After reaching new highs this summer, the S&P 500 index has receded to price support around 2,120. That’s frustrating for investors because most good stocks will move somewhat in tandem with the S&P, so your stock portfolios have probably been a disappointment in recent weeks. But the pullback is perfectly normal. Stocks and market averages do not go straight up. While prolonged sideways trading ranges are boring, they also contribute strength to a stock’s—or the S&P 500’s—eventual upside breakout.
While you’re waiting for the market to rise again, there are a couple of productive things that you can do: buy more of your favorite stocks while their prices are low and buy stocks that have wide trading ranges, for short-term capital gain opportunities.
This past weekend, I reviewed a lengthy research report about travel and leisure operations in China, focusing on the portion pertaining to the cruise industry, since we have two cruises companies in the Cabot Undervalued Stocks Advisor portfolios: Carnival (CCL) and Royal Caribbean (RCL). The 41-page research report was produced by a team of international equity analysts from a famous investment bank after they visited China. The report also covered travel companies, hotels, theme parks and coffee shops. I’m prohibited from directly quoting the research, but here are the highlights:
• Cruise vacations in China are expected to be a long-term growth industry.
• The Chinese government supports the cruise industry, and is making substantial investments in cruise infrastructure (ports, ships), as are Taiwan and South Korea, which are Chinese cruise destinations.
• RCL and CCL’s combined market share in China is expected to drop from 76% in 2015 to 62% in 2018, as additional local and international cruise operators launch ships.
• Cruise vacation passengers in China totaled 100,000 in 2010, 1.2 million in 2015, 2.2 million in 2016, and are expected to total 5 million passengers in 2020.
• In 2015, 0.1% of China’s population went on cruise vacations. Other emerging markets experienced distinctly higher cruise participation rates of 0.2% to 0.4%.
• Passenger capacity expanded too quickly, leading to a 10% to 20% drop in pricing for 2017. Perception of cruise vacations transitioning from a luxury commodity to more of a mass market commodity has also led to lower pricing.
• RCL is handling the overcapacity problem better than CCL; while both companies have cut back on their services to China.
• Chinese citizens enjoy visa-free cruise travel to Japan and South Korea, while still needing to go through a lengthy visa application process when they travel by air.
• The convenience and assortment of activities associated with cruise vacations appeals to the Chinese culture’s penchant for multi-generational family travel and group travel.
• Chinese tourists are more likely to spend money at on-board duty-free luxury shops than other tourist demographics, making this consumer group very profitable to cruise operators.
• RCL and CCL are not licensed to sell cruise vacations directly to Chinese consumers. They instead sell in bulk to agents, who in turn market the cruises to consumers. This situation makes retail price-tracking difficult, and requires RCL and CCL to expend more energy in marketing to Chinese customers vs. the more streamlined sales processes they enjoy in other locations.
The analysts’ report repeatedly favored RCL’s Chinese operations over CCL’s. In addition, RCL has slightly stronger earnings growth prospects, and slightly bigger short-term capital gain potential than CCL. However, RCL has a higher debt ratio than I would prefer, while CCL has a very low debt ratio. All in all, both stocks are very attractive with dividends approaching 3%.
Cruise company stocks have languished all year. RCL and CCL are good investments for patient growth stock investors and dividend investors. Once this industry becomes more favored in the stock market, there’s no reason why RCL and CCL shouldn’t rise at an attractive pace.
Upcoming dates of interest:**
October 18: Goldman Sachs (GS) to release 3Q results in the morning.
October 19: Robert Half (RHI) to release 3Q results in the afternoon.
October 20: E*Trade (ETFC) to release 3Q results in the afternoon.
Week of October 24: Boise Cascade (BCC) to release 3Q results.
October 25: General Motors (GM) to release 3Q results in the morning.
October 25: Whirlpool (WHR) to release 3Q results in the morning.
October 25: Vertex (VRTX) to release 3Q results in the afternoon.
