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Cabot Benjamin Graham Value Investor Weekly Update

Six Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news. There is one sell recommendation: Dollar General (DG).

Six Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news. There is one sell recommendation: Dollar General (DG). Prices appearing after each stock symbol are the closing prices on Thursday, August 25. Reports are for the quarter ended July 31, 2016 unless otherwise stated. Sales and earnings increases and decreases are based on year-ago comparisons. I also include some interesting questions from subscribers with my responses.

I also present two indexes that list companies featured in the Cabot Value Model or in the Cabot Enterprising Model during the most recent four months. The indexes indicate when the summaries of the companies were published so 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, September 2, 2016. My schedule for the next five weeks will be:

• Thursday, September 1, Cabot Value Model issue 266V
• Friday, September 2, Weekly Update
• Thursday, September 8, Cabot Enterprising Model issue 266E
• Friday, September 9, Weekly Update
• Friday, September 16, Weekly Update
• Friday, September 23, Weekly Update
• Friday, September 30, Weekly Update

Company Reports

CVS Health (CVS 93.78) fell 3.5% after Mylan’s CEO placed part of the blame for the skyrocketing price increases for EpiPen, the company’s emergency treatment for anaphylaxis, on pharmacy benefit managers such as Express Scripts (ESRX) and CVS. The accusations, which could be partly true, have pulled CVS into the well-publicized controversy. Mylan is offering a $300 savings card, which could hurt CVS’s profits to a very slight degree. Buy CVS at 98.28 or below.

Dollar General (DG 75.61) missed estimates. For the quarter ended July 29, sales rose 6% and EPS climbed 14%, after increasing 7% and 23% in the prior quarter. Same-store sales advanced 0.7%, which was well below forecasts of 2.4%. Management cited lower food prices, lower store traffic and increased competition as reasons for the disappointing results. Dollar Tree (DLTR) also reported disappointing results, but Wal-Mart (WMT) delivered surprisingly strong sales and earnings.

Wal-Mart began an aggressive campaign to undercut the low prices offered at Dollar General and Dollar Tree several months ago. Wal-Mart is abandoning its Walmart Express store concept in favor of aggressively expanding its successful Neighborhood store brand. Walmart’s lower prices and Neighborhood store expansion is a long-term threat to Dollar General.

DG’s price plummeted 17% after reporting the disappointing results on August 25. Shares now sell at a bargain price, but prospects for the next 12 months have dimmed. Therefore, I recommend selling your DG shares now. Sell.

Kroger (KR 32.76) is counteracting Wal-Mart’s price cuts by reducing prices on about 1,000 grocery items in its 120 stores in the Mid-Atlantic region. Kroger operates 2,778 stores in 35 states, and will likely extend its price cuts to other regions. The move could hurt sales and earnings during the remainder of 2016, but the company’s proactive action will keep customers happy and create larger purchases. Kroger will report quarterly results on September 9. Buy at 36.67 or below.

Rackspace (RAX 30.19) shares jumped 30% during the past three weeks. The company sold its cloud sites business recently, but the surge in RAX appears to be related to new rumors that the company could be acquired at a substantially higher price. Hold.

Royal Bank of Canada (RY.TO 81.37) beat analysts’ estimates and raised its dividend. Revenue surged 16% and EPS advanced 4% for the quarter ended July 31, after revenue rose 8% and EPS dipped 1% in the previous quarter. The bank’s City National purchase in the U.S. bolstered wealth management revenue. Higher securities trading revenue also aided results. The bank recorded an additional $0.16 per share on the sale of its general insurance unit.

Royal Bank raised its quarterly dividend to $0.83 from $0.81, boosting the yield to 4.1%. Management is upbeat about future quarters. Hold.

Ulta Salon (ULTA 271.45) delivered exceptional results for the quarter ended July 30. Sales surged 22% and EPS climbed 24%, after increasing 24% and 39% in the prior quarter. Same-store sales jumped 14%, and internet sales soared 55%. Management raised its guidance for sales and earnings for the third and fourth quarters. ULTA soared 47% in 2016 and could dip after the quarterly report release. Buy at 249.85 or below.

