The economy is humming, interest rates are falling, and stocks are rising. All in all, therefore, conditions are great, and our diversified portfolio—currently weighted toward lower-risk dividend-payers—is doing well.
This week we sell one growth stock, downgrade two portfolio stocks to hold—because they’ve done so well—and add a new growth stock, a high-tech communications company whose name harkens back to an earlier era.
Details in the issue.
Cabot Stock of the Week 270
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Technically, Cabot’s market timing indicators are positive today, standing healthily above their moving averages and telling us the market is likely to move higher. However, the divergence between growth stocks (which have been faltering) and dividend-paying value stocks (which have been thriving) continues, reminding us that a house divided cannot stand. Furthermore, a quick glance at the charts of the major indexes shows a pattern of tops in July and September followed by a third one right now, suggesting that the present might be a good time to lighten up. Thus, a certain amount of caution is advised, like holding some cash, buying more cautiously (target the dips), and selling more aggressively when stocks fail to meet expectations. The portfolio comes into today with 15 stocks out of a possible 20, and today’s recommendation is at what looks like an attractive entry point. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.
RingCentral (RNG)
To this day I remember being a kid and waiting for my Dad to get home from the office every day so I could talk to him about whatever was on my mind—usually baseball or football. Like everyone else, my Dad went into the office from 9 to 5 (more like 8 to 6 or 6:30) every weekday and, sometimes, headed in for a few hours on Saturday, too. Sure, he read a few documents at home every night, but if he wanted to be in touch and have meetings with his team, it had to be in the office.
Today, of course, that’s all changed thanks to technology. My wife, for instance, who has a job with a huge partnership, works from home full time. And I usually write from my comfy couch a couple of days a week. Given the reality of today’s mobile, connected workforce, you’d think the communications systems found at most companies big and small would have evolved, too. But you’d be wrong! Many companies still have legacy, on-premise, voice-oriented systems for employees to talk to each other, customers or suppliers.
Therein lies the massive opportunity for RingCentral, which is a leader in a field clunkily known as Unified Communications as a Service (UCaaS). Basically, the firm offers a cloud-based business communications and collaboration platform that is location- and device-independent and includes everything a firm needs—voice, virtual meetings, digital faxes, team messaging (including file sharing and task management) and even contact center functions. The solution is customizable, too, and can be integrated into other cloud-based systems (Oracle, Okta, Zendesk, Box, Salesforce, etc.). The advantages are numerous, especially for big workforces that collaborate from all over the place at various times.
The firm’s Office offering is the core of its services, and the hurdle to sign up doesn’t seem big—from $20 to $50 per month per user depending on the services a firm needs. In fact, not only is the product better, but RingCentral ends up saving its clients a bunch of money over time, too.
There is competition out there, but we’re not overly concerned about that; truthfully, the biggest “competition” is simply the inertia of the legacy communications systems out there. Plus, the opportunity is so large (possibly $25 to $50 billion over time) that there’s plenty of room for a few players. Indeed, Ring has one of the most consistent, rapid growth records we’ve seen, with sales up between 30% and 37% each of the past 10 quarters. The firm’s large recurring revenue and strength in enterprise clients (revenue up 88%) are big plusses.
That said, the reason we’re recommending the stock here is because of a recent deal that should likely accelerate that growth. The firm recently inked a deal with (and took a 6% stake in) Avaya to offer an Avaya-branded (but powered by RingCentral) UCaaS solution to Avaya’s 100 million customers. By comparison, Ring has just a couple million current users! Avaya will leverage its thousands of sales reps and partners to upgrade its current installed base, which includes 90% of the Fortune 100. It’s a huge deal, which caused the stock to go ballistic for a couple of days, surging to new highs.
The biggest risk with RingCentral probably has nothing to do with the company itself or the overall story. Instead, the perception of cloud stocks could be the biggest intermediate-term factor—the group’s renewed weakness last week caused RNG to skid, for instance. That said, cloud names have already gone through the wringer, and as long as they don’t melt down, we think big investors will be comfortable building positions in this stock.
All told, RNG looks like rare merchandise to us—a company with rapid, steady and reliable growth, as well as a gigantic opportunity in front of it thanks to the Avaya deal. Since closing at a high of 177 last Tuesday, the stock has pulled back normally, and this pullback has the potential to take the stock down to 150 or even 145. If you’re risk-averse, you could wait and see if the stock gets there, but the portfolio, keeping it simple, will buy here.
