Cabot’s “This Stock is Set to Deliver 1,120% Returns” Pitch

What's being touted as having Tesla-like potential by Cabot Stock of the Week?

By Travis Johnson, Stock Gumshoe, September 20, 2017

Cabot is pitching its Stock of the Week service, which chooses a favorite stock from among all of Cabot’s newsletters each week, and in order to entice subscribers they’re dangling the promise of huge gains… including this promise:

“If you’ll give me just 10 minutes a week, I promise our Cabot Stock of the Week picks will double your money in the next 12 months.”

On average? Or all of them? Or just one of the 52? That’s a pretty bold promise to make unless you’re just claiming that you’ll have one stock double in a year — which should be pretty easy, given that Cabot newsletters are mostly buying growth and momentum stocks (meaning that you’ve got a better chance of a double, and also a better chance of a pretty sharp collapse if the momentum hits a wall).

So… what’s the idea they’re dangling this time to get us to pull out our credit cards? (Stock of the Week is currently $997/year, in case you’re wondering.) Here are our hints:

“I’d be willing to bet that this company could give us Tesla-like returns (+1,120%) over the next four years.

“What makes me say so? Because this company will become one of the biggest profit takers in the hotel services business in China.”

OK, so there aren’t a lot of “hotel services” companies in China that are publicly traded (quite a few have disappeared, been hoovered up into other companies, or been delisted over the years), so that cuts down our list of candidates quite a bit.

Any other clues? This is what we get from the ad:

“The company is growing rapidly not only by building many new hotels but also by acquiring existing hotels and rebranding them. In this way, they take from the competition and add to their own. Since 2009, using this method, this company has grown its share of the Chinese market from less than 0.4% all the way to 2.4% and shows no signs of slowing down.”

And we get some hints about what the stock has done recently…

“The stock is up 133% in the last 12 months and up 92% year-to-date! With double-digit revenue growth and continuing business expansion, this company has much more room to grow.”

So… hoodat? Thinkolator sez that these hints being dropped point to: China Lodging Group (HTHT)

China Lodging was founded by Qi Ji, who was previously CEO of HomeInns (HMIN), the most recent Chinese hotel stock darling (though HMIN wasn’t exactly booming at the time that it was acquired by a consortium that included its management team, Ctrip (CTRP), and China-listed tourism company BTG). There are a lot of connections among these travel companies in China, with Ctrip, particularly, seemingly pretty focused on integrating hotels into its platforms — Ctrip also bought into HTHT at its IPO in 2010, though I don’t know whether or not they still hold a meaningful stake.

Why is this the match? Well, it’s mostly that stock return hint that matches for us today. If you go from a mid-August date, which might have been when this stock was originally recommended (presumably by Paul Goodwin in his Cabot Emerging Markets Investor, which remains very China-focused despite striking “China” from its name a year or two ago) then HTHT was indeed up 92% year to date… and at that moment, it was also up 133% over the previous 12 months. That kind of precise match is a nearly perfect indicator that the Thinkolator is on target.

Will China Lodging Group be a big winner? Certainly tourism is growing like gangbusters in China, though there’s also plenty of competition, particularly in the low-end hotels that make up most of China Lodging’s portfolio… though they’re also acquiring new hotels and brands and expanding more into the more compelling mid-tier hotels (the luxury hotel segment in China is apparently still dominated by foreign brands, but the rising middle class is making the mid-tier look appealing).

You can get a look at where HTHT sees itself now, and where it sees opportunity, in its latest investor presentation here and the earnings call transcript here. If you want a bit more background, there’s a story here about founder Ji Qi’s strategy.

I do like the general strategy that HTHT is using, expanding primarily through “manchised” properties (where they franchise the brand and manage the property, but don’t own it) that give them a better chance of a good return on capital, but that’s not particularly unique — most successful hotel brands do something similar to avoid taking on a lot of debt or property-ownership risk. The stock is expensive, at 60X trailing earnings and 33X forward earnings, but they’re also expecting to grow revenue by 20% and earnings by 30% next year, so paying that kind of multiple makes sense if they can keep that growth going.

Can they? Beats me. Analysts say “no” — according to the summary collected by Yahoo Finance, they have HTHT penciled in for 4% earnings growth per year over the next four years… but that seems, well, silly. It could just be that not many analysts are making longer-term projections, so perhaps that’s your opportunity — those who have a big more faith in the longer-term prospects win because they’re willing to pay that premium on current earnings. After all, if the few analysts who have a 2019 estimate in are at all accurate (a big “if”), then the stock is only trading at 26X 2019 earnings.

So you’ll have to make your own call on this one. There is decent insider ownership, there is no major short position in the stock, they’re profitable and have beaten estimates pretty handily for three of the past four quarters, and I don’t see any big red flags on the balance sheet or in their operating or profit margins. But the stock sure is expensive, and I don’t know what the future holds… if your look into the future conjures up darkness or light for China Lodging Group, let us know with a comment below.

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...

Irregulars Quick Take

Paid members get a quick summary of the stocks teased and our thoughts here. Join as a Stock Gumshoe Irregular today (already a member? Log in)