The major indexes continue to hit new highs, all Cabot’s market timing indicators remain positive, and our portfolio is solid, overall, with the exception of Designer Brands (DBI), which reported third-quarter earnings this morning; more on that in the update section.
As for today’s new recommendation, it’s a brand new business with a familiar name—a high-risk/high-potential investment. It’s not for everyone, and it will be volatile. But it could change the world!
Details in the issue.
Cabot Stock of the Week 276
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The broad market remains very healthy, with all major indexes near recent highs and no notable divergences, and thus I continue to recommend that you be heavily invested in a diversified portfolio of high-potential stocks. Today’s featured stock is rather unusual, in that the company has no earnings and virtually no revenues—but it has a great story, with the potential to change the world. The stock was originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and here are Carl’s latest thoughts.
Virgin Galactic (SPCE)
The commercialization of space has captured the imagination of many, including those with a lot of cash to burn.Elon Musk spent $100 million in 2006 to launch Space X.Jeff Bezos is reportedly injecting $1 billion a year into Blue Origin.Blue Origin hopes to go the moon for passenger trips by 2024 while Musk has Mars in his sights, with SpaceX planning its first cargo mission to the red planet in 2022. A crewed mission is planned to follow a couple of years later.Since 2000, Goldman Sachs estimates that $13.3 billion has been invested in space startups. We certainly have come a long way from Sputnik 1, the first satellite launched by the Russians in 1957. Incrementally lower costs, new technology, and increased commercial activity could make space the next trillion-dollar industry.And one of the most intriguing segments of the “space economy” is space tourism.Dennis Tito paid $20 million to become the first space tourist in 2001 but prepaid tickets for 90-minute suborbital flights in 2020 with Virgin Galactic went for “just” $250,000. Over the next 10 years, the company plans on bringing this price down to $40,000 or so. Virgin Galactic was founded and won the X Prize for its SpaceShip One in 2004. The company has been at the forefront of commercial space and produced the first private space vehicle to put humans into orbit.Virgin’s flamboyant and well-connected entrepreneur Sir Richard Branson has brought in heavy hitters like Chamath Palihapitiya, a billionaire tech investor and former Facebook executive. In 2010, George Whiteside joined the team from NASA and he is currently CEO. In 2016, the company was awarded a commercial operator license by the FAA.Virgin Galactic operates the reusable SpaceShipTwo spaceflight system.
This consists of WhiteKnightTwo, a custom-built carrier aircraft, and SpaceShipTwo, the world’s first passenger carrying spaceship to be built by a private company and operated in commercial service.
More than 600 people from 60 countries have secured a spot on one of Branson’s first space flights by making a deposit representing half the total fare. Virgin has an additional 2,500 people on the waiting list.
This 90-minute flight will escape the Earth’s atmosphere allowing passengers to experience weightlessness and see the planet’s rim from space.
Credit Suisse recently concluded that that Virgin would have a “near-term monopoly” on the space tourism market once Spaceship Two begins operations in 2020.
My recommendation of Virgin Galactic at this time is based on the following:
- 1. The share price has corrected 35% in the last few months, exhausting investors’ selling power.
- 2. The company has adequate cash reserves and a pipeline of customers with demonstrated willingness to pay
- 3. Credit Suisse’s report underscores the company’s opportunity for a near-monopoly on space tourism
- 4. World-class executive team and deeply experienced pilots
- 5. Projected 70% Google-like profit margins are a key part of its strategy as it scales and incrementally lowers prices
- 6. Potential to leapfrog to hypersonic point-to-point travel, cutting travel time for LA-Tokyo from 11 hours to two hours
- 7. First full flight in 2020 will include Branson and six others and create great drama as well as significant media and investor attention
The chief risk is, of course, the possibility of a failed or unsuccessful flight, which would, without question, hit the stock hard. For this reason I see Virgin as an aggressive idea and recommend a 20% trailing stop loss.
