We’ve had a huge stock market rebound in October, with the NASDAQ up 9%, and the Dow and S&P 500 each up about 8% month-to-date. Investors are going to breathe a great sigh of relief when they see their October 31 account values; especially people like my Dad, who’s not online. He won’t really know where he stands until he gets his statement via snail mail. The important thing is that he didn’t panic and sell when stocks fell in August. Basically, “panic and sell” is rarely the correct move.
The real time to worry about U.S. stocks is when they’re either overvalued or overextended. That situation does not currently exist. When it happens, I’ll be the first person to raise the yellow caution flag. For now, U.S. stock markets are simply rebounding to normal levels. When they reach their summertime highs, expect them to trade sideways for several months, as they finish recovering from the August-September market correction.
Here’s some interesting evidence that U.S stock markets are not “too high”. J.P. Morgan Chase & Co. reported that stock market short interest is near a three-year high, at $90 billion. What that means, in English, is that there are $90 billion worth of bearish bets outstanding in the market, at a time when the market averages are up 11%-17% from their August lows. All the people who shorted those stocks are going to need to buy them back, to cover their short positions. Ouch! And all that buying activity is bullish for stock prices!
Last week, SanDisk (SNDK) agreed to be purchased by Western Digital (WDC). The stock is up 28% so far in the Growth & Income Portfolio; and it could increase another 7%-10% plus dividends during the coming 12 months. Read more about the SanDisk buyout in the Growth & Income Portfolio review below.
If you’re adding to your stock portfolio this week, here are some suggestions. Adobe Systems (ADBE) and Royal Caribbean Cruises (RCL) in the Growth Portfolio have just broken past upside resistance and begun climbing. In addition, Royal Caribbean Cruises announced a new $500 million stock repurchase program, which should boost earnings estimates.
In the Growth & Income Portfolio, there are two stocks that just began breakouts: Carnival (CCL) and H&R Block (HRB). If your goal is to earn the biggest possible dividend while waiting for capital gains, take a look at General Motors (GM) and GameStop (GME).
My best suggestion in the Buy Low Opportunities Portfolio is Harman International Industries (HAR). I believe the stock could reach 118 in the short-term, giving new investors a potential 9% capital gain.
There are a few rating changes in the portfolios this week. I lowered D.R. Horton’s (DHI) rating from strong buy to hold, after competitor PulteGroup (PHM) announced that labor shortages are affecting its bottom line. I want you to hold off on buying additional shares of DHI until we know for sure, based on D.R. Horton’s next earnings report, whether the company is experiencing similar problems.
The increase in The Priceline Group’s (PCLN) share price has raised its P/E from undervalued to fairly valued, while the chart remains quite bullish. I therefore lowered the rating from strong buy to buy.
Union Pacific’s (UNP) 2016 earnings growth outlook has become more modest, causing me to change my rating on the stock to hold.
Growth Portfolio
Growth Portfolio stocks have bullish charts, strong projected earnings growth, little or no dividends, low-to-moderate price/earnings ratios (P/Es) and low-to-moderate debt levels.
Adobe Systems (ADBE) is a software company. ADBE is a very undervalued, aggressive growth stock with a strong balance sheet. The stock is trading at new highs this month, between 86-88 (just a fraction above the recent high). Rating: Strong Buy.
Chemtura (CHMT) manufactures specialty chemicals. CHMT is a very undervalued aggressive growth stock with a strong balance sheet. The stock is trading between 29-31, and appears capable of climbing higher to new all-time highs shortly. Rating: Strong Buy.
Delta Air Lines’ (DAL) earnings per share (EPS) growth projections keep inching upward, now standing at 40% and 23% in 2015 and 2016, with growth slowing in 2017. The stock retraced January’s all-time high around 51 last week. Expect the stock to rest in the 48-51 range before making its next move. DAL is up 11% since joining the Growth Portfolio, and could easily keep climbing. DAL is a very undervalued aggressive growth stock. Rating: Strong Buy.
D. R. Horton (DHI) is a homebuilder. The company will report fourth-quarter and full-year 2015 results on November 10 before the market opens (September year-end). I’m concerned about the next earnings report because labor shortages in the housing industry caused PulteGroup’s (PHM) share price to fall through price support last week. We won’t know if D.R. Horton is experiencing similar problems until they make public comments or report 4Q earnings.
In the meantime, DHI is still an undervalued growth stock. The chart is turning more bullish, as the trading range narrows toward recent highs around 32. A risk-taker would buy based on the bullish chart. A cautious person would use stop-loss orders based on PulteGroup’s labor problems. I would personally hold the stock and use a stop-loss order at 28.25. Rating: Hold.
