Some areas of the market have wobbled in recent days, and even the major indexes have stalled out a bit—but none of this looks unusual to me after such a strong 10-week run prior to this. With the trends pointed up and the vast majority of stocks in uptrends, we remain overall bullish, though we’re also keeping a close eye on all our stocks and jettisoning any where the potential has faded (we have two sells tonight).
And in their place, of course, we’re adding higher potential names. Tonight’s Stock of the Week is helping to revolutionize the advertising industry, and the stock has taken a brief rest after a powerful earnings-induced breakout nearly two weeks ago.
Cabot Stock of the Week 237
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Yesterday’s broad market decline may have been the first step toward the first correction of 2019, and if so, there’s no question the pullback is well-deserved. But all of Cabot’s market-timing indicators remain positive, telling us the odds are very good that the market will be higher in the months ahead, so I continue to work to get the portfolio into a fully-invested position (20 stocks) while remaining diversified among a broad variety of growth and value stocks, large and small. This week’s recommendation is a fast-growing, and already profitable, company at the forefront of the digital advertising boom. The stock has been hot and the risks are substantial here, but so are the long-term prospects. The stock was recently recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.
The Trade Desk (TTD)
No matter what today’s hot products, shows, movies or vacation destinations, advertising will always be key—it’s truly the industry that will never die and, in general, grows steadily along with the overall economy.
However, while advertising itself has moved online, the process by which campaigns are bought, set up and negotiated has remained surprisingly old school, with phone calls, paperwork and handshakes still being used by big marketing agencies and publishers.
Now, though, that is changing. The new world of ad buying, called programmatic advertising, involves ad buyers and sellers interacting digitally, sometimes through algorithms, to set up and better target audiences. Note that we’re talking about the way ads are purchased; the advertising itself could be online, on TV, radio, connected TV, you name it.
But the key is the programmatic ad-buying platform, and The Trade Desk appears to have the industry’s best platform, allowing agencies to pick from over 500 billion ad opportunities every day. Advertising as a whole is growing slowly (up about 4% or so), but programmatic ad buying grew an estimated 22% last year—and Trade Desk grew 55% last year, well over twice the pace of the programmatic market. In fact, the firm has grown at least twice as fast as the programmatic market five years in a row.
But this is just the beginning. Of the $725 billion estimated advertising market, just $33 billion. Is programmatic buying today, and while there will always be some degree of old school ad buying, you can see that a 10% shift to programmatic platforms would nearly triple the potential pie. With an early estimate of $3.2 billion of spend on its platform this year, you can see the potential is huge.
There is competition, of course, but Trade Desk looks like the leader thanks to its breadth (it powers the advertising of many of the world’s largest brands via their agencies), its global presence (the company is making big inroads into Asia and many of the big e-commerce firms over there) and the platform itself; Trade Desk built a data platform first (and recently updated it with artificial intelligence) so ad buyers can make the most detailed decisions, and it provides the most detailed and transparent reporting of its competitors.
Thus, it’s no surprise that people are beating a path to the company’s door, and they’re using the platform for all manner of ads—mobile spend increased 77% last year, mobile video was up 130%, audio more than tripled and connected TV (a small but exciting opportunity) was up nine-fold. Most impressive of all to us is the fact that once people join the platform they stick around, with Trade Desk’s customer retention rate coming in north of 95% each of the past 20 quarters!
Not surprisingly, all of this has led to fantastic fundamental numbers. Revenues have grown more than 50% each of the past four quarters, while earnings growth is accelerating and, in Q4, earnings trounced expectations ($1.09 per share vs. 80 cents expected, up 102% from a year ago). Management has guided toward 33% revenue growth in 2019, too, and they’re almost always conservative.
Big investors seem to agree, too. After a good (but relatively brief—just five months) run last year, TTD got hit with the market in the fourth quarter, but found repeated support above its 200-day line and marched back toward its highs by mid February. And then the Q4 report caused funds to jump in, with shares exploding to new highs.
