Cabot Stock of the Week 299

The broad market remains in an uptrend, according to our intermediate-term market timing indicator, but our longer-term timing indicator, while improving, remains in a negative state. Thus, it remains possible that a major pullback is right around the corner—and if one comes, it will be handy to have cash at the bottom. So I’m still working to avoid being fully invested, though it’s getting tough because our stocks acting so well.
For today’s selection, I’m going with a small company that’s taken a proven path to growth—consolidating a fractured industry. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

Cabot Stock of the Week 299

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The broad market remains in an uptrend, according to our intermediate-term market timing indicator, but our longer-term timing indicator, while improving, remains in a negative state. Thus, it remains possible that a major pullback is right around the corner—and if one comes, it will be handy to have cash at the bottom. So I’m still working to avoid being fully invested, though it’s getting tough because our stocks acting so well. For today’s selection, I’m going with a small company that’s taken a proven path to growth—consolidating a fractured industry. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

GFL Environmental (GFL)
In the old days, GFL would have been called a garbage collection business; today it falls under the umbrella of pollution control. Regardless of the label, the fact is that providers of solid waste services tend to enjoy a steady business. Waste collection is an essential service during good times and bad, contracts typically span several years, and pricing is consistent, based on frequency and volume.

GFL Environmental has a cool story. Entrepreneur Patrick Dovigi started in 2007 with a small transfer station near Toronto, Canada and grew it bit by bit. He has completed an amazing 124 acquisitions since then, and his company is now based in Vaughan, Ontario. Along the way he picked up experienced executives, including several from acquired Waste Industries, which has a 50-year operating history.

GFL is currently the fourth largest solid waste company in North America. Business is done across Canada, which generates 53% of revenue, and in 23 states in the U.S., which generates the other 47%. Roughly 75% of the company’s revenue comes from solid waste services while infrastructure and soil remediation contribute about 16%. Liquid waste services make up the remainder. The company processes over four million tons of solid waste annually through its transfer stations, then the solid waste is shipped off to one of 45 company-owned or managed landfills.

Still, the solid waste market remains very fragmented with many smaller players operating in the same regions and following the same routes as larger competitors. And even at its current size, GFL has plenty of acquisition targets, not least because targets can see how well being acquired has worked out for previous firms that were gobbled up.

Mr. Dovigi plays a hands-on role in these acquisitions and frequently builds relationships with owners in order to better understand their long-term goals and to help them achieve these goals under GFL ownership. Dozens of tuck-in acquisitions have helped GFL increase route density and volumes in current markets while larger acquisitions have helped it expand into new markets.

In 2018 GFL’s acquisitions were responsible for 31% of its growth. In 2019, they drove 73%. Looking forward, acquisitions should drive 20% growth, plus or minus, depending on the year.

Revenue was up 39% in 2018, then 81% in 2019. In 2020, revenue is expected to approach $3 billion, implying roughly 15% growth. Unannounced acquisitions will likely add to that, however, and bring growth to north of 20%.

The company isn’t yet profitable. Adjusted EPS was -$0.93 in 2019. Profitability should improve by around 50%, to -$0.44, this year. Debt is meaningful (debt/adjusted EBITDA nearing 4.4 at year-end 2020, versus around 2.5-times for peers), but that risk is largely offset by the recurring revenue nature of the business.

GFL went public at 19 on March 3, which was about the worst timing of an IPO ever. The stock closed down 12% the first day and kept falling from there, finally hitting an intra-day low of 11.92 on April 6 during the depths of the market crash. Since then the stock has come roaring back. It first consolidated just above the 15 level in April then broke higher and has been consolidating in the 17 to 19 range since the beginning of May.

Tim’s note: GFL is unlikely to be a hot stock, but at this time, with the market up big over the past two months, I think there’s increased risk in buying hot stocks. What I expect from GFL is higher prices over time as acquisitions continue, as the stock reflects the value of those acquisitions and as more investors become aware of this solid growth story.

Current Recommendations

With today’s addition of GFL Environmental, the portfolio grows to 18 stocks, two shy of our fully-invested 20—and many of these stocks are hitting new highs! Short-term, there have been numerous profit-takiing opportunities in recent weeks as buying power outweighed selling power, but some day that will change and when it does, you’ll be glad if you have some cash. The only change in the portfolio today is an upgrade of Virgin Galactic (SPCE), which has built a nice launchpad (sorry, couldn’t resist).

Changes
Virgin Galactic (SPCE) to Buy

AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, is still climbing, nearing its February high of 96. In last week’s update, Tom wrote, “Healthcare has been the best-performing sector during this pandemic, down only 3.38% from the highs while the overall market is down over 13%. It’s a defensive industry as people continue to take medicine in any economy, it’s a hero of the pandemic, and it has a huge longer-term headwind with the aging population. AbbVie is one of the best healthcare companies. It has one of the best drug pipelines in the industry and cutting-edge treatments. The overblown worry about Humira has kept the stock cheap. While ABBV is actually making a run toward its 52-week high of over 97 per share, it is still a long way from the 2018 high of 140. Meanwhile, it pays a huge 5.2% yield.” HOLD.

