In choosing today’s stock, I leaned toward the growth side, because that’s what’s working best today. Then, to get an element of safety—because somewhere, sometime, a nasty correction is likely to hit the market—I chose a stock with very strong and growing institutional sponsorship, the kind of stock that has the potential to be the last stock standing when this bull market eventually ends.
Cabot Stock of the Week 146
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The great bull market of 2017 remains in force, and I continue to recommend heavy investment in stocks that meet your own investment criteria. In choosing today’s stock, a few considerations took precedence. One of these is that growth stocks continue to be favored by the market, especially in the wake of a flood of great earnings reports. And the other is my perception—expectation, really—that as the bull market ages, the last stocks standing will be the most famous, of which Facebook is clearly one. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor. Here are Mike’s latest thoughts.
Facebook (FB)
It’s not usually the case that one of the best-known stories in the market also has the greatest potential, but that’s what we have in Facebook. To me, the story is one of a kind, and I believe the company itself has only scratched the surface of its potential.
To put the opportunity in perspective, consider that the Super Bowl in February 2015 (Patriots vs. Seahawks) was the most watched TV event of all time; 115.2 million people tuned in. Now realize that Facebook gets 11 times as many viewers every single day! Granted, those users aren’t perusing Facebook for three or four hours per day (at least I hope they aren’t), but the fact is 1.28 billion people use the service each day—a mind-boggling number of eyeballs that advertisers can target in different ways.
And that’s just the company’s flagship service. Instagram, the firm’s photo- and video-sharing platform, is next in line in the monetization ramp-up. That service now counts 700 million monthly users (including 59% of U.S. millennials!) and, while revenues aren’t explicitly broken out, most analysts believe that Instagram will bring in nearly $3 billion of sales this year, with many years of rapid growth ahead of it.
Then you have Facebook Messenger and WhatsApp, which are two messaging platforms; each platform sports more than 1.2 billion monthly active users. Neither is being monetized to any real degree yet, but CEO Mark Zuckerberg talked about his plans going forward in last week’s conference call; he wants businesses and users to interact organically, whether it’s for customer support or for some news content. That’s already starting, and once it becomes the norm, there are many ways for Facebook to offer paid content or link to certain businesses to drive sales leads.
Lastly, there’s Oculus, the company’s virtual reality arm that is beginning to roll out a few different products. It’s one of a handful of leaders in the field, so if virtual reality becomes as big as some analysts expect, there’s no question Oculus will participate.
Of course, in a mass market this big, there’s competition, partly from Snap, Tim’s recommendation of two weeks ago. On that topic, I have two thoughts. First, there’s plenty of room for a few winners in this area. And, second, as Facebook has copied some of Snapchat’s most popular features (such as Stories, the daily photo and video albums that users put together), the uptake has been incredible; Instagram Stories is being used by more than 200 million users, while a similar service from WhatsApp’s garnered 175 million users in just two months!
All in all, Facebook and its various platforms have an unparalleled and active user base, so success is just a matter of continually developing more accurate and targeted opportunities for advertisers—especially when it comes to video content and ads.
In the meantime, the numbers speak for themselves; first-quarter advertising revenues at Facebook jumped 51% on a currency-neutral basis, and that was actually a slight deceleration from recent quarters. Earnings soared 73%, generally topping expectations, while after-tax profit margins clocked in at 38.1%. Analysts see the bottom line rising 42% this year and 24% next, though both figures are likely conservative.
The stock actually made no net progress during the last 11 months of 2016, wearing out many weak hands in the process. But this year has been mostly up, with the stock advancing persistently through March, dipping to its 10-week line and then catapulting to new highs. FB topped 153 after its earnings report, but has backed off a bit since, and I recommend buying anywhere between here and 145. Any correction deeper than that would be cause for mild concern.
Facebook (FB 150)
1601 Willow Road
Menlo Park, CA 94025
650-543-4800
www.facebook.com
CURRENT RECOMMENDATIONS
Today’s addition of Facebook means that the portfolio once again grows to 20 stocks, my self-imposed limit. By my rough categorization, nine of these are “growth” stocks, while 11 are “value” stocks. But of course, it’s not that simple. Still, I believe we have both balance and diversification, and in the long run, that’s a good thing.
But do all these stocks deserve to stay in the portfolio? It’s a question I ask every week, and this week, the answer is yes.
Adobe (ADBE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth portfolio, has been trading tightly near its highs at 135 for the past week. Crista no longer has it rated Buy, mainly because the stock is fairly valued. But she’s happy to hold on as long as the upward momentum continues. Still, some profit-taking—or a close stop—might be prudent here. HOLD.
