Today’s stock is a name you’ll know. The company was born in the early days of the internet and today it’s all grown up—a major player in the world of financial transactions.
Cabot Stock of the Week 160
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The market’s main trend remains up, but the short-term trend has worsened, with sellers taking charge for a while. And that’s okay; the market was due for a correction. What I like about this corrective phase is this: it was kicked off by the highly visible war of words with North Korea—and that visibility (or transparency to use today’s buzzword) is good. It’s much more worrisome (to me at least) when the market corrects for no obvious reason. So, assuming that this spat will pass, and that the broad market will resume its uptrend, I continue to recommend that you remain heavily invested in stocks that meet your investing objectives. Today’s stock is a well-known name that continues to take an increasing share of the pie of the global payments industry. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor. Here are Mike’s latest thoughts.
PayPal (PYPL)
The best stocks often have big-picture growth stories that are simple enough that you can explain them in just a minute or two, and PayPal is a good example: The company is leading the way in the digital and mobile payment industry, making it safer and easier for both merchants and consumers to pay (or accept payments) and transfer money.
This great growth story has consistently produced excellent metrics, even when the firm was part of eBay (PayPal was spun off in July 2015). Sales and earnings have cranked ahead steadily for the past six years, including 2016’s 17% sales hike and 15% earnings gain. (Analysts see the top and bottom lines rising 18% and 23% this year, respectively.) But after nearly touching 43 on its first day of trading, the stock made zero net progress through mid-April of this year, 21 months of backing and filling.
Now, though, the stock is strong, and I think there’s a great chance it will remain so for a long time to come. What’s changed? Mostly lessening fears of competition and the effect that competition will have on PayPal’s margins.
Despite PayPal’s solid headline growth numbers, it was hard not to notice major payment firms and tech outfits like Google and Apple and a slew of major banks moving into the digital wallet space. While PayPal was clearly a leader in the space, it was hard to predict how it would all play out, and whether the natural, slow decline in PayPal’s take rate (the cut the firm gets per transaction) would accelerate.
But PayPal’s continued growth has resulted in a scale that the other players in the industry simply can’t ignore. (The company ended the second quarter with 210 million active accounts, up 6.5 million just from the prior quarter, and those accounts averaged 32.3 payments in the quarter, totaling $106 billion in payment volume.) That’s led to a slew of deals in recent months that appear to solidify PayPal’s position at the center of the digital payment movement.
After an initial partnership last year, PayPal in April expanded its deal with Visa to the Asia Pacific region, expanding the use of PayPal to retailers that accept Visa in physical locations. It also offers an option for PayPal users to move funds to their Visa accounts in real time.
Then in July, PayPal and Visa again expanded their deal, this time to Europe, with similar features as in Asia.
Two days later, PayPal expanded its collaboration with Citi, allowing Citi card users to use their rewards points to pay for purchases when shopping online at merchants that accept PayPal. (At the end of Q2, there were 17 million merchant accounts on PayPal.) This builds on the 2016 deal that set up a plan to tokenize Citi cards, allowing customers to use PayPal for in-store purchases.
That same day, PayPal struck a deal with JPMorgan Chase, allowing users to link their Chase cards to their PayPal accounts, pay with rewards points and use PayPal in stores where Chase cards are accepted. And a week later came a deal with Bank of America, providing many of the same services as those with JPMorgan Chase.
All told, PayPal has announced 22 strategic partnerships during the past year and a half, which makes it easier to project that the company will be a winner as the digital payment and wallet sector expands. And that has led to a rush of buying during the past three months.
PYPL decisively broke out on the upside in mid-April and has had two consolidations since, the first in June, which led to a push as high as 61, and a second one during the past three weeks as the market has wobbled. I think this marks a solid entry point in a liquid leader of the bull market, one that can trend higher for a long time to come.
