Please ensure Javascript is enabled for purposes of website accessibility
Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 277

The major indexes continue to hit new highs, all Cabot’s market timing indicators remain positive, and our portfolio is solid, overall, though I’m downgrading three stocks to Hold today for various reasons.

As for today’s new recommendation, it’s a very familiar name—a dividend-paying Wall Street Blue Chip—that Mike Cintolo says now has great growth potential because of its new business.

Details in the issue.

Cabot Stock of the Week 277

[premium_html_toc post_id="193202"]

The broad market remains in fine health as the economic expansion rolls along and low interest rates make the stock market the best investment in town. Of course, the bull market will end someday, and when it does we’ll do more selling and reduce risk by holding more defensive investments—but until then, I continue to recommend heavy investment in a portfolio of diversified stocks that meet your investment needs. This week’s recommendation is a big blue chip name we all know, which Mike Cintolo of Cabot Growth Investor says is attractive today as a growth stock because of a major change in investor perception. Unlike last week’s recommendation of Virgin Galactic, which is a high-risk stock definitely not for everyone, this stock could fit in everyone’s portfolio. Here are Mike’s latest thoughts.
Disney (DIS)
Way back in 1998, when the internet bubble was just inflating, we remember one of the leading stocks (which we jumped on in Cabot Growth Investor) was Charles Schwab. The company didn’t offer anything revolutionary, but investor perception had changed; instead of being seen as a “regular” brokerage firm, the company started to be perceived as the pioneer of online trading, which led to a huge run in the stock.

Of course, today’s environment is a far cry from the days of the internet bubble, but we see a similar situation playing out today with Disney (DIS), the Dow Industrials blue chip known for its moneymaking theme parks, movie production brands and various media properties. All of those are still good businesses, of course—Frozen 2 is another mega-hit at the box office, and that will translate into untold merchandise and, eventually, theme park revenue, too, with this weekend’s launch of Rise of Skywalker almost sure to be another hit.

However, the real driver of Disney today is the firm’s online properties. Just as with Schwab 21 years ago, investors are beginning to value the company based on the current sales and future potential of its streaming and online content offerings. And that’s a big reason why we think the stock can surprise on the upside from here.

The big attraction, of course, is Disney+, the recently launched streaming platform that contains all of the company’s films (including not just Disney but Pixar, Marvel and Star Wars) and myriad TV shows (including The Simpsons and various National Geographic and Disney Channel shows) plus some original content (The Mandalorian, a new Star Wars series, is the most streamed show in the U.S.), more of which will be coming in 2020.

Back in the spring, when plans for the service were announced, the top brass thought it could garner 60 to 90 million Disney+ subscribers by 2024. But that’s now looking like a big undershoot; the firm already announced it had 10 million subscribers on the first day (!) and the Disney+ app has been downloaded 22 million times during the past few weeks. Estimates for current subscriber totals are all over the place (one outfit claims there are already 18 million subscribers, but no one really knows), and analysts have been busy ratcheting up their forecasts in both the near and long term.But the story is more than just Disney+. The company also controls Hulu and ESPN+, both of which are being offered in a package with Disney+ (just $13 a month for all three); management has forecast bullish figures for these two properties in the years ahead, and the outperformance by Disney+ will only help the cause.

Of course, with the recent launch come expenses, especially advertising, and that’s crimping earnings—the bottom line fell nearly 20% last fiscal year (ending in September) and should ease a smidge in the coming year, too.

But that’s a small blemish on the story, because as we wrote above, it’s all about investor perception—and right now the perception of Disney has shifted from one focused on current valuation and dividend yields (like most blue chips) to the upside earnings and cash flow potential of Disney+ and the company’s other online offerings.

The stock is certainly painting a bullish picture. DIS broke out of a four-year consolidation in the spring when the plans and forecasts for Disney+ were announced, and the stock had a decent run after that. But then it fell into a correction in August and September, tumbling back to its breakout level and its 40-week moving average.

But then Disney+ was launched, and that brought the buyers back in; the stock rallied seven weeks in a row to new highs (the first five of which came on accelerating buying volume) before easing a bit over the past two weeks. We think DIS is a good buy right around here as it gathers strength for its next pop higher.

dis121719

www.disney.com

distable121719

Current Recommendations

sowrectable121719

With today’s addition of Disney, the portfolio finally holds a full complement of 20 stocks—which is my maximum—so next week something will definitely be sold. But for now, the broad and strong market advance argues for full investment, so the only changes today are three downgrades to Hold, for various reasons.

