In choosing today’s stock, I selected one that’s not only undervalued but also at a low-risk entry point, technically. It’s a company you’ve never heard of, and I think you’ll like the story. As to the current portfolio, most of our stocks still look great! But I’m recommending taking profits in two.
Cabot Stock of the Week 148
[premium_html_toc post_id="134290"]
Most investors know that investing in bull markets tends to be profitable; a rising tide lifts all boats. Similarly, most investors know that being more defensive—even holding cash—is smarter in bear markets. But very few investors know how to identify the point when a bull market rolls over and morphs into a dangerous bear market—and very few investors know how to identify (and have the courage to act on) the point when a punishing bear market changes into a rewarding bull market.
Happily, Cabot has been working on and refining market-timing tools for nearly 50 years, and today we use three primary indicators for determining the direction of the market. You can see the status of these indicators in detail in every issue of Cabot Growth Investor, but today I’ll give you a brief update.
The long-term trend of the market remains up, as it has been since April 2016. The intermediate-term trend of the market is neutral; the strength that bloomed after the election has faded into a trendless trading range. And the internal health of the market is unhealthy; there are signs of deterioration that tell us risk is slowly rising, as forward-looking investors take profits and prune their holdings. Generally, a market top may develop anytime within six months after this signal, but breadth is likely to narrow as time goes by. Thus the challenge for investors is to remain invested in the shrinking list of stocks that are still making headway in increasingly difficult conditions.
Anticipating this, I have a number of sell recommendations today; you’ll find full details in the update. As to today’s recommended Buy, I’ve chosen a low-risk stock originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor.
Alliance Data Systems (ADS)
Alliance is one of those companies that knows all about your spending habits, and uses that information to get you to buy more things—or, as they put it, “serve the customer better.”
Half the company’s business comes from processing branded credit cards for customers like Caesar’s Entertainment, J. Crew, Victoria’s Secret, Pottery Barn and Walgreen’s. Thirty percent of revenues come from using that data to provide marketing solutions to nine of the top 10 banks, eight of the top 10 retailers, the top 10 pharmaceutical companies and all the big automakers. And 20% of revenues come from loyalty programs offered through airlines, gas stations, pharmacies, grocers and more.
Overall, 80% of revenues come from the U.S., 10% come from the Canada and the rest from smaller countries around the world.
As the leader in the data-driven marketing industry and one of the largest third-party payment processors in the U.S., Alliance is very well positioned to capitalize on the growing trend toward data-driven strategies.
Founded in 1996 and headquartered in Plano, Texas, Alliance has achieved much of its growth through intelligent acquisitions, and acquisitions remain a key element of the company’s growth strategy. Furthermore, Alliance will buy back shares when stock is used to facilitate acquisitions.
For the quarter ended March 31, revenues increased 12% to $1.88 billion, while earnings per share grew 2% to $3.91 per share. But earnings typically grow substantially faster than that; looking ahead, analysts expect revenues to grow 10% and earnings to surge 17% over the next 12-month period.
Last but far from least, Roy says the stock is undervalued, trading at 15.8 times the latest earnings, while the company’s balance sheet is strong with almost $2 billion in cash. Thus Roy rates ADS low risk. He says you can get a Margin of Safety by buying anywhere under 255.88 and reap a tidy profit (roughly 50%) by holding until the stock reaches his sell target, which is currently 386.64. The journey might take two years, but could easily take more or less time.
Today, I’m selecting the stock not only for all the reasons Roy likes it but also for the fact that over the past month the stock has corrected from 265 to 235, where it seems to have found support—so technically it’s at a low-risk point also. BUY.
Alliance Data Systems (ADS 236)
7500 Dallas Parkway
Suite 700
Plano, Texas 75024
214-494-3000
www.alliancedata.com
CURRENT RECOMMENDATIONS
The long-term trend of the market remains up, but I’m growing concerned (because of our market timing indicators) that the months ahead will be more difficult, so I’m recommending a couple of sells today. You don’t need to follow my recommendations exactly; you must consider your own circumstances, including risk profile, total portfolio composition and affinity for trading as opposed to investing. In any event, as always, I recommend that you try to buy on dips and sell on bounces.
