Today’s recommendation is a doozy. It may go to the moon, or it may fall flat on its face, but it’s got a good story, and I think we’ve got a decent entry point here.
Cabot Stock of the Week 155
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The bull market remains intact, so I recommend that you remain invested in a diversified portfolio of stocks that will help you meet your investment goals. Today’s investment is a very aggressive selection—with substantial downside risk—so take care to invest (or not) accordingly. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor. Here are Mike’s latest thoughts.
Carvana (CVNA)
Carvana has a fundamental story that’s easy to enthuse about. The company is aiming to revolutionize the used car buying experience by bringing it online. “Buying a car online? What are you nuts!?” I know, I know … that’s what I thought when I first heard the idea, but Carvana seems to have taken care of all the pressure points and is thriving as a result.
Here’s how it works. The company acquires used cars from auctions, from cars coming off lease or rental and even from customer trade-ins—but only after ascertaining that the cars have never been in an accident and have no body damage. It puts every car in its fleet (north of 7,000 vehicles today) through a 150-point inspection at one of its three inspection centers in the U.S. It posts the cars on its very user-friendly website (check it out for yourself), which offers an abundance of photos (including 360-degree interactive views) and car data for browsers. And it also offers easy financing.
Once a customer has selected a vehicle, it takes just 10 minutes to finalize the purchase. The company provides a scheduled delivery date (by the next day in many cases) and, importantly, allows customers a seven-day test period (money-back guarantee) with their purchase.
The advantages are numerous. First there’s the inventory; while a typical dealership might have 100 used cars to choose from, Carvana’s 7,000-plus total means most Americans can easily find what they want from the comfort of their own home. Second, the system saves customers money, with the average purchase last year coming in at $1,430 less than the Kelly Blue Book price. And lastly, it avoids the used-car shopping experience that so many people hate—a recent study showed that 81% of consumers do not enjoy the car buying process. By contrast, 95% of Carvana’s customers would recommend the experience to a friend.
As you’d expect, the market potential for this revolutionary used car shopping experience is gigantic. Used car sales totaled north of $700 billion last year, and in markets where Carvana has operated the longest, like Atlanta, and/or has a huge car vending machine (you read that right) like Nashville, the company has achieved a market share north of 1% and is still growing. Moreover, the firm’s recent launches have all been tracking similarly in terms of market share gains over time, adding a degree of predictability to the firm’s growth.
At the end of last year, Carvana was operating in 21 markets, but because it’s relatively cheap to leap into new markets (just $500,000 of CapEx spending to hire a team of “advocates,” connect everything to the firm’s logistics network, and turn on an initial marketing program), the company is expanding quickly. Last week, it entered Louisville (its 31st market) and it has a goal of 38 markets by year-end.
And those new markets are translating into sales in short order. Revenues have been growing at triple-digit rates since the firm opened for business in 2014, with the first quarter bringing 118% top-line growth and with a 140% revenue gain expected for the second quarter.
Earnings are still in the red as the company expands and invests in its technology and platform, but all the sub-metrics are pointed sharply higher. The firm sold 8,334 vehicles in the first quarter (up 120%), with management expecting full-year sales to be around 45,000 (up 140% from 2016), while gross profit per unit sold should rise 49% this year to north of $1,500.
All told, Carvana has a huge opportunity, is gaining visibility and credibility, and is growing rapidly by expanding into large markets. From here, it’s all about execution. If management pulls the right levers and continues to deliver a best-in-class customer experience, the sky’s the limit.
The stock is showing unusual strength, too, though it needs to be handled with care. CVNA came public on April 28 (below its offering price of 15) and was sitting around 9 heading into June. Then a fantastic Q1 earnings report attracted buyers and the stock went bananas, soaring to 24 by the middle of the month!
The recent Nasdaq dip pulled the stock down below 19 but it’s bounced back in recent days. In total, CVNA is very volatile, but also very strong, with huge potential should things go right. I think you can buy some around here, but I recommend you use a smaller-than-normal position (dollar-wise) and use a looser leash than you normally would, given that the stock moves around so much. BUY.
