The good news today is that both our intermediate-term market timing tool, Cabot Tides, and our emerging markets timing tool, Cabot Emerging Markets Timer, have both flashed buy signals, telling us that we should work to get more heavily invested, by buying attractive stocks at sensible entry points.
Cabot Stock of the Week 230
[premium_html_toc post_id="168584"]
The market’s great strength since the day after Christmas has been very encouraging, flipping our Cabot Emerging Markets Timer to the buy side and our intermediate-term Cabot Tides (for domestic stocks) is on the verge of doing the same. That’s pushed all Cabot growth-oriented analysts to begin moving back into the market, working hard to ensure that they are holding leaders, and not laggards. For Cabot Stock of the Week, the choice this week is relatively easy. Given that the Emerging Markets Timer was the first to give a sell signal in early 2018, and the first to bottom in late 2018, it seems right that international stocks should lead the current advance. And given how strongly I preach the values of diversification, it seems right that the stock to recommend now is a China-centric fund that specializes in rare earth metals, which are critical to the semiconductor chips and more that will power global technology in the decades ahead. The stock was originally recommended by Carl Delfeld, chief analyst of Cabot Emerging Markets Investor. Here are Carl’s latest thoughts.
Van Eck Rare Earths/Strategic Metals (REMX)
One of my favorite books is Daniel Yergin’s riveting tale of the major role oil played in the 20th century; The Prize: The Epic Quest for Oil, Money & Power. Oil not only powered the economy, it also played a pivotal role in the century’s statecraft.
The following sentence in the book’s prologue really caught my eye: “As we look toward the 21st century, it is clear that mastery will certainly come as much from a computer chip as from a barrel of oil.” But what’s behind the computer chip and advanced technology that forms the backbone for so much that we take for granted in modern life?
The answer is critical, strategic metals and, in particular, an important subset called rare earths. These vital ingredients are critical to economic growth and advancement of technology—sort of like the special ingredients of the age of technology.
Like yeast in making bread and wine, they are required in small quantities in all sorts of products from cell phones to advanced weapons systems, aircraft engines, robots and hybrid batteries. Rare earth elements (which, ironically, are not particularly rare), are very difficult, time consuming and expensive to extract and process.
The real value of these materials is their unique magnetic and electrochemical properties, helping to boost the efficiency, performance, speed and durability of many technologies—for instance, playing a big role in miniaturization and allowing for much lighter, stronger, resilient and efficient components.
One example is Neodymium. Many of the magnets around you have neodymium in them: speakers and headphones, microphones, computer storage, and magnets in your car. It’s also found in high-powered industrial and military lasers and especially important for green tech.
So how does this play into emerging market? Since the 1990’s, China has effectively become the Saudi Arabia of rare earths, as the country’s favorable geology, low cost labor and lax environmental standards allowed it to produce about 85% the world’s rare earth output.
After a long period of weak pricing and being off the front page (the group had a nice run a few years ago), rare earths are now back in the news with prices and headlines on an upward trajectory.
All of this is why I like the VanEck’s Rare Earth/Strategic Metals Fund (REMX), which launched in 2010. It’s fairly concentrated with 21 holdings - and the top 10 holdings represent 61% of assets and more than half of the holdings are Chinese companies involved in the rare earths field.
Overall, REMX offers diversified exposure to a basket of companies with a slant to China. It also offers a nice hedge on U.S.-China tensions since China has tremendous leverage to limit production or exports to the US if it chooses to play hardball.
After surging from 14 to 30 in the second half of 2017, this fund sunk right back down for most of last year, dropping all the way to 13 in December. The bounce since then isn’t the be-all, end-all, but I think this is a buy-low opportunity. BUY.
Van Eck Rare Earths/Strategic Metals (REMX)
CURRENT RECOMMENDATIONS
As a whole the portfolio is now making good progress, with most stocks recouping good portions of their November/December losses, and the best stocks are breaking out to new highs. Even better, as I wrote in the intro, Cabot’s growth analysts are now working on getting back into the market, following the signals of our market timing indicators. However, we still have a few stinkers in the portfolio and this week I’m selling two of them. Details below.
Apollo Global Management (APO), originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor, and featured here just two weeks ago, is definitely enjoying this nascent bull move. Last week the stock crossed above its 25-day moving average and today it climbed above its 50-day moving average. In her latest update, Crista wrote, “Apollo is an alternative asset manager with assets under management (AUM) totaling $270 billion, broken down as follows: credit (68%), private equity (27%) and real estate (5%). Apollo also manages over $70 billion AUM for Athene, a fixed-annuity provider. Last week, Reuters reported that Apollo “is working on an offer to acquire General Electric Co’s aircraft leasing operations, which are worth as much as $40 billion.” And as I reported on January 4, Apollo is also reportedly vying to acquire GameStop (GME).” BUY.
Arena Pharmaceuticals (ARNA), originally recommended by Tyler Laundon in Cabot Small-Cap Confidential, hit its highest level since October last week and has pulled back minimally since. In his latest update, Tyler wrote, “This week the development-stage biotech stock announced more good data for etrasimod, for treatment of moderate to severely active ulcerative colitis (UC). The oral drug candidate showed long-term safety and efficacy in the open-label extension of the Phase 2 OASIS trial. Etrasimod addresses a potential market opportunity of $4 billion to $8 billion, and it’s not the only trick up Arena’s sleeve (it recently out-licensed its ralinepag asset to United Therapeutics (UTHR) in exchange for up-front cash and future royalties). The company will be moving etrasimod on to a Phase 3 trial in UC, as well as Crohn’s, plus a Phase 2 program in atopic dermatitis. Management spoke at the JP Morgan conference this week. I haven’t had time to review the entire transcript, but suffice to say the company is executing well and the future looks bright. Keep averaging in, but be aware a little pullback here is quite possible given the broad market’s recent strength and that we’re right up against short-term resistance.” I agree; in fact, I think we could easily see 40 again. BUY.
