Cabot Stock of the Week 304

The market remains in good health, though there’s been some weakness among growth stocks, but overall I think this correction provides some decent entry points so I continue to recommend that you be heavily invested in a diversified portfolio of the best stocks—while pruning your portfolio of underperformers.

Today our underperformer is Verizon (VZ), which I’ll sell because the stock has weakened further.

As for the newest recommendation, it’s unusual in that it’s actually in a sector I don’t care for, but the confluence of several factors (including COVID-19) means there’s substantial upside potential right now.

Cabot Stock of the Week 304

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The market’s main trend remains up, and thus I continue to recommend that you be heavily invested in stocks that help you achieve your investment goals. Last week I deviated a bit from our mission by recommending an ETF, rather than a stock, but that was the best way to benefit from the growth of a sector I’m very bullish on (cybersecurity), so I thought it justifiable. This week, I’m back to a single stock, and the surprising thing about this recommendation is that it’s in a sector that I don’t feel good about. But feelings are not to be trusted in investing; proven systems are. And Mike Cintolo, who originally recommend the stock in Cabot Top Ten Trader, explains why now is the right time for Big Lots.

Big Lots (BIG)
Big Lots has been around for a very long time, beginning its life back in 1967 and coming public back in the mid-1980s. The firm has always been on the discount side of retail; the founder had a penchant for getting great closeout deals, especially on auto parts, but today the company has more than 1,400 closeout and discount retail locations in the U.S.

Given the shift in consumer spending over time toward the low end—dollar stores of all stripes have done well in recent years, as have other closeout retailers like Ollie’s Bargain Outlet—that should have been a great thing for Big Lots. But in the end, you still have to execute properly, and this company’s management fell behind. For instance, from 2012 to 2020, Ollie’s earnings were up sixfold (admittedly off a low base), while Dollar General’s earnings were up 180%. Big Lots? Their bottom line rose a total of 18% during that time, which led to horrible stock performance (no net progress for a decade!).

So why are we diving into such a dog of a company? Because that’s in the past, and the stock has completely changed character thanks to some solid catalysts.

The first occurred during the recent stock market crash. After Big Lots reported yet another uninspiring quarter that led to a big drop in the stock, two activist outfits (Macellum Advisors and Ancora Advisors) teamed up to take a 10%-plus stake in the firm and proposed a handful of new board members to right the ship. (Two ended up making the cut.) Indeed, in a letter, the activists suggested that with some monetization efforts and share buybacks, the firm could double earnings to $6 per share and have no debt!

Second, Big Lots itself began on a transformation plan, and one of the bigger aspects of that involved some of its coveted real estate assets. The company completed a sale/leaseback transaction with Oak Street Real Estate, selling that firm its four distribution centers (two in Ohio, one in Pennsylvania and the other in Oklahoma) for net proceeds of $550 million. Given that Big Lots already paid down its credit facility before this transaction, most investors believe a chunk of this money could go to share buybacks, and to continuing its solid dividend.

But probably the most important reason the stock has turned around is this: Business has gone from zero to hero, partially thanks to the pandemic, which bolstered demand for many of the essentials that Big Lots sells. And then the stimulus checks led to another round of buying (furniture proved popular). All in all, sales grew 11% in the quarter ended May 2, a big acceleration from recent quarters, while earnings surged 37%.

At first, that looked like a one-time boost to business due to the shut-in, but (a) spiking infections in parts of the country have many thinking a return to normal isn’t going to happen right quick, and (b) Big Lots itself has continued to see smashing demand; just last Friday, the company said business is running miles ahead of expectations, with earnings expected to rise north of $2.50 per share, compared to estimates of 84 cents! Moreover, the top brass hinted that strength was seen across all merchant categories, and with $720 million of liquidity, returning more cash to shareholders (buybacks) could happen soon.

Nobody thinks Big Lots has transformed into a long-term growth stock, but the stunning change in the firm’s fortunes is starting to be reflected in the stock. After crashing to a multi-year low near 10 in March, the stock had a hyper advance to 42 by the end of May. A tight, three-week pullback toward the stock’s 50-day moving average created a new base, and then just last Friday the stock blasted out to a new high on big volume after the firm hiked guidance. Any pullback from here is likely to be minor, while the upside potential is substantial.

Current Recommendations

The addition of BIG to the portfolio means we now have 20 stocks—and that’s my limit. But should we sell any—perhaps in anticipation of a correction? It’s easy to say, but hard to do, in part because you don’t know when a correction will start and which stocks will correct the most. Certainly, taking partial profits is appropriate, particularly in the hottest stocks, but my favorite target for selling is weak stocks, which is why I recommend selling Verizon (VZ) today. Details below.

Changes
Verizon Communications (VZ) to sell.

AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, continues to trade tightly in the upper-90s, preparing for a breakout to new highs. In his update last week, Tom wrote, “This biopharmaceutical giant isn’t far from the 52-week high. That said, the price is still a long way from the 2018 high and still represents a good value. Investors are increasingly coming around to the view that AbbVie’s new drugs and pipeline can offset the increased Humira competition. At the same time, the sector is in the sweet spot of this market. Healthcare is naturally defensive and biotech is sexy. The biotech index just hit a new all-time high. This is still one of my very favorite stocks in this market and I’m comfortable holding it through any type of market.” If you haven’t bought, you could buy here. HOLD.

Beyond Meat (BYND), originally recommended by Mike Cintolo in Cabot Growth Investor, is the global market leader in the field of plant-based meat substitutes, which are better than meat for the health of both humans and the earth. Last week I wrote, “If you haven’t bought yet, you can buy now, but to reduce risk, you could wait for a pullback to the 140 area.” Well, today you got that pullback in spades, as the stock gapped down below 130 in sympathy with the weakness in growth stocks. BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for the High Yield tier of Cabot Dividend Investor, is a low-risk way to benefit from the world’s growing infrastructure needs. In last week’s update, Tom wrote, “The stock of this infrastructure partnership is still in an uptrend. Investors love the consistent earnings during a recession. But in the post-pandemic market BIP should be a star as infrastructure becomes an increasingly popular subsector. I like the stock going forward and feel particularly good about holding it in the event that the market has another significant downturn.” BUY.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, pulled back from its record high last week so the breakout isn’t exactly thriving. But I think patience will pay as the growth story remains intact. In last week’s update, Mike wrote, “CHGG is like one of those roller coasters you eagerly get on at the park but after a few ups and downs you’re wondering if you made the right decision. The stock has done nothing wrong, though we’re a little disappointed that, after a great-looking leap last week, it’s given up nearly half that move this week. Given the story, numbers and chart, we still believe the next big move is up, and if you don’t own any, you can pick up a half-sized position here. But we want to see an orderly upmove before filling out our position.” BUY.

GFL Environmental (GFL), originally recommended by Tyler Laundon in Cabot Early Opportunities, continues to trade at a level of support, which I think presents a great entry point for North America’s fourth-largest environmental services (waste management) company. Last week the company announced an agreement to purchase a large portfolio of solid waste collection, transfer, recycling and disposal assets for $835 million—the assets basically coming from the divestiture assets that were triggered by the previously announced acquisition of Advanced Disposal Services by a subsidiary of Waste Management. The Department of Justice mandated the divestiture to preserve competition in the industry and GFL anticipates it will see annualized revenue of $345 million from the assets, which bring it into Wisconsin for the first time while adding to the company’s assets in Michigan, Georgia, Alabama and Pennsylvania. BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and featured here last week, remains in a consolidation phase between 19 and 20 so is a fine buy here. In last week’s update, Carl wrote, “The companies in the BUG basket address online security as cybercrime, which has reached an all-time high, with the cost of damages from these activities expected to cost $6 trillion annually by 2021. Cloudflare is one of the 29 companies in BUG and we made these recommendations at the same time to provide subscribers with two different strategies to play this cutting-edge growth trend. Though it’s rated a hold, I’m fine with new subscribers buying BUG, which represents a conservative way to invest in a competitive industry.” 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 of China’s largest hotel operator through normal technical sell signals. The stock has rallied with the market since the March bottom and all its moving averages are trending up. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is finally having a real pullback; it’s now trading below all its moving averages. And that means Tom might soon upgrade it to buy! In his latest update he wrote, “This regulated utility and alternative energy giant is one of the best stocks for conservative income investors, or anyone, to own. The only thing holding me back is valuation. There could be further weakness in the market in the weeks ahead and I will look to raise NEE to a BUY rating if it goes below 230 per share.” HOLD.

