This morning’s market crash will go down in history as a big one—biggest by point drop and one of the biggest by percentage drop. But this is no time to panic. Instead, it’s time to recognize that the market is increasingly offering its wares at bargain prices, and all you need to do is have cash on hand when the climate improves.
For our portfolio, that means selling one more stock today, Endava (DAVA).
In the meantime, Cabot analysts continue to find stocks that are attractive for one reason or another and today’s featured stock is one of them—a leading chipmaker with great prospects as the world goes increasingly online and digital.
Full details in the issue.
Cabot Stock of the Week 288
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Before I get into the market action and today’s recommendation, I have a few words of what I believe is wisdom about the coronavirus. In short, I believe the world in general has overreacted to the threat and that with this morning’s plunge, the market has discounted the worst-case scenario.
And I say this based on two things—first, my experience with previous scares over the decades (the market has recovered fairly quickly from all of them), and second a review of the facts of the coronavirus, including these: Every year in the U.S., roughly 56,000 people die from either the flu or pneumonia (which often follows). It’s something most of us accept, and while we try to make those numbers better, the fact is that people who are elderly and in poor health are going to die from something—and the flu is often that something. Coronavirus is new, therefore unknown and therefore scary, but so far not proven worse than the flu we know and accept. So far there are 3,000 dead in China (with 59,000 recovered, for a 5% mortality rate of detected cases), 366 dead in Italy and only 22 dead in the U.S.
Masses of people are acting as if the virus is a death sentence when in fact it isn’t. Now, I realize that may sound a bit cold and insensitive and I do plead guilty to that. But warm and sensitive doesn’t yield good investing advice. Bottom line—this too shall pass, and unless you truly need more cash on hand, this is the time to start thinking about buying, not selling.
So what can you buy today that might lead the market back to recent highs? How about a technology stock that’s not greatly harmed by COVID-19? When people are limiting travel, shopping and restaurant behaviors, they’re still using their phones, working on their computers, playing video games and watching televised news and entertainment.
With that in mind, here is our latest recommendation, from Cabot Undervalued Stocks Advisor chief analyst Crista Huff.
Nvidia (NVDA)
Nvidia was the pioneer and it’s now the leading designer of graphics processing unit (GPU)-accelerated computing, which has ignited modern artificial intelligence (AI). Nvidia powers the fastest supercomputers in the U.S., Europe and Japan. Conversational AI is used in large-scale cloud data centers that serve voice, video, image and recommendation services to billions of users. The company’s products are coveted by gamers, designers and scientists. Target markets include gaming, professional visualization, data center and autonomous driving. Nvidia is achieving attractive growth in gaming and data centers, while revenue opportunities in passenger cars, robo taxis and the trucking industry are expected to ramp up in the coming years.Nvidia is also a market leader in ray tracing, a lighting technique that attempts to simulate the way light works in the real world within a gaming context, thus improving the user’s gaming experience. For example, reflected images and shadows within a video game look far more realistic when ray tracing is incorporated into the technology.Nvidia is in the process of acquiring Mellanox, an early innovator in high-performance interconnect technology, routinely used in supercomputers and so-called hyperscale data centers. The acquisition is expected to immediately add to Nvidia gross margins and EPS. As of their January quarter, Nvidia had $11 billion cash on hand, which will be largely used to fund the Mellanox acquisition.
Nvidia profits declined 13% in fiscal 2020 (January 2020 year end). Earnings per share (EPS) are now expected to rise to record levels in fiscal 2021 and 2022, increasing 35% and 19%, respectively. The 2021 P/E is 32. The company beat earnings expectations in each of the last five years and also in the last five quarters, which translates into investor confidence that Nvidia tends to under-promise and over-deliver. The company is managing its cash flow quite well, maintaining low debt levels and aiming to repurchase $2 billion of its shares once the Mellanox transaction is completed.
Management is expecting a $100 million revenue impact this year from COVID-19. For perspective, the company achieved $10.9 billion of revenue last year, and consensus estimates point to $13.3 billion revenue this year. So the effect of the virus on Nvidia revenue will be about 0.75% this year. The stock is down 20% from its February all-time high of 315. It’s fair to say that investors may have recently fled stocks in fear, but as rational thought later prevails, they will realize, “Oh. Nvidia still in business, and thriving. Let’s buy some shares!”
