There are two major reasons that we saw a 3.6%+ drop in U.S. stock markets last week.
- The price of West Texas Intermediate crude oil (WTI) fell 10% in recent days, which triggered a drop in energy stocks.
- U.S. stock markets experienced a huge rebound in October. They’re now having a pullback, which is a perfectly normal reaction after a run-up.
I have come to an important conclusion. It’s becoming statistically clear to me that U.S. stock markets are recently far more volatile than normal, while not being overvalued nor overextended.
Right now, commodity prices, unusual interest rate situations and quick market corrections and rebounds are the tail that’s wagging the dog. In that light, I am changing my general position on stop-loss orders.
The practice of using stop-loss orders to protect profits works quite well during normal levels of market volatility, but it harms investors in the current market. Therefore, I encourage you not to use stop-loss orders on your undervalued growth stocks; instead, ride out the storms.
I would like to emphasize, however, that this suggestion only applies to:
- Undervalued stocks, in which the price/earnings ratios (P/Es) are lower than the earnings per share (EPS) growth rates; and
- Growth stocks, in which three-year EPS projections reflect double-digit annual percentage gains.
My suggestion does not apply to day-trading, low-priced stocks or companies with slow EPS growth, falling EPS or net losses.
Please hold onto your undervalued growth stocks during market turmoil, and consider adding to them during market dips. These are the best companies on Wall Street for investors seeking capital gains while minimizing risk.
Two Sides of the Retail Dollar
Last week, during the stock market correction, the retail sector got slammed. Shares of discount retailer Big Lots (BIG) fell about 15% and GameStop (GME) fell 21%. There was no company-specific bad news for BIG, and one GME rating downgrade from Barron’s. The earnings outlook hasn’t budged for either company in the past six to eight weeks.
The problem had more to do with Macy’s (M) and Wal-Mart Stores (WMT) reporting earnings problems and skittishness on Wall Street. A poor earnings outlook for a prominent company can temporarily cast a cloud over the entire sector. We saw that recently in the housing sector, when labor shortages at PulteGroup (PHM) pulled D.R. Horton’s (DHI) share price down … until DHI reported great earnings last week and DHI rebounded. This is a common scenario in the stock market. The situation usually clears up during the next cycle of earnings reports, when investors begin to, once again, confidently differentiate between the winners and losers in the affected stock sector.
Analysts’ consensus EPS estimates for BIG still reflect growth of 20.3%, 18.6% and 20.8% in 2016 through 2018 (January year-end). That’s tremendous earnings growth. In comparison, WMT’s EPS are expected to fall -11.0% and -7.3% in 2016 and 2017, followed by slow 6.2% growth in 2018 (January year-end).
BIG’s 2016 and 2017 price/earnings ratios (PEs) are 14.0 and 11.8, very low in comparison to the EPS growth rates; indicating that the stock is quite undervalued.
I am confident that BIG’s and GME’s share prices will rebound with strength this winter. In the meantime, investors who buy now are locking in 1.8% and 3.8% dividend yields, respectively.
This Week’s Best Capital Gain Opportunities
I’m not worried about the prices of the stocks in my portfolios, and I still don’t think it’s time to buy energy stocks, since oil prices haven’t stopped falling. In general, bargain hunters will fare well if they wait for prices of depressed investments to stabilize after a long downturn—and I’m talking about oil prices in 2015, housing prices after 2008, etc., not the one-week or one-month volatility that you might see in a random stock.
When an investment falls a large amount—50% or more—there’s plenty of time to buy before it begins its real recovery. If you wait and buy later, you will minimize your downside risk, and minimize the time spent waiting for the investment to produce capital gains.
While you’re waiting for a good opportunity to buy energy stocks—in 2016? 2017?—here are some great opportunities today:
- Now that the worry has dissipated in the housing sector, I’m changing the rating on D.R. Horton (DHI) from Hold to Strong Buy.
- The stocks in the Growth Portfolio that are showing the most strength right now are Chemtura (CHMT), D.R. Horton (DHI) and Vulcan Materials (VMC).
- The stocks in the Growth & Income Portfolio that are showing the most strength right now are General Motors (GM) and H&R Block (HRB). The stocks in the Buy Low Opportunities
- Portfolio that are showing the most strength right now are Boeing (BA), Intuit (INTU) and Johnson Controls (JCI).
The portfolio stocks that offer 10% or more in the short-term (for traders) based on current trading ranges include Abercrombie & Fitch (ANF), Axiall (AXLL), Big Lots (BIG), Boise Cascade (BCC), GameStop (GME), Harman International Industries (HAR) and The Priceline Group (PCLN).
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company. ADBE is a slightly undervalued aggressive growth stock with a strong balance sheet. The stock reached new highs this month, then barely pulled back during last week’s market downturn. It’s now trading between 88 and 92. I expect ADBE to continue climbing this year, fueled by strength in software stocks and institutional window dressing activity. Rating: Strong Buy.
