September is living up to its reputation as a tricky month, with lots of volatility among leading stocks and rotation and news-driven moves on a day-to-day basis. Still, just going with the evidence, the trends of the major indexes and most stocks are up, so I remain bullish. That said, finding stocks early in their overall uptrends that aren’t obvious to the crowd is vital—tonight’s Stock of the Week fills the bill, blasting off three weeks ago after a 14-month correction and consolidation.
Cabot Stock of the Week 215
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September is living up to its reputation, with repeated bouts of selling in leading stocks (though few have broken down), and with many growth-oriented indexes chopping around and testing support. That said, with the intermediate-term (and longer-term) trends of most indexes and stocks still up, I remain generally bullish, but it’s vital to pick your stocks and buy points carefully, looking for early-stage opportunities with great potential that aren’t obvious to the crowd (and thus, are more apt to suffer profit taking). This week’s stock fills the bill, with a year-long correction and consolidation ending with a powerful earnings move three weeks ago.
Rest Period Over–New Uptrend Underway
Ulta Beauty (ULTA)
From 2014 to mid 2016, Ulta Beauty was one of the market’s favorite cookie-cutter stories. The firm’s large, well-stocked beauty stores (averaging 20,000 individual products each, including everything from mass market to prestige brands) were grabbing tons of market share from drug and department stores, where most of these products were traditionally sold.
A sharp management team (led by CEO Mary Dillon), excellent store locations (90% are off mall) and new offerings (many of its stores have beauty services and exclusive “mini stores” of popular brands now) combined to push sales and earnings consistently higher, with same-store sales growth (from locations open at least a year) regularly hitting double digits.
But starting in 2016, perception changed—there were no major snafus at Ulta, but after a few years of growth, the pace was bound to slow down. And it has—revenues, which usually cranked ahead at 20% to 25% rates, have come in below 20% in three of the past four quarters. Plus, more simply, the stock had enjoyed a big run (rallying about four-fold in three years) and needed a rest.
Now, though, the 14-month correction and consolidation is over, and, while it’s unlikely to be as dynamic as it was a few years ago, the odds strongly favor a good run from here.
As for the business, it remains in fine shape. Ulta currently has just under 1,200 stores, and sees the potential for 1,400 to 1,700 in the U.S. alone. Frankly, we think even that range could prove conservative, as the company’s new store openings remain highly productive, with a payback of the initial investment in just two years. Either way, there’s years worth of expansion left; in Q2, Ulta’s total square footage in operation rose 11% from a year ago.
And it’s not all about the number of stores, either. Ulta’s e-commerce operations have been a huge success, making up nearly 10% of total sales (about 9% in Q2) and growing rapidly (up 38% in Q2), which is a big reason that same-store sales growth has remained solid (6.5%). Thus, even as the store expansion plan slows down (if it does), there’s reason to believe overall business will continue to hum.
Some initiatives that are helping the cause include the firm’s strong and growing loyalty program (28.6 million active members as of May), complete with personal offers and credit card rewards, as well as Ulta’s aforementioned salon services, which are growing solidly (10% or so in Q2) and comprise some of Ulta’s most profitable customers (salon customers spend three times as much as non-salon shoppers). Getting a larger chunk of their customers’ beauty spending is key.
All told, Ulta is doing just fine, and is still likely in the middle innings of its growth wave as it has just a small slice of the U.S. beauty products market given the long-term shift of buying these products in mega-stores and online from places like Ulta, and away from grabbing them at department and drug stores. All told, analysts see earnings up 30% this year (partially boosted by tax reform) and 17% next. A solid share buyback program (the share count is down 3.2% from the prior year) also helps.
As for the stock, it plunged from a high of 315 last May to a low of 188 in October, and retested that low in March of this year. Then came a quick rally during April and May that quickly sputtered out, leading to a nice (12% deep) consolidation through August (including some beautiful tightness near the end of the rest, a sign all the weak hands were out).
Then came the Q2 report, and big investors loved it, with the stock surging higher for the next five days on excellent volume, a clear sign big investors think the worst is passed and a new uptrend has begun. We think the recent pause is a good chance to get in. As for the high price of the stock, don’t worry about it—just buy fewer shares (focus on the dollars invested, not the number of shares). BUY.