Aqua Metals (AQMS), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential and featured here last week, is a small-cap stock with low institutional support and substantial short interest—factors that can work for or against the stock. In his latest update, Tyler wrote, “Shares have begun to stabilize and are trending modestly upward, with a few trades going up near the 50-day moving average. Management will report earnings next Tuesday (that’s today after the close, just as this is sent) and that event will be closely watched by the market given all the drama over the past month. Then executives are off to NYC to attend the Oppenheimer Emerging Growth Conference on May 16. I’m expecting roughly $5 million in revenue this quarter, along with updates on the Johnson Controls licensing deal, progress on new plant planning, an operations update from TRIC, update on IP protection, and about a gazillion other things.” BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has pulled back in the two weeks since it gapped up on an excellent earnings report, and is now trading below Roy’s Maximum Buy Price, recently lowered to 269.27. So technically, you can buy it here. But given that the stock is likely to soon be trading above that level, and on the way to Roy’s Minimum Sell Price of 358.47, I’ll just leave it rated Hold. HOLD.
Celgene (CELG), also recommended by Roy Ward in Cabot Benjamin Graham Value Investor, plunged 4% yesterday as investors ditched medical stocks, and rebounded modestly today. Roy expects CELG to climb to his Minimum Sell Price of 188.17 within two years, and rates the stock a Buy if it’s under his Maximum Buy Price (recently lowered from 128.72 to 122.63). Since we’re already on board, I’ll continue to rate CELG Hold, but if you’re new, feel free to buy here. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, blasted out to another new high yesterday on no particular news and climbed even higher today. The main thing that is changing here is that investors are getting more optimistic! Thus my advice from last week stands. Feel free to take partial profits on this strength, but consider holding some shares long-term by designating China Lodging a Heritage Stock once your profit exceeds 100%. Earnings will be released tomorrow, May 10, after the market close. HOLD.
GameStop (GME), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, continues to climb, as more and more investors conclude that this turnaround is going to work. Technically, I have the stock rated Hold, waiting for either a good correction that provides a buying opportunity—or the earnings report, due May 25 after the market close. But if you don’t own yet, you can buy some now; the stock’s price/earnings is a dirt-cheap 7.1 while the dividend yield is 6.2%. HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, reported earnings last week, and here’s what Roy told his readers in response: “Intercontinental Exchange recorded no growth in the first quarter. Revenue inched ahead 1% and EPS were flat after sales and EPS increased 30% and 8% in the prior quarter. Trading and clearing revenue declined 6% while data and listings revenue rose 8%. The company posted higher fees from IPOs (initial public offerings) because it listed all of the last 27 large U.S. company IPOs. After consummating several large acquisitions during the past 10 years, ICE made no new significant purchases during the past year to fuel revenue growth. However, management expects growth to accelerate during the second half of 2017.” Roy’s Maximum Buy Price was recently raised to 60.36, so if you don’t own it yet, you can buy here. His new Minimum Sell Price is 75.89. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, announced its first-quarter earnings before the market opened yesterday and the results were terrific, setting off an 8% advance for the day. Revenue at the online retailer was a massive $11.1 billion, up 41.2% from the previous year, while net income from operations was $122.5 million compared to a $126 million loss in the previous year. Looking ahead, JD.com said net revenue for the second quarter of 2017 is expected to be between $12.8 billion and $13.1 billion, a growth rate of between 35% and 39% compared with the second quarter of 2016. If you don’t own yet, you can buy here, but take it slow. BUY.
Jabil Circuit (JBL), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here three weeks ago, continues to build a base in the 29 area. You can still buy here. BUY.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, has pulled back over the past two weeks, and is an excellent buy here, according to Crista. In fact, she featured the stock in her latest issue, and here are some of her main points: “Legg Mason is expected to report over 20% EPS growth in each of its next two fiscal years. The only other company [among its peers in the industry] that is expected to achieve relatively similar aggressive earnings growth is Ameriprise Financial (AMP). In addition to outstanding earnings growth, Legg Mason shares offer the biggest disparity between earnings growth rates and price/earnings ratios (P/Es), making LM the most undervalued stock within its peer group. Lastly, LM has one of the highest dividend yields of these ten stocks, at 3.0%. So whether you’re reviewing mutual fund asset management company stocks for growth, value or dividend yield, Legg Mason comes out on top as a premiere investment choice. Legg Mason took a net loss in fiscal 2016 (March year-end). You can see on the five-year chart that the stock declined during the company’s 2016 fiscal year, as investors anticipated the loss and sold the stock. Then the share price stabilized, as the market began to understand that the loss was a one-time event and did not represent a chronic problem. Therefore, I added LM to the Buy Low Opportunities Portfolio in October 2016, in anticipation of the rebound in profitability and the concurrent rebound in the share price. The stock has lots of room to deliver additional capital gains to investors. Professional investment managers who are comparing LM to its peer group are seeing the same numbers that I reported here today. As they select stocks within the asset management industry, many of them buy LM, and each purchase is going to drive the share price up further. LM broke out of a trading range in mid-April, then pulled back a bit. The stock could reach medium-term price resistance at 44-45 relatively quickly, at which point it will still be undervalued.” BUY.
