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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 268

The market is no longer as healthy as it was, but the bull market is not dead, either, just going through a change of character—a change that helps some of our stocks and hurts others. That’s investing!

As for this week’s stock, it’s a name you may not have heard of yet—it’s young—but lots of Chinese have, as it serves the mass market.

And in the portfolio, there are two changes—one simple sell and one “retirement” of a stock that has achieved its short-term potential but that might still be kept around for the long term.

Details in the issue.

Cabot Stock of the Week 268

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Clear

The broad market’s health remains mixed, with safer, high-yielding and value stocks holding up best while growth stocks have cycled out of the lead for now. Thus, your best bet is to favor more of what is working. In this portfolio, however, we come into this week overweighted with safer, value-oriented stocks, so I’m recommending one of Mike Cintolo’s current favorites, a stock he recently highlighted in Cabot Growth Investor. Here are Mike’s latest thoughts.
Pinduoduo (PDD)

Ask the average investor about his favorite Chinese e-commerce stocks, and after giving you a decided frown, they’ll probably go through the usual list of names: Everyone knows Alibaba and Baidu, most have heard of Tencent, and JD.com is one that’s probably come onto most radar screens at one time or another.

But all of those stocks are owned by at least 1,000 mutual funds already, and while that’s not necessarily a bad thing, we see far more upside potential in newer, less well-known (and less well-owned) names. And that’s a big reason why we’re so high on Pinduoduo (PDD) today.

Part of the attraction is that the stock itself is new; Pinduoduo just came public in July of last year, though, encouragingly, it already counts 413 funds as owners, a figure we see going much higher in the quarters to come.

But a much bigger piece of the attraction has to do with the firm’s very unique operation that’s driving jaw-dropping growth. As opposed to just another e-commerce site selling the usual array of goods, the company looks to be one of (if not the) leading pioneers in so-called “social commerce,” which encourages team shopping via interaction and invitations. (Much of those occur via WeChat, which is the most popular messaging app in China with more than a billion monthly users.)

Products on the site are generally bargain-priced merchandise to begin with, so even solo shoppers can find a deal. But the more people who join a team and buy a product at once, the lower the price is for everyone. And Pinduoduo encourages that, with frequent flash sales and leaderboards for teams that have recruited the most friends and gotten the most deals.

The result: The company’s own users are its greatest source of growth, with all the incentives lined up for them to attract more friends and family (and others) to buy with them. It’s like a viral marketing campaign wrapped up in an e-commerce operation.

The strategy is working almost unbelievably well. In the second quarter of 2017, when Pinduoduo was just starting up, it had just $15 million in revenue. In the second quarter of 2018, it posted $409 million in revenue. And Q2 of this year saw the top line top $1 billion! The other metrics are just as impressive—the value of goods sold on its platform increased 171% year over year in the second quarter, while there were 483 million active buyers (up 41%) and spending per buyer rose 92%.

Probably one of the most important numbers, though, had to do with who was buying rather than just the total amounts. For a while, many investors feared the company’s potential market was limited to small cities and towns looking for great deals. But in Q2, nearly half of its gross merchandise volume came from larger Tier 1 and Tier 2 cities in China, up from 37% a year ago. So it’s likely Pinduoduo’s potential is much larger than anyone thought a few months ago—which is one reason the stock has taken off.

All told, this looks like an exciting new concept in the e-commerce realm, and while macro factors like U.S.-China trade shenanigans will surely affect perception of all Chinese stocks, there’s little doubt that the firm will get much larger over time.

As for the stock, it had lots of ups (testing the 30-31 area a few times) and downs (support in the 17-20 area) during the first year of being a public company. But PDD has really changed character since early July, zooming to new highs on the back of a blowout earnings report. The pullback since then, while sharp, has been more than reasonable given the prior run, the weak overall stock market and a good-sized ($1 billion) convertible bond (dilutive) offering. I think this offers a decent entry point, if the stock fits your portfolio.

PDD 10.8.19

Pinduoduo Inc.
No. 533 Loushanguan Road
28th Floor Changning District
Shanghai 200051
China
86 21 5266 1300
pinduoduo.com

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PDD

CURRENT RECOMMENDATIONS

CSOW Portfolio 10.8.19

While the market is no longer healthy as a horse, selected stocks are still doing fine, and we own a few of them. However, two stocks are being cut from the portfolio today. One is for the most common reason; it’s going the wrong way. But the other—famous Apple—is being “retired” because Crista says there are now better opportunities. However, there’s still an argument for long-term investors to hold Apple—see below.

Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has just had a few good days of action—closing the negative gap from last week—and now could go either way, through Crista’s analysis says the odds are for a move upward. In her latest update, she wrote, Alaska Air Group is expected to report third-quarter EPS of $2.25, within a range of $2.08-$2.41, on the afternoon of October 24. ALK is a mid-cap stock, expected to achieve aggressive earnings growth rates of 33% and 16% in 2019 and 2020. The 2020 P/E is low at 9.3. ALK could easily trade anywhere between 63-72 this year.” BUY.

Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, hit a new high last Friday—propelled by the forces rewarding yield and security in the broad market—and has pulled back moderately since. If you don’t own it, you can nibble here. BUY.

Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been one of the market leaders, equaling its high of last October just last week, and Crista now thinks the stock has done enough for her readers. In today’s update, Crista wrote, “According to the Nikkei Asian Review last week, Apple plans to increase their iPhone 11 production by 8 million units, or about 10%, as determined by reports of higher orders at suppliers. The stock promptly reacted by recovering from the market correction in the early part of last week and resuming its uptrend. I’m retiring AAPL from the Buy Low Opportunities Portfolio today, now that the stock has retraced its high near 230 from October 2018. (And yes, I still love AAPL as a long-term hold for people who prefer to minimize portfolio turnover.)” Thus, I will “retire” AAPL from this portfolio as well. If you’re in for the long haul and want to hold, feel free to consult with Crista in the future. RETIRED.

Bandwidth (BAND), originally recommended by Tyler Laundon for Cabot Small-Cap Confidential, bottomed at 64 over the past two weeks, and is likely to resume its uptrend eventually. But do we want to wait that long? In his latest update, Tyler wrote, “BAND was flat this week as the stock continues to teeter on the edge of being cut from our portfolio. As I’ve been saying, 64.5 looks like the last zone of support before shares slide off and into the abyss (at least temporarily). At the same time, BAND trades right on its 200-day line and the combo of that and the aforementioned support zone increase the odds of shares rising from here, in my view. That’s why I’ve kept at buy for aggressive investors. That said, we’re not going to be irrational just because a few lines on the chart can paint a seemingly bullish picture. If the stock falters, I’ll cut it.” Given that this portfolio is not yet fully invested, I can wait. HOLD.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, gapped up to a new high two weeks ago when the company announced it would create a new Canadian entity, named Brookfield Infrastructure Corporation—and it gave back the gains last week, so it’s back in trend. In his latest update, Tom wrote, “The point of the new company will be to broaden appeal to investors that don’t like or can’t buy MLPs (including institutions) and to qualify for inclusion in several indices. Shares of BIPC and BIP will be considered equal with identical distributions. It’s a positive for shareholders in that BIP has a track record of successfully investing the new issuance money raised and it will broaden the appeal.” HOLD.

Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has been a mover in recent days, but I can’t say I see a real trend—yet. In today’s update, Crista wrote, “Analysts expect Citigroup to report third-quarter EPS of $1.95, within a range of $1.86-$2.00, on the morning of October 15. Wall Street expects Citigroup’s full-year EPS to grow 14.3% and 11.1% in 2019 and 2020. The 2020 P/E is 8.1. The stock could trade anywhere between 66-73 in the coming days, especially in reaction to next week’s earnings report. Barring a correction in the broader market, I think we could see the stock travel back to its January 2018 peak at 77 within 3-6 months. Buy C now.” BUY.

Coupa Software (COUP), originally recommended by Mike Cintolo in Cabot Growth Investor, is one of the best-looking growth stocks in the market. In Mike’s latest update he wrote, “It’s hard to ignore Coupa Software’s relative performance—shares actually zoomed above their 50-day line on solid volume, pushing back into the middle of their 11-week consolidation. Of course, many headwinds remain, including the market itself, growth stocks and the still-weak action among most of its peers. But as we’ve written before, we’re willing to give our remaining shares a chance—the risk from here is down toward our stop in the mid/upper 120s (it tickled that level on Monday), but the upside if the market and COUP can get going is much larger than that. Continue to hold your shares, albeit while watching our stop.” HOLD.

Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio and featured here two weeks ago, has pulled back modestly, but volume has been light, so buyers should step in soon—and you could be one of them! BUY.

