Please ensure Javascript is enabled for purposes of website accessibility

Cabot Benjamin Graham Value Investor 275

This month’s Cabot Value Model contains a diversified list of buy recommendations, with a bias toward high quality companies in the technology and financial sectors. These and similar companies have propelled the Cabot Value Model to gain more than the Dow Jones Industrial Average, Standard & Poor’s 500 Index and Warren Buffett’s Berkshire Hathaway.

Cabot Benjamin Graham Value Investor 275

Benjamin Graham is called The Father of Value Investing. His influence has inspired many successful investors, including Warren Buffett.

[premium_html_toc post_id="134906"]

Another Mini Portfolio

The stock market moved higher in May, led by large-cap growth stocks, such as Apple (AAPL), Alphabet (GOOG), Amazon (AMZN) and Facebook (FB). Value stocks lagged growth stocks, and are now overdue for a significant rally. Technology will continue to surge, but the laggards will soon begin to join the party.

This month’s Cabot Value Model contains a wide variety of stocks, with a slight focus on companies in the technology and financial sectors. For the second consecutive month, I have avoided recommending companies in the energy and automotive sectors because forecasts for those sectors continue to be weak.

I feature four companies and one ETF (exchange traded fund) in the following pages. These are not necessarily my favorites, but I hadn’t featured the companies for several months. The five, Walt Disney (DIS), Facebook (FB), T. Rowe Price (TROW), UnitedHealth (UNH) and WisdomTree International Hedged Quality Dividend Growth ETF (IHDG), could create an excellent “mini” portfolio for you!

Newcomers T. Rowe Price and WisdomTree International Hedged Quality Dividend Growth ETF offer interesting possibilities. Read on to find out why I am excited about these unique stocks.
“By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.” — Benjamin Graham

CABOT VALUE MODEL

The Cabot Value Model applies A-List Dividend and Modern Value Model analyses.

The stock choices using the A-List Dividend analysis meet the following criteria:
(1) Dividend increases every year for 25 years or 10% dividend increases every year for 10 years
(2) Standard & Poor’s Quality Rating of A+, A, or A-
(3) Dividend yield is 1.0% or higher
(4) Dividend payout ratio is less than 50%

The Modern Value analysis uses a system initially developed by Benjamin Graham and Dr. Wilson Payne in 1946, and later modernized and enhanced by J. Royden Ward. The analysis uncovers undervalued stocks of well-known, high-quality companies which have recorded steady earnings growth. Ward’s Modern Value analysis is similar to the approach used by Warren Buffett.

When the market is low and undervalued, the Cabot Value Model will hold 75% moderately aggressive stocks and 25% conservative, counter-cyclical stocks, bonds or ETFs. When the market is high and overvalued, the Model will hold 25% moderately aggressive stocks and 75% conservative, counter-cyclical stocks, bonds or ETFs.

Buy Recommendations

The Cabot Value Model on page three contains 16 securities this month with three new stocks: Walt Disney (DIS), T. Rowe Price (TROW) and WisdomTree International Hedged Quality Dividend Growth ETF (IHDG). Three stocks transition out of the Model: MSCI Inc. (MSCI), Starbucks (SBUX) and Williams-Sonoma (WSM).

MSCI, Starbucks and Williams-Sonoma are now listed in the table of Hold and Sell Recommendations on page 7. The page 7 table shows my Hold/Sell Opinions for these securities and for my previous recommendations, which have transitioned out of the Model. My Hold recommendations remain excellent investments. You should continue to hold your stocks and ETFs until your selection reaches its Min Sell Price, at which time I will issue a sell alert. I will also issue a sell alert when a disappointing performance or adverse condition affects any company or ETF.

Currently, five stocks in the Cabot Value Model are priced slightly above their Max Buy Prices. Before buying Cabot Value Model stocks, you should wait until the price of the stock decreases to or dips below its Max Buy Price.

Defensive Securities: This month’s allocation for my Model remains at Level 5, which calls for a mix of four stocks and 12 defensive positions. The defensive or protective portion of the Model is composed of stocks, ETFs, bonds and cash and is fulfilled by AT&T, BRKB, DIS, FDX, GOOG, ICE, IHDG, LOW, NKE, SDY, TROW and UNH.

My objective for portfolio allocation is to increase the defensive holdings in the Model when the market rises and becomes overvalued, and decrease the defensive holdings in the Model when the market declines and becomes undervalued. I believe my strategy of increasing or decreasing the number of defensive positions will help you reduce your risk and enhance your profits.

