Apple (AAPL) reported a great quarter this week. Consider adding to your position in AAPL, as long as you’re not overweighted in AAPL or in the technology sector. I’m selling two healthcare stocks today: Gilead Sciences (GILD), with a dreary outlook and a poor price chart, and McKesson (MCK), with an extremely modest outlook and a recent rebound.
It’s been my experience that the more an investor can lower their portfolio risk, the more enjoyable and lucrative their investing experience will be. When researching stocks, select the ones with strong future earnings per share (EPS) growth, relatively low price-earnings ratios (P/Es) and relatively low debt levels.
Some people think that “lower risk” means “lower reward,” but I don’t see it that way at all. Any group of 50 stocks is going to have great companies, average companies and bad companies. We want to screen out the average and bad companies, and keep the great companies, as defined by their financial successes and comparably low share prices. It makes sense that if you take the “bad” and “average” companies out of a stock portfolio, the remaining “great” companies will perform better than the portfolio previously performed, right? That’s essentially why I’m asking you to sell GILD and MCK today. There’s no compelling reason for other investors to buy those two stocks, and without other investors buying them, how are the share prices going to rise? Yet if you take that same principal, and invest it into “great” companies—like AAPL—you can logically expect your money to grow sooner and better than it will if you leave the money stagnating in GILD or MCK.
I want you to enjoy stock investing and achieve good capital appreciation. Let me know if you have questions, fears, comments or excitement. This is a learning process, and I’m way ahead of most investors with 30 years of stock investing behind me. Please take advantage of my experience.
Please send questions and comments to Crista@CabotWealth.com.
Today’s portfolio changes:
Sell Gilead Sciences (GILD).
Sell McKesson (MCK).
Last week’s portfolio changes:
(none)
Portfolio Stocks
Alphabet Cl. A (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. Subsequent to Alphabet’s first-quarter earnings report, analysts revised their full-year earnings estimates. Earnings per share (EPS) are now expected to grow 37% and 7% in 2018 and 2019, respectively. Slow 2019 EPS growth reinforces my plan to sell GOOG when it nears 1,180. Hold.
Apple (AAPL – yield 1.7%) operates on a September fiscal calendar, and they reported second-quarter results as of the end of March:
• Revenue of $61.1 billion slightly beat the consensus estimate of $60.9 billion, representing a new March quarter record.
• Earnings per diluted share of $2.73 modestly beat the consensus estimate of $2.68, representing a new March quarter record.
• The company increased the quarterly dividend by 16%, from 63 cents to 73 cents per share.
• At a share price of 170, the current yield is 1.7%.
• Apple expects third quarter revenue to range between $51.5 billion and $53.5 billion vs. the consensus estimate of $51.7 billion.
CEO Tim Cook commented, “We’re thrilled to report our best March quarter ever, with strong revenue growth in iPhone, Services and Wearables. Customers chose iPhone X more than any other iPhone each week in the March quarter, just as they did following its launch in the December quarter. We also grew revenue in all of our geographic segments, with over 20% growth in Greater China and Japan.”
Based on current consensus earnings estimates, I won’t consider AAPL to be fairly valued until the share price reaches 208. I’m quite comfortable with the idea of holding AAPL well into its next fiscal year. If the numbers turn ugly, we’ll have plenty of warning, but there’s nothing like that on the current horizon. Keep buying AAPL. And pssst, buy more on pullbacks, because that’s exactly when Apple will be repurchasing shares. Buy.
Berkshire Hathaway Class B (BRK.B) is expected to report first-quarter earnings per share of $3,115.57 on May 5, within a range of $2,921.99 to $3,255.60. Changes in accounting rules might cause Berkshire to report a first-quarter loss, although I don’t know if such a loss would be reflected in non-GAAP results. In other news, USG Corp. (USG), which is 31% owned by Berkshire Hathaway, indicated its willingness this week to have open talks about selling itself to Germany’s Gebr Knauf AG. Warren Buffett supports the sale of USG.
Berkshire will transition from a year of over 50% earnings growth in 2018 to just 8.4% growth in 2019. There’s room within the 2018 trading range for short-term traders to buy now and make 10% profit as the stock returns to 217. Sell near 217.
