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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Weekly Update

For now, based on S&P trends, economic growth and the proliferation of easily identifiable undervalued growth stocks, I remain bullish on U.S. stock markets. I’m raising the rating on Big Lots (BIG) to Strong Buy, raising the rating on FedEx (FDX) to Buy, and lowering the ratings on Cardinal Health (CAH) and Intuit (INTU) to Hold.

The S&P 500 index (SPX) appears bullish and likely to promptly retrace its former highs. It closed at a high of 2,126 in May 2015 and again in July 2015—about 1% higher than current levels. Barring unforeseen bad news, early June trading looks promising for bulls.

One thing I’ve noticed about investors is that they have very firm beliefs about their favorite financial instruments (gold, bonds, etc.) and about the economy. When their beliefs do not match reality, there’s nothing I can do except smile. I can’t convince people of things that I know to be true because in order to believe me, they first have to let go of their misconceptions and that hurts their egos. It’s easier for them to believe that I’m wrong. Whatever. I let it go.

If you’re open to the discussion, I would like to point out that people (investors, media pundits, your brother-in-law…) have been raising alarms about the economy for many months. But what has the economy been doing? Growing, slowly, exactly according to the economic forecasts that I follow.

We’ve seen the results of continued slow economic growth: the Federal Reserve’s slow-but-consistent approach to interest rate increases and in growth in the housing, auto and discount retail sectors. April’s new home sales showed the biggest monthly increase since 1992! People are earning money, reflected by increases in employment and hourly wages, and they’re spending money, reflected by increases in home, auto and discount retail sales.

You might say, “What about Macy’s? What about Target?” It is absolutely true that those stores are selling less apparel and electronics than they’d aimed for, with much of the slack being attributed to the ongoing consumer shift toward online spending. I’d also like to point out that Macy’s has not been on my buy list for several years due to the company’s rising debt levels, and Target has not been on my buy list for several years due to slow earnings growth projections that have been repeatedly revised downward.

But a couple of earnings misses do not make an economic trend! The person who ignores housing, auto, and dollar-store sales increases, and instead points to one quarter of Macy’s and Target’s earnings misses, is a person who is trying to shape the statistics to fit their belief that the economy is in terrible shape.

Many of you know that I lobby on trade in Washington D.C. I’m extremely aware of the long-term trend of U.S. manufacturing job loss in the wake of NAFTA, KORUS and other trade agreements. There is more work to be done to improve employment and manufacturing in America—and that does not mean asking steelworkers and coal miners to be customer service agents!

But for now, based on S&P trends, economic growth and the proliferation of easily identifiable undervalued growth stocks, I remain bullish on U.S. stock markets.

Portfolio Notes

We have three stocks in our portfolios reaching new all-time highs: Adobe Systems (ADBE), Big Lots (BIG) and Dollar Tree (DLTR). In general, a new high on a share price is an extremely bullish thing. The price chart and the P/E will give you more clues on whether the stock can sustain a run-up. Always remember: when a stock is reaching new highs, there are no investors who own the stock at a loss! There are no investors who are trying to sell at a certain price in order to break even. There are no stop-loss orders being triggered. Every single person who owns the stock at that moment owns it at a profit, and they are happy with it!

I’ve met investors who are fearful of buying stocks that are reaching new highs, but I believe their fears are largely misplaced. There have been times in my investing career that I’ve only purchased stocks that are reaching new highs! I am a busy woman. I don’t have time to micromanage my personal stock portfolio. Sometimes I just do the easy thing that I know is likely to be fruitful, and that’s why I might just buy Adobe, Big Lots and Dollar Tree, then turn my focus back to my job and family.

When a company announces a dividend increase, it can sometimes take many weeks for the new, higher dividend to show up in stock quotes from various media sources. Therefore, if I quote a dividend yield to you today, and the dividend yield on your computer screen is lower, that’s the most likely reason for the difference.

Here’s some more relevant news in this week’s portfolio update:
• I’m raising the rating on Big Lots (BIG) to Strong Buy.
• I’m raising the rating on FedEx (FDX) to Buy.
• I’m lowering the ratings on Cardinal Health (CAH) and Intuit (INTU) to Hold.
• Better-than-expected quarterly earnings were reported last week from Big Lots (BIG), Dollar Tree (DLTR), GameStop (GME), Intuit (INTU) and Toll Brothers (TOL). (There were no poor earnings reports last week.)
• Consensus earnings estimates rose last week at Boise Cascade (BCC), Dollar Tree (DLTR), FedEx (FDX), Intuit (INTU) and Toll Brothers (TOL).

