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 214
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As the bull market rolls on, I continue to recommend that you be heavily invested in a diverse group of stocks that help you meet your investing goals. At some point, the climate will become more challenging, and we will shift to a lower-risk stance by reducing holdings of aggressive stocks, building cash and acting more “tactically” by trying to catch shorter-term moves. But for now the tide is still coming in and you should take advantage of it. In selecting today’s stock, I leaned back to the conservative side for balance and found a very old-school company that’s enjoying a phase of above-average earnings growth. The stock was originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth portfolio and here are Chloe’s latest thoughts.
CSX Corp. (CSX)
CSX Corp. is the third-largest railroad in the U.S. The company recently underwent a major transformation, boosting margins, cash flow and profits. Now, the stock is riding a strong uptrend in the transportation sector, helping earnings to push even higher.
CSX’s rail network includes 21,000 miles of track, covering most of the U.S. east of the Mississippi. CSX trains carry coal from Appalachia to the Rust Belt, ferry trash out of New York City and haul fresh orange juice from Florida to New Jersey.
The company’s customers are diverse. Coal makes up only 13% of CSX’s volume, contributing 18% of revenues. About 44% of volume is intermodal, contributing 16% of revenue. The remaining 62% of revenue and 42% of volume is merchandise: everything from lumber to lettuce.
Last March, the company installed a new CEO, Hunter Harrison, who initiated a massive transformation of CSX’s network. Harrison was previously CEO of both Canadian National and Canadian Pacific, where he introduced “precision railroading”—essentially moving from a hub-and-spoke system to a point-to-point system. (EasyJet and Southwest revolutionized the air travel industry by moving to a similar model.)
The transformations made Harrison a legend in the railroad industry, and CSX shareholders welcomed him on board 18 months ago (over some objections from the company), and assumed he would do the same thing at CSX.
Harrison got right to work, and CSX now has half as many railcars and locomotives as before he came on board, a 12% smaller workforce, and the lowest costs in the industry. At the same time, train speeds have improved by double digits, while free cash flow more than doubled last year (after declining for three years in a row).
Unfortunately, Harrison died unexpectedly in December from an unspecified illness. CSX’s stock dropped immediately, and continued to struggle for several months. However, results at the company continued to improve, and analysts eventually concluded that Harrison’s revolution would continue without him. CSX’s stock finally broke out past overhead resistance in April, and has been trending up since.
Long-term growth prospects at the company look excellent. Analysts expect EPS growth to come in at 57% this year and 12% next year. Over the next five years, analysts expect EPS growth to average 20% annually.
CSX also rewards investors with regular dividends. The company has paid dividends every year since 1981, and has increased the dividend in each of the past eight years. However, long-term buy-and-hold investors should know that dividend cuts aren’t off the table. Like all railroads, CSX is sensitive to economic growth. When the U.S. economy is doing well, demand for all types of materials and products rises, and so does traffic on CSX’s network. When economic growth slows, so does business. That makes CSX a cyclical investment, and when times get tough, the company sometimes has to cut costs by slashing the dividend. In 2001, for instance, CSX cut the dividend by two-thirds, from $0.30 to $0.10 per quarter.
That said, the dividend has never been suspended, and when times are good, it can grow quickly. Over the past five years, CSX has increased the dividend by an average of 8% per year. The strong earnings growth expected over the next five years should lead to an even faster pace of payout hikes. And though CSX only yields 1.2% at current prices, the company’s payout ratio of 25% leaves plenty of room for growth.
The stock has been aided by a tailwind from the transportation sector, which has been outperforming the market since July. If the current rotation from some big-cap technology stocks to conservative stocks continues, railroads and dividend-paying stocks will both benefit.
CSX may be a little extended here, but it started a short consolidation period two weeks ago, so the current pullback to the 25-day moving average provides a decent buying opportunity. If you’re patient, you could even wait a little longer to see if the stock meets up with its 50-day line, currently at 71.
CSX Corporation (CSX)
500 Water Street 15th Floor
Jacksonville, FL 32202
904-359-3200
http://www.csx.com
CURRENT RECOMMENDATIONS
When all is said and done, there are two ways to succeed as an investor: buy low and sell high, and buy high and sell higher. The first method belongs to value investors, while the second belongs to growth investors (and, at the extreme, momentum investors). I use these two methods in the Cabot Stock of the Week Portfolio, buying stocks that are recommended by Cabot’s growth-oriented and value-oriented analysts. But sometimes I sell sooner than they do, and the main reason is this: the fact that I recommend one stock per week, combined with the fact that I have a cap of 20 stocks on the portfolio, means that I need to sell an average of one stock per week. So today I’m exiting a couple of stocks with big profits—even while the original analysts still like the stocks—and aiming to redeploy the proceeds in recommendations with better risk/reward situations. I’m also selling one loser, because cutting losses short is a key tenet of growth stock investing. Details below.
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 topping pattern since January as the broad Chinese market has corrected broadly downward. When it fell to long-term support three weeks ago I saw it as a buying opportunity, but since then the stock has fallen below that support and now it’s hard to see where this decline might stop. Yes, business still looks good; in his latest update, Paul noted that thanks to a massive investment spree, revenues have grown more than 61% each of the past four quarters. But all that spending has hurt earnings, and with the stock now trending down to who-knows-where, I’m going to sell and cut the loss short. SELL.
