Tonight’s Stock of the Week is little known among investors, but it has a national brand name and an excellent cookie cutter growth story. The stock recently reacted well to earnings and has tightened up a bit; we think the next big move is up.
Cabot Stock of the Week 162
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We can’t say the sellers are running wild—many stocks are holding up just fine, and most major indexes aren’t far from all-time highs—but we can say that the buyers aren’t in control, as few stocks and sectors are moving higher (and those that do tend to give up the gains in short order) and the major indexes are still stuck at or below their 50-day lines. Thus, I think being relatively cautious makes sense, with new buying focused on stocks that have shown recent buying volume and aren’t overly loved. This week’s pick, originally featured by Mike Cintolo in Cabot Top Ten Trader, is an under-loved retail name with an established business and great growth story.
Planet Fitness (PLNT)
Cookie-cutter growth stories are some of our favorites to invest in—if you can find a retail company that has a unique concept or business model (or both) that’s been successful, it’s usually just a matter of opening new locations around the U.S. (and internationally) and watching profits grow. These stories also usually have a high degree of reliability, which, along with growth, are the two things institutional investors look for when building big positions.
Of course, there haven’t been many great cookie-cutter stocks in recent months, partly because the retail sector hasn’t been able to get off its knees—Amazon gets much of the blame, as it has decimated many mall-based retailers. But Planet Fitness looks Amazon-proof and has a great (and relatively unknown) growth story that should last for years.
The company is a leading operator of fitness centers in the U.S., with 1,403 locations at the end of June (all but 16 in the U.S.) that had more than 10 million paying members. There’s nothing special about gyms, but the company has an edge is its business model—it targets first-time and casual exercisers (40% of new adds over the past two years were first-time gym goers), offering a non-intimidating environment (no “gymtimidation” as the company calls it) and frowns on muscle-head activity. Planet Fitness’ national brand and low entry price (starts at $10 per month, up to $20 to go to any location the patron wants) are also big plusses.
The bottom line is that Planet Fitness is truly targeting a mass market. 80% of the U.S. population has no gym membership, and the company’s locations have proven to have a very broad appeal, whether it’s gender (more than 50% of members are women), age (35% are younger than 35 years old and 22% are over 55) or income (29% make less than $50,000 and 27% make over $100,000).
Those attractions (combined with the firm’s heavy emphasis on franchising) has led to some fantastic returns for the company. Each new store costs about $1.8 million to get up and running, but pays back that investment in about four years. Cash flow margins run around 35% per store, and once open, they grow—Planet Fitness’ same-store sales have risen a whopping 42 quarters in a row, including a buoyant 9% gain in the second quarter. As you’d expect, around 90% of revenue is recurring from monthly memberships and franchisees’ required equipment purchases.
Thus, the concept is certainly proven and working—now it’s a matter of expanding. And there’s plenty to look forward to on that front. The company believes it has the potential for 4,300 locations in the U.S. and Canada, and will open nearly 200 this year, has around 500 new openings committed for the next three years and 1,000 new openings over the next five years. If we approximate 200 new openings annually, there’s well over a decade of growth to come.
Quarterly results can be a bit lumpy depending on advertising spending, revenue recognition and seasonality (the fourth quarter is the biggest by far), but the trends are clear—revenue, same-store sales and EBITDA (a measure of cash flow) have grown steadily during the past few years, and the second quarter continued that trend, with revenue up 17% and EBITDA rising 30%. EBITDA for the first six months rose 27% from a year ago.
The stock came public in August 2015 and hit 18 in its second week of trading; in April of this year, it was still at 18. But since that point, the stock has trended higher, reaching all-time highs in June and, after consolidating for a few weeks, reacting well to earnings.
There’s certainly downside if the market has a leg down possibly into the 22 to 23 area of support, but I think the big picture is very bullish here, and the stock looks ready to run after a long post-IPO period of no progress. The bottom line is we think the next big move for the stock is up, so we’ll take a position tomorrow. BUY.
Planet Fitness (PLNT 25)
26 Fox Run Road
Newington, NH 03801
603-750-0001
www.planetfitness.com
CURRENT RECOMMENDATIONS
The market had an encouraging show of support today, rallying back after opening lower on the North Korea news. Thus, the selling pressures aren’t overwhelming, but the buyers are hard to find, too, as few stocks or indexes are making any headway, and most that do pull back quickly.
Thus, we continue to advise some caution here—keeping any losers and laggards on tight leashes makes sense, as does holding some cash until the bulls retake control. A couple of powerful up days could change the landscape, but until it occurs, it’s best to play things carefully.
In tonight’s issue, our only change is with GameStop (GME), which is now rated Sell.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has sold off along with most Chinese stocks this week after a huge upmove earlier in August. While some Chinese stocks look overheated, the sector as a whole (and ATHM) only recently leapt out of multi-year consolidations. If you don’t own any, you could buy a small amount (maybe half your normal position size) here. BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, found some life yesterday on news that Gilead was buying Kite Pharmaceuticals for nearly $12 billion; the M&A move is a good sign for the group. The stock continues to trade right around its max buy price (287.5), but is far short of its minimum sell price of 362. HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, continues to trade tightly after its big early-August shakeout and recovery, a sign that the weak hands are likely out. You can grab a few shares here, and a decisive lift above 78 would be highly bullish (especially if the market can kick into gear). BUY.
