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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Weekly Update

The S&P 500 appears to be breaking past price resistance, which it has repeatedly pushed up against since early 2015. This is great news! I expect the stock market to surprise people by rising to new highs and establishing a new, higher trading range.

The S&P 500 appears to be breaking past price resistance, which it has repeatedly pushed up against since early 2015. This is great news! I expect the stock market to surprise people by rising to new highs and establishing a new, higher trading range. It’s about time! It’s happening in the summer, which is a tad unusual, but I’ll take it.

GameStop’s (GME) share price is surging this week because GameStop sells accessories to the wildly popular new game app, Pokemon Go. All three of my teenagers are entranced by this game. They’re getting together with friends and walking around the community looking for clues or rewards, or whatever it is that the game has them searching for.

Investors are expecting GameStop to reap good revenue and profit increases from the Pokemon Go phenomenon. My suggestion is that investors do not underestimate the potential popularity of this game, and the attention it brings to GameStop’s stock. GME can be found in the Growth & Income Portfolio, with an added benefit of a 5.4% dividend yield.

Today, Cardinal Health (CAH) moves from Hold to Buy in the Growth & Income Portfolio.

Here are portfolio highlights from last week’s July issue: (AMZN) was added to the Growth Portfolio.
Vertex Pharmaceuticals (VRTX) was added to the Buy Low Opportunities.
D.R. Horton (DHI) moved from Buy to Strong Buy.
Dollar Tree (DLTR) moved from Strong Buy to Buy.

These are the portfolio stocks that I would buy today:
• Growth Portfolio: (AMZN), Chemtura (CHMT), D.R. Horton (DHI) and WellCare Health Plans (WCG)
• Growth & Income Portfolio: Big Lots (BIG), Cardinal Health (CAH), GameStop (GME), Goldman Sachs (GS) and H&R Block (HRB)
• Buy Low Opportunities Portfolio: Boise Cascade (BCC), Borg Warner (BWA), Johnson Controls (JCI) and Vertex Pharmaceuticals (VRTX)

Updates on Growth & Income Portfolio Stocks

Adobe Systems (ADBE) is a software company. As Adobe adds a marketing focus to its products, users can now gauge the efficacy of what they’re doing. Read more in this CNBC interview with Chief Marketing Officer Ann Lewnes, “The Heritage and Future of the Adobe Brand.” ADBE is an aggressive growth stock with a strong balance sheet; very undervalued based on 2017 EPS (November year-end). The stock is rising toward short-term upside resistance at 100. Strong Buy. dominates the online retail space by offering a wide variety of merchandise at low prices to customers around the globe. Amazon’s annual shopping holiday, Prime Day, takes place July 12, with results benefiting the company’s third fiscal quarter. Strong growth in most of its businesses, better product mix and expanding gross margins are contributing to dramatically increasing profits in 2016 and 2017. AMZN was featured in the July issue of Cabot Undervalued Stocks Advisor.

AMZN is an undervalued, large-cap aggressive growth stock in the consumer discretionary sector. The share price rose to a new high in early May, traded sideways for two months, then began reaching new highs again on July 6. I believe AMZN will rise for a while before establishing a new trading range. Strong Buy.

Chemtura (CHMT) is a specialty chemical manufacturer. CHMT is a very undervalued small-cap growth stock. Traders could make 10% as the stock rebounds to upside resistance at 29.50. Strong Buy.

D.R. Horton (DHI) is a homebuilder. The company will issue third-quarter results on July 21 before the market opens (September year-end). U.S. 30-year mortgage rates dropped to a multi-year low in June.

DHI is an undervalued growth stock with a 0.9% dividend yield. EPS are expected to grow 19% and 13.4% in 2016 and 2017, with the latter number steadily climbing since April. Last week, I raised DHI to a Strong Buy. DHI then broke past upside resistance on July 8. Strong 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; the company also owns an oil refinery. Last week, the U.S. Department of Transportation granted permission for Delta to operate daily non-stop service to Havana, Cuba.

The company will announce second-quarter results on the morning of July 14. The market is expecting adjusted EPS of $1.48. Good news could push the share price up to 41.

Delta’s new dividend yield, based on the preannounced third-quarter dividend increase, is 2.1%. The share price is stabilizing from the drop in airline stocks. I will suggest that investors buy DAL when the price chart turns more bullish. Hold.

Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. DLTR is a slightly undervalued, large-cap aggressive growth stock, with a low degree of volatility. I moved DLTR from Strong Buy to Buy on July 5. After a huge run-up in May, the stock rested for four weeks, then rose to new highs again in July. Buy.

