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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 291

As the market gets back on its feet after the recent 33% drawdown, all Cabot analysts are looking for opportunities—with the growth-oriented analysts looking for strength and the value-oriented analysts looking for value—and it’s value that describes today’s featured stock perfectly. A well-known pharmaceutical giant, the stock is a bargain today.

Cabot Stock of the Week 291

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One of the underappreciated aspects of investing is psychology. Psychology is the reason you’re more likely to invest in a stock that has brought you profits before—and it’s the reason you’re less likely to invest in a stock that has brought you a loss before. But psychology, as we all know, isn’t rational. So as you go through your own personal process of deciding which stocks to invest in, you should try hard to ensure that biases of psychology don’t creep in. For example, today’s recommendation is a stock I sold for a loss last year, but I don’t hold that against it; it still has a great story, and now it’s even cheaper! The stock was originally recommended in Cabot Dividend Investor by Tom Hutchinson and here are Tom’s latest thoughts.
AbbVie, Inc. (ABBV)
Everything is about the Coronavirus these days. It’s an issue that supersedes all else as investors work to figure out which companies will win or lose in this vastly changed world.

Biopharmaceutical giant AbbVie Inc. is a stock that scores highly in this regard. You won’t go on a cruise anytime soon. You won’t go to a restaurant. You probably won’t buy a new outfit. But you will continue to take your medicine no matter what. And so will everybody else.

That said, the fact that the healthcare company has a resilient business model that holds up in any economy hasn’t saved it from the deepest recesses of a bear market. In the days of panic selling, ABBV was thrown under the bus along with everything else. And that’s why the stock is cheap now.

But as more investors come back into the market, as investors look beyond the panic to see which companies will thrive in the underwater economy of the virus aftermath, AbbVie should be a top pick. While it’s true that just about every other stock is cheap too, AbbVie was a great pick before the Coronavirus bear market and will continue to be afterwards.

AbbVie is a cutting edge company specializing in small molecule drugs. It has grown into the eighth largest pharmaceutical company in the world, primarily on the strength of its blockbuster biologic auto immune drug Humira, which is the world’s number one drug by far with annual sales of about $19 billion.

But now Humira is causing problems. It accounts for over 50% of revenues and the drug is facing increasing competition overseas where revenue there is declining. Overseas profits are expected to drop over 30% this year because of biosimilar competition. But in the US (which accounts for three quarters of sales), Humira has patent protection until 2023.

The prospect of the loss of Humira revenue had been spooking investors. The historically stellar performing stock fell 36% between early 2018 and early 2019. But AbbVie has invested heavily in the future and has drugs lined up to replace the falling Humira revenue.

The company believes recently launched cancer drugs Imbruvica and Venclexta can generate $9 billion in annual sales by 2025. In addition the company has two immunology drugs gaining approval this year that market research firm EvaluatePharma ranks the number 2 and number 3 drugs in its analysis of top new drug launches for 2019. AbbVie thinks the two drugs could bring in $10 a year by 2025.

And those are just the current allstars. AbbVie has what EvaluatePharma recently called the second best pipeline in all of pharma with many more drug launches in the next few years. And Humira isn’t likely to disappear. It’s still estimated to be one of the world’s top selling drugs until at least the middle of this decade.

To further diversify away from dependence on Humira, AbbVie purchased Ireland-based Allergan (AGN) for $63 billion last year. The company is about half the size of AbbVie and features blockbuster facial treatment drug Botox. The acquisition, expected to close in the next few months, will diversify the company away from Humira in the near term while the stellar pipeline gains traction.

This is one of the best and most advanced drug companies in the world with the enormous tailwind of the rapidly aging population. The longer term prognosis is fantastic as the company is effectively addressing the near term issues.

Investors, along with company insiders, had realized the value as the stock soared nearly 50% in the months before the bear market. It’s now back to a dirt cheap price, selling at an obscenely low 7.35 times forward earnings with a 6.5% yield backed by a low payout ratio, rising earnings, and a better than 40 year track record of consecutive dividend hikes.

