Cabot Stock of the Week 326

The bull market remains alive and well, and I continue to recommend that you be heavily invested in a diversified portfolio of stocks.

This week’s recommendation is a very small medical technology company focused on the business of processing and testing cells, as accurately and efficiently as possible. Long-term potential is big.

But to make room for it in the portfolio, something has to go, and this week it’s Digital Realty (DLR), which never really got going for us.

Full details in the issue.

Cabot Stock of the Week 326

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The overall investing environment remains positive, with all major indexes in strong uptrends and minimal signs of divergence. But investor sentiment is high by many measures (partially due to the vaccines), and as experienced investors know, when the last skeptic decides it’s safe to get back in the market, that’s when the market tops. In the meantime, we won’t fight the trend because it could easily run to year-end. Today’s recommendation is a small biopharma company focused on the cell market. It will be almost certainly be volatile, but the trend is up. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

Berkeley Lights (BLI)
There are a lot of companies active in areas of the cell-based market, which reached $148 billion in 2019 and is growing by around 11% annually.

The market includes activities such as harvesting, culturing, imaging, sequencing, and characterizing cells. Major players include Thermo Fischer (TMO), Danaher (DHR), and 10X Genomics (TXG).

However, Berkeley Lights (BLI), which has a market cap of $5.4 billion, is arguably the most attractive pure-play company in the cell-based product market. Its solutions do everything biopharma companies need to have done on one single platform. And, arguably, Berkeley does it all better. The company’s technology can measure tens of thousands of single cells in parallel. That means it can find the best cell out of millions, and do so quickly.

Moreover, Berkeley’s platform enables functional characterization without killing cells. That means it helps users keep the best cells alive for downstream development.

By contrast, competing solutions often work slower and with high cell death rates. That crushes the ROI of the biopharma company using those solutions.

This is why biopharma companies, CROs, and CDMOs are increasingly turning to Berkeley Lights. Its platform helps them do everything needed to find therapeutic candidates faster and cheaper, often shaving three to five months off the process, boosting yields and reducing manufacturing costs. It’s a win-win-win.

The company has three automation systems. Beacon launched in 2016 and sells for almost $2 million, Lightning launched in 2019 and sells for around $450K. Culture Station just launched in January. Berkeley also sells workflow and automation software, and offers a portfolio of consumables (chips, reagents, etc.).

Berkeley has also adapted its antibody discovery workflow to allow the recovery of neutralizing antibodies from Covid-19 patients, which helps researchers discover therapies.

In Q3 2020 (reported November 12) management said it sold eight systems for $12.4 million, twice what it sold in Q2. CROs and CDMOs bought half of them. The addition of new workflows aided in sales of at least six of those systems and two more workflows are being added in 2021, which should keep system sales flowing.

Adding in recurring revenue ($3.7 million) from consumables, plus partnership revenue ($2.1 million), Berkeley delivered quarterly revenue of $18.2 million, up 16%. While there’s not a huge revenue base today – estimated 2020 revenue is just $60 million, up 6% over 2019 – Berkeley’s growth should take off as it places more systems in the market and starts to generate more significant recurring revenue from subscriptions and consumables. Looking into 2021, revenue could jump by 50% to $90 million and adjusted EPS loss could be cut by 25%, to -$0.61.

BLI came public at 22 on July 17, 2020 and soared 198% its first day. The stock has since traded in a wide range – moves of 15% to 30% within a couple weeks are not uncommon – but the trend is up and BLI’s pattern of higher lows and higher highs suggests considerable demand for the stock. Also, a stock offering priced at 86 on November 19 has been absorbed and the stock is right back to the offer price. The offering was from certain stockholders so it was not dilutive and Berkeley received no proceeds.

The most recent low near 77 (December 3) represented a roughly 28% pullback from the previous high of 99 (November 16). That’s a “normal” pullback for this stock. Over the last two sessions BLI has begun to bounce back, suggesting the stock could advance to a fresh all-time high by the end of the year. As always, average in.

Current Recommendations

Overall, our holdings are performing very well, with many hitting new highs—and that’s a sign that you should consider taking partial profits in some stocks. But stay heavily invested—until the market changes course. This week the only change is the sale of DLR, to make room for BLI. Details below.

Changes
Digital Realty Trust (DLR) to Sell.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, bounced off support at 26 two weeks ago and thus remains in the consolidation phase that’s occupied it since August, when the stock topped at 31. In his update last week, Bruce wrote, “In the short term, BGS seems to be a pandemic play, but longer term it’s a much improved defensive and high dividend paying stock. It has strong fundamentals and sells at a good value. This should be a winner over time. In the meantime, enjoy the dividend.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here three weeks ago, is a low risk investment that’s trending up. In his update last week, Bruce wrote, “The stock has about 22% upside to our 64 price target. While the valuation is not statistically cheap, at 24.8x 2021 estimated earnings of $1.89 and 22.5x estimated 2021 earnings of $2.11 (both unchanged in the past week), it is undervalued while also offering an attractive 3.1% dividend yield.” BUY.

