In the coming months, I will be reporting on the stocks that you might own from your former subscription to Cabot Benjamin Graham Value Investor. Please bear with me as my writing and investing styles will be different from that of the previous analysts.
My recommendations focus on numbers and price charts, because they make up 95% of my decision-making process on stocks. For the companies that retain Buy or Hold recommendations after today, I’ll bring you future corporate news as well. I’ve included my current recommendation with each stock’s description.
You’re welcome to send questions and comments to me at crista@cabotwealth.com.
Portfolio Stocks
Alliance Resource Partners LP (ARLP – yield 11.4%) is expected to see EPS fall in both 2018 and 2019. I don’t recommend that investors own stocks that lack earnings growth, because without earnings growth, there’s no logical reason to expect the share price to rise. Sell.
Alphabet Class C (GOOG) is the world’s largest internet company. Revenue is derived from Google’s online ads, with the balance coming from the sale of apps, digital content, services, licensing and hardware. I will consider GOOG to be fairly valued when it retraces its January high near 1,190, at which time I will sell in order to make room for a more undervalued stock recommendation. For those of you who want to own GOOG long term, it’s a high quality aggressive growth stock, and will probably deliver attractive capital gains for years to come. Sell near 1,190.
Apple (AAPL – yield 1.4%) manufactures a wide range of popular communication and music devices. The company is expected to see EPS grow 24.8% in 2018 (September year-end), and the P/E is 15.7. Fiscal 2019 EPS projections continue to present AAPL as an undervalued growth stock. (There are many years when I absolutely would not consider AAPL to be either undervalued or exhibiting attractive earnings growth, but that is not currently the case.) The stock broke out of a trading range late last week, and is now reaching new all-time highs. That’s an extremely bullish time to own a stock! Traders, longer-term growth investors and dividend investors should buy AAPL now. Buy.
Berkshire Hathaway Class B (BRK.B) is slated for tremendous earnings growth of 52.4% this year, followed by 8.5% EPS growth in 2019. That type of disparity in earnings growth usually brings the share price run-up to a screaming halt when the market is ready to turn its attention toward the 2019 outlook. In addition, the stock is undervalued based on this year’s numbers, but distinctly overvalued based on next year’s numbers. What I’m going to do is sell BRK.B near its recent high of 217. The stock could easily continue climbing after a brief pause at 217, so if you who want to see how high BRK.B could rise this year, my suggestion is that you use a stop-loss order to protect your downside. Sell near 217.
Big Lots (BIG) does not have the kind of earnings growth that I prefer to see in a stock, but all in all, the numbers are decent, the stock’s undervalued, the dividend yield is hefty and the debt burden is relatively low. The problem is the share price, which plummeted when fourth-quarter 2018 numbers were reported this month (January year-end). The stock hasn’t settled down to form a base yet, which means we probably won’t see BIG return to the upper 50s until next year. If you want to wait for that to happen—or even buy more stock while the share price is low—go for it. But if you’re an investor who will be seriously annoyed to see the stock trade between 47 and 51 for months on end, then sell BIG now and move your capital into a stock with a stronger earnings growth outlook and a more bullish price chart. Sell.
Discovery Communications (DISCA) – The fundamental and technical prognosis for DISCA is relatively attractive, although I hate the very high debt ratio. There are very few analysts providing earnings estimates right now, so take these numbers with a grain of salt: EPS are currently expected to rise 41.6% and 21.2% in 2018 and 2019, with corresponding P/Es of 9.0 and 7.4. Those numbers are really out of whack from each other, indicating a very undervalued aggressive growth stock, although certainly the debt situation puts a damper on the P/E.
After a long decline, the share price bottomed in November 2017, then immediately rose from 16 to 26. It’s been resting since the recent correction in the broader market, establishing price support at 24. I expect the stock to trade between 24 and 26 for a short while, then begin another run-up before summer. Buy.
Gentex (GNTX – yield 1.9%) manufactures innovative products for automobiles and airlines, and also serves the fire protection industry. On March 9, Gentex announced a new capital allocation strategy that increases the return of capital to shareholders while also increasing business investment. Gentex will pay down debt, repurchase more stock and increase the April dividend by 10%.
