The market remains challenging, in that we really don’t know if growth stocks are cooked, or China is in trouble or housing has peaked—but uncertainty has always been part of the game. If you want certainty, buy a bond.
Cabot Stock of the Week 209
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While recent weeks have seen some sharp declines among growth stocks, the market’s main trend remains up, with many leading indexes at or near record highs. So once again I turn to a healthy established growth stock, a stock with which we have history. I previously recommended GRUB in August 2016, when it was trading around 39 (and much less established)—but sold it three months later for a loss of about 10% as the company projected slower growth.
But here we are two years later and the stock is trading at 129, reminding us that we could have had a profit of 230%. On the other hand, holding might have brought a larger loss; there was no certainty about the future. In any case, I have no regrets, and the stock doesn’t know that we owned it before, so now we’ll take another crack at it. GRUB was originally recommended by Mike Cintolo for Cabot Growth Investor and here are Mike’s latest thoughts.
GrubHub (GRUB)
Just Scratching the Surface
The two big reasons institutional investors pile into a quality growth stock are (a) they see solid sales and earnings growth going forward, but also (b) they feel that growth is very certain to occur—that is, the risk of something going wrong, be it from the economy, a downturn in a particular sector or from competition, is viewed as small. With both of those things in hand, big investors are usually comfortable building big positions.
GrubHub has always had the first part of that equation locked down—sales and earnings have been growing rapidly since 2012 as the company built its online food ordering website and platform, adding tons of new restaurants and expanding into new cities. But competition was always a worry, especially when GrubHub added delivery services, and it wasn’t until late last year, when the company acquired a couple of key peers (including Eat24 from Yelp) that institutional investors decisively dove in, believing the competition question was answered.
Since then, it’s been a great ride for GrubHub’s stock, but in terms of potential, the company is still just scratching the surface. Back in early 2016, the company projected that chains and independent restaurants would see a whopping $245 billion of takeout and delivery orders per year. GrubHub is the hands-down leader in the online food ordering and takeout sector (about four times as large as its closest peer), but even it saw “only” $1.2 billion in gross food sales in Q2—just 2% of the total market!
That figure is sure to go up, for a few reasons. First is that everything is moving online; while more than 40% of travel purchases are made online these days, just 6% or so of takeout and delivery orders are. Second and more specific to GrubHub, many big chains have warmed up to online ordering and delivery, finding that including such an option boosts sales.
The biggest deal on this front came from Yum! Brands, which in January inked an online ordering and delivery partnership with GrubHub for its KFC and Taco Bell restaurants in the U.S.; GrubHub expects to begin servicing some of these restaurants in the fourth quarter and supporting all of them by 2020. Yum! also bought $200 million of GRUB stock to help the firm accelerate its delivery footprint, which it has, with 70 new markets being covered so far this year.
Jack in the Box followed Yum!’s lead, signing a similar deal with GrubHub in May. And you can bet that more restaurant chains will be looking to hook up with GrubHub given its best-in-class logistics and largest delivery network.
Given the network effect (more users attract more restaurants to the platform, which in turn attract more users), at this point the company’s growth just comes down to management investing in the business and prudently expanding into new markets. If it does that, there’s no reason sales and earnings can’t grow manyfold in the years ahead.
Not that growth isn’t fantastic today. In the second quarter, sales (up 51%), earnings (up 92%) and EBITDA (up 61%) all easily beat expectations, and the sub-metrics (15.6 million active diners, up 70%; daily orders of 423,200, up 35%; gross food sales of $1.2 billion, up 39%) did the same. Some of these figures were boosted by last year’s acquisitions, but there’s still no doubt GrubHub’s underlying growth is picking up steam.
As for the stock, its original breakout occurred late last October, and from then until mid-March shares more than doubled. A great run! But what happened after that was very bullish, too—despite an up-and-down market, the stock corrected just 20% from high to low over the next few months, a sign of resilience after the prior moonshot. And just two weeks ago, GRUB gapped up on big volume following its latest quarterly report. The pullback since then has been normal, and I think buying anywhere between here and 120 over the next few days will work out well in the long run.
GrubHub (GRUB)
111 West Washington Street
Suite 2100
Chicago, IL 60602
877-585-7878
http://investors.grubhub.com/
investors/overview/default.aspx
CURRENT RECOMMENDATIONS
Diversification may be the most important aspect of this advisory, as I continually work to balance the portfolio with stocks in a variety of industries and selected by a variety of successful investment disciplines. On the growth side, for example, a key part of the discipline involves selling stocks whose charts weaken—as we did with WTW and Z just last week. (See the note at the end of this issue). Meanwhile, on the value side, patience is often key; see my internal debate about PHM—and note that patience certainly paid off with TSLA this week. But it won’t always be wine and roses; what goes up often comes down. In the long run, though, diversification and respect for proven investing systems will continue to succeed.
