The good news is that fears of China tariffs have passed, and our Chinese stocks look better. The bad news is that formerly leading growth stocks are now being sold, while new leadership, like juggernaut Citigroup (C), comes to the fore. And additional good news is that all our Cabot market-timing indicators are once again positive, telling us the wind is at our back.
Bad news. Good news. The important thing is to watch each of your stocks carefully, nourish the ones that are doing what you hired them to do and fire the ones who don’t measure up.
This week, thanks to the big shifts in the market, we have an unusual number of rating changes, six! Details in the issue.
Cabot Stock of the Week 264
All of Cabot’s market timing indicators are once again positive, as uptrends have resumed, but that doesn’t mean you can buy just anything. In fact, there’s been some real weakness in leading growth stocks in recent days, as rotation brings new leaders to the fore. One of these new leaders is a stock that has spent six long years trying to break out above resistance and recently succeeded—and that’s my recommendation today. It was recently recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.
Meritage Homes (MTH)
Many of the sectors that have been leading the market higher this year, like cloud software and cybersecurity stocks, have run right off a cliff in recent days. Yet the major indexes have actually gathered strength! So where has the money gone? A lot of it has gone into turnaround-type situations—names that were dead as a duck in recent months (or years) but have brighter prospects ahead. And a slug has gone into stocks that benefit from the plunge in interest rates.
Meritage Homes, the seventh largest homebuilder in the U.S., plays into both of those “new” themes, and we think it (along with many of its peers) can enjoy solid upside as the overall bull market continues.
Meritage doesn’t offer anything revolutionary, but it does focus on some longer-term segments of the market that should see growing demand. The company’s bread and butter are homes for first-time buyers (52% of Q2 orders) and first-time move up buyers (38% of orders), both of which should benefit as Millennials get into (and initially move up within) the housing market. The company also does a decent business in move down buyers (most of the remaining 14%), mainly the ever-growing flow of Baby Boomers that are looking to enjoy their Golden Years. And it operates in nine states in the south (east, west and Texas) that are generally seeing their populations grow nicely.
Meritage recovered steadily along with most homebuilders in recent years, but it wasn’t able to avoid the sector’s struggles over the past year; higher home prices and mortgage rates, along with a lack of supply, cut new and existing home sales starting early last year. And Meritage has actually seen two straight quarters of falling revenue now, the first time that’s occurred in years.
But that’s the past—the stock is looking ahead, and thanks mostly to the environment and the firm’s Q2 report, the future looks solid.
When it comes to the environment, all of the fundamental pieces are in place for an uptick in housing: bullish consumer confidence, low unemployment, a slowdown in housing price gains and, most important, a plunge in mortgage rates of around a full percentage point since the start of the year—with most of that occurring since April!
As for Meritage itself, the Q2 report didn’t show any growth from a year ago, but (a) earnings of $1.31 per share trounced estimates by 28 cents, and (b) forward-looking indicators like new orders were strong, rising 14% in value terms and a strong 22% in units, leading the top brass to raise estimates in a big way.
It’s not so much that big investors think the company is going to grow rapidly going forward, but the expectations of continued sales and earnings declines are gone, replaced by solid growth next year. Indeed, analysts see earnings of $5.40 this year, which is up from an estimate of $4.76 just two months ago. Next year’s earnings are expected to rise 13% to $6.10, a figure that stood at just $5.22 before the Q2 earnings report.
Throw in a reasonable valuation (12 times this year’s estimates) and the fact that these earnings beats tends to come in bunches, and the odds are that MTH is headed higher. In fact, it’s long overdue for such a move, given that the stock has spent six years trying to break out above the 50 level, and finally succeeded when that earnings report came out in late July. That move gapped the stock up into the low 60s, and it’s been basing there since, ranging between 62 and 66.
Meritage Homes Corporation (MTH)
8800 East Raintree Drive, Suite 300
Scottsdale, AZ 85260
The good news is that news and worries of China tariffs have nearly disappeared. The bad news is that rotation is upon us. Rotation in the market happens when a leading group of stocks slows down (or falls down) and another group takes the lead. However, it’s typically not as orderly as it sounds, and while it can be very profitable if you jump on the new leaders quickly, it can also be painful if you own some of those old leaders, as we do today.
Thus, while last week saw a rare instance of no rating changes in the portfolio, this week we have six! There’s an old saying warning against switching horses in the middle of a stream, but in investing that’s exactly what you’ve got to do if you want to minimize losses and maximize profits. Details below.
Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, gave investors some good news last week. Fuel costs are down, it’s dropping underperforming routes and moving others from year-round to seasonal service, and the result will be third quarter EPS of $2.19, up 15% from the previous year. Beyond that, the company expects earnings to accelerate in the fourth quarter as merger synergies take effect. Investors piled into the stock after the news, pushing it right back up to its highs of July, where it now sits, poised to break out to new highs. BUY.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, and featured here last week, hit a new high last Friday and has pulled back normally since. In his latest update, Tom wrote, “High occupancy rates for its in-demand unique laboratory properties make this stock a favorite in the current environment. It’s a highly defensive REIT that consistently grows earnings and its dividend. It has delivered solid returns in the recent down market and should continue to be in favor going forward. Despite recent strong performance, the valuation is still reasonable.” BUY.
Apple (AAPL), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, closed at its highest level of the year yesterday and Crista says it’s going higher. In today’s update, she wrote, “In a Morgan Stanley research report cited by CNBC, “new research from app data tracking firm Sensor Tower … shows that August App Store revenue saw the strongest year-over-year growth [28%] since February 2018 and the largest month-over-month acceleration since early 2015.” Wall Street expects an EPS drop of 2.2% in 2019 (September year end) followed by an increase of 9.8% in 2020. News of the rapid August acceleration of Services revenue growth will likely spur a September increase in earnings estimates. Apple is a unique, innovative, thriving company. The stock just emerged from a trading range and will now likely rise toward its October 2018 all-time high near 230. Buy Apple now.” BUY.
Bandwidth (BAND), originally recommended by Tyler Laundon for Cabot Small-Cap Confidential, came very close to breaking out to a new high last week, but this week it fell victim to rotation, as high-flying growth stocks have been sold heavily. The selling leaves BAND below its 50-day moving average and ripe for at least a modest rebound. But given the volume of the selling, and the likelihood that repairing the damage will take time, I’m going to downgrade the stock to hold now. HOLD.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, hit new highs on Wednesday, Thursday and Friday last week before pulling back slightly today. In his latest update, Tom wrote, “In the defensive infrastructure space, this MLP has successfully grown cash flow by an annual average of 18% per year over the past decade and the stock has averaged a 17% return over the same period, compared to a return of just 9% for the overall market. It owns some of the safest, most recession-resistant assets on the planet in things like transportation, telecommunications, water and energy infrastructure. The stock has also significantly outperformed the S&P over the past tumultuous month and notched a new high. The stock is an investor favorite in the uncertain environment and could continue to run higher.” Long-term, I assume Tom is right, but short-term, this chart looks too far out of trend to the upside, so I’m going to downgrade it to Hold until it settles down. Traders could even take partial profits here. HOLD.
Carvana (CVNA), originally recommended by Mike Cintolo in Cabot Growth Investor, hit new highs last week and sold off a bit today, coming down to its 25-day moving average, which is totally acceptable. In his latest update, Mike wrote, “The company presented at a conference this week and relayed some interesting nuggets—in Q2, Carvana had a total of 0.4% of the used car market, so just getting to 1% or 2% in the years ahead would represent massive growth. Moreover, management also talked about how gross margin per unit has ramped from about $1,000 in 2016 to $3,175 in Q2 thanks to quicker car sales, monetizing their finance platform and buying more cars directly from customers (better margins on those), and sees even higher margins down the road. All in all, the story is intact and the stock is acting well.” BUY.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, is one of the beneficiaries of rotation, heading back to its July high of 72. Crista says Wall Street expects Citigroup’s EPS to grow 14.6% and 11.3% in 2019 and 2020, while the P/E is currently 9.6. BUY.
Coupa Software (COUP), originally recommended by Mike Cintolo in Cabot Growth Investor, was hitting new highs last week (on big volume!) but was pulled down yesterday with many other leading growth stocks, and now sits within the basing area it etched during August. In his update last week, Mike wrote about the second quarter report, “revenue growth accelerated again to 54% (subscription revenues up 51%), deferred revenue was up 47%, billings rose 50% and the outlook was hiked.” Then yesterday, after the selling, he wrote, “While we don’t advise reacting to a bad day here or there, we’ve now seen many weeks of distribution and sloppy action in the group, with the recent selling pressure a red flag, at least in the intermediate-term. Today, then, we’re going to sell one-third of our shares in Coupa. The stock is one of the best looking names in the entire sector, but the stock’s had a big run and last week’s breakout attempt has failed.” I’ll downgrade to Hold. I do see some support here. HOLD.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, has made some progress in recent weeks—and, of course, you get a fat 6.2% yield. In his latest update, Tom wrote, “The company seems to be firing on all cylinders. It is an elite and highly successful American energy company operating in the midst of the energy boom. An estimated $44 billion per year will need to be spent on energy infrastructure to accommodate the new supply through 2035. Opportunities for growth abound. EPD has $5 billion in projects under construction and between $5 and $10 billion in development. That should provide ample growth to go with the 6% yield. The market doesn’t like the energy sector right now. While EPD has been outperforming the sector by a lot, it still isn’t getting the respect it deserves. But the market usually gets it right eventually.” BUY.
