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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 245

The market remains in fine health, with many of our stocks hitting new highs and a slew of earnings reports providing reassurance that the good times are not over yet.
For today’s recommendation, we have another financial stock to replace the one that was sold profitably last week. It’s a strong sector, with no end to the strength in sight.
As for the current portfolio, overall, our holdings are performing well. But we have one sell, an emerging market stock that’s gone the wrong way and presented us with a small loss. Details in the issue.

Cabot Stock of the Week 245

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The great bull market of 2019 remains alive and well, not least because it recently received the good news that the U.S. economy is humming along at a fine 3.2% growth rate. Someday, of course, this will change, but it’s a fool’s game to try to guess when that will be. Thus I continue to recommend that you be heavily invested in a diversified portfolio of stocks that meet your own investment objectives. In this portfolio, which is capped at twenty stocks, we took profits in Apollo Global Management (APO last week) and are jumping into another financial stock this week. The stock was originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor and these are Crista’s latest thoughts.
CIT Group (CIT)

Financial companies occupy the sweet spot in American business. Strong GDP growth, stable interest rates, lower personal and corporate income tax rates and deregulation are all contributing to a flourishing economy. Banks dwell at the center of the economy, providing places to deposit increased income, invest and borrow for corporate growth and family needs.

The current administration in Washington, D.C. continues to tweak broken pieces of legislation, resulting in an improved tax code, renegotiated trade agreements, and smaller banks’ exemptions from regulations that were originally meant to control very large banks. Small- and mid-cap financial institutions continue to benefit from these changes, but their stocks remain largely undervalued.

CIT Group operates both a bank holding company and a financial holding company that provide financing, leasing and advisory services to small and middle market businesses, consumer markets, and the real estate and railroad industries. During the current earnings season, CIT Group reported first-quarter EPS of $1.18 vs. the consensus estimate of $1.08, accompanied by a slight revenue beat, attributed to stronger net interest income and lower expenses. The company delivered strong growth in deposits and core loans and leases during the quarter, including 48,000 new Direct Bank customers, ending the March quarter with $50 billion in assets.

Investors may visit the CIT Group website to access conference call and presentation materials, including the annual report, that pertain to the April 23 first-quarter results and the upcoming May 14 Annual Meeting of Shareholders.

The quarter’s earnings beat pushed full-year consensus earnings estimates higher by 3% and 2% for 2019 and 2020. There are at least a dozen Wall Street analysts who cover the stock. Consensus earnings estimates do not fluctuate often for this company.

U.S. companies’ borrowing, as reported by the Equipment Leasing and Finance Association (ELFA), rose 39% in March from February figures, adding $8.2 billion in new loans, leases and lines of credit. The Equipment Leasing & Finance Foundation reported that its confidence index stood at 58.3% in April, with 50% representing a positive business outlook.

A strong economy can easily lead to rising interest rates that benefit companies that loan money, like CIT Group. That’s because higher interest rates can allow CIT Group to garner a slighter higher profit on loan balances than during periods of lower interest rates.

CIT Group is on a roll, with annual double-digit earnings growth. Earnings per share (EPS) grew 50% and 31% in 2017 and 2018. Wall Street’s consensus earnings estimates now point to EPS growth of 19.8% and 13.6% in 2019 and 2020. The corresponding price/earnings ratios (P/Es) are low in comparison at 11.1 and 9.7, indicating that the stock is undervalued.

Moody’s Investors Services recently upgraded CIT Group’s senior unsecured rating to Ba1 with a positive outlook.

On April 17, the company declared a 40% increase to the second-quarter dividend to $0.35 per share. The current yield is 2.6%. The company repurchased $1.6 billion of stock during 2018, and plans to repurchase another $450 million of stock through September 2019.

CIT has a $5.3 billion market capitalization, putting the stock on the cusp between small-cap and mid-cap measurements.

The stock rose repeatedly to 53 in 2018, before suffering greatly during the fourth-quarter market correction. Constant media pronouncements of impending recession scared investors away. Sadly, there were no actual negative economic numbers that would have indicated a pending recession, such as falling GDP. This serves to illustrate the herd mentality among investors, and the incredible volatility that can take place over the short term. Focus on quality! And don’t create problems where they don’t exist. If a recession arrives, at which time you might not want to own stocks that work better in strong economies, you’ll have plenty of warning via falling GDP numbers, and you’ll be able to calmly handle your portfolio reallocation chores.

Last week, UBS and Compass Point raised their price targets on the stock to 60 and 62, respectively. CIT recovered from the last market correction, and finally appears ready to break past last year’s price ceiling of 53. I expect lots of upside after the breakout. Strong Buy.

