I want to talk to you today about something that’s happening with the stock of GameStop Corp. (GME), because there’s a lesson within it that can add to every stock investor’s knowledge base.
When the predominant mood of the investing crowd is heading to the left, but your knowledge of the facts takes you to the right, don’t sit there wondering why you’re wrong. You’re not wrong. The crowd is wrong, and within the investment world, this phenomenon happens all the time.
Just look at this winter’s stock market correction! The market fell because investors were cashing in their stock investments over fears about oil prices (which rose), a recession (GDP is rising), bank liquidity (banks repurchased stock) and more! The market fell because investors were wrong, and they ran headlong in the wrong direction!
Fortunately, these situations always right themselves, because facts eventually rise to the surface, and level-headed investors take advantage of the market chaos—in this case, by purchasing the stock market bargains that had materialized during the downturn.
Now here’s a case where that crazy phenomenon has happened with a single stock. We’re past the midpoint, meaning that the stock’s rebound has begun.
Please take a moment to look at these features of GameStop shares, because I have something important to tell you:
- Earnings per share (EPS) are expected to grow 8.1% and 9.1% in 2016 & 2017 (January year-end).
- The Wall Street consensus EPS estimates for fiscal 2016 & 2017 have been steadily increasing since late-January.
- The dividend yield is large, at 4.8%, and was increased as recently as February 2016.
- The 2017 price/earnings ratio (P/E) is 7.6. For comparison, when contemplating GME’s EPS and dividend, a P/E of 14 would be considered fairly valued. This means that GME could rise 84% from today’s price, and still not be overvalued.
- The company repurchased 26.0% of its outstanding shares between fiscal year-end 2011 and fiscal year-end 2015, with repurchases ongoing.
- The company’s 2015 long-term debt-to-capitalization ratio was very low at 14%.
- The stock rebounded 35.4% from its February low to its March high, and is now pausing briefly—like so many other Smart Investing portfolio stocks—before it continues its rebound.
From the point of view of fundamental analysis, this stock is practically bulletproof, and those of you who are experienced investors are nodding your heads.
Why am I telling you all this about GameStop? Because GME is the most shorted stock on Wall Street! 40% of the outstanding shares have been shorted. (For newer investors, that means that gamblers are betting that the price will go down.)
It’s been my decades-long experience that when the investment crowd unanimously heads off in one direction, the wise investor takes note, and intentionally heads in the opposite direction. Among investors, the crowd is never right: they buy when they should sell, they cash in at market bottoms … you know the drill.
I’ve met these short-sellers on StockTwits. They are literally foolish gamblers who don’t have a clue how to use fundamental analysis, how to separate fact from fiction, and they don’t have any experience in cutting their losses. These people are going down with the ship!
Why is this important to GME shareholders? Because as good news and earnings reports continue to emerge from GameStop, and the stock continues to rise, those short-sellers are losing more and more money. They will have to repurchase the shares they shorted, in order to stem their losses and close out their short positions. All the buying activity from the short covering is going to push GME significantly higher!
Think about it this way: 40% of the outstanding shares of GameStop are going to be purchased in the near future. If I told you that about any other stock in the world, you’d be BEGGING ME for the name of the stock, so that you could buy it before the big price run-up.
Well, I’m giving you the name of that stock right here: GameStop Corp. (GME). Now get crackin’!
This Week’s Smart Investing Highlights
I have no new earnings reports, dividend changes or stock repurchase news to report.
I’m raising the rating on Adobe Systems (ADBE) from Hold to Buy, after the stock rested in its uptrend, and pulled back a little. I’m lowering the rating on Universal Electronics (UEIC) from Strong Buy to Buy, because the stock just experienced an aggressive run-up. It’s less clear now as to whether there’s any further upside in the coming weeks.
Adobe Systems (ADBE) will report first quarter earnings on March 17.
Universal Electronics (UEIC) entered into a warrants agreement with Comcast Corp. (CMCSA). You can read more about that in today’s stock updates.
Finally, here’s a quick list of stocks that seem best poised for near-term capital appreciation, appropriate for both longer-term investors and traders:
- Chemtura (CHMT), E*Trade (ETFC) and WellCare Health Plans (WCG) in the Growth Portfolio;
- General Motors (GM) and GameStop (GME) in the Growth & Income Portfolio;
- and Harman International Industries (HAR) and Johnson Controls (JCI) in the Buy Low Opportunities Portfolio.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company. The company is expected to report first quarter 2016 results on March 17 (November year-end). A quarterly earnings beat, combined with an up week in the market, could take the stock up to December’s all-time high around 96; at which point short-term traders should Sell! A mild earnings disappointment, combined with a down week in the market, could take the stock price down to 80; at which point investors and traders should Buy!
