Today’s selection is one of the big, fast-growing Chinese companies (you might call it the Google of China), which has just pulled back to offer us a lower-risk entry point.
Cabot Stock of the Week 172
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The market sold off broadly today, reminding those who’d forgotten that this is a two-way street, but the main trend remains up, and thus I continue to recommend that you be heavily invested in a diversified portfolio of well-chosen stocks. For today’s selection, I turned away from the U.S. market, because it was looking a bit overextended short-term, and turned to Paul Goodwin’s recommendations in Cabot Emerging Markets Investor, looking for a stock with a lower-risk entry point. And what I found was one of the Big Three, which had recently sold off (down to its 50-day moving average) after a good-but-less-than-spectacular earnings report. Here are Paul’s latest thoughts.
Baidu (BIDU)
If ever there was a Chinese stock that needs no introduction, it’s Baidu (BIDU). With the catchy nickname of “The Google of China,” the company has been China’s dominant online search engine since Google withdrew from China back in 2010 as a protest against the government’s censorship requirements.
Even before Google’s withdrawal, Baidu was actually mopping the floor with Google, beating it on the speed and quality of its search results based on its superior knowledge of the intricacies of the Chinese language.
Despite its near-monopoly position in online searching, Baidu ran into an unanticipated obstacle when Chinese internet users made a massive switch to mobile devices as the primary way to get online. Baidu suddenly found itself outmaneuvered by smaller, more nimble competitors whose online browsers included search and offered hipper alternatives.
Baidu has never stopped growing, and has always been profitable, but after BIDU completed its monster run from 10 in early 2009 to 166 in July 2011, momentum was lost, and it took a long, hard scramble to get it back. The stock made another run from 83 in the middle of 2013 to 252 in November 2014, and then stalled out again.
The chart tells a remarkable story. From its November 2014 high and its subsequent August 2015 low at 100, BIDU formed one of the longest, most regular wedge patterns I’ve ever seen, tightening up over a period of two-and-a-half years.
And then came the company’s July 27 earnings report, which featured a 12% jump in revenue and a powerful 93% hike in earnings. The company’s 26.7% after-tax profit margin was the best since 2014 and mobile search accounted for 72% of growth in the second quarter. Analysts said they expected the company’s earnings to increase by 62% in 2017, which isn’t bad for a company with $67 billion market cap.
After that great earnings report, BIDU finally broke out of its long wedge pattern in July, gapping up to 230. It spent July and August consolidating its gains, then started soaring again in September and really built up a head of steam in October, hitting 275 on October 17.
And then on October 26, the company reported its third-quarter results. Baidu’s earnings were just fine … more than fine actually, with revenue growth at 29% and earnings up a whopping 162%, with a 38.6% after-tax profit margin that was the strongest ever. But management’s guidance wasn’t quite as rosy as investors had been expecting, so the stock gapped down to around 240 on three times its average volume.
For many stocks, that kind of action would be a warning sign. But BIDU immediately stabilized at that level and is now trading above 240 and riding its 50-day moving average higher.
It’s hard to overestimate Baidu’s importance in the Chinese internet world. It’s so important that it’s one of the BAT stocks (Baidu, Alibaba and Tencent Holdings), which is the rough equivalent of the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) that supplied most of the Nasdaq’s outperformance this year. The three Chinese companies are all characterized by strong leadership, massive cash flow and an eagerness to expand in every logical direction.
I regard BIDU’s pullback as a great buying opportunity. Baidu is a very solid, innovative business in the biggest internet market in the world. And after more than a year spent on infrastructure, making strategic investments, forging joint ventures and building up its AI division, its forward success is a very good bet. BUY.
NN at yesterday’s low near 140, but the stock bounced strongly today, so we’re stuck with tomorrow’s average, whatever it is. If you’re patient, you still might be able to buy at 140.
