Please ensure Javascript is enabled for purposes of website accessibility
Value Investor
Wealth Building Opportunites for the Active Value Investor

Smart Investing in Turbulent Times Weekly Update

Last week, The Priceline Group (PCLN) reported fourth-quarter 2015 results that surpassed market earnings per share (EPS) expectations, while Boise Cascade (BCC) reported fourth-quarter 2015 results that disappointed the market. I’m raising the ratings on Carnival (CCL), D.R. Horton (DHI) and Royal Carribean Cruises (RCL) to Buy. I’m lowering the rating on Boise Cascade (BCC) to Hold.

Traders vs. Buy-and-Hold Investors

Each of my portfolio stocks is accompanied by a rating: Strong Buy, Buy, Hold or Sell. Those ratings are aimed at buy-and-hold investors. When I rate a stock “Buy,” I expect the stock to do well over a several-year period, based on its good earnings growth and undervalued P/E.

However, lots of traders are reading Smart Investing, too. When I say “trader,” I’m not talking about day traders. Day traders are simply gamblers; and gambling has nothing to do with fundamental analysis. It’s all about daily technical chart movement.

The traders I refer to are opportunistic stock investors who want to capitalize on two-week to 12-week stock price movements. That’s why I say things like, “There’s short-term upside price resistance at 90.” A trader can read that sentence, look at the current share price, and quickly know whether there’s enough short-term profit in the stock to buy it now.

When I say that there’s “medium-term” or “long-term” upside price resistance, it means that the stock is likely to rise to that target price and then stop climbing. The stock might not make a significant move above that price for three to 12 months. Use those cues to decide whether you--as a trader or a buy-and-hold investor--want to hold the stock and wait for its next move, or sell the stock and switch into another stock with a better near-term capital gain opportunity.

When I say, “traders should sell now,” everybody else should be prepared for the stock price to rest or pull back a little before its next run-up.

My trading decisions are made based on stock chart patterns. I will occasionally be very wrong in my predictions, because stocks have myriad market and corporate influences. However, stocks generally repeat previous trading patterns, and those patterns give us good guidance in most circumstances.

I know that some of you watch your stock prices throughout the day, while others glance at your account balances once or twice a month. If there’s anything I can do to achieve more clarity in my stock recommendations, please let me know in an email to crista@wallstreetsbest.com.

This Week’s Smart Investing Highlights

Last week, The Priceline Group (PCLN) reported fourth-quarter 2015 results that surpassed market earnings per share (EPS) expectations. Boise Cascade (BCC) reported fourth-quarter 2015 results that disappointed the market.

I’m raising the ratings on Carnival (CCL), D.R. Horton (DHI) and Royal Carribean Cruises (RCL) to Buy. I’m lowering the rating on Boise Cascade (BCC) to Hold.

The best total-return plays in the Smart Investing portfolios today are Federated Investors (FII) and GameStop (GME), which offer 4% to 5% dividend yields and immediate capital gains. I also recommend looking at Adobe Systems (ADBE) and D.R. Horton (DHI) for continued share price growth in the coming days.

Updates on Growth Portfolio Stocks

Adobe Systems (ADBE) is a software company. Analysts expect EPS to grow 32.7% and 34.4% in 2016 and 2017 (November year-end). The 2016 P/E is 29.3. ADBE is a slightly undervalued aggressive growth stock. This month, the stock price bounced at the lows established during the August market correction. There’s short-term upside price resistance at 84, and again at 90. A neutral-to-bullish stock market could bring the share price back to 90 by April. Rating: Buy.

Chemtura (CHMT) is a specialty chemical manufacturer. The company will report full-year 2015 results on February 22. Chemtura was featured in the February issue of Smart Investing in Turbulent Times. CHMT is a vastly undervalued, small-cap, aggressive growth stock.

The stock reached new all-time highs in November; then fell with the broader market. The share price stabilized beginning in early January, and has since turned upward. I expect the price to rise to at least 28.50 this winter. Rating: Strong Buy.