GNTX is an undervalued mid-cap growth & income stock. Earnings per share are expected to grow 25.6% in 2018, while the P/E is just 14.5. Earnings estimates for 2019, which currently present a fair valuation, will probably rise as analysts rework estimates based on the new capital allocation strategy. The stock rose to new all-time highs in January, corrected with the broader market, and now appears capable of reaching new highs again this month. Buy GNTX now. Buy.
Gilead Sciences (GILD – yield 2.8%) is expected to see a big drop in profits in 2018, followed by just 3% EPS growth in 2019. In addition, debt levels are somewhat high. I see no reason to own this stock. The price chart appears in synch with those of Gilead’s industry peers, presenting a biotech stock that’s on an upswing. I don’t like the idea of counting on the rising tide of much healthier companies to lift Gilead’s ship. My suggestion is to let GILD rise just a little more, to 83, then sell. Falling profits are not conducive to rising share prices. Sell at 83.
HanesBrands (HBI—yield 3.0%) is expected to see profits fall 8.8% in 2018, and the long-term debt-to-capitalization ratio is 80%, much higher than my 40% threshold. There’s no motivation in those numbers for other investors to buy HBI and drive the share price up. I recommend selling HBI now. Sell.
Home Depot (HD – yield 2.3%) is slated for strong earnings growth of 26.7% in 2019 (January year-end), followed by 7.7% EPS growth in 2020. That type of sudden slowdown in earnings growth usually affects the share price as we approach the next fiscal year. In addition, the stock is undervalued based on this year’s numbers, but distinctly overvalued based on next year’s numbers. The last alarming number is the 85% long-term debt-to-capitalization ratio. The share price has not promptly turned upward after the recent market correction. Therefore, I recommend selling HD and reinvesting your capital into a company with stronger fundamentals and a more bullish price chart. Sell.
Intercontinental Exchange (ICE – yield 1.3%) operates regulated exchanges and clearing houses in the commodity and financial markets. ICE is a large-cap growth & income stock, fairly valued based on the expectation of 20% EPS growth in 2018, but overvalued when factoring in expectations of low-double-digit earnings growth in 2019. The stock rose to new all-time highs in January, corrected with the broader market, and now appears capable of reaching new highs again in the near term. I will hold ICE due to the bullish price chart, and will likely sell the stock after the next run-up. Hold.
LKQ Corp. (LKQ) is a distributor of vehicle products in the U.S. and Europe. Consensus estimates show strong 2018 EPS growth of 24.5% slowing down to 10.3% growth in 2019. LKQ is overvalued based on 2019 numbers, with a 2019 P/E of 15.3. A fourth-quarter 2017 run-up took LKQ to new all-time highs in January 2018, at which point the stock pulled back with the broader market. There’s 9% upside as LKQ rebounds to 43, which could happen fairly soon. Hold.
Lowes Companies (LOW – yield 1.6%) is slated for strong earnings growth of 25.1% in 2019 (January year-end), followed by 12.0% EPS growth in 2020. The stock is undervalued based on this year’s numbers, but fairly valued based on next year’s numbers. The long-term debt-to-capitalization ratio is higher than I would prefer at 68%. The 2020 EPS figure, P/E and debt numbers are more attractive than the comparable numbers at Home Depot. The stock has been languishing with price support at 85. It’s not yet ready to rise, but we could see LOW head back to short-term price resistance at 97 within the next couple of months. During that time, if next year’s earnings estimates improve, I’ll encourage shareholders to continue holding LOW for a retracement of January’s high near 107. Hold.
Magna International (MGA – yield 2.5%) is an undervalued stock with attractive fundamentals and lots of upside. Consensus estimates point toward EPS growing 13.1% and 9.5% in 2018 and 2019. The 2019 EPS number is lower than I would prefer, but with 2018 and 2019 P/Es of 7.9 and 7.2, and a 2.5% dividend yield, MGA is decidedly undervalued. The stock traded repeatedly at a high of 59 in January, prior to falling with the subsequent stock market correction. There’s good price support at 52, and 11% upside as the stock heads back to 59. I expect additional capital gains thereafter. Buy MGA now. Buy.
McKesson Corporation (MCK – yield 0.9%) is problematic for me, because it was recently recommended to investors, yet the profit situation is so lackluster that there’s no reason to believe that investors can expect good capital gains from the stock. McKesson is finishing up its 2018 fiscal year (March year-end) and is expected to see EPS fall 1.6%, followed by 5.7% EPS growth in 2019. The 2019 P/E is 11.6, which is much higher than the EPS growth rate, and that sends up warning signals when I’m valuing stocks. The dividend is steady and the debt situation is fine.
