I’m going to be brief today. Many stocks are rising—either toward former highs, or surpassing recent highs—because the companies are growing profits very well. It’s not “Trump,” nor “irrational exuberance,” nor “a lack of other good investment markets.” It’s simply strong earnings growth. From my point of view, that’s exactly the way stocks should work: rising when companies are thriving and falling when companies are stagnating or suffering.
I’m always going to put on blinders to negative and sensational news stories, and just focus on earnings growth and valuation, because those have always been dependable for my understanding of stock price movement.
Bring me the naysayers who shout that the market’s overvalued, and I’ll hand them 50 undervalued stocks on a silver platter. Don’t worry—they’re not going to accept my free stock picks, because they don’t care about making money. They care about being right, and they’re going to go down with that ship!
Are stocks overextended? In English, “overextended” means that they’ve run up a lot without taking a breather. Certainly some stocks are overextended, such as Ameriprise Financial (AMP), and that was a contributing factor to my sale of AMP yesterday. I’ll do my best to caution you when stocks become overextended. In the interim, enjoy this bull market!
Send questions and comments to crista@cabotwealth.com.
Quarterly Earnings Release and News Calendar
October 31 am: Boise Cascade (BCC) and BP plc (BP) – 3Q
November 1 pm: Cavium (CAVM) – 3Q
November 2 am: Martin Marietta Materials (MLM), Quanta Services (PWR) and Vulcan Materials (VMC) – 3Q
November 2 pm: Molina Healthcare (MOH) and Universal Electronics (UEIC) – 3Q, and Apple (AAPL) – 4Q
November 7 pm: Cimarex Energy (XEC)* – 3Q
November 8 pm: Andeavor (ANDV) – 3Q
November 9 am: Johnson Controls (JCI) – 4Q
November 13: General Electric (GE)* investor meeting – expect a reduction in the dividend.
Virtually all companies offer extensive information on their websites pertaining to their quarterly earnings releases, often including slide shows or webcasts.
*Not in the Cabot Undervalued Stocks Advisor portfolios, but discussed in previous issues, at the 2017 Cabot Wealth Summit or in Wall Street’s Best Daily.
Earnings Season Scorecard
Big earnings beats: Alexion Pharmaceuticals (ALXN), Ameriprise Financial (AMP), Bank of America (BAC), Blackstone Group (BX), Goldman Sachs (GS), Legg Mason (LM), Morgan Stanley (MS), Nucor (NUE), Total (TOT), Vertex Pharmaceuticals (VRTX) and Weyerhaeuser (WY)
Slight earnings beat: PulteGroup (PHM)
Earnings in line with estimates: Schlumberger (SLB)
Slight earnings miss: XL Group (XL)
Big earnings miss: Chipotle Mexican Grill (CMG), Commercial Metals (CMC) and Mattel (MAT)
Portfolio Notes
Make sure to review the Special Bulletins from October 25, 26, 27 and 30 in which I mentioned news, rating changes and/or price action on Alexion Pharmaceuticals (ALXN), Ameriprise Financial (AMP), Apple (AAPL), Chipotle Mexican Grill (CMG), Commercial Metals (CMC), Legg Mason (LM), Mattel (MAT), PulteGroup (PHM), Total (TOT), Vertex Pharmaceuticals (VRTX), Weyerhaeuser (WY) and XL Group (XL).
Buy-Rated Stocks Most Likely* to Rise More Than 5% Near-Term:
Apple (AAPL)
Cavium (CAVM)
Martin Marietta Materials (MLM)
Molina Healthcare (MOH)
Quanta Services (PWR)
Schlumberger (SLB)
Vertex Pharmaceuticals (VRTX)
Vulcan Materials (VMC)
*I can review price charts and make an educated determination about what’s likely to occur, but I will sometimes be wrong. I cannot control the stock market; I can only guide you through it.
Today’s Portfolio Changes: None
Last Week’s Portfolio Changes:
Ameriprise Financial (AMP)
moved from Hold to Sell.
Bank of America (BAC) moved from Strong Buy to Buy.
Chipotle Mexican Grill (CMG) moved from Buy to Hold.
Invesco (IVZ) moved from Hold to Sell.
KLX Inc. (KLXI) moved from Strong Buy to Buy.
Nucor (NUE) moved from Buy to Hold.
PulteGroup (PHM) moved from Strong Buy to Buy.
Vertex Pharmaceuticals (VRTX) moved from Buy to Strong Buy.
