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Cabot Stock of the Week 235

With today’s recommendation, I leave the U.S. to return to the fast-growing giant that China has become, with a company that will join Tesla in the fast-growing electric car industry. It’s a low-priced stock, so it’s not for everyone, but it does have enormous growth potential.

Cabot Stock of the Week 235

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The market remains in a strong uptrend, driven by the gradual return of investors who sold out in December and are now being drawn back in by the market’s inexorable ascent. And the strength is not limited to the U.S.; Cabot’s Emerging Markets Timer has also flashed a buy signal, and once again one of the strongest markets is China.

So, today I’m adding another Chinese growth stock to the portfolio—and the interesting twist is that this company has the potential to be a major competitor to the portfolio’s biggest winner, Tesla. Ideally, both companies will win; in any case, the opportunity here is too big for me to ignore. The stock was recently recommended by Carl Delfeld in Cabot Emerging Markets Investor and here are Carl’s latest thoughts.
NIO, Inc. (NIO)

I was a classic skeptic about electric vehicles (EV) but a deep dive last year convinced me the industry is on a growth path that is very likely to accelerate.

Global EV sales were up 68% for 2018, reaching a global market share of 2% and UBS predicts that the global market for electric vehicles by 2025 could be 10 times bigger than in 2018.

The most important reason is China, followed by steady advancements in technology.

Electric vehicles are a winning proposition for China because they help solve two big problems. First, the mandarins in Beijing have a powerful incentive to push EVs due to political pressures to reduce smog in major cities. Second, EVs can generate significant jobs and help the country capture the commanding heights of the global economy, the key goal of its China 2025 strategic plan.

Already, China’s share of global electric vehicle production has gone from 1.2% in 2013 to 22.6% in 2017. And China has a huge advantage over America that Japan never had—tremendous scale due to its population of 1.4 billion people.

EVs are still at a relatively low base but the consensus is that the rate of adoption of this technology is strong and momentum will accelerate as costs fall and market acceptance increases. Nearly 5 million electric cars have been sold so far—with more than half of global sales in China.

Which brings us to NIO, a Shanghai-based electric vehicle company that already has a market capitalization of $7.9 billion. The company was founded just four years ago and came public in the U.S. last September, three months after starting deliveries of its first model, the ES8 sport utility vehicle that seats seven.

Coming next is the ES6, a five-seat SUV. The company claims the ES6 base model has a range of up to 255 miles while the high-end model has a range of up to 317 miles on a single charge. And if that’s not enough, in January NIO announced the opening of its battery swap network along the G2 Expressway in China so NIO vehicle owners can make the trip from Beijing to Shanghai without needing to charge their cars.

This is an aggressive investment for sure, but I like the rapid growth, the huge potential, the apparent strong support of the government and the backing of influential shareholders. The lead shareholder is William Li, the founder of BitAuto Holdings (BITA), an Internet marketing, content and transaction company for the Chinese auto market. Tencent holds the second-largest stake and the third-largest investor is the well-respected investment management firm Baille Gifford. Interestingly, both firms have a stake in Tesla.

I also like the stock’s big post-IPO bottoming action and the breakout two weeks ago to a high of 8.5, from which the stock has since pulled back normally.

Tim’s comment: NIO does not expect to become profitable until 2020, and there are certainly other companies in China making electric cars, but NIO has great backing, a U.S. stock listing, and a chart that reminds me of TSLA when I recommended it back in 2011. Also, it is a low-priced stock, so you should expect volatility. Start small.

Nio Inc. (NIO)

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CURRENT RECOMMENDATIONS

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One market truism that comes to mind today is this: “The market always does what it can to fool the majority of investors.” Indeed, having scared out all the weak hands in December, the market turned right around and climbed relentlessly higher, hardly pausing to accommodate buyers waiting for a “better” buying opportunity. Of course, hindsight is easy; the real challenge is dealing with what comes next. Odds are that the uptrend will continue (trends tend to do just that), but there’s always the possibility of a correction, so you should be prepared for any of your holdings to decline to their 25-day, or even 50-day, moving averages. And seeing that possibility, you should have a rough idea of whether you’re going to hold through that correction or bail out at the first sign of trouble. Today I remain optimistic that trends will continue, but continue to sell the occasional stock that doesn’t meet expectations—and today that’s Canada Goose (GOOS). Details below.

AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, and recommended here two weeks ago, has drifted higher over the past week, but volume is not yet encouraging. In his latest update, Tom wrote, “This biopharmaceutical company is down over 30% from its 52-week high because of higher than expected foreign competition for its blockbuster drug Humira. The company has more than enough new drugs and drugs in the pipeline to offset the problem. Meanwhile it pays a 5.4% yield with a dividend that has increased for 46 straight years, including 40% last year and an approved 19% this year. There is some near-term uncertainty but with the stock selling at a single-digit forward PE ratio, double-digit anticipated profit growth for the next five years and a fat and growing payout, you should be well rewarded for holding over the longer term.” BUY.

Apollo Global Management (APO), originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor, continues to trade calmly at 30, where it’s been building a base since blasting higher at the end of January on an excellent fourth quarter report. Prospects are good. HOLD.

Arena Pharmaceuticals (ARNA), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, closed at a record high last Friday (but only just barely) and pulled back slightly today, so the trend remains very good. In Tyler’s latest update, he wrote, “We’ve essentially been range-bound between 35 and 50 since the beginning of 2018, with a few spikes a couple points lower here and there. It would be a welcome change to move up into a new range and establish 50 as a “floor.” We’ll see. I moved the stock to Hold last week since the risk-versus-reward profile of loading up at this very moment isn’t particularly attractive. Long term, Arena looks great. Estimated Earnings Date: March 12.” HOLD.

