Today’s recommended stock is a niche medical provider whose risk is substantially outweighed by reward, both fundamentally and technically. As to our current portfolio, most stocks are acting well and there are no ratings changes.
Cabot Stock of the Week 149
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We remain in the grip of the Great Bull Market of 2017, though most people don’t recognize it as that yet. Thus, I continue to recommend that you remain heavily invested in stocks that meet your investing criteria. However, as I mentioned last week, I believe we may be entering the first phase of this market’s long topping process, the phase in which the weakest stocks begin to be left behind. That shouldn’t be a problem for us, particularly if you are diligent about pruning your portfolio of laggards, but it does mean that you should be wary of risk, especially when it comes to deciding when you will buy a stock.
Today’s selection, originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, is a perfect example of a stock at an excellent buy point. Here are Crista’s latest thoughts.
Vertex Pharmaceuticals (VRTX)
Vertex Pharmaceuticals is a biotech company that is working to corner the market for treatments for cystic fibrosis (CF), a relatively rare and deadly disease that inhibits lung function. The company’s drug therapies treat 29,000 of the 70,000 worldwide people afflicted with CF. Vertex aims to eventually treat every CF patient by improving the effectiveness of its drugs, minimizing side effects, and increasing access for people who don’t have the financial means to obtain treatment.
Vertex currently markets two dominant CF treatments: Kalydeco, which launched in 2012, and Orkambi, which launched in 2015. In May 2017, the FDA approved an expanded use for Kalydeco in younger patients, aged two and older, increasing the potential U.S. patient population by 900, and increasing future revenue by about $70 million per year.
The company also earns revenue from the rights to several oncology compounds developed by its R&D team, which were purchased by Germany-based Merck KGaA in early 2017. Merck paid Vertex $230 million up front, and will also pay royalties to Vertex from future net sales.
Vertex is in advanced trial phases for additional CF drugs—Tezacaftor (VX-661) and a triple combination therapy—for which the medical community and stock market are optimistic. CEO Jeffrey Leiden is the former President and COO of Abbott Laboratories, and also a physician, scientist and venture capitalist. Dr. Leiden has a goal of treating CF via “one pill, once a day” with the triple combination pill. It would be extremely bullish for the share price if the triple combination therapy were approved for launch in 2018. Vertex also has early stage pipeline drugs seeking to treat cancer, pain, flu and spinal cord injuries. Lastly, the pending purchase of a CF treatment from Concert Pharmaceuticals has been approved by Concert’s shareholders, and is under review by the U.S. Federal Trade Commission (FTC).
Vertex offers several important features that differentiate it from the typical biotech company and serve to lower stock investors’ risk. For one thing, the company has marketable products. (Many biotech companies operate on a wing and a prayer!) The company is also profitable. True, Vertex reported many years of net losses, but that situation turned around in 2016. And finally, while many profitable biotech company stocks have astronomical price/earnings ratios (P/Es), VRTX shares are undervalued. Let’s look at the numbers.
There are currently 23 Wall Street analysts who are covering VRTX, providing earnings estimates and encouraging research reports to investors. After noting that Vertex earned $0.85 per share in 2016 (December year-end), these analysts estimate that earnings will hit $1.65 and $3.12 per share in 2017 and 2018, representing earnings growth rates of 94% and 89%. Wow!
Generally speaking, a stock is undervalued when its P/E is lower than its earnings growth rate. The 2017 and 2018 P/Es for VRTX are 73 and 38. Notice that the 2018 P/E is less than half of the 2018 earnings growth rate, leaving lots of room for the share price to rise—or even double!—before anybody would consider the stock to be fairly valued.
Turning to the stock’s chart, many famous biotech and pharmaceutical stocks peaked in mid-2015, then declined dramatically for the next 12 to 18 months. VRTX, similarly, peaked at 141 in August 2015, plummeted in January 2016, then spent a year stabilizing in preparation for a recovery that began in January 2017. Over the past two months, shares have traded in a tight range between 114 and 120—a bullish pattern that indicates the stock could immediately break past 120 and begin its next run-up.
