Blue Chip with Exceptional Management

Home Depot (HD) is the nation’s largest home improvement retailer. The company sells building materials, home improvement products and lawn and garden products, and provides many other services. Home Depot serves do-it-yourself homeowners as well as professional builders, contractors and repair people. The company operates 2,278 retail warehouse-type stores in the U.S., Canada and Mexico.

The U.S. housing market is expected to strengthen during the remainder of 2017, and older homes need repairs and upgrades. Low mortgage interest rates will help the home improvement boom expand into 2018.

Carol B. Tomé, 60, is chief financial officer and executive vice president of Home Depot. Ms. Tomé has served as chief financial officer since May 2001 and was named executive vice president of corporate services in January 2007.

At 23.6 times current EPS and with a dividend yield of 2.6%, HD sells at a reasonable price. Home Depot is a blue-chip company with a proven track record and exceptional management. Buy.

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How GoPro Can Become a Great Company (and Stock)

Wait a Second. GoPro Soared 20%?

GoPro (GPRO) is one of those stocks that always draws a lot of attention. It did so when it was soaring in early 2014, when it was crashing later that same year, and again when it was crashing in late 2015. It’s even drawn eyeballs over the last two years when the stock hasn’t done much at all, other than mount a failed rally on the back of high hopes for last year’s new product launches.

Given its popularity, it’s not surprising that there was a flurry of articles covering GoPro when shares jumped 20% following last Thursday’s surprise earnings beat. In a minute, I’ll get into the earnings report and why the stock rallied so much. I’ll also give you my opinion on whether or not you can make money by buying it now.

But first, let’s talk a little about GoPro and what I think could make the company great once again (assuming it was great before it began flailing post-IPO).

How GoPro Can Be Great Again

GoPro started out as a hardware company that had a really neat and innovative product. Sure, the market for action cameras is somewhat limited, but that didn’t become an issue until the company went public. After the IPO, there was more pressure to show a growing addressable market, push revenue and EPS growth, etc. And that seemed to shift the company’s focus to creating an entertainment unit, creating media relationships and figuring out ways to leverage all the content created on the cameras.

The problem was that amateur video footage doesn’t have much value unless you have a personal relationship with the people on camera. And the company then failed to do what it had started out doing, which was innovating on the product development front. At least, that’s my interpretation of what happened.


Lost in the shuffle was GoPro’s ability to expand its user base to people like me, who could have been customers by now—and could be on their second or third camera.

I’m relatively adventurous. I ski. I surf. I mountain bike. I fish. I have kids. I’m in an older age bracket (over 40) that I suspect GoPro has trouble penetrating. And I try to document many activities with my iPhone, but it’s pretty annoying to do so. The risk of destroying an expensive cell phone is relatively high, so I don’t use it that much. A GoPro seems like a good thing for me, but I still don’t have one.

Why not? And why did I return the one my wife bought me for Christmas? GoPro, listen up!

The answer is simple. Because, as much as I’d like to capture more picture and video footage of activities in my life, I don’t want to feel like a tool while doing so.

tool: (n) [toooooooooool]

1.) One who lacks the mental capacity to know he is being used. A fool.

2.) An un-cool person. A loser.

3.) Someone whose ego far exceeds his talent, intelligence and likeability.

There are a lot of people who like the idea of a GoPro, but feel like I do. Our desire to avoid looking toolish wearing GoPros is stronger than our desire to capture the footage.

I believe this has stopped not just me, but tens of thousands of other potential buyers from taking the step that, in my opinion, could help turn GoPro back into a great investment. Implied in my reasoning is that if GoPro could pull us into the fold, it will have become a great company by significantly expanding its user base through product innovation.

Before I get a lot of angry emails, let me clear up one thing. I’m not saying that everybody that wears a GoPro is a tool. I’m sure some are and some aren’t. A lot of people feel fine wearing one. More power to them. A ton of kids have GoPros, and they all get a pass because, hey, they’re kids.

But from conversations that I’ve had with a lot of other people that do the same activities I do, the main hesitation isn’t video quality, desire to capture content, cost, etc. It’s all about not wanting to wear a big accessory that sticks out like a sore thumb.

