The market’s main trend remains up, with many major indexes hitting new highs in recent days—and many of our stocks doing the same. Those are the stocks you should hang onto tightly—because there’s no telling how far they’ll run.
Cabot Stock of the Week 206
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The Nasdaq Composite hit a record high last week, as did the S&P 600 Small-Cap Index and the S&P 400 Midcap Index, so there’s no question that the bull market is alive and well. Thus I continue to recommend that you be heavily invested in a diversified portfolio of stocks that help you meet your investment goals.
In selecting today’s stock, I leaned back to the lower-risk end of the spectrum, choosing an established dividend-paying company in the retail sector that is ripe for a rebound. The stock was originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor, and here are Crista’s latest thoughts.
Guess?, Inc. (GES)
This spring, several specialty retail stocks landed on my pre-screened “waiting in the wings” list. I always stop and take notice when several stocks from any one industry land on the list, because that’s a big hint that there’s going to be good capital appreciation potential there. Then in late May, one of those excellent stocks fell 19% after an earnings report that was applauded by Wall Street. That’s when I jumped at the opportunity to add Guess?, Inc. (GES) to my Buy Low Opportunities Portfolio.
Guess? designs, markets, distributes and licenses a lifestyle collection of contemporary apparel, denim, handbags, watches, footwear and other related consumer products. Guess?, its licensees and distributors operate 1,663 stores in over 90 countries.
Earlier this decade, Guess? revenue and net income suffered a multi-year decline. In August 2015, Paul Marciano stepped down as CEO in favor of new hire Victor Herrero. Mr. Herrero has a significant, decades-long background in international commerce, spanning the fields of law, management consulting and apparel, along with tremendous success in retail apparel expansion in European and Asian markets.
More recently, Paul Marciano stepped down from his position as Guess? Executive Chairman in June 2018, as the company and the Securities and Exchange Commission made a monetary settlement over complaints of sexual harassment.
Revenue, operating margins and net income are now growing consistently and are projected to continue doing so. Specifically, annual revenue is expected to grow from a recent low of $2.18 billion in fiscal 2016 (January year-end) to $2.7 billion in fiscal 2020.
Earnings per share (EPS) are expected to grow from a low of approximately $0.50 in fiscal 2017 to $1.07 in fiscal 2019 and $1.30 in fiscal 2020, reflecting EPS growth rates of 52.9% and 21.5% this year and next year. Price/earnings ratios (P/Es), at 20.7 and 17.0, are low in comparison to current and next year earnings growth rates.
Even though Guess? is well into its turnaround, the market has not really caught on to the good news, making the stock a classic “buy low opportunity”.
Second quarter results will be announced in late August. Wall Street is currently expecting revenues of $649.5 million, an increase of 13.22% over the prior year’s second quarter. The quarter’s profit estimate is $0.32 EPS, within a range of $0.29 to $0.35.
Guess? maintains a very low long-term debt–to-capitalization ratio of 4%. The dividend yield is hefty at 4.0%. There’s no recent history of the company raising the payout.
GES is a small-cap stock with a market capitalization of just $1.8 billion. It’s been my experience that small company stocks can not only provide outsized capital appreciation, but can occasionally become takeover targets too. The same financial strength and corporate growth that attracts you and me can be equally appealing to larger industry peers.
GES broke past long-term price resistance in March, rose to 26, and had pulled back to 24 when the company reported first-quarter results on the afternoon of May 30. The next day, the market trashed the stock, taking it down 19.5%! The dramatic drop in the share price seems to have been caused by traders, because a handful of Wall Street analysts raised their price targets and/or their earnings estimates for the stock before trading commenced on May 31.
Does that make any sense? No. But stock market anomalies are exactly what investors look for in order to capture bargains and profit from them.
The stock quickly rebounded from 19 to 22, and has since traded quietly between 21 and 23 for six weeks. That’s a bullish indication that the stock is preparing for its next run-up. I expect GES to retrace its recent high of 26, with additional gains later this year. Buy GES now.
