It’s no secret that I’ve favored energy, financial and construction materials stocks for many months. That’s because many stocks in those sectors are expected to achieve very strong, multi-year profit growth. One typical stock market phenomenon that’s related to surging corporate profits is that analysts tend to lowball their full year earnings estimates. They probably don’t want to stick their necks out too far and risk exhibiting “irrational exuberance,” lest they sound like snake oil salesmen.
You can read about the surprising strength of first quarter energy industry profits in this May 12 article from TheStreet, “Analysts Off the Mark on Energy Earnings”. Here’s an excerpt:
“The interesting factor is not that energy and materials (the second-highest-growing sector in the S&P 500 with 17.8% aggregate EPS growth in the first quarter) drove year-on-year growth in earnings for the S&P 500, it’s that analysts underestimated just how strong these earnings would be.”
Fortunately for investors, overly-cautious consensus earnings estimates generally lead to quarterly earnings beats, upward earnings estimate revisions, and lots of media attention, all of which contribute to buying activity in the affected stocks. I’m still quite bullish on the aforementioned market sectors.
Assurant (AIZ) made a special guest appearance in the March issue of Cabot Undervalued Stocks Advisor. Those of you who follow the stock should read my update on AIZ in the May 12 Wall Street’s Best Daily.
Feel free to send questions and comments to Crista@CabotWealth.com.
Portfolio Notes
Make sure to review the Special Bulletin from May 11, in which I mentioned news, rating changes and/or price action on American International Group (AIG), Cavium (CAVM), ExxonMobil (XOM), PulteGroup (PHM), Quanta Services (PWR) and TiVo (TIVO).
Today’s Portfolio Changes:
- No changes today.
Last Week’s Portfolio Changes:
- Universal Electronics (UEIC) moved from Hold to Buy.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a fairly-valued software company with aggressive earnings growth. ADBE continues to climb; the price chart remains bullish. Hold.
American International Group (AIG – yield 2.1%) is a very undervalued diversified insurance company with strong projected earnings growth. I mentioned in a Special Bulletin on May 12 that the CEO of Hamilton Insurance, Brian Duperreault, might become the new CEO at AIG. That appointment was officially made on May 14, just in time for Mr. Duperreault to make opening remarks at AIG’s Consumer Investment Day on May 15. The presentations will focus on Japan and Personal Insurance. Investors may access a replay of the presentation on the company’s website.
Rising earnings estimates and the new CEO appointment should relieve pressure on the share price. AIG appears to have begun a recovery from a recent downturn. There’s upside resistance at 67. 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 fairly soon, 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 in 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. 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 premier Wall Street investment bank. The stock is slightly 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 & security services, residential and commercial HVAC/R (heating, ventilation, air conditioning and refrigeration), automotive batteries and building equipment. The company’s CEO will speak at the Electrical Products Group Annual Conference in Florida on May 22. Interested investors may tune in to the live webcast via Johnson Control’s website. 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%) is an aggressive growth stock that’s quite undervalued based on 2018 numbers. Buy MLM now in anticipation of a breakout past 242. Strong Buy.
PulteGroup (PHM – yield 1.6%) is a single-family U.S. homebuilder. Pulte will make a presentation at the J.P. Morgan Homebuilding & Building Products Conference on May 18, which investors can access on the company’s website. PHM is a very undervalued growth stock. The stock had a big run-up this year through mid-March, followed by a small pullback. We could see PHM rise to the upper 20s this year. Strong Buy.
Quanta Service (PWR) is an undervalued aggressive growth stock. The share price weakened this month, coming down to 32, where it last traded in November. The stock is a bargain at this price, but it’s not yet ready to rebound. Strong Buy.
Vulcan Materials (VMC – yield 0.8%) is an aggressively growing supplier of construction aggregates, asphalt and concrete. Vulcan reported first-quarter 2017 non-GAAP EPS of $0.34 when the market was expecting $0.20. Results were bolstered by a 5% increase in product pricing. The company closed on four acquisitions during the quarter. Management reiterated their previously-announced, full-year 2017 profit goals.
VMC is rising toward short-term price resistance at 135, and could surpass that ceiling this year. Strong Buy.