Axon Enterprise (AAXN), originally recommended by Mike Cintolo of Cabot Growth Investor, has been a great winner for the portfolio in the five months we’ve owned it, and I remain long-term bullish on both the company and the stock, which I have included on my list of Forever Stocks. But this portfolio won’t hold it forever. In fact, we’ll sell it now, noting that the stock has lost momentum. It is now nearing its July high (a double top?) on light volume, which I think is a good exit point. SELL.
Carvana (CVNA), originally recommended by Mike Cintolo of Cabot Growth Investor, hit another new high today but remains ripe for a pullback. In his latest issue, Mike wrote, “CVNA remains extended. A few weeks of calm trading or pullbacks toward the 50-day line (way down near 50, though rising quickly) could provide an opportunity.” The company is disrupting the used car dealer industry, and that’s a good thing. BUY.
DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has been trading calmly between 70 and 71 over the past two weeks, which looks like a healthy pattern to me. 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 resting as it rises 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, is a twin of Axon Enterprise (AAXN) in several ways. We bought both stocks in April, we have a great five-month profit in both stocks, and I remain long-term bullish on both stocks. Yet both stocks have shown some signs of topping recently, and both are due for a period of underperformance, simply to let the fundamentals catch up to the stocks. So, as with AAXN, I am going to sell EVBG now, and try to redeploy the money in a better opportunity. SELL.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, has now declined for 10 consecutive days, and the reasons are no secret: August sales fell more than expected and the costs imposed by tariffs are expected to cut into earnings. Still, the stock is sitting at long-term support right here—pretty much where it bottomed in May—so I’m optimistic that buyers will take charge soon. But I will downgrade it to Hold. HOLD.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is a virtual bank that’s the 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 three weeks ago, and I’d like to put it back on buy after the correction/consolidation 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, but above all because it’s the market leader in a sector with huge potential. And today the stock broke out to a new high, just a week after a sharp selloff that knocked out some weak hands. BUY.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio and now in her Growth & Income Portfolio, is still tracing out a slow uptrend. 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 49% and 28% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 21.3 and 16.7. Earnings estimates rose last week, yet the stock pulled back to price support at 22, boosting the current dividend yield to 4%.” 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—and the action has been terrible lately as Chinese stocks have tanked. Still, there’s hope that the stock will find support around 26, where it bottomed last November, and the long-term fundamentals of the largest hotel operator in China remain compelling. HOLD.
Instructure (INST), originally recommended by Tyler Laundon of Cabot Small Cap Confidential and featured here last week, is heading the right way. In Tyler’s latest update, he wrote, “Instructure sells learning management software, and while it’s done amazingly well in the higher education market (with its Canvas product) the next leg of growth is expected to come from its corporate learning solution, Bridge. The stock sold off after Q2 2018 earnings were reported [at the end of July] due to a light forecast for Q3, but it was moved back to buy last week after shares jumped above their 200-day line.” BUY.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, has been super in the month that we’ve owned it, and traders could actually take profits now and feel good. But I’ll stick with it. In Chloe’s latest update she wrote, “You can Buy MKC here for dividends and capital gains; the company 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, broke out to new highs two weeks ago, sold off sharply last Wednesday, and has recovered some of the loss since, so the main trend remains up. In his latest update Mike wrote, “Overall, we continue to think PYPL will be fine, but want to see more constructive action (that could include some tight trading or big-volume strength) before putting new money to work. Fundamentally, the firm announced today that it has more than 250 million active accounts, up six million or so from June 30 and continuing the steady mid-teens growth in that metric that’s been in place for a while. All told, if you own some, continue to sit tight.” HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, hit a record high in mid-August and has spent the time since consolidating that gain, trading very calmly between 28 and 29. And now I think it’s time to return it to a Buy rating. The biggest known risk for the company is rising interest rates, but for now that seems to be more than offset by strong demand for warehouse space in the U.S. BUY.
Stitch Fix (SFIX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains the hottest stock in the portfolio, hitting new highs on six of the last eight trading days. If you own it, you should think about booking some partial profits here; the potential for a pullback grows day by day. 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. I’ll keep it rated hold until I see a decent entry point. HOLD.
Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, has a great chart; it hit a new high a week ago and has pulled back only slightly since. And it’s got huge potential as a business, too, as it provides a more efficient and convenient doctor/patient experience. In his latest update, Mike wrote, “Our focus is on the company’s Investor Day on September 27, where the company is likely to do a deeper dive into its business strategy (and possibly reveal some intermediate-term growth targets, too). Hold on if you own some, and if you don’t, you can buy here or (preferably) on dips of another couple of points.” 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. However, if you don’t own it yet, I think you could nibble here, in the wake of last week’s dip to support at 260 following the widespread news that CEO Musk smoked marijuana on live TV. Remember, “bad news” defines bottoms, while “good news” defines tops. Fundamentally, the firm is beating all other contenders hands-down in selling electric cars, as you can see from this detailed scorecard at InsideEVs. HOLD.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has pulled back further over the past week, and may fall as low as 46.5, but the big picture remains attractive. 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. Consensus earnings estimates for 2019 rose last week to their highest point since I began following VOYA in April. Wall Street now expects Voya’s full year EPS to grow 123% and 24.5% in 2018 and 2019, respectively. The corresponding P/Es are 11.4 and 9.1 …there’s upside resistance at 55.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED September 18, 2018
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