The S&P 500 stock index rose about 12% from its February lows to its March highs. It’s resting now, and it could easily pull back a little. Always remember that it’s perfectly normal for a stock--or an entire market index--to recede a bit after a big run-up. There’s absolutely no cause for alarm, unless some kind of game-changing news emerges.
The profitability of multi-national corporations, in 2014 and 2015, was adversely affected by the rising trade-weighted U.S. dollar, which peaked at a 14-year high in January 2016. The value of the dollar is now coming down, although it could surge again later this year.
The Federal Reserve is backing away from its previous forecast of three rate hikes in 2016; now it’s expecting only one or two hikes in 2016. Inflation is tentatively forecast at about 1.5% for 2016.
Fewer rate hikes are good for current bond prices, bad for potential bank and bond yields, and good for corporate and personal debt payments. However, as the Fed hems and haws on interest rate trends month after month, the indecision leads to enhanced stock and bond market volatility.
These minor changes in interest rates are of very little concern to me. Having lived through interest rates in the 10%-to-20% range, current low interest rates don’t ruffle my feathers, although they are very unfortunate for people who are looking for good and safe income payments.
Interest rates are low and will remain low, even with the small rate increases in 2016. Therefore, my best suggestion would be to look for value in stocks, because you’re still not going to find it in bonds. (I am not always a bear on bonds. I made a killing after the 1994 Treasury bond market crash, and in junk bonds, prior to that. I’m all for making money! I just don’t see the opportunity to do so in bonds anytime soon.)
Many Smart Investing portfolio stocks are trading in narrow, sideways price ranges, since having a strong initial rebound from the winter’s stock market correction. Those trading ranges give us good guidance on how to proceed with stocks. Predictable trading ranges show us the best prices at which we can reasonably expect to buy or sell in the coming weeks.
In addition, predictable trading ranges are a normal place for a stock to rest after a big up-or-down move. If there’s no ominous news facing a company--such as there is with Valeant Pharmaceuticals (VRX)--you will frequently see an undervalued growth stock rise after it’s been trading sideways for about two-to-eight weeks.
The stock market sector that appears most likely to continue rising, right now, is financial stocks. This includes a broad array of financial stocks: banks, investment managers, mutual funds, full-service and discount brokers, and financial software. Homebuilder stocks also appear capable of rising again, beginning in a few weeks.
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company. Here’s a summary of some commentary from Barron’s, pertaining to Adobe’s Marketing Summit in Las Vegas last week.
Analysts raised their earnings per share (EPS) growth expectations for Adobe in the wake of the company’s strong first quarter 2016 earnings report (November year-end). The consensus estimates now project EPS to grow aggressively at 36.5% and 33.5% in 2016 and 2017. The 2016 price/earnings ratio (P/E) is a little low compared to the EPS growth rate, indicating that the stock is slightly undervalued.
ADBE rose to short-term upside price resistance and is now trading in a tight range between 91 and 94. December’s all-time high was 96.42. If ADBE climbs past that high point, it would be an extremely bullish omen for a near-term run-up. Lots of professionals wait for such breakouts and then buy the stock. I would consider that a very smart move.
If the share price dips down to 88, I’d consider that to be a Strong Buy. ADBE is a great stock for long-term investment portfolios. Rating: Buy.
Chemtura (CHMT) is a specialty chemical manufacturer. CHMT is an undervalued small-cap growth stock. I’ve been cautious on Chemtura’s 2017 earnings outlook due to several recent downward revisions in the consensus EPS estimates. Last week, that number edged upward. I want to emphasize that the numbers are very attractive, and I’m paying close attention to the trend because declining earnings estimates can lead directly to problems with the stock price.
CHMT is trading between 25 and 27, and is likely to rise past 27 in the coming months. My suggestion is to continue buying and owning CHMT, but protect your downside with a stop-loss order. Rating: Strong Buy.
