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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 260

This week’s update is a day early, because the rest of the week is filled by the Cabot Wealth Summit, which brings all our analysts to Salem to meet subscribers face-to-face and fix all the world’s problems—or at least help them become better investors.

In the meantime, the market remains under pressure, with our intermediate-term market timing now negative. Thus I’m continuing to raise cash, by selling our worst performers, and you should too, so you’ll have ammunition to use on the new leaders when the market turns up again. This week that means selling four stocks.

As for the new recommendation, it’s a small-cap stock in the communications software industry that you probably haven’t heard of, but it’s shrugged off the market volatility lately, trending slowly higher, and its long-term prospects are great.

Cabot Stock of the Week 260

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Last week our intermediate-term market timing indicator flashed a sell signal, telling is that in the short-term, the market trend is now down. Thus, more caution is now recommended, which mainly means keeping stocks on tighter leashes, buying more carefully and holding more cash. Still, there are opportunities to be found. This week’s recommendation is a little-known small-cap stock in the fast-evolving field of communications software, which, in a way, takes over where Twilio (a recent holding) leaves off. The stock was first recommended by Tyler Laundon of Cabot Small Cap Confidential, and here are Tyler’s latest thoughts.
Bandwidth (BAND)

The last switchboard operator for a hand-cranked phone walked away from her post in 1983. That was the beginning of the end of personalized help when you called a company. Fast-forward two decades and in the early-2000s people were increasingly stuck in automated phone systems that were everything but helpful and led to more than one phone getting thrown against the wall!

Now we’re moving back in the right direction when it comes to customer service, in large part because companies realize it’s less expensive to keep a customer than it is to find one—and because communications platforms are finally advancing to the point where they work across all the methods people use to get and keep in touch. Personal assistants, like Alexa and Siri, are also helping to shoulder some of the load when AI is a good substitute for a real person.

One of the emerging leaders in the communications software space is Bandwidth, a $1.8 billion market cap company that develops Communications-Platform-as-a-Service (CPaaS) solutions for large enterprises. Bandwidth has layered an Application Programming Interface (API) on top of its network, which allows software developers to easily build, scale and operate software-based voice, messaging, and emergency service-related communications tools.

Customers can develop new mobile applications that allow them to send Application-to-person (A2P) messages, receive Person-to-Application (P2A) messages, add voice calling to residential Internet of Things (IoT) devices and develop innovative 911-calling solutions that improve emergency response times.

You’ve probably used the platform yourself! Zoom (ZM) is a customer of Bandwidth Voice for its conferencing solution. Google (GOOG) uses Bandwidth Voice in its Google Home smart speaker, as does Amazon’s (AMZN) Alexa. Microsoft (MSFT) also uses Bandwidth Voice and Messaging in some applications, including Skype.

All in, Bandwidth has 1,467 customers (up 34% from a year ago), including about a dozen from the Fortune 1000. No customer makes up more than 10% of revenue.

Bandwidth mostly competes with the legacy network providers, including Verizon, AT&T and CenturyLink. But it also competes with Twilio (TWLO). One of the big differentiators between Twilio and Bandwidth is that Bandwidth owns its own infrastructure, just like the legacy network providers. Twilio doesn’t, which means it has lower capital expenses than Bandwidth, but higher operating expenses since it needs to pay for usage.

Growth has been solid and should accelerate as Bandwidth ramps up its sales force, expands into Europe and goes deeper into the smart devices and IoT market where makers of smart speakers may soon begin to offer 911 services (a rational speculation).

The company reported second quarter results on July 31. Revenue was up 18% to $56.8 million, but EPS dipped to -$0.04 (from $0.20) due to growth-oriented investments. Analysts see full-year revenue up around 15% this year and 22% in 2020, with EPS staying negative until around 2021 due to the aforementioned investments. The company is debt free.

As for the stock, BAND went public at 20 in November 2017, sat quietly for a few months, and then walked up to the mid-50s by the end of last summer. Shares sold off late in 2018 with the broad market, getting as low as 28, but started the year off strong and broke out to fresh highs above 60 in March following a secondary offering (priced at 54.25). Since then the stock has been consolidating that gain while leaning slowly higher, with one brief intra-day pop above 85 after the second quarter earnings release two weeks ago, but now it’s right back with its 25- and 50-day moving averages, ripe for buying.

sow260-band

Bandwidth (BAND)
900 Main Campus Drive, Suite 500
Raleigh, NC 27606
800-808-5150
http://www.bandwidth.com

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CURRENT RECOMMENDATIONS

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The broad market remains under pressure, with last Thursday’s big rebound an anomaly that appears destined to fade as the correction progresses. The portfolio’s strategy now is to hold onto our top performers and hold onto stocks that are on normal corrections, but to sell stocks that have broken their uptrends and that appear due for a longer cooling-off period. And that means selling four stocks today (following the three sold last week). But don’t take this as a sign to run for the hills. While the short-term trend is clearly down now, the long-term trend remains up, so my goal is to own the best stocks as the market goes through the process of incubating the next uptrend.

Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, is at a good buy point right here, sitting down near its 200-day moving average. BUY.

Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, dropped below its 200-day moving average last Monday on market weakness but has rallied since, aided by a good (though unsurprising) earnings report on Wednesday. HOLD.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor, has been in demand recently as investors migrate toward safety. In his latest update, Tom wrote, “This global infrastructure company announced solid earnings last week. Funds from operations (FFO), the key earnings measure for an MLP, was up 13% on a per share basis for the quarter. The results displayed success in its asset rotation strategy, whereby it’s replacing mature assets with higher margin ones. The stock didn’t really move up but during the market tumult it barely budged, showing nice resilience. The stock really looks strong here.” I think the stock could dip to its 200-day moving average at 43.4, and if so, that would be a good entry point for risk-averse investors. BUY.

Coupa Software (COUP), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here two weeks ago, has made no progress since we recommended it, but the potential is still there. In last week’s update, Mike wrote, “As opposed to the market’s over-the-cliff decline, Coupa retreated in an orderly fashion, found support at its 50-day line on Monday and has rebounded well since.” BUY.

Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, and featured here last week, was bought on Wednesday, as the stock sold off after what Tom said was a good earnings report. His words: “The U.S. infrastructure giant had another impressive earnings announcement last week. Distributable cash flow increased a staggering 21.3% over last year in the company’s seventh consecutive quarterly earnings beat. The stock price is still stuck where it has been since March, but even the recent market selloff hasn’t knocked this stock off the high point of its trading range. The market hasn’t been rewarding EPD for the great results ,but it seems to refuse to punish it for being in the energy sector. Even though it isn’t breaking out right now, the high dividend and great operational performance make this stock a terrific holding in any market.” Note: I should have mentioned in my original recommendation that EPD, being a Master Limited Partnership (MLP), is not ideally suited for IRAs and other tax-advantaged accounts as it publishes a K-1 tax form. BUY.

Everbridge (EVBG), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, sold off last week after its quarterly report (though it has stabilized since) and now the question is whether to stick with it patiently or to cut it loose, take our profit, and move on.

In his update last week, Tyler wrote, “Shares sold off today because of a little quarterly lumpiness in the billings trend. The headline numbers were that revenue was up 35% to $48.4 million, slightly ahead of consensus. Adjusted EPS of -$0.07 beat by a penny. On the conference call management reiterated that quarterly billings will go up and down but that it’s trailing twelve-months billings that matter. By way of comparison, billings were up 60% in Q1, but up just 1.6% in Q2. That deceleration in the quarter pulled trailing twelve-month basis billings down some, to around 29%. Everbridge ended the quarter with 4,667 customers, which is a 100-130 fewer than Street expectations. At the same time ongoing strength in the Crisis Event Management (CEM) product (eight new customers and 50 total customers) is resulting in higher average sales prices, which were just shy of $80,000 in the quarter, up from $45,000 a year ago. The bottom line here is the market has a few questions around the billings number and there wasn’t a ton to get excited about, even though there is a huge amount of potential business that could come about in Europe due to countries adopting population alerting across the region. With the stock having doubled from the beginning of the year through last week there is some froth here, and investors wanted a clean “beat and raise.” Oh well. I don’t think the story is broken at all and the stock will probably correct, stabilize, and then eventually recover and go on to new highs as evidence that the business is still cranking bubbles back to the surface. I’ve had the stock rated hold and may move back to buy when we see signs of that stabilization.” So, Tyler is sticking with it, and that may be best for you, too, particularly if the taxes on profits would be costly.

I, on the other hand, am going to let it go today, take that nice seven-month profit, and get into Tyler’s latest—today’s featured stock, Bandwith (BAND)—which has a healthy, attractive chart now. Experience tells me it may be many months before EVBG can develop a new uptrend. SELL.

Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, rebounded strongly from its dip below its 50-day moving average last week and is once again primed to break out to new highs, having washed out investors with weak hands. In fact, I like this setup so much, I’m going to upgrade it to buy now. BUY.

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, expects to announce its quarterly results on Thursday August 15, so buying now entails some extra risk. On the other hand, the stock has just rebounded from its 50-day moving average, and new investors are continually discovering “The Starbucks of Asia,” so buying here might work out for aggressive investors. BUY.

