This week’s featured stock is a fast-growing Chinese stock that dominates its mass-market business segment. Conservative investors will probably want to give it a pass, but risk-takers can jump on board. It has great growth potential!
Cabot Stock of the Week 156
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The great bull market of 2017 remains intact, and thus I continue to recommend heavy investment in stocks that will help you achieve your investment goals. At the same time, I strongly recommend that you work hard to manage your portfolio, a topic I address every week following the new stock recommendation.
In choosing this week’s stock, I was drawn to the recommendations in Paul Goodwin’s Cabot Emerging Markets Investor, mainly because Chinese stocks have just kicked off a new growth leg. Paul has half a dozen stocks that I find attractive here, both fundamentally and technically, but in the end, I chose a stock that just happens to be in the same industry as last week’s recommendation (Carvana). The difference is, Carvana is selling cars while Autohome is selling information. Here are Paul’s latest thoughts on the stock.
Autohome (ATHM)
The Chinese auto industry is massive, with auto sales setting new records every year for the past 26 years; sales in 2016 were well over 21 million passenger vehicles. And the number of drivers is booming, too; the number of car owners rose from 154 million at the end of 2014 to 172 million at the end of 2015 to 191 million in 2016. China is now the top market for both General Motors and Volkswagen.
Looking forward, the rate of growth may slow, in part because the government has reduced tax breaks, but there’s no question that this is a great growth market, and that’s one reason that Autohome is attractive as an investment.
In China, as in the U.S., when a person thinks about getting a car, he goes online. Here in the U.S., if I search for new cars, I might end up on newcars.com or carsdirect or Edmunds, but in China, I’m most likely to end up on the site of Autohome (ATHM).
This is no accident. Autohome has worked hard to become the top choice for online automobile consumers. Just as the U.S. real estate site Zillow does for home buyers and renters, Autohome offers a treasure trove of free information to interested auto browsers, then makes its money by selling advertising space to auto manufacturers, dealers, financers, insurers and sellers of aftermarket gear, and than selling data analysis and marketing services to dealers. At its online “Autohome Mall,” Autohome becomes a virtual extension of dealers’ showrooms.
It’s a powerful business model, and it drove Autohome’s revenue up by more than 70% per year from 2009 through 2014. Revenue growth cooled to a still-robust 59% in 2015, then strengthened to 62% in 2016. This year, the company’s Q1 report featured a 16% jump in revenue and a 15% increase in earnings per share. Revenue was driven by massive online traffic that, in the first quarter, saw 10.1 million average daily unique visitors on the company’s mobile websites and 8.2 million using its mobile apps.
Earnings at Autohome have grown every year since 2008 (the year the company was incorporated) and are projected to grow by 14% in 2017 and 20% in 2018. The company has no long-term debt and has total cash of around $900 million.
Autohome has generated headlines in the past year or so for reasons other than growth. Starting in 2008, 71.5% of the company’s stock was owned by Telstra, an Australian telecom. But in April 2016, Telstra sold a 48% stake to China’s largest insurance company, Ping An Insurance. Then, just a few days after the Ping An deal, Autohome’s CEO and a consortium of private equity companies launched a bid to buy Telstra’s remaining stake and take Autohome private.
That bid didn’t succeed, probably because it would have needed Ping An’s approval, and Autohome’s stock, which had been in a long, bouncy correction since its 2015 high at 57, finally found a bottom at 19 in July 2016. In the rebound since, the stock has been quite volatile, with three significant corrections during 2016 and one in March and April 2017. But since then, the trend has been up.
ATHM ran into a little resistance at 43 in May, and spent most of June under resistance at 46. But since late June, the stock has been outpacing its rising 25-day moving average; in fact, it’s now been up for 13 consecutive trading days. The persistent rise in ATHM, coming on steady volume, says a lot about the power of the story that’s driving the advance. BUY.
Autohome (ATHM 48)
CEC Plaza, Tower B
10th Floor
Beijing 100080 China
http://ir.autohome.com.cn
CURRENT RECOMMENDATIONS
One of the many market truisms I’ve internalized over the decades is this: trends last longer and run farther than most people expect. This is certainly the case with the current bull market, and the only reasonable response is to take advantage of the trend by owning stocks that are participating—or are expected to participate.
Unfortunately, if you simply hold patiently to a lot of stocks that are expected to participate, you end up with a portfolio of non-performers. A lot of investors fall into this trap; I’ve seen their portfolios. So having a rigorous sell discipline is important! In this portfolio, I’ve limited myself to 20 stocks, which means that on average, I must sell one every week.
This week, after careful examination of all the portfolio’s components, it’s WYNN that gets the axe.
Alliance Data Systems (ADS), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, closed at a new high last Thursday (just barely) and has pulled back normally since. There is some resistance at this level so getting through it may take time—and I am patient! Roy’s new Maximum Buy Price for ADS is now 258.55 (up from 243.55), while his Minimum Sell Price is now 353.10, down from 376.41. The firm’s second-quarter earnings report is expected on July 20 before the market open. HOLD.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has a new Maximum Buy Price of 268.79 (up from 258.14), and a new Minimum Sell Price of 362.81 (up from 351.13). The firm’s second-quarter earnings report is expected on July 25 before the market opens. HOLD.
