Happy Holidays!
In this Weekly Update, I have summarized information for four Cabot Benjamin Graham Value Investor companies that reported quarterly financial results or other noteworthy news during the past week. In addition, I have included questions from subscribers along with my answers. Prices appearing after each stock symbol are the closing prices on Thursday, December 22, 2016.
I also present two indexes of companies featured in the Cabot Value Model or in the Cabot Enterprising Model during the most recent four months so you can quickly find my recent write-ups for stocks appearing in the models.
My schedule for the next five weeks will be:
• Monday, December 26, Wall Street’s Best Daily
• Tuesday, December 27, Wall Street’s Best Daily
• Friday, December 30, No Weekly Update – New Year’s weekend
• Thursday, January 5, Cabot Value Model issue 270V
• Friday, January 6, Weekly Update
• Thursday, January 12, Cabot Enterprising Model issue 270E
• Friday, January 13, Weekly Update
• Friday, January 20, Weekly Update
• Friday, January 27, Weekly Update
Company Reports
FedEx (FDX 190.89) delivered solid sales and earnings for the quarter ended November 30. Sales surged 20% and EPS advanced 9% after increasing 19% and 20% in the prior quarter. Earnings were slowed by acquisition costs from the purchase of TNT Express, the Netherlands-based carrier with operations throughout the world, but TNT will add significant earnings in 2017 and beyond. Online holiday shopping is running well ahead of expectations, and has created better than expected sales and earnings for the current quarter. Buy at 190.08 or below.
Guggenheim Bulletshares 2016 High Yield Corporate Bond ETF (BSJG 25.80) will mature on December 30. The amount of the net asset value (currently 25.81) for your shares will be credited to your brokerage account during the first week of January 2017. I advise investing the proceeds from your BSJG redemption into the Guggenheim Bulletshares 2020 High Yield Corporate Bond ETF (BSJK: Current Price 24.34; Max Buy Price 23.95) which will mature at the end of 2020. BSJK’s portfolio is well diversified with 195 bonds, the expense ratio is 0.43% and the net asset value is 24.25. The dividend yield is attractive at 5.14%. Wait for BSJK to fall to 23.95 before buying, though. New Buy at 23.95 or below.
NIKE ‘B’ (NKE 52.14) beat sales earnings estimates for the quarter ended November 30 and increased the dividend. Sales climbed 6% and EPS rose 11% after increasing 8% and 9% in the previous quarter. The sales increase was led by increases of 12% and 16% in China and Japan, respectively. Wholesale orders set to be delivered in the next six months were flat, but management expects basketball sneakers and apparel, with the help of lower prices and new designs, to bounce back vigorously during the next several quarters. The board of directors raised the quarterly dividend to $0.18 from $0.16, which now provides investors with a yield of 1.4%. Buy at 50.85 or below.
Oracle (ORCL 38.96) posted mixed results for the quarter ended November 30. Sales were flat and EPS slipped 3% after increasing 2% and 4% in the prior quarter. Total cloud revenues soared 62% from a year ago. The company’s on-premise software revenue fell 4% compared to the year ago, and hardware revenue declined 10%. Oracle continues to hold an excessive amount of cash, now $58 billion or $14 per share. Management expects revenue growth of 3% to 5% in the current quarter, but earnings will likely be flat. Cloud revenue is beginning to account for a significant portion of total sales, which will lead to more rapid overall growth in the future. Hold.
Questions and Answers
Q. I am curious how the following will affect Gilead in the future? I realize they have an abundance of cash to pay such a liability, but is the effect on future revenue, etc. going to dilute earnings and growth?
“Merck (MRK) has been awarded $2.54 billion in royalties by a federal jury in a patent lawsuit against Gilead Sciences (GILD), over the latter’s blockbuster hepatitis C drugs Sovaldi and Harvoni.” (from subscriber G.H.)
A. According to a recent Wall Street Journal article, Gilead Sciences (GILD 73.30) was ordered by a federal jury to pay $2.5 billion in damages to Merck & Co. for infringing its patents in developing hepatitis C drugs.
The patent-infringement decision involved Gilead drugs, Sovaldi and Harvoni, which have rung up billions of dollars in sales. The jury decided that Gilead’s two drugs violated the patents held by Idenix Pharmaceuticals, a company bought by Merck in 2014.
Gilead said it disagrees with the verdict and “intends to vigorously” appeal. “We remain steadfast in our opinion that Idenix’s U.S. patent is invalid,” Gilead said, adding that the ruling won’t affect the company’s ability to sell its hepatitis C drugs.
Merck stated: “The jury’s verdict upholds patent protections that are essential to the development of new medical treatments.” Merck said the judge could increase the damages award at his discretion. Jury verdicts tend to be just the first step in a long legal process and often are reduced and can be thrown out.
In a separate patent-infringement case in June, a judge reversed a $200 million jury award that Merck won against Gilead, after the judge concluded Merck engaged in misconduct in its efforts to obtain its hepatitis C patents.
I am more concerned about disappointing sales results for Gilead’s hepatitis C drugs during the second and third quarters. In the third quarter, total sales declined 10% and EPS fell 19% after decreasing 6% and 12% in the second quarter. Third-quarter sales for hepatitis C drugs declined $2.1 billion from a year ago, which was only partially offset by sales of new drugs of $1.3 billion.
