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

When I’m out and about in the world, talking to investors, I’ve noticed that when I mention my goal of minimizing the risk associated with stock investing, people’s eyes glaze over. I’ve come to realize that people generally believe eliminating risk actually means eliminating reward. Holy moly, NO!

Some thoughts about risk…

When I’m out and about in the world, talking to investors, I’ve noticed that when I mention my goal of minimizing the risk associated with stock investing, people’s eyes glaze over. I’ve come to realize that people generally believe eliminating risk actually means eliminating reward. Holy moly, NO!

Removing risk factors does not make a portfolio boring; it makes a portfolio successful!

Look, there’s risk and there’s reward; there’s lots of both in the investment world. If you remove some of the risk, then you have proportionately more of the reward.

Here’s an example: If you take every stock in the S&P 500, and eliminate the ones that have stagnant earnings, falling earnings or net losses, the remaining stocks have growing earnings. We eliminate the companies that are less likely to be growing and thriving, therefore eliminating the stocks that are less likely to be purchased by investors. We keep the stocks that are more likely to be purchased by investors. And what makes share prices rise? More buyers than sellers!

How about debt? Let’s remove the S&P 500 companies that are heavily debt-laden. What’s remaining? Companies with less debt. How does that help your share prices rise? When you own stock in a company with low debt obligations, that company theoretically has more cash available to make the company and stock attractive to investors. They can pay dividends and repurchase shares. They can hire employees, improve product lines, stay on top of technological innovations and build new manufacturing facilities. They can weather industry downturns without cutting dividends or going bankrupt. All of those activities attract investors, who in turn push share prices upward.

Repeat after me: minimizing risk is not boring, minimizing risk is not boring, minimizing risk is not boring. In fact, if you want to earn capital gains in the stock market, minimizing risk should be the goal.

Portfolio Notes

Make sure to review the Special Bulletins from March 15 and 17, in which I mentioned news, rating changes and/or price action on Adobe Systems (ADBE), Ameriprise Financial (AMP), Blackstone Group LP (BX), Boise Cascade (BCC), H&R Block (HRB) and Schnitzer Steel (SCHN).

Buy-Rated Stocks Most Likely to Rise More Than 5% Near-Term:

BP plc (BP)
Blackstone Group (BX)
Boise Cascade (BCC)
Johnson Controls (JCI)
PulteGroup (PHM)
Schnitzer Steel (SCHN)

Portfolio Changes Today:


Last Week’s Portfolio Changes:

Blackstone Group LP (BX) joined the Growth & Income Portfolio on March 15.

Updates on Growth Portfolio Stocks

Adobe Systems (ADBE) I expect ADBE to continue rising this month, as analysts issue bullish research reports, following the company’s strong March 16 earnings report. In my estimation, when the new consensus earnings estimates become available, ADBE will be slightly undervalued based on 2018 EPS and P/E. I don’t foresee enough room in the new earnings estimates to confidently pronounce the stock “undervalued” and issue a buy rating. Nevertheless, famous tech stocks like ADBE can make big moves into overvalued territory, and we’re definitely not there yet. I will continue to monitor ADBE closely with an eye toward selling if the price action becomes concerning. Hold.

American International Group (AIG – yield 2.0%) While news headlines might lead you to believe that AIG is in some sort of trouble, you should know that analysts expect $4.91 and $5.92 EPS in 2017 and 2018, with corresponding P/Es of 12.7 and 10.5. The company is thriving financially—with low debt levels and big returns of capital to shareholders—despite the media’s focus on whatever alarming thing they can highlight today. Professional investors, who have the buying power to move the share price, are privy to AIG’s ongoing financial improvements. Don’t be distracted by news reporters who need to sell advertising space. It is true that CEO Peter Hancock stepped down due to pressure from activist investors including Carl Icahn. Keep in mind that Carl Icahn wouldn’t be involved with AIG if he didn’t see lots of unrealized value in the share price. Buy AIG now, while it’s low within its trading range. Strong Buy.

Dollar Tree (DLTR) is a fairly-valued growth stock, with much higher earnings growth prospects this year than peers BIG, DG, TGT and WMT. When the share price rebounds towards its November high near 90, I will likely sell, unless the earnings estimates change. Traders can continue to buy DLTR, but buy-and-hold investors should look for a more undervalued stock. Buy.

Goldman Sachs Group (GS – yield 1.1%) is an undervalued growth stock that appears capable of a near-term breakout. Buy GS now. Strong Buy.

Johnson Controls (JCI – yield 2.4%) is an undervalued growth stock, trading between 41 and 45.50. At 45.50, JCI will still be undervalued. Buy JCI now, while it’s low within its trading range. Buy.

Martin Marietta Materials (MLM – yield 0.8%) is an aggressive growth stock. I expect the stock to trade between 210 and 240 in the coming months. Buy MLM now, while it’s low within its trading range. At 240, MLM will still be undervalued. Strong Buy.

