The market remains in good health, and all Cabot’s market timing indicators are positive, telling us the odds are that the market will be higher in the months ahead.
For today’s recommendation, I have a well-known dividend-paying mega-cap that has a very good chance of providing good capital gains in the months ahead, thanks to a landmark deal with Apple.
As for the current portfolio, overall, our holdings are performing quite well, with many hitting new highs in recent weeks. The portfolio is now full, but I have no sell recommendations. Details in the issue.
Cabot Stock of the Week 246
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The Cabot Stock of the Week portfolio remains heavily invested, as the market’s main trends remain up and market breadth is still quite healthy. At any moment, of course, that could change, but it’s a fool’s game to try to predict when that might occur; better to just listen to the market and invest in synch with the main trend. For this week’s recommendation we shift to a well-known dividend-paying company whose stock is ripe for a substantial advance. The stock was first recommended by Mike Cintolo in Cabot Growth Investor and these are Mike’s latest thoughts.
Qualcomm (QCOM)
We don’t follow the classic market capitalization delineations in Cabot Growth Investor, instead looking for what we call emerging blue chips—firms that have established businesses but are still early in their growth curve so. Because of that, what we tend to avoid are mega-caps, for the simple reason that their size restricts how much growth is possible.
However, there are exceptions to every rule, and Qualcomm—which had $21 billion in revenue during the past year and whose stock carries a market capitalization of $108 billion—looks like one of them.
The company is one of the dominant providers of chips and technologies that power much of the communications world; its CDMA Technologies division (dubbed QCT) contains all of the firm’s products and services, as well as R&D and engineering functions, while its Technology Licensing (QTL) division owns substantially all of the firm’s best-in-class patent portfolio.
Qualcomm has long been a great, profitable company, but business has meandered in recent years due to lawsuits and the ups and downs of the smartphone and telecom industries—revenues fell three straight years before gaining a mere 2% last year, while earnings have steadily slipped since 2014. That trend continued in the calendar first quarter, when QCT (which makes up three-quarters of revenue but just 45% of cash flow) shrank 4% from a year ago, while QTL dipped 8%, with another decline likely in the current quarter.
But nobody cares about any of that now. Qualcomm’s stock has completely changed character because its wide-ranging settlement with Apple (and the corresponding exit from the business from Intel) has completely changed the company’s outlook. Gone is mundane growth, and coming are a huge increase in revenue and cash flow, especially as the 5G trend accelerates.
After years of trying to win in court and wait for Intel to offer its own 5G modem chipsets, Apple essentially capitulated to Qualcomm. Just for a “catch up” payment, Qualcomm is going to recognize north of $4.5 billion in the current quarter alone, and that’s just the beginning, as the firm expects future royalties and chipset sales to Apple to tally another $2.5 billion or thereabouts (around $2 per share).
This settlement alone is enough to dramatically change the firm’s earnings outlook, but there are more potential positives, too, not the least of which is a possible “follow-on” settlement with Chinese giant Huawei, which also is battling Qualcomm in the courts.
There’s also upside potential in general from higher pricing from 5G mobile modems (possibly twice what most analysts initially expected) and from 5G demand in general, as there are some signs that the industry is taking off sooner than anticipated.
On the flip side, a case before the Federal Trade Commission could be decided soon and, if it doesn’t go Qualcomm’s way, could cause some trouble for the stock. But there’s little chance it will change the underlying story in a major way. Analysts see earnings for next fiscal year (starting October) rising 37%, and the company pays a tidy 2.8% dividend to boot.
Beyond the numbers, the biggest reason we’re high on the stock is because we think Qualcomm has become to go-to institutional quality growth stock in the 5G field, which is set to begin mushrooming in the second half of 2019. It’s already heavily owned, of course, but we think QCOM has become a stock big investors have to own in size as the growth story (and bull market) plays out.
As for the stock, all that really matters is the past three weeks—the stock has exploded on monstrous volume to new 19-year highs (its Internet bubble peak of 100 still stands), with any pullback arrested within a day or two. Will QCOM eventually pull back a few points? Of course. But, while the stock won’t rise 10 points a week, we do think it’s a great bet that shares head nicely higher as the 5G story kicks into gear and as any further deals are inked. BUY.
