The market remains in good health, and all Cabot’s market timing indicators are positive, telling us the odds are that the market will be higher in the months ahead.
For today’s recommendation we move outside the U.S. to a Chinese company targeting a mass market, a mass market that is virtually guaranteed to grow in the years ahead. It’s a stock that not known to most U.S. investors, and I think it’s a good buy here.
As for the current portfolio, some stocks are hitting new highs and many are close to it, while our value-based selections and Heritage stocks still show long-term potential.
Cabot Stock of the Week 243
The bull market of 2019 remains intact, with four of the five U.S. indexes I follow hitting new highs today—the exception remains the small-cap index. Thus, my advice remains the same: be heavily invested in a diversified group of high-potential stocks. And when I think diversified, I also think internationally, because while the U.S. remains the world’s largest economy, many emerging markets are growing faster, and offer opportunities to invest in growth stocks that are overlooked by U.S. investors. Today’s recommendation is one of these. The stock was originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, and here are Carl’s latest thoughts.
In Asia many things are moving fast including young, upwardly mobile, tech-savvy Chinese consumers. And this is the case across most emerging markets.
Financial service platforms based on mobile phones are often referred to as “fintech.” This is an exciting, crowded, fast-growing market offering huge growth potential.
LexinFintech Holdings operates as an online consumer finance platform for young adults in the People’s Republic of China. The company operates Fenqile, an online consumer finance platform that offers personal installment loans, installment purchase loans, and other loan products, as well as Le Card credit line.
It also matches customer loans with diversified funding sources, including individual investors on its Juzi Licai online investment platform and institutional funding partners in its direct lending programs.
My recommendation is based on the following considerations.
Well-defined and fast-growing target market
The company’s target customer cohort, educated young adults aged between 18 and 36 in China, features young people with high income potential, high educational background, high consumption needs, a strong desire to build their credit profile, and an appreciation for efficient customer experience.
The 250 million strong who make up China’s post-1995 generation will become a new force of consumption. LX customers are young, they have high growth potential and they care about their credit. And because LX begins serving them early in their career, the company has a clear advantage in data and analysis.
LX gets them ahead of Alibaba, ahead of Tencent by two years and ahead of the banks by five years. In addition, while there is considerable competition in this space, the market is huge, so nobody can serve it all.
Strong growth and low valuation
LexinFintech (LX) is growing at an incredible rate yet its stock trades at only ten times expected 2019 earnings. In its most recent quarter, LexinFintech originated about $2.5 billion equivalent in U.S. dollars, 68% more than it did in the same quarter last year.
In terms of outstanding principal owed by its borrowers, the company’s loan portfolio almost doubled to $3.73 billion. And LexinFintech now has 37 million registered users, an increase of 56% in the past year, and users with credit lines of 10.5 million, up 39%. Fourth quarter adjusted net income was up 473% year over year and for all of 2018, net income was up 439%.
High-quality credit position and careful attention to risk management
In terms of risk, the key issue to watch is credit quality, but it looks like the company has a good system in place and is adequately reserving for unexpected credit issues. LX’s credit quality is high today and in a recent conference call its CEO stated that he expects credit statistics and charge-off ratio to remain at the same level. The company’s 90-day plus delinquency ratio remains low at 1.41%, and its lifetime charge-off ratio is just over 2%.
The other issue is regulatory changes by the mandarins in Beijing. This is less of a risk given the national agenda of moving to a more consumer-oriented economy.
Opportunities to expand internationally, prime takeover candidate
There are two final points in favor of LX.
There is no reason the company cannot take its system and platform to other Asian and emerging markets. This could easily be done through joint ventures with financial institutions that already have a strong position in their home markets but wish to follow LX’s first mover strategy.
In addition, given its growth and rising profile, LX seems to me to represent an ideal takeover candidate. I could easily see a large bank or other financial institution going after LX to strengthen its position with young, high-quality consumers.
