Volatility returned to the stock market during the past week. Investors are concerned about the possibility of a Fed interest rate hike next week after a batch of weak economic news indicated that the U.S. economy will continue to sputter. Additional worries on whether central banks in Europe and Japan have run out of ways to spur economic growth abroad didn’t help. Lastly, the election for a new U.S. President has become a dead heat, adding more uncertainty for investors.
In my opinion, the stock market will remain volatile for another month. However, investors will continue to take advantage of buying opportunities, and that will prevent stocks from dropping significantly. My advice is to be cautious and buy low risk undervalued stocks during the market weakness.
Four Cabot Benjamin Graham Value Investor companies reported quarterly financial results or other noteworthy news. Prices appearing after each stock symbol are the closing prices on Thursday, September 15, 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 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 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 23, 2016. My schedule for the next five weeks will be:
• Tuesday, September 20, Cabot Wealth Advisory
• Friday, September 23, Weekly Update
• 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
• Friday, October 21, Weekly Update
Company Reports
Apple (AAPL 115.57) surged nearly 10% this week after the company reported that all pre-orders for the iPhone 7 were sold out. The surprising success followed dire forecasts that the phone would receive tepid demand because of the lack of new features. Coupled with Apple’s low valuation, this brought investors back to the stock. AAPL sells at 14.9 times current EPS with a dividend yield of 2.0%. My current Hold opinion for the stock could change to Buy depending on additional revenue estimate details. Hold.
Kroger (KR 31.25) reported decent sales and earnings for the quarter ended August 13. Sales advanced 4% and EPS climbed 7%, after increasing 5% and 11% in the prior quarter respectively. Same-store sales rose 1.7%, the slowest growth in six years. Much of the slowdown is caused by lower food prices. Kroger shares are down 25% in 2016 to a new 52-week low.
Kroger’s stock price is now a bargain. The company’s P/E of 14.4 is less than most grocery chains including Wal-Mart. Kroger’s latest same-store sales increase is the 51st consecutive same-store sales increase, dating back to 2004. The company is gaining market share despite fierce competition.
Management warned investors that the next couple of quarters will be challenging because of lower food prices. Food costs have been falling for nine straight months, but are expected to stabilize late this year or early next year The problem will then diminish and Kroger shares will begin to recover. Hold.
McKesson (MCK 168.97) shares dipped this week in reaction to Mylan Labs’ pending appearance before the U.S House oversight committee, and news that German authorities raided the offices of eight pharmaceuticals wholesalers including McKesson. Mylan is in the hot seat because of skyrocketing prices for its EpiPen.
In response to the EpiPen pricing furor, a bipartisan group of Senate and House members plan to introduce a bill soon that will force drug makers to inform the Department of Health and Human Services why any price hike of more than 10% is justified at least a month before the increase.
The furor over high drug prices could cause drug makers and drug suppliers, including McKesson, to lower prices, which would cause profit margins to falter. I believe Congress will be unable to agree on new legislation and the fuss will abate after the election concludes. Buy at 180.20 or below.
Oracle (ORCL 40.86) reported mixed results for the quarter ended August 31. Sales rose 2% and EPS climbed 4%, after sales decreased 1% and EPS increased 4% in the previous quarter. The company’s cloud-computing business posted another strong sales gain, but growth was offset by steep declines in Oracle’s conventional software-licensing business. Management lowered its earnings forecast for the current quarter.
Cloud revenue surged 59% to $969 million, whereas new license revenue dropped 11% to $1.03 billion. Revenue from cloud services is less profitable because margins are initially lower on subscription sales compared to software licenses. The company will likely announce new cloud services at its Oracle OpenWorld conference next week. Oracle’s transition to selling cloud services will continue to hurt profits until the changeover is complete. Hold.
Skyworks Solutions (SWKS 77.02) shares jumped 15% during the past week and could go a lot higher. Skyworks supplies semiconductors to Apple for Apple’s recently launched iPhone 7. The surprising success of the new iPhone will translate into noticeably higher sales for Skyworks because the company derives 40% of its sales from Apple. I will re-evaluate Skyworks in the October Enterprising issue. Hold.
Questions and Answers
Q. I cannot find when you changed PRU from BUY to HOLD in your Enterprising Model. May I know your current consideration about this stock? (from subscriber A.R.)
A. Prudential (PRU 80.45; Max Buy Price 74.01; Min Sell Price 96.54) changed from Buy to Hold in the June Enterprising issue (#263e). The insurer has been reporting weak results during the past several quarters, which will improve when interest rates rise. Higher interest rates will increase income from Prudential’s vast bond portfolio and help earnings per share to rise—but in June, I determined that the Federal Reserve is not likely to raise interest rates until December.
Prudential is also suffering from a steady stream of outflows from assets under management in the U.S., but PRU shares are really cheap, demonstrated by the stock’s 8.1 P/E, 3.5% yield and 0.80 P/BV ratios. Prudential is an excellent long-term holding, but near-term price appreciation potential is limited. Hold.
Index of Latest Summaries – Recommendations featured in recent issues.
