The market has softened over the past week, and we’ve seen some high-volume selling in former leading stocks, so I’m now pulling back a bit on risk, which is one reason today’s recommendation is a low-risk utility stock.
Technically part of the Safe Income portfolio of Cabot Dividend Investor, this stock pays a healthy 2.6% yield and it has decent upside potential as well.
As for the current portfolio, we still have some stocks hitting new highs, but we’ve also got some showing renewed weakness, so today I have two sell recommendations. Details in the issue.
Cabot Stock of the Week 240
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One of my favorite quantitative indicators of investment potential is accelerating growth, whether it’s revenues and/or earnings. That’s because analysts have a hard time updating their projections under these conditions, so their estimates are always lagging, while business is continually improving—as illustrated by an advancing stock chart. And that’s the factor I like best about today’s stock, which has enjoyed accelerating revenue growth over the past year. The stock was originally recommended by Tom Hutchinson of Cabot Dividend Investor and here are Tom’s latest thoughts.
NextEra Energy (NEE)
Utility stocks are great; they have a very special quality all their own. They are the most reliable dividend payers in the market. And the sector is the most defensive in the market as earnings are virtually immune to economic cycles. In today’s environment of low bond yields and market uncertainty, utilities really hit the sweet spot for many investors.
NextEra Energy (NEE) has all the advantages of a utility stock, but it also has much, much more. This company is the world leader in the practical application of clean energy sources. Clean energy is likely to be this country’s chief source of energy in the second half of this century. But the rapid growth phase that will pave the way is just starting to take off.
Don’t think clean energy advancement is reliant on politics either. The fact is that it doesn’t matter if an administration considers climate change a low priority or if an administration is gung-ho on the topic. It won’t matter if Democrats or Republicans are running the show. The stratospheric growth of clean energy will continue unimpeded either way. It is the next logical technological breakthrough in a mass-market application, and NextEra is on the front lines.
NextEra is the largest utility in the United States, but it is really two companies in one: Florida Power and Light and NextEra Energy Resources. One provides steady and predictable income. The other provides strong earnings growth.
The Florida Power and Light segment is a topnotch utility in its own right. The relative strength of a regulated utility depends on the regulatory environment and the population it serves. Florida Power and Light operates in an extraordinarily friendly regulatory environment where it is able to easily pass on costs to its customers. At the same time, the population base it serves, on the east coast of Florida, continues to grow as more people move into the desirable climate. It may be the best place in the country to operate a utility.
NextEra Energy Resources is the exciting part. It is an unregulated clean energy juggernaut, offering wind, solar and nuclear energy all over the country. The energy source breakdown is as follows: wind (67%), nuclear (12%), solar (11%), and oil and gas (10%). Wind and solar accounted for close to 10% of the nation’s total energy production in 2018 and many analysts expect that share to grow to 13% by 2020. The rise of solar energy is particularly impressive. It has accounted for at least 27% of all new capacity from any energy source added to the grid each year since 2013.
The combination of the two companies has provided a nirvana combination of both reliable income and earnings growth. Earnings have grown about 10% per year for the last five years, which is stellar for a utility, and the dividend has grown at a five-year rate of 11%. And the company still has just a 64% payout ratio. But it is what lies ahead that matters now.
There are two sizable catalysts that should enable NextEra to continue to grow earnings at an 8% clip going forward. In the near term, the company plans to invest more than $50 billion in existing plant expansions and upgrades and acquisitions through 2023. Longer term it will execute its 30-by-30 plan of installing 30 million solar panels by 2030. The plan would increase solar energy’s share of its service territory from the current 1% to 20% by the end.
The dividend yield is currently a fairly modest 2.58% but it is well supported with a low payout ratio. And the annual payout is expected to grow 12% to 14% per year for at least the next couple of years.
In NextEra, you get all those great things utilities offer and solid growth as well. You have your cake and eat it too.
One criticism of the stock today might be that the stock is expensive, trading at its 52-week high. But best-in-class companies like this are almost always a little expensive—and they should be. There is no bad time to buy NEE.
NextEra (NEE)
700 Universe Boulevard
Juno Beach, FL 33408
561-694-4000
http://www.nexteraenergy.com
CURRENT RECOMMENDATIONS
The market has softened a bit over the past week, and that’s not surprising. The rebound from the December bottom couldn’t go on forever; at some point, the market needed to take a breather, and to cause some pain. Thus the onset of the inverted yield curve came right on schedule, just when it was needed. This is not likely the start of a bear market, but it is likely the start of a good correction, because we need one. So the strategy in the portfolio going forward will be to be a bit less aggressive when selecting new recommendations, and to prune the weakest stocks a little faster. Today I have two sell recommendations, NIO and TDOC. Details below.
AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, still looks like it’s building a bottom, promising that buyers will eventually take charge. In his latest update, Tom wrote, “Can this biopharmaceutical giant overcome increasing overseas competition for its top-selling autoimmune drug Humira? That uncertainty has resulted in this top-performing stock falling almost 30% over the past year. I’ve often made the case that it has more than enough firepower in its newly launched drug and industry-leading pipeline to do just that. This week the company’s president made a similar case, while mentioning lesser-known promising developments with the early-stage pipeline as well. The market liked it and the stock moved up a couple bucks.” BUY.
