January 11, 2021

First, note that due to next week’s holiday (and the market being closed), your issue will be delivered one day later, on Tuesday, January 19.

Today, the market’s main trend remains up, and thus I continue to recommend that you be heavily invested. However, I also see a lot of potential for corrections from this dizzy height, so I’m selling one stock today (TSM) and downgrading two to hold (NUAN and QCOM).

As for today’s recommendation, it’s a low-risk dividend-paying stock we actually owned for two months last year—and did well with. And I think the portfolio can benefit from it again now.

Full details in the issue.

Cabot Stock of the Week 330

The first week of the year saw buyers dominate, pushing the major indexes to higher heights on most days. Thus the major uptrend is intact, but extended, which means this is probably not the best time to buy an aggressive growth stock. So this week I’m swinging back to the low-risk side of the spectrum with a recommendation of a solid performer that we actually owned last year (successfully) for a couple of months. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.

Brookfield Infrastructure Partners (BIP)
Bermuda-based Brookfield Infrastructure Partners owns and operates infrastructure assets all over the world. The master limited partnership (MLP) focuses on high-quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.

Infrastructure is defined as the basic physical structures and facilities needed for the operation of a society or enterprise. It includes things like roads, power supplies and water facilities. Not only are these some of the most defensive and reliable income generating assets on the planet, but infrastructure is rapidly becoming a more timely and popular subsector.

The world is in desperate need of updated infrastructure. Developed economies have badly aging systems in need of replacement and emerging markets have infrastructure that is woefully insufficient to accommodate growing urban populations and more advanced economies. The G-20’s global infrastructure hub estimates that a global investment of $94 trillion will be needed over the next several decades.

The private sector is an essential part as governments don’t have all those trillions lying around. Limited partnerships, giant sovereign-wealth funds, multilateral and development-finance institutions are raising billions of dollars a year for infrastructure investments. It’s almost becoming a new asset class.

As one of the very few tested and tried hands, BIP is right there. It’s been successfully acquiring and managing these properties for more than a decade in a way that delivers for shareholders. Since its IPO in 2008, BIP has provided a total return of 680% (with dividends reinvested) compared to a return of 254% for the S&P 500 over the same period. And those returns came with considerably less risk and volatility than the overall market.

Brookfield operates a current portfolio of over 1,000 properties in 30 countries on five continents. The partnership operates in four segments: Utilities, Transport, Energy Services, and Data Infrastructure.

Assets include:

• Toll roads in South America
• Telecom towers in India and France
• Railroads in Australia and North America
• Utilities in Brazil
• Natural gas pipelines in North America
• Ports in Europe, Australia and North America
• Data centers on five continents

The future looks bright for the stock as the infrastructure trend is sure to continue gaining traction. But the near future looks even better.

BIP performed on par with the market in 2020 with a 15.5% total return for the year. But despite its highly defensive assets, it was impacted by Covid. The unprecedented shutdown of much of the world diminished revenues in the transportation sector. But Brookfield still generated positive earnings growth in every quarter, including 8% funds from operations (FFOs) growth in the last reported quarter.

The diminished transportation sector revenue should bounce back this year as the pandemic restrictions recede. The company has also been swapping into more profitable assets. Over the last year it has made a considerable shift into the higher margin cell tower business.

Brookfield is also using its considerable liquidity to buy assets on the cheap as the pandemic is causing cash-strapped governments to unload assets to raise money. It acquired $1 billion in new assets last quarter and should continue to pick up new assets that will boost the bottom line in 2021.

As an MLP, BIP pays the bulk of earnings to shareholders in the form of distributions. It currently yields a solid 4%. And the partnership is targeting annual distribution growth of 5% to 9% as well as 12% to 15% growth in return on equity. While that formula should provide solid total returns, those numbers may be better this year for the aforementioned reasons.

As an important note, you can also buy the identical company in the form of a regular corporation instead of an MLP with symbol BIPC. MLPs generate an annoying extra tax form and can have taxable consequences in a retirement account. The new company was created to enable investing for investors or institutions who can’t own MLPs.

Tim’s Note: We owned BIP in the portfolio from June-August last year, but sold for a small profit to make room for a faster stock. If you kept it (which I suggested was a fine choice for income-oriented investors), you’re now up about 18%, even after the current pullback to the 50-day moving average—and it’s this pullback (combined with the market’s recent strength) that makes the stock attractive again.

