As we leave behind last week’s market lows—as well as the peak fears of tariff wars—it remains critically important to focus on the action of the market itself, and not be swayed by the news of the day. Which brings me to today’s recommendation, a fast-growing company with a revolutionary product whose stock hit new highs recently and is primed to do so again. You’ll find full details in the issue.
Cabot Stock of the Week 192
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While the market’s intermediate-term trend is officially down, the recent wave of selling brought most major indexes down to their 200-day moving averages, which now appear to be providing support. Many good stocks—including ones we own—can be expected to bounce off these support levels. But some stocks will not bounce, and those we
will sell.
As for new buying, when targeting growth stocks, the best strategy is to focus on those stocks that resisted the waves of selling and went the other way, hitting new highs! Today’s recommendation is such a stock; it was originally recommended by Mike Cintolo in Cabot Growth Investor.
Here are Mike’s latest thoughts on the stock:
Axon Enterprises (AAXN)
Axon Enterprises used to be known as Taser, which was one of the market’s (and Cabot’s) biggest winners of the 2003-2004 bull market. The attraction back then was the company’s next-generation stun guns (the firm prefers to call them electrical weapons) that became very popular among police departments (and some individuals) for a time. However, various management snafus, a lack of cost controls and some lawsuits stunted growth, and Taser bumped along unimpressively after the big initial surge.
Over the past five years, however, the company has been expanding its offerings. Those stun guns still make up the majority of Axon’s revenues—68% in Q4—but growth there is modest (up 10%). The firm continues to see a steady stream of orders for these weapons from municipalities (it announced that it received 12,000 orders for weapons from various departments in Q4, with all shipped by March), and it even does a small business selling some to individuals for self-defense.
However, the reason the stock is very strong has to do with excitement surrounding its new products, and its overall shift to a steadier, higher-margin recurring revenue business model.
Specifically, Axon seems to have a hit on its hands with its cameras (both body-worn and in-car), which are becoming very popular among police departments; the company says about three dozen U.S. cities are using them, and they’ve seen a huge reduction in the number of complaints from citizens as a result. And those figures are growing—over the past two months, Axon announced a 400-camera order from the Chicago police, an order for 1,060 cameras from Virginia Beach and a whopping 11,000 cameras from Australia’s Victory Police.
Newer products, and equally likely to prove popular, are the firm’s Fleet in-car cameras that are connected to the network (automatic upgrades come when more advanced technologies are integrated) and mobile apps that sync with cameras and record evidence on a smartphone.
Even more enticing, though, is Evidence.com, which is Axon’s cloud-based, digital evidence management platform that allows investigators to easily upload, store, check and share evidence files, saving time and money. Axon is constantly adding features (it recently allowed closed-circuit video to be uploaded) and licenses this system to users (more than 200,000 of them at year end). All told, there are 20 petabytes (equivalent to around six million HD movies on iTunes) already on the platform.
Thus, instead of selling a few thousand weapons here and there, Axon is now offering a complete solution for police departments, resulting in a steady stream recurring income. In the fourth quarter, while the weapons segment grew 10%, the rest of its offerings saw sales rise 27%.
All told, the company’s future contracted revenue at the end of 2018 totaled $536 million, up 8.5% from the prior quarter and much larger than the firm’s total revenues in 2017 ($344 million). All in all, management sees total revenue growth lifting into the mid-teens this year, while earnings should boom more than 50%, with more growth beyond that.
One last bullish factor is management, which, frankly, we’ve been a bit skeptical of in recent years. But the CEO recently eliminated his pay and is now working based on an incentive plan that will pay off as the company’s market cap, revenues and EBITDA (a measure of cash flow) rise. The plan was modeled after a deal Elon Musk took at Tesla, and should prove shareholder friendly.
As for the stock, the chart is about as bullish as you can get. AAXN peaked at 36 back in mid-2015, plunged to 14 during the market’s mini-bear market into 2016 and bounced back to 30 later that year. And then it went dead—shares bobbed and weaved between 21 and 30 for more than a year.
But the Q4 report changed all that, with AAXN soaring to 40 after earnings, holding tight during the market’s recent plunge and actually pushing to new highs last week despite the wobbly market. For aggressive growth investors, it’s an attractive pattern. BUY.
