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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Weekly Update

Today’s portfolio changes: Archer Daniels Midland (ADM) moves from Strong Buy to Buy, Boise Cascade (BCC) moves from Buy to Hold and Tesoro (TSO) moves from Hold to Buy.

There are a variety of stock market patterns that take turns ebbing and flowing over a market cycle. If you take a look at a five-year chart of the S&P 500 index, you’ll see a big bull run in 2013 and 2014, followed by sideways trading activity in 2015 and 2016, interspersed with several ghastly price corrections.
We’re now in a new bull phase that stuck its toe in the water in July 2016, but didn’t dive into the lake until December 2016. The S&P 500 hasn’t had a better-than-average year since 2013, so in my estimation, we’re overdue.


During a boring, underperforming year in the stock market like the one we had in 2016, I tend to find many undervalued stocks. I’ll add them to the portfolios, mostly with Strong Buy ratings, because most of them have huge potential.

Once the market takes off and our portfolio stocks begin to rise, I’ll move more and more of them down to Buy or Hold. The end goal is to either trade out of them when they reach significant upside price resistance, or, if they’re still undervalued, move them to Hold for a while. That’s because good stocks don’t go straight up. They rise, rest, rise, have a price correction, rise, rest. There will obviously be some smart points of entry as they swim around, and some times when they’re just going to be stuck treading water for a while.

If the market stays on its current course, I will sell some of the stocks we bought last year simply because we accomplished what we set out to do—earn capital gains—and the stocks’ run-ups seem to be coming to a close.

If we get to a point where the S&P 500 rises enough that everybody in the car pool line is talking about buying stocks, that means that a price correction is imminent. I’ll be happy to guide you through that when the time comes. Hint: we will be taking profits and holding onto cash, in anticipation of buying low, a few weeks into the market correction.

Just as a stock market index can’t have a 35% year without subsequently having a slow or down year, neither can a stock rise 35% in a matter of months, then continue rising without resting or pulling back.

Have questions about your stocks? Email me:
Portfolio Notes

Make sure to review the Special Bulletins from February 9 and 13, in which I mentioned news, rating changes and/or price action on ASML Holding (ASML), Adobe Systems (ADBE), Applied Materials (AMAT), Archer Daniels Midland (ADM), BP (BP), Boise Cascade (BCC), BorgWarner (BWA), Cardinal Health (CAH), Dollar Tree (DLTR), Kraft Heinz (KHC), Royal Caribbean (RCL), Schnitzer Steel (SCHN), Tesoro (TSO), Vulcan Materials (VMC) and Whirlpool (WHR).

Buy-Rated Stocks Most Likely To Rise More Than 5% Near-Term:

Goldman Sachs (GS)
Legg Mason (LM)
Royal Caribbean (RCL)
Schnitzer Steel (SCHN)
Whirlpool (WHR)

Today’s Portfolio Changes:

Archer Daniels Midland (ADM) moves from Strong Buy to Buy.
Boise Cascade (BCC) moves from Buy to Hold.
Tesoro (TSO) moves from Hold to Buy.

Last Week’s Portfolio Changes:

Adobe Systems (ADBE) moved from Buy to Hold on February 7.
Applied Materials (AMAT) was sold from the Growth Portfolio on February 13.
BP plc (BP) moved from Strong Buy to Hold on February 9.
BorgWarner (BWA) was sold from the Buy Low Opportunities Portfolio on February 9.
Legg Mason (LM) moved from Strong Buy to Buy on February 7.
Martin Marietta Materials (MLM) joined the Growth Portfolio on February 7.
Tesoro (TSO) moved from Buy to Hold on February 9.

Updates on Growth Portfolio Stocks

ASML Holding NV (ASML – yield 1.0%) is a fairly valued aggressive growth stock. The stock is reaching all-time highs, which is always a bullish chart pattern. Semiconductor stocks are popular right now, so I recommend holding ASML a while longer for additional capital appreciation this winter. Hold.

Adobe Systems (ADBE) is actively rising, and approaching fair valuation. Reminder: I am seriously contemplating selling this aggressive growth stock when this run-up ends. Hold.

American International Group (AIG – yield 1.9%) is a very undervalued aggressive growth stock. Consensus estimates point toward $3.76 EPS when AIG reports full-year 2016 results on the afternoon of February 14. The market will be watching for AIG’s fourth quarter reserve charge, and a possible new share repurchase announcement totaling $2 billion to $3 billion. There’s also a decent chance that AIG could increase its quarterly dividend at that time, although the company’s dividend increases do not happen on a regular schedule. The stock has traded erratically between 63 and 67 since the November elections. My instinct is that any near-term run-up will be followed by a pullback, because stocks usually need to establish more traditional trading patterns before they can successfully launch upward. Strong Buy.

Dollar Tree (DLTR) The earnings outlook is strong, and the stock is fairly valued. DLTR has strong price support in the mid-70s, and upside resistance at 90. Traders could buy now, with the intention of selling near 90. The stock appears ready to rise. Buy.