XL Group (XL – yield 2.1%) is a very undervalued, aggressive growth insurer and reinsurer. XL has exhibited a consistent pattern on its chart since July 2016. The stock rises, then trades sideways, then repeats that process; and is currently trading sideways after its fourth price increase. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 6.8%) is a very undervalued integrated oil company. BP had a big run-up throughout 2016, then a smaller price correction in 2017, from which it is now rebounding. I expect BP to rise to—and possibly surpass—38 this year. This is a good time to buy BP. 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. XOM is threatening to break out of the trading range where it’s resided since late January. There’s upside resistance at 91. 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. The company will report first-quarter results (January year-end) on the afternoon of May 25. GME has been rising steadily toward price resistance at 26, with little pullbacks along the way. Hold.
H&R Block (HRB – yield 3.3%) 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 rest at 27, where a certain amount of profit-taking will likely commence. A better-than-expected fourth quarter (April year-end) could launch the stock higher. Be prepared for price volatility in either direction, when fourth quarter results are announced on June 13. Hold.
Royal Caribbean Cruises (RCL – yield 1.8%) is an undervalued growth stock in the travel industry. Take a look at the one year price chart on RCL. You can see that each time the stock rises from a previous trading range, it holds its gains, and trades in a narrow sideways range for a short while. In contrast, you can see a very different pattern, representing a two-steps-forward-one-step-back price advance, in the one-year chart for Blackstone Group (BX). Based on RCL’s normal trading patterns, I believe it’s telling us that it’s going to begin climbing again quite soon. I still anticipate selling when the run-up appears to peak, due to travel industry concerns. Hold.
TiVo (TIVO – yield 4.3%) is a digital entertainment company that provides technology licensing and related services that enable people to access online and televised entertainment. As I reported this month, TiVo had a much-better-than-expected first quarter, which was widely misreported, apparently causing the share price to fall. I found examples of seven different incorrect numbers reported by news agencies and financial companies, six of which were much lower than the real number. No wonder the stock fell!
Here’s what I learned during my conference call with TiVo’s Chief Financial Officer, Peter Halt:
The reason that the company has ceased reporting non-GAAP EPS numbers—the number that is used in direct comparison to analysts’ consensus estimates—is that the Securities and Exchange Commission (S.E.C.) has specifically told TiVo that they are not allowed to use that number in their earnings report. Yes, I realize that’s highly unusual, and that this mandate is not being equally applied to all public companies. No, I am not able to polish that information to make it sound logical.
The reason that news agencies subsequently reported the wrong EPS number is that most of those news stories are written by bots. When the bots can’t easily locate the number that they’re programmed to find in the earnings release, they apparently grab a different number or invent one.
As for the curious heavy-handedness on the part of the S.E.C., I’m going to make a few inquiries among my friends in Washington D.C. Something smells fishy.
In other news, the U.S. International Trade Commission is expected to make an initial determination this month on six cases of patent infringement, in which TiVo is the complainant and Comcast (CMCSA) is the defendant. Additional cases are being litigated in the Southern District Court of New York.
TIVO is an extremely undervalued small-cap stock. Current consensus estimates show full-year EPS increasing 11.3% and 43.7% in 2017 and 2018. The corresponding P/Es are 10.6 and 7.4.
Since there has not been any negative news on the company’s products or finances, I would expect the share price to rebound in the near future. Fortunately, a large dividend yield tends to limit the downside during random price volatility. I still expect TIVO to deliver outsized capital gains over the next six to 24 months. Strong Buy.
Whirlpool (WHR – yield 2.4%) is a global manufacturer of home appliances. The stock is undervalued based on expectations of 14.9% EPS growth in 2018. WHR is resting after a big run-up in April. A breakout past 190 could happen this summer, followed by the stock reaching its early-2015 highs of 205. Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Archer Daniels Midland (ADM, yield 3.0%) is expected to grow EPS by 25.9% and 9.2% in 2017 and 2018. The stock is somewhat overvalued based on 2018 numbers. During the last year, ADM traded between 41 and 44 for five months, then raised the top of its trading range to 47. The stock could realistically reach 47 again in the coming months. Hold.
