Cabot Stock of the Week 253

The broad market sold off today, but odds are it’s just a normal pullback in the renewed bull market. Overall, our market-timing indicators tell us the trends are up. However, eternal vigilance is the price of success in investing, so today I’m recommending selling two stocks that have recently broken down.

Cabot Stock of the Week 253

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Last week Cabot’s intermediate-term market-timing indicator, the Cabot Tides, turned positive. Thus all market trends are once again up; it’s a bull market, and you should be heavily invested. As always, I recommend a diversified portfolio, but when the wind is at your back, as it is today, I recommend leaning toward growth stocks, like the stocks recommended in Mike Cintolo’s Cabot Growth Investor and Cabot Top Ten Trader—one of which Mike writes about here.
Zillow (Z)

Zillow is the world’s most visited online source for residential real estate information. In the first quarter, the firm’s sites and apps (including Trulia, StreetEasy, RealEstate.com, Naked Apartments and more) saw 181 million monthly unique visitors that made a combined two billion visits. And all those eyeballs are the main reason why the company, which had $326 million in revenue back in 2014, grew to north of $1 billion in 2017.

The vast majority of that growth came from the firm’s Premier Agent business; basically, real estate agents followed the eyeballs and advertised to get leads. That segment is still a big producer (making up nearly half of total revenues), but it’s no longer a huge growth driver. With the housing market slowing, agent-related revenues were up just 11% last year and up only 2% in the first quarter of 2019.

However, like many of the best companies of the past decade or two, Zillow’s future is bright thanks to some new products. One is its rental business (8% of revenue, with sales up 30% from a year ago), while another is mortgages, which, thanks to its acquisition of Mortgage Lenders of America, now account 28% of its business and should get a boost from the recent plunge in mortgage rates.

But the real excitement today comes from the firm’s Offers product, which allows sellers to receive an offer directly from Zillow, without the need to make the house tidy (the initial offer doesn’t include somebody checking out the house) or do any repairs, and lets them pick a closing date. If it all works out, Zillow buys the house, makes any updates and repairs it wants and then sells the house a short time later.

In just the few months that Offers has been up and running in a few markets, demand has been huge; in Q1 alone, Zillow received 35,000 quote requests, and ended up buying 898 homes and selling 414 of them for a total of more than $128 million. In response, the company is continuing to plow into new markets; it’s entered Minneapolis and Orlando since early May, and by the first quarter of 2020 it anticipates being up and running in 20 markets, up from nine in April.

More impressive than the top line with Offers is that, despite just getting started, Zillow nearly broke even on the business in Q1. Even including interest expenses, renovations and acquisition costs, its profit margin was -1%. As the firm gains scale, expertise and synergies within big markets, it thinks it can earn a margin of a couple of percent after interest expenses and overhead. And that doesn’t include so-called adjacent opportunities, like title & escrow, mortgages, moving services, insurance offerings and the like.

The size of Offers could be enormous. Just for Q2, Zillow guided to revenues of $235 million or so, and best of all, it released a three- to five-year goal of getting to 5,000 home purchases a month with annualized revenue of $20 billion! Furthermore, it thinks it can get one-third of those to use its mortgage and ancillary services, too.

Of course, those are just forecasts, and the company will still be tied to the overall health of the housing market. Plus, the ability to make some profits on a cash flow basis will be vital—there’s no point in buying a ton of these places if it loses money on every sale. But the early returns are very promising and management sounded a very confident intermediate- to longer-term tone on the Q1 conference call.

It was these results and that tone that has changed the stock’s character. Z had plunged from 66 in mid 2018 to a low of 27 last November, and even in late April, it was still mired in the low 30s. But now the buyers have stepped up, with shares rallying five weeks in a row to nine-month highs and consolidating tightly in recent weeks.

Tim’s Note: After two-plus weeks of consolidation, the stock’s 25-day moving average has caught up, and the stock is ripe to resume its uptrend. Next stop, ideally, is its 2018 high of 65.

Zillow (Z)
1301 Second Avenue
Floor 31
Seattle, WA 98101
206-470-7000
www.zillowgroup.com

CURRENT RECOMMENDATIONS

Last week, as LK became the 20th stock in the portfolio, thus filling it to capacity, I had trouble finding anything to sell, as the rising tide since the end of May had lifted all boats. So I wrote, “Next week, of course, we will have to sell something, and the odds are the market will make it easy to decide.” And that has certainly come true! Two of our stocks have come under serious selling pressure and will now be sold. In your own portfolio, you may well need to make similar adjustments to maintain a healthy portfolio, and it shouldn’t be difficult; stocks are like tools, not children—when they no longer serve, you can leave them behind.

AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, plunged 15% today after the company announced an agreement to buy Allergan for $63 billion. Long term, this is probably good, but we now have a loss and thus can’t afford to be long-term investors here, so I recommend selling and moving on. SELL.

Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, blasted off from the market’s correction bottom at the end of May and has been stair-stepping higher since, driven by the buying of investors realizing that slowing iPhone sales will be more than equaled by growing revenue from the company’s new services. In her update today, Crista wrote, “Five new services will roll out in the coming months: Apple News+, Apple TV+, Apple TV Channels, Apple Arcade and Apple Card. There are over 1.4 billion active Apple devices globally. In comparison to the devices, Apple’s services deliver bigger gross margins, faster revenue growth, and nobody’s going to slap a tariff onto a service! Last week, Reuters reported that due to the great and rising risks of depending heavily on manufacturing in China, “Apple has asked its major suppliers to assess the cost implications of moving 15%-30% of their production capacity from China to Southeast Asia as it prepares for a restructuring of its supply chain. The countries being considered include Mexico, India, Vietnam, Indonesia and Malaysia.” AAPL is a great stock for a high quality, buy-and-hold equity portfolio. Wall Street expects EPS to fall 4.0% in fiscal 2019 (September year end), then to rise 10.4% in 2020. Deutsche Bank is expecting a surge in 5G iPhone revenue in 2020, plus slow and steady growth of other Apple hardware products, including AirPods and Watch. Evercore ISI chimed in with bullish expectations for Apple Services’ high margins and revenue growth. The company has $38 billion in cash, raises the dividend annually, and repurchases tens of billions of dollars of its stock each year. AAPL is slowly rising toward price resistance at 210.” HOLD.

Axis Capital Holdings (AXS), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, has just pulled back to its 25-day moving average but remains in a basing pattern centered on 60. In today’s update, Crista wrote, “Axis is an A+-rated 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 $4.95 and $5.56 in 2019 and 2020. AXS has been trading quietly between 59-61 for several weeks. The ex-dividend date is coming up on July 2. There’s price resistance at the stock’s March 2017 all-time high of 66. Buy AXS now.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor, has also pulled back—very minimally—to its 25-day moving average but remains in a base-building pattern, primed to break out to new highs. In Tom’s latest update, he wrote, “There’s a lot to like about this global infrastructure company right now. While the stock significantly outperformed the market in 2016 and 2017, it struggled last year. Now the company has an asset replacement strategy in place that should boost earnings and reignite the outperformance. It looks on track as the stock is up 26% so far this year. Valuations are still cheap relative to the market and its peers and the stock chart looks strong.” BUY.

CIT Group (CIT), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, retreated over the past couple of days so it remains in the long basing formation that has contained the stock since late February. 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. CIT is an undervalued growth stock with an attractive dividend yield. Wall Street expects EPS to increase 19.6% and 14.1% in 2019 and 2020. The P/E is 10.4. The company continues to repurchase large amounts of stock. The price action has been quiet and stable. When CIT reaches 55—a new high—expect the beginning of an extended run-up.” HOLD.

Delta Air Lines (DAL), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, rebounded sharply with the broad market in early June and continues to climb slowly higher. 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. DAL is an undervalued growth & income stock. Wall Street’s earnings estimates have been climbing since early March. Delta is now expected to achieve 18.9% EPS growth in 2019, and the P/E is 8.3. Last week, Delta acquired a 4.3% equity stake in Hanjin-KAL, the largest shareholder of Korean Air, with a goal of acquiring up to a 10% stake. Delta has been involved in a joint venture with Korean Air since May 2018. The stock has been trading between 55-57, and could surpass short-term price resistance at 58 this summer.” BUY.

