As the market continues to strengthen, we are very close to having all of our market timing indicators back on the bullish side. In the meantime, most of our stocks look good, with many hitting new highs in recent days. In fact, I can find none to sell today.
As for today’s recommendation, it’s a fast-growing Chinese stock with a product you’re probably familiar with. It’s not a low-risk stock, but with the right timing, it could be a home run.
Cabot Stock of the Week 252
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While we don’t officially have a new buy signal from our intermediate-term trend-following indicator, we are very close. Stocks in general have recovered quite well from the May correction, with the best hitting new highs—and the broad market remains in a healthy long-term uptrend. Thus I continue to recommend that you be heavily invested in a diversified portfolio of high-potential stocks—while selling those that disappoint. Today’s recommendation is a fast-growing Chinese coffee company with the potential to beat king-of-the-hill Starbucks. The stock was originally recommended by Carl Delfeld in Cabot Emerging Markets Investor and here are Carl’s latest thoughts.
Luckin Coffee (LK)
Coffee is trading below $1 a pound, less than half the value it fetched five years ago. The reason: a flood of beans from leading producer Brazil, whose coffee exports are being supercharged by a weaker currency.
This is the main reason well-known Starbucks (SBUX) stock is on a tear, despite the fact that it is becoming a mature cash-generating company.
Several years ago I highlighted Starbucks as a low-risk China play. As of March 2019, Starbucks had 3,789 stores in China, 17% more than a year earlier, making China the company’s second largest market after America. Starbucks’ China same-store sales grew 3% during its most recent quarter, up from 1% in the first quarter.
Growing tremendously faster, however, and gunning to overtake Starbucks by the end of this year, is Luckin Coffee. Since its inception in June 2017, Luckin has opened an astounding 2,400 coffee outlets in 28 cities in China—and is aiming to have 4,500 by the end of 2019.
Starbucks, of course, isn’t sitting still; Starbucks has a goal of having 6,000 stores in China by 2022 and has a deal with Alibaba to deliver coffee.
But Luckin’s model is very different from Starbucks’.
Luckin outlets are usually quite small delivery points with customers using apps to order and then pick up at a pre-determined time.
Also, Luckin in 2018 had only $125 million in revenue and lost $238 million before taxes. Luckin’s coffee is priced at a 20% - 50% discount to Starbucks’ and Luckin has given away a lot of free cups of coffee to get things moving.
The big attraction here is that history shows that with economic development and higher incomes comes higher consumption of coffee—even in tea-drinking Asia.
The average Chinese citizen drinks only 2-3 cups of coffee each year.
That’s each year, not each day.
For Taiwan, the number is 209 cups of coffee per year, for Hong Kong 249 cups, and for Japan 279 cups.
In short, coffee sales in China are expected to grow dramatically in the next few years. According to Frost & Sullivan, “We forecast per capita consumption of freshly brewed coffee to accelerate from 1.6 cups per/year per capita in 2018 to 5.5 cups per capita per year in 2023.”
This growth represents a 25% compound annual growth rate from 2018 to 2023, which is why Starbucks, which has been in China since 2000, continues to bet big on China.
But Starbucks is extremely well known, so there’s less opportunity there for investors than in little-known Luckin. Plus, Luckin’s competitive advantages include:
1) limited direct competition
2) low development costs
3) better tech and data analytics than peers
4) low per-unit cost structure, and
5) ability to take its model to other markets in Asia.
Another plus is that three well-regarded investment firms have recently picked up research coverage of LK. Morgan Stanley has it rated a buy, Key Banc has a price target of 22, and Needham has it rated a buy. Several large hedge funds have reportedly also taken some significant positions.
Tim’s note: Carl wrote about Luckin several weeks prior to the firm’s May 17 IPO on the Nasdaq and suggested holding off. The IPO was priced at 25, and the stock lost steam immediately, moving as low as 14 before climbing back to 22 and change and then dipping down to 17 again. But now Carl and his readers are on board—and with good results so far.
