The market remains strong and cohesive and thus I remain bullish. However, numerous indications remind me that the market is overdue to deliver a painful shock to investors, so today I’m leaning back to the conservative side, recommending a dividend-paying stock that has solid long-term prospects and minimal downside risk.
Cabot Stock of the Week 159
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Dow 22,000 has come and gone, and 23,000 seems to be right around the corner; the market’s traditional summer slump remains a no-show in 2017. However, the summer is not over, and the higher the market goes, the more overvalued it gets. That alone does not bother me, particularly since the market’s divergences have disappeared—everyone in the boat is now rowing in the same direction. But I do know that this overvaluation means that someday the market will deliver a serious shock to investors, and the pain is likely to be the greatest in the high-fliers, the stocks that have come furthest fastest, which will see quick profit-taking by short-term traders. So part of my strategy has been to develop a diversified portfolio, where steady-growing lower-risk stocks—often paying a dividend—provide a quality core that will hold up much better when the going gets rough. Today’s selection is one of those. It was originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor. Here are Chloe’s latest thoughts.
Broadridge Financial Solutions (BR)
Though it has the word “financial” in its name, Broadridge is actually a technology company, providing solutions to the financial industry. The company has a wide variety of tools that financial professionals use for everything from securities analysis to expense management. Broadridge also provides investor communications services, like distributing quarterly reports and processing proxy votes.
Broadridge is constantly investing in new technologies, which both attracts new customers and consistently increases revenue-per-customer. Last month, for example, Broadridge acquired a British company called Spence Johnson that provides data, analytics and consulting to asset managers.
Broadridge has delivered consistent EPS growth, averaging 26% per year over the past five years. Management has focused on growing recurring revenues in recent years, largely through acquisitions, to improve the stability of earnings even further.
In its latest earnings report, Broadridge beat estimates by 15%. The company will report fourth-quarter and full-year earnings this Thursday, August 10 (Broadridge’s fiscal year ends in June). For the quarter, analysts are expecting EPS of $1.69 and revenue of $1.3 billion, up 17% and 34%, respectively. Full-year revenues are expected to surge 41% (thanks to a major acquisition; organic sales growth will likely be in the high single digits), while EPS are expected to rise 14%.
In the coming year (July 2017 through June 2018), Broadridge’s sales are expected to grow 6%, while EPS rise 17%.
The Dividend
Broadridge makes paying “a meaningful dividend” a high priority, and aims for a dividend payout ratio of at least 45% (based on prior year net earnings). Currently, the stock yields 1.8%.
The company has paid dividends consistently since its IPO in 2007, and has increased the dividend for nine years running. Over the past five years, the dividend increases have averaged 16% per year, earning BR a Dividend Growth Rating of 8.4 out of 10. The company’s dividend history and payout ratio of 51% contribute to the stock’s 6.6 Dividend Safety Rating.
The Stock
BR has a P/E of 30 and a forward P/E of 22. After consolidating for most of 2015 in the 50s, BR began a strong rally in January 2016, advancing from 50 to 70 with only minor pullbacks. But that top at 70 (last September) proved to be resistance, and the ensuing correction brought the stock back down to 60, briefly, in November. For a stock like BR, a 15% correction like that presents a great buying opportunity, and as buyers stepped back in, they pushed BR back up to 70 by March of this year, where it began a 10-week consolidation phase (in the process tracing out a perfect cup-and-handle pattern.
That set the scene for the stellar third-quarter earnings report (May 10), after which the stock surged to a new all-time high at 78. BR has been consolidating that gain now for 10 weeks, and in that time, the stock’s 50-day moving average caught up to it, offering support that has the potential to lead to a breakout through 77 if Thursday’s earnings report provides a reason.
In sum, the long-term prospects for continued slow and steady growth are very good, while the stock’s dividend is a reliable source of rising income. Furthermore, short-term prospects are positive for a breakout to new highs if Thursday’s earnings report is well received.
That was Chloe, this is Tim. Buying a stock just before it reports earnings can be risky, and many Cabot analysts advise against it, particularly when the stock involved is a hot one. But BR is far from a hot stock, and I like the set-up of this stock; I think the odds are good that BR will move higher after the report. Still, if you’d prefer not to assume that risk, waiting is fine. You might get a chance to buy at support down at 73!
