Cabot’s

10 Favorite
Low-Priced
Stocks
for

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Cabot’s 10 Favorite Low-Priced Stocks for 2018
BIG PROFITS IN LOW-PRICED STOCKS ... IF YOU KNOW HOW TO HANDLE THEM
By Michael Cintolo, Cabot Vice President of Investments

We’ve been refining our growth stock methodology since Cabot Growth Investor was launched
back in 1970, and one of its key tenets is to avoid the junk stocks … which usually means the
low-priced, thinly-traded stocks that have little chance of attracting much in the way of
institutional support (and thus, little chance of enjoying sustained uptrends).

But we’re nothing if not pragmatists, and after lots of research and experience, we’ve found that
many thinner, lower-priced names do have a place in your portfolio—but only if you enter at the
right time, and look to take short-term profits on pops. After further testing and trial runs, we
launched our annual Cabot’s 10 Favorite Low Priced Stock report back in 2003.

The report takes advantage of two trends. The first (and most commonly talked about) is tax-
loss selling, which tends to drive down many stocks and sectors (especially those that have
performed poor during the year) in mid- to late December. The second factor is simply the
market’s pattern of performing well around the holidays and into the middle of January (and
sometimes longer). We call this the “euphoria effect,” with sellers usually putting up little in the
way of resistance to higher prices, allowing some low-priced names to tack on great gains.

Because of the great market advance this year, you’d think there would be few stocks scraping
multi-year lows. But it turns out there are plenty of areas that were poor performers for much of
the year, and have only recently found buyers. This year’s list has a bunch of these turnaround-
type situations—babies that were tossed out with their sector’s bathwater during the year, but
now look ready to (and often have begun to) bounce back.

Just as important as what to buy is having a plan on how to handle these stocks. Here are a few
guidelines.

First, don’t invest the rent money. Obviously, we think these stocks have potential, but
they’re not the institutionally-owned liquid leading stocks we usually recommend. They’re
on the speculative side of the equation, so keep your positions small. And don’t place orders
overnight, which often results in a bad buy price

Second, be sure to cut all losses short, usually near 20% (though we suggest more specific loss
limits inside). Even in shorter-term trading, the market is a game of outliers, so work hard to
make sure none of these stocks get away from you on the downside.

Third, look to sell some or all of your shares offensively, i.e., on the way up. These
recommendations aren’t meant as long-term holds, though some can perform well for many
months if things go right. We’re aiming for a swing trade usually between three and eight weeks.
So if you get a quick gain of 10% to 20%, consider taking at least some (if not all) of your position
off the table.

Fourth, if you’re more aggressive, you can sell some shares (say, one-third to one-half) on the
way up, and then trail a mental stop on the rest of your position (starting from breakeven) in an
effort to capture a longer-term move. Such a method will allow you to have your cake (booking
a small profit when the stock pops higher) and eat it too (if the stock continues rising for many
weeks or even months).

All in all, what really counts is having and sticking to a sound game plan. While we will not
provide regular updates on these stocks (this is a one-time report), we are here to help, so feel
free to email me directly at mike@cabotwealth.com with questions or comments. Good luck!
Prices as of December 14, 2017.
Cabot’s Low-Priced Stock Report
December 2017 3

EXPR Express (10.4)