XL Group (XL) moved from Hold to Buy.
Updates on Growth Portfolio Stocks
Apple (AAPL – yield 1.5%) manufactures the iPhone, iPad, Mac and Apple TV. Apple will release fourth-quarter and full-year 2017 results on the afternoon of November 2. Wall Street is expecting $1.87 4Q EPS, with a range of $1.79 to $2.01.
Here’s what you need to know about Apple’s fiscal 2018 prognosis (September year-end) that you’re not hearing from financial news reports, which are instead warning you that the new iPhone is experiencing sales and production problems: consensus 2018 EPS estimates have been steadily rising throughout 2017. Back in January, analysts expected the company to achieve 2018 EPS of $10.08. That number continues to rise, now standing at $11.16.
Always remember that the news media will harp on negative stories to get you to tune in because bad news sells. Here’s the reality: Wall Street expects Apple’s 2018 EPS to grow 24.0%, and the current P/E is only 14.6. Does that sound like a company that’s on shaky ground? No. Does that sound like an overvalued stock? No. Statements from Apple clearly contradict a gloomy outlook: Apple says iPhone X pre-orders are ‘off the charts’.
Apple does not often experience years with big full-year EPS growth, but when they do, the share price virtually always has a big run-up. Do not miss the run-up! Based on prior-year patterns, I estimate that you can confidently hold AAPL until at least June 2018. (If a stock market correction rears its ugly head along the way, hold AAPL.) The stock could easily surge past the recent all-time high of 164 this week. Buy AAPL now, and buy more on pullbacks. Strong Buy.
Bank of America (BAC – yield 1.7%) is an undervalued large-cap growth stock. BAC was featured in the October 2017 issue of Cabot Undervalued Stocks Advisor. The stock is up 24% from its September lows, and despite the bullish price action, a pullback would be normal. Buy.
Cavium (CAVM) is an undervalued, mid-cap aggressive growth stock in the semiconductor industry. The company will release third-quarter results on the afternoon of November 1. Wall Street expects third-quarter EPS of $0.74, with a range of $0.73 to $0.75. Barring a market disruption, I expect CAVM to rise to price resistance at 74 this week. Barring a poor earnings report, I expect CAVM to break past 74 to new all-time highs quickly, certainly in November. Strong Buy.
KLX Inc. (KLXI) is an undervalued, small-cap aggressive growth stock in the aerospace and energy services industries. The stock is up 20% from its late-August lows, and despite the bullish price action, a pullback would be normal. Buy.
Martin Marietta Materials (MLM – yield 0.8%) is a supplier of crushed stone, sand and gravel. The company will release third-quarter results on the morning of November 2. Wall Street expects third-quarter EPS of $2.46, within a range of $2.14 to $2.79. Expect volatility. MLM is expected to achieve aggressive earnings growth in 2018. Barring a poor earnings report, MLM could continue rising toward its May peak at 240, where the stock will still be undervalued. Buy.
PulteGroup (PHM – yield 1.2%) is a U.S. homebuilder, and a very undervalued aggressive growth stock. PulteGroup reported good third-quarter results last week. (See the October 25 Special Bulletin.) Earnings estimates subsequently increased a bit, and at least six analysts raised ratings and price targets on the stock. The UBS analyst swung for the fences with a new 38 price target! PHM is up 38% since joining the Growth Portfolio in February. It’s going to need to rest eventually. Buy.
Quanta Services (PWR) provides specialized infrastructure and network services to the electric power, oil and natural gas industries. The company will release third-quarter results on the morning of November 2. Wall Street expects third-quarter EPS of $0.61, with a range of $0.50 to $0.66. Expect volatility. Last week, Citigroup raised its price target on PWR from 43 to 47. PWR is an undervalued, aggressive growth stock. A good earnings report could easily push PWR past price resistance at 38.5 this week. There’s 13% upside to my fair-value price target of 44. Strong Buy.
Vertex Pharmaceuticals (VRTX) is an aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). Vertex will present at this week’s 2017 North American Cystic Fibrosis Conference. The company reported a huge third-quarter earnings and revenue beat last week. (See the October 26 Special Bulletin.) The latest full-year consensus EPS estimates represent 104% and 66.5% growth in 2017 and 2018, with corresponding P/Es of 86.8 and 52.1. Those are big numbers, as befitting a biotech stock, yet VRTX is still undervalued. The shares traded quietly sideways in the three months since the huge jump in July, then the price chart exhibited a shakeout pattern last week, which is usually a bullish harbinger of a near-term run-up. Strong Buy.
