Recognizing the risk in today\'s hot market, today’s selection is not a hot stock; it’s a slower grower, a big stock with a heathy and growing dividend that’s technically in the leisure services business.
Cabot Stock of the Week 147
[premium_html_toc post_id="134102"]
The bull market rolls on, and I continue to recommend that you be heavily invested in a well-diversified portfolio of stocks that meet your investment criteria. In choosing today’s stock, I leaned back to the conservative side, after a substantial run by our relatively aggressive growth stocks, some of which have already been sold and some of which are doing great.
My final two candidates for this week’s selection were a company that specializes in diesel engine technology and a company that specializes in leisure travel, and I chose the latter, because I firmly believe that global trends toward increased leisure will continue, while the diesel industry is likely to encounter serious headwinds. The stock was originally recommended by Chloe Lutts Jensen in Cabot Dividend Investor. Here are Chloe’s latest thoughts.
Carnival Corporation (CCL)
If you’ve taken a cruise recently, there’s a pretty good chance you sailed with Carnival. The company carried 11.5 million passengers last year, a full 48% of the world’s cruisers. In addition to the eponymous Carnival, the company’s lines include Princess Cruises, Holland America Line, Cunard, U.K. and Australian P&O Cruises, German line AIDA, Italian brand Costa, social impact-focused Fathom, and the luxury line Seabourn.
To put it simply, business is good. Growth is strongest in developing markets like China, where cruising comes within reach of more consumers every year. Carnival launched its first ship built just for the Chinese market earlier this year. But demand is also increasing in mature markets, including the U.S., thanks to improving economies and increased consumer spending on travel.
Carnival is also driving demand through unconventional marketing. The company sponsors three cruising-themed reality TV shows that air on ABC, NBC and the CW. Management believes that the shows, which are largely filmed on board Carnival ships, have both raised the profile of Carnival’s brands and increased interest in cruising in general.
It seems to be working: both passenger numbers and ticket prices are rising in almost all regions this year. Carnival’s revenues rose 4.3% in 2016 (the company’s fiscal year ends in November), and are expected to grow 3.9% this year and 4.9% next year.
That solid single-digit revenue growth is fueling much faster EPS growth, thanks to ongoing efforts to boost efficiency. For example, Carnival has boosted occupancy by replacing aging ships with larger, more efficient liners, and by adopting yield management techniques like those used by airlines (including variable pricing). Management is also cutting costs by leveraging their scale, for example streamlining freight, marketing and food provisioning services across brands.
These efforts drove operating margins to 18.7% last year, up from a low of 8.6% in 2013. That contributed in turn to EPS growth of 27%, well above Carnival’s single-digit top line growth.
And the improvements are continuing. Analysts expect Carnival to report 7.5% EPS growth this year and 14.8% growth next year, and both estimates have risen in recent months.
The reality could be even brighter. Carnival has beaten estimates in each of the last four quarters and on the most recent quarterly call, management said bookings for the rest of the year are “well ahead” of where they were last year, and raised their 2017 guidance.
All these improvements have not gone unnoticed by the stock market. After about a year of choppy sideways action, CCL began its current rally in November 2016, and has risen 20% in the last six months. However, I don’t think the stock is overextended; the advance has been orderly, with each move to new highs followed by a brief consolidation. The stock’s 50-day moving average has never been far behind.
After a three-week rally to new all-time highs earlier this month, CCL is currently pulling back toward its 50-day moving average once again, providing a good buying opportunity.
In addition to capital appreciation, CCL also rewards investors with regular dividends. The company has paid dividends since 1989, and the stock currently yields 2.6%. Carnival increased the dividend by 20% in 2015, 16% last year, and by 14% just last month. If you buy before May 24, you’ll be eligible to receive the next dividend payment.
Carnival rewards investors in one more way too: shareholders who own at least 100 shares can get $50 to $250 in shipboard credits on any Carnival cruise. BUY.
Carnival Corporation (CCL 61)
3655 NW 87th Avenue
Miami, FL 33178
305-599-2600
www.carnival.com
CURRENT RECOMMENDATIONS
The market remains very strong, with 10 stocks in the portfolio hitting new highs in the past week. However, not all has been peaches and cream; in the same period, two portfolio stocks plunged more than 20% after reporting earnings. I sold one, Aqua Metals (AQMS) on a Special Bulletin, and kept the other, Snap (SNAP), and so far, the market says that’s been the correct decision. The loss was the biggest I’ve suffered in quite some time, but happily, it is more than eclipsed by all those stocks hitting new highs. Looking ahead, the future of the market remains bright, but there will continue to be surprises, and I will continue to deal with them by relying on the time-tested rules that apply. This week, there is only one ratings change: Snap (SNAP) from Buy to Hold.
