We’re having weird weather in Colorado this year. Spring arrived in early February, and stuck around until a cold snap in March that cracked my windshield. May has been full of rain, snow, wind and hail, and I had to wear a hat and gloves numerous times last week. Several saplings in my yard are bent at 90 degree angles from the weight of the recent snow, and they haven’t bounced back up! Now I have to figure out how to get them to stand up again. Or I could leave them bent over, and tell everybody that they’re divi divi trees.
On top of all that, the Rockies are leading the National League!
Amid all this unprecedented weather and sports news, there’s something unusual and significant afoot in the bond market. Therefore, I’m going to pluck my Goldman Sachs update out of the Growth Portfolio updates, and put it right here in the intro so that nobody misses what’s going to be happening soon.
Goldman Sachs Group (GS – yield 1.3%) is a premier Wall Street investment bank. Investors need to be aware that the Federal Reserve—a major purchaser of U.S. Treasury bills and bonds and mortgage-backed securities—plans to allow up to $20 billion per month of its debt holdings to be redeemed, and not subsequently reinvested. That’s going to throw a wrench into the status quo of bond and housing markets, and could easily have a big impact on interest rates and bond and stock prices.
The folks who run the Fed, including Janet Yellen, have no experience in this endeavor. They plan to communicate their intentions and actions frequently with the financial markets in an attempt to stave off investment market disruptions.
Raise your hand if you think that U.S. government employees who have no experience in overseeing hundreds of billions in debt redemptions are going to successfully handle this situation with foresight and expertise. Personally, I’m not optimistic.
So how does that affect Goldman Sachs? Goldman traders make a lot of money for their company during volatile bond markets, and that enhances Goldman’s earnings per share. The Fed’s decision to redeem debt obligations, and the ensuing bond market volatility, have not yet been factored into Wall Street’s earnings estimates for Goldman. Since we already know that Goldman is probably going to make money on this escapade, we’re either going to see analysts increasing their earnings estimates or quarterly upside earnings surprises. Each situation would normally push the share price higher.
The share price rose over 80% from July 2016 through March 2017, then experienced a correction. The stock is cheap, and could rise to its recent high above 250 in the coming months. Buy GS now. Buy.
Feel free to send questions and comments to Crista@CabotWealth.com.
Portfolio Notes
Make sure to review the Special Bulletins from May 25 and 26, in which I mentioned news, rating changes and/or price action on Dollar Tree (DLTR), GameStop (GME), Quanta Services (PWR), Schnitzer Steel (SCHN), Thermon Group (THR) and TiVo (TIVO).
I recommended Chevron (CVX) last week in Cabot’s free publication, Wall Street’s Best Daily. Read more here: “Buy This Undervalued Energy Stock as OPEC Extends Production Cuts.”
Buy-Rated Stocks Most Likely To Rise More Than 5% Near-Term:
Cavium (CAVM) and most semiconductor stocks!
Mattel (MAT)
Martin Marietta Materials (MLM)
Schnitzer Steel (SCHN)
Tesoro (TSO)
Vertex Pharmaceuticals (VRTX)
XL Group (XL)
Today’s Portfolio Changes: none
Last Week’s Portfolio Changes:
Thermon Group Holdings (THR) moved from Strong Buy to Hold on May 25.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a somewhat overvalued, aggressive growth software stock. ADBE has risen for five months without any decent pullback, and the stock is still climbing. Each week, I look at the valuation and price chart, and decide whether to give ADBE a little more rope. It’s behaving well, so I’m not selling yet. Hold.
American International Group (AIG – yield 2.0%) is a very undervalued diversified insurance company with strong projected earnings growth. AIG’s new CEO Brian Duperreault indicated that he favors a balanced strategy of both pursuing growth and returning capital to shareholders. Some investors are therefore concerned that the company might pare back its aggressive share repurchase plan in favor of reinvesting towards future business growth. That’s certainly a possibility, although it would be hard to characterize business growth as “negative.” In other news, Mr. Duppereault purchased $4.9 million of AIG stock on May 18, and credit rating agency A.M. Best reaffirmed AIG’s “A” rating on May 23 after reviewing the company for a possible downgrade. A.M. Best included Mr. Duppereault’s industry experience as one of the reasons for the positive review.
Full-year 2017 earnings estimates have consistently risen for the last four weeks. The stock broke out of a trading range last week, and could reach 67 before resting again (where it will still be quite undervalued). Strong Buy.
Cavium (CAVM) is a manufacturer of semiconductor processor chips and related products. CAVM is an undervalued, mid-cap aggressive growth stock. The stock began reaching new all-time highs when it broke past 74 in mid-May. It then had a little pullback, and now appears immediately capable of experiencing a profitable run-up. The only reason that I rate CAVM a Buy, and not a Strong Buy, is that the company’s long-term debt ratio is a little higher than I would prefer—though I don’t see that as an impediment to earnings growth or share price growth. Buy CAVM now. Buy.
