Cabot Stock of the Week 196

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Cabot’s intermediate-term market timing indicator has swung back to the positive side, lending a bit of ammunition to the bulls, but a look at the bigger picture reveals that the market remains in the sideways trading pattern that has defined it since the market’s initial selloff at the start of February. Such trading patterns are not uncommon, and nimble traders can take advantage of them to make money with short-term bets. But for our longer-term commitments (of at least a couple of weeks), the best way to use them is to identify optimum buying points for new stocks.

Which brings me to today’s stock. Just last week, when I sold BHGE for a profit of 33% after just two months of holding, I told you I would try to recommend another of Crista Huff’s Buy-Low Opportunities soon. And that’s where today’s stock came from. I’m not going to promise to duplicate the feat, but I do like the risk-reward relationship at this time—even given the added wild card of the earnings report that comes out after today’s market close. Here are Crista’s latest thoughts on the stock.
Supernus Pharmaceuticals (SUPN)

Supernus Pharmaceuticals (SUPN) focuses on the development and commercialization of products for the treatment of central nervous system diseases and psychiatric disorders. Products include Oxtellar XR and Trokendi XR, and several pipeline products that are currently in Phase III trials.

Oxtellar XR is a once-a-day medication for the treatment of epilepsy. Supernus is also enrolling patients in trials for Oxtellar XR as a potential therapy for bipolar disorder. Trokendi XR is a once-a-day medication for the treatment of partial seizures and for migraine. Supernus launched Trokendi XR for the treatment of migraine in 2017, leading to strong fourth quarter 2017 results that exceeded analysts’ expectations.

The research pipeline includes SPN-810 and SPN-812, which are in Phase III clinical development. SPN-810 research concentrates on controlling impulsive aggression in pediatric patients who have ADHD. Additional trials are in place for adolescent patients. Results from the pediatric trials are expected in the first quarter of 2019. SPN-812 is a novel non-stimulant for the treatment of ADHD, with Phase III results due in the first quarter of 2019.

Both revenue and earnings per share (EPS) are on strong annual growth trajectories. The company expanded its sales force in the fourth quarter of 2017, which should contribute to 2018 revenue and profit growth. Supernus is expected to report first quarter results of $0.33 per share this afternoon, within a range of $0.20 and $0.45. Quarterly revenue is expected to be $85.3 million, within a range of $71.3 million to $92.2 million. The company far surpassed profit estimates in the fourth quarter of 2018, so let’s hope for a replay of that bullish result in the first quarter.

Wall Street expects full-year revenue to increase from $302.2 million in 2017 to $398.5 million in 2018. Analysts expect full-year EPS to grow 47.6% and 43.5% in 2018 and 2019, with continued aggressive growth in subsequent years. The corresponding P/Es are relatively low at 24.2 and 16.9. The company has very little debt on its balance sheet.

Supernus is a small company with a $2.4 billion market cap, and a classic buyout candidate. The vast majority of shares are held by professional investors such as mutual funds and pension funds. Big companies often seek to acquire small, successful companies for myriad reasons, including boosting the bigger companies’ net incomes and product offerings.

The share price quadrupled in 2016 and 2017, rising from 10 and peaking at 50 in September 2017. Any stock would naturally need to pull back and rest after such a run-up, and SUPN has since traded in a well-defined range between 36 and 50. While there might certainly be investors who worry that they missed the chance to buy at the recent lows, I believe it’s more important to focus on these three things:

The stock has navigated a price correction in the broader stock market while remaining within a predictable and steady trading range, and this trading pattern sets up SUPN for its next sustainable run-up.

Earnings growth isn’t expected to be aggressive for simply one or two years. Consensus estimates point to EPS growing between 34% and 48% in each of the next four years! Wall Street analysts generally won’t venture past 2019 with their earnings estimates, so you know that the future at Supernus Pharmaceuticals inspires tremendous confidence on Wall Street.

The current price/earnings ratio, which is only half the company’s earnings growth rate, continues to fall as we consider earnings projections for 2018 and beyond. Investors might worry about the broader stock market, politics or the economy, but the one thing they don’t need to concern themselves with is whether SUPN might be an overvalued stock.

SUPN is a great stock for investors who prefer aggressive growth and/or small-cap stocks, investors who concentrate in the biotech space and investors who want to own potential takeover targets. The stock climbed to 49 in recent weeks, and is now on a normal (9%) pullback. I believe SUPN has enough strength to break past 50 in the near term and to begin a new run-up to all-time highs. Strong Buy.

