The market needed a correction and now we have one, or at least the start of one. And the kickoff has been powerful enough to turn our short-term timing indicator negative, which means it’s time to turn a bit defensive, raising cash and leaning toward lower-risk investments. Thus, we sell two more stocks today and downgrade two to hold.As for the new recommendation, it’s a slow and steady telecom company that not only pays a good dividend but also is poised to benefit from the rollout of 5G technology.Full details in the issue.
Cabot Stock of the Week 286
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Today’s market plunge has turned Cabot’s short-term timing indicator negative, and thus we will now turn a bit more defensive, both in managing the current portfolio and in recommending new stocks. Which brings us to the well-known name below. Not only was the stock up today as most stocks plunged and investors fled to safety, it also has good growth prospects tied to the rollout of 5G technology. The stock was originally recommended by Tom Hutchinson for the High-Yield Tier of Cabot Dividend Investor and here are Tom’s latest thoughts.
Verizon Communications (VZ)
Verizon in the largest U.S. wireless carrier. Of the four major U.S. telecom carriers (Verizon, AT&T, Sprint and T-Mobile), Verizon has by far the most wireless revenues with the largest network and coverage.Verizon also has other sources of revenue in addition to wireless services including fixed line services including cable and internet (12%), as well as enterprise services like payment processing, online shopping amd security systems (10%) and some online media. But, make no mistake about it, wireless is the main part of the business accounting for 70% of revenues and 85% of adjusted earnings.Verizon is the closest thing to a pure wireless company. The other providers are distracted and tied up with mergers (the pending Sprint/T-Mobile merger and AT&T’s absorbtion of Time Warner) while Verizon is homed in on wireless. That’s a good thing as I will explain.
The telecommunications business was once high growth technology as wireless proliferated in the 1990’s. But it has since become a slow-growth, stodgy business, more like a utility. It takes a massive investment to build out these cellular networks, which is why there are so few providers left. The U.S. market is also saturated. Everybody already has a cellphone and a plan. And people are dumping fixed line services left and right to cut costs.The only growth area of the business left is cellular data services, for which there is fierce competition. The predictable cash flow from cellphone plans provides dependable revenue from which to pay dividends. But there is little earnings growth left.
Verizon, and its big telecom peers, provide big dividends and a defensive business that should hold up well in a down market. Verizon is yielding 4.2%, AT&T yields 5.4%. While VZ has underperformed in this bull market, the returns have still been better than any other asset class. Over the last ten years while the S&P provided average annual returns of 14.41%, VZ averaged 11.19% over the same period.
But the dynamic is changing. A huge growth catalyst is being added to the mix. The world is changing. And it’s changing in a way that will inject this sleepy high-dividend icon with some serious testosterone.
5G is the next generation of cellular wireless technology. But it’s far more than just an incremental advancement. Much higher speeds and internet connectivelty will enable a new generation of technology like artificial intellegence, self driving cars, robotics, smart cities and much more. The technology is a game-changer that will thrust the world into a digital age like nothing we’ve seen before.
Verizon’s focus on wireless not only enables it to achieve better profitablity than its peers, but it enables the company to focus on upgrading its networks and expanding 5G technology. It is well ahead of its peers as it built 5G mobile services in 30 cities in 2019. It is building the most expansive 5G network and is first to the party in most cases.
Smartphones with 5G are just hitting the market this year. Apple (AAPL) launches its 5G enabled phones in Sepember. The technology is just now descending on us. All the new techologies will need a much higher degree of internet connectivity through cellular networks. They will need Verizon, which controls the largest network. Naturally, Verizon will charge for additional services.
The cellular giant will likey be able to charge higher fees per smartphone, as they will offer more and better services. The Internet of Things involving all things connected to the internet like autonomous cars, smart cities, health monitoring services, and a wide range of other things will ring the register as well. And, being first to the party, Verizon can lock in customers.
Look, Verizon by the old rules would be a solid choice in this market. It’s cheap, high dividend-paying and defensive. But when you add the likely additional revenues and growth from 5G, it makes the stock a great choice.
Tim’s note: Technically, VZ has just bounced off its 200-day moving average, adding one more positive factor to the story.
Current Recommendations
When the market is strong, we invest aggressively. When the market is weak, we reduce risk, holding cash and leaning toward lower risk stocks—and that’s the recommended course now, as the market begins a very well-deserved correction. But the reason for the correction doesn’t matter! It might be coronavirus or Bernie Sanders or the Fed or any combination of factors; it really doesn’t matter and it’s important not to overthink it. In time, this correction will run its course and the market’s long-term uptrend will resume, and our goal is to get from here to there with our portfolio unscathed. Today, the portfolio sells two stocks and downgrades two to hold.
Changes
Broadcom (AVGO) to SELL.