Chemtura (CHMT) manufactures specialty chemicals. CHMT is a very undervalued aggressive growth stock. Wall Street’s earnings estimates for Chemtura’s fourth quarter and full-year 2016 have been ratcheting upwards in recent weeks (December year-end). The stock reached new highs this month, then barely pulled back during last week’s market downturn. It’s now trading between 29 and 32. CHMT could easily continue climbing this year. 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. The stock traded at new highs in recent weeks, then barely pulled back during last week’s market downturn. It’s now trading between 48 and 52. DAL could easily continue climbing this year. Rating: Strong Buy.
D. R. Horton (DHI) is a homebuilder. DHI shares have traded sideways since reaching annual highs in mid-August, amid stock market weakness compounded by industry concerns over housing labor shortages. The company reported fourth-quarter results on November 10, which turned out to be a strong earnings beat, with full-year profits also coming in a bit higher than expected. Quarterly new home orders, sales and EPS rose significantly. In addition, the quarterly dividend was increased 28% from $0.0625 to $0.08. The market was thrilled, sending the stock price back up to upside resistance at 32.
DHI is an undervalued growth stock. Wall Street’s consensus EPS estimates for DHI have increased, now reflecting growth of 17.0%, 13.7% and 12.4% in 2016 through 2018 (September year-end). The 2016 P/E is low in comparison to the earnings growth, at 13.1. I anticipate the stock will briefly trade between 30 and 32, then reach new annual highs before the new year. Rating: Strong Buy.
E*Trade Financial (ETFC) offers financial brokerage and banking products and services. I introduced ETFC into the Growth portfolio last week. ETFC is a volatile aggressive growth stock. The 2016 P/E is 18.6, which is at the bottom of its 2014-2015 P/E range of 18-27, meaning that the stock is not only undervalued vs. its 2016 projected earnings growth, but also undervalued vs. its historical P/E range. I expect the stock to trade briefly between 28 and 31.50, which it could surpass this year. Rating: Strong Buy.
The Priceline Group (PCLN) is an online travel service company. Last week, Priceline announced a new business venture between its Booking.com unit and Contur, a leading provider of corporate travel and expense-management solutions. The venture will enhance Booking.com’s total revenue.
The company repurchased $588 million of stock during the current fourth quarter, and has only $162 million remaining in last February’s $3 billion repurchase authorization. (Hint: will we see another repurchase announcement in early 2016?) PCLN is rated Hold due to its fair 2016 valuation, and recently completed run-up. I expect PCLN to trade between 1270 and 1476 in the coming months. However, PCLN hasn’t yet bottomed from the current stock market pullback, so there’s still some downside risk. Rating: Hold.
Royal Caribbean Cruises (RCL) is a very undervalued aggressive growth stock with a 1.6% dividend. RCL reached a new high in October, just over 100, and will likely trade between 92 and 100 in the near term. Rating: Strong Buy.
Vulcan Materials (VMC) produces construction aggregates. Vulcan’s consensus 2016 EPS estimate reflects 75% growth, and the 2016 P/E is very low in comparison, at 27.6. VMC was barely affected by last week’s market downturn. Based upon its undervaluation, bullish chart and likely window dressing activity, I expect the stock to continue climbing toward all-time highs of 122 this year. Please expect volatility in January, when window dressing season will abruptly end. Rating: Strong Buy.
WellCare Health Plans (WCG) is a very undervalued aggressive growth stock in the managed healthcare sector. WellCare’s consensus 2016 EPS estimate reflects 34% growth, while the 2016 P/E is only 16.9. The stock price has been stuck in a sideways trading pattern with strong support at 77. Traders, value investors and growth investors, should buy now. Rating: Buy.
| Growth Portfolio | |||||
| Stock (Symbol) | Date Added | Price Added | Price 11/16/15 | Total Return | Rating |
| Adobe Systems (ADBE) | 10/6/15 | 85 | 90 | 5% | Strong Buy |
| Chemtura (CHMT) | 10/6/15 | 31 | 30 | -2% | Strong Buy |
| Delta Air Lines (DAL) | 10/6/15 | 46 | 48 | 4% | Strong Buy |
| D.R. Horton (DHI) | 10/6/15 | 31 | 31 | 3% | Strong Buy |
| E*Trade Financial (ETFC) | 11/12/15 | 29 | 29 | -1% | Strong Buy |
| Priceline (PCLN) | 10/6/15 | 1,275 | 1,267 | -1% | Hold |
| Royal Caribbean Cruises (RCL) | 10/6/15 | 92 | 94 | 3% | Strong Buy |
| Vulcan Materials (VMC) | 10/6/15 | 94 | 102 | 8% | Strong Buy |
| WellCare Health Plans (WCG) | 10/6/15 | 84 | 79 | -6% | Buy |
| Growth Portfolio Total Return* | 1% | ||||
| S&P 500 | since 10-06-15 | 1,982 | 2,053 | 4% | |
Updates on Growth & Income Portfolio Stocks
Abercrombie & Fitch (ANF) is a fashion clothing retailer. Wall Street expects aggressive earnings growth from Abercrombie in fiscal 2017 and 2018 (January year-end). The stock is undervalued, the balance sheet is strong and the dividend yield is 4.0%. ANF traded between 19 and 23 for the last eight months, except for a brief shakeout during the August stock market correction. The stock has pulled back with last week’s market correction. ANF is a bargain right now. Rating: Strong Buy.