QUALCOMM (QCOM)
5775 Morehouse Drive
San Diego, CA 92121
858-587-1121
http://www.qualcomm.com
CURRENT RECOMMENDATIONS
The addition of Qualcomm means the portfolio is now full—20 stocks is the maximum—and thus I should look hard for sale candidates. But I can’t find any to sell! Overall, earnings season has treated us quite well, with many stocks hitting new highs and none breaking down. Next week, though, I’ll have to sell something, and it will be interesting to see what stock(s) it will be. Until then, the most I can do is downgrade two stocks to Hold. Details below.
AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, has been trading generally sideways since late January, with a slight upward bias. In his latest update, Tom wrote, “The drug maker reported first quarter earnings last week and beat expectations. It showed EPS growth of 14.4% over last year’s quarter and raised guidance for 2019 earnings. The stock was rocked after fourth quarter earnings because it missed revenues as overseas competition took a bigger-than-expected bite out of Humira sales. But this quarter was much better and the company expects double-digit earnings growth on the year, which is huge for a big drug company. But the market greeted the news with a yawn as investors need further proof that new and pipeline drugs can offset the slippage in Humira sales. The company is still at a bargain price with a great yield and should deliver nice appreciation over the intermediate term.” BUY.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, broke out to new highs after releasing its quarterly report after the market close last Tuesday. In Crista’s update today, she wrote, “Warren Buffett, CEO of Berkshire Hathaway (BRK/A), said that he “was pleased” with the quarter’s results. His company owns over $50 billion of AAPL. I anticipate AAPL climbing to 230 in the coming months, then resting for quite a while. AAPL is a great stock for a high quality, buy-and-hold equity portfolio. Earnings growth is not always double digits, and the P/E is not always low, but the company is a consumer products & services powerhouse and a cash machine. Buy AAPL now.” BUY.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor, continues to build a base between 41 and 42. In his latest update, Tom wrote, “The global infrastructure MLP has a very good looking chart here as the stock is consolidating at recent highs. It has new projects, namely two new data centers, that came online in December and January, that should help boost earnings and it will announce first quarter earnings on Friday. It’s a good, defensive business with a strong yield 4.9% in an industry that’s coming into vogue. I like this in both the short and long term.” BUY.
CIT Group (CIT), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, and featured here last week, is building a mini-base centered on 53, and is likely to continue upwards soon. In her latest update, Crista wrote, “CIT 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. CIT is an undervalued growth stock with an attractive dividend yield. The price chart has become more bullish. There’s some upside resistance at 55, then lots of capital gain potential thereafter.” BUY.
Delta Air Lines (DAL), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, continues to base in the 56-58 area following its early-April surge higher. In today’s update, Crista wrote, “Delta is expected to achieve 18.2% EPS growth in 2019, and the P/E is 8.7. Subsequent to a brief, rapid run-up, DAL has traded quietly between 56-58 for five weeks, near price resistance at the December high of 60. A breakout past 60 could happen soon, and would be extremely bullish.” BUY.
Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, blasted out to a new high today following an excellent earnings report last night—which I’ll let Tyler comment on next week. The important thing is that this is a bullish breakout, so if you don’t own it yet, it’s OK to grab a few shares around here—though officially I’ll leave it rated hold until Tyler changes his rating. HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, looks fabulous, hitting new highs for five consecutive days until yesterday. The reason was a great first quarter report, featuring revenues up 79% to $162 million and a loss of $0.58 per share. HOLD.
Huazhu Group Limited (HTHT), originally recommended in Cabot Emerging Markets Investor, is 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. The stock has dropped sharply over the past two days (apparently due to Chinese economic worries as the trade war heats up) but the important news comes on May 22 when the company releases its first quarter results. HOLD.
Invitae (NVTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is scheduled to report its first quarter results after the market close today, so watch the stock closely tomorrow to see if big investors like the report. As it is, the stock could go either way; it’s been basing around 24 for seven weeks. HOLD.
