I’m really trying to avoid buying high—so today’s selection is an undervalued stock that recently had a great correction and is now working its way back up.
Cabot Stock of the Week 187
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The market’s rebound reveals a growing divergence. On one hand, the major indexes continue to struggle; our intermediate-term market timing indicator is now clearly negative. On the other hand, the market’s long-term trend remains up, and growth stocks in particular have been strong! The latter is great for growth stocks we hold—some have been hitting new highs in recent days—but it doesn’t make for attractive buying opportunities.
Thus, this week I’ve turned to a low-risk high-yield stock that has recently pulled back to its 50-day moving average. The stock was originally recommended by Chloe Lutts Jensen and these are Chloe’s latest thoughts.
AllianceBernstein (AB)
AllianceBernstein is a New York-based investment manager. Very roughly, about 60% of AB’s clients are institutions (like pension funds) and 40% are retail investors. About 57% of clients are based in the U.S. (or at least their assets are). The company’s strength is active management.
AllianceBernstein, or AB, was formed in 2000 when Alliance Capital, known for its growth-oriented mutual funds, acquired Sanford C. Bernstein, a money management firm known for its value-oriented research.
The combined AB invests across all markets and strategies, including equity, fixed income and alternative assets. In addition to managing client money, AB offers mutual funds, and provides research, brokerage and trading services to institutional clients. About 65% of AB is owned by the French insurance giant AXA.
While many investors are shifting to passive investing strategies—like index funds—AllianceBernstein is benefiting from a mini-renaissance in active strategies. In 2017, net flows into AB’s active strategies totaled $19 billion, with actively managed fixed income funds getting the lion’s share. AB’s passively managed assets declined by $6 billion.
Part of the reason is outperformance: 90% of AB’s assets under management outperformed their benchmark over the past five years, a track record that’s like catnip to investors large and small. AB’s fixed income strategies did particularly well, accounting for the especially strong flows into the firm’s fixed income strategies in 2017. But AB’s equity investments also did well this year, particularly in the fourth quarter, when their five-year outperformance rate rose to 91%. That helped AB beat estimates by a large margin in its latest quarter, and thus attract even more investors.
Investors may also be turning to AB because they think active managers can help mitigate some of the risks facing fixed income investors today. For example, AB offers a mutual fund called the Bond Inflation Strategy Fund, which seeks to return more than inflation by using TIPS and derivatives. Another fund, the AB Limited Duration High Income Portfolio, claims it “manages interest rate risk by keeping an average duration of less than four years.”
Active management, of course, costs more than passive management, and the high demand for AB services allowed the company to raise its average fee rate by 2.7% last year.
As to the dividend, this is where things get a little quirky. AllianceBernstein has paid distributions every quarter since 1988, but the amount is variable, based on available cash flow. In addition, because AB is organized as a partnership, the distributions are considered return of capital, and the company issues a K-1 form instead of a 1099. That can be a turnoff for some investors, but if you’re willing to deal with a little extra paperwork, the company provides investors with ample tax guidance through its website. Do keep in mind though, that if you invest through a tax-advantaged fund like an IRA, you may incur additional taxes on your AB distributions. Click here to see Everything You Should Know about MLPs Before You Invest, also available on your subscriber website, for more details on the tax consequences of owning partnerships.
So with all those caveats surrounding the distribution, what makes AB worth owning?
First, there’s the 8.5% yield (based on AB’s total distribution of $2.30 over the past 12 months.)
Then there’s the various catalysts for the stock to outperform over the next few years. As noted above, AB’s asset managers are delivering superior returns, attracting more investor dollars. The latest earnings beat prompted a handful of analyst upgrades, and analysts now expect AB to deliver 12% EPS growth this year and 4% growth in 2019. Over the next five years, EPS growth is expected to average 12%.
Lastly, there’s the chart. Way back in 2007, AB hit an all-time high north of 90. But the stock fell over 80% during the financial crisis, and has been working its way back ever since.
The stock recently broke out above 25, which was its peak in 2015, and got as high as 27.40 before pulling back to its 50-day moving average, and I think this is a decent entry point.
