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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 208

Last week’s “surprise” failure by Facebook to meet growth expectations has kicked off a correction in growth stocks that will likely run for a while, while allowing other types of stocks to come to the fore. This is natural. Our job is to follow the leaders, and to discard stocks that are no longer doing what we hired them to do.

Cabot Stock of the Week 208

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The market’s main trend remains up, so I continue to recommend that you be heavily invested in a well-diversified portfolio that suits your investment needs. However, with Facebook’s disappointing second quarter results kicking off heavy selling in the growth sector last week, the odds are very good that these stocks will fall further before the correction runs its course.

Thus for now I’m leaning more conservative. This week’s recommendation pays a very safe dividend and brings the promise of a bit of capital appreciation as well. The stock was originally recommended by Chloe Lutts Jensen for her Safe Income Portfolio, and here are her latest thoughts.
McCormick & Company (MKC)

Founded in 1889, McCormick & Company (MKC) is one of the world’s largest makers of spices and flavorings. In addition to their eponymous line of spices, McCormick makes condiments, stocks, oils, recipe mixes, salad dressings, baking ingredients and more. Consumer products make up about 62% of sales.

The remainder of sales goes to food service and food and beverage companies, which buy commercial versions of the above products, as well as “custom flavor solutions” that flavor many of the packaged foods you eat, from chips to chocolates.

McCormick’s consumer brands include McCormick, Old Bay, Zatarain’s, Thai Kitchen, Club House and Lawry’s. Last year, McCormick added the French’s and Frank’s RedHot brands to its portfolio with the acquisition of Reckitt Benckiser’s food division, the largest acquisition in the company’s history.

McCormick is international, but the Americas are the company’s largest market, making up 68% of sales. Selling spices is a steady business, and McCormick’s revenues have risen steadily in each of the past ten years. EPS declined slightly in 2013 and 2015, but grew in every other year, often at double-digit rates.

A major reason I’m recommending MKC now is analysts’ strong estimates for the next few years. MKC is expected to report 17% earnings growth this year and 8% growth next year, supported by 13% and 3% revenue growth. Longer-term, analysts expect EPS growth to average 11% per year over the next five years.

McCormick’s fiscal year starts in December, so the company reported second-quarter earnings at the end of June. The company’s next earnings report will likely be released toward the end of September.

McCormick’s steady revenue stream translates into equally steady dividend payments, and the stock currently yields 1.8%. The company has paid dividends since 1925, and has increased the dividend every year for 31 straight years. Over the past decade, McCormick has increased the dividend by an average of 9% per year, an impressive growth rate to sustain for 10 years. The company’s payout ratio based on EPS is currently 42%, which is just a little below its average (49% over the past 5 years).

With such a long, impressive dividend history, plus strong earnings estimates, it’s no wonder that MKC earns Dividend Safety and Growth Ratings of 10.0 and 9.0 respectively.

The final argument for buying MKC today is the stock’s chart. MKC was in a strong uptrend until June 2016, when consumer staples stocks began a period of correction and consolidation that lasted for two years. MKC traded in a wide sideways range until late last month, when the stock broke out to a new all-time high after reporting stellar second-quarter earnings. The stock followed through with several more days of gains, a sign of strength, and as it’s consolidated that gain over the past month, the 25-day moving average has caught up—and is now providing support.

The valuation is reasonably valued, with a P/E of 25 and a forward P/E ratio of 23.

If consumer staples and other conservative stocks continue to do well in the second half of the year, MKC should be at the forefront of the move, and the stock’s recent breakout could be the start of a strong new uptrend for the stock.

If, on the other hand, consumer staples remain under pressure and faster-growing stocks retake the lead, we’ll still be happy to own the stock, which is a rock-solid long-term investment with an impeccable dividend history.

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McCormick & Company (MKC)
18 Loveton Circle
Sparks, MD 21152
410-771-7301
www.mccormickcorporation.com

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CURRENT RECOMMENDATIONS

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With earnings season now in high gear, not only are the surprises coming thick and fast—as expected—the majority of reactions in our portfolio have been to the downside, and this was not expected. Combined with the fact that growth stocks as a whole appear to be beginning a correction, this means it’s now time to reduce our risk level. Details below. But that doesn’t mean it’s time to sell all and stick your head in the sand. If history is any guide—and it is—the weeks and months ahead will bring new leaders, and I will happily guide you to investing in these leaders, as the money that fell out of FB and TWTR last week finds new homes.

