March 8, 2021

The Dow was up big today but growth stocks are still having a rough time, and I’m growing increasingly concerned that the broad market will eventually roll over, too. The news has been so good, and investors have become so bullish, that eventually we’re going to need a big correction.

Last week I recommended selling four stocks and this week I’m recommending selling two more.

In the meantime, I’ve got to recommend something to buy; that’s the name of the publication! So today’s recommendation is a little-known small company in a solid industry that will likely be substantially larger in years to come.

Details inside.

Cabot Stock of the Week 338

The Dow was up big today as investors flooded into the stocks of big companies that are expected to benefit from the economic reopening, but growth stocks in general remain under pressure, so I recommend minimizing buys in this sector until the picture improves. For today’s recommendation I went looking for an attractive chart of a lesser-known company with a solid core business and I found it in Tyler Laundon’s latest issue of Cabot Early Opportunities. Here are Tyler’s latest thoughts.

APi Group Corporation (APG)
My quest to add some growthy stocks with a cyclical dimension and downside protection brings us to APi Group. It’s best known as a provider of fire safety and sprinkler systems, but the business is really a diversified provider of safety (43% of revenue), specialty (36% of revenue) and industrial (21% of revenue) services to customers in the U.S., Canada and U.K.

End market customers come from commercial, high tech, manufacturing, medical, utilities, infrastructure, telecom, energy, security and defense markets and more. The company has a market cap of $3.7 billion.

At the low end of the project size spectrum are safety services (backflow devices, controls, lighting, fire suppression, alarm and detection systems, HVAC systems, security systems, etc.) which have an average project size near $10,000.

Specialty services (fiber optic and cellular installation systems, water lines and sewer systems, insulation, ventilation and temperature control systems, etc.) tend to cost around $60,000, while industrial services (oil pumping stations, gas compressors and transmission and distribution services, etc.) come in closer to $725,000 per project.

One of the key attributes of APi Group is the recurring nature of its revenue base. The types of services it provides are not optional. Regulations, public awareness about safety and legitimate concerns of “what ifs” drive an ongoing cycle of inspections. These lead to installations, maintenance, upgrades and design/engineering and fabrication work.

This means a lot of potential recurring service revenue (mostly maintenance and inspection), which APi group is working hard to capture. It is doing well – recurring service revenue is approaching 50% of total revenue.

The business is well diversified. No customer accounts for over 5% of revenue. But there are some big names on the client list, including Google, Microsoft, Walmart, Verizon, Shell, Pfizer, Disney, Apple, AT&T, Honeywell and Facebook.

Big picture, this company should do well as the economy recovers, but it is also not likely to implode if and when things slow down. Even when industrial activity stalled in 2015 and 2016 APi Group’s revenue inched a little higher.

That said, 2020 is an outlier since so many businesses were forced to temporarily shut down and/or scale back operations. After growing revenue by 10% in 2019 revenue in 2020 is likely to have declined by 13%, to $3.5 million. That result is based on management’s preliminary 2020 results, which were released on February 15. Official results will come out in a few weeks. Estimated adjusted EPS for 2020 is $1.15.

Management also issued preliminary guidance for 2021 that calls for revenue of $3.65 billion to $3.75 billion, implying growth of 6% at the high end. That guidance gels with analyst expectations. The growth rate won’t snap your head back but investors would be right to assume this is probably conservative guidance, and APi Group’s chart suggests investors are snapping up shares. Estimated adjusted EPS for 2021 is 1.23.

APi Group entered 2021 with $515 million in cash and equivalents and has added roughly $244 million more to the balance sheet through the mandatory redemption of warrants. This war chest of $759 million means management has a lot of options for investment in the quarters ahead.

APG came public on April 29, 2020 through a merger with the SPAC J2 Acquisition Limited. Shares closed at 10.4 on the first day, retreated to 9 within a couple of weeks and then took off. They’ve made a series of higher highs and higher lows since, mostly above the 50-day line.

The pullbacks have been getting smaller, with the first (July 2020) a 25% decline and the most recent (February 2021) just a 7% decline. APG has been strong since preliminary results were released and trades just below its all-time high.

Current Recommendations

The ongoing selling of growth stocks continues to damage our portfolio and as a result, we are selling two more stocks today. This increases our cash position a bit more, which feels right given that the market as a whole is increasingly ripe for a major correction. Details below.

