The market looks great today. The correction is over and buyers are back in control, so I recommend heavy investment in stocks that meet your portfolio’s goals.
Last week I made a slew of ratings changes to our portfolio to get back in synch with the market, but today all looks well so there are no changes at all—though of course that will change!
As for this week’s recommendation, it’s a bit unusual, in that it’s a recent IPO that got very little notice (unlike giant Uber for example), but it has a good growth story, and could even thrive in the next recession.
Cabot Stock of the Week 265
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The bull market is alive and well, with all major indexes near all-time highs and all Cabot’s market timing indicators giving positive signals, telling us the market will likely be higher months from now. Thus, being heavily invested in a portfolio of stocks that meet your needs is the continuing prescription. Today’s recommendation is a young stock you may not have heard of if you don’t live in the six states where it operates, but as its stores proliferate across the U.S., that will change. The stock was originally recommended in Cabot Growth Investor by Mike Cintolo and here are Mike’s latest thoughts.
Grocery Outlet (GO)
Everyone likes a bargain, and that truism has launched some huge winners over the years in the retail world. Grocery stores, though, haven’t seen successful nationwide efforts at bargain shopping, partly because margins in the industry are already thin, and, of course, because nobody wants to buy horrid-quality food to save a buck.
But Grocery Outlet seems to have cracked the code, as it cranks out solid growth and profits even while offering consumers crazy-low prices on name brand merchandise. How low? According to the company, its prices are around 40% less than those at traditional grocers and 20% less than at discount peers!
The firm is able to do this (and make money) thanks to three key factors. The first is that Grocery Outlet offers an extreme value, treasure hunt-type of environment in its relatively small-box stores, each one with an ever-changing assortment of around 5,000 products (the changing products create a buy-now mentality), though there are consistent offerings of staples. There’s even a “WOW!” wall of products that have all of the best deals of the day, which is an obvious selling point. And there are no membership fees or the need to buy in bulk.
Another key factor is the purchasing team. Because it sells name brand stuff and not its own, brands view Grocery Outlet as a solid partner, and the company’s centralized sourcing team is able to take advantage of (and buy in large quantities) stuff at huge discounts due to order cancellations, changes in packaging, overruns or approaching “sell by” dates. This includes plenty of produce, too, not just older boxes of crackers and cereal.
Then you have the structure of the whole operation. Grocery Outlet’s stores are managed by local, independent operators, giving each store (and its customers) the love and attention that’s needed. Indeed, the corporate office often shares 50% of gross profits with the stores, so there’s plenty of incentive to boost the bottom line! These operators select around three-quarters of products for their stores, so there’s a definite local flavor to what’s on the shelves.
This unique strategy is working for customers and for the company. The firm’s store-level economics are hard to beat in the grocery world; of all the stores opened since 2011 (average opening cost is just $2 million due to the small size), the average store has not only recouped all its costs within four years but also made 40%. Helping the cause is a sterling record of 15 straight years of same store sales growth. And for those wondering, growth accelerated in a big way during 2008 and 2009, so any economic slowdown going forward should actually play into Grocery Outlet’s hands.
At the end of June, the firm had 330 stores in operation, albeit in just six states in the U.S. (California, Oregon, Washington, Idaho, Nevada and Pennsylvania). But that’s just the tip of the iceberg; the firm has been opening stores quickly (26 new ones in 2018, 32 new openings this year) and believes it can more than double its locations just in the six states it’s currently in! Beyond that, the sky’s the limit, with the firm seeing 1,600 new locations possible in neighboring states, with a total potential U.S. market of 4,800 locations.
Of course, with growth will come challenges, including finding talented independent operators. But the model clearly works, and there’s no reason to think Grocery Outlet can’t crank out 10% to 20% annual growth and eventually grow many-fold in the years ahead. Analysts see sales up 10.5% this year, with a 13% bump expected in 2020 (while earnings are anticipated to rise 17% in 2020).
Having just come public on June 20, there’s not a ton to analyze when it comes to the chart, but so far, it looks good. The stock opened around 28 and zoomed as high as 46 by mid August. But the market’s wobbles and recent rotation out of anything showing strength got to it after that, pulling GO as low as 34 last week before a modest bounce, and this looks like a decent entry point.
