Please ensure Javascript is enabled for purposes of website accessibility
Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Weekly Update

I don’t have a sense that the current market correction will last very long. I am comfortable buying now, as opposed to waiting a few weeks, as I did in the early 2016 market correction. I have two rating changes today: Johnson Controls (JCI) moves from Hold to Buy, and Robert Half (RHI) moves from Buy to Hold.

I trust you received my June 24 Special Bulletin concerning the Brexit vote—the U.K.’s vote to leave the European Union. I am not going to speculate on the long-term implication of how countries, industries and companies will be affected by a political entity that will slowly transform for many years to come.

The United Kingdom has been a sovereign nation since the year 1707, with only a brief and rejected foray into global governance via its membership in the European Union. The country will land on its feet!

First off, every single media source in the world is going to assign people to cover the Brexit story. Only a tiny fraction of them will have anything accurate or insightful to report. I will ignore virtually all of it. Nothing about my investment strategy will change. Cabot Undervalued Stocks Advisor will always present you with undervalued growth stocks, and enough commentary on their price charts that you can figure out which ones to buy today and which ones to wait on.

Yesterday, I sent a Special Bulletin that itemized opportunities this week within U.S. bank stocks. Financial stocks have a strong presence in my portfolios, because there are so many that meet my investment criteria. That means that the entire sector is largely undervalued, rife with buying opportunities.

In that light, please watch this brief video. It’s a CNBC interview with Dick Bove (pronounced bow-vay’; rhymes with “okay”), U.S. Banks in Phenomenally Strong Position. When I was a financial advisor at Dean Witter, Dick was our bank stock analyst in the early 1990s, before the company purchased—and changed its name to—Morgan Stanley.

Portfolio Notes

Here are some portfolio highlights from today’s update:

• I issued a Special Bulletin on June 27, in which I discussed this week’s Federal Reserve decisions for major U.S. banks’ capital plans. In that context, I reiterated a Strong Buy on Goldman Sachs (GS).

I issued a Special Bulletin on June 24, in which I discussed the Brexit vote and U.S. stock market volatility.
• Johnson Controls (JCI)
moves from Hold to Buy.
• Robert Half (RHI)
moves from Buy to Hold.

There are four types of stocks that I like to buy during market downturns:
• Stocks that barely fell, such as Dollar Tree (DLTR). Nobody who owns DLTR was willing to sell during a period of extreme market volatility, not even when they were dumping their other stocks. DLTR remains in high demand. That’s an extremely bullish sign that DLTR will lead the market during the recovery.
• Stocks that fell a little but stayed within their normal trading ranges, such as Kraft Heinz (KHC).
• Stocks that fell down to medium-term price support, thereby presenting a trading opportunity when the rebound takes place, such as Whirlpool (WHR).
• Stocks that fit one of those previous categories and have a huge dividend yield, such as GameStop (GME).

These are the portfolio stocks that I would buy today:
• Growth Portfolio: D.R. Horton (DHI), Dollar Tree (DLTR), Vulcan Materials (VMC) and WellCare Health Plans (WCG)

Growth & Income Portfolio: Big Lots (BIG), GameStop (GME), General Motors (GM), Goldman Sachs (GS) and Kraft Heinz (KHC)
• Buy Low Opportunities Portfolio: Boise Cascade (BCC), Johnson Controls (JCI), Toll Brothers (TOL) and Whirlpool (WHR)

I don’t have a sense that the current market correction will last very long. I am comfortable buying now, as opposed to waiting a few weeks, as I did in the early 2016 market correction.

Updates on Growth Portfolio Stocks

Adobe Systems (ADBE) is a software company. The company reported a second-quarter earnings beat on June 21, for which I sent a Special Bulletin. ADBE is an aggressive growth stock with a strong balance sheet; very undervalued based on 2017 EPS. The stock rose to an all-time high on June 2, and has pulled back with the Brexit news. Strong Buy.

Chemtura (CHMT) is a specialty chemical manufacturer. CHMT was recommended in a Zacks analysis this week. CHMT is an undervalued, small-cap growth stock. CHMT is revisiting this year’s lows around 24.25 and has upside resistance at 29.50. Strong Buy.

D.R. Horton (DHI) is a homebuilder. DHI is an undervalued growth stock with a 1% dividend yield. DHI has good price support at 29 and upside resistance at 33. Buy.