Tim’s note: If the Supernus story interests you, I recommend that you read today’s earnings report, and then watch how the stock opens tomorrow. If there’s something truly unexpected that changes my opinion, I will send a Special Bulletin. Otherwise, my general advice is this: if the stock reacts positively, feel free to jump right on board. If the stock reacts negatively, don’t buy immediately; wait a couple of days for selling pressures to fade, and then step in.
Supernus Pharmaceuticals (SUPN)
1550 East Gude Drive
Rockville, MD 20850
301-838-2500
http://www.supernus.com

CURRENT RECOMMENDATIONS

Bearing in mind that our goal is to maintain a diversified portfolio of stocks, from aggressive high-potential growth stocks to conservative low-risk dividend-payers, I am always on the lookout for holdings that aren’t living up to expectations. And given that the portfolio buys one new stock every week, and that I limit the portfolio to 20 stocks, there’s quite a revolving door effect, with some new arrivals lasting only a few weeks before they are escorted out in favor of better prospects. Today, it’s Insulet (PODD) that’s getting the boot, as we lock down a modest profit, and next week, who knows? As for your own portfolio, it’s up to you how you tailor my advice for your own circumstances, but I do strongly recommend (having seen a lot of portfolios laden with do-nothing stocks that have been held far too long) that you practice your own conscious program of weeding out the poorer prospects and replacing them with better ones.

AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, released an excellent earnings report two weeks ago that served to push the stock back above its 50-day moving average, and yesterday the stock broke out to new highs! Last week I covered the highlights of the report, but one item I missed was the distribution. Here’s Chloe’s comment. “Management also announced a second-quarter distribution of $0.73, which is 63% higher than the distribution paid in the second quarter of last year. AB’s distributions vary based on cash flow…Risk-tolerant investors can buy here for high yield, just remember that distributions don’t qualify for the lower dividend tax rate, and you’ll get a K-1 at tax time.” 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. HOLD.

Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, released its first quarter report this morning: Net revenues were $205 million, exceeding the high end of the Company’s original guidance of $199 million. Net revenues excluding direct vehicle sales achieved 32.6% year-over-year growth. And net income attributable to Autohome Inc. increased 47.5% year-over-year to $77.0 million. The number of average daily unique visitors who accessed the Company’s primary “Autohome” application reached 10.1 million, representing an increase of 34.5% compared with the first quarter of 2017, further strengthening the Company’s dominant position among auto vertical applications in China. The Company’s SaaS platform for used car dealers now covers over 35,000 dealers as of March 2018. This one-stop total solution offers many innovative services, including reliable used car sourcing, inventory management, customer relations management (“CRM”), online marketing and channel management, as well as a wider array of financing options that enable used car dealers to strengthen leads generation, increase sales and improve inventory turnover. And the company implemented the use of its Augmented Reality Automobile Show (the “AR Auto Show”) for the recent Beijing International Automobile Exhibition during April 25 to May 4, 2018, in order to enhance user engagement and interaction. The AR Auto Show attracted 21 branded automakers with over 100 automobile styles on display. This resulted in over 41 million unique visitors, with approximately 80% originating from tier 2 and below cities. In addition, the cumulative page views of the AR Auto Show totaled over 200 million. Commenting, CEO Min Lu stated, “During the first quarter of 2018, we continued to experience strong growth in all aspects of our businesses and exceeded our top line guidance. Our solid operational and financial performance reflects the successful execution of our key growth strategies, including stimulating overall quality traffic, expanding consumer audiences of our targeted groups such as the young generation, broadening and customizing content, increasing user loyalty, advancing big data technology, which all bode well to drive the growth of our core media and lead generation businesses as well as our new initiatives for auto-financing and data product suites. With a solid start to the year, I am confident in our ability to continue optimizing these four pillars of our business by leveraging Autohome’s preferred media channels, leading traffic generation, enhanced user engagement, and precise transaction matching, to further reinforce our strengths and competitive advantages as the leading online destination for automobile consumers in China.” The stock sold off modestly on the news but remains in a clear uptrend, so if you don’t own it yet, you can buy now. BUY.

Axon Enterprise (AAXN) originally recommended by Mike Cintolo of Cabot Growth Investor, will report first quarter results after the market close today, and there’s little doubt the results will be good—the stock’s strength in recent days is a clear omen—but will they be good enough to reward the recent buyers who pushed the stock up to this level? Time will tell. In any case, the fundamental story behind the company’s cloud-based digital evidence vault for law enforcement group remains very strong. As long as the stock doesn’t fall apart on the news you can buy. BUY.

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, continues to work its way back to 56, which marks the top of its three-month trading range. Chloe (more focused on dividends) is likely to hold if it gets there, while Crista (more focused on capital appreciation) may sell if she doesn’t see analysts ratchet up their earnings estimates. HOLD.

Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, reported fiscal third quarter results this morning, and the results were excellent, with total revenues growing 6% to $1.07 billion and adjusted earnings growing 45% to $1.00 per share. Rich Daly, Broadridge’s CEO, commented, “We are raising our fiscal year 2018 guidance for adjusted EPS growth to 31%-35% from 27%-31% and reaffirming our outlook for revenue growth and margin expansion. As we close out fiscal year 2018, we remain confident that Broadridge is on track to meet the three-year financial objectives we laid out at our Investor Day last December. Our discussions with clients remain very active, and the investments we have made over the past several years to strengthen our product line continue to position us well for future growth.” In response, the stock jumped up out of its base at 110, in the process sending our profit in the issue over the 50% level. This is certainly impressive for a nine-month investment in a dividend-paying stock, but it sets me thinking about the inevitable upcoming slower time for the stock—and eventually taking that profit and moving on. For now, I’ll hold. 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 is currently trading above all of its moving averages, which is very encouraging. First quarter results will be released May 14, after the market close. HOLD.

Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small Cap Confidential, broke out of its seven-week basing pattern last Friday on big volume, two trading days before the release of its first quarter report. Maybe somebody knew something? In any case, the report, released this morning, revealed excellent progress. Total revenue was $30.5 million, an increase of 34% compared to $22.8 million for the first quarter of 2017. (Analysts’ estimates were for growth of 31%.) Adjusted EBITDA was a loss of $1.8 million, compared to a loss of $2.3 million in the first quarter of 2017. Cash flow from operations was $7.5 million compared to $1.5 million for the first quarter of 2017. Free cash flow was $5.3 million compared to an outflow of $0.3 million for the first quarter of 2017. And the company ended the quarter with 3,811 global customers, up from 3,318 at the end of the first quarter of 2017.

CEO Jaime Ellertson commented, “Our first quarter results exceeded our guidance ranges for revenue and profitability,” said. “This strong performance was driven by the continued global adoption of Everbridge Mass Notification, the growing number and size of multi-product deals, highlighted by upgrades to our Critical Event Management platform, and continued success leveraging our global partner network.”

Ellertson continued, “We completed our acquisition of UMS in early April, significantly expanding our global footprint and bringing us capabilities to serve entire countries. We are optimistic that our growing product portfolio and broadening geographic reach will further enable us to extend our market leadership as we pursue the multi-billion-dollar opportunity ahead of us.”

In response, the stock continued higher this morning. If you haven’t bought yet, you could buy a little here (smaller than your usual amount) or you could wait for a pullback. BUY.

Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, did as expected; it broke out to the upside (and record-high territory) after last Thursday’s earnings report. But then it faltered, and ended down for the day—and it’s been sagging lower since. For the record, revenues grew 21% to $123.6 million (topping analysts’ estimates of $121.6 million), while the net loss was $0.11 per share, compared to a loss of $0.17 the year before (and topping analysts’ estimates of a loss of $0.19). And CEO Patrick Sullivan commented, “We have significantly expanded market access for Omnipod, made substantial progress on our innovation roadmap, and strengthened our global commercial footprint. We are building on last year’s momentum and look forward to another year of substantial growth and achieving positive operating income in 2018 for the first time in Insulet’s history.” So why is the stock down? I don’t have a simple answer. And neither does Mike Cintolo, who sold the stock from his portfolio several weeks ago. Part of me wants to hang on because I’m high on the firm’s tubeless insulin delivery technology, but another part of me says the stock knows more than I do (obviously) and that in a sector such as this, it may be wise to take our profit and move on. That’s what I’m going to do. SELL.

iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, and featured here last week, is a very young stock that came public in late March, peaked in mid-April, bottomed last Thursday and has been working its way back since. In his latest update, Paul wrote, “ the fundamentals here remain very enticing—in the first quarter, the firm’s revenues boomed 57% in local currency, led by a 67% surge in membership revenue for its various video offerings and a 52% hike in online advertising. And for Q2, management expects growth to continue (45% sales growth expected). The bottom line is still drenched in red, but this is the type of mass market idea and rapid growth that could attract a lot of big investors.” BUY.

PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, fell through its 200-day moving average after reporting earnings but came right back up on the same day, probably marking a nice buying opportunity. In his latest update, Mike wrote, “PYPL remains a great growth story, and Q1 results confirmed that the company has big potential as payments and money transfers go digital. Encouragingly, peer-to-peer volume rose 50% from a year ago, with Venmo itself rising 80%. The 2018 outlook was confirmed, and most analysts continue to see 20% to 25% annual growth for many years to come. The stock didn’t react much to the news, though one fairly recent pressure on the stock is the news that Amazon is developing a peer-to-peer payments system for its digital assistant, Alexa. In any case, we’re content to just follow our plan—as long as PYPL is above support in the 70 to 72 area, we’re content to hold on, but a break below there would call into question the stock’s overall uptrend. If you own some, hang on.” HOLD.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, will report first quarter results today after the market closes, and there’s little doubt that the results will be great; the stock hit a new high yesterday. Still, it’s investors’ reaction to the report that matters, and that we’ll see tomorrow. Assuming all is well, the stock stays on Buy. BUY.

PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor, continues to work its way up from the bottom it established at 28 in March. In her latest report, Crista 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, 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, reported first quarter earnings on May 1, and the stock climbed higher over the next four days, so you know investors were satisfied. As for the details, core FFO (funds from operations) of $0.43 per share met analysts’ estimates, and were up 5% year-over-year. Revenues rose 18% but missed estimates slightly. Operationally, the company acquired six buildings in the quarter, for $78.8 million, sold two buildings for $50.4 million, netting a gain of $22.7 million; achieved an occupancy rate of 94.7% on the total portfolio; and enjoyed retention rates of 83.2% for leases expiring in the quarter. Investors, looking ahead, are clearly optimistic, but the stock seems overextended to me here, so if you still don’t own it, I suggest you wait for a normal correction. BUY.

TD Ameritrade (AMTD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is once again above all its moving averages and closing in on its early March high of 62. Traditionally, we regard brokerage stocks as “bull-market stocks” and the fact that this stock still looks healthy is a good sign for the market as a whole. HOLD.

Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, not only released its first quarter earnings a week ago, it also raised $250 million (up from a proposed $225 million) by selling convertible notes that are due in 2025. Translation: demand for the stock is strong. Looking at the quarterly results: revenue was $89.6 million, up 109% from the year before; total visits from paid members were 554,000, up 44% from the year before; and adjusted EBITDA was a loss of $1.4 million, compared to a loss of $9.1 million the year before. CEO Jason Gorevic commented, “Teladoc is off to an excellent start in 2018, posting strong first quarter results across all key financial and operating metrics. I’m very pleased with our performance during the intense 2018 flu season, providing yet another proof point for the inevitability of virtual care as a critical component of the healthcare system. I’m more encouraged than ever by the tremendous market response to Teladoc’s comprehensive virtual care platform, further validating our multi-dimensional growth strategy.” 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 new high since last September. Furthermore, the high public profile of both the company and the stock means there’s a lot of open disagreement about what’s going to happen next, with opinions ranging from wild success to bankruptcy. As to reality, the company’s first quarter report, released last Wednesday, revealed that Model 3 production hit 2,270 cars per week in April for the 3rd straight week over 2,000, that the company had a cash balance of $2.7 billion at the end of Q1, that 2018 Capex projection was reduced from less than $3.4 billion to less than $3 billion, and that the company is expecting positive GAAP net income and positive cash flow in Q3 and Q4 2018. After the report, the stock gapped down, but the next day buyers stepped in, and as I write, the stock is right back where it was before the report. I’ll continue to hold long-term, but if you want to buy a stock that will work for you now, you should look elsewhere, to a less famous stock like TDOC. HOLD.

WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, sold off sharply after reporting first quarter earnings, and now we have a small loss, but Crista is sticking with the stock and so will I. Here’s Crista’s latest: “WestRock is a global packaging and container company. WestRock’s acquisition of Kapstone Paper and Packaging is expect to close in the early fall. WestRock 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.” 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 to its January high at 70.” HOLD.

Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had just completed a normal pullback to its 50-day moving average last week when it released an excellent first-quarter report. System-wide sales increased 20.4% to $313.0 million. System-wide restaurant count increased 12.2% to 1,157 global locations. Domestic same store sales increased 9.5%. Total revenue increased 11.9% to $37.4 million, beating analysts’ estimates of $35.6 million. And adjusted earnings increased 16.4% to $0.25 per diluted share, beating analysts’ estimates of $0.20. After the report, Chairman and CEO Charlie Morrison stated, “Our strong start in 2018 is another example of the strength of our model and the outstanding performance of our franchisees and team members. This gives us confidence in our ability to deliver 2018 results that are above our long-term targets.”

Morrison continued, “We remain focused on executing against our four growth strategies: building awareness of the Wingstop brand; innovating across our technological platforms; optimizing delivery in our three test markets as we build a foundation for a national delivery rollout; and developing Wingstop internationally. These efforts are proving successful in strengthening our ‘category of one’ brand and helping position Wingstop to become a top 10 global restaurant brand.”

In response, the stock blasted higher on big volume breaking out to new highs. If you haven’t bought yet, you can buy now, or wait for a correction of a few points. BUY.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED MAY 15, 2018

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