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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Weekly Update

The broader U.S. stock market is having a pullback after a 12% post-election run-up. The S&P 500 is only down about 2.5% from its recent high, and it’s too soon to tell whether it might fall a little more.

The broader U.S. stock market is having a pullback after a 12% post-election run-up. The S&P 500 is only down about 2.5% from its recent high, and it’s too soon to tell whether it might fall a little more. Market pullbacks are frustrating and/or boring, but they’re also necessary and normal. Stocks don’t go straight up. Even during very strong performance years, they have intermittent pullbacks.

There’s very little happening among our portfolio stocks right now. I expect Adobe Systems (ADBE) to reach new highs right away, and for Dollar Tree (DLTR) and Royal Caribbean Cruises (RCL) to continue rebounding through early April. Thermon Group (THR) might bust out of its trading range very soon. Just about every other portfolio stock is either stuck in a trading range or sitting at the bottom of its trading range.

I know that the news media likes to tie every stock market move to an economic or political event, but sometimes market moves are completely coincidental to news events. Current stock market action seems perfectly normal to me. I look forward to more portfolio growth in the coming months.

Portfolio Notes

Make sure to review the Special Bulletin from March 24, in which I mentioned news, rating changes and/or price action GameStop (GME), with brief mentions of most of our buy-rated stocks.

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

Dollar Tree (DLTR)

Today’s Portfolio Changes:

(No changes today)

Last Week’s Portfolio Changes:

(No changes last week)

Updates on Growth Portfolio Stocks

Adobe Systems (ADBE) Wall Street is issuing favorable research reports to investors in the wake of Adobe’s strong first-quarter results. Yesterday, BTIG raised ADBE from neutral to buy. Revised consensus estimates project EPS growing 30.9% and 26.4% in 2017 and 2018 (November year-end). The corresponding P/Es are 32.4 and 25.6. The stock is relatively fairly valued. I expect ADBE to continue reaching new highs in the very near term. Hold.

American International Group (AIG – yield 2.1%) AIG executives met with Wall Street analysts last week to reiterate their 2017-2018 goals in the wake of the resignation of CEO Peter Hancock. The execs and board of directors are committed to increasing return on equity (ROE) by repurchasing shares, expense savings and reducing the core loss ratio. AIG is a very undervalued stock with strong projected earnings growth trading at 80% of book value. The stock is trading between 60 and 67. Buy AIG now. Strong Buy.

Dollar Tree (DLTR) is, by far, the most attractive retail stock on my radar. EPS are expected to grow 18.0% and 13.2% in 2018 and 2019 (January year-end), with corresponding P/Es of 16.8 and 14.9. The downside is that DLTR is slightly overvalued based on 2019 numbers, and the debt ratio is higher than I would prefer, at 52.7%. The upside is that institutional investors need to have portfolio representation among consumer and retail stocks, and they’ll be hard-pressed to find a better choice than DLTR, if earnings growth is their biggest goal.

DLTR has firm price support at 73 to 75, and is currently climbing toward short-term price resistance at 80. Afterwards, the stock could easily rebound to November’s high near 90. Buy DLTR now. Buy.

Goldman Sachs Group (GS – yield 1.1%) is an undervalued growth stock. GS could trade anywhere between 210 and 255 in the short term prior to its next upside breakout. Strong Buy.

Johnson Controls (JCI – yield 2.4%) is an undervalued growth stock, trading between 40.50 and 45.50. At 45.50, JCI will still be undervalued. I don’t expect JCI to fall below 40.50 unless the broader market gets much weaker. Buy JCI now. Buy.

Martin Marietta Materials (MLM – yield 0.8%) is an aggressive growth stock. MLM has been bouncing at 205 for five weeks, as many types of construction and basic industry stocks have undergone price corrections. The eventual rebound should take MLM up to short-term price resistance at 240, where it will still be undervalued. Strong Buy.

PulteGroup (PHM – yield 1.5%) is an undervalued aggressive growth stock. PHM broke past four-year upside resistance this month, and is trading between 23 and 24. I expect a sustainable run-up. Buy PHM now. Strong Buy.

Quanta Services (PWR) could easily break past 39 and begin a new run-up during the next bullish move in the broader market. In the interim, there’s good price support at 34, dating back to December 1. Buy PWR now. Buy.

Vulcan Materials (VMC – yield 0.9%) is an aggressive growth stock that’s sitting at the bottom of its trading range, after a price correction among basic industry and construction stocks. Strong Buy.

XL Group (XL – yield 2.2%) is a very undervalued global property & casualty insurer. The earnings outlook has declined since early February, but it remains fantastic. After earning $1.63 per share in 2016 (December year-end), analysts expect EPS of $3.18 and $4.03 in 2017 and 2018, reflecting 95.1% and 26.7% growth rates. The corresponding P/Es are 12.5 and 9.9. XL has traded between 39.50 and 41 for the last six weeks. Buy XL now. Strong Buy.