LexinFintech Holdings (LX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, has been knocking on the ceiling at 14.5 several times over the past month, most recently just last Friday, so the odds are good that it will break out eventually. In last week’s update, Carl wrote, “Last 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 the 149 million-strong Generation Z (those born after 1995). This group is increasingly the driving force behind China’s consumer 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, you can grab a half-sized position here.” BUY.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, notched a record high close just yesterday, signaling that investors are raising their perception of the world’s leading provider of dating resources. If you don’t own it, try to buy on pullbacks. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has sold off over the past week but remains above its low of early April. In his update last week, Tom wrote, “This is the largest utility and, in my opinion, the best. It offers steady income from its best-in-class regulated utility business while delivering a higher level of growth courtesy of its world-leading alternative energy business…But it is too highly priced to continue to accumulate at the current level. I’m changing the rating from a BUY to a HOLD.” I’ll follow suit. HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, was one of the strongest stocks in the portfolio over the past two months, but that ended when the company reported first quarter results last Thursday; the stock sold off in response. But it quickly found support, recovering most of the lost ground, and Mike held calmly through it all. Interestingly, the company announced that all its locations will be free for teenagers ages 15 to 18 this summer. Sounds like a great way to get new customers. BUY.
Rapid7 (RPD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, released its first quarter results last Thursday, and the stock hit new highs on Friday but has pulled back since. Here’s what Tyler said after the report. “Rapid7 reported a great quarter yesterday. Revenue was up 34.1% to $73.2 million (beating by $3.3 million) while adjusted EPS of $0.02 crushed expectations by $0.10. Annualized recurring revenue (ARR), which is the number analysts were hoping would grow by 20% a year when I recommended the stock, was up 51%. That’s huge!! With the business firing on all cylinders, management raised full-year ARR guidance to +30% and revenue growth guidance to 28% to 30% (analysts had seen 2019 revenue up 26.4% to $308.5 million). EPS guidance of $0.05 is in line with current consensus but seems very conservative given the Q1 result and boost in revenue guidance. The message from management is that Rapid7 has “… transformed to a high growth, multi-product cloud software company on the path to long-term profitability.” That’s like a bartender saying this beer will give you a persistent buzz, but no hangover. Investors are likely to keep “drinking up” shares of RPD! The stock should react well to this report and analysts will likely raise price targets to around where the stock is trading now (they’ve been behind the curve lately). Keep Holding.” HOLD.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, looks fine, trading right up to its old high yesterday and pulling back slightly today. In his update last week, Tom Hutchinson wrote, “The industrial REIT reported earnings yesterday that beat expectations. The stock has been a solid performer, up 16% for the year. It has also been flirting with a key resistance level near the 52-week high. We’ll see if the positive earnings announcement can propel the stock into a new range.” HOLD.
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has managed to rally back above 250—the level that has supported the stock over the past 13 months—and if it can stay up here, or better, we can say the worst has passed. HOLD.
The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, looks great, hitting a record high last Friday and pulling back normally since. First quarter results will be released May 9 before the market open and there’s little doubt they’ll be good. HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high after an excellent quarterly report and then reversed course. Here’s Mike’s post after: “In our special bulletin this morning, we booked partial profits in Twilio, partially due to the stock’s ugly post-earnings reversal lower, but also because of waning momentum (not much price progress or upside buying power) in recent weeks. Longer-term, we still believe this story has legs, and the Q1 report backs that up—revenue growth accelerated to 81% (even taking out the benefit of the SendGrid acquisition, organic growth was about 60%), with same-customer growth remaining at ridiculous heights (46% in the quarter). And going forward, the SendGrid merger will not just add email capabilities to its communications platform but will also offer Twilio cross-sell opportunities into a whopping 84,000 new customers! If you didn’t sell any and want to hold on to all your shares after today’s modest rebound, there’s nothing wrong with that. But we generally like to take some off after a good run (we bought in at 93), not just to put some profit in our pocket, but to allow us to give our remaining position plenty of leeway for what will hopefully turn into a long-term advance.” I’ll downgrade to hold now. HOLD.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, looks fine, with a month-long base between 54 and 55, but tonight’s quarterly report could change that, either way. 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 accompanied by strong stock market performance. VOYA is an undervalued aggressive growth stock. 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. I’m very pleased that VOYA recently rose to its previous highs of 54-55 and didn’t then give up any ground. 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.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED May 14, 2019
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