Late October: Royal Caribbean (RCL) to release 3Q results.
October 27: BorgWarner (BWA) to release 3Q results in the morning.
October 27: Federated Investors (FII) to release 3Q results in the afternoon.
October 27: Amazon (AMZN) to release 3Q results in the afternoon.
October 28: Legg Mason (LM) to release 2Q 2017 results in the morning.
October 31: Cardinal Health (CAH) to release 1Q 2017 results in the morning.
October 31: Johnson Controls (JCI) to spin off Adient (ADNT) to shareholders.
Approximately November 1: Vulcan Materials (VMC) to release 3Q results.
November 1: WellCare Health Plans (WCG) to release 3Q results in the morning.
November 3: Kraft Heinz (KHC) to release 3Q results in the afternoon.
November 3: Harman (HAR) to release 1Q 2017 results in the morning.
November 8: D.R. Horton (DHI) to release 4Q EPS results in the morning.
December 5: Johnson Controls (JCI) Corporate Analyst Meeting*
*The analysts who attend industry conferences write updates on the affected stocks, often causing increased market activity with the stocks.
**Public companies typically host a conference call immediately after posting quarterly results. Investors can visit the companies’ websites for instructions on how to access the conference call or the broadcast. (Do an internet search: “company name Investor Relations”.)
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company that’s amid a multi-year phase of successfully shifting customers to a subscription revenue model. Customers continue to embrace Adobe’s Creative Cloud package of software tools, driving a 41% year-over-year increase in third-quarter subscription revenue (November year-end) and record profits. The CFO forecasted “another record quarter” in the current fourth quarter.
ADBE is an undervalued aggressive growth stock with a strong balance sheet. EPS are now expected to grow 42.8% and 30.0% in 2016 and 2017. The corresponding P/Es are 36.3 and 27.9. The stock is showing strength. ADBE rose to new highs in early October, then remained high, trading sideways while the market pulled back. Buy ADBE now. Strong Buy.
Amazon.com (AMZN) dominates the online retail space by offering a wide variety of merchandise at low prices to customers around the globe. The company is on track to achieve over $1 billion in advertising revenue in 2016. AMZN is an undervalued, large-cap aggressive growth stock in the consumer discretionary sector. Wall Street’s consensus earnings estimates for 2016 rose in each of the last five months, and each week in October. EPS are expected to grow 370% and 83.6% EPS growth in 2016 and 2017 (December year-end). The corresponding P/Es are 140.2 and 76.3.
AMZN rose to new all-time highs in October, and is now having a small pullback with the broader market. If you’re tense about having missed the boat on AMZN, buy it now. If you’re relaxed, and only interested if the price pulls back farther, I think the lowest it might go this week is somewhere around 800-810. Growth investors should definitely own AMZN. Strong Buy.
American International Group (AIG) is an insurance company that operates in over 100 countries, providing property and casualty, life and commercial insurance, and retirement and financial products and services. AIG was featured in the October issue of Cabot Undervalued Stocks Advisor.
AIG is an undervalued, large cap stock. Earnings per share (EPS) are expected to grow 84.5% and 37.1% in 2016 and 2017 (December year-end), with corresponding P/Es of 14.8 and 10.8. The current dividend yield is 2.1%.
Watch for an October breakout past 60.90. There’s medium-term resistance at 63. AIG could appeal to investors seeking aggressive growth, growing dividends, and value. Strong Buy.
D.R. Horton (DHI) is a homebuilder. The company just completed its 2016 fiscal year in September, with 19.0% EPS growth expected to be reported on November 8. Looking toward to fiscal 2017, EPS are expected to grow 13.0%. The corresponding P/E is 10.7. The stock is undervalued with a dividend yield of 1.1%.
On September 27, Fitch Ratings upgraded Horton’s senior unsecured debt from BB+ to BBB- on the heels of an August rating increase from Standard & Poor’s from BB to BB+. Horton’s bonds now qualify for inclusion in investment-grade bond indexes.
