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Value Investor
Wealth Building Opportunites for the Active Value Investor

Cabot Undervalued Stocks Advisor Weekly Update

I’m changing my recommendations on Dollar Tree (DLTR) to Hold; and on Big Lots (BIG), Kraft Heinz (KHC) and WellCare (WCG) to Buy.

The current price chart on the S&P 500 index is a beautiful sight to behold ... yet I can’t look at it without cringing, because I know that many investors have been too gloomy to own stocks. Isn’t that how it always goes? Investors are typically too bearish to buy when they should buy, and too bullish to sell when they should sell.

I’m so glad that Cabot subscribers are savvy enough to own stocks right now! There are so many opportunities, I feel like a kid in a candy store.

Last week, at the Cabot Investors Conference, I didn’t meet a single gloomy investor. I also didn’t meet any gold bugs or anyone waxing poetic about bonds. Everyone seemed unanimously enthusiastic about stocks! So of course, I was thrilled.

In the coming weeks, my expectation is that the S&P will continue climbing, and then have a pullback. We all know that the market doesn’t go straight up, and that pullbacks are normal ... except for news media, who seem to think that three down days in a row are a bear market signal.

Please don’t be shocked if I sell half a dozen stocks all at once at some point this summer. Many of them will be hitting upside price resistance during the current bull run. That will be an excellent time to take profits on winners, jump out of laggards and reposition into more undervalued opportunities. (It would be normal for me to recommend some stock sales, and then ask you to wait about two weeks to reinvest the cash, after the market’s had a chance to pull back. So make sure to hold cash if I say to hold cash, because you’ll want to “go shopping” with me a couple of weeks later!)

As some of our portfolio stocks are peaking, I’ll direct slightly different comments to traders than I will to longer-term investors. When I say, “Traders should sell....”, I never mean that non-traders should sell. All I’m saying is that if you are in a stock for a short-term capital gain, you’ve probably maxed out your opportunity based on previous price chart patterns.

At those times, I’ll often cite price support, so that people who’ve been waiting for a pullback will know where to buy. I hope that’s not confusing. There are a wide variety of investment styles among my readership, and I’ll try to be as clear as possible when I speak to you.

Portfolio Notes

Yesterday, I sent out a Special Bulletin, letting traders know that Chemtura (CHMT) in the Growth Portfolio is probably nearing the end of its recent run-up.

Vertex Pharmaceuticals (VRTX)
was my top stock pick for the coming year at the 2016 Cabot Investors Conference in August.

Two of our Growth Portfolio stocks, Dollar Tree (DLTR) and WellCare (WCG), are recommended in this Zack’s article, “3 Stocks Set to Move Faster, Higher, Stronger.” But don’t buy their third recommendation, Motorola Solutions (MSI). The company has an extremely high 2015 long-term debt-to-capitalization ratio of 102%. MSI is not a value stock!

As the Anthem-Cigna merger continues to deteriorate, chances increase that WellCare (WCG) will receive a buyout offer from Cigna (CI). I’m guessing there’s an 80% change that the merger fails, and then a 50% chance that WCG becomes a takeover target. That puts the likelihood of WCG being a takeover target at 40%. Those are decent odds.

Buy the way, if you still own Axiall (AXLL) from my recommendations earlier this year, sell now. The takeover price is 33, and the stock is mere pennies away from that price right now. There’s no more upside to the stock; so rather than wait to receive cash for your shares in the fourth quarter, sell the stock now and reinvest it into another growth opportunity. If you want to shoot for back-to-back takeover stocks, buy WellCare (WCG).

Speaking of mergers, please read my update on Johnson Controls (JCI) in the Buy Low Opportunities Portfolio. Even if you have no plans to own the stock, what you might learn about mergers and taxation can contribute to your body of knowledge and facilitate your future buy and sell decisions.

Watch for earnings reports in the coming week from Applied Materials (AMAT) and Big Lots (BIG). I think that everybody should own AMAT in the Growth & Income Portfolio because it’s wildly undervalued, and the chart is bullish, with no upside resistance since the Tech Bubble. That being said, AMAT is volatile, so if for some reason you don’t want the stock at the current price, put it on your watch list, in case we get a sudden pullback.

