In the wake of surprisingly successful second-quarter results among large-cap banks, all eyes are turning to regulatory reform as the next catalyst to rising earnings estimates among bank stocks. The ABA Banking Journal gave a detailed explanation of what to expect in this article: Treasury Department Issues Sweeping Regulatory Reform Recommendations. Think of the reforms as you would a family fine-tuning its budget to remove waste, thereby keeping more money for savings and more efficiently allocating the family’s spending and charitable giving.
It would be fairly easy for the average intelligent adult who is comfortable with numbers to examine government functions and eliminate duplicate or illogical procedures, thereby saving the targeted industries money and encouraging economic growth. That’s exactly what’s going on in the banking industry right now. (Some of us had long wondered whether we’d see such a process take place within any government agency during our lifetimes!)
In addition to increases in interest rates benefiting banks’ net interest income, the streamlining of regulatory procedures should lead to rising earnings estimates at all sizes of American banking institutions. Bank of America (BAC) and Goldman Sachs (GS) continue to present capital gain opportunities.
Looking for more great stock ideas? Here’s my July 21 feature article from Wall Street’s Best Daily: A New “Buy Low Opportunity” – Voya Financial (VOYA).
Calendar of upcoming quarterly earnings reports:
July 25 am: PulteGroup (PHM)
July 25 pm: Ameriprise Financial (AMP) and Chipotle Mexican Grill (CMG)
July 26 pm: Legg Mason (LM), Vertex Pharmaceuticals (VRTX) and XL Group (XL)
July 27 am: Boise Cascade (BCC), Invesco (IVZ), Johnson Controls (JCI) and Total (TOT)
July 27 pm: Mattel (MAT)
July 28 am: ExxonMobil (XOM)
August 1 am: Archer Daniels Midland (ADM) and Martin Marietta Materials (MLM)
August 2 am: Vulcan Materials (VMC)
August 2 pm: American International Group (AIG) and Cavium (CAVM)
August 3 pm: TiVo (TIVO) and Universal Electronics (UEIC)
Send questions and comments to crista@cabotwealth.com.
Portfolio Notes
Make sure to review the Special Bulletins from July 18, 19 and 20 in which I mentioned news, rating changes and/or price action on Ameriprise Financial (AMP), Bank of America (BAC), Blackstone Group (BX), Chipotle Mexican Grill (CMG), Dollar Tree (DLTR), Goldman Sachs (GS), KLX (KLXI), Vertex Pharmaceuticals (VRTX) and XL Group (XL).
Buy-Rated Stocks Most Likely to Rise More than 5% Near-Term:
Ameriprise Financial (AMP)
Commercial Metals Company (CMC)
Dollar Tree (DLTR)
Quanta Services (PWR)
Schnitzer Steel (SCHN)
Universal Electronics (UEIC)
Today’s Portfolio Changes:
Goldman Sachs (GS) moves from Hold to Buy.
Last Week’s Portfolio Changes:
Blackstone Group (BX) moved from Buy to Hold.
Legg Mason (LM) moved from Strong Buy to Hold.
Updates on Growth Portfolio Stocks
American International Group (AIG – yield 2.0%) is a diversified insurance company. AIG will report second quarter results on the afternoon of August 2. The consensus earnings per share estimate is $1.20, with a range of $1.10 to $1.33. The stock meets all of my growth and value criteria. AIG appears on the verge of rising toward short-term price resistance at 67, where it will still be undervalued. Strong Buy.
Bank of America (BAC – yield 2.0%) report strong second-quarter results on July 18. (See the July 18 Special Bulletin.) The new $0.12 quarterly payout per share that investors will receive in late September has not yet been officially declared, and therefore it’s not reflected when you pull up stock quotes on brokerage firm websites or nasdaq.com. The official declaration will take place near August 1. BAC was featured in the July issue of Cabot Undervalued Stocks Advisor.
BAC is an undervalued large-cap growth stock. BAC has short-term upside price resistance at 25.5, which it could easily surpass this year. Strong Buy.
Cavium (CAVM) is a very undervalued, aggressive growth semiconductor stock. Cavium will report second-quarter results on the afternoon of August 2. The consensus earnings per share estimate is $0.65, with a range of 64 to 66 cents. Continued strength in the Nasdaq could push CAVM back to 74 in August. Risk-tolerant investors should buy CAVM now. Buy.
