Busy week! Lots of earnings reports. Here are this week’s noteworthy pieces of news and price action in the Cabot Undervalued Stocks Advisor portfolios.
Highlights
- Sell BorgWarner (BWA)
- BP (BP) moves to Hold
- Tesoro (TSO) moves to Hold
- The stocks I’d buy today are Royal Caribbean (RCL), Schnitzer Steel (SCHN) and Whirlpool (WHR). (Please refer to the February issue of Cabot Undervalued Stocks Advisor.)
ASML Holding (ASML) is actively rising and overvalued. I will sell once the run-up appears to be over. Hold.
Adobe Systems (ADBE) is actively rising, and approaching fair valuation. Reminder: I am seriously contemplating selling, once this run-up ends. Hold.
Applied Materials (AMAT) is actively rising and overvalued. Reminder: I will sell soon. Hold.
Archer Daniels Midland (ADM, yield 2.73%) reported a fourth-quarter earnings miss, a revenue beat, a higher income tax rate and a quarterly dividend increase from 30 cents to 32 cents. The stock reacted by falling, then surging upward. The CEO was bullish about economic policies and deflected trade concerns. (I am aware that most trade concerns voiced by the media are “fake news,” but newscasters aren’t ready to stop telling people that the U.S. might withdraw from NAFTA, because it’s their job to scare people. FYI, the potential 20% border tax is also fake news. Gotta love the media. Sigh.)
EPS are expected to grow 32.9% and 7.0% in 2017 and 2018. (It’s common for 2018 earnings estimates to be low-balled, but I’ll watch the number closely. I’d prefer it to be higher.) The 2017 P/E is 15.2.
ADM is low within a steady trading range between 43.50 and 47.50. Patient investors should buy low within that range. Strong Buy.
Boise Cascade (BCC) is actively rising toward medium-term resistance at 28, where it will assuredly rest for a while before continuing upwards. Buy.
BorgWarner (BWA – yield 1.4%) reported full-year 2016 and fourth-quarter diluted EPS of $3.27 and $0.85, when the market was expecting $3.26 and $0.84. Engine margins rose to surprising record levels, though they are expected to be impacted in 2018 by electric powertrain expenses. Management reiterated $3.35 to $3.45 EPS guidance for 2017.
Since earnings growth is expected to be slow in both 2017 and 2018, I’m selling BWA today. I’m no longer willing to wait for the stock to reach medium-term upside price resistance at 45 because I don’t see a realistic catalyst to push the share price there. Sell.
BP plc (BP – yield 7.0%) reported lower-than-expected 4Q results, due to higher-than-expected capital expenditures; a trend that will continue into 2017. Exploration and production (E&P) cost-savings targets were reached one year ahead of schedule; expenses were lower than expected while production was higher than expected. Refining and marketing (R&M) profits did not meet expectations due to weaker trading results and a long turnaround time at the Whiting refinery.
Wall Street’s EPS projections have been reduced to $2.44 and $2.63 in 2017 and 2018, reflecting 190% and 7.8% growth. The stock remains slightly undervalued. (Given two years of earnings projections, I always look out to 2018 when determining valuation.)
I’m moving BP from Strong Buy to Hold so that if earnings estimates come down farther, I can act quickly. The current numbers are fine for growth & income investors, but they will not be fine if they deteriorate. I’ll keep you apprised. Hold.
Cardinal Health (CAH – yield 2.3%) reported a third-quarter 2017 earnings beat (June year-end), combined with a revenue miss, due to pricing pressure within the generic drug market. The stock surged upwards because Cardinal and its key competitors have all expressed their beliefs that chronic pricing pressures are behind them. Analysts are currently expecting moderate EPS growth in 2017, followed by strong EPS growth in 2018. The stock could rise as high as 84 this winter. Hold.
Dollar Tree (DLTR) appears ready to climb to 90. Buy.
Kraft Heinz (KHC) just broke out of a trading range today. This is bullish! I will need to see final 2016 results and ensuing changes in 2017 projections before I’ll know how to proceed. For now, keep your shares! Hold.
Tesoro (TSO) reported a strong fourth-quarter earnings beat this week. Frankly, every news and research agency is reporting different numbers, which means the balance sheet report was complicated. I’ll just wait for the dust to settle on that. In the meantime, analysts are adjusting their 2017 and 2018 earnings estimates (which so far look decent-to-good). I’m going to have to see more accurate bottom-line 2016 numbers before I’ll know exactly where I want to go with TSO. For now, I’m moving TSO to Hold. The share price is rising toward short-term upside resistance at 92, and I might trade out, depending on earnings projections. Hold.
Vulcan Materials (VMC – yield 0.6%) reported a fourth-quarter earnings miss that seemed to be related more to timing of the seasonal business cycle than anything else. Full-year 2016 EPS rose 30.6%, and they’re expected to rise another 43.0% and 35.5% in 2017 and 2018. The stock remains undervalued and the industry outlook remains strong. The market punished the earnings miss by pushing VMC down to a lower support level at 120. I would anticipate the stock trading in the 120s for at least four weeks before climbing back to the 130s. Strong Buy.