Axon Enterprise (AAXN)
17800 North 85th Street
Scottsdale, AZ 85255
480-991-0797
http://www.axon.com
CURRENT RECOMMENDATIONS
Portfolio management is an underappreciated part of investing. It’s easy to talk about what to buy, but in the long run, it’s what you hold—or not—that makes the difference. So, as the market works to bounce off its recent low, my focus is on holding the stocks that continue to have good growth prospects, relative to their risk, and on selling the others—when they deserve it. Last week we sold two stocks, but this week we sell none.
AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, remains in a long-term uptrend, trading above both its 25-day and 50-day moving averages and a stone’s throw from its January closing high of 27.25. In her latest update, Chloe wrote, “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).” If you haven’t bought yet, you can buy here. BUY.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, is the biggest loser in the portfolio, and on that basis alone, it’s a candidate for sale. But I’m holding because I see support around these levels and I’d rather sell where Crista wants to sell. In her latest update she wrote, “I will consider GOOGL to be fairly valued when it retraces its January high near 1,190, at which point I might sell so as to make room for a more undervalued stock to join the portfolio. I’m pleased that GOOGL maintained very firm price support at 1,000 during this year’s stock market correction.” She recommends buying here, to aim for that 16% gain, but I’ll stick with hold. HOLD.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, broke out to new highs today on no particular news, which is the way I like it; the good news will come later. As China’s biggest source of car-buying information, the company has a bright future. Paul says analysts are looking for 20% earnings growth this year and 24% next, though both are likely conservative. BUY.
Azul S.A. (AZUL) originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and featured here two weeks ago, has been resting between 33 and 35 over the past few weeks. In Paul’s latest update, he wrote, “I think this airline has huge potential as it adds new routes; the firm just announced a partnership with a French carrier to offer nonstop flights from Sao Paulo to Paris.” 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, bottomed at 51 in February and found support at the same level in the market’s latest selloff, and if all is well, the stock should turn up soon. In her latest update, Chloe wrote, “BBT remains below its 50-day and above its 200-day, around where it bottomed in February. Financials remain under pressure due to the flattening yield curve, and BBT is trading in line with the sector. On the plus side, analyst estimates are moving up and the consensus estimate now predicts 41% EPS growth this year (that’s including a nice tailwind from the tax break). I’ll keep BBT on Hold for Dividend Growth investors.” And Crista echoed the hold rating soon after, writing, “Analysts expect EPS to grow 41.2% and 8.1% in 2018 and 2019. I’m moving BBT from Strong Buy to Hold, with the intention of selling near its January high of 56 if the 2019 earnings growth rate does not improve further. The stock is still a good investment, but I have stocks with stronger 2019 earnings growth projections waiting in the wings.” HOLD.
Baker Hughes, a GE Company (BHGE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio, enjoyed a big move today, which took the stock right back up to its March highs at 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 rose by 10 last week to a total of 1,003, up 164 vs. a year ago. Piper Jaffray upgraded BHGE to Overweight with a $39 price target last week, citing the company’s attractive free cash flow, P/E and debt levels, and calling the oil service provider “best in class”. Baker Hughes will report first quarter results on the morning of April 20. Wall Street expects full-year EPS to grow 81.4% and 100% in 2018 and 2019, respectively. BHGE is slowly ratcheting upward from its February lows. I expect BHGE to rise to its January high of 37, with additional capital gains in 2018.” BUY.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, was a top performer through the selling wave, hitting a new high at 110 two weeks ago and trading tightly around 108 since. In her latest update, Chloe wrote, “The stock remains exceptionally strong, but given the weakening market, and the fact that BR is still nearly 7% above its 50-day line, I’m going to move it to Hold today. There’s no reason to worry if you own it though.” I already had it rated Hold, and there I’ll stay. 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. The stock bounced off its uptrending 200-day moving average two weeks ago and its action since then has been neither exciting nor distressing. Fundamentally, analysts are looking for revenues to grow 20% this year and earnings to grow 28%. HOLD.
