With today’s recommendation, I swing 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.
Cabot Stock of the Week 169
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As the bull market rolls on, I continue to recommend a variety of stocks, from high-risk aggressive growth stocks with the potential to be huge winners to low-risk dividend-payers that are almost guaranteed to go up, and almost certain to do it fairly slowly. But I don’t expect anyone to buy all my recommendations. Instead, I expect you to buy the ones that meet your investing style, and that will help you meet your investing goals. Last week, I recommend an undervalued steel company that is likely to benefit from the ongoing retreat from globalization, and today I swing back to a fast-growing technology company. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader. Here are Mike’s latest thoughts.
HubSpot (HUBS)
One of the market’s leading themes over the past few years has been companies that help other firms (including small- and mid-sized operations) succeed in the evolving digital, e-commerce world. Shopify (SHOP), for instance, has been one of this year’s biggest winners as its e-commerce platform helps companies get up and running. Square (SQ) and PayPal (PYPL) are two more examples, providing payment and add-on services (short-term lending, invoicing, etc.) that thousands of clients rely on.
And then there’s marketing, which has been revolutionized by the great shift to digital. Gone are the days of cold calls, email blasts and direct mail (the latter was a staple of Cabot’s marketing efforts) as things like no-call lists and unsubscribes from intrusive email lists grow. Taking their place are so-called “inbound marketing” efforts that are less intrusive, offer potential customers more relevant content and yield far better results. (The term inbound means attracting customers by offering good content, rather than pushing content to them that they may or may not want.)
HubSpot is a leader in the inbound marketing field, offering a software suite and supporting services that help any business find more customers. The company has two main products, Sales Hub and Marketing Hub. Its Sales Hub can track every interaction with a lead, notify a client when a lead clicks a certain link or opens an email, automate a personalized follow-up and more.
The Marketing Hub is more well rounded, helping clients modify their websites with drag-and-drop functions, optimize posts and content for search engines or social media, form great-looking landing pages to boost organic traffic and conversions. And HubSpot also offers a free customer relationship tool to easily organize all a business’s contacts and efforts.
While there’s obviously competition in the marketing field, HubSpot seems to have hit on something unique, especially given that it was built from the ground up for the inbound marketing world we now live in. It’s also focused on the mid-market, with its clients generally having fewer than 2,000 employees.
The Marketing Hub is the main driver, but everything is selling well as companies big and small move to HubSpot to attract leads—the firm has more than 34,000 total customers today in more than 90 countries and offices in six countries. The vast majority of revenue (about 95%) comes from subscriptions to its software suites, with the rest from professional services and support.
Business has been very consistent and very strong, with revenues growing sequentially every quarter since the company came public in the second half of 2014. Overall revenue growth has decelerated a touch in recent quarters, but Q2’s figure of 37% was just fine by our standards, and at a recent Investor Day, management nudged up its Q3 outlook, with analysts now expecting another quarter of 37% top line growth when results are released on November 1. We also like how earnings have just begun to head into the black.
At the Investor Day, management laid out its long-term financial model, which brought a smile to many investors’ lips. The company’s operating margin was a minuscule 2% in the first half of the year, but that’s up from -14% two years ago and, over time, the top brass sees that figure ranging from 20% to 25%. Without getting into specific projections, the bottom line here is that HubSpot has a ton of earnings power as the business continues to grow.
As for the stock, HUBS made no net progress between late 2015 and February of this year, but then shares broke out on the upside and rallied as high as 78 in June. That led to another, shallower consolidation, which the stock ripped out of just a few days ago thanks to management’s bump in Q3 guidance. After five straight days of big-volume buying, HUBS has pulled back calmly in recent days, offering a nice entry point.
