Cabot Stock of the Week 292

The market was up big today, and a couple of our stocks hit new highs—which is impressive considering the recent crash—but the market’s major pattern is one of bottom-building, and that takes time.
In the meantime, the action of the best growth stocks gives us a clue as to developing leadership, and the best value stocks are absurdly cheap. Plus, many are paying huge dividends! That’s the case with today’s recommendation, a giant in the oil industry.

As for the rest of the portfolio, it’s acting well (with a couple of very strong stocks in the mix), and thus I have no changes today.

Full details in the issue.

Cabot Stock of the Week 292

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As the market’s bottoming formation progresses, remember that this is a process that takes time; it’s not to be hurried. Just as it takes time to gather intelligence on the progression of the coronavirus, it takes time for investors to determine where the best investment prospects are in the wake of the crash, and it takes time for the pendulum of investor sentiment to shift from selling to buying. In the meantime, Cabot’s expert analysts continue to spotlight the stocks with the most promising prospects (from growth to value), and today I bring you another undervalued mega-cap stock with a monster yield. The stock was originally recommended by Crista Huff in Cabot Undervalued Stocks Advisor and here are Crista’s latest thoughts.
Marathon Petroleum (MPC)
With the COVID-19 virus dominating consumer, healthcare and financial news, it could be easy to miss the profound and rapid change that’s taking place in the energy industry. I’m sure you know that oil prices plummeted alongside U.S. stock markets in recent weeks, and yes, COVID-19 was certainly a catalyst in both situations. Investors were alarmed at the effect of global quarantines on economic activity. People weren’t buying gas because they weren’t driving their cars. Businesses weren’t consuming normal amounts of oil and gas because their manufacturing plants were running on reduced schedules, or completely on hiatus.

Then Saudi Arabia and Russia got into a bit of a feud, after Saudi Arabia ostensibly backed away from an OPEC agreement and began increasing oil production while also lowering prices. Russia followed suit, and oil prices suffered. Brent crude oil fell from $65 per barrel in February to $25 per barrel at the end of March. Yikes! That’s when world leaders stepped in and began talking to each other, especially those from the U.S., Saudi Arabia and Russia, indicating that they might agree to a ceasefire. Oil prices promptly turned upward, carrying energy stock prices with them, as Brent crude closed last week at $34.11 per barrel.

On April 4, Reuters reported, “Western Europe’s largest oil and gas producer, Norway said … it would consider cutting its oil production if a global deal to curb supply is agreed to by the world’s biggest producers. OPEC and its allies are working on a deal for an oil output cut equivalent to about 10% of world supply in what member states expect will be an unprecedented global effort including the United States.”

Then on April 6, the chief executive at Russia’s sovereign wealth fund, the Russian Direct Investment Fund (RDIF), indicated that Russia and Saudi Arabia would likely meet later this week to iron out their differences, with a goal of stabilizing oil prices. Additional OPEC countries and the U.S. will likely be required to cooperate in production cutbacks before a final agreement is reached.

Stock investors are now presented with a buy-low opportunity among energy stocks. Keeping in mind that we’ll likely experience a global recession throughout 2020, I think it more prudent to go bargain hunting among the oil majors and refining & marketing companies than to buy oilfield service companies’ stocks, the latter of which depend more on currently-weak capital expenditure budgets.Marathon Petroleum is still my favorite integrated downstream energy company. It’s profitable, undervalued, provides a big dividend yield, and is under pressure to continue improving operations and shareholder returns.

Marathon is the nation’s largest energy refiner, with 16 refineries, a majority interest in midstream company MPLX LP, 10,000 miles of oil pipelines, and product sales in 11,700 retail stores. The company has been the target of agitation by activist investor and billionaire Paul Singer, the founder of hedge fund Elliott Management Corp. In September 2019, Singer urged Marathon’s Board of Directors to split into three companies and replace the CEO. The Board almost immediately announced the retirement of CEO Gary Heminger, and the pending spinoff of the company’s Speedway retail stores in late 2020.