The drop in sales for hepatitis C virus was attributed to deep discounts offered by Gilead, prompted by stiff competition from Merck and AbbVie. Gilead’s sales woes will likely reverse by the end of 2017 when the company is expected to report positive sales comparisons as new drug sales overtake the sales declines in hepatitis C drugs.
I would normally recommend selling a stock where sales and earnings are plummeting, but Gilead shares are so cheap and the cash on hand is so high, that I think Merck, Pfizer, or a large European drug company might attempt a takeover. Gilead’s large size ($100 billion market cap) and the ongoing squabble with Merck are detriments, but GILD’s bargain price might be too good to pass up. GILD shares sell at only 7.3 times my 2016 EPS forecast of 10.00.
On the flip side, Gilead could use its spare cash to make acquisitions to diversify its portfolio and add growth. I am staying with my Buy recommendation because something very positive could occur in 2017. Buy.
Q. I am already in one of the Cabot services. How will your program help me do a few things?
• Help me build a portfolio over time of solid investments
• Not over run me with so much information that I have a hard time picking “which one is the way to go”?
• I want to learn as I approach retirement so that I will become better at getting my money working for me so I will be able to rely on some income in retirement.
Help me turn knowledge into action. That is the part I have missed in the past and my biggest losses were from not pulling the trigger because I lacked the confidence to do so. (from subscriber B.C.)
A. I can help you to build your portfolio initially, and then help if you need assistance deciding when to sell a stock and which stock to buy as a replacement. Cabot Benjamin Graham Value Investor is divided into two monthly issues. The Value Model issue will usually be sent to you on the first Thursday of each month, and it will contain buy recommendations for 16 conservative stocks.
The Enterprising Model issue will be sent to you on the second Thursday on each month and will contain buy recommendations for 16 moderate risk stocks. I will recommend buying each stock at its Maximum Buy Price, so that you will not overpay for each of your stocks. You can expect to hold each stock for about two years, and attain a two-year gain of about 27% plus 2% per year in dividends. Since my holding period is extended, you may need to ride out two to three corrections in each of your stocks before they attain my recommended Minimum Sell Price.
I advise buying 12 to 20 stocks for your portfolio. Buy equal dollar amounts for each stock. Your stocks should include conservative as well as moderate risk stocks, and you should hold stocks in at least five different industry sectors. There will be times when a company encounters problems that have long-term negative implications. I will then issue a sell alert before the stock price reaches my Min Sell Price.
My system is quite simple: Buy low at the Max Buy Price, and sell high at the Min Sell Price. After you sell a stock, analyze your portfolio and determine which sectors are underweighted. Also determine if you are overweighted in moderate risk stocks or if your portfolio is too conservative. I list 32 buy recommendations each month, but only a few will fill the gaps in your portfolio.
The best way to learn about my investing techniques and analysis is to read each issue cover to cover, and also read my Weekly Updates every Friday. The Weekly Updates contain the latest quarterly financial results, any dividend increases, merger news and other important news about your stocks, along with my analysis.
In addition to reading, I encourage you to send me emails whenever you need help or you don’t understand something. I will be glad to hear from you and answer any of your questions.
I have consistently outperformed the major indexes during the past 20 years, and I have even outperformed Warren Buffett’s Berkshire Hathaway by a wide margin. I expect undervalued stocks will outperform growth stocks in 2017, led by financials, industrials and energy.
Q. I wonder if you could give me some background of what to expect. Do your stock picks fall into different portfolios and can you give me an idea of their returns. Are the returns of the last few years consistent, and do you expect the coming year to be different?
What is the typical holding period of your picks and generally the typical gain (not the most mind-boggling win)? (from subscriber E.S.)
A. As you noted, I have two groups of buy recommendations each month. The first group is called the Cabot Value Model and contains 16 companies each month that are conservative investments. The second group, the Cabot Enterprising Model, includes an additional 16 companies which are slightly more aggressive. The comparison below will give you an idea of how each Model has performed since inception. The Cabot Value Model is usually published on the first Thursday of each month, and the Cabot Enterprising Model is published on the second Thursday. The time comparisons are slightly different for each model as you’ll see below.
Performance as of 11/30/16.
Both Models underperformed in 2015 when oil stocks plunged, but my recovery in 2016 through November 30 has been encouraging. The inception date for the Cabot Value Model is December 31, 1995. The Cabot Enterprising Model was initiated on March 10, 2005. Dividends are not included in my performance calculations, nor are brokerage fees.
I find it difficult to forecast which Model might perform best during the months ahead, so I advise investing in stocks from both Models. I can always provide help with your choices if you send me an email.
My average gain for the 217 stocks sold during the past seven years is 26.9% and the average holding period for those stocks is 26.8 months. Stocks are introduced in a Model when the stock’s price is undervalued. Typically, a stock will remain in the Model until the price rises to well beyond its buyable price and will then be placed into a hold category. The typical stock will stay in the hold category until its price reaches my overvalue price target or until the fundamentals of the company turn negative, whereupon I will send out a sell advisory.
I also find it very difficult to predict what percentage of your stocks might decline, because stock performance depends a lot on how well the overall stock market is performing. I believe, though, that 2017 will be a very good year for stocks.
Index of Latest Summaries – Recommendations featured in recent issues.