As I have done my research, I’ve been impressed by the seriousness of this enterprise and the team of investors and management that has been pulled together to prepare for the 2020 launch of private flights.
SPCE began trading on the NYSE October 28 at $11.75 and corrected down to 7.0 after third quarter results revealed a net loss of nearly $51 million for the quarter and $138 million for the year to date. But then on Monday, Morgan Stanley recommended the stock with a price target of 20, and the stock is quickly recovering lost ground. This will obviously be a volatile stock, but it’s early days and the long-term potential is huge.
www.virgingalactic.com
Current Recommendations
With today’s addition of Virgin Galactic, the portfolio once again holds 19 stocks, one shy of my maximum of 20. But the goal is not to hold 20 stocks, the goal is to hold a portfolio of good stocks, with the maximum being 20. All told, most stocks in the portfolio are doing what they were hired to do, although some are taking a bit longer to do it than expected. The main disappointment today is Designer Brands (DBI), which released a poor earnings report this morning and will now be downgraded to Hold. Details below.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, continues on its steady uptrend. In his update last week, Tom wrote, “Of all the REITs in this portfolio, this had been the most consistent and solid performer though the recent more turbulent time for the sector. The stock is again at new highs as it continues its slow and steady slog ever higher. Demand for its rare life science and research lab facilities remains strong and investors are still attracted to the defensive nature of the business. Even if the overall market continues to move higher, there is still a lot of uncertainty out there and I believe investors will continue to demand a rock solid dividend payer like this. Alexandria is still a great place to be in this environment.” BUY
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, hit another new high last Friday and has now pulled back normally to near its 25-day moving average. In his latest update, Tom wrote, “The global infrastructure company continues to hover around all-time highs, seemingly no matter what the overall market does. It’s a defensive company with a high yield in the increasingly popular infrastructure subsector. The market loves this stock right now. The company also has an additional $1.1 billion in new investments that should come on line in future quarters. The stock is still rated HOLD because it is already up over 60% on the year and valuations are a little high for new money. But the momentum is marvelous.” HOLD
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has hit resistance at 76 three times over the past month, and Crista says it will eventually get through. In today’s update, she wrote, “C is a large-cap growth & income stock. Wall Street expects EPS to grow 16.5% and 9.8% in 2019 and 2020. The 2020 P/E is 8.8. (I rate C a Buy rather than a Strong Buy because the 2020 earnings growth projection is a little lower than I would prefer.) Now that it’s becoming clear that there is no recession on the horizon, and that the economy remains strong, certain financial stocks are reacting well, namely banks and investment firms. Citigroup shares appear poised for an immediate new run-up. The stock hasn’t traded above 80 since 2008, so we are now witnessing a modern version of C reaching a ‘new all-time high.’ That’s important because every single investor who bought C during the last decade is sitting pretty with capital gains, so there’s no selling pressure looming in dark corners, ready to rain on this stock’s parade. Buy C now.” BUY
Corteva (CTVA), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, will probably stay down in this region a little longer thanks to year-end selling pressures, so if you haven’t bought yet, you still have time. In today’s update, Crista wrote, “CTVA is a mid-cap growth & income stock. Analysts expect EPS of 1.24 and 1.49 in 2019 and 2020, reflecting 20.2% growth next year. The 2020 P/E is 17.3 and the dividend yield is 2.0%. CTVA remains within its recent price range of 25.5-28.5. I believe what we’re witnessing is that investors who received shares of CTVA during the DowDuPont (DWDP) breakup but prefer not to own the stock are selling; while investors who specifically want to own a good agricultural chemical stock are buying. Thus, the stock is churning in place on heavy volume. I would expect the selling to be done by the end of December. Continue to accumulate shares.” BUY
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, disappointed investors this morning when adjusted third-quarter earnings came in at $0.67 per share, and the stock dropped like a stone in response, But all is not lost. Here’s what Crista sent to her readers today:
“Gross margins were impacted by three non-recurring situations:
“1. CEO Roger Rawlins attributed less-than-expected performance to unseasonably warm weather, ‘which hindered performance across our entire business’ during September/October, historically their most profitable and busiest time of the year.
