Today’s recommendation is a little-known but mature industrial company with great growth prospects. Chart risk is small, as the stock has been basing for months, but there is some liquidity risk—this is more thinly traded than any of the current stocks in the portfolio. So if you buy, buy carefully.
Cabot Stock of the Week 181
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One of the rules of investing is that the market always does what it can to fool the greatest number of people. Over the past year, the market advanced without a major pause, defying the legions of people waiting for a pullback. And this year, the trend has continued—even accelerated! At some point, the market will enter a cooling-off phase, whether it be a steep correction or a quiet pause, but it’s impossible to identify that point until it has passed. So our strategy remains the same—make hay while the sun shines, and continue to fine-tune your portfolio so that you remain heavily invested in a diversified portfolio of the very best stocks.
Today’s recommendation is a little-known stock from the industrial sector that has minimal downside risk and substantial upside potential. The stock was originally recommended by Azmath Rahiman of Cabot Benjamin Graham Value Investor. Here are Azmath’s latest thoughts.
LCI Industries (LCII)
LCI Industries belongs to that category of value stocks which are known as “good business at a fair price” stocks. They are not deeply discounted value stocks, but trade around their intrinsic value. The potential for appreciation, therefore, comes mainly from improvements in the business. You might say it’s the kind of business Warren Buffett likes to buy.
LCI is the number-one OEM (original equipment manufacturer) and supplier of components for RV manufacturers. With 52 facilities in the U.S., Canada and Italy, the company manufactures and supplies axles, leveling systems, slide-out mechanisms, awnings, windows, furniture and more for RV manufacturers and related recreational industries (busses, cargo, boating and equestrian trailers). As the economy is recovering and consumer spending is increasing, companies in the recreational space are in the midst of a robust recovery.
LCI in particular has enjoyed impressive growth in its top and bottom lines (as shown in the chart) since the Great Recession nearly 10 years ago.
Such an impressive track record (on a par with the top RV manufacturers) shows LCI’s leadership in the industry. In addition, operating margin has been improving—despite fluctuating raw material and wage expenses. Due to the shortage of skilled labor, the company has undertaken rigorous investments in automation, which are expected to deliver benefits in the long term. In the September board meeting, the company approved a 100,000 square-foot fully automated chassis manufacturing facility. The company expects to save $30 million on manufacturing costs over the next five years due to automation.
LCI was known as Drew Industries until a year ago, when it changed its name to reflect the fact that its major operating unit is Lippert Components. The CEO of LCI is Jason Lippert, the grandson of the founder. LCI has completed 40 acquisitions over the past 15 years and recently agreed to acquire Taylor Made Group, a marine and industrial supplier (not to be confused with TaylorMade, the golf club company).
Although the recreational RV space has rebounded after the recession, recreational boating industry has been sluggish—a trend that can be seen in the Google trend here. But a closer look reveals that the boating industry might finally be reviving. Taylor Made had sales of $150 million last year, with diversified products for boat builders and the aftermarket, and the acquisition will add to LCI’s existing marine businesses, which make galley equipment, bedding accessories, marine furniture and more.
With about $1.8 billion in revenue, 10% operating margin and a clean balance sheet, LCI Industries gives a return on equity of around 25%, which is attractive. However, if you own Thor Industries (THO) or any other RV manufacturer, I would not recommend additional exposure to the RV industry as it’s hard to predict when RV sales will peak—though there’s room for further growth from millennials.
Tim’s note: the chart shows LCI climbing slowly and steadily higher since the market’s 2009 bottom, and I expect the trend to continue as the company grows revenues and earnings, so the current pullback from 133 to a recent low of 124 offers a decent entry point. (But do not make the mistake of buying the stock whose symbol is LCI; that’s Lannett, a maker of generic drugs.)
LCI Industries (LCII 127)
3501 County Road 6 East
Elkhart, Indiana 46514
574-535-1125
http://www.lci1.com
CURRENT RECOMMENDATIONS
When I look at this portfolio and see that all our positions are profitable, it feels good. But it doesn’t make me feel smart! Instead, it makes me remember this button, which is right over my computer screen.
Clearly, the lion’s share of the credit for our strong performance recently goes to the great bull market, not me. I’m simply an experienced participant, happy to enjoy the trend—and grateful for the excellent research work all the Cabot analysts do. But I know that somewhere in the future, the bull market will end, and at that time, amassing profits will become substantially more difficult.
