The recommended stock, unusually, is not a U.S. company; it’s a Canadian company. But it trades on the NYSE, and it has a great growth story.
Cabot Stock of the Week 154
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When it comes to recommending where to invest your money, I believe in ignoring borders. From China to Russia to Argentina, if a stock meets one of our analysts’ investment criteria, I’ll take a look. Which explains why I’m recommending a Canadian clothing company on the day before our own independence day. The stock was originally recommended in Cabot Top Ten Trader by Mike Cintolo. Here are Mike’s latest thoughts.
Canada Goose Holdings (GOOS)
For the first time in years, the market’s initial public offering spigot is now flowing strongly, and unlike many of the IPOs of a few years ago (mostly old world and income-oriented stocks like pipelines or drop-down entities), this year has brought some real growth companies with excellent stories. Canada Goose is one of my favorites, and as the bull market continues, I think the stock can do very well.
Canada Goose got its start way back in 1957, but even as of the late 1990s, it was still a small fry, with revenues of around $3 million. However, the past 20 years have shown amazing growth as customers flock to the firm’s merchandise.
What merchandise is that? Very high-quality (and very high-priced) outerwear, including jackets, hoodies, snowsuits, parkas, vests and more, all filled with goose down. Prices generally range from $600 to $1,000 but go even higher! And these products aren’t being bought solely for their looks; the company’s products initially got their recognition by being used in some of the harshest environments in the world.
Recently, the company has branched out a bit into spring outerwear (rain and wind jackets, etc.), but winter is still the firm’s mainstay; in the fiscal year that ended in March, 83% of revenues came in the September and December quarters.
The big idea here is that Canada Goose has a chance to be one of the next big brands in high-end retail. Combined with a shift to a more direct-to-consumer business model, this should drive earnings significantly higher for many years.
Canada Goose used to do all of its business wholesale, and in fact, in the March quarter, wholesale revenues rose 12% and made up 71% of the firm’s total. But direct-to-consumer revenues exploded 249% and yielded far higher gross margins—management said that a jacket sold directly to the consumer results in a profit margin two to four times as large as one sold through wholesale! (Wholesale gross margins were 43.3% last year, compared to 75.5% when selling direct to the end user.)
A lot of those direct sales were e-commerce, but the company is also opening stores; it opened two last year (one in New York City, one in Toronto), and has another three coming this year (Chicago, London and another one yet to be finalized), all of them in prime locations.
All told, Canada Goose reminds us a lot of another high-end retail brand that came public six years ago. Michael Kors’ products weren’t as expensive as Canada Goose’s, and thus appealed to a larger market, but its brand was in a similar position, just beginning to gain a huge and growing following, which is what retail is all about. (And before MK, there was Coach.)
Canada Goose has grown its revenues by 44%, 33% and 39% during the past three years, and it’s been solidly profitable during that time, with EBITDA (a measure of cash flow) margins of 20.1% last year. Management sees growth slowing some going forward—it expects mid-to-high-teens revenue growth, with 20%-ish EBITDA growth annually through 2020—though being so new, it’s hard to tell if the top brass is simply being conservative.
Big investors seem to like the story, though—110 funds bought shares within the first month that Canada Goose was public. We’ll be looking for updated sponsorship data during the next couple of weeks as figures are reported.
As for the stock, GOOS came public in mid-March and, after a brief dip, formed a nice post-IPO base through May. Then a bullish earnings report in early June caused the stock to catapult as high as 24, before a secondary offering (and the overall wobbly market) yanked the stock back down to 20 or so. Such wild action isn’t unusual for a recent IPO, and GOOS remains above its 50-day line and the top of its IPO base.
All told, I think the retreat is offering a decent lower-risk entry point. BUY.
Canada Goose Holdings (GOOS 20)
250 Bowie Avenue
Toronto, ON M6E 4Y2
Canada
www.canadagoose.com
CURRENT RECOMMENDATIONS
The bull market continues, interspersed with normal pullbacks and rotation, but you shouldn’t let short-term movements that deter you from your long-term objectives. As always, a key part of portfolio management involves indentifying which stocks no longer belong in the portfolio, and this week, the answer is Weibo (WB). Details below.