Designer Brands Inc. (DBI) to SELL.
Inphi (IPHI) to HOLD.
Sea, Ltd. (SE) to HOLD.
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, began a well-deserved correction a week ago, and with today’s small drop the stock has now penetrated its 25-day moving average—which means that technically it’s still fine. In his update last week Tom wrote, “The research lab and life science REIT announced solid earnings on Monday and the stock jumped to new all time highs. Funds from operations grew 5.4% in 2019 over the previous year and revenues climbed 15.4% as the company grew its property portfolio. The relentless slog higher for this stock just got a nice bump. With everything going so well for the stock I’m tempted to take profits on part of the position. But the momentum is still great and the stock is a trouper in down markets. So I will continue to hold the whole position for now.” HOLD.
Axonics (AXNX), originally recommended by Tyler Laundon in Cabot Early Opportunities, has a disruptive solution for patients who suffer from overactive bladder (OAB), Urinary Retention (UR) and Fecal Incontinence (FI). This is a market where Medtronic leads, but Axonics’ neurostimulator is better and cheaper so doctors are switching teams fast. Analysts see sales growing from $14 million in 2019 to $80 million in 2020 (up 470%). After eleven consecutive up days, and many new highs, the stock pulled back modestly today. HOLD.
Broadcom (AVGO), originally recommended by Crista Huff for the Growth & Income portfolio of Cabot Undervalued Stocks Advisor, fell below support at 300 this morning, and the portfolio has a small loss, so the question is whether to hold or take the quick loss here. In Crista’s latest update, she wrote, “Last week, Broadcom announced the world’s first Wi-Fi 6E client device, the BCM4389. Wi-Fi 6E extends the Wi-Fi 6 standard to support the soon-to-be-operational 6 GHz band with wider 160 MHz channel bandwidths that double Wi-Fi speeds and cut latency in half compared to Wi-Fi 5. The BCM4389 delivers over 2 Gbps of real-world speeds and up to five times better battery utilization, making it an ideal solution for flagship smartphones and future AR/VR devices. The company will report first quarter results on the afternoon of March 12. Wall Street expects EPS to grow 9.2% and 9.9% in 2020 and 2021 (November year end).” On its own, AVGO doesn’t look bad; it’s even sitting at its 200-day moving average right here so might find support—but I do want to raise cash in this market environment, and AVGO (with a loss and a technical breakdown) is a leading candidate. SELL.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, pulled back with the market today after two very stong weeks up so now the stock is back where it was three weeks ago. And that’s not bad. In his update last week Tom wrote, “The global infrastructure company reported solid earnings last week. Operationally, things are solid as the company is successfully employing its asset rotation strategy of selling mature assets and buying higher margin new ones. The market loves defensive stocks right now and this is one of the best. It’s also not as overvalued as most of the other defensive stocks, even though it has returned over 40% in the past year.” 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. In fact, it fell more than the market today, despite the fact that it’s supposed to be a good value. Technically, the stock is at long-term support here, dating back to the middle of 2017, and it does have a big dividend, but it’s now our portfolio’s biggest loser, and with no buying power in sight, I’d prefer to hold cash. SELL.
Endava (DAVA), originally recommended by Tyler Laundon in Cabot Early Opportunities, jumped 14% two weeks ago after a great earnings report, and today’s market-related drop has taken away about a third of that—which isn’t bad at all. HOLD.
Equitable Holdings (EQH) originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Special Situation Portfolio and featured here last week, has pulled back to its 50-day moving average today so is at a great buying point. In Crita’s last update she wrote, “The company changed its name in January from AXA Equitable Holdings to Equitable Holdings. Equitable has $701 billion in assets under management in two principal franchises: Equitable Life Insurance Co. and a majority stake in AllianceBernstein Holdings L.P. (AB), an investment management firm. Equitable is expected to report fourth EPS of $1.17, within a range of $1.10-$1.25, and $3.4 billion revenue, within a range of $3.2-$3.5 billion, on the afternoon of February 26. Last week, AllianceBernstein reported fourth quarter net income of $0.85 per unit vs. the consensus estimate of $0.70, and $817 million revenue beat the $769.8 million consensus estimate. AllianceBernstein’s bullish results served to slightly increase analysts’ estimates for Equitable’s fourth quarter and full-year 2019 results. Equitable is now expected to grow full-year EPS 20.1% and 4.9% in 2019 and 2020, respectively. The 2020 P/E is extremely low at 5.5. Barring a downturn in the broader stock market, I expect continued capital gains from EQH this year.” BUY.
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 has made no progress over the past two years, but China’s leading hotel operator keeps growing revenues and earnings (and it’s diverisifed into Germany too), so eventually the stock will get moving again (though probably not as spectacularly as our other Heritage Stock, Tesla, did this year). HOLD.
Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, posted record closing highs last Tuesday and Wednesday, but today it’s back to its 50-day moving average, thanks to the market selloff. In a special update today, Mike wrote, “The main trend is up here, but there was huge-volume churning on earnings and the stock is cracking its 50-day line this morning. We’re going to sell one-third of our shares and hold the rest with a fairly tight mental stop (mid 70s).” I’ll simply downgrade to Hold and honor Mike’s mental stop. HOLD.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, peaked at 50 in mid-January, bottomed at 27 (on huge volume) at the end of January, effectively washing out all the weak hands, and now the buyers are in control again. Yes, the stock dipped a bit today in sympathy with the broad market, but volume was light. In his latest update, Carl wrote, “I have been recommending that you take some Luckin profits off the table but see no reason not to keep this stock a buy.” Thus, if you haven’t bought it, you could nibble here. I’ll just keep it rated hold. HOLD.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, remains very close to its recent highs. In his update last week, report, Tom wrote, “I would say slow and steady wins the race. But this stock has changed. Now it’s fast and steady. After a terrific 2019 where NEE returned over 46%, it has returned over 16% so far in 2020. And this is a utility stock mind you. Just about everything I said about ARE applies to this stock as well. The company recently approved a 12% dividend hike.” 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 closed at a record high last Tuesday and has pulled back modestly since then but remains well above its 25-day moving average. HOLD.
Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, closed at a record high last Thursday and has pulled back normally since. Last week, analyst Carl Delfeld of Cabot Global Stocks Explorer wrote, “Shares jumped 10% this week, reflecting the step-change in gaming revenues and profitability following the success of “Free Fire”, Sea’s first self-developed game. I see further upside potential to Sea’s share price based on better e-commerce numbers, the introduction of its “Battle Pass” game and expansion into India. Garena, Sea’s gaming group, continues to do well in India and Latin America. Its lead independent game, “Free Fire” continues to maintain its position as the #1 or #2 grossing game on the Google Play Store in India. The company is primarily known for gaming and its e-commerce platform Shopee is being deeply discounted despite gaining market in the fast-growing Southeast Asian market. More conservative investors may want to take some partial profits in Sea while aggressive investors should keep all shares. This company has the potential to be an enduring growth stock and is expected to report its next earnings on March 3.” Then, this morning, Mike Cintolo sent a special bulletin to his readers of CGO saying, “SE is getting hit pretty hard this morning, as fears of a sharp economic slowdown across Asia (not just China) are spiking. The stock looks fine, but it’s extended after its good run, and could be in the crosshairs of future virus worries. We’ll book partial profits (sell one-third of our shares) here, with a mental stop for the rest near our average cost. I’ll simply downgrade to hold, but you, too, could consider taking partial profits. 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 it’s certainly been a star this year, propelled by fundamental developments, changes of investor sentiment and short-covering. Last week the stock tagged 945, nearly equaling its blowoff high of 969 of February 4, and now it’s pulled back slightly. Downside potential from here is 720 (the 25-day moving average) or 580 (the 50-day moving average) so if you’ve got profits, you could consider partial profit-taking. HOLD.
Trulieve (TCNNF), originally recommended by yours truly in Cabot Marijuana Investor, is the market leader in Florida, with 45 medical dispensaries, as well as nascent operations in California, Massachusetts and Connecticut. But the stock remains mired in a basing formation, with support at 10, as the sector prepares for its next uptrend. If you don’t own it, you could buy some here. BUY.
Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record highs last Tuesday and has pulled back slightly since. In last week’s update, Mike wrote, “VRTX remains a bit choppy, but is also in a solid uptrend. We’re fine picking up shares here or (preferably) on dips, as the rapid and reliable growth profile should keep big investors interested, especially on dips. BUY.
Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is a one-of-a-kind stock—the only investment the public can make into a company that will take paying passengers into space. In last week’s update, published on the exact day the stock hit 42.5 and then reversed lower, Carl wrote, “I suggest that SPCE owners sell one-third of their shares to lock in some profits. This week the company announced the relocation of the VSS Unity to Spaceport America to engage in the final stages of its flight test program. This will begin with a number of initial captive carry and glide flights from the new operating base in New Mexico, allowing the spaceflight operations team to get familiar with the airspace and ground control. Then the team will carry out a number of rocket-powered test flights from Spaceport America to continue the evaluation of VSS Unity’s performance in preparation for the start of commercial spaceflight operations. The company has reservations from over 600 people in 60 countries, accounting for $80 million in deposits and $120 million in potential revenue. Sir Richard Branson confirms that space tourism flights will begin within a year and he expects profitability by 2021.” BUY.
The next Cabot Stock of the Week issue will be published on March 2, 2020.
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