The bull market remains alive and well, with most stocks and sectors in good shape, so we\'re generally letting our winners run and staying heavily invested. That said, January is often a tricky month, so with the potential for potholes and volatility, tonight\'s Cabot Stock of the Week is a mega-cap growth stock that, by some measures, is undervalued.
Cabot Stock of the Week 178
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Happy New Year! 2017 was a great one for investors, and we hope you took full advantage. And I have high hopes, too, for 2018, which is very likely to be more volatile than last year, but also likely (according to a handful of long-term studies) to result in further gains as the bull market matures. That said, in the near-term, because of some risk of potholes and because January is usually volatile, I’m going with a mega-cap growth stock that, by some measures, is undervalued. The company needs no introduction, so let’s get right to our first recommendation of 2018. It was recently recommended by Crista Huff, Chief Analyst of Cabot Undervalued Stocks Advisor. Here are her latest thoughts.
Alphabet (GOOGL)
Back in January 2011, one of my family’s brokerage accounts contained a very small amount of cash, so I decided to buy one share of Google when the price was 621. Then in 2014, the stock split two-for-one, which gave me one share each of Google Class A (GOOGL) and Class C (GOOG); followed by a corporate name change to Alphabet in 2015. My two shares are now worth 2,128, representing a 243% capital gain, a approximately a 19% per year compounded annual growth rate. And I think there’s plenty more upside ahead.
Alphabet is the world’s largest internet company. The Cabot Undervalued Stocks Advisor portfolios were underweight technology stocks in the fall of 2017, after I’d sold several overvalued semiconductor stocks, as well as Cavium (CAVM), which received a buyout offer. Fortunately, the technology sector had a pullback, giving me a perfect opportunity to acquire Alphabet.
Alphabet is expected to see annual revenue climb from $90 billion in 2016 to $131 billion in 2018. 85% of Alphabet’s revenue comes from Google’s online ads, with the balance coming from the sale of apps, digital content, services, licensing and hardware. Alphabet additionally invests in innovative technologies, smart homes, self-driving cars and more.
Whereas some companies’ consensus earnings estimates change almost weekly, Alphabet’s earnings estimates do not vary much until earnings season, when analysts naturally refigure all their projections following the company’s results and outlook. Curiously, stock research sources usually quote GAAP earnings per share (EPS) numbers on GOOGL, rather than the much more common non-GAAP numbers. However, if you’re researching the stock, make sure you’re comparing apples to apples, because I found at least one website that’s quoting a mixture of both GAAP and non-GAAP numbers, which can be both confusing and misleading. In that light, here are the current GAAP EPS numbers.
Alphabet reported earnigs of $27.88 per Class A share in 2016, and is expected to have earned $32.31 per share in 2017. Analysts see the firm cranking out $41.56 per share in 2018 and $49.39 in 2019 (December year-end). EPS growth rates are therefore expected to be 15.9%, 28.6% and 18.8% in 2017 through 2019. The interesting thing about these estimates is that analysts usually lowball their estimates when looking out a couple of years. Despite being cautious, though, they’re projecting almost 19% earnings growth in 2019. I consider that aggressive growth estimate to be both surprising and encouraging.
The 2018 price/earnings ratio (P/E) is 25.7, which is not a small number, but it’s certainly below the earnings growth rate. In the case of a popular technology stock, I like buying under these circumstances because price action very often pushes tech stocks into overvalued territory down the road.
Alphabet has a tiny amount of long-term debt on its balance sheet, which it could repay in a heartbeat because the company has roughly $100 billion in cash and current assets. The newly-legislated Tax Cuts and Jobs Act (TCJA) imposes a 15.5% repatriation tax on unremitted foreign earnings of U.S. corporations that are held in cash investments, regardless of whether the companies bring that cash back to the U.S. Alphabet reportedly has $52.2 billion in overseas cash and equivalents. The company will owe approximately $8.8 billion to the U.S. government in accordance with the change in the tax law, which allows the payments to be made over the course of eight years.
The cash repatriation gives Alphabet a net $43.4 billion of play money, and of course, the firm will be subject to a lower tax rate for its U.S. operations going forward, which will add to the company’s bank account. Since the company’s not paying a dividend to shareholders, and the repurchase program was last enhanced by $7 billion in October 2016, I think it’s fair to assume that the company might use some of that repatriated cash for dividends and/or share repurchases in the coming years.
GOOGL rose in early 2017, then plateaued for six months, trading between 920 and 1,005. The stock broke past upside resistance in late October, and , though there have been some swings, the trend has remained up. More recently, shares pulled back in an orderly fashion to close out the year, found support at their 25-day moving average, and bolted ahead today. It looks like a good entry point here. Last but not least, yes, the share price is high, but what matters is the dollars invested not the number of shares you own (GOOGL moves an average of 15 points per day from high to low), so just buy fewer shares. BUY.
Alphabet (GOOGL 1073)
1600 Amphitheatre Parkway
Mountain View, CA 94043
650-253-0000
http://abc.xyz
CURRENT RECOMMENDATIONS
January is probably the trickiest month of the year, with the first few days showing lots of volatility (as big investors reposition their portfolios and book capital gains from the prior year), and the latter part being pushed and pulled by earnings season (which will be especially interesting this year as companies give outlooks in the new, lower-taxed world). Thus, we don’t advise overreacting to stock movements during the next few days if they occur within a stock’s overall uptrend.
With that in mind, our only change tonight is placing Nucor (NUE), which has been rallying nicely, on Hold.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, is still looking like a good buy here as financial stocks consolidate their heady post-Thanksgiving gains. It’s not going to double in a month, but analysts see earnings up 24% this year, and the 2.7% dividend yield is a nice plus. BB&T announced that it will hike its minimum pay rate (by 25%) and will pay out a $1,200 bonus to nearly 27,000 employees after the tax cut. With the 25-day line catching up to the stock, you can take a position here. BUY.