Baidu (BIDU 243)
Baidu Campus
No 10, Shangdi 10th Street
Beijing 100085 China
www.baidu.com
CURRENT RECOMMENDATIONS
As the bull market rolls on, the majority of our stocks continue to participate, but there are scattered spots of weakness, and it’s quite possible these spots will grow. So it’s important not to be complacent but, as always, to respect the messages the stocks are sending us. Today, that means selling one stock and downgrading two to Hold. Details below.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, surged 10% in the two weeks following its excellent third-quarter earnings report, hitting its latest high last Wednesday, and has pulled back normally since. If you haven’t bought yet, I suggest waiting for a deeper pullback. BUY.
Biogen (BIIB), originally recommended by Cabot Benjamin Graham Value Investor, continues to recover from its plunge to near 300 after an unsatisfying earnings report—but it remains below its 50-day moving average. In his latest update, Azmath Rahiman wrote, “Although Biogen looks cheap compared to its historical price-to-earnings ratios, there is a fear that the market will value it at a lower price-to-earnings ratio due to less promising growth expectations.” Azmath is recommending that his readers sell a partial position, but I like to keep things simple in this concentrated portfolio, so I recommend taking the profit and moving on. SELL.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, presents our biggest challenge. Every week (seemingly) the stock goes down, and every week Tyler tells his readers that the future is bright for the little medical technology company. In his latest update, he wrote, “Shares have just been demolished since that Off Wall Street short attack came out, even though analysts have picked up coverage and boosted price targets on the stock (both SunTrust and Raymond James initiated coverage of the heart monitoring specialist with price targets of 41 and 37, respectively, within the last two weeks). The three factors at play, aside from that short attack, are concerns that (1) upstart iRhythm (IRTC) will eat BioTelemetry’s lunch with its ZIO monitoring patch, (2) that integration of the acquired LifeWatch business will be bumpy for BioTelemetry, and (3) that storms in the last quarter will cause the company to miss expectations. I think there is something to the competitive threat from iRhythm, but the fact remains that BioTelemetry is the leader in remote cardiac monitoring, and is also coming out with its own patch. I don’t think customers will leave en masse to go with a less proven company. And I think there is plenty of room in this market for multiple winners. On the acquisition front, we don’t know how it’s going, but will get an update next week! And as far as the hurricanes go, I’ve scanned SEC filings for any mention of geographic exposure that could hurt (i.e., Puerto Rico), and come up with nothing. The bottom line appears to me that shares of BioTelemetry have been killed on the perception of threats, but not confirmation. The burden of proof remains on management, but provided it continues to execute its growth agenda, as I expect it will, shares should recover from this dip. Given the size of the pullback, there is potential for a huge post-earnings rally. I think the stock is a good buy here.” Combining Tyler’s confidence with the chart—which looks ripe to rally to at least its 200-day moving average at 30.5—I’ll continue to hold. HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, continues to trend steadily higher, with minimal volatility, but as I wrote last week, the fact that it’s been getting increasingly distant from its 50-day moving average (now at 82), means short-term risk is growing. Chloe has the stock rated Buy, but I think it’s more prudent to wait for a pullback. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has finally run into some selling pressure, the first that it’s seen since June. In Paul’s update last week, he wrote, “HTHT remains in an uptrend, but I’ve been noticing a little funky action, including some high-volume selling and (for the first time in months) a dip below the shorter-term 25-day line. Some of that is probably due to last week’s $425 convertible bond offering (which is dilutive), but it’s worth keeping an eye on. A “real” pullback after such a big run (the stock was at 77 back in July) is certainly possible—but it’s also possible the firm’s terrific business trends (earnings expected to rise 52% in Q3 and another 36% in 2018) will keep buyers interested. Right now, the stock is still in good shape.” Earnings are due November 28, and the combination of that and the fact that the stock has doubled since May tells me it’s time for a Hold rating. In my case, though, this is a very strong Hold, because I’ve designated HTHT a Heritage Stock, meaning I’m so confident of its long-term potential that I’m willing to hold through what might be normal sell signals. If you’re not in the same boat, you probably want to respect the stock’s 50-day moving average, now at 123. HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, blasted off last Monday on big volume after reporting an excellent third quarter and is even higher today. In his latest update, Mike wrote, “Exact Sciences reported another great quarter on Monday as Cologuard gains in popularity. In Q3, Exact’s revenues soared 156% while Cologuard tests numbered 161,000, up 19% from the prior quarter. Moreover, it was good to see that revenue per test ($428, up $5 from last quarter) and cost per test ($129, down $4) both continued to head in the right direction. Management hinted that some seasonality could rear its head in the holiday quarter (fewer people return tests on time due to the holidays), but investors are focused on the big picture, with the top brass believing the company can increase its share of the colon cancer screening market to 40% in the long term (from just 2% to 3% today). EXAS popped to new highs on the news, and though it did pull back briefly after a downgrade, the overall chart looks fine.” BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, beat analysts’ expectations on both revenues and earnings last week, and the stock blasted out to a new high on big (but not huge) volume in response. I like the continuation of the uptrend, and I continue to think that FB is likely to be one of the very last stocks advancing when this bull market eventually ends, but I don’t think the stock is a good buy here. Also, Mike has noted that the stock’s relative performance line is flat, indicating that FB is simply an average performer. HOLD.
