We’re nearing the end of third-quarter earnings season, and so far, 75% of companies reported results that beat Wall Street’s expectations! You can see strong earnings results reflected in my comments on some of our portfolio stocks including Boise Cascade (BCC), Priceline (PCLN), Vulcan Materials (VMC) and WellCare Health Plans (WCG).
On November 6, I sold Bank of New York Mellon (BK) from the Buy Low Opportunities Portfolio after it reached my price target. Recent earnings downgrades made it unlikely that new buyers would push the stock higher. Fortunately, BK delivered an 11% total return during the 31 days that it was in the portfolio!
On November 9, I added Abercrombie & Fitch (ANF) to the Growth & Income Portfolio, and added Axiall (AXLL) and Boise Cascade (BCC) to the Buy Low Opportunities Portfolio.
If you’re adding to your stock portfolio this week, here’s an interesting situation. Vulcan Materials (VMC), in the Growth Portfolio, just began reaching annual highs last week, after several months of sideways trading. This stock is volatile, undervalued and could be subject to institutional fourth-quarter window dressing.
Window dressing is the practice by portfolio managers of buying that year’s popular and profitable stocks during the fourth quarter. Portfolio managers do this so that when they report their year-end portfolio holdings to shareholders, they can look like heroes. (Okay, that’s a little tongue-in-cheek, but you get the picture. They want to look like they were smart enough to have held the stock all year, and racked up big profits for their shareholders.) The flip side of window dressing buying is that, come January, many portfolio managers have no further need to own the stock. If it doesn’t fit their investment strategy, they sell it.
If you buy VMC to catch the near-term run-up, please be prepared to use stop-loss orders by January 2. Yes, the stock might still be undervalued at that time, but over the very short-term, stocks don’t necessarily trade based upon valuation. Myriad other factors could push stock prices around, including post-window dressing selling.
Please note that WellCare Health Plan’s (WCG) stock chart is stuck in a neutral trading pattern, while so many other Growth Portfolio stocks have bullish charts. I am therefore lowering the rating from strong buy to buy.
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 slightly undervalued aggressive growth stock with a strong balance sheet. Last week I said, “I’m expecting a very near-term upside breakout.” ADBE immediately began climbing to new highs. Rating: Strong Buy.
Chemtura (CHMT) manufactures specialty chemicals. CHMT is a very undervalued aggressive growth stock. I expect additional near-term price appreciation. Rating: Strong Buy.
Delta Air Lines (DAL) offers investors aggressive earnings growth in 2015 and 2016, a very low P/E with lots of room for it to rise within its normal P/E range, share repurchases and a 1.1% dividend yield. Wall Street’s consensus EPS estimates for Delta have ratcheted a bit higher each time I reviewed the numbers in recent months. DAL is up 12% since joining the Growth Portfolio and appears poised to continue climbing now. Rating: Strong Buy.
D. R. Horton (DHI) is a homebuilder. DHI continues to trade sideways amid stock market weakness in the housing and construction materials sectors and concern about housing labor shortages—announced recently by PulteGroup (PHM)—which could affect D.R. Horton’s bottom line. I don’t expect any significant price action until the November 10 earnings report, when I expect a market overreaction in either direction. DHI is an undervalued growth and income stock. I’m waiting for the chart to turn more bullish, and/or for the labor shortage worries to alleviate, before putting a buy rating on the stock. Rating: Hold.
Priceline (PCLN) is an online travel service company. Priceline reported third-quarter EPS of $25.35 yesterday, much higher than the consensus estimate of $23.23. Revenue came in slightly above expectations, with increases in hotel and rental car bookings. The stock opened down 6% on the news. Sometimes stocks run up in anticipation of good quarterly results, then traders sell when the good news is finally announced. It’s a perfectly normal trading pattern. I changed PCLN’s rating from buy to hold last week because the stock was fully valued, and had just had a big run-up. The fundamentals are strong and the chart is bullish. Rating: Hold.
Royal Caribbean Cruises (RCL) is a very undervalued aggressive growth stock with a 1.5% dividend. The price is up 7% in the Growth Portfolio so far, and remains in an uptrend. Rating: Strong Buy.
