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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Weekly Update

In this update, we take a look at recent news and earnings reports from our portfolio stocks, and raise the ratings on Boise Cascade (BCC), Delta Air Lines (DAL) and D.R. Horton (DHI) to Buy.

Kraft Heinz (KHC) had a blowout earnings report last week, which launched the stock upwards to new highs. I think the price action is sustainable and the stock will continue climbing this year.

Would you do me a favor? I wrote about this potential scenario with Kraft Heinz in the April issue of Smart Investing in Turbulent Times. Would you please re-read that?

The reason I’m asking you to do so is that stock market success has a lot to do with our ability to recognize patterns and phenomena that repeat themselves. We learn what to avoid, and we learn what tends to work well.

In that light, stocks tend to act in predictable ways when big corporate mergers are taking place. I recognized that pattern playing out earlier this year in KHC. That’s why I added it to the Growth & Income Portfolio. I fully expected an upside earnings surprise, followed by a sudden market focus on the company’s strong earnings growth potential.

Lo and behold, the company stunned investors with much better-than-expected quarterly results. Now, Wall Street analysts, pundits and portfolio managers will be scrambling to reassess Kraft Heinz and increase their ratings, price targets and buying activity on the stock.

These upside surprises don’t happen with ALL post-merger companies, but when they do happen, the writing is on the wall. Strong earnings growth rates and low P/Es pointed me directly to Kraft Heinz. There really wasn’t any guesswork involved.

I want you to memorize this piece of stock market trivia: if consensus earnings estimates reflect strong growth and the P/E seems ridiculously low on a post-merger company, you are recognizing an opportunity before the rest of the market catches on.

You’d think that hundreds of investment professionals would have seen that pattern, too. I don’t know why it came as such a surprise to Wall Street. Perhaps it’s simply human behavior: most people don’t like to stand up and promote an idea when nobody else around them is doing so.

Well guess what? The market tossed a softball, and the professionals swung and missed. You—the investor—should take note. Investing in stocks does not have to be complicated. Buy stocks in companies with strong earnings growth projections and low P/Es. Then be patient. You own quality stocks. These companies are not going out of business tomorrow. Give them time to thrive in your portfolio.

Let’s take a closer look at recent news and earnings reports from our portfolio stocks:
• These companies reported quarterly results last week: Axiall (AXLL), Boise Cascade (BCC), Kraft Heinz (KHC), Priceline (PCLN), Universal Electronics (UEIC), Vulcan Materials (VMC) and WellCare Health Plans (WCG).
• This week, I’m raising the ratings on Boise Cascade (BCC), Delta Air Lines (DAL) and D.R. Horton (DHI) to Buy.
Cardinal Health (CAH) reported both a dividend increase and a new share repurchase authorization.
Adobe Systems (ADBE) reported the acquisition of Livefyre last week; and we have three portfolio stocks that are undergoing significant M&A activity: Axiall (AXLL), FedEx (FDX) and Johnson Controls (JCI).

These are my three most timely stock picks today based on profit outlooks and current price action:
• Growth Portfolio: Dollar Tree (DLTR)
• Growth & Income Portfolio: Carnival (CCL)
• Buy Low Opportunities Portfolio: Boise Cascade (BCC)

Updates on Growth Portfolio Stocks

Adobe Systems (ADBE) is a software company. Last week, Adobe agreed to acquire Livefyre for its social engagement platform to enhance Adobe Experience Manager. This aggressive growth stock is undervalued based on both 2016 and 2017 earnings (November year-end). ADBE is trading near its recent all-time highs, between 92 and 97. It could easily begin another run-up the next time the S&P 500’s trajectory becomes bullish. Strong Buy.

Chemtura (CHMT) is a specialty chemical manufacturer. In the wake of strong first-quarter results, analysts have again increased their full-year earnings estimates for Chemtura. CHMT is small-cap growth stock, very undervalued based on both 2016 and 2017 earnings (December year-end).

