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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 233

Market trends remain quite positive, and I continue to recommend that you work to get more invested. According to our market timing indicators, the odds are still very good that months from now, the market will be higher.
Today’s recommendation is a well-known medical stock that’s temporarily a bargain, chosen for both diversification and the fact that the broad market, which has surged higher since Christmas, is due for a real correction.

Cabot Stock of the Week 233

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Clear

The market continues to motor higher, drawing buyers back in while confirming the validity of the Blastoff Signal of a couple of weeks ago. And I continue to work to get the portfolio more fully invested, ideally in a balanced mix of growth stocks that will lead the market higher and value stocks that are ripe for rising off bottoms. That’s what I’ve selected today, and it comes with the bonus of a hefty yield, which should be attractive to investors looking for income. The stock was originally recommended by Tom Hutchinson of Cabot Dividend Investor and here are Tom’s latest thoughts.
AbbVie Inc. (ABBV)

Because of lower fertility rates and longer life spans, the U.S. and global populations are older now than ever before. And the pace of aging is rapidly accelerating.

In the US, nearly one third of the population is already over 50 years old. The fastest growing segment of the population is people over 65, as an average of 10,000 baby boomers turn 65 every single day. The size of that group is expected to grow 65% by 2030, with similar trends being seen worldwide.

These “new” demographics change things. Older people have unique needs and baby boomers control 71% of the nation’s wealth. Great profits can be made by following the money. As they age, these people will demand healthcare like they’ve never demanded anything before. All that means that healthcare is becoming a high growth industry as well as a defensive one.

AbbVie is a U.S.-based biopharmaceutical company formed in 2013 when it was spun off from Abbott Laboratories (ABT). Since then, it’s gotten big—Abbvie is the eight largest pharmaceutical company in the world and the fifth largest biopharmaceutical company.

The firm specializes in small molecule drugs and using biology or living things to effect the next generation of medicine in addressing the world’s health needs. Biotechnology combines advanced medical science and technology to deliver a new age in treating ailments. It’s at the cutting edge of medicine at a time when newer and better healthcare solutions are voraciously demanded. Growth in this industry is staggering.

A big part of the attraction here is that AbbVie is a rare company that combines the high growth of biotechnology with the stability and high dividend payout of a large pharmaceutical company; for investors, it plays offense and defense at the same time. Since its spinoff in December of 2012, the stock has been a phenomenal performer, returning an average of about 19% per year.

AbbVie’s success to this point is largely attributable to its blockbuster drug Humira. The biologic autoimmune treatment is by far the world’s number one selling drug, with about $20 billion in annual sales. That’s great, but the drug accounts for about 60% of net revenues, which is a lot of eggs in one basket. Recently, the disproportional reliance on Humira has presented a problem for the stock.

With $20 billion in annual sales, the competition naturally wants a piece of the action. Overseas, Humira is facing strong competition from biosimilars, which are generic copies of a biologic. In the latest quarter, earnings reflected greater competition than previously expected. The market got spooked and ABBV now sells below $80 per share, 35% below the 52-week high.

Still, there are several reasons why I think the market is overreacting, with the recent drop providing a good opportunity for new buyers to get in.

For one, about 75% of Humira sales are in the U.S. where the drug won’t face biosimilar completion until 2023. Market research firm EvaluatePharma expects Humira U.S. sales to still be $15.2 billion in 2024.

Meanwhile, AbbVie has drugs out there that can make up for any coming slackening of Humira sales. Blood cancer drug Imbruvica, for instance, grew sales 42% in the last quarter to $3.6 billion. The drug is expected to achieve $7 billion in annual sales in the next few years, making up for most of the projected shortfall all by itself.

But the biggest reason for optimism is AbbVie’s pipeline of new drugs on the way. According to EvaluatePharma, Abbvie has the second most valuable clinical pipeline across all of biopharma. It has 20 new products slated for launch by 2020 and 15 drugs and treatments that are already in phase 3 clinical trials, the last step before the approval process.

The bottom line is that AbbVie has more than enough firepower to overcome Humira competition. Meanwhile, the stock sells at valuations well below historical averages at just over 9 times forward earnings and pays a huge 5.4% dividend yield. ABBV is a timely opportunity to get in front of a megatrend that is changing the world.