CURRENT RECOMMENDATIONS
It’s a cliché to say that a market is a “stock-picker’s market” but like all clichés, there is some truth behind it. In broad bull markets, most stocks go up, and selectivity is not particularly important. But in a “stock-picker’s market” the proportion of stocks going up is smaller, and thus selectivity is more important. That’s where we are now. The indexes look good, and high-yielding low-risk stocks look good, but there are a lot of potholes. Happily, we’ve not fallen in any big ones for a long time and for that I credit the talented Cabot analysts, who originally selected the stocks that I highlight in this portfolio. Today, as we add one of Mike Cintolo’s growth stocks (RNG), and we subtract one as well (COUP). Details below.
Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has had a good run, but Crista says it’s not a good buy at this level. In today’s update, she wrote, “Alaska Air is a low-cost passenger airline. Alaska Airlines and its regional partners fly 46 million guests per year to more than 115 destinations with an average of 1,300 daily flights across the United States and to Mexico, Canada and Costa Rica. Alaska Air does not operate any Boeing 737 Max jets. The third-quarter consensus EPS estimate rose significantly last week. Alaska Air Group is now expected to report third-quarter EPS of $2.48, within a range of $2.08-$2.65, on the afternoon of October 24. I don’t recall ever seeing such a large change in earnings estimates, mere days away from the reporting date. Expect volatility.
“ALK is a mid-cap stock with an $8.2 billion market cap. Full-year earnings estimates jumped again last week, and have been rising for eight weeks. Alaska Air is now expected to achieve EPS growth rates of 39% and 12.4% in 2019 and 2020. The 2020 P/E is 9.9. The price chart remains bullish. I’m moving ALK from Strong Buy to a Hold recommendation as the stock approaches 72-73, where it last traded in 2018.” HOLD.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, bounced off its 25-day moving average last week and promptly broke out to new highs, showing us that investors’ appetite for yield and lower risk remains undiminished. In his latest update, Tom wrote, “The stock continues to slowly forge to new all-time highs no matter what the market throws at it. High occupancy rates for its in-demand unique life-science laboratory properties make this stock a favorite in the current environment. It has significantly outperformed both the overall market and the REIT index in every measurable period over the last five years. Falling interest rates should be a tailwind for the stock going forward.” BUY.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, remains on a normal correction, trading right at its 25-day moving average. In his latest update, Tom wrote, “The stock had a nice bump a few weeks ago after the announcement that it will create a new corporation and distribute shares to BIP holders. But the stock has since leveled off. There hasn’t been much news and earnings will be announced at the beginning of November. I still think this infrastructure player is in the sweet spot of the market. It’s defense in an uncertain environment and it is not overpriced. It also has solid momentum and a high yield.” HOLD.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has been a good performer, but Crista says it’s not a buy at this level. In today’s update, she wrote, “Citigroup is a global financial company that serves consumers, businesses, governments and institutions in 98 countries; and the third-largest U.S. bank by assets. Strength in Citi’s Consumer Banking and Treasury and Trade Solutions businesses carried the third quarter. Notably, the bank is ahead of schedule in working toward their 2020 return on average tangible common shareholder’s equity (ROTCE) target. The 2019 earnings estimate rose subsequent to last week’s third-quarter report. Wall Street now expects EPS to grow 15.6% and 9.2% in 2019 and 2020. The 2020 P/E is 8.5. I’m moving the stock from Strong Buy to a Hold recommendation. There’s 7% upside as the stock retraces its January 2018 peak near 77, at which point I will likely retire C from the portfolio in favor of a dividend stock with a stronger projected 2020 EPS growth rate.” HOLD.
Coupa Software (COUP), originally recommended by Mike Cintolo in Cabot Growth Investor, was one of the last growth stocks to remain strong, but last week it joined its peers on the downside—and Mike sold. In his update last Friday, he wrote, “Last night, we decided to hold our shares of Coupa (COUP) despite this week’s ugly slide, as the stock was still within its consolidation area of the past few months—though we also hiked our mental stop given the funky action. And this morning, instead of finding support, COUP is again down on another round of heavy volume. After a sharp drop, a bounce is always possible, but the combination of the sector’s weakness following a huge, prolonged run, COUP’s failed breakout and the outsized selling volume this week tells us a more meaningful top is possibly in place. At the very least, the stock doesn’t appear like it will be ready to lead any market advance that gets going. Beyond that, the simple fact is that COUP is violating our stop this morning—thus, we’re going to take the rest of our profit here and hold the cash.” We got in later than Mike, and thus have a small loss—which is even more reason to sell. SELL.
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, has done nothing lately, but Crista says patience will pay. In today’s update, she wrote, “Designer Brands is one of North America’s largest designers, producers and retailers of footwear and accessories. The company operates DSW Warehouse, The Shoe Company and Shoe Warehouse stores with nearly 1,000 locations in 44 U.S. states and Canada; and Camuto Group. DBI is an undervalued, small-cap growth stock. The company has delivered 27 consecutive years of revenue growth. Analysts expect EPS growth rates of 14.5% and 14.7% in 2019 and 2020 (January year end); and company management is projecting 2021 EPS growth of about 24%. The 2020 P/E is very low at 7.5. DBI has traded between 16-17.5 since early September. The next run-up could lift DBI to price resistance at 19, and then to 22.5. Buy DBI for outsized total return potential in 2019 and beyond.” BUY.
Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon and featured here two weeks ago, offers mobile operators and OEMs a mobile delivery platform for Android OS that helps customers find the apps they want. We bought near the stock’s correction low three weeks ago and the stock has been moving ahead steadily since; it’s currently vying to break above its 50-day moving average. BUY.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, remains near its low, but Tom says there’s no reason to worry—as long as you can be patient. In his latest update, he wrote, “This energy giant with over 50,000 miles of pipeline servicing the American energy boom just raised its distribution again, for the 61st consecutive quarter. It has not moved up significantly in a while and is still trading near the top of the recent range. It sells at valuations that are half that of the overall market while paying a yield of better than 6% while earnings are in a growth cycle. It has many billions of projects coming on line this year that should boost earnings and about $6 billion in projects under construction. It’s a fantastic value that pays you to wait.” 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. In recent months, that’s meant holding while Chinese stocks in general suffered; for HTHT, that means the stock today is no higher than it was two years ago. But the company has been growing steadily all that time, which means that the stock is not a much better value. And last week the company announced preliminary third-quarter results that sparked substantial buying on Thursday. As of September 30, the company had 5,151 hotels with 504,414 rooms in operation. Huazhu’s brands include Hi Inn, Elan Hotel, HanTing Hotel, HanTing Premium Hotel, JI Hotel, Starway Hotel, Orange Hotel Select, Crystal Orange Hotel, Manxin Hotels & Resorts, Joya Hotel, and Vue Hotels & Resorts. Huazhu also has the rights as master franchisee for Mercure, Ibis and Ibis Styles, and co-development rights for Grand Mercure and Novotel, in the pan-China region. 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 and overtake Starbucks in the Chinese coffee market. And the stock has had a few good weeks; just now it’s working to break above its 50-day moving average. In his latest update, Carl wrote, “LK shares gained 6% this week and 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 are a cause of concern but can be dialed back in the future. Luckin is an aggressive stock that has only one quarter of operations under its belt since its IPO earlier this year.” HOLD.
Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, and featured here last week, has been strong—and Crista says it’s going higher. In today’s update, she wrote, “Marathon is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interest in a midstream company, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. Marathon has prepared their refining system for upcoming IMO 2020 regulations, and is confident in their ability to produce large amounts of ultra-low-sulfur diesel fuel to meet the new demand. Marathon Petroleum was featured in the October issue of Cabot Undervalued Stocks Advisor.
“Activist investors are urging the Board of Directors to split Marathon into three entities: Speedway, refining operations and midstream holdings. The financial media reported that the Board of Directors met with activist investors last week to discuss their suggestions, including potentially replacing CEO Gary Heminger with Executive Vice Chairman Greg Goff. Investors will likely hear more on this topic during the third-quarter earnings conference call.
“MPC is an undervalued large-cap stock. The company is expected to report third-quarter EPS of $1.41, within a range of $1.02-$2.16, on the morning of October 31. Expect volatility. Full-year EPS are expected to fall 35% 2019, then rise 84% in 2020. The 2020 P/E is low at 8.9. Last week, Citigroup raised their price target on MPC from 60 to 71, which is a rather large increase, although to me that seems more like chasing and less like forecasting. MPC has begun a new run-up that could take the stock to 77 before year end.” BUY.
Meritage Homes (MTH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains one of the strongest stocks in the portfolio; it strung together seven consecutive up days through yesterday. If you don’t own it, try to buy on a pullback. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has had a great run in the seven months we’ve owned it, but no tree grows to the sky, and Tom knows this is much as any investor. In his update last week, Tom wrote, “A few weeks ago I took a profit on half of the position of this utility/alternative energy company. Returns had been too good for a utility stock and valuations got stretched. Since then the stock has pulled back somewhat. It’s still a best-in-class company in a sector that the market loves right now so I will continue to hold the remaining one half position right here. The company reports third-quarter earnings next week and we’ll see what happens.” HOLD.
Pinduoduo (PDD), 0riginally recommended by Mike Cintolo in Cabot Growth Investor and featured here two weeks ago as it pulled back to near its 50-day moving average, has been looking healthy since. In his latest issue, Mike wrote, “PDD has been gaining ground during the past week. It’s more speculative given its ties to China, but if the market environment improves, we think a half position here is worth a shot.” 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 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. Third-quarter results will be released tomorrow (Wednesday) after the market close. HOLD.
Chart courtesy of StockCharts.com
Your next Cabot Stock of the Week issue will be published on October 29, 2019.
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