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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 174

Today’s recommendation is a chain restaurant—a chain I’d never even heard of—but the company is growing fast and the chart is very constructive.

Cabot Stock of the Week 174

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The long bull market remains intact, and the good news is that the divergences I’ve previously mentioned have lessened, reducing the chance that the uptrend will end soon. Which is not to say that it will be smooth sailing from here—it seldom is—but simply that the main trend remains in your favor. In selecting today’s stock, I turned to Cabot Top Ten Trader, looking for a stock with a very constructive chart, and came up with a stock that you may not have heard of—yet. The stock was originally recommended by Mike Cintolo. Here are Mike’s latest thoughts.
Wingstop (WING)

Vibrant young retail companies are some of my favorite investments because they offer not only great growth (through a combination of new store openings and increasing sales among existing locations) but also great consistency and predictability, which attracts big investors who are willing to pay up for what is likely to be years of earnings upside.

This year hasn’t been kind to retail stocks, as fears that Amazon will take over the world have beaten down many old-world, mall-based retailers and dragged down the entire sector. But that’s beginning to change; I latched onto one retail winner three months ago (Planet Fitness) and today I think Wingstop (WING) has an equally bright future.

Wingstop is a restaurant chain with a simple menu, specializing in chicken wings that can be made three ways (classic, boneless or crispy tenders) and come in about a dozen yummy flavors (from Atomic to Louisiana Rub to Hawaiian). There are also a handful of classic sides (including seasoned or cheese fries, baked beans, potato salad, veggies and cole slaw), a couple of cookies for desserts and non-alcoholic drinks.

It might not be good for your waistline, but Wingstop’s simple, high-quality approach is clearly a hit. The company ended the third quarter with 1,088 locations (994 of them in the U.S., mostly franchised), a figure that’s been growing at a 15%-plus annual pace for the past few years. Throw in the fact that Wingstop has seen sales at existing locations grow for 14 straight years, and it’s no surprise that revenues have grown between 14% and 17% over the past three years, with a 15% gain expected for full-year 2017.

As usual with successful cookie-cutter stories, the reason this company can expand so quickly is its highly profitable store economics. Franchisees generally see a cash-on-cash return of 35% to 40% within two years, which is why the majority of Wingstop’s new store openings are by existing franchisees.

Not that the company is resting on its laurels. Wingstop has recently launched a national advertising campaign to boost traffic, with good results so far; nearly every major market it operates in has seen a sales boost since the campaign launched. And the firm has seen some positive early results from delivery services (a 10% sales boost in Las Vegas) and online ordering (average ticket is $5 over an in-store order).

But the core of the story going forward will remain opening up new locations and cranking out positive same-store sales growth. Long-term, management believes there’s room for a whopping 2,500 Wingstops in the U.S. alone, and that says nothing about the potential overseas, where the firm is slowly building up its operations.

Put it all together and the top brass sees many years of double-digit increases in the store count, low double-digit sales growth, EBITDA up 13% to 15% per year and earnings lifting 18% to 20%. Given the firm’s history of topping expectations, those projections could easily prove conservative, and mutual funds seem to agree—336 of them owned a total of 28 million shares at the end of Q3, up from 252 funds owning 19 million shares a year ago.

While growth has been solid, steady and predictable since WING came public back in June 2015, the stock didn’t make any net progress for more than two years! But WING has now changed character, forming a very tight, quiet base from August through October, and then exploding to new highs on excellent volume following earnings.

Short-term, the stock is a bit extended, with the 25-day line below 37 and the 50-day line still around 35. But I’m putting more emphasis on the stock’s long-term breakout, which tells us the odds of a sustained advance are high. I think you can pick up shares around here. BUY.
Wingstop (WING 40)
5501 LBJ Freeway, 5th Floor
Dallas, TX 75240
972-686-6500
www.wingstop.com

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WING data.xls

Sue Hourihan

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CURRENT RECOMMENDATIONS

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Some of the portfolio’s stocks are hitting new highs, but some are weakening. There are lots of ratings changes this week, but only one outright Sell, and that’s on strength! Details below.

Baidu (BIDU), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor and featured here three weeks ago after it dipped below its 50-day moving average, continues to set up well. If you want a piece of one of China’s internet giants, you can buy here. BUY.

BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, is a bank with good growth prospects and decent valuation. In her latest update, Chloe wrote, “BBT has traded sideways since our last update. The bank and financial services company remains stymied by upside resistance at 50, with persistently low long-term interest rates a challenge. But a breakdown looks unlikely, so I’ll keep it on Buy for dividend growth investors.” BUY.

BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small Cap Confidential, is one of the portfolio’s two big losses, and I’m sticking with it for now simply because Tyler is sticking with it—and I like the fundamental story. In Tyler’s latest update, he wrote, “BioTelemetry shares have been demolished since the 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. We’ll see. 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. BUY.

Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, surged nearly 5% on big volume after reporting earnings three weeks ago and has been consolidating that gain in textbook fashion since. If you own it, it’s a strong Hold. If not, you can now buy, but try to buy on a normal pullback. The 25-day moving average is at 88, while the 50-day moving average is at 85. BUY.

China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is scheduled to report earnings as this is emailed, and judging by the action of the stock in recent weeks, there is likely to be some slowing of growth. According to Paul, analysts are looking for $474 million in revenue and 21 cents in earnings. In any case, I’m in it for the long run. I’ve designated HTHT a Heritage Stock, meaning that I’m so confident of the company’s long-term growth prospects, and so comfortable with our initial profits, that I’ve resolved to hold it through what might normally be considered sell signals for a growth stock. HOLD.

Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, is now in consolidation mode, as it deserves to be. In his latest update, Mike wrote, “EXAS has caught its breath in recent days, partly due to a valuation-driven analyst downgrade last week. (I also saw some bearish options activity picking up last week, so some investors are betting on the stock retreating further.) Even so, the rest looks normal on the chart, and a dip into the mid-50s wouldn’t be surprising. The company itself is certainly a believer that it has a ton of growth ahead of it: Exact Sciences is in the process of upping its production capacity at one facility from one million to 2.5 million Cologuard tests annually, and it just broke ground on another facility that will eventually boost total capacity to 4.5 million tests annually. That compares to an expected 570,000 tests this year! If you don’t own any, you can start a position here or on dips of a couple of points.” BUY.

Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, has been hitting new highs in recent days and looks fine. In his latest update, Mike wrote, “On a price chart, FB remains in fine shape; if you own some, the stock is a solid Hold. (Remember that, unlike on Wall Street, hold actually means hold to us.) But whether it’s because of fears of slowing growth next year (mostly due to higher spending) or the fact that the stock is so well known, FB isn’t a leader right now—the RP line is no higher today than it was in late-July, which means the stock hasn’t been outperforming the market. Eventually, I think the stock will kick into gear, but I want to focus new buying today on stronger situations.” HOLD.

HubSpot (HUBS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has rallied back up to its 50-day moving average, and is likely to pause here, as traders who bought the dip sell and move on. But I like the stock’s longer-term pattern as well as the fundamental growth story so I’ll stick with it. If you’re not on board yet, feel free to buy on any normal pullback. BUY.

Nucor (NUE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, is still in buying range. In her latest update, Crista wrote, “Nucor is a low-cost producer of a diversified portfolio of iron and steel products, and an undervalued mid-cap growth stock. Last week, Jim Cramer recommended NUE again, saying, “if the president were to ever authorize the end of the [steel] dumping, then I would say ‘Hallelujah’ and you get a $64 stock.” On that topic, the U.S. Commerce Department is in the midst of a Section 232 investigation into the national security implications of the illegal dumping of steel in the U.S. A final report is due on President Trump’s desk on January 14. In November, Commerce Secretary Wilbur Ross reiterated his stance on getting tough against trade abuses that harm not just the steel industry, but all U.S. industries. As a person who has spent a lifetime coming to the aid and defense of people and organizations that are under attack, I am grateful that we finally have somebody in Washington D.C. who is focused on economic problem solving. There are few people I respect more than those who, despite intense criticism, are willing to do the hard work involved in resolving entrenched, corrupt situations. NUE is low within a wide trading range. There’s about 17% upside as NUE retraces its December 2016 high of 65.” BUY.

PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, hit a new high last Friday and has pulled back normally since. In Mike’s latest update, he wrote, “PayPal made a big move last week, agreeing to sell its consumer credit portfolio to Synchrony Financial for more than $6 billion, which will lessen PayPal’s credit risks and free up a ton of cash to invest in other, higher-yielding areas. While the move will play around with the company’s numbers in the short-term, investors generally like the move, thinking it will raise the ceiling on PayPal’s potential growth and free cash flow down the road. The stock popped on the news and continues to look fine, but shares remain extended to the upside in the short-term [the 50-day line is at 70] and intermediate-term (PYPL hasn’t had a correction in seven months). I don’t see any major warning signs, so I’ll stay on Buy, but you should try to buy shares on pullbacks.” 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. In her latest update, Chloe wrote, “PBA has pulled back to its 50-day moving average as energy stocks have corrected over the past two weeks, bringing it back to the middle of its trading range. The stock looks like it found support around this level yesterday, although it also has strong support at 32 if the downtrend persists. High yield investors looking to add monthly income to their portfolio can buy a little here.” BUY.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is one of the strongest stocks in the portfolio, hitting new highs more often than not. If you don’t own it yet, wait for a pullback. BUY.