Goldman Sachs Group (GS – yield 1.1%) is an undervalued growth stock. Earnings estimates have been rising almost weekly since late October. Prospects for Wall Street to continue increasing earnings estimates on bank stocks remain very strong due to a variety of potential changes in interest rates, tax rates, economic activity and the regulatory environment. GS broke past 245 yesterday, and will likely continue rising now. Buy GS now. Strong Buy.

Johnson Controls (JCI – yield 2.4%) Wall Street’s earnings estimates for the company have been inching downwards for several months, but still reflect 15% to 16% expected EPS growth in both 2017 and 2018 (September year-end). The stock is undervalued. The share price is bouncing around somewhat erratically between 41 and 45.50. Buy.

Martin Marietta Materials (MLM – yield 0.7%) is an undervalued aggressive growth stock in the construction aggregate industry. The company will report fourth-quarter and full-year 2016 results on the morning of February 14 (December year-end). The market is expecting full-year EPS of $6.72, reflecting 49.3% growth over the prior year. A good earnings report could push the stock past its recent high of 242. Buy MLM now. Strong Buy.

Quanta Services (PWR) is a very undervalued aggressive growth stock. The chart looks attractive; PWR could rise past 38 this month. Buy PWR now. Strong Buy.

Vulcan Materials (VMC – yield 0.8%) Last week, Vulcan increased its quarterly dividend from $0.20 to $0.25, representing a 25% increase. Full-year 2016 EPS rose 30.6%, and are expected to rise another 41.6% and 33.3% in 2017 and 2018. Corresponding P/Es are 30.3 and 22.7. The stock remains undervalued and the industry outlook remains strong. There’s about 10% upside this winter as VMC retraces its recent high of 135. I expect the stock to continue climbing thereafter. Strong Buy.

XL Group (XL – yield 2.0%) is a very undervalued aggressive growth stock. XL is rising but could easily have a pullback below 38.50 before continuing upward. Definitely buy if there’s a pullback. Strong Buy.

Updates on Growth & Income Portfolio Stocks

BP plc (BP – yield 6.9%) is expected to achieve aggressive EPS growth in 2017, followed by moderate 7.8% EPS growth in 2018. The stock is slightly undervalued and the huge dividend is not perceived to be at risk. If there are investors who want to buy BP solely for the dividend or primarily for the dividend, I would support that idea. As for 2018 EPS, I’ll be watching that number closely. Any upward revisions will likely cause me to recommend a Buy on BP. The stock will likely trade between 34.50 and 38.50 for several months. Hold.

Cardinal Health (CAH – yield 2.3%) A good third-quarter earnings report (June year-end) pushed CAH past upside resistance at 76. The stock could rise as high as 84 this winter. Hold.

D.R. Horton (DHI – yield 1.3%) is slightly undervalued. DHI just exhibited a double-bottom chart pattern, which is a bullish indication of a likely near-term run-up. There’s upside resistance at 34. Hold.
Exxon Mobil (XOM – yield 3.5%) is one of the most attractive stocks that I’ve seen in a long while, with big future earnings growth (both 2017 and 2018), low P/Es, big dividend and low debt ratio. The stock is at the bottom of a 10-month trading range between 81 and 92. Everybody should buy XOM right now. Strong Buy.

GameStop (GME – yield 5.8%) has been trading between 22.50 and 26.50, but I would not be surprised if GME kept rising toward 28, without pausing at 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 4.2%) has been plagued by uncertainty over tax reform, a crackdown on tax fraud via The PATH Act, a decline in early-season filings of tax returns, and investor angst over HRB’s attempt to regain last year’s lost market share. HRB has been trading between 21 and 24 since June 2016. Hold.

Kraft Heinz (KHC – yield 2.6%) will report fourth-quarter 2016 results on the afternoon of February 15. This fairly valued aggressive growth stock broke past medium-term upside resistance last week. Traders should buy now. I anticipate a run-up towards 100, and I’ll likely sell the stock at that time. Hold.

Royal Caribbean Cruises (RCL – yield 2.0%) is undervalued, and slated for mid-teens earnings growth in 2017 and 2018 (December year-end). RCL appears likely to rise immediately toward medium-term upside price resistance at 102, at which price the stock will still be undervalued. Strong Buy.

Whirlpool (WHR – yield 2.3%) Wall Street’s consensus estimates on WHR have been declining. At this point, 2017 and 2018 EPS are expected to grow 11.0% and 12.6%, with corresponding P/Es of 11.2 and 9.9. The decline is never pleasant for investors, because it can weigh on the share price in the short term. However, the actual earnings growth is quite attractive, especially for such a large blue chip company. WHR remains undervalued. The stock is trading in the upper half of an 11-month trading range, between approximately 170 and 192. WHR will still be undervalued at 192, and we could see a long-awaited breakout into the 200s. Buy WHR now. Buy.

