In selecting today’s stock, I swung back to the conservative side, and selected an undervalued stock in the energy/industrial sector that has recently resumed its upward trend as institutions climb back on board.
Cabot Stock of the Week 157
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The market has grown increasingly cohesive and powerful in recent weeks, erasing some of my earlier concerns about divergence. Thus, I continue to recommend that you be heavily invested in a diversified portfolio of stocks that meet your needs. In choosing today’s stock, I leaned back toward the value side, to choose an undervalued energy/industrial stock that has been attracting increasing institutional interest. The stock was originally recommended by Crista Huff. Here are Crista’s latest thoughts.
Quanta Services (PWR)
Quanta provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Like many energy companies, Quanta is based in Houston, Texas. But unlike many energy companies, Quanta has diversified internationally; its operations in Canada and Australia now account for 21% of revenues.
The outlook for the company is fantastic. Revenue growth is coming from all segments of the company, notably from acquisitions, electric power projects and a continued recovery in the natural gas industry. Quanta is benefiting from ongoing upgrades to an aging electrical grid and has a project backlog totaling over $9 billion. In May, CEO Duke Austin remarked, “Our end markets are strengthening and we believe there is opportunity for our backlog to achieve record levels over the coming quarters.”
Quanta completed the acquisition of energy services companies Stronghold, Ltd. and Stronghold Specialty, Ltd. on July 21. Quanta is paying $450 million in cash and stock for the companies. The Stronghold businesses have been producing about $500 million in annual revenue, which will now contribute to Quanta’s oil & gas infrastructure services business. The transaction is expected to be accretive to Quanta’s 2017 net income, to the tune of about $0.06 to $0.07 non-GAAP EPS.
Wall Street expects steady revenue growth from $7.7 billion in 2016 to $8.4 billion in 2017 and $9.1 billion in 2018. Quanta is expected to report second-quarter 2017 earnings per share (EPS) in early August; the consensus EPS estimate is for $0.53, with a range of $0.48 to $0.61. Beyond that, Wall Street’s consensus estimates currently project Quanta to achieve aggressive EPS growth of 31.1% and 19.2% in 2017 and 2018 (December year-end). Analysts’ estimates have barely fluctuated this year, and have recently edged higher. The respective price/earnings ratios (P/Es) are 17.2 and 14.5, much lower than the EPS growth rates, indicating that the stock is undervalued.
Quanta’s common stock share count is interesting if you’re a numbers person who studies stocks. The number of basic outstanding common shares peaked in 2014 at 219.67 million, then declined 11.2% in 2015, and another 19.4% in 2016 to 157.29 million. It’s highly unusual to find companies with such aggressive share repurchases. In May 2017, Quanta authorized a new $300MM share repurchase plan. That could reduce the share count by about 5.6%, or 8.8 million shares.
Quanta’s common stock is 83%-owned by institutions. The stock does not pay a dividend. The long-term debt-to-capitalization ratio has been extremely low for many years, and currently stands at 9.6%.
This industrial stock does not have a glamorous story. It’s simply a very undervalued aggressive growth stock. PWR doubled in price from early 2016 through February 2017, and therefore needed to rest and digest its huge run-up. After pulling back in the spring, PWR bottomed in late May, then began its rebound toward recent highs at 38.5. In the last two weeks, the stock completed a double-bottom chart pattern, which is a classic harbinger of near-term price appreciation.
Once the stock breaks past 38.5, there’s no upside resistance that could put a ceiling on the share price.
PWR is a bargain at the current price. The stock could reasonably rise to 42.5, giving it a 2018 P/E of 18, which is still below the earnings growth rate. Under that scenario, investors who buy now could earn a 23% capital gain in the coming months. Bullishness within the broader market or among basic industry stocks could push PWR even higher. BUY.
Quanta Services (PWR 34)
2800 Post Oak Boulevard
Suite 2600
Houston, Texas 77056
713-629-7600
http://www.quantaservices.com
CURRENT RECOMMENDATIONS
Of the 20 stocks in our portfolio, an amazing 12 have hit a new price high over the past week. This is wonderful, but it makes we worry, because I know I’m not that smart. And experience has taught me that when I start looking like a genius, it’s because the market is setting up to make me look like the opposite—maybe not tomorrow, and maybe not next week, but someday in the weeks and months ahead. So what can I do about it? Obviously, it’s extremely hard to sell stocks hitting new highs. At best, I can be alert to the growing risk, and hope that you are too.