Pulte Group (PHM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, was sold last week in a special bulletin, simply because it had come so far so fast. Crista wrote, “PHM rose roughly 78% this year, and is still climbing. That’s just ridiculous. I’m selling PHM today because it’s extremely overdue for a price correction, and I’d rather sell now than watch it fall.” SOLD.

Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, found a base at 36 after releasing a slightly disappointing third-quarter earnings report, but the stock is up since then, and once again trading in the middle of its recent range. In her latest update, Crista wrote, “When PWR rises above 38, it will be breaking past long-term price resistance. The stock could therefore have a fantastic year in 2018. Buy PWR now.” BUY.

Signet Jewelers (SIG), originally recommended by Azmath Rahiman of Cabot Benjamin Graham Value Investor and featured here in the last issue two weeks ago, has been a bust so far—but there are two reasons for optimism. One is technical. SIG has bottomed at the 50 level twice before over the past six months, and the buyers who stepped in then are likely to step in again. The other reason is fundamental, and that’s the one Azmath replayed to his readers. “SIG lost close to 30% after releasing disappointing Q3 earnings results. The quarterly loss was hard to predict because most of the loss was due to unforeseen circumstances, including hurricane-related incidents and systems disruptions associated with the outsourcing of its credit portfolio. While undergoing a $1 billion sale of in-house credit to ADS, Signet faced a large-scale server outage. Most analysts, including me, failed to take into account the possibility of such a loss, and the market reacted sharply to the news. On the conference call, management clearly regretted that it was unprepared to handle such a massive transaction. My Buy recommendation was broadly based on two trends: Signet’s increasing online presence since its acquisition of JamesAllen.com, and increasing profit margin at Zales Jewelry, which Signet acquired in 2014. I expected that Signet would become the leading online diamond jewelry retailer by leveraging its 15% overall market share and the online expertise gained from the acquisition of JamesAllen and R2Net. Around 25% of Signet’s revenue comes from Zales, however the operating profit margin of Zales Jewelry is only 4% relative to 18% of Sterling Jewelers (which includes Kay and Jared Jewelers). I expected Zale’s margin to increase to the Sterling’s level in the long term. In addition to these two growth expectations, the company’s cash flow yield provided a good margin of safety. Our investment was long term in nature, with an investment horizon of three to five years. As I examine the results of Q3 earnings, I’ve become concerned that Signet may not be able to increase Zales’ margin as I had expected earlier. It would be premature to make that conclusion based on one quarterly earnings report, but given the decrease in sales of both the Zales and Sterling divisions, and management’s revised earnings estimates, I am changing the rating from Buy to Hold.” HOLD.

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. The company reported third-quarter earnings last week, and the results were good. Revenues for the three months were $559 million (up 10.8% from the year before), while analysts had expected $526 million, and earnings per share were $0.43 per ADR (up from $0.21), while analysts had expected $0.42. Nevertheless, the stock’s slow decline has continued, and now the stock is not only below its 50-day moving average, it’s also nearing support at 52.5, where the stock found support in mid-September. I’ll downgrade to Hold and see if the stock can pick up some support soon. If not, I’ll let it go. HOLD.

Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, has been the hottest stock in the portfolio for some time (and I’ve occasionally suggested that you take profits if that’s appropriate) but the climactic run ended last Friday when buyers ran out of appetite and sellers took over. Short-sellers can finally cash in, at least for a while. So what comes next? Well, the long-term growth prospects for the company remain intact—and may be even better if the recent Bitcoin dreams come true. But it’s dreams like that that often accompany tops, and typically, when a hot stock turns cold, it takes longer than expected for it to complete its cooling-off phase. I’m talking months—even years. So I’m going to sell SQ today, take our profit of nearly 200% garnered in less than ten months, and move on. SELL.

Tesla (TSLA), a recommendation of Cabot Top Ten Trader, has now rallied for nearly a month since selling off on the “bad news” that Model 3 production was behind schedule. Bad news creates bottoms; good news (even dreams—see SQ) creates tops. And TSLA is slowly climbing again as the company works out the kinks in Model 3 production. Also, Tesla recently revealed an all-electric semi truck that has the potential to revolutionize the industry. TSLA is a Heritage Stock for me. 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 another new high today. HOLD.

Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, hit record highs on every trading day last week before pulling back minimally this week. In Chloe’s latest update, she wrote, “WYNN is in a strong uptrend and earnings estimates are excellent. Wynn hasn’t increased its dividend since VIPs started to return to Macau, so investors likely still have a big hike or two to look forward to. Dividend growth investors can buy here.” WYNN’s dividend is 1.3%. BUY.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED DECEMBER 5, 2017

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