Brexit is official! The United Kingdom will leave the EU (European Union). Investors around the world are quite surprised by Britain’s departure. Stock markets in Europe and North America surged on Thursday, June 23 in anticipation of a final vote to stay in the EU.
I expect the reaction will send U.S. stocks down initially, but stocks in this country will rebound next week. Therefore, you might enjoy a unique buying opportunity during the next couple of days, followed by a robust rally. Companies with limited foreign exposure will offer the best potential.
Six of my Benjamin Graham companies reported quarterly financial results or other noteworthy news. Prices appearing after each stock symbol are the closing prices on Thursday, June 23. Reports are for the quarter ended April 30, 2016 or quarter ended May 31, 2016, as noted. Sales and earnings increases and decreases are based on year ago comparisons.
In addition, I include two Indexes. These list companies featured in the Cabot Value Model or in the Cabot Enterprising Model during the most recent four months. The Indexes identify the companies and indicate when my summaries of the companies were published. Reading the list alphabetically by company name, you can quickly find my recent write-ups for stocks appearing in the models.
My next Weekly Update will be sent to you on Friday, July 1, 2016. My schedule for the next five weeks will be:
* Tuesday, June 28, Cabot Wealth Advisory
* Thursday, June 30, Cabot Value Model issue 264V
* Friday, July 1, Weekly Update
* Thursday, July 7, Cabot Enterprising Model issue 264E
* Friday, July 8, Weekly Update
* Friday, July 15, Weekly Update
* Thursday, July 21, Cabot Wealth Advisory
* Friday, July 22, Weekly Update
* Thursday, July 28, Cabot Value Model issue 265V
* Friday, July 29, Weekly Update
Company Reports
AMC Networks (AMCX 59.21) slumped after the company was downgraded at Morgan Stanley, citing disappointing new-show launches. Viewership of AMCX’s three major new shows launched this year, Night Manager, Preacher and Feed the Beast, came in 50% below expectations. In addition, ratings for the network’s biggest hit of 2015, Fear the Walking Dead, have declined 40% this year. There appears to be limited potential for a major new hit until The Son and The Terror premiere in 2017. In my opinion, AMCX’s new shows will perform better during the second half of 2016. Buy at 69.90 or below.
FedEx Corp. (FDX 157.89) reported solid results for the quarter ended May 31. Sales climbed 7% and EPS jumped 24% after increasing 8% and 24% respectively in the prior quarter. Strong e-commerce growth more than offset the negative effects of a weakening global economy.
Investors were somewhat disappointed with management’s choice to exclude from current results and forecasts for the next 12 months its newly acquired TNT Express. However, the forecast for $12.00 EPS for the next 12 months is encouraging. The company’s board of directors raised the quarterly dividend to $0.40 from $0.25. FedEx’s dividend now yields 1.0%. Buy at 163.57 or below.
Korn/Ferry International (KFY 22.55) reported excellent sales and earnings results for the quarter ended April 30 that beat estimates. Sales surged 48% and EPS advanced 14% after increasing 39% and 13% in the previous quarter. Sales were bolstered more than expected by the recent purchase of the Hay Group.
Korn/Ferry’s stock price tumbled nearly 20% after management provided a mediocre forecast for the current quarter. Ensuing quarterly EPS growth will likely accelerate as the company begins to benefit from cost savings during the integration of the Hay Group. Korn/Ferry’s current low stock price has created an excellent chance to buy KFY. Buy at 29.65 or below.
Kroger Co. (KR 34.67) reported good results and raised its dividend. For the quarter ended April 30, sales rose 5% and EPS climbed 11% after increasing 4% and 12% in the prior quarter. Same store sales advanced 2.4%, which fell short of investors’ high expectations. Management lowered its sales and earnings forecast for the remainder of 2016 by a slight amount.
Kroger’s board of directors increased the quarterly dividend to $0.12 from $0.105, resulting in a yield of 1.4%. The current low stock price offers excellent value for long term investors. Buy at 36.48 or below.
Oracle Corp. (ORCL 40.83) reported improved results for the quarter ended May 31. Sales declined 1% but EPS rose 4% after decreasing 3% and 6% in the previous quarter. Total cloud revenue soared 49%, equaling last’s quarter’s gain. Continuing rapid growth in cloud revenue will cause total revenue and earnings growth to accelerate noticeably during the next several quarters. Hold.
Taiwan Semiconductor (TSM 26.81) increased its annual dividend to $0.9295 from $0.7277. The company’s dividend yield is now 3.5%. Hold.
