Cabot Prime Pro Week Ending October 20, 2017
Guide to Cabot Prime Pro
This Guide to Cabot Prime Pro will help you make the best use of your Prime membership to create a strong personal portfolio.
Cabot Prime Pro Quarterly Market Report
In this Cabot Prime Pro Quarterly Market Report, Cabot President Timothy Lutts offers his read on the stock market, looking back at Q3 2018.
Cabot Prime Pro Quarterly Analyst Teleconference
Watch the October 18 Quarterly Prime Pro Teleconference, in which Cabot Analysts answer members’ questions live.
Cabot Weekly Review
In this week’s stock market video, Mike Cintolo reiterates his overall bullish view on the market, especially when it comes to the intermediate- and longer-term. In the near-term, Mike thinks it’s best to be a bit choosy when buying, mostly because of earnings season, so keep new positions small in stocks that are extended and set to report earnings in a couple of weeks. But with the odds favoring higher prices in the weeks and months to come, he’s focused on the leaders of the market, many of which he examines here.
Cabot’s 10 Best Marijuana Stocks
October Update (emailed to Prime Pro members on October 9): If you bought a basket of Tim’s 10 Best Marijuana Stocks when the report was originally published on August 22, you’re off to a good start. Since that report was written, the average of the 10 stocks is up 21%, with the best up 49% and the worst down just 6%.
Cabot Growth Investor
Bi-weekly Update October 18: The overall market remains in great shape, with all our market timing indicators solidly bullish. Short-term, a pullback wouldn’t be surprising, but the odds remain in favor of higher prices down the road. We have no new buys in the Model Portfolio tonight, which still has 14% in cash, but we are placing Facebook (FB) and Universal Display (OLED) back on Buy.
Other Stocks of Interest October 13: Follow ups to stocks featured May 10, 2017 (issue 1367) to October 11, 2017 (issue 1378). Since they’re not in the Model Portfolio, you don’t see them followed on a regular basis. However, we are monitoring these stocks, and this listing gives their current momentum status.
Bi-weekly Issue October 11: Mike goes over all his recent moves, dives into the recent action in Shopify (SHOP) and reviews one of our proprietary indicators that, along with some precedent analysis, adds further evidence to the market’s bullish outlook. No changes in the Model Portfolio tonight.
Cabot Top Ten Trader
Movers & Shakers Weekly Update October 20: We remain overall bullish, so you should be holding your strong stocks and following your plan as earnings season progresses. On the buy side, there’s nothing wrong with putting money to work, but look for solid entry points and be sure to keep new positions on the small side if a stock is due to report earnings within the next two weeks. Buy Ideas: Atlassian (TEAM), Catalent (CTLT), Live Nation (LYV), Sociedad Quimica (SQM) and YY Inc. (YY).
Weekly Issue October 16: This week’s Top Ten has another nice mix of growth and “old world” stocks that emerged in September. Our Top Pick is one of the latter—Adient (ADNT) is a powerful supplier to the car industry that blasted off last month and has pulled back grudgingly in recent days.
Cabot Options Trader and Cabot Options Trader Pro
Note that the current week’s Weekly Update, earnings updates, position updates and stocks on watch are posted on the website in the Market Update section, which is deleted each week.
Trade Alert October 20: Buy Union Pacific (UNP) January 120 Calls (exp. 2019) for $8 or less or Buy Union Pacific (UNP) January 120/145 Bull Call Spreads (exp. 2019) for $6.20 or less.
Options Education October 19: Jacob is often asked about the difference between Cabot Options Trader and Cabot Options Trader Pro, so here he explains the difference so that you can choose the right service for your needs.
Position Updates October 19: Updates on Bank of America (BAC) and Pulte Homes (PHM), and Jacob notes that traders have been repositioning and rolling trades to expiration cycles further out.
Earnings Update October 19: PayPal (PYPL) will report earnings today after the close, and General Electric (GE) will report earnings tomorrow before the open.
