Today’s recommendation is a medical device company whose one product—an insulin delivery system for diabetics—is growing market share rapidly.
Cabot Stock of the Week 177
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Coming into year-end, the market is acting great, and all long-time signs point to higher prices ahead—yes, even from these elevated levels. So I continue to recommend heavy investment in a portfolio of stocks that will help you achieve your investment goals.
Last week’s recommendation, GDS, is off to a great start, and this week, I’m sticking with the technology/growth theme with a stock originally recommended by Mike Cintolo in Cabot Growth Investor. Here are Mike’s latest thoughts.
Insulet (PODD)
Insulet’s focus is diabetes, a terrible disease that affects more than 30 million Americans (with another million-plus diagnosed each year) and possibly three times that number outside of the U.S. Insulet isn’t concerned with curing the disease, but it has better solution for the insulin management market.
Despite all the advances in technology in recent years, 80% of diabetics still use what’s known as the multiple daily injection (MDI) method, which involves injecting themselves many times per day. How many? On average, more than 14 times! It’s an inferior, burdensome technique.
Thus, some users (about 20%) have moved on to insulin pumps. But, while pumps are a great improvement, many are a hassle, with numerous pieces (including tubes, making the pumps less discreet) and they still require the user to insert the cannula (a thin tube that transfers the insulin) into their own body.
Insulet has a far better mousetrap that’s just beginning to exploit its potential, and that’s why I think the stock will continue to do well. The company’s insulin pump, named Omnipod, is a major step forward. There are just two pieces (and no tubes!), it has automatic cannula insertion, can pump insulin for three days straight (other pumps start and stop), and has fewer tasks (less complexity) for the user to do. It’s even waterproof!
Omnipod also has an integrated technology platform that allows greater control, scheduling and monitoring of a patient’s insulin regimen, along with a personal diabetes manager device (it looks like a smartphone).
Omnipod is thus a huge improvement over current pumps, and compared to MDI, it’s not even close. Of course, it takes a long time for people to switch techniques, but there’s no question that Omnipod is rapidly gaining share. Currently, the firm has about 4% to 5% of the Type 1 diabetes market in the U.S. (and 1% to 2% share internationally) and less than a 1% share of the Type 2 diabetes market. And those figures are only going up.
In the third quarter, Insulet saw solid revenue growth in the U.S. (up 17%), and it also has a drug delivery business (tied mostly to an Amgen drug), which saw sales up 19%. But the fastest growth is occurring overseas, with revenue up 70% last quarter, and next year should be even bigger on that front; Insulet is moving to a direct seller sales model in Europe starting in July of 2018, which is expected to dramatically raise revenues and prices. Revenue to Insulet as a direct seller should be a huge 50% higher than they are now using a distributor! Throw in continued efficiency gains (the cost to manufacture an Omnipod has fallen 15% over the past couple of years) and the company expects to turn cash flow-positive next year.
Longer-term, management believes it’s well on its way toward $1 billion in revenue by 2021 (up from $450 million or so this year) as well as higher margins (gross margins of 70%, vs. 60% currently) and solid profitability. Bottom line, success is just a matter of execution and continuing to improve its technology platform to stay ahead of the competition. As for next year, analysts see revenues rising 20% and a loss of 27 cents per share, both of which could prove conservative.
Despite steadily improving numbers, PODD was stuck in a wide trading range from March 2014 (when it hit 51 after multi-year advance) through June of this year. But since then, the buyers have been in control, with PODD generally rallying above its 50-day line. The big earnings gap of early November was impressive, and I like the stock’s calm, tightening consolidation since then (trading between 68 and 72), with the 50-day line again catching up to the stock. The stock may not blast off immediately—like last week’s recommendation—but this is a very positive pattern, so I recommend buying in the days ahead. BUY.
