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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 247

As of yesterday, the market’s intermediate-term trend is now negative, so certain defensive measures are now appropriate. These might include lowering your overall risk profile by holding cash when possible, taking profits when stocks are extended, and being less tolerant of poor behavior.

Cabot Stock of the Week 247

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Clear

Thanks to fears of tariff impacts, the market’s intermediate-term trend (as measured by the Cabot Tides) is now negative. But it’s not just tariffs that are responsible; the market has just had a fabulous four-month advance, so a pause is needed. So how do we play this? Basically, we cut losses short and keep a tight leash on stocks that are weakening, in general reducing the number of stocks in our portfolio and holding some cash. At the same time, however, we keep in mind that the market’s long-term trend (as measured by the Cabot Trend Lines) is still positive, telling us that once this correction is over, the main trend up will resume.

As for today’s recommendation, it’s a great Chinese stock looking for a bottom, and there’s a chance that the high-profile tariff issue is creating it right now. The stock was recently recommended by Carl Delfeld in Cabot Emerging Markets Investor and here are Carl’s latest thoughts.
Baidu (BIDU)

Founded in 2000, Baidu enjoys an impressive 75% share of China’s internet search market. Given that more than 40% of the China’s citizens are not yet online, the company would appear to have many years of growth ahead for its core business.

The reason to buy Baidu right now is that the stock has been out of favor and on the bench since July 2018 when it traded at 270 a share.

Baidu, founded in 2000, now trades near 150, despite the robust recovery in Chinese stocks in early 2019.

What’s going on? Analysts don’t seem to have one compelling answer, citing higher spending, more competition, U.S.-China trade tensions, Beijing’s crackdown on internet content and slower growth in earnings due to slower growth in China.

My hunch is that investors have been ignoring Baidu because the sharp pullback presented the market with dozens of faster-growing stocks beaten up in late 2018.

But the strengths of Baidu can’t be ignored. With Google no longer a player in China, its dominance of the search business is strong. But there’s more! In owning Baidu, an investor gets not only a commanding position in Chinese search, but also interests in social media and entertainment, including a 58% position in iQIYI (IQ), the Netflix of China, worth about $10 billion; a 19% stake in online travel king Ctrip; and food takeaway, apps, maps, payment services, and Baidu cloud services.

Since its launch in 2010, iQIYI has evolved from a video streaming platform to a major production house in China for variety shows, drama series and more.

The company had more than 87 million subscribing members at the end of 2018, up from 58 million the year before.

In addition, Baidu is making a strong move into new strategic areas requiring higher expenses but setting the stage for future growth. For example, the company has launched a number of artificial intelligence (AI) initiatives. The company is employing AI to better match users with video content and also serve customers of Baidu’s cloud computing business.

In addition, its voice-activated digital assistant continues to expand its user base to reach 204 million at the end of 2018, showing compound annual growth of more than 100% for the seventh consecutive quarter.

Another high potential application of Baidu’s AI technology is Apollo, the company’s self-driving car platform.

In the last quarter it reported, Baidu delivered $3.96 billion in revenue, up 9% on a U.S. dollar basis, and up 22% in yuan, the Chinese currency. However, due to higher expenses, net income slowed sharply in the fourth quarter.

The current quarter will probably be tough as well, since the company is expanding investments outside of search. This core business, accounting for roughly 75% of its business, grew at a 14% clip in the last quarter.

Wall Street has reset their expectations in terms of a target price for Baidu, though they are still pretty lofty, ranging from 205 to 220 a share. But if Baidu can show some unexpected mojo, it could really bounce given that there were nearly 7 million shares sold short at the start of May. It is also reassuring that Baidu has a nice war chest too, with more than $13 billion of cash on its balance sheet.

On the valuation side, even taking into account the possibility of weaker profits in 2019, Baidu’s stock now trades at a multiple of forward earnings lower than the average S&P 500 stock.

The bottom line is that decelerating growth and the ongoing trade war have pushed down its stock price to the point where it seems to be priced for a worst-case scenario.