I’m changing my recommendations on Dollar Tree (DLTR) to Hold; and on Big Lots (BIG), Kraft Heinz (KHC) and WellCare (WCG) to Buy.

New and higher post-merger debt ratios became available on Dollar Tree (DLTR) and FedEx (FDX). Therefore, those numbers will factor into my investment decisions going forward.

For a quick lesson on “double bottom” price chart patterns, scroll down to read about Goldman Sachs (GS) in the Growth & Income Portfolio.

The following stocks appear ready to climb immediately:

* Adobe Systems (ADBE) – breaking out to new highs

* (AMZN)
* Applied Materials (AMAT)

– I love this stock!
* Big Lots (BIG)
– breaking out to new highs
* BorgWarner (BWA)
– imminent breakout, traders and investors take note!
* FedEx (FDX)
– possibly beginning its last run-up before we sell
* H&R Block (HRB)
– for traders

Updates on Growth Portfolio Stocks

Adobe Systems (ADBE) is a software company. The company is in a multi-year phase of successfully shifting customers to a subscription revenue model. ADBE is an undervalued aggressive growth stock with a strong balance sheet. Last week I said, “The stock is trading near short-term upside resistance at 100, which it will likely surpass very soon.” ADBE proceeded to break out, but nobody has missed the run-up. Growth investors should buy now. Strong Buy. (AMZN) dominates the online retail space by offering a wide variety of merchandise at low prices to customers around the globe. Amazon hosted a Web Services (AWS) Summit on Friday. With an absence of significant price reductions, it became clear that AWS plans to compete on functionality (new services, efficiency, etc.). AWS is also garnering higher spending per client. Famous customers include GE, Bristol Meyers, Lyft and Comcast.

As a result of Amazon’s strong second-quarter results, the full-year consensus earnings estimates now reflect 359% and 80% growth in 2016 and 2017. The corresponding P/Es are 134.6 and 74.7.

AMZN is an undervalued, large-cap aggressive growth stock in the consumer discretionary sector. The stock began reaching new highs again on July 29. I expect the run-up to continue. Buy AMZN now and also buy during pullbacks. Strong Buy.

Chemtura (CHMT) is a specialty chemical manufacturer. Wall Street expects Chemtura’s earnings per share (EPS) to grow 20.4% and 19.2% in 2016 and 2017 (December year-end). The corresponding P/Es are 17.2 and 14.5. CHMT is a very undervalued small-cap growth stock.

Last week, I commented, “CHMT is rising to short-term upside resistance at 29.50, and might promptly continue on to 32.” Sure enough, the stock blew past 29.50--did not even pause!--and is rapidly approaching 32.

CHMT briefly reached an all-time high of 32 last November, and was then pulled down by the deteriorating stock market. As it approaches 32 (this week??), it could stall out anywhere above 31. I definitely expect the stock to pull back shortly thereafter, with 30.50 possibly becoming a new support level. If you were in CHMT for a shorter-term trade, plan your exit now. Remember, nobody is lucky enough to sell at the very top!

Longer-term investors should hold CHMT, and new investors should buy below 30.75 in the coming days/weeks. It’s still quite undervalued, but it will need to rest, because it’s already up 25% from the Brexit correction. If you’re an options trader, I just gave you the entire scenario that you can reasonably expect to happen, so good luck! Strong Buy.

D.R. Horton (DHI) is a homebuilder. Third-quarter results reflected strong increases in sales, orders, closings and backlog. DHI is an undervalued growth stock with a 1.0% dividend yield. EPS are expected to grow 19.0% and 12.6% in 2016 and 2017 (September year-end). The corresponding P/Es are 13.5 and 12.0. The stock was in an accumulation phase this month--a flat/sideways trading pattern, which is a bullish sign of a near-term price increase; and it turned upwards yesterday. There’s a little upside resistance at about 34.50. Strong Buy.

