The S&P 500 index had a nice breakout last week. I consider the move to be the beginning of a trend that could easily last for many months. Along the way, there will be pullbacks that will provide good buying opportunities. Always remember that when stock markets rise, not all sectors rise together.
There are leaders and laggards. You don’t need to chase after popular stocks or stocks that just rose 50% in order to make money. I’ll let you know which sectors and stocks present strong earnings growth, low P/Es, and bullish charts. For example, see what I have to say about H&R Block’s (HRB) price chart this week at the end of this introductory commentary.
Today I’m moving Whirlpool (WHR) from the Buy Low Opportunities Portfolio to the Growth & Income Portfolio. WHR joined the Buy Low Opportunities on Novemver 3, 2015 when the share price was 160. The stock rose as high as 193 in April 2016, then established a new trading range, which was very briefly interrupted by the Brexit event. WHR is now heading back toward the April high, and will presumably continue climbing thereafter, as the market now recognizes its total return potential.
Here are the portfolio stocks that I would buy this week based on a combination of their Buy recommendations and their bullish charts:
• Growth Portfolio: Adobe Systems (ADBE), Amazon.com (AMZN) and WellCare Health Plans (WCG)
• Growth & Income Portfolio: H&R Block (HRB)
• Buy Low Opportunities Portfolio: Harman International Industries (HAR), Johnson Controls (JCI) and Vertex Pharmaceuticals (VRTX)
Of all the aforementioned portfolio stocks, the one that appears to offer the best immediate opportunity is H&R Block (HRB). The stock appears to be breaking past short-term upside resistance at 24 and heading toward 28, offering investors and traders an approximate 15% immediate capital gain. The dividend yield is 3.6%.
Updates on Growth & Income Portfolio Stocks
Adobe Systems (ADBE) is a software company. As Adobe adds a marketing focus to their 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 slowly rising toward short-term upside resistance at 100, where it might not pause at all before rising to new highs. Strong Buy.
Amazon.com (AMZN) dominates the online retail space by offering a wide variety of merchandise at low prices to customers around the globe. The company will launch Prime Instant Video—a streaming movie and TV service—in Italy, Spain and France in the coming months. Instant Video has increased Prime membership by over 30% in the U.K. and Germany. AMZN was featured in the July issue of Cabot Undervalued Stocks Advisor.
Analysts expect $1.11 EPS when the company reports second-quarter results on July 28, after the markets close. 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 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. A small pullback last week means that nobody has missed the breakout. Buy AMZN now. Strong Buy.
Chemtura (CHMT) is a specialty chemical manufacturer. Analysts are expecting 47 cents EPS when the company reports second-quarter results on July 28. CHMT is a very undervalued, small-cap growth stock. Shareholders take note: CHMT is approaching short-term upside resistance at 29.50. Strong Buy.
D.R. Horton (DHI) is a homebuilder. Analysts are expecting 66 cents EPS when the company reports third-quarter results on the morning of July 21 (September year-end). DHI is an undervalued growth stock with a 0.9% dividend yield. EPS are expected to grow 19.5% and 13.0% in 2016 and 2017. DHI broke past upside resistance on July 8. Buy DHI now, and if the stock pulls back to 32, buy more! Strong Buy.
Delta Air Lines (DAL) is the third-largest passenger airline in the world, serving 58 countries. The company also owns an oil refinery. Last week, Delta reported second-quarter EPS of $1.47 vs. the consensus estimate of $1.42. In early July, the U.S. Department of Transportation granted permission for Delta to operate daily, non-stop service to Havana, Cuba.
Delta’s new dividend yield, based on the preannounced third-quarter dividend increase, is 2.0%. DAL could reach 44 before this run-up ends, where it will have risen 35% from its June lows. DAL will then most likely resume trading between 41 and 44. 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. After a huge run-up in May, the stock rested for four weeks, then rose to new highs again in July. DLTR is climbing very slowly and steadily. Buy.
E*Trade (ETFC) offers financial brokerage and banking products and services. Analysts are expecting 38 cents EPS when the company reports second-quarter results on July 21 after the markets close. E*Trade’s EPS are expected to grow 37.6% and 6.2% in 2016 and 2017 (December year-end). The stock is overvalued based on 2017 earnings expectations. ETFC has short-term upside resistance at 26, and will then likely trade between 24.75 and 26 for a short while. Hold.
Royal Caribbean Cruises (RCL) is a global cruise vacation company. Analysts are expecting $1.01 EPS when the company reports second-quarter results on July 29. 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. Cruise company stocks are lagging, most recently due to the Brexit event and the French terrorist attack. Patient 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 0.6% 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 anticipate that the merger between health benefit companies Anthem (ANTM) and Cigna (CI) will be denied by the U.S. Justice Department 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. If the Justice Dept. denies the Anthem/Cigna merger, expect WellCare’s share price to jump a bit.