Johnson Controls (JCI – yield 2.2%) 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 company will report third quarter results (September year-end) on the morning of July 27. The consensus earnings per share estimate is $0.71, with a range of 68 to 73 cents. JCI is an undervalued growth stock. JCI could reach price resistance at 45 in July, and could easily continue climbing a short time thereafter. Strong Buy.
KLX Inc. (KLXI) is a manufacturer of aerospace fasteners, consumables and logistics. KLXI is an undervalued aggressive growth stock. KLXI rose to a new high near 53 in early June, fell about 10%, and quickly rebounded. KLXI could begin reaching new highs this month. Buy KLXI now. Strong Buy.
Martin Marietta Materials (MLM – yield 0.7%) is an aggressive growth stock that’s quite undervalued based on 2018 numbers. Martin Marietta will report second-quarter results on the morning of August 1. The consensus earnings per share estimate is $2.40, within a range of $2.17 to $2.53. The stock could surpass short-term price resistance at 240 this year. Strong Buy.
PulteGroup (PHM – yield 1.5%) is a single-family U.S. homebuilder. Pulte will report second-quarter results on the morning of July 25. The consensus earnings per share estimate is $0.41, within a range of 17 to 51 cents. PHM is a very undervalued growth stock. The stock broke out of a very long-term trading range this month, but hasn’t advanced yet. There’s lots of upside. Buy PHM now. Strong Buy.
Quanta Services (PWR) completed the acquisition of energy services companies Stronghold, Ltd. and Stronghold Specialty, Ltd. on July 21. The acquisition will add approximately $500 million in revenue to Quanta’s oil & gas infrastructure services business. Last week, UBS raised PWR from neutral to buy. The corporate outlook remains fantastic, with aggressive earnings growth and a low P/E. PWR is ratcheting upward toward short-term price resistance at about 38.5, which the stock could conceivably surpass in 2017. Last week’s pullback presents an excellent buying opportunity. Buy PWR now. Strong Buy.
Vulcan Materials (VMC – yield 0.8%) is an aggressively growing supplier of construction aggregates, asphalt and concrete. The company will report second quarter results on the morning of August 2. The consensus earnings per share estimate is $1.23, within a range of $1.15 to $1.36. Stocks within Vulcan’s peer group traded sideways all year. VMC could retrace 135 this summer, then possibly head higher. Strong Buy.
XL Group (XL – yield 1.9%) is an aggressively growing insurer and reinsurer. The company will report second quarter results on the afternoon of July 26. XL is actively rising, and remains extremely undervalued. A brief pullback could happen at any time. Buy.
Updates on Growth & Income Portfolio Stocks
Ameriprise Financial (AMP – yield 2.4%) offers insurance products and asset management to retail and institutional clients. AMP is an undervalued growth & income stock. The company will report second-quarter results on the afternoon of July 25. The price chart is extremely bullish. AMP could rise into the 160s and still not be overvalued. Buy AMP today. Buy.
BP plc (BP – yield 6.9%) It was reported last week that BP might issue a spin-off of a master limited partnership (MLP) consisting of its extensive US. Midwest and Gulf Coast pipeline assets, perhaps in the coming winter. The spinoff seems like a wise idea, but it will be many months before investors are presented with decisions to be made on that topic. BP is an undervalued, aggressive growth integrated oil company. Shares of integrated oil companies have recently bounced at the bottoms of their trading ranges. I encourage growth investors and dividend investors to buy BP. There’s short-term upside price resistance at 37, and a maximum price target of about 44 during the next year. Strong Buy.
Blackstone Group LP (BX – variable large payouts) is an innovative and undervalued alternative asset manager. See the July 20 Special Bulletin for Blackstone’s second-quarter results. The next quarterly distribution will be $0.54 per share, at an annualized yield of 6.2%. The distribution is payable on August 7, with an ex-dividend date of August 1. BX is heading toward long-term price resistance at 38, at which time I will be removing the stock from the portfolio. Dividend investors and long-term growth investors should feel comfortable keeping BX. Hold.
Commercial Metals Company (CMC – yield 2.4%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. With regard to the Commerce Department’s Section 232 investigation, Reuters reported, “In a statement on Friday [July 21], the Commerce Department said exporters from Taiwan had sold rebar in the United States at 3.50 percent to 32.01 percent less than fair value.” Preliminary tariffs on the offending exporters’ products will be finalized in August.