Details below.

Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, has had a great year, but Tom says it’s too high to buy now. In his update last week, he wrote, This has been a relentlessly strong performing healthcare REIT. Of all the REITs in this portfolio, this had been the most consistent through the recent 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. It also helps that investors have a newfound appreciation for anything Healthcare in recent months. The stock is up over 40% this year and has blown away the performance of its peers in every measurable period over the last 10 years. The problem is that valuations are getting a little high to initiate a position at the current price. It is therefore being downgraded to a Hold.” Since then, interestingly, the stock has dipped below its 50-day moving average, on slightly elevated volume, which might be a warning sign. HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, has also pulled back a bit, but remains above its 50-day moving average. In his latest update, Tom wrote, “The global infrastructure company continues to hover around the highs. It’s worth noting that the company is considered to be in the utility sector, but unlike that overall group, BIP has been solid over the last several months. The stock seems to be in the right place at the right time as it does well in any type of market. It 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 still good.” HOLD

Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, has now broken out above the resistance mentioned last week and is hitting new highs. In today’s update, Crista 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 9.9% in 2019 and 2020. The 2020 P/E is 9.0. Citigroup shares are now rising past their peak near 77 from January 2018. 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.” BUY

Corteva (CTVA), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, is up 13% over the last two weeks, and volume clues tell me there’s more to come, though we may need a normal pullback first. In today’s update, Crista wrote, “Corteva provides farmers with seeds and crop protection products (herbicides, fungicides and insecticides), enabling them to maximize yield and profitability. 2019 was a difficult year for seed and crop protection businesses as many months of wet weather and flooding in the U.S. disrupted normal planting cycles and yields. Analysts are expecting a return to more normalized weather and market conditions in 2020, with profits expanding due to rising margins, merger savings and lower expenses. 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 17.8. The price chart improved a bit this month with CTVA rising above its 50-day moving average. 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, has rebounded from its big selloff a week ago—which took the stock right down to its August support level at 14, and Crista thinks it’s worth holding here. In today’s update she wrote, “Designer Brands really blew it in their third quarter when they reined in their sales and marketing plans due to an expectation that consumers would change spending habits due to all of the scary news headlines about “tariffs.” Honestly, when I go to the shoe store – especially DSW – I expect to see a wide variety of prices. The last thing on my mind is tariffs. As long as my income and budget have not changed (neither of which is affected by tariffs), I’m going to buy shoes in the general price range that I planned to buy – sometimes splurging and sometimes getting bargains. I literally cannot imagine the degree of hysteria that must have been generated by Designer Brands’ sales & marketing executives that would have caused them to change a very successful marketing strategy. After all, the company itself was not harmed by the cost of tariffs. It was their very incorrect perception of consumer reactions to tariff news that caused them to change their marketing plan, thus harming their quarter. Fortunately, they recognize that they were wrong, and now they can get back to business as usual. (I’m still stunned at the stupidity of the decision to change their marketing plan. I hope somebody was fired over that blunder.) DBI is an undervalued, small-cap stock. The revenue and profit impact of the poor third quarter caused analysts to lower EPS estimates to reflect growth rates to 5.4% and 4.6% in 2019 and 2020 (January year end). The 2020 P/E is low at 8.2.” HOLD

Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon, remains in an uptrend, but the stock has pulled back to its 50-day moving average on some above-average volume, so there’s definitely potential for this correction to persist longer. I’ve considered selling the stock and taking a quick profit here (and you may certainly chose to do that), but for now I’ll hold, thinking APPS has potential to move higher from this support level and I like having a fully invested portfolio when the market is this strong. HOLD

Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, saw some real buying power last week, and now the stock is consolidating that gain. In his update last week, Tom wrote, “There has been weakness in the energy infrastructure sector over the past several months, at least partly due to concerns that falling rig counts will stall oil and gas production in 2020. That may be a concern for the overall sector but EPD can easily weather such a situation and has billions in new projects coming on-line to boost earnings. It’s also expanding its presence in the rapidly growing crude oil export market. The distribution is rock solid with 1.7 times coverage and 22 years straight of growth.” 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, with 5,151 hotels as of September 30) that I’ve resolved to hold the stock through normal technical sell signals. The stock found a bottom at 33 in early December and is now heading up again. HOLD

Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, hit its old high of 76 last week and is off slightly this week. In last week’s update, Mike wrote, “One catalyst [for the rebound]: An upgrade from a JP Morgan analyst, who said Inphi’s various catalysts (many players set to ramp up their buying of its cloud connectivity solutions as 2020 hits; data center interconnect product demand should surge in the second half of next year and beyond; the recent eSilicon acquisition will help speed up product development) should drive a 25% to 30% annual growth rate over the next few years. Further near-term wiggles are possible, but we think IPHI is likely to head higher over time.” BUY

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, peaked at 33 three weeks ago, and has been trading in a range between 29 and 33 since—which is generally a good sign. In his latest update, Carl wrote, “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. Its strategy to compete with Starbucks is a combination of quality, convenience and affordability, with coffee prices that are roughly half of Starbucks’. Most of its shops are set up for takeaway and delivery. Luckin is an aggressive stock carving out a niche in China’s high-growth coffee market. 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, completed its seven-week correction last week when it nearly touched its 200-day moving average—and now buyers are coming back. In today’s update, Crista wrote, “Yesterday, Marathon announced that it has entered into an agreement with Elliott Management and will appoint Jonathan Z. Cohen to the company’s board of directors. Mr. Cohen has extensive experience in the energy industry, and currently serves as Chairman of Falcon Minerals Corporation. He will serve on Marathon’s special committee charged with evaluating options for the midstream business, as well as the special committee charged with overseeing the CEO search process, which continues to progress. The company expects to update investors on strategies to optimize their midstream business in the first quarter of 2020. MPC is a greatly undervalued large-cap stock with a solid dividend yield. Full-year EPS are expected to fall 28% in 2019, then rise 67% in 2020. The 2020 P/E is very low at 8.3. The stock had a November pullback after a 50%+ run-up, found a bottom near 58, and is now rising.” BUY

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, broke out to new highs today, just as I suggested it might last week. 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 is still okay.” HOLD

Pinduoduo (PDD), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, is still in an uptrend, riding its 50-day moving average higher. HOLD

Qorvo (QRVO), 0riginally recommended by Mike Cintolo in Cabot Top Ten Trader, has been strong, up on eight of the past 10 trading days and hitting new highs on many of them—so a little pause would be fine. In last week’s update, Mike wrote, “Chip stocks have become a bit bifurcated during the past couple of weeks, with some names that began showing strength in the summer waffling, while others that just emerged in October/November (including many that are tied to the 5G smartphone boom) are looking peppy. In our mind, Qorvo is one of the leaders, with radio frequency products and solutions for a variety of applications (defense, Internet of Things, satellites, etc.), but the big draw is the aforementioned smartphone trend—there is competition from Broadcom, Skyworks and others, but the complexity of 5G smartphones has (at least to this point) phone makers sticking with high-quality suppliers with integrated (not one-off) systems, which plays into Qorvo’s hands. The big idea here is the size of the opportunity—most analysts see 200 to 250 million 5G smartphones shipped in 2020, but Qorvo actually sees 300 million as the target, with a much larger opportunity in 2021 and 2022. The company earnings have flattened out in recent quarters, and customer concentration is always a risk (Apple is a huge customer), but the stock is strong because the Q3 report crushed estimates and management’s meaningful hike in estimates has big investors thinking the boom has begun—the Q4 revenue forecast was boosted to $850 million (up from $760 estimate beforehand!), and while the consensus is for $6.57 per share next fiscal year, some are thinking $7 to $7.50 is more likely. Chip stocks are always tricky investments, but Qorvo looks near the start of a big growth wave.” 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, and thus is technically ripe for a resumption of the 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) and the years of patient waiting are finally paying off, as the stock continues to move higher on improving investor perceptions. In last week’s Cabot Top Ten Trader, Mike wrote, “Tesla requires no introduction, as it’s almost always in (or producing) eye-popping news (and tweets). But outweighing the tedious 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 that 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.” Additionally, Tesla’s German luxury competitors are increasingly perceived as woefully behind, with Audi shedding thousands of jobs so it can invest in electric cars and Mercedes-Benz, just this week, delaying the U.S. debut of its first electric vehicle, the EQC crossover, by a year. Technically, 390 is the stock’s record high, hit in September 2017, and when that is eclipsed, we can expect higher prices. HOLD

