New Sell Recommendation: Sell Eaton Vance (EV)
Relief and a rally returned to the stock market on Wednesday, July 12, as Fed Chair Janet Yellen assured Congressional members and investors that her Federal Open Market Committee would not “normalize” interest rates by raising rates at predetermined time intervals. Instead, the Fed will keep an open mind before reacting to current economic data.
Investors took this as a signal that the Fed will go slow with future rate hikes and not go overboard when selling bonds from its massive accumulation of debt instruments, acquired during the recovery from the 2008 financial crisis. Investors liked what they heard and sent stock prices higher. The chances of a meaningful summertime rally have improved. New stock purchases are warranted!
In this Weekly Update, I summarize the latest news for seven companies. I also include questions from subscribers along with my answers. Max Buy and Min Sell Prices are the recent price targets appearing in the Cabot Value Model Issue 276V, which was sent to you on July 13. Prices appearing after each stock symbol in this Update are the closing prices on Thursday, July 13.
Also, in this Update, I 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 four weeks will be:
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
Thursday, August 3: Cabot Value Model issue 277V
Friday, August 4: Weekly Update
Thursday, August 10: Cabot Enterprising Model issue 277E
Friday, August 11: Weekly Update
Company Reports
Alliance Resource Partners LP (ARLP 20.45) is down 10% during the past month as investors begin to question whether President Trump has the backing to ease emission standards for the coal industry. ARLP management has prudently guided the company forward despite shrinking demand for coal and declining prices. Alliance has expanded at a slow, measured pace with focus on a long-term production plan and long-term price commitments from its customers.
In addition to a possible lift from President Trump’s policies, demand for coal could receive an additional boost if natural gas prices increase. Either of these scenarios are possible during the next six to 12 months. In the meantime, ARLP shares have fallen to bargain basement levels.
The stock’s current P/E of 5.9 times and the dividend yield of 8.6% places ARLP as one of the most undervalued stocks in the market. The limited partnership has a strong balance sheet and should easily provide an investment return of 13% per year, if the dividend is maintained and earnings rise at a minimal 4% pace. Alliance will report quarterly results on July 25. Buy at 21.60 or below.
Berkshire Hathaway ‘B’ (BRK.B 169.69) is in a race to purchase Oncor (formerly Texas Utilities), one of the largest transmission companies in the U.S. Oncor is in bankruptcy court in Texas and is being pursued by Warren Buffett’s Berkshire Hathaway and Elliott Management, a large hedge fund. Both suitors will need approval from the Public Utility Commission of Texas and the bankruptcy judge.
Berkshire has made an all cash offer of $9 billion, whereas Elliott, Oncor’s biggest bondholder, has talked about making a higher offer, but has held back from making a written proposal. Oncor would fit in well with Berkshire’s other utility holdings and provide steady returns for the company. Berkshire hopes to finalize a deal within the next 60 days. The company will report quarterly results on August 4. Buy at 164.59 or below.
Chicago Bridge & Iron (CBI 17.91) shares rocketed 64% higher at the end of June, after CBI won a court battle against Westinghouse. The stock has since dropped 18% which is quite normal after such a large gain. I expect CBI to consolidate in the 17 to 19 area, and then move higher during the next few months.
Chicago Bridge & Iron is another of the few deep-discount stocks that offer great rebound potential. The shares sell at a very low P/E of 4.2 times with a dividend yield of 9.3%. CBI is on Hold now, but if Congress can pass legislation to increase infrastructure spending, I’ll place the company back on Buy. CBI will report quarterly results on August 7. Hold.
Eaton Vance (EV 48.50) reached its Min Sell Price of 48.49 near the close yesterday, July 13. The company produced excellent results for the quarter ended April 30. Revenue rose 16% and EPS surged 29%. Assets under management increased 22%, aided by the company’s acquisition of Calvert Investments. Management expects strong results during the remainder of 2017.
