Please ensure Javascript is enabled for purposes of website accessibility
Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 151

In selecting today’s stock, I looked for a quality stock with a strong and healthy technical pattern that was presenting a decent buy point. Oddly, it’s a bricks-and-mortar retailer, a category with an abundance of losers these days. But it’s a winner, and I think you’ll like it.

Cabot Stock of the Week 151

[premium_html_toc post_id="135075"]

The Great Bull Market of 2017 has been very rewarding to us, not least because we’ve been heavily invested right from the start. And last Friday’s market selloff didn’t do much to change my bullish stance—though it did reinforce my opinion that the bull market is now beginning its long final phase, a phase that it likely to reward an increasingly narrow group of leaders. But that’s no reason to be more cautious; it’s simply reason to be more selective—while being as diligent as ever about managing your portfolio.

In selecting this week’s stock, I turned to a company that is building a great cookie-cutter business, and that over the past year has achieved one of my favorite growth-stock metrics—accelerating earnings growth. The stock was originally recommended by Mike Cintolo of Cabot Growth Investor, and here are Mike’s latest words.

Ulta Beauty (ULTA)

Retail stocks have been horrible performers in this year’s bull market, and there’s no surprise why—the “Amazon effect” continues to crush mall-based retail stores. Macy’s, J.C. Penney and the like continue to struggle, and their stocks continue to sink.

But, interestingly, many retail companies in a variety of sub-sectors are still thriving. These firms offer something for consumers that Amazon can’t offer and as a result they’re seeing sales, traffic and profits surge. One of those is Ulta Beauty, which has as good a track record as you’ll find in retail—and a very long runway of growth ahead.

Ulta operates 990 beauty stores across the U.S., and its big attraction is that it’s a one-stop shop for all your beauty needs. From mass-market products to prestige brands to salon services (salon sales rose 17% in the latest quarter and made up about 5% of total revenue), a customer can get anything she wants at an Ulta location. Cosmetics make up 46% of revenue, compared to 23% for hair care products and 22% for skincare.

And, for those always worried about Amazon (usually for good reason), it’s important to note that Ulta’s own e-commerce operation is a huge draw. In the first quarter, e-commerce sales rose a whopping 70% and made up 8% of total revenue. Management believes its online revenues can expand 40% annually for the next few years.

But Ulta is more than just a big generic beauty store with a ton of products (often stocking as many as 20,000 per location). The company has been deft at accelerating new brand additions (which desperately want to place more products at Ulta locations, including many “in-store brand shops”), boosting its exclusive business (now 6% of revenue) and attracting loyalty members, who totaled 21.7 million at the end of last year (up 28% from a year before), who are the firm’s biggest spenders.

Those initiatives have produced jaw-dropping same-store sales in recent quarters, at a time when many retailers are struggling. In the first quarter, for instance, Ulta’s comparable store sales (including e-commerce) rose 14.3%. Looking at physical stores alone, the gain was 10.9% from a year ago. Clearly, the firm is getting more customers to spend more money as time goes by.

Ulta’s biggest opportunity may come from the industry itself. Not only is this a gigantic mass market ($127 billion is spent on beauty products and services in the U.S. every year), there’s also a major shift going on, with beauty sales at department and drug stores shrinking, while specialty outlets (Ulta is the largest) grab tons of share. This process is still in the early innings and should drive Ulta’s growth for many years to come.

As I wrote earlier, Ulta operated 990 stores at the end of April, and its current plan is to eventually have between 1,400 and 1,700 stores in the U.S. (Yet that range is up from a goal of 1,200 just a couple of years ago, so there’s no knowing how big the firm will get.) What’s more important is that, thanks to its excellent store economics (Ulta’s new openings cost an average of $1.4 million, with full payback on that investment achieved over two years), the company is aiming to open 100 to 120 stores annually, so there’s plenty of built-in growth to come.

Add it all up and you have a company with a unique retail offering in a huge mass market and a management team (led by ace CEO Mary Dillon) that has a record of making the right moves.

