The market remains in a strong uptrend, and thus I continue to recommend that you be heavily invested in stocks that will help you meet your investment goals. At the same time, however, you need to manage risk, and it’s worth noting that the higher the market climbs, the greater the potential for loss once the uptrend ends.
Cabot Stock of the Week 167
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The market remains in a strong uptrend, and while there are no signs of divergence, there have been definite signs of rotation in recent weeks—which is normal as bull markets progress. One of the new strong sectors is biotechnology, though it’s important not to define the category too strictly. Last week’s recommendation was BioTelemetry (BEAT), which is definitely on the fringe of the category, and today’s is smack in the center of it. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor; here are Mike’s latest thoughts.
Exact Sciences (EXAS)
Every type of cancer is a downer, but colon cancer is particularly gloomy, partly because of its combination of mortality and preventability. Colon cancer is the second deadliest form of cancer in the U.S., with more than 50,000 deaths annually. However, it turns out that nine of 10 patients that are diagnosed with stage I or II colon cancer live at least five years. Those that are diagnosed Stage III or IV? Just one of 10 makes it five years.
Put those two things together and it’s not a surprise that the American Cancer Society (ACS) has been fighting to increase regular screenings of people over 50—younger if they have a family history. The greater the number of early diagnoses, the better the survival rate. But it just hasn’t happened, as the colon cancer screening rate remains well below the 80% goal set by the ACS.
Part of the reason for that is that the most common screening technique, a colonoscopy, is not only less than pleasant, it’s also inconvenient (requiring prep time, sedation and time off from work) and it carries some risks of complication. Colonoscopies aren’t going to be replaced, but Exact Sciences has come up with a DNA-based test that can be used at home, requires no prep work and is non-invasive, adding to the industry’s screening capabilities.
Called Cologuard, Exact’s test requires fecal matter (you basically have to go in a specialized box) that you literally mail in, where Exact conducts specialized DNA analysis. The test has boosted compliance in a big way and, most important, it’s proven to be very accurate. 94% of users who have early-stage colon cancer (the kind that often allows for a cure or long-term survival) test positive with Cologuard. If it’s not revolutionary, it’s close, and it’s having a huge impact on the colon cancer testing market.
Because of all those advantages, the test is catching on fast, both among doctors and insurers. In the second quarter, 11,000 additional providers ordered Cologuard for the first time, bringing the total to more than 80,000. And there were 135,000 tests completed in Q2, up a whopping 149%. That growth is being facilitated by the fact that 86% of the 80-million-person addressable market is now covered by insurance.
Perhaps the best statistic involving Cologuard is that about half of all patients have never been screened before for colon cancer. Some of those could be younger patients, but it’s likely the product is in fact expanding the number of people being screened, which is a very good thing.
Of course, not everyone agrees that Exact Sciences has a hit on its hands. One short-selling outfit took a swing at the company in May, saying that re-order rates are low and that prices may fall going forward. I won’t get into the weeds of the argument, but I will note that the numbers tell a different story and that big investors don’t seem to think the company has issues—440 institutions owned shares at the end of June, up from 320 at the start of the year.
That’s not to say the company is a shoo-in to be a winner, of course. The valuation is certainly elevated ($5.6 billion market cap!), the company is losing money and, at this time, is a one-product company. Those are certainly risks. But growth has been outstanding (see table below) and the potential rewards are huge, as management believes it can increase its current 2% share of the screening market by 10-fold in the long run.
As for the stock, it’s had a lot thrown at it in recent months, from the aforementioned short attack to a good-sized share offering to the general rotation in and out of growth stocks. But despite a few potholes, EXAS has remained in an uptrend, with the stock notching new price and relative performance (RP) peaks in August and September. Short-term pullbacks are possible, but I wouldn’t expect the stock to fall below 41. BUY.