Dollar Tree (DLTR) reported a good first quarter last week (see May 26 Special Bulletin). Dollar Tree will make a presentation at the RBC Capital Markets Consumer and Retail Conference on the afternoon of May 31, 2017. Investors can visit the company’s website to listen to the webcast.
I moved DLTR to a Hold when it surpassed 82 recently, on the theory that new buyers will have less than 10% upside as the stock advances toward 90, where I intend to sell due to overvaluation. I’m not going to keep moving the stock back and forth between Buy and Hold as it occasionally dips below 82. If you’re happy with a potential 13% profit, and willing to trade out near 90, then by all means, buy DLTR now. I expect a near-term upswing in the share price. Hold.
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. The stock is showing a little strength right now and could rise to 45.5 in the coming months. Strong Buy.
Martin Marietta Materials (MLM – yield 0.7%) is an aggressive growth stock that’s quite undervalued based on 2018 numbers. MLM had a big run-up in April, followed by a partial pullback in May. Buy MLM now. There’s short-term price resistance at 240. Strong Buy.
PulteGroup (PHM – yield 1.6%) is a single-family U.S. homebuilder. PHM is a very undervalued growth stock. We could see PHM break past 24.50 soon, and rise to the upper 20s this year. Buy PHM now. Strong Buy.
Quanta Service (PWR) authorized a new $300MM share repurchase last week. The share price suffered in the aftermath of its fall run-up, falling with some other “Trump Bump” basic industry stocks (including steel stocks). PWR is a bargain at this price. The corporate outlook remains fantastic, with aggressive earnings growth and a low P/E. Patient investors who buy now could earn a large capital gain before year-end. Strong Buy.
Vulcan Materials (VMC – yield 0.8%) is an aggressively growing supplier of construction aggregates, asphalt and concrete. This undervalued stock has been ratcheting upwards toward recent highs at 135, and could surpass that ceiling this year. Strong Buy.
XL Group (XL – yield 2.0%) is a very undervalued, aggressive growth insurer and reinsurer. Zack’s published an informative review of XL Group on May 24. XL shares have been repeatedly rising and resting since June 2016. Last week, the stock began another run-up. Buy XL now. Strong Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 6.5%) is an undervalued integrated oil company. Here’s an excellent article from Real Money, “I Still Have Faith in BP,” which emphasizes BP’s financial strength—including $23 billion in cash—and a large number of current, low-risk projects. Consensus earnings estimates jumped last week to reflect 113% EPS growth in 2017. The stock rose to short-term price resistance at 37, then pulled back a little. You might get a chance to buy BP below 35.5, before it gathers the strength to climb above 37. Strong Buy.
Blackstone Group LP (BX – variable large payouts) is an alternative asset manager. Consensus earnings estimates for Blackstone have been rising slowly and steadily for six weeks, now reflecting 46% EPS growth in 2017. The stock is greatly undervalued. BX rose about 9% last week, and could rise as high as 38 this year, where it will likely establish a new trading range. Strong Buy.
ExxonMobil (XOM – yield 3.8%) is the largest U.S. integrated oil company. XOM is an extremely undervalued stock, experiencing aggressive multi-year earnings growth. When XOM rises past short-term resistance at 83, it could then climb to 91. Buy XOM now. Strong Buy.
GameStop (GME – yield 6.8%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. GameStop reported first-quarter profits that far exceeded analysts’ estimates. Nevertheless, traders drove the share price down to end the week at 22.2. (I had predicted a low of 22.5.) GameStop is a financially healthy company, with a huge & growing dividend, low debt levels and large share repurchases. In addition, S&P reports that 95% of GameStop’s shares are held by financial institutions, which means that professional investors find tremendous value in the company and in its stock.
I expect the share price to bounce back to 25 quickly, and possibly rise much higher this year as investors continue to witness a successful transition away from an emphasis on physical game revenues. Hold.
H&R Block (HRB – yield 3.4%) is a nationwide tax preparation company. HRB is most likely to trade between 25 and 27 until fourth-quarter results (April year-end) are reported on June 13. Hold.
Royal Caribbean Cruises (RCL – yield 1.7%) is an undervalued growth stock in the travel industry. The stock broke out of a trading range last week, and could approach 120 in the short-term. I anticipate selling when the run-up appears to peak, due to travel industry concerns. Hold.
TiVo (TIVO – yield 4.4%) is a digital entertainment company that provides technology licensing and related services, which enable people to access online and televised entertainment. TiVo will present at the Cowen and Company 45th Annual Technology, Media & Telecom Conference on the afternoon of May 31. The U.S. International Trade Commission is expected to make an initial determination shortly 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 project EPS increasing 11.3% and 43.7% in 2017 and 2018. The share price has stabilized from its recent drop, after quarterly numbers were misreported by news agencies. I expect the stock to rise toward short-term resistance at about 19.5, then to have a pullback before making another upward move. Low-priced and small-cap stocks are not for the faint of heart, but they can deliver outsized capital gains. This is a good time to buy low. Strong Buy.
