Cabot Stock of the Week 190

Today, my recommendation is outside the U.S., and outside China, too! In fact, my recommendation is in Brazil, where a young airline is enjoying rapid growth and the chart is positive.

Cabot Stock of the Week 190

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While 2017 was one of the least volatile years ever for the market, 2018 has seen volatility return—with a vengeance! Early February brought the greatest point decline in history for the Dow, while yesterday brought the biggest one-day advance since August 2015 for the Dow, S&P 500 and Nasdaq. So what comes next? Technically, our long-term market timing indicator remains positive, but our intermediate-term market timing indicator is now negative, so a challenging path might be expected. Also, I’ve mentioned before the growing divergences among the indexes, and now it’s clear that we’ll have to be increasingly astute about stock selection as what might be the final phase of the bull market develops. In the meantime, it’s good to remember that there are potential investments all over the globe, and while global markets are increasingly linked, there are still strong and weak countries.

Right now, one of the strong ones is Brazil, which is the home of today’s recommended stock. It was originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, and here are Paul’s latest thoughts.
Azul S.A. (AZUL)

Airline stocks can be tricky, as changes in fuel prices can undercut earnings and terrorism alerts can affect the public’s desire to fly. But when they work right, airline stocks can soar just like the jetliners they fly, and Azul (AZUL), a Brazilian airline company, is doing just that. Azul has been the fastest-growing airline in Brazil since its founding in 2008, and is now the third-largest Brazilian airline with a 32% market share.

Young airlines are often successful in their first years, as there are few legacy costs (union contracts and the like), giving them an advantage over rivals who have been around for decades. There can also be value in having a younger organization with better technology and a younger, more fuel-efficient fleet of planes that keeps maintenance costs down.

Starting from zero in 2008, Azul’s 792 daily flights now connect 104 cities in Brazil via a network of 223 non-stop routes. And the company just announced on March 26 that it intends to expand its network by up to 35 new cities in the coming years, as well as starting service to selected international destinations. The company’s guidance for 2018 already holds out the promise of eight to 10 new destinations.

The company’s fleet of 200 planes includes Airbus A320 and A330 jets, plus Embraer ERJ 170 and 190 jets. A fleet of twin-engine ATR 72s serves shorter and lower-capacity routes. Azul’s fleet is ideally suited to Brazil’s size, which offers a variety of short- and medium-haul routes.
Azul has great soft metrics, including a rating as the world’s third-best airline in the world by TripAdvisor and an award for the most on-time low-cost carrier in the Americas and most on-time airline in Brazil. Generous onboard services, premium legroom and live TV on most flights also contribute to the airlines’ high customer satisfaction. And the airlines’ TudoAzul loyalty program is the fastest-growing in Brazil.

After three years of investment and route development, the company booked and turned profitable in 2017 (a string of six quarters with double-digit revenue growth). Earnings growth has been even stronger, growing by 105% in Q3 2016, 116% in Q4 2016, 183% in Q1 2017, slowing to 75% in Q2 2017, then jumping to a record 5,600% in Q3 and 750% in Q4. The more esoteric industry metrics were also strong, as revenue per available seat-kilometer increased by 9.4% combined with a 10.2% increase in available seat-kilometers. Average fares were up 17% year-over-year.

Azul reported excellent Q4 results on March 8, booking record operating results, which were achieved despite a 16% increase in fuel prices. Revenue totaled $662 million, up from $590 million in 4Q16. Passenger traffic grew 12.7% on a capacity increase of 10.2%, resulting in a load factor of 82.7%, 1.9 percentage points higher than in 4Q16. Analysts are forecasting earnings growth of 33% in 2018 and 55% in 2019.

AZUL stock is still very young (it came public in April 2017), so institutional support (currently 110 whales on board) is still very low, leaving lots of room for big investors to jump in.

