This is an exciting time of year for me because I review many hundreds of stocks during the fourth quarter for possible inclusion in the Cabot Undervalued Stocks Advisor portfolios. Typically, these stocks didn’t previously “make the cut,” but based on 2017 earnings expectations, some of them now look quite attractive. Alphabetically, I’m up to the letter “J” in my screening process, and so far, I’ve found 17 new stocks for consideration. As their price charts become attractive, I’ll consider introducing them into the Cabot Undervalued Stocks Advisor portfolios.
The important trend that has emerged from my research is that 10 of the 17 attractive stocks are in financial areas: insurance and investment management. When you combine that information with the fact that I’ve recommended a preponderance of financial companies in recent months—mostly banks—you can see that it might be wise to own an exchange-traded fund (ETF) or mutual fund that invests in financial stocks.
I would personally select a mutual fund over an ETF, and in fact would never own an ETF. That’s because there’s one hurdle to profits with a mutual fund, but there are two hurdles to profits with an ETF.
Mutual funds calculate the net asset value every day, and that’s the price of the investment each day. It doesn’t matter whether $200 million flows into or out of the mutual fund on a given day, the net asset value (NAV) and closing share price are identical, and calculated based on the price of the stocks owned by the fund. Therefore, in order to earn capital gains, the investor needs the mutual funds’ stock prices to rise.
With an ETF, the net asset value is calculated based on the value of the underlying stocks, just as it is with a mutual fund. However, the share price will trade up or down, all day long, based on supply and demand, fluctuating just like the share price of any common stock. That means investor sentiment controls the share price, despite the actual NAV. So in order for the investor to make money, he needs the underlying stock prices to rise, and he needs investors to be buying the ETF, which supports the share price.
Again, with a mutual fund, investors can sell shares, and the selling activity does not harm the share price. With an ETF, selling activity directly harms the share price.
For example, let’s pretend that there are two financial stock investments, the Financial Mutual Fund and the Financial ETF. On a given day, they each have an NAV of $12.30. The Financial Mutual Fund will be priced at $12.30 at the close of business that day. The Financial ETF will trade based on supply and demand, with a share price that fluctuates constantly. If investors buy the Financial ETF, their buying activity will push the share price higher than $12.30, possibly quite a bit higher. If investors don’t buy the Financial ETF, or if they sell their shares, the share price can fall lower than $12.30, possibly quite a bit lower.
It’s hard enough to make money in stocks. That’s why I don’t buy ETFs, which require me to be right on both the direction of its underlying stocks and on the bullishness of investor sentiment in that particular ETF.
Last week, I wrote about cruise vacation stocks Carnival (CCL) and Royal Caribbean (RCL). Two days later, TheStreet recommended both stocks. Both stocks have since shown modest improvement, but have not yet developed good momentum.
We saw very strong earnings reports last week from E*Trade (ETFC) and Goldman Sachs (GS).
Yesterday, Scottrade Financial Services agreed to be acquired by TD Ameritrade (AMTD). Read more about how that scenario might affect E*Trade (ETFC) in this week’s E*Trade update.
The following portfolio stocks appear likely to rise this week:• Adobe Systems (buy now)
• Applied Materials (buy now)
• Dow Chemical (buy now)
• General Motors
• Goldman Sachs (buy now)
• H&R Block
• Robert Half
• Whirlpool (buy now)
Upcoming Dates of Interest**
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.
October 26: Robert Half (RHI) to release 3Q results in the afternoon.
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 28: Royal Caribbean (RCL) to release 3Q 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.
November 1: WellCare Health Plans (WCG) to release 3Q results in the morning.
November 2: Vulcan Materials (VMC) to release 3Q results in the morning.
November 2: American International Group (AIG) to release 3Q results in the afternoon.
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 results in the morning.
November 8: Johnson Controls (JCI) to release 4Q 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. ADBE is a slightly undervalued aggressive growth stock with a strong balance sheet. 2016 profit expectations continue to increase. EPS are now expected to grow 43.3% and 29.5% in 2016 and 2017. The corresponding P/Es are 36.6 and 28.2. ADBE rose to new highs in early October, rested for a few weeks, and has now launched to new highs again. 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.
The company is expected to report EPS of 80 cents when they release third-quarter results on the afternoon of October 27. Wall Street’s consensus earnings estimates for 2016 rose in each of the last five months. Full-year EPS are expected to grow 369% and 81.9% EPS growth in 2016 and 2017 (December year-end). The corresponding P/Es are 140 and 76.8.
AMZN rose to new all-time highs in early October, and has since been trading between 800 and 850. 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. The company is expected to report EPS of $1.21 when they release third-quarter results on the afternoon of November 2. Full-year EPS are expected to grow 84.9% and 37.0% 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 a near-term 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. Investor’s Business Daily reported on October 20, “Single-family [home] starts jumped 8.1% in September to the highest since February. Building permits, a gauge of future activity, climbed 6.3% to a 1.225 million pace, the highest since November 2015.” News on multi-family construction was negative, which explains why headlines might have been negative, while underlying news affecting D.R. Horton was positive.
