PORTFOLIO NOTES
Today’s portfolio changes:
LKQ Corp. (LKQ) moves from Hold to Buy.
Last week’s portfolio changes:
(none)
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO STOCKS
Apple (AAPL – yield 1.6%) manufactures a wide range of popular communication and music devices. Apple is rebuilding its popular iPhone Maps app, with a rollout beginning this fall. Also watch for three new iPhone models due out this year. Share repurchases among Apple’s IT hardware peers are running 78% above the four-year average, excluding Apple’s repurchases that push the number even higher. That means technology companies are bullish on their multi-year outlooks and expect their share prices to rise. (They wouldn’t be repurchasing stock at recent prices if they expected those prices to be lower in the near future. That means they’re not expecting either a bear market or a recession.)
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 16.0 and 13.9. There’s a $100 billion share repurchase authorization in effect. 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. Buy AAPL now while the price is low. Buy.
Berkshire Hathaway Class B (BRK.B) is the largest beneficiary of the Federal Reserve’s recent banking stress tests. The Fed allowed dividend increases of 10% at Wells Fargo (WFC), 11% at American Express (AXP), 17% at Bank of New York Mellon (BK), 23% at US Bancorp (USB) and 25% at Bank of America (BAC). Berkshire Hathaway owns shares in all those companies, plus Goldman Sachs (GS) and M&T Bank (MTB), and is the largest shareholder of AXP, BAC and WFC. If Berkshire maintains its holdings in the aforementioned banks, the company will reap $1.7 billion from dividends in the coming year.
Berkshire is expected to transition from a year of 55.4% earnings growth in 2018 to just 6.9% growth in 2019. The 2019 P/E is 19.3. The share price has been weak. 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. Analysts expect full-year EPS to grow aggressively at 58.4% and 18.3% in 2018 and 2019, with corresponding P/Es of 9.1 and 7.7. Despite the debt, this stock offers incredible value. DISCA rose 35% in June. A pullback has begun. Try to buy at 26 or below. I expect the stock to continue rising later this year. 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 price chart weakened in late June. I expect a rebound in the coming weeks. 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 15.4% in 2018 and 2019. Corresponding P/Es are 14.0 and 12.1, making the stock undervalued. LKQ seems to be experiencing a normal pullback as it advances following the April drop in the share price. I’m moving LKQ from Hold to Buy. There’s 16% upside as the stock travels to price resistance at 37. Buy.
Lowe’s Companies (LOW – yield 2.0%) is a home improvement retailer with a new CEO, which competes with Home Depot (HD). 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. Sell at 106.
Magna International (MGA – yield 2.3%) is a Canadian global automotive supplier. Last week, Magna signed a deal to acquire automotive lighting manufacturer OLSA S.p.A. by year end. And in the prior week, Magna 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 8.8% in 2018 and 2019. The corresponding P/Es are 8.2 and 7.5. MGA rose to a new all-time high in May and June, then turned downward toward price support. There’s 16% upside as MGA retraces its recent high of 67. Buy.
Stifel Financial (SF – yield 0.9%) – SF recently retreated to price support in the low 50’s. The stock is undervalued, but the price will need to stabilize before it can rise again. Hold.
Thor Industries (THO – yield 1.6%) is a maker of recreational vehicles. The stock reacted well when competitor Winnebago (WBO) reported bullish quarterly results in June, but has since given back those gains. Thor subsequently 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 10.9 and 9.6. 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 their homebuilding peers are experiencing 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 8.8% in 2019. Corresponding P/Es are 8.3 and 7.6. The stock is undervalued but 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.
• June 27, 2018 – The U.S. Department of Justice announced that Disney agreed to divest 22 regional sports networks in order to facilitate DOJ approval of a Disney/Fox merger.
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 13.6, the stock is overvalued vs. its EPS growth rate. DIS could retrace its January high of 112 this summer. Sell at 111.5.
