The market’s intermediate-trend has turned decidedly down, so taking steps to minimize the risk from your most aggressive stocks is critical. But don’t throw the baby out with the bathwater! The market’s long-term trend is still up, and I’m confident there is still more upside potential for a well-diversified portfolio of carefully-chosen stocks.
Cabot Stock of the Week 218
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With the market in retreat, at least for a while, it’s increasingly important to manage risk, not only by selling stocks—as I discuss in the portfolio section—but also by buying stocks that are bucking the downtrend, like energy stocks. So today’s recommendation is a young stock in that industry that has both a great growth story and a strong chart. It was originally recommended by Mike Cintolo in Cabot Growth Investor. Here are Mike’s latest thoughts.
Centennial Resource Development (CDEV)
Traditional growth stocks have been cut off at the knees, but instead of a punishing market-wide selloff, we’ve seen more of a rotation, with money flowing into both safer stocks and cyclical sectors that have basically sat out the bull market of the past year. Energy stocks are one area we’re very intrigued by, as many companies in the industry sport rapid growth and lower costs, and their stocks have etched big launching pads as weak hands have bailed and strong hands have slowly accumulated shares.
There are a few stocks in the group that look good, but our pick of the litter looks like a new leader; Centennial Resource Development has all the characteristics of a solid winner should energy stocks’ nascent uptrend continue.
The company has more than 80,000 acres in the Delaware Basin, which is within the larger Permian Basin. 16,000 acres in the north of the basin have one drilling rig, while 64,000 acres in the southern Delaware have six rigs. And Centennial’s well results have been terrific; by transitioning to pad drilling (basically drilling multiple wells with one platform), production has gone up significantly, with one area spitting out nearly twice as much oil as it did under older drilling methods!
At the same time, the firm’s costs have stayed in check despite the uptick in drilling demand across the industry. In fact, on a per-barrel basis, the company chopped its production expense expectations by around 5% after its second-quarter results.
Because of that, the company is drilling as fast as it can. In the second quarter, total production boomed 94% from a year ago, with oil output surging 79%. For the full year, management sees output rising around 88%, with oil production rising just a bit less than that. And longer term, management believes Centennial is set to get a lot bigger, with a 2020 oil target that represents 70% growth from this year’s estimates.
That said, many energy companies in the Permian have great acreage, well results and production gains, and yet earnings and cash flow are struggling (unlike Centennial). Why? Because pipeline capacity hasn’t kept up with production growth, and hence, there’s a glut of oil in Texas! The result: Just about everybody is receiving prices for its oil much lower than the commonly quoted NYMEX price.
But not Centennial! In fact, in the second quarter, it had by far the highest realized price among its peer group thanks to firm takeaway deals that are in place for the next couple of years. The company got $62.90 per barrel for its oil while its peers received just $55.82 on average, a 12% difference. And it has firm sales agreements in place for a good amount of its output, both oil and gas, for the next few years.
Throw in a very healthy balance sheet (debt to capitalization is just 11%), and barring a sustained plunge in energy prices, there’s nothing standing in the way of Centennial significantly boosting output and cash flow in the quarters and years to come.
As for the stock, CDEV came public in mid 2016 and embarked on a great rally, basically doubling to 21 later that year. But since then, it’s been range-bound, with lows in the 14 to 16 area and highs in the 21 to 22 zone. Even so, the action in recent months has been intriguing—we count nine weeks where the stock rallied on well-above-average volume, which is usually a reliable sign of accumulation by big investors. (Indeed, 411 mutual funds owned shares at the end of June, up from 332 at the start of the year.)
More recently, in the past four weeks, CDEV has pushed to a new high at 23 before being yanked back down by the market, but it remains above the old resistance level of 21 and I think buying here is a good risk/reward proposition.
