PORTFOLIO NOTES
In this weekly update, you’ll find great news from RV-makers Thor Industries (THO) and Winnebago (WBO), the potential for a near-term breakout in shares of Intercontinental Exchange (ICE), and exciting news about the Disney-Comcast-Fox takeover tussle and how it’s affecting the Discovery Communications (DISCA) share price.
The day will come when all that’s left within the Benjamin Graham Value stock portfolio are Apple Inc. (AAPL) and a small handful of thriving companies. At that time, I’ll likely discontinue writing these updates. I hope the updates have been helpful for you, especially in terms of slowly unwinding positions in stocks with more moderate earnings outlooks, in favor of value stocks that are achieving strong earnings growth. Thank you for your patience during this portfolio transition. If there’s any useful information that I overlook, you’re always welcome to bring it to my attention by emailing me at Crista@CabotWealth.com.
Today’s portfolio changes:
(none)
Last week’s portfolio changes:
Walt Disney Co. (DIS) moved from Hold to Sell at 111.5.
PORTFOLIO STOCKS
Apple (AAPL – yield 1.6%) manufactures a wide range of popular communication and music devices. Yesterday, Variety reported that Apple is teaming up with Sesame Workshop to create a new slate of original kids’ live action and animated programming for Worldwide Video. AAPL is an undervalued growth stock, expected to see EPS increase 24.8% and 15.3% in fiscal 2018 and 2019 (September year-end). The corresponding P/Es are 16.2 and 14.1. Investors should always be aware of the recently-announced $100 billion share repurchase authorization. I cannot stress enough how bullish that will be for the share price in the coming years. If I only owned one stock, it would be AAPL. AAPL rose to new all-time highs in June, then pulled back a bit. Buy AAPL now. Buy.
Berkshire Hathaway Class B (BRK.B) – Yesterday the Los Angeles Times reported “Dr. Atul Gawande, a surgeon and bestselling author, has been named chief executive of a venture sponsored by Amazon.com Inc., JPMorgan Chase & Co. and Warren Buffett’s Berkshire Hathaway Inc. that aims to bring down those three firms’ healthcare costs.” I applaud the effort.
Berkshire Hathaway is expected to transition from a year of 55% earnings growth in 2018 to just 7.2% growth in 2019. The stock recently stabilized after falling this year, but it still looks vulnerable to downside action. If you need to raise cash for other purposes, or for better growth stock investments, use BRK.B as a source of funds. I’ll continue reporting on the stock’s progress until it reaches my price target. 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. Analysts expect full-year EPS to grow aggressively at 53.7% and 21.9% in 2018 and 2019, with corresponding P/Es of 9.7 and 7.9. Despite the debt, this stock offers incredible value. DISCA rose 33% in June, likely spurred on by investor excitement over M&A activity among media stocks. Realistically, there will likely be a pullback soon, and the stock will rest before continuing upward. Buy on pullbacks. 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. I don’t like owning overvalued stocks, but there’s no doubt the price chart is bullish and appears to be signaling an immediate run-up into new all-time high territory. In addition, Deutsche Bank raised its price target on ICE yesterday to 81, so that can cause a bit of buying in the stock in the near-term. If you’re nervous about valuation, use a stop-loss order. For now, the trend is your friend. I plan to sell after the next run-up. Hold.
LKQ Corp. (LKQ) is a distributor of vehicle products in the U.S. and Europe. The first quarter earnings report included news of 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 EPS to grow 20.7% and 15.9% in 2018 and 2019. Corresponding P/Es are 14.4 and 12.5, making the stock undervalued. LKQ continues to recover from its recent share price drop, and the price chart is showing strength. There’s 13% upside as the stock retraces short-term price resistance at 37. Hold.
