Why Investors Don’t Need to “Overthink” Economic Trends
As we enter 2017, big changes are afoot, both economically and politically. News media is currently laser-focused on which stocks are or are not likely to fare well with a new political administration in Washington D.C. This is a good time to remind you why I make my investment decisions based on numbers and price charts, not on trending news topics.
These questions and more are contemplated by Wall Street analysts, who then come up with earnings estimates for public companies in 2017 and beyond:
Will the dollar remain strong, thus continuing to impact profits at multinational corporations?
Will we have a new 20% border adjustment tax, which impacts companies that import supplies?
Will interest rates rise, which can help financial companies, but harm the housing industry?
Will tax rates fall, which will help most companies?
Will last year’s big drop in food prices boomerang upwards in 2017?
How will rising energy prices affect consumers’ disposable income?
The reason that I don’t have to overthink currencies, energy prices, et al is because the analysts have already done all that thinking. The result of their studies is consensus earnings estimates—the average dollar amount that analysts believe a particular company will earn per share in the coming year.
I’ve learned over the decades that the consensus earnings estimates are the best possible predictor of future share price growth. So no matter what’s happening “in the news,” if a company’s earnings projections reflect strong growth, its stock is likely to perform well.
If you’ve been heeding my advice to own semiconductor stocks—or dodging my advice because technology conversations makes your head spin—here’s an excerpt from a January 21 Barron’s article, “The Risks and Rewards in ASML and Applied Materials”
“This year’s dilemma is one of conservatism versus radicalism. Either you buy the equipment industry’s heavyweight, Applied Materials (ticker: AMAT), or you buy the specialist, ASML Holding (ASML), a Dutch company with an exotic but controversial technology that may finally be ready for prime time after years of delay.”
Portfolio Notes
Make sure to review my January 20 Special Bulletin, in which I mentioned news and/or price action on ASML Holdings (ASML), Adobe Systems (ADBE), Applied Materials (AMAT), BP plc (BP), Broadcom (AVGO), ExxonMobil (XOM), Goldman Sachs (GS), Kraft Heinz (KHC), Mattel (MAT), Molina Healthcare (MOH), Tesoro (TSO), Total (TOT) and Vulcan Materials (VMC).
Buy-Rated Stocks Most Likely to Rise Near-Term:
Adobe Systems (ADBE)
Applied Materials (AMAT)
Legg Mason (LM)
Whirlpool (WHR)
Today’s Portfolio Changes:
Johnson Controls (JCI) moves from Hold to Buy.
Whirlpool (WHR) moves from Hold to Buy.
Last Week’s Portfolio Changes:
ASML Holdings (ASML) moved from Strong Buy to Buy.
Goldman Sachs (GS) moved from Buy to Strong Buy.
Kraft Heinz (KHC) moved from Buy to Hold.
Updates on Growth Portfolio Stocks
ASML Holdings NV (ASML – yield 1.0%) Last week, ASML reported fourth-quarter results of 1.23 euro per share vs. consensus estimates closer to 1.00 euro (December year-end). Fourth quarter revenue came in much higher than expected, current first quarter revenue is trending slightly above consensus estimates, first quarter gross margin is trending significantly above estimates, as is 2018 product backlog. Full-year 2016 earnings per share came in at 3.44 euros. Consensus estimates point to 4.53 euros and 5.36 euros per share in 2017 and 2018, while the company has additionally projected 9.00 euros per share in 2020.
ASML was featured in the January issue of Cabot Undervalued Stocks Advisor. The stock rose about 10% to all-time highs since joining the portfolio on January 3. Typically, a stock will need to rest—or pull back—after a sudden run-up. If 2018 earnings estimates rise or the chart seems to be presenting us with more obvious near-term price appreciation, I’ll raise my recommendation to Strong Buy. Buy.
Adobe Systems (ADBE) is finishing up its most-recent $2 billion share repurchase authorization, announced in January 2015. Last week, the company announced a new $2.5 billion repurchase authorization through year-end 2019. That’s about 4.6% of market cap and will serve to slightly boost expected EPS. This undervalued aggressive growth stock is on the verge of breaking past 111 and, in theory, beginning a new run-up to new-high territory. Buy ADBE now. Strong Buy.
Amazon.com (AMZN) is expected to report fourth-quarter 2016 EPS of $1.35 on the afternoon of February 2. AMZN’s 2017 earnings estimates have been slowly declining for the last five weeks. While profits are growing aggressively, the P/E has caught up to the earnings growth rate, and AMZN is no longer undervalued. Unless there’s some game-changing news, I will likely sell the stock as the price approaches upside resistance at 840. Hold.