Questions and Answers
Q. What is your advice on both AIOCF and FIG. AIOCF has been streaking up and down and FIG seems to be staying pretty much the same up one day down the next. (from subscriber T.L.)
A. I just returned from an investor conference in Quebec City and was fortunate to attend a presentation by Darren Seed, V.P. at Avigilon. Mr. Seed described in detail the company’s successful efforts to avoid an activist hostile takeover of the company. The time, effort and resources required to foil the takeover detracted from Avigilon’s performance in the first quarter.
Avigilon (AIOCF 10.14) will very likely get back on track during the next couple of quarters and begin to report rapid sales and earnings growth once again. The company’s research and development efforts continue to produce leading products in the video surveillance arena, and higher spending on sales and marketing will add sales. The growing pains of this small cap company are obvious, but the long-term results should be well-worth your patience. Buy.
Fortress Investment (FIG 4.59) dropped back to the 4.50 to 4.65 range again after a couple of nice advances in February and April. Revenue and earnings are hard to predict, as evidenced by the company’s big misses and occasional beats during the past 3 years. Fortress’s recent restructuring and improving investment results will hopefully begin to produce better growth. The recent dividend hike and special dividend payout is a good sign of management’s confident outlook.
FIG’s low P/E at 4.4 and dividend yield of 7.8% are very attractive, although management will need to produce steadily rising revenue and earnings to bolster the stock price. FIG shares could double within the next 12 to 18 months. Buy.
Q. This is in regard to your latest issue to buy Biogen (BIIB) at the max buy price of $271.24. In the recent days to follow, it had dropped to $242.19. Even for this do you sell if it drops below 20% of your purchased price? I did not see a stop limit on this. (from subscriber A.L.)
A. Biogen (BIIB: Current Price 238.62; Max Buy Price 271.24), formerly Biogen Idec, tumbled recently due to disappointing study data for the company’s multiple sclerosis treatment, Opicinumab, designed to repair multiple sclerosis patients’ nervous systems. Biogen missed its primary and secondary goals to improve walking and cognition, and to slow disability progression. According to the company’s news release, Opicinumab, in a different trial, did meet its primary goal of treating patients after patients’ first attack of acute optic neuritis. The shares fell 12% to $254.61 following the news.
Despite the setback, Biogen remains the market-share leader in treating multiple sclerosis. The company is launching new treatments that improve patient dosing, which will boost sales and profits. While multiple sclerosis is a key revenue driver for Biogen now, there are still other promising drugs in the company’s pipeline including three drugs that are in mid- and late-stage trials for Alzheimer’s disease. An effective Alzheimer’s treatment could be worth tens of billions in annual sales for Biogen within 2 to 3 years.
In addition, political candidates from both parties have been criticizing biopharmaceutical companies for inflating drug prices to ridiculous levels. Indeed, medication prices rose by more than six times the rate of inflation between 2006 and 2013. Biogen is not part of the problem, but the negative impact on the industry has spilled over to the company’s stock price performance.
During the next 12 months, I expect sales to rise 6% and earnings per share to advance 15%. Biogen’s return on equity is extraordinary at 40%, and the current P/E (price to earnings ratio) is reasonable at 13.8. The company does not pay a dividend. In addition, Biogen warrants a Value Rating of 4 (5 is best) from Standard & Poor’s, along with a Star Rating of 4 and Quality Rating of B+.
The recent drop in Biogen’s stock price presents an outstanding chance to purchase the stock, because the price is well below my Max Buy Price and is therefore notably undervalued. I do not recommend using stop limits for my value stocks. When a stock’s price declines, the lower price becomes a better buying opportunity rather than a sell candidate. However, if a company’s fundamentals begin to fail, I will recommend selling before the stock becomes a long-term loss. My system is not perfect, but my past performance has been quite good. I expect BIIB’s stock price to advance 52% to 359.03 within two years. Buy at 271.24 or below.
Q. I have been holding Synaptics and the price I bought into it was $66.00 a share. Now I see they are restructuring, laying people off and closing offices. The stock price has dropped considerably. Do we continue to hold it ? Do you feel business will pick up later this year or not? (from subscriber J.B.)
A. Synaptics (SYNA 56.72) Max Buy Price 67.91; Min Sell Price 113.92; has performed very poorly in 2016. First quarter sales dropped 16% and EPS plunged 27%. Demand from Apple, Synaptics’ second largest customer behind Samsung, weakened during the quarter. However, Synaptics posted record sales from its fingerprint authentication products, and expects strong sales to continue. Management forecast lower sales and earnings in the current quarter, to be followed by more normal growth patterns in the second half of 2016.
