Before I introduce the stock that I’m adding to the Buy Low Opportunities Portfolio today, let’s talk about social media.
What’s happened to our country? And why is it so perilous now to broach any level of political discussion with our friends and neighbors?
I know that some of you are extremely upset at the new political regime, and some of you are massively relieved. Since I have extensive experience in that realm, I thought I’d give you some pointers on handling politically emotional people—or about being a politically emotional person—that really, truly work. Then, if I strike a nerve, you’re welcome to email me with follow-up questions and comments. I don’t get tweaked when somebody has a vastly different opinion from me, so I’m a safe haven, I promise. Here goes:
1. Whether you are political or not, if you are absolutely sick of the emotions that people are expressing on social media, you can do the two things that I have done: un-friend all of the hysterical people (on both sides of the proverbial aisle), and stop watching TV. By eliminating those two things, you’ll dramatically increase your level of peace, I promise.
2. If you’re all atwitter—that’s a pun, get it?—about political goings-on, and can’t find any peace, I’ll tell you what’s effective and what’s not. Ranting and raving and chaining yourself to fences and lampposts generally doesn’t accomplish anything on a national level, although it can definitely impact local and state-level decisions. Do not confuse media attention with actual results. If your goal is to change the direction that the country is heading, pick ONE specific issue, and then get involved in an issues group.
How does that help with your peace, you say? When you’re doing something constructive to solve a problem, you lose the angst that’s associated with feeling helpless and you gain the satisfaction that comes from making progress. Prepare to work for several months or years on the issue that’s most important to you, and then ignore the other issues. You can’t impact several issues, but YOU CAN IMPACT ONE ISSUE. My Dad did it with nuclear power, I did it with the TPP and a friend of mine did it very recently when he single-handedly established the very first government-approved foster care program in India. Honestly, his Facebook posts brought tears to my eyes. What an amazing accomplishment!
I was also part of a small group of activists that defeated a countywide ballot issue, which every elected official in the county, except one, had endorsed. You CAN fight City Hall! Go make an impact. If you need encouragement, email me: crista@cabotwealth.com.
Today I’m adding Schnitzer Steel Industries (SCHN) to the Buy Low Opportunities Portfolio. The steel industry is garnering a lot of attention this year due to expectations of increased economic activity and the President’s announcement that new oil and gas pipeline construction will be built with U.S.-manufactured steel.
Schnitzer Steel is both a recycler of scrap metals, and a manufacturer of steel products that are used in nonresidential construction. The company also owns over 50 stores that sell used auto parts. Schnitzer is based in Oregon and exports 60% of its steel products to international destinations.
The company is run by a woman who has an investment banking background. Schnitzer is considered to be well managed and benefiting from a recent focus on cost cutting. Schnitzer’s full-year 2016 earnings per share were $0.48 (August year-end). Wall Street expects $1.21 and $1.48 EPS in fiscal 2017 and 2018, representing earnings growth of 152% and 22.3%. The corresponding P/Es are 19.6 and 16.0.
The company’s long-term debt-to-capitalization ratio is 27%, down from 32% three years ago.
Schnitzer last announced a quarterly dividend increase in April of 2012. The current yield is 3.1%.
The number of basic shares outstanding has been relatively unchanged over the last five years. 91% of those shares are held by financial institutions, which means that professional investors think that SCHN is a good investment. However, please note that there are very few Wall Street analysts following the stock, so we could see big disparities between earnings estimates and actual quarterly results.
SCHN had a big run-up in 2016, which was actually a recovery from a drop in 2015, followed by a recent price correction in December and January. I expect SCHN to trade between 22.50 and 30 in the coming months. The stock has about 25% upside as it rebounds to its December high around 30. By the time it gets there, I expect lots of profit-taking, so I would consider SCHN to be a shorter-term hold. The stock is low within that trading range, which is why I chose this moment to add it to the portfolio. Strong Buy.