The stock surpassed its former all-time high of 290 in January, rising as high as 315 before falling back to 250 today. What we’re likely to experience during the coming market rebound – which could begin in two weeks, two months or longer, depending on when the virus dissipates and the Saudi Arabia-Russia price challenge in the oil markets is resolved – is that recovering stocks will rise to recent highs, then trade back down. I expect NVDA to trade between 250-315 during this volatile period in the broader market, and to eventually lead the market higher. NVDA is a great stock for growth investors and traders.
Current Recommendations
March 9, 2020 will go down in history as one of the biggest one-day market crashes ever, and the reasons are obvious—which is a good thing. Going forward, of course, the market will recover, and eventually hit new highs again, but for now, a little more caution is advisable. In the meantime, I’ll continue to recommend one well-researched stock every week, and there’s no question that some of them will be bought at bargain prices. Today the portfolio has only one sell, Endava (DAVA).
Changes
Endava (DAVA) to Sell
Vertex Pharmaceuticals (VRTX) to Hold
Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, pulled back with the market today but remains above its low of seven trading days ago, which is a great sign of support. In his update last week Tom wrote, “This normally consistent-performing research lab REIT had a stunning pullback from the recent highs. It pulled back more than 13% from its high in just two weeks. But the stock has since recovered about half of what was lost. There is no fundamental or operational reason for the selloff. Earnings were stellar. The main problem is that the stock was flying too high and at its highest just when the market got whacked. It rose too far too fast and then fell too far too fast. But it is still a solid defensive REIT that should thrive going forward as investors will be scared with uncertainty after this coronavirus experience.” HOLD.
Axonics (AXNX), originally recommended by Tyler Laundon in Cabot Early Opportunities, released fourth quarter results last week. Revenue was $9.9 million, up from $0.5 million the year before, and of course losses continue as the company is still in building mode. The stock hit a high on the day of the announcement and has pulled back since in sympathy with the market. Tyler still has the stock rated buy, but I’m going to leave it on hold out of respect for the broad market’s weakness. Axonics has a disruptive solution for patients who suffer from overactive bladder (OAB), Urinary Retention (UR) and Fecal Incontinence (FI), and prospects are bright. HOLD.
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, plunged to its 200-day moving average today, to roughly the same level where the stock bottomed in December. In his update last week Tom wrote, “The global infrastructure company had been one of the market’s safe-stock stalwart performers. Performance had been fantastic over the past year and BIP was forging to new all-time highs. Since the market selloff began on February 20, BIP has outperformed the market as well. While the S&P is down over 11%, BIP is just off a little more than 6%. It’s proving to be one of the better stocks to own in a down market and I expect the stock to benefit when the selloff abates and investors’ appetite for safety is renewed.” HOLD.
Endava (DAVA), originally recommended by Tyler Laundon in Cabot Early Opportunities, gapped down below its 50-day moving average this morning and remained below it throughout the day, with trading volume for the day above average. That means the stock’s February breakout has now failed, and the stock is back in its basing pattern. Technically, it’s not a terrible pattern, but it does signal that the nascent uptrend is dead, and thus I think it’s best to sell now and move on. 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, and it hasn’t been much of a mover in these coronavirus days either, but long term, as China’s leading hotel operator, prospects are bright. HOLD.
Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, dipped a bit with the market this morning, but the basing pattern of recent weeks remins intact. In his latest update, Carl wrote, “In fact, it’s been reported that Starbucks is temporarily closing about half of its stores in China in the wake of the virus issue and this issue may impact LK as well. I have been recommending that some of you should take some Luckin profits off the table but see no reason not to keep this stock a Buy for more aggressive investors.” In the long run, LK is likely to thrive as citizens of China—still mainly a tea-drinking nation—develop a taste for coffee. Also, Mike Cintolo, who has the stock on his watch list for Cabot Growth Investor, last week wrote, “This Chinese bare-bones coffee store operator is posting mind-boggling growth, and while the chart still needs some work, we like the (much) higher low recently and the relative tightness, too.” HOLD.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, sold off with the market this morning but remains well above its low of two weeks ago. In his update last week, report, Tom wrote, “You know the market has had a serious pullback when NEE stops going up. As it is, the stock is down about 3.5% from the high, much less than the overall market. And part of the reason it’s even down that much is that it was flying so high when the market tanked. The stock is still on a strong upward trajectory despite the recent turbulence. I still love this dependable regulated utility that is also the world’s largest producer of alternative energy. But it didn’t go down enough to put it back into the BUY range.” HOLD.
RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, was a featured stock in last week’s Cabot Top Ten Trader. Here’s part of that write-up. “Cloud-based communication providers (the firms in the industry call it unified-communications-as-a-service) have fared resiliently during the coronavirus panic as they allow people to reduce exposure risk by holding meetings remotely via the Internet. RingCentral is a leader in the $50 billion unified communications industry, offering a full cloud of communication offerings, including online voice calls, multi-user web conferencing, team messaging, conference calls and contact center solutions. Growth has been consistent and rapid for a while now, and there’s still a long runway of potential growth (Ring estimates less than 10% of potential customers are using its or similar services). But a big part of the story here is some of the giant partnerships Ring has signed, including with AT&T, Avaya, and more recently, Atos. In the latest quarter, RingCentral delivered outstanding results and surpassed its goal of a $1 billion annual revenue run rate. Although it reported a Q4 operating loss of $20 million, total revenue was an eye-catching $253 million, increasing 34% year over year for the fourth straight quarter. Importantly, subscription growth is equally strong, with annualized recurring revenue (ARR) increasing 32% in the latest quarter. Going forward, it should be more of the same as RingCentral guided for a 29%-ish increase in Q1 revenue, which is likely conservative. The valuation is up there, but there doesn’t seem to be much standing in the way of Ring growing nicely for many years to come.” The stock dropped to its 50-day moving average this morning, but volume was light, so the long-term trend looks fine. In fact, if you don’t own it, you could nibble here. HOLD.
Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, closed at record highs last Wednesday and Thursday and has pulled back normally since, right to its 50-day moving average. In a special bulletin this morning, Mike wrote, “for those of you that still own Sea Ltd (SE), we’d still be holding on, albeit with a mental stop in the 44 area. It’s taking a hit today of course, but is actually still north of its 50-day line for the moment, which is rarefied air these days.” HOLD.
Seattle Genetics (SGEN), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, continues to trade sideways, setting up for an eventual breakout to new highs. I won’t say it’s immune to the weak market, but it certainly has some immunity. If you didn’t buy last week, you can buy now. 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 while it was a top performer earlier this year, it’s just fallen to its 50-day moving average for the second time in three weeks—perhaps the beginning of a process of base-building in the 600 region. Fundamentally, Tesla looks to be in a great place, as all automakers have finally recognized that electric cars are the future (though short-term, with oil prices now plumbing new lows, gasoline is looking cheap again). In any case, while most auto stocks looks terrible; TSLA looks healthy. 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 sector as a whole remains week, and in this morning’s weakness TCNNF fell to its October lows. HOLD.
Verizon Communications (VZ), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his High Yield Portfolio, and featured here two weeks ago, may be the safest stock in the portfolio. In his update last week, Tom wrote, “So far, this telecommunications stock is coming as advertised. It was chosen as a safe and high-dividend paying stock that now has a growth catalyst with the rollout of 5G and the new technologies it will spawn. While we haven’t seen the 5G growth hit the bottom line yet, the safe part of the story has shown its impressive colors. This stock is a good way to play defense and offense at the same time.” BUY.
Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, was hitting record highs three weeks ago but now it’s in the trenches with most stocks—though still technically healthy. Mike recommended taking partial profits (selling one-third of the position) early last week and then later in the week he wrote, “Bigger picture, we think VRTX is likely to find support on dips and see higher highs down the road, but right now, we’re staying on Hold as shares are likely to get tossed around by the overall market.” I’ll downgrade to Hold. HOLD.
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. That’s one reason the stock was red-hot last month when investors were throwing money around and our profit topped 300%. Today, though, as investors are running scared, the stock is viewed as a big risk, so investors continue to sell—though admittedly on declining volume. In last week’s update, Carl wrote, “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 it was 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 2 million prospects with liquid assets of $10 million or more. Customers will be passengers aboard a six-passenger plane that will be carried aloft by a larger jet before being released and using its own rocket to reach the edge of space. Passengers on the 90-minute flights would experience three to four minutes of weightlessness. Furthermore, beyond space tourism, the company is taking dead aim at a global commercial aviation market worth $900 billion and could potentially land some defense contracts. Those would include a proposed hypersonic jet that could in theory travel from London to New York in an hour. Boeing last year invested $20 million in the company, in part to support the hypersonics effort and work on urban mobility initiatives. 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 “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. The stock’s pullback over the last few weeks offers more aggressive investors a chance to buy more shares.” BUY.
The next Cabot Stock of the Week issue will be published on March 16, 2020.
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