Cabot Undervalued Stocks Advisor Special Bulletin
Sell one of our stocks. There is nothing wrong at the company, and earnings are growing at an attractive rate. However, the share price is quite fairly valued, with the 2018 EPS and dividend growth rates equal to the 2018 P/E.
Sell D.R. Horton (DHI). Buy PulteGroup (PHM) and Buy BP plc (BP)—the subject of takeover speculation
Today I’m selling D.R. Horton (DHI) from the Growth & Income Portfolio. There is nothing wrong at the company, and earnings are growing at an attractive rate. However, the share price is quite fairly valued, with the 2018 EPS and dividend growth rates equal to the 2018 P/E.
If the price chart appeared more bullish, I would keep the stock in the portfolio for a while longer. However, you can see on the chart that the stock is now retracing its high from last summer. What typically happens in such a scenario is that the stock gets stuck for a while, trading near that former high and having pullbacks. That’s because there are people who bought the stock around 34, and they’re disappointed in its performance so they’re using this opportunity to sell and break even. The selling activity causes the price pullbacks.
Could DHI climb farther? Yes, it could. A rising tide lifts all ships. Many media outlets are touting homebuilder stocks right now. But as DHI morphs from an investment into a gamble, you are going to lower your portfolio risk by switching from a fairly-valued stock into an undervalued stock. Alternately, you could use a stop-loss order to protect your downside, and let the stock do what it will. Sell
In contrast, look at the five-year price chart on PulteGroup (PHM – 1.5% yield) You can see that the stock just broke past long-term upside resistance. At this point, there is nobody who owns the stock who is disappointed in its performance. They’re all going to hold their shares, while other people who are reading the price chart are excited at this breakout and are buying shares. Strong Buy.
I highly recommend that you sell DHI and move your capital into a stock with strong earnings growth and a price chart that displays near-term upside opportunity. I mentioned several of those potential purchases in a Special Bulletin yesterday, and today I’m name another excellent stock, BP plc (BP –6.9% yield) Strong Buy.
Today we learned that BP is the subject of takeover speculation by Exxon Mobil (XOM – 3.7% yield) Strong Buy.
Is it credible that XOM could buy BP? Yes, it could happen. BP has approximately 30% of the market capitalization of XOM. It’s an extremely attractive investment, with strong earnings growth, low P/E, moderate debt ratio and a huge dividend yield.
Exxon Mobil has a low 20% long-term debt-to-capitalization ratio as of December 2016. The company can probably afford to buy BP.
What’s more, we don’t have to overthink the regulatory issues, because all we really need is for XOM to make an offer. BP’s share price will shoot upwards, and then we will sell at the appropriate strategic moment. There’s rarely any point in holding onto a stock during the six to 24 months between the date of the takeover offer and the date of the actual merger, or the date when the regulatory agencies officially prohibit the deal.
I’ll spell out the sell vs. hold considerations if a buyout offer materializes. In the meantime, BP is a profoundly attractive investment. Short of a shocking tragedy or scandal, I see far less downside with BP than with just about any other stock available to investors today. Strong Buy.