AbbVie is a company with a bright future and a rapidly improving present. It’s a nice way to get into this market while it’s cheap.

Note: Cabot Stock of the Week recommended selling ABBV last June when the stock plunged 15% in one day after the company announced the agreement to buy Allergan—and the stock did fall lower for seven weeks after that. Then came the 50% advance Tom mentioned—and then the coronavirus bear market that has taken it back to the lows of last summer—now cheaper than ever.

ABBV33020

ABBVRevenue and Earnings
Forward P/E: 8Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 8($bil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 37.8%Latest quarter8.705%2.2116%
Debt Ratio: NA%One quarter ago8.483%2.339%
Dividend: $4.72Two quarters ago8.260%2.2613%
Dividend Yield: 6.5%Three quarters ago7.83-1%2.1414%

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 3/30/20ProfitRating
AbbVie (ABBV)New6.5%75.24Buy
Blackline Inc (BL)3/24/20520.0%532%Buy
Brookfield Infrastructure Partners (BIP)Sold
Huazhu Group Limited (HTHT)3/30/1690.0%27191%Hold
Luckin Coffee (LK)6/19/19200.0%2626%Hold
NextEra Energy (NEE)3/27/191942.3%24627%Hold
Nvidia (NVDA)3/10/202540.0%2665%Buy
RingCentral (RNG)10/23/191530.0%22849%Hold
Sea Ltd (SE)1/21/20410.0%449%Hold
Tesla (TSLA)12/29/11300.0%5021594%Hold
Vertex Pharmaceuticals (VRTX)1/7/202240.0%2324%Hold
Virgin Galactic (SPCE)10/11/199.240.0%1560%Hold
Zoom Video (ZM)03/17/201080.0%15140%Buy

As the bear market of 2020 drops into negative-30% territory, it’s natural to feel that the crash will never end—but in fact, it’s that feeling exactly that is necessary to create market bottoms. Thus, this is no time for despair but time to continue managing the stocks in your portfolio, so that you’ll be in position when the market turns up. Today, we have just one change, a downgrade of BIP to Sell. Details below.

Changes
No changes

BlackLine (BL), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, has now climbed above its 200-day moving average. Short-term, there’s a chance of a pullback, perhaps to the 48 area, so if you haven’t bought yet, I suggest waiting for that—but long-term, this provider of cloud-based automated accounting services has great prospects. 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 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, is now in what I believe is likely to be a long cooling-off phase, as investors who chased it when it was hot move on to greener pastures. Still, I’m going to stick with it here, as the long-term prospects for the company are good and the risk of holding right here is low. In his latest update, Carl wrote, “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 at buy for more aggressive investors.” HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, bottomed last Monday and is now up 40% from that panic-selling low, trading above both its 200-day moving average and its 25-day moving average. In his update last week, Tom wrote, “Demand for heating and air conditioning will only grow as people stay home. Alternative energy will not be scrapped because of this virus either. NEE was a market darling before the virus and investors will fall in love again after the virus.” HOLD.

