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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 204

One of the minor predictable patterns that the stock market has developed over the years involves the days before and after holidays (like the Fourth of July). Basically, stocks do a little bit better on those days, but the pattern is neither big enough nor dependable enough to make money on. Still it’s worth keeping in mind as you watch the action of stocks this week.

Cabot Stock of the Week 204

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Three weeks ago the market was hitting new highs and investors were giddy over their profits. But since then we’ve been through a sharp selloff, colored by fears of tariffs, recession and more. So far, however, this looks like nothing more than a normal correction—which could easily go further. In any event, my goal remains the same: build and maintain a diverse portfolio of stocks with good risk-reward prospects by cherry-picking the recommendations of Cabot analysts and continually weeding out those that don’t perform as expected.

Today’s stock is a solid dividend-payer with modest growth prospects as well. It was originally recommended in Cabot Dividend Investor by Chloe Lutts Jensen and here are Chloe’s latest thoughts.
McGrath RentCorp (MGRC)

McGrath RentCorp was founded in San Leandro, California, in 1979 to rent modular buildings. You’ve probably been in a modular building: they’re an increasingly popular and practical solution for organizations that need more space. McGrath’s offerings include classrooms, sales offices, mobile bathrooms, construction trailers, medical clinics, and many more types of buildings.

From its humble beginnings McGrath has grown quickly, listing on the Nasdaq just five years after it was founded. A series of acquisitions in the ’80s and ’90s expanded the company’s geographic reach and added electronic test equipment to its rental offerings. In the 2000s, McGrath acquired New Jersey-based Adler Tank Rentals, which rents containers used for temporarily storing liquids or solids (including hazardous materials) that are commonly used at airports, construction sites, oil fields, disaster cleanup zones and more. And in 2008, McGrath added portable storage containers to it rental lineup—they can be used for storing everything from files to retail merchandise.

While containment tank and electronic equipment rentals tend to be fairly short-term, modular building rentals are generally longer-term and add predictability to revenues. Revenues have grown consistently almost every year since 1984, with temporary pullbacks during the last two recessions. Over the last five years, EPS have risen by an average of about 5% per year. And last year, EPS grew 33% (ignoring a huge non-cash benefit from the new tax law passed in the fourth quarter.)

This year is off to a great start as well. In May McGrath reported first quarter EPS growth of 79%, beating estimates by 26%. (At their higher 2017 tax rate, EPS still would have risen 45% year-over-year.) Revenues rose 11% to $105.09 million, beating estimates by $5.17 million.

For the full year, analysts are currently forecasting 3% revenue growth and 34% EPS growth. Over the next five years, EPS are expected to grow by about 14% per year, on average.

McGrath’s stable growth makes it a great dividend payer. The company started paying a dividend in 1990, and has increased the dividend every year for the past 25 years. The dividend increases have been slow and steady, with the boosts averaging 7% over the past five years. However, management just handed investors a huge 31% dividend increase in February, funded in part by the company’s big tax cut. McGrath’s payout ratio, which tells you how easily the company can afford its dividend payments, is still a very reasonable 50%.

Finally, looking at the chart, now looks like a great time to start a position in MGRC. The stock has been in a steady uptrend since gapping up on an earnings beat in August 2017, well supported by its 50-day and 200-day moving averages. MGRC behaved well during the broad market correction earlier this year, then broke out to a new all-time high on unusually high volume in April. A week later came the first quarter earnings beat, and the stock spent the next five weeks marching higher. After closing at an all-time high of 67.60 on June 6, MGRC started a normal pullback that has brought the stock just down to its 50-day moving average, providing an excellent buying opportunity.

As a 25-year dividend grower still boasting solid earnings growth, McGrath strikes the perfect balance between offensive and defensive. Investors interested in reliable dividends and steady growth will find a lot to like here, especially since McGrath flies blissfully under the radar and is generally unaffected by today’s big news stories.

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McGrath RentCorp (MGRC)
5700 Las Positas Road
Livermore, CA 94551
925-606-9200
http://www.mgrc.com

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CURRENT RECOMMENDATIONS

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As a whole, the portfolio is doing well, with the majority of stocks behaving normally during the recent wave of selling and some (AAXN, WTW) building impressive bases that are likely to lead to new advances. However, with the addition of MGRC to the portfolio, the number of stocks hits 21, which is higher than my limit of 20, so at least one stock needs to be sold. One contender for sale is the biggest loser, PAGS, but it looks like it’s sitting at a bottom so I’m going to hold on longer, hoping for a bounce. Instead, I recommend selling recent addition GIII, which gapped down yesterday (a sign of a vacuum of buying power) and is thus likely to be out of action for a while. Details below.

Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is the leading purveyor of Chinese automobile information to both buyers and sellers, with great long-term growth prospects. But the stock has been dragged down in recent weeks by the weakness in Chinese stocks. In his latest update, Paul wrote, “After remaining mostly above its 50-day line all year, the stock plunged through that support on heavy volume [last Wednesday]. That said, we’re not throwing in the towel here, as ATHM’s story is excellent, the long-term trend is firmly up and the recent pullback, while unpleasant, isn’t abnormal. If you own some, hold on.” HOLD.

Axon Enterprise (AAXN) originally recommended by Mike Cintolo of Cabot Growth Investor, has excellent long-term growth prospects as the owner of the law enforcement video cloud storage site, Evidence.com. I downgraded the stock to hold on June 10, after it gapped down off its record high, but the stock has traded calmly since then, telling us that any selling pressures (profit-taking) are being balanced by the buying pressures of investors just learning about the company (or learning about the new focus of the company that used to be called Taser). If you don’t own it, you could buy a little now, taking the chance that the stock won’t fall further (the 50-day moving average is down at 58). Officially, though, I’ll stick with Hold and look for a slightly better entry point. HOLD.

BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, and later recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has pulled back to its lows of April, and in the process met up with its 200-day moving average, so support here appears solid. In her latest update, Chloe wrote “BBT bottomed around 51 multiple times in the first quarter, and is just about to meet with its 200-day moving average for the first time since November. If support fails, I’ll sell. If it holds, I expect BBT to continue trading between about 51 and 56 for the time being. Long-term investors can probably nibble when the stock is in the lower half of that range, although I’ll keep the BBT on Hold as long as momentum stays primarily sideways. Long-term, earnings estimates are firm, and looser regulations mean BB&T is freer to make acquisitions, buy back stock and raise its dividend. BBT will report second-quarter results July 19, before the open.”

Then, just today, Crista wrote, “As a result of the Federal Reserve’s annual Comprehensive Capital Analysis and Review (CCAR), its Board of Governors accepted BB&T’s capital plan. BB&T plans to raise its third-quarter dividend by 3 cents to 40.5 cents per share, an 8% increase, after a vote by its board of directors on July 24. The company also intends to repurchase $1.7 billion of its stock, some of which will be used in the Regions Insurance Group acquisition. In review, BB&T declared an extra dividend this year in March, raised the second quarter dividend, and will now raise the third quarter dividend. The new annual payout will be $1.62 and the current yield is 3.2%. Analysts expect full-year EPS to grow 43.7% and 8.2% in 2018 and 2019. Corresponding P/Es are 12.6 and 11.6. I’m not worried about the stock, although it’s not yet ready to rebound to its 2018 high of 56.” HOLD.

Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, looks fine. In her latest update, Chloe noted, “Broadridge is a steady grower that has increased its dividend every year for 10 years. Trending up nicely just above its 50-day moving average, BR is a good Buy for dividend growth right here.” BUY.

DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, and featured here last week, is building a mini-base between 65 and 67 and can be bought here. In today’s update, Crista wrote, “The Dow Chemical Company (DOW) and E.I. du Pont de Nemours & Company (DD) finalized their merger on August 31, 2017, forming DowDuPont, which is comprised of three divisions: Agriculture, Materials Science and Specialty Products. DowDuPont intends to separate these divisions into three publicly traded companies in 2019. It’s likely that the three stocks will be worth more than today’s DWDP share price.” BUY.

Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small Cap Confidential, recorded eight consecutive up days in June as it ran up to record highs and then declined for nine consecutive days before bouncing strongly off its 50-day moving average last Thursday. And that’s not unusual for a small-cap stock! In his latest update (last week), Tyler wrote, EVBG sells cloud-based critical communications software that help keep people safe and businesses running. Earlier in the month a number of analysts upgraded price targets to the high 50s and given the strength of yesterday’s bounce off the 50-day line I suspect the selloff is mostly over. That said, until things settle down the prudent thing to do is give Everbridge a little space, so I’ll keep at hold for now. This week management announced the integration of its IT Alerting solution with Ayehu, a leading provider of intelligent automation and orchestration powered by artificial intelligence (AI). I’m not familiar with Ayehu, but I have commented a number of times in recent months that Everbridge is making a more concentrated push to grow its IT Alerting service, and this is more evidence of that initiative.” My own Buy rating stands—for investors who can handle the volatility. BUY.

G-III Apparel Group (GIII), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here just two weeks ago, gapped down yesterday through the gap up that was created a month ago, thus creating an “island reversal” which is not a healthy pattern. I’m not usually this quick on the trigger, but looking at all my stocks, GIII looks like it could continue lower or at least have some issues rallying for a while. Sell and take the small loss here. SELL.

Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, bounced off 71 (where it also bottomed in late May) last Thursday, and has already recovered half the loss from its June high. Also, volume clues are very positive. As the world’s largest issuer of prepaid debit cards (by market capitalization) as well as the company with the platform behind Apple Pay Cash and Uber and Intuit, the company is a growing piece of the cashless economy. BUY.

Huazhu Group Limited (HTHT) (previously known as China Lodging Group) was originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and now it’s one of the Heritage Stocks in this portfolio, 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 that’s what we’re doing now. From April through mid-June, the stock was hot, running from 31 up to nearly 50, but then the correction in Chinese stocks (as well as normal profit-taking) pulled it down, and now it’s given up half that gain—which might be enough. But more time is likely needed before the stock can resume its uptrend. HOLD.

iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is best understood as “the Netflix of China,” which is not to say that there is no competition—there is plenty—but that iQIYI’s status as a spinoff from giant Baidu gave it a huge advantage in the industry. In his latest update, Paul wrote, “IQ has come back down to earth like every Chinese stock. Our thoughts here are twofold: First, after a huge run and steep, big-volume correction, IQ likely needs time to consolidate at the very least. But second, we can’t say the decline is abnormal considering the overall advance. Long story short, we’re going to hang onto our position in IQ here, giving it a chance to bottom and build a new launching pad. We will downgrade the stock to Hold, though, to respect the recent action and our market timing [Chinese stocks being negative].” I agree, and I’ll add that the buying volume of IQ in recent days has been very light, increasing the probability that the stock might fall further. HOLD.

PagSeguro (PAGS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is our Brazilian digital payments play, and so far, it’s not working out. In fact Paul, whose portfolio owns only stocks in emerging markets (which have been performing rather poorly), sold his as a way to raise cash. But I’m giving the stock a little more rope, in part because my portfolio is very diversified, so I can tolerate the risk from this one Brazilian stock, and in part because there’s some pretty good chart support right here, which is where the stock bottomed after it came public in January. If the stock weakens substantially further, I’ll sell, but for now, the rebound potential is significant enough to justify holding. HOLD.

PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, peaked above 87 less than two weeks ago, fell to its 50-day moving average near 80 last Wednesday, and has already regained half the lost ground. Thus, the long-term uptrend remains intact, though the stock could easily pull back again if the market weakens. In last week’s update, Mike wrote, “Fundamentally, we read this week about Venmo’s (which is PayPal’s peer-to-peer payment service and the most popular in the industry) increasing monetization via online shopping; more than two million merchants, including big boys like Walmart, Target and Lululemon, now accept payments from Venmo accounts—and PayPal gets a cut of each transaction. Venmo also just launched a MasterCard debit card for consumers. Venmo should help PayPal retain its lead in the mega-trend toward online payments and money transfers. We’re going to stay on Buy, though you should keep new positions small.” BUY.

PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth portfolio, bounced off a very solid bottom at 28 last week, and according to Crista, will eventually get back to its old high at 35. In her latest update, she wrote, “Pulte Group is a U.S. homebuilder and a very undervalued growth stock. Consensus earnings estimates reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 8.7 and 7.7. There’s uniformity among homebuilders in both very strong revenue and profit growth, and stock trading patterns. Both KB Home (KBH) and Lennar (LEN) reported strong quarterly results last week. The industry is rife with cheap stocks, low within their trading ranges, but not yet ready to run back up to recent highs. The stock is at the bottom of a solid trading range, where it tends to bounce and reverse direction immediately. There’s 21% upside as PHM travels back to its January peak at 35.” HOLD.

STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, remains the strongest stock in the portfolio, hitting another new high today. In her latest update, Chloe wrote, “After bouncing off its 200-day moving average last week, the stock hit its highest level since January 2 yesterday. STAG is a REIT benefitting from moderation in Treasury yields and a flight to safety. However, STAG is an industrial REIT—and is outperforming its peers nicely. A big chunk of STAG’s properties are warehouses used for distribution by e-commerce companies, which is a booming sector of the real estate market. 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 but since upgraded to her Growth Portfolio, hit a record high last Friday and has since pulled back on low volume to its 50-day moving average. In her latest update, Crista wrote, “Supernus focuses on the development and commercialization of products for the treatment of central nervous system diseases and psychiatric disorders, including epilepsy, migraine and ADHD. SUPN is an undervalued, small-cap stock with a high degree of institutional ownership. Analysts expect full-year EPS to grow 50% and 37.0% in 2018 and 2019. Corresponding P/Es are 31.7 and 23.1.”

Additionally, SUPN was a featured stock in Monday’s issue of Cabot Top Ten Trader, where Mike Cintolo wrote, “Maryland-based Supernus Pharmaceuticals is a drug company focused on central nervous system diseases with two marketable drugs and a pipeline with a couple of high-potential drugs. The company’s Trokendi XR, an extended-release treatment for migraines, and Oxtellar XR, an extended release treatment for epilepsy, both of which launched in 2013, have made the company solidly profitable, with revenue up 46% in 2016, 41% in 2017 and jumping 57% higher in Q1. The company has two important drugs in its pipeline: SPN-810, a treatment for Impulsive Aggression in ADHD (a condition for which there are no approved products), and SON 812, a treatment for ADHD, both of which are in Phase III trials. Also in Phase III trials is an additional indication for Oxtellar XR and SPN-809, a depression treatment that is in development and is Phase II ready. Supernus, which has made three previous appearances in Top Ten, is driven by news from clinical trials and by increases in the annual prescriptions written for Trokendi and Oxtellar, which have enjoyed a combined annual growth rate of 110% since their introduction in 2013. The combined target markets for the two drugs is $13.4 billion, with some analysts seeing a peak market share of 8% for the two drugs’ use against epilepsy and migraine and 5% for Oxtellar’s use against bipolar conditions. This is a healthy drug company with excellent upside potential.” BUY.

Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, is the hands-down leader in telemedicine, an industry that should grow massively in the years ahead. Earnings are still in the red, but the stock just got going from a huge consolidation in early May and remains in an uptrend today. And TDOC, like SUPN, was featured in Cabot Top Ten Trader yesterday. Here’s what Mike wrote: “We frequently like companies that are leaders in an entirely new industry—ones that didn’t exist a few years ago—and Teladoc is one of them. The company is the clear leader in the telemedicine (sometimes called virtual care) sector, which is transforming how people access health care. The company’s members (20.8 million as of Q1, up 41% from a year ago) can call or videoconference one of many thousands of doctors that are aligned with Teladoc in a variety of specialties (everything from behavioral health to dermatology to HIV to normal colds or flus) to get prescriptions and treatment options. For big customers (more than 300 of the Fortune 1000 have signed up), that means less sick time for employees, who gain a clear benefit, too. (The firm has deals with most big health plans and more than 200 hospitals, so clients have access to everything they need.) Teladoc continues to expand its offerings and cement its #1 position in the sector, mostly via acquisition—the company recently announced the purchase of Advance Medical, for instance, which is the leading virtual care provider outside the U.S.! In the first quarter, total “visits” rose 57% to 606,000, while revenues (mostly from subscription fees, but also per-visit fees) boomed 109% and organic revenue (ex-acquisitions) lifted 47%. With everyone looking to cut health care costs (both time and money), virtual care should have a bright future, and Teladoc is the leader.” Interestingly, I downgraded the stock to hold way back on June 5th, thinking it was extended, but the stock climbed eight points higher—and even after the market’s wobbles, it remains higher today. I’ll follow Mike’s lead and upgrade to Buy. 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. The stock has pulled back to the confluence of all three of its major moving averages, so this is a decent place to buy if you don’t own it. But realistically, your odds are better in stocks that are less famous, like SUPN or TDOC or EVBG. HOLD.

TiVo (TIVO), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio, continues to base in the 13-15 range. In her latest update, Crista wrote, “TiVo is an entertainment technology company that joined the Buy Low Opportunities Portfolio specifically because it’s a takeover target. The company is interested in being acquired or going private because the shares are so undervalued. TiVo intends to complete the process of its strategic review by the time second quarter results are reported in early August. The share price traveled lower last week. Fortunately, TIVO does not sit still. I therefore expect the stock to promptly head back toward 15 while we await M&A news, as which time I expect a significant surge in the share price. Expect volatility. Buy TIVO now.” BUY.

Weight Watchers International (WTW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to trade tightly at the psychologically important level of 100, and just below its high of 105 two weeks ago. If you haven’t bought yet, you can buy here. There’s no selling pressure. BUY.

Zillow (Z), originally recommended by Mike Cintolo of Cabot Growth Investor, fell through its 25-day moving average last Thursday in the weak market, but bounced off its 50-day moving average the next day and is higher now. Long-term prospects remain great for the company as it leads the market for online resources about the housing market, but short-term, there’s a tug-of-war going on between those who believe factors like higher interest rates and higher lumber prices will hurt the housing market and those who think the good times will last longer. HOLD.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JULY 10, 2018

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