Alliance Data Systems (ADS), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has a name that says almost nothing. But behind that generic name is a very profitable marketing machine based on consumer data that serves both credit-card issuers and airline loyalty programs. The stock is now well above Roy’s official Maximum Buy Price of 243.55, so I’m just holding until the stock reaches Roy’s Minimum Sell Price of 376.41. HOLD.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, and added to the portfolio a year ago, is also above Roy’s Maximum Buy Price (258.14). That’s what happens in an extended bull market; bargains get harder to find. I’m just holding for his Minimum Sell Price of 351.13. HOLD.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has been trading fairly tightly in the 66 range over the past two weeks—a period that included the firm’s second-quarter earnings report. In her latest update, Chloe wrote, “Carnival announced second-quarter earnings that beat revenue and earnings expectations last Thursday. Adjusted EPS and revenue both grew about 6%, to $0.52 per share and $3.94 billion. Analysts were expecting the cruise company to report a 4.1% decline in EPS and 4.8% sales growth, to $3.88 billion. Higher sales and operational improvements more than made up for higher fuel prices and worse exchange rates. Cruise ticket prices rose 5%, and bookings for the rest of the year are well ahead of last year. Management raised the low end of their full-year EPS guidance, from $3.50 to $3.60. The high end is still $3.70 per share. If you don’t own CCL yet, this week’s slight pullback looks like a decent buying opportunity; the stock rarely pauses for long.” BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has pulled back from 134 over the past week, but it remains above Roy’s Maximum Buy Price of 119.48, so you still can’t buy it. I’m holding, waiting for Roy’s Minimum Sell Price of 177.34. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is the newest Heritage Stock in the portfolio—which means that, having accumulated a profit of greater than 100%, and believing that the stock has far greater long-term potential, I’ve resolved to tolerate behavior that would normally trigger a Sell rating for a growth stock. Happily, I see no such behavior today. In Paul’s latest update, he wrote, “China Lodging Group seemingly has nine lives, as the stock’s sharp selloff toward its 50-day line earlier this month was met with five days in a row of big-volume buying before today’s drop. The company will likely announce second-quarter metrics within a couple of weeks, which could move the stock. Given the recent action, though, I’ll stick with my Buy rating.” BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, may be just one week off its recent high, but it’s below its 50-day moving average; the stock has made no progress over the past two months. In fact, in his latest update, Mike wrote, “Facebook has stalled out during the past couple of months, with shares hitting resistance in the 154 to 156 area on three occasions since early May. Overall, though, I don’t see much weakness or strength here, so Hold remains the appropriate rating. A drop below 145 or so would be an intermediate-term yellow flag, but right here, if you own some, sit tight.” At the same time, however, Roy Ward says the stock is a good value; his Maximum Buy Price is 156.97. Given two somewhat conflicting advisors, what do you do? Be decisive! For me, with Facebook, the choice is easy; given that I’m already holding five of Roy’s value stocks—waiting patiently—I’ll follow the growth system with Facebook. HOLD.