As a clincher, Baidu has a history of successfully responding to short-term challenges, and there isn’t any reason to think that this time will be different.

sow247-bidu

Baidu (BIDU)
Baidu Campus
No 10, Shangdi 10th Street Haidian District
Beijing 100085
China
http://www.baidu.com

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CURRENT RECOMMENDATIONS

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What a difference a week makes! Last week all our stocks looked good and I couldn’t find a single sell candidate. Today, thanks to the broad market correction, there are a slew of stocks that could justifiably be sold. However, I’m only selling one—and the main reasons are these: First, overall, we’re still in a bull market, as our long-term trend model (called Cabot Trend Lines) is still positive. Second, it’s good that the market correction has been so broad-based; it’s not characteristic of a market top. Third, the fact that we know the reason for the market’s recent weakness is good; it’s far worse if there’s no obvious reason. And fourth, most of the stocks in the portfolio hit new highs in recent weeks, so could easily do so again once the pressure comes off the market. In your own portfolio, you may well come to different conclusions, depending on your own portfolio balance and risk tolerance, and of course, I will change my opinions as the stocks change, but for now, the only sell is Invitae. 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. And today it surged higher, for good reason. In his latest update, Tom wrote, “This is a fantastic company that just isn’t getting any love right now. Earnings were good and the market didn’t even care. The main issue is whether it can replace competition for its top selling Humira drug with newly launched and pipeline drugs. I have outlined often how I believe it will. But the market won’t believe it until there is obvious proof. This is a fantastic drug company that is obscenely cheap and it’s paying you fantastic 5.4% yield to wait it out.” Well, it appears that the wait may be over. Just this morning, the company announced that it had reached an agreement with biosimilar drugmaker Boehringer Ingelheim, under which Boehringer, beginning in 2023, will pay royalties to AbbVie for licensing the patents that enable it to sell its biosimilar version of Humira called Cyltezo in the U.S. And the market liked the news. BUY.

Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been a roller coaster! On May 1, after announcing excellent earnings, the stock broke out to new highs. But today, the stock is below all of its moving averages, whacked by both tariff worries (cell phones are the U.S.’s biggest import from China) and a Supreme Court legal decision. In Crista’s update today, she wrote, “Importantly, and to the chagrin of many readers, I would remind people that the threat of increased tariffs is a negotiating tactic, a hardball approach to stalled negotiations. When the opposition digs in their heels and refuses to correct bad behaviors, the only choices at that point are to allow the bad behaviors, as many previous presidential administrations did, or to turn up the heat in a type of “tough love” stance. With regard to ongoing Chinese theft of U.S. intellectual property, for example, it would be irresponsible for our government to keep the status quo. So while it’s uncomfortable to see the tension of trade negotiations portrayed on the nightly news, it also represents an opportunity for finally ending IP theft. I think we can all agree that IP theft is bad and that the prospect for stopping the practice is good, despite our potential distaste for the negotiating style.

“Additionally, today the U.S. Supreme Court ruled, basically, that iPhone users will be able to sue Apple for antitrust practices relating to the sale of apps for the phone, and the stock dropped further on the news. This is likely to be a story that unfolds over a very long time, and I will follow it as it does—but it has no effect on Apple’s earnings power today.

“As for AAPL’s share price, it will probably bounce soon, and later climb to price resistance at 230 this year. AAPL is a great stock for a high quality, buy-and-hold equity portfolio. Earnings growth is not always double-digit, and the P/E is not always low, but the company is a consumer products & services powerhouse and a cash machine.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor, has been building a base between 41 and 42 for two months but now looks like it may be breaking out! In his latest update, Tom wrote, “ This global infrastructure MLP reported a slight miss in earnings last week. But it’s more complicated than that. Strong operating results were tarnished by recent asset sales and currency fluctuations. Organic growth was up 10% year-over-year. More importantly, the process of selling underperforming assets for higher margin ones that began last year appears to be working. New projects are coming online and boosting profits. The company projects that when all projects in the pipeline are online later this year funds from operations (FFO) will be up 22% from when the strategy started a year ago.” BUY.

CIT Group (CIT), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, was hitting new highs just two weeks ago and has now pulled back in a normal correction, to what looks like a good entry point. 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 is bullish, with 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, pulled back normally over the past two weeks and bounced off its 50-day moving average yesterday, which is generally a good sign, technically. In today’s update, Crista wrote, “DAL is an undervalued growth & income stock. Delta is expected to achieve 18.2% EPS growth in 2019, and the P/E is 8.5.” BUY.

Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, is that rare stock that is still going up, and it’s all thanks to earnings. In Tyler’s latest update, he wrote, “EVBG reported a great Q1 in which revenue was up 40% to $42.8 million and EPS of -$0.15 beat by $0.03. Big picture, the story here continues to be about a large, global opportunity to sell Everbridge solutions into, and new product development that fits the market’s needs. The new-ish Critical Event Management (CEM) suite continues to gain traction with seven new customers (up to 42 total) and better than 100% growth. Deals over $200K were up 80%, too. The other big growth trend is coming from international, which was up 150%. This trend should continue as Europe has mandated population alerting, which opens up a $100 million market opportunity by 2023. There were more details from the call, including a lot about unnamed customers. But the overall takeaway is that the business remains on fire and we should keep our eyes open for news on European deals. Management will host an Analyst Day next month, and they seem to be narrowing in on a new CEO too. Shares were up to an all-time high in the face of a down market yesterday, which tells you about all you need to know! Keep Holding.” HOLD.

Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, was hitting new highs just six trading days ago thanks to an excellent first quarter report, and now it’s down at its 50-day moving average, thrown out like a baby in the bathwater. There were also fears from potential competition from Guardant Health, though that looks very far down the road. Back to the stock, there is support here, and the main trend is still clearly upward, so, I’m going to stick with EXAS a bit longer. HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Emerging Markets Investor, is one of the Heritage Stocks in the portfolio, meaning our profit is so big and the prospects for growth still so substantial that I’m committed to holding as long as those prospects remain intact. As the largest lodging chain in China, the company is almost guaranteed to get a lot bigger—over time. The stock was hitting new highs in late April, but has pulled back sharply with all the tariff talk and is now near the support of its 200-day moving average at 33. First quarter results will be released May 22. HOLD.

Invitae (NVTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the biggest loser in the portfolio and thus an easy sell. First quarter results were released a week ago and the market didn’t like what it heard, gapping the stock down on big volume. SELL.

LexinFintech Holdings (LX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, has held up rather well since hitting a record high just two weeks ago, especially considering that it’s a Chinese stock—which means investors see great growth ahead! In his latest update, Carl wrote, “LX lost some ground this week due to the trade imbroglio but LX’s 149 million-strong Generation Z target market (those born after 1995) is increasingly the driving force behind China’s consumer market. This high-growth fintech idea is currently trading at a very reasonable valuation and, based on this week’s pullback, I encourage you to take advantage of the discounted price and buy a half position.” BUY.

Match Group (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, released a superb first quarter report last Wednesday and the stock surged to record highs as a result, climbing even higher since. In this week’s Cabot Top Ten Trader, Mike made Match his Top Pick, writing, “Tinder has long been the growth driver here (it ended March with 4.73 million subscribers, up 36% from the year before and making up around 55% of total Match subscribers), but the firm is making inroads with some newer, more targeted products (two for Latinos and African Americans are seeing rapid growth in app downloads), while a refresh of the Match app is boosting engagement. The story has been solid for a while, and while growth is slowing a bit, the stock has kicked into gear in the wake of a great Q1 report—sales lifted 14%, subscriber totals (8.6 million, up 16% from a year ago) topped expectations, revenue per user (up 4% on a currency-neutral basis) is heading in the right direction and earnings of 42 cents topped estimates by 10 cents. Long-term, the move into Asia carries massive promise, too. Analysts see sales and earnings up in the 16% to 21% range both this year and next.” 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, is a very conservative stock, so I wasn’t surprised to see it surge in recent days when the broad market fell apart. But I was impressed to see the stock hit a new high today! In his update last week, Tom wrote, “I love this stock but I’m not married to it. If the opportunity presents itself, I might leave it for a younger and prettier utility. That said, I don’t see any prospects out there. This steady revenue generator and earnings grower is still the hottest utility around. The stock was downgraded to a hold last week on concern that the price had gotten a little ahead of itself in the near term. But it is still fairly valued and the best in its class.” HOLD.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, continues to impress, hitting a highs last Thursday and Friday before pulling back today. In his issue last week, Mike wrote, “Planet Fitness released a fine first-quarter report last week, with revenues up 23%, same-store sales up 10.2% (well ahead of estimates) and cash flow and earnings both up 30%. The firm also opened 65 new gyms and operated 1,806 at quarter’s end (up 3.7% sequentially). Like many stocks this earnings season, the stock sold off anyway, supposedly because revenues came in a bit light and management didn’t boost the yearly outlook (sales up 15%, earnings up 25%) for the year. A drop below the 68 area (which was the low of the earnings day and is a bit below the 50-day line) would be a red flag, but there’s no sign of that here—in fact, PLNT has shaken off its post-earnings dip and ripped back to new highs this week! (No China-related exposure to this business has helped.) If you own some, hang on, and if you don’t, we’re OK picking up a few shares around here.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here last week, is up slightly since, fairly immune to the action of the broad market at the moment. If you don’t own it, you can buy here. BUY.

