U.S. stock market indexes tumbled yesterday, August 10, in reaction to the escalating rhetoric between President Donald Trump and North Korean Premier Kim Jong-un. I expect the war on words to continue for a while longer, which will keep investors on edge. The stock market could face further deterioration until President Trump and Premier Kim cool off.
Stocks were due to consolidate recent gains, so the feud between the leaders could become the catalyst for a slippery slide to the downside that was going to happen anyway. Stock market action will likely moderate as investors, looking for bargains, will step in and buy stocks. Hold conservative and defensive stocks to avoid large losses.
In this Weekly Update, I summarize the latest news for eight companies. Max Buy and Min Sell Prices are the recent price targets appearing in the Cabot Enterprising Model Issue 277E, for which you received the link on August 10. I have also included pertinent questions from subscribers with my responses. Results are for the quarter ended June 30 unless otherwise stated. Prices appearing after each stock symbol in this Update are the closing prices on Thursday, August 10, 2017.
Also, in this Update, I 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:
• Wednesday, August 16, Wall Street’s Best Daily
• Friday, August 18, Weekly Update
• Thursday, August 24, Wall Street’s Best Daily
• Friday, August 25, Weekly Update
• Thursday, August 31, Cabot Value Model issue 278V
• Friday, September 1, Weekly Update
• Thursday, September 7, Cabot Enterprising Model issue 278E
• Friday, September 8, Weekly Update
• Wed-Fri, September 13 - 15, Cabot Conference, Salem
Company Reports
Avigilon Corp. (AVO.TO: Toronto Stock Exchange Current Price 16.00; AIOCF: U.S. Over-the-Counter Current Price 12.79) reported stellar second quarter results which sent shares 11.5% higher. Sales climbed 16% and EPS popped 250% after sales increased 15% and EPS fell 25% in the prior quarter. Sales received a boost from market share gains, new product introductions, and broader adoption of video analytics.
Research and development expenses and marketing expenses leveled off after extended expenditures in previous quarters. Management stated that R&D and marketing expenses will increase somewhat in line with sales increases in future quarters. Buy Avigilon at or below 14.36 on the Toronto Stock Exchange (AVO.TO) or 11.48 on the U.S Over-the-Counter market (AIOCF).
Berkshire Hathaway (BRKB 176.36) results were hurt by lower investment gains and a loss in its insurance underwriting unit. Book value increased 6%, but EPS declined 15%. Berkshire’s insurance underwriting business swung to a $22 million loss from a profit of $227 million a year ago. Funds available for investment rose to $107 billion.
Berkshire will exercise its right to buy 700 million shares of Bank of America at $7.14 apiece, well below the bank’s current price of $24.12 per share. The purchase will make Berkshire the bank’s largest shareholder. Berkshire will benefit if interest rates move higher. Buy at 170.85 or below.
Canadian Tire ‘A’ (CTCA.TO: Toronto Stock Exchange Current Price 149.89; U.S. Over-the-Counter Current Price 111.99) beat forecasts. Sales rose 3% and EPS advanced 14% after increasing 8% and 38% in the previous quarter. Strong demand for apparel and sports gear bolstered sales. Same-store sales rose 1.8% from a year ago. Canadian Tire’s stock price jumped 6% following the report. Buy at or below 148.47 Canadian or 118.78 U.S.
Chicago Bridge & Iron (CBI 11.97) surprised investors by reporting a large loss and huge drop in sales for the quarter ended June 30. Investors immediately sold, sending the shares down 31%. Sales plummeted 52% and EPS fell to a deficit of 4.22 per share.
Sales of $1.28 billion missed estimates of $2.45 billion, and the EPS deficit of 4.22 missed analysts’ forecast for EPS profits of 0.83 per share. Management lowered sales and earnings guidance considerably, although the company is expected to be profitable in the final two quarters of 2017. Management stated that costs will be cut, and CBI’s technology unit, which is performing well, will be sold as soon as a buyer can be found.
CBI’s dive today is overdone, and the stock price should rebound somewhat before leveling off. Management has successfully negotiated favorable terms on CBI’s debt, so the balance sheet is in good shape and will improve further when CBI’s technology division is sold.
