Heading into the last month of the year, the prospects for the market remain very good, with a plethora of technical indicators telling us the market will be higher in the years ahead, and thus I continue to recommend that you be heavily invested.
Forget tariffs, forget trade negotiations, forget politics, and forget all the “problems” of the outside world. Just hold a portfolio of carefully selected high-potential stocks, and all will be well.
Today’s recommendation is a fast-growing company that’s a major participant in the 5G communications revolution.
Details in the issue.
Cabot Stock of the Week 275
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Heading into the last month of the year, the prospects for the market remain very good, with a plethora of technical indicators telling us the market will be higher in the years ahead, and thus I continue to recommend that you be heavily invested. Forget tariffs, forget trade negotiations, forget politics, and forget all the “problems” of the outside world. Just hold a portfolio of carefully selected high-potential stocks, and all will be well. Today’s recommendation is a fast-growing company that’s a major participant in the 5G communications revolution. The stock was first recommended by Mike Cintolo in Cabot Top Ten Trader and these are Mike’s latest thoughts.
Qorvo (QRVO)
We’ve been hearing about the coming 5G boom for a long time now; in fact, for much of last year and earlier this year, one of the more common questions we got was about 5G and what stocks would benefit. The problem was, at the time, hardly anything was prospering because of it; the upcoming trend was too far out for the market to care.
Now, though, that’s changing; while 5G isn’t in fifth gear today, just about every company involved in it believes the trend will pick up steam early next year and really accelerate in the second half of 2020. And, the way the market works, that means big investors are building positions today.
There are a few ways to play it, including cell phone towers and network infrastructure. But our favorite investment is Qorvo, a chipmaker that looks to be one of the leading beneficiaries of the tidal wave of 5G smartphone sales beginning next year.
Qorvo is a leading producer of core technologies and radio frequency (RF) solutions for a variety of products and applications; the firm has more than 2,000 individual products in its portfolio, claims that 1.5 billion mobile devices have been shipped using its technology and says 250,000 of its devices are in satellites to support broadband data and the like. It also does a good business in defense and its products help connect the Internet of Things.
All of that is good, but the reason the stock went bananas after the release of third-quarter results a month ago is because of excitement of its role in 5G over the next couple of years; the company is booking many key design wins in upcoming 5G smartphones among many big players across the globe. And while there is competition (Broadcom, Skyworks) in the space, Qorvo is definitely one of the leaders and, more importantly, the complexity of 5G phones and their inner workings drives the need for superior (and often) integrated products, which plays into Qorvo’s hands.
Thus, the company should thrive as 5G phones (and infrastructure) get bought up. And the opportunity is huge: A few months ago, many analysts thought 200 million 5G smartphones would be sold in 2020. Then, when it reported earnings in late October, Qorvo guessed 300 million would be sold! And that’s just the beginning, with giant Qualcomm (also a big 5G player) forecasting 450 million 5G chipsets sold industry-wide in 2021 and another 750 million in 2022! Given that Qorvo sees its revenue opportunity at $6 to $7 per phone sold using its technology, we’re talking about a massive opportunity going forward.
Whatever the exact sales figures turn out to be, it’s clear the 5G boom is coming and, unless something drastic occurs, Qorvo is set to thrive because of it. Right now, the firm is solidly profitable but it’s looking like the current fiscal year (ending in March 2020) will be mundane, with earnings basically flat. But consensus estimates see the bottom line rising 15% next year, though that’s likely conservative given the huge beat-and-raise Q3 report (they guided Q4 revenues to $850 million vs the then-consensus of $763 million!). Indeed, at least one analyst we know thinks 30% growth is coming next year.
As for the stock, it was a nothing-burger from mid-2015 through October of this year, unable to get decisively above the 86 to 90 area during that time. But the Q3 report changed all that, with QRVO exploding higher by 20% on nearly seven times average volume, and then followed that up with another nearly 5% push higher the next day. Since then, it’s held all those gains as volume has dried up—and with some chip stocks experiencing hiccups, that’s impressive.
There are no sure things, of course, but the story, numbers and chart are all lined up very well for Qorvo. We think it can be a solid winner.