Here’s a recent, six-minute video interview with Adobe’s CEO. ADBE is a slightly undervalued aggressive growth stock, and a good choice for long-term investors.
I like it that the stock rebounded strongly from its February lows, and is resting without giving back all those gains. In the March 1 issue of Smart Investing in Turbulent Times, I lowered the rating on ADBE from Buy to Hold, anticipating its subsequent sideways trading. I’m pleased that ADBE rested for a while, and I believe it could now rise again. I’m raising the rating back to Buy. Rating: Buy.
Chemtura Corporation (CHMT) is a specialty chemical manufacturer. CHMT is an undervalued small-cap growth stock. The stock appears to be breaking out of a recent trading range. Expect some short-term upside resistance around 28.50. Rating: Strong Buy.
D.R. Horton (DHI) is a homebuilder. U.S. home resales rose to a six-month high in January, while economists had been expecting a decrease in the pace of resales. DHI is an undervalued growth stock with a 1.1% dividend yield. The stock is now actively rising toward short-term upside resistance at 31. There’s additional resistance at 33. Rating: Buy.
Delta Air Lines (DAL) is a global passenger & cargo air transportation company. In a March 10 analysis of Delta, United Continental Holdings (UAL) and American Airlines Group (AAL), Morgan Stanley not only found Delta to be far more undervalued than its peers, but the investment bank also gave DAL a 68 price target, 42% higher than today’s price. Major Wall Street firms do not typically take such bullish stances!
Delta is expected to repurchase $775 million of stock this month. Last week, Delta suggested that first quarter earnings would come in a tad under analysts’ expectations, due to softer pricing and higher fuel costs.
DAL is a growth stock with a 1.1% dividend yield. Last week I said, “Try to buy below 48.” The stock proceeded to quickly bounce at 46, which it could do again this week. Rating: Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. ETFC is an undervalued aggressive growth stock with a strong balance sheet. Last week I said, “A few down days in the market could take the stock price down to 24, at which point both traders and longer-term investors should buy!” That price came and went, and the stock’s ready to climb again. There’s near-term upside price resistance at 28, and medium-term resistance at 31. Rating: Buy.
The Priceline Group (PCLN) is an online travel service company. PCLN is a fairly valued growth stock. The share price had a tremendous rebound in February, traded sideways for three weeks, and is now climbing toward November’s all-time high of 1,476. Rating: Hold.
Royal Caribbean Cruises (RCL) is a global cruise vacation company. RCL is a very undervalued growth stock with a 2.1% dividend yield. There’s short-term upside price resistance at 85, which represents a 15% increase over the current price. Rating: Buy.
Universal Electronics (UEIC) is a manufacturer and cutting-edge world leader of wireless remote control products, software, and audio-video accessories for the smart home. UEIC rose 13% last week on news that the company entered into a warrants agreement with Comcast Corp. (CMCSA), in which Comcast will have the opportunity to purchase shares of Universal Electronic’s capital stock, as Comcast achieves pre-agreed upon milestones in their business relationship.
This is very bullish news for shareholders, which not only reaffirms the desirability of UEIC shares as a long-term investment, but presents the additional implication that Comcast might, at some point, offer to purchase the entire company.
The stock price shot up to upside resistance around $66, retracing its all-time high from February 2015. While I would expect UEIC to pause in the mid-$60s and trade sideways for a while, the Comcast news could push the stock higher. It will certainly encourage portfolio managers to buy on pullbacks.
UEIC is a fairly valued, volatile small-cap stock, which was featured in the March issue of Smart Investing in Turbulent Times. I’m lowering the rating from Strong Buy to Buy, because the stock is now fairly valued, and it’s risen to medium-term upside resistance. Rating: Buy.
Vulcan Materials (VMC) produces construction aggregates. The share price is approaching its recent peak price of 106.84 from November 2015. VMC is a very undervalued aggressive growth stock, and a great portfolio holding for longer-term investors. The stock would be a Buy on any dip to $98, and a Strong Buy at $94. Rating: Hold.
