Today’s recommendation is a case in point. After a long three-year waiting period, the stock broke out to new highs yesterday and followed through today. The stock’s name will probably be familiar to you; its story is certainly interesting.
Tesla (TSLA)—Stock of the Week
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We remain in the grip of a strong bull market, a market driven by expectations that reasonable energy prices, reasonable interest rates, improved tax policy and reduced regulation will combine to drive corporate earnings higher. Yes, there are some serious worries out there and that is good. When there are no worries remaining is when you should worry because bull markets climb a wall of worry; when there is no worry left, the bull market ends.
For today’s recommendation, I’m taking the unusual step of repeating a previous recommendation that is still in the portfolio. It’s been more than five years since my original recommendation, and the stock’s action this week merits a renewed comprehensive look. Note: the stock was recommended in Mike Cintolo’s Cabot Top Ten Trader just yesterday, but the words below are my own.
Tesla (TSLA)
The automotive industry is mature and slow-growing and thus not the most likely place to find a fast-growing company—unless that company is revolutionizing the industry! And that’s exactly what Tesla is doing. Tesla is now the world’s number one manufacturer of electric cars and is making great strides toward achieving its vision “to create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles”—and the dinosaurs of the industry are struggling to catch up.
On Sunday, Tesla announced that it had delivered 25,418 vehicles in the first quarter of 2017, beating analysts’ estimates and proving that it was overcoming supplier bottlenecks while increasing factory efficiencies. The company is expected to deliver 47,000 to 50,000 vehicles in the first half of 2017 (which would be up 65% from last year), and aiming to produce half a million vehicles in 2018—many of them the mid-size Model 3, which should begin production in July of this year. (Tesla has received roughly 400,000 deposits from customers who want the vehicle.)
Meanwhile, GM’s all-electric Chevy Bolt, which was launched in December, saw deliveries of just 978 vehicles in March, marking no progress from February, even though the car is now available in seven states. If you were a GM dealer, how much effort would you put into selling a disruptive product that might cannibalize your most profitable business—gasoline-powered trucks? And if you were any traditional dealer, accustomed to generating a major part of your profits from service, how much effort would you put into selling a product that needed far less service?
And speaking of disruption, it’s worth remembering that all Teslas are sold at list price, straight from the manufacturer to the customer. There’s no middleman (salesman) wasting your time and trying to increase his commission by selling additional options. Buying a Tesla is a wonderful experience.
Elsewhere in the company, Tesla’s super-efficient battery gigafactory in Nevada continues to ramp up production; its solar energy business (previously SolarCity) is a small sideline for now; and the holy grail of an Uber-like network of self-driving electric cars (Tesla Mobility) is fast approaching. In fact, given that cars (or the drivers behind the wheels of those cars) killed 38,300 people on U.S. roads in 2015, and given that Tesla is leading the race to take the wheel out of their hands and let intelligent machines take over, that future can’t come soon enough.
A lot, of course, depends on CEO Elon Musk, the Thomas Edison of the 21st Century. But investors are increasingly coming around to the realization that Musk’s big dreams are actually coming true, and that’s one reason that Tesla is now worth more than Ford. As time goes by, I expect investors to continue shifting money from the stocks of other manufacturers into TSLA.
The stock is still expensive on a valuation basis (a characteristic typical of the best revolutionary stocks), but if you wait for a “reasonable” valuation you’ll never invest in world-changing stocks. Analysts are expecting Tesla to earn $2.61 per share in 2018, so it’s possible that a positive earnings trend might actually evolve—though knowing Musk’s penchant for investing in big ideas, I wouldn’t count on it.
As for the chart, TSLA was a hot stock in 2013, peaking at 265 in February 2014, but it’s been in a wide and loose consolidation pattern since, cooling off while the company grew increasing valuable fundamentally. The latest uptrend began in early December, and took the stock close its old high in mid-February before easing off. But the news on Sunday, combined with the tailwind of the bull market, sparked a gap up to record highs yesterday. This has all the hallmarks of the breakout we’ve been waiting for and it’s the main reason I’m featuring TSLA as the stock of the week. If you’re not already a shareholder, you can initiate a pilot position here. BUY.