Sell Alert October 17: Close Existing Position: Sell your Micron (MU) October 33 Calls for $7.50 or more or Sell your Micron (MU) October 33/38 Bull Call Spreads for $4.80 or more.
Sell Alert October 16: Sell your Kraft Heinz (KHC) January 87.5 Calls for $0.20 or more.
Earnings Update October 16: Netflix (NFLX) will report earnings today after the market close, and Goldman Sachs (GS) will report tomorrow before the open.
Weekly Update October 15: The VIX closed the week at 9.61, unchanged from the previous week. Interestingly, the VIX has closed below 10 on 32 separate occasions—16% of all days this year. This is an amazing frequency, as a close below 10 on the VIX before this year had only happened nine times since 1990, the equivalent to one day every three years!
Daily Watch List: Order Flow Reading is a strategy Jacob uses to follow the biggest hedge funds or traders into their trades. These are recent large order flows that Jacob has spotted, plus two covered call ideas.
Cabot Undervalued Stocks Advisor
Special Bulletin October 20: Schlumberger (SLB) third-quarter results meet Wall Street’s estimates, Commercial Metals (CMC) and XL Group (XL) move from Buy to Hold, and price action on Mattel (MAT).
Special Bulletin October 19: Blackstone Group (BX) and Nucor (NUE) reported third-quarter earnings beats; KeyCorp (KEY) reported third quarter in line with estimates.
Special Bulletin October 17: Goldman Sachs (GS) and Morgan Stanley (MS) reported earnings beats; sell GS and buy MS.
Weekly Update October 17: All investors should be aware of the quality-control scandal emanating from Kobe Steel, in which the company admitted falsifying data on its steel products for a currently-vague amount of time between one and 10 years. Today’s portfolio changes: Weyerhaeuser (WY) moves from Strong Buy to Hold.
Monthly Issue October 3: Today’s featured stocks are Bank of America (BAC), Schlumberger NV (SLB) and Nucor (NUE). BP plc (BP) and Legg Mason (LM) move to Hold and Schnitzer Steel (SCHN) moves to Sell.
Cabot Stock of the Week
Weekly Issue October 17: With today’s recommendation, Tim swings back to the aggressive side, with a technology company that is revolutionizing (well, maybe that’s too strong a word) the marketing industry. In any case, it’s growing very fast and it’s expected to turn profitable this year. In the current portfolio, Tim has two sells, Autohome (ATHM) and Celgene (CELG), and Broadridge Financial Solutions (BR) moves to Hold.
Cabot Emerging Markets Investor
Bi-weekly Issue October 19: Despite the sting of today’s pullback that included just about the entire market, the Cabot Emerging Markets Timer is holding on to its buy signal. With good profits in many of our stocks, we’re willing to be patient as we head into earnings season, and new stock recommendation Jupai Holdings (JP) is as hot as anything Paul’s ever recommended.
Cabot Benjamin Graham Value Investor
Weekly Update October 19: One major news item hit one of our stocks adversely: the Federal judge’s rule against Allergan’s (AGN) plan to use Native American sovereignty to protect six patents associated with its blockbuster dry eye drug, Restasis. Considering Allergan’s strong pipeline and solid free cash flow, I wouldn’t panic.
Monthly Issue October 12: Azmath begins the transition of stocks from Roy Ward’s Value and Enterprise Models to his new, more consolidated Prudent Model. Azmath’s top recommendation is Gentex (GNTX).
Cabot Small-Cap Confidential
Weekly Update October 20: Even though the Dow, S&P 500 and Nasdaq hit all-time highs this week, news flow felt a little more negative, and the small-cap indices all moved slightly lower. No ratings changes today.
Monthly Issue October 6: A year ago, a group of college kids laid out the case for a Trump’s victory. And they did it with a mess of disparate data in just 20 hours using a data prep platform by the little-known company that Tyler is recommending today: Datawatch (DWCH). One rating change: US Concrete (USCR) moves to Buy.