Portfolio Notes
Make sure to review the Special Bulletins from January 25 and 26, in which I mentioned news and/or price action on ASML Holdings (ASML), Adobe Systems (ADBE), Amazon.com (AMZN), Applied Materials (AMAT), Boise Cascade (BCC), D.R. Horton (DHI), Legg Mason (LM), Mattel (MAT), Quanta Services (PWR), Royal Caribbean (RCL), Tesoro (TSO), Toll Brothers (TOL), XL Group (XL), Vertex Pharmaceuticals (VRX), Vulcan Materials (VMC) and Whirlpool (WHR).
Buy-Rated Stocks Most Likely to Rise Near-Term:
• Adobe Systems (ADBE)
• Schnitzer Steel Industries (SCHN)
• Tesoro (TSO)
Today’s Portfolio Changes:
• Adobe Systems (ADBE) moves from Strong Buy to Buy.
• Federated Investors (FII) moves from Hold to Sell.
• Schnitzer Steel Industries (SCHN) joins the Buy Low Opportunities Portfolio.
Last Week’s Portfolio Changes:
• ASML Holdings (ASML) moved from Buy to Hold.
• Amazon.com (AMZN) was sold from the Growth Portfolio.
• Applied Materials (AMAT) moved from Buy to Hold.
• D.R. Horton (DHI) moved from Buy to Hold.
• Johnson Controls (JCI) moved from Hold to Buy.
• Royal Caribbean (RCL) moved from Buy to Strong Buy.
• Toll Brothers (TOL) moved from Buy to Hold.
• Vertex Pharmaceuticals (VRTX) moved from Buy to Strong Buy.*
• Whirlpool (WHR) moved from Hold to Buy.
*I changed my recommendation on Vertex (VRTX) from Buy to Strong Buy in the January 26 Special Bulletin, but failed to highlight the change.
Updates on Growth Portfolio Stocks
ASML Holding NV (ASML – yield 1.0%) Consensus estimates point to $4.36 and $5.27 euros per share in 2017 and 2018, with corresponding P/Es of 27.9 and 23.1. Between estimates coming down and the share price rising rapidly in January, the stock is fairly valued. Semiconductor stocks are popular right now, so I recommend holding ASML for additional capital appreciation this winter. ASML was featured in the January issue of Cabot Undervalued Stocks Advisor. Hold.
Adobe Systems (ADBE) This aggressive growth stock broke past 111 to new highs last week, and could continue climbing in the coming weeks. I’m moving ADBE from Strong Buy to Buy, since the run-up makes the stock less undervalued than it was in recent months. Buy.
American International Group (AIG – yield 1.9%) Investors are waiting to see AIG’s fourth-quarter reserve charge when the company reports results on the afternoon of February 14. We are also likely to see a new share repurchase announcement totaling $2 billion to $3 billion, and there’s also a decent chance that AIG could increase its quarterly dividend, although the company’s dividend increases do not happen on a regular schedule. AIG is an undervalued aggressive growth stock. There’s very minor upside resistance at 67, although the stock won’t likely do much until fourth-quarter results are publicized. Strong Buy.
Applied Materials (AMAT – yield 1.1%) Earnings growth slows dramatically in 2018 (October year-end), so consider AMAT to be a shorter-term hold. The share price continues to rise. Hold.
Dollar Tree (DLTR) Discount retail stocks remain in the doldrums, with DLTR bouncing at its November lows. Earnings growth projections remain very strong. Patient investors should buy this growth stock now. There’s about 21% upside when DLTR eventually retraces its November high around 90. Buy.
Goldman Sachs Group (GS – yield 1.1%) is an undervalued growth stock. GS is trading sideways right now. 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. JCI is ratcheting toward short-term upside resistance at 45.50. Buy.
Quanta Services (PWR) is a very undervalued aggressive growth stock, expected to achieve 30%+ EPS growth in both 2016 and 2017 (December year-end). The 2017 P/E is 18.2. PWR began rising again last week. Buy PWR now. Strong Buy.
