The market weakness that I mentioned last week has vanished, and with it my cautious stance. Thus, this week’s stock is what we call a zinger—a stock that has been hot, and will likely remain hot for a substantially longer period of time as investors learn about its great growth story.
Cabot Stock of the Week 176
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The market’s main trend remains up, and the good news is that the divergences I mentioned last week have eased; every major index is well above its moving averages today. In fact, with every passing day, the odds grow that this market will keep driving higher right through the end of the year. Thus, I continue to recommend that you be heavily invested in stocks that help you meet your investment goals.
Last week’s recommendation was a low-risk dividend-payer (which is off to a good start), and this week, we shift to the other end of the spectrum with a fast-growing Chinese company that most investors have never heard of. The company is not yet profitable, but it’s growing rapidly, and promises real earnings once management slows its expansionary efforts. The stock was originally recommended by Paul Goodwin in Cabot Emerging Markets Investor. Here are Paul’s latest comments.
GDS Holdings (GDS)
Most individual investors who choose to diversify into Chinese stocks gravitate first to national tech giants like Alibaba (BABA), Baidu (BIDU) and Tencent Holdings (TCEHY). These companies are highly visible, they dominate their industries and they’re growing fast. But finding quality investments outside of those headline makers is more difficult.
That’s partly because of the tendency of investors to stick with the crowd—even though diverging from the crowd can lead you to higher potential investments. But it’s also because the internet is the backbone of the greatest growth companies in China, and if your focus is great growth, you’re going to have a hard time finding it in companies that are not leveraging the internet.
So, even though today’s recommendation is technically a company that most investors have never heard of, the fact is that its core business is internet communications—and that means that there’s a strong connection to the power of Alibaba and Tencent.
GDS Holdings is a Chinese company in the data center business; its carrier-neutral, cloud-neutral facilities allow connections to all major Chinese telecommunications carriers and to many financial services companies and large enterprises. Founded in 2001 as a business continuity and disaster recovery vendor, the company relied initially on third-party data centers.
But in 2009, the company started building big data centers of its own in key locations and courting users who needed substantial capacity and power. In 2011, GDS established new data centers in Kunshan, Chengdu and Shanghai, followed by its first Shenzhen data center in 2014 and two new centers in Beijing and Shanghai in 2015. And in 2016, GDS powered up four new data centers and came public on the Nasdaq exchange on November 2.
But all this growth has not translated into earnings—not yet. The company enjoyed revenue growth of 47% in 2015, 42% in 2016 and 56%, 40% and 43% in the first three quarters of 2017, respectively. But the price of building data centers is enormous, and while adjusted EBITDA was up over 70% in Q3, nobody expects GDS to turn profitable anytime soon.
The story here is growth, and a client list that includes major players like Alibaba and Tencent Holdings (who accounted for 45% of total revenue in 2016). The company also expects to start hosting Baidu’s cloud platform (and its traditional search business) in the fourth quarter. Including the 6,000 square meters gained in Q3, GDS Holdings added over 21,000 square meters of new customer commitments so far in 2017 and the company expects to end the year with $120 million of new bookings. After adding nine new customers in Q3, GDS has 496 customers and six new data centers under construction.
Furthermore, just a few weeks ago, the company announced that it had acquired a second data center in Guangzhou that is fully committed and already in use by a big internet customer. And since customer churn in the third quarter was just 0.1%, the future visibility of that revenue stream seems secure.
As if all that growth weren’t enough, GDS Holdings has so far concentrated exclusively on Tier 1 Chinese cities, leaving the entire Tier 2 and Tier 3 landscape open for expansion. And just for an extra, the company gets 10% of its revenue from customers outside China, and with its highly connected data interchange structure, GDS will be an attractive partner for more non-Chinese firms. Bottom line: even though many investors won’t touch it until they see actual earnings, GDS has a great fundamental growth story.
As to the stock, GDS came public at 10 a little over a year ago and went through a routine post-IPO correction to just below 7 in June 2017. The stock rallied to just below 10 in July, took a little break through the end of August, then blasted off on heavy volume (but no apparent news) on September 11. The stock climbed steadily through October and November, with frequent volume spikes on advancing days, and closed for the first time above 20 on November 20. Since then, the stock has been consolidating its big advance, with the dip last week taking the stock nearly down to its 50-day moving average (now approaching 17). I don’t expect any major selling pressures from here, and I recommend that you buy now.
Tim’s comment: With the stock now trading in a consolidation range between 17 and 21, you should aim to buy in the lower half of the range. However, keeping it simple as usual, Cabot Stock of the Week will record a buy at tomorrow’s average price. BUY.