Carvana (CVNA 22)
4020 East Indian School Road
Phoenix, Arizona 85018
602-852-6604
www.carvana.com
CURRENT RECOMMENDATIONS
As the aging bull market climbs higher, I continue to see signs that it is losing its cohesiveness. This doesn’t mean that you should turn bearish and run to the safety of cash; bull markets can last a lot longer than most investors expect. But it does mean that you should be aware of the growing risks, and position your portfolio so that the next unexpected sharp drop (aren’t they all unexpected?) doesn’t cause more pain than you can bear. This week, as usual, I looked hard for stocks that deserved to be sold, but I couldn’t find any (though I did find two to downgrade to Hold) so the portfolio grows to its maximum size of 20 stocks.
Alliance Data Systems (ADS), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has pulled back normally over the past two weeks but remains above Roy’s official Maximum Buy Price of 243.55, so I’m just holding until the stock reaches Roy’s Minimum Sell Price of 376.41. The firm’s second-quarter earnings report is expected on July 20 before the market open. HOLD.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, and added to the portfolio a year ago, is also above Roy’s Maximum Buy Price (258.14), so I’m holding for his Minimum Sell Price of 351.13. The firm’s second-quarter earnings report is expected on July 25 before the market opens. HOLD.
Canada Goose Holdings (GOOS), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, has pulled back a little further since my recommendation, but remains in an attractive buying region. BUY.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, closed at a record high last Wednesday, and has pulled back normally since. Clearly the buyers have been in control recently, sanguine about low oil prices and rising consumer demand for cruises. However, in her latest update, Chloe wrote, “Fourteen analysts have raised their current year earnings projections in the last 30 days. The only tiny reason for concern is the stock’s big run so far this year; if institutional investors are repositioning themselves into 2017 laggards for the second half, CCL might pause here.” My eye says the stock has the potential to pull back to its 50-day moving average, which is now down under 64, and that would be a better place to buy, so I’ll downgrade to Hold for now. HOLD.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, looks absolutely fine technically, still consolidating its big June surge from 114 to 134. But it remains above Roy’s Maximum Buy Price of 119.48, so you still can’t buy it. I’m holding, waiting for Roy’s Minimum Sell Price of 177.34. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, bounced off its 50-day moving average last week (the first time it had touched the average since April), and now looks ready to resume its advance. This looks like a good spot for new buying. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, is once again working to break through the 155 level that has constrained it since early June, and if it does so on good volume, I’ll upgrade it to Buy, but until then, Hold is the proper rating. In his latest update, Mike wrote, “FB has turned sloppy since early May, whipping back and forth between 145 and 156. Such volatility after a smooth advance tells you sellers are beginning to take a toll, which often marks a trend change. That said, fundamentally, a new, bullish data point seems to be released nearly every week, the most recent being that Facebook has surpassed two billion monthly active users (mind-boggling when you think about it). I do wonder whether FB has become so popular so that it’s already reached its point of peak perception (no tree grows to the sky), plus the stock’s relative performance (RP) line hasn’t made much progress since early 2016. Yet I still believe Facebook’s earnings can grow rapidly for many years to come, and the stock’s longer-term uptrend is clearly intact. It’s not strong enough for a Buy rating, but if you own some with a profit, I advise hanging on.” HOLD.
