Despite the daily focus on the worst aspects of the China tariff story, the fact is that the broad market has built a decent base (albeit loose) over the past month. Repeated tales of doom and gloom aren’t sending it any lower. Thus, I remain long-term bullish, though short-term somewhat cautious.And I continue to recommend that you maintain a portfolio full of diversified stocks that meet your investment goals. Last week’s recommendation was a hot growth stock, so this week we swing back to a conservative dividend-paying stock, one that is performing very well today.As for our current stocks, there are no changes. The last week of August changed little, but going forward, I expect a little more action, ideally to the upside. Details in the issue.
Cabot Stock of the Week 263
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The broad market remains under pressure, at least in the short-term, so some degree is caution is still prudent. For this portfolio, that means we come into this week holding 16 stocks rather than 20. But the market’s long-term trend remains up, and I fully expect the market to be higher months from now, so I remain very focused on maintaining a portfolio with great appreciation potential. Last week’s recommendation was a hot growth stock (CVNA), so this week, to keep things balanced and diversified, we swing back to a conservative, dividend-paying real estate investment company. The stock was recently recommended by Tom Hutchinson in Cabot Dividend Investor, and here are Tom’s latest thoughts.
Alexandria Real Estate Equities (ARE)
The convergence of two megatrends makes this week’s stock an ideal investment. The population is aging and the pace of technological advancement is accelerating. The older population will demand advances in healthcare that new technologies can provide.
Because of longer life spans and lower fertility rates, the US population is older now than ever before. And the pace of aging is accelerating at warp speed. The size of the over-65 demographic is expected to grow 65% by 2030 as 10,000 baby boomers on average turn 65 every single day.
At the same time, technology is advancing at breakneck speed. The rollout of 5G technology represents a huge step forward in the digital age. It is a crucial tipping point in wireless technology that will enable self-driving cars, robotics, artificial intelligence, smart cities and much more. Going forward, the pace of technological change will dwarf that of the past decade.
Demand drives innovation and technology enables it. Baby boomers will demand better healthcare as they age like they have never demanded anything before. And now they have all the money. Much needs to be done. There are an estimated 10,000 known human diseases. But there is currently only medicine available for about 5% of them.
Alexandria Real Estate Equities (ARE) is an urban office Real Estate Investment Trust (REIT) focused on serving the life science industry. It specializes in laboratories and research centers for biotechnology and technology in innovation clusters throughout the country. The properties are rented by primarily high quality tenants and the cash flow is well supported by long term, triple net lease contracts.
Innovation clusters are defined as geographically proximate groups of interconnected companies and associated institutions in a particular field. These areas enjoy robust funding from charities, government and private companies and demand for facilities is high. The mix of tenants includes public biotech (27%), multinational pharmaceutical (25%), life science (17%), institutional (10%), technology (10%) and private biotech (7%).
I like this better than other REITs for several reasons. Healthcare REITs have underperformed other REITs recently because several property types, most notably senior living facilities, have gotten overbuilt. Other properties that depend on reimbursements from the government face legislative risk. But quality research labs in areas where research spending remains robust have not been overbuilt and demand remains strong. The properties are also popular with both political parties and they face little legislative risk.
Office REITs are more cyclical and contend with the headwind of more people working from home. Research labs are unique and far less cyclical. And Alexandria is one few REITs focused on such properties.
The business formula uses triple net leases for 97% of revenues, a formula that many of the most successful REITs use. With these leases, the REIT buys properties and leases them back to tenants where tenants pay all taxes, insurance and maintenance expenses. The lessee doesn’t have to worry about unexpected expenses. In addition, the tenants sign long term contracts with automatic increases built in.
The REIT pays a modest 2.74% yield at the current price, but it is well supported and likely to grow. Alexandria has just a 60.5% payout ratio, very low for a REIT which pays no corporate income taxes provided the bulk of earnings are paid out to shareholders. The low payout enables the company to retain earnings, which it can invest in additional properties to grow earnings and the dividend. Alexandria has grown the payout at an average annual rate of 8% over the past five years and enjoys investment grade credit ratings.
ARE has been a stellar and consistent performer in all kinds of markets, significantly outperforming both the overall market and the REIT index. Going forward, ARE has the best tailwinds possible, megatrends. It deals in properties that are perfectly positioned for the current dynamic that enjoy high demand. The business is a highly defensive one that can thrive in any economy.
Alexandria Real Estate Equities (ARE)
385 East Colorado Boulevard, Suite 299
Pasadena, CA 91101
626-578-0777
http://www.are.com
CURRENT RECOMMENDATIONS
While the talk of China tariffs continues to make headlines, the fact is that the last week of summer was relatively tame for the market, so tame that I’ve made no ratings changes to our stocks today. But I don’t expect this relative calm to last; now that we’re into September, I expect activity to pick up, and hopefully for the better! It wouldn’t take much for our short-term trend-following indicators to turn positive again. Details on individual stocks below.
Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has rebounded from its low of 57 last week but remains below all its moving averages—just barely. In her update today, Crista wrote, “Alaska Air is a low-cost passenger airline. Alaska Air and its regional partners fly 46 million guests per year to more than 115 destinations with an average of 1,300 daily flights across the United States and to Mexico, Canada and Costa Rica. Alaska Air does not operate any Boeing 737 Max jets. Beginning in January 2020, Alaska Air will launch eight new routes serving destinations in the Pacific Northwest and California. Alaska Air will present at the Cowen & Co. 12th Annual Global Transportation Conference on September 4. ALK is a mid-cap stock, expected to achieve aggressive earnings growth rates of 31% and 19% in 2019 and 2020. The 2019 P/E is low at 10.2.” BUY.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, remains in a healthy uptrend, just a few percent shy of its recent highs. In today’s update, Crista wrote, “Apple is a manufacturer and provider of many popular technology devices and services, including the iPhone, iPad, Mac, App Store, Apple Care, iCloud and more. App Store revenue grew 19% year-over-year in the June quarter, assisted by strength in China. Apple will host an event on September 10 at 10:00 a.m. PT at which the company is widely expected to introduce new iPhone and Apple Watch models. 5G iPhones are expected to launch in September 2020. Wall Street expects a profit drop of 2.2% in 2019 (September year end) followed by an increase of 9.8% in 2020. Apple is a unique, innovative, thriving company. The stock appears capable of promptly rising past price resistance at 212 and heading back to the October 2018 all-time high of 230.” BUY.
Bandwidth (BAND), originally recommended by Tyler Laundon for Cabot Small-Cap Confidential, is very close to breaking out above its high of two weeks ago. In his latest update, Tyler wrote, “There’s no news, except that Bandwidth continues to fight the good fight against robocalls by signing an agreement with 51 attorney generals stipulating, in part, to launch call-blocking technology at no cost to consumers. The communications technology stock still looks like a good buy.” BUY.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, has been a super performer over the past three weeks, climbing relentlessly from 43.5 to 47.5 and then pulling back slightly Friday and today. In his latest update, Tom wrote, “I’m very happy with the way this stock is behaving. It’s delivering as advertised. BIP is supposed to be a good solid defensive play in the growing infrastructure sector. In the past tumultuous month while the market is down 4.7%, BIP is up 5.9%. The market loves this stock right now, and the affair could last a while. It’s recently embarked upon an asset rotation strategy, whereby it sells mature assets and buys higher margin ones—and the strategy is working. Last quarter Brookfield grew funds from operations (FFO) at 15% compared to 5% in the first quarter and management indicated that similar results should persist in future quarters.” BUY.
Carvana (CVNA), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, remains strong, just below its high of last week. In his latest update, Mike wrote, “We took a nibble on Carvana late last week as the stock is holding up well following its huge-volume rally after earnings. Obviously, the market is likely to toss the stock around in the near term, but (a) the stock is acting very well, holding all of its earnings gains during the past three weeks, and (b) we’re more focused on the bigger picture, both the fundamentals (we think Carvana could effectively become an online CarMax) and technicals (shares are breaking out of a big 11-month consolidation, and upside volume has been dramatic). A drop into the upper 60s would be a sign this move was a head fake, which would cause us to cut our loss. But we see the odds favoring a sustained advance from here once the market gets out of its own way. If you don’t own any, you can buy a half-sized position here.” BUY.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, remains at an attractive entry point. In today’s update, Crista wrote, “Citigroup is a global financial company that serves consumers, businesses, governments and institutions in 98 countries. Strength in consumer lending, and lower expenses, tax rate and share count contributed to second quarter successes. Citigroup CFO Mark Mason will present at the Barclays Global Financial Services Conference on September 9. Citigroup is an undervalued, large-cap growth & income stock. Wall Street expects Citigroup’s EPS to grow 14.6% and 11.3% in 2019 and 2020. The P/E is currently 8.4. The stock participated in the August market pullback and has begun its recovery. There’s upside resistance at 77, where C last traded in January 2018, potentially offering new investors an approximate 20% capital gain in the next 6-18 months.” BUY.
