The market decline of the past month has turned Cabot’s long-term trend-following indicator negative (after 30 months on the positive side), so it’s time to recognize that the tide is now going out. Defense is now a major part of the game.
Cabot Stock of the Week 220
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Cabot Stock of the Week recommends one stock every week—rain or shine, bull market or bear—and there are pros and cons to this.
The biggest con is that when I recommend a stock just before a major downturn, such as we’ve had over the past month, the odds are high that we’ll lose money, at least in the short term. And the biggest pro is the converse: that when I recommend a stock just before a major upturn (which might be right around the corner), the odds are very good that we’ll make money, at least in the short term. Long term, however, the trend of the stock market is up, and will be as long as investors believe that capitalism will continue to create value. Thus, all things being equal, if you simply follow my advice (or any good advisor’s advice), you’ll win in the long run.
However, I do want to point out today that for the first time in 30 months, Cabot’s long-term market-timing indicator, the Cabot Trend Lines, has turned negative. This does not mean that the market will necessarily head lower from here, but it does mean that the odds are now worse than they have been in a long time, so an additional dose of caution is wise. For today’s stock, for example, it might mean waiting for an ideal buy point as well as using tighter stops than usual. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.
Match.com (MTCH)
When the Internet hit the investing mainstream in the late 1990s, predictions ran wild about how it would revolutionize all sorts of things, from business communications to retail sales to how you ordered a pizza. But one of the bigger “industries” that’s been transformed—somewhat surprisingly—is dating. Match.com is the biggest player in the industry by far and, if it continues to pull the right levers, should have many years of growth ahead of it.
Match.com offers a variety of different dating sites and services around the world, including Match, Tinder, PlentyofFish, Meetic, OkCupid, and OurTime; in total, its products are available in 42 languages and more than 190 countries and had a total of 7.7 million subscribers in the second quarter of this year. And Match is by far the dominant player in the industry—management says that its sites have accounted for 60% of all dates, relationships and marriages that originated online!
While the firm has many sites that all have a different flavor, there’s no question that Tinder is the horse pulling the cart—it’s the most downloaded and top-grossing dating app in the world and the second-highest grossing app overall! In Q2, Tinder accounted for nearly half of Match’s overall subscribers (3.77 million), up a whopping 81% from a year ago (compared to 27% for the company as a whole).
Tinder has always enjoyed solid growth, but a year ago Match began offering Gold premium subscriptions, which allow people to see who “likes” them without liking them back. Believe it or not, that’s made a big difference, boosting revenue per user (up 8% overall for the company in Q2) and keeping new subscriber growth strong. Tinder also offers some a la carte features, like the ability to purchase “Super Likes”, and has some advertising, but subscription fees make up the lion’s share of the business.
As mentioned above, Match.com has a ton of other brands (including four the top five in the U.S.), but many of those were launched more than a decade ago. (Match started in 1995, PlentyofFish in 2003 and OkCupid in 2003; Tinder, by comparison, just started monetizing its subscriber base in 2015.) The downside of that is that growth in these older properties is modest at best, but on the flip side, capital expenses for these properties are low.
Said another way, Match has the characteristics of both a cash cow and a growth company. For the first six months of 2018, for instance, Match.com saw cash flow from operations total $243 million, and because CapEx was just $15 million, free cash flow was $229 million, or about 77 cents per share (about in-line with pretax income). And, of course, Tinder is helping those figures grow—revenue growth of 36% in the first two quarters of this year marked a big acceleration from last year (when revenues were rising 10% to 19%), and earnings have advanced at triple-digits rates during Q1 and Q2 as well. It’s a similar story for cash flow, which was up 59% in the first six months of the year.
Growth will probably slow somewhat going forward (the Gold boost to Tinder accelerated growth rates recently), but analysts still see revenues up 17% next year and earnings up 22%, both of which are likely conservative as Match regularly tops estimates.
The combination of it all has big investors accumulating positions and has kept the stock afloat despite the recent horrible environment for growth stocks. MTCH originally broke out at 21 in September 2017 and ran to 49 by April of this year. Then came an earnings-induced plunge as investors worried about subscriber growth. Still, the stock held its 40-week line and got going again when Q2 earnings in August topped expectations.
Ironically, it’s probably because of that springtime decline that MTCH has remained resilient recently; many weak hands were likely scared out during the downturn, leaving fewer potential sellers in recent weeks. Indeed, MTCH, while pulling back, has held above its prior base, and has found support near 50 twice this month. For growth investors who want to take a chance in a difficult market environment, this looks like a decent entry point.