As for the pullback this week, it’s been sharp and could continue, but in the big picture, it’s perfectly normal and sets up a more advantageous buy point.
The Trade Desk (TTD)
CURRENT RECOMMENDATIONS
As I’ve mentioned several times in recent weeks, I’ve been working to get the portfolio to a fully invested position, but if I only add one stock a week, it takes time, especially if I occasionally sell one or two, as I do this week. Luckily, you have no such constraints, so I hope you’ve enjoyed the super start to 2019. Today’s sells are two that I didn’t see coming, but there’s nothing wrong with that. One is a sell where I follow the lead of the original analyst, who now concludes that future prospects have dimed, while the other is one where I’m choosing to exit in the face of diminished short-term prospects while the original analyst is choosing to hold for the long-term. Happily, both sales bring profits. 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, “This is in my opinion one of the very best dividend stocks in the healthcare sector. It yields a stellar 5.3% at the current low price and the dividend will grow as it has increased 168% since 2013. The stock is nearly 35% below the 52-week high after a rare bad spell. As I’ve mentioned, there is more overseas completion for its blockbuster Humira drug. The threat is overblown as AbbVie has a fantastic array of newer drugs to pick up the slack as well as one of the best pipelines of new drugs in the industry. The healthcare sector has underperformed the overall market so far this year. One reason is that the sector held up much better than most during the selloff but there is a new risk shaping up. The government is making more noise about capping drug prices—I don’t think they’ll do anything anytime soon because they can’t even pass a budget, but I’ll keep an eye on things. Meanwhile, the stock has stabilized and should be a longer-term winner.” BUY.
Apollo Global Management (APO), originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor, continues to trade quite 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. In her latest update, Crista wrote, “Apollo is an alternative asset manager with assets under management (AUM) totaling $280 billion, dispersed among credit, private equity and real estate investments. 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. There’s additional price resistance at 32 and 35. Buy APO now.” BUY.
Arena Pharmaceuticals (ARNA), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, saw a couple of days of big-volume selling over the past week, taking the stock down to its 25-day moving average for the first time since the start of the year. In Tyler’s latest update, he wrote, “ARNA reported results earlier this week. It’s still all about the pipeline, which is going to take some time, but Arena has a few potential blockbuster treatments that could drive meaningful revenue in 2022 and beyond. Arena has $1.3 billion in cash so it’s well funded. Things to look for include: (1) beginning of a pivotal trial for etrasimod in ulcerative colitis (UC) in mid-2019 (two studies, one 12-week, one 52-week), (2) beginning of phase 2b/3 pivotal trials for etrasimod in Crohn’s disease (management not committing to timeline yet), (3) initiation of a phase 2 study for etrasimod in atopic dermatitis (AD) in 2019, (4) a multi-dose phase 2b trial for olorinab in irritable bowel syndrome (IBS) pain in 2019, and (5) Investigational New Drug (IND) submission for ADP418 for treatment of decompensated heart in second half 2019. In terms of data readouts, first data for etrasimod in UC and Crohn’s are probably 2021 events, while data for etrasimod in AD is likely coming in 2020 (i.e., be patient!). There is also the potential royalty stream from ralinepag, which was licensed to United Therapeutics for treatment of pulmonary arterial hypertension (PAH). This stock is trading on sentiment for biotech stocks (positive at the moment), as well as the improved percentage chance of success for eventual approval of leading pipeline assets. To quantify that, I’d say the market is saying ralinepag has about an 80% chance for success, etrasimod in UC is 70% to 80%, etrasimod in Crohn’s is just under 50%, and the earlier-stage stuff (olorinab and ADP418) remain glimmers in investors’ eyes. We may be seeing a takeover premium creep in as well. If management can speed up pipeline development without hurting the chance of success, that would be a huge plus! But don’t hold your breath; the company is being incredibly diligent with the trials, which, in the long term should pay off. Keeping at hold until a break higher or new fundamentally positive news.”
