Today’s stock is from one of the hottest sectors of the market, China, and it’s got a big growth story—as well as the beginnings of a move to expand outside of China. As for our current stocks, in general all is well, not least because of the market’s recent rebound. In fact, we’ve got several stocks hitting new highs!
Cabot Stock of the Week 185
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It’s no secret that the great bull market of 2017-2018 must eventually end. The recent sharp correction, in my opinion, is the first phase of the end. But tops take time, which means there are still plenty of profit-making opportunities for investors who know what to look for. For growth investors, the most important factor is strength, which is demonstrated by a stock hitting new highs. And if it’s backed up by accelerating revenue growth as this week’s recommendation is, all the better.
This week’s stock was originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, and here are Paul’s latest thoughts.
Vipshop Holdings (VIPS)
The Chinese retail industry is an enormous playground, with a few giants and many smaller aspirants. Alibaba (market cap $470 billion) is the biggest name, a company that distinguishes itself by offering a marketplace where others can buy and sell, but not owning any merchandise itself. JD.com. (market cap $66 billion) is a more traditional online retailer, with a string of warehouses and an extensive delivery infrastructure that covers virtually all of China.
Many investors think that these two giants are the only choices in Chinese retail. But today, we’re looking at Vipshop Holdings (VIPS, market cap $11.9 billion), a company that’s finding a way to prosper in the shadow of the giants.
Vipshop’s big thing is big discounts and limited quantities, in other words, flash sales. The company focuses on name-brand apparel, shoes and handbags, but will sell almost anything that it can offer at a great price.
The company has cultivated relationships with over 20,000 brands, including many top names. And manufacturers see Vipshop as a way to introduce new lines, promote styles and liquidate inventory. After adding Diesel, Marc Jacobs, Sergio Rossi, Shanghai Tang and Peuterey to its list of brand partners in the third quarter, Vipshop scored alliances with Vera Wang and Jil Sander Navy in Q4.
One quirky highlight is that Vipshop recently announced that it has become a sponsor (and the exclusive Chinese e-commerce partner) for London Fashion Week. The company plans to use this sponsorship to introduce British brands and fashions to Chinese consumers.
In its latest quarterly report, the company increased its number of active customers by 22%, up from 49.6
million at the end of Q3 2016 to 60.5 million in 2017. The company’s customer base skews young, and customer loyalty is high, with 96% of orders coming from repeat customers and a 22% year-over-year increase in average revenue per customer.
The company is still primarily a Chinese retailer, but that has been changing, with Vipshop increasing its warehouse space in Australia, France, the U.S., the U.K. and Italy. 99% of Vipshop’s merchandise was delivered through its proprietary last mile network, up from 90% a year earlier. Returns collected directly by Vipshop last mile staff increased from 50% a year earlier to 72% in Q3.
The company made headlines in December when it cut deals with JD.com and Tencent Holdings, both of which are looking for ways to gain traction in the battle against Alibaba. The combined $863 million in outside investment will leave 7% of Vipshop stock owned by Tencent, with JD.com increasing its prior 2.5% equity position to 5.5%.
We got a good read on the development of Vipshop’s business when the company delivered its Q4 and full-year report on February 12. Analysts were looking for $3.7 billion in revenue and twenty cents per share in earnings. What the company delivered was revenue that hit expectations exactly and beat on earnings by two cents per share.
VIPS made a huge run from the middle of 2012 to April 2015, and then started a long decline, falling to 10 in early 2016 and trading sideways through May 2017, when it started another correction. The stock rebounded with unusual sharpness in December, gapping up from 8.4 to 12.6 on immense volume, and the rally that followed ran to nearly 18 by late January. The general weakness in Chinese stocks that began on January 29 brought a much-needed correction, taking the stock down to its 25-day moving average just under 15, but after the quarterly earnings report brought buyers back, who took the stock up to a high of 19 just last week.
Tim’s note: This stock is strong, but lower-priced and therefore volatile. You could buy on the current small pullback, or wait for a deeper correction down to 17. I’ll keep it simple and buy at tomorrow’s average price.