Martin Marietta Materials (MLM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth Portfolio, released an excellent first-quarter report last Tuesday, which I reported on in last week’s issue. Now here’s Crista’s take on the results and the continuing opportunity. “Martin Marietta Materials reported first-quarter revenue and profit that far exceeded the market’s expectations. While quarterly EPS came in $0.27 above the consensus estimate, the 2017 full-year consensus EPS estimate subsequently rose by only $0.09. The implication is that analysts are either purposely being extremely cautious with their estimates, or that despite the blowout first quarter numbers, Wall Street expects no additional upside earnings surprises during the balance of the fiscal year. My sense is that (a) earnings estimates will continue to rise and/or (b) we’re going to see more upside surprises in quarterly reports. MLM is an aggressive growth stock that’s undervalued based on 2018 numbers. I mentioned in the May issue of Cabot Undervalued Stocks Advisor that “MLM could break past short-term upside resistance at 242 this year.” It looks like that breakout could happen within a few days or weeks. Buy MLM now and buy on pullbacks, too.” BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has rebounded nicely since it sold off a week ago on the news that it would acquire Veresen, a fellow Canadian energy company, for $9.7 billion (Canadian). Then last Thursday, the company announced its first-quarter earnings report, beating analysts’ estimates on both revenues and earnings, and raising the dividend as well. The future is bright for this big pipeline operator and the yield-oriented investors who are on board. BUY.
PRA Health Services (PRAH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a contract research organization for the biotechnology and pharmaceutical industries, and thus to some extent immune to the inconsistencies of companies dependent a single drug or sector. The stock has recovered from its post-earnings dip, advancing for five consecutive days and breaking out to new highs today, and this is reason enough to restore the stock’s Buy rating. BUY.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here two weeks ago, looks fine, though it may encounter resistance at 24. The company will report earnings tomorrow after the market close. BUY.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, released a great earnings report last week. Revenue in the first quarter was $462 million, up 22% compared to the first quarter of 2016. The company processed $13.6 billion of payments, up 33% from the first quarter of 2016. And it launched in the U.K., Square’s fourth international market. Notably, the quarter’s growth came with no revenue from Starbucks, which transitioned off Square infrastructure during the fourth quarter of 2016. The stock gapped up after the report, and has been holding tightly around 20 since. If you don’t own it, you can buy some here, but take it slow. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, also released an excellent earnings report last week, but the stock sold off in response, though it’s recovered the loss—and more—since. Highlights from the report include these tidbits. Vehicle production in the quarter increased by 64% compared to a year ago, which enabled Tesla to set new quarterly records of 25,051 deliveries and $2.7 billion in revenue. Model 3 remains on track to start production in July. This year, Tesla plans to add nearly 100 retail, delivery and service locations globally, representing an approximately 30% increase in facilities. These additions include the first-quarter openings of the first stores in Dubai and South Korea. Also this year, Tesla expects to at least double the number of Superchargers and Destination Charging connectors globally. Lastly, Tesla is being selective in its solar business, prioritizing projects that have higher margins and generate cash up front. Later, on the conference call, CEO Elon Musk voiced his conviction that in time, all transport will be fully electric, “with the ironic exception of rockets.” He noted that many people erroneously assume that the forthcoming Model 3 will be a more advanced car than the Model S, when in fact the Model S will always be the more full-feature car. And he noted that Tesla, which has never done any paid media marketing, “antisells” the Model 3 to push more buyers to the currently available Model S. Nevertheless, Model 3 reservations “continue to climb week after week. No advertising, antiselling, nothing to test drive, still grows every week.” TSLA’s 50-day moving average is currently down at 283, and someday, the stock will touch that line. But right now, the stock remains strong—while the stocks of Ford and General Motors are sinking. BUY.
Total (TOT), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities portfolio, blasted out to a new high last Friday and has pulled back normally since. BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, hit another new high today. Roy’s Maximum Buy Price is now 83.79, while his Minimum Sell Price is 110.18. HOLD.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, found resistance at 125 after gapping up after the company’s quarterly report, and has pulled back from those highs since, presenting a decent buying opportunity. In her latest update, Chloe wrote, “On top of Wynn’s strong first quarter, Macau gaming revenue jumped 16.3% in April, the ninth straight month of growth and a slightly faster pace than expected. If you don’t own WYNN yet, try to buy on pullbacks.” 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 MAY 16, 2017
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