Greetings! I hope you’re enjoying this week’s uptick in U.S. stock markets. Today I’m selling Gentex (GNTX). Make sure to consider owning Discovery Communications (DISCA), because their debt numbers and price chart are improving, and their EPS and P/E numbers continue to look very appealing!
Today’s portfolio changes:
Gentex (GNTX) moves from Hold to Sell.
Last week’s portfolio changes:
Sold STORE Capital (STOR).
Stifel (SF) moved from Buy to Hold.
Sold Target (TGT).
Please send questions and comments to Crista@CabotWealth.com.
Portfolio Stocks
Alphabet Cl. 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. Analysts expect Alphabet’s EPS to grow 37.6% and 7.0% in 2018 and 2019. I plan to sell GOOG at the top of its steady trading range near 1,180 because the stock is quite overvalued based on 2019 earnings projections. The price chart is improving. Traders might have one more chance to buy below 1,072 and make 10% profit as the stock returns to 1,180. Hold.
Apple (AAPL – yield 1.6%) manufactures a wide range of popular communication and music devices. Last summer, I published my basic investment strategy with AAPL – a strategy that is unique to AAPL and incredibly simple to follow. You can read about the strategy in Making Money in Apple (AAPL) Stock is Much Easier Than You Think. All you need to do to determine whether the share price will rise or fall in the coming 12 months is to look at the earnings projections in June for the next fiscal year. If profits are projected to increase, the share price will increase. If profits are projected to fall, the share price will fall. You might think, “well of course Apple’s profits will increase!” Not so fast, there, cowboy! Sure, Apple makes a boatload of money every year, but that doesn’t guarantee that profits will be even bigger than they were in the prior fiscal year (September year-end). Anyway, go ahead and read the article.
Apple is an undervalued growth stock, now expected to see EPS increase 24.8% and 15.6% in fiscal 2018 and 2019. The corresponding P/Es are 16.2 and 14.0. AAPL rose to a new all-time high this month. Buy AAPL now and buy more on pullbacks. Buy.
Berkshire Hathaway Class B (BRK.B) is expected to transition from a year of 55% earnings growth in 2018 to just 7.2% growth in 2019. Traders might have one more chance to buy below 197 and make 10% profit as the stock returns to 217. Sell near 217.
Discovery Communications (DISCA) is delivering robust free cash flow generation and paying down debt—debt being my one big problem with Discovery. The long-term debt-to-capitalization ratio fell from 74.5% in the fourth quarter of 2017 to 65.4% in the first quarter of 2018. I’m pleased with that progress, but note that I prefer to own stocks with debt ratios below 40%.
Discovery’s consensus earnings projections rose again last week, subsequent to strong first quarter results. Analysts now expect full-year EPS to grow 47.9% and 27.4% in 2018 and 2019, with corresponding P/Es of 8.2 and 6.4. Despite the debt, I consider these numbers to be somewhat eye-popping. The stock is trading between 21 and 26 this year. Buy.
Gentex (GNTX – yield 1.9%) manufactures innovative products for automobiles and airlines, and also serves the fire protection industry. The stock is overvalued based on projections of moderate 2019 earnings growth. Now that GNTX has risen to my target price of 24, it’s time to sell. 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 that’s overvalued based on its 2019 numbers. 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 as the stock market correction resolves. I’ll likely sell the stock thereafter. Hold.
LKQ Corp. (LKQ) is a distributor of vehicle products in the U.S. and Europe. Please refer back to my May 10 update for details about LKQ’s first quarter earnings report, which included acquisitions in Tennessee and Germany, expansion in Western and Eastern Europe, and lower revenue and profit expectations for the full year that do not yet reflect expected benefits from the 2018 German acquisition.
Wall Street expects 2018 EPS to grow 18.1%. The stock fell down to support levels that were established in the first half of 2017. The company seems to be prospering and expanding, but the share price will need to rest for a while before it can attempt a recovery. Hold.
