This might be your last post-election commentary from a Cabot analyst, because all the other analysts published their weekly updates after the election, while mine was published on Election Day. So here goes:
I was not surprised that Donald Trump won the election. As a trade lobbyist, I’m closely involved with voters and political activists from all points in the political spectrum, because they’re almost unanimously upset about the effects of past trade agreements on the U.S. economy. In speaking with them, I was well aware of who they were planning to vote for, and the variety of their motivations and concerns. I’m not saying that the Democrats and Socialists that I speak with were planning to vote for Mr. Trump, but I knew enough about the bigger picture to surmise that he would win. (It certainly helps that I don’t watch TV, so I was not given a false impression of where voters stood this year.) Enough said.
For you, the investor, I’m happy for your recent stock performance. For you, the voter, I wish you blessings. I understand the level of devastation that some of you feel because I have felt the same level of devastation in the past. I wish you well, and you’re welcome to email me to celebrate, commiserate, or discuss various political issues and how they might affect the stock market.
Please let me say this one more time: financial stocks, as a group, are undervalued, with strong expected earnings growth, bullish price charts and prospects of upward earnings revisions as interest rates rise. (The market continues to expect a Fed rate hike in December.) Everybody should own at least one financial stock; and larger portfolios should own at least one bank stock (look at GS or ZION) and one insurance company stock (look at AIG). Be careful on the timing of your purchases, because many good financial stocks had big run-ups last week. Try to buy on pullbacks.
I will probably add one or two energy stocks to the Cabot Undervalued Stocks Advisor portfolios this month—stocks that meet all of my investing criteria. I’m just waiting for price pullbacks, and then I’ll send out a Special Bulletin. So if you’ve been searching for an attractive energy stock, it’s coming!
Congratulations to my fellow Cabot analyst, Roy Ward, on yesterday’s buyout offer of Harman International Industries (HAR). HAR was Roy’s top stock pick for the coming year at the Cabot Investors Conference in August 2016. Great job, Roy!
Stocks That Look Great at Today’s Prices
• Applied Materials (AMAT)
• Dollar Tree (DLTR)
Today’s Portfolio Changes:
• BigLots (BIG) moves to a Hold.
• D.R. Horton (DHI) increased its dividend.
Portfolio Changes in Last Week’s Special Bulletins:
• BorgWarner (BWA) increased its dividend on November 9.
• Carnival (CCL) moved to a Buy on November 14.
• E*Trade (ETFC) was Sold from the Growth Portfolio on November 10.
• FedEx (FDX) was Sold from the Buy Low Opportunities Portfolio on November 8.
• Harman (HAR) was Sold from the Buy Low Opportunities Portfolio on November 14.
• Johnson Controls (JCI) moved to a Strong Buy on November 14. JCI also moved from the Buy Low Opportunities Portfolio to the Growth & Income Portfolio.
• Legg Mason (LM) moved to a Strong Buy on November 14.
• Robert Half (RHI) was Sold from the Buy Low Opportunities Portfolio on November 10.
• Universal Electronics (UEIC) moved to a Buy on November 14.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a Strong Buy on fundamentals. Wait for the share price to stabilize from the current pullback before jumping in. Strong Buy.
Amazon.com (AMZN) – Amazon’s earnings estimates change weekly. Full-year EPS are now expected to grow 279% and 89.7% in 2016 and 2017 (December year-end). The corresponding P/Es are 152 and 80.1. The stock remains undervalued. AMZN is a Strong Buy on fundamentals. Wait for the share price to stabilize from the current pullback before jumping in. Strong Buy.
American International Group (AIG – yield 2.0%) will host an Investor Day on November 18. Investors can listen to the live webcast. Full-year EPS are now expected to grow aggressively at 72.1% and 44.0% in 2016 and 2017 (December year-end), with corresponding P/Es of 16.8 and 11.7, making the stock extremely undervalued. AIG is a Strong Buy on fundamentals. In recent days, AIG launched up toward medium-term price resistance at $64-$65. At least one brief pullback is likely, so try to buy on dips below 60. Strong Buy.
D.R. Horton (DHI – yield 1.4%) reported fiscal fourth quarter and full-year results on November 8 (September year-end), reflecting increases in revenue, pre-tax income, pre-tax profit margin, net income, book value, homes closed and order backlog. Fourth quarter EPS were 75 cents, when analysts were expecting 77 cents, with higher-than-expected tax rates. Horton finished fiscal year 2016 with 18.5% EPS growth. Looking forward to fiscal 2017 and 2018, EPS are expected to grow 13.5% and 10.0%, with corresponding P/Es of 10.2 and 9.3. The company raised the dividend by 25% from 8 cents to 10 cents per share. The full-year debt-to-cap ratio remained the same year-over-year at 29%.
