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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 271

Many major indexes have hit new highs in recent days, and all Cabot’s market timing indicators are currently positive. Conclusion: it’s a bull market and you need to be heavily invested.

But, as always, you need to manage your portfolio. In our own portfolio, eight of our stocks have hit new highs in the past week, which is great. But two of the others are being downgraded to hold because their prospects are less secure.

As for today’s new recommendation, it’s a young, fast-growing company in a high-risk/high-potential market sector. It’s certainly not for everyone, but for aggressive investors, it could be fun.

Cabot Stock of the Week 271

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Over the decades that I’ve been in the business of recommending stocks to individual investors, there have been a handful of strong growth sectors in which some investors were reluctant to participate—for what we might call moral reasons. Most memorable were the gaming stocks, firearms stocks and Chinese stocks, all sectors that spawned numerous big winners. Today, cannabis stocks are in the same boat—but even more so; not only are they shunned by some individual investors for moral reasons, they’re also avoided by many institutional investors because marijuana is still a Schedule 1 drug under U.S. federal law. The result of this is that while 80% of all U.S. stocks are owned by institutions, only 7% of cannabis stocks are owned by institutions. Yet cannabis is the fastest-growing industry in the U.S., with investment opportunities that dwarf those of more established industries—which is why Cabot launched a service dedicated to the marijuana stocks over two years ago. This is not a sector for beginners; volatility is high and the sector’s stocks make big moves, both up and down. But as we all know, the goal of successful investors is to buy low and sell high, and today, with the sector having corrected a massive 55% from its March high and news of vaping-related deaths still spooking out the weak hands, I think this is a great time to invest in the sector. Below is my favorite stock in the sector to buy today.
Trulieve Cannabis Corp. (TCNNF)

Trulieve is the leading seller of medical marijuana in Florida, the third most populous state in the U.S. The company has 37 stores today and is aiming for 44 by year-end. Plus, thanks to acquisitions, it also has a new dispensary in Connecticut and one in California—with more coming in both states—and has bought licenses in Massachusetts, too.

The company’s stores sell a wide variety of products—both marijuana and CBD—in pre-rolls, tinctures, vapes and creams. Much of the product comes from the company’s 1.6 million sq. ft. of growing space in Florida, while some comes from respected national brands like Love’s Oven, Blue River, Slang Worldwide, Binske and Bhang.

All told, Trulieve sells over 240 individual products and is constantly adding new items to its product line. It has 214,000 registered patients, with 3,000 new patients added every week. And, of course, when Florida eventually legalizes adult-use marijuana, Trulieve will have a head start on all the competition.

Already, in fact, Trulieve sells 55% of the medical cannabis in Florida. Part of this stems from its large store count, its statewide delivery service (from a fleet of 79 vehicles) and its well-trained phone operators (who handle more than 3,000 calls a day). But I believe part stems from its company’s culture, which views all employees and patients as “trulievers” and focuses on building a community among them.

Second quarter revenues at Trulieve were $57.9 million, up 149% from the previous year—which makes Trulieve the #1 cannabis company in the U.S., at least for the moment. Adjusted EBITDA was $31.6 million, yielding EPS of $0.52, up 550% from last year. Going forward, management is projecting revenues of $220 to $240 million in 2019 and $380 to $400 million in 2020, with EBITDA margins in the 40% range.

These stats are notable because many cannabis companies are still not profitable, and many don’t offer clear financial guidance for the small but growing number of institutional investors who are paying attention. And the main reason for that, in my opinion, is CEO Kim Rivers, a former corporate lawyer who spent several years in private practice specializing in mergers, acquisitions and securities for large companies and then ran several successful businesses in the real estate and financial industries.

Ms. Rivers spoke to a group of analysts in New York on October 2, and the result was clearly visible in the action of the stock, which surged on big volume that day and continued higher on big volume for the next two days. I added the stock to my Cabot Marijuana Investor portfolio on October 17, as TCNNF was the best-looking marijuana stock chart at the time, and then just last week I heard Ms. Rivers speak at a cannabis investing conference in Chicago.

In addition to the above facts, she mentioned that while some companies in the industry have been suffering as investors have pulled back from the sector, her company has cash. And its 3,000 employees are being augmented by an ERP system that will enable more intelligent management of the enterprise as it expands.

