Happy Thanksgiving!
As we approach the end of 2015, I wish you peace and blessings. Thank you for joining me at Smart Investing in Turbulent Times. I’m grateful for your participation, and for the opportunity to increase your investing success.
My investment strategy is entirely focused on numbers and charts ... it’s a Rain Man thing. In that light, I’m done looking at 2015 earnings projections. Professional investors, who drive the markets, focus on future earnings because stock price movement is highly correlated to future earnings expectations. And by “future,” I’m not talking about five years from now; I’m talking about calendar years 2016 and 2017.
There’s been lots of news on our portfolio stocks in recent days: upside earnings surprises (Abercrombie & Fitch and Intuit), downside earnings surprises (GameStop), share buybacks (E*Trade), dividend increases (Johnson Controls), and M&A activity (Delta Air Lines). If you’re a newer investor, read my comments on those situations to learn how these events can affect companies and stock prices.
There’s a dark cloud on the horizon regarding Obamacare. (Yes, the cloud’s always been there, but now the bad weather is arriving.) News articles are making it increasingly clear that UnitedHealthcare might leave the Obamacare exchanges if it can’t find a way to turn a profit, and that Aetna and Anthem might follow suit. Many other lesser-known insurance companies have already given up on Obamacare and exited the health insurance exchanges.
Investors must face this bald fact: If big health insurance companies leave the exchanges, stocks are going to fall throughout that sector, because the market will be panicked over their profit prospects. The baby will be thrown out with the bathwater.
I anticipate a prolonged drop in their stock prices, followed by a several-month period during which the stock prices stabilize. Behind the scenes, insurance companies will assess the fallout on their balance sheets, while stock portfolio managers pay close attention to earnings reports and statements from corporate management. Once it becomes clear that earnings estimates are stable--lacking ugly downside surprises--then Wall Street will once again be able to make informed buying decisions on these stocks. The most profitable companies will lead the sector’s rebound.
This potentially ugly scenario has not begun. I’m just letting you know what to expect, so that when it happens, you don’t jump in to bargain hunt, three days after the stocks begin falling. You will have many, many months to make informed buying decisions; there will be no hurry.
As for WellCare Health Plans (WCG) within the Growth Portfolio, I am paying keen attention to it, in light of potential fallout from Obamacare.
I made a couple of rating changes in the portfolios today:
*I’m changing the rating on Delta Air Lines (DAL) in the Growth Portfolio, from Strong Buy to Buy. Delta announced its intent to purchase a 49% stake in Grupo Aeromexico. I’m always cautious when a company makes a large acquisition, until I see the new balance sheet numbers in the coming months.
*I’m changing the rating on Abercrombie & Fitch (ANF) in the Growth & Income Portfolio, from Strong Buy to Hold (with caveats!), after last week’s huge price run-up.
*I’m changing the rating on Intuit (INTU) from Strong Buy to Hold. The stock has already risen 11% since joining the Buy Low Opportunities Portfolio in early October, and there’s only about 5% remaining on the upside before it reaches price resistance.
These are some of the best portfolio stocks to buy today:
*If you like buying stocks as they’re breaking out of trading ranges for immediate growth, look at Adobe Systems (ADBE), D.R. Horton (DHI), E*Trade Financial (ETFC), H&R Block (HRB), Johnson Controls (JCI), Vulcan Materials (VMC) and Whirlpool (WHR).
*If you like buying stocks with lower share prices, look at E*Trade (ETFC) and D.R. Horton (DHI). As a reminder, I don’t ever recommend stocks with price support below 18. I’ll discuss that more next week in the December issue. Yes, there’s a method to my madness!
*If you like buying extreme bargains during market volatility, today’s the day to buy GameStop (GME)!
*If you’re a trader who wants to make 10% or more in a few short weeks, take a look at Big Lots (BIG), Robert Half International (RHI) and Whirlpool (WHR).
*If you’re looking to lock in a big dividend yield while waiting for capital gains, consider Axiall (AXLL) at 3.3%, Big Lots (BIG) at 3.2%, GameStop (GME) at 4.1% and General Motors (GM) at 4.0%.
You’re always welcome to ask me questions: crista@cabotwealth.com. There’s much about stock investing that’s counter-intuitive. I’m happy to shed light on confusing concepts.
