June 1, 2021

I hope you enjoyed the long weekend!

Investors in our stocks certainly did, as more and more of them have been hitting new highs. In fact, they’re doing so well that I’m selling none today.

As for today’s recommendation, it’s a young growth stock trading 50% off its recent high—a great opportunity for aggressive investors.

Details inside.

Cabot Stock of the Week 350

The bull market that began in March 2020 remains in effect, and our policy of investing in a balanced portfolio of stocks chosen using a variety of investing systems continues to work. Today I’m happy to recommend a growth stock that’s currently trading 50% off its high—which in some respects makes it a bargain. The stock was originally recommended by Carl Delfeld in Cabot Explorer and here are Carl’s latest thoughts.

Palantir Technologies (PLTR)
Palantir is a software company specializing in big data analytics. Peter Thiel and Nathan Gettings, Joe Lonsdale, Stephen Cohen and Alex Karp from the PayPal mafia founded Palantir in the early 2000s. The company name is derived from the palantiri, crystal ball-like “seeing stones” from The Lord of the Rings.

The stock is a bit on the controversial side due to its beginnings focused on government contracts and because of the unconventional politics of Peter Thiel, yet if you can get past that, you’ll find a great growth opportunity.

Palantir’s software is used by government agencies in a wide range of applications and the company sees plenty of room to expand into the commercial sector.

The Colorado-based company offers three platforms: Palantir Gotham, used primarily by government agencies; Palantir Metropolis, used by banks, financial services firms and hedge funds; and Palantir Foundry, used by corporate clients. The company’s commercial customer target sectors are health care, energy and manufacturing sectors. Government agencies, the chief growth driver, use Palantir software for intelligence gathering, counterterrorism and military purposes.

Last week Palantir announced that it is expanding its strategic partnership with the U.S. Space Force and U.S. Air Force, proving its ability to offer cutting-edge technologies. As part of the new deal, the company will provide software for powering advanced critical missions and support the Space Command and Control program. The company’s solutions will also provide senior leadership at the Air Force with an analytics platform that merges data sources from across the Service. The total value of the contract is $32.5 million.

Palantir’s new Space Force and Air Force deal will complement its growing list of new and expanded U.S. government contracts, which already include deals with the U.S. Army, the Food and Drug Administration, the Central Intelligence Agency, and Immigration and Customs Enforcement.

Palantir and IBM also announced a global partnership earlier this year making Foundry software available to IBM’s cloud computing customers.

Palantir generated 56% of its revenue from government customers last year, while the remaining 44% came from commercial customers. Both of these business segments grew robustly in 2020 and the first quarter of 2021.

The company’s government business posted revenue growth of 77% in 2020 while its commercial side revenue growth was 22%. These numbers held for the first quarter of 2021. So the blended growth rate for Palantir right now is just under 50%.

On May 11, the company posted its first quarterly profit on revenues of $341 million, up 49% from the prior year. In America, revenue grew 83% in the U.S. government segment and 72% in the commercial segment.

“Where the government response to the pandemic has been efficacious, we are seeing a commercial tailwind,” Chief Operating Officer Shyam Sankar said on the earnings call.

Average revenue per customer increased 29% year-over-year to $8.1 million during the trailing 12 months ending on March 31. However, Palantir expects the growth rate for average revenue per customer to slow as it targets customers across different segments, particularly the middle market and small-to-medium business enterprises (SMBs) in a bid to broaden its customer base.

In the second quarter, PLTR expects revenues to grow 43% year-over-year to $360 million. The company anticipates revenues to rise at a rate of 30% or more annually from 2021 through 2025.

Analysts are generally positive on the stock but also in a wait-and-watch mode with Palantir as the company is still in the process of broadening its customer base by targeting customers across different market segments. At the same time, it is also looking to bring more government agencies on board as customers.

PLTR stock is trading 50% off its January 27 peak but it’s up roughly 140% since going public in September 2020 at $7.25 a share. The stock has been in an uptrend and demonstrating relative strength. Cathie Wood’s ARK Investment Management in the first quarter sharply increased its stake and now owns 18.6 million shares of Palantir.

Current Recommendations

Overall, our holdings are doing what they were hired to do, so there are no sells from the portfolio this week, and there are no ratings changes, either. The new addition of PLTR increases our holdings to 19 (20 is the maximum). Details below.

