As we head into December, there are several major factors at work on the market, and most of them are negative: interest rates are rising, global trade is at risk of slowing, and the major trend of the market is now down. But not all factors are bleak. On the positive side, the deep correction has made stocks cheaper, and as stocks have fallen, investors have become more fearful, which eventually becomes a good thing.
So while caution is clearly warranted, it’s important not to stick your head in the sand.
Cabot Stock of the Week 224
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Trends have not been good in recent weeks, as the market’s renewed plunge has brought many indexes down to their lows of late October. One way to play this kind of weakness is to try to buy stocks that are low and catch a bounce, as we have done several times in recent months. The other way is to buy strength, reasoning that if a stock bucks the trend when the market is weak, it will soar when the pressure comes off. And that’s our strategy today, with a stock originally recommended by Mike Cintolo of Cabot Growth Investor. Here are Mike’s latest thoughts.
Canada Goose (GOOS)
Most of our best retail investments over the years have been cookie-cutter stories, where a new concept is replicated all over the country (and world) via the opening of new stores—think Chipotle, McDonalds or even Home Depot—that leads to years of steady, predictable growth.
However, we’ve also seen success with retail plays that have succeeded as their brands become “hot.” These are usually higher-end apparel firms that have had some success but are transitioning from a niche to mainstream, expanding distribution and their product offerings, and seeing sales and earnings mushroom in response. Lululemon, Michael Kors and Coach are recent examples, and we think Canada Goose is the next one in line.
The company has been around since 1957, known for super high-quality (and super high-priced) winter jackets (often $1,000 or more) that are stylish but also extremely functional; many people have used Canada Goose’s jackets and other winter wear (hoodies, parkas, gloves, hats, vests, scarves and more) on expeditions up mountains and on the job in harsh conditions. Even so, the company was effectively a niche business, with revenues of around $3 million as recently as the late 1990s.
But in recent years the firm has branched out, both in terms of products and distribution. Product-wise, the company is still mostly focused on winter outdoor apparel (70% or so of annual revenues come in the September and December quarters), tinkering with some new, bright-colored jackets that, in the company’s words, are “designed to meet all your needs, be it on the mountain or in the city.” But it’s also branched out into some springwear (rain jackets), knitwear (sweaters, pullovers, cardigans) and kids clothing. And now, thanks to a recent $33 million acquisition of Baffin, Goose will be entering the performance outdoor and industrial footwear market. Demand in all these segments seems to be strong.
In terms of distribution, the company has always relied on wholesale sales to other outlets, and that still makes up the majority of business today. In Q3, for instance, wholesale revenue totaled nearly $180 million (Canadian), up 18% from a year ago and making up 78% of total revenue.
But Goose is now moving into direct-to-consumer sales as well, both through a handful of new store openings and a revamped e-commerce site. In the third quarter, not only did this segment see sales rise to $50.4 million (up 150% from a year ago), but it was far more profitable, too, with gross margins of 75%, vs. 50% for wholesale. (Encouragingly, both figures are rising nicely thanks to manufacturing efficiencies.)
The combined result has been a surge in growth for the top line (up 34% in Q3) and bottom line (earnings up 59%, EBITDA up 53%), with management expecting the fiscal year (ending next March) to see 30% revenue and 40% earnings growth—both of which could prove conservative should the holiday shopping season go well.
From here, continued success is just a matter of management continuing to execute when it comes to broadening awareness and distribution, as well as getting its newer product lines off to fast starts. Given the firm’s steady history of growth, there’s little reason to believe the story won’t continue to play out.
As for the stock, it originally broke out a year ago and, with a couple of big hiccups along the way, ran from 22 to as high as 69 in June. That was a bit too far, too fast, though, and GOOS proceeded to correct and consolidate from there—mostly sideways through September, though hitting a low of 47 (near its 200-day moving average) during the market’s October meltdown.
But since then, the action has been terrific, first with a strong bounce back to 60, and then an earnings-induced surge into the low 70s. And, even better, GOOS has held relatively firm since then, despite the continued weak environment. Going forward, we could easily see a retreat to 62, especially if the market weakens, but overall, it’s clear that the buyers are in control here, and continued improvement of investor perceptions as the story spreads is likely to see more buyers joining the crowd. Thus, keeping it simple as usual, we will buy at tomorrow’s average price.
