U.S. stock markets remain depressed and volatile this week. I don’t foresee a resolution to that mood until after the November POTUS election. Even more important to investment markets is the potential lame duck vote on the Trans-Pacific Partnership (TPP) trade agreement. (Yes, I know that various political leaders have announced opposition to a lame duck vote. I still think there’s at least an 80% chance that the vote will take place by December.) A change in political leadership in the U.S. will upset investment markets because countries around the world are in a panic over the outcome of four pending trade agreements.
Notice that I did not say that either Presidential candidate would be “good” or “bad” for the stock market, from a multi-year point of view. What’s really at stake—which you’re mostly not seeing in the press, because financial news writers are not well informed on the topic—is that the four major trade deals that are currently being negotiated are each falling apart. When we look at U.S. stock market malaise, I definitely see more trade issues suppressing market sentiment than I do any particular economic news.
• U.S. voter sentiment against the Trans-Pacific Partnership (TPP) trade agreement continues to escalate, which worries world leaders. And, of course, a Trump presidency would send them into full-blown panic, because he so strongly opposes the TPP.
• Last week, the Belgian region of Wallonia voted against signing the Comprehensive Economic and Trade Agreement (CETA) between the E.U. and Canada, which could ultimately serve to destroy the trade agreement.
• International trade ministers are at odds with the E.U. over the pending Trade in Services Agreement (TiSA), and are now discussing whether to leave the E.U. out of the deal.
• Various trade ministers within the E.U. are discussing walking away from ongoing Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations, due to a prolonged impasse with the U.S. over multiple chapters within the trade agreement.
I love bull markets. I love capital gains. I don’t foresee such a scenario commencing this year. I will continue to buy undervalued growth stocks while their prices are low, and await the next stock market run-up. Please read further, for highlights of this week’s earnings as reported by companies within the Cabot Undervalued Stocks Advisor portfolios. In addition, here are two important details:
• Boise Cascade (BCC) moves from Buy to Hold.
• Federated Investors (FII) declared a special dividend.
Amazon.com (AMZN) reported third-quarter 2016 earnings per share (EPS) of 52 cents vs. 17 cents a year ago, and vs. the consensus estimate of 78 cents. Revenue rose 29% vs. a year ago. High spending on warehouses and video production is impacting both third- and fourth-quarter profits. The company opened 23 new warehouses so far since June 30, and grew its workforce by 38% during the quarter.
The list of new products and services that Amazon began offering in recent months is astonishing. The products include movies, books, music, games, cloud and web services, commerce in India, software, hardware, photography, fashion, employment, scholarships and more.
Profit and revenue growth remain on a strong upward trajectory. All growth stock investors should consider AMZN to be a core portfolio holding. Strong Buy.
Boise Cascade (BCC) – I reported in my weekly update that Boise had its first earnings disappointment this year on October 24. I’m moving the stock to a Hold until the share price is ready to show some strength. Hold.
BorgWarner (BWA) reported third-quarter 2016 adjusted earnings per share (EPS) of 78 cents vs. the consensus estimate of 77 cents. Results include the November 2015 acquisition of Remy International, maker of electric and hybrid motors. Full-year 2016 EPS are now expected in a range of $3.24 to $3.28, in line with the consensus estimate of $3.25. Shareholders who are very interested in automotive systems can read more about BorgWarner’s current projects in the “Recent Highlights” section of the earnings press release. The stock did not react to the earnings report, and continues to trade near upside price resistance at 36. Buy.
Federated Investors (FII) reported third-quarter 2016 earnings per share (EPS) of 54 cents vs. the consensus estimate of 52 cents, and vs. 42 cents a year ago. The company declared its normal quarterly dividend of 25 cents per share. In addition, Federated declared a special dividend of $1.00 per share—its fourth special dividend in eight years—essentially doubling the annual yield on the stock to 7.6%. Federated also announced a new authorization to repurchase up to four million shares, with 537,000 shares remaining in the prior authorization. I’ll consider putting a Buy recommendation on FII when the share price begins to show strength. Hold.
General Motors (GM) reported third-quarter 2016 adjusted earnings per share (EPS) of $1.72 vs. the consensus estimate of $1.44. The company also expects its full-year EPS to come in at the high end of its previous estimate of $5.50 - $6.00. The company is profiting from auto sales in the U.S. and China, expecting to break even in Europe this year, and losing money in South America and Asian markets (ex-China). Traders pushed GM’s share price down upon the earnings announcement. I still expect the stock to remain on a slow uptrend to 35. Hold.
Legg Mason (LM) reported second quarter 2017 earnings per share (EPS) of 63 cents vs. the consensus estimate of 58 cents. The stock is down today, despite the good news, and bouncing at support levels established in March through June 2016. Buy.
Robert Half (RHI) reported third-quarter 2016 earnings per share (EPS) of 71 cents, on target with the consensus estimate. Revenue came in at $1.34 billion vs. the consensus estimate of $1.36 billion. The company had a very good quarter, yet traders trashed the stock, sending RHI down to recent price support at $36.75. I expect RHI to promptly resume trading between 36.75 and 39. Hold.
Royal Caribbean Cruises (RCL) reported third-quarter 2016 adjusted earnings per share (EPS) of $3.20 vs. the consensus estimate of $3.10. The earnings report was tremendously upbeat, and financial news writers apparently couldn’t find a bad number to pounce upon, so the stock rose this morning. Buy.
Vertex Pharmaceuticals (VRTX) reported third-quarter 2016 earnings per share (EPS) of 16 cents vs. the consensus estimate of 18 cents. Revenues were $413.5 million vs. the consensus estimate of $419 million. Management reiterated its expectation to reach full-year targets for sales of Kalydeco and Orkambi. Expenses also remain on target.
Vertex reported that its research on a new “triplet” pill for cystic fibrosis is moving into Phase II studies. The treatment combines Vertex’ currently marketed drug, ivacaftor (Kalydeco), with two additional drugs. The market was highly-concerned that the Phase II studies might be delayed, so this announcement should signal the end of the recent downturn in the share price. Buy.
Whirlpool (WHR) reported third-quarter 2016 earnings per share (EPS) of $3.66 vs. the consensus estimate of $3.86. The company repurchased $100 million of stock during the quarter. Total revenue and earnings growth remain on strong upward trajectories, but weak sales in the U.K. were compounded by weakness in the British pound, causing the company to miss Wall Street’s quarterly earnings estimate. Revised full-year consensus estimates project Whirlpool to grow EPS by 14.5% and 14.3% in 2016 and 2017. The stock remains vastly undervalued, with a 2.7% dividend yield. Strong Buy.