Canada Goose Holdings (GOOS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is building a tidy base at 19. Technically, that’s a setup for what is likely to be a renewed uptrend, but if buyers don’t materialize, this young stock could fall further. Risk-tolerant investors can buy here; more cautious investors can wait until there’s real evidence of a renewed uptrend. BUY.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has proven me wrong—and that’s a good thing in this case. I had downgraded the stock to Hold, interpreting the recent flat action as a topping pattern that might see the stock fall to its 50-day moving average. But the stock instead broke out to a new high yesterday! Volume on the advance was not particularly impressive, but you can’t have everything. Respecting the action of the stock, as well as the attractive fundamentals of the industry leader, I’m restoring the Buy rating. BUY.
Carvana (CVNA), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, has pulled back to support and thus is attractive here for risk-tolerant investors. BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, closed at a new high yesterday and pulled back modestly today. The stock remains a bit high to buy with a Margin of Safety, but you could put it on your watch list and hope for a good correction. In Roy’s latest issue, he gave a good recap of the company’s fundamental story.
“Celgene is a biopharmaceutical company focusing on the discovery, development and commercialization of treatments for cancer and other severe conditions. The company concentrates on various cancers including multiple myeloma and myelodysplastic syndromes, chronic lymphocyte leukemia and non-Hodgkin’s lymphoma, glioblastoma and ovarian, pancreatic and prostate cancers.
“Revlimid, Celgene’s leading drug, comprises 62% of the company’s total sales, but new drugs are providing considerable diversification. Revlimid is an oral cancer drug used to treat multiple myeloma. The drug works against cancer cells partly by impacting the functioning of the immune system. Revlimid sales should continue to rise, bolstered by expanded uses and market share gains. Celgene has patent protection for Revlimid through the end of 2026. Revlimid’s list price is more than $100,000 per year for patients and could be scrutinized further by Federal authorities, but President Trump has avoided going after companies producing high-priced drugs. The company has raised the price of Revlimid by an average of 8% a year since 2010. Celgene has developed 35 partnerships with small biotech companies developing next-generation cancer drugs. In addition, Celgene continues to purchase small development companies with promising research activities. Celgene is among the fastest growing companies in the biotech sector. The company does not pay a dividend, but the balance sheet is strong with $9.0 billion in cash and manageable debt. My Maximum Buy Price is 127.75 [recently raised from 119.48]. I expect the stock to climb 31% to reach my Minimum Sell Price of 173.41 [recently reduced from 177.34] within one to two years.” HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, blasted out to a new high yesterday on big volume after the hotel chain reported excellent second-quarter metrics. The average occupancy rate at the firm’s 3,541 hotels was 90% compared to 85% a year ago, while the average daily room rate was 199 RMB up from 184. Last week I noted that the stock’s bounce off the 50-day moving average presented a good entry point, and you can still buy today as momentum is strong. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, also broke out to new highs last week, so as promised in last week’s update, I’ll now upgrade it to Buy. In his latest update, Mike wrote, “Facebook has stormed back to new highs during the past few days, bolstered by a couple of analyst upgrades and news that the company is starting a global rollout of ads on Messenger, which has 1.2 billion monthly users. The firm also struck a deal today with Papa John’s, which becomes the first national pizza brand to launch Facebook Instant Ordering, allowing users to order right from Papa John’s Facebook page. Earnings are due out on July 26, which adds risk, but I can’t ignore the stock’s new price and relative performance (RP) peak today. I’ll go back to Buy, though you should keep new purchases on the small side this close to earnings.” 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 that rare stock whose yield (7.3%) is higher than its P/E ratio (a lowly 6). So unless things fall apart in the turnaround, this patient investment should eventually pay off. Roy’s Maximum Buy Price is 23.33. HOLD.
IntercontinentalExchange (ICE), is another one of Roy’s stocks—one that I told you just last week was too high to buy. But since then, Roy has incorporated new information into his calculations (as he does every month) and the result is that his Maximum Buy Price has jumped from 61.33 to 65.76 (which is the exact current price as I write this). Conclusion: if you haven’t bought this bull market stock yet, you can get on board now. In Roy’s latest update, he summarized the opportunity this way:
“IntercontinentalExchange owns and operates the leading worldwide electronic marketplace for trading futures and over-the-counter (OTC) energy and soft commodities contracts. In November 2013, ICE completed the $11 billion acquisition of NYSE Euronext. The purchase nearly tripled ICE’s revenues and added significant earnings. Cost reductions from NYSE Euronext are ongoing, and should continue to lift earnings during the foreseeable future. ICE has purchased several other smaller businesses during the past few years to bolster its product and service offerings and expand into new geographic areas.
IntercontinentalExchange is now the leading network of exchanges and clearing houses for financial and commodity markets with 11 exchanges and seven clearinghouses. Growing demand for innovative new products for OTC trading and oil futures contracts bode well for the new ICE. Vigorous transaction and clearing activities will benefit ICE now that President-elect Trump is easing regulatory guidelines.
