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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 287

As the coronavirus correction rolls on, wise investors adapt,by selling weak stocks, holding cash and making smaller strategic investments in new opportunities.

Today, for our portfolio, that means selling two current holdings (one for a loss and one for a profit) and recommending a fast-growing medical company that has notonly a great growth story but also a chart that has been building a base for three months, setting up for its next advance.

Full details in the issue.

Cabot Stock of the Week 287

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The market needed a correction after zooming higher for nearly five consecutive months, and now we have one—a real doozy! But as every investor knows, market corrections provide buying opportunities, so I, for one, am happy that the format of this advisory not only allows but requires a new recommendation every week. The challenge, of course, is choosing what to buy when the market is falling apart—and Mike Cintolo has the answer in today’s featured stock, which was first recommended in Cabot Growth Investor. Here are Mike’s latest thoughts.
Seattle Genetics (SGEN)
Nobody who’s bullish enjoys over-the-falls market declines; even if you acted quickly last week, your portfolio likely took a sizable haircut. But the one bright spot about a horrid environment is that, as the dust settles, it becomes a lot easier to see which stocks are mustering buying support from institutional investors; if a stock can withstand last week’s maelstrom, it’s definitely a positive sign.Of course, we don’t buy stocks solely based on their charts (which, after all, can change quickly)—we also need a good story and some good numbers, plus some history showing that the stock has been a leader in the recent past. And that’s just what Seattle Genetics (SGEN) has, which is why it’s our pick this week.

The big idea here is that Settle Genetics looks to be on the way toward being an oncology powerhouse, with successful drugs on the market and a buoyant pipeline that should bear fruit in the relatively near future. On the market, the firm has been riding Adcertis, which received its initial FDA approval back in 2011 but has since gotten the thumbs up for a variety of additional indications, mostly involving different types of lymphoma. It’s a frontline treatment (along with chemo) for types of Hodgkin and T-cell lymphomas.

Sales have been terrific, both in North America and overseas (it gets lucrative royalties from Takeda in the mid-20% range), with Q4 sales in North America up 26%, while royalty revenue tripled as Takeda met a big milestone. Going forward, the prospects here look solid.

But Seattle is far from a one-drug outfit. Just approved in December (three months ahead of schedule) was Padcev, which treats certain patients with locally advanced or metastatic urothelial cancer; in the Q4 call, management said initial sales are tracking ahead of expectations. And, like Adcertis, Padcev will likely enjoy more label expansions down the road for other patients with this disease (it received FDA breakthrough designation for one other indication with Merck), as well as metastatic solid tumors.

Beyond that is Tucatinib, which has been submitted to the FDA for one indication of HER2-Positive breast cancer, with another application for another indication in the same disease likely in Q1. The FDA has given Tucatinib breakthrough designation status, which could lead to some approvals this year. It could be a big one.

The company has also has some early-trial irons in the fire, and both Padcev and Tucatinib will expand globally as they ramp up in the quarters ahead. All in, analysts see growth slowing this year (there were some royalties that are unlikely to reoccur in 2020), but later this year and early next should see a return to rapid growth (sales up 42% in 2021). Just as important is the aforementioned likelihood that Seattle will get a lot bigger in the years ahead as more approvals are earned.

As for the stock, it etched a huge launching pad for a couple of years, and, like many stocks, it staged a long-term breakout late last year (actually in September) and enjoyed an awesome run, zooming from around 80 to north of 120 by the end of November. It stalled out after that, which wasn’t ideal, but it never did anything wrong, moving straight sideways for the most part, consolidating its big gains.

Then, last week, as the market imploded, SGEN showed some real relative strength. Shares couldn’t even dip below their January low near 104, and by week’s end, the stock had found excellent volume support on the weekly chart, closing in the middle of its three-month rest period range.

Obviously, the broad market’s immediate future may be a big factor in moving the stock, but SGEN certainly looks to be one of the top contenders to see higher prices if and when the buyers return.

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Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 3/02/20ProfitRating
Alexandria Real Estate Equities (ARE)9/4/191522.7%1563%Hold
Axonics Modulation (AXNX)1/28/20300.0%3722%Hold
Broadcom (AVGO)Sold
Brookfield Infrastructure Partners (BIP)4/24/19424.2%5225%Hold
Designer Brands Inc. (DBI)Sold
Endava plc (DAVA)1/2/20470.0%5312%Hold
Equitable Holdings (EQH)2/18/20272.8%22-18%Sell
Huazhu Group Limited (HTHT)3/30/1690.0%35273%Hold
Inphi (IPHI)11/6/19700.0%768%Sell
Luckin Coffee (LK)6/19/19200.0%3992%Hold
NextEra Energy (NEE)3/27/191942.1%26838%Hold
RingCentral (RNG)10/23/191530.0%24057%Hold
Sea Ltd (SE)1/21/20410.0%4818%Hold
Seattle Genetics (SGEN)New0.0%112Buy
Tesla (TSLA)12/29/11300.0%7442409%Hold
Trulieve Cannabis Corp. (TCNNF)10/30/199.950.0%9.37-6%Hold
Verizon (VZ)2/25/20584.4%57-1%Buy
Vertex Pharmaceuticals (VRTX)1/7/202240.0%2324%Buy
Virgin Galactic (SPCE)10/11/199.240.0%26180%Buy

