September 27, 2021

The market has recovered remarkably quickly from last Monday’s sharp selloff. Thus, the long bull market remains intact and I continue to recommend that you be heavily invested.

Today’s featured stock is another conservative one, with a good yield, and in an industry that’s truly unloved. And that means its valuation is dirt cheap.

As for the current portfolio, I am selling our biggest loser, DocuSign (DOCU), and downgrading Tesla (TSLA) to Hold.

Details inside.

Cabot Stock of the Week 367

Last Monday brought the market’s biggest selloff since the spring, but the rebound since then has been impressive, telling us this long bull market is not over yet. Thus, I continue to recommend that you be heavily invested in a portfolio that meets your investment needs. And I continue to preach the benefits of diversification. Today we venture into the unloved oil and gas industry, where some real bargains can be found. The stock was originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and here are Bruce’s latest thoughts.

ConocoPhillips (COP)
Our interest in oil and natural gas exploration and production (E&P) companies has been warming up lately. Many of these stocks are beaten down, yet oil prices have remained resilient, leaving producers like ConocoPhillips meaningfully undervalued.

Four issues are weighing on E&P stocks like ConocoPhillips. First, investors are increasingly looking to avoid climate-unfriendly companies. Also, investors have little interest in exposure to volatile and unpredictable oil and gas prices, especially since the entire energy sector has a tiny 2.6% weighting in the S&P 500 index. Another concern is that company managements will lose their newfound capital spending discipline. Lastly, there is always the risk that OPEC+ opens their oil production spigots, sending oil prices down.

Yet, supporting energy prices is resilient demand, which has nearly returned to pre-pandemic levels despite still-subdued jet fuel and gasoline demand. Despite urgent calls for alternative fuels to help mitigate climate change, the challenges to reducing the reliance on carbon-based energy remains daunting, with a wholesale shift likely to be slow-moving and measured in decades.

Subdued supply growth should also support oil prices. Major global energy companies are under increasing pressure to reduce their production to help fight climate change. And, following years of aggressive drilling in the U.S., shale oil’s most productive days may be in the past. If so, domestic production, now running about 15% below 2019 levels, may be permanently lower. These supply/demand dynamics imply more reliance on OPEC, which historically has been bullish for oil prices.

Given this, we see a contrarian opportunity in ConocoPhillips. The company is the world’s largest independent E&P company, with most of its production in the United States, Canada and Australia. With the news that it is acquiring Royal Dutch Shell’s Texas assets for $9.5 billion in cash, we believe the time to buy has arrived.

We like Conoco’s low valuation at about 5x EV/EBITDAX1. It also offers a free cash flow yield of close to 12% – an indicator of the company’s strong cash production as well as its discounted price. Most analysts have oil prices of perhaps $55-$60/barrel in their earnings estimates, implying that profits and cash flow will be stronger than estimated, as oil has traded close to $70/barrel for most of the year so far.

While it is spending most of its $9 billion cash hoard on its Texas asset purchase, we see its strong free cash flow leading to a rebuilding of its already-investment-grade balance sheet. Importantly, Conoco’s low-cost structure allows it to fund maintenance capital spending and its dividend at sub-$40 oil.

Conoco has publicly stated that it will limit its capital spending to 50% of its annual cash flow, even after the deal. Management is unlikely to renege on this commitment. For perspective, at $50 oil, the company guided for a $75 billion return of capital to shareholders over the next decade, essentially equal to its current $76 billion market cap. While this full return of capital is unlikely, the analysis illustrates the deep value offered by the shares, particularly as oil now trades above $70/barrel. Conoco shares currently have a dividend yield of about 2.8%, offering a respectable base-level cash inflow to shareholders that appears rock-solid.

We have an 80 price target on ConocoPhillips shares. The stock has jumped on the Texas acquisition news, so investors may want to buy a partial position now, then wait for any pullbacks.

Current Recommendations

Amateur investors typically like to take profits in their winners, because it feels good, but they hold onto losers, waiting for the stocks to come back so they can at least break even. The result is that they often have a portfolio full of losers—and that’s the wrong way to do it. Instead, it’s best to sell losers, and let the winners run, so the profits can get bigger! Today, our only sale is our biggest loser, DocuSign (DOCU). Details below.

