PORTFOLIO NOTES
If a major piece of corporate news splashes onto media headlines, feel free to ask me if I’ve written about the situation. I often cover the major U.S. takeovers, spin-offs, scandals and CEO changes because so many investors own the affected stocks. Got questions? Contact me at Crista@CabotWealth.com.
Today’s portfolio changes:
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Last week’s portfolio changes:
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PORTFOLIO STOCKS
Apple (AAPL – yield 1.6%) manufactures a wide range of popular communication and music devices. Watch for three new iPhone models coming this fall. 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 14.0. 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 a new all-time high in May, and has since pulled back. Always buy AAPL 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. The stock weakened in recent days; more so than other financial stocks, although Berkshire is more of a multi-industry conglomerate that’s generally tossed into the financial sector. If you need to raise cash for other purposes, or for better growth stock investments, use BRK.B as a source of funds. Patient investors will likely get an opportunity to sell near 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. Earnings estimates continue to rise. Analysts now expect full-year EPS to grow aggressively at 58.4% and 18.3% in 2018 and 2019, with corresponding P/Es of 9.2 and 7.8. Despite the debt, this stock offers incredible value. DISCA rose 33% in June. A pullback would be normal, and a great buying opportunity. Buy.
IntercontinentalExchange (ICE – yield 1.3%) operates regulated exchanges and clearinghouses 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 more bullish than at any previous time since February. If you’re nervous about valuation, use a stop-loss order. 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 14.3 and 12.3, making the stock undervalued. LKQ continues to recover from its recent share price drop, and the price chart is showing strength. When the stock breaks past 33.5, it could reach price resistance at 37 rather quickly, representing a 14% short-term gain. At that point, you should expect a pullback and resting period. Hold.
Lowe’s Companies (LOW – yield 2.0%) 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 fiscal 2020 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 2.2%) is a Canadian global automotive supplier. The company announced last 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 18.3% and 8.8% in 2018 and 2019. The corresponding P/Es are 8.7 and 8.0. MGA rose to a new all-time high in May and June, then turned downward toward price support at 58-59. Barring unexpected bad news, I expect the near-term low to be 58. Buy.
Stifel Financial (SF – yield 0.9%) presented last week at the JMP Securities Financial Services Conference. The stock has suffered in recent weeks. SF is undervalued again, although I would like to see the price chart improve before encouraging investors to buy. Hold.
Thor Industries (THO – yield 1.5%) is a maker of recreational vehicles. The stock reacted well when competitor Winnebago (WBO) reported bullish quarterly results last week, but has since given back those gains. 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 23.0% and 14.4% in 2018 and 2019 (July year-end). The P/E ratios are low in comparison to the earnings growth rates, at 11.3 and 9.8. 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 is low within its trading range and relatively stable. THO could conceivably meander back to 130 by year end. Buy.
Toll Brothers (TOL – yield 1.2%) – Demand for residential new home construction remains strong. Toll Brothers and most of its homebuilding peers are enjoying big increases in revenue and profits this year. 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 8.2 and 7.5. 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 – 1.6%) – 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 13.8, 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 could retrace its January high of 112 this summer. Sell at 111.5.