With the market in a correction, you should be cautious with new investments, keeping more cash on the sidelines until the market environment improves. And you should be working harder than usual to get rid of your weakest stocks—those that don’t have the energy/support to rebound when the pressure comes off the market. For us, this week that means selling two. But don’t lose faith; this high-profile selloff will almost certainly prove a key part of the setup for the resumption of the market’s uptrend.

Changes
Equitable Holdings (EQH) to SELL.
Iphi (IPHI) to SELL.
Trulieve (TCNNF) to HOLD.

Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, dropped to its 200-day moving average last week, and Tom says that makes it attractive to investors. In his update last week he wrote, This research lab REIT has been on fire and has dropped less than half as much as the overall market over the past week. If anything, this past week should increase investor appetite for safety going forward. As well, the fact that this stock has finally taken a breather bodes well for it in the weeks and months ahead.” 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%). The stock was very strong in early February, and since then has been in a consolidation pattern—and on the one day that sellers took chrge last week (Friday) the buyers pushed the stock right back up! Tyler has the stock rated buy, but I’m going to leave it on hold out of respect for the broad market’s weakness. HOLD.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, fell below its 50-day moving average last week but remains in an uptrend, with a clear pattern of higher highs and higher lows. In his update last week Tom wrote, “The global infrastructure company finally pulled back over 5% from all-time highs in this week’s rapidly declining market. The stock had been an incredibly resilient performer but with a decline of this magnitude it was bound to fall somewhat after rising so much in the past year. It’s still a great place to be as it has rising profits in a very defensive business and pays a great dividend. If the down market continues and the stock falls below 50, I will likely consider upgrading it to a BUY.” HOLD.

Endava (DAVA), originally recommended by Tyler Laundon in Cabot Early Opportunities, continues to consolidate the gains from its 14% spike higher three weeks ago after a great earnings report, virtually ignoring the turmoil in the general market. HOLD.

Equitable Holdings (EQH) originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor for her Special Situation Portfolio and now in her Growth & Income Portfolio, reported fourth quarter results last week, and they were good, actually beating analysts’ estimates. However, the stock gapped down in response, as the market fell apart and investors anticipated tougher sledding for all investment companies going forward. In her latest update, Crista wrote, “This stock is a very attractive bargain, but if the price falls below support, hold off on additional near-term purchases.” Well, the price has definitely fallen through support. Plus, this is now the biggest loser in the portfolio. Combined, that’s reason enough to sell. SELL.

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. Last week it dipped in sympathy with the market, though remains above its low of January. HOLD.

