My recommendation this week is a high-quality Chinese growth stock that has just completed a normal pullback. In fact, while the market was down today, this stock was up!
Cabot Stock of the Week 182
[premium_html_toc post_id="143813"]
Traditional economic analysis says that rising interest rates will eventually kill a bull market—but there’s no way of knowing when. So with stock charts as a whole still acting healthy, I continue to recommend heavy investment in a diversified portfolio of stocks that meet your investment needs. For today’s stock, I turned to China, where markets have been exceptionally strong and I’ve been eyeing quality stocks, waiting for a pullback. Now we have one, in a stock originally recommended by Paul Goodwin. Here are Paul’s latest thoughts.
Melco Crown & Entertainment (MLCO)
Hong Kong and Macau are special regions within China, both former colonies of Western nations, and each has a unique status that was negotiated when they reverted to Chinese control. Hong Kong was handed back to China by the British in 1997, and is a global financial center with its own currency and one of the highest per capita incomes in the world.
Macau was returned to Chinese control by Portugal in 1999, and the two regions—Hong Kong on the western edge of the Pearl River delta and Macau on the eastern edge—became unique spots for economic development. Hong Kong is a cash-rich center of capitalism and Macau is the only place in mainland China where gambling is legal.
It’s not cultural stereotyping to say that the Chinese love to gamble. So when the number of Chinese millionaires started to increase, the proximity of Hong Kong and Macau made it a natural for Melco International Development to make a deal with Australian gaming company Crown Limited to start building casinos in 2004 using the name Melco Crown. The funding came from Hong Kong and Australia and the gamblers came from across China to Macau.
The company enjoyed triple-digit percentage revenue growth from its founding through 2008, and lower, but still steady growth until 2014, when Chinese authorities, worried that Macau casinos were 1) being used to launder money from corruption and 2) were encouraging Communist Party officials to flash too much inappropriate cash, cracked down on gambling.
Melco’s revenue fell by 6% in 2014 (after growing by 25% in 2013) and fell an additional 17% in 2015. And this came after the company, which was competing with U.S. gambling companies like MGM Resorts, Wynn and Las Vegas Sands, had built the City of Dreams, a 420,000 square foot casino with 450 gambling tables, 1,500 gaming machines and 175,000 square feet of retail space along with theaters, hotels, live acts and other attractions for families.
Macau began to grow revenue again in 2016 as China relaxed its pressure on gambling operations, and Melco Resorts became independent of its Australian backers in 2017. Melco has now booked seven quarters of increasing revenue (including a 19% jump in Q3) and three quarters of triple-digit earnings growth.
And Melco is still building. Phase III of the City of Dreams complex is underway, and the company is scheduled to launch its NUWA luxury hotel brand in Macau and Manila in January 2018. A potential integrated resort in Japan is also being discussed.
There is nothing certain about Melco Resorts. It will always be subject to the whims of Xi Jinping’s regime in China and its anticorruption campaign. But the City of Dreams and Melco’s other casinos—Altira Macau, Studio City and Mocha Clubs and a Manila branch of the City of Dreams in the Philippines—are competing at a high level with Western casinos. And the situation in Macau has improved materially; gambling revenue rose 23% year-over-year in November.
MLCO (the symbol was changed from MPEL when the company shed its Australian connection) was a favorite of ours for years until the crackdown on gambling dropped it from its high of 41 in March 2014 to 11 in February 2016. The stock turned around after forming a double bottom in early 2016 and has soared to 30 in recent trading, hitting its highest levels since August 2014.
The pullback since to a low of 28 has brought the stock down below its 25-day moving average, and though further pullback to its 50-day moving average (around 27) is possible, I think we are being presented with a decent entry point. BUY.
Melco Resorts & Entertainment (MLCO 29)
The Centrium
36th Floor 60 Wyndham Street
Central
Hong Kong
http://www.melco-resorts.com
CURRENT RECOMMENDATIONS
Today’s big market pullback was not only overdue, it was sorely needed, to cool off this hot old bull market. And it could easily go further; in fact, I’m recommending selling several stocks today that have the potential to fall further. At the same time, our long-term market timing indicators remain up, so the best prescription is to keep on following proven investing systems: buy strong growth stocks and sell them when they weaken, and buy good undervalued stocks when they’re down, and sell them when they’re up.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, continues to climb strongly, hitting another new high yesterday. In her latest update, Crista wrote, “GOOGL is a fairly valued, large-cap aggressive growth stock. Analysts expect 2018 EPS to grow by 28.8%, and the P/E is 28.5. Fourth-quarter 2017 results will be reported on the afternoon of February 1. Analysts are expecting $10.00 EPS with a range of $9.00 to $10.92 per share. Expect volatility! An earnings beat could push the stock in either direction. GOOGL could certainly rise due to good news. However, traders who push share prices up prior to earnings reports often “sell on the news,” and the stock is already up 12% from its last pullback mere weeks ago. Additionally, an earnings miss could easily cause a pullback in the share price. Odds are therefore stacked in favor of a short-term drop in the share price on February 2. Caution is warranted. Buy on pullbacks.” BUY.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, remains strong, hitting another record high yesterday. In her latest update, Chloe wrote, “Rising interest rates are working in BB&T’s favor, and are expected to provide a tailwind through 2018. The company’s taxes are also going down, and CEO Kelly King said they plan to pass about a third of the savings on to investors through dividend increases. Over two dozen analysts have increased their 2018 earnings estimates for BBT in the past month. Dividend growth investors can buy some here.” The stock is also recommended by Crista Huff of Cabot Undervalued Stocks Advisor, who recently wrote, “Consensus earnings estimates jumped again last week. Wall Street now expects BB&T’s 2018 EPS to grow 40.1%, and the P/E is 14.2. The stock keeps rising. Buy on pullbacks.” BUY.
