It’s Election Day in America. Head for the hills! Seriously, I wish you well. I know how difficult and distasteful this year has been for everybody.
Please take a look at the two-year chart on the S&P 500 index below. What you can easily see is that the stock market traded sideways for a very long time, with several price corrections along the way. Those included the following triggers: the late summer 2015 Chinese currency devaluations, the severe drop in oil prices in early 2016 and the Brexit vote in June 2016.
None of those corrections were caused by U.S. stocks being overvalued. I’ve lived through many overvalued markets, including stocks, bonds, precious metals, housing, Beanie Babies and baseball cards. If there were rampant overvaluation of U.S. stocks, I would have difficulty finding undervalued stocks in which to invest. The reality is, there are so many undervalued stocks right now that I have to fight the urge to add another dozen to the Cabot Undervalued Stocks Advisor portfolios.
On the S&P 500 chart, you can see the market finally beginning to climb to new all-time highs in July and August 2016, followed promptly by yet another pullback. I believe the current trigger is politics, so one way or another, we’re almost past the trough. Hang in there!
Some of my subscribers are newer investors, and I hope you reread what I just wrote, and stare at the chart. I want you to have confidence that there is a method to the madness of stock markets; that you CAN live through these fluctuations with calmness and clarity. Once you attain a certain peace about the whole thing, you will be able to confidently “buy low.” Just as you might jump at the chance to shop at Nordstrom during its Half-Yearly Sale, your goal as a stock investor is to keep some cash on the sidelines so that when stocks are on sale, you are able to take advantage of their low prices!
“Perseverance, secret of all triumphs.”—Victor Hugo
Portfolio Notes
I’ve only been writing the Cabot Undervalued Stocks Advisor since October 2015. I have a way of doing things, which sometimes gets adjusted on-the-fly as market situations warrant. I have maintained portfolios of 25 to 29 stocks since we started, but I’ve decided to add some flexibility to that guideline, at least for a little while, because there are so many great stocks that have become ridiculously cheap.
I’m not talking about companies with scandals, like Valeant Pharmaceuticals (VRX), or companies with annual net losses, like many energy stocks. I’m talking about companies that fit my growth criteria, companies which had minor bad news that caused major volatility in their share prices. That’s why I added Universal Electronics (UEIC) to the Buy Low Opportunities Portfolio on November 4. And in last week’s issue, Quanta Services (PWR) joined the Growth Portfolio.
I issued a Special Bulletin on November 3 covering earnings announcements for American International Group (AGI), GameStop (GME), Harman (HAR), Loews (L), Quanta Services (PWR), Vulcan Materials (VMC) and WellCare Health Plans (WCG). Loews (L) is not in the Cabot Undervalued Stocks Advisor portfolios; rather, it was featured in Cabot Wealth Advisory on September 15. The stock has 16% upside as it travels toward longer-term price resistance at 48.
What are consensus earnings estimates? Consensus estimates are simply the average of several Wall Street’s analysts’ earnings estimates for a company. These numbers are gathered and reported by two sources: Zacks and Thomson Reuters. The reason the two sources’ estimates frequently vary by a penny or so is because each source polls a slightly different set of analysts. Earnings estimates typically forecast “non-GAAP” or “adjusted” earnings per share.
In a research report on global pharmaceutical and biotech stocks from a major investment firm, which was published on November 6, I noticed a significant trend. Of the 58 companies in the report—including Vertex Pharmaceuticals (VRTX)—only 11 of them saw their share prices increase year-to-date. That’s sobering.
Pay special attention to stocks in the housing and discount retail sectors. They fell in recent months, and have now turned upward.
Upcoming dates of interest:**
November 8: D.R. Horton (DHI) to release 4Q results in the morning.
November 8: Johnson Controls (JCI) to release 4Q results in the morning.
November 8: Vertex (VRTX) to present at Credit Suisse Healthcare Conference*
November 9: Quanta (PWR) to present at the Baird Industrial Conference*
November 9: Toll Brothers (TOL) to present at the UBS Building and Building Products Annual CEO Conference*
November 17: Applied Materials (AMAT) to release 4Q results in the afternoon.