Inphi (IPHI), originally recommended by Mike Cintolo in Cabot Growth Investor, posted record closing highs just two weeks ago, but Mike characterized that action as “churning” in response to earnings—and then last week the stock joined the market in a serious correcion. In response, Mike wrote, “It’s definitely still possible that Inphi is near the start of a new growth wave as many big players upgrade their networks and firms look for faster, more reliable speed inside and between data centers, too. But the stock, which had been in a steady uptrend for the past few months, is telling a different story. First, IPHI churned on earnings, then stalled out around 85, and this week, decisively broke support. We could always revisit it if the stock sets up again, but we sold a chunk on Monday and the rest on Tuesday, booking our profit.” I’ll follow suit, taking our modest profit. SELL.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, was like Buddha last week, undisturbed by the waves of panic selling in the broad market. 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 if you don’t yet own it.” HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, continues to look healthy after a well-deserved shakeout. In his update last week, report, Tom wrote, “The market has been frog-ugly this week, with the S&P down 7.5%. But it will have to do a lot better than that to put a dent in this stock. NEE fell a little over 2% over the last week but I think it will gain that back quickly when the market stabilizes. This safe and growing regulated and alternative energy utility continues to offer the right stuff in this market. Recent market volatility will probably bolster investor demand for the stock going forward. It’s expensive but it will likely run higher in a rebounding market and outperform if the market continues to struggle. The company also 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 was amazingly rock-solid last week and remains above its 25-day moving average. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit new highs two weeks ago, and then last week fell to its its 50-day moving average before quickly bouncing. In his update last week in Cabot Growth Investor, after selling a third, Mike wrote, “SE has taken it on the chin this week, likely because (a) it just had a huge run and (b) it has exposure to the growing virus issue in Asia. However, the stock really isn’t in awful shape here—yes, it’s been hit very hard this week, but it found support at its 50-day line this morning, which is miles better than the major indexes and the vast majority of stocks out there. (Just 21% of NYSE stocks were above their 50-day lines, and that was before today!) On the other hand, SE has had an extended run from its original breakout a year ago, and it’s clearly exposed to a worsening Asian economy that could develop due to the virus. Moreover, it’s now suffered a few days of heavy selling during the past five sessions and has earnings due next week (March 3). Thus, we took partial profits earlier this week (on Tuesday’s special bulletin), selling one-third of our shares. We’ll hold the rest, albeit with a fairly tight leash a couple of points below here.” 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, notching a record high close two weeks ago before pulling back to its 50-day moving average last week. Recent positives include the news that Tesla’s batteries are not only better that those of its competitors but cheaper. Cairn Energy Research Advisors estimates that the company’s pack-level costs reached $158.27 per kilowatt-hour in 2019, a decline of over $100 from four years ago and approaching the $100/kWh price point that will bring EVs to cost parity with traditional vehicles. “Tesla simply has been engineering these packs longer than its competitors, and therefore it has a technology lead that is significant,” said Sam Jaffe, Cairn’s Managing Director. Another Tesla advantage is its Gigafactory in Nevada, which gives Tesla the scale to further drive down costs. The other automakers have finally awakened to the fact that they’ve fallen behind, and they now understand the challenge posed by the Silicon Valley disruptor. “Five years ago when I spoke to automotive engineers about Tesla, they made fun of it,” said Jaffe. “Today that’s very different. They’re not necessarily going to speak publicly in this way, but there’s a lot of respect, and maybe envy, for what Tesla has done.” Meanwhile, shares of Ford (F) hit an 11-year low last week. 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 earnings estimates for the company have been slipping (analysts now expect $1.32 in 2019 and $0.66 in 2020), and even worse, the stock last week fell through support at 10. Until that point, Cabot Marijuana Investor had been overweight the stock, but last week I recommended selling one third and downgraded it to hold, so I’ll downgrade it here as well. HOLD.

Verizon Communications (VZ), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his High Yield Portfolio, and featured here last week, would have been a great stock to hold last week as the broad market tanked; unfortunately the FCC chose that week to announce proposed fines of over $200 million against the country’s largest wireless carriers ($48 million for Verizon) for selling access to customers’ location data without taking reasonable precautions against hackers. So Friday the stock gapped down, and this morning as cooler heads prevailed it gapped back up, leaving an island reversal (a good sign). If you haven’t bought yet, you can buy now. BUY.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, hit record highs two weeks ago but fell through it 50-day moving average last week. In his update last week, Mike wrote, “Vertex has slipped below its 50-day line, and because of that (and the horrid environment) we decided to take a few chips off the table earlier this week, selling our usual one-third of a position. We won’t play favorites, of course, but we are content to give our remaining shares room to maneuver; this is an institutionally-owned name with very fast and foreseeable earnings growth coming up, and the stock just got going from a multi-year base back in October. Translation: We continue to think VRTX can see higher prices down the road, so we want to give our remaining, profitable position (cost around 199) room to breathe.” 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. Two weeks ago, on the exact day the stock hit 42.5 and then reversed lower, Carl suggested that readers take partial profits—and since then, in a well-deserved correction, SPCE has come down to its 50-day moving average. And then last week Carl wrote, “Virgin Galactic reported a loss of $72.8 million for the fourth quarter, including $48 million in costs tied to its public offering. This all needs to be balanced out against the company having no debt, $480 million in cash and ready access to capital markets. SPCE still plans to make its first commercial space-tourism flight this year, and took a step toward resuming ticket sales for jaunts expected to cost upward of $250,000. The company said on an investor call Tuesday that it’s focused on working through testing and approval for its space launch system. More than 600 potential customers have already paid a collective $80 million in deposits for the flight and the company has in its sales funnel two million prospects with liquid assets of $10 million or more. CEO George Whitesides said the company was focused on the commercial launch and had completed 20 of the 29 approvals required to validate the commercial license it received from the Federal Aviation Administration in 2016. He also stated that Virgin Galactic’s use of a reusable plane made its technology “orders of magnitude” cheaper than the space capsules developed by Blue Origin. This stock has had an incredible run this year and after selling just one-third of our position, our remaining shares are all potential profit. This week’s pullback offers aggressive investors a chance to buy more shares.” BUY.


The next Cabot Stock of the Week issue will be published on March 9, 2020.

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