Worried investors are currently controlling U.S. stock markets, despite abounding good financial news. That’s because when investors sell stocks--most typically via 401k mutual fund exchanges into money market funds and bond funds--portfolio managers need to liquidate stocks to cover the outflows. However, the portfolio managers themselves are probably not worried about U.S. stocks, because here’s what they’re seeing in the U.S. economy:
- There were 3 million new jobs in the U.S. last year, alongside increasing job hours and hourly wages.
- GNP is rising based on consumer purchases, ex-energy and materials.
- Chinese economic growth was reported at 6.8% in 2015, with another 6.0% growth expected in 2016.
- There’s such a lack of inflation pressure that the Federal Reserve continues to scale back its plans for interest rate increases.
- Banks are reporting strong earnings, liquidity and capital ratios.
- Merger & acquisition activity reached record levels in 2015.
All of these activities bode well for stock prices!
What’s more, we had great stock market news last week, when the S&P 500 index bounced at its August and September lows. While it’s too soon to officially pronounce the recent downturn “over,” I’m greatly encouraged by the trading pattern on the S&P 500.
While I select stocks based upon fundamental criteria (balances sheets, earnings, etc.), I put on technical (a.k.a. chartist) glasses when I eye current prices. When you look at price charts of stocks, market indexes and virtually all investments, what you see is a bunch of repeated trading patterns, interrupted by run-ups and price drops that are engendered by newsworthy events. When the news dies down, as with the recent oil price-induced stock market correction, the investment in question tends to settle, once again, into familiar trading patterns. From there, investors can decide how to proceed.
Like you, I want to see my stocks go up. The best thing I can do during a market downturn is to separate emotion from facts, watch for familiar trading patterns to resume, and identify investments to buy while their prices are low.
In the case of S&P 500 stocks, there are some that have already begun stabilizing, enough so that I would buy them today. Many others, however, have not stabilized; that is, their share prices have not found a definite bottom to their recent downturns. I ignore the ones that are still vulnerable, and concentrate my buying activity in stocks with more decisive chart patterns. I am confident that the others will catch up eventually.
And by the way, that confidence comes from the stock’s fundamentals. If we concentrate our investment holdings in financially strong, growing companies that have undervalued stock prices, we never have to second guess our investment decision. We know that our stocks have great outlooks. We just need to let the cream rise to the top after market corrections, and once again, we’ll accumulate capital gains.
Here are the highlights from today’s Smart Investing in Turbulent Times Update:
- Yesterday, Johnson Controls (JCI) reported an agreement to purchase Tyco International (TYC).
- We had strong earnings reports from three portfolio stocks last week: Delta Air Lines (DAL), D.R. Horton (DHI) and E*Trade Financial (ETFC). Many more portfolio companies will report earnings this week.
- As the portfolio stocks stabilize from the January downturn, I’ll be pointing out opportunities to buy low. Today, I’m upgrading Chemtura (CHMT) to a Buy rating.
- Adobe Systems (ADBE) still has the strongest stock chart in the three portfolios.
- When stocks fall, their current dividend yields increase. The smartest dividend opportunities in the Smart Investing portfolios are GameStop (GME) at 5.6%, and General Motors (GM) at 5.1%.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company. ADBE is a fairly valued aggressive growth stock. While I would not normally give a Strong Buy rating to a fairly valued stock, ADBE has one of the most bullish charts of any stock that I follow. ADBE shares have been trading sideways, mostly between 86-92, since mid-October. Rating: Strong Buy.
Chemtura (CHMT) manufactures specialty chemicals. EPS growth expectations remain strong at 92% and 27% in 2015 and 2016 (December year-end), with a 2016 P/E of 14. CHMT is a vastly undervalued aggressive growth stock. CHMT reached new highs in November; then fell with the weak market. The stock’s chart shows a classic double-bottom pattern in January, indicating that the worst is likely over for the share price. I expect the stock to begin its recovery by trading between 24 and 27.50 this winter. Rating: Buy.
D.R. Horton (DHI) is a homebuilder. The company reported first-quarter 2016 results yesterday, including revenues up almost 4.8% and orders up 9.4% vs. a year ago (September year-end*). EPS rose 10.7% to $0.42, above the market’s expectation of $0.41. DHI is an undervalued growth stock with a 1.2% dividend yield. Watch for analysts to tweak their 2016 earnings estimates in the coming days. The stock broke past annual highs in late November, then fell to last summer’s support levels. Wait for the price to stabilize before buying, please. Rating: Hold.
*
Please note that I misreported D.R. Horton’s fiscal year-end as “December” in my last Smart Investing update. Mea culpa!
