In choosing today’s recommendation, I returned to a sector that was white-hot a few years ago, bringing big profits to investors who got out before the sector collapsed. But now the sector is back in favor and my selection is the leading Chinese stock in the industry.
Cabot Stock of the Week 158
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A few months ago, I was growing concerned that the market’s growing divergences signaled a maturing bull market. But in recent weeks, those divergences have disappeared; the market is once again pushing forward as a cohesive group, driven above all by growing optimism about corporate profits. Thus I continue to recommend that you be heavily invested in a diversified portfolio of stocks that can help you achieve investment goals.
In selecting today’s recommended stock, I went straight for a high-growth sector that is coming back into favor after years on the sidelines. It’s the solar power industry and my selection is the leading Chinese company in the business. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader. Here are Mike’s latest thoughts.
JinkoSolar (JKS)
Solar stocks as a whole haven’t been great long-term investments during the past decade, but they have provided a couple of amazing rallies. The first wave was in late-2006 through early 2008, when the group was just forming. The second wave came in 2013, after the sector had bottomed out after a multi-year decline. And now we’re beginning to see signs of another big wave, with TAN (the Guggenheim ETF that tracks the sector) pushing higher on great volume recently after a three-year, 66% decline.
With the charts pointing up (and the fundamentals improving—more on that in a second), I went hunting for the leading stock in the group and found JinkoSolar. While it’s not a well-known name in the U.S., Jinko is one of China’s largest solar suppliers, with more than $3 billion in revenues during the past 12 months. And it’s a global operation, too, with 58% of sales in China and Asia, 19% in emerging markets, 13% in North America and 11% in Europe.
Like most solar companies, JinkoSolar has had a rough time recently, mainly because the low price of oil has weakened demand, which has softened prices. In the first quarter, earnings slipped notably from a year ago (even as currency-neutral revenues rose 13%) because average selling prices were down slightly and costs were up—especially the cost of silicon, where supply is running short.
But investors’ focus is on the future, and the future is looking better. JinkoSolar’s first-quarter shipments were up 29% from a year ago, and company management is now pushing a big capacity expansion, aiming to boost its wafer, cell and module capacity by 40%, 12% and 23%, respectively, from March through year-end.
That increase in production is expected to coincide with a ramp in shipments, with management forecasting 8.5 to 9.0 gigawatts shipped this year, up more than 30% from last year. That increase will result in lower costs per unit (efficiencies of scale), which, when combined with lower expected silicon prices and big demand for one of Jinko’s modules (mono crystalline with PERC technology)—which carries higher margins and is sold out through 2017!—should begin to goose results later this year.
Driving demand has been a combination of cost competitiveness—prices have fallen so much that solar is nearly on par with other forms of electricity generation—and a buying spree by the Chinese government, which reportedly installed 24 gigawatts of solar capacity in the first half of the year as it accelerates its effort to clean up its air. There are signs that some of that demand was “pulled” in from the second half of the year to beat an expiring feed-in tariff (payments to energy users for the renewable electricity they generate), but demand is expected to remain strong going forward.
A bigger risk may come from a potential ordinary tariff that one bankrupt solar company (Suniva) is pushing for. U.S. officials are considering it, and some analysts believe it could have a big impact on demand if it ever gets enacted.
But it’s also worth considering the fact that JinkoSolar has cut expenses to the bone in recent years (the company’s all-in costs per watt are down 22% in the past year alone), so any improvement in demand should fall right to the bottom line. Analysts see the company’s 2018 earnings (which big investors are starting to take into account) rising 36%, which could prove conservative.
As for the stock, JKS had a gigantic run from mid-2012 to the end of 2013 (2 to 38!), before beginning a long, slow, tedious decline back to 13 last fall. The stock advanced for much of this spring and early summer, then accelerated sharply higher in July before pausing in the 25 to 28 area. JKS is very volatile and a pullback is clearly possible, but big picture, I think the stock and the solar sector as a whole are likely in the early innings of a new uptrend.
That was Mike, this is Tim. Aggressive investors can buy here, taking the risk that the stock won’t fall out of the 26-28 range before powering higher. More risk-averse investors should wait, buying perhaps on either a pullback to the stock’s 50-day moving average at 21 or a breakout to new highs above 28. Keeping it simple as usual, we’ll record tomorrow’s average price as our buy price. BUY.
