) – One more analyst is now contributing to consensus earnings estimates for Stifel, and current numbers show the stock to be undervalued. SF is showing stability at the bottom of its 2018 trading range, in synch with the correction in the broader market. Now that the EPS and PE look a little better, and there’s 18% upside as SF eventually retraces its 2018 highs at 68, I’m moving my recommendation from Hold to Buy. Buy.

Target (TGT – yield 3.5%) – Target has certainly had its woes in recent years, but the outlook for fiscal 2019 (January year-end) is actually relatively attractive. Profits are expected to grow 11.9%, and when I consider the contribution of the 3.5% dividend yield, I conclude the stock is currently undervalued. Unfortunately, Wall Street is expecting fiscal 2020 to deliver earnings growth of just 3.6%, and that’s not enough to cause professional investors to buy and hold the stock. My recommendation is that investors sell the stock as it approaches its January high of 78, in favor of a more undervalued growth opportunity. Sell at 78.

Thor Industries (THO – yield 1.3%) is a maker of recreational vehicles. THO is a very attractive and undervalued growth stock. The fundamentals are outstanding at this company. Consensus estimates point toward EPS growing 30.6% and 18.4% in 2018 and 2019 (July year-end). The P/E ratios are low in comparison to the earnings growth rates, at 11.9 and 10.0. In addition, the long-term debt-to-capitalization ratio is very low at 4.4%.

The stock experienced an exaggerated run-up in 2017, peaked at new all-time highs in January, then fell for several months with the correction in the broader market. THO has not yet stabilized from its fall. There’s 42% upside as THO gradually returns to its January high of 156. Buy.

Toll Brothers (TOL – yield 0.7%), like most of its peers, is experiencing a cycle of very strong earnings growth. Profits are expected to rise 41.0% in fiscal 2018 (October year-end), then slow to 9.4% growth in 2019. The price chart has been weak. There’s 20% upside as TOL heads back to its January high of 52, where I will likely sell due to full valuation. Buy.

Walt Disney Co. (DIS yield – 1.6%) – News emerged this week that Walt Disney Co. is considering buying Sky News from pay-TV group Sky, which helps Twenty-First Century Fox (FOXA) clear a regulatory hurdle in its pursuit of owning Sky. Sky News does not currently produce annual profits.

Disney had no profit growth in fiscal 2017 (September year-end), and is now expected to see profits grow 20.9% and 8.3% in 2018 and 2019. The stock is overvalued based on 2019 numbers. Disney shares have traded sideways for over three years. There’s 11% upside as DIS retraces its January high near 112. Hold.

Williams-Sonoma (WSM – yield 3.4%) – Attractive 2019 earnings growth will give way to low single-digit growth in 2020 (January year-end). The price chart indicates that WSM could possibly rise above short-term price resistance at 55 in the coming months. I intend to sell after the subsequent run-up, before the market turns its attention to next year’s lackluster earnings outlook. Buy.

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