Digital Turbine (APPS), originally recommended in Cabot Early opportunities by Tyler Laundon and featured here last week, continues to build a launching pad just above 6. In his recent update, Tyler wrote, “There’s been no news to speak of and the stock is holding above its 50-day line. It’s still looking good.” But I would like to comment that when prices are under 10, volatility tends to be higher and fundamental risk is generally higher as well. If you choose to buy, pick your spots and don’t over-commit. BUY.

Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, dipped below some support today, but it’s now testing stronger support from the May/June low area. In his latest update, Tom wrote, “Everything seems to be going well for this company except the energy sector. While the stock has been stuck in the mud for some time, it has done so in a lousy market for energy stocks. The blue chip energy company continues to grow earnings at an increasing clip as new projects come on line. The stock price is still 30% below the 2014 high while earnings have grown 11% per year over those five years and should accelerate going forward. It represents great value here with growth as well, and with a 6% yield that is rock solid and will grow.” 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 (it’s China’s largest hotel chain) that I’ve resolved to hold the stock through normal technical sell signals. The stock has been basing between 30 and 39 in recent months. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has great fundamentals—chief among them its rapid growth as it works to undercut Starbucks in the Chinese coffee market. But the stock’s action is less than impressive. In his latest update, Carl wrote, “Despite its breakneck pace of opening new stores and stands, its CFO has publicly stated it plans to be a breakeven by the end of next year. Its second quarter had high sales and marketing expenses, which can be dialed back in the future. Luckin believes there is room for more than Starbucks in a market of 300 million plus middle class consumers. Its strategy to compete with Starbucks is a combination of quality, convenience and affordability with prices around half of what Starbucks offers. Most of its shops are set up for takeaway and delivery rather than the Starbucks model of a place to meet and work. In addition to coffee, Luckin has added tea and just announced that it will be developing a joint venture to produce and distribute co-branded juices.” HOLD.

MakeMyTrip (MMYT), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is going the wrong way and Carl thinks it’s time to cut this loss short—and I agree. In his latest update, he wrote, “While I believe that MMYT offers attractive exposure to a high growth consumer market in India, I’m moving this to a sell based on its relative weakness. We will very likely come back to this stock down the road.” SELL

Meritage Homes (MTH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is hitting new highs! If you bought on my original recommendation, you could average up now (by buying a smaller amount than your original position) but be cognizant of your total risk. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, hit a new high Friday and is just below that level today. In his update last week, Tom wrote, “The market loves utilities and safe stocks right now but it is obsessively stalking NEE. This is a utility stock that has returned an average of 22% per year over the last five years, 26% for the last three, and 42% over the last year while the S&P 500 has only returned 1.93%. Sure, it’s the best big utility out there, but geez, it sure is overvalued at this point. I love this company and the stock. But it’s a utility not a tech stock. It is now venturing into nosebleed territory where the price is become increasingly hard to justify. While the getting is so good, I will take half of the position off the table, booking a 34% profit in about 10 months on half and let the other half ride for a while longer.” To keep things simple, I’ll continue to rate NEE hold, but if you have a good profit, consider selling half. HOLD.

Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has had a rough couple of weeks, but Mike isn’t giving up on it yet. In last week’s Cabot Growth Investor, Mike wrote, “SNAP has been going down a sinkhole during the past week, though it appeared to find some buyers at key support (14 to 14.5) before today’s bad news hit—Facebook is launching a camera-based messaging app called Threads, aimed for people to use with a smaller circle of friends than it would via Instagram. The product didn’t exactly come out of nowhere (SNAP took a hit in August when rumors surfaced Facebook was working on Threads), but regardless, it fell sharply on the report—though, encouragingly, finished well off its lows after dipping below support near 14. Making a decision here is a tough one—the stock is right near our mental stop, but it’s already come straight down in recent days, the bad news is out and we already have a large cash position. Because of that, we’re going to hold SNAP tonight (today could have been a shakeout), but it needs to find buyers right quick or else we’ll cut the loss. I’ll follow Mike’s lead. 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 and is still far ahead of all its competitors by many measures means that long-term prospects are still very good. The company delivered “only” 97,000 vehicles in the third quarter—missing Elon Musk’s goal by 3,000, but that’s still great progress. And while the stock sold off on the news, it has regained most of the loss. HOLD.


Your next Cabot Stock of the Week will be published on October 15, 2019

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