JinkoSolar (JKS 28)
1 Jingke Road
Shangrao Economic Development Zone
Shangrao 334100 China
86 79 3846 9699
http://www.jinkosolar.com
CURRENT RECOMMENDATIONS
As we roll into August, traditionally the slowest month of the year on Wall Street, the market continues to hit new highs, and I continue to manage the portfolio for optimum performance (commensurate with risk). At all times, therefore, I’m balancing value stocks with growth stocks, while balancing short-term opportunities with long-term opportunities. At the same time, I have in the back of my head dozens of investing guidelines learned over the decades. One of these is, “If a stock isn’t doing what you hired it to do, let it go.” Heeding that voice, today I’m letting two stocks go, LM and SHW. Details below.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is China’s biggest online source of information for automobile buyers and its chart continues to walk higher, closing at new high today. In Paul’s latest update, he wrote, “Autohome continues to glide along its 25-day line in recent weeks, with a push to new highs today. My only worry short-term is that the recent upmove has come on very light volume, so I can’t say demand is overwhelming. But bigger picture, the story is intact and the trend is firmly up.” Try to buy on pullbacks; the stock’s 25-day moving average is down at 47. BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, continues to trend higher, pulling away from its June bottom. In his latest update, Roy wrote, “Biogen reported encouraging results enabling management to raise full-year revenue and earnings guidance. Sales advanced 6% and EPS fell 15% after sales and EPS increased 3% and 17% respectively. In June, Biogen completed an exclusive licensing agreement with Bristol-Myers Squibb for BIIB092, a biopharmaceutical with potential to treat Alzheimer’s disease and other progressive neurodegenerative disorders. Biogen’s rollout of Spinraza, used in the treatment of spinal muscular atrophy, generated $203 million sales compared to $47 million in the prior quarter. Biogen completed the purchase of Remedy Pharmaceuticals’ CIRARA for the treatment of large hemispheric infarction, a severe form of ischemic stroke where brain swelling often leads to death. Biogen recorded a $120 million charge related to the acquisition of in-process research and development expenses, which led to a drop in second-quarter earnings. Buy at 281.59 or below.” I’m simply holding, with an eye on Roy’s Minimum Sell Price of 362.81. HOLD.
Canada Goose Holdings (GOOS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, got down near 18.5, where it bottomed in early July, this morning, but as the day wore on, buyers stepped in, and I’m optimistic that the Goose can take flight from here. BUY.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, hit another new high today. In her latest update, Chloe wrote, “Growth expectations are high and the stock’s tight four-week consolidation should provide a solid base for CCL’s next advance. Carnival is the largest cruise company in the world and is seeing rising demand in all markets, especially China. Analysts expect sales and earnings to rise 5% and 8% this year. (Carnival operates on a fiscal year that ends in November, and will report third-quarter earnings at the end of September.)” BUY.
Carvana (CVNA), originally recommended by Mike Cintolo in Cabot Growth Investor, looks a bit like GOOS in the way that it’s pulled back to its early July low—but no buyers stepped in today. Earnings are expected after the market close on August 8. BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, beat second-quarter sales and earnings estimates last week, but the stock fell as management lowered its earnings guidance slightly for the remainder of 2017. Nevertheless, the value case stands. In his latest update, Roy wrote, “Sales surged 19% and EPS rocketed 75% higher after increasing 18% and 27% in the previous quarter. Sales of the company’s leading drug, Revlimid, used to treat blood cancer, advanced 20%, while Celgene’s other drugs performed very well in the U.S. and overseas.” Roy’s Maximum Buy Price is 127.75, while his Minimum Sell Price is 173.41. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, was hot last year (up 65%), but it’s been even hotter this year—up 92% so far—and it hit another new high today. In his latest update, Paul wrote, “HTHT chopped around in June and early July, but after tagging its 50-day line, shares have exploded higher on excellent volume as they take aim at the century mark. Earnings are due out on August 16, though investors have already signaled their approval of China Lodging’s preliminary hotel results (90% occupancy rate, 10% rise in per-room prices and a 7% sequential rise in number of rooms in operation). You can buy a little here or (preferably) on dips of a couple of points.” Alternatively, if you’ve been on board a while and you’re feeling overweight in the stock and you don’t relish the prospect of a correction down to the 50-day moving average (now at 83), you could take some profits here. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, released a very impressive second-quarter report last week and the market responded by gapping the stock up on heavy volume the next day. Mike has yet to comment on the earnings report, but it’s worth noting that Cabot’s value analyst Roy Ward also likes the stock. In his comment, Roy wrote, “Facebook reported exceptional second-quarter results that topped expectations. Sales surged 45% and EPS popped 69% after increasing 49% and 73% in the prior quarter. Mobile ad revenue grew 53% from a year ago and now makes up 87% of Facebook’s total ad revenue. Facebook now has over two billion monthly active users, more than one in four people in the entire world. Two-thirds of FB’s users are daily users. North America makes up only 12% of Facebook’s monthly active users but is responsible for 49% of the company’s revenue. Instagram has begun to contribute to earnings, whereas Messenger and WhatsApp will add profits in future years.” Roy’s Maximum Buy Price is around 146, so he has it rated Hold, but Mike likes the momentum (not to mention the growth) so he has it rated Buy. 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), continues to test my patience, but I hold it in part because it provides such great diversification from all those stocks hitting new highs that have the potential to fall dramatically when the market (someday) gives us a big shock. GME looks nearly immune to that today. Roy’s Maximum Buy Price is 23.33. HOLD.