A week ago, DHI seemed to be forming a shakeout chart pattern, but the stock did not follow through. Instead, DHI will likely be finding support in the 28-29 area, where it bounced a dozen times since August 2015. When the rebound begins, there’s upside resistance at 34.50, about 19% higher than the current price. Buy.
Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. KeyBank Capital Markets initiated coverage on DLTR last week with an Overweight rating. “Dollar stores are insulated from online competition, have the ability to take market share from mass, grocery and drug stores, and have favorable demographics, according to KeyBanc,” reported TheStreet. Consensus EPS estimates reflect aggressive growth of 31.9% and 19.2% in 2017 and 2018 (January-end), with corresponding P/Es of 20.3 and 17.0. The stock’s long-term debt-to-capitalization ratio is high at 62%.
DLTR had a big price correction since late August, along with many retail stocks, eventually finding price support at 75, where it bounced repeatedly from December 2015 through May 2016. Patient growth stock investors should buy DLTR now. There’s 25% upside as this undervalued stock returns to its August all-time high, which could happen this winter. Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. E*Trade is expected to report third-quarter EPS of 39 cents on the afternoon of Thursday October 20. Analysts expect EPS to grow 45.3% and 3.5% in 2016 and 2017 (December year-end).
I issued a Special Bulletin this month, alerting shareholders to enter a sell-limit order at 30.50 good-til-cancelled. That’s because ETFC has significant upside price resistance at 31 (which limits its ability to break past 31 in the near future), and 2017 earnings growth is expected to be minimal. Therefore, this is no credible catalyst to propel the stock past 31. While you’re waiting for ETFC to reach 30.50, be prepared with a short list of attractive, undervalued stocks to buy. (Consider DLTR or WHR.)
Lastly, here’s an important caveat. Both ETFC and Scottrade are recently the subjects of takeover speculation. The potential buyers are rumored to be Charles Schwab (SCHW) or TD Ameritrade (AMTD). If you want to hold ETFC, with the hope that a buyout offer emerges, go right ahead. I don’t see any significant risk in owning the stock for several more months, but I will be removing it from the portfolio shortly. Hold.
Royal Caribbean Cruises (RCL) is a global cruise vacation company. Third-quarter results will be reported at some point in late October. Last month, the company hiked the quarterly dividend by 28%, from 37.5 cents to 48 cents per share. The current yield is 2.7%. EPS are currently expected to grow 25.3% and 14.7% in 2016 and 2017 (December year-end), with very low corresponding P/Es of 11.6 and 10.1.
The stock rose $10 in late September, then pulled back with the broader market in October. Good news or a strong stock market could bring RCL all the way up to 83 this month, although that would be somewhat surprising. Cruise vacation stocks have been out of favor all year. Patient growth stock investors, bargain hunters and those who love growing dividends should buy this undervalued growth stock now. Buy.
Vulcan Materials (VMC) is the nation’s largest producer of construction aggregates. Consensus earnings estimates have been coming down slowly since the springtime. EPS are currently expected to grow 45.2% and 39.6% in 2016 and 2017, with corresponding P/Es of 34.5 and 24.7 (December year-end). VMC has a nominal 0.7% dividend yield.
VMC peaked this year in late July, then pulled back to a trading range between 107 and 116. There’s additional upside resistance at 121. Aggressive growth investors should buy now. Strong Buy.
WellCare Health Plans (WCG) is an aggressive growth stock in the managed healthcare sector. WellCare recently announced the acquisition of Care1st Health Plan Arizona for $157.5 million cash-on-hand. The deal is expected to close in the first quarter of 2017 and add to EPS during its first year.
WellCare aims to double its revenues between 2017 and 2021, through both organic growth and acquisitions. EPS are expected to grow 46.2% and 17.9% in 2016 and 2017 (December year-end). The corresponding P/Es are 22.6 and 19.2. The stock is fairly-valued based on 2017 earnings estimates.
