Today’s selection is a company you’ve probably not heard of, but it provides a valuable medical technology that should see increased use in the years ahead. Also, it’s growing by acquisition.
Cabot Stock of the Week 166
[premium_html_toc post_id="138923"]
Despite some hiccups from Nasdaq, the market remains in a strong and broad uptrend, despite the occasional intrusion of political factors into its consciousness. But I don’t allow thoughts about world politics—or football politics, for that matter—to intrude on the sensible systems I use to select stocks and manage the Cabot Stock of the Week portfolio. Last week I added a relatively conservative bank stock to the mix and this week I’m shifting back to the other end of the spectrum, with a small-cap stock that you’ve probably never heard of but that has great growth prospects. The stock recently plunged 26%, presenting what looks like a decent buying opportunity.
The stock was originally recommended by Tyler Laundon of Cabot Small Cap Confidential. Here are Tyler’s latest thoughts.
BioTelemetry (BEAT)
How is your heart doing?
If you’re among the five million Americans affected by cardiac arrhythmias (irregular heartbeats), you probably want to know the answer. Fortunately, modern mobile cardiac telemetry (MCT) monitoring equipment makes it easier than ever to find out.
With MCT, access to lifesaving heart rhythm data is available 24/7, whether at the hospital, at home, or out on the golf course. Patients just need to wear a wireless device that’s connected to electrodes stuck to their skin. Those electrodes collect data that the wireless device beams to a monitoring center for review by trained technicians.
The main benefits of remote cardiac monitoring include accuracy, speed of diagnosis and convenience. In many cases, continuous monitoring over days and weeks also helps inform treatments and lifestyle changes that can be difficult to prescribe with short-term monitoring.
Globally, cardiac monitoring is a $22 billion market, growing at around 5% annually. It’s a competitive market, but there’s room for multiple winners, and one of the emerging leaders is BioTelemetry, a small cap company with a market cap of $1 billion.
BioTelemetry reports revenue from three segments. Healthcare (79% of revenue) covers the diagnosis and monitoring of cardiac arrhythmias. The Research segment (16% of revenue) provides services for drug and medical device trials. And the Technology segment (5% of revenue) makes and sells medical devices. The company is also expanding into the diabetes management market with a newly introduced remote blood glucose monitoring solution.
The company monitors over half a million patients a year, and supports over 20,000 physicians and sites. More than 50,000 of its monitoring devices are out in the market, processing more than two billion heartbeats a day. This all means quicker diagnosis for patients, a better quality of life, and lower costs to the health care system.
It has also meant for a relatively stable business. Over the last four years, revenue has grown by 16%, 29%, 7% and 17%, respectively. Last year (2016) was a record, with $208 million in revenue and EPS of $0.85 (up 85%).
Those numbers are small compared to what BioTelemetry will do moving forward, however. That’s because it recently acquired its largest competitor, Switzerland-based LifeWatch. The strategic rationale for the acquisition—besides absorbing a major competitor—was helping BioTelemetry grow into a connected health powerhouse!
The focus will continue to be remote cardiac monitoring. But access to LifeWatch’s overseas markets, relationships and sales staff should help advance BioTelemetry’s other growth-oriented initiatives, like remote blood glucose monitoring. Critically, LifeWatch also has a heart monitor in the patch form-factor (very convenient for patients) that has recently launched in the U.S. Over the coming quarters we’ll want to keep an eye on how well management is meeting its targets as it integrates LifeWatch and rationalizes the combined companies’ product lineups.
It’s reasonable to expect BioTelemetry to grow revenue by 38% in 2017 and 35% in 2018 (to $385 million). Earnings growth should be 17% this year, then grow on par with revenue in 2018 (up roughly 35%, to $1.33).
Shares of the stock currently trade around 32, roughly 18% off the all-time high hit on September 11. The drop was due to a hit piece published by a short-selling firm, whose bear case was largely predicated on slowing growth in the cardiac monitoring division. There is some truth to that, but the reason isn’t a flawed business model; it’s due to BioTelemetry’s growing scale (which makes it harder to maintain a high growth rate as the revenue base increases) and a 2017 Medicare reimbursement cut (set to reverse in 2018).
These short attacks don’t typically keep quality stocks down for long. While competitive threats always exist, BioTelemetry’s strategy to expand through acquisition, diversify the product base, and innovate on the form factor should set it up for market share gains over the coming years.
This appears to be the market’s interpretation as well. The stock found firm footing at its 200-day line (at 29), and over the past week has begun to rise once again. You can enter anywhere between here and 30.
