Today’s recommended stock is an old-world company in a prosaic business, and its prospects are bright as it reaps improved efficiencies from its recent big merger.
Cabot Stock of the Week 175
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The market’s main trend remains up, but there are serious divergences taking place, at least for the short term. Technology stocks have been dumped across the board, while old-world stocks—and banks in particular—have rallied to new highs! Our job is not to predict what comes next—or to argue with the market; our job is to recognize the trends and take advantage of them! Thus today’s recommendation, which is in the oh-so-exciting business of making cardboard boxes and more. The stock was originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor. Here are Crista’s latest comments.
WestRock Company (WRK)
WestRock Company is a leading North American integrated manufacturer of packaging and containers, with a 20% industry market share. WestRock has hundreds of business locations in 30 countries, serving consumer and corrugated markets. The company also owns a real estate business in Charleston, South Carolina.
In July 2015, MeadWestvaco Corp. (MWV) merged with Rock-Tenn Co. to form WestRock. WestRock has since achieved 84% of its three-year synergy and productivity goals, which extend through June 2018. The company has also acquired additional smaller firms and spun off both its specialty chemicals business and its home, health and beauty division. In 2016, WestRock entered into a joint venture with Grupo Gondi, whereby it owns 25% of three corrugated packaging facilities in Mexico, and has current plans to invest in a Brazilian box plant in 2018.
2017 and 2018 pricing increases throughout WestRock’s paper businesses are expected to lead to rising margins in the first half of 2018. Cost savings from the merger are expected to continue pushing margins higher for several years.
The company reported big third- and fourth-quarter 2017 earnings beats (September year-end). Analysts currently project sizeable increases in EPS during WestRock’s second through fourth quarters of fiscal 2018. WestRock is expected to see 2018 revenue rise 10% to a record $16.4 billion. Half of WestRock’s revenue comes from corrugated packaging, enhanced by demand from Amazon.com and the burgeoning e-commerce industry and offset somewhat by a trend of lower paper product usage in the U.S.
Wall Street expects WestRock’s earnings per share (EPS) to grow 40.4% and 13.0% in 2018 and 2019, assisted by margin expansion, post-merger cost-saving initiatives and a flourishing global economy. The 2018 price/earnings ratio (P/E) is comparably low at 17.2. Fluctuations in currencies and raw material pricing can positively or negatively affect profits.
Beyond revenue and earnings, WestRock is focused on packaging safety and the environment. The company issued its first sustainability report in 2016, featuring the three pillars of its sustainability platform: people, planet and performance. The report shows investors how WestRock employs specific strategies and projects to drive sustainability throughout its worldwide operations. The company also helps minority business executives generate new business by introducing them to WestRock’s procurement leads and executives.
WestRock even lends a hand to the National Wild Turkey Federation’s efforts to increase wild turkey populations throughout North America. You might be scratching your head at that statement if you live in a dense metropolitan area and have never seen wild turkeys. I saw them “up close and personal” two years ago while driving, when I rounded a bend and suddenly stopped on a country road to avoid a collision with a dozen turkeys that blocked my route. Too bad the guy driving the Ford F-150 behind me wasn’t prepared to stop! Oh well, my vehicle’s been repaired, and the turkeys were not injured.
WestRock has a recent history of raising its dividend annually in the fourth quarter. The latest increase, from 40 cents per share to 43 cents, was paid to shareholders in late November.
WRK is a mid-cap basic materials stock. Institutions hold 87% of the outstanding common shares. That tells you that financial professionals consider the stock to be an attractive investment.
Many energy and basic materials stocks suffered greatly when the price of oil plummeted in 2015, and WRK was no exception. The stock fell precipitously through early 2016, rebounded through early 2017, and then traded mostly sideways until October, when it finally rose to new all-time highs.
WRK offers portfolio diversification in the popular materials sector, earnings growth, attractive valuation, a good dividend yield (2.7%) and a bullish price chart.
WestRock Company (WRK 63)
1000 Abernathy Road
Suite L-2
Atlanta, GA 30328
http://www.westrock.com
CURRENT RECOMMENDATIONS
With sellers gaining the upper hand in recent days, it’s time to change tactics and get more defensive. The market hasn’t had a major correction all year, and if this downtrend gains momentum, we want to minimize damage. Thus today, I’m selling three stocks and downgrading two others to Hold. In your own portfolio, I recommend selling stocks that have acted notably poorly, selling stocks that pose major risks, and being more selective about buying.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, is a bank with good growth prospects and decent valuation. Over the past week, the stock has soared nearly 10% as the prospect of reduced regulation in the industry lifts expectations. In her latest update, Chloe wrote, “The company has a 30-year dividend history and a portfolio of high-quality loans, and the stock has support at 44 and 42. Long- and medium-term dividend growth investors can buy a little here.” BUY.