Delta Air Lines (DAL) is a global passenger and cargo air transportation company. Delta is the third-largest passenger airline in the world, serving 58 countries; and also owns an oil refinery. The stock was featured in the June issue of Cabot Undervalued Stocks Advisor. DAL is an undervalued stock. Its new dividend yield, based on the preannounced third-quarter dividend increase, is 2.3%. The stock chart is very weak. Do not buy DAL right now. There will be plenty of time to buy low, after the share price stabilizes. Hold.

Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. DLTR is an undervalued, large-cap aggressive growth stock, with a low degree of volatility. (Caveat: Dollar Tree’s long-term debt-to-capitalization ratio is higher than I would prefer, at 62%.) After a huge run-up in May, the stock rested for four weeks, and appears ready to climb again. Strong Buy.

E*Trade (ETFC) offers financial brokerage and banking products and services. ETFC is overvalued based on 2017 earnings expectations. The stock has spiked down to its February lows with the Brexit news. Hold.

Royal Caribbean Cruises (RCL) is a global cruise vacation company. RCL offers investors strong earnings growth, a low P/E, a 2.1% dividend yield, big dividend increases and share repurchases. The stock is significantly undervalued. The share price has spiked down to its February lows since the Brexit vote. Traders and longer-term investors could buy now. Buy.

Vulcan Materials (VMC) produces construction aggregates. VMC is a very undervalued aggressive growth stock, with a small 0.7% dividend yield. The stock did not fall with the Brexit news, and the price chart remains bullish. VMC rose as high as 120 in late May, and is now trading sideways. Strong Buy.

WellCare Health Plans (WCG) is an undervalued aggressive growth stock in the managed healthcare sector. Here’s an interesting article from TheStreet that discusses the possibility that Cigna (CI) might be interested in purchasing WellCare, if Cigna’s troubled merger with Anthem (ANTM) falls through. The stock would be relatively fairly valued at 126, based on its expected 2017 EPS growth rate. WCG has a bullish price chart. Strong Buy.

Updates on Growth & Income Portfolio Stocks

Big Lots (BIG) is an American discount retailer. BIG is a slightly undervalued growth & income stock with a strong balance sheet and a 1.7% dividend yield. The share price is having a minor correction after a big run-up in late May. Strong Buy.

Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. Cardinal will be wrapping up their 2016 fiscal year this week, with market expectations of 19.6% full-year EPS growth. We’ll probably see changes in the consensus 2017 earnings estimates in the coming weeks, followed by more definitive numbers when full-year results are reported on July 28.

Cardinal and its two biggest competitors, AmerisourceBergen (ABC, September year-end) and McKesson (MCK, March year-end), each guided their fiscal 2017 earnings projections downward in recent months. The industry is being impacted by fewer new generic drug launches and price deflation. In addition, Cardinal is incurring increased IT expenses.
Pluses include Cardinal management’s expectation of long-term double-digit EPS growth and a possible June pharmaceutical contract win from Kaiser. The contract could add 1% to 2% to earnings growth and lead to future profitable joint ventures.

CAH has a dividend yield of 2.4%. The share price has been weak. Hold.

Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. CCL was recommended in a Zacks analysis this week. CCL is extremely undervalued, with a current dividend yield of 3.1%. The price charts of cruise company stocks have been weak, but their earnings growth is strong. Investors’ patience will likely be well rewarded with CCL. The stock is revisiting its February lows. Buy.

Federated Investors (FII) is a global investment management company. New rules governing money market funds, which take effect in October, will 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. FII has a 3.5% dividend yield. The share price has spiked downward with the Brexit news. Traders could make almost 10% on the rebound to 32.50. Hold.

GameStop (GME) is a video game and consumer electronics retailer. GameStop’s earnings growth is slow, but Wall Street’s consensus estimates show the company achieving record profits in 2017 and 2018 (January year-end). The share price is forming a bottom; and importantly, it did not suffer with the Brexit news. The current dividend yield is 5.8%. Buy.

General Motors (GM) is an American auto manufacturer. This month, credit rating agency Fitch revised General Motor’s outlook from “stable” to “positive,” reflecting a strengthening credit profile.

The market’s expecting GM’s EPS to grow 13.1% this year. While earnings growth slows dramatically in 2017, the stock remains incredibly undervalued, especially in light of the big 5.3% dividend yield. The 2016 and 2017 P/Es are literally lower than the dividend yield! I can’t recall ever running across that phenomenon in a growth stock in my entire career. Buy.

Goldman Sachs Group (GS) is a global investment banker, serving consumer, institutional and government clients. Please read yesterday’s Special Bulletin about GS and bank stocks; and last weekend’s Barron’s article, “Battered Goldman Sachs Poised For Rebound.” Goldman was featured in the June issue of Cabot Undervalued Stocks Advisor. GS offers investors aggressive earnings growth, a very low P/E and a 1.8% dividend yield. Investors who buy now will be getting quite a bargain. The share price is revisiting its February lows. Strong Buy.

