Today we have two rating changes, news on General Motors (GM)—which is not in the Cabot Undervalued Stocks Advisor portfolios—and recommendations on the best stocks to buy today.
I’m moving two growth stocks from Hold to Buy today: Boise Cascade (BCC) and Goldman Sachs (GS).
Boise Cascade (BCC) has been a laggard in the Buy Low Opportunities Portfolio, largely because 2016 ended up being a down year for the company when it was initially projected to be an up year. But take heart! The company’s EPS are expected to grow 44% in 2017, after falling 20% in 2016; and the 2017 P/E is just 15.9. The chart is looking chipper. (That’s a pun. Wood chips ... get it?) BCC could rise to 28 in the coming months, and would be most appropriate for traders and aggressive growth investors. Buy.
I moved Goldman Sachs (GS) to Hold on December 13 after a big run-up. I fully expected a pullback, which never arrived. Now the stock appears ready to rise again as I’m sure it will if the January 18 earnings report brings good news. Wall Street expects EPS to grow 18.4% in 2017. The P/E is 13.1, and the dividend yield is 1.1%. The stock remains undervalued. GS is a good choice for growth stock investors, but I’d like to reiterate that there’s still some downside risk based on that pullback that never arrived. Buy.
General Motors (GM) announced a new $5 billion repurchase authorization (without an expiration date), and also raised their EPS estimate for 2017 to a range of $6.00-$6.50 (December year-end). I know that many investors own the stock, so here’s a recap of current statistics, followed by my recommendation on how to handle the stock.
GM’s EPS were $5.02 in 2015, and are expected to be $5.75 and $6.25. The latter numbers are mid-range of the estimates that came directly from CEO Mary Barra this week, as opposed to the Wall Street consensus estimates that I almost always quote. The 2017 P/E is 6.1 and the current dividend yield is 4.1%. Debt levels are fair.
There’s been a lot of share repurchase activity at GM in recent years. Share repurchases and EPS have a direct relationship. When shares are repurchased by the company, there are fewer shares outstanding. EPS are calculated by taking the net income and dividing by the number of shares outstanding. Therefore, when there are fewer shares outstanding via repurchases, the EPS number is bigger than it would have otherwise been.
Here are the recent and projected future repurchase transactions at GM:
• 2015 and 2016: GM repurchased $6 billion of stock.
• 2017: Investors should expect $3 billion in buybacks.
• 2018–2020:The new $5 billion repurchase plan will be executed.
Watch for full-year 2016 results to be reported on February 7.
I sold GM from the Growth & Income Portfolio on December 1. (Caveat: I suggested that people who own GM for the dividend should keep the stock because the dividend is safe.) The stock provided a 16% total return during the 13.8 months it was featured in the portfolio. I sold GM because earnings were expected to be flat in 2017, and the price chart showed the stock pushing up against two-year upside price resistance. The earnings outlook is now more attractive, but not strong enough to warrant me adding GM back into the portfolio.
If you own GM for the dividend, keep the stock. You should know, however, that the company has indicated that it’s unlikely to increase the dividend in 2017.
If you own GM for capital gains, based on the revised EPS projections, the stock is undervalued, so the expectation of additional gains is reasonable. Keep in mind, though, that there’s some longer-term upside price resistance at 41, from when GM briefly rose to 40.99 in December 2013.
If you do not own GM, and are contemplating buying the stock, I would ask you to focus on your investment goals. If your goal is dividend income, with a secondary goal of capital appreciation, you’ll likely do better with BP plc (BP), Mattel (MAT) and Total (TOT). If your goal is capital appreciation, lots of stocks have stronger earnings growth rates than GM ... and remember, when all is said and done, it’s earnings growth that drives share price growth.
Good choices for capital appreciation today, based on their bullish price charts, include ASML Holdings (ASML), American International Group (AIG), Applied Materials (AMAT), Boise Cascade (BCC), Goldman Sachs (GS), Legg Mason (LM), Royal Caribbean (RCL) and Universal Electronics (UEIC).
As long as we’re at it with comprehensive stock recommendations today, some of our excellent stocks are at low points within relatively stable trading ranges. So for those of you who love to buy low, these are your best candidates today: Dollar Tree (DLTR), ExxonMobil (XOM) and Tesoro (TSO).
Molina Healthcare (MOH) joined the Buy Low Opportunities Portfolio on January 3, and has already risen 9%. It’s pushing up against some price resistance at 60, so I expect it to pause in its uptrend or even pull back a bit in the coming days. However, the company is slated for aggressive earnings growth and the stock is still wildly undervalued. There’s a lot more upside. Buy on pullbacks. Buy.
Please send your questions and comments to Crista@CabotWealth.com.