D.R. Horton (DHI) is a homebuilder. DHI is a very undervalued growth stock with a 1.3% dividend yield. Analysts expect EPS to grow 16.0% and 12.5% in 2016 and 2017 (September year-end). The stock price fell below its recent price support due to investor worries about a recession. However, the housing market has been booming, as reflected in homebuilder companies’ profits. The real risk factor in the housing industry is the ongoing labor shortage, which could impact gross margins.

DHI’s stock chart shows a double-bottom chart pattern in mid-February, which is a very productive pattern, indicating that the stock price has bottomed and turned around. Now that it’s climbing, I’m raising my rating to Buy. Please expect near-term upside price resistance at 28. Rating: Buy.

Delta Air Lines (DAL) is a global passenger and cargo air transportation company. This month, Moody’s Investors Service upgraded Delta’s debt rating to Baa3. Delta is the first global U.S. airline to achieve a current investment grade rating. The rating upgrade came as a consequence to superior cash flow management, including debt repayment, rising operating margins, pension plan funding and share repurchases.

In a February MarketWatch article on 20 transportation stocks, DAL was the only stock on the list that had Buy ratings from 100% of Wall Street analysts who cover the stock.

Delta is a very undervalued aggressive growth stock with a 1.2% dividend yield. I mentioned last week that there’s “short-term upside price resistance at 47.” The stock proceeded to rise to 47. It would be normal for DAL to trade sideways for a bit or bounce back down to 44 before beginning its next leg upward. Try to buy below 45. Rating: Buy.

E*Trade (ETFC) offers financial brokerage and banking products and services. ETFC is a very undervalued aggressive growth stock with a strong balance sheet. The share price fell during the recent market downturn, before turning upward in mid-February. I’d like to see the chart look a little more bullish before changing the rating to Buy. Rating: Hold.

Priceline (PCLN) is an online travel service company. As I reported in a Special Bulletin on February 17, Priceline reported a blowout fourth quarter and initiated another $3 billion share repurchase authorization. EPS are expected to continue growing nicely, at 16.0% and 15.4% in 2016 and 2017. The stock is now fully valued, with a P/E of 19.0.

Last week, I said that “the best-case scenario for February price action” was 1,150. Oops! PCLN closed on Friday at 1,284, up 21.3% for the week. I know that many investors believe they can’t make money on “high-priced” stocks. I reiterate: I’ve learned from experience that high-priced stocks can deliver attractive capital gains. That’s because it’s not about the share price; it’s about whether the stock is undervalued or overvalued. And we don’t determine value via the share price; we determine value via the price/earnings ratio (P/E).

The share price reached new all-time highs in November, then traded down to support levels established in January and February 2015. Now that it’s rising again, PCLN is most likely to meet upside price resistance at 1,330. There’s a lot of bullish market sentiment behind PCLN, and it’s a top holding in some famous hedge funds. There’s probably more money to be made in the stock this year, but as a value investor, I’m not going to suggest that people buy at the current price. Traders have likely maxed out their short-term gains, and should consider selling. Rating: Hold.

Royal Caribbean Cruises (RCL) is a global cruise vacation company. Investors have been worried about how the Zika virus will affect travel stocks, and thus, travel stock prices fell more dramatically than the market averages during the recent market correction. Then last week, The Priceline Group--also in my Growth Portfolio--reported such strength in revenues and profits that the stock rose 23% in one week! Investors now know that travel bookings have not been affected by Zika.

RCL is a very undervalued growth stock with a 2.2% dividend yield. The share price reached an all-time high in late December, then fell with the weak 2016 market. It bottomed in early February, and has just begun to move upward. Therefore, I’m changing the rating from Hold to Buy. There’s short-term upside price resistance at 85, giving new buyers a potential 20% short-term capital gain. At 85, the stock will still be very undervalued. Rating: Buy.