“IntercontinentalExchange recorded mixed results in the first quarter. Revenue rose 27% and EPS were flat. Revenue was bolstered by recent acquisitions, while the company posted higher fees from IPOs (initial public offerings) because it listed all of the last 27 large U.S. company IPOs. Management expects earnings growth to accelerate during the second half of 2017.
“At 22.1 times trailing EPS, ICE shares are a tad high, but I expect Intercontinental to announce additional favorable acquisitions in 2017. ICE’s balance sheet is very strong with low debt and lots of cash available to fund future needs. I expect ICE shares to advance 15% to my Min Sell Price of 75.28 within 12 to 18 months.”
Note: when we bought ICE two full years ago, the Minimum Sell Price (adjusted for a split) was 62, but increases in the value of the company have caused Roy to increase that number several times. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is looking better (as are many Chinese stocks). In Paul’s latest update, he wrote, “JD doesn’t look bad, with the stock just a few percent off all-time highs after a volatile past two months. The company’s story and growth numbers are great (analysts see earnings of 38 cents per share this year, rising to 81 cents in 2018), and the next quarterly report is likely out in early August).” HOLD.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, has hit a little resistance at 40, but is still likely to keep running until it hits firmer resistance at 44. At that point, Crista thinks short-term investors should sell, while long-term investors should stand pat. I’m inclined to join the first group (given the need to find stocks to sell every week), but I’ll cross that bridge when I come to it. HOLD.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, closed at a new high last Friday and has pulled back minimally since. In her latest update, Chloe wrote, “PBA held up well to the pullback in oil prices this week. Oil prices peaked at $47.07 last Monday, retreated to just above $44, and are now back in the high $45s. The pipeline company will report second-quarter results on August 2 before the market opens. Analysts expect very strong earnings and sales growth, thanks to a number of new infrastructure projects completed last year. EPS are expected to rise 47.4%, to $0.28 from $0.19 in the same quarter last year. Revenues are expected to rise 27.1%, from $789.56 million to $1 billion. Risk-tolerant investors whose priority is monthly income can buy a little here.” BUY.
Schnitzer Steel (SCHN), originally recommend by Crista Huff of Cabot Undervalued Stocks Advisor, continues to consolidate the quick gains made when the stock soared from 19 to 26 in the last two weeks of June. If you haven’t bought yet, and you want an underappreciated infrastructure stock, you can get on board here. BUY.
Sherwin-Williams (SHW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is expected to report second-quarter earnings before the market opens on July 20, so new buying can wait until the (small) risk from that event has passed. Technically, the stock has support at 350 and resistance at 360. BUY.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, has been hot in recent months, and it’s not cooling down yet! In Mike’s latest update, he wrote:
“Square closed at all-time high Tuesday after an analyst at Loop Capital Markets suggested that PayPal Holdings Inc. should buy the company. Acquiring Square would help PayPal increase its offerings at brick-and-mortar retailers and bring in more customers for PayPal’s Venmo service, as the small business customers on Square could accept Venmo transactions as payment, wrote Joseph Vafi, the lead analyst on the note. “By having both consumers and retailers on its platform, the combined entity would have significantly increased strategic positioning and optionality,” he wrote.
Square merchants can already accept PayPal as payment option, so the combination with Venmo may not be difficult on a technological level. Additionally, Venmo monetization would help PayPal with its transaction profit growth rates, which is something the analyst believes PayPal needs as it faces declining transaction margins due to a shift in consumer funding sources.Vafi believes PayPal could acquire Square for more than a 30% premium without hurting its balance sheet.”
Respecting the action of the stock, I’m restoring the stock’s buy rating for aggressive investors. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, is now manufacturing its new Model 3 and early deliveries (and subsequent reviews) should be out soon. Meanwhile, the stock, after pulling back 20% from its peak, is now building a base at the 310—a base that should eventually serve as a springboard for a new advance—and I’m holding patiently. After all, this is a Heritage Stock for me, with plenty of growth potential ahead. It’s also an opportunity to demonstrate to you the principles of developing Heritage Stocks. 1. Develop a profit exceeding 100%. 2. Have confidence that great long-term growth is possible. 3. Resolve to hold through normal technical sell signals. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, looks great, but Crista is planning to sell when it approaches two-year price resistance near 140. HOLD.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, rallied powerfully yesterday on the news that the company is in talks with Amazon’s cloud business to expand their partnership into software for corporate data centers. Roy’s Maximum Buy Price is now 77.84, down from 87.79, while his Minimum Sell Price is now 110.82, down from 113.61. HOLD.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, fell sharply—and on high volume—last Friday on two news items. First, one of Macau’s top prosecutors was found guilty of corruption—a sign that the Chinese government is cracking down on the gambling district. And second, one of the region’s junket operators is concerned about liquidity—in part because of crackdowns on money laundering. Neither of these concerns is new, but the action of the stock tells me it’s time to take our nice four-month profit and walk away—the same way a smart gambler walks away from a table when his winning streak ends. SELL.
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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 25, 2017
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