The market remains in good health, though selectivity remains important.
For today’s recommendation we swing back to the more conservative side of the market with a very big, very well known company whose stock has just begun a new uptrend.
As for the current portfolio, we have five stocks hitting new highs in recent days, and none doing poorly, so overall, progress is being made! There are no sells today. Details in the issue.
Cabot Stock of the Week 242
[premium_html_toc post_id="174751"]
The bull market of 2019 remains intact, though rotation means some groups are favored more than others; small-cap stocks, for example, have been lagging. But overall, trends remain in your favor, and thus I continue to recommend that you be heavily invested in a diversified portfolio of the best stocks. Someday, a real correction will get under way (they tend to come when they’re least expected), but we’ll deal with that when it comes, by holding the stocks that resist the downtrend the best, selling those that don’t, and adding new stocks that are performing well in that situation. For today’s recommendation, we swing back to the lower-risk side of the market with a recommendation for a well-known airline. I can tell you from experience with airline stocks that this is highly unlikely to be a long-term investment, but it might be very profitable in the short term. The stock was originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, and here are Crista’s latest thoughts.
Delta Air Lines (DAL)
A slew of positive announcements coming from and about Delta Air Lines in recent weeks brought lots of investor attention to the stock, launching DAL out of a nine-week trading range. Let’s examine what’s happening with Delta, Warren Buffett, and the Boeing Max 737 to see if the stock run-up has staying power.
Delta Air Lines is a U.S. and international passenger and cargo airline with an extensive and efficient hub complex. Last week, Delta’s management raised first-quarter revenue and earnings guidance to Wall Street due to strong business travel demand. Management is now expecting $0.85-$0.95 earnings per share (EPS) vs. their previous forecast of $0.70-$0.90.
Delta will report first quarter results tomorrow morning, April 10. Wall Street is estimating $0.89 EPS, within a range of $0.75-$0.95, and $10.4 billion revenue, within a range of $10.2-$10.5 billion. You’d have to wonder why there is an analyst predicting $0.75 when Delta clearly guided that number higher. Maybe they were on vacation last week, taking advantage of their Delta SkyMiles rewards? This discrepancy benefits investors in that the consensus earnings estimate is inappropriately skewed downward, thereby increasing the odds that Delta will report numbers that surprise the market on the upside. And we all know that upside earnings surprises can push share prices higher!
The company also expressed good thoughts about first-quarter capacity and revenue per available seat mile (RASM). That’s significant because many investors were worried that airlines’ first-quarter results would be disappointing in light of business interruptions associated with the government shutdown and the polar vortex weather pattern. Delta also renewed a longstanding relationship with American Express (AXP) by signing a new 10-year contract. Barron’s recently called Delta the best-managed U.S. airline, and “the leader in fare segmentation, international alliances, and technology, as well as maintenance and repair.”
Delta preannounced a repurchase of $1.3 billion of stock during the first quarter, which inadvertently caused Berkshire Hathaway’s (BRK) stake in DAL to exceed 10%. Berkshire CEO Warren Buffett laughs about the occurrence in this CNBC video, explaining that once he accidentally exceeded 10% ownership of DAL, he decided to go ahead and buy another $325,000 of Delta stock in March.
Media pundits continue to speculate that Warren Buffett might buy Delta Air Lines – the entire company. Berkshire Hathaway owns approximately 10% and 18% of DAL and AXP shares. Buffett has clearly stated to investment markets that he’d like to make a major purchase, i.e. buy an entire company. He has the cash to do it, and he loves airlines, with large positions in four major airlines. As you decide whether to buy DAL, keep in mind that rumors will swirl on this topic until Berkshire Hathaway finally announces its next major M&A decision.
With regard to the Boeing 737 Max jet problem, Delta does not fly any 737 Max jets. Delta is also deemed insulated from price wars or market share losses that could affect many other airlines in conjunction with Southwest Airlines’ (LUV) new service to Hawaii.
DAL is an undervalued growth & income stock. Analysts expect 16.8% EPS growth in 2019, and the P/E is 8.7.
Airlines historically carry high debt levels, which oftentimes gets them into trouble. That’s a key reason that I prefer to invest in companies that have a long-term debt-to-capitalization ratio under 40%. Delta’s debt ratio seems quite fair at 35%, as opposed to the 54% debt ratio at United Continental Holdings (UAL) and the 87% debt ratio at American Airlines Group (AAL).
