The overall bull market remains in good shape, with most indexes and stocks trending up. But earnings season, which is now underway, will likely have a big impact—even today we saw lots of distribution among growth stocks ahead of their reports this week and next.
Cabot Stock of the Week 207
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The major indexes are still in solid shape, with most hitting new all-time or multi-month highs this morning. Granted, there are some potential potholes out there, with news events (tariffs and the like) still getting attention and earnings season just getting started. And today’s across-the-board distribution in growth stocks is something to keep an eye on. Still, overall, the trends are up for the indexes and most stocks (even growth stocks), so we remain bullish and continue to look for (and find) stocks with attractive stories and charts. This week’s pick fills the bill, with its recent pause after a powerful June breakout providing a nice setup—and the story is hard to beat.
Carvana (CVNA)
Revolutionizing the Used Car Industry
Cabot Stock of the Week tried its hand with Carvana (CVNA) last July, but our timing was off—shares knocked us out after a few weeks as the post-IPO droop took effect. But the fundamental story never faltered, and after a huge 11-month consolidation (which included a 50% correction), the stock has broken free on the upside. So we’re getting back onboard.
The story is as enticing as it gets—Carvana is revolutionizing the used car industry in the U.S., a gigantic sector ($764 billion in used car sales in 2017!), that’s fragmented (the 100 largest players have just 7% of the total market) and unloved (81% of people in surveys don’t enjoy the car buying process).
Carvana is taking the used car industry online, and the company has thought of everything to make the car buying decision as easy as possible. First, there’s the selection, with more than 11,000 cars available to browse. And it’s just not a picture or two; every car has a 360-degree, interactive exterior and interior virtual “tour.” Carvana also doesn’t acquire used cars that have been in reported accidents.
The company also allows potential customers to get automated, nearly instantaneous trade-in offers, plus real-time financing offers when zeroing in on the car of their choice. On the delivery side, many of the markets Carvana operates in actually have next-day delivery, and the firm has even built 13-car vending machines (seriously) that are a few stories high and carry two to three dozen automobiles, allowing people to pick up their newly bought cars in person.
There’s even a seven-day test drive policy to customers wanting another layer of comfort. And, most importantly, customers get good value, with an average $1,000 savings compared to the price they can get at traditional dealers.
The business model is a huge hit, and Carvana is taking advantage of that by rapidly broadening its reach. The company operated in 21 markets at the end of 2016, 44 at the end of last year and is aiming to be in around 80 or so by year-end 2018. And everywhere Carvana has gone, it’s seeing similar, bullish penetration trends, which have helped growth remain rapid.
As you can see in the table below, revenues have been plowing ahead at triple-digit rates, right alongside the number of cars sold (18,464 in Q1, up 122% from a year ago). And, while the bottom line is still drenched in red, the key sub-metrics are showing great improvement—the gross profit per car sold, for instance, came in near $1,850 in Q1, up 20% from last year’s average figure, with management seeing that rise to north of $2,000 by year end. And given that Carmax’s gross margin is near $3,800, there’s plenty of upside ahead as Carvana’s economies of scale expand.
Long term, the sky’s the limit as Carvana enters new markets and grabs an increasing share of the used car market in the U.S. If management pulls the right levers, there’s no reason the firm can’t grow many-fold from here.
In contrast to the last time we danced with the stock, CVNA looks like a decent entry point here. As mentioned earlier, the stock etched a big 11-month structure, making no progress from the end of June 2017 through the end of May this year. But when the breakout came, it was powerful, driving the stock from 32 to as high as 50 within a few weeks before its recent pause. Generally speaking, the first pullback after an initial breakout is buyable, so whether it’s here or after a bit more weakness, we feel the next big move is up.
The trick is that the company will report earnings on August 8, just over two weeks away. Because of that, it’s fine if you want to buy a smaller-than-normal position initially, then look to add if CVNA makes it through earnings in good shape. As usual, though, we’re going to keep it simple and just buy a normal-sized position tomorrow. BUY.