Updates on Growth & Income Portfolio Stocks

BP plc (BP – yield 7.0%) Yesterday, BP announced another gas discovery in Egypt. Consensus earnings estimates have been coming down for BP since the company reported 2016 results. EPS amounted to $0.84 in 2016, and are expected to rise to $2.24 and $2.63 in 2017 and 2018 (December year-end), reflecting growth of 167% and 17.4%. The P/Es remain quite low in comparison, at 15.1 and 12.8. BP is a very undervalued growth stock. The downside for BP during the current weakness among energy stocks is about 33.40. There’s upside resistance at 38, at which point the stock will still be quite undervalued. Buy BP now. Strong Buy.

Blackstone Group LP (BX – yield varies between 3% and 6%) is a limited partnership. Distributions are reported on a Schedule K-1 tax form for income tax filing purposes. The stock is undervalued and the price chart is moderately bullish. The short-term downside is 28.50. BX could rise to price resistance between 38 and 39 this year. Buy BX now. Strong Buy.

ExxonMobil (XOM – yield 3.7%) is an undervalued stock, projected for aggressive earnings growth in 2017 and 2018. XOM is low within its trading range, between 81 and 92. Buy XOM now. Strong Buy.

GameStop (GME – yield 7.3%) Please refer to the March 24 Special Bulletin, which discussed GameStop’s full-year 2017 results (January year-end). The earnings report featured better-than-expected full-year profits, continued (expected) declines in physical game sales, a plan to close 2% to 3% of its GameStop retail stores in 2017, a plan to open 100 collectibles and technology stores in 2017, and expanding profit margins from its newer, diversified businesses.

In addition, the company has repurchased 26.1% of its common shares in the last five years. The 2017 long-term debt-to-capitalization ratio came in at 26.7%, which I find impressive, considering that GameStop purchased another 507 AT&T authorized retailer last year.

The stock continues to suffer in the days following each earnings announcement, even though the news is always the same: GameStop’s physical gaming business is declining, while collectibles, technology stores and entertainment businesses are growing rapidly and profitably. I’m not going to sell a stock that has a 7% dividend, large share repurchases, and a P/E lower than the dividend yield. Eventually, the market will accord GME a fair value. Hold.

H&R Block (HRB – yield 3.9%) made a huge upward move in early March, and now seems to be establishing a new trading range between 22 and 24.50. I expect increased price action in the stock between now and the company’s full-year 2017 earnings report (April year-end). Hold.

Royal Caribbean Cruises (RCL – yield 1.9%) is slowly rising to medium-term price resistance at 102. Hold.

Whirlpool (WHR – yield 2.3%) is an undervalued growth & income stock. WHR has strong price support at 167.50, going back to early December. Buy WHR now. Strong Buy.

Updates on Buy Low Opportunities Portfolio Stocks

Archer Daniels Midland (ADM, yield 2.8%) is climbing towards price resistance at 47, where I may sell due to moderate 2018 earnings growth projections. Hold.

Boise Cascade (BCC) is a very undervalued and volatile aggressive growth stock. I expect BCC to rise to longer-term price resistance at 32 in 2017. There’s price support at 25.50. Buy BCC now. Buy.

Legg Mason (LM – yield 2.5%) is a seriously undervalued aggressive growth stock. There’s recent support at 34.50 and upside resistance at 40. Buy.

Mattel (MAT – yield 6.0%) is a very undervalued aggressive growth stock. MAT is resting at price support at 25. Buy MAT now for big capital gains this year. Buy.

Schnitzer Steel Industries (SCHN, yield 3.8%) pre-announced second quarter results on March 22 (August year-end), with final results to be reported on the morning of April 6. The company expects to report EPS in the range of $0.37 to $0.40, while the analysts’ estimate is $0.33—so clearly, there will be an upside earnings surprise which is not yet reflected in the share price.

Schnitzer earned $0.48 per share in 2016 (August year-end), and is expected to earn $0.95 and $1.17 in 2017 and 2018, reflecting EPS growth of 97.9% and 23.2%. The corresponding P/Es are 20.8 and 16.9. The stock remains undervalued, but it’s going to be volatile, as is the nature of lower-priced stocks, small-cap stocks, aggressive growth stocks and stocks with little analyst coverage. SCHN has traded down to price support that was established in October 2016. Strong Buy.

Tesoro (TSO – yield 2.7%) management met with analysts last week. The company is in the early stages of incorporating its recent acquisition of Western Refining, expecting $350 million to $425 million in cost savings through the two combined companies’ enterprises. TSO is an undervalued aggressive growth stock. TSO is bouncing around between 79 and 92. Buy.

Thermon Group Holdings (THR) Yesterday, BMO Capital Markets raised their recommendation on THR from market perform to outperform, and the stock launched up to price resistance at 21. The stock could have a small pullback before surpassing 21 and subsequently rising toward additional price resistance at 25. This small-cap stock was featured in the March issue of Cabot Undervalued Stocks Advisor. Strong Buy.

Total SA (TOT – yield 5.3%) is a greatly undervalued, aggressive growth stock. TOT has been trading between 48 and 52 since December. Strong Buy.

Universal Electronics (UEIC) has strong price support at 66, and could rise sooner than most other portfolio stocks. There’s upside price resistance in the upper 70s. Hold.

Vertex Pharmaceuticals (VRTX) is a very undervalued and volatile biotech stock with rapid EPS growth. The stock has upside price resistance at 95 and 103. The best-case scenario this year is that VRTX could rise all the way toward its 2015 highs around 140. Strong Buy.