Mall-based retail has been one of the worst
performing sectors in 2017, but we’re seeing
multiple signs that sentiment has turned up. (We
actually have a mall-based REIT recommendation
later in this report!) Express is a relatively well-
managed specialty apparel retailer with a great
brand name, but that hasn’t kept it from falling
on hard times, with revenues and earnings slowly
receding during the past four years.
But that’s the past. Thanks to a bunch of moves,
the company’s future is increasingly bright, and the
stock, which has turned super strong, should have
more upside ahead.
Interestingly, not a ton has changed with the
company’s offerings. Express has added some new
product lines to drum up enthusiasm, and has
revamped its marketing efforts (much more digital
and social media, and a partnership with the NBA)
with good success. But the company is still selling
work, casual, jeanswear and going-out apparel to
men and women in their 20s and 30s—the core
target market and style is the same.
Instead, most of the big changes have come in the
firm’s operations and business model. Three years
Express (EXPR)
ago, for example, the company had 632 retail locations.
By the end of 2017, though, there will only be 491 retail
stores, but 145 outlet stores, which has helped boost
per-square-foot productivity.
Online sales have also been a big plus. In the third
quarter, e-commerce sales rose 23% (compared to a 1%
shrinkage in overall revenues) and now make up nearly
one-quarter of all sales. There’s also been a new loyalty
program that’s topped sign-up expectations, and
management is working hard to keep costs in check—
it’s on track to slice about 25 cents per share of costs
this year and even more going forward.
All of that has brought Express to the brink of a
return to growth. In the all-important holiday quarter,
management now sees comparable-store sales up in
the low single digits (the first positive reading in a
while), and analysts see earnings of 43 cents per share,
up 48% from last year. Looking to next year, Wall Street
expects the firm to see earnings up 27% as business
starts to trend up.
Just as important for the stock is that the top brass
has kept the company highly liquid, and now that
business is advancing, is looking to return some
cash to shareholders. The company has no debt
outstanding and a whopping $198 million of cash on
the books. That’s prompted the company to set up a
$150 million share repurchase program—compared to
the current market cap of less than $900 million, that’s
huge!

There’s no timetable for the buyback, but after years

in the dumps, management clearly thinks the stock
is a good value and is confident that Express will be
spinning off an ever-greater amount of cash in the
coming quarters.

EXPR has had a terrible couple of years, falling from

an all-time high of 26 in 2012 (and a recent high near
22 in April 2016) to a low near 6 in early June 2017. But
the stock then began to bottom out, finding support
multiple times through mid-November. And now, with
a third-quarter earnings beat and the huge share
Relative Performance* buyback program, EXPR has gone to the moon!

Buying after such a run seems tricky, but remember

*Measures how the stock is that (a) the stock has gone through the wringer for
performing relative to the market
years, so we view this strength as a kick-off, not a blow-
off, and (b) the upside volume has been so strong that
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Cabot’s Low-Priced Stock Report
December 2017 4

FMSA Fairmount Santrol (5.2)

Oil stocks were the “leaders” of the 2015-2016 bear
phase on the downside, and one of the worst hit
areas within the sector was frac sand companies,
which mine and sell specialized sand and other
materials that boost well output when fracking. The
industry had a huge boom as the number of land rigs
soared from 2010 to 2014, but when the rig count
plummeted, so did demand for (and pricing of) frac
sand.
Now, however, nearly two years after the bottom
in the energy patch, drilling activity has picked up
enough for the leading firms in this sub-group to
begin cranking out some excellent results. And their
stocks are just beginning to reflect this! Our pick
of the litter is Fairmount Santrol, an Ohio company
that’s a leader in the group.
The company is one of the largest providers of sand-
based proppants, with four mines that have proven
reserves of more than 900 million tons and annual
capacity of 15.6 million tons. Moreover, Fairmount
produces various types of frac sand, addressing
more than 95% of the market. And the business is
more than just mines—Fairmount’s fully-integrated
distribution network has tentacles in every major
basin in the U.S., which has allowed it to cut delivery
costs as volumes have ramped.
Indeed, in the third quarter, Fairmount’s industrial
and recreational sand revenues fell 4%, while its oil
and gas-related products soared 140% from a year
ago and 26% from the prior quarter thanks to both
higher volumes and higher pricing. Earnings per share
reached 15 cents, a penny above estimates and up
from a loss of eight cents last year.
The company is a bit capacity constrained in the
current quarter, though management is implementing
price hikes that will show up in the first quarter
of next year. Combined with the Kermit opening,
analysts expect earnings of 57 cents per share in 2018,
nearly double this year’s tally.
FMSA has been all over the place during the past
couple of years, rallying from a low of 1 during the
energy bear market low in January 2016, back to 13
early this year, then sliding all the way down to 2.5
in August. However, the stock has begun to show
some spunk since then, rallying on strong volume to
5 in early October and holding those gains in recent
weeks.
We think it’s likely the bottom is in, which means
FMSA is a great candidate for a positive short-term
(and possibly long-term) upside. Keep a stop just
below 4 in case the uptrend falters.

Obviously, the pickup in drilling activity in various Fairmount Santrol (FMSA)

basins is the big driver, but there’s also some bullish
longer-term shifts in how wells are drilled—more
stages per well and longer laterals demand greater
amounts of sand and other proppants. All told,
Fairmount’s management believes overall demand
will rise 33% next year, and that figure will be even
greater for certain finer grades of sand.

