There’s a lot of talk about the Federal Reserve potentially increasing the Fed funds rate in June or July. Such a move would be positive for most financial stocks because they’d earn increased fees on their customers’ deposits, thereby boosting EPS. There are two financial stocks that are affected by rising interest rates in the Cabot Undervalued Stocks portfolios: E*Trade (ETFC) and Federated Investors (FII). Would you like a quick assessment of the earnings outlook for your favorite financial stock? Send an email to me at Crista@cabot.net.
Here’s some highlights from this week’s portfolio update:
• I’m raising the rating on H&R Block (HRB) to Buy.
• I sent a Special Bulletin last week, alerting investors that Delta Air Lines (DAL) reported intentions of a third-quarter dividend increase and an accelerated share repurchase plan.
• Cardinal Health (CAH) and Carnival (CAH) each received favorable debt comments from Moody’s Investors Service.
• Earnings reports are expected this week from Big Lots (BIG), Dollar Tree (DLTR), Intuit (INTU) and Toll Brothers (TOL).
• Consensus earnings estimates having been increasing for D.R. Horton (DHI), Federated Investors (FII) and WellCare Health Plans (WCG).
These are the buy-rated portfolio stocks that appear most likely to rise 5% or more immediately, barring any sudden market downturn.
• Growth Portfolio: Adobe Systems (ADBE), Delta Air Lines, (DAL), E*Trade (ETFC), Royal Caribbean Cruises (RCL), Vulcan Materials (VMC) and WellCare Health Plans (WCG).
• Growth & Income Portfolio: H&R Block (HRB) and Kraft Heinz (KHC).
• Buy Low Opportunities Portfolio: Boise Cascade (BCC), Harman International Industries (HAR), Intuit (INTU), Johnson Controls (JCI) and Toll Brothers (TOL).
Updates on Growth Portfolio Stocks
Adobe Systems (ADBE) is a software company. This month, 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). The stock just completed a double-bottom chart pattern, which is a harbinger of a run-up in the share price. Buy ADBE now. Rating: Strong Buy.
Chemtura (CHMT) is a specialty chemical manufacturer. 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. Rating: Strong Buy.
D.R. Horton (DHI) is a homebuilder. Analysts’ 2016 consensus EPS estimates have been increasing in recent weeks, from an expectation of 17.5% growth to 19.5% growth (September year-end). DHI is an undervalued stock with a 1.1% dividend yield. The share price pulled back with the market this spring, and has now turned upward. Buy DHI now. There’s some upside resistance at 31.50, and again at 33. Rating: Buy.
Delta Air Lines (DAL) is a global passenger and cargo air transportation company. Last week, I sent a Special Bulletin, after Delta announced dividend and buyback news. The company will increase its annual dividend during the third quarter of 2016, from 54 cents per share to 81 cents. The current yield is 1.25%. The new yield, based on today’s share price, will be 1.9%. In addition, Delta is actively buying back stock, and will complete the remaining $3 billion of its current repurchase authorization by May 2017.
In other news last week, the crash of an EgyptAir passenger plane caused airline share prices to pull back. Still, Delta’s stock chart shows distinctly more strength than charts of its key competitors.
DAL remains undervalued, based on both 2016 and 2017 EPS, P/E and dividend. There’s room for traders to potentially earn a 7% to 21% capital gain this year. Depending on broader market strength, DAL could rise anywhere from 46 to 52 this year. I do not expect the stock to surpass 52 in 2016. The stock could easily continue climbing immediately. Rating: Buy.
Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. Dollar Tree’s first quarter results are expected on May 26. The consensus estimate is 81 cents, vs. 71 cents a year ago. DLTR is a large-cap, undervalued aggressive growth stock, with a low degree of volatility. The stock has been trading sideways for six months. I expect it to rise above that range as soon as the S&P 500 turns bullish. Rating: Strong Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. This month, Asian investment banker CLSA advised clients that Goldman Sachs could benefit from buying E*Trade. Financial stocks rose last week, as the market factored in a 50% likelihood that the Federal Reserve will increase interest rates again by July. E*Trade benefits from rate increases, which bring the company increased fee income from cash deposits and margin loans. In addition, Fortune wrote about E*Trade’s troubled past and rosy future—a good read for shareholders. (And no, I never recommended the stock until all of the company’s trouble became history!)