Grocery Outlet Holding (GO)
5650 Hollis Street
Emeryville, CA 94608
510-845-1999
www.groceryoutlet.com
CURRENT RECOMMENDATIONS
The broad market looks great today, with buyers clearly overwhelming sellers, even though market rotation has pulled down some old leaders. And our portfolio, too, looks good overall, as we move back toward our fully invested position of 20 stocks. Last week we had a major crop of ratings changes (six), but this week I see no reason to change anything. Your own portfolio, of course, may be different, so take a close look, and if a stock isn’t doing what you hired it to do, let it go.
Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, hit a high of 66.52 last week, peaking exactly to the penny where it peaked in February—and it’s pulled back normally since, with the Saudi Arabia attack (and higher oil prices) a contributing factor. In her latest update, Crista wrote, “ALK is a mid-cap stock, expected to achieve aggressive earnings growth rates of 32.5% and 17.3% in 2019 and 2020. The 2019 P/E is low at 11.1. Be aware that earnings estimates could come down a bit if oil prices remain elevated. ALK rose past short-term price resistance at 65 last week, and could easily trade anywhere between 63-72 this year. Buy ALK now.” BUY.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, and featured here two weeks ago, looks great, just off its high of last week. In his latest update, Tom wrote, “It was a rough week in the market for REITs and Utilities, and most of those stocks took a gut punch just for showing up. But none of that seemed to bother this healthcare REIT; ARE was up for the week anyway. High occupancy rates for its in-demand unique laboratory properties make this stock a favorite in the current environment. It’s a highly defensive REIT that consistently grows earnings and the dividend. Even a rough week for the sector can’t seem to quell investors’ affections for this stock.” BUY.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, hit more new highs last week as the company began selling its new iPhones—even though investors know services is where the growth will be in the future. In today’s update, Crista wrote, “Wall Street expects an EPS drop of 2.1% in 2019 (September year end) followed by an increase of 9.1% in 2020. While iPhones still makes up over 50% of annual gross revenue and profit, Services gross profit is growing rapidly, currently at a 30% rate. The stock emerged from a trading range on September 5 and is now rising toward its October 2018 all-time high near 230, again attaining a $1 trillion market cap. AAPL is my favorite buy-and-hold stock for long-term capital gains.” BUY.
Bandwidth (BAND), originally recommended by Tyler Laundon for Cabot Small-Cap Confidential, had two rough weeks before bouncing anemically yesterday. In last week’s update Tyler wrote, “BAND pulled back from the high 80s this week and is now in the middle of the 68 to 82 trading range where it was just before I recommended the communications specialist in early August. This week management announced that it’s made more improvements to its phone number porting solution. This doesn’t seem like a huge deal for the average person, but if you’re a large company moving to a new communications platform and have hundreds, if not thousands, of phone numbers to move it’s best if it goes smoothly.” HOLD.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, has been trading tightly between 47 and 48 over the past week. In his latest update, Tom wrote, “This infrastructure stalwart has been great lately. The stock has had an impressive 7.3% upmove over the past month and has vastly outperformed the market in every measurable period over the past year. And that’s after a slight pullback from its high of 49 last week. It’s still near its all-time high and looks like it wants to go higher. It also helps that new assets coming on-line should continue to boost earnings in the quarters ahead.” HOLD.
Carvana (CVNA), originally recommended by Mike Cintolo in Cabot Growth Investor, plunged through its 25-day moving average a week ago, but has been riding that line back up since and is very near its old high, so overall it looks good. In his latest update, Mike wrote, “CVNA finally succumbed to the rotation earlier this week, with a big-volume decline as investors took profits. But the chart looks fine, with the stock still within its post-earnings gap range (75 to 85 or so). Fundamentally we think the story is as good as ever—this month, the firm opened its second vending machine in Los Angeles (and 21st in the U.S.), which is an attraction that’s been shown to boost engagement in business. And the firm also entered three more cities in Tennessee, putting Carvana in 141 markets, which is within its year-end goal (140 to 145). Because of the story and the fact that the stock looks early-stage (it just broke free from a year-long base), we’re willing to give CVNA plenty of rope (probably into the upper 60s) before cutting bait. And, on the upside, should the market settle down and this stock push to new highs, we could look to average up.” BUY.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, had three strong weeks up and is now on a minor pullback. In today’s update, Crista wrote, “Citigroup is a global financial company that serves consumers, businesses, governments and institutions in 98 countries. Strength in consumer lending, and lower expenses, tax rate and share count contributed to second quarter successes. The lower interest rate environment, with slow global economies, has led Citigroup and most of its peers to lower their 2019 net interest income (NII) outlook. Citigroup is now projecting full-year NII to rise in a range of 3-4%, which came as a relief to Wall Street, because analysts were expecting a 2.6% increase. Wall Street expects Citigroup’s EPS to grow 14.3% and 10.5% in 2019 and 2020. The P/E is currently 9.3. There’s short-term price resistance at 72, and again at 77 where C last traded in January 2018. Accumulate C, especially on pullbacks to 68.” BUY.
