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. Third-quarter earnings have been good to us.
Of course, that will change, and when it does, we will adjust our stance, but for now, we’re making hay while the sun shines—only downgrading one stock to hold today because it’s gotten too expensive.
As for today’s new recommendation, it’s an undervalued stock in a traditional industry, and paying a solid dividend to boot.
Details in the issue.
Cabot Stock of the Week 274
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The market remains in fine health, with all the major indexes at or near highs, market breadth healthy and investor sentiment still far from euphoric. Investors aren’t putting money into stocks because they’re excited about growth; they’re putting money into stocks because all of the alternatives look so dismal. And now we’ve seen the start of a shift to value investing, which tells us increasing numbers of investors are concerned about stocks being too high. To me, it’s all good, and thus I continue to recommend that you be heavily invested in a diversified portfolio of stocks that meet your needs. For this week’s recommendation, we swing back to an undervalued agriscience company that pays a nice dividend and looks like a low risk investment that could pay off nicely in the months ahead. The stock was originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor and these are Crista’s latest thoughts.
Corteva (CTVA)
Corteva is the only major agriscience company completely dedicated to agriculture. Corteva Agriscience provides the world’s farmers with seeds (corn and soybeans) and crop protection products (herbicides, fungicides and insecticides), enabling them to maximize yield and profitability. The company applies an open-source philosophy toward innovation, seeking inspiration from a diverse range of thoughts, ideas and solutions. Management and employees work closely with farmers to ensure that the latest thinking and technology are used to grow better food, while sustaining the land and conserving resources. Corteva is fortunate to draw upon decades of professional experience from the former Dow Chemical Company and DuPont de Nemours. Those two companies merged in recent years to form DowDuPont, then accomplished a debt-free spinoff of Corteva earlier this year.
Corteva’s financial goals include above-market revenue growth (4%-6% annually in 2020-2022), 12%-16% three-year annual EBITDA growth, and rising free cash flow and margins. The company reported a third-quarter loss of ($0.39) per share, at the high end of the analyst estimate range. Seed revenue rose 24% alongside a 12% drop in crop protection revenue as record U.S. flooding in the first half of 2019 and a drought in several Asian countries continued to affect planting and production cycles. The fall 2019 planting season is expected to show distinct improvement in the U.S. and Brazil; while more normalized U.S. weather in 2020 is expected to usher in a demand for soil nutrients, an increase in planted acres and a demand for herbicides.
Corteva introduced at least half a dozen new products this year, and gained market share in North America Pioneer brand corn and soybean seed, Brazil summer corn seed, and insecticides and fungicides globally. Corteva delivered over $30 million in operating improvement from new products during the third quarter and expects that number to reach over $150 million from new products in 2019. The quarter was impacted by foreign exchange headwinds from the Brazilian Real.
Corteva is on track to achieve $350 million in 2019 cost synergies from the M&A activity, and $1 billion in cumulative cost synergies in the coming years, which directly benefits shareholders. The company aims to distribute 25%-35% of net income to shareholders annually in the form of dividends and share repurchases. Upon completing the spinoff, Corteva promptly established a quarterly dividend and a $1 billion share repurchase plan. Their year-to-date return of capital totals $220 million.
Management recently revised full-year 2019 operating earnings guidance up $0.04 per share over the prior guidance mid-point, from a range of $1.06-$1.31 EPS to a range of $1.20-$1.26 EPS. As a result, the analysts’ consensus earnings estimate rose from $1.17 to $1.23 EPS. The 2020 consensus estimate of $1.52 reflects an aggressive EPS growth rate of 23.6%. The 2020 price/earnings ratio (P/E) is 16.8.
CTVA is a mid-cap growth & income stock and a new member of the S&P 500 index, trading between 25-31.5 this year. Wall Street’s earnings estimates have consistently risen since early August, while the stock has traded up and down in a nondescript fashion, currently sitting at the bottom of this year’s trading range. Investors who buy now can lock in a 2% dividend yield, potentially achieve a 23% capital gain within the confines of the 2019 trading range, and look forward to additional capital gains as the company continues to deliver on financial goals and product innovations. Buy Corteva now for attractive total returns in 2019 and beyond.