November 18: American International Group (AIG) to host an Investor Day*
November 22: GameStop (GME) to release 3Q results in the afternoon.
December 5: Johnson Controls (JCI) Corporate Analyst Meeting*
*The analysts who attend industry conferences write updates on the affected stocks, often causing increased market activity with the stocks.
**Public companies typically host a conference call immediately after posting quarterly results. Investors can visit the companies’ websites for instructions on how to access the conference call or the broadcast. (Do an internet search: “company name, Investor Relations”.)
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company that’s amid a multi-year phase of successfully shifting customers to a subscription revenue model. At last week’s Adobe MAX conference, the company asserted that it’s on target to reach its fourth quarter revenue and profit goals; and that they will meet or exceed their 2015 through 2019 compound annual EPS growth target of 30%. Adobe also projected 20% annual revenue growth to $7 billion in fiscal 2017 (November year-end).
ADBE is a slightly undervalued aggressive growth stock with a strong balance sheet. EPS are expected to grow 43.3% and 29.2% in 2016 and 2017. The corresponding P/Es are 35.6 and 27.6. The stock is trading near recent all-time highs, between 106 and 111. Strong Buy.
Amazon.com (AMZN) dominates the online retail space by offering a wide variety of merchandise at low prices to customers around the globe. The company’s U.S. Prime customers now total 10 million households. Amazon opened 23 new warehouses, July through October, and grew its workforce by 38% during the third quarter. The list of new products and services that Amazon began offering in recent months includes movies, books, music, games, cloud and web services, commerce in India, software, hardware, photography, fashion, employment, scholarships and more.
AMZN is an undervalued, large-cap aggressive growth stock in the consumer discretionary sector. Full-year EPS are expected to grow 281% and 89.3% in 2016 and 2017 (December year-end). The corresponding P/Es are 158 and 83.8.
AMZN rose to new highs in early October, then pulled back towards short-term price support around 760. I expect the stock to rebound promptly. All growth stock investors should consider owning AMZN as a core portfolio holding. Strong Buy.
American International Group (AIG) is an insurance company that operates in over 100 countries, providing property and casualty, life and commercial insurance, and retirement and financial products and services. The company will host an Investor Day on November 18. AIG released third-quarter results last week. Operating EPS were $1.00 when Wall Street expected $1.21.
• The company’s improvement in its core loss ratio was less exciting this quarter than in the second quarter, and AIG took $323 million in charges for loan loss reserves, contributing to the market’s disappointment in the earnings report. Earnings were also affected by adverse foreign currency movements related to the British pound.
• The good news is that expenses are down 12% year-to-date, exceeding its goal of 6% ($700 million) in full-year expense reduction. AIG is progressing toward its 2017 return on equity (ROE) goal of 9%.
• AIG spent $2.6 billion on dividends and share repurchases in the quarter, and $9.8 billion year-to-date, with a goal of a $12.5 billion return of capital in 2016 and again in 2016. The company also authorized another $3 billion in share repurchases, with $4.4 billion remaining from the prior repurchase authorization.
Full-year EPS are expected to grow 78.1% and 39.7% in 2016 and 2017 (December year-end), with corresponding P/Es of 14.7 and 10.5, making the stock extremely undervalued. The current dividend yield is 2.2%.
AIG spiked down with the broader market last week, and is now rebounding. Strong Buy.
D.R. Horton (DHI) is a homebuilder. Analysts are expecting fourth-quarter EPS of 77 cents when the company reports fourth-quarter results on November 8 (September year-end), and for D.R. Horton to finish the full fiscal year with 19% EPS growth. Looking forward to fiscal 2017, EPS are expected to grow 13.4%. The corresponding P/E is 10.6. The stock is undervalued, with a dividend yield of 1.1%.
Most homebuilder stocks peaked in July, had price corrections, and are now rising. DHI has upside resistance at 34.50. Buy.
Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. KeyBank Capital Markets initiated coverage on DLTR in October with an “overweight” rating. “Dollar stores are insulated from online competition, have the ability to take market share from mass, grocery and drug stores and have favorable demographics, according to KeyBanc,” reported TheStreet. Consensus EPS estimates reflect aggressive growth of 31.9% and 19.2% in 2017 and 2018 (January-end), with corresponding P/Es of 19.4 and 16.3. The stock’s long-term debt-to-capitalization ratio is high at 62%.
The discount retail stock sector fell for several months, and is now turning upward. Buy DLTR now. Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. E*Trade reported third-quarter results that came in much higher than the market expected. As a result, consensus EPS projections have been increasing, now reflecting 55.6% growth in 2016, followed by a drop of 2.7% in 2017 (December year-end). In addition to the stagnant 2017 earnings outlook, ETFC has significant upside price resistance at 31, which limits its ability to break past 31 in the near future. Shareholders should enter a sell-limit order at 30.50 good-til-cancelled. Hold.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Its geographic areas of operation focus on the U.S., Canada and Australia. The company is based in Houston, Texas, with 24,500 employees. Quanta will present at the Baird Industrial Conference on November 9. The company was featured in the November issue of Cabot Undervalued Stocks Advisor.
Wall Street expects slow and steady revenue growth, from $7.5 billion in 2015 to over $8.1 billion in 2018. Revenue growth is coming from all segments of the company, notably from acquisitions, electric power projects and a continued recovery in the natural gas industry. Quanta Services is benefiting from ongoing upgrades to an aging electrical grid, and has a project backlog totaling over $9 billion.
Quanta reported third-quarter EPS of 55 cents last week, on target with Wall Street’s expectations. Revenue was $2.04 billion vs. the consensus estimate of $2.08 billion. The company is pleased with strength in both business segments, citing “numerous large pipeline projects that moved into construction during the third quarter,” and expects strong second-half 2016 results.
Full-year EPS are expected to grow aggressively at 40.5% and 24.4% in 2016 and 2017, The respective P/Es are 18.0 and 14.5. The stock is undervalued, with its 2017 P/E at the bottom of its long-term P/E range, which often reaches 30-40 and higher. PWR does not pay a dividend. The long-term debt-to-capitalization ratio is very low at 13%. The stock appears capable of breaking past short-term upside price resistance at 29. Strong Buy.
Royal Caribbean Cruises (RCL) is a global cruise vacation company. The company recently reported that cruise bookings for 2017 are up in terms of both price and volume. Full-year EPS are expected to grow 25.7% and 12.5% in 2016 and 2017 (December year-end), with corresponding P/Es of 12.4 and 11.0. The company hiked the quarterly dividend by 28% in October, from 37.5 cents to 48 cents per share. The current yield is 2.5%. Royal Caribbean’s 2015 long-term debt ratio was a little higher than I would prefer, at 46%.
RCL is emerging from a four-month trading range. We could see the stock reach 83 this fall. Cruise vacation stocks have been out of favor all year. Growth stock investors, bargain hunters and those who love growing dividends should buy this undervalued growth stock now. Buy.
Vulcan Materials (VMC) is the nation’s largest producer of construction aggregates. Vulcan reported third-quarter EPS of $1.01 last week, when the market expected $1.13. Results were impacted by extremely wet weather and slow project starts. The company forecasts growth in volume, pricing and margins in 2017. Full-year projections will likely come down a bit, yet the stock will remain quite undervalued. Full-year EPS are expected to grow 42.5% and 38.1% in 2016 and 2017, with corresponding P/Es of 37.4 and 27.1 (December year-end). VMC has a nominal 0.7% dividend yield.
VMC peaked in July at 127, pulled back to 107, and is now actively climbing. There’s a little upside resistance at 121. This undervalued stock is a good choice for aggressive growth investors. Strong Buy.
WellCare Health Plans (WCG) is a growth stock in the managed healthcare sector. The company aims to double its revenues between 2017 and 2021, through both organic growth and acquisitions. WellCare recently announced the acquisition of Care1st Health Plan Arizona for $157.5 million cash-on-hand. The deal is expected to close in the first quarter of 2017, and add to EPS during its first year.