WCG would be relatively fairly valued at 123, based on its expected 2017 EPS. It’s entirely possible that WCG will break past 109 in the coming days. Be ready to buy on the breakout and/or to buy on any pullback toward 104. 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%. 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. Buy BIG now. 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 8.8% in 2016 and 2017 (June year-end). CAH has a dividend yield of 2.2%. The share price is rapidly approaching upside resistance at 87, where it will have risen 18.8% from its June lows. I expect CAH to then pull back to about 83 or 84, and trade sideways for a while. Buy.
Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. 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. Analysts are expecting 48 cents EPS when the company reports second-quarter results on July 28, after the markets close. 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 3.2% 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 & consumer electronics retailer. Sales of game console upgrades from Microsoft and Pokemon Go accessories are enhancing near-term revenue. Importantly, short interest in GME has fallen from 45% of outstanding shares in December 2015 to 29% in June 2016.
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 5.3%. I believe that the share price slump in is over. There’s short-term upside price resistance at 29.50, and more resistance at 33. Buy GME now. Buy.
General Motors (GM) is an American auto manufacturer. Analysts are expecting $1.49 EPS when the company reports second-quarter results on July 21. GM is launching 18 new vehicles in 2016 and 2017. The company reported a record 273,563 vehicle deliveries to China in June, up 11% vs. a year ago. GM is also decreasing low-margin sales to rental companies, while increasing its highest-margins sales to individuals.
The market’s 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 4.9% dividend yield. There’s some upside resistance at 32. Buy.
Goldman Sachs Group (GS) is a global investment banker, serving consumer, institutional and government clients. Analysts are expecting $3.00 EPS when the company reports second-quarter results on July 19. 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 1.6% dividend yield. GS is rapidly approaching short-term upside resistance at 167, where it will have risen 20.8% from its June lows. I expect the stock to pause there. A pullback could then take GS down to 160 or 154, depending on the overall market. Buy on dips! Strong Buy.
H&R Block (HRB) is a leader in tax preparation services. HRB is a slightly undervalued growth & income stock with a 3.6% dividend yield. The share price rose over 25% from mid-May through mid-June, then had a brief pullback. HRB is now pushing past 24, heading toward upside resistance at 28. Buy.
Kraft Heinz (KHC) is a global food and beverage producer. KHC is an undervalued aggressive growth and income stock, with a 2.6% dividend yield. The stock has been reaching new all-time highs, and could rise again this summer. Strong Buy.
Whirlpool (WHR) is the world’s largest appliance manufacturer. Analysts are expecting $3.37 EPS when the company reports second-quarter results on the morning of July 22. WHR is an extremely undervalued growth stock with a 2.3% dividend yield. The share price rebounded 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.
Updates on Buy Low Opportunities Portfolio Stocks
Sometimes a stock produces good capital gains within the Buy Low Opportunities Portfolio, and the share price is 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 Company (BCC) is a leading U.S. wholesaler of wood products and building materials. Analysts are expecting 38 cents EPS when the company reports second quarter results on July 21. BCC is quite undervalued based on 2017 earnings estimates.
BCC is up 34% from its June lows. The stock could pause at any time now, or it could rise all the way to 32, where it will likely screech to a halt and rest for a while. A pullback could then take BCC down to 29.50 or 25, depending on the overall market. 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 generally 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.
Analysts are expecting 82 cents EPS when the company reports 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 1.6%. BWA continues to recover from the Brexit volatility. There’s upside resistance at 35. Buy.
FedEx (FDX) is an international package delivery company. The recent TNT Express 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 from the merger in September. The current yield is 1.0%.
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 1.8% dividend yield. The company is beginning its 2017 fiscal year (June year-end). Analysts expect 12.1% EPS growth with a P/E of 11.2.
HAR bounced down to its February lows during the Brexit correction, and rebounded promptly. HAR seems poised to continue rising promptly toward upside resistance at 88. Buy.
Johnson Controls (JCI) operates in the areas of energy management and auto batteries. Analysts are expecting $1.03 EPS when the company reports third-quarter results on the morning of July 21. 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 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 ten 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. On July 15, famed stock market guru Jim Cramer commented, “I love that merger.”
JCI could soon break past 45. Buy.
Robert Half International (RHI) is a staffing and consulting company. Analysts are expecting 73 cents EPS when the company reports second quarter results on July 21. RHI is a slightly undervalued growth & income stock with a strong balance sheet and a 2.2% 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. I expect TOL to ratchet upwards to price resistance at 30 this summer. 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 $1.03 per share in 2016, $3.17 in 2017 (December year-end)—reflecting 208% earnings growth in 2017—and to surpass $11.00 EPS by the year 2020. Analysts are expecting 21 cents EPS when the company reports second-quarter results on July 27 after the markets close.
VRTX recovered quickly from the Brexit correction. There’s medium-term upside resistance at 110. Buy.