Match Group (MTCH)
8750 North Central Expressway
Suite 1400
Dallas, TX 75231
214-576-9352
www.mtch.com
CURRENT RECOMMENDATIONS
Two weeks ago, as the market correction was gathering momentum, I sold four stocks. Last week I sold none, waiting to see which of the remaining stocks would bounce—even a little. And now that I’ve seen what I was waiting for—or not—I’m selling three more stocks today. Part of this defensive activity stems from the recognition that the market’s main trend is now down—and if you take a look at long-term charts, you can see that there’s a lot of potential downside to most stocks. And part of it comes from the simple strategy of cutting losses short; with switching costs so low, your money is likely to do better in stocks that are going in the right direction. Details below.
Altair Engineering (ALTR), originally recommended by Tyler Laundon in Cabot Small-Cap Confidential, and featured here last week, was bought low and has bounced since, so we’re off to a good start. In Tyler’s latest update, he wrote, “Altair is a simulation software stock (computer aided engineering, to be specific) that helps companies design new products, use new materials, cut waste and get products to market faster. The company is all about transforming design and decision making throughout product lifecycles by applying simulation, machine learning and optimization. The software is used in markets where physics really matter—think aerospace, heavy equipment and automotive industries. It’s also used in sporting goods and medical device markets. Customers include Ping Golf, Medtronic and Daimler.” BUY.
Centennial Resource Development (CDEV), originally recommended by Mike Cintolo in Cabot Growth Investor, is an oil driller and producer in West Texas with great growth potential, and if you haven’t bought yet, you can buy here. In his latest update, Mike wrote, “CDEV is our top pick right now among energy stocks. It’s a fresh idea near the top of a two-year base with huge growth and potential. Earnings are likely out in early November.” BUY.
CSX Corp. (CSX), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Dividend Growth portfolio, released its third-quarter earnings report last week and the results were excellent; revenue rose 14% and EPS rose 106%, both beating analyst estimates. Yet the stock continues to head lower. With the sellers now in control, and our loss growing, I’m going to sell and hold the cash. SELL.
DowDuPont (DWDP), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, fell through its bottom at 59 last week and is now heading lower still. Crista continues to stand by her value case, but notes fundamental troubles in the ethane market, as “demand and pricing for ethane—a DowDuPont product—waned in October vs. September, primarily due to unscheduled outages in ethylene production.” Additionally, noting that the stock might continue to struggle through year-end, and then rebound in the first quarter of 2019, she downgraded the stock to hold. But I don’t like holding a growing loss, so I’m selling now. SELL.
General Motors (GM), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High-Yield Tier, has now recorded three consecutive days up as bargain-hunters step slowly into the picture. In her latest update, Chloe wrote, “GM will release third quarter earnings October 31, before the market open. Analysts are expecting the automaker to report a 3.6% bump in sales, to $34.84 billion, and EPS of $1.25, down 5.3%. The stock is near 52-week lows, but I still think it’s a good long-term investment for yield and, eventually, capital gains.” I tend to agree, and the stock’s long-term chart, showing the stock now at its 200-day moving average, provides additional technical evidence. HOLD.
Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is a virtual bank that’s the leading provider of prepaid cards, debit cards, checking accounts, secured credit cards, payroll debit cards, consumer cash processing services, wage disbursements and tax refund processing services. And the stock looks great, all things considered! It bottomed at 73 two weeks ago and has been working to build a base since, as new buyers come in to support the stock. I’m upgrading to Buy. BUY.
GrubHub (GRUB), originally recommended by Mike Cintolo of Cabot Growth Investor, is also working on building a base. It bottomed at 112 a week ago Monday and returned to that level today, on substantially lighter volume. In his latest update, Mike wrote, “GRUB’s story continues to play out just fine. The company announced this morning that it expanded its delivery services into 19 new markets, with the expansion for all of this year hitting the goal of 100 new markets set out by management, which only expands the firm’s leading position in the industry and increases its attractiveness to all sorts of restaurants that don’t offer delivery services. That said, the big report will be next Thursday morning, when the company will release Q3 earnings before the open. A poor reaction that takes the stock decisively below its 200-day line [now at 109] would probably be enough for us to bail out of the rest of our shares, but above there we’re fine giving the longer-term uptrend a chance to resume.” HOLD.