AZUL has been in a general uptrend during its short history, with a rally from its 22 IPO price in April 2017 to 26 in May. A quick correction to 20 in June gave way to another rally that took the stock to 29 in September before another correction pulled it to 23 in December. But since that December low, the stock has been in a steady uptrend, with only a quick pullback in February to mar its momentum. AZUL is now trading around 34, and has been pretty much ignoring the weakness in the major U.S. exchanges. Volatility is likely to remain high for a while as big investors jockey for position. But the company is very strong and the stock looks buyable right here or on pullbacks (its 25-day moving average is near 32). BUY.
Azul S.A. (AZUL)
Av. Marcos Penteado de Ulhôa Rodrigues, 939
Edif. C. Branco Office Park Torre Jatobá 9º andar Alphaville Industrial
Barueri, SP 06460-040
Brazil
http://www.voeazul.com.br

CURRENT RECOMMENDATIONS

Everyone knows that the market has had some very bad days since the start of February. But the market is not a monolith. Some stocks have done worse than average, like Facebook (FB)—good riddance. And some stocks have done much better; just look at the way Broadridge Financial (BR), Insulet (PODD), Planet Fitness (PLNT), Teladoc (TDOC) and Wingstop (WING) are holding up. So for all the focus on the broad market—and it is important—it is even more important to monitor the action of your own stocks carefully. Last week we sold two stocks that were faltering, and this week we sell one more.

AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has been trading around its 25-day moving average in recent days, still setting up for a breakout to new highs above 27. In her latest update, Chloe wrote, “Volume hasn’t picked up, and the stock is above its lows from a few weeks ago, so I’ll keep it on Buy for high-yield investors. 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, has been a market performer in recent weeks, but the fundamental prospects remain attractive to Crista. In her latest update she 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. At last week’s Shoptalk conference, the future of voice-activated hardware got a perception boost when Google reported that a majority of consumers who use voice-activated speakers indicated a willingness to make retail purchases via voice activation in the coming months. In addition, French retailer Carrefour (the largest retailer in Europe) announced a partnership with Google aimed at competing aggressively with Amazon’s Alexa, with a new online voice assistant name Lea. I will consider GOOGL to be fairly valued when it retraces its January high near 1190, at which point I might sell so as to make room for a more undervalued stock to join the portfolio…For those of you who 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 looks great; in fact, it hit new highs just last Wednesday. In his latest update, Paul wrote. “The stock is showing solid relative strength, and we like the steady earnings growth (20% this year, 24% next, both likely conservative) that analysts forecast.” 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, sold off sharply last week when long-term bond yields declined after the Fed raised rates. In her subsequent update, Chloe wrote, “out of an abundance of caution, I’m going to move BBT to Hold today.” But Crista was more bullish, writing, “BB&T could benefit from the U.S. Senate’s bipartisan “Economic Growth, Regulatory Relief, and Consumer Protection Act” (S.2155), by relieving the bank from “systemically important financial institution” (SIFI) status. Analysts expect EPS to grow 40.9% in 2018, and the stock is undervalued. Now that the share price has pulled back with the broader market, I’m moving BBT from Buy to Strong Buy. I expect BBT to rise to its January high of 56 in the short term, with additional capital gains in 2018.” I’ll keep it rated buy. BUY.

Baker Hughes, a GE Company (BHGE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio, continues to correct normally following its big surge higher in early March. 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 five last week to a total of 995, four of which were oil rigs. It’s worth noting that the number of operating Canadian oil and natural gas rigs is in drastic weekly decline, which is of concern to investors who own stocks in the Canadian energy sector. (I have not recommended any Canadian energy stocks.) Analysts expect EPS to grow 86% and 96% in 2018 and 2019, and the stock is undervalued. The earnings estimates have been slowly falling. I expect BHGE to rise to its January high of 37, with additional capital gains in 2018.” BUY.

BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, has a great fundamental story, but technically, the stock has done nothing this year, building a loose base between 31 and 36. In his latest update. Tyler wrote, “BEAT isn’t giving me much to write about after reporting earnings on February 22. The stock is just going through the motions now, hovering in its 30 to 36 range, which includes both the 50- and 200- day moving average lines. I put BEAT on hold when the stock failed to break out above the 35 to 36 zone of resistance and am sticking with that rating for now. Nothing too material on the competitive front with iRhythm (IRTC) over the last two weeks, and I’d note that shares of that stock have demonstrated roughly the same unenthusiastic trading pattern as BioTelemetry’s lately.” HOLD.

Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has held up extremely well; it now sits a whisker away from the record high it hit last Tuesday. In her latest update, Chloe wrote, “BR remains near all-time highs, strong but somewhat extended. The stock’s 50-day moving average is at 99 and the 200-day is way down at 86. Wait for a pullback before buying.” 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. In the past week, the stock has traded slightly lower, and is now close to its uptrending 200-day moving average, now at 121. HOLD.

Cronos Group (CRON), originally recommended by me in Cabot’s 10 Best Marijuana Stocks, looks roughly like most marijuana stocks, consolidating after the sector’s big, blow-off peak in early January. In CRON’s case, the defining characteristic of the chart is a base at 7, so buying anywhere in that area is likely to pay off over time. 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.

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 fabulous. In fact, the stock closed at a record high yesterday and hit more new highs today! This is a classic fast-growing technology stock, in which nimble traders can do quite well, but long-term investors might do even better—if the technology becomes as widely adopted as hoped. So, if you’re already on board, hang on tight. If you’ve yet to buy, wait for a normal pullback. BUY.

Knight-Swift Transportation Holdings (KNX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, looked fine a week ago, but since then the stock has fallen apart, falling through both its 25- and 50-day moving averages. Crista is sticking with the stock because of the attractive valuation, but I don’t have that patience—and there’s nothing revolutionary here—so I’m going to sell and move on. SELL.

PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, is now below both its 25-day and 50-day moving averages. In his latest update, Mike noted, “the odds continue to favor PYPL’s longer-term uptrend resuming, and the recent dip has brought shares down to support. Fundamentally, CEO Dan Schulman recently talked up the firm’s potential overseas (already half of PayPal’s revenue comes from outside the U.S.), seeing big opportunities in emerging markets, where some digital payment solutions are leapfrogging traditional checking accounts.” BUY.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has a great cookie-cutter growth story and the chart has been pretty great in recent months too! Over the past week, the stock has been consolidating in the 38 area (its 25-day moving average just caught up to provide a little support), so aggressive investors might step in here. I’m going to be a little less aggressive (given the stock’s big run in recent months) and let this consolidation go on a bit longer. The stock’s 50-day moving average is down at 35. HOLD.

TD Ameritrade (AMTD), originally recommended by Mike Cintolo in Cabot Top Ten Trader and recommended here last week, sold off sharply last Thursday with the broad market and now sits just above its uptrending 50-day moving average. If you haven’t bought yet, you can buy here. BUY.

Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, is a young fast-growing company whose shareholders appear to be holding on tightly, confident in the company’s prospects in the telehealth movement, which enables patients to access board-certified doctors 24/7/365. Today the stock’s 25-day moving average finally caught up to it, and if you don’t own it, you could buy a little 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. Last week I upgraded the stock to buy, arguing that the dip to 300 presented a low-risk buying opportunity, and this week I’ll repeat the advice, as the stock falls under 300 on news of an investigation into the fatal crash of a Tesla Model X in California last week. Remember, good news builds tops and bad news builds bottoms. BUY.

WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, nearly touched its 200-day moving average last Friday before rebounding, and Crista thinks that presents a fine buying opportunity. In her latest update, she wrote, “WestRock is a global packaging and container company. 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. This week, Credit Suisse raised their target price on WestRock from 70 to 79. Wall Street is expecting EPS to grow 50.8% in 2018, and the stock is undervalued. I expect WRK to rebound to its January high at 70.” HOLD.

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a restaurant chain succeeding by following the model mastered by McDonalds. And the stock looks great! For nearly three weeks it’s been trading tightly at 48, building a base to support further advances. If you haven’t bought, you can still buy here. BUY.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED APRIL 3, 2018

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