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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 229

The market has begun 2019 with a bang, and it well could go on longer—though prediction is a fool’s game. It’s far better to simply follow proven systems of investing, whether growth or value or hybrid, and continually work to maintain a portfolio of high-potential stocks.
This week’s recommendation, for example, is a solid grower, nothing fancy. But the stock withstood the selling of December and is now at an attractive entry point, primed to break out to new highs in the weeks or months ahead.

Cabot Stock of the Week 229

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December’s market bottom has held so far, and we’ve seen a couple of days of impressive upside action in recent weeks, but there’s still a very good chance of a retest of that recent low, a process that could take months. Nevertheless, there are stocks that are acting well, and today’s selection is one of them, combining a solid growth story with a healthy chart. It was originally recommended by Mike Cintolo in Cabot Top Ten Trader and these are Mike’s latest thoughts.
Deckers Brands (DECK)

The market’s rebound during the past couple of weeks is very encouraging (it’s growing more likely that the peak in downside momentum was seen around Christmas), but we can’t say the trend has turned back up. Thus, some further reverberations are likely, so we think big investors will be putting a premium on companies and stories that have their own levers to drive earnings higher, as opposed to being overly dependent on rumors about interest rates and trade deals.

One such company is Deckers Brands, a good-sized (around $2 billion in annual revenue) footwear maker. Years ago, it was a massive growth stock as its Ugg boots first became popular. Today, in fact, Ugg is still the main driver, making up around three-quarters of all revenue in the most recent quarter. But Deckers is diversified, too; its Teva and Sanuk brands are small but profitable, while its Hoka One One running shoes are quickly gaining in popularity and now make up 10% of the firm’s business.

In fact, the Hoka brand looks like the main growth driver going forward (sales up 28% last quarter) as it gains penetration overseas and expands into some other outdoor and fitness products. And with Ugg, Deckers is aiming to attract some younger guys to that brand, as well as develop a spring/summer product line (including apparel and loungewear) to smooth out the seasonality. Throw in an emphasis on its international opportunity in general and a boost to its ecommerce capabilities and it’s clear Deckers isn’t standing still.

Even so, the days of rapid growth are likely behind the company. Sales grew just 4% in Q3 (Ugg revenues were down 1%), and analysts see the top line advancing at a similar pace for all of fiscal 2020 (which ends March 2020). Instead, the big attraction here is the firm’s operating improvements that are driving profit margins (and earnings) significantly higher.

We’re talking about things like general organizational efficiencies, supply chain improvements, optimizing its existing retail footprint, shortening the time-to-market process and leveraging previous infrastructure investments—MBA sort of stuff. And it’s working! Earnings growth has consistently outpaced sales growth in recent quarters, and in Q3, operating margin came in at 18%, four full percentage points above the year-ago quarter. (That type of margin gain isn’t sustainable over time, but earnings should continue to grow faster than sales going forward.)

The other plus is management’s shareholder friendly stance. With a more efficient operation throwing off more cash, the top brass has put some of that to work buying back stock; the company has bought back nearly $300 million of stock during the past year, including 1.1 million shares (about 3% of the total!) last quarter alone. All told, Q3’s share count was a huge 7% below the year-ago figure.

Add it up and Deckers offers a well-established brand, has several avenues for growth, and management is pulling the right levers to keep costs in check while gobbling up its own stock (which boosts per-share growth). Throw in a reasonable valuation (18 times earnings) and it’s no surprise the stock has been very resilient during the wild market environment.

After rallying nicely for many months, DECK hit a peak of 123 in June of last year, which preceded a long consolidation that didn’t end until shares dipped toward the century mark as the market went over the falls in October. However, a fantastic earnings report kicked the stock to new highs in November, and while the action has been very choppy, DECK held support in the 117 to 120 area numerous times of late, even when the indexes crashed in December.

Looking at the action of the past two months as a temporary trading range in a long-term uptrend, we can see 138 as the top of that range and 118 as the low, so if the setup intrigues you, you should aim to buy in the lower half of that range. We’ll keep it simple, as always, by buying tomorrow.


Deckers Brands (DECK)
250 Coromar Drive
Goleta, CA 93117





As the market’s December low recedes, the story of 2019 is off to a great start, characterized by a strong and broad advance; today, for example, all major indexes punched through their 25-day moving averages (which are still trending down). This rally won’t last forever, but markets always do what it takes to fool the majority, so given that 2018 ended with investors fearing the worst, 2019 has proven a great opportunity for investors brave enough to remain invested. In our own portfolio, last week I wrote, “in the weeks ahead, I expect some of our stocks to falter, and those are likely to be sold.” Well, the first victim is McCormick (MKC), which performed splendidly last year but is now out of favor. Details below.