Guess? (GES), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, fell to its 200-day moving average this week, and I see decent technical support here. In her latest update, Crista wrote, “”Wall Street expects EPS to grow 55.7% and 22.0% in 2019 and 2020 (January year-end). Corresponding P/Es are low in comparison to earnings growth rates, at 18.3 and 15.0. The share price is suffering, and this may continue—possibly until the third-quarter earnings release in late November, or even through year end—giving investors an opportunity to lock in a high yield on new purchases.” I’ll hold. HOLD.
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, which means that I’ll hold through periods of poor performance to benefit from the positive long-term fundamentals. The stock bottomed two weeks ago along with the broad Chinese market and has bounced decently since. If you don’t own it, and you want a piece of China’s leading hotel company, you can nibble here. HOLD.
McCormick & Company (MKC), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her Safe Income Tier, remains the star performer of the portfolio, hitting another new high yesterday. In her latest update, Chloe wrote, “The spices company reported excellent third-quarter earnings three weeks ago, triggering a flurry of upward estimate revisions, and the stock is benefitting from a rotation into conservative sectors. Buy on pullbacks for dividends and capital gains.” Long term, her advice make sense, but I’m going to downgrade the stock to Hold, noting that it’s up 20% in the less-than-three months that we’ve owned it, and is due for a pause, or worse. HOLD.
STAG Industrial (STAG), originally recommended by Chloe Lutts Jensen of Cabot Dividend Investor for her High Yield Tier, bottomed two weeks ago and bounced nicely, and today, even though it’s given up some of that bounce, selling pressures seem to have nearly disappeared. In her latest update, Chloe noted that STAG will report third-quarter results November 1, after the close. Analysts’ average revenue estimate is $74.81 million, up 13.9% over the same quarter last year. BUY.
Synchrony Financial (SYF), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Buy Low Opportunities Portfolio, sold off sharply this morning, but recovered quickly, effectively creating a double bottom with its late-July low. In her latest update, Crista wrote, “Synchrony is a consumer finance company with $56.5 billion in deposits and 74.5 million active customer accounts. Synchrony partners with retailers to offer private label credit cards, and also offers consumer banking services and loans. The 2018 consensus earnings estimate rose to its highest point this year. Analysts now expect full-year EPS to increase by 32.8% and 28.4% in 2018 and 2019 (December year-end). The corresponding P/Es are extremely low at 9.0 and 7.0.” All this is very encouraging, but recognizing our loss, as well as the lack of buying power visible in the chart, I’ll downgrade it to Hold. HOLD.
Teladoc Health (TDOC), originally recommended by Mike Cintolo in Cabot Growth Investor, has pulled back in recent days but remains well above its low of two weeks ago—a good sign. In Mike’s latest update, he wrote, “TDOC has bounced in recent days, which is good to see, but the chart looks a lot like the market—a big-volume selloff, lower-volume rally and plenty of overhead to chew through on the way up. Fundamentally, CVS’ MinuteClinic, which leverages Teladoc’s platform, rolled out virtual care services in seven new states this week, and backed up by the firm’s bullish Investor Day in September, we don’t think the underlying story has changed at all. That said, the company is not the stock, so we’ll be watching to see if this bounce can sustain itself. So far, we’re comfortable holding our remaining shares.” 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 remains in a long and broad trading range, and today bounced very strongly off the lower end of that range on news that Citron Research (a frequent short-seller of high-flying stocks) is now long TSLA. Third-quarter results will be released after the market close on Wednesday. HOLD.
Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, pulled back to its 50-day moving average today, but remains at the level of its lows of two weeks ago, which isn’t bad at all. Additionally, the stock is just 7% off its early-September high. If you don’t own it, you could buy here. BUY.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, fell below its June lows yesterday and continued lower today, as fears of rising interest rates sparked an exodus from financial stocks. In Crista’s latest update, she downgraded the stock to Hold, saying, “Wall Street now expects Voya’s full-year EPS to grow 124% and 24.2% in 2018 and 2019. The corresponding P/Es are 10.8 and 8.7. The share price is weak. I’m moving VOYA from Strong Buy to Hold until the price chart turns bullish.” But we have a growing loss, and looking at the chart, I don’t see support until 40. SELL.
WNS Holdings (WNS), originally recommended by Paul Goodwin in Cabot Emerging Markets Investor, is an Indian outsourcing firm with a solid growth story. In his latest update, Paul wrote, “WNS is thrashing around its 200-day line, which is acceptable for now. But a big break from here would probably imply a deeper longer-term downtrend and consolidation, and have us dropping it from our coverage. Earnings are due out October 25, which will likely determine the stock’s next move.” I’m optimistic that emerging markets stocks have bottomed, so I’ll leave it on buy, for aggressive investors. BUY.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED October 30, 2018
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