The market’s main trends remain up, and thus I remain bullish. In fact, I think the challenging action of the past few weeks has cleared the air a bit and set the stage for a renewed advance.
Cabot Stock of the Week 211
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The broad market remains in good shape, with all major indexes at or near recent highs. At the same time, though, rotation continues; last week the traditionally defensive sector of Consumer Staples came to the fore. The bottom line, though, is that the market is generally supportive and that you should remain heavily invested in a diversified portfolio. With this week’s selection, I’m taking the slightly unusual step of targeting a top Chinese stock after what I think was likely the bottom for Chinese stocks. The stock was originally recommended by Paul Goodwin of Cabot Emerging Markets Investor. Here are Paul’s latest thoughts.
Alibaba Group (BABA)
Alibaba was founded by Jack Ma in 1999 as an online marketplace where Chinese companies could offer their wares to foreign buyers and a place where prospective buyers could search for goods to buy at good value. Right from the start, Alibaba’s T-Mall was a place where buyers and sellers could find one another, with Alibaba taking a small cut of any transactions that followed. It’s the eBay model right down to the payment, buyer protection and shipping services.
But Alibaba has ridden the buildout of the internet across China (mostly via mobile devices, which is how a vast majority of Chinese shoppers do their buying) to run past eBay in scope. Alibaba has a market cap of over $460 billion and reported revenue of $37.6 billion over the past fiscal year based on gross merchandise sales on its various sites of $547 billion. During that fiscal year (which ended on March 31), Alibaba took in $19.5 billion from core commerce, almost $970 million from its cloud computing services, $2.1 billion from digital media and entertainment and $435 million from innovation initiatives.
The money coming in from outside the company’s core commerce division is a good indicator of the company’s ambitions in every phase of Chinese online life. Fueled by $10 billion of free cash flow in fiscal 2018, Alibaba has taken dozens of equity positions in content providers, media outlets and internet innovators, while also forming strategic alliances with other retailers, manufacturers and industries.
Under the continuing leadership of Jack Ma, Alibaba has also turned Singles Day (November 11 every year) into a 24-hour festival of online buying and an online broadcast marathon featuring international movie and music stars. In 2014, Singles Day produced $9.3 billion of total online merchandise sales. In 2017, that number was up to $25.4 billion. That number puts Black Friday and Cyber Monday, combined, in the shade.
As for the stock, BABA has been through four distinct phases since its headline-producing IPO back in September 2014. In the first phase, the stock ran from its 68 opening price to 120 in November 2014. Then came the second phase, the long post-IPO droop when investors were afraid that there was nothing new to know about Alibaba and that its stock was overvalued. That ended with BABA trading at a low of 57 a year after its IPO.
In the stock’s third phase, the reality of Alibaba’s strength and the sheer scale of the Chinese opportunity sank in, and investors began to chase BABA in earnest. The rally (with a pause for a three-month pullback in late 2017) pushed BABA to 192 in November 2017.
Since then, BABA has hit a few new highs (205 in January and 210 in June) but in reality, the stock’s fourth phase has been a long sideways ramble that has included dips to 167 in April and 169 just last week. This, of course, has come in a climate where Chinese stocks—under threat of tariffs—have performed terribly.
In a way, the time BABA has spent trading sideways—at its current price, it’s trading where it was in September 2017—is its biggest asset. The stock still isn’t cheap (its P/E is 47), but you don’t expect cheap valuations in great growth stocks.
With the stock still near the bottom of its nearly yearlong basing pattern, this looks like a good time to buy, particularly if the pressure continues to come off Chinese stocks in the weeks ahead.
Alibaba Group (BABA)
969 West Wen Yi Road
Yu Hang District
Hangzhou 311121
China
http://www.alibabagroup.com
CURRENT RECOMMENDATIONS
At last week’s Cabot Wealth Summit, I joined Paul Goodwin and Tyler Laundon on a panel devoted to growth stocks. Paul discussed a couple of his favorite Chinese stocks and Tyler reviewed a couple of his small-cap stocks, while I talked about Axon Enterprise and Carvana, two stocks in this portfolio that I have great expectations for, long-term. Both companies have terrific growth stories; they’re disrupting their industries. Both have great numbers; Carvana has crazy fast growth while Axon has an increasingly large stream of recurring revenue. And both have good charts! But two stocks alone do not make a portfolio. And these two stocks in particular are on the aggressive end of the spectrum of stocks in the portfolio, so they’re balanced by more conservative selections. After last week’s housecleaning, the portfolio is in good shape, with the exception of the first stock, Autohome, which will now be sold.
