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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 144

In choosing today’s stock, I deliberately looked for one that was not hitting new highs, a stock with limited downside. And what I found was a stock that came public recently—to great fanfare—but that has since cooled off and settled down to what I believe is a buyable bottom.

Cabot Stock of the Week 144

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The broad market remains in a strong uptrend, and I remain optimistic that the market can continue its advance for months to come. Thus I feel very comfortable investing for growth. However, I am leery of buying stocks hitting new highs, as many are doing today; I like the reduced risk inherent in buying a growth stock near the bottom of a normal correction. And that’s what I believe I’ve found today.

It’s a company whose name will be familiar to you, even though its product—aimed at a younger demographic—may not. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor. Here are Mike’s latest thoughts on the stock.

Snap Inc. (SNAP)

Snap Inc. came public to great fanfare on March 2, just one day after the market began its seven-week consolidation. Over that time, the stock has sagged while investor enthusiasm has cooled, partly due to the stock’s high valuation, partly due to competition and partly due to the fact that the last big social media IPO (Twitter) flopped in a big way.

Still, we’re optimistic about Snap for a few reasons, the most important being that the company is changing the way millions of people use their phones. The company’s free app is really a camera and content creation platform, which empowers users to take pictures (and oftentimes, doctor them up with goofy add-ons) and share them with friends. Because the content is deleted by default after it’s been seen, the experience is much more conversational than, say, posting a picture or a Tweet and having it sit there forever.

Relative to other social networks, then, Snap is really designed more for a close network of friends, not for sharing content and opinions with everyone under the sun. The result is a very impressive and active user base. The company ended last year with 158 million daily active users who visited the Snap platform an average of 18 times per day (!) for a combined 25 to 30 minutes per day. Moreover, 60% of users create a picture (called a Snap) every day, and collectively, they watch more than 10 billion videos every day.

Snap offers features beyond pictures, as well. Snap offers chat functions (text, Snaps, voice or video) that tend to drive most of the visits. It also pioneered Stories, which is a collection of photos or short videos that can be shared with a user’s contacts; 80% of users, in fact, look at Stories daily. Possibly most intriguing of all is that a whopping 85% of Snap’s users are under the age of 35—a very hard-to-reach audience for advertisers that is spending far less time watching TV or reading newspapers while spending far more time online.

Snap spent a few years building up its services and user base, and really just began monetizing the platform last year, which caused revenue to explode from $59 million to $404 million. And that should be just the beginning of a huge growth wave; analysts see revenues of just over $1 billion this year and $2 billion in 2018, thanks mainly to rising ad revenue per user. Long-term, some analysts see revenues of $6 billion in 2020! Earnings are likely to stay in the red until 2019.

I suspect the real question mark going forward will be user growth, which has been Twitter’s major bugaboo in recent quarters. Indeed, the fact that Snap gained only 15 million users in the second half of last year (down from 21 million new additions in the year-earlier period) created some jitters pre- and post-IPO.

While user growth will be one thing to watch, I believe user growth expectations are already pretty modest, and the ramp in ad sales is far more dependent on user engagement (and increasing ad tools and products) than it is on user growth. We’ll get all the latest details in the firm’s first-quarter report, which is due on May 10.

As for the stock, its post-IPO droop wasn’t surprising, as it faded from a second-day high of 29 to 19 in mid-March. Since then, though, SNAP has built a solid bottom, with the stock finding support in the 19 to 20 area three times and selling volume drying up.

That was Mike; this is Tim. Snap will report earnings after the market close on May 10, and investor reaction to that event has the potential to move the stock substantially—either up or down. I’m betting on up, while also thinking that if it’s down, the stock will find support at either 20 or 19, thus limiting the potential loss to about 10%. As usual, we’ll record our buy at tomorrow’s average price. BUY.

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Snap Inc. (SNAP 21)
63 Market Street
Venice, CA 90291
310-399-3339
www.snap.com

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CURRENT RECOMMENDATIONS

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One factor that becomes evident when you run a portfolio composed of both growth and value stocks is this: value stocks tend to be held longer, while growth stocks often come and go rather quickly. As a result, more growth stocks tend to come and go from the Cabot Stock of the Week portfolio than value stocks. If you like action, trading and the hunt for quick profits, this can be good news for you. But if you’re more focused on the longer-term, and would rather minimize trading, you might feel as though you’re not getting your fair share of recommendations. If so, I urge you to take a closer look at our three more value-oriented advisory services—Cabot Benjamin Graham Value Investor, Cabot Dividend Investor and Cabot Undervalued Stocks Advisor—where you’ll find more undervalued, conservative and dividend-paying stocks than you can shake a stick at.

In the meantime, numerous stocks in the portfolio continue to hit new highs. It’s great to make hay while the sun shines. However, there is one laggard that deserves to be sold, and that’s Berry Global (BERY). Details below.

Adient (ADNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has now regained half of its correction loss. If the stock rolls over from here, the correction will still be in effect, and my optimism about the stock will fade. But if the stock continues to power ahead toward its old high at 75, I’ll conclude that investors are continuing to upgrade their opinions about Adient’s prospects for growth in the evolving global market for automotive seating. Just last week, the company debuted its “Integrated Luxury Seat,” a product designed in China for the booming market for back-seat luxury seating in that country. The seat, which reclines to 170 degrees, includes a cup holder, table tray, iPad holder, 220V power outlet, USB port, ventilation, heating, cooling, massage, lumbar support and four-way power leg rest. HOLD.

Adobe (ADBE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth portfolio, is once again surging to new highs! In her latest update, Crista wrote, “Adobe is a fairly-valued software company with aggressive earnings growth. Despite a 27% run-up year-to-date, ADBE continues to climb after a brief three-week pause. Traders take note: I expect additional capital gains in the coming weeks. Be aware that Adobe and most of its peers have been reporting revenue and earnings beats for several consecutive quarters. That bullish sentiment will likely contribute to ADBE’s upward momentum. While I fully acknowledge that any stock could have a price correction after such a run-up, I’m not planning to remove ADBE from the Growth Portfolio unless it becomes distinctly overvalued. And if we get a price correction that lowers the valuation, I’ll recommend a Buy on ADBE. Cautious investors should use stop-loss orders because this run-up will eventually come to a halt when ADBE is ready to rest.” HOLD.

Berry Global (BERY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a global plastics manufacturer at the mercy of global commodity trends, and the charts of many stocks in the sector tell us the future is getting a bit dimmer. Happily, BERY has clawed back a substantial portion of its losses over the past three weeks, and thus we can exit roughly where we started more than three months ago. Note: The company will report its fiscal second-quarter results on Wednesday, May 3, before the market opens. SELL.

Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, gapped higher this morning after the company released an excellent first-quarter earnings report. Earnings were $5.20 per share, while analysts had been expecting $4.98. This result will probably bring changes in Roy’s numbers the next time he publishes, but for now I can only repeat that Roy’s current Maximum Buy Price is 276.66 (below today’s level), while his Minimum Sell Price is 362. Downgrading to HOLD.

Celgene (CELG), also recommended by Roy Ward in Cabot Benjamin Graham Value Investor, popped higher this morning on no particular news. Roy expects CELG to climb to his Minimum Sell Price of 188.17 within two years, and rates the stock a Buy if it’s under 128.72. Since we’re already on board, I’ll continue to rate CELG Hold, but if you don’t own it yet, feel free to buy here. HOLD.

China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, continues to run, as money flows fast into high-momentum Chinese stocks! In his update last week, Paul wrote, “the stock has been running for a while, so we’re looking for any signs of abnormal weakness. But, clearly, big investors are still taking advantage of dips, so we think you can, too; try to grab shares on a pullback of a couple of points.” BUY.

GameStop (GME), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is the one stock that all three of Cabot’s value-centric analysts have recommended. With the stock’s recent advance, the stock’s price/earnings ratio has climbed to 6.8% (still low) while the dividend yield has fallen to 6.5% (still high). HOLD.

IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, is now too high to buy; Roy has a Maximum Buy Price of 59.94. So now it’s just a matter of holding patiently until ICE hits his Minimum Sell Price, currently 76.77 (a gain of 28% from here). HOLD.

JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, continues to soar like a homesick angel, driven by money flowing into Chinese stocks, especially fast-growing e-commerce stocks like JD. BUY.

Jabil Circuit (JBL), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, climbed out of its four-week base to hit new highs last week, and continued to run to a new high today. You can still buy here. BUY.

Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, reached its highest closing price of the year yesterday and surpassed it today! In her latest update, Crista wrote, “Legg Mason is a seriously undervalued asset management and financial services company with aggressive earnings growth. The company will report fourth-quarter and full-year results on the afternoon of April 26 (March year-end). Watch for an annual dividend increase around May 1. LM broke past price resistance at 37.5 on April 24. The stock could climb as high as 45 before resting again.” BUY.

Martin Marietta Materials (MLM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth Portfolio, is another sluggish commodity stock (like Berry) but our argument for holding this one revolves around value. In her latest update, Crista wrote, “Martin Marietta will report first-quarter results on the morning of May 2. MLM is undervalued based on 2018 numbers. MLM could break past short-term upside resistance at 242 this year.” BUY.

Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has pulled back normally over the past week, but remains above both its 25-day and 50-day moving averages. In Chloe’s latest update, she wrote, “The pipeline company will report first-quarter results on May 4 after the close. Analysts’ average EPS estimate is $0.26 (52.9% higher year-over-year), and their average revenue estimate is $1.05 billion (up 38.4% year-over-year). High yield investors who want to start a position can do so here. BUY.

PRA Health Services (PRAH), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, has rebounded to the 66 level in recent days, making our buy near the low of the correction look pretty good from today’s perspective. But there’s a little resistance here (dating to late March), which may contain the stock for a while. If you haven’t bought yet, don’t buy until the stock succeeds at breaking above 66. BUY.

Q2 Holdings (QTWO), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, has broken out above resistance to hit new-high ground in recent days. Tyler credits some of this strength to the rally in small-cap stocks, while I give a lot of the credit to Tyler. Q2 will announce earnings on May 3. HOLD.

Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, nosed out above two-month resistance to hit new highs today, carried higher by the broad market. Square will also release its earnings report on May 3. BUY.

Tesla (TSLA), a recommendation of Cabot Top Ten Trader, continues to consolidate the gains achieved after the stock blasted out of its three-year trading range on April 3, and remains very close to new-high territory. Fundamentally, the main focus of analysts remains the long-anticipated start of production on the affordable Model 3 sedan (presumably July). But beyond that is the promise that Tesla will unveil an electric semi truck in September—and all the questions that follow. Will Tesla partner with fleet operators; will it lease and/or swap batteries; will the truck be autonomous? No analyst can know the answer to all these questions—and you don’t need to when you accept that investing involves the faith to put money on “the unforeseeable and the incalculable.” BUY.

Total (TOT), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, is an international oil and gas company based in France—and that explains why the stock gapped up following the results of the French primary election. The winner of the primary was the most pro-business and pro-global of the four candidates. Crista says the company, which is deeply undervalued, will report first-quarter results on the morning of April 27. BUY.

VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, broke out to new highs above two-month resistance yesterday and continued higher today. Roy’s Maximum Buy Price is now 83.33, so if you’re not on board, it’s too late to buy. His Minimum Sell Price is 117. HOLD.

Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has pulled back normally over the past two weeks, nearly touching its fast-climbing 25-day moving average. In her latest update, Chloe wrote, “WYNN continues to consolidate just under its 52-week high at 120. The latest data from Macau showed VIP gaming revenues grew twice as fast as mass market revenue in the first quarter, good news for Wynn’s upmarket properties. Growth- and dividend-growth oriented investors who don’t own WYNN yet can start positions here.” BUY.
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All Cabot Stock of the Week buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special alerts via email. To calculate the performance of the hypothetical portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s growth stock policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED May 2, 2017
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