The past week was one of the most fun in a while! But you can’t rest on your laurels in this business; just when you start to congratulate yourself is when the market comes around to slap you down. Today I’m dialing back the risk a bit with a conservative growth stock that you almost certainly know, and which is at a decent buying point.
Cabot Stock of the Week 197
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After establishing three bottoms over a three-month period—with each bottom higher than the last—the broad market blasted higher last week, turning our intermediate-term market timing indicator positive again. Part of the strength, no doubt, was the result of great earnings reports, but part, I believe, came simply from time. After a three-month pause, the market had cooled off enough and was ready to resume its uptrend. So now our major trend-following indicators are both positive, and that means you can invest freely, confident that the market’s trend will assist, rather than hinder, your efforts.
So what stock am I recommending this week? Interestingly enough, I’m going for a conservative growth stock, mainly because my previous two recommendations (aggressive growth stocks) have enjoyed such quick success that I fear there may a brief retreat this week. Of course, I may be wrong. In any case, I am focused on diversification as much as ever. The stock was recently recommended by Mike Cintolo in Cabot Growth Investor.
Zillow (Z)
Zillow is the world’s largest online organizer of real estate information, with data on more than 110 million homes in the U.S.
Some of these homes are for sale, some are for rent, and many are listed just for comparison. And the data is free to people like you and me!
Zillow gets its money from real estate agents, who have found over the past decade that if they don’t pay Zillow to get their homes shown to house-hunters, they miss out on a lot of valuable leads. And the business, now 14 years old, is still growing fast.
In 2015, Zillow acquired its biggest rival, Trulia, and revenues grew 98% to $645 million. In 2016, they shot ahead another 31% to $847 million. And in 2017 they grew 27%, to $1.08 billion. So growth is not a problem here—though it is slowing.
As for earnings, growth has been less consistent, because of investments. But analysts’ consensus is that earnings will grow 62% in 2018 and 38% in 2019. (In the first quarter of 2018, revenues grew 22% while earnings decreased 36%).
And management still has lots of new ideas! Last May, Zillow introduced a pilot service named Instant Offers in Las Vegas and Orlando. Using Instant Offers, a homeowner looking to sell could get all-cash offers from a hand-selected group of large private investors.
After receiving the offer(s), the homeowner had three choices.
1. Accept an offer and sell directly to an investor
2. Accept an offer and use an agent to manage and close the transaction
3. Reject the offers and list the property on the MLS with an agent.
The results of the first year of testing showed that the vast majority of sellers wound up selling their home with an agent, making Instant Offers an excellent source of seller leads for Premier Agents and brokerage partners.
So last month, Zillow announced not only that it was expanding the program to the Phoenix area, but also that Zillow would join in as a potential buyer (and seller) of homes.
THE CHART
Zillow came public at 20 in July 2011, and topped 60 in its first week. But six months later it was back down to 21.
In the three years that followed, the stock trended generally higher (sometimes with high volatility), peaking at 57 in July 2014 on news of the possible Trulia merger. But the year that followed wasn’t kind to Zillow, as the stock dipped all the way to 16 in early 2016.
Since then, however, the stock has been trending generally higher, working at getting back to those old highs. And it did succeed this March, briefly hitting 60. But then the weight of the market correction pulled it down to the low 50s—and the announcement that Zillow was getting into the home buying and selling business brought it down to the high 40s.
Then, over the past two weeks, the stock rallied strongly, touching 57 on the day after earnings were announced (May 7) and pulling back normally over the past week. Short-term, it’s possible this correction could go a little longer—you might be able to buy at 50, for example. But long-term, the trend is up, and I believe it’s only a matter of time before Z breaks through that old high at 60.
Zillow (Z)
1301 Second Avenue
Floor 31
Seattle, WA 98101
206-470-7000
www.zillowgroup.com
CURRENT RECOMMENDATIONS
One of the truisms of investing is that the greater your profit in a stock, the greater your attachment to it. And the longer you have owned a stock, the greater your attachment to it.
These feelings, illogical as they are, can help or hurt your performance; there are no certainties in investing. But if you can succeed, at least, in recognizing them, you can attempt to use reason to counteract them. Today in this portfolio, for example, we have two Heritage Stocks, China Lodging (HTHT) and Tesla (TSLA), which have been held for years and will (hopefully) be held years longer; one is breaking out to a new high and one is stuck in neutral. And then we have Planet Fitness (PLNT), with a tidy 60%-plus profit, which asks today how strong our commitment is. The answer: not very.
AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has been climbing higher and higher since releasing an excellent earnings report three weeks ago, and if you still haven’t bought, it might be wise to wait for the next correction. In her latest update, Chloe wrote, “The stock’s 200-day moving average, which provided support in February, is rising and is now around 24. 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 still a hold. In her latest update, Crista wrote, “Analysts expect Alphabet’s EPS to grow 37.6% and 7.0% in 2018 and 2019. I plan to sell GOOGL at the top of its steady trading range near 1,190 because the stock is quite overvalued based on 2019 earnings projections.” HOLD.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, broke out to new highs two days after releasing an excellent earnings report last week and hit another high yesterday! In his latest update, Paul wrote, “Analysts see earnings up 26% and 22% during the next two years (respectively), and there’s little doubt this growth story is continuing. If you own some, hang on, and if not, you can start a position here or on dips of a couple of points.” BUY.
Axon Enterprise (AAXN) originally recommended by Mike Cintolo of Cabot Growth Investor, blew away analysts’ expectations last week by announcing quarterly revenue of $101 million (they expected $90 million) and EPS of $0.24 when analysts had expected a loss. While Taser weapons continue to sell well, the excitement is all about the firm’s shift to a recurring revenue model by selling cameras (both body and in-car) to police departments and then preserving the resulting video in a cloud storage area (Evidence.com) and charging for the privilege. In the quarter, total backlog for software and sensors hit $570 million, and there was $83.3 million of annualized recurring revenue from the segment. Also, 93% of the net contracts signed were multiyear agreements. 25,400 new Evidence.com seats were booked in the quarter, and there was a total of 226,900 cumulative seats booked at the end of the quarter. The pace of bookings was the strongest in the company’s history. Additionally, Axon announced the acquisition of VIEVU, one of Axon’s biggest competitors in the body camera market. As part of the deal, Axon will gain five major city customers, including New York City and Miami-Dade. Since the report, the stock is up 20%, and if you want to take a quick profit here, that’s fine, but I’m going to try to stick around for the long run. Optionally (excuse the pun), you can buy options on the stock by following the guidance of Cabot’s options expert, Jacob Mintz. Jacob took a profit of 175% on AAXN calls last week! 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, is working to break out to a new high and leave behind its three-month trading range that dates back to January. Chloe (more focused on dividends) continues to rate it a Hold for Dividend Growth investors, while Crista notes, “Analysts expect full-year EPS to grow 43.7% and 8.2 % in 2018 and 2019, with corresponding P/Es of 13.7 and 12.7. In the next few months, I will likely sell BBT in favor of a financial stock with more aggressive 2019 earnings growth prospects.” Hold for now. HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, enjoyed three very strong days last week after its earnings report and is now in the process of consolidating those gains. In her latest update, Chloe noted, “Management raised their 2018 EPS guidance, and is now expecting EPS to rise 31% to 35% for the full year, up from the previous range of 27%-31%. This is BR’s second breakout past 110 in two months, but the stock has better support from its 50-day moving average this time (and volume was higher).” 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. And I did sit through a sharp selloff in March that was erased as the stock resumed its uptrend in April and accelerated higher in May. And then today the stock broke out to new highs on the heels of a superb first-quarter earnings report! Revenues grew 29.6% from the year before to $333 million, exceeding the higher end of management’s guidance. Adjusted EBITDA increased 47.5% from the year before to $89.2 million. As of March 31, 2018, the Company had 673 leased hotels, 2,943 manachised hotels, and 201 franchised hotels in operation in 382 cities. The number of hotel rooms in operation totaled 384,959, an increase of 14.6% from a year ago. Looking forward, management provided guidance for Q2 2018 net revenue growth of 24%-26% year over year, and revised upward full-year net revenue growth estimate ranges from 16%-19% to 18%-22%. HOLD.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small-Cap Confidential, had a nice run last week following a good Q1 earnings report, and has pulled back just a bit this week. In his latest update, Tyler noted, “The quarter was highlighted by 49% of revenue coming from new products (other than the core Mass Notification solution), 100 new customers (up to 3,811), more multi-product deals, and 19 six-figure, or larger, deals. Guidance for 2018 implies 30% revenue growth but the conference call left the door open for accelerating growth. This story appears to be getting better and better and, as I’ve stated before, I won’t be surprised if we see more states jumping on board with Everbridge for state-wide deployments. As the company grows in scale the sales pitch likely gets easier given the benefits to users who can rely on one platform across city, state and even country borders.” BUY.
iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, and featured here last week, is off to a great start, and if you’re inclined to take some quick profits, that’s not a terrible idea; odds of a pullback are good. But I’m sitting pat because the fundamental developments of last week mean the future is even brighter for iQIYI, which we might call the Netflix of China. In brief, there’s a new online partnership with retail giant JD.com; the company now has 61 million paying subscribers, up from 51 million at the end of 2017; and its digital rights management system was approved by China DRM Lab, which will make it easier to secure high-value content in the future. If you don’t own it (and you can handle volatility!), you can consider buying some as this correction unfolds. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has had a good run over the past two weeks but long-term, remains in a correction, with the current boundaries (perhaps) being the 200-day moving average (now at 73), and the stock’s old January high of 86. In his latest update, Mike wrote, “We’ve written about the overblown fears of competition many times (the digital payments industry is enormous and growing, there’s room for a few players and PayPal is definitely one of the leaders with 237 million active accounts, including 19 million merchant accounts)…That said, we’re still handling our position in a fairly robotic way—if the stock closes below 71 or thereabouts, we’ll likely sell because the stock’s long-term uptrend would be in question. But above that level, we’re holding on and think PYPL can do very well once it finishes up its correction.” HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, released a mixed earnings report last week; revenues grew to $121 million, beating estimates 0f $113, but earnings were only $0.23 per share, missing the estimate of $0.26. In response, the stock sold off sharply, but it’s rebounded (partially) since, and now the question is whether to stick with it or take our profit and move along. After some deliberation, my choice is to sell. PLNT has had a great run since we bought last August, which means the stock could be in for an extended period of underperformance. Furthermore, much as I like the cookie-cutter business model, the company offers nothing revolutionary; there is no moat. SELL.
PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor, continues to work its way up from its February-March-April bottom, and the current retreat should find support at the 200-day moving average. In her latest report, Crista wrote, “Consensus earnings estimates reflect 60.2% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 9.5 and 8.4. Buy PHM now for 11% 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, climbed for eight consecutive days—which included an earnings announcement in the middle of the run—and is now on a normal pullback. In her latest update, Chloe wrote, “The industry is healthy, management said on Wednesday’s call: tenants are signing longer leases and rents are rising. While most demand is still driven by population and economic growth, e-commerce is providing a nice tailwind, with 35% of STAG’s buildings now tied to e-commerce. High-yield investors can buy some here.” BUY.
Supernus (SUPN), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio, and featured here last week, is off to a fine start! And it’s so fine that I’ll repeat what I wrote above relative to AAXN and IQ; if you’re inclined to take some profit here, go ahead! I like to keep it simple in this portfolio, so I’m holding. In her latest updates, Crista wrote, “Supernus reported first-quarter earnings per share of $0.49 when the market was expecting $0.33. Revenue of $90.4 million surpassed the $80.0 million consensus estimate. The company is on a strong growth trajectory due to the successes of its two marketable prescriptions: Trokendi XR® and Oxtellar XR® that treat partial seizures and migraine. The FDA will decide on an expanded label indication for Oxtellar XR® before year-end. Supernus is also in the midst of several Phase III drug trials, exploring potential treatments for ADHD and bipolar disorder. Phase III trial results are currently expected in the first quarter of 2019.
“Since SUPN is still a very undervalued aggressive growth stock [but no longer a Buy-Low Opportunity], I’m moving it to the Growth Portfolio…The stock is likely to be volatile in the coming days, possibly bouncing down below 50…Traders might want to sell, and then repurchase below 50. Shareholders who don’t like to trade should feel confident in Supernus’ strong earnings growth projections and bullish price chart. I don’t want to change the rating back and forth between Strong Buy and Hold, depending on the day’s price fluctuations, so I’m going to change it to Buy, and encourage you to consider adding more shares on any pullback to 50.” BUY.
TD Ameritrade (AMTD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has hit resistance in the 62 region three times over the past three months, with yesterday being the most recent. In the meantime, the stock’s 25-and 50-day moving averages (both now around 59.50) are approaching to lend support. 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. As for the stock itself, odds are good for a breakout above 62—in time. HOLD.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, has advanced for eight consecutive days, with buyers encouraged by the latest earnings report. But volume on the advance is dwindling, so eventually there will be a pause. If you’ve got it, hang on tight (or take some profits if you’re so inclined). If you don’t own yet—the growth story is impressive—look to get in on a normal correction. 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, as bulls and bears argue about whether the company—currently valued at more than Ford Motor—is headed for success or failure. Remember, to amass long-term gains, you need to sit patiently through some challenging periods—and you always get the worst news at the bottom. HOLD.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has climbed strongly over the past two weeks but we still have a small loss. Still, 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 expected to close in the early fall. Analysts expect full-year EPS to increase 53.8% and 16.1% in 2018 and 2019. The corresponding P/Es are low in comparison at 15.1 and 13.0. The share price suffered in late May and has begun its rebound. There’s 14% upside as the stock gradually retraces its January high at 70.” HOLD.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, blasted higher on big volume after its earnings report two weeks ago, breaking out to new highs. And now it’s corrected normally, right down to its 25-day moving average. If you don’t own it yet—and maybe you like wings—this is your opportunity. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED MAY 22, 2018
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