Here in mid-November, several themes are foremost in my mind. First is rotation; tech stocks are out and defense is in. Also in, as always, are underappreciated stocks, both big and small. Second is the traditional year-end selling of losers (for tax purposes) and year-end buying of winners (for window dressing purposes.) And third is the developing strength in international markets, which have been under pressure far longer than U.S. market and are thus riper to return to their uptrends.
Cabot Stock of the Week 223
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In the two-plus weeks since the market bottomed, we’ve seen a strong bounce and now a normal reaction to that, and the question in everyone’s mind is whether the bounce can evolve into a true uptrend that takes the market to new highs, or whether the market will roll over and head to new lows. I have no preconceived notions, but I do know that when the trends are not clearly supportive, it pays to reduce risk, by minimizing high-risk positions and working harder to enter lower-risk situations. Buying low, of course, is one of these low-risk strategies, and that’s a specialty of Crista Huff, who recently recommended today’s stock in Cabot Undervalued Stocks Advisor. Here are Crista’s latest thoughts.
Alexion Pharmaceuticals (ALXN)
My suggestion during market downturns is to “buy low and exhibit patience.” When markets turn upward, they can move fast. Here’s an undervalued growth stock that’s not suffering nearly as much as many popular stocks, yet still has lots of potential upside.
Alexion Pharmaceuticals is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. Its primary therapies are Soliris, Strensiq and Kanuma. Current and experimental therapies are designed to treat paroxysmal nocturnal hemoglobinuria (PNH), atypical hemolytic uremic syndrome (aHUS), migraine, and other maladies with acronyms (gMG, HPP, ADHD and LAL-D). The company is based in New Haven, Connecticut.
ALXN1210 is in current and pending Phase 3 trials for the improved treatment of aHUS, both intravenously and subcutaneously, in adults, adolescents and/or children.
Recent third quarter 2018 earnings per share (EPS) came in above all analysts’ estimates, generating renewed excitement in the stock. Alexion management also increased full year 2018 guidance for revenue, operating margins and EPS. The quarterly report itemized ongoing product and financial successes, an increased $1 billion share repurchase authorization, and updates on the company’s product pipeline. CEO Ludwig Hantson, Ph.D. commented, “Following the groundbreaking Phase 3 results of eculizumab in NMOSD [neuromyelitis optica spectrum disorder], we are moving quickly to prepare global regulatory submissions, which could make it the first approved therapy for patients with this devastating disease.”
Alexion recently announced the acquisition of Syntimmune for $400 million up front and up to $800 million upon reaching performance milestones. Syntimmune is far along in the development of SYNT001, a treatment for warm autoimmune hemolytic anemia (WAIHA), adding to Alexion’s pipeline of treatments for rare diseases. A Cowen & Co. analyst believes that SYNT001 could contribute $1 billion in annual revenue to Alexion. The acquisition was previously budgeted and will not therefore affect the 2018 earnings outlook. The deal is expected to close in the fourth quarter of 2018.
Alexion also revealed successful trials of Soliris in combating symptoms of neuromyelitis optica (NMO), an inflammatory disease of the central nervous system. Management intends to promptly file an application with regulators for approval of Soliris in treating NMO, which could add hundreds of millions of dollars to Alexion’s annual revenue.
Alexion delivered 26.8% EPS growth in fiscal 2017. Both the 2018 and 2019 full-year consensus earnings estimates rose in November to their highest levels all year. Wall Street now expects EPS to grow 30.0% and 14.2% in 2018 and 2019.
If you’re looking for an undervalued growth stock, ALXN is a top candidate. The stock’s price/earnings ratio (P/E) has trended down in recent years, from the mid-30s in 2014 to the low-to-mid 20s in 2017, with the 2019 P/E now just 14.2.
ALXN peaked near 210 in 2015. Despite the fact that earnings growth has ramped up and the price/earnings ratio (P/E) has fallen by half since 2015, the share price has languished within a wide trading range for two years. Granted, a string of management shake-ups through the first half of 2017 contributed to the lower share price, but we’re long past those events.
Investors are now presented with opportunities for both short-term trading and for outsized longer-term capital gains as the share price will eventually boomerang back to a higher and more deserved valuation.
The stock could continue to trade anywhere between 116 and 140 through year-end, but one thing is certain: this stock will not sit still! Expect constant price action.
I expect January 2019 to bring a collective sigh of relief to U.S. stock markets, ushering in some bullish action to both ALXN and the broader market. Try to buy ALXN anywhere below 127 in order to capitalize on trading range fluctuations and future bull market trends.
Alexion Pharmaceuticals (ALXN)
121 Seaport Boulevard
Boston, MA 02210
http://www.alexion.com
CURRENT RECOMMENDATIONS
October’s plunge was unpleasant, but it did serve an important purpose—to knock down many stocks whose valuations were just silly and to install the level of uncertainty that is required before stocks can advance again. At the same time, the correction gave us a chance to watch our stocks carefully, to see which bounced like tennis balls and which splattered on the floor like eggs—and those that didn’t bounce were sold. So now we look ahead, as market rotation continues out of popular technology stocks and into less popular stocks, and continue to adjust the portfolio to benefit from the changes. There are no sales today, but there are three rating changes.
