Please ensure Javascript is enabled for purposes of website accessibility
Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 258

The broad market remains in fine health, with the major indexes trending higher and sentiment measures still bullish. Thus I continue to recommend that you be heavily invested in a diversified portfolio of stocks that fit your investment needs.

Last week’s recommendation was an undervalued cyclical business, and this week we swing back to a fast-growing cloud software stock with strong momentum and big upward potential.

Cabot Stock of the Week 258

[premium_html_toc post_id="183098"]

Clear

The market remains in fine health, with most indexes very close to their recent highs and all our momentum indicators remaining positive. There’s a modest chance of a correction in the near future, given that the indexes are a bit extended, but it’s impossible to say when that might occur, so I continue to recommend that you be heavily invested in a diversified portfolio of stocks that fit your needs. Last week’s recommendation was an undervalued stock in an old cyclical industry (airlines), and this week we swing back to a fast-growing cloud software stock that’s been one of the market leaders this year and has great prospects going forward. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor, and here are Mike’s latest thoughts.
Coupa Software (COUP)

20 years ago when I began working at Cabot, one of the hottest Internet stocks around was Ariba, which promised to revolutionize business-to-business e-commerce (as it was called back then). Gone would be the days of paper-based transactions; instead, firms would be connected via the Internet, thus saving time, money and enabling more transparency on their purchases.

Of course, the internet bubble popped soon after, and Ariba faded into the background; in the years after, a couple of other players had a go at the business, but never really made waves. Today, though, Coupa Software has come through on the promise of all those years ago, with an easy-to-understand story that should drive rapid growth for years to come.

The company has the leading cloud-based platform for business spend management (as it’s now called), which allows firms to digitally execute and track every kind of spending, from procurement to invoices, regular expenses, payroll and much more. Combined with customizability and a vast partner and app ecosystem (including big installation partners like Deloitte, Accenture and KPMG), Coupa offers a huge return on investment for its clients, saving both money and (just as important) time. One customer, in fact, recently saw a 54% drop in the average purchase order approval time.

It’s a simple, powerful story that’s attracting a ton of big customers. At the end of April, the firm had more than 900 customers, including names like Baxter, Proctor & Gamble, Darden, TD Bank, American Red Cross, MGM Resorts, Airbus, Molina Healthcare, Kroger, Baylor University, AAA, Zurich and many others. Indeed, since launching a few years ago, Coupa’s platform has handled a whopping $1.2 trillion (with a “t”) in transactions, including nearly $450 billion in the past year alone!

Linked to the core business spend management platform is Coupa Pay, its solution for payment processing and transaction financing, including the ability to optimize a firm’s working capital and take advantage of early payment discounts. Coupa Pay has been small potatoes up to this point, but the company is pushing it now—in June, it partnered with both Citi Commercial Cards and PayPal (among others) to expand Coupa Pay’s attractiveness. One analyst thinks Coupa Pay could bring in $270 million in revenue within five years, compared to basically zilch right now.

Another big attraction is the business model. Historically, while the company has a lot of costs getting clients up and running in year one (costs are about four times revenues), it’s all gravy from there, with Coupa seeing 70%-plus margins every year after that. Net-net, the firm earns a total of about a 50% cash flow margin over a four-year period, with every new customer leading to a stream of recurring revenue down the road.

Indeed, as Coupa has begun to scale, we’re seeing the positive results; in the quarter ended in April, free cash flow was $16.1 million, or nearly 20% of revenue! (Long-term, management is targeted a 30%-plus free cash flow margin.)

The other growth numbers are just as enticing, with the recent quarter showing total revenues up 44%, subscription revenues up 46% and billings up 50%. From here, progress is mainly a matter of continuing to get more large-and medium-sized businesses on the platform (both here and overseas) and boosting usage of Coupa Pay, all of which will boost the company’s recurring revenue stream.

As for the stock, it’s been a glamour leader this year, pushing out to all-time highs in January (just a month off the market’s low), resting from February through April, and then rising into the mid 140s before this week’s growth stock selloff.