The Priceline Group (PCLN) retraced and surpassed its March 2014 all-time high of 1,379 last week. Now that the share price is up 11% since joining the Growth Portfolio, it’s fairly valued based on 2016 EPS. I’m changing the rating from strong buy to buy, because it’s no longer undervalued; but the fundamentals are strong and chart is bullish. Rating: Buy.
Royal Caribbean Cruises (RCL) reported a strong third-quarter earnings beat last week, raised its full-year earnings projection and announced a new $500 million stock repurchase program through December 2016. The stock price is up 8.5% in the Growth Portfolio so far, after retracing its September all-time high near 98 last week. RCL is a very undervalued aggressive growth & income stock. I expect it to continue climbing immediately. Rating: Strong Buy.
Vulcan Materials (VMC) produces construction aggregates. VMC is an undervalued aggressive growth stock. It’s been trading sideways between 84-102 for four months after a big run-up in the first half of 2015. Rating: Strong Buy.
WellCare Health Plans (WCG) revisited its August and September lows again last week. Healthcare stocks have lagged the market for several months. However, the fundamentals of the healthcare stocks on my buy list have not diminished. WCG remains a very undervalued aggressive growth stock. There’s upside price resistance at the annual high, around 98. Rating: Strong Buy.
| Growth Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 10/26/15 | Total Return | Rating |
| Adobe Systems (ADBE) | 10/6/15 | 85 | 89 | 4% | Strong Buy |
| Chemtura (CHMT) | 10/6/15 | 31 | 30 | 0% | Strong Buy |
| Delta Air LInes (DAL) | 10/6/15 | 46 | 51 | 11% | Strong Buy |
| D.R. Horton (DHI) | 10/6/15 | 31 | 31 | 1% | Hold |
| Priceline (PCLN) | 10/6/15 | 1,275 | 1,416 | 11% | Buy |
| Royal Caribbean Cruises (RCL) | 10/6/15 | 92 | 99 | 7% | Strong Buy |
| Vulcan Materials (VMC) | 10/6/15 | 94 | 92 | -2% | Strong Buy |
| WellCare Health Plans (WCG) | 10/6/15 | 84 | 84 | 0% | Strong Buy |
| Growth Portfolio Return | 4% | ||||
| S&P 500 | since 10-06-15 | 1,982 | 2071 | 5% |
Growth & Income Portfolio
Growth & Income Portfolio stocks have bullish charts, good projected earnings growth, dividends of 1.5% and higher, low-to-moderate price/earnings ratios (P/Es) and low-to-moderate debt levels.
Big Lots (BIG) The discount retail sector continues to show weakness. Focus on the fact that BIG is an undervalued, aggressive growth & income stock with a strong balance sheet. It’s been trading in the mid-to upper 40s, near the all-time high of 51.11 from March 2015. Rating: Strong Buy.
Carnival (CCL) is a cruise vacation company. CCL is an undervalued, aggressive growth & income stock with a strong balance sheet. Shares are up 9% since joining the Growth & Income Portfolio. The stock broke past upside price resistance at 53 last week. It could easily continue climbing and establish a new trading range. Rating: Strong Buy.
GameStop (GME) is a video game and electronics retailer. GME is an undervalued growth & income stock with a strong balance sheet. Last week, I said that GME “continues to climb. When it reaches 47, please expect it to pull back and trade between 44-47 for a short while, before pushing higher.” The stock proceeded to rise as high as 47.62, then pulled back to 44.50. Rating: Strong Buy.
General Motors (GM) reported a third-quarter earnings surprise last week, exceeding all Wall Street profit estimates. The quarter was characterized by strong North American performance, good results in China and operating margins achieving targets a year ahead of schedule. The company also reported $2.9 billion in year-to-date share repurchases. GM is a vastly undervalued growth & income stock. The stock is up 11% since being added to the Growth & Income Portfolio, and, barring unexpected bad news, has tons more upside. Expect price resistance at 36, then again at 39. Rating: Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. HRB rose to an all-time high of 36.82 earlier this month. It now appears capable of pushing past that price, and beginning its next run-up. Rating: Strong Buy.
SanDisk (SNDK) provides flash storage solutions. The company received a buyout offer from Western Digital (WDC) last week. If the deal proceeds, SNDK shareholders will receive a value of approximately $84-$86 in cash and WDC shares in the third quarter of 2016. Morgan Stanley says, “We view the risk of this deal falling through as minimal.” The stock is up 28% since being added to the Growth & Income Portfolio.
Please follow these instructions with SNDK: use a stop-loss order to protect your profit, in case the deal falls through and the share price falls, and sell the stock when it reaches the 84-86 buyout range. There is no logical reason to hold a stock for many months waiting for the actual buyout to take place. Once the stock price reaches the buyout range, you should take that capital and put it into another stock that has a chance of rising in the near-term. (Also note: SNDK is trading approximately 7%-10% below the buyout price. There’s a trading opportunity there for aggressive investors.) Rating: Hold.
