Today, most major indexes have pulled back to nearly their early February lows, so short-term, a bounce from here would be quite normal, though longer-term, further weakness cannot be ruled out. But we don’t need to know where the market is going. We only need to know what it’s doing now—and watch carefully what our own stocks are doing—and react appropriately. Today that means selling two stocks, downgrading one to hold, and upgrading one to buy. Details inside.
Cabot Stock of the Week 191
[premium_html_toc post_id="147585"]
One of the most easily forgotten aspects of the market at times like these—when the market indexes are heading rapidly downward and the news is getting worse by the day—is that the biggest and smartest investors are always looking ahead. It’s not today’s bad news that is triggering their selling; it’s their perception of what is coming three and six months down the road. To a larger extent than is appreciated, in fact, the bad news is an attempt to explain why the market is acting the way it is. As a result, the more the major indexes decline, the worse the news gets—and the news will be the very worst at the bottom. And that’s the way it’s always been, with the converse true in bull markets; remember the rosy headlines about low unemployment and the corporate tax cut just two months ago? The bottom line is that the news is a terrible guide to investing—and always has been! The best way to invest is to read charts carefully and buy stocks (using a growth and/or value methodology) whose prospects are bright.
Today, Cabot’s intermediate-term market timing indicator remains negative while our long-term market timing indicator remains bullish. And the Cabot analysts—each using their own proven methodology—continue to uncover investments with good prospects. Today’s recommendation is a high-yielding REIT that was recently recommended by Chloe Lutts Jensen in Cabot Dividend Investor; here are Chloe’s latest thoughts.
STAG Industrial (STAG)
STAG Industrial is a real estate investment trust, or REIT, a type of company designed to pass most of its income on to investors through regular distributions (though they’re similar to dividends, REIT distributions aren’t technically dividends, so they’re just called distributions).
What makes REITs such a good source of income? First, they have a steady income stream themselves, usually generated by renting out properties that they own. They’re basically landlords on a large scale. Second, REITs are granted special tax status as long as they pass most of that rental income directly to investors. That does create some tax complications for you, the investor, but a lot of investors think the extra paperwork is more than worth the giant yields REITs can generate.
In the case of STAG Industrial, that yield is currently a nice round 6.0%. Even better (especially if you use income from your investment portfolio to pay the bills) STAG pays distributions monthly. STAG’s history of dividend payments isn’t long (seven years), and its pace of dividend growth is slow (about 3% annually over the past five years), but payments have been steady and the stock’s payout ratio is reasonable for a REIT. IRIS, my algorithm that rates stocks based on the safety and growth potential of their dividends, awards STAG Dividend Safety and Growth Ratings of 4.9 and 5.6 (both out of 10).
STAG’s steady income stream comes from its large portfolio of industrial real estate—mostly warehouses (over 80% of their 356-property portfolio). Warehouse space is in high demand these days as e-commerce companies compete to ship faster and faster, often by storing products closer to their customers. The Federal government is also a major tenant (they have a lot of files).
Thanks to a steady stream of rent increases and acquisitions, STAG has grown funds from operations every year since it came public in 2011. Funds from operations, or FFO, is a widely used measure of REIT cash flow that ignores non-cash real estate depreciation and gains from the sale of real estate (which generate non-recurring revenue). Over the last five years, STAG has grown FFO by an average of 31% per year, including 39% growth last year.
Investors in STAG should be aware of the potential for interest rate changes to impact REIT stocks. Because REITs borrow heavily and are high-yield investments (and thus used as fixed income alternatives), rising rates can cause selloffs in the REIT sector. Anxiety about Fed rate hikes and higher long-term interest rates caused a lot of volatility in REITs in recent years, culminating in a 20% selloff in the sector between November 2017 and February 2018. However, signs suggest that rate hike expectations have plateaued for now—helping REITs to find support and stop falling in early February. While the Fed is still planning two more rate hikes this year, they’re priced into the market, and long-term treasury yields peaked at the end of February.
The good news right now is that sector selloff brought STAG to an attractive entry point. The stock corrected 20% as interest rates surged, finally finding support in early February. That’s a big drawdown (risk is always higher with high-yield stocks) but presents a good buying opportunity for us. It also defined a nice support level around 22.50 to watch should things go south.
And should interest rate expectations moderate, I expect STAG to resume its long-term uptrend, which dates back to the start of 2016. In the meantime, STAG provides a nearly unparalleled stream of high monthly income for investors with relatively high risk tolerance.
(A note on taxes: Because STAG’s distributions aren’t technically dividends, they don’t qualify for the lower dividend tax rate. Most of your distributions will be treated as ordinary income, while a smaller fraction may be considered capital gains or return of capital, depending on how the REIT earned the cash. The REIT will let you know how to classify the dividends at the end of the year. On average though, about 70% of REIT distributions are taxable as ordinary income, making REITs a good fit for tax-advantaged accounts like IRAs and 401(k)s and for investors with a low income tax rate.)
