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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 283

The much-needed market correction is now two weeks old and thus still quite young, but as it evolves, and we adapt to its actions, we will continue to cultivate a portfolio of the best stocks by selling our laggards and holding our leaders.

Last week that meant selling four stocks, but this week it means only a couple of downgrades to hold, along with one upgrade to buy.

As for this week’s recommendation, it’s a big old high-tech company that is currently range bound, but whose valuation and chart are attractive, so long-term investment should work out well. Plus it pays a dividend of 4.3%.

Details in the issue.

Cabot Stock of the Week 283

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The market correction is well under way, but that doesn’t mean all stocks are falling; growth stocks are suffering the most while some low-risk stocks (including some of ours) are actually hitting new highs. But don’t let that make you complacent. The best general strategy in this situation is to hold your best performers while continuing to sell stocks that are heading down—particularly those that are showing a loss. Today’s recommendation, which has an interesting corporate history, is a big old technology company with low valuation and good long-term prospects. The stock was originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Growth & Income Portfolio and here are Crista’s latest thoughts.
Broadcom (AVGO)
Broadcom is a global technology leader that designs, develops and supplies semiconductor and infrastructure software solutions that serve the world’s most successful companies. If we review the company’s origins and extensive M&A history, we can unlock the answer to an investor’s first question, “Why is the stock symbol seemingly unrelated to the corporate name?” Singapore-based Avago Technologies Ltd. (AVGO) purchased LSI Corp. in 2014 for their enterprise storage expertise; that was followed by the purchase of Emulex in 2015, a network connectivity, monitoring, and management company. Then in 2016, Avago purchased Broadcom and changed the new company’s name to Broadcom Ltd., while keeping the AVGO ticker symbol. Aha! It’s not entirely odd for the acquiring company to change their name to the acquired company’s name. Dean Witter, Discover & Co. did it after they purchased Morgan Stanley in 1997; and just last year, Chemical Financial Corp. did it when they purchased TCF Financial Corp. (I imagine nobody really wants to have the word “chemical” in their company name if there’s a better alternative.)

In 2016, Broadcom acquired Brocade, a maker of routers, switches and other computer networking equipment. Then in 2017, Broadcom famously attempted to buy Qualcomm (QCOM), a transaction which was denied by the U.S. government in March 2018. Broadcom Ltd. subsequently redomiciled in the U.S., becoming Broadcom Inc.

Most significantly for the current stock valuation, Broadcom acquired CA Technologies, one of the world’s leading providers of IT management software and solutions, in the second half of 2018; followed by the 2019 acquisition of Symantec’s Enterprise Security Business. Broadcom’s basic semiconductor business experienced a cyclical downturn in 2019. Fortunately, their aggressive acquisition strategy has diversified the product assortment, making the company less reliant on the cyclical memory chip business. Wall Street has been a bit standoffish regarding the CA and Symantec acquisitions, letting AVGO trade at a lower P/E than industry peers while waiting to see how well these new businesses perform under the Broadcom umbrella.

Thus far, the acquisitions have contributed to annual revenue growing from $4.3 billion in 2014 to $22.6 billion in 2019. The company is growing organically as well. In late January, Broadcom announced $15 billion in new Apple (AAPL) contracts in which Broadcom will supply iPhone parts over the next 3.5 years.

Cash flow has grown just as aggressively as revenue, and will likely contribute to future debt repayment and additional acquisitions. In late December, news emerged that the company might sell their radio frequency semiconductor business for about $10 billion. In January, Broadcom agreed to sell Symantec’s Cyber Security Services business to Accenture (ACN); leaving Broadcom with higher margins from the remaining Symantec business.Wall Street expects EPS to grow 9.1% and 9.9% in 2020 and 2021 (November year end). Management expects that their 2020 revenue mix will consist of approximately 72% semiconductor solutions and 28% infrastructure software, totaling $25 billion. Broadcom’s core semiconductor business went through a cyclical correction last year, and is expected to produce year-over-year growth in the second half of 2020. The software business is benefiting from cost synergies and performance from the CA Technologies acquisition. Positive results from the continued integration of both the CA Technologies and Symantec Enterprise Security acquisitions this year could easily cause the P/E to expand from the current 13.1.

