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 shift to a somewhat unusual investment, a high-yielding limited partnership that may avoid the cycles of a notoriously cyclical sector, while offering substantial upside potential.
As for the current portfolio, overall, our holdings are performing well. But we have one sell, a stock that has popped higher in recent days on news and is now closing in on resistance. Details in the issue.
Cabot Stock of the Week 244
As the bull market rolls on and our portfolio fills up, diversification remains a key tenet of my investing system, a principle I’ve referred to as “Spectrum Investing.” This doesn’t mean investing in everything—it’s always wise to avoid sectors in downtrends—but it does mean investing in a wide variety of stocks that are trending up now and that are likely to do so in the near future. Which brings me to today’s featured stock. A partnership that was a pioneer in the infrastructure investment industry, it offers a high yield, anti-cyclical exposure to a cyclical industry, and potential resistance to a market correction. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and these are Tom’s latest thoughts.
Brookfield Infrastructure Partners (BIP)
The world’s infrastructure is in sorry shape. How bad is it?
The American Society of Civil Engineers just gave the state of our infrastructure a grade of D+. And the rest of the world is even worse. Developed countries all over the world have aging systems in desperate need of replacement. In emerging markets, systems are often woefully insufficient to accommodate growing urban populations and more advanced economies.
Infrastructure is defined as the basic physical structures essential to the operation of a modern society. It includes water systems, power plants, ports, highways and bridges, communication systems and the like.
The G-20’s Global Infrastructure Hub estimates that a staggering $94 trillion global investment will be needed over the next several decades to get systems up to snuff. Of course, governments don’t have all those trillions lying around. The private sector will have to step up. In fact, it’s already doing so.
Infrastructure is becoming a hot investment for private funds to the extent that it is almost becoming its own asset class. Limited partnerships, giant sovereign-wealth funds, multilateral and development-finance institutions are raising by some measurements trillions of dollars a year for infrastructure investments.
It’s a huge opportunity going forward. The right infrastructure assets can provide very reliable cash flow in essential assets that are basically monopolies. Brookfield Infrastructure Partners LP (BIP) was one of the first to the party. It’s been investing successfully in infrastructure assets all over the world for the last ten years.
Bermuda-based Brookfield Infrastructure Partners particularly focuses on high quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry. It’s a Master Limited Partnership (MLP) established by world renowned, Toronto-based asset manager Brookfield Asset Management (BAM) in 2008 to take advantage of the infrastructure build-out.
Brookfield has a current portfolio with 2000 assets in 30 countries on five continents. It is well diversified geographically with roughly 25% in North America, 30% South America, 25% Europe and 20% Asia Pacific.
• Toll roads in South America
• Telecom towers in France
• Railroads in Australia
• Natural gas pipelines and storage in North America
• Utilities in Brazil
• Ports in Europe, Australia and North America
• Date centers on three continents
How is it working?
Over the last ten years the stock has returned 764% (with dividends reinvested) compared to a return of 318% for the market over the same period. As an MLP, BIP pays no taxes at the corporate level provided the bulk of earnings are returned to shareholders in the form of distributions. It has a higher payout than most dividend stocks and the current yield is 4.8%. It’s also grown the payout over 10% per year for the last five years.
But what matters now is the future. As money is pouring into the sector, Brookfield is well positioned with established relationships, contacts and established expertise all over the world. The company knows how to pluck the most profitable assets. And more and more opportunities are flooding in with the rising tide of investments.
Despite the terrific historical performance the stock is still reasonably priced because it had a rare bad year in 2018, down almost 20%. The reason it was down is because Brookfield shifted its strategy to accommodate the rush of opportunities coming into the space. They sold lower performing assets to buy higher margin ones.
In the interim profits fell and the market didn’t like that. But now the newly purchased higher margin assets are starting to come on line and should boost profits. BIP seems to be regaining favor with the market as it’s up over 21% so far this year.
Infrastructure provides the rare combination of non-cyclical earnings and high growth. It is a huge area just coming into vogue with investors and BIP is a seasoned and proven hand.