Ulta Beauty (ULTA)
1000 Remington Boulevard
Suite 120
Bolingbrook, IL 60440
630-410-4800
www.ulta.com
CURRENT RECOMMENDATIONS
So far, I haven’t seen any major red flags for the market, though September is starting to live up to its reputation as a tricky month; there’s been lots of iffy-but-not-negative action. For instance, many stocks have seen lots of up-down-up-down action (sometimes a sign of distribution after a good advance), but few have broken down. The major indexes have dipped to their 50-day lines and haven’t made much progress since mid June, but haven’t dipped below that key intermediate-term support area. And so on.
Thus, my antennae are up, and as always, I’m open to anything. But as most readers who have been with us for a while know, I and other Cabot analysts go with the evidence in front of us, and right now, that’s still bullish. That doesn’t mean you should throw caution to the wind—stock selection is key, and holding a little cash isn’t a bad idea—but I advise patience and holding strong, resilient growth stocks and undervalued ideas, too.
After a handful of changes last week (including three sells), our only move this week is to place Carvana (CVNA) on Hold.
Carvana (CVNA), originally recommended by Mike Cintolo of Cabot Growth Investor, looks fine overall (it’s still hanging around its 25-day line), but I’m going to switch my rating to Hold tonight because of its recent volatility. Just since the start of the month, shares have gone from 68 to 57, back to 72 and then as low as 58 yesterday. It’s not the end of the world, and if you have a good profit we’d hold on (though I’m not against partial profits if you haven’t taken any). But after a huge run and with some growth stocks under pressure, I’ll move to Hold and see if the stock can steady itself. HOLD.
CSX Corp. (CSX), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth portfolio, is trading tightly above its rising 50-day line and looks under control. We’re also pleased to see some of CSX’s rail peers pop to new highs today on pleasing analyst comments. We think CSX will follow suit. BUY.
DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, continues to round out a launching pad—it’s faded a bit during the past three weeks but there should be solid support in the upper 60s. With earnings estimates still looking fine (up 24% this year and 17% next) and the split-up into three separate companies looking like a bullish catalyst, I’ll stay on Buy. BUY.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, has finally bounced a bit, but the stock continues to get tossed around by trade-related headlines. Rumors that the company’s August sales dipped 13% in August (worse than forecasts, though partly due to lower incentives) haven’t helped. Still, this is a situation where a lot of bad news is priced in, the yield is big, earnings estimates are holding firm and the stock has a lot of support in this area. Chloe’s still holding, and so am I. 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 remains in a firm uptrend, so if you own some, sit tight. (Remember, to us, hold really does mean hold, unlike Wall Street.) SunTrust recently boosted its price target and said it expects continued strong organic growth. HOLD.
GrubHub (GRUB), originally recommended by Mike Cintolo of Cabot Growth Investor, has shown more volatility than I’d prefer, with lots of up-down action this month. The stock originally broke out back in October of last year, so it’s not in the first inning of its run, either. It’s all worth keeping an eye on, but at this point, the stock is still north of its 25-day line and has only pulled back a few points from all-time highs. Throw in the still-huge story, and I’m comfortable staying on Buy, though dips of a couple of points would make for better entries. 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, was upgraded to a “Strong Buy” rating (from “Buy”) by Crista yesterday. The company is in a solid turnaround, with earnings expected to rise 49% this year and 28% next (and those are likely conservative given that the firm has topped estimates in recent quarters). If you don’t own any, you can pick up some shares here. 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. The action has been terrible recently, with the U.S.-China trade spat keeping the pressure on Chinese stocks. Still, I continue to have confidence that Huazhu’s cookie-cutter story (total hotel rooms were up nearly 10% in Q2, while room rates rose 16%) will lead to another good run once the pressure comes off Chinese stocks. As an aside, the latest survey of fund managers from Bank of America/Merrill Lynch came out, and they’re overweight cash and extremely underweight emerging markets—a positive contrary sign that a lot of selling has already been done in HTHT and its peers. HOLD.