Apollo Global Management (APO), originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor, and featured here last week, is off to a great start. In her latest update, Crista wrote, “Apollo is an alternative asset manager with assets under management (AUM) totaling $270 billion, broken down as follows: credit (68%), private equity (27%) and real estate (5%). Apollo also manages over $70 billion AUM for Athene, a fixed-annuity provider. Last week, Reuters reported that Apollo “is working on an offer to acquire General Electric Co’s aircraft leasing operations, which are worth as much as $40 billion.” And as I reported on January 4, Apollo is also reportedly vying to acquire GameStop (GME). APO is an undervalued mid-cap stock growth & income stock. The quarterly dividend payout varies, totaling $1.93 per share in 2018, and $1.85 in 2017. Presuming that the worst of the market correction is behind us, the stock will likely trade between 24 and 29 in the coming weeks. Try to buy below 26.” BUY.

Arena Pharmaceuticals (ARNA), originally recommended by Tyler Laundon in Cabot Small Cap Confidential, is unlike most stocks because it didn’t fall to new lows in December, and that was a great sign. But even better has been the way the stock has blasted off since Christmas; it’s up 15% since then. In his latest update, Tyler wrote, “Arena is a development-stage biotech stock and thus its value is derived from its pipeline. First revenue, assuming successful Phase 3 trials, won’t be for several years. The company recently out-licensed its ralinepag asset to United Therapeutics (UTHR) for up to $1.2 billion in exchange for an $800 million upfront payment, a $400 milestone payment, and tiered low double-digit royalties on global sales. That cash will help Arena move other assets, including etrasimod and olorinab, through the pipeline.” And then just yesterday, the company announced “positive data from the open-label extension (OLE) of the Phase 2 OASIS trial of its investigational drug candidate etrasimod, a next-generation, oral, selective sphingosine 1 phosphate (S1P) receptor modulator in development for the treatment of moderate to severely active ulcerative colitis (UC),” news that the market loved. I’ll leave it rated buy, but recommend that if you haven’t bought yet, you wait for a pullback. BUY.

Canada Goose (GOOS), originally recommended by Mike Cintolo in Cabot Growth Investor, has bounced strongly with the market over the past two weeks, but volume has been shrinking, so it’s likely that a pause—or worse—is around the corner. Still, I remain long-term optimistic. It was only two months ago that the stock blasted out to record highs on huge volume after an excellent fiscal second quarter report (revenues up 34% and earnings up 59%). Plus, the company just opened its first store in China. HOLD.

General Motors (GM), originally recommended in Cabot Dividend Investor for the High-Yield Tier, is the second portfolio stock that didn’t fall to new lows in December; in fact its low was way back in October. In his latest update, chief analyst Tom Hutchinson wrote, “GM is a great company and an undervalued stock. The financials look great. It pays a strong and well-supported dividend. It sells at a microscopic valuation of less than 6 times earnings. The sum of its parts should add up to a better stock price. But investors haven’t shown the stock much love, and probably won’t for the rest of this cycle. Additionally, the stock is at the mercy of trade news and the global economy. Like many stocks it got too beat up in the recent market and should bounce back nicely as the market recovers.” HOLD.

Green Dot (GDOT), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is an innovative bank holding company that is invisible to most Americans, because its products—like prepaid cards—are sold through partners and branded GoBank, MoneyPak, AccountNow, RushCard and RapidPay. But growth is solid, and the stock’s action is positive, riding its 200-day moving average higher. HOLD.

Huazhu Group Limited (HTHT) (previously known as China Lodging Group) was originally recommended in 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; revenues grew 16% in the latest quarter. As for the stock, it hasn’t bounced as well as most of the portfolio’s stocks, but it is performing better than the average Chinese stock. HOLD. (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, is the world’s largest company devoted to connecting single people. Its brands include Tinder, LoveScout 24, PlentyOfFish. OurTime, OkCupid, Meetic, Twoo, and Pairs. And growth is great, with revenues up 29% in the third quarter and earnings up 38%. As for the stock, it bottomed way back in November (with a low of 32!) and has seen impressive support since. HOLD.

McCormick & Company (MKC), originally recommended in Cabot Dividend Investor for the Safe Income Tier, outperformed all expectations until the second week of December and then finally succumbed to the market’s selling pressure, dropping 14% in two weeks before buyers stepped in. Since then, it’s been working on building a base, centered around 137, but it has not bounced with the market. Thus I conclude that post-correction, investors are moving from “safe” stocks like MKC back into more aggressive stocks, and thus the prospects for the stock in the near term are diminished. Technically, the stock could come down to 120—or simply trade sideways for long time—so I’m going to sell here and move on. SELL.