Boise Cascade (BCC) is a wood products manufacturer and building materials distributor. Zack’s published another bullish recommendation on Boise Cascade last week. Full-year 2017 consensus EPS estimates rose again last week to $1.75, reflecting 66.7% growth vs. a year ago. The P/E is 16.3. This aggressive growth stock remains significantly undervalued.
BCC has a very specific trading pattern since the November general election. The stock tends to rise for a few weeks, then trade sideways for six to seven weeks, then repeat the process. Growth stock investors should take advantage of any price below 30, and buy BCC. Strong Buy.
Chipotle Mexican Grill (CMG) Consensus earnings estimates have steadily risen since the recent first-quarter earnings report. Analysts now expect Chipotle to earn $8.48 and $12.25 per share in 2017 and 2018 (December year-end). The stock is undervalued, and the price chart remains distinctly bullish. I expect the share price to be greeted with some selling pressure when it rises to 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. During fiscal 2017 (March year-end), the company repurchased 6.4% of its basic outstanding shares of common stock. Over the course of the last six years, the company repurchased 35.1% of its outstanding shares. Legg Mason was featured in the May issue of Cabot Undervalued Stocks Advisor. LM could reach medium-term price resistance at 44-45 soon, at which point it will still be undervalued. Buy LM now. Strong Buy.
Mattel (MAT – yield 6.7%) 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 appears to have begun its recovery. It will most likely return to its recent trading range of 25 to 26, then dwell there for a while. Traders, growth investors and dividend investors should buy MAT now. Buy.
Schnitzer Steel Industries (SCHN, yield 3.9%) is a scrap metal recycling company, expected to achieve 133% EPS growth in 2017. SCHN appears ready to rise after a recent drop in the share price. There’s a little upside resistance at 21. Buy.
Tesoro (TSO – yield 2.7%) is an undervalued aggressive growth stock in the oil refining and marketing industry. Tesoro reported first-quarter 2017 earnings per share (EPS) of $0.42 on the afternoon of May 8, when analysts were expecting an average of $0.31. Tesoro’s quarterly profit exceeded all 16 analysts’ estimates. Analysts subsequently revised their full year earnings expectations, with the 2017 number declining and the 2018 number rising. At this point, the consensus EPS estimates reflect growth of 24.2% and 30.8% in 2017 and 2018 (December year-end), with corresponding P/Es of 15.2 and 11.6.
The share price ratcheted downward between late February and late April. I fully anticipate that the share price recovery, which began in late April, will exhibit a similar, upward ratcheting pattern. Strong Buy.
Thermon Group Holdings (THR) is an aggressive growth stock in the electrical equipment industry. The company will report fourth-quarter and full-year 2017 results on the morning of May 24 (March year-end). Full-year EPS are expected to fall 46.1% to $0.48. Looking forward to fiscal 2018, analysts are expecting earnings growth of 35.4% to $0.65 per share. As I mentioned in the March issue, when I added THR to the Buy Low Opportunities Portfolio, “It has been my experience that when there’s a distinct change in an earnings trend, there’s a concurrent change in the direction of share price movement. That’s why I’m recommending THR right before its earnings situation is expected to turn upward.”
The price chart is looking more bullish now. I expect THR to break past 21 quite soon, and rise to upside resistance at 25. Buy THR now. Strong Buy.
Total SA (TOT – yield varies, approx. 4.3%) is an international oil and gas company that’s based in France. TOT is a greatly undervalued growth stock. The share price 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. The company will make a presentation at the B. Riley & Co. Investor Conference on May 25 in California, which is available to investors via a live webcast. Wall Street’s earnings estimates have changed for Universal Electronics, with 2017 numbers decreasing and 2018 numbers increasing. The company earned $2.91 per share in 2016 (December year-end), and is expected to earn $3.35 and $4.02 per share in 2017 and 2018, reflecting EPS growth rates of 15.1% and 20.0%. The corresponding P/Es are 19.2 and 16.0. I consider UEIC to be overvalued based on this year’s numbers, but undervalued based on next year’s numbers.
UEIC fell upon news of the 2017 downward EPS revision, at which time I changed my recommendation 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.