Cabot Dividend Investor
Weekly Update October 18: Financials are lower since our last update and REITs have made up some ground lost earlier this month. Elsewhere, third quarter earnings season has begun, with the big financials reporting this week. Chloe provides earnings dates and expectations for our companies that are reporting in the next two weeks.
Monthly Issue September 26: Chloe is adding CME Group (CME), a unique play on financial markets, to the Dividend Growth Tier. She also writes about interest rates—the driving force behind many of this month’s sector rotations. No ratings changes.
Wall Street’s Best Investments
Daily Alert October 20: Bank of America (BAC) from Cabot Undervalued Stocks Advisor
Daily Alert October 19: Michael Kors Holdings (KORS) from Pivotal Point Trader
Monthly Issue October 18: This month’s Spotlight Stock is Advance Auto Parts (AAP), a household name that ran into some challenges that put a dent in its stock price. But now with a new management team and favorable industry trends, the turnaround looks promising, and the stock price is certainly discounted—and attractive.
Daily Alert October 18: Lannett Company (LCI) from The National Investor
Daily Alert October 17: Sony (SNE) from AlphaProfit Sector Investors’ Newsletter
Daily Alert October 16: Loblaw Companies (L.TO) from The Successful Investor
Wall Streets Best Dividend Stocks
Daily Alert October 20: Enterprise Products Partners LP (EPD) from Capitalist Times
Daily Alert October 19: Donegal Group (DGICA) from Forbes Dividend Investor
Daily Alert October 19: Sell Compass Minerals International (CMP) from Forbes Dividend Investor
Daily Alert October 18: Gentex (GNTX) from Cabot Benjamin Graham Value Investor
Daily Alert October 18: Sell Johnson Controls (JCI) from Cabot Benjamin Graham Value Investor
Daily Alert October 18: Sell AT&T (T) from Cabot Benjamin Graham Value Investor
Daily Alert October 17: AirBoss of America (BOS.TO) from The Income Investor
Daily Alert October 16: MDC Holdings (MDC) from The Prudent SpeculatorMonthly Issue October 11: Our Spotlight Stock this month is representative of thriving stock markets. CME Group (CME) owns and operates exchanges for stocks, options, futures and derivatives. It has grown leaps and bounds, both internally and by acquisition, and numerous opportunities for expansion remain. Nancy’s feature further explores those opportunities.
This Week’s Q&As
Cabot Growth Investor and Cabot Top Ten Trader
Question: On yesterday’s quarterly Prime conference call, you said you were overall bullish but a bit hesitant in the short-term. What would change that—a pullback? More strength?
Mike: Good question. It could be either, really. A pullback for a few days/couple of weeks that instills some fear into people, but doesn’t crack many leading stocks, would probably set up a solid entry point. Or, it’s possible the indexes futz around for a bit but some new leadership blasts off on earnings.
Obviously, I try not to tell the market what to do and just evaluate things as I see it on a day-to-day, week-to-week basis. Intermediate- and longer-term, I remain quite bullish, but the recent quiet, wedging-up action of the indexes didn’t really result in many great patterns on the charts, and I’ve seen more than a few signs of short-term complacency. So either some shakeout action (like we saw Thursday) or some super-powerful signs of accumulation could create some buyable opportunities, but we’ll see how it goes.
Cabot Undervalued Stocks Advisor
Crista: What is your opinion of Davita (DVA)?
Answer: Davita’s (DAV) profits are expected to fall less than 10% in 2017, then rise less than 10% in 2018 ... nothing exciting happening there. I see no compelling reason to buy DVA for capital gains. If I owned DVA, I’d sell the stock because the price chart is bearish, and I’d move the capital into an undervalued growth stock.
Question: What are your thoughts on Starbucks (SBUX)?
Crista: Starbucks (SBUX) has moderate 2017 EPS growth, attractive 2018 EPS growth, a high P/E (overvalued), and a dividend yield of 1.8%. The stock’s been trading sideways since mid-2015, although it peaked higher in 2017. If I owned SBUX, I would plan on selling after the next run-up to price resistance at 58.5, then reinvest the capital into a more undervalued growth stock.
