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 213
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As we shift from the unofficial end of summer into fall, and traders return to their desks, we can expect stock trading volumes to rebound, for better or worse—and I think it will be for the better! I still believe the man on the street is underinvested in stocks; many simply don’t care. But as the major indexes continue to blast to new record highs, I see the potential for that to change as we head toward the end of 2018, and I think we can make a lot of money between now and then—provided we’re in the right stocks.
In selecting today’s stock, I went looking for a good but underappreciated growth stock whose chart provided a low-risk entry point and I found it in Cabot Small Cap Confidential. Here are Tyler Laundon’s latest thoughts on the stock.
Instructure (INST)
As the world moves toward knowledge-driven economies, continuous learning is critical. It’s not an option to just sit on your butt if you want to get into a great college, land a terrific job or move up the corporate ladder.
For years, people have been achieving their knowledge goals with the help of specialized software called Learning Management Systems (LMS). LMS products burst onto the scene in the mid-1990s, primarily in the higher education market where industry innovator Blackboard gained first-mover advantage. Later, these same systems were adapted for use in the corporate world for training, performance management, recruiting, and compensation management.
An emerging leader in today’s LMS market is Instructure (INST), a $1.4 billion market cap company that has developed an innovative and easy to use cloud-based learning management system for academic and corporate customers. The company’s software is delivered on a software-as-a-service (SaaS) subscription basis, which drives 85% to 90% of revenue. The rest comes from professional services.
Instructure’s applications are valued because they enable frequent, candid interaction between instructors and learners, streamline workflow, and allow creation and sharing of content, on all devices, from virtually anywhere. Its products are powerful and feature-rich, but easy to use, and feature elegant user interfaces.
The company says its software makes people smarter. I think that’s a fair claim. Millions of students, teachers, and employees currently use the software to achieve their learning goals. And many schools are switching to Instructure, especially from Blackboard, because the company’s software is so much better. Instructure also competes favorably against Desire2Learn (D2L), Moodle and Sakai.
Instructure’s first product, Canvas, launched in 2011, has quickly become the dominant solution in the higher education market. Canvas is used by seven Ivy League schools, including Brown, Harvard, Stanford, Yale and Dartmouth, as well as K-12 schools in 49 U.S. states and schools in over 70 countries.
In 2015, the company launched Bridge for corporate customers, essentially doubling its addressable market opportunity, which stands at roughly $9 billion today. Perhaps more importantly, this new enterprise opportunity comes with higher profit margins than the education space!
Since the introduction of Bridge, many high-profile corporate customers have been added to the client roster, including Tesla, McKesson and the Better Business Bureau. In Q2 2018 Bridge won a 10,000-seat contract with Holiday Retirement and another with the State of Missouri to train 40,000 people in the field of cybersecurity. Bridge is on track to generate 15% to 20% of new bookings.
All in all, Instructure has over 3,000 customers. If it can replicate the success it’s had in the education space in the corporate space, the stock could easily go on a multi-year run.
Growth has been tremendous. Revenue was up 51% in 2016, 43% in 2017 and 47% in the second quarter of 2018. Around 88% of revenue is recurring, and revenue retention is over 100%. In 2018, Instructure should grow revenue by 32%.
Earnings are in the red but trending in the right direction now that major Bridge-related investments are in the rearview mirror. Adjusted EPS will likely be around -$0.90 in 2018 and -$0.60 in 2019, and then turn positive in 2020.
Shares performed well in the first half of the year. But while second quarter earnings came in slightly ahead of expectations, third quarter guidance was a little lighter than expected (at $53.6 million to $54.2 million, versus consensus at $54.4 million) and second quarter billings were about $5 million lower than expected (at $199 million). That said, rolling 12-month billings, which strips out quarterly lumpiness, was fine at $214 million (up 31%).
In the context of a major tech and software stock selloff (at the time), this quarterly report didn’t get the job done. I believe the resulting dip in shares has provided a buying opportunity, and now is a terrific time to start building a position. Last week the stock jumped back above its 200-day line, giving us the buy signal we’ve been waiting for. BUY.
Instructure (INST)
6330 South 3000 East, Suite 700
Salt Lake City, UT 84121
800-203-6755
http://www.instructure.com
CURRENT RECOMMENDATIONS
One of the keys to successful investing is to go with the flow in the middle of trends, but to lean against the flow at the ends of trends—to be contrary. But it’s far from a precise science! Not only are the movements of the broad market overlaid by the movements of the individual stocks, but no one rings a bell at the end of a trend! Still, today I feel confident that the main trend of the market remains up, while the short-term term trend is ripe for a pullback, and thus I am leaning away from aggressive investing when it comes to stocks hitting new highs. That’s why SFIX, for example, is downgraded to Hold. Overall, though, the portfolio is in good shape, with the weakest stock Alibaba, reflecting the continuing softness in Chinese and emerging markets stocks.