ETFC broke through short-term upside price resistance last week. There may be a little more resistance at 28, and then medium-term resistance between 30.50 and 31.50, where it traded repeatedly last year. Buy ETFC now. Rating: Buy.
Priceline (PCLN) is an online travel service company. A Forbes interview last week discussed Priceline management’s cautious practice of under-promising and over-delivering on earnings. PCLN is a slightly undervalued growth stock. EPS are expected to grow 15% to 17% in both 2016 and 2017 (December year-end). The share price is correcting alongside the S&P 500. Rating: Hold.
Royal Caribbean Cruises (RCL) is a global cruise vacation company. RCL offers investors very strong earnings growth, a low P/E, a 1.9% dividend yield, big dividend increases and share repurchases. The stock is significantly undervalued.
The stock is slowly recovering from the winter stock market downturn, currently rising toward short-term upside price resistance at 85. 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 RCL now. 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 is a volatile small-cap growth stock. The stock is slightly undervalued based on 2016 EPS estimates, and overvalued based on 2017 EPS estimates.
UEIC rose 52% from its January lows to its April highs, then corrected alongside the broader market. The share price seems ready to rebound to 68/69, although that upswing will become clearer in the coming days. If earnings estimates don’t increase in the coming weeks, I will likely advise shareholders to sell after the rebound. Rating: Hold.
Vulcan Materials (VMC) produces construction aggregates. Vulcan’s business ebbs and flows with the economic cycle, which remains favorable. (Investors who worry about an economic downturn could allay their fears by using stop-loss orders on economically sensitive stocks.) VMC is a very undervalued aggressive growth stock. Earnings estimates have been consistently inching upwards for four months, with 2016 and 2017 EPS now expected to grow 61% and 34% (December year-end). The chart remains bullish, with the stock currently trading between 114 and 118. There’s stronger price support at 107. Rating: Strong Buy.
WellCare Health Plans (WCG) is a very undervalued aggressive growth stock in the managed healthcare sector. Earnings estimates have been climbing since mid-April, with 2016 and 2017 EPS growth expected to be 35% and 22%. The company aims to double its revenue through the year 2021, through a combination of organic growth and acquisition opportunities. WCG’s trading range has been ratcheting higher since March. It will likely reach 98 in late spring, and could rise significantly higher when the market turns bullish. Buy WCG now. Rating: Strong Buy.
Updates on Growth & Income Portfolio Stocks
Big Lots (BIG) is an American discount retailer. First quarter results are due on the morning of May 27. BIG is a very undervalued growth & income stock with a strong balance sheet and a 1.9% dividend yield. The share price was pulling back with the broader market in early May after its big springtime run-up. Then Target’s (TGT) earnings disappointment temporarily shook up retail stocks last week, followed immediately by a share price surge related to Wal-Mart’s earnings beat. (Isn’t stock investing fun??!!) The price chart seems to be exhibiting a shakeout pattern, which is extremely bullish for a near-term rebound. Buy BIG now. Rating: Buy.
Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. Last week, Moody’s Investors Service changed its outlook on Cardinal Health from stable to positive. This change in outlook represents Moody’s enhanced view of Cardinal Health’s financial and business outlook, and paves the way for a potential bond rating upgrade. Cardinal Health currently has a Baa2 investment grade debt rating from Moody’s. The next-highest rating is Baa1.
This month, Cardinal increased the quarterly 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. CAH recently fell back down to its February lows, then stabilized. It hasn’t turned upward yet, but this is a good time to buy, while it’s sitting at price support. Rating: Strong Buy.
Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. Last week, Moody’s Investors Service raised its senior unsecured debt rating on Carnival from Baa1 to A3. This change in outlook resulted from Carnival’s rising margins and earnings, and its strong business outlook. The stock is extremely undervalued, with a current dividend yield of 2.8%.
