The rally continues, but it is definitely losing steam; odds are that the market will see more downside action soon, so if you’re heavily invested, you should think about lightening up.
At the same time, there are pockets of strength developing, so if you’re perhaps underinvested, several of the portfolio stocks deserve a hard look.
Cabot Stock of the Week 222
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The market has been rallying for a week now, but remains well off its September highs and below key moving averages. Thus, the main trend remains down, and caution is the watchword. However, international markets have also been rallying, and given that this group peaked way back in January, I’m optimistic that their decline is over and that aggressive investors can start dipping a toe in the water. Our initial foray into the arena was in the Indian outsourcing firm WNS Holdings (WNS) a month ago, and that position is only slightly under water—not bad, all things considered. So today I’m recommending a small South African software firm that not only enjoys good growth but also pays a small dividend. The stock was originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, and here are Paul’s latest thoughts.
MiX Telematics (MIXT)
Money-saving software ideas can come from any corner of the globe, and MiX Telematics (MIXT), a South African software designer, is a good example. MiX is making a global mark in software that enables companies to manage their truck and car fleets and other mobile assets like buses, vans and trailers. Users include enterprise fleets, small fleets and even individual consumers that use the company’s service to better control fuel costs, help with regulatory compliance and recover stolen assets.
Those users are located in more than 120 countries on six continents and MiX’s software tracks more than 700,000 mobile assets. Offices are located in South Africa, the U.K., the U.S., Uganda, Brazil, Australia and the United Arab Emirates, but business can come from any place that has internet access.
MiX Telematics was founded in 1995 as Matrix Vehicle Tracking, a consumer-focused business going vehicle recovery and personal safety services. After achieving a dominant position in that segment, the company acquired Omnibridge, the licensee for the Siemens VDO Fleet Manager product range. Other acquisitions (Tripmaster in the U.S. and SafeDrive International in Dubai) expanded the company’s product range and geographic reach.
The company’s product line includes MiX Fleet Manager Premium, which puts a sophisticated computer onboard each vehicle. The computers then send vehicle and driver data to data centers where it is available via mobile apps. The result of the adoption of MiX Fleet Manager Premium is fuel savings, improvements in safety and better client service. Importantly, MiX guarantees significant results.
The addressable worldwide market for fleet management software is enormous, with a global fleet base of 192 million vehicles, of which only 14% are currently using any management software at all. MiX Telematics charges a reasonable monthly rate of $35 per vehicle ($420 per year), which makes the value of the addressable market $81 billion.
MiX Telematics has been consistently profitable, but really started to gain traction in fiscal 2017 (its fiscal year ends in March) when revenue grew by 6%, and 2018, when it was up by 22%. Earnings growth has also improved sharply during the past couple of years, with quarterly bottom-line gains averaging triple-digit rates over the past nine quarters. After-tax profit margins have also leapt above 10% in the three most-recent quarters. As is common for the industry, the company’s software as a service subscription model for both its software and hardware keeps recurring revenue high.
MiX Telematics reported its fiscal Q2 results on November 1, and investors liked the 18.4% growth in subscription revenue and the 22,000 net subscriber additions, pushing the company’s total base above 714,000. Overall revenues grew by 15% and earnings growth was a solid 80%.
As for the stock, MIXT was trading at 21 in May 2018, capping a rally that had shot it from 5.6 in May 2017. But shares corrected all the way down to 13 in early October and built a brief bottom at that level in the week or so before the earnings report. And when the earnings report was released, investors reacted very positively to the good numbers, shooting the stock up to 17.5 on heavy volume.
Tim’s comment: This is a relatively thinly traded small-cap stock, so risks are high; if the market weakens, there’s potential for MIXT to pull back to 16. But I’m very impressed by the volume that was seen in the post-earnings blastoff, and I think odds are good that the sellers are done here. I’ll keep it simple, as usual, by buying at tomorrow’s average price. BUY.
MiX Telematics (MIXT)
Matrix Corner
Howick Close Waterfall Park
Midrand 1686
South Africa
27 11 654 8000
www.mixtelematics.co.za
CURRENT RECOMMENDATIONS
With today’s addition of MIXT, the portfolio grows to 16 stocks, still short of the maximum of 20. And that’s good; in an unfavorable market, I don’t want to be fully invested. In fact, I want to reduce risk by selling stocks! So as usual, this week I looked for potential sells—but I didn’t find any. Yes, some of the portfolio stocks are struggling, but overall, I believe the odds are that most of these stocks will be higher in the weeks ahead. But I am downgrading three stocks to hold, now that they’ve had the chance to bounce. And I’m most excited of all to see ULTA breaking out to a new high for the year today!