American International Group (AIG – yield 1.9%) On January 20, AIG announced that it will pay Berkshire Hathaway’s National Indemnity Co. unit $9.8 billion plus interest, and in return, the Warren Buffet company will provide a maximum of $20 billion of insurance coverage on future insurance claims at AIG. The transaction will bring a large fourth-quarter 2016 charge to AIG, in return for lower future reserve risk, lower earnings volatility and management’s intent to give shareholders higher capital returns. There’s very minor upside resistance at 67. Strong Buy.
Applied Materials (AMAT – yield 1.2%) Earnings growth slows dramatically in 2018 (October year-end), so consider AMAT to be a shorter-term hold. The share price continues to rise. Shorter-term growth investors can continue to buy AMAT. Buy.
Dollar Tree (DLTR) is sitting at the bottom of its trading range, but not yet showing readiness to rise. Patient investors should buy this growth stock now. There’s about 17% upside as the stock retraces its November high around 90. Buy.
Goldman Sachs Group (GS – yield 1.1%) I wrote about Goldman’s great fourth-quarter earnings report in my January 20 Wall Street’s Best Daily, “Is Goldman Sachs Stock Still a Buy?” Consensus earnings estimates continue to climb. EPS grew 34.2% in 2016, and are expected to increase 18.1% and 13.6% in 2017 and 2018, with corresponding P/Es of 12.1 and 10.6. The stock is undervalued. GS shares pulled back a bit last week. I expect the pullback to be short-lived. Strong Buy.
Johnson Controls (JCI – yield 2.3%) will report first-quarter 2017 EPS on the morning of February 1. JCI is a very undervalued growth stock. Now that JCI’s December price pullback is over, I’m moving JCI from Hold to Buy. Try to buy low between 41 and 45.50. Buy.
Quanta Services (PWR) is a very undervalued, aggressive growth stock. The stock has been quiet, trading between 34 and 35 all month. Strong Buy.
Vulcan Materials (VMC – yield 0.6%) is an undervalued aggressive growth stock. VMC and shares of most other construction aggregate companies had big run-ups in October and November. Now that their share prices have had a chance to subsequently pull back and consolidate, they’ve commenced their rebounds. We could see VMC break past 135 this winter if the industry’s momentum stays strong. Strong Buy.
XL Group Ltd. (XL – yield 2.1%) After a down year in 2016, XL is expected to have huge earnings growth in 2017. The stock could break past upside resistance at 38 this winter. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 6.5%) After a down year in 2016, BP is expected to have huge earnings growth in 2017. The stock is having what appears to be a normal pullback. Take advantage of the lower price and buy BP. I expect BP to break past 39 this winter, and head toward 43. Strong Buy.
Cardinal Health (CAH – yield 2.4%) is fairly valued. Expect volatility in healthcare stocks due to potential changes to U.S. government healthcare policies and legislation. The price chart is bullish, with upside resistance at 78. Hold.
D.R. Horton (DHI – yield 1.4%) is expected to report fourth-quarter EPS of $0.47 on the morning of January 24. The price chart will turn bullish when DHI breaks past 29.50 on the upside. Buy.
Exxon Mobil (XOM – yield 3.5%) After a down year in 2016, Exxon Mobil is expected to have huge earnings growth in 2017. XOM was featured in the January issue of Cabot Undervalued Stocks Advisor. XOM had a quick $10 post-election run-up, and is now having what appears to be a normal pullback. Take advantage of the lower price and buy now. Strong Buy.
Federated Investors (FII – yield 3.7%) will report fourth-quarter EPS on the afternoon of January 26. FII is currently overvalued. The stock has been trading between 27 and 29.50 since its run-up during election week. Hold.
GameStop (GME – yield 6.3%) is recently trading between 22.50 and 26.50. The company is slated for slow EPS growth in 2018 (January year-end). The stock is undervalued and volatile. Hold.
H&R Block (HRB – yield 3.8%) is trading in the upper end of its 10-month trading range, between 22.75 and 24. Good news could push the stock up to 27. Hold.
Kraft Heinz (KHC – yield 2.7%) I’m seriously contemplating selling KHC in the near future. Here are the pros and cons:
Con: Food production costs, which fell in 2016 (including dairy, coffee and energy), are expected to rise 6% in 2017. That’s going to negatively affect margins and EPS. (Keep in mind that the effect on margins would already be built into Wall Street’s consensus estimates. Nevertheless, the press will act like this is surprising bad news, and they’ll write very negative headlines, which will invariably harm food stock prices.)
Pro: Analysts’ earnings estimates for KHC have been steadily climbing since May 2016. That means the upcoming fourth-quarter 2016 earnings announcement is likely to hold an upside surprise, which could boost the share price.
Con: The stock has very attractive earnings growth and dividends, but the P/E indicates a full valuation. (However, every increase in earnings estimates serves to improve the valuation scenario.)