GameStop (GME), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier (and also recommended by Crista Huff and Roy Ward), has given up some of its recent gains, but selling volume has been light, so I remain optimistic that the bottom at 20.5 will not be touched again. The fundamental story that has attracted three Cabot analysts to the stock remains intact. HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, is another one of Roy’s stocks that’s too high to buy now, so I’m just sitting tight, waiting for the stock to hit Roy’s minimum sell price of 73.63. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, remains a cipher; is the uptrend intact or is the stock now in a long and messy topping formation? In Paul’s latest update, he wrote, “The stock has now made zero net progress since early May, and trading volume on both up and down days has been heavy. With a nice profit booked on the sale of half our position, we can be patient with our remaining shares, as the stock looks to have support at 38 (which is also the top of the stock’s May gap up). HOLD.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, bounced off its uptrending 50-day moving average last week, and still looks fine to me. But Crista has a lot more to say. Here’s what she wrote in her latest update:
“Legg Mason is a very undervalued asset management and financial services company with aggressive earnings growth. I have very different instructions for short-term investors vs. longer-term investors on LM, based on the likely price action in the second half of 2017. Please carefully consider which of the following two scenarios best fits your investment style, and then stick with the recommendation:
“1. Short-term investors need to know that there’s upside price resistance on LM dating back to late 2015. Therefore, the stock’s current upward momentum is very likely to stop at that price. We will then most likely either see a pullback, or some sideways trading. You will want to sell near 44, but not expect to get a price above 44. If there’s enough room for capital gains between the current price and 44, go ahead and buy the stock today.
“2. Longer-term investors should first read what I just wrote to short-term investors. Thanks! If that potential period of three to six months of sideways trading doesn’t phase you, and you actually prefer to own good growth stocks for as long as their earnings outlook is attractive, then LM is a great stock for you to continue to own. Feel free to buy more shares, because even at 44, the stock’s still quite undervalued.
“I will be moving LM to a Hold recommendation around 40 [she wrote that when it was 38], and selling near 44. I will consider repurchasing the stock later if the price chart once again indicates a strong near-term capital gain opportunity.” HOLD.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, looks fine, in part because energy prices have firmed up. In her latest update, Chloe wrote, “Oil prices have bounced back to $47/barrel over the past two weeks, and PBA has followed suit. But unlike oil prices, which remain well below their springtime level, PBA hit a new 52-week high on Monday. I wrote last week that PBA looks closer to breaking out of its trading range to the upside than to the downside, and that’s even more true today. Risk tolerant high yield investors can buy a little here.” BUY.
Schnitzer Steel (SCHN), originally recommend by Crista Huff of Cabot Undervalued Stocks Advisor, and featured here just two weeks ago, is now consolidating the quick gains it made when it soared from 19 to 26 in the last two weeks of June. In Crista’s latest update, she recapped the events that led to this strength: “On May 25, I issued a Special Bulletin pertaining to the U.S. Department of Commerce’s Section 232 investigation into the national security implications of trade abuses associated with steel imports. The essential question for the Section 232 investigation is whether low prices on steel imports are harming the steel industry enough that the U.S. government needs to attempt to put a stop to the unfair trade practices. The Commerce Department is contemplating new tariffs on imports (which could prompt retaliation by foreign producers), limits on imports of specific steel products (which could push consumer prices higher), tariffs on imports that exceed quotas (potentially affecting consumer prices), and/or tariffs that ensure minimum pricing (which maintains foreign competition without the undercutting of U.S. pricing that had led to job losses and bankruptcies). As with many government agendas, big plans tend to get seriously watered down after considering foreign relations and other economic considerations. Results tend to be rather ho-hum after months of alarming news headlines. Steel stocks reacted well to the commencement of the Section 232 investigation. That’s because the companies finally have prospects for relief from trade abuses that chronically harmed the industry. Virtually any result—short of a decision to do nothing—will likely help steel companies’ balance sheets and abilities to avoid additional job losses.” Crista thinks SCHN could surpass price resistance at 27 (dating to February) this summer and likes the fact that SCHN still has relatively little analyst coverage. BUY.
