The major U.S. stock market indexes experienced a shakeout chart pattern last week. Visually, a shakeout pattern looks like a rapid spike downward, followed within one to three days by a rapid spike upward. This pattern typically precedes a run-up in a share price or in a market index.
Sometimes, what appears to be a shakeout turns into a double-bottom, which has the visual appearance of the letter “W,” another constructive chart pattern.
You can enter any of these symbols on your favorite stock chart website to see how the shakeout pattern looks: SPX, DJIA, COMP, CCL, DHI or RCL.
The markets remain far more volatile this year than in recent years. I’m not referring to the extremely slow year-to-date performance of the S&P 500 and the Dow, which are up 1.39% and 1.29% through December 4. I’m referring to the constant extreme influences of falling commodity and precious metals prices, strength in consumer spending, weakness in manufacturing, skittishness over timing of the Fed’s rate hike, worries over debt rating downgrades, a booming housing market, the strong dollar’s negative impact on corporate profits, and weak Asian and Third World economies.
Those combined situations have led to extreme short-term volatility among U.S. stocks. Whether the companies are thriving or suffering financially, it has made no difference. Your favorite stock could be next. It’s a tough year for investors.
The good news is that politics, economics and moods that affect investment markets are constantly changing. Today’s investment climate will pass, as will El Nino. I encourage you to hold you’re your undervalued growth stocks and ride out any storms.
If you’re inclined to pare back your stock holdings, to either move to cash or to purchase different stocks, start with the companies whose earnings per share (EPS) are not projected to grow in 2016. If profits aren’t rising, then there’s no motivation for institutional investors to buy the stocks, and institutional investors move the markets.
In your career and family, you aim for rising income and lower debt, correct? If you own a company, you aim for rising profits and moderate debt, right? Try to buy stocks of companies with similar features. Generally speaking, the same approach to your personal finances that optimizes your income and cash flow, also works in identifying good companies to invest in.
I know that investors like to focus on products, because products might be more understandable than balance sheets; but balance sheets are the tail that wags the dog in the stock market. That’s why I go straight to projected EPS and blow right past a company’s products.
Stay focused on value and profits; the combination of the two help to lower the risk in stock investing.
I have two rating changes in the portfolios today:
* The rating on Intuit (INTU) in the Buy Low Opportunities Portfolio moves from Hold to Buy, due to the capital gain opportunity presented by the price pullback.
* The rating on Priceline (PCLN) in the Growth Portfolio moves from Hold to Buy, due to the capital gain opportunity presented by the price pullback.
These are some of the best portfolio stocks to buy today:
* D.R. Horton (DHI) looks like it will climb again this week.
* I sent a Special Bulletin on December 3, reiterating my Strong Buy rating on H&R Block (HRB).
You’re always welcome to send questions and comments to crista@cabotwealth.com.
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 in late November. I expect ADBE to continue to climb this year, fueled by strength in software stocks and institutional window dressing activity. Rating: Strong Buy.
Chemtura (CHMT) manufactures specialty chemicals. Chemtura will host an Investor Day in New York City on December 16. Investors may pre-register for the webcast on the company’s website. CHMT is a very undervalued aggressive growth stock. The stock reached new highs in November, followed by an orderly price correction. It’s slowly climbing back toward 32. CHMT could easily reach new highs again this winter. Rating: Strong Buy.
Delta Air Lines (DAL) I have Delta rated Buy, rather than 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. We’ll know more in a few months.
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. In addition, Wall Street analysts keep pushing the 2016 earnings estimate upwards. The stock rose to new highs in recent weeks, had a correction, and then completely rebounded. DAL could easily reach new highs again in December or January. Rating: Buy.
D. R. Horton (DHI) is a homebuilder. DHI is an undervalued growth stock. The stock broke past annual highs in late November, and proceeded to trade between 31.50 and 33.00. I expect DHI to continue to reach new annual highs very soon, with possible upside resistance around 36. Rating: Strong Buy.
E*Trade Financial (ETFC) offers financial brokerage and banking products and services. ETFC is a very undervalued aggressive growth stock. The chart is bullish, and the stock could surpass the June annual high of 31.48 before year’s end. Expect volatility. Rating: Strong Buy.