In April, I wrote, “a surge in the S&P 500 could propel CHMT to 29.50. If the latter scenario takes place, traders should exit.” Sure enough, the stock proceeded to close at 29.51 two days in a row, then fell back to short-term price support after the earnings announcement. Both traders and longer-term investors should buy now. The next time CHMT passes 29.50, there’s additional upside resistance around 32. Strong Buy.

D.R. Horton (DHI) is a homebuilder. DHI is a slightly undervalued growth stock with a 1.1% dividend yield. DHI has moderate upside price resistance at 33. The price appears to be in a very short-term trough, and in that light, I’m raising the rating to Buy for both traders and longer-term investors. Buy.

Delta Air Lines (DAL) is a global passenger and cargo air transportation company. This undervalued stock has a dividend yield of 1.3%. DAL just executed a double-bottom chart pattern, which signals a turnaround in the stock price. Therefore, I’m raising the rating to Buy. Depending on broader market strength, DAL could rise anywhere from 46 to 50 in May and June. Buy.

Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. Yesterday’s Forbes article describes the phenomenon of retail dollar stores stealing market share from grocery store chains. Dollar Tree’s first-quarter results are expected on May 19. DLTR is a large-cap, undervalued aggressive growth stock, with a low degree of volatility. DLTR could easily begin a new run-up to all-time highs within days. Buy DLTR now. Strong Buy.

E*Trade (ETFC) offers financial brokerage and banking products and services. E*Trade was featured in the May issue of Cabot Undervalued Stocks Advisor. The stock is having a small pullback during an uptrend, in tandem with the broader market. There’s a little upside price resistance at 28, and then medium-term resistance between 30.50 and 31.50, where it traded repeatedly last year. A rebound toward 31 will give new investors a 24% capital gain opportunity. Buy.

Priceline (PCLN) is an online travel service company. Last week, the company reported first-quarter earnings per share (EPS) of $10.54 vs. the consensus estimate of $9.56. Profits rose 24% vs. a year ago. Sales were $2.15 billion, a bit higher than the consensus estimate.

Priceline guided Wall Street lower on second quarter profits, as Easter—and the timing of additional holidays and events—shifted away from the second quarter on a year-over-year comparison. For example, the Easter holiday brought approximately $40 million of profit to first quarter results, which fell within the second quarter last year. Additionally, Priceline plans to increase its advertising spending for and

Priceline’s CEO Darren Huston resigned in April, after an investigation into a personal relationship between Huston and another employee—a relationship which ran afoul of the company’s code of conduct. Board Chairman Jeffery Boyd immediately assumed the role of interim CEO, which pleased the markets. Boyd “effectively built the business,” reported Reuters.

PCLN is a slightly-undervalued growth stock. EPS are expected to grow 15% to 17% in both 2016 and 2017 (December year-end). The stock fell to recent price support, with the earnings report. PCLN could become a trading buy in the near future. Hold.

Royal Caribbean Cruises (RCL) is a global cruise vacation company. RCL offers investors very strong earnings growth, a low P/E, an attractive 2% dividend yield, big dividend increases and share repurchases. The stock is significantly undervalued.

The stock has been recovering from the winter stock market downturn in a “two steps forward, one step back” pattern. Your best-case scenario in the coming months is for RCL to return to December’s all-time high of 103.40. And by the way, at 103.40, the stock would still be undervalued, based on both 2016 and 2017 earnings expectations. 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 is a volatile small-cap growth stock. The company reported first-quarter results last week. Sales and profits were higher than a year ago but lower than analysts’ expectations.

The stock is fairly valued based on 2016 EPS estimates, and overvalued based on 2017 EPS estimates. UEIC just began reaching new highs in late April, followed by a small pullback in tandem with the overall market. I expect to see more near-term upside in the stock. Only experienced traders should buy now. For everybody else, be forewarned that I will advise selling after the current run-up unless the 2017 earnings outlook increases. Hold.

