The market’s main trend remains up, though there is certainly some rotation going on, with technology stocks pulling back and financials and medical stocks surging. My advice is to react slowly to these shifts, taking things on a stock by stock basis according to what the stocks are actually doing—and not assuming anything.
Cabot Stock of the Week 152
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Though leading technology stocks are still under pressure, the broad market remains impressively healthy, and thus I continue to recommend that you remain heavily invested in stocks that meet your investing criteria. For today’s selection, I looked for a lower-risk stock with good growth prospects and I found a familiar name. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader. Here are Mike’s latest thoughts.
Sherwin-Williams (SHW)
When most investors think of Sherwin-Williams, they think of a big, old company in a slow, dull industry. And that’s … basically correct. The firm was the second largest paint and coatings maker in the world last year, with revenues north of $12 billion and growth generally coming from riding the industry’s trends, with revenues advancing at single-digit rates each of the past five years.
That, however, understates the company’s earnings power. Thanks to cost controls, price hikes and good management, earnings have nearly doubled during the past five years while margins have expanded. And with mortgage rates remaining low and construction activity steadily advancing, demand for Sherwin-Williams’ paints should continue to step higher in the quarters and years ahead.
That is all good, but the big reason for the stock’s strength lately (and the big reason for our recommendation) concerns the company’s recently completed acquisition of Valspar, which was the fifth largest paints and coatings company, and brings with it 57 manufacturing facilities in 20 countries. The combination not only created the #1 player in the industry, it also will result in huge synergies and diversify Sherwin-William’s business in many ways.
In the first quarter, for example, paint store sales made up about 65% of the firm’s business, but with Valspar in the fold, that should decrease to 45%, with global finishes and consumer products making up more of the pie. Moreover, the combined company will have about a quarter of its business outside of the U.S. and have more opportunities in faster-growth countries, something that’s especially important given the fragmented nature of the industry (more than 40% of the market is controlled by small companies).
Possibly the biggest news, though, concerns the synergies Sherwin-Williams is likely to generate from the merger. Management sees the acquisition as being immediately accretive to earnings, and within three years, the firm expects annual savings of a whopping $320 million, or nearly $3.50 per share!
Even before the acquisition, business was good. Sales growth has been slowly accelerating in recent quarters, while the first quarter saw earnings surge 48% (though part of that was a one-time bump) while same-store sales rose 7.5%, a very healthy figure. Before the merger, analysts were modeling about 15% earnings growth this year and 18% in 2018.
But those estimates (especially 2018 and beyond) are likely to be bumped significantly when the firm updates its guidance on July 20 (when it will also report second-quarter results), and the synergies should provide an increasing tailwind to the company’s bottom line as the quarters go by.
Throw in the fact that the industry’s backdrop remains healthy, both in terms of a healthy construction sector and a steadily improving housing market in the U.S., and you have enough catalysts to keep buyers interested.
The long-term chart is also enticing, and tells us big investors are moving in. SHW was a big winner through late-2014, but then fell 26% before beginning a long, slow recovery over the next year and a half. All told, SHW made no progress over a two-year span.
But first-quarter earnings kicked the stock above 300, and after a very tight seven-week period, SHW broke out again and has been advancing since, even hitting a new high this week! It’s not going to double in a month, but the chart tells us that the stock has recently begun a sustained advance following a huge base-building effort, and the positive industry backdrop and the Valspar acquisition should both provide the juice for rising earnings estimates and higher prices down the road.
That was Mike, this is Tim. Buying stocks at new highs tends to add a little more risk, and if you want to avoid that, you’re welcome to wait for a pullback, perhaps to the stock’s 50-day moving average down near 334. But I like to keep it simple so as usual, we’ll record our buy tomorrow. BUY.
Sherwin-Williams (SHW 358)
101 West Prospect Avenue
Cleveland, OH 44115
www.sherwin-williams.com
CURRENT RECOMMENDATIONS
Eternal vigilance is not only the price of liberty, it is also the price of a top-performing portfolio. So if your portfolio holds stocks that are no longer helping, are that have not done what you hired them to do, let them go! Only by continually monitoring and upgrading your holdings can you stay on top of the ever-changing market. This week, we sell one, Jabil (JBL), upgrade one to Buy, China Lodging (HTHT) and downgrade one to Hold, Alliance Data (ADS).