Questions and Answers

Q. I bought AIOCF at 10.09 a couple months ago, would you recommend doubling down at the current price? It currently only stands at about 2% of my portfolio. (from subscriber S.S.)

Avigilon (AIOCF 7.25) Max Buy Price 11.48; Min Sell Price 20.90; is selling at a bargain price, partly brought on by weak second-quarter sales and earnings. Management forecasts similar results for the remainder of 2016, but growth should accelerate in 2017. The company’s addition of low-cost surveillance cameras is a good move, but the transition will take time to develop.

I believe doubling up at the current price, 25% below your original purchase price, will turn out to be an excellent decision. The stock could move somewhat lower, but Avigilon’s strong balance sheet, abundant cash flow ($1.05 per AIOCF share), and rising sales should attract investors to the stock within the next few months.

At what point do you say enough with respect to TMH? Since purchasing late last year, it is down around 30%. This exceeds my threshold drop to sell, but you continue to suggest to hold? Thoughts? (from subscriber M.W.)

A. Team Health (TMH 33.54) Max Buy Price 46.04; Min Sell Price 67.43; is a difficult call. The company has been rumored to be a takeover candidate for over a year, but the encouraging stock rallies have been followed by disappointing declines. The company has made several small acquisitions during the past several quarters, which has bolstered sales, but earnings growth has floundered.

Earnings should begin to show improvement during the next four quarters. Analysts have lowered their EPS estimates for 2016 to $2.65—equal to a year ago. Estimates for next year have been lowered to $3.05. If the company can beat estimates, TMH should begin to recover.

At 13.0 times current EPS, TMH is undervalued, but unexciting. I suggest placing a trailing stop loss order 10% below the daily high, to protect against further declines. The stop loss could help you participate in future gains if the stock begins to rebound.

Q. CTSH, ABBV, UTX and UNH. I’m worried about UTX and CTSH. Please give me a shout. (from subscriber C.P.)

A. AbbVie (ABBV 64.72) is my favorite stock in the healthcare sector. Sales climbed 18% and EPS surged 17% in the quarter ended June 30. The launch of several new drugs and a small acquisition bolstered sales and earnings increases. Management raised its earnings forecast for the remainder of 2016. ABBV has plenty of room to run. My Min Sell Price is 89.33, so I expect a 36% rise in the stock within the next year. Hold onto your ABBV shares.

Cognizant Technology (CTSH 57.57) has not performed well during the past several months because of several factors. Major corporations in the financial sector, where Cognizant derives a big chunk of its business, are holding back spending until rule changes are finalized. Also, demand from healthcare companies has weakened because of the many mergers that are disrupting the sector. Cognizant will be able to take advantage of these changes and will likely report accelerating sales and earnings growth in 2017. CTSH will likely rise 47% to my Min Sell Price of 61.13 in 2017. Hold.

UnitedHealth Group (UNH 137.30) is performing very well. Sales surged 28% and EPS advanced 10% in the quarter ended June 3j0. UnitedHealth’s Optum (44% of total sales) continues to shine with 52% sales growth during the quarter. Also, the company’s purchase of Catamaran a year ago will bolster sales and earnings in future quarters. UnitedHealth suffered losses from participation in Affordable Care Act exchanges that have led the company to exit exchange marketplaces in all but a few states in 2017. The move will save the company from further substantial losses. UNH is too pricey to buy now, but a pullback to 135 would present a buying opportunity. UNH has 23% upside potential within the next year.

United Technologies (UTX 107.72). I recommended selling UTX last October at 96.55, but the stock has performed quite well since then. Sales and earnings were up very slightly during the latest quarter, and could show some improvement during the remainder of 2016 and into 2017. However, Brexit could have a negative impact on UTX during the next year or more. My Min Sell Price for the stock is 125.65, but I think any rise in the stock will be slow and tedious. I recommend selling UTX at the current price.

Index of Latest Summaries – Recommendations featured in recent issues.
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