HubSpot (HUBS 83)
25 First Street, 2nd Floor
Cambridge, MA 02141
888-482-7768
www.hubspot.com
CURRENT RECOMMENDATIONS
The addition of HubSpot means the portfolio once again swells to more than my self-imposed limit of 20 stocks, so I once again need to sell one (or more). And it’s a very difficult decision this week! The market is so strong that there are precious few contenders! However, technical analysis yields one sell (ATHM), while value analysis yields another (CELG). Details below.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, sold off on big volume on September 28 after its president and CFO both resigned, and while the stock is no lower now, it’s no higher, either. Buyers have not stepped in, and now the stock is below both its 25-day moving average and 50-day moving averages. Long-term, there is still great growth potential for the company as the automotive markets in China grow, but short-term, the combination of the recent action and the fact that the stock had gained a huge 235% since its July 2016 bottom (and we’re up 30% in just three months) means there’s substantial downside risk from here. SELL.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, is now consolidating its recent gains, trading between 46 and 48 as it prepares to break out to new highs. In her latest update, Chloe wrote, “BB&T Corp is a regional bank offering a broad range of financial services in the south, the mid-Atlantic region, Texas and some of the mid-west. I put BBT back on Buy last week after the stock started to make up for its recent underperformance versus the rest of the financials. The stock is now up 8.5% over the past 30 days, thanks in large part to the surge in interest rates. BB&T will report third-quarter earnings on October 19 before the open. Analysts are expecting 6.8% EPS growth, to $0.78 from $0.73, and revenues of $2.84 billion, about the same as last year. Dividend growth investors can buy BBT on pullbacks for long-term gains and steady dividends.” To avoid a big surprise, you could defer buying until after the earnings announcement. BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, continues to march upward, hitting one new high after another. Roy’s old Minimum Sell Price in Cabot Benjamin Graham Value Investor was 362, and his replacement, Azmath Rahiman, thinks the stock is worth holding. In fact, in Azmath’s new ranking system, BIIB sits smack in the middle of his 30-stock portfolio. HOLD.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small Cap Confidential, is working on finding support above its uptrending 200-day moving average and is a strong Hold (a Buy if you’re not yet in) for investors who can tolerate the volatility of a small-cap stock lacking big institutional ownership and the stability such sponsorship often confers. In his latest update, Tyler wrote, “BEAT has been selling off a little this week on what I interpret to be sector weakness. The small-cap health care ETF was down 2.7% this week, while shares of BioTelemetry fell 5%. The catalyst (for the sector, not specifically for BEAT), could well be disruption due to Hurricane Maria, and Trump’s proposal to roll back ACA subsidies. After the close last Friday, Medtronic (MDT), one of the bigger players in the medical device field, said that Maria could cause up to $250 million in Q3 revenue disruption. That company has significant Puerto Rico exposure, something that others in the industry don’t (I haven’t found any in BioTelemetry’s SEC filings). At any rate, healthcare stocks opened down significantly on Monday, and haven’t bounced back yet. I’m keeping BEAT at Buy, but watching closely.” BUY.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has been trending strongly up for two months, fueled by the perception that rising interest rates will be good for the company’s customers and, by extension, itself. I assume that’s true. But I think the chart has become extended, and for that reason alone I’m downgrading it to Hold. There are better risk-reward set-ups in the portfolio. HOLD.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, is now a Sell. Roy had a Minimum Sell Price of 173 on the stock, but Azmath has been busy reducing the number of stocks in Roy’s portfolios from 60 to a more manageable number (and with an even smaller number of Buys). You may want to hold on until it hits 173, but I’m going to follow Azmath’s lead (in part because the stock came under selling pressure two weeks ago). Azmath says, “I do think that Celgene is an excellent company, but the price is too high to justify. Imagine that revenue keeps growing at 18% and the profit margin stays around 20%. In five years, the EPS will be around $7/share. It is highly unlikely that the P/E in the fifth year will stay at the current 44x. If the P/E is a more normal 20x, then the price will be somewhere around 140—which is where it is today.” SELL.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is the biggest hotel chain in China, yet still has great growth potential. As for the stock, it’s had a great year; since it last touched its 50-day moving average in July, the stock is up 70%! Aggressive trend-following investors can still buy here; Chinese growth stocks as a whole are still very strong. But more prudent investors will wait for a correction. Note: I’ve designated HTHT a Heritage Stock for this portfolio, meaning that given my ample profit cushion and the company’s great growth potential, I’ve resolved to hold it through any technical action that might otherwise warrant selling. BUY.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here two weeks ago, has pulled back a little and can still be bought here. In his latest update, Mike wrote, “More and more analysts seem to be coming around to the thought that Cologuard is going to grab a big chunk of the colon cancer screening market. It has just 2% of that market today, but it’s already shown to be reaching new populations (half of users have never been screened before) and management thinks it can expand manyfold from here. Of course, as a one-product company, there is downside, and it’s worth nothing that EXAS was attacked back in May by the same short-selling outfit that hit SHOP last week. (EXAS fell sharply for a few days but stabilized after.) That said, if business continues to grow wildly (sales up 172% last quarter!), I think higher prices are coming. You can buy some here or on dips of a point or two. Earnings are due out on October 31.” BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, has just broken out to a new high, leaving behind the resistance level at 173 that had constrained it for 11 weeks. This is good, but volume was not impressive and the stock is no longer a market leader, so Hold is still the appropriate rating. Earnings are due on November 1. HOLD.
Nucor (NUE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, spiked up last Wednesday (the day we officially record as a Buy), thanks to the Japanese steel scandal and remains near that level today. In Crista’s latest update, she had strong words about the steel situation: “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. On October 11, I predicted that the scandal would be more extensive in reach than initially reported. Then on October 13, this additional news emerged: “Kobe Steel Scandal Grows to Include Subsidiaries.”
“It’s the nature of bad news that people do their best to minimize the amount of details that they initially reveal. (Think Equifax, Harvey Weinstein, Enron or any random spouse caught with their lover.) I don’t think it’s too farfetched to expect to learn of additional corruption among Kobe’s Japanese competitors. Japan’s economy was already shaky from debt and demographics. The country did not need this steel industry scandal, which should directly affect its GDP and national reputation.
“My investments in U.S. steel stocks just morphed from shorter-term trades into longer-term holds. I expect attractive capital gains. I’m still recommending Nucor (NUE) and Commercial Metals (CMC). I have not thus far seen similarly attractive growth, value and price charts in any of the other major U.S. steel stocks.”