CMC was featured in the July issue of Cabot Undervalued Stocks Advisor. The stock is ratcheting higher. In the coming months, I expect CMC to retrace its December 2016 high around 24, at which time it will still be significantly undervalued. Buy CMC now. Strong Buy
ExxonMobil (XOM – yield 3.8%) is the largest U.S. integrated oil company. XOM is an undervalued growth stock. The company will report second-quarter results on the morning of July 28. The consensus earnings per share estimate is $0.85, with a range of $0.74 to $1.02. Shares of integrated oil companies have recently bounced at the bottoms of their trading ranges. I encourage growth investors and dividend investors to buy XOM in anticipation of a maximum run-up to 91 this year, as it eventually retraces highs from July and December 2016. Strong Buy.
GameStop (GME – yield 7.3%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. The company is transitioning through a multi-year process of diversifying its product areas away from a dependence upon physical game revenue. The stock is volatile, currently trading between 20.5 and 22, and not yet signaling an upturn. Hold.
Invesco (IVZ – yield 3.2%) is an undervalued growth & income stock in the asset management industry. The company will report second-quarter results on the morning of July 27. The consensus earnings per share estimate is $0.61, with a range of 59 to 64 cents. Full-year 2017 consensus earnings estimates continue to slowly rise each week, since early May. IVZ is approaching upside price resistance at 38-39 where it last traded in March 2015. I will very likely issue a Sell recommendation when IVZ surpasses 38, to avoid a prolonged sideways trading period. Hold.
TiVo (TIVO – yield 3.7%) is a digital entertainment company that provides technology licensing and related services, which enable people to access online and televised entertainment. The company will report second-quarter results on the afternoon of August 3. The consensus earnings per share estimate is $0.26, with a range of 16 to 30 cents. TIVO is an extremely undervalued small-cap stock. TIVO is rising toward short-term price resistance at 21.
The share price fell dramatically three months ago, upon the release of a strong first-quarter earnings beat, apparently because TiVo has agreed with the Securities Exchange Commission not to report non-GAAP EPS in its earnings press releases. News agencies that covered the quarterly results were unable to calculate non-GAAP numbers, and therefore they reported at least five different inaccurate EPS numbers, four of which were below the real number. I’m not willing to potentially watch that situation unfold each quarter, and I therefore intend to sell TIVO prior to the second-quarter earnings release. I still love the stock’s growth prospects, undervaluation and its prospects as a buyout target, but I have a responsibility toward investors not to recommend stocks that present extra risks. Hold.
Updates on Buy Low Opportunities Portfolio Stocks
Archer Daniels Midland (ADM – yield 3.1%) is fairly valued, with double-digit earnings growth expected in 2017 and 2018. The company will report second-quarter results on the morning of August 1. The consensus earnings per share estimate is $0.53, with a range of 48 to 62 cents. ADM has traded between 40 and 43 since early May. The stock could realistically reach 47 again later this year. Hold.
Boise Cascade (BCC) is a wood products manufacturer and building materials distributor. Boise Cascade will report second-quarter results on the morning of July 27. The consensus earnings per share estimate is $0.60, with a range of 52 to 65 cents. This aggressive growth stock remains significantly undervalued. BCC could surpass upside price resistance at 31 this summer, then reach the upper 30s later this year. Strong Buy.
Chipotle Mexican Grill (CMG) is an undervalued aggressive growth stock. The company landed in the news again last week when customers at a Virginia location fell ill from norovirus. (See the July 19 Special Bulletin from.) Chipotle will report second-quarter results on the afternoon of July 25. The consensus earnings per share estimate is $2.20, with a range of 1.89 to 2.62.
At this point, the outlook for the share price is cloudy. A problem in one Chipotle restaurant location should not affect earnings; but the news could further affect the share price or sales across the country if this incident receives prolonged media attention. Hold.
Dollar Tree (DLTR) was featured in the July issue of Cabot Undervalued Stocks Advisor. DLTR is experiencing 18.5% current-year earnings growth, higher than all of its discount retail and food company peers. DLTR completed a double-bottom chart pattern in mid-July, a harbinger of immediate upside price action. Buy DLTR today in anticipation of a quick rebound to 75, followed by an increase up to the 80s later this year. Buy.
Goldman Sachs Group (GS – yield 1.3%) reported second-quarter results that were higher than all analysts’ estimates. (See the July 18 Special Bulletin.) Full-year consensus 2017 EPS estimates have since risen from 18.22 to 18.28. GS is an undervalued growth & income stock.