CCL had a big run-up in the late winter, then corrected a bit. I expect it to return to 53, then to continue climbing to its 2015 high of 55.77 in the coming months. Rating: Strong Buy.
Federated Investors (FII) is a global investment management company. Financial stocks rose last week as the market factored in a 50% likelihood that the Federal Reserve will increase interest rates again by July. Federated Investors benefits from rate increases, which allow them to earn more fees from money market funds, a dominant part of its product mix.
New rules governing money market funds, which take effect in October, will also work in Federated Investors’ favor. Institutional investors are expected to move approximately $400 billion from prime funds to government money funds. That’s because prime funds, which invest in corporate debt securities, will be potentially less liquid, and their net asset values (NAV) will be more likely to fluctuate from the common $1 per share.
Consensus 2016 EPS expectations have been steadily increasing since early April, from 16.0% to 18.5% (December year-end). I’m encouraged at the increasingly profitable 2016 outlook, and paying close attention to the slow-growth 2017 numbers.
FII rose 38% from its February low to its April high, had a brief price correction, and now appears ready to break past short-term upside resistance at 32. The next resistance point is at 34. Rating: Hold.
GameStop (GME) is a video game and consumer electronics retailer. GME is an extremely undervalued stock with a 5.2% dividend yield and a strong balance sheet. The stock pulled back in recent weeks as earnings growth expectations were reduced. There’s price support at 28. GME has short-term upside price resistance at 33, and more resistance at 38. Rating: 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 5% dividend yield. The share price has steadily been establishing higher highs and higher lows since February, and GM is currently at a low point within that cycle. Patient investors should buy GM now, in order to lock in the huge dividend, while awaiting the share price rebound. Rating: Buy.
H&R Block (HRB) is a leader in tax preparation services. This past weekend, TheStreet featured HRB in “Five Stocks Warren Buffett Would Love.” HRB fell in April, on news of disappointing tax season results. The full-year 2016 earnings report is due on June 9 after the market closes. The 2017 outlook is very attractive, offering 14.9% EPS growth, a low 10.7 P/E and a 3.9% dividend yield (April year-end).
I’m raising the rating to Buy because the share price has stabilized and is just beginning to turn upward. Traders, longer-term investors and dividend investors should jump in now. Rating: Buy.
Kraft Heinz (KHC) is a global food and beverage producer. KHC offers investors aggressive earnings growth in 2016 and 2017, an undervalued P/E and a 2.8% dividend yield. The stock price rose to new highs after the company reported strong first-quarter results then pulled back. I expect the pullback to be brief, with KHC trading between 81 and 86 in the near term. Rating: Strong Buy.
Updates on Buy Low Opportunities Portfolio Stocks
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 prices resulting from increased foreign and domestic competition and a strong dollar.
Investors might like to read last week’s report from Zacks Investment Research. Zacks downgraded Boise’s competitor, Weyerhaeuser Company (WY), to a strong sell. But don’t worry: the Weyerhaeuser problems are unrelated to anything happening at Boise, and Zacks maintains a strong buy rating on BCC. Boise is expected to grow EPS by 50% in 2017.
The price chart is leaning bullish, reflecting slow and steady growth. Buy BCC now. Rating: Buy.
BorgWarner (BWA) is a maker of engineered automotive systems for power train applications. BWA is fairly valued based on 2016 earnings, and quite undervalued based on 2017 earnings. The dividend yield is 1.6%.
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. The pullback gives traders and growth & income investors, one more opportunity to buy BWA before it rises to upside price resistance at 44-45. Rating: 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. Famed hedge fund Tiger Management established a new $20 million position in FDX in late March. And last week, financial media guru Jim Cramer said, “I’m a FedEx guy when it comes to transport.”
FedEx expects to close on its purchase of TNT Express on May 25. As I discussed recently when reviewing last summer’s Kraft Heinz (KHC) merger, analysts often lowball their earnings estimates after big mergers take place because they don’t have a feel for accurate assessments until the company reports several quarters of combined results. Therefore, as FedEx commences its 2017 fiscal year on June 1, expect the coming year to be characterized by frequent changes in earnings estimates as analysts begin to get a handle on the combined companies’ revenues, margins and net income.