E*Trade (ETFC) offers financial brokerage and banking products and services. E*Trade’s EPS are expected to grow 38.5% and 9.9% in 2016 and 2017 (December year-end). The stock is overvalued based on 2017 earnings expectations. The price chart is weak, after ETFC spiked down to its February lows with the Brexit news. Hold.

Royal Caribbean Cruises (RCL) is a global cruise vacation company. The company will report second-quarter results on July 29. RCL offers investors strong earnings growth, a low P/E, a 2.2% dividend yield, big dividend increases and share repurchases. The stock is significantly undervalued.

RCL spiked down to its February lows during the Brexit correction, and may take longer than other stocks to recover because the chart is weak. Patient traders and longer-term investors could buy now. Buy.

Vulcan Materials (VMC) produces construction aggregates. You can read about VMC in this Investor’s Business Daily article from July 5, “Investors Love Vulcan Materials’ Results Like a Rock.”

VMC is a very undervalued aggressive growth stock, with a small 0.6% dividend yield. VMC is approaching its former high of 128 from 2007. Strong Buy.

WellCare Health Plans (WCG) is an undervalued aggressive growth stock in the managed healthcare sector. As financial pundits expect the merger between health benefit companies Anthem (ANTM) and Cigna (CI) to be denied by the Justice Dept. due to antitrust concerns, speculation continues that Cigna will subsequently acquire a healthcare company with its $1.85 billion breakup fee from Anthem. Repeatedly, WellCare is identified as the most likely target of a Cigna takeover bid.

WCG would be relatively fairly valued at 126 based on its expected 2017 EPS. The stock has a bullish price chart, recently trading between 103 and 109. There’s a possibility that we’ll see a breakout on the price chart this month. Strong Buy.

Updates on Growth & Income Portfolio Stocks

Big Lots (BIG) is an American discount retailer. The company was featured in the July issue of Cabot Undervalued Stocks Advisor. BIG is an undervalued, mid-cap growth & income stock with a strong balance sheet. The dividend yield is 1.6%, and was most recently increased in March 2016 when the company also announced a new $250 million share repurchase authorization.

BIG traded sideways for two years, then finally pushed above upside price resistance at 50 and rose to a new high in early June. We could see another upside breakout in July. Strong Buy.

Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. Cardinal’s EPS are expected to grow 19.6% and 9.2% in 2016 and 2017 (June year-end). 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. CAH has a dividend yield of 2.2%. I’m raising CAH to a Buy because the price chart has turned more bullish. I expect an immediate rise to 87. Buy.

Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. Carnival recently reported a second-quarter earnings blowout and a new $1 billion share repurchase authorization. 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. 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 is recovering from the Brexit news. Traders should exit as FII approaches 32.50, where the stock will likely commence sideways trading. Hold.

GameStop (GME) is a video game and consumer electronics retailer. The share price is surging this week because GameStop sells accessories to the wildly popular new game app, Pokemon Go.

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 current dividend yield is 5.4%. I believe that the slump in the share price is over. There’s short-term upside price resistance at 29.50 and more resistance at 33. Buy.

General Motors (GM) is an American auto manufacturer. GM reported a record 273,563 vehicle deliveries to China in June, up 11% vs. a year ago. For more good news about GM, read this Letter to the Editor to The Wall Street Journal from Alan Batey, President of GM North America. GM is launching 18 new vehicles in 2016 and 2017. The company is also decreasing low margin sales to rental companies, while increasing its highest-margins sales to individuals.

The market is expecting GM’s EPS to grow 12.4% this year. While earnings growth slows dramatically in 2017, the stock remains incredibly undervalued, especially in light of the big 5.1% 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. There’s some upside resistance at 32. Buy.

Goldman Sachs Group (GS) is a global investment banker, serving consumer, institutional and government clients. The Federal Reserve approved Goldman’s annual capital plan in June. Goldman commented that its plan “includes the repurchase of outstanding common stock, an increase to its quarterly common stock dividend and the possible issuance and redemption of other capital securities,” but the company has not yet named the associated dollar amounts. GS offers investors strong earnings growth, a very low P/E, and a 1.7% dividend yield. Investors who buy now will be getting quite a bargain. The share price is recovering from the Brexit correction. Strong Buy.

H&R Block (HRB) is a leader in tax preparation services. HRB is a slightly undervalued growth & income stock with a 3.7% dividend yield. The share price rose over 25% from mid-May through mid-June then briefly pulled back. HRB appears likely to push past 24 in July, and possibly reach upside resistance at 28 in the next couple of months. Buy.

