March 21, 2022

With the market bouncing strongly last week, we leave our previously cautious stance behind and jump on a fast-growing, young chipmaker today.
And we’re not selling a thing, because after the February weakness, which saw a lot of irrational panic selling, the buyers are now back in charge and stocks are moving higher.

Details inside.

New Recommendation

For many months now we’ve been treading lightly with aggressive stocks, as they were hit hard in the recent market correction/bear market. (There are valid reasons for calling it both.) But recent market strength has triggered several buy signals from the indicators monitored by Cabot’s growth stock expert Mike Cintolo (though not the long-term Cabot Trend Lines yet), and thus last week he added a couple of stocks to his Cabot Growth Investor portfolio for the first time in months. Whether this blastoff turns into a full-fledged new bull market remains to be seen, but if it does, today’s recommendation has the potential to be one of the hottest stocks out there. Here are Mike’s latest thoughts.

GlobalFoundries (GFS)
We can’t definitively say the market is out of the woods quite yet; most stocks are still below longer-term resistance, and the indexes are (mostly) in the same boat. That said, last week’s action was very rare on a couple of fronts, and that should bode well in the months ahead—and if that’s the case, we want to be on some stocks that are showing the peppiest action just as the market is getting going.

That’s what led us to our choice today: GlobalFoundries, which recently came public (around Halloween of last year), has been around a while (was originally formed as a joint venture between a big UAE investment firm and AMD in 2009), and has morphed into its present form via a handful of acquisitions (Chartered Semiconductor in 2010; IBM Microelectronics in 2015) and focuses on growthy, feature-rich end markets. Today, GlobalFoundries is one of the five largest semiconductor foundries in the world, and the best is yet to come.

The company is a huge player in making chips for firms that dominate the smart mobile device market; in fact, the company says it has 75% of “silicon area” in top smartphones for functions including RF and near-field communications (which is getting big in Android phones), though there’s also big demand for chips that prolong the battery life of 5G handsets and for image sensors and cameras. In Q4, this segment made up nearly half of all revenues and was up a solid 24% from a year ago; full-year revenue here was up 38%.

Communications and infrastructure chips are also selling well, especially its silicon photonics (greater efficiency and processing power) business; sales here lifted a solid 7% sequentially (from Q3; overall made up 16% of revenues), while home and industrial Internet-of-Things (14% of total revenues, up 20% from the prior year) did well thanks to greater wireless connectivity demand, and automotive (5% of the total, but up 121% from a year ago) was a star thanks to assisted driving and safety applications. (Automotive should be a big growth area for years to come.)

However, the stock is acting like an early leader not just because of a solid business. First, of course, are industry conditions—the chip shortage is well known but is also likely to persist for a year or two, which doesn’t hurt prices. And GlobalFoundries is expanding quickly to meet that demand, but—and this is key—it’s not speculative building, but instead backed by lots of long-term contracts with blue-chip clients that are willing to commit to spending money to ensure a supply of chips in the years ahead.

In 2021, for instance, the firm inked more than 30 “significant” long-term agreements (including $3.2 billion of customer funding and pre-payments) that the top brass say, “has positioned our business for sustained growth over the next three to four years with … accelerated profitability.” Indeed, just in Q4, the firm announced that it inked a direct supply assurance agreement with BMW, as well as an expansion of its wafer supply agreement with AMD, increasing the volume of chips GlobalFoundries will supply through 2025.

It’s these deals that give the company confidence (and often money, as clients pay some of the contract up front) to expand quickly: It aims to exit 2023 with 50% more capacity than it had in 2020, thanks a whopping $4 billion expansion in Singapore (already its largest fab; first production from the new lines in early 2023) and in its Malta, NY and Dresden, Germany facilities.

Long story short: GlobalFoundries’ high-quality, long-term contracts, thanks to its position in many faster-growth markets (not just memory, which is more like a commodity), have it set for a very solid few years to come, building off some solid results in recent quarters. And the stock has responded: After getting nailed in January, GFS etched a higher low in both February and March, and when the pressure came off the market last week, GFS’ roof blew clean off, with the stock racing to new highs on heavy volume.

Current Recommendations and Changes

Current Recommendations

Last week I told you that I would sell a stock from the portfolio this week even if none of the analysts were rating their stock a sell—but I failed to anticipate the market’s strength. If I were still advising substantial caution, I might suggest taking profits in VECO or DVN or giving up on ST, but with the market’s newfound strength—and coming off a very negative period of investor sentiment—I’m now leaning toward being more invested! The addition of GFS to the portfolio brings us to 19 stocks, still under our maximum number of 20. Details below.