Discovery Communications (DISCA) is expected to report first-quarter earnings per share of $0.42 on the morning of May 8, within a range of $0.17 to $0.54. Analysts expect full-year EPS to grow 40.5% and 25.5% in 2018 and 2019, with corresponding P/Es of 9.0 and 7.2. DISCA is a very undervalued aggressive growth stock with a precariously high debt ratio.
The stock is heading back to its January and February high of 26. Once there, I expect the stock to rest a while before proceeding upward. The high debt ratio would inspire me to protect my downside with a stop-loss order, because debt adds risk to the company and its share price. Buy.
Gentex (GNTX – yield 2.0%) manufactures innovative products for automobiles and airlines, and also serves the fire protection industry. Full-year EPS are now expected to rise 31.0% and 8.3% in 2018 and 2019. The 2018 P/E is 13.4. I plan on selling on the next run-up to 24, due to slow 2019 earnings growth prospects. Hold.
Gilead Sciences (GILD – yield 3.4%) reported poor first-quarter results on the afternoon of May 1, with the stock dropping below recent trading levels. Since there’s no hope of the stock performing well in the coming months, investors would be far better off placing their capital in a stock with a strong earnings growth outlook and a more bullish price chart. Good choices include Schlumberger (SLB), CIT Group (CIT) and D.R. Horton (DHI) in the Cabot Undervalued Stocks Advisor portfolios. It’s time to sell GILD. Sell.
Intercontinental Exchange (ICE – yield 1.3%) operates regulated exchanges and clearing houses in the commodity and financial markets. The company is expected to report first-quarter earnings per share of $0.88 on the morning of May 3, within a range of $0.86 to $0.89. ICE is a large-cap growth & income stock that’s overvalued based on its 2019 price/earnings ratio. The stock rose to new all-time highs in January, then corrected with the broader market. Based on strong 2018 earnings growth, bullish sentiment towards financial stocks and Intercontinental’s record futures trading volumes in the first quarter of 2018, I think ICE is capable of surpassing 76 and reaching new highs again fairly soon. I’ll likely sell the stock thereafter. Hold.
LKQ Corp. (LKQ) is a distributor of vehicle products in the U.S. and Europe. LKQ reported first-quarter earnings per share of $0.55 when the market was expecting $0.59. Revenue of $2.72 billion beat all analysts’ estimates. During the first quarter of 2018, LKQ acquired an aftermarket radiator and related products distributor in Tennessee. LKQ’s European operations opened one branch in Western Europe and four branches in Eastern Europe. The company lowered its full-year guidance for revenue, earnings, cash flow and capital expenditure figures (see chart within press release). Full-year projections do not include any results for the pending $1.77 billion acquisition of Germany’s Stahlgruber Otto Gruber AG, which may be completed in the first half of 2018.
Consensus earnings estimates were revised downward to reflect full-year 2018 EPS growth of 18.1% and 12.2%. The stock fell down to support levels that were established in the first half of 2017. I would estimate that the Stahlgruber acquisition will add to revenue and earnings estimates, and that the share price will eventually reflect a more true valuation of the company. Do not expect a quick rebound. Hold.
Lowes Companies (LOW – yield 1.9%) – Consensus estimates project strong earnings growth of 24.4% in 2019 (January year-end), followed by 12.5% 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%. Watch for Lowe’s to announce their annual dividend increase somewhere between Memorial Day weekend and the first week in June. Lowe’s increased its dividend payout by 17% to 28% in each of the last four years. The current quarterly payout is $0.41 per share.
The share price is beginning its recovery from the correction in the broader market, followed by an ugly April for housing-related stocks. There’s 14% upside as LOW returns to short-term price resistance at 97. 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 2.2%) is a Canadian global automotive supplier. MGA is an undervalued mid-cap growth stock. MGA broke through short-term price resistance in April and rose to a new all-time high at 61, followed by a quick pullback and recovery. I expect a new run-up shortly. Buy MGA now. Buy.