Altair Engineering (ALTR), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, and featured just three weeks ago, was off to a great start; I thought we had nailed the bottom. And then yesterday happened, and now we’re underwater! Here’s Tyler’s analysis.
“Yesterday Altair announced it would acquire Datawatch (DWCH), a company we’re somewhat familiar with as we held it in the Cabot Small-Cap Confidential portfolio for a short time. Altair management justifies the $176 million acquisition – the largest in its history – by pointing to the depth of technology that it gets in the acquisition. Datawatch has three disparate solutions; Angoss is a prediction tool, Monarch and Swarm are data prep tools, and Panopticon is a visualization tool.
These technologies have applications across Altair’s customer base because of the similarities they share with simulation, especially in areas like IoT utilization in manufacturing. Management believes the underlying technologies are converging, and that by rolling Datawatch tools into the Hyperworks Units model it can offer both customer bases something new, exciting and valuable. There is an opportunity to sell Datawatch technologies into marketing departments among Altair’s 6,000 customers, and an opportunity to sell Altair’s solutions into Datawatch’s userbase.
That said, Altair’s customer base is mostly involved in manufacturing. Datawatch has a large presence in financial services. There isn’t a lot of overlap. On the one hand, if management is right and there are direct applications leading to cross-sell opportunities the potential is significant. Especially since Datawatch didn’t really need to be a stand-alone public company; it has three disparate technologies and limited resources. While they are powerful, selling and scaling the business has been a persistent challenge. Altair could help fix that.
On the other hand, breaking into new markets represents execution risk and new competition. Software for financial markets and marketing is beyond the scope of Altair’s current manufacturing focus.
In the near-term Altair says the deal could reduce the acquired revenue stream (Datawatch was expected to deliver $55.6 million in revenue in 2019, up almost 20% over 2018). That’s because of the conversion of subscriptions to the Hyperworks model. Datawatch is also expected to be around break-even on an adjusted EBITDA basis. There will be some cost synergies. Bottom line: management is striking a very conservative tone with respect to financial impact.
The market had a visceral reaction to the deal and sent Altair’s stock sharply lower yesterday. Shares closed near session lows indicating the Street sees significant execution risk and questions the validity of the deal’s logic. I’ll admit that when I first read the press release, I was a little perplexed by the marriage of these two companies.
I can, however, see the potential after further examining the respective companies’ product lines. For example, one of the areas Datawatch’s Panopticon visualization software is used is in high frequency trading. It gives trade desks the ability to react quickly to market moving events. As manufacturing becomes more digitized (through use of sensors) it’s not too hard to imagine how real-time visualization software can be used for sophisticated operations. It’s all about pulling in data, cleaning and filtering it then streaming it to users in an easy-to-consume format so they can make better decisions based on what’s happening now, and likely to happen in the future.
For now, the market has voted. And we need to respect the reaction. Altair moves to hold after yesterday’s drop. It’s doing a little better today. Management will report on Thursday and we’ll get more info on the deal then, along with an update on the rest of the business. The pressure is on.”
As for the upcoming earnings report, Tyler last said that the market is expecting 12.4% revenue growth to $95.5 million and EPS of $0.06, up from a loss of -$0.09 in Q3 2017. HOLD.