Brookfield Infrastructure Partners (BIP)
73 Front Street
Hamilton HM 12
The addition of BIP to the portfolio gives us 20 stocks, so the portfolio is full—and in a bull market, that’s good. But as I’ve said repeatedly, it’s important to manage your portfolio so the stocks you own are working for you, and today I have one sell recommendation, Apollo, that has surged higher in recent days and will soon come up against resistance. Otherwise, there are no changes. Overall, the portfolio is acting well.
AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor for the Dividend Growth Tier, continues to bounce along, building a base in the high 70s. In his latest update, Tom wrote, “The biopharmaceutical giant pays a 5.3% yield; that’s huge for a big pharmaceutical company, especially one with as much growth potential. As well, it’s grown the payout an average of 17.5% a year for the last five years. Of course, the fact that the stock is 25% off the 52-week high is boosting the yield and there are reasons for subpar stock performance. Increased competition for its blockbuster Humira drug is scaring investors. I’m confident that over time its strong newly-launched drugs and industry-leading pipeline will overcome the problem. The near term is less certain. We’ll see what happens when AbbVie reports earnings next week. Either way, you’re really getting paid to wait it out.” BUY.
Apollo Global Management (APO), originally recommended by Crista Huff for the Growth & Income Portfolio of Cabot Undervalued Stocks Advisor, blasted out of the trading range between 28 and 30 that had defined it for months and is now racing up toward its old high at 35, and the reason is clear; fellow investment manager Blackstone Group announced it was converting to a C-corp structure—and investors are thinking that Apollo might do the same. In her latest updates, Crista, who has both stocks in her portfolio, wrote, “I began telling investors about the possibility of Blackstone converting to a corporation in early May 2018 when KKR & Co. (KKR) made such a decision on the heels of a similar decision coming from Ares Management (ARES). At that time, I also mentioned that Apollo Global Management (APO) could come to an identical decision. I told you about these potential outcomes at least half a dozen times during the last twelve months.
The effects of the corporate conversion include these outcomes:
1. Blackstone will gradually pay a higher income tax rate.
2. Blackstone’s post-conversion quarterly reports will stop reporting economic net income (ENI) and begin reporting earnings per share (EPS). The EPS numbers are expected to be slightly lower than ENI.
3. Shareholders will eventually cease having to deal with K-1 reporting on their income tax returns.
4. Blackstone estimates that up to 60% of institutional investors (e.g. mutual funds and pension funds) and most stock market indexes have investment policy statements and prospectuses that prohibit them from investing in limited partnership shares. Once Blackstone completes its corporate conversion, those same financial entities will be free to consider buying shares of Blackstone, thus potentially pushing the share price upward. Blackstone is one of the largest and most successful investment companies in the world and could therefore be reasonably perceived as a desirable investment to the aforementioned institutional investors.
If you look back at the share prices of ARES and KKR during 2018, you can see that they whipsawed all over the place throughout the year. You might then assume that the act of converting from an LP to a C-corp does not resonate well with investors. I just want you to keep in mind that we had three stock market corrections in 2018—THREE!—in February, October and December. Therefore, despite any potentially bullish results from a corporate conversion over the medium- and long-terms, literally any company’s stock is still subject to short-term stock market volatility. Your job, right now, is to decide whether you want to keep BX and/or APO during these short-term run-ups, and then sell (essentially, do you want to be a trader?); or are you a longer-term investor who loves either the big dividend income offered by alternative asset manager stocks or the capital gain potential that could accompany this corporate conversion?”
