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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 261

The market has been all over the place so far in August, with some huge daily declines and advances depending on the news of the day. While the continued rebounds are a good sign buyers are lurking out there, the fact is the intermediate-term trend isn’t up, so we think it’s best to stick with a cautious stance—jettisoning your portfolio of losers and laggards (as we’ve done in recent weeks) while looking for either undervalued or resilient stocks to take their place. Our choice this week is a blue chip that’s cheap, near support, pays a nice dividend and is in position to benefit from any bounce in interest rates.

Cabot Stock of the Week 261

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Clear

The market has been all over the place so far in August, with some huge daily declines and advances depending on the news of the day. While the continued rebounds are a good sign buyers are lurking out there, the fact is the intermediate-term trend isn’t up, so we think it’s best to stick with a cautious stance—jettisoning your portfolio of losers and laggards (as we’ve done in recent weeks) while looking for either undervalued or resilient stocks to take their place. Our choice this week is a blue chip that’s cheap, near support, pays a nice dividend and is in position to benefit from any bounce in interest rates.
Citigroup (C)

The U.S. financial news media’s latest obsession-du-jour is speculation that we’re heading into a recession. Is that really the best fake disaster that they could come up with? The U.S. economy is so far from a recessionary environment that it causes me to shake my head. Let’s review some very simple facts: The U.S. is experiencing good GDP growth, record employment, rising wages, low inflation, rising retail sales and strong consumer confidence, about the polar opposite of what you’d expect to see before going over the cliff.

It’s unfortunate that the media is unable to discern economic strength from weakness, but for investors, this disparity between news headlines and reality has created an excellent buying opportunity among bank stocks, whose businesses tend to flourish during economic expansions—as money flows through the economy via business growth and consumer prosperity, banks provide the services and capital that facilitate economic expansion. And today, with the sector out of favor because of scary headlines, there’s an opportunity to buy the very best large-cap bank stock: Citigroup (C).

Citigroup operates globally, serving consumers, businesses, governments and institutions in 160 countries. Citigroup is the largest global credit card issuer, and they serve over 100 million consumers and over 90% of Fortune 500 companies.

Despite low interest rates (which decrease the spread banks can make on their lending) and the aforementioned economic fears, the company’s Q2 results brought a strong revenue beat (up 9% from a year ago), with earnings per share (EPS) higher than all analysts’ estimates (up 20%). Strength in consumer lending, and a lower share count (more on that below), tax rate and declining expenses all contributed to the quarter’s success. Citigroup is actively managing operating leverage, reflecting growth in the bank’s revenue outpacing growth in the bank’s expenses, largely as a result of successful technology initiatives and expense control. Consensus estimates point to revenue growing 1.4% and 2.3% in 2019 and 2020, from $72.9 billion to $75.6 billion.

However, analysts are currently expecting Citigroup to grow EPS by 14.6% and 11.3% in 2019 and 2020. The corresponding price/earnings ratios (P/Es) are 8.4 and 7.6. Citigroup offers significantly better 2020 earnings growth prospects than many mega-cap bank peers, including Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS) and Wells Fargo (WFC).

Thus, the stock is dirt cheap. But P/E isn’t the only measure of value. Citigroup announced their annual dividend increase in July, boosting their quarterly per-share payout from $0.45 to $0.51 per quarter, a 13% increase. The current yield on Citigroup’s stock is 3.2%.

Moreover, the company has repurchased a whopping 24.7% of outstanding shares from year-end 2015 through the second quarter of 2019. And more is on the way—in June, following the federal “stress tests,” Citigroup authorized the repurchase of $17.1 billion of stock from third-quarter 2019 through second-quarter 2020, higher than analysts had expected. When completed, this forthcoming round of share repurchases should take the outstanding share balance down from 3.0 billion shares at year-end 2015 to 2.0 billion shares, give or take.

Overall, then, C is an undervalued, mega-cap stock with a solid yield and improving fundamentals. And should the economy reaccelerate and/or interest rates rise (sentiment is sky-high in the bond market, which often precedes a backup in rates), growth could pick up further.

In line with many bank stocks, Citigroup shares fell with the broader market in May, fully recovered in June, rose to 2019 highs in July, then experienced another pullback in August. Citigroup shares are now recovering along with the broader market, trading right around their 200-day moving average.

In recent weeks, numerous analysts have raised their targets, and there’s plenty of recovery space above here should the stock retrace to its recent (72) or 2018 (77) highs. Further near-term wiggles due to the market and interest rates are possible, but with C having pulled back into an area of support and found some buying, we think it’s a solid buy here. BUY.

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Citigroup Inc. (C)
388 Greenwich Street
New York, NY 10013
United States
212-559-1000
http://www.citigroup.com

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CURRENT RECOMMENDATIONS

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The market’s recent snapback is certainly encouraging and continues a pattern we’ve seen this month—every time stocks seem close to going over the edge, prices rebound, which is a good sign that buyers are lurking. That said, nothing has really changed with the overall trend; despite the recent bounce, most indexes are meandering in the middle of their August ranges and are sitting below their 50-day lines. We’re open to anything, including the possibility that the recent wobbles were a short-term, news-driven (tariff, inverted yield curve) shakeout, but the onus remains on the bulls to prove that. In the meantime, we’re playing a bit of defense, having pruned some losers and laggards in recent weeks while moving into fresher opportunities.

Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, is getting pushed/pulled by the transport sector as a whole, including a sharp selloff last week. But there’s plenty of support in this area, business is set to improve rapidly (earnings up 31% this year and 19% next), the valuation is tame (10 times projected earnings; 2.3% dividend yield) and, importantly, Crista still has it rated a Strong Buy. I’m fine buying here. BUY.

Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has rebounded well from its early-August selloff; in fact, today nearly marked its highest closing level since November! Short term, AAPL will likely be news driven based on U.S.-China trade rumors and updates (the recent delay in China tariffs on smartphones and the like helped), but it appears big investors are looking ahead toward a pickup in earnings growth going forward. Hold on. HOLD.

Bandwidth (BAND), originally recommended by Tyler Laundon for Cabot Small-Cap Confidential, and featured here last week, popped above some resistance near 80 during the past few days, which is a good sign that, despite some initial hiccups, the July 31 quarterly report is bringing in buyers. There’s great potential in the firm’s cloud-based communications platform BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for Cabot Dividend Investor, continues to trend higher, notching new highs yesterday. You might not think a 1.5% yield on the 10-year Treasury bond makes much sense, but it is what it is, and that’s going to push more investors into solid dividend payers with steady growth prospects—like BIP. Tom remains on Buy, and I agree. BUY.

Coupa Software (COUP), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to hang in there, with solid support near the 50-day line, which is far better than the overall market. In last week’s issue of Growth Investor, Mike said, “Cloud enterprise software stocks have definitely been one of the leading areas of the market this year, but now they’re a mixed bag, with some having cracked their intermediate-term uptrends, while others, like Coupa, are still holding up pretty well. Frankly, we want to give our position every chance to hold up given the common-sense growth story here. We see no reason COUP’s rapid, reliable growth won’t continue for many years and spin off more free cash flow (20% of revenues in Q2!), which will continue to attract more big investors (481 funds now own shares, up from 369 six months ago and 306 a year ago).” Because of market timing, Mike has COUP rated a Hold, but I’m still OK grabbing a small-ish position here if you don’t own any. Earnings are due out September 3. BUY.

Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, has bounced nearly halfway back from its recent decline, in part due to a bullish Barron’s article on the energy sector over the weekend. Sooner or later, investors will recognize the value (6.1% dividend yield, including 60 straight quarterly dividend hikes) and growth (distributable cash flow up 21% in Q2, with more on the way as projects come online) Enterprise has to offer. As Tom said last week, “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.” BUY.

Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, hasn’t been easy to hold onto this year—I count six sharp corrections, including the earnings- and buyout-induced selloff in late July and early August. But each time, buyers have shown up and pushed the stock back up. You can see this in the sponsorship data, too—just since the start of the year, mutual fund ownership has soared from 602 funds to 819. With all that said, EXAS has been contained by 120 or so, and after a good run this year, a deeper correction is possible if the market has another leg down. But, just going with the evidence, this remains one of the more resilient growth stocks in the market. 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. Encouragingly, the stock has found support at 30 three separate times since early June and saw some decent buying volume yesterday as many Chinese stocks perked up. That said, the next earnings report will be released tomorrow evening (August 21), which will likely determine the stock’s path. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, posted another quarter of rapid growth in Q2, with revenues soaring to the equivalent of $132 million, up seven-fold from a year ago, while the number of stores totaled 2,963 at the end of June, up from 624 a year ago and the other sub-metrics (number of customers up 411%, items sold up 590%) all posting mind-boggling growth. And management said it expects to be at “store-level” breakeven in Q3! However, current red ink ($0.40 a share) and the iffy market environment brought out the sellers anyway, with LK dipping back into the upper teens. There’s a lot of support in this area, and there’s no question the fundamental potential is massive. But I’ll respect the chart and switch our rating to a Hold, looking for buyers to show up soon. HOLD.

MakeMyTrip (MMYT), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is our weakest stock, having been hit hard after earnings and during the market correction. That said, the stock fell down to major support near 21 (which I’ve mentioned in recent weeks) and bounced well on Friday and Monday. Having sat through the decline, I’m holding on here, albeit with a tight leash. HOLD.

Match Group (MTCH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has given up a good chunk of last week’s earnings move, and on some big volume to boot. However, that’s not a sin given the iffy market environment, it’s still holding above all its moving averages and there’s no doubt business remains good. A drop back into the mid 70s would be a yellow flag, but right here, I advise sitting tight. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, continues to trend up as interest rates remains near historic lows. In last week’s update, Tom wrote, “The market has certainly shown some weakness in the past couple of weeks as trade issues have deteriorated and there is growing concern about the state of the global economy. So what does this utility do? It makes new all time highs. It has all the properties of a safe, rock-solid regulated utility with the addition of strong growth in its alternative energy business. It offers everything the market is looking for right now and should continue to thrive.” HOLD.

Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, found some support after earnings two weeks ago, but it’s continued to sag and it’s time to let it go. That’s just what Mike did last week, in fact, when shares closed below support at 70—making the past few months of ups and downs look like a possible top. Nobody’s predicting PLNT is going to fall 50% from here, but after a good-sized run in recent years and the stalling out/selling seen since mid-May, there should be better names to own going forward. SELL.

Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has pulled back since its earnings gap in late July, but has found some support near its rising 50-day line, which looks like a solid entry point. In last Tuesday’s Growth Investor, Mike wrote, “SNAP’s had a big run since the start of the year, has surged since breaking out in early June and just sold a good-sized convertible note offering ($1.1 billion), which is dilutive. Despite all that, the stock continues to act well. We don’t expect major upside if the market continues to futz around, but shares continue to act as if big investors are building positions. A drop to 14 or below would be a red flag, but at this point we’re holding on tightly to our shares, and if you don’t own any, think you can start a small position around here.” BUY.

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 company’s been relatively quiet on the news front, which I take as a good thing; Tesla’s been in the public’s eye too much in recent months and years. As for the stock, it’s actually stabilized after its late-July earnings decline, which is a decent show given the market. HOLD.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED August 27, 2019

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