Today’s recommendation is a very strong Chinese stock that had quieted down nicely during the past two weeks and is now on a four-day run. One thing we really like in a growth stock is a huge mass market, and this company is right in the middle of one of the biggest markets there is.
Cabot Stock of the Week 150
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The overall market remains in good shape and we’ve even seen a touch of broadening in the advance, though most of the money is still flowing into growth and Nasdaq-type stocks. In the short-term, I am seeing some giddiness from investors, which, combined with the recent run, could lead to some dips and shakeouts. I’m still bullish, but as I wrote last week, it’s important to look for quality setups and entry points.
Today’s recommendation, originally from Paul Goodwin of Cabot Emerging Markets Investor, is a very strong Chinese stock that’s quieted down nicely during the past two weeks.
Weibo (WB)
Weibo is a social media platform that was originally a subsidiary of Sina Corp., one of the largest web portals in China. Sina spun Weibo off in 2014, but still owns a majority stake. E-commerce giant Alibaba owns a hefty minority position, too.
Weibo’s platform allows many kinds of interactions, from relatively simple Twitter-like messaging (using the same 140-character limit) with attachments like pictures and videos. But a Weibo message is actually closer to a Facebook post, as 140 Chinese characters carry a much higher information density than 140 English letters. The platform gets 64,000 posts per minute and 82% of users shop online.
In the company’s latest quarterly earnings report (May 16, 2017), Weibo boasted 340 million monthly active users (MAUs), up from 313 million at the end of 2016. And 89% of MAUs use their mobile devices to access Weibo.
Weibo is growing fast. In that Q1 report, Weibo revealed that earnings were up 271% and revenue rose 67%, with an after-tax profit margin of 29.0%. The earnings results were well ahead of analysts’ estimates, which caused them to ratchet up their numbers. Wall Street now sees the bottom line rising 84% this year and another 51% in 2018 as advertising revenues soar.
From a fundamental perspective, Weibo is close to a slam dunk. The company is a dominant force in social media, but still growing. Its content is user-generated, so expenses are low. It gets about 85% of its revenue from advertising and its close relationship with Alibaba makes it an especially attractive target for e-commerce advertising. And it’s the platform of choice for “Weibo Celebrities,” users who post pictures and videos of their ideal lifestyles as they travel, wear the latest fashions, and dine and party with other celebs. The Weibo Celebrities use their popularity to drive followers to their online stores, usually a Taobao location on the Alibaba website. One estimate places the sales value of Weibo Celebrities on e-commerce platforms at $8.4 billion. More traditional advertisers are starting to generate live broadcasts to capitalize on this phenomenon.
Yet, despite phenomenal fundamentals and a rosy future, the company’s stock is owned by just 296 mutual funds. (Admittedly, this is a meteoric rise from just 85 whales on board a year ago, but it’s still relatively small.) And the reason may be that Weibo is subject to some political risk.
Any social media platform has the potential to feature politically objectionable messages or to allow dissidents or protestors to communicate and coordinate activities, and that makes Weibo a subject of constant government scrutiny. And since the government holds Weibo responsible for any content that it allows to be posted, the threat of sanctions or shutdowns is constant. Weibo has been very good at policing its content, but there is little room for error. And that may be why big investors have been behind the curve.
Despite that one drawback, WB has been a powerful stock since February 2016, when it began an eight-month rally that would take it from 12 to 56 in October. The stock took a six-month breather at that point, trading mostly around 50, but correcting to as low as 40 and up to resistance in the high 50s.
WB had pushed out to new all-time highs in May when the positive Q1 earnings report caused a high-volume gap up to 79. After another (brief) push higher, the stock has pulled back and consolidated those gains for a couple of weeks. It gave back a few points, but has pushed up in recent days.
The Weibo story is huge, and the company has useful allies and partners throughout the Chinese online world. One thing we really like in a growth stock is a huge mass market, and Weibo is right in the middle of one of the biggest markets there is. We think you can take a position here or on dips of a couple of points. BUY.
