As to this week’s stock, once again I’m trying to buy low, with a recommendation of Crista Huff that should soon see improved earnings thanks to last year’s huge merger.
Cabot Stock of the Week 203
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The market’s long-term trend remains up, but last week brought the start of a normal correction, which will continue until all the “weak hands” have sold their shares. Pundits will tell you the reason for the heavy selling is the talk about tariffs, but the truth is that the market was very extended (exactly as I pointed out last week in bold type), and it was due for a downturn. Now it is here, and it will likely go farther. This is normal. But the good thing about this downturn is that it gives us an opportunity to observe which stocks are the most resilient, and to buy them before the market resumes its uptrend. My choice today is a couple of well-known names that merged last year and whose stock is undervalued according to Crista Huff, editor of Cabot Undervalued Stocks Advisor. Here are Crista’s latest thoughts.
DowDuPont (DWDP)
There are all kinds of lucrative stock market opportunities that investors can learn to identify before Wall Street analysts and news media catch on. One of my favorite strategies is to buy post-merger companies exactly nine months after they finalize their mergers. I love this strategy because you can follow it like clockwork, and there’s no rush to make a buying decision. It works like a pregnancy: You sit back and watch it slowly develop for nine months, and then the big moment arrives. If you’re watching the affected stock, you make a buying decision.
Why nine months? That seems to be the sweet spot with regard to timing a purchase right before everybody on Wall Street begins recommending the stock to their institutional clients. If the merger is working out well, the success is already exhibited in the consensus earnings estimates and various balance sheet data. So I’m not going out on a limb and guessing; I’m simply using my normal stock-screening process, and waiting for institutional buyers to get a clue that the new company is ripe for delivering capital gains.
I’ve recommended many post-merger stocks in the Cabot Undervalued Stocks Advisor portfolios in the past, including Dollar Tree (DLTR) after it bought Family Dollar Stores (FDO), and Kraft Heinz (KHC) after its merger. Both sets of companies coincidentally merged in July 2015 and I bought them each nine months later in April 2016. DLTR delivered an annualized total return of 9.9% to subscribers, and KHC delivered an annualized total return of 26.8%. And now, earlier this month, I added DowDuPont (DWDP), which yields 2.3%.
The Dow Chemical Company (DOW) and E.I. du Pont de Nemours & Company (DD) finalized their merger on August 31, 2017, forming DowDuPont. The new company is comprised of three divisions: Agriculture, Materials Science and Specialty Products. The Agriculture Division includes DuPont Pioneer, DuPont Crop Protection and Dow AgroSciences. The Materials Science division focuses on plastics and chemicals, and the Specialty Products division focuses on technology-driven specialty businesses.
Importantly, the merger is not the end of the story—it’s just the beginning! DowDuPont intends to separate into three publicly traded companies, with target separation dates of approximately April and June 2019. Once the companies are separated, institutional investors will be able to more effectively compare the successes and balance sheets of the new Materials Science company to its chemical industry peer LyondellBasell Industries N.V. (LYB). At that time, the more attractive company should garner more Wall Street recommendations. Hint: At this point, DWDP has far more attractive earnings growth prospects than LYB, and half the debt ratio of LYB.
Consensus earnings estimates point to DowDuPont’s EPS growing aggressively at 23.8% and 17.5% in 2018 and 2019. Those are huge numbers for a company with a market cap of $155 billion, which more typically grows at a single-digit pace. The respective price/earnings ratios (P/Es) are 15.9 and 13.5, well under the earnings growth rates, making the stock undervalued.
DowDuPont is currently paying a $0.38 quarterly dividend, resulting in a 2.3% annual yield. The next record date is August 31. The debt-to-capital ratio is quite low at 21%—unusual after a big merger, which typically increases corporate debt. All in all, I love the numbers on the newly merged company, and I’m sure that institutional investors will also recognize their value.
Like many attractive stocks, DWDP peaked in January 2018, and then experienced a big price correction with the broader stock market, but DWDP has been ratcheting upward since bottoming in early April. There’s 15% upside as DWDP retraces its January high of 76 and I expect additional capital appreciation thereafter, followed by an even higher sum-of-the-parts value after the company splits into three different stocks in 2019. BUY.
Tim’s note: I like the price chart a lot; the pattern of higher lows and higher highs since April forms a clear uptrending channel that tells you buying between 65 and 68 will work out well.
