After a brief shakeout last Monday, supposedly on fears that Italy would leave the EU, the market reversed course and has been pushing higher and higher since, supposedly cheering on the continued strong performance of the U.S. economy.
I’m enjoying the ride, and I assume you are, too. But I must remind you that good news is prevalent at market tops, while bad news is what you wallow in at market bottoms. So keep your eyes on the exits—while continuing to hold the best stocks as long as the market supports them.
Cabot Stock of the Week 200
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The market’s main trends remain up, with small stocks continuing to lead the way—and many of our portfolio stocks are among these leaders. But diversification remains a key factor in the recipe for long-term investment success, so today I’m swinging back to a big, well-known brand that has great growth prospects as it tackles a major factor in the sphere of public health, both in the U.S. and internationally. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.
Weight Watchers (WTW)
There is a lot of competition out there in the world of calorie counting and weight management solutions, mainly because people around the world keep putting on weight. Just in the U.S., a full one-third of the population is considered obese!
The proliferation of weight management programs means few have consistently risen above the fray. But some platforms are indeed better than others, and over the last 18 months it’s become clear that Weight Watchers (WTW) is emerging as the platform of choice.
With the help of new CEO Mindy Grossman, who was largely responsible for turning the Home Shopping Network (HSNI) into a direct-to-consumer content and commerce leader, Weight Watchers has developed into a lifestyle brand encompassing more than just calorie counting and weight management.
It is now an overall health and wellness brand. And that positioning, along with savvy social media marketing, has helped Weight Watchers expand beyond its traditional demographic of women over 50 to include younger people, including lots of teens. This trend was on display in the company’s first quarter of 2018, when 40% of new signups came from people new to Weight Watchers.
Another sign of the company’s standout performance is the popularity of new solutions as it marches toward its goal to become the everything app for health and wellness. The core Weight Watchers Freestyle program is already proven, as evidenced by six-month clinical trials that show participant weight loss. And new and improved features, such as SmartPoints, to help with healthy eating, Fitbreak, to help encourage activities, and Connect, a social media tool that allows access to other community members, are driving significantly more business.
There are also partnerships in the works to try and push the average membership duration past the current length of nine months, including one with FreshRealm to develop branded ready-to-cook meals.
The proof is in the (low-fat) pudding. Revenue rose 12% in 2017 to $1.3 billion, while EPS surged 113% to $1.79. In the just-reported second quarter of 2018, revenue jumped 24% to $408 million, while subscriber count increased nearly 30% to 4.6 million people globally.
Management also revealed that the subscriber value/cost per acquisition sits at around five-to-one, well above the three-to-one metric other successful subscription businesses typically see. That efficiency in the business model is helping to drive strong profit growth, as evidenced by a jump in second-quarter EPS to $0.31, up from a loss of -$0.02 in the year ago quarter.
Then, of course, there’s the icing on the cake—the collaboration with Oprah Winfrey, which began in October 2015 when she made a $43 million investment. Shares soared back then on expectations that she’d pull in thousands of new customers.
It’s taken a little while for Oprah’s presence to really be felt. But based on results over the last 18 months, the evidence strongly suggests her credibility, commitment and potential marketing synergies are pushing Weight Watchers’ value higher. Analysts expect the good times to continue, with earnings expected to rise a whopping 56% this year and another 31% in 2019.
As for the stock, it wasn’t doing much until early 2017. That’s when revenue growth started to materialize, albeit slowly at first (Q4 2016 revenue was up 3.2%). Shares then ascended as the pace of quarterly revenue growth accelerated to 7%, 10%, 15%, 17% and finally to 24% in the most recent quarter. There was a consolidation phase in late 2017 and, after a run to 77 in February, another in recent months. But both were well contained, and the stock’s recent big-volume surge (spurred in part by Q1 earnings) tells us the uptrend is resuming.
The bottom line is that the stock’s trend, along with expectations for 20% revenue growth and rapid EPS growth in the quarters ahead, suggest Weight Watchers can maintain its leadership position, even in a crowded market. The stock popped higher on an upgrade today, so you might be able to get shares down a couple of points. But, as usual, I’ll keep it simple and add WTW to the portfolio tomorrow. BUY.
Weight Watchers (WTW)
675 Avenue of the Americas
6th Floor
New York, NY 10010
212-589-2700
www.weightwatchersinternational.com
CURRENT RECOMMENDATIONS
So many new highs! That’s my impression when I look at our stocks—eight hit new highs today. On one hand I love this; who doesn’t? On the other hand, I know that such giddy periods don’t last forever; it’s always brightest just before somebody turns the lights out. So, while I love riding strong trends, and I’m thrilled that so many of our stocks have been participating, I remain alert to opportunities to take profits and/or reduce risk. Today, that means selling Wingstop (WING) for a nice profit, downgrading Teladoc to Hold, and (again) a few suggestions for taking partial profits.
AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is on the move again after a brief but effective six-day consolidation. In her latest update, Chloe wrote, “Financial stocks were hit particularly hard by yesterday’s selling but AB held up better than most of its peers, a good sign. Another good sign is that AB followed up its recent breakout to a new 52-week high with a few more days of gains before pausing to consolidate. Momentum is good, AB is outperforming other financials, and earnings estimates are solid. AllianceBernstein is a New York-based investment manager known for their active strategies. Risk-tolerant investors can buy here for high yield, but remember that distributions are variable (based on cash flow), don’t qualify for the lower dividend tax rate, and that you’ll get a K-1 at tax time.” BUY.
Alphabet (GOOGL), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, remains within the consolidation pattern that has contained the stock since the start of February, though we saw some very big up days on big volume last week. In her latest update, Crista wrote, “Alphabet’s Waymo subsidiary, an autonomous car development company, announced an agreement with Fiat Chrysler on June 1 to add up to 62,000 Chrysler Pacifica Hybrid minivans to Waymo’s self-driving fleet. Consider the possibility that Alphabet might spin off Waymo in order to keep any legal liability associated with autonomous cars attached to Waymo and separated from Alphabet.…Alphabet’s 2019 EPS are expected to grow just 7.2%, while the 2019 P/E is much higher at 23.9. That’s not an attractive growth or value situation. GOOGL is now rising rapidly toward price resistance at 1,190, where I plan to sell.” HOLD.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, completed a three-week pause early last week and has been climbing since, propelled by the buying of investors growing more bullish on the future of this leading purveyor of Chinese automobile information to both buyers and sellers. In his latest update, Paul wrote, “ATHM remains in good shape, having spiked off its 25-day line (around 101.5) yesterday to new highs on solid volume. Shares have been advancing in a two-steps-forward, one-step-back manner, so try to get in on dips.” BUY.
Axon Enterprise (AAXN) originally recommended by Mike Cintolo of Cabot Growth Investor, continues to climb, defying investors who’ve been waiting for a pullback. In fact, what the chart is really showing is that there is little appetite for selling among investors, and thus every would-be buyer who capitulates is forced to pay a higher price. Eventually this trend will end, but there’s no telling when. In the meantime, my advice remains unchanged; traders could take some profits here, but I’m holding tight, optimistic that this story—managing cloud storage of video evidence for police departments all over the country—will be very profitable in the long run. The firm partnered with a leading drone maker to sell them directly to law enforcement. BUY.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, sold off last week as traders panicked about Italian politics, but it’s recovered half the loss since. In her latest update, Chloe wrote, “BB&T is another beneficiary of the Dodd-Frank rollback signed into law Thursday, which eases capital requirements on banks with under $250 million in assets, making it easier for them to raise their dividends, buy back stock and complete acquisitions. Over the past five years, BB&T has raised its dividend by an average of 10% per year, but still has a relatively low payout ratio of 38%, so there’s room for more growth in the dividend (especially with the savings from the recent tax cuts). I’d put BBT back on Buy on a confirmed breakout to new highs. To the downside, I’d take some profits on a violation of support around 51. For now, Hold.” And today, Crista wrote, “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 is expected to commence with M&A activity by buying a smaller bank within its region shortly after BB&T is in compliance with new bank legislation and its related requirements. Earnings estimates have slowly risen all year. Analysts now expect full-year EPS to grow 43.7% and 8.5% in 2018 and 2019, with corresponding P/Es of 13.3 and 12.2. The ex-dividend date was May 10. BBT fell a bit with bank stocks last week, and appears capable of reaching price resistance at 55.5 quite soon.” HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, broke out to a new high after three weeks of consolidation. In her latest update, Chloe noted, “Intermediate- and long-term, BR remains in a strong uptrend. The company processes proxy votes and distributes investor communications for roughly 80% of the outstanding shares in the U.S. They also provide other technology and services to financial companies, like trade settlement and wealth management tools. The stock is low-yielding, but growth is steady: Broadridge has increased its dividend every year for 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 has been hitting new highs in recent days. If you don’t own it, you could buy here; the stock recently broke out from a four-month consolidation phase. Otherwise, continue to hold patiently—and profitably. HOLD.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small Cap Confidential, continues to climb! In his latest update, Tyler wrote, “EVBG stepped 5% higher this week. Management from the critical communications software company will be speaking at several conferences in June and will hopefully give an update on how the integration of Unified Messaging Systems (UMS) is going. Mark your calendar. Everbridge is scheduled at the Bank of America Merrill Lunch conference on June 6, the Stifel 2018 Cross Sector Insight Conference on June 11, and the William Blair Annual Growth Stock Conference on June 12. The stock is modestly extended here at roughly 16.5% above its 50-day moving average line, but on any dips it’s still a buy.” BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, broke out to a new high today! The company may never be a household name, but it’s clearly becoming a bigger factor in the financial lives of Americans. BUY.
iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is the hottest of stocks in these hot-stock times. In his latest update, Paul wrote, “IQ went bananas yesterday, rallying 11% on a big pickup in volume. There was no obvious news to drive it, but it was a hot day for many small Chinese Internet stocks. IQ is sure to remain extraordinarily volatile, but we’re OK buying a small position here or on dips. The stock’s action since its IPO in late-March is encouraging and we could have a tiger by the tail with IQ if [emerging market stocks] get going.” BUY.