Wall Street analysts list WellCare as Cigna’s most likely takeover target, if the Anthem-Cigna merger fails. Cigna’s management affirmed that if the merger with Anthem fails, Cigna will seek to deploy cash—including the $1.85 billion merger break-up fee—into strategic M&A opportunities. If Cigna makes a bid for WellCare, it will likely happen this coming winter, and will likely push WCG’s share price significantly higher.
The U.S. Department of Justice (DOJ) sued to block the Anthem-Cigna merger in July due to antitrust issues. The trial begins November 21 and wraps up by December 30. A decision is expected in January. However, Anthem reiterated on August 12 the likelihood that Cigna will not agree to wait for a decision past December 31. (The two companies have a hostile relationship.) On September 21, the DOJ filed court documents that intend to force the insurers to reveal alleged breaches of the merger agreement.
WCG broke past 117 in October, reaching new all-time highs, then pulled back with the broader market. The stock is a Hold due to valuation, but not a Sell because the chart remains bullish, and the possibility of a buyout offer looms in the new year. Hold.
Updates on Growth & Income Portfolio Stocks
Applied Materials (AMAT) is a worldwide leader in the manufacture of capital equipment within the semiconductor industry. EPS are expected to grow 47.1% and 27.4% in 2016 and 2017, with subsequent EPS growth rates averaging 13% in 2018 and 2019 (October year-end). The corresponding P/Es are 16.0 and 12.6. AMAT is a volatile, large-cap aggressive growth stock, but it’s also a seriously undervalued stock with an attractive dividend yield of 1.4%, and a low debt ratio.
The stock pulled back to 28 last week alongside the correction in the broader market, after trading sideways between 29 and 30.50 for eight weeks. A breakout past 31 would be quite bullish, with no discernible upside price resistance. All growth stock investors should own AMAT. Strong Buy.
Big Lots (BIG) is an American discount retailer, with over 1,400 stores in 47 states. BIG is expected to grow EPS by 18.9% and 11.0% in 2017 and 2018 (January year-end). The corresponding P/Es are 12.7 and 11.4. BIG is an undervalued mid-cap growth & income stock with a strong balance sheet. The dividend yield is 1.9%.
BIG rose to new highs in August, then had a big pullback with most retail stocks. Barring bad news, the stock could return to 56 this year. Traders and growth & income investors should buy now. Buy.
Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. The company is actively expanding internationally. EPS are expected to grow 6.7% and 11.6% in 2017 and 2018 (June year-end), with corresponding P/Es of 13.5 and 12.1. CAH is an undervalued growth & income stock with a 2.4% dividend yield. CAH has been trading sideways for two years, with price support at 75, and upside resistance in the low 80s and again at 89. Based on previous trading patterns, investors could expect the stock to rise to 89 again by year-end. Buy.
Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. EPS are expected to grow 24.4% and 11.9% in 2016 and 2017 (November year-end). The corresponding P/Es are 13.7 and 12.3, and the dividend yield is 3.0%. CCL is undervalued, trading between 44.50 and 49, with medium-term upside resistance at 54. Strong Buy.
Federated Investors (FII) is a global investment management company. Consensus estimates show Federated’s EPS growing 21.6% and 6.1% in 2016 and 2017 (December year-end). The dividend yield is 3.6%. FII is having a price correction right now. Fortunately, the stock does not tend to linger at price support. There’s medium-term upside resistance at 33.50, where it traded in early 2015. Hold.
GameStop (GME) is a video game and consumer electronics retailer. GameStop’s earnings growth is expected to be slow for a while, however, gross margins and full-year earnings are reaching record levels. The stock remains quite undervalued, with a huge 5.8% dividend yield, and a very low 2015 long-term debt-to-capitalization ratio of 14.4%.