Exact Sciences Corporation (EXAS 49)
441 Charmany Drive
Madison, Wisconsin 53719
www.exactsciences.com
CURRENT RECOMMENDATIONS
Overall, the portfolio continues to perform well; we have only one small loser in the bunch today. Of course, that’s as much a result of the strong bull market as anything, but portfolio management has played an important role, too. For growth stocks, it’s important to sell stocks that have lost momentum, while for value stocks, it’s important to sell stocks that have reached full value. Additionally, there are arguments for selling when stocks reach resistance levels, and that’s the case with Schnitzer (SCHN), which gets the cut today. Details below.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, fell out of bed last Thursday when the company announced that the firm’s president and CFO had both resigned. Paul wrote, “This kind of unexpected shakeup in the executive suite is never good news, and the market’s reaction is completely understandable. (The new CFO is a trusted veteran of several high-profile Chinese companies, which is a calming influence.) There may be more bad news ahead as the reasons behind the resignations come out, but so far the market’s reaction has been muted. I will move the stock to a Hold rating and watch closely.” Ditto. HOLD.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier and featured here two weeks ago, is off to a good start, but looks a bit extended in the short term; traders might be able to sell here and buy back lower. But Chloe is in for the long haul and so am I. In her latest update, she wrote, “BB&T is a regional bank offering a broad range of financial services in the South, the mid-Atlantic region, Texas and some of the Mid-West. Financials have been on a tear since interest rates bottomed early this month. BBT has been underperforming the sector slightly, but looks healthier after finding support around 44 for a second time. Dividend growth investors can hold for long-term gains and the steady dividend.” Buy on dips. BUY.
Biogen (BIIB), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor, has completed its correction from its recent high of 330, but you shouldn’t buy it here as it remains well above Roy’s Maximum Buy Price. I’m just holding until it reaches Roy’s Minimum Sell Price of 362. And speaking of Roy, he retired at the end of September, after ably serving Cabot readers for 15 years. Roy’s replacement at Cabot Benjamin Graham Value Investor, Azmath Rahiman, plans to maintain continuity of Roy’s current portfolio while slowly transitioning the portfolio to better reflect his own style. HOLD.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small Cap Confidential and featured here last week, continues to climb. In Tyler’s latest update, he wrote, “BEAT is still looking strong and shares have remained above their 50-day line since late-June. The digital health company, which specializes in remote cardiac monitoring, is likely to grow revenue by well over 30% over each of the next two years, in part because of the LifeWatch acquisition. Shares of upstart iRhythm Technologies (IRTC) also continue to do well, suggesting there is plenty of room for multiple companies to grow quickly in the remote cardiac monitoring market. It’s going to be interesting to see if and when this turns into a dogfight given that BioTelemetry is debuting a monitor in the patch form factor very soon. This has been part of iRhythm’s claim to fame. Stay tuned.” BUY.
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. The stock hit another new high today. BUY.
Celgene (CELG), recommended by Roy Ward in Cabot Benjamin Graham Value Investor, hit another new high yesterday and pulled back slightly today. 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. Thus it’s possible that once the stock gets to 173 I may start treating it like a growth stock—but one step at the time. HOLD.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has spent the past two weeks digesting its big spike up to 125 on September 19. In his latest update, Paul wrote, “While there was no obvious reason for the jump, investors may have been taking note China Lodging had taken a minority position in Oyo, an Indian hotel chain. HTHT is in fine shape.” Note: I’ve designated HTHT a Heritage Stock for the portfolio, meaning that I believe its future is so bright that I’ll be willing to hold through any normal technical sell signal, believing that the stock will eventually be higher. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, has bounced very impressively over the past week, making up all the ground lost in one big down day, and then some. In hindsight, we can say the stock washed out some weak hands. In his latest update, Mike wrote, “More important to the stock’s long-term future is the continued growth in the business. Instagram just announced they’ve surpassed 800 million monthly users (up from 700 million in May), 500 million of whom log in daily, and the number of advertisers on the photo- and video-sharing platform has doubled since March.” BUY.