The share price has been weak, partly due to the slowing earnings growth forecast, and partly due to election-related uncertainty in the housing market. One additional concern, expressed to me by a homebuilding friend, is that any economic boom accompanying Trump policies will put additional pressure on the already-scarce selection of workers in the homebuilding sector. DHI is a Buy based on fundamentals. If you’re timing a purchase, wait for the share price to stabilize before taking action. Buy.
Dollar Tree (DLTR) – DLTR is a slightly undervalued aggressive growth stock with high debt levels. The discount retail stock sector fell for several months then turned upward last week. A rebound to its August highs could give new investors a 24% capital gain. Buy DLTR now. Buy.
Quanta Services (PWR) – Analysts have increased 2017 earnings expectations. Full-year EPS are now expected to grow 38.7% and 28.6% in 2016 and 2017. The respective P/Es are 20.6 and 16.0. Last week I wrote, “The stock appears capable of breaking past short-term upside price resistance at 29.” PWR promptly launched upward, as infrastructure stocks got a post-election boost from prospects of a “Trump economy.” There’s significant upside resistance at 37, at which price PWR will still be undervalued. Strong Buy.
Royal Caribbean Cruises (RCL – yield 2.3%) emerged from a four-month trading range last week, and already rose to upside resistance around 83. It’s somewhat of a wild card on whether RCL quickly blows past 83 or temporarily pulls back to 77. The stock remains undervalued. Buy.
Vulcan Materials (VMC – yield 0.6%) – Analysts repeatedly revised Vulcan’s EPS outlook since July, with 2016 growth rates receding and 2017 growth rates rising. Full-year EPS are now expected to grow 37.9% and 42.4% in 2016 and 2017, with corresponding P/Es of 44.7 and 31.4 (December year-end). VMC is a Strong Buy on fundamentals, but is overextended after last week’s run-up to new all-time highs. Try to buy on pullbacks. Strong Buy.
WellCare Health Plans (WCG) will present at the Stifel 2016 Healthcare Conference on November 15. Full-year EPS are now expected to grow 57.8% and 14.0% in 2016 and 2017 (December year-end). The corresponding P/Es are 23.3 and 20.5. Those numbers have shifted quite a bit in the last three weeks. The stock is now overvalued based on 2017 EPS. Cautious investors should use stop-loss orders or sell. If the Anthem-Cigna merger fails to win regulatory approval by year-end, there’s a decent chance that Cigna will make a buyout offer to WellCare. WCG rose to new highs in November, fell $10 then promptly recovered. Aggressive growth investors should hold WCG due to the potential buyout. Hold.
Updates on Growth & Income Portfolio Stocks
Applied Materials (AMAT – yield 1.4%) is expected to report fourth quarter EPS of 65 cents on the afternoon of November 17 (October year-end). EPS are expected to grow 47.1% and 26.9% in 2016 and 2017. The corresponding P/Es are 16.6 and 13.1. The stock has traded sideways for three months, between 27.50 and 31. A bullish earnings report could launch AMAT past 31 partly because it’s a tech stock, and partly because the market has exhibited enhanced volatility since August. All growth stock investors should own AMAT. Buy AMAT now. Strong Buy.
Big Lots (BIG – yield 1.7%) – Last week I said, “Barring bad news, the stock could return to 56 in the coming months. Traders and growth & income investors should buy now.” Since then, BIG rose about 15%, and might surprise us by promptly reaching 56. The stock is now fairly valued based on its 2018 EPS outlook (January year-end). I’m changing my recommendation to Hold. Hold.
Cardinal Health (CAH – yield 2.5%) – CAH had a 10% post-election run-up and appears capable of continuing to rise. The stock is now fairly valued. Hold.
Carnival (CCL – yield 2.8%) – See my November 14 Special Bulletin. Buy.
Federated Investors (FII – yield 3.5%) – Financial stocks rose last week, largely spurred on by more serious prospects of rising interest rates. I recently mentioned that FII “does not tend to linger at price support.” Sure enough, the stock declined after August, stabilized for just two weeks, then promptly rose last week. There’s medium-term upside resistance at 33.50, where it traded in early 2015. Hold.
GameStop (GME – yield 6.6%) – The stock is rebounding from a recent drop after a downward earnings revision. Growth & income investors should buy now to lock in a huge dividend yield while awaiting the share price recovery. Buy.
General Motors (GM – yield 4.5%) – GM will probably reach 35 this week, at which time I will sell, due to lack of 2017 earnings growth and significant upside price resistance. Caveat: The 4.5% dividend yield is safe, so keep GM if the dividend is your primary investment goal. Hold.