The company just completed its 2016 fiscal year in September, with 19% full-year 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 10.8. The stock is undervalued, with a dividend yield of 1.1%.
Most homebuilder stocks peaked in July, then had a price correction. DHI has strong price support in the 28 to 29 area, where it bounced a dozen times since August 2015. When the rebound begins, there’s upside resistance at 34.50. Buy.
Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. KeyBank Capital Markets initiated coverage on DLTR this month 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 19.9 and 16.7. The stock’s long-term debt-to-capitalization ratio is high at 62%.
DLTR had a big price correction, along with many retail stocks, since late August; 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 29% 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. I issued a Special Bulletin on October 21 after E*Trade reported third-quarter results that came in much higher than the market expected. As a result, consensus EPS projections changed to an expectation of 54.7% growth in 2016, followed by a drop of 2.2% in 2017 (December year-end). The company plans a future focus on earnings growth, but Wall Street analysts are not confident in that goal.
In addition to the stagnant 2017 earnings outlook, ETFC has significant upside price resistance at 31, which limits its ability to break past 31 in the near future. I asked shareholders to enter a sell-limit order at 30.50 good-til-cancelled.
Lastly, here’s an important caveat. I mentioned, in recent weeks, that both ETFC and Scottrade Financial Services have been the subjects of takeover speculation, with the potential buyers rumored to be Charles Schwab (SCHW) or TD Ameritrade (AMTD). Yesterday, Scottrade agreed to be acquired by TD Ameritrade. You can look at this scenario as “a glass half empty,” because there are now fewer potential buyers of ETFC, or “a glass half full,” because Charles Schwab might feel more pressured to acquire ETFC, to remain competitive with TD Ameritrade. 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. RCL was featured in the October 18 issue of Cabot Undervalued Stocks Advisor. The company is expected to report third-quarter EPS of 3.10 on the morning of October 28. Full-year EPS are currently expected to grow 24.8% and 14.4% in 2016 and 2017 (December year-end), with very low corresponding P/Es of 11.5 and 10.1. Last month, the company hiked the quarterly dividend by 28%, from 37.5 cents to 48 cents per share. The current yield is 2.8%. The company’s 2015 long-term debt ratio was a little higher than I would prefer, at 46%.
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 fall, 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. The company is expected to report third quarter EPS of $1.15 on the morning of November 2. Full-year EPS are currently expected to grow 45.2% and 39.6% in 2016 and 2017, with corresponding P/Es of 35.1 and 25.1 (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. This undervalued stock is a good choice for aggressive growth investors. Strong Buy.
WellCare Health Plans (WCG) is an aggressive growth stock in the managed healthcare sector. The company aims to double its revenues between 2017 and 2021, through both organic growth and acquisitions. 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.
The company is expected to report EPS of 1.11 when they release third-quarter results on the morning of November 1. Full-year EPS are expected to grow 46.2% and 18.1% in 2016 and 2017 (December year-end). The corresponding P/Es are 23.5 and 19.9. The stock is fairly-valued based on 2017 earnings estimates.
Wall Street analysts list WellCare as Cigna’s (CI) 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 16.2 and 12.7. 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 is rising toward short-term upside resistance at 30.50. 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. Cardinal Health is expected to report EPS of $1.21 when first-quarter results are released on the morning of October 27. Full-year EPS are expected to grow 6.9% and 11.4% in 2017 and 2018 (June year-end), with corresponding P/Es of 13.4 and 12.0. 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 85 again by year end. Buy.
Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. CCL was featured in the October 18 issue of Cabot Undervalued Stocks Advisor. EPS are expected to grow 24.4% and 11.9% in 2016 and 2017 (November year-end). The corresponding P/Es are 13.9 and 12.4, and the dividend yield is 3.0%. CCL is undervalued, and trading between 44.50 and 49, with medium-term upside resistance at 54. Strong Buy.
Federated Investors (FII) is a global investment management company. The company is expected to report 52 cents EPS when they release third-quarter results on the afternoon of October 27. Consensus estimates show Federated’s full-year EPS growing 21.6% and 5.6% 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 5.9% 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 upon its repetitive trading patterns, I expect GME to be back at 32 this fall, although the stock will need to stabilize before the rebound begins. 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 $1.44 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 has significant upside price resistance at 35. Many institutional fund managers will choose to sell GM and reinvest into stocks with more promising price charts. The selling pressure will push GM’s price back down toward 32.
Traders and growth investors should be prepared to sell. Caveat: The 4.7% 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. I issued a Special Bulletin on October 18, when Goldman reported tremendous third-quarter results. As a result of Goldman’s strong financial results, the 2016 consensus EPS estimate now reflects 27.0% growth, followed by an expectation of 13.5% growth in 2017 (December year-end). The corresponding P/Es are 11.3 and 10.0, indicating that the stock is significantly undervalued. The dividend yield is 1.5%.
