Top Picks Mid-Year Winners: Timothy Lutts

07/10/2015 10:00 am EST

Focus: STOCKS

Timothy Lutts

Publisher, Cabot Heritage Corporation

In January, MoneyShow asked all of the nation's leading advisors to select a favorite stock for 2015. In this special series of interviews we are talking with the five advisors who had the top performing stock picks as of mid-year. Here, we talk with Timothy Lutts, editor of Cabot Stock of the Month, to discuss a top performing China-based firm.

Steven Halpern: Our guest today is growth stock expert Timothy Lutts, editor of Cabot Stock of the Month.  How are you doing today, Tim?

Timothy Lutts: I’m good Steve, happy to talk to you.

Steven Halpern:  Now, from more than 80 ideas in our Annual Top Picks Report in January, your selection, eHi Car Services (EHIC), was the second best performer, rising over 75% through mid-year; congratulations.

Timothy Lutts:  Thank you.

Steven Halpern:  First, can you remind our listeners a little about the company and explain your original rationale for selecting this stock?

Timothy Lutts: Sure, eHi Car Services is a little Chinese company.  Revenue was $48 million in the latest quarter.  It’s tied in with Enterprise Holdings, which is the largest car rental company in the world and eTrip, which is one of China’s largest travel agencies.  

In China, eHi is number one in car services and it’s number two in car rentals and it’s growing fast. That’s the original rationale for buying then, back in December.  

Number one is revenue growth, which is always my number one criteria for growth stocks. Revenue growth tends to make a lot of things easier.  At the time, eHi had averaged growth well over 40% per quarter in the previous three quarters; that’s good speed.

Number two reason was there was far more potential for buyers and sellers of the stock, simply because eHi came public only in November—November 18—so very few investors even knew about it.

Three, the huge mass market growth potential in all of China, which is—they’ve been raising their investment in China for the past ten years—and it’s for a good reason despite China’s shrunken volatility stock-wise.  

The growth is just fantastic in general, especially for a mass market concept like car rental.

Number four was the chart.  From a high of $13 the week of the IPO, the stock had slumped to $8 by December, so I could see the buyers had put in a bottom and started to take control, so there was support.  

Looked pretty good at 8 then I was optimistic as the yearend rolled over in January, tax time would be out of the way and new aggressive investment was often common early in January, so with short-term risk low and long-term business potential very high, I thought it was a good entry point.

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Steven Halpern:  Now as I mentioned, since you initially recommended it at the beginning of January, the stock rose some 75%.  Could you walk us through some of the developments that would account for the strong gains over the past six months, and also, could you touch on the very high volatility we’ve seen lately?

Timothy Lutts: Sure.  When people ask for reasons why a stock is up, they always want a fundamental reason. The easiest answer is that first quarter earnings report, which showed revenues up, accelerating actually, up 59% from the year before and the company earning a penny for its first profit.

So, that’s great fundamental news, but the fact is the stock took off two days before the report, jumping from $11 to $14 on heavy volume and that volume tells us that work was starting even before the report came out.  Those in combination are really the major contributors.  

Most recently, you mentioned volatility, the stock has fallen from 18 down to about 13 area, profit taking, clearly, combined with weakness in China in general, which is still gaining steam or losing steam as you want to phrase it, a short-term outlook is not good for the stock and volatility is a fact of life here with a small, little-known, fast-growing company.  

Most likely, it doesn’t have the traditional support yet; it’s early.  I think it’s going to need more months to regain sponsorship, plus the Chinese market is still tough, so short-term, cautious on the stock, but long-term, still very bullish. For interested investors, there’s a good buy down here, somewhere, maybe here.

Steven Halpern:  Now, are there any other ideas looking out towards year-end that you might highlight for our listeners that warrant investor attention at this time?

Timothy Lutts:  We are generally bullish in the market, I think far more—too much—attention has been devoted to the problems in Greece, in my news today and not enough attention given to small, fast-growing companies like eHi.  

I will say I’m looking at a promising stock in India, where there is great growth expected, thanks to the new prime minister. That’s my final optimistic thought.

Steven Halpern:  Okay, again, our guest is Timothy Lutts of Cabot Stock of the Month.  Thank you so much for your time today.

Timothy Lutts:  Thank you, Steve.

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