Altair Engineering (ALTR), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, has bounced nicely over the past week, and Tyler has upgraded the stock to Buy. Here’s his explanation: “Altair reported earnings Thursday night and revenue growth of 10.5% to $93.9 million missed by $1.6 million while adjusted EPS of $0.07 beat by a penny. The revenue miss can be attributed to $900K in foreign currency impacts and $1.8 million in multi-deliverable deals that couldn’t be recognized because not enough work was completed on the services line to trigger revenue recognition of the software element. The FX impact is just part of the deal with ALTR. One could argue that the services teams need to step it up and get their work done. The end result is a little noise in the quarter, but currency-neutral billings growth of 16% shows that the business is still healthy and there are no major changes in underlying demand trends.
On the subject of trends, management was asked if it’s seen any disturbance from macro concerns, specifically in the auto industry where Altair generates a significant amount of business. The answer was that business is still strong and that design and simulation software is a relatively low percentage of an auto manufacturer’s costs but of immense strategic importance. With roughly a dozen new auto companies sprouting up in the electrical vehicle market, and greater focus from established companies on electric, Altair feels good about demand from autos.
There were a lot of questions about the Datawatch acquisition, which makes sense given that the stock fell sharply the day after it was announced. The short version is that management doesn’t expect to divert significant resources to growing in the financial markets where Datawatch’s products are mostly used now, but will continue to support current customers, especially the larger dollar value ones and those where cross-selling opportunities abound.
Management also spoke at length about the rationale for the acquisition, saying that in the machine learning, AI and simulations areas where Altair is focused, data sciences play a huge role. Data science requires data prep, and that’s Datawatch’s specialty. Having covered Datawatch in the past (I added it to this portfolio in 2017), I have to agree. Management offered several examples of existing customers (none by name) that have been asking for the capabilities that Datawatch’s software offers and asserted that by rolling Datawatch into Altair’s units-based pricing model, the company believes it can remove much of the friction that has held Datawatch back in the past.
Management also clarified that Datawatch’s streaming analytics tools do have some presence in IoT markets including automotive (connected and autonomous vehicles), manufacturing (production planning, quality control), energy (smart meter and grid monitoring, oil and gas drilling), transportation, logistics and retail markets. Those markets haven’t historically been a focus. Now they will.
Altair management gave full-year 2018 revenue guidance of $378 to $380 million, which is about $1.4 million shy of consensus, an amount that’s accounted for in the Q3 miss. No guidance has been issued for 2019, but to put out relative numbers, Datawatch is expected to deliver $55.5 million in revenue (up 18.4%) while Altair has been expected to deliver $430 million (up 12.8%). Once the deal is closed we should get more accurate guidance from management.
I think the selloff that followed the Datawatch acquisition was overdone and may have reflected some program trading that took ALTR lower than it should have. I’m moving back to buy since the Q3 report suggests there are no major issues that the Datawatch acquisition is trying to cover up, and that there are in fact significant opportunities to pursue with Datawatch in the fold. Management will be challenged to execute, as with any acquisition, but at this time and at the current price, Altair looks like a good deal.” BUY.
Centennial Resource Development (CDEV), originally recommended by Mike Cintolo in Cabot Growth Investor, has been a victim of falling oil prices, but I think the selling has been overdone at this point. I don’t like holding a loss of this magnitude, but the chart tells me the long-term trend is up and that selling pressures are abating, so I expect to see buyers show up soon. HOLD.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, has been building a tight base at 36 since the stock gapped up powerfully two weeks ago. In her latest update, Chloe wrote, “GM also announced this week that they expect to launch their autonomous taxi fleet next year. The stock is looking healthier than it has in months.” HOLD.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, has been on a roller-coaster ride over the past week, jumping from 80 to 93 on a terrific earnings report that exceeded expectations and then falling all the way back, presumably due to fears that management won’t be able to sustain the momentum if the economy slows. The only bright spot I can see in the chart is that selling volume was lighter than buying volume, but that’s not conclusive given that this is a lightly traded stock to begin with. Still, the main trend is up. HOLD.
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, hit resistance at 23 on four consecutive days before pulling back slightly to its current position. In her latest update, Crista 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 19.8 and 16.2. The stock is likely to trade between 21 and 24 in the coming weeks, with additional capital appreciation as the broader market recovers from its recent drop. Buy GES now.” 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 working on building a bottom (it’s tested and held support in the 25-26 range many times during the past month). Third quarter results will be released November 15 after the market close. Also, Paul has been seeing signs of constructive action in the Chinese stock market, which has been under pressure all year. HOLD.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, released an excellent earnings report a week ago. Revenue grew 29% to $444 million, topping analysts’ estimates of $437, while earnings were $0.44 per share, up 131% from a year ago and killing analysts’ estimates of $0.36—all good. But the stock sold off because projections for the fourth quarter were well below expectations, and since then the stock has been working to build a base at this level, a full 30% off its September high. MTCH had been heavily shorted before the report, and there’s no doubt that many of those shorts have now covered, but I’m going to downgrade the stock to hold now and see if it can stabilize here. HOLD.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, hit another new high last Thursday and has been pulling back normally since, and Chloe has an interesting explanation for the stock’s unusual strength. In last week’s update, she wrote, “MKC was a standout during October’s correction, so it wouldn’t have been surprising to see the stock weaken a bit once the market rebounded. Instead, MKC continues to hit new highs. That lends credence to my thesis that consumer staples stocks are in the early stages of a longer-term upcycle, not just temporary beneficiaries of a market panic. Long-term investors can continue to Buy on pullbacks. The spices company is a Dividend Aristocrat and reported excellent third-quarter earnings three weeks ago, triggering a flurry of upward estimate revisions. For a similar investment, see this month’s new recommendation of Hormel (HRL).” I’ll hold. HOLD.