Whirlpool (WHR – yield 2.4%) is a global manufacturer of home appliances. The stock is slightly overvalued based on moderate 2017 earnings growth, but quite undervalued based on expected stronger 2018 earnings growth. WHR is trading sideways, with upside resistance at 190. Buy WHR now. Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Archer Daniels Midland (ADM, yield 3.0%) 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. This aggressive growth stock remains significantly undervalued. The share price had a big pullback after the very-bullish first-quarter earnings report. Traders and growth investors should buy BCC now. Strong Buy.
Chipotle Mexican Grill (CMG) is an undervalued aggressive growth stock. Last week, the company provided an update on its recent security breach. The malware was located and removed from its computer system, and Chipotle is working with cyber security firms to further enhance its security measures. The price chart remains bullish, with a near-term target of 530, where CMG last traded in March 2016. Hold.
Legg Mason (LM – yield 3.0%) is an undervalued asset management and financial services company with aggressive earnings growth. We could see the stock rise past 38.5 soon, and begin a run-up toward medium-term price resistance at 44-45. Buy LM now. Strong Buy.
Mattel (MAT – yield 6.7%) is a global toy manufacturer, and an undervalued growth stock. They stock has begun rising from its recent downturn. I expect MAT to return to its recent trading range of 25 to 26, then stay there for a while. Traders, growth investors and dividend investors should buy MAT now. Buy.
Schnitzer Steel Industries (SCHN, yield 3.8%) is a scrap metal recycling company, expected to achieve 133% EPS growth in 2017. Please refer to the May 25 Special Bulletin, which outlines a change in the U.S. government’s approach to handling trade issues that benefits steel companies. SCHN is rebounding from the recent downturn in steel and basic industry stocks, and could reach short-term price resistance at 21 in June. Buy.
Tesoro (TSO – yield 2.6%) is a very undervalued aggressive growth stock in the oil refining and marketing industry. Consensus earnings estimates change weekly for Tesoro. Analysts now expect EPS to grow 19.8% and 38.7% in 2017 and 2018, with corresponding P/Es of 16.2 and 11.7.
For those of you paying intricate attention, the 2017 EPS estimate of $5.14 declined slowly for four months, while the 2018 EPS estimate had held steady at about $6.99 for four months, then jumped to $7.13 last week. Analysts tend to be more cautious in next year’s earnings estimates. I would therefore view a 2% upward revision as being significant and bullish.
TSO is rising toward short-term price resistance at 88, where it will likely pause, then continue climbing. Strong Buy.
Thermon Group Holdings (THR) is an aggressive global growth stock in the electrical equipment industry. The company reported fourth-quarter and full-year 2017 results last week (March year-end). (See the May 25 Special Bulletin.) Quarterly earnings came in below expectations, and revenue beat estimates. Earnings were impacted by competitive pricing pressures, and a geographic mix shift of business to lower-margin Eastern Hemisphere projects. On a positive note, backlog is up 32% vs. a year ago, with over 850 projects in the pipeline. Ongoing cost-cutting efforts resulted in $2.9 million in savings for the year.
Going forward, full-year 2018 EPS are expected to rise 32.6%, while revenue is expected to be flat to slightly down. Profits are expected to grow another 26.3% in fiscal 2019. The debt ratio remains low, and the number of outstanding shares remains relatively unchanged.
The share price fell on news of the earnings miss, and will need to stabilize before it can recover. Expect the stock to trade in the 18-19 area for a while. I will consider moving THR back to a Strong Buy recommendation when the price chart shows strength, presuming that the earnings growth outlook remains aggressive. Hold.
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 growth stock. The stock has a pattern of rising, then trading sideways. I’m estimating that we’ve just entered a sideways trading pattern between 50 and 55. I’ll be ready to move TOT back to a Strong Buy when it shows a readiness to break out above 55. Hold.
Universal Electronics (UEIC) is a consumer electronics company. The company will make a presentation on June 7 at Baird’s 2017 Global Consumer, Technology and Services Conference, and also on June 8 at Citi’s 2017 Small and Mid Cap Conference. Investors can access the webcasts on Universal Electronics’ website. This growth stock is overvalued based on 2017 numbers, but undervalued based on 2018 numbers. 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. Tune in to this informative CNBC interview with Vertex CEO Dr. Jeffrey Leiden from May 23. VRTX appears ready to break past 120, any day now. Buy VRTX now. The best-case scenario this year is that VRTX could rise to its 2015 high around 140. Strong Buy.