Delta Air Lines (DAL) is the third-largest passenger airline in the world, serving 58 countries, and also owns an oil refinery. Delta’s new dividend yield, based on the preannounced third-quarter dividend increase, is 2.2%. Delta’s earnings estimates for 2017 have come down to a no-growth expectation. As DAL approaches short-term resistance at 44, I will make a hold vs. sell decision. Hold.

Dollar Tree (DLTR) is the nation’s leading operator of discount variety stores. DLTR was highly recommended as a value stock this week, by Zack’s. Consensus EPS estimates reflect 32.3% and 22.0% growth in 2017 and 2018 (January-end), with corresponding P/Es of 25.3 and 20.7.

While the stock remains somewhat undervalued, and the price chart remains strong, I am somewhat concerned that the long-term debt-to-capitalization ratio is 62%--a number that was not available when I added the stock to the Growth Portfolio. Therefore, I’m changing my recommendation to Hold. (It’s not unusual for debt levels to take a while to be published after a major corporate merger.)

The share price has been steadily reaching new highs for two months. There’s price support at 90. Hold.

E*Trade (ETFC) offers financial brokerage and banking products and services. After E*Trade’s second-quarter earnings blowout, analysts raised their EPS estimates to reflect 44.4% and 2.4% growth in 2016 and 2017 (December year-end). ETFC could rise to upside resistance at 28, with good price support at 24.5. Hold.

Royal Caribbean Cruises (RCL) is a global cruise vacation company. EPS are currently expected to grow 25.9% and 15.5% in 2016 and 2017, with corresponding P/Es of 11.6 and 10.1. RCL offers a 2.1% dividend yield, big dividend increases and share repurchases. RCL is slowly ratcheting upwards, with volatility, and could reach 84 in the next few months. Risk-tolerant traders and longer-term investors should buy now. Buy.

Vulcan Materials (VMC) is the nation’s largest producer of construction aggregates. The company was featured in the August issue of Cabot Undervalued Stocks Advisor, which also highlighted Martin Marietta Materials (MLM) and Eagle Materials (EXP). EPS are expected to continue growing aggressively, at rates of 56.2% and 37.4% in 2016 and 2017, with corresponding P/Es of 34.8 and 25.3 (December year-end). VMC has a nominal 0.7% dividend yield. Two weeks ago, VMC pulled back from recent highs. Price charts are bullish throughout the construction materials sector. Buy VMC now for both near-term and long-term capital gains. Strong Buy.

WellCare Health Plans (WCG) is an aggressive growth stock in the managed healthcare sector. WCG was highly recommended as a value stock this week by Zack’s.

WellCare is a potential takeover target by Cigna (CI), if the Anthem-Cigna merger fails. The U.S. Department of Justice (DOJ) sued to block the Anthem-Cigna merger, due to antitrust issues. The new judge on the case announced on August 12 that the trial will begin on November 21, wrap up by December 30, and that she will issue a decision in January. However, Anthem reiterated on Friday the likelihood that Cigna will not agree to an extension past December 31. Cigna’s management recently affirmed that if the merger with Anthem fails, Cigna will seek to deploy cash--including the $1.85 billion merger break-up fee--into strategic M&A opportunities.

Wall Street analysts continue to list WellCare as Cigna’s number-one potential takeover target, if the Anthem-Cigna merger fails. Investors should consider owning WCG (or buying call options on the stock at a more appropriate time), because if a takeover offer arrives, it will likely happen this coming winter, and likely push WCG’s share price significantly higher.

Consensus EPS estimates increased after WellCare’s strong second-quarter report, to reflect growth of 46.5% and 17.1% in 2016 and 2017 (December year-end). The corresponding P/Es are 23.0 and 19.6. The stock is now fairly valued based on 2017 earnings estimates. Therefore, I’m changing my recommendation from Strong Buy to Buy.

WCG broke out of a trading range in early August, and the chart remains bullish. When it surpasses 116.50, it will be reaching all-time highs. Buy.

