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Giving Thanks

When I think of Thanksgiving, I think of the Pilgrims, their suffering, the frozen weather, the starvation. I think of the men who were tasked with planning and management coming up empty-handed in the food department. They were responsible for keeping their community and their loved ones alive. And they were failing.
I ponder the desperation and humility, as the Pilgrims asked the Native Americans for help, for food; literally asking them to save their lives.

Being thankful is a wonderful thing, and Thanksgiving is an abundant, joyful holiday. But before there was abundance, there was hard work and humility, which led to learning and growing, which led to success, which put the Pilgrims squarely on the doorstep of giving thanks.

Humility: The Breakfast of Champions

Four hundred years later, our country is a bit short on humility. College kids demanding free stuff, our “victim” society, all the moochers living on the backs of taxpayers ... you know the drill. It’s depressing.
I turned to my friends almost begging for inspiration. “Were you humbled? Did you learn? Are you grateful?”

Roger expressed regrets at the voting patterns of his youth, as did Lily. They used words like “embarrassed, ashamed, reckless, impulsive.” They’re both greatly relieved to have a better grasp on their voting decisions now.

Miguel had decades of misplaced anger toward a parent. He finally owned up to it and apologized to her. That action led to peace, and his thankfulness that he was able to put aside his aggressive emotions, humble himself, and do a difficult, yet rewarding thing. His humility quickly led to healing.

Joey talked about debating with college roommates, rarely achieving agreement or understanding. He used words like “pride” and “opinionated.” But Joey also remembered that the importance of their friendships trumped their pride. As the months passed, they would come around to understanding and sometimes adopting each other’s points of view. Joey remembered humility being a catalyst for college discussions leading to personal growth.

Lastly, there was Sonia. “I used to think that people who believed in natural childbirth, homeschooling and Catholicism were crazy. Now I believe in and practice all three (although my last baby is now 11). I always tell my boys to be careful who you make fun of because you may be way more uninformed than you realize.”

“You may be way more uninformed than you realize.” There it is, in a nutshell. How do we know what we’re missing until we’re exposed to it?

I began investing in stocks in 1988. My first trades were fun and exciting, but not necessarily profitable. I had to face the fact that I didn’t know all the answers, that I wasn’t great at stock investing, and that I couldn’t get there by bragging about my wins and hiding my losses.

First, I needed to figure out what questions to ask. Then, I had to find the answers. Not the common perceptions, but the real truth. “Do stock splits matter?” “Do low vs. high share prices matter?” “Why do stock prices fall when earnings reports are good?” “How can I minimize risk?” “How can I eliminate even more risk?”

In the stock market, pride goes before a fall. I wanted to win. So I humbled myself and thoroughly examined stocks, preconceived notions about stocks, catalysts for big up and down market moves, when to “buy low,” and every common or uncommon situation. The only way to consistently make money in the stock market is with lots of practice, acknowledging mistakes, and finding ways to avoid repeating them.

I’ve come to view humility as the breakfast of champions. I’m glad I made the effort. I absolutely love stock investing. Please give a shout if I can assist you in your stock market journey.

This Stock has Growth and Value

I run into investors who scratch their heads over my outperforming, numbers-based investment style. The newbies openly sneer at it. “But the directors just sold shares!” “But people don’t buy that product!” “But there’s a big short position.” But but but but...

Honey, I would buy stock in the United States Postal Service if I thought it could make me some money.

But of course, that’s ridiculous. Because FedEx (FDX) delivers the goods in that sector. Business is booming at international package delivery giant FedEx, fueled by growth in e-commerce, market share gains, improving global economies and price increases.

FedEx reported its first-quarter results in mid-September (May year-end). FedEx Express experienced rapid earnings growth, with operating income up 45% vs. a year ago, despite weaker than expected trends in global trade. FedEx Ground profits were up 10% year-over-year, prior to one-time charges.

From a fundamental analysis point of view, FDX meets all of my investing criteria. I look for specific levels of profit, price/earnings ratio (P/E), dividend, and debt ratio, because my experience has proven that stocks that meet my criteria are extremely likely to outperform the broader markets. In addition, these criteria lower risk, by weeding out companies with lackluster earnings growth, overvalued P/Es, and levels of debt service that reduce management’s flexibility to best serve the company.

Wall Street analysts’ consensus earnings per share (EPS) estimates for FDX are very attractive, with EPS expected to grow 19.1%, 14.4% and 10.3% in 2016 through 2018 (May year-end). (Imagine what those projections look like at the U.S.P.S.—ouch!) Typically, analysts lowball the third-year number, until forecasting for 2018 becomes more clear; so I expect that number to ratchet upwards.

EPS are increasing due to a multi-year profit improvement plan, increased revenues, lower expenses, and ongoing share repurchases. The company repurchased 10% of outstanding shares in fiscal 2014 & ’15. Revenue grew 4% in 2015, and is expected to grow 6% and 5% in 2016 & ’17.

So what you’ve got in FedEx is a consistently profitable company, which racks up $47 billion in annual revenue. Chalk one up for corporate management!

Next, the 2016 P/E is 15.2. That’s smack in the middle of the five-year P/E range (2010-2015) of 10 to 21. The 15.2 P/E tells you that the stock’s undervalued compared to the EPS growth rate, and compared to the typical P/E range. Yes, FDX is a bargain right now.

There’s a tiny little dividend, yielding 0.6%, and a moderate long-term debt-to-capitalization ratio of 32.6%.

Nothing to see there folks, but nothing to become alarmed over, either.

The repetitive trading pattern on FDX tends to be one of lots of sideways trading—with a price correction in the midst—followed by a big price run-up. The last big run-up occurred in the second half of 2014, followed by sideways trading in the first half of 2015 when the stock reached a high of $185.19 in June. Then came the price correction with the falling market in August–September.

FDX shares are rising from the market correction, but have not yet retraced the June highs. At this point, the chart has turned bullish. I expect the stock to climb back towards $185, resting briefly along the way; then blowing past $185 for its next run-up. As for timing, barring any unexpected bad news or major market correction, we could see this scenario play out this winter.

When the stock retraces the June high, that will be a 14% gain over today’s price, and the shares will still be undervalued, with a P/E of 17.4.

It’s not unusual for a large, famous company’s stock to deliver an oversized capital gain. Union Pacific (UNP) rose 41.8% in calendar year 2014, with $23 billion in revenues; and Lowe’s (LOW) rose 38.8% that year, with $56 billion in revenues. Time Warner (TWX) rose 46% in 2013, with $30 billion in revenues; Comcast (CMCSA) rose 57% in 2012, with $62 billion in revenues.

All of these companies were in my annual model portfolios. It’s all about timing. Stocks go up in fits and starts. All we need to do, as investors, is find growth and value stocks, and wait for the “fits” to end and the “starts” to begin. In that light, it’s time to invest in FedEx.

This stock is appropriate for growth investors, value investors and momentum investors. Aggressive growth investors and dividend investors will want to pass on this one.

Rating: Strong Buy.

Happy investing!

crista huff
Crista Huff
Chief Analyst, Smart Investing in Turbulent Times

Crista Huff is the lead analyst of Cabot Undervalued Stocks Advisor, where she combines a strict fundamental methodology with technical analysis, to identify growth and value stocks whose charts are turning bullish.