When you have a value approach to investing, you become acutely aware of which stock sectors are overvalued or undervalued. It’s easy to review undervalued sectors and identify the best prospects for growth. It’s far more of an art to know when the market’s ready to embrace the sector.
Today I want to talk about energy stocks, because I’m seeing a growing correlation between quality and share price performance.
As you all know, energy stocks suffered greatly in recent years. Most of them saw several years of declining earnings and losses. Other than Loews Corp. (L), a multi-industry company, I haven’t recommended any energy stocks since 2013 because their balance sheets looked dismal. But finally, energy stocks are offering attractive earnings growth in the coming year, and many of them have large dividend yields.
Here are the six energy stocks that meet my investment criteria, followed by comments on their price charts and Buy recommendations.
These stocks have huge 2017 earnings growth rates because their earnings fell in 2016, exaggerating the comparisons between the two years.
Many energy stocks already had a run-up in November. A near-term pullback in their prices would be perfectly normal. In that light, I would watch for a pullback before buying CVX, PSX or VLO.
I would certainly buy TOT, TSO and XOM at today’s prices. (TSO has a debt ratio that’s a fraction higher than I would prefer.)
I added Total SA (TOT) to the Buy Low Opportunities Portfolio on November 18. TOT is at the bottom of a steady trading range. While I do believe that TOT will rise with the energy group, it’s a foreign stock (French), so it receives a little less investor attention than the U.S. stocks. However, with that huge dividend, investors are being paid nicely to exercise patience on the share price.
Today I’m adding Tesoro (TSO) to the Buy Low Opportunities Portfolio. The stock was $35 higher a year ago. A retracement of those highs will give new investors a 40% capital gain. I’ll write more about this petroleum refining and marketing company in next week’s December issue of Cabot Undervalued Stocks Advisor.
Today’s Portfolio Changes:
• Royal Caribbean (RCL) moves from the Growth Portfolio to the Growth & Income Portfolio.
• Tesoro (TSO) joins the Buy Low Opportunities Portfolio.
Portfolio Changes During the Last Week:
• Applied Materials (AMAT) moved to a Buy on November 22.
• WellCare Health Plans (WCG) was sold from the Growth Portfolio on November 28.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a slightly undervalued aggressive growth stock. Try to buy below 103. Strong Buy.
Amazon.com (AMZN) Black Friday sales hit a record $3.34 billion, higher than predicted. Investors should therefore expect upward revisions in consensus earnings estimates for many retailers and product manufacturers, including Amazon, Apple and Mattel, triggering a ripple effect in stock valuations and share prices. AMZN is a slightly undervalued aggressive growth stock. Investors can probably buy AMZN on a near-term bounce below 770. Strong Buy.
American International Group (AIG – yield 2.0%) is a very undervalued aggressive growth stock. AIG is resting after a big run-up this month, and could easily break past 65 soon. Strong Buy.
D.R. Horton (DHI – yield 1.4%) is undervalued, and the price chart is turning bullish. Buy DHI now to capitalize on the rebound to 34. Buy.
Dollar Tree (DLTR) reported a strong third quarter last week (see the November 23 Special Bulletin). DLTR is a fairly valued aggressive growth stock with high debt levels. Try to buy DLTR on a pullback below 86 to capitalize on the rebound to 97. Buy.
Quanta Services (PWR) is an aggressive growth stock with a very low debt ratio. PWR is resting during an uptrend and could easily continue climbing toward significant upside resistance at 37, at which price the stock will still be quite undervalued. Strong Buy.
Vulcan Materials (VMC – yield 0.6%) rose to all-time highs in November, and is now having a pullback. Strong Buy.
Updates on Growth & Income Portfolio Stocks
Applied Materials (AMAT – yield 1.2%) Zacks Investment Research had very favorable things to say last week for both AMAT and the semiconductor equipment–wafer fabrication industry, giving AMAT a Strong Buy recommendation. Chris Laudani from The Street concurred, with a $40 price target. AMAT is slated for aggressive earnings growth in fiscal 2017 (October year-end), followed by slow growth in 2018. The stock is actively climbing. Buy AMAT now. Buy.