Revenue growth has been rock-steady, rising between 19% and 25% each of the past 13 quarters (!), while earnings growth has accelerated (24%, 26%, 33% and 41%) over the past four quarters. Analysts see earnings up 28% this year and 19% next, but given the firm’s history of topping expectations, those figures are almost certainly conservative.

As for the stock, it’s been a long-term winner, but after hitting 279 last August, the stock had a big correction and a slow recovery that contained the stock for months. The first real attempt to break out came in early March, but it wasn’t very fruitful. And then just three weeks ago, ULTA blasted out to new price and relative performance (RP) peaks following a great earnings report. Shares have since pulled back normally, and I think this presents a good entry point.

That was Mike—this is Tim. You should also know that ULTA has been recommended by Roy Ward of Cabot Benjamin Graham Value Investor. Roy likes quality companies like Ulta, but only if he can buy them at a bargain price—and Roy’s Maximum Buy Price for ULTA is 287, while his Minimum Sell Price is 387. You’re welcome to wait for the stock to decline to 287 (which is just under the stock’s 50-day moving average), but I like it enough right here, sitting on the support of both its 25-day moving average and its early May highs, so, keeping it simple as always, we will record our buy using tomorrow’s average price. BUY.

Ulta Beauty (ULTA 303)
1000 Remington Blvd.
Suite 120
Bolingbrook, IL 60440
630-410-4800
http://www.ulta.com

sow151ulta

sow151ulta-financials

CURRENT RECOMMENDATIONS

SOW151portfolio

Long ago, I heard an institutional investor say he could achieve a better return by managing a portfolio of stocks he hadn’t picked than by selecting stocks for a portfolio and then not being able to manage them. In short, managing the stocks in a portfolio—including this portfolio—is the real key to performance. In recent weeks, I’ve been taking profits in stocks that been extended to the upside, and I’ve been rather lenient with stocks that have been lagging, figuring that these stocks have less downside risk. Now that the correction in technology stocks has kicked off, that looks smart.

Adobe (ADBE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth portfolio, is now a Sell. We’d been riding the stock higher (even though it was no longer undervalued), because the uptrend was strong, but that is no longer the case. Crista advised her readers to sell on Monday, writing, “The tech group could rebound in the coming week, but I’m ready to sell. While Adobe is not one of the greatly overvalued tech stocks, any additional weakness in the sector will surely pull ADBE down further. I’m ready to be cautious and preserve capital.” SELL.

Alliance Data Systems (ADS), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has an official Maximum Buy Price of 243.55 and a Minimum Sell Price of 376.41, and we bought well at 236, as the stock bottomed at 235 in April, May and June. Now, it’s simply a matter of patience. Roy says, “ADS has a very reasonable valuation (14 times trailing earnings, 0.9% dividend).” BUY.

Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, corrected for three full months (March, April and May), but the buyers have been under control since the end of May. Just last week, Roy lowered his Maximum Buy Price from 269 to 258, so officially, you shouldn’t buy it here (but practically, I’d excuse you if you did). We’re just holding patiently, aiming at Roy’s new Minimum Sell Price of 351. HOLD.

Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, was added to the portfolio in mid-May when the stock pulled back to its 50-day moving average, and that proved to be a good entry point. But I’m not so confident about the stock’s short-term future today. Yes, the bounce off the stock’s 25-day moving average this morning was encouraging (and reason enough to retain the stock’s Buy rating), but the volume readings are not. If you own it, holding is still fine, but if you’re looking to buy, I think waiting a little longer may prove wise. BUY.

Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has an attractive valuation, a low-risk chart and great long-term growth potential, so I will continue to be patient with the stock. Roy’s new Maximum Buy Price is 119.48, while his Minimum Sell Price is now 177.34. If you don’t own it, you can buy here. For consistency’s sake, I’ll leave it rated Hold. HOLD.

China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, hit a new high last week and has pulled back normally since. In his latest update, Paul wrote, “On May 29, the company received authorization from the Chinese antitrust bureau to acquire Crystal Orange Hotel Holdings, a leading boutique hotel operator with more than 100 hotels in tier 1 and tier 2 cities that enjoys excellent brand recognition. China Lodging will announce updated full-year 2017 revenue projections along with its Q2 results next month.” If you don’t own it yet, wait for a lower-risk entry point. HOLD.

Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high last Friday but quickly rolled over and joined the technology stock selloff. You may remember that I added FB to the portfolio just a month ago because I saw the bull market aging and I thought that FB was likely be one of the final participants in the advance—so if I’m right, it will recover soon. In any case, my recommendation is buttressed by that of our value expert Roy Ward, who has FB in his Cabot Benjamin Graham Value Investor portfolio as well. In his latest update, Roy wrote, “Facebook produced excellent first-quarter results. Sales surged 49% and EPS soared 73%. Daily active users advanced 38%. Management’s focus on advertising on mobile devices is producing exciting new growth. Mobile ads now account for 85% of ad revenue, spurred by 14% higher ad prices. Also, advertisers are spending 41% more on mobile advertising. The availability of video postings on the company’s Facebook and Instagram platforms is attracting new users by the millions. The number of Facebook users is now close to two billion. The company’s current P/E (price to earnings ratio) is a hefty 39.2, but the forward P/E, based on next 12 months’ EPS, is a more reasonable 30.7. The company is expected to grow earnings at a 27% pace during the next three to five years with more rapid growth expected during the next couple of years. Facebook is a great company with a proven track record and exceptional management, I expect FB will rise 56% and reach my Min Sell Price of 239.18 within 18 to 24 months. Buy at 156.97 or below.” BUY.

GameStop (GME), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier—and also recommended by Crista Huff and Roy Ward, continues to build a base above 20. In her latest update, Chloe wrote, “GME has been slipping since a disappointing earnings report two weeks ago. Technically, earnings beat expectations, but investors still found a few things not to like. Adjusted EPS fell 4.5%, to $0.63, beating the consensus analyst estimate of $0.51 by a wide margin. Revenues also beat estimates, rising 4.1% year-over-year to $2.05 billion (analysts were expecting $1.94 billion.) Nintendo’s new Switch console contributed to a 25% increase in new hardware sales. However, new software sales still fell 8%, and pre-owned sales (which account for 36% of profits) fell 6%. GameStop’s new businesses remain healthy: digital sales grew 3%, collectibles sales rose 39% and technology brands sales rose 22%. International sales outpaced U.S. sales, in part because Nintendo’s non-U.S. Switch distribution was more generous toward GameStop. The international stores have also been able to convert square footage to collectibles more quickly. The tech brands stores saw some expected weakness because of a lack of new phone launches; management expects a big bump when the iPhone 8 launches in the second half of the year. Management reiterated full-year EPS guidance of $3.10 to $3.40.” HOLD.

IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, has hit new highs on four of the past five days, buoyed by investors’ rotation into financial stocks. We’re just sitting tight, waiting for the stock to hit Roy’s minimum sell price, which has been lowered from 75.89 to 73.63. HOLD.

JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, hit a record high last Wednesday on the heels of good revenue news from Alibaba, but joined the technology stock selloff on Friday. It then found support at 38 (the top of the May gap up), and if this level holds, it might set up a decent entry point for aggressive investors. On the other hand, the technology stock selloff could mushroom. For now, I suggest holding patiently. HOLD.

Jabil (JBL), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is partially a technology stock, but it’s not acting like one; it’s acting more like a stable member of the global supply chain industry. In any event, Jabil is scheduled to report earnings tomorrow, June 14, after the market close, and if the stock reacts well to that report, you can buy. BUY.

Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, broke out above three-month resistance at 38.5 last Friday and has hit new highs every day since. In her latest update, Crista wrote, “My tentative plan is to move LM to a Hold when it reaches 40, then sell near 45. (I will be open to rebuying LM during a subsequent price correction.” Given that we’re nearly at 40 now, I’ll move to Hold. HOLD.

Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, broke out to a new high today, surpassing its peak of early April. Admittedly, volume was less than impressive, so the breakout may not hold. Still, the trend is up. In her latest update, Chloe noted that nine analysts have raised their earnings estimates for Pembina in the past 30 days. BUY.

Snap (SNAP), originally recommended by Mike Cintolo in Cabot Growth Investor, presents us with a challenge. On one hand, any positive momentum the stock had was killed by the earnings report and the selling pressure that has held the stock down since. On the other hand, the stock seems to be building a bottom at 18 and the long-term prospects are as bright as ever. It’s a natural temptation to hold here, but long and hard experience has taught me that it’s better to listen to the stock, take the loss, and move on. SELL.

Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high Friday before joining the tech selloff, but has recovered roughly half the loss since—so still looks quite healthy. However, it’s worth noting that the stock has substantial downside potential—its 50-day moving average is way down at 19.8. Thus, if you’ve become a bit over-weighted in the stock, and you want to reduce risk, you should feel free to take some profits here. I’m simply going to downgrade the stock to Hold and wait until it cools off a bit. HOLD.

Tesla (TSLA), a recommendation of Cabot Top Ten Trader, joined in the technology stock selloff on Friday but rallied quickly and closed at a new high today! Part of this strength may reflect big investors increasing their opinion of the company, but some is certainly from short-sellers covering their losses. As Mike Cintolo wrote in his latest update, “For a stock that is revolutionizing a major industry, sentiment toward TSLA remains surprisingly subdued, if not bearish—31.7 million shares are still sold short, and of the 24 analysts that follow the stock, just seven have Buy ratings, with 11 Holds and six Sells! We’re obviously bullish, mainly because of the company’s improving fundamental outlook (as production booms and the Model 3 hits the assembly lines next month) and the big-picture chart pattern (TSLA only recently emerged from a two-and-a-half-year consolidation). And if some of those bears turn positive (or at least neutral), it should further boost the stock. As with most stocks, a pullback could come, but given the recent big volume buying, we’d expect dips to find support.” Additionally, just today, Tesla announced that the National Highway Traffic Safety Administration (NHTSA) had awarded Tesla’s Model X a 5-star safety rating in every category and sub-category, making it the first SUV ever to earn the 5-star rating across the board. That makes it not only safer than any other SUV but also safer than every other car but one—Tesla’s own Model S.” Buy on pullbacks. BUY.

Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, has pulled back normally from its high of 130 last week, and the 120 level is now likely to provide support. In her latest update, Crista wrote, “Vertex is an undervalued, aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). On June 1, Vertex announced a long-term reimbursement agreement with the country of Ireland, which enables life-saving CF medications to reach another 500 patients. The article is especially helpful in explaining the intricacies of how Vertex’s medicines—Orkambi and Kalydeco—work with the human body to improve the health and lives of cystic fibrosis patients. The stock is actively rising. I intend to sell VRTX when it retraces its 2015 highs, in the range of 136-143, because it’s likely to rest there for several months. (I will subsequently consider repurchasing the stock if it experiences a large pullback.)” I’m now joining Crista in a downgrade to Hold. HOLD.

VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has fallen out of bed over the past two weeks (it was down 12% at the extreme), but the worst is likely over. In fact, in his latest update, Roy increased his Minimum Sell Price for the stock from 110.18 to 113.61. At the same time, he lowered his Maximum Buy Price from 87.79 to 81.65—which means the stock is still too high to buy with a Margin of Safety. HOLD.

Weibo (WB), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and featured here last week, looks fine. In his latest update, Paul wrote, “WB has been trading sideways since its big gap up move on enormous volume on May 16 after a great earnings report. The correction after that big move found support at 73, and WB rallied for the first five trading sessions of June before beginning a pullback. This three-week consolidation looks like a good reset for WB.” BUY.

Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has been very impressive! In her latest update, Chloe wrote, “WYNN’s run-up was prompted by a good month for the Macau gaming industry, where revenues improved 23.7% (well ahead of the 16.5% increase that was expected). It marked the 10th straight month of growth in Macau, which is good news for its Wynn Palace resort.” The stock presented you with a buying opportunity (briefly) on Friday and Monday, but now it’s right back up to its resistance area at 135, which has contained the stock for the past two weeks. Buy on pullbacks. BUY.
[premium_html_footer]

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 JUNE 20, 2017

We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/r/CSOW
Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit www.cabotwealth.com or write to support@cabotwealth.com.

[/premium_html_footer]