WellCare reported adjusted third-quarter EPS of $1.63 last week, when the market was expecting $1.11. Full-year EPS are now expected to grow 55.2% and 15.2% in 2016 and 2017 (December year-end). The corresponding P/Es are 22.6 and 19.6. The stock is fairly valued.
Wall Street analysts list WellCare as Cigna’s (CI) most likely takeover target, if the Anthem-Cigna merger fails. Cigna’s management affirmed that if the merger with Anthem fails, Cigna will seek to deploy cash—including the $1.85 billion merger break-up fee—into strategic M&A opportunities. If Cigna makes a bid for WellCare, it will likely happen this coming winter, and will likely push WCG’s share price significantly higher.
The U.S. Department of Justice (DOJ) sued to block the Anthem-Cigna merger in July, due to antitrust issues. The trial begins November 21 and wraps up by December 30. A decision is expected in January. However, Anthem reiterated on August 12 the likelihood that Cigna will not agree to wait for a decision past December 31. (The two companies have a hostile relationship.) On September 21, the DOJ filed court documents that intend to force the insurers to reveal alleged breaches of the merger agreement.
WCG is actively reaching new highs. The stock is a Hold due to valuation, but not a Sell, because the chart remains bullish, and the possibility of a buyout offer looms in the new year. Hold.
Updates on Growth & Income Portfolio Stocks
Applied Materials (AMAT) is a worldwide leader in the manufacture of capital equipment in the semiconductor industry. The company will report fourth-quarter and full-year results on the afternoon of November 17 (October year-end). EPS are expected to grow 47.1% and 27.4% in 2016 and 2017, with subsequent EPS growth rates averaging 13% in 2018 and 2019. The corresponding P/Es are 16.1 and 12.7. AMAT is a volatile, large-cap aggressive growth stock, but it’s also a seriously undervalued stock with an attractive dividend yield of 1.4%, and a low debt ratio.
The stock is trading between 27.50 and 31. A breakout past 31 would be quite bullish, with no discernible upside price resistance. All growth stock investors should own AMAT. Strong Buy.
Big Lots (BIG) is an American discount retailer, with over 1,400 stores in 47 states. BIG is expected to grow EPS by 18.9% and 11.0% in 2017 and 2018 (January year-end). The corresponding P/Es are 12.4 and 11.1. BIG is an undervalued mid-cap growth & income stock with a strong balance sheet. The dividend yield is 1.9%.
BIG rose to new highs in August, then had a huge pullback with most retail stocks. Barring bad news, the stock could return to 56 in the coming months. Traders and growth & income investors should buy now. Buy.
Cardinal Health (CAH) is a pharmacy benefit manager (PBM), and one of the largest U.S. distributors of healthcare products and services. The company is actively expanding internationally. Cardinal Health was featured in the November issue of Cabot Undervalued Stocks Advisor.
Shares of PBMs fell dramatically on October 28 when McKesson (MCK) reported an unexpectedly poor second quarter (March year-end), seriously lowering its full-year outlook. Pricing pressures coming from generic pharmaceuticals are currently impacting PBMs’ profit margins, with low name-brand pharmaceutical price inflation also contributing to results in the sector.
Cardinal’s stock fell in sympathy with MCK. Yet Cardinal proceeded to report a strong quarter, and much less of a forecasted earnings impact from the industry’s pricing pressures. The company is expected to grow EPS by 4.2% and 10.6% in 2017 and 2018 (June year-end). The corresponding P/Es are 11.9 and 10.8, and the dividend yield is 2.6%. The stock is undervalued.
Cardinal is a healthy, growing and profitable company. The share price will eventually reflect the company’s high quality and success, but it will need to stabilize before it can sustain a rebound into the 80s. Hold.
Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. CCL was featured in the October 18 issue of Cabot Undervalued Stocks Advisor. EPS are expected to grow 24.4% and 11.6% in 2016 and 2017 (November year-end). The corresponding P/Es are 14.5 and 13.0, and the dividend yield is 2.9%. CCL is undervalued, and trading at the top of its recent range. We could see CCL promptly break past 49 and rise toward medium-term resistance at 54 in November. Strong Buy.
Federated Investors (FII) is a global investment management company. Analysts have been pushing Federated’s 2016 earnings estimates up all year. The expected EPS growth rate is now 50% higher than it was nine months ago, at 23.5%. Will this situation play out again in 2017? Analysts expect 2017 EPS to grow 4.5%. The dividend yield is 4.0%.
Federated declared its normal quarterly dividend of 25 cents per share; and also declared a special dividend of $1.00 per share—its fourth special dividend in eight years—essentially doubling the annual yield on the stock. (The ex-dividend date on the extra dividend has since passed.) Federated also announced a new authorization to repurchase up to four million shares, with 537,000 shares remaining in the prior authorization.
FII seems to be stabilizing after a price correction. Fortunately, the stock does not tend to linger at price support. There’s medium-term upside resistance at 33.50, where it traded in early 2015. Hold.
GameStop (GME) is a video game, collectibles and consumer electronics retailer, and a publisher of video games. Last week, GameStop pre-announced lower-than-expected third-quarter 2017 results due to ongoing weakness in sales of video games. Revenue from technology brands and collectibles continues to grow rapidly. CEO Paul Raines said, “We remain excited about the innovation coming into the video game category over the next twelve months, including virtual reality, the Sony PlayStation 4 Pro, the Nintendo Switch and Microsoft’s Scorpio.” Final third-quarter results are due on the afternoon of November 22 (January year-end).
The company’s product transition has been painful for shareholders, but has not harmed its finances. GameStop continues to achieve near-record EPS and record gross margins, to repurchase large amounts of stock, and pay investors a dividend that currently yields over 7%. To reiterate, the company is not having trouble with profit or cash flow—the problems that typically accompany falling stock prices. GME’s problem is, unfortunately, one of investor perception.
Last week, GameStop revised its full-year 2017 EPS forecast down to a range of $3.65 to $3.80, when Wall Street had expected $3.99 (January year-end). Prior year earnings had totaled $3.90 per share. This is the first time that investors have been faced with declining year-over-year earnings for GameStop. EPS are now expected to fall 3.3% in 2017, then rise 4.2% in fiscal 2018.
I encourage investors to hold GME because there’s no logical reason that the price-pendulum will not swing toward much higher numbers. In addition, I encourage dividend investors and those who love buying dirt-cheap bargains to buy GME now. Buy.
General Motors (GM) is an American auto manufacturer. The company is profiting from auto sales in the U.S. and China, expecting to break even in Europe this year, and losing money in South America and Asian markets (ex-China). EPS are expected to rise 19.7% in 2016, then fall 4.5% in 2017 (December year-end).
GM remains stuck in a trading range, with significant upside price resistance at 35. The stock’s long-term sideways trading range has become its own worst enemy. Many institutional fund managers will choose to sell GM, and reinvest into stocks with more promising price charts. Traders and growth investors should be prepared to sell at 35. Caveat: The 4.9% dividend yield is safe, so keep GM if the dividend is your primary investment goal. Hold.
Goldman Sachs Group (GS) is a global investment banker, serving consumer, institutional and government clients. As a result of Goldman’s strong third-quarter financial results, the 2016 consensus EPS estimates keep increasing, now reflecting 28.8% growth, followed by an expectation of 12.1% growth in 2017 (December year-end). The corresponding P/Es are 11.5 and 10.3, indicating that the stock is significantly undervalued. The dividend yield is 1.5%.
Goldman plans to increase both its dividend and its share repurchase authorization, but has not yet announced the timing or the dollar amounts. The announcements will likely occur in January or April 2017, in conjunction with normal quarterly dividend announcements. The next round of capital plan approvals, following the Fed’s annual banking stress tests, is due in June 2017.