TopBuild (BLD), originally recommended in Cabot Top Ten Trader by Mike Cintolo, has fallen below its 25-day moving average and found support at its 50-day moving average, so all is probably well here. But with a small loss, and lacking any specific positive guidance from Cabot Top Ten Trader, I’m going to downgrade it to Hold. HOLD

Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, has been the star performer of the marijuana sector over the past few months, but that all changed today as the stock came under attack by a short-selling outfit. Here’s what I sent to my Cabot Marijuana Investor readers earlier today.

“Trulieve (TCNNF) is down sharply today on big volume following a report by short-sellers Grizzly Reports that accuses the company and insiders of numerous improprieties, ranging from political cronyism and corruption to overvaluation of assets to misrepresentation of financial relationships.

I have read the entire report and here’s what I think.

First, you should recognize that this is primarily an attempt to make money from selling short—an attempt that so far has been successful for the producers of the report.

tcnnf121719

In that way it’s reminiscent of the attack on Aphria (APHA) a year ago—an attack that also succeeded in the short term. You can see the gap down in APHA last December and what the stock has done since.

apha121719

Aphria is still is business and I believe Trulieve will still be in business—and still be the leading seller of medical marijuana in Florida—a year from now.

Now, this is not to say that Grizzly Reports’ claims have no merit. I have previously mentioned the FBI’s interest in JT Burnette, and I am not surprised to find that such well-connected people were able to grow the company rapidly by dealing with friends and associates.

But there is nothing in here to deny that Trulieve has succeeded in opening 41 medical marijuana distribution centers in Florida, and nothing to make me think that the company can’t keep growing, albeit at a slower pace.

However, I might be wrong. It is possible that there is enough meat in these allegations to attract the attention of the authorities and that there will be a real cost to Trulieve, business-wise, in dealing with the authorities. And it is possible that the strain of dealing with the fallout of this report will negatively impact the company’s growth.

Still, investing is a game of odds, and with TCNNF now down and the “bad news” out, I don’t think this is the time to give up on the stock.

In fact, I have previously mentioned that Trulieve was by far the best-performing stock in the cannabis sector in recent months, and also mentioned that it is difficult for a stock to diverge notably from its sector’s peers—and with today’s correction, TCNNF now looks more like its peers.

WHAT TO DO NOW
My plan at the moment is to stick with TCNNF in Cabot Marijuana Investor. Yes, we have a small loss, but there’s a decent chance the bottom is near, and there is substantial upside from here. My goal has always been to hold the top cannabis companies in both the U.S. and Canada, and in my book, Trulieve is still one of them.

That said, what is right for my portfolio may not be right for yours. If you have been overweight in the stock, you may want to lighten up, particularly if there’s a decent rebound. And if you have not bought the stock yet and were waiting for an opportunity, I suggest that this is it. The best time to buy a growth stock is when the news is terrible and sellers have thrown in the towel.” Downgrading to Hold. HOLD

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, and featured here last week, is holding on to the gains from its big jump higher last week, so technically it looks good. In his latest update, Carl wrote, “Boeing’s venture capital arm HorizonX took a $20 million minority stake in Virgin to help Sir Richard Branson’s company develop a vehicle to travel Earth at hypersonic speeds. The company has reservations from over 600 people in 60 countries, accounting for $80 million in deposits and $120 million in potential revenue. Branson confirms that space tourism flights will begin within a year and he expects profitability by 2021. The cost of a Virgin flight on SpaceShipTwo, which can hold seven passengers and two pilots, is $250,000. I agree with a just-released Morgan Stanley report that equates the space tourism company to a biotech in terms of risk/reward and that the big payoff down the road will be hypersonic point-to-point travel. While a business jet takes 11 hours to fly from Los Angeles to Tokyo, a hypersonic vehicle traveling at nearly five times the speed of sound could make the same journey in just two hours.” Best for aggressive investors. BUY


The next Cabot Stock of the Week issue will be published on December 31, 2019.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2019. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved.