The long-awaited market correction has finally begun, and while you may be tempted to tie the correction to fundamental events, I don’t find any value in that—because all that news is public information so it has no real value to us. Instead, I prefer to watch the action of the stocks carefully, to judge where the money is flowing. And the result of my observations today is that we will sell four stocks and downgrade another to hold—and then continue watching.
As for this week’s recommendation, it’s a high-potential little medical stock that most investors haven’t heard of. It’s not for everyone, but it does provide diversity to our portfolio and it may be perfect for yours.
Details in the issue.
Cabot Stock of the Week 282
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Friday saw the arrival of a well-earned market correction, but the main trends of all indexes remain up—and all our market timing indicators remain bullish—so I believe that once this correction is over, the market will resume its uptrend. In the meantime, however, your chief job is to minimize losses as this correction unfolds—and you’ll find more advice on that in the update section. As for this week’s recommendation, it’s a very small company with great growth potential, and the fact that it is so little known means that it has a chance to avoid any broad selling pressures that may sweep the market lower in the days and weeks ahead. The stock was first recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.
Axonics Modulation (AXNX)
Axonics Modulation, which has a market cap of $875 million, is an up-and-coming MedTech stock with a disruptive solution for patients who suffer from overactive bladder (OAB), Urinary Retention (UR) and Fecal Incontinence (FI), the most common symptoms of which are a frequent and urgent need to go to the bathroom.
A proven treatment option for these patients is sacral neuromodulation (SNM). This involves electrical stimulation therapy via a programmable stimulator implanted in the body to deliver low amplitude electrical stimulation to the sacral nerve, thereby restoring normal control of the bladder and bowel.
Historically, the SNM market has been dominated by Medtronic (MDT). But Axonics leapfrogged the MedTech behemoth by building a better mousetrap, dubbed the Axonics System. Distinguishing features include a miniaturized, long-lived rechargeable neurostimulator that’s 60% smaller and which works for up to 15 years (versus Medtronic’s roughly five years). Axonics’ solution also features a very simple user interface on the remote and is MRI compatible. The Axonics system is approved for OAB, UR and FI in the U.S., Europe, Canada & Australia.
The total market for SNM in just the U.S. and Europe is over 80 million adults, and Medtronic generates annual SNM sales of almost $700 million from roughly 45,000 patients. Market demand is seen on the rise because there’s finally innovation going on. Axonics could surpass 12% market share this year and approach 30% within a couple years, all while the SNM market accelerates to 15%+ growth annually.
Word on the street is that physicians are extremely interested in this new offering and that, even with Medtronic set to release its next-gen Interstim Micro in 2020, the stage has been set for Axonics to grab sustainable market share. Axonics is working on next-gen products too. In fact, just last week the company announced FDA approval for its second-generation Programmer for its SNM System. The new Programmer is a custom-made tablet with color touchscreen that’s even more user-friendly than the first-generation version.
Revenue growth potential is massive given that the Axonics System, which runs about $16,000 “installed,” just launched internationally in Europe & Canada for OAB in November 2018, and in the U.S. late in 2019. Sales in 2018 were just $700,000 as the system first hit the market. Preliminary Q4 2019 revenue revealed sales outside the U.S. were $1.9 million and within the U.S. were $8.4 million, well ahead of expectations.Reading between the lines it appears Axonics had around 200 to 300 physicians implanting two to three devices each in the quarter. Management believes total 2019 revenue should approach $14 million. Stepping back, Axonics could easily grow revenue to over $80 million in 2020 (up 470%) and then reach $300 million by 2023-2024.
We’ll know more as things advance. The company is not profitable and ended 2019 with about $184 million in cash, thanks to a secondary offering in November. That could get it close to breakeven, which could be some point in 2021, depending on how the chips fall.
AXNX went public at 15 in October 2018 and got off to a slow start. But shares blasted higher in February 2019 and peaked at 25 before a pullback to 18. The stock rebounded quickly, and momentum carried AXNX to 43 by the end of June. A slow decline accelerated into September and shares didn’t find firm ground until they hit 19 in October. The stock has been trending higher since, albeit with some significant jumps after earnings releases, and some pullbacks as well. This stock will likely be volatile so averaging in is a good strategy.