DAL is the only major U.S. airline stock that’s trading anywhere near its 12-month high, with a price chart that’s somewhat mirroring that of the S&P 500 index. DAL could lead the index higher in the coming weeks. The stock reacted extremely well to the aforementioned news items. There’s price resistance at the December high of 60, which could temporarily serve as a minor roadblock. Nevertheless, the airline stock that you would want to own in the coming months is the one with the most price strength, and that’s Delta Air Lines. Presuming no disruptions in the broader stock market, I would expect DAL to surpass 60 sometime in the next few months.
Delta Air Lines (DAL)
1030 Delta Boulevard
Atlanta, GA 30354
404-715-2170
http://www.delta.com
CURRENT RECOMMENDATIONS
Overall, the portfolio continues to perform quite well, with five stocks hitting new highs over the past week and none breaking down; thus, there are no sells this week. But there are two downgrades to hold, and you can read the reasons for those below. Interestingly, the market atmosphere feels unnaturally quiet to me, and thus I suspect that there will be some fireworks soon—for better or worse—to shake things up.
AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, closed at its highest level of the past two months yesterday and pulled back normally today. In his latest update, Tom wrote, “I suspect that good news about one of the pipeline drugs is getting out even though the information is not yet public. When the company reports earnings at the end of this month we might get a better idea of how fast overseas Humira sales are slipping versus how fast newly launched drug sales are growing. In the meantime, the stock goes ex-dividend April 12.” BUY.
Apollo Global Management (APO), originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor, remains stuck in a trading range between 28 and 30. In her latest update, Crista wrote, “Apollo is an alternative asset manager with assets under management (AUM) totaling $280 billion, dispersed among credit, private equity and real estate investments. APO is an undervalued mid-cap growth & income stock. APO continues to trade sideways between 28-30 after a huge January run-up. Buy APO now.” BUY.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, advanced for 10 consecutive days before rolling over this afternoon, a clear sign of accumulation as investors put news of slowing iPhones sales behind them and focus on the growth potential of the company’s new services. In Crista’s update today, she wrote, “Apple is a manufacturer and provider of many popular technology devices and services, including the iPhone, iPad, Mac, App Store, Apple Care, iCloud and more. Five new services will roll out in the coming months: Apple News+, Apple TV+, Apple TV Channels, Apple Arcade and Apple Card. There are over 1.4 billion active Apple devices globally, which provide a strong and growing revenue base for Apple Services. AAPL is currently on an uptrend, with price resistance at 230, where it last traded in October. Buy AAPL now and buy more on pullbacks.” BUY.
Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small-Cap Confidential, finally began a correction last week.
In his update soon after Tyler wrote, “EVBG is one of those ‘expensive’ cloud software stocks that’s also posting super-strong growth (33% revenue growth expected in 2019). The stock topped out around 77 a couple weeks ago and revisited that level this week, but it dipped back into the low 70s yesterday. A pause here has been expected, and we could easily see shares drop down to their 50-day line around 69. The stock is trading right near peak valuation from 2018 (EV/Forward Revenue multiple of 12.7).” HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, has been trading fairly tightly around 91 for the past week, setting up below its February high of 97 and being supported by both its 25- and 50-day moving averages. There’s still the possibility that this will prove to be the end of a long topping pattern, but I’m optimistic that it will be the base for a resumption of the uptrend. HOLD.
Huazhu Group Limited (HTHT) (previously known as China Lodging Group) has been working its way back to its high of 49 from last June, and may face some resistance as it gets closer to that level. Long term, however, the future is bright for China’s biggest lodging chain, and that’s one reason that I’ve designated it a Heritage Stock for the portfolio, meaning I’m committed to holding as long as the prospects for great fundamental growth remain intact. HOLD.
Invitae (NVTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, has climbed steadily right back up toward its all-time high of 26, and can still be bought by aggressive investors looking for a piece of this fast-growing genetics testing technology company. BUY.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is the world’s largest online dating service and thus has great recurring income. The stock peaked at 58 in September 2018, corrected with the market down to a low in November, rallied strongly to a high of 60 in mid-March, and now it’s consolidating that gain, setting up for a resumption of its uptrend. If you don’t own it, you can buy now. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, bounced off 188 last week and is a good buy here. In his update last week, Tom wrote, “Defensive utilities have their moments in the sun. But this company is much more. It is a best in class utility with huge exposure to the fastest growing energy sources. It is destined to provide reliable and growing income with growth as well. This is truly one of the very best stocks a dividend and income investor can own. Go baby go.” BUY.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, hit another new high last Friday and has pulled back minimally since. In last week’s update, Mike wrote, “We’ll stay on Buy, though with the 50-day line way down at 62.5, we think aiming for dips of at least two or three points makes sense.” BUY.