Last month, Marathon named a new CEO, Mike Hennigan, who has recently been the CEO and President of MPLX LP. The Board of Directors additionally completed their strategic review of MPLX, deciding to keep the asset rather than sell it or spin it off to shareholders. MPLX generated $1.75 billion EBITDA in 2019. Marathon plans to spin off the Speedway retail business in the fourth quarter of 2020.

MPC is an undervalued large-cap stock. Annual income projections are a roller coaster, greatly affected by swings in oil prices. At this time, consensus estimates project earnings per share of $2.55 and $3.96 in 2020 and 2021. Those numbers change weekly, and will certainly be enhanced if world leaders agree to some sort of peace accord relating to oil production.

The 2020 price/earnings ratio is 8.6, a low number with room for expansion without harming the stock’s perceived valuation. The dividend is the real icing on the cake. Due to the drop in the share price, the $2.32 annual dividend payout is now yielding 10.6%. There have been no comments from the company about cutting the dividend, which is a common investor worry when the stock market gets shaky. What’s more, Marathon most recently increased their annual dividend payout in March. It would therefore be unlikely that the company would reverse course any time soon. Investors can stay abreast of Marathon’s corporate and financial plans on April 29, during the company’s online annual shareholder meeting.

The price chart exhibited a stable bottoming pattern in March, and continues to improve. I believe the stock could climb 50% to about 35 within a matter of weeks, influenced by both a rebounding stock market and a potential OPEC agreement on oil pricing.

Current Recommendations

Coming into today, the portfolio held 12 stocks out of a possible 20—which corresponds to a roughly 40% cash position. And that seems right to me right now, as the market works on building a bottom and sorting out which stocks will lead the way higher when the market turns up again. Truthfully, though, this portfolio works on a stock-by-stock basis; if stocks are working, I hold them; if they fail to deliver, I sell them (as I intend to sell last week’s disappointment, LK, soon). Today there are no changes.

Changes
No changes

AbbVie (ABBV), originally recommended by Tom Hutchinson in Cabot Dividend Investor and featured here last week, is little changed since then, building a short base to consolidate its gains from the past two weeks. In last week’s update, Tom wrote, “Nothing has really changed for this healthcare giant just because the world around it is collapsing. People won’t stop taking their medicine. And healthcare will likely emerge as the hero of this crisis. Everything this company had going for it (the pipeline, the merger, better than expected earnings, the safe and high dividend) is still intact, only the stock is a lot cheaper now. Maybe it’s now less special because everything is cheap, but few companies have such a defensive business along with extremely powerful demographic headwinds from the aging population. I think this is one of the few stocks you can buy here with the remaining uncertainty.” BUY.