To meet the increasing demand, the company plans

to open a new mine (dubbed Kermit) in Q2 of 2018,
ramping up to full capacity by Q4. But this won’t be
a speculative operation; Fairmount expects to have
70% to 80% of active capacity under contract when
Kermit opens its doors.

About 28% of the company’s sand goes to

industrial and recreational uses (to make glass,
building products, filtration devices and more),
which provides some stability. But there’s no
doubt Fairmount’s future (and stock price) will be
determined by its oil and gas-related operations,
which make up 72% of its output (a figure likely to
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Cabot’s Low-Priced Stock Report
December 2017 5
GLUU Glu Mobile (4.5)
Glu Mobile is a San Francisco-based mobile game
company that’s had an up-and-down history. Growth
was rapid when the firm came public back in 2007,
but since then there have been plenty of downs and a
couple of ups.
After 10 years of this yo-yo performance, the Board
made a change a year ago, bringing in Nick Earl to
be the new CEO. And that move has proven to make
the difference, as Mr. Earl (who has since brought
in some top-notch talent, including a Senior VP of
Studios from Electronic Arts) implemented both
creative and operational changes that have Glu on a
solid growth path.
In terms of content, the new management team has
shifted the company’s focus away from celebrity-
focused games and toward creative games that
have “new” events and attractions that generate a
continuing stream of revenue and bookings. (The
typical game gets most of its bookings right after
the launch, and then dies off fairly quickly. Glu’s
“evergreen” titles, which are updated frequently and
offer special attractions to keep interest up, tend to
slowly grow over time, with their highest levels of
bookings achieved more than 18 months after launch.
Glu Mobile (GLUU)
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That said, it’s not just about evergreen games, but
also new games that attract new users. And, while it
is launching The Swift Life (with Taylor Swift) late this
year, its new games next year will be focused on things
like sports and action, which tend to be stickier over
time.
The game development process is another big change
the top brass made. In a year’s time, it’s changed the
entire method of game idea generation, with the aim
of more rapid development and quicker thumbs up/
thumbs down about whether to commercialize a game.
Thanks to the increased pipeline activity, Glu expects to
launch three to four new titles in 2018.
Right now, a big driver of business is its Design Home
game, which, like most, is free to download but has a ton
of things to buy once you start playing. Design Home
allows users to unleash their inner interior designer,
decorating digital houses with various high-end brands
and joining a creative community that helps everyone
learn about diverse décor styles. Glu believes this
has become a lifestyle app of sorts—it has more than
one million daily active users and is one of the top 20
grossing games on the U.S. iTunes app store.
Operationally, there’s also been some belt tightening
on spending, along with improved marketing (user
acquisition costs have been falling) with management
putting an emphasis on actual profits for shareholders.
So far, all of these initiatives have come together
perfectly. After five straight quarters of falling revenues,
the top line has grown 4%, 42% and 58% during the past
three quarters. Bookings have also been soaring, rising
67% in the third quarter, and impressively, they came
from all different sources—Design Home did account for
35% of total bookings in the quarter, but evergreen titles
represented 43% with a few other games making up the
rest.
Mr. Earl’s outlook for the fourth quarter is bullish, and
just as important, Glu believes it can turn profitable on
a cash flow basis in Q1 of 2018—and be consistently
profitable after that.
Investors are turning into believers. GLUU skidded from
7 in 2015 to 2 in October 2016, and then effectively began
a long bottoming process, bobbing between 1.7 and 2.7
through July of this year. Shares then surged as high as
4.8 in October before beginning its current two-month
rest period. The next major move is likely up. Keep a
stop in the 3.5 to 3.8 area.
Cabot’s Low-Priced Stock Report
December 2017 6

NGL NGL Energy Partners (13.9)