Just yesterday, the stock closed at a record high, and today it traded even higher, working to achieve a true breakout. If this breakout works, the stock could run higher right away—but if it doesn’t, the stock could fall back to the teens, particularly if the market weakens again. Aggressive buyers can jump on board now and manage risk carefully. Cautious readers could wait for a correction. The portfolio, as usual, will buy at tomorrow’s average price.
Luckin Coffee (LK)
Block A, Tefang Portman Tower
17th Floor No. 81 Zhanhong Road Siming District
Xiamen 361008
China
86 59 2338 6666
http://www.luckincoffee.com
CURRENT RECOMMENDATIONS
With the addition of Luckin Coffee (LK), the portfolio once again numbers 20 stocks, which is my cap, so once again I ask if there are any stocks that deserve to be sold. And the answer today is no. Certainly there are some stocks where traders might want to take quick profits, like Everbridge (EVBG) and Exact Sciences (EXAS) and even Stag Industrial (STAG), but long-term investors should continue to hold—because the first two stocks in particular have great growth prospects. Next week, of course, we will have to sell something, and the odds are the market will make it easy to decide.
AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, remains in a long base-building pattern, paying a fat dividend. In his latest update, Tom wrote, “The stock has had an up week but still isn’t getting any love from this market. It has outperformed the Biotech Index over the last three months, though. Its time will come but it will likely take a catalyst in the form of encouraging news about its newly launched drugs and pipeline. When it moves it can move fast. In the meantime, you get a great 5.5% yield.” BUY.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, surged higher today after resting at 195 over the past week. In her update today, Crista wrote, “AAPL is a great stock for a high quality, buy-and-hold equity portfolio. Wall Street expects EPS to fall 3.9% in fiscal 2019 (September year end), then to rise 10.5% in 2020. The company has $38 billion in cash, raises the dividend annually, and repurchases tens of billions of dollars of its stock each year. There’s upside resistance at 210.” HOLD.
Axis Capital Holdings (AXS), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio and featured here two weeks ago, hit a new high yesterday (just barely) but basically remains in a healthy three-week basing pattern. In today’s update, Crista wrote, “Axis is a global provider of specialty lines insurance and treaty reinsurance with shareholders’ equity of $5.3 billion and locations in Bermuda, the United States, Europe, Singapore, Middle East, Canada and Latin America. AXS is an undervalued, small-cap stock. Axis reported full-year 2018 EPS of $1.92 in 2018, and is expected to report $4.94 and $5.56 in 2019 and 2020. The stock is actively rising toward its March 2017 all-time high of 66. Buy AXS now.” BUY.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor, is building a normal base between 42 and 43. In Tom’s latest update, he wrote, “This company owns infrastructure assets all over the world and has been upgrading its portfolio toward higher-margin assets. The area of greatest recent investment has been oil and gas infrastructure, which now accounts for 26% of its funds from operations (a key cash flow metric). A few weeks ago the company announced that it would be looking at data infrastructure assets. The stock recently made a new 52-week high. It’s up 27% so far this year and likely has room to run as it’s still below the 2017 high.” BUY.
CIT Group (CIT), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, inched out to its highest level of the month today, so it’s moving in the right direction. But it’s not strong, basically trading with its 25- and 50-day moving averages. In today’s update, Crista wrote, “CIT Group operates both a bank holding company with $30 billion in consumer deposits and a financial holding company. CIT Group provides financing, leasing and advisory services to small and middle market businesses, consumer markets, and the real estate and railroad industries. Wall Street expects EPS to increase 19.6% and 14.3% in 2019 and 2020. The P/E is 10.4. The company continues to repurchase large amounts of stock. CIT maintained a stronger price chart than many quality stocks during the May market downturn. I’m returning CIT to a Strong Buy recommendation, and anticipate near-term upside.” Because of the chart, I’ll stay on Hold for the moment. HOLD.