Question: May I ask how you determine if a company is fairly valued?
Crista: That’s a great question, because “value” means something different to almost everybody!
Here’s my formula: When I look at a stock, I want the price/earnings ratio (P/E) to be lower than the earnings per share (EPS) growth rate plus the dividend yield; and I want the EPS + dividend to equal 15% or more.
As an example, let’s use Nucor (NUE). Nucor is expected to see 2018 EPS grow 15.9%, the P/E is 12.8 and the dividend yield is 2.6%15.9% + 2.6% = 18.5%, which is greater than the P/E of 12.8.
There are nuances to my formula, because certain industries typically command high P/Es (biotech) while others usually carry low P/Es (banks).
The formula is rather simplistic, but importantly, it works. I’ve been using this same formula for seven years, and I’ve cumulatively outperformed the S&P 500 for the six years that I’ve measured my performance (since January 2012).
Cabot Stock of the Week
Question: I read about Aphria (APHQF) being a low cost marijuana producer. I have a small position in this stock.
Tim: APHQF was one of the 10 stocks featured in my report “Cabot’s Ten Best Marijuana Stocks” in August, and I did an update on October 9 that read:
“Aphria is not only the third largest grower of marijuana in Canada, it’s also the lowest-cost producer, growing its product in sunlit greenhouses rather than warehouses lit by electric lights. With growing demand, the company is fast accumulating cash and diversifying rapidly.
“In recent weeks, it has put roughly $25 million in a new venture capital fund named Green Acre Capital that will invest in the legal cannabis industry and made an $11.5 million strategic investment in Scientus Pharma, a biopharmaceutical company that will provide Aphria with exposure to drug development firms that target endocannabinoid receptors.
“The stock has been climbing higher over the past two months, and at any time could begin a normal correction. My original recommendation said that the stock “looks like a decent buy anytime it’s near its 50-day moving average.” Today that’s still true, with the 50-day moving average at 5.10.”
Today, the sector is in the midst of that expected correction and 5.10 is very close, but I wouldn’t buy until the correction finds a bottom.
Good luck, and don’t miss the next quarterly marijuana report when it comes out in November.
Cabot Emerging Markets Investor
Question: Jupai (JP) is a recent Chinese new issue. I am intrigued with its mission. Your thoughts?
Paul: You’re right that this is a fascinating story. While the Chinese stock market is quite active, there haven’t been many entries in what we would call the financial services industry. I know only about Noah Holdings (NOAH) and another newcomer China Internet Nationwide Financial Services (CIFS).
Jupai has a record of profitable operation that dates back to 2012 and has growth revenue at excellent rates every year (171% in 2013, 73% in 2014, 142% in 2015 and 78% in 2016). The company isn’t followed by any analysts and has only four institutional investors on board.
JP has certainly taken off since early August, with speculation about changes in China’s interest rate policy getting part of the credit. The stock also pays a dividend that yields 2% annually.
I don’t have anything bad to say about Jupai, but I would just caution that the volatility of this kind of rocket-shot rally can cut both ways. So keep any initial investment on the small side until you get a profit cushion to work with. This could be the start of something big, or it could be a mayfly.
Cabot Small-Cap Confidential
Question: Want to ask you about Asure Software (ASUR)—it’s showing a lot of weakness and now I’m at loss position. Concerned this is more than a pullback. What are your thoughts on this stock?
Tyler: I think the weakness is due to rumblings about payroll providers (including ASUR, ULTI, PAYC, etc.) potentially losing some Affordable Care Act (ACA)-related revenue if health care subsidies are rolled back (as Trump has proposed). From what I understand, the biggest part of these companies’ exposure is from annual filings showing proof of insurance for employees (maybe 2% to 5% of revenue for ULTI and PAYC, I don’t know specifically for ASUR).