Kraft Heinz (KHC) is a global food and beverage producer. KHC is an undervalued aggressive growth and income stock, with a 2.5% dividend yield. The stock is reaching new all-time highs and has more room to rise. Strong Buy.

Updates on Buy Low Opportunities Portfolio Stocks

Sometimes a stock produces good capital gains while it’s in the Buy Low Opportunities Portfolio, making the share price no longer low, yet the stock remains an attractive, undervalued investment. Those stocks will then be moved into the Growth Portfolio or the Growth & Income Portfolio.

Boise Cascade (BCC) is a leading U.S. wholesaler of wood products and building materials. On June 30, Zacks wrote that Boise’s forest product competitor, Weyerhaeuser (WY), converted preferred stock into 23 million newly issued shares of common stock. BCC closed up over 8% that day, presumably because Weyerhaueser’s EPS will be diluted by the transaction, making BCC an even more attractive investment in comparison. BCC has faster earnings growth, much lower P/Es, and lower debt levels than WY.

BCC is quite undervalued based on 2017 earnings estimates. The share price broke past upside resistance last week, and could rise to 25.50 or higher this month. Buy.

BorgWarner (BWA) is a maker of engineered automotive systems and components for power train applications. During down markets, we can get so focused on disappointing share prices that we forget that we oftentimes own the best companies in their industries. Such is the case with BWA. Shareholders should read this recent Forbes article, Vehicle Electrification Is Much Bigger Than EVs.

The company will report second-quarter results on the morning of July 28. 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 spiked down and up with the Brexit volatility. There’s upside resistance at 35, with room for traders to make 10%+ in the short-term. Buy.

FedEx (FDX) is an international package delivery company. In June, FedEx increased its quarterly dividend by 60% from 25 cents to 40 cents per share. The current yield is 1.0%. The recent TNT Express acquisition is expected to cost FedEx about 10 cents per share in interest expense in fiscal 2017; then to be accretive to earnings in fiscal 2018. Management will more fully discuss expectations from the merger in September.
The share price is recovering from the Brexit correction, with upside resistance at 168. 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. HAR is an undervalued growth & income stock with a 1.9% dividend yield. The company is beginning its 2017 fiscal year (June year-end). Analysts expect 12.3% EPS growth with a P/E of 10.5. The stock bounced down to its February lows during the Brexit correction, and rebounded promptly. HAR has a wide trading range, with upside resistance at 88. 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 2.6% 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.

Not only could JCI recover from the weak market more quickly than most other stocks, but it could soon continue climbing past 45. Buy.

Robert Half International (RHI) is a staffing and consulting company. RHI is a slightly undervalued growth & income stock with a strong balance sheet and a 2.3% dividend yield. RHI recovered rapidly from the Brexit correction. I’ll give it a little more time to stabilize, before returning it to a Buy. Hold.

Toll Brothers (TOL) is the leading U.S. luxury homebuilder. U.S. 30-year mortgage rates continue to decline, standing at 3.48% on June 30. Rates are down over a full percentage point from a recent peak in August 2013, directly benefiting the housing industry. TOL is a greatly undervalued, mid-cap growth stock. Housing stocks are surging, and TOL is reaching toward upside resistance at 30, where it will likely rest for a short while. Buy.

Vertex Pharmaceuticals (VRTX) is a biotech company that develops breakthrough drugs and carries them through to the manufacturing process. Vertex is a clear leader in the treatment of cystic fibrosis. The company was featured in the July issue of Cabot Undervalued Stocks Advisor.

Despite only one barely-profitable year between 2006 and 2015, Vertex is expected to earn $1.10 per share in 2016, $3.27 in 2017 (December year-end)—reflecting 197% earnings growth in 2017—and to surpass $11.00 EPS by the year 2020. The company will report second-quarter results on July 27.

VRTX is recovering quickly from the Brexit correction. Traders can jump out with about 22% profit as VRTX approaches medium-term upside resistance at 110. Everyone else should hold their shares for future capital gains. Buy.

Whirlpool (WHR) is the world’s largest appliance manufacturer. In light of global investment market volatility associated with the U.K. decision to leave the European Union, Whirlpool management reassured investors that they do not anticipate any disruption of the company’s 2016 sales and profit goals. Whirlpool also intends to carry through with third-quarter price increases on its products and to continue using hedging strategies on global currencies where appropriate.

WHR is an extremely undervalued growth stock with a 2.3% dividend yield. The share price is recovering from the Brexit correction. 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.