AllianceBernstein Holding (AB)
1345 Avenue of the Americas
New York, NY 10105
United States
212-969-1000
http://www.abglobal.com
CURRENT RECOMMENDATIONS
Everyone loves to talk about stocks, but very few investors spend much time thinking about market timing; typically, they rely on gut feelings—often with disastrous results. But market timing is worth a lot of thought, because it can add so much value to your portfolio on the upside—and protect you from so much pain on the downside. Which brings us to today. After three-plus weeks of market rebound, a lot of stocks are back close to their old highs, ripe for breakouts, but also ripe to roll over and head for lower lows. So which way are they going to go? I believe strongly that the odds favor the upside because 1) the long-term trend of the Cabot Trend Lines (seen regularly in Cabot Growth Investor) remains up, 2) the Blast-Off Indicators identified by Mike Cintolo in Cabot Growth Investor months ago remain in effect, and 3) it would be highly unlikely for the broad market to roll over so soon after the late-December top—tops typically take more time. Thus, my bias is to hang onto stocks and expect higher prices.
The exception is Vipshop (VIPS), which I now recommend selling. This sale leaves the portfolio holding 18 stocks out of a possible maximum of 20. Details below.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, has been an average performer lately, and that’s not bad. In her latest update, Crista wrote, “I will consider GOOGL to be fairly valued when it retraces its January high near 1,190, at which point I will sell so as to make room for a more undervalued stock to join the portfolio. For those of you who want to own GOOGL long term, it’s a high quality aggressive growth stock, and will probably deliver attractive capital gains for years to come.” HOLD.
Baker Hughes, a GE Company (BHGE), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio and featured here last week, was bought at what will probably look like a great entry point in the future—but it’s not too late to get on board. In her latest update, Crista wrote, “Baker Hughes offers products, services and digital solutions to the international oil and gas community. The number of U.S. rigs drilling for crude oil and natural gas rose by three last week to a total of 981 vs. 756 active rigs a year ago. The rig count peaked in 1981 at 4,530. Analysts expect EPS to grow 90.7% in 2018, with continued aggressive growth in subsequent years, and the P/E is 33.5. There’s 34% upside as BHGE retraces its January high of 37. When the stock is ready to move, it moves rapidly.” BUY.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, looks great, sitting right back up at resistance at 55 that constrained the stock since mid-January. Last week, I gave details about the special dividend just paid, and in her latest update, Chloe added, “Management hopes to make the 4.5-cent boost a permanent addition to the quarterly dividend starting next quarter, but will have to secure approval from regulators when they submit their capital plans in the second quarter. If the $0.375 level is made permanent, the 13.6% boost will be a generous increase compared to BBT’s average annual dividend increase of 8%.” Additionally, Crista Huff wrote, “Analysts expect EPS to grow 40.9% in 2018, and the P/E is 13.8. Financial stocks are showing price strength vs. the broader market. BBT appears capable of surpassing 56 this month and rising to new all-time highs.” BUY.
BioTelemetry (BEAT), originally recommended by Tyler Laundon of Cabot Small-Cap Confidential, continues to trade calmly, surrounded by its moving averages. And the company’s fundamental prospects remain bright. However, Tyler recently downgraded the stock to Hold, writing, “We’re up 10% (on par with the small-cap index) and I believe the stock has a lot more upside. But I don’t like how it failed to break above the 35 to 36 range for a third time in five months (first in October, then again in January). Let’s be a little cautious here and move to Hold.” I’ll follow suit. HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, continues to soar to new highs. If you’ve got it, hang on tight, but if you’re looking to get on board, wait for a normal pullback. In her latest update, Chloe noted that analysts expect EPS to rise almost 30% this year.” 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 wrote, “HTHT has executed a complete V-shaped correction and rebound, and is now trading right on top of its 50-day line. It’s likely that the stock will continue to trade sideways as investors await the company’s quarterly results on March 13 after the close. Analysts are predicting a hair over $344 million in revenue and 73 cents per share in earnings. The company recently announced a joint venture with TPG Capital Asia to acquire a couple of Beijing hotels, which is further evidence of management’s aggressiveness.” HOLD.
Cronos Group (CRON), originally recommended by me in Cabot’s 10 Best Marijuana Stocks, has been the strongest marijuana stock over the past week for one simple reason: its upgrade to the Nasdaq has attracted a flood of money that would never risk going to smaller exchanges. As a result, we have an unexpected (paper) profit of more than 30% from our buy just three weeks ago. Traders could take profits here, but I’m targeting the long term. In fact, you’ll remember that my strategy for reducing risk in this volatile sector was to make the initial investment a half-position, with the intention of buying the other half when the chart provided an opportunity. I’m still looking for that opportunity, and the good news is that when it comes, we’ll be averaging up, and that’s smart growth stock investing. HOLD.