These buy-rated portfolio stocks appear best-positioned to rise 5% or more in early June:

• Growth Portfolio: Adobe Systems (ADBE), Chemtura (CHMT) and Royal Caribbean Cruises (RCL).
• Growth & Income Portfolio: H&R Block (HRB).
• Buy Low Opportunities Portfolio: Boise Cascade (BCC), BorgWarner (BWA), Harman International Industries (HAR), Robert Half (RHI) and Whirlpool (WHR).

Updates on Growth Portfolio Stocks

Adobe Systems (ADBE) is a software company. Last week I wrote, “The stock just completed a double-bottom chart pattern, a harbinger of a run-up in the share price.” The run-up has commenced, and ADBE is reaching new all-time highs. The stock remains undervalued, based on both 2016 and 2017 earnings (November year-end). 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).

This spring, CHMT rose to upside price resistance at 29.50, fell back to short-term price support at 25, completed a double-bottom chart pattern (bullish!), and is now climbing again. 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 rose in April and May, from an expectation of 17.5% growth to 19.5% growth (September year-end). DHI is an undervalued stock with a 1% dividend yield. The chart is exhibiting the completion of a cup-and-handle pattern (bullish!). Buy DHI now. There’s a little upside resistance at 31.50 and again at 33. Rating: Buy.

Delta Air Lines (DAL) is a global passenger and cargo air transportation company. In May, 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. DAL remains undervalued based on both 2016 and 2017 earnings expectations.

Delta’s price chart shows distinctly more strength than charts of its key competitors. 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. The company reported great first-quarter results on May 26 and raised its full-year earnings guidance. The successful quarter was characterized by increased customer visits, higher spending per customer and on-target integration of the Family Dollar store acquisition. CEO Bob Sasser commented, “when times are tough, we’ll sell more consumer goods; when times improve, we sell a little more discretionary. Our discretionary business has been a very bright spot for us, outpacing our consumables this quarter.”

DLTR is an undervalued, large-cap aggressive growth stock, with a low degree of volatility. As a result of the earnings outperformance, the share price surpassed its March 2015 all-time high of 84, and rose as high as 89. I’m leaving my Strong Buy rating on the stock for longer-term investors. Take advantage of any pullback below 84 to buy DLTR! Rating: Strong Buy.

E*Trade (ETFC) offers financial brokerage and banking products and services. In May, Fortune wrote about E*Trade’s troubled past and rosy future—a good read for shareholders. (Note: I never recommended the stock until all of the company’s trouble became history!)

The stock continues to climb, so don’t be too quick to sell! Bank and brokerage stocks are in a favored sector right now, and could have an extended run-up. There’s very little upside resistance until ETFC reaches 31, giving new investors a 11% short-term capital gain opportunity. Buy ETFC now. Rating: Buy.

Priceline (PCLN) is an online travel service company. An interesting Forbes interview last week discussed Priceline management’s cautious practice of under-promising and over-delivering on earnings. PCLN is a fairly valued growth stock. EPS are expected to grow 15% to 17% in both 2016 and 2017 (December year-end). The stock has been trading sideways and is likely to rise to 1,355 in the short-term. Rating: Hold.

Royal Caribbean Cruises (RCL) is a global cruise vacation company. RCL offers investors strong earnings growth, a low P/E, a 1.9% dividend yield, big dividend increases and share repurchases. The stock is significantly undervalued.

Wall Street research is uncovering a problem with cruise pricing in China. While that market there remains growing and profitable, any pricing problem will lead to a drop in earnings estimates. The drop is currently small and hasn’t yet been reflected in consensus earnings estimates. However, in tandem with the potentially growing Zika virus problem, investors who own shares in cruise companies should be cautious and use stop-loss orders to protect their downside.

The stock is slowly recovering from the winter stock market downturn, currently rising toward short-term upside price resistance at 84. 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. 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 fairly valued based on 2016 EPS estimates, and overvalued based on 2017 EPS estimates.