Baidu (BIDU), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, gapped down sharply today along with the broad Chinese market, cutting our profit to the bone—and I don’t like it. I don’t like fearing that a profit will become a loss. I don’t like the fact that this is two gaps down since October and there’ve been no gaps up. And I don’t like the fact that fourth-quarter earnings will be reported on February 1. If you’ve been in the stock a long time and have a big profit, you can hold longer—the main trend is still up. But if you bought when I did—or even higher—I recommend selling now. SELL.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, hit a new high last Thursday and has pulled back normally since, but remains on track to hit its old high of 39 from last September. In his latest update, Tyler wrote, “BEAT continues to rally with shares trading higher in all but three days in 2018. I’ve mostly given updates on the company’s new partnerships (Apple and Onduo) lately since those initiatives are relatively new additions to the story. Clearly, something has changed in terms of perception here, and the stock is now just 11% off its all-time high. There is no announced earnings date yet. For 2017, the market is currently expecting revenue growth of 36% (35% in 2018) and flat EPS growth (up 42% in 2018). Out of curiosity, I pulled up the company’s most recent 10-Q filing to see what its effective tax rate was. Management said it expected an effective tax rate of 35% in 2017, excluding the impact of the LifeWatch acquisition. That suggests the company should see a significant benefit from the new 21% tax rate for 2018. And that’s probably contributing to some of the strength in the stock.” BUY.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, hit a record high last Friday and has pulled back normally since. In her latest update, Chloe wrote, “BR continues to hit new all-time highs almost daily. Broadridge provides technology and services, like portfolio management tools and proxy vote processing, to financial firms. Analysts expect earnings growth of 22% in 2018. The company has increased its dividend in each of the past nine years, with the last five increases averaging 16% each. Dividend growth investors can buy on pullbacks.” BUY.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor has continued to pull back over the past week, but the long-term picture for this Heritage Stock—which I’ve committed to holding long term—remains positive. In fact, in his latest update, Paul put it in perspective, writing, “HTHT pulled out of a sharp correction at the end of November and rallied from 106 to 146 at the end of the year. Since 2018 began, HTHT has been digesting those gains, pulling back in a controlled way to support at 150. The company’s aggressive expansion strategy is likely to produce another great quarterly report, so this mild correction looks like a good entry point.” If you don’t own any, you could buy here; otherwise, hold. HOLD.
Discovery Communications (DISCA), originally recommended by Azmath Rahiman of Cabot Benjamin Graham Value Investor, has been consolidating its recent gains over the past week, and could fall to its 25-day moving average at 24 (or even lower), but I don’t think it’s likely; the buyers are clearly in control these days. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, closed at a record high last Friday, and is off slightly since. In his latest update, Mike wrote, “The stock was pounded two Fridays ago after it announced changes to its News Feed, but then, after steadying itself, ripped back toward its old highs. We think the rebound is very encouraging, and if you want to nibble here, we’re not going to argue with you. But given that the RP line remains mostly sideways and earnings are due out January 31, we’ll officially stick with our Hold rating and see what comes.” HOLD.
Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, is a little-known but very promising medical device company whose insulin delivery technology is simply better—and the stock looks great, trading right near its high. BUY.
LCI Industries (LCII), originally recommended by Azmath Rahiman of Cabot Benjamin Graham Value Investor and featured here last week, completed its acquisition of Taylor Made last Friday, and the stock gapped down in response, handing us a quick loss (on paper). But the long-term fundamental picture remains intact, and there’s support here dating to November, so I’m holding tight. If you haven’t bought yet, you can buy now or wait until the company reports earnings on February 1. BUY.