For now, though, the trend is our friend. In fact, the trend is so powerful, that I’ve found no stocks that deserve to be sold. The only change is a downgrade of WYNN to Hold, simply because the stock is so extended.
Note: You can see more of my buttons here: https://cabotwealth.com///about-us/buttons/
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor and featured here two weeks ago, remains one of the leading big stocks in the market—and a very well loved one at that. In her latest update, Crista 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. Last week, Alphabet revealed that Google agreed to a patent licensing deal with Tencent Holdings, its first big deal with a Chinese technology firm. The agreement allows Google to expand its presence in China, which was often blocked by regulators in the past. GOOGL is a slightly undervalued, large-cap aggressive growth stock. EPS are expected to grow 28.7% in 2018, with a P/E of 27.5. If you take a quick look at the GOOGL price chart, you’ll see that the stock tends to rise about $80, followed by a brief pullback, then repeats the pattern. Since we’re probably on the tail end of the most recent run-up, I’m temporarily moving GOOGL from Strong Buy to Buy.” BUY.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, remains strong, notching new closing highs over each of the past four days. And the stock has also been recommended by Crista Huff, who recently wrote, “BB&T CEO Kelly King discussed the dividend last week, indicating that the next dividend increase might be bigger than last year’s 10% hike due to benefits of the new Tax Act. Consensus earnings estimates rose again last week. Wall Street now expects BB&T’s 2018 EPS to grow 34.8%, and the P/E is 14.6. The stock keeps rising. I’m moving BBT from Strong Buy to Buy until the share price rests for a while.” BUY.
Baidu (BIDU), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, has pulled back normally over the past week. In his latest update, Paul wrote, “BIDU is in a situation similar to BABA, consolidating after a gap down on October 27 with support around 230. The stock has finally filled the gap from that event, which is constructive. If Baidu beats expectations when it reports on February 1, BIDU will have an excellent base to work with. (Analysts are looking for revenue of $3.57 billion and earnings of $2.05 per share.) Baidu is likely to be a long-term winner, but our horizon is measured in months, so the earnings reaction will be very important.” HOLD.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, continues to climb higher. In his latest update, Tyler wrote, “The stock has been looking better and better since shares turned around at 24 in mid-November. The stock is up roughly 38% since then, and is up 10% over the last six sessions. There’s a lot cooking here, from the integration of the LifeWatch acquisition to the Apple Heart (irregular heart rhythms) and Onduo (diabetes) studies. The second two are particularly interesting since they help move the story from one that’s more clinical in nature to one that’s increasingly consumer-oriented. If you own an Apple Watch, you can participate in the Apple Watch Study (image here from Stanford Medicine’s website). While you never know how things will turn out, this stock has the feeling of one that could blow up [in a good way]. Let’s just say that 10 years from now, the Apple Watch has really caught on, as have other wearable technologies, and BioTelemetry is powering the software and monitoring centers that help people detect and manage abnormal heart rhythms, blood glucose levels and more. It could be huge. In the meantime, they have a pretty good business to run too!” BUY.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, continues to hit new highs! In her latest update, Chloe wrote, “Broadridge provides technology and services, like portfolio management tools and proxy vote processing, to financial firms. The company has increased its dividend in each of the past nine years, with the last five increases averaging 16% each.” BUY.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, blasted off from a three-week base yesterday on big volume to hit a new high at 165, but today the stock pulled back, telling us that buyers weren’t quite ready to invest in that move. Long-term, however, all trends are good here, as China’s largest hotel operator has huge expansion potential as the fragmented industry consolidates. HTHT is a Heritage Stocks for us; we’re committed long term. HOLD.
Discovery Communications (DISCA), originally recommended by Azmath Rahiman of Cabot Benjamin Graham Value Investor and featured here two weeks ago, was bought just as it kicked off a run of eight consecutive up days. Today marked the stock’s first down day. If you haven’t bought yet, try to get in after this pullback ends. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, has rallied strongly since last week, when it traded below its 50-day moving average for four consecutive days, and now it’s back near its high! Rather impressive. Fourth-quarter earnings are due on January 31, and there’s no doubt they’ll be good—but it’s the reaction of the market to the announcement that matters. HOLD.
Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to consolidate its big gains from early January. If you haven’t bought this fast-growing manufacturer of superior insulin delivery systems, you can buy some here. This is still a decent entry point. BUY.
Nucor (NUE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, has finally taken a breather, and is now likely to consolidate its gains by trading in the 67-70 range for a while. 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. Deutsche Bank turned bullish on steel, copper and aluminum last week, saying it expected prices to rise in 2018 and 2019 due to increased global demand, and specifically favoring NUE. The company will report fourth-quarter results on the morning of January 30. Analysts are expecting $0.58 EPS within a range of $0.53 to $0.79 per share. Earnings estimates for full-year 2018 and 2019 jumped again last week. 2018 EPS are now expected to grow 36.7%, while the P/E is just 14.2. I expect to continue profiting from capital gains and dividends in 2018. Buy NUE on pullbacks.” HOLD.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has had a great run, but there’s a cooling-off phase somewhere ahead. In his latest update, Mike wrote, “I’m certainly happy to see PYPL kick off 2018 with a bang, as the stock has motored higher by about 10% since the calendar flipped. The stock has picked up another analyst upgrade, which is nice, but the intermediate-term future will likely come down to earnings (no set date but probably near the end of the month) and management’s outlook. I think PYPL has plenty of upside over time, as the stock’s story is excellent and the prior uptrend only lasted for six months or so. But at this point, with the RP line still in a consolidation [PYPL is not as strong as the indexes], I think it’s best to remain on Hold and wait for clearer signs of accumulation.” HOLD.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, remains on a slow and steady uptrend, and can be bought on the current pullback. In her latest update, Chloe wrote, “PBA remains in good shape. The stock is trading in a tight range around 35, and the long-term trend still points slightly up. 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, presented a good buying opportunity last week when it dipped to its uptrending 50-day moving average, and today the stock is back near its high of 35. With the opening of a Hawaii location this year, the company now has fitness centers in all 50 states. BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, continues to build a base in the 39 area, prepping for a resumption of its uptrend. 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. The consensus earnings estimate for 2018 rose again, now reflecting 28.6% EPS growth, while the P/E is just 15.5. Last week, Deutsche Bank raised its price target on PWR to 45, which is 15% above the current share price. Given a neutral-to-bullish stock market, I think PWR could easily reach that price in 2018. PWR has been moving slowly in an upward direction. Buy PWR now.” BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, was featured here last week when it was trading at its 200-day moving average. That’s often a great buying area for stocks in long-term uptrends, and so far, it’s worked for TDOC. But there is still resistance ahead at the old high of 38. Traders might take profits there, while investors will hold for the long term. If you haven’t bought yet, you can still buy. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, is the second Heritage Stock in the portfolio; there are still years of great growth likely ahead as the company leads the electric car revolution. And today’s story about Elon Musk’s new contract reveals that the CEO has a similar vision. In short, if the automaker doesn’t reach a number of milestones, Musk won’t get paid! And if he does achieve them—with every $50 billion increase in market capitalization, more stock options are vested—both Musk and shareholders will benefit. Ideally, the plan sees Tesla’s market capitalization growing to $650 billion over the next decade, from $59 billion today. The chart shows TSLA continuing to motor higher, working its way back to its September high of 385. HOLD.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has pulled back normally after hitting a high of 70 a week ago. In her latest update, Crista wrote, “WestRock is a major player in the global packaging and container industry, and a mid-cap growth & income stock. The company will report fourth-quarter results on the morning of January 31. Analysts are expecting $0.76 EPS, with a range of $0.72 to $0.81 per share. Earnings estimates for full-year 2017 and 2018 rose a little last week. Analysts expect EPS to grow 42.7% in 2018, with a P/E of 18.5.” BUY.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has a market capitalization of only $1.4 billion (only BEAT is smaller), but growth is almost guaranteed; it’s as simple as opening more restaurants! The stock remains strong, hitting new highs yesterday and today. 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 strong! Since the stock gapped up to a new high a week ago, it’s hit new highs every single day—and now sits some 20% above its 50-day moving average. Traders might take profits here, but I’m in for the long haul—and looking forward to visiting the Wynn casino in Boston when it opens in mid-2019. Still, recognizing the elevated chart, I’ll downgrade the stock to Hold now. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JANUARY 30, 2018
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