It’s fall in Colorado, and quite beautiful. For many weeks, all I saw were yellow leaves, beiges and browns. I was disappointed that we apparently were not going to have reds and oranges in the landscape this year. I was wrong! The trees that wanted to turn red were just lingering longer than usual.
Today I’d like to briefly discuss a few stocks that are not in our portfolios, but are newsworthy.
The merger between KLA-Tencor (KLAC) and Lam Research (LRCX) has been terminated. KLAC and LRCX are each overvalued stocks with moderate earnings growth and dividends. The stocks did not suffer due to the news of the failed merger. KLAC is climbing within a trading range between 67 and 78. LRCX is climbing, having recently reached new all-time highs. If I owned these stocks, I would use a stop loss order on LRCX, and I would sell KLAC at the top of its trading range. I would then reinvest the capital into undervalued growth stocks, to increase my capital gain opportunities.
Palo Alto Networks (PANW) is a stock that I recommended to the attendees at the Cabot Investors Conference in August. The share price was then between 125 and 128, and is now 160. The stock has met upside price resistance, and is also now overvalued. Odds are that PANW will pull back and bounce around a bit.
If you were in PANW for a trade, it’s time to sell. If you’re looking for a good buy price, take advantage of any dip to price support at 140, at which point the stock will be fairly valued, but might present a short-term opportunity for traders.
Twitter (TWTR) fell yesterday because rumors of a potential buyout offer fizzled. The stock has not recently been on my buy list because it was overvalued. Based on the new, lower share price, it’s still quite overvalued.
Turning to the price chart, now that TWTR has fallen from about 25 to 17, it’s going to be depressed for a while. If it finds price support this week at 18, I would expect TWTR to trade between 18 and 21 in the coming weeks. If it falls to 16, then I would expect TWTR to trade between 16 and 19 in the coming weeks.
Here are some news items and portfolio highlights from today’s update:
• Based on current price action, the best portfolio stocks to buy this week are American International Group (AIG), Boise Cascade (BCC), BorgWarner (BWA), H&R Block (HRB), Toll Brothers (TOL) and Whirlpool (WHR). Some of these stocks are actively rising, and some are at the bottoms of stable trading ranges.
• There’s takeover talk on E*Trade (ETFC). If you own the stock, make sure to read my update below.
• In last week’s October issue, I added American International Group (AIG) to the Growth Portfolio and Legg Mason (LM)to the Buy Low Opportunities Portfolio.
• I moved WellCare (WCG) to Hold last week.
Upcoming dates of interest:
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.
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 36.6 and 28.1. Buy ADBE now, and take advantage of any brief dip below 105 to buy additional shares. 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. Analysts’ consensus estimates reflect 368% and 80.3% EPS growth in 2016 and 2017 (December year-end). The corresponding P/Es are 143.5 and 79.6. 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.)
AMZN is reaching new all-time highs. Growth investors should definitely buy AMZN on pullbacks. 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 84.9% and 37.3% in 2016 and 2017 (December year-end), with corresponding P/Es of 14.8 and 10.8. The current dividend yield is 2.1%.
The stock is climbing toward medium-term resistance at 63, which it could surpass in 2017. 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 expectations of 19.0% EPS growth. Looking toward to fiscal 2017, EPS are expected to grow 13.0%. The corresponding P/E is 11.0. 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.
The recent price correction in DHI has created a buying opportunity. DHI seems to have exhibited a shakeout chart pattern in the last couple of days—a bullish sign that the next move is up. There’s upside resistance at 34.50, with room for traders to make over 10% on the rebound. Buy.
Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. Consensus EPS estimates reflect aggressive growth of 31.9% and 19.5% in 2017 and 2018 (January-end), with corresponding P/Es of 20.5 and 17.2. 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 25% upside as the 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. Analysts expect EPS to grow 45.3% and 2.4% in 2016 and 2017 (December year-end).
I issued a Special Bulletin last week, 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 grinding to a halt. Therefore, there 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.)
Finally, here’s an important caveat. Both ETFC and Scottrade are currently 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. In September, the company hiked the quarterly dividend by 28%, from 37.5 cents to 48 cents per share. The current yield is 2.6%. EPS are currently expected to grow 25.3% and 14.9% in 2016 and 2017 (December year-end), with very low corresponding P/Es of 12.2 and 10.6.
The stock rose $10 in late September, and will need to rest for a short while. 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 46.1% and 39.1% in 2016 and 2017, with corresponding P/Es of 33.3 and 23.9 (December year-end). VMC has a nominal 0.7% dividend yield. VMC peaked this year in late July, then pulled back. The stock is at or near the bottom of its trading range, and will need to dwell there for at least a few weeks before beginning its recovery. Patient aggressive growth investors should buy now. Strong Buy.
WellCare Health Plans (WCG) is an aggressive growth stock in the managed healthcare sector. Last week, WellCare 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 45.9% and 18.1% in 2016 and 2017 (December year-end). The corresponding P/Es are 23.6 and 20.0. The stock is fully-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.
I issued a Special Bulletin last week, when WCG broke past 117 on the upside. I moved the stock to Hold because it’s fully-valued. The chart remains bullish. I expect WCG to deliver additional capital gains to shareholders in 2016. Hold.
