Our pick this week is a resilient stock with great growth, a reasonable valuation and is part of a sector that\'s holding up well. We think it offers both low risk and solid returns, especially once the market resumes its longer-term advance.
Cabot Stock of the Week 161
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The market’s evidence has worsened during the past couple of weeks. The major indexes have broken their 50-day moving averages and the broad market is in rough shape, as the number of stocks hitting new lows every day remains way too high for comfort. To be fair, the long-term trend is still clearly up, the big-cap indexes are just 3% to 4% off their highs and many leading stocks are holding up well, but it’s probably best to trim your sails a bit and see what comes. (More on that in our update section.) For new buying this week, I went with a resilient stock that has solid growth, a reasonable valuation and is part of a sector that’s not overly loved and holding up well. It was originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor. Here are Crista’s latest thoughts.
PulteGroup (PHM)
Homebuilder stocks continue to present interesting opportunities for upside, due to their attractive earnings growth and low valuations. Prospects for increasing employment and wages under the new administration also serve to enhance new home purchases, and a recent Reuters poll projects that a chronic shortage of homes and steady demand are expected to continue to lift U.S. home prices in the next few years.
Today I’d like to introduce the homebuilder that outranks all of its major competitors in projected earnings growth. Since earnings growth correlates mightily to capital gains over the medium- and long-term, that’s an important consideration!
PulteGroup (PHM) is a single-family U.S. homebuilder. The firm does provide mortgages and title services through its Pulte Mortgage business, but its main business is homebuilding, in the form of single-family detached, townhomes, condos and duplexes. The company’s homes are sold under brand names that include Centex, Pulte Homes, Del Webb, DiVosta Homes, and John Wieland Homes.
Pulte reported a large second-quarter earnings beat in July (sales rose 12%, earnings were up 27%), which was its fifth quarter in a row where it outperformed analysts’ profit expectations. Pulte’s quarterly successes included increases in new orders (up 23% in dollar terms), higher average selling prices (up 6%), number of homes sold (up 6%) and backlog (up 19%). In addition, the company is increasing its presence in California, whose the revenue per home sold is higher (often much higher) than elsewhere in the U.S. Pulte CEO Ryan Marshall commented, “We believe housing demand can continue to move higher over the coming quarters.”
When it comes to the numbers, PHM is a very undervalued growth stock. Earnings per share (EPS) rose 29% in 2016, and the consensus of Wall Street analysts projects the company to grow EPS by 24% and 29% in 2017 and 2018 (December year end), respectively. Those are very aggressive earnings growth rates!
Wall Street consensus estimates forecast Pulte surpassing all of its peers’ earnings growth rates in 2018, including D.R. Horton (DHI) at 12.9%, Lennar (LEN) at 20.6%, M.D.C. Holdings (MDC) at 11.5% and Toll Brothers (TOL) at 10.5%. That’s going to bring the company a lot of attention from big investors, and will presumably cause money to flow into the stock, pushing the share price higher.
I love strong earnings growth, but unless the price-earnings ratio (P/E) is below the earnings growth rate, I’m not going to recommend the stock. In the case of PHM, the stock passes the P/E test with flying colors. The 2017 and 2018 P/Es for PHM are incredibly low at 12.2 and 9.4, leaving lots of room for share price appreciation without pushing the stock into overvalued territory.
The stock pays a dividend yielding 1.4% annually. Pulte increases the dividend periodically, but not on an annual basis. In addition, PulteGroup returns capital to shareholders via share buybacks. The company annually repurchased 3% to 5% of its outstanding shares in 2014, 2015 and 2016, and is on track to do so again this year.
PHM is a mid-cap stock, with a market capitalization of $7.7 billion.
One of the most attractive things to consider about PHM is its price chart. As with many housing and financial stocks, PHM had a higher share price prior to the housing crisis in 2008. More recently, PHM had repeatedly risen to upside resistance in the 22 to 23 area for four years through 2016. The stock finally rose to 24 and higher, beginning in June, opening the door to a sustainable run-up. Nobody has missed their opportunity to make money in PHM! We think you can take a position here, and see plenty of upside ahead. BUY.
PulteGroup (PHM 25)
3350 Peachtree Road, NE, Suite 150
Atlanta, Georgia 30326
404-978-6400
www.pultegroupinc.com
CURRENT RECOMMENDATIONS
Our sales over the past couple of weeks (ICE, CVNA and JD) left us with 18 stocks coming into this week (out of a maximum of 20). Given the market’s weakened position—today’s bounce was nice, but the broad market remains weak and the onus is clearly on the bulls to prove they’re back in the game—we’re less inclined to hold onto losers and laggards. Tonight, we’re selling Canada Goose (GOOS) and keeping a couple of other names, like JinkoSolar (JKS) and GameStop (GME), on very tight leashes.
That said, you should continue to practice patience with your strong performers and undervalued stocks; while the market has hit a pothole, the overall bull market is still intact, so you want to give your top performers a chance to continue to power your portfolio.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, continues to bask in the glow of its excellent Q2 report, which caused the stock to go vertical. Better yet, ATHM remains extremely resilient, testing new high ground today. Longer-term, we’re intrigued that ATHM’s recent surge just brought it out to all-time highs, surpassing its highs in 2014-2015—one of many multi-year breakouts we’ve seen among growth stocks this year. We’ll stay on Buy, but either keep the position small here or look to buy on dips of three or four points. BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, took a hit last week with the market and with biotech stocks as a whole, as well as on news that a House committee is investigating price hikes on MS drugs. Still, the damage wasn’t much to panic about, as the stock has remained in a 6% trading range since late July. More importantly, Roy’s maximum buy price is 287.5 (with a minimum sell price of 362.6). If you don’t own any, we’re not opposed to nibbling below 287.5, but we’ll stick with Hold as our official rating. HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, is acting well following the big-volume, earnings-induced shakeout, tightening up near its highs. With the weak hands likely out of the stock, we think it’s a good buy around here. BUY.