The Dow Jones Industrial Average has topped my peak Minimum Sell Price target of 21,202 indicating that the stock market is overvalued. My current allocation of four stocks and 12 defensive positions will not change if the stock market climbs higher. If the Dow falls to 19,550, my allocation mix will change to six stocks and 10 defensive positions, or Level 4.

bgv275-p2.png

bgv275-p3.png

Walt Disney (DIS) Industry: Consumer Discretionary–Media; Very Low Risk; 1.5% Yield; A-List Dividend Analysis

bgv275-dis

Walt Disney (DIS: Current Price 105.50; Max Buy Price 107.24) is a diversified international family entertainment and media enterprise with five business segments. Media networks includes ABC and ESPN (44% of 2015 revenue). The parks and resorts division comprises Disneyland, Walt Disney World and a cruise line (31%). The remaining three divisions are: studio and entertainment (14%), consumer products and retail (9%) and interactive digital media (2%). In addition, Disney earns royalties from Tokyo Disneyland and manages Disneyland Paris and Hong Kong Disneyland.

Disney’s recent film successes include Zootopia and Finding Dory, which set box office records. The company has scheduled releases for several more potential blockbuster movies during the next three years, including Captain Marvel, Frozen, Toy Story, two more Star Wars movies and others.

ESPN, Disney’s cable sports network, continues to experience declining subscriptions, which peaked in 2010. In addition, Disney World attendance in Florida declined slightly because of a drop in visitors from economically troubled Brazil. The company opened its much-anticipated Shanghai Disney Resort on June 16, 2016, which will bolster results going forward.

For the quarter ended March 31, Disney produced solid numbers despite further problems at ESPN. Sales advanced 3% and EPS climbed 15%. Disney movie studios and theme parks and resorts produced profit gains of 21% and 20% respectively.

Sports cable network ESPN suffered weak results again. Consumers prefer video streaming which takes market share from traditional cable TV. Disney will introduce an ESPN-branded subscription streaming service soon. The company is also cutting costs and laying off 100 journalists and on-air commentators at ESPN.

The opening of Shanghai Disney recreation park plus five new Disney movies slated to be released before the end of 2017, including Star Wars Episode VIII, will provide continued growth during the remainder of 2017. Lower advertising revenue and fewer ESPN viewers crimped sales, but management expects modest EPS growth in 2017 and “more robust growth” in 2018 and beyond.

Disney has increased its dividend more than 10% nearly every year during the past decade at a compound growth rate of 19% per year. The dividend is paid twice a year and currently yields 1.5%. The company’s payout ratio (dividend per share divided by EPS) is only 27%.

Disney’s stock price has been volatile during the past year, but an impressive recovery is underway. DIS is now very attractively priced at 16.8 times current EPS. I expect DIS to climb 18% to reach my Min Sell Price of 124.15 within one year. Buy at 107.24 or below.

Facebook (FB) Industry: Information Technology–Internet Software; Low Risk; No Dividend Modern Value analysis.

bgv275-fb

Facebook (FB: Current Price 152.81; Max Buy Price 156.97) is the world’s largest social media company. Facebook enables people to connect, share, discover and communicate with each other on mobile devices, personal computers, and other electronic gadgets worldwide. Facebook is led by Mark Zuckerberg, the 33-year-old founder, chairman and CEO.

The Facebook Platform is used by both developers to build apps and integrated websites that are personalized and social, and by advertisers who reach users, based on user information related to age, location, gender and interests. Facebook offers advertisers a compelling combination of user data including reach, relevance, social context and engagement with which to enhance their messages. Advertisers and developers frequently partner with each other to optimize success.

Facebook recently introduced Marketplace, a place for Facebook users to buy and sell items. Marketplace has launched in four countries and will expand rapidly during the next few months. Marketplace apps are now available on iPhone and Android devices, but a desktop version will be introduced soon.

Management is focused on adding video to all of Facebook’s products. Facebook users are spending more time watching videos on Facebook and its photo-sharing app Instagram. Video is bolstering advertising revenue.