MedMen (MMNFF), originally recommended by me in Cabot Marijuana Investor, has the potential to be the leading marijuana retailer in the U.S., so the long-term prospects are especially bright. Short-term, however, minefields abound, as stocks in this hot sector are notoriously volatile. Last week I suggested that if you didn’t own the stock yet, you could wait and try to buy under 5, and now you’ve got your chance, as the stock plunged below that level on the news that MedMen was raising up to $120 million by selling units to a syndicate of underwriters and thus diluting current shareholders. The cash, of course, will enable faster expansion. I’m upgrading it to buy. BUY.
MiX Telematics (MIXT), originally recommended by Paul Goodwin and featured here last week, has pulled back slightly since then and remains a good buy for investors looking for international diversification. The South African transportation fleet software company has been in an uptrend since October 25, and the latest quarterly report, which beat estimates handily, sparked a wave of high-volume buying. BUY.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is in correction mode, but Chloe says, “The retreat isn’t too worrying, following three strong weeks of gains and coming as it does during a period of market rotation. High-yield investors can Hold.” HOLD.
Synchrony Financial (SYF), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, rebounded for five consecutive days following the big selloff two weeks ago, and Crista says continued holding will pay off. Here’s her latest: “SYF is a very undervalued aggressive growth stock with an attractive dividend yield. The company is currently enmeshed in a contract dispute with Wal-Mart (WMT), their former business partner. The dispute has not harmed Wall Street’s earnings outlook for Synchrony. Analysts expect full-year EPS to increase by 35.9% and 24.7% in 2018 and 2019 (December year end). The 2019 P/E is 6.2. The share price remains weak, and due to tax-loss selling, will not likely begin to recover until January. At that time, I will likely give the stock a Strong Buy recommendation.” HOLD.
Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, has a great long-term growth story and we have a big long-term profit as well, so are able to give the stock some rope as it corrects slowly down toward its 200-day moving average, now at 57. In his latest update, Mike wrote, “Teladoc reported earnings last Thursday evening, and they confirmed that its business is very much on track. Q3’s top line grew a strong 60% (up 29% excluding the purchase of Advance Medical), driven by both subscription and visit fee revenue gains. And while organic paid membership was up just 12% (or 18% including acquisitions), member usage is going up nicely, with visits from paid members up 44% from a year ago and international visits now making up about one-quarter of the total. The top brass also nudged up revenue estimates for Q4. The stock initially reacted positively, but then sank sharply on Monday, supposedly due to some worries surrounding its newer behavioral health offerings, which have driven a good amount of its organic growth in recent quarters. We highly doubt that’s a big issue, and instead think the dive was “only” a matter of big investors lightening up as the stock ran into resistance.” 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, “We remain very encouraged by TSLA, which has built on its excellent post-earnings reaction in recent days. While most observers are caught up in the firm’s superficial news, we think the Q3 report may be a turning point and launch a solid Reality Phase as margins perk up and earnings boom (nearly $6 per share estimated for 2019).” For the record, the concept of a Reality Phase in stocks came from my father, who noted that great growth stocks often experienced three phases: In the first phase, the Romance Phase, the stock boomed, even though the company was typically losing money as its investments exceeded its returns. Then came the second phase, the Transition Phase, as business gradually improved and earnings were achieved, but the stock went nowhere as valuations came down to “normal” levels. Finally, the Reality Phase occurred when the stock resumed its advance as earnings grew. For Tesla, the Romance Phase ended in mid-2017 when the stock peaked at 390, and the stock has been in Transition Phase since, swinging between 250 and 390. When the Reality Phase does arrive (Mike says it may be now), the profits won’t accrue as fast as they did in the heady days of the Romance Phase, but the nasty corrections won’t threaten those profits so frequently either. HOLD.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to hit new highs, adding more evidence to Chloe’s observation that consumer staples stocks are the favored class. But ULTA isn’t just reliable; 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, and the stock is going up! In his latest update, Paul wrote, “WNS has been very choppy, but the general trend has been up since October 12, which includes a positive reaction to the company’s October 25 earnings report. There’s still a wad of overhead to chew through between 50 and 52, but the stock’s action has broken the downtrend that started in the middle of July.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED November 27, 2018
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