Synaptics’ situation bears watching. Management’s predictions have been unreliable lately, so I am skeptical of their forecast for renewed growth within the next few quarters. However, the restructuring and cost cuts proposed by the company could help profits within the next couple of quarters. And fingerprint sensor products could add significant sales growth. The biggest concern facing Synaptics is determining whether Apple will increase or decrease orders for SYNA products.
My opinion for Synaptics continues to be Hold. Hopefully the next couple of quarters will start to show noticeable improvement--enough to prompt me to change SYNA to a Buy. Hold for now, though.
Q. What are your thoughts on GILD? Is it a good time to buy now? (from subscriber B.Q.)
A. Shares of Gilead Sciences (GILD 81.66) Max Buy Price 97.44; Min Sell Price 128.48; received a temporary boost earlier this week when the company announced favorable results from Phase 1 studies of bictegravir. The drug is in Phase 3 trials as part of a single tablet regimen in combination with tenofovir alafenamide (TAF) and emtricitabine (FTC) for the treatment of HIV-1 infection. Analysts forecast this regimen will launch in 2018, and grow to over $4 billion in global sales by 2020 and $7 billion by 2022.
Gilead’s stock price has retreated to a 52-week low in reaction to disappointing first quarter results that reflect lower drug prices and market share losses to competitors. In addition, political candidates from both parties have been criticizing biopharmaceutical companies for inflating drug prices to ridiculous levels. Indeed, medication prices rose by more than six times the rate of inflation between 2006 and 2013. Gilead is part of the problem, but the company has lowered its prices for Sovaldi and Harvoni (for the treatment of hepatitis C) in recent months to counteract the criticism and compete more effectively.
At 7.0 times current EPS, a PEG ratio of 0.56, and with a dividend yield of 2.3%, Gilead shares are clearly undervalued. I have placed Gilead in a Hold status, because I want to wait for second quarter results which should (I hope) be better than the first quarter. I advise holding off new purchases. Hold.
Q. I have AAPL, CVS, and KR. Please help. (from subscriber C.P.)
A. The stock market has been unsuccessful in reaching new high ground after several attempts. I think the S&P 500 will set new highs if Britain stays in the EU, so the vote on Thursday will be very important.
Apple (AAPL 96.10) Max Buy Price 103.77; Min Sell Price 150.87; continues to dawdle along after management forecast mediocre sales and earnings for the next couple of quarters. I believe the bar is not set so low that the company will exceed forecasts, which should provide a boost to the stock. At 11.7 times current EPS and with a dividend yield of 2.4%, Apple is too cheap to sell now.
CVS Health (CVS 94.02) Max Buy Price 99.80; Min Sell Price 131.57; recent slide in stock price presents an excellent buying opportunity. Sales growth continues on target, but EPS growth in quarter one was 3.5%. The takeover of Target’s in-store pharmacy operations will weigh on EPS growth during the first two or three quarters of 2016, but earnings should accelerate nicely before the end of 2016 and into 2017. The stock is one of my best long-term holdings.
Kroger (KR 34.67) Max Buy Price 36.48; Min Sell Price 50.91; reported strong results for the quarter ended 5/21/16. Sales rose 5% and EPS climbed 11%, as expected. Same store sales increased an impressive 2.4%. The company’s purchase of Roundy’s bolstered results. Management forecast a slight slowing in EPS growth because of fluctuating gasoline profit margins, but overall growth is on target.
I advise holding AAPL, CVS, and KR because they are excellent blue-chip, long-term holdings.
Q. I bought Team Health at $64.64 in August 2015 based on your recommendation with a target of $79 within one year. I am now down some 30 percent. What to do? Continue to hold? (from subscriber G.L.)
A. Team Health Holdings (TMH 43.79) has been a total disaster. Management and the board of directors rejected an offer from AmSurg at $71.47, which was a huge mistake. Jana Partners has become a big investor in the company, and hopefully, they will help steer the company in the right direction. At the current low price, Team Health should become a very attractive addition for a larger health care company. I expect to see some favorable news within the next few months. Hold.
Q. After BRS report, the stock tanked. Now it is flying up. Would you buy and if so at what price? (from subscriber W.N.)
A. Bristow (BRS 14.25) has become quite volatile and is therefore higher risk. I still like the company, though, and think my Max Buy Price of 13.43 could be a good price to buy, if the stock drops that low.
Index of Latest Summaries – Recommendations featured in recent issues.