PORTFOLIO NOTES
In recent days, there’s been a proliferation of articles and news commentaries about a tentative shift in the market’s multi-year preference of growth stocks over value stocks. Great news! I have witnessed this myself.
The only point I would like to add is that the terms “growth” and “value” are not mutually exclusive. A stock can be a pure growth stock, without the typical value components of moderate P/E and debt levels. Netflix (NFLX) is a good example of a pure growth stock. A stock can be a hybrid growth & value stock, Apple (AAPL) being an excellent example. Most stocks present neither growth nor value. Certainly their balance sheets and business successes can change over time, catapulting them back into one category or another.
I would caution you not to assume that just because a share price fell, or because a famous company’s stock is currently down in the dumps, that does not mean that the stock presents value to investors. General Electric (GE) is a good example of a low-priced stock that does not present value. The company is struggling through a long process of attempting to sell enough of its businesses to shore up its cash flow and meet its pension obligations. The dividend is still at risk. As a good rule of thumb, investors should avoid any company that is experiencing serious prolonged problems.
If I were intent on owning a fallen growth stock like Facebook (FB) or a formerly attractive company like GE, I would wait until January 2, 2019, when tax loss selling season is behind us. I realize that my pronouncement to avoid FB is possibly premature and wrong, but my gut feeling tells me that FB is not going to perform well again at least until 2019.
Send questions and comments to 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 1.5%) manufactures a wide range of popular communication and music devices. AAPL is an undervalued growth stock with a 2019 PEG ratio of 0.91. The company reported a very strong third quarter earnings and revenue beat on July 31, and the stock subsequently began reaching new highs. Paid subscribers to Apple Services rose 60% year-over-year. New services are in development, including original video content. The company repurchased $20 billion of stock during the quarter, and has well over $200 billion in cash. I’ll have updated full year earnings estimates for you next week (September year-end). Buy AAPL now. Buy.
Berkshire Hathaway Class B (BRK.B) – In mid-July, the company announced that they will commence occasional share repurchases. Berkshire 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 20.6. The stock remains overvalued based on 2019 numbers.
The stock reacted strongly to the repurchase news, then held its share price gains. That’s a bullish sign that BRK.B can continue rising in the near-term. Patient investors will likely get an opportunity to sell near 217 in the next 2-6 months, barring any significant downturn in the broader stock market. 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. Discovery CEO David Zaslav commented that the company is considering combining all its networks into a streaming service. Its networks currently capture a huge market share of women’s programming, in addition to popular shows like “Shark Week”. The company is expected to report second quarter EPS of $0.86 on the morning of August 7, within a range of $0.73-$1.05. Expect volatility. DISCA is an undervalued aggressive growth stock. Despite the debt, this stock offers incredible value. DISCA rose 35% in June, and has since traded between 26 and 28.5. This is an excellent time to buy DISCA. Buy.
LKQ Corp. (LKQ) is a distributor of vehicle products in the U.S. and Europe. On July 26, the company reported second quarter EPS of $0.61 vs. the consensus estimate of $0.58, and record quarterly revenue of $3.0 billion vs. the expected $2.9B. Management increased full year guidance on revenue, adjusted EPS, cash flow and capital expenditures. The company acquired five European wholesale businesses during the quarter, and opened 17 European branches. Debt levels are rising, though not in a danger zone. Wall Street now expects full year EPS to grow 21.3% and 15.4% in 2018 and 2019. Corresponding P/Es are 14.6 and 12.7.
Last week, Raymond James raised their price target on LKQ from 35 to 40. The price chart is bullish, and the stock 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 11% profit as the stock rises.) Sell at 37.
Lowe’s Companies (LOW – yield 2.0%) is a home improvement retailer with a new CEO and management team. 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. 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 8.3 and 7.7. 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. Buy.
Stifel Financial (SF – yield 0.9%) is an undervalued growth stock. On July 30, the company reported second quarter EPS of $1.22 vs. the consensus estimate of $1.15, above all estimates. Revenue of $742.5 million missed the consensus estimate of $745.6 million. Client assets rose to a record $277.7 billion. The company repurchased 800,000 shares of stock during the quarter. Full year 2018 earnings estimates subsequently rose. Wall Street now expects EPS to grow 26.3% and 10.5% in 2018 and 2019. Corresponding P/Es are 11.0 and 10.0.
The share price recently made a decided turnaround from recent 2018 lows, which is why I moved the stock from Hold to Buy on July 19. The financial sector is showing broad-based participation in the upswing. There’s about 12% upside as SF rebounds to its June high near 62, where it will likely rest again. If 2019 earnings estimates don’t perk up in the coming weeks, I will recommend that investors sell near 62 and move on to a company with stronger 2019 earnings growth prospects. Buy.
Thor Industries (THO – yield 1.6%) is a maker of recreational vehicles. The market expects EPS to grow 22.4% and 13.4% in 2018 and 2019 (July year-end). (Those numbers have been slowly declining.) The 2019 P/E ratio is quite low at 9.2. 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 1.3%) – Demand for residential new home construction remains strong. Toll Brothers is beginning to build another 2,200 homes in Arizona. Most 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 11.6% in 2019. Corresponding P/Es are 7.9 and 7.1. The stock is continuing to suffer. If you have patience, hold TOL, and accumulate shares while the stock is cheap. Buy.