GDS Holdings (GDS 19)
Youyou Century Place 2nd Floor, Tower 2
Shanghai 200127 China
www.gds-services.com
CURRENT RECOMMENDATIONS
The market weakness I mentioned last week didn’t last long, so I’m leaning back to a more aggressive stance once again—because you’ve got to make hay while the sun shines! In general, the action in the portfolio’s stocks has been constructive this week, but there is one exception, and that is SQM, which I now recommend selling. Details below.
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. Since hitting a record high last Monday—and topping 51—the stock has pulled back normally. In her latest update, Chloe wrote, “Long-term, BBT is in a choppy uptrend, and I expect another rally will follow this latest breakout sooner or later. The company has a 30-year dividend history and a portfolio of high-quality loans. 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 over a month ago after it had pulled back to its 50-day moving average at 240 and today it continues to build a base just below that level. In Paul’s latest update, he wrote, “BIDU has now had more than six weeks to recover from its October 27 post-earnings gap down from 261 to 239. The stock has been acting like it wants to shake us out, pushing below 230 three times over that time. The stock’s [recent] bounce looks hopeful, but volume isn’t particularly strong. There’s a slight possibility that BIDU has formed a very long cup formation that dates back to November 2014, but that’s a long shot. We will hold our position in BIDU until the stock tells us what to do.” HOLD.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small Cap Confidential, continues to rebound from its big low a month ago—but still has a long way to go to return to its old high of 39. In his latest update, Tyler wrote, “BioTelemetry enjoyed a big boost when it announced collaborations with both Onduo, to supply remote blood glucose systems and resulting data for Onduo’s diabetes management program, and Apple, to provide cardiac monitoring services for the Apple Heart Study, which just launched. It’s too early to know, but on the surface, these appear to be material events that can contribute significantly to revenue over the long-term. There are hoops to jump through (like approval of Apple Watch for irregular hearth rhythms), but given that BioTelemetry already has an extremely viable business, has just completed a major acquisition which greatly expands its international exposure, has a patch form factor heart monitor hitting the market, and was significantly oversold prior to the announcements of these two deals, I think the stock will head significantly higher. To put things in context, a 35% gain only gets us back to the September 2017 high.” BUY.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, continues its textbook consolidation pattern between 89 and 90. In her latest update, Chloe wrote, “BR remains more volatile than usual as it consolidates its early-November earnings gap up. The company 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 their current fiscal year, which ends in June 2018. Dividend growth investors can buy a little here, or try to wait for the stock’s 50-day moving average [currently nearing 87] to catch up.” 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. We received such a signal two weeks ago, when the stock fell as low as 102 (and Paul Goodwin told his readers to take profits in half their positions), but since then, the stock has rallied to its 50-day moving average (which is now trending gently down). If you don’t have a big profit cushion, as well as plenty of patience, you might take this opportunity to sell and move on, but if you’re like me, and you believe in the company’s potential to grow significantly larger as the Chinese lodging industry consolidates, you’ll hold. HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, fell through its uptrending 50-day moving average yesterday and continued lower today, on normal volume, reaching below 50 before rebounding. This area acted as resistance back in October, so it should act as support now, though I can easily see the stock venturing down below 48 to shake out more investors. Mike told his readers to take partial profits, but we don’t really have much profit to speak of yet, so I’ll simply downgrade to the stock to Hold and wait. In Mike’s latest update, he wrote, “Fundamentally, Exact still has tremendous potential as Cologuard use ramps up, which seems likely as worries surrounding insurance coverage and reordering have been answered.” HOLD.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, isn’t beating the market, but the stock is still in a long slow uptrend, and the fundamental story remains huge. In Mike’s latest update, he wrote, “I’m intrigued by Facebook’s move into content—its new Watch platform, which looks like it will compete with YouTube, is sure to be a big investment (including original content) but the payoff could be huge as more and more content viewing moves online. The real key, in my view, is how conservative next year’s earnings estimates are (now at just +13%)—big upward revisions would probably kick the stock back in gear. For now, though, I’ll just stick with a Hold rating until we see buyers arrive en masse.” HOLD.
