Eternal vigilance is the price of investment success. For us, that means continually adapting our portfolio so that it is best positioned to benefit from the stocks that can do well in today’s market.
Cabot Stock of the Week 205
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In six more months, the current bull market will be ten years old—but that doesn’t mean it needs to end. Yes, it is showing signs of aging, and the flattening yield curve is one more piece of evidence that a recession is likely somewhere ahead. But right now, there are still plenty of stocks with healthy trends and attractive valuations for the investor who is paying attention.
In recent weeks my recommendations have tended toward the low-risk end of the spectrum, as I waited for the latest correction to run its course. But now that it has done so, I’m swinging back to the higher-risk end of the spectrum with a small, fast-growing company that just came public last November. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader, and here are Mike’s latest thoughts.
Stitch Fix (SFIX)
Stitch Fix is listed as just another online retailer, but in reality it’s the leading player in an entirely new industry that’s sprung up during the past few years: Online personal styling, which offers a variety of benefits for users. Here’s how it works:
First, Stitch Fix collects about 85 data points about the customer via a 10-minute online survey. It’s not just about sizes and measurements; it also involves price points and what kind of clothing or accessories a person likes or already owns. That data is then input into the firm’s proprietary and predictive algorithm (run by more than 85 data scientists), which, combined with one of Stitch Fix’s 3,700 designers, selects and ships a few pieces of clothing or accessories (including both third-party brands and Stitch Fix’s own wares) to the user.
Once the customer gets the package (which the company calls a Fix), s/he has three days to try on and judge the clothes from the privacy of home. Users can keep (and pay for) or return as many of the items in the Fix as they want, and there is a $20 styling fee that is be applied to any items kept.
But even that fee can be worked around; Stitch Fix Style Pass allows a one-time annual $49 payment to substitute for the per-Fix $20 fee (shades of Amazon Prime). And customers can choose a variety of frequency options (on-demand, monthly, bi-monthly or quarterly) to fit their buying desires.
For the customer, the benefits are many, including time savings, having other people making fashion decisions (speaking for us men) or a cheap, easy way to get new apparel ideas.
The company’s biggest prospect for growth, of course, comes from adding users, and on that front Stitch Fix is doing great. At the end of April, the company had 2.7 million active customers, which was up 30% from a year ago. And the firm’s analysis shows that customers are increasing their purchases over time, as they’re satisfied with the service and eventually come to rely on the company to do some of their “shopping” for them.
Even with the solid growth from the company (sales went from $73 million in fiscal 2014, ending in July, to $977 million last year!), it’s just scratching the surface of its potential. Stitch Fix has been moving quickly into new categories over time, expanding its target market and trying to capture a larger share of its customers’ wallets. For example, the firm launched its Plus-size offering in February 2017, which management said is going well. And it just announced last month that it will launch a Kids segment that will go live before the back-to-school rush.
As the company has acquired more customers and gotten more and larger purchases from them, revenues have been on a steady upward track; the top line has expanded between 26% and 29% each of the past five quarters, with the latest report (last month) easily topping expectations. Earnings have been choppier, but what’s intriguing is that, because of low capital expenditures, free cash flow (cash flow from operations less spending on plant and equipment) totaled nearly $49 million during the past nine months, nearly twice net income.
All told, there’s big potential here. Yes, there will be competition, but Stitch Fix’s head start, brand name and mounds of data from customer purchases, returns and feedback all contribute to its ability to build a solid moat.
As for the stock, it came public last November, and like many IPOs, did well for a few weeks but then fell flat, falling from 30 in December to 18 in February and retesting that low in early June. But since then, SFIX has gone nuts. Shares exploded higher after the earnings report in early June, the first of three straight weeks of gigantic buying volume. And after pulling back for more than a week, shares ripped to new highs last Friday.
Tim’s note: When I chose this stock yesterday, the stock was beginning a correction that I hoped would bring it closer to its uptrending 25-day moving average, now approaching 27. If you’re looking to reduce risk a bit, that’s your target. But today the stock is higher still, so I’ll accept the risk that will come from buying at tomorrow’s average price. This is a young stock with no visible selling pressures, and thus the odds are that higher prices are ahead.