FDX is fairly valued, based on current fiscal 2017 earnings estimates (May year-end). The stock rose tremendously in February and March then had a brief pullback, from which it’s now recovering. There’s good price support at 157, and short-term upside resistance at 168. Hold FDX for additional capital gains. 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. Harman and Google announced a new partnership last week, in which Harman will provide audio solutions for Google’s new modular mobile device, Ara, and for Google’s new Project Soli, which features touchless human interactions.
The company is about to begin its 2017 fiscal year (June year-end). Analysts expect 13.2% EPS growth, with a P/E of 10.7. HAR is an undervalued growth & income stock with a 1.8% dividend yield. The share price corrected in May, and appears ready to rebound to short-term upside price resistance at 89. Buy HAR now. Rating: Buy.
Intuit (INTU) is a maker of business and financial management solutions, including Quickbooks and TurboTax tax preparation software. Third-quarter earnings will be reported on May 24 after the market closes. Results will reflect very strong performance from the 2016 income tax filing season. Wall Street expects $3.20 EPS. The company’s transition to a cloud-based subscription model is expected to generate continued increases in revenue, margins and EPS in the coming years.
INTU is a slightly undervalued, aggressive growth stock with a strong balance sheet and a 1.1% dividend yield. INTU has paused in an uptrend, trading between 100 and 105. The slightest bullishness in the S&P 500 index could push the stock to upside resistance at last July’s all-time high at 108. Rating: Buy.
Johnson Controls (JCI) operates in the areas of energy management and auto batteries. The market expects EPS to grow by 14.3% and 10.2% in 2016 and 2017 (September year-end). The dividend yield is attractive at 2.7%. (The dividend is expected to remain fully intact throughout the spin-off and merger processes.) JCI is a very undervalued, large-cap growth & income stock.
Here’s a recap of upcoming Johnson Controls M&A activity:
• Johnson plans to spin off Adient (ADNT), its automotive seating and interiors business, on October 3, 2016. Adient’s margins are expected to rise from 5.8% to about 6.9%, post-spinoff. JCI shareholders will receive one share of ADNT—valued somewhere near $8 per share—for every 10 shares of JCI that they own. The ADNT spinoff is expected to be a taxable event.
• Johnson 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. Tyco brings strength in Europe to the new venture, while Johnson Controls is strong in the Americas and Asia. The combined company will domicile in Ireland to take advantage of lower income tax rates. The deal is expected to close on June 13, 2016.
JCI finished its recent, brief price pullback, and has resumed its climb toward medium-term upside price resistance at 45. Rating: Buy.
Robert Half International (RHI) is a staffing and consulting company. 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 2.2% dividend yield. RHI shares fell in late April, and have since begun a slow and steady rebound. There’s short-term upside price resistance at 43 and again at 47. Buy RHI now. Rating: Buy.
Toll Brothers (TOL) is the leading U.S. luxury homebuilder. The company will report second-quarter results on May 24. In last week’s report from the National Association of Home Builders, expectations for sales in the next six months jumped to the highest level of the year. Continued increases in job growth and wages are supporting demand for new homes.
TOL is a greatly undervalued mid-cap growth stock. The share price corrected in May with the broader market, and has begun its recovery. 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 TOL now. Rating: Buy.
Whirlpool (WHR) is a global appliance manufacturer. Approximately 50% of Whirlpool’s revenue comes from expanding international markets. For example, only 16% of households in India own appliances! 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 2.4%.
Consensus EPS estimates reflect growth of 19.1% and 16.1% in 2016 and 2017 (December year-end). The corresponding P/Es are 11.4 and 9.8. WHR remains very undervalued.
WHR rose 53% from its January low to its April peak, at which time I wrote, “The short-term outlook has become speculative. The stock will need to rest soon.” The overdue price correction came immediately, and WHR has since stabilized. The rebound could begin as soon as this week. By next week, the near-term outlook should be clearer. There’s price support at 165. Rating: Strong Buy.
