The broad market remains strong, and all Cabot’s market timing indicators are currently positive, so as we head into the New Year, I remain optimistic that we’ll see higher prices in the month ahead.
However, there’s always room for portfolio improvement, and as we head into January, there are a number of laggards in the portfolio that may be cut soon if they don’t shape up. Additionally, there is one stock you can sell this week for a quick five-week profit—though you can hold for longer-term gains if you choose.
As for the new addition, it’s an English stock (which is rare), but it has a good story as well as a good chart, so prospects are good. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities.
Details in the issue.
Cabot Stock of the Week 278
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As we near the end of 2019, which overall was very good for the market, I look forward to more strength in 2020. Trends are up, and market studies tell us there’s more upside ahead. Also, our system of investing in a diversified portfolio of stocks chosen using a variety of investing systems is working just fine—so I don’t anticipate changing much in 2020.
However, there is one definite change you should know about: beginning next week, Cabot Stock of the Week will be published on Mondays. Additionally, there is one gradual change that may or may not develop—mainly because there are reasons to believe that U.S. stocks are currently more overvalued than stocks in other countries, and thus have the potential to underperform stocks from outside the U.S., as a whole. Of course, we don’t own baskets of countries’ stocks, we own individual stocks, so we could probably do fine by sticking mainly with U.S. stocks.
But as we head into the New Year, I expect to be a little more attuned to the risk/reward relationships of U.S. stocks vs. foreign stocks, and thus you may see a few more of the latter—like today’s stock. The stock was originally recommended by Tyler Laundon of Cabot Early Opportunities and since Tyler’s on vacation this week, I’m mainly reprinting what he sent to his readers two weeks ago. Since then the stock has been up and down but is basically unchanged.
Endava Plc (DAVA)
Technology has become increasingly central to the way people live and work. It truly is a digital world, and organizations must constantly evolve so they can be ahead of trend and constantly engaging with their customers in effective and efficient ways. Endava, a next-generation technology services provider with a market cap of $2.5 billion, helps clients do just this.
The U.K.-based company went public in 2018 but was started in 2000 by founders who wanted to help people succeed in an increasingly technological world and deliver better products, platforms and solutions to market. They wanted to set up the business to cover the empty space between traditional IT services and consultants. This was done by building multi-disciplinary teams with industry-specific knowledge and expertise across strategy, customer experience and engineering.
It has turned into a winning formula for a rapid growth market. Digital transformation services now represent a roughly $390 billion global market growing at 17% a year. That puts it on pace to reach $622 billion by 2022.
Endava has been going after the opportunity by consistently expanding across the globe and through select partnerships, including one with Bain & Company in November 2019. The company now has over 5,900 staff members spread across the U.S., U.K., European Union and Latin America (Argentina, Colombia, Uruguay and Venezuela). At the end of September 2019 the company had 278 clients, including Worldpay/FIS and a number of private equity firms.
The bulk of Endava’s revenue is from work related to payments and financial services (53% of revenue), technology, media and telecom (25% of revenue), and consumer, healthcare, logistics and retail (22% of revenue). Typically, 80% to 90% of revenue comes from clients that were with Endava in the prior year.Revenue in fiscal 2019 (ended September 25) was up 24% to $360 million while adjusted EPS was up 46% to $0.98. Revenue is seen up around 23% in each of the next two years. First-quarter fiscal 2020 revenue (reported November 19) was up 25%, while adjusted EPS was up 36% to $0.30. An investment in Endava does carry some currency risk as revenues are recorded in pounds, as well as exposure to business conditions in overseas markets. However, these risks currently appear balanced given increased clarity on Brexit.