Changes
DocuSign (DOCU) to Sell
Tesla (TSLA) to Hold

Ambarella (AMBA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, makes state-of-the-art computer vision chips that are in great demand by intelligent vision systems. In Cabot Growth Investor last week, Mike wrote, “AMBA’s four-year investment spree has led to new and unique computer vision chips; as millions of new autos have a ton more cameras and as millions of legacy security cameras are upgraded to smart cameras, demand could explode for at least a couple of years. The stock’s liftoff on earnings was something else (17x average volume!) and it’s actually piled on more big gains this week. We’re not chasing it here but something special seems to be happening, so it’s worth monitoring.” BUY

ASML Holding (ASML), originally recommended by Mike Cintolo in Cabot Growth Investor, is a Dutch manufacturer of high-end photolithography machines in high demand by semiconductor manufacturers—which, as we all know, are working as quickly as possible to fulfill the world’s demand for chips. The stock has been hot, and the current correction to the 25-day moving average presents a decent buying opportunity. BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been knocking on the ceiling at 500 since February, and while it’s spent more time above that level than below it in recent weeks, it still hasn’t been able to pull away—yet. In his update last week, Tom wrote, “This chipmaker stock has been a lackluster performer since the tech rally petered out in February. That said, AVGO is still very near the all-time high despite the precarious market. It’s been behaving better on a relative basis since it announced strong earnings that beat expectations earlier this month. I believe in Broadcom. It should continue to benefit from the 5G rollout over the next several quarters while it’s also built for long-term growth.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, tagged its 200-day moving average, presenting a good buying opportunity, and is back in its uptrend today. In his update last week, Tom wrote, “Business is good for this infrastructure partnership. Between the rebound in transportation assets in the recovery, new projects coming online, and the recent Inter Pipeline acquisition, earnings should grow nicely in the quarters ahead. But the stock has behaved true to form. It always pulls back and consolidates after making a new high. It’s just the nature of the beast.” HOLD

ChargePoint (CHPT), originally recommended by Carl Delfeld in Cabot Explorer, is a small stock that’s likely to be volatile—but in recent weeks it’s been basing calmly at 20. In his update last week, Carl wrote, “ChargePoint shares are way off their 2021 highs despite reporting that the most recent quarterly revenue grew 61% year over year. ChargePoint has developed an EV-charging network that offers drivers in North America and Europe more than 118,000 places to power up their EVs. It is the leading North American Level 2 charging network, which uses 240-volt power. It also has more than 2,000 publicly available fast-charging stations and is growing its network in European countries. This lead is a huge advantage because of network effects as the company already has partnerships with more than roughly 60% of the Fortune 50 companies. Therefore, while competition is intense, I believe that the stock can be accumulated at its current levels.” BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, has been hanging just under its 50-day moving average for the past week. In his latest update, Bruce wrote, “Last week, at Cisco’s first Investor Day in four years, the company provided color on its strategy and financial targets. Cisco is targeting 5-7% revenue growth and non-GAAP EPS growth through FY2025 and reiterated its policy of returning at least 50% of free cash flow to shareholders through dividends and share repurchases.

While the revenue and EPS targets imply no margin expansion (a tad disappointing), we believe that this is intentionally conservative, as Cisco’s management is highly skilled in managing investor expectations. In terms of revenue growth, there appear to be enough opportunities from organic and inorganic sources to meet their target. As Cisco shares rely on revenue growth, the size of the target (respectably strong but not an overreach) is somewhat of a confidence-builder, although we consider revenue growth to be acquirable and thus the target is of lower quality than if it had said ‘organic’ revenue growth of 5-7%.

The company is emphasizing recurring subscription software growth and is changing its salesforce compensation structure to help drive this growth. Cisco said its current markets are about $150 billion in size and growing 5%, with ‘expansion’ markets being $140 billion in size and growing 18%. Adjacent markets are about $500 billion in size. We see Cisco continuing its acquisitions, perhaps at a stepped-up pace, in the expansion and adjacent markets.

Overall, following the Investor Day, the story continues to look worthwhile enough on the fundamentals and current share valuation to stay involved. CSCO shares have about 8% upside to our 60 price target. The shares trade at 16.2x estimated FY2022 earnings of $3.43 (unchanged in the past week). On FY2023 earnings (which ends in July 2023) of $3.68, the shares trade at 15.1x (unchanged). On an EV/EBITDA basis on FY2022 estimates, the shares trade at a 11.5x multiple. CSCO shares offer a 2.7% dividend yield. We continue to like Cisco.” BUY

Dexcom (DXCM), originally recommended by Mike Cintolo in Cabot Growth Investor, is a leading maker of diabetes monitoring and controlling tools and the stock has been very strong, hitting another new high last week. In his update last week, Mike wrote, “DXCM isn’t the fastest horse, but it looks fine, trending higher above its 25-day line. The new G7 CGM, set to be released later this year, should drive a new, multi-year growth wave.” BUY

DocuSign (DOCU), originally recommended by Mike Cintolo in Cabot Growth Investor, remains the biggest loser in the portfolio and it’s moving even lower today and thus I’m going to sell. In his update last week, Mike debated selling it, but chose to give it a little more rope, but odds are he will soon sell, too. SELL

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, still has a beautiful chart, hitting more new highs last week. In his update then, Mike wrote, “There have been some worries that sky-high prices and a general lack of inventory (just 2.6 months of supply!) will crimp the housing market, but some forward-looking indicators (especially mortgage activity and building permits) point to continued healthy demand, and some company-specific measures (like traffic to Floor & Décor’s website) also point to strength—and likely making the forecasts for flat-ish growth for this company in the second half of this year (due to tough comparisons) much too low. Whatever the reason, FND continues to act well, with a brief shake to its 25-day line (and 10-week line) during Monday’s mayhem leading to a solid rebound back to its prior highs. Like a lot of names we see, it looks like this stock wants to get going following many months of ups and downs … but the overall market will have a lot to do with it. We’re sticking with our Buy rating, but given the environment, new buyers should aim for dips of a few points.” BUY

