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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 289

Just when you start to think this coronavirus crash will never end—it will. And our goal is to have a portfolio of healthy stocks when that day arrives. In the meantime, our selling has increased our cash position significantly—and there are two more recommended sales today.

As for new buying—there aren’t a lot of healthy stocks to choose from, regardless of whether you’re looking for low-risk or high-risk, but one that stands out is today’s recommendation, which benefits from the booming growth in working-from-home (WFH).

Full details in the issue.

Cabot Stock of the Week 289

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The market remains in panic selling mode, as the forced closure of businesses around the world virtually guarantees a sharp recession. This selling won’t last forever, it won’t take the market to zero, and the world won’t end. But you’re forgiven if you feel that way. Watching stocks gap precipitously lower week after week can be draining, especially when the result is a shrinking portfolio that was designed to get you a comfortable retirement. But very soon the market will bottom, and eventually a new uptrend will emerge. In the meantime, aggressive investors can still find opportunity in stocks of companies benefitting from the major shifts going on thse days. Today’s stock, originally recommended by Mike Cintolo in Cabot Top Ten Trader, is one of them. Here are Mike’s latest thoughts.
Zoom Video (ZM)
We’re not big fans of looking at a stock just because some unusual event could boost business—buying stocks of infrastructure firms after a devastating hurricane, for instance, usually isn’t a great strategy, as the market doesn’t pay up for a (sometimes questionable) boost in business that will only last a couple of quarters.But the virus situation looks unique—not only will it provide a short-term benefit to some firms, but it will introduce these services to a whole new set of businesses and users that may not be eager to give them up even when the world goes back to normal. Zoom should be one of the major beneficiaries of that trend, and when you combine it with a business that was already going gangbusters, the long-term upside potential here looks huge.

Zoom’s big-picture story is easy to understand: Most videoconferencing solutions were built on top of systems that were originally make to handle voice or online chat—which leads to myriad problems (low-quality video) and inefficiencies—which is a big reason why one study a couple of years ago showed that 94% of virtual meetings were still audio-only. That’s amazing given today’s streaming video-centric world.

But Zoom is changing that. Its solution was built from the ground up for video, which is why most analysts believe it’s hands-down the best solution in the industry. “It just works” is a common comment from customers, as the offering is easy to use and, thanks to proprietary multimedia routers, provides high quality even when bandwidth or network performance isn’t top-notch.

And it’s not just videoconferencing, either—while Meetings and Rooms (video) are the firm’s core offerings, Zoom has moved into the huge, rapidly-growing phone business, too, competing with the likes of RingCentral. Zoom is not only expanding quickly here (2,900 firms with at least 10 customers now use Phone; the year-end run rate was 230 million audio minutes), but Phone provides another way to get its foot in the door of clients who can be upsold to videoconferencing.

Thus, even before the virus hit, Zoom was a company doing very well. In the quarter ended January, revenues were up 78% from a year ago, while the number of clients with at least 10 employees totaled 81,900, up 61% from a year ago. (Impressively, the firm’s same-customer growth rate, similar to same-store sales for a retail firm, has been north of 30% for seven straight quarters.) Earnings have leapt into the black, and the firm’s so-called remaining performance obligations (all billed or unbilled business they expect to earn eventually) was up 94%.

Thus, on its own, Zoom’s future was bright—and now it’s looking like the virus is going to accelerate the rapid growth the company was already enjoying. Anecdotally, there’s an avalanche of examples where Zoom is in the news. Two examples: A money manager buddy of mine has a kid in college whose in-room classes were cancelled—and they’re using Zoom to teach for the rest of the semester. A second example is another child we know, whose tutor is using Zoom instead of in-office reading and math help.

Beyond that, Zoom has removed its free time limit on meetings in China (healthcare workers are using it in that country), is monitoring/boosting capacity globally to serve new users and is providing info sessions to teach those people how best to use their offerings. Chances are, both short- and long-term, a lot more healthcare, educational and regular business users are going to be using Zoom going forward than in the past.

