Cabot Stock of the Week 189
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The market’s main trend remains up, with smaller growth stocks continuing to outpace the bigger, well-known stocks (like Facebook—ouch!). In fact, two of our top performers in recent weeks have been stocks from Mike Cintolo’s Cabot Top Ten Trader, namely Planet Fitness (PLNT) and Wingstop (WING). And the market’s recent pullback presents an opportunity to add a third at a modest discount—but which one?
I surveyed Mike’s recent recommendations, and in the end, chose the same stock that he chose as his Top Pick in Cabot Top Ten Trader last week. It’s a classic Bull Market stock, and here are Mike’s latest thoughts.
TD Ameritrade (AMTD)
The past couple of months have been tricky for the market, with this week’s Facebook-inspired selling in the broad market the latest example of that. Even so, many signs (including the positive long-term trend and rare blastoff indicators that flashed in December and January) tell us the overall bull market remains intact, and one of our favorite “sectors” to play in a bull market is—Bull Market stocks!
Bull Market stocks are those whose business is directly tied to the stock market (or financial markets in general), including exchanges, money managers and brokers. When investor sentiment is poor, these stocks tend to struggle. But now, as money has been pouring into stocks and as trading activity picks up, many stocks in the group are acting well.
Moreover, there’s another tailwind that’s helping the group—higher short-term interest rates, which for some companies is dramatically boosting the interest income they earn on their customers’ cash holdings.
My favorite play in the group right now is TD Ameritrade, which is taking advantage of the two trends above and has another catalyst that’s already boosting the bottom line.
The company, of course, is one of the big public brokerage houses, providing investing services, education and custodial services to more than 6,000 registered investment advisors. At year-end, the firm had a whopping $1.18 trillion of customer assets, 11.1 million customer accounts and, in Q4 alone, executed 726,000 client trades per day.
Things have been going the company’s way for a few quarters, but the big, game-changing event came last September, when Ameritrade finalized its takeover of Scottrade. The move added three million funded accounts, the largest physical branch network among online brokers (500 branches) and a strong trading core (137,000 trades per day). Ameritrade began onboarding Scottrade’s assets late last year, and management is very bullish on the results, expecting $450 million in cost savings by the end of next year that will boost earnings by 15% to 20%.
The combination of adding Scottrade’s business and the bull market in general goosed fourth-quarter results, with sales (up 46%) and earnings (up 53%) easily topping expectations. Looking at the details, commission revenue surged 24%, driven by a 49% bump in average daily trades (a price cut in early 2017 accounts for the discrepancy), while net interest income surged 85%, thanks to higher interest rates and a 25% gain in interest-rate sensitive assets. Bank account deposit fees were up a strong 55% and investment product fees rose 42%.
Thus, it’s clear that business is surging thanks to all these positive factors—the bull market, higher interest rates (another two or three Fed rate hikes appears to be a sure thing this year) and the new Scottrade assets and synergies. Throw in the corporate tax cut, which should be a boon for Ameritrade, and analysts see revenues up 42% this year while earnings explode 70% to around $3 per share. And the early expectation is for the bottom line to rise another 25% in 2019 as more Scottrade synergies kick in.
As for the stock itself, what’s really caught my eye is its action in recent weeks. You’d expect a Bull Market stock like AMTD to retreat and rest during the market’s wobbles of the past few weeks. But no! Instead, the stock found some giant-volume support in early February when the market was diving, and then decisively pushed to new highs two weeks ago before easing lower over the past few days with the major indexes.
Certainly, if the market moves lower from here, AMTD could as well. But the stock’s uptrend looks firm, and dips toward the 25-day line (near 58.5) or even the 50-day line (around 56.7) should offer support. BUY.
TD Ameritrade (AMTD)
200 South 108th Avenue
Omaha, Nebraska 68154
402-331-7856
http://www.amtd.com
CURRENT RECOMMENDATIONS
The market’s main trend remains up and thus you should continue to cultivate a diversified portfolio of stocks that help you achieve your investment goals. The addition of TD Ameritrade brings the portfolio to 20 stocks, which is a full complement. So once again I ask whether any of the current stocks deserve to be sold. And this week, I find two: the high-profile Facebook (FB) and the low-profile Discovery Communications (DISCA). At the same time, two stocks are upgraded to Buy: PayPal (PYPL) and Tesla (TSLA). Details below.
AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier and featured here last week, has pulled back normally over the past week. In her latest update, Chloe wrote, “AB pulled back to its 50-day moving average yesterday after the company reported that assets under management fell in February. The early-February market drop certainly played a role; assets under management (AUM) in equity strategies declined 3.9%, compared to a 2.5% drop in AUM overall. But bond market weakness—which is likely to be more persistent—also contributed; fixed income AUM fell 2.0%. Fund flows were also negative in retail and institutional funds (reflecting clients withdrawing money), though private wealth saw net inflows. The stock remains above its 50-day though, and volume yesterday was no higher than normal, so I’ll keep AB on Buy for high-yield investors for now. As a reminder, AB is organized as a partnership, so it’s not appropriate for all accounts and taxes entail some extra paperwork.” BUY.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, pulled back normally with the market over the past week. 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. I will consider GOOGL to be fairly valued when it retraces its January high near 1,190, at which point I will sell to make room for a more undervalued stock to join the portfolio. There’s room within the current trading range for short-term traders to make 5%-10% profit. If you want to own GOOGL long term, it’s a high quality aggressive growth stock, and will probably deliver attractive capital gains for years to come.” HOLD.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is China’s biggest source of car-buying information and the stock is set up for a breakout to new highs, as Paul explained in his latest update. “ATHM, which ran into resistance at 86 in January and February, bounced off its 50-day moving average after its earnings report on March 7 and made a few intraday moves above 90 before pulling back a bit. With ATHM using its old resistance at 86 as support, the setup in ATHM looks technically sound.” BUY.
Baker Hughes, a GE Company (BHGE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio, peaked at 37 in January, and bottomed at 26 in February and we bought it soon after—which has worked out well so far. But it’s not over! In her latest update, Crista wrote, “Baker Hughes offers products, services and digital solutions to the international oil and gas community. The number of U.S. rigs drilling for crude oil and natural gas rose by six last week to a total of 990, four of which were oil rigs. Analysts expect EPS to grow 88.4% in 2018, with continued aggressive growth in subsequent years, and the P/E is 36.9. There’s 22% upside as BHGE heads back to 37. I expect additional capital gains thereafter, with a good amount of volatility along the way. Buy BHGE now.” BUY.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, and subsequently recommend by Crista Huff, continues to set up for a breakout above 56. In her latest update, Crista wrote, “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. Last week, the U.S. Senate voted to pass the bipartisan Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155). This piece of legislation cleans up many flaws in the Dodd-Frank Wall Street Reform and Consumer Protection Act (a.k.a. Dodd-Frank), which went into effect in 2010. If S.2155 makes it through the House of Representatives and is signed by the President, virtually all banks will see earnings estimates rise, because the cost of doing business will fall. Analysts expect EPS to grow 40.9% in 2018, and the P/E is 14.0. I expect BBT to embark on another run-up quite soon, along with many other financial stocks. I have the intention of selling BBT afterwards, because the 2019 earnings growth outlook is quite moderate.” BUY.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, has a great fundamental story, but technically, the stock has cooled off. And that’s okay with me; I’m willing to be patient here. At the moment, BEAT is sitting on its 50-day moving average at 32, and likely to rebound to resistance at 36. HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, hit another new high today! In her latest update, Chloe wrote, “BR still looks impeccable, recently hitting new closing highs six days in a row. The only problem is that the stock is fairly extended now. Don’t start a big new position here; wait for a consolidation or a pullback to the 50-day [now at 99]. If you want, you can nibble on pullbacks, and if you own it, hold on.” HOLD.
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. But Paul Goodwin has no such designation in his advisory, and last week he sold, taking a profit of 278%. In his update, he wrote, “HTHT is a casualty of earnings season, as the company’s quarterly report and 2018 guidance didn’t impress investors, missing on both revenue and earnings. The portfolio bought HTHT almost two years ago at 36 and we took partial profits at 108 at the end of November … the long-term prospects for HTHT are positive, but a major gap down on heavy volume after a poorly received earnings report is likely to keep the stock under pressure for a while. If you haven’t already, it’s time to sell HTHT.” Bottom line: if you’re in for the short-term, sell. If you’re in for the long-term—and have the profit cushion to justify it—hold. HOLD.
Cronos Group (CRON), originally recommended by me in Cabot’s 10 Best Marijuana Stocks, had a great day yesterday (while Facebook was leading most stocks lower), thanks to an announcement that Cronos had begun a 50/50 partnership with the U.S. firm MedMen to create a Canadian retail operation. MedMen, with nearly 700 employees, is the largest retailer of marijuana in the U.S., and MedMen Canada will extend that brand. As to the stock, it looks better than the average marijuana stock, and can be bought here. But remember, this is a volatile stock in a volatile sector, so buying smaller-than-usual positions and averaging in over time are smart strategies. BUY.
