The Dow Jones Industrial Average was unchanged during the past week. The bullish rise in the price of oil to $50 a barrel was offset by worries about the stability of Deutsche Bank in Germany.
Some undercurrents in the stock market and the economy are worrisome. Auto sales are showing signs of slower demand despite recent incentive programs. However, General Motors (GM) and Nissan (NSANY), both in my Top 275 Value Stocks database, continue to gain market share.
Restaurant sales are also showing signs of weakness. At least three small fast-casual restaurant chains, Don Pablo’s, Garden Fresh and Cosi, have declared bankruptcy, and many restaurants are reporting weak same-store sales. The reasons for the restaurant slowdown are lower food costs at grocery stores, which have been created by price wars and an oversupply of meat products--consumers are buying groceries and eating at home because restaurants have yet to offer noticeably lower menu prices. Enterprising Model company BJ’s Restaurants (BJRI), however, is faring quite well, though I’ll keep my eyes open to detect any problems.
Three Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news in the past week, and A.O. Smith (AOS) reached its Min Sell Price and is now recommended to be sold. I also include a question from a subscriber along with my answer. Prices appearing after each stock symbol are the closing prices on Thursday, October 6, 2016. Reports are for the quarter ended August 31, 2016 unless otherwise stated. Sales and earnings increases and decreases are based on year-ago comparisons.
I also present two indexes of companies featured in the Cabot Value Model or 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:
* Thursday, October 13, Cabot Enterprising Model issue 267E
* Friday, October 14, Weekly Update
* Friday, October 21, Weekly Update
* Thursday, October 27, Wall Street’s Best Daily
* Friday, October 28, Weekly Update
* Tuesday, November 1, Wall Street’s Best Daily
* Thursday, November 3, Cabot Value Model issue 268V
* Friday, November 4, Weekly Update
Company Reports
Alphabet (GOOG 776.86), parent of Google, introduced a broad range of devices including two new smartphones, a smart home hub, a new streaming device, a virtual reality headset and a new wi-fi router. These devices are the vehicles through which the tech giant is rolling out its biggest product, the new Google Assistant.
The artificial intelligence powered Assistant is included in Google’s new Pixel phones. The system powers Google Home hub and helps Google Wi-Fi determine which frequency to tune into to ensure the best connection.
Assistant is designed to pull together all of Google’s various services ranging from Google Search, Google Photos, Gmail, Google Voice, Google Translate and others in a single, easy-to-use voice-based interface. Google is counting on this kind of interface for the company’s next generation of gadgets. Buy at 759.96 or below.
Gilead Sciences (GILD 76.21) has declined 25% since the start of 2016, caused mostly by pressure from the U.S. Senate to reduce the cost of high-priced drugs. The equity has also been hurt by slower sales of the company’s hepatitis C drugs. The steep selloff in the stock price is excessive. Gilead now trades at 6.9 times current EPS, which is far below its historical average. I will likely place GIL back on my buy list when sales begin to improve or a favorable acquisition is announced. Hold.
LKQ Corp. (LKQ 33.24) revealed that it will purchase Andrew Page, based in the United Kingdom. The announcement created a wave of selling in LKQ shares. However, the purchase looks good, even though the terms of the purchase were not made public. Chances are good that the purchase price was quite advantageous given the fall in the British pound and skepticism concerning the future of the U.K. economy during the next couple of years.
LKQ will buy 102 of Page’s distribution sites. These dispense auto parts, workshop equipment and tools. The purchase is one of many that LKQ has completed during the past several years. Demand for auto parts should remain strong if the British economy weakens, as expected. The dip in LKQ’s stock price offers an excellent buying opportunity. Buy at 34.29 or below.
A.O. Smith (AOS 51.41) reached its Minimum Sell Price of 51.36 on October 6. The company reported slow sales growth in the first two quarters, but earnings increased more than 20% in each of the quarters. Profits were aided by lower raw material costs and higher prices for the company’s water heaters. AOS shares have surged to a new all-time high and are now overvalued at 28.2 times current earnings per share. The dividend yield is small at 0.9%.
A.O. Smith shares split two for one on October 6, and I’ve adjusted my data to reflect the split.
A.O. Smith was first recommended in September 2015 at 34.48. The company was featured in the Cabot Enterprising Model using the Graham-Buffett analysis. AOS has advanced 49.0% in the past 12 months compared to a gain of 10.1% for the Standard & Poor’s 500 Index during the same time period. Sell.
Questions and Answers
Q. I just noticed BRS has been moved up nicely. What are your thoughts on starting a position here? (from subscriber W.N.)
A. Bristow Group (BRS 13.98) has become quite speculative and carries high risk. The company has reported deficits in four of the last five quarters, and analysts are forecasting EPS deficits for the next two years of -$1.75 and -$1.05 (for the years ending 3/31/17 and 3/31/18). If oil prices can rise to $60 or more in 2018, BRS could earn $2.00. BRS could earn $4.00 if oil prices eventually rise to $80 and remain there.
Oil has risen strongly to almost $50 a barrel recently, so a pullback could materialize in the near-term. My Max Buy Price is 12.66, which might be a good entry point for you to make a small purchase. My Min Sell Price of 25.79 indicates that the stock could double within two years, but oil prices will have to continue to move higher for BRS to achieve 25.79 in less than two years--three years is more realistic.