The company typically announces a large annual dividend increase in December, most recently raising the quarterly payout by 22.6% to $3.25, for a beefy yield of 4.3%.

AVGO rose to a new all-time high in late November, but rather than immediately climbing, the stock has been trading between 300 to 325. No one has missed their opportunity to capitalize on the next run-up, which might require a slightly more bullish attitude in the broader market before it can really gather momentum. AVGO is a great choice for technology investors, dividend-growth investors, and large-cap growth investors.

avgo chart

sowtableavgo

Current Recommendations

crtable020320

Last week the portfolio sold four stocks, as an initial reaction to the nascent correction, and looking at them today, I can say I’m glad they’re gone; all four are lower than when they were sold. But we kept all our strong stocks, and the good news is that four of them are hitting new highs today, while a fifth (SE) is likely to notch a record high close. Two of the stocks hitting highs are “safer” stocks while the other two are high-risk growth stocks—and this will change. But as the situation changes we will continue to adapt, always working to own the stocks with the greatest potential relative to risk. This week there is no sale recommended, but I am downgrading two stocks to Hold and upgrading another to Buy. Details below.

Changes
Designer Brands Inc. (DBI) to Hold.
Qorvo (QRVO) to Hold.
Trulieve (TCNNF) to Buy.

Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, had spent two weeks consolidating its latest gains and then today the stock broke out to another new high. There was no particular news for the breakout, and that’s great. In his update last week Tom wrote,It’s easy to forget the magnificence of a defensive stock, until the market hits the skids. The seemingly relentless slog to still more new all-time highs has gone uninterrupted by contagious diseases. In fact, this is a company invested in medical research facilities. The stock has gotten a little pricey but the momentum is still good. And the stock is especially good to hold through a period where the likelihood of more market turbulence is high.” HOLD.

Axonics (AXNX), originally recommended by Tyler Laundon in Cabot Early Opportunities, and featured here last week, has sunk a bit since then but the pullback is normal so this presents a fine entry point. In last week’s update, Tyler wrote, “Axonics is an up and coming MedTech stock with a disruptive solution for patients that suffer from overactive bladder (OAB), Urinary Retention (UR) and Fecal Incontinence (FI). It has developed a neurostimulator that appears better than Medtronic’s (MDT) version, which has been the market leader so far. Axonics could change that. With the product just having launched, revenue growth is huge. Analysts see sales growing from $14 million in 2019 to $80 million in 2020 (up 470%). Preliminary Q4 results were already released, with the full quarterly details set to be released on March 4.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, closed at a record high last Thursday and then climbed even higher today! In his update last week Tom wrote, “The global infrastructure company…has reliable assets like toll roads, cell towers and railroads that generate steady income in any environment. And the global infrastructure boom is creating lots of growth opportunities at the same time that BIP is taking advantage by trading up some of its assets to higher margin properties. Safety with growth is in the market’s wheelhouse these days and the stock’s performance is reflecting that fact.” HOLD.

Designer Brands Inc. (DBI), originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Buy Low Opportunities portfolio, is still a loser for us, and still not rising, but Crista remains patient, focused on the long term. In her update last week, she wrote, “Consensus earnings estimates project EPS falling 8.4% their fiscal 2019 year (January 2020 year end) and 19.7% EPS growth in 2020. The 2020 P/E is low at 8.5. DBI is an undervalued, small-cap stock with a huge dividend yield. Patient growth and dividend investors should buy now, lock in the large current yield, and benefit from eventual capital gains as the company continues to fulfill their successful marketing strategies. If a market correction pulls DBI below 15.25, hold off on further purchases until the market stabilizes.” Given that the stock fell through 15.25 on Thursday, though, I’ll downgrade the stock to Hold. HOLD.

