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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 293

Market volatility remains high, and the good news is that since the bottom three weeks ago, most of the volatility has been to the upside. But don’t get complacent; conditions remain ripe for a substantial pullback as the market works to raise the fear level among investors.
In the meantime, the action of the best growth stocks remains impressive, and one of the leaders, with a great story about internet security, is today’s recommendation.

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 293

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The market has rallied nicely over the past three weeks, and many of our stocks have done quite well in that time. So what happens next? History says this upside action is unlikely to go on much longer, mainly because the market’s bottoming process typically needs time to lower the confidence of investors. Right now, investors haven’t felt enough pain—for a long enough period of time—to truly turn negative on the market. Technical analysis, however, says if we can just get a few more up days, our intermediate-term trend model will turn positive! Until that happens, however, caution is the watchword. In the meantime, for investors who are truly underinvested, or feel the need to nibble on promising growth stocks, there’s today’s featured stock, which was originally recommended by Mike Cintolo in Cabot Growth Investor. Here are Mike’s latest thoughts.
Zscaler (ZS)
One of our favorite themes during 2018 and much of 2019 was what we dubbed the new-age cybersecurity stocks. Everyone by now knows the need for beefy e-security, as nearly every month brings another report of a major breach at a large firm by criminal hackers, foreign entities or even overseas governments. But the bigger story is really about how the workforce has become more mobile and more digital—which means the old, legacy solutions aren’t cutting it.

Think about it: Just 10 or 15 years ago, the vast majority of employees went in the office every day, where they connected to the company’s various software programs. Even if your job was out of the office (pharmaceutical salesperson, say), data would be entered at day’s end on that person’s home computer via a virtual private network (VPN) so s/he could safely log in. And a company would have all of its technology housed within its office building(s).

In that type of environment, having a bunch of routing and security products in-house (firewalls and the like) made sense and worked well. But that type of environment has been blown apart in recent years.First off, the move to the cloud changed everything. Instead of having all of a firm’s servers and software in the building, they’re now being hosted at data centers, which means even employees who are in the office are accessing cloud-based apps (Office 365, Salesforce, Workday, Slack and more). And, of course, more people are working from home or the road and connecting to those apps as well—that aforementioned pharmaceutical salesperson probably accesses Veeva after every doctor’s visit, for instance.

In this environment, the old products can patch a few holes here or there but don’t provide the overall protection needed, especially if you’re a big outfit. (The old way also costs a bunch and is a nightmare when making acquisitions and integrating new systems into the fold.) Long story short, a new solution is needed, and Zscaler is one of the top choices out there.

The details of the offering can get a bit word-heavy, but suffice it to say that when customers sign up for the Zscaler security cloud, all of a firm’s traffic runs through its platform—whether it’s from an office, from the road or at home—allowing users to securely access whatever apps they are allowed to, no matter the time, place or device. The platform is located in 150 data centers globally, performs 120,000 security updates each day and, at peak periods, can process 80 billion transactions! Translation: It’s scalable for even the biggest of corporations.

Not only does the platform lessen the chance of any hacks, but going with Zscaler usually lets big companies save money (by ditching much of that old, expensive, in-house equipment) and provides more insight into a firm’s traffic, too.

As firms transition to the cloud, this company’s platform has been a hit—sales have ramped north of 50% each of the past five years, and while that’s expected to slow some this year (analysts see the top line up 37%), the underlying metrics look fine; adjusted for one-time items, revenues actually rose 41% in Q4 while billings were up 30%, same-customer growth was 16% and remaining performance obligations (non-cancellable future revenue) was up 32%.

Some fears built up around billings late last year, causing the stock to plunge, but that concern has fallen by the wayside, especially as the global virus shut-in (more people working from home) is likely to accelerate demand. And ZS has shown impressive strength of late—yes, it slipped to 14-month lows in early March, but found big-volume support that week and catapulted back to its February highs two weeks later, a feat few stocks have equalled. ZS has since paused in the low 60s, and I think this pesents a decent entry point for opportunistic growth investors who want to bet on an eventual breakout.

zs41320

ZSRevenue and Earnings
Forward P/E: 417Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 261($mil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 11.8%Latest quarter10136%0.090%
Debt Ratio: 0%One quarter ago9448%0.0350%
Dividend: naTwo quarters ago8653%0.07NA
Dividend Yield: naThree quarters ago7961%0.05NA