Canada Goose (GOOS), originally recommended by Mike Cintolo in Cabot Growth Investor, is the hardest call this week; do we stay or do we go? Arguing for going is the loss, which remains uncomfortably large—though smaller than it was at the December bottom—on top of the fact that that December selloff followed a big two-year advance. The argument for staying is the fact that the stock was deeply oversold at that December bottom and that if it simply recovers half its loss it will get back to 56—as well as the fact that fundamental progress is still great (latest quarterly revenues were up 34% while earnings were up 59%). I could go either way. But in the end the deciding factor revolves around the portfolio; since I’m already selling two other stocks, I don’t want to sell a third while our market timing has turned more positive. HOLD.
Deckers Brands (DECK), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here last week, sold off 10% immediately following our Wednesday buy and now the question is whether to hold patiently or cut it loose and move on—and the answer is surprisingly simple. Given that the stock was recommended in Cabot Top Ten Trader, which is short-term oriented and based much more on technical rather than fundamental analysis, and given that the technical chart now looks terrible, the conclusion is sell. Yes, the stock could bounce back, but so far it hasn’t—and the potential downside is large. SELL.
General Motors (GM), originally recommended in Cabot Dividend Investor for the High-Yield Tier, surged 7% last Friday after management projected strong earnings growth in 2019—and it’s held onto most of the gain since then. Looking longer term, in his latest update, chief analyst Tom Hutchinson wrote, “GM is a great company and an undervalued stock, and it has a better chance of achieving its true potential in the next cycle. Since I believe the market will trend higher over the next six months and the stock is still about 30% off its recent high, I’m still holding GM.” 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, and the stock’s action in recent weeks has been great; the stock is above all three of its major moving averages. 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. But there’s nothing poor about this stock now. It bottomed back in November, after pulling back 51% from its high of mid-2018, and now it’s climbing again. Today, management released preliminary results for the fourth quarter, showing the number of hotels under its umbrella grew 9.4% from the year before to 279; occupancy rate fell 0.4% to 86.7% and revenue per average room grew 8.8%. This plus the new buy signal from the Cabot Emerging Markets Timer means you can once again buy HTHT and ride it back to its old high of 49. BUY.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is the world’s largest company devoted to connecting single people. Its brands include Tinder, LoveScout 24, PlentyOfFish. OurTime, OkCupid, Meetic, Twoo, and Pairs. And growth is great, with revenues up 29% in the third quarter and earnings up 38%. As for the stock, it got whacked hard back in November, but it’s been climbing impressively since and is now above all its major moving averages. However, volume is not impressive, so I don’t think it warrants a buy rating. HOLD.
MedMen (MMNFF), originally recommended by me in Cabot Marijuana Investor, is the leading marijuana retailer in the U.S. today—last quarter’s revenues were $59 million—and it has the potential to remain the biggest if it plays its cards right. As for the stock, which lost 67% of its value from the October peak to the December low, it had a great post-Christmas bounce and is now above its 25-day moving average. The marijuana group as a whole has also shown persistent strength so far this year, which is encouraging. HOLD.
MiX Telematics (MIXT), originally recommended by Cabot Emerging Markets Investor, is a South African transportation fleet technology company with a solid growth story. But the stock has lost sponsorship since early December, and even after the recent bounce (weak), it remains below all its major moving averages. If investors see no reason to support the stock, I see no reason to stick around. SELL.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, bottomed in sync with the market in late December and has bounced like a Superball since; it now sits above all its major moving averages! In Tom Hutchinson’s latest update, he 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. STAG avoids the more expensive top-tier properties in favor of second-tier ones that tend to be less expensive and can garner a higher return. 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 had a big long-term profit at the stock’s October top, so we were able to give the stock some rope as it corrected down with the market to its December bottom. But since then all the action has been up! TDOC is now above its 25-and 50-day moving averages and is closing in on its 200-day moving average. Fundamentally, I remain very bullish on the company’s prospects as it leads the telemedicine movement. 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. And I’m not the only one watching the stock. In this week’s Cabot Growth Investor, Mike Cintolo writes about both the company’s great fundamentals—sales growth has accelerated over the past three quarters (26%, 43% and 129%), earnings were hugely positive in Q3 ($2.90 per share)—and the potential for the stock to run once it gets above its old high of 380. Earnings are likely out in early February. HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to hit new highs! In his latest update, Mike wrote, “TWLO has also ripped higher in recent days; the stock was testing its November lows two weeks ago in the low 70s, but yesterday, shares actually briefly nosed to new highs above 100 before pulling in. Obviously, the volatility remains extreme, which isn’t the ideal situation, but we’re putting most of our focus on the stock’s relative strength during the market downturn. As with FIVE, we think the action is bullish when looking out a bit (the stock has likely bottomed, is primed to be a leader, etc.), though shorter-term, dips are more likely than not. Thus, we’ll restore our Buy rating, but either keep it small or try to get in on dips of a few points.” BUY.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has now recorded eight consecutive days of advances—and on heavy volume, a strong sign that the selling is done and the buyers are back in control. In her latest update, Crista wrote, “VOYA is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. VOYA is an undervalued aggressive growth stock. Analysts expect EPS to increase 107% and 35.5% in 2018 and 2019, and the 2019 P/E is 7.9. Management intends to increase the dividend yield to 1% in 2019. The stock could trade anywhere between 39 and 47 in the coming months.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED January 22, 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.