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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 249

Short-term, the market remains under pressure, and this corrective phase could easily go longer (I don’t sense enough pain yet), but long-term, the market’s main trend remains up, so I continue to recommend that you be heavily invested in a diversified portfolio of stocks that are performing well.

Today’s recommendation is a recent IPO, but it’s not Uber or Pinterest or any of the big popular names. I think you’ll like it, but be careful; volatility is to be expected.

As for the portfolio’s current holdings, several are hitting new highs—and none are performing so badly that they deserve to be sold. So this week we’ll stand pat. Details in the issue.

Cabot Stock of the Week 249

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Diversification is one of the key tenets of successful investing, and in Cabot Stock of the Week, we don’t just diversify across stocks but also across investment disciplines, mixing hot growth stocks and unknown small-cap stocks and undervalued large-cap stocks and steady dividend-paying stocks. In recent weeks, we’ve lost a few of the more volatile growth-oriented issues in the portfolio, as the broad market has cooled off, so today I’m adding a new one, both to improve diversification and because a recent pullback has brought the stock down to an attractive level. The stock was first recommended by Mike Cintolo in Cabot Top Ten Trader and these are Mike’s latest thoughts.
Zoom Video Communications (ZM)

Tracking recent IPOs is great way to find new growth stocks. In fact, we have a couple of computer screens set up just for this subsector of the market so that we always have our eyes on any IPOs with great growth and liquidity; if a new issue has all the characteristics we look for, there’s a decent chance it will become a big market leader sooner or later. (FYI, Liquidity is often the hardest thing to come by in new issues, but it’s important, signaling many big investors are actively building positions.)

This year, obviously, has seen a ton of high-profile companies come public, including Uber, Lyft and Pinterest, but the recent IPO that checks the most boxes for us is Zoom Video Communications (ZM). Zoom appears to be revolutionizing the videoconferencing industry with what by accounts is a better, easier-to-use solution.

While the videoconferencing industry has been around for years, it’s still riddled with inefficiencies. The one statistic that highlights this: According to one study, a whopping 94% of virtual meetings are still audio-only (conference calls), which is amazing when you think of how video (streaming products, etc.) has permeated the rest of our lives.

The main reason? Most current video solutions were simply built on top of systems that were originally made to handle voice or chat. The result is often low-quality video that varies with bandwidth and the number of users, along with an interface that’s hard to navigate and isn’t intuitive.

Zoom, on the other hand, has built its platform from the ground up for the new digital age. It’s video-first and cloud native, built to deliver reliable, high-quality video across a range of devices. In the company’s words, it’s developed a “proprietary multimedia router optimized for the cloud that separates content processing from the transporting and mixing of streams.”

Translation: Zoom delivers excellent performance even when bandwidth and network performance is subpar; the platform can deliver a productive meeting experience even with up to a 40% loss of packets (those little pieces of video that are transmitted around the internet). Throw in an intuitive interface, a simple installation process (workers can often access zoom through third-party apps they already use, which greases the skids), and top-notch customer support, and it’s no surprise the firm’s offerings are being adopted fast.

The core offering is Zoom Meetings, which includes a full suite of features so that people can connect with each other. But the company isn’t just about video, as it’s launched a cloud-based phone system that integrates with Meetings.

All told, Zoom’s offerings have been a hit, with thousands of customers of all sizes signing up for a variety of uses. (One of our favorite examples: One good-sized hospital uses Zoom to connect specialists live into operating rooms to improve results!) And that’s led to rapid revenue growth—the top line expanded 149% in 2017 and another 118% last year. The bottom line is still in the red, but it’s good to see Zoom’s cash flow operations in positive territory.

As for the stock, it’s so young that there’s not a ton to analyze, but a few things stick out. First, ZM priced at 36 but closed its first day at 62. Second, the stock rose in a big way from there, reaching as high as 90 in mid May. And third, trading volume has been very solid; ZM regularly trades north of three million shares, or $220 million of volume per day.

Tim’s Note: I like ZM’s strength—way more impressive than UBER or LYFT or PINS—and I like last week’s pullback that took the stock right down to its 25-day moving average at 75. The stock will be volatile, so short-term risk is high, but if we can stay in the saddle, the prospects are bright. Earnings are due June 6.

sow249-zm

Zoom Video Communications (ZM)
55 Almaden Boulevard
6th Floor
San Jose, CA 95113
888-799-9666
http://www.zoom.us

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CURRENT RECOMMENDATIONS

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The addition of Zoom brings the portfolio to twenty stocks, a full complement—and a thorough review of those stocks shows none that deserve to be sold, though there are a couple that are close. Thus we’ll sit tight—and next week we’ll sell at least one stock. Interestingly, the strongest stocks in the portfolio today are the “safe” stocks recommended by Tom Hutchinson in Cabot Dividend Investor. Of the four stocks recommended by him, three have hit new highs in the past two trading days! If you own these, let your profits run; trends tend to last longer and go further than people expect. And if you’re looking to invest new money, I recommend diversifying, as discussed earlier. Ideally, you’ll always have something that’s working, as you prune the laggards from your portfolio.

AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, continues to build a base with a slight upward bias. In his latest update, Tom wrote, “In a market near all time highs with volatility picking up, there has to be a place for value. Spooked primarily by the loss of exclusivity in overseas sales for its flagship drug Humira, AbbVie has crashed 30% and now sells at 8.4 times forward earnings. That’s pricing in a severe sales drop that is unlikely in my view. Newly launched hematologic oncology drugs Imbruvica and Venclexta are growing sales beyond expectations. Newly approved psoriasis drug Skyrizi should give results a boost. And there’s also the industry-leading pipeline. Patience with a 5.4% yield should pay off over time.” BUY.

Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, drifted even lower last week—along with the broad market—but for the past three days has been sitting at 180, a level that might mark the bottom of the stock’s correction. In her update last week, Crista wrote, “AAPL will probably climb to price resistance at 230 later this year. AAPL is a great stock for a high quality, buy-and-hold equity portfolio. Earnings growth is not always double-digit, 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, is our low-risk winner today, breaking out of its recent trading range and hitting its highest level of the year. And the good news about this is that there’s no news; investors are simply gravitating to the stock because they like its risk/reward prospects. If you need a stabilizing influence in your portfolio, you can buy here. BUY.

CIT Group (CIT), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, remains in the basing pattern that’s contained it since mid-February. In her latest update, Crista wrote, “CIT is an undervalued growth stock with an attractive dividend yield. The price chart is moderately bullish, with some upside resistance at 55, then lots of capital gain potential thereafter.” BUY.

Cresco Labs (CRLBF), originally recommended by yours truly in Cabot Marijuana Investor, and featured here last week, remains on a normal correction so is still a good buy here. In my update to readers last week, I wrote, “Down in the U.S., Chicago-based Cresco is one of the leading vertically integrated multi-state operators, with the potential to be one of the U.S. industry leaders in the years to come. The stock appears moderately valued, and is acting fine, consolidating in a range centered on 12 since early April. Also, its 50-day moving average is now at 11.5, so could lend support.” BUY.

Delta Air Lines (DAL), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, now has a couple of good reasons to bottom here at 54, as this is the top of the stock’s gap up in early April, and the stock’s 200-day moving average is now above 53. If you don’t own it, you can buy here. BUY.

Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader and also followed by Tyler Laundon of Cabot Small Cap Confidential, hit record highs two weeks ago and pulled back normally last week. In Tyler’s update last week, he wrote, “EVBG has fallen five points after reaching a new all-time high of 85 last week. The critical events communication platform has global reach and with both government and corporate customers there is a ton of growth potential left. We could easily see a big jump in Everbridge’s European business given that the EU gave a directive in 2018 that member states, as well as countries that want to remain part of Europe’s Economic Area, have two years to enact legislation on population alerting, and 40 months to deploy solutions. Everbridge already has deals with Finland, Sweden, Greece and the Netherlands, and management thinks deals in the $5 million to $10 million range are possible for smaller countries, with $20 million to $30 million a more likely range for larger countries like France. There are no guarantees, but you can be sure Everbridge will be at the table.” HOLD.

Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, is once again trading above all its moving averages in the uptrend that’s been in effect all year. Last week, Mike wrote, “We were shaken out of Exact Sciences earlier this year, and in recent weeks it’s been generally strong but all over the place—which has led to many questions regarding our current thoughts. First, fundamentally, nothing has really changed with the story; Cologuard is selling very well, with Q1 revenue and test volume growth both accelerating to 79%, and longer-term, management still thinks business can grow many-fold. However, the stock currently isn’t near the top of our watch list for the moment for two reasons. First, there’s growing perception that competition is coming; Guardant Health (GH) is trying out a blood test for colorectal cancer, and while it’s not close to hitting the market, it (along with the market) was enough to drive EXAS down 15% in just two days. Second, that recent selloff was a continuation of a wobbly pattern from the stock lately—while shares have made some progress since early February, they’ve also suffered pullbacks of 11%, 15%, 17%, 12% and now 15% over the past three and a half months. That’s not an indicator of certain doom, but it is a sign that buyers and sellers are beginning to fight it out on a regular basis, which isn’t ideal. To be clear, we’re not bearish on EXAS—if we owned it here, we’d hold on with a mental stop in the upper 80s, and would be happy to remain patient as long as the stock can find support. But for us to click the buy button, we’d prefer to see a change in character, with either a decisive, big-volume leap to new highs (with the ability to hold those gains) or a more persistent advance with tamer pullbacks and pauses.” HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Emerging Markets Investor, released its first quarter report last Wednesday, after the market close, and the results were mixed. The company opened 226 hotels and closed 60. Occupancy rate was 80.6%, down from 83.7% the year before, thanks to the softening economy. Revenues were $356 million, up 7% from the year before. And EPS was $0.11, down 27% from the year before. All told, it was not good enough for the market, which continues to pressure Chinese stocks. However, the long-term prospects remain bright, as the company is the largest lodging chain in China. So I continue to believe that holding will pay, for investors who have designated this a Heritage Stock in their portfolios. HOLD.