H&R Block (HRB) is a leader in tax preparation services. In a June analyst meeting, H&R Block’s management said that they are rethinking their pricing strategy, and that the pricing changes would be very visible and marketable. Earlier in June, the company reported fourth-quarter results that met analysts’ downward-revised expectations, and increased its quarterly dividend by 10% from 20 cents to 22 cents per share.

HRB is an undervalued growth & income stock with a 3.9% dividend yield. The share price rose over 25% from mid-May through mid-June, and is now having a pullback, which is normal and expected after an outsized run-up. Buy.

The Kraft Heinz Company (KHC) is a global food and beverage producer. KHC is an undervalued aggressive growth and income stock with a 2.7% dividend yield. The share price is trading sideways after a big run-up in early May. 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 pricing, which resulted from increased foreign and domestic competition, and a strong dollar. The company is currently slated for 4.5% and 41.7% EPS growth in 2016 and 2017 (December year-end). The stock is quite undervalued based on 2017 earnings estimates. The share price held steady within a narrow trading range throughout the Brexit event. Buy.

BorgWarner (BWA) is a maker of engineered automotive systems and components for power train applications. BWA is fairly valued based on moderate 2016 earnings growth, and quite undervalued based on stronger 2017 earnings growth. The dividend yield is 1.7%. BWA has a wide trading range, with upside resistance at 40. The share price is revisiting its February lows, alongside the Brexit volatility. Buy.

FedEx (FDX) is an international package delivery company. A $1.6 billion criminal case against FedEx was dismissed in June, when a U.S. District Court judge found FedEx factually innocent of charges that it shipped packages from illegal online pharmacies.

FedEx reported a fourth-quarter 2016 earnings beat last week, on which I sent a Special Bulletin. The TNT acquisition is expected to cost FedEx about ten cents per share in interest expense in fiscal 2017; then to be accretive to earnings in fiscal 2018. Management will more fully discuss expectations as a result of the merger in September.

Current earnings estimates for 2017 and 2018 reflect 10.4% and 13.0% EPS growth. In June, FedEx increased its quarterly dividend by 60%, from 25 cents to 40 cents per share. The current yield is 1.1%. The stock had a big run-up in mid-March, traded sideways for three months, and has now fallen with the Brexit news. FedEx remains a growing company and a leader in its field. 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. The company is about to begin its 2017 fiscal year (June year-end). Analysts expect 13.4% EPS growth with a P/E of 9.4.

HAR is an undervalued growth & income stock with a 2.0% dividend yield. The stock is revisiting its February lows. Buy.

Johnson Controls (JCI) operates in the areas of energy management and auto batteries. JCI is an undervalued large-cap growth & income stock with a 2.7% dividend yield. (The dividend is expected to remain fully intact, throughout the spin-off and merger processes.)

Here’s a recap of 2016 M&A activity:

• The company plans to spin off Adient (ADNT), its automotive seating & 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.

• In June, Johnson Controls bought 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.

Based on trading patterns, I told traders to sell JCI on June 2 and everyone else to hold their shares because I did not anticipate additional near-term upside in the price. I additionally said to “accumulate shares as the price dips down to 42.”

Sure enough, the stock proceeded to trade sideways through June. Now that JCI has fallen slightly below 42 with the Brexit news, I’m moving the stock from Hold to Buy. I think JCI could not only recover from this weak market more quickly than most other stocks, but that it could soon continue climbing past 45. Buy JCI now. Buy.

Robert Half International (RHI) is a staffing and consulting company. RHI is an undervalued growth & income stock with a strong balance sheet and a 2.4% dividend yield. The share price is suffering with the Brexit news. I’m changing the stock to a Hold until the price stabilizes, at which point it will present a good buying opportunity. Hold.

Toll Brothers (TOL) is the leading U.S. luxury homebuilder. TOL is a greatly undervalued, mid-cap growth stock. The share price has spiked downward with the Brexit news, but I expect it to be a very brief pullback. Buy.

Whirlpool (WHR) is the world’s largest appliance manufacturer. Whirlpool was featured in the June issue of Cabot Undervalued Stocks Advisor. WHR is an extremely undervalued growth stock with a 2.5% dividend yield. The share price peaked in April, pulled back, and has fallen further with the Brexit news. I’ve seen WHR rise 50% or more three times during the last three years! The stock is so cheap that it could rise 50% from today’s price and still be undervalued. Strong Buy.