Last week I said, “Sell Williams-Sonoma (WSM) at 54 or higher”. The stock has since risen to 54 several times, and I’ve therefore removed WSM from the portfolio. To be clear, despite the excitement of last week’s share price surge, the company is only expected to see profits grow 3.4% next year. It’s time to move on to a company with better earnings growth prospects.
Apple (AAPL) appears capable of beginning a new run-up, LKQ (LKQ) looks like it’s ready to rise immediately from price support and Stifel (SF) is actively rising.
Discovery (DISCA) is incredibly cheap and touching upon price support, although there’s some risk that it could fall further, because the price chart is just not as stable as it could be. If you have an investment horizon of six months to three years, DISCA could be an excellent investment, with strong earnings growth projected through at least December 2020.
Today’s portfolio changes:
(none)
Last week’s portfolio changes:
Williams-Sonoma (WSM) was Sold at 54.
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. Alphabet’s EPS are expected to grow 37.6% and 7.2% in 2018 and 2019. The GOOG price chart looks remarkably similar to that of the S&P 500 (SPX)—they each appear ready to head back to their January highs. I think we’ll have made significant progress toward that goal by the end of June. I plan to sell GOOG near 1,180 because the stock is quite overvalued based on 2019 earnings projections. Traders who buy below 1,080 could make 8% profit when GOOG reaches 1,180. Hold.
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. Revenue and margin increases at Apple Services (Apple Music, the App Store, etc.) are expected to drive corporate growth for years to come. 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 16.4 and 14.2. AAPL rose to a new all-time high in May, and appears capable of promptly beginning another run-up. 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 53.7% and 22.9% in 2018 and 2019, with corresponding P/Es of 7.4 and 6.0. Despite the debt, I consider these numbers to be somewhat eye-popping. The stock is trading between 21 and 26 this year. The price chart is definitely not bullish, but the stock is incredibly cheap. Buy.
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 surged yesterday on reports of record trading volumes in interest rate futures, options and Euribor futures contracts. ICE is in a trading range with upside price resistance at 76. 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% and 12.2%. The stock is fairly valued, although the balance sheet results of the German acquisition could boost EPS growth, thereby making valuation more attractive.
Yesterday, SunTrust Robinson began research coverage on LKQ with a Buy rating and a price target of 40. LKQ is now rising from price support at 30. I tentatively plan to sell near upside resistance at 37, unless the valuation improves. Hold.
Lowe’s Companies (LOW – yield 1.7%) – The stock rose in late May on news that former 12-year Home Depot (HD) executive and current J.C. Penney (JCP) CEO Marvin Ellison will be the new CEO at Lowe’s. Consensus estimates project strong full-year earnings growth of 24.6% in fiscal 2019 (January year-end), followed by 11.9% EPS growth in 2020. The stock is overvalued based on next year’s numbers and the long-term debt-to-capitalization ratio is high at 69%, so there’s lots of reason to be cautious.
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 stock rose to short-term price resistance at 97. I encourage you to hold LOW for a retracement of January’s high near 107, at which point I will urge everybody to sell in favor of an undervalued stock, in order to lower portfolio risk. 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 18.3% and 9.2% in 2018 and 2019. The corresponding P/Es are 9.1 and 8.4. MGA rose to new all-time highs in the mid-60s in May. Buy.
Ross Stores (ROST – yield 1.1%) – Last week, Ross reported first quarter adjusted earnings per share of $0.92 when the market expected $1.07. Revenue of $3.6 billion beat the analysts’ consensus estimate of $3.5 billion. Same-store sales rose 3%—an attractive number—yet were impacted by poor weather during the quarter. Margins were impacted by wage-related expenses and freight costs (which in turn are rising due to wage costs at freight companies due to driver shortages). All in all, it was a good quarter, and the company also repurchased 3.3 million shares of stock.
The problem is that the stock is overvalued, with a P/E that’s significantly higher than the 2019 earnings growth rate. Therefore, there’s less of a chance that the stock will perform well in the medium term. The stock is currently trading between 77 and 85, which represents a small improvement over price support of 75 earlier this year. I’m planning to sell ROST at 84, near its January high. 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. The price chart seems to indicate that SF is ready to rise immediately. 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. Thor will announce third-quarter results (July year-end) in early June, and they have not yet released the exact date. 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 10.4 and 8.8. In addition, the long-term debt-to-capitalization ratio is very low at 4.4%. The stock gave back all the gains this year from its big 2017 run-up—and that’s a great reason to use stop-loss orders! THO 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%) Full-year profits are expected to rise 40.4% in fiscal 2018 (October year-end), then slow to 9.2% growth in 2019. Corresponding P/Es are 9.2 and 8.4. While I don’t anticipate the share price falling further, I also don’t anticipate a quick rebound. TOL 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 1.7%) – 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. Disney has the ability to leverage its balance sheet further in order to counter whatever price Comcast is willing to pay for the Fox assets.
The market expects Disney’s EPS to grow 24.4% and 8.3% in 2018 and 2019 (September year-end). With a 2019 price/earnings ratio (P/E) of 13.0, the stock is overvalued vs. its EPS growth rate. Disney shares have traded sideways for over three years. I’m hoping to sell near their January high of 112. Hold.