GME shares are undervalued, with minimal downside, because the stock has traded down to support levels that were established in January and June 2016. Based on its repetitive trading patterns, I expect GME to be back at 32 this fall. Traders and growth & income investors have an especially attractive opportunity in GME. Buy.
General Motors (GM) is an American auto manufacturer. The market is expecting EPS of $1.43 when GM reports third-quarter results on the morning of October 25. Strong 2016 EPS growth is expected to come to a halt in 2017 (December year-end).
I issued a Special Bulletin in early October, telling shareholders to put in a sell limit order on GM at 35, good-til-cancelled. The stock’s long-term sideways trading range has become its own worst enemy. GM is widely owned by hedge funds. Hedge fund managers are attuned to profit opportunities, more so than mutual fund managers. They all know that GM has significant upside price resistance at 35. Many fund managers will choose to sell GM and reinvest to stocks with more promising charts. The selling pressure will push the price back down toward 32.
Traders and growth investors should be prepared to sell. Caveat: The 4.8% dividend yield is safe, so keep GM if the dividend is your primary investment goal. Hold.
Goldman Sachs Group (GS) is a global investment banker, serving consumer, institutional and government clients. The company introduced its new online lending platform last week, which offers unsecured loans to borrowers. The loans will provide GS with stable, recurring net interest income. Wall Street expects EPS to grow 17.8% and 20.7% in 2016 and 2017 (December year-end). The corresponding P/Es are 11.9 and 10.0, indicating that the stock is significantly undervalued. The dividend yield is 1.5%.
Goldman is expected to report third-quarter EPS of $3.82 this morning. The company plans to increase both its dividend and its share repurchase authorization, but has not yet announced the timing or the dollar amounts. Since 2012, Goldman has announced dividend increases that were spaced between two and four quarters apart; with the current dividend remaining steady for six quarters. There’s a dividend announcement due in mid-October. Goldman declared its last four dividends between the 14th and 18th days of the month. The current quarterly dividend is 65 cents per share, with typical increases of 5 cents. If the new dividend comes in much higher than 70 cents, the market will be especially pleased.
Good news from today’s announcements could easily push GS past upside resistance in the low 170s, toward 190. Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. Management remains focused on improving sales during the next tax season, rolling out a new marketing campaign, and possibly introducing a new refund anticipation loan product that will involve a bank partnership.
EPS are expected to grow 9.4% and 7.5% in fiscal 2017 and 2018 (April year-end). The share price is low, the dividend is big at 3.8%, and the company continues to be the subject of takeover speculation. While HRB no longer meets all of my investment criteria, I still see significant upside potential this year. HRB is actively rising toward price resistance at 24.50. Traders should be prepared to exit around 24.25. Everyone else should hold HRB for additional capital gains. The best-case scenario for the share price in 2016 is probably 28. Buy.
Kraft Heinz (KHC) is a global food and beverage producer of dozens of famous brand names, including Jell-O, Velveeta, Oscar Mayer, Maxwell House and many more. Kraft Foods Group (KRFT) merged with privately owned H.J. Heinz in July 2015. The merger was backed by a $10 billion investment by 3G Capital and Berkshire Hathaway.
Wall Street is anticipating additional acquisitions, divestitures and/or share repurchases in 2017. Due to the company’s low debt ratio, Kraft Heinz has a lot of balance sheet flexibility for M&A transactions, and potential acquisitions costing up to $100 billion. Full year EPS are expected to grow 47.0% and 21.7% in 2016 and 2017 (December year-end), with corresponding P/Es of 27.6 and 22.7. The dividend yield is 2.7%.
KHC traded sideways in May and June, then rose to the current trading range, where it has traded sideways for three months. Take a look at the price chart. The sideways trading range has narrowed dramatically, towards the top of its range, which indicates that the stock will probably break past 90.50 and begin a new run-up.
KHC could appeal to a wide variety of stock investors, including those who focus on growth, aggressive growth, growth & income, value and momentum. Buy KHC now. Buy.