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has now put together five consecutive up days, which is encouraging. In his latest update, Bruce wrote, “GM said that it has resumed battery production for the Chevy Bolt, and that it will begin shipping replacement batteries next month. But a new problem has arisen, as GM is part of a group of nearly two dozen vehicle manufacturers involved in a U.S. government probe of 30 million faulty airbags made by Takata. The government said that ‘no present safety risk has been identified,’ but that further work is needed to evaluate future risk. We are sensing that third-quarter results could be a bit sloppy for GM and the car industry overall, as chip supplies continue to create a drag on production. GM shares have 39% upside to our 69 price target. On a P/E basis, the shares trade at 7.2x estimated calendar 2022 earnings of $6.92 (down 2 cents this past week). On estimated 2023 earnings of $6.80 (unchanged), the shares trade at about 7.3x. Investors appear to have little confidence in the 2023 estimate, as the estimates suggest that profits will peak yet essentially remain stable next year.” HOLD

Global-E Online (GLBE), originally recommended by Tyler Laundon in Cabot Early Opportunities, is a young stock that’s likely to be volatile, but the company is growing fast in the world of direct-to-consumer cross-border e-commerce software, and the stock is once again above its 25-day moving average. BUY

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, hit a record high last week! HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, came very close to hitting a new high last week, and all indications are that it will achieve the feat soon. In his latest update, Carl wrote, “Shares have been stuck in a trading range over the past month. On a year-over-year basis, Marvell earnings in the recent quarter jumped 62% while sales surged 48%. The stock is up about 45% since May. Credit Suisse upgraded the stock, calling Marvell ‘one of the most strategic assets in semiconductors.’ Marvell’s semiconductor products are state-of-the-art and in high demand, allowing businesses and consumers to take advantage of new 5G capabilities, and the majority of those products are proprietary and made in-house. I recommend buying at current prices if you have not already done so.” BUY

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has dipped below its 50-day moving average, but odds are it won’t go much lower. BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced off its 50-day moving average last week, but volume on the bounce was weak, suggesting the stock needs more time before it can push out to new highs. HOLD

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, had a well-deserved sharp pullback three weeks ago that took the stock down to its 25-day moving average, but it’s been trending higher since, so it’s still in an uptrend. In his update last week, Carl wrote, “Shares were flat this week after a nice surge the previous week. Garena’s popular hit game Free Fire continued to be the highest-grossing game in Southeast Asia, Latin America, and India and achieved a record of over 150 million peak daily active users during the quarter. Total revenue in the quarter was $2.3 billion, up 159% year over year, and total gross profits were $930.9 million, up 363% year over year. I would be an incremental buyer of this stock, but long-time holders should definitely take partial profits from time to time.” BUY

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, first topped 60 in early January, and since then has been trading in a range between 55 and 60. In his update last week, Bruce wrote, “ST 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. Once a threat, electric vehicles are now an opportunity, as the company’s expanded product offering (largely acquired) allows it to sell more content into an EV than it can into an internal combustion engine vehicle. The company introduced its battery management system, which came with the Lithium Balance acquisition. This system sounds encouraging, as it could develop into a major product in a key category for electric vehicles. ST shares have about 37% upside to our 75 price target. Investors appear to be selling off ST along with auto-related stocks in general. While we recognize the company’s reliance on the auto industry, it has other interesting growth prospects (like the battery management system) that provide appeal beyond ‘just cars.’ The stock trades at 13.2x estimated 2022 earnings of $4.16 (down a cent this past week) and 12.0x estimated 2023 earnings of $4.55 (unchanged). We expect this 2023 estimate will move around a lot. On an EV/EBITDA basis, ST trades at 10.6x estimated 2022 EBITDA.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to trend higher in concert with its 25-, 50- and 200-day moving averages, and I continue to think the company has even greater growth potential in the energy business than in the automotive. Analysts are looking for earnings per share of $5.12 this year and $7.21 in 2022 (both estimates keep rising), but I’m going to downgrade it to Hold now because the closer the stock gets to its old high (900), the more it looks like it needs a rest. HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, and recommended here last week, has been up every day since then! In his update last week, Tom wrote, “I like USB right now because of the yield curve trade, among other things. Business is strong in every aspect of the business in the strong economy, with the exception of net interest income. Profits have decreased as interest rates have fallen. But there is a high likelihood that rates increase over the rest of this year. That will complete the missing piece of the puzzle for this regional bank that is otherwise firing on all cylinders.” BUY

The next Cabot Stock of the Week issue will be published on October 4, 2021.

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