Priceline (PCLN) is an online travel service company. PCLN is fairly valued, with 2016 EPS projected to grow 18.8% and the 2016 P/E at 19.0. I moved PCLN to a Hold rating after it reached new all-time highs in November, and consensus earnings estimates decreased a bit. The stock then experienced a big pullback. Now that the share price is rebounding toward its November high of 1,476, I’m changing the rating to Buy. There’s room for investors to make 13% on PCLN near-term on the rebound. Rating: Buy.
Royal Caribbean Cruises (RCL) 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 92 and 100 for a short while, then continue its upward climb. Rating: Strong Buy.
Vulcan Materials (VMC) produces construction aggregates. The stock remains dramatically undervalued, despite its huge 2015 run-up. VMC broke past short-term upside price resistance in late November, then corrected with last week’s weak stock market. Aggressive growth investors should buy now. Please expect volatility in January, when window dressing season will abruptly end. Rating: Strong Buy.
WellCare Health Plans (WCG) 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. Rating: Buy.
| Growth Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 12/07/15 | Total Return | Rating |
| Adobe Systems (ADBE) | 10/6/15 | 85 | 90 | 5% | Strong Buy |
| Chemtura (CHMT) | 10/6/15 | 31 | 30 | -3% | Strong Buy |
| Delta Air LInes (DAL) | 10/6/15 | 46 | 52 | 12% | Buy |
| D.R. Horton (DHI) | 10/6/15 | 31 | 33 | 8% | Strong Buy |
| E*Trade Financial (ETFC) | 11/12/15 | 29 | 30 | 3% | Strong Buy |
| Priceline (PCLN) | 10/6/15 | 1,275 | 1,302 | 2% | Buy |
| Royal Caribbean Cruises (RCL) | 10/6/15 | 92 | 94 | 2% | Strong Buy |
| Vulcan Materials (VMC) | 10/6/15 | 94 | 98 | 5% | Strong Buy |
| WellCare Health Plans (WCG) | 10/6/15 | 84 | 80 | -5% | Buy |
| Growth Portfolio Total Return | 3.2% |
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. The company reported third-quarter results last week. Revenues and earnings per share (EPS) came in slightly below the consensus estimates, though they were much better than a year ago. In addition, same-store sales were up 2.6%. Fiscal 2017 (January year-end) is expected to bring margin expansion from retail store sales. The company is incurring higher-than-expected incentive compensation costs associated with the first quarter 2017 rollout of its e-commerce business.
As I mentioned recently, retail stocks have been ridiculously volatile this fall, as has the overall market. BIG fell dramatically on the news of a slight earnings miss; the stock is down 18% since joining the Growth & Income Portfolio in early October. Yet the earnings outlook and all significant numbers remain exemplary. Just to recap, EPS are expected to grow very nicely at 20.3% and 18.6% in 2016 and 2017 (January year-end), the accompanying price/earnings ratios (P/Es) are low at 13.5 and 11.4, the dividend yield is attractive at 1.9%, the debt ratio is extremely low at 7%, and the company is repurchasing stock.
In the November issue of Smart Investing in Turbulent Times, I wrote a piece called “Sometimes Stocks Plummet,” in which I discussed how bad news affects stock prices; situations that are way more serious than a one cent EPS miss. I advised, “If your stock price falls due to a one-time event, which does not apparently also involve a scandal, you will likely see the stock recover in the near future.”
Please give your Big Lots shares a little time to recover. There’s absolutely nothing wrong at the company and the fundamentals are GREAT. The stock market is simply being skittish. Push past it; BIG shares will likely deliver capital gains this winter. The stock has been trading between 40 and 51 since August. 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. CCL shares experienced a shakeout chart pattern last week, which is a bullish harbinger for a near-term increase in the stock price. The stock is trading between 49.5 and 54, and could surpass 54 this winter. Rating: Strong Buy.
Federated Investors (FII) is a global investment management company. FII is an undervalued growth & income stock with a 3.2% dividend yield and a strong balance sheet. The stock is trading between 30.5 and 32. After it breaks past 32, there’s upside resistance at 34.5. Rating: Strong Buy.
