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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 262

The market remains under pressure in the short-term, for all the well-publicized reasons, but long-term, the market trend remains up, and many of our stocks are acting well. Today’s recommendation is a repeat, a stock we made money in last year that subsequently had a big correction and is now ready to run again. And it’s got a great story, too!

Cabot Stock of the Week 262

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Short-term, the market remains under pressure, buffeted by the selling of investors scared by the prospects of an extended tariff war, but long-term, the trend remains up, so we still see the current weakness as a normal correction. Caution is recommended in general, but opportunistic investors—or those who have too much cash—can still find attractive situations; in fact, many leading growth stocks have been hitting new highs! This week’s stock is one of them, and for long-time readers it will be familiar, because we owned it in July and August last year, selling with a 22% profit. The stock was recently recommended by Mike Cintolo in Cabot Growth Investor, and here are Mike’s latest thoughts.
Carvana (CVNA)

Many of the biggest winners in market history have a revolutionary product in what is an entirely new industry; Cisco’s routers and networking equipment as the Internet was being built out, Intuitive Surgical’s robotic surgery system that eliminated the need for many invasive procedures and XM Satellite Radio’s one-of-a-kind service in a sector that didn’t exist before 2000 are all examples.

But many huge performers also brought a new approach to an existing mass market. Home Depot’s massive warehouse-style stores became the go-to one-stop shop for all things building materials and construction supplies. Similarly, Costco (and before that, Pic N Save) changed how people shopped for bargains. And, of course, Amazon has done the same, starting with books and branching out into everything else.

We think Carvana has a little Amazon-ness to it—the company is upending the huge used car industry, whose sales totaled $764 billion a couple of years ago. The sector is extremely fragmented, and if Carvana can capture just a small fraction of the total industry, it’s going to grow many-fold from here.

The company is becoming a nationwide used car dealer by selling cars online. But the story isn’t just about setting up a website and listing a bunch of cars; in fact, Carvana has seemingly thought of everything to make it as attractive as possible for consumers to buy through Carvana. The company has more than 20,000 vehicles to choose from, 360-degree high-definition views of every car and all their details, a guarantee that its cars have never been in a reported accident and have no frame damage and it puts all cars through a 150-point inspection before offering them for sale. There are plenty of financing and trade-in options, too, with Carvana also willing to buy a car from consumers directly.

After the buy, the company offers a three-month limited warranty and a seven-day test drive period, which is a big deal, allowing consumers to take a shot and giving them an out if they’re not satisfied. Many markets provide next-day delivery, and Carvana also has 20 car vending machines (seriously), where buyers can come to pick up their cars with a token. (They’ve proven to boost awareness and sales in the surrounding area.) Throw in investments in marketing, reconditioning facilities and car acquisitions (those coming off lease, former rental cars, etc.) and Carvana has the infrastructure in place for huge growth.

And huge growth is just what the company has seen! Revenues have been advancing at triple-digit rates for years as Carvana moves into new markets; it should be selling in 140-plus markets by the end of 2019, up from 85 last December and just 44 the year before that. The bottom line is still drenched in red ink, but importantly, Carvana is producing some operating leverage (gross margin was up 181% in dollars in the second quarter vs. a 107% gain in revenues).

Best of all, management is thinking big: This year, the company is aiming to sell a total of about 170,000 vehicles, but its long-term target is to get that figure to two million or more. Based on the trends of the past couple of years, there’s no reason to doubt they will get there.

As for the stock, CVNA looks like it’s near the start of a new advance. The stock had a nice run last year, but then got taken apart during the market’s implosion late last year, falling 60% from its highs. But then the stock showed some real power, rallying back to its highs during the next few months on a few waves of big-volume buying.

After such a big rebound, a stock usually needs to digest near its prior highs for a bit, and that’s what CVNA did from May through July—until a super earnings report catapulted the stock to new highs three weeks ago in spite of the wobbly market. Since then the stock has held those gains nicely, though there is still a risk of a pullback to the low 70s. Keeping it simple as always, the portfolio will buy tomorrow.

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Carvana Co. (CVNA)
1930 West Rio Salado Parkway
Tempe, AZ 85281
United States
480-719-8809
http://www.carvana.com

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CURRENT RECOMMENDATIONS

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Overall, the portfolio is in good shape today, with some stocks hitting new highs and others in the midst of normal corrections, so I have no sell recommendations today. But I do want to reiterate that you should continue to exercise some caution until this correction runs its course. Eventually, it’s likely that investors will conclude that reality is better than they feared and the buyers will take control again; in fact it’s possible that the bottom has already passed. But there’s no reason to rush to be the first one back in the pool. Keep your eye on the charts—of both the indexes and your own stocks—and the market will tell you what to do.

Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, is currently revisiting the region between 57 and 58, where it bottomed three and four months ago. But Crista still has it rated a Strong Buy, because the stock meets all her investment criteria: Earnings growth is good, the valuation is low and there’s a 2.4% dividend yield. BUY.

Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, remains in a healthy uptrend, just a few percent off its recent highs. Crista has it rated a Strong Buy and now that the worst of the market correction has likely passed, I’m going to get back in synch with her. BUY.

Bandwidth (BAND), originally recommended by Tyler Laundon for Cabot Small-Cap Confidential, hit a new high last Friday and has pulled back minimally since. In his latest update, Tyler wrote, “Bandwidth is a $2 billion market cap company that has developed one of the leading cloud-based communications (CPaaS) platforms out there for large enterprises. This platform helps Bandwidth’s customers build, scale and operate software-based voice, messaging, and emergency service-related communications tools. Google (GOOG) uses Bandwidth Voice in its Google Home smart speaker to power outbound calls. Amazon’s (AMZN) Alexa does, too. Microsoft (MSFT) also uses Bandwidth Voice and Messaging in some applications, including Skype. Revenue should be up 20% this year, but it will be 2021 or so until the company is profitable.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, continues to hit new highs! In his latest update, Tom wrote, “In this MLP you have a dividend that has risen each of the last nine years and a fantastic stock performance over the past decade. It also has solidly growing earnings in some of the safest, most recession-resistant assets on the planet—things like transportation, telecommunications, water and energy infrastructure.” BUY.

Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, and featured here last week, remains at an attractive entry point. BUY.

Coupa Software (COUP), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to a new high today, after spending the past five weeks in a shallow correction that took the stock down to its 50-day moving average—but the stock fell back as the day went on. Even so, the stock remains resilient. In last week’s update, Mike wrote, “Coupa acts stronger than the market, but it’s still doing more chopping than trending in recent weeks. We’re hanging on, but looking ahead, the market environment and the firm’s upcoming quarterly report (due September 5) will probably tell the tale.” BUY.

Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, has made no progress for us yet, but Tom says it’s just a matter of time. In his latest update, he wrote, “As usual, the American energy infrastructure giant is hovering at the top of the range in which it has traded since 2016. It has key resistance around the 30 level but just can’t seem to convincingly break over it. This is a rock solid company that is doing well even if the market is a little fussy about the energy sector. An estimated $44 billion per year will need to be spent on energy infrastructure to accommodate the new supply through 2035. Opportunities for growth abound. EPD has $5 billion in projects under construction and between $5 and $10 billion in development. That should provide ample growth to go with the 6%-plus yield.” BUY.

Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, has been building a base between 115 and 120 for two months now, and sits right on top of both its 25- and 50-day moving averages. This combination should eventually launch the stock out to new highs, but there could be one more correction if the market has another leg down. Long-term, the prospects are great for the maker of the Cologuard colorectal cancer test. 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. The stock has been building a bottom since late May when it hit 30—outperforming most Chinese stocks since then—and last week the company released a great second quarter report. Revenues grew 13% from the year before to $417 million, EBITDA increased 59% to $173 million, and the company opened 311 hotels in the quarter. However, occupancy rate fell from 89.6% a year ago to 86.9%, mainly because of the slowing Chinese economy. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is back where we started thanks to an earnings report that disappointed some investors. In last week’s update, Carl wrote, “While its revenue rose 648% from a year ago to $132 million, Luckin posted an adjusted net loss of $89 million, or a net loss of $0.48 per American Depositary Share (ADS), missing expectations by three cents. The chief culprit is sales and marketing expenses, which surged 119% annually to $57 million during the second quarter. On the other hand, Luckin keeps expanding its fleet of stores, which grew 375% to 2,963 locations. Amazingly, that puts it within striking range of Starbucks, which finished last quarter with 3,922 locations across China. It plans to eclipse Starbucks with 4,500 stores by the end of the year. This sort of growth comes at a cost as it posted $379 million in operating expenses in the first half of the year while generating $202 million in revenue. 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%. That’s a good sign.” HOLD.

MakeMyTrip (MMYT), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, fell hard in early August but has rebounded well since, so odds are good that the bottom has passed. But with most emerging market stocks under pressure, I can’t recommend it as a buy yet. HOLD.

Match Group (MTCH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the global leader in online dating, and thus a good candidate for very long-term investment, as the world grows more open to its services. Since gapping up on big volume three weeks ago after an excellent earnings report, the stock has been consolidating that gain—and is still above all its moving averages. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has just advanced for nine consecutive days, a great sign of investor sponsorship. In last week’s update, Tom wrote, “This stock is showing real down market resilience. In the past down month for the market, NEE is up 4.7%. It’s up over 25% in the past year while the market is only up 2.3%. 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.

Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been weakening slowly in recent weeks, and today dipped below its 50-day moving average, which is troubling—even though volume has been light. In last week’s Cabot Growth Investor update, Mike wrote, “If the stock cracks support, we’ll switch to a Hold rating,” so that’s what I’m doing today. 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 while it hasn’t been a market leader for years, the fact that the company is still growing at a good rate (revenues were up 59% in the second quarter from the previous year) and is still far ahead of all its competitors by many measures means that long-term prospects remain very good. HOLD.

THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED September 3, 2019

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