Today I’m leaning back toward the low-risk end of the spectrum with a recommendation of a stock that is a potential takeover candidate; I think you’ll like the story.
Cabot Stock of the Week 201
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Fundamental factors like low inflation and a healthy yield curve argue that the long bull market of 2017-2018 can last even longer; the charts of the major indexes show that many have broken out above their January highs; and the Chinese market remains healthy too, with plenty of big growth stories to boot. So there are plenty of healthy stocks to choose from today! But there’s risk in buying stocks hitting new highs (despite our recent experience with WTW-see below), so this week I’m hunting in the bargain basement, with a stock that will hopefully be a takeover target soon.
The stock was originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor, and here are Crista’s latest thoughts.
TiVo Corporation (TIVO)
TiVo is a global leader in entertainment technology and audience insights. From the interactive program guide to the DVR, TiVo delivers innovative products and licensable technologies that revolutionize how people find content across a changing media landscape. In September 2016, Rovi (ROVI) completed its acquisition of TiVo and changed the company name to TiVo.
In recent news, TiVo added Alexa voice control to its DVRs. In addition, Business Wire reported, “TiVo entered into a multi-year (IP) license agreement covering the consumer electronics brands of the Fnac Darty Group, the European retailer of entertainment and leisure products, consumer electronics and household appliances.” But this is not a story about technology and growth; it’s a story about a potential takeover.
In February 2018 TiVo’s management revealed that it considers its stock to be woefully undervalued, leading the company to publicly discuss their interest in being acquired or going private. TiVo management hired LionTree Advisors to seek strategic alternatives that can maximize shareholder value (that’s code for “we’re going to allow our company to be bought out”). According to management, “multiple buyers have expressed interest in acquiring TiVo.” Yet the share price barely reacted to the news!
What’s more, in its first quarter 2018 earnings press release in May, the company reiterated the news that they are exploring strategic alternatives, and that they will have definitive news by the time the next earnings release is due in early August. Here’s the official statement:
“As announced in TiVo’s Q4 2017 earnings release and its related earnings call, we are continuing to explore a broad range of strategic alternatives to maximize the value of the Company and best deliver value to our shareholders. We expect to provide an update on this exploration process no later than our Q2 2018 earnings call.”
In short, we now know, in advance, that an undervalued company will announce progress on significant M&A activity within two months that’s specifically being undertaken in order to drive the share price up. That means investors who buy TIVO today could rack up very attractive capital appreciation by mid-summer!
Why haven’t investors taken advantage of this valuable information? Well, I think it’s primarily because TIVO is a small-cap stock with a market capitalization of just $1.8 billion. There are only about four analysts on Wall Street who are writing research reports on the company, so there’s very little attention drawn to the stock. That being said, institutional ownership in the stock stands at 89%.
After a huge year of surging profits and revenue in 2017—during which time the stock did not perform well—TiVo is expected to see earnings per share fall 34% in 2018, then rise 35% in 2019. The stock is a bargain, with a 2019 P/E of 9.0. You’re also getting paid a nice dividend while waiting for an M&A transaction to occur. The dividend yield is a hefty 5.2%, although with prospects of an M&A transaction looming, a significant change in the corporate structure could be announced way before the September 2018 record date for the next dividend. Corporate debt levels are fair, and should not provide a deterrent to potential corporate buyers. Additionally, the company routinely repurchases its stock. TiVo’s Board increased the company’s stock repurchase authorization by $150 million in February 2017.
What’s the worst-case scenario? It’s possible that no buyout offer will materialize, and investors will own an undervalued and growing company with a 4.9% dividend yield—a stock that could please both growth investors and equity income investors!
TIVO shares have languished for several years. Finally, after trading between 13 and 15 throughout 2018, the price chart is slowly turning from neutral to bullish. The trading range is narrowing toward the top of the six-month range. Continued new business wins and/or M&A news could easily push the stock to break out above 15 and begin a sustained run-up.
Buy TIVO now before the next breakout, and watch for M&A news by early August. BUY.
TiVo Corporation (TIVO)
2 Circle Star Way
San Carlos, CA 94070
408-562-8400
http://www.tivo.com
CURRENT RECOMMENDATIONS
The market is strong, we’re making money, and I remain bullish on the prospects for good stocks in the months ahead. But portfolio management is an ever-present concern, and this week I have five rating changes (an unusual amount). Additionally, I want to remind you that you don’t need to mimic my portfolio exactly; instead you should build a portfolio that is right for your own financial situation and risk tolerance. And you should take care to do it rationally, just as I try to manage this portfolio rationally. Listen to the experts (as I do), think about diversification, think about risk vs. reward, and think about long-term potential vs. short-term potential. Last but not least, enjoy this bull market while it lasts!
AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, remains healthy. In fact, a look at the weekly chart of the stock reveals that this is the eighth consecutive week that the stock has advanced. Chloe remains long-term bullish on the investment manager, but I think the stock is overdue for a pause, so I’m going to be proactive and downgrade it to hold now. HOLD.