Goldman plans to increase both its dividend and its share repurchase authorization, but has not yet announced the timing or the dollar amounts. At this point, the announcements are most likely to occur in January or April 2017, in conjunction with normal quarterly dividend announcements. The next round of capital plan approvals, following the Fed’s annual banking stress tests, is due in June 2017.
Good news from the quarterly report pushed GS out of its recent trading range, toward medium-term resistance at about 190. Buy GS now. 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 3.7%, 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.
The company is expected to report EPS of 75 cents when they release third-quarter results on the afternoon of November 3. Full-year EPS are expected to grow 47.0% and 21.7% in 2016 and 2017 (December year-end), with corresponding P/Es of 27.3 and 22.4. The dividend yield is 2.7%.
KHC traded sideways in May and June, then rose to the current trading range, where it 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 $3.86 on the morning of October 25. There is a possibility that a 2016 increase in steel prices, which peaked in June, might affect earnings. However, any serious impact would likely already be factored into consensus earnings projections, which came down a bit in October. Wall Street’s consensus EPS estimates reflect growth of 18.0% and 16.2% in 2016 and 2017 (December year-end), with corresponding P/Es of 11.4 and 9.8. That’s really strong earnings growth for a blue-chip stock. The dividend yield is 2.4%. WHR remains quite undervalued.
WHR has huge and very tradeable price swings. In September, the stock experienced its third price correction from 2016 highs. WHR is now rising. 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 reported adjusted third-quarter EPS of 41 cents yesterday, when the market was expecting 56 cents. Revenue came in roughly on target at $1.07 billion, vs. the consensus estimate of $1.09 billion. Prior to yesterday’s report, Wall Street expected EPS to grow 6.8% and 38.0% in 2016 and 2017 (December year-end). Analysts will adjust those numbers in the coming weeks. The 2016 and 2017 P/Es are 16.5 and 12.0. BCC is extremely undervalued based on strong projected 2017 earnings growth.
Both BCC’s share price and consensus earnings estimates are constantly in motion. The stock traded down to 20 yesterday, where it has bounced repeatedly in 2016. There’s upside price resistance at 28, and again at 32. Risk-tolerant 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 9.8 and a 1.5% dividend yield.
Good news from the earnings report could push BWA past short-term upside price resistance at 36. There’s no additional major price resistance until BWA 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 company paid $4.8 billion to acquire Europe’s TNT Express in May 2016. FedEx’s EPS are expected to grow 12.4% and 12.1% in 2017 and 2018, with corresponding P/Es of 14.0 and 12.5 (May year-end). The current yield is 0.9%. Companies that have recently undertaken significant M&A activity typically experience wide variances in quarterly earnings results vs. Wall Street estimates.
FDX rose 20 points in late September, then pulled back a bit. The stock could rise to the 180 to 185 range this year, where it will meet 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. The company is expected to report EPS of $1.54 when they release third-quarter results on the morning of November 3. Analysts expect the next two years’ EPS to grow 9.9% and 8.3% (June year-end). The stock is fairly valued with a 1.7% dividend yield. HAR 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 (TYC) 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. In addition, it’s difficult for analysts to calculate future earnings when companies go through big M&A transactions. There’s frankly a lot of guesswork in the earnings estimates until the company has reported one or two quarters of post-merger or post-spinoff financial results.
At this point, consensus earnings estimates show Johnson Controls earning $3.60 and $2.99 per share for fiscal years 2016 and 2017 (September year-end). Remember, with Adient being removed from Johnson Control’s financial results, the $2.99 number does not represent a drop in EPS in the classic sense. It simply means that Adient’s numbers will be stated separately, when Adient reports its own financial results.
JCI is trading between 44 and 49. The share price will adjust downward on the day of the ADNT spinoff, and shareholders’ cost basis will adjust accordingly. 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 40.3% earnings growth in 2018. LM’s 2017 and 2018 PEs are 13.8 and 9.8. 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 26 in the afternoon. RHI offers investors moderate earnings growth, a very strong balance sheet and a 2.2% dividend yield. Despite rising annual profits, the stock is now overvalued, due to a decline in the earnings outlook. RHI broke past its trading range on October 21, and will likely rise to 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 11.4 and 9.2. TOL is a greatly undervalued mid-cap growth stock. TOL surpassed upside price resistance at 30 in mid-August, then recently pulled back with weakness in the homebuilding stock sector. 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, 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 18 cents on the afternoon of October 25. Despite only one barely-profitable year between 2006 and 2015, Vertex is expected to earn $0.83 per share in 2016 and $2.65 in 2017 (December year-end)—reflecting 219% earnings growth in 2017 with a 30.5 P/E.
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 had 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, although the stock will need to stabilize at 80 before beginning its next run-up, and the earnings report will be a wild card. There’s upside resistance at 110, in the low 130s, and again at the August 2015 high of 141. Buy.