D.R. Horton (DHI) is a homebuilder. DHI is a slightly undervalued growth stock with a 1.1% dividend yield. The stock is resting now after its recent price recovery; trading between 29 and 30.50. Watch for opportunities to buy below 29.50. Rating: Buy.
Delta Air Lines (DAL) is a global passenger and cargo air transportation company. In March, Delta entered into a codeshare partnership with Jet Airways and KLM Royal Dutch Airlines, in which the companies will market daily, non-stop flights from Amsterdam to Mumbai, New Delhi and Toronto.
On March 26, Barron’s reported, “Delta can hit $70 by the end of this year.” The author cites a portfolio manager who discusses lower fuel costs, the falling dollar and Delta management’s smart balance sheet decisions.
P.S., in the article, the portfolio manager makes wise comments about energy stocks. I would not, however, follow his advice about owning shares in Anadarko Petroleum (APC), without using a stop-loss order. That’s because APC is expected to lose money in 2016 and 2017.
DAL is a slightly undervalued growth stock with a 1.1% dividend yield. I would need to see 2017 EPS estimates continue to increase in order to give the stock a Strong Buy rating. DAL rebounded in early February, and has since traded between 46 and 50. I expect DAL to break past December’s all-time high of 52.77 during the next stock market run-up. 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. ETFC has traded sideways between 23.50 and 26 for a month, following its February run-up. There’s some upside price resistance at 28. Rating: Buy.
Priceline (PCLN) is an online travel service company. PCLN is a fairly valued growth stock. Traders could buy below 1,300, and earn a 13% short-term capital gain as PCLN climbs toward its November all-time high of 1,476. Rating: Hold.
Royal Caribbean Cruises (RCL) is a global cruise vacation company. RCL is one of my favorite stocks because it offers very strong earnings growth, a comparably low P/E, an attractive 2.0% dividend yield, big dividend increases and share repurchases. On top of all that, the stock has only recently begun its recovery from this winter’s stock market downturn. You have not missed your opportunity to buy this excellent stock at a low price. I believe both longer-term investors and traders will be thrilled in a few months if they buy RCL today.
There’s a little upside price resistance at 85, where I expect the stock to pause in its uptrend. Your best-case scenario in the near future is for the stock to return to December’s all-time high of 103.40, giving new investors a potential 39% return! 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% in early March on news that the company entered into a warrants agreement with Comcast (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 there’s an additional implication that Comcast might, at some point, offer to purchase the entire company.
UEIC is a volatile small-cap stock, featured in the March issue of Smart Investing in Turbulent Times. The stock recently rose to medium-term upside resistance around 66, and is now trading sideways between 61 and 66. Any pullback below 62 should be considered a good buying opportunity. Rating: Buy.
Vulcan Materials (VMC) produces construction aggregates. VMC is a very undervalued aggressive growth stock, and a great portfolio holding for longer-term investors. Read this Investor’s Business Daily article, “Markets For This Gravel Supplier Are Solid As A Rock”.
I changed the rating on VMC from Strong Buy to Hold in early March because the stock had a significant run-up, back towards its 2015 annual high of 106.84. I certainly expected the stock to rest, and trade sideways for quite a while. However, VMC did not ask my advice, and appears capable of breaking past upside price resistance in the near future. Good! Therefore, last week, I changed the rating back to Strong Buy. 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. The stock’s chart looks good, trading between 89 and 94. We could see WCG rise to 98 in the near-term, assuming a neutral-to-bullish stock market. Rating: Strong Buy.