Note: Apollo will report first quarter results on the morning of May 2. But going back to Crista’s final question, we’re not in this stock for the long term. We’ve got a very healthy profit after less than four months, plus the likelihood that the stock will hit resistance as it approaches 35, plus a portfolio that’s now full, and that’s reason enough to rate this a sell. Your decision may vary, and might include using mental stops if the stock climbs closer to 35. SELL.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, continues to march higher. 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. Also, watch for an announcement of an annual dividend increase in conjunction with the earnings report. Click here to read my April 18 article about Apple and Qualcomm’s (QCOM) agreement to cease litigation and instead work together. Qualcomm will now be the supplier of Apple’s iPhone 5G modem chips, and Intel (INTC) will exit the modem chip business. AAPL continues to rise, with 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, is building a base in the 58 area following its early-April surge higher. In today’s update, Crista wrote, “DAL is an undervalued growth and income stock. Delta is expected to achieve 18.1% EPS growth in 2019, and the P/E is 8.6. I’m keeping an eye on the 2020 EPS estimate, which currently reflects 7.9% growth. That number has gradually improved since early March. The stock is resting from a big recent run-up. 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, fell through its 50-day moving average last week and rebounded only moderately this week, so we can say that the momentum is gone for now—though the long-term fundamentals remain very promising. In his update last week, Tyler wrote, “This move wasn’t unexpected; I’ve had the stock at hold for a little while now given that it’s trading near all-time highs on price and valuation. Earnings will be out on May 6.” My sense is that the stock will probably remain north of support at 67, and if earnings surprise, it may do substantially better, so I’ll hold for now. But given that the portfolio is full, it is a candidate for sale, especially if either earnings or stock action disappoint. HOLD.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, has pulled back from its new high of last week, returning to its slightly uptrending base that has been built over the past two months. First-quarter results will be released after the market close on April 30. HOLD.
Huazhu Group Limited (HTHT) (previously known as China Lodging Group), originally recommended in Cabot Emerging Markets Investor, last week announced preliminary results for the quarter ended March 31, and the stock has been advancing strongly since! The number of hotels leased and owned was 4,396 (up 166 from the prior quarter), with 439,614 rooms (up nearly 17,000 from year-end). 20% of rooms are operated under the lease and own model, while 80% are operated under its manachised and franchise models. Huazhu remains the largest lodging chain in China, 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, hit a record high two weeks ago and then last week pulled back to test its 50-day moving average—from which it has now rebounded. Last week, in Cabot Growth Investor, Mike wrote, “NVTA got smacked around with just about every medical-related stock on Wednesday, but the action still looks normal to us. In fact, some steadying around here and a push higher in the stock could offer a solid entry point, though we’d probably start with a half position given the stock’s volatility.” BUY.
LexinFintech Holdings (LX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, and featured here last week, is relatively low-priced and relatively volatile, but that means traders have opportunities. In last week’s update, Carl wrote, “This high-growth fintech idea is currently trading at a very reasonable valuation and, if you don’t own any, I encourage you to build a half position.” BUY.
Match.com (MTCH), originally recommended by Mike Cintolo of Cabot Top Ten Trader, notched a record-high close yesterday and extended its gains today, leaving behind a three-month base in the mid-50s. As the world’s leading provider of dating resources, the long-term prospects are bright. BUY.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, reported first quarter results today and the market shrugged; there were no big surprises. Revenues were $4.08 billion, down marginally from the year before, while earnings were $2.20 per share, up 12.2% from the year before and beating the consensus estimate. In his update last week, Tom wrote, “This is a stock you can hold indefinitely. You get solid predictable cash flow with a high level of growth from its alternative energy business. Although the stock is nearing the 52-week high, valuations aren’t stretched considering the high level of earnings growth it offers.” BUY.
Planet Fitness (PLNT), originally recommended by Mike Cintolo in both Cabot Growth Investor and Cabot Top Ten Trader, has a beautiful chart, stair-stepping higher over the past two months. In last week’s update, Mike wrote, “PLNT remains relatively quiet on the news front, but that hasn’t stopped the stock from continuing its strong uptrend. Buying volume has tapered off a bit, which could be a sign that shares will finally rest. But the story, numbers and chart all look good to us—we’re still on Buy, but as usual, try to get in during normal weakness.” BUY.