DAVA went public in July 2018 at 20 and jumped 26% in its first day of trading, but slid back into the low 20s in the final months of 2018 and early 2019, building a nice base—and unlike many IPOs, DAVA never fell apart to trade below its IPO price. In April 2019 shares jumped above 30, hitting new highs, and eventually hit 44 before pulling back and consolidating in the 34 to 42 range through October. But late October saw the stock again hitting new highs, and through most of December, the stock built a nice base between 45 and 47. Last week saw the stock hit 49, but it’s since pulled back and I think buying around the 47 level, where we currently find the stock’s 25-day moving average, will work out just fine.
www.endava.com
Current Recommendations
With today’s addition of Endava (DAVA), the portfolio is more than full, so I must sell something, and happily, there’s no difficulty in choosing what, as Crista Huff has suggested taking profits in Corteva (CTVA). So that’s what we’ll do. Beyond that, potential sales in the future are Digital Turbine (APPS), Pinduoduo (PDD) and TopBuild (BLD), but I’m going to stand pat on them for now and see what the New Year brings.
Details below.
Changes
Corteva (CTVA) to Sell.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, has had a great year, but Tom lowered its rating from Buy to Hold two weeks ago, saying it was too high to buy, and soon after, the stock had its first serious correction, falling below its 50-day moving average. It’s back above that level now, but Tom’s sticking with Hold. In his update last week, he wrote, “The stock was up over 40% for the year and has blown away the performance of its peers in every measurable period over the last 10 years. This is a conservative play that could continue that level of performance forever. ARE is still in favor as demand for its unique facilities remains strong and the stock is still in an uptrend.” HOLD.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, has also pulled back below its 50-day moving average, so it’s possible that Tom will upgrade it to Buy soon. In his latest update, he wrote, “What does Brookfield actually do? In the company’s own words it owns ‘critical and diverse global infrastructure networks which facilitate the movement and storage of energy, water, freight, passengers and data.’ These crucial assets provide a reliable cash flow and BIP has been able to raise the dividend every year this decade. Earnings should continue to grow as its asset rotation strategy replaces mature assets with new, higher margin properties. It’s in a defensive business in a subsector increasingly in vogue with investors. I will probably upgrade to a BUY on any weakness.” HOLD.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has had a great run in December, and Crista says it’s not over yet. In today’s update, she wrote, “Citigroup reported a November credit card charge-off rate of 2.57%, down from 2.61% in October, indicating an uptick in consumers’ abilities to pay their bills on time in this thriving economy. The new Current Expected Credit Loss (CECL) accounting rules, which I outlined in last week’s issue, will bring modest downward revisions to consensus earnings estimates to all affected companies in the coming weeks, because many analysts did not have this huge, impactful situation previously calculated into their estimates. Also, be prepared for several months of scary news headlines from the financial media. My investment focus will remain on financial companies and retailers that are expected to deliver better profit growth than their peers. In that light, Citigroup remains my favorite large-cap bank stock. Wall Street expects EPS to grow 15.9% and 9.3% in 2019 and 2020. The 2020 P/E is 9.5. Citigroup shares continue to rise. The stock hasn’t traded above 80 since 2008, so we are now witnessing a modern version of C beginning a run-up in new all-time high territory.” BUY.
Corteva (CTVA), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, is both a good long-term hold and a good short-term sell, so you have a choice. One, take some profits now (which is what I’m going to do, as Crista suggested it just this morning and the stock is up 21% since its early December low), or two, hold on. In today’s update, Crista wrote, “Corteva provides farmers with seeds and crop protection products (herbicides, fungicides and insecticides), enabling them to maximize yield and profitability. 2019 was a difficult year for seed and crop protection businesses as many months of wet weather and flooding in the U.S. disrupted normal planting cycles and yields. Analysts are expecting a return to more normalized weather and market conditions in 2020, with profits expanding due to rising margins, merger savings and lower expenses. CTVA is a mid-cap growth & income stock. Analysts expect EPS of 1.24 and 1.49 in 2019 and 2020, reflecting 20.2% growth next year. The 2020 P/E is 19.6. The stock had a nice run-up in December.” Crista is holding for her longer-term portfolio, but I’ll sell here to lock in the quick five-week profit and look to replace CTVA with a new stock from Crista in the weeks ahead. SELL.