Nvidia (NVDA), originally recommended by Crista Huff for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, bounced off its 200-day moving average last week and is now that very rare stock that is trading above all its moving averages! In her latest update, Crista wrote, “Earnings estimates came down a tiny fraction this week from their peaks in March. Wall Street expects EPS to grow 33.9% and 19.0% in fiscal 2021 and 2022 (January year end). The 2021 P/E is 31.2. The price chart is much stronger than the broader market indexes. Continue to accumulate shares.” BUY.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, sank below its 200-day moving average two weeks ago, but buyers stepped in quickly (well before the broad market bottomed) and today the stock hit a new high! The reason, obviously, is that today’s Work From Home (WFH) movement has boosted demand and visibility for the copmany’s cloud-based communication services. Of course, Zoom Video Communications (ZM) has been even hotter, and as today wore on, RNG pulled back below 230, but that’s still healthy. If you don’t own RNG, you could nibble here, though it’s more prudent to wait for this pullback to end. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, rallied to touch its 50-day moving average last week and has pulled back normally since. Mike has sold the stock from Cabot Top Ten Trader, but Carl Delfeld of Cabot Global Stocks Explorer recently recommended it, and in his latest update he wrote, “Sea’s self-developed global hit game, “Free Fire,” was the most downloaded mobile game globally in 2019, according to App Annie, and recently hit a new record of 60 million peak daily active users. The company also owns Shopee, the largest Southeast Asia e-commerce platform by orders. It registered over 188 million orders in the fourth quarter, or a daily average of over 2 million orders, an increase of 124.6% year-on-year. All indications point to Sea having the potential to be an enduring growth stock.” 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 the stock is on a correction like almost everything else. Fundamentally, the latest news is that the company’s Chinese factory is back producing cars at full speed, while its U.S. factories are operating with sharply reduced staff while gearing up to produce ventilators in partnership with Medtronic (MDT), a major medical equipment company. HOLD.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, actually looks pretty good! It’s just popped up above all its moving averages and is now within range of its February high of 250. In his update last week, Mike wrote, “VRTX has been tossed around with everything else during the past month, but its correction was relatively mild (only 20% vs. 35% for the S&P 500) and it held its 200-day line, too. And why shouldn’t it? Demand for its cystic fibrosis (CF) treatments, including its new Trikafta triple-combination offering, shouldn’t be impacted much by the virus, and Vertex itself has already said its supply chain is in good shape and (as of a couple of weeks ago) that it was standing by its buoyant 2020 financial guidance. A decisive break below its recent lows would be a red flag, but there’s little doubt that, over the next couple of years, Vertex’s earnings are set to boom as Trikafta (which expanded the company’s addressable market to 90% of CF patients) sales ramp up; analysts see Vertex earning around $10 a share in 2021. We took partial profits a while back and are happy to sit tight with the rest of our shares—we think the stock can be a steady performer once the market puts this down period behind it.” If you’re under-invested, you could consider buying on a pullback to below 220. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is another stock (like Luckin Coffee) that was red-hot and now needs a cooling-off period. In a rip-roaring bull market, I’d likely take profits here and move on (remember, both Carl and I recommended taking partial profits when the stock was higher), but given that the portfolio already has many open slots and the long-term prospects for the company are bright, I’ll hold. In last week’s update, Carl wrote, “SPCE shares soared this week from 10 to 16 after rising earlier this year to 37. It’s been an incredible ride for Galactic stock this year. At one point in February, shares were up more than 220% for the year. Yesterday, Morgan Stanley came out with a buy rating valuing SPCE’s space tourism business at 14 a share and the hypersonic flight opportunity at 10 a share to arrive at a current target price of 24. The stock’s pullback over the last few weeks offers more aggressive investors a chance to buy more shares.” HOLD.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, remains one of the strongest stocks in the market. In fact, it was featured again in last week’s Cabot Top Ten Trader, where Mike wrote, “Even before the virus struck, the trend toward a more mobile and remote workforce had been in place for many years. A December Forbes article cited a 159% increase in remote working in the U.S. since 2007. Interestingly, though, despite this trend, videoconferencing remains relatively rare; a study done a couple of years ago showed that 90%-plus of remote team meetings were audio-only. But Zoom is changing that and is clearly the go-to play as the need for remote work (and play) mushrooms. The company’s platform was built from the ground up for video, able to offer high-quality output even when bandwidth is iffy, with clients remarking that “it just works,” something that often can’t be said about the competition. It also offers unified communication (similar to RingCentral) and other services, basically making it the number one play for “new age” conferencing and communications. Growth has been fantastic for a while, and the virus reality could turbocharge results; personally, we know of many that have just started using Zoom for tutoring, work and general fun, and one report said that Zoom’s app got 600,000 downloads yesterday alone! For now, most of those are free users, but getting your product in front of that many people is priceless. Thus, even after the virus issue passes (and it will), Zoom’s future should be very bright. It’s possible that when the market finally gets off its duff, ZM could pull in for a bit as money looks for “non-virus” stocks. But the trend of business and the stock are in place—we’re OK nibbling on pullbacks.” BUY.


The next Cabot Stock of the Week issue will be published on April 6, 2020.

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