Centennial Resource Development (CDEV), originally recommended by Mike Cintolo in Cabot Growth Investor, is an oil driller and producer in West Texas with great growth potential, but the stock was sucked down by the broad market soon after we bought it, so we have a modest loss. Over the past week, it’s bounced with the market, and now we have third quarter earnings, which were released last night after the close. Daily crude production was up 71% over the previous year, and the company acquired 2,900 net acres in Texas and New Mexico. Revenues were $235 million, up 110% from the year before, while earnings per share were $0.15, up from $0.06 the previous year. The stock sold off a bit today, but the main trend remains up. HOLD.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, looks a lot better. First, as Chloe reported last week, “Automakers including GM popped Monday after Bloomberg reported that the Chinese government is considering cutting the sales tax on new cars in half. That would provide a significant sales boost to GM, whose largest market is China (although like all foreign automakers it operates there through a joint venture).” Then the company released an earnings report that was received very positively by investors. Revenue was $35.8 billion, up 6.4% from the year before and well above the expected $34.9 billion, while EPS was $1.75, well above the expected $1.25. The stock gapped up hugely on big volume after the report and since then has been building a tight base at 36. 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 bounced off its 200-day moving average last week, but the volume has not been particularly impressive, so I’m going to downgrade it to hold now and watch its progress closely. HOLD.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, has been building a loose base centered on 22 since April, and eventually, if Crista is right, that base will launch a renewed advance. In her latest update, she wrote, “GES is an undervalued aggressive growth stock with a big dividend yield. 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 20.5 and 16.8. GES has traded sideways since April and could rise to 25 quite soon. I expect additional capital appreciation thereafter.” And the 4% dividend yield should keep investors interested, too. 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. The stock peaked in June, bottomed in October—at the same level it bottomed at last November—and is now ready to advance again; in fact, there was a big-volume surge just last Thursday. Third quarter results will be released November 15 after the market close. HOLD.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader and featured here two weeks ago, didn’t plunge with the broad market and didn’t bounce strongly either, so as I write, we’re right where we started. Long-term, prospects are bright for the leading online dating company on the planet. BUY.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, remains the star performer of the portfolio, hitting another new high today! I keep saying this strength can’t go on, and yet it does! In her latest update, Chloe wrote, “MKC has gained almost 8% since the start of October, and remains above its 50-day line. Groceries are the classic counter-cyclical investment and conservative stocks have seen strong inflows ever since the correction started. The spices company is a Dividend Aristocrat and reported excellent third-quarter earnings three weeks ago, triggering a flurry of upward estimate revisions.” HOLD.
MedMen (MMNFF), originally recommended by me in Cabot Marijuana Investor, has the potential to be the leading marijuana retailer in the U.S.; already, its stores take in more revenue per square foot than Apple stores. As for the stock, the sector rally of the past week has certainly got us off on the right foot, and next come the results of today’s elections, in which marijuana laws in four states are on the ballot. Short-term, my sense is that all this good news may be followed by a cooling-off period, so if you don’t own yet, you could wait and try to buy under 5. (Note: In Cabot Marijuana Investor, I am selling 1/3 of the portfolio’s position today, but that’s mainly to reduce the stock’s overweight in the portfolio from 12% to 8% and not from any thought that there’s trouble ahead.) HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, rebounded strongly for three weeks before cooling off last week. And then third quarter results—released after the market close Thursday—sparked a wave of selling Friday morning, though there has been no follow-though to the downside. Core FFO were $0.45 per share, up 4.3% year-over-year, just as expected. And revenue for the quarter was $88.9 million, up 13.8% from the year before and above the $87.7 million expected. Given that the results were good, why the selling? Possibly because investors are looking ahead to slower growth. Respecting the action of the stock, I’ll downgrade it to hold now. HOLD.
Synchrony Financial (SYF), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, sold off last week, but Crista is holding, confident that the stock is undervalued and will reward patient investors. Here’s her reasoning.
“Synchrony is a consumer finance company with $56.5 billion in deposits and 74.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans.
What’s happening between Synchrony Financial and Wal-Mart? Wal-Mart announced in July 2018 that it will end its 20-year private label and co-branded credit card contract with Synchrony upon the contract’s expiration in July 2019, and begin a new contract with Capital One Financial (COF) on August 1, 2019. Synchrony has yet to decide whether to keep the Wal-Mart credit card portfolio or sell it to Capital One. Negotiations broke down, leading to Wal-Mart filing a lawsuit against Synchrony last week over a dispute in the valuation of the credit card portfolio.
Why is the value of the credit card portfolio important? The sale of the loan portfolio to Capital One could require an unplanned-for outlay of cash by Wal-Mart, which the retailer would naturally oppose. Wal-Mart wants Synchrony to change its method of valuing the loan portfolio, resulting in a lower portfolio value.
The Wall Street Journal reported that Wal-Mart’s lawsuit alleges “that some of Synchrony’s underwriting standards financially harmed Wal-Mart. The merchant said it is seeking damages ‘in an amount to be proven at trial but estimated to be no less than $800 million.’” Fox Business added that Wal-Mart alleged “that Synchrony broke an ‘implied promise’ that it wouldn’t harm Wal-Mart’s ability ‘to receive fruits of the contract.’”
Synchrony responded by saying that “Wal-Mart is trying to avoid paying the fair market value for the [approximate $10 billion loan] portfolio as required by our contract.