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, has been a bit disappointing, but Crista thinks it’s worth holding here. 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. Earnings estimates for Designer Brands continue to change. At this time, consensus estimates assume no earnings growth in 2019 (January 2020 year end) and 18.4% EPS growth in 2020. The fiscal 2020 P/E is low at 8.8. DBI is an undervalued, small-cap stock. I will keep a Hold recommendation on the stock until the earnings estimates and share price stabilize. If you’re tempted to buy in order to lock in the dividend yield, do it. I still love the company and its outlook.” HOLD.
Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon, fell below its 50-day moving average last week, deepening the correction that began in early December, but the long-term trend remains up, so I’ll continue to hold, and see what the stock does as we enter the New Year. HOLD.
Disney (DIS) originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured in our latest issue two weeks ago, is technically Walt Disney Company, so alphabetically, it should be near the end of the portfolio, but everyone calls it Disney, and the symbol is DIS, so here it is. The big attraction for the stock today is that it’s an established blue-chip stock with big new growth potential thanks to Disney+. If you haven’t bought yet, you can buy now. BUY.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, has made no progress since we bought it in August, but I’m not giving up yet. In fact, the stock had a great December and even after last week’s correction, it still sits on top of all its moving averages. In his latest update, Tom wrote, “I still believe this is one of the best dividend stocks to own right now. It’s a stellar company that has raised the dividend every year for 20 years. It has a pristine balance sheet and a low payout ratio. It has billions in new projects coming on line that should boost earnings. But the market hasn’t liked energy very much and it doesn’t seem to matter that this company is not exposed to oil prices. I believe the market will wake up eventually and this stock should be over 40 per share. In the meantime, you get 6.4% while you 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, with 5,151 hotels as of September 30) that I’ve resolved to hold the stock through normal technical sell signals. The stock saw three very large buying spikes in December as it jumped from 33 to 42, and now it’s taking a breather. HOLD.
Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, closed at a record high last Wednesday and has pulled back slightly since. In last week’s update, Mike wrote, “The company has begun sampling its latest product for data center interconnects, which is sure to be gobbled up by big cloud operators down the road. Dips of a couple of points are always possible, but we’re OK picking up shares around here; a decisive push north of the 76-77 range would be bullish.” BUY.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, continues to hit new highs and thus is going to finish the year a big winner, having roughly doubled from its May IPO. In his latest update, Carl wrote, “In the third quarter, the number of stores/outlets grew to 3,680 and revenue was up nearly 70% or 2.9 times the increase in store count. Its strategy to compete with Starbucks is a combination of quality, convenience and affordability, with most of its shops set up for takeaway and delivery.
Luckin is an aggressive stock carving out a niche in China’s high growth coffee market. I like the trajectory of this young company and think aggressive investors can aim to get in on the next pullback.” At the same time, Carl has mentioned that partial profit-taking—or at least the establishment of stops—would be appropriate for some investors here, because when the current strength ends, there’s substantial short-term downside potential. BUY.
Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, is another energy stock that hasn’t really gotten going yet—but 2020 may change that, as energy stocks were one of the worst-performing sectors in 2019, and rotation may bring them to the fore. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, continues to climb! In his update last week, Tom wrote, “Just when you thought this stock might be running out of gas it has another upside leg and is now trading at a new all time high. I’m sensitive about valuation and sold half the position to protect profits. The stock is fairly expensive. But I held the remaining position because it is still a highly coveted stock with upside momentum. NEE combines steady cash flow from its stellar Florida Power and Light division with growth from the alternative energy business. It’s a huge player in the fast-growing clean energy field and is the world’s largest producer of wind and solar energy. It is also shareholder friendly, targeting 12% to 15% annual dividend growth through 2024.The only kink in the armor is a high valuation. But the stock seems to want to go still higher.” HOLD.