Vulcan Materials (VMC) produces construction aggregates. The company reported first-quarter adjusted EPS of 26 cents last week, when the market was expecting six cents. Revenue also handily beat consensus estimates. As a result, analysts increased their full-year 2016 expectations to reflect 59.8% EPS growth. VMC is a very undervalued aggressive growth stock. The share price continues to climb. Strong Buy.

WellCare Health Plans (WCG) is a very 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. WellCare reported a blowout first quarter last week, with $1.06 EPS, when analysts were expecting 69 cents, enhanced by lower than expected medical loss ratios (MLRs) in its Medicare Advantage and Part D businesses. As a result, the 2016 consensus earnings estimate rose from an expected 29.4% EPS growth rate to 34.0% growth. Read an analysis of first quarter results in the Tampa Bay Business Journal.

The share price jumped last week. It will likely reach 98, promptly; and could rise significantly higher if the market turns bullish. The stock would be relatively fairly valued at 129, based on its expected 2017 EPS growth rate. Buy WCG now. Strong Buy.

Updates on Growth & Income Portfolio Stocks

Big Lots (BIG) is an American discount retailer. First-quarter results are due on May 23. BIG is a very undervalued growth & income stock with a strong balance sheet and a 1.8% dividend yield. BIG left its recent trading range in mid-April and will likely climb toward its all-time closing high of 50.80 (from November 2014). Based on expected 2018 EPS (January year-end), the stock will be fairly valued at 59, giving today’s investors an approximate 26% capital gain. Buy.

Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. Last week, Cardinal increased the dividend to 44.89 cents, giving the stock a current yield of 2.3%. The company also announced a new $1 billion share repurchase plan.

The stock fell in late April, and appears to have just completed a double-bottom chart pattern. I therefore expect the price rebound to commence. There’s upside resistance at the stock’s previous all-time high of 91.38, 16.5% higher than the current price. Strong Buy.

Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. Carnival was featured in the May issue of Cabot Undervalued Stocks Advisor. The stock is extremely undervalued with a current dividend yield of 2.8%.

CCL is rebounding from a brief price correction. I expect it to promptly return to 53, then continue climbing to its 2015 high of 55.77 in the coming months. Please expect the stock to pause there before its next run-up. Strong Buy.

Federated Investors (FII) is a global investment management company. Analysts keep increasing Federated’s 2016 earnings estimates (December year-end), but earnings growth is expected to be much slower in 2017. If 2017 EPS estimates do not increase in the coming weeks, I will issue a Special Bulletin to sell FII when it reaches medium-term resistance at 34. The stock rose 38% from its February low to its April high, and has now pulled back a little with the overall market. Hold.

GameStop (GME) is a video game and consumer electronics retailer. GME is an extremely undervalued growth & income stock with a 4.9% dividend yield and a strong balance sheet. The stock pulled back in recent weeks, along with a small correction in the overall market, to price support at 30. I expect a quick rebound. There’s no significant upside price resistance until GME reaches 38. Buy now. Buy.

General Motors (GM) is an American auto manufacturer. On May 8, a Forbes article emphasized GM’s incredibly low stock valuation, and its big 4.8% dividend yield. GM has been rising since mid-February, in a two-steps-forward, one-step-back pattern, and could climb all the way to 35.50 before resting. Buy GM now. Buy.

H&R Block (HRB) is a leader in tax preparation services. The stock fell in April on news of disappointing tax season results. As a result, the company plans to amend its marketing and pricing strategies, pare down its work force and replace its CFO.

Block completed its 2016 fiscal year in April; those results will be reported after the market closes on June 9. The 2017 outlook offers 14.9% EPS growth, a 10.2 P/E, and a 4% dividend yield.

The company is still very profitable, but any corporate disappointment that affects earnings is going to cause its stock price to fall in the short-term. I’ll let you know when the stock appears ready to turn upward, so that you can take advantage of the rebound. Give it a few months to settle down first. Hold.

