The market’s main trends remain up, and thus I remain bullish, while continuing to remind you that a balanced portfolio with attention to risk management is always smart.
Cabot Stock of the Week 212
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With the Nasdaq crossing 8,000 for the first time and many other major indexes strong as well, the market remains healthy overall, and thus still worthy of heavy investment, provided that you stick with good stocks.
In selecting today’s stock, I looked at Crista Huff’s Cabot Undervalued Stocks Advisor, simply because some recent sales had left her under-represented in the portfolio and I wanted to get back to a more balanced position. The stock I chose is a financial stock (also an under-represented sector) with a constructive chart. Here are Crista’s latest thoughts.
Voya Financial (VOYA)
Formerly named ING U.S., Voya Financial is a retirement, investment and insurance company serving approximately 14.3 million individual and institutional customers in the United States. This Fortune 500 company manages $528 billion in assets. Voya’s products and services include employer-sponsored and personal retirement plans, employee benefits, investment management and life and disability insurance. The company won a variety of awards in 2018 for workplace excellence, ethics and diversity.
Voya is well into a multi-year process of improving its business operations and profitability, while lowering its risk. The sale of the majority of the company’s variable and fixed annuity operations was completed on June 1, although Voya retained its profitable role as asset manager. The sale of Voya’s life insurance segment is also a possibility. In addition, management is focused on expanding the company’s return on equity (ROE) to a range of 13.5% to 14.5% by 2019, and has thus far been reaching ROE milestones ahead of schedule.
After half a dozen years of relatively solid but stagnant profits, Voya is now expected to achieve very strong earnings growth in the coming years. Voya beat analysts’ earnings estimates in both the first and second quarter this year, with impressive improvements in expanded margins and improved life insurance loss ratios. Wall Street now expects Voya’s full-year earnings per share (EPS) to grow 123% in 2018 and 24.3% and 2019. The corresponding price/earnings ratios (P/Es) are 11.9 and 9.5. (It’s normal for investment firms to have P/Es within a range of 10-15, no matter how strong their earnings growth. Still, the stock has plenty of opportunity for P/E expansion within that range.)
VOYA is a mid-cap stock with a market capitalization of $8.5 billion and heavy institutional ownership. The company has repurchased $1 billion of its stock since the fourth quarter of 2017, representing 10% of outstanding shares. Voya has also announced a new authorization to repurchase $500 million of its stock during the second half of 2018.
Financial stocks had a tough year in 2016. After bottoming mid-year, VOYA doubled its share price through the end of 2017, and has traded sideways since. This is normal; stocks need to rest after big run-ups, including those like VOYA that remain undervalued. The very promising news is that, despite this year’s stock market correction, VOYA did not give back any of its gains from 2016 and 2017, indicating that the stock has underlying strength.
Currently, VOYA appears immediately ready to rise past short-term price resistance at 51, and is therefore most likely to retrace its May 2018 all-time high of 55 before resting again. I expect additional capital gains thereafter. Buy VOYA now to catch the pending run-up. BUY.
Voya Financial (VOYA)
230 Park Avenue
New York, NY 10169
212-309-8200
http://www.voya.com
CURRENT RECOMMENDATIONS
“The most bullish thing a stock can do is hit new highs” is one of the precepts of successful growth investors, and there has certainly been a lot of that in our portfolio in recent weeks—and there’s no reason the trends can’t continue. But the combination of these record highs and rising investor sentiment does remind me that it’s always important to keep an eye on the risk-o-meter. Today, that means downgrading STAG to Hold (it’s had a great run) and qualifying many of my buy recommendations with the phrase “Buy on normal pullbacks.”
Alibaba (BABA), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and featured here last week, reported earnings last Thursday. Here’s what Pail had to say about it. “BABA held support in the mid 160s for the umpteenth time this year, bounced with the market and, initially today, rallied nicely following a solid quarterly report. Revenues soared 61% in local currency (65% in U.S. dollars), thanks to a 61% bump in its core ecommerce businesses and a 93% gain in its cloud computing segment. Earnings were basically flat from a year ago due to the company’s big investment spree, but that was baked into the cake a while ago; free cash flow totaled nearly $4 billion in the quarter. The stock opened higher, then dipped to 174, edged back to 178 and finally finished the day below 173.” I still rate it buy here. BUY.
