The market rebound over the past few weeks has been very impressive; it’s now turned our intermediate-term timing indicator back to positive. But buying after such a spike is risky, so today’s recommendation is a beaten-down stock that has nowhere to go but up.
Cabot Stock of the Week 186
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The market’s rebound over the past few weeks has been impressive; in fact it’s turned our intermediate-term timing indicator back to positive. But the strength that’s brought stocks back so fast is highly unlikely to last, making new buys up at this level increasingly risky. Thus, for today’s pick, I went shopping in undervalued territory, looking specifically for a stock that had previously been beaten down and had nowhere to go but up.
And I found it in Cabot Undervalued Stocks Advisor in Crista Huff’s Buy Low Opportunities portfolio. Here are Crista’s latest thoughts.
Baker Hughes (BHGE)
General Electric (GE) bought Baker Hughes (BHI) in July 2017, merging Baker Hughes with GE’s own oil and gas equipment and services operations and creating the company named Baker Hughes, a GE Company. GE owns 62.5% of the new company—and thus has control—while shareholders own the rest.
Baker Hughes, a GE Co. offers products, services and digital solutions to the international oil and gas community. Oil prices are at a three-year high, global energy demand is strong, U.S. crude inventories are declining, and the U.S. rig count is rising, all of which contribute to bullish sentiment toward energy stocks. The U.S Energy Information Administration expects U.S. oil production to surpass 1970’s record highs in 2018, and to reach new highs again in 2019.
Baker Hughes reported a good fourth quarter of 2017, with both earnings per share (EPS) and revenue exceeding analysts’ consensus estimate. Free cash flow is turning positive, and expected to reach approximately $1 billion in 2018. The company is gaining market share in the Permian Basin, winning new contracts in the Middle East, expecting to see a higher-margin product mix in 2018, on track to achieve cost synergy goals thanks to last year’s merger, and its prospects for new contracts in liquefied natural gas remain strong.
BHGE is an undervalued aggressive growth stock. Consensus EPS estimates now point toward phenomenal earnings growth of 90.7%, 92.7% and 60.8% in 2018 through 2020. The 2018 price/earnings ratio (P/E) is 33.7, which is high relative to many other stocks, but well under Baker Hughes’ earnings growth rate. And with earnings continuing to rapidly expand, the 2019 and 2020 P/Es are much lower at 17.5 and 10.9.
Here’s some more good news: the company’s long-term debt-to-capitalization ratio is incredibly low at 13%. (My cut-off for acceptable debt levels is 40%.) And by the way, the debt ratio has remained below 20% for at least five years. When companies can easily handle their debt obligations, they usually have extra cash on the balance sheet. In November, Baker Hughes’ management announced its intention to repurchase $3 billion of stock, or 8% of outstanding shares, including shares owned by GE. The company also pays an attractive dividend, yielding 2.6%. (The most recent dividend increase took place in November.)
Fortunately, GE’s well-known less-than-optimal financial situation does not rub off on Baker Hughes, which is thriving under its own management team. Last week, General Electric’s CFO Jamie Miller quashed rumors that GE might sell or spin off its holdings in Baker Hughes, saying “Given today’s valuation levels, we see a lot of upside there. We like the macro trends. At this point in time, we have no intent to change anything or execute prior to the expiration of any of the lockup periods.” The share price was bolstered by the positive statements.
BHGE is a large-cap stock. Financial institutions own 97% of the outstanding shares, which is no surprise because this multi-faceted stock could easily fit into growth portfolios, value portfolios and dividend-focused portfolios.
It’s quite common that stocks flounder in the wake of big corporate events that can take months or years to unfold, such as M&A activity or recoveries from serious problems. Examples include the Kraft-Heinz merger, the BP oil spill and the Adobe revenue model transition. (Believe it or not, people were worried about Adobe! That cracks me up.)
There’s one more reason that I’m focused on BHGE shares: I believe the market ignored the stock during its recent merger, and is now waking up to the company’s extraordinary earnings growth prospects.