Vulcan Materials (VMC) produces construction aggregates. CEO Tom Hill expects “multiple years of double-digit revenue growth” associated with the housing boom and the recently approved five-year highway funding bill. This month, Vulcan Materials doubled its quarterly dividend payout to $0.20 per share, giving the stock a current yield of 0.8%. VMC is a very undervalued aggressive growth stock. VMC reached an annual 2015 high in late November, fell with the weak market then began its recovery. There’s a small amount of upside price resistance at 97, then more significant resistance at 104-106. Rating: Strong Buy.

WellCare Health Plans (WCG) is an undervalued aggressive growth stock in the managed healthcare sector. The company aims to double its revenue through the year 2021, through a combination of organic growth and acquisition (M&A) opportunities.

WCG surged upwards yesterday, because new Medicare Advantage payment rates help WellCare’s profitability (and one other competitor’s) far more than they affect WellCare’s seven other major insurance competitors. As a result, several major investment firms raised their ratings on the stock.

I issued a Special Bulletin yesterday, following WCG’s price run-up. Last week, I said, “I believe the stock could continue upward to 85 before pausing.” WCG proceeded to rise to 85 last week, pulled back a bit, then leaped to upside price resistance at 90+ yesterday. Traders should sell around 90, and everybody else should hold the stock. Consider buying additional shares on any pullback to 84. Rating: Strong Buy.

Growth Portfolio
Security (Symbol)Date AddedPrice AddedPrice 2/22/16Total ReturnRating
Adobe Systems (ADBE)10/6/158584-2%Buy
Chemtura (CHMT)10/6/153127-13%Strong Buy
D.R. Horton (DHI)10/6/153126-15%Buy
Delta Air LInes (DAL)10/6/1546496%Buy
E*Trade Financial (ETFC)11/12/152923-22%Hold
Priceline (PCLN)10/6/151,2751,2881%Hold
Royal Caribbean Cruises (RCL)10/6/159274-20%Buy
Vulcan Materials (VMC)10/6/1594963%Strong Buy
WellCare Health Plans (WCG)10/6/1584907%Strong Buy
Growth Portfolio Total Return-6.1%

Growth & Income Portfolio

Big Lots (BIG) is a discount retailer in the U.S. and Canada. Big Lots was featured in the February issue of Smart Investing in Turbulent Times. BIG is an undervalued growth & income stock with a 2% dividend yield and a strong balance sheet.

BIG reached an all-time high of 51.50 in March 2015, fell with last summer’s market correction, retraced its high then fell again with the subsequent market correction. The stock recently found price support at 36, with short-term upside resistance at 40. I expect BIG to trade sideways, then continue climbing toward 47. Rating: Buy.

Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. CAH is an undervalued growth & income stock with a 1.9% dividend yield. Last week, CAH bounced at its September lows then turned upward. As the stock recovers, I expect it to pause briefly at 83 then continue climbing to 86. Rating: Buy.

Carnival (CCL) is a global cruise vacation company. Investors have been worried about how the Zika virus will affect travel stocks, and thus, travel stock prices fell more dramatically than the market averages during the recent market correction. Then last week, The Priceline Group--in my Growth Portfolio--reported such strength in revenues and profits that the stock rose 23% in one week! Investors now know that travel bookings have not been affected by Zika.

CCL is a very undervalued stock with a 2.7% dividend yield. CCL reached a 2015 high in late December, fell with the market downturn, then turned upward in recent days. Therefore, I’m changing the rating from Hold to Buy. I mentioned last week that “there’s some upside resistance at 47 and again at 50.” Now that the stock is approaching 47, it would be normal for it to rest briefly before continuing upward. Rating: 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. FII is an undervalued stock with a hefty 4.2% dividend yield. Dividend investors should buy now to lock in the large yield. It’s my impression that FII is ready to climb. There will be a little upside price resistance at 26, and more at 28. Traders could make 12% profit in the very short-term. Rating: Buy.

GameStop (GME) owns and operates 6,200 video game and electronics stores in the U.S., Canada, Australia and Europe. Watch for the company’s full-year 2016 earnings report on March 24 (January year-end). GME is a very undervalued growth & income stock with a 4.9% current dividend yield. The huge short-term total return potential is going to bring new money into the stock. GME has begun its recovery. There’s upside price resistance at 38. Rating: Buy.