Updates on Growth & Income Portfolio Stocks

Applied Materials (AMAT) is a worldwide leader in the manufacture of capital equipment within the semiconductor industry. The company was featured in the August issue of Cabot Undervalued Stocks Advisor. The company is expected to report third-quarter EPS of 48 cents on August 18 (October year-end). EPS are expected to grow by 28.6% and 22.9% in 2016 and 2017, with the 2017 number increasing repeatedly in recent months. The corresponding P/Es are 17.8 and 14.3. AMAT has a dividend yield of 1.5%.

AMAT is a volatile, large-cap aggressive growth stock, but it’s also a seriously undervalued stock with an attractive dividend yield and a strong balance sheet. The share price is rising right now, and hasn’t been this high since the Tech Bubble. Traders and longer-term investors should buy now. I have no expectation that the price will pull back unless some kind of bad news emerges. Strong Buy.

Big Lots (BIG) is an American discount retailer. The company is expected to report second quarter EPS of 46 cents on or before August 22. Analysts expect EPS to grow 16.8% and 11.5% in 2017 and 2018 (January year-end), with corresponding P/Es of 15.9 and 14.3.

BIG is a mid-cap growth & income stock with a strong balance sheet. The dividend yield is 1.6%. Last week, I said, “I expect BIG to launch upwards any time now.” The breakout to new highs took place on August 11. I’m changing my recommendation from Strong Buy to Buy, because the stock is relatively fairly valued right now. However, any breakout to new highs is distinctly bullish. Buy.

Cardinal Health (CAH) is one of the largest U.S. distributors of healthcare products and services. Cardinal finished 2016 with EPS growing 19.6% (June year-end), but lowered its 2017 profit forecast. Full-year EPS are expected to grow 7.3% and 11.9% in 2017 and 2018, with corresponding P/Es of 14.9 and 13.3. CAH has a dividend yield of 2.1%. The share price could reach 87 in August. Buy.

Carnival (CCL) is a cruise vacation company, and the largest leisure travel company in the world. Wall Street is expecting earnings to grow 23.3% and 15.6% in 2016 and 2017 (November year-end). The corresponding P/Es are 13.8 and 12.0. CCL is extremely undervalued, with a current dividend yield of 3.0%. CCL has upside resistance at 49 and again at 52. Buy.

Federated Investors (FII) is a global investment management company. Federated is having a great year, but earnings growth is expected to be moderate in 2017. Consensus estimates show Federated’s EPS growing 22.2% and 6.6% in 2016 and 2017 (December year-end). The dividend yield is 3.1%. The FII price chart is looking attractive, with medium-term upside resistance at 33.50, where it will most likely hit a ceiling and trade sideways. Hold.

GameStop (GME) is a video game and consumer electronics retailer. The company just acquired 507 AT&T Mobility stores in keeping with its ongoing diversification into non-video game technology brand stores. Here’s a late July CNBC interview with CEO J. Paul Raines, in which Mr. Raines discusses how GameStop is benefiting from the Pokeman GO craze.

GameStop will report second-quarter results on the afternoon of August 25, with a consensus estimate of 28 cents per share. My guess is that quarterly revenue and profits will surpass Wall Street’s estimates because store traffic and sales increased dramatically in association with the Pokemon Go phenomenon. Therefore, if the share price does not jump in the days leading up to the earnings report, it will likely jump upon the earnings release.

Even though earnings growth is expected to be slow for a while, the stock remains quite undervalued, with a huge 4.9% dividend yield. GME is rising toward slight resistance at 33, and could continue on to 36 (or higher?) before resting again. Buy.

General Motors (GM) is an American auto manufacturer. It was revealed last week that taxi-alternative Lyft recently solicited interested acquisition partners, then instead decided to go the fund-raising route in order to expand its business and remain competitive with Uber. GM invested $500 million in Lyft in January 2016.

Analysts increased their 2016 EPS growth estimate to 16.5% in the wake of GM’s recent blowout second-quarter report. However, analysts now expect a year of flat earnings in 2017 (December year-end). GM has a large 4.8% dividend yield. I expect the stock to trade in the low 30s for a short while then climb to 35. Hold.

Goldman Sachs Group (GS) is a global investment banker, serving consumer, institutional and government clients. The company reported a strong earnings beat in late July, and repurchased $1.75 billion of stock during the quarter. Goldman plans to increase both its dividend and its share repurchase authorization, but has not yet announced the dollar amounts.

