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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Special Bulletin

One of our stocks reported a strong earnings beat and another joins the Buy Low Opportunities Portfolio as a Strong Buy.

Today’s news: Southwest Airlines (LUV) reports a strong earnings beat; Abercrombie & Fitch (ANF) joins the Buy Low Opportunities Portfolio as a Strong Buy.



Southwest Airlines (LUV – yield 1.2%) reported $1.17 fourth quarter earnings per diluted share this morning when the market was expecting $1.07. Revenue came in a fraction above estimates. The company expects “strong” first quarter results.

Southwest is in the final phase of obtaining FAA authorization to begin service between California and the Hawaiian Islands, and will discontinue service to Benito Juarez Mexico City International Airport by March 30.

The stock is up 5% to 53.60 in pre-market trading. There’s upside price resistance in the 54-55 area. I’ll return LUV to a Buy recommendation when the price chart firms up, which could happen in the coming weeks. Today’s pop is encouraging, but shares are still trading like a ship without a rudder. Hold.


In recent days, I did a quick review of 19 retail apparel stores (excluding footwear companies) to see if there were any that seemed wise to invest in. Three of these companies are projected to see earnings per share (EPS) decline in the coming year: Macy’s, Chico’s and Capri. Twelve companies are expected to produce less than 11% EPS growth. Four companies are projected to experience strong earnings growth: Under Armour (UAA), Lululemon (LULU), Guess? (GES) and Abercrombie & Fitch (ANF).

I immediately tossed Under Armour and Lululemon out of the running because their price/earnings ratios are higher than their earnings growth rates, so they don’t fit my investment style. And we already own Guess? in the Growth & Income Portfolio.

Looking further, I discovered that Abercrombie & Fitch (ANF – yield 4.0%) fits all of my fundamental investment criteria, and I love their price chart, so ANF is joining the Buy Low Opportunities Portfolio today. Abercrombie is a leading, global specialty retailer of apparel and accessories for men, women and kids, operating under the Abercrombie & Fitch, abercrombie kids, Hollister and Gilly Hicks brands. The Company operates more than 865 stores under these brands across North America, Europe, Asia and the Middle East, as well as e-commerce sites.


Wall Street consensus earnings estimates forecast 2019 and 2020 EPS growth rates of 49.2% and 17.5% (January year end). The 2020 price/earnings ratio (P/E) is 17.6, and the debt-to-capital ratio is low at 21%.

Let me be blunt about the earnings estimates. Analysts and company management do a terrible job of forecasting Abercrombie’s earnings. Full-year 2018 EPS came in about twice what analysts had expected. Since that time, the 2019 and 2020 consensus estimates have been revised upward, repeatedly. The good news is that the earnings surprises have been pleasant, but the bad news is that we could also experience a big earnings miss that nobody foresaw. Fortunately, the company reaffirmed their fourth quarter outlook on January 14, so I’m not expecting much volatility upon the March 6 earnings release.

ANF is a small-cap stock. The dividend is hefty, and the payout has remained unchanged for many years.

This stock could actually fit into any of our three portfolios because it has strong earnings growth, a big dividend yield, and the share price is much cheaper than it was at its August 2018 peak near 29. I decided to add ANF to the Buy Low Opportunities Portfolio because once ANF retraces its recent high, I will consider it to be fully valued. (Of course, the earnings outlook could change, and if that happens, I’ll reconsider my decision on how long to hold the stock.)

The stock has been rising to 21 and then reversing course repeatedly since September. In my estimation, ANF appears ready to break past 21 quite soon. There’s about 33% upside as ANF eventually retraces its 2018 high near 29. Risk-tolerant growth stock investors and traders should buy ANF now. Strong Buy.