I have no formal market research to back up this assertion. And I don’t know the precise number of potential customers GoPro is missing out on. But I think it’s a very, very significant number.

I also think it’s not an unsurmountable challenge to get me and people that feel like me to buy one. It’s just a matter of innovating on the form factor front.

In plain English, that means changing the size and shape of the camera so that it’s not so obvious while being worn. I don’t want to look like a peacock while skiing or mountain biking. I’m not going to hold a camera in my mouth while surfing, drill into my board to mount it, wear what looks like a laser tag vest to hold it in front of my body, or hold it in one hand while paddling with the other (I’m just not that good a surfer!). I think the head strap accessory GoPro makes is good for a lot of low impact activities and ends up looking like a headlamp, but the reality is these are the times when my iPhone works well enough.

Even though GoPro made progress shrinking the form factor with the Session (far right in this image), the ice cube sized camera is still too big. There’s just no way it’s going to happen.

I’ve spent the last couple of years thinking that innovation on the form factor front is such an obvious way to grow sales that GoPro is working on solutions.

But I could be wrong. If I am, and the engineers don’t have files full of drawings and technical specs, I want to make a few suggestions and point to specific examples on the market that GoPro should be working toward (in my head I’m shouting, “Aren’t they doing this stuff already!?).

The first idea is to incorporate the camera into helmets. GoPro could design their own (probably the best route), or partner with leading helmet manufactures in biking, skiing, motocross, auto racing and other markets. Given that we’re all wearing helmets for all these activities anyway, this represents a very low hurdle for those of us who don’t want the helmet-mounted accessory.

I’m sure there are technical challenges to overcome, like where do you put the battery, how do you adjust the angle, what about durability, safety, etc. But these seem surmountable, especially for what should be an innovative company that created the action camera category.

I did a quick web search and came across a small company in California pursuing this design. It’s called C-Preme, and it has a couple of subsidiaries, Bult and Video Head, that make helmets with integrated cameras. I don’t know anything about it, but the concept seems like a natural fit for GoPro.

Another idea is to incorporate the camera into goggles. Again, we already wear them for a lot of activities (skiing, diving, motocross), so it’s not a big deal to buy a pair with a camera, assuming it functions just as well as other alternatives. There are various versions of this on the market right now that you can buy on Amazon, including a number from a company named Liquid Image. I have no idea if they’re any good.

Designing a camera that’s an improvement for surfing is more challenging. You could integrate one into various locations in a wetsuit. Surfers wear hoods in cold water, or there could be room on a shoulder or chest. For warm water applications, a lot of surfers wear rash guards on their upper halves, and, like a wetsuit, a small camera could be incorporated into the fabric on the shoulder. It would probably have to stick out some, but not as much as current designs. Cables might be necessary to allow for a battery back in an unobtrusive location like around the waist (heated wetsuits on the market use this approach).

These are just a couple of ideas. Clever engineers might be able to make one camera that could work in helmets, goggles, wetsuits and other pieces of equipment. It seems worth the effort. In addition to expanding the market for the cameras, there are also tons of potential accessory sales that would align with GoPro’s current sales strategy.

Should You Consider Buying GoPro Now?

Let’s move on to what GoPro actually did in Q2, and why the stock jumped almost 20% last Friday.

The main two reasons were that revenue of $297 million beat by $27 million (a 10% beat), and EPS of -$0.09 beat by $0.16. Both were significant beats and represented big percentage-based improvements; revenue was up 34% while EPS was up 83% (albeit still in negative territory, but let’s not be overly critical). Here’s what the charts of quarterly revenue and EPS look like.

Other contributing factors were that channel inventories appear to be back to normal (meaning retailers aren’t sitting on boxes of unsold cameras), the new HERO6 camera is reportedly on track for launch this quarter (we don’t know what the form factor is), the new QuikStories software (integrates easily with smartphones with ready-to-share videos) appears to be popular, global sell-thru was up 18% and sales on Amazon Prime Day were very strong.

The high-end Fusion 5.2K spherical camera also sounds like an exciting new product. And the Karma drone might finally be selling a few units (though still less than 10% of revenue), and is launching overseas.

