Two Undervalued Stocks with Low Volatility

by J. Royden Ward on March 18, 2014
originally from Cabot Wealth Advisory

My Favorite Websites for Investment Research

A Simple Stock Screen that Works

Two Undervalued Stocks with Low Volatility and High Quality

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I research stocks all the time, and I’ve been doing this for decades. I have my favorite research sources that I have trusted for years—some free, some not so free—and I am always on the lookout for new sources that might be better than my current investment resources.

Among paid subscriptions, I use Value Line, Investor’s Business Daily eTables, Zacks, American Association of Individual Investors (AAII) and Barron’s. I depend on these services to provide me with reliable data, opinions, and ratings for my database of 1,000 stocks. From this data, I’m able to analyze stocks and find undervalued stocks that have excellent prospects for future growth.

I also check out free websites on a regular basis, which helps me conduct some due diligence to double-check my data and conclusions. I strongly recommend that you also develop a system to double-check the information you have gathered and the advice you have received. Your investment results will improve greatly if you take the time to dig a little deeper and discover more and more about companies that pique your interest.

In the interest of helping you become a better investor, I’ve compiled a list of free, or nearly free, websites that can help you make the best investment decisions possible. My best of the best websites appear below under the general categories of Education, Research, News and Tools. (Our Cabot website, of course, covers all of the categories extensively!)

Cabot: www.cabot.net Contains a wealth of free information about our investment letters, our expert analysts, latest stock picks and a daily market update. The education section contains extensive information on such topics as: Why do stocks go up? How do I get started in investing? Stock market advice, portfolio management, growth investing, value stocks, emerging markets, energy stock investing, stock market timing and much more!

Education

AAII Investor Classroom: 

Contains various lessons covering everything from managing risk to evaluating dividend stocks. Best of all, you can easily find guidance on a specific investing topic. The cost to join is only $29 a year.

Investopedia: www.investopedia.com This is an excellent source for definitions of financial terms. In addition, the site has tutorials and articles broken down by investment level and style, such as Beginners, Active Traders and Retirement. Investopedia is free.

Research

AAII Stock Screens:

The stock screens area offers both education and investment ideas for members looking to construct and manage a stock portfolio. The area profiles more than 60 strategies grouped by investment style. Members can read about factors that make each approach unique, see how a hypothetical portfolio following each approach has performed during various market environments, and access a listing of stocks which are filtered by each screen. The cost of an annual membership is $29.

SEC EDGAR: 

The Securities and Exchange Commission (SEC) publishes filings for publicly traded companies in its EDGAR system. Pay particular attention to Form 10-K, which is a company’s annual report and a goldmine of information. Free.

Seeking Alpha: www.seekingalpha.com Publishes quarterly conference call transcripts for many companies. These transcripts can offer insight into how a company performed over the past quarter and management’s outlook for the future. Registration is free.

State of the Markets: www.stateofthemarkets.com The Market Analysis section contains the latest stock market information each day before the market opens, extensive updates during the day and Dave Moenning’s daily state of the markets analysis.

News

Barron’s: www.barrons.com Barron’s includes its own articles, and articles from The Wall Street Journal, Dow Jones Newswires and MarketWatch. A subscription is required to read the actual articles from Barron’s and The Wall Street Journal. The $52 per year introductory rate is well worth the money.

CNNMoney:

CNNMoney aggregates news articles from a variety of credible sources. The site does a good job of highlighting breaking news. The site also offers unique portfolio tools for monitoring all of your stocks. Free.

MarketWatch.com: www.marketwatch.com Another good company news website. MarketWatch features articles from leading sources including WSJ.com, Barron’s, TheStreet.com and Seeking Alpha. The site also contains company press releases to give you “unfiltered” news about a company as well as articles with an analytical slant. Free.

Tools

Discount Brokerage Research I have accounts at two discount brokers and they both offer research on stocks and mutual funds from third-party services. While the research offerings differ, most top discount brokers give their customers free access to research reports from companies such as Morningstar, Thomson Reuters and Standard & Poor’s.

Investor Relations Websites Simply type the company’s name followed by “investor relations” in a search engine such as Google. The investor relations section of a company’s website can offer a large amount of information including presentations, annual reports, dividend history, press releases and a calendar of upcoming events.

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How to Find the Best Stocks Using Free Websites

Although I use free websites mostly to double-check my data and conclusions, I also use some websites to find stocks. My brokerage firm has a handy website that provides the necessary screening tools to effortlessly find stocks fitting the assumptions listed below. Your broker likely has similar screening capabilities. Holding a good portion of your portfolio in companies that meet the list of criteria will greatly reduce your chances of suffering large losses during unforeseen market declines.

