August 30, 2021

The bull market remains intact, so I continue to recommend that you be heavily invested in stocks that help achieve your investing goals.

Today’s featured stock is a speculative suggestion—a small company with great potential to grow as the market for electric vehicle charging booms.

As for the current portfolio, most of our stocks look good, and many are hitting new highs, so I’m downgrading three to hold because they are ripe for correction.

Lastly, a reminder that because of the Labor Day holiday, next week’s issue will be published on Tuesday, September 7.

Details inside.

Cabot Stock of the Week 363

The long bull market continues, and thus I continue to recommend that you be heavily invested in a portfolio that meets your investment needs. Today’s recommendation is a speculative stock with great potential in the field of electric vehicle infrastructure development. The stock was originally recommended by Carl Delfeld in Cabot Explorer and here are Carl’s latest thoughts.

ChargePoint (CHPT)
What has been propelling adoption of electric vehicles forward and what will power them into the mainstream across the world? It is a combination of growing political concern over climate change, the need to get air pollution under control in big cities with urban congestion, and breakthroughs in electric vehicle batteries that lower costs and expand range.

In the United States and around the world, governments support EV sales in different ways, from simple lump sum grants and subsidies to tax breaks to more complex formulas that vary with the type of vehicle or the incomes of buyers.

The infrastructure for electric-vehicle charging continues to expand. In 2019, there were about 7.3 million chargers worldwide, of which about 6.5 million were private, light-duty vehicle slow chargers in homes, apartment buildings and workplaces. Convenience, cost-effectiveness and a variety of support policies (such as preferential rates, equipment purchase incentives, and rebates) are the main drivers for the prevalence of private charging.

An indirect but powerful way to play the electric vehicle (EV) revolution is through companies providing battery-charging ports and stations. Many analysts point to the lack of charging ports as perhaps the most important impediment to the growth of EV adoption.

With more than 112,000 charging points in North America and Europe, ChargePoint is one of the biggest EV charging companies in the world. The company claims to control 70% of the public charging market share in North America. 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.

ChargePoint also has teamed up with auto makers like BMW so that their charging locations are seamlessly integrated into in-car navigation systems plus the company has a widely downloaded app which allows EV drivers to easily locate ChargePoint charging stations.

It’s worth highlighting that between 2010 and 2020, the U.S. installed a daily average of 30 charging ports. Considering the outlook for EV adoption, the country needs to install 380 charging ports on a daily basis over the next decade.

The electric vehicle charging station market is expected to be worth $103 billion by 2028 and this translates into a compound annual growth rate (CAGR) of 26.4%.

ChargePoint’s cloud subscription platform and software-based charging hardware include options for use at home, multifamily units, workplaces, parking facilities, retail and transport fleets. One ChargePoint account provides access to hundreds-of-thousands of places to charge in North America and Europe. So far, more than 92 million charging sessions have been delivered, with drivers plugging into the ChargePoint network every two seconds.

ChargePoint went public through a SPAC and the stock traded at 42 in early and is now trading at 22. The stock was down 32% in July alone and part of the problem was that ChargePoint announced on July 14 that its underwritten secondary public offering of 12 million shares by some current stockholders would be priced at $23.50 per share.

In short, the stock got way ahead of itself in terms of valuation as EV mania in the market overtook common sense. The stock does appear to have some support around 20.

For its most recent quarter, ChargePoint generated revenue of $40.5 million compared to the $2.2 million generated by its main competitor Blink Charging. Revenue grew 24% year over year in the first quarter and the company expects revenue between $195 million to $205 million for its fiscal year ending January 31, 2022. Looking ahead, ChargePoint projects that it will reach 425,060 and $2.1 billion in revenue by 2026.

I believe the market may be undervaluing ChargePoint’s strong growth outlook. Consequently, I believe that the stock can be accumulated at its current levels. The stock traded at a 52-week high of 49 and I would not be surprised if the shares regain that level in the next 12-18 months. The company is expected to release financial results for the second quarter after market close on Wednesday, September 1, and that might bring some volatility. Speculators can buy before that event, but it’s more prudent to wait until after.

Tim’s note: This service, as usual, will use the average price of Tuesday.

Current Recommendations

The portfolio has many stocks hitting new highs today and none falling apart (though a few are testing our patience), so there are no sell recommendations. But I have downgraded three stocks to Hold, all because they are extended to the upside and thus ripe for correction. Details below.