UEIC rose 52% from its January lows to its April all-time high, then corrected alongside the broader market. The share price is now rebounding toward 68. If earnings estimates don’t increase in the coming weeks, I will likely advise you 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. 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. My Strong Buy rating is for longer-term investors. Traders should not buy until VMC pulls back. 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 2021, through a combination of organic growth and acquisition opportunities. WCG broke past medium-term upside resistance at 98 last week. I expect the stock to climb further, and then to establish a new trading range. Rating: Strong Buy.

Updates on Growth & Income Portfolio Stocks

Big Lots (BIG) is an American discount retailer. On May 27, Big Lots reported a first-quarter sales and earnings beat. The company also increased full-year earnings guidance to reflect approximately 16.2% EPS growth. (New consensus earnings estimates should be available by mid-June.) In the wake of investor worries over a possible recession and poor first-quarter earnings reports from Macy’s (M) and Target (TGT), the market was thrilled with Big Lots’ earnings report and the stock shot up 14%.

BIG is an undervalued growth & income stock with a strong balance sheet and a 1.6% dividend yield. Now that earnings estimates have increased, the stock meets all of my investment criteria, so I’m raising its rating to Strong Buy. The stock just inched past its former all-time closing high of 50.80 from November 2014. BIG could continue rising immediately or it could briefly pull back a couple of dollars before rising to a new, higher trading range. I encourage all stock investors to buy BIG now! Rating: Strong Buy.

Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. In May, 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.

Cardinal increased the quarterly dividend to 44.89 cents in May, giving the stock a current yield of 2.3%. The company also announced a new $1 billion share repurchase plan.

The company is about to begin its 2017 fiscal year in July. The expected earnings growth rate declined to 9.4% in May, so I’m lowering the rating on CAH to Hold. The stock’s trading range is solid: CAH could easily rebound to 87. If the earnings outlook does not improve in the coming weeks, I will make a sell decision. Rating: Hold.

Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. In May, 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%.

As I mentioned in the Royal Caribbean update, Wall Street research is uncovering a problem with cruise pricing in China. While that market remains growing and profitable, any pricing problem will lead to a drop in earnings estimates. The drop is currently small, and hasn’t yet been reflected in consensus earnings estimates. However, in tandem with the potentially growing Zika virus problem, investors who own shares in cruise companies should be cautious and use stop-loss orders to protect their downside.

CCL had a big run-up in the late winter, then corrected a bit. I expect it to return to 53, then 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 are rising, as the market factors in a 50% likelihood that the Federal Reserve will increase interest rates again by July. Federated Investors benefits from rate increases, which allow the company to earn more fees from money market funds, a dominant part of Federated’s 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 one dollar 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 I’m paying close attention to the slow-growth 2017 numbers.

Last week, I mentioned that FII “appears ready to break past short-term upside resistance at 32.” That breakout took place. There’s stronger upside resistance at 34. Rating: Hold.

GameStop (GME) is a video game and consumer electronics retailer. Last week, the company reported a first-quarter 2017 earnings beat, with EPS of 66 cents vs. the consensus estimate of 62 cents. Revenue came in on-target at $1.97 billion. Revenue in GameStop’s technology brands business rose 62.2%, while sales of new gaming software and hardware fell 4.3% vs. a year-ago.

The market was disappointed that GameStop lowered its second-quarter revenue and earnings guidance. The company expects fewer blockbuster game launches vs. a year-ago. GameStop gave the market conservative second-quarter EPS guidance in a range of 23 cents to 30 cents, vs. the consensus estimate of 33 cents. GameStop reaffirmed its full-year earnings guidance.

Earnings growth projections have slowed dramatically in recent months. However, the company is still expected to achieve record profits in both fiscal 2017 and 2018 (January year-end). In addition, when earnings estimates are viewed alongside the huge 5% dividend and the low P/E, GME remains quite undervalued. 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. The stock is volatile, and popular among day-traders. 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 4.8% dividend yield. The share price has steadily been establishing higher highs and higher lows since February. The price chart looks promising for a near-term climb past 32.50, toward 34. 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 10.9 P/E and a 3.9% dividend yield (April year-end).