Most bank stocks had pullbacks in conjunction with their recent stellar first-quarter earnings reports. Take advantage of these minor pullbacks that are presenting lucrative short-term capital gain opportunities. I had moved GS from Buy to Hold on July 13, the day it pushed above 230, because there was less than 10% upside to my price target in the low 250s. Now that the stock has pulled back to 220, I’m moving GS from Hold to Buy. Buy.
Legg Mason (LM – yield 2.8%) will report first-quarter results (March year-end) on the afternoon of July 26. Actor Steve Guttenberg discussed his ownership of LM shares in this CNBC video last week. LM is a very undervalued asset management and financial services company with aggressive earnings growth. I plan to sell LM as it approaches long-term upside price resistance at 44, which could easily happen this summer. Hold.
Mattel (MAT – yield 2.8%) is a global toy manufacturer with a new CEO who is redirecting the company’s product and marketing focus. The company is joining with professional wrestling organization WWE to launch a new product line of female Superstar dolls this summer. Mattel will announce second-quarter results on the afternoon of July 27. The stock is undervalued based on strong expected 2018 earnings growth (December year-end). The share price recently bounced at a support level from 2015, and could easily reach 23 in August. The strong 2018 earnings growth outlook should push MAT upward in the coming months. Hold.
Schnitzer Steel Industries (SCHN – yield 2.8%) is one of the largest U.S. scrap metal recycling companies. Full-year 2017 earnings estimates have risen steadily for four weeks. SCHN is an undervalued aggressive growth stock. SCHN rose to upside price resistance at 27 last week, and could easily continue to 29 where it traded during the fourth-quarter of 2016. SCHN is a small-cap stock in a volatile market sector, with relatively little analyst coverage. I’m inclined to take the money and run at 29. Buy.
Tesoro (TSO – yield 2.3%) will change its name and stock symbol on August 1, to Andeavor (ANDV). Last week, Tesoro reached a definitive agreement with Petróleos Mexicanos to supply transportation fuels in Mexico. In addition, Moody’s Investors Service upgraded Tesoro’s senior unsecured debt to a Baa3 rating, reflecting investment grade quality.
Due to the increase in the share price combined with the decline in 2017 EPS estimates, TSO is slightly overvalued based on 2017 numbers. However, the stock remains quite undervalued based on expectations for aggressive earnings growth in 2018. TSO is resting after a huge run-up from its April lows. There’s upside price resistance at 102 and again at 115, which represents long-term resistance from November 2015. Strong Buy.
Total SA (TOT – yield varies, approx. 4.5%) is a French integrated oil and gas company, and a greatly undervalued growth & income stock. On July 12, Goldman Sachs analysts named TOT their “preferred stock in the sector as it offers the most attractive combination of cash flow generation, high growth and high return on new investment opportunities on the back of ongoing cost discipline and better execution.”
Total will report second-quarter results on the morning of July 27. Earnings estimates for integrated oil companies have been falling along with the drop in the price of all, yet the earnings outlook for most companies, including Total, remains very attractive. Shares of integrated oil companies have recently bounced at the bottoms of their trading ranges. This is a great time to buy TOT. My plan is to keep TOT in the portfolio until it reaches three-year price resistance in the low 60s. Strong Buy.
Universal Electronics (UEIC) will announce second-quarter results on the afternoon of August 3. This growth stock is overvalued based on 2017 numbers, but undervalued based on 2018 numbers. The stock began reaching above its recent trading range on July 7, but hasn’t really taken off yet, so no one’s missed the pending run-up. There’s some price resistance at 74, and again at 78, where I plan to sell. Buy UEIC now. Buy.
Vertex Pharmaceuticals (VRTX) is an undervalued, aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). Vertex will announce second-quarter results on the afternoon of July 26. The consensus earnings per share estimate is $0.35, with a range of 22 to 41 cents.
Last week, Vertex announced optimal results from Phase I and Phase II trials of three triple-combo drug regimens, and the stock soared to new all-time highs. (See the July 20 Special Bulletin.) Read more in this Bloomberg article, which also analyzes the possibility of buyout offers for Vertex.
The stock rose about 26% last week. Since rapid run-ups are often followed by pullbacks, it would not be unusual for VRTX to fall to 135 and rest there, followed by another run toward 170. If you don’t want to witness that scenario, you should consider selling or using a stop-loss order. I’m going to keep the Hold recommendation on VRTX for the time being. If it drops down to 140, I’ll probably recommend new purchases. Hold.
