March 29, 2021

The market’s divergent behavior continues, with small growth stocks in particular suffering, but there are still attractive investments, and for investors looking for something in the electric vehicle sector, today’s recommendation is one of them.

As for the current portfolio, I have two sell recommendations, both small, lightly traded stocks that are losing support.

Details inside.

Cabot Stock of the Week 341

The market divergence that has been evolving since early February continues, with the Nasdaq in particular looking weak while the more conservative indexes like the S&P 500 remain near their highs. From here, anything is possible, but my guess is that the correction spreads (and deepens) and eventually the party atmosphere that has propelled speculative investments like GameStop (GME), EV stocks and SPACs in general fades. I could be wrong, of course, but by following the action of the stocks, we are guaranteed never to be wrong for long. Today’s recommendation is one of those EV stocks that had a huge run in recent months, but it’s come back to earth, and the chart says it’s at a decent entry point today. The stock was originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and here are Carl’s latest thoughts.

QuantumScape (QS)
California-based QuantumScape is working on some breakthrough electric vehicle battery technology backed by some heavyweight industrialists as well as Volkswagen (VWAGY).

Current lithium-ion batteries are heavy, expensive to produce, don’t last all that long and take considerable time to recharge. QuantumScape believes they will fairly soon be rendered obsolete by solid-state batteries.

Let me explain why, though this is all a bit technical. Lithium-ion batteries are made up of three layers: a positive cathode and a negative anode, each with an electrical contact. Between them is a porous polymer separator, and the whole cell is flooded by a liquid electrolyte.

In a QuantumScape solid-state battery, there is only a cathode connected to an electrical contact through a solid-state ceramic separator. No anodes needed.

In layman’s terms, this means more energy can be stored in a smaller space, giving QuantumScape’s battery greater energy density.

Greater density means these batteries can achieve greater range, superior reliability and a longer life than their lithium-ion cousins. In addition, they’re also capable of charging to 80% in as little as fifteen minutes, half the time needed by the fastest Tesla Supercharger.

Even better, these batteries will be much cheaper than lithium-ion ones once production scales up because of fewer and cheaper materials.

The chief asset of QuantumScape is the backing of respected technologists such as co-founder and CEO Jagdeep Singh who was educated at Berkeley and Stanford University.

Next comes QuantumScape’s chief technology officer, Dr. Timothy Holme with degrees in physics and mechanical engineering from Stanford. Tesla co-founder J.B. Straubel and venture capitalist John Doerr are on the board as well.

You may recall that Doerr is famous for backing Google in 1999, turning a $12.5 million stake into $2 billion when Google went public. Bill Gates is also a prominent investor and is keenly interested in battery tech.

The next positive is the company’s partnership with Volkswagen (VWAGY), the largest automaker in the world and a big player in China where its sells about 40% of its vehicles. Volkswagen has partnered with QuantumScape for close to a decade and in 2018, the company set up a joint venture to make solid-state batteries

In 2020, Volkswagen invested $300 million in QuantumScape, securing 20% equity ownership of the company. When Volkswagen’s QuantumScape batteries go operational, Volkswagen and its brands such as Audi, Porsche and Bentley could offer cars with 450 to 500-mile range batteries.

This partnership could vault Volkswagen to the front of the pack of EV players. In 2020, fueled by its strong market position in both Europe and China, Volkswagen electric vehicle (EV) sales were up 200%. VW is also selling EVs in America as well as many other markets.

A third positive is the recent announcement that VW is ramping up its EV plans and that QuantumScape is now capable of producing multilayered battery cells. Its four-layer battery is still short of the 12 or so needed to be commercially viable. But the company is confident enough to build a “pre-pilot” production facility.

Last November, VW hiked its planned investment on EV technologies to 73 billion euros ($86 billion) over the next five years. Volkswagen also announced plans for a vast expansion in EV charging infrastructure. By 2025, it sees 18,000 public fast-charging points in Europe, a fivefold expansion from its coverage today. It’s also expanding public fast-charging networks in the U.S. and China.

QuantumScape’s stock was hot in late 2020 (as investors piled into EV stocks), climbing from around 20 to above 130 before coming back to earth in January 2021 and establishing a bottom at 40. Recently, the company executed a public offering of 10,400,000 shares of common stock causing its share price to pull back to 40 once more. This provides us with an attractive entry price.