LexinFintech Holdings (LX)
27th Floor No. 3099 Keyuan South Road Nanshan District
The addition of LexinFintech to the portfolio brings our number of positions up to 19, one short of the maximum of 20, but I can’t find any that deserve to be sold; generally, the stocks are doing what they were hired to do. Can you say the same for your own portfolio, or are there some stocks you’ve been holding too long, ignoring their negative action? I suggest you take a good look now, while the broad market is quite healthy, because when the broad market softens, as it undoubtedly will, performance will worsen.
AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, has pulled back normally over the past week and seems to be at a good buying point, still above both its 25- and 50-day moving averages. In his latest update, Tom wrote, “The drug maker has had a pretty good April so far, up about 3% for the month while the market is basically even. More importantly, it’s broken into a higher range since bottoming at the end of January. The main test in the near term will be when it reports earnings later this month. The stock could have a big move up or down depending on how lower Humira sales overseas compare to growth of revenue from newly launched drugs. I’m very confident that over the intermediate and longer term the company can more than compensate for increased competition for its blockbuster drug, but I don’t know exactly how it will play out in three-month increments.” BUY.
Apollo Global Management (APO), originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor, has been stuck in a trading range between 28 and 30, but it is trending back toward the top of that range and may well break through this time. In her latest update, Crista wrote, “Apollo is an alternative asset manager with assets under management (AUM) totaling $280 billion, dispersed among credit, private equity and real estate investments. APO is an undervalued mid-cap growth & income stock. Next year’s consensus estimates have been rising in recent weeks, with Apollo’s 2020 economic net income (ENI) now expected to increase 18.9%. Add a 6.3% dividend yield and a stable price chart, plus the market’s growing bullishness toward financial stocks, and you’ve got a significant total return opportunity. Buy APO now before the next run-up begins.” BUY.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been catching its breath near 200 over the past week, consolidating the big advance of the past three months. In Crista’s update today, she wrote, “Apple is expected to report second-quarter EPS of $2.36, within a range of $2.12-$2.49, and revenue of $57.4 billion, within a range of $54.5-$59 billion, on the afternoon of April 30.
“Last week, an analyst at HSBC lowered his AAPL recommendation from Hold to Reduce, whining that we might not see increased earnings from Apple’s five new services right away. The analyst continued his gloom and doom with more handwringing over iPhone sales.
“In the meantime, analyst Wamsi Mohan at Bank of America raised his price target on AAPL from 210 to 220, his second increase in a month. Mohan apparently decided to do the actual math on iPhone sales and potential replacement purchases, and the numbers are attractive.
“Yet another investment firm reported on a variety of iPhone data points that increased during the March quarter, including shipments and market share, which leads me to believe that Apple will deliver an upside earnings surprise on April 30. Also, watch for an announcement of an annual dividend increase in conjunction with the earnings report.
“AAPL is up 40% from its December low, continuing a pattern of climbing and resting. I anticipate additional near-term upside, either prior to the April 30 earnings report or in response to it. There’s price resistance at 230, where AAPL last traded in October. Buy AAPL now and buy more on pullbacks.” BUY.
Delta Air Lines (DAL), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, and featured here last week, reported first-quarter results last week, and here’s what Crista wrote immediately after. “Delta reported adjusted earnings per share (EPS) of $0.96 this morning, above all analysts’ estimates. Revenue came in on target at $10.4 billion. The company also guided Wall Street to adjusted second-quarter EPS in a range of $2.05-$2.35. Prior to today’s earnings guidance, the second-quarter consensus EPS estimate was $2.13, within a range of $1.97-$2.29.
“The increases in first- and second-quarter actual and projected results should push analysts’ full-year estimates to reflect approximately 19.3% EPS growth vs. the previous consensus estimate that pointed toward 16.8% EPS growth. Any time you see double-digit full-year earnings growth in a large company, especially for two or more years in a row, that’s an achievement worth noting—and you can bet that professional investors are noticing it, too. (Delta grew EPS by 14.6% in 2018.)