Rapid7 (RPD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high last Wednesday and has pulled back to its 25-day moving average since. The stock was also recommended in Cabot Small-Cap Confidential by Tyler Laundon, who last week wrote, “Like many of our high-flying cloud software stocks, Rapid7 has been rated hold. I mean, the stock is up 67% so far this year! Valuation is also at an all-time high (EV/Forward Revenue of 8.0 versus peak of 7.2 last September). Peak valuation here isn’t totally suggestive of an overvalued stock since the business model has changed (to cloud, from perpetual) and Rapid7 has gained significant leverage in the business (EPS of $0.05 expected in 2019, versus a loss of -$0.41 last year). Still, let’s sit tight for now.” I’ll follow Tyler’s lead and downgrade to Hold. HOLD.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, has been treading water over the past week, still well above all its moving averages. In his update last week, Tom Hutchinson wrote, “This all-star performing industrial REIT just keeps on going. But it has been trading in a range for more than two years. It just recently broke slightly above the old range. It is just about at the 52-week high and fairly valued. It also has a history of falling back after breaking the old highs, so I’m cautious here. I’ll be watching closely if it can break out to a new level or it starts to pull back. For now it’s a HOLD.” HOLD.
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio, and I’ll continue to hold as long as I believe the company has great growth potential. The stock is still low in the trading range of 250-390 that it’s occupied since mid-2017, and it doesn’t have positive momentum, but the company remains far ahead of all other contenders in the electric car industry. And there are two notes of interest about that industry. First, China, where generous subsidies for electric cars spurred the creation of an amazing 487 electric automakers (as of 2018), is cutting those subsidies, speeding the process of eliminating the weaker competitors. Second, one of the side effects of Tesla’s leadership in the electric vehicle industry is that traditional automakers are paying the company for pollution credits. Tesla earned $360 million from selling such credits in the U.S. in 2017 and $419 million in 2018, and now Fiat Chrysler has agreed to pay Tesla hundreds of millions to pool both companies’ vehicles and thus avoid fines for polluting in Europe, where the rules are getting stricter. HOLD.
The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, has essentially been trending sideways since it blasted up to 200 in late February. Ideally, this base will launch a renewed uptrend, but nothing is certain. Given that Mike has sold the stock, I’ll simply hold. HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, is on a normal three-week correction that has taken it down to its 50-day moving average. In his update last week, Mike wrote, “TWLO was one of many growth stocks that (a) didn’t come close to hitting new highs in the past few days with the market and (b) was hit very hard today, closing below its 25-day line for the first time since early January. Like many of its ilk, the stock is probably near an intermediate-term do-or-die point; a decisive break of the 50-day line (118.5 and rising) would increase the odds that TWLO needs time to correct and build a new launching pad, and such action would have us moving to Hold (and possibly taking partial profits). However, right now the trend is still up, so we’ll stay on Buy—but we’ll be watching to see if and when the stock finds support.” BUY.
Van Eck Rare Earths/Strategic Metals (REMX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, is a diversification play with potential for great growth, as technology requires more rare earths. And the stock is moving in the right direction, heading higher since the December bottom and currently above both its 25-day and 50-day moving averages. In his latest update, Carl wrote, “REMX is up 18.7% since we highlighted this ETF in a special report early this year. REMX remains a hedge against U.S.-China tensions and a play on rare metals and rare earths that are undervalued and underappreciated given their importance to high tech products and markets. We still like REMX and recommend holding on to your position.” HOLD.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, broke out above resistance at 51 last week, hit a new high on Monday and is now working to hold on to that gain. In today’s update Crista wrote, “Voya is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. The company is prioritizing share repurchases, and planning a large dividend increase this year that has not yet been finalized. VOYA is an undervalued aggressive growth stock. Analysts expect EPS to grow 34.7% in 2019, and the P/E is 9.6. Now that the stock has begun the final leg of its rebound to its 2018 high of 54-55, I’m moving VOYA from Buy to a Hold recommendation.” I’ll follow suit. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED April 16, 2019
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.