Changes
Brookfield Infrastructure Partners (BIP) to Hold
HubSpot (HUBS) to Hold
Nvidia (NVDA) to Hold

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 topped 800 a month ago, then pulled back to its 25-day moving average in a normal correction and is now hitting new highs again. It can be bought here. BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, broke out to a new high today, leaving behind the basing pattern it had built since February. In his latest update, Tom wrote, “The things to realize about this semiconductor and technology industry goliath is that 90% of internet traffic uses its systems and the company will also benefit disproportionately in the near term from 5G. AVGO has been sort of floundering along with the rest of the technology sector since February. But technology is where all the growth is beyond the pandemic recovery. And the market never sours on the sector for very long.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a record high last Wednesday and has pulled back normally since. In his update last week, Tom wrote, “This infrastructure partnership should start to go places. It’s already very near the all-time high. The Inter Pipeline acquisition should go through in the third quarter and be accretive to earnings immediately. It should bring already steadily rising earnings to another level. A likely passage by Congress of an infrastructure bill of some kind should increase investor awareness and interest in the rapidly growing infrastructure subsector as well. However, at these heights, it is no longer in the ideal accumulation phase.” Because of that, I’ll downgrade to Hold. HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, had a great run into last week, hitting new highs on five consecutive days—all in the wake of reporting excellent second-quarter results. In his latest update, Bruce wrote, “Cisco reported encouraging fiscal fourth-quarter results, particularly with a strong new order flow, and provided favorable and longer-term guidance. The company’s fundamentals are improving, and management is helping boost investor confidence by providing more visibility.

In the quarter, earnings of $0.84/share rose 5% from a year ago and were 1 cent above the consensus estimate of $0.83. Revenues rose 8% compared to a year ago and were in line with the consensus estimate.

Product revenues rose 8% and product orders grew 31% – encouraging as equipment revenues, particularly Infrastructure Platforms (grew 13%), have been a laggard segment. Enterprise orders, which have been a concern due to their flat/sluggish growth that suggested declining relevancy, rose an impressive 25%. Some of the year/year strength was due to pandemic-weakened orders a year ago, but clearly not all. Strong product sales and orders implies growing relevancy and competitiveness, as well as what appears to be a recovery in underlying demand. In many ways, Cisco shares are driven by revenues, with little need for expanding margins although this would help the shares’ valuation multiple.

In the quarter, operating margin progress was mixed as component shortages and cost pressures weigh on results.

Cash flow from operations was strong at $4.5 billion, up 18% from a year ago. Cisco’s ability to generate cash is a key aspect of the story – this quarter’s robust results provide further support to Cisco’s underlying value. The company returned $2.4 billion of this quarter’s cash flow to investors through dividends and repurchases.

One negative practice we are wary of, however, is that Cisco uses much of its cash flow to make acquisitions. This is in effect a replacement for R&D spending, but as acquisition spending doesn’t hit the income statement like R&D spending does, this practice artificially boosts Cisco’s profitability. For the full fiscal year, the company generated $15.5 billion in operating cash flow, but spent almost half of it on acquisitions. Had this $7 billion been R&D spending, it would have reduced net income by 66%. For reference, its actual R&D spending was about $6.5 billion. Capital spending was only $700 million.

Also, acquisitions usually bring revenues, providing a boost to revenue growth that has almost nothing to do with the company’s core products. Anyone can acquire revenues, and this may be hiding dull trends in Cisco’s core revenues. This gaming will likely push us to sell the stock sooner than if its earnings were of higher quality.

Cisco gave FY2022 guidance for revenues to increase between 5%-7% and earnings to grow by about 6%. Both were modestly higher than consensus estimates. The earnings guidance range is remarkably narrow at +/- 1% around the midpoint. We understand they have a strong $31 billion backlog and $22 billion in deferred revenue, both of which provide considerable revenue and profit visibility. But we are fairly confident that the company’s earnings guidance is very conservative – that is the only way it can provide such a narrow range without risking a ‘miss’ in some future quarter.

This is the first time in years that the company has given year-ahead guidance. The management seems to be showing more confidence in their outlook, both from underlying demand and from their years-long efforts to improve their competitiveness. Helping to highlight this confidence, which of course is contagious on Wall Street, will be their upcoming Investor Day on September 15.