PulteGroup (PHM – yield 1.5%) is an undervalued aggressive growth stock. PHM broke past four-year upside resistance this month. I expect a sustainable run-up. Buy PHM now. Strong Buy.

Quanta Services (PWR) I expect a near-term breakout past 38, which could easily lead to overvaluation in the share price. Only short-term traders should be buying PWR right now. Buy.

Vulcan Materials (VMC – yield 0.8%) is an aggressive growth stock that’s sitting at the bottom of its trading range after a price correction among basic industry and construction stocks. Strong Buy.

XL Group (XL – yield 2.2%) is a very undervalued global property & casualty insurer. XL is resting after a recent run-up. The stock could conceivably break past 41 in the coming weeks. Strong Buy.

Updates on Growth & Income Portfolio Stocks

BP plc (BP – yield 7.0%) has begun a rebound from its February lows. There’s upside resistance at 38. Buy BP now. Strong Buy.

Blackstone Group LP (BX – yield varies) is the largest and most diversified alternative asset manager, with over $350 billion under management. The company invests in private equity, lower-rated credit instruments, hedge funds and real estate. BX is featured in TheStreet’s “Credit Suisse’s Top Ten Stocks” for 2017.
The stock’s annualized dividend yield from the last four quarterly distributions is 4.9%. Please note that Blackstone Group is a limited partnership, and that distributions are reported on a Schedule K-1 tax form for income tax filing purposes.
Buy BX now. The stock is undervalued and the price chart is bullish. BX could rise to price resistance between 38 and 39 before coming to a halt. Strong Buy.

ExxonMobil (XOM – yield 3.6%) There was no further news last week that XOM might purchase BP. However, it was reported that XOM is seeking to sell up to half of its 2,500 gas stations in Italy, valued at $537 million. Since it’s common that companies sometimes sell off assets during mergers, when they have duplicate retail locations, one could ponder whether this asset sale is related to a potential buyout offer for BP. However, BP’s website did not seem to indicate that the company has gas stations in Italy, so there might be no substance there to contribute to buyout rumors.
XOM is low within its trading range between 81 and 92. Buy XOM now. Strong Buy.

GameStop (GME – yield 6.2%) Full-year 2017 results will be reported on the afternoon of March 23 (January year-end). GME is recently trading between 24 and 26. Hold.

H&R Block (HRB – yield 3.6%) has surprising share price strength right now. The stock could quickly rise to 27, where it traded a year ago. Hold.

Royal Caribbean Cruises (RCL – yield 1.9%) appears ready to rise to medium-term price resistance at 102. Hold.

Whirlpool (WHR – yield 2.3%) is an undervalued growth & income stock, recently trading between 170 and 190. Strong Buy.

Updates on Buy Low Opportunities Portfolio Stocks

Archer Daniels Midland (ADM, yield 2.8%) is recently trading between 44 and 47. When the stock approaches 47, I may sell, due to moderate 2018 earnings growth projections. Hold.

Boise Cascade (BCC) is a very undervalued and volatile aggressive growth stock. I expect BCC to continue rising toward longer-term price resistance at 32. Buy BCC now. Buy.

Legg Mason (LM – yield 2.4%) is a seriously undervalued aggressive growth stock. The price chart remains bullish, with LM resting after a February run-up. There’s upside resistance at 40. Buy.

Mattel (MAT – yield 5.9%) is a very undervalued growth stock. MAT is resting at price support, just above 25. Buy MAT now for big capital gains this year. Buy.

Schnitzer Steel Industries (SCHN, yield 3.4%) is an undervalued aggressive growth stock. SCHN seems to be recovering from a normal price correction among basic industry, energy and construction stocks. Strong Buy.

Tesoro (TSO – yield 2.6%) is expected to grow EPS by 33.1% and 20.1% in 2017 and 2018 (December year-end), with corresponding P/Es of 14.9 and 12.4. TSO is bouncing around between 79 and 92. Buy.

Thermon Group Holdings (THR) is an electrical equipment company that provides engineered thermal solutions for process industries. The stock was featured in the March issue of Cabot Undervalued Stocks Advisor. THR is a small-cap stock. THR could break past 21 very soon, and rise to 25 before resting again. Buy THR now for near-term capital gains. Strong Buy.

Total SA (TOT – yield 5.3%) is a greatly undervalued, aggressive growth stock. TOT could easily rise past 52 in the near future. Strong Buy.

Universal Electronics (UEIC) shares appear to be rebounding from a recent pullback, which followed a huge share price run-up on February 18. I plan to sell UEIC at price resistance in the upper 70s. Hold.

Vertex Pharmaceuticals (VRTX) is a very undervalued and volatile biotech stock with rapid EPS growth. Earnings estimates change frequently for VRTX. At this point, a consensus of 25 Wall Street analysts expects the company to grow EPS by 88.2% and 86.9% in 2017 and 2018 (December year-end). The corresponding P/Es are 57.5 and 30.7. The stock has upside price resistance at 95 and 103. The best-case scenario this year is that VRTX could rise all the way toward its 2015 highs around 140. Strong Buy.