Con: 3G Capital Management has been raising money, with the intent of doing an acquisition through Kraft Heinz. On M&A announcements, the share price of the acquiring company typically falls or stagnates.
Pro: The price chart appears bullish. When KHC breaks past upside resistance at 90, it would have the strength for a sustained run-up.
I’m leaning toward waiting for the fourth-quarter results, which could be the catalyst for a share price breakout. Hold.
Royal Caribbean Cruises (RCL – yield 2.2%) is expected to report fourth-quarter 2016 results on the morning of January 26. This undervalued growth & income stock has short-term upside price resistance at 102. Buy.
Whirlpool (WHR – yield 2.1%) If you’re interested in WHR, take six minutes and listen to this focused and favorable review of the company from Jim Cramer. Final 2016 results, which will be reported on the morning of January 26, are expected to reflect 14.6% full-year EPS growth. Analysts expect 12.3% EPS growth in 2017, with a corresponding P/E of 11.7. The stock remains undervalued. WHR is rising toward price resistance at 190. I believe WHR will surpass 190 in the very near future, based on its slow and orderly ascent. (A rapid ascent is almost always followed by a pullback.) I’m therefore moving WHR from Hold to Buy. Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Archer Daniels Midland (ADM – yield 2.7%) is expected to achieve 30.8% EPS growth in 2017, with a P/E of 15.2. Zacks reviewed the components of ADM’s successes in this article last week, including M&A activity, production enhancements and expense reduction goals. ADM has been volatile since late October, trading between 43.50 and 47.50. Patient investors should buy low within that range, in preparation for an eventual breakout towards 50 and higher. Strong Buy.
Boise Cascade (BCC) is trading between 22 and 25, with additional price resistance at 27. Buy.
BorgWarner (BWA – yield 1.4%) is trading between 39 and 42. Hold.
Legg Mason (LM – yield 2.7%) will report third-quarter 2017 results on the afternoon of February 1. December assets under management came in higher than analysts expected, indicating potential upside revisions to fourth-quarter 2016 and full-year 2017 earnings estimates. It’s likely that LM will trade between 31.50 and 34.50 in the coming months. Strong Buy.
Mattel (MAT – yield 5.0%) announced a new CEO last week, Margaret Georgiadis, who was recently Google’s Americas president. The news was well-received by the market. I expect MAT to have a very good year. The stock is low within its recent trading range of 29 to 33.50. Bargain hunters, growth investors and dividend investors should buy MAT now. Buy.
Molina Healthcare (MOH) was featured in the January issue of Cabot Undervalued Stocks Advisor. Expect volatility in healthcare stocks due to potential changes to U.S. government healthcare policies and legislation. MOH appears ready to break past 60 and head toward upside resistance at 66. Buy.
Tesoro (TSO – yield 2.7%) will report fourth-quarter 2016 results on the morning of February 6. We’ve seen January pullbacks among the majority of oil & gas E&P and refining stocks, including TSO. Part of the downturn is a natural pullback after December run-ups, and part of it is attached to worries about a potential new 20% border adjustment tax on imports. Tesoro imports oil that it then refines. The new tax is expected to have a modest impact on Tesoro’s EPS, offset by rising product pricing and benefits from proposed lower corporate taxes.
Several sectors that had falling earnings in 2016 are projected for strong earnings growth in 2017, including energy companies, insurance companies, and most banks. In that light, current consensus estimates project Tesoro to grow EPS by 31.0% in 2017. The P/E is 13.2 and the dividend yield is 2.7%. (That 31% EPS growth includes analysts’ assessments of all of the aforementioned changes in taxes/laws.) The growth projections remain intact, and the stock is significantly undervalued.
The share price charts throughout the energy sector appear to be exhibiting normal pullbacks, and I don’t see any cause for alarm. I expect energy stocks to have a good year in 2017. TSO seems to be finding support around 79; however, the stock is not yet ready to rebound. Patient investors should buy low. Buy.
Toll Brothers (TOL) has traded between 31 and 33 since an early December run-up. Patient investors should buy low. Buy.
Total SA (TOT – yield 5.3%) Unlike most of its peers, TOT is showing tremendous price strength this month. Continue to buy TOT for capital appreciation and/or the huge dividend yield. Strong Buy.
Universal Electronics (UEIC) has upside resistance at 70 and again at 78. Patient investors should buy UEIC now. Buy.
Vertex Pharmaceuticals (VRTX) Full-year 2016 results will be reported on the afternoon of January 25. During the last five weeks, Wall Street’s consensus full-year 2016 EPS estimates have come up from $0.77 to $0.84, with $1.93 EPS expected in 2017. (The company took annual losses during the last 10 years through 2015.) VRTX is resting after an early-January run-up. Buy VRTX now. There’s short-term upside price resistance at 95. Buy.
Closing prices on January 23