Centennial Resource Development (CDEV)
1001 Seventeenth Street
Suite 1000
Denver, CO 80202
720-499-1400
www.cdevinc.com
CURRENT RECOMMENDATIONS
The exodus from growth stocks accelerated over the past week, making our sell of four stocks last week look good—they’re all substantially lower now. But this week I’m selling none, as the downtrend may have bottomed (at least in the short term), and our remaining stocks—generally lower risk— are holding up better. In fact, the only change in the portfolio this week is a downgrade of Teladoc to Hold. As to your own portfolio, this is a good time to take a hard look at how your stocks performed in the recent selloff, to set expectations for the future and to cut loose those that don’t measure up. The #1 mistake of investors is holding losers too long.
CSX Corp. (CSX), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth portfolio, is a railroad operator benefitting from both process improvements and the strength of the U.S. transportation sector. And the stock looks rock-solid, primed to break out to a new high. In her latest update, Chloe wrote, “CSX remains in a tight consolidation just above its 50-day line, which looks like a good buying opportunity. The company is the third-largest U.S. railroad and recently underwent a major transformation, switching to a point-to-point system that boosted margins, cash flow and profits. CSX has paid dividends every year since 1981, and has increased the dividend for eight years in a row. Over the past five years, the dividend increases have averaged 8%. CSX only yields 1.2% at current prices, but the company’s payout ratio of 25% leaves plenty of room for growth. The stock is not undervalued, but it’s in a strong uptrend that is likely to continue as long as transport stocks and the broad market remain strong.” BUY.
DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has fallen from 72 to 61 over the past two months, and thus is even more attractive than previously. Plus, there’s pretty good technical support at this level. In her latest update, Crista wrote, “DowDuPont is expected to see strong full year EPS growth rates of 23.2% and 16.7% in 2018 and 2019. The corresponding P/Es are 15.3 and 13.1. News of higher ethane prices—a feedstock for various DowDuPont products—pushed DWDP down toward the bottom of its 2018 trading range in recent weeks. This is a perfect time to buy low on DWDP and lock in a slightly higher yield. I expect additional capital appreciation in 2019 as the spin-offs take place.” BUY.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, continues to work to find a bottom. In her latest update, Chloe wrote, “The new North American trade agreement removes some uncertainties for the automaker, although sales fell industry-wide in September, dragged down by higher interest rates and higher prices caused by tariffs. GM is now near the bottom of its trading range, where it offers good value, although you may have to wait patiently for a rebound. I moved the stock to Hold earlier this month and will keep it there for now. While sales are expected to fall this year, 2019 should bring a return to growth, and the longer-term potential of GM’s autonomous driving and ride-sharing investments is big—and should draw new investors into the stock.” 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 fell through its 50-day moving average last week (it’s the first time it’s been below that line since May) and I’ll watch carefully to see how well it bounces. HOLD.
GrubHub (GRUB), originally recommended by Mike Cintolo of Cabot Growth Investor, has joined the movement of aggressive growth stocks to the downside, but Mike sees reasons to hold onto it. In his latest update, Mike wrote, “GRUB actually isn’t doing that badly. If you have a loss (or a giant position), a relative tight stop in the upper 120s makes sense, but if you have a good-sized profit, we’d remain patient here. GRUB could easily fall further if the market remains in rough shape, but it remains well above the top of its prior consolidations (115-117 area) and, of course, the fundamentals remain pristine—the firm continues to ink deals, with the latest being with Blue Apron, which is testing selling its meal kits through Grubhub in New York City. It’s not the biggest deal in the world but is another sign GRUB is the deliverer of choice for most meal providers.” HOLD.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio has rallied back rather impressively from its one-day plunge a week ago. In her latest update, Crista wrote, “Wall Street expects EPS to grow 55.7% and 22.0% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 19.7 and 16.1. The stock is low within a stable trading range.” HOLD.