“2. Gross margins were also impacted by ‘the mitigation of tariffs, which led us to pull back inventory and cut marketing investment in anticipation of a change in consumer spending, that in hindsight was not the right decision to make.’ Of note, the company successfully mitigated the cost of 90% of the tariffs affecting the Camuto Group – largely by moving production out of China and sharing costs with vendors – but the quarter’s gross margin problem resulted from marketing decisions made regarding the fear of consumers’ reactions to tariffs. The CEO stated that the feared consumer impact did not materialize.
“3. To a lesser extent, gross margins were impacted as the company faced internal issues with their newly upgraded POS system: ‘We issued more discounts than expected to our promotional campaigns.’
“Designer Brands reported $0.67 EPS vs. the consensus estimate of $0.75. Gross margins rose in Canada and fell in the U.S., for a net reduction of 3.7 percentage points to 28.9%. Operating expenses fell by 4.0 percentage points. Rawlins commented, ‘Our Camuto organization delivered their first positive operating income contribution in the quarter.’
“As a result of these problems during the quarter, management lowered their full-year outlook for adjusted EPS in the range of $1.50 to $1.55 per diluted share, compared to their previous range of $1.87 to $1.97 per diluted share.
“Quarterly revenue totaled $936.3 million, near the consensus estimate of $937.9 million. Comparable store sales increased 0.3% vs. a year ago.
“The integration of the Camuto Group and the Shoe Company acquisitions are progressing as planned, as are various in-store innovations. For example, the company is reaping ‘a 40% increase in annual footwear [spending] when a Rewards member becomes a nail bar customer.’ I’ll report additional details in next week’s update, after I listen to the full conference call.
“The company repurchased 1.0 million shares during the quarter and 7.1 million shares year-to-date. Keep in mind that the large dividend yield is safe. If the company were anywhere close to being worried about their ability to pay the dividend, they would almost certainly discontinue share repurchases rather than reduce the dividend.
“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 667 stores in 44 U.S. states and Canada, and Camuto Group. Designer Brands continues to cross-apply the successes of its separate U.S. and Canadian businesses in order to maximize revenue and profit growth, drawing upon expertise in retail and online operations and their rewards program. The company has delivered 27 consecutive years of revenue growth.
“DBI is an undervalued, small-cap growth stock. The stock is down 17% right now to 14.12, retracing its August lows. I consider today’s price action to be an overreaction to temporary bad news at a solidly profitable and growing company. The annual dividend payout of $1.00 per share provides new investors with a 7.1% yield while they await the share price rebound. Dividend investors and growth stock investors who like to buy bargains should buy now.”
