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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 290

Bottoms bring bargains, but identifying bottoms is devilishly difficult—which is why it’s better not to try but to simply reduce your risk-taking until the environment is more constructive. Last week’s recommendation of Zoom Video is off to a great start (though risk in the stock is higher now), and this week’s recommendation is a smaller Software-as-a-Service (SaaS) company with decent growth prospects in the corporate finance sector.
As for the current portfolio, we now hold eleven stocks out of a possible twenty, and many of them look like they are building a bottom here. Thus the only change is a downgrade of our weakest stock, Brookfield Infrastructure Partners (BIP) to Sell

Full details in the issue.

Cabot Stock of the Week 290

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As the market works to find a bottom, with the S&P 500 some 33% off its high of just five weeks ago, there’s no question that there are bargains out there. The question is, how do you determine which stocks will head up after the selling pressures abate and which will just wallow in the mud? One promising indication is if a stock has already bounced off its low, as buyers have already begun to retake control. That’s the attraction of today’s stock, along with a solid growth story. The stock was originally recommended in Cabot Early Opportunities by Tyler Laundon and here are Tyler’s latest thoughts.
BlackLine (BL)
BlackLine (BL) is a Software-as-a-Service (SaaS) company with products for finance and accounting departments. Companies use the software to perform a variety of processes, including account reconciliation, intercompany accounting and the financial close, a recurring process that takes raw financial data and turns it into the audited financials that senior management reviews, that gets submitted to the SEC, and that becomes available for investors like us to view.Prior to BlackLine, much of this work was done manually, using spreadsheets. That is a cumbersome, inefficient and error-prone way to do it.

BlackLine has come up with a better way. The company’s cloud platform helps automate the process, pulling in data from banks, ERPs (SAP, Oracle, NetSuite, etc.), transactional systems and more, then running it through the appropriate BlackLine products, which can be set up with internal controls.

The idea is to transform a quarterly, recurring process into a continuous one so that accountants, controllers, managers and auditors can have real-time visibility into the state of a company’s books.

BlackLine was founded by Theresa Tucker, who previously worked as Chief Technology officer for SunGuard Treasury Systems (acquired by FIS in 2015). In the early days the company sold on-premise software, then made the leap to cloud-based software in 2007. That was the year the first iPhone came out and it was good timing; companies wanted to move away from expensive desktop software toward software subscriptions, especially when the recession struck.

Private equity firms took note of BlackLine’s success, jumped in, and the rest is history. Today, BlackLine is going after a big opportunity with over 165,000 global companies that could use its software. It has been working on expanding internationally, where there are many untapped markets, growing a partner network, including with SAP, and developing new products, including an Intercompany Hub Product that helps streamline intercompany accounting.

In Q4 2019, reported on February 13, global demand was as strong as ever as the company added 153 net new customers, bringing total customer count up to 3,024. That translated to 267,621 users and a net revenue retention rate of 110%, meaning that current customers continued to increase their spending with Blackline in Q4.The bottom line is that Blackline grew revenue by 27% in 2019 and by 29%, to $80.3 million, in Q4. Fourth-quarter results beat expectations by $2.4 million, and that was the fourth consecutive quarter of accelerating revenue growth. Adjusted EPS in 2019 was $0.37 and Q4 2019 adjusted EPS was $0.14, which beat by a penny.Looking forward, management issued 2020 guidance of $347 million to $352 million, implying just over 20% growth, and adjusted EPS of $0.45 to $0.48, implying growth of around 27%.

The wild card, of course, is what the impact of the COVID-19 pandemic will be. Guidance was released in the second week of February and the world has changed dramatically since. While BlackLine’s solutions should continue to be used, there is risk that new deals will get pushed back as companies scramble to conserve cash and address the immediate problems resulting from the virus.

Still, with the stock roughly 40% off its previous high and looking to try to get back into its trading range from 2019, now looks like a relatively attractive time to start a modest position.