“Virtually all Wall Street analysts will be writing glowing research updates on DAL in the coming days and raising both their second-quarter and full-year earnings estimates.”
And in today’s issue, she wrote, “Analysts boosted their 2019 earnings estimates last week, but there could be more upside. That’s because Delta management expressed cautious optimism of reaching near the top of FY19 EPS guidance. Their previous guidance was a range of $6.00-$7.00 per share. Last week, the consensus estimate rose from $6.60 to $6.69, so there is clearly more room for earnings revisions. Remember, every analyst’s earnings revision is accompanied by a research report that goes to clients and institutional investors, thus encouraging more buying activity. At this point, Delta is expected to achieve 18.4% EPS growth in 2019, and the P/E is 8.7. I’m keeping an eye on the 2020 EPS estimate, which currently reflects just 7.6% growth. That’s a ho-hum number, but I hardly expect that number to sit still while the 2019 number gets a weekly boost.
“DAL rose as high as 59 last week, up 10 from just two weeks prior. There’s price resistance at the December high of 60. Buy on dips and give the stock some time to catch its breath before it advances again.” BUY.
Everbridge (EVBG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small-Cap Confidential, has been trading tightly around 72 for more than a week, while its 50-day moving average catches up. In his update last week, Tyler noted that the 123rd Boston Marathon yesterday would use Everbridge’s Critical Event Management (CEM) platform to communicate with roughly 10,000 volunteers, medical tent personnel, the Boston police and fire departments and the Boston public health commission—and that residents can use the mobile app as well. HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to new highs today, leaving behind a rough two-month basing structure—and that’s terrific. If you don’t own the stock of this provider of revolutionary colon cancer testing services, you could buy here—perhaps after going back in our archives to read the original recommendation. First-quarter results will be released after the market close on April 30. HOLD.
Huazhu Group Limited (HTHT) (previously known as China Lodging Group) has been building a base centered on 43-44 over the past two weeks, setting up to make a run at last June’s high of 49. Long term, the future remains bright for China’s biggest lodging chain, and that’s one reason that I’ve designated it a Heritage Stock for the portfolio, meaning I’m committed to holding as long as the prospects for great fundamental growth remain intact. HOLD.
Invitae (NVTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, hit a record high last Thursday and has pulled back since. And this week, in Cabot Growth Investor, Mike wrote, “Thanks to years of heavy investments that put all available genetic information onto one platform, Invitae is now bringing genetic testing to the masses by driving down costs (down 24% last year alone!). The days of genetic tests done on a case-by-case basis and costing thousands are being replaced by more commonplace testing (much of it in oncology, but the firm is moving into reproductive health in a big way) for just hundreds of dollars. Three years ago, Invitae’s platform processed 59,000 tests, but that grew to 149,000 in 2017, 303,000 last year, and management is looking for 500,000 tests (likely conservative) this year, with revenue growth around 50% both this year and in 2020. The bottom line is in the red, but if Invitae can grab just a small fraction of this potential market (many millions of tests per year), the company could easily grow many-fold from here. As for the stock, it did nothing for a few years after coming public, but it’s changed character this year, zooming to all-time highs on expanding volume and holding those gains in recent weeks.” BUY.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, broke out to new highs yesterday on the news that the company was restructuring leadership in Asia to more aggressively pursue the 400 million singles there, two-thirds of whom had not yet tried an online dating product. Today, nearly half of Match Group’s revenue comes from areas outside of the U.S. and Canada, and the goal is to see a quarter of revenue derived from Asia within five years. If you don’t own it, you can buy now. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has resumed its uptrend and can still be bought as it heads back to its high of 195. In his update last week, Tom wrote, “Defensive utilities have their moments in the sun. But this company is much more. It is a best in class utility with huge exposure to the fastest growing energy sources. It is destined to provide reliable and growing income with growth as well. Although the stock is nearing the 52-week high, valuations aren’t stretched especially considering the high level of earnings growth it offers. Stay tuned for fourth-quarter earnings in a couple of weeks.” BUY.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, continues to hit new highs! In last week’s update, Mike wrote, “PLNT presented at a recent analyst conference where it shared a couple of encouraging tidbits. First, management said that it takes nine cents of every dollar of membership dues and rolls that right back into marketing, which has helped keep comparable store growth strong (up 10.1% in Q4). And second, the top brass said the real estate environment is extremely favorable because Planet is now recognized as a huge traffic driver for other stores—on average, the company sees about 5,000 visits per week per gym, and most of those visits occur on Monday through Wednesday (less working out on the weekend), helping to boost traffic for neighboring retail outfits (grocery stores, etc.) when their traffic is normally slower.” BUY.