Delta Air Lines (DAL) reported fourth-quarter and full-year 2015 results last week (December year-end). EPS rose +39.3%. Delta’s CEO reported that airline bookings are holding up well in 2016. The company raised its first-quarter 2016 operating margin guidance from 16%-17% to 18%-20%, partially due to lower jet fuel costs.
Analysts have again raised their full-year 2016 EPS estimate, reflecting expected growth of 50.5%. Keeping in mind that two consecutive years of 39%-50% EPS growth is highly unusual, analysts expect Delta’s 2017 EPS to increase by 4.5%. While the 2017 estimate could easily increase as next year’s outlook becomes more clear to analysts, investors should definitely be prepared for Delta’s earnings growth to slow dramatically from 2016-2017 levels.
On January 6, I reported that Delta is aggressively paying down debt. The 2015 long-term debt-to-capitalization ratio came in at 35%, down from 46% in 2014. It’s now clear that Delta’s debt rating might be moved up to investment grade levels later this year.
Delta is a very undervalued aggressive growth stock with a 1.2% dividend yield. The stock reached new highs in December, then fell with January’s weak stock market. The stock’s chart shows a classic double-bottom pattern in January, indicating that the worst is likely over for the share price. I expect the stock to begin its recovery by trading between 45.50 and 49 this winter, and possibly retrace the December high of 52. Rating: Strong Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. The company reported full-year 2015 results last week (December year-end). Fourth-quarter revenue and EPS came in above analysts’ estimates. Delta repurchased 1.7 million shares of stock, totaling $51 million, with approximately $749 million remaining in the repurchase authorization.
Full-year EPS also came in slightly above estimates, with strong gains in new brokerage accounts and assets. The 2015 long-term debt-to-capitalization ratio came in at 20%, down from 26% in 2014.
The consensus 2016 EPS estimate increased again. Analysts now expect EPS to grow 36.8% and 21.9% in 2016 and 2017. Those are fantastic earnings growth rates, sure to attract a horde of mutual fund portfolio managers. The 2016 price/earnings ratio (P/E) is very low in comparison to EPS growth expectations, at 14.7, making ETFC a very undervalued aggressive growth stock.
The share price fell during the recent market downturn. Investors should hold their shares, and consider buying additional shares when the price stabilizes. Rating: Hold.
The Priceline Group (PCLN) is an online travel service company. Watch for full-year 2015 results to be reported on February 17. PCLN is an undervalued growth stock. The share price reached new all-time highs in November, then experienced a big pullback in January. The price appears to be stabilizing. I’ll give it a little more time to steady itself before issuing a buy recommendation. Rating: Hold.
Royal Caribbean Cruises (RCL) will report full-year 2015 results on February 2. Analysts are bullish on Royal Caribbean’s strong demand in the Caribbean, market share gains, and low P/E vs. peers. RCL is a very undervalued aggressive growth stock with a 1.7% dividend yield. The share price reached an all-time high in late December, then became weak with the recent market downturn. Rating: Hold.
Vulcan Materials (VMC) produces construction aggregates. The company will announce fourth-quarter 2015 results on the morning of February 4. If you’d like to join the live webcast of the earnings conference call, please read the instructions here.
VMC is a dramatically undervalued aggressive growth stock. EPS are expected to grow 116% and 66% in 2015 and 2016 (December year-end). The 2016 P/E is 25.1. VMC reached an annual 2015 high in late November, then fell with the weak market. The price appears to have begun stabilizing. I’ll give it a little more time to steady itself before issuing a buy recommendation. Rating: Hold.
WellCare Health Plans (WCG) will report full-year 2015 results on February 9. WCG is a dramatically undervalued aggressive growth stock in the managed healthcare sector. EPS are expected to grow 88% and 32% in 2015 and 2016 (December year-end). The 2016 P/E is 16.0. WCG shares have been trading in a tight sideways range since January 7, closing between 72 and 75. This is a constructive chart pattern. I anticipate more sideways trading prior to the price rebounding. Rating: Hold.