Weibo (WB 75)
QIHAO Plaza, 8th Floor
Beijing 100027 China
86 10 6061 8000
www.weibo.com
CURRENT RECOMMENDATIONS
The market’s evidence has improved in recent days, with the S&P 500 and NYSE Composite joining the Nasdaq in new high territory. There remain some pockets of weakness in the broad market—the falling price of oil and natural gas has kept most energy and materials stocks under wraps—but overall, the bulls are in control. At this point, our focus is on managing our portfolio and keeping our eyes open for any changing tides. Now’s a good time to make sure you have some plans in place in case the market (or an individual stock or two) hit the skids, and just generally to make sure you keep your feet on the ground as this bull market progresses.
The good news is that most of our stocks continue to act just fine, but I also want to stick to a limit of 20 stocks so my list doesn’t get too unwieldy. With that in mind, I’ve decided to take our profit in PRA Health Services (PRAH). Details below.
Adobe (ADBE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Growth portfolio, continues to act very well, especially after its shakeout to its 50-day line a little over two weeks ago. Crista is getting a little worried about the valuation, but is content to hold on as long as the stock acts well. That sounds like good advice to us. HOLD.
Alliance Data Systems (ADS), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, is a well-run company with steady growth (earnings are estimated to rise 10% this year and 15% next) and a very reasonable valuation (14 times trailing earnings, 0.9% dividend). Roy has a price target north of 380 for the next couple of years, so the current dip is a good time to pick up shares if you don’t own any. BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has now shown three solid-volume buying days during the past week and a half, increasing the odds that the 245 to 250 zone is an area big investors are willing to initiate new buys and add to their positions. If you don’t own any, BIIB is still below Roy’s maximum buy price near 269, though we’ll officially remain on Hold as we await the stock’s march toward the target price of 358 in the months ahead. HOLD.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has enjoyed an excellent rebound since the stock bounced off its 50-day line in mid-May, thanks in part to some analyst love. A report that the U.S. is set to roll back normalized relations with Cuba (a negative for cruise liners) hasn’t led to much selling pressure. CCL is a bit out of trend on the upside, which often leads to pullbacks, but business is good and the company recently hiked its dividend by 14% (now yielding nearly 2.5% annually). We’ll stay on Buy, but try to buy on dips of a couple of points. BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, took a dive recently after a competing MS drug lost a patent battle, which will open it up to generic competition. That’s only “bad” for CELG because it’s bringing up a competing MS drug, and the hope was that it would able to take on the competition head on; now a bunch of lower-priced generics will be in the mix, too. Still, the stock has popped back, finding support in the 112-114 area for the umpteenth time during the past few months. Roy’s minimum sell price is up above 188, so we advise patience. Once the biotech sector comes back in favor, we think CELG can do very well thanks to its big bottoming area, reasonable valuation and solid earnings prospects. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, continues to work off its churning action from a couple of weeks ago in fine fashion—a pullback from here still wouldn’t be surprising, but the fact that HTHT never dipped below its 25-day line and hit new highs today is very encouraging. As a Heritage Stock, we’re content to sit through any weakness that comes, though for new buying, we’d look elsewhere at the moment until a lower-risk entry point reveals itself. HOLD.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, isn’t the dynamic young pup it was four years ago, when Mike initially recommended the stock. (He’s up 350% since!) But the company continues to grow rapidly (earnings are expected to rise 39% this year), and after a sluggish 2016 (FB made no progress from February through December), the stock has been in a solid uptrend since the calendar flipped. Near-term wiggles are possible but the path of least resistance remains up. 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—just went ex-dividend on Monday (a 38 cent per share dividend will be paid June 20 if you owned the stock before Monday). As for the stock, it found huge-volume support on Friday, May 26, after falling to nearly 21, and has stabilized since then. It’s not a pretty chart, but we own GME for the cheap valuation (7 times estimated earnings!), big dividend (6.8% annual yield) and likelihood that business is beginning to stabilize; first-quarter earnings were down just 5% from a year ago and came in miles above expectations. We’re sitting tight and think GME could eventually surprise on the upside when value and dividend stocks come back into favor. HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, shot ahead to a new closing higher yesterday on the back of a bullish business update—total average daily contract volume in May rose 27% from the year before, with energy (up 29%) and financial contracts (up 33% leading the way. Open interest finished the month up 12%. The stock is too high to buy here, but we’re just waiting patiently for it to rally to Roy’s minimum sell price of nearly 76. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, continues to digest its recent advance in fine fashion, which is encouraging—I still think the stock could pull back or consolidate further, but so far there’s been a lack of any heavy selling. Either way, you should sit tight. HOLD.