I advise long-term investors to hold Chicago Bridge & Iron, because the company has been through rough times in the past and recovered nicely. During the next six months, though, CBI shares will probably languish in the $12 to $18 range. If you are a short-term investor, you might want to sell and seek other opportunities. Otherwise, Hold.
Disney, Walt (DIS 101.35) reported weak results. Sales were flat and EPS fell 5% after increasing 3% and 15% in the prior quarter. Strong results in the parks and resorts segment were undermined by high programming costs and slow ad sales at sports network ESPN.
Disney will invest another $1.8 billion in the streaming video company BAMtech, in addition to an earlier $1 billion investment. Disney’s multi-year contract with Netflix for first broadcast syndication rights to new Disney movies will be allowed to expire at the end of 2018. Rather than streaming movies on Netflix’s service, Disney will use BAMtech to stream Disney movies and ESPN sports events.
BAMtech already streams major and minor league baseball, the National Hockey League, and many other attractive sports properties, and should fit well with ESPN. The break with Netflix and uncertainty about the new venture with BAMtech caused Disney shares to sag. Disney CEO Robert Iger knows what he’s doing, though, so sales and earnings growth will likely resume in 2018. Buy at 110.81 or below.
Magna International ‘A’ (MGA 46.85) reported solid results. Sales advanced 3% and EPS climbed 5% after increasing 5% and 25% in the previous quarter. Sales and earnings were bolstered by the start of production of the BMW 5-Series at the company’s assembly facility in Austria. MGA’s sales in North America rose 2%, Europe sales declined 1% and Asia sales jumped 16%. Management remains upbeat about prospects for the remainder of 2017. Hold.
Priceline Group (PCLN 1848.43) exceeded sales and earnings estimates. Sales climbed 18% and EPS surged 20% after increasing 13% and 7% in the previous quarter. Room nights booked rose 21% from a year ago. Management provided conservative estimates for third quarter performance. The resulting 10% dip in PCLN’s stock price is unwarranted and will likely disappear soon. Management’s sales forecast for the current quarter is modest and will likely be exceeded when results are announced in November. Hold.
Wheaton Precious Metals - formerly Silver Wheaton (WPM 19.94) reported solid second quarter results. Sales decreased 6% but EPS advanced 7% after increasing 6% and 40% in the prior quarter. The price of silver decreased 1% from a year ago, which hurt sales and earnings. Wheaton’s board of directors increased the quarterly dividend to $0.10 from $0.07 resulting in a yield of 2.0%. Worries over the political rhetoric between North Korea and the U.S. has caused gold and silver prices to spike during the past few days. Persistently higher prices will help boost sales and earnings for Wheaton. Hold.
Questions and Answers
Question: In the next day or two I will be buying the stocks (in equal $ amounts) picked from your ‘Current Buy Recommendations” from the Value Investor.
Ticker symbols: T, FB, BRK.B, ICE, SBUX, NKE, LOW, DIS, LYB & FDX. In your judgment would you change any of these or have any other comments?
Should I buy the stocks using the “Dollar cost averaging method”. Like 5 this month and 5 next month? Or all at once?? (from subscriber D.P.)
Roy: You have chosen a very well-diversified group of high-quality companies. I highly recommend buying all of them, although I note that you don’t have representation in the health care sector. You might consider replacing SBUX with UNH to add health care to your holdings and lighten up on retail.
I advise spreading your purchases over the next two months: 5 this month and 5 next month. Stock prices have become somewhat unpredictable, so spreading your purchases over time seems appropriate.
Question: I just joined up today for the Cabot Benjamin Graham Value Investor and am really looking forward to learning more. What is your thought on buying your recommendations using margin? (from subscriber D.P.)
Roy: I do not advise using margin to buy stocks at this particular time, primarily because the stock market is fully valued.
The Dow Jones Industrial Average, at 21,844, is slightly below my peak Minimum Sell Price (peak value) target of 21,895 indicating that the stock market is overvalued. I believe a cautious approach is warranted in the current market environment.
Index of Latest Summaries – Recommendations featured in recent issues.