In terms of the stock’s history, BL went public in 2016 at 17 and, despite some pullbacks, rose steadily to 45 by late 2018. Shares then corrected and bounced around for most of 2019, ending the year near 50. It rose in the first two months of 2019, including a spike to 75 after a big earnings result. Since then it has fallen below 50. As with any stock right now it would be wise to start slow, maintain a tight stop, and average in if the chart continues to look constructive.

bl32320

BLRevenue and Earnings
Forward P/E: 103Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 122($mil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 10.0%Latest quarter80.329%0.14600%
Debt Ratio: 96%One quarter ago74.928%0.1271%
Dividend: NATwo quarters ago69.726%0.10900%
Yield: NAThree quarters ago64.125%0.02NA

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 3/23/20ProfitRating
Alexandria Real Estate Equities (ARE)Sold
Blackline Inc (BL)New0.0%49Buy
Brookfield Infrastructure Partners (BIP)4/24/19427.4%29-31%Sell
Huazhu Group Limited (HTHT)3/30/1690.0%28197%Hold
Luckin Coffee (LK)6/19/19200.0%2418%Hold
NextEra Energy (NEE)3/27/191943.1%178-8%Hold
Nvidia (NVDA)3/10/202540.0%211-17%Buy
RingCentral (RNG)10/23/191530.0%18521%Hold
Sea Ltd (SE)1/21/20410.0%38-7%Hold
Seattle Genetics (SGEN)Sold
Tesla (TSLA)12/29/11300.0%4281345%Hold
Vertex Pharmaceuticals (VRTX)1/7/202240.0%203-9%Hold
Virgin Galactic (SPCE)10/11/199.240.0%1234%Hold
Zoom Video (ZM)03/17/201080.0%15645%Buy

As the bear market of 2020 drops into negative-30% territory, it’s natural to feel that the crash will never end—but in fact, it’s that feeling exactly that is necessary to create market bottoms. Thus, this is no time for despair but time to continue managing the stocks in your portfolio, so that you’ll be in position when the market turns up. Today, we have just one change, a downgrade of BIP to Sell. Details below.

Changes
Brookfield Infrastructure Partners (BIP) to Sell

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, looks terrible and our loss is nearing our 30% limit. In his latest update, Tom wrote, “This is a leading global infrastructure company that operates high-quality, long life essential assets that generate stable cash flow with low maintenance expenses. Unfortunately, the defensive nature of the business has not protected it from the current selloff, so far. A business like this will likely be popular with investors on the other side of this virus emergency. As well, holders of record on March 20th will receive a special dividend in the form of 0.11 shares of a newly established Brookfield Infrastructure Corporation (BIPC). You will have the option to keep the new shares or exchange them back for more BIP shares prior to March 31.” That’s all very good fundamentally, but I don’t see any sign of buying power stepping in, so I recommend selling now. SELL.

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 that I’ve resolved to hold the stock through normal technical sell signals. The stock has made no progress over the past two years, but long term, as China’s leading hotel operator, prospects are bright. The stock has seen buying power step in several times over the past few weeks, so the odds are very good that the next move is up—at least to the top of the trading range at 42. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, continues to fall, as investors leave this once-hot stock in search of safer pastures. Still, the long-term prospects are good for the company. If you took some profits out in the earlier frothy times, you can afford to hold the stock, but if you didn’t, take care to cut losses short. At this point, the stock looks like it’s heading to 19. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, continues to sink. In his update last week, Tom wrote, “The market isn’t even sparing this regulated utility and alternative energy juggernaut. It’s down over 20% in the past month. This is still a great stock to own and will be one of the first I raise back to a BUY when the crisis abates. But in the fastest bear market selloff in history, no stock is safe.” HOLD.