JinkoSolar (JKS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a little lower this week, (and it’s our only loss), but selling pressures have dried up and technically there’s support here. As the biggest solar power firm in China, Jinko has a very bright future. Aggressive investors can buy here. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, has rallied back strongly since selling off with the broad market two weeks ago. In his latest update, Mike wrote, “The firm has been relatively quiet on the news front, though it continues to make some small investments in payment and online marketplace companies; it recent joined a small fundraising round for Raise, a private company that operates a marketplace for gift cards. If the Nasdaq really caves in, PYPL will probably go along for the ride, but so far, the stock’s uptrend looks good and I continue to think the stock has lots of upside as the digital payment revolution goes on.” BUY.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, continues to enjoy the support of rising energy prices, hitting another new high today. In her latest update, Chloe wrote, “I wrote last week that if PBA could break out past its 52-week highs from late July, it would be a bullish signal. That’s exactly what happened Monday, as a rally in energy stocks propelled PBA above 35 for the first time in over two years. I’ll keep PBA on Hold while we see if the breakout sticks. Pembina is a Canadian pipeline company that pays reliable monthly dividends denominated in Canadian dollars.” HOLD.
Planet Fitness (PLNT) originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a new high yesterday and pulled back normally today. The 25-day moving average is down at 26, and that might be a good entry point. BUY.
Pulte Group (PHM), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth portfolio, has now been up for eight consecutive trading days, signaling that buying power is truly substantial here, and the reason is that investors see earnings growth ahead (so don’t believe any stories you read about the housing market slowing). In her latest update, Crista wrote, “Pulte is a U.S. homebuilder and a very undervalued aggressive growth stock. PHM has been slowly ratcheting upward since breaking out from a long-term trading range in July. I have a sense that there’s a good capital gain yet to come.” BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, hit another high last week and has been trading very tightly near that level since. In her latest update, Crista wrote, “Quanta provides specialized infrastructure and network services to the electric power, oil and natural gas industries. The company has regional operations based in Houston, and could easily be called upon to assist in municipal rebuilding projects. PWR is an undervalued, aggressive growth stock. I expect PWR to rise to 38.5, where it traded in February, then rest again before climbing further. There’s 18% upside to my fair-value price target of 44.” BUY.
Schnitzer Steel (SCHN), also recommend by Crista Huff of Cabot Undervalued Stocks Advisor, came very close to touching 29 yesterday and remains in the neighborhood today. Crista had been targeting 29, where SCHN last traded in November/December 2016, as a selling point, and I believe this is close enough. Yes, the stock has the potential to climb higher, but Crista thinks the odds are very good that it will have trouble getting beyond 29, at least for a while. SELL.
Sociedad Quimica y Minera de Chile (SQM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is the biggest lithium miner on the planet, so there’s no surprise that its stock has been pushed up, down and up again as perceptions and emotions about lithium batteries in electric cars came to a boil in recent weeks. In his latest update, Paul wrote, “The stock’s rapid advance on rising volume in the middle of the month was just too hot to maintain, and the ideal would be for SQM to cool off and trade sideways for a while.” If you don’t own it yet and you want it, you could target the 25-day moving average at 53. Otherwise, hold. HOLD.
Square (SQ), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to a new high yesterday and climbed higher today. In the switch to digital payments, PYPL is the stable “slow” grower while SQ is the young buck. BUY.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, remains a very high profile stock, not least because all the traditional automobile companies have now seen the light and vowed to shift production—in time—to electric cars, thus validating Tesla’s big early gamble. Yesterday the company reported that the production ramp-up of the new Model 3 was behind schedule, but investors didn’t seem to mind. If you don’t own the stock, you can buy here, as there’s decent support in this neighborhood and the old high of 390 remains a short-term target. Long-term, I remain very bullish on both the company and thus this stock, like HTHT, has been designated a Heritage Stock. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor in her Buy Low Opportunities Portfolio, remains in buying territory, sitting at the lower end of its eleven-week trading range. Crista says it’s a great value here. BUY.
VMware (VMW), originally recommended by Roy Ward in Cabot Benjamin Graham Value Investor a year ago, has brought us a nice profit (on paper), and the stock has just worked its way back up to its old high, so taking profits here is one option; the stock may resist further progress for a while. On the other hand, Roy’s official Minimum Sell Price is 118.75, so I’ll hold a little longer (while eagerly awaiting the guidance of Roy’s replacement, Azmath). HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED OCTOBER 10, 2017
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