I don’t see much downside risk for the market here but I do see a lot of upside, though the challenge is knowing which stocks are going to lead the next advance. Happily, one of the advantages of investing in a basket of stocks recommended by Cabot Stock of the Week is that you can own an extremely well diversified portfolio, which means that as the market’s bounce continues, you have a good chance of owning some of the leaders.
Cabot Stock of the Week 228
[premium_html_toc post_id="167443"]
One of the ironies of investing in the stock market is that when the news is positive and all trends are good and you feel like investing, it’s probably close to a market top—so you probably shouldn’t. Contrarily, when the news is terrible and trends are down and you feel like hiding in a hole—like today—it’s probably close to a market bottom. The challenge, however, is what to buy in such a climate, when almost nothing is going up. Happily, Crista Huff, who just recommended today’s stock to readers of Cabot Undervalued Stocks Advisor, has a perfect candidate. Enjoy.
Apollo Global Management (APO)
Stock market downturns aren’t any fun, but if we take off our “panic hat” and put on our “buy low hat”, we find that opportunities abound. The secret is in capitalizing on equities with low prices that have reason to lead the market out of the downturn.
There are three types of growth stocks that I focus on during bearish markets: stocks with outsized dividend yields, stocks with neutral-to-bullish price charts, and stocks of consumer staples that would otherwise trade with very high P/Es. Today I’m recommending shares of a growing company with a huge dividend yield.
Apollo is an alternative investment company, founded in 1990 and serving institutional clients in dozens of countries. Apollo’s assets under management (AUM) total $270 billion, with 50% of AUM invested in public pension funds and sovereign funds, and the balance spread far and wide between corporate pension funds, financial companies, endowments and high net worth individuals. Sixty-three percent of Apollo’s assets are invested in the U.S., with the balance invested in Europe, Asia, Australia, the Middle East and Latin America.
The asset mix breaks down as follows: credit (68%), private equity (27%) and real estate (5%). Apollo maintains possibly the largest global credit platform at $183 billion AUM. Founder and CEO Leon Black expects the credit business to grow to $300-$400 billion in the next three to four years, indicating a minimum compound growth rate for total AUM of 20% per year. That growth figure seems achievable, considering that AUM grew at better than an 18% compound annual growth rate in the most recent ten years through September 2018.
Mr. Black has not ruled out conversion to a C-Corp, a recently popular topic among Wall Street asset managers. He’s following the progress of two of his peers that recently converted—KKR & Co. and Ares Management—as he assesses whether conversion could be wise and lucrative for Apollo. C-Corp conversion opens up a wide list of potential investors in the company’s stock, thus assisting the share price, although the downside is that Apollo would then likely pay higher income tax rates.
APO is a mid-cap stock with a market capitalization of $4.9 billion. The most recent four quarterly dividend payouts totaled $1.93. At a share price of 24.54, the stock is therefore yielding 7.9%. What’s more, the stock traded as high as 35.5 in October, so there’s 44% capital gain potential for new investors if the stock rebounds to 2018 highs.
I’m frankly not pleased with the price chart, which looks as dismal as those of most popular stocks right now. However, as the dividend yield increases in relation to the falling share price, the prospect of owning APO shares becomes more compelling for both individual and institutional investors. And that’s exactly why I favor big-dividend growth stocks during bearish markets: investors’ urges to lock in the temporarily large dividend yields provide buying support to the share price, so that the stock is likely to find a bottom much sooner than most other growth stocks. In that light, it was reported last week that Tiger Global Management just purchased 1.1 million APO shares at an approximate cost of $26 million.
The share price of APO needs to continue stabilizing for a while before it recovers. But with the prospect of a near-8% dividend yield and a possible 40%+ capital gain on the rebound, I’m very willing to buy low and wait. Income investors and patient growth investors should buy APO now. If Apollo decides to follow suit among its alternative asset management peers with C-Corp conversion, expect the stock to shoot upwards as if it had received a buyout offer. With three different potential ways to make money, APO shares provide one of the best opportunities in today’s stock market.
Apollo Global Management (APO)
9 West 57th Street
43rd Floor
New York, NY 10019
212-515-3200
http://www.apollo.com
CURRENT RECOMMENDATIONS
December was a terrible month for investors, but that’s now in the rearview mirror, and our job going forward is to ensure that our portfolio holds onto the stocks with the best prospects while ditching those that won’t move up soon. One way to compare stocks is to look at when they bottomed; we have a number that bottomed in November or even October and the fact that they weren’t pulled down by the market in December is encouraging. Another way is to compare the way stocks bounce off the recent bottom. The bounce has been fairly universal so far, but in the weeks ahead, I expect some of our stocks to falter, and those are likely to be sold. Today there is only one change. Details below.
Arena Pharmaceuticals (ARNA), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, is unlike most stocks because it didn’t fall to new lows in December, and that’s a great sign. In his latest update, Tyler wrote, “ARNA lost some ground this week but it’s not a stock I’m particularly concerned about. That’s mainly because it’s really not economically sensitive. Other than a small amount of revenue generated through partnerships with legacy products, Arena’s value is derived from its pipeline. And first revenue, assuming successful Phase 3 trials, won’t be for several years. On the one hand that means you have to be patient to realize the big value in the stock. On the other, there’s really no revenue risk in the near term! As you know if you’ve been following along, Arena recently out-licensed its ralinepag asset to United Therapeutics (UTHR) for up to $1.2 billion in exchange for an $800 million upfront payment, a $400 milestone payment, and tiered low double-digit royalties on global sales. That cash will help Arena move etrasimod, olorinab and other early-stage assets through the pipeline. It also jolted the stock back to life (though some has drained out lately) as investors were reminded about why the stock’s attractive.” BUY.
