The stock market—as measured by the S&P 500 and DJIA indexes—is still showing a lot of strength, despite an approximate 4% run-up since a breakout in mid-January. It’s perfectly normal for stock markets to rise and to have pullbacks. However, I don’t see the stock charts signaling an imminent pullback. Be prepared for more near-term capital gains.
I’m searching for stocks to add to the Cabot Undervalued Stocks Advisor portfolios, very aware that we currently have only seven stocks in the Growth & Income Portfolio, only four of which are Buy-rated. The biggest problem is that every good dividend stock that I find comes from either the energy or financial industries. We’re already overweighted in those industries, so I’m extremely hesitant to add more of those stocks to the Growth & Income Portfolio.
I’ll continue my research this week with the goal of introducing a good stock to the Growth & Income Portfolio in next week’s March issue. In the meantime, if you think I’m being ridiculously cautious, or if you want the names of additional energy or financial stocks, send an email to Crista@CabotWealth.com. Your questions and comments on other topics are welcome, too!
If you have an upcoming event that needs a stock market speaker this year, contact me, and we’ll see if we can arrange something.
Portfolio Notes
Make sure to review the Special Bulletin from February 22, in which I mentioned news, rating changes and/or price action on ASML Holding (ASML), Archer Daniels Midland (ADM), Boise Cascade (BCC), GameStop (GME), Legg Mason (LM), PulteGroup (PHM), Quanta Services (PWR), Toll Brothers (TOL), Total (TOT), Whirlpool (WHR) and Zions Bancorp (ZION).
Buy-Rated Stocks Most Likely to Rise More than 5% Near-Term:
BP plc (BP)
Boise Cascade (BCC)
Exxon Mobil (XOM)
PulteGroup (PHM)
Royal Caribbean (RCL)
Vertex Pharmaceuticals (VRTX)
Whirlpool (WHR)
Today’s Portfolio Changes:
Boise Cascade (BCC) moves from Hold to Buy
Quanta Services (PWR) moves from Strong Buy to Buy
Whirlpool (WHR) moves from Buy to Strong Buy
Last Week’s Portfolio Changes:
Archer Daniels Midland (ADM) moved from Buy to Hold on February 22.
ASML Holding (ASML) was sold from the Growth Portfolio on February 22, with a 12.49% capital gain in 1.6 months.
Cardinal Health (CAH) was sold from the Growth & Income Portfolio on February 21, with a loss of 5.71% in 13.5 months.
PulteGroup (PHM) joined the Growth Portfolio on February 22.
Toll Brothers (TOL) was sold from the Buy Low Opportunities Portfolio on February 22, with an 18.8% total return in 10.5 months.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a fairly valued aggressive growth stock. Earnings estimates have barely changed since fourth-quarter results were reported in mid-December (November year-end). Hold.
American International Group (AIG – yield 2.0%) is a very undervalued aggressive growth stock. I expect AIG to trade between 63 and 67 for a while, as it gathers steam to rise above 67 later this year. Strong Buy.
Dollar Tree (DLTR) will report fourth-quarter 2017 results on the morning of March 1 (January year-end). The earnings outlook is strong, and the stock is fairly valued. I expect DLTR to rise to upside resistance at 90, at which time I will likely sell the stock, unless the company raises its fiscal 2018 earnings outlook. Traders could buy now with the intention of selling near 90. Buy.
Goldman Sachs Group (GS – yield 1.0%) is an undervalued growth stock. GS broke past 245 this month, but you haven’t missed your opportunity to buy GS before the impending run-up. Strong Buy.
Johnson Controls (JCI – yield 2.4%) is bouncing around somewhat erratically between 41 and 45.50. When JCI reaches 45.50, it will still be greatly undervalued. Buy JCI now, while it’s low within its trading range. Buy.
Martin Marietta Materials (MLM – yield 0.8%) Stocks in the construction aggregate industry fell last week on news that the Trump administration is putting domestic infrastructure spending on the back burner. It is important for investors to understand that construction aggregate stocks were expected to have very strong earnings growth in 2017—as they have in each recent years—before President Trump won the November election. These companies already have tons of business in their pipelines, and will not suffer over rumored business deals that don’t happen. Martin Marietta is expected to grow EPS by 26.4% and 26.5% in 2017 and 2018. Those are incredible numbers.
MLM is an aggressive growth stock. In recent days, MLM appears to have exhibited a shakeout chart pattern—a bullish pattern that resembles the letter “V”—and will therefore likely establish support around 215, in preparation for its rebound toward 240. At that point, MLM will still be undervalued. Strong Buy.
PulteGroup (PHM – yield 1.7%) is a U.S. homebuilder with strong earnings growth. Read more about PulteGroup in my February 23 Wall Street’s Best Daily article. PHM has repeatedly risen to upside resistance in the 22 to 23 area for four years. Based on its trading pattern in recent weeks, combined with the bullish price charts on other homebuilder stocks, I believe that PHM is finally ready to break past price resistance and begin a sustainable run-up. Buy PHM now. Strong Buy.
Quanta Services (PWR) reported full-year 2016 EPS up 36.0% last week, on target with consensus estimates (December year-end). Analysts expect EPS to grow 29.1% and 17.4% in 2017 and 2018, with corresponding P/Es of 19.4 and 16.5. The stock is slightly undervalued based on 2018 numbers.
I’m changing my recommendation on PWR from Strong Buy to Buy. While I absolutely expect a near-term price breakout past 38, and subsequent run-up, the stock will thereafter be overvalued unless 2018 consensus earnings estimates increase. If the numbers don’t increase, I will want to exit the stock after the run-up. At this point, people who enjoy making 10% or more in the short-term should buy PWR. Buy.