STAG Industrial (STAG)
One Federal Street, 23rd Floor
Boston, MA 02110
617-574-4777
http://www.stagindustrial.com
CURRENT RECOMMENDATIONS
The broad market’s course has become increasingly suspect, as the latest plunge by the major indexes has brought most of them nearly down to their early February lows. Short-term, a bounce from here would be quite normal, though longer-term, further weakness cannot be ruled out. But we don’t need to know where the market is going. We only need to know what it’s doing now—and watch carefully what our own stocks are doing—and react appropriately. Today that means selling two stocks, downgrading one to hold, and upgrading one to buy. Details below.
AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, remains in a long-term uptrend, trading around its 25-day and 50-day moving averages. In her latest update, Chloe wrote, “AB is right where we left it last week, which is good, considering the week the market’s had. The stock’s short-term momentum is sideways, but longer-term its choppy uptrend remains intact. The asset manager remains a decent buy for investors whose priority is high income, and for whom predictability isn’t essential (AB’s distributions vary based on cash flow). AB is organized as a partnership, so dividends aren’t qualified and they issue a K-1 at tax time.” BUY.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, is one of the technology giants (like FB and AMZN) that’s been hit hard in recent weeks; as I write, the stock is below its 200-day moving average! But the company’s fundamental prospects remain attractive to Crista. In her latest update she wrote, “Google announced a new service last week, Cloud Text-to-Speech, which converts blocks of text into speech using Alphabet’s DeepMind technology. The artificial speech is natural-sounding, and available in 12 languages. The application can be used within call centers, autos, TVs, robots, and audio books & podcasts. I will consider GOOGL to be fairly valued when it retraces its January high near 1190, at which point I might sell to make room for a more undervalued stock to join the portfolio. I’m pleased that GOOGL maintained very firm price support at 1000 during this year’s stock market correction. There’s room within the current trading range for short-term traders to make 13% profit.” 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 pretty fine, just two weeks off a record high and sitting on its 50-day moving average. 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.
Azul S.A. (AZUL) originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and featured here last week, hit a record high last Friday and the buyers are still in charge. In Paul’s latest update, he wrote, “AZUL is probably the strongest chart of all of our stocks.” If you’re looking for diversification to smooth the U.S. market’s bumpy road, the fastest-growing airline in Brazil might be the ticket. BUY.
Baker Hughes, a GE Company (BHGE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio, sold off with the market over the past two weeks, but the correction stopped well short of the big low of February and now the stock is working to climb back toward (and above) its March high of 31. 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 decreased by two last week to a total of 993. Analysts expect EPS to grow 86% and 96% in 2018 and 2019, and the stock is undervalued. I expect BHGE to rise to its January high of 37, with additional capital gains in 2018.” 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 two weeks ago when long-term bond yields declined after the Fed raised rates—and the stock hasn’t really bounced since. Chloe recently wrote, “It’s not a pretty technical picture, but volume on the selloff wasn’t especially elevated and the stock is still well above its 200-day moving average, which is down at 49.” But Crista remains more bullish (for fundamental reasons), writing “Last week, Wells Fargo raised its price target on BBT to 63 and its rating to outperform; while B. Riley FBR analyst Steve Moss raised his price target to 59 and his rating to buy. Consensus earnings estimates also rose last week, now reflecting 41.2% and 8.4% growth in 2018, and the current P/E is 13.2. If the 2019 number continues to rise, I’ll keep the stock beyond its January high of 56.” BUY.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, has a great fundamental story, but technically, the stock has been weakening, as investors’ appetite for riskier stocks has cooled. In his latest update, Tyler wrote, “BioTelemetry has a story that should be resonating with investors, but just can’t seem to stick. It might be that the stock needs some time to digest the LifeWatch acquisition. Or maybe the competitive threat from iRhythm (IRTC) is holding back new money, or those interested in this space are more interested in iRhythm. In any event, shares of BioTelemetry have been kicking around in the $30-to-$36 area for the last three months and can’t seem to mount a convincing rally. We have a modest gain in the stock now, and while it pains me to cut it loose, I’d rather lock in the gain we have right near a solid support level than risk seeing it evaporate should shares break lower (which would probably trigger a high-volume decline). In other words, BioTelemetry is moved to sell, and will go back on my watch list.” Having bought a bit higher than Tyler, we have a small loss, but the advice is the same. The odds are that your money can do better elsewhere. SELL.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, remains a top performer, hitting a new high last Friday! In her latest update, Chloe wrote, “Our only concern is that our profit is getting big (40% on price alone) and the stock is a little overextended—about 8% above its 50-day line. But it’s held up so well over the past week that there’s no real reason to sell now. Do wait for a pullback before buying though.” 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 bounced modestly off its uptrending 200-day moving average, now at 122. Fundamentally, analysts are looking for revenues to grow 20% this year and earnings to grow 28%. HOLD.
