The market’s broad rebound continued today, erasing a good part of the losses sustained in the recent two-week collapse. The major indexes still have a long way to go to return to their old highs, but I think they will do it, as our market timing studies tell us that the sharp pullback was likely simply a normal correction in the long-term uptrend.
Cabot Stock of the Week 219
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With the market’s intermediate-term trend clearly down, making money has been difficult in recent weeks. Indeed, the best refuges from the carnage have been cash and marijuana stocks (a sector in its own mini-bull market). Yet by all measures, the long-term trend of the market remains up. Additionally, our market-timing guru, Mike Cintolo, can cite numerous studies, both fundamental and technical, that predict the market will be higher at year end. The challenge before me today, given that I must recommend one stock every week, is what to buy now; most short-term charts look terrible. And the answer is one of Tyler Laundon’s small-cap stocks, which has just fallen to an important support level. Here are Tyler’s latest thoughts.
Altair Engineering (ALTR)
There is a renaissance underway in the industrial manufacturing industry that is changing how products are designed, built and introduced to market. The impacts are huge – McKinsey says this fourth industrial revolution, known as “Industry 4.0”, could drive an eight- to nine-times increase in GDP from established economies!
The foundation of Industry 4.0 is a concept called the Digital Twin. It’s kind of an abstract concept. But in simplest terms a Digital Twin is a digital replica of a physical object. It can also be the digital representation of a process. It’s used in industries where physics really matter, like the automotive, aerospace and heavy equipment manufacturing sectors.
Companies are adopting the concept of the Digital Twin to build better products, save money, get products to market faster, improve maintenance schedules, tweak complex manufacturing processes, and more.
A Digital Twin involves many powerful technologies working together, including Computer Aided Design (CAD), Computer Aided Engineering (CAE), Machine Automation, Virtual Reality (VR), Augmented Reality (AR) and Internet of Things (IoT). Simulation is also a key technology, which is where today’s recommendation comes in.
Altair Engineering is a $2.4 billion company that develops and sells computer aided engineering (CAE) software. This simulation software helps manufacturing companies innovate across their entire product lifecycle, from concept design, to manufacturing, to in-service operation.
There are a huge variety of ways Altair’s simulation software is used. It is used to create 3D simulations when airplanes are designed. It’s used to design and test loads on helicopter rotor blades. And it’s used to help auto manufacturers make lighter cars without sacrificing structural integrity.
It’s a very compute-power intensive field. Many customers don’t have the resources in-house, so they turn to Altair, who can help them run simulations in the cloud by tapping into high-performance computing (HPC) infrastructure.
The company was founded in 1985, but didn’t go public until November 2017. One founder, James Scapa, is an engineer by training and began his career with Ford Motor Company in 1978. He is the current Chairman and CEO of Altair, which began as a small consulting operation in the CAE field.
Today, Altair has 71 offices in 24 countries. It generated $333 million in revenue last year (up 6%) and is on target to grow revenue by 15% in 2018 and 12% in 2019. Over 80% of revenue comes from software and related services, while roughly 14% comes from a force of embedded engineers that work with key customers to advance their Digital Twin initiatives. There is also a very small internal division that commercializes technologies.
Importantly, Altair is delivering profitable growth. EPS was $0.08 in the first quarter of 2018 and $0.05 in Q2. In 2018—Altair’s first full year a public company—EPS should be around $0.29, then grow by around 60%, to $0.48, in 2019.
Altair has tens of thousands of users across roughly 5,000 large manufacturing companies. It is particularly strong in the automotive, aerospace and heavy equipment markets. It counts 15 out of the top 15 auto manufacturers and 10 out of the top 10 aerospace companies as customers. Automotive now makes up around 40% of the business (down from 100% years ago) and management says demand remains high as autonomous and electric vehicles require powerful simulation software.
This is what the chart looks like.
The stock was strong right after it came public and has worked its way higher, finding consistent support at its 50-day line along the way. But as the market retreated in October, the stock retreated with it, falling below its 50-day line last week and finally finding support at 34, which is slightly above the stock’s 200-day line, and within the consolidation range of 33 to 36 that persisted through the month of July. I think this is a decent entry point for a little-known small-cap stock with solid growth prospects.
Altair Engineering (ALTR)
1820 East Big Beaver Road
Troy, MI 48083
248-614-2400
http://www.altair.com
CURRENT RECOMMENDATIONS
Market corrections are no fun, particularly when they’re as broad-based as the recent one, which has left my last eight recommendations in the red. The normal human reaction to such pervasive short-term losses is to give up—to sell and put the proceeds someplace safe. But long experience has taught me that market corrections like this bring opportunities, if you can determine which stocks will rebound best. So I’m selling none today—simply watching to see what bounces best. Today GRUB, TDOC and TSLA are the biggest movers, but the real answer will develop over days; those that don’t impress are likely to be sold next week.
Centennial Resource Development (CDEV), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here last week, is an oil driller and producer in West Texas with great growth potential. It can be bought right here. BUY.
CSX Corp. (CSX), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth portfolio, fell through its 50-day line last Wednesday, dropping about 7% and mirroring a similar decline in other transportation stocks. But it’s bounced normally over the past three days, and will probably be fine from here, assuming the broad market doesn’t worsen. Chloe has downgraded the stock to Hold and I’ll do the same. HOLD.
DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has bottomed repeatedly at 59 over the past week, establishing a bottom. But there’s no upward movement yet. Still, Crista is confident it will come. In her latest update, she wrote, “Chemical stocks fell when industry peer PPG Industries (PPG) warned that third quarter sales would be flat due to higher raw material costs, softer China demand and weakening foreign currencies. The drop in the sector was exaggerated by the overall market correction. I still expect DWDP to be attractively profitable by mid-2019 when it’s done separating into three companies. However, there’s no hurry to buy today, because the stock is probably going to remain near 60 while it slowly gathers strength for its rebound. Patient investors can buy at a good price today.” BUY.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, has fallen a full 28% off its June high, and now it’s waiting for buyers to take over. In her latest update, Chloe wrote, “Last week, Honda invested $2 billion in Cruise, GM’s self-driving subsidiary, furthering GM’s lead in self-driving technology. Honda and GM will work together to design and produce a self-driving vehicle that can be used in an Uber-like fleet. Honda’s participation will help GM quickly ramp up global production of the vehicle. In other autonomous driving news, the Super Cruise system in GM’s new Cadillac bested Tesla’s Autopilot in tests conducted by Consumer Reports, which liked that Super Cruise includes more safeguards to make sure drivers are paying attention (like a camera that tracks drivers’ eye movements and warns them if they look away from the road for too long.) None of this good news has moved the needle on the stock though, which is still trying to find a bottom down near 33. At this point, GM’s lows from last May are starting to look like a viable support level. We have a small position and a decent profit cushion, and GM’s yield is great, so we’ll continue to Hold. Eventually, I expect GM’s autonomous driving investments to attract lots of new investors to 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 with the market last week and is now bouncing, and I’ll be watching to see how much support the stock has. HOLD.
GrubHub (GRUB), originally recommended by Mike Cintolo of Cabot Growth Investor, fell with the market and has rebounded since. In his latest update, Mike wrote, “GRUB’s choppy action in early September ended up being a sign of distribution, with shares fading back into their post-gap trading range during the growth stock selloff. Still, while the decline isn’t fun, the stock hasn’t flashed any major red flags (massive-volume declines or churning), and given our big profit, we’re OK giving GRUB room to maneuver; the stock’s prior base should offer a lot of support (likely in the 110 to 115 range, if not higher) should the decline turn ugly. If you have a loss, you should consider selling or using a very tight stop, but with a big profit, we’re aiming to give GRUB some rope, thinking the longer-term uptrend is likely to reassert itself down the road. There’s no set date yet, but earnings are likely out around Halloween; analysts are looking for revenues to rise 46% with earnings of 41 cents per share, also up 46% from last year.” I’ll stick with it. HOLD.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, fell to its 200-day moving average at the market low and has rebounded since. 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 19.3 and 15.8.” 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 the past months have certainly one of those periods, as foreign stocks trended lower and lower, with Chinese stocks in particular leading the way down. But my optimistic reading is that the toughest times are over these stocks. All the “bad news” is known and thus factored into the stocks. So, if you don’t own this stock, now is a decent time to start nibbling. If you own some, practice patience. HOLD.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, has been a star performer in recent weeks. In her latest update, Chloe wrote, “McCormick is firing on all cylinders: the company reported excellent third-quarter earnings two weeks ago, triggering a flurry of upward estimate revisions, and the stock is benefitting from a rotation into conservative sectors. 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 then joined the broad market on the downside, finally bottoming at its 200-day moving average last week. In her latest update, Chloe wrote, “Interest rate anxiety is likely to keep STAG from making any progress for a while, but it has good support, so risk-tolerant high-yield investors can Buy when it’s close to the bottom of its trading range.” BUY.
Synchrony Financial (SYF), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, sold off with the market last week but remains well above its lows of July-August. 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. Last week, Synchrony and JCPenney (JCP) agreed to a multi-year extension of their decades-long partnership. Synchrony is expected to report third quarter EPS of $0.80, within a range of $0.72-$0.89, on the morning of October 19. Full year EPS are expected to increase by 30.9% and 31.5% in 2018 and 2019 (December year end). The corresponding price/earnings ratios (P/Es) are extremely low at 8.7 and 6.6. There’s about 12% upside to its September high, and lots more upside as SYF rises to a more fair valuation. 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, sold off with the market in recent weeks, but remains in an uptrend. In Mike’s latest update, he wrote, “TDOC is the third stock we took partial profits in during the past week and a half, selling one-third of our position last Wednesday. Because we sold some last week, we’re giving TDOC some room below our entry price, especially seeing as how the stock has already slipped sharply; we’d like to give the stock a chance to bounce and see how strong (or not) any rebound becomes. We still love this story, and think it’s likely that the stock builds a new launching pad and eventually gets going rather than it suffering a long, sustained downturn. But you know us, we’ll just follow along and let the stock tell its own story—with some partial profits in the bag, we’ll give TDOC a few points of room to find support and show some renewed accumulation.” 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 is currently out of favor, and the closer we get to year end, the more likely it is that the stock will remain under pressure until the new year. HOLD.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, held up quite well last week and has rebounded this week; it’s now less than 3% from its September high. BUY.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, dropped with the market and found support at its June-July bottom. 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. Wall Street expects Voya’s full year EPS to grow 123% and 24.5% in 2018 and 2019. The corresponding P/Es are 11.0 and 8.8.” BUY.
WNS Holdings (WNS), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, is an Indian outsourcing firm with a solid growth story. In his latest update, Paul wrote, “After building a long basing structure around 50 since the beginning of May, WNS Holdings (WNS) caught a cold on Tuesday and fell all the way to its 200-day moving average on Wednesday. [It’s back above that line now.] WNS Holdings will release its latest fiscal quarterly results before the market open on October 25, and that will likely set the tone for the stock in the short term.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED October 23, 2018
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