DowDuPont (DWDP)
2211 H.H. Dow Way
Midland, MI 48674
800-422-8193
www.dow-dupont.com
CURRENT RECOMMENDATIONS
On a short-term basis, all the indexes we follow—U.S., China and other emerging markets—have turned down in a normal correction pattern, and the correction is likely to go further. So ideal portfolio management will consist of selling stocks that will fall substantially further (unless they are very long-term commitments) while holding onto those that will resist the selling—or even advance. But how do you know which will fall further? That’s the tricky part! In fact, after a thorough review of all the stocks in the portfolio today, I can’t find any to sell! In fact, the best I can do is downgrade one to hold and upgrade one to buy. Details below.
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, with great long-term growth prospects. In his latest update, Paul wrote, “I like the company’s strategic investment in TTP Car, a Chinese used-car auction site.” As to the stock, it had been holding up quite well until yesterday, when it dropped sharply with the rest of the Chinese sector, and now it’s sitting just on top of its 50-day moving average, which makes this a normal correction so far. It’s tempting to keep the stock rated buy here, but I’m going to downgrade to hold, honoring the new downtrend of Chinese stocks as well as the fact that ATHM, which has climbed from 30 to 120 over the past 18 months, could give up a lot more of that gain before the correction is over. HOLD.
Axon Enterprise (AAXN) originally recommended by Mike Cintolo of Cabot Growth Investor, has excellent long-term growth prospects as the owner of the law enforcement video cloud storage site, Evidence.com. But unlike ATHM, this stock has been hot for much less time (it “only” blasted off in February), so it has much less to give back. In the near term, a reunion with its 50-day moving average, now at 56, makes sense, but I don’t see much potential for the stock to fall below there. HOLD.
BB&T Corp. (BBT), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, has pulled back with the market over the past week and is now very close to its 200-day moving average, as well as support from April. In her latest update, Chloe wrote “The stock is in an increasingly firm trading range between about 51 and 56. Long-term investors can probably nibble when the stock is in the lower half of that range, although I’ll keep BBT on Hold as long as momentum stays primarily sideways. Still, the long-term picture is good, earnings estimates are firm, and looser regulations mean BB&T is likely considering acquisitions again, which would give a nice boost to growth.” Then, this week, 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. 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. Analysts expect full-year EPS to grow 43.4% and 8.8% in 2018 and 2019. Corresponding P/Es are 12.9 and 11.9. Bank stocks pulled back in recent weeks. This week’s CCAR results could prompt a rebound.” HOLD.
Broadridge Financial Solutions (BR), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth Tier, looks fine. In her latest update, Chloe noted, “Broadridge’s addition to the S&P 500 this week caused a volume spike, but the stock is behaving normally. Broadridge, an investor communications firm, is a steady grower that has increased its dividend every year for 10 years. Trending up nicely just above its 50-day moving average, BR is a good Buy for dividend growth right here.” I agree, so given the stock’s strong support at this level dating back to May, I’m upgrading the stock to Buy. BUY.
Everbridge (EVBG), recommended by Tyler Laundon in Cabot Small Cap Confidential, has dropped for eight consecutive days since it hit a record high two weeks ago, and is now getting close to its 50-day moving average at 44. In his latest update (last week), Tyler downgraded the stock, writing, “With revenue expected to be up 34% this year and 26% in 2019, and a leading position in a compelling growth market, it’s easy to see why the stock keeps going up. That said, Everbridge has traded down in each of the last five sessions, and shares trade with an EV/TTM revenue multiple of 12.3, which makes them quite expensive on that measure. Given the rapid growth, the stock’s EV/2019 revenue multiple of 7.8 is much more palatable. But given the stock’s recent action I’ll move to Hold for now and see if we can’t get a better entry point for new money.” Since then, the stock has dropped four more points, and with the support promised by the 50-day moving average, I’m loath to change to Hold here; I’m keeping it on Buy, for opportunistic-minded readers. Note: Everbridge is now the world’s largest global critical event management organization. BUY.
G-III Apparel Group (GIII), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, has built a small base just on top of its 25-day moving average in recent days and can be bought here. BUY.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, has pulled back normally to its 25-day moving average (around 75) over the past week, and also has support at this level dating back to May. 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, 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. And that’s what we’re doing now—sitting through gyrations. Last week I told you that the stock had the potential to correct to its 200-day moving average down at 35, and the stock has now made about 40% of that trip—it’s sitting at support provided by its May high and it may find a bottom here, or not. In any case, I’m holding tight. HOLD.
iQIYI (IQ), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor, peaked last Tuesday, having more than doubled over just four weeks, and is now on a normal correction—normal for a hot stock. Traders took profits last week as I suggested, but I’m holding on, given the long-term growth prospects of the company labeled as “the Netflix of China.” In his latest update, Paul wrote, “If you have the temperament to play a big mover, this pullback looks like a reasonable buy point, although there may be more ups and downs ahead.” Also, note that Jacob Mintz of Cabot Options Trader last week closed a position in IQ Calls for a 309% gain. BUY.