MCK traded as high as 176 in January, prior to the stock market correction. At this point, the stock is rising, largely because the currently-rising tide of healthcare stocks is pushing MCK upward. My recommendation is that current shareholders hold their MCK shares, and plan to exit when the stock gets closer to its January highs. As we approach a share price of 170, I’ll have a better idea of how much more short-term upside the stock might present to investors. Hold.
Nautilus (NLS) is a maker of gym and exercise equipment. The company is expected to see EPS grow 14.8% and 15.8% in 2018 and 2019, with corresponding P/Es of 12.9 and 11.1. Wall Street foresees 2018 revenue growth of 5.6%. The long-term debt-to-capitalization ratio is quite low at 14.1%. Those numbers are all attractive. Another positive point is that Nautilus is a micro-cap stock with a market capitalization of $400 million. Any large company that wants to acquire a profitable leisure products company could probably buy Nautilus with cash flow.
Here’s my problem with NLS. I don’t like owning stocks with share prices much below 18, because they tend to exhibit far more unexplained volatility than higher-priced stocks. And frankly, the NLS price chart has been a disaster. The stock is currently climbing toward short-term price resistance at 14.5. I recommend that investors sell when NLS reaches 14. (Barring a takeover offer, the best price anybody will likely see on NLS this year is 16, where it last traded in October before the share price plummeted.)
Here’s another problem: When NLS crosses 14, the selling activity coming from Cabot subscribers is going to cause the share price to fall, simply because the stock is so thinly traded. Average daily trading volume is 576,000 shares. I know that number sounds big, but for comparison, Apple’s (AAPL) average trading volume is 33.4 million shares per day! If you own NLS and plan on selling near 14, don’t wait for me to announce that NLS has reached the price target. Simply put in a limit order today at a price near 14 that you’d be happy with.
Again, the company’s fundamentals are fine. It’s the share price, price chart and trading volume that are throwing red flags in my path. Successful stock investing does not have to be this complicated. Sell at 14.
Ross Stores (ROST – yield 0.90%) is expected to have a strong year with 24.9% earnings growth, followed by more moderate EPS growth of 10.8% in fiscal 2020 (January year-end). While a 10.8% EPS growth rate is not alarming, it does not pair will with its current 2020 P/E of 17.1. Additionally, the dividend yield is too low to add much to that equation. ROST has traded between 74 and 85 since early December. I’m currently planning to sell near 85. Hold.
STORE Capital (STOR – yield 5.1%) is a real estate investment trust (REIT). My intention is to hold the stock as it rises toward 26, then sell. REITs don’t fit my investment model, because they don’t offer reasonable and consistent opportunities for capital gains. Hold.
Signet Jewelers (SIG – yield 3.7%) (This commentary is reprinted from the March 13 Special Bulletin.) “SIG fell dramatically upon news surrounding the fourth-quarter earnings release. The fourth-quarter numbers were not the problem. In fact, they exceeded the market’s expectations, and the company increased the dividend by 20%. However, there were many additional announcements (store closures, the sale of credit receivables, and more) that led to the really number: Signet forecasted 2019 non-GAAP EPS in a range of $3.75-$4.25 when Wall Street had been expecting $6.09. That’s pretty much an earnings disaster, and that’s why the stock fell again today.
“As a guiding rule, I do not invest in companies that are forecasted to see EPS fall, largely because there’s no logical reason to expect the share price to rise. My recommendation is to sell SIG and reinvest in an undervalued growth stock that’s forecasted to achieve strong earnings growth. Why wait several years for a company’s finances to turn around, so that your capital can eventually grow, when you can put that same capital into a stock like Apple (AAPL) today? Sell.”
Stifel Financial (SF – yield 0.7%) is expected to see profits grow 28.6% and 11.3% in 2018 and 2019. The stock is fairly valued based on 2019 numbers. The slightest earnings estimate increase could lend a hand in the stock’s valuation, while another share price run-up could push SF into overvalued territory. The price chart is showing an inclination to break out above 68 in the near future. Let’s hold SF for additional capital gains in 2018. Hold.