| Growth Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 3/28/16 | Total Return | Rating |
| Adobe Systems (ADBE) | 10/6/15 | 85 | 92 | 8% | Buy |
| Chemtura (CHMT) | 10/6/15 | 31 | 25 | -17% | Strong Buy |
| D.R. Horton (DHI) | 10/6/15 | 31 | 30 | -2% | Buy |
| Delta Air LInes (DAL) | 10/6/15 | 46 | 48 | 5% | Buy |
| E*Trade Financial (ETFC) | 11/12/15 | 29 | 24 | -17% | Buy |
| Priceline (PCLN) | 10/6/15 | 1,275 | 1,287 | 1% | Hold |
| Royal Caribbean Cruises (RCL) | 10/6/15 | 92 | 75 | -18% | Buy |
| Universal Electronics Inc (UEIC) | 03/1/16 | 54 | 63 | 17% | Buy |
| Vulcan Materials (VMC) | 10/6/15 | 94 | 106 | 13% | Strong Buy |
| WellCare Health Plans (WCG) | 10/6/15 | 84 | 92 | 9% | Strong Buy |
| Growth Portfolio Total Return | -0.1% |
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 very undervalued growth & income stock with a strong balance sheet and a 1.9% dividend yield. BIG is trading between 43 and 46, and could possibly rise to upside resistance at 48 quite soon. 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. The stock has barely begun its share price rebound and could rise about 10% to 90 in the coming months. Rating: Buy.
Carnival (CCL) is a global cruise vacation company. CCL is a very undervalued stock with a 2.4% dividend yield. The share price is in an uptrend, and could reach 55 in the coming months. 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. FII is a growth & income stock with a hefty 3.5% dividend yield. The stock is on an uptrend, and could climb all the way to 31 before establishing a new trading range. Rating: Buy.
GameStop (GME) is a video game & consumer electronics retailer. In my March 15 Weekly Update, I featured GameStop in a commentary about short interest on Wall Street, and the tremendous opportunity it presented to GME investors. Several days later, this article was published by Reuters: “GameStop attracts large investors as shorts back off.” Then yesterday, I issued a Special Bulletin, detailing GameStop’s fourth-quarter 2016 earnings results (January year-end), and updating you on its 2017 and 2018 outlook.
GME is an extremely undervalued growth & income stock with a 4.9% dividend yield. All of the fundamental numbers on GME look great--2018 EPS, revenue, net income, P/E, dividend, debt and share repurchases--except for fiscal 2017 EPS growth, which will be slow. To rephrase, that’s “great,” “great,” “great,” “great,” “great,” “great,” “great,” and “meh.” Therefore, I’m maintaining my Buy rating, rather than giving the stock a Strong Buy rating. Please buy now, rather than waiting for a lower price, which I truly do not believe will materialize. Rating: Buy.
General Motors (GM) is an American auto manufacturer. GM recently announced that it aims to boost sales in South Korea by 15% in 2016; and that it foresees tremendous sales growth in China, both long-term and short-term. While GM’s EPS growth is not big, the stock remains vastly undervalued and offers a 4.9% dividend yield. The stock is ratcheting upwards, and could reach 34 soon. 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 (EPS), leading to a downward overreaction in the stock price. The outlook remains strong, with EPS expected to rise 15.9% in fiscal 2017.
HRB is a very undervalued growth & income stock with a strong balance sheet and a 3.0% dividend yield. The company announced a $3.5 billion share repurchase authorization last September, and has thus far repurchased $1.9 billion of stock.
When HRB gains some momentum, I’ll alert you to the buying opportunity. If you are willing to wait for the price rebound, you could certainly acquire shares at a bargain price right now. Rating: Hold.
| Growth & Income Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 3/28/16 | 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 | 81 | -8% | Buy |
| Carnival (CCL) | 10/6/15 | 50 | 49 | -2% | Strong Buy |
| Federated Investors (FII) | 11/30/15 | 31 | 28 | -10% | Buy |
| GameStop (GME) | 10/6/15 | 43 | 30 | -30% | Buy |
| General Motors (GM) | 10/6/15 | 32 | 31 | -3% | Strong Buy |
| H&R Block (HRB) | 10/6/15 | 36 | 26 | -26% | 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 | -4.6% |
Updates on Buy Low Opportunities Portfolio Stocks
Axiall (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.)
Axiall divested four non-core businesses since April 2015 in order 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 is steadily rising, along with most chemical industry stocks, and the distinct possibility of a higher takeover offer remains. I encourage all shareholders to use stop-loss orders. Rating: Hold.