BHGE rose rapidly in January, only to fall dramatically as a drop in oil prices combined with a correction in the broader stock market to hammer energy stocks. Fortunately, both oil prices and U.S. stock prices are now recovering from that brief-yet-dramatic downturn.
I absolutely love BHGE. In fact, BHGE was one of my two top stock picks for 2018. There’s 33% upside as BHGE retraces its January high above 37.
Baker Hughes, a GE Company (BHGE)
17021 Aldine Westfield Road
Houston, TX 77073
713-439-8600
http://www.bhge.com
CURRENT RECOMMENDATIONS
The market bounce of the past few weeks has rewarded most investors who sat through the worst of the correction—hopefully you. Even better, it’s been able to provide us some insight as we notice which stocks are leading—breaking out to new highs—and which are lagging. Our leaders, hitting new highs today, are BBT, BR and DISCA (and PLNT which hit a new high yesterday). And our only real laggard is MLCO, which I now recommend selling to make way for better opportunities. Details below.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, has rallied 14% from its low three weeks ago (when it bounced off its 200-day moving average), but it is unlikely to keep rising at this rate. In fact, in her latest update, Crista wrote, “Unless earnings estimates change in March, I will consider GOOGL to be fairly valued when it retraces its January high near 1,190. I’m moving GOOGL from Strong Buy to Hold, and will sell near 1,190 to make room for a more undervalued stock to join the portfolio. If you want to own GOOGL long term, that’s an option, as it’s a high quality aggressive growth stock, and will probably deliver attractive capital gains for years to come.” I’ll follow Crista’s lead and downgrade it to Hold. HOLD.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, broke out to a new high yesterday and continued the trend today. 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.” Then, just today, Crista Huff, who also recommends the stock, explained last week’s dividend news, writing, “BB&T is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serve businesses and individuals. Due to the benefits of tax reform, BB&T announced on February 22 that they will raise the quarterly dividend payout by 13.6%, from $0.33 to $0.375. They will execute the dividend increase in a slightly unusual way, so pay close attention if you closely track your dividend income.
- On March 1, shareholders of BB&T Corp. who owned the stock prior to February 9 will receive the normal quarterly payout of $0.33 per share.
- On March 20, shareholders of BB&T Corp. who owned the stock prior to the close of business on March 6 will receive the just-announced dividend increase of $0.045 per share. (To be clear, they will receive the increase, not the entire quarterly dividend.)
- Future quarterly dividends will amount to $0.375 per share until BB&T Corp. announces a change in the dividend policy.” BUY.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, looks fine, riding atop all its moving averages. And the company’s fundamental prospects look superb! Here’s Tyler’s post-earnings update.
“BioTelemetry reported a great Q4 yesterday with revenue of $91.7 million up by 70% (beating by $3.4 million) and EPS of $0.32 up by 39% (beating by $0.08). A good portion of that growth was due to the LifeWatch acquisition (closed July 2017), but even if we strip that out, organic revenue growth was solid (up 10%). The big topics of discussion with BioTelemetry are: (1) progress on the LifeWatch acquisition, (2) the new patch form-factor products and (3) the Apple and Onduo partnerships. Let’s take these in order.
“On the conference call, management talked at great length about how well the integration of the two companies is going and how well the entire team is pulling together. It sounds like synergies are tracking ahead of plan, and they put out initial guidance for around $380 million in revenue in 2018, which is essentially in line with consensus estimates. Management said sales of the flagship Mobile Cardiac Outpatient Telemetry (MCOT) product line have been accelerating since the acquisition, and business within the company’s top 500 accounts (50% of the healthcare business) continues to grow. This is good.
