2015 is almost over, thank the Lord! The stock market lacked momentum, trading sideways virtually the entire year. Investors couldn’t grab onto a theme and run with it, because the themes kept changing! Was the Fed going to raise rates, or not, and when would we hear a decision? Oil prices stopped falling, and everybody relaxed, only to see them fall again in December. The news on housing was bullish, then bearish, then bullish, then bearish ... Wages and work hours rose, but so did every taxpayer’s legal obligation to fund Obamacare, far outpacing their increased income.
The S&P 500 index is down 2.59% year-to-date, and the Dow is down 3.90%. For comparison, the most recent disappointing years in S&P 500 performance were a flat year in 2011, and a 38% drop in 2008. Based on recent market-trading patterns, I think we’re likely to see the S&P bounce up to 2,075 before year-end, and finish the year close to breakeven.
That’s not fun, and it’s not profitable. We’re in this to make money, save for college expenses, retirement and the American Dream.
The thing is, with stock investing, there’s no straight path to the goal. It’s a rocky road. Do you know that from 1995 to 1999, the S&P rose between 20% and 34% each year, followed by three straight years of declines in 2000, 2001 and 2002, falling between 10% and 23% each year. We don’t often see a “normal” year in the stock market.
I look at stock investing like a high school track & field coach looks at his upcoming track meets. How’s my team looking? Are they healthy or injured? Are they going to improve this season? What’s the competition doing? My state champion hurdler graduated last year. Who’s going to be this year’s star?
There are a lot of great, profitable, and undervalued American companies in the Smart Investing portfolios. They’re not all going to rise simultaneously. Here’s some advice on what you’re likely to see in the near-term.
The sprinter: D.R. Horton (DHI) makes brief rapid moves, then sits on the sidelines for a while. Buy DHI during any pullback for a nice short-term capital gain on its next sprint.
The long-distance runner: Adobe Systems (ADBE) has more consistent upward momentum than any stock in the Smart Investing portfolios.
The hurdler: These are stocks that are rising and falling within a trading range, such as Federated Investors (FII) and Whirlpool (WHR). You can trade them, or buy them to hold.
The discus thrower: The market is keen on airline stocks. Delta Air Lines has a stronger chart than just about any of its competitors. I expect DAL to continue rising.
The multi-event competitor: Sometimes you find a stock with a huge dividend yield and prospects for huge earnings growth. Best of both worlds! Two excellent choices include higher-risk Axiall (AXLL) and lower-risk Federated Investors (FII).
The relay team: Carnival (CCL) and Royal Caribbean Cruises (RCL) are receiving focused market attention right now. They’re both very undervalued, with nice dividends and bullish charts. If you want to own a stock that’s likely to rise immediately, buy CCL or RCL.
The injured list: These stocks all need to stabilize before they can rise again: Axiall (AXLL), Big Lots (BIG), GameStop (GME) and Robert Half (RHI). Some of them have huge dividends, which attract new investors; especially those fleeing bond markets.
In the coming weeks, I’ll talk more about capital gain prospects for 2016, including the effects of China’s weak economy, falling commodity prices, continued Fed rate increases, a trembling junk bond market, and the recession in American manufacturing. I expect 2016 to be another choppy year in U.S. stock markets, but there are always opportunities to make money. I’m as motivated to capitalize on those as you are!
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company. Wall Street’s consensus 2016 and 2017 EPS growth projections of 33% and 34% could continue to change in the coming weeks, as analysts reassess Adobe’s outlook, now that final 2015 numbers were reported. The P/E is currently 33, indicating that the stock is fairly valued. ADBE reached new all-time highs last week, and could continue climbing in the coming weeks. Rating: Strong Buy.
Chemtura (CHMT) manufactures specialty chemicals. CHMT is a vastly undervalued aggressive growth stock. CHMT reached new highs in November, and is now having a price correction with the overall market. Rating: Strong Buy.
Delta Air Lines (DAL) hosted an Investor Day last week. There were no major announcements. The company is focused on expanding international investments, reducing expenses and taxes, paying down $4 billion of debt by 2020, and returning about 50% of free cash flow to shareholders--approximately $3 billion in 2016--via dividends and share repurchases.