Adobe (ADBE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth portfolio, has become a real tractor stock in this bull market; it just keeps plowing ahead! But Crista no longer has it rated Buy, mainly because the stock is fairly valued. She aims to sell when the stock’s momentum fades, and I aim to follow her lead. HOLD.
Aqua Metals (AQMS), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, collapsed last week after disappointing investors with its first-quarter earnings report and both Tyler and I recommended selling soon after. The company’s technology continues to look sound; the problem was in management’s opaque communications and their failure to give analysts the guidance they were looking for. We sold on the bounce on the day after the earnings report, but the stock has fallen further since. If you haven’t sold yet, I recommend that you bite the bullet and move on. There are plenty of other fish in the sea, and this stock is damaged. SOLD.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has been down and up since last week, but remains in a slow uptrend. More important, it remains just below Roy’s Maximum Buy Price of 269.27, so if you still don’t own it, you can buy it here. We’re just holding, waiting for the stock to get to Roy’s Minimum Sell Price of 358.47. HOLD.
Celgene (CELG), also recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has been building a base at 119 over the past week, and is a good buy here if you don’t own it yet. Roy’s Maximum Buy Price is 122.63, and he expects the stock to climb to his Minimum Sell Price (currently 188.17) within two years. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, reported earnings last week, and here’s what Paul told his readers. “[Results] were solid, with revenues rising 11% in local currency terms, EBITDA (a measure of cash flow) rising 35% and earnings lifting a huge 74%. As reported earlier, the firm had an occupancy rate of 83.9% in the quarter, while total rooms operated were 335,900 at the end of March. Management also forecast second-quarter revenues up about 11%, similar to this quarter.” As for the stock, it remains red-hot, as Chinese stocks in general, and growth stocks in particular, continue to be accumulated. Where this strong uptrend will end, no one knows, but it is futile to attempt to identify the end until it has passed. In the meantime, my advice remains the same. Consider taking partial profits on this strength, but also consider holding some shares long-term by designating China Lodging a Heritage Stock—once your profit exceeds 100%. HOLD.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor and featured last week, is building a mini-base at 150. I continue to believe that as one of the “generals” of this bull market, FB will be one of the last stocks to roll over when the bull market ends. You can buy here. BUY.
GameStop (GME), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has gained 20% since its late-March bottom, and may be pausing to consolidate its gains here. In her latest update, Chloe wrote, “GME is still high risk, but for value-oriented and yield-focused investors, GME’s 6.2% yield and P/E of 7.1 offer an attractive risk-reward tradeoff. The company is transforming from a chain of video game stores to a multi-channel technology and collectibles retailer. The new businesses are doing well, but haven’t gotten large enough to offset rapidly falling video game sales yet. If all goes according to plan, revenues and earnings will start to rebound next year. GameStop will report first-quarter earnings on May 25 after the market closes. Analysts are expecting EPS of $0.51 and revenue of $1.95 billion, down from $0.66 and $1.97 in the same quarter last year.” Note: GME has also been recommended by Crista Huff in Cabot Undervalued Stocks Advisor, who also rates it Hold, and Roy Ward of Cabot Benjamin Graham Value Investor, who rates it a Potential Buy under 24.08. HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, has been in the portfolio for nearly two years and sports a return of more than 30%. It hasn’t been a thrilling ride, but if you can do that over and over with a portfolio of stocks—as Roy does—you can do very well. And note that Roy’s Maximum Buy Price has crept up along with the stock over the time. Thus, if you don’t yet own it, you can still buy under Roy’s Maximum Buy Price of 60.36. His Minimum Sell Price is 75.89. HOLD.
Jabil Circuit (JBL), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been building a base in the 29 area for two months, and just today, the stock broke out to new highs. Trading volume was normal, so this may or may not be the kickoff to something big. Still, the action is definitely positive. BUY.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is our second Chinese stock, and it too is a rocket: the stock is up 57% year-to-date and up 13% since reporting earnings just over a week ago. Buying stocks that are this extended can be scary, but there are ways to reduce the risk. For example, in his latest update, Paul wrote, “Like any stock that has caught this kind of updraft, JD is extended from its 25-day moving average. Either wait for a pullback or take a small position to get started, then average up if the stock continues higher.” BUY.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, has rallied over the past week, confirming that its main trend remains up. In her latest update, Crista wrote, “Legg Mason is a seriously undervalued asset management and financial services company with aggressive earnings growth. LM could reach medium-term price resistance at 44 to 45 soon, at which point it will still be undervalued.” BUY.