Big Lots (BIG) is a discount retailer. BIG is a volatile, undervalued aggressive growth stock with a 1.8% dividend yield and a strong balance sheet. The stock has been trading between 41 and 51 since August. BIG is appropriate for traders, growth investors, value investors and growth & income investors. Rating: Strong Buy.
Carnival (CCL) is a cruise vacation company. CCL is an undervalued aggressive growth stock with a 2.4% dividend yield and a strong balance sheet. People who buy CCL before the ex-dividend date of November 18 will receive the next dividend. I expect the share price to trade between 49.50 and 54 in the coming days during the current market correction. 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 & income stock with a 3.8% dividend yield and a strong balance sheet. GME is appropriate for traders, value investors, and growth & income investors. Rating: Strong Buy.
General Motors (GM) is achieving its sixth consecutive year of increased new light vehicle sales, expected to surpass record volume from the year 2000. GM is a very undervalued growth & income stock, with a 4.2% dividend yield. The stock has shown considerable strength in light of last week’s market correction. I expect GM to surpass upside price resistance of 36, and climb toward 39, before year end. 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. The stock had a slight pullback with last week’s market correction; and could easily continue reaching new highs this year. Rating: Strong Buy.
| Growth & Income Portfolio | |||||
| Stock (Symbol) | Date Added | Price Added | Price 11/16/15 | Total Return | Rating |
| Abercrombie & Fitch (ANF) | 11/9/15 | 22 | 20 | -12% | Strong Buy |
| Big Lots (BIG) | 10/6/15 | 49 | 42 | -14% | Strong Buy |
| Carnival (CCL) | 10/6/15 | 50 | 51 | 2% | Strong Buy |
| GameStop (GME) | 10/6/15 | 43 | 38 | -11% | Strong Buy |
| General Motors (GM) | 10/6/15 | 32 | 35 | 10% | Strong Buy |
| H&R Block (HRB) | 10/6/15 | 36 | 36 | 3% | Strong Buy |
| Growth & Income Portfolio Total Return* | -1% | ||||
| Dow Jones 30 Industrials | since 10-06-15 | 16,790 | 17,483 | 4% | |
Updates on Buy Low Opportunities Portfolio Stocks
Axiall Corp. (AXLL)—formerly Georgia Gulf Corp.—manufactures chemicals and plastics. I recently added AXLL to the Buy Low Opportunities Portfolio because the company is expected to have very aggressive earnings growth in the next two years, after a poor 2015. The 2016 P/E is extremely low at 15.4, and the current dividend yield is 3.3%. AXLL has upside price resistance at 34–35. This stock could appeal to traders, aggressive growth investors, value investors and growth & income investors. Rating: Buy.
The Boeing Company (BA) shares remain modestly undervalued based on 2016 numbers, and have a 2.4% dividend yield. The stock price has been consolidating between 142 and 148 since late October. When BA rises again, there will be upside resistance at February’s all-time highs in the upper 150s. Rating: Hold.
Boise Cascade (BCC) is a wood products and building materials company. BCC is a very undervalued aggressive growth stock. The stock has upside price resistance at 38–39. Risk-tolerant and patient aggressive growth investors should buy now. Rating: Buy.
Harman International Industries (HAR) is a manufacturer of vehicle audio systems. HAR is a growth & income stock with a 1.4% dividend yield. The pullback from last week’s stock market correction has put the share price in a position to rebound 10% back to early November levels, and 18% toward short-term upside 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. 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 & income stock with a 2.4% dividend yield. JCI shares 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 1.6% 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’s recovery from the August market correction has been slow. Nobody has missed their opportunity to catch the stock’s eventual rebound. Rating: Buy.
Whirlpool (WHR) is a global appliance manufacturer. This undervalued growth stock has a 2.4% 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 Opportunities Portfolio | |||||
| Stock (Symbol) | Date Added | Price Added | Price 11/16/15 | Total Return | Rating |
| Axiall Corp. (AXLL) | 11/9/15 | 22 | 21 | -4% | Buy |
| Bank of New York Mellon (BK) | 10/6/15 | 40 | 43 | 11% | Sold |
| The Boeing Company (BA) | 10/6/15 | 135 | 144 | 7% | Hold |
| Boise Cascade (BCC) | 11/9/15 | 30 | 30 | -2% | Buy |
| Harman International Industries (HAR) | 10/6/15 | 105 | 101 | -4% | Buy |
| Intuit (INTU) | 10/6/15 | 91 | 97 | 6% | Buy |
| Johnson Controls (JCI) | 10/6/15 | 43 | 44 | 3% | Buy |
| Robert Half International (RHI) | 10/6/15 | 51 | 51 | 0% | Buy |
| Whirlpool (WHR) | 11/3/15 | 160 | 155 | -4% | Buy |
| Buy Low Portfolio Total Return* | 2% | ||||
| Dow Jones 30 Industrials | since 10-06-15 | 16,790 | 17,483 | 4% | |