The month of May brought a much-needed market correction; will June bring the return of the uptrend? Technically, it’s certainly possible, and fundamentally, too, given that global events probably won’t unfold as negatively as investors now fear.
Cabot Stock of the Week 250
[premium_html_toc post_id="178726"]
This morning’s news told me the Nasdaq has just entered “correction” territory because it’s down more than 10% since its high. To me, that number means nothing. What matters to me is that our Cabot Tides trend-following indicator says the intermediate-term trend of the market is still down, while our Cabot Trend Lines tells us the long-term trend of the market is still up. Combined with the Blast-Off signals seen in December, it tells me the odds favor the market resuming its uptrend—and hitting new highs—once this correction has run its course. And when will that be? No one can say. What we need is for fear to grow strong enough that selling pressures climax, causing buyers to then retake control. When that event is far enough in the rear-view mirror, it will be easy to see (it might have been yesterday), but in the meantime, I continue to recommend that you hold a diversified portfolio of high-potential stocks, while continually pruning your portfolio of its weakest stocks. My last two recommendations were rather aggressive, so this week’s is conservative. The stock was first recommended by Crista Huff in Cabot Undervalued Stocks Advisor and these are Crista’s latest thoughts.
Axis Capital Holdings (AXS)
Property & casualty insurance stocks landed on my radar in 2018 when I read that the industry’s premiums were set to rise after a prolonged, multi-year period of stagnancy. Since rising rates would naturally lead to improved profitability, I decided to examine P&C companies more closely. I immediately discovered three companies worthy of my investing dollars.
That’s good news because in the stock market, it’s better for a company to fare well along with its peers—thus leading to good market sentiment towards the industry group—than it is for a company to be the lone success within a floundering industry.
Axis (yield 2.6%) is a global provider of specialty lines insurance and treaty reinsurance that’s based in Bermuda. Axis operates in the U.S., Europe, Singapore, Middle East, Canada and Latin America. The company’s 2018 business mix was 55% insurance and 45% reinsurance. Axis is successfully executing on its corporate priorities: improving the customer experience, improving portfolio quality (balance, profitability, volatility, credit quality), and cost controls.
Axis is focused on profitability (vs. revenue), has strong excess reserves, and is achieving cost synergies ahead of schedule related to their October 2017 acquisition of Novae Group plc, a Lloyd’s insurer. The company carries A+ ratings from A.M. Best and Standard & Poor’s. In May, Axis announced a refreshed brand, logo and website.
Property & Casualty companies earn the bulk of their profit through investment income, with policy premiums being a secondary source of profit. Axis is aggressively growing assets under management in its Strategic Capital Partners reinsurance division, with associated fee income up 65% and 33% in 2017 and 2018, and on track for a 65% gain in 2019. The company’s loss ratio fell from 79.2% in 2017 to 66.6% in 2018, followed by 58.5% in the first quarter of 2019.
Strong 2018 industry-wide pricing trends have continued into 2019. Axis experienced total policy rate increases averaging 3-5% in each of the last five quarters, with loss-affected accounts renewing policies at substantially higher rates. The company projects mid-year 2019 renewals in the U.S. to produce 10-15% rate increases for loss impacted accounts. Higher premiums are working in tandem with lower catastrophic losses to produce outsized earnings growth. Axis has been reducing net catastrophic loss volatility through multi-faceted strategies, down 49% in the last eight years.
Axis reported full-year 2018 EPS of $1.92 in 2018, and is expected to report $4.96 and $5.56 in 2019 and 2020. The 2020 consensus earnings estimate has held steady during the four months that I’ve closely monitored the numbers, wavering by only one percent. The 2019 P/E is relatively low at 12.0, and the dividend yield, at 2.6%, is higher than most of Axis’ industry peers.
AXS is an undervalued stock with a $5.1 billion market capitalization. The company repurchased 20% of their stock in the four years through December 2018, but is not planning repurchases in 2019.
Axis could appeal to growth investors, dividend investors and momentum investors. The stock is currently sporting a rare, bullish price chart in the midst of correction in the broader stock market.
Other than a brief downturn in December 2018, AXS traded sideways between 53-57 for 13 months. The stock then broke free from that range in May, rising a few dollars, but no one has missed the potential extended run-up. On May 23, UBS upgraded AXS from neutral to a Buy recommendation, and raised their price target to 67. Morgan Stanley followed with an increased price target on May 29—after also raising their price target in April. AXS could now rise to its March 2017 all-time high of 66 before resting again.