So the bottom line is, I think, it’s an industry issue that’s affecting ASUR’s stock the most (it’s the smallest, most thinly traded, etc.). Given that this isn’t a big slice of the revenue pie (I don’t think) and we don’t even know what will happen, I’m inclined to stick with ASUR. It should pull out of this if/when there’s more certainty on this subject.
I’ll have more details in tomorrow’s update too, and, of course, will continue to keep an eye on the stock.
Cabot Benjamin Graham Value Investor
Question: I look forward to your change in approach for this newsletter. I have a few comments/requests/questions. First, I like that you are downsizing the portfolio so that it is more realistic to follow and invest in them. Would it be possible to also include the sector next to the company name in the Prudent Portfolio? As some of us might be overexposed to certain sectors with our other investments.
I also have some individual stock questions. Do you not recommend Facebook because you feel that it is a growth stock or because you believe it is overvalued? As for AT&T, do you just not like the strong competition, I feel it has a nice price to earnings ratio and is safe. And what you think of these 3 socks, AMCX, EAT, & ALK?
Azmath: I am glad you liked the new approach. Due to the formatting issues in PDF, we had to remove the sector column from the table. However, you can download the excel file with information on sectors from our website. We will update you with the link once it is uploaded. Also, attached is the table for your info.
Regarding individual stocks:
I believe Facebook (FB) is doing right regarding its strategic acquisitions and its R&D on artificial intelligence. Its revenue has been growing ~50% for past few years with a 30% to 40% profit margin. If it could continue to grow at this rate, it is an excellent bargain even at the current valuation. However, I am not confident enough to say that its profit will continue to grow at the same rate in five to 10 years. That is the main reason I avoided FB in my portfolio. It was more of a defensive strategy.
Among the three stocks AMCX, EAT and ALK, EAT seems to be undervalued. Its P/E ratio is at around a 10-year low. If I had to select one of those three stocks, I would go for EAT. ALK could give a good return if it realizes the anticipated synergy gain from its Virgin America butI am not sure about it.
Question: I read with great interest your first issue. Thank you so much for your valuable advice. I have a question regarding Hold recommendations. A Hold recommendation is assigned on what factors? I see that several Hold stocks are well below their fair value. Thor Industries (THO) for example. Is it based on technical indicators for a stock such as overbought conditions or due to other concerns like sector rotations or company earnings and other company related concerns? Or is it because we need to have a wide margin of safety in case of a market downturn? Can you please clarify.
Azmath: Thank you for reading the issue in great detail.
In Cabot’s vocabulary, ‘Hold’ means to hold the shares you own. ‘Buy’ means to buy new shares or buy additional shares. When the price of a stock is trading below its fair value, it says the stock is undervalued. None of my recommendations are based on technical indicators—I do not know how the past price movements will affect future price movements. My recommendations are solely based on fundamental factors along with certain intuition from the company’s historic valuations.
Here is how I would look at the portfolio. Regardless of Buy or Hold recommendations, I would allocate more capital for the top ranking stocks. In other words, if I had to pick 10 stocks from a universe of stocks, I would consider top 10 ranked stocks from the Prudent portfolio. Those are the stocks which I think has a reasonable margin of safety and is quite undervalued. You may add more stocks from the portfolio and elsewhere for further diversification.
In essence, the portfolio is a guide for an investor to make quality decisions. In this issue, I selected the top 28 quality stocks from the universe of 59 stocks in Roy Ward’s Cabot Value and Enterprise Models. In the future issues, I hope to add more stocks to the portfolio replacing some of the existing stocks. In time, my goal is to provide stocks with the greatest margin of safety along with greatest growth potential to my subscribers.
Question: What is your recommendation for buying or not buying any of the of the equities you recommend as Hold, if I do not own them now?