Additionally, on Nucor, she wrote, “The company will report third-quarter results on the morning of October 19. The consensus third-quarter EPS estimate is $0.85, with a range of $0.75 to $1.17. Full-year EPS are expected to grow 69.9% and 15.9% in 2017 and 2018. The corresponding P/Es are 15.2 and 13.1. The stock is undervalued, and I anticipate upward revisions in earnings estimates for 2018. My 2017 price target on NUE is 65, where the stock last traded in December 2016. I will move the stock to Hold as it gets closer to the price target, which could surprise us and happen soon. I expect NUE to eventually rise past the mid-60s. I love the outlook for the steel industry and steel stocks.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, hit new highs repeatedly last week, peaking on Friday at 69.61. In his latest update, Mike wrote, “PYPL remains in a smooth, steady uptrend, having perked up to new highs today after an analyst upgrade. Fundamentally, the company expanded another key deal in recent days—PayPal and MasterCard recently extended their partnership into Canada, Europe, Latin American and the Caribbean, giving PayPal a presence in millions more point-of-sale locations, and letting people easily switch cash from their PayPal accounts to MasterCard debit cards. After the stock’s run in recent months, the valuation looks a bit stretched (36 times this year’s earnings estimates, compared to 20% expected growth next year), but remember that (a) estimates could be conservative, and (b) PayPal’s free cash flow is meaningfully larger than reported earnings. That’s not to say that the stock can’t have a correction—earnings are due on October 19—but I’m more focused on the longer-term bullish story playing out over time.” BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is the highest-yielding stock in the portfolio, and doing a great job of providing stability along with that income. If you haven’t bought, try to do so at the lower end of corrections. In her latest update, Chloe wrote, “The pipeline stock has begun another pullback, influenced by oil’s slide back under $50 per barrel. I still think the monthly dividend stock is a good medium-term holding for high yield investors, so I’ll keep it on Buy. Pembina will report third-quarter results on November 2 after the close.” HOLD.
Planet Fitness (PLNT) originally recommended by Mike Cintolo in Cabot Top Ten Trader, has slipped below its 25-day moving average to find support—for the second time this month—at the 26 level, but selling pressures are minimal. You can buy here. BUY.
Pulte Group (PHM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, was heading down toward its 25-day moving average last week, but it didn’t get there; buyers stepped in and are now pushing it back toward its old high of 27.76. In her latest update, Crista wrote, “Pulte is a U.S. homebuilder, and a very undervalued aggressive growth stock. PHM rose 10% after breaking out from a long-term trading range in July. I expect lots more upside. Buy PHM now.” Earnings will be released October 24 before the market opens. BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, broke out above its recent resistance level at 37.75 on above-average (but not huge) volume and pulled back normally today. This is definitely promising but there’s still another resistance level at 38.50, where the stock traded in February. In her latest update, Crista wrote, “Quanta provides specialized infrastructure and network services to the electric power, oil and natural gas industries. PWR is an undervalued, aggressive growth stock. There’s a decent chance that PWR could walk right past 38.5 and perform quite well in the coming months. There’s 17% upside to my fair-value price target of 44.” BUY.
Sociedad Quimica y Minera de Chile (SQM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is one of the stocks I considered selling this week. If so, the logic would have been locking in a quick profit and avoiding the risk that the stock would fall (again) to support at 52.5 (or its 50-day moving average at 51.5). So you can sell here if that makes sense to you. But I’m holding on because the action of the stock since that first selloff has been quite positive (remember what I wrote about the steepness of the angle of the recovery) and because the long-term potential for the company remains huge. I’m not typically a commodity stock investor; I prefer companies where the intelligence of people adds value. But SQM is the biggest miner of lithium on the planet and demand for lithium is expected to increase by 400% by 2025. HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, advanced for 15 consecutive days—powerful evidence of an institutional appetite for accumulation—before finally pulling back today. If you haven’t bought yet, I recommend waiting for a lower-risk entry point. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, remains roughly in the middle of its wide (310 to 390) trading range, while fundamentally, the company remains highly focused on ramping up production volumes of its Model 3 sedan. I don’t see a great setup for new buyers in the stock’s chart today, but I do see great potential for long-term growth in the company’s revolutionary business model, and thus TSLA is the second Heritage Stock in the portfolio. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, has spent the past week trading tightly around 155, near the the lower end of its 12-week trading range. In her latest update, Crista wrote, “Vertex is an aggressive growth biotech company that corners the market in treatments for cystic fibrosis. VRTX is fairly valued based on 2017 EPS, but distinctly undervalued based on 2018 earnings projections. The stock’s been trading sideways between 147.5 and 167.5 since its big run-up in July.” Note: Mike Cintolo also likes the current setup and the fundamental growth story. BUY.
VMware (VMW) is the third of Roy Ward’s value stocks in this portfolio, and it’s still looking good, hitting new highs on each of the past four days. Roy’s official Minimum Sell Price was 118.75 (which is close), and Azmath has recommended selling, saying that it’s now overvalued. However, given that I’m already selling two stocks today, and that the stock is trending strongly up, I’m going to hold on for how, and delay selling until I see the technical action deteriorate. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED OCTOBER 24, 2017
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