Insulet Corporation (PODD 70)
600 Technology Park Drive, Suite 200
Billerica, Massachusetts 01821
http://www.insulet.com
CURRENT RECOMMENDATIONS
The market continues to power ahead, as more and more investors, both institutional and individual, grow more comfortable with investing in this market. The addition of PODD to the portfolio means that we now have a well-diversified portfolio of 18 stocks, and thus don’t need to sell any (my limit is 20). But it’s always wise to survey your portfolio to ask if all components are pulling their weight or some deserve to be sold—for me it’s a constant dialogue—and after surveying the lot today, the answer is that they all stay. EXAS may be the closest to an exit, but it’s still got a chance, so I’ll be patient. Unusually, there are no ratings changes today. Details below.
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, “Financial stocks have been the best-performing sector of the past 30 days, and BBT remains near all-time highs. Dividend growth investors can buy a little here.” BUY.
Baidu (BIDU), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, continues to trade above support at 230, but risks falling below it—in which case selling would be the proper response. In Paul’s latest update, he wrote, “BIDU continues to tiptoe above support in the 225-230 area, which keeps us in the Hold column. The big question going forward is earnings next year—because of investments, analysts see the bottom line up just 4% (to around $9.50 per share), despite a 23% gain in revenues. The company continues to ink deals in the artificial intelligence space (the latest with Qualcomm), which could be big, but for our part, we’ll just play it by the book. With BIDU holding above support, we advise hanging on.” HOLD.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, has strung together a series of impressive gains in recent days as it continues to rebound from its big low a month ago. In his latest update, Tyler wrote, “BioTelemetry is best known for its remote cardiac monitoring business, but it also has divisions that provide services for drug and medical device trials, manufacturing medical devices, and, most recently, remote blood glucose monitoring (BCM) services. It recently bought out its largest competitor in the cardiac monitoring space, Switzerland-based LifeWatch. That acquisition has muddied the waters a bit as there is some product overlap and, as with all major acquisitions, management has to balance the disruptive realities with the need to get the merger work done, weed out redundancies and build out a healthy corporate culture. We’re on the outside looking in, and most of the windows have blackout shades. So we’ll have to have faith in management and go along with things until the team is ready to reveal what’s going on. That murky operating environment is one of the reasons that shares of the company began falling in September. The other is the risk of competitive threats, mainly from upstart iRhythm (IRTC), which is a much smaller, but much more rapidly growing (organic growth) company with a monitoring device in the patch form factor. BioTelemetry has a patch coming to market too, but it was behind the curve in this department (from what I understand). Notably, BioTelemetry has recently revealed collaborations with Onduo (owned by Sanofi and Alphabet), to supply remote blood glucose systems and resulting data for Onduo’s diabetes management program, and Apple, to provide cardiac monitoring services for the Apple Heart Study, which just launched. It’s too early to know, but on the surface, these appear to be material events that can contribute significantly to revenue over the long term. Those revelations have helped restore confidence in the stock, but it’s still a long way from its 52-week high [39]. I think there is considerable upside, and am keeping it rated Buy. Shares are just now moving above their 50-day line and another 3.5% to the upside will put them at their 200-day line. Breaks above these technical levels should attract buyers.” BUY.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, inched out to new highs yesterday and today on no particular news, and that’s a good sign. BUY.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has come a long way since I recommended it in early 2016, and the company still has great growth prospects. Thus, many months ago, I 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. We received such a signal three weeks ago, when the stock fell as low as 102, but since then, the stock has rallied strongly back and is now just 5% below its October high. HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, did find support at 50 as I suggested it would last week, and the rebound since then has taken the stock back up to its 50-day moving average, but the buying volume is not impressive. So the difficult choice today is between selling and taking our quick eleven-week profit, or being patient and trusting that the great growth story will eventually attract new buyers. In Mike’s latest update, he wrote, “Fundamentally, nothing has changed, so we want to give shares every chance to hold up. That said, we also don’t want to let a good trade go awry; we took partial profits last week and have a rough mental stop near our cost basis (in the 48 area).” Makes sense. HOLD.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, isn’t beating the market, but the stock is still in a long slow uptrend, and the fundamental story remains huge. In Mike’s latest update, he wrote, “FB has bounced back impressively during the past week, recouping around three quarters of its decline. Like many growth stocks, it doesn’t look ready to run quite yet, but after a long rest period (no progress from late-July through early December), FB is back above its 50-day line and isn’t far from all-time highs. A bit more strength could have us going back to Buy, but right now, Hold is the appropriate rating.” HOLD.