Baidu (BIDU), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, was bought for Cabot Stock of the Week nearly a month ago after it had pulled back to its 50-day moving average at 240. Today it continues to build a base at the 230 level, which mirrors the resistance at 230 that contained the stock’s rise in August. If all is well, the stock will eventually find buyers here, though it may take one final plunge below this level to shake out the weakest hands before the uptrend resumes. In Paul’s latest update, he noted, “There is some hubbub about the firm’s driverless cars, which reportedly are already being tested, but in the near-term, BIDU will be driven by sentiment surrounding China as a whole and the company’s search business.” HOLD.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, had a big jump last week, and Tyler explained why in his latest update. “I’ve been quite certain that good things were going on behind the scenes (they always are with good companies) but without concrete facts speculation can only hold a stock up for so long. So what’s the news?
“First, BioTelemetry’s Telcare division (the one that purchased the first FDA-cleared cellular-enabled blood glucose monitor) entered into a strategic collaboration with Onduo, which is a virtual diabetes clinic formed through a joint venture between Verily (owned by Google) and Sanofi. Telcare will supply remote blood glucose systems and the resulting data for patients enrolled in Onduo’s diabetes management program, which means these patients can go about their daily lives instead of hanging out at a clinic. Onduo’s solution includes diabetes tools and services that can be accessed through a smartphone, devices (wireless cellular meters and sensors) that integrate with the mobile app, Personal Care Leaders assigned to each member, and diabetes supplies (blood strips, lancets, etc.) at no cost since Onduo is covered by qualifying insurance. At this point, I don’t know the terms of this collaboration, but on the surface it appears to be a good endorsement for Telcare’s solution and opens the door to a larger deal should Onduo progress with development of its virtual diabetes clinic.
“The second bit of news is that BioTelemetry will provide cardiac monitoring services for the Apple Heart Study, which just launched yesterday. The study uses the Apple Watch and a dedicated Apple Heart Study app to try to discover undiagnosed irregular heart rhythms, such as atrial fibrillation. From the rather brief press release it sounds like BioTelemetry will contribute software and monitoring centers. The Apple Heart Study app will probably send the data to BioTelemetry’s monitoring centers, where the data will be evaluated in similar fashion to data collected by all of BioTelemetry’s FDA-approved remote cardiac monitoring devices.
“Investors love it whenever a stock is included with Apple in anything, but that also leads to all sorts of speculation as to how big the partnership could become. In this case, it seems logical to me that the highest potential partnership outcome is that, if Apple’s heart monitoring initiative moves forward and Apple Watch gains FDA approval, then Apple supplies the hardware and BioTelemetry’s Healthcare division supplies software and service center support. This would be good for BioTelemetry since its Healthcare division has the highest gross profit margin (around 68%), whereas its Technology division (which manufactures medical devices) only has a gross profit margin of 31%. I’m guilty of speculating here, but that’s my early analysis. And it, along with the stock’s recent move, means the stock is now a Buy.” BUY.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, continues a textbook consolidation pattern between 89 and 90. In her latest update, Chloe wrote, “BR, which has advanced in 14 of the past 15 weeks, remains in a strong uptrend, though it’s currently consolidating its post-earnings gains just under 90. Broadridge provides a variety of solutions to the financial industry, including technology, software and investor communications services. Analyst estimates for this year and next have both been rising steadily, and analysts currently expect Broadridge to deliver 19% earnings growth for its current fiscal year, which ends in June 2018. Dividend growth investors can buy a little here, or try to wait for a pullback to the stock’s rising 50-day moving average [currently around 86].” BUY.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has come a long way since I recommended it in early 2016, and the company still has great growth prospects. Thus many months ago, I designated HTHT a Heritage Stock, meaning that I’m so confident of the company’s long-term growth prospects, and so comfortable with our initial profits, that I’ve resolved to hold it through what might normally be considered sell signals for a growth stock. And here we are with such a signal! On the heels of a fine earnings report (third-quarter sales up 34% and earnings up 58% and fourth-quarter revenue likely to rise north of 30%), the stock plunged on high volume to a low of 102. Since then, it’s rebounded, but now both the stock’s 25-day and 50-day moving averages are heading down. If you’ve only bought recently and you’re under water, it’s probably best to sell and move on; this stock may be broken for a while. If you’re in a comfortable long-term profit position and you’re patient, hold. HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, was hit by selling in technology stocks yesterday, pulling back to nearly touch its uptrending 50-day moving average. But volume wasn’t particularly high, and long and short-term trends remain up. If you’ve been waiting for a buying opportunity, this is it. BUY.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, was also hit by technology selling, but the stock found support just above 170 (where it has support going back to July), so the long uptrend remains intact. It’s not strong enough to buy, but I continue to rate it a strong Hold. HOLD.