In the meantime, looking at stocks on an individual basis, we reward the winners (that’s you VRTX) and dump the losers (so long ADS; we barely knew you). Details below.
Alliance Data Systems (ADS), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, plunged 10% last Thursday on big volume after management reported disappointing second-quarter results. Revenue was $1.82 billion, missing the consensus estimate of $1.85 billion, and EPS was $3.58, missing the consensus of $3.73. Roy says the results will likely lower his Maximum Buy Price and Minimum Sell Price (previously 258.55 and 353.10) “a few dollars” when he recalculates his numbers in August. Thus, the case for value investors remains—plus the stock has support at the 235 level. So long-term investors can hold here—or even initiate new positions. But I’m going to sell, because the pattern has disappeared, most of our profit has disappeared, and with them has gone my patience. SELL.
Autohome (ATHM), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, and featured here last week, is China’s biggest online source of info for automobile buyers and its chart looks fine. BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, reported earnings this morning before the market opened and the results were terrific. Revenues for the quarter were $3.08 billion, beating estimates of $2.81 billion, and EPS was $5.04, beating estimates of $4.50. Shares spiked higher on the news but quickly settled down, and by the end of the day, not much had changed. However, it’s worth noting that Roy’s Maximum Buy Price as of last week was 281.59, while his Minimum Sell Price was 362.81. HOLD.
Canada Goose Holdings (GOOS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, crossed back above its 50-day moving average last Thursday and has continued higher since. If you’re a risk-tolerant investor hoping to catch the next Coach or Michael Kors—and get some “Canada Cool” too—feel free to jump on board here. More conservative investors will feel more comfortable getting on board the next stock. BUY.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, closed at a record high last Thursday and hit another new high today. BUY.
Carvana (CVNA), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to trade in a consolidation pattern, setting up for an eventual resumption of its uptrend. Earnings are expected after the market close on August 8. In his latest update, Mike wrote, “Carvana is on the speculative side of things (which means you need to handle it with care), but I love the mass market story, the triple-digit revenue growth and the stock’s unusual strength and recent setup.” BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, continues to plow ahead, as analysts turn increasingly positive on the company’s prospects. It’s well above Roy’s Maximum Buy Price of 127.75 now, so we’re just holding for Roy’s Minimum Sell Price of 173.41. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has jumped 20% over the past eight days, so if you’re not on board now, you should probably wait for a better entry opportunity (though for consistency I’ll leave the stock rated Buy). Fundamentally, the prospects for growth at the company remain excellent. While it is the largest hotel operator in China, with 3,541 rooms, it still has less than 4% of the total Chinese hotel market. Furthermore, while 70% of the U.S. lodging market consists of branded establishments, just 20% of hotels in China are branded. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another record high yesterday before pulling back slightly today. In his latest update, Mike wrote, “FB spiked to new highs on good volume after a 10-week rest period, which is a good sign heading into earnings next week. While the company is in the news nearly every day, the biggest announcement came last week when Facebook said that, after a test period in a couple of countries, it would begin rolling out advertisements on its Messenger platform (which has 1.2 billion monthly users) globally. Short-term, I doubt Messenger will contribute much to the firm’s top line; Facebook was slow to ramp up ads on Instagram a few years back. Long-term, though, it opens another gigantic opportunity for the company that should keep growth humming. With earnings out next Wednesday evening (July 26), any new positions should be kept on the small side.” 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 little changed from last week. The turnaround is taking longer than expected, but the promise remains. I judge downside risk to be minimal from here, while the upside potential remains substantial. Roy’s Maximum Buy Price is 23.33. HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, hit another record high today. Roy’s Maximum Buy Price is 65.76, so you can still buy on dips. To be consistent, I’ll leave it rated Hold, waiting patiently for Roy’s Minimum Sell Price of 75.28. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, also hit a record high today. As the biggest direct seller of online goods in China, prospects for growth are enormous. Try to buy on dips. HOLD.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, also hit a record high today, though volume was sub-par. Last week, I mentioned that LM was a possible sell candidate, in part because a 30% profit in nine months is more than I expected from the stock and I don’t want to lose it. And I still have my eye on the exit. In her latest update, Crista wrote, “Legg Mason’s June assets under management (AUM) number came in surprisingly high, but details reveal that much of the increase came from assets under advisement (AUA) being reclassified as AUM. Still, it was a good month for asset gathering. As LM approaches long-term upside price resistance at 44, I’m moving the stock from Strong Buy to Hold, simply because there will be less than 10% capital gain potential between the current price and the price target.” HOLD.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, also hit a new high today! In her latest update, Chloe wrote, “The rally in energy stocks this week has pushed Pembina to a new 52-week high. High yield investors can buy on pullbacks. Pembina 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.” If you haven’t bought yet, it’s probably smart to wait until the earnings report—or a correction—before jumping in. The stock is definitely extended, but for consistency’s sake, I’ll leave PBA rated Buy. BUY.