Guess?, Inc. (GES)
1444 South Alameda Street
Los Angeles, CA 90021
213-765-3100
www.guess.com
CURRENT RECOMMENDATIONS
In general, I like to handle stocks on a case-by-case basis, but sometimes sector forces are so powerful that it helps to consider them as well. Today, for example, Chinese stocks are working to recover from the heavy wave of selling that pushed the sector into oversold territory a few weeks ago, though I don’t see a lot of buying power. But the three Chinese stocks in our portfolio are better than average; all three hit new highs a month ago. Still, I think all three are now being restrained a bit by the pressures on the sector—so I don’t think it’s a great time to buy any Chinese stocks—though I am sticking with those three for now. As to the rest of the portfolio, diversification feels good now as we approach earnings season. There will be surprises, both pleasant and unpleasant, but it in the long run, I believe the portfolio is well positioned.
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 probably needs some time, but the stock has bounced decently from its low of 95 during the late-June correction. We doubt any of the trade shenanigans will affect the company’s business much, and analysts still see earnings growing in the 20% to 25% range both this year and next. A move back above the 50-day line (now at 107) would be a positive sign.” 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—and its original business of selling TASER electronic weapons is doing well, too. In fact, a recent press release announced orders for 10,113 TASERs, including 357 for the British Transport Police, 2500 for the Detroit Police Department, 190 for the Gainesville Police Department, 450 for the Lubbock Police Department, 150 for the Pennsylvania Game Commission, 100 for the Minister of Interior Dubai, 200 for the New South Wales (Australia) Police, 195 for the New Zealand Police, 183 for the North Dakota Highway Patrol, 130 for the Port of Los Angeles Police Department, 100 for the State Border Guard of Lithuania and 150 for the Sussex (UK) Police. As for the stock, it’s been strong all year and closed at a record high yesterday and today. 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, recently bounced off its 200-day moving average, and it’s found support at 50 all year, so risk in the stock remains low. But earnings are coming! In her latest update, Chloe wrote “BB&T will report second-quarter results Thursday, July 19, before the open. Analysts are currently expecting to see 31.2% earnings growth, from $0.77 per share to $1.01 per share (with a big boost from the tax cut bill). Revenues are expected to rise a more modest 0.8%, from $2.90 billion to $2.92 billion.” And today Crista wrote, “BB&T plans to raise its third quarter dividend by 3 cents to 40.5 cents, 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. Earnings estimates, which are enhanced by growing loan volumes, increased each month in 2018. Analysts now expect full-year EPS to grow 43.4% and 9.0% in 2018 and 2019. Corresponding P/Es are 12.7 and 11.7. BBT is bouncing repeatedly at the bottom of its 2018 trading range, even amid price weakness throughout the financial sector.” HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, looks fine, trading just off its record high of last Friday. In her latest update, Chloe noted, “BR continues to behave well, trending up gradually just above its 50-day line. Broadridge is an investor communications firm, and trades more in line with the tech sector than with financial stocks, despite its name. Most importantly, the stock has low volatility, and is a steady grower that has increased its dividend every year for 10 years. Investors looking for steady capital gains and dividend growth can Buy BR right here.” BUY.
DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, is the result of the September 2017 merger of two American industrial giants—and management thinks that more growth can come from breaking the company up. 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. Analysts project EPS to grow aggressively at 24.1% and 17.7% in 2018 and 2019. The respective price/earnings ratios (P/Es) are 15.9 and 13.5. DWDP has been ratcheting upward since bottoming in early April. There’s 16% 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 spin-offs take place in 2019.” BUY.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small Cap Confidential, is the leading provider of public alert systems, growing both in the U.S. and internationally. The stock was overbought (out of trend to the upside) in mid-June and then oversold (out of trend to the downside) in late June, but it’s right back in trend now. In his latest update, Tyler wrote, “EVBG hit a 52-week high of 53 in early June then the stock slid back to its 50-day line at 44 by the end of the month. Shares firmed up right at that trend line and have moved back up toward 50 over the last three weeks. I’ve had the stock at hold given the big run (Everbridge is up 66% year to date), but with the trend improving you can pick up a few shares if you like.” BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is 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 stock closed at a record high last Thursday and is just off that high today. If you haven’t bought yet, I suggest waiting for a deeper 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 at the end of June with the whole Chinese sector, and it’s been trading sideways 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, but the late-June market swoon dropped the stock by 33% and since then it’s recovered half the loss, which is fairly standard behavior for a healthy stock. Fundamentally, all seems well with the company, but with Chinese stocks still under pressure, and IQ in particular likely in need of more cooling-off time, Hold is the prudent rating. HOLD.