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. If you don’t own it, you can buy it here as it sets up for a breakout. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, found support at 72 in February and in the latest selling wave, and has rallied modestly since. In his latest update, Mike wrote, “The stock really isn’t doing anything out of the ordinary (good or bad) and is still a few points above its 200-day line (unlike some major indexes). Fundamentally, we don’t think anything has changed; it’s likely earnings and cash flow can crank ahead at 20%-plus rates for many years. A drop below 70 would probably cause us to throw in the towel, but if you have a profit like us, we advise gritting your teeth and giving the stock a bit more room.” HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has enjoyed a nice bounce since I upgraded it to buy last week when it had pulled back to its 50-day moving average. And Mike was so impressed by the setup that he featured it again in Cabot Top Ten Trader this week, writing, “Planet Fitness remains a very solid long-term growth story, and with retail stocks showing strength, its shares have begun to perk up. To review, the story is both simple and enticing, as the company’s fitness centers have a very wide appeal, attracting people from all over the economic spectrum who want a low-stress (and reasonably priced) place to work out. The firm ended 2017 with 1,518 fitness centers (up 16% from the year before, almost all of them franchises) and 10.6 million members (up 19%), and the top brass believes there’s room for 4,000 or more locations in the U.S. Throw in some solid store economics (payback within four years in general, if not sooner) and healthy sales from existing locations (same-store sales were up a huge 11.6% in Q4!) and there’s a clear map for Planet Fitness to get much bigger over time. Beyond the top-level numbers, the firm’s national advertising campaign has been a great success, and a recent price hike for Black Card members (who can use any Planet Fitness location) and higher royalty rates from franchisees are helping to boost results. Revenue growth isn’t lightning fast, but has been generally picking up steam in recent quarters, while earnings and EBITDA (a measure of cash flow) have been advancing 15% to 25%. This year looks like much the same thing, with years of growth beyond that…most encouraging is its action during the market’s plunge of the past four weeks—PLNT calmly pulled back to its 50-day line before bouncing on solid volume. If you want in, you can nibble here or on dips, or just keep it on your watch list.” BUY.
Stag Industries (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, and featured here last week, has been trading calmly sideways over the past week. In her latest update, Chloe wrote, “REITs have outperformed over the past few weeks, as sharp selloffs in the broad market drove investors into income investments and other counter-cyclical options. STAG is an industrial REIT that mostly owns warehouses and has increased funds from operations (or FFO, a widely-used measure of REIT cash flow) every year since coming public in 2011. Distributions are paid monthly and payments are steady (though they don’t qualify for the lower dividend tax rate). STAG just completed a 20% correction as interest rates surged, eventually finding support in early February, so it’s at a lower-risk entry point (although risk is always higher with high-yield stocks). Investors with high risk-tolerance looking for high monthly income can Buy some STAG here.” (Note: high risk for Chloe’s dividend-centric audience might be moderate or even low risk for Mike’s aggressive Cabot Top Ten Trader audience.) BUY.
TD Ameritrade (AMTD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to trade back and forth between its uptrending 25- and 50-day moving averages, working its way back to its March high of 63. 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. The stock is currently testing support at its uptrending 50-day moving average, and I think this presents a fine entry point. 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. That’s why I was able to sit calmly through the stock’s plunge to 250 two weeks ago, as the broad market’s selling wave was amplified by a rash of articles casting doubt on the company’s ability to survive. Since that bottom, the stock is up 21% on huge volume (last week’s volume was the stock’s heaviest in four years!), and I still think it’s a good buy. Note: Today Chinese President Xi Jinping mentioned that he would open China’s markets wider for foreign companies, saying, “China’s door of opening up will not be closed and will only open wider. Beijing will significantly lower tariffs on auto imports this year and ease restrictions on foreign ownership in the auto industry as soon as possible.” With current tariffs on Teslas sold in China at 25%, this can only help. BUY.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, found support at its 200-day moving average and remains in a long-term uptrend. In Crista’s latest update, she wrote, “WestRock is a global packaging and container company. Consensus earnings estimates have been consistently rising all year. Analysts now expect EPS to increase 54.2% in 2018. The P/E is just 15.5. As the market recovers, 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 cookie-cutter model mastered by McDonalds. And the stock continues to look healthy; in fact last week saw a close that was just four cents off the record close of early March. If you haven’t bought, you can still buy here. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED APRIL 17, 2018
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