My best screen, which is easy to create, searches for companies with all of the following:

• S&P (Standard & Poor’s) Star Ratings of 4 or higher
• S&P Fair Value Rankings of 4 or higher
• S&P Earnings/Dividend Ratings of A- or higher
• S&P Beta Ratings below 1.40
• Dividend yields greater than 1.0%.
• In addition, I require companies to be included in one of the following S&P Sectors: Consumer Discretionary, Consumer Staples, Health Care, Industrials, Information Technology, Telecommunications or Utilities.

If you would like to receive a complete list of the 17 companies that qualify using the criteria listed above, please send me an email with your request by responding to this email. Also, if you have additional websites that are top-notch, I would like to hear about them and mention your favorite sites in a future Cabot Wealth Advisory. Email with your favorites by responding to this email.

Two companies that currently fit my screening criteria for undervalued stocks with low volatility and high quality are Baxter and PetSmart.

Baxter International (BAX 66.50) is the original producer of commercially prepared intravenous (IV) solutions. Founded in 1931 and headquartered in Deerfield, Illinois, Baxter currently makes and distributes medical products and equipment which focus on blood and the circulatory system. Operations in the U.S. account for 43% sales, Europe 29%, Asia-Pacific 16%, and Latin America and Canada 12%.

Baxter’s BioSciences unit produces various clotting factors for hemophilia, as well as bio-pharmaceuticals for immune deficiencies, cancer, and other disorders. The company’s Medical Products unit makes IV solutions and various specialty products such as pre-filled IV vials and syringes and inhalation anesthetics. Baxter’s Renal Care division produces dialysis equipment and other products for kidney failure patients.

In September 2013, Baxter acquired Gambro AB, a Swedish maker of dialysis care products. Gambro will add $0.20 to 2014 EPS. In addition, Baxter has developed unique intravenous immunoglobulin (IVIG) products which contain new delivery mechanisms and expanded indications.

I expect sales to increase 11% and EPS to rise 8% to 5.12 in 2014. Baxter’s many promising new products are nearing final FDA approval which bodes well for future sales and earnings. At 14.6 times current EPS and with a generous dividend yield of 2.9%, Baxter has paid dividends every year since 1934 and carries a Standard & Poor’s highest Quality Rating of A. Buy BAX at the current price. Sell when BAX reaches my Minimum Sell Price.

PetSmart (PETM 67.58) provides top-quality pet products and services in North America. In 2013, PETM’s 1,289 stores produced an industry-leading $7.0 billion in revenue. Most stores are located in the U.S. but 73 are in Canada and five are in Puerto Rico.

PetSmart stores carry a broad selection of high-quality pet supplies at everyday low prices. PetSmart offers 10,000 items, including nationally recognized brand names as well as an extensive selection of private brands.

The company's broad product assortment is complemented by a selection of value-added pet services, including grooming, pet training, boarding and day camp. Virtually all of its stores offer complete pet training services and feature pet styling salons that provide high-quality grooming services.

PetSmart emphasizes premium dog and cat foods, many of which are not available at supermarkets, warehouse clubs or mass merchandisers. The company also offers its own brands in supermarkets and pet stores.

In addition, PetSmart offers full-service veterinary hospitals in 816 of its stores. Medical Management International, an operator of veterinary hospitals, manages most of PetSmart’s hospitals under the name “Banfield, The Pet Hospital.”

PetsHotels provide boarding for dogs and cats, 24-hour supervision, an on-call veterinarian, temperature-controlled rooms and suites, daily specialty treats and play time, as well as day camp for dogs. PetSmart operates 196 PetsHotels within its retail stores, and expects to expand this concept. The Doggie Day-Camp concept is available at all PetsHotel locations.

Sales are expected to advance 6% during the 12 months ending 1/31/15 while EPS will climb 13% to 4.48. Baby-boomers are buying more pets to provide companionship in retirement and are spending larger amounts of money to pamper their pets.

PETM shares are reasonably valued at 17.0 times current EPS with a dividend yield of 1.2%. Quarterly dividends have been paid since 2003 and were raised 0.03 to 0.195 recently. The company operates in a recession-resistant industry and will therefore produce steady growth in future years. Buy PETM at the current price. Sell when PETM reaches my Minimum Sell Price.

Until next time, be kind and friendly to everyone you meet.

Sincerely,

J.Royden Ward
Chief Analyst, Cabot Benjamin Graham Value Investor

You can read more about Baxter and PetSmart and get continuing coverage of the stocks, including my Minimum Sell Prices, in my Cabot Benjamin Graham Value Investor. There you’ll not only find buy and sell advice for BAX and PETM, you’ll also discover additional stocks selling at bargain prices. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 275 stocks plus my up-to-date predictions for the Dow Jones Industrial Average.

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