NGL Energy is a diversified midstream master limited Second, the top brass has decided to sell certain
partnership (MLP) that appears both very cheap and retail propane businesses it owns, and to sell a 50%
oversold—and in the early stages of a new upturn. stake in its Glass Mountain Pipeline. Combined,
these sales will bring in $520 million, which will be
The company has its hands in various energy cookie used to make a huge dent in NGL’s debt load.
jars. The biggest is crude oil pipelines, storage and
other transportation—NGL owns the Grand Mesa And third, when it comes to the distribution,
(100% interest) and Glass Mountain (50% interest) management stated: “We’ve been pretty consistent
pipelines that run in Colorado, Oklahoma and Texas, here and firm, but we’re not cutting our distribution.
as well as eight storage facilities and some trucks, We indicated we’re going to maintain it this year and
railcars and barges used to transport oil. then look to recommend a book to the board that
we would increase the distribution with really the
The Grand Mesa is the big driver in this segment, caveat being that we hit our forecasted numbers. So
with higher volumes pushing profitability way up; all definitely no cut, and there’s been no discussion of
told, the segment should account for $125 million of a cut. All the discussions are about increasing.”
EBITDA this fiscal year (ending next March), more
than double last year’s tally. Thus, the top brass is thinking its dividend is
not just stable, but could rise as business ramps
The next biggest segment is NGL’s water business, up. We’re not investing here for income, but
with 72 water treatment and disposal facilities spread with a current dividend yield of 10.9%, it should
across the Permian Basin (35), Eagle Ford (31), DJ attract some bargain hunters in the weeks ahead,
Basin in Colorado (21) and others. This segment especially if energy prices cooperate.
is directly tied to drilling activity, which means its
presence in the Permian is helping a ton—in the third The stock has been meandering higher since
quarter, NGL processed 30% more wastewater than a September, and recently popped to multi-month
year ago, and management expects full-year EBITDA highs on good volume. A stop in the 11.5 to 12 range
here to total $105 million, up 67% from a year ago. makes sense.

Beyond those two segments, NGL Energy does

good business in retail propane (72% of sales go to NGL Energy Partners (NGL)
consumers), which can be very cyclical, and refined
products and renewables (which includes lots of
storage and an ethanol plant), though that’s seeing
cash flow shrink as margins compress.

It all sounds good, but NGL Energy went through

the wringer for most of this year as results came in
well below expectations. Pretty much everything
went wrong, from warmer weather dropping propane
volumes, pricing pressure in crude logistics services
and just all around lower-than-expected demand.
That plus some horrid sector action and fears of a
distribution cut drove the stock down from 26 in
February to below 9 in September!

However, a few moves have begun to change

investor perception. First, the company reported a
solid third quarter; while its cash flow still doesn’t
cover the dividend, revenues grew 29%, the Grand
Mesa pipeline and water business are exceeding
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Cabot’s Low-Priced Stock Report
December 2017 7
PEI Pennsylvania REIT (11.1)
2017 has been a disaster for many mall-based retail
stocks, and for good reason—business has been
tough for their clients, with an increasing number
of bankruptcies and empty space, lower sales per
square foot and worries about lease renewals.
Funds from operation (the preferred profit metric
for REITs) have generally fallen off this year for even
some of the best firms in the group.
But while business has been challenging, it looks
like a classic turnaround situation is shaping up for
early 2018 (and possibly beyond), as even higher-
quality stocks in the sector have been crushed,
yields are high, and many management teams
and analysts see cash flow stabilizing and even
improving as the calendar flips.
Our pick is Pennsylvania REIT, a mid-sized firm
($373 million in revenue during the past four
quarters) that operates mostly in the mid-Atlantic
area (with a heavy emphasis on Pennsylvania). At
the end of the third quarter, it owned and leased
more than 21 million square feet to a well-diversified
client base, including 32% to entertainment outfits,
15% to off-price retailers, 21% to apparel, 14% to fast
fashion and 8% to dining.
Pennsylvania REIT (PEI)
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While business has been tough this year (cash
flow has been off 9% and 14% during the past two
quarters), there are many positive signs. In the third
quarter, for instance, Penn REIT opened 475,000 new
square feet of space, saw tenant sales per square
foot reach an all-time high of $475, and saw wholly-
owned same store operating income increase by
3.2%. Moreover, the firm continued to make some
shrewd moves on the financing front, including
selling two properties for a total of $64 million (it has
another on the market, too), as well as refinancing
some preferred stock and one of its malls, saving a
combined $2.7 million annually.
Importantly, Pennsylvania REIT’s exposure to
troubled clients like Sears and Bon-Ton Stores is
minimal (just nine stores), especially compared
to competitors like GGP Inc. (69 locations), CBL &
Associates (61) and Washington Prime (58). And on
the flip side, the company’s top five clients make up
nearly 40% of revenue and average a lofty $591 of
sales per square foot, a very healthy figure.
Looking ahead, Penn REIT has plenty of liquidity
(undrawn $400 million revolver), and claims that an
independent study projects sales per square foot for
its entire real estate portfolio will rise to $540 by 2019.
In the near-term, it’s definitely a plus that various
surveys suggest the holiday shopping season is off
to a strong start, even when it comes to brick-and-
mortar locations.
None of those are knock-your-socks-off figures, of
course. But within the context of a stock that’s down
60% from August of last year, has a well-covered yield
of 7.5% (it pays out about 88% of its distributable cash
flow) and trades at just six times cash flow, it tells
you that Pennsylvania REIT is one of the babies that
was thrown out with the mall REIT bathwater. Indeed,
analysts see cash flow rising 5% next year (we think
that’s a touch low), and management is budgeting for
modest dividend increases going forward.
Even better, the stock itself has shown bottoming
action for months—while PEI didn’t hit its low until
late October, you can see in the chart that shares
have basically been carving out a long-term low
in the 10 to 12 area since May. With the economy
accelerating and the potential for a bang-up holiday
shopping season, we think PEI has great short- and
longer-term potential. Use a loss limit in the low- to
mid-9s.
Cabot’s Low-Priced Stock Report
December 2017 8