Carnival (CCL), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, remains in a slow, steady uptrend above its 50-day (and often 25-day) moving average. The stock hasn’t had a pullback in many months, so a major breakdown would be an intermediate-term red flag, but there’s no sign that the sellers are stepping up. We’ll stay on Buy. BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, popped higher on the aforementioned biotech M&A news yesterday, but it’s still below its 50-day line. Long-term, though, the firm’s steady 20%-plus earnings growth should get the stock moving, with Roy’s minimum sell price near 173. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has pulled back to its 25-day line, with big selling volume coming in yesterday. Long-term, the trend is obviously up, both for the stock and the business. Shorter-term, though, it’s a fact that HTHT doubled from mid-April through last week, and it hasn’t penetrated its 50-day line since December. Thus, near-term risk is elevated, though it’s not our style to anticipate a correction. Bottom line, we’ll stay on Buy, but keep new positions small, and any abnormal weakness from here could be a signal for long-term holders to book a little partial profit. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, has been wedging gradually lower with the market during the past month, but the damage has been limited. As one of the top liquid leading growth stocks in the market, we’re OK taking a position on this retreat if you’re not yet in. BUY.
We’ve run out of patience with 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). The company’s quarterly results last week weren’t horrible (sales and same-store sales topped expectations, though earnings fell short by a penny), but the stock collapsed through support anyway, and it’s shown no ability to bounce since. Yes, it’s cheap, and when GME eventually bottoms out and gets going, it could have a good run (and we could consider getting back onboard). But cheap or not, holding a losing position in a downtrending stock in an iffy market isn’t our goal. We’ll cut the loss here. SELL.
JinkoSolar (JKS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has pushed higher in recent days, holding its 50-day line after its (and the solar sector’s) sharp decline last Monday. Given the potential turnaround in the sector, we’re happy to give JKS a chance, especially as the stock really hasn’t done anything wrong. Thus, we advise holding with a tight mental stop near 23. HOLD.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, continues to hold up very well. In fact, it’s actually tightening up, which is a constructive sign after the past few weeks of correcting and consolidating. It’s not going to set the world on fire, but Mike thinks PayPal is a liquid growth leader of the market that’s still relatively early in a longer-term advance. I agree. BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has chopped around in the 31 to 32 area lately, which is fine—so far shares are finding support after their recent slide. We like the dividend (nearly 5% annual yield) and the firm’s business prospects, as PBA has plenty of built-in expansion opportunities that should boost cash flow in the years ahead. HOLD.
Pulte Group (PHM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, hasn’t done much over the past week, which is fine by us given the market and some less-than-stellar reports on July home sales. We think the combination of an ongoing housing recovery, tame mortgage rates, PHM’s valuation (13 times trailing earnings), dividend (1.4% annually) and big earnings estimates (up 24% this year, up 29% next, boosted in part by a big share buyback program) should propel the stock higher over time. BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, is still hanging around the mid-30s. There’s been some hubbub that Quanta could benefit from the east Texas rebuild following Harvey, but the story here is much broader than that, as the company has a huge backlog and accelerating earnings growth. With the stock near support, we’ll stay on Buy. BUY.
Schnitzer Steel (SCHN), originally recommend by Crista Huff of Cabot Undervalued Stocks Advisor, remains in a nice, tight set-up, and the stock is now creeping back toward its highs. We’ve seen some money flow into the materials sector during the past couple of weeks, which is obviously a plus. One thing to watch for is whether the administration pulls the trigger on steel tariffs, which the sector is begging for to cut into “dumping” by importers. With a small profit, we’re content to hang on here and see if SCHN can get moving in the weeks ahead. HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, isn’t super resilient, and thus any new buying you do should be targeted elsewhere. But given SQ’s advance this year, the stock’s consolidation looks totally normal—it’s formed two launching pads since early June, each one sitting on top of the other. If you have a nice profit, sit tight. HOLD.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, remains in the middle of its two-month consolidation. As usual, there are plenty of news and rumors (mostly rumors) surrounding the company, from the price of its bonds to rumors of Model 3 cancellations to reports that the company will unveil an electric-powered truck soon. Really, though, we’re ignoring the noise and focusing on the stock—so far, it has set up a decent base, and a powerful move above 370 (and a healthier market) could kick off a sustained advance. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, continues to look like a good buy if you’re not yet in, as the stock has shown some positive volume clues, is tightening up and isn’t far from its rising 50-day line (now near 145). BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has gone bananas during the past couple of weeks, first after releasing solid earnings, then after enjoying a couple of analyst upgrades and, this week, after some new product introductions including its cloud solution that’s now available on Amazon Web Services. The stock is quickly approaching Roy’s minimum sell price near 111, so we’ll see if he has any updates in the days ahead. Right now, we’re holding and enjoying the ride. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED SEPTEMBER 5, 2017
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