Calling market tops is impossible, but leaning against the wind is something you learn after a while, if you pay attention. So today, with many of our stocks once again hitting or near new highs, I’m leaning into the wind by selling one and downgrading another to hold.
As for new buying, today’s recommendation comes straight from Cabot Top Ten Trader. It’s an underappreciated retail stock that surged higher on a great earnings report two weeks ago and has since pulled back to what I think is a great entry point.
Cabot Stock of the Week 202
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Sometimes I think of the market as I think of the ocean, where tides rise and ebb twice a day, where waves arrive numerous times per minute, and ripples—affected by even the tiniest wind—continuously color the surface. The tanker captain minds the tides, the surfer minds the waves, and the heron in the shallows minds the ripples as he hunts for his next little meal. Combined, the tides, waves and ripples form the character of the ocean—at least the surface part. And so it is with the stock market, which has similar tides, waves and ripples. Big investors like Warren Buffet ride the tides and ignore the smaller fluctuations. Investors who like a little more action and enjoy watching the market may buy and sell several times a week as waves come and go. And traders who watch the minute-to-minute action can be in and out of one stock in the same day, happy to scalp a point here and there as prices ripple back and forth.
Which is all simply a long introduction to say that the tide (the long-term trend) is still coming in—as it has for the past decade; the wave (the intermediate-term trend), is also still positive—with some indexes still recovering their losses from the February selloff and others hitting new highs; and the ripples—well, they hardly concern me, save when it comes to buying and selling individual stocks…like today’s stock.
It’s recently caught a big wave, and over the past few days, the ripples have pulled it back to what looks like a fine buying area. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader, and here are Mike’s latest thoughts.
G-III Apparel Group (GIII)
Most successful retail outfits follow similar paths. They spend all their time building their brand, they expand their product line from the ground up and they open up their own retail stores to boost sales (and, again, their brand).
G-III, which got its start back in the 1950s when a Holocaust survivor named Aron Goldfarb emigrated to the U.S. and started his own outerwear company, has taken a different tack. And through flawless execution, it’s become a powerhouse in the apparel sector, with recent results causing the stock to surge.
G-III’s proprietary brands have mainly come via acquisitions over the decades—its own brands include Donna Karan (which it purchased last year), DKNY, G.H. Bass, Marc New York and Wilsons Leather. But it also manufactures coats, jackets, pants and sportswear for a slew of licensees, including Calvin Klein, Tommy Hilfiger, Kenneth Cole, Cole Haan, Guess?, Levi’s and Dockers. And it also has a burgeoning sports business, as the NFL, NBA, Major League Baseball, NHL and over 150 colleges and universities are partners.
G-III is more than just an apparel foundry for its licensees and partners, though. As CEO Morris Goldfarb said in the Q1 conference call: “We know how critical it is for G-III to continue to be a supplier of choice that understands the marketplace, the trends, and consumers’ shopping habits … To that point, today, we are a dominant resource to our retail partners in many major categories, including outerwear, sportswear, dresses, suit separates, performance apparel, handbags, and footwear in North America.”
Again unlike most of its peers, G-III’s business is steering away from direct retail. The company does operate a bunch of stores (mostly Wilsons Leather and G.H.Bass stores), but that brick-and-mortar business has only hurt the firm’s bottom line. Because of that, the company is “right sizing” that operation (i.e., cutting way back). It had 350 stores in early 2017, but the company expects to close 105 of those by next January (it’s already shuttered 60). The end result should be a $10 to $15 million cost savings when all is said and done.
What’s driving the business today is wholesale, which in Q1 made up 86% of the business (the rest was retail). And growth there is strong and steady. In Q1, Calvin Klein and Tommy Hilfiger both grew double digits; its important Karl Lagerfeld brand lifted revenue by 50%; and its own DKNY and Donna Karen brands are expanding nicely. G-III has even licensed those latter two brands out to PVH to broaden their distribution.
All in all, there’s nothing proprietary or revolutionary when it comes to G-III; it’s not even following the standard script for other retail winners. But the company has some powerhouse brands and is executing in fine fashion, which is driving results sharply higher.
In Q1, revenues grew 16%, while earnings of 22 cents were up from a loss of 18 cents per share the year before and miles north of expectations. Then, management raised guidance for Q2; they’re now looking for revenues of nearly $3 billion (up more than 6% on the year), and an earnings surge of 50% to $2.37 per share. I have a feeling that outlook will prove conservative given the magnitude of the Q1 beat.
As for the stock, GIII had a couple of brutal years starting in mid-2015 with the entire retail sector; shares fell from 74 to 18 as margins were crimped and earnings sank. The stock had a jagged recovery after that (including a nice November-January rally to 41), and then settled down for a tidy five-month consolidation phase.
The breakout actually came in late May, but the real action was seen after earnings, as GIII gapped up on huge volume from 43 before the report to as high as 51 after. Given that this is the stock’s first decisive breakout since bottoming out, I think the stock will move higher, and the recent minor pullback offers a nice entry point. BUY.