Delta Air Lines (DAL), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, fell sharply with the market last month but rebounded just as sharply and is now trading above all its moving averages. 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. Wall Street’s earnings estimates have been climbing since early March. Delta is now expected to achieve 18.8% EPS growth in 2019, and the P/E is 8.3. Last week, the JPMorgan airline analyst got very bullish on airline stocks based on this summer’s expected increases in air traffic and fares, ensuing increases in analysts’ earnings estimates, and low stock valuations. DAL is rebounding from the May pullback, with short-term price resistance at 58.” BUY.
Everbridge (EVBG), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, hit another new high yesterday, but volume on the advance has been waning, suggesting that the next move for the stock will be a correction. Thus there’s reason to take profits for traders, but still reason to hold long-term for investors. In Tyler’s update last week, he wrote, “Everbridge was founded in 2002, shortly after the 9/11 attacks, to provide fast, automated communications services during life-threatening situations and mission-critical business events. The software platform powers apps that help organizations and government entities keep people safe, and business running. The stock was up 4% last week and 2% this week. Management announced it recently became the first U.S. emergency notification provider to achieve Germany’s BSI C5 attestation, an accreditation that means it complies with all security requirements defined by C5. This is an incremental step to helping Everbridge expand in Europe.” HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, remains one of the strongest stocks in the portfolio, hitting new highs again today as investors raise their expectations for the company’s Cologuard test which screens for colon 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. The stock fell heavily with the market in May but is now working on its recovery and today hit its highest level of the month. HOLD.
Match Group (MTCH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains well above all its moving averages, heading back toward its old May high of 75. If you’ve got it, hold tight. And if you don’t own shares of the world’s number one dating service yet, you could nibble here, though risk-averse investors will wait a while longer. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, closed at a record Friday and is just below that level today. In his update last week, Tom wrote, “It’s a sweet market for utilities, with uncertainty and falling interest rates. But NEE also adds a higher level of earnings growth than most of its peers to the mix. There doesn’t seem to be anything in the market to put the brakes on this stock right now. Eventually, it will get too pricey and pull back. But for now it’s worth riding.” HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, closed at a record high yesterday and moved higher today before pulling back. In his update last week, Mike wrote, “PLNT isn’t showing amazing strength, but it remains above its 50-day line and well within its overall uptrend. Our plan remains the same—a dip below the recent lows of 74 would probably have us going to Hold, but right here we’re OK picking up shares if you don’t own any. On the fundamental side of the equation, one thing that’s proof of Planet’s attractive economics is the demand from franchisees; Planet has about 150 franchise groups it deals with, and when expanding its gym count, it doesn’t deal with any new ones. Said another way, current franchisees are very happy expanding their number of Planet locations, which is good for the brand (experienced operators). Indeed, Planet has 1,000 more gyms under area development agreements already in place, with half of those expected to open in the next three years.” BUY.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here last week, is off to a fine start, breaking out to a new high today. Last week Mike wrote, “It’s not as well-sponsored as we’d prefer, but we think SNAP could be a solid turnaround in the making as new management expands the firm’s offerings, driving revenue and user growth.” BUY.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, has just advanced for 10 consecutive days, a real sign of strength! In his update last week, Tom Hutchinson wrote, “This industrial REIT just keeps on going. It continues to forge to new highs in June after having outperformed the overall market and the REIT index in every measurable period over the past three years. It has a great niche in a sector of the market that has been doing well. It’s a little expensive here but we will continue to ride the momentum as long as it lasts. Plus, you get a 4.7% yield on a stock that goes ex-dividend at the end of this month (and every month, as it pays out monthly).” HOLD.
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the portfolio’s second Heritage Stock (big profits and big potential) so I’m committed to holding as long as the prospects are good. At the end of May, the stock was deeply oversold, as both the general market and a flood of bad news (and opinions) about Tesla stimulated sellers. But now those sellers are gone; the stock is up 27% since the bottom (some short-covering, no doubt), and the fundamental story is improving—Elon Musk told shareholders at last week’s meeting that demand for the company’s electric vehicles remains strong. HOLD.
