The major indexes continue to hit new highs, all Cabot’s market timing indicators remain positive, and our portfolio is solid, with no particular worry spots today.
Of course, that will change, and when it does, we will adjust our stance, but there’s no predicting where the trouble will come from, so for the moment we’re standing pat with our portfolio, making no changes.
As for today’s new recommendation, it’s in a traditional industry, but growing fast thanks to acquisitions—and on a pullback right now that offers an attractive entry point.
Details in the issue.
Cabot Stock of the Week 273
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The broad market continues to look healthier, with all of the major indexes trading at or near their highs and a wave of new buying entering last week as prospects for U.S.-China relations improved. Additionally, investor sentiment, from the amateurs to the pros, remains subdued, telling us there is additional buying power in the wings, waiting until the news gets—somehow— even better. So I continue to recommend that you be heavily invested in a diversified portfolio of stocks that meet your investment needs. This week’s recommendation has its feet in both the aggressive and conservative camps—aggressive because it recently appeared in Cabot Top Ten Trader, where momentum is key, but conservative because it’s in a traditional industry, growing through acquisition. The original recommendation was by Mike Cintolo and here are Mike’s latest thoughts.
TopBuild (BLD)
While the major indexes have been relatively flat during the past 20 months or so (at least before their recent upside breakouts), individual stocks and sectors have been all over the place as investors rotated into, out of, and then sometimes back into certain areas. The building group was one that hit the skids, with rising interest rates and fears of a recession causing a big fall late last year and holding most stocks down for much of this summer.
Now, though, that correction and consolidation appears over, representing a big launching pad for the sector. And the fundamentals back up a new upmove; despite the uptick recently, mortgage rates remain near all-time lows, and following a year-plus of no growth, housing starts (and permits, which are a leading indicator) and home sales have perked up. Plus, given still-strong employment trends and the fact that housing starts remain 25% to 40% below historical norms, there’s the potential that a sustained uptick in building could get under way.
Of course, there are numerous ways to play this trend, but one of our favorites is TopBuild, which was spun off from giant Masco back in 2015. This is no small player, though; the company is by far the leading installer (nearly 200 branches and 8,000 installers) and distributor (more than 75 branches) of insulation. In fact, the firm is twice the size of its nearest competitor and is used in more than 40% of new housing starts!
Thus, TopBuild is a direct play on the health of the housing industry, as more than three-quarters (78%) of revenue is tied to the residential side of the market. That said, the company is making headway in expanding into commercial-related sales. It currently has around a 10% market share in commercial insulation and sees big opportunities going forward. In Q3, same-branch commercial revenue was up 19% and management said it has a good-looking backlog going forward. TopBuild also has its fingers in a few other housing cookie jars like rain gutters (6% of sales), glass and windows (4%), paint (3%) and things like garage doors, fireplaces and fireproofing, but insulation is the driver.
A key part of the strategy here is M&A. Management has said that its top priority when it comes to capital allocation is acquisitions, with 11 completed since 2016 alone and a “robust pipeline of acquisition candidates.” In fact, those buyouts are now contributing about $515 million of annual revenue, or about 20% of TopBuild’s total.
As for the recent trends, they look solid; sales were up 5.4% in Q3, but earnings lifted 24% as margins increased in a big way. (Impressively, every dollar of extra sales led to 39 cents of improved cash flow in the quarter.) While analysts think growth will be relatively tame in 2020 (13% expect earnings growth), that’s probably conservative; analysts have hiked their estimates for next year from $5.75 per share to $6.12 per share just in the past couple of months.
All told, there’s nothing revolutionary here, but TopBuild is a dominant player in the housing and construction field, with a history of solid execution (and acquisitions) even when the industry slows down. And now, with activity likely to pick up in the quarters ahead, big investors are flocking to the stock.
BLD got whacked late last year and rebounding during the first few months of this year with everything else. After taking a break for two and a half months, the stock broke out in early August and stair-stepped its way higher into October. There was a quick shakeout two weeks ago, but the Q3 report caused the stock to surge to new highs on excellent volume before a modest, controlled pullback in recent days, and this looks like a decent entry point.
