Five Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news. I have one sell recommendation: Cummins (CMI). Prices appearing after each stock symbol are the closing prices on Thursday, September 8, 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 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 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 16, 2016. My schedule for the next five weeks will be:
* 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
* Thursday, October 13, Cabot Enterprising Model issue 267E
* Friday, October 14, Weekly Update
Company Reports
Cummins (CMI 119.88) shares dropped after Volkswagen announced that it had bought a 17% stake in truck maker Navistar International (NAV). Cummins supplies 73% of Navistar’s heavy duty trucks with Cummins engines. Going forward, Volkswagen will supply the engines for Navistar’s trucks. Cummins has reported lower sales and earnings during the past several quarters. Sell.
Danaher (DHR 79.00) split into two companies on July 1, 2016. I recommended selling one of the two companies, Fortive, but I like the other company, Danaher, because of its growth possibilities. Danaher announced that it will purchase Cepheid (CPHD) for $4 billion.
Cepheid develops, manufactures and markets systems for testing molecules of genetic-based disease. Cepheid’s sales have doubled during the past five years, but losses have been mounting. In 2016, though, the company is slightly profitable and could earn $1.00 per share in 2017.
Danaher will integrate Cepheid into its existing testing business, and with its market reach, will expand sales and earnings quickly. Cepheid will become a drag on Danaher’s earnings during the next year or so, but long-term results should turn very favorable. Buy at 83.02 or below.
Korn/Ferry International (KFY 24.09) reported strong results for the quarter ended July 31. Sales surged 41% and EPS advanced 11%. after increasing 48% and 14% in the prior quarter. The purchase of Hay Group bolstered sales in the most recent quarter. Management provided a positive outlook for the current quarter. Buy at 24.07 or below.
Kroger (KR 31.31) will report quarterly financial results at 8:45 am on September 9. Sales and earnings growth are expected to be flat or slightly higher than a year ago. Management is expected to warn investors that the next couple of quarters will be challenging because of lower food prices. Food costs have been falling for nine straight months, a phenomenon which hasn’t occurred during the past 50 years. Prices are expected to stabilize late this year or early next year, so the problem will abate and Kroger shares will begin to recover soon. Hold.
Whirlpool (WHR 174.80) fell 4% after South Korea won an appeal ruling at the World Trade Organization that puts U.S. anti-subsidy duties on Korean-made washing machines in jeopardy. The issue will likely get resolved in 2017, with only minor consequences for Whirlpool, General Electric and other U.S. appliance makers. If WHR shares fall further, I will likely change my opinion to Buy. Hold.
Questions and Answers
Q. I am wondering what your thoughts are on BSJI & UUP in the current environment. (from subscriber L.D.)
A. Guggenheim 2018 High Yield Corporate Bond ETF (BSJI 25.20) invests in short duration corporate bonds with high yields. So-called junk bonds (BB rated or lower) make up 78% of the 131 bonds in the ETF. All bonds in the fund will be redeemed or sold before December 31, 2018. The net proceeds will be distributed to your brokerage account soon after. The current yield for BSJI is 3.83%, which is attractive for a bond fund with a short 1.33-year duration.
I have been recommending Guggenheim bond ETFs to help you reduce volatility in your portfolio while receiving an attractive yield. Usually bonds rise when stocks are falling, but bonds have been rising and falling in synch with stocks. BSJI has had a nice increase from 23.00 in February to the current 25.20 price. If you need to control volatility in your portfolio, BSJI is a solid holding because the ETF will not likely suffer defaults before it is liquidated at the end of 2018.
PowerShares US Dollar ETF (UUP 24.57) tracks the value of the U.S. dollar relative to a basket of the six major world currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The ETF had a big run from June 2014 until March 2015, but has drifted lower during the past 18 months.
I like the fund as a hedge against the strong dollar’s negative effect on multinational U.S. corporations. UUP can also serve as a hedge if the British pound and European euro fall further as a result of Brexit. I continue to like UUP because the U.S. dollar could rise noticeably during the next 12 months. But since UUP and BSJI act as a hedge against future uncertainties, they are not going to make us rich--just less poor when and if stocks falter!
Q. Do you think it is a good time to add to my AVO.TO holding? (from subscriber N.A.)
A. Avigilon (AVO.TO 8.93) plummeted after reporting disappointing second-quarter sales and earnings. Sales increased 17% but EPS dropped 50% after sales rose 20% and EPS fell 30% in the prior quarter. Management forecast more of the same for the second half of 2016. The company is changing its strategy and will offer a new line of lower-priced surveillance cameras with the intent to attract new customers searching for lower-tech products.
I advise against buying additional shares until the new strategy shows signs of success. I look for improved sales (and maybe earnings) beginning in the first quarter of 2017. During the next two quarters, though, I expect lackluster growth which will not provide impetus for Avigilon’s stock to advance. A year from now, we should be sitting on excellent gains.
Index of Latest Summaries – Recommendations featured in recent issues.