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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 184

Today’s bargain is a little-known stock in the fast-growing industry of marijuana farming, production and distribution, which recently was selling at a discount of more than 50% from its recent high. It’s rebounded a bit since then, but is trading calmly, and I think this is a decent entry point.

Cabot Stock of the Week 184

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Everyone knows that the route to investment success is to buy low and sell high. But there are a hundred and one obstacles to putting those words into practice successfully, not least of which are our own hopes and fears. When stocks are high we are more hopeful, more likely to buy, and thus more likely to lose when stocks turn down. And when stocks are down, as they are today, we are more likely to fear, and thus less likely to buy and more likely to miss the subsequent rise. With education and practice, however, we can learn to buy low—intelligently—and win. So, with the market currently on a well-deserved correction—a correction that is likely to continue at least a while longer—I searched for a stock that had been hit hard but that has the potential to rebound quickly, and I found Cronos Group. The stock was originally recommended in Cabot’s 10 Best Marijuana Stocks (by yours truly) and these are my latest thoughts.
Cronos Group (PRMCF)

One of the hottest investment sectors coming into 2018 was marijuana stocks, which were pushed higher and higher as demand exceeded supply. Luckily, I had been tracking more than 100 of these stocks since early 2017, and in August I recommended ten of them in the first quarterly issue of Cabot’s 10 Best Marijuana Stocks. In November, I replaced three of the stocks. And later this week, when the February issue is published, I will replace a couple more, always aiming to own the top ten stocks in the industry.

Cronos Group is one of the stocks that were added in November. Readers who bought back then now have a profit—even after the market’s recent plunge—of roughly 140%, and it’s possible their profits will shrink a little more in the days ahead. But generally, the trend is up and thus the current correction is presenting you a buying opportunity.

Cronos is a Canadian company, and the fifth-largest (by market capitalization) of the Canadian marijuana growers that serve the legal medical market in Canada. But Cronos is not simply a grower; it’s more of an investor, taking stakes in smaller operations and using its expertise—and its capital—to help them scale up rapidly as the industry prepares for a particularly explosive growth phase after marijuana is legalized for the adult recreational market in Canada this summer.

Cronos owns 100% of Peace Naturals, a company licensed to produce and sell medical marijuana as well as cultivate cannabis oil. Located near Toronto, Peace Naturals has 95 acres of land zoned and licensed for cannabis production, operates three completed production buildings and is constructing additional capacity via a 286,0000 sq. ft. production facility (Building 4) and a 28,000 sq. ft. greenhouse.

Cronos also owns 100% of Original BC (OGBC), a company that is currently licensed to cultivate and sell medical marijuana. Original BC is located on 31 acres of land in the heart of the Okanagan Valley, British Columbia—a region with a history of growing cannabis and currently produces and sells (bulk intercompany) dried cannabis to Peace Naturals, which is sold under the Peace Naturals brand. Looking ahead to this summer, however, Original BC will serve as the Company’s recreational cannabis platform.

Cronos owns 21.5% of Whistler Medical Marijuana Corporation (WMMC) a licensed producer and seller of medical marijuana with operations in Whistler, British Columbia.

Cronos has partnered with an Israeli kibbutz (Gan Shmuel) to grow marijuana for the export market. Israel’s climate is ideal for greenhouse cultivation, and the company expects to produce cannabis at a cost between $0.40 and $0.50 per gram. When complete, the project is expected to generate about $160 million a year by producing about 53,000 pounds of cannabis annually. Also, given that the kibbutz has nearly 5,000 acres, there is plenty of room for expansion.

Cronos has an exclusive supply agreement with Pohl-Boskamp, an international pharmaceutical manufacturer and supplier that distributes its products to over 12,000 pharmacies.

And the company has a 49.9% stake in Indigenous Roots, a medical cannabis company that will work cooperatively with Canadian First Nations towards building and operating licensed facilities and providing medical cannabis to First Nations.

Revenues and earnings are just beginning to ramp up, as you can see by the numbers below. And as for cash, it’s not an issue. The industry is drowning in money today, and the biggest challenge for management is finding places to invest it beyond building production facilities. Guiding the efforts at Cronos today are four key strategic priorities: 1) Establish a low-cost, global production footprint. 2) Develop a diversified revenue base through a global sales and distribution network. 3) Create intellectual property to help protect margin durability over the long run. 4) Grow a portfolio of iconic brands.