Vulcan Materials (VMC – yield 0.8%) Stocks in the construction aggregate industry fell last week on news that the Trump administration is putting domestic infrastructure spending on the back burner. It is important for investors to understand that construction aggregate stocks were expected to have very strong earnings growth in 2017—as they have experienced in each recent years—before President Trump won the November election. These companies already have tons of business in their pipelines, and will not suffer over rumored business deals that never actually take place. At this point, Vulcan is expected to grow EPS by 40.2% and 34.7% in 2017 and 2018. Those are incredible numbers.
VMC is an aggressive growth stock. In recent days, VMC appears to have exhibited a shakeout chart pattern—a bullish pattern that resembles the letter “V”—and will therefore likely establish support around 120, in preparation for its rebound toward 135. At that point, VMC will still be greatly undervalued. Strong Buy.
XL Group (XL – yield 2.1%) is a very undervalued growth stock. XL rose for three straight weeks this year, then leveled out. A pullback would be normal at this point, and would definitely be a buying opportunity. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 7.1%) is an incredible bargain right now. The stock offers attractive earnings growth, comparably low P/Es and a huge dividend. The share price seems to have found support at 33.50. The stock could rebound to short-term upside resistance at 38 within a few months, at which time it will still be greatly undervalued. Buy BP now. Strong Buy.
D.R. Horton (DHI – yield 1.3%) is slightly undervalued, and seems to be rising past its recent trading range towards upside resistance at 34. Hold.
Exxon Mobil (XOM – yield 3.7%) has very attractive fundamentals and is trading at the bottom of a 10-month trading range, between 81 and 92. Buy XOM now. Strong Buy.
GameStop (GME – yield 5.6%) I don’t have a date for full-year 2017 results (January year-end) as of yet, and I don’t want to urge people to buy GME until I see the results and the 2018 outlook. Nevertheless, for the first time in five months, GME appears ready to rise past 26.50. Despite the stock’s slow-growth scenario, it’s still undervalued. Hold.
H&R Block (HRB – yield 4.4%) 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. Hold.
Royal Caribbean Cruises (RCL – yield 2.0%) has traded steadily in the mid-90s for four weeks. There’s medium-term price resistance at 102, at which price the stock will still be undervalued. Strong Buy.
Whirlpool (WHR – yield 2.2%) continues to rise toward short-term resistance at 190, where it will still be greatly undervalued. I’m moving WHR from Buy to Strong Buy, based on good earnings growth, low P/E, attractive dividend and a bullish price chart. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Archer Daniels Midland (ADM, yield 2.8%) Strong 2017 earnings growth is expected to fade to moderate growth in 2018. Therefore, I might sell when ADM approaches 47.50. Hold.
Boise Cascade (BCC) is a U.S. wood products and building materials company. On February 24, BCC reported full-year 2016 non-GAAP EPS of $1.05, as analysts had expected (December year-end). The consensus estimates project 2017 and 2018 EPS of $1.52 and $2.10, representing aggressive earnings growth of 44.8% and 38.2%. In comparison, the respective P/Es are incredibly low at 17.2 and 12.4. The company repurchased 400,000 shares of stock during the fourth quarter, with about 700,000 shares remaining in the repurchase authorization.
BCC is a very undervalued and volatile aggressive growth stock. Last week, when the stock rose to 28, I said that BCC “should, in theory, stop rising now. Traders should exit. If BCC has a decent pullback, I’ll change it to a Buy.” Sure enough, the stock pulled back to 26. I’m raising BCC from Hold to Buy, due to the strong earnings outlook, low valuation and attractive share price. When BCC begins a run-up above 28, there’s longer-term price resistance at 32. Caution: The share price and the earnings estimates are volatile, there are only five Wall Street analysts covering the stock, and the 2016 debt ratio might end up a little higher than I would prefer. Buy.
Legg Mason (LM – yield 2.4%) Last week, LM became the subject of takeover speculation, with rumors circling that an unnamed buyer has made overtures to the company. There has since been no additional news. The stock is seriously undervalued. The price chart remains bullish, with LM resting after a February run-up. There’s upside resistance at 40. Buy.
Mattel (MAT – yield 5.9%) is a very undervalued growth stock. The share price has stabilized since falling in late January on news of slow holiday sales. The earnings outlook remains very strong. The six-month best-case scenario for the stock is that it rises 32% to 34, where it traded repeatedly in 2016. The only reason that I won’t give MAT a Strong Buy rating is that the long-term debt ratio is 45%, slightly above my threshold of 40%. Buy MAT now for big capital gains this year. Buy.
Schnitzer Steel Industries (SCHN, yield 3.1%) Steel stocks had a price pullback last week. SCHN has short-term upside resistance at 30, at which point it will still be undervalued. Buy SCHN now for a potential 20% short-term gain, and certainly consider holding the stock for additional gains in 2017. Strong Buy.
Tesoro (TSO – yield 2.5%) rose 10% in February and is now resting on an uptrend toward short-term price resistance at 92. Buy.
Total SA (TOT – yield 5.4%) is greatly undervalued, with a big dividend yield and a strong balance sheet. TOT could easily rise past 52 in the near future. Continue to buy TOT for capital appreciation and/or the huge dividend yield. Strong Buy.
Universal Electronics (UEIC) shares are having a normal pullback, subsequent to a huge share price run-up on February 18. I plan to sell UEIC at price resistance in the upper 70s due to overvaluation. Hold.
Vertex Pharmaceuticals (VRTX) is a very undervalued and volatile biotech stock. The price chart is exhibiting a cup and handle pattern, which is a bullish sign that the stock will continue in its uptrend. There’s short-term price resistance at 95. The best-case scenario this year is that VRTX could rise all the way to its 2015 highs around 140. Buy VRTX now. Strong Buy.