McKesson Corporation (MCK – yield 0.9%) is neither a growth stock nor an undervalued stock. MCK is up 13% from its recent lows, and will likely rest in the mid-150s. My recommendation is to sell MCK and invest your capital into an undervalued growth stock, to lower your investment risk and increase your capital gain potential. Sell.
Ross Stores (ROST – yield 1.1%) – John Fox, chief investment officer at Fenimore Asset Management, recommended ROST in Barron’s this week. The stock’s okay, and the company has very low debt levels, but there’s nothing particularly compelling about next year’s earnings growth or valuation. I’m planning to sell ROST when the stock retraces its January high, which could happen quite soon. Sell at 84.
STORE Capital Corp. (STOR – yield 5.0%) is a real estate investment trust (REIT). REITs don’t fit my investment model because they don’t offer reasonable and consistent opportunities for capital gains, yet they’re subject to a variety of risks such as fluctuations in interest rates and real estate values. The stock is trading between 24 and 26, where it last traded in December 2017. My suggestion is that growth & income investors sell STOR at 25.50 and reinvest the principal into stocks that offer both dividends and attractive earnings growth. While the stock briefly touched upon 25.50 four times in recent weeks, I’m going to leave the sell instructions here until the stock clearly trades at that price for more than five minutes at a clip. Use limit orders so that you don’t have to stare at the computer watching the stock bounce around. Sell at 25.50.
Stifel Financial (SF – yield 0.8%) reported first quarter results on April 30. Stifel delivered the strongest first quarter in its history, with both revenue and earnings per share beating all analysts’ estimates, $2.8 million in share repurchases, and record client asset levels. Stifel also raised more capital in U.K. markets during the first quarter than its peers. (Refer to the press release for more details.) In this CNBC video, Stifel CEO Ron Kruszewski discussed his bullish outlook for stocks and the economy. Full-year earnings estimates, which had been slipping in April, reversed course after analysts reviewed the strong first-quarter results. The company is now expected to see full-year EPS grow 26.6% and 11.7% in 2018 and 2019, with corresponding P/Es of 11.5 and 10.3. The stock remains undervalued. There’s 16% upside as SF eventually retraces its 2018 high at 68. Buy SF now. Buy.
Target (TGT – yield 3.5%) – Analysts expect EPS to grow 11.9% and 3.4% in fiscal 2019 and 2020 (January year-end), with the latter number being slow enough that it will ultimately inhibit share price growth. My recommendation is that investors sell the stock as it approaches its January high of 78, in favor of a company with multi-year, double-digit earnings growth. Sell at 78.
Thor Industries (THO – yield 1.3%) is a maker of recreational vehicles. THO is an undervalued growth stock with outstanding fundamentals. After slipping for four consecutive weeks, consensus earnings estimates for Thor reversed course last week. The market now expects EPS to grow 30.0% and 19.5% in 2018 and 2019 (July year-end). The P/E ratios are low in comparison to the earnings growth rates, at 12.0 and 10.0. 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 for several months with the correction in the broader market. The share price has finally stabilized, and will likely trade between 100 and 115 for a while before heading upward. 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 41.0% in fiscal 2018 (October year-end), then slow to 9.4% growth in 2019. Homebuilder share prices were weak in the first quarter. Most of them stabilized in April, with PulteGroup (PHM) leading the group’s recovery. If you’re inclined to own a homebuilder with much better 2019 earnings growth projections, take a look at D.R. Horton (DHI – yield 1.1%) in the Cabot Undervalued Stocks Advisor Growth Portfolio. There’s 21% upside as TOL heads back to its January high of 52, where I will consider selling if the 2019 earnings outlook doesn’t get bumped up. Buy.
Walt Disney Co. (DIS yield – 1.7%) is expected to see profits grow 20.9% and 8.0% in 2018 and 2019. The stock is overvalued based on 2019 numbers. Disney shares have traded sideways for over three years. There’s 10% upside as DIS retraces its January high near 112. Hold.
Williams-Sonoma (WSM – yield 3.6%) – Attractive 2019 earnings growth will give way to low single-digit growth in 2020 (January year-end). I plan to sell when the stock reaches short-term price resistance at 55 in the coming months. Hold.