Changes
None

Barrick Gold (GOLD), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, ran higher until the middle of May, and has been correcting gently since. In his update last week, Bruce wrote, “Earlier this week there was an attempted coup in Mali, home to Barrick’s giant Loulo-Gounkoto mine and some smaller side mining operations. Barrick owns an 80% interest in this mine, with the balance owned by the Mali government. This mine is a valuable source of cash to whomever is in power, and few companies have the ability to operate the mine and return cash to the government like Barrick can. However, there is always the risk of a renegotiation of the split. Currently the mine produces about 9% of Barrick’s annual gold output. Mali is holding presidential elections this coming February to return the country to civilian rule, which perhaps is the catalyst for the unrest. Barrick shares have about 10% upside to our 27 price target. The stock trades at a discount to our value estimate of 27, based on 7.5x estimated 2021 EBITDA and at a modest premium to its $25/share net asset value. Commodity gold ticked up to $1,882 this past week. On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.5% dividend yield. Barrick will pay an additional $0.42/share in special distributions this year, lifting the effective dividend yield to 3.2%.” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, peaked at 495 back in mid-February, and the stock has been working to break through that level since. In his update last week, Tom wrote, “These are rough days for the technology sector as inflation worries are hurting growth stocks. And AVGO has been held back and dragged down by the overall sector. But a little temporary inflation while the economy booms isn’t going to end the technological revolution. Broadcom will benefit mightily from 5G and over 90% of internet traffic uses its products. It’s a good time to accumulate the stock.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, broke out to a new high this morning—which means the stock will probably correct in the days ahead, because this stock never goes to extremes. In his update last week, Tom wrote, “The infrastructure partnership trends very slowly higher. It’s up about 9% YTD, which is on par with the S&P. The returns haven’t been exciting, but the stock is stable and trending the right way. Earnings should get a nice boost from new assets coming online as well as a recovery in its transportation assets. Infrastructure should also be a popular subsector after the pandemic.” BUY

Coca-Cola (KO), originally recommended by Bruce Kaser for the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, broke out to a new high last Friday—but just barely. In his latest update, Bruce wrote, “The European Union has started a preliminary anti-trust investigation into Coca-Cola’s European operations. At this very early stage, it is nearly impossible to assess the concerns and implications, although initial reports suggest that the inquiry was due to complaints by major retailers and wholesalers. For now, we see limited impact on Coca-Cola, but recognize that governments in developed countries in general are stepping up their anti-trust scrutiny. KO shares have about 17% upside to our 64 price target. While the valuation is not statistically cheap, at 25.1x estimated 2021 earnings of $2.18 (unchanged in the past week) and 23.2x estimated 2022 earnings of $2.36 (unchanged), the shares remain undervalued given the company’s future earning power and valuable franchise. Also, the value of Coke’s partial ownership of a number of publicly traded companies (including Monster Beverage) is somewhat hidden on the balance sheet, yet worth about $23 billion, or 9% of Coke’s market value. This $5/share value provides additional cushion supporting our 64 price target. KO shares offer an attractive 3.1% dividend yield.” BUY

Columbia Care (CCHWF), originally recommended in Cabot Marijuana Investor by yours truly, continues to build a base in the 6 area, though there’s still the possibility of a repeat dip to 5.25. In last week’s issue, I wrote, “Columbia Care is a New York-based vertically integrated multistate operator, with 87 dispensaries and 27 cultivation and manufacturing facilities in 10 states (Arizona, California, Colorado, Florida, Illinois, Massachusetts, New Jersey, Ohio, Pennsylvania and Virginia). But it’s still substantially smaller than the big four, and thus growing faster. Chartwise, I like the low at the end of March and the slightly higher lows since, as well as the basing action at 6, so if you’re underinvested in the sector, this is one that can still be bought. Just note that the low price means volatility will be higher.” BUY

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gapped down three weeks ago with the market, and has been trying to build a base in the 180 area since—so technically it’s still acceptable. However, the stock is our biggest loser, so it could be a sale on that count; cutting losses short is important for growth investors. But I’m going to hold for now, in part because that’s what Mike is doing. In his update last Thursday, he wrote, “FIVE had a sharp selloff with the market in early May, but it’s done a good job of finding support and starting to bounce. We’ve been giving the stock plenty of rope due to our profit (and partial profits already taken) and the reliable growth story—a move below the 40-week line (now near 168.5 but rising steadily every week) would be a no-no, but right here, we advise continued patience.” HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been a great success in the six-plus months we’ve owned it, but it’s now much closer to a buy than a sell. In his update last week, Bruce wrote, “GM is making immense progress with its years-long turnaround from a poorly-managed post-bankruptcy car maker to a highly profitable gas and electric vehicle producer. We would say it is perhaps 85% of the way through its gas-powered vehicle turnaround, and is well-positioned but in the early stages of its EV development. GM Financial will likely continue to be a sizeable profit generator. GM’s shares are at least partly trading on the prospects for President Biden’s $2 trillion infrastructure bill, which include as much as $100 billion in federal support for electric vehicles. President Biden’s pitch for $174 billion in EV subsidies, which he promoted last week, would be a noticeable positive for GM. We hope it would not subsidize weaker EV companies like Lordstown Motors, which said that it is sharply cutting its production forecast and risks running out of capital unless it receives new financing. The EV industry has many (too many) competitors, most of which will collapse. GM looks to be a highly likely survivor and the sooner these competitors go away the better. GM shares have 9% upside to our 62 price target.” HOLD

Huazhu Group Limited (HTHT), originally recommended in Cabot Explorer, remains a long-term hold, as growth prospects remain great for the largest operator of hotels in China. The company’s first-quarter results, released last week, saw revenues of $355 million, up 25% from the year before, and a loss of $0.22 per share. As of March 31, the company had 6,881 hotels, with 2,649 unopened hotels in the pipeline. The stock has been trading in a consolidation zone between 50 and 60 for a few months, but will almost certainly break out to the upside in time. HOLD