Discovery Communications (DISCA), originally recommended by Azmath Rahiman of Cabot Benjamin Graham Value Investor, is now too high to buy, but it’s a solid Hold—heading back at least to its January high of 26. HOLD.
Facebook (FB), originally recommended by Mike Cintolo in Cabot Growth Investor, is still trending up, but it’s no longer a leader. In his latest update, Mike wrote, “We are tossing around the idea that Facebook may have matured to the point of being more like, say, a Google—i.e., a fine company, but a stock that usually doesn’t dramatically underperform or outperform the market. After all, when we originally bought the stock back in 2013, Facebook had around $6.5 billion in revenue (vs. $40.6 billion today) and earnings of around 40 cents per share ($6.16 today). Of course, the company now has more legs of growth than back then (Instagram, Messenger, etc.), so it’s possible the firm’s rapid earnings growth could continue. That said, it’s best not to overanalyze the situation; our goal is to be a bit “dumb” by watching support in the high 160s, holding above that level but saying goodbye if it doesn’t. Right now, you should sit tight.” HOLD.
Insulet (PODD), originally recommended by Mike Cintolo in Cabot Growth Investor, is the world leader in tubeless insulin delivery technology and its stock looks fine. Trading mainly between 72 and 77 since early January—and gapping up this morning—the stock looks increasingly ripe for a breakout to new highs. BUY.
Knight-Swift Transportation Holdings (KNX), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, also has a chart looking ripe for a breakout. In her latest update, Crista wrote, “Knight-Swift is a truckload carrier formed from the September 2017 merger between Knight Transportation and Swift Transportation Company. The market expects 2018 EPS to grow 65.9%, and the P/E is 21.1. Last week, Baird raised its price target on KNX to 60. The KNX price chart is signaling a near-term breakout. Buy KNX now.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, is in limbo here, neither strong nor weak. In his latest update, Mike wrote, “PYPL remains in a consolidation phase—it’s bounced about more than halfway back from its early-February plunge (which was both market- and earnings-induced) but is also sitting above its November high. We still think PayPal has the makings of a MasterCard or Visa for the digital, e-commerce age, and the stock will eventually resume its longer-term uptrend. Thus, we remain patient, though we’re using a mental stop in the high 60s in case something goes wrong.” HOLD.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has hit new highs in each of the past three weeks and looks like it’s going even higher. In his latest update, Mike wrote, “It’s not quite as fast-growing as we’d prefer (15% to 20% expectations), but Planet’s cookie-cutter (and Amazon-proof) story has years of solid growth ahead of it. And the stock just reacted well to earnings, too. BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, certainly pleased investors with its fourth-quarter earnings report last week. Revenues of $77 million were up 106% from the year before, beating analysts’ estimates by $1 million, while the loss per share was $0.40, up from a loss of $0.31 the year before. The stock has climbed strongly since and is currently at new highs. Try to buy on normal pullbacks. BUY.
Tesla (TSLA), originally recommended in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio—now on a long-term Hold. Over the past week, it’s pulled back normally, but the long-term trend looks fine—and the long-term fundamental prospects remain excellent. HOLD.
Vipshop Holdings (VIPS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, was bought too high, and that’s not the only negative I see here. I also see the stock falling through its 25-day moving average today and that moving average rolling over. These are all fairly short-term developments, but we don’t have the luxury of a fat long-term profit, so I’m going to cut the loss short by selling here. SELL.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has been an average performer in recent weeks and now sits at its uptrending 50-day moving average. In her latest update, Crista wrote, “WestRock is a major player in the global packaging and container industry. Analysts are expecting EPS to grow 50.8% in 2018, and the P/E is 16.6. I expect WRK to trade between 65 and 70 in the coming weeks, with additional gains in the first half of 2018.” If you don’t own it, you can buy here, but officially I’m on Hold. HOLD.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has not traded below its 50-day moving average since early December. That’s strong! And in the wake of the excellent fourth-quarter earnings report of two weeks ago, the stock has mainly traded sideways, gathering energy for a push to new-high ground. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED MARCH 13, 2018
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