Alibaba (BABA), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is one of the “blue chip” stocks of China, almost certain to grow as the country grows, but the stock has been in a long basing pattern since January as the broad Chinese market has corrected downward. I saw this as a buying opportunity two weeks ago, and still rate it a buy today. In his latest update, Paul wrote, “Despite trading as low as 166 and as high as 212 over the past year, BABA is still hovering at the same price as in August 2017. The company reported 65% revenue growth in its latest quarterly report, although earnings growth was an anemic 3%. Analysts are looking for 14% earnings growth this year and 33% next year. When Chinese stocks come back into favor, BABA should do well.” BUY.
Axon Enterprise (AAXN), originally recommended by Mike Cintolo of Cabot Growth Investor, has climbed steadily over the past three weeks, erasing all of the loss that followed its second quarter earnings report. My opinion of the company’s long-term prospects remains very high, but I’d like to see the stock build a base here above its 50-day moving average before I return it to a buy rating. HOLD.
Carvana (CVNA), originally recommended by Mike Cintolo of Cabot Growth Investor, hit another new high today, as more and more investors note the success that this firm is having taking market share from old-school used car dealers. In fact, at the recent Cabot Wealth Summit, I talked with an attendee who had sold two trucks to Carvana and was very impressed by the whole process. If you don’t own it yet, you can buy a little here or wait for the next normal pullback. BUY.
DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, pulled back normally last week after its prior surge, but the main trend since April has definitely been up. In Crista’s 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 24.7% and 16.7% in 2018 and 2019. The corresponding P/Es are 16.7 and 14.3. The stock is heading toward its January high of 76. I expect additional capital appreciation in 2019 as the spin-offs take place. Buy DWDP now.” BUY.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small-Cap Confidential, has had a great run in recent months, but now it’s in consolidation mode. Here’s Tyler’s latest update: ”EVBG dipped slightly this week but regained composure at 58, and after an uptick yesterday is still near a 52-week high. The stock looks ready to consolidate some of its August gains so I don’t think it’s a screaming buy right here, but more of a nibble-on-the-pullbacks type. Long term, I love the potential. 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. Management recently illustrated how the platform was used by the Hawaii Police Department to keep island residents and visitors up to speed regarding Hurricane Lane and eruptions of the Kilauea volcano. At the same time, across the Pacific, residents in California were constantly updated on the status of the Ferguson and Mendocino-Complex fires. If you think communication platforms for these types of events have use in this world, Everbridge is a stock for you.” BUY.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, has pulled back over the past five days to once again test the lower end of its trading range. In Chloe’s latest update, she wrote, “I think the stock is a good value at this level, especially for investors whose priority is high yield. Earnings are still expected to decline this year, in part because of cost increases caused by President Trump’s new tariffs, but revenues are expected to recover in 2019, turning GM’s earnings growth positive again (albeit by low single-digits).” BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is not your typical bank. First, it is virtual (though headquartered in Pasadena, California). And second, it basically designs products and services, and then is paid when companies like Apple, Intuit, Walmart and Apple roll out those products and services to their customers. With six revenue divisions, Green Dot is a leading provider of prepaid cards, debit cards, checking accounts, secured credit cards, payroll debit cards, consumer cash processing services, wage disbursements and tax refund processing services. The stock hit a high two weeks ago, and I’d like to put it back on buy after the correction goes a little deeper—or further. HOLD.
GrubHub (GRUB), originally recommended by Mike Cintolo of Cabot Growth Investor, has great growth prospects, in part because fewer people are cooking these days. In fact, my brother-in-law, who’s a geology teacher at Harvard, has led a student trip to the Canadian Rockies every summer for the past 20 years. It’s a great place to study rock formations at large scale. It’s also a place where you’ve got to cook your own food. And he says that the kids this year were terrible at that part; many have no experience cooking at all! Maybe they’re ordering on GrubHub? In Mike’s latest update, he wrote, “GRUB has pushed above its post-earnings high from late July on good (not great) volume, joining the upmove among most growth stocks. There’s been nothing new from the company since its earnings release, and there’s been no change in our thinking, either—while competition exists, Grubhub is the clear leader in online food ordering and delivery, a market that has huge growth potential since just 2% to 3% of takeout orders are placed online. As with most stocks, GRUB could pull back a bit after its recent rally, but the trend is up.” BUY.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, was moved to the Growth & Income Portfolio last week—because after a great earnings report last Wednesday, the stock is no longer low! Here’s some of what Crista wrote soon after:
“Analysts expected $0.32 EPS, and the market was surprised by $0.36 EPS. Revenue of $645.9 million slightly missed the estimate of $650.6 million. Management projected full year revenue, adjusted operating margin and adjusted EPS numbers higher than their previous guidance, with a notable drop in expected currency impact. Analysts’ 2019 earnings estimates (January year end) were already higher than management’s projections, so I don’t necessarily believe that Wall Street’s 2019 EPS estimates will rise significantly from here, although 2020 estimates might certainly be bumped up.