Coupa Software (COUP), originally recommended by Mike Cintolo in Cabot Growth Investor, was hitting new highs two weeks ago, but is now back in its base between 130 and 140, setting up (hopefully) for another try. In his update last week, Mike wrote, “This stock looked ready to get going following its fantastic quarterly report, but the cloud software sector went from stud to dud starting last week, and Coupa got caught up in the riptide. However, not all is lost here—COUP is definitely one of the more resilient in the group, hanging around its August range. And why shouldn’t it be? The company has the makings of an emerging blue-chip; we think it could be another Salesforce.com in the sense that Coupa’s spend management platform could become the gold standard, adopted by thousands of large- and mid-sized organizations. Thus, we still favor giving the stock as much rope as possible.” HOLD.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, continues to make slow progress—which is just fine for a stock yielding 6.1%, In his latest update, Tom wrote, “Buying great stocks at cheap prices has been a money making strategy historically. This is a great stock in a beleaguered sector. Energy is the worst performing sector of the market for the last 10 years, 5 years, 3 years, 1 year, year-to-date and 3 months. That will change. It always does. But EPD has been performing anyway, vastly outperforming the energy indexes and performing largely on par with the market. Think how well it could do when things turn around. Meanwhile, it’s performing okay with a monster 6.1% yield that’s rock solid.” 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 hold the stock through normal technical sell signals. Last week the stock broke through 38 (where it peaked two months ago) but it couldn’t maintain the altitude and has pulled back normally since. HOLD.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has been climbing nicely for a month and is now above both its 25- and 50-day moving averages, aiming for its old high of 27. Last week Carl wrote, “Luckin keeps expanding its fleet of stores, which grew 375% annually to 2,963 locations in its most recent quarter, and plans to eclipse Starbucks with 4,500 stores by the end of the year. 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%. 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 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 strong for three weeks, but we’re still under water, having bought just before the July top. In Carl’s latest update, he wrote, “A play on India’s travel industry as well as digital payments and marketing, MakeMyTrip has evolved into a leading travel company as India evolves into a digital marketplace by providing a comprehensive range of travel services. The company has made key acquisitions and strategic partnerships and a key alliance is with Ctrip, China’s largest online travel group.” HOLD.
Meritage Homes (MTH), originally recommended in Cabot Top Ten Trader by Mike Cintolo in Cabot Top Ten Trader, and featured here last week, keeps hitting new highs, as investors perceive good times for this homebuilder. Encouragingly, many peers are also acting well. If you haven’t bought yet, try to buy on a pullback. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, hit a new high two weeks ago, but then the stock gapped down, and now it sits right on its 25-day moving average, thinking about resuming its uptrend. In his update last week, Tom wrote, “Even this safe utility with growth had a rough week. Ordinarily, I would worry that if recent market action continues this stock could be in trouble. After all, it’s a conservative utility that’s up over 25% already this year. But with predictable, rock-solid income from its regulated business and strong growth from its cutting edge alternative energy business, it may well endure even a shift in market leadership.” HOLD.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had been trading sideways, tracking its 25- and 50-day moving averages, for several weeks, when Mike wrote in last week’s Cabot Growth Investor, “Overall, SNAP’s been tedious, but we still view it as early stage (the first breakout came in June, while the low was back in December of last year), and the stock is holding above its prior low near 14. Throw in a powerful turnaround situation and we’re inclined to hang on, let the stock wiggle around and, ideally, resume its major advance. If you own some, sit tight.” Then today, a bearish analyst turned neutral on the stock and the stock surged higher on good volume. Prospects are good. 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 are still very good. This week the good news is that the company’s Gigafactory in China is being built at record speed and will soon enable the manufacture of Model 3 sedans at far lower cost than in the U.S. The stock remains above both its 25- and 50-day moving averages, going the right way. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED September 24, 2019
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