I have Delta at a Buy rating, rather than a Strong Buy, due to the company’s intended purchase of a 49% stake in Grupo Aeromexico. The purchase will potentially increase Delta’s debt obligations to levels that don’t meet my investment criteria. However, the company is also focused on debt reduction. I will not upgrade Delta until I see the final 2015 debt ratio in a few months.
Wall Street’s 2016 consensus EPS estimate for Delta has increased every time I’ve reviewed the numbers since September. EPS are expected to grow aggressively at 27.5% in 2016 (December year-end). The 2016 P/E is 8.5, and the dividend yield is 1.1%.
DAL shares have reached new highs repeatedly this fall, including last week; most recently trading between 49 and 52. I expect the stock to continue climbing, despite weakness in the broader market. Rating: Buy.
D.R. Horton (DHI) is a homebuilder. DHI is a modestly undervalued growth stock with a 1.0% dividend yield. The stock broke past annual highs in late November, and is now trading between 30.50 and 33.00. I expect DHI to climb past 33 this winter. Rating: Strong Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. This month, Moody’s Investors Service raised the ratings on E*Trade Financial and E*Trade Bank. ETFC is a very undervalued aggressive growth stock. ETFC’s price rebounded nicely from the August market correction, and is now trading between 28.50 and 31.00. Rating: Strong Buy.
Priceline (PCLN) is an online travel service company. PCLN is a fairly valued growth stock. PCLN reached new all-time highs in November, then experienced a big pullback. I believe the stock will rebound toward the November high of 1,476 this winter, barring unforeseen bad news. Rating: Buy.
Royal Caribbean Cruises (RCL) The market was excited last week as Royal Caribbean’s competitor, Carnival, reported a 40% increase in full-year 2015 earnings (November year-end). Wall Street’s expectation is that Royal Caribbean’s 2015 EPS will grow 42% (December year-end). Investors are realizing that vacation travel is a niche market sector that is delivering fantastic earnings; thus, the share prices are showing strength during a weak market.
RCL is a very undervalued aggressive growth stock with a 1.5% dividend yield. RCL is climbing toward its October all-time high, just over 100. Rating: Strong Buy.
Vulcan Materials (VMC) produces construction aggregates. VMC is a dramatically undervalued aggressive growth stock. VMC reached an annual high in late November, then corrected with the recent weak stock market. Rating: Strong Buy.
WellCare Health Plans (WCG) WCG is an undervalued aggressive growth stock in the managed healthcare sector. The stock price has been stuck in a volatile sideways trading pattern all year, with strong support at 77. Rating: Buy.
| Growth Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 12/21/15 | Total Return | Rating |
| Adobe Systems (ADBE) | 10/6/15 | 85 | 92 | 7% | Strong Buy |
| Chemtura (CHMT) | 10/6/15 | 31 | 27 | -13% | Strong Buy |
| Delta Air LInes (DAL) | 10/6/15 | 46 | 51 | 12% | Buy |
| D.R. Horton (DHI) | 10/6/15 | 31 | 31 | 3% | Strong Buy |
| E*Trade Financial (ETFC) | 11/12/15 | 29 | 29 | -2% | Strong Buy |
| Priceline (PCLN) | 10/6/15 | 1,275 | 1,276 | 0% | Buy |
| Royal Caribbean Cruises (RCL) | 10/6/15 | 92 | 99 | 8% | Strong Buy |
| Vulcan Materials (VMC) | 10/6/15 | 94 | 95 | 2% | Strong Buy |
| WellCare Health Plans (WCG) | 10/6/15 | 84 | 80 | -5% | Buy |
| Growth Portfolio Total Return | 1.3% |
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) is a discount retailer. BIG is an undervalued growth & income stock with a 2.0% dividend yield. Many retail stocks have been tossed aside by investors this year, including BIG. The good news is that, for the better stocks in the affected market sector, the prices often turn in January. Year-end earnings reports in February and March should further contribute to share price recoveries. There will be plenty of time to buy BIG and other downtrodden retail stocks once their share prices stabilize. Please give BIG a little time to recover. There’s absolutely nothing wrong at the company, and the fundamentals are GREAT. The average rating on Wall Street is a Buy, and the average price target is 50.50--32% above today’s price! Rating: Hold.
Carnival (CCL) is a cruise vacation company. Carnival reported full-year 2015 net income of $2.1 billion, up 40% over last year (November year-end). Revenue was $15.7 billion, impacted by $800 million of adverse currency exchange rates. The company repurchased approximately $400 million of stock in its third and fourth quarters. The market reacted by pushing CCL shares upward, despite overall market weakness.
CCL is an undervalued growth stock with a 2.3% dividend yield. The stock has recently traded between 49.50 and 54, and is currently climbing back to 54. There’s some upside resistance at all-time highs around 58. Rating: Strong Buy.
Federated Investors (FII) is a global investment management company. As an industry leader in the management of money market funds, Federated is uniquely positioned to increase its net income from asset management fees as interest rates rise. In addition, as investors flee from heightened volatility in junk bond mutual funds, they will likely park their money in money market funds, bringing an additional surge of fee income to Federated Investors. FII is one of the best possible financial stocks to capitalize on rising interest rates.
FII is slated for 24% EPS growth in 2016 (December year-end), with a hefty 3.5% dividend yield. The weak stock market has pulled FII down to recent price support at 28. Rating: Strong Buy.
GameStop (GME) owns and operates 6,200 video game and electronics stores in the U.S., Canada, Australia and Europe. GME is a wildly undervalued growth & income stock with a 5% dividend. Retail stocks have suffered greatly in recent months for no rational reason. Consumers are spending money, and retailers are making lots of profit.
The stock’s chart will certainly remain bearish until at least January. I would expect the share price to turn upward at some point between early January and the company’s full-year 2016 earnings report on March 24. The rating will be Hold until the stock price stabilizes, at which point I’ll encourage bargain-hunters to snap up shares while the dividend yield remains high. Rating: Hold.
General Motors Company (GM) GM is a very undervalued growth & income stock with a 4.2% dividend yield. As of September 30, GM was the most widely owned stock in hedge funds, held in a whopping 88 hedge fund portfolios. The stock recovered nicely from the August market downturn, currently trading between 33 and 36.50. Rating: Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. Wall Street’s analysts have lowered their current year earnings expectations for H&R Block. EPS are now expected grow 12.6% and 18.3% in 2016 and 2017 (April year-end). The dividend yield is 2.4%. The stock is now overvalued based on 2016 numbers, but undervalued based on 2017 numbers.
Morgan Stanley analysts expect a dividend increase in the coming months, and for the company to repurchase $4 billion to $5 billion of stock in the next three years. The share price is recovering from a drop in early December. There’s upside resistance between 37 and 38. Rating: Strong Buy.
| Growth & Income Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 12/21/15 | Total Return | Rating |
| Abercrombie & Fitch (ANF) | 11/9/15 | -- | -- | 15% | Sold 11/30/15 |
| Big Lots (BIG) | 10/6/15 | 49 | 39 | -21% | Hold |
| Carnival (CCL) | 10/6/15 | 50 | 54 | 8% | Strong Buy |
| Federated Investors (FII) | 11/30/15 | 31 | 29 | -9% | Strong Buy |
| GameStop (GME) | 10/6/15 | 43 | 29 | -33% | Hold |
| General Motors (GM) | 10/6/15 | 32 | 34 | 5% | Strong Buy |
| H&R Block (HRB) | 10/6/15 | 36 | 33 | -6% | Strong Buy |
| SanDisk (SNDK) | 10/6/15 | -- | -- | 27% | Sold 11/2/15 |
| Union Pacific (UNP) | 10/6/15 | -- | -- | -5% | Sold 11/2/15 |
| Growth & Income Portfolio Total Return | -1.70% |
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.
Updates on Buy Low Opportunities Portfolio Stocks
Axiall (AXLL)--formerly Georgia Gulf Corp.--manufactures chemicals and plastics. After a slow year in 2015, Wall Street expects Axiall’s EPS to grow 81% in 2016 (December year-end). The 2016 P/E is shockingly low in comparison, at 10.6.