Exact Sciences (EXAS), originally recommended by Mike Cintolo in Cabot Growth Investor, fell out of bed yesterday as investors discarded growth stocks and fell even further today. I don’t see any support nearby, so despite the great long-term prospects for the business, I think it’s best to exit here and take our profit. SELL.
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 hold the stock through normal technical sell signals. The stock spent three months building a bottom in June, July and August and now with the improving sentiment about China, it’s rising again—and the big question now is whether the stock will hit resistance at 38 (where it peaked two months ago) or whether it can push through that level and establish a true uptrend. If it’s the latter, a Buy rating might be in order! HOLD.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has climbed nicely over the past three weeks, and with tariff fears now receding, prospects are good for it to climb higher. Last week Carl wrote, “Luckin keeps expanding its fleet of stores, which grew 375% annually to 2,963 locations in its most recent quarter, and plans to eclipse Starbucks with 4,500 stores by the end of the year. According to Iyiou’s estimate, Starbucks China sold 400 million cups in 2018, which implies only 311 cups per day per store. Luckin currently gets 345 orders per store each day, an increase of 18% from a year ago and 41% from the previous quarter. Since Luckin sells its coffee at less than half of the price as Starbucks, it obviously needs to generate more orders to make profits. Keep in mind that while Taiwan consumes 209 cups of coffee per person each year, China consumes only six cups of coffee per person. 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. Luckin is on track to surpass Starbucks by the end of 2019 as the largest coffee network in China by number of stores.” Given the renewed strength, I’m upgrading to Buy. BUY.
MakeMyTrip (MMYT), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has been strong for three weeks, but we’re still under water, having bought just before the July top. In Carl’s latest update, he wrote, “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.” HOLD.
Match Group (MTCH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the global leader in the online dating industry, and just a week ago the stock was in a tight basing pattern, looking healthy. But over the past four days, sellers have pushed the stock down—possibly in response to the launch of Facebook Dating in the U.S. In the long run, Match may certainly be fine; the competition may just legitimize the industry more. But in the short run, MTCH has the potential to fall much farther, given that the stock has more than doubled since late last year. The portfolio will now sell and take the profit. SELL.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has also had a good run this year, and Tom thinks it will continue. In last week’s update, he wrote, “There’s a reason why this utility has outperformed both the market and its peers in every measurable period over the past 15 years. It gets predictable, rock-solid income from its regulated business in growing and regulation friendly Florida while generating strong growth from its cutting edge alternative energy business. It’s a stock for the present and the future. As a result of these appealing characteristics, it has returned over 35% for the past year while the market was flat and while the market is in negative territory for the past month, NEE is up over 7%. This is a utility that delivers better than advertised and should continue to thrive for the foreseeable future.” If the stock can cool off a bit more, I’d like to put it back on Buy. HOLD.
Snap (SNAP), originally recommended by Mike Cintolo in Cabot Top Ten Trader, fell 7% yesterday, and followed through this morning, but as the day wore on, buyers appeared—so there’s a good chance the bottom has passed. In last week’s Cabot Growth Investor update, Mike wrote, “Interestingly, my colleague Jacob Mintz of Cabot Options Trader continues to pick up on sizable call buying in the stock, which is usually a sign that some big investors are building positions. Another positive: One analyst talked very bullishly earlier this week, saying Snap’s push into games could be a $350 million opportunity by 2022, while the firm’s overall fundamentals are currently extremely positive. We’re content to give SNAP some time and room to kick into gear.” 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. And the good news today is that since the stock hasn’t been a leader in a long time, it’s fairly immune to the selling that’s been targeting growth stocks lately. As I write, the stock is above both its 25- and 50-day moving averages, going the right way. HOLD.
THE NEXT CABOT STOCK OF THE WEEK WILL BE PUBLISHED September 17, 2019
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