QNST QuinStreet (8.8)

A year ago, QuinStreet—a small digital advertising
company—was at the tail end of a very tough multi-
year stretch. Business had basically flat lined during
the prior couple of years and higher costs caused
cash flow to dip to breakeven. That led to a big
restructuring, including a whopping 25% reduction
in personnel costs and (importantly) a refocusing on
key growth areas.
Those were dark days, but it proved to be the right
move, as QuinStreet now looks to be in the early
stages of a growth wave that could take it very far as
the move toward digital marketing accelerates.
So what does the company do? It operates a variety
of industry- and product-focused advertising websites
that are purposely built to rank high in search engine
rankings (through search engine optimization, though
they also engage in pay-per-click marketing to boost
rankings) that grab a large number of eyeballs.
QuinStreet operates insurance.com, carinsurance.
com, insure.com, cardratings.com, savingsaccounts.
com, schools.com and more. Each site has lots of
content, rankings and user-friendly formats that allow
customers to search for products, get quotes and
request call backs.
To be clear, QuinStreet simply builds and manages
the websites and drives traffic to the sites. The
products themselves are offered by the company’s
numerous clients—on insurance.com, for instance,
clients include Progressive, Esurance, 21st Century,
The Hartford, Liberty Mutual and Safeco, with each
offering a variety of products and having their own
“home pages” on the insurance.com site.
suffering in a big way as for-profit schools have gone
through the wringer. But revenue growth returned
to the black in Q3 as those clients stabilized and
international growth beat expectations.
All in all, the third quarter saw revenue growth of 19%,
which was the fastest in years. And because of the
cost cuts, most of that is falling to the bottom line—
earnings of eight cents per share were up from a penny
the year before and three cents above expectations.
Even better, free cash flow is much larger than earnings
(about 12.5 cents per share in Q3) and QuinStreet has
more than $50 million in cash (more than 10% of its
market cap!) and no long-term debt.
There are risks, of course (rising interest rates could
dampen demand for some of the financial products of
its clients), but it’s a good bet the company will see
rising revenue, booming margins and healthy earnings
growth going forward.
The stock is certainly seeing a bright future—after
falling from 25 in 2011 to 3 last year, QNST bottomed
out for months before finally breaking out in
September. It’s had a great run since then, and we like
how buying volume has consistently increased during
its advance. This recent dip to the 50-day line looks
buyable; a loss limit between 7.0 and 7.5 seems right.
QuinStreet (QNST)

Basically, QuinStreet creates a one-stop shop for a

given product and drives traffic to the site, which
then attracts clients, who pay for placement of
quotes and (likely) a cut of each transaction.

The company’s financial services division is its

largest segment (makes up two-thirds of revenue)
and includes insurance, credit cards, deposits
and personal loans. The restructuring mentioned
above refocused on this area, and that’s proven to
be a good idea—revenue growth has reaccelerated
recently and totaled 31% during the September
quarter, driven by a 35% gain in insurance products
and a 24% gain in other financial business lines.