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CIT Group (CIT)
11 West 42nd Street
New York, NY 10036
http://www.cit.com

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CURRENT RECOMMENDATIONS

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We are now in the thick of earnings season, with four portfolio companies reporting results after the market close today and many more in the week ahead. But remember, it’s not the results that matter, but how the stock reacts to the results. The addition of CIT means the portfolio now has a full complement of 20 stocks, but I only see one that deserves to be sold (REMX)—though after the earnings reports I may have some different thoughts. What we do have is one stock downgraded to hold and one upgraded to Buy. Details below.

AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, reported first quarter results last Thursday, and both revenues and earnings were above expectations, with revenues up 0.4% and adjusted diluted EPS up 14.4%. U.S. Humira revenues were $3.2 billion, up 7.1%, while international Humira revenues were $1.2 billion, down 23%. In his latest update, written before the release, Tom wrote, “As I’ve often said it is a great company that has been undeservedly knocked down. It’s down 15% so far this year. Overseas competition for Humira can easily be offset by sales of its newly launched drugs, especially hematology/oncology drugs Imbruvica and Venclext … I’m confident in the intermediate and longer term for this dirt cheap company, and you get a 5%-plus yield while you wait.” BUY.

Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, will release its first quarter report after the market close today. In Crista’s update today, she wrote, “Apple is expected to report second-quarter EPS of $2.36, within a range of $2.12-$2.49, and revenue of $57.4 billion, within a range of $54.5-$59 billion. Also, watch for an announcement of an annual dividend increase in conjunction with the earnings report, and possibly another large repurchase authorization. One analyst told CNBC that the most important number in this earnings report would be Services’ revenue growth. He says that Wall Street is expecting 15% growth, and that 18% growth “will keep the stock moving higher.” AAPL continues to rise, with price resistance at 230, where it last traded in October. Buy AAPL now and buy more on pullbacks.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor and featured here last week, continues to build a base between 41 and 42. In his latest update, Tom wrote, “After a rare down year in 2018 this infrastructure MLP is back on track, up 21% year-to-date. In addition to the reliable cash flow and great business model, the company has new assets coming on line in the next several months that should boost earnings. Technically, the stock looks strong as it is consolidating at recent highs. It also helps that the infrastructure sector is increasingly in vogue with investors and BIP’s defensive and high-yielding features should be popular going forward.” BUY.

Delta Air Lines (DAL), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, continues to base in the 58 area following its early-April surge higher. In today’s update, Crista wrote, “DAL is a U.S. and international passenger and cargo airline that serves nearly 200 million people every year, flying to more than 300 destinations in over 50 countries. DAL is an undervalued growth & income stock. Delta is expected to achieve 18.1% EPS growth in 2019, and the P/E is 8.7. The stock is resting from a big recent run-up. There’s price resistance at the December high of 60. Buy on dips and give the stock some time to catch its breath before it advances again.” BUY.

Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, fell through its 50-day moving average two weeks ago, but has roared back in fine style—having knocked out the weak hands; it now boasts seven consecutive up days! In his latest update, Tyler wrote, “Shares are expensive on valuation, so we’ll head into the earnings report [May 6] with a Hold rating and see what management has to say. I’m expecting another solid report.” HOLD.

Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, has been up for six consecutive days, notching record closing highs over the past three. First-quarter results will be released after the market close today, and there’s no doubt they’ll be good. HOLD.

Huazhu Group Limited (HTHT) (previously known as China Lodging Group), originally recommended in Cabot Emerging Markets Investor, has pulled back normally since its record closing high last Tuesday in the wake of a great quarterly report. Huazhu remains the largest lodging chain in China, and that’s one reason that I’ve designated it a Heritage Stock for the portfolio, meaning I’m committed to holding as long as the prospects for great fundamental growth remain intact. HOLD.

Invitae (NVTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced off its 50-day moving average two weeks ago and has been trending higher since, heading back toward its mid-April high of 26, but overall, it looks like the stock has weakened a bit over the past month. First quarter results will be released May 7, after the market close, and I’ll downgrade it to Hold for now and see how the stock reacts to the report. HOLD.

LexinFintech Holdings (LX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, surged higher in early April, and has been consolidating its gains since. In last week’s update, Carl wrote, “This week LX launched Le Card, an APP that offers young people lifestyle benefits and privileges, ranging from KFC coupons to 20%-off movie tickets. It will also increase the types of services available on Fenqile, its e-commerce-driven platform, as young people are consuming more services, such as flight tickets and training services, than ever before. LX’s target market is China’s 149 million Generation Z, those born in 1995 and after who are increasingly the driving force behind the country’s consumption market, accounting for a quarter of e-commerce users in China, according to market research company iResearch. This high-growth fintech idea is currently trading at a very reasonable valuation and, if you don’t own any, I encourage you to build a half position.” BUY.

Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, hit another record high last Wednesday and has pulled back normally since. From here, it could easily touch its 25-day moving average, now down at 58, but as the world’s leading provider of dating resources, the long-term prospects are bright. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has climbed higher every day since reporting a solid first quarter last week, and today it closed at its highest level of the month! In his update last week, Tom wrote, “The utility anticipates annual earnings growth of 6% to 8% through 2021. This is fantastic growth for a utility … The stock still has upside momentum and looks strong technically. I like this stock in both the short and long term.” BUY.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, has been one of the strongest stocks in the portfolio over the past two months, hitting another new high just yesterday. In last week’s update, Mike wrote, “PLNT is set to report earnings next Thursday (May 2) after the market’s close; analysts are looking for both sales and earnings to rise 26%, though same-store sales and cash flow (EBITDA) will be closely watched. Given the stock’s nearly straight-up move over the past two months, short-term risk is probably elevated heading into earnings, but with a profit cushion, we’re willing to give this stock some room to maneuver. Our rating remains Buy, though we’d keep new positions small this close to the quarterly release.” BUY.

Rapid7 (RPD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, looks fabulous technically, hitting new highs over each of the past four days. First quarter results will be released on May 2 after the market close. In his update last week, Tyler wrote, “Rapid7 will deliver the goods next Thursday and I’m planning on keeping at Hold through the event since this week’s 8% rally brought the stock right back to its 52-week high. The market will be looking for any change in the environment for security spending, which has been a resilient space lately due to increasing complexity (partially from the cloud) and elevated threat levels. Analysts see Q1 revenue up 28% and an EPS loss of -$0.08. For 2019, expect revenue to grow 26.4% (to $308.5 million) and EPS to jump to $0.095, from a loss of -$0.41 in 2018.” HOLD.

STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, has been trading between its 25- and 50-day moving averages over the past two weeks, so technically has the potential to break up or down, and the catalyst may well come tonight, when the company reports its first quarter results. In his update last week, Tom Hutchinson wrote, “This all-star performing industrial REIT has … a history of falling back after breaking the old highs, so I’m cautious here. The earnings announcement on April 30 may reveal STAG’s direction.” HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is at a critical point here, technically—showing three full days of trading below the bottom at 250 that has supported the stock over the past 13 months. Thus, either the buyers step in soon, and take the stock back up into its trading range, or the sellers truly gain control, and push the stock even lower. Given what I wrote last week about not giving up—plus our big long-term profit—I’m still patient, but I am concerned. HOLD.

The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, runs a self-service cloud-based ad-buying platform that enables optimized decision-making capabilities, and the stock has been strong, jumping up to a new high yesterday on good volume. First quarter results will be released May 9 before the market open. HOLD.

Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, tagged its 50-day moving average last week and then advanced for six straight days, culminating in a record high yesterday. Good stuff. But earnings are due after the market close today, so what happens next is important. In his update last week, Mike wrote, “at the end of the day, the intermediate-term will likely be determined by the reaction to earnings. (Analysts see sales up 73% and a profit of a penny per share, though we’ll also be interested in the firm’s updated same-customer growth metric, which came in at 47% in Q4.) It’s always possible that the big run from the stock over the past year means a prolonged rest is needed, but as always, we’ll just go with what’s in front of us—Twilio’s story, numbers and chart all look good here, so we’ll stay on Buy, albeit with an eye toward next week’s report.” BUY.

Van Eck Rare Earths/Strategic Metals (REMX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, continues to sink, and now Carl is done with it. In his latest update, Carl wrote, “I believe we can profitably shift this capital to new ideas with more upside potential.” SELL.

Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, looks absolutely great, sitting right up at the high it first hit two week ago. In today’s update Crista wrote, “Voya is expected to report first-quarter EPS of $1.12, within a range of $0.96-$1.23, and revenue of $279.0 million, within a range of $270-290 million, on the afternoon of May 7. Voya’s earnings are equity-sensitive. The S&P 500 index rose 13% in the first quarter. The company could easily deliver an upside earnings surprise for any quarter that was characterized by strong stock market performance. Analysts expect full-year EPS to grow 36.4% and 14.9% in 2019 and 2020, and the current P/E is 9.9. Voya is prioritizing share repurchases, and planning a large dividend increase this year that has not yet been finalized. An earnings disappointment could knock the share price down 5%. An earnings or revenue beat—especially in tandem with a bullish forecast or a dividend increase—could cause a strong breakout to new all-time highs. With those potential catalysts on the immediate horizon, I’m moving VOYA from Hold to Strong Buy.” I’ll follow suit. BUY.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED May 7, 2019

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