Apollo Global Management (APO), originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor, has pulled back to support at 28, and is now slightly below all its moving averages, which Crista’s sees as a great entry point. 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. APO is an undervalued mid-cap growth & income stock. The stock has traded sideways since early February. I’m moving APO from Buy to a Strong Buy recommendation now that it’s had a chance to digest its huge January run-up and the share price is low within its trading range.” BUY.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, and featured here two weeks ago, is moving in the right direction, but is still far below last year’s high of 232. In Crista’s latest update this morning, she wrote, “Apple is a manufacturer and provider of many popular technology devices and services, including the iPhone, iPad, Mac, App Store, Apple Care, iCloud and more. There are over 1.4 billion active Apple devices globally, which provide a strong and growing revenue base for Apple Services.
Apple announced upgrades to iMac, AirPods and iPads last week. In addition, Apple announced five new Services yesterday: Apple News+, Apple TV+, Apple TV Channels, Apple Arcade and Apple Card.
• Apple News+ is a subscription news service offering content from over 300 magazines and digital content providers, which is available now at $9.99 per month.
• Apple Arcade is a new subscription gaming platform available in the Fall.
• Apple Card is the company’s first credit card, available this summer.
• Apple TV+ is an expansion of the Apple TV app., available in the Fall.
• Apple TV Channels will be available in May, and will offer content from famous providers including Hulu, HBO and more.
As a result of the new potential revenue sources, three investment firms raised their price targets on AAPL to a range of 220-230 by early this morning, with more to come, I’m sure. Upgrades to Wall Street’s research recommendations and price targets will likely continue rolling out throughout the balance of 2019 and beyond as more clarity is eventually provided on pricing, timing of Services rollouts, and financial results within future quarterly earnings releases.
I’m raising the stock from Buy to Strong Buy, due to the plethora of new products and services that will undoubtedly spark a buying spree among Apple’s gigantic user base. AAPL is currently in an uptrend, with price resistance at 230, where it last traded in October.” BUY.
Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, hit a new high last Thursday and has pulled back normally since. In his update last week, Tyler wrote, “EVBG is delivering next-level performance (up ~38% year-to-date), with a valuation to match (EV/Forward revenue of 12.4 is in line with 2018 high). As I’ve said before there is scarcity value here so it’s not necessarily a red flag that the stock’s so hot. But it’s not time to load up on shares either. I moved my rating to Hold recently so we can just watch and enjoy, and I’ll stick with that rating for now.” HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, has hit resistance at 97 twice and is currently on a normal pullback. In his update last week, Mike wrote, “EXAS has continued its topsy-turvy action, with another quick pullback (8% or so) after testing its February highs. Granted, it’s not the most pleasant action, but the stock hasn’t done anything abnormal, the story and numbers are excellent and EXAS isn’t far from new-high ground. A drop all the way to the low 80s would be a red flag, but right now, we think the next big move is up.” BUY.
General Motors (GM), originally recommended in Cabot Dividend Investor for the High-Yield Tier, closed near 40 a month ago and has spent the time since pulling back normally to its 200-day moving average—which I think is far enough. In his latest update, Tom Hutchinson wrote, “This is still a company with solid internals in a deteriorating external environment, as I’ve previously mentioned. It’s had a good year so far and good momentum. But this week it’s in President Trump’s crosshairs. He sent out a Tweet berating the company for its planned closure of a Lordstown, Ohio plant and asked the CEO to stop the closure. I don’t know what the company will do about it. But it gave GM some unneeded bad publicity and it’s down about $1 for the week. It shouldn’t be a significant factor but we’ll see how things play out. It’s still a HOLD for now.” HOLD.
Huazhu Group Limited (HTHT) (previously known as China Lodging Group) released a superb earnings report two weeks ago and has spent the time since consolidating the big spike higher that followed. In fact, the technical action has been so positive that the stock was featured in Cabot Top Ten Trader yesterday, where Mike Cintolo wrote, “When we think of cookie-cutter stories, we usually think of restaurants or apparel stores, but Huazhu Group, a leading hotel brand in China, fits squarely in that category, too. The company operates 4,230 hotels under 18 different brands in around 400 cities in China, focusing mostly on the midscale and economy segments of the hotel industry, which is extremely fragmented (just one-third of hotels in China are branded, vs. 70% in the U.S.) and growing quickly. The firm has been growing steadily through both new buildings and acquisitions, yet has just 3% or so of the economy’s hotel pie, and with all of the macro factors pointed in the right direction (growing Chinese middle class, more business travel, etc.), there should be years of growth ahead…Looking ahead, management sees revenues up 16% or so, with the hotel base growing north of 15%, and analysts see earnings up in the 30% range both this year and next. The valuation is a bit up there (46 times trailing earnings), but Huazhu remains a great growth story.”
