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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 236

All Cabot’s market timing indicators have now flashed green lights, so I continue to recommend that you work to get more invested.
With today’s recommendation, we return to the U.S. with a medical technology stock that addresses a mass market and is growing fast—though it’s not booking profits yet.

Cabot Stock of the Week 236

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Clear

Over the past two months, every one of Cabot’s market-timing indicators has turned positive, from the “blastoff” indicators to the short-term trend-following indicator to finally (just last Friday) the long-term trend-following indicator that says, “This is no longer a bounce; this is a real uptrend, so if you’ve been waiting for a pullback, you’re going to be disappointed.” Of course, a pullback will come eventually, but by then the odds are that the market will be a lot higher. So if you’ve been holding back out of an abundance of caution, I suggest you face the facts, recognize the trend, and get back in the market now. This week’s recommendation is a medical technology stock that provides an innovative service that’s a welcome alternative to a standard procedure that most of us have experienced. The stock was recently recommended by Mike Cintolo in Cabot Growth Investor. Here are Mike’s latest thoughts.
Exact Sciences (EXAS)

Every type of cancer is a downer, but colon cancer is particularly depressing, because of its combination of mortality and preventability. Colon cancer is the second deadliest form of cancer in the U.S., responsible for more than 50,000 deaths annually. However, it turns out that nine of 10 patients who are diagnosed with stage I or II colon cancer live at least five years. Those who are diagnosed at Stage III or IV? Just one of 10 makes it five years.

Put those two facts together and it’s no surprise that the American Cancer Society (ACS) has been fighting to increase regular screenings for people over age 50; the earlier the diagnosis, the better the survival rate. Exact Sciences’ claim to fame is its easy-to-use, non-invasive colorectal cancer test that patients take at home, which is boosting compliance rates relative to colonoscopies and thus saving lives.

The company’s test, named Cologuard, is DNA-based. Basically, after a doctor orders a test, a kit is sent to the patient’s home, where, on his/her own schedule, the patient deposits a stool sample in a specialized box, seals it up and mails it to a special facility. There, the sample is tested using Cologuard’s proprietary methods for a positive or negative result.

The advantages are numerous: No sedation, no preparation, no time off from work and, if needed, 24/7 customer support, all of which boost compliance. Indeed, in the few years that Cologuard has been on the market, nearly half of users are people who’ve never had a previous colorectal cancer test.

And, most important, the results are excellent; Cologuard has 94% sensitivity for early-stage colorectal cancer (94% of those tested who had early-stage cancer were correctly identified). As we mentioned above, detection at that stage usually leads to many treatment options and a longer lifespan. Moreover, by Exact’s estimates, 94% of patients taking the test also have no out-of-pocket costs thanks to expanding insurance coverage.

Because of all these factors, the test is catching on fast, both among doctors and insurers. Since its launch a few years ago, about 1.9 million tests have been completed, with about half of those (934,000) last year alone. In Q4, Cologuard saw 292,000 completed tests, up 64% from the year-ago period, as 15,000 new healthcare providers ordered Cologuard for the first time.

Despite the huge ramp, Exact Sciences is just scratching the surface of its potential. The company believes it ended 2018 with a 4.1% share of the test market, yet thinks it can achieve 40% market share in the years ahead, translating to $6 billion of revenue (compared to $454 million in 2018)! And these aren’t just long-shot goals; the company doubled its production capacity last year (to three million tests annually), with a goal of more than doubling it again to seven million tests per year by the end of 2019. The company is clearly thinking demand will continue to gallop ahead.

A big help on its way toward capturing that share comes from pharmaceutical giant Pfizer, which inked a three-year co-promotion deal with Exact Sciences last fall, greatly expanding the reach of the sales force behind Cologuard. Early results have been positive, and thanks to this deal, as well as current momentum and some catalysts this year (Exact thinks it can get FDA approval to offer Cologuard to patients 45 to 49 years old, which would be big), management expects revenues to grow another 58% in 2019, a number most analysts think will prove conservative.

As for the stock, it held up well during the market’s bloodbath late last year, stormed to new highs in January and, after a shakeout ahead of earnings, leapt back to its highs following its quarterly report last week. This is not only a very positive pattern, it also offers the strong likelihood that downside movement from here will be minimal.

Exact Sciences (EXAS)

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CURRENT RECOMMENDATIONS

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One of the most common mistakes made by amateur investors—and even by experts from time to time—is holding onto losing positions long after they should have been sold. These investors reason, often stubbornly, that if they just hold on long enough, the stock will turn around and their original investment thesis will be proven right. Sadly, stocks seldom are so accommodating. What’s behind this phenomenon, of course, is the desire to be proven right, the reluctance to admit that they were wrong and a tendency toward overconfidence that values their own rational decision-making more than the opaque workings of the market. But there is a cure, and it’s not that difficult. First, investors need to remember that the goal is not to be right; the goal is to make money (part of which is losing less money). Second, investors need to remember that the market itself, most of the time, is smarter and better informed than any one of us individually, and the results of its valuation calculations are plainly visible for us to see every day, if we simply take the time to look and truly see. Today it’s clear to me that I’ve stayed too long in Green Dot (which reported earnings last week) and so that will now be sold for a modest loss. Details below.

AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, is a high-quality high-dividend stock that is almost certain to be higher months down the road. In his latest update, Tom wrote, “The stock doesn’t have great momentum here but it has a fantastic story and a 5.3% yield that pays you to wait. It’s down 30% from the high because of investor nervousness over competition for its blockbuster drug Humira. However, I’ve outlined several times that the company should have more than enough sales growth in other existing drugs as well as new drugs from its powerful pipeline to more than offset lower Humira sales. The stock is absurdly cheap right now and should be a strong winner over time.” BUY.

Apollo Global Management (APO), originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor, continues to trade calmly between 29 and 30, where it’s been building a base since blasting higher at the end of January following an excellent fourth quarter report. And now Crista’s upgraded the stock to Buy. In her latest update, she wrote, “Apollo is an alternative asset manager with assets under management (AUM) totaling $280 billion, dispersed among credit, private equity and real estate investments. Most alternative asset managers, including Apollo, are now moving from a mark-to-market method of calculating earnings to cash earnings, which is expected to result in higher price/earnings ratios within the industry. APO is an undervalued mid-cap growth & income stock. The stock is trading in a very tight range between 29 and 30, which is typically a bullish sign that a new run-up will begin shortly.” BUY.

Arena Pharmaceuticals (ARNA), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, continues to push steadily higher, working to get out above its May 2018 high (49.85) and into record-high territory. In Tyler’s latest update, he wrote, “ARNA ticked up another couple percentage points this week in a nice little move to a new seven-month high. I’m still looking for that move above 50 though, which would mark a new 52-week high. There’s no real fundamental news driving the performance, but with every month that slides past, Arena gets closer to getting what should be blockbuster treatments to market (still a couple years off). It’s a Hold now just because we’re bumping up against resistance. If we can crack through 50 and hold that level I’ll likely move back to buy.” Earnings will be announced February 26 (today), after the market close. HOLD.

Delek U.S. Holdings (DK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, surged higher last Wednesday after releasing an excellent earnings report and has been consolidating the gain since. In her latest update, Crista wrote, “Delek reported fourth quarter adjusted diluted EPS of $1.59 this week, above all analysts’ estimates. Revenue came in on target at $2.4 billion. The surge in profits was largely attributed to higher utilization and lower operating expenses in the refining segment, and cost synergies associated with the 2017 Alon USA acquisition. Delek increased the quarterly dividend from 26 cents to 27 cents. That sounds boring until you look at the dividend payout history. Delek paid a steady quarterly dividend of 15 cents for many years until the first quarter of 2018, when a dividend increase was announced, followed by three more increases. The company repurchased $365 million of stock in 2018, and expects to repurchase $50 million during the first quarter of 2019. I’m moving Delek from a Strong Buy to a Hold recommendation while I await adjustments to consensus earnings estimates. The stock is moving rapidly toward short-term price resistance at 40. There’s a decent chance that DK could blow right past 40 and rise as far as 45-47 in the coming weeks.” I’ll follow Crista’s lead and move to Hold. HOLD.

Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, released a great earnings report last week. Here’s what Tyler wrote in response, “Everbridge reported Q4 2018 results the other night that were better than expected. Revenue was up 43% to $41.8 million while EPS of -$0.09 beat by a penny. For the full-year 2018, revenue was up 41% (versus 35.8% in 2017), while EPS came in at -$0.54. There weren’t a lot of surprises, which is a good thing in this case. Everbridge continues to land deals (new and expanded) with multiple products, and expansion opportunities in Europe abound (population alerting is now mandated in Europe and creates a roughly $100 million market over just the next few years). Forward guidance also came in ahead of consensus ($185.6 million) at $195.1 million to $196.6 million, implying around 33% growth this year. Everbridge still won’t be profitable on an adjusted earnings basis until 2021. At its current trajectory we should expect 2019 EPS of around -$0.27, 2020 at -$0.06 and 2021 at $0.18. Stock-based compensation is likely to jump a bit in 2019 given the strong stock performance. Investors should also be aware that both the CEO and CFO are stepping down this year, though the CFO will remain as Executive Chairman. The stock’s not cheap on an EV/Forward Revenue basis, trading with a multiple of about 10X, but that’s below the peak multiple of 12.1x from last September so we’re not in nosebleed territory (yet). Plus, there is potential for Everbridge to beat its forward guidance so the actual multiple might be lower. I’m keeping the stock rated Buy, but to balance the near-term risks I recommend that you just buy small blocks of shares. Don’t go in huge at these levels!” BUY.