Stitch Fix (SFIX)
1 Montgomery Street
Suite 1500
San Francisco, CA 94104
415-882-7765
http://www.stitchfix.com
CURRENT RECOMMENDATIONS
Buying stocks is easy; when you buy you’re full of hope. But selling stocks can be difficult, particularly when it means accepting that things didn’t work out as planned. In fact, for many investors, selling losers is so difficult that they hold on and see losses of 50% or greater pile up, as these stocks become smaller and smaller parts of their portfolio. But not me. Today we say goodbye to PagSeguro (PAGS), after a brief five-week relationship. As for the rest of the portfolio, as a whole, we’re doing okay, with a well-diversified bunch of stocks that will satisfy both investors hungry for growth and investors hungry for safety and/or income. 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. In his latest update, Paul wrote, “ATHM was hit hard by sellers over the first three days of last week, with trading volume rising to a peak on Wednesday. After a decline from near 120 in mid-June, ATHM found support around 97 and has bounced back above 100. We have great faith in the strength of Autohome’s story, but it’s not a good idea to regard any stock as a can’t-fail proposition. We’ll keep the stock rated Hold.” Since then the stock, like the whole Chinese market, has climbed higher, and is now right at its uptrending 50-day moving average. If it can get back above that line, great. If not, it may be selling time. 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 a month ago after it gapped down off its record high, but the stock has traded calmly since then, building a base in the mid-60s, and I think that’s healthy enough to earn a renewed buy rating. BUY.
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 just bounced off its 200-day moving average, so risk here remains low. In her latest update, Chloe wrote “B&BT got permission from Federal regulators to raise its dividend last week. The bank will increase its payout to $0.405 per quarter, an 8% boost. (A 13.6% bump was already announced earlier this year, for a total 2018 dividend increase of 23%.) The new annual dividend rate of $1.62 will boost BBT’s yield to 3.2% at current prices. BB&T also got approval to buy back up to $1.7 billion of stock, some of which will be used in the Regions Insurance Group acquisition…The company will also report second-quarter results July 19, before the open.” Then, just today, Crista wrote, “Earnings estimates, which are enhanced by growing loan volumes, increased each month in 2018. Analysts now expect full-year EPS to grow 43.7% and 8.7% in 2018 and 2019. Corresponding P/Es are 12.8 and 11.7. The stock is fairly valued… There’s a little upside price resistance at 53.5, where the stock will likely rest before continuing toward its 2018 high of 55.5.” 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, “BR continues to behave well. The stock bounced off its 50-day line nicely last week and is now moving up again. Broadridge, an investor communications firm, is a steady grower that has increased its dividend every year for 10 years. 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, is still an attractive buy here. In today’s update, Crista wrote, “DowDuPont 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. Analysts project EPS to grow aggressively at 24.1% and 17.7% in 2018 and 2019. The respective price/earnings ratios (P/Es) are 15.8 and 13.4. DWDP has been ratcheting upward since bottoming in early April. There’s 15% upside as DWDP travels back to its January high of 76. I expect additional capital appreciation after the stock rests near 76 for a while, and again as the spinoffs take place in 2019. Buy DWDP now.” BUY.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small Cap Confidential, bounced off its 50-day moving average two weeks ago at the market bottom and has climbed back above its 25-day moving average since, tracing out a positive pattern. If you don’t own this global provider of public alert systems, you can buy some now, though the light volume in recent days (possibly holiday-related) suggests there’s potential for a small pullback. BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, also bounced off its 50-day moving average (at 71) two weeks ago and today climbed back to its June high of 78. 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. If you haven’t bought yet, I suggest waiting for the next pullback. 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. HTHT bottomed two weeks ago with the whole Chinese market, but it hasn’t bounced as well as ATHM since. HOLD.
iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, was red-hot in May and June as the story of “the Netflix of China,” spread, and since then it’s been enjoying a well-deserved correction. In this corrective process, hot money leaves the stock, to be replaced by money seeking to get on board for the next stage of the advance, which will almost certainly be less hot. Yet as Paul pointed out in his latest update, IQ’s advance was so big that even now, with the stock 32% off its high, it is still above its 50-day moving average, which is down at 28. With the Chinese market still questionable, and IQ likely to need more time to cool off, Hold is the proper rating. HOLD.
McGrath RentCorp (MGRC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income tier, and featured here last week, has rebounded with the market and can still be bought here as it works its way back to its June high of 68. In last week’s update, Chloe wrote, “MGRC has pulled back neatly to its 50-day line, providing a good buying opportunity for Safe Income investors interested in the stock. MGRC hit a new 52-week high two weeks ago, and is in a strong overall uptrend. McGrath rents modular offices, classrooms, and more, and has a 25-year history of dividend growth. It’s also blissfully under the radar and unaffected by today’s big news stories.” BUY.
PagSeguro (PAGS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is our Brazilian digital payments play, but the stock has done little right since we bought it five weeks ago. It’s easy to blame the Brazilian government for that, or other political and economic factors outside the company’s control, but in the end, it doesn’t matter. The stock has lost sponsorship, it risks falling below support at 27, and thus it has the weakest prospects for the near-term. SELL.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, closed at a record high yesterday. And because this breakout comes after a six-month base-building process, the odds are good that this will kick off a significant advance. In last week’s update, Mike wrote, “PayPal has been busy on the acquisition front during the past couple of weeks. The big one was the $2 billion-plus buyout of iZettle, which greatly expanded the company’s international abilities. Late last month, it bought Hyperwallet for $400 million in cash, boosting PayPal’s suite of payment solutions to both e-commerce platforms and marketplaces. And then it spent $120 million (cash, not shares) to buy Simility, a fraud prevention and risk management platform for merchants. We’re not experts on the ins and outs of all these companies, but it’s a safe bet they’ll continue to build up PayPal’s moat, making the service more attractive to both merchants and consumers.” BUY.
PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth portfolio, continues to climb away from the bottom at 28 that it hit two weeks ago, heading, if Crista is correct, for its old high of 35. In her latest update, Crista wrote, “Pulte Group is a U.S. homebuilder and a very undervalued growth stock. In recent days, Kiplinger’s Personal Finance published a lengthy recommendation of homebuilder stocks, specifically touting PulteGroup. Consensus earnings estimates reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 8.9 and 7.9. There’s uniformity among homebuilders in both very strong revenue and profit growth, and stock trading patterns. After quite a bit of weakness, homebuilder stocks turned upward last week. The industry is rife with cheap stocks that are trading in the lower portions of their trading ranges. PHM is rising from the bottom of a solid trading range. There’s 17% 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, is one of the strongest stocks in the portfolio, having hit its latest new high last Friday. In her latest update, Chloe wrote, “STAG is an industrial REIT benefitting from reasonable interest rates and high demand for warehouse space. High-yield investors can buy some here, or on a pullback to the 50-day, currently at 26.” 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 at the end f June and has pulled back since. 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% in 2018 and 2019. Corresponding P/Es are 27.7 and 20.2. SUPN rose to a new all-time high at 60 in late June, then rapidly pulled back into the low 50’s. I expect the upward momentum to continue shortly. Buy SUPN now.” BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a new high yesterday and pulled back normally today. As the hands-down leader in telemedicine, an industry that should grow massively in the years ahead, the company has great growth potential. In fact, one of my readers argued (very respectfully) that its growth potential is so enormous and so bulletproof that the stock should have been included in my recent feature of Ten Forever Stocks. But I’m not so confident about it; I see the potential for any large company—even Google or Apple—to get into the business and immediately grab a big piece of the market. But maybe they won’t! And maybe TDOC will keep on climbing! For now, the trend is great, and volume clues are great, too. And as all experienced growth stock investors know, the trend is your friend. 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 stuck in the consolidation pattern that’s occupied it over the past year, and thus there are better opportunities for growth investors. 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. Last week, TiVo’s CEO Enrique Rodriguez left the company to become the Chief Technology Officer at Liberty Global. I would imagine that he may have left TiVo with an awareness that he might not have a future role at the company if TiVo is sold to a larger company; or perhaps his presence at TiVo was simply a bad fit.” As for me, I remain optimistic that Crista’s scenario will work out, but our portfolio’s growing loss, combined with the CEO’s departure, argue for a downgrade to Hold. HOLD.
Weight Watchers International (WTW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has pulled back over the past two days to dip below its 25-day moving average. If you haven’t bought, you can buy here. BUY.
Zillow (Z) originally recommended by Mike Cintolo of Cabot Growth Investor, bounced off its 50-day moving average two weeks ago and is now back to its 25-day moving average. But volume patterns are weak, so the stock could easily pull back again. Long-term, however, the prospects are very bright at Zillow, as it leads the online real estate information industry (and Z is one of my latest Forever Stocks). HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JULY 17, 2018
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