Updates on Buy Low Opportunities Portfolio Stocks

Archer Daniels Midland (ADM, yield 2.9%) EPS are expected to grow 31.9% and 8.1% in 2017 and 2018. Since earnings growth is expected to be much more modest in 2018, I’m moving ADM from Strong Buy to Buy. ADM is trading between 43.50 and 47.50, and patient investors should buy low within that range. Buy.

Boise Cascade Company (BCC) Based on 2017 numbers, BCC is a very undervalued aggressive growth stock. I’m moving BCC from Buy to Hold because the stock’s likely going to rest after this year’s quick run-up to upside price resistance at 28. The stock is volatile, with very few analysts covering the company. Not for the faint-hearted. Hold.

Legg Mason (LM – yield 2.5%) During the month of January, Legg Mason’s assets under management (AUM) rose from $710 billion to $714 billion. LM is extremely undervalued. The stock just pushed past upside resistance at 35 and will likely climb to 40 in the near-term, at which time it will still be undervalued. Buy.

Mattel (MAT – yield 5.9%) The company’s long-term debt-to-capitalization ratio finished 2016 a little higher than I would prefer, at 45% vs. 38% a year ago. EPS are expected to grow 39.6% and 16.2% in 2017 and 2018 (December year-end), with corresponding P/Es of 17.4 and 14.9. MAT is still a very undervalued growth stock with a huge dividend. The six-month best-case scenario for the stock is that it rises 32% to 34, where it traded repeatedly in 2016. Dividend investors and bargain hunters should buy low. Buy.

Molina Healthcare (MOH) will report fourth-quarter 2016 results on the afternoon of February 15, and will host an Investor Day meeting on the afternoon of February 16. Analysts expect Molina’s EPS to come in flat to 2015 numbers, then to grow 32.7% in 2017. The corresponding P/E is quite low at 16.0. MOH appears imminently ready to break past upside price resistance at 60. If the Investor Day mood is bullish for 2017, the stock could begin a big run-up. Buy.

Schnitzer Steel Industries (SCHN, yield 3.0%) The value of the Australian dollar (AUD) has a strong correlation to Schnitzer’s share price, with the two rising and falling together. Recent strength in the AUD is expected to abate. I would count that as just one of many factors contributing to the stock’s valuation. Scrap metal pricing is thought to have hit a short-term trough, and is expected to rise in the coming months along with steel mill pricing.
SCHN is a very undervalued aggressive growth stock in the steel industry. I expect SCHN to trade between 22.50 and 30 this winter. The stock has about 14% upside as it rebounds to its December high around 30, at which point it will still be undervalued. Buy SCHN now. Strong Buy.

Tesoro (TSO – yield 2.5%) reported full-year 2016 operating earnings of $4.04. Wall Street expects 2017 and 2018 EPS of $6.25 and $6.99, reflecting 54.7% and 11.8% growth. The stock is undervalued, with corresponding P/Es of 14.0 and 12.5.
Last week I moved TSO from Buy to Hold, while I assessed the company’s prognosis after the earnings report. I’m moving TSO back to Buy now. Sorry for the brief disruption! I just needed to be sure that there was going to be an earnings catalyst to get the stock past short-term upside resistance at 92. Buy.

Toll Brothers (TOL) There’s a good chance that favorable industry sentiment, combined with TOL’s attractive 2017 earnings growth prospects, could propel the stock past 33 in the near-term. However, after several years of strong earnings growth, 2018 EPS are expected to grow just 8.8% (October year-end), making the stock slightly overvalued. If earnings projections don’t improve, I’m going to sell the stock as it approaches 33. Hold.

Total SA (TOT – yield 5.3%) report full-year 2016 results last week, which came in a fraction better than expected. 2017 and 2018 EPS are expected to grow 33.1% and 23.3%, with corresponding P/Es of 11.3 and 9.2. The stock is greatly undervalued, with a big dividend yield and a strong balance sheet. The stock could easily break past 52 in the near future. Continue to buy TOT for capital appreciation and/or the huge dividend yield. Strong Buy.

Universal Electronics (UEIC) is expected to report fourth-quarter and full-year 2016 EPS of $0.70 and $2.90 on the afternoon of February 16. After remaining unchanged since mid-November, the 2017 EPS estimate just rose to $3.66, reflecting expected earnings growth of 26.2%, with a corresponding P/E of 17.1. UEIC has only three analysts covering the stock, which generally indicates more potential for volatility on earnings announcements. UEIC could bounce anywhere between 59 and 68 in reaction to earnings. I would like the price chart to show some strength before I give UEIC a Buy recommendation. Hold.

Vertex Pharmaceuticals (VRTX) Consensus earnings estimates rose a bit for Vertex last week. Analysts expect EPS of $1.65 and $3.00 in 2017 and 2018, representing earnings growth of 94.1% and 81.8%. The 2017 and 2018 P/Es are 53.4 and 29.4. In addition, the company closed 2016 with a long-term debt-to-capitalization ratio of 38.5%, down from 42% a year earlier.
VRTX is volatile, currently ratcheting upward toward short-term price resistance at 95. The best-case scenario this year is that VRTX could rise all the way toward its 2015 highs around 140. Strong Buy.