Stocks in the chemical sector have fallen in tandem with oil sector stocks, despite AXLL’s strong earnings outlook. The stock price will not likely begin a recovery until at least January. Dividend investors should buy now, to lock in the 4.8% current yield. Rating: Buy.
Boeing (BA) reported a variety of good news this week.
China Southern Airlines and Xiamen Airlines signed contracts to purchase $10 billion of Boeing airplanes.
Delta Air Lines ordered 20 new planes from Boeing, and 20 older Embraer jets that were in Boeing’s inventory.
China Postal Airlines ordered 10 planes from Boeing.
Boeing will report fourth-quarter 2015 results on the morning of January 27.
The company added $8.75 billion to its share repurchase authorization, bringing the total outstanding authorization to $14 billion. Buybacks are expected to begin again in January, and continue for two to three years. Buybacks in 2015 totaled $6.75 billion.
Boeing increased the quarterly dividend by 20%, to $1.09 per share. The current dividend yield is 3.1%. This week’s dividend increase represents Boeing’s fifth consecutive annual dividend increase.
BA is an undervalued growth & income stock. BA shares had a strong rebound after the August market correction; then more recently pulled back with the weak stock market. Meanwhile, the valuation has become more compelling. As soon as the share price stabilizes, I will likely raise the rating to Buy. Rating: Hold.
Boise Cascade (BCC) is a leading U.S. wholesaler of wood products and building materials, benefiting from a strong home-building market. Yesterday, Boise Cascade announced that it will purchase several of Georgia-Pacific LLC’s engineered lumber production facilities, for $215 million; financed by cash and new borrowing. Moody’s Investors Service says the transaction is credit positive; that it will increase the company’s operational diversity, provide cost synergies and provide additional manufacturing capacity.
BCC is a volatile, undervalued aggressive growth stock. BCC is revisiting its October lows; and has bounced around between 25 and 32 in recent months. Rating: Buy.
Harman International Industries (HAR) is a manufacturer of vehicle audio systems. HAR is an undervalued growth stock with a 1.6% dividend yield. The stock price is revisiting its August-September lows. Buy.
Intuit (INTU) is an industry leader in financial management software solutions. INTU is an undervalued aggressive growth stock with a 1.2% dividend yield. INTU’s price improved steadily since the August market correction, most recently trading between 95 and 108. Rating: Buy.
Johnson Controls (JCI) operates in the areas of energy management and auto batteries. The company intends to spin-off its automotive seating and interiors business in October 2016. Thereafter, Johnson Controls plans to resume its share repurchase program.
JCI is an undervalued growth & income stock with a 3% dividend yield. The share price is revisiting its lows from August-September. Rating: Buy.
Robert Half International (RHI) is a staffing and consulting company. RHI is an undervalued growth stock with a 1.8% dividend yield. The stock’s chart will likely remain weak through year-end due to tax-loss selling. When the share price stabilizes, I’ll change the rating to Buy. Rating: Hold.
Whirlpool (WHR) is a global appliance manufacturer. WHR is a very undervalued growth stock with a 2.5% dividend yield. The weak stock market has pulled WHR’s price down to its September-October lows. Rating: Buy.
| Buy Low Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 12/21/15 | Total Return | Rating |
| Axiall (AXLL) | 11/9/15 | 22 | 13 | -38% | Buy |
| Bank of New York Mellon (BK) | 10/6/15 | -- | -- | 11% | Sold 11/6/15 |
| The Boeing Company (BA) | 10/6/15 | 135 | 141 | 5% | Hold |
| Boise Cascade (BCC) | 11/9/15 | 30 | 26 | -13% | Buy |
| Harman International Industries (HAR) | 10/6/15 | 105 | 89 | -15% | Buy |
| Intuit (INTU) | 10/6/15 | 91 | 96 | 5% | Buy |
| Johnson Controls (JCI) | 10/6/15 | 43 | 39 | -10% | Buy |
| Robert Half International (RHI) | 10/6/15 | 51 | 46 | -11% | Hold |
| Whirlpool (WHR) | 11/3/15 | 160 | 147 | -9% | Buy |
| Buy Low Portfolio Total Return | -8.30% |