The broad market remains strong, and all Cabot’s market timing indicators are currently positive, so I remain optimistic that we’ll see higher prices in the month ahead.
This week’s recommendation is a growth-oriented medical stock with great potential; it was originally recommended by Mike Cintolo last November and it’s currently hitting new highs.
And as for the current portfolio, most of our stocks look fine, but because I limit the portfolio to 20 stocks, one has to go—and it’s the weakest.
Details in the issue.
Cabot Stock of the Week 279
[premium_html_toc post_id="194715"]
The broad market remains in fine shape, and all our indicators remain positive, telling us we can expect higher prices in the months ahead—along with the occasional correction. Thus, I continue to recommend that you be heavily invested in stocks that help you meet your investment goals. This week’s selection comes from Cabot’s growth investing expert, Mike Cintolo, who originally recommend the stock in Cabot Growth Investor in November. The stock is up about 10% since then, but has spent the past month pulling back from its high, so I think this is a good entry point. Here are Mike’s latest thoughts.
Vertex Pharmaceuticals (VRTX)
For more than a decade, Vertex Pharmaceuticals used to be something of a running joke—the firm came public in the early 1990s and while the stock had some ups and downs, its rallies never lasted. Why? Because the firm never made any money: It cranked losses in all but one year through 2015!
Today, though, Vertex is a different and far more prosperous animal. The company is best known for its various best-in-class treatments for cystic fibrosis (CF), a life-threatening hereditary disease that damages the lungs and digestive system. The company’s first successful drug (Kalydeco) was approved back in 2012 for patients age 6 and older with a certain CF mutation. Then came Orkambi, approved in 2015 for patients 12 and older with different mutations. And third was Symdeko/Symkevi, which got the go-ahead in 2018 for patients 12 and over with yet other specific CF characteristics.Each drug has been successful, and Vertex has worked to expand the labels of each over time (Kalydeco itself was recently approved for patients six to 12 months!), which has grown the firm’s target market. But the big reason the stock is strong today is that, after completing a couple of Phase III trials that produced excellent results, Vertex’s Trikafta (basically a triple-combination of two of the above drugs and one other) got the thumbs-up from the FDA in October of last year, five months ahead of expectations.
Long story short, Trikafta looks like a game changer, not only via an expansion of its target market again (6,000 patients that weren’t eligible to be treated with a Vertex product can be treated with Trikafta) but also via some “upgrades” to existing patients (12,000 of which could switch from a current Vertex offering). Altogether, Vertex can now treat up to 90% of all people with CF. Combined with a higher-than-expected price point ($311,000 vs. $250,000 expected prior to approval) and full commercialization efforts (it’s been quickly gaining coverage from carriers here and governments in Europe), Wall Street sees Vertex enjoying a huge growth wave.
Not that growth during the past couple of years was anything to sneeze at. The company grew revenues 22% in 2018 (earnings soared to $4.08 per share), and when all is said and done, 2019 likely saw the top line up 23% and earnings up 18%. But 2020 is when the real fun begins; analysts see sales and earnings up 28% and 39% (respectively) this year, and while we don’t usually look too far ahead, some on Wall Street think Vertex’s bottom line will basically double from 2019 through 2021—and likely keep growing beyond that.
Of course, as a biotech firm, Vertex is always busy on the research front. Some of that does involve Trikafta (a Phase III study for children ages 6 to 11 is now underway; only ages 12+ are eligible for it now), but it also has a handful of early-stage clinical trials going on in various areas (kidney diseases, sickle cell diseases and a condition that raises the risk of lung and liver cancer) that are beginning to produce data readouts. Still, for the next few quarters at least, the stock is likely to trade mostly on its execution of getting Trikafta into the marketplace.
What’s interesting is that, despite Vertex’s various positives during the past couple of years, the stock did zilch; it enjoyed a great first half of 2017, but from that peak, it made no net progress until October of last year! But the early Trikafta approval (and the improved market environment) changed investor perception; VRTX began galloping ahead after the announcement and didn’t stop until it rallied to north of 220 (eight weeks up in a row).
In the month since then, the stock has calmed down, giving up very little ground but allowing its 50-day moving average—now at 213—to draw close. If you wait a little longer, you might be able to get on board closer to that level, but I think the stock has cooled off enough, and given that I see no signs of selling pressure, I think entering here will work out fine.
www.vrtx.com
Current Recommendations
With today’s addition of Vertex Pharmaceuticals (VRTX), the portfolio is more than full, so I must sell something, and the unlucky victim is Digital Turbine (APPS). The company still has a good story and a not-bad chart, but the goal is to have a portfolio of the best stocks, and thus weeding out the weakest is what we’ve got to do. Hopefully, you do the same in your portfolio, too.
Details below.