General Motors (GM) is an American auto manufacturer. GM is a vastly undervalued growth & income stock with a 5.3% dividend yield. This month, the stock bounced at its August lows, and began stabilizing. The share price weakness presents a big dividend opportunity for investors who buy low. You can lock in a 5%+ yield today, and benefit from capital gains as the stock eventually rebounds. Rating: Strong Buy.

H&R Block (HRB) is a leader in tax preparation services. The stock is recession-proof, because people will file tax returns no matter the state of the economy. In addition, the Affordable Care Act complicates tax return filing, causing more do-it-yourself filers to seek tax preparation assistance.

HRB is a growth & income stock with a strong balance sheet and a 2.3% dividend yield. The stock is overvalued based on 2016 numbers, and undervalued based on 2017 numbers (April year-end). The share price has been improving since mid-January. I expect the stock to trade between 33.50 and 37 during the next few months. Rating: Strong Buy.

Growth & Income Portfolio
Security (Symbol)Date AddedPrice AddedPrice 2/22/16Total ReturnRating
Abercrombie & Fitch (ANF)11/9/15----15%Sold 11/30/15
Big Lots (BIG)10/6/154938-22%Buy
Cardinal Health (CAH)01/4/168881-7%Buy
Carnival (CCL)10/6/155048-4%Buy
Federated Investors (FII)11/30/153125-19%Buy
GameStop (GME)10/6/154329-32%Buy
General Motors (GM)10/6/153230-8%Strong Buy
H&R Block (HRB)10/6/153634-4%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-5.6%

Buy Low Opportunities Portfolio

Axiall (AXLL)--formerly Georgia Gulf Corp.--manufactures chemicals and plastics. In January, Axiall rejected a $1.4 billion ($20/share) takeover attempt by Westlake Chemical (WLK). There’s a decent chance that Westlake will return with a higher purchase offer. Last week, Westlake Chemical informed Axiall that it intends to nominate 10 new directors to Axiall’s Board, at Axiall’s yet-unscheduled 2016 Annual Meeting of Shareholders. You can read more here.

As I mentioned in my February 19 Special Bulletin, Axiall’s fourth-quarter earnings report has been rescheduled for Thursday, February 25. It is somewhat unusual for this date to continue changing. I speculate that the reason has to do with the fact that Axiall is currently focused on Westlake Chemical’s hostile buyout offer.

While Axiall’s 2015 earnings estimates have improved a bit in recent months, 2016 estimates have come down dramatically to reflect zero earnings growth. While the stock no longer fits my growth criteria, the distinct possibility of a higher takeover offer persists. I encourage all shareholders to put in stop-loss orders around $17.50. Rating: Hold.

Boise Cascade (BCC) is a leading U.S. wholesaler of wood products and building materials, benefiting from a strong home-building market. I issued a Special Bulletin on February 19, pertaining to Boise’s fourth-quarter 2015 earnings report. The company reported much lower-than-expected profits for the quarter due to weak plywood pricing, which resulted from increased foreign competition. (A strong dollar harms exporters and benefits importers.)

Analysts have adjusted their earnings outlook for Boise Cascade to reflect 30% and 40% EPS growth in 2016 and 2017 (December year-end). (Those numbers were previously higher.) The 2016 price/earnings ratio (P/E) is 8.1. Normally, a stock that’s expected to have aggressive earnings growth would have a P/E somewhere near the earnings growth rate. As you can see with BCC, the stock is extremely undervalued.

It will take a while for the market to relax about Boise Cascade’s outlook. The housing market remains strong and Boise Cascade is a key player in that arena. While I am confident that buy-and-hold investors will eventually be rewarded with capital gains, I also understand that many investors will not be willing to wait around. If you prefer to switch into another stock that’s low but more likely to rise in the very near future, my suggestion is to buy GameStop (GME) or Federated Investors (FII).