Current Recommendations

The one best guide to what your stocks will do next is what they’re doing now—and that’s why I put so much emphasis on chart-reading. Today, for example, two of our stocks (both small and lightly traded) are headed the wrong way, which reinforces the message from the indexes that smaller growth stocks are in a troubling period, while bigger stocks still look healthy. So my response is simple: sell the weak ones (APi Group and Progyny) and hold the rest. Details below.

Changes
APi Group (APG) to Sell.
Progyny (PGNY) to Sell.

APi Group (APG), originally recommended by Tyler Laundon in Cabot Early Opportunities, released a fourth-quarter report last week that failed to impress investors, and the stock fell below its 50-day moving average (on big volume) in response. That led Tyler to recommend selling the stock (for roughly breakeven), but since then the stock has rallied, and now we have a choice: sell or hold. Holding is certainly possible; least week’s shakeout might be just what the stock needed before it could continue its advance. But I’m going to sell (and like Tyler, get out roughly even), because the volume on the rebound (Friday and today) has been light, and in this market, I want to get a little more defensive. SELL.

Barrick Gold (GOLD), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here last week, has pulled back minimally so is still a good buy here. In his update last week, Bruce wrote, “At about 20, Barrick shares trade at a sizeable discount to our value estimate of 27, based on 7.5x estimated 2021 EBITDA and on a modest premium to its $25/share net asset value. The combined dividends this year will produce a 3.7% yield. Although the company may not pay a special dividend next year, it could raise its recurring dividend to provide an above-market yield. We think Barrick has a much better future than the market is assuming. Shares have about 34% upside to our 27 price target. On its recurring $0.09/quarter dividend, GOLD shares offer a reasonable 1.8% dividend yield.” BUY.

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a large growth stock that has recovered nicely from its post-earnings selloff a few weeks ago—but has yet to hit a new high. In his update last week, Tom wrote, “I’m not sure about this one in the near term. Performance is somewhat dependent on the tech sector, and I don’t know if it has more downside in the weeks ahead. But even if there is weakness over the next few weeks, I like AVGO’s prospects very much in the months ahead. The company will benefit from the 5G rollout as that inevitably becomes a bigger story in the market down the road a little bit.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, may be slow, but it did hit a new high last week (by three cents). In Tom’s latest update, he wrote, “Someday soon BIP will break out to higher price level. BIP has been bouncing around and getting nowhere for months now. It’s a defensive income stock holding its own while investors neglect such plays during the cyclical stock rally. But the market always changes stripes eventually. Profits should soar as cyclical areas in transportation and energy rebound. New assets purchased on the cheap last year will come online and boost earnings. And infrastructure will likely be an increasingly popular subsector as Washington increases the focus” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, doesn’t report earnings for another 21 days, but the stock is definitely acting a little better. In his latest update, Bruce wrote, “Coca-Cola’s subdued near-term revenue and profit outlook is somewhat driven by pandemic-related lockdowns, particularly outside of the United States. Consensus estimates point to 10% revenue and earnings-per-share growth in 2021. Another overhang is the tax dispute that could cost as much as $12 billion – we don’t see an immediate resolution but consider $12 billion to be a worst-case scenario. Coke will likely continue to generate robust free cash flow in 2021. The risk of fresh lockdowns and delayed re-openings in Germany and possibly other European countries will likely push out the full recovery of Coca-Cola. The stock has about 25% upside to our 64 price target. While the valuation is not statistically cheap, at 23.9x estimated 2021 earnings of $2.15 (unchanged in the past week) and 22.0x estimated 2022 earnings of $2.33 (unchanged), the shares are undervalued while also offering an attractive 3.3% dividend yield.” BUY.

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, has a great growth story and the current pullback to the 50-day moving average presents a decent entry point. In last week’s update, Mike wrote, “DKNG has pulled in some after nosing to new highs last week (not a surprise, as selling near new-high ground is typical in sour environments), but we think the stock still looks fine, holding north of its 50-day line despite the market and a good-sized convertible note (dilutive) offering last week. Near term, March Madness (NCAA basketball) is likely to goose sports betting totals where it’s legal (one industry outfit sees $1 to $1.5 billion in legal wagering on the overall event), and longer term, analysts continue to up their projections for certain states once they’re legalized (one said New York could eventually be a $3 billion revenue opportunity with DraftKings the lead dog; the company already has a deal in place with an existing casino to enter the market when legalization occurs). It’s possible the stock continues to fade if the correction persists, but we think DKNG has all the makings of a new leader in a gigantic new industry for the next uptrend. A dip into the mid 50s could trip our loss limit, but right here, we’re OK picking up a few shares if you’re not yet in.” BUY.