Pinduoduo (PDD), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, is still in an uptrend, riding its 50-day moving average slowly higher. I’ll hold and see what the New Year brings. HOLD.
Qorvo (QRVO), 0riginally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a new high last week and has pulled back normally since. In Cabot Growth Investor last week, Mike wrote, “QRVO remains in great shape, refusing to give back any of its sharp early-December gains. Like most stocks, it’s extended to the upside (the 50-day line is down around 100, though it’s rising quickly), so any market retreat could possibly take a bite out of the stock. But we think QRVO’s huge November blastoff and the 5G smartphone boom will propel the stock even higher down the road.” 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 remains in a consolidation pattern following the huge spike higher in early October—currently trading near both its 25- and 50-day moving averages—and thus is technically ripe for a resumption of the advance. 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 years of patient waiting are finally paying off. Two weeks ago the stock broke out above 390 to hit all-time highs, and now the stock is consolidating those gains amidst a flood of good news. The company recently secured a 10-billion-yuan ($1.4 billion), five-year loan from a group of China banks, in order to expand production at its Shanghai factory. That factory, situated on what was vacant land just a year ago, is now producing “more than 1,000” Model 3 vehicles per week. And management says they will be able to produce 3,000 cars per week “in the near future.” Furthermore, “while 30% of the made-in-China Model 3 parts are sourced in China today, the Model 3’s localization level will climb to about 80% by around mid-2020 and the car will be totally localized by the end of next year, meaning that all of its parts will be supplied by Chinese companies.” The result: lower production costs, increased sales, and increased earnings. In his latest Cabot Top Ten Trader, Mike Cintolo wrote, “The next pullback (its first after breaking out) should provide a solid buying opportunity.” HOLD.
TopBuild (BLD), originally recommended in Cabot Top Ten Trader by Mike Cintolo, bottomed two weeks ago and has been drifting slowly higher since. If it can’t get going, I’ll cut it loose soon, but for now, holding is recommended. HOLD.
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, has recovered almost all the losses that followed the well-timed attack by short-sellers two weeks ago, and if you owned it, I hope you still have your shares. (Also, that you learned something about short attacks; I used the attack as an opportunity to average up in Cabot Marijuana Investor.) Trulieve is the largest seller of medical marijuana in Florida (with roughly 55% of the market), it’s profitable, and it has plans to move into other states (particularly Connecticut, Massachusetts and California). And what of the allegations in the short-sellers’ report? Well, last week CEO Kim Rivers was announced as the keynote speaker at the Benzinga Cannabis Capital Conference in Miami in February, and I trust Benzinga far more than I trust those short-sellers. Also, after the attack, management quickly acted to extend their own lock-up restrictions and added two high-quality advisors to the company’s Board of Directors. Analysts expect EPS of $1.33 in 2019 and $0.76 in 2020. HOLD.
Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is an aggressive investment, guaranteed to be volatile, but so far the volatility has been in the right direction. In his latest update, Carl wrote, “Shares tacked on another 20% gain this week! The company has reservations from over 600 people in 60 countries, accounting for $80 million in deposits and $120 million in potential revenue. Sir Richard Branson confirms that space tourism flights will begin within a year and he expects profitability by 2021. The cost of a Virgin flight on SpaceShipTwo, which can hold seven passengers and two pilots, is $250,000. A recent Morgan Stanley report correctly compares the space tourism company to a biotech in terms of risk/reward. The big payoff is down the road with hypersonic point-to-point travel. While a business jet takes 11 hours to fly from Los Angeles to Tokyo, a hypersonic vehicle traveling at five times the speed of sound could make the same journey in just two hours. Although this stock has made a substantial move in the last three weeks, I would still be a buyer though some may wait for a dip to buy shares.” BUY.
The next Cabot Stock of the Week issue will be published on January 6, 2020.
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