Last week I told you that we’d received a new buy signal from our intermediate-term market-timing indicator—but it didn’t last long. The market’s widespread selling on Wednesday and Thursday quickly turned it negative again.
So capital preservation is once again of primary importance—though the charts say the time is ripe for at least a modest bounce.
Cabot Stock of the Week 226
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As we approach the end of 2018, it’s clear that the market’s main trend is down, so capital preservation is of prime importance. However, there’s always something that looks good, and this week there’s also the possibility that after last week’s horrendous action, the market is ripe for a short-term bounce. Put it all together, and it looks like a pretty good time to invest in this week’s recommendation, which was originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor. Here are Crista’s latest thoughts.
Voya Financial (VOYA)
Formerly named ING U.S., Voya Financial (VOYA) is a retirement, investment management, employee benefits and insurance company serving 47,000 institutional clients and nearly 4.5 million individual retirement plan investors in the United States. This Fortune 500 company manages $543 billion in assets. Voya won a variety of awards in 2018—including from Forbes, Fortune and Bloomberg—for workplace excellence, ethics and diversity.
Voya announced another contract win today; it was chosen as the new record keeper and service provider for New York City’s Deferred Compensation Plan, which has $21.6 billion in assets under administration. The new business will transfer to Voya in the second half of 2019, and will add to analysts’ 2019 earnings per share (EPS) estimates for Voya.
Voya is well into a multi-year process of improving its business operations and profitability, while lowering its risk. The sale of the majority of the company’s variable and fixed annuity operations was completed on June 1, although Voya retained its profitable role as asset manager. Voya will also cease life insurance sales upon year-end, to focus on more profitable and less capital-intensive business segments.
After half a dozen years of relatively solid but stagnant profits, Voya is now achieving very strong earnings per share (EPS) growth. Voya beat analysts’ earnings estimates in the first through third quarters of 2018. Last week, Wall Street’s consensus estimate for 2019 EPS rose to its highest point thus far. Analysts now expect Voya’s full-year EPS to grow 108% in 2018 and 37.3% and 2019. Management increased earnings growth targets at the November 2018 Investor Day, with a goal of 10% or more EPS growth annually through 2021.
The 2019 price/earnings ratio (P/E) is very low at 7.8. Even if the share price doubles to 86, the P/E would still only be 16, so you can see that there’s lots of capital gain potential before anybody would consider the stock to be overvalued.
VOYA is a mid-cap stock with a market capitalization of $6.7 billion and heavy institutional ownership. The company is committed to returning capital to shareholders, now and in the coming years. Voya repurchased $1 billion of its stock in the first half of 2018, and is on track to repurchase another $1 billion of stock through year-end.
One big change that will likely enhance the share price is the new dividend policy that was announced at the Investor Day. Management intends for the stock to have a 1% dividend yield by mid-2019. The current dividend payout is minimal at one penny per quarter, or 0.01%. The new dividend, which has not yet been declared, would need to equal at least $0.11 per quarter in order to achieve a 1% yield.
A 1% dividend yield will qualify VOYA for inclusion in mutual fund and institutional portfolios that focus on dividend stocks. In addition, strong earnings growth will qualify VOYA for inclusion in portfolios that focus on growth stocks, and the low P/E will also grab the attention of value stock portfolio managers. The more institutional buying that takes place in VOYA shares, the higher the share price can potentially travel.
VOYA climbed to a new all-time high of 55 in May before joining the market’s downtrend and bottoming in October. But it held up better than the market in the November selloff, so is likely to remain in the mid-40s as we approach the end of 2018. Looking into 2019, VOYA has enough desirable growth and value qualities to attract an outsized share of new money. Buy VOYA now before the stock market rebound kicks into high gear.
Voya Financial (VOYA)
230 Park Avenue
New York, NY 10169
212-309-8200
http://www.voya.com
CURRENT RECOMMENDATIONS
Short-term, the market is due for a bounce after last week’s wholesale selling, but long-term, it looks sick. In fact, Cabot Growth Investor, our advisory with the strongest market-timing component, now has its portfolio more than 70% in cash! In Cabot Stock of the Week I don’t recommend specific allocations; the stocks come and go too quickly to dwell on that. But in your own portfolio I do recommend that you recognize and respect the market’s main trend, and then do what you can to position yourself properly, whether it’s holding cash or buying covered calls. In the portfolio this week we have one sell. Details below.
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 for severe and rare health disorders. The stock has been in a wide-and-loose trading range for the past two years, and we bought recently in the lower end of that range. In her latest update, Crista wrote, “An updated report on ALXN1210 studies is expected 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 13.3. There’s 10% upside to 125, where the stock traded two weeks ago, and 22% upside to 139, where the stock last traded in September. Traders and risk-tolerant growth stock investors should buy ALXN now.” BUY.
Arena Pharmaceuticals (ARNA), originally recommended by Tyler Laundon in Cabot Small Cap Confidential and featured here last week, has been trading rather tightly around 40 since gapping up four weeks ago, so the odds are very good that the sellers are done and the buyers will eventually push the stock higher. In his latest update, Tyler wrote, “The deal to out-license its ralinepag asset to United Therapeutics (UTHR) for up to $1.2 billion is an encouraging sign of the long-term potential. Ralinepag is being investigated for the treatment of pulmonary arterial hypertension (PAH). The deal means an $800 million upfront payment, a $400 milestone payment, and tiered low double-digit royalties on global sales. The capital will help Arena move etrasimod and olorinab (as well as other early-stage assets) through the pipeline.” BUY.