Barrick Gold (GOLD), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, has pulled back normally and can be bought here. BUY.

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the brains of industrial robots. In last week’s update, Carl wrote, “Shares gained 6% this week as the Japanese market was up along with U.S. markets. Fanuc offers investors a balance sheet with zero debt and a sizable $7 billion in cash. Profit margins are impressive and Fanuc has also bought back more than 70 million shares last month. In short, Fanuc is a high-quality play on a growth trend.” Today the stock popped out to new recovery highs. 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 that I’ve resolved to hold the stock through normal technical sell signals. The stock has made no progress over the past two years, but the business keeps growing, so the valuation keeps getting better and better. Admittedly, this is not an exciting story, particularly given China’s role in the pandemic, but I do believe holding will pay off for long-term investors. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, was sold last week on a special bulletin after it resumed trading—and after Carl gave similar advice. In that bulletin, I wrote, “Long-term, the odds are very good that LK will be higher, so there is an argument for holding patiently. However, I simply hate having “dead money” in a portfolio, especially in a losing position. It’s far better to put the money to work in a positive situation, and to hold long-term winners.” SOLD.

Marathon Petroleum (MPC), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, keeps on marching higher, as investors look forward to better days for energy refiners. In last week’s update, Crista wrote, “Wall Street analysts are now forecasting a 2020 full-year loss of ($1.80) per share, followed by a 2021 profit of $2.41 per share. Share repurchases have been suspended, but the dividend payout remains intact. The stock market is enthused at the prospect of businesses reopening around the globe. This directly benefits the energy industry via increasing demand for their products.” BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is going nowhere fast, but it pays a nice dividend, while adding a dose of defensiveness to the portfolio. In his latest update, Tom wrote, “A regulated utility is great stock to own in a recession as earnings remain relatively unaffected by the economy. But NEE is also a huge player in the high growth alternative energy business. You don’t have to sacrifice growth for safety or safety for growth. You get both. That’s why this stock tends to be so popular. If the market again turns south, I will recommend a “BUY” on NEE at a cheaper price.” HOLD.

Nvidia (NVDA), originally recommended by Crista Huff for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, looks terrific! In a special update last week, Crista wrote, “Nvidia reported great first-quarter results yesterday afternoon (January year end). Non-GAAP EPS of $1.80 handily beat the $1.69 consensus estimate, and revenue was $3.08 billion, slightly ahead of expectations. Importantly, the company guided second-quarter revenue to $3.65 billion, higher than the $3.29 billion consensus estimate. As expected, the recent Mellanox acquisition is enhancing NVIDIA’s data center chip business, which delivered $1.14 billion in quarterly revenue, 80% higher than a year ago. NVDA shares have had a tremendous run since the March market correction. At this point, I would expect the stock to settle down and rest for a while.” HOLD.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is definitely in the class of companies benefitting from the virus shut-in as more and more people aim to master the logistics of working at home. The stock has pulled back as expected and may find support here at its 25-day moving average . HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is an Asian ecommerce and gaming giant, and the stock is now on an unsustainable uptrend, thanks to an excellent first quarter report. In Carl’s update last week, he wrote, “Sea shares surged 20% this week after the company reported first-quarter numbers and are now up 76% so far in 2020.

SE reported strong revenue and user numbers. Revenue in the first quarter jumped 58% to $913.9 million and gross merchandise volume (GMV) in the e-commerce segment soared 74% to $6.2 billion, and adjusted revenue in the digital entertainment business increased 30% to $512.4 million. Quarterly active users grew to 402.1 million, of which 35.7 million were quarterly paying users. Sea’s Free Fire game reached a new record of over 80 million peak daily active users.

Despite these impressive numbers, the company’s adjusted net loss was $0.52 per share, which was worse than the $0.32 per share in adjusted net losses that the market was expecting. This week, JP Morgan raised its price target for SE to 70 so it has already blown by this number.