Vulcan Materials Company (VMC) produces construction aggregates. VMC reported good third-quarter results last week. Standard & Poor’s commented, “VMC’s outlook for strong revenue and earnings growth is intact … We forecast both volume and pricing growth driven by ongoing recovery in construction activity.” VMC is a very undervalued aggressive growth stock, up 8% so far in the Growth Portfolio. Last week, I said that VMC “could climb to 102 this month.” The share price reached 102 on November 6. VMC reached all-time highs of 122 in 2007, right before the 2008 financial meltdown. I believe it will continue climbing now, and could surprise investors with a run toward 122 this year. Rating: Strong Buy.
WellCare Health Plans (WCG) reported third-quarter results last week. Earnings per share (EPS) were $1.00, versus the market’s expectation of $0.95. While that would normally be very good news and drive the share price higher, the stock market has been extremely volatile in recent days, after the huge run-up in October. Granted, most healthcare and pharmaceutical stocks did not participate in the October run-up, so that makes last week’s volatility especially annoying. There is some concern over WellCare’s new Iowa Medicaid contract, which will not be profitable during its first 18 months. Standard & Poor’s said, “We see WCG growing faster than peers.” WCG remains a very undervalued aggressive growth stock in the managed healthcare sector. The stock continues to show weakness. I’m changing the rating from Strong Buy to Buy because the stock’s near-term prospects do not look nearly as bullish as the other stocks in the Growth Portfolio. Rating: Buy
| Growth Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 11/09/15 | Total Return | Rating |
| Adobe Systems (ADBE) | 10/6/15 | 85 | 90 | 5% | Strong Buy |
| Chemtura (CHMT) | 10/6/15 | 31 | 31 | 2% | Strong Buy |
| Delta Air LInes (DAL) | 10/6/15 | 46 | 51 | 10% | Strong Buy |
| D.R. Horton (DHI) | 10/6/15 | 31 | 29 | -6% | Hold |
| Priceline (PCLN) | 10/6/15 | 1,275 | 1,311 | 3% | Hold |
| Royal Caribbean Cruises (RCL) | 10/6/15 | 92 | 98 | 6% | Strong Buy |
| Vulcan Materials (VMC) | 10/6/15 | 94 | 101 | 7% | Strong Buy |
| WellCare Health Plans (WCG) | 10/6/15 | 84 | 83 | -2% | Buy |
| Growth Portfolio Return | 2% | ||||
| S&P 500 | since 10-06-15 | 1,982 | 2079 | 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.
Abercrombie & Fitch (ANF) is a clothing retailer. The company made tremendous changes in leadership and marketing practices in 2015, leading to Wall Street expectations of aggressive earnings growth in fiscal 2017 and 2018 (January year-end). The stock is undervalued, the balance sheet is strong and the dividend yield is 3.6%. In addition, ANF repurchased between 5.7% and 7.9% of outstanding shares each year from 2013 to 2015. ANF traded between 19 and 23 during the last eight months, except for a brief shakeout during the August stock market correction. I expect the stock to begin rising promptly. There’s medium-term upside price resistance at 30. Rating: Strong Buy.
Big Lots (BIG) is a discount retailer. BIG is an undervalued growth stock with a 1.6% dividend yield and 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 stock with a 2.3% dividend yield and a strong balance sheet. People who buy CCL before the ex-dividend date of November 18 will receive the next dividend. The share price has paused briefly in an uptrend. Rating: Strong Buy.
GameStop (GME) is a video game and electronics retailer. GameStop will report third-quarter results before the market opens on November 23. GME is an undervalued growth and income stock with a 3.1% dividend yield and a strong balance sheet. GME is up 6% in the Growth & Income Portfolio. I expect the stock to trade between 44 and 48 in the near-term. Rating: Strong Buy.
General Motors (GM) is a very undervalued growth and income stock with a 4.0% dividend yield. It’s up 11% so far in the Growth & Income Portfolio. The stock has been consolidating between 35 and 36 since October 21. This trading pattern is often followed by a continuation of an uptrend. There’s upside price resistance at 39. Rating: Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. HRB is an undervalued growth stock with a 2.2% dividend yield and a strong balance sheet. HRB has paused in its uptrend, but could easily continue reaching new highs this month. Rating: Strong Buy.
| Growth & Income Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 11/09/15 | Total Return | Rating |
| Abercrombie & Fitch (ANF) | 11/9/15 | 22 | 22 | -1% | Strong Buy |
| Big Lots (BIG) | 10/6/15 | 49 | 47 | -4% | Strong Buy |
| Carnival (CCL) | 10/6/15 | 50 | 53 | 5% | Strong Buy |
| GameStop (GME) | 10/6/15 | 43 | 45 | 6% | Strong Buy |
| General Motors (GM) | 10/6/15 | 32 | 36 | 11% | Strong Buy |
| H&R Block (HRB) | 10/6/15 | 36 | 37 | 4% | Strong Buy |
| Growth & Income Portfolio Return | 5% | ||||
| Dow Jones 30 Industrials | since 10-06-15 | 16,790 | 17,730 | 6% |
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.