Note: Huazhu is a Heritage Stock for the portfolio, meaning our profit is so large and the prospects for growth still so high that I’ve resolved to sit through normal technical sell signals in pursuit of longer-term gains. And we did sit with the stock as it lost half its value from June 2018 to December, but since then both the stock and the Chinese market have been strong, and now HTHT is heading for its old high of 50. If you don’t own it, you can nibble here and average up as appropriate. HOLD.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is the world’s largest online dating service and has great long-term prospects, and right now the stock is in a base-building pattern, preparing for a breakout to new highs. BUY.
NIO (NIO), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, is the portfolio’s biggest loss and thus its biggest challenge. Long-term, the prospects for this Chinese luxury electric carmaker have not changed, but short-term, the stock looks terrible, plumbing record lows. Carl is sticking with it in his portfolio, relying on the fact that 2019 revenue expectations by management have not changed, and long-term, I assume holding will work out. But I’m going to sell now because this portfolio does not have that kind of patience, especially with stocks that are going the wrong way. SELL.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, continues to build a base near its recent record high. In last week’s update, Mike wrote, “PLNT has finally paused for breath in the 67-68 area as volume has dried up. The stock could chill out or pull back for a bit, though after the seven-week tight area with a big post-earnings shakeout, we’re not expecting a huge retreat. Hold on if you own some, and if you don’t, you can buy here or (preferably) on dips of a couple of points.” BUY.
Rapid7 (RPD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here last week, hit a record high last Thursday and is just off that high now. The stock was also recommended in Cabot Small Cap Confidential by Tyler Laundon, who last week wrote, “RPD is an interesting case because the stock is trading at all-time highs on both price and valuation (EV/Forward Revenue ratio of 7.6, versus 2018 peak of 7). The key difference here is that the stock has historically traded at a discount due to a hybrid delivery model (cloud and on-premise) and limited product offerings. That’s changed. Rapid7 has broadened its solution offerings and transitioned to the cloud, and both customers and investors like what they see (growth is picking up). There could be more upside in the near term, but I moved the stock to Hold recently just so we can enjoy the run and not stress about buying at a near-term peak.” Having featured the stock just last week, I can’t see downgrading the stock to hold yet; the stock is up only a hair since our buy. But it is worth noting Tyler’s concern. Buying on weakness is preferred. BUY.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, continues to impress! In his update last week, Tom Hutchinson wrote, “STAG is one of the best REITs in the promising Industrial space, consistently outperforming both the overall market and the REIT index. But it is currently running up against technical resistance near the 52-week high. For now it’s a hold, but if it can form a base here I might upgrade it to a buy. I’ll be watching it closely.” Well, since then, STAG has inched out to new high, a positive sign. HOLD.
Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, is the leader in the virtual medical care market, and seems to have a very bright future; last week it announced it was moving into Europe with an acquisition in the French telemedicine market. But the intermediate-term action of the stock tells a story of distribution, as the rebound from December failed to get close to the old high, and then high-volume selling in both late February and the past few days pushed the stock sharply downward. There is an argument for treating TDOC as a Heritage Stock and hanging on for the long term, but I’ve found that moats in the very competitive medical field are often bridged—so there are some real uncertainties. Thus I’m going to sell and take the profit now. SELL.
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, once the industry gets past its current soft spot. The stock is now low in the trading range of 250-390 that it’s occupied since mid-2017. New investors could buy some here, as I think the risks are pretty low, but I’ll just hold. HOLD.
The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, blasted higher in med-February on an excellent earnings report and since then has been consolidating that gain, trading in a range between 180 and 210. If you haven’t bought yet and you like the story of the digitization and automation of the ad-buying process, you can buy on the current pullback. BUY.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high last Thursday and has pulled back minimally since. In his update last week, Mike wrote, “TWLO continues to look just fine, as it’s hit new closing highs on most days of the past week. We will say, though, that buying volume has been below average during this latest upmove, and the stock (like many) is stretched above support (50-day line is down below 113), so some sort of shakeout or pullback wouldn’t shock us. But big picture, we see TWLO as an emerging blue chip and a leader of this market advance. We’re staying on Buy, though you should consider keeping new positions small up 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. In his latest update, Carl wrote, “REMX is a nice hedge against U.S.-China tensions and given that, this issue is likely to be with us for a while. REMX is likely to be relatively quiet until a spike in tensions sparks an upsurge. Commodities have in general pulled back from late third-quarter 2018 highs, which doesn’t help. We still like REMX and we recommend holding on to your position.” HOLD.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, hit a record high last Monday and then sold off sharply, pulling back to its uptrending 50-day moving average at 48. In today’s update Crista wrote, “Voya is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. The company is prioritizing share repurchases, and a large dividend increase this year that has not yet been announced. Analysts expect EPS to grow 34.4% in 2019, and the P/E is 8.9. We might see first quarter earnings estimates rise, because Voya’s earnings are sensitive to fluctuations in the S&P 500, which advanced significantly year-to-date. (VOYA’s 2019 earnings estimate hasn’t changed since mid-February.) The first quarter consensus EPS estimate is $1.12. VOYA is having a pullback after a big run-up. There’s price support at 47-48. The maximum upside in the coming months will likely be the stock’s 2018 highs of 54-55.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED April 2, 2019
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