All-in, an encouraging quarter. CSCO shares have about 2% upside to our recently increased 60 price target. We continue to like Cisco.” BUY

Dexcom (DXCM), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here last week, is off to a good start and still a good buy here for growth-seeking investors. BUY

DocuSign (DOCU), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high three weeks ago, then pulled back to its 50-day moving average on low volume, and is now close to the old high again. In his update last week, Mike wrote, “Like many growth stocks, DOCU has lost some steam of late—net-net, shares really haven’t done much since the end of June, and the recent bounce has been just OK. Still, examining the move since its June earnings-induced blastoff, the stock’s rally from 230 to 315 and retreat to 280 (round numbers) is far from abnormal, and the fact that the stock has held its 50-day line (its first test of that key support area) is a good thing. Similar to ASAN, though, more will be revealed next week—DocuSign’s quarterly report is due out September 2, with sales expected to rise 43% and earnings to come in at 40 cents per share, though the stock will probably move more based on management’s commentary regarding the growth outlook. Right here, the main trend is up, and the story remains as good as ever, so we’re sticking with our Buy rating.” BUY

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then in Cabot Growth Investor, hit record highs on three consecutive days last week, and has now pulled back to its 25-day moving average. In his update last week, Mike wrote, “Patience is usually a virtue in life and in the market, and that’s obviously been the case with Five Below, which has staged a rare (for this environment anyway) breakout and upside follow-through in August after months of base-building—all on no meaningful news. Now, today was a clunker, with a sharp selloff after Dollar Tree said shipping costs were eating into profits, though a sharp dip isn’t surprising after the recent move and the environment. The real test will come on earnings next Wednesday, September 1 (sales expected to rise 52% from a year ago, with earnings of $1.11 per share), where Wall Street will get the full update on both sales trends and costs. In our view, there’s little doubt the overall growth story is still intact, in fact, it’s likely better than it was before the pandemic given the firm’s spending spree (new distribution centers) is easing and its e-commerce capabilities (including its expanded deal with Instacart) have ramped up, and the stock looks refreshed after weak hands were worn out the past many months. We’ll stay on Buy but suggest keeping new positions on the small side given the upcoming report.” BUY

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, hit a record high four weeks ago as quarterly results were released, pulled back to its 50-day moving average two weeks ago, and is now heading higher again. In his update last week, Mike wrote, “FND fell from a high of 128 to a low near 111 after earnings, but it’s bounced nicely since, as its test of its 50-day line (now near 112 and rising) brought in some buyers. Despite the ups and downs, we still have high hopes here, as the stock hasn’t done anything wrong, the growth story remains in fine shape (including the long-term cookie-cutter story) and the industry remains in favor: while Home Depot was walloped on earnings, Lowe’s did well, and this week high-end homebuilder Toll Brothers crushed estimates. If you’re skeptical, the question here is whether the growth slowdown will be very pronounced (analysts see earnings basically flat in the second half of 2021 before growing 18% in 2022) or milder. As usual, we’ll let the stock tell the story—so far, the trend is up, so you can grab shares around here or on dips if you don’t own any.” BUY

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, hit a record high back in early June, but it’s been on a correction since then, and the latest quarterly report didn’t help. In his latest update, Bruce wrote, “GM shares continued to slip, partly on news of yet another recall for its battery-powered Chevy Bolt, which will cost upwards of $1 billion, following a multi-billion-dollar recall last quarter. We are starting to wonder if battery fires are an endemic problem with EV batteries in general, or only with GM batteries. Either would weigh on our view of the profitability of GM’s EV future. However, it seems more likely to be a problem with GM’s current battery supplier, LG Chem of South Korea (their shares fell over 6% on the news). If this is the ultimate source of the problem, it clarifies GM’s urgency in building its own battery factories. GM shares have 41% upside to our 69 price target.” HOLD

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, has had had a great run since reporting an excellent second quarter a month ago, but the stock is extended now, so I’m going to downgrade it to hold and let it cool off a bit. HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, hit new highs on three consecutive days last week and has now pulled back minimally in the wake of the second-quarter report. Revenues were $1.08 billion, up 48% from the year before (an accelerating trend) and eps was $0.34, up 62% from the yar before. In his update last week, Carl wrote, “Marvell’s semiconductor products are state-of-the-art and in high demand, allowing businesses and consumers to take advantage of new 5G capabilities, plus 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