Education is QuinStreet’s second largest segment,

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Cabot’s Low-Priced Stock Report
December 2017 9

RIGL Rigel Pharmaceuticals (3.6)

Development-stage biotech stocks are the stock On average, patients in Rigel’s study started with
market’s equivalent of lottery tickets, moving up just 16,000 platelets per microliter of blood; by
or down in a huge way based on early-stage trial comparison, a normal level is 250,000 to 400,000,
results and super-long-term projections. Rigel and you generally need a level of 50,000 to clot, so
Pharmaceuticals has been one of those lottery these were severe cases. Moreover, these patients
tickets for many years, but the stock is beginning had suffered from ITP for an average of 8.5 years
to change character as the company moves into (!), with a bunch failing to respond to most of the
its commercialization phase. common treatments.

The big idea revolves around a drug called It turned out that about 30% of patients
Fostamatinib, which is an oral SYK inhibitor (able responded to Fostamatinib, and encouragingly,
to inhibit incorrect immune responses by the most of those that did respond saw their platelets
body) that Rigel is researching for a few different spike to well above 50,000 (where clotting can
diseases. But the treatment the market is focused occur) within a couple of weeks. In other words,
on most is for idiopathic thrombocytopenic Fostabmatinib usually works quickly, and if it
purpura (ITP), a disease where the body’s own doesn’t, a doctor can quickly switch to a different
immune system destroys its platelets, leading to treatment.
an inability to clot and other side effects.
A 30% response might not sound like much,
ITP is very rare, affecting just 65,000 adults in the but these were severe cases and the FDA is
U.S., and it’s proven tough to treat—some people clearly impressed. Rigel submitted a new drug
respond to treatments but others don’t, leading application earlier this year, and on October 2,
to a long/expensive trial-and-error process. the FDA announced that it’s not planning to hold
But Rigel has gone through the testing process a specific committee meeting. Investors read
treating chronic and persistent ITP patients with that as meaningfully raising the odds of a full-
Fostamatinib—and the results were great! out approval no later than April 2018. That news
caused the stock to skyrocket, with investors
Rigel Pharmaceuticals (RIGL) thinking a commercial launch is very likely in the
second quarter of next year.

As mentioned above, Rigel is studying

Fostamatinib in various indications; the next in
line after ITP is a debilitating anemia condition
that affects around 40,000 people in the U.S.
There are no approved therapies for this
condition, and Rigel recently released positive
Phase 2 data, with further trial data next year.

Still, the focus is on ITP, and while approval

isn’t likely until late Q1/early Q2, anticipation of
the drug’s launch (and any predictions on how
lucrative the market could be) and/or rotation
into some biotech stocks has the potential to
goose the stock. The setup looks great—RIGL has
been bottoming for years in the 1.5 to 2.5 range,
but soared on the October FDA news and has
meandered since on generally light volume. The
potential is big, though a loose loss limit around 3
is advised given the stock’s volatility.
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Cabot’s Low-Priced Stock Report
December 2017 10

SSW Seaspan (5.9)