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, posted a record closing 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, closed at a record high last Wednesday and has pulled back slightly since. In his latest update, Paul wrote, “JD has ripped back into new high ground, thanks in part to an expansion of the firm’s current partnership with Walmart, as the two companies further integrate their platforms in China ahead of that country’s big August 8 shopping day. If you own some JD, just hang on but if you don’t, you could pick up a small position here or on dips of a point or two. Earnings are likely out in a couple of weeks.” HOLD.
Legg Mason (LM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, fell sharply last Thursday after reporting second-quarter results, but it’s rebounded a bit since. Crista is still telling her readers to hold the stock, aiming to get out around its old high of 44, but I’m going to pull the trigger here. In recent weeks, I’ve mentioned the possibility of selling LM, given our bigger-than-expected gain in just 10 months and my need to sell an average of one stock per week, and the stock’s high-volume drop tells me it’s time. SELL.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, will report second-quarter results after the market close tonight, and results should be excellent. Analysts expect EPS will rise 40%, to $0.28 from $0.20 in the same quarter last year, while revenues will grow 27%, from $815.54 million to $1.04 billion. Assuming the stock doesn’t go crazy on either the upside or downside after the report, you can still buy here; the stock is currently a bit above its 25-day moving average. BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, and featured here last week, was bought on Wednesday as the stock (luckily) dipped sharply and briefly down toward its 50-day moving average. In her latest update, Crista wrote, “Quanta completed the acquisition of energy services companies Stronghold, Ltd. and Stronghold Specialty, Ltd. on July 21. The acquisition will add approximately $500 million in revenue to Quanta’s oil & gas infrastructure services business. Last week, UBS raised PWR from neutral to buy. The corporate outlook remains fantastic, with aggressive earnings growth and a low P/E. PWR is ratcheting upward toward short-term price resistance at about 38.5, which the stock could conceivably surpass in 2017. Last week’s pullback presents an excellent buying opportunity.” Buy.
Schnitzer Steel (SCHN), originally recommend by Crista Huff of Cabot Undervalued Stocks Advisor, has pulled back over the past week, to just below its 25-day moving average on low volume, so the uptrend is still intact. In her latest update, Crista wrote, “Schnitzer is one of the largest U.S. scrap metal recycling companies. Full-year 2017 earnings estimates have risen steadily for four weeks. SCHN rose to upside price resistance at 27 last week, and could easily continue to 29 where it traded during the fourth quarter of 2016. SCHN is a small-cap stock in a volatile market sector, with relatively little analyst coverage. I’m inclined to take the money and run at 29.” HOLD.
Sherwin-Williams (SHW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has continued to sell off on high volume following the disappointing earnings report, so it’s time to part company. Odds are very good that eventually the company will get the synergies it expected from the Valspar acquisition, and the stock will recover, but I don’t have the luxury of waiting for that day. SELL.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, sold off last Thursday with all tech stocks but has been up every day since, which is very encouraging. Still, the big test comes with the earnings report that is due to be released tomorrow after the market close. Unless the stock falls apart in a big way, it will remain rated Buy. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, delivered its first Model 3 sedans to employees last Friday in an event that highlighted the car’s major features: 220 miles range for the base version, 310 miles range for the larger battery, no traditional gauges in front of the driver—just one 15-inch touchscreen in the center of the dash—and no key; the car unlocks as it detects the presence of your phone. Also, more than 500,000 people have put down $1,000 to reserve a car. So long-term, the picture remains bright. But short-term, the next big event is tomorrow’s second-quarter report, due after the market close. And as the year rolls on, the big challenge for the company will be ramping up production volume to 5,000 cars per week by the end of the year. The stock is now in a consolidation pattern, likely to find support above 300. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, has been pulling back normally since it hit a new high on excellent clinical data two weeks ago. And last week, the company released a good second-quarter earnings report. In her latest update, Crista wrote, “Vertex reported second-quarter earnings per share of $0.39 yesterday afternoon, when the market was expecting $0.35, with a range of $0.22 to $0.41. Quarterly revenue was $514.0 million, when analysts expected $487.5 million. Vertex is the dominant purveyor of treatments for cystic fibrosis. I continue to expect the stock to rest or decline in the near-term, subsequent to the recent price run-up.” Hold.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has been trading tightly between 92 and 93 for the past two weeks, setting up to resume its advance. 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 8, 2017
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