Cronos Group (CRON), originally recommended by me in Cabot’s 10 Best Marijuana Stocks, continues to head lower, as the hot money that jumped on board when the Cronos became the first cannabis company listed on the Nasdaq moves on to greener pastures (or the safety of cash), and it’s quite possible the stock won’t stop until it hits 5. Fundamentally, the future remains bright, but that’s not reason enough to let this loss get any bigger. I recommend selling and moving on. SELL.
Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, is the world leader in tubeless insulin delivery technology and its stock looks great. After hitting a record high last Tuesday, the stock fell back to its base on roughly double average volume the next day (profit-taking), but the main pattern is still very positive, and if you don’t own it, you can buy it here. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has continued to pull back over the past week and is probably at the point where short-term traders could buy and make a few bucks. But the longer-term trend is getting a bit worrisome, as Mike noted in his latest update: “There’s been nothing new from PayPal on the news front, and accordingly, the stock remains in a choppy phase with a pattern of higher lows from December through March but not much net progress since Thanksgiving. As time passes, we see worries over the eBay separation (which isn’t taking effect for a couple of years) fading and big investors refocusing on PayPal’s excellent core fundamentals. A drop below 70 or so would likely have us selling, while a decisive move above 86 would be highly bullish. But right now, with PYPL in the middle of its range, we’ll stay on Hold.” Following Mike’s lead, I’ll downgrade to Hold. HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has a great cookie-cutter growth story as well as a strong long-term chart over the past two years. More recently, the stock surged from 29 to 40 (a gain of 38%) in just one month, and it’s spent the past three weeks cooling off (on low trading volume), pulling back to nearly its 50-day moving average. This looks like a decent entry point to me, so I’m going to upgrade it to buy. BUY.
TD Ameritrade (AMTD), originally recommended by Mike Cintolo in Cabot Top Ten Trader and recommended here two weeks ago, has spent the past week trading back and forth between its 25- and 50-day moving averages (roughly between 58 and 59). If you haven’t bought yet, you can buy here. BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, is a fast-growing leader in the telehealth movement, which enables patients to access board-certified doctors 24/7/365. As for the stock, it looks a lot like PLNT. Having hit a new high and then cooled off for a few weeks, it’s now just above its uptrending 50-day moving average. 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. Like other high-profile glamour stocks, TSLA was hit by heavy selling in recent weeks, as hot money pulled out of growth stocks. And in Tesla’s case, the decline was accompanied by a growing chorus of doubters and/or short-sellers predicting all manner of failure for the company—a chorus that included April Fools’ tweets by Elon Musk about bankruptcy. (The fact that he can joke about it means it’s highly unlikely.) Then, just this morning, Tesla released a report on third quarter production (at the same time that General Motors announced that it would no longer provide monthly sales data, instead reducing its sales data to quarterly—like Tesla). In the report—which preceded a strong rebound by the stock today—were these highlights:
“Q1 production totaled 34,494 vehicles, a 40% increase from Q4 and by far the most productive quarter in Tesla history. 24,728 were Model S and Model X, and 9,766 were Model 3. Model 3 output increased exponentially, representing a fourfold increase over last quarter. In the past seven days, Tesla produced 2,020 Model 3 vehicles. In the next seven days, we expect to produce 2,000 Model S and X vehicles and 2,000 Model 3 vehicles. It is a testament to the ability of the Tesla production team that Model 3 volume now exceeds Model S and Model X combined. What took our team five years for S/X, took only nine months for Model 3. Tesla continues to target a production rate of approximately 5,000 units per week in about three months, laying the groundwork for Q3 to have the long-sought ideal combination of high volume, good gross margin and strong positive operating cash flow. As a result, Tesla does not require an equity or debt raise this year, apart from standard credit lines. Q1 deliveries totaled 29,980 vehicles, of which 11,730 were Model S, 10,070 were Model X, and 8,180 were Model 3. Net orders for Model S and X were at an all-time Q1 record, and demand remains very strong.”
Additionally, detailed sales data from InsideEVs, available here, reveals not only that the Model 3 was the best-selling electric car in the first quarter, but that 28% of all plug-in automobiles sold in the US in the first quarter of 2018 were made by Tesla. If you don’t own it yet, I believe this is a great buying point; there’s 47% upside to the stock’s old high. BUY.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, continues to trade just above its 200-day moving average. In Crista’s latest update, she wrote, “WestRock is a global packaging and container company. Consensus estimates point to revenue increasing 10.1% in 2018 and EPS growing 51.9%. The P/E is just 16.1. Amusingly, the two downward spikes of the February and March stock market corrections make the WRK price chart give the visual appearance of a Rorschach test. That’s fine with me—patterns are good, chaos is bad. I expect WRK to rebound to its January high at 70, with additional gains this year.” 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 still looks healthy, though not quite as robust as when it was sitting at 48; since then it’s pulled back to support at 46, where we also find the stock’s 50-day moving average. If you haven’t bought, you can still buy here. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED APRIL 10, 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.