GameStop (GME) is a video game and electronics retailer. GameStop recently reported third-quarter results that disappointed Wall Street, causing the stock to fall. Despite management’s statements that the fourth quarter is going well and that full-year expectations remain unchanged, the market is now pessimistic on GameStop’s near-term outlook. This attitude will not likely change until the company reports its full-year 2016 results in February (January year-end).
In the meantime, GameStop is still an undervalued growth stock with a 4.3% dividend yield and a strong balance sheet. Earnings growth is expected to ramp up significantly in fiscal 2018.
The chart remains bearish, despite no serious news on the company’s outlook. The stock price will need to stabilize before it can recover. 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 (GM) General Motors sold 347K vehicles in China during November, up 14% year-over-year, and with total China sales up 4.1% year-to-date. GM is a very undervalued growth & income stock, with a 4% dividend yield. The stock chart is extremely bullish. I expect an immediate climb toward 38/39. The next resistance level will be the all-time highs from December 2013, around 41/42. Rating: Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. HRB is an undervalued growth stock with a 2.1% 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 year. Rating: Strong Buy.
| Growth & Income Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 12/07/15 | Total Return | Rating |
| Abercrombie & Fitch (ANF) | 11/9/15 | -- | -- | 15% | Sold 11/30/15 |
| Big Lots (BIG) | 10/6/15 | 49 | 40 | -18% | Strong Buy |
| Carnival (CCL) | 10/6/15 | 50 | 51 | 2% | Strong Buy |
| Federated Investors (FII) | 11/30/15 | 31 | 30 | -3% | Strong Buy |
| GameStop (GME) | 10/6/15 | 43 | 33 | -23% | Hold |
| General Motors (GM) | 10/6/15 | 32 | 36 | 13% | Strong Buy |
| H&R Block (HRB) | 10/6/15 | 36 | 37 | 4% | 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 | 1.6% |
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.
Updates on Buy Low Opportunities Portfolio Stocks
Axiall (AXLL)--formerly Georgia Gulf Corp.--manufactures chemicals and plastics. AXLL is a very undervalued, aggressive growth stock. EPS are expected to grow 81% in 2016 (December year-end) and the current dividend yield is 3.3%. AXLL has stabilized after a late-summer price correction. There’s upside price resistance at 22, and medium-term resistance at 34/35, which it could reach in 2016. This stock could appeal to traders, aggressive growth investors, value investors and growth & income investors. Rating: Buy.
Boeing (BA) Last week, Boeing announced that it completed its design of the 787-10 Dreamliner. Next steps: assembly in 2016, first flight in 2017, and product delivery in 2018. The company has orders for 164 new 787-10 Dreamliners, which offer significantly larger passenger capacity and comparatively lower fuel consumption than previous models.
BA shares remain modestly undervalued based on 2016 numbers, and have a 2.5% dividend yield. BA shares had a strong rebound after the August market correction, and appear ready to climb toward their all-time high around 155, where the stock traded February-March 2015. When the stock reaches 155, expect it to stop climbing. Rating: Hold.
Boise Cascade (BCC) is a leading U.S. wholesaler of wood products and building materials. BCC is a very undervalued aggressive growth stock. Prospects for the company remain strong in 2016 and 2017. Risk tolerant growth investors should buy now. Rating: Buy.
Harman International (HAR) is a manufacturer of vehicle audio systems. HAR is a growth & income stock with a 1.4% dividend yield. I expect the stock to rise toward 111 this winter, rest a bit, then continue climbing toward its next resistance point around 118. Rating: 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.
The stock is trading between 96 and 103. I expect it to climb to medium-term upside price resistance at 107, then trade sideways for at least a few months. When the stock price was higher in November, I changed the rating to Hold, because the remaining upside on the price was becoming limited. Now that the price has receded, I’m changing the rating back to Buy. If you’d be pleased with a near-term capital gain of about 8%, then buy now. Rating: Buy.
Johnson Controls (JCI) operates in the areas of energy management and auto batteries. Last week, S&P commented, “We see significant revenue and margin opportunity in new core businesses.” JCI is an undervalued growth & income stock with a 2.4% dividend yield. The stock corrected back down to price support at 42 last week. 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 a little higher than the last. Both short-term traders and patient investors could buy now, and likely make 8% profit before the yew year. Rating: Buy.