Whirlpool (WHR) is the world’s largest appliance manufacturer. The company markets its products under many familiar brand names, including Whirlpool, Maytag, KitchenAid and Jenn-Air. WHR was featured in the October issue of Cabot Undervalued Stocks Advisor.
Whirlpool is expected to report third quarter EPS of 3.88 on the morning of October 25. Wall Street’s consensus EPS estimates reflect growth of 18.3% and 16.8% in 2016 and 2017 (December year-end), with corresponding P/Es of 11.1 and 9.5. That’s really strong earnings growth for a blue-chip stock. The dividend yield is 2.5%. WHR remains quite undervalued.
WHR has huge and very tradeable price swings. The stock just experienced its third price correction from 2016 highs. You can see on the price chart that WHR fell in the first half of September, then traded sideways, with support at 160. Odds are very strong that the next move is up! Growth investors, dividend investors and traders should buy WHR now. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Boise Cascade Company (BCC) is a leading U.S. wholesaler of wood products and building materials. The company will likely report third-quarter EPS of 56 cents during the week of October 24. Wall Street expects EPS to grow 6.8% and 38.0% in 2016 and 2017 (December year-end). The 2016 and 2017 P/Es are 17.3 and 12.5. BCC is extremely undervalued based on strong projected 2017 earnings growth.
Both BCC’s share price and consensus earnings estimates are constantly in motion. This volatile stock has a wide and stable trading range. There’s upside price resistance at 28 and again at 32. Traders and growth investors should buy BCC. Buy.
BorgWarner (BWA) is a maker of engineered automotive systems and components for power train applications. The company is expected to report third-quarter EPS of 77 cents on the morning of October 27. EPS are expected to grow 7.6% and 9.5% in 2016 and 2017. The stock is undervalued with a 2017 P/E of 9.7 and a 1.5% dividend yield.
I issued a Special Bulletin in early October when the stock began reaching above its recent trading range, telling investors that it’s time to buy BWA. The stock proceeded to pull back with last week’s weak market. I expect BWA to rise shortly. There’s no serious upside resistance until it approaches 45. There’s a lot of room in there for traders and longer-term investors to make money. Buy.
FedEx (FDX) is an international package delivery company. The early results of the FedEx-TNT merger look good, as exhibited through the first-quarter earnings beat that was reported in September (May year-end). FedEx’s EPS are expected to grow 12.3% and 12.2% in 2017 and 2018, with corresponding P/Es of 14.1 and 12.6. The current yield is 0.9%.
FDX rose 20 points in late September and is now resting. The stock could easily rise to the 180 to 185 range, at which point I definitely expect it to get stuck. I will then likely issue a Sell recommendation—barring any increases in the earnings outlook—because the stock is approaching a fair valuation and significant price resistance. Hold.
Harman International Industries (HAR) is the premiere connected technologies company for automotive, consumer and enterprise markets, best known for its JBL and Harman Kardon audio systems. Analysts expect the next two years’ EPS to grow 9.9% and 8.3% (June year-end). HAR has a 1.7% dividend yield. The stock has recently traded between 78 and 88, with additional upside resistance at 110. Buy.
Johnson Controls (JCI) operates in the areas of energy management, security and fire protection systems, and auto batteries. The company completed its purchase of a 56% stake in Tyco International PLC on September 2.
The company plans to spin off Adient (ADNT), its automotive seating and interiors business, on October 31, 2016. JCI shareholders will receive one share of ADNT—expected to be valued somewhere near $8 per share—for every 10 shares of JCI that they own. The ADNT spinoff is expected to be a taxable event. It will trigger a JCI share price adjustment and a drop in JCI’s 2017 EPS estimates.
There’s a strong disparity right now in both JCI’s earnings estimates and price charts, depending on which financial source investors use. That’s because some sources have already adjusted for the upcoming ADNT spinoff. I’m hesitant to quote EPS and P/E right now, in case the numbers are inaccurate, but I’m definitely noticing that the new company’s 2016 earnings estimates are rising week-over-week (September year-end), while the 2017 numbers are very solid, but constantly changing.