Vipshop Holdings (VIPS 18)
No. 20 Huahai Street
Liwan District
Guangzhou 510370 China
http://www.vipshop.com
CURRENT RECOMMENDATIONS
Market corrections offer a great opportunity to check on the health of your stocks, and to make changes as a result of what you see. For growth investors, the best stocks are those that break out to new highs soon after the correction ends; the worst are those that barely bounce. For value investors, conversely, you want to see the stocks you hold resist the correction, but when it comes to new buying, you want to target stocks that have become cheap! We’ll see how the portfolio’s stocks measure up below. The addition of Vipshop brings the portfolio to 18 stocks, still two shy of our maximum of 20.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, dropped all the way to its 200-day moving average at the bottom of the correction, just like the major market averages, and it’s now rebounded to its 50-day moving average. Technically, it’s now an average performer. In her latest update, Crista noted, “Wall Street expects EPS to grow between 17% and 29% per year over the next three years. Those numbers came down a bit in recent weeks, but it’s too soon to tell whether they’ll stabilize or keep falling. The stock is slightly undervalued.” BUY.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, looks fabulous! After dipping briefly to 51, just below its 50-day moving average, the stock bounced right to its old high of 55, where it is now setting up for a breakout to new highs. In her latest update, Chloe wrote, “Rising interest rates are a tailwind, as is the tax bill, and analysts expect EPS to grow a whopping 40% this year.” BUY.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, fell from 36 to 30, touching its 50-day moving average in the process, and has now recovered two-half of the loss. Earnings are expected Thursday February 22, and Tyler is looking forward to learning more about the financial aspects of the company’s deals with Apple and Onduo, as well as an update on the integration of LifeWatch. BUY.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, is hitting new highs, thanks to strong buying in the wake of an excellent earnings report. The company is a major beneficiary of the bull market as financial firms flush with cash are eager to upgrade their technological capabilities. BUY.
China Lodging Group (HTHT), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is one of our Heritage Stocks, meaning that the company’s long-term growth prospects are so good—and our profit cushion so ample—that I can afford to sit through market gyrations in pursuit of major long-term profits. In his latest update, Paul noted that quarterly earnings should be out soon, but there is no set date. In the meantime, the stock (like most Chinese growth stocks) is definitely acting stronger than the average U.S. stock. HOLD.
Cronos Group (PRMCF), originally recommended by me in Cabot’s 10 Best Marijuana Stocks and featured here last week, continues to trade tightly between 7 and 8, building what might be a base used to launch a resumption of the stock’s uptrend. But it’s too early to say—and the same is true for most of the stocks in the industry. After such a huge run up, the corrective phase typically takes longer than expected, and there are often multiple bounces off the eventual bottom. For PRMCF, that bottom might be 5, but only time will tell. We bought only a half position in the stock last week, with the idea of buying the other half when I have more confidence that the corrective phase is over. If you haven’t bought yet, you can buy here, or wait for a lower price. For clarity, I’ll rate the stock Hold until I believe the correction is over. HOLD.
Discovery Communications (DISCA), originally recommended by Azmath Rahiman of Cabot Benjamin Graham Value Investor, has been an average performer in the correction, and is now heading back toward its old high of 26. Earnings are due out February 27, and if Azmath’s analysis is correct, they should attract more value-conscious buyers. HOLD.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, has not bounced as well as the broad market, and there are numerous theories why. In his latest update, Mike wrote, “We’ve owned FB for nearly five years (one of our longest holds ever!), but we’re not complacent—we sold one-third of our position late last week, partly because of the market, but also partly because FB has continued to act sluggishly (the RP line’s peak dates back to late July). Rumor-wise, there have been rumblings that the company is losing out on younger users to Snap, and it’s uncertain how the News Feed changes will affect business—analysts see earnings up just 18% this year, which would be a big slowdown compared to 77% in 2017. That said, there’s clearly big potential here from Instagram, Messenger, WhatsApp and Oculus, and the stock remains just 10% off its peak. We’re holding our remaining shares, and looking for either a push back into the mid-180s (a strong sign that the uptrend is resuming) or a drop into the low 160s (which could have us pulling up stakes and moving on).” HOLD.
Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, is one of the strong ones; it’s sitting right at its high as I write! But the big test comes tomorrow, February 21, after the market close, when earnings are reported. I don’t recommend that you buy between now and then (because earnings report can trigger nasty reactions), but assuming the stock reacts well to the report, you can buy after. BUY.