Alliance Data Systems (ADS), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, is a data-driven marketing company that works with credit-card issuers and airline loyalty programs. The stock has been strong since we bought near the correction low a month ago, and is now well above Roy’s official Maximum Buy Price of 243.55, so I’m downgrading it to Hold. Roy’s Minimum Sell Price is 376.41. In his latest update, Roy noted, “ADS has a very reasonable valuation (14 times trailing earnings, 0.9% dividend).” HOLD.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, and added to the portfolio a year ago, remains a small winner for us, but the stock’s potential, according to Roy, remains great. In his latest update, he wrote, “Biogen is a biopharmaceutical company based in Cambridge, Massachusetts.
The company discovers, develops, manufactures and delivers therapies to patients for the treatment of neurodegenerative diseases, hematologic conditions, and autoimmune disorders. Biogen markets Tecfidera, Avonex, Plegridy, Tysabri and Fampyra for multiple sclerosis (MS), Eloctate for hemophilia A and Alprolix for hemophilia B, and Fumaderm for the treatment of severe plaque psoriasis.
Biogen, collaborating with Genentech, utilizes Rituxan to treat non-Hodgkin’s lymphoma and chronic lymphocytic leukemia (CLL). It uses Gazyva to treat CLL and follicular lymphoma. Biogen is also developing products such as Aducanumab for the treatment of neurodegeneration and Nusinersen for spinal muscular atrophy.
Despite a setback due to a disappointing study data for Biogen’s Opicinumab multiple sclerosis treatment, the company remains the market-share leader in treating multiple sclerosis. The company is launching new treatments that improve patient dosing, which will boost sales and profits.
While multiple sclerosis is a key revenue driver for Biogen now, other promising drugs in the company’s pipeline include Aducanumab, which is in late-stage phase III trials for Alzheimer’s disease and has been fast-tracked by the FDA. An effective Alzheimer’s treatment could be worth tens of billions in annual sales for Biogen within two to three years. Over five million patients in the U.S. and 44 million people worldwide suffer from Alzheimer’s.
Biogen is streamlining its operations and recently spun off its hemophilia business into a company called Bioverativ (BIVV). The company’s recent moves have created speculation on Wall Street that Biogen could become a takeover candidate. Several senior management changes, including CEO, chief commercial officer and head of Research and Development also indicate a sale of Biogen could occur.
I expect sales and EPS to advance 6% and 13% respectively in 2017. Biogen’s return on equity is 32%, the current P/E (price to earnings ratio) is reasonable at 14.3, although the company does not pay a dividend. BIIB sells at only 11.7 times current cash flow, which is low. In addition, the stock warrants a Value Rating of 5 (5 is best) from Standard & Poor’s, along with a Star Rating of 4 and Quality Rating of A-. I expect BIIB to advance 34% to 351.13 within one year.” Note: BIIB is above Roy’s Maximum Buy Price of 258.14, so if you buy here, you won’t get his Margin of Safety. On the other hand, if you do buy here, after reading Roy’s analysis, I’ll understand. HOLD.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has quickly proven me wrong! I saw the recent low buying volume as a mild warning sign, but in fact the stock closed at a new high yesterday! Long-term, this remains a very attractive story, as Carnival is the biggest cruise line in the growing industry. In her latest update to her readers, Chloe wrote, “CCL continues its perfect uptrend. If you have double-digit profits, like we do, feel free to take some off the table (we’ll wait until we get a little less constructive about either the stock or the market).” BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has been hot over the past week, as biotech stocks gain strength, and now sits right at the level of its mid-March high. Roy’s Maximum Buy Price is down at 119.48, so you definitely can’t buy here, but you can hold tight, waiting for his Minimum Sell Price of 177.34. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has pulled back with other Chinese stocks in recent days in what looks like a normal correction. In his latest update, Paul wrote, “HTHT has faded with everything else during the past few days, but the decline has been reasonable and the stock remains above support. The company’s purchase of Crystal Orange (a boutique hotel outfit in China with more than 100 hotels) should be a plus and lead to some increased guidance next month. Long-term, I still love this story, and with the stock’s uptrend intact, I’ll stay on Buy.” With the stock some 13% off its high, and finding support at 75, I’ll now restore my Buy rating. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, has recovered nearly all of its loss since the technology stock selloff two Fridays ago, so technically it remains healthy. And according to our value guru, Roy Ward, the stock is still a good value, with a Maximum Buy Price of 156.97 and a Minimum Sell Price of 239.18. In his latest update, Mike wrote, “Facebook is making an interesting move, as it is reportedly working on a feature that will allow users to subscribe to publishers directly from its app, which could open up another revenue stream as it monetizes its billion-plus daily users.” 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, doesn’t look good, bumping along at its low around 20 (which it first hit in November). But this base should eventually turn into a launching pad, so I’ll continue to be patient. With a yield of 7.4% and a P/E ratio of 6.1%, GameStop is cheap. On the other hand, if management finds it necessary to cut the dividend (not likely but always possible), look out below! HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, has (like many financial stocks) been strong; the stock hit a record high yesterday before pulling back slightly today. I’m just sitting tight, waiting for the stock to hit Roy’s minimum sell price of 73.63. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has done very well in the five months we’ve owned it, but I’m getting worried—and I don’t want to see those profits evaporate. The risk, of course, is that JD is both a technology stock and a Chinese stock, and those two groups have seen selling pressures grow in recent trading. For now, with the stock holding above the support of its 50-day moving average, I’ll hold cautiously. HOLD.