Discovery Communications (DISCA), originally recommended in Cabot Benjamin Graham Value Investor, is now below all of its moving averages, and our profit has disappeared. There’s a chance the stock will rebound from here, but I’m not willing to take it. The odds are better in stocks that are in uptrends. SELL.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, led the market lower yesterday on very visible news about the misuse of data, and today the selling continued, though volume was lighter. I believe the selling is overdone here, in part because Facebook has been such a highly visible company and stock, and I believe the stock will be higher in the days ahead. But the stock’s uptrend is clearly broken here, and thus selling is the proper course—perhaps on a bounce tomorrow. SELL.
Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, is the world leader in tubeless insulin delivery technology and its stock continues to look great! In fact, the stock was recommended in yesterday’s Cabot Top Ten Trader, where Mike wrote, “Nearly 80% of the 30 million diabetics in the U.S. (including a million that are newly diagnosed every year) still manage their insulin by what’s known as the multiple daily injection (MDI) method, which involves patients injecting themselves usually 10 to 15 times per day. That is the growth opportunity for Insulet, whose insulin pump (dubbed Omnipod) looks like the best one on the market—it includes just two pieces (and no tubes!), automatically inserts the cannula, can pump insulin for three days straight and is less complex for the user than the competition. It also has an integrated mobile technology platform that allows easy control, scheduling and monitoring of a patient’s insulin regime. All of this (along with factors like Medicare Part D insurance coverage and recent insurance expansion with UnitedHealth) has let Omnipod quickly gain market share in the industry, but as mentioned above, the opportunity for pumps in general (and Insulet in particular) remains giant. The fourth quarter produced another solid quarter of growth (the fifth straight quarter of 24% to 28% revenue growth), and the top brass sees revenues up 23% this year and a similar pace right through 2021, when it believes it will reach $1 billion in revenue. The bottom line is still in the red, but analysts see that changing next year. Overall, this looks like a growth story with years of runway ahead of it.” BUY.
Knight-Swift Transportation Holdings (KNX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, is one stock that’s immune to the Facebook fuss; it just keeps on trucking. In her latest update, Crista wrote, “In recent days, Knight-Swift announced the acquisition of Abilene Motor Express, which brings the company 400 additional drivers and $100 million in annual revenue. Last week, a major investment bank included KNX in its list of 10 favorite short-term stock ideas. The market expects 2018 EPS to grow 65.9% and the P/E is 21.8, with 2019 numbers also reflecting strong earnings growth and undervaluation. KNX rose from a six-week trading range on March 16, and will likely commence a profitable run-up. Buy KNX now.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has pulled back for a few days, but remains above all its moving averages. In his latest update, Mike wrote, “PayPal is another liquid growth leader from last year that’s been consolidating for a while—the stock made no net progress for about 15 weeks, though now it’s beginning to perk up. I think the growth story here is very much intact. For instance, the firm’s Venmo service (which saw volume of $10.4 billion in the fourth quarter alone, up 86% from a year ago) is a leading contender to dominate the small money transfer industry (average transaction is $60). The real question is whether last year’s big-cap winners like PYPL have another major up-leg left in them. Given that the stock broke out of a multi-year base last spring and ran up for “only” seven months, I believe the answer is yes … If you buy around here, you can use a loss limit in the low to mid-70s.” BUY.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, pulled back with the market for five days before rallying today, but remains well above all its moving averages. The growth story is terrific, but I’ll keep it rated Hold, looking for a better entry point. HOLD.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, looks similar to PLNT, but not quite as extended. The company is the leading force in the telehealth movement, which enables patients to access board-certified doctors 24/7/365. You can buy the stock here. BUY.
Tesla (TSLA), originally recommended in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio; we have a fat profit, and I have confidence in the firm’s long-term growth prospects as it leads the automotive revolution for both electric and autonomous cars. And now I’m upgrading it to Buy! The reason: technically, the stock has been in a basing pattern since it hit 387 last June, with the low end of the range at 300, and the recent approach of the stock toward that low, in concert with the news about the autonomous Uber fatality, presents a good buying point. BUY.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has pulled below its 50-day moving average in recent days, but Crista remains optimistic. In her latest update, she wrote, “WestRock is a major player in the global packaging and container industry. CFRA (formerly Standard & Poor’s) is expecting revenue to rise 10% and margins to increase by 200 basis points in fiscal 2018 (September year-end) and to continue growing in 2019. Analysts are expecting EPS to grow 50.8% in 2018 and the P/E is 16.8. The 2019 numbers are currently fairly valued. I expect the stock to rise to its January high at 70, and then deliver additional gains in the first half of 2018. HOLD.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has ignored the market weakness, breaking out to a new high two weeks ago and trading tightly just above the 48 level over the past seven days. It’s a very positive pattern, so you can still buy here. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED MARCH 27, 2018
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