PagSeguro (PAGS), originally recommended by Paul Goodwin of Cabot Emerging Markets Investor is our Brazilian digital payments play, which we tried to buy low but which dipped even lower after. That bottom, from last Monday, still holds, and I remain optimistic that the stock can move up from here. In fact, last week, Jacob Mintz of Cabot Options Trader, who has call options on the stock, wrote, “On Friday afternoon hedge fund titan Steve Cohen’s Point72 reported a 5.2% passive stake in PagSeguro (PAGS). As of this filing Point72 owns 6.4 million shares. While I love the option activity, as well as Point72’s taking a large position, I do recognize that PAGS stock does not look so great. That said, for now I feel that odds favor a move higher for PAGS.” HOLD.
PayPal (PYPL), originally recommended by Mike Cintolo of Cabot Growth Investor, hit another record high last Thursday but then joined the market on the downside. In last week’s update, Mike wrote, “We’re still of the mind that the stock’s longer-term uptrend is resuming—hence our Buy rating. One factor that gets ignored when it comes to PayPal and potential competition is the firm’s huge stable of partnerships that continue to expand; in Q1, the firm inked deals with JP Morgan (certain members get more cash back when using PayPal with their credit cards), Bank of America (link credit cards to PayPal), Visa (merchants don’t have to ask for credit card info on follow-up transactions), Samsung Pay (integrated with PayPal), Grubhub and Seamless (both of which are now integrated with Venmo), creating an ever-greater moat in the payments industry. Another thing to consider: While PayPal’s take rate (how much of a cut it gets from each transaction) has been sliding, it’s not all from competition; in Q1, the take rate fell 19 basis points, but eight of that was currency fluctuations and another seven was the growth in its peer-to-peer platforms (like Venmo) that are just starting to be monetized. Bigger picture, we think PYPL has the combination of steady and reliable growth that big investors crave.” BUY.
PulteGroup (PHM), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor, has sold off hard these past two weeks and is now right back to the bottom that it established in February, March and April. Yet Crista remains resolutely bullish on the stock. In her latest update, she 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 8.5 and 7.6. There’s 23% upside as PHM travels back to 35 where it peaked in January.” We’d also note that peer Lennar (LEN) reported a solid quarter this morning, a positive fundamental sign for the group. HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, is hitting new highs! To some extent, this reflects a flight to safety, as investors shift out of risky growth stocks and into equities with more stability. But there’s also a real growth factor here, as Chloe explained in her recent update: “STAG is an industrial REIT that mostly owns warehouses, so it’s benefitting from the proliferation of e-commerce distribution centers as well as from overall economic growth. 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, hit a record high last Thursday before joining the market on the downside, but there’s been precious little selling pressure so the stock is simply back in its base between 56 and 58—which looks like a decent entry point. 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…Buy SUPN now.” BUY.
Teladoc (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, 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. After doubling since January, the stock hit a record high last Wednesday and has pulled back normally since. I’m going to keep it on hold a little longer, as I think a little more cooling off will be healthy. 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. In last week’s Cabot Growth Investor, Mike noted that analysts see revenues surging 67% this year and 41% in 2019. But Tesla is more than cars! In fact, just last December the company supplied the world’s largest backup battery system to the Hornsdale Wind Farm in Australia, and that system has exceeded expectations since, reducing the cost of grid services to the Australian Energy Market Operator by 90% and generating an estimated $2.5 million in profit for its owner in the first quarter. The stock is now pulling back to approach all three of its major moving averages, and the bottom of this correction will likely be a good place to buy, if you don’t own it. HOLD.
TiVo (TIVO), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy-Low Opportunities Portfolio, is a recent addition that I tried to get at a low point, and nearly succeeded—so far. 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 was a $270,000 call option purchased on TIVO last week, as reported by Jacob Mintz, Chief Analyst of Cabot Options Trader. The share price remains within a narrowing trading range, with the price dips becoming progressively higher over the last four months. I expect a significant surge in the share price when TiVo’s management announces some sort of M&A decision. Expect volatility. Buy TIVO now.” BUY.
Weight Watchers International (WTW), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high last Wednesday and has pulled back a little since—but there’s no real power behind the selling. If you haven’t bought yet, you can still do so here, but I suggest a lighter commitment, as there’s still potential for a pullback of 10% or more. BUY.
Zillow (Z), originally recommended by Mike Cintolo of Cabot Growth Investor, has pulled back normally over the past two weeks and now sits at its 25-day moving average. Long-term prospects remain great for the company as it leads the market for online resources about the housing market. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED JULY 3, 2018
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