https://www.qorvo.com
Current Recommendations
With today’s addition of Qorvo, the portfolio holds 19 stocks, one shy of my maximum of 20—which is not to imply that being full is the main goal; the main goal is to have a portfolio of well-diversified stocks whose growth potential is commensurate with their risk level. Today, most of the stocks in the portfolio fill the bill, but one fails, and that’s Meritage Homes (MTH), which will now be sold. Additionally, there are a few ratings changes, but overall, the path to the end of the year looks good.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, closed at record highs on every trading day last week and pulled back normally yesterday. In his update last week, Tom wrote, “This life science and research lab REIT continues to forge robotically higher. It was the most consistent and solid performing REIT in portfolio through the recent turbulent time for the sector. The stock is again at new highs as demand for its rare facilities remains strong and investors are still attracted to the defensive nature of the business. Even if the overall market continues to move higher, there is still a lot of uncertainty out there and I believe investors will continue to demand a rock solid dividend payer like this. Alexandria is still a great place to be in this environment.” BUY.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, hit a record high last Wednesday and has pulled back normally since. However, Tom still says the stock is too high to buy. In his latest update, he wrote, “The global infrastructure company continues to make new all time highs. Its long-life stable infrastructure assets generate reliable cash flow that is growing as new higher margin investments in North America energy pipelines, North American railways and Indian telecom towers with higher margins increase revenue. The company also has an additional $1.1 billion in new investments that should come on line in future quarters. Infrastructure remains in vogue with investors as safety and high yield remains popular. The stock is still rated HOLD because it is already up over 60% on the year and valuation is a little stretched for new money. But the momentum is still strong.” HOLD.
Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, sold off this morning with the broad market, but my guess is that will make it even more attractive to Crista. In today’s update, she wrote, “Last week, Citibank introduced Citi Elevate Checking, which offers unlimited ATM reimbursements while paying interest up to 1% for U.S. customers residing outside of the bank’s physical branch footprint. Citibank also launched a new cross-border platform called Citi Global Collect that automates their multinational customers’ workflow, including international billing, automated payment, currency selection and reconciliation. Wall Street expects EPS to grow 16.5% and 9.8% in 2019 and 2020. The 2020 P/E is 8.7. The stock rose 23% from its August low through early November, and has since retained most of those gains. I’m moving C from Hold to Buy due to recent increases in earnings estimates and the solid price chart. We could see additional upside this year.” I’ll move to buy, too. BUY.
Corteva (CTVA), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth Portfolio, and featured here two weeks ago, still looks attractive—and now it’s even cheaper! In today’s update, Crista wrote, “CTVA is a mid-cap growth & income stock. The full-year 2019 consensus earnings estimate has been gradually rising since early August. Analysts now expect EPS of 1.24 and 1.49 in 2019 and 2020, reflecting 20.2% growth next year. The 2020 P/E is 17.0 and the dividend yield is 2.1%. Continue to accumulate shares.” BUY.
Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, remains low in its trading range, and Crista still likes it. In this morning’s update, she wrote, “Designer Brands has delivered 27 consecutive years of revenue growth. The company is expected to report $0.76 third-quarter EPS, within a range of $0.71-$0.79, and $940.8 million revenue, within a range of $926.2-$956.5 million, on the morning of December 10. Analysts expect full year EPS growth rates of 14.5% and 15.8% in 2019 and 2020 (January year end); and company management is projecting 2021 EPS growth of about 23%. The 2020 P/E is very low at 7.5. Buy DBI now for outsized total return potential in 2019 and beyond.” BUY.
Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon, hit record highs last Thursday and Friday and has pulled back normally since. Tyler still has the stock rated hold, mainly because it’s already done so well this year, but he has lots of other attractive buys in his advisory, and now sees small-cap stocks gaining strength. HOLD.
Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, remains above its lows of two weeks ago, and Tom says it’s a good buy here. In his latest update, he wrote, “The energy sector has been under pressure as oil prices have been weak because global inventories are rising while China trade fears persist. As a result, rig counts in the U.S. have been falling, which is probably curbing the enthusiasm for infrastructure stocks. The stock rallied a bit this week as crude inventories rose less than expected. This company is growing strongly regardless of the rest of the sector. It has billions in new projects coming on line in the upcoming quarters. The stock is a great value with an enormous dividend that is rock solid and growing.” BUY.
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 (it’s China’s largest hotel chain) that I’ve resolved to hold the stock through normal technical sell signals. The stock remains in a month-long correction in its two-year consolidation phase, becoming a better value as time passes—and could be a tempting buy if it finds support around 32. HOLD.
Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, is now in the fourth week of its correction, but still above its 50-day moving average. In recent updates, Mike wrote, “The advance in chip stocks has become a bit more selective, with many (especially chip equipment titles) pausing or pulling back a bit, and Inphi is no exception. But the story is as bright as ever. It looks like the firm’s recently announced acquisition of a firm named eSilicon (for $216 million) will be a hit, as it not only expands Inphi’s capabilities in the data center and cloud markets but also proves accretive in both 2020 (in a smaller way) and especially 2021 (possibly boosting earnings per share by 20% or so). All in all, the action is something to watch, but IPHI hasn’t done anything wrong (basically where it was after its earnings gap in late October; pullback was on light volume) and many chip stocks have been pulling back and consolidating of late, so there’s nothing abnormal here. Hang on if you own it, and if not, we’re fine taking a position here.” BUY.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is up more than 50% over the past month, thanks to growing institutional awareness of the company’s great prospects. In recent updates Carl wrote, “Luckin SEC filings show that seven institutional investors collectively hold over 60% of shares. In the third quarter, the number of stores/outlets grew to 3,680 and revenue was up nearly 70%, or 2.9 times the increase in store count. The company is also exploring introducing a revenue sharing franchise model. I’m keeping the stock rated buy but advise holders to take some profits off the table as the stock is up 63% over the past two weeks.” Also, last week the stock was featured in Cabot Top Ten Trader, where Mike Cintolo wrote, “Some of the numbers the company is posting are mind boggling. At the end of September, the firm had 3,680 stores, up 24% from the prior quarter (!!); average monthly transacting customers totaled 9.3 million in Q3, up from 1.9 million a year ago; and monthly items sold rose 470%, too. All of that led to a 500%-plus gain in revenue, and while the bottom is in the red, operating leverage is appearing in multiple areas. There’s definitely risk, but Luckin is expected to continue its hypergrowth (revenues expected to be up 183% in 2020, and even that could be conservative) as the net loss shrinks. LK has gone vertical since earnings, rallying to new highs on two straight weeks of outrageous volume. It’s going to be extremely volatile, but nibbling on weakness sounds good to us.” With both Carl and Mike now rating it buy, and evidence that institutional sponsorship will provide a floor somewhere here, I’ll upgrade it to Buy. BUY.
Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, remains in the midst of a normal correction, close to reaching support at 58. In today’s update, Crista wrote, “Marathon is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interest in a midstream company, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. The company is prepared to meet the IMO 2020 demand for ultra-low-sulfur diesel fuel by the world’s ships and tankers. Marathon aims to spin off their Speedway retail stores into a separate company by year-end 2020, and is also strategizing ways to optimize their midstream business. MPC is a greatly undervalued large-cap stock with a solid dividend yield. Full-year EPS are now expected to fall 29% in 2019, then rise 68% in 2020. The 2020 P/E is very low at 8.3. MPC is having a pullback after a recent 50%+ run-up. There’s tentative price support at 58.” BUY.
Meritage Homes (MTH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was on the fence a week ago—capable of resuming its uptrend or falling through support—and it’s fallen through support. So now we’ll sell, noting that Mike has already done so. Also note: this decision involves no thinking at all about the housing industry or interest rates. The stock rolls over; I sell. SELL
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, remains above all its moving averages, primed to break out above its all-time high (hit in October) of 239. In his update last week, Tom wrote, “This utility not only earns consistent and growing regulated utility income from its Florida Power and Light division in regulator friendly Florida, but it is also a huge player in alternative energy, which enables a higher level of earnings growth than its peers. At present, NEE is the best performing large utility in the country. But it has a bright future, as alternative energy only represents about 10% of America’s energy consumption and is expected to grow strongly over the next decade. Investors still love defense and NEE remains near the all time high with still solid momentum.” HOLD.
Pinduoduo (PDD), originally recommended by Mike Cintolo in Cabot Growth Investor, fell through support right after our last issue two weeks ago after the third-quarter earnings report disappointed some investors—but then last Monday it gapped up more than 4% following reports that Amazon was opening a store on its platform through the end of the year. Remember, Amazon stopped running a Chinese marketplace earlier this year, so this is a possible avenue back into that important market and Pinduoduo could be a major beneficiary. Technically, I now judge the chart to be in limbo—it could go either way—so I’ll downgrade it to hold and wait. HOLD.
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 remains in a consolidation pattern following the huge spike higher in early October, and it bounced off its 50-day moving average today. HOLD.
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 stock’s action in recent months has been interesting. After climbing 64% in just two months, the stock finally found an excuse to sell off—the unveiling of the company’s radical new pickup truck. But that just puts it at its 25-day moving average and way above its 50-day moving average. In last week’s Cabot Growth Investor, after the gap down, Mike Cintolo wrote that the stock “might need some time to consolidate. But the uptrend is far from broken and we think a decent setup could emerge going forward.” HOLD.
TopBuild (BLD), originally recommended in Cabot Top Ten Trader by Mike Cintolo, broke out to new highs last week and has now corrected to its 25-day moving average, which looks like a decent entry point. BUY.
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, is performing great, as institutions (those brave enough to invest in marijuana stocks) swarm into the best-executing U.S. company in the industry. In last week’s update, I wrote, “Trulieve has by far the strongest stock in the entire cannabis universe, up eight weeks in a row—and with good reason. The company is the leading seller of medical marijuana in Florida and I expect it to eventually take the lead when adult-use marijuana becomes legal in Florida. And the company is moving into other states as well, including California, Massachusetts and Connecticut. Third quarter results, released Monday of last week, were terrific, and the stock is up 20% since then. Additionally, the stock’s 50-day moving average is trending clearly up and its 200-day moving average is on the verge of joining it. If you haven’t bought yet, you can buy a little here.” BUY.
Your next Cabot Stock of the Week issue will be published on December 10, 2019.
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