Highlights: Sell Toll Brothers (TOL), Buy PulteGroup (PHM), Sell ASML Holding (ASML), Legg Mason (LM) takeover rumors, Archer Daniels Midland (ADM) moves from Buy to Hold and more.
Toll Brothers (TOL) rose sharply this morning, due to a better-than-expected first quarter 2017 earnings report (October year-end). However, after strong 2017 fiscal performance, 2018 earnings growth is expected to be moderate. Therefore, I had earmarked the stock for a sale as it approached medium-term upside resistance around 34, where we will have earned about 17% profit in 10.5 months. Sell.
In related news, I’m adding homebuilder PulteGroup (PHM) to the Growth Portfolio today as a Strong Buy. I wrote about PulteGroup (PHM) for an appearance tomorrow in Cabot’s free advisory, Wall Street’s Best Daily. Here’s the gist of my recommendation:
PulteGroup (PHM – yield 1.7%) is expected to more than double its peers’ earnings growth rates in 2018. That’s going to bring the company a lot of attention from Wall Street, and presumably, more institutional dollars will flow into the stock, pushing the share price higher.
The company is growing organically, with increasing orders, closings and average sale prices per home. In addition, the company is increasing its sale of homes in California, which bring in higher revenue per home than elsewhere in the U.S.
PHM reported EPS of $1.59 in 2016 (December year-end), meeting analysts’ most recent estimates, which had risen by $0.30 as the year progressed. Estimates for 2017 are increasing, too. The current 2017 consensus EPS estimate is $2.22, up from $2.07 a mere four weeks ago. That’s year-over-year earnings growth of 39.6%; with 2018 expected to bring another 20.7% growth to $2.68 per share.
The 2017 and 2018 P/Es for PHM are 9.7 and 8.1, below both the long-term industry average P/E, and well-below PHM’s average P/E.
PHM has repeatedly risen to upside resistance in the 22 to 23 area for four years. Based on its trading pattern in recent weeks, combined with the bullish price charts on other homebuilder stocks, I believe that PHM is finally ready to break past price resistance and begin a sustainable run-up. Strong Buy.
ASML Holding (ASML) appears to have peaked in its recent run-up. The stock is fully-valued, based on both its 2017 and 2018 EPS expectations (December year-end). We’re up about 12.6% since ASML joined the Growth Portfolio in early January 2017. Let’s sell ASML and reinvest into a more undervalued growth stock. Sell.
Legg Mason (LM) has become the subject of takeover speculation, with rumors circling that an unnamed buyer has made overtures to the company. It’s very common for such rumors to turn into an actual takeover bid within a few days of the original rumor, so we’ll know soon enough.
In the meantime, if there’s a sudden spike in the share price—more than just a 1% to 3% upward move on a bullish day—consider using a stop-loss order because, in case a takeover bid never materializes, the share price will invariably come back down to where it traded prior to the rumors.
Since LM is extremely undervalued, I would consider the current share price momentum to be normal, and nothing that would provoke extreme caution. By the way, the only reason that I have the stock at a Buy, rather than a Strong Buy, is that the price is approaching upside resistance at 40, where it could theoretically get stuck for a little while. But if a takeover bid appears, the concept of “upside resistance” will quickly fly out the window, and the stock will immediately rise to the approximate amount of the bid. Buy.
Archer Daniels Midland (ADM) moves from Buy to Hold because it appears that strong 2017 earnings growth will fade to moderate growth in 2018. I’ll make a subsequent decision (Hold vs. Sell) as the stock approaches 47.50. Hold.
Boise Cascade (BCC) has run up to medium-term price resistance at 28. It should, in theory, stop rising now. Traders should exit. BCC is still an undervalued aggressive growth stock so I would expect the stock to eventually continue rising toward longer-term resistance at 32. If BCC has a decent pullback, I’ll change it to a Buy. Hold.
GameStop (GME) has run up to short-term price resistance at 26.50. The stock could push higher soon if the full-year earnings report pleases the market (January year-end). I don’t have a date for the earnings report yet. Hold.
Quanta Services (PWR) had an on-target earnings report yesterday, which pleased the market. The stock is flirting with a breakout past 38. My instinct is that it would need to bounce at 34 before gaining enough strength to have a successful breakout. If I bought at the current price, and it pulled back to 34, I’d simply buy more. Strong Buy.
The price chart on Total (TOT) appears to be showing us a quick shakeout pattern, which typically precedes an immediate price breakout. I would absolutely be buying TOT today! Strong Buy.
Whirlpool (WHR) continues to rise toward short-term resistance at 190. The stock could easily break past 190 shortly thereafter, at which time I’ll move it to a Strong Buy. Buy.
Zions Bancorp (ZION) was featured in Cabot’s free publication, Wall Street’s Best Daily, in early February. I have not added it to our Cabot Undervalued Stocks Advisor portfolios, but that doesn’t mean you can’t make good capital gains on ZION in 2017.
Prepare for the Inevitable Stock Market Correction
The stock market has been rising consistently for quite a while now. It will invariably have a price correction at some point. I’m not expecting anything drastic—just a normal correction—and I don’t see it happening just yet.
When the correction arrives, you will probably be happy if you have some cash on the sidelines with which to “buy low” on your favorite stocks. If you earmark those stocks right now, and target your preferred purchase prices, one or more of them is likely to present themselves as a gift to you during a market correction.
When a correction arrives, I will be here to help you select great opportunities. And by the way, there’s nothing wrong with buying stocks right now. But if you’re the cautious type, go bottom fishing among energy stocks—they’re not trading in synch with the S&P 500 right now, so when a stock market correction arrives, energy stocks will likely be rising, not falling.