Coupa Software (COUP), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to a new high last week and has pulled back normally since, so is still an attractive buy. In last week’s update, Mike wrote, “Overall, we still think the stock is fairly well positioned (it remains north of its 50-day line, which is becoming a rarity), and we remain uber-bullish on the longer-term prospects for its business; there’s a decent chance Coupa becomes one of the core “must-have” software products for businesses as they improve the efficiency and automation of their spending. That said, the stock’s intermediate-term future is likely to come down to earnings [which are due after the market close today]; Wall Street is looking for revenues to grow 39% and a loss of $0.10 per share, but billings growth and the outlook will be just as important. All told, we’re sticking with our game plan—a drop toward our cost near 123 would be our uncle point, but above there, we’re content to hang on and give shares a chance to resume their overall advance.” BUY.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, has still made no progress, but Tom says it’s just a matter of time. In his latest update, he wrote, “I don’t know what to say. The market continues to treat the energy sector like a stray dog that’s foaming at the mouth. Sure, bad news about the global economy is bad for oil prices. But EPD barely has any exposure to commodity prices. It makes money storing and transporting the stratospheric volumes of oil and gas sloshing around the country. It also has plenty of additional assets coming on line and should continue to grow earnings. But I’m optimistic because I’m old fashioned. I believe that rising earnings with a well-supported and growing 6% payout will ultimately be appreciated. Fundamentals usually win out in the end.” BUY.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to a new high last Thursday but on Friday it fell right back down to the base that the stock has been building for two months. Long term, the prospects remain great for the maker of the Cologuard colorectal cancer test, but it looks like the stock wants us to be a little more patient. BUY.
Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is one of the portfolio’s Heritage Stocks, meaning our profit is so great and the potential so large that I’ve resolved to sit through normal technical sell signals. The stock has now spent three months building a bottom—and eventually this will launch a renewed uptrend. HOLD.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, rebounded nicely last week and now sits just below its 50-day moving average—technically ready to go either way, though Carl says fundamentals argue for the upside. In last week’s update, Carl wrote, “Luckin keeps expanding its fleet of stores, which grew 375% annually to 2,963 locations. That puts it in striking range of Starbucks, which finished last quarter with 3,922 locations across China. It plans to eclipse Starbucks with 4,500 stores by the end of the year. This sort of growth comes at a cost as it posted $379 million in operating expenses in the first half of the year while generating $202 million in revenue. It will be a while before the company posts a profit. Some big hitters have accumulated substantial ownership of LK. The American Funds mutual fund company Capital Group has a 15.6% stake, followed by Singapore’s sovereign wealth fund GIC with 13% and Qatar’s Investment Authority at 8.8%.” HOLD.
MakeMyTrip (MMYT), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, fell hard in early August but has rebounded well since, so odds are good that the bottom has passed. In Carl’s latest update, he wrote, “A play on India’s travel industry as well as digital payments and marketing, MakeMyTrip has evolved into a leading travel company as India evolves into a digital marketplace by providing a comprehensive range of travel services. The company has made key acquisitions and strategic partnerships and a key alliance is with Ctrip, China’s largest online travel group. If you have not yet done so, I encourage you to take a half position in this India growth stock at the heart of a growth sector.” HOLD.
Match Group (MTCH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the global leader in the online dating industry, and thus a good candidate for very long-term investment, as the world’s evolving cultures grow more open to its services. Since gapping up on big volume four weeks ago after an excellent earnings report, the stock has been consolidating that gain in an increasingly tight pattern—a good sign. HOLD.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has been very strong, hitting a new high last Tuesday and breaking out above that level today. In last week’s update, Tom wrote, “It’s no accident that REITs and utilities have been the best performing sectors in the down market over the past month. Defensive businesses and dividends are the antidote to China trade headlines and recession worries. NEE is up 6% over the past month while the S&P 500 is down 5%. While investors are running for the hills, NEE is taking the opportunity to make new all time highs. Its performance in the up market was none too shabby either. The only thing better than a utility stock in a rough market is the very best utility there is. Bring it on. This stock likes good news, but it loves bad news.” HOLD.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has rebounded from its low of last week, and is now riding its 50-day moving average higher—though if it weakens again, the ride could be over. In last week’s Cabot Growth Investor update, Mike wrote, “SNAP isn’t a horror show, but we’re placing the stock on Hold as the firm’s powerful earnings move late last month has faded, with the stock dipping a bit below its 50-day line on Tuesday. That’s not a sin given the market environment, especially as the decline has been relatively gradual (i.e., no massive selling spree). And nothing has changed with the fundamental story; there were reports of a new Instagram service in testing that allows users to share more info (like location and speed) with a small group of users, which brought out the sellers, but we don’t see that affecting Snapchat at all. If anything, we think business is gaining momentum due to management’s various moves and new products. A drop down to 14 or so (the prior low) would have us cutting the loss, but at this point we’re giving SNAP a chance to find support and, eventually, resume its advance.” HOLD.
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the portfolio’s second Heritage Stock (big profits and big potential) so while it hasn’t been a market leader for years, the fact that the company is still growing at a good rate (revenues were up 59% in the second quarter from the previous year) and is still far ahead of all its competitors by many measures means that long-term prospects are still very good. Last week, in fact, the stock gapped up on two consecutive days on two pieces of good news. First, Tesla announced that it would begin selling insurance to Tesla owners—beginning in California. And second, China announced a list of cars that would be exempt from the 10% national purchase tax (which is not a tariff, but a sales tax). The list focused on new-energy cars that would pollute less and all Tesla vehicles made the list. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED September 10, 2019
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