Five Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news. One stock is recommended to be sold: Fastenal (FAST). Prices appearing after each stock symbol are the closing prices on Thursday, July 14. Reports are for the quarter ended June 30, 2016. Sales and earnings increases and decreases are based on year ago comparisons. This Update also includes some interesting questions from subscribers with my responses.
In addition, I present two indexes that list companies featured in the Cabot Value Model or in the Cabot Enterprising Model during the most recent four months and indicate when my summaries of the companies were published.
My next Weekly Update will be sent to you on Friday, July 22, 2016. My schedule for the next five weeks will be:
* Thursday, July 21, Cabot Wealth Advisory
* Friday, July 22, Weekly Update
* Thursday, July 28, Cabot Value Model issue 265V
* Friday, July 29, Weekly Update
* Thursday, August 4, Cabot Enterprising Model issue 265E
* Friday, August 5, Weekly Update
* Friday, August 10-12, Cabot Conference - No Weekly Update
* Friday, August 19, Weekly Update
Company Reports
Alliance Data Systems (ADS 212.51) received some good news recently. Activist investor ValueAct Capital Management disclosed that it has purchased a 6.8% stake in Alliance Data. ValueAct intends to discuss with ADS management and board members how to enhance shareholder value. The investment by ValueAct is good news for ADS shareholders. Buy at 198.22 or below.
Fastenal (FAST 43.30) reported sluggish second-quarter results. Sales inched ahead 2% and EPS fell 4%, after increasing 4% and 2% respectively during the prior quarter. Fastenal increased its number of industrial vending machines to 58,346 from 50,620 during the past 12 months, and reduced its store count to 2,605 from 2,616. The company added about 300 new employees to its stores in an effort to increase same-store sales. However, second-quarter same-store sales increased only 1.2% after advancing 2.2% in the previous quarter. Lower demand from existing customers was partially offset by the addition of new customers.
Fastenal has been missing analysts’ sales and earnings forecasts during the past several quarters. Sales and EPS are forecast to grow at less than 5% during the next four quarters, as well. FAST sells at 23.3 times current EPS, which is too high. Fastenal was first recommended to be purchased on May 11, 2015 at 42.38. FAST has advanced 2.17% in the past 14 months compared to a gain of 2.77% for the Standard & Poor’s 500 Index during the same time period.
I recommend selling your FAST shares now. SELL.
General Motors (GM 30.76) is currently recommended in Cabot Dividend Investor as a Hold by Chief Analyst, Chloe Lutts Jensen. Here’s the GM update that Chloe sent to her subscribers on July 13:
“GM is 9.5% higher since our last update, advancing on each of the past five days. The automaker announced an expansion of its rental program for Lyft drivers, which provides free or cheap GM cars to drivers who give a certain number of Lyft rides per week. More importantly, June sales numbers released yesterday showed the Chinese auto market is growing at the fastest pace in six months, thanks in part to a temporary tax break. GM’s sales in the country, its largest market, rose 11% year-over-year. GM is still trapped in a trading range and faces significant resistance at 32 and 36, so there’s probably no hurry to add to positions, but the stock is a solid long-term Hold.”
My current recommendation is: Buy at 38.94 or below.
Nissan Motor (NSANY 19.35) reported excellent sales results in China. Sales surged 17% in the month of June in China. The strong June performance helped offset Nissan’s sluggish performance in the early part of 2016. Hold.
Penske Automotive (PAG 34.67) shares have performed poorly in recent weeks. Recently, the U.K.'s vote to exit the European Union sent PAG reeling as one-third of Penske’s sales come from the U.K. A representative for Penske said the company could face currency risks as a result of the Brexit vote, but it was difficult to estimate the extent Penske could be affected. Hold.
Questions and Answers
Q. I have a question about Avigilon (AIOCF). I bought it a couple of weeks ago (recommended in the June 24 letter). Later you referred to Avigilon (AVO.TO) at a different price than AIOCF. Are there two Avigilons?, and it appears that there have been no trading of AIOCF in the last two trading sessions. I have some concerns; did I buy the wrong Avigilon? And why has it not traded in the last two days? I bought at 9.78, the last price listed was just over 10. What are your thoughts (from subscriber R.L.)