PayPal (PYPL 60)
2211 North First Street
San Jose, CA 95131
408-967-1000
www.paypal.com
CURRENT RECOMMENDATIONS
The Dow has been the strongest component of the market in recent weeks; other indexes continue to lag. But we don’t buy indexes; we buy individual stocks. And if you can keep your portfolio filled with stocks that are performing well, and continually sell those that aren’t, you’ll do just fine. Our first order of business today is evicting Carvana, which has fallen apart over the past week. And after much deliberation, JD joins it in the exit line. And on the positive side, VRTX is now at a great entry point. Details below.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has been a rocket over the past week, soaring from 50 to 63 in the wake of an excellent earnings report. In Paul’s latest update, he wrote, “Autohome reported a great quarter yesterday, with revenues rising 13%, but that doesn’t reflect the firm’s core growth—it’s been de-emphasizing its online marketplace segment (revenues fell by two-thirds there), but its core media services (up 34%) and leads generation (up 40%) businesses are thriving. Earnings boomed 39%, crushing expectations, and management guided Q3 sales above expectations.” If you don’t own it yet, there’s no hurry. Wait to see where the stock finds support in the days ahead—ideally above 58, and then try to step into it near the support level. 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.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, and featured her last week, released its fourth-quarter report last Thursday. Revenues grew 38% to a record $1.35 billion, beating analysts’ estimates of $1.3 billion, while EPS grew 18% to $1.71, beating analysts’ estimates of $1.69. The stock gapped down on big volume immediately following the report, but buyers stepped in on Friday, filling the gap and sending it higher Monday and today. So now BR, having washed out the weak hands, is back in its base-building zone and prepped to move higher. BUY.
Canada Goose Holdings (GOOS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, also released its earnings report last Thursday, and the results were good. Direct-to-consumer sales surged more than six-fold to $6.5 million, while wholesale revenue grew 38% to $15.6 million. The loss per share was $0.10, while analysts were expecting a loss of $0.15. In response, the stock gapped up, closed down and since has stabilized back in the base that it’s been building at 19 over the past six weeks. If you don’t own it, you can buy here. BUY.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, hit another new high today (on low volume), as growing global demand and low energy prices combine to create the best of both worlds for all cruise lines. These conditions won’t last forever, but I’m happy to ride the trend while it lasts. In her latest update, Chloe wrote, “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, reported earnings last Tuesday, and while the results were good, beating analysts’ estimates, the stock has been falling every day since —apparently because of worries about the acquisition of Carlypso, a vehicle data marketplace. Someday the stock will bottom and rebound (a bit), providing a short-term trading opportunity, but I can’t wait for that. CVNA is now a broken stock and will need time (months at least) to mend before is a suitable growth stock again. SELL.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, sold off with the market last week, and has bounced since. Yet the stock remains too high to buy with a Margin of Safety; Roy’s Maximum Buy Price is 127.75. Thus I’m 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, has pulled back normally since hitting a new high last week. In his latest update, Paul wrote, “Earnings are due out August 16 (after the close), so keep new buys on the small side here. I love the buoyant earnings estimates (up 37% this year and next) here.” BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, sold off briefly with the market but has bounced right back and continues to set up in preparation for its next leg up. In his latest update, Mike wrote, “FB spiked from 149 (in early July when the market’s rally began) to 173 following earnings three weeks later, and has basically marked time since—which is fine by me. As for the company, analysts are beginning to analyze the potential for Messenger as Facebook slowly rolls out ads on that platform; there are no set estimates yet, but given how successful management was in managing Instagram’s rollout, confidence is high that Messenger will also be a multi-billion dollar revenue producer in the years ahead. If you don’t own any, you can start a position here or on dips of three or four points.” 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 a bricks-and-mortar retailer transitioning to the online world, but investors continue to ask for proof that the transition is working. The next report on the matter will come when the company releases second quarter results on the afternoon of August 24. In her latest report, Chloe wrote, “Analysts are expecting EPS to decline by 44%, from $0.27 to $0.15, while revenues are expected to decline only 0.6%, to $1.62 billion. The big EPS decline is partly due to a difficult comparison to the second quarter of 2016, which included the release of several big games. Some analysts are describing 2017 as a “barbell year” for GameStop, with weaker second- and third-quarter numbers bookended by better performance in the first and fourth quarter, when the Switch should be back in stock and the new iPhone will be released.” Note: Roy’s Maximum Buy Price is 23.33. HOLD.