Management has said it’s trying to do fewer things better. One of the central parts of its growth strategy is to go back to its roots and focus on delivering better products and services to its target market, which includes a lot of consumers who are already GoPro enthusiasts. Within this strategic re-focus, I think there’s room for serious innovation on the form factor front, including some of the ideas I just talked about.

“While we are building experienced sharing products and solutions for a much larger addressable market, we feel that the easiest way to gain momentum and the appropriate way, frankly, is to market these improved solutions to our existing community, our existing customer base and lookalike customers, consumers who fit a GoPro customer profile, but haven’t yet purchased from us.” – Nick Woodman, GoPro CEO, Q2 2017 earnings call

Another key element of GoPro’s strategy is to push integration with smartphones so that GoPro devices function like extensions of a smartphone, capturing content that can then be quickly and easily edited, then distributed to contacts and social media sites via all the popular smartphone apps. This makes sense, for now. But within a few years, I think GoPro needs to offer cameras that can connect directly to cellular networks. This would be a big step forward and remove a lot of integration challenges. Apple is working on this very thing with upcoming Apple Watch models. If they can do it in such a small device, GoPro should be able to too.   

(Just a side note here: people love to speculate that GoPro will eventually get acquired by somebody like Apple (AAPL), Amazon (AMZN) or Google (GOOG). Having its devices well integrated with smartphones seems like a step in the right direction, given the importance of hardware and software integration.)

Management guided for 25% revenue growth in Q3 (plus or minus 5%) and EPS of -$0.06 (plus or minus $0.05). Both these numbers are well above consensus estimates, which had projected around 15% revenue growth and EPS of -$0.12.

Another notable strategy from the conference call was that management is saying it plans to constrain inventory for late in the year (i.e., Q4). The idea is to avoid excess inventory, preferably forgoing some potential sales, delivering a profit and being well-positioned for 2018. This strategy makes sense and seems to be the trend with outdoor product companies with high customer loyalty (good luck buying a Patagonia jacket in your size and a good color in December or January!).

The bottom line is that GoPro is guiding for low single-digit revenue growth in 2017. That implies there will be zero revenue growth in Q4 (it had a monster Q4 in 2016 when the company was flooded with inventory). I have to believe that surpassing guidance is almost a gimme. At this point, we all know the company has to under-promise and over-deliver.

Let’s assume management is allowing plenty of room to beat. Revenue growth could be 30% (to $313 million) in Q3 2017, and 3% in Q4 2017 (to $557 million). This implies 2017 revenue growth of 17% ($1.39 billion). And if you go with the same 17% growth rate in 2018, you get to $1.62 billion in sales. This gets you back to GoPro’s revenue in 2015 (not coincidentally, since I worked the numbers this way!). Presumably, with its reined-in cost structure, EPS would be back in the black, and possibly even above the 2015 level of $0.76.

This might be an overly bullish scenario. But it doesn’t seem impossible. And frankly, I’d be surprised if management hasn’t talked about how it can accomplish this very goal. It would mean three years to get back “on track.” Which, if management is capable, should be doable.

If GoPro comes close to replicating its 2015 results in 2018, I suspect the stock would be up 100% from where it is now by 2019. That’s only 16 months away. Assuming the share count is unchanged, the stock could hit 20 at the end of 2018 and be trading at a trailing PE of 25, if GoPro delivered EPS of $0.76. That’s not a crazy valuation.

Should you buy it?

That’s a very tough call. It’s been a losing bet for so long. And while you want to believe the company can pull it together, the evidence thus far hasn’t been very convincing.

But if you want to roll the dice with a little money, are comfortable holding on for a while (and through some volatility), and have the discipline to average in and not get too emotionally attached to the stock, I think dabbling a little could pay off. I’d probably wait a week or so to see how the stock settles in after this big jump. And then start very slow, buying up to 20% of a desired position size first, waiting a while, and going from there.

One of the compelling things about the stock now is that nobody really likes it. Analysts are barely lukewarm on the name, even after this recent move (I think everybody’s been burned before). When nobody likes a stock and it’s not going down, it typically means that everybody who’s going to sell has already done so (look at the long tail on the stock’s chart). Perhaps the only way left to go is up.

