Today we have important news on American International Group (AIG) and H&R Block. In addition, pay attention to comments on PulteGroup (PHM) and D.R. Horton (DHI).
But first, some details about investment strategy.
Stocks are undervalued when investors are avoiding them, leading to low price/earnings ratios (P/Es) in relation to earnings growth. There are various reasons that investors avoid stocks:
- Market sectors that are not thriving for specific reasons (e.g., basic industry stocks during recessions, energy stocks harmed by a big drop in oil prices)
- Expensive company-specific problems and scandals like tragedies, lawsuits, fraud, boycotts, debt problems and rumors (e.g., Adobe Systems’ transition to a subscription-based revenue model, BP oil spill, Enron cooking the books, Target bathroom boycott, rumor of tainted baby formula, Vertex Pharmaceuticals’ former chronic net losses)
- Uncertainty surrounding the ultimate balance sheet outcome after big M&A activity (e.g., Johnson Controls/Tyco, Dollar Tree/Family Dollar Stores)
- Random and somewhat ridiculous investor panic over earnings reports (e.g., Universal Electronics)
- Threats of legislation that will dramatically change or adversely affect the sector (e.g., Dodd-Frank legislation, shutting down the coal industry, implementation or demise of Obamacare)
There eventually comes a point in time when the affected companies will work their way out of the problems. Many companies will begin to fare well again. In such instances, I typically wait for full-year earnings per share (EPS) projections to reflect 15%+ growth, and then begin buying the stock a month or two prior to the onset of the profitable fiscal year. As long as the share price seems to have bottomed out and steadied itself after the period of share-price turmoil, I will buy low and wait for Wall Street to embrace the company’s new growth prospects. The turnaround in earnings will cause analysts to write encouraging research reports, which will in turn cause institutional investors to look at the stocks in a new light, triggering buying activity that drives the share prices up.
Examples of stocks that I bought under these circumstances include Adobe Systems, American International Group, Dollar Tree, Kraft Heinz and Universal Electronics.
This morning, we were greeted with news that American International Group’s (AIG) CEO Peter Hancock is stepping down, under scrutiny from activist investor Carl Icahn and board members. This sounds like bad news, right? Yet the share price rose this morning. So what’s really going on here?
As in the aforementioned scenarios, AIG suffered from various problems for quite a few years. The company hadn’t actually lost money since 2009, but annual EPS randomly rose and fell. I was not invested in the stock during that timeframe because I’m not interested in owning stocks with stagnant earnings, falling earnings or net losses.
But heading into fiscal 2017, AIG was projected to have strong multi-year EPS growth. All of the stock’s other key numbers lined up with my investment criteria—P/E, debt ratio, dividend yield—so it was time to turn my attention to the price chart.
I added AIG to the Growth Portfolio on October 4, 2016, following a period of flat sideways trading, because that chart pattern generally indicates an impending price breakout. Sure enough, the stock began rising within days.
I remain very bullish on AIG because the fundamentals and valuation look fantastic, and the company continues to aggressively work on solving former problems. Strong Buy.
Yesterday, H&R Block (HRB) reported a smaller-than-expected third quarter loss (April year-end), and the share price rose 14.88%. Wow! In addition, the company’s tax business is faring better than expected in the current quarter. Since HRB earns all its annual profit in the fourth quarter, that’s very good news. Analysts are now revising their earnings projections for the coming year. I’ll have revised numbers for you in next week’s update.
Importantly, the share price rose to medium-term upside price resistance at 24. I would expect the stock to have a pullback and trade around 22-24 for a while before it gathers the strength to break past 24.
I have HRB rated Hold because earnings growth is not strong enough to warrant a Buy rating. But Hold does not mean Sell. Unless you’re a short-term trader who bought around 20-21 for the express purpose of selling near 24, my suggestion is to hold the stock for additional gains in the first half of 2017. Hold.
Shares of U.S. homebuilders are rising after Barclays raised price targets on four stocks, including PulteGroup (PHM) and D.R. Horton (DHI).
My strong buy recommendation for PulteGroup (PHM) remains intact. The stock is breaking out past four-year price resistance. This is extremely bullish. I continue to recommend that investors buy PHM for capital gains in 2017. Strong Buy.
D.R. Horton (DHI) is approaching upside resistance at 34, and it’s fully valued. I’ll probably sell DHI stock this week—I’m literally waiting for another $0.50 on the share price. Go ahead and plan your exit. Hold.
Stocks to Buy Today:
- If you want another homebuilder stock, buy PHM.
- If you want a stock that’s breaking out of a trading range, buy PHM.
- If you want a stock that’s trading in a flat line, which often precedes a breakout, buy GS or PWR.
- If you want to buy low with a stock that’s sitting at price support, buy AIG, DLTR or JCI.
- If you want a stock with a big dividend that will also likely deliver capital gains this year, buy BP, MAT or TOT.