Tim’s note: Assuming the uptrend continues, the best entry point for COUP is on a correction, ideally to the stock’s 25-day moving average (now at 137) or its 50-day moving average (now at 126). The portfolio, as usual, will keep it simple by buying tomorrow.

sow258-coup

Coupa Software (COUP)
1855 South Grant Street
San Mateo, CA 94402
650-931-3200
http://www.coupa.com

image-blank.png
sow258-coup-data-1024x169.png

image-blank.png

CURRENT RECOMMENDATIONS

csow258-portfolio-1024x533.png

One of the biggest challenges for some investors is keeping their portfolio to a manageable size. Every time they hear about good stock, they buy it, but they don’t know when to sell, and as a result, they own 50 or more stocks! And the trouble with that is that many of those stocks are doing nothing; they’re dead weight! Here in Cabot Stock of the Week, by contrast, I am repeatedly forced to sell stocks to keep the portfolio at 20 stocks or fewer, and thus I get rid of deadwood quickly. But sometimes, choosing what to sell is a challenge. This week, for example, candidates include Sunrun (RUN), our biggest loss (though not big), CIT Group (CIT) (a smaller loss), and Exact Sciences (EXAS) (which has just announced a massive acquisition). After much thought, my bias today is for the stocks with greater upside potential, both short-term (RUN) and long-term (EXAS), so it’s CIT that gets the axe today. Details below.

Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, and featured here last week, is the biggest airline on the west coast, and one reason it’s doing well today is that it doesn’t own any Boeing 737 Max jets. But there’s more. In her update today, Crista wrote, “On July 25, Alaska Air Group reported second-quarter non-GAAP earnings per share of $2.17 vs. the consensus estimate of $2.13. Revenue was $2.288 billion vs. the $2.28 billion consensus estimate. Pre-tax margin of 15% came in 300 basis points (3 percentage points) higher than a year ago. The company repurchased $25 million of stock during the first half of 2019, and repaid $140 million of debt during the second quarter. Alaska Air Group has now repaid a total of $1.2 billion towards the $2.0 billion that was borrowed for the Virgin America acquisition. ALK is a mid-cap stock with a $7.8 billion market capitalization. ALK has upside price resistance at 74, 80 and 95. There’s plenty of room for traders, growth stock investors and growth & income investors to potentially make good profit in both the short term and the long term.” BUY.

Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, remains above all its moving averages, climbing steadily higher, but it may face resistance at 212, which is where the stock’s advance was halted at the end of April. First, though, the world is waiting for tonight’s earnings report. In her update today, Crista wrote, “Apple is expected to report third-quarter EPS of $2.10 on the afternoon of July 30, within a range of $1.79-$2.20, and $53.4 billion revenue, within a range of $52.5-$54.2 billion. Five investment firms raised their ratings and/or price targets on AAPL during the second half of July. I frankly don’t think they’d stick their necks out like that, right before the earnings report, unless they strongly expected both good quarterly results and a positive market reaction. Apple announced an agreement to buy Intel’s smartphone modem business for $1 billion. The purchase, which is targeted to close in the fourth quarter, includes 2,200 Intel employees, along with intellectual property, equipment and leases. In other news, the U.S. has denied Apple’s request for tariff exemption on 15 parts, including some used for the Mac Pro. AAPL is a great stock for a high quality, buy-and-hold equity portfolio. The price chart is showing strength. A good earnings report could easily push AAPL to 220. There’s additional price resistance at 230, where the stock last traded in October 2018.” HOLD.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor, is also trending higher, above all its moving averages and is now close to exceeding its high of 45 of just two weeks ago. In Tom’s latest update, he wrote, “BIP is part of Brookfield, one of the best asset managers in the world. The partnership has a solid track record of investing in profitable, stable, long-life assets with near monopolies in their areas. The defensive nature of the cash flow, high dividend and superior track record make this a great dividend stock.” BUY.