Eaton is an excellent company with good growth prospects, but at 20.5 times current EPS, shares are overvalued. Eaton Vance was first recommended in the June 2014 Cabot Enterprising Model issue at 36.51 and has climbed 32.81% during the past 37 months. The Standard & Poor’s 500 Index gained only 26.51% during the same time period. I recommend selling your EV shares now. Sell.
Five Below (FIVE 46.64) shares have been weak lately, mostly because the company is a retailer and investors are throwing retailers under the bus. Five Below, though, recorded excellent results for the quarter ended April 30. Sales surged 21%, EPS jumped 25%, and the company opened 31 new stores. Stores open more than one year increased their sales 2.3%. Management raised its sales and earnings outlook for the current quarter and full year ending January 31, 2018. Five Below will report quarterly results on August 30. The current low price offers an excellent buying opportunity. Buy at 47.13 or below.
PowerShares US Dollar ETF (UUP 24.77). Just a quick reminder that I recommended selling UUP on Monday, July 10. The ETF provided a low return, exacerbated by the lack of a dividend, but provided stability during episodes when most stocks were falling. Sell.
WestJet Airlines (Toronto Stock Exchange: WJA.TO 25.23; U.S. Over-the-Counter Market: WJAFF 19.81) achieved record capacity utilization during the second quarter of 82.8% and flew a record 5.9 million guests, a year-over-year increase of 11.5%. The Canadian economy is finally beginning to perk up after several years in the doldrums caused by the severe slide in oil prices.
On Wednesday, July 12, the Bank of Canada raised interest rates for the first time in seven years, a sign that the central bank believes Canada’s economy will strengthen during the next several quarters. A stronger Canadian economy and the usual surge in summer travel bode well for WestJet. Hold.
Questions and Answers
Question: Do you think it is good time to buy Greenhill (GHL) now? (From subscriber T.Y.)
Roy: Greenhill & Co. (GHL 20.35) Max Buy Price 19.56; Min Sell Price 31.98 dropped from 30 in mid-March down below 20 in June. GHL is beginning to form a base within the 19 to 21 range, which is good timing if the company reports better than expected second-quarter sales and earnings. Management hinted that results will be good, so I have held the stock based on their assessment.
Analysts lowered their second-quarter estimates down to $0.30 from $0.45 during the past 30 days, which is troublesome, but the low forecast should be easy for Greenhill to beat. The company’s sales and earnings tend to swing wildly as merger and acquisition activity ebbs and flows. The current slow period is caused by companies delaying mergers and acquisitions to wait for regulatory and tax policies in the U.S. and U.K. to gel. Greenhill’s balance sheet is in solid shape which will enable the company to gain a competitive advantage.
I recommend buying a small position now, and adding shares if the second-quarter report is good. Quarterly financial results are due to be released on July 24.
Question: I recall you recently mentioned (6/15/17) to wait for a pullback to purchase ULTA. Is the knife still falling or time now to buy? What is the time period for your estimated upside of 392? 24 months? (From subscriber C.B.)
Roy: Ulta Beauty (ULTA 257.40) is down more than 5% today, July 11, partly as a result of today’s article in The Wall Street Journal about recent discounting of cosmetics in department stores such as Macy’s. The WSJ article points out that Ulta and Sephora have been gaining market share from department stores, and now Macy’s et al are fighting back by offering discounts. However, this tactic could backfire because department stores are already discounting apparel and other items to draw customers in the door. The discounting could be a short-term fix.
Earnings estimates for Ulta have been rising after the company easily beat first-quarter forecasts. For the year ended January 31, 2018, Ulta will likely post EPS of $8.25, a 27% increase from a year ago. The consensus forecast for January 2019 is $9.85, with $12.00 possible in 2020. ULTA shares still aren’t cheap at 35.8 times current EPS, but sales and earnings are slated to surge 20% or more in each of the next three to five years. My new Max Buy Price (as of July) is 253.10, with upside potential to 390.32. Buying at the bottom when a stock is falling is always difficult, but I highly recommend buying Ulta in the 250 to 255 range.
Index of Latest Summaries – Recommendations featured in recent issues.