MedMen (MMNFF), originally recommended by me in Cabot Marijuana Investor, is the leading marijuana retailer in the U.S. today—last quarter’s revenues were $59 million—and it has the potential to remain the biggest if it plays its cards right. For example, just yesterday the firm announced that it would spin out its real estate holdings to Treehouse Real Estate Investment Trust and use the proceeds to accelerate its store development program. MedMen currently operates 16 stores and three cultivation and manufacturing facilities, but has 76 retail licenses and the potential to develop 16 cultivation and manufacturing licenses in 12 states. As for the stock, which lost 67% of its value from the October peak to the December low, it’s had a great post-Christmas bounce and is now correcting normally. HOLD.

MiX Telematics (MIXT), originally recommended by Cabot Emerging Markets Investor, is a South African transportation fleet technology company with a solid growth story. The stock looked great in October and November, but was dragged down by the market in December. In his latest update, chief analyst Carl Delfeld wrote, “MIXT stacks up as a bargain compared to Workday (WDAY),” but acknowledging the stock’s weak performance, he rates it Hold. I’ll do the same. HOLD.

STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, bottomed in sync with the market two weeks ago when economic fears peaked, but it bounced strongly last week and extended its gains this week as the prospects for further Fed rate hikes dimmed. If you’re investing for income, you can buy here. Otherwise, hold. HOLD.

Teladoc Health (TDOC) originally recommended by Mike Cintolo in Cabot Growth Investor, has a great long-term growth story and we have a big long-term profit as well, so we were able to give the stock some rope as it corrected down through its 200-day moving average in mid-December. It bounced with the market post-Christmas and extended those gains this week, to the extent that it may need a pullback, but overall I remain very bullish on the company’s fundamentals as it leads the telemedicine movement. HOLD.

Tesla (TSLA), originally recommended in Cabot Top Ten Trader, is the second Heritage Stock in the portfolio, and I’ll continue to hold as long as I believe the company has great growth potential. This week the company began work on its new factory in China. Designed to build 500,000 cars per year (the same amount as the company’s U.S. factory) when it gets to full speed, the factory will be owned solely by Tesla, unlike other U.S. companies’ factories. As for the stock, it’s been cycling between 300 and 350 in recent weeks, but the ultimate goal remains the old high of 390, because when it surmounts that, buyers will come running. HOLD.

Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, looks great. In his latest update, Mike wrote, “Every December some publishers reach out for our top pick of the following year, and for 2019, my pick is Twilio, for many of the reasons that have been written about before: The company looks like an emerging blue chip, the type of name we think will see its fund sponsorship increase dramatically over time (443 mutual funds owned shares at the end of September, but we wouldn’t be shocked to see that figure up over 1,000 within two or three years) as the firm’s communications platform continues to gain traction both among new customers (client count was up 32% in Q3) and current users (revenue per client leapt 27% in Q3!), driving revenues higher and pushing earnings further into the black (the bottom line has been positive each of the past two quarters). The thing we most enthuse about here from a fundamental perspective is the pervasiveness of its solution; most companies that sell productivity-enhancing software to other businesses target a certain segment (Fortune 500, a specific industry or two, etc.), but Twilio is being used by everything from giant, worldwide outfits to us! (We use it for some text message alerts and to route certain phone calls.) Now, for full disclosure, our top pick prediction is obviously a guess; last year’s pick was Five Below, which worked well, but if Twilio’s outlook darkens or if the chart implodes, we’ll cut our loss and move on. But so far, the evidence continues to support the notion that TWLO wants to get going if the market can bottom out—even at its December nadir, the stock’s low (73) was above the November and October lows (72, 63), and it quickly snapped back above its 50-day line. A drop back below its recent low would mark a change in character and cause us to move on, but right now, we’re holding on to our shares.” Aggressive investors can buy here, while the more risk-averse should wait for a normal pullback. BUY.

Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, bounced with the rest of the market after the December bottom and has been trending higher since. In her latest update, Crista wrote, “VOYA is a retirement, investment and insurance company serving approximately 14.7 million individual and institutional customers in the United States. VOYA is an undervalued aggressive growth stock. Analysts expect EPS to increase 107% and 36.4% in 2018 and 2019, and the 2019 P/E is 7.6. Management intends to increase the dividend yield to 1% in 2019.” BUY.


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