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 and I continue to recommend that you remain heavily invested. However, it’s worth noting that the market is increasingly ripe for a pullback, and that a few of our super-strong stocks (LK and SPCE and TSLA) are also ripe for major pullbacks. In other words the market looks a bit overheated here.
Thus this week’s recommendation is a lower-risk, high-yielding chemical stock with very little downside potential. I think it will balance those higher-risk stocks nicely. Lastly, the addition of this stock means we have to sell one, and the victim this week is TopBuild (BLD).
Details in the issue.
Cabot Stock of the Week 280
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The market is strong, our portfolio is full, and the prospects for the months ahead look good. Thus I continue to recommend that you be heavily invested in stocks that help you meet your investing goals. However, as you all know, market corrections are inevitable, and it’s important that you be positioned so that these corrections don’t cause serious damage to your portfolio. Strategies to do this include buying on corrections, taking profits at tops, holding cash when the market is weak, and diversifying your portfolio, so that weakness in any one area doesn’t impact your portfolio excessively. Which brings me to today’s recommended stock, which seemed a perfect choice to balance some of the high-risk/high-potential stocks I’ve recently recommended. It’s a familiar name, with a healthy 5.4% yield and a chart that presents a good buying opportunity. The stock was originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor and here are Crista’s latest thoughts.
Dow Inc. (DOW)
Dow is a commodity chemicals company that derives roughly 50% of profits from its polyethylene business. Dow Inc. was the materials science division of the former DowDuPont (DWDP), from which Dow was spun off in April 2019. Dow delivered good third-quarter results in October, with profits far exceeding analysts’ expectations, despite weak demand and a rise in inventories of chemicals used in making plastics. Dow grew volume in their packaging, polyurethanes and silicones businesses, and successfully leveraged their industry-leading feedstock flexibility in the U.S. and Europe. They also delivered notable improvements in pricing in the Packaging and Specialty Plastics business toward the end of the quarter. Additionally, management completed a $1.365 billion cost synergy program and removed $40 million of stranded costs. The company is exhibiting progress on cash flow, cost cutting, a focus on debt repayment, and an ability to thrive during a weak global economy.
In October, a judge in Canada ordered Nova Chemicals to promptly pay approximately $1.08 billion to Dow Inc. with regard to lost profitability in an ethylene business venture. The judgment pertains to the joint venture’s operations through the year 2012. An additional judgment has yet to be determined, which will cover subsequent years’ liability on the part of Nova Chemicals. The business problems that caused the lawsuit have been rectified, and Dow is earning ongoing profits from the joint venture. For perspective, the $1.08 billion award is approximately the same amount of money as Dow’s recent second-quarter operating EBIT (earnings before interest and taxes). That’s a nice windfall that Dow can use to pay down debt.
The company will announce fourth-quarter results on the morning of January 29. Wall Street is expecting Dow to report $0.75 EPS, within a range of $0.57-$0.85, and $10.2 billion revenue, within a range of $9.9-$10.9 billion. Additionally, analysts expect full-year EPS of $3.50 and $4.12 in 2019 and 2020. The projected 2020 EPS growth rate is 17.7% and the corresponding P/E is 12.6.
At the time of the April spinoff, Dow announced a $3 billion share repurchase authorization, then proceeded to buy back $400 million of stock through September. The quarterly dividend for the new company is $0.70 per share.
It’s been my general experience that Wall Street analysts don’t begin to thoroughly embrace a company that’s recently experienced significant M&A activity (e.g. acquisitions or spinoffs) until the new company has reported two successful quarters of post-M&A financial results. Thus far, Dow has reported two quarters of financial results through mid-October. And right on cue, the stock emerged from a stagnant trading situation and delivered attractive capital gains in October and November. Eight investment firms have since raised their price targets on DOW to a range of 51-60. The company’s ongoing successes, low stock valuation and hefty dividend yield should not only provide downside protection, but should attract institutional investors as they become more confident in the new Dow’s financial performance and management expertise.
The stock had a large run-up from 39 to 55 after its August low, and has since traded sideways, with price support at 51. There’s 8% upside within the trading range. Investors can benefit from additional capital gains as the projections for aggressive earnings growth materialize and draw attention to the stock. DOW is a one-size-fits-all portfolio stock, accommodating investors’ desires for growth, income, a trading opportunity and a big blue-chip name. Buy DOW now before the company impresses the market yet again with fourth-quarter results in a few weeks.
Current Recommendations
In general, the portfolio, like the market, is performing quite well, with numerous stocks at or near new highs. However, with today’s addition of Dow, Inc. (DOW), the portfolio becomes more than full, so I must sell something, and the unlucky victim is TopBuild (BLD), which hasn’t done anything wrong but hasn’t really done anything right, either.