Jabil (JBL), originally recommended by Mike Cintolo in Cabot Top Ten Trader, reported earnings last week, beating analysts’ estimates on revenues but missing by a penny on earnings. What matters more than those numbers, of course, is the reaction of the stock to the numbers (and accompanying statements), and it wasn’t pretty. The stock sold off on heavy volume, falling right back to its base at 29. This is where we bought it just two months ago, but back then the volume trends were positive and now they’re not. Patient investors who stick with the stock a little longer might be rewarded, but to me the deterioration in the technical action is reason enough to sell and move on. SELL.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, broke out above 40 yesterday and pulled back a tad today. In her latest update, Crista wrote, “As shares of financial services company Legg Mason approach long-term price resistance at 44, I’m moving the stock from Strong Buy to Hold, simply because there’s less capital gain potential in the near-term. I expect to sell LM near 44, rather than hold the stock for a prolonged period of sideways trading. There is nothing wrong with the company, and I will definitely consider buying LM again in the future, if a decent price correction takes place.” HOLD.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has pulled back normally from the new high it hit a week ago, but volume trends remain positive. If you’re looking for high yield and moderate risk, it’s still a decent buy—though real bargain-hunters will wait (and hope) for a pullback to the 200-day moving average at 31. BUY.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, has been a big quick winner for us this year, and is now taking a well-deserved rest—which has the potential to take the stock down to its 50-day moving average at 20.5. However, the stock so far isn’t cooperating; the sellers aren’t yet motivated. Long-term, SQ has huge growth potential, so I’m holding tight, and I’ll happily upgrade it to Buy when I see risk reduced. HOLD.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, closed at a record high last Wednesday on big volume and hit another record high today—but volume was light and the gain didn’t hold. Nevertheless, TSLA’s strength remains very impressive; it’s one of the top glamour stocks of our time. In fact, possibly the only way to raise the stock’s profile could be for Elon Musk to wed Kim Kardashian! Barring such scary developments, the next piece of important news is expected to be the start of production of the Tesla Model 3, the affordable electric car that has more than 400,000 reservations. The faster Tesla can make them, and the lower the production cost, the better. New buyers can still get on board the stock here, but should note that TSLA’s short-term downside risk is 327, down 12% from here. BUY.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, pulled back to its 50-day moving average at 293 yesterday and rebounded a bit today. Given that the stock’s main trend remains up, this presents a fine buying opportunity. BUY.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, remains in a long-term uptrend, and now enjoys the support of a strengthening medical sector, but volume is not impressive. Furthermore, Crista now has the stock rated hold, explaining that “when it retraces its 2015 highs, in the range of 136-143, it’s likely to rest there for several months,” and she’s likely to sell then. HOLD.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has found support in the 88 region. Roy’s Maximum Buy Price is 87.79, while his Minimum Sell Price is 113.61. HOLD.
Weibo (WB), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and featured here two weeks ago, continues to set up for a resumption of its advance. In his latest update, Paul wrote, “WB has been skidding steadily since last Friday and fell to some short-term support around 70. The decline is tedious, no doubt, but on the chart, WB is doing nothing wrong—in fact, so far, the pullback has been normal given the stock’s prior gap higher. If you own a position, our advice is to hang on; if you don’t, you could buy a little around here with a loss limit near 63.” BUY.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, hit another new high yesterday!
In her latest update, Chloe wrote, “WYNN has had a great couple of weeks, jumping from 128 to 134. The run-up was prompted by a good month for the Macau gaming industry, where revenues improved 23.7% (well ahead of the 16.5% increase that was expected). It marked the 10thstraight month of growth in Macau, which is good news for its Wynn Palace resort. Investors whose primary goals are growth and dividend growth 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 27, 2017
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