We are in a strong position, having sold half our position a month ago at 55 for a gain of 310%. Sea is now at 72 and I have it rated a hold but we will be buyers if the stock pulls back. If you have not already sold half your shares, I strongly suggest you do so now.” Note: The phrase “unsustainable uptrend,” which I used earlier, does not mean that the stock will roll over now, but that it will eventually—and there are ways to play that depending on how closely you follow the market. 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 remains very healthy, wedging slowly higher over the past month. In fact, it earned a spot in last week’s Cabot Top Ten Trader again! Here’s what Mike Cintolo wrote: “Tesla CEO Elon Musk is frequently in the news, and that’s been the case recently; he won the battle to open the company’s Fremont, California factory after he defied Alameda County’s shutdown order (the country backed off), and rumor has it that Musk is close to choosing Austin, Texas (the other contender is Tulsa, OK) for its fourth manufacturing site to make the Model Y and the Cybertruck. Of course, the stock is strong because of more than that; the bulls expect Tesla to be making more than one million electric vehicles (EVs) by 2022, with demand for its newer vehicles strong in the U.S. and with significant growth in Europe and China (its Shanghai manufacturing facility is once again operating at full capacity). Industry watchers are waiting on a rumored June announcement of significant battery improvements for its Model 3, perhaps bringing the cost to manufacture them under $100 per kWH and expanding vehicle driving range, which could lead to price reductions/margin enhancements, and boost Tesla’s addressable market. Supposedly, the batteries can be charged up to 4,000 times and are good for a million miles and could be as durable as those found in gasoline-powered autos. The company’s numbers have turned around the past couple of quarters, and while the shut-in has dropped estimates some, analysts still see a solid profit this year and north of $12 per share in 2021. You could start a position here or on dips, with the idea of averaging up on a push above 850.”

Additionally, the latest update to Bloomberg’s “Electric Vehicle Outlook” says that while gas cars will continue to make up more than half of global auto sales for years ahead, sales of gas cars have peaked – and EVs will now take over. But it will be China and Europe leading the way, while the U.S. follows. Bloomberg, in fact, predicts that the pandemic will spur China and Europe to increase their support of EVs while in the U.S., EV sales will “slow drastically” as policy support weakens. If you don’t own it, you could buy here, and practice risk management like any reader of Cabot Top Ten Trader. I’ll just keep it rated hold. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor is not only the biggest seller of marijuana in Florida, with 19% of legal stores and over 50% of revenue, it’s also a contender for biggest seller of marijuana in the entire U.S. The stock enjoyed a strong surge (like other industry leaders) two weeks ago and has been building a short base centered on 13 since. If you haven’t bought yet, try to buy closer to 12. BUY.

Tyson Foods (TSN), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Investor, remains in a basing pattern and is thus still attractive from a longer-term perspective. In last week’s update, Crista wrote, “TSN is an undervalued stock, attractive for growth investors and dividend investors. Profits are expected to fall 22% in 2020 due to pandemic business disruptions, then rise 42% in 2021. The stock has traded sideways since mid-March in a narrowing trading range, which is a constructive chart pattern that could enable a near-term run-up toward about 70.” BUY.

Verizon (VZ), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, is a solid choice for low-risk diversification—if you need that in your portfolio. In his update last week, Tom wrote, “The wireless giant purchased videoconferencing company BlueJeans for $500 million this week. The company is a strong player in an area that will likely remain hugely important after the virus. And Verizon’s deep pockets and huge industry presence will likely make it thrive. Other than that, the story is the same. Verizon’s business is solid through this crisis as people use wireless more than ever. And there is a strong catalyst for growth on the intermediate-term horizon with 5G.” BUY.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, has pulled back normally since hitting a new high last week. In his update last week, Mike wrote, “There are many stocks out there making dramatic moves and headlines, but Vertex isn’t one of them—and that’s fine by us, as the stock remains in a steady uptrend as big investors continue to buy in. Buoyant results for the firm’s cystic fibrosis drugs (especially its newer triple combination Trikafta) are expected, but the question is how high those products can drive earnings during the next couple of years; analysts had been modeling around $10 in earnings per share next year (up from $5.33 in 2019), but now they’re looking for nearly $11, and if margins continue to top expectations that figure could continue to go up. We’ll stay on Buy—as always, it’s best if you can get in on dips of a few points.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has definitely cooled off, but I’m holding tight because I love the stock’s long-term potential—and now Carl has upgraded the stock to buy! In his update last week, he wrote, “Galactic plans to send groups of paying customers on brief flights to the edge of space. Perhaps even more important to its future than space tourism is its plan to launch point-to-point hypersonic flights. Virgin Galactic reported a cash position of about $420 million suggesting the company has enough money to finish its test flights before commercial operations begin. SPCE still plans to make its first commercial space-tourism flight this year, and took a step forward with two test flights from its New Mexico spaceport in the first quarter. Challenges remain but I’m moving this stock from a hold to a buy to take advantage of the share price pullback to seek more profits from this remarkable story.”

Interestingly, just yesterday the first test launch by sister company Virgin Orbit was cut short, but investors clearly know the difference, as SPCE was up today. I’ll follow Carl’s lead and upgrade to Buy. BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, took the spotlight thanks to the coronavirus shut-in and the booming growth in video interactions, and now we’ll see what kind of staying power it has. The stock pulled back normally today but remains very close to its high. HOLD

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, is a fast-growing internet security stock with great growth prospects and today the stock (contrary to my expectations last week) toyed with a breakout! HOLD.

The next Cabot Stock of the Week issue will be published on June 1, 2020.

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