We’re on the tail end of earnings seasons for companies that wrapped up their quarters in March. Reports are due early this week from Tesoro (TSO) and Vulcan Materials (VMC).
Almost every one of our portfolio companies that reported earnings delivered an upside earnings surprise, especially in the integrated oil and construction materials industries. That’s not to say that all of their share prices subsequently rose! After all, over the short term, stock market action tends to resemble results at a craps table in Las Vegas.
Every now and then, I’ll receive an email from a brand new investor who was unprepared for stock market volatility. Here’s what volatility means: in less than a year’s time, stocks of companies with strong balance sheets and good earnings growth can occasionally fall in half, and stocks of companies with weak balance sheets and/or a lack of earnings growth can double. Those are both extremes, obviously, yet I have seen both situations happen many times.
If you are a new investor and you’re not prepared for that degree of risk, then think hard about whether you will be able to relax about owning stocks. You could always own stocks via mutual funds, which have less volatility than individual stocks.
Value stocks can take a while to gather upward momentum. By their very nature, they are stocks of quality companies that have been ignored by investors. Consequently, their share prices are cheap. Some investors love value stocks. As long as you’re confident in the companies’ balance sheets, you can buy value stocks and then not look at your stock portfolio very often. That scenario works well for very calm people and for busy people.
Some investors do not have the patience to own value stocks. They want more immediate price action. They want to buy and sell. They look at their stock portfolios every day, and expect to see activity. These investors might be more appropriately invested in growth stocks, such as those you might find in Mike Cintolo’s Cabot Top Ten Trader.
For those of you who follow energy stocks and oil prices, here’s a recent article from Barron’s: “As Crude Prices Firm, Oil Majors Rise to the Top.“ The article points out the big profits reported by integrated oil companies in recent weeks, citing BP plc (BP) and other European stocks. The surge in oil company profitability is likely to continue because the companies got lean and mean in recent years after oil prices suffered a big drop. I continue to encourage investors to own shares of oil exploration and production stocks, as well as oil refining and marketing stocks.
Feel free to send questions and comments to Crista@CabotWealth.com.
Portfolio Notes
Make sure to review the daily Special Bulletins from May 3, 4 and 5, in which I mentioned news, rating changes and/or price action on Adobe Systems (ADBE), American International Group (AIG), Archer Daniels Midland (ADM), BP plc (BP), Boise Cascade (BCC), Martin Marietta Materials (MLM), Quanta Services (PWR), TiVo (TIVO) and Vulcan Materials (VMC).
Buy-Rated Stocks Most Likely To Rise More Than 5% Near-Term:
BP plc (BP)
Blackstone Group (BX)
ExxonMobil (XOM)
Johnson Controls (JCI)
Mattel (MAT)
Schnitzer Steel (SCHN)
Tesoro (TSO)
Thermon Group (THR)
TiVo (TIVO)
Universal Electronics (UEIC)
Vulcan Materials (VMC)
Today’s Portfolio Changes:
Universal Electronics (UEIC) moves from Hold to Buy
Last Week’s Portfolio Changes:
American International Group (AIG) moved from Hold to Strong Buy
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a fairly-valued software company with aggressive earnings growth. Barclays began analyst coverage on ADBE last week with an Overweight recommendation. ADBE is up 30% year-to-date, and the price chart still looks bullish. Hold.
American International Group (AIG – yield 2.0%) is a very undervalued diversified insurance company with strong projected earnings growth. AIG reported first-quarter adjusted EPS of $1.36 when the market was expecting $1.08. The company also announced a new $2.5 billion share repurchase authorization on the heels of the February 2017 announcement of a new $3.5 billion share repurchase authorization. (See May 4 Special Bulletin.)
The market was relieved to see AIG produce strong quarterly results, in light of the company’s recently-disappointing fourth quarter. Analysts cautiously raised the full-year 2017 consensus earnings estimate by $0.11 to $4.91. As investors gain confidence that AIG is following through on its ROE and capital plan goals for the year, their attention turns toward AIG’s selection of a new CEO. The announcement will likely be bullish for the share price.
The stock has been trading between 59 and 67 since October 2016, and is currently rising within that range. Given a neutral-to-bullish stock market, I expect AIG to surpass 67 and begin another run-up this year. Strong Buy.
Cavium (CAVM) is a manufacturer of semiconductor processor chips and related products. Cavium was featured in the May issue of Cabot Undervalued Stocks Advisor. CAVM is an undervalued, mid-cap aggressive growth stock. I expect CAVM to surpass 74 this year, spurred on by surprisingly strong earnings growth and favorable market sentiment toward semiconductor stocks. Buy CAVM now. Buy.
Dollar Tree (DLTR) offers the strongest earnings growth within its discount retail peer group. However, the stock is overvalued based on 2019 numbers (January year-end). The stock broke out of a four-month trading range in late April, and could rise to November’s high near 90 before stopping. My intention is to sell the stock at 90 to clear the path for a more undervalued growth stock to join the portfolio. Hold.
Goldman Sachs Group (GS – yield 1.3%) is a premiere Wall Street investment bank. The stock is undervalued, the earnings outlook is good, and the share price is low within its trading range. I expect GS to retrace its March highs above 250 this year. Buy.