JD.com (JD), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, released its second quarter report yesterday, and the results were good—sort of; revenues grew 44%. At the same time, however, the company’s loss nearly doubled, thanks to $400 million invested in June in the UK based high-end ecommerce platform Farfetch. This investment was designed to allow JD to compete with Alibaba for high-end shoppers, so it may pay off in the long term. But short-term, investors weren’t impressed. The selloff of the past five days—with very big volume yesterday—has taken JD down to nearly its 50-day moving average. A patient investor invested for the long term will hold here, but that’s not JD’s role in this portfolio. JD has given us a 50% profit since January, and I recommend taking it now. It’s likely the months ahead will not be as easy for this stock. SELL.
JinkoSolar (JKS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was pulled down briefly by broad market forces last Thursday but has rebounded quickly and remains poised to embark on a new leg up. JKS is a leader in the Chinese solar power industry. BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has taken away half our profit over the past week, falling all the way to its 200-day moving average. But trading volume has not been excessive, and the healthy dividend continues to flow, so I continue to recommend holding patiently. If you’re not on board yet, and you’d like a healthy dividend, consider this your invitation. HOLD.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has now given up half of its early August post-earnings gain, which is perfectly normal action. In her latest update, Crista wrote, “Quanta Services provides specialized infrastructure and network services to the electric power, oil and natural gas industries. Consensus earnings estimates for the company have been rising almost weekly since late May, and the share price has followed suit. I expect PWR to rest again when it reaches 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, although 44 seems like a reasonable fair value.” BUY.
Schnitzer Steel (SCHN), originally recommend by Crista Huff of Cabot Undervalued Stocks Advisor, has a beautiful chart. Since blasting higher in late June, the stock has been consolidating that gain, building a tidy base at the 25 level. In her latest update, Crista wrote, “Schnitzer is one of the largest U.S. scrap metal recycling companies. SCHN is a small-cap stock, in a volatile market sector, with relatively little analyst coverage. SCHN rose rapidly in June, and has recently been trading sideways. Short-term investors who buy below 26 will have over 10% upside to my price target at 29, where I plan to sell.” HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, has found support at 25 and selling volume has dried up, so there’s no good reason to give up on the stock yet. Also, the stock is sitting right on its 50-day moving average at 25. If the selling pressures return, I’ll advise selling and moving on, but for now, holding is recommended. HOLD.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, remains within spitting distance of its record high of 387, hit in mid-June. Short-term investors might treat any approach to that level as a selling opportunity, as the stock is likely to meet some resistance there. Long-term investors will hold patiently. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, has found good support between 150 and 155, which is also where we find the stock’s 50-day moving average. In Crista’s latest update, she wrote, “Vertex is an undervalued, aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). Don’t miss this August 8 Forbes article about Vertex! The personal story in the first two paragraphs is impactful. I added VRTX to the Buy Low Opportunities Portfolio in July 2016 when the share price was 86, with a goal for the stock to retrace its 2015 high at 140. The stock reached that goal this summer. The outlooks for both the company and the share price have significantly changed due to successes with pipeline treatments for CF. I moved VRTX from Hold to Buy last week, and I’m now also moving the stock to the Growth Portfolio. VRTX is fully valued based on 2017 EPS, but distinctly undervalued based on 2018 earnings projections. Buy now in preparation for the next run-up.” Following Crista’s lead (and liking this chart), I’ll upgrade VRTX to Buy. BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, is scheduled to announce second quarter earnings on August 24, but yesterday management pre-announced that it expects to report second quarter adjusted EPS of $1.15 to $1.19 on revenues of $1.894 billion to $1.906 billion. (The consensus estimates were for EPS of $1.13 and revenues of $1.86 billion.) VMW gapped up on the announcement on big volume (hitting 98) and pulled back normally today. And all of that is good—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 22, 2017
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