Probably the best advice I can give you is the one I’m taking myself. I own a very small position in the stock, and plan to keep it for a long time. I’ve bought a little more over the past couple of years, and I’m open to buying a little more. But I’m not rushing out to buy more tomorrow. I’ll wait to see how the stock trades following this report, to see how HERO6 is received (it should launch in September), and go from there.

My big picture thesis is that, eventually, the company will expand its market by offering new camera form factors. I think I’d become more bullish on the stock if the company made products that I liked. I do think the brand is well enough known and there are enough loyal customers that the company can be managed, at least, as a steady, slow growth enterprise that’s quite profitable. That’s not asking a lot, and even that scenario could mean a market-beating return over the next five years.

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Undervalued Stock #5: Triumph Group (TGI)

Triumph Group (TGI) makes a wide variety of structural products for military and commercial aircraft, and designs, manufactures and retrofits a variety of aircraft components. The company serves a broad, worldwide spectrum of the aviation industry, including original equipment manufacturers of commercial, business and military aircraft and aircraft parts suppliers, as well as commercial and regional airlines and air cargo carriers.

Sales and earnings have suffered during the past 18 months because production at Boeing, Airbus and Gulfstream for older aircraft models slowed. New management is implementing a plan to downsize the company’s manufacturing operations, improve efficiency and cut costs. Several aircraft makers will begin work on new aircraft in 2017, which will provide a boost to sales for Triumph. The company also won a new contract from Raytheon.

Sales will likely slip another 4% during the next 12 months because of TGI’s ongoing downsizing. EPS will rise 5% to $4.50 spurred by management’s new plan to streamline operations throughout the company. A corporate income tax cut by the new Republican administration could propel earnings considerably higher. The company’s current tax rate is 30%.

Triumph Group reported much better results for the quarter ended March 31. Sales dropped 13% but EPS skyrocketed 114%. Management’s restructuring plan produced better than expected results. New contract wins also added sales and earnings. Triumph settled its dispute with Bombardier, which clears the way for future business between the two companies. TGI shares sell at only 7.2 times current EPS and 3.7 times cash flow, which is extremely low. Buy.

For more updates on these five stocks, and to get access to my portfolio of market’s best value stocks, take a trial subscription to Cabot Benjamin Graham Value Investor by clicking here.

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Five Below (FIVE) Will Benefit from Retail Trend

Not all stocks in the retail industry are suffering. Sellers of luxury goods are on the top end of the spectrum. Dollar stores and retailers selling merchandise at bargain-basement prices are at the bottom end. Both ends will prosper during the next several years. In my mind, the best retail stock to take advantage of that trend is Five Below.

Five Below (FIVE) is a specialty value retailer offering merchandise marketed to teen and pre-teen customers in the U.S. The company offers products priced at $5 or below, including select brands and licensed merchandise across a broad range of categories, which it refers to as worlds: Style, Room, Sports, Media, Crafts, Party, Candy and Seasonal.

The company’s merchandise includes sporting goods, games, fashion accessories and jewelry, hobbies and collectibles, bath and body, candy and snacks, room décor and storage, stationery and school supplies, video game accessories, books, DVDs, iPhone accessories, and novelty and seasonal items. Five Below is headquartered in Philadelphia, Pennsylvania. As of May 5, 2017, the company operated 555 locations in 31 states. The stores average 8,000 square feet and are typically located in shopping centers.

Five Below is expanding rapidly by opening lots of new stores. The company’s 2017 plans include 100 new stores that will extend into new markets, including California. In addition, TV advertising will be increased, and e-commerce on the company’s website will be enhanced.

For the 12 months ended January 31, 2017, sales surged 20% and EPS jumped 24%. Similar growth is forecast for the next 12 months. Five Below’s outstanding performance stands out in the retail sector. The company is not Amazon-proof, but young shoppers are attracted to the trendy bargain-priced merchandise for $5.00 or less at their favorite mall.