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 index of Chinese stocks looks terrible, so it’s a lot to ask ATHM to buck the trend. In Paul’s latest update, he wrote, “ATHM has both good and bad in its chart. On the positive side, we like the reasonable correction after a good run and the stock’s recent calm trading despite all the trade war hoopla. On the negative side, ATHM hasn’t really bounced much during the past couple of weeks, even as most names have. The risk is that China’s economy is slowing, which means fewer car sales and a decline in growth for Autohome in the quarters ahead. But we don’t see any clear signs of that—we’re staying on Hold here, thinking a drop below 94 or so (on the sell side) or a push above 107 (on the buy side) will have us changing our stance.” HOLD.

Axon Enterprise (AAXN), originally recommended by Mike Cintolo of Cabot Growth Investor, hit a record high just a week ago, so it’s one of the strongest stocks in the portfolio. Plus it’s got a great growth story as the owner of the law enforcement video cloud storage site, Evidence.com. Earnings will be released August 7. BUY.

Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has just pulled back to 113, where it’s found support several times since mid-May, so the stock is likely to pause here while investors wait for the earnings report. In her latest update, Chloe wrote, “BR will report fourth-quarter and full-year results before the open on August 7 (the company’s fiscal year ends in June). Analysts are expecting revenues to fall slightly (about 2%), to $1.32 billion, but EPS are expected to jump from 1.71 to 1.87, about 9%. For the full year, EPS are expected to rise 34%, to 4.20 per share, while revenues are expected to rise 4%, to $4.33 billion.” But I’m going to recommend selling here, and my main reasoning is this: After nearly a year, we have a surprisingly large profit of over 50% (impressive for a so-called conservative stock) and I believe the downside risk—or the risk that the stock will do nothing for a year—outweighs the upside potential in the short term. SELL.

Carvana (CVNA), originally recommended by Mike Cintolo of Cabot Growth Investor, and featured here last week, pulled back to 40 yesterday, and bounced today and will soon see support from its 50-day moving average, now approaching 39. Second quarter earnings will be out August 8. 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, each of which will become independent, publicly-traded companies by June 2019. DWDP is an undervalued growth stock with an attractive dividend yield. 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 23.8% and 18.0% in 2018 and 2019. The respective price/earnings ratios (P/Es) are 16.4 and 13.9. DWDP has been ratcheting upward since early April. It will likely rest a bit at 70, on its way back to its January high of 76. I expect additional capital appreciation thereafter, especially after 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. Second quarter earnings will be reported August 6. As for the stock, it’s pulled back in sympathy with most growth stocks to test support at 44, where it found support a month ago, but the selling volume this time around is far lighter, and that’s a strong positive sign. 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 hit a record high last Thursday and has settled on its 25-day moving average yesterday and today. Earnings are likely out around August 8. BUY.

Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, has been unaffected by the recent market turmoil; in fact, it’s been trading solid as a rock in the 22 area for the past two months. In her latest update, Crista wrote, “Guess? is a global apparel manufacturer, selling its products through wholesale, retail, ecommerce and licensing agreements. Revenue growth largely stems from expansion in Asia and Europe, while rising operating margins are contributing to multi-year earnings per share (EPS) growth. Wall Street expects EPS to grow 50.0% and 23.8% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 20.9 and 16.9. GES has traded quietly between 21 and 23 for eight weeks, with upside resistance at 26. Buy GES now.” The next quarterly report should be out around the end of August. 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, continues to hold at support at 30, which is great compared to the Chinese indexes! In his latest update, Paul wrote, “IQ is an interesting situation—it’s now nearly six weeks into its base-building phase, and compared to some other hot IPOs, it’s been holding up relatively well, bottoming in early July and, even during this dip, finding a little support at its 50-day line (now at 31.5 and rising). It’s temping to buy another half position here, but the issue is that the firm will report results next Tuesday [today after the close].” Investors’ reactions tomorrow will be interesting. HOLD.