“I have frankly been more bullish on the stock than most of Wall Street. Earnings growth projections have been very strong, the P/Es have been relatively low for a stock with such aggressive earnings growth, the dividend yield is much higher than you ever see on a growth stock, and the debt-to-cap ratio is ridiculously low. GES joined the Buy Low Opportunities Portfolio on June 1 at an average price of 19.88 after a stunning and unwarranted share price drop. The stock has now retraced its 2018 high of about 26. If you were in GES for a short-term trade, it’s probably time to sell. But because this stock still presents incredible value, I’m keeping GES and moving it to the Growth and Income Portfolio, and also ratcheting the recommendation down from Strong Buy to Buy for a little while.
“If you haven’t previously owned GES, you should feel confident buying on any pullback, as long as you have a good tolerance for the common level of volatility that’s associated with small-cap stocks. That’s all for now. If you bought GES in June, congratulations! At 26.25, it’s up 32% since joining the portfolio. If GES gets anywhere near 34, where it last traded in 2010, I will sell.” 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. As for the stock, it’s put in a solid bottom at 30 this year as the Chinese market has fallen, and this past week it pulled back once again toward that level. I’m holding tight, but if you don’t own the stock and you’re underexposed in China, 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, is actually looking pretty strong for a conservative stock! Over the past few weeks it built a base at 124—and it might return there once more—but the next move is likely to be a breakout above 126 and out to new highs. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, broke out to new highs last week and has traded tightly at the 93 level since—a good sign. In his latest update, Mike wrote, “PYPL is another growth stock that’s rallied to new highs on light volume. The action is a plus, and reinforces our view that the stock’s longer-term uptrend is intact; if anything, the company’s position at the heart of the digital payments and money transfer movement has only strengthened in recent months with some of PayPal’s key acquisitions. The question, though, is whether the stock is starting its next leg up (a move that we think can go on for a bit given the stock’s rest in recent months), or whether the stock will pull back and chop around like it has after prior rallies. If you own some, hold on tightly to your shares, but we’d like to see a bit more constructive action (strength or tightness) before restoring our Buy rating.” 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’ve downgraded it to Hold for now because I think the stock is ripe for a meaningful cooling-off phase. In her update last week, Chloe wrote, “STAG is bouncing back toward all-time highs as REITs begin to recover this week. After the stock’s recent pullback to its 50-day line, STAG has plenty of gas in the tank for a sustained advance. The company is a warehouse REIT that pays monthly dividends.” HOLD.
Stitch Fix (SFIX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the hottest stock in the portfolio at the moment, up 43% over the past four weeks on some pretty impressive volume. If you own it, congratulations; perhaps you should think about booking some partial profits here. But keep some; this story has great long-term potential as, just like GrubHub, the company liberates people from the tedium of everyday activities by outsourcing them to people better qualified. If you’re not on board yet, you could buy a little here, but I’m going to downgrade it to Hold until I judge that risk was been reduced. HOLD.
Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, is another hot one, but it’s more mature than SFIX, so is up “only” 27% over the past four weeks. Still, those numbers are a reminder that short-term risk is higher now. In his latest update, Mike wrote, “It’s interesting to note that, even though the U.S. population is increasing and aging, the number of hospitals is actually declining by about 0.5% or more per year. The phenomenon is not directly related to Teladoc (nobody’s using the Internet to have knee surgery), but it’s a sign that, especially in rural locales, seeing a specialist is getting more onerous, which should hike demand for virtual care solutions like Teladoc’s. Back to the stock, a pullback toward the 25-day [now at 71] or even 50-day line [nearing 68] wouldn’t be a surprise after the recent run, especially if growth stocks as a whole take a rest. Longer-term, though, we see TDOC as relatively early in its overall run, with the initial breakout in May.” 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 on Hold as it continues to trade in the 260-390 range that has contained it since June 2017. HOLD.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, and featured here last week, continues to base in the 50 area. In her latest update, Crista wrote, “Voya is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. Wall Street expects Voya’s full year EPS to grow 123% and 24.3% in 2018 and 2019. The corresponding P/Es are 11.7 and 9.4. The stock appears capable of breaking past 51 quite soon, and traveling to upside resistance at 55. Buy VOYA now.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED September 11, 2018
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