Canada Goose (GOOS), originally recommended by Mike Cintolo in Cabot Growth Investor, fell through its 200-day moving average in mid-December and is now deeply extended to the downside, just like the broad market. A bounce is due, at least up to 48 and 50. And long-term, I remain bullish on the company, which saw revenues grow 34% in the latest quarter, and which just opened its first store in China. HOLD.
General Motors (GM), originally recommended in Cabot Dividend Investor for the High-Yield Tier, is the second portfolio stock that didn’t fall to new lows in December; in fact its low was way back in October! In his latest update, the new chief analyst Tom Hutchinson wrote, “GM is a much better company than people realize. Today’s GM is financially solid with $19 billion in cash, a mere 25% dividend payout ratio and a successful array of vehicles. It’s a far cry from the pre financial crisis GM that was sloppily run, a financial mess and offered inferior vehicles that were getting their butts kicked by Japanese cars. This reinvented, superior car company also has strong growth prospects in self-driving cars going forward. It is also a great value with a microscopic PE ratio and a fat payout. That said, the stock will not likely realize its true value until the next cycle. Before that happens we will go through a recession, and you don’t want to own a car company during a recession because the sector is as cyclical as Las Vegas. But the price will likely rise as the market recovers and we can find a better exit point in the first half of 2019.” I’ll now downgrade to Hold. HOLD.
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 is solid. The stock did dip briefly to new lows two weeks ago amid the worst of the market selling, but buyers stepped and the stock is once again above its uptrending 200-day moving average. HOLD.
Huazhu Group Limited (HTHT) (previously known as China Lodging Group) was originally recommended in 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; revenues grew 16% in the latest quarter. As for the stock, it’s performing better than the average Chinese stock, having bottomed in October and having built a pattern of higher lows since then. In the long run, there’s no question that this leading Chinese lodging company will get bigger. In fact, if you don’t own it, you could buy a little here, though officially I’ll just stay on Hold. HOLD.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, bottomed in November (with a low of 32!) and has seen impressive support since. Fundamentally, Match’s dominant position in the industry promises fine growth for years to come. HOLD.
McCormick & Company (MKC), originally recommended in Cabot Dividend Investor for the Safe Income Tier, outperformed all expectations until the second week of December and then finally succumbed to the market’s selling pressure, dropping 14% in two weeks before buyers stepped in. In his latest update, Tom Hutchinson wrote, “This food company has similar market dynamics as its peer HRL, but I believe this is a better company and a better stock. It had been everything a defensive stock should be and more. In 2018, while all the indexes were negative for the year, MKC posted a 39% return. Unfortunately, the market has turned on outperformers like this over the past month, so I’m reducing the rating to a 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., and the long-term prospects are especially bright in this hot growth sector. But the stock is young and not yet well supported by institutions, so in the December selling, it fell back to the level it traded at after its June IPO. Today, however, the sector was very strong—in part because the start of January often sparks investors’ interest in the hottest sectors. If you haven’t bought yet, you can nibble here. We’ll hold. HOLD.
MiX Telematics (MIXT), originally recommended in Cabot Emerging Markets Investor, is a South African transportation fleet technology company with a solid growth story. The stock looked great in October and November, but as new chief analyst Carl Delfeld wrote, “MIXT succumbed to the selling pressures [recently], falling out of its tight consolidation area. But it’s still well above its October low and we believe the steady business and growth will keep the stock afloat. We advise sticking with your position.” I think it’s a good buy here. BUY.
STAG Industrial (STAG), originally recommended in Cabot Dividend Investor for the High Yield Tier, bottomed in sync with the market two weeks ago and bounced strongly last week. In his latest update, Tom Hutchinson wrote, “This is a solid industrial REIT that has outperformed other REITs in recent years. Industrial properties are in short supply and demand is strong right now. But as fears of a slowing economy have grown, this more cyclical industrial subsector has been underperforming its peers, albeit only slightly. STAG is still a keeper for now but I may look to sell it down the road as we get closer to a recession.” 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 in mid-December. Now that the stock has bottomed, it will be interesting to see whether this company at the forefront of the telemedicine movement can attract a new wave of growth investors. 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 the third quarter, automotive revenue was $6.1 billion, up 158% from the year before.) As for the stock, it’s ignored the movements of the general market for most of this year; most recently it was just 3% away from its old 2018 high of 390. But now it’s in correction mode, back down around its 200-day moving average. HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here two weeks ago, looks pretty good! It bottomed in October, hit a new high in December, and is just 13% off that high today. In his latest update, Mike wrote, “We still see TWLO as a stock that can be a big winner during the next round of buying.” BUY.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, bounced with the rest of the market last week and is still an attractive value here. Voya is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED January 8, 2019
We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/r/CSOW
Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit www.cabotwealth.com or write to support@cabotwealth.com.