BioTelemetry (BEAT 32)
1000 Cedar Hollow Road, Suite 102
Malvern, PA 19355
www.gobio.com
CURRENT RECOMMENDATIONS
Market rotation is a fact of life, and now it looks like money is rotating out of the leading technology stocks (Facebook, Amazon, Apple, Netflix and Google) and into better values. Happily, the ultra-diversified method I use in Cabot Stock of the Week means we suffered little from yesterday’s selloff; in fact, the most common phase in my updates recently has been “new high.” But there is always room for improvement and today that means selling Grubhub (GRUB), which has not done what I hired it to do. Details below.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, continues to consolidate in the mid-60s following its surge from 50 to 65 back in early August. The stock’s 50-day moving average is now up to 59, rising to provide additional support. If you haven’t bought yet, you can still get on board. BUY.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier and featured here last week, has continued to rally but volume has dropped off, suggesting that the rally may run out of gas—for a while. But the big picture is solid: BB&T Corp is a regional bank offering a broad range of financial services in the South, mid-Atlantic, Texas and some of the Midwestern U.S., and financial stocks in general are benefiting from investors’ perception that interest rates are finally on the way up. If you haven’t bought yet, try to buy on a pullback, perhaps as low as 44. BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has pulled back from its recent high of 330 over the past two weeks but remains well above its Maximum Buy Price. I’m just holding until it reaches Roy’s 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, provides information, technology and services to banks, asset managers and other financial companies and like BBT is benefiting from the revival of financial stocks. BR has now hit record highs for three consecutive days. You can buy here, but consider starting with small positions and averaging up. BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, hit another new high yesterday and pulled back slightly today. The drug company’s biggest product is Revlimid, a treatment for blood cancers that grossed nearly $4 billion in the first half of 2017 and is being tested on new indications, but Revlimid has a big pipeline as well as a web of partnerships. The stock remains above Roy’s Maximum Buy Price of 135, so buying here is not prudent for value investors. Officially, I’m holding, with an eye on Roy’s Minimum Sell Price of 173. However, Mike Cintolo now thinks the stock is attractive for growth investors! In his latest update, Mike wrote, “Celgene isn’t the young buck it once was, but it’s my top pick in the biotech sector, which looks like it’s finally emerging from a multi-year bottoming process.” HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has pulled back normally since breaking out to a new high on big volume a week ago. In his latest update, Paul wrote, “The firm inked a deal with Indian hospitality firm Oravel, with China Lodging both taking a small stake in the firm and looking for mutual alliances. As to the stock, HTHT could be a candidate for taking partial profits once the sellers make a stand, but there’s no sign of that yet. Hold on if you own some, and if you don’t, try to buy on dips below 120.” BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to make great strides fundamentally. In his latest update, Mike wrote, “Facebook’s Messenger platform recently topped 1.3 billion active monthly users, matching the firm’s other messaging services (WhatsApp).” Also, in a column for Wall Street’s Best Daily—to be published tomorrow—Roy Ward opined that Facebook stock would hit $1,000 within 10 years, and maybe in five years! However, the stock sold off on big volume yesterday as big money rotated out of the FAANG stocks, and today it digested the gain. Roy sees this as a buying opportunity and I tend to agree. BUY.
Grubhub (GRUB), originally recommended by Mike Cintolo of Cabot Growth Investor, has continued to slide, and the stock is now our biggest loser. Additionally, the stock is now below its 50-day moving average. Technically, the stock could find support anywhere in this neighborhood, but I don’t see any sign of buyers stepping in yet, and thus it’s an easy call to downgrade the stock to sell and cut the loss short. Note: if you’re looking for a fundamental reason for GRUB’s decline, you might blame Amazon and UberEATS, but that doesn’t really factor into my decision. When investing in growth stocks, selling weak stocks and buying strong stocks is the recipe for success. SELL.
JinkoSolar (JKS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is our second loser, but the situation is not so ugly here—although with politicians in China and the U.S. continuing to bicker about tariffs and other protectionist measures, anything can happen. Aggressive investors can buy on this correction. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has been trending steadily higher for months and hit another new high Friday before joining the crowd in yesterday’s retreat. Still, it remains above both its 25-day moving average and 50-day moving average, which is quite impressive. In his latest update, Mike wrote, “PayPal doesn’t generate a ton of headlines, but the stock has pushed to new highs on solid volume in recent days. This morning, one analyst meaningfully hiked his price target after what he called a very bullish meeting with PayPal’s management. If you own some, sit tight, and if you don’t, try to get in on dips of a point or two.” BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has had a great run over the past three weeks thanks to rising energy prices, first rebounding to its July highs and then just yesterday breaking out to a new high on big volume. Ideally, the 34.50 level will now act as support, so any pullback to that level can be used to buy more stock. But energy stocks can be tricky (cyclical), so the support level may not hold. In any case, for now I’m happy holding and collecting the fat dividends. HOLD.