The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, remains way above all its moving averages, consolidating the gains that took it to a high of 257 two weeks ago. This week in Cabot Top Ten Trader, Mike wrote, “The Trade Desk is the number one company in the programmatic ad buying market, a rapid growth market that’s gradually replacing the normal offline method of booking ads (phone calls and handshakes), instead allowing customers to book ads online. The California-based company’s self-service and cloud-based platform lets ad agencies and other organizations book data-driven digital advertising campaigns for video, social media and mobile channels. The Trade Desk has been beating expectations lately and Q1 2019 results, which included 41% revenue growth (to $121 million) and an EPS beat of $0.25 (EPS of $0.49), suggest that trend can continue. The company is increasingly seen as the single best stock to play the trend from linear TV engagement to digital advertising, not only in the U.S. but in Asia and Europe as well. Analyst estimates have been rising, with consensus estimates now calling for 35% revenue growth this year and 30% in 2020. One interesting aspect of the company is how it works closely with both Google and Apple on privacy issues, which have been a hot button issue lately (and will continue to be). Management believes The Trade Desk is extremely well positioned to grow its business, in part because of recent API updates with both Google and Apple that address these concerns. It’s a solid long-term growth story.” HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, remains in a strong uptrend, slightly off its high of June 10. Last week Mike wrote, “TWLO is a close call, ratings-wise—the stock’s excellent snap back brought it to new highs last week on solid volume, but the market isn’t out of the woods and we’re not thrilled with the stock’s constant day-to-day gyrations (TWLO’s average daily range is six points during the past couple of weeks). Bigger picture, of course, we remain bullish, and if the market kicks into gear we think this will be one of the leaders. Thus, we’re not going to argue if you want to nibble here, but officially we’ll stay on Hold until the stock settles down a bit and/or the market turns positive.” HOLD.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has been trading extremely tightly between 54 and 55 for nearly a week, setting up for what is likely to be a continuation of its uptrend. 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. The Secure Act passed the U.S. House of Representatives in recent weeks, a.k.a. H.R. 1994, Setting Every Community Up for Retirement Enhancement Act of 2019. The proposed legislation would remove age limits for workers’ contributions to traditional IRAs; raise the starting age for required minimum IRA distributions (RMDs) to 72; and mandate distribution of IRA assets to non-spouse heirs over a 10-year period, as opposed to over the non-spouse heirs’ lifetimes (with some exceptions). The U.S. Senate is working on a similar bill. As an asset manager, Voya benefits when assets within IRAs grow. Therefore, the potential extension in the allowable ages of IRA contributions and the higher age for mandatory IRA distributions would both serve to increase fee income at Voya. VOYA is an undervalued aggressive growth stock. Analysts expect full-year EPS to grow 36.4% and 14.5% in 2019 and 2020, and the current P/E is 9.8. The company intends to increase the dividend yield to about 1% in the third quarter. There’s a decent chance that VOYA could promptly surpass its April all-time high of 55 and begin a new run-up. Buy VOYA now.” BUY.
Zoom Video Communications (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader continues to build a base in the 100 region, consolidating the great gains that followed the company’s excellent first quarter report. On Monday of last week, Mike wrote, in Cabot Top Ten Trader, “Zoom offers a video communications and collaboration platform that is grabbing market share in a rapidly expanding industry. There are many reasons why, and collectively they’re driving intense investor excitement for the newly public company. First, Zoom’s platform is the first that can handle all four common use cases, spanning video conferencing, sales and marketing webinars/videos, internal team communications and one-on-one internal and external communications. Such a wide variety of easy-to-use solutions, with a technology edge, make it insanely easy to for customers to try Zoom and stick with it. Zoom has also jumped into the Unified Communications-as-a-Service (UCaaS) space with the Zoom phone; just two quarters after releasing that solution it has already signed a 5,000-seat deal with Ciena, showing the potential of the platform to grab a chunk of a $40 billion (and growing) market. All this has produced impressive growth for a $20-plus-billion market cap company. Zoom appears to be one of those rare companies with both scale and incredibly fast growth.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED June 25, 2019
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