Disney (DIS), originally recommended by Mike Cintolo in Cabot Top Ten Trader, spent five days building an “island” smack on its 200-day moving average, and then today gapped up and away from that island as the broad market rebounded. This is a positive technical pattern, indicating a potential bottom and the presence of institutional money that can push the stock higher. However, the company will report its quarterly results tomorrow, Tuesday, after the market close, so I’ll keep it rated hold until that risk event passes. HOLD.

Endava (DAVA), originally recommended by Tyler Laundon in Cabot Early Opportunities, is a U.K.-based company that bridges the gap between consultants and traditional IT services companies, helping organizations succeed in an increasingly technological world. Revenue should be up around 26% this year. The stock continues to trend sideways. 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 that I’ve resolved to hold the stock through normal technical sell signals. The stock suffered from the original selling wave in Chinese stocks as coronavirus fears spread, but it bottomed a week ago and is now getting back on its feet. HOLD.

Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a new high just over a week ago but spent the past week sliding right down to its 50-day moving average at 76. In last week’s update, Mike wrote, “Inphi has released its new Capella SerDes IP solution for data center environments, which promises better performance and lower power consumption in data centers and AI-powered devices. That’s not a game changer, but these new products will only help as big players upgrade their networks—and as the leading provider of all sorts of high-speed interconnects, Inphi should obviously benefit. The stock has taken on some water in recent days with most chip and networking names, but it continues to act fine, holding above its 50-day line and its prior high (both near 76). That said, earnings are due out next Tuesday (February 4), and that will probably tell the intermediate-term tale. We’ll stay on Buy, but keep new positions small this close to the report.” BUY.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is not a stock for the faint of heart; after soaring from 20 to 50 in two months, it’s now pulled back as deeply as 27.5, thanks to both profit-taking and coronavirus fears. In his latest update, Carl wrote, “It is reported that competitor Starbucks is temporarily closing about half of its stores in China in the wake of the virus issue. I have been recommending that you take some Luckin profits off the table as it has roughly doubled in the last six months.” Long-term, I remain very optimistic about the growth possibilities here, in part because China is still largely a tea-drinking nation, so there’s a lot of room for growth in the coffee industry. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, hit another new high last Thursday and has pulled back minimally since. In his update last week, report, Tom wrote, “Nothing seems to stop the relentless march of this utility and alternative energy superstar. Despite starting this year near an all-time high, NEE is up about 12% so far this year while the overall market is only up 1.41%. Utility stocks have swung back into vogue and NEE is the best of the best, offering reliable income and decent growth. The utility announced earnings last Thursday night that missed estimates but the company reiterated its guidance for the full year. The stock dipped a little bit at the next day’s open but finished the day significantly higher. The stock has gotten overpriced but the momentum is great, and the stock should do well if the market has more down days in the weeks ahead.” HOLD.

Qorvo (QRVO), originally recommended by Mike Cintolo in Cabot Top Ten Trader, spiked to a record high briefly last Thursday but has been trending lower since and Mike explained why in his Cabot Growth Investor update last Thursday: “Qorvo reported a terrific quarter last night, though the market’s wobbles (and fears over the coronavirus) brought out sellers despite the good news. As for the report, sales and earnings crushed estimates thanks to the 5G ramp, and management significantly raised estimates—it’s now looking for $820 million in revenue in the current quarter (the prior estimate was $730 million!) with earnings of $1.55 per share (estimate was $1.15). Just as important, Qorvo remains very well positioned to benefit as the 5G boom picks up steam thanks to wins at most major smartphone firms and increased content per phone. That said, big investors took the stock’s initial post-earnings pop this morning as an opportunity to sell, probably because of fears (despite the guidance) that the virus will crimp demand (and possibly output) from China in the months ahead. The end result was a huge reversal today that saw QRVO close lower on big volume, finishing in the lower end of its recent trading range. Bigger picture, today’s action isn’t necessarily a death knell—there’s still plenty of support in the low 100s and the stock’s long-term chart is fine. But we’re not complacent, either, so we’ll be using a mental stop in the 105 area (just above our cost) in case perception changes. Hold for now.” With the stock sitting just above Mike’s limit, I’ll downgrade to Hold. HOLD.