Lowe’s Companies (LOW – yield 1.9%) is a home improvement retailer that’s benefiting from a consumer spending boom and a strengthening economy. Consensus estimates project strong full-year earnings growth of 24.1% in fiscal 2019 (January year-end), followed by 12.3% EPS growth in 2020. The stock is overvalued based on 2019 earnings, and the long-term debt-to-capitalization ratio is high at 69%, so there’s lots of reason to be cautious. The stock is resting after a big recent run-up, on its way toward January’s high near 107. At that price, I recommend investors sell in favor of an undervalued growth stock, in order to lower portfolio risk. Sell at 106.
Magna International (MGA – yield 2.1%) is a Canadian global automotive supplier. The company announced this week that they’ve formed a joint venture with Beijing Electric Vehicle Company to manufacture electric vehicles in China, aiming for production in 2020. MGA is an undervalued mid-cap growth & income stock. Analysts expect EPS to grow 18.1% and 9.2% in 2018 and 2019. The corresponding P/Es are 9.0 and 8.2. MGA rose to a new all-time high in May, and is now trading between 63 and 66.5. Buy.
Stifel Financial (SF – yield 0.9%) presented this week at the JMP Securities Financial Services Conference. The stock has suffered in recent weeks, pulling back to short-term price support near 56. SF is undervalued again, although I would like to see the stock hold support at 56 before venturing a buy recommendation. Hold.
Thor Industries (THO – yield 1.4%) is a maker of recreational vehicles. Thor’s competitor Winnebago (WBO) reported bullish quarterly results yesterday morning, dispelling market fears that higher gasoline prices or steel and aluminum tariffs will hurt profits and consumer demand for RVs. In reaction, WBO rose 15% and THO rose 6%. Then after the market closed yesterday, Thor announced that they paid off their revolving credit facility, and that they authorized a $250 million share repurchase that can take place over the next two years.
The market expects EPS to grow 22.7% and 15.6% in 2018 and 2019 (July year-end). The P/E ratios are low in comparison to the earnings growth rates, at 12.0 and 10.4. In addition, the long-term debt-to-capitalization ratio is very low at 4.1%. If you want an undervalued growth stock with a low debt burden and a dividend, THO is a great candidate. The stock could conceivably meander back to 130 by year end. Buy.
Toll Brothers (TOL – yield 1.2%) – Investors’ fears that Fed rate hikes will put a damper on the housing market pushed homebuilder stocks down yesterday. Despite those fears, Wall Street expects Toll Brothers’ profits to rise 40.4% in fiscal 2018 (October year-end) and 9.0% in 2019. Corresponding P/Es are 8.4 and 7.7. The stock has not yet stabilized from this year’s decline in the share price. If you have patience, hold TOL, and accumulate shares while the stock is cheap. Buy.
Walt Disney Co. (DIS yield – 1.5%) – There’s a bidding war taking place for Twenty First Century Fox (FOXA), which we’ll call “Fox”. Let’s recap the timeline and the players:
- December 14, 2017 – Walt Disney Co. made a $52.4 billion all-stock offer to buy most of the Fox assets, including British satellite broadcaster Sky.
- June 7, 2018 – I reported that Comcast (CMCSA) was rumored to be preparing a competing offer for Fox, and that Disney had the ability to leverage its balance sheet further in order to counter a Comcast offer.
- June 13, 2018 – Comcast followed up with a $65 billion all-cash offer for Fox.
- June 20, 2018 – Disney stepped forward with a $71.3 billion cash-and-stock offer for Fox, which has been approved by the Boards of Directors of both companies. However, Comcast can still come back with a higher offer prior to the shareholder vote on July 10.
The market expects Disney’s EPS to grow 24.6% and 7.6% in 2018 and 2019 (September year-end). With a 2019 price/earnings ratio (P/E) of 14.0, the stock is overvalued vs. its EPS growth rate. In order to lower portfolio risk, I routinely sell overvalued stocks and reinvest the capital into undervalued stocks like Apple (AAPL) and Discovery Communications (DISCA). DIS is recently rising toward its January high of 112. Sell at 111.5.