Barring an unexpected stock market disruption, I fully expect VRTX to return to its recent high around 140 in the coming months, where it will likely rest before continuing its upward climb. VRTX is a large-cap stock that is suitable for both aggressive growth investors and value investors. BUY.
Vertex Pharmaceuticals (VRTX 120)
50 Northern Avenue
Boston, MA 02210
617-341-6100
www.vrtx.com
CURRENT RECOMMENDATIONS
In general, our stocks look great; in fact, the only laggards are Roy Ward’s two health care stocks and Gamestop (recommended by all three value analysts). But Roy’s system has taught me that these undervalued stocks pay off eventually, so I’ll be patient. As for all our other stocks, many of which—like the broad market— have been hitting new highs in recent days, I have three thoughts, none of them original.
1. Trends often go farther and last longer than expected
2. The most bullish thing a stock can do is hit new highs.
3. A bull market climbs a wall of worry.
So, hold your winners, dump your losers, and don’t worry about the fundamentals, regardless of what politicians and the media do or say. They are not your best guide here—the market is. This week there are no ratings changes.
Adobe (ADBE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth portfolio, has been a very impressive performer. In her latest update, Crista wrote, “Adobe is a somewhat overvalued, aggressive growth software stock. ADBE has risen for five months without any decent pullback, and the stock is still climbing. Each week, I look at the valuation and price chart, and decide whether to give ADBE a little more rope. It’s behaving well, so I’m not selling yet.” HOLD.
Alliance Data Systems (ADS), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor and featured here last week, gapped up the day after we bought it and has held onto the gains since. As the leader in the data-driven marketing industry and one of the largest third-party payment processors in the U.S., Alliance has great growth potential. And Roy says it’s a good value anywhere under his Maximum Buy Price of 255.88. BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, bounced strongly on big volume last week and has since pulled back to support at 250, which looks like a great buying area for patient investors. Roy’s Maximum Buy Price remains 269.27, so if you don’t own yet, you can buy here. I’ll keep holding, waiting patiently for the stock to reach Roy’s Minimum Sell Price of 358.47. HOLD.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, blasted out to a new high last Friday and continued the trend today. In her latest update, Chloe, who was in Shanghai taking some business courses, wrote, “CCL remains in a perfect uptrend. The stock pulled back just to its 50-day moving average during Wednesday’s weakness, then bounced nicely. Carnival is seeing higher cruise demand in almost all markets this year, and analysts expect 5% sales growth and 8% EPS growth. China is one of Carnival’s fastest-growing markets; I’ve seen ads for their cruises around Shanghai. Dividend growth investors can still buy here.” BUY.