Lowes Companies (LOW – yield 1.9%) – Consensus estimates project strong earnings growth of 24.4% in 2019 (January year-end), followed by 12.3% 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 13% 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 2.0%) is a Canadian global automotive supplier. Magna reported first quarter earnings per share of $1.84 and record quarterly revenue of $10.79 billion on May 10, each above all analysts’ estimates. The company guided Wall Street higher on full-year revenue and net income expectations. MGA is an undervalued mid-cap growth & income stock. The market was pleased with the earnings report, and MGA rose to new all-time highs in the mid-60’s. Buy on pullbacks to the low-60’s. Buy.
Ross Stores (ROST – yield 1.1%) – There’s nothing particularly compelling about next year’s earnings growth or valuation at Ross Stores. I’m planning to sell ROST at 84, near its January high, which could happen quite soon. My suggestion is that you put in a limit order to sell at 84, in case the stock only touches upon 84 briefly before pulling back. Sell at 84.
Stifel Financial (SF – yield 0.8%) – Last week, Stifel announced the agreed-upon acquisition of Business Bancshares, Inc., a bank holding company and parent of The Business Bank of St. Louis. The company is expected to see full-year EPS grow 28.3% and 10.2% in 2018 and 2019, with corresponding P/Es of 11.5 and 10.5. The stock is fairly valued based on 2019 numbers. I plan to sell when the stock retraces its 2018 high at 68. (There’s still room for traders to buy below 62 and make 10% profit in the short-term, presuming that the stock reaches 68 soon.) Hold.
Thor Industries (THO – yield 1.4%) is a maker of recreational vehicles. THO is an undervalued growth stock with outstanding fundamentals. The market expects EPS to grow 29.6% and 18.9% in 2018 and 2019 (July year-end). The P/E ratios are low in comparison to the earnings growth rates, at 11.1 and 9.3. 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 for several months with the correction in the broader market. I’m sure that rising oil prices are causing investors to worry that higher gasoline prices will affect Thor’s revenue and profits. Thus far, earnings projections remain strong and stable. The stock is trying to establish price support, but it’s a little early to know if the worst is over for the share price. Buy.
Toll Brothers (TOL – yield 0.8%) is expected to report second quarter earnings per share of $0.76 on the morning of May 22, within a range of $0.73 and $0.83. Toll Brothers, like most of its homebuilding 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 11.5% growth in 2019, although the 2019 number has been slowly improving.
Homebuilder share prices were weak in the first quarter, and most have not begun their recovery. Investors are worried that rising interest rates will deter prospective homebuyers. Keep in mind that when Wall Street’s chartered financial analysts come up with earnings projections, they take into account all scenarios, including rising interest rates. If they believe, as a group, that Toll Brothers’ profits will grow 39% this year, you have little reason to doubt their accuracy. I personally focus on earnings projections and I ignore news headlines. If the news is important, it will be reflected in the earnings projections! There’s 25% upside as TOL heads back to its January high of 52, where I will consider selling if the 2019 earnings outlook doesn’t bump up further. Buy.
Walt Disney Co. (DIS yield – 1.6%) – Earnings estimates rose last week, subsequent to Disney’s second quarter earnings report (September year-end). The market now expects EPS to grow 24.6% and 5.5% in 2018 and 2019 (September year-end). With a 2019 price/earnings ratio (P/E) of 14.0, the stock is overvalued, although it’s common for popular stocks like Disney and Coco-Cola (KO) to carry high P/Es. Disney shares have traded sideways for over three years, and are currently rising toward their January high of 112, where I plan to sell. Hold.
Williams-Sonoma (WSM – yield 3.5%) – Attractive 2019 earnings growth will give way to low single-digit growth in 2020 (January year-end). WSM established price support at 48 in recent weeks. That’s a necessary step in the process of a share price chart morphing from bearish to bullish. I plan to sell when the stock reaches short-term price resistance at 55 in the coming months. Hold.