Facebook earned $3.30 per share in 2016 and produced $27.6 billion in revenue generated by 1.23 billion daily active users. Each FB user generated $4.83 in revenue in the fourth quarter, jumping 29% from $3.73 a year earlier, helping to send the company’s revenue up 51% to $8.8 billion. Revenue will likely advance 31% and EPS will jump 41% in 2017 to $4.25, despite the company’s prediction that revenue will slow in 2017. Facebook will introduce fewer ads into its news feed, which will precipitate a drop in revenue growth later this year.

Facebook’s venture into virtual reality with the purchase of Oculus VR is progressing slowly. Facebook lost a $500 million lawsuit alleging that Oculus stole another company’s intellectual property, although Facebook will appeal. Facebook’s $29 billion cash hoard will make the outcome insignificant.

Facebook produced excellent first-quarter results. Sales surged 49% and EPS soared 73%. Daily active users advanced 38%. Management’s focus on advertising on mobile devices is producing exciting new growth.

Mobile ads now account for 85% of ad revenue, spurred by 14% higher ad prices. Also, advertisers are spending 41% more on mobile advertising. The availability of video postings on the company’s Facebook and Instagram platforms is attracting new users by the millions. The number of Facebook users is now close to two billion.

The company’s current P/E (price to earnings ratio) is a hefty 39.2, but the forward P/E, based on next 12 months’ EPS, is a more reasonable 30.7. The company is expected to grow earnings at a 27% pace during the next three to five years with more rapid growth expected during the next couple of years.

Facebook is a great company with a proven track record and exceptional management, I expect FB will rise 56% and reach my Min Sell Price of 239.18 within 18 to 24 months. Buy at 156.97 or below..

T. Rowe Price Group (TROW) Industry: Financial Asset Management & Custody Banks; Very Low Risk; 3.3% Yield; A-List Dividend Analysis

bgv275-trow

T. Rowe Price Group (TROW: Current Price 71.06; Max Buy Price 73.03) provides asset management services for individual and institutional investors. The company offers a broad range of no-load U.S. and international stock, bond, hybrid and money market funds. Two-thirds of the firm’s managed assets are held in retirement accounts and variable-annuity investment portfolios. T. Rowe Price also manages private accounts, provides retirement planning advice, and offers discount brokerage and trust services. The company had $862 billion in total assets under management at March 31, 2017.

T. Rowe Price is the successor to an investment counseling business formed by Thomas Rowe Price, Jr. in 1937. The company, based in Baltimore, is one of the largest publicly held U.S. mutual fund firms.

I expect T. Rowe Price to continue generating impressive growth after 82% of the firm’s mutual funds beat its peers during the past three-year period, 79% exceeded peers in the last five years, and 85% beat competitors in the last 10 years. Total outflows of $3.4 billion last year were driven primarily by withdrawals from equity/balanced mutual fund products.

Target-date retirement portfolios remain the largest contributor of growth for T. Rowe Price. During the past five years, the firm has pulled in close to $62 billion in managed assets with its target-date retirement portfolios, which account for 24% of total assets under management. Long-term retail customers are switching to index and ETF funds, which have lower fees.

T. Rowe Price’s strong fund performance is partly offset by competition from passively-managed funds, but assets under management will likely grow 6% in 2017, in line with 2016’s performance. After stellar first-quarter performance, 2017 EPS will likely rise from $4.84 in 2016 to $5.20 in 2017 and $5.50 in 2018. TROW’s target-date retirement funds should continue to attract new assets as more baby boomers reach retirement. Also, the recent recession has forced some Americans to delay retirement in order to build savings.

I expect TROW to climb 27% to reach my Min Sell Price of 90.14 within one year. T. Rowe Price is a Dividend Aristocrat after having increased its dividend every year during the past 28 years. The stock’s 3.3% yield is among the highest in the 108-company Aristocrat index. The recent consolidation in T. Rowe Price’s stock presents an excellent buying opportunity. Buy at 73.03 or below.

UnitedHealth Group (UNH) Industry: HealthCare–Managed HealthCare; Very Low Risk; 1.4% Yield; A-List Dividend Analysis

bgv275-unh

UnitedHealth (UNH: Current Price 180.82; Max Buy Price 182.48) is a diversified health care company. With revenues of $185 billion, the company ranks as one of the largest health care providers in the U.S. UnitedHealth offers a comprehensive array of health benefit plans and services for individuals, including Medicare beneficiaries, and for employers of all sizes.

UnitedHealth also provides network-based health services to Medicaid recipients and to participants in other government-sponsored healthcare programs. In addition, through its OptumHealth division, UnitedHealth provides behavior and clinical care and financial services.