Nucor (NUE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, fell through its 25-day moving average after the company reported an excellent fourth quarter; EPS of $0.65 beat all analysts’ estimates, when the market was expecting $0.55 and revenue of $5.09 billion exceeded the consensus estimate of $4.85 billion. So why is the stock down? First, the anticipation of good news was the reason the stock gained 28% from its November lows to its recent highs; the market always looks ahead and such good news is likely to be difficult to duplicate. And second, the market fears—to some extent—the outcome of NAFTA discussions and changes in U.S. trade policies. Crista remains fundamentally bullish on both the stock and the U.S. steel industry, and recommends buying on corrections. But I’m not that patient—and I fear a retracement—so I’m going to sell and take our profit before this correction goes further—technically, it could take the stock down to 59. SELL.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has had a great run, but still looks fine. In his latest update, Mike wrote, “In an interview at Davos this week, CEO Dan Schulman said that, for the first time, e-commerce represented more than half of retail sales during the holiday period, and (also for the first time) mobile represented more than half of e-commerce sales. He’s also bullish on peer-to-peer services, citing one study that says these peer-to-peer offerings will grow nearly 10-fold in the next three to five years, and reiterating that PayPal has just begun to monetize Venmo (its own peer-to-peer offering) in recent months.” Earnings are due tomorrow, January 31. HOLD.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is our highest-yielder, so we don’t expect a lot in the way of capital gains; all we want is a modest long-term uptrend. And that’s what we’ve still got, despite the stock’s retreat over the past three weeks that has brought it down toward its November low. In her latest update, Chloe wrote, “The company has been growing steadily through acquisitions and capital investment, and analysts expect EPS to grow by double-digits this year and next. Pembina will report 2017 results before the open on February 23.” BUY.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, looks great; it keeps knocking on the ceiling at 35 and will eventually break through—but it’s possible the stock will pull back once more to support at 32. 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 high 30s, and its 50-day moving average has just caught up to add support. In her latest update, Crista wrote, “Quanta provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Watch for fourth-quarter 2017 results to be reported in the second half of February.” BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, was featured here two weeks ago 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 could take profits here, while investors will hold for the long term. Recognizing today’s market selloff and the possibility that the stock is out of gas short-term, I think it’s prudent to downgrade to Hold. HOLD.
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. As to the stock, 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 displayed some unusual chart behavior in recent days. On Friday, it spiked to a new high, but volume was only average, and then on Monday, it sold off on big volume. But in the end, the stock is where it was a week ago, which isn’t bad, considering the broad market. The reason for the big volume on Monday is that WestRock announced it was buying smaller rival KapStone Paper and Packaging for about $5 billion—which should be good in the long run. In her latest update, Crista wrote, “The company will report first-quarter 2018 results on the morning of January 31 (September year-end). Analysts are expecting $0.77 EPS with a range of $0.72 to $0.84 per share. That estimate rose by a penny last week, and full-year 2018 estimates rose again for the fourth straight week. Wall Street expects EPS to grow 45.8% in 2018, with a P/E of 18.4. The stock rose to a new high last week and the price chart remains bullish.” BUY.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is one of the smallest stocks in the portfolio and one of the strongest—it keeps closing at new highs! The story is as simple as they come; an international chain of casual restaurants that’s growing very fast by serving chicken wings and more. If you haven’t bought yet, wait for a pullback. BUY.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has been a big news story recently, and not for a good reason. As Chloe put it in her recent update, “Wynn Resorts (WYNN) has fallen 18% over the past two days, after The Wall Street Journal published multiple claims of sexual harassment and assault against founder and CEO Steve Wynn. Steve Wynn has denied the allegations. While the pullback is large percentage-wise, the stock remains above its 50-day moving average and is at about the same level it was trading two weeks ago, before fourth-quarter results were released. However, the fallout of the allegations is likely to be long-lived. Steve Wynn is Chairman and CEO of Wynn Resorts, and his name is closely associated with the company and its properties. If the company fires him, it will lose the driving force behind its ambitious expansion projects, and investors are likely to become skeptical about future growth prospects. If he stays on, any legal consequences and public scrutiny related to the allegations could further tarnish the company’s reputation and the stock. In addition, Wynn operates under close supervision from state gaming regulators. Regulators in Nevada, where Wynn has two properties, and Massachusetts, where Wynn is opening a casino is 2019, have said they are reviewing the allegations. And shares declined further yesterday after news broke that Chinese government representatives are meeting with Wynn Macau executives. Macau’s gaming concession law allows for consideration of the “reputation” of companies that are granted concessions as well as their major shareholders. Steve Wynn owns 12% of Wynn Resorts and Wynn’s Macau concession expires in 2022. Monday also brought analyst downgrades from UBS, Morgan Stanley, JP Morgan and others. We sold half our WYNN shares in August for a 36% gain, and have an unrealized profit of 76% on our remaining position. I’m going to sell another half of our shares today, to protect some of our remaining profit. The stock could find support here, at the 50-day, but even if it does, the stock may remain under pressure for some time. If it declines further, we’ll have protected most of our gains.” We, of course, have nowhere near the profit that Chloe’s readers had; we only got on board in November. And my recommendation now is to take that short-term profit and move on. There’s too much risk here, including the possibility that the stock could fall to its 200-day moving average, now at 143. SELL.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED FEBRUARY 6, 2018
We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/r/CSOW
Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit www.cabotwealth.com or write to support@cabotwealth.com.