Five Below is not a bargain stock, but future growth prospects warrant a premium. With a P/E of 39.4 times latest 12-month EPS, FIVE sells at a 10% lower multiple than Ulta Beauty (ULTA), which sports a P/E of 43.5. Both retailers are expected to grow earnings at a robust 20% pace during the next five years, and neither pays a dividend. Five Below is expected to report first-quarter results on June 5. I recommend purchase of FIVE at the current price.

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Activision Blizzard (ATVI): Owns several of the world’s top game franchises

Activision Blizzard (ATVI 43.17) is an international publisher of interactive entertainment software products. The company was formed in July 2008 when Activision merged with Vivendi Games. Activision was a leading developer of video games for game consoles, hand-held platforms and personal computers. Vivendi Games was a global developer of interactive entertainment and the leader in the multi-player online role-playing games segment. Vivendi has retained a 12% stake in Activision Blizzard.

Activision owns several of the world’s top game franchises, including World of Warcraft, Call of Duty, Skylanders, StarCraft and Diablo. The company also has a long-term exclusive license for certain Marvel Enterprises comic book characters, including Spider-Man and X-Men.

Activision acquired King Digital in February 2016. King is best known for its super popular Candy Crush games and had nearly 500 million monthly active users for its mobile-focused games. Activision now has global scale, multiple strong franchises, and growing digital offerings.

Sales likely advanced 19% and EPS (earnings per share) climbed 16% during the 12 months ended September 30, 2016. Results were bolstered by the purchase of King Digital. Sales will surge another 16% to $6.7 billion and EPS will increase 22% to $2.10 during the next 12 months ending September 30, 2017. Sales and earnings growth is accelerating, and analysts are raising earnings estimates for the next several quarters. In addition, Activision beat analyst EPS estimates by 28% and 95% in the last two quarters.

At 20.5 times next 12-month $2.10 EPS and with a small dividend yield of 0.6%, ATVI shares are undervalued. Activision is expected to increase EPS at a 17.6% pace during the next five years. The company maintains a strong balance sheet. Activision will report third quarter financial results on November 3.

I recommend that you buy ATVI shares at the current price.

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Netflix (NFLX): Great company, but is the stock undervalued?

I found Netflix (NFLX) to be very attractive. It’s an excellent company and deserves your attention for possible future investment. The company is growing at a very fast pace, dominates its current market, and will continue to innovate and create new products and services.

The question is: Is the stock undervalued? Here’s my analysis.

nflx 10-27-16

Netflix is the world’s largest internet subscription service for viewing TV shows and movies. As of September 30, 2016, Netflix had 87 million streaming users (48 million in the U.S. and 39 million international), and six million U.S. DVD subscribers. Netflix offers a variety of subscription plans with no due dates, no late fees, no shipping fees and no pay-per-view fees. Netflix obtains content from various studios and other content providers through streaming license agreements, DVD direct purchases and DVD revenue-sharing agreements.

Netflix’s balance sheet is strong with a manageable debt load, even after its recent addition of $1 billion of new debt. NFLX shares rallied sharply recently after the company posted better-than-expected third-quarter sales and earnings. Subscriber additions totaled 3.6 million, driven by 3.2 million international additions—well ahead of expectations. Management forecasts the recent rapid international subscription and revenue growth will continue into 2017 and beyond.

Netflix earned only $0.37 per share but generated $8.2 billion in sales during the 12 months ended September 30, 2016. More importantly, the company produced $10.25 cash flow per share during the past 12 months, which indicates that earnings per share will explode in future years. The company is expected to grow earnings at a torrid 48% rate during the next three to five years. At 344.4 times current earnings per share, though, (yikes!) NFLX shares appear to be clearly overvalued. However, based on latest 12-month cash flow per share, NFLX is selling at only 12.4 times current cash flow per share, which is very reasonable.

I recommend purchase of NFLX at the current price for investors seeking outstanding growth and who can tolerate the inherent volatile price swings.

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Emergent BioSolutions (EBS): Getting a ton of attention from investors

By Paul Goodwin, Chief Analyst, Cabot Global Stocks Explorer
From Cabot Wealth Advisory 6/11/16 Sign up for Cabot Wealth Advisory—it’s free!