Axon Enterprise (AAXN), originally recommended by Mike Cintolo of Cabot Growth Investor, has rallied back above both its 25- and 50-day moving averages, but volume on the advance has tapered off and the stock remains below its high of mid-July, so there are more attractive growth stocks for now. HOLD.
Carvana (CVNA), originally recommended by Mike Cintolo of Cabot Growth Investor, continues to act superbly, hitting new highs day after day as analysts ratchet up their earnings estimates and new investors discover this revolutionary used car retailer. Technically, Mike doesn’t have it in his Cabot Growth Investor portfolio, but it’s on his Watch List, and last week he wrote: “CVNA has shown tremendous power, zooming from a pullback low of 40 at the end of July to as high as 60 this week! It will probably go higher near-term, but we’re looking for a lower-risk entry, preferably on normal weakness.” Buy on normal pullbacks. BUY.
DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, surged with other materials stocks on the Mexican NAFTA agreement, but Crista’s perspective is based on real numbers. In her latest update, she wrote, “DowDuPont intends to break up into three companies by June 2019, comprised of its three divisions—Agriculture, Materials Science and Specialty Products. 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. DowDuPont is expected to see strong EPS growth rates of 25.0% and 16.7% in 2018 and 2019. The corresponding P/Es are 16.5 and 14.1. Debt levels are low relative to market cap. The stock is running 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, closed at record highs five days in a row before pulling back normally over the past two days. In his latest update, Tyler wrote, “Everbridge sells critical communications software solutions that help keep people safe and businesses running. The software alerts people in scenarios like active shooter, terrorist and severe weather events, and helps them get to safety and check in so others know if they’re OK, or if they need help. Growth is solid as a rock, and in Q2 revenue expanded by 43% (well above the 37% growth expected) while EPS of -$0.18 beat by $0.04. Full-year guidance also went up to around 38% revenue growth and EPS should be in the range of -$0.56 to -$0.58. Management flagged sales in the core Mass Notification solution as well as accelerating market acceptance of the Critical Event Management (CEM) suite, as well as international sales (helped by the UMS acquisition) as fueling growth.
“I’ve kept the stock rated buy even though we’re up nicely on the position because in the grand scheme of things it seems like Everbridge has a long way to go. That’s been the right call lately, and over the last two weeks the stock has been particularly kind to us, rising almost 10% each week! Everbridge is definitely a little extended here so I would recommend only adding smaller positions, if you can’t help yourself. It would probably be better to wait for a little dip as I wouldn’t be surprised to see the stock give back 10 points or so. That said, it’s still a long-term Buy.” BUY.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, is another perceived winner of the Mexican NAFTA news; investors bought both it and Ford in big volume when the news was announced. In Chloe’s latest update, she wrote, “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 4.1%. I’m going to put GM back on Buy today for volatility-tolerant investors looking for high current yields (note that GM is not currently an annual dividend increaser).” 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 debit cards, Uber and Intuit. The stock hit record highs on a couple of days last week and has now begun a pullback that has the potential to go further, perhaps as low as 80. I’ll keep it on Hold for now. HOLD.
GrubHub (GRUB), originally recommended by Mike Cintolo of Cabot Growth Investor, has an interesting chart, but first, here’s Mike: “Interestingly, a competitor of GRUB named DoorDash (which delivers for some big firms like Chipotle, Cheesecake Factory and Wendy’s) just had another funding round ($250 million worth) that raised its overall valuation to $4 billion, a sure sign money is flowing into this area, which we take as a good sign. (GRUB’s market cap is about $12 billion.) The stock is still trying to chew through some resistance, but overall, it’s done a nice job holding most of its post-earnings gains.” That phrase about chewing through resistance refers to the month-ago period when the stock gapped up to 141 one day but finished down at 136—and the stock has been climbing through that zone for the past four days. Technically, it’s a positive pattern, and could lead to a continued run higher. On the other hand, the stock could easily pull back to 130. If you buy, buy on normal pullbacks. BUY.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, continues to trade sideways, keeping close to both its 25- and 50-day moving averages. In her latest update, Crista wrote, “Wall Street expects EPS to grow 50% and 23.8% in 2019 and 2020 (January year end). Corresponding P/Es are low in comparison to earnings growth rates, at 22.3 and 18.0. GES traded quietly between 21 and 23 for eleven weeks, and has now begun ratcheting higher. There’s 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 two weeks ago and has rallied since, in part because the firm’s second-quarter earnings report, released last Wednesday, was quite good. Revenues grew 29% from the year before to $381 million, while earnings grew 33% to $0.28 per share. On June 30, the company had 3,903 hotels in operation, having opened 147 in the quarter and closed 61. Interestingly, the average daily rate (ADR) was 226 renminbi in the quarter, up from 199 a year ago, signaling a gradual move away from cheaper hotels toward middle and upscale properties. I’m holding tight, but if you don’t own the stock, this looks like a decent low-risk entry point. HOLD.