So, if you’re committed to the long-term like Tyler, holding the stock here is fine. For this portfolio, however, which has an above-average three-month gain in the stock and the likelihood of a soft period ahead, I’m going to sell now and move on. SELL.
Delek U.S. Holdings (DK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, has pulled back over the two weeks since surging higher on an excellent earnings report, and Crista says it’s now time to take profits. In her latest update, she wrote, “Delek racked up tremendous earnings growth in 2017 and 2018, including a big fourth-quarter earnings beat. But analysts now expect lower profits in both 2019 and 2020, which is a significant change in outlook from just a month ago. The lack of earnings growth will not inspire institutional investors to buy the stock, thereby limiting capital gain potential. I recommend that investors sell DK now.” I’ll follow her lead. SELL.
Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, continues to consolidate its gains after an excellent earnings report. In last week’s update, Tyler wrote, “For the full-year 2018, revenue was up 41% (versus 35.8% in 2017), while EPS came in at -$0.54. Forward revenue guidance came in ahead of consensus ($185.6 million) at $195.1 million to $196.6 million, implying around 33% growth this year. The stock’s not cheap on an EV/Forward Revenue basis (trading at ~10X), but it’s still below the peak multiple of 12.1x from last year. There is scarcity value here, and the company has done a great job of executing its growth agenda. Management presented at conferences at KeyBanc and Morgan Stanley this past week and moves on to Raymond James next week. I’m keeping it rated buy, but caution that smaller purchases are prudent.” BUY.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here last week, hit a record high last Wednesday (the day we recorded our buy, unfortunately) and has pulled back normally since. In his latest update, Mike wrote, “Exact Sciences reported another terrific quarter last week, confirming that the Cologuard growth story is very much intact. Fourth-quarter revenues leapt 64%, and while the bottom line remains in the red, the key sub-metrics (cost per test fell 4%, 292,000 tests were ordered and 15,000 healthcare providers ordered their first Cologuard test during Q4) were impressive. Management also boosted its 2019 outlook, expecting revenue to grow another 58% (which most analysts believe is somewhat conservative) with the help of Pfizer’s sales team. Moreover, the top brass reiterated its hugely bullish long-term forecast: Cologuard ended the year with 4.1% of the colorectal cancer screening market, but Exact believes it can eventually garner a 40% share, and that’s not just pie-in-the-sky talk, as the company is rapidly expanding its production capacity to meet anticipated demand. As for the stock, it sold off ahead of its report, but the buyers drove the stock to new highs on excellent volume after the report. We’re OK buying some here or on dips of a couple of points if you’re not yet in.” So, here’s your chance. BUY.
General Motors (GM), originally recommended in Cabot Dividend Investor for the High-Yield Tier, hit a record high for the year yesterday before pulling back today. In his latest update, Tom Hutchinson wrote, “High quality vehicles, great management, a solid balance sheet and a great plan for the future? What have they done with the old GM? I like everything about this company except the fact that we are in the late stage of the economic cycle and the trade stuff. But GM is not as economically sensitive as it once was. Cost cuts and efficiencies have enabled GM to lower its North American breakeven point to about 10 million to 11 million of industry sales. But it might not even get to that point in the next recession. Sales only sank to about 9 million in the last recession. In the meantime, the stock continues to behave well.” 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 of China’s leading hotel operator. The stock has good a good run this year, hitting a high just last Monday, but remains below its 2018 peak of 49, so that’s our near-term target. 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 now declined for more than three weeks since breaking out on big volume after an excellent earnings report, and now rests just below its 25-day moving average, which I think provides an attractive entry point. If you haven’t bought yet, you can buy now. Match is the world’s largest online dating service and has great long-term prospects. BUY.