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 weight of the Chinese markets continues to pull the stock down. Still, the big factor in the next two days will be the company’s second-quarter earnings, which will be reported tomorrow, August 8, before the market opens; analysts are looking for revenue of just under $285 million and earnings of 84 cents per share. A negative reception could send the stock down to its 200-day moving average at 85, while a positive reception could be a signal to upgrade the stock to buy. HOLD.
Axon Enterprise (AAXN), originally recommended by Mike Cintolo of Cabot Growth Investor, will report second-quarter earnings after the market close today, and there’s little doubt they’ll be good; the stock hit a new high just two weeks ago. But will they be good enough? Analysts are looking for revenues to grow 20% to $96 million and earnings to jump 125% to $0.09 per share. As with ATHM, investors’ reaction is the key to my future advice, but so far, this stock looks fine, sitting on a solid base at 65 that it’s built over the past two months. BUY.
Carvana (CVNA), originally recommended by Mike Cintolo of Cabot Growth Investor, and featured here two weeks ago, has been acting great, knocking on the ceiling of its old high (set in early July) both yesterday and today. But once again, the key factor for the days ahead will be second-quarter earnings, which will be reported tomorrow, August 8, after the market close. Analysts are looking for a loss of $0.30 per share as the company invests rapidly in new locations—the latest being in Cleveland, and featuring an eight-story high Car Vending Machine. If you agree with me that the typical used-car buying experience in this country is ripe for improvement, take a look at Carvana. 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 the second-quarter results released last week reflect that merger. Revenues grew 75% to $24.2 billion, while earnings grew 41% to $1.37 per share. And now management thinks it can generate more growth by breaking the company up—and Crista is a big fan of the idea. In today’s update, she wrote, “The company’s three divisions—Agriculture, Materials Science and Specialty Products – will each become independent, publicly-traded companies by June 2019. Management is planning the spin-offs because they fully expect the value of the three stocks to be higher than the value of the current stock. Considering their business acumen in managing a company with $87 billion in revenue and successfully forecasting profits almost to the penny, I believe management has likely made another wise assessment when forecasting the potential market value of the spin-off companies.
“Earnings estimates are incredibly stable. In late March, consensus earnings estimates pointed to EPS of $4.12 and $4.92 in 2018 and 2019. Despite two subsequent quarters of earnings releases, the current consensus estimates are $4.18 and $4.92. The consistency in those numbers tells us two important things. The first is that DowDuPont management has a firm grasp on business operations, despite the fact that two huge companies merged less than a year ago. That first post-merger year is more typically a time period when companies are still hoping and praying that the merger will succeed. The second point is that management is apparently very clear when discussing company prospects – including earnings projections -- with Wall Street analysts. A lot of the volatility associated with stock ownership stems from the disparity between Wall Street’s expectations vs. the real numbers that are reported when quarterly results are announced. We’re not seeing that problem with DowDuPont. DowDuPont management has a confident grasp on business operations and they’re openly willing to share that information with the entire financial community.