A. Avigilon trades on the Toronto Stock Exchange under the symbol AVO (13), and on the U.S. Over-The-Counter market under the symbol AIOCF (10.05). If you are a U.S. citizen, you are required to open a Canadian account and hold Canadian dollars in the account to buy AVO. The easier transaction is to buy OTC (Over-The-Counter) through your normal broker on your broker’s website. There is a difference in price because AVO is in Canadian dollars, and AIOCF is in U.S. dollars.
You bought the correct shares, but AIOCF trading volume on the OTC tends to be light, especially during the doldrum days of summer. It is quite unusual for the stock not to trade at all on the OTC, but there is no need to become alarmed. I expect a few hundred shares will trade during the next few days at a price above 10.
I expect AIOCF to perform quite well in the months ahead, as sales and earnings begin to accelerate. My current Max Buy Price for AIOCF is 10.75 and my Min Sell Price is 21.40. Avigilon is experiencing the typical growing pains that most small companies have to endure--high marketing expenses and high research and development costs--but the expenditures will lead to rapid growth in future years. I am confident that AIOCF will reach my 21.40 sell target within two years because of the company’s technologically superior surveillance systems. Buy AIOCF at 10.75 or below.
Q. Can you please give me some help with a long time Hold, PRU. It represents a significant loss for me and seems especially weak. I appreciate any insight you have on this. (from subscriber B.I.)
A. Prudential Financial (PRU 75.02 Max Buy Price 74.01; Min Sell Price 96.54) has reported disappointing quarterly results for the past three quarters. Low interest rates, including negative rates in Japan, and a steady stream of outflows from assets under management in the U.S. are hurting revenue and earnings. Prudential earnings will probably not improve until interest rates begin to rise in 2017.
PRU shares are really cheap as demonstrated by its 7.3 P/E, 3.9% yield and 0.77 P/BV ratios. Prudential is an excellent long-term holding, but near-term price appreciation potential is limited. Hold.
Q. I have not bought Danaher as yet and was wondering what is your buy below price after the spin-off. (from subscriber M.B.)
A. I believe the new Danaher, post spinoff, has become more attractive with better growth prospects. My new Buy and Sell targets for Danaher (DHR 80.88) are Max Buy Price 75.42 and Min Sell Price 100.37. At this point, analysts’ sales and earnings estimates are conservative because there has been limited guidance from Danaher. As soon as analysts begin to raise estimates, I will increase my Max Buy and Min Sell Price targets. I think that it is safe to buy Danaher at the current price in anticipation of better than expected results during the next several quarters.
Q. I have a question regarding the recommendation to buy GOOG at approximately $695. If you expect it to reach $987 in one to two years, what makes it not still a good buy at $715? (from subscriber D.J.)
A. You are correct in assuming that Alphabet (GOOG 720.95) is still a good buy at $715 or 720. My Max Buy Prices are generated by computer and offer a guideline for the “optimum” buy price for each stock. However, if a stock starts to run higher, it’s ok to chase the stock a bit, especially if the stock has plenty of upside potential. As you noted, GOOG has 37% upside potential within one to two years, which is very attractive.
Q. Roy, in your Friday update, Rita asked about the possibility of lightening up on certain positions and you suggested that SWKS and GILD were good candidates for potential sales and yet today they have been moved back into the model. I am wondering why the discordant advice? (from subscriber C.L.)
A. During the Brexit turmoil that sent the stock market down sharply for a couple of days, one of my subscribers commented that he had never been in a bear market before, and could I suggest ways to avoid further damage to his portfolio. I advised selling Gilead Sciences (GILD 85.54) and Skyworks Solutions (SWKS 67.39), and replacing them with AT&T (T 42.77) and AbbVie (ABBV 63.62). The latter two companies are a lot lower risk and are less volatile than GILD and SWKS, which are expected to produce mediocre results during the next couple of quarters.
Mediocre results will put a damper on their stock prices for a while. However, GILD and SWKS have excellent prospects for 2017, so once these stocks endure a soft patch, their prices should take off in 2017 or a little before. For long-term investors, the low prices in GILD and SWKS present an excellent time to buy. Therefore, I included GILD and SWKS in my latest Enterprising Model.
Index of Latest Summaries – Recommendations featured in recent issues