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Cabot Undervalued Stocks Advisor Special Bulletin

Universal Electronics (UEIC) reported earnings yesterday and shares are up 12%. Kraft Heinz (KHC) shares are up over 8% today on news that the company has made a bid to buy Unilever (UN).

Universal Electronics (UEIC) reported earnings yesterday and shares are up 12%. Longer-term investors should Hold UEIC. Kraft Heinz (KHC), whose shares are up over 8% today, is now rated Sell because the stock has morphed from an investment into a gamble.

HOLD Universal Electronics (UEIC) Shares are up over 12% as I write, just shy of 71. UEIC is a worldwide leader in sensing and control technologies for the smart home.
Yesterday afternoon, the company reported fourth-quarter 2016 EPS that came in on target. The only news that I can find that seems worthy of today’s bullishness is a higher first-quarter earnings projection from the company than analysts had expected.
Still, a quarterly earnings increase does not warrant a rapid 12% boost in a share price. It would not be unusual for the share price to have quite a pullback next week, because unless the company is an M&A target, stocks don’t usually jump big amounts and retain the gains.
How to proceed? Well, it depends on whether you’re a trader or a longer-term investor. Here are the factors to consider about the company, and about the share price:

The company:

  • UEIC is a very successful company, with expertise in a niche business.
  • First-quarter 2017 profits are growing faster than expected, which is always a bullish sign.
  • Full-year 2017 EPS are expected to grow 26.2%, with a P/E of 19.4 (The consensus EPS number was derived prior to yesterday’s earnings report, and will likely increase.) The stock therefore remains undervalued.
  • The company had a very low 16% debt ratio as of December 2015. Low debt ratios enhance a company’s attractiveness as a buyout candidate.
  • Comcast has an invested interested in UEIC, which makes UEIC a buyout candidate.
  • There are only three Wall Street analysts covering the stock right now, whose estimates contribute to the consensus. The fewer the analysts, the more room there is for quarterly results to stray from consensus estimates, contributing to share price volatility.

The stock:

  • Again, the stock is volatile. I had traded in and out of it in the Spring of 2016, for 29% profit in the Growth Portfolio.
  • On November 4, 2016, I bought UEIC in the Buy Low Opportunities Portfolio at 57, after a huge price drop related to minor bad news in its third-quarter earnings report. (So now we’re seeing a pattern of huge price swings in UEIC on the release of quarterly earnings reports.)
  • The stock is up a ridiculous amount today. Very short-term traders should probably sell.
  • There’s medium-term upside price resistance at 77, where the stock traded last summer. I will probably sell when UEIC retraces those recent highs.
  • I had the stock rated as a Hold recently. If it follows through with a normal pullback next week, I will move it to a Buy.

Ultimately, my current recommendation is to hold your shares in Universal Electronics. Hold.

SELL Kraft Heinz (KHC)

In other news, share of Kraft Heinz (KHC) are up over 8% today, at 94.50, on news that the company has made a bid to buy Unilever (UN). When M&A activity hits the news, what typically happens is that shares in the acquisition target rise, while shares in the acquiring company fall. In this case, KHC shares rose.
KHC stock was already fully valued, fell on this week’s earnings report, and then rose today due to the excitement of the M&A activity. I’m going to do something that you’re probably not expecting. I’m recommending the sale of KHC.
I will sell KHC from the Growth & Income Portfolio today because I think the stock has morphed from an investment into a gamble. I’m not here to gamble. Shareholders who are comfortable using stop-loss orders should consider using a stop at 92, and raise the stop each day that the stock rises. When it sells, let it go, and move on to another undervalued growth opportunity. Sell.