The market, of course, has been sniffing this out. ZM came public last April and had a good first two months, then had the typical post-IPO droop and stayed down basically through January. But as the virus first hit the scene in January, ZM began to perk up, and it’s gone bananas since, rallying as high as 130 on gigantic volume before finally pulling back last week to its 25-day moving average. Today it was up on good volume (while the rest of the market swooned), so aggressive investors could buy here, using close stops.

zm31620

ZMRevenue and Earnings
Forward P/E: 239Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 307($mil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 23.0%Latest quarter18878%0.15275%
Debt Ratio: 0%One quarter ago16785%0.09800%
Dividend: NATwo quarters ago14696%0.08300%
Yield: NAThree quarters ago122103%0.03NA

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 3/16/20ProfitRating
Alexandria Real Estate Equities (ARE)9/4/191522.7%122-19%Sell
Axonics Modulation (AXNX)Sold 3/12/20
Brookfield Infrastructure Partners (BIP)4/24/19424.5%36-13%Hold
Endava plc (DAVA)Sold 3/10/20
Huazhu Group Limited (HTHT)3/30/1690.0%27196%Hold
Luckin Coffee (LK)6/19/19200.0%3049%Hold
NextEra Energy (NEE)3/27/191942.2%2014%Hold
Nvidia (NVDA)3/10/202540.0%196-23%Buy
RingCentral (RNG)10/23/191530.0%139-9%Hold
Sea Ltd (SE)1/21/20410.0%410%Hold
Seattle Genetics (SGEN)3/4/201120.0%96-15%Sell
Tesla (TSLA)12/29/11300.0%4451402%Hold
Trulieve Cannabis Corp. (TCNNF)Sold 3/12/20
Verizon (VZ)Sold 3/12/20
Vertex Pharmaceuticals (VRTX)1/7/202240.0%200-11%Hold
Virgin Galactic (SPCE)10/11/199.240.0%1229%Hold
Zoom Video (ZM)New0.0%108Buy

In case you missed it, last Thursday I sent out a mid-week bulletin (my first in over two years) recommending the sale of Axonics (AXNX), Trulieve (TCNNF) and Verizon (VZ). Thus, coming into today the portfolio had 12 out of a possible 20 holdings. And today we’re selling two more, as detailed below. But by no means are we running scared; we’re just clearing the portfolio of its least healthy components, because someday soon, there’s going to be a great reaction to the upside and we aim to own the best stocks when it comes.
Changes
Sold last Thursday: AXNX, TCNNF and VZ
Alexandria Real Estate Equities (ARE) to SELL
Seattle Genetics (SGEN) to SELL
Virgin Galactic (SPCE) to HOLD

Alexandria Real Estate Equities (ARE), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Safe Income Tier, is now 26% off its February high, and that’s a big drop for a REIT! In his update last week, Tom wrote that he still views this as a “rock solid defensive REIT that should benefit not only from investors’ appetite for safety after this mess is over, but from the fact that it is in the medical research business,” but I don’t like the fact that it’s now the biggest loser in our portfolio. With the chart definitely broken here, I’m selling. SELL.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his High-Yield Tier, has also plunged with the market, but Tom has a good explanation. In his update last week, he wrote, “There was no change in the fundamental story. It was likely just market shenanigans. As an MLP it is not widely traded and a big holder probably dumped its holdings in a panic. The safe infrastructure business makes it one of the best stocks to own in this wild environment. I expect the stock to trend higher over the course of the year. But until the panic is exorcised from the market, it will remain a HOLD.” I’ll stick with it, too. 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 has made no progress over the past two years, but long term, as China’s leading hotel operator, prospects are bright. Today, as the stock has pulled back to its 200-day moving average, it’s a strong hold—and even a buy for adventuresome bottom-seekers. Note: Chinese stocks have been looking better than U.S. stocks in recent days, as it looks like the worst of the coronavirus crisis has passed in China. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is now testing its low of one month ago, and thus technically offers a decent entry point. In his latest update, Carl wrote, “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.” Also last week, Mike Cintolo mentioned the stock in Cabot Growth Investor, writing, “There aren’t too many revealing things during a market meltdown, but one surprising thing we’ve seen is a general resilience among Chinese stocks—it’s possible the market thinks that China, which was the first into the virus fire, might be the first out of it. Luckin Coffee isn’t necessarily the best-looking stock in the group (BILI, JD, VIPS are all a bit stronger), but it definitely has the biggest story: The company has taken China by storm, opening thousands of quick-service coffee locations around the country; it now has more stores than Starbucks! But these aren’t big places where people can lounge and chit-chat—instead, customers will often order and pay for their coffee (and other stuff) online, set a pick-up time, and then walk to it and grab it. That’s it! It’s bare bones, but that leads to lower costs (for Luckin and consumers), and the company is expanding into more offerings, including tea, nuts and juices; in Q3, 45% of products sold were not coffee. Growth has been mind-boggling (revenues were up 517% in the last quarter; store count up 209%; items sold up 670%!), and while earnings are in the red, store-level margins are improving rapidly. Of course, the virus-induced shutdown of the country’s economy likely has (and will) hurt business in the short-term, but the stock has shown some relative strength of late—after a big run into mid-January, LK was nailed during the first virus selloff, but this time around it’s found support a few points higher. The chart, like most, still needs some work, and LK has yet to report Q4 earnings, but the longer it can hang in there, the better the chance its prior uptrend can resume.” HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, gapped down with the market last Thursday but seems to have found support in the 210 area. In his update last week, report, Tom wrote, “Despite the fact that the price of this regulated and alternative energy utility had run sky high before the selloff, it has still fallen far less than the overall market. I love this stock because it offers steady and reliable income with growth from the alternative energy business. I believe the market will continue to love it because it is the very best stock in the defensive utilities sector. Investors are likely to have one foot on safety for a good long while after the coronavirus hysteria fades. In the meantime, it should be a solid down market performer. If selling persists this may come back into the BUY range.” HOLD.