That sounds like good advice, however, given that we now have a loss, I’m going to downgrade it to hold. HOLD
Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon, remains in an uptrend. Tyler still has the stock rated hold, mainly because it’s already done so well this year. HOLD
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, was still in its bottom-building formation last week, when Tom wrote, “The energy sector continues to be unloved. It looks like the global energy markets still haven’t found any equilibrium with all the additional U.S. supply. But Enterprise continues to grow earnings. The company has more new projects coming on line in the quarters and years ahead that should boost earnings. The distribution is rock solid with 1.7 times coverage and hikes every quarter for the last 20 years. EPD is a great bargain here and you collect 6.8% while you wait for the market to realize it.” And then yesterday the company announced that it had signed a letter of intent with Enbridge (ENB) to jointly develop a deepwater crude oil terminal in the Gulf of Mexico capable of fully loading Very Large Crude Carriers (VLCCs) at rates of approximately 85,000 barrels per hour, or up to approximately 2 million barrels per day. Named Sea Port Oil Terminal (SPOT), the facility would include a fixed platform located approximately 30 nautical miles off the Brazoria County, Texas coast in approximately 115 feet of water. The market loved the news and both stocks are now moving higher (though ENB is not officially recommended here). 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 found a bottom at 33 last week after correcting for a month and is now heading up again. HOLD
Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, climbed higher all last week and today blasted out above its 25-day moving average. In last week’s issue, Mike wrote, “Encouragingly, the fundamental breadcrumbs continue to improve: One analyst highlighted Inphi’s new, faster digital signal processor platform (dubbed Canopus) that will be used in next-generation data center interconnect, long haul, metro and other applications; it should expand its addressable market to other huge data center players and even to networking OEMs like Arista and Juniper. Canopus isn’t going to boost business right away but should help as the need for speed increases. Back to the stock, a break of the 65 to 66 area would have us going to Hold, with a deeper plunge telling us that the stock probably isn’t a real leader of this advance. But given the story and still-healthy chart, we continue to think the next big move is up. We’re fine buying some here.” BUY
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, peaked at 33 two weeks ago, bottomed at 29, and now appears to be settling down to build a base around 30—though volatility will likely return before long as the calendar turns to 2020. In his latest update, Carl wrote, “Luckin SEC filings show that seven institutional investors collectively hold over 60% of shares. In the third quarter, the number of stores/outlets grew to 3,680 and revenue was up nearly 70% or 2.9 times the increase in store count. I like the trajectory of this young company and maintain a buy rating for aggressive investors. If you have owned LK for a while, feel free to take partial profits to lock in some gains.” BUY
Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, remains in the midst of a normal correction, touching support at 58. In today’s update, Crista wrote, “Marathon is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interest in a midstream company, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. The company is prepared to meet the IMO 2020 demand for ultra-low-sulfur diesel fuel by the world’s ships and tankers. Marathon aims to spin off their Speedway retail stores into a separate company by year-end 2020, and is also strategizing ways to optimize their midstream business. Last week, energy investment bank Tudor, Pickering, Holt & Co raised earnings estimates on U.S. refiners by an average of 8% to reflect better expectations for fourth quarter results, adding that Marathon Petroleum is benefiting from a strong retail environment. MPC is a greatly undervalued large-cap stock with a solid dividend yield. Full-year EPS are now expected to fall 28% in 2019, then rise 66% in 2020. The 2020 P/E is very low at 8.2. MPC is having a pullback after a recent 50%+ run-up.” BUY
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has a very interesting chart. After hitting a high of 239 in late October, it sold off rapidly to correct to a low of 220 in early November, but then just as quickly rebounded—and is now building a base from which I expect it to break out to new highs. In his update last week, Tom wrote, “This largest American utility by market cap combines steady cash flow from its stellar Florida Power and Light division with growth from the alternative energy business. NextEra is a huge player in fast-growing clean energy and is the world’s largest producer of wind and solar energy. It is also shareholder friendly, targeting 12% to 15% annual dividend growth through 2024.The only kink in the armor is a high valuation. But momentum looks good.” HOLD
Pinduoduo (PDD), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, climbed back above its 50-day moving average last week and remains a solid hold. HOLD