Changes Since Last Week’s Update
None

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, launched off support at 120 last week and thus might easily return to its recent high of 148—if the market cooperates. In his update last Thursday, Mike wrote, “ANET reminds us a bit of the market’s progress in recent weeks. Has it done anything amazing and noteworthy? No, not really. But, slowly but surely, it’s firmed up in recent weeks, with a reasonable overall correction (27% from high to low; support above the 200-day line), higher lows since the Russian invasion and a pop above the 50-day line today—indeed, the stock’s solid rally (albeit on light volume) since the market bounce started three days ago is a good early sign. As we have all along, we remain optimistic here, with Arista’s rapid and reliable growth story likely to keep big investors interested. We’ll stay on Hold here, but a push into the mid-130s along with a buy signal from some of our market timing measures would be very encouraging.” HOLD

Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, remains one of the strongest stocks in the portfolio—and Bruce says it’s still undervalued. In his update last week, he wrote, “BMY shares have about 12% upside to our 78 price target. Valuation remains low at 8.9x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 8.3x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers. Assuming an average of $15 billion/year in free cash flow, the shares trade at a 10% free cash flow yield.” HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, looks ready to break out above its February high of 615 and then head for its December high of 678. In his update last week, Tom wrote, “This technology stalwart stock sold off at the very beginning of the year but has since rebounded and stabilized. Another stellar earnings quarter helped AVGO outperform the sector over the past coup of months. Business is booming as Broadcom benefits from the 5G rollout and should also benefit from increased internet usage further out.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, provides a 3.5% yield with little drama, and the chart looks terrific, hitting new highs! In his update last week, Tom wrote, “This defensive infrastructure partnership just continues to do its thing regardless of the market trends. It remains near the high and on a long-term, slow and bouncy uptrend. Reliable and growing income and solid dividends never really go out of style. I expect more of the same going forward, slow and reliable appreciation and income. (This security generates a K1 form at tax time).” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, has been up and down since our July recommendation but has made little net progress yet, which just means it’s a better buy now. In his update last week, Bruce wrote, “CSCO shares have 21% upside to our 66 price target. The dividend yield is an attractive 2.8%.” HOLD

Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, tends to blow with the winds of the energy sector, but the main trend is still up. In his update last Thursday, Mike wrote, “We booked partial profits last week in Devon Energy, thinking a shakeout in energy stocks was close by—and sure enough, the group took a whack on the head Monday and early Tuesday, though today’s action is certainly better. Our take on DVN and the group in general: In the near term, the highs from last week will probably stick for a while, as the sector’s good tidings became very obvious; on the other hand, we doubt a true unraveling is on the horizon given (a) the pullbacks to this point haven’t been big-picture abnormal, and (b) even at much lower oil prices, DVN is likely trading at 6% to 7% dividend yields, not to mention a good amount of buybacks and debt reduction, too. We still have a good-sized stake here, so we’re all for the stock ratcheting higher from here, but we think the odds favor some more backing-and-filling and news-driven moves in the next few days or weeks. If you don’t own any, we won’t argue with a small buy around here; the snapback so far is encouraging. But officially we’ll stay on Hold and look for a better setup for new buyers.” HOLD

Ford Motor (F), originally recommended by Carl Delfeld in Cabot Explorer and featured here last week as the stock was trading 38% off its high, is up since then so we may have got in at the very bottom of the correction. In his update last week, Carl wrote, “Ford shares were relatively flat this week following the company’s announcement that it’s splitting the company into two with Ford Model e in charge of its EV business and Ford Blue handling its legacy combustion engine business. Ford outlined that it expects to produce two million EVs by 2026 and targets $50 billion in EV investment through 2026. For international markets, Ford said it would introduce three new electric passenger vehicles and four new electric commercial vehicles in Europe by 2024, adding it plans to sell more than 600,000 EVs in the region by 2026. As part of its push, Ford deepened its existing partnership with Volkswagen under which the U.S. carmaker will produce a second electric vehicle for the European market based on its German rival’s platform. This will include investments of $2 billion at Ford’s Cologne site in Germany.” BUY

Halliburton (HAL), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, is the mirror image of F so far, as energy stocks were very strong when we bought, and then pulled back sharply immediately afterward. So, short term, we bought the top. But the stock gapped up this morning, so the uptrend is still intact. In Cabot Growth Investor last week, Mike wrote, “HAL has pulled back somewhat sharply with most energy stocks, but it’s not broken (near the 25-day line) and the prospects for higher energy spending remain excellent.” BUY