Broadridge Financial (BR)
5 Dakota Drive
Suite 300
Lake Success, NY 11042
516-472-5400
www.broadridge.com
CURRENT RECOMMENDATIONS
Everyone likes to talk about what stocks to buy, but nobody likes to talk about how to manage a portfolio, an actual group of stocks that exists as an entity, with the task of providing you a reasonable chance if achieving your investment goals while controlling risk. But that’s what I do here every week in the portfolio section of Cabot Stock of the Week. I keep the balance between growth and value, between high-risk and low-risk, and I continually analyze the portfolio’s components for signs that the risk-reward equation is out of whack, always with the goal of minimizing risk while maximizing upside opportunity. This week, the surprise change is that old friend IntercontinentalExchange (he’s been here more than two years) gets the boot. Details below.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, continues to climb, hitting new highs both yesterday and today. But what really matters is what management says when it reports earnings tomorrow morning (August 9). So if you don’t own it yet, hold off until at least tomorrow. The stock’s recent strength tells us clearly that the news will be good—but will it be good enough? If not, the stock has the potential to fall 20% or more. I’ll keep the Buy rating for now. BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, is acting fine, but it remains above Roy’s Maximum Buy Price of 281.59. Thus I’m simply holding, with an eye on his Minimum Sell Price of 362.81. HOLD.
Canada Goose Holdings (GOOS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is scheduled to release its second-quarter earnings report before the market opens on Thursday, August 10. Generally, I’d recommend holding off buying until after the report, but given that GOOS has just corrected 26% from its early June high, I think buying here will work out fine. BUY.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, continues to hit new highs. In her latest update, Chloe wrote, “CCL got a nice boost after competitor Royal Caribbean (RCL) reported estimate-beating earnings. Royal Caribbean’s CFO said they’re seeing strong demand, and raised full-year guidance. (Carnival itself operates on a fiscal year that ends in November, and will report third-quarter earnings at the end of September.)” As the mass-market volume leader in the cruise industry, Carnival is looking forward to continued growth, particularly as the Chinese market for cruises expands. BUY.
Carvana (CVNA), originally recommended by Mike Cintolo in Cabot Growth Investor, fell briefly below its 50-day moving average last week, and was up big today in anticipation of a good earnings report after the market close. Also, last week the company opened for business in its 33rd market in the U.S., its own hometown, Phoenix. If you’re in the market for a used car, check out Carvana.com. And then check out the company’s second-quarter report. BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, remains too high to buy with a Margin of Safety; Roy’s Maximum Buy Price is 127.75. Thus we’re just holding for his Minimum Sell Price of 173.41. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, hit another new high yesterday before pulling back minimally today. In his latest update, Paul wrote, “Analysts are expecting quarterly revenue of $270 million when the company reports on August 16 after the close.” BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, has yet to exceed the high it touched after gapping higher two weeks ago following a very positive second-quarter report, but it hasn’t given up much ground either. As a modern-day growth stock leader, FB is increasingly being viewed as a must-own stock. Mike remains very bullish on the company’s growth prospects, and Roy Ward of Cabot Benjamin Graham Value Investor, who also likes the stock, has just raised his Maximum Buy Price from 146 to 177.33. 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 climb out of its hole; in fact, I’m tempted to upgrade it to Buy. But I’m going to leave it on Hold because I just don’t see enough power behind this move—and there are many, many more attractive stocks. For the record, Roy’s Maximum Buy Price is 23.33. HOLD
IntercontinentalExchange (ICE), originally recommended by Roy Ward of Cabot Benjamin Graham Value Investor, released a second-quarter report last week that met expectations but didn’t beat them, and that wasn’t enough to keep the market happy. The stock sold off on big volume in response, and it’s even lower now, telling me that the sellers (at least in the short term) continue to outweigh the buyers. Roy’s latest Maximum Buy Price was 65.76, so technically, value investors can buy the stock here (his latest Minimum Sell Price was 75.28). But I’m recommending selling (after holding for more than two years), for three reasons. First, that selling pressure looks like it might last a while; second, upside potential is relatively small; and third, I’m very happy with the results of our two-year investment. SELL.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is another hot Chinese stock; it hit new highs yesterday and today! In his latest update, Paul wrote, “JD ran from 39 at the start of July to 47 late in the month, breaking above its stubborn resistance at 44. When JD.com reports its Q2 results on August 14, analysts are forecasting revenue of $13.2 billion and earnings of eight cents per share.” Technically, I like the stock’s action, but to avoid the risk of subscribers buying just before a sharp, earnings-related selloff, I’ll keep the stock rated Hold until after the report. HOLD.