Rowe Price Group (TROW – yield 2.4%) has some attractive features: a nice dividend yield and a complete lack of long-term debt. My concern is that 2018 earnings growth of 15.2% is expected to give way to just 5.1% earnings growth in 2019. That doesn’t bode well for share price growth.
The stock broke out of a trading range in July 2017, then rose 70% through its peak at 119 in January 2018, then fell with the broader market. Fortunately, TROW has almost completely recovered from the market correction. Now here’s what you need to know: It’s highly unusual for a stock to rise 70% in seven months. That’s not a sustainable long-term trajectory for a company that is only expected to see 5.1% EPS growth in 2019. There’s no way that I would hold onto a stock immediately following such a run-up, unless the earnings outlook was exemplary. It’s time to take the money and run on TROW, and be grateful that the stock did not give back half its recent gains. Sell.
Target (TGT – yield 3.5%) has certainly had its woes in recent years, but the outlook for fiscal 2019 (January year-end) is actually relatively attractive. Profits are expected to grow 11.9%, and when viewed alongside the 3.5% dividend yield, the P/E of 13.4 is quite fair. Unfortunately, Wall Street is expecting fiscal 2020 to deliver earnings growth of just 3.0%, and that’s not enough to cause professional investors to buy and hold the stock.
TGT experienced a 30% run-up in December and January, then pulled back with the correction in the broader market. TGT has since been trading between 70 and 78. My recommendation is to hold TGT for now, then sell as it approaches 78, in favor of a more undervalued growth opportunity. Hold.
Thor Industries (THO – yield 1.2%) is a maker of recreational vehicles. THO is a very attractive and undervalued growth stock. The fundamentals are outstanding at this company, with EPS expected to grow 31.2% and 16.3% in 2018 and 2019 (July year-end). The P/E ratios are low in comparison to the earnings growth rates, at 13.2 and 11.3. In addition, the long-term debt-to-capitalization ratio is very low at 4.4%.
The stock experienced an exaggerated run-up in 2017, peaked at new all-time highs in January, then fell over 20% with the correction in the broader market. There’s 27% upside as THO gradually returns to 156, at which time the stock will still be undervalued. Buy THO now for attractive capital gains in 2018. Buy.
Toll Brothers (TOL – yield 0.7%), like most of its peers, is experiencing a cycle of very strong earnings growth. Profits are expected to rise 39.7% in fiscal 2018 (October year-end), then slow to 8.6% growth in 2019. The stock is fairly valued. Price charts on homebuilder stocks show huge run-ups that peaked in January 2018, then fell with the stock market correction. Many of these stocks are resting, and will likely rebound toward their January highs in the coming months. If 2019 earnings estimates for Toll Brothers do not increase, then I will sell the stock as it approaches its January high of 52. In the interim, there’s 17% upside for investors who want to catch the rebound in the share price. Buy.
Walt Disney Co. (DIS yield – 1.6%) had no profit growth in fiscal 2017(September year-end), and is now expected to see profits grow 21.1% and 8.7% in 2018 and 2019. I’m concerned about the 2019 number, especially since the 2019 P/E is high in comparison at 13.9. Believe it or not, Disney shares have traded sideways for over three years, making literally no progress at all! The best we’ll likely see the stock do in the near-term is retrace its January high near 112. My recommendation is that you hold DIS for a rebound toward 112. We’ll see if earnings estimates rise in the interim, which could then boost the stock’s growth potential in the latter half of the year. Hold.
Williams-Sonoma (WSM – yield 2.9%) reported fiscal 2017 results (January year-end) after the market closed yesterday. Fourth-quarter earnings per share (EPS) of $1.68 beat the consensus estimate of $1.61. In addition, the company increased the quarterly dividend payout by 10% to $0.43 per share, and increased the stock repurchase authorization to $500 million. The company projected full-year fiscal 2018 EPS within a range of $4.12-$4.22, above the consensus estimate of $4.07. The stock is currently undervalued. Today’s share price reaction to the earnings report and analysts’ new earnings projections for 2019 will be important in determining how to proceed for the balance of the year. WSM has traded sideways between 42 and 59 for over two years. Today’s strong earnings report and bullish outlook should be enough to finally push the share price past short-term resistance at 55.Buy.
Closing prices on March 14, 2018