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, closed at a record high last Friday—for good reason! In his update last Thursday in Cabot Growth Investor, Mike wrote, “FIVE reported a terrific Q4 late last week (the 13.8% gain in same-store sales was the firm’s best result in a Q4 ever!), and the outlook for Q1 was much better than expectations, too. But more important to us is that the fundamental picture is brighter than ever—not only is the store growth plan back on track (175 new stores this year, 34 of which are have already opened), but the forced (by the pandemic) investments in its digital operations (website, delivery, curbside pickup) and the launch of the company’s Five Beyond theme (prices up to $10—in 140 stores at year-end, a figure that should double this year) lengthens the runway of growth. (It also doesn’t hurt that in January management effectively said its prior store target of 2,500, from 1,000 in December, is likely conservative.) Of course, in this market environment, good news means little, and FIVE has hacked around since the report as it battles with round number resistance near 200. Thus, we’re not complacent, but we think the stock wants to head higher once this correction finishes up. We’ll stay on Buy, but keep new positions on the small side.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, remains in a minor correction. In his update last week, Bruce wrote, “General Motors is estimated to produce about 14% higher revenues in 2021, but earnings are expected to increase only about 6% (to about $5.21) due to near-term headwinds from tight semiconductor chip supplies. GM Financial will likely continue to be a sizeable profit generator. President Biden may be favoring a proposal to require the phase-out of the sale of gas-powered cars by some future date, perhaps 2035. It is impossible to say today how such a policy would impact GM’s value, although any acceleration of EV adoption should help GM, as its under-funded and behind-the-curve competitors would fall away more quickly. However, such a mandate would be unprecedented in its sweeping impact on the U.S. economy, would face immense logistical hurdles and could easily be repealed or diluted by future administrations of either party. Sales of EVs will eventually fully replace sales of gas-powered cars at some point in the future, but we see little likelihood of this happening over the next 15 years. China’s new policy of banning Tesla vehicles for military use is intriguing. If it is a first step, future steps could include ultimately banning sales of vehicles made by any non-Chinese company. We see little likelihood of this outcome but are placing it as a marker to watch. The semiconductor chip shortage was worsened by a fire at a chip factory in Japan owned by Renesas Electronics. The (relatively) good news is that damage was minimal – and will mostly require the cleaning of the particle-free environment inside the facilities. GM shares have 9% upside to our 62 price target.” HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, remains a long-term hold, as growth prospects remain great for the largest operator of hotels in China. Last Wednesday saw the release of fourth-quarter results. Revenues were $471 million, up 13% from the year before, while earnings were nonexistent. But looking forward to 2021, the company expects revenue growth of 50% to 54%! HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, is now working on it seventh consecutive up day, a sign that the trend has truly changed here. In his update last week, Bruce wrote, “Molson is estimated to produce about 5% revenue growth and a 1% decline in earnings in 2021. Profit growth is projected to increase to a 5-6% rate in future years. Weakness this year is closely related to the sluggish re-opening of the European economies, along with higher commodity and marketing costs. The company will likely reinstate its dividend later this year, which could provide a 2.9% yield. The risk of fresh lockdowns and delayed re-openings in Germany and possibly other European countries will likely push out the full recovery of Molson Coors. TAP shares have about 21% upside to our 59 price target. Earnings estimates remain stabilized, with a 1-cent decline in the 2021 estimate but a 1-cent increase in the 2022 estimate. TAP shares trade at 12.6x estimated 2021 earnings of $3.87. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.9x current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies.” HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has found support at 70 twice over the past month, but there’s no sign yet of the buying power necessary to kick off a renewed uptrend. In his update last week, Tom wrote, “This combination regulated and alternative energy utility stock is a simple story right now. Its normally relentless rise ever higher has been interrupted by investors’ focus on cyclical stocks. It has been a rare blip for NEE. But defensive stock investing will come back in vogue. And alternative energy will also come back and likely accelerate with the increased focus from Washington.” BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, was hit hard by the growth stock selloff a few weeks ago and while it’s recovered some of that loss, the stock still sits just below its 50-day moving average. In his update last Thursday, Mike wrote, “PINS was beginning to show a little bit of relative strength, calming down and holding up fairly well during the Nasdaq’s latest dip, though today wasn’t as encouraging. Even so, barring a massive market meltdown, we still see this stock as likely to have another fruitful leg up over time. The reasons: Fundamentally, the main story of Pinterest gaining an increasing share of online ad dollars is playing out as expected (a small analyst shop yesterday said its channel checks are pointing to that), and technically, it’s hard not to ignore the fact that the stock has suffered just four above-average volume down weeks since its breakout last September—and two of those closed near the highs of the week, which is usually a sign of support. As with everything else, there’s nothing that says the stock can’t bite the dust, but we like to play the odds, and PINS’ top-notch growth story, pristine numbers (analysts see earnings up 100% this year and nearly 50% more in 2022—both of which are likely conservative) and acceptable correction thus far have us sitting tight.” HOLD.