G-III Apparel Group (GIII)
512 Seventh Avenue
New York, NY 10018
212-403-0500
http://www.giii.com
CURRENT RECOMMENDATIONS
The addition of G-III Apparel Group to the portfolio brings us once again to our maximum number of stocks (twenty), so I once again look around to see if there are any stocks that deserve to be sold. And what I see are a lot of stocks that are very extended, and in many cases overdue for a significant pullback! I’m extremely reluctant to sell stocks with great long-term growth potential, but I am willing to let go of AllianceBernstein (AB), the high-yielder that has had a good run. Also, I’ll downgrade Zillow to hold, because the company’s good news is out and a cooling-off phase is due there as well. Meanwhile, down in the basement, recent addition PagSeguro of Brazil tanked today, but is sitting right at support, so I’ll stick with it for now.
AllianceBernstein (AB), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, has finally settled into a consolidation phase after notching eight consecutive weeks up. In her latest update, Chloe noted that assets under management (AUM) rose 0.6% in May, thanks to both firm-wide inflows and market appreciation. Holding the stock is fine here if you appreciate the high yield and you have the patience to sit through the gentle but long ups and downs that are inevitable in this kind of stock. But I’d rather not sit through that, especially in a stock that doesn’t have great growth potential. So, with a preemptive sell, I’m going to get out while the getting’s good. SELL.
Autohome (ATHM), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, is the leading purveyor of Chinese automobile information to both buyers and sellers, and its stock looks fine. In his latest update, Paul wrote, “It was good to see the stock find big-volume buying support on its mini-shakeout last Friday [June 8]. At some point the stock will see a deeper correction, of course, but the stock did do a lot of chopping around earlier this year (it was up just three net points from mid-January through early May), which likely wore out some weak hands. Either way, I like the story, the earnings estimates (up 25% and 23% this year and next) and the chart action. Hold on if you own some, and if you don’t, you can grab shares here or (preferably) on dips toward the rising 25-day line [now approaching 110].” BUY.
Axon Enterprise (AAXN) originally recommended by Mike Cintolo of Cabot Growth Investor, has a fine growth story. Previously known as Taser, the company still sells electric stun guns, but the exciting part of the business is the part that sells body-cameras and in-car cameras to police departments and then houses all the data from those devices (and other makes of camera as well) at its cloud storage site, Evidence.com. The potential for recurring income is tremendous. As for the stock, after climbing from 27 to 69 in just over three months, the stock is now taking a well-deserved rest. If you’ve got it, hold on tight. Otherwise, wait a bit longer and I think you’ll find a decent buying opportunity. HOLD.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, pulled back sharply last week when the Fed raised rates, and Chloe wrote that the stock’s 200-day moving average, currently nearing 51, might eventually provide a launching pad if it can catch up to the stock. Then, this week, 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. BB&T Chairman and CEO Kelly King presented at the Morgan Stanley Financials Conference on June 12 and discussed efforts to increase digitalization, which is resulting in expenses being flat to down in 2018. Institutional investors are most focused on banks’ loan growth—as opposed to deregulation, credit quality, etc.—and BB&T is well-positioned to benefit from currently-increasing commercial and industrial (C&I) loan demand. To further capitalize on improving C&I loan trends, BB&T is working toward closing medium-sized business loans faster, from 28 days to three days by year-end. In conjunction with its recent Regions insurance acquisition, BB&T is restructuring its large-scale and successful insurance brokerage business with a goal of substantially raising profit margins within a couple of years.
“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. Wall Street expects BB&T 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. BB&T’s consensus earnings estimates have consistently risen since late December. Analysts expect full-year EPS to grow 43.7% and 8.5% in 2018 and 2019. Corresponding P/Es are 13.0 and 12.0. Bank stocks pulled back last week. I expect a relatively prompt rebound, with BBT rising toward price resistance at 55.5.” HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, was added to the S&P 500 on Monday, an upgrade from the S&P MidCap 400, and the stock is down a bit since then, basing in the 115 region. In her latest update, Chloe noted, “Broadridge, an investor communications firm, is a steady grower that has increased its dividend every year for 10 years. BR is a Buy for dividend growth, especially on pullbacks.” HOLD.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small Cap Confidential, hit a record high last Thursday and has pulled back normally since, though it still remains well above its 25-day moving average at 47. In his latest update, Tyler wrote, “Everbridge sells cloud-based critical communications software that help keep people safe and businesses running. 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 Stifel 2018 Cross Sector Insight Conference on Monday, and the William Blair Annual Growth Stock Conference on Tuesday. I listened to one of these and it was a good reminder about what the company did. The assets acquired in the UMS purchase (a company based in Norway in the same space) are something I’m looking forward to hearing more about as Everbridge integrates these onto its platform and seeks out growth opportunities overseas.” I’ll keep it rated buy, noting that there’s the possibility of a correction to the 50-day moving average down at 43. BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is on a shallow pullback with selling volume comfortably low—which means buyers should resume control soon. 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. BUY.