LexinFintech Holdings (LX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, has pulled back normally since hitting resistance at 14.5 four times over the course of a month and is now at a decent buying point, trading just under its 50-day moving average. However, if Chinese stocks stay soft, the recovery may take a while. Then again, as a purely domestic digital company, tariffs should not be a big concern. Carl still has it rated buy. BUY.

Match Group (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, hit a peak at 75 two weeks ago and has pulled back normally since. If you don’t own it yet, you could nibble here, though risk-averse investors should wait for a reunion with the stock’s 50-day moving average, now at 62. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, hit new highs last week as investors gravitated toward safer stocks, and is just off that high today. In his update last week, Tom wrote, “Everything seems to be going right for this stock right now. This is a good environment for utilities and NEE is the sexiest one of the lot. Not only does it generate steady, defensive and predictable returns and income; but it also offers a higher level of earnings growth than its peers with its magnificent alternative energy business. While the stock is starting to get expensive, it’s getting a renewed boost in the current uncertain environment.” HOLD.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, hit record highs two weeks ago and has pulled back normally since. In his update last week, Mike wrote, “After a great post-earnings run over 80, PLNT has hit some turbulence, selling off on increasing volume in recent days (and, according to our options guru Jacob Mintz, has seen a modest pickup in put buying as well). Given the stock’s advance since the start of March (it hasn’t closed much below its 25-day line during that time) and the intermediate-term downtrend in the market, some further weakness could be in store, and we’re open to any scenario given that the stock has had a big run during the past year or two. But, until proven otherwise, we’re going to assume the path of least resistance remains up as the firm’s business isn’t dependent on the overall economy and has plenty of white space for expansion both in terms of number of gyms and revenue per member. If you don’t own any, you can grab shares on this dip, but keep new positions small because of the market.” BUY.

Rapid7 (RPD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, continues to build a base in the low 50s, very close to its all-time highs. In his latest update, Tyler wrote, “RPD jumped out to new highs above 40 in February and kept walking higher until it reached the mid-50s in March. For the last two months shares of the IT security software stock have been consolidating, mostly in the 50 to 55 range. The company has been delivering big earnings beats and with 2019 expected to mark the first profitable year (EPS of $0.05 expected) and massive EPS growth in 2020 (660%, to $0.38 expected) it’s easy to see why the stock is standing tall in the face of some broad market volatility.” HOLD.

STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, broke out to new highs Friday and continued higher today! In his update last week, Tom Hutchinson wrote, “This industrial REIT is in a good subsector of the business. Industrial space is in short supply and high demand. The economy is strong and the proliferation of online retail demand for warehouse space gets even stronger. As well, the properties only have to house stuff and not people. Stuff is much less demanding and the housing of it tends to be much cheaper. In the first quarter revenue was up 15% from the year ago quarter, and adjusted funds from operations soared 21%. The stock made a new all time high this week. We’ll see how much higher it can go.” HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has lost half its value since its peak of mid-2017, and there’s no sign of a bottom yet. As explained last week, if the stock closes below 141 at the end of any week, I’ll sell. However, I remain optimistic that the stock will bottom somewhere in this flood of bad news and buyers will take control. Unreported by the media recently was the news that Tesla had completed the acquisition of Maxwell Technologies, the company whose capacitor technology should provide a nice complement to Tesla’s battery technology. HOLD.

The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to trade horizontally, right at its 50-day moving average—still in a long-term uptrend. HOLD.

Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high two weeks ago and has corrected minimally since. Last week Mike wrote, “We make it a point not to get too close to our stock’s day-to-day action, which usually stirs up emotions (and confusion), leading to poor decisions. But sometimes a little extra focus is warranted, and TWLO’s action last week caught our eye. After the stock dove below its 50-day line on heavy volume (its first decisive dip below that trend line all year), TWLO immediately went nuts on the upside, rallying 15% to new price and relative performance (RP) peaks over three days, all of which came on impressive volume. That sort of shake-and-snap action in a leading stock is great to see, effectively telling you there are tons of big investors wanting to build positions on dips. Obviously, the overall environment is going to have an impact—TWLO fell sharply today along with most growth stocks—but it’s showing some relative strength as its low this week (131) is well above its prior nadir (123), even as the Nasdaq is hitting lower lows. We’re not whistling past the graveyard, but we still think you can start a position on this dip if you don’t own any and have some cash on the sideline.” BUY.

Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, looks fine, riding its 50-day moving average higher as it heads back to its old high of 55. In last week’s update Crista wrote, “VOYA is a retirement, investment and insurance company serving millions of individuals and 49,000 institutional customers in the United States. Voya has $547 billion in total assets under management and administration. CEO Rodney O. Martin, Jr. recently stated, “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.” The dividend increase will spur institutional buying. Analysts expect full-year EPS to grow 36.4% and 14.5% in 2019 and 2020, and the current P/E is 9.6. The price chart remains relatively bullish. I anticipate VOYA performing better than the broader market for the balance of 2019.” BUY.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED June 4, 2019

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