My initial thinking is to just work with your new recommendations for buying stocks and eventually work out of the stocks I now have from the previous recommendations. The stocks I currently own from the Roy Ward recommendations are: FB, GOOG, TECD, TGI, THO, ULTA, and FIVE. Of the 7 stocks I own, you recommend selling TECD, TGI, and FIVE. I would be down to four stocks from the past recommendations. I also have growth stocks and dividend stocks in my portfolio in addition to the value stocks.
Azmath: The new portfolio ranks stocks based on the potential growth prospects along with a good margin of safety. Regardless of Buy/Hold recommendations, I would buy the stocks in the top 10-15 of the portfolio.
I would be a bit cautious to own TGI and perhaps would sell it to buy some of the top stocks in the new portfolio. I removed TECD from the new portfolio mainly based the concern of its long-term sustainability of the business due to its thin profit margin. I think FIVE is overvalued with a P/E of 42—I wouldn’t consider it a value stock.
I suggest that you partially sell shares of less desirable stocks and buy more of more desirable stocks.
Question: We have a position in CELG ,which I think was previously a recommendation of Roy’s. Should we continue to hold it at this time or sell it?
Azmath: Celgene (CELG) is an excellent company, but I think it is considerably overvalued. Even if the company keeps growing its fundamentals at the current rate, I believe the price is too high for the company. I would sell Celgene and buy other top-ranked stocks from the new portfolio.
I would ideally have around 20 stocks in my portfolio, with no stock having a weight of more than 20% of the portfolio.
Cabot Dividend Investor
Question: What do you think of Annaly Capital Management (NLY)? It looks like their current yield is 9.7%.
Chloe: Annaly Capital Management (NLY) is what’s called a mortgage REIT. That means they don’t own real estate, like an equity REIT, they own mortgages.
Annaly is a pretty unwieldy beast, as far as companies go, but I’ll try to explain the salient facts as simply as possible. First, they raise capital from investors (like you!) by issuing equity, preferred stock and debt. They then use that money to buy mortgages (both residential and commercial) and agency Mortgage-Backed Securities (MBS).
Importantly, Annaly’s income is equal to the interest rates on those mortgages, which depend on long-term interest rates (because mortgage terms are 10, 15 or 30 years).
But the company is investing largely using money borrowed at short-term rates. So Annaly’s profit depends on the spread, or difference, between short- and long-term interest rates. When it’s big, Annaly makes a lot, and when it’s small, profits decline.
Interest rate spreads are affected by numerous factors, but the biggest are the Fed’s benchmark rate and inflation. Short-term interest rates reflect the Fed’s benchmark rate, which is currently low but rising. Long-term interest rates reflect inflation expectations, which are low and not rising much. That means the yield curve is getting flatter: short-term rates are getting closer to long-term rates. That’s bad for Annaly’s profits.
That spread has already narrowed a few times in recent years, and dividend cuts at Annaly followed (in 2005 and 2013) causing great pain for shareholders.
So, with that as a backdrop, I would not buy Annaly at the current time.
However, I know that 9.7% yield is tempting, and there is still a way to use Annaly to secure a high income.
Because it needs to borrow a lot of cash, Annaly has also issued numerous preferred shares, some of which offer very generous yields, with much lower risk than the common stock. If you’re not familiar with preferred stocks, we’ve provided some free background information on them here: https://cabotwealth.com///daily/preferred-stocks-2/
Most recently, Annaly issued Series F shares with a 6.95% yield. (Full name Annaly Capital 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred, symbol probably NLY-PF or NLY-F, but depends on your broker.)
The Series F Preferreds will pay 6.95% interest through September 30, 2022. After that, Annaly can either redeem the shares for par value ($25) or begin paying interest at a floating rate.
The Series F Preferreds were recently recommended by one of our contributors to the Wall Street’s Best Dividend Stocks, who wrote “This is a much better deal than I’ve seen with any of the floating rate securities at the big banks, despite the fact that Annaly is considerably less leveraged than that gang of bandits.”
Lastly, note that because Annaly is a REIT, the dividends (on the common or preferred shares) don’t qualify for the lower dividend tax rate.