Qorvo (QRVO), 0riginally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here last week, is expected to be a leading provider of 5G chips in the years ahead, and the stock is looking good, hitting a new high just yesterday. In last week’s issue, Mike wrote, “As always, we’re open to anything; if the trade war reignites in a big way, for instance, it’s possible many chip stocks will falter. (China will be by far the largest market for 5G smartphones.) But we think it’s far more likely that Qorvo is a new leading glamour name, with the 5G smartphone boom likely to kick into high gear next year (many see 225 to 250 million 5G smartphones sold next year; Qorvo thinks 300 million will be the number) and grow from there. Long story short, we’re optimistic. We filled out our position (buying another half-sized stake) last week and are holding on tightly. If you’re not yet in, feel free to hop onboard here or on any wobbles.” BUY
Ring Central (RNG), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, is one of the leading providers of Unified Communications Services, which integrate a variety of communications technologies using cloud-based services and thus enable both employees and customers to get what they need from enterprises large and small. The stock remains in a consolidation pattern following the huge spike higher in early October, riding its 50-day moving average slowly higher and setting up (ideally) for a future breakout to new highs. 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 years of patient waiting are finally paying off, as the stock is moving higher on a wave of good news. The Tesla Model 3 is now the best-selling luxury car in the U.S., while Mercedes and Volkswagen are busy cutting employment by thousands so they can invest in electric car production. And in Lordstown, Ohio, where GM closed a plant earlier this year, GM is lending $40 million to a startup named Lordstown Motors so it can retool the recently shuttered plant to make an electric truck—and GM is partnering with South Korea’s LG to build a $2.3 billion EV battery factory, the better to compete with Tesla. And now Morgan Stanley has raised its Bull Case price target for TSLA to 500, citing potential catalysts as the China Gigafactory Ramp, European Giga Construction Milestones, Cybertruck Progression and Model Y Ramp-up. However, the firm also has a Bear Case price target of $10; that’s basically where everything goes wrong. But right now, a lot is going right. All along, Tesla has said that its main goal was to accelerate the transition away from fossil-fuel vehicles and now the industry is playing catch-up, which is good news for all except those traditional autoworkers whose skills won’t be needed in the electric vehicle world.
And now the stock is in Cabot Top Ten Trader again. Just yesterday Mike Cintolo wrote, “Tesla requires no introduction, as it’s almost always in (or producing) eye-popping news (and tweets). But outweighing the noise are increasingly attractive results and meaningful progress. The latest happening came on November 21, when Tesla unveiled its new Cybertruck with a compelling (some say ugly) futuristic design, and was promoted as having “better utility than a truck with more performance than a sports car.” Despite some skepticism, the company immediately accumulated 250,000 pre-orders from Tesla enthusiasts, each order contingent upon a $100 refundable deposit. While it’s a long way from being a hit, it’s certainly a good start for the product and could be another catalyst going forward. That said, what’s attracting big investors now is that Tesla’s bottom line has turned the corner—third-quarter results (released late October) pleased analysts and brought two days of heavy-volume buying, mostly because gross margins came in above expectations and strong cash flow shocked the market. Production is running ahead of schedule for the Model 3 in China and the Model Y, too. In fact, as we’ve written before, demand has never been the problem—people are buying Teslas in droves, especially the cheaper Model 3, and now it appears the firm has tightened up the expense side of the ledger. Analysts see earnings leaping into the black next year (around $5.50 per share), though even that could prove low if Musk and the other top brass make the right moves…the weekly chart looks fine and TSLA has tightened up a bit since that decline, too. It might need more time to rest, but today’s pop was encouraging and we think higher prices are coming down the road.” HOLD
TopBuild (BLD), originally recommended in Cabot Top Ten Trader by Mike Cintolo, continues to ride its 25-day moving average, so if you haven’t bought yet, you can buy here. BUY
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, hit a new high yesterday (the group was strong because of the news that Canopy (CGC) will now be led by the soon-to-be-ex-CFO of Constellation Brands), but it remains an outlier, in that it’s performed so much better than most cannabis stocks over the past two months. In last week’s update of Cabot Marijuana Investor, I wrote, “If you got in on my original recommendation, you now have a quick profit of 30%, and you should consider taking some partial profits, recognizing that it’s very difficult for a stock to swim against the tide of the sector for long. Long-term prospects for the stock, of course, remain bright, and I’m still looking for an opportunity to average up.” Officially, it remains on buy, but you should recognize that risk is elevated up here. BUY
The next Cabot Stock of the Week issue will be published on December 17, 2019.
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