CURRENT RECOMMENDATIONS
“The trend is your friend” is considered one of the eternal truths of growth investors, and today the market trend is clearly up, which bodes well for our portfolio as a whole. In fact, five of our stocks have hit record highs in recent days, while others have notched sub-peaks. Thus, riding strong stocks higher is a winning strategy. However, in this diversified portfolio, I have a number of stocks that are lagging the trend, but that have the potential, according to Cabot analysts, to be higher soon—and in those cases I defer to those experts, because I know that in the long run diversification pays. This week there are no rating changes. Details below.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, dipped through its 50-day moving average last Friday, completing a normal pullback, and has moved higher since. In his update last week, Tom wrote, “This life science and research lab REIT has had a slight blip in its ever-so-relentless slow trend higher. The REIT selloff has knocked it about 2.5% from its high but the upward chart pattern of the stock still remains intact. The third-quarter earnings report a couple of weeks ago was strong as well. This is a very solid REIT in the highly specialized life science and research lab niche that should continue to benefit amid the search for new medicines and treatments for the aging population.” BUY.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, released an excellent third-quarter report last week. Funds from operations (FFO) were $338 million, up 15% from the year before, and net income was $82 million, compared to $5 million the year before, and in response, the stock soared to new highs! However, Tom says the stock is now too high to buy. In his latest update, he wrote, “I lowered the rating to a HOLD last week because it has returned over 50% already this year and it is getting pricey to continue to acquire at the highs.” HOLD.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, hit a new high last Thursday and has pulled back normally since. In today’s update, Crista wrote, “Two investment firms raised their price targets on C to 84.5 and 113 last week. The stock is approaching its January 2018 peak near 77, where it will likely rest.” HOLD.
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, has been on a roller-coaster lately, jumping from 16 to 19 and then retreating below 18, but the main trend remains up, and Crista says it’s still rated Buy. BUY.
Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon, spiked more than 13% today (at the extreme) as it broke out to new highs—and it’s interesting that this surge came several days after last week’s earnings report. Writing about that last week, Tyler wrote, “Digital Turbine reported that Q3 revenue was up 37.5% to $32.8 million and that adjusted EPS rose from $0.01 in Q3 2018 to $0.05 in Q3 2019. Both results beat expectations. On the conference call, management said it doesn’t have a ton of new info to share on android smartphone device growth in 2020 because it seems we’re in a bit of a lull and it’s just waiting for the next round of product releases and upgrades. But it did have really interesting commentary around expanding its platform to other devices, including TV. And it talked about how Verizon awarded it the deal to deliver the Disney+ app for the holiday period and beyond. That feels like another big win, and when viewed in the context of others (Facebook, Netflix, Apple music, etc.) it’s clear that Digital Turbine is a trusted partner.” Short-term traders could take a quick profit here (either partial or full), but long-term investors should sit tight as the long-term growth story is still young. Officially, the stock is still rated buy, but if you haven’t bought yet, I think waiting for a little cooling off may be wise. BUY.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, remains weak, but Tom says the stock is still a good buy here. Here’s what he wrote last week: “The energy company missed on earnings last week for the first time in the last five quarters. The miss was attributable to lower margins in the NGL unit but volumes were otherwise up across the board, which should drive up fee-based revenues going forward. The main drag on the stock has been the energy sector but things have picked up in the past week as oil prices rallied on OPEC cutbacks and trade war optimism. The company has $9.1 billion in projects under construction and $3 billion coming on line in the next six months. It’s a good opportunity to get in cheap.” 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 long-term chart shows a good uptrend through 2015, 2016 and 2017, and then a two-year consolidation, during which time the stock has become a better value. Eventually, this consolidation phase will give birth to the next uptrend, and my goal is to be there when it comes. HOLD.
Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here last week, is off to a fine start. Here’s what Mike wrote last week: “IPHI wasn’t exactly inspiring the bulls ahead of earnings, but the stock had done nothing wrong (a reasonable sideways range after a strong long-term breakout) and the Q3 report was a great one, with sales (up 21%) and earnings (up 50%) both topping expectations, allowing management to hike guidance going forward. Beyond the numbers, the best news was the top brass’ general optimism that most trends are in its favor; Amazon appears ready to open its wallet to upgrade its data centers (likely using Inphi’s products), with Alibaba and some others to follow suit in 2020; demand for the firm’s data center interconnect system should get a boost from Microsoft’s recent massive deal with the Department of Defense; and its platform that speeds the transmission of data over fiber is earning some solid wins among Tier-1 and Tier-2 carriers. In response to the positives, IPHI gapped out of its base on excellent volume, and while shares have backed off a bit since (most growth stocks that have shown strength have done the same), it’s nothing out of the ordinary. We filled out our position following the gap and are sticking with our Buy rating today.” BUY.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has been an underperformer lately, but Carl hasn’t given up, and now I’m seeing some buying power in anticipation of tomorrow’s release of third-quarter results (before the market opens). In his latest update, Carl wrote, “The company continues to open new coffee shops at a breathtaking rate in China. Furthermore, its CFO has publicly stated it plans to be at breakeven by the end of next year. Its strategy to compete with Starbucks is a combination of quality, convenience and affordability, with coffee prices that are roughly half of Starbucks’.” HOLD.
Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, remains in the midst of a brief correction, riding its 25-day moving average slowly higher. In last week’s update, Crista 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. The company prepared its 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 aims to spin off their Speedway retail stores into a separate company by year-end 2020, and is also strategizing ways to optimize their midstream business. MPC is an undervalued large-cap stock. Full-year EPS are expected to fall 31% in 2019, then rise 72% in 2020. The 2020 P/E is low at 9.1. The stock rose over 50% from its August low, and is now resting in the upper 60s. There’s additional price resistance at 78 and 83. Buy on dips.” BUY.
Meritage Homes (MTH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, sold off a little more last week, and Mike sold the stock, taking a modest profit. But I’m going to stick with it for a couple of reasons. First, I’m trying to get the portfolio fattened up in this bull market, aiming for a full portfolio of 20 stocks. And second, the stock has bounced modestly from last week’s low (which was just below the low that followed the earnings release of October 22), and now it looks to be building a base in the 68 area. If it falls below that level, I’ll sell, but right now, the bull market says it may pay to be patient. HOLD.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has fallen 7% since it hit a record high three weeks ago, but Tom, having already taken a partial profit, is sticking with it. In his update last week, he wrote, “This utility/alternative energy juggernaut has had about a 4.5% pullback from the recent high. The stock is right at the 50-day moving average and well above the 200-day. Although it has pulled back along with the rest of the safe stuff as investors move more toward greed than fear, its upward pattern is still intact at this point. As well, the operational performance of the company continues to be strong. The stock is still overpriced in my opinion, which is why I took a profit on half the position last month. Again, we’ll see if this becomes a more substantial move in the market away from REITs and utilities. But for now, because the upward bias has not been broken, it’s still a Hold.” HOLD.
Pinduoduo (PDD), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, is a Chinese e-commerce company that is growing rapidly by enabling consumers to save money by teaming up with other buyers. The stock hit a new high last Wednesday, and has pulled back normally since. Earnings are due out November 20. BUY.
Ring Central (RNG), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, has just strung together six consecutive up days and is nearing its high of four weeks ago—and the big reason is the earnings report, released last Wednesday. Revenues hit $233 million, up 34% from the year before, beating analysts’ estimates of $222 million. Earnings hit $0.22 per share, up 16% from the year before and also beating analysts’ estimates. And management raised guidance for the remainder of the year. We were fortunate to buy RNG at the “perfect” time, at the bottom of a correction, and if you did the same, you could take some profit here, with the stock close to resistance. But I’ll keep it simple and hold, as the long-term prospects are bright, and this is a bull market. 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) and the stock is looking better and better as doubts about Tesla’s survivability fade and anticipation about reliable profits grows. At the same time, numerous automotive competitors have stumbled as they try to start up electric car operations while running faltering internal combustion vehicle operations, and the result is that money is once again flowing into TSLA. This renewed strength, in turn, has Mike Cintolo once again interested in the stock. In yesterday’s Cabot Top Ten Trader, he wrote, “We’ve been following the market for decades, and we’ve never quite seen a stock be so much in the news as Tesla, yet do so little (no net progress for five years through September) over such a long period of time. The reason for that underperformance (and for the extraordinary short interest of 37 million shares, or 28% of the float) wasn’t bad products or fading demand; Tesla has sold as many cars as it could produce, and it’s been producing a lot more (more than doubling output during the past 18 months) over time. Instead, it’s been in the crosshairs due to its inability to turn that demand into profits, which in turn caused some fears about its liquidity. But the stock appears to have turned the corner. Fundamentally, the company turned cash flow positive in Q2, and the stock has changed character after the Q3 report resulted in a good-sized surprise profit, with many future positives (planned launch of its Model Y electric crossover next summer; ramping up readiness of its Shanghai production facility, which should cut per-unit costs down the road) also talked about. Few investors are willing to take management at their word here, but S&P said the firm’s credit outlook has shifted positive, Wall Street analysts see earnings surging north of $5 per share next year and the market seems to be sniffing out good things (or at least a lack of downside surprises) going forward. We think Tesla makes for an intriguing turnaround story and aiming to buy on modest weakness should work.” Additionally, Jefferies analyst Philippe Houchois recently raised his price target on TSLA from 300 to 400, writing, “Trend cost performance outweighs 10-Q concerns.” In short, falling costs of producing the Model 3 (the best-selling electric car in the U.S. by far) are providing a big boost toward profitability. HOLD.
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor and featured here two weeks ago, is the biggest seller of cannabis in Florida by far, it boasts rapidly growing profits and it has the best-looking chart in the industry; just yesterday it hit its highest level since May. Plus, the stock’s P/E ratio is just 11. Third-quarter results will be released on November 18, after the market close. If you haven’t bought yet, you can buy now. BUY.
Chart courtesy of StockCharts.com
Your next Cabot Stock of the Week issue will be published on November 19, 2019.
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