Columbia Sportswear (COLM), originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, continues to rally back from its selloff at the end of October, and Bruce still rates it a buy. In his update last week, he wrote, “After a disappointing third quarter, after which the stock fell sharply, as price-sensitive investors we raised COLM shares back to a Buy. We think the company low-balled its guidance, with its long-term earnings power impeded but pushed out into the future. It also announced personnel changes in several key operational roles. Columbia’s balance sheet remained solid. Columbia’s shares have about 21% more upside to our 100 price target. The shares trade at 22.4x estimated 2021 earnings of $3.71. The earnings estimate is unchanged from last week. For comparison, the company earned $4.83/share in 2019.” BUY.

Digital Realty Trust (DLR), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, is our worst performer and thus it’s being sold (to make room for BLI). Tom, however, is sticking with it, and you could, too if you like low risk and steady income. In his update last week, Tom wrote, “This data center REIT has had a big downward move over the last couple of months. While this up and down trend is normal, DLR is in the midst of a bigger downward move than usual. There is no fundamental problem and the latest move likely got exaggerated by the pandemic market that has shunned a lot of strong pandemic market performers. This is most likely a great buying opportunity for DLR, in an overdone near-term downward move. But I will continue to watch it closely for any signs of further deterioration in the stock or in the fundamental story.” SELL.

Eli Lilly & Company (LLY), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, has climbed above its 50-day moving average over the past two weeks, but I don’t really see a true uptrend yet. In his update last week, Tom wrote, “I’m disappointed in the recent performance of this health care juggernaut. Sure, it got a big bounce after the election as divided government all but eliminated the possibility of a draconian health care overhaul. But that’s been the only positive move for the stock since the summer. Meanwhile, health care is an ideal sector with defensive earnings and strong growth as the aging population will continue to present a huge tailwind. Lilly is one of the best health care companies in the business. Eventually the stock will move to reflect that fact.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, is up 25% since our recommendation and up 56% from its low of late September. It’s hot! But it’s no longer cheap and for that reason, it’s no longer as attractive—for value investors. In his update last week, Bruce wrote, “The company restructured its deal with Nikola, greatly reducing the size and scope of the agreement. GM will not produce Nikola’s Badger truck, nor will it take any equity stake in Nikola. GM will, however, provide its fuel cell technology to Nikola, with Nikola making up-front payments. In effect, it appears that GM is treating Nikola like any other commercial customer. We have mixed feelings on this – while Nikola has turned out to be more vapor than reality, most early-stage emerging technologies are just that, and it takes some capital and engineering to convert that vapor into actual products/services that work. So, GM is essentially cutting Nikola loose and losing a possibly valuable brand in the process, but it is also crippling a likely future competitor. The shares have about 9% upside to our newly-raised 49 price target. GM shares trade at 9.5x estimated 2020 earnings of $4.74 and 7.6x estimated 2021 earnings of $5.90. While the 2020 estimate ticked down in the past week, the more important 2021 estimate increased by about 1%.” Additionally, Mike Cintolo, who had recommended the stock in Cabot Top Ten Trader, wrote, “Don’t forget to take some partial profits if you’ve gotten some windfall gains in just a few weeks.” HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is China’s largest hotel operator, with 6,507 hotels and 637,087 hotel rooms in operation in 16 countries—and we’re in it for the long haul, as the long-term prospects are great. Since hitting a record high a few weeks ago, it has pulled back minimally. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, is hitting more highs! In Bruce’s update last week, he wrote, “Molson Coors recent results showed that the company is making progress with its turnaround and that investors underestimate this progress. Net revenues fell 3.1% but were about 4% better than consensus estimates. Adjusted per share earnings were nearly 60% better than estimates. Underlying EBITDA was 1% higher than a year ago and 26% higher than estimates. The company announced that it will be expanding its production capacity by 400% to accommodate surging sales of some of its seltzer and other new drinks. TAP shares have about 27% upside to our 59 price target. Consensus estimates for each year from 2020 to 2022 are currently $4.17. So, the shares trade at 11.2x this estimate for all three years. These valuations are low, although not the stunning bargain from a few months ago. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.3x estimates, among the lowest valuations in the consumer staples group and well below other brewing companies. For investors looking for a stable company trading at an unreasonably low valuation, TAP shares have considerable contrarian appeal. Patience is the key with Molson Coors shares. We think the value is solid although it might take a year or two to be fully recognized by the market.” BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has pulled back to below its 50-day moving average over the past two weeks, but the main trend remains up. In his latest update, Tom wrote, “The pandemic will come and go. Markets will always go up and down. After the vaccine and full recovery, what’s next? Who knows? But regardless of what twists lie ahead, NEE will continue to be popular with investors and likely trend ever higher. Alternative energy continues to get ever cheaper to produce while demand for it continues to increase with no end in sight. Reliable revenues never go out of style either. If NEE was cheaper it would be a perfect stock. But it’s only great right now.” HOLD.

