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HubSpot, Kraft Heinz, CNBS, Canopy Growth, Aurora Cannabis and GW Pharmaceuticals highlighted as Zacks Bull and Bear of the Day

Zacks Equity Research


For Immediate Release

Chicago, IL – August 14, 2019 – Zacks Equity Research Shares of HubSpot HUBS as the Bull of the Day, Kraft Heinz KHC as the Bear of the Day. In addition, Zacks Equity Research provides analysis on CNBS, Canopy Growth CGC, Aurora Cannabis ACB and GW Pharmaceuticals GWPH.

Here is a synopsis of all five stocks:

Bull of the Day:

HubSpot hit the spot for investors in its earnings report last week with a big beat on sales and EPS estimates, sending share surging 13.5%. This positive earnings story has analysts revising their models upward and propelling HUBS into a Zacks Rank #1 (Strong Buy).

The Business

HubSpot provides companies with software as a service (SaaS). It delivers cloud-based business services with segments including Marketing Hub, Sales Hub, Service Hub, and a free CRM system. This is a company with a growing international presence, generating 32% of sales coming from operations abroad.

HubSpot’s started with its Marketing Hub and has built its system out from their since its IPO in 2014 with free CRM and a preliminary Sales Hub. In 2017 the firm added its Service Hub for customer service support. HubSpot’s goal is create a seamless customer experience that allows businesses to “grow better”. Their target customers are small to medium sized businesses that have large growth potential.

HubSpot has nearly 65,000 customers spread across more than 100 countries, representing 35% growth year-over-year. Multiplatform customers grew 80% since Q2 last year and multiplatform users now make up over 38% of HubSpot’s total customer base. This is a great sign for a young SaaS company, illustrating customer confidence in HubSpot and its platforms ability to improve business operations.

According to HubSpot’s CEO, Brian Halligan, “customers on average integrate more than five different third-party applications with HubSpot.” The ability to integrate platforms could make or break a firm’s decision of whether to use HubSpot’s platforms. This firm is investing more in its developer experience to smooth out any developer speedbumps.

The firm focusses on small to medium size companies as their niche market, though their tiered system allows them to broaden that product offering. The segmented tiered system expands HubSpot’s total addressable market (TAM).

HubSpot is expanding its freemium offering to entice more firms to try out their product. This might cause some customers to initially downgrade but the long-run benefits of the broadened exposure will far outweigh this short-term drop. Having a strong freemium platform is a crucial pipeline for a subscription based service like this.

Top competitors in the SaaS space include Salesforce CRM, Microsoft Azure MSFT, and Google Cloud GOOGL.

Financials and Performance

Since HubSpot went public 5 years ago it has been able to illustrate consistent year-over-year and quarter-over-quarter topline growth with a compounded annually growth rate (CAGR) of 42%. HUBS international sales growth outpaces domestic at 62% CAGR.

This firm has been able to achieve economies of scale over the last five years, continuously expanding margins. HubSpot posted an 8.3% operating margin this past quarter with a long term target of 20% - 25% (2% - 3% improvement per year). Below you can see HubSpot’s gross and operating margins over the last 5 years.

HubSpot has rallied hard thus far in 2019 returning shareholders 51%, far outperforming the broader market and the software industry.

HubSpot’s consistent topline growth quarter-over-quarter allows investors to be comfortable with an excessively high multiple. This is not of concern when evaluating an equity with so much growth potential. Analyst are estimating 30% topline growth and a 57% EPS expansion just this year.

Take Away

HubSpot is operating in the competitive SaaS space, but I believe that its niche positioning in the market gives them a competitive edge. Start-ups and growing businesses still need the same cloud-based business infrastructure. I expect this company to continue to proliferate growth domestic as well as internationally as businesses becomes more competitive and the demand for SaaS escalates.

Bear of the Day:

Kraft Heinz continues to disappoint investors with continuous brand write-downs, pessimistic management guidance and a 36% dividend cut. KHC has lost almost 40% of its value since the start of 2019 and over 56% of it market cap flushed down the toilet in the last 52-weeks. Sell-side analysts continue to drop EPS estimates with management’s sizable downward revisions propelling KHC into a Zacks Rank #5 (Strong Sell).