Jabil Circuit (JBL), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was close to being kicked to the curb two weeks ago, but the stock’s dip below 28 turned out to be a shakeout, and JBL has since lifted to new highs. Remember, too, that the stock recently (back in March) emerged from a huge five-year trading range. All of that is great, and so we’ll stay on Buy—but note that earnings are due out next Wednesday (June 14) after the market close. Thus, if you buy around here, keep your position size smaller than normal. BUY.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, has tightened up nicely in the 36 to 38 area for many weeks, which is usually a constructive sign. It’s also positive relative to the so-so action of most financial stocks. The valuation (14 times earnings), dividend (2.9% annual yield) and recent results (earnings up 77% in the first quarter, well ahead of estimates) all point toward good things ahead. BUY.
Pipeline operators have been poor performers—the Alerian MLP Fund (symbol AMLP) is down about 10% from its early-February peak—but that makes the resilient performance of Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, all the more impressive (shares are up a smidge since that February peak and just 2% off their highs). The longer it can hold up here (while still paying a solid 4.5% dividend), the greater the chance PBA can get going once the pressure comes off energy stocks. You can buy a little here if you’re not yet in. BUY.
PRA Health Services (PRAH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has had a good couple of months since our recommendation, and while it looks fine on the chart here, we’ve decided to book our profit and move on, partly because the stock isn’t really a go-go name, yet the stock has been kiting higher for a few weeks and hasn’t had a meaningful pullback all year. If you want to hold on and use a trailing stop near the 50-day line (now near 67), you can, but we’re going to book our profit. SELL.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Growth Investor, took a hit yesterday after an analyst cut his price target on concerns about the company’s ability to monetize its user base, as well as the expiration of the post-IPO share lockup later this month, which could pressure the stock. We’re less concerned with opinions of analysts than the opinions of institutional investors (which can be gleaned through the stock’s action), and so far, we’re OK with SNAP—the post-earnings rebound on huge volume probably means it will find support in this area. If it doesn’t, we’ll take a small loss and move on. For now, hold. HOLD.
Ever since its Investor Day in mid-May, Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, has been on fire as more and more big investors think the company’s potential is larger than expected. There was no single data point from that day’s events that is responsible for the rally, but one figure caught our eye—the company gets back its initial investment (to acquire new customers) in just three to four quarters, with a greater than 100% return on that investment within a couple of years. Moreover, the company’s long-term model aims for an EBITDA profit margin of 35% to 40%, up from 13% expected this year. There’s no question the stock is extended to the upside, but SQ is also the kind of new leading growth stock that could keep going in a bull market. We’ll stay on Buy, but if you don’t own any, try to buy on dips of a point or two. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, has been hit with some sour news in recent days, from CEO Elon Musk’s spat with President Trump over the Paris climate accord, to reports that AAA is raising insurance rates on Tesla vehicles because of abnormally high claim frequencies, to news that Toyota had sold its remaining position in the company (bought way back in 2010!). And how did the stock respond? By moving to all-time highs this week! In fact, the stock’s successful test of its 10-week moving average two weeks ago, followed by three huge up days on big volume, is a sign the next leg higher has begun. BUY.
Vertex Pharmaceuticals (VRTX), which came from Cabot Undervalued Stocks Adviser, is off to a great start for us, as it’s accelerated out of its tight consolidation in recent days. Short-term, VRTX could easily dip some, but the three straight days of big volume last week tell us big investors should support the stock on any retreat. BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, reported a fine quarter last week, with sales (up 9%) and earnings (up 15%) both topping expectations, and with free cash flow totaling $726 million ($1.75 per share, vs. $0.99 per share of net income). Despite a series of upgrades, the stock has taken a hit, breaking below its 50-day line for the first time in months. Even so, the action looks more like profit taking after a solid advance (VMW hit a new high last week), and on a value basis, Roy’s target price remains around 110. If you own some, hang on through this pullback. HOLD.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, lifted out of its month-long rest in the 120 to 129 area last week thanks to another great monthly report from Macau, with gaming revenues rising nearly 24% from the prior year, about 7% higher than forecasts. WYNN is likely getting its share of that bump from its various casino resorts in the area, including its new Wynn Palace. We’ll stay on Buy, though dips into the high 120s would offer better entries. 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 13, 2017
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