Harley-Davidson (HOG), originally recommended by Carl Delfeld in Cabot Explorer, has a great American brand and is working on building another with its all-electric LiveWire motorcycle division, which will spin off into a SPAC later this year. In his update last week, Carl wrote, “HOG shares gained a point this week, finishing just under 40. One analyst has a projected upside for the stock over the next year of 30%. This leading motorcycle maker is banking on its LiveWire electric motorcycle to open new markets and recently reported a fourth-quarter profit that saw motorcycle revenue surge 54%.” BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was spun off from Merck in June 2021 and is a member of the S&P 500—but undervalued by the market according to Bruce. In his update last week, Bruce wrote, “The management and board appear capable, the company produces robust free cash flow, has modestly elevated debt and will pay a reasonable dividend. Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings. OGN shares fell 12% in the past week, mostly due to a sharp one-day 10% drop this past Monday. We have found no company-specific news, changes in analyst ratings or any other direct justification for the drop. Our best guess is that it occurred on a day when Chinese stocks fell sharply due to possible regulatory crackdowns. Organon has significant business in China and thus might experience similar regulatory pressure. The shares have about 42% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.5% dividend yield.” BUY

Pioneer Natural Resources (PXD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is hitting record highs today. As noted previously, the sector is strong now, but that won’t last forever, so we’ll just ride the trend until it ends. If you haven’t bought, try to get in on a pullback. BUY

Portillo’s (PTLO), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured two weeks ago, is a Chicago-based restaurant chain that came public last October and is planning on using the proceeds from that offering to expand from its current nine states to many more. After peaking at 57 in November, the stock corrected all the way down to 21, and as it recovers from that low, it looks like a good investment. BUY

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, was at a record high of 65 at the start of the year, but today it’s down 19% since then and thus a better value. In his update last week, Bruce wrote, “Sensata is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%. Investors undervalue Sensata’s durable franchise. Its sensors are typically critical components that generally produce high profit margins. As the sensors’ reliability is vital to safely and performance, customers are reluctant to switch to another supplier that may have lower prices but also lower or unproven quality. Sensata has an arguably under-leveraged balance sheet and generates healthy free cash flow. The relatively new CEO will likely continue to expand the company’s growth potential through acquisitions. Electric vehicles are an opportunity as they expand Sensata’s reachable market. ST shares have about 44% upside to our 75 price target.” BUY

TaskUs (TASK), originally recommended by Tyler Laundon in Cabot Early Opportunities, provides customer support and customer experience (CX) services to “new economy” companies like Zoom (ZM), Uber (UBER), Netflix (NFLX), Coinbase (COIN), DoorDash (DASH) and Meta Platform’s (FB) Instagram, among others. The stock came public last June, peaked at 85 in September, pulled back to the 30 area in January and February (where we recommended it) and then gapped up after the company’s fourth-quarter report was released three weeks ago. There should be plenty of upside ahead. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bottomed in the 800 area in January and February and toyed with its 200-day moving average for a while, but the buyers stepped back in last week, and if the market remains healthy, a return to its recent high of 1200 could come very quickly. Fundamentally, the company continues to build cars as fast as it can to meet surging demand, but Elon Musk is looking well into the future and recently announced that he will soon release Tesla Master Plan 3, which will give a view of his goals beyond cars and solar roofs. To recap, Tesla Master Plan 1, released in 2006, was:

1. Build sports car
2. Use that money to build an affordable car
3. Use that money to build an even more affordable car
4. While doing above, also provide zero emission electric power generation options

Tesla Master Plan 2, released in 2016, was:

1. Create stunning solar roofs with seamlessly integrated battery storage
2. Expand the electric vehicle product line to address all major segments
3. Develop a self-driving capability that is 10X safer than manual via massive fleet learning
4. Enable your car to make money for you when you aren’t using it

Clearly, Musk has not quite completed Master Plan 2, but I look forward to reading 3! HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, climbed back into its trading range between 55 and 60 last week, so I believe the worst is over for this stock. In Tom’s update last week, he wrote, “Yeah, this regional bank stock has been knocked down a lot this year. But I regard the stock as one that looks ahead to a friendly bank environment and growing profits over the course of the year that has been temporarily disrupted. The yield curve was actually flattening for a while. But it has since rebounded as the 10-year Treasury got back to over 2% again. Inflationary pressure remains and should push yields higher. It’s tough to say what the stock will do in the near term, but I expect it to be higher six months from now.” BUY

Veeco Instruments (VECO), originally recommended by Carl Delfeld in Cabot Explorer, was hitting new highs in early January and now it’s back in the middle of its uptrending channel, looking fine. In his update last week, Carl wrote, “VECO shares were up marginally and this stock, with its strong balance sheet and steady growth, has been an excellent place to invest in a volatile market, though it has also been a bit uninspiring. Veeco makes the equipment and technology essential for the chip fabrication game, a business with technological and high capital barriers to entry which leads to high margins and return on equity.” HOLD

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was hit hard by panic selling early in the Ukraine war, but it’s recovered that loss over the past two weeks, so all is well. In his update last week, Tom wrote, “Visa was a victim of the initial panic from the Russia/Ukraine situation as fears of a global economic slowdown took hold. But those initial fears are abating, and V is coming right back with a vengeance. Its business should grow sharply this year and the stock is still undervalued.” HOLD

The next Cabot Stock of the Week issue will be published on March 28, 2022.