Changes
ElectraMeccanica Vehicles (SOLO) to Sell
NextEra Energy (NEE) to Buy
Spotify (SPOT) to Sell

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, and featured here two weeks ago as it dipped to its 50-day moving average, is a little lower since then so it’s still a good buy. In his update last week, Tom wrote, “This technology company stock continues to trend consistently higher since last March with very few hiccups along the way. And 5G is coming. Technology continues to expand and proliferate. New technologies from 5G are also likely to boost profits. And 5G will likely become a bigger market story in the post-pandemic environment. In anticipation, the stock’s uptrend has significantly steepened over the past year.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, continues to track its 50-day moving average higher. In Tom’s latest update, he wrote, “Utilities, which BIP technically is, have been the worst performing stocks for the past three-month, YTD, and one-month periods. Investors have been dumping more defensive stocks. That’s okay. The longer-term uptrend is very much intact and BIP is near the low point of the recent range. This year should be good as earnings in the transportation and energy sectors rebound and $2.5 billion in acquisitions from last year also boost earnings.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, gapped up at the open today as investors gravitated toward large-cap stocks that should benefit from the economic reopening. In his latest update, Bruce wrote, “Full year 2021 guidance is for organic revenue growth of 7%-8% and adjusted earnings per share growth of 9%-12%. This could well be conservative, particularly if the reopening is strong this summer. The company alerted investors to a potential $12 billion settlement for its outstanding tax matter. This is a worst-case scenario and much higher than our initial estimate, but we see little chance of a final loss this large. Coke repaid about $11 billion in debt from cash on hand and will likely continue to generate robust free cash flow in 2021. The stock has about 28% upside to our 64 price target. While the valuation is not statistically cheap, at 23.2x estimated 2021 earnings of $2.15 (up a cent in the past week) and 21.5x estimated 2022 earnings of $2.32 (unchanged in the past week), the shares are undervalued while also offering an attractive 3.4% dividend yield.” BUY.

ElectraMeccanica Vehicles (SOLO), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, was a speculation from the start, and there was a chance that, being lower-profile than the more visible electric vehicle companies, the stock might hold up as the sector and market corrected. But it hasn’t, and now we need to cut our loss before it gets worse. In his update last week, Carl wrote, “Shares retreated from 6.6 to 5.6 this past week and given the sharp pullback in EV shares and that we have taken profits at significantly higher price points, I think we should exit this stock and wait for another entry point. This is an aggressive electric vehicle play, way ahead of the fundamentals, which is why I have been recommending taking some profits.” SELL.

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, bounced off its 50-day moving average last Friday so can still be bought here. In his latest update, Mike wrote, “FIVE gives us some exposure to the cyclical/re-opening theme, which is where the money has been flowing during the past couple of weeks—and that’s a big reason the stock has been relatively resilient…. Of course, bigger picture, it’s going to be the firm’s growth story that really drives the stock, and the next update on that should be out in a couple of weeks (mid-March). Analysts see Q4 sales up 22% and earnings of $2.11 per share (up 8% from a year ago), but more important will be the full-year outlook (analysts currently see $4.04 per share, up 91%). With FIVE acting well, we’ll stay on Buy, but expect further shenanigans in the near-term.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, nearly touched its 50-day moving average last Friday (after seven weeks of sideways action), and this morning it was up strongly, aiming for its old high of 57. In his update last week, Bruce wrote, “Last week, GM said that the worst of the chip shortage, from its perspective, may be behind it. The company’s CFO said this improvement increases GM’s chances of meeting its revenue and earnings guidance for the year. The company is only moderately vulnerable to small increases in interest rates as this headwind would be overpowered by the strengthening job market. However, large increases in interest rates, which would push 10-year Treasury yields to, say, 3%, would risk an economic slowdown. Also, it might reduce the value of GM Financial’s loan portfolio even though the segment would generate higher spread profits (borrowing at low short-term interest rates while lending at higher longer-term interest rates). GM shares rose 1% in the past week, with 18% upside to our 62 price target. With some settling of last week’s market volatility, the shares appear to be recovering. On a P/E basis, the shares trade at 8.4x estimated calendar 2022 earnings of $6.26 (down about 1% this past week). The P/E multiple is helpful, but not a precise measure of GM’s value, as it has numerous valuable assets that generate no earnings (like its Cruise unit, which is developing self-driving cars and produces a loss), its nascent battery operations, its Lyft stake and other businesses with a complex reporting structure, nor does it factor in GM’s high but unearning cash balance which offsets its interest-bearing debt. However, it is useful as a rule-of-thumb metric and we will continue its use here. Our 62 price target is based on a more detailed analysis of GM’s various components and their underlying valuation.” HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, remains a long-term hold, as I think growth prospects are great for the largest operator of hotels in China. Since hitting a record high three weeks ago, the stock has pulled back normally and remains above its 50-day moving average. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, sold off four weeks ago after a disappointing quarterly report and remains below its 50-day moving average. In his update last week, Bruce wrote, “TAP shares slipped 1% in the past week and have about 31% upside to our 59 price target. The shares are incrementally more attractive because of the price drop, not less. We see no change in the company’s longer-term prospects regardless of the earnings report, and now have a chance to buy more shares at a lower price. Earnings estimates stabilized this past week and the 2022 estimate ticked up a cent. TAP shares trade at 11.6x estimated 2021 earnings of $3.87 (unchanged this past week). 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 8.3x 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. Patience is the key with Molson Coors.” HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, continued to fall last week as investors turned away from utility stocks in the face of rising rates, and now Tom thinks it’s a good buy! In his update last week, he wrote, “This bull market has not been kind to utility stocks so far. It is the worst-performing sector of the S&P 500 for the past one-year, YTD, three-month and one-month periods. But NEE is such a great stock that it had been immune to weakness in the sector and outperformed the market anyway, until this latest cyclical stock bender has taken down even this juggernaut. NEE pulled back more than 15% from the high in January. That’s rare. But it means it’s a great time to buy. This temporary phase in the market won’t last forever. Meanwhile, NEE is one of the most highly desired large stocks on the market and alternative energy will likely be a bigger story going forward. NEE was upgraded to a BUY last week.” I’ll upgrade it too. BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, has now been correcting for three weeks, and as with many pure growth stocks, the correction has grown rather nasty, taking the stock well below its 50-day moving average and leaving it at 65, a level where the stock has found support over the past three months. Potentially, the stock will see buyers step in here. But if the stock falls off this support level, we’ll have to sell and preserve our profit. HOLD.