“The stock might now be ready to break past 70. Subsequent to the second quarter earnings release, four brokerage firms changed their price targets for DWDP to a range of 79-88. The stock has been ratcheting upward since early April. While I realize that reading price charts is a bit like reading smoke signals, I think the DWDP price chart, in conjunction with the market’s evolving upbeat disposition toward value stocks, is indicating that DWDP is finally ready to rise past 70. I certainly believe the stock could retrace its January high of 76 before year end. And of course, I expect additional capital appreciation in 2019 as the spin-offs take place.” BUY.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small-Cap Confidential, reported second-quarter earnings after the close Monday and the results were terrific. Revenues grew 43% to $35.8 million, while the loss per share was $0.18, far better than the loss of $0.22 expected by analysts. At quarter’s end, the firm had 4,158 global enterprise customers, up from 3,201 a year previously. And shortly before that release, the company announced that it had achieved a FedRAMP Agency Authorization for its Everbridge Suite solution. FedRAMP (Federal Risk and Authorization Management Program) is a government-wide program that provides a standardized approach to security assessment, authorization and continuous monitoring for cloud products and services, and Everbridge’s qualification for this standard means that the company is now officially listed on the FedRAMP Marketplace – the central, online portal of approved cloud service offerings available for federal government use. But this is far from the company’s first Federal qualification. Everbridge currently serves more than 40 federal agencies including the Department of Defense, the Department of Justice, the Environmental Protection Agency, and the Social Security Administration, and Everbridge has also been certified and designated as an approved technology by the U.S. Department of Homeland Security under the SAFETY Act (Support Anti-terrorism by Fostering Effective Technology). As to the stock, it surged today following the good results and can still be bought as it works to break out above its June high of 53. 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. And once again, the story is earnings, which will be announced after the market close on August 8. The stock looks fine here, so if you don’t own it, and you can handle the risk of an earnings disappointment, you could buy here. 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 21.1 and 17.1. GES has traded quietly between 21 and 23 for nine weeks, with upside resistance at 26.” To me, the chart looks calm, totally ripe for a renewed uptrend. 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. The stock fell out of bed last week (its base at 39) as the Chinese market sank lower, and found support at 33, two points above its March-April lows of 31. Now we wait for the next earnings report, due August 22. Analysts see earnings up 38% this year and 44% next. HOLD.
iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, reported second-quarter earnings last week. Here’s what Paul had to say about it: “IQ reported its Q2 results on July 31, booking $931 million in revenue (a 46% increase) and a loss of 45 cents per share, a 54% bump in EPS. The company also announced a 75% year-over-year increase in total subscribing members. The response was positive, with the stock bumping higher on August 1 on good volume. But then all of that bump disappeared, as emerging market stocks in general, and Chinese stocks in particular, were hit by a wave of selling.” Still, the chart looks quite good for a Chinese stock and I think this is a fine entry point, if you don’t own it yet and you can handle the volatility. Officially, I’ll stay on hold and wait for more strength. HOLD.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, reported earnings way back at the end of June (and the stock vaulted 8% in one day in response) so there’s no worry about earnings now. Even better, the one-month basing period that followed that surge ended last Friday when the stock again broke out to new highs, on no particular news. If you haven’t bought yet, and you’d like a high-yielding stock with the potential for a bit of capital gains in your portfolio, you can still buy here. BUY.
McGrath RentCorp (MGRC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income tier, reported second-quarter results last week and beat analysts’ estimates on both revenues and earnings. Revenues grew 7%, to $117 million, beating estimates of $113 million, while earnings of $0.65 per share were one cent above the consensus estimate, and up 35% year over year. Also, the dividend was hiked 31% to $0.34 per share. But the reaction hasn’t been particularly positive. Yes, there were a couple of days up on elevated volume, but as of today, the stock is threatening to fall below support at 58 and tumble to its 200-day moving average at 54. I’ll downgrade to hold. HOLD.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has bounced back from its earnings-triggered selloff two weeks ago. In his latest update, Mike wrote, “Our thoughts on PYPL are similar to our thoughts on most growth stocks: Intermediate-term, the trend is broken, with a recent failed breakout (a bug seen in many charts these days) likely to lead to another consolidation, though longer-term, the trend is still up and the stock has held key support (30-week line this week, for instance). Fundamentally, the second-quarter earnings report confirmed that business remains on a fast and steady growth track—sales (up 23%) and earnings (up 28%) looked fine, as did the 15% increase in total accounts (now 244 million, including 19.5 million merchants), the 27% hike in total payment volume (including a 78% jump in Venmo’s volume), a 9% increase in payments per account and another huge mound of free cash flow. Of course, our leash isn’t limitless, but having already taken partial profits a few months back and with a modest-sized position, we’re giving our stake some room to find support.” I agree, and I’ll note that big-picture, the stock is just 10 trading days off its record high. HOLD.
PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth portfolio, remains in the basing pattern it’s built over the past six months and I must admit I’m getting not only impatient, but also fearful that if there’s any bad news about the housing industry, this base will not hold. But Crista remains resolute. In today’s update, she wrote, “Earnings estimates did something curious last week that’s worth mentioning. The 2018 consensus EPS estimate leaped upward to $3.75, while the 2019 estimate rose modestly to $3.83. At this point, earnings growth is slated to be 82.0% and 2.1% in 2018 and 2019. The corresponding P/Es are 7.6 and 7.5. The 2019 EPS growth rate is problematic for me, although I promise the market won’t focus on it until much later this year. I expect the stock to rise toward short-term price resistance at 33 relatively soon. In the interim, I’ll monitor the earnings estimates, which could continue to change in the wake of the strong second-quarter earnings report.” I’ll give it a little more time. HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is a thing of beauty today, and the main reason is the second-quarter earnings report, released last Tuesday. Funds from operations (FFO) were $0.45 per share, beating analysts’ estimates by a penny, while net income was nine cents per share, compared to a loss of a penny the year before. In the quarter, STAG acquired 15 more buildings, sold five buildings, and achieved an occupancy rate of 96.6% on the operating portfolio as of June 30. After the report, the stock broke out to a new high and has been higher every day since until today. If you don’t own it, you buy here, or try to get in a little lower. BUY.