Canada Goose (GOOS), originally recommended by Mike Cintolo in Cabot Growth Investor, released its fiscal third quarter earnings report (for the quarter ended December 31) last Thursday and the market wasn’t pleased, even though revenues for the quarter grew 50.2% to $399 million and earnings grew 65% to $0.96 per share. The stock immediately sold off on very high volume, closing at 51, and has been consolidating in that area since. Long-term prospects for the company remain good, but the fashion sector seldom provides good long-term investments. We’ve ridden the bounce from the bottom, and shrunk our loss moderately, but there’s no reason to stick with the stock any longer. SELL.

Delek U.S. Holdings (DK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, climbed steadily up and away from its bottom last week, poking up into territory it hadn’t seen since December. 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. Delek is expected to report fourth quarter EPS of $1.25 on the afternoon of February 19, within a range of $1.11-$1.38; and $2.4 billion revenue, within a range of $2.2-$2.7 billion. DK is an extremely undervalued small-cap growth stock. The stock is actively rising toward short-term price resistance at 40, where it will still be undervalued.” BUY.

Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, has spent the past week consolidating its recent advance into new-high territory, building a base centered on 65. But the big factor comes today after the market close, when fourth quarter earnings are announced. In last week’s update, Tyler wrote, “Everbridge is an easy stock to like since it’s doing all the right things. We have another new high this week, and a big earnings event coming up next Tuesday.” Assuming the stock doesn’t fall apart after the earnings report, you can still buy. I like the company’s leadership position in the field of public safety communications. BUY.

General Motors (GM), originally recommended in Cabot Dividend Investor for the High-Yield Tier, continues to impress, technically. In his latest update, Tom Hutchinson wrote, “Last week’s earnings were strong and better than expected ($1.43 per share versus $1.22). However, earnings were still down a bit from the peak in 2017. GM is actually doing forward-looking things these days like a massive restructuring that will significantly cut costs and investing heavily in future technologies like electric and self-driving cars. The only thing I don’t like about the situation is the external environment for autos with the slowing global economy, a late cycle in the US and trade frictions with China. For now I’ll hold it and see how much further it can run.” 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 has had trouble getting away from its December bottom. As I’ve explained before, if the portfolio were full I’d ditch the stock now, but as I’m working to get the portfolio full, and I still think GDOT is better than cash, I’ll stick with it. Fourth quarter results will be released January 20 after the market close and the chart, which has traced out an inverse head-and-shoulders pattern over the past four months, says there’s potential for a good move up. 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, propelled in part by the broad market’s rebound since December. But going forward, I don’t expect progress to come quite so easily—the stock is still below its high of 48, hit in June—so I’ll downgrade it to Hold now. Long-term, I have great confidence in China’s leading hotel operator. HOLD.

Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is the world’s leading provider of dating products, with brands like Tinder, Match, PlentyOfFish, Meetic, OkCupid, OurTime, Pairs, and Hinge available in over 40 languages to users all over the world. The release of the company’s fourth quarter results two weeks ago sparked a big wave of buying and since then the stock has been consolidating its gains, trading between 56 and 58. I recommend holding, looking for a pullback to provide a lower-risk entry point. HOLD.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, and featured here last week, has been building a base between 57 and 59 for more than five weeks now, and the best clue that the next move will be up is the big volume on days that the stock is up. If you haven’t bought yet, you can still buy here. BUY.

STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, is like the Energizer Bunny that just won’t quit! Day after day it hits new highs! The most recent reason is found in its quarterly results, released last Wednesday after the close. During the quarter, the company acquired 17 new buildings for $217.9 million with an Occupancy Rate of 99.7% upon acquisition, and sold eight buildings for $119.5 million, resulting in a gain of $39.9 million. Diluted net income was $.40 per share, up from $.06 the year before. I’m not comfortable buying up here—the stock has the potential to pull back to 27 or 26—but I’m holding tight. HOLD.

Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, continues to climber higher, as it has every week since Christmas—but it still has a ways to go before it encounters resistance at its old September high around 86. Fourth quarter earnings will be released after the market close on February 27. 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, as Tesla transitions from a niche manufacturer to the technology leader of the automotive industry. HOLD.

Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, released its quarterly report last week, and the stock sold off in response, but has bounced more than halfway back since. Here’s what Mike had to say about it in his latest update: “Fundamentally, TWLO continues to have a rare growth story, which was reaffirmed by the quarterly report this week. Revenue growth accelerated again (to 77%), though that was partly thanks to the acquisition of Sendgrid; active customers grew to more than 64,000 (up 31% from a year ago); and same-customer revenue growth was a whopping 48%, again picking up a bit from the prior quarter. Other anecdotal signs (inking E*Trade and GoDaddy deals) sounded good, as did the fact that it booked more deals for its new Flex contact center platform in Q4 than in Q3. The firm’s guidance (45% revenue growth for 2019) was also solid (and probably conservative), though didn’t crush expectations like they had in the past. All that said, the stock didn’t react well to the news, with a big-volume dip back into the mid 100s, though at this point, the damage isn’t bad; shares “only” came down to their 25-day moving average before finding support. If TWLO continues to stumble from here, we could go to Hold and throw up a mental stop (likely in the mid 90s), but so far, the stock’s drop looks more like a shakeout than the start of a larger correction. If you own some, hang on, and if you don’t, we’re OK starting a position here.” 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%. Technically, the stock is not strong, but its action has been positive since the December bottom, and today the stock inched out to a new recovery high. BUY.

Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has been acting great since December; it closed at its highest level since October on Friday and climbed a little higher today. 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 grow 34.4% in 2019, and the P/E is 9.1. Management intends to increase the dividend yield to 1% in 2019. I anticipate VOYA trading between 45 and 55 in the coming months. VOYA is up 34% from its December low. 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 26, 2019

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