Rapid7 (RPD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been building a little base at 52 in recent days, consolidating the gains from its move to new highs just two weeks ago. First-quarter results will be released on May 2, after the market close. HOLD.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, fell through its 25-day moving average today, and is likely to find support at its 50-day moving average, down at 28.5. In his update last week, Tom Hutchinson wrote, “STAG has a history of falling back after breaking its old highs, so I’m cautious here. I’ll be watching closely if it can break out to a new level or starts to pull back. It pulled back just a little this week, but that could be healthy. There is no cause for alarm yet.” HOLD.
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been trading between 260 and 290 over the past month, basically building a base near the bottom of the range (250-390) that has constrained the stock for the past 22 months. This action, plus the relentless drumbeat of critical news of the company could cause an investor to give up on the stock, but I’m holding tight, because I’ve designated Tesla a Heritage Stock and I still believe the company has great growth potential. Note: it’s a fact of the investing life that bad news builds bottoms and good news builds tops. HOLD.
The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, is very close to a new high. HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, is up six days in a row since tagging its 50-day moving average, but remains below its March high. In his update last week, Mike wrote, “Overall, we’re still quite bullish on Twilio, as the company has that emerging blue chip-type of feel to it. That said, we wouldn’t say TWLO’s near-term action has been terrific—the stock hasn’t seen much buying since mid March, and even as growth stocks have rebounded this week, shares haven’t done all that much. We’re not freaking out about that (one good day could put the stock near all-time highs, so we’re not going to get too worried), but consider it a heads up that the stock might have some further wobbles ahead. Right now, though, we’ll just follow the system—we’re sticking with a Buy rating, though we’d like to see some good-volume buying appear. On the flip side, a decisive slide into the mid 110s would likely have us going to Hold and, depending what we see elsewhere, potentially taking partial profits too.” BUY.
Van Eck Rare Earths/Strategic Metals (REMX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, looks fine, chart-wise, consolidating its position in the 16-16.5 region before resuming its advance. In his latest update, Carl wrote, “REMX moved ahead this week helped in part by the buyout offer mentioned above (Australian firm Wesover offered to buy Lynas, but Lynas rejected the offer). REMX remains a hedge against U.S.-China tensions and a play on rare metals and rare earths that are undervalued and underappreciated given their importance to high-tech products and markets.” HOLD.
Voya Financial (VOYA), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, has been the star of the portfolio over the past week, hitting new highs day after day. In today’s 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’s earnings are equity-sensitive. The company could easily deliver upside earnings surprises when reporting quarterly results that were influenced by strong stock market performance; the S&P 500 index rose 13% in the first quarter. Stay tuned for Voya’s first quarter results on May 7.
“The company is prioritizing share repurchases, and planning a large dividend increase this year that has not yet been finalized. VOYA is an undervalued aggressive growth stock. Analysts expect EPS to grow 36.1% and 14.9% in 2019 and 2020, and the current P/E is 9.9.
“I’m reading lots of positive research comments about VOYA, and about institutional investor interest in VOYA. This month, Sandler O’Neill, UBS and KBW raised their price targets on VOYA to 59, 60 and 62 respectively. I’m cautious because the stock is retracing its 2018 high of 54-55, which normally signals that the run-up will come to a halt. Don’t sell your shares. I think that any near-term pullback is likely to be extremely brief.” HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED April 23, 2019
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