Stitch Fix (SFIX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains a substantial loser, in part because I bought high and in part because the growth stock correction kicked off immediately after—but I’m not giving up yet. In his latest issue, Mike wrote, “One of the rare characteristics we like to see in a stock is that it’s the top player in a brand new industry, and Stitch Fix fills the bill—the company is the leader in emerging online personal styling sector, where customers take a 10-minute survey that shares 85 data points about them and their tastes, including measurements, what clothing or styles they like and own and what price point is desired. That data is inputted into a proprietary algorithm and, with the help of one of Stitch Fix’s 3,700 designers, selects and ships a handful of items to the customer. The customer can then keep (and pay for) or return any of the items, within three days (with a minimum $20 per box charge, which itself can be replaced by a yearly $49 membership that allows for unlimited shipments). The idea’s been a hit, with steady (and recently accelerating) revenue growth, earnings in the black and a big and growing customer base (2.7 million active clients as of April, up 30% from a year ago). Analysts see the bottom line sagging as Stitch Fix invests in category expansions (such as Plus-size, which is off to a great start over the past year, and a new Kids segment that should be a hit for the back-to-school season), marketing and more, but Wall Street’s OK with that given the newness of the sector and the massive longer-term potential.” The stock’s sharp two-week correction seemed to bottom last Tuesday, so if you haven’t bought yet, you can 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. But short-term, it’s the earnings report that matters. In her latest update, Crista wrote, “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. SUPN is an undervalued aggressive growth stock. Analysts expect full year EPS to grow 46.8% and 40.5% in 2018 and 2019. Corresponding P/Es are 28.5 and 20.3. SUPN has recently been trading between 52 and 60. There’s room to make 13% profit within the trading range, and I also expect the stock to surpass its June all-time high of 60 at some point this year.” BUY.
Teladoc (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, and due to be rebranded Teladoc Health on August 10, announced second-quarter earnings on August 1. Revenues grew to $94.6 million, up 112% from the year before, while the loss per share was $0.40 compared to a loss of $0.28 the year before. Total visits from paid membership grew 41% to 309,000, while total U.S. membership grew 48% to 22.5 million. The stock is up since the report, though still shy of its record high of 71, hit in July, so overall, the picture is good. But I just downgraded it to hold last week, following Mike’s lead, so I’ll keep it there a while longer. The stock could easily spend weeks consolidating that gain. 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 I haven’t had the stock rated buy for a long time, mainly because the chart is so sloppy and news-driven. Last week, of course, the news was great, as Tesla not only succeeded in producing 53,339 vehicles in the quarter, but also succeeded in producing 5,000 Model 3s for several weeks in the quarter, and is now aiming to produce 7,000 Model 3s per week in the second half of the year. Even better, on the conference call, Musk several times stated his conviction that the company henceforth will be both sustainably profitable and cash flow positive. Wall Street liked that a lot (even knowing that Musk has often been over-optimistic about hitting previous targets), and buyers sent the stock soaring 16% in the next day’s trading. Then today the stock soared even higher as Musk tweeted that he might take the company private at $420 a share—and said he already has funding! Given his “uneven” relationship with the press and analysts, going private is understandably attractive to Musk. But the stock remains constrained by its high of 390 from June 2017. HOLD.
Note: We recently sold both Weight Watchers (WTW) and Zillow (Z) and so were interested (gratified?) to see both plunge today as Weight Watchers reported a declining subscriber base (relative to the first quarter) and Zillow announced an agreement to acquire Mortgage Lenders of America, thus getting into the lending business. Both companies, interestingly, are still growing and posted very good results. In the short term, I’m happy we dodged a bullet; in both cases, the behavior of the stock was a yellow flag. But long term, I think both companies will succeed, and I remain very bullish on Z in particular (it’s still on my list of Forever Stocks). Still, I don’t recommend buying here—best to let the dust settle.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED August 14, 2018
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