Martin Marietta Materials (MLM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth Portfolio, has pulled back since gapping up on big volume after releasing an excellent first-quarter report. Technically, all signs are positive, so this presents a decent entry point for an undervalued growth stock. BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, not only provides a big yield but also promises growth as well, especially with the upcoming acquisition of Veresen. In her latest update, Chloe wrote, “Pembina, a Canadian pipeline company, beat earnings estimates by a wide margin last week, and the stock is up 4% since the announcement. EPS of $0.49 beat the average estimate by 13 cents, and revenue rose 46% year-over-year, beating estimates by $460 million. The stock could still see some pressure from weakness in oil prices, as well as Pembina’s pending acquisition of Veresen, another Canadian pipeline company. However, Pembina is expected to deliver strong earnings growth this year and next, and eight analysts have raised their 2017 estimates in the past month. Risk-tolerant high yield investors can nibble here.” BUY.
PRA Health Services (PRAH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a contract research organization for the biotechnology and pharmaceutical industries, and the company’s growth prospects are extremely bright. In the two weeks since the company’s post-earnings droop, the stock has advanced to repeatedly hit new highs and is now ripe for a correction—or at least a consolidation. Traders could take some profits here, while longer-term oriented investor should look for an entry opportunity. BUY.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Growth Investor, released an excellent earnings report last week; revenues surged 286% to $150 million, while the company’s loss per share swelled to $1.91. But management’s guidance caused analysts to lower their expectations a bit; now they’re looking for a loss of $0.67 this year and a loss of $0.38 in 2018. After the report, the stock plunged 23% (at the extreme) on four times average trading volume. But the rebound since has been encouraging, so I’m going to stick with it, though a downgrade to Hold is definitely appropriate. HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to hit record highs! In his latest update, Mike wrote, “Square started its business with the little square dongle that turns smartphones, iPads and tablets into full-service cash registers. From that foothold, it has expanded into a suite of applications like invoices, inventory, cash advances and lending—its Square Capital made 40,000 business loans in Q1 (totaling $251 million). The company’s Caviar app lets businesses offer take-out orders just like GrubHub. The company’s move into the U.K. (its fourth international market) is going well and its Q1 report featured a 200% jump in earnings on a 22% boost in revenue. SQ features a nose-bleed-inducing 154 P/E, but its appeal to small- and medium-sized businesses is undeniable, and SQ is well into new high territory.” As with the other hot stocks in the portfolio, SQ is ripe for profit-taking. But if you don’t own it yet, you can either buy a little now (with the intention of averaging up) or wait for a correction. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, broke out above three-year resistance at the start of April and is now building a base in the 320 area as futurists attempt to see exactly where this revolutionary company is going. From electric cars to autonomous vehicles to semi trucks to shared autonomous vehicles, much is possible, but the variables are mind-boggling—and the prognostication is getting pretty broad. Just this week, for example, a Morgan Stanley analyst opined that Tesla’s true competition will not be traditional automakers (like Ford, which is laying off 10% of its global workforce), but today’s technology giants—Apple, Alphabet and maybe Uber! Fundamentally, there are plenty of arguments to be bullish on Tesla (market leadership and Elon Musk, for example) and plenty of reasons to be bearish (valuation and competition). But what you can’t argue with is the stock’s chart, which conveys the consensus of all investors and which is decidedly bullish. BUY.
Total (TOT), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities portfolio, hit more new highs yesterday and today as Saudi Arabia and Russia announced supply cuts. In her latest update, Crista wrote, “Total is an international oil and gas company that’s based in France. The stock is greatly undervalued and ratcheting upwards and I expect it to produce very attractive returns for investors going forward.” BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, hit another new high today. Roy’s Maximum Buy Price is now 83.79, while his Minimum Sell Price is 110.18. HOLD.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, also hit new highs today! Part of the credit goes to the bull market, while part goes to the specific strength of Chinese stocks. In her update last week, Chloe wrote, “China announced new requirements for ATM withdrawals in Macau. Users of Chinese-issued ATM cards will now have to show ID and undergo a facial recognition scan to withdraw money, measures aimed at stanching the flow of money out of China. Macau casino stocks all pulled back, and WYNN initially fell nearly 5%. However, buyers stepped in, keeping the stock above its pre-earnings gap-up level … Risk-tolerant dividend growth and total return investors who don’t own WYNN yet can use this pullback to start positions.” With the stock now at new highs, my Buy rating stands. Just try to get in carefully. BUY.
[premium_html_footer]
All Cabot Stock of the Week buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special alerts via email. To calculate the performance of the hypothetical portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s growth stock policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED MAY 23, 2017
We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/r/CSOW
Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit www.cabotwealth.com or write to support@cabotwealth.com.
[/premium_html_footer]