The stock is actively rising toward medium-term resistance at about 190. Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. Block’s goal is to regain market share in 2017. Block announced a partnership with BofI Federal Bank in October, through which they will offer IRA accounts, and also offer up to $700 million in interest-free Refund Advance loans to Block’s customers in 2017. The refund loans will cost HRB due to loan origination fees, but will increase both sales volume and fee income from tax services.
EPS are expected to grow 9.4% and 7.5% in fiscal 2017 and 2018 (April year-end). The share price is low, the dividend is big at 4.0%, and the company continues to be the subject of takeover speculation. While HRB no longer meets all of my investment criteria, I still see significant upside potential. There’s upside price resistance at 24.50. Traders should be prepared to exit around 24.25. Everyone else should hold HRB for additional capital gains. Buy.
Kraft Heinz (KHC) is a global food and beverage producer of dozens of famous brand names, including Jell-O, Velveeta, Oscar Mayer, Maxwell House and many more. Kraft Foods Group (KRFT) merged with privately owned H.J. Heinz in July 2015. The merger was backed by a $10 billion investment by 3G Capital and Berkshire Hathaway.
Wall Street is anticipating additional acquisitions (possibly as early as first-half 2017), divestitures and/or share repurchases. Due to the company’s low debt ratio, Kraft Heinz has balance sheet flexibility for acquisitions costing up to $100 billion. International expansion is expected to bring billions more dollars in revenue in the next several years.
Kraft Heinz reported third-quarter EPS of 83 cents last week, when analysts were expecting 75 cents. The outperformance was attributed to margin expansion and tax benefits. Food price deflation had a small impact on revenue. Year-to-date, the company achieved $1.3 billion of its 2016 target of $1.5 billion in post-merger cost savings; with final 2016 numbers heading toward $2 billion. Full year EPS are expected to grow 48.9% and 19.9% in 2016 and 2017 (December year-end), with corresponding P/Es of 26.4 and 22.0. The dividend yield is 2.7%.
The recent drop in the broader stock market pulled KHC down to the bottom of its four-month trading range, in what appears to be a bullish shakeout pattern on the price chart. I expect a rapid rebound toward 90, given a neutral-to-bullish S&P. Kraft Heinz’ huge earnings growth rates are relatively unheard of within the food stock sector, and will continue to draw the attention of professional investors. Take advantage of this anomaly, and buy KHC. KHC could appeal to investors who focus on growth, aggressive growth, growth & income, value and/or momentum. Buy.
Whirlpool (WHR) is the world’s largest appliance manufacturer. The company markets its products under many familiar brand names, including Whirlpool, Maytag, KitchenAid and Jenn-Air. Whirlpool reported third-quarter 2016 earnings per share (EPS) of $3.66 vs. the consensus estimate of $3.86. The company repurchased $100 million of stock during the quarter. Total revenue and earnings growth remain on strong upward trajectories, but weak sales in the U.K. were compounded by weakness in the British pound, causing the company to miss Wall Street’s quarterly earnings estimate.
Wall Street’s consensus EPS estimates reflect growth of 14.2% and 14.5% in 2016 and 2017 (December year-end), with corresponding P/Es of 11.0 and 9.6. The dividend yield is 2.6%. WHR remains quite undervalued.
WHR has huge and very tradeable price swings. The stock is climbing out of its third major price correction this year. Growth investors, dividend investors and traders should buy WHR now. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Boise Cascade Company (BCC) is a leading U.S. wholesaler of wood products and building materials. The company reported adjusted third-quarter EPS of 41, when the market was expecting 56 cents. Revenue came in roughly on target at $1.07 billion, vs. the consensus estimate of $1.09 billion. Current analysts’ projections show the company’s earnings falling 17.3% in 2016, then rising 41.8% in 2017 (December year-end). The 2016 and 2017 P/Es are 16.9 and 11.9. BCC is extremely undervalued based on strong projected 2017 earnings growth.
The stock traded down near its 2016 lows on news of the quarterly earnings disappointment. BCC is a Hold until the share price is ready to show some strength. Hold.