| Growth Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 1/25/16 | Total Return | Rating |
| Adobe Systems (ADBE) | 10/6/15 | 85 | 87 | 2% | Strong Buy |
| Chemtura (CHMT) | 10/6/15 | 31 | 25 | -19% | Buy |
| D.R. Horton (DHI) | 10/6/15 | 31 | 26 | -14% | Hold |
| Delta Air LInes (DAL) | 10/6/15 | 46 | 46 | 0% | Strong Buy |
| E*Trade Financial (ETFC) | 11/12/15 | 29 | 23 | -20% | Hold |
| Priceline (PCLN) | 10/6/15 | 1,275 | 1,098 | -14% | Hold |
| Royal Caribbean Cruises (RCL) | 10/6/15 | 92 | 83 | -9% | Hold |
| Vulcan Materials (VMC) | 10/6/15 | 94 | 83 | -11% | Hold |
| WellCare Health Plans (WCG) | 10/6/15 | 84 | 73 | -14% | Hold |
| Growth Portfolio Total Return | -11.10% |
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 strong balance sheet, and a 2.1% dividend yield. EPS are expected to grow 20.3% and 11.5% in 2016 and 2017. Wait for the price to stabilize before buying. Rating: Hold.
Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. Cardinal’s second-quarter earnings will be reported on February 1. CAH is an undervalued stock with a 1.9% dividend yield. EPS are expected to grow 21.0% and 13.2% in 2016 and 2017 (June year-end). The worst seems to be over for the share price. I anticipate CAH to trade between 80 and 85 in the very near-term. Rating: Strong Buy.
Carnival (CCL) is a cruise vacation company. CCL is an undervalued stock with a 2.4% dividend yield. EPS are expected to grow 24.4% and 16.4% in 2016 and 2017 (November year-end). CCL reached a 2015 high in late December, then fell with the recent market downturn. I’m encouraged that the stock bounced this month at its September-October lows, and I will continue to assess the stock for a potential Buy rating. Rating: Hold.
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. FII is one of the best possible financial stocks to own to capitalize on rising interest rates.
FII is a very undervalued stock, with a hefty 3.9% dividend yield. EPS are expected to grow 12.7% and 24.4% in 2015 and 2016 (December year-end). Analysts raised their 2016 number last week. Wait for the price to stabilize before buying. Rating: Hold.
GameStop (GME) owns and operates 6,200 video game and electronics stores in the U.S., Canada, Australia and Europe. The current dividend yield is 5.6%. It could be several months before the rebound begins. Watch for the company’s full-year 2016 earnings report on March 24. The huge dividend yield is going to bring new money into the stock during the market downturn. Rating: Buy.
General Motors (GM) is an American auto manufacturer. The company will report full-year 2015 results on February 3. GM is a vastly undervalued stock with a 5.1% dividend yield. EPS are expected to grow 58.0% and 14.1% in 2015 and 2016 (December year-end). The huge dividend yield is going to bring new money into the stock during the market downturn. The stock is revisiting trading support levels that were established in September-October. There’s upside price resistance at 33.50. Rating: Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. HRB is a growth & income stock with a strong balance sheet and a 2.4% dividend yield. EPS are expected to grow 9.7% and 19.3% in 2016 and 2017 (April year-end). The stock is overvalued based on 2016 numbers, and undervalued based on 2017 numbers. HRB shares traded down to July and August trading support levels during the January market downturn, and proceeded to stabilize. The worst appears to be over for the share price. Rating: Strong Buy.
| Growth & Income Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 1/25/16 | Total Return | Rating |
| Abercrombie & Fitch (ANF) | 11/9/15 | -- | -- | 15% | Sold 11/30/15 |
| Big Lots (BIG) | 10/6/15 | 49 | 36 | -26% | Hold |
| Cardinal Health (CAH) | 01/4/16 | 88 | 81 | -7% | Strong Buy |
| Carnival (CCL) | 10/6/15 | 50 | 49 | -2% | Hold |
| Federated Investors (FII) | 11/30/15 | 31 | 25 | -21% | Hold |
| GameStop (GME) | 10/6/15 | 43 | 25 | -42% | Buy |
| General Motors (GM) | 10/6/15 | 32 | 29 | -9% | Strong Buy |
| H&R Block (HRB) | 10/6/15 | 36 | 32 | -9% | 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 | -7.50% |
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. The company will report full-year 2015 results on February 16 (December year-end). AXLL has a 6.7% dividend yield. Please do not consider buying more shares until the share price stabilizes and fourth-quarter earnings are reported. Rating: Hold.
Boeing (BA) will report fourth-quarter 2015 results tomorrow (December year-end). BA is an undervalued aerospace stock. The recent dividend increase boosts the current yield to 3.5%. EPS are expected to grow 14.6% in 2016. The share price is revisiting its August-September lows; however, please let it stabilize before buying additional shares. Rating: Hold.
Boise Cascade (BCC) is a leading U.S. wholesaler of wood products and building materials, benefiting from a strong home-building market. BCC is a volatile, undervalued aggressive growth stock. Watch for full-year 2015 results to be reported on February 17. EPS are expected to grow 27.7% in 2016 (December year-end). Wait for the price to stabilize before buying. Rating: Hold.