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 4/13/20ProfitRating
AbbVie (ABBV)3/31/20766.0%805%Buy
Blackline Inc (BL)3/24/20520.0%555%Buy
Huazhu Group Limited (HTHT)3/30/1690.0%28205%Hold
Luckin Coffee (LK)6/19/19200.0%4-78%Hold
Marathon Petroleum (MPC)4/7/20249.2%255%Buy
NextEra Energy (NEE)3/27/191942.4%23621%Hold
Nvidia (NVDA)3/10/202540.0%2675%Buy
RingCentral (RNG)10/23/191530.0%21038%Hold
Sea Ltd (SE)1/21/20410.0%4715%Hold
Tesla (TSLA)12/29/11300.0%6412063%Hold
Vertex Pharmaceuticals (VRTX)1/7/202240.0%25012%Hold
Virgin Galactic (SPCE)10/11/199.240.0%1565%Hold
Zoom Video (ZM)03/17/201080.0%13626%Buy
Zscaler (ZS)New0.0%62Buy

Coming into today, the portfolio held 13 stocks out of a possible 20—which corresponds to a roughly 35% cash position. And that seems right to me, though truthfully, if our stocks weren’t behaving so well, we could easily have more empty slots. For now though, there are no disappointments in the portfolio (save LK, which has bombed—at least temporarily), so there are no changes in the portfolio today.

Changes
No changes

AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, has been climbing strongly since the March market bottom and has now recovered half its crash loss. Technically, the stock is due for a bit of a rest here, pulling back possibly to the 75 level. BUY.

BlackLine (BL), originally recommended by Tyler Laundon in Cabot Early Opportunities, is now trading tightly near its 25- and 200-day moving averages—thus in a rough state of equilibrium. Long-term prospects remain great for this provider of cloud-based automated accounting services, so if you haven’t bought yet it’s not too late. 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 two weeks ago on the news that the company’s board had suspended its COO and several employees reporting to him for misconduct related to fabricated transactions. And then last week trading in the stock was halted, pending new information from the company. So we’re stuck holding this loser—for now. On the bright side, Carl last week wrote, “My risk-reward analysis suggests holding Luckin Coffee shares. A restatement to the financial reports published in 2019 is now certain, and that could trigger another sell-off, but these events may not push the company to bankruptcy as long as its reported balance sheet numbers are accurate. For instance, the company had $775 million in cash and liquid investments at the end of September 2019, which I believe will be used to scale up the company. Keep in mind that that the coffee chain’s unit expansion story is not impacted by this financial fiasco. And the company didn’t overstate the number of stores it has opened. In the statement issued regarding the scandal on April 3, Luckin Coffee suggests that both operating expenses and revenue were inflated. In short, we need more facts, so it does not seem wise to completely write off a comeback from Luckin.” The bottom line today is that all we can do is hold. And if you want to read about the two other small-company frauds that we’ve encountered at Cabot over the past 50 years, see my Cabot Wealth Daily column of today. HOLD.

Marathon Petroleum (MPC), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, was heavily impacted by the collapse in the price of oil, but the stock has been slowly working its way back over the past few weeks. In her latest update, Crista wrote, “Marathon is still my favorite integrated downstream energy company. MPC is appropriate for risk-tolerant traders and dividend investors. It’s profitable, undervalued, provides a big dividend yield (most recently increased in March; current yield 9%-plus), and is under pressure to continue improving operations and shareholder returns. 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. At a price of 24, I believe the stock could climb 45% to about 35 within a matter of weeks, influenced by both a rebounding stock market and an OPEC agreement on oil pricing.” BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, remains above its 200-day moving average and looking good as it heads back to its old high of 280. First quarter results will be released on Wednesday April 22, before the market open. HOLD.