If you are willing to wait for BCC to rise again, I will keep you apprised of news and the earnings outlook, and let you know when the stock price appears ready to rise. In the interim, I’m lowering the rating to Hold. Rating: Hold.

BorgWarner (BWA) is a maker of engineered automotive systems for power train applications. Last week, I reported on BorgWarner’s better-than-expected fourth-quarter 2015 results, and noted that future earnings growth expectations have been declining. I recommended that investors hold this fairly-valued stock to take advantage of the near-term uptrend in the share price.

My opinion from last week stands, “Odds are strong that the stock continues climbing immediately. The share price could rise to 37 or as high as 40 in the short-term, depending on the overall strength of the market. Hold BWA for the rebound. I think there’s enough momentum in the stock that traders could make 15% or more in the next two to eight weeks. Be forewarned that when the near-term runup appears to be over, if the earnings outlook has not improved, I will likely advise investors to sell BWA and move into a stock with stronger earnings growth.” Rating: Buy.

FedEx (FDX) is an international package delivery company. I featured FedEx in the February issue of Smart Investing in Turbulent Times. FDX is an undervalued growth stock. The share price bottomed in January, and has recently traded sideways between 123 and 134. FDX now appears ready to climb toward 145, with additional upside price resistance at 152. Rating: Buy.

Harman International Industries (HAR) is the premiere connected technologies company for automotive, consumer and enterprise markets, best known for its JBL and Harman Kardon audio systems. HAR is an undervalued growth & income stock with a 1.9% dividend yield. The share price fell with the weak January market then began stabilizing in February. I’m going to give it another week, at least, before I raise the rating to Buy. 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 1.2% dividend yield. After falling with the market, the share price found support at 90 in January. Last week, I said, “The stock chart appears to be showing us the latter half of a cup-and-handle formation, which is a bullish chart pattern, typically followed by an upward move.” I expect the stock to continue rising immediately, to 102-103, and then trade sideways for a while. Rating: Strong 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.

Johnson Controls intends to purchase a 56% stake in security systems company Tyco International PLC (TYC). The combined company will offer electrical systems and security systems to the building industry. The new company will domicile in Ireland to take advantage of lower income tax rates.

JCI is an undervalued growth & income stock with a 3.2% dividend yield. The stock has been trading sideways since early January, between 34 and 36.50. There’s upside resistance at 39, and again at 41. Rating: Buy.

Robert Half International (RHI) is a staffing and consulting company. This month, Robert Half increased its quarterly dividend by 10% from $0.20 to $0.22. RHI is a slightly undervalued growth & income stock with a strong balance sheet and a 2.2% dividend yield. I’m waiting for the share price to stabilize before recommending additional purchases. Rating: Hold.

Whirlpool (WHR) is a global appliance manufacturer. WHR is a very undervalued growth stock with a 2.6% dividend yield--a fantastic choice for blue-chip stock investors.

I issued a Special Bulletin yesterday, following WHR’s price run-up. Last week I said, “Given a modest market rebound, WHR could reach upside price resistance at 150 by April.” It now looks like we might get to 150 this week! Traders should be prepared to sell at 149-150, although I would personally hold the stock for more growth in the coming months. Rating: Strong Buy.

Buy Low Portfolio
Security (Symbol)Date AddedPrice AddedPrice 2/22/16Total ReturnRating
Axiall (AXLL)11/9/152220-7%Hold
Bank of New York Mellon (BK)10/6/15----11%Sold 11/6/15
The Boeing Company (BA)10/6/15-----13%Sold 1/27/16
Boise Cascade (BCC)11/9/153015-49%Hold
BorgWarner (BWA)12/30/154433-25%Buy
FedEx (FDX)01/4/16145135-7%Buy
Harman International Industries (HAR)10/6/1510576-28%Hold
Intuit (INTU)10/6/1591988%Strong Buy
Johnson Controls (JCI)10/6/154336-18%Buy
Robert Half International (RHI)10/6/155139-24%Hold
Whirlpool (WHR)11/3/15160148-8%Strong Buy
Buy Low Portfolio Total Return-14.4%