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 last week, and is up 8% so far in the Growth Portfolio. 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 full-year 2016 increased again last week. The stock reached new highs this month, then had an orderly price correction. It’s now climbing back toward 32. CHMT could easily reach new highs again this year. Rating: Strong Buy.
Delta Air Lines (DAL) Last week, Delta announced its intention to buy up to 49% of Grupo Aeromexico stock. I always become cautious when expensive corporate transactions take place, because they can significantly impact cash flow, debt levels and the timing of share repurchases or dividend increases. It could be four months before the cost of this transaction becomes more public, via quarterly earnings reports. I’ll be keeping a close eye on Delta’s debt levels. For now, I’m changing my rating on DAL from Strong Buy to Buy.
Delta 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 is up 6% so far in the Growth Portfolio. DAL reached new highs in recent weeks, pulled back a bit, and is now heading back toward 51.50. DAL could easily reach new highs again in December. Rating: Buy.
D. R. Horton (DHI) is a homebuilder. DHI is an undervalued growth stock. Last week I said, “I anticipate the stock will briefly trade between 30 and 32, then reach new annual highs before the new year.” The stock proceeded to break past upside price resistance and began reaching new annual highs again, with possible upside resistance around 36. Rating: Strong Buy.
E*Trade Financial (ETFC) offers financial brokerage and banking products and services. Last week, E*Trade announced that it will buy back up to $800 million of its common stock, through March 31, 2017. This was the company’s first repurchase announcement in eight years. Analysts will therefore increase ETFC’s EPS growth estimates in the coming weeks. ETFC is a very undervalued aggressive growth stock. The chart is bullish; the stock could surpass the June annual high of 31.48 before the year’s end. Expect volatility. Rating: Strong Buy.
The Priceline Group (PCLN) is an online travel service company. PCLN is rated Hold due to its fair 2016 valuation, and recently completed run-up. I expect PCLN to trade between 1,260 and 1,476 in the coming months. There’s an opportunity in the coming days for traders who are confident in their chart-reading abilities. Everyone else should stand pat, and we’ll revisit the potential trading opportunity next week. 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. The stock will likely trade between 93 and 100 for a short while, then continue its upward climb. Rating: Strong Buy.
Vulcan Materials (VMC) produces construction aggregates. Wall Street increased 2015 and 2016 earnings estimates for VMC in recent days. The stock rose 13% since joining the Growth Portfolio in October, and remains dramatically undervalued, despite its huge 2015 run-up. VMC broke past short-term upside price resistance again last week, and is actively climbing toward all-time highs of 122 this year, partially spurred on by fourth-quarter window dressing. Aggressive growth investors should buy now, or on any down day in the market this week. 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. The stock price has been stuck in a sideways trading pattern, with strong support at 77. It could easily climb to 90 before the new year. Be prepared for continued volatility. (Make sure to read my comments on health insurance stocks in today’s introduction, above!) Rating: Buy.
| Growth Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 11/23/15 | Total Return | Rating |
| Adobe Systems (ADBE) | 10/6/15 | 85 | 92 | 8% | Strong Buy |
| Chemtura (CHMT) | 10/6/15 | 31 | 31 | 0% | Strong Buy |
| Delta Air LInes (DAL) | 10/6/15 | 46 | 49 | 6% | Buy |
| D.R. Horton (DHI) | 10/6/15 | 31 | 32 | 6% | Strong Buy |
| E*Trade Financial (ETFC) | 11/12/15 | 29 | 30 | 2% | Strong Buy |
| Priceline (PCLN) | 10/6/15 | 1,275 | 1,264 | -1% | Hold |
| Royal Caribbean Cruises (RCL) | 10/6/15 | 92 | 95 | 3% | Strong Buy |
| Vulcan Materials (VMC) | 10/6/15 | 94 | 106 | 12% | Strong Buy |
| WellCare Health Plans (WCG) | 10/6/15 | 84 | 80 | -5% | Buy |
| Growth Portfolio Return | 2% | ||||
| S&P 500 | since 10-06-15 | 1,982 | 2089 | 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 fashion clothing retailer. Last week, the company reported a huge third-quarter earnings beat. Despite flat year-over-year sales, EPS more than doubled Wall Street’s expectations; inventories decreased and gross margins increased. The stock soared 25% that day, which is practically unheard of except in cases of M&A activity.
Hold the stock. The market’s quite worried about retailers, but ANF just fell off the sector’s hit list. However, the pressure’s not off. Industrywide inventories are high going into the fourth quarter; therefore Morgan Stanley says, “We expect ... an intensely promotional 4Q environment.”