Updates on Growth & Income Portfolio Stocks
Applied Materials (AMAT) is a worldwide leader in the manufacture of capital equipment for 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 17.0 and 13.3. AMAT is a volatile, large-cap aggressive growth stock, but it’s also a seriously undervalued stock with an attractive dividend yield of 1.3%, and a low debt ratio.
The stock has traded sideways between 29 and 30.50 during the last 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 13.3 and 12.0. BIG is a slightly undervalued mid-cap growth & income stock with a strong balance sheet. The dividend yield is 1.8%.
BIG rose to new highs in August, and has since pulled back to price support around 47. 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 13.7 and 12.2. CAH is an undervalued growth & income stock with a 2.3% 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 12.2% in 2016 and 2017 (November year-end). The corresponding P/Es are 14.2 and 12.7, and the dividend yield is 2.9%. CCL is trading between 44.50 and 49. This undervalued stock pulled back late last week in conjunction with Hurricane Matthew’s landfall. I expect a quick rebound. There’s medium-term upside resistance at 54. Strong Buy.
Federated Investors (FII) is a global investment management company. Consensus estimates show Federated’s EPS growing 22.2% and 6.1% in 2016 and 2017 (December year-end). The dividend yield is 3.5%. 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 5.5% dividend yield and a very low 2015 long-term debt-to-capitalization ratio of 14.4%.
GME shares are undervalued right now, with minimal downside. The big dividend provides extremely strong price support. 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. Strong 2016 EPS growth is expected to come to a halt in 2017 (December year-end).
I issued a Special Bulletin last week, 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 into 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 4.7% 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. 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 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.
After bank stocks had pullbacks in late September, GS has had a rapid rebound thus far in October. There’s a little upside resistance in the low 170s, but if the sector gains momentum, GS could rise to 190 this year. 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.
HRB is an undervalued growth & income stock with a 3.9% dividend yield. 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, 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 buy and 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. The company is in the early stages of revenue management initiatives in the wake of the July 2015 merger between Kraft Foods Group (KRFT) and privately owned H.J. Heinz, which was backed by a $10 billion investment by 3G Capital and Berkshire Hathaway.
Early results show Kraft Heinz’ post-merger cost savings efforts launching them past their $1.5 billion goal. The company will also focus on international expansion.
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 27.1 and 22.3. 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. 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.
Wall Street’s consensus EPS estimates reflect growth of 18.7% and 17.2% 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 2.4%. WHR remains quite undervalued.
WHR has huge and very tradeable price swings. The stock is now experiencing 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. Wall Street expects EPS to grow 10.5% and 35.4% in 2016 and 2017 (December year-end). The 2016 and 2017 P/Es are 17.1 and 12.6. BCC is extremely undervalued based on strong projected 2017 earnings growth. BCC rose 10% in late September, then pulled back a bit. There’s upside price resistance at 28 and again at 32. Traders and growth investors should continue to buy BCC. Buy.
BorgWarner (BWA) is a maker of engineered automotive systems and components for power train applications. EPS are expected to grow 7.6% and 9.5% in 2016 and 2017. The stock is undervalued with a 2017 P/E of 10.2 and a 1.4% dividend yield.
I issued a Special Bulletin last week, telling investors that it’s time to buy BWA. I expect the stock to continue rising immediately. 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. BWA is a somewhat undervalued growth & income stock. 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 12.4% and 12.1% in 2017 and 2018, with corresponding P/Es of 14.4 and 12.8. 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 9.8% and 8.5% (June year-end). HAR has a 1.7% dividend yield. The stock is fully valued; however, I think it’s going to perform well in the coming months. There’s upside resistance at 88 and again 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 spin-off 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 of them have already adjusted for the upcoming ADNT spinoff. I’m hesitant to quote EPS and PE right now in case the numbers are inaccurate, but I’m definitely noticing that the new company’s earnings estimates are rising, week-over-week.
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 took a loss in fiscal 2016 (March year-end), and is expected to earn $2.31 per share in 2017, followed by 40.7% earnings growth in 2018. Wall Street is expecting 57 cents EPS when the company reports second-quarter earnings near October 28. LM’s 2017 and 2018 PEs are 14.5 and 10.3. The current dividend yield is 2.6%.
Repeatedly this year, the stock rose to 35, then pulled back. The most recent pullback has been minimal, indicating that LM is likely gathering the strength necessary to push past 35. Once it does so, investors should expect to see upside resistance at 40 and again at 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. RHI offers investors moderate earnings growth, a very strong balance sheet and a 2.3% dividend yield. The stock is now overvalued, due to a decline in the earnings outlook. RHI appears to be actively 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 11.9 and 9.6. TOL is a greatly undervalued, mid-cap growth stock. TOL surpassed upside price resistance at 30 in mid-August. I expect the stock to trade between 29 and 35 for a while. 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 to $1.1 billion has been adjusted to a range of $950 to $990 million. Ergo, earnings estimates have come down a bit.
VRTX is a vastly undervalued, aggressive growth stock. Despite only one barely-profitable year between 2006 and 2015, Vertex is expected to earn $0.87 per share in 2016, $2.74 in 2017 (December year-end)—reflecting 215% earnings growth in 2017 with a 31.6 P/E—and to surpass $11.00 EPS by the year 2020. VRTX was my top stock pick for the coming year at the 2016 Cabot Investors Conference in August 2016.
VRTX is having a 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. 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.