Baidu (BIDU), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, ticked Paul’s mental stop (in the low 220s) a few times in recent months, but held support every time and is now looking to jump back above its 50-day line. The big question in our minds is whether the firm’s investments into new areas (artificial intelligence, autonomous driving) will catch investor’s attention, as earnings are projected to be relatively flat in 2018. Still, with the stock holding support, I’ll give it a chance. HOLD.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, pulled back in recent days to a solid level of support, and then bounced today. After a tedious decline into mid-November, we think the trend is turning up. You can pick up some shares around here if you’re not yet in. BUY.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, remains in a firm uptrend and, in fact, has traded nice and tightly (usually a good sign) in recent weeks. While the yield is modest (1.6% annually), Chloe mentioned in her latest update that the firm has hiked its payout nine straight years by an average of 16%. I think the stock is likely a good buy right here. BUY.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has been extremely impressive in recent weeks. We were wondering whether, after a huge, prolonged run, HTHT was cooked after its sharp October/November dip, but the stock has come roaring back on big volume, even blasting out to new highs today! The long-term growth story here remains super enticing, as does the growth (analysts see earnings up 42% this year). Over time, all of this bodes well—but right now, I’m going to stay on Hold solely because the stock (after running straight up from 102 to 152!) likely needs a catch its breath. HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, took a hit early this morning but found some support as the day wore on. Mike is simply playing this one by the book, using a mental stop in the 48 area, and we will, too. One analyst reiterated EXAS as one of his top picks, and believes there should be an early read on Q4 Cologuard sales at an industry conference early next week. HOLD.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, was one of many big-cap growth stocks to perk up today after meandering for most of December. Chart-wise, the stock looks solid here, with support in the mid-170s. And, of course, the fundamentals are pristine. That said, we’ll follow Mike’s advice here and remain on Hold given FB’s so-so relative strength—but I’m optimistic the next big move is up. HOLD.
GDS Holdings (GDS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is holding near its highs just south of 23. As the internet and cloud computing becomes more and more pervasive in China and Asia, demand for GDS’s data centers should continue to surge. Ideally you can buy on dips of a point or so. BUY.
Insulet (PODD), originally recommended by Cabot Growth Investor and featured in our last issue (two weeks ago), has continued to meander sideways above its 50-day line on light volume. I’m staying on Buy and looking for a push above 72 or 73 as a sign the uptrend is resuming. BUY.
Nucor (NUE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, isn’t as much of a buy-low candidate as it was a couple of weeks ago—shares have rallied from a low of 54 and blasted through 65 today! (Interestingly, Jacob Mintz of Cabot Options Trader spotted some large call buying in the stock today, which is usually a plus.) Crista is still overall bullish on the stock, but she did move shares to Hold, thinking NUE could rest a bit after the recent run. I think that makes sense, so I’ll follow her lead. HOLD.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, is sitting right on its 50-day line and right in the middle of its post-Thanksgiving trading range. Long-term, like many of last year’s growth stock winners, PYPL likely heads higher. Near-term, though, I’m keeping my Hold rating in place until we see definitive signs of buying. HOLD.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has moved straight up a couple of points during the past two weeks, so it could take a breather. But this move come after lots of up and down action from the stock (and more serious wiggles from the pipeline sector as a whole). I like the fact that energy stocks (and prices) are perking up, which should provide a nice tailwind to Pembina’s cash flow and dividend (4.6% yield, paid monthly). Hold on if you own some, and if not, you can buy here or on dips of a few dimes. BUY.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, pulled back on good-sized volume today, but the stock is still above its 25-day line. After a nice advance in recent months, a deeper retreat is certainly possible, but I like the action of the retail sector and I (and Mike) still think the company’s growth story has a long way to run. You can buy some here or on further dips if you’re not yet in. BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, isn’t setting the world on fire but it acting just fine, hovering south of all-time highs near 40. Analysts see earnings up 25% in 2018 (to $2.45 per share), but that could prove conservative as electric, oil and gas infrastructure orders pick up with the economy. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, certainly isn’t strong enough for a Buy rating here, but there are some encouraging signs in the chart. The stock has now tested and held support in the 290 to 310 area—the range of the stock’s prior two-plus-year range—five times since July, which is a solid sign that some far-sighted investors are buying on dips. Fundamentally, this year will probably be all about the Model 3 (orders and, more important, production)—there are likely to be hiccups, but with the stock having gone nowhere for many months, some of those hiccups have probably been discounted. Of course, there’s always the chance that business goes sideways, but I remain optimistic that after months of choppy action, the next big move is up. HOLD.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, doesn’t have a sexy story, but that’s fine with me—this packaging firm’s earnings are beginning to surge (and should rise 40% in the current fiscal year, ending in September) and the recently announced buyout of Plymouth Packaging should be a plus. The stock just bounced off its 25-day line today following a three week rest. BUY.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, looked great in early December, but the stock faded into year-end. Even so, the path of least resistance is definitely up after the early-November earnings move, and WING has now found support at its 50-day line twice during the past week. BUY.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, pulled back this morning after Macau reported that December gaming revenue rose 14.6%, short of the 20% gain expected. That said, it sounds like much of it was simply bad luck for the casinos in the VIP segment (big customers forgot to roll enough 7s apparently), and WYNN’s dip was modest, not even touching its 25-day line. We’ll stay on Buy, though aim for dips of another couple of points. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JANUARY 9, 2018
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