BorgWarner (BWA) is a maker of engineered automotive systems for power train applications. Watch for full-year 2015 results to be reported on February 11. BWA is an undervalued stock with a strong balance sheet and a 1.8% dividend yield. The share price has been weak with the recent market downturn, and has not yet stabilized. Rating: Hold.
FedEx (FDX) is an international package delivery company, and an undervalued growth stock. EPS are expected to rise 18.1% and 13.4% in 2016 and 2017. Wait for the price to stabilize before buying, please. Rating: Hold.
Harman International (HAR) is a manufacturer of in-car technology and entertainment systems, best known for its JBL and Harman Kardon audio systems. Harman will report second-quarter 2016 results this week, on January 28. HAR is a very undervalued growth stock with a 1.8% dividend yield. Wait for the price to stabilize before buying. Rating: Hold.
Intuit (INTU) is an industry leader in financial management software solutions. INTU is an undervalued aggressive growth stock with a strong balance sheet and a 1.3% dividend yield. EPS are expected to grow 34.4% and 25.0% in 2016 and 2017 (July year-end). The stock price has begun stabilizing from its January downturn. I expected INTU to trade between 90 and 96 in the near-term; rising as high as 102 on any favorable news reports. Rating: Buy.
Johnson Controls (JCI) operates in the areas of energy management and auto batteries. The company plans to spin off Adient, its automotive seating and interiors business, in October 2016.
Yesterday, Milwaukee-based Johnson Controls announced that it will purchase a 56% stake in Ireland-based security systems company Tyco International PLC (TYC). The new company will domicile in Ireland, where corporate taxes are lower, and where Tyco is already domiciled. Tyco operates from headquarters in Princeton, NJ. The new combined company will have their primary headquarters in Milwaukee, WI.
The combined company will offer electrical systems and security systems to the building industry. (Note: when Wall Street and news media use the term “merge,” it’s simply a polite way to say “buyout” without trampling the corporate egos at the company that’s being purchased.)
The new company will be run by Johnson Controls’ CEO Alex Molinaroli, although the Tyco CEO is scheduled to take over that position after 18 months.
One very big change to Johnson Controls’ post-merger outlook will be a vastly lower income tax rate associated with establishing a base in Ireland.
In other news, Johnson Controls will report first-quarter 2016 results on the morning of January 28 (September year-end). The company pre-announced earnings this week, and is thus expected to report first-quarter EPS of $0.82 per share, which equals the Wall Street consensus estimate.
JCI is an undervalued growth & income stock with a 3.3% dividend yield. The share price began its stabilizing process a few weeks ago. I would give it time to regain strength before buying additional shares. Rating: Hold.
Robert Half International (RHI) is a staffing and consulting company. They will report full-year 2015 results tomorrow, January 27. RHI is an undervalued growth stock with a 1.8% dividend yield. Wait for the price to stabilize before buying. Rating: Hold.
Whirlpool (WHR) is a global appliance manufacturer. The company will report full-year 2015 results on the morning of January 29. If you’d like to join the earnings conference call or the webcast, please read the instructions here. WHR is a very undervalued growth stock with a 2.7% dividend yield. 2016 EPS are expected to grow 18.6% (December year-end). Wait for the price to stabilize before buying. Rating: Hold.
Prices as of 1/25/16 market close.
| Buy Low Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 1/25/16 | Total Return | Rating |
| Axiall (AXLL) | 11/9/15 | 22 | 9 | -58% | Hold |
| Bank of New York Mellon (BK) | 10/6/15 | -- | -- | 11% | Sold 11/6/15 |
| The Boeing Company (BA) | 10/6/15 | 135 | 124 | -8% | Hold |
| Boise Cascade (BCC) | 11/9/15 | 30 | 19 | -38% | Hold |
| BorgWarner (BWA) | 12/30/15 | 44 | 28 | -36% | Hold |
| FedEx (FDX) | 01/4/16 | 145 | 126 | -13% | Hold |
| Harman International Industries (HAR) | 10/6/15 | 105 | 78 | -26% | Hold |
| Intuit (INTU) | 10/6/15 | 91 | 92 | 0% | Buy |
| Johnson Controls (JCI) | 10/6/15 | 43 | 34 | -21% | Hold |
| Robert Half International (RHI) | 10/6/15 | 51 | 43 | -16% | Hold |
| Whirlpool (WHR) | 11/3/15 | 160 | 133 | -17% | Hold |
| Buy Low Portfolio Total Return | -20.20% |