Rapid7 (RPD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and also recommended by Tyler Laundon in Cabot Small Cap Confidential, looks great technically, setting up to break out above its recent high of 54. First quarter results will be released on May 2 after the market close. In his update last week, Tyler wrote, “RPD slipped from all-time highs last week but the trend is far from broken. Security has been a hot space lately and analysts are going to be watching closely to see if the secular growth drivers (uptick in threat levels, complexity of environments due to cloud, compliance requirements, vendor consolidation, etc.) remain intact. As one of the smaller vendors with both security and visibility, Rapid7 appears well positioned. But there’s no doubt there will be some winners and losers as we move through earnings season and stocks react to the past quarter and forward guidance. Let’s keep holding through earnings then see where we’re at.” HOLD.
STAG Industrial (STAG), originally recommended by Cabot Dividend Investor for the High Yield Tier, is now sitting on its 50-day moving average, and could easily move higher or lower from here based on what management says when it announces first quarter results on April 30. In his update last week, Tom Hutchinson wrote, “I’m cautious here. I’ll be watching closely to see if it can break out to a new level or if it starts to pull back. There is no cause for alarm yet but I’ll be watching. The earnings announcement on April 30th may reveal its direction.” HOLD.
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has been taking a lot of heat lately, with the media criticizing Elon Musk’s ambitious plans for autonomous driving and expecting poor results when the company reports first quarter results tomorrow (Wednesday) after the market close. And the stock remains quite close to the bottom of the range (250-390) that has constrained the stock since June 2017. However, I’m holding tight, because I’ve designated Tesla a Heritage Stock and I still believe the company has great growth potential. Furthermore, a look back at the stock’s last big basing period, which came after the stock rocketed higher in 2013, shows that it lasted 27 months. The current basing period, which followed the early 2017 surge higher, has lasted 22 months, so precedent says the long wait may be over soon. Note: Ross Perot once commented, “Most people give up just when they’re about to achieve success. They quit on the one-yard line. They give up at the last minute of the game, one foot from a winning touchdown.” HOLD.
The Trade Desk (TTD), originally recommended by Mike Cintolo in Cabot Growth Investor, runs a self-service cloud-based ad-buying platform that enables optimized decision-making capabilities, and today the company announced integration with Throtle, a leading identity-based data onboarder. The stock is trading very close to its March all-time high. First quarter results will be released May 9 before the market open. HOLD.
Twilio (TWLO), originally recommended by Mike Cintolo in Cabot Growth Investor, looks fine, trading once again above its uptrending 25-day moving average. In his update last week, Mike wrote, “TWLO hasn’t done anything wrong—the stock zoomed up from 75 in December, broke out above 100 in January, tagged 135 in mid March and has since chopped lower to around 120. We still enthuse about the stock’s potential (the company launched an app that makes it easier to send and receive text messages through the Salesforce platform), but it appears that the intermediate-term uptrend is on the fence. Much more weakness from here could have us taking partial profits and holding the rest through earnings (due out April 30), but as we said, TWLO isn’t doing anything “wrong” and a couple of good days would have it back near new highs. We’re keeping a close eye on it, but right now, we’re sticking with our Buy rating.” BUY.
Van Eck Rare Earths/Strategic Metals (REMX), originally recommended by Carl Delfeld in Cabot Emerging Markets Investor, has dropped below its 50-day moving average, but remains in the uptrend that began last December. In his latest update, Carl wrote, “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, hit another record high last Thursday and has pulled back normally since. 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 is expected to report first quarter EPS of $1.12, within a range of $0.96-$1.23, and revenue of $279.0 million, within a range of $270-290 million, on the afternoon of May 7. Voya’s earnings are equity-sensitive. The S&P 500 index rose 13% in the first quarter. The company could easily deliver an upside earnings surprise during any quarter that was accompanied by strong stock market performance.
VOYA is an undervalued aggressive growth stock. Analysts expect full-year EPS to grow 36.4% and 14.9% in 2019 and 2020, and the current P/E is 9.9. Voya is prioritizing share repurchases, and planning a large dividend increase this year that has not yet been finalized. I’m cautious because the stock just retraced 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, and a great buying opportunity.” HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED April 30, 2019
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