Current Recommendations
The market’s trend remains up and most of our stocks look good; in fact, the only change in the portfolio this week is a downgrade to hold, simply because one stock has gotten too expensive. Overall, earnings season has been great for us. But that will change, so as we go forward, remember that eternal vigilance is the price of good performance. Stocks that don’t do what we hired them to do will be thrown out.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, had a record high close yesterday and has pulled back only minimally today. In his update last week, Tom wrote, “The life science and research lab REIT has rare niche properties with strong and rising demand in a very defensive sector. I don’t see investors running away from that anytime soon. Alexandria is still a great place to be in this environment.” BUY.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, has hit numerous new highs since reporting third-quarter results two weeks ago. However, Tom says the stock is now too high to buy. In his latest update, he wrote, “The bottom line, as measured by funds from operations (FFO), increased 15% over last year’s quarter, boosted by new higher margin investments in North America energy pipelines, North American railways and Indian telecom towers. The company also has an additional $1.1 billion in new investments that should come on line in future quarters. The business looks good and the stock is still solid.” HOLD.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, corrected normally last week from its highs hit two weeks ago, but has moved higher in recent days so the pattern is still very positive. In today’s update, Crista 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. In 2020, Alphabet (GOOGL) will offer personal checking accounts through its Google Pay app, in partnership with Citigroup and a Stanford University credit union. It is not yet clear as to whether Google will have the ability to view the customers’ checking accounts. Citi announced that their October credit card charge-offs came in at 2.61%, unchanged from September. (A rising number, over the course of several months, would indicate a weakening consumer economy.) Wall Street expects EPS to grow 16.5% and 9.7% in 2019 and 2020. The 2020 P/E is 8.8. During the third quarter, Soros Fund Management increased their position in the stock by 74.9% to 319,779 shares. I’m pleased with the price chart and valuation, but would prefer to see a stronger earnings growth rate, so I’m leaving C on Hold for now. The stock is trading near its January 2018 peak of 77. We could see additional upside this year.” HOLD.
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, fell through its 50-day moving average today, but the main trend remains up, and Crista says it’s still rated Buy. In this morning’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 15.8% in 2019 and 2020 (January year end); and company management is projecting 2021 EPS growth of about 23%. The 2020 P/E is very low at 8.0. Buy DBI now for outsized total return potential in 2019 and beyond.” Third-quarter results will be reported on December 10, before the market open. BUY.
Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon, had been building a base around 8 since the stock spiked up to that level a week ago but today it inched out to a new high, crossing 8.5. In his update last week, Tyler wrote, “Taking it all in, I see this stock holding its gains because of upside potential but probably not blasting off to new all-time highs in the next month or so. Long-term investors can still buy as the growth story remains intact. However, if you’re looking for a short-term trade, there are probably other opportunities out there.” I’ll downgrade to Hold. HOLD.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, remains weak—in fact, it fell to its lowest level since January today—but Tom says the stock is still a good buy here. Here’s what he wrote last week: “This energy company is cheap with a sky high dividend that should be very safe, with 1.7 times coverage with cash flow and 20 straight years of dividend hikes. Earnings growth should continue to be solid as new investments continue to come on line to boost volumes. The company has a pristine balance sheet and has vastly outperformed the energy sector as well as its peers. The market still isn’t loving these energy infrastructure stocks but that could change. In the meantime, you get paid 6.8% 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. Third-quarter results, reported after the market close last Tuesday, saw revenues of $427 million, up 10.4% from the year before and earnings of $0.20 per share, down 20% from the year before. During the quarter the company opened 548 hotels and closed 62, but occupancy fell to 87.7% (compared to 90.7% the year before) because of the deepening China economic slowdown. The stock sold off after the report, but quickly recovered, so it remains in its two-year consolidation phase, becoming a better value as time passes. HOLD.
Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, closed at a record high last Wednesday and has pulled back normally since. In last week’s update, Mike wrote, “The big news this week was that Inphi acquired eSilicon. Not only will the move expand its addressable market in data center and telecom applications, management sees it as highly accretive starting next year. For 2021, the top brass expects the acquisition to boost earnings per share by a whopping 60 cents, compared to recent estimates of $2.60! Given the stock’s recent run, IPHI’s pop on that news brought in some sellers, but the action looks normal and the path of least resistance is up.” BUY.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, was an underperformer just a week ago, but this week it’s the star of the show (for investors who can handle the volatility), up 50% since last Monday’s close! The reason, of course, is earnings. In last week’s update, Carl wrote, “Total net revenues from products in the quarter were $209 million, representing an increase of 558% over the same quarter of 2018. Average monthly total items sold in the quarter jumped 470%. The number of stores/outlets rose to 3,680, representing an increase of 210%. Store level operating profit in the quarter was $26.1 million, or 12.5% of net revenues from products, compared to a loss in the third quarter of 2018.” That’s great progress, and it improves the odds that this could grow to be a big winner, but if you haven’t bought yet, it’s probably best to let the stock digest its recent gains. And if you like short-term profits, you could take some here. HOLD.
Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, remains in the midst of a normal correction, close to touching its 50-day moving average. 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. After falling all year, 2019 EPS estimates have risen 10% in the last four weeks—not that it matters much. From Wall Street’s point of view, 2019 is already ‘in the can,’ and all eyes are focused on 2020. Full-year EPS are now expected to fall 28% in 2019, then rise 68% in 2020. The 2020 P/E is low at 8.7. During the third quarter, Third Point LLC sold their stake in MPC and Elliott Management increased their stake in MPC by 86.9%, now owning 8.6 million shares. Last week, Credit Suisse raised their target price on MPC to 80. There’s additional price resistance at 78 and 83.” BUY.
Meritage Homes (MTH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has climbed right back up to its 25- and 50-day moving averages over the last two weeks and is now sitting tight with both of them, deciding whether to keep climbing or to roll over and die. If it’s the former, we’ll stick with it, with an eye on the recent high of 76—and if it’s the latter, we’ll sell and move on, as Mike already has. HOLD.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, washed out some weak hands with its sharp 8% correction a couple of weeks ago, but it’s since come roaring back, stringing together seven consecutive up days. In his update last week, Tom wrote, “This utility/alternative energy stock has one of the very best longer-term upward charts I’ve ever seen. The price has likely gotten a little above trend, which is why half the position was sold. It may continue to pull back a little bit as long as the bullish mentality in the market continues. But I don’t think investors are all that confident and will continue to have one foot on safety. And this stock is the best of the best. The upward bias has still not been broken and NEE is 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 two weeks ago and has pulled back normally since to its 25-day moving average. In last week’s Cabot Growth Investor, Mike wrote, “We think PDD is acting just fine, with a modest pullback on tame volume after a big run in late October. If you want to roll the dice with a small position, that’s fine, but we’re going to hold off until after earnings (due out next Wednesday, November 20.)” Thus, prudent investors will wait, but officially, I’ll keep it rated buy, noting that there’s support down at 36 so downside risk appears to be limited. BUY.
Ring Central (RNG), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, is one of the leading providers of Unified Communications Services, which integrate a variety of communications technologies using cloud-based services and thus enable both employees and customers to get what they need from enterprises large and small. The stock peaked at 178 in early October after the announcement of a partnership with Avaya, corrected for a couple of weeks, and is now right back near its old high, preparing to break out into virgin territory. We were fortunate to buy RNG at the “perfect” time, at the bottom of the 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. In fact, the stock is up 63% since late September, and the introduction of the new all-electric Ford Mustang SUV this week did nothing to slow it down. Instead, it looks like more and more investors are coming to realize that the electric future is coming fast and they’re putting their money on the leader. In the latest Cabot Growth Investor, Mike wrote, “TSLA has certainly changed character since its two-day earnings-induced leap a couple of weeks ago. We’re optimistic the stock has turned a corner and, while it will never be the darling it was back in 2013, it could emerge as a liquid leader.” HOLD.
TopBuild (BLD), originally recommended in Cabot Top Ten Trader by Mike Cintolo and featured here last week, continues to build a base between 105 and 110, consolidating the gains from its post-earnings surge higher. If you haven’t bought yet, try to buy in the low end of the range. BUY.
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, reported third-quarter results yesterday after the market close and they were excellent. Revenues hit $70.7 million, up 150% from the year before and up 22% from the immediately preceding quarter, while adjusted EBITDA was $36.9 million, up 17% from the second quarter. During the quarter, Trulieve opened six additional dispensaries, bringing its total to 35 at the end of September (it’s now 39) and it plans to be a major contender in the Florida adult-use market, whenever it opens. Most important of all, TCNN remains the strongest cannabis stock in the portfolio of Cabot Marijuana Investor. If you haven’t bought yet, wait for the stock to settle down a bit. BUY.
Chart courtesy of StockCharts.com
Your next Cabot Stock of the Week issue will be published on December 3, 2019.
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