MakeMyTrip (MMYT), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, remains weak in the wake of its earnings report, but I remain patient. Last week I mentioned that I saw potential for support at several levels between 24 and 21, and here we are nearing the low end of that range, ripe for a rebound. HOLD.

Match Group (MTCH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, released an excellent second quarter report last week: Revenue climbed 18% to $498 million, beating estimates of $489 million, and earnings were $0.43 cents per share, topping estimates of $0.40. Tinder, which accounts for half the company’s revenues, added 503,000 subscribers in the quarter, topping estimates of 390,000 new adds, as international growth shined. Overseas markets such as India, Japan, Taiwan and South Korea are key for Tinder as social conventions modernize. For the September quarter, Match forecast revenue of $540 million, blowing past estimates of $521 million. In response, the stock gapped up on big volume, rocketing up as much as 29% on Wednesday before settling down. Short-term oriented investors could consider taking partial profits on this strength, as the stock is likely to regroup for a while, but I’ll stick with it. I like owning the leading brand of a growing global mass-market. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, hit new highs last Wednesday, Thursday and Friday and held up very well today, an example of how highly valued safety is in today’s market. In last week’s update, Tom wrote, “Utilities are the best asset class to own in this ugly market. And NextEra is the best of the breed. While the market fell precipitously in a short period of time this week, NEE actually moved higher. It also does well when the market is good. I slobber over this stock every week, so I’ll keep it short here. This is a stock every income investor should own.” HOLD.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, continues its correction—and now we have a quarterly report to add to the picture. Here’s last week’s update by Mike. “Planet Fitness released a solid quarterly report on Tuesday evening, though it had some good and bad elements to it. On the positive side, most of the numbers were solid and topped expectations, with total revenue up 29%, earnings per share up 27% and EBITDA (a measure of cash flow) up 31%. Moreover, the firm boosted its expected store openings this year (255 expected, vs. 225 previously). That said, the all-important same-store sales metric (up 8.8%) was a bit less than forecast and the company seemed to lower estimates for that figure going ahead. The result was a bad day for the stock—though PLNT closed above key support in the 70 area and rallied solidly today. Bigger picture, we think the company’s growth story is just fine as it attracts more members (up 16% from a year ago) and opens new locations. But it’s really about how much the stock has discounted with its overall advance during the past couple of years. We’ll just stick with our plan—a close much below 70 or so would tell us the stock is no longer a leader and would likely have us selling. Above there, we advise holding and giving PLNT a chance to resume its longer-term advance.” I’m fine with following Mike’s lead on this, knowing that if he sells it, something good will take its place. HOLD.

Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit new highs three weeks ago on the heels of an excellent earnings report, corrected down to its 25-day moving average, and then bounced right off it, so remains healthily above all its moving averages. In last week’s Cabot Growth Investor update, just as the bounce was beginning, Mike wrote, “SNAP has been losing some ground in recent days, first because of the market, and second because of a good-sized ($1.1 billion) convertible note offering. (Those types of offerings attract funds that buy the convertible bond but hedge it by shorting the stock.) Still, the decline has been reasonable given the prior earnings rally and we still think big investors will continue to build positions over time; today’s bounce off the 25-day line was a good sign. If you don’t own any, we’re OK buying some here.” BUY.

Sunrun (RUN), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was one of the leading stocks of the solar power sector, but it broke through its 50-day moving average last Friday and continued lower today, taking our loss into uncomfortable territory. And the reason for the plunge is clear: The second quarter report showed good revenue growth but unexpected growth in costs as well. With the stock now broken, at least in the short term, it’s time to sell. SELL.

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. Since falling from the 260 area to the 230 area two weeks ago, the stock has been quiet, ignoring the broad market’s turmoil. HOLD.

Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, reported its second quarter results last week, and while earnings beat analysts’ estimates, revenue growth lagged—and investors have been bailing since, sending the stock down through its 200-day moving average. From here there’s a decent possibility that the stock will bounce, simply because it’s so oversold. But the uptrend is clearly over for now, so I’m going to get out now with our modest profit. SELL.

Zillow (Z), originally recommended in Cabot Growth Investor by Mike Cintolo, sold off sharply last Thursday after reporting second quarter results. In a special bulletin last week, Mike wrote, “The core business is OK and the prospects for the Offer segment remain bright, but the market wasn’t in the mood to hear about all of the company’s investments (and losses) looking out a few quarters. We’re not saying the stock is going to fall 50% from here, but the action today has broken the uptrend.” SELL.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED August 20, 2019

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