This week’s retail news and earnings reports brought great surges in the share prices of Lowe’s Companies (LOW) and Williams-Sonoma (WSM). Even though LOW seems fairly valued, I think you can see more near-term capital appreciation. However, I think WSM gave us everything it had to give, and it’s time to sell.
Stifel (SF) and Alphabet (GOOGL) are each offering traders an opportunity to make 10% profit in the short-term, while Apple (AAPL) and Discovery (DISCA) offer attractive longer-term capital appreciation. If you own Ross Stores (ROST), it’s moments away from my target sell price, so pay close attention. Today’s ROST earnings report will surely whip the share price around.
Today’s portfolio changes:
Williams-Sonoma (WSM) moves from Hold to Sell above 54.
Last week’s portfolio changes:
Gentex (GNTX) moved from Hold to Sell.
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. YouTube announced new versions of YouTube Music and YouTube Premium (formerly YouTube Red), each designed to increase revenue and capture market share through subscription services by emphasizing local authenticity. Wall Street expects Alphabet’s EPS to grow 37.6% and 7.2% in 2018 and 2019. GOOG is ratcheting toward the top of its steady trading range near 1,180, where I plan to sell because the stock is quite overvalued based on 2019 earnings projections. Traders who buy below 1,072 could make 10% profit within that trading range. Hold.
Apple (AAPL – yield 1.6%) manufactures a wide range of popular communication and music devices. AAPL is an undervalued growth stock, expected to see EPS increase 24.8% and 15.5% in fiscal 2018 and 2019. The corresponding P/Es are 16.3 and 14.1. 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 have another 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. Discovery’s consensus earnings projections rose again last week. Analysts now expect full-year EPS to grow 50.5% and 25.2% in 2018 and 2019, with corresponding P/Es of 8.1 and 6.5. Despite the debt, I consider these numbers to be somewhat eye-popping. The stock is trading between 21 and 26 this year. Buy.
IntercontinentalExchange (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 toward 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 in 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 market was very disappointed in LKQ’s revised 2018 outlook, and the stock fell hard, from 38 to 30. LKQ is now resting near 30. It appears that the worst is over for the share price, but the stock is not ready to recover yet. Hold.
Lowe’s Companies (LOW – yield 1.7%) – LOW rose 10% yesterday on the news that former 12-year Home Depot (HD) executive and current JC Penney (JCP) CEO Marvin Ellison will be the new CEO at Lowe’s. This is great news, and I believe the jump in the share price is sustainable.
In addition, Lowe’s reported first quarter EPS of $1.19 vs. the consensus $1.22, and revenue came in on target at $17.4 billion. The small earnings miss was attributed to “prolonged unfavorable weather”, which is a common affliction for retailers in the late winter months. Consensus estimates project strong full-year earnings growth of 24.4% in fiscal 2019 (January year-end), followed by 12.1% 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. The stock is approaching short-term price resistance at 97. I encourage you to hold LOW for a retracement of January’s high near 107. Hold.
Magna International (MGA – yield 2.0%) is a Canadian global automotive supplier. MGA is an undervalued mid-cap growth & income stock. Earnings estimates continue to rise. Analysts now expect EPS to grow 18.1% and 8.9% in 2018 and 2019. The corresponding P/Es are 9.4 and 8.6. MGA rose to new all-time highs in the mid-60’s, in recent days. Buy on pullbacks to the low 60’s. Buy.
Ross Stores (ROST – yield 1.1%) – Analysts expect Ross to report first quarter earnings per share of $1.07 on the afternoon of May 24, within a range of $1.04 to $1.09. The stock is overvalued based on next year’s earnings projections. 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%) – The stock is fairly valued based on 2019 numbers. I plan to sell when SF 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 1.5%) 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 11.0 and 9.2. 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.
THO fell quite a bit yesterday on heavy volume. There were no news stories to explain the price drop, and no apparent changes in earnings estimates. The stock is not ready to rebound yet, but if you want an undervalued growth stock with a low debt burden and a dividend, THO is a great candidate. Buy.
Toll Brothers (TOL – yield 1.1%) reported second quarter diluted EPS of $0.72 this week when analysts expected $0.76. The earnings miss was attributed to rising prices for building materials and shortages of land and skilled workers. Record second quarter revenue of $1.60 billion met analysts’ expectations. The company repurchased $81.5 million of common stock during the quarter. Full-year profits are expected to rise 40.7% in fiscal 2018 (October year-end), then slow to 10.1% growth in 2019. Corresponding P/Es are 8.9 and 8.1.
The stock fell an exaggerated amount in reaction to the earnings miss, despite many successes during the quarter, which you can read about in Toll Brothers’ press release. While I don’t anticipate the share price falling further, I also don’t anticipate a quick rebound. The stock is undervalued and earnings growth is strong. If you have patience, hold TOL and even consider buying more shares. If you’re more of a momentum investor, consider selling TOL and buying PulteGroup (PHM), which is featured in Cabot Undervalued Stocks Advisor. Pulte is a homebuilder with strong multi-year earnings growth projections, and its share price has begun rising from the lows that most homebuilder stocks recently experienced. Buy.
Walt Disney Co. (DIS yield – 1.6%) – In developing news, Comcast (CMCSA) is planning to one-up Disney’s $52.4 billion all-stock offer to buy most of the assets of Twenty First Century Fox (FOXA). Although Comcast has not finalized its offer, they made their intent public so that Disney shareholders don’t rush into a decision to go with Disney’s offer. Rupert Murdoch is a 17% shareholder in FOXA, and the primary target of Comcast’s embrace.
Earnings estimates rose again last week, subsequent to Disney’s second quarter earnings report (September year-end). The market now expects EPS to grow 24.6% and 7.7% in 2018 and 2019 (September year-end). With a 2019 price/earnings ratio (P/E) of 13.5, the stock is overvalued vs. its EPS growth rate, 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 recently rising toward their January high of 112, where I plan to sell. Hold.
Williams-Sonoma (WSM – yield 3.5%) reported a strong first quarter earnings beat yesterday afternoon. Earnings per share of $0.67 handily beat the $0.58 consensus estimate. Revenue came in on target at $1.2 billion. Ecommerce revenue comprised 57% of total quarterly revenue. The company modestly raised full-year revenue and EPS guidance. Williams-Sonoma was already slated for attractive fiscal 2019 earnings growth (January earnings growth). The problem is that the company is expected to achieve very low single-digit EPS growth in fiscal 2020, leaving investors without a good reason to expect continued share price growth.
I’ve been planning to sell WSM on the rebound to price resistance near 55. News of the earnings beat was enough to drive the stock up 20% to 57 in after-hours trading yesterday. I expect the stock to trade in the mid-50’s, and possibly have a pullback, without any expectation that the stock will move any higher. Take this gift that’s just been handed to you, and sell WSM at 54 or higher. Sell above 54.