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, but it’s definitely near the top of the range. And now it’s time to sell, for reasons both complicated and simple. The complicated reason, which Crista explained thoroughly to her readers last week, revolves around the fact that between now and September 28, the Global Industry Classification Standard will be reorganized, the telecommunications sector will be renamed communications services, and GOOGL will move from the information technology sector to the communications sector. Crista thinks this shift will dampen demand for these shares in the short run. The simple reason is that GOOGL is now close enough to Crista’s long-term target of 1,190 to move on and look for greener patures. SELL.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, closed at a record high a week ago and is now on a normal pullback. Short-term, anything could happen, from a breakout to new highs to a pullback to the stock’s 50-day moving average at 101, but long-term, the future is bright for this leading purveyor of Chinese automobile information to both buyers and sellers. BUY.
Axon Enterprise (AAXN) originally recommended by Mike Cintolo of Cabot Growth Investor, finally sold off last Thursday after an analyst downgraded the stock based on valuation. But it’s traded higher every day since then, making the selloff look like a short-term buying opportunity. So what comes next? Odds are that this correction needs time to mature, and it’s possible that this process could include a return to the stock’s 50-day moving average, which is currently at 52—the stock is up 145% since it last touched that average. So I’m going to downgrade it to Hold now, though long-term I remain very optimistic about the company’s prospects. HOLD.
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, has been constrained between 50 and 56 since March, but the main trend is clearly up. In her latest update, Chloe wrote, “The 50-day line isn’t providing much support; the stock has crossed it repeatedly in recent months. The 200-day moving average, currently nearing 51, could provide a better launching pad if it can catch up to the stock. For now, I’ll keep BBT on Hold.” And just today, Crista wrote, “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. CEO Kelly King will present at the Morgan Stanley Financials Conference on June 12. 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. Analysts expect full-year EPS to grow 43.7% and 8.5% in 2018 and 2019. Corresponding P/Es are 13.6 and 12.6. BBT appears capable of surpassing 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, hit a record high last Friday, and the pullback since then has taken the stock down to its 25-day moving average, which is perfectly normal, though volume yesterday was unusually high. Still, long-term prospects look good. In her latest update, Chloe noted, “The company processes proxy votes and distributes investor communications for something like 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.” 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 closed at a record high last Wednesday and is consolidating that gain. But there is big news to report. Just yesterday, the company announced that it will change its name to Huazhu Group Limited. The stock ticker will remain the same, but the name will change on June 15. HOLD.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small Cap Confidential, popped out to another new high today—the sixth day of new highs—on the news that its subsidiary Unified Messaging Systems (UMS) had signed a deal with the country of Sweden that will enable all cell phones in Sweden to receive location-based text alerts in cases of major accidents, weather and terror events. In his latest update, Tyler wrote, “Everbridge sells cloud-based critical communications software that is used by businesses, municipalities, states and countries to keep people safe and businesses running during critical events, such as natural disasters, severe weather, active shooter situations and terrorist attacks. The company also has a growing cybersecurity product in its IT Alerting solution. It recently acquired Unified Messaging Systems (UMS), which extends its alerting businesses reach throughout Europe. While the underlying need for the software is unfortunate, the demand for what Everbridge does is undeniable, and the company has been executing well. There appears to be a long runway for growth, and revenue should be up around 34% this year and 26% in 2019. Management presented at the Bank of America Merrill Lynch conference on June 6, now heads to the Stifel 2018 Cross Sector Insight Conference on June 11, and the William Blair Annual Growth Stock Conference on June 12. The trend is strong and I’m keeping it at Buy. We’re up around 200%.” Well, clearly Cabot Stock of the Month readers joined the party later than Tyler’s readers, but not too late. If you don’t own it, you can buy some here. BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, continues to hit new highs! As the world’s largest issuer of prepaid debit cards (by market capitalization) as well as the company with the platform behind Apple Pay Cash and Uber and Intuit, the company is a growing piece of the cashless economy. Meanwhile, the stock remains a relative unknown—which spells opportunity for you. BUY.
iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, remains red-hot; it’s nearly doubled since our buy six weeks ago. Of course, we got a bit lucky with our buy back then, as the stock dipped to support on the day we bought (the opposite of WTW below), and we’ve been helped by the tailwind in Chinese stocks. But the long-term promise remains big here. In his latest update, Paul wrote, “Everything about IQ is extreme, and we don’t rule out the possibility of a big correction if there’s a piece of negative news. But for now, with the “Netflix of China” nickname gaining traction, subscriber growth healthy and good earnings on the books, I see no obvious potholes.” This, of course, does not mean there won’t be volatility. BUY.
PagSeguro (PAGS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is facing a strong headwind in the deterioration of the Brazilian economy. In fact, just last week, Paul recommended selling (he had a 16% loss in the stock), saying “The general weakness in the Brazil market is too much to overcome for now.” But I’m not giving up yet, in part because we bought lower and in part because I’m optimistic that the low point in expectations for Brazil has passed. However, I will downgrade the stock to Hold now. HOLD.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, looks set to close at a new high today—for the first time since January! In last week’s update, Mike wrote, “Ever since PYPL got nailed in early May on reports that Amazon was entering the payment field, the stock has been a sterling performer, steadily rallying back toward its all-time highs from January…the company nudged up its three- to five-year outlook and is now looking for 17% to 18% annual revenue growth with expanding margins and healthy free cash flow that it’ll use to invest in its business, buy back shares and engage in some M&A—it just bought Jetlore, for instance, an AI-powered predictive platform for retailers that will boost PayPal’s marketing solutions segment.” And in today’s update Mike upgraded the stock to Buy, writing, “There’s some resistance around here, and after a sharp move off its lows, PYPL could chop around for a bit. But we think the path of least resistance is up, so we’re restoring our Buy rating.” I’ll join him. BUY.
PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor, looks great but I’m looking for the exit ramp from this one. In her latest update, Crista wrote, “PulteGroup is a U.S. homebuilder and a very undervalued growth stock. Consensus earnings estimates reflect 60.7% and 12.4% EPS growth in 2018 and 2019. The corresponding P/Es are 9.8 and 8.8. Homebuilder stocks leaped upward last week. PHM peaked in January at 35. When PHM reaches 34, short-term investors should sell, because there’s a very strong likelihood that PHM will then have a pullback. Based on trading patterns, I’m moving PHM from Strong Buy to Hold, since the near-term upside is now limited.” I’ll hold for now, but look to sell around 34. 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 hit its highest level since January 2 yesterday. The stock is above its 50- and 200-day moving averages, and is trending up nicely. The company is an industrial REIT that mostly owns warehouses. REITs are doing well again as rate hike expectations moderate, and we already have a 15% total return in STAG (added to the portfolio near the end of March). High-yield investors can buy some here. Note that STAG pays monthly distributions that don’t qualify for the lower dividend tax rate.” 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. SUPN is an undervalued, small-cap stock with a high degree of institutional ownership. Analysts expect full-year EPS to grow 50% and 37.0% in 2018 and 2019. Corresponding P/Es are 28.6 and 20.8. After reaching a new all-time high in May, SUPN began a consolidation phase. I expect new highs again in the coming months.” BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high today! In his latest issue, Mike wrote, “Teladoc is hoping to revolutionize the medical industry with its science-fiction idea of accessing doctors via an online link. The company’s 3,100 board-certified physicians (in a broad spectrum of specialties) are available to the company’s 20 million members via video link and 92% of issues are solved in one video session, leaving members with a 95% satisfaction rate. The company’s focus on growth has kept earnings in the red, but revenue has grown by triple digits in the last three quarters, so growth hasn’t been a problem. It’s hard to overestimate the possible disruption Teladoc represents to the traditional medical industry, and investors seem to agree. After an eight-month patch of flat trading that ended in February, TDOC ran to new highs in March and caught fire again in May, bolstered by an acquisition that significantly boosts its overseas operations.” I downgraded the stock to hold last week thinking it was a bit extended, and I’ll leave it there for now. 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 last hit a new high in June 2017, nearly a year ago (at 387) and spent most of the year since falling slowly to build a bottom at 280, but the past five days have seen the stock blast off that bottom as perceptions improved about the company’s ability to manufacture Model 3 vehicles fast enough. Note: Tesla has been one of the most heavily shorted stocks for quite some time, so when the stock heads up, some of those shorts are forced to buy—which simply increases volatility. Also note: though many analysts wish CEO Elon Musk would set more realistic targets, he just made waves by announcing (on Twitter) that the “SpaceX option package for new Tesla Roadster will include ~10 small rocket thrusters arranged seamlessly around car. These rocket engines dramatically improve acceleration, top speed, braking & cornering.” Musk is without a doubt the most creative CEO in the industry today—perhaps the most creative since Henry Ford. HOLD.
Weight Watchers International (WTW), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, is an interesting stock. When I selected it last Monday, the stock was trading below 80, at roughly the midpoint of its three-week consolidation pattern. But on Tuesday, as I was writing, it shot up 8%, on no particular news. And on Wednesday, the day that our official buy price is determined, the stock was higher still—almost 9% higher than the price I was contemplating when I chose the stock. And then today it gapped higher at the open, thanks to a J.P. Morgan recommendation that foresees continued growth as the firm adds more big-name celebrities like Oprah Winfrey. To quote, “Management stabilized the trajectory ... by revamping its points program, significantly improving the mobile platform, and recruiting pivotal social media influencers.” New celebrities on the team include record producer DJ Khaled, chef Eric Greenspan, comedian Kevin Smith and singer Hélène Ségara. J.P. Morgan’s price target is $105. Bottom line: in this case, buying strength has worked out. Strength begets strength, and thanks to the great setup that Mike identified in Cabot Top Ten Trader, we’re now in good shape. If you haven’t bought yet, you can still buy here, but I suggest a lighter commitment, as there’s growing potential for a brief pullback, given that the good news is out. BUY.
Zillow (Z), originally recommended by Mike Cintolo of Cabot Growth Investor, continues to hit new highs. Last week the company announced an agreement with Century 21 Canada to receive a direct listing feed for its Canadian listings, an agreement that mirrors the partnership with Century 21 in the U.S. This is the first Canadian deal made by Zillow, and probably not the last. If you don’t own, try to buy on dips. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JUNE 19, 2018
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