JinkoSolar (JKS), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, broke out of its basing pattern (technically a flag) yesterday and held up well today. If you haven’t bought this leading Chinese solar power company yet, you can still buy today. BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, reported record second-quarter results last week, but missed expectations on both revenues and earnings. In response, investors drove the stock down to its 50-day moving average—basically where it was just four weeks ago. I’ve considered selling here (because the selling could continue), but I’m going to continue to hold because the stock is simply back to its main trend, selling volume has dried, and management seems to have explained the miss satisfactorily. HOLD.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, released a very satisfying earnings report last week, and investors responded by shooting the stock higher. In her updates, Crista wrote, “Quanta reported second-quarter results this morning, a new business win, and an increase in full-year revenue projections. Non-GAAP EPS of $0.50 missed the consensus estimate of $0.53, with a range of $0.48 to $0.61. Revenue was $2.20 billion when the market expected $2.12 billion. The company restated its full-year 2017 earnings outlook, with a range of $1.92 to $2.10. Prior to this morning, the full-year consensus estimate stood at $2.00, with a range of $1.87 to $2.13. The company had earned $1.51 per share in 2016. The biggest surprise in the earnings report was the revised full-year revenue expectation of $8.65 billion to $9.05 billion, when the market had expected $8.5 billion. The share price continues to rise. I expect the stock to rest again when it retraces its February high at 38.5. Once the stock breaks past 38.5, there’s no upside resistance that could put a ceiling on the share price.” Buy, ideally on modest pullbacks. BUY.
Schnitzer Steel (SCHN), originally recommend by Crista Huff of Cabot Undervalued Stocks Advisor, has spent most of the past month trading between 25 and 26, consolidating its big, late-June gains. In her latest update, Crista wrote, “Schnitzer is one of the largest U.S. scrap metal recycling companies, but SCHN is a small-cap stock in a volatile market sector with relatively little analyst coverage. SCHN is resting after a huge run-up this summer. There’s upside price resistance at 27, and again at 29, where I plan to sell.” HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, reported a better-than-expected 26% jump in quarterly revenue last week, and a loss of 4 cents instead of the expected 5. Yet the stock sold off on big volume in response, taking the stock down to touch its 50-day moving average before beginning a modest rebound. Fundamentally, the long-term picture continues to look good here, but I can’t ignore the fact that last week’s selling volume dwarfs this week’s buying volume. Odds are that this rally will fail soon and lead to (at best) a longer consolidation phase). Thus, I’ll downgrade to Hold, and listen to the stock closely. HOLD.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, released an excellent second-quarter report last week, and in response, buyers took charge, gapping the stock up above its 50-day moving average and pushing the stock ever higher every day since. From here, it’s only 6% to the stock’s old high, so this is not a great place to buy. But it’s a great place to hold! Tesla remains on track as the leading force in the transition away from fossil-fueled vehicles. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, continues to consolidate in the 155 area after hitting a new high on excellent clinical data three weeks ago. In her latest update, Crista wrote, “Vertex is an undervalued, aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). Consensus earnings estimates change weekly on VRTX. There are 24 analysts covering the stock, which is a high number vs. most other stocks. The company took a net loss of ($1.11) per share in 2015, then booked a profit of $0.85 per share in 2016. Analysts now expect EPS to reach $1.59 and $3.10 per share in 2017 and 2018, reflecting growth rates of 87.1% and 95.0%. The corresponding P/Es are 97.7 and 50.1, making the stock fully valued in 2017, but quite undervalued based on 2018 numbers. VRTX has pulled back after a rapid run-up in July. I will consider a Buy rating if the price chart presents an obvious near-term capital gain opportunity.” HOLD.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, broke out above resistance last Friday and has continued higher since. 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.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED AUGUST 15, 2017
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