Schnitzer Steel (SCHN), originally recommend by Crista Huff of Cabot Undervalued Stocks Advisor, has given us a quick double-digit profit since our buy a month ago, but it can’t keep rising at this rate. In her latest update, Crista wrote, “Schnitzer Steel is one of the largest U.S. scrap metal recycling companies. Steel stocks spiked upward last week as President Trump emphasized his intention to put a stop to illegal dumping of steel in the U.S. by China. SCHN is an undervalued aggressive growth stock. Shares of steel companies rose in June, followed by a little profit taking. SCHN has upside price resistance at 27 and 29. SCHN is a small-cap stock in a volatile market sector, with relatively little analyst coverage.” Noting that resistance at 27, I’m going to downgrade it to Hold now. HOLD.
Sherwin-Williams (SHW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, sold off sharply on big volume last Thursday after reporting disappointing results but rebounded during the day to finish down just 2.5%. The report was good on the top line; revenues were up 16.1% to a record $3.74 billion, mainly due to the Valspar acquisition. But earnings decreased 15.8% to $3.36 per share, with the change again mainly attributable to Valspar-related adjustments. In short, both big changes were one-time events and now analysts are trying to see where the company is going next. Judging by the stock, which has held steady above 350 since the disruption, the future is probably still solid, but the big selloff does raise a warning. Thus, respecting the message of the stock—which is telling us that SHW no longer has the positive setup we bought it for, I’ll downgrade the stock to Hold. HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, has been a rocket in the six months we’ve owned it and shows no sign of slowing down. If you choose to get on board here, be sure to use appropriate risk-control measures. And if you’ve been on board with me for six months, consider taking some profits! BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, has often marched to a different drummer and it continues to do so today, as the world awaits the release of the Model 3 at the end of this week. As I write, the stock has just climbed back up to its 50-day moving average, retracing roughly half of its recent correction. I’m going to keep it on Hold now, mainly because there are so many other stocks acting better. But long-term, the future remains bright and this remains a Heritage Stock for me. Earnings are due on August 2. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, is scheduled to release its second-quarter earnings report before the market open tomorrow, but that’s not what investors are focused on. Instead, they’re focused on the dramatically positive clinical results released by the firm last week and the implications for the long term. To recap the events, Vertex reported, “positive data from Phase 1 and Phase 2 studies of three different triple combination regimens in people with cystic fibrosis (CF) … These are the first data to demonstrate the potential to treat the underlying cause of CF in these patients, who have a severe and difficult-to-treat type of the disease.” An analyst from a major Wall Street company called the drug study results a “best case scenario,” and raised his price target on VRTX to 190. And Crista told her readers, “VRTX rose 21% to 159.69 yesterday, following Tuesday’s good news of successful drug trials, giving the stock an approximate 117% year-to-date gain. There will likely be no change in earnings estimates based on the drug trials because the company isn’t expected to begin marketing a new drug until the year 2020. As of yesterday’s market close, earnings per share (EPS) are expected to grow 95.3% and 92.2% in 2017 and 2018 (December year-end), with corresponding price/earnings ratios (P/Es) of 96.2 and 50.1. It would be fair to say that VRTX is fully valued on 2017 earnings expectations, but quite undervalued based on 2018 numbers. I had previously planned to sell VRTX as it approached two-year price resistance near 140. However, the good news on the triple-combo drug has completely changed the stock’s outlook. Stocks that are reaching new highs act differently from stocks that have a ceiling on their share prices. It would not be remotely unusual for the stock to pull back toward 135 and rest there, followed by another run toward 170. If you don’t want to see VRTX fall toward 135, you might consider selling right now. I’m going to keep the Hold recommendation on VRTX for the time being. If it drops down to 140, I’ll probably recommend new purchases.” I’ll follow Crista’s lead—while noting that VRTX hit another new high today! HOLD.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, is advancing in sync with the broad market, but you can’t buy it here. Roy’s Maximum Buy Price is now 77.84, while his Minimum Sell Price is 110.82. HOLD.
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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 AUGUST 1, 2017
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