Another Optum segment sells software and data management services and provides consulting and pharmaceutical research services to help clients develop pharmaceutical products. OptumRx offers pharmacy benefit management services, including retail network pharmacy management and mail order pharmacy services. Optum generated 45% of total sales, and is growing rapidly.

UnitedHealth abandoned all but three public health insurance exchange markets at the beginning of 2017. UnitedHealth’s losses from Affordable Care Act subscribers in 2016 will dwindle in 2017 with fewer health exchanges serviced. The company is well prepared to meet any changes in the U.S. healthcare system brought about by the new Republican administration.

UnitedHealth Group has agreed to acquire Surgical Care Affiliates for $2.3 billion, adding a major surgical company to its growing roster of doctor groups and clinics. Surgical Care is the largest independent surgical provider in the U.S., serving about one million patients a year at its 205 facilities.

UnitedHealth will get a meaningful presence in the growing market of outpatient surgeries. Surgical Care specializes in performing complex surgical procedures in outpatient settings. These enable treatment at lower cost and with less recovery time. The purchase will add $1.5 billion in sales to UnitedHealth’s current $7.6 billion in sales.

UnitedHealth has produced rapidly growing sales, earnings and dividends at a steady pace since the company was founded in 1977. Revenue and EPS topped forecasts for the quarter ended March 31. Revenue rose 9% and EPS jumped 31%. The company’s exit from most of the Affordable Care Act’s exchanges resulted in higher profits. Rapid growth in UnitedHealth’s Medicare business aided revenue. Management raised its revenue and EPS forecast for the remainder of 2017.

Sales will climb 9% and EPS will advance 15% during the next 12-month period. At 19.9 times current EPS, UNH shares are reasonable. UnitedHealth has increased its dividend rapidly during the past several years. I expect UNH to climb 24% to reach my Min Sell Price of 224.38 within 12 to 18 months. Buy at 182.48 or below.

WisdomTree International Hedged Quality Dividend Growth ETF (IHDG) Industry: Financial–Europe Stock ETF; Very Low Risk; 2.3% Yield; Modern Value Analysis

bgv275-ihdg

WisdomTree International Hedged Quality Dividend Growth ETF (IHDG: Current Price 30.27; Max Buy Price 30.50) tracks an index of stocks in developed markets outside North America. Stocks are screened for growth factors, and holding sizes are determined by dividend yields—higher yielding stocks are over-weighted. The fund is hedged against currency fluctuations for U.S. investors.

The strategy’s result is a portfolio with high-quality stocks, lower dividend yields and a lot of sector and country biases. WisdomTree typically excludes financials in favor of consumer stocks and basic materials, and underweights Japan and prefers Switzerland and The Netherlands. Many of the countries represented in the ETF will likely produce stronger economic growth than projected growth in the U.S. IHDG’s fee is somewhat high at 0.58%, but the ETF is competitive with similar ETFs. IHDG launched in May 2014 and has outperformed its index consistently.

bgv275-wisdomtree

At 20.5 times current EPS, IHDG shares are reasonable. The dividend yields a respectable 2.3% and is expected to grow. I expect IHDG to climb 45% to reach my Min Sell Price of 44.00 within two years. Buy at 30.50 or below.
Hold and Sell Recommendations

The following table includes my Hold and Sell Opinions for securities appearing in previous Cabot Value issues. These stocks have transitioned out of the Model but remain excellent investments. You should continue to hold the stocks and ETFs you purchased until your selection reaches its Min Sell Price, at which time I will issue a sell alert. I will also issue a sell alert when a disappointing performance or adverse condition affects any company or ETF. The stocks recommended to be sold in prior issues are not included in the table.

My buy recommendations (including Risk Ratings) for the June 2017 Model can be found in the table on page 3.

bgv275-holdandsell.png

Sells:
Penske Automotive Group (PAG) has produced excellent results during the past several years, but auto industry sales have likely peaked. I advised selling Penske in my Special Report, Stocks to Buy, Stocks to Hold, and Stocks to Sell dated May 9.

Penske was first recommended in August 2015 at 52.57. PAG lost 15.54% in the past 21 months compared to a gain of 15.81 % for the Standard & Poor’s 500 Index during the same period.

