The major indexes have been hitting new highs in recent days, all Cabot’s market timing indicators are currently positive, and our portfolio looks good!
However, there is one sale—of a strong stock that now has less upside potential—as well as one downgrade to hold and one upgrade to buy. Details in the issue.
As to the new addition, with true growth stocks turning strong again, I’m recommending one of the strongest, a provider of hardware that enables ever-faster movement of data in the cloud-computing environment.
Details in the issue.
Cabot Stock of the Week 272
The major indexes are hitting new highs, as the U.S. economy proves to be the strongest in the world. All Cabot’s market timing indicators are positive, telling us the odds are good that the market will be higher in the months ahead. And Mike Cintolo, our growth stock guru, now says that the tedious months of rotation and potholes that afflicted growth stocks are over, with numerous breakouts—many after good earnings reports—kicking new waves of advances. Thus, it seems only right that this week’s stock is one of Mike’s recent buys in Cabot Growth Investor. Here are Mike’s latest thoughts on the stock.
A basic fact of the technology era is that data is ever-increasing, and the world needs ever-better solutions to transmitting and storing that data. And that fact has led to great investment over the decades, from hard-disk drives and their cousins (remember Iomega’s Zip drives?) to Ethernet switches (Aruba Networks) to server farms (Rackspace) and more. It’s a perennial growth industry, so somewhat reliable as an investment theme—but the tricky part is that, while the general theme doesn’t change, the leaders switch every few years.
Just a couple of years ago, for instance, Arista Networks (ANET) burst on the scene with a new cloud networking platform that was a big step forward for the cloud build-out. And it was a great winner, with the stock breaking out at 95 in early 2017 and rallying to 310 a year later as earnings soared! But that was it for the stock; it’s now 40% below where it was in February 2018 and earnings, while elevated, are expected to slip.
While you have to know when to pull the plug with these stocks, the upside for the leaders of this never-ending shift to faster data movement is lucrative. And that’s why we’re high on Inphi (IPHI), a little-known stock that has big potential.
As a player in the chip and networking fields, the firm’s product lineup will give you the proverbial ice cream headache, from its M200 coherent DSP platform to its COLRZ and 200G/400G PAM4 cloud connectors, but the big idea here is simple: Inphi is the leading provider of high-speed data interconnects, so whether you’re expanding a data center, connecting data centers to each other or building out a metro or long-haul telecom network, Inphi’s products (many of which are built into other systems) are likely doing the heavy lifting.
As you’d expect, the firm’s results are highly dependent on the spending cycle of big telecom and cloud operators. But the good news is that, after a few slow quarters, those spending cycles are just beginning to converge on the upside, which is helping results surge and should drive growth for many quarters to come.
In fact, what we like is that the company has many areas where demand is picking up. Data centers are undergoing an upgrade cycle, where faster speeds are necessary, and Inphi has a dominant market share (one analyst believes up to 80% share thanks to 130 design wins) in that general area; Amazon (which is reportedly just beginning to ramp spending) should be a big driver, with Facebook, Microsoft and Alibaba likely to join the upgrade party in 2020.
Moreover, despite a big drop in sales to Chinese giant Huawei, Inphi’s telecom business is very healthy, with a huge sequential gain in Q3 revenue thanks to its platforms that speed the transmission of data over long-haul and metro fiber optic networks. The future is bright here as well, as Inphi is selling well to some huge Tier-1 and Tier-2 carriers as it takes market share from competitors due to better (faster) performance.
Down the road there are other opportunities, too—the Cisco-Acacia merger should open up a chunk of the data center interconnect market in late 2020 and into 2021, while Microsoft’s recent huge contract win with the Department of Defense is another plus.
All told, Inphi looks like it’s in the right place at the right time. In Q3, revenues grew 21% and earnings leapt 50% (both nicely ahead of estimates), while management hiked expectations for the fourth quarter. Encouragingly, the top brass said it’s not dependent on any new product introductions to see great growth through next year; analysts see the bottom line rising 30% in 2020.
