The market remains in fine health, with all major indexes in strong uptrends and no signs of divergence that typically precede major market tops. Additionally, numerous market-timing indicators tell us the market is likely to be higher months from now. However, as all investors know, corrections will occur, and it’s looking increasingly likely that one is due. So, you should be prepared. This might mean taking profits in stocks that are extended—as many are now. Or it just might mean setting some stops, so that winners don’t turn into losers. In the meantime, there are plenty of fine-looking stocks to buy, and today I’m leaning toward an Asian company that happens to have my favorite fundamental characteristic—accelerating revenue growth.
Details in the issue.
Cabot Stock of the Week 281
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The market remains in fine health, with all major indexes in strong uptrends and no signs of divergence that typically precede major market tops. Additionally, numerous market-timing indicators tell us the market is likely to be higher months from now. However, as all investors know, corrections will occur, and it’s looking increasingly likely that one is due. So, you should be prepared. This might mean taking profits in stocks that are extended—as many are now. Or it just might mean setting some stops, so that winners don’t turn into losers. In the meantime, there are plenty of fine-looking stocks to buy, and today I’m leaning toward an Asian company that happens to have my favorite fundamental characteristic—accelerating revenue growth. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.
Sea Ltd. (SE)
Chinese stocks have turned very strong of late, soaring to the heavens following a year and a half in the wilderness. While we do think some of the big players over there look like they can continue to motor higher (Alibaba, for instance, is on my watch list in Cabot Growth Investor), we’re even higher on Sea Limited, which operates in Southeast Asia, outside of China, doing good business in Singapore, Taiwan, Indonesia, Vietnam, Thailand and even the Philippines.
Actually, Sea doesn’t just operate in these areas—it dominates them, at least when it comes to the firm’s two main division. The first is its digital entertainment operation, where it operates the region’s largest gaming platform (dubbed Garena), including its hit Free Fire game, which has is one of the world’s most popular battle royale games and has made inroads in many places (recently the largest grossing game in Latin America as well as Southeast Asia). Sea also offers some e-sports events, where people actually watch others play “competitive” video games.Thanks mostly to the game segment, Sea’s digital entertainment business has been booming; in Q3, revenues were up a whopping 212% from a year ago. That said, because of a lack of new games, growth here is likely to slow in 2020; some analysts see 10% to 15% expansion, and while that’s likely conservative (Sea regularly trashes estimates), triple-digit growth isn’t going to be repeated.The good news is that Sea’s e-commerce division should more than pick up the slack. Thanks to its Shopee brand (fifth most downloaded shopping app in the world!), the firm is growing like mad as people and businesses in Southeast Asia get online and incomes rise. The growth for Sea in this business is truly crazy—total orders (up 103%) and gross merchandise volume sold (up 70% to $4.57 billion) boomed across the business, with its largest market (Indonesia) showing even more impressive numbers (orders up 118%).Just as impressively, Sea’s take rate (the cut it gets of each transaction) more than doubled in the quarter, which allowed total e-commerce revenues to rise a mind-boggling 261%.While that level of growth can’t be sustained for long, there’s plenty of excitement about the future. One recent report claimed that gross merchandise volume for e-commerce in Southeast Asia would likely come in around $38 billion in 2019—and by 2025, that could grow to $153 billion, a fourfold increase! Of course, we’re not going to put all our eggs on a six-year projection, but the point is there’s a ton of growth coming down the pike. And, looking just at the next few quarters, the general expectation that global economic growth will pick up steam will only help the countries Sea serves.
Given the firm’s rapid growth, Sea is investing in infrastructure and marketing and some other areas (like micro-lending, payment services and the like), which has kept the bottom line firmly in the red. That’s OK with us, though, as long as management continues to pull the right levers expanding the business. Analysts see revenues up 36% this year in total, though that’s likely going to prove too low.
As for the stock, SE broke out of a big post-IPO base in February 2019 and had a fantastic run, basically doubling in about five months. Thus, it was no surprise when the stock pulled in for a while, eventually tagging its long-term 40-week moving average in October. However, a month later, the Q3 report brought buyers back (shares gapped up on one of their heaviest volume weeks ever), and while SE hasn’t set the world on fire since then, it’s pushed gradually higher with no signs of major selling, riding its 25-day line higher. Bottom line, we think the next big move is up.
Current Recommendations
In general, the Cabot Stock of the Week portfolio, like the market, is performing quite well, with numerous stocks at or near new highs. However, with today’s addition of Sea, Ltd. (SE), the portfolio becomes more than full, so I must again sell something, and the unlucky victim today is Marathon Petroleum (MPC), which is the portfolio’s biggest loss. As a growth investor at heart, I like to let winners run and cut losses short. On the other hand, Crista Huff is sticking with MPC for fundamental reasons, and it might be right for your portfolio to stock with it too—particularly if you prefer to take some profits in high-fliers instead.