Sherwin-Williams (SHW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to trade tightly between 350 and 355, which is also where we find the stock’s 25-day moving average. If you haven’t bought yet, you can find a low-risk entry point anywhere between here and the stock’s 50-day moving average at 342. Second-quarter earnings are expected before the market open on July 20. BUY.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to new highs today on good (but not great) volume after trading tightly around 24 for a month. If this breakout can hold, great, especially if other stocks with similar patterns join it. In Mike’s latest update, he wrote, “Square has provided some new leadership to the market this year, and the stock continues to show outstanding relative strength, even during the recent growth stock selloff. I’m not going to repeat the firm’s basic story—suffice to say that Square’s various card readers are gaining in popularity (gross merchandise volume rose 33% last quarter) and its customers love its value-added services (marketing, cash advances, instant deposit, etc.), which are growing at far faster rates and now make up 15% of revenues. I believe the stock moved into a higher gear after its Analyst Day on May 16. That’s when management talked more about Square’s strategy to grab larger merchants (those with at least $500,000 in annual gross merchandise volume are now 15% of the total, up from 4% a year ago) and its international opportunity (where it’s hitting it big in places like Australia, with 80% sequential growth), while revealing some outstanding profit margin figures for new clients—Square’s new customers cost $36 million to acquire, but return $62 million (72% return) after eight quarters. And when you include add-on services, the return leaps to 120%! The top brass sees revenues up 31% this year and EBITDA up 150%, but just as important, big investors are becoming convinced that (a) the market opportunity for Square is massive and (b) the firm can scale in a big way as it grows. A total of 313 funds owned 99 million shares at the end of March, up from 180 and 37 million two quarters before.” Technically, it’s tempting to upgrade the stock to Buy, but I’d really like to see more trading volume, as well as more growth stocks also breaking out. HOLD.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, seems to have bottomed at 310—which was also a support level back in May—but only time will tell. The quick 20% pullback came after what I noted was a sentiment peak. Bulls were giddy about the imminent high-volume manufacturing of the Model 3, so any remotely negative news had the potential to send the most recent buyers running. In this case, one major “negative” story was the announcement by Volvo (owned by Zhejiang Geely Holding Group since 2010), that as of 2019, all its new car models launched would be either hybrid or fully electric cars. Many, many news outlets (including The Wall Street Journal) misinterpreted this to mean that Volvo will stop making traditional gasoline-powered cars at the same time. Not true. Volvo will continue making and selling existing gasoline-powered models, and the market—among other things—will determine when the actual end of the line comes for those traditional vehicles. But the fact that people perceive that Volvo is stopping production of those vehicles so quickly is an indication that they are ready for that future! And that further validates Tesla’s Mission Statement, which is “to accelerate the world’s transition to sustainable transport.” Interestingly, analysts at Morgan Stanley, among other firms, believe that Tesla’s toughest competition will come not from traditional auto manufacturers but from deep-pocketed technology firms like Apple and Alphabet. As for the stock, it’s a Heritage Stock for me, with plenty of growth potential ahead, so I’m holding long-term. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, looks great. In her latest update, Crista wrote, “Vertex is an undervalued, aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). Vertex raised the price on Orkambi by 5%, which will likely lead to increases in earnings estimates. VRTX is the biggest gainer among S&P 500 stocks year-to-date, and it’s still on a general uptrend. I plan to sell VRTX when it approaches two-year price resistance near 140.” HOLD.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, is once again just above Roy’s Maximum Buy Price of 87.79, so technically, you can’t buy it here. But practically, I’d say you can, as the steep early-June correction has washed out risk in the stock, and the next major move is almost certainly up. For the record, Roy’s Minimum Sell Price is 113.61. HOLD.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, looks good but not great. The failure of the stock to hold above 135 after its June breakout has evolved into what might be interpreted as a head-and-shoulders pattern—which could signal a top.But it’s far from conclusive. In her latest update, Chloe wrote, “WYNN has pulled back 3.4% since our last update, on low volume. Macau gaming revenues rose 26% last month, which is impressive, but analysts were expecting 30% growth. As with CCL, WYNN could become collateral damage if institutional investors’ rotation into the dogs of the first half gathers steam. However, for now, WYNN’s pullback looks perfectly normal, and the long-term story is excellent.” Respecting the chart, and thinking that WYNN might be the next stock to be sold, I’ll downgrade it to Hold. HOLD.
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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 JULY 18, 2017
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