Big Lots (BIG – yield 1.6%) Analysts are expecting a loss of $0.01 per share when Big Lots reports third-quarter results on the morning of December 2. I mentioned the market’s renewed interest in discount retail stocks in a Special Bulletin on November 23. Financial services company RBC recently named Big Lots in a list of 40 recommended small- and mid-cap stocks that it expects to thrive in the new U.S. political administration. My decision to hold the stock will depend upon earnings revisions in the coming days and weeks. I do not recommend buying BIG right now, despite the improving retail sentiment, because BIG is slightly overvalued and approaching upside price resistance near 56. Hold.
Cardinal Health (CAH – yield 2.5%) is slightly undervalued, and the stock is resting after its post-election run-up. There’s additional upside resistance at 78. Hold.
Carnival (CCL – yield 2.6%) (See the November 23 Special Bulletin.) The stock is fairly valued and approaching medium-term upside resistance at 54. Hold.
Federated Investors (FII – yield 3.6%) Last week, Federated announced the acquisition of $431 million in mutual fund assets from Horizon Advisors. The stock is overvalued. Bullish sentiment toward financial stocks could lift FII toward medium-term upside resistance at 33.50. Hold.
GameStop (GME – yield 5.7%) reported a third-quarter earnings beat last week. (See the November 23 Special Bulletin.) Financial services company RBC recently named GameStop in a list of 40 recommended small- and mid-cap stocks that it expects to thrive in the new U.S. political administration. GME is very undervalued and actively rising toward its 2016 highs around 32. Traders and dividend investors should buy now. Expect volatility. Buy.
General Motors (GM – yield 4.4%) is rising, and could reach price resistance at 35 quite soon. Hold.
Goldman Sachs Group (GS – yield 1.2%) rose 20% since Election Day, earning it a featured spot in this Forbes article, and a bullish recommendation from Jim Cramer. The stock has finally plateaued, and a near-term pullback would be perfectly normal. GS is still undervalued and a Strong Buy on fundamentals. Strong Buy.
H&R Block (HRB – yield 4.0%) will report second-quarter results on the afternoon of December 7. HRB is experiencing its third downward spike in as many weeks due to uncertainty about potential tax policy changes under the new political administration. Buy.
Johnson Controls (JCI – yield 1.9%) will host an analyst meeting on December 5. Ensuing updates of research reports should move the share price. This undervalued stock is actively rising. There’s some price support at 44. Strong Buy.
Kraft Heinz (KHC – yield 2.9%) This undervalued stock is low within its trading range, with upside resistance at 90. Buy.
Royal Caribbean Cruises (RCL – yield 2.3%) is completing several years of aggressive earnings growth, with 2017’s EPS growth rate forecasted at 12.5%. Therefore, I’m moving RCL from the Growth Portfolio to the Growth & Income Portfolio to more accurately reflect its status as an undervalued growth & income stock. The share price could rise to the December 2015 high around 102 in the coming months, a 23% increase over the current price. Buy.
Whirlpool (WHR – yield 2.4%) is on the move again. Growth investors, dividend investors and traders should buy this greatly undervalued stock now. Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
Archer Daniels Midland (ADM – yield 2.7%) will likely begin rising shortly and could reach 51 this winter. Buy ADM now. Strong Buy.
Boise Cascade (BCC) is heading toward upside resistance at 24. Hold.
BorgWarner (BWA – yield 1.6%) is slightly undervalued, and appears capable of breaking past 36 at any time now. Buy BWA now. Buy
Legg Mason (LM – yield 2.7%) I expect this greatly undervalued stock to continue rising to 35 in the short term. Given a neutral-to-bullish stock market, LM could break past 35 at any time this winter. Strong Buy.
Tesoro (TSO – yield 2.5%) was added to the portfolio today. Buy TSO now for expected near-term price appreciation. Buy.
Toll Brothers (TOL) is expected to report $0.99 EPS on the morning of December 6. TOL has upside resistance at 40. Buy this undervalued aggressive growth stock now. Buy.
Total SA (TOT – 5.8%) is one of the few excellent energy growth stocks that didn’t have a run-up in November. Buy TOT now. Strong Buy.
Universal Electronics (UEIC) recovered from its dramatic, early November shakeout. There’s about 18% short-term upside as UEIC continues climbing toward its August highs. Buy.
Vertex Pharmaceuticals (VRTX) pulled back after a $20 run-up in early November, and seems to be finding price support at 86. Buy this greatly undervalued aggressive growth stock now. Buy.
Neither Cabot Investing Advice nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks.