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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Special Bulletin

Three stocks move to Hold, one stock moves to the Growth & Income Portfolio, and one stock moves to Strong Buy.

American International Group (AIG) moves from Strong Buy to Hold, Ameriprise Financial (AMP) moves from Buy to Hold, Goldman Sachs Group (GS) moves from Buy to Hold, Johnson Controls (JCI) moves from the Growth Portfolio to the Growth & Income Portfolio, and Legg Mason (LM) moves from Hold to Strong Buy.

American International Group (AIG – yield 2.0%) As a result of AGI’s very strong second quarter (see the August 3 Special Bulletin), the 2017 consensus earnings estimate rose last week from $5.00 to $5.12 per share. The problem is that the 2018 earnings estimate fell to $5.50, reflecting 7.4% expected earnings growth. That number is not alarming, especially in tandem with the 2% dividend yield, but it’s not big enough to offset the rising P/E. Therefore, I’m moving AIG from Strong Buy to Hold, and will plan my exit in the near future. Hold.

Ameriprise Financial (AMP – yield 2.2%) has risen rapidly since joining the Growth & Income Portfolio on July 13. It could keep rising, or just as easily have a pullback. I’m moving AMP from Buy to Hold now. There’s no upside price resistance; however, the stock will be fairly valued at 160. Hold.

Goldman Sachs Group (GS – yield 1.3%) I had moved GS from Hold to Buy on July 25 as the stock dipped down to 220, creating a brief buying opportunity. Now that GS is rising above 230 again, there’s less than 10% upside to my price target in the low 250s, where the stock traded in February and March. I’m therefore moving GS from Buy to Hold today, in anticipation of selling near 250. The price chart could still look bullish at that time, but I will sell GS because the shares will be fully valued. Hold.

Johnson Controls (JCI – yield 2.5%) is just about finished with its 2017 September fiscal year. In recent weeks, analysts lowered JCI’s 2018 earnings estimate to reflect 13.4% EPS growth, while the corresponding P/E is 12.2. The stock is now undervalued, and more representative of a growth & income stock than a growth stock. Consequently, I’m moving JCI from the Growth Portfolio to the Growth & Income Portfolio. After its recent drop, JCI bounced at price support that was established in 2016. Buy JCI now to catch the rebound to 44. I anticipate additional gains in the coming months. Strong Buy.

Legg Mason (LM – yield 2.9%) has a wide trading range that we’ve been very successful trading this year. Now that it’s revisiting the bottom of its range near 38, I’m temporarily moving LM from Hold to Strong Buy. Traders should buy now. I plan to sell as the stock approaches long-term upside price resistance at 44, because it will likely get stuck there, although it will still be quite undervalued. At that point, longer-term investors should feel comfortable holding the stock for additional capital gains in 2018. Strong Buy.