As for the stock, it built a giant two-year-plus consolidation but finally broke out in early July and had a solid run (part of a string of 13 weeks up in a row, which is a sign of persistent institutional accumulation that hints at something bigger). The stock then chopped around for 10 weeks, which was normal, and last week’s quarterly report gapped the stock to new highs—a strong sign that IPHI is getting going again. I’m you’re attentive, you’ll probably be able to buy under 70, but the portfolio will keep it simple by buying tomorrow.
All things considered, the portfolio looks great today, with numerous stocks near their highs and no real problems. That, of course, will change, but the best way to ensure that your portfolio remains healthy is to continually weed out the stocks that have less potential and replace them with stocks that have more potential. In our portfolio this week, that means selling one stock that’s had a good run, Alaska Air (ALK). Details below.
Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been quite strong in recent months, but Crista says there are better opportunities out there now, so she’s retired the stock. In today’s update, she wrote, “Alaska Air Group is now trading up near its recent peaks that date back to January and November 2018, at about 72. Since 2020 earnings growth is expected to be much slower than 2019 performance, I’m going to Retire ALK from the portfolio in favor of a company with stronger 2020 earnings prospects. Buy-and-hold investors should feel comfortable holding ALK longer term.” Technically, I don’t have a retired category, so I’ll simply sell here (the stock does look extended short-term) and look to pick up a new opportunity from Crista’s Buy Low Opportunities Portfolio soon. SELL.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, has had a great run over the past three months, and is now on a normal pullback. In his latest update, Tom wrote, “The stock reported earnings yesterday and matched estimates with 5.4% year-over-year funds from operations (FFOs) growth and 14.2% revenue growth, which exceeded estimates. As well, rental rates increased 11% from last year’s quarter reflecting strong demand for its life science properties. Alexandria also acquired 11 properties as it continues to add to its strong pipeline. This is a very solid REIT in the highly specialized life science and research lab niche that should continue to benefit amidst the search for new medicines and treatments for the aging population.” BUY.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, hit new highs yesterday and today! In his latest update, Tom wrote, “This owner of infrastructure assets across the globe has returned over 50% so far this year. But it is still reasonably valued because of a rare bad year in 2018. Defense is in vogue. Infrastructure is up and coming. The stock could run for a while. However, it does announce earnings next week where newly acquired assets should help boost the bottom line. That said, after the big up move this year and this past month, it is getting a little too pricey to continue to acquire up here. I’m reducing the rating to HOLD and will consider raising it again if the stock pulls back into the mid 40s.” I had already lowered my rating to hold back on September 10 when the stock was extended to the upside, so there it will stay. HOLD.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has just hit new highs for three consecutive days, and Crista says it’s almost time to retire this stock, too. In today’s update, she wrote, “ Citigroup is a global financial company that serves consumers, businesses, governments and institutions in 98 countries; and the third-largest U.S. bank by assets. Wall Street expects EPS to grow 16.5% and 9.7% in 2019 and 2020. The 2020 P/E is 8.7. The stock is approaching its January 2018 peak near 77, at which time I will likely retire C from the portfolio in favor of a dividend-paying stock with a stronger projected 2020 EPS growth rate.” HOLD.
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, broke out above its September highs today, and the chart says there’s much more upside possible. In today’s update, Crista wrote, “Designer Brands is one of North America’s largest designers, producers and retailers of footwear and accessories. The company operates DSW Warehouse, The Shoe Company and Shoe Warehouse stores with nearly 1,000 locations in 44 U.S. states and Canada; and Camuto Group. DBI is an undervalued, small-cap growth stock. The company has delivered 27 consecutive years of revenue growth. There’s very little corporate or Wall Street news on Designer Brands, in between the quarterly earnings reports. Analysts expect EPS growth rates of 14.5% and 14.7% in 2019 and 2020 (January year end); and company management is projecting 2021 EPS growth of about 24%. The 2020 P/E is very low at 8.0. DBI has traded between 16-17.5 since early September, and appears ready to climb toward price resistance at 19. Buy DBI now for outsized total return potential in 2019 and beyond.” BUY.
Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon, reported its fiscal second quarter results (ended Sept. 30) last night. Revenues were up 37% from the year before to $32.8 million, but the loss was two cents per share, compared to a profit of three cents per share the year before. Going forward, the company expects third quarter revenue of between $37.0 and $38.2 million. In response to the announcement, the stock sold off this morning, but then rebounded, and it’s now on its 25-day moving average, and still trending up. I’ll give you Tyler’s take on the situation next week. BUY.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, remains weak, but after analyzing last week’s earnings report, Tom says the stock is still a good buy here. Here’s what he wrote: “This energy company continues to lag in an otherwise friendly market for undervalued stocks. The company missed on earnings last week with profits of $0.50 per unit versus an estimated $0.53, and also a missed on revenues. The company had exceeded estimates for the last four quarters by an average of 14%. The miss resulted from one-time write-offs as well as an earnings decrease in the small part of the business that is exposed to commodity prices. But volumes were higher in just about every facet of the business, which will ultimately deliver higher profits for the fee-based business. The company has $9.1 billion in projects under construction and $3 billion coming on-line in the next six months. It’s a good opportunity to get in cheap.” I’ll follow Tom’s lead and restore the Buy rating. 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 (it’s China’s largest hotel chain) that I’ve resolved to hold the stock through normal technical sell signals. The stock had a great October, and just yesterday climbed above its September peak. HOLD.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has great fundamentals—chief among them its rapid growth as it works to undercut and overtake Starbucks in the Chinese coffee market. In his latest update, Carl wrote, “Luckin Coffee is an exciting young growth story but its shares are up only marginally over the last month. It is expected to report its next quarterly numbers on November 11.” HOLD.
Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, hit a new high last Wednesday, and then sold off sharply to tag its 25-day moving average, but has bounced right back and is once again near its recent high. BUY.
Meritage Homes (MTH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains on a correction from its high two weeks ago, and while that’s short, time-wise, the stock is now below its 25-day moving average—plus our small profit has disappeared. That’s reason enough to downgrade the stock to hold, and if it doesn’t turn around soon, we’ll sell. HOLD.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, closed at a record high last Thursday, but it’s dropped sharply since and now sits below its 25-day moving average. In his update last week before the stock’s drop, Tom wrote, “The stock is expensive and I took half of the position off the table a few weeks ago for that reason. But the stock has exactly what the market seems to want right now. So I’ll let the other half ride.” HOLD.
Pinduoduo (PDD), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, has hit plenty of new highs in recent days and Mike says it’s back on his radar. In his update last week, he wrote, “PDD has staged a decisive breakout and so far is holding firm. A bit more weakness or consolidation could have us snatching up a half position. BUY.
Ring Central (RNG), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, released its third quarter results yesterday and the market liked what it saw, as the stock was up on big volume today. Highlights: total revenues were up 34% from last year to $23 million, while GAAP operating loss was $10.7 million, compared to a loss of $7.0 million last year. Looking forward, the company expects fourth quarter revenues of between $238 and $240 million as it grows its leadership position in the global enterprise cloud communications market. 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) and the stock is now building a mini-base to consolidate the gains that followed the surprise profit announced two week ago. HOLD.
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor and featured here last week, is off to a decent start, recording its highest close since early August just yesterday. The cannabis sector as a whole is still weak, but TCNNF has been one of the best-looking stocks in recent months, as investors attracted to its profitable Florida operations get on board. And the stock is not expensive, with a P/E ratio of just 11. Third-quarter results will be released on November 18, after the market close. If you haven’t bought yet, you may be able to get in closer to 10, or even 9.5. BUY.
Chart courtesy of StockCharts.com
Your next Cabot Stock of the Week issue will be published on November 12, 2019.
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