“The newest product additions to the MCOT line are the extended-wear Holter products, the CardioKey (which has been on the market for a little while), and the highly anticipated ePatch, which is a form factor going up against the ZIO patch/service from iRhythm (IRTC). There was much more talk than usual about iRhythm, and there is clearly some tension between the two companies, who are beginning to throw a few stones back and forth. On its Q4 call, iRhythm’s management made some comments about limited reimbursement rates for MCT products, which they said are typically limited to a narrow set of indications and are not covered by many health plans. BioTelemetry management said that is patently false. They went on to explain that iRhythm’s product has been selling with a temporary Current Procedural Terminology (CPT) code since it came out, which means there isn’t enough clinical evidence to support a permanent reimbursement code, which BioTelemetry’s main product line (but not its new extended wear Holter, yet) has had for around a decade. Bottom line: expect competition between these two companies to become incredibly fierce. BioTelemetry is a much more established company and has a lot of ground to defend (with more products to defend it with), whereas iRhythm is more of an upstart with a relatively new product line and limited clinical evidence. I think there is room for both, and don’t expect either company to go anywhere.
“Lastly, on the Apple and Onduo partnerships, there weren’t many specifics, but management stated what’s relatively obvious: that these can turn into meaningful partnerships. Apple’s Watch isn’t intended to be a diagnostic device, but more of a screening tool for hearth rhythm abnormalities in the general population. If the study goes well and Apple Watch is approved for this, it could expand the cardiac monitoring market, and that could work out well for BioTelemetry. Management said it sees itself as a connected health company first and foremost, and that it is in discussions with other significant partners to help build out this business in 2018. Overall, this was a good quarter and I heard what I wanted to hear. Shares should respond well and there should be numerous catalysts over the coming months to keep investors engaged and the company building value.” BUY.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, continues to soar to new highs. If you’ve got it, hang on tight, but if you’re looking to get on board, wait for a normal pullback. BUY.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is one of our Heritage Stocks, 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. After two strong weeks up, nearly hitting its old high, the stock sold off yesterday and today, and if you don’t own any, you can aim to buy after this correction is over. In his latest update, Paul noted that earnings are due on March 13, and that analysts expect earnings growth of 42% in 2018. HOLD.
Cronos Group (CRON), originally recommended by me in Cabot’s 10 Best Marijuana Stocks and featured here last week, announced yesterday that it would be the first marijuana stock to trade on the Nasdaq, and today that trading started, under the new symbol CRON. (The old symbol was PRMCF.) When I wrote last week’s recommendation, I said that we would take an unusual half-position in the stock, waiting to add the second half until I have more confidence that the corrective phase of the sector is over. Well, it’s definitely not over yet; all the growers continue to build a base and most look weaker than CRON. If you haven’t bought yet, you can buy a little here, or wait for a lower price. HOLD.
Discovery Communications (DISCA), originally recommended by Azmath Rahiman of Cabot Benjamin Graham Value Investor, released an excellent earnings report this morning. Fourth-quarter revenues grew 11.5% from the year before to $1.864 billion, beating analysts’ estimates of $1.783 billion, and the deal to acquire Scripps Network moved even closer to completion; it’s now expected to close by March 31. The stock surged higher in response, breaking out to new highs—and is now too high to buy. HOLD.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, is still trending up, but it’s no longer a leader. In his latest update, Mike wrote, “We’re just following our plan, holding the stock above its longer-term support areas (low-160s or so) and seeing if buyers return. Last week, one analyst jumped back on the bandwagon, saying the stock’s valuation is reasonable and Messenger monetization in 2018 (along with traditional Facebook and Instagram) should keep growth humming. If you have a good longer-term profit, we advise hanging on.” HOLD.
Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, reported its fourth-quarter results last Wednesday. Revenues were $130.5 million in the quarter, beating analysts’ forecasts of $125.3 million, while the loss per share was 12 cents, worse than analysts’ expectation of 8 cents. The following day, shares surged to a new high on big volume, but since then they’ve pulled back and now sit on the stock’s 25-day moving average, still in a clear uptrend. If you haven’t bought this maker of next-generation insulin delivery systems yet, you can buy here. BUY.