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, is back below its 200-day moving average, but Bruce is keeping his price target of 69. In his update last week, he wrote, “The company’s second-quarter report on July 29 was encouraging. Revenues rose 14%, powered by a resurgence in Europe. Revenues were about 4% ahead of the consensus estimate. Adjusted net income rose 2% from a year ago and was 17% above the consensus estimate. However, adjusted EBITDA fell 1%, as the company spent more on marketing and battled rising transportation, brewery and packaging materials costs. Beating the revenue and earnings estimates is important as it supports our view that investors don’t fully appreciate the resiliency in Molson’s business. The company reaffirmed its 2021 full-year guidance. Molson’s debt balance is unchanged from year end but cash is starting to accumulate. TAP shares have about 43% upside to our 69 price target.” HOLD

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, came very close to equaling its old January high of 88 two weeks ago, and has pulled back normally since. In his latest update, Tom wrote, “NEE has had a nice move higher since the end of June. The normally up-trending juggernaut has been knocked around with the fortunes of cyclical stocks this year. NEE got pulled down as cyclical stock rallied earlier this year. And lately, it has rallied while those stocks have struggled. Such a stark connection to the fortunes of cyclical stocks is likely temporary. NEE should also benefit from the growth of alternative energy and again be the highly desirable conservative play on the growth in that area.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has continued to run higher since reporting excellent second-quarter results, but volume is now fading, hinting that buyers are becoming exhausted, so I’m going to downgrade it to hold for now. HOLD

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, is hitting new highs once again! In his update last week, Carl wrote, “SE shares continue their upswing following an impressive second-quarter earnings report. Morgan Stanley raised its target to 351 and forecast that Sea’s fintech revenues will grow at a compounded rate of better than 60% from 2021-2024. Total revenue in the quarter was $2.3 billion, up 159% year-on-year, and total gross profit was $930.9 million, up 363% year-on-year. Sea has become both the largest digital entertainment platform and the largest e-commerce operation in the Southeast Asia region. 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 building a base at that level, so technically, all is well here. 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%. On July 27, Sensata reported encouraging second-quarter results. Its earnings were sharply higher than the pandemic-weakened results a year ago and about 10% above the consensus estimate. Revenues were 72% higher than a year ago and were also above estimates. The company raised its full-year revenue and earnings guidance. Cash flow was robust and net debt increased modestly to fund the Xirgo acquisition. Sensata announced their acquisition of Spear Power Systems, a lithium battery that will help expand Sensata’s efforts in battery management systems. The deal price was not announced. ST shares have about 26% upside to our 75 price target.” BUY

Spectrum Brands (SPB), originally recommended by Tom Hutchinson in Cabot Dividend Investor, and featured here two weeks ago, as it was on a normal correction, is up a little since then. In his update last week, Tom wrote, “This home essentials retailer is no ordinary retailer. Demand for home products is stronger with bad virus news. Plus, demand for home products is likely to remain strong after the pandemic stuff is long over. It’s still a good entry point for the stock if you don’t own it already.” 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. BUY

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is one of the four leading cannabis companies in the U.S., and trends are terrific in the industry, with the average company in my portfolio growing revenues 135% over the past year. But this is a young industry, unsupported by institutional investors because of the federal prohibition, and the sector has been weak since topping in February. In my Cabot Marijuana Investor update last week, I wrote, “The biggest seller of marijuana in Florida, with a 51% market share, Trulieve released second-quarter results on August 12. Revenues were $215 million, up 78% from the year before, while EPS (the sixth consecutive positive quarter) were $0.31, up 94% from the previous year. During the quarter, the company announced plans to acquire Harvest Health and Recreation, one of the largest cannabis acquisitions announced in the U.S. to date; commenced operations and opened its first dispensary in Massachusetts; completed the acquisition of Keystone Shops in Philadelphia, entering the Greater Philadelphia area and bringing the dispensary count in Pennsylvania to six; and commenced operations in West Virginia as the first medical cannabis company to start planting in the state. Commenting on the results, CEO Kim Rivers said, “Our performance in the second quarter was strong across all financial and operating metrics. We have become operational in Massachusetts and West Virginia and recently won an application for one of two class 1 production licenses in Georgia. We continue to execute on our national expansion model, building our footprint both organically, with license application awards, and inorganically, with strategic acquisitions.” And then just today, the company announced the opening of two new dispensaries in Boynton Beach and Port Orange, Florida, which will bring the company’s total dispensary count to 100 (10 are outside Florida). All this is good, yet the stock remains weak with the sector. HOLD

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

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