PORTFOLIO NOTES
If you own shares of Walt Disney (DIS), it’s time to decide whether you’re planning to hold it forever because you’re in love with the stock, or whether you’d rather trade it for an undervalued growth stock, thereby lowering your portfolio risk and increasing your chances of achieving capital appreciation. Please read today’s DIS stock recommendation, below.
Today’s portfolio changes:
Intercontinental Exchange (ICE) moves from Hold to Sell.
Last week’s portfolio changes:
LKQ Corp. (LKQ) moved from Hold to Buy.
Send questions and comments to Crista@CabotWealth.com.
PORTFOLIO STOCKS
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. AAPL is an undervalued growth stock, expected to see EPS increase 24.8% and 15.3% in fiscal 2018 and 2019 (September year-end). The corresponding P/Es are 16.6 and 14.4. There’s a $100 billion share repurchase authorization in effect. If I only owned one stock, it would be AAPL. The price chart remains bullish. AAPL could surpass its early June all-time high quite soon. Buy AAPL now. Buy.
Berkshire Hathaway Class B (BRK.B) is expected to transition from a year of 55.0% earnings growth in 2018 to just 7.2% growth in 2019. The 2019 P/E is 19.6. The share price has been weak, in tandem with the entire financial sector, although financial stocks appear to be turning upward now. 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 9.4 and 8.0. Despite the debt, this stock offers incredible value. DISCA rose 35% in June, then had a brief pullback. The stock is showing a lot of strength and could reach 30 fairly easily. Buy.
Intercontinental Exchange (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. ICE is trading near its June all-time highs. Since the stock is overvalued, it would be wise to sell ICE and buy an undervalued growth stock, in order to both lower your portfolio risk and increase your chances of achieving capital appreciation. I’m changing my recommendation from Hold to Sell now. Sell.
LKQ Corp. (LKQ) is a distributor of vehicle products in the U.S. and Europe. Wall Street expects EPS to grow 20.2% and 15.9% in 2018 and 2019. Corresponding P/Es are 14.7 and 12.7, making the stock undervalued. The stock appears poised to rise toward price resistance at 37. Buy.
Lowe’s Companies (LOW – yield 1.9%) is a home improvement retailer with a new CEO. 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 2.2%) is a Canadian global automotive supplier. MGA is an undervalued mid-cap growth & income stock. Analysts expect EPS to grow 18.1% and 8.7% in 2018 and 2019. The corresponding P/Es are 8.7 and 8.0. MGA rose to a new all-time high near 67 in May and June, then experienced a price correction from which it is now rebounding. Buy.
Stifel Financial (SF – yield 0.9%) is an undervalued growth stock. SF recently retreated to price support in the low 50’s, where it will likely trade for a while before advancing again. Hold.
Thor Industries (THO – yield 1.5%) is a maker of recreational vehicles. 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 11.6 and 10.1. 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 traded between 95 and 105 in recent weeks, and could advance to 130 before year-end, presuming a neutral-to-bullish stock market. 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. Read more about Toll’s successes in this July 6 Barron’s recommendation. 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 8.4 and 7.7. The stock is undervalued but has only just begun stabilizing 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 Rupert Murdoch’s Twenty First Century Fox (FOXA), which we’ll call “Fox”. Let’s recap the timeline and the players:
• December 9, 2016 – British satellite broadcaster Sky (SKYAY) revealed that they had been approached by Fox to buy the 61% of Sky that Fox did not already own.
• December 12, 2016 – Fox offered $23.3 billion to buy the 61% of Sky that it did not already own.
• December 14, 2017 – Walt Disney Co. made a $52.4 billion all-stock offer to buy most of the Fox assets, including Fox’s 39% stake in Sky.
• April 25, 2018 – Comcast (CMCSA) offers $30.7 billion to outbid Fox for ownership of Sky.
• June 7, 2018 -- I reported that Comcast 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.
• July 11 – Fox offered $32.5 billion to outbid Comcast for ownership of the 61% of Sky shares that it does not already own.
• July 11 -- Comcast is expected to counter Fox with a higher offer for Sky.
The market expects Disney’s EPS to grow 24.6% and 7.3% in 2018 and 2019 (September year-end). With a 2019 price/earnings ratio (P/E) of 14.2, the stock is overvalued vs. its EPS growth rate. DIS could retrace its January high of 112 this summer.
If you sell an overvalued stock with moderate earnings growth prospects, and reinvest that capital into an undervalued stock with double-digit earnings growth prospects, you will both lower your investment risk and increase your chances of capital appreciation. Get ready to sell DIS and make a better investment decision. Sell at 111.5.