Whirlpool (WHR) is a global appliance manufacturer. Whirlpool’s main competitor, Electrolux AB (ELUXY), received bad news this week. Its plan to purchase General Electric’s (GE) appliance business was thwarted by the Federal Trade Commission. The news is a moderate positive for Whirlpool’s share price. This very undervalued growth stock has a 2.3% dividend yield and big capital gain potential. The stock price recovery began recently; shares are currently trading between 157 and 167. The stock could climb as high as 182 this winter before pausing. Rating: Buy.
| Buy Low Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 12/07/15 | Total Return | Rating |
| Axiall (AXLL) | 11/9/15 | 22 | 17 | -20% | Buy |
| Bank of New York Mellon (BK) | 10/6/15 | -- | -- | 11% | Sold 11/6/15 |
| The Boeing Company (BA) | 10/6/15 | 135 | 148 | 10% | Hold |
| Boise Cascade (BCC) | 11/9/15 | 30 | 27 | -10% | Buy |
| Harman International Industries (HAR) | 10/6/15 | 105 | 98 | -6% | Buy |
| Intuit (INTU) | 10/6/15 | 91 | 99 | 8% | Buy |
| Johnson Controls (JCI) | 10/6/15 | 43 | 42 | -3% | Buy |
| Robert Half International (RHI) | 10/6/15 | 51 | 50 | -2% | Buy |
| Whirlpool (WHR) | 11/3/15 | 160 | 158 | -2% | Buy |
| Buy Low Portfolio Total Return | -1.5% |
Which Financial Stocks Are Good Investments?
Financial stocks are expected to do well in the market as the Federal Reserve commences interest rate hikes. Banks, brokerage firms and mutual fund companies all achieve higher interest income from savings and loan products when interest rates increase.
Naturally, investors will want to know which financial stocks are positioned best for capital gains. Here’s a recap of the prospects for some big names in the financial sector.
Bank of America (BAC) Analysts expect EPS at Bank of America to grow 9% in 2016. The P/E is 11.2 and the current yield is 1.2%. BAC is fairly valued. I would hold the stock, but I’d invest new money elsewhere.
Citigroup (C) Citigroup is expected to grow EPS just 3.6% in 2016 (December year-end), and the dividend is negligible at 0.36%. There’s upside price resistance around 59 from summer 2015.
E*Trade (ETFC) Brokerage and banking company E*Trade appears in the Growth Portfolio. Analysts expect the company to grow EPS 34.5% in 2016, with a corresponding P/E of 19.5. The stock is quite undervalued. Rating: Strong Buy.
Fifth Third Bancorp (FITB) Wall Street expects Fifth Third Bancorp to grow EPS just 2.3% in 2016 (December year-end). The dividend yield is 2.47%. There’s upside resistance around 21.50 from summer 2015.
Goldman Sachs (GS) Wall Street investment banker Goldman Sachs is projected to grow EPS by 22.6% in 2016 (December year-end). The P/E is quite low at 9.8, and the current yield is 1.4%. A rebound could take the share price back to summer 2015 annual highs around 210-215, presenting an approximate 14% capital gain opportunity in the coming months. This stock could appeal to both short-term and long-term investors.
Morgan Stanley (MS) - Analysts expect global investment banker Morgan Stanley to achieve 18.2% EPS growth in 2016 (December year-end). With a 2016 P/E of 11.0, the stock is significantly undervalued. In addition, the dividend yield is 1.7%. The share price is recovering from the August market correction, travelling back toward its annual high near 40. This stock could appeal to both short-term and long-term investors.
Wells Fargo & Co. (WFC) Analysts expect U.S. financial services company Wells Fargo to grow EPS just 6.5% in 2016 (December year-end). The P/E is comparatively overvalued at 12.5, and the dividend yield is attractive at 2.7%. There’s upside resistance near the summertime highs around 58.
Any stocks that I mentioned above with earnings growth below 9% are not the best stocks to own in the financial group. Presuming that the entire reason you buy stocks is for capital gains, you’re going to have your best opportunities with companies that have the strongest earnings growth.