Knight-Swift Transportation Holdings (KNX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has a solid uptrending chart. In her latest update, Crista wrote, “Knight-Swift is a new truckload carrier formed from the September 2017 merger of Knight Transportation and Swift Transportation Company. A major Wall Street investment firm reports that the most recent truckload freight index (TLFI) shows February demand at a four-year high, and the flatbed index is at an all-time high for this time of year. It’s no surprise, then, that consensus earnings estimates are rising weekly. The market now expects 2018 EPS to grow 65.2%. The stock remains significantly undervalued. The KNX price chart is signaling a near-term breakout. Buy KNX now.” BUY.
Melco Resorts (MLCO), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, remains slightly under its 50-day moving average (not good), but selling pressures have dwindled and volume in recent days has been very light (good). Thus, we could sell the stock (an option I mentioned last week), or we could hold it, trusting that the long-term trend will resume. In his latest update, Paul wrote, “MLCO doesn’t look terrible, but we’re going to pull the plug on it tonight because (a) its recent earnings report was just so-so, (b) the stock’s recent bounce has been so-so (very light volume and still plenty of overhead) and (c) many of our other stocks are acting better. Maybe the stock just needs more rest, but we’re going to pull up our stakes here and focus on stronger situations.” One additional factor here in Cabot Stock of the Week is that we bought high, and thus have a loss. So I’m going to sell, too, and try harder than ever not to buy stocks high! SELL.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, is in limbo here, neither strong nor weak. In his latest update, Mike wrote, “PYPL is hanging right around its 50-day line—not great action, but not bad, either. Overall, the stock has etched a few higher highs and higher lows since Thanksgiving, and we still think the fundamentals are enticing and the next big move is up. We’ll continue to sit tight with our remaining shares, though a break of the 70 area would be a red flag.” HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gapped up to new highs last week after the company released an excellent fourth quarter report. Total revenue increased 15.1% from the year before to $134 million. 88 new stores were opened in the period, bringing the total to 1,518 as of December 31. System-wide same store sales grew 11.6%. Adjusted net income grew 16.0% to $51.2 million. And the company increased its share repurchase program to $100 million. If you don’t own it yet, try to buy on a pullback. If you do own it, you can average up now. BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, is scheduled to report earnings today after the market closes, and there’s little doubt that the results will be good. Still, it’s the action of the market in response that really matters, so I’ll be watching the stock carefully tomorrow. BUY.
Tesla (TSLA), originally recommended in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio—now on a long-term Hold. Over the past two weeks, the stock has rallied 20% to equal its January high, so it’s ripe for a pause. HOLD.
Vipshop Holdings (VIPS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and featured here last week, was bought after its breakout, but today it’s on a 10% pullback, offering you a better entry point. In Paul’s latest update, he wrote, “VIPS looks great—we think it has big potential as a turnaround situation. The recent quarterly report topped estimates and analysts see earnings up 21% this year.” BUY.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has rallied from 60 to 67 over the past three weeks and Crista expects it to hit its January high of 70 before the trend is over—but she might recommend selling them. In her latest update, she wrote, “Increases in containerboard volume and pricing are contributing to an expected 10% revenue increase in fiscal 2018 (September year-end). Analysts are expecting EPS to grow 50.8% in 2018.” If you’ve got it, you might consider taking profits as the stock nears 70. HOLD.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, reported fourth-quarter results last week. System-wide restaurant count increased 13.5% to 1,133 global locations. System-wide sales increased 15.6%. Domestic same store sales increased 5.2%. Total revenue increased 21.9% to $28.3 million. And net income increased to $10.5 million, or $0.36 per diluted share, compared to $4.1 million, or $0.14 per diluted share. Those results beat analysts’ estimates, but what the company projected moving forward was less than thrilling to some (perhaps the company was being cautious?). Anyway, the stock sold off on heavy volume in response, briefly touching its 50-day moving average, but it’s been strong since. If you don’t own it, you can buy it here. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED MARCH 6, 2018
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