We’ve followed Seaspan Corp.—the largest
containership lessor in the world—off and on for
many years. Despite a business that’s centered
around very long-term, fixed-rate charters for its
ships, the stock has experienced some huge ups and
downs based on industry conditions. Today, after a
prolonged downswing, we think the stock is ripe for
some solid gains as the industry improves.
For the past couple of years, the fundamentals of the
containership market have been tough, partly due to
the bankruptcy of one of the largest ship operators in
the world, which dumped a bunch of excess capacity
onto the industry. The relatively slow economic
growth of the past couple of years also dampened
demand, driving charter rates to very low levels.
Seaspan’s business has been affected by the
downturn, though not to a huge degree—revenues
have slipped each of the past four quarters, but only
by single digits, as more than 90% of the company’s
revenues come from fixed-rate charters. However, the
issue for Seaspan was that when the industry went
sideways, Seaspan found itself with a lot of debt that
needed to be refinanced.
Because of that, the company slashed its dividend
earlier this year by two-thirds, to $0.125 cents per
share per quarter. With the money it retained, Seaspan
reduced its debt load by 15% and extended maturities,
bringing its net-debt-to-equity ratio down from 2.0 at
the end of 2015 to 1.5 today. Other spending has also
been cut, with ship operating expenses falling nearly
11% in Q3.
Combined with rising trade volumes, the scrapping
has pushed the idle fleet down to just 2% to 3% during
the past year, which has driven spot rates higher
so much that they should provide Seaspan with a
tailwind next year. In the third-quarter conference
call, management highlighted that 24 of its vessels
that will be trading on short-term charters next year
are currently earning $2,000 per day less than current
spot rates, and more than $4,000 less than broker
estimates for charter rates next year!
While the firm’s vessels on short-term charters should
only make up 10%-ish of next year’s revenue, the point
is that a recovering rate environment could add a
nice boost to Seaspan’s top and bottom lines. Already,
the company’s lower common stock dividend (8.5%
annual yield) looks safe, with distributable cash flow
of more than $60 million per quarter, compared to
just $16 million of common dividends. And with the
industry turnaround, investors could start looking
ahead to higher earnings and payouts in 2018.
As for the stock, SSW has been crushed from a high
of 25 in 2013 to around 6 today … close to its lows
during the financial crisis. It’s been building a bottom
since mid-November, and we think the next big move
is up. A dip back into the high 4s would tell you to cut
the loss.
Seaspan (SSW)

This isn’t just a slash-and-burn story, though. Seaspan

has continued to gradually expand its fleet—but
selectively, and with long-term charters in place. Just
this week, it took delivery of a big containership that
immediately started a 17-year (!) bareboat charter,
after which the liner (MSC Mediterranean Shipping
Company) must purchase the vessel. Nice deal!
Seaspan now operates 89 vessels, with a handful of
new deliveries coming next year.

While the company has tended to its own operations,

there are real signs that the containership industry
is ready for a new upleg. The soft conditions of the
past few years (between 5% and 8% of the global fleet
was idle in 2015 and 2016) led to huge amounts of
scrapping. Last year, for instance, set a new record for
ships that were sent to the scrapyard, and 2017 will
likely come in with the second-largest scrapping total
of the past decade.
WONDA® Copyright© 2017 William O’Neil + Co., Inc. All rights reserved. Unauthorized
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Cabot’s Low-Priced Stock Report
December 2017 11

SORL SORL Auto Parts (7.3)

The automotive industry in China is enormous, U.S. and Europe, and is working on a broader global
which isn’t surprising in a country with the fourth sales network.
largest land mass in the world. While China has
yet to make significant inroads in global passenger SORL is a small-ish company (revenues during the
car manufacturing, its domestic market is growing past year have totaled $350 million, though the
strongly as the middle class in the country sees stock’s market cap is less than half that figure),
its standards improve and commercial fleets grow but it has been consistently profitable, and its
with the economy as a whole. international sales (a bit more than one-fifth of
revenue) is proving to be a nice compliment to its
The country’s domestic market is robust enough leading role in the Chinese OEM brake business.
to support a fully developed network of car, truck
and bus manufacturers who, in turn, support a Most of the interest in SORL comes from its
web of parts manufacturers. Through both growth unexpectedly strong quarterly earnings report
at home and penetration overseas, the growth on November 15. The headline numbers were
potential of this old world sector is high. exceptional—earnings per share were up 159%
and revenue increased by 59%—and topped
SORL Auto Parts, founded in 1982, is a Chinese expectations by a wide margin. And to top it off,
company that designs, makes and distributes management increased its guidance for full-year
brake systems and brake parts for original revenue from $315 million to $370 million and net
equipment manufacturers. The company is a income from $27.5 million to $30.5 million.
global tier-one supplier whose products cover
65 different categories and 2,000 specifications The company enjoyed a robust 71% increase in
in both commercial and passenger brake OEM sales, which is well ahead of the 32% growth
systems. Sales are made to about 70 vehicle in truck sales and 28% hike in overall commercial
manufacturers, including every primary truck and vehicle sales. (Translation: SORL is taking lots of
bus manufacturer in China. The company also has market share.) The company’s aftermarket revenue
four international sales centers in UAE, India, the from Chinese customers expanded an even faster
76% clip.
SORL Auto Parts (SORL)
Only one analyst follows SORL Auto Parts, and that
analyst’s price target is 10. But even that could
prove conservative given the firm’s P/E ratio of
around 5 and healthy balance sheet (book value is
north of $200 million).