Canada Goose (GOOS), originally recommended by Mike Cintolo in Cabot Growth Investor, saw shares tumble last week when the arrest of Huawei Technologies’ CFO—in Canada—spurred fears that Chinese consumers would cut back on purchases of the company’s trendy high-priced clothing. Hopefully, that’s a short-term fear, but I’m downgrading the stock to hold and will be watching it closely. GOOS is a fast-growing glamour stock and, thus, will likely be very susceptible to changes in perception. HOLD.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, pulled back with the market last week, but today the stock was up as word spread that China would cut tariffs on American-made cars from 40% to 15%. Thus, the uptrend that started in October remains intact. Additionally, on the operational side, there’s optimism about the savings that will be gained from plant closings and the higher margins that will come from focusing on trucks and SUVs, and longer-term, there’s great potential as GM pursues its ambitious vision of “Zero Crashes, Zero Emissions, Zero Congestion.” BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is an innovative bank holding company that is invisible to most Americans, because its products—like prepaid cards—are sold through partners and branded GoBank, MoneyPak, AccountNow, RushCard and RapidPay. But growth at the company is good; revenues were up 19% in the last quarter to $804 million, while earnings surged 37% to $1.92. The stock had a failed breakout soon after that report a month ago, but it’s resumed its uptrend and is a solid hold. 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, pulled back last week with the market, but selling pressure was minimal. In her latest update, Crista wrote, “GES is an undervalued aggressive growth stock with a big dividend yield. Analysts expect EPS to increase 47.1% and 31.1% in fiscal 2019 and 2020 (January year end). The 2020 P/E is 16.4. GES has held up well in the face of recent turmoil in U.S. stock markets. I expect the stock to trade between 22 and 25 this month, and to be a leader when the market is ready to rise again.” 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 I did hold as Chinese stocks trended down for the second half of this year. But HTHT bottomed at the end of October, and last week’s pullback was minor, telling us that selling power has likely been spent. HOLD.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is the rare stock that was up last week—though technically it looks likely to pause here. Long-term, though, the story remains quite sound as Match dominates its industry. HOLD.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, hit another new high today! In last week’s update, Chloe wrote, “MKC is back at all-time highs. The stock is in a sustainable uptrend well supported by its 50-day line. Management just increased their dividend by 10%, McCormick’s 32nd consecutive annual dividend increase. McCormick makes spices as well as numerous brand-name sauces, seasonings and condiments. Long-term investors can continue to Buy on pullbacks.” 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 in this hot growth sector. But short-term, the stock looks pretty terrible, still suffering from the selling wave that hit the entire sector after Canadian legalization day—and was amplified by the company’s fund-raising deal. Still, I think the worst has passed and that the stock will now develop some support around 3. HOLD.
MiX Telematics (MIXT), originally recommended by Paul Goodwin, is the most thinly traded stock in the portfolio, but the South African transportation fleet technology company has a solid growth story. The stock blasted off in late October after a great earnings report and built a nice base through November, but just today started to fall out of that base. That could be worrisome, but the volume is low so it’s probably not serious. If you don’t own it, you could buy some here. BUY.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, looks great, trading just off last week’s high. In her latest update, Chloe wrote, “STAG still looks solid. The stock has been a good store of value and source of income during the last two months; it’s trading in a tightening range around 26 and pays dividends monthly. The industrial REIT owns properties in 37 states that are mostly used as warehouses and fulfillment centers.” 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 were able to give the stock some rope as it corrected down through its 200-day moving average—falling all the way to 49 at the extreme. Now it’s working to build a base somewhere above that level, though trading volume is high as some active growth investors abandon ship to be replaced by bargain-hunters getting on board at a low price. Fundamentally, I continue to have great hopes for the company as it leads the telemedicine industry in the U.S. 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. Fundamentally, today’s tariff news was good for the stock, though we all know trade-related news can change at any time. The bigger story is that the company has made great progress toward growing profitability as it works to accelerate the end of our fossil fuel culture. And technically, it’s been refreshing to see the stock shrug off the market weakness of recent months.
In his latest update on the stock in Cabot Growth Investor, Mike wrote, “TSLA has now rebounded over 350, and while it hasn’t actually hit all-time highs, it looks like there has been a real shift in perception about the stock. Maybe it was the return to positive earnings in the company’s Q3 earnings report or the recent news that the company had produced 1,000 Model 3 cars in one day. But whatever it is, the stock’s late-October surge (and the calm consolidation through November) has put TSLA near the top of our watch list. Tesla will likely remain controversial and its stock will be volatile as long as Elon Musk is at the helm, but it looks like big investors are ready to treat his company like the real deal. If the company continues to execute, we think the stock will do very well.” HOLD.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, fell out of bed last week on big volume after its earnings report revealed flattening margins. It’s tempting to say that the stock is at support here at its 200-day moving average, but the fact is that this type of well-known growth stock can see continued selling pressure if investors sour on the growth story. SELL.
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 lows of October, with a pattern of higher lows, but there’s little sign of any real buying power, either. In his latest update, Paul wrote “ WNS has been pushed around by the market recently, rallying from the middle of October to the middle of November, then slipping back again. The business is steady, and support around 47 looks solid.” HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED December 18, 2018
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