Last week I downgraded four stocks to Hold, and this week I recommend selling two—one for a fat profit and one for a quick loss. Still, because I keep adding a new stock every week, that leaves nineteen stocks in the portfolio, and most of them are acting very well!
As to this week’s recommendation, it’s a real wild card, a recent Chinese IPO that has been spun off from one of the big Chinese leaders. Risk-averse investors might want to give it a pass, or at least wait until there’s an established uptrend, but if you can handle the risk, buying down here might work out really well!
Cabot Stock of the Week 195
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As long-time Cabot readers know, every analyst brings a bit of their own personality to their investing system. My own personality tends toward optimism about individual companies and the market, and thus I have a hard time turning bearish; in fact, I often see lows as buying opportunities. Paul Goodwin, on the other hand, who helms Cabot Emerging Markets Investor, tends to be more sober about the prospects for the market; he’s always leery of the next downturn and thus will turn bearish quickly when his intermediate-term market timing signals start flashing sell signals—as they did in the middle of last week. And sometimes this helps his readers avoid painful losses. But sometimes these signals mark quick market bottoms, and I think (optimistically, of course) that that’s the case with last week’s bottom, which was the third since the market’s initial big selloff in February. The pattern of these bottoms suggests to me that the sellers are running out of ammunition and that eventually the buyers will once again take control.
Bottom line: investors who are optimistic and/or who have enough cash in reserve and/or can control risk well may buy here. Investors who are more cautious and/or are already heavily invested and/or prefer to wait until the odds are better will let this “opportunity” pass. In any case, here are Paul’s latest thoughts on today’s recommended stock.
iQIYI (IQ)
China has the biggest population of internet users in the world, with about 772 million of the country’s 1.4 billion people online as of the end of 2017. That amounts to about 55% internet penetration, which has created epic opportunities for the companies—Baidu, Alibaba, Tencent Holdings, JD.com and others—that have figured out how to make online search, sales, messaging and social media work.
And into this red-hot internet hive drops iQIYI, a company that combines an ambitious program of entertainment generation and partnerships with a solid technology base for delivery. It’s not easy to pigeonhole iQIYI, but it looks like it wants to be the Netflix of China, a company that uses its online video platform to stream its own premium content and has a wide web of content distribution partnerships.
iQIYI (the name translates literally into something like “Love fantastic art”) is a leader in the Chinese entertainment industry, owning the top spot for most active users and most time spent by those users on its platform; at the end of 2017, the company was averaging more than 126 million mobile daily users (DAU). Last year the company’s original content contributed five of the top 10 original internet variety shows and six of the top 10 original internet drama series. Offerings also include live broadcasting, animations, e-commerce, games and a social platform.
This success has created a network effect for iQIYI (pronounced “ee-chee-yee”) that increases its attractiveness to both advertisers and prospective viewers. The company offers advertisers a wealth of data about users to assist in ad targeting.
iQIYI makes money from online advertising (47% of 2017 revenue), membership services like premium content subscriptions (38%), content distribution (7%) and other sources. The company is a subsidiary of Baidu, which has been footing the bill for its development and rollout. Baidu’s massive user base is also the reason behind iQIYI’s rapid growth.
The company’s revenue history is strong, but begins only in Q1 2016. Revenue grew 104% in 2016 and 56% in 2017. Earnings haven’t turned positive yet, although the meaningful decline in the company’s Q4 loss was a positive sign.
IQ is as new as new can be, having come public as an independent entity in late March at around 18, pocketing more than $2 billion in the spinoff IPO from Baidu. The stock fell the next day to 15.5, but climbed higher in April, trading briefly above 20 on April 17 before pulling back on reasonable volume to build a mini-base at 18.
At this point, IQ is so young that it doesn’t even have a 25-day moving average; that will take a couple more days of trading. And, while it’s not our usual practice to jump on recent IPOs, there are a couple of reasons to make an exception for IQ.
First, most of the better-known names among emerging markets ADRs are either becalmed or trapped in trading ranges. And while we expect that many of these stocks will resume their advances at some point, the situation is ideal for testing a brand new stock that has no history, minimal institutional support and a great story.
Second, we haven’t made much use of our watch list, but building such a list is a traditional activity for periods of stock market consolidation, volatility or decline. Putting IQ on the watch list will put a high-potential stock under the spotlight. And when the market regains its momentum, it will be a good test to see if IQ responds positively.
Tim’s comment: Paul is playing it safe by putting IQ on his watch list. I’m playing it more aggressively by buying here, while the stock is at a low.
iQIYI (IQ)
iQIYI Innovation Building
9th Floor No. 2, Haidian North First Street Haidian District
Beijing 100080
China
86 10 6267 7171
http://www.iqiyi.com
CURRENT RECOMMENDATIONS
As earnings reports continue to arrive—almost daily—my view is that the market remains generally healthy; there’s a lot of good growth being achieved out there! At the same time, the market has definitely become more selective, so any failure to meet investors’ expectations is quickly punished. Thus, our job, as ever, is to keep our money invested in stocks with good prospects for appreciation, while removing it from those where the prospects are dimming. Today, that means selling two stocks. Details below.
AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, released an excellent earnings report last Thursday. Revenues were $868 million, up 13% from the year before and beating analysts’ estimates by $2 million, while earnings were $0.73 per share, up 59% from the year before and beating analysts’ estimates by five cents. Additionally, assets under management (AUM) were $550 billion at the end of March, up 10% from the year before. In her latest update (before the report), Chloe wrote, “The stock remains between overhead resistance around 27.5 and support at the 200-day moving average, currently around 25…Support looks solid and risk-tolerant investors can buy a little for high yield. Remember that AB’s distributions vary based on cash flow and don’t qualify for the lower dividend tax rate, and the partnership issues a K-1 at tax time.” Since the report, the stock has bounced back up to that resistance level at 27.5, and logic says it will break through eventually. BUY.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, is not a strong stock, but it’s at the low end of its range and I continue to believe that it is likely to rebound to its recent high of 1,190, as Crista expects. In her latest update, she wrote, “Subsequent to Alphabet’s first-quarter earnings report, analysts revised their full-year earnings estimates. Very strong 2018 earnings growth will give way to single-digit earnings growth in 2019. The market doesn’t blink when companies like Procter & Gamble (PG) deliver single-digit earnings growth, but it scowls when FANG favorites see their earnings growth slow dramatically. The share price will almost always react negatively to prospects of slow earnings growth, but don’t worry, it’s early yet. The market will be focused on 2018 numbers well into the third quarter, so we have plenty of time to trade out of GOOGL when it nears 1,190.” HOLD.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, remains in an uptrend, working to break out above the psychologically important level of 100. In Paul’s latest update, he wrote, “ATHM has been a nice pocket of strength in a tough market. The stock actually nicked 100 briefly last week and has held well atop its 25-day moving average. I’ll keep ATHM rated Buy, but in light of the shaky condition of the market, I recommend that you keep any initial investment small.” BUY.
Axon Enterprise (AAXN) originally recommended by Mike Cintolo of Cabot Growth Investor, has pulled back gently from its high at 44 and is now at its uptrending 25-day moving average. In his latest update, Mike wrote, “AAXN has, impressively, quieted down in recent days after its move to new highs at the start of April. The firm continues to get a bunch of orders for its electrical weapons, in-car and body cameras and for its Evidence.com digital evidence management platform. Earnings are likely out in late May.” BUY.
Azul S.A. (AZUL) originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, sold off on two big down days last week and has bounced modestly since, but is now the portfolio’s biggest loser. In Paul’s latest update, he wrote, “AZUL hasn’t been the subject of any negative headlines, but its stock was hit by a steep, two-day correction on Tuesday and Wednesday that dropped it from 32 to 29. It wasn’t an especially high-volume move, but it took AZUL to within a hair of our mental stop at 29. The stock has shown a little resilience in today’s supportive market environment, but we’re still going to heed the message of the Cabot Emerging Markets Timer and sell AZUL. If the company’s earnings report on May 10 (before the open) proves constructive, we may consider buying back in. But for now, selling is the right move.” I’m joining Paul. SELL.
Baker Hughes, a GE Company (BHGE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio, is up more than 30% since our buy two months ago, nearing its January resistance level of 37, and the question now is whether to take the money and run or sit patiently—probably through some consolidation action—and wait for further gains. Noting the same situation, Crista recently wrote, “If you were in the stock for a quick trade, you’ll want to sell when it passes 36. Everybody else should hold BHGE, and consider buying more shares on the next pullback.” Well, BHGE has topped 36 in each of the past four trading days, but failed to move past it, so I’m going to sell now, take the money and run, and try to jump on another of Crista’s Buy-Low Opportunities stocks soon. SELL.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, and subsequently recommended by Crista Huff, has been range-bound between 51 and 56 since early February, but the main trend still appears to be up. 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 serves businesses and individuals. The recent acquisition of Regions Insurance Group from Regions Financial (RF) expands BB&T’s business reach into Arkansas and Louisiana. Earnings estimates have steadily risen for the past four months. Analysts now expect full-year EPS to grow 43.0% and 8.5% in 2018 and 2019. The pace of loan growth in the balance of 2018 will likely be key to BBT’s desirability as a portfolio holding in 2019. I’ll therefore be closely monitoring 2019 earnings estimates, which are currently a little lower than I prefer. The stock could reach short-term price resistance at 56 quite soon.” HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, broke out above 110 two weeks ago on big volume but the breakout failed and the stock is now back in its base. In Chloe’s last update, she kept the stock rated hold for investors seeking dividend growth, and I’m going to follow her lead. Broadridge provides investor communications and other technology to financial companies, and a large percentage of revenue is recurring. 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 remains in a long-term uptrend, and just yesterday broke out above its 50-day moving average, which is very encouraging. HOLD.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small-Cap Confidential, remains in a basing pattern, preparing to break out above its old high of 39. In his latest update, Tyler wrote, “EVBG won’t report earnings until Monday, May 7 and given the stock’s muted action over the past week I don’t expect much movement until after the earnings report. Analysts currently see revenue growth of around 31% this year. As I’ve been saying, those figures will likely change a little as the impact of UMS becomes clearer. This week Everbridge announced a product integration with Cherwell, which sells enterprise service management solutions. Everbridge’s IT Incident Response Automation Solution will augment the capabilities of Cherwell’s IT Service Management Suite.” BUY.
Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, is the world leader in tubeless insulin delivery technology, used by more than 140,000 users across the globe, and the potential for growth is great—though competition is always a factor in this field. The stock has been trading tightly between 84 and 88 over the past seven weeks, and odds are good that the company’s first-quarter results, due to be announced Thursday, May 3, after the market close, will help the stock break out of this pattern, ideally to the upside. HOLD.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, reported first-quarter earnings last week and beat analysts’ estimates. Revenues grew 24% to $3.69 billion, while analysts were expecting 21% growth, and earnings grew 29% to $0.57 per share, while analysts were expecting $0.54. The stock surged higher in response, on big volume, but came right back down after, and thus continues to build a base in the low 70s. In his latest update, Mike wrote, “PYPL has basically moved sideways since Thanksgiving, with little net progress and a flat relative performance (RP) line. Given its big prior run, this consolidation has been normal thus far, but we’re probably getting close to the make-or-break point. Our overall stance with the stock hasn’t changed much despite its ups and downs in recent weeks—a break of long-term support in the 71 to 72 area would tell us the major uptrend is cracking, but above there, we’re happy to give it a chance. Bigger picture, PYPL, like many stocks last year, broke out of a big (21-month) consolidation and had a great run for nine months until topping; given the relatively brief run (compared to its base), it would be unusual for the stock to form a major top unless business or the market really imploded. Thus, we’re optimistic, but as always we’ll just play it by the book.” HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, will report first-quarter results Tuesday, May 8, after the market closes. In the meantime, the stock looks great, trading tightly between 40 and 41, setting up to break out to a new high. BUY.
PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor, is working its way up and away from the bottom established when the U.S. markets sold off broadly in early February. In Crista’s latest update, she wrote, “PHM is a U.S. homebuilder and a very undervalued aggressive growth stock. Subsequent to last week’s earnings report, three investment firms raised their price targets on PHM to a range of 36 to 40, and Raymond James raised their rating to Outperform. Consensus earnings estimates jumped as well, now reflecting 59.7% and 12.5% EPS growth in 2018 and 2019. The corresponding P/Es are 9.4 and 8.4.…Buy PHM now for 14% upside on the rebound, and additional capital gains thereafter.” BUY.
Stag Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, looks a lot like PHM in that it too is working its way out of that February bottom. And earnings are on the way right now. In her latest update, Chloe wrote, “STAG, a warehouse REIT, will report first-quarter earnings May 1, after the close. Analysts expect FFO (funds from operations) of $0.43 per share, up 5% from $0.41 per share in the same quarter last year. Revenues are expected to rise 19%, from $69.5 million to $82.6 million. Risk-tolerant high yield investors can buy STAG here for monthly income.” BUY.
TD Ameritrade (AMTD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has rebounded to its 50-day moving average, and I’m going to continue to hold. I think that as the market improves, AMTD can recover to at least its recent high of 62—and if the Scottrade acquisition is managed well, it may do much better. HOLD.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, is another stock that will release first-quarter results today after the market close—and the chart says the results will be good. But what matters more than the numbers is how investors react to the numbers. Assuming the stock doesn’t fall apart, you can continue to buy this young leader of the telehealth movement. 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. But the stock remains in a long consolidation pattern and hasn’t hit a high since last September. As to fundamentals, we may learn something when the company releases its first-quarter earnings report after the market close tomorrow (May 2). HOLD.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, reported second-quarter adjusted EPS of $0.83 on April 27 (September year-end), when the market expected $0.84. Revenue of $4.0 billion slightly missed the consensus estimate of $4.1 billion. CEO Steve Voorhees commented, “The WestRock team performed well and delivered a strong second quarter. With our acquisition of Plymouth and the agreement to acquire KapStone, we are further strengthening our capabilities and solutions offerings for our customers. Paper and packaging markets remain attractive and, with the momentum that we have across our businesses, we expect to exceed our previously announced financial goals for fiscal 2018. As a result, we have raised our guidance for annual sales and EBITDA.” Sadly, the stock sold off in response, taking the stock down to levels it hadn’t seen since last November. But Crista remains resolute; in her latest update, she wrote, “Consensus earnings estimates have been gradually increasing almost weekly for four straight months. Analysts now expect full-year EPS to increase 54.6% and 15.3% in 2018 and 2019. The corresponding P/Es are 15.0 and 13.0. Last week, WRK came down to the bottom of its 2018 trading range near 60, and it’s not yet ready to rebound. There’s 18% upside as the stock gradually retraces its January high at 70.” HOLD.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has just completed a normal pullback in its long uptrend. But all eyes are on first-quarter results, which will be released May 3. Assuming the stock reacts well, you can continue to buy. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED MAY 8, 2018
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