Union Pacific (UNP) beat all of Wall Street’s earnings estimates for the third quarter, causing the stock to rise and the chart to become more bullish. Here’s the problem: analysts’ estimates for 2016 have been ratcheting downward in recent weeks, and when combined with the increasing share price, the P/E is no longer undervalued. Hold the stock, because the chart is bullish, but use a stop-loss order at 91.25, to protect yourself from sudden bad news. There’s relatively little chance that the share price will climb past 120 in the medium-term, so that’s your ultimate exit point. I’ll keep you apprised of any new developments in earnings outlook or chart activity. Rating: Hold.
| Growth & Income Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 10/26/15 | Total Return | Rating |
| Big Lots (BIG) | 10/6/15 | 49 | 47 | -5% | Strong Buy |
| Carnival (CCL) | 10/6/15 | 50 | 54 | 7% | Strong Buy |
| GameStop (GME) | 10/6/15 | 43 | 45 | 4% | Strong Buy |
| General Motors (GM) | 10/6/15 | 32 | 36 | 11% | Strong Buy |
| H&R Block (HRB) | 10/6/15 | 36 | 37 | 3% | Strong Buy |
| SanDisk (SNDK) | 10/6/15 | 62 | 77 | 28% | Hold |
| Union Pacific (UNP) | 10/6/15 | 94 | 95 | 1% | Hold |
| Growth & Income Portfolio Return | 7% | ||||
| Dow Jones 30 Industrials | since 10-06-15 | 16,790 | 17,623 | 5% |
Buy Low Opportunities Portfolio
Buy Low Portfolio stocks have neutral charts, strong projected earnings growth, low-to-moderate price/earnings ratios (P/Es) and low-to-moderate debt levels. (Dividends are not a portfolio requirement, but some of the stocks will have dividends.) Investors should be willing to wait patiently for these stocks to climb.
Bank of New York Mellon (BK) is a global investment manager. The company reported a good third quarter last week, pleasing analysts in the area of expense control. 2016 estimates continue to ratchet downward, although 2017 expectations remain strong. BK is up 5% so far in the Buy Low Opportunities Portfolio. The stock is actively climbing toward 45, at which point it will assuredly pull back and trade sideways, largely because there’s no earnings catalyst on the horizon to push it higher. I would put in a sell order at 44.50, and after the stock sells, move on to another capital gain opportunity. Rating: Hold.
The Boeing Company (BA) reported strong third quarter revenue and profit last week, which surpassed all Wall Street estimates. The stock then reached upside price resistance around 147. It will likely trade sideways between 140-148 for several months, as it did earlier in 2015 before the August stock market correction. BA is up 9% since joining the Buy Low Opportunities Portfolio, and remains modestly undervalued based on 2016 earnings estimates. Rating: Hold.
Harman International Industries (HAR) is a manufacturer of vehicle audio systems. The stock price has turned around from the August-September market correction, and is now climbing toward price resistance around 118. Rating: Buy.
Intuit (INTU) is an industry leader in financial management software solutions. INTU is an undervalued, aggressive growth & income stock. The share price continues to climb, up 9% since being added to the Buy Low Opportunities Portfolio. It won’t likely surpass 107 in the near-term. Rating: Buy.
Johnson Controls (JCI) operates in the areas of energy management and auto batteries. JCI is an undervalued growth & income stock, up 5% so far in the Buy Low Opportunities Portfolio. The stock is actively climbing and could reach the low 50s in the coming months, at which point I expect it to trade sideways. Rating: Buy.
Robert Half International (RHI) is a staffing and consulting company. Robert Half’s third quarter came in on target last week, although the market was disappointed that aggressive revenue growth at its Protiviti management consulting division is slowing a bit. The stock price revisited its August-September lows. RHI is a slightly undervalued growth & income stock. The stock will need to trade sideways for a while longer before beginning its rebound. Rating: Buy
| Buy Low Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 10/26/15 | Total Return | Rating |
| Bank of New York Mellon (BK) | 10/6/15 | 40 | 42 | 5% | Hold |
| The Boeing Company (BA) | 10/6/15 | 135 | 147 | 9% | Hold |
| Harman International Industries (HAR) | 10/6/15 | 105 | 108 | 3% | Buy |
| Intuit (INTU) | 10/6/15 | 91 | 98 | 7% | Buy |
| Johnson Controls (JCI) | 10/6/15 | 43 | 45 | 5% | Buy |
| Robert Half International (RHI) | 10/6/15 | 51 | 51 | 0% | Buy |
| Buy Low Portfolio Return | 5% | ||||
| Dow Jones 30 Industrials | since 10-06-15 | 16,790 | 17,623 | 5% |