WellCare Health Plans, Inc. (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 is up over 30% from its February lows. Last week I said, “try to buy on a pullback to 85.” The stock immediately had a shakeout chart pattern, with the price bouncing at 84 and quickly recovering. A shakeout is an extremely bullish chart pattern that often precedes another price run-up. Watch for upside price resistance at 98. Rating: Strong Buy.
| Growth Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 3/14/16 | Total Return | Rating |
| Adobe Systems (ADBE) | 10/6/15 | 85 | 87 | 2% | Hold |
| Chemtura (CHMT) | 10/6/15 | 31 | 26 | -16% | Strong Buy |
| D.R. Horton (DHI) | 10/6/15 | 31 | 29 | -3% | Buy |
| Delta Air LInes (DAL) | 10/6/15 | 46 | 48 | 4% | Buy |
| E*Trade Financial (ETFC) | 11/12/15 | 29 | 25 | -15% | Buy |
| Priceline (PCLN) | 10/6/15 | 1,275 | 1,326 | 4% | Hold |
| Royal Caribbean Cruises (RCL) | 10/6/15 | 92 | 73 | -21% | Buy |
| Universal Electronics Inc (UEIC) | 03/1/16 | 54 | 63 | 18% | Buy |
| Vulcan Materials (VMC) | 10/6/15 | 94 | 104 | 11% | Hold |
| WellCare Health Plans (WCG) | 10/6/15 | 84 | 90 | 7% | Strong Buy |
| Growth Portfolio Total Return | -1.0% |
Updates on Growth & Income Portfolio Stocks
Big Lots (BIG) is an American discount retailer. In early March, Big Lots reported a fourth quarter earnings beat, increased the quarterly dividend from $0.19 to $0.21, and announced a new $250 million share repurchase authorization. BIG is a growth & income stock with a strong balance sheet and a 1.8% dividend yield. The stock is up 25% since mid-February. BIG could trade anywhere between 42-49 in the coming months, depending upon the strength of the market. Time your buys & sells accordingly. Rating: Buy.
Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. CAH is a growth & income stock with a 1.8% dividend yield. CAH is currently climbing toward 86, where it might rest before continuing onward to 90. At that point, I’ll likely change the rating to Hold, because the stock will be fairly valued, and the near-term upside will have been maxed out. Rating: Buy.
Carnival (CCL) is a global cruise vacation company. CCL is a very undervalued stock with a 2.6% dividend yield. The stock has been trading sideways. A moderately bullish market could easily push CCL higher. Traders and longer-term investors should buy now. There’s upside resistance at 55. 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 3.6% dividend yield. The stock is on a tear, spurred on by bullish sentiment among financial stocks, and could climb all the way to 31 before establishing a new trading range. Rating: Buy.
GameStop Corp. (GME) is a video game & consumer electronics retailer. The stock was featured in the March issue of Smart Investing in Turbulent Times. As I mentioned in a Special Bulletin on March 3, GameStop rolled out its new Ship from Store process in all 4,100 of its U.S. stores in late February. Ship from Store gives employees an easy ability to locate a product for a customer at another GameStop location, and ship it to them quickly. Ship from Store is boosting both sales volume and profit margins, because fewer products are being marked down.
GME is an extremely undervalued growth & income stock with a 4.8% dividend yield. The stock could climb to 38 in the coming weeks, depending on overall stock market activity, and GameStop’s March 24 earnings report. Please see additional remarks in today’s opening commentary, above. Everybody should buy this stock right now. Rating: Buy.
General Motors Company (GM) is an American auto manufacturer. GM is a vastly undervalued growth & income stock with a 4.9% dividend yield. The stock is actively rising, and could reach 34 quickly. Rating: Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. H&R Block reported third quarter 2016 results recently (April year-end). A 1% revenue miss led to a 3% miss on earnings per share. The company announced a $3.5 billion share repurchase authorization last September, and has thus far repurchased $1.9 billion of stock. The share price fell in early March upon the earnings report, and it’s expected that H&R Block will take advantage of the lower price by repurchasing another several $100 million of stock.
HRB is a growth & income stock with a strong balance sheet and a 2.8% dividend yield. The stock is overvalued based on 2016 numbers, and undervalued based on 2017 numbers (April year-end).
HRB is most likely to trade between 28-32 in the near-term. When the share price gains some momentum, I’ll alert investors to the buying opportunity. Rating: Hold.
| Growth & Income Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 3/14/16 | Total Return | Rating |
| Abercrombie & Fitch (ANF) | 11/9/15 | -- | -- | 15% | Sold 11/30/15 |
| Big Lots (BIG) | 10/6/15 | 49 | 45 | -8% | Buy |
| Cardinal Health (CAH) | 01/4/16 | 88 | 84 | -5% | Buy |
| Carnival (CCL) | 10/6/15 | 50 | 48 | -3% | Buy |
| Federated Investors (FII) | 11/30/15 | 31 | 28 | -11% | Buy |
| GameStop (GME) | 10/6/15 | 43 | 32 | -26% | Buy |
| General Motors (GM) | 10/6/15 | 32 | 31 | -3% | Strong Buy |
| H&R Block (HRB) | 10/6/15 | 36 | 28 | -21% | Hold |
| 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 | -3.8% |
Updates on Buy Low Opportunities Portfolio Stocks
Axiall Corp. (AXLL)—formerly Georgia Gulf Corp.—manufactures chemicals, plastics and building products. In January, Axiall rejected a $1.4 billion ($20/share) takeover attempt by Westlake Chemical (WLK). (It’s possible that Westlake will return with a higher purchase offer.) In February, 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. The latest news on Axiall includes a Board Chairman appointment, and a letter from the CEO of Westlake Chemical to Axiall’s shareholders.