The Street will invariably adjust their 2016 and 2017 EPS estimates for ANF (January year-end), now that 3Q results were a complete blowout. I’m going to need to wait for the new numbers, before deciding what’s most likely to happen next with the stock. Stock price movement has a huge correlation to earnings estimates, so even a 10% change in growth expectations can have a big impact on capital gain opportunities.
ANF is up 13% since joining the Growth & Income Portfolio in early November. Last week, the stock launched out of its trading range of 19 to 23. At this point, we’ll either see a brief pullback to 22/23, or an immediate climb to 28.
Even though I’m more of a buy-and-hold, patient investor, I’m not going to look a gift horse in the mouth. If the stock shoots up to 28 this year, it’s going to need to rest for quite a while before climbing any further. Odds are, I’ll pull the plug at that point, and move on to a more undervalued opportunity.
Hang in there. ANF just became the fashionable stock to own in a dreary sector. Mutual funds need to own retail stocks, and they’re all going to gravitate toward the few that are providing good news. Buy on dips to 22.50, and sell on a quick run-up to 28. For all other price scenarios, Hold, and we’ll review the stock again next week. Rating: Hold.
Big Lots (BIG) is a discount retailer. BIG is a volatile, undervalued aggressive growth & income stock with a 1.7% dividend yield and a strong balance sheet. Poor earnings outlooks at Macy’s, Wal-Mart, and Urban Outfitters have cast a pall over the entire retail sector. But as I mentioned in my comments on Abercrombie & Fitch, above, portfolio managers are going buy the few shining stars in retail. I wholeheartedly expect BIG to benefit from that buying activity. The stock has been trading between 41 and 51 since August, currently on an uptrend. It could reach 48 immediately, then 51 this winter. Rating: Strong Buy.
Carnival (CCL) is a cruise vacation company. CCL is a very undervalued aggressive growth & income stock with a 2.3% dividend yield and a strong balance sheet. The stock is trading between 49.50 and 54, and could surpass 54 this year. Rating: Strong Buy.
GameStop (GME) is a video game and electronics retailer. GameStop reported third-quarter results yesterday below market expectations, causing the stock to fall. The drop in the share price was a huge overreaction to temporary news that is already righting itself.
Lower-than-expected sales in the third quarter, combined with delayed new store openings, impacted third-quarter results. Revenue fell 3.6% and net income fell 0.9% vs. a year ago. However, GameStop fully expects to make up for the disappointment in the fourth quarter.
Fourth quarter hardware sales have already increased dramatically, with strong demand for new video games. It’s important to note that since the company reiterated its full-year earnings outlook, the stock is now more undervalued than it was last week.
One very curious thing that happened in recent days is that GME’s consensus 2018 EPS estimate shot upward (January year-end), yet there’s no major accompanying news or research. Unless the info is a typo (which rarely happens), I presume that the strong outlook for fiscal 2018 is related to the recent Geeknet acquisition. Analysts now expect 26.9% EPS growth in 2018.
That surge in 2018 EPS growth is not only huge, it’s a game-changer. While it’s way too early to act on that info, here’s what will play out: the stock will, at least for a while, morph from a growth & income stock into an aggressive growth stock. It will land on the radars of growth and aggressive growth portfolio managers; whereas its been firmly planted in the growth & income category up until now. The ensuing buying activity will drive the price up.
GME is a dramatically undervalued growth & income stock with a 4% dividend yield and a strong balance sheet. Patient stock investors who buy today should be very handsomely rewarded within a few months. Rating: Strong Buy.
General Motors (GM) is a very undervalued growth & income stock, with a 4.0% dividend yield. Last week I said, “I expect GM to surpass upside price resistance of 36, and climb toward 39, before year-end.” The climb has begun. After 38/39, the next resistance level will be at the all-time highs from December 2013, around 41/42. GM is up 12% since joining the Growth & Income Portfolio, and there’s a lot more upside to the stock. 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 reached new highs in early November, then completed a quick price correction. HRB could easily begin reaching new highs again this month. Rating: Strong Buy.
| Growth & Income Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 11/23/15 | Total Return | Rating |
| Abercrombie & Fitch (ANF) | 11/9/15 | 22 | 25 | 13% | Hold |
| Big Lots (BIG) | 10/6/15 | 49 | 46 | -6% | Strong Buy |
| Carnival (CCL) | 10/6/15 | 50 | 51 | 3% | Strong Buy |
| GameStop (GME) | 10/6/15 | 43 | 38 | -12% | Strong Buy |
| General Motors (GM) | 10/6/15 | 32 | 36 | 12% | 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 | 17,824 | 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. AXLL is a very undervalued, aggressive growth stock. The current dividend yield is 3.4%. AXLL has upside price resistance at 34-35, which it could reach in 2016, potentially giving investors an 84% capital gain. This stock could appeal to traders, aggressive growth investors, value investors, and growth & income investors. Rating: Buy.