Novocure (NVCR), originally recommended by Mike Cintolo in Cabot Top Ten Trader, broke out above its mid-October highs last week and is higher today! And the stock is in Cabot Growth Investor as well, where Mike wrote last week (before the breakout), “We have a mental stop in the low 110s (call it 110 to 112), so a dip down there would probably have us cutting bait; conversely, a powerful upmove could signal a resumption of the overall advance. For now, we advise sitting tight with your half position.” BUY.

Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities, is now building a base centered on 42, consolidating the big gains that followed its earnings report three weeks ago. If you haven’t bought yet, you can buy now. BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, has been strong and now sits just a hair below its recent high. In his update last week, Mike wrote, “PINS has been tossed around with the on-again, off-again action in growth stocks during the past few weeks, but it looks just fine to us, gliding higher above its 25-day moving average and avoiding any big-volume selling to this point. The company has been quiet on the news front since reporting earnings in late October, and that’s fine by us—all signs point to Pinterest’s various initiatives on both the content side (investment in more video and “stories” to show how something is done, instead of just the end product) and advertising side (automatic bidding, improvements in search) bringing in new users and businesses that should keep growth humming in the quarters to come. We wouldn’t be shocked to see the stock have a shakeout, but big picture, PINS is a leader and should have a very bright future. Hold on if you own some, and if not, you can start a position here or on any weakness.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, continues to hit new highs! In his update last week, Tom wrote, “This chip maker stock is another huge winner. And the thing to remember is that despite the recent surge, up 70% YTD and 80% over the last year, it’s still fairly cheap for a technology stock with strong prospects. At just 21 times forward earnings, it is a cheap tech stock that can certainly move higher. And good news is likely to continue as QCOM reaps a better than expected bounty from 5G royalties.” BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, remains in a long and strong uptrend. In his update last week, Carl wrote, “Though the stock is up more than 320% so far in 2020, aggressive investors can add to their position at these levels, but I will keep Sea as a hold and encourage holders to take some profits if they have not already done so. Sea is Southeast Asia’s biggest internet platform, with 40 million daily active users. The stock has benefited from strong tailwinds during the COVID-19 pandemic, rising 4x in the last six months. Sea’s business operations are in the e-commerce, gaming, and payments space, which have seen strong user adoption over the last few years. Given the macroeconomic factors (such as the rise of the middle class and increased smartphone penetration) and demographic shifts (young population) in Southeast Asia, SE will continue to see strong growth over the next few years.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, remains very healthy, hitting another new high today. In his update last week, Carl wrote, “This company is a dominant global semiconductor chip fabricator with tremendous economies of scale in a capital-intensive industry. China recently announced major investments in its semiconductor industry, though the country is several generations behind Taiwan Semiconductor, which dominates global chip fabrication with a market share of 56%. The company delivered an impressive return on equity of 31% in its most recent quarter. I maintain a buy rating on the stock.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit another new high this morning, taking our profit over the 10,000% level, and providing a fine opportunity for some partial profit-taking. On December 21, the stock will be added to the S&P 500—and history says that after such an event the stock is likely to underperform the index over the next year. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is one of the leading vertically integrated multi-state operators in the U.S.—with particular strength in Florida, where it has roughly 50% market share. And it’s one of the most well-run as well, posting profits since 2017—while many peers are still losing money. Two weeks ago I advised taking some partial profits in the stock, as the sector has had a great year and the stocks are due for a correction. But long-term, I remain bullish on both TCNNF and the sector as a whole and expect to restore its buy rating when risk is lower. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here in our last issue (two weeks ago), hit new highs on a couple of days last week and has pulled back minimally today. BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, continues to climb higher, though it’s still shy of its peak of 42, hit in February of this year. In his update last week, Carl wrote, “Shares have zoomed from 18 to 28 over the last month. The stock benefitted from the renewed attention to the commercial space sector with Elon Musk’s SpaceX launching its first operational crewed mission to the International Space Station. As the only pure-play space tourism stock in the public markets, this remains your best way to gain exposure to this megatrend. If the next two missions run smoothly, Virgin Galactic plans to send founder Richard Branson up in the first quarter of 2021. Aggressive investors can buy at these levels ahead of 2021 developments.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, reported excellent third quarter results on November 30. Revenue was $777 million, up 367% from the prior year while the number of customers contributing more than $100,000 was up 136% from the prior year. But the stock sold off; investors were expecting more. And this, combined with the fact that ZM actually peaked in mid-October as investors saw vaccines enabling the end of the pandemic that has helped Zoom, means it’s time to consider selling the stock. Short-term investors should certainly do so; the stock has had a great high-profile year and there’s no knowing how long this cooling-off phase will last. But I’m going to stick with it, as the long-term trend remains up and there’s still great growth potential as much of the world is likely to stick with Zoom as the pandemic fades. HOLD.

The next Cabot Stock of the Week issue will be published on December 14, 2020.

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