However, there exists a small dark cloud that I would be remiss not to mention. Ms. Rivers’ husband, J.T. Burnette, a successful real estate investor from Tallahassee, has been indicted by the FBI on charges that include racketeering, extortion and mail fraud. Two former Tallahassee city officials have already pleaded guilty in the public corruption case, which dates to 2013 and involved FBI agents who posed as businessmen looking to bribe those officials and involved Burnette in the scheme, but Burnette has not, and his attorneys continue to fight. Ideally, this will not affect investors in Trulieve—Burnette has no role in the company—but forewarned is forearmed.

Ultimately, what I like best about TCNNF is the entire package. There’s the revenues, the earnings, management, growing institutional support, the stock trading above $10 (where institutions can get interested), the stock above its 25- and 50-day moving averages, and the chart with a clear pattern of higher lows and higher highs since its August bottom.

TCNFF Chart

https://www.trulieve.com

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tcnnf table

CURRENT RECOMMENDATIONS

Portfolio

Many major indexes have hit new highs in recent days. Eight of the stocks in our portfolio have hit new highs in the past week. And all Cabot’s market timing indicators are currently positive. Conclusion: it’s a bull market and you need to be heavily invested. However, not all stocks are going up, with growth stocks being the major sector where there are still spots of weakness. But if you can dodge those potholes, the going is good! The only changes in the portfolio this week are that two stocks get downgraded to hold. Details below.

Alaska Air (ALK), originally recommended by Crista Huff for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, reported earnings after the market close last Thursday and the stock had a great day on Friday, blasting from 69 to 72. It’s pulled back normally since, but the trend looks great! In today’s update, Crista wrote, Alaska Air Group reported third-quarter diluted EPS of $2.63 vs. the consensus $2.52, near the top of the wide estimate range. The company expects 2020 capacity growth of 3-4%. In addition to share repurchases and a pension plan contribution, Alaska Air Group reduced their debt-to-capitalization ratio to 42% as of Sept. 30, 2019 compared to 47% as of Dec. 31, 2018. Cowen & Co. and Raymond James promptly raised their target prices to 77 and 80, respectively. ALK is a mid-cap stock with an $8.8 billion market cap. Full-year earnings estimates continue to rise. Alaska Air is now expected to achieve EPS growth rates of 40% and 11% in 2019 and 2020. The 2020 P/E is 10.0.” HOLD.

Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, hit another new high last Thursday and has pulled back normally since. In his latest update, Tom wrote, “The stock had a strong week as it continues to slowly forge ever higher. High occupancy rates for its in-demand unique life-science laboratory properties make this stock a favorite in the current environment. It has significantly outperformed both the overall market and the REIT index in every measurable period over the last five years. Falling interest rates should continue to be a tailwind for the stock going forward. It’s also a REIT in a defensive business that is right in the market’s wheelhouse these days.” Then today, the company reported third quarter results. Funds from operations (FFO) were in line with estimates, up 5.4% from the year before while revenues were up 14.2% (beating estimates) to $390.5 million. BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, has not only completed its correction—five consecutive up days have brought a new high! In his latest update, Tom wrote, “I mistakenly wrote that BIP was going to announce earnings last week but the announcement won’t be until November 7. The infrastructure partnership is still a great fit for the current market with its defensive business and high yield. And earnings should be strong as newly acquired holdings boost profits.” HOLD.

Citigroup (C), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio, is another one of our stocks hitting new highs. In today’s update, Crista wrote, “Citigroup is a global financial company that serves consumers, businesses, governments and institutions in 98 countries; and the third-largest U.S. bank by assets. Earnings estimates rose again last week. Wall Street now expects EPS to grow 16.7% and 9.8% in 2019 and 2020. The 2020 P/E is 8.7. The stock is approaching its January 2018 peak near 77, at which time I will likely retire C from the portfolio in favor of a dividend stock with a stronger projected 2020 EPS growth rate.” HOLD.

Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, continues to bide its time, trading in a range between 16 and 17.5, but Crista says patience will pay. In today’s update, she wrote, “Designer Brands is one of North America’s largest designers, producers and retailers of footwear and accessories. The company operates DSW Warehouse, The Shoe Company and Shoe Warehouse stores with nearly 1,000 locations in 44 U.S. states and Canada; and Camuto Group. DBI is an undervalued, small-cap growth stock. The company has delivered 27 consecutive years of revenue growth. Analysts expect EPS growth rates of 14.5% and 14.7% in 2019 and 2020 (January year end), and company management is projecting 2021 EPS growth of about 24%. The 2020 P/E is very low at 8.0. DBI has traded between 16-17.5 since early September, and now appears ready to climb toward price resistance at 19. Buy DBI now for outsized total return potential in 2019 and beyond.” BUY.

Digital Turbine (APPS), originally recommended in Cabot Early Opportunities by Tyler Laundon, offers mobile operators and OEMs a mobile delivery platform for Android OS that helps customers find the apps they want. We bought near the stock’s correction low a month ago and the stock has been moving ahead steadily since; it’s currently close to breaking out above its late August high of 7.8. BUY.

Enterprise Products Partners (EPD), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High Yield Tier, is still going the wrong way, and yesterday’s third quarter earnings release didn’t help. I’ll leave it to Tom to analyze the contents of that release and determine whether the stock is worth sticking with, but in the meantime, I’m going to downgrade the stock to hold. HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is one of the portfolio’s Heritage Stocks, meaning our profit is so great and the potential so large (it’s China’s largest hotel chain) that I’ve resolved to hold the stock through normal technical sell signals. The stock has had a great October, but it remains in the sideways pattern that has constrained it for two years—which means the stock is slowly becoming a better value. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has great fundamentals—chief among them its rapid growth as it works to undercut and overtake Starbucks in the Chinese coffee market. In his latest update, Carl wrote, “This aggressive company continues to open new coffee shops at a breathtaking rate in China. Its CFO has publicly stated it plans to be at breakeven by the end of next year, and Luckin believes there is room for more than just Starbucks in a market of 300 million-plus middle class consumers. Its strategy to compete with Starbucks is a combination of quality, convenience and affordability, with coffee prices that are roughly half Starbucks’. Most of its shops are set up for takeaway and delivery. Luckin is an aggressive stock that just went public so I need to see next quarter’s numbers before moving this to a buy.” HOLD.

Marathon Petroleum (MPC), originally recommended by Crista Huff of Cabot Undervalued Stocks Advisor for her Growth Portfolio, and featured here two weeks ago, has a spectacular chart that has been climbing strongly for two months—and Crista says it’s going higher. In today’s update, she wrote, “Marathon is a leading integrated downstream energy company and the nation’s largest energy refiner, with 16 refineries, majority interest in a midstream company, 10,000 miles of oil pipelines and product sales in 11,700 retail stores. Marathon has prepared its refining system for upcoming IMO 2020 regulations and is confident in their ability to produce large amounts of ultra-low-sulfur diesel fuel to meet the new demand. Last week, it was reported that Marathon is considering the sale of two refineries that are located in Utah and Alaska. This potential action is likely a result of pressure from activist investors who seek to split the company into three entities: Speedway, refining operations and midstream holdings. These investors issued an open letter to Marathon shareholders last week, calling for the resignation of CEO Gary Heminger. MPC is an undervalued large-cap stock. The company is expected to report third-quarter EPS of $1.38, within a range of $1.20-$2.16, on the morning of October 31. Expect volatility. Full-year EPS are expected to fall 34% 2019, then rise 80% in 2020. The 2020 P/E is low at 9.3. Morgan Stanley raised their price target on MPC from 70 to 80. MPC is up 25 points from its August low, and still rising. There’s some price resistance near 70, then again at 78 and 83. Buy on dips.” BUY.

Meritage Homes (MTH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high last Friday and has pulled back to its 25-day moving average since. If you don’t own it, and you’d like piece of the housing industry, you can buy on this pullback. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has pulled back normally since hitting a record high a week ago. In his update last week, Tom wrote, “This utility/alternative energy juggernaut announced earnings yesterday and it was all good. NextEra beat estimates with earnings growth of 10.1% year over year. It also reiterated its target of 6% to 8% annual earnings growth (from the 2017 base) through 2021 and dividend growth of 12% to 14% per year through at least 2020. The market liked it and the stock is again at new all-time highs, with no signs of a break in upward momentum from a technical standpoint despite lofty valuations. Sure, the stock is expensive but it keeps producing and giving Mr. Market what he wants.” HOLD.