Changes
Digital Turbine (APPS) to SELL.Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, looks great, technically, having climbed back above all its moving averages after a well-earned correction—and could easily break out to a new high any day. Trouble is, Tom says the valuation doesn’t justify buying here. In his update last week, he wrote, “Even this consistent performer pulled back ever so briefly during the REIT selloff. But it’s right back on track and still trading above its moving averages. Demand for its rare life science and research lab facilities remains strong and investors are still attracted to the defensive nature of the business. It also helps that investors have a newfound appreciation for anything Healthcare in recent months. The stock returned over 40% in 2019 and has blown away the performance of its peers in every measurable period over the last 10 years. The problem is that valuations are getting a little high to initiate a position at the current price. On valuation reasons alone it is just a Hold.” HOLD.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, also had a well-deserved correction that pulled it below both its 25- and 50-day moving averages. But the recovery hasn’t been as impressive as ARE’s, as BIP has only just now gotten back up to both averages. In Tom’s latest update, he wrote, “The global infrastructure company had a great 2019, returning over 50%. That said, valuations aren’t that stretched because the stock had a rotten 2018. Going into 2020 I still like the way the stock is positioned as demand for safe companies that own steady revenue-generating assets should remain strong. As well, infrastructure is a growing subsector that is increasingly popular with investors, almost like a Utility on steroids. The stock is still rated HOLD because it has had a solid run-up and this might not be the ideal entry point.” HOLD.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, had a great run in December, hitting a new high as recently as last Thursday (the first day of the New Year) and Crista says it’s not over yet. Because of our new publishing schedule (Cabot Stock of the Week will now be published on Mondays while Cabot Undervalued Stocks Advisor will now be published on Wednesdays) there is nothing new from Crista regarding the stock. If you don’t own it, try to buy on weakness. BUY.
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, has been a slow starter, but Crista still thinks it’s worth holding, particularly with the New Year providing an opportunity for investors to look for new bargain stocks. Consensus estimates assume 18.4% EPS growth at the company in 2020, but the P/E is just 8.8—and you get a fat yield of 6.2%. HOLD.
Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon, has seen three waves of high-volume selling over the past month, with no buying power to counter, and now the stock is having a hard time getting back up to its 50-day moving average. It’s not a fatal pattern, but in this portfolio, it’s the weakest, and thus out it goes (with a nice profit). SELL.
Disney (DIS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is an established blue-chip stock with big new growth potential thanks to the Disney+ service. It will take time for investors to adjust their perceptions to see the company in this new light, but as they do, the stock should strengthen. If you haven’t bought yet, you can buy now, as the stock is a month off its high and has nearly pulled back to its 50-day moving average. BUY.
Endava (DAVA), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, is a U.K.-based company that bridges the gap between consultants and traditional IT service companies, helping organizations succeed in an increasingly technological world. The bulk of the company’s business (54%) comes from work for payments and financial service companies, while other clients are in technology, media, consumer, healthcare, logistics and retail. As a smaller company, risks are a bit higher here, but so are the potential profits as the company grows and becomes more visible to Wall Street. The stock has pulled back to its 25-day moving average and is rated Buy here. BUY.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, saw a big wave of buying in early December, and the stock remains under accumulation, as it hit another high today. In his latest update, Tom wrote, “I’m very positive on this midstream energy company for 2020. Other value areas stocks have already rebounded but energy has been lagging. Everything is working for this company right now, except performance. Earnings are growing as many new projects continue to come on line. The dividend is well supported. And the stock is cheap in a high priced market. At some point, investors will awaken to the story in a yield-starved world. Energy stocks are selling at a huge discount to the S&P 500, despite the fact that oil prices gained 35% in 2019. EPD is still selling 30% below the 2014 high and revenues are up 25% on a trailing year basis. It’s a great yield and a great value here.” BUY.
Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is one of the portfolio’s Heritage Stocks, meaning our profit is so great and the potential so large (it’s China’s largest hotel chain, with 5,151 hotels as of September 30) that I’ve resolved to hold the stock through normal technical sell signals. The stock saw three very large buying spikes in December as it jumped from 33 to 42, and now it’s taking a breather. HOLD.
Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, last hit a new high in mid-November, but it’s been acting quite normally since, first going through a normal correction and now building a base right below its old high, telling us it could break out to new highs any day. In last week’s update, Mike wrote, “IPHI hasn’t done a ton (net-net) since its great earnings gap back in late October, but we see encouraging tea leaves on the chart; eight of the past nine completed weeks have closed up and the stock has etched a reasonable seven-week consolidation. One worry is that the chip sector in general has been strong, so if the group corrects it could weigh on the stock. But IPHI isn’t so directly tied to chip stocks (it’s more on the networking side of things), and all indications are that the company as begun what should be a very strong growth phase for the next couple of years. A drop a few points (say, into the 66 to 67 area) could have us switching to a Hold rating, but the evidence continues to say that the buyers are in control.” BUY.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, more than doubled over the past two months and now it’s finally having a correction—though it’s still above its 25-day moving average. In his latest update, Carl wrote, “Some more conservative investors may wish to take some profits off the table at these levels. More aggressive investors should keep all their shares but may wish to put in place a stop-loss at 30.” Also, the stock appeared in Mike Cintolo’s Cabot Top Ten Trader last week, where he wrote, “Luckin Coffee is set to become the largest coffee player in China. The firm is the pioneer of a technology-driven retail pick-up model that provides coffee and other products to customers in a 100% cashier-less environment, with customers ordering online and given a time to swing by and pick up their drink. The Chinese coffee market remains shockingly underpenetrated by western standards—China is a nation of tea drinkers, while coffee consumption was a mere 6.2 cups per capita in 2018. Thus far, marketing costs for new store openings and customer promotions are heavily outpacing revenue, but the company expects to generate positive free cash flow by fourth quarter 2020. Revenue is projected to quickly expand from $732 million in 2019 to $2.0 billion in 2020 from both organic growth and the onset of franchisees reaching revenue-sharing goals. It’s a huge idea. We advise waiting for pullbacks in this volatile stock before starting a position.” BUY.
Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, is another energy stock that hasn’t really gotten going yet—but 2020 may change that, as energy stocks were one of the worst-performing sectors in 2019, and rotation may bring them to the fore. Right now, the stock is trading just above its 200-day moving average, which is likely to offer support. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, remains in a slow but steady uptrend, with no signs of selling pressure. In his update last week, Tom wrote, “The market soared on the first trading day of the year and investors expressed their contempt at being slowed down by anything safe. Utilities and REITs took a beating. But don’t let this opening day price action fool you. There is still a strong appetite for safety and yield and NEE is one of the very best in class. This largest American utility by market cap combines steady cash flow from its stellar Florida Power and Light division with growth from the alternative energy business. NextEra is a huge player in fast-growing clean energy and is the world’s largest producer of wind and solar energy. It is also shareholder-friendly, targeting 12% to 15% annual dividend growth through 2024.The only chink in the armor is a high valuation. But momentum still looks great.” HOLD.
Pinduoduo (PDD), originally recommended by Mike Cintolo in Cabot Growth Investor, operates a Chinese e-commerce platform that has great growth potential and the stock is still in an uptrend, riding its 50-day moving average slowly higher. HOLD.
Qorvo (QRVO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a new high two weeks ago and has pulled back normally since. In Cabot Growth Investor last week, Mike wrote, “QRVO is our favorite among a handful of semiconductor stocks that look set to earn huge money during the next two to three years as 5G smartphones and Internet of Things devices hit the mainstream. After no growth during the past two years, one analyst sees total radio frequency (RF) component sales growing at a 14% annual pace through 2022, with 5G RF sales exploding from just $250 million last year to $11 billion in 2022! Moreover, one fact playing in Qorvo’s favor is the preference of device makers for integrated solutions (instead of one-off components that usually offer less performance); it’s likely the company will outperform current conservative market share guesstimates by Wall Street. As for the stock, it’s certainly earned the right to consolidate for a bit if it wants to, but we’re thinking the massive multi-year breakout in November and big growth story mean higher prices are coming down the road. We’ll stay on Buy, though you might consider keeping new buys on the small side or looking for pullbacks of two or three points.” BUY.
Ring Central (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is one of the leading providers of Unified Communications Services, which integrate a variety of communications technologies using cloud-based services and thus enable both employees and customers to get what they need from enterprises large and small. The stock saw high-volume buying on the first day of the year and is now very close to breaking out to all-time highs. HOLD.
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the portfolio’s second Heritage Stock (big profits and big potential) and the years of patient waiting are finally paying off, as short-sellers are gradually buying in and the entire auto industry races to catch up. The stock is up 72% since it blasted off in October, but given that the surge came after five-plus years of consolidation, logic says the current run has further to go. HOLD.
TopBuild (BLD), originally recommended in Cabot Top Ten Trader by Mike Cintolo, bottomed on December 19 but has been working its way slowly higher since, so I’ll continue to hold. HOLD.
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, is now completing its wash-and-rinse cycle; it fell from 13.73 to 9.18 (33%) on the short-sellers’ attack in mid-December, rebounded to 12, and has now pulled back to below 11—and when this cycle is truly over, it looks like the stock’s comfort zone will be around 11. But what we really need now is for the cannabis sector to start trending up again. HOLD.
Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is an aggressive investment, guaranteed to be volatile, but so far the volatility has been in the right direction. And in last week’s update, Carl retained the stock’s buy rating! Long-term, SPCE has the potential to do for the aircraft industry what Tesla has done to the automobile industry (so owning some is a good goal for aggressive, forward-looking investors), but short-term, I’d be reluctant to buy at this altitude. Buying volume has tapered off recently, and the 50-day moving average is way down at 9.6. Still, to reflect Carl’s optimism, I’ll leave it rated buy, with the warnings about downside potential. BUY.
The next Cabot Stock of the Week issue will be published on January 13, 2020.
Cabot Wealth Network
Publishing independent investment advice since 1970.
CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com
Copyright © 2020. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved.