The broad market has now begun a well-needed correction, which is likely to go on at least a little longer, and our job is to adjust our portfolio, on a continuing basis, so that we are always invested in a diversified portfolio of stocks that fit your investment needs.
This week that means selling three stocks. But it also means that there are buying opportunities in some of our stocks.
As for the new recommendation, I’m leaning conservative once again, with a low-risk petroleum infrastructure stock that has great recurring business and is decently valued as well.
Note: Because of the Cabot Investors Summit, which will bring all the Cabot analysts together in Salem late next week, the next issue of Cabot Stock of the Week will come out a day early next week, on Monday.
Cabot Stock of the Week 259
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Buying immediately after a 700-plus point Dow drop takes guts—but is it wise? Well, the last time the Dow fell that much was in December, and you know how well the market has done since then. Still, it may be early; this correction may last longer and go a bit deeper. Thus for this week’s recommendation, I’ve tapped the low-risk side of Cabot’s analyst pool and chosen a high-yielding stock that has just pulled back to its 50-day moving average. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.
Enterprise Product Partners (EPD)
Something amazing is happening in America. The country is in the throes of an energy boom never thought possible just a few short years ago.
The U.S. is now the world’s largest producer of oil, eclipsing both Saudi Arabia and Russia. It is also the number one producer of natural gas. If you’re old enough to remember the 1973 Arab Oil Embargo and the ensuing gas lines and recession, you can appreciate the magnitude of the feat.
Because of new technologies in hydraulic fracturing (fracking) and horizontal drilling the country has gone from being hopelessly dependent on foreign sources of oil at the end of last decade to the world’s greatest energy powerhouse. And production is expected to continue soaring in the years ahead.
You would think that under the circumstances U.S. energy stocks would be booming. They’re not. They’re actually cheap. The additional American supply on the world market combined with the global economic slowdown spurred an oil price crash from 2014 to 2016. It wreaked havoc in the industry and most stocks have still not recovered.
Therein lies the special opportunity. Business is booming while stocks wallow. Particularly attractive are those energy companies not exposed to volatile and unpredictable commodity prices. And one company is the shining star of the lot.
It’s Master Limited Partner Enterprise Product Partners (EPD), one of the largest midstream energy companies in the country with a vast portfolio of service assets connected to the heart of American energy production. The company has $36 billion in annual revenues from an unparalleled reach in the industry that is connected to every major U.S. shale basin and 90% of American refiners east of the Rockies, and offers export facilities as well in the Gulf of Mexico.
The company is a toll collector that simply collects fees for the piping, storage and transport of American oil and gas. It directly benefits from the simple fact that there is lots of oil and gas sloshing around the country. It has a pristine balance sheet with much lower debt levels than its peers and investment grade ratings. And EPD stock has been a spectacular performer.
Since its IPO 21 years ago, EPD has achieved a total return of over 2,000%, compared to just 263% for the market over the same period. It has also raised its dividend payout every single year for 21 years. But that’s in the past. There are several things I like about the stock now.
It’s Cheap
The stock is still about 30% below its 2014 high. But while the price hasn’t recovered yet, earnings and revenues have. The company has surpassed earnings estimates for seven straight quarters and although profits have consistently risen over the past several years, the stock still sells at valuations significantly below the five-year average.
It’s Growing
The fact is that there is still insufficient infrastructure to service all the additional oil and gas production in this country. That creates huge opportunities for expansion. And large, more established players like EPD have a huge advantage. The company also has something else over its peers: With an industry low 60% payout ratio, it retains earnings for growth projects, giving it a huge cost advantage.
Enterprise has been investing like crazy in expansions over the past several years and those projects are now coming on line. It has over $2 billion in new projects coming into service this year and about $6 billion in future years. These new earnings sources should give the company’s bottom line a significant boost.
The stock also pays a massive 6% yield at the current price on a dividend that is highly secure and should continue to grow in the future. The stock has also recently broken above the 30 level, the high point of the trading range over the last three years. And it could be poised for a much longer breakout.
Enterprise Products Partners (EPD)
1100 Louisiana Street, 10th Floor
Houston, TX 77002
713-381-6500
www.enterpriseproducts.com
CURRENT RECOMMENDATIONS
Market corrections are wonderful things; they provide an opportunity to do a little housecleaning, as they reveal which of your portfolio’s stocks truly have investor support. And, of course, as we come into his week with a full portfolio of 20 stocks, we need to do some housecleaning. So, after a thorough review, I’m selling STAG Industrial (STAG), Twilio (TWLO) and Valero (VLO). Your own decisions may be different, but you should definitely take a good hard look at your portfolio. Also, note that last week’s sell decision on CIT Group (CIT) has worked out quite well. Meanwhile, on the buy side, because market corrections do create buying opportunities, I suggest you take a look at all the stocks still rated buy. Details below.
Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, looks good, down just 6% from its recent high and sitting right at its 200-day moving average. In her update today, Crista wrote, “ALK is a mid-cap stock, expected to achieve aggressive earnings growth rates of 30.7% and 19.9% in 2019 and 2020. The 2019 P/E is low at 10.9. Last week, JPMorgan raised their price target on ALK from 72 to 76.” BUY.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, reported last Wednesday and the next day Crista wrote to her readers, “Apple reported third quarter EPS of $2.18 yesterday afternoon, near the high end of the estimated range of $1.79-$2.20, when the market expected $2.10. Revenue of $53.8 billion exceeded the $53.4 billion consensus estimate, and landed near the top of the estimate range of $52.5-$54.2 billion. CEO Tim Cook told Reuters that “marked improvement in greater China” drove the results. The quarter’s all-time record revenue from Services will be well received by Wall Street. Wearables, Home and Accessories grew 48% vs. a year ago, and made up 10% of Apple’s quarterly revenue. “In regards to iPhone, the most important thing for us is that we continue to grow the installed base,” Cook told Reuters. “And we did that on iPhone. And so the fact that people are hanging onto them a little longer, it’s not something I worry about in the 90-day clock.” Apple management raised fourth-quarter revenue expectations to a range of $61.0-$64.0 billion. Analysts had been expecting an average of $61.02 billion. Apple repurchased $17 billion of stock during the quarter.”
Of course, since then, AAPL has fallen with the market, but in her update today, Crista wrote, “AAPL closed yesterday at 193.34, down about 9% from last week’s closing peak. Could it fall a little more before recovering toward the 210-220 range? Sure, but it’ll probably be a very temporary drop. There’s one portfolio that I manage in which I buy a little more AAPL during each of its price corrections. I will buy more AAPL today, and I won’t even blink if the stock is cheaper tomorrow. I’ll be happy to own more AAPL at 193, because today’s low price will likely soon be a distant memory. Apple is a unique, innovative, thriving company. It’s literally the only stock that I currently recommended for a permanent buy-and-hold portfolio position. Except for big-dividend investors, all stock investors could benefit from buying AAPL now.” HOLD.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor, barely noticed yesterday’s big market drop. For risk-averse investors, therefore, this is a fine entry point. Tom says it’s still undervalued. BUY.
Coupa Software (COUP), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, tagged its 50-day moving average at yesterday’s low and is higher now, so this might be an excellent entry point for aggressive investors. BUY.
Everbridge (EVBG), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, was hitting new highs just a week ago, but now it’s plunged to levels not seen since early June, and the culprits appear to be both the broad market and the company’s earnings report, released yesterday. My quick analysis sees that revenue of $48.4 million, up 35% from the year before, exceeded analysts’ consensus of $48 million, while the loss of $0.07 per share beat analysts’ expectations of a loss of $0.09. I’ll give you Tyler’s take next Monday. HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor (and having reported quarterly results previously) sold off with the market yesterday, but rebounded to its 50-day moving average today, and now the question is whether to hold or sell, taking our profit. If you need more cash as a cushion, you could certainly sell here, but I’m going to hold. I like the long-term story, and will be interested to see how the big acquisition announced last week progresses. 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 is now building a bottom above 30. 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 stock is a real mover! In last week’s update, Carl wrote, “Some big hitters have accumulated substantial ownership of LK. The American Funds mutual fund company Capital Group has a 15.6% stake, followed by Singapore’s sovereign wealth fund GIC with 13% and Qatar’s Investment Authority at 8.8%. The company expects to announce its next quarter’s earnings on August 15th.” Aggressive investors can buy on this correction. BUY.
MakeMyTrip (MMYT), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, reported fiscal first quarter results last week. Revenues were $142 million, up 3.1% from the year before, while the adjusted operating loss was $29.2 million, compared to a loss of $32.8 million the year before. The stock sold off on the report, and if there were substantial downside, I might rate it sell, but I see the potential for support at several levels between 24 and 21 so I will simply downgrade it to hold for now and see if support materializes. HOLD.
Match Group (MTCH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, looks fine, just a few weeks off its all-time high and sitting on its 50-day moving average. If you don’t own a piece of the world’s leading dating company, you could nibble here, but officially I’ll stick with my Hold rating. HOLD.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is an oasis of calm in this turbulent market; it hit a record high last Friday and is only 2% off that high as I write. Part of the reason is the recent earnings report, which I reported on last week. If your portfolio would benefit from owning a utility or two, this should be one of them. HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, has been building a base (or a ceiling) mainly between 74 and 80 since the start of May. And in yesterday’s market wipeout, PLNT shareholders barely blinked. But let’s see how they react to tonight’s earnings report. In his last update, Mike wrote, “Analysts are looking for sales growth of nearly 20% and earnings of 41 cents per share, up 21%, though same-store sales and cash flow will be closely watched, too. A decisive push above 82 would tell us PLNT’s uptrend is resuming, but a drop much below 70 would likely have us selling our remaining shares. For now, we’ll hold on and see what the report reveals.” HOLD.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit new highs two weeks ago on the heels of an excellent earnings report and now, even after a two-week correction—and a very weak market yesterday—the stock is still above all its moving averages! In last week’s Cabot Growth Investor update, Mike wrote, “SNAP can be a bit fidgety (lower-priced stocks usually are), but the evidence continues to point toward this being a new leader in the social media space with great potential going forward assuming management continues to pull the right levers (which they have so far). One bullish nugget from the conference call last week was that Snap brought in $1.91 in revenue per active user in Q2, up 37% from last year and up 14% from the prior quarter. That’s great, but still miles below a peer like Facebook, which saw Q2 revenues of more than $10 per user! Of course, Facebook is the gold standard in the industry, so the gap won’t fully close, but as Snap improves its ad platform and expands its reach (11 million new users in Q2, the largest figure in three years), that key metric should move higher. As for the stock, it’s pulled back after its post-earnings gap, but looks buyable here. We added our second half last week, giving us an average cost near 16.3, and will use a loss limit on the combined position in the upper 13s.” Our cost is lower, so we have more leeway. Still, a break below 14 would be concerning. Aggressive investors can buy here. BUY.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, reported quarterly results last week and almost exactly met analysts’ estimates, which was not quite enough, according to the action of the stock since then; it’s now 8% off its high. Long-term, there’s no question that the business is doing fine, but short-term, the trading patterns of the past few years tell me that since STAG has just completed a better-than-average seven-month run, it is now likely to suffer through a worse-than-average phase for a few months, which is likely to take the stock somewhere below 27—how far is hard to say. I could be wrong, of course, but it feels prudent to take our tidy profit earned over 16 months before it shrinks any more. SELL.
Sunrun (RUN), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is one of the leading stocks of the solar power sector, which has shown impressive strength in recent months. In fact, yesterday’s market weakness only brought RUN down to its lows of the past two weeks. From here, though, a lot depends on the company’s second quarter results, which will be released after the market close tomorrow, August 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 was hardly fazed by yesterday’s market weakness; it exhibits more volatility on company-specific news and rumors—and tweets. And there was recent good news—of a sort—in the fact that energy products, which accounted for roughly 6% of Tesla’s second quarter revenue, are likely to grow substantially, thanks to several big factors. One, the company is putting more effort into its solar roofs. Two, California has mandated that all new homes in the state should have solar power next year. And three, the company just introduced its Megapack energy storage system, designed for utilities trying to adjust to the variable inputs from renewable energy systems. HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, was downgraded to hold last week, as its stock had lost momentum and the quarterly earnings report was impending. And now it will be sold, for a tidy profit. The report was okay—revenues boomed 86% and earnings of three cents per share matched expectations—but as Mike wrote last night, “TWLO has completely broken down and is our weakest stock. The company appears to be doing fine, but shares stalled out in June and July and the recent collapse is a red flag.” SELL.
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. Yet our investment is underwater, thanks to a second quarter report last Friday that disappointed investors, and exacerbated by the shutdown of some capacity at its Port Arthur refinery for maintenance. We’ll get out now with a small loss. SELL.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, is expected to report second quarter earnings of $1.47 per share this afternoon, with a range of $1.38-$1.62. In today’s update, Crista wrote, “CEO Rodney O. Martin, Jr. announced the awaited dividend increase last week, raising the payout from once cent to $0.15 per quarter. He commented, “We are committed to deploying capital in a way that will drive greater value for our shareholders, as evidenced by the approximately $5.5 billion in excess capital that we have used for share repurchases. While share repurchases remain the primary component of our capital deployment plans, this increase in our common stock dividend is consistent with our plans to increase the dividend to a yield of at least 1% and gives us another opportunity to deliver value for our shareholders.” Finishing up, Crista wrote, “VOYA is an undervalued growth stock. VOYA rose to new highs through late July, then fell with the market correction. Take advantage of this lower price and buy VOYA now.” BUY.
Zillow (Z), originally recommended in Cabot Growth Investor by Mike Cintolo, sold off with the market over the past couple of days—but not big—and then rebounded strongly today. Very impressive. In his update last week, Mike wrote, “Z remains in great position to continue higher—though the next big move will likely come down to earnings, which are due out next Wednesday (August 7) after the close. The headline numbers (sales expected to rise 79%, with a loss of 14 cents per share) will certainly count, but more focus will be on Zillow’s Offers segment, including how many homes were bought and sold and how profitability in that area is shaping up. If Z can react well to the report, we’ll look to fill out our position, but at this time we’ll simply stick with our Buy a Half rating and see how it goes.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED August 12, 2019
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