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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 179

Today’s recommendation is a familiar name, not because I’ve recommended the stock before (I haven’t) but because the company’s creations are enjoyed by millions of Americans and a major new acquisition will only increase the company’s reach.

Cabot Stock of the Week 179

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The market remains impressively strong, with no signs of topping out, so I continue to recommend that you be heavily invested in a diversified portfolio that helps you meet your financial goals. My goal is to help you make the most money while losing the least, and that involves a perpetual balancing act, combining hot high-risk stocks with undervalued low-risk stocks. Today’s recommendation is one of the latter. It was originally recommended by Azmath Rahiman in Cabot Benjamin Graham Value Investor. Here are Azmath’s latest thoughts.
Discovery Communications (DISCA)

Discovery Communications is a global media company that provides content through Discovery Channel, TLC, Animal Planet and The History Channel across multiple distribution platforms. In 2016, revenue from U.S. networks was $3.28 billion while international networks brought in $3.04 billion. Revenue growth was an unimpressive 2%, but earnings jumped 21% for the year, from $1.76 per share to $2.13.

The big story here, however, is the future. Back in July, Discovery announced that it would acquire Scripps Networks for $14.6 billion. Scripps provides lifestyle and interactive content on channels like Food Network, HGTV, Travel Channel, DIY Network, the Cooking Channel and Great American Country. Scripps’ annual revenue was $3.4 billion in 2016, with a net profit margin of around 20%. Discovery and Scripps expect that the merger will provide $350 million in cost synergies as well as increased international exposure to Scripps’ female audience-targeted content. The combined firm will also allow for better bargaining power with advertisers and distributors due to its sheer size.

Yet after the announcement, the stock, already in a slow downtrend, sank from 26 to a low of 16 in November! That’s when I first recommended it, primarily on the grounds that the stock was cheap and the merger synergies underappreciated. And soon after that, Liberty Media Chairman John Malone reached the same conclusion, buying 332,523 shares for $6.6 million—essentially doubling his position. And that kicked off the stock’s recovery, which took it to a high of 24 before the current correction.

Thus, the stock is not dirt-cheap anymore, but there are still two big reasons to buy and hold Discovery. Reason one is that media stocks have been undervalued by the market due to fears of cord cutting. In fact, the industry is evolving much faster than the market fears, as traditional media companies create their own online identities. For instance, Disney has already announced that it is going to release its own streaming service. Discovery is already well positioned in the market to supply its unmatched low-cost content to the emerging online streaming services.

Reason two is that with the merger with Scripps, Discovery can also push content from Scripps to its wide international audience. Having John Malone, who owns one of the widest cable networks in Europe through Liberty Global, on board will also help Discovery to monetize its content globally.

Discovery’s long-term strategy is to introduce new scripted content to streaming platforms just as Netflix has done so well. But NFLX is an expensive stock, and Discovery’s potential for growth from direct to consumer channels is big in the long run.

The November-December surge by the stock took it close to my estimated fair value of 25 per share, which was a very conservative estimate. However, even at that price, Discovery could be a good stock to buy and hold for a long term. Also possible, though not factored into my analysis, is the likelihood of an acquisition of Discovery by a bigger player, a scenario that could spark further upward movement.

Tim’s comment: Since hitting 24 in late December, DISCA has pulled back normally to nearly touch its 25-day moving average, which is currently nearing 22. It’s possible that broad market weakness might take the stock down to 21 or even 20 (which would be a retracement of half the advance as well as the location of the stock’s 50-day moving average), but I think downside risk is low here, while the long-term upside possibilities are major.
Discovery Communications (DISCA 22)
One Discovery Place
Silver Spring, MD 20910
240-662-2000
http://corporate.discovery.com

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CURRENT RECOMMENDATIONS

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As market momentum continues into 2018, my plan is to continue doing what worked best in 2017. That means buying strong stocks with great growth prospects and undervalued stocks with good upside potential, and managing them all according to the time-tested rules. If there’s one thing I wish I had done differently for this portfolio in 2017, it’s this: I wish I’d bought one of the marijuana stocks I recommended in August in the inaugural issue of Cabot’s 10 Best Marijuana Stocks—because the average of those recommendations is now up 169%! But I didn’t; they were high-risk stocks (most were priced under 10), and I had no idea they would perform so well so quickly. Today, they’re still high risk, but the sector is maturing, so I may try to fit one into this portfolio. As for the existing stocks, there is one ratings change today. Exact Sciences (EXAS) gets the axe.

Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor and featured here last week was bought (fortunately) on the exact day that it broke out from its base at 1,050. In Crista’s latest update, she wrote, “Alphabet is the world’s largest internet company. Revenue is derived from Google’s online ads, with the balance coming from the sale of apps, digital content, services, licensing and hardware. GOOGL is an undervalued, large-cap aggressive growth stock. EPS are expected to grow 28.7% in 2018, with a P/E of 26.7. Consensus earnings estimates additionally point to 18%–19% annual EPS growth in 2019 and 2020. While I might eventually sell GOOGL if it becomes very overvalued—which absolutely happens from time to time—longer-term investors should feel comfortable ignoring the price chart and planning to own this stock for years to come. I expect GOOGL to continue ratcheting upward. A brief pullback to 1,070 would be normal, and provide a good buying opportunity.” BUY.

BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, is a regional bank with branches in 15 states and Washington, D.C. Growth comes mostly from corporate loans, recreational vehicle loans, commercial mortgages and wealth management. The stock built a base at 50 through December, but has been moving strongly higher since the start of 2018. Try to buy on pullbacks. BUY.