Everbridge (EVBG), originally recommended by Tyler Laundon in Cabot Small-Cap Confidential, gapped up to a new high last Wednesday and closed at a record high that day, but the stock couldn’t hold the gain, though it does remain well above all its moving averages. In Tyler’s update last week, he wrote, “Everbridge stepped out and rallied 14% to a fresh all-time high this week on renewed enthusiasm about international growth potential following the news it will power Australia’s Nationwide Alerting system and the hiring of former COO of Rackspace, David Meredith, as the new CEO. As previously announced, current CEO and Chairman of the board, Jamie Ellertson, moves to the role of Executive Chairman where he will focus on big picture, strategic initiatives. Everbridge is another stock, like Repligen, that has immense scarcity value. It’s just not that easy for a competitor to build a platform/solution set that can reach citizens in over 200 countries on various devices, in their native language, to deliver notifications of utmost importance. The market opportunity surpasses $40 billion, and Everbridge is going after it. In addition to Australia, the Netherlands, Greece and Sweden are rolling out Everbridge’s solution. There are four more RFPs out in the EU, with up to six more coming this year. The incentive for countries to go with Everbridge, when their neighbors already have, is big.” 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 last Thursday and pulling back normally since. In yesterday’s Cabot Top Ten Trader, Mike wrote, “Exact Sciences is revolutionizing the colorectal cancer (which is the second leading cause of cancer death in the U.S.) testing market with its non-invasive Cologuard test, which can be done at home and is based on DNA testing. Cologuard is driving far higher compliance than colonoscopies (a recent sample of Medicare-ordered Cologuard tests shows a whopping 71% compliance rate, which is way above colonoscopy compliance of around 40%) and it works (94% of those with early-stage colorectal cancer are correctly ID’d by the test). Pfizer is on board for the next two-plus years to help sell the test, which is probably a reason Q1 results were outstanding (revenue and test volume both grew 79%, posting strongly accelerating growth). And the big picture is enormous—Exact’s goal is to have 40% of the testing market (possibly $6 billion or more of revenue), vs. less than 5% currently! There will be competition from potential liquid biopsies, but those are still very early-stage and unproven, whereas Cologuard is growing like mad and has a powerful sales team behind it. The bottom line is still deep in the red, which isn’t ideal, but big investors are paying up for the huge growth potential.” The stock is high now, so if you don’t own it, wait for a pullback. BUY.

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, China’s largest hotel operator will only get bigger. The stock gapped up on big volume last Thursday and has pulled back normally since. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, and featured here last week, is a relatively high-risk investment, given that it’s a very young stock and Chinese, to boot. But the long-term prospects are great, as the Chinese are expected to increase their coffee consumption from a very low level. In his latest update, Carl wrote, “Coffee sales in China are expected to grow significantly in the next few years, according to Frost & Sullivan, a growth strategy consulting and research firm. Here’s what the firm wrote in a recent research note: ‘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.” If you haven’t bought yet, you can buy on the current pullback. BUY.

Match Group (MTCH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, dipped to its 50-day moving average last Friday but rebounded strongly Monday on above-average volume, and thus continues to set up for an eventual breakout to new highs. If you haven’t bought yet, you can buy here. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, continues to hit new highs—and on above-average volume, too! In his update last week, Tom wrote, “This best-in-class utility had another strong week. The stock seems to hold up well when the market goes down but also participates in the market rallies. I like that very much. By the way, you just got a dividend and future payouts should continue to grow. The stock isn’t particularly cheap here but considering it’s perfect for the current market it has a good chance to trend still higher.” HOLD.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, hit a new high last Tuesday, but has been falling steadily since on growing volume, and is now well below its 50-day moving average. Long term, Mike remains bullish on the stock, but short term, this selling pressure is more than is comfortable. Mike will be advising his readers to take partial profits today. I’ll simply downgrade the stock to Hold. HOLD.

Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here three weeks ago, has now advanced for seven consecutive weeks, though it’s still below last year’s high of 21. Volume trends are good, but volatility is to be expected, so try to buy on pullbacks. BUY.

STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, hit another record high last Thursday and is now having a little rest. In fact, the selling volume last Friday was the highest since early April, so the well-deserved correction could run longer. If you don’t own it, and the 4.6% yield is attractive, look for an entry point when this correction is over. Possible entry points: the 25-day moving average down at 30.3, and the 50-day moving average down at 29.7. 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. The stock bottomed with the market at the end of May, surged higher in June, and has pulled back minimally over the past week, on reduced volume, which is good. HOLD.

The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high last Thursday and has pulled back normally since; today it touched its 25-day moving average. As the number one company in the programmatic ad buying market, The Trade Desk is growing fast. HOLD.

Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, also hit a new high Thursday and has also pulled back normally since, falling to its 50-day moving average today. Last week Mike wrote, “This remains a leader that wants to head higher. Last week we wrote that if the stock settled down (it has a bit) and the market turned positive (yup), we’d go back to Buy—so that’s what we’ll do here. If you own some, sit tight, and if you don’t, we’re OK grabbing some shares around here.” I’ll follow Mike’s lead and upgrade to Buy. If you don’t own it, and you want a strong growth stock, you can buy here. BUY.

Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, hit a high of 55 in mid-April and has been consolidating that gain since as its 25- and 50-day moving averages slowly flattened out—and now it’s ripe to break out. But will it? 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. 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, gave us a quick profit (on paper) of 38% when it gapped higher three weeks ago following a superb first-quarter report. A few days later, I wrote, “Short-term traders could take a quick profit here, but long-term investors can still buy shares of what may be the best videoconferencing provider in the world.” Now, however, our profit has been cut by two-thirds in two days of heavy selling, and I’m going to sell. Yes, the long-term prospects for the firm’s video communications and collaboration platform remain very bright, but this is a young stock with the potential to easily fall farther. SELL.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED July 2, 2019

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