Wall Street now expects Goldman’s EPS to grow aggressively at 17.2% and 20.0% in 2016 and 2017 (December year-end). The corresponding P/Es are 11.5 and 9.6, indicating that the stock is significantly undervalued. GS has a current dividend yield of 1.6%.

At last week’s Cabot Investor Conference, I talked about some simple, bullish chart patterns that investors can memorize, to enhance the timing of their stock purchases. One of those is referred to as a “double bottom,” for which there’s an excellent illustration and discussion in this August 9 article from TheStreet. GS has upside resistance at 167, and again at 175. Strong Buy.

H&R Block (HRB) is a leader in tax preparation services. HRB is a fairly valued growth & income stock with a 3.6% dividend yield. The stock is breaking out of a trading range. There’s upside resistance at 28, and again at 32. Traders should buy HRB now. Buy.

Kraft Heinz (KHC) is a global food and beverage producer. The company reported a strong second-quarter earnings beat in early August, and increased the quarterly dividend from 57.5 cents to 60 cents. Kraft Heinz is in the early stages of revenue management initiatives in the wake of the 2015 merger between Kraft Foods Group (KRFT) and privately owned H.J. Heinz. (Read more about KHC’s outlook in this Barron’s article.)

KHC is an aggressive growth & income stock, with a 2.7% dividend yield. Full year EPS are expected to grow 46.6% and 21.8% in 2016 and 2017 (December year-end), with corresponding P/Es of 27.9 and 22.9. I’m changing my recommendation from Strong Buy to Buy because the increase in the share price has made the stock more fairly valued.

The stock is pushing up against short-term resistance at 90, which it could surpass quite soon. Buy.

Whirlpool (WHR) is the world’s largest appliance manufacturer. Wall Street expects EPS to grow 18.6% and 17.6% in 2016 and 2017 (December year-end), with corresponding P/E’s of 12.7 and 10.8. WHR is an extremely undervalued growth stock with a 2.1% dividend yield.

The stock is having a small pullback after its post-Brexit rebound. There’s price resistance at 200. 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

Boise Cascade (BCC) is a leading U.S. wholesaler of wood products and building materials. Here’s an August 11 article from Zack’s, citing Boise’s attractiveness as an undervalued growth stock. Consensus EPS estimates have increased dramatically since Boise’s recent second-quarter report. Wall Street now expects EPS to grow 10.5% and 38.8% in 2016 and 2017 (December year-end). The 2016 and 2017 P/E’s are 17.5 and 12.6. BCC is extremely undervalued based on strong projected 2017 earnings growth.

BCC is a volatile stock that doubled in price from the February market bottom. The stock is now having a pullback. I expect BCC to rise to upside resistance at 32 during the next few months. This is a fantastic time to buy BCC! Buy.

BorgWarner (BWA) is a maker of engineered automotive systems and components for power train applications. Consensus earnings estimates have been increasing in recent weeks. EPS are currently expected to grow 7.6% and 9.5% in 2016 and 2017. The stock is fairly valued based on 2016 numbers; however, with a 2017 P/E of 9.7 and a 1.5% dividend yield, the stock is undervalued based on 2017 numbers. I think BWA is ready to surpass short-term upside price resistance at 35, and rise to 38 or 40 before resting against. Buy.

FedEx (FDX) is an international package delivery company. The company completed its acquisition of Europe’s TNT Express, which is expected to be accretive to earnings in fiscal 2018 (May year-end). Investors need to be aware that the TNT acquisition increased FedEx’s long-term debt-to-capitalization ratio from 33% to 50%. That’s not an egregious number; still, it’s higher than I would prefer. Here’s a good and up-to-date August 8 review of FDX vs. its competitors, from The Street.

FDX repurchased 2.47% of outstanding shares in fiscal 2016, and a total of 12.4% of outstanding shares in the last three years. The TNT shares were acquired with cash, and did not increase the share count.