Vulcan Materials (VMC – yield 0.8%) is a supplier of construction aggregates, asphalt and concrete. The company will release third-quarter results on the morning of November 2. Wall Street expects third-quarter EPS of $1.07, with a range of $0.80 to $1.33. Expect volatility. VMC is undervalued based on aggressive 2018 EPS growth expectations. Barring a poor earnings report, VMC appears likely to rise toward its June peak at 134 this fall, where it will still be undervalued. Buy.
XL Group (XL – yield 2.1%) is an insurer and reinsurer, and an undervalued mid-cap stock. XL Group reported third-quarter results last week. (See the October 25 Special Bulletin.) XL is in a strong financial position, with $1.4 billion in excess reserves. The stock had a minor pullback last week. There’s 13% upside to XL’s recent July high near 47. Buy.
Updates on Growth & Income Portfolio Stocks
BP plc (BP – yield 6.0%) is a European integrated oil company and a very undervalued aggressive growth stock. The company will report third-quarter results on the morning of October 31. Analysts expect $0.49 EPS, with a range of $0.46 to $0.55. (The numbers I posted last week were incorrect. My bad!) The share price broke past 39.5 this week. I expect BP to rise toward 43, where it last traded in 2014. Hold.
Blackstone Group LP (BX – yield 6.9*) is an alternative asset manager, and a very undervalued growth & income stock. Here’s a long Fox Business interview between Maria Bartiromo and Blackstone CEO Steve Schwartzman, in which they discuss U.S. infrastructure and global investment opportunities. Barring a stock market correction, I expect BX to rise toward 37 now, where it last traded in early 2015. I will probably remove BX from the portfolio near 37 to make room for a stock that has more immediate upside. At that time, dividend investors should hold BX. Hold.
*The payout varies each quarter, with the total of the last four announced payouts yielding 6.9%.
Commercial Metals Company (CMC – yield 2.5%) is a recycler and manufacturer of steel and metal products, including rebar and fence posts. The company reported a poor fourth quarter last week. (See the October 26 Special Bulletin.) Full-year results and future consensus estimates are as follows: 2016 EPS: $0.90, 2017 EPS: $0.71, 2018 EPS: $1.32 and 2019 EPS: $1.69 (August year-end). The 2017 number came in lower than expected, and the 2018 number has been revised downward, yet the future earnings growth trajectory remains steep and attractive. In addition, the P/Es are quite low. I anticipate the stock will trade between 19 and 22 in the foreseeable future. Hold.
GameStop (GME – yield 8.1%) is a retailer of games, collectibles and technology, with additional ventures in the entertainment field. Dividend investors should consider owning GME. Hold.
Johnson Controls (JCI – yield 2.3%) is a multi-industry, large-cap growth & income stock. If fourth-quarter numbers surprise on the upside (September year-end), I might consider holding the stock longer. Otherwise, I plan to sell JCI quite soon, near its July 2017 high near 44 or its December 2016 high near 45. Hold.
Morgan Stanley (MS – yield 1.9%) is a major U.S. investment bank and wealth manager, and an undervalued growth & income stock. The stock is rising. I currently give MS a fair-value price target of 59. Strong Buy.
Schlumberger (SLB – yield 3.1%) is a premier oilfield equipment and services company with a global footprint. Schlumberger is experiencing aggressive earnings growth in both 2017 and 2018. SLB was featured in the October 2017 issue of Cabot Undervalued Stocks Advisor. The stock has a wide trading range, and is currently rising from recent lows. Next stop: 69.5. There’s 34% upside plus dividends as SLB eventually retraces its December 2016 high near 86. Buy SLB now. Strong Buy.
Weyerhaeuser (WY – yield 3.5%) operates in the areas of timberland, wood products, real estate, energy and natural resources. The company reported strong third-quarter results last week, and also projected a strong fourth quarter. (See the October 27 Special Bulletin.) Weyerhaeuser has received consistent increases in 2017 consensus earnings estimates since joining the Growth & Income Portfolio in August, while the 2018 estimate hasn’t changed. As a result, the 2018 earnings growth rate has fallen to 16.2%, while the 2018 P/E is 27.5. The stock is overvalued according to my investment strategy. The big caveat is that WY is reaching new all-time highs, which is the most bullish time to own a stock. I’m going to let it run. Hold.