Nvidia (NVDA), originally recommended by Crista Huff for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, and featured here last week, has come down with the market (of course), but remains above its 200-day moving average, and thus looks like a decent buy here if you haven’t bought yet. As Crista would say, you can expext a gain of 30% as it climbs back to its old high. BUY.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, was holding up pretty well until last week, but then it joined in the exodus and today finds the stock sitting on its 200-day moving average, technically offering a good entry point. Fundamentally, RingCentral’s cloud-based communication services are a good growth story, but the stock’s weakness may be telling us that competition (note today’s featured stock, Zoom Video Communications) may be becoming a bigger factor. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, closed at record highs two weeks ago and has pulled back with the market since—though “only” 20%, which is not much in this environment for a great growth stock. Last week, Mike wrote, “Fundamentally, things here are in great shape: The company released a very solid Q4 report that beat estimates on the top line (up 134% in local currency), driven by its booming e-commerce division (up 182%, including marketplace revenue up 224%!), and management’s expectation of higher take rates going forward.” HOLD.

Seattle Genetics (SGEN), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here two weeks ago, has fallen out of its long base and thus is technically less positive. It may bounce a bit from here, but with the prospects for a real advance slimmer, I’m going to sell. SELL.

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, the stock fell through its 50-day moving average last week and now looks to be heading back to the 400 area. Last week, the stock still looked healthy, but now it doesn’t; investors fear a major headwind for all auto companies as a recession takes hold. (Encouragingly, Tesla has begun Model Y deliveries in the U.S.) If you’ve got a good profit (and time), you can still afford to hold long-term. Otherwise, you should sell. HOLD.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, was hitting record highs four weeks ago but for the past three days it’s been dancing on the top of its 200-day moving average, down 20% from those highs—and that looks like a decent place to build a base. Last week, Mike wrote, “Vertex has hit the skids along with most everything in the market, but it does have some support from the 200-day line. Just as important, management threw out some good news this week. Vertex announced this week that it’s confident in its supply chain, that it hasn’t seen any effects from the virus on the launch of Trikafta or other elements of its business, and that its 2020 business outlook remains unchanged. Of course, if the stock can’t find support going forward we’ll take action, but having already booked partial profits and with such solid, reliable business prospects, we advise holding your remaining shares.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, was red-hot last month when investors were throwing money around but it’s quickly come back to earth and now sits on its 200-day moving average. Hopefully you took some partial profits back then when I suggested it. 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. 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.” Carl is still recommending that aggressive investors buy, but I don’t like the stock’s trend and I’m afraid there’s more potential selling power than buying power here. So I’ll downgrade to hold. HOLD.


The next Cabot Stock of the Week issue will be published on March 23, 2020.

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