Progyny (PGNY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a fertility benefits provider with a great growth story. But the stock, which is fairly lightly traded, acts squirrely sometimes, and now it represents the biggest loss in our portfolio. Thus, I’m now recommending selling (Mike has already done so) and maybe we’ll come back when conditions are better. SELL.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, is now on a 30% correction, well below its 50-day moving average and potentially heading for its 200-day moving average. But Carl is resolute—and says this is a good buying opportunity. In his latest update, he wrote, “Shares are under some pressure and are down significantly from their high, though Sea’s strategy and numbers remain impressive. Sea’s gaming group continues to grow its user base. Sea has 610 million quarterly active users and is growing at an annual rate of 120%. The company’s Free Fire game is often voted the number one most downloaded game in the world. E-commerce is Sea’s second growth engine, with gross merchandise value of $12 billion last quarter and a billion orders last quarter. We have taken profits several times over the remarkable rise of this stock but with this sharp pullback, I upgraded this stock back to buy from a hold in last week’s issue, and we’ll maintain that buy rating.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, looks a lot like SE, and that’s not surprising considering that both stocks were top performers in 2020. Short-term, I expect nothing from this stock, but long-term, I still think holding will pay off. Long-time readers will remember that we spent six years holding patiently (with a comfortable profit cushion) before the stock blasted off in late 2019. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, continues to have one of the best-looking charts in my marijuana portfolio. And there’s good reason why. On Monday of last week, the company announced that it had entered into a definitive agreement to acquire Mountaineer Holding of West Virginia. Mountaineer brings a cultivation permit and two additional dispensary permits to Trulieve, resulting in six dispensaries throughout the state. Also, Trulieve announced it had begun planting at its Holyoke, Massachusetts cultivation and processing facility and expects the first harvest in the second half of 2021. Then on Tuesday before the open, the company announced fourth-quarter revenues of $168.4 million, up 111% from the previous year, and EPS of $0.32, for its 12th consecutive quarter of profitability. Trulieve opened 11 new retail dispensaries in the fourth quarter, ending the year with 75 stores in the U.S. and ended 2020 with a 49% market share in oil and 53% market share in flower in the state of Florida. Lastly, the company estimates 2021 revenues in the range of $815 million to $850 million, and $355 million to $375 million in adjusted EBITDA. If you don’t own the stock you could nibble here, but the sector as a whole is still under pressure, so I’ll keep it rated Hold. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is once again below its 50-day moving average—and that moving average may be turning down. In last Thursday’s update Mike wrote, “UBER remains very tedious, falling a few points after again being rejected by the 60 area, partially due to its exposure to Europe and the poor vaccine rollout (and new shutdowns) going on in various cities over there. Even so, the stock is still basically range bound, and that range is sitting on top of the massive November blastoff. And, at least in North America, business is cranking ahead beautifully, with bookings rising strongly for the Rides business (March was shaping up well as of the last update) and Delivery continuing its hot (generally triple-digit) growth track. A drop into the upper 40s would be very iffy, but right here we advise patience as the stock meanders its way through this consolidation.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explore, has been our most volatile stock in recent months, blasting from 23 to 63 and then falling back to 24 where it bounced off its 200-day moving average—but long-term prospects remain bright. In his update last week, Carl wrote, “SPCE shares, after a rebound last week, came back a bit this week and are trading at about half of their 2021 high. Given that the company has faced delays due primarily to the pandemic, that we have taken profits several times, and that the share price is four times our entry point, I’m keeping this stock a hold. The company is spending around $16 million per quarter and has over $660 million in cash, counterbalancing concerns that the company’s next test flight will not take place until May.” HOLD.

The next Cabot Stock of the Week issue will be published on April 5, 2021.

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