Axiall (AXLL)—formerly Georgia Gulf Corp.—manufactures chemicals and plastics. Axiall reported third-quarter results last week, with profits far above the market’s expectations. Third-quarter EPS were $0.91, compared to the consensus estimate of $0.29. Full-year EPS are expected to grow 119% and 31% in 2016 and 2017 (December year-end). The 2016 P/E is extremely low at 14.9, and the stock has a dividend yield of 3.0%. Wow! AXLL has upside price resistance at 34-35. Rating: Buy.
Boeing (BA) is up 9% since joining the Buy Low Opportunities Portfolio. The stock remains modestly undervalued, based on 2016 numbers, and has a 2.5% dividend yield. BA has been consolidating in a tight range since October 22. Rating: Hold.
Boise Cascade (BCC) is a wood products and building materials company. Boise Cascade went public in 2013 after nine years as a privately held company. The company surprised Wall Street last week with third-quarter revenue and profit much higher than the market’s expectations. EPS were $0.56 versus the consensus estimate of $0.48. Revenue was $991.6 million versus the expected $969.6 million. Full-year EPS are expected to grow 42% and 48% in 2016 and 2017 (December year-end). The 2016 P/E is extremely low at 14.4. The stock has upside price resistance at 38-39. Rating: Buy.
Harman International Industries (HAR) is a manufacturer of vehicle audio systems. HAR is a growth and income stock with a 1.3% dividend yield. The stock price is slowly climbing toward short-term price resistance around 118. Rating: Buy.
Intuit (INTU) is an industry leader in financial management software solutions. Intuit will report first-quarter 2016 results after the market closes on November 19. Investors can listen to the earnings conference call that afternoon at 1:30 PM PT at http://investors.intuit.com/events.cfm. INTU is an undervalued, aggressive growth stock with a 1.2% dividend and a strong balance sheet. INTU is now consolidating during an uptrend. I expect the stock to continue climbing toward 107 this year. Rating: Buy.
Johnson Controls (JCI) operates in the areas of energy management and auto batteries. JCI is an undervalued growth and income stock with a 2.3% dividend yield. JCI is slowly edging higher and could reach the low 50s in the coming months, at which point I expect the stock to trade sideways. Rating: Buy.
Robert Half International (RHI) is a staffing and consulting company. RHI is a growth stock with a 1.5% dividend yield and a strong balance sheet. People who buy RHI before the ex-dividend date of November 23 will receive the next dividend. RHI is slowly recovering from the August market correction. The price could rise as high as 58 this year. Rating: Buy.
Whirlpool (WHR) is a global appliance manufacturer. The undervalued stock offers strong earnings growth, a 2.3% dividend yield and big capital gain potential. People who buy WHR before the ex-dividend date of November 18 will receive the next dividend. Continue accumulating shares of WHR while we await the stock price recovery. Rating: Buy.
| Buy Low Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 11/09/15 | Total Return | Rating |
| Axiall (AXLL) | 11/9/15 | 22 | 121 | -4% | Buy |
| Bank of New York Mellon (BK) | 10/6/15 | 40 | 11% | Sold | |
| The Boeing Company (BA) | 10/6/15 | 135 | 146 | 8% | Hold |
| Boise Cascade (BCC) | 11/9/15 | 30 | 31 | 1% | Buy |
| Harman International Industries (HAR) | 10/6/15 | 105 | 108 | 2% | Buy |
| Intuit (INTU) | 10/6/15 | 91 | 98 | 7% | Buy |
| Johnson Controls (JCI) | 10/6/15 | 43 | 45 | 4% | Buy |
| Robert Half International (RHI) | 10/6/15 | 51 | 53 | 3% | Buy |
| Whirlpool (WHR) | 11/3/15 | 160 | 156 | -3% | Buy |
| Buy Low Portfolio Return | 3% | ||||
| Dow Jones 30 Industrials | since 10-06-15 | 16,790 | 17,730 | 6% |