SORL has been all over the map in price terms in

recent years. The stock dipped from 12 to 1 during
the Great Recession in 2008 and roared back to 13
in early 2010. But a persistent correction dragged
the stock back to 1.7 in 2012 and the stock bounced
around for several years, up to 5.4 in late 2013 and
down to 1.4 in February 2016, followed by a seven-
month flat basing structure.

The stock has been in a general, volatile uptrend

since then, with some big rallies and some big dips.
And we think it’s set up for another rally—after
falling as low as 3.7 in September, SORL surged on
earnings last month and has consolidated south of
8 since then. It looks ready for another leg up—a
WONDA® Copyright© 2017 William O’Neil + Co., Inc. All rights reserved. Unauthorized
stop in the high 5s seems right.
duplication, modification, photocopying or distribution in any form is strictly prohibited.

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Cabot’s Low-Priced Stock Report
December 2017 12

USAT USA Technologies (9.2)

Vending machines, kiosks, parking meters, arcade
games and commercial laundry machines are rarely
the stuff that great growth stories are made from,
but the fact is these devices and machines represent
a huge mass market—13 to 15 million of them all
together. Yet, while the world is moving to cashless
(and even digital) payments, the vast majority of
these machines still accept only coins and maybe
dollar bills, which leads to a ton of lost sales, not to
mention higher costs for the operators.
dependability element that is very attractive to larger
investors.
The bottom line is that USA Technologies is a great
growth company in a huge mass market, with a
history of strong growth. Yes, there’s competition,
but USA is the leader, and all it takes from here is for
management to continue to expand within its client
base and add a few new big operators to keep growth
going.

That’s a massive opportunity, and through product
innovation and selective acquisitions, it’s the reason
USA Technologies has a bright future. The company
has an end-to-end solution (dubbed ePort Connect)
that includes the hardware that serves as the user
interface and allows swipeless payments, including
Google and Apple Pay. It also has blue-chip payment
deals galore with the likes of MasterCard, Chase,
Samsung Pay, Verizon and more.
There’s also software that processes transaction and
provides real-time sales and inventory data, which
leads to huge productivity gains for operators. USA
also allows for additional services like coupons,
loyalty rewards and even digital advertising.
It’s a simple-but-powerful growth story, and USA
Technologies has done a great job of grabbing and
maintaining a dominant position in the industry. At
the end of the third quarter, it had nearly 600,000
connections (up 26,000 from the prior quarter),
leading the industry by a good margin. And now it’s
going for the jugular! In November, it announced the
acquisition of Cantaloupe Systems, which brings
with it a highly complimentary client base, dynamic
route scheduling and inventory management
capabilities, as well as another 250,000 or so
connections.
Better yet, the stock has shown unusual strength
recently after a solid Q3 report, the acquisition of
Cantaloupe and raised guidance for the coming
quarters—management expects revenues to grow
another 35% this year, while analysts see earnings of
tripling to 18 cents per share.
The stock had a choppy run to nearly 6 in September
2016, then began to build a long launching pad. In
mid-October of this year, USAT was still hanging
around 6, but since then, we’ve seen a real character
change, as shares nearly rallied to 9 in a straight
line on excellent volume (10 of 11 days were up on
very strong volume. And now, USAT has tightened
up in the mid-8s, consolidating its gains. We love the
potential here. A stop near the 50-day line (7.4) is
advised.
USA Technologies (USAT)

That brings the combined company’s total to 850,000

connections, but management thinks it’s just getting
started. Within its current client base, it believes it
has the opportunity to gain more than two million
connections—in fact, 82% of new connections last
quarter came from existing customers. And of
course, the vast majority of the aforementioned 13
to 15 million machines are still cash-based and thus
potential customers.

Another plus is the business model. According

to management, 78% of revenue comes from
recurring licensing and processing fees, providing a WONDA® Copyright© 2017 William O’Neil + Co., Inc. All rights reserved. Unauthorized
duplication, modification, photocopying or distribution in any form is strictly prohibited.

Cabot Wealth Network • 176 North Street • P.O. Box 2049 • Salem, MA 01970 • 978-745-5532 • https://cabotwealth.com