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities, and featured here two weeks ago, was bought on a normal correction and it’s up since then, so we’re off to a good start. If you don’t own it, and you’d like a piece of the fast-growing inbound marketing software developer, you can buy here. BUY

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, was cheap when we bought it; now it’s not. In fact, it could be a sell. But Bruce is holding. In his update last week, he wrote, “TAP shares are re-approaching our 59 price target. The shares trade at 15.0x estimated 2021 earnings of $3.87 (up a cent this past week). Estimates for 2022 rose another 2% this past week to $4.20. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 9.7x current year estimates, still among the lowest valuations in the consumer staples group and below other brewing companies. As the shares are essentially at our price target and have largely fully recovered from the pandemic, we are evaluating the position. Molson Coors is a stable company trading at a low valuation with contrarian appeal. However, the upside from here is less clear but still may be plenty interesting.” HOLD

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, peaked at 88 in January and bottomed at 68 in February and will eventually get above that old high, but it’s taking its time. In his update last week, Tom wrote, “This combination regulated and alternative energy utility had been adored by investors for years, until recently. NEE ran out of gas in late January and has been floundering since. Nothing has changed fundamentally. The company is killing it. And the environment ahead will likely be even better for NEE than before as the new Administration showers clean energy companies with subsidies and tax breaks and other goodies. It’s also a high-growth sector that should get more attention.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, released an excellent first-quarter report last week, showing revenues of $5.66 billion, up 84% from the prior year, and EPS of $3.66, up 103%! The stock inched out to a new high on Friday and is pulling back minimally today. BUY

Realty Income (O), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, came close to hitting a new high last week, so it will very likely achieve it soon. In his update last week, Tom wrote, “After pulling back for a couple of weeks, O is back to a post-pandemic high. In a technically bullish move, O broke out of a long sideways trend. It’s also worth noting that the stock is still well below the pre-pandemic price while earnings are higher, and the economy is more booming.” BUY

Roblox (RBLX), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here last week, broke out just before we recommended it, and the power of that move took the stock to nearly 100 before profit-taking pulled it down. But it’s back up again today! In his update last week, Mike wrote, “RBLX is a hot potato right now, and frankly, it’s a bit extended to the upside; if you prefer to start really small (even less than a half position) or look for dips of a few points, that’s fine. But this is really one of the few breakouts in the growth world of late that (a) showed a lot of power and (b) has followed through nicely; it’s now working on its third straight big-volume week coming out of its IPO base, so while pullbacks (possibly sharp ones) are possible, we think the odds strongly favor shakeouts finding support. Plus, of course, there’s the story and growth numbers. If you want to try to sharpshoot an entry down a few points from here, there’s nothing wrong with that, but we think there’s a chance RBLX could be a new leading glamour stock if all goes well.” BUY

Schlumberger (SLB), originally recommended by Mike Cintolo in Cabot Top Ten Trader, seems to have ended its brief correction today, popping higher along with the energy sector (and oil prices) after some pleasing news from OPEC. The path of least resistance for SLB and the group as a whole remains up. BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, looks great. In his latest update, Carl wrote, “Shares continue to outperform after posting another high-revenue-growth quarter. Sea’s e-commerce revenue already improved 160% to $2.2 billion in 2020. And in the first quarter of 2021, its e-commerce revenue surged another 250% year over year to $922 million. Its digital entertainment revenue surged 111% year over year to $781 million as its bookings rose 117% to $1.1 billion. We have taken profits several times over the remarkable rise of this stock. It is a great momentum stock in the world’s fastest growth markets of Southeast Asia.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains a long-term hold for investors with big profits, because there’s still plenty of growth opportunity in both the automotive and the energy business. Short-term, however, the stock has no momentum today. After peaking at 900 in January, it pulled back to 600 (roughly) in March, and that has served as the bottom for the stock since. If you’re gung-ho on owning the stock, I think this is a decent entry point, but I’ll leave it rated hold because less famous growth stocks generally offer better investment opportunities. HOLD

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is one of the four leading cannabis companies in the U.S., as measured by revenues, but the number one leader as measured by profitability, mainly because it focused solely on Florida in its early years. In last week’s issue, I wrote, “The biggest seller of marijuana in Florida, with 83 stores and a 51% market share, Trulieve is now expanding into other states (California, Massachusetts, Connecticut, Pennsylvania and West Virginia). In fact, the company just announced that its first store in Massachusetts will open in Northampton (near the University of Massachusetts) on June 3. But the big news of recent weeks was the acquisition of Harvest Health and Recreation, based in Phoenix, which had $89 million in revenue in the first quarter and will add a powerful west coast presence to the company’s business. As for the stock, I had previously downgraded it to hold because of the stock’s weakness in mid-April, and while it’s rebounded since then, there is still no real buying power, and there’s the possibility that the stock will return to its low of 35 and touch its 200-day moving average.” HOLD

The next Cabot Stock of the Week issue will be published on June 7, 2021.

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