BlackLine (BL), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here two weeks ago, has made no progress since then, as it continues to oscillate around its 200-day moving average. And that means it’s still a good buy. Long-term prospects are great for this provider of cloud-based automated accounting services. 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, saw its stock collapse last week on the news that the company’s board had suspended its COO and several employees reporting to him for misconduct related to “fabricated transactions”—reportedly to the tune of 40% of reported revenues over the last three quarters of 2019. Fundamentally, that puts an end to this fantastic growth story, as the Chinese government is unlikely to treat this crime lightly. Last week I told you to hold until a bounce developed that would allow selling a bit higher and I still think that’s a good strategy. Note: In the 50 years that Cabot has been advising investors, this is the third case of management fraud that has fooled us (and many other investors, as well as the company’s auditors)—and that’s something I’ll write about in the days ahead. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is now above its 200-day moving average and looking good as it heads back to its old high of 280. In last week’s update, Tom wrote, “This regulated utility/alternative energy superstar is one of the best stocks to own in a market like this. People will continue to use the heat and air conditioning in any economy. The company is cutting rates to provide aid to customers in this time of crisis. So, earnings will be impacted more than they otherwise would be in the near term. But that will build goodwill with customers and regulators alike. If the market takes another significant dip from here, I will likely raise NEE to a BUY.” 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 at the market bottom, and has been impressive since; today it’s trading above all its moving averages! And now Mike Cintolo is recommending it in Cabot Top Ten Trader! In last week’s issue, he wrote, “NVIDIA has its hands in many growth-oriented markets, including high-performance graphic processing units (GPUs) and processors for gaming, computer-aided design, special effects, data center and artificial intelligence. The company vies with AMD for the top spot in gaming GPUs, which make up 57% of Nvidia’s revenues, while data centers comprise 21% and are the fastest-growing segment of the firm’s business. (Some analysts expect data center-related sales to account for 30% of revenue this year). Nvidia has also expanded its product offerings into chips for self-driving cars and machine learning. The company has prospered by making strategic acquisitions like Israeli designer Mellanox Technologies (bought for $6.8 billion) as well as internal innovations like its upcoming release of Ampere, its next generation GPU. And NVDA is also joining the coronavirus challenge, offering Parabricks, which can complete genome processing in less than an hour, down from several days. After a string of challenging results, the company’s underlying business began to reaccelerate in Q4, and like many of today’s strong stocks, it will probably end up benefiting from the virus as demand for cloud storage is soaring as the shut-in grows. There’s obviously uncertainty near-term, but analysts see earnings up 21% this year and more than 30% next.” BUY.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a new high last Monday and has pulled back normally since—though it remains above all its moving averages. As a key provider of cloud-based communication services, growth prospects are excellent, particulary as the Work From Home (WFH) movement grows. If you don’t own RNG, you could nibble here. 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 remains just under it today. 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, “The company recently released its quarterly and full-year financials. Total adjusted revenue was $909 million, up 133.5% year-on-year from the fourth quarter of 2018. Sea’s Shopee Mall, the largest Southeast Asian e-commerce platform by orders, continues to see healthy growth in stores ahead of peers in ASEAN – online stores in Indonesia have grown by 30% in three months. Our analysis indicates widespread mall and store closures in ASEAN. Prolonged store closures could support adoption of e-commerce. 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. ‘Free Fire’ was also the highest grossing mobile game in Latin America and in Southeast Asia in the fourth quarter and for the full year of 2019. 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 remains in a correction like almost everything else. Fundamentally, the latest news, reported last week, is that in the first quarter, the company produced about 103,000 vehicles and delivered about 88,400; both are records for a quarter. As for the stock, it’s well above its 200-day moving average, but there’s no particular sign of strength today. HOLD.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a new high today! In his update last week, Mike wrote, “Vertex saw its first business update (March 9) get mostly ignored by investors, so the company was on the horn again last week (March 27) to re-re-confirm that its supply chain is intact and it will be able to supply all of the cystic fibrosis patients that need its medications. Most important for investors, management again stood by the buoyant guidance for 2020 it gave earlier this year. (On the flip side, some clinical studies have been put on hold for a while.) As for the stock, we like the action—the overall high-to-low correction (20%, ballpark) was more than reasonable given the market’s crash, and it recouped more than three-quarters of that by Tuesday before backing off a bit. Nothing is out of the woods yet given the market, but VRTX is acting about as well as any growth stock.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is sitting right on its 200-day moving average; the stock is no more able to fly today than a toad. The world cares a lot more about medical technology these days than dreams of low-cost space flight. 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, “Last week, 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 composite target price of 24. 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. 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.” HOLD.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, peaked two weeks ago and has pulled back normally since, right down to its 50-day moving average, accompanied by talk of security risks in the very popular program. The stock hasn’t been in Cabot Top Ten Trader recently, but Mike mentioned it in Cabot Growth Investor last week, writing, “There’s been some news on the competition front (from RingCentral) and worries about security that have dented the stock, but so far ZM’s retreat has been acceptable. The next few days will likely be key.” BUY.

The next Cabot Stock of the Week issue will be published on April 13, 2020.

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