PORTFOLIO NOTES
Today’s portfolio changes:
LKQ (LKQ) moves from Buy to Sell at 37.
Stifel Financial (SF) moves from Hold to Buy.
Sell Walt Disney. (DIS).
Last week’s portfolio changes:
Intercontinental Exchange (ICE) moved from Hold to Sell.
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. MarketWatch published an interesting and bullish data-intense article on July 14, “How iPhone buying patterns have changed over time, in one chart”. In other news, June quarter App Store revenue reached a new high, running ahead of analysts’ estimates, which means that Apple’s quarterly earnings report might also exceed expectations. (Earnings estimates have barely changed since early May.)
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. AAPL rose to a new all-time high in May, proceeded to have a small pullback, and is now heading back to its recent high. The stock could easily begin a new run-up from there. Buy AAPL now. Buy.
Berkshire Hathaway Class B (BRK.B) announced that they amended the company’s share repurchase plan, which effectively allows Berkshire more flexibility in repurchasing shares. The company has $108 billion in cash. Their last share repurchase took place half a dozen years ago. The stock reacted strongly to the news. (Generally speaking, share repurchases tend to lead to capital appreciation, from both emotional and balance sheet causes.)
Berkshire Hathaway is expected to transition from a year of 55% earnings growth in 2018 to just 7.3% growth in 2019. The 2019 P/E is comparably high at 20.7. Earnings estimates will likely rise a bit as analysts guess how many shares might be repurchased in the near future, but the stock will remain overvalued based on 2019 numbers. The share price is rising. 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. DISCA is an undervalued aggressive growth stock. 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.
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 14.9 and 12.8. There’s a very strong likelihood that LKQ will stop advancing at price resistance at 37, which represents the bottom of its prior trading range. (It could advance again after several months of rest.) I therefore think you should put in a limit order today to sell at 37, so that you don’t miss the opportunity or second-guess your investment plan at the last minute. (There’s still room for traders to buy now and make about 9% profit as the stock rises.) Sell at 37.
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 12.5% 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.
In a bold move on July 13, Oppenheimer raised their price target on LOW from 115 to 140. That would be very cool if it played out as they hope, but that would require the 2019 P/E to be as high as 23. I just don’t see that as realistic without taking on a lot more risk. I recommend investors sell near the January high near 107 in favor of an undervalued growth stock. Sell at 106.
Magna International (MGA – yield 2.1%) is a Canadian global automotive supplier. 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 8.7 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. Wall Street expects EPS to grow 24.1% and 12.5% in 2018 and 2019. Corresponding P/Es are 10.9 and 9.7. SF recently retreated to price support in the low 50s, and appears capable of advancing now. I’m moving SF from a Hold to a Buy recommendation. There’s about 13% upside as the stock retraces its June high near 62, where it will likely rest again. Buy.
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 11.5 and 10.0. 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 40.1% in fiscal 2018 (October year-end) and 10.6% in 2019. Corresponding P/Es are 8.5 and 7.7. The stock is undervalued and has recently 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.
• July 16 – News reports say that Comcast is unlikely to attempt to outbid Disney for purchase of Fox.
The market expects Disney’s EPS to grow 24.2% and 6.4% in 2018 and 2019 (September year-end). With a 2019 price/earnings ratio (P/E) of 14.7, the stock is overvalued vs. its EPS growth rate.
DIS rose to my target price of 111.5 on July 17. It’s time to sell. If you want to gamble that the share price will go higher, you can use a stop-loss order to protect your downside. Sell.