Kraft Heinz is facing substantial systemic issues that management has not seemed to be able to alleviate in recent quarters. In fact it appears the problems are accelerating.

The Brazilian private equity firm, 3G Capital, merged Kraft and Heinz with the help of investment guru Warren Buffet and his firm Berkshire Hathaway. This merger occurred in July of 2015 and was able to initially provide positive results with the new 3G managements cost cutting, margin expanding measures.

The primary issue with this strategy is the quintessential private equity move. They go into a firm gut management and lean up operations to eventually sell off for a profit. Unfortunately it didn’t work for a company of this size with such solidified brand names.

It appears that Kraft cut its cost too far leading to brand deterioration. The company has had to continuously write-down its brand over the last few years with the last 6 months exemplifying over $1.2 billion in impairment charges.

Kraft Heinz net income fell a drastic 51.4% year-over-year in the first half of 2019 on sales that were down over 51% compared to the first half of 2018. Margins have continued to deteriorate, and I don’t see this trend changing anytime soon under current management.

Take Away

Private equity firms don’t know how to operate a growing brand-based business, they are too focused on short-term profitability. Consistent brand impairment charges are a sign that this company doesn’t expect to recoup market share anytime soon and that profitability may have an expiration date.

The best thing that could happen to Kraft Heinz is a buyout from a more properly run CPG company with management that is willing to continue to grow its long-standing brands oppose to turning a short-term profit.

Additional content:

Cannabis Expert Tim Seymour’s Favorite Pot Stocks and ETF

(Please use this Libsyn link: https://etfspotlight.libsyn.com/cannabis-expert-tim-seymours-favorite-pot-stocks-and-etf)

In this episode of ETF Spotlight, I speak with Tim Seymour, founder & CIO of Seymour Asset Management and co-host of CNBC's Fast Money, and Christian Magoon, founder & CEO of Amplify ETFs.

We discuss cannabis investing and the Amplify Seymour Cannabis ETF, which is actively managed by Tim.

We start with the investment case for cannabis--why investors should consider marijuana stocks and ETFs. Per Amplify, global legal cannabis sales have risen approximately 30% per year recently, with 2019 sales expected to grow 39% from 2018.

Tim is an early stage cannabis investor and also serves as a board member for several private cannabis companies. What drew him to the cannabis industry?

Recreational marijuana use is now legal in 11 states and Washington D.C. and medical marijuana use is legal in 33 states, but it remains illegal at the federal level. We discuss the current regulatory landscape, rising support for legalizing cannabis and recent legislative developments.

CNBS invests in marijuana companies that derive 50% or more of their revenue from the cannabis and hemp ecosystem. Its top holdings include Canopy Growth , Aurora Cannabis, GW Pharmaceuticals MediPharm Labs, Organigram Holdings, Village Farms International, and Canaccord Genuity.

Tim talks about some of his favorite cannabis stocks.

There are four more pot ETFs available to investors now--the ETFMG Alternative Harvest ETF (MJ), the AdvisorShares Pure Cannabis ETF, The Cannabis ETF, and the Cambria Cannabis ETF. How is CNBS different from other pot ETFs?

Are there any pot stocks investors should stay away from? CannTrust Holdings has lost more than 50% of its value since it disclosed a serious regulatory breach on July 8.  What else do investors need to know?

Amplify has a number of ETFs focused on disruptive themes, like the Amplify Online Retail ETF. We talk about the role of thematic ETFs in investors’ portfolios.

Please visit AmplifyETF.com to learn more about CNBS and other Amplify ETFs.

Make sure to be on the lookout for the next edition of ETF Spotlight! If you have any comments or questions, please email podcast@zacks.com.

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HubSpot, Inc. (HUBS) : Free Stock Analysis Report
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salesforce.com, inc. (CRM) : Free Stock Analysis Report
The Kraft Heinz Company (KHC) : Free Stock Analysis Report
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Canopy Growth Corporation (CGC) : Free Stock Analysis Report
Aurora Cannabis Inc. (ACB) : Free Stock Analysis Report
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