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, has been trading tightly around 124 for the past week. In her update last week, Chloe wrote, “After advancing for seven trading days in a row (closing at new all-time highs on five of them) MKC finally pulled back significantly. Stocks of most food companies declined after J.M. Smucker (SJM) issued lower-than-expected guidance. McCormick’s stock still looks very healthy—in fact, a longer pullback to the 50-day line, currently at 116, might be in order. Use it as a buying opportunity. MKC is in a strong uptrend, spent four weeks consolidating before the recent move, is expected to report 13% sales growth and 17% EPS growth this year, and has a 31-year history of dividend growth.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, surged higher last Friday and since then has been sitting on the 90 line, just two points off its record high of late July. In his latest update, Mike wrote, “Longer term, we think the stock has more gas left in its tank, as its position at the forefront of the digital payment and money transfer areas will drive consistent growth.” HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, was bought back in early April just after the bottom of a big (20%) three-month correction and it’s had a great run since, not least because the demand for warehouse space in the U.S. is strong. And Chloe still has the stock rated buy for high-yield investors. But I think the stock is ripe for a substantial cooling-off phase somewhere, so I’m going to downgrade it to Hold now. HOLD.
Stitch Fix (SFIX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been hot; the stock closed at record highs on four consecutive days last week, and has only pulled back slightly since. In his latest update, Mike wrote, “SFIX has leapt back to new highs after its sharp July dip. With the stock only recently clearing its post-IPO base, we think it has room to run if management executes.” BUY.
Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, is another hot one; it closed at record highs three days last week. In his latest update, Mike wrote, “TDOC stretched decisively to new highs this month, nearly reaching 77 (well above its July peak of 71) before resting a bit so far this week. The firm will present at a Wells Fargo conference on September 5, and it will host its Investor Day on September 27, which occasionally results in some longer-term guidance. Big picture, we see Teladoc as the leader in a new industry that’s catching on fast, and it’s a good bet institutional investors are looking to build stakes. We’ll stay on Buy, though as always, aim for dips of a couple of points.” I’ll leave 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. Still, the continuing high-profile publicity about the company and Elon Musk has raised doubts among readers. One of them wrote this earlier this week:
“I was reviewing the latest edition of Cabot Stock of the Week. It seems that despite of all the negative press and swings in the Tesla stock, you have not changed your position from recommending us to HOLD the stock. Should I hold despite of the way the stock is moving? Please let me know your ideology behind this.”
And I answered,
“We can look at TSLA from three perspectives: fundamental, technical and sentimental.
“Fundamentally, Tesla remains on a fast growth track; in the second quarter, automotive revenues grew 47% from the year before, and 23% from the quarter before. That’s impressive growth. As to earnings, Elon Musk says they will be achieved soon. Knowing Musk, this could easily turn out to be a bit later than ‘soon,’ but that’s fine with me.
“Technically, if you look at a long-term (5-year) chart of TSLA, you see a long uptrend. Recently, TSLA has been at the lower end of that channel, but it is still definitely in the uptrend. Also, note that when a writer crafting a headline about TSLA uses the words ‘plunges’ or ‘falls’ or ‘crashes’ you should simply pull up the chart and judge for yourself. Sometimes writers exaggerate.
“As to sentiment and the negative press, there’s an old saying, “Winds blow hard on high hills.” Tesla’s high profile invites criticism—and Musk’s imprudent texting recently has not helped. But you should remember that bad news typically comes around bottoms, while good news comes around tops.”
Certainly, there are many growth stocks in better shape than TSLA—we own many in the portfolio—and that’s why the stock is rated Hold today. But I still believe the odds are good that Tesla will be a long-term winner in the same league as Microsoft, Netflix, Apple and Google, while changing the world for the better as all those companies have done, and that’s why I’m holding tight. HOLD.
And I might mention that other companies in the portfolio that are improving our world in revolutionary ways—like AAXN, CVNA, EVBG, GRUB, PYPL, SFIX and TDOC—also have great long-term prospects.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED September 4, 2018
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