Highlights:
• Sell Amazon.com (AMZN)
• Applied Materials (AMAT) moves from Buy to Hold
• ASML Holding (ASML) moves from Buy to Hold
• D.R. Horton (DHI) moves from Buy to Hold
• Royal Caribbean (RCL) moves from Buy to Strong Buy
• See quarterly and holiday earnings results below for Mattel (MAT), Royal Caribbean (RCL), Vertex (VRTX) and Whirlpool (WHR).
What to Buy Today
• If XL Group (XL) breaks above 38 this morning, that’s the one I’d buy for immediate upside.
Amazon.com (AMZN) has reached upside price resistance, and shares are overvalued. Full-year EPS are expected to grow from approximately $4.77 in 2016 to $8.71 in 2017, reflecting 82.6% growth. The 2017 P/E is 96.0.
While I fully realize that the stock might keep climbing, it no longer fits my investment strategy, due to the P/E being higher than the earnings growth rate. I’m selling AMZN from the Growth Portfolio today. Sell.
Applied Materials (AMAT, yield 1.2%) shares are rising again. EPS are expected to grow 37.7% in 2017 (October year-end), but just 7.1% in 2018. I’m moving AMAT from Buy to Hold now, with the intention of selling when the current run-up appears complete. In a few months, the market will shift its focus from the strong current-year EPS growth to the slow 2018 EPS growth, and the price action will change course. I’ll be happy to take the money and run this winter. Hold.
ASML Holding (ASML) Between the quick run-up in the share price, and a slight downward revision in earnings estimates for 2017 (December year-end), ASML is getting close to a fair 2017 valuation. I’m moving ASML from Buy to Hold. There’s still room for price appreciation. Hold.
D.R. Horton (DHI) is certainly having a great week! I’m moving DHI from Buy to Hold. The stock could rise as high as 34 before resting. Hold.
Mattel (MAT) reported poor holiday sales this morning, which will push the share price downward. The huge dividend will limit downside on the stock. 2017 earnings growth is expected to be very strong. Dividends investors and bargain hunters should buy low. Buy.
Royal Caribbean Cruises (RCL) reported 2016 fourth quarter adjusted EPS of $1.23 this morning, when the market was expecting $1.20. The company also estimates 2017 EPS of $6.90 to $7.10, above the $6.80 consensus estimate. I’ve mentioned previously that RCL has short-term upside resistance at 102. When the stock reaches that price, based on today’s 2017 profit estimates, RCL will still be undervalued. I’m raising RCL from Buy to Strong Buy. Strong Buy.
Vertex Pharmaceuticals (VRTX) reported fourth quarter 2016 non-GAAP earnings per share (EPS) of $0.35 last night, when analysts were expecting $0.29. Revenue rose 64% for the quarter and 71% for the full year vs. a year ago. The company reiterated previous guidance for product revenues and expenses, which should serve to allay investor worries. Vertex is a leader in the research and development of treatments for cystic fibrosis.
VRTX is an undervalued aggressive growth biotech stock. The company took net losses through 2015, then turned a profit in 2016. Future profits are expected to rise for at least the next decade. 2017 EPS are expected to be $1.92, up 129% from $0.84 in 2016. The 2017 P/E is 44.4.
I added VRTX to the Buy Low Opportunities Portfolio in July 2016, after the stock had fallen tremendously and then stabilized. The share price did not reflect the high earnings growth rate or the comparably low P/E. VRTX promptly rose 20% in five weeks, but then got bogged down by downward revisions in earnings estimates and sector market volatility. Throughout the second half of 2016, VRTX remained on a strong path of earnings growth, while the share price languished. Last night’s quarterly results should go a long way toward pushing the share price back up over 100. The best-case scenario this year—somewhat of a longshot—is that a couple more quarters’ of upside earnings surprises could push VRTX all the way toward the stock’s 2015 highs around 140. Strong Buy.
Whirlpool (WHR) reported fourth-quarter 2016 EPS of $4.33 when the market was expecting $4.44. The earnings miss was attributed to the weak British pound. The company estimates adjusted 2017 EPS in the range of $15.25 to $16.25 vs. the consensus estimate of $15.96. The stock remains distinctly undervalued, and I would therefore take advantage of today’s price volatility, and buy WHR. Buy.