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), remains my biggest loser—but it looks like it’s finally coming around. In fact, the stock has just strung together seven consecutive up days, a sign that buyers are finally taking control. In her latest update, Chloe wrote, “Last week, I wrote that GME needed to find support above 20 if it was going to keep its place in our portfolio, and that’s just what the stock has done. After bottoming out at 20.5 on Wednesday, GME is bouncing nicely this week. In corporate news, GameStop is selling Kongregate, the mobile game publisher they acquired in 2010. GameStop’s digital segment grew slowly last quarter, only 3%, compared to 39% growth in its collectibles business and 22% growth in its technology brands stores. And digital sales declined by 4% last year, to $181 million, compared to collectibles sales of $494 million (up 60%) and tech brands sales of $814 million (up 52%). The divestment looks like a smart move. If you own GME, you can Hold.” HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, continues to hit new highs, driven by increased optimism about both financial stocks in general and exchange stocks in particular. It’s too high to buy here, so 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, was downgraded to Hold last week in the wake of its technical action and Paul Goodwin did the same soon after. Here’s Paul’s latest update. “JD hasn’t done anything wrong, per se, but its action has turned very sloppy after a big run, with the stock moving from 44 to 37, back to 44 and then just below 40 yesterday. Fundamentally, business remains solid—the firm’s anniversary event (June 1 through June 18) resulted in $17.6 billion worth of transactions, up 50% from the same period a year ago. That said, JD has been running higher since the start of the year without much of a pullback, so the recent up-and-down action is a worry. Thus, tonight, we’re going to sell half our shares in JD, booking a solid profit, and use a mental stop in the 36 area for our remaining position.” Long-term, the stock still has great potential, but as a high-risk technology stock, and a Chinese one at that, awareness of the risk is important. HOLD.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, was trading near its highs just a week ago, but the sellers took control on Wednesday (on high volume) and now the stock is trading at its 50-day moving average. Crista had been planning to sell at 44 (a long-term price resistance level) and she hasn’t changed her tune yet. HOLD.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, broke out to a new high last Wednesday and traded even higher today, as investors interpret the strengthening of oil prices as a positive for the company. In her latest update, Chloe wrote, “Oil prices found support at $42.50 last week, putting an end to energy stocks’ slide. Risk tolerant high yield investors can buy a little here.” BUY.
Schnitzer Steel (SCHN), originally recommend by Crista Huff of Cabot Undervalued Stocks Advisor, and recommended here last week, continues to shoot higher, though it’s possible it will be halted (at least for a while) by resistance at 27. In her latest update, Crista wrote, “Schnitzer is one of the largest U.S. scrap metal recycling companies. Yesterday, Schnitzer reported its best third-quarter and nine-month results (August year-end) in five years. Adjusted earnings per share (EPS) of $0.56 came in at the top of the projected EPS range that the company issued on June 15, and quarterly revenue was $477 million, above estimates. SCHN rose rapidly near 24 after the earnings report, then settled near short-term upside price resistance at 22.5, which I expect it to surpass relatively easily. This is a small-cap stock in a volatile market sector, with relatively little analyst coverage.” BUY.
Sherwin-Williams (SHW), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, has pulled back normally. If you haven’t bought yet, you can find a low-risk entry point anywhere between here and the stock’s 50-day moving average at 342. BUY.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, has a great growth story, but the stock’s action continues to look toppy—no wonder given that it’s gained 60% year-to-date. If you’re looking to reduce your portfolio’s risk level, selling some SQ here is an option. I’ll simply keep it rated Hold for now—while looking for support from the stock’s 50-day moving average. Now nearing 22. HOLD.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, is my second Heritage Stock—and one that’s been held far longer than China Lodging. So, long-term, I’m committed to the stock. But short-term? Last week I downgraded the stock to Hold because I saw more short-term potential on the downside than the upside. Reason one was the chart; with the stock up 74% this year, it looked similar to Square’s. And reason two was the fundamental picture; the first deliveries of the affordable Model 3 begin this month and expectations are very high—so high that it will hard to meet, never mind exceed them. Thus, short-term profit-taking is an option here, too. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, looks fine. In her latest update, Crista wrote, “I plan to sell VRTX when it approaches two-year price resistance near 140.” HOLD.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, is the only one of Roy’s stocks that’s in his buying range—and that’s just barely. His Maximum Buy Price is 87.79, while his Minimum Sell Price is 113.61. So if you’re looking for a low-risk way to participate in this market, look no further. For consistency, I’ll keep the stock rated Hold. HOLD.
Weibo (WB), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has continued to trend lower and it’s time for us to part company. In his latest update, Paul wrote, “Weibo has been skidding since the Chinese government’s regulatory action … The stock made some attempt to hold its 50-day line, but today’s big market selloff threw that hope to the side. I don’t think WB is likely to crash, but the fact is that, unlike most stocks that broke out in April or May, this one has been fading since its big earnings gap many weeks ago. Sell and hold the cash.” SELL.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has pulled back to its 50-day moving average over the past week, but there are no worrisome signs to the action. If you don’t own it, 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 JULY 11, 2017
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