Boise Cascade Company (BCC) is a leading U.S. wholesaler of wood products and building materials, benefiting from a strong home-building market. The company’s profits are suffering due to weak plywood pricing, which resulted from increased foreign and domestic competition and a strong dollar. While the company remains solidly profitable, the stock no longer meets my investment criteria.
While I’m not thrilled with the downside revision to the 2016 earnings forecast, “you can’t fight the tape.” BCC is steadily climbing, and could rise to 25 before resting. Whenever you own a stock that doesn’t have good current earnings growth, please be cautious and use stop-loss orders. Rating: Hold.
BorgWarner (BWA) is a maker of engineered automotive systems for power train applications. 2016 earnings growth prospects have slowed to a moderate rate. BWA is up 33% from its January lows and still climbing. The share price could rise as high as 45 in the short-term, depending on the overall strength of the market. When the 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 (FDX) is an international package delivery company. The company’s 2016 and 2017 consensus EPS estimates have increased repeatedly in recent weeks (May year end), although the stock is somewhat fairly valued, based on fiscal 2017 EPS.
The share price rose more than $40 from its January lows to its March high of 164.84. It’s unreasonable to expect it to climb further in the short-term. A few down days in the market could easily pull FDX down to 150, at which point I’d give it a Buy rating. Rating: Hold.
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 1.6% dividend yield.
The share price continues to steadily recover from the winter market downturn. Given the huge price rebounds we’ve seen since February in stocks like Whirlpool (WHR) and FedEx (FDX), it appears that HAR could mirror that pattern. The stock could rise to 110 by this summer, assuming a neutral-to-bullish stock market, giving it a potential 28% short-term gain. Rating: Buy.
Intuit (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. INTU is surprising me by showing a readiness to retrace last July’s all-time highs around 108. While I expect the stock to pause at 108, upside resistance is not strong. If the stock wants to climb from there, it will do so. 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 3.0% dividend yield. The stock is steadily climbing. There’s upside resistance at 41. Rating: Buy.
Robert Half International (RHI) is a staffing and consulting company. RHI is a fairly valued growth & income stock with a strong balance sheet and a 2.0% dividend yield. The stock has been climbing since February 12, and now appears as if it will blow past upside price resistance at 44 towards more significant resistance at 50. There’s room for traders to make about 13% in the short-term, but longer-term investors should put new capital into a Smart Investing stock with a Buy or Strong Buy rating. Rating: Hold.
Whirlpool (WHR) is a global appliance manufacturer. WHR is a very undervalued growth stock. 2016 and 2017 earnings per share (EPS) are expected to grow 17.8% and 16.3% (December year-end). The dividend yield is 2.0%. (Read more in this March 15 Barron’s article.) In February, Moody’s Investors Service raised its rating for Whirlpool’s senior unsecured debt to Baa1.
The stock rose over $50 from its January lows. I’m keeping my Strong Buy rating for WHR’s longer-term outlook. However, shareholders should be prepared for the recent run-up to end immediately. The stock has got to rest now. Wait for a pullback below 165 before accumulating more shares. Rating: Strong Buy.
| Buy Low Portfolio | |||||
|---|---|---|---|---|---|
| Security (Symbol) | Date Added | Price Added | Price 3/28/16 | 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 | 19 | -37% | Hold |
| BorgWarner (BWA) | 12/30/15 | 44 | 37 | -16% | Hold |
| FedEx (FDX) | 01/4/16 | 145 | 162 | 12% | Hold |
| Harman International Industries (HAR) | 10/6/15 | 105 | 85 | -19% | Buy |
| Intuit (INTU) | 10/6/15 | 91 | 102 | 12% | Strong Buy |
| Johnson Controls (JCI) | 10/6/15 | 43 | 38 | -12% | Buy |
| Robert Half International (RHI) | 10/6/15 | 51 | 44 | -13% | Hold |
| Whirlpool (WHR) | 11/3/15 | 160 | 177 | 10% | Strong Buy |
| Buy Low Portfolio Total Return | -6.0% |