Instructure (INST), originally recommended by Tyler Laundon of Cabot Small Cap Confidential, continues to repair the damage from its earnings-induced plunge in August (before we bought it), and has been holding support near its 200-day line. It won’t be a straight-up move, but Tyler is optimistic the bottom is in, as am I. BUY.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, has been acting terrifically in recent weeks, following-through beautifully since its huge breakout in June. In her latest update, Chloe wrote “As expected, MKC’s weeklong consolidation was followed by a renewed surge past resistance at 126 and on to 131. Like ECL, the stock is benefitting from a rotation into conservative, non-cyclical names, like blue-chip consumer staples stocks. Buy MKC on pullbacks 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.” I’ll stay on Buy here, but look for dips toward the 25-day line (now at 127 and rising) given its run. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has been slapped around this month, with two waves of high-volume selling—but, like the market as a whole, PYPL hasn’t punctured support. In last week’s issue, Mike wrote “PYPL continues to flop around, and we don’t have many new thoughts—longer-term, the odds favor a continuation of its advance, but near-term, the stock is doing more chopping than trending, so we’re fine sticking with a Hold rating. On the business front, the company just launched a free service to give sellers in good standing instant access to their funds, as opposed to many days (or longer) it often takes due to fraud concerns; the top brass thinks it could be a meaningful differentiator to attract more merchants to PayPal’s platform. The firm also just partnered with DraftKings, giving it deals with five of the seven online sportsbooks. A bit more strength or tightness could be enough to get us to restore a Buy rating, but today we think new buying should be focused elsewhere.” I agree. HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, remains in fine shape, chopping slightly lower during the past month with most REITs as interest rates have risen (the 10-year Treasury note has popped above 3%), but holding above support. Further weakness isn’t out of the question if rates continue to perk up, but this pause looks healthy, the 5.0% (paid monthly) yield looks solid and analysts see cash flow rising in the 5% to 7% range going forward. I’m OK buying some around here. BUY.
Stitch Fix (SFIX), originally recommended by Mike Cintolo in Cabot Top Ten Trader, soared to a new high yesterday (despite the big down day in the market) before pulling back some today. Given that the stock just blasted off in June, the huge upside volume in recent weeks and that this is an entirely new industry (providing a personalized online stylist to customers), I’m hopeful shares have a lot longer to run over time. Short-term, though, there’s no question the stock is extended (the 50-day line is around 36 and rising) and is ripe for a correction. (Earnings, due out October 1, could bring some profit taking.) If you own some, we’d hold at least most of your shares (partial profits are fine), but for new buying, we’d look for other names at better entry points. HOLD.
Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, remains perched near its highs. Last week, Mike wrote “One piece of news that slipped under the radar from the firm’s quarterly report was that the Centers for Medicare & Medicaid Services is beginning to embrace telehealth, announcing it will reimburse these services for its Medicare Advantage patients as well as its fee-for-service enrollees, with both approvals coming earlier than expected. Separately, management was clear in the conference call that the company’s pipeline is much larger than a year ago, both thanks to potential deals with larger customers and payers opting to offer more of Teladoc’s services. We’re sure to hear more details at the firm’s Investor Day on September 27.” Back to the stock, while TDOC has had a good run, we’re impressed with the tightness seen on the weekly chart, which is usually a sign of accumulation (or, at least, a lack of distribution). I’ll stay on Hold but a bit more rest could set up a good entry. 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. That said, the stock remains too widely followed these days, with millions of investors and reporters opining on the company’s (and Elon Musk’s) every move. Today, the stock was hit after reports that the firm is facing a criminal probe over Musk’s tweets about going private a few weeks back. It sounds bad, but nothing has really changed with the stock, which continues to thrash around in a wide trading range. HOLD.
Like most financial stocks, Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, remains range-bound. Crista remains bullish on the name mostly because of its excellent growth prospects (analysts see the bottom line up 39% this year and 25% in 2019) and a comparatively low P/E ratio (11 times this year’s estimates). But there’s more than just an upturn in business—Voya’s sale of its annuity business this year not only brought in money but made it a more growth-oriented outfit. Management is very shareholder friendly, with $1 billion of share buybacks in the first half of the year and a goal of $500 million more in the second half. (The share count was down 8% in Q2 versus the year before.) If the sector or VOYA itself breaks down, I might move on, but with a firm range in place and some good signs of buying during the past week. I’m staying on Buy. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED September 25, 2018
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