Canada Goose Holdings (GOOS)
250 Bowie Avenue
Toronto, ON M6E 4Y2
416-780-9850
www.canadagoose.com
CURRENT RECOMMENDATIONS
In the two weeks since our last issue (I hope you enjoyed the Thanksgiving holiday!), the market has sold off sharply, and then bounced back—partially. The good news is that the selloff did not go as deep as the late-October selloff (though the tech-heavy Nasdaq was an exception), which is a sign that the market could be building a bottom. Also encouraging is the fact that investor sentiment is worse than it has been in months, and bad sentiment tends to characterize bottoms. The bad news is that the bounce has been pretty pitiful so far; the buyers haven’t taken control with convincing volume. So caution remains the watchword. Above all, that means keeping risk low by holding more cash, and the two ways to do that are to own fewer stocks and to own smaller positions. Given that I must recommend one stock a week in this advisory, it’s hard to get the number of stocks in the portfolio down, but it should be easy for you to do that in your own portfolio, and to keep position sizes smaller as well. Today there are two sells from the portfolio.
Alexion Pharmaceuticals (ALXN), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, is a biopharmaceutical company that researches and manufactures treatments of severe and rare health disorders. I look at the stock and I see a wide and loose trading range but no net progress over the past two years. Crista, however, sees great potential. In her latest update, she wrote, “Alexion will present at the Evercore ISI Healthcare Conference on November 27. Analysts expect an updated report on ALXN1210 studies in the first quarter of 2019. Analysts expect EPS to grow 30.0% and 14.2% in 2018 and 2019. The 2019 P/E is 13.6. ALXN has solid seven-month price support near 115, and a wide trading range. Traders and risk-tolerant growth stock investors should buy ALXN now.” BUY.
Altair Engineering (ALTR), originally recommended by Tyler Laundon in Cabot Small-Cap Confidential, has now fallen through all support as investors have dumped small-cap stocks and fled to the safety of big and slow investments. Tyler downgraded the stock to Hold last week (he’s confined to investing in that sector—which was fabulous earlier this year), but I’m going to sell now because I have no idea when the sector will revive. SELL.
Centennial Resource Development (CDEV), originally recommended by Mike Cintolo in Cabot Growth Investor, has been a victim of falling oil prices. Technically, the stock has the potential to bottom at 16, which is where it bottomed in June, but so far, there are no signs of buyers, so I recommend selling. SELL.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, is looking a lot better! In her update last week, Chloe wrote, “GM is ignoring the market pullback. The stock gapped up on great volume three weeks ago and is now building a slightly declining but tight base at 36. The Trump Administration is expected to hold off on new auto tariffs for a while, and GM recently announced that it will begin allowing non-GM cars in its Maven ridesharing fleet in mid-2019. Longer term, GM’s investments in autonomous cars are promising. GM’s revenues rose nearly twice as much as expected in the latest quarter, and the stock is looking healthier than it has in months.” And then just yesterday, after the company announced that it would lay off nearly 15,000 workers (15% of its salaried workers), the stock soared on massive volume. If you don’t own it, you can buy some here. I’m upgrading to Buy. BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, bounced off its 200-day moving average last week (the second time in a month it’s done that) and has climbed nicely since. The long-term trend of this small buy innovative credit card company remains 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, is going nowhere fast, wobbling back and forth across its 200-day moving average. But that moving average is trending up, and the fact all three major moving averages (25-, 50-, and 200-day) have converged in this area suggests that the stock has solid support here. As to Crista, 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). The 2020 P/E is 15.5. The stock is likely to trade between 20 and 24 in the coming weeks, with additional capital appreciation as the broader market recovers from the correction. Please note: just in case GES shoots upward due to a strong earnings report, I would expect the share price not to exceed 24 for more than two business days. No matter how bullish the news, the stock will need to pull back and rest.” 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 along with the broad Chinese market, and has been improving slowly since. If you don’t own the stock, and your portfolio could benefit from the diversification, this is a fine time to buy China’s leading hotel stock. HOLD.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, fell a huge 45% from its September high to its low last week, and I’m almost certain that that’s enough of a correction, as the stock has found support at this level in both May and July of this year. The question, however, is whether buyers will show up soon or whether the stock will languish for months. Fundamentally, the story remains quite sound as Match dominates its industry, so I will be patient for a while and see what the stock can do. HOLD.