Pinduoduo (PDD), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, hit new highs on big volume on three consecutive days before pulling back today. In his latest issue of Cabot Top Ten Trader, Mike wrote, “We can’t say Chinese stocks are out of the woods yet, and few investors really know about Pinduoduo—but big investors are catching on and the stock looks like a glamour leader of the next market upturn. The company is taking China’s e-commerce industry by storm as it pioneers a new type of operation—frequently called “social commerce,” Pinduoduo’s platform encourages team shopping via interaction and invitations, and the more people that join a team to buy a product, the lower its price! (Most products are bargain priced anyway, being off-season or overbuys by merchants, etc.) In effect, it’s almost like Costco but in reverse and online; instead of the company buying in bulk and requiring buyers to do the same (as well as purchasing a membership), Pinduoduo is customer-driven, which encourages user growth and, in turn, prompts more merchants to join the platform. Growth has been out of this world, both on the top line and in the sub-metrics (spending per buyer up 92% in Q2!), and analysts see the bottom line leaping into the black next year. Looking ahead, there will probably be some more competition since the concept has taken off, but with such a big (483 million users at the end of June) and broad (48% of gross merchandise sales came from larger cities; the rest from smaller ones) customer base, Pinduoduo should remain on top. It’s a great story. BUY.

Ring Central (RNG), 0riginally recommended by Mike Cintolo in Cabot Growth Investor, is an interesting case that illustrates the value of buying well. Mike bought near the top, just before cloud stocks sold off, while we bought just last week, near the bottom of the correction. Since then the stock has rebounded, so we have a small profit for now. But Mike, being underwater and intolerant of growing losses, sold last week. Here’s what he wrote then: “Ring will launch its own video product and take share in that huge market. And, of course, the Avaya deal promises to keep growth humming (or accelerating) for a long time to come. That said, it’s not about the fundamentals right now, it’s about the environment for growth stocks and the sector’s action, which are terrible. When we added the half position, we set a loser mental stop around 15% from our entry point (correlates to a 7.5% loss on a “full” position), and RNG tripped that earlier this week. And beyond that, the sector’s meltdown and RNG’s cave-in makes the prior big-volume surge look more like a blowoff after a big run instead of a kickoff to a new advance. Today’s bounce was solid, and if you still own some and want to give it a chance to rebound, that’s fine. But we sold into today’s upmove and are looking for greener pastures.” So the question for us is, do we take a quick profit here and move on, accepting the odds that the recent surge was likely a blowoff top—or do we let our winner (small as it is) run and hold? Given that the portfolio is not yet full and that RNG has great prospects, I’ll hold, expecting that RNG might have to fight awhile before its uptrend is truly renewed. HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the portfolio’s second Heritage Stock (big profits and big potential) and third quarter results, released last Wednesday after the market close, confirm that the company remains on track for continued big achievements. While analysts were expecting a loss of $0.42 per share, Tesla delivered a surprise profit of $1.86 per share on revenues of $6.3 billion. The biggest reason for the profit was reduced costs, particularly for the Model 3, which accounted for 81% of the quarter’s deliveries. And there was lots of good news promised, too. Tesla expects to launch its Model Y SUV/crossover next summer. It will make a limited production run of its Tesla Semi truck next year. Its Gigafactory in Shanghai is ahead of schedule, already doing trial manufacturing. And Tesla will soon announce the location of its new European Gigafactory, where it plans to begin manufacturing in 2021. Additionally, this week the company announced that it was prioritizing deliveries of its solar and Powerwall systems to homeowners in California affected by wildfires and offering a $1,000 discount as well. Musk has noted that users who combine its solar power systems with Powerwall battery packs can avoid the problems of the electric grid, and even said that as Tesla Energy becomes a distributed global utility, it could outgrow its automotive business! The stock has had a great week, but needs to break out above 390 to escape its 2-plus year trading range. HOLD.


Chart courtesy of StockCharts.com


Your next Cabot Stock of the Week issue will be published on November 5, 2019.

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