HubSpot (HUBS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a small tech stock that was hit hard by the recent selling—and it’s not the company’s fault; it’s just the market. If we had a bigger profit cushion, I might try to ride the storm out, but I think the stock could easily drop to 71, and I don’t want to be holding it if it does. In short, it’s time to cut the loss short. SELL.
Nucor (NUE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, is still in a buying range. Crista’s short-term target is the top of that range—65—which would be a gain of about 12% from here. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, finally sold off last week and bottomed at its 50-day moving average at 71 yesterday. In Mike’s latest update, he wrote, “Long-term, the stock probably has further to run, but after such a long advance, I think it’s prudent to take partial profits and let the rest ride.” Mike, who is very precise about giving advice and tracking his results, advised his readers to sell one-third of their holdings and hold the rest. I’ll simply downgrade the stock to Hold. HOLD.
Pembina Pipeline (PBA), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, remains the highest-yielding stock in the portfolio, and is thus particularly attractive for investors seeking current income. In her latest update, Chloe wrote, “Canadian pipeline stock PBA is holding up better than its natural gas companion in our portfolio, OKE. PBA pulled back to its 50-day moving average earlier this month, but remains well within the middle of its trading range. Longer-term, PBA is trending up gradually above its 40-week moving average. High yield investors looking to add monthly income to their portfolio can buy a little here.” BUY.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains one of the strongest stocks in the portfolio; it hit a new high last Thursday, and selling pressure has been minor since then. If you don’t own it yet, wait for a little more of a pullback—or a consolidation. BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, is one of the old world stocks doing well while technology stumbles; the stock broke out above resistance at 38 yesterday and is thus free to float higher. In Crista’s update today, she wrote, “PWR finally rose above long-term price resistance today. I therefore expect immediate capital gains, and for the stock to perform well in 2018. Buy PWR now, and buy more on pullbacks.” BUY.
Signet Jewelers (SIG), originally recommended by Azmath Rahiman of Cabot Benjamin Graham Value Investor, looks like a boxer who’s been knocked to the canvas and can’t get up; the stock fell right back down to 50 yesterday, and while it’s up a bit today, buying power is minimal. This may still be a successful three-to-five-year investment—and in fact it may be a great buy here—but I can’t wait. I recommend selling and putting the funds in stronger opportunities. SELL.
Sociedad Quimica y Minera de Chile (SQM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is a diversified South American miner with a major presence in the lithium market, which is expected to thrive as electric cars grow in popularity. The stock peaked at 63 in mid-September and bottomed a week later at 52.5, and in the 10 weeks since then, those two levels have constrained the stock. But now, sitting right at the bottom of that range, the stock is at risk of falling out of bed. Paul Goodwin recommended that his readers sell and take profits, but I’m inclined to stick with it a little longer to see if support holds here and buyers materialize soon. HOLD.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, has a chart that is similar in a way to SQM’s, in that it’s sitting at long-term support. As previously mentioned, TSLA is a Heritage Stock for Cabot Stock of the Week; we’re in it for the long haul, holding tightly. But if you’ve got new money to put to work, there are better places to put it. HOLD.
VMware (VMW), originally recommended by Cabot Benjamin Graham Value Investor, was officially “fully valued” when it hit 118.75, but I held it longer, letting it ride higher (up to 127.57 last week) while also noting that you could sell at anytime. But today, my recommendation is a flat Sell. Selling pressure came on big-time last week, and short-term, the trend is now broken. SELL.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, hit new highs yesterday and today! You can still buy here. BUY.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, looks fine. In fact, it’s the second stock in the portfolio that hit a new high today! In Chloe’s latest update, she wrote, “The stock is in a strong uptrend and earnings estimates are excellent. Wynn hasn’t increased its dividend since VIPs started to return to Macau, so investors likely still have a big hike or two to look forward to. Dividend growth investors can buy here.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED DECEMBER 12, 2017
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