Last week, I raised HRB’s rating to Buy. The best-case scenario for the share price, through the earnings report on June 9, is for HRB to rise to mild price resistance at 24. Please expect a brief pullback at that point. The best-case scenario for the share price through the summer is for it to rise to 28. 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 2.7% dividend yield. The stock price launched upward to new highs after the company reported strong first-quarter results, then had a price pullback. The stock could easily bounce at 81 again. Rating: Strong Buy.

Updates on Buy Low Opportunities Portfolio Stocks

Boise Cascade (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, resulting from increased foreign and domestic competition and a strong dollar.

Wall Street’s earnings estimates for Boise have increased steadily throughout April and May. The company is currently slated for 4.5% and 41.7% EPS growth in 2016 and 2017 (December year-end).

The price chart is bullish, reflecting slow and steady growth. BCC could rise to 25 in June. 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 1.5%.

I recently issued a Special Bulletin to buy BWA because the stock completed a classic cup-and-handle chart pattern. The stock then pulled back with the overall market and is now recovering again. If you take a look at this year’s price chart, BWA moves rapidly back and forth between 34 and 38. Traders should take note! 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 in May, financial media guru Jim Cramer said, “I’m a FedEx guy when it comes to transport.”

FedEx closed on its purchase of TNT Express last week. As I discussed recently when reviewing last summer’s Kraft Heinz (KHC) merger, analysts often lowball their earnings estimates after big mergers take place, and 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. As a matter of fact, the 2017 consensus EPS estimate for FDX rose last week, from an expectation of 12.8% growth to 13.8% growth. In addition, it’s widely assumed that the company’s next dividend announcement will reflect a 20% to 35% increase in the dividend.

FDX is slightly undervalued based on the fiscal 2017 consensus EPS estimate (May year-end), and distinctly undervalued vs. competitor United Parcel Service’s (UPS) stock valuation. FDX rose tremendously in February and March, rested for a while, and now appears ready to bust past 168. There’s more significant price resistance at 180.

I’m raising the rating on the stock to Buy, now that the EPS projection increase, pending dividend hike, TNT merger completion and improving price chart are all adding to the stock’s appeal. 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. Harman and Google announced a new partnership in May 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 11.1. 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. Traders and growth stock investors should buy now! Rating: Buy.

Intuit (INTU) is a maker of business and financial management solutions, including Quickbooks, and TurboTax tax preparation software. The company reported a big third-quarter revenue and earnings beat on May 24. Intuit’s transition to a cloud-based subscription model is expected to continue generating increases in revenue, margins and EPS in the coming years. 2016 EPS are now expected to grow 41% (July year-end).

Importantly, Intuit’s fiscal 2016 year ends in July. Investors who want to stay ahead of the game need to look toward fiscal 2017 and make decisions accordingly. The company is expected to grow EPS by 18% in 2017. Unfortunately, the 2017 P/E is already overvalued at 25.

The stock is retracing its July 2015 all-time high of 108. I’m changing the rating on INTU to Hold, with the intention of issuing a Sell alert when the current run-up appears near completion. Rating: Hold.

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 2.6%. (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:

• The company 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-spin-off. 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 spin-off is expected to be a taxable event.
• 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. 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 is approaching medium-term upside price resistance at 45, where it will likely get stuck for a little while. Try to buy on pullbacks to 42. Rating: Buy.

Robert Half International (RHI) is a staffing and consulting company. Earnings estimates came down after the first-quarter report, and now reflect 9.7% and 10.2% growth in 2016 and 2017. RHI is a growth & income stock with a strong balance sheet and a 2.1% dividend yield. RHI fell in late April, began its rebound in late May and is still climbing. 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 reported a strong second-quarter revenue and earnings beat last week. Executive Chairman Robert Toll said, “We continue to believe the drivers are in place to sustain the current housing market’s slow but steady growth.” Analysts afterward increased their 2016 earnings estimates to reflect 32.5% growth.

TOL is a greatly undervalued, mid-cap growth stock. The share price rose 9% on the good news. I expect TOL to deliver lots more capital gains to shareholders this year. Buy now. Any price below 30 is a bargain. 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 2.3%.

Consensus EPS estimates reflect growth of 19.1% and 16.1% in 2016 and 2017 (December year-end). The corresponding P/Es are 11.8 and 10.2. 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: WHR has since stabilized, and the rebound has begun. There’s upside resistance at 190. Rating: Strong Buy.