Two of my Benjamin Graham companies 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, January 12, 2017.
I also present two Indexes. These list companies featured in the Cabot Value Model or in the Cabot Enterprising Model during the most recent four months. The Indexes identify the companies and indicate when my reviews of the companies were published. Reading the list alphabetically by company name, you can quickly find my recent write-ups for stocks appearing in the models.
My schedule for the next five weeks will be:
• Friday, January 20, Weekly Update
• Monday, January 23, Wall Street’s Best Daily
• Tuesday, January 24, Wall Street’s Best Daily
• Friday, January 27, Weekly Update
• Thursday, February 2, Cabot Value Model issue 271V
• Friday, February 3, Weekly Update
• Friday, February 10, No Weekly Update – MoneyShow in Orlando
• Thursday, February 16, Cabot Enterprising Model issue 271E
• Friday, February 17, Weekly Update
Company Reports
UnitedHealth Group (UNH 162.36) has agreed to acquire Surgical Care Affiliates Inc. 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 1 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, which enables treatment at lower cost and with lower recovery time. The purchase will add $1.5 billion in sales to UNH’s $7.6 billion current total. Buy UNH at 161.77 or below.
Zimmer Biomet Holdings (ZBH 114.43) shares surged after the company announced preliminary fourth quarter results. Based on unaudited financials, Zimmer will post a sales increase of 4%. Sales were aided by the recent purchase of LDIR Holding Corp. Zimmer expects EPS for the quarter to approach 2.14, slightly higher than analysts’ estimates of 2.11.
Also, Zimmer finalized an agreement with the Department of Justice and the Securities and Exchange Commission regarding Biomet’s violations of the U.S. Foreign Corrupt Practices Act. Biomet’s conduct occurred prior to Zimmer’s acquisition of Biomet in June 2015, and Zimmer’s $30 million liability was fully expensed in prior quarters. The settlement finalizes the incident, which is a pleasant relief to ZBH investors. Hold.
Questions and Answers
Q. Any Canadian companies that you would invest in? (from subscriber B.B.)
A. Avigilon Corp. (AVO.TO 13.02), Silver Wheaton (SLW 20.11), WestJet Airlines Ltd. (WJA.TO 23.33) and Magna International ‘A’ (MGA 45.06) are all undervalued and have good prospects for 2017. AVO, SLW and WJA are moderate risk, but MGA is low risk because it is a leader in the auto parts sector. The reason I haven’t included MGA in either of my models is that the auto manufacturing cycle could be near a peak in the U.S. A pick up in sales in Europe and China could propel MGA and other auto parts stocks considerably higher in 2017, though.
Q. In the December 1st issue, you classified Schwab as a “Drop” and CVS as a “Sell”. So, we sold CVS, but not Schwab. However, both are no longer included in your list of 275 in your newsletter today. Please explain what “Drop” means. (from subscriber J.J.)
A. I “dropped” Schwab (SCHW 41.26) because the stock failed to decline to my Max Buy Price on or after November 7. My rule is to include a stock in the model for performance purposes only if the stock is available at or below its Max Buy Price on or after the Monday following the release of the Ben Graham Investor. This procedure provides a chance for all subscribers to invest in a stock after the Investor is released. Schwab’s stock price took off and now exceeds my Min Sell Price of 39.88.
The stock’s P/E is 33.8 based on current EPS (28.7 based on 2017 EPS), which is too high. However, Schwab is a great stock to own, and I advise setting a mental or actual sell stop order 10% to 15% below the current price. Hopefully, SCHW will continue to climb and provide you with big profits.? Schwab did not appear anywhere in the latest Investor because its price exceeds my Min Sell Price.
Q. I was wondering if you have any advice on regular rebalancing of the holdings I’ve purchased from your recommendations. I’ve followed your recommendation to make equal dollar weight purchases but as time goes on obviously the values of each position start to diverge. (from subscriber C.P.)
A. First, let’s consider stocks that have gone up a lot. If a stock rises to a level where it is double the average of your other stocks, you should consider selling half. Of course, it’s ok to let your winners run, but you might want to place a trailing sell stop order 10% below the current price for half of your holding to maximize your profit.
If one of your stocks declines 15% to 20%, you should take a close look to see whether the fundamentals or future prospects for your company have changed, and whether those changes will last for more than 6 months. Usually if a company has run into problems that are going to persist for more than 6 months, I will then issue a sell alert.
If investors have over-reacted to a short-term problem, and your stock has dropped 20%, you might consider buying additional shares. This action will help to rebalance your portfolio, and you will buy additional shares at a bargain price. Unfortunately, this is quite hypothetical, because it is difficult to quantify problems and their effects on the future of any company. I try my best to send out sell advisories when appropriate, and whenever you have a question about buying, holding, or selling any of your stocks, just send your question to me in an email.
In my opinion, you should not rebalance when your holdings are only slightly out of balance. However, when you sell a stock or have additional funds available, invest or reinvest an amount that is approximately equal to your average holding.
Indexes of Latest Summaries - Recommendations featured in recent issues.