Baidu (BIDU), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, was bought in early November after a sharp pullback, and now that low-entry-point investment is finally starting to bear fruit. The next goal is the stock’s old October high of 275. HOLD.

BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, has been correcting normally for three weeks. In his latest update, Tyler wrote, “As I said a couple of weeks ago, there could be some resistance at the 35 level. Given the huge upside potential, I’m staying at Buy.” BUY.

Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, provides technology and services, like portfolio management tools and proxy vote processing, to financial firms. The stock broke out to new highs last week and is even higher today. Try to buy on pullbacks. BUY.

China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has been a mover—from 140 in October to 102 in November to 159 last week! Clearly, there are aggressive investors/traders at work here. But I’m in it for the long haul. I’ve designated HTHT a Heritage stock, meaning I aim to hold through what might be normal sell signals (like the November plunge) because the long-term growth picture for the biggest hotel operator in China looks exceptional. HOLD.

Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, took a big hit yesterday (on very high volume) after delivering a solid pre-announcement of fourth quarter sales. It’s possible this was the final fake-out of a month-long weak spell, and that the stock will rally from here, but I have no confidence of that. Instead, I combine the technical signal with the guideline that says, “Don’t give up more than half your profit,” and my conclusion is sell—which is what Mike told his readers yesterday. SELL.

Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, spent November and December building a loose base in the 170s, but as the calendar turned, it broke out to new highs and it’s been climbing since. In his latest update, Mike mentioned that he’s eager to see the company’s fourth-quarter earnings report, which is likely out near the end of the month. HOLD.

GDS Holdings (GDS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is a little-known but critical operator of data centers in China. In his latest update, Paul wrote, “GDS Holdings has been forming partnerships with Chinese telecoms for data center developments in expanding Chinese markets and its stock has been making higher lows as it tightens up under resistance at 24.” But that was last week, and the stock is in new-high territory now. BUY.

Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, blasted higher on huge volume yesterday after management announced a favorable FDA decision. Insulet CEO Patrick Sullivan commented, “We are incredibly excited about CMS’ confirmation that Omnipod is eligible for coverage under Medicare Part D, which allows many additional people living with diabetes to benefit from Omnipod’s freedom and ease of us. Gaining Medicare coverage of our Omnipod System was one of our top priorities, since individuals living with diabetes deserve the right to choose the product that will best help them manage their diabetes. We are thrilled more people will be able to choose our innovative and differentiated Omnipod technology, which delivers continuous insulin without the use of tubes and eliminates the stress and anxiety of multiple daily injections.” If you haven’t bought yet, you can buy here. BUY.

Nucor (NUE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, is up 20% in three months, and I call that pretty good for an old steel company, so if you want to take profits here, go right ahead (or at least use a tight stop). But Crista thinks the stock has more to give. In her latest update, she noted that analysts expect EPS to grow 26.5% in 2018, yet NUE has a P/E of just 15.0. HOLD.

PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, bounced off its 50-day moving average last Wednesday and has been moving higher since, hitting a new high today. Long-term, all is well. HOLD.

Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, hit a record high at 37 last Friday and has pulled back normally since. In her latest update, Chloe wrote, “High yield investors looking to add monthly income to their portfolio can buy a little here. Pembina is a Canadian company (that pays monthly dividends in Canadian dollars) with an extensive network of oil and gas processing and transportation infrastructure. The company has been growing steadily through acquisitions and capital investment and analysts expect EPS to grow by double-digits this year and next.” BUY.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has put on a little weight this year, falling to its 25-day line at 33 (but then finding solid support there). If you’re not yet on board, you can buy on this pullback. Mike loves the cookie-cutter aspect of the company’s growth strategy. BUY.

Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has pulled back normally to its 25-day moving average at 39 and can be bought here. 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, mid-cap aggressive growth stock. Analysts expect EPS to grow 26.0% in 2018, with a P/E of 16.0.” BUY.

Tesla (TSLA), a recommendation of Cabot Top Ten Trader, is another Heritage Stock for the portfolio; its hottest growth days are likely past, yet there are still years of great growth likely ahead, as the company leads the electric car revolution. Investors who haven’t bought can get on board now, while the stock is in the lower half of its recent 300-390 range. HOLD.

WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, spent the last three weeks of December correcting normally, but in 2018, it’s surged strongly ahead on big volume. In her latest update, Crista wrote, “WRK is a major player in the global packaging and container industry, and a mid-cap growth & income stock. Analysts expect EPS to grow 40.8% in 2018, with a P/E of 18.2. The stock is reaching new all-time highs. Buy on pullbacks.” BUY.

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, blasted out to a new high on big volume yesterday, and today management released preliminary fourth-quarter results that justify the action. In short, system-wide restaurant count is up 13.5% to 1,133 locations and system-wide sales were up 15.6% to $285 million for the quarter. Try to buy on pullbacks. BUY.

Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, is currently on a pullback that looks just like WING’s before that stock blasted off. In her latest update, Chloe wrote, “Dividend growth investors who don’t own WYNN yet can use this pullback as a buying opportunity. The stock is in a strong uptrend, and earnings are expected to grow by double-digits this year and next. Wynn owns two casino resorts in Macau, China, two in Las Vegas and is building the first large casino resort in the Boston, Massachusetts area.” BUY.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JANUARY 16, 2018

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