General Motors (GM), originally recommended in Cabot Dividend Investor for the High-Yield Tier, keeps on trucking higher, heading toward its old high of 44, hit in both 2017 and 2018. In his latest update, Tom Hutchinson wrote, “All anyone seems to want to talk about these days when it comes to American car companies is tariffs and trade frictions with China. In the meantime, GM continues to evolve into a great car company. Operational performance has been terrific and the company is aggressively defending against the next economic downturn while investing seriously in the future with self-driving and electric vehicles. It looks like the stock will continue the solid momentum as long as the market is strong.” HOLD.

Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, released its fourth quarter report January 20 after the market close. Total operating revenues were $237.8 million for the quarter, up 12% from the year before, while diluted earnings per common share was $0.26, up 13% from the year before. That’s not bad, but it’s deceleration, which generally leads to lower valuations from big investors, and the market took the stock down on high volume on Thursday and then again yesterday. Additionally, if you step back and look at the chart of the stock dating back to the start of 2017, when the stock was selling at 25, you can see that the long-term uptrend is now clearly broken. SELL.

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 of China’s leading hotel operator. Fourth quarter results will be released after the market close on March 14. HOLD.

Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, has pulled back normally since breaking out on big volume three weeks ago on an excellent earnings report, and today the stock touched its 25-day moving average, which I think provides an attractive entry point. If you haven’t bought yet, you can buy now. I’m upgrading MTCH to Buy. BUY.

NIO (NIO), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, and featured here last week, is off to a spectacular start, thanks in part to a fortuitous 60 Minutes profile of the company last Sunday and the resultant short-covering since. And that presents us with a challenge, namely, how to handle a hot low-priced stock. The easiest course, which this portfolio will follow, is simply to sit tight, with our eyes on the long-term growth potential. Short-term investors, however, could consider taking partial profits here (selling, say, one-third of your shares while holding the rest), or at least setting mental stops. And what if you didn’t buy it yet? One strategy is to buy now and use a close stop so you don’t lose much if the stock pulls back. And another strategy is accept that you missed this blastoff, and wait for the next set-up. All these strategies are valid; you just need to select the one that fits you and your portfolio. As for the fundamentals, last week Carl noted, “Sales of electric cars are growing fast in China, the world’s biggest auto market, with deliveries of Electric Vehicles (EVs) more than doubling to 85,000 units in January while total passenger car sales decreased 18%.” Fourth quarter results will be reported on Tuesday, March 5, before the open of the U.S. markets, so I’ll discuss that next week. In the meantime, I’m officially going to rate this Hold, as I suspect the stock will have a hard time getting above its old high of 12. HOLD.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, has seen increased volatility over the past week as well as a definite tilt to the downside, which has now brought the stock down to its 50-day moving average. But the big event is the quarterly report that will be released today after the close; the reaction of investors to that report will likely determine whether we stick with the stock or let it go. In last week’s update, Mike wrote, “Given the stock’s great story, longer-term uptrend and tight trading action, we’re sticking with our Buy rating, but you should keep new positions on the small side given the upcoming quarterly report.” BUY.

STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, hit record highs after reporting earnings two weeks ago and has pulled back normally since then, to the point that it’s nearly touched its 25-day moving average. In his latest update, Tom Hutchinson wrote, “STAG is up 16% so far this year as it continues to outperform the market. However, after a strong run the stock…faces some technical resistance in the near term. As well, the near-term catalyst to drive it higher has passed. It’s still a strong stock with a solid business plan and balance sheet, but I’m not confident enough to accumulate more shares here until it breaks through the current resistance.” HOLD.

Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, continues to work its way higher, heading for its old September high around 86. Fourth quarter earnings will be released after the market close tomorrow, 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 stock has great growth potential. Certainly the company is still growing, and improvements in fundamentals alone can eventually drive the stock higher. But what will be harder to grow is public perception of the company. Everybody already knows about Tesla (unlike NIO), despite the fact that Tesla has never done any paid advertising to sell its cars. So the only way for perception to improve is for the public’s image of Tesla (and Elon Musk) to improve. Maybe fewer impromptu tweets? HOLD.

Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high yesterday, two weeks after a great earnings report, and pulled back slightly today. In his latest update, Mike wrote, “The firm’s Q4 report has us more convinced that the company’s communications platform is going to be very, very big. Same-customer revenues leapt a whopping 47% from a year ago, one of the largest numbers we’ve ever seen for a good-sized operation and the figure actually accelerated from prior quarters. If you own some, hang on, but the recent up-down-up-down action probably tells you to expect some further wiggles in the days ahead.” 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%. Carl’s original recommendation said, “Overall, REMX offers diversified exposure to a basket of companies with a slant to China” and “more than half of the holdings are Chinese companies involved in the rare earths field.” So the very positive action of the past few days has clearly been driven by optimism that the probability of tariffs is decreasing. If you don’t own it, wait for a pullback. BUY.

Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has had a great run since the market’s December bottom, climbing higher every single week to eventually notch a gain of 35% before entering into the current pattern of tight trading at 50. Crista has previously written that she sees the stock trading between 45 and 55 in the weeks ahead, and that she intends to upgrade the stock to buy once the chart presents a lower-risk entry point. For now, though, I’ll stick with a hold rating. HOLD.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED March 5, 2019

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