Details below.
Changes
Endava (DAVA) to Hold
Luckin Coffee (LK) to Hold
Marathon Petroleum (MPC) to Sell
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, saw some high-volume selling in early January that washed out the final weak hands and last week the stock broke out to new highs! In his latest update (before the breakout) Tom wrote, “This life science and research lab REIT pulled back a little bit last week after announcing a new offering of 6 million shares. But the company has a proven track record overcoming dilution from new issuances and has resumed its upward momentum after just a couple of days. Demand for its rare life science and research lab facilities remains strong and investors are still attracted to the defensive nature of the business. The stock has been an all-star performer for many years and I expect it to continue to behave well in this environment. 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 high-volume selloff, though it was back in December, and last week this stock too broke out to new highs! Just before that event, Tom wrote, “The global infrastructure partnership appears to have resumed an upward trend. 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 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, has been in a steady uptrend since September, and hit a new high last week—for good reason. In her latest update Crista wrote, “Citigroup reported fourth quarter 2019 results this morning. Earnings per share of $2.15 beat the estimate of $1.84 and all analysts’ estimates, though that included a one-time tax benefit. Revenue came in at $18.4 billion, above the $17.9 billion estimate and at the very top of the estimate range. Strong results were attributed to the Institutional Clients Group (ICG) and Global Consumer Banking (GCB). The company repurchased 69 million shares during the quarter and 264 million shares during the full year. C only recently rose above significant price resistance at about 76, and hasn’t traded above 80 since 2008, so the stock has just entered a modern version of new high territory. Nobody has missed the coming run-up. Buy C now. (A brief stock market correction could temporarily pull C back to the upper 70s, and that would be a buying opportunity.)” 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 Crista remains optimistic that value will win out—and I remain optimistic that if/when some of those high-flying stocks fall, DBI will be fairly immune to selling pressure. In her update last week, Crista wrote, “Consensus earnings estimates project no earnings growth in their fiscal 2019 year (January 2020 year end) and 19.7% EPS growth in 2020. The 2020 P/E is low at 8.7. DBI is an undervalued, small-cap stock. The stock continues to trade somewhat aimlessly in the 15-17 range. Patient growth and dividend investors should buy now, lock in the large current yield, and benefit from eventual capital gains as the company continues to fulfill their successful marketing strategies.” 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 still buy here, as the stock is six weeks off its high, and sitting right at support, accompanied by both its 25- and 50-day moving averages. BUY.
Dow, Inc. (DOW), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio and featured here last week, has popped up slightly, but mainly remains in the long base that it’s been building since early November, which is almost certain to eventually lead to a renewed uptrend. In last week’s update, Crista wrote, “DOW is an undervalued stock with strong earnings growth and a large dividend yield. The company is exhibiting progress on cash flow, cost cutting, a focus on debt repayment, a litigation win and an ability to thrive during a weak global economy. The company will deliver 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.
“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 pattern 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.” 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. In his latest update, Tyler noted that there’s been no real news from management, but that the stock has been soft nonetheless—which is not good in such a hot bull market. Thus, he downgraded the stock to Hold and I’ll do likewise. HOLD.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, continues to climb, staying above all its moving averages. In his latest update, Tom wrote, “This underappreciated blue-chip energy company has acted better of late. After a disappointing year where it significantly underperformed the market, EPD has moved 15% higher since late November. Hopefully, investors are done neglecting this gem. It has everything going for it: valuation, growing earnings and a rock solid dividend payout with a massive 6.2% yield. The market will figure it out eventually. In the meantime, you get very well paid to wait and have limited downside if the market turns south.” 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 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 in a correction. Preliminary results for hotel operations for the fourth quarter ended December 31 saw the company add a net of 467 hotels, bringing its total to 5,618 hotels (with 536,876 rooms). Occupancy rates fell a bit in the quarter while average room rates rose. Additionally, soon after the end of the quarter, the company completed its acquisition of Deutsche Hospitality, acquiring the brands Steigenberger Hotels & Resorts, Maxx by Steigenberger, Jaz Hotel, Intercity Hotel and Zleep Hotel; most of these hotels are in Germany, with a few in Austria and Switzerland. The stock sold off a bit on the report but it has recovered the loss since and the main trend remains up. HOLD.
Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, remains hot; it hit another new high Friday. In last week’s update, Mike wrote, “Following seven weeks of consolidation and a couple of tests of the 50-day line, IPHI broke out nicely last week on a solid pickup in volume, which is obviously good to see. The firm completed its acquisition of eSignal this week (for $216 million), which not only solidifies its leadership position in products that connect data centers, and importantly, is expected to be highly accretive to earnings in 2021 (boosting the bottom line by 20% on its own!). With many uncertainties out of the way that possibly could have crimped business spending, the odds are even greater that demand for Inphi’s high-speed interconnects will be in big demand for many quarters. Earnings will likely be released around the end of January.” BUY.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, continues to soar like a homesick angel as more and more investors become aware of the stock and the company’s great growth potential. In his latest update, Carl wrote, “Luckin this week raised a combined $778 million from an additional share sale and convertible bond offerings. Credit Suisse issued an update yesterday. The company recently unveiled Luckin Coffee Express, a vending machine for brewed coffee and snacks. The company also announced that it ended 2019 with about 4,500 outlets, which is a larger number than Starbucks. More conservative investors should take some profits off the table but the most aggressive investors should keep all their shares.” I’ve been impressed by Carl’s ability to keep the stock rated buy even as it kites higher (and the fact that buying high has paid off so far), but I’m going to downgrade it to hold here, buying volume is fading and the odds of a correction have grown too high to ignore. HOLD.
Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, closed at its lowest level since September last week (though an optimist could call it a triple bottom) and I’m going to sell here out of fear of further downside—despite the fact that Crista remains bullish on the stock. It’s a tough call, and there’s certainly a possibility that the stock will turn right around and march higher from here. But as I write, MPC represents our biggest loss, and I don’t like holding losers. SELL.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has hit new highs on the past five trading days! In his update last week, Tom wrote, “This utility and alternative energy superstar has blown away the performance of both its utility peers and the S&P 500 in every measurable period over the last ten years. It’s the largest American utility by market capitalization, combining steady cash flow from its stellar Florida Power and Light division with growth from the alternative energy business. It’s a beautiful combination of steady cash flow and growth. 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 is still phenomenal.” 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, has recovered from a small correction over the past two weeks and is primed to break out to a new high. In Cabot Growth Investor last week, Mike wrote, “Along with some semiconductor peers (including a couple focused on 5G smartphones), QRVO has been in a normal consolidation for three weeks (fallen just 8% from high to low; never got to its 50-day line). Chip stocks are frequently hard to handle, partially because they’re down-the-food-chain situations; if a big customer or two sneeze (usually because of industry conditions), then everyone gets the flu. That’s why our eyes are always open for a meaningful change in character, but right here, our thoughts haven’t changed: It’s likely that Qorvo will be one of the big beneficiaries of the 5G ramp in 2020, and the out-of-this-world November breakout should bode well going forward. We half-expect some more wobbles in the days ahead, but we’re sticking with our Buy rating, thinking this rest (and/or any coming shakeout) will prove buyable. As a heads up, the next quarterly report is due out next week (January 29), so you might consider keeping new positions on the smaller side.” 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 broke out to all-time highs at the start of the year and keeps going up! 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 their losses and the entire auto industry races to increase their electrification efforts to catch up to Tesla. The stock doubled from its October blastoff to its high last early week, and buying volume finally seems to be easing, telling us a correction (possibly minor) is likely. Short-term traders could take some profits here, but my thoughts remain long-term. Finally, here’s a column I wrote for our website today comparing TSLA to two other hot stocks: https://cabotwealth.com/daily/growth-stocks/tesla-tsla-luckin-coffee-lk-virgin-galactic-spce/ HOLD.
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, saw its stock bottom at 10 two weeks ago (just as I suggested it could) and it’s rallied to 11 since—though there’s still no positive momentum. But that will come, when the sector comes back to life. Until then, holding is recommended, with 10 being the line in the sand. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, hit new highs on multiple days last week! In last week’s update, Mike wrote, “Vertex presented at the JPMorgan healthcare conference, and while it didn’t make any major waves (it’s going to save 2020 guidance and Q4 results for its year-end report, which is likely out in early February), it did offer a few interesting numbers—management expects further label broadening for Trikafta (approval to treat patients 12-and-over in Europe this year; patients 6-11 years old in the U.S. after that; its addressable market should expand to 90% of all cystic fibrosis patients) and, longer-term, sees solid revenue and cash flow growth for many years to come, which is sure to keep big investors interested. The stock bounced off its 50-day line and moved to new highs last week, and it remains perched near virgin turf today. As with every stock, some further ups and downs are possible, especially if the market hits a pothole, but we think VRTX’s uptrend should carry it nicely higher over time.” BUY.
Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, saw more high-volume buying last week and more new highs—which left the stock 55% above its 50-day moving average. So there’s room for a correction—but there’s no sign of selling pressure yet. In last week’s update, Carl wrote, “Last week the company presented at the Merrill Lynch Defense and Aerospace Forum and will be presenting today at the UBS Future of Travel Conference. This is an aggressive idea that has made a strong move since being added to the Explorer portfolio but I believe there is more upside as the company stays in the media spotlight throughout 2020.” Note: If you had invested $117,327 in the stock on December 5 when Carl first recommended it, you would now be able to cash in your stock to buy a $250,000 ticket into space (ignoring fees and taxes). BUY.
The next Cabot Stock of the Week issue will be published on January 27, 2020.
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