Knight-Swift Transportation Holdings (KNX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, also has a good-looking chart; it has yet to close a day below its 25-day moving average. In her latest update, Crista wrote, “Knight-Swift is a new truckload carrier formed from the September 2017 merger of Knight Transportation and Swift Transportation Company. Earnings estimates are rising weekly. The market now expects 2018 and 2019 EPS to grow 63.8% and 20.4%. The stock remains significantly undervalued. The KNX price chart is signaling a near-term breakout. Buy KNX now.” BUY.
Melco Resorts (MLCO), originally recommended by Paul Goodwin of Cabot Emerging Markets Report, hit a low of 25 after releasing a mediocre earnings report two weeks ago, but the stock has rebounded to its 50-day moving average, so it might charitably be called an average performer. On the other hand, the volume on the rebound was weak, and a longer-term perspective notes that the stock has more than doubled since the start of 2017 and is thus ripe for a major correction or pause. If I were looking to sell something, this stock would be a candidate, but I don’t feel over-invested, so I’ll hold for now. HOLD.
(Note: speaking of stocks that fail to bounce, take a look at Wynn Resorts (WYNN), which we sold just before Steve Wynn stepped down as CEO.)
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, is in somewhat the same boat as MLCO. The stock more than doubled over the past year, but after the initial selloff, has only bounced to its 50-day moving average. In Mike’s latest update, he wrote, “We trimmed back on PYPL last week given the market environment and the stock’s negative reaction to eBay’s move to cut off PayPal as a payment provider. As we wrote at the time, we think the news, while not trivial, isn’t the end of the world—eBay represents 14% of PayPal’s total payment volume today, but that’s expected to decline to less than 5% by 2020, when the deal expires. (Plus, PayPal will still be a payment option on eBay through 2022, so many users will surely continue to opt for it.) Even so, the stock is back to where it initially was back in November, so we decided to take some profits and use a loose leash (in the mid-60s, near the 200-day line) for the rest.” My leash isn’t as long as Mike’s—party because my buy price is a bit higher—but I do see pretty good support at 74, so will hold for now. HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has become one of the strong ones; it’s vaulted back above its 25-day moving average and 50-day moving average and is now trading less than two points from its old high at 35—and that deserves a Buy rating. BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, is scheduled to report earnings on Tuesday February 27, after the market closes but some investors seem to know what’s coming; the stock broke out to a new high today! In Mike’s latest update, he wrote, “Teladoc is bringing healthcare online with a service that lets subscribers talk or video chat online with a board-certified physician and get prescriptions. The typical user is an employee of a big firm, one that values the time saved from visits to doctors’ offices. While the company has yet to turn a profit, revenue growth has been strong (59% in 2016 and 60%, 68% and 112% from Q1 to Q3 2017). Investors are interested because of Teladoc’s acquisition of Best Doctors in June 2017. The $440 million takeover brings with it a huge team of more than 50,000 top-rated medical experts, which should enhance Teladoc’s sales pitch.” Also, I received a very optimistic letter this week from a knowledgeable reader who loves the company’s prospects. I’m upgrading to Buy today. BUY.
Tesla (TSLA), originally recommended in Cabot Top Ten Trader, has rallied well since the market bottom and is now smack in the middle of its 25-, 50- and 200-day moving averages. Medium-term, the stock remains in a trading range between 300 and 390, but long-term, I remain very bullish on the stock. TSLA is the second Heritage Stock in the portfolio. HOLD.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has performed pretty much like the market averages in the selloff and subsequent recovery. In her latest update, Crista wrote, “WestRock is a major player in the global packaging and container industry. Earnings estimates for 2018 (September year-end) have been rising for nine weeks. Analysts are expecting EPS to grow 50.8% in 2018, and the P/E is 16.8. The stock is roaring back toward its January high [of 71]. HOLD.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been the strongest stock in the portfolio in recent days; it closed at a new high yesterday! Earnings are due out February 22 and will without doubt be good. In Mike’s latest issue of Cabot Growth Investor, he wrote, “Analysts are expecting $27.6 million in revenue and 16 cents per share in earnings … This might be one of the strongest retail plays around, but the reaction to that February 22 earnings report will be crucial in the near term. And even if the stock pulls back, WING has proven super resilient.” BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED FEBRUARY 27, 2018
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