Kraft Heinz (KHC) is a global food and beverage producer. Last week, Kraft Heinz reported first-quarter EPS of 73 cents, far above the 62-cent consensus estimate. The earnings beat was attributed to increased sales, lower prices of raw materials, aggressive cost savings and margin expansion. Cost savings targets from the July 2015 merger of Kraft Foods Group and H.J. Heinz Co. are pacing ahead of expectations.

KHC has aggressive earnings growth, an undervalued P/E and a 2.7% dividend yield. The stock price launched upward to new highs on the earnings report. I expect good capital gains this year. Strong Buy.

Updates on Buy Low Opportunities Portfolio Stocks

Axiall (AXLL)—formerly Georgia Gulf Corp.—manufactures chemicals, plastics and building products. This year, Axiall twice rejected buyout offers from Westlake Chemical (WLK), valued at $20 and $23.34 per share. And yesterday, Axiall referred to Westlake’s proposal as “inadequate.” In turn, Westlake plans to attempt to elect its chosen representatives to Axiall’s Board of Directors. In more recent news, China Petrochemical Development plans to sell its 40% interest in Taiwan Chlorine Industries to Axiall.

Axiall reported first quarter results last week. Adjusted EPS were 17 cents, far above the consensus estimate of a 27-cent loss. Revenue was $699 million, 7.6% lower than analysts had expected. Wall Street expects Axiall’s poor 2016 earnings outlook to be followed by a very strong earnings rebound in 2017. I expect analysts to increase their 2016 EPS estimates in the coming days. The dividend yield is 2.6%.

Risk-tolerant traders are presented with an opportunity to buy AXLL in anticipation of a possible higher, successful takeover bid. The stock carries increased risk, since the company’s profits are falling this year. I will remove AXLL from the Buy Low Opportunities Portfolio if the price drops to 23. For now, it’s climbing, so hold your shares. Hold.

Boise Cascade Company (BCC) is a leading U.S. wholesaler of wood products and building materials. Revenue is benefiting from a strong home-building market, but profits are suffering due to weak plywood pricing, which resulted from increased foreign and domestic competition and a strong dollar. Demand for wood products correlates with trends in single- and multi-family housing starts. Housing starts, which were 1 million and 1.11 million in 2014 and 2015, are forecasted to rise to 1.23 million in 2016.

Last week, Boise reported adjusted first-quarter EPS of 19 cents vs. the consensus estimate of a four-cent loss. The 2016 consensus earnings estimate rose as a result of the strong first quarter. Analysts are now expecting EPS to fall 6.8% in 2016, then to rise 58.9% in 2017. The 2016 and 2017 price/earnings ratios (P/E) are 18.1 and 11.4.

The share price broke out on May 2, followed by a cup-and-handle chart pattern, which is a bullish precursor to a stock price run-up. Therefore, I’m raising the rating on BCC to Buy. Shareholders should expect the run-up in the share price to pause at 25. Buy.

BorgWarner (BWA) is a maker of engineered automotive systems for power train applications. BWA is slightly overvalued based on 2016 numbers, and quite undervalued based on 2017 numbers. The dividend yield is 1.5%.

I recently issued a Special Bulletin to buy BWA, as the stock completed a classic cup-and-handle chart pattern. The stock then pulled back with the overall market. There’s good price support at 33.5-34. The price pullback gives traders and growth & income investors one more opportunity to buy BWA before it rises to upside price resistance at 44-45—a 31% near-term capital gain opportunity. After the stock rests near 45 for a while, I expect it to rise toward additional upside price resistance at 50, at which point it will be fairly valued. Buy.

FedEx (FDX) is an international package delivery company. The company is benefiting from a macro trend toward increasing e-commerce and an inward focus on reducing overcapacity and improving margins within its Express business. (Read more in this Barron’s recommendation of FDX from May 4.)