Without going into a long disquisition about the company, here’s a biopharma that is getting a ton of attention from investors. (It also earned a place in Cabot Top Ten Trader, which is almost like the Good Housekeeping Seal of Approval for a growth stock.)

The stock is Emergent BioSolutions (EBS), and here’s how it has spent its last 52 weeks.

When you’re looking for growth stocks, a great chart isn’t enough all by itself, but if a strong chart isn’t part of the package, your chance of success is far lower.

Cabot Top Ten Trader recommends market leaders with strong charts and fundamentals before they are ready to break out. Since January 1, the advisory delivered 101 winning trades, and investors grabbed 68% gains in Barrick Gold, 42% gains in Edwards Lifesciences and 55% gains in Universal Display, just to name the few. If you would like to start profiting from fast growing momentum stocks, consider taking a risk-free trial subscription to Cabot Top Ten Trader.

Emergent BioSolutions (EBS): One great antiterrorism stock

By Timothy Lutts, Chief Analyst, Cabot Stock of the Week
From Cabot Wealth Advisory 5/30/16 Sign up for Cabot Wealth Advisory—it’s free!

Bioterrorism and biowarfare are the threats that drive Emergent BioSolutions’ (EBS) business. Its number-one product (accounting for 82% of revenues) is BioThrax, an anthrax vaccine, and its number one customer—by a long shot—is the U.S. Center for Disease Control (CDC).

The company’s current BioThrax procurement contract with the CDC is scheduled to expire on September 30, and there’s no follow-on contract in place yet. But the CDC has reaffirmed its intent to award a new contract, and the stock’s chart (which knows all) says that investors are not worried about that.

As to the company’s other efforts, a big one is the upcoming spinoff of Aptevo Therapeutics, which is focused on cancer research and treatments. The cancer business accounted for 11% of revenues, but a much bigger payout may be in the cards when the spinoff is completed—possibly this summer.

The company’s other two efforts, still small but with strong niche potential, are Emergard, which is a military-grade auto-injector device that has been selected by the U.S. Department of Defense as a platform for nerve agent antidote delivery, and Reactive Skin Decontamination Lotion (RSDL) for removal and neutralization of chemical warfare agents, which has been approved in Israel.

Quarter-to-quarter trends here are not smooth, due to the ebbs and surges in the U.S. government’s buying. Still, the company’s first-quarter results, released May 5, were impressive. Revenues jumped 74% to $111 million, and earnings were $0.16 a share, up from a loss of $0.50 a year ago. If you can survive the stock’s volatility, the long term is bright.

EBS came public in 2006 and has been trending higher since, but there have been three pullbacks of greater than 50% in that time, so this is not a stock for the faint-hearted. Still, the volatility seems to be abating; the latest big pullback, which occupied most of 2014, took the stock down “only” 32%. Most recently, the May 5 earnings report kicked off an advance that took the stock above its old high of 41, so that resistance should now act as support.

If you’re game, you could buy here. A smarter choice, though, would be to become a regular reader of Mike Cintolo’s Cabot Top Ten Trader, where you’ll get 10 recommendations of high-potential stocks every Monday. To learn more, click here.

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Activision Blizzard (ATVI): Keeps humming along

By Paul Goodwin, Chief Analyst, Cabot Global Stocks Explorer
From Cabot Wealth Advisory 10/5/15 Sign up for Cabot Wealth Advisory—it’s free!

My stock pick for today is a Activision Blizzard (ATVI), a stock that was covered in Cabot Top Ten Trader on September 21. I like any growth stock with a good combination of story, numbers and chart, but I was especially interested in this one, because I know World of Warcraft has been a huge earner in China.

Here’s what Mike Cintolo had to say about ATVI in that issue.

“This is a stock we recommended a few months ago, and it just keeps humming along. The latest bit of good news is that Activision’s newest game, Destiny: The Taken King, just set a record for the highest number of first-day downloads in the history of Sony PlayStation consoles. That’s important for Activision because it gives the company a worthy successor to Call of Duty, Skylanders and World of Warcraft, popular games Activision developed that no longer enjoy the same kind of sales growth they once did. Destiny’s record-breaking success should help Activision build on its second-quarter earnings momentum: earnings per share improved 117% year-over-year last quarter, and beat consensus analyst expectations on both the top and bottom lines. Two other new franchises that Activision created— Heroes of the Storm and Hearthstone—have helped spur the company’s recent growth. Along with the Destiny franchise (The Taken King is the franchise’s third installment), those three had a combined 70 million registered players at the end of the second quarter, generating $1.25 billion in non-GAAP revenue to date.