Carvana (CVNA)
1930 West Rio Salado Parkway
Tempe, AZ 85281
602-852-6604
www.carvana.com
CURRENT RECOMMENDATIONS
The deluge of earnings reports is underway, with 40% or so of the S&P 500 reporting this week alone; all told, the next two to three weeks will have a big influence on the intermediate-term action of most stocks and sectors. It’s always important to have a plan heading into earnings season and to get rid of any stocks that decisively break down.
But it’s also important not to anticipate and to just go with the evidence in front of you. Today was a bit of a heads-up, with many growth-oriented stocks being selling, but overall, the evidence is bullish and is the reason we remain heavily invested.
In our portfolio, with Carvana joining the ranks, we’re over our limit of 20 stocks. The vast majority of our stocks are in fine shape, but we do have a few iffy situations. Tonight, we’re selling BB&T Corp. (BBT), which is not just lagging the market but the financial sector that’s recently gotten a lift.
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. Chinese stocks remain stuck in the mud, likely because of the uncertainties of the trade war, and ATHM is no different, sitting near the low end of its base-building effort. Paul doesn’t believe the trade shenanigans will impact Autohome much if at all given that it’s a domestic-focused business, and investors agreed for much of this year, driving shares higher until their mid-June peak. A break lower from here would be a worry, but at this time I’m comfortable with a hold rating. 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. The stock has moved to new highs in recent days, which is great, but volume has been persistently below average, which is not. Overall, the main uptrend is what we’re focused on, but don’t be surprised to see a retreat in the short-term. Earnings are likely out in a couple of weeks. 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, reported a decent second quarter, with revenues up 6% and earnings up 29%, which equaled estimates. The stock dipped to new lows before rebounding somewhat, and both Chloe and Crista still like the name. But my patience has run out—I don’t see BBT falling through the floor, but with most financial stocks finally getting some wind (the sector’s hitting multi-month highs), BBT is stuck at the bottom of its range. I think there are better opportunities out there, so we’re selling BBT tonight. SELL.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, continues to act just fine, though buying power has dried up recently with 120 acting as resistance. Still, longer term, the trend is up for both the stock and the business—about 60% of the company’s revenue comes from recurring fees, and management expects them to grow in the high single digits for the next few years, which should lead to steady low double-digit earnings (and dividend) increases, too. A wave of selling at this point could have us going to hold, but as we wrote above, we’re not going to anticipate that. Earnings are likely out the second week of August. 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. Crista remains a big fan of the stock, writing today that “DowDuPont is comprised of three divisions: Agriculture, Materials Science and Specialty Products, all three of which will become independent, publicly-traded companies in 2019. The company is expected to report second-quarter EPS of $1.30 on the morning of August 2, within a range of $1.19 to $1.39. Analysts project full year 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 resting quietly for four weeks. 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 spin-offs take place in 2019. Buy DWDP now.” For my part, I continue to like the sturdy bottoming action in the stock since early April and agree DWDP is buyable right here, though be aware that earnings are due out the morning of August 2. 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 has rebounded nicely from its 50-day lien test in late June, and is now creeping back toward its old highs. Last Friday Tyler pointed out, “Earnings won’t be out for a few more weeks, but when they come the market will be expecting quarterly revenue growth of 37% and EPS of -$0.22. The company announced that Alison Dean, the current CFO of iRobot (IRBT) has been added to the Board of Directors.” I’ll stay on Buy. 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, some of Walmart’s debt cards, Uber and Intuit. The stock has been marching straight up from its late-June shakeout, and even made it into Mike’s Top Ten again this week, a sign of strength. I’ll stick with a buy rating, ideally on dips of two or three points. Earnings are likely out around August 8. 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. Shares continue to build a new launching pad after a big push to new highs in May and early June. Analysts see earnings up 38% this year and 44% next, so the fundamental story is on track. The next quarterly report is August 22. HOLD.
iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is volatile and choppy, which isn’t surprising given its moonshot in May and early June and its sharp correction after that. I expect further ups and downs, but so far IQ is holding above its 50-day line, so the damage isn’t that bad. The next big event will come a week from today (July 31), when the firm will report earnings—a positive reaction will be great to see, while a negative reaction could have us moving on. For now, hold is the appropriate 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. It, too, will report earnings a week from today (July 31), and possibly ahead of that, some investors are booking profits. In her latest update, Chloe said “MGRC has pulled back since our last update, slicing through its 50-day line for the first time since February and declining on each of the last six trading days. It’s still probably just a normal pullback, but the break through the moving average is a yellow flag, so I’m going to put MGRC on Hold for now. The company 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 beat earnings estimates by more than 20% in each of the last four quarters, and gapped up following its last earnings report.” I won’t predict what the stock’s reaction will be, but I agree moving to Hold is prudent here, though a positive earnings reaction would probably kick off another advance. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has popped to new highs, partly due to reports that Dan Loeb of the Third Point funds has taken a big position in PayPal and thinks the stock can rally significantly in the next 18 months as it monetizes Venmo (Dan sees $3 billion of revenue potential in the next few years), expands margins and rolls out dynamic pricing for different merchants. Without getting too deep in the weeds, Mike and I both think the long-term future for PayPal is very bright as commerce and payments go digital. Near-term, though, we’ll both be watching how the stock reacts to earnings tomorrow evening. BUY.
PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth portfolio, has hit some resistance near the top of its four-month range (around 31.5) and backed off a point or so during the past three days. In today’s update, Crista wrote, “PulteGroup is expected to report second quarter EPS of $0.74 on the morning of July 26 (this Thursday), within a range of $0.68 to $0.79. Full year consensus earnings estimates reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es
are 9.4 and 8.4. There’s uniformity among homebuilders in both very strong revenue and profit growth. The industry is rife with cheap stocks, many now rising. There’s 12% upside as PHM travels back to its January peak at 35.” Additionally, I’ll note that Jacob Mintz, who runs our Cabot Options Trader, has picked up on some unusual bullish options buying in the homebuilding sector. I’m staying on hold and will see what earnings bring. HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has eased lower to its 50-day line with most REITs; I think it’s a good buy here, though a dip of another point or so wouldn’t shock me if interest rates continue to rise. Earnings are out July 31. If you’re looking for a solid dividend (5.3% annual yield, paid monthly), STAG is a great option. BUY.
Stitch Fix (SFX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was hit today with most growth stocks, but it looks fine; it’s still holding above its 25-day line, in fact. Bigger picture, I remain bullish on the company as the leader of an entirely new industry, and the very powerful chart action since early June (multiple huge-volume up weeks) tells me big investors are buying. If you don’t own any, you can buy some here; earnings aren’t due until early September. 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, got about half of its recent decline back through yesterday, albeit on very light volume. Crista expects the stock to surpass its June high (near 60) sometime this year; I remain optimistic long-term and will stay on Buy given the stock’s bounce. Earnings are likely out during the first half of August. BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, was smacked lower today, partly due to the market, but also due to an announced secondary offering last night. After a good-sized run, such a sharp decline isn’t abnormal (TDOC is still north of its 25-day line), but it is a shot across the bow. I’m going to stay on Buy tonight, but the next few days will be key—if this secondary offering-related dip brings in the buyers, all is probably fine, but if a deeper retreat occurs it will raise the odds that TDOC has hit at least a short-term peak. Right now, if you don’t own any, I’m OK with nibbling here. 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. Near-term, though, the stock continues to act sloppily, with the latest report that the company was asking for better deals from its suppliers causing people to fear a cash crunch. We highly doubt the bear case will come to fruition, but I can’t deny the stock is a laggard here, which is why we continue to look elsewhere for new buying. HOLD.
Weight Watchers International (WTW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is still holding its 50-day line, but its lack of a bounce in recent days is a worry. Mike has a stop-loss recommendation near 88, and that makes sense to me—a close below the 50-day line, especially if it comes on heavy volume, would be a red flag. For now, though, I’m giving it a chance. HOLD.
Zillow (Z) originally recommended by Mike Cintolo of Cabot Growth Investor, looks like a lot of growth stocks—a sharp retreat in the second half of June (from 66 to 57), a good-sized rebound (to 64) and now a sloppy pullback today (to 61 or so), but not one that looks abnormal. There’s good support in this area, so I’m comfortable staying on Buy and seeing what earnings (due out August 6) bring. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JULY 31, 2018
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