Adobe (ADBE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth portfolio, sold off sharply last Wednesday when the market plunged in response to political turmoil, but it’s come roaring back, hitting new highs both yesterday and today. Very impressive. HOLD.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has fallen to 250, where it bottomed in late January, and may find support at that level. Health care stocks remain weak thanks to political uncertainties, but Roy maintains his Minimum Sell Price of 358.47 on the stock (up more than 40% from here), so I believe it’s worth holding. If you don’t own it, you can buy anywhere under Roy’s Maximum Buy Price of 269.27. HOLD.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, fell right down to its 50-day moving average as we bought it last week and has bounced nicely since. In her latest update, written on that very day, Chloe wrote, “The stock’s last few such pullbacks—most recently April’s six-day retreat—have all been good buying opportunities. Carnival is seeing higher cruise demand in almost all markets this year, and analysts expect 4% sales growth and 8% EPS growth. Dividend growth investors can buy here.” BUY.
Celgene (CELG) is the second health care stock recommended by Roy Ward in Cabot Benjamin Graham Value Investor, and it, too, has been soft in recent weeks. Still, I believe it’s worth holding; Roy’s Maximum Buy Price is 122.63, and he expects the stock to climb to his Minimum Sell Price (currently 188.17) within two years. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has been one of the leaders of the red-hot Chinese stock movement this year, but over the past two weeks, it’s paused to catch its breath, building a base at the 75 level. I continue to recommend that you consider taking partial profits here, as the stock has the potential to fall to its 200-day moving average, which is way down at 53. At the same time, however, the 100%-plus profit we’ve built in the stock over the past year means we have the opportunity to label it a Heritage Stock, and that’s what I’m going to do today. Heritage Stock status means that I resolve to hold the stock through action that might normally trigger selling, confident that the stock will be higher in the years to come (the company is still growing at a very fast rate). Holding, just as we did with Tesla, will not always be easy, but it can be a valuable strategy as part of a diversified portfolio. HOLD.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, dipped down to its 50-day moving average in last week’s market selloff, but has bounced right back since. You can buy here. BUY.
GameStop (GME), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier—and also recommended by Crista Huff and Roy Ward—is scheduled to release its first-quarter earnings report on Thursday May 25 after the market closes, and much depends on not only the contents of that report but also how the market reacts to it. In her latest update, Chloe wrote, “Analysts are expecting EPS of $0.51 and revenue of $1.94 billion, down from $0.66 and $1.97 billion in the same quarter last year … The stock offers a remarkably high yield of 6.3% and a remarkably low P/E of 7.1.” And Crista wrote, “Each time GameStop announces quarterly results, the news media harps on the company’s declining physical gaming business, but does not usually mention its rapidly-growing collectibles, technology and entertainment businesses. Investors should note that similar changes and news reporting happened at Adobe Systems (ADBE). The company switched to a subscription revenue model in 2013, yet four years later, each quarterly earnings report is greeted with news articles questioning whether the revenue transition will be successful. Unfortunately, many news writers know that readers will tune in to worrisome headlines no matter how stale and inaccurate that news may be, and we’re seeing that phenomenon repeat itself with GameStop. The stock could break above 26 if there’s a strong earnings beat that gets accurately reported, but could temporarily fall as low as 22.5 under virtually any other news reporting scenario, regardless of the strength of the actual earnings report.” HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, bounced off 58 last week and has resumed its slow uptrend. ICE is what we like to call a “bull market stock,” in that the company benefits from the increased trading that comes with a bull market. If you don’t yet own it, you can still buy under Roy’s Maximum Buy Price of 60.36. His Minimum Sell Price is 75.89. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is a perfect example of an extended stock becoming even more extended; today it sits some 18% above its 50-day moving average. A little profit-taking might be in order here if you’re tempted; the stock could easily pull back to support at 38. For my part, I’ll just downgrade it to Hold until it cools off a bit. HOLD.