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, is one of the stocks that investors have favored in their flight to safety in recent months. In last week’s update, she wrote, “MKC has spent the past two weeks consolidating, after rallying to new 52-week highs earlier this month. Consumer staples stocks are a traditional safe haven during market corrections, because spending on groceries and other staples is so reliable. McCormick makes spices as well as numerous brand-name sauces, seasonings and condiments.” 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, the stock looks terrible, and the reason—aside from the general market weakness—is a botched fundraising deal. First came the news that MedMen aimed to raise up to $120 million by selling units to a syndicate of underwriters—which was seen as diluting current shareholders and thus sparked the initial selloff. And then came the news that the share offering—in an absolutely terrible climate—was amended, with the result that only $75 million was raised, and dilution was even greater than originally feared. The company’s CFO resigned when the updated terms were announced and now the company is looking for a replacement for him. So the news is pretty bad, and the stock looks terrible, short term. But the long-term picture remains bright, and the question now is whether to hold—remembering that bad news creates bottoms—or to sell, and my choice is to hold, as selling volume has dried up. If you haven’t bought yet (congratulations!) you could buy here. HOLD.
MiX Telematics (MIXT), originally recommended by Paul Goodwin, is the most thinly traded stock in the portfolio, and the chart looks great! The South African transportation fleet technology stock blasted off in late October and has recently been building a base around 18. BUY.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, bounced off its 200-day moving average back in mid-October and has been working its way slowly higher since. In her latest update, Chloe wrote, “STAG is looking solid, etching a nice base just above its 200-day line. The industrial REIT owns properties in 37 states that are mostly used as warehouses and fulfillment centers. 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, fell 37% from its January high to its recent low, so it’s almost guaranteed to stay out of favor through the end of the year as tax-selling pressures hold it down. But Crista remains bullish on the stock’s long-term prospects. In her latest update, she wrote, “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. 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 5.8. 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 we’ve been able to give the stock some rope as it corrected slowly down toward its 200-day moving average. And last Tuesday it did plunge through that line, getting all the way down to 49, but it’s rebounded strongly since then, and unless the market truly falls apart, that low should hold. Fundamentally, Teladoc is on the cutting edge of virtual medicine in the U.S., and in China, there’s a parallel story: Giant insurer Ping An will roll out 1,000 unstaffed medical clinics in the next 60 days. Resembling oversized phone booths, these clinics begin with an Artificial Intelligence enabled exam, move on to a telemedicine session with a human physician and end in many cases with a prescription for medicine which is sold from the clinic’s Smart Medicine Cabinet vending machine, which stocks over 100 medications. I’m not saying that Teladoc will do the same, but there’s no doubt they’re aware of the possibilities. If you’ve got TDOC, hold on tight, and if you don’t own it, you can nibble here. 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. One benefit of holding the stock recently has been that it’s been more resilient than most growth stocks, thanks in part to the fact that the company is now on track to deliver real earnings. In Mike’s latest update in Cabot Growth Investor, where he has the stock on his Watch List, he wrote, “TSLA was a rare sight on Monday, briefly hitting three-month highs before the market weighed it down. The skepticism surrounding the company remains very high (30 million shares are still sold short, or about 23% of the float!), but it seems that the stock has found its lows and big investors are looking ahead to big profits; earnings estimates keep rising, now at $6.29 per share for 2019.” HOLD.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has pulled back normally over the past week after hitting a record high of 322, and it could easily pull back as low as 285, where we find both its 50-day moving average and support from its September-October highs. But long term, the picture remains bright, as ULTA offers a hybrid of both safety (as a consumer staples company) and growth. BUY.
WNS Holdings (WNS), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, is an Indian outsourcing firm with a solid growth story. The stock remains well above its low of October, but it fell back below its 200-day moving average last week, and I’m going to downgrade it to Hold and see if buyers materialize. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED December 4, 2018
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