Sell Kroger (KR) and Oracle (ORCL).
Stock indexes are situated just a tad below all-time highs, yet tech stocks are sitting on quicksand, energy prices are dropping, and President Trump’s policy agenda is falling apart. The bears have plenty of reasons to push prices lower, but stocks keep rising. Why?
Investor funds are flowing into mutual funds and ETFs at record rates. According to Bank of America’s Merrill Lynch, in the week ending June 14, investors poured $34 billion into stock and bond funds, the second largest weekly inflow ever. The total included the inflow of $25 billion into equity funds, which was the most since the U.S. election. Cash flowed into technology funds for the 15th straight week. Most of these funds are required to be invested right away, leading me to believe stocks will continue to climb higher during the weeks ahead.
In this Weekly Update, I recommend selling Kroger and Oracle, and summarize the latest news for four companies. I also include two questions from subscribers with my answers. Prices appearing after each stock symbol are the closing prices on Thursday, June 22, 2017.
I also present two indexes which list 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:
Friday, June 30, Weekly Update
Tuesday, July 4, Wall Street’s Best Daily
Friday, July 7, Weekly Update
Thursday, July 13, Cabot Value Model Issue 276V
Friday, July 14, Weekly Update
Thursday, July 20, Cabot Enterprising Model Issue 276E
Friday, July 21, Weekly Update
Tuesday, July 25, Wall Street’s Best Daily
Friday, July 28, Weekly Update
Company Reports
Alliance Resource Partners LP (ARLP 18.80) has declined 18% during the past week in reaction to the slide in crude oil prices. Energy prices for oil, coal and natural gas have been moving in tandem in 2017, which has hurt the ARLP stock price. Alliance, though, is in good shape.
Alliance’s business is centered in the Illinois Coal Basin, a region that has been gaining market share as other regions have faltered. Alliance’s coal production fell last year but production is up 20% since 2010. According to the Energy Information Administration, coal will remain important at least through 2040, which will enable ARLP to maintain its current dividend, with increases quite possible in the not-too-distant future. Alliance’s current dividend yield of 9.3% is very attractive. Buy at 22.42 or below.
Chicago Bridge & Iron (CBI 13.53) shares have plunged 62% since I first recommended buying CBI seven months ago. The company has been beset by one problem after another. For shorter-term investors, you might want to sell and redeploy your CBI proceeds elsewhere. For long-term investors, I suggest that you stay the course. This year is a disaster for the company, but 2018 will very likely bring improvement. At 4.1 times 2017 EPS estimates and 3.1 times projected cash flow per share, CBI is the most undervalued stock in my database. Long-term investors: Hold.
For a complete analysis of CBI, go to https://www.zacks.com/stock/news/265105/
FedEx (FDX 211.63) reported excellent results for the quarter ended May 31. Sales surged 21% and EPS jumped 29% after revenue increased 19% and EPS dipped 6% in the previous quarter. Revenue and earnings benefited from higher base rates, increased volume, continued cost management and the inclusion of TNT Express. Management provided a robust outlook for the next 12-month period. As a result, analysts raised their forecasts for the company’s fiscal year ending May 31, 2018. Buy at 203.52 or below.
Korn/Ferry International (KFY 34.84) reported better than expected revenue and earnings for the quarter ended April 30. Revenue rose 1% and EPS climbed 7% after increasing 10% and 2% in the prior quarter. Management is upbeat on the company’s fiscal year ending April 30, 2018. Hold.
Kroger (KR 22.56) reported weak sales and earnings which sent the shares down 18% after the report on June 15. The drop was problematic and then Amazon announced its intention to purchase Whole Foods, which sent KR’s stock price down another 11%.
Yesterday, June 22, Kroger increased its quarterly dividend to $0.125 from $0.120, and announced a $1 billion stock repurchase program. Management provided an upbeat assessment of the company’s future prospects, but KR’s stock price was down slightly in reaction. I expect KR shares to flounder in the 21.5 to 23 area for an extended period of time. Therefore, I recommend that you sell your KR shares now. SELL.
Oracle (ORCL 50.30) exceeded its Minimum Sell Price of 48.62 on June 22. The company recorded solid sales and earnings for the quarter ended May 31. Sales advanced 3%, EPS climbed 10%, and cloud revenue surged 64%. ORCL jumped 10% following the report and the stock is now overvalued.
Oracle was first recommended in April 2006 at 13.73. The company was featured in the Cabot Value Model using the Modern Value analysis. ORCL has climbed 275.89% in the past 134 months compared to a gain of 88.14% for the Standard & Poor’s 500 Index during the same time period. Holding high-quality stocks for long periods of time pays off! I recommend that you sell your ORCL shares now, though. SELL.
Questions and Answers
Question: Yesterday, Disney stock fell briefly below its 200-day moving average (104.28) to 103.54 mid-morning, but closed at 104.80. The stock opened today at 104.71, and again dropped briefly to 104.11 today about 11:00 am. It has recovered to 104.40. Do you still have a BUY recommendation on Disney? (from subscriber J.M.)
Roy: I continue to like Disney (DIS 104.22) and am maintaining my Buy rating. The company produced solid numbers for the quarter ended March 31 despite further problems at ESPN. Sales advanced 3% and EPS added 15% after declines of 3% and 10% in the prior quarter. Disney’s 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. Analysts are holding their revenue and EPS estimates steady, which I like.
Disney’s stock price has been volatile during the past year, but a recovery is underway. DIS is now very attractively priced at 16.6 times current EPS. I expect DIS to climb 19% to reach my Min Sell Price of 124.15 within one year. Buy at 107.24 or below.
Question: Do you think buying MGA on this pullback is a good idea? (from subscriber B.Q.)
Roy: The auto industry in the U.S. may have peaked and car sales in China are weak, but Europe is coming to life. Global car and light truck sales will likely be flat this year, but Magna International (MGA 44.99) is taking market share. The company is also gearing up to become the leading maker of parts and assemblies for electric and self-driving vehicles.
Management is upbeat about the near-term and long-term outlook for the company.
MGA is currently selling below my Max Buy Price of 45.49 with a P/E of 7.9 and dividend yield of 2.5%. This high quality leading auto supplier is a good buy. The only reason I moved MGA to Hold is because of the peaking auto business in the U.S. Hold.
Index of Latest Summaries – Recommendations featured in recent issues.