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, which means that I’ll hold through periods of poor performance to benefit from the positive long-term fundamentals. And this is certainly one of those periods! The Chinese index that Paul follows has lost 31% of its value since June, and could fall further still, though selling volume is definitely waning. Long-term, however, the future is bright; revenues at the hotel group grew 26% in the latest quarter, while income from operations grew 53%. HOLD.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, has climbed higher every single day since the company released an excellent third quarter report two weeks ago. In her latest update, Chloe wrote, “McCormick reported excellent third-quarter results, including 14% revenue growth (vs. the consensus estimate of 13%) and 53% EPS growth (analysts had expected 17%). Management also bumped up their full-year earnings guidance by about seven cents, and now expects to achieve 16% to 17% EPS growth this year. The stock broke out to new highs following the announcement, and is also benefitting from the rotation into more defensive stocks. MKC remains in a strong uptrend, if a little overextended short-term. Buy on pullbacks for dividends and capital gains.” BUY.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, sold off with the REIT group as fears of rising interest rates spread, and now it’s bounced nicely over three days—though on light volume. In her latest update, Chloe wrote, “STAG didn’t get as nice of a bounce as Community Health Trust (CHCT) last week, and remains below its 50-day line. After a good run in the first half of the year, it wouldn’t surprise me to see the stock go through another multi-month consolidation phase here. I’ll keep it on Buy—for high-yield investors—for now.” BUY.
Synchrony Financial (SYF), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, has shuffled sideways over the past week—and that’s not bad given the environment. In her latest update, Crista wrote, “Synchrony is a consumer finance company with 74.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. The company has been investing in mobile capabilities and expanding its online savings account into a full-service bank. Synchrony is expected to report third quarter EPS of $0.81, within a range of $0.72-$0.90, on the morning of October 19. Full year EPS are expected to increase by 31.3% and 31.1% in 2018 and 2019 (December year end). The corresponding price/earnings ratios (P/Es) are extremely low at 9.1 and 6.9. The stock rose 10% in September then gave it all back at the end of the month. I expect SYF will continue to trade between 31 and 34 in October. My price target on SYF is 40, where the stock reached an all-time high in January.” BUY.
Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high a week ago Monday, but has fallen sharply since, wiping out 20% of its value at this morning’s low. I expect at least a small bounce here, but I also expect, as does Mike, that it will take some time to repair this damage. He advised his readers to take partial profits, but also to hold tight to some, writing, “The firm’s Investor Day last week was very bullish and painted an overall picture of years of rapid growth as virtual care becomes more common. We still think this is a very big story that can be a “big stock,” i.e., one where hundreds more mutual, pension and hedge funds take positions. If you have a good profit, you can take partial profits while holding the rest.” 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 currently, the stock is out of favor, testing support at both its March lows and its 200-day week average. HOLD.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, lost a third of its value in 2017, but has been working to claw it back for most of 2018. Most recently, the stock fell below its 25-day moving average, but selling volume was not heavy and I’m optimistic that buyers will support it here. BUY.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, looks rather good as it makes progress toward its January-May resistance area of 55. 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. Voya is expected to report third quarter EPS of $1.18, within a range of $1.13-$1.22, on the afternoon of October 30. The company will host an Analyst Day on November 13, which could easily generate new and bullish research reports for Voya. The biggest question among institutional investors is whether Voya might sell its life insurance division. It seems not to be a problematic piece of the company, although the life division might be sold if an attractive price is offered. VOYA is an undervalued aggressive growth stock. Wall Street expects Voya’s full year EPS to grow 123% and 24.5% in 2018 and 2019. The corresponding P/Es are 12.0 and 9.6. VOYA just rose above upside resistance at 51 and will likely retrace to 55, where it traded earlier this year.” BUY.
WNS Holdings (WNS), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, and featured here last week, continues to trade sideways, though the long-term fundamentals of this Indian business process outsourcing company are very favorable for steady growth. In his latest update, Paul wrote, “WNS just keeps plowing sideways, which is a sign of relative strength in a squishy market. The company just announced that it will release its fiscal second quarter results on October 25 before U.S. markets open. That should stir the pot enough to get WNS going.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED October 16, 2018
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