The company expects to close on its purchase of TNT Express in the first half of 2016. FDX is fairly valued based on fiscal 2017 EPS (May year-end). The stock is resting, after surging 36% from its January lows through its April highs. Hold FDX for additional capital gains. 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. Full-year 2016 earnings expectations now reflect 8.4% growth (June year-end). The company is about to begin its 2017 fiscal year. Analysts expect 13.9% EPS growth, with a P/E of 10.4. HAR is still an undervalued growth & income stock with a 1.9% dividend yield.

The share price has been correcting in recent weeks. There’s upside price resistance at 89 and again at 110. Buy.

Intuit (INTU) is a maker of business and financial management solutions, including Quickbooks, and TurboTax tax preparation software. Intuit was featured in the May issue of Cabot Undervalued Stocks Advisor. Yesterday, Forbes published a long interview with Intuit’s CIO Atticus Tysen. Shareholders and investors with experience in corporate management will likely benefit from this interesting read.

Third-quarter earnings will be reported on May 19 and will reflect very strong performance from the 2016 income tax filing season. After transitioning to a cloud-based subscription model, Intuit is expected to reach record profit levels in 2016 and again in 2017.

INTU is a slightly undervalued, aggressive growth stock with a strong balance sheet and a 1.2% dividend yield. INTU has paused in an uptrend, trading between 100 and 105. There’s a little upside resistance at last July’s all-time high at 108. Buy.

Johnson Controls (JCI) operates in the areas of energy management and auto batteries. Consensus earnings estimates increased significantly for Johnson Controls after the company reported strong second-quarter results. The market expects EPS to grow by 14.3% and 10.2% in 2016 and 2017 (September year-end). The 2016 P/E is low at 10.4, and the dividend yield is attractive at 2.8%. JCI is a very undervalued, large-cap growth & income stock.

Here’s a recap of Johnson Controls’ upcoming M&A activity:
• The company plans to spin off Adient, its automotive seating and interiors business, in October 2016.
• The company 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. The deal is expected to close on June 13, 2016.
• On April 14, Forbes wrote a great synopsis of the JCI/Tyco merger and the Adient spin-off. Current shareholders should save that article for quick reference to the benefits of these M&A transactions.

JCI appears to be having an orderly price pullback within an uptrend, and is possibly exhibiting a cup-and-handle chart formation, which is bullish. The stock will continue to be undervalued when it reaches medium-term upside price resistance at 45. I expect the price to stop climbing at that point and trade sideways for a while. Hold JCI for additional future capital gains. Buy.

Robert Half International (RHI) is a staffing and consulting company. RHI fell in late April to support levels established in February. Earnings estimates came down after the first-quarter report, now reflecting 9.7% and 10.2% growth in 2016 and 2017. RHI is a growth & income stock with a strong balance sheet and a 2.3% dividend yield. A rebound to the early April high of 47 would give new investors a 21% profit. Buy.

Toll Brothers (TOL) is the leading U.S. luxury homebuilder. The company will report second-quarter results on May 24. Analysts expect EPS growth of 31.5% and 16.6% in 2016 and 2017 (October year-end), with corresponding P/Es of 10.2 and 8.8. TOL is a greatly undervalued mid-cap growth stock.

After trading sideways for a few months, the share price is correcting again. This doesn’t appear to be any more than a short-term annoyance. There’s upside resistance at 30, then 34, and again at 38. Even at 38, the stock would still be vastly undervalued with a 2016 P/E of 14.7. Buy.

Whirlpool (WHR) is a global appliance manufacturer. Wall Street’s full-year 2016 earnings estimates for Whirlpool have been rising for the last five weeks. Consensus EPS estimates reflect growth of 19.2% and 16.0% in 2016 and 2017 (December year-end), with corresponding P/Es of 12.0 and 10.3. In April, Whirlpool announced a $1 billion share repurchase plan, and increased the quarterly dividend from $0.90 to $1.00 per share, currently yielding 2.2%. WHR remains very undervalued.

In April, I mentioned that “the short-term outlook has become speculative. The stock will need to rest soon.” That pullback has arrived. The stock seems to be finding price support at 175. Strong Buy.