Nucor (NUE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, is a low-cost producer of a diversified portfolio of iron and steel products. Crista likes the stock both because it’s undervalued and because the company is expected to benefit from trade policies that are more favorable to U.S. companies. In her last update, she wrote, “Steel stocks are rising in response to U.S. Department of Commerce action against foreign trade abuses. Certain Vietnam steel products will now be subject to significant anti-dumping and countervailing duties, retroactive to the commencement of the investigation in November 2016. (The problem stemmed from Chinese steel products being finished in Vietnam in order to travel to the U.S. under existing rules between Vietnam and the U.S.) As a result, steel prices are expected to rise in the U.S. in 2018. The U.S. Department of Commerce continues to investigate additional instances of trade abuses within the steel industry.” For the past 12 months, the stock has been trading in a range between 52 and 65, and the longer this pattern persists, the greater the odds that the stock will break out to a new high. But in the short term, Crista’s target is the top of that range—where she may advise traders to take profits. Anyway, the stock has seen some strong up days recently, so it may reach 65 soon! I’ve had the stock rated Buy for a while, and I will leave it there—for now. BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, nearly doubled this year before starting its long-overdue correction in late November. The first wave down brought some heavy volume days, while the rebound since has seen lighter volume, suggesting to me that this process will take more time. In Mike’s latest update, he wrote, “PYPL was the second of two stocks we’ve taken partial profits in over the past week, selling one-third of our position. The main reason wasn’t just the recent down move, but also the stock’s uninterrupted uptrend since April and move out of trend on the upside, which typically precedes a rough stretch. However, as with some other liquid leaders we own, the goal now is to ride out near-term headaches, thinking PYPL will head higher down the road because the firm’s underlying business trends are strong and have a long way to run. If you have a loss, you should tread carefully, possibly using a stop near the recent lows (68-ish). But if you have some cushion like us, we advise keeping things loose with a stop in the 60 to 62 area, allowing the stock room to build a new base.” I concur. 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, “PBA is trending up nicely, making a series of higher highs and higher lows over the past six months. The Canadian pipeline stock is investing heavily in its network, and recently announced two more capital projects coming online in 2018 and 2020. 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; since hitting a new high two weeks ago, the stock has been consolidating tightly, still above its approaching 25-day moving average (now at 31). If you don’t own it yet, you could buy a little here. Note: Mike recently wrote in Cabot Growth Investor, “PLNT remains one of my favorite cookie-cutter stories and the stock continues to act very well.” BUY.
Quanta Services (PWR), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, is looking great. In Crista’s update today, she wrote, “PWR is a very undervalued aggressive growth stock. PWR rose above long-term price resistance last week. I expect immediate capital gains. Buy PWR now, and buy more on pullbacks.” BUY.
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—and lithium, of course, is a key component of the batteries used in electric cars. So the potential for growth is big here. On the other hand, since the stock peaked in late September, it has been weakening, with sellers consistently overpowering buyers. Also, we’ve lost more than half our profit, and that’s one of my important selling guidelines. Paul recently told his readers to sell, and I’m joining him today. SELL.
Tesla (TSLA), a recommendation of Cabot Top Ten Trader, has seen growing strength in recent days and is now up 16% from its lows of a month ago—a low which came amid news of the firm’s slow production of Model 3 sedans. (Remember, bad news often creates buying opportunities.) But production of the Model 3 is slowly increasing and there’s increasing good news about the firm’s recently revealed semi truck as well; Budweiser recently reserved 40 of the electric vehicles to use in its beer distribution fleet; Sysco reserved 50; and PepsiCo reserved 100. (Each reservation requires a deposit of $20,000, so that’s $3.8 million.) TSLA is the portfolio’s second Heritage Stock; we’re in it for the long haul. HOLD.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio and featured here last week, is supposed to be a relatively low-risk stock—a good dividend-payer with moderate upside potential. But in the week since I recommended it, the stock hit new highs on three different days, with the latest highs coming this morning! In her latest update, Crista wrote, “At WestRock’s Investor Day on December 8, management elaborated on their revenue and margin goals, saying “WestRock has the opportunity to expand its margins and deploy its capital to grow adjusted EBITDA from $2.3 billion in fiscal year 2017 to more than $4 billion in fiscal year 2022.” BUY.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, is a far riskier stock than WRK, but it has far greater growth potential—and it’s hit new highs in each of the past three days! This comes after a month of basing action, so you can still buy here if you can handle the volatility. BUY.
Wynn Resorts (WYNN), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, gapped up to another new high yesterday before pulling back a hair today. The short-term reason for yesterday’s pop was probably Cramer, but the long-term reason for the consistent strength is all about fundamental growth. In Chloe’s latest update, she wrote, “Data released by Macau last week showed strong growth in November gaming revenues, pushing the YTD growth rate in the territory to nearly 20%. Closer to home, Wynn is preparing to shut down the Wynn Golf Club to begin construction on its new lagoon and boardwalk. Dividend growth investors should try to buy WYNN on pullbacks.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED DECEMBER 19, 2017
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