As I bring you up to date on the remaining Benjamin Graham Value portfolio stocks, I’m aware that some subscribers are not entirely aware of the recent change at Cabot. I don’t know about you, but I don’t read the vast majority of my personal email, since I receive at least 100 emails each day from my kids’ schools, community activities, social media, online bill paying, industry news, trade journals, politics, dental check-up reminders and so much more!
The Cabot Benjamin Graham Value Investor (BGV) publication has been discontinued (please check your inbox from March 12), and I’ll be writing about its portfolio stocks until such a time as it seems prudent to sell them, one at a time, for better investing opportunities. In addition, BGV subscribers have been given a subscription to Cabot Undervalued Stocks Advisor, for which I am Chief Analyst.
Cabot Undervalued Stocks Advisor is a stock advisory that employs a stock strategy that screens for growth and value, and then uses technical analysis to identify optimal entry and exit points. Each facet of my stock selection strategy serves to lower the risk associated with stock investing. Obviously, there is always risk. I work hard to remove obvious risks, such as avoiding companies that lack earnings growth or are overloaded with debt.
Please send questions and comments to Crista@cabotwealth.com.
Portfolio Stocks
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 1180, 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 1180.
Apple (AAPL – yield 1.4%) manufactures a wide range of popular communication and music devices. The company is expected to see EPS grow 24.5% in 2018 (September year-end), and the P/E is 15.3. The stock briefly touched a new all-time high last week, then pulled back a bit. Investor’s Business Daily recommended AAPL on March 17 based on that price action. The price chart remains bullish. Nobody has missed their chance to catch the next run-up on AAPL. 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 for those of 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.
Discovery Communications (DISCA) — The fundamental and technical prognosis for DISCA is relatively attractive, although I hate the very high debt ratio. Last week I warned that Wall Street consensus earnings estimates did not reflect the input of many analysts. Sure enough, the numbers shored up this week, with five analysts weighing in. Earnings per share are currently expected to rise 16.8% and 36.5% in 2018 and 2019, with corresponding P/Es of 10.5 and 7.5. After a long decline, the share price bottomed in November 2017, then immediately rose from 16 to 26. DISCA has been resting since the recent correction in the broader market. I expect the stock to trade between 22 and 26 for a while. 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 a mid-cap growth & income stock. Earnings per share are expected to grow 27.1% in 2018, while the P/E is just 14.3. Analysts currently expect 2019 EPS to rise 9.1%, which is not a big enough growth rate to warrant holding GNTX into 2019. I plan on keeping GNTX for what appears to be an imminent run-up, and then selling the stock thereafter. Investors who would be happy with a 10-15% near-term capital gain should 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.
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 share 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 a new all-time high 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 1.9%) is slated for strong earnings growth of 24.8% in 2019 (January year-end), followed by 12.4% 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 2.4%) – Last week Magna and Lyft announced a partnership to develop and manufacture autonomous driving systems. There is no expected impact on earnings in the foreseeable future. The stock jumped 6% on the news to about 56.5. MGA is an undervalued stock with attractive fundamentals and lots of upside. Consensus estimates point toward EPS growing 13.1% and 9.8% in 2018 and 2019. The 2019 EPS number is lower than I would prefer, but with 2018 and 2019 P/Es of 8.3 and 7.5, and a 2.4% dividend yield, MGA is decidedly undervalued. I expect MGA to head back to 59, where it last traded in January, and to deliver additional capital gains thereafter. Buy.
McKesson Corporation (MCK – yield 0.9%) – Shares of some drug makers, pharmaceutical supply companies and pharmacies fell this week over political banter addressing the U.S. opioid abuse crisis, and prescription drug pricing. 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. My recommendation is that current shareholders hold their MCK shares, and plan to exit when the stock gets closer to its January highs. 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 12.7 and 10.9. 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. I recommend that investors sell when NLS reaches 14. (You don’t need to wait for me to pull the trigger. The stock got close to 14 on March 16.) Again, the company’s fundamentals are fine. It’s the price action that’s throwing red flags in my path. Sell at 14.
Ross Stores (ROST – yield 1.2%) — Ross 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 well with its current 2020 P/E of 17.2. 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 Corp. (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.
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 stock could rise above short-term resistance at 68 in the coming months. Hold.
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 13.6 is quite fair. Unfortunately, Wall Street is expecting fiscal 2020 to deliver earnings growth of just 2.8%, 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 30.5% and 17.5% in 2018 and 2019 (July year-end). The P/E ratios are low in comparison to the earnings growth rates, at 13.3 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, and then fell over 20% with the correction in the broader market. There’s 26% 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 9.5% growth in 2019 (although that number did rise last week). There’s 17% upside as TOL heads back to its January high of 52, where I will likely sell due to full valuation. Buy.
Walt Disney Co. (DIS yield – 1.7%) – Last week, Disney’s stock landed on the “top ten best ideas” buy list at a major investment bank, despite the fact that the company will be somewhat adversely affected by the Toys R Us U.S. store liquidation. Disney had no profit growth in fiscal 2017 (September year-end), and is now expected to see profits grow 20.9% and 8.3% in 2018 and 2019. I’m concerned about the 2019 number, especially since the 2019 P/E is high in comparison at 13.6. Disney shares have traded sideways for over three years. 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. Hold.
Williams-Sonoma (WSM – yield 3.2%) – Analysts’ consensus earnings estimate rose last week, with 2019 EPS expected to grow 16.1% (January year-end). However, next year’s earnings growth rate is currently projected to be just 3.6%. That number could change quite a bit in the coming months, and I’ll be monitoring it weekly. The stock rose to short-term price resistance at 55 last week, then pulled back a bit. We could see WSM trade in the upper 50s in the coming months. Buy.
