U.S. stock market indexes consolidated during the past week after stellar gains in the previous week. The Dow, S&P 500 and Nasdaq retreated less than 1%, as another earnings season ended.
President Trump surprised a few people when he sided with Democrats on a proposal to attach emergency aid for Hurricane Harvey victims to measures to keep the government funded and suspend the debt ceiling until mid-December. His decision to strike a deal with Democrats could open avenues to bipartisan legislation—something we haven’t seen in decades. Or I suppose this deal could be a “one and done” affair, and Washington will go back to what it does best … nothing! I’m an optimist, so I foresee progress in our future on tax reform, health care and immigration.
In this Weekly Update, I summarize the latest news for one company, KornFerry (KFY). Max Buy and Min Sell Prices are the recent price targets appearing in the Cabot Enterprising Model Issue 278E, for which you received the link yesterday, September 7. I also include pertinent questions from subscribers with my responses. Prices appearing after each stock symbol in this Update are as of mid-day on Thursday, September 7, 2017.
Also, in this Update, I present two indexes of 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 three weeks will be:
Wed-Fri, September 13–15, Cabot Wealth Summit, Salem
Friday, September 15, No Weekly Update
Friday, September 22, Weekly Update
Tuesday, September 26, Wall Street’s Best Daily
Wednesday, September 27, Wall Street’s Best Daily
Friday, September 29, Weekly Update
Company Reports
KornFerry International (KFY 35.60) reported solid results for the quarter ended July 31. Sales and EPS advanced 6% after increasing 1% and 7% respectively in the prior quarter. Sales and earnings were slightly better than expected and sent KFY shares up 7% after the report. Management stated that sales and earnings will continue to improve during the next several quarters. Recent acquisitions and KornFerry’s diversification into benefits management and leadership development are boosting results. Hold.
Questions and Answers
Question: Didn’t it used to be that P/E should be less than forecasted annual growth. Seems like we accept P/E at as much as double projected growth. (from subscriber D.L.)
Roy: I use the PEG ratio extensively in my work, because the ratio provides a good indication if a growth stock is undervalued. The ratio doesn’t work quite as well when searching for value stocks or defensive stocks, but I still take a look at it in all situations.
The current stock market is over-valued, which is making it difficult to find good quality stocks selling at P/Es that are less than forecast five-year growth. If stock prices fall substantially, then PEG ratios will drop to reasonable levels. But I don’t foresee a big decline on the horizon. I advise staying cautiously fully invested.
Question: I see volume has picked up for Avigilon along with price. Comment please. (from subscriber J.S.)
Roy: The pickup in Avigilon’s share price (currently 16.95) and increase in share volume has been caused by the company’s second-quarter sales and earnings report. Avigilon reported stellar quarterly 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 high expenditures in previous quarters. Management stated that R&D and marketing expenses will increase in line with sales increases in future quarters.
Avigilon shares have been on a bumpy ride for the past several years, and now investors are convinced that sales and earnings will climb steadily in the future. The wild ride in previous years was accentuated by steep rises and falls accompanied by heavy volume.
In my opinion, Avigilon’s stock price has consolidated sufficiently after its 11.5% jump on August 10 and is ready to run. Avigilon is included in my September Enterprising Model buy list, which you received on September 7. Buy AVO.TO at 17.08 or below.
Question: Any comments on the major price move for Tech Data? (from subscriber S.T.)
Roy: Tech Data (TECD 81.70) reported solid second-quarter results, but earnings fell short of expectations. Sales surged 40% and EPS climbed 23% after increasing 29% and 78% in the previous quarter. Management’s forecast for current quarter earnings indicates weak earnings are likely in future quarters.
Sales received a boost from the recent purchase of Technology Solutions from Avnet. Earnings climbed 23% but were held back by acquisition costs and lower profit margins produced by the new Technology Solutions division. Acquisition costs will dissipate, but low profit margins will linger during the next two to three quarters.
Tech Data’s earnings miss and tepid earnings forecast sent its stock price tumbling 19% after the report was released on August 31. In my opinion, investors have over-reacted and sent the shares to a very attractive level. At 9.6 times current EPS and with a very achievable five-year EPS growth forecast of 14%, Tech Data still merits my Buy opinion, so I included TECD in my September Enterprising Model buy list. Buy at 94.94 or below.
Index of Latest Summaries – Recommendations featured in recent issues.