AbbVie (ABBV)

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CURRENT RECOMMENDATIONS

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The portfolio has made great progress since the December market bottom, and as I write we have two stocks hitting record highs (EVBG and TWLO) and three that are close to hitting their old highs of 2018 (ARNA, MTCH and STAG)—where they have the potential to take a rest. Hopefully, your own portfolio is doing as well or better. Going forward, the game plan remains unchanged: stay diversified by owning both the best growth stocks and the best value stocks, and take advantage of the market’s uptrend while it lasts.

Apollo Global Management (APO), originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor, has had a great run since we bought at the start of January, and may find resistance here between 30 and 31, where we find the stock’s 200-day moving average. In her latest update, Crista wrote, “APO is an alternative asset manager with assets under management (AUM) totaling $280 billion, distributed among credit, private equity and real estate investments. Last week, Apollo authorized a quarterly distribution of $0.56 per share to be paid on February 28, and also authorized a repurchase of $250 million of stock. APO is an undervalued mid-cap growth & income stock. At a price of 30.36, the stock is up 24% since joining the Growth & Income Portfolio in January. I’m moving APO from Buy to Hold as it approaches price resistance at 31. I expect a subsequent pullback.” I, too, will downgrade it to hold. HOLD.

Arena Pharmaceuticals (ARNA), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, finished building its base between 42 and 44, and then used it as a launching pad to blast right through its old October high of 48. (Some credit, of course, goes to the broad market). If you don’t own it, wait for a pullback before buying. BUY.

Canada Goose (GOOS), originally recommended by Mike Cintolo in Cabot Growth Investor, has now climbed above all three of its moving averages (25-, 50- and 200-day), so is looking better. But it’s not yet strong enough to get a buy rating. HOLD.

Delek U.S. Holdings (DK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, and featured here last week, continues to build a bottom. In her latest update, Crista wrote, “Delek is a diversified downstream energy company, with businesses that include petroleum refining, transportation, marketing, renewables (producing biodiesel fuel) and asphalt operations. Delek is the largest licensee of 7-Eleven stores in the U.S. Delek owns 63.4% of Delek Logistics Partners, LP (DKL), which operates through two segments: Pipelines and Transportation, and Wholesale Marketing and Terminaling. DK is an extremely undervalued small-cap growth stock. The company will announce fourth-quarter results after the market close on February 19. Wall Street expects full-year EPS to grow 296% and 16.3% in 2018 and 2019. The 2019 P/E is 6.2. There’s plenty of room between the current share price and upside price resistance at 40 for new investors to achieve attractive capital gains in the near term. I expect DK to surpass 40 later this year.” BUY.

Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here two weeks ago, broke out above its old September high yesterday (though volume was only average) and pulled back a bit today. Technically, it would be nice to see the stock build a base at 62, but a retreat to the stock’s 50-day moving average, now at 58, wouldn’t be bad, especially if it’s in sync with a market correction. Looking ahead, though, the big event will be earnings, announced after the market close on February 19. BUY.

General Motors (GM), originally recommended in Cabot Dividend Investor for the High-Yield Tier, continues to climb. It’s now above all its moving averages, but still below its old high of 44, hit in both 2018 and 2017. In his latest update, chief analyst Tom Hutchinson wrote, “I used to hate GM, but now I love it! It is actually a very good, well run, financially sound car company now. It’s cranking out high quality vehicles that are no longer inferior to their Japanese counterparts. It also has a management team that now looks further into the future more than a week and a half. The company is making impressive strides in the area of electric vehicles and self-driving cars, which bodes well for its future. At the same time, it sells at a cheap valuation with a fantastic dividend that is rock solid. Current earnings and future prospects look great. That said … the external environment is lousy. GM has big investments in China and is always vulnerable to news about trade. A slowing global economy is bad for sales. As I mentioned earlier, we’re also in the very late stages of this economic upturn. This is a cyclical company that you don’t want to own going into a recession. But the stock bounced back like a champ in the market recovery and has shown resilience even on down days. The momentum is still strong in GM, and I will continue to hold as long as the trend is up.” HOLD.

Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is the world’s largest prepaid debit card company as ranked by market capitalization as well as the payments platform company used by Apple, Uber and Intuit. But the stock failed to participate in the market’s January surge; instead, it’s still building a base between 74 and 76, below all its moving averages. It’s not an attractive buy here, but I think it has better prospects than cash so I’ll hold it as I continue to work to fill the portfolio up to its maximum complement of 20 stocks—one stock at a time. Fourth quarter results will be released February 20 after the market close. 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. The stock bottomed in November, before the broad Chinese market, and has been working its way higher since. If you don’t own it, you could aim to buy on the next pullback to the 50-day moving average, now nearing 31. Long-term, I have great confidence in China’s leading hotel operator. BUY.

Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, has performed fantastically since the market’s December bottom (the stock itself actually bottomed in November), and is now nearing its September high of 58. Traders can consider taking profits as the stock nears that level, while long-term investors can sit tight. As the world’s largest company devoted to connecting single people, the long-term prospects remain bright. Fourth quarter results will be released after the market close tomorrow, February 6. HOLD.

MedMen (MMNFF), originally recommended by me in Cabot Marijuana Investor, remains far from strong, but at least it’s been going in the right direction. In fact, since the December bottom, it’s established a pattern of higher highs and higher lows—which is good. And business is great; preliminary results for the quarter ended December 29 show revenue of $29.9 million, up 40% from the preceding quarter (and when acquisitions are complete, the number will jump to $49.5 million). HOLD.

STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, continues to climb as investors see good prospects in this industrial REIT. In Chief Analyst Tom Hutchinson’s latest update, he wrote, “There are some good reasons to like this industrial REIT. It has some tailwinds right now. First, this is a good environment for REITs in general. Along with renewed volatility comes an investor appreciation for the more defensive dividend payers. As well, STAG deals in industrial properties at a time when they are in short supply and demand is through the roof. The e-commerce boom also helps STAG because it owns a lot of warehouses and storage facilities. Meanwhile, it’s yielding 5.4%, with monthly payouts.” The stock is approaching its old high of 28, last hit in August, and it may pause there. HOLD.

Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, has climbed higher every week since Christmas. In his latest issue, Mike wrote, “Teladoc is the clear leader in virtual care, with an ever-increasing array of offerings (it recently launched advice on back pain management) that are gaining acceptance from partners and consumers, and analysts see continued solid growth this year (revenues up 32%), albeit with more red ink.” The stock is still way below last October’s high of 89. HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo 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. The stock remains in the wide trading range (250-390) that has constrained it since mid-2017, but the fundamental story remains solid. In fact, last week the company posted its second consecutive quarter of positive earnings ($1.93 per share) as it delivered 63,359 Model 3 vehicles in North America. Going forward, the company aims to begin building the Model Y SUV, which shares about 75% of its components with the Model 3, late this year. And then this week Tesla announced the acquisition of Maxwell Technologies for an all-stock deal valued at about $218 million. Maxwell’s expertise is in capacitors, which are similar to batteries, but less capable of storing power and more capable of delivering it rapidly and maintaining performance through multiple cycles. HOLD.

Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, has clearly become one of the market’s leaders, as more and more investors learn about the company’s growing dominance in the communications field; the stock hit new highs on each of the past four days! In his latest update, Mike wrote, “The firm’s one-of-a-kind communications platform has led to accelerating revenue growth and has monstrous potential as more clients sign up (61,153 at the end of September, up 32% from the year before) and current clients expand their usage (in Q3, same-client revenues rose a whopping 45% year-over-year), a trend that could pick up steam as Twilio’s newer offerings (like its Flex contact center application and, soon, its email-related offerings via the acquisition of Sendgrid) are adopted. Earnings will be released February 12, after the market close.” If you don’t own it, wait until after the earnings report. BUY.

Van Eck Rare Earths/Strategic Metals (REMX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, is a diversification play with potential for great growth as technology requires more rare earths. Plus, it has a yield of 13.9%. Since bouncing off the bottom after Christmas, the stock has worked to establish an uptrend, but it’s not a strong one yet; the stock ran into its downtrending 50-day moving average today and it will be interesting to see what happens next. Still, it’s a great diversification play. BUY.

Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, had an awesome advance after the Christmas low, and now it’s taking a rest, building a base between 46 and 47. 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 Financial is expected to report $1.22 fourth-quarter EPS on the afternoon of February 5 [today], with a range of $1.15-$1.28. VOYA is an undervalued aggressive growth stock. Final full-year 2018 results are expected to deliver 106% EPS growth, followed by another 34.2% EPS growth in 2019. The 2019 P/E is 8.9. Management intends to increase the dividend yield to 1% in 2019. At a price of 46.96, VOYA is up about 27% from its December lows. A pullback is overdue, after which I will likely return VOYA to a Strong Buy recommendation.” HOLD.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED February 12, 2019

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