Curiously, as of November 4, there is no press release on Wal-Mart’s website pertaining to the lawsuit. I can’t recall ever reading significant news about a business situation that was not also announced via a press release being simultaneously posted on the company’s website. That makes me think Wal-Mart might be trying to bully their way to a resolution that will not otherwise come about in a righteous manner. I’m standing with Synchrony on this issue. I’ve heard enough stories about Wal-Mart’s bullying business tactics over the years to believe that the retail behemoth is yet again attempting to win via intimidation. My opinion doesn’t really matter, though. I’m still using earnings estimates and other fundamentals to steer my stock-investing decisions.
Has the Synchrony/Wal-Mart divorce harmed Synchrony’s earnings outlook? Let’s start by reviewing Wall Street’s consensus earnings per share (EPS) estimates for Synchrony, both before and after the July 2018 corporate divorce announcement.
As the year progressed, Synchrony’s very attractive earnings estimates rose. Analysts now expect full-year EPS to increase by 35.9% and 25.3% in 2018 and 2019 (December year end). Yet the share price fell, giving the stock a shockingly low valuation, as evidenced by the 2019 price/earnings ratio of 5.9.
Synchrony offers significant returns of cash to shareholders. The company increased its dividend payout by a hefty 40% in July, currently yielding 3.2%. A new $2.2 billion share repurchase was authorized on June 30, and Synchrony immediately proceeded to repurchase $966 million of stock during the third quarter.
The strong earnings growth appears sustainable. American Banker reported, “In a regulatory filing, [Synchrony] predicted that regardless of whether it sells or holds [the Wal-Mart loan portfolio], its decision will be accretive to earnings relative to renewing the contract with Walmart.”
In case you’re a newcomer to stock investing, “accretive to earnings” means that the situation will boost profits per share. Therefore, Synchrony is telling investors something like, “Yes, we’re fighting with Wal-Mart right now, but our finances are in great shape, and are not in jeopardy.” That’s important because professional investors ultimately make portfolio decisions based on actual balance sheet results, and not on rumor and innuendo.
What can I expect from the share price? Synchrony’s share price has suffered this year, partly because of two stock market corrections in 2018, partly because value stocks and bank stocks have been out of favor among investors, and partly because the Synchrony/Wal-Mart divorce scared investors. Compound that by the inevitable fourth-quarter selling pressure that comes with the tax-loss selling season, and you’ve got a stock that probably won’t recover until January.
I continue to recommend that investors hold their SYF shares. Unless the earnings outlook falls apart for some unforeseen reason, I will be giving the stock a Strong Buy recommendation once the share price stabilizes, and certainly by January 2.”
Additionally, a look at the long-term chart reveals support at 25.5 dating back to October 2016. HOLD.
Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, was one of the strongest stocks in the portfolio through 2018 so it deserved a rest—and the good news is that it bottomed before the broad market, at 62, and has been building a sloppy base at that level for the past four weeks. Fundamentally, the firm’s third quarter report, released November 1, looked fine. Revenues were $111 million, up 62% from the year before (analysts were expecting 60% growth) and the net loss per share was ($0.34), better than the expected loss of ($0.36). If you think our country’s health care system needs improvement, take a look at Teladoc. Hopefully, the stock will merit a buy rating soon. HOLD.
Tesla (TSLA), originally recommended in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio, and I’ll continue to hold as long as I believe the company has great growth potential. In Mike’s latest update in Cabot Growth Investor, he wrote, “TSLA hasn’t made any net progress for a very long time, and there’s lots of controversy surrounding the stock. But beyond the dramatic headlines, business may have turned a corner in Q3; gross margins surged, costs were kept in check and the company blew away expectations for deliveries and earnings. (Analysts now see 2019 bringing nearly $6 per share.) While the stock has shown very, very impressive accumulation since then, the chart still needs work.” HOLD.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, broke out to a new high for the year today! That makes it a true leader and thus a strong candidate for buying if you’re underinvested. As a consumer staples company, ULTA can be viewed as a classic defensive stock, but with revenues growing at a 15.4% rate, it can also be viewed as a true growth company. 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, “WNS has been easing generally lower for a few months, which is acceptable action given the market, and we’re pleased to see it show some relative strength since early October (the low was 46, but it’s been above that level ever since). It’s not going to be a rocket, but given its steady business, WNS could be a good foot-in-the-door stock once the market’s trend improves.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED November 13, 2018
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