Axiall has divested four non-core businesses since April 2015, to focus on its chlorovinyl and derivatives business; and plans to sell its window and door products business to OpenGate Capital. The deal will close on March 31, 2016. Axiall’s Royal Building Products division will continue to produce siding, trim, mouldings, fittings, and pipes.
The stock no longer fits my growth criteria; however, the share price appears ready to climb again immediately, and the distinct possibility of a higher takeover offer remains. I encourage all shareholders to use stop-loss orders. If any bad news emerges you want to avoid any decline, as the company is not currently slated for the kind of earnings growth that would bring a dependable rebound to the stock price in 2016. Rating: Hold.
Boise Cascade Company (BCC) is a leading U.S. wholesaler of wood products and building materials, benefitting from a strong home-building market. The company’s profits are suffering due to weak plywood pricing, which resulted from increased foreign competition. (A strong dollar harms exporters, and benefits importers.) While the company remains solidly profitable, the stock no longer meets my investment criteria.
BCC is actively rising toward upside price resistance around 20. Once it reaches 20, your best opportunity for capital gains will be to sell BCC and buy a stock with a stronger earnings growth outlook, since earnings growth is what really drives stock prices over the medium- and long-term. Rating: Hold.
BorgWarner (BWA) is a maker of engineered automotive systems for power train applications. The stock is actively climbing, and could rise as high as $40 in the short-term, depending on the overall strength of the market. 2016 earnings growth prospects have slowed to a moderate rate. When the near-term run-up appears to be over, I will likely advise investors to sell BWA, and move into a stock with stronger earnings growth. Rating: Hold.
FedEx Corp. (FDX) is an international package delivery company. FDX is an undervalued growth stock. The stock is actively climbing. There’s some upside price resistance at 152. Rating: Buy.
Harman International Industries, Inc. (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 1.8% dividend yield. HAR could appeal to both traders and longer-term investors. The share price is now rising, with upside resistance at 88, and again at 95. Rating: Buy.
Intuit Inc. (INTU) is an industry leader in developing and marketing financial management software solutions. INTU is an undervalued, aggressive growth stock with a strong balance sheet and a 1.2% dividend yield. The stock was featured in the March issue of Smart Investing in Turbulent Times. I expect INTU to trade between 96-103 for a few months, before continuing upward. Rating: Strong Buy.
Johnson Controls, Inc. (JCI) operates in the areas of energy management and auto batteries. The company plans to spin off Adient, its automotive seating & 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 3.1% dividend yield. The stock is actively climbing. There’s upside resistance at 39, and again at 41. Rating: Buy.
Robert Half International Inc. (RHI) is a staffing & consulting company. RHI is a fairly valued growth & income stock with a strong balance sheet and a 2.1% dividend yield. The share price is rebounding from the recent market correction, and could rise to $43.50 before resting. Rating: Hold.
Whirlpool (WHR) is a global appliance manufacturer. WHR is a very undervalued growth stock with a 2.2% dividend yield. In February, Moody’s Investors Service raised its rating for Whirlpool’s senior unsecured debt to Baa1. The stock is surprising me by moving up again, after barely resting from its February run-up. Buy WHR, and if a brief market downturn takes it down to 150, buy more! Rating: Strong Buy.
| Buy Low Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 3/14/16 | Total Return | Rating |
| Axiall (AXLL) | 11/9/15 | 22 | 21 | -2% | 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) | 11/9/15 | 30 | 18 | -42% | Hold |
| BorgWarner (BWA) | 12/30/15 | 44 | 36 | -18% | Hold |
| FedEx (FDX) | 01/4/16 | 145 | 144 | -1% | Buy |
| Harman International Industries (HAR) | 10/6/15 | 105 | 83 | -20% | Buy |
| Intuit (INTU) | 10/6/15 | 91 | 99 | 9% | Strong Buy |
| Johnson Controls (JCI) | 10/6/15 | 43 | 38 | -14% | Buy |
| Robert Half International (RHI) | 10/6/15 | 51 | 42 | -18% | Hold |
| Whirlpool (WHR) | 11/3/15 | 160 | 166 | 4% | Strong Buy |
| Buy Low Portfolio Total Return | -9.5% |