Johnson Controls (JCI – yield 2.4%) is a multi-industry company with the following business mix: fire and security services, residential and commercial HVAC/R (heating, ventilation, air conditioning and refrigeration), automotive batteries and building equipment. Barron’s recommended JCI last week in “Air Conditioning is Hot; The Best Stock to Own”. JCI is an undervalued growth stock. I expect JCI to rise to 45.5 in 2017. Strong Buy.
Martin Marietta Materials (MLM – yield 0.7%) reported first-quarter revenue and profit that far exceeded the market’s expectations. (See May 3 Special Bulletin.) While quarterly EPS came in $0.27 above the consensus estimate, the 2017 full-year consensus EPS estimate subsequently rose by only $0.09. The implication is that analysts are either purposely being extremely cautious with their estimates, or that despite the blowout first quarter numbers, Wall Street expects no additional upside earnings surprises during the balance of the fiscal year. My sense is that (a) earnings estimates will continue to rise and/or (b) we’re going to see more upside surprises in quarterly reports.
MLM is an aggressive growth stock that’s undervalued based on 2018 numbers. I mentioned in the May issue of Cabot Undervalued Stocks Advisor that “MLM could break past short-term upside resistance at 242 this year.” It looks like that breakout could happen within a few days or weeks. Buy MLM now and buy on pullbacks, too. Strong Buy.
PulteGroup (PHM – yield 1.6%) is a single-family U.S. homebuilder. PHM is a very undervalued growth stock. The stock had a big run-up this year through mid-March, followed by a small pullback. Buy PHM now. We could see it rise to the upper 20s this year. Strong Buy.
Quanta Service (PWR) reported a good first quarter last week, and raised its full-year 2017 revenue target (December year-end). (See May Special Bulletin.) PWR is an undervalued aggressive growth stock. The stock has traded between 34 and 39 since December. I expect PWR to rebound to 38, and possibly climb higher this year. Strong Buy.
Vulcan Materials (VMC – yield 0.8%) is an aggressively growing supplier of construction aggregates, asphalt and concrete. Vulcan will report first-quarter results on the morning of May 10. Thus far this earnings season, the S&P materials sector is showing big profit growth vs. a year ago. Last week, VMC burst past upside price resistance at 124 after competitor Martin Marietta Materials (MLM) reported a strong earnings beat. VMC could climb to 135 or higher this year. Strong Buy.
XL Group (XL – yield 2.1%) is a very undervalued, aggressive growth insurer and reinsurer. The stock began a new run-up in late April. Buy XL now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 6.7%) is a very undervalued integrated oil company. BP delivered a big first-quarter earnings beat on May 2 (See May 3 Special Bulletin.) The CFO expects operating cash flow to grow in each quarter of fiscal 2017, with an especially large gain in the fourth quarter. Despite the upside earnings surprise and bullish corporate outlook, Wall Street analysts responded by lowering full-year 2017 EPS estimates. I believe their excessive caution with integrated oil stocks is going to lead directly to additional quarterly upside earnings surprises this year. I expect BP to rise to—and possibly surpass—38 this year. Strong Buy.
Blackstone Group LP (BX – variable payouts) is an alternative asset manager. When EPS are viewed in conjunction with the large dividend, the stock is decidedly undervalued. BX broke out of a four-month trading range in late April. Nobody has missed their opportunity to capitalize on the pending run-up in the share price. Buy BX now. Strong Buy.
ExxonMobil (XOM – yield 3.7%) is the largest U.S. integrated oil company. ExxonMobil was featured in the May issue of Cabot Undervalued Stocks Advisor. XOM is an extremely undervalued stock, experiencing aggressive multi-year earnings growth. After a quick run-up to 92 in December, XOM’s price receded to 81 in February, and has since been trading sideways. Given a stable or bullish stock market, I expect XOM to rebound to 92 (or higher) this year. Buy XOM now. Strong Buy.
GameStop (GME – yield 6.3%) is a retailer of games, collectibles and technology; with additional ventures in the entertainment field. GME is rising toward price resistance at 26. Hold.
H&R Block (HRB – yield 3.5%) is a nationwide tax preparation company. Block effectively recaptured some market share during the recent tax season, achieving higher pricing and margins. HRB’s current rise will likely come to a halt at 27, where it traded in March 2016. Hold.
Royal Caribbean Cruises (RCL – yield 1.8%) is an undervalued growth stock in the travel industry. RCL is reaching new highs, and appears likely to continue climbing this month. Hold.
TiVo (TIVO – yield 3.9%) is a digital entertainment company that provides technology licensing and related services, which enable people to access online and televised entertainment. Here are highlights from last week’s first quarter earnings report:
- Non-GAAP $0.40 EPS was much higher than the $0.27 consensus estimate.
- Quarterly revenue also exceeded estimates, $206 million vs. 188.8 million.
- Many news and financial companies reported the wrong EPS numbers, thus driving the share price down to price support at 18. The correct number was verified by TiVo’s CFO. (See May 4 and 5 Special Bulletins.)