AXIS Capital Holdings Limited (AXS)
AXIS House
92 Pitts Bay Road
Pembroke HM 08
Bermuda
441-496-2600
http://www.axiscapital.com
CURRENT RECOMMENDATIONS
Bad news brings bottoms and good news brings tops, and the question today is whether the news that accompanied yesterday’s bottom was bad enough. Did enough sellers sell? And did enough buyers rush in today? One clue is in the island reversal pattern, which can be seen in several of the portfolio’s stocks as well as some indexes. These charts basically show a gap down in price last Friday, stable action in that area yesterday, and then a gap up today, leaving behind an “island.” It’s generally a positive pattern, and if it is quickly followed by more buying, even better. As to the portfolio, careful analysis of all the stocks reveals three that deserve to be sold today, as well as three that are downgraded to Hold. New investors should nibble on the stocks rated buy.
AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, fell last week as medical stocks cratered, so is now back near the lower limit of its base-building pattern. In his latest update, Tom wrote, “This is a great biopharmaceutical company. But the stock’s momentum stinks. That said, it seems to have little downside from here because it’s already absurdly cheap as the market seems to be pricing in a very ugly scenario going forward. Its blockbuster, world sales-leading drug is facing increased competition. The company is more than capable of replacing the falling revenue but the market won’t believe it until it sees it, and that could take a while. I believe the story will work out longer term and in the meantime you get 5.4% in a stock with little downside in a volatile market.” BUY.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, drifted even lower last week, and finally bottomed—I think—yesterday at 170, the exact level it bottomed at in early March. In her update last week, Crista wrote, “Negative potential outcomes to U.S.-China trade negotiations have put a cloud over Apple. If Apple products are caught up in a new wave of tariffs (which have not yet been finalized), the company will either earn less profit by absorbing the cost of tariffs or sell fewer products by increasing product pricing to offset the cost of tariffs. Accumulate shares. The stock is not yet ready to rise.” Conclusion: Patient investors can wait, or even buy here. This portfolio is less patient, especially with stocks where it has no profit, and thus I’ll downgrade to Hold. HOLD.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor, has pulled back from its record high of last week and is now right on its uptrending 25- and 50-day moving averages. In Tom’s latest update, he wrote, “The company describes itself as “one of the largest owners and operators of critical and diverse global infrastructure networks which facilitate the movement and storage of energy, water, freight, passengers and data.” It owns some of the most defensive, non-cyclical assets in the world that generate a reliable cash flow. But it also offers growth as new and higher returning assets should come online over the next quarters and years. It’s a great place to be in a turbulent market with a 4.9% yield and a strong technical chart.” BUY.
CIT Group (CIT), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, left behind an island reversal on the stock’s 200-day moving average as it gapped up today, and remains in a long basing pattern. In today’s update, Crista wrote, “CIT operates both a bank holding company with $30 billion in consumer deposits and a financial holding company. CIT is an undervalued growth stock with an attractive dividend yield. Wall Street expects EPS to increase 19.6% and 14.3% in 2019 and 2020. The P/E is 10.0. Based on weakness in the broader stock market and fears of a recession that are suppressing shares of financial stocks, I’m moving CIT from Strong Buy to Hold until the market calms down.” I’ll do the same, though I do like today’s action. HOLD.
Cresco Labs (CRLBF), originally recommended by me in Cabot Marijuana Investor, is going the wrong way and I don’t like it. When I added the stock to the portfolio two weeks ago, the stock was sitting on its 50-day moving average, which should have provided support. But the broad market weakened further, and then last Friday, the FDA had a hearing on cannabis (mainly CBD) that spooked investors in that sector, as the hearing “highlighted the messy state of the industry, with widespread use of CBD products with minimal standardization, evidence for benefit and understanding of safety profile,” according to Evercore ISI analysts led by Josh Schimmer. Long-term, I remain bullish on the sector and Cresco in particular, which has the potential to be a leader in the U.S. industry. But short-term, this stock is going the wrong way and I don’t see any support nearby. SELL.
Delta Air Lines (DAL), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, also traced out an island reversal over the past few days, and surged up and away from that island today. In her latest update, Crista wrote, “Delta is expected to achieve 18.2% EPS growth in 2019, and the P/E is 7.8.” BUY.
Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was hitting record highs three weeks ago, but then it joined the market correction, and yesterday, in a big selling day, it got down to its 50-day moving average. Now, the uptrend should resume. In Tyler’s update last week, he wrote, “We’re watching for any news out of Europe, where Everbridge’s business has huge potential 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 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.” HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, is one of the strongest stocks in the portfolio; just yesterday it was very close to its record high of early May. Clearly, more and more investors are learning about the company’s Cologuard test to screen for colon cancer as well as the company’s progress on developing a test for pancreatic cancer. HOLD.