Updates on Buy Low Opportunities Portfolio Stocks
Alexion Pharmaceuticals (ALXN) is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Last week, the company reported a big third-quarter earnings beat and received FDA approval for a new use for Soliris. (See the October 25 and 26 Special Bulletins.) Five Wall Street analysts subsequently raised and lowered their price targets to a range of 155 to 178. ALXN is fairly valued based on 2017 numbers and solidly undervalued for 2018, with expected EPS growth of 26.9% and an 18 P/E.
Biotech shares fell in sympathy with company-specific problems at Celgene (CELG) in October. (CELG has not been on my buy list since a July 2015 acquisition announcement necessitated taking on too much debt for my investing strategy.) The pullback in ALXN shares creates an excellent buying opportunity. In the coming months, I expect ALXN to rise to 160, where it last traded in April 2016. Buy.
Andeavor (ANDV – yield 2.1%) is an oil refiner and marketer, with refineries in the western and northern United States. Earnings estimates for 2017 and 2018 continue to rise. Analysts now expect EPS to grow 52.4% and 22.5% in 2017 and 2018, with corresponding P/Es of 16.2 and 13.2. I expect the stock to stop rising when it reaches 112, where it last traded in 2015. A good third-quarter earnings report could push the stock up to 112 in November. Hold.
Boise Cascade (BCC) is a wood products and building materials company. Third-quarter results will be released on the morning of October 31. The market is expecting $0.65 EPS, within a range of $0.57 to $0.72. Expect volatility. BCC is an undervalued, aggressive growth small-cap stock, recently trading between 34 and 36. A good earnings report could push BCC toward 40, where it last traded in early 2015. Buy.
Chipotle Mexican Grill (CMG) is an undervalued aggressive growth restaurant chain. Chipotle reported good third-quarter results last week which did not meet the consensus estimate. (See the October 25 Special Bulletin.) The market reacted poorly to news that the company will open fewer new stores in 2018 and 2019 than previously planned. CMG is going to need to settle down before it can begin a rebound. Hold.
Dollar Tree (DLTR) is recently a retail stock favorite among analysts. DLTR is up 41% since early July. I plan to sell DLTR when it retraces its August 2016 high above 95, which could happen this week. It will be both overextended and overvalued. If you choose to hold the stock when I sell, please know that 40% run-ups are unusual, and almost always followed by significant pullbacks. Hold.
Legg Mason (LM – yield 2.9%) is a U.S.-based global asset management and financial services company with $754 billion in assets under management (AUM). Legg Mason reported a great second quarter last week. (See the October 26 Special Bulletin.) LM is a very undervalued aggressive growth stock. My price target is 44, where LM last traded in October 2015. I’m not going to move the stock back and forth between Buy and Hold, but any share price below 39.5 represents a 10%+ capital gain opportunity. Hold.
Mattel (MAT) – Mattel posted a poor third-quarter last week and suspended the dividend. The new management team continues to focus on improving the cost structure and repositioning the company. (See the October 27 Special Bulletin.) My suggestion is that investors hold MAT for a corporate and share price rebound in 2018. Hold.
Molina Healthcare (MOH) is a managed healthcare operator, serving about 4.7 million members. The company will release third-quarter results on the afternoon of November 2. The market is expecting $0.38 EPS, with a range of (-$0.07) to $0.88. Expect volatility. 2017 EPS numbers are completely in flux, while analysts are more confident of the company achieving 2018 EPS of $2.87. The 2018 P/E is 23.4. My longer-term price target is 80, where the stock traded in the summer of 2015, giving today’s new investors a potential 20% capital gain. Strong Buy.
Nucor (NUE – yield 2.5%) is a low-cost producer of a diversified portfolio of iron and steel products. This undervalued growth stock was featured in the October 2017 issue of Cabot Undervalued Stocks Advisor. I expect NUE to stop rising when it retraces its December 2016 high of 65. I love the outlook for the steel industry and steel stocks. Hold.
Total (TOT – approx. 4.0%) is a fairly-valued French integrated oil & gas stock. Total reported a strong third-quarter last week. (See the October 27 Special Bulletin.) TOT continues to climb toward the low 60s, where it last traded in July 2014. Hold.
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 with a strong pipeline of new products. The company will release third-quarter results on the afternoon of November 2. The market is expecting $0.85 EPS, within a range of $0.85 to $0.86. UEIC is undervalued based on 2018 numbers. There’s 17% upside as UEIC retraces its July high around 72, where the stock will still be undervalued. Buy.