“ATVI shares were barely affected by the recent market downturn. The stock started the year at 20, shot up to 23 in February, and after trading sideways for three months, inched up to 26 in early June. It met resistance there until the stellar second-quarter earnings were released in early August, prompting a jump all the way up to 29. It dipped back down to 26 during the late-August correction, but within a week was back up to 29. Last week’s record-setting news pushed ATVI to another new high at 31. You can buy a little on any weakness and set your losses at around 27, which is the current 50-day moving average.”

If this seems like the type of growth stock research and stock buying direction that you’re looking for, check out the details on a Cabot Top Ten Trader introductory subscription here.

Company Details

Activision Blizzard (ATVI)
3100 Ocean Park Boulevard
Santa Monica, California 90405
310-255-2000
www.activisionblizzard.com
Index Membership: N/A
Sector: Technology
Industry: Multimedia & Graphics Software
Full Time Employees: 6,690
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Alaska Air Group (ALK): Seattle-based operator of Alaska Airlines and Horizon Air Industries

By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 8/16/10 Sign up for free Cabot Wealth Advisory e-newsletter

Airline stocks tend to fluctuate with the health of the economy and the swings in fuel prices. The resulting volatility and airlines’ high debt levels cause most of the airline stocks to become risky selections. Yet, the wide fluctuations in the prices of airline stocks provide the nimble investor with plenty of opportunities.

The airline industry is poised for a return to profitability this year. Carriers are reporting better summer booking trends, which reflect an economy that is beginning to move slowly forward. Corporate as well as consumer flying is on the rise, a trend that should continue during the next several quarters. Major carriers are neither planning increases in service nor adding jets to their fleets. Productivity and planeloads are improving, and fuel prices have become less volatile and remain at reasonable levels. Another trend to note is that smaller, more-efficient airlines continue to gain market share from the largest airlines.

One such airline is Alaska Air Group (ALK), based in Seattle, operator of Alaska Airlines, which contributes 81% of the company’s total revenues, and Horizon Air Industries, which makes up the other 19%.

The Alaska division is a major airline serving destinations along the Pacific Coast, Alaska, Hawaii, Canada and Mexico. The Horizon Air division is a regional carrier, which complements Alaska Air with connecting flights to smaller cities using smaller, more efficient planes.

J.D. Power rated Alaska Air the “Highest in Customer Satisfaction” for the third year in a row in 2010. In addition, the company has held the top spot for on-time performance for 13 of the last 14 months.

Alaska Air has completed its transition to an all-Boeing fleet composed of 115 jets with an average age of 7.5 years. Horizon is in the process of transitioning to an all-Bombardier Q400 turboprop airplane fleet with a current average age of 5.8 years. Alaska Air recently signed multi-year contracts with its pilots, flight attendants, and mechanics.

Revenues increased 16% and EPS tripled during the quarter ended 6/30/10 boosted by fuller planes, lower costs, higher ticket prices and flights to new cities. We expect 25% EPS growth during the next 12 months as the company expands its service to Hawaii and Mexico and closes less profitable routes. At 8.5 times our 12-month forward earnings per share estimate of 5.85, ALK shares are a real bargain at the current price.

Editor’s Note: You can find additional stocks selling at bargain prices in the Cabot Benjamin Graham Value Letter. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 250 stocks. Click here to get started today: More on Cabot Benjamin Graham Value Letter

 


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Roy WardJ. Royden Ward
Editor of Cabot Benjamin Graham Value Letter

A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the Value Letter.

Company Details

Alaska Air Group (ALK)
19300 International Boulevard
Seattle, WA 98188
206-392-5040
http://www.alaskaair.com
Index Membership: S&P 400 MidCap, S&P 1500 Super Comp
Sector: Services
Industry: Regional Airlines
Full Time Employees: 12,440
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