Grupo Supervielle (SUPV), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is base-building in the 26 area, less than 2 points off its recent high. In his latest update, Paul wrote, “SUPV is still in a firm uptrend, with pullbacks lasting just a few days before shares resume their rise. Earnings for this small-ish Argentinean financial outfit are out on November 8; we’ll be interested in hearing whether they have an early look into 2018 (analysts are currently expecting 32% bottom line growth).” BUY.
HubSpot (HUBS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, released a good earnings report last week, and the stock hardly reacted. But yesterday, the stock was down on elevated volume, and today, the decline accelerated, taking the stock down—briefly—to its 50-day moving average. If you don’t own it, you can buy it here. BUY.
Nucor (NUE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, continues to trade around its 25-day moving average—a great entry point. In Crista’s latest update, she wrote, “Nucor (NUE) is a low-cost producer of a diversified portfolio of iron and steel products. The company has solid earnings growth, low valuation and low debt levels. The biggest negative on Nucor’s horizon is an abundance of low-cost steel imports, creating pricing pressure at Nucor. The stock is therefore greatly affected by news of potential trade remedies to foreign steel dumping (a situation wherein foreign steel is sold in the U.S. without regard to profitability, with a goal of undermining U.S. companies and stealing market share). The Trump administration has undertaken a Section 232 investigation into the national security implications of steel imports. Consensus earnings estimates for NUE change with the wind. The company reported $2.26 non-GAAP EPS in fiscal 2016 (December year-end), up 27.7% over the prior year. 2017 EPS estimates have changed from $3.56 in January to $4.53 in May to $3.92 today. Bottom line: the market currently expects EPS to grow 73.5% in 2017 and another 14.3% in 2018. The corresponding P/Es are 14.3 and 12.5. The dividend yield is attractive at 2.7%. Nucor raises its dividend each year, right around December 1, but only by a tiny fraction. As for the long-term debt-to-capitalization ratio, the number held steady in recent years through December 2015 at about 36%, and has since fallen significantly to 25%. In September, Citigroup raised NUE to a Buy recommendation, and financial media guru Jim Cramer said that NUE is “the only steel company worth buying,” as he pounded the table. The growth, value, dividend and price chart situations make this mid-cap stock attractive to virtually all types of stock investors … except maybe the bears! NUE rose to 65 in December 2016. That peak now becomes our price target. I’m recommending that traders buy NUE today for approximately 14% upside. Unless company-specific bad news or a big market correction rolls our way, I would expect NUE to retrace that previous high this year. NUE will still be an undervalued growth stock at 65, and therefore it’s also an attractive stock for longer-term investors.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has been in an accelerating uptrend since early August and hit new highs in each of the past three days. In Mike’s latest update, he wrote, “PayPal remains in fine shape, pushing up further since its earnings rally nearly two weeks ago. The stock remains a bit out of trend on the upside, so try to get in on dips of a point or two.” BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, remains the highest-yielding stock in the portfolio, and is thus particularly attractive for investors seeking current income. The company’s third-quarter report, released November 2, missed analysts’ estimates on both revenues and earnings. But what has the stock done since? Climbed higher every day, on above-average volume, and broke out to new highs today! In short, the market is looking ahead. In the conference call after the announcement, CFO Scott Burrows remarked, “The past few months have been some of the most exciting ones in our company’s history. Not only did we place over $3 billion of new assets into service, we also closed the $9.4 billion acquisition of Veresen on October 2. 2017 truly marks a transformational year and has positioned us as a leading North American energy infrastructure company. In terms of the Veresen acquisition the integration is progressing very well.” BUY.