CIT Group (CIT), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, is not a bad stock to own, especially if you need a lower-risk investment. In this morning’s update, Crista wrote, “CIT is an undervalued growth stock with an attractive dividend yield. Wall Street expects EPS to increase 19.6% and 13.5% in 2019 and 2020. The P/E is 10.5. There’s about 8% short-term upside to 55, where CIT traded repeatedly in 2018.” However, in this portfolio, something’s got to go today, and I’m favoring the higher-potential stocks for now, so out it goes. If it still fits your portfolio, feel free to hold. SELL.

Everbridge (EVBG), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, continues to hit new highs! In his latest update, Tyler wrote, “There’s no new news this week, but management will be reporting on August 5. I’ll revisit my rating after the event.” HOLD.

Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, released its earnings report yesterday and the results were great; revenues were $200 million for the quarter, up from $103 million a year ago (analysts had expected $182 million), and the loss per share was $0.30, while analysts had expected $0.56. More important, the company announced a massive acquisition! Exact Sciences will pay $2.8 billion (in cash and stock) to buy Genomic Health, a well-respected peer in the gene-profiling business that will result in a powerhouse going forward. At first, the stock sold off sharply on the deal, as investors/traders reacted to the dilution in their shares. But the stock closed yesterday nearly unchanged, and this morning it jumped up, though it gave back those gains as the day wore on. Overall, the future still looks bright, and the stock’s base remains intact, so I’m going to hold. HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, 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 had a great June, corrected in early July, and has rallied in recent weeks but is not yet strong. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is challenging Starbucks’ dominance of China’s coffee market with a leaner and faster strategy, and its chart is looking good! In last week’s update, Carl wrote, “Luckin shares moved 18% higher over the last week and the company expects to announce earnings on August 15. Just this week, Luckin announced that it would partner with the Kuwait-based company The Americana Group to launch its coffee business in the Middle East and India. Americana runs 1,900 franchises across the Middle East for several fast food brands, including KFC, Red Lobster, Olive Garden, Krispy Kreme and Starbucks’ UK rival Costa Coffee. If you have not invested in Luckin, which is an aggressive idea that won’t be posting profits for some time, I encourage you to do so starting small, with up to a half position with a 20% trailing stop loss in place.” BUY.

MakeMyTrip (MMYT), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has been trending up since early June and eked out another recovery high this morning before meeting with some selling. In his latest update, Carl wrote, “MMYT is a play on India’s travel industry as well as digital payments and marketing. It is expected to report earnings on July 30. MakeMyTrip has made key acquisitions and strategic partnerships and a key alliance is with Ctrip, China’s largest online travel group. If you have not yet done so, I encourage you to take a half position in this Indian growth stock.” BUY.

Match Group (MTCH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had a record closing high last Wednesday and has pulled back normally since. If you don’t own a piece of the world’s leading online dating company, look for an entry point down around 72. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is looking fine, trading right up near its highs of two weeks ago. In his update last week, Tom wrote, “The country’s largest utility announced earnings this morning that beat estimates for both revenue and earnings. The company grew earnings in the quarter at a 13% clip over last year’s quarter and reiterated a target earnings growth rate of 6% to 8% through 2021, very high for a utility, especially one this size. The operational performance continues to be sound, the valuations aren’t out of whack, and the stock still has good momentum.” HOLD.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, is no longer strong, but it’s not weak, either—though it could turn weaker from here. In his last update, Mike wrote, “PLNT remains in the mid 70s as it steadies itself following the heavy-volume selling it saw in the back half of June. Earnings will be released on August 6, which will probably tell the tale—a decisive drop into the mid to upper 60s would damage the longer-term uptrend, but obviously a positive reaction would be welcome. Right here, with the stock moving sideways (no progress since late April), we’ll stay on Hold.” HOLD.

Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and later added to Cabot Growth Investor, is this week’s big winner, and it’s all thanks to earnings. In last week’s Cabot Growth Investor update, Mike wrote, “SNAP had the makings of a new leader when it broke out on the first day off the market’s early-June low, and yesterday’s earnings reaction added to the bullish evidence—Snap’s much-better-than-expected report (revenues up 48%; daily active users of 203 million were 11 million above estimates; significantly higher guidance for Q3) caused a buying frenzy that pushed shares to new highs. As we said when we initially bought in, SNAP might not turn into another Facebook or Google, but with unrivaled appeal to younger users (Snapchat reaches three-quarters of the 13- to 34-year-olds in the U.S.), the company has a unique offering that should drive growth for a long time to come. We bought a half-sized position initially, and we do think the stock could pull back or consolidate for a bit. But the trend is clearly up, and with earnings out of the way, we’ll buy the second half now.” BUY.

STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, pulled back to its 50-day moving average two weeks ago and has been riding it higher since. In his latest update, Tom wrote, “STAG is a high dividend payer with a great niche in a strong REIT sector. Industrial REITs enjoy a high demand that outstrips current supply. The sector seems to be benefitting from the proliferation of E-commerce as much retail space is moving into warehouses.” HOLD.

Sunrun (RUN), originally recommended by Mike Cintolo in Cabot Top Ten Trader, can be a volatile stock, on both the upside and the downside. The latest downside action came on one day last week, when an analyst downgraded the stock, but the stock has been building a base since then and is supported by its 50-day moving average, so the big question is what happens next. If the stock rolls over further, and other stocks in the sector join it, we’ll probably sell for a quick loss (our buy happened to be the very top day). But if the buyers return—after all, the sector is still healthy—the rebound could be dramatic and bring a quick profit. Second quarter results will be released after the market close on August 7 and will probably be instrumental. 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. And they are, long-term, as illustrated by the fact that revenues in the second quarter grew 59% from the year before—and that all other mass-market manufacturers are still playing catch-up, while anchored to internal combustion technology. In the short-term, however, there are still challenges for Tesla, as the company works to reduce its costs; for the quarter, the loss was $1.12 per share, improved from last year’s loss of $3.06. The stock gapped down on the news, but has been climbing back since. HOLD.

Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, has been a great performer since it blasted off in February 2018, but how long can it last before the stock enters into a serious correction? Mike downgraded the stock to Hold yesterday, noting that the stock had come under selling pressure after repeatedly failing to surmount resistance near 150, and I’ll now do the same. The second quarter report will be released Wednesday evening. HOLD.

Valero (VLO), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Dividend Growth Tier, has a fat 4.3% yield and good growth prospects as demand for refining booms. Second quarter results, released last week, saw revenues shrink 7% while earnings fell 30%, but looking ahead, analysts are looking for earnings to grow 77% next year. As for the stock, it barely reacted. BUY.

Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, hit a record high last Thursday and has held up tightly in that region since, telling us the buyers are in control. In today’s update, Crista wrote, “Voya is expected to report second-quarter EPS of $1.45 on the afternoon of August 6, within a range of $1.17-$1.62. VOYA is an undervalued growth stock. VOYA began reaching new all-time highs in late June, and the price chart remains bullish. I expect the pending dividend announcement and the second-quarter earnings release to bring additional capital gains.” BUY.

Zillow (Z), originally recommended in Cabot Growth Investor by Mike Cintolo, sold off last Tuesday but bounced right back and all appears well now. In his update last week, Mike wrote, “Zillow appeared done for on Tuesday morning, with shares under pressure after news broke that Amazon had teamed up with leading real estate firm Realogy (which owns Century 21, Coldwell Banker and many others). But, encouragingly, Z tagged its 50-day line and proceeded to roar back on huge volume, and has held most of that rebound since. (The action supports our thought that fears of competition in the gargantuan housing market are overblown.) A drop to 44 or so would look iffy and probably have us cutting bait, but at this point it appears big investors took advantage of the “bad news” to start/add to their positions. Earnings are due out August 7, which will be vital, but given the action, we’re OK buying a half-sized position here.” BUY.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED August 6, 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.