Ring Central (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is one of the leading providers of Unified Communications Services, which integrate a variety of communications technologies using cloud-based services and thus enable both employees and customers to get what they need from enterprises large and small. The stock hit another new high this morning but couldn’t maintain the altitude. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is an Asian stock that’s been hitting new highs, mainly because the majority of its business is outside China. In Mike’s update in Cabot Growth Investor last week, he wrote “Sea remains one of our stronger stocks, actually coming close to tagging new highs yesterday. The big upgrade last week (Goldman put the name on its “conviction list” and talked positively about the company’s e-commerce potential) got the juices flowing, though a small acquisition announced this week is also helping perception—the firm’s digital entertainment arm bought Phoenix Labs, a Canadian firm that operates Dauntless, a video game that was launched last May (for the major game consoles; mobile launch is this year) and now has more than 20 million users. The purchase will diversify Sea’s gaming business, which today is hugely dependent on Free Fire, and also bring with it a highly thought-of development team. As for the stock, SE is clearly extended to the upside (the 50-day line is around 39.5), but we like its resilience and volume clues in recent days. We’ll stay on Buy, though dips of a couple of points will provide better opportunities. Earnings are likely out in late February.” BUY.

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 it’s still hitting new highs! The stock was up 88% in the third quarter of last year, up 55% in January alone of this year, and it tacked on another 15% this morning! One reason is the firm’s latest earnings report, which turned a lot of skeptics into believers. Another is the quarterly report of Panasonic, which featured a surprisingly large profit. And another is yesterday’s Super Bowl ad lineup, which featured a flood of commercials for electric cars, with GM using Lebron James to push its electric Hummer, Audi using Games of Thrones star Maisie Williams to sell its e-Tron Sportback, Porsche pushing its Taycan and (in some markets) Ford using Idris Elba to sell its Mustang Mach-e SUV. Then of course there’s the short-covering. The tide is turning. HOLD.

Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, continues to consolidate between 10 and 11.5, trading roughly in sync with the sector, as it leaves the effects of the short-sellers’ attack in the rearview mirror. In my issue last week I wrote, “It’s been six weeks since short-sellers attacked TCNNF in mid-December (when it was the strongest of all cannabis stocks), and the good news is that the stock has stabilized very nicely since then, building a base around 11. This tells us (especially given the broad market’s weakness lately) that investors are not afraid, and that they believe the company will continue to be the largest seller of medical marijuana in Florida. Going forward, there’s still a risk the stock will pull back once more to 10, but if it does, I recommend you treat it as a buying opportunity. I’m upgrading the stock to Buy.” I’ll do the same here. BUY.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high last Friday after releasing an excellent earnings report but was pulled back by the market as the day wore on. But today it’s up again. In last week’s update, just before that earnings report, Mike wrote, “There shouldn’t be much standing in the way of a surge in earnings during the next few years (especially the next two) as Vertex’s cystic fibrosis treatments gain acceptance.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, nearly tripled from late December through late January, and now it’s in a well-deserved consolidation phase, beginning to build a base in the 17 region. In last week’s update, Carl wrote, “Media attention to the private space race highlight Jeff Bezos, who founded Blue Origin, in 2000; Elon Musk’s SpaceX, which was founded in 2002 with colonizing Mars as its ultimate mission; and of course Branson, who started Virgin Galactic in 2004. This is an aggressive idea that has made a strong move since being added to the Explorer portfolio but I believe there is more upside as the company stays in the media spotlight throughout 2020.” BUY.


The next Cabot Stock of the Week issue will be published on February 10, 2020.

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