Autohome (ATHM), fell with all the Chinese stocks over the past two months; it fell even faster when disappointing earnings results were released two weeks ago; and last week, when the Chinese market bounced, ATHM didn’t. Conclusion, there’s no buying power here. SELL.
Axon Enterprise (AAXN), originally recommended by Mike Cintolo of Cabot Growth Investor, has climbed steadily back from its post-earnings selloff two weeks ago, but still lies below its 25- and 50-day moving averages. Thus the short-term pattern is weak. One explanation for this may be investor perceptions that the company’s rapid expansion (after Evidence.com will come Dispatch.com and Citizen.com) will cut into earnings growth. And that may be so. But long-term, I remain bullish on the company as it revolutionizes the technology of the law enforcement industry. HOLD.
Carvana (CVNA),originally recommended by Mike Cintolo of Cabot Growth Investor, has been hitting new highs as more and more investors come to understand the disruptive potential of this firm’s car buying platform. Check out the Carvana web site for yourself, even if you’re not in the market for a car. And try to buy the stock on dips. 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, but management intends to break it up into three companies by June 2019 to spur faster growth and unlock value. In her latest update, Crista wrote, “DowDuPont is expected to see strong EPS growth rates of 24.7% and 16.9% in 2018 and 2019. The corresponding P/Es are 16.2 and 13.8. Debt levels are low relative to the market cap. The stock has been ratcheting upward since early April. When it breaks past 70, it will likely head toward its January high of 76. 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, notched another new high today! With a market capitalization of $1.67 billion, Everbridge is the smallest stock in the portfolio, but it has great growth potential as a leading provider of alerts and information about all manner of potential hazards, from weather to active shooters and everything in between. As the company becomes embedded in the government-sanctioned alert/information establishment, the dependability of cash flows becomes increasingly robust, which should attract more big investors. Try to buy on pullbacks. BUY.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier and featured here last week, is off to a good start. In fact, it’s possible we caught the bottom! Time will tell. In the meantime, after reading my chart-based rationale for buying last week, Chloe sent me some additional info: “GM’s costs are increasing this year, even as revenues shrink, thanks to President Trump’s new import tariffs on aluminum and steel. Earnings are currently expected to fall by about 9% in 2018. The cost-cutting measures—including the divestment of Opel/Vauxhall and withdrawing from some unprofitable markets—that helped keep margins and earnings afloat last year won’t be enough this time around.
“However, revenues are expected to begin to recover in 2019, helping GM’s earnings growth to turn positive again (albeit by low single-digits). Then, over the next five years, analysts think EPS could increase by an average of 10% per year.
“One big, incalculable element here is GM’s big investment in “the future of mobility.” In 2016, the company invested $500 million in Lyft and acquired autonomous driving startup Cruise. Then in May, SoftBank invested $2.25 billion in Cruise, which could help GM launch an autonomous ridesharing fleet as soon as 2019. These big unknowns could help GM trade a bit more like a startup than a multi-billion-dollar blue chip. The stock spiked higher after SoftBank’s investment, but gapped down following second-quarter earnings a few weeks later. GM is now back near its lows from May, where it has found support multiple times.
“At this level, the stock looks like a bargain. GM has been consolidating since October, trading in a wide, sloppy range between about 35 and 47. When GM is near the bottom of this range, as it is now, it’s usually a decent buying opportunity for value-minded investors. Adding to GM’s value bona fides is the stock’s forward P/E ratio of 6.0, and the stock’s yield of 4.2%.” 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 the stock has been hitting new highs in recent days! But volume on the advance has been fading, so a pullback is likely soon. As to the long-term, Mike and I discussed it and came to the conclusion that it’s possible we’ll be able to hang onto the stock as a long-term winner—but it’s also possible that if investors sell off lower-quality financial stocks in the months ahead (something that happens near the end of every bull market), GDOT could suffer. Noting that, plus the chance of a short-term pullback, I’ll downgrade the stock to hold now. HOLD.