Current Recommendations

Overall, our holdings continue to perform very well—but I continue to recommend that you consider taking partial profits in some, because there is a major correction ahead, somewhere. As for outright sells, I have only one today, though two stocks get downgraded to Hold. Details below.

Changes
Nuance Communications (NUAN) to Hold.
Qualcomm (QCOM) to Hold.
Taiwan Semiconductor (TSM) to Sell.

Berkeley Lights (BLI), originally recommended by Tyler Laundon in Cabot Early Opportunities, has built a small base at 90 over the past week, just above its 50-day moving average. Berkeley has great long-term prospects in the business of supplying equipment for harvesting, culturing, imaging, sequencing and characterizing cells. BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, suffered a few days of heavy selling last week after JPMorgan downgraded the stock (but kept its price target of 55) because of an IRS judgement that the beverage giant owes about $3.4 billion in back taxes. But the stock bounced Friday and looks to be stabilizing here. In his update last week (the day before the downgrade), Bruce wrote, “The stock has about 22% upside to our 64 price target. While the valuation is not statistically cheap, at 24.7x estimated 2021 earnings of $2.12 and 22.4x estimated 2022 earnings of $2.34 (the 2021 estimate ticked up a cent in the past week), the shares are undervalued while also offering an attractive 3.1% dividend yield.” I think buying on this correction is attractive. BUY.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, continues to trend higher. In his update last week, Bruce wrote, “Shares have about 17% upside to our 100 price target. Valuation is 23.2x estimated 2021 earnings of $3.67, with the earnings estimate unchanged from last week. On 2022 estimated earnings of $4.63, the valuation is a more reasonable 18.4x. For comparison, the company earned $4.83/share in 2019.” BUY.

CrowdStrike (CRWD), originally recommended in Cabot Growth Investor by Mike Cintolo, hit another record high today. In last week’s update, Mike wrote, “CRWD is typical of what we’ve seen with growth stocks over the past few weeks, with a very sharp advance (especially after the SolarWinds breach), a relatively sharp, quick dip, and lots of volatility this week (daily range of 5% or so each of the first three days this week). Some further choppiness could be in the cards (the breakout above 155 came just over a month ago!), but the chart looks fine (25-day line is around 191) and the story remains pristine, with rapid, reliable growth very likely for years to come. Some calm action could have us filling out our position, but we’ll wait on that; if you don’t own any, though, we’re OK buying a half-sized stake around here.” BUY.

Elastic (ESTC), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, has climbed higher from that buying opportunity and can still be bought as it heads back to its recent (and all-time) high of 160. BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, lifted off from its three-week base in the 40-42 area last week and is now very close to breaking out above its November high of 46. In his update last week, Bruce wrote, “GM shares have about 19% upside to our recently-raised 49 price target. Valuation is at 6.9x estimated 2021 earnings of $5.98. This estimate was unchanged this past week. Our 49 price target can be thought of as assuming a 7x multiple of $7.00 in earnings. The 2022 estimate is already at $6.49, so a few strong quarters (which GM is capable of) would likely raise estimates enough for the shares to reach our target.” 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. After hitting a record high near 54 in mid-November, the stock pulled back to just under its 50-day moving average but is now once again above it and heading higher. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, is hitting new highs! In his update last week, Bruce wrote, “The thesis for this company is straight-forward – a reasonably stable company whose shares sell at a highly discounted price. TAP shares have about 26% upside to our 59 price target. Estimates for 2020-2022 ticked up in the past week. TAP shares trade at 11.1x estimated 2021 earnings of $4.21. This valuation is 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 8.2 current year 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 a low valuation, TAP shares continue to have contrarian appeal.” BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, enjoyed a big jump on high volume last Wednesday, so short-term, it’s a bit extended. Long-term, however, I continue to think it’s a great investment. In last week’s update, on the day of the big move, Tom wrote, “This combination regulated and alternative energy utility is getting a huge bounce today. The market perceives the likelihood of Democratic control of the Senate to be positive for clean energy. NEE is a hugely popular beneficiary of the trend and is one of the first places investors will go. This is a great company anyway and a greater belief in the sector during the new Administration could make it even better.” HOLD.

Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities, had a strong move last week and is once again hitting all-time highs. Long-term prospects for this voice-recognition giant are terrific, but short-term, this stock has a lot of downside potential, so I’m going to downgrade it to Hold. HOLD.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, bounced off its 50-day moving average perfectly last week and has resumed its uptrend. In his update last week, Mike wrote, “PINS dove to its 50-day line by Monday of this week and it’s begun to bounce—given that this is the stock’s first tag of that key support area, it should find support in and around here. Nothing has changed with our thoughts here fundamentally, and the firm remains all quiet on the news front. It’s a solid risk-reward entry point here if you’re not yet in.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, continues to trend higher and is very close to exceeding its December high of 160. In his update last week, Tom wrote, “Sure, this 5G chipmaker stock has had a huge move higher since the summer and recorded a 73% price gain for 2020. But I don’t think the party is over. Qualcomm is a primary beneficiary of the 5G rollout as it currently has the only 5G smart phone chip and other important supporting technologies. It’s going to ring that register big time as the royalties flood in over the next year plus. It’s also likely that 5G becomes a market driver in 2021 as the pandemic finally fades.” Tom has the stock rated hold (it has had quite a big run), so I’ll downgrade it now to join him. HOLD.

SABESP (SBS), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, continues to go the wrong way, but Carl thinks patience will pay. And technically, I like the fact that the chart of this water company is nearing support at 7.2, so I’ll keep it rated Buy. BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, is once again hitting new highs! In his update last week, Carl wrote, “Not much news here except that the company recently announced it has been granted a license to operate a full-service digital bank by the Monetary Authority of Singapore. This is a big deal, but I would again recommend that investors take some profits here. This story will likely continue into 2021 since Sea is Southeast Asia’s biggest gaming, e-commerce and payments firm with more 40 million daily active users in a region populated by 655 million tech-savvy consumers.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, had a great run last year and has been particularly strong in the first week of 2021, and I’m now going to take the somewhat unusual step of selling very close to a high. To be clear, Carl still likes the stock—and still has it rated buy. All the news about the semiconductor industry is positive. However, I know that widespread good news can accompany tops and I respect the advice (at least in the short term) of Mike Cintolo, who recommended, in Cabot Top Ten Trader last week, that traders take profits here because the stock was extended in both time and price. If you want to stick with it and try to ride it higher, that may work as well. SELL.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, put together 11 consecutive up days before pulling back moderately today. The reason: Everyone loves Tesla. And I agree that the future is bright for the company; today even saw the promise of a $25,000 car for the Chinese market. But moments packed with good news tend to bring tops more often than buying opportunities, so I’ll continue to rate it hold, for long-term investors. Traders could cash in some partial profits here. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, closed at a record high last week and pulled back minimally today. And that’s typical behavior for the leading marijuana stocks in the U.S., in part because a solidly Democratic federal government is expected to continue to pave the road toward full legalization. In the meantime, I continue to feel that the group is ripe for a correction, so taking partial profits is an option—but I’ll simply hold tight. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, closed at a record high last Thursday and has pulled back minimally since. In last week’s update Mike wrote, “UBER looks very good, as it appears to be getting going from a tight, four-plus-week rest (after a 10-week kiss this week) following its huge-volume blastoff in November. One analyst recently said what we’ve been writing for a while—if all goes well this year (pandemic disappears and economies boom), Uber could be printing money later this year as both Rides and Delivery services surge. (Plus, even if there are some virus-related economic hiccups, Uber should have business support from a further acceleration in the Delivery side of things.) If you’re nit-picking, volumes on the past two days of rally have been sub-par, and January is sure to bring more volatility, so we can’t rule out another shakeout, but the path of least resistance remains up. Go ahead and buy some here if you’re not yet in.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is back above its 50-day moving average, building a base of sorts at the 25 level. In last week’s update, Carl wrote, “Virgin Galactic CEO Michael Colglazier recently outlined how from just a single operational VSS Unity spaceplane today, flying out of Spaceport America in New Mexico, Virgin Galactic plans to build entire fleets of spaceplanes and fly them out of multiple spaceports around the world with the goal of bringing in annual revenue of $1 billion. This is welcome ambition, but it will require eight crafts each flying 50 flights per year as well as a higher price per ticket relative to the $250,000 set for the first 600 passengers. Given all the uncertainty regarding the timing of tests and then the launch of the spaceplanes, I recently moved this stock to a hold.”

Short-term, that’s understandable; I already had the stock on hold. But long-term, I want to share some intelligence from just this week. One of the top mutual fund managers of 2020 was Ron Baron, who achieved a gain of 148% in one of his funds, in part because of his longtime large holdings of TSLA. And what else is Baron holding because he thinks it’s a great long-term investment? SPCE! HOLD.

The next Cabot Stock of the Week issue will be published on January 19, 2021.

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