Huazhu Group Limited (HTHT) (previously known as China Lodging Group) was originally recommended by Paul Goodwin of Cabot Emerging Markets Investor and now it’s one of the Heritage Stocks in this portfolio, 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 yesterday and pulled back normally today. As with many of our holdings, there is serious potential for a correction—the 200-day moving average is at 35, down 23% from here—but I’m holding tight. HOLD.
iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, has doubled over the last four weeks—and the odds are very high that it won’t repeat the feat over the next four. But it’s not impossible! That’s why the mantra for true momentum investors is “Cut losses short, and let winners run.” Someday (probably soon) the stock will enter into a well-deserved correction, and momentum players will sell and move on. But I’m inclined to hold, given the long-term growth prospects of the company, which many label as “the Netflix of China.” In his latest update, Paul wrote, “If you don’t own any, you could buy a token amount here, but a better entry point should come after the stock’s first meaningful shakeout.” Note, the 25-day moving average is down below 29, while the 50-day moving average is below 24. Shorter-term traders might take profits now and hope to get back in somewhere down there. BUY.
PagSeguro (PAGS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor announced the launch of a proposed follow-on offering today which will dilute current shareholders’ interests, and the market didn’t like it, dropping the stock right down to its low of early February. So the question now is, do we sell and move on here, or wait patiently? Arguing for selling now is the policy of “cutting the loss short” and moving on (though this is not a true momentum stock)—and in the process getting out of troubled Brazil. Arguing for holding is the fact that the stock is at support, the “bad news” is out, and the long-term prospects for the company remain bright. I’m holding. HOLD.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, closed at a record high yesterday and pulled back normally today. In last week’s update, Mike wrote, “PYPL continues to act well, taking aim at its high from late January. 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.” BUY.
PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor, was “almost” sold. Last week when the stock closed at 33 I wrote, “I’ll hold for now, but look to sell around 34.” But today the stock is back down below 30, so now it’s a solid hold. In her latest update, Crista wrote, “Pulte Group 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 8.9 and 8.0. PHM peaked in January at 35. Last week, I moved PHM from Strong Buy to Hold after a quick run-up to 33. Subsequently, homebuilder stocks fell after the Fed’s interest rate increase. Now that PHM has dipped below 30 again, I’m moving it back to a Strong Buy recommendation. If you’ve never done any short-term trading, and want to stick your toe in the water, buy PHM now and sell it when it reaches above 34.” Hang on. HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, remains in a consolidation phase, above all its moving averages and below its recent high of 27. In her latest update, Chloe wrote, “STAG took a breather while investors waited for inflation data this week, but remains above its 50- and 200-day moving averages and close to its high for the year. The company is an industrial REIT that mostly owns warehouses. 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 29.1 and 21.2. After reaching a new all-time high in May, SUPN began a consolidation phase, trading between 54 and 58. I expect new highs again in the coming months. Buy SUPN now.” BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, has had a hot seven weeks, climbing from 42 to 63 (a gain of 50%) at yesterday’s high before pulling back with the market today. The company has 3,100 board-certified physicians (in a broad spectrum of specialties) serving 20 million members via video link and 92% of issues are solved in one video session, leaving members with a 95% satisfaction rate. Plus, a recent acquisition brings great growth potential in Europe. Hold while the stock cools off; there’s some support at 54. 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. That said, I would prefer that the company weren’t so famous! Every day there are stories: about the speed of Model 3 production; about cars on fire; about employees hired or fired; about Elon Musk’s latest impolitic statement; about competition from yet another would-be competitor, etc. But these stories don’t help! The most troubling come out when the stock is down, while the most positive come when the stock is up. In the past few weeks the stock has been under strong accumulation, heading back toward its June 2017 high of 387. HOLD.
TiVo (TIVO), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio, and featured here last week, remains at a fine buy point as we wait for some sort of merger/takeover action. In her latest update, Crista wrote, “TiVo is an entertainment technology company that joined the Buy Low Opportunities Portfolio specifically because it’s a takeover target. The company is interested in being acquired or going private because the shares are so undervalued. TiVo intends to complete the process of its strategic review by the time second quarter results are reported in early August. There are no recent news stories or changes in earnings estimates, but there was a large $360,000 call option purchased on TIVO last week, as reported by Jacob Mintz, Chief Analyst of Cabot Options Trader. The share price remains with a narrowing trading range, with the price dips becoming progressively higher over the last four months. I expect a surge in the share price when TiVo’s management announces some sort of M&A decision. Expect volatility.” Also, notice that the fat yield could disappear as the company’s strategy changes. BUY.
Weight Watchers International (WTW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains in play, as growth investors continue to learn about the company’s renewed momentum, thanks to growing earnings and an expanded roster of celebrity spokespeople. If you haven’t bought yet, you can still buy here, but I suggest a lighter commitment, as there’s growing potential for a pullback. BUY.
Zillow (Z), originally recommended by Mike Cintolo of Cabot Growth Investor, closed at a record high last Friday and has pulled back normally since. This pullback could easily take the stock down to its 25-day moving average at 59 or even lower, but long-term prospects are great for the company—in fact, the stock is featured in my recent series “Forever Stocks to Buy in 2018.” Still, given its rapid ascent over the past few weeks, I believe it’s prudent to downgrade the stock to hold. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JUNE 26, 2018
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