Details below.
Changes
Designer Brands Inc. (DBI) to Buy
TopBuild (BLD) to Sell
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, has climbed back above all its moving averages after selling off on big volume a week ago. Tom explained the selloff, which is nothing to worry about, in last week’s update: ”The reason is simple. The REIT announced a public offering of an additional six million shares at $155 per share. This happens with tax-advantaged securities like REITs, MLPs and BDCs. Since the companies are required to pay out most of earnings in dividends, they need to raise capital by borrowing or issuing new stock. New stock is a bummer because it dilutes existing shares. That said, the dilution is minor because ARE has 115 million shares outstanding. This should only be a blip as the business is very strong. 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.” HOLD.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, remains on a well-deserved correction, and Tom says he’s like to see another selloff before he restores its buy rating. Last week, 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, revenue generating companies should remain strong. As well, infrastructure is a growing subsector that is increasingly popular with investors, almost like a utility on steroids. The stock has pulled back a little bit from the high in November but the minor consolidation is healthy. BIP is still rated HOLD because it had a sizable run up and I will wait to upgrade it if there is a further selloff.” HOLD.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, hit a new high on the first day of the New Year and has pulled back minimally since. In last week’s update she wrote, “The new Current Expected Credit Loss (CECL) accounting rules will bring modest downward revisions to consensus earnings estimates to all affected companies in the coming weeks, because many analysts did not have this huge, impactful situation previously calculated into their estimates. Also, be prepared for several months of scary news headlines from the financial media. My investment focus will remain on financial companies and retailers that are expected to deliver better profit growth than their peers. In that light, Citigroup remains my favorite large-cap bank stock. Wall Street expects EPS to grow 16.1% and 8.9% in 2019 and 2020. The 2020 P/E is 9.5. This month, Barclays and RBC raised their price targets on C to 98 and 84, respectively. The stock hasn’t traded above 80 since 2008, so it appears that C is preparing to enter a modern version of new high territory.” BUY.
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, is still a loser for us, but the stock recovered nicely through December, and now sits near both its 25- and 50-day moving averages, so technically, it’s ripe for an advance if the fundamentals justify it—and Crista says they do. In her update last week, she wrote, “Consensus earnings estimates project no earnings growth in 2019 (January 2020 year end) and 19.7% EPS growth in 2020. The fiscal 2020 P/E is low at 9.0. DBI is an undervalued, small-cap stock. I’m moving DBI from Hold to a Buy recommendation, now that earnings projections and the share price have stabilized, subsequent to the disappointing third quarter.” BUY.
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. If you haven’t bought yet, you can buy now, as the stock is a month off its high, and has now pulled back to its 50-day moving average, establishing support at 144 several times in the process. BUY.
Endava (DAVA), originally recommended by Tyler Laundon in Cabot Early Opportunities, is a U.K.-based company that bridges the gap between consultants and traditional IT services companies, helping organizations succeed in an increasingly technological world. The bulk of the company’s business (54%) comes from work for payments and financial services companies, while other clients are in technology, media, consumer, healthcare, logistics and retail. 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, has been climbing since mid-November and hit another new high last week. In his latest update, Tom wrote, “The stock has definitely been performing better since it dipped to about $25 per share in November. We’ll see if the stock continues to rally. It is still selling 30% below the 2014 high despite the fact the earnings have been rising ever since 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, waiting for its moving averages to catch up. HOLD.
Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, has been hot; it’s up 12% over the past week. In last week’s update, Mike wrote, “Last week, we highlighted some encouraging chart action we saw in Inphi, despite the fact that it hadn’t done much during the prior two months. And this week those factors have proven out—IPHI leapt to new highs on a couple of days of heavy volume. The company announced today a sales milestone for its COLORZ data center interconnect system, which is being sold with the help of Microsoft. If you own some, sit tight, and if not, we’re OK buying here or (preferably) on dips of a couple of points.” BUY.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, had a correction that only lasted three days—just long enough for the stock to tag its 25-day moving average—and then it resumed its strong uptrend, which included the stock’s biggest-volume day yet. At some point this uptrend will top out, but until then aggressive investors can enjoy the ride. In his latest update, Carl wrote, “LK announced Luckin Coffee Express – a vending machine for brewed coffee and snacks. The company also announced that it ended 2019 with about 4,500 outlets, a number that exceeds the total Starbucks stores in China. Luckin trades more than 100% above where its IPO was priced last May so 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.” BUY.
Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has bottomed at 57 twice since early December, so technically is ripe to trend higher. In her latest update, Crista wrote, “Marathon will report fourth quarter results on the morning of January 29. Analysts currently expect $1.17 EPS, within a range of $0.73-$2.07; and $33.7 billion revenue, within a range of $29.2-$48.1 billion. MPC is a greatly undervalued large-cap stock with a solid dividend yield. Full-year EPS are expected to fall 28% in 2019, then rise 67% in 2020. The 2020 P/E is very low at 7.9. Oil refining stocks fell on Friday, January 3 in reaction to military action in Iran. I expect that price situation to be fleeting. This is an excellent moment for all types of growth investors and dividend investors to buy MPC.” BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, remains in steady uptrend, hitting new highs regularly. In his update last week, Tom wrote, “There is still a strong appetite for safety and yield and NEE is one of the very best in class. Investors love this company and it rarely misses a beat. It’s right back at new all time highs. 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), 0riginally 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), 0riginally recommended by Mike Cintolo in Cabot Top Ten Trader, had a normal correction after hitting new highs in late December and now the stock is working its way back. In Cabot Growth Investor last week, Mike wrote, “5G smartphone-related chip stocks have softened of late, with QRVO suffering some selling on elevated volume in recent days. We obviously have our eyes open, as chip stocks often come and go quickly, but so far, the action is normal; some type of retreat was likely after the stock’s huge post-earnings run, after all. A drop below the 50-day line (now nearing 108) would probably have us going to Hold, but given what we see now, we’re sticking with our Buy rating.” BUY.
Ring Central (RNG), 0riginally 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 broke out to all-time highs last week and is still flying high today. 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 have finally paid off, as short-sellers have raced to cover and the entire auto industry races to increase their electrification efforts. The stock has now doubled since it blasted off in October. That it can go further in the days ahead is certainly possible; I often say that trends can last longer and go farther than originally expected. On the other hand, the preponderance of good news about Tesla, along with the increasingly popular perception that going electric is good (everyone from Mini to Hummer is going electric) is a sign to me that this trend is getting a bit frothy. Thus, short-term investors could take some partial profits now, or at least put in a stop somewhere north of 375, which is where we find the 50-day moving average. Thinking long-term, I’ll hold. HOLD.
TopBuild (BLD), originally recommended in Cabot Top Ten Trader by Mike Cintolo, bottomed on December 19 and hasn’t been able to get above its 50-day moving average. Long-term, it may work out fine; the stock is certainly not broken here. But the portfolio needs to sell something, and given that we still have a small loss here, and that Mike has already sold from Cabot Top Ten Trader, out it goes. SELL.
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, continues to feel the weight of the cannabis sector, which performed abysmally last year and has yet to begin a true rebound this year. Since short sellers attacked the stock four weeks ago (when it was the strongest of all cannabis stocks), the stock has sold off to 9.2, rallied to 12, and now pulled back to 10, where if all is well it will build a bottom. Today the company announced that it was suing the short sellers (Grizzly Research LLC) for defamation for publicly disseminating false and libelous statements, calling the report “false, misleading, and unsubstantiated” but the stock didn’t react much. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, was scheduled to present at a J.P. Morgan Healthcare Conference today, but it doesn’t seem to have affected the stock much. In last week’s update, Mike wrote, “In the meantime, we like the action—VRTX’s modest, month-long retreat found support last Friday and the stock has lifted to higher highs on good volume this week. It’s not likely to be the fastest horse, but we continue to think the stock is relatively early in a new advance after two years in the wilderness.” BUY.
Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, continues to rocket higher! (Sorry, I couldn’t resist.) In last week’s update, Carl wrote “Shares are up 39% over the last month. Today the company is presenting at the Merrill Lynch Defense and Aerospace Forum and announced that its second commercial spaceship was nearing completion ahead of schedule. The company has reservations from over 600 people in 60 countries, totaling $80 million in deposits and $120 million in potential revenue. Company founder Sir Richard Branson confirms that space tourism flights will begin within a year and he expects profitability by 2021. The cost of a Virgin flight on SpaceShipTwo, which can hold seven passengers and two pilots, is $250,000. The big payoff is down the road, when hypersonic point-to-point travel becomes a reality. While a business jet takes 11 hours to fly from Los Angeles to Tokyo, a hypersonic vehicle traveling at five times the speed of sound could make the same journey in just two hours. I agree with a recent Morgan Stanley report that compares the space tourism company to a biotech in terms of risk/reward, and I encourage you to buy this stock if you have not yet done so.” At this level, however, I’d say the stock is not for beginners, as it does have substantial potential downside. Also, last week the company completed a successful “Weight on Wheels” test, proving that the landing gear of SpaceShipTwo could support the entire fuselage. It’s another step in the right direction. BUY.
The next Cabot Stock of the Week issue will be published on January 20, 2020.
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