McGrath RentCorp (MGRC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income tier, rents modular offices, storage containers, classrooms, and more, and has a 25-year history of dividend growth. Plus, the current pullback presents a nice buying opportunity. In last week’s update, Chloe wrote, “McGrath will report second-quarter earnings July 31, after the market closes. Analysts are currently expecting a big EPS bump of 33%, thanks in part to MGRC’s new lower tax rate, and slower but steady 3% growth in revenues. McGrath has beaten earnings estimates by more than 20% in each of the last four quarters, and gapped up following its last earnings report. Safe income and dividend growth investors can buy right here.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, closed at another record high last Thursday and has pulled back slightly since. In last week’s update, Mike wrote, “PayPal looks like a tennis ball, having snapped right back to its highs in recent days as the market bounced. In the last issue, we wrote about three of PayPal’s recent acquisitions (including the $2 billion-plus iZettle deal), and it looks like that will be a theme going forward, as the CEO recently said it’s willing to spend up to $3 billion annually on M&A to bolster its position in the payments and money transfer sector. Big picture, we continue to see PayPal as the major beneficiary of the online payment boom. We’ll stay on Buy. Earnings are due out July 25.” 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 three 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. Consensus earnings estimates reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 9.0 and 8.0. There’s uniformity among homebuilders in both very strong revenue and profit growth. The industry is rife with cheap stocks, low within their trading ranges. There’s 16% upside as PHM travels back to its January peak at 35.” Earnings will be released before the market open on July 26. HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, hit a record high seven trading days ago and has pulled back to its 25-day moving average since. In her latest update, Chloe wrote, “The industrial REIT is in steady uptrend and enjoying a supportive environment for REITs and other high-yield investments, although it may take a breather here if more growth-oriented names begin leading the market higher. The company will report second-quarter 2018 results on July 31, after the close. High-yield investors looking for monthly dividends can buy some here, or try to wait for a pullback to the 50-day, currently at 26.” BUY.
Stitch Fix (SFX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here last week, is holding up in the low 30s, with no significant selling pressure materializing yet. There’s still a decent chance of a correction down to 29, to connect with the 25-day moving average, so if you haven’t bought and you’re looking to buy at a lower-risk point, you could keep an eye on that. But investors who love the thrill of riding hot stocks will buy now. It’s possible that this will become a very big story. 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 of June and then sold off sharply, but in recent weeks it’s been building a base around 52. 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 27.4 and 20.0.” BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high today. As the acknowledged leader in telemedicine, an industry that should grow massively in the years ahead, the company has great growth potential. In his latest update, Mike wrote, “Teladoc is the hands-down leader in the new field of virtual care, where a patient can get in touch (by phone or video call) with a doctor associated with Teladoc, get advice, prescriptions and much more. The company has dramatically broadened its scope in recent quarters via acquisition, offering everything from behavioral health to dermatology to treatment for normal colds or flus, and is seeing more companies sign up for its services and more employees use it; in Q1, total “visits” rose 57% to 606,000. Revenues come mostly from subscription fees (recurring income), and Teladoc gets a per-visit fee on certain types of visits, too. The stock broke out in early May and had a fantastic run, and after a sharp shakeout last month, has pushed back to new highs. It’s a bit extended to the upside, and earnings are due out on August 1, so if you want to start with a smaller-than-normal position, we’re OK with that.” 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) was originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor and 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 on August 8… I expect the stock to promptly head back toward 15 while we await M&A news, at which time I expect a significant surge in the share price.” I hope she’s right, but the stock keeps on going down and our loss keeps growing, and today the stock is threatening to break through its February support level at 12.75. Adding it all up, and bearing in mind the adage about cutting losses short (and the fact that the CEO recently abandoned ship), I conclude it’s time to move on. SELL.
Weight Watchers International (WTW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was driven down to its 50-day moving average by six consecutive days of selling before bouncing today. It’s still a fairly good chart, but the slightly elevated volume on those selling days bothers me a bit, so I’m going to downgrade the stock to Hold now and see if buyers can get the uptrend going again. HOLD.
Zillow (Z) originally recommended by Mike Cintolo of Cabot Growth Investor, was down at its 50-day moving average just three weeks ago, but it’s been climbing steadily since then and is now well above its 25-day moving average and heading for its old high of 66. In other words, it’s a healthy, strong stock, worth upgrading to Buy. Second quarter results will be released on August 6. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JULY 24, 2018
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