Vulcan Materials (VMC – yield 0.6%) will report fourth-quarter 2016 results on the morning of February 7. VMC is an undervalued aggressive growth stock, expected to achieve 38% and 39% EPS growth in 2016 and 2017. The 2017 P/E is 31.8. Current strength in the sector could push VMC past 135 soon. Strong Buy.
XL Group (XL – yield 2.1%) will report fourth-quarter 2016 results on the afternoon of February 1. After a down year in 2016, XL is expected to grow EPS by 130% in 2017. The corresponding P/E is 10.8. The stock could break past upside resistance at 38 very soon. Buy XL now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 6.5%) will report fourth-quarter 2016 results on the morning of February 7. 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 2.5%) will report second-quarter 2017 results on the morning of February 7. CAH is slightly undervalued. Expect volatility in healthcare stocks due to potential changes to U.S. government healthcare policies and legislation. Hold.
D.R. Horton (DHI – yield 1.4%) reported strong first-quarter results last week (September year-end). 2017 earnings estimates have been climbing slowly and steadily since mid-November. DHI reacted to the good news with an upside breakout. The stock is slightly undervalued. There’s upside resistance at 34. Hold.
Exxon Mobil (XOM – yield 3.5%) After a down year in 2016, XOM is expected to grow EPS by 91.8% in 2017, with a P/E of 20.4. XOM was featured in the January issue of Cabot Undervalued Stocks Advisor. Oil & gas stocks are having what appear to be normal pullbacks. Take advantage of the lower price and buy now. Strong Buy.
Federated Investors (FII – yield 3.8%) reported full-year 2016 EPS of $2.03 when the market was expecting $1.99, and vs. $1.62 a year ago. Unfortunately, earnings are now expected to be flat in 2017 and grow very slowly in 2018. Therefore, I’m selling FII from the Growth & Income Portfolio today. Sell.
GameStop (GME – yield 6.1%) is most 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 4.0%) is caught in the crossfire of tax reform comments made by the new political administration. The more pertinent question is whether H&R Block’s marketing changes will recapture market share this tax season. Hold.
Kraft Heinz (KHC – yield 2.7%) will report fourth-quarter 2016 results on the afternoon of February 15. Last week, I discussed the pros and cons of holding KHC a while longer, including the likelihood of a near-term share price breakout. The stock seems to have risen past its recent trading range on January 26, so I’m looking forward to some immediate price appreciation. Hold.
Royal Caribbean Cruises (RCL – yield 2.0%) Last week, Royal Caribbean reported full-year 2016 EPS up 25.9% (December year-end), a bit higher than expected. Wall Street expects EPS to rise another 13.3% and 14.5% in 2017 and 2018. The share price rose quickly on the good news. This undervalued growth & income stock has short-term upside price resistance at 102. Strong Buy.
Whirlpool (WHR – yield 2.3%) reported full-year 2016 EPS growth of 13.6% last week, slightly lower than expected. The earnings miss was attributed to the weak British pound. Wall Street expects 2017 and 2018 EPS to grow 13.3% and 16.1%. These are fantastic and consistent earnings trends for such a large company. The 2017 P/E is 10.7, and the stock remains undervalued.
The stock fell last week as news agencies harped on the slight earnings miss. The price action was ridiculous. Any professional investor would be thrilled to own shares of a blue-chip company that’s growing profits in the mid-teens year after year. I expect this downturn to be short-lived. Patient investors should buy WHR soon, before the price heads back toward 190. Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Archer Daniels Midland (ADM – yield 2.7%) will report fourth-quarter 2016 results on the morning of February 7. ADM is expected to achieve 30.4% EPS growth in 2017, with a P/E of 15.2. The stock 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) broke out of an eight-week trading range last week, and began pushing above 25, spurred on by good news and earnings reports in the housing sector. Based on 2017 numbers, BCC is a very undervalued aggressive growth stock. There’s some upside price resistance at 28. Buy.
BorgWarner (BWA – yield 1.4%) is expected to report fourth-quarter EPS of $0.84 on February 9. The stock rose to its current trading range between 39 and 42 in early December. A bullish earnings report could push BWA up to medium-term price resistance at 45, at which time I will likely sell the stock. Hold.