Boeing (BA) Yesterday, Britain announced a 10-year plan for $18 billion in defense spending, including nine of Boeing’s submarine-hunting aircraft. BA shares remain modestly undervalued based on 2016 numbers, and have a 2.4% dividend yield. The stock is up 10% so far in the Buy Low Opportunities Portfolio. BA broke through its short-term trading range last week; and is now heading toward its all-time high around 155, where it traded February to March 2015. When the stock reaches 155, expect it to stop climbing. Rating: Hold.
Boise Cascade (BCC) is a wood products and building materials company. The company’s earnings outlook for 2015 has improved nicely in recent weeks; although we definitely bought BCC for the expected aggressive growth in 2016 and 2017. The stock, which is significantly undervalued, is currently trading between 29 and 33. I expect BCC to exceed that range before year-end, then head toward medium-term resistance at 38 to 39. 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 the recent stock market correction has put the share price in a position to rebound 10% quickly to $111, and 18% toward short-term upside resistance around 118. Rating: Buy.
Intuit (INTU) is an industry leader in financial management software solutions. Last week, Intuit reported a strong first-quarter earnings beat, causing the stock price to shoot up 6%--a huge one-day move. This was the fourth consecutive quarter that Intuit’s results surpassed the analysts’ consensus estimate. Quickbooks online subscribers grew 57%. Quarterly revenue grew 16.5% vs. last year. Second-quarter revenue is expected to grow 17% to 20% year-over-year.
INTU is a slightly undervalued, aggressive growth stock with a 1.2% dividend and a strong balance sheet. I continue to expect the stock to climb to medium-term upside price resistance at 107. At that point, I expect the stock to trade sideways for at least a few months. INTU is up 11% in the Buy Low Opportunities Portfolio. Now that there’s less than 5% near-term upside in the stock, I’m changing the rating to hold. At 107, I will likely sell the stock, since it will have fulfilled my expectations for a profitable rebound from an unwarranted low price. Rating: Hold.
Johnson Controls (JCI) operates in the areas of energy management and auto batteries. JCI is an undervalued growth & income stock with a 2.5% dividend yield. Last week, the company increased its quarterly dividend by 11.5% to $0.29 per share. The stock is up 6% since joining the Buy Low Opportunities Portfolio. JCI is climbing, and could reach the low 50s in the coming months. 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. The stock is trading between 50 and 54, with each upturn reaching a little higher than the last. Both short-term traders and patient investors could buy now, and likely make 8% to 10% profit before the New Year. Rating: Buy.
Whirlpool (WHR) is a global appliance manufacturer. This undervalued growth stock has a 2.2% dividend yield, and big capital gain potential. The stock price recovery just began. It could climb another $20 this winter before pausing. Rating: Buy.
| Buy Low Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 11/23/15 | Total Return | Rating |
| Axiall (AXLL) | 11/9/15 | 22 | 19 | -10% | Buy |
| The Boeing Company (BA) | 10/6/15 | 135 | 148 | 10% | Hold |
| Boise Cascade (BCC) | 11/9/15 | 30 | 31 | 3% | Buy |
| Harman International Industries (HAR) | 10/6/15 | 105 | 102 | -3% | Buy |
| Intuit (INTU) | 10/6/15 | 91 | 101 | 11% | Hold |
| Johnson Controls (JCI) | 10/6/15 | 43 | 46 | 7% | Buy |
| Robert Half International (RHI) | 10/6/15 | 51 | 51 | 0% | Buy |
| Whirlpool (WHR) | 11/3/15 | 160 | 164 | 3% | Buy |
| Buy Low Portfolio Return | 3% | ||||
| Dow Jones 30 Industrials | since 10-06-15 | 16,790 | 17,824 | 6% |