Celgene (CELG) is a lot like Biogen. It’s in the health care business; it was recommended by Roy Ward in Cabot Benjamin Graham Value Investor; and it’s working to build a base. 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, hit a high of 81 three weeks ago and has been consolidating that gain since, acting similarly to many Chinese stocks. Ideally, this consolidation pattern will be followed by further advances, but the stock could just as easily fall to 70 first, especially if Chinese stocks weaken. In any case, as explained last week, I’ll be holding tight. HTHT is now a Heritage Stock for us, which means that we have not only a 100%-plus profit but also conviction that the stock will be even higher in the years to come (the company is still growing at a very fast rate). HOLD.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, is very close to breaking out to new highs. In last week’s update, Mike wrote, “The stock found support at its 50-day line during last week’s selloff, the major uptrend is intact and the fundamental growth story (analysts see earnings up 39% this year and 24% next, and they’re almost always conservative on these guesstimates) has a long way to run as it grabs more and more eyeballs for its various services. (Facebook has a deal to livestream 20 major league baseball games this year, and has partnered with ESL for other live sporting events.)” If you own some, sit tight. 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—released its first-quarter earnings report last week, and while the results beat analysts’ estimates, the stock sold off anyway. In Crista’s latest update, she wrote, “GameStop reported first-quarter profits that far exceeded analysts’ estimates. Nevertheless, traders drove the share price down…GameStop is a financially healthy company, with a huge and growing dividend, low debt levels and large share repurchases. In addition, S&P reports that 95% of GameStop’s shares are held by financial institutions, which means that professional investors find tremendous value in the company and in its stock. I expect the share price to bounce back to 25 quickly, and possibly rise much higher this year as investors continue to witness a successful transition away from an emphasis on physical game revenues.” HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, is now very close to Roy’s Maximum Buy Price of 60.36. If you buy under that price, you get the comfort of Benjamin Graham’s Margin of Safety—and if you buy above that price, you’re taking on more risk than is necessary. Me, I’m holding—and waiting until the stock gets to Roy’s Minimum Sell Price of 75.89. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is one of the stocks that I suggested readers take profits from in recent weeks; the stock is up 56% this year and it deserves a bit of a rest. Plus, of course, there’s the risk that if market support collapses (in either China or globally), a hot stock like this could fall all the way to its 200-day moving average—which is down at 29. HOLD.
Jabil Circuit (JBL), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is looking better. Last Wednesday, it again hit a new high, but in the days after, it again pulled back toward its long base. If you don’t own it, and you want to own a piece of the leader in electronics manufacturing, you can still buy here. BUY.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, remains ripe for a breakout above 38.5. The latest pullback has taken the stock right down to support at its 50-day moving average. BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is not a big mover, but it is in a steady uptrend, and pays a fat dividend. Plus, with the acquisition of Veresen likely to close this year, the company is on a great growth track. BUY.
PRA Health Services (PRAH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has had a great month, climbing from 64 to 72, but is a bit extended now, so while I’ll keep it rated Buy, I encourage new subscribers to wait for a correction—or at least a consolidation. Note that when I originally recommended the stock in mid-April, it was on a normal correction. BUY.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Growth Investor, is looking better! Last Thursday brought a high-volume surge to 22, and the stock has pulled back normally since. With huge growth potential (Snap acquired a drone company last week) and a huge valuation ($24 billion), SNAP is sure to be a mover, so this is not a stock for conservative investors. But for risk-tolerant investors, a small investment here might pay off well years down the road. HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, has now advanced for eight consecutive days, hitting new highs on five of the last six. In other words, the stock is strong. And the reason is simple, increasing numbers of institutional investors see this little company taking an increasing share of the transactions market. Right now, the stock is extended, but 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, spent most of May consolidating its April gains, building a nice base on top of 300—while the fundamental battle over the stock’s future raged, with supporters projecting rapid growth and short-sellers grousing that the stock is wildly overvalued. But today, the market rendered a verdict as the stock broke out to a record high, forcing some of those shorts to cover. In his latest update in Cabot Growth Investor, Mike Cintolo wrote, “We’re still optimistic because nothing has changed with the major story: Tesla is significantly ramping production to meet demand for the Model S and Model X, and management recently affirmed it will start production for its Model 3 in July and begin deliveries this year. And note that expectations aren’t very high—many analysts see just a couple of thousand Model 3 deliveries all year, and the huge short interest (31.4 million shares, or about a quarter of the stock’s trading float) suggests that many are betting against the company.” BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, is well above Roy’s Maximum Buy Price of 83.79, so all we need do is sit patiently and wait for the stock to hit his Minimum Sell Price of 110.18. HOLD.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, looks great, working to break out to a new high after a month of consolidation. In her latest update, Chloe wrote, “WYNN looks like it’s forming a nice consolidation pattern after April’s gap up. The stock may trade here, between 120 and 129, for a few more weeks. On the other hand, Macau estimates are rising, so we might see another rally before too long. If your primary goals are growth and dividend growth, you can buy here.” 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 JUNE 6, 2017
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