PORTFOLIO NOTES
We’re going through a period of tremendous stock price volatility, very similar to the aftermath of a correction in the broader stock market, except this particular price action is affecting random individual stocks and industries. Hold on tightly to your high quality stocks. Sell your low quality stocks and use that cash to buy low among the gems that are selling at discounts to their true values: everything from Discovery Communications (DISCA) to NetFlix (NFLX) to Knight-Swift Transportation (KNX) to homebuilders to banks.
Where to start? Look at the full year consensus earnings per share (EPS) estimates for your portfolio stocks. (Your investment advisor or the chat-box representative at your discount brokerage can show you how to look up those numbers.) Sell ALL of the following stocks: companies that are expected to see earnings per share stagnate or fall in 2018 and 2019; companies that are expected to lose money in 2018 and 2019; companies that have only 0-2 analysts providing research coverage. Unless they’re paying you huge dividends, there is literally no reason to own such companies. If the numbers are ugly, there is no reason for institutions to step in and buy shares, thus driving the share prices up.
Make the decision to sell so that you can stop worrying and wishing that those stocks will rise. You think those companies will thrive at some point in the future? Fine. Then buy them in the future after they’re thriving, but don’t sit around waiting while your money stagnates for a few more years.
Now that you have cash available with which to buy bargains, concentrate on buying very profitable companies (as represented by double-digit annual earnings growth projections), relatively low price/earnings ratios (PEs) and low debt levels.
If you make any of these recommended changes, send me an email and tell me about them. I want you to develop more stock expertise, so that you improve your portfolio performance. Good luck!
Send questions and comments to Crista@CabotWealth.com.
Today’s portfolio changes:
(none)
Last week’s portfolio changes:
LKQ (LKQ) moved from Buy to Sell at 37.
Stifel Financial (SF) moved from Hold to Buy.
Sold Walt Disney (DIS).
PORTFOLIO STOCKS
Apple (AAPL – yield 1.5%) manufactures a wide range of popular communication and music devices. AAPL is an undervalued growth stock. The company is expected to report third quarter EPS of $2.18 on the afternoon of July 31, within a range of $2.10-$2.24. The Morgan Stanley analyst expects fourth quarter guidance to come down a bit due to a delayed product launch for the 6.1-inch LCD iPhone.
Analysts expect full year EPS to increase 24.6% and 15.5% in fiscal 2018 and 2019 (September year-end). The corresponding P/Es are 16.8 and 14.6. There’s a $100 billion share repurchase authorization in effect. AAPL appears quite capable of promptly breaking out of its recent trading range, after reaching new highs in June and subsequently resting a bit. 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. Berkshire Hathaway is expected to transition from a year of 55% earnings growth in 2018 to just 7.1% growth in 2019. The 2019 P/E is comparably high at 20.4. The stock remains overvalued based on 2019 numbers. The stock reacted strongly to the news of the repurchase plan, rising to short-term price resistance around 200. If you’ve been itching to sell, sell BRK.B now. Patient investors will likely get an opportunity to sell near 217 in the next 3-12 months. Long-term buy-and-hold investors still own shares in a thriving company. 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. Second quarter results will be released on the morning of August 7. 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, down 9% from the June high. This is an excellent time to buy DISCA. Buy.
LKQ Corp. (LKQ) is a distributor of vehicle products in the U.S. and Europe. The company is expected to report second quarter EPS of $0.58 on the morning of July 26, within a range of $0.55 to $0.59. Wall Street expects full year EPS to grow 20.2% and 15.9% in 2018 and 2019. Corresponding P/Es are 14.9 and 12.8. The stock is rising, and will likely cease its run-up at price resistance at 37. (It could advance again after several months of rest.) I therefore think you should put in a limit order 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. To date, three former Home Depot (HD) executives have joined Lowe’s in 2018, vastly improving the chances that a change in company culture, combined with successful home improvement retail experience, will launch Lowe’s competitiveness forward in the coming years. 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 are reasons to be cautious.
While LOW is a fine choice for a long-term buy-and-hold stock portfolio, it does not provide compelling opportunity for value investors today. I recommend investors sell near the January high near 107 in favor of an undervalued growth stock. Sell at 106.
Magna International (MGA – yield 2.3%) is a Canadian global automotive supplier. The company is expected to report second quarter EPS of $1.76 on the morning of August 8, within a range between $1.65 and $1.95. Expect volatility. Despite all of the worry over tariffs, the consensus estimates for Magna’s full year prospects have held steady since they were last increased, subsequent to the first quarter earnings release. MGA is an undervalued mid-cap growth & income stock. Analysts expect full year EPS to grow 18.0% 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 near 67 in May and June, then experienced a price correction. The stock is cheap, although there is some downside risk as investors panic about tariffs – and again, the tariff topic is not affecting Wall Street’s profit and revenue projections. Buy.
Stifel Financial (SF – yield 0.9%) is an undervalued growth stock. The company is expected to report second quarter EPS of $1.15 on the afternoon of July 30, within a range of $1.13 to $1.17. Wall Street expects full year 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. There’s about 14% upside as the stock retraces its June high near 62, where it will likely rest again. Buy.
Thor Industries (THO – yield 1.7%) is a maker of recreational vehicles. The market expects EPS to grow 22.7% and 13.9% in 2018 and 2019 (July year-end). The P/E ratios are low in comparison to the earnings growth rates, at 10.3 and 9.0. 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 fell below its trading range in recent days, presumably as news headlines about “trade wars” continue to scare investors. The stock is cheap, but not yet ready to rise. Buy.
Toll Brothers (TOL – yield 1.2%) – Demand for residential new home construction remains strong. Toll Brothers is beginning to build another 2,200 homes in Arizona. Most of homebuilders are experiencing big increases in revenue and profits this year. 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 7.9 and 7.2. The stock is continuing to suffer. If you have patience, hold TOL, and accumulate shares while the stock is cheap. Buy.