Nvidia (NVDA), originally recommended by Crista Huff for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, was one of the stongest stocks before the crash and it’s been one of the strongest since, climbing quickly back above all its moving averages—which earned it a spot in Cabot Top Ten Trader. In last week’s issue, Crista wrote, “NVDA is a great stock for growth investors and traders. On April 1, Bank of America Global Research raised their price target on NVDA from 300 to 340. On March 31, Susquehanna raised their price target on NVDA to 330. The price chart is much stronger than the broader market indexes. When NVDA rises past 282, the stock could approach its February all-time high of about 315, where it will surely come to a halt.” BUY.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, was one of the very first stocks to hit a new high after the market bottomed, and it’s cooled off a bit since—totally normal behavior. And last week it appeared in Cabot Top Ten Trader, where Mike wrote, “Cloud-related communication firms continue to be among the few industries to actually benefit from the global pandemic as demand picks up due to the stay-at-home situation. RingCentral has been a leader in its field for years thanks to its Unified Communications offering, which at its core provides a phone, messaging and text platform that allows firms to adjust to mobile workplace. No longer do employees sit at their desk all day and use a landline; instead they get in touch from a variety of places and devices. The firm estimates less than 10% of the market is penetrated, so the growth potential is huge. And now Ring is making a bigger push into video; Its latest service is RingCentral Video (a Zoom competitor), a unified video solution that’s entirely browser-based, eliminating the need for downloading an app. The firm is working closely with Google to ensure the highest video quality, and its new product will also include RingCentral Rooms, which easily transforms any room into a video conference space (available in Q2); both could see solid uptake given some recent security-related worries surrounding Zoom. As for the numbers, Ring is the poster child for rapid, reliable growth, with revenues (mostly subscription-based) growing at a 34% clip for many quarters in a row. Analysts see that slowing somewhat this year (24%), though our guess is that outlook will prove conservative (the company regularly beats and raises guidance). The valuation is rich, but the story and numbers remain very strong.” HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, dipped to its 200-day moving average in the crash but has been heading higher since and is now above all its moving averages! 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 Shopee Mall, the largest Southeast Asian e-commerce platform by orders, continues to see healthy growth in stores ahead of peers in ASEAN. Sea’s self-developed global hit game, Free Fire, was the most downloaded mobile game globally in 2019 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 has definitely gained momentum in the past week (it’s up 77% since the market bottom). One factor was the announcement of record first quarter deliveries, while another was likely Morgan Stanley’s insight that “the immense disruption to OEM businesses from COVID-19 favors Tesla’s medium-term electric vehicle lead.” In other words, if GM can’t find $2 billion to invest in its Michigan electric vehicle factory and other legacy manufacturers who are seeing sales crater are in a similar boat, Tesla’s advantage may remain substantial. HOLD.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, hit new highs last Monday and Tuesday and has pulled back normally since. In his update last week, Mike wrote, “VRTX was the second of our stocks (along with DOCU) to actually rally to a new high in recent days—and similarly, shares have backed off since then, which is actually quite normal in these types of environments. Still, while there are no sure things, we’d be surprised if the buyers didn’t step in relatively soon, as Vertex is one of the few companies that has come out and said (a couple of times) that its core business (cystic fibrosis treatments, especially Trikafta, which expanded the company’s addressable market to 90% of CF patients, up from 60% previously) has been unaffected by the virus shut-in, which effectively means Vertex’s huge growth projections—earnings are expected to rise from $5.33 per share last year to north of $10 in 2021 and $12 in 2022—are intact. Like most biotechs, Vertex also has more than a few irons in the fire for future drugs, covering many diseases, but the firm’s CF treatments are what big investors are focusing on today. Don’t forget, too, that VRTX itself just got going from a two-year dead period back in October, so this is far from a later-stage situation. Earnings are likely out in late April or early May, which will be key, but we remain optimistic VRTX has a bright future, and big investors agree, as many top-performing mutual funds own sizable positions. If you own some, hang on.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is no longer the hot stock that it was earlier this year, but neither is it dead; it’s climbed back above its 200-day moving average and now it’s building a base. 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—and that the company’s first flight with paying passengers may take place next year—I’ll hold. In last week’s update, Carl wrote, “The company announced that it plans to report its financial results for the first quarter 2020 following the close of the U.S. markets on May 5. Morgan Stanley came out recently 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.” HOLD.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is one of the highest-profile stocks today, thanks to the coronavirus shut-in. The stock hasn’t been in Cabot Top Ten Trader recently, but it was in Cabot Growth Investor two weeks ago, as Mike is continually comparing it to competitor Ring Central. And today ZM is the stronger of the two, as it’s trading above all its moving averages! If you haven’t bought yet, you can buy now. BUY.


The next Cabot Stock of the Week issue will be published on April 20, 2020.

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