FedEx is a growth & income stock, undervalued based upon 2018 EPS growth of 12.8% and a 2018 P/E of 12.4. The current yield is 1.0%. FDX appears ready to break past 168, and rise to more significant resistance at 180. The stock will be close to fully valued at 180, and will have maxed out its near-term capital gains. I will then consider removing it from the portfolio. 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 reported a great fourth quarter in early August (June year-end), with full-year EPS up 9.3%, and a 34% long-term debt-to-capitalization ratio. Analysts expect the next two years’ EPS to grow 9.9% and 7.7%. HAR has a 1.6% dividend yield. Roy Ward, Chief Analyst at Cabot Benjamin Graham Value Investor, selected HAR as his top stock pick for the coming year at the 2016 Cabot Investors Conference last week.

I no longer consider the stock to be undervalued, however, I think there’s room for investors to make money. HAR recently rebounded to upside resistance at 88, and had a brief pullback. Buy HAR now. There’s medium-term upside resistance at 110. Buy.

Johnson Controls (JCI) operates in the areas of energy management and auto batteries. Famed stock/media guru Jim Cramer commented on JCI in early August, saying, “That’s a very undervalued situation.”

Wall Street expects EPS to grow 15.8% and 9.1% in 2016 and 2017 (September year-end), with corresponding P/Es of 11.2 and 10.2. JCI’s dividend yield is 2.6%. (The dividend is expected to remain fully intact, throughout the spin-off and merger processes.) It will be many months before we know the new, post-M&A debt ratio, but the current debt ratio is quite acceptable at 34%. Just be aware that the number often increases immediately after M&A activity, so if that number is important to you, you’ve been put on notice.

Here’s an August 16 update on JCI’s 2016 M&A activity:
• The company plans to spin off Adient (ADNT), its automotive seating & interiors business, on October 31, 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.
• Johnson Controls bought a 56% stake in security systems company Tyco International PLC (TYC), in a transaction that closes on October 1, 2016. JCI shareholders will receive a combination of cash and stock in the new company. The receipt of cash will be a taxable event.
• 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.
In light of the potentially complicated tax reporting associated with taxable spin-off and merger situations, consider whether it might be wiser to own JCI in a retirement account (thus avoiding the per-transaction tax reporting). Also consider selling JCI just prior to October 1, possibly repurchasing the new stock shortly after the Adient spin-off in order to avoid both tax-reportable situations. If you are concerned that the new stock might rise while you’re waiting for the Adient spin-off to be completed, you could consider buying call options on the new stock.

JCI just had a small pullback during an uptrend. There’s price support at 44 and upside resistance at 50-51. Buy JCI in retirement accounts now. Buy.

Robert Half International (RHI) is a staffing and consulting company. RHI offers investors moderate earnings growth, a very strong balance sheet and a 2.4% dividend yield. The stock is now overvalued, due to a decline in the earnings outlook. RHI appears quite capable of rising to upside price resistance at 41-42 in the short-term. Hold.

Toll Brothers (TOL) is the leading U.S. luxury homebuilder. The company was featured in the August issue of Cabot Undervalued Stocks Advisor. Toll Brothers is expected to report third-quarter EPS of 61 cents on August 23. EPS are expected to grow 31.5% and 15.4% in 2016 and 2017 (October year-end), with corresponding P/Es of 11.1 and 9.6. TOL is a greatly undervalued, mid-cap growth stock. There’s upside price resistance at 30, and again at 35. Buy TOL now. Any price below $30 is a bargain. 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.

VRTX is a vastly undervalued, aggressive growth stock. Despite only one barely-profitable year between 2006 and 2015, Vertex is expected to earn $1.02 per share in 2016, $3.11 in 2017 (December year-end)--reflecting 205% earnings growth in 2017 with a 33 P/E--and to surpass $11.00 EPS by the year 2020. VRTX was my top stock pick for the coming year at the 2016 Cabot Investors Conference.

VRTX is climbing, with short-term resistance at 110, and much stronger price resistance in the low 130s. When it retraces the August 2015 high of 141, expect a big pullback. Some sudden short-term volatility could take the stock briefly down to 90, and if that happens, jump all over it! Buy.