PagSeguro (PAGS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and featured here last week, remains in the consolidation pattern that began at the start of April, held back in part by the economic and political troubles in Brazil. Our investment may be early, and it may even turn out to be a mistake, but my reasoning is that if the stock holds up so well in bad times, it will fly when the climate improves. In his latest update, Paul wrote, “PAGS had some wild, but intriguing, action following its earnings report yesterday. As for business, it certainly remains in excellent shape—revenues soared 98%, earnings leapt 133%, local currency payment volume was up a huge 139% and active merchants on its platform rose 83% (to 3.1 million). Still, by some estimates, earnings came in below expectations and the take rate (the cut the firm gets on every transaction) fell 41 basis points, which caused the stock to plunge below 30 briefly yesterday. But it found big-volume support and closed at 34, a good sign big investors bought the dip. All in all, PAGS still has lots of work to do, but we’re OK holding to see if yesterday’s washout leads to higher prices.” BUY.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, broke out above its March high yesterday and is now very close to its all-time high of January. In his latest update, Mike wrote, “PayPal is looking like it may have turned the corner, with the Amazon-related selling back in early May (which briefly took the stock down to its 200-day line) looking like the final shakeout. Encouragingly, the company nudged up its long-term growth outlook at last week’s investor day, now expecting 17% to 18% annual revenue and cash flow growth during the next three- to five-years, with earnings growing faster than that. I also read a great data point this morning—according to a JP Morgan study, PayPal operates the dominant peer-to-peer money transfer apps, with PayPal used by 58% of respondents and Venmo at 12%. Even among millennials, PayPal is number one at 37% and Venmo is second at 26%. (Square Cash and Google Pay are tied in third place at just 9%.)” HOLD.
PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor, and featured here two weeks ago, continues to work its way slowly higher. In her latest report, Crista wrote, “PulteGroup is a U.S. homebuilder and a very undervalued aggressive growth stock. PulteGroup management will present at the Deutsche Bank 2018 Global Industrials and Materials Summit on June 6. Consensus earnings estimates reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 9.2 and 8.2. 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 very close! In her latest update, Chloe wrote, “REITs outperformed during yesterday’s selloff because of the decline in Treasury yields, adding to the evidence that STAG is getting ready for a sustained rally. The company is an industrial REIT that mostly owns warehouses, which are in high demand from e-commerce companies competing to fulfill orders faster. Funds from operations (or FFO, a widely-used measure of REIT cash flow) have increased every year since the REIT came public in 2011, including a 29% jump last year. 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 early-May 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. Supernus management will present at the Jefferies 2018 Global Healthcare Conference on June 5. SUPN is an undervalued, small-cap stock with a high degree of institutional ownership. Analysts expect full-year EPS to grow 50% and 37% in 2018 and 2019, with corresponding P/Es of 30.5 and 22.4. After reaching a new all-time high in May, SUPN had a brief pullback. Since there was no major price correction, and SUPN seems capable of reaching new highs again quite soon, I’m moving the stock from Buy to Strong Buy.” BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, announced today that it will acquire Advance Medical, a worldwide leader in telemedicine and expert medical opinion services. Advance Medicine has significant operations in Latin American and Asian markets, where the private health insurance growth rate is faster than that of the United States, so this deal expands Teladoc’s growth potential. As for the stock, which hit another new high today, Mike and I discussed last week the fact that over the decades, it’s been very difficult for us to develop long-term profits in stocks in the medical technology sector. Now, maybe Teladoc is not exactly a medical technology company; maybe it’s more of a service company. And maybe this time is different. But our conclusion was that keeping an eye on possible exits, or at least taking some partial profits on good news—like today’s—might be a good idea. With the stock now 20% above its 50-day moving average, and the good news out, I’m reducing risk by downgrading to hold. HOLD.
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. The stock is not participating in the current bull market, so Hold is the appropriate rating, however, the long-term chart shows support around 260, so if the stock gets down to that area in the weeks ahead, it would be a tempting buy. HOLD.
Wingstop (WING), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has failed to bounce off its 25- and 50-day moving averages, and thus I’m going to recommend selling and taking the profit. Long-term prospects for the company seem fine, but there have been some disappointing earning reports in the industry recently, and now the stock is telling us that the buyers are retreating. SELL.
Zillow (Z), originally recommended by Mike Cintolo of Cabot Growth Investor and featured here two weeks ago after a normal pullback, broke out to a new high today! 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 12, 2018
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