Current Recommendations
As the market correction gets rolling, pundits will guess how long the correction will last and how deep it will go—but I won’t. What I’ll do is give advice and show by example how to reduce risk, raise cash and hold on to your best prospects. Goal number one is to not lose much money. Goal number two is to hang onto your best-performing stocks so that when this correction ends (whenever that is) we’re in a position to benefit from the renewed uptrend. Today that means selling four stocks (two for profits and two for losses) and downgrading one to Hold.
Details below.
Changes
Citigroup (C) to Sell.
Disney (DIS) to Hold.
Dow, Inc. (DOW) to Sell.
Enterprise Products Partners (EPD) to Sell.
Pinduoduo (PDD) to Sell.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, is shrugging off this market correction, as good safe stocks should. In his update last week Tom wrote, “This life science and research lab company is another portfolio REIT making new all time highs. Since the beginning of last year ARE has pushed almost relentlessly higher up over 45%. It barely stumbled after announcing a new offering of 6 million shares. Demand for its rare life science and research lab facilities remains strong and investors are still attracted to the defensive nature of the business. The stock has been an all-star performer for many years and I expect it to continue to behave well in this environment. On valuation reasons alone it is just a HOLD.” HOLD.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, is also holding up nicely, two days off its record top. In his update last week Tom wrote, “The global infrastructure company is soaring to new all time highs this week. After pulling back from the old high, BIP is up about 6% this week and 11% since mid December. It has also returned over 43% for the past year, much better than its peers and the overall market. The reliable and significantly growing payments from its essential assets makes BIP like a utility on steroids, sort of like NEE and XEL. And the market loves those kinds of plays these days. I expect continued solid performance as new, higher margin assets continue to come on line and drive earnings higher. The stock is still rated HOLD because it has had a solid run-up and this might not be the ideal entry point.” HOLD.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, hasn’t held up well at all over the past two trading days, falling through both its 25- and 50-day moving averages—and that, combined with Crista’s reduced opinion of the stock, is reason to sell. Here’s what Crista wrote last week. “Revised consensus earnings estimates have been published in the wake of Citigroup’s fourth quarter 2019 report. Analysts now expect EPS to grow 5.8% and 9.2% in 2020 and 2021. Those are fine numbers for sure, but they’re not high enough for me to give the stock a Buy recommendation. Therefore, I’m moving Citigroup from Buy to a Hold recommendation, and I’m keeping the stock on a short leash.” I’ll sell and take the profit. SELL.
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, is still a loser for us, but Crista remains optimistic that value will out—and I remain optimistic that as this market correction continues, DBI will hold up better than most stocks. In her update last week, Crista wrote, “Consensus earnings estimates project no earnings growth in their fiscal 2019 year (January 2020 year end) and 19.7% EPS growth in 2020. The 2020 P/E is low at 8.7. DBI is an undervalued, small-cap stock. The stock continues to recover from a dramatic-yet-brief price disruption in December, from which it proceeded to rise and then exhibit a quick shakeout in mid-January. Patient growth and dividend investors should buy now, lock in the large current yield, and benefit from eventual capital gains as the company continues to fulfill their successful marketing strategies.” BUY.
Disney (DIS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has plunged with the market over the past few days, handing us a quick loss, but I’m not selling today, as the stock is now sitting right at support at 136 and there’s a decent chance that buyers will step in here. However, recognizing that the stock has lost power, I will downgrade it to Hold. HOLD.
Dow, Inc. (DOW), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio and featured here just two weeks ago, has fallen out of bed over the past week, handing us another quick loss, and in this case I recommend selling. Fundamentally, Crista believes all is well and that when the company reports earnings on Wednesday morning, buyers will step in. But the problem from a technical point of view is that the sellers are in charge now and there’s no real support at this level—and with the broad market rolling over, I’d rather have the cash. SELL.
Endava (DAVA), originally recommended by Tyler Laundon in Cabot Early Opportunities, is a U.K.-based company that bridges the gap between consultants and traditional IT services companies, helping organizations succeed in an increasingly technological world. There’s been no news from the company, but the stock is looking better; it was actually up last Friday, and continues to ride its 50-day moving average higher. HOLD.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, has fallen apart over the past week, and is now below all its moving averages. Tom claims it’s still an amazing value (with a giant yield), but we now have a loss and I don’t want it to get bigger—so out it goes. 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 had corrected sharply over the past month, bottoming on Friday roughly where it bottomed in December and October, so downside seems minimal from here—even considering the coronavirus fears—and today the stock was up. HOLD.
Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high on Friday and sold off today on modest volume, so the buyers are still in charge here. In last week’s update, Mike wrote, “Like most everything else, the stock is extended to the upside, so we advise aiming for dips of two or three points to enter. Bigger picture, though, IPHI broke out of a two-plus-year base last July, so while pullbacks can (and eventually will) occur, the odds favor the stock having more longer-term upside, especially as the ramp in demand for its high-speed network interconnects is just beginning to surge.” BUY.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, peaked two Fridays ago and has just fallen below its 25-day moving average—totally normal behavior for a once-hot stock. In his latest update, Carl wrote, “More conservative investors should take some profits off the table but most aggressive investors should keep all their shares.” HOLD.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has hit new highs on the past 12 trading days—with the latest buying following the release of the company’s quarterly earnings report on Friday. In his update last week, before the earnings report, Tom wrote, “Nothing seems to stop the relentless push higher. The stock price has more than doubled in the last three years. In that time it has absolutely blown away the returns of the utility sector as well as the overall market. It’s a great company that combines the steady revenue of one of the best regulated utilities in the country with the growth of the world’s largest alternative energy producer. It is also in the wheelhouse of a market that loves best-in-class safe stocks. The stock is pricey but the momentum is to die for.” Short-term investors should consider the possibility of taking partial profits here. HOLD.
Pinduoduo (PDD), originally recommended by Mike Cintolo in Cabot Growth Investor, operates a Chinese e-commerce platform that has great growth potential but the stock has now fallen below its 25- and 50-day moving averages, so I recommend selling and taking the profit; Mike has already sold. SELL.
Qorvo (QRVO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high last Thursday—though it was barely above December’s high—and it’s now correcting sharply, in part because investors are anticipating (or fearful of) the earnings report expected after the market close today. I’ll leave it rated buy, and only change if the stock weakens substantially. BUY.
Ring Central (RNG), originally 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 broke out to all-time highs at the start of the year and has hit new highs frequently since—most recently last Friday. HOLD.
Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here last week, is off to a great start! As Mike put it in his update in Cabot Growth Investor last week, “SE boomed to new highs yesterday, helped by a major upgrade (it was put on the “conviction list” at Goldman), as the analyst sees the firm’s e-commerce division posting big growth in 2020 and showing a path to profitability. If the market hangs in here, we think SE can do well.” BUY.
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 have definitely paid off. But Tesla is no longer an undiscovered gem, and no longer even a company that most investors are skeptical of—and thus I don’t see it as a great buy. But I do believe that holding the stock long-term still makes sense. Short-term, however, taking partial profits here could be smart for some people. HOLD.
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, continues to consolidate between 10 and 11.5, trading roughly in sync with the sector, as it leaves the effects of the short-sellers’ attack in the rearview mirror. Until it strengthens, holding is the best recommendation I can give. HOLD.
Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high last Wednesday and has pulled back normally since. In last week’s update, Mike wrote, “Vertex presented at the JPMorgan healthcare conference, and while it didn’t make any major waves (it’s going to save 2020 guidance and Q4 results for its year-end report, which is likely out in early February), it did offer a few interesting numbers—management expects further label broadening for Trikafta (approval to treat patients 12-and-over in Europe this year; patients 6-11 years old in the U.S. after that; its addressable market should expand to 90% of all cystic fibrosis patients) and, longer-term, sees solid revenue and cash flow growth for many years to come, which is sure to keep big investors interested.” BUY.
Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, nearly tripled from late December through last Wednesday before the market began pulling it back to earth. But today the stock was up again, telling us there are buyers waiting to get on board! In last week’s update, Carl wrote, “This is an aggressive idea that has made a strong move since being added to the Explorer portfolio, but I believe there is more upside as the company is likely to remain in the media spotlight throughout 2020. SPCE stock has a lot of momentum behind it and management is very media savvy.” BUY.
The next Cabot Stock of the Week issue will be published on February 3, 2020.
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