BorgWarner (BWA) is a maker of engineered automotive systems and components for power train applications. The company reported third-quarter 2016 adjusted earnings per share (EPS) of 78 cents vs. the consensus estimate of 77 cents. Results include the November 2015 acquisition of Remy International, maker of electric and hybrid motors. The company projected full-year 2016 EPS in a range of $3.24 to $3.28, in line with the consensus estimate of $3.25. EPS are expected to grow 7.9% and 9.2% in 2016 and 2017. The stock is undervalued with a 2017 P/E of 9.9 and a 1.5% dividend yield.
The stock did not react to the earnings report, and continues to trade in a range between 33.50 and 36. There’s no additional major price resistance until BWA approaches 45. Buy.
FedEx (FDX) is an international package delivery company. The company paid $4.8 billion to acquire Europe’s TNT Express in May 2016. FedEx’s EPS are expected to grow 12.5% and 11.8% in 2017 and 2018 (May year-end). FDX is currently fairly valued. The stock is approaching medium-term upside price resistance in the 180 to 185 area. Hold.
Harman International Industries (HAR) is the premiere connected technologies company for automotive, consumer and enterprise markets; best known for its JBL and Harman Kardon audio systems. Harman reported first quarter 2017 results last week. Non-GAAP EPS were $1.87 vs. the consensus estimates of $1.53 and $1.54. Sales were $1.8 billion vs. the consensus estimate of $1.73 billion. All business segments experienced year-over-year revenue increases, with gross margins also rising. EPS are now expected to grow 11.9% and 6.6% in 2017 and 2018 (June year-end), with corresponding P/Es of 11.8 and 11.1. The dividend yield is 1.7%. The stock is undervalued based on 2017 earnings projections.
HAR is now rising toward 88, the top of its trading range, and could break out in the very near-term. Buy.
Johnson Controls (JCI) operates in the areas of energy management, security and fire protection systems, and auto batteries. The company will release its fiscal fourth-quarter results on the morning of November 8 (September year-end). Wall Street is expecting $1.06 fourth quarter EPS. Results will include its September 2 purchase of a 56% stake in Tyco International PLC (TYC). Johnson Controls was featured in the November issue of Cabot Undervalued Stocks Advisor.
The company spun off Adient (ADNT), its automotive seating and interiors business, on October 31, 2016. JCI shareholders received one share of ADNT for every ten shares of JCI that they owned. I will publish a link to Adient’s cost basis statement, once it becomes available.
It’s difficult for analysts to calculate future earnings when companies go through big M&A transactions. There’s frankly a lot of guesswork in the earnings estimates until the company has reported several quarters of post-merger or post-spinoff financial results. At this point, consensus earnings estimates show Johnson Controls earning $2.88 per share in fiscal 2017 (September year-end). The 2017 P/E is quite fair at 14.5. The dividend yield is 2.8%, based upon the previous quarterly dividend of 29 cents per share. I’m waiting to see if future dividends remain at the same level, or adjust due to the ADNT spin-off.
JCI has been trading between 39 and 44 for several months. I expect the stock to have a sustainable advance over the next couple of years, now that the M&A activity is finally behind it. Buy.
Legg Mason (LM) is a U.S.-based global investment management company, with $733 billion assets under management and over 2,900 employees. The company reported second-quarter 2017 earnings per share (EPS) of 63 cents vs. the consensus estimate of 58 cents. The company took a loss in fiscal 2016 (March year-end), and is expected to earn $2.27 per share in 2017, followed by 38.8% earnings growth in 2018. LM’s 2017 and 2018 PEs are 13.0 and 9.3. The current dividend yield is 3.1%.
Repeatedly this year, LM rose to 35, fell and rebounded, as it is doing now. Aggressive growth investors, dividend investors and value investors should consider owning this substantially undervalued mid-cap stock. Buy.
Robert Half International (RHI) is a staffing and consulting company. The company reported third-quarter 2016 earnings per share (EPS) of 71 cents, on target with the consensus estimate. Revenue came in at $1.34 billion vs. the consensus estimate of $1.36 billion. Robert Half offers investors slow earnings growth, a very strong balance sheet (no long-term debt) and a 2.3% dividend yield. Despite rising annual profits, the stock is now overvalued, due to a decline in the earnings outlook. RHI has been trading between 36.75 and 39. Hold.
Toll Brothers (TOL) is the leading U.S. luxury homebuilder. Yesterday, Toll Brothers announced the all-cash acquisition of Coleman Homes, a dominant homebuilder in the Boise, Idaho market. Toll Brothers’ CEO will be featured in a live webcast at the UBS Building and Building Products Annual CEO Conference on November 9 at 10 AM ET. Fiscal 2017 EPS are expected to grow aggressively at 24.5%, with a corresponding P/E of 9.0 (October year-end). TOL is a greatly undervalued, mid-cap growth stock. TOL pulled back with the entire homebuilding sector in recent months, and appears to have begun its rebound. Traders and growth investors should buy now. Buy.
Universal Electronics (UEIC) is a manufacturer and cutting-edge world leader of wireless remote control products, software and audio-video accessories for the smart home. Based in California, the company sells its products and services throughout the globe. Customers include retailers and a wide variety of technology companies including television service providers, OEMs, software companies and computer companies.
Product demand is being driven by technological innovations and improvements in consumer spending patterns. Demand is increasing in the areas of smart phones and tablets, and slowing in more saturated markets such as flat-screen TVs.
The company reported an earnings beat last week, but also reported current fourth-quarter delays in product shipments, as customers optimize hardware and software systems in preparation for Universal’s new products. The market overreacted, pushing the share price down as much as 23% intraday.
Stocks are not supposed to fall 23% in one day over temporary bad news. Yet the market has been shoving stocks up and down, by large amounts, since August. Therefore, I added UEIC to the Buy Low Opportunities Portfolio on November 4, so that subscribers can consider capitalizing on the next rebound in the share price.
Wall Street now expects Universal Electronics to grow EPS by 10.4% and 18.8% in 2016 and 2017 (December year-end). The 2017 P/E is 16.4, 15% below the EPS growth rate. UEIC rose to a P/E of 24 or 25 in each of the last three years.
UEIC does not pay a dividend. The long-term debt-to-capitalization ratio is quite low at 16.25%.
UEIC was featured in the Cabot Undervalued Stocks Advisor Growth Portfolio from March 1 through June 15 of this year, during which time the stock rose 29%. The share price and 2017 P/E are now lower, while the 2017 EPS growth rate is higher.
UEIC has strong price support at 57.50. It will take a while for the stock to stabilize and recover. Your six-month best-case scenario—other than a corporate buyout—is that the stock will rebound to its recent highs around 77. Coincidentally, analysts’ median price target is 77. Strong Buy.
Vertex Pharmaceuticals (VRTX) is a biotech company that develops breakthrough drugs and carries them through to the manufacturing process. Vertex is a clear leader in the treatment of cystic fibrosis (CF), a disabling and deadly genetic disease affecting the lungs. The company has lengthy patent protection on the only two disease-modifying drugs within that rare-disease niche. Vertex’s research on a new “triplet” pill for cystic fibrosis is moving into Phase II studies. The treatment combines Vertex’ currently marketed drug, ivacaftor (Kalydeco), with two additional drugs. Vertex will present at the Credit Suisse Healthcare Conference on November 8.
VRTX is a vastly undervalued, aggressive growth stock. Despite only one barely-profitable year between 2006 and 2015, Vertex is expected to earn $0.79 per share in 2016 and $2.38 in 2017 (December year-end)—reflecting 201% earnings growth in 2017 with a 33.2 P/E. The company’s projected one-, three- and five-year EPS and revenue growth rates are all significantly higher than those of its U.S. biotech peer group (ALXN, AMGN, BIIB, CELG, GILD, INCY and REGN). VRTX was my top stock pick for the coming year at the 2016 Cabot Investors Conference in August 2016.
VRTX had a big pullback after its summertime run-up, and has begun its rebound. Aggressive growth investors should buy now. Buy.