GDS Holdings (GDS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and featured here last week, is off to a great start! We bought at the consolidation level, and were quickly rewarded with a breakout to new highs! If you haven’t bought yet, you can buy now, and own a piece of a fast-growing Chinese internet infrastructure company that most investors haven’t even heard of—yet. BUY.
Nucor (NUE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, is a low-cost producer of a diversified portfolio of iron and steel products that’s been strong; in fact, it just broke out above its July high. In Crista’s last update, she wrote, “Consensus estimates point toward 20.5% EPS growth in 2018, with a P/E of 13.7. I expect NUE to rest when it reaches its December 2016 high of 65, before gathering enough momentum to continue its run-up.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, remains in recovery mode, but the long-term picture is still bright. In Mike’s latest update, he wrote, “The stock’s rebound has been solid, though not spectacular, getting back more than half of its decline, though the bounce came on very low volume. One analyst opined today that the firm’s deal with Synchrony (in which PYPL will sell nearly $7 billion of its loans and receivables, freeing up cash to invest elsewhere) will prove even more beneficial than initially thought. Over time, I think PayPal’s growth story has a long way to run, but like many growth stocks that have enjoyed big runs, shares look like they need some time to rest.” HOLD.
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 remains in good shape, trending up via a series of higher highs and higher lows. High yield investors looking to add monthly income to their portfolios can buy a little here.” BUY.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, offered you a great buying opportunity last week when it pulled back to tag its uptrending 25-day moving average. And then it resumed its uptrend, breaking out to new highs on Friday and Monday! PLNT remains one of the strongest stocks in the portfolio and thus retains its Buy rating. BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, is looking great. In Crista’s update today, she wrote, “Quanta Services provides specialized infrastructure and network services to the electric power, oil and natural gas industries. EPS are expected to grow 25% in 2018 with a P/E of 15.4.” The stock recently broke out to all-time highs (volume on the advance was impressive) and it can be bought on the current correction. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, has climbed from 300 to 345 over the past six weeks, in the process recovering half of its loss of the prior six weeks. From here, anything is possible in the short term, but the long-term picture remains bright. In fact, UPS announced today that it had placed a reservation order for 125 Tesla semi trucks. That’s the largest order yet for the revolutionary vehicle that was introduced one month ago—and that won’t begin production until 2019. One of my favorite factoids about the truck is that it uses the same electric motors as the Model 3, thus enabling increased production efficiency and higher margins. TSLA is the portfolio’s second Heritage Stock; we’re in it for the long haul, holding tightly. HOLD.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has pulled back normally over the past week and can be bought here. In her latest update, Crista wrote, “WestRock is a major player in the global packaging and container industry. Last week, WestRock announced the pending acquisition of corrugated packaging company Plymouth Packaging, thereby expanding WestRock’s containerboard market share via Plymouth’s customer base, and also producing post-merger cost synergies. WRK is a mid-cap growth and income stock. After a slow-growth year in 2017, WestRock is expected to see EPS grow 40.1% in 2018 (September year-end), with a P/E of 17.2. The stock rose to a new all-time high this month. I expect additional capital gains in 2018.” BUY.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has also pulled back normally over the past week and can also be bought here. BUY.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has hit several new highs in recent days but shrinking volume suggests that buyers are running out of gas (in the short term). In Chloe’s latest update, she wrote, “Analysts at Bernstein said that, based on the first 10 days of the month, they think Macau’s gaming revenues will grow over 20% this month, which represents further acceleration from this year’s already-strong growth rate. WYNN has run a long way—we’re sitting on an unrealized gain of over 60% in our remaining half position—but there’s no reason to think the party will end anytime soon. Dividend growth investors should try to buy WYNN on pullbacks.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JANUARY 2, 2018
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