Tesla (TSLA 304)
3500 Deer Creek Road
Palo Alto, CA 94304
650-681-5000
www.tesla.com
CURRENT RECOMMENDATIONS
I received a letter from a reader this week asking for a little more guidance on whether particular stocks in the portfolio might be held long-term short-term or long-term. He owns Lumentum (LITE) and NetEase (NTES)—and has profits in both—and was looking for confirmation of his suspicion that LITE might not become a long-term investment. In short, I confirmed his suspicion. I said that typically, fast-growing technology hardware stocks like LITE have big swings both up and down. But I can’t be sure. LITE just might surprise me, and bring us a big enough profit that we can treat it as a long-term holding. And NTES, established as it is and likely to enjoy long-term fundamental success, just might fall apart tomorrow for some reason beyond its control (North Korea?) and force us to sell it. And lo and behold, that’s where we are today. After a big run, NTES is now under pressure and I’m recommending taking profits. Bottom line: preconceived notions are often wrong, so being nimble and listening to the message of the market is the only sure route to success.
As to the other stocks in the portfolio, most are performing quite well, typical bull market behavior. There are a few that are marginal, which would be cut loose in a higher-risk market, but once again I’m inclined to stand pat and give them a chance.
Adient (ADNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured last week, is still building its base. As long as it can hold above 67, where there’s support from both the 50-day moving average and the stock’s February-March action, buying is recommended. BUY.
Adobe (ADBE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth portfolio, continues to amaze; the stock advanced for eight consecutive days before closing at a record high last Friday. In her latest update, Crista wrote, “Consensus earnings estimates rose another fraction last week, in the wake of a strong first quarter earnings report. The stock remains relatively fairly valued, with the P/Es equal to the EPS growth rates. ADBE could continue reaching new highs this month.” HOLD.
Berry Plastics (BERY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to struggle to get off the bottom it’s built at 48—as the stock’s 200-day moving average (now at 46) draws closer. In a higher-risk market I’d sell and move on, but BERY hasn’t done anything wrong, so I’ll be patient a bit longer. Note: on April 13 the company will change its name to Berry Global. HOLD.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, remains under Roy’s current Maximum Buy Price of 285—and right on its 200-day moving average. If you’re looking for a low-risk value stock, consider Biogen. BUY.
Celgene (CELG), also recommended by Roy Ward in Cabot Benjamin Graham Value Investor, looks great, building a mini-base at 124 while it gathers strength to break out above 127 and into new high territory. Roy’s Maximum Buy Price is still 128.45, so if you’re not on board, you can buy now while maintaining a Margin of Safety. Our target remains Roy’s Minimum Sell Price of 170, so the stock’s rating is a very solid hold. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has been a very rewarding investment for us so far, and hindsight says that success was obvious—but that’s an illusion. Even when all the fundamentals seem right, as they did in HTHT’s case, success is never assured. In Paul’s latest update, he wrote, “HTHT is acting exactly like a strong stock of a fundamentally sound business should. The stock corrected to below its 25-day moving average in the first half of March, then accelerated back to its upward trend line in a two-day rally following a great earnings report. The stock is still throwing a selling day in about every three days, and that’s what you should look for to get started if you don’t own any. We’ll stay on Buy.” As I write the stock is down for five consecutive days. BUY.
GameStop (GME), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is our troubled child—though far from a lost cause. In fact, all three of Cabot’s value-oriented advisors rate it Buy. In her latest update, Chloe wrote, “While the company’s guidance is disappointing, the stock has already begun to rebound. GME has found support at this level before, in November. The company’s buyback program is another likely source of support here. And, with the stock’s yield now over 7%, and its P/E at 5.6, bargain hunters are probably stepping in as well.” Additionally, Crista Huff is looking for a near-term rebound to 26 and Roy Ward, always thinking longer term, gives GME a Maximum Buy Price of 27.93. HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, is a classic bull market stock, meaning that its business, trading, thrives as more and more investors join in. The stock remains just under Roy’s Maximum Buy Price of 60.17 and just above its 50-day moving average, now approaching 59. If you don’t own it, this marks a great entry point. Otherwise hold patiently until the stock climbs to Roy’s Minimum Sell Price of 75.86. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has regained its previous altitude—in fact it closed at a record high yesterday—but the action hasn’t been quite convincing enough to turn Paul more bullish on the stock so I’ll stay on hold. HOLD.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, pulled back with all financial stocks for a couple of weeks, finding support at its 50-day moving average, and now it’s heading slowly higher. Crista’s latest update said, “LM is a seriously undervalued asset management and financial services company with aggressive earnings growth. LM has traded between 34.50 and 37.50 for eight weeks. There’s additional upside resistance at 40.” BUY.