Huazhu Group Limited (HTHT), originally recommended in Cabot Emerging Markets Investor, is one of the portfolio’s Heritage Stocks, meaning our profit is so great and the potential so large that I’ve resolved to sit through normal technical sell signals. Long-term, the largest lodging chain in China is almost guaranteed to succeed. However, right now, the stock remains in a serious correction, like most Chinese stocks, as fears of tariffs mount. There’s strong support down at 25. HOLD.
LexinFintech Holdings (LX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, has extended its correction over the past week and now looks likely to hit its 50-day moving average, currently down at 10.6. And writing that number reminds me of an important factor regarding this stock: while I normally ignore individual stock prices (a $40 stock is the same as a $400 stock to me), and simply focus on charts and percentages, I do fear lower-priced stocks (generally below $12 a share) because they tend to be more volatile, and less well supported by institutional investors. Thus, while fundamentally, LexinFintech should do well, the odds today are very good that the stock is going lower—particularly if tariff-driven selling of Chinese stocks continues. Thus I’m going to sell and cut the loss here. SELL.
Match Group (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, hit a peak at 75 three weeks ago and has pulled back normally since. If you don’t own shares of the world’s number one dating service yet, you could nibble here, though risk-averse investors should wait for a reunion with the stock’s 50-day moving average, now at 63 and rising. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, hit a record high two weeks ago and has pulled back slightly since, though it remains above all its moving averages. In his update last week, Tom wrote, “The only thing better than owning a utility in this volatile market is owning a superstar utility. 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 from its alternative energy business. In a market where dividend income is highly coveted, this utility has already raised the dividend 12.6% this year and expects the dividend to further increase as much as 14% in 2020. The stock is pulling back a little after surging to new all time highs this past week as the market struggled.” HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, hit record highs three weeks ago and has corrected normally since, dipping nearly to its 50-day moving average last week and then climbing back above its 25-day moving average this week. In his update last week, Mike wrote, “Nothing has changed with the story—there’s years worth of growth ahead thanks to a rapid expansion in the store base and large increases in same-gym revenues. A drop below 73 or so would probably have us going to Hold (though we’d still be giving the stock some room to correct and consolidate), but right here, we’re OK picking up some shares on the dip if you don’t own any. BUY.
Rapid7 (RPD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, is a young, fast-growing company in the IT security industry. But the stock was hit hard yesterday, and only rebounded partially today, so overall, we’ve made no net progress since our buy in late March, and going forward I fear that this is just the start of a more serious correction; the stock hasn’t had one all year. Thus I’m going to sell now, even though officially Tyler is still on hold. SELL.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, hit a new high last Tuesday and remains just off that high 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. Everything looks sound from an operational standpoint. In the first quarter revenue was up 15%, from the year ago quarter, and adjusted funds from operations soared 21%. The stock recently made a new all time high and it still has positive momentum.” HOLD.
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced strongly today with the market (it was the portfolio’s second-largest gainer), but remains well below all its moving averages, and thus ripe for a bigger recovery. As a Heritage Stock (big profits and big potential) in this portfolio, Tesla has an extremely long leash, and one big reason is fundamentals. Despite all the talk of competition, there is no mass manufacturer whose electric cars currently rival Tesla’s. Nevertheless, the fear of analysts lately is that demand is slowing, and that profitability will become more elusive. If the stock continues to slide, I will sell if it closes any week below 141. But for now, I believe holding is best. HOLD.
The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, was the portfolio’s top performer today, up more than 11%. This follows a firm base (while the market was sliding) and thus indicates that buyers remain in control of this global technology platform for buyers of advertising. HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high three weeks ago and has corrected normally since, though today it remains just below its 50-day moving average. Last week Mike wrote, “TWLO’s move to new highs two weeks ago turned out to be a fakeout, so we returned the stock to a Hold rating in last night’s special bulletin. And then after the close, the company announced plans to offer $750 million of stock in a secondary offering, which looks like a 4.5% to 5% dilution. The damage wasn’t bad today, though there’s no telling the stock’s reaction once the deal is finalized. Either way, we’re sticking with a Hold rating, though we’re planning to give our remaining shares (we took partial profits a couple of weeks ago) plenty of room to maneuver, thinking the stock’s rest period will lead to higher prices down the road.” I’ll downgrade to Hold to get in sync with Mike. HOLD.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, is another stock with a classic island reversal pattern; today it’s back above all its moving averages! In today’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. VOYA is an undervalued aggressive growth stock. Analysts expect full-year EPS to grow 36.6% and 14.3% in 2019 and 2020, and the current P/E is 9.4.” BUY.
Zoom Video Communications (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, is off to a fine start and can still be bought here for aggressive accounts that want to invest in what may be the best videoconferencing provider in the world. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED June 11, 2019
We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/r/CSOW
Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit www.cabotwealth.com or write to support@cabotwealth.com.