Goldman Sachs Group (GS – yield 1.3%) – A Trump administration is expected to be a boon for financial stocks. Goldman would benefit from rising net interest margin (which typically accompanies the rising interest rates that correlate with economic expansion) and lower tax rates (a hallmark of the Trump campaign). In addition, the potential decrease in the Fed’s minimum capital requirements can free up cash to grow Goldman’s loan portfolio, repurchase stock and increase dividends. Finally, a Barron’s article citing Goldman’s exemplary technology capabilities capped off a week of good news for Goldman, driving the stock price up $22 (12.4%) for the week. Expect analysts’ consensus EPS estimates for Goldman to change frequently in the coming year. Wall Street now expects EPS to grow 28.0% and 13.6% in 2016 and 2017 (December year-end). The corresponding P/Es are 13.1 and 11.5.
During last week’s exuberant stock market, GS shot up to 205. In the short-term, the stock could rise as high as 215, where it traded in June 2015, or fall as low as 175. GS is a Strong Buy on fundamentals. Patient investors will probably be able to buy on a pullback below 190. Strong Buy.
H&R Block (HRB – yield 3.8%) – HRB is rising toward upside price resistance at 24.50. Traders should be prepared to exit. Everyone else should hold HRB for additional capital gains. Growth & income investors can continue to buy HRB. Buy.
Johnson Controls (JCI – yield 1.9%) – See my November 14 Special Bulletin. Strong Buy.
Kraft Heinz (KHC – yield 3.0%) shares fell last week after a Brazilian blog reported that buyout firm 3G Capital Management is raising $8 billion to $10 billion in order to acquire a global consumer goods company. 3G Capital owns a 24% stake in KHC, through which they plan to do the acquisition. Potential buyout targets include Mondelez International (MDLZ) and General Mills (GIS).
For investors who are wondering whether you should speculate on a purchase of MDLZ or GIS in the event of a buyout offer, here are a few facts:
Both companies are expected to grow EPS in the 6% to 11% range over the next two years, with Mondelez’ numbers slightly better than General Mills.’ Both stocks are trading at P/Es that are much higher than their earnings growth rates. Mondelez has a fair debt-to-cap ratio at 34%, while General Mills’ is high at 49%.
3G Capital is going to make its acquisition decision based on how well the targeted company’s products fit in with Kraft Heinz’ current products and geographies, and might not make the decision based on valuation. Both stocks fell last week, presumably due to post-election sector rotation. MDLZ has traded steadily between 40 and 46 since July 2015. It could rebound rapidly within that range even if a buyout offer doesn’t emerge. GIS had a big run-up from January through June 2016, and then a big price correction. It’s going to take far longer to rebound than will MDLZ if a buyout offer doesn’t come through. If I were speculating on a buyout offer, I’d buy MDLZ.
Kraft Heinz’ expected 2016 earnings growth rate has increased by eight percentage points to 49.8% in the last three months, while the 2017 number has declined five percentage points to 19.5%. With a 2017 P/E of 20.7, the stock remains somewhat undervalued.
KHC fell on the M&A news, likely because the prospect of M&A activity was out of synch with the post-election growth stock euphoria that we saw last week. Patient investors should accumulate shares in the 78-82 area. Buy.
Whirlpool (WHR – yield 2.4%) – WHR is climbing out of its third major price correction this year, and will probably trade between 160 and 170 in the near term. Growth investors, dividend investors and traders should buy WHR now. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Boise Cascade (BCC) – BCC is a Hold until the share price is ready to show some strength. Hold.
BorgWarner (BWA – yield 1.5%) – See my November 14 Special Bulletin. Buy.
Legg Mason (LM – yield 2.8%) – See my November 14 Special Bulletin. Strong Buy.
Toll Brothers (TOL) is a greatly undervalued, mid-cap aggressive growth stock. TOL is trading between 27 and 32. Growth investors should buy now. Buy.
Universal Electronics (UEIC) – See my November 14 Special Bulletin. Buy.
Vertex Pharmaceuticals (VRTX) – Last week, Vertex revealed positive phase III results for its cystic fibrosis treatment, Orkambi, in children ages 6-11. This news opens the door for label expansion in Europe, making the drug potentially available to another 3,400 children. The stock surged upward last week due to the label expansion on Orkambi, positive reaction from analysts and investors at the Credit Suisse Healthcare Conference on November 8, and a post-election jump in share prices for biotech stocks.
VRTX is a vastly undervalued, aggressive growth stock. The recent price correction in the biotech sector is over. VRTX will likely trade between 85 and 103 in the coming weeks. Time your transactions accordingly. Buy.