- The Board of Directors announced that they will consider share repurchases in the future.
TIVO is an extremely undervalued small-cap stock. TIVO has traded between 18 and 22.5 this year. There’s longer-term price resistance at 25, which is a reasonable 2017 target price for the stock. Buy TIVO now. Strong Buy.
Whirlpool (WHR – yield 2.4%) is a global manufacturer of home appliances. The stock is overvalued based on 2017 numbers because earnings estimates have come down in recent months; but WHR is undervalued based on expectations of 14.9% EPS growth in 2018. WHR has risen to a range of 185 to 190 four times since April 2016. A breakout past 190 could happen, with WHR then rising to early-2015 highs of 205 before resting again. Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Archer Daniels Midland (ADM, yield 3.0%) reported a small first-quarter earnings miss on May 2. (See May 3 Special Bulletin.) Full-year consensus EPS estimates now reflect 26.9% and 8.8% EPS growth in 2017 and 2018. The stock is somewhat overvalued based on the 2018 P/E. In an overreaction to the earnings miss, the stock fell down to very strong price support near 41, and will likely trade up to 44 in the near-term. Hold.
Boise Cascade (BCC) is a wood products manufacturer and building materials distributor. Boise reported a huge first-quarter earnings beat last week, pushing full-year consensus EPS estimates up to $1.69 and $2.20, vs. $1.05 in 2016. This aggressive growth stock remains significantly undervalued. Last week, BCC traded up to price resistance around 33 that was established in 2015; then profit-taking took the price down to 29.5. (See May 3 and 4 Special Bulletins.) Growth stock investors should take advantage of any price below 30 and buy BCC. The sideways trading will continue for a little while before BCC launches past 33. Strong Buy.
Chipotle Mexican Grill (CMG) is experiencing multi-year aggressive earnings growth as the company rebounds from its 2015 food safety problems. The stock is undervalued. I expect the current rise in the share price to come to a halt at 530, where CMG last traded in March 2016. Hold.
Legg Mason (LM – yield 3.0%) is a seriously undervalued asset management and financial services company with aggressive earnings growth. Legg Mason was featured in the May issue of Cabot Undervalued Stocks Advisor. LM could reach medium-term price resistance at 44 to 45 soon, at which point it will still be undervalued. Buy LM now. Strong Buy.
Mattel (MAT – yield 6.9%) is a global toy manufacturer. Mattel is expected to achieve good double-digit earnings growth in 2017 and 2018. The stock has a huge dividend yield, and is very undervalued based on 2018 numbers. MAT fell in mid-April and his since stabilized. Dividend investors should buy now. Growth stock investors should wait for MAT to trade in the low 20s for a while before a rebound can commence. Buy.
Schnitzer Steel Industries (SCHN, yield 4.0%) is a scrap metal recycling company. Consensus earnings estimates have been rising steadily since early April, now reflecting an expectation of 133% EPS growth in 2017. SCHN stabilized after a recent drop. Patient investors can buy here. Buy.
Tesoro (TSO – yield 2.7%) is an undervalued aggressive growth stock in the oil refining and marketing industry. The company reported first-quarter results on the afternoon of May 8. TSO exhibited a shakeout pattern on its price chart in the second half of April; a bullish sign indicating that an upturn in the share price is imminent. Strong Buy.
Thermon Group Holdings (THR) is an aggressive growth stock in the electrical equipment industry. THR appears ready to rise past 21 soon. There’s additional price resistance at 25. Buy THR now. Strong Buy.
Total SA (TOT – yield varies, approx. 4.2%) is an international oil and gas company that’s based in France. TOT is a greatly undervalued, aggressive growth stock. TOT is ratcheting upwards. I expect the stock to produce very attractive returns for investors going forward. Buy TOT now. Strong Buy.
Universal Electronics (UEIC) is a consumer electronics company. On May 4, Universal Electronics reported first-quarter adjusted non-GAAP earnings per share of $0.65 vs. the consensus estimate of $0.63. Sales were $161.4 million vs. the consensus estimate of $158.6 million. Universal Electronics’ CFO stated, “We expect average [long-term] annual sales growth of 5% to 10% and average earnings per share growth of 10% to 20%.” The company also announced the acquisition of RCS Technology, maker of energy management and control products.
The company anticipates second-quarter non-GAAP EPS of $0.72-$0.82, and sales in a range of $172 million to $180 million. Analysts had anticipated second-quarter EPS of $0.92 and revenue totaling $181.8 million. The shortfall comes from close to $1 million in severance payments that Universal Electronics will make in conjunction with a factory closure in China.
UEIC fell upon news of the current second quarter’s EPS revision. I’m therefore moving UEIC from Hold to Buy. The stock is cheap again, and there’s plenty of room for investors to make money in the short term within UEIC’s trading range. Buy.
Vertex Pharmaceuticals (VRTX) is an undervalued, aggressive growth biotech company that corners the market in treatments for cystic fibrosis. VRTX is resting after a big year-to-date run-up. If it trades down to 108, that would be an excellent purchase price. The best-case scenario this year is that VRTX could rise all the way to its 2015 high around 140. Hold.