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Cabot Undervalued Stocks Advisor Special Bulletin

Today’s Portfolio Changes:
Universal Electronics (UEIC) moves from Buy to Hold

XL Group (XL, yield 2.1%) reported fourth quarter and full year 2016 operating income per share of $0.47 and $1.63, when the market was expecting about $0.35 and $1.52. The strong quarter featured higher income, higher core underwriting margin, and a lower tax rate. During fiscal 2017, analysts expect improvements in expense reduction, return on equity and core loss ratio, as well as $700 million in share repurchases. XL Group provides insurance and reinsurance services.

XL continues to trade below its $43 book value per share. This week, the stock rose above recent upside price resistance. XL briefly traded near $40.50 in the second half of 2015, so that’s your next point of upside resistance. Strong Buy.

Yesterday afternoon, Legg Mason (LM, yield 2.6%) reported fiscal third quarter 2017 non-GAAP EPS of $0.64, in line with the market’s expectations. Total revenue, tax rate and operating expenses were each higher than expected. Assets under management (AUM) were $710.4 billion, up 6% from a year ago, with fixed income making up 54% of the asset mix.

As is frequently the case, news reporters misread the company’s earnings press release, and initially reported that the company had missed consensus earnings estimates for the quarter, which led to a drop in the share price in after hours trading yesterday.

LM has been rising this year. A move past 35 would be very bullish. Strong Buy.

Johnson Controls (JCI, yield 2.3%) reported fiscal first quarter 2017 EPS of $0.53, vs. company guidance of $0.50-$0.52. Sales numbers were mildly disappointing, with power solutions growing more than expected, but building technologies sales missing estimates. The company lowered its second quarter earnings target, but reiterated its full-year 2017 earnings target.

JCI pulled back somewhat, within its trading range, this week. The earnings outlook remains strong, with the market expecting 16% EPS growth in both 2017 and 2018. Buy.

Shares of Universal Electronics (UEIC) have been very weak in recent days, though they’ve bounced at their November lows. There’s no particular bad news, and earnings estimates remain the same as they were in mid-November. Full-year 2016 results will be reported on the afternoon of February 16. There are only four analysts covering the stock, and they expect EPS to grow 3.9% and 23.4% in 2016 and 2017, respectively (December year-end). I’m moving the stock from Buy to Hold until the price chart indicates that UEIC is likely to rise again. Hold.

Most stocks are trading within recent trading ranges, or trading somewhat flat lately, as are the S&P 500 and DJIA. However, Tesoro (TSO) appears ready to rise. That’s the stock I’d buy today. Buy.