Jabil Circuit (JBL), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has an interesting chart. First there’s last Monday’s breakout to new highs, which I previously noted came on only normal trading volume. Then there’s last Wednesday’s breakdown (in concert with the broad market), which came on more than triple average volume. And then there’s the return to the basing area that is now two months old—where we also find the stock’s 50-day moving average. In short, there’s a lot of technical support for the stock here, and if you believe that manufacturing industries in general have bright days ahead, you’ll want to be on board for the eventual breakout. BUY.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, is ripe for a breakout above 38.5. In her latest update, Crista wrote, “Legg Mason is a seriously undervalued asset management and financial services company with aggressive earnings growth … LM appears ready for an immediate breakout past 38.5. There’s medium-term price resistance at 44-45, 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, has given us an 8% profit in just 10 weeks—mainly because we bought at a bottom—and I’m going to take that profit now. Crista says the stock is still undervalued, but it’s almost certain that any progress from here will come at a slower rate. SELL.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, provides both a big yield and growth potential—along with the industry risk that comes from fluctuating oil and gas prices. In her latest update, Chloe wrote, “On the heels of a strong earnings report, the stock is also getting a boost from the rebound in oil prices and energy stocks. PBA also got a nice review from analysts at J.P. Morgan this week, praising the company’s proposed acquisition of Veresen. Risk-tolerant high yield investors can buy some here.” 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 the company’s growth prospects are extremely bright. The stock is rather extended from its 50-day moving average, so I don’t encourage buying now. But if you get the opportunity to buy on a normal pullback of a week or longer, as we did a month ago, go ahead. BUY.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to calm down since plunging and bouncing in the wake of its good-but-not-great earnings report. If you own it, I recommend holding on, but only if you’re willing to be very patient. At the moment, the stock has no positive momentum, just immense potential. HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, blasted out to a record high yesterday and continued higher today. The little company currently processes just 3% of the U.S. payments market, but as it grows, and the transaction volumes of its clients grow, Square’s margins should grow, too. If you haven’t bought yet, and you have a high risk tolerance, you can still buy a little here with the intention of averaging up over time. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, was named a Heritage Stock after we amassed a big profit in the stock’s 2013-2014 run, and that status enabled us to hold the stock for three years of up-and-down trading in a wide range—until it broke out above resistance at the start of April. The stock is currently pulling back gently toward its 50-day moving average, which is currently at 297. If you don’t own it, you can buy here. BUY.
Total (TOT), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities portfolio, has brought us a 13% profit in six months—with the most recent boosts coming from the Saudi Arabia/Russia oil production cutbacks and the French election—and today I recommend selling. In her latest update, Crista wrote, “Total is an international oil and gas company that’s based in France. TOT is a greatly undervalued growth stock. The stock has been rising toward long-term resistance at 55, where it will likely rest for a while. Traders should exit near 55, and everybody else should hold TOT, and considering buying additional shares on pullbacks. We could see additional capital gains later this year. To reiterate, I believe TOT is a great total return stock for investors who plan to hold it for another six to 24 months; but TOT has probably maxed out its near-term capital gain prospects.” I’m happy selling here and looking for another opportunity to buy low. SELL.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has done very well in the seven months we’ve owned it, and the stock 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, looks fine, consolidating its latest gains in the 125 area. In her latest update, Chloe wrote, “WYNN has more than recovered from last week’s pullback, triggered by China’s new ID requirements for ATM withdrawals in Macau. Various analysts have weighed in to say any chilling effect from the new rules is likely to be short-lived. And there are plenty of positive catalysts for Wynn in the pipeline, from the general rebound in Macau tourism to the completion of construction around the new Wynn Palace. WYNN is a Buy on pullbacks for investors whose primary goals are growth and dividend growth.” BUY.
[premium_html_footer]
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 30, 2017
We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/r/CSOW
Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit www.cabotwealth.com or write to support@cabotwealth.com.
[/premium_html_footer]