Canada Goose Holdings (GOOS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to have a great story and solid growth numbers. But given the market environment, we can’t ignore the stock’s action—GOOS reversed lower following its quarterly report, which was acceptable, but has since sunk to lower lows, dipping back into its IPO base. (Horrid performance by myriad retail stocks hasn’t helped the cause, either.) Given the evidence, we think it’s best to sell tonight, cut the loss and look for greener pastures. SELL.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, continues to advance slowly but steadily, and peers Royal Caribbean and Norwegian Cruise Lines are also acting well. With a reasonable valuation (20 times earnings), plus a dividend (2.3%) and expectations of accelerating growth next year (up 17%), you can pick up a few shares around here. BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, broke out from a very long-term bottoming area in June at 127, and then tested that area later that month and last week, after sliding with the market. It’s not the strongest name, of course, but the action isn’t abnormal at this point, and Roy continues to see plenty of value—CELG’s minimum sell price is north of 173, as earnings should grow 20% for years to come. We’re holding on. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, reported another fantastic quarter last Thursday, which, along with great strength among Chinese stocks, has caused a rush of buying. The second quarter saw China Lodging’s sales, EBITDA and earnings rise 20%, 27% and 19%, respectively, with the earnings figure topping estimates by a mile. Analysts have ratcheted up their earnings estimates (now looking for 47% growth this year and 37% next) in response. Handling the stock here is a bit tricky, as HTHT is out of trend on the upside, but showing excellent power, too. We’ll stay on Buy, but any new buys should be kept small or wait for a calm consolidation of a week or two. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, is one of many liquid growth leaders that have held up well during the market’s recent fits and starts. Shares have had three mini-legs down, but not much damage has been done. FB looks poised to rally once the selling pressures on the market ease. BUY.
GameStop (GME), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier (and also recommended by Crista Huff and Roy Ward), is set to report earnings on Thursday (August 24), which will probably determine the stock’s intermediate-term fate. Interestingly, despite the market’s fall and the horror show among retail stocks, GME has etched three higher lows (20.3 in June, 20.7 in July and 20.9 in August), which is a ray of light. But it’s all about earnings—a negative reaction could have us moving on, but a positive reaction could finally kick-start a sustained advance. HOLD.
JinkoSolar (JKS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was yanked sharply lower yesterday along with the entire solar group as a trade case that could result in tariffs (which is considered a big negative). That said, the pullback has been arrested by the 50-day line, so we’re hanging on, but if all’s well, JKS should start bouncing from these levels. HOLD.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, held up well during the market’s recent leg down, so it’s a not a shock that it challenged its old highs today. Overall, the stock remains in a tight, calm sideways consolidation, and looks ready to run once the market confirms a new uptrend. BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, fell from 35 to 31 over the past few weeks, joining the slide in most pipeline stocks. We won’t stick around for a bunch more weakness, but the stock should have plenty of support in the 30 to 32 area from its highs last year, its lows this year and the 40-week moving average. Combine all that with a solid dividend, and we’re comfortable given PBA some rope and seeing how it reacts following this retreat. HOLD.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has pulled back to its 50-day line, mostly because of the market’s retreat. Still, Crista (and we) remain very optimistic here as demand for Quanta’s infrastructure planning, building and consulting services should only increase. (It’s the number-one specialty, utility, pipeline and electrical contractor.) With the stock finding some support and with solid earnings growth down the pike, we’ll stay on Buy. BUY.
Schnitzer Steel (SCHN), originally recommend by Crista Huff of Cabot Undervalued Stocks Advisor, continues to consolidate normally after its big advance from mid-June to late July. Given the market and the stock’s recent holding pattern, we’ll stay on Hold, but the odds favor the next big move being up. HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, has been dillydallying near its 50-day line for a couple of weeks, which is fine with us. We still believe the long-term possibilities are huge as Square expands its payments and add-on services (invoices, short-term lending, etc.), but short-term, the stock is working through a correction. HOLD.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, came under selling pressure recently as the market slid, but overall, the stock remains in its two-month range (303 on the low end and 387 on the high end) and volume on the dip was light. There’s been some hubbub about how the bonds Tesla recently sold are trading below par, but we don’t consider that meaningful. Long-term, we still think TSLA has turned the corner, but short-term, we’ll stick with a Hold rating given the still-iffy market and the stock’s choppy action. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, surged nicely today, which could be the start of a new upmove after its modest four-week decline. We went back to Buy last week and still think it’s a decent time to enter. BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, looks great! It gapped up on its earnings report a few days ago, and today, it caught an upgrade from an analyst who said he overestimated the competitive threat from Amazon’s cloud division. It’s too high to buy, but Roy’s minimum sell price is around 111, so we advise sitting tight, especially as the stock just lifted to new highs after a 10-week pause. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED AUGUST 29, 2017
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