Lumentum (LITE), originally recommended by Mike Cintolo of Cabot Growth Investor, is your classic volatile technology hardware stock. In Mike’s latest update, he wrote, “Fundamentally, Lumentum was busy on the news front last week, announcing two new families of 100G transceivers for its datacom product line (targeting so-called hyperscale data centers), one new product for 100G short-reach data links and the industry’s first small form factor line card for optical applications. Earnings estimates have been nudged higher, too. Hold on if you own some, and if you don’t, you can buy here or on dips of a point or two.” BUY.
Martin Marietta Materials (MLM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth Portfolio, has spent five months consolidating the gains from its big November surge, and bounced off its 200-day moving average just last week. In Christa’s latest update, she wrote, “The stock has been trading between 205 and 240 this year. I expect it to surpass that trading range later in 2017.” To my eye, the selling pressures are drying up, and bargain hunters are slowly climbing on board. BUY.
NetEase (NTES), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, fell through support at 280 today after the company noted that game revenue weakened in January and February. Investors who’ve been in the stock long-term and have a good cushion can sit tight through this; there’s support at 260 and 220, and NetEase has great long-term prospects. But as we only got on board in January, we’re going to grab our quick profit and move on. SELL.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is a high-yielding stock in a slow uptrend. In Chloe’s latest update, she wrote, “PBA held up well to this month’s slide in oil stocks and last week’s shakeout. The Canadian pipeline company pays monthly dividends. High yield investors who want to start a position can do so here.” BUY.
Q2 Holdings (QTWO), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, continues to act quite maturely for a small-cap stock; it’s been building a base between 35 and 36 for the past six weeks. Tyler’s keeping the stock rated hold until he sees a good entry point, but if I didn’t own it, I’d be tempted to buy now. The stock’s 50-day moving average is getting close, and selling pressures are dwindling. HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to consolidate the gain made after its big post-earnings report surge. Fundamentally, the only news is that the company is moving to break into the U.K. market—and later the rest of Europe. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, finally broke through three-year resistance at 280 on Monday and added to its gains today. Technically, that old long-term ceiling at 280 is now likely to act as a floor, reducing risk for new investors in the stock. As for long-term holders, who’ve been holding patiently, it’s now safe to average up—if you determine you want more of the stock. Upgraded to Buy. BUY.
Total (TOT), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities portfolio, has seen some big buying volume in recent days and is now close to breaking out to new highs. With a big yield and a low P/E, it can still be bought. BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, is also very close to breaking out to new highs. But you shouldn’t buy it here. VMW is well above its Maximum Buy Price of 82.89, so if you own it, you should just hold on tight. Our target is Roy’s Minimum Sell Price of 117. HOLD.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier and featured here last week, hit a record high yesterday and pulled back very slightly today. In Chloe’s latest update, she wrote, “The big catalyst here is accelerating improvement in Macau’s tourism sector (although the addition of two pro sports teams to Las Vegas helps, too). WYNN is a buy on pullbacks for medium-term dividend growth and growth investors with moderate risk tolerance.” BUY.
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All Cabot Stock of the Week buy and sell recommendations are made in issues or updates and posted on the Cabot subscribers’ website. Sell recommendations may also be sent to subscribers as special alerts via email. To calculate the performance of the hypothetical portfolio, Cabot “buys” and “sells” at the midpoint of the high and low prices of the stock on the day following the recommendation. Cabot’s growth stock policy is to sell any stock that shows a loss of 20% in a bull market (15% in a bear market) from our original buy price, calculated using the current closing (not intra-day) price. Subscribers should apply loss limits based on their own personal purchase prices.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED APRIL 11, 2017
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