Nvidia (NVDA), originally recommended by Crista Huff for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, and featured here two weeks ago, has come down to its 200-day moving average, and seems to be stabilizing there, some 33% off its high—pretty much like the broad market. From here back to the old high would be a gain of 50%, and I think this key component of the technology universe is more likely to achieve that feat than numerous slower-growing stocks. BUY.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, plunged through its 200-day moving average early last week, but then the buyers appeared and over three consecutive days they boosted the stock 40%! It’s cooled off a bit since then, but it’s a good bet the worst of the selling is over. Fundamentally, RingCentral’s cloud-based communication services are still a great growth story, though last week’s featured stock, Zoom Communications, is hotter thanks to its direct relevance to today’s Work From Home (WFH) movement. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit record highs as recently as early March, but now it’s been pulled down with the rest, to touch its 200-day moving average. Mike has sold the stock from Cabot Top Ten Trader, but Carl Delfeld of Cabot Global Stocks Explorer recently recommended it, writing, “Sea’s self-developed global hit game, ‘Free Fire’, was the most downloaded mobile game globally in 2019, according to App Annie, and recently hit a new record of 60 million peak daily active users. “Free Fire” was also the highest grossing mobile game in Latin America and in Southeast Asia in the fourth quarter and for the full year of 2019. The company recently released its quarterly and full-year financials. Total adjusted revenue was $909 million, up 133.5% year-on-year from the fourth quarter of 2018. Adjusted revenue for digital gaming was $479.9 million, up 107% year-on-year. Quarterly active users reached 354 million, an increase of 64% year-on-year. The company also owns Shopee, the largest Southeast Asia e-commerce platform by orders. It registered over 188 million orders in the fourth quarter, or a daily average of over 2 million orders, an increase of 124.6% year-on-year. All indications point to Sea having the potential to be an enduring growth stock.” 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 on a correction like almost everything else. But with TSLA the pullback was big, maxing out at 63% last Wednesday—so now it’s right back where it started the year! Fundamentally, the big news these days is the company’s partial shutdown, as it complies (grudgingly) with government guidance meant to slow the spread of coronavirus. (On the bright side, the company said it would use the disruption to increase capacity of its factories.) And technically, the stock bounced off its 200-day moving average last week so odds are very good that the decline is over. Lastly, I’m optimistic that the visible reductions in air pollution in recent weeks thanks to the cutbacks in driving bode well for the continuing switch from petroleum-powered vehicles to electric. HOLD.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, shed 20% of its value over the past five weeks (substantially less than the S&P) and is now working on bulding a base above its 200-day moving average, which sits at 200. In his update last week, Mike wrote, “Vertex has actually held up well since last Thursday’s market dump, with the stock showing some big-volume support around its 200-day line (near 200). A decisive drop from here could have us cutting bait, but we’re optimistic the firm’s reliable growth outlook and recent statement that it’s leaving 2020 guidance intact will keep big investors interested.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, was red-hot last month when investors were throwing money around but it’s quickly come back to earth and now sits just below its 200-day moving average. Hopefully you took some partial profits back then when I suggested it. In last week’s update, Carl wrote, “SPCE shares have rounded the bases and are just where we started a couple of months ago at just over 10 a share. In retrospect, I wish we sold more than the one-third position I recommended when the stock was in the mid-30s. Even though we are at a nice profit above breakeven, this pullback has been painful. SPCE still plans to make its first commercial space-tourism flight this year, and took a step toward resuming ticket sales for jaunts expected to cost upward of $250,000. The company said on an investor call Tuesday it was focused on working through testing and approval for its space launch system; it has completed 20 of the 29 approvals required to validate the commercial license it received from the Federal Aviation Administration in 2016. The stock’s pullback over the last few weeks offers more aggressive investors a chance to buy more shares.” HOLD.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, is easily the strongest stock in the portfolio. In fact, last week, Mike wrote that “Zoom remains one of the best growth stocks in the entire market—the virus situation is likely to accelerate the move to its best-in-class platform.” In retrospect, we were “lucky” to buy last week as the stock was bouncing off its 25-day moving average. But what do you do if you didn’t buy last week, and now you realize how popular Zoom is getting—but you see a chart that is definitely extended? You do what you do with any extended chart: either wait for the next pullback or buy here using close stops. I’ll leave it rated buy for risk-tolerant readers. BUY.


The next Cabot Stock of the Week issue will be published on March 30, 2020.

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