GrubHub (GRUB), originally recommended by Mike Cintolo of Cabot Growth Investor, saw some strong buying yesterday, though still short of its July closing high of 135. In his latest update, Mike wrote, “From today’s perspective, the push to new highs looks like a resumption of GRUB’s longer-term uptrend, especially considering the tameness of the prior consolidation (just 20% from high to low after shares doubled over the prior five months) and the huge fundamental story. If you don’t own any, you can start with a smaller-than-normal position; if you own some with a big profit, you can add a small amount to your holdings.” BUY.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, is a well-known name, but surprisingly, it’s the second smallest stock in the portfolio by market cap. In her latest update, Crista wrote, “Revenue growth stems largely 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 21.5 and 17.4. GES traded quietly between 21 and 23 for eleven weeks, and now appears ready to rise to price resistance at 26.” 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 I won’t be shaken out by the stock’s action; I’m intent on holding for the long-term gains I expect will come from the largest hotel operator in China. The stock bottomed with the broad Chinese market last week and has rallied since. The company’s next earnings report is due August 22. HOLD.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, sold off today as profit-takers took charge of the recently strong defensive stock, but the big picture looks fine. In her latest update, Chloe wrote, “The spice and flavoring company is a reliable cash cow, with a big industrial business as well as major consumer brands like Old Bay and Frank’s RedHot. Consumer staples stocks were dogs for most of the first half of this year, but have been among the leaders since June. McCormick is also a Dividend Aristocrat, boasting a 31-year history of dividend growth plus a 9% dividend growth rate over the past decade. Safe income investors can Buy here.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, remains in a consolidation pattern. In his latest update, Mike wrote, “After falling about 11 points from high to low, PYPL has recouped as many as seven of those points, a fair showing after the late July dip. That said, the near-term action (big-volume selloff, light volume rally) isn’t a low-risk setup, so we’ll stay on Hold. The company has been quiet on the news front since its earnings release, but it’s a plus that analysts have basically maintained their earnings estimates (up 23% this year, up 21% next, with similar growth in the years beyond) following the Q2 report. If you own some, we advise patience.” HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, hit a new high yesterday and pulled back a hair today. In her latest update, Chloe wrote, “STAG has held its post-earnings gains and is trading at its highest level since December (before interest rate shocks caused a sharp pullback in REITs). In the second quarter, core FFO of $0.45 beat estimates by one cent and rose 10% year-over-year. Revenue was also higher year-over-year and beat estimates nicely. After the stock’s recent pullback to its 50-day line, this bounce looks like a good start to STAG’s next advance. High-yield investors can buy some here.” BUY.
Stitch Fix (SFIX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been holding up at 34 for more than a week now, less than a point from the all-time high that it hit in mid-July. But volume has been growing lighter, and it looks to me as if the stock needs more time to consolidate by basing here, or even back down toward its 50-day moving average at 30. Buy on pullbacks. BUY.
Teladoc Health (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, looks great; it closed at record highs on each of the past three days. In his latest update, Mike wrote, “The quarterly report was very solid, with organic (i.e., not including acquisitions) revenue growth of 39%, including a big bump up in its visit revenue, which is still small (about 16% of revenue) but growing quickly (thanks to a 41% leap in paid visits and a 23% organic bump in paid membership). But possibly more encouraging was the announcement we wrote about in last week’s update; CVS’s medical clinic operation (MinuteClinic) will be leveraging Teladoc’s technology to launch its own virtual care operation, which backs the view that (a) Teladoc is the hands-down leader in the sector and (b) there’s potential for more partnerships with other big care providers. Back to the stock, it remains very volatile, so expect some wiggles, but the main trend is up and we think plenty more big investors will be looking to get in if the market behaves itself. 420 mutual funds now own shares, up from 318 a year ago.” I’ll keep it on hold, waiting for a pullback. 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 the stock remains in the long consolidation pattern between 280 and 380 that has constrained it for more than a year—and then there’s the matter of Elon Musk’s imprudent tweet about going public and the heavy media coverage since. I prefer you put new money into stocks that are lower profile (and thus have more potential buyers and fewer potential sellers). HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED August 28, 2018
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