In the long run, I have little doubt that Cronos will succeed—or be acquired by a bigger player, whether from the industry or not. So I feel pretty confident saying that a ten-year investment will work out great. But in the short term, there are risks, and your job, if this investment is attractive to you, is to understand them, and take steps to deal with them.

Looking at the chart, which looks quite similar to those of the four larger growers, you can see that PRMCF peaked on January 9, along with the entire industry. (That was just one day after I sent my readers an update recommending that traders take profits in all marijuana stocks and investors take partial profits.) Since that peak, the stock has pulled back 50%, breaking briefly through its 50-day moving average, and then rebounded to above the line. (Some of the other stocks are still below their 50-day moving averages, which is one of the reasons I favor PRMCF today.)

In recent days the stock has been trading tightly between 7 and 8, and if it stays above its 50-day moving average in the days ahead, great. But there’s a risk that it will retest the recent low at 5—which could result in a quick loss of over 30%! So I’m going to borrow a technique from Paul Goodwin, who frequently deals with hot stocks in Cabot Emerging Markets Investor. I’m going to buy only a half position now (at tomorrow’s average price), with the intention of buying the second half in the future when the chart so advises.

Note: The company will likely release its fourth quarter earnings report somewhere around February 28, and that adds one more element of risk to the mix.
Cronos Group (PRMCF 7.44)
720 King Street West
Suite 320
Toronto, ON M5V 2T3
Canada
416-504-0004
http://www.thecronosgroup.com

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CURRENT RECOMMENDATIONS

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Short term, the market remains vulnerable to further corrective action—it’s earned it!—but long term, our timing indicators tell us the bull market is highly likely to resume its uptrend. So don’t panic. Continue to focus on building a top-performing portfolio of stocks that meet your investment criteria. Just note that when the uptrend eventually resumes, you should focus on owning the stocks that participate in the advance—and if yours don’t participate, you should sell them. One tool that’s particularly helpful at times like this is the 50-day moving average, which I refer to frequently below. While there are many “advanced” techniques of interpretation, in general, if your stock is above its 50-day moving average and that average is trending up, all is well. Conversely, if your stock is below its average and that average is trending down, you should consider selling.

Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, dropped all the way to its 200-day moving average late last week, which just happened to be at the psychologically important level of 1,000. And it could fall to that level again in a retest. But the attractive valuation at that level caused Crista to upgrade the stock last week and I’m going to join her today. BUY.

BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, found support at its 50-day line last week, and looks just fine. In her latest update, Chloe wrote, “Rising interest rates are a tailwind, as is the tax bill, and analysts expect EPS to grow a whopping 40% this year.” BUY.

BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, has a great fundamental story with huge growth potential, and the stock looks ok, all things considered. In Tyler’s latest update, he wrote, “BEAT is trading right around both its 50 and 200-day lines, and about the level it was when 2018 began. I don’t have an earnings release date yet. This is one report I’m very interested to get since I’m hoping to get some insight into the financial aspects of the deals with Apple and Onduo, as well as an update on the integration of LifeWatch. The stock is at 31 now, and even though a dip below its moving average lines would be disappointing, I won’t get too concerned unless it sinks below 29.” BUY.

Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, released a good fiscal second quarter report last week, shortly after both Chloe and I downgraded the stock to hold based on its technical action.

Revenues grew 13% to $1.01 billion (analysts were expecting $939 million) while earnings grew 103% to $0.79 per share (analysts were expecting $0.54.) Also, management increased its earnings projections for the fiscal year; they’re now looking at earnings growth of 27-31%. Since then, the stock has bounced strongly, and there’s some good volume behind the move, so today I’m putting it back on buy. BUY.

China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has been straddling its 50-day line in recent days, and that’s fine, from a long-term perspective. I previously designated HTHT a Heritage Stock, meaning that the company’s long-term growth prospects are so good—and our profit cushion so ample—that I can afford to sit through market gyrations in pursuit of major long-term profits. In his latest update, Paul wrote, “Fundamentally, the company continues to expand, with a newly-formed joint venture acquiring a company that operates many hotels in Beijing’s central business area.” HOLD.

Discovery Communications (DISCA), originally recommended by Azmath Rahiman of Cabot Benjamin Graham Value Investor, is trading in the neighborhood of both its 50-day moving average (uptrending since the stock’s November bottom) and its 200-day moving average (still downtrending shallowly). So there’s good support here! Earnings are due out February 27, and if Azmath’s analysis is correct, they should attract more value-conscious buyers. HOLD.

Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, touched its 200-day moving average last week in the depths of the market selling, but it’s well above that level today. In his latest update, Mike wrote, “the overall trend for the stock is gradually up (slightly higher highs and higher lows), though its relative performance (RP) line remains mostly flat. The quarterly report last week was great, with sales (up 47%) and earnings (up 83%) both topping expectations and all the sub-metrics looking good. We’re still curious about the earnings estimates—analysts see the bottom line rising just 18% this year, which, even if it proves conservative (as it likely will), would still be a big slowdown. But we’re not sweating it too much—if you own some with a good profit, sit tight.” HOLD.

Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, looks fine, sitting on its 50-day moving average. Earnings are due out February 21. BUY.

Knight-Swift Transportation Holdings (KNX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, and featured here last week, is a new truckload carrier formed from the September 2017 merger between Knight Transportation and Swift Transportation Company. In her latest update, Crista wrote, “I moved KNX from Strong Buy to Buy on January 31, expecting a pullback. The stock only fell 5% in the market correction, and the price chart remains bullish for near-term upside. Therefore, I’m moving KNX back to a Strong Buy recommendation. Buy KNX now.” BUY.

Melco Resorts (MLCO), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, doesn’t look so hot, and there’s a good reason why. As Paul wrote in his latest update, “Melco reported a good-not-great quarter this morning (February 8), with sales up 12%, EBITDA (cash flow) up 12% and earnings up 62%, but those figures were a bit shy of estimates. The company did bump up its dividend by 50% (new annual yield is around 1.9%), which is a plus, but the stock still sagged a bit on the news. We’ll move MLCO to a Hold rating and watch its progress closely.” I’ll follow Paul’s lead. HOLD.

PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, more than doubled over the past year, but now some investors are jumping ship after learning that eBay will phase out PayPal from being the sole payment provider on its platform by mid-2020 (though PayPal would continue to be a payment option for a couple of years after that). Somewhere, this selling will end, because PayPal has many other partners, but until then, hold is the proper rating for long-term investors. Technically, there’s some support here, as well as at 72 and 70. HOLD.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has a great (and simple) growth story. Open more gyms and the revenues grow—up 36% in the latest quarter. But this has been a relatively hot stock so a lot of short-term investors sold last week, driving the stock down 17% from its recent high at 35. There’s some support right here, and a fair chance that the stock can return to 35, but I can’t ignore the fact that the stock is now below its 50-day moving average—and that average is heading down. Hold is the proper rating. HOLD.

Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, is the world’s largest and most trusted provider of virtual healthcare delivery services, but the stock is going nowhere fast, sitting at the lower end of a solid seven-month consolidation. Earnings are due Tuesday February 27, after the market closes. HOLD.

Tesla (TSLA), originally recommended in Cabot Top Ten Trader, released its fourth quarter earnings report last week in the midst of the market’s big correction. Highlights: revenues up 44% from the year before to $3.29 billion; deliveries of 28,425 Model S and Model X vehicles and 1,542 Model 3 vehicles, totaling 29,967 deliveries; installation of the world’s largest battery in Australia; the unveiling of the Tesla Semi truck; and the awarding of Automobile Magazine’s 2018 Design of the Year to the Model 3. Looking forward, management is targeting weekly Model 3 production of 2,500 by the end of Q1 and 5,000 by the end of Q2 and aiming to reach sustainably positive quarterly operating income at some point in 2018. Still, the stock sold off with the market, falling briefly below 300 before rebounding this week. To me, 300 represents a great support level, going all the way back to April, 2017. Thus if you don’t own the stock yet and you’d like to—or you’d like to own a little more—you can consider this a decent entry point. Otherwise, hold. TSLA is a Heritage Stock for the portfolio. HOLD.

WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, was hit hard by the market selloff but remains in a long-term uptrend. In her latest update, Crista wrote, “WestRock is a major player in the global packaging and container industry, and a very undervalued mid-cap growth & income stock. The stock rose to a new high in January, then pulled back to 61. Dollar cost averaging over several weeks would be a good approach to accumulating a position in WRK.” HOLD.

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been the strongest stock in the portfolio in recent days; it closed at a new high yesterday! Earnings are due out February 22 and will without doubt be good. Buy on pullbacks. BUY.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED FEBRUARY 20, 2018

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