Three Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news in the past week. I have one sell recommendation: Rackspace Holding (RAX). Prices appearing after each stock symbol are the closing prices on Thursday, September 1, 2016. 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 an interesting question from a subscriber 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. The indexes identify the companies and indicate when my 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 8, Cabot Enterprising Model issue 266E
* Friday, September 9, Weekly Update
* Friday, September 16, Weekly Update
* Tuesday, September 20, Cabot Wealth Advisory
* Monday, September 26, Weekly Update (note schedule change)
* Friday, September 30, Weekly Update
* Thursday, October 6, Cabot Value Model issue 267V
* Friday, October 7, Weekly Update
Company Reports
Apple (AAPL 106.73) has attracted a lot of attention regarding its tax deal with Ireland. The company’s tax breaks allowed Apple to pay minimal income taxes to Ireland for about 10 years through 2014. Ireland offered the lucrative tax deal to Apple and other tech giants in exchange for creating jobs in the country. The European Union is demanding $14.5 billion from Apple on the basis that the tax deal is akin to illegal state aid. Apple and Ireland will appeal the ruling. A final decision could take years or even decades to sort out. Hold.
Rackspace (RAX 31.47) agreed to be purchased by private equity firm Apollo Global Management for $32 per share. Rackspace shareholders will receive $32 cash for each share held, and the company will become privately held. The deal is expected to close before the end of 2016. I advise selling your RAX shares now, rather than waiting several months to gain another $0.53 profit.
Rackspace was initially recommended using my Low PEG Ratio Analysis in the December 2014 Enterprising Model at a purchase price of 25.51. Shares have since gained 23.4% compared to a gain of 7.8% for the Standard & Poor’s 500 Index during the same time period. SELL.
Ulta Salon, Cosmetics & Fragrances (ULTA 245.52) has tumbled from its all-time high price of 278.63 reached on August 24. Shares had gained 50% in 2016, so a modest pullback is normal. The company beat sales and earnings expectations and raised its guidance for sales and earnings for the third and fourth quarters. Ulta’s exceptional results prompted analysts to raise forecasts: 19 analysts raised their EPS estimates for fiscal years ending January 2017 and January 2018. Only one analyst revised EPS down during the last three months. The current dip in the stock presents an excellent buying opportunity at or below my Max Buy Price of 246.56. Buy.
Questions and Answers
Q. I’ve noticed something very interesting in the stocks that move out of your models and remain Holds. Especially in the Cabot Value Model, many stocks move out of the model--sometimes for good reasons and some for bad reasons--then subsequently go on to reach significant highs, or after dropping, form an uptrend that leads to significant new highs. EV, PAG, KNX, MCK, TSM, DGX, MATW and many others are examples of this.
I was wondering if you had an explanation, especially for the stocks moving out for “bad reasons” and not just valuation reasons. I am also wondering if there is a way to capitalize on this. Hindsight is always twenty-twenty but purchases in EV, MATW, PAG as they started to climb or as they bounced off their lows would have yielded significant gains and I have myself added to my positions in MATW and EV when they were in the hold box. I wonder if this is just a fluke or something that is a pattern that we can monopolize on. (from subscriber C.L.)
A. I am sometimes asked if stocks in the Buy category outperform stocks in the Hold category. My answer is: on average there is little or no difference, so it doesn’t pay to concentrate on one or the other. Ideally, I hope that after I initially recommend a stock to buy, the stock will rise to its Min Sell Price within one to two years. When a stock moves well above its Max Buy Price, I place it in the Hold category and wait for the stock price to climb to its Min Sell Price. Therefore, the stock should rise whether it is on the Buy or the Hold list, but stocks in the Hold list usually have less upside potential to reach my Min Sell Price, because they have moved noticeably higher than my Max Buy Price.
Of course, we both know that a million things can occur in the journey from the Max Buy Price to the Min Sell Price. You are correct in concluding that during disruptive periods, opportunities arise. If you can create a methodology to identify opportunities and identify which stocks are going to produce quick gains even though I have relegated them to the Hold list, then you might be able to significantly outperform my 14.3% average annual gain. I have not been able to ascertain a pattern that we can take advantage of, which is frustrating. But I think there are possibilities.
Index of Latest Summaries – Recommendations featured in recent issues.