Nvidia (NVDA), originally recommended by Crista Huff for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, closed at a record high a week ago and has pulled back normally since. In her update last week, Crista wrote, “NVDA is a high-P/E, aggressive growth stock. Wall Street expects EPS to grow 40% and 22% in fiscal 2021 and 2022 (January year-end). The company has $7 billion remaining in their repurchase authorization as of April 2020. On June 10, an insider reportedly bought about $1.86 million of NVDA shares; and on June 17, Jefferies raised their price target on NVDA to 415. The stock continues to reach new all-time highs.” HOLD.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is the market leader in the field of Unified Communications as a Service—which means that as more people decide to continue working at home, RingCentral will have the job of ensuring that all their communications systems work together. And it’s also one of the strongest stocks in the portfolio, having hit a new high as recently as last Friday. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, is still overdue for a correction—trading well above all its moving averages. In Carl’s update last week, he wrote, “Sea Limited is the leading internet company in Southeast Asia and Taiwan. These economies are going digital at an exponential rate, and Sea is strategically positioned to take advantage of this growth in part due to its partnership with China’s Tencent. The company operates in two segments: an e-commerce platform (Shopee) and an online and gaming entertainment division (Garena). Both are growing fast. According to Bain & Company, the digital economy in Southeast Asia has tripled in the past five years to $100 billion and is expected to triple again by 2025 to $300 billion. Sea is up 170% so far this year and I have been advising subscribers to take some profits while rating the stock a hold.” 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, trading very tightly just under the 1,000 level. While the “affordable” Model 3 is the company’s biggest seller, Tesla now has over 650,000 reservations for its futuristic-looking Cybertruck electric pickup, with most opting for the dual motor and tri-motor versions, which start at about $50,000. These won’t be available until late 2021 at the earliest, but the numbers do illustrate substantial appetite. In the meantime, last week cars.com announced that three of the company’s vehicles placed in the top 10 spots for most-American-made vehicles (Ford Ranger was number one). Unfortunately, the rapid pace of expansion has come at the cost of quality, as Tesla placed dead last (of 32 brands) in the annual JD Power Initial Quality survey. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is the biggest seller of marijuana in Florida, with the company’s 50^th store in the state opened last Friday. In the latest quarter, revenues were $96.1 million, up 116% from the year before. As for the stock, it remains on a normal shallow correction and can be bought here, because eventually it’s going to break out above 14. BUY.

Tyson Foods (TSN), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Investor, remains in a slow uptrend, and the current pullback presents a great entry point if this stock has what you want—low risk, a healthy dividend and good upside potential. In her update last week, Crista wrote, “A COVID-19-related supply/demand imbalance has led to rapidly depleting inventories and higher prices on pork products, which benefits Tyson’s pork business. On June 21, China suspended the import of poultry from Tyson’s Springdale, Arizona plant after an outbreak of the COVID-19 virus among the plant’s employees. (There is no evidence that the virus is transmissible to poultry products.) Tyson’s profits are expected to fall 18.5% in 2020 due to pandemic business disruptions, then rise 35.5% in 2021. The company is expected to deliver record revenues in 2020. The 2020 P/E is 14.2. Traders, growth investors and dividend investors should buy low within the stock’s wide trading range of 60-70.” HOLD.

Verizon (VZ), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, is now showing a loss for us, even though our initial buy was on a decent correction, and the reason is simple: VZ has weakened, with several recent days showing growing volumes of selling pressure. In last week’s update, Tom wrote, “The stock of this wireless behemoth has not been behaving particularly well since about mid-April. It seriously outperformed the market during the selloff but has lagged since the market recovery gained traction.” Long-term, all will likely be fine here, especially for investors focused on income, but with the portfolio filling up, I think it’s appropriate to sell VZ here and focus on stocks moving in the right direction. SELL.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high last Monday and has pulled back normally since. In last week’s update, Mike wrote, “Vertex remains firmly in the good-not-great category—shares perked up to new price highs earlier this week, though relative to the overall market, the stock is no higher today than it was in early April. That’s not a reason to panic by any means; VRTX is a mega-cap name that’s not likely to keep up with the fast-moving growth stocks out there. Plus, fundamentally, everything appears to be on track; next year’s estimates continue to trickle higher (now $10.97 per share for 2021, up from $5.33 last year). If you really want in, we’re not dead set against grabbing a few shares here or (preferably) on dips, but if you already own some, just hang on. We have a relatively loose mental stop in the 250-260 range.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, remains in a long consolidation pattern, notwithstanding the powerful upmove last week on the NASA news. In Carl’s update last week, he wrote, “Shares surged 14% earlier this week on the announcement that it had signed a Space Act agreement with NASA for private orbital spaceflights to the International Space Station (ISS). Under terms of the agreement, Virgin Galactic will develop a private orbital astronaut readiness program, including identifying people interested in buying private missions to the ISS. Virgin 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. At this point, Virgin Galactic is a speculative concept stock but it represents a compelling growth story and has a professional management team so I have it rated a strong buy for aggressive investors.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains red-hot, thanks to its high-visibility position as the solution for work-from-home meetings. Technically, the stock is overdue for a correction, but fundamentally I can’t ignore the fact that Zoom is a major beneficiary of the COVID disruption and thus there’s no telling how great the company’s growth will be. HOLD

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, remains on a very shallow correction, with minimal signs of selling pressure. If you want a single cybersecurity stock (rather than the cybersecurity ETF, which holds 29 stocks in the sector), you could nibble here. HOLD.

The next Cabot Stock of the Week issue will be published on July 6, 2020.

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