Over the past few weeks, the market has given us a bunch of presents—and now the market is trying to take some of our presents away. But this should come as no surprise. The only “surprise” is what excuse the media finds to pin the blame on, whether it’s China or Russia or Italy or interest rates or Trump or simply an economy that’s too good to last.
I’ll leave the finger-pointing to someone else. Instead, I’ll keep picking high-potential stocks and managing the portfolio to maximize gain and minimize risk.
Cabot Stock of the Week 199
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The market main trends remain up and thus I remain bullish, always working to find you the stocks with the best potential for appreciation—commensurate with risk. So let’s talk about risk. If you’ve been reading these issues a while, you know that diversification is one of my recurring themes. Diversification can reduce risk, especially if you can invest not only across companies and across industries but also across countries.
So today I’m happy to recommend a stock that is based in neither the U.S. nor China but in Brazil, the workhorse of South America. The stock was originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, and here are Paul’s latest thoughts.
PagSeguro (PAGS)
Over the past couple of decades, U.S. shoppers have noticed that traditional cash registers are going the way of the dinosaurs in favor of credit card modems. And in just the past five years, give or take, more and more merchants have been using a little dongle on their cell phones or tablet computers to swipe cards as Square powered a revolution in point-of-sale (POS) payment options.
That payment revolution has now gone international, with Paypal fighting it out in Brazil with local vendors like MercadoPago (which is e-commerce giant MercadoLibre’s payment arm) in the online arena. Square is also aiming for a piece of the international payment pie, targeting the dedicated device market by virtually giving away its dongles and making its money primarily from transaction fees.
But an upstart Brazilian company, PagSeguro (which translates roughly to “secure pay”), has been quietly and quickly gaining an advantage on both its international and Brazilian competition, producing wildly rapid growth in the process.
PagSeguro is a creation of Brazilian media group Universo Online, which is in turn owned by Grupo Filha, a media conglomerate that owns the top newspaper in Brazil. Universo is also ranked as the biggest internet portal in Brazil, with 50 million unique visitors and almost seven billion page views per month.
PagSeguro was formed in 2006 to provide a financial services platform and grew quickly, taking over BrPay, an electronic payment company, soon after. The company had more than 12 million registered users by 2010 and grew further by acquiring a fraud prevention company and partnering with Nokia on a unique Near Field Communication technology that allows two cell phones to communicate securely when in proximity. And in 2013, PagSeguro launched its MINI credit- and debit-card reader, a hand-held device that uses Wi-Fi.
The target customer for the MINI system is a small company with no website or e-commerce presence. PagSeguro’s technology and alliances with banks give buyers and sellers a number of options for completing sales, and (importantly) the company guarantees the validity of sales and settles disputes.
PagSeguro’s revenue growth has been meteoric, with double-digit growth from Q2 2015 through Q3 2016 and triple-digit growth in the five subsequent quarters. Earnings growth has been at triple-digit rates since Q2 2016 with the most recent quarters showing 367% (Q3 2017) and 350% (in Q4) bottom line gains. (Fourth quarter results were reported on March 9.) After-tax profit margins have been growing quickly and have topped 20% in the two most-recent quarters. And the good times should continue to roll—analysts are estimating 2018 earnings growth at 89% and 44% in 2019.
The Big Idea here is that Brazil, while it’s not as big a market as China, is still early in its integration of online purchases and payments into its economy. PagSeguro offers smaller businesses a secure way to make sales and get payments. And it’s likely that as the company grows, it will begin to offer bookkeeping, data-mining and financing services in imitation of Square’s evolution.
The word “disruptive” gets tossed around a lot these days, applied to companies that have come up with marginal improvements to existing products or services. But PagSeguro’s business proposition is proving genuinely disruptive to existing Brazilian payment practices. And it will both promote and benefit from the further rollout of online commerce in that country.
As a stock, PAGS is still just a baby, having come public on January 24 in an IPO that pulled in $2.3 billion. The stock climbed to near 40 at the end of March, and then corrected to 31 in late April, building a bottom for a month until May 23, when it caught a strong updraft. The rally last week pushed PAGS above both its 25- and 50-day moving averages, but broad market weakness today brought it back down near its May low—which I think provides a decent entry point for the stock’s return to old highs. On the way, of course, there will be volatility, but that’s the price of big opportunity.
Note: PAGS is due to report earnings after the market close today, and unless there’s a huge surprise that diminishes the company’s propects, I think buying tomorrow will work out fine.
PagSeguro (PAGS)
Avenida Brigadeiro Faria Lima, 1384
4º Andar Parte A
São Paulo, SP 01451-001
Brazil
http://pagseguro.uol.com.br
CURRENT RECOMMENDATIONS
The market’s very long trend is up, but there are ebbs and flows (both large and small) in that trend, and only the most farsighted investor (hello, Warren Buffett) can afford to ignore those trends. So, as the number of stocks in our portfolio grows to 21 (one more than allowed), and as the broad market seems to be beginning another leg down, I ask what stock (or stocks) we can sell to reduce the risk of losing money. And the answer is two: TD Ameritrade (AMTD) and WestRock (WRK). Details below.
AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is finally taking a break, and is likely to pause a bit longer, perhaps even dipping toward its 25-day moving average, which is now at 27. In her latest update, Chloe wrote, “Risk-tolerant investors can buy here for high yield, just remember that distributions don’t qualify for the lower dividend tax rate, and you’ll get a K-1 at tax time.” BUY.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, remains within a consolidation pattern that has been going on since the start of February, though at present the stock is above all its moving averages. In her latest update, Crista wrote, “Google is the world’s largest internet company. Revenue is derived from Google’s online ads, with the balance coming from the sale of apps, digital content, services, licensing and hardware. Alphabet’s EPS are expected to grow 37.6% and 7.2% in 2018 and 2019. The GOOGL price chart looks remarkably similar to that of the S&P 500 (SPX)—they each appear ready to head back to their January highs. I think we’ll have made significant progress toward that goal by the end of June. I plan to sell GOOGL near 1,190 because the stock is quite overvalued based on 2019 earnings projections. Traders who buy below 1,090 could make 9% profit when GOOGL reaches 1,190.” HOLD.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, pulled back a little last week but volume was light and the overall pattern remains very positive. In his latest update, Paul wrote, “ATHM is still consolidating its early May jump from 91 to 107, and the stock was dragged down a little today by general market weakness. Overall, the stock has been acting well since dipping to its moving averages in February, so we’re not overly concerned. We’ll stay on Buy.” BUY.
Axon Enterprise (AAXN) originally recommended by Mike Cintolo of Cabot Growth Investor, is the rocket-shot of the moment, though volume on the advance has been fading so the end of this advance is likely near. Nevertheless, the story—managing cloud storage of video evidence for police departments all over the country—has clearly captured the imagination of investors, who see very lucrative earnings power in all that recurring income. As I said last week, traders could take some profits here—but I’m holding tight. And again, it’s worth noting that readers who followed the advice of Cabot’s options expert, Jacob Mintz, are now looking at profits of 370%! I’ll leave it rated buy but suggest you wait for a pullback if you don’t own it yet. BUY.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, and subsequently recommended by Crista Huff, continues to work to break out of the trading range that dates back to January though today’s weak market brought it back to the middle of that range. Chloe (more focused on dividends) continues to rate it a Hold for Dividend Growth investors, while noting the firm will benefit from the Dodd-Frank rollback heading to the President’s desk. And Crista notes, “BB&T is a 145-year-old financial holding company with $222 billion in assets and 2,100 financial centers that serves businesses and individuals. BB&T is in a multi-year cycle of increasing its net interest margin (NIM) as the company earns higher income from investments and its growing loan portfolio, while keeping costs down via an increase in non-interest bearing deposits and extending maturities on lower-yielding CDs. BB&T’s COO will present at the Deutsche Bank Global Financial Services Conference on May 30. Analysts expect full-year EPS to grow 43.4% and 8.5% in 2018 and 2019, with corresponding P/Es of 13.7 and 12.6. The ex-dividend date was May 10. BBT appears capable of beginning a new run-up soon, after which I will sell in favor of a financial stock with stronger 2019 prospects.” HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, came very close to hitting a new high last week, but there wasn’t quite enough buying power to complete the feat, so the stock remains in a tidy consolidation phase. In her latest update, Chloe noted, “Broadridge continues to consolidate just under recent all-time highs. Broadridge, which provides investor communication tools and other technology and services to financial companies, has increased its dividend each of the past 10 years. BR is a Buy for dividend growth.” HOLD.
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. But that’s not a problem now. The stock hit a new high last week, and is now on a normal pullback. The future looks bright for the biggest operator of hotels in China. HOLD.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small-Cap Confidential, is trading just off its record highs, thanks to a great earnings report. In his latest update, Tyler noted, “EVBG moved sideways this week and the critical communications software stock is still a buy. Revenue growth is solid and there’s potential for it to accelerate faster than management’s implied guidance of around 30%. An 11% pullback would bring us down to the 50-day line [now at 39], a support area the stock has found support in the past. I’m not saying that will happen, but at the same time it wouldn’t be too surprising. I’d be a buyer of a few shares here, and more down near that level.” BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, has pulled back a little more over the past week, but remains well above the top of its gap (68). As long as the stock holds above there, buying is advised. BUY.
iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, hit new highs last Wednesday and Thursday and is now trading just off those highs, as the young stock remains buoyed by the buying of investors just discovering the stock. In his latest update, Paul wrote, “IQ is still young and still volatile as heck. In the last three days, it has popped from 20.5 to 23.5, maybe in response to news that this streaming video leader is expanding its offline operations with an on-demand physical movie theater. This kind of volatility can cut both ways, but can be a great opportunity as long as we keep very close tabs on the stock’s movements.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, is like GOOGL. Both are old leaders whose stocks remain below their January highs, and both still have fine long-term growth prospects. In his latest update, Mike wrote, “PayPal made waves last week by purchasing iZettle, a company that many call the “Square of Europe,” in a $2.2 billion deal that will give PayPal a major in-store presence in many new international markets (including France, Germany, Italy, Mexico and Brazil), boost its presence in many existing markets and expand its e-commerce products in the U.S., U.K. and Australia. More details on the purchase and PayPal’s overall outlook and strategy will come on Thursday, when the company hosts an Analyst Day. Right now, analysts are still looking for steady 20% to 25% earnings and free cash flow growth in the years ahead, though we’ll be eager to see if there’s any upgrade to that once they have a clearer picture of how iZettle fits in the growth story. As for the stock, it still has resistance to chew through, but PYPL has rallied nicely off its early-May lows, reacted well initially to the acquisition announcement and is just 7% or so off its high. We’ll stay on Hold for now, but a bit more strength from here would go a long way toward telling us the stock’s major uptrend is resuming.” HOLD
PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor, has been working its way slowly higher since selling off in early February with the broad market. In her latest report, Crista wrote, “PulteGroup is a U.S. homebuilder and a very undervalued aggressive growth stock. Consensus earnings estimates, which rose last week, reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 9.2 and 8.2. Keep in mind that analysts’ earnings estimates reflect all known influences to company operations, including changes in interest rates, income tax rates, wages and other economic data. Despite constant headlines about rising interest rates, the average analyst on Wall Street still expects PulteGroup to see profits rise 60.7% in 2018!
PHM is ratcheting upward after a big 2018 price correction experienced by most of its homebuilding peers. (After their huge 2017 run-ups, the extended pullback was not surprising.). If you glance at the six-month price chart on PHM, you’ll see an interesting pattern showing the stock moving two-steps-forward and one-step-back repeatedly since February, with each upward move reaching about $0.50 higher than the last upward move. In keeping with that trend, the stock will likely reach 32 quite soon, with additional gains as the months pass.” HOLD.
Stag Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has been working since February to get back to its 2017 highs of 28—and it’s getting close! In her latest update, Chloe wrote, “STAG is an industrial REIT that mostly owns warehouses, which are in high demand from e-commerce companies competing to fulfill orders faster. The stock pays monthly distributions that don’t qualify for the lower dividend tax rate. High-yield investors can buy some here.” BUY.
Supernus (SUPN), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio but since upgraded to her Growth Portfolio, continues to consolidate after its big blastoff. In her latest update, Crista wrote, “Supernus focuses on the development and commercialization of products for the treatment of central nervous system diseases and psychiatric disorders, including epilepsy, migraine and ADHD. SUPN is an undervalued, small-cap stock. Analysts expect full-year EPS to grow 50% and 36.5% in 2018 and 2019, with corresponding P/Es of 30.3 and 22.2. After reaching a new all-time high in May, SUPN had a brief pullback. The stock seems capable of reaching new highs again quite soon, given a neutral-to-bullish stock market. I’ll likely move the stock to a Strong Buy again, once the upside breakout occurs.” BUY.
TD Ameritrade (AMTD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, peaked at 63 back in March and has spent the two months since consolidating those gains, looking for buyers to coalesce to continue the advance. But they haven’t. Instead, the sellers have been gaining the upper hand, as today for the third time they pushed the stock below its 50-day moving average—in sympathy with the weakening broad market. It’s possible that this is the “final fakeout” and a great buying opportunity—but the odds are better that it signifies an end to the stock’s two-year advance. Also, we have a growing loss in the stock and cutting losses short is a paramount guideline. SELL.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high last Friday! Clearly, there’s growing optimism about the firm’s business model as an efficient alternative to our over-priced time-consuming system of seeing doctors. Will the stock now begin a well-deserved correction? Time will tell. For consistency’s sake, I’ll keep it rated buy, while noting that buying on a correction is generally favored. BUY.
Tesla (TSLA), originally recommended in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio; we have a fat profit, and I have confidence in the firm’s long-term growth prospects as it leads the automotive revolution for both electric and autonomous cars. But today the stock remains in a long consolidation pattern, weighed down by short-term concerns about the production ramp of the Model 3. Eventually—it could be very soon—this pattern will move into a base from which the resumption of the uptrend will begin. HOLD.
WestRock (WRK), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has just completed seven consecutive down days—which is not good. Crista remains patient with the stock, expecting it to rebound to its January high of 70, but I don’t like the way sellers are ganging up here—and we have a growing loss, which I’m going to cut short right here. SELL.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has now pulled back to its 25-day moving average, offering what is probably a fine buying opportunity for the stock of this cookie-cutter growth business. The last four advances of the stock—dating back to December when the stock was trading at 36—have come from bounces off the 50-day moving average. BUY.
Zillow (Z), originally recommended by Mike Cintolo of Cabot Growth Investor and featured here two weeks ago, rocketed higher last Wednesday on big volume, but remains below both its May high of 57 and its April high of 60, in what looks like a normal consolidation phase. If you haven’t bought yet, you can buy here. As the #1 player in the business of putting real estate properties in front of consumers’ eyeballs, and getting brokers to pay for advertising to these consumers, Zillow has a bright future. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JUNE 5, 2018
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