NIO (NIO), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, and featured here just two weeks ago, got off to a super start, so now we have a nice profit cushion, which brings choices. In his latest update for his readers, Carl wrote, “I suggest that you sell one-third of the position and leave the 20% trailing stop loss in place for the rest of your position. You should be aware that the IPO lockup expiration for NIO is March 11, according to Nasdaq data. We are expecting 4th quarter results on March 5th. 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%.” With earnings coming out after the market close today, there will almost certainly be volatility tomorrow, and my inclination is to stick with the stock. Certainly, the action over the past week has been constructive, telling us that more and more investors are discovering the stock, which might be dubbed the “Tesla of China” but probably not the “Tesla-killer.” We like the action of the stock, of course, but we’ll simply stick with our hold rating and see how shares react to the quarterly report. HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, is the portfolio’s star performer this week, as it’s been hitting record highs thanks to a superb earnings report last Tuesday. In last week’s update, Mike wrote, “Revenues rose 30% from a year ago, while same-store sales lifted 10%, EBITDA (a measure of cash flow) rose 22% and management hiked its 2019 outlook, too.” If you didn’t buy while the stock was basing, it’s probably best to hold off until the stock pulls back a bit, though I’ll leave it rated buy for risk-tolerant investors who like riding true leaders. BUY.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, had a truly fabulous start to 2019 and now it’s digesting its gains, trading around its 25-day moving average. In his latest update, Tom Hutchinson wrote, “STAG is a great smaller REIT in a lucrative space. It leases to single tenants in the industrial and light manufacturing space, like warehouses and discount centers. They aren’t sexy properties but they require little maintenance and are cash machines. The stock has been a spectacular performer. I like everything about STAG except the price. I downgraded it from “BUY” to “HOLD” last week as it approached some technical resistance near the 52-week high and I will keep it at HOLD until it breaks through current resistance.” HOLD.
Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, sold off on heavy volume after reporting fourth quarter results last week and remains at that level today, so the question for the portfolio, which has a great profit, is whether we stick with it long-term (the prospects are excellent, though management’s guidance for 2019 was a little cautious) or whether we sell and move on. And I’m going to be patient and stick with it. As one analyst wrote, “we believe the company is very well positioned as the only comprehensive virtual care delivery solution…the company’s strong competitive position and multi-pronged growth strategy should continue to drive impressive organic growth trends over the near and long term.” I’m not against nibbling on some if you don’t own any, but officially I’ll stick with our Hold rating. 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. Short-term, the stock is under pressure, in part because of the company’s decision to close many stores and rely on more cost-effective online sales. And I suppose some Tesla investors are moving their money to NIO, the new kid on the block. But this selling has brought the stock down to its 200-week moving average, and while it might fall even further, to long-term support at 250, there’s little question in my mind that the stock is a better buy here than a sell. HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, released a great earnings report three weeks ago and has hit news highs on many days since, but yesterday the sellers took charge. In his update last week, Mike wrote, “TWLO had a brief shakeout after earnings, but it would be unusual for a true market leader to up and die so soon in a new market advance, and indeed, the stock has pushed back to new highs since. Fundamentally, we’ve mentioned before that we like the pervasiveness of the firm’s communications platform, which works for voice, messaging and now email; just about any size organization is a potential customer. But that doesn’t mean big enterprises aren’t beating a path to the firm’s door—one Fortune 100 retailer said that it sees a future where Twilio is the foundation of their customer engagement platform across all channels, and we’re sure others are thinking the same. Analysts see revenues up 66% this year, and even that figure could prove conservative if management makes the right moves. Back to the stock, it’s a bit extended to the upside like many names (the 25-day line is around 111), so dips are possible, but the path of least resistance is up.” Well, the possible dip that Mike mentioned has occurred, so if you’ve been waiting to get on board, here’s your chance. 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.” The stock hit its highest level of the year last week and has now pulled back normally. If you don’t own it, you could buy now. BUY.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has had a fantastic run since the market’s December bottom. In her latest update she 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% and 15.1% in 2019 and 2020, and the P/E is 9.3. Management intends to increase the dividend yield to 1% in 2019. I anticipate VOYA trading between 45 and 55 in the coming months. The stock is going to need to rest soon, most likely repeating a price chart pattern from 2018 when it traded between 46 and 53 for several months.” HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED March 12, 2019
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