Planet Fitness (PLNT) originally recommended by Mike Cintolo in Cabot Top Ten Trader, dipped under its 50-day moving average today (not good), but remains within the healthy base-building zone between 25.5 and 27 (good). Third-quarter earnings will be released after the market close today, and the market’s reaction will be important. BUY.
Pulte Group (PHM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has climbed relentlessly since releasing an excellent third-quarter earnings report two weeks ago. In her recent updates, Crista wrote, “Pulte is a U.S. homebuilder, and a very undervalued aggressive growth stock. Wall Street expects EPS to grow 30.2% and 30.0% in 2017 and 2018, with corresponding P/Es of 13.2 and 10.2. PHM has been slowly ratcheting upward since breaking out from a long-term trading range in July. There’s market talk that housing industry stocks are beginning to take the stage. In that light, PHM might surprise investors with significant additional capital gains in the coming months. Additionally, Mike Cintolo recently wrote, “Homebuilders have come to life recently, and PHM looks like one of the leaders. It’s reacted well to earnings, is cheap (for whatever that’s worth) and is expected to grow earnings 37% next year.” BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, released third-quarter earnings on November 2 and the stock immediately plunged from 38 to 36. But it’s been stabilizing in that area since, and Crista is still bullish. In her latest update, Crista wrote, “Quanta provides specialized infrastructure and network services to the electric power, oil and natural gas industries. PWR is a very undervalued aggressive growth stock. The stock is having a pullback, and could fall to 34 where it repeatedly bounced during the last year. There’s 21% 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 a diversified South American miner with a major presence in the lithium market, which is expected to thrive as electric cars grow in popularity. In Paul’s latest update, he wrote, “SQM tried to push to new highs yesterday but was reeled back in. Even so, we continue to like the stock’s overall action as it holds above its 25-day line and has recouped most of its big late-September shakeout.” Earnings are due out on November 22. BUY.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high yesterday, but the power has gone out of the advance. After gaining 50% in 10 weeks, the stock needs a rest. I’m going to downgrade it to Hold for a while. HOLD.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, released its third-quarter earnings report last week and the market didn’t like it; the stock fell to a low of 293 soon after, before rallying to the 300 region where it is now trying to build a base. I believe the short-term bad news is out (difficulty ramping up Model 3 production), and the long-term good news (the enormous growth ahead for the modern digital electric automobile industry, as well as the semi truck being unveiled later this month) will eventually get the stock trending up again. Until then, Hold is the proper rating. Note, TSLA, like HTHT, is a Heritage Stock for the portfolio. HOLD.
VMware (VMW), originally recommended by Cabot Benjamin Graham Value Investor, was officially “fully valued” when it hit 118.75, so it can be sold anytime. But given that the stock’s main trend remains up, I’m sticking with it. The stock hit a new high today. HOLD.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier and featured here last week, was bought, unfortunately, on a strong up day (we always use the day following recommendation for our records). Nevertheless, we already have a little profit, as there’s no selling power in the stock here. According to Chloe, the strength in the stock stemmed from a “research note from Nomura forecasting a “noticeable pickup” in October gaming numbers from Macau, based on their on-the-ground observations.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED NOVEMBER 14, 2017
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