Rapid7 (RPD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, has been building a base in the low 50s over the past two months, and while the excellent first quarter report two weeks ago didn’t yield a lasting new high, I believe it did insulate the stock from selling pressures since, as any sellers have been met by new buyers wanting to get a piece of this great cloud software company. In his latest update, Tyler wrote, “The stock hasn’t changed much since the report, which isn’t all that surprising given that it’s up almost 70% in 2019. Keep Holding.” HOLD.

STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, looks fine, trading slightly off its high of two weeks ago. In his update last week, Tom Hutchinson wrote, “The industrial REIT reported earnings last week that beat expectations. The stock has been a solid performer, beating the overall market and its peers in every measurable period for the last three years. It has also been flirting with a key resistance level near the 52-week high. The chart still looks strong and in the absence of any real sign of weakness it could still go higher.” HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains in an intermediate-term downtrend, as the stock found resistance at its falling 50-day moving average and has now dropped to its lowest level since January 2017. Thus, it’s not an attractive stock to buy here. But it is a Heritage Stock for this portfolio, with both a big profit and the promise that the business has great growth prospects, so I will continue to hold. But what might change that? First, real evidence that the company has lost its leadership edge, and second, a breakdown below its lows of 2016. HOLD.

The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high two weeks ago, but was slammed after reporting first quarter results last week. The problem wasn’t growth; revenues surged 41% to $121 million (beating estimates), while earnings mushroomed to $0.49 per share, easily beating estimates of $0.25. No, the problem was guidance, as management’s forecast of second quarter revenue ($154 million) was no higher than what analysts had expected. Of course, the broad market was part of the problem, too. So now the stock is sitting at the lows where it found support twice in March—and we have a small loss. Selling is an option, and if the stock breaks down from here, I’ll certainly let it go. But a rebound is also possible—particularly given the company’s great growth prospects as advertising management migrates to the cloud—so I’m going to hold. HOLD.

Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high two weeks ago after releasing an excellent quarterly report and has corrected moderately since. In Mike’s latest update, he wrote, “Our thoughts on Twilio are a lot like our thoughts on the overall market: Big picture, we’re optimistic the stock has further to run, but in the short term, we still think it (and some other stocks that have had big runs) is vulnerable to further declines (or at least choppy action), especially if the market’s wobbles continue. Fundamentally, though, the recent quarterly report only reinforced our view that this company is going to get much bigger over time. As the need to communicate with customers, partners and employees via a variety of channels (text, email, video, etc.) grows, Twilio is a sure bet to attain more clients and to have current clients dramatically increase their usage of its platform (same-customer revenue growth up a crazy 46% in Q1), especially with the SendGrid’s best-in-class email capabilities being integrated. We sold one-third of our position last week after the stock’s post-earnings decline, but are aiming to give our remaining shares plenty of rope to consolidate if need be.” HOLD.

Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, hit record highs a few weeks ago and has now pulled back to its 50-day moving average in normal action. In today’s update Crista wrote, “Last week, Voya report adjusted first quarter EPS of $1.22 vs. the consensus estimate of $1.12. The quarter’s highlights included better-than-expected expense reductions, favorable mortality trends in the Life Insurance division, and a repurchase of $200 million of stock. The company also authorized an additional $500 million share repurchase. Expenses were high in the Retirement division. Retirement and Investment Management divisions experienced net inflows of approximately $1.2 billion, higher than in each of the four prior quarters. Reported book value jumped from $52.28 in December to $59.13 in March. With regard to the anticipated dividend increase, CEO Rodney O. Martin, Jr. stated, “As we previously announced, we intend to increase our common stock dividend to a yield of at least 1% and we expect to do so beginning in the third quarter of 2019. As we continue to execute on share repurchases given the current attractive valuation levels of our common shares, providing a higher-yielding dividend will enable us to attract new investors to Voya.” To be clear, there is a big difference in the investment world between a 0.1% dividend yield and a 1.0% dividend yield. There are many institutional portfolios that use dividend yield as one of their investment criteria. A certain percentage of those portfolio managers will be free to begin purchasing VOYA shares, providing additional upside to the stock. VOYA is an undervalued aggressive growth stock. Analysts expect full-year EPS to grow 36.4% and 15.4% in 2019 and 2020, and the current P/E is 9.8. The price chart remains relatively bullish. I anticipate VOYA performing better than the broad market for the balance of 2019.” BUY.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED May 21, 2019

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