Progyny (PGNY), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is a fertility benefits provider with a good growth story, but we remain under water in the stock thanks to the selling in growth stocks. PGNY fell as low as 39 last Friday but buyers stepped in and brought it back to the 43 level, where it has been basing over the past week. If it can hold here, I’ll hold, too. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, is another growth stock that sold off last week, and now it’s below its 50-day moving average for the first time since last April. In his latest update, Carl wrote, “The company reported fourth-quarter and full-year 2020 numbers with 101% year-over-year revenue growth. Revenue increased to $1.6 billion in the last three months of 2020 from $777.2 million a year earlier while its net loss widened to $523.6 million from $283.8 million. Sea’s e-commerce business’s fourth-quarter sales increased 178% to $842.2 million and the company expects e-commerce revenue to double in 2021.” HOLD.

Spotify (SPOT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has fallen along with other high-growth stocks and now it’s time to cut our loss short. Yes, the fundamental story is still intact, but it doesn’t pay to argue with the market. Technically, the stock’s next real support looks to be at 230. Downgrading to Sell. SELL.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to cool off, as investors move money into younger contenders in the electric vehicle industry and investors who got into TSLA late exit with losses. Long-term, however, the future for the company remains bright, so if your position is not excessively large, I continue to recommend holding. Technically, the 50-week moving average shows support at 430. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, remains above its 50-day moving average, so it is definitely acting better than most stocks in the sector. But I remain concerned that the sector is in a correction phase so the best I can rate it now is a hold. In my update to readers last week, I wrote, “I’ve often mentioned that Trulieve’s long record of profitability makes the stock a favorite of institutional investors, and the action of the stock recently supports that, as TCNNF is just 8% below its high of three weeks ago. Still, until we see a true breakout, ideally on big volume, I’m skeptical. Today the company, which has more than half the market for medical marijuana in Florida and expects to get a big chunk of the recreational market when it opens, announced the opening of new dispensaries in Clearwater and Tampa, the company’s 81st and 82nd nationwide.” HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, remains a bit below its 50-day moving average but it’s found support in this area so there’s hope. In last week’s update Mike wrote, “UBER is actually still holding above its lows from last week, partially thanks to a bullish note from peer Lyft, which said its rideshare traffic volume hit its highest level at the end of February since the pandemic hit last March (and it also nudged up Q1 estimates, too). At heart, we think Uber’s big 2021 should keep big investors involved on dips, and if it can get through this rough stretch, there could be plenty of upside in this blue-chip-type name. Still, we’re playing this by the book—a drop back into the upper 40s would likely force our hand and have us cut bait. For now, we’re willing to give UBER a chance to hold up.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has a roller-coaster chart; it started the year at 23, zoomed up to 63 in five weeks, and then fell steadily back for four weeks, tagging 24 last week. Part of the reason for this volatility is the normal over-reaction that drives small concept stocks but part is actual fundamentals. In his update last week, Carl wrote, “SPCE shares were hit by an announcement that the company’s next test flight will not take place until May. This delay of Virgin’s next powered test flight of its SpaceShipTwo vehicle pushes any potential revenue into the fourth quarter of 2021 and was not received well by the market. If the next retest is successful, the company plans a second powered flight, a key step needed before revenue-generating commercial flights can begin. Shares more than doubled in the first month of 2021 and we took some profits, so we will hold the remaining shares for now.” HOLD.

The next Cabot Stock of the Week issue will be published on March 15, 2021.

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