Legg Mason (LM – yield 2.8%) will report third-quarter 2017 results on the afternoon of February 1 (March year-end). Consensus EPS estimates point to $2.23 and $2.99 EPS in fiscal 2017 and 2018, representing 34.1% EPS growth in the year ahead, and a 2018 P/E of 10.4. The stock is extremely undervalued.
Shares of asset managers—including T. Rowe Price (TROW), Invesco (IVZ) and Federated Investors (FII)—fell last week. There are no indications that there’s anything wrong at Legg Mason—it’s just sector weakness. Risk-tolerant aggressive growth investors should buy now, and I’ll keep everybody else informed as to when the share prices in the sector have stabilized. Strong Buy.
Mattel (MAT – yield 5.7%) reported poor holiday sales last week, pushing the share price down to price support established a year ago. Industry-wide toy sales rose about 5% for the year, when forecasts had previously pointed toward 6.5% growth. Mattel’s full-year EPS came in at $1.06. Consensus estimates project 2017 EPS to be $1.66, representing 56.6% earnings growth in the coming year, with a P/E of 15.7. MAT is a very undervalued growth stock with a huge dividend. Dividend investors and bargain hunters should buy low. Buy.
Molina Healthcare (MOH) will report fourth-quarter 2016 results on the afternoon of February 15. Analysts expect Molina’s EPS to come in flat to 2015 numbers, then to grow 32.6% in 2017. 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 is having a pullback, after a 27% post-election run-up. Buy.
Tesoro (TSO – yield 2.7%) will report fourth-quarter 2016 results on the morning of February 7. Many financial and energy companies, including Tesoro, are expected to report down years in 2016, and then big earnings growth in 2017. Analysts expect full-year 2016 EPS of $4.39, followed by $6.38 in 2017 (December year-end), representing 45.3% earnings growth. The corresponding P/E is very low at 12.9. The stock is significantly undervalued. TSO is finding price support around 79. Bargain hunters should buy low, before the rebound. Buy.
Toll Brothers (TOL) Homebuilder stocks rose rapidly early last week on excellent earnings reports and industry news, then pulled back sharply by Friday. All the good ones that I follow remained well within their trading ranges on the pullbacks, so I don’t see any cause for alarm. There’s a good chance that favorable industry sentiment, combined with Toll Brothers’ attractive 2017 earnings growth prospects, could propel the stock past 33 in the near-term. Hold.
Total SA (TOT – yield 5.3%) will report fourth-quarter 2016 results on February 9. Last week, TOT and Chevron (CVX) finally had pullbacks, preceded by the rest of the sector’s stocks. Their price strength vs. the sector should serve as an omen that they are likely to outperform when the sector rebounds. Continue to buy TOT for capital appreciation and/or the huge dividend yield. Strong Buy.
Universal Electronics (UEIC) shares were down in recent days with no apparent news stories. My instinct is that the stock is exhibiting a shakeout, which is akin to a “last hurrah” for the bears, before the share price rises. We’ll know soon enough. If the price quickly rebounds to 64, that will be a good sign; if not, I’ll be moving it to Hold. Buy.
Vertex Pharmaceuticals (VRTX) reported full-year 2016 EPS of $0.85 vs. the consensus estimate of $0.84 and no prior history of net income. Full-year revenue rose 71%. In that light, 2016 marked a significant turnaround for Vertex’ balance sheet. Wall Street expects the company to earn $1.70 and $3.13 per share in 2017 and 2018, representing 100% and 84.1% earnings growth. The corresponding P/Es are 50.2 and 27.3. VRTX is an undervalued aggressive growth biotech stock.
The stock is volatile; currently ratcheting upward toward short-term price resistance at 95. The best-case scenario this year—somewhat of a long shot—is that a couple more quarters’ of upside earnings surprises could push VRTX all the way toward the stock’s 2015 highs around 140. Strong Buy.
