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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Special Bulletin

Four of our stocks reported earnings, plus a new Buy, a Sell and a rating change.

June quarter results: Archer Daniels Midland (ADM), BP plc (BP), Martin Marietta Materials (MLM) and Vulcan Materials (VMC)

Highlights: Buy Apple (AAPL), Sell Archer Daniels Midland (ADM), Tesoro (TSO) changed its name to Andeavor (ANDV) and Andeavor (ANDV) moves from Strong Buy to Buy.

Apple (AAPL – yield 1.7%) reported a great quarter this week. More important, Apple’s profit outlook has changed from one of slow 6.7% EPS growth in 2017 (September year-end) to an expectation of 20.4% EPS growth in 2018. The 2018 P/E is low in comparison at 14.1. Now that AAPL finally fits my investing criteria, I’m happy to add the stock to the Growth Portfolio. (I’ll write more about the company in next week’s update.)

AAPL broke out of a trading range today and began reaching new all-time highs. That’s the most bullish time to buy a stock. Buy AAPL today. Strong Buy.

Andeavor (ANDV) is the new name for Tesoro (TSO), as of August 1. FYI, there is no change to your number of shares or cost basis. This is simply a corporate name change. All major brokerage firms will automatically handle the name change efficiently within your account.

Energy refining and marketing industry stocks are rising. ANDV has been rising toward its 2015 high around 112, where I intend to sell the stock. I’m moving ANDV from Strong Buy to Buy as it nears the price target. There’s still 10% upside. Buy.

Archer Daniels Midland (ADM) reported second-quarter EPS of $0.57 yesterday, when the market was expecting $0.52, with a range of $0.48 to $0.62 per share. CEO Juan Luciano stated, “We are diversifying our capabilities and geographic reach through acquisitions and organic expansions. We are aggressively managing costs and capital, and taking additional portfolio actions; and we are ahead of pace to meet our 2017 target of $225 million in run-rate savings.”

Revenue came in below all analysts’ estimates, at $14.9 billion. Despite the great quarterly profit, the company has been disappointing the market this year with its business results, largely due to unfavorable trends in commodities markets.

Strong 2017 earnings growth is expected to give way to approximately 11% EPS growth in 2018. That’s not a bad number by any means, but the stock’s already fully-valued. Therefore, I’m going to take this opportunity to sell ADM, because there’s no current reason to believe that commodities markets will create a value opportunity for ADM shares any time soon.

The price chart turned bullish in recent days, and if the market is so inclined, it could push ADM up near 47 where it traded sporadically during the last nine months. Despite the improving price chart, I’m selling today in order to make room for better capital gain opportunities in the portfolios. Sell.

BP plc (BP – yield 6.6%) reported second-quarter adjusted EPS of $0.21 yesterday, when the market was expecting $0.18, with a range of $0.09 to $0.39 per share.

CEO Bob Dudley commented, “Directionally our break-even prices are moving down quicker than we may have anticipated at the start of the year.” He discussed his expectation that oil will be priced at about $50 per barrel over the next five years, and that BP is aiming to drive its cost per barrel down to the $30s.

There was a bit of speculation in news reports that BP’s debt levels are worrisome, but the CFO made it clear that they’re not remotely concerned with debt levels, and that he expects net debt “will naturally decline over time as we go forward.” He also indicated an ability to cut capital expenditures by $1 billion if lower oil prices warranted that move.

During the first half of 2017, BP made payments of $4.3 billion related to the Gulf of Mexico oil spill incident. Subsequent financial obligations are expected to be drastically lower.

The stock is significantly undervalued, and continues to offer aggressive earnings growth. BP shares could appeal to growth investors, dividend investors and buy-and-hold investors.

The market is pleased with BP’s quarterly results, and the stock is up about 4% for the week thus far. There’s some short-term price resistance at 37, which I expect the stock to surpass this year. Investors should expect significant price resistance at 44, where BP traded in 2014. Strong Buy.

KLX Inc. (KLXI) is a manufacturer of aerospace fasteners, consumables and logistics. I’m reiterating my Strong Buy on KLXI today because the price chart appears ripe for an immediate breakout. Buy KLXI now. Strong Buy.

Martin Marietta Materials (MLM – yield 0.8%) reported second-quarter EPS of $2.25 yesterday, when the market was expecting $2.36, with a range of $2.17 to $2.48 per share. The press release states:

“Ward Nye, Chairman, President and CEO of Martin Marietta, stated, “Our record second-quarter results reflect improved sales, gross profit and earnings from operations in each reportable group, underscoring the breadth of our business and our ability to capitalize on the ongoing recovery in construction activity.””

The company reiterated its full-year revenue and income guidance. Nevertheless, MLM fell on the earnings miss, dragging its industry peers (EXP and VMC) down with it—all three of which are experiencing strong multi-year earnings growth. Eagle Materials (EXP) reported a small earnings beat last week, and Vulcan Materials (VMC) reported an earnings miss today. Buy on weakness; these are all excellent undervalued growth stocks. Strong Buy.

Vulcan Materials (VMC – yield 0.8%) reported second-quarter EPS of $0.90 today when the market was expecting $1.20, with a range of $1.11 to $1.28. The press release elaborates:
“Tom Hill, Chairman and Chief Executive Officer, said, “Aggregates shipments in
the quarter were hit hard by prolonged and extremely wet weather in the
Southeast, particularly in May and June, and the absence or delayed timing of
large project work in Illinois and coastal Texas compared to last year. This
shortfall in second quarter aggregates shipments drove most of the difference
in our reported results versus our plan.””

Pricing rose 5%, and the shipment backlog hit a three-year high.

I’ve been invested in Vulcan Materials since January 2015, and have seen wet weather interrupt shipments. That’s not an unusual situation in the construction industry, and it doesn’t mean that anything’s wrong with the company’s business outlook. It’s just rain. I encourage growth stock investors to buy VMC on the recent weakness. Strong Buy.