McGrath RentCorp (MGRC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income tier, will also report second quarter results after the close today. In her latest update, Chloe wrote, “Analysts are currently expecting a big EPS bump of 33.3%, from $0.48 to $0.64, thanks in part to MGRC’s new lower tax rate. Revenues are expected to rise by about 2.8%, to $112.7 million. McGrath has beat earnings estimates by more than 20% in each of the last four quarters, and gapped up following its last earnings report.” Thus, buying is fine if the stock reacts positively, but if it reacts negatively, we may need to sell. For now, I’ll leave the rating unchanged. BUY.

PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, reported second quarter earnings last week and beat analysts’ estimates on both revenues ($3.86 billion vs. $3.81 billion) and earnings ($0.58 vs. $0.57). But the stock sold off anyway, falling back to the lower end of its uptrending channel. This is not a terrible reaction, given the unsupportive broad market, but Mike thought it warranted a downgrade to hold and I agree. HOLD.

PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth portfolio, sold off last week after reporting earnings, but remains in the basing pattern it’s built over the past six months. In today’s update, Crista wrote, “PulteGroup reported second quarter adjusted EPS of $0.89 and revenue of $2.57 billion today, when the market expected $0.75 and $2.37 billion. Net new orders decreased by 1%, while the backlog increased 11% to 11,845 homes and the backlog value increased 17%. CEO Ryan Marshall commented, “We continue to see U.S. housing demand being supported by a number of positive market dynamics including an expanding economy, ongoing growth in jobs and wages, historically low unemployment, and sustained high levels of consumer confidence.” During the quarter, PulteGroup repurchased 1.7 million common shares for $53 million. PHM is an undervalued growth stock. The stock has repeatedly bounced at 28 all year. I expect PHM to return to its January peak at 35 at some point this year.” HOLD.

STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is scheduled to report second quarter results after the market closes today. In her latest update, Chloe wrote, “Analysts are looking for revenue of $71.7 million, up 16% from last year. EBITDA is expected to hit $59.0 million, 13% higher than in second-quarter 2017.” But some impatient/optimistic investor isn’t waiting; the stock surged higher today (on low volume) and is now very close to breaking out above its old high of 28. BUY.

Stitch Fix (SFIX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was bought higher than I would have liked, and in the current market weakness we now have a loss. But the main pattern is still positive, and there’s no earnings report to worry about; that came out in early June. So, if you’re not yet on board, you can still buy 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, remains in a constructive pattern. 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. The company is expected to report second quarter EPS of $0.43 on the afternoon of August 7, within a range of $0.37 to $.0.50. Analysts expect full year EPS to grow 46.8% and 40.5% in 2018 and 2019. Corresponding P/Es are 28.9 and 20.6. I expect the stock to surpass its June all-time high of 60 at some point this year. Buy SUPN now.” BUY.

Teladoc (TDOC) was originally recommended by Mike Cintolo in Cabot Growth Investor, and Mike downgraded the stock to hold yesterday as the stock fell through its 25-day moving average. But it found support at its 50-day moving average, and now we simply wait for the second quarter results, due to be reported after the market close tomorrow (August 1). In the meantime, the firm today announced that as of August 10, the firm’s name will be Teladoc Health. As to my rating, I’ll follow Mike’s lead and shift to hold; the stock has come a long way and deserves a rest. HOLD.

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 near-term, the stock continues to act sloppily—so I’m eagerly hunting for new undiscovered growth stocks. Tesla’s earnings report is due tonight and there’s little doubt you’ll hear about it, whatever your media source. HOLD.

Weight Watchers International (WTW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, will report earnings after the close on August 6, but the stock fell below its 50-day moving average yesterday, and today’s bounce was pitiful. Also, this action filled the gap up from early June, and that’s not a positive technical pattern. Fundamentally, there’s an argument for holding the stock long-term (especially if you have patience), but Cabot Top Ten Trader has little patience. WTW was bought on technical strength and I now recommend selling because of technical weakness—and taking the small profit. SELL.

Zillow (Z) originally recommended by Mike Cintolo of Cabot Growth Investor, is a stock that I have included (elsewhere) on my list of stocks to hold forever. But this is not a forever portfolio, and Z’s short-term action—worse than the broad market—says it’s time to sell and take our small profit. Note: earnings are due out August 6. SELL.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED August 7, 2018

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