The stock is trading between 44 and 49. Buy.
Legg Mason (LM) is a U.S.-based global investment management company, with $737 billion assets under management, and over 2,900 employees. LM was featured in the October issue of Cabot Undervalued Stocks Advisor.
Legg Mason is expected to report second-quarter 2017 EPS of 58 cents on the morning of October 28. The company took a loss in fiscal 2016 (March year-end), and is expected to earn $2.31 per share in 2017, followed by 41.1% earnings growth in 2018. LM’s 2017 and 2018 P/Es are 13.7 and 9.7. The current dividend yield is 2.7%.
Repeatedly this year, the stock rose to 35, then pulled back. Once LM finally pushes past 35, investors should expect to see additional upside resistance at 40 and 45. Aggressive growth investors, dividend investors and value investors should consider owning this undervalued mid-cap stock. Buy.
Robert Half International (RHI) is a staffing and consulting company. The company is expected to report third-quarter EPS of 71 cents on October 19 in the afternoon. RHI offers investors moderate earnings growth, a very strong balance sheet and a 2.3% dividend yield. Despite rising annual profits, the stock is now overvalued due to a decline in the earnings outlook. RHI appears to be slowly rising toward upside resistance at 41. Hold.
Toll Brothers (TOL) is the leading U.S. luxury homebuilder. EPS are expected to grow aggressively at 26.9% and 24.0% in 2016 and 2017, with corresponding P/Es of 11.3 and 9.1. TOL is a greatly undervalued, mid-cap growth stock. TOL surpassed upside price resistance at 30 in mid-August, then recently pulled back with the weak October stock market. Traders and growth investors should buy now. Buy.
Vertex Pharmaceuticals (VRTX) is a biotech company that develops breakthrough drugs and carries them through to the manufacturing process. Vertex is a clear leader in the treatment of cystic fibrosis (CF), a disabling and deadly genetic disease affecting the lungs. Vertex has lengthy patent protection on the only two disease-modifying drugs within that rare-disease niche. The company’s projected one-, three- and five-year revenue growth rates are all significantly higher than those of its U.S. biotech peer group.
Vertex is expected to report shortly on results for a new “triplet” pill for cystic fibrosis. The treatment combines Vertex’ currently marketed drug ivacaftor (Kalydeco) with two additional drugs. The FDA recently approved Orkambi for use in U.S. patients ages 6 to 11. The company will apply for similar approval in the E.U. in the first half of 2017.
News stories continue to discuss the slow uptake of Orkambi vs. full-year company projections. The company’s previous expectation of revenue ranging from $1.0 billion to $1.1 billion has been adjusted to a range of $950 million to $990 million. Ergo, earnings estimates have come down a bit.
VRTX is a vastly undervalued, aggressive growth stock. The company is expected to report third-quarter EPS of 20 cents on the afternoon of October 25. Despite only one barely-profitable year between 2006 and 2015, Vertex is expected to earn $0.86 per share in 2016, $2.72 in 2017 (December year-end)—reflecting 216% earnings growth in 2017 with a 29.6 P/E—and to surpass $11.00 EPS by the year 2020.
In an October 16 research report, one major investment bank projects Vertex to grow its EPS by an average of 63% per year between 2017 and 2020, far surpassing the expected EPS growth rates of its biotech peers (ALXN, AMGN, BIIB, CELG, GILD, INCY and REGN). VRTX was my top stock pick for the coming year at the 2016 Cabot Investors Conference in August 2016.
VRTX is having a big pullback after its summertime run-up. The pullback has lasted longer than I expected, however, it’s in tandem with a pullback among biotech stocks. The stock bounced at 80, half a dozen times this year. I don’t see any red flags. Buy VRTX now. There’s upside resistance at 110, in the low 130s, and again at the August 2015 high of 141. Buy.