Taiwan Semiconductor (TSM) reached its Minimum Sell Price of 35.69 on May 11. First-quarter sales and earnings were strong, which sent the stock higher. Management expects demand to diminish in the second quarter due to inventory reductions in the company’s supply chain, so now is a good time to take profits.

Taiwan Semiconductor was first recommended in September 2014 at 21.17. TSM has advanced 68.59% in the past 32 months compared to a gain of 19.31 % for the Standard & Poor’s 500 Index during the same period.

Other Changes Since Last Issue:
Walt Disney (DIS) Hold to Buy. A dip in the stock price presents an excellent buying opportunity.

MSCI Inc. (MSCI) Buy to Hold. The company continues to impress, which has pushed the stock higher. I’ll wait for the price to drop to 99.44 or below before placing MSCI back in the Value Model.

Starbucks (SBUX) Buy to Hold. The stock price is high. SBUX will be buyable again if it declines to 62.90 or below.

Williams-Sonoma (WSM) Buy to Hold. Retail stocks are out of favor. I’ll wait for better market conditions.
Model Performance

bgv275-model.png

Performance calculations for the Cabot Value Model include all Buy-rated and all Hold-rated stocks.

The Cabot Value Model slipped 0.75% in May, compared to an increase of 0.33% for the Dow Jones Industrial Average. The Model gained 6.03% during the first five months of 2017 compared to an increase of 6.31% for the Dow. Value stocks continue to underperform in 2017.

Fourteen years ago, the Model was first published in Cabot Benjamin Graham Value Investor. During the ensuing 14 years, the Model has increased 248.0% compared to increases of 136.2% for the Dow and 157.6% for the Standard & Poor’s 500 Index. All performance numbers do not include dividends.

The Cabot Value Model was also used extensively by investment advisors since 1995 and by individual subscribers since 2002, and has outperformed the Dow Jones Industrial Average by a wide margin during those past 21 years. Since inception on 12/31/95, the Cabot Value Model has provided an impressive return of 1,102.5% compared to a return of 674.0% for Warren Buffett’s Berkshire Hathaway. During the same 21-year period, the Dow has gained just 310.6%.

The Cabot Value Model performance includes the performance results of the Modern Value Model for the period from 12/31/95 to 11/30/02. Performance for the period from 11/30/02 to 3/3/14 was derived from the average monthly performance of the Classic Value Model and Modern Value Model, weighted equally.
Beginning March 3, 2014, the Cabot Value Model includes buy recommendations derived from the Modern Value and the A-List Dividend analyses. Performance calculations for the Cabot Value Model now include all Buy-rated and all Hold-rated stocks. Prior to March 3, 2014, performance calculations included only stocks contained in the Model.

Top 275 Value Stocks

Following are the highest rated Top 275 Value Stocks in the Benjamin Graham database. Use the Top 275 to look up data and ratings for stocks you already own or in which you have an interest. The table is also available on the Google cloud as an interactive, real-time worksheet. The maximum rating for Quality, Value, Growth and Technical is 5.00, which is best. The maximum Total Rating is 10.00, also the best.

Explanation of terminology for the Roy’s Opinion column:
Buy-V: Cabot Value Model stocks recommended to be purchased.
Buy-E: Cabot Enterprising Model stocks recommended to be purchased.
Potential Buy: Stocks with the possibility to be recommended. Their current prices are below their Maximum Buy Prices.
Hold-V: Cabot Value Model stocks recommended to be held until Roy issues a sell alert or the stock reaches its Minimum Sell Price.
Hold-E: Cabot Enterprising Model stocks recommended to be held until Roy issues a sell alert or the stock reaches its Minimum
Sell Price.
Sell: Stocks recommended to be sold.
Neutral: Interesting stocks in Roy’s database but not sufficiently researched to form an opinion.

bgv275-p9.png
bgv275-p10.png
bgv275-p11.png
bgv275-p12.png

[premium_html_footer]

Send questions or comments to roy@cabotwealth.com.
Cabot Benjamin Graham Value Investor • 176 North Street, Salem, MA 01970 • www.cabotwealth.com

Cabot Benjamin Graham Value Investor is published by Cabot Wealth Network, independent publisher of investment advice since 1970. Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit https://cabotwealth.com// or write to support@cabotwealth.com

THE NEXT CABOT BENJAMIN GRAHAM VALUE INVESTOR WILL BE PUBLISHED JULY 13, 2017

We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/bengrahamsurvey
[/premium_html_footer]