Planet Fitness (PLNT) originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, continues to climb steadily higher, hitting a new high just last Friday. And it was too small to be a victim of the big selling pressures yesterday. Continue to buy the trend. BUY.
Pulte Group (PHM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth portfolio, hit a record high two weeks ago and continues to work to break out above that level—in fact today the stock exactly equaled that old high. BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, is another stock benefitting from the strength in the energy industry. Crista is still targeting 44, where she says the stock will be fairly valued. BUY.
Schnitzer Steel (SCHN), also recommend by Crista Huff of Cabot Undervalued Stocks Advisor, is one of the largest U.S. scrap metal recycling companies and a manufacturer of steel products that are used in nonresidential construction. The stock hit a new high last week and Crista as still targeting 29, where SCHN last traded in November/December 2016. HOLD.
Sociedad Quimica y Minera de Chile (SQM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has been interesting in the six-plus weeks we’ve owned it. First came the accelerating advance to a high of 63.80 that quickly swelled our profit to 32% as lithium mania swept the sector. And then came the correction, which in five days has cut our profit by two-thirds. So what’s the best course from here? One guideline says that once you have a substantial profit in a stock you shouldn’t give up more than half that profit—but that’s generally for slower-moving stocks than SQM, as well as for longer-term profits. Another says that since the stock is still above its 25-day moving average, holding is still fine. Lastly, an old rule concerns the angle of the recovery after this correction; if the buyers come on strong and the stock shoots back up, great. But if the recovery is slow and the angle is low, moving on is best. In Paul’s latest update, he wrote, “SQM has finally come down from orbit. There was a mini-mania in all things lithium during the past few weeks, with SQM definitely one of the leaders of the move, powering from the low 40s to the mid-60s on gigantic volume in just about a month. Could that have been a blow-off move that leads to a long-lasting top? It’s possible, but I think the odds are against that because SQM (and the lithium story in general) isn’t overly well known and the stock hasn’t been “hot” for that long. Plus, of course, the fundamentals haven’t changed, as lithium demand (and prices) should generally increase for many years. Long story short, I’m hanging on to our position and will see how this correction progresses.” I’ll downgrade to hold for now and watch the action closely. HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, sold off a bit yesterday in sympathy with the leading technology stocks, but it remains well above its 25-day moving average and poised to break out to new highs. If you don’t own it yet, you can buy here. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, continues to march to its own drummer. Last week, with the stock trading at 375, I wrote, “If you don’t own it yet, the odds are good that you’ll be able to buy when the stock next meets its 50-day moving average (now at 348).” And here we are! In his latest update, Mike wrote, “TSLA remains very herky-jerky on a daily basis, but it’s set up a decent-looking launching pad during the past three months. Overlooked among all the daily noise surrounding the company is that production and revenues are growing at triple-digit rates—and that’s before the impact of major Model 3 sales.” Long-term, I remain very bullish on both the company and the stock. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, has pulled back to the low end of its ten-week trading range, and thus is a better buy on a value basis. In her latest update, Crista wrote, “VRTX is an aggressive growth biotech company that corners the market in treatments for cystic fibrosis (CF). VRTX is overvalued based on 2017 EPS, but distinctly undervalued based on 2018 earnings projections. The stock’s been trading sideways since its big run-up in July.” BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor almost a year ago, hit a record high last Wednesday and has pulled back normally since. Roy’s Minimum Sell Price is 118.75, up 10% from here. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED OCTOBER 3, 2017
We appreciate your feedback on this issue. Follow the link below to complete our subscriber satisfaction survey: Go to: www.surveymonkey.com/r/CSOW
Neither Cabot Wealth Network nor our employees are compensated by the companies we recommend. Sources of information are believed to be reliable, but are in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on the information assume all risks. © Cabot Wealth Network. Copying and/or electronic transmission of this report is a violation of U.S. copyright law. For the protection of our subscribers, if copyright laws are violated, the subscription will be terminated. To subscribe or for information on our privacy policy, call 978-745-5532, visit www.cabotwealth.com or write to support@cabotwealth.com.