Cabot Stock of the Week 294

The good news is that four weeks of upside action has brought a new buy signal from Cabot’s intermediate-term market timing indicator. But this doesn’t mean you can jump in with both feet yet; there’s still reason for caution.

One way Cabot Stock of the Week exercises caution is by diversifying widely, not only among industries but also among investment strategies. Today’s recommendation, a big undervalued robotics company in Japan, is an excellent example.

As for the rest of the portfolio, it’s acting well and thus the only change today is a downgrade of one stock—which has got a bit high—from buy to hold.

Full details in the issue.

Cabot Stock of the Week 294

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The good news today is that Cabot’s intermediate-term market timing indicator turned positive last week, telling us that buying power is now strong enough to allow us to reduce our defenses a bit. On the other hand, our long-term market timing indicator remains negative, so it’s not time for a fully bullish attitude yet. For this advisory, the main effect of these indicators will be to make me a little more forgiving of any stock’s short-term weakness. As for buying, I’ll continue recommending a timely mix of aggressive and conservative stocks, keeping the portfolio well diversified. Last week’s recommendation was a big U.S. oil company and today we shift to Japan. The stock was originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and here are Carl’s latest thoughts.
Fanuc (FANUY)
While you have seen a multitude of stories about the rise of robots in manufacturing as well as everyday life, you may not be aware of Fanuc, a Japanese blue chip with zero debt, a sterling reputation, and a storied past.

Headquartered in the shadow of Mount Fuji, Fanuc is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the brains of industrial robots. Fanuc claims to be the only company that uses robots to make robots.

Fanuc, whose name is an acronym for Fuji Automatic Numerical Control, has been a world leader in robotics since the early 1970s. It was founded as a wholly owned subsidiary of Fujitsu in 1955 after that electronics giant decided to enter the factory automation business.

Today Fanuc is as global as it gets with over 240 joint ventures and offices in over 46 countries and a commanding 65% share of its world market. For example, industrial robot manufacturer Shanghai-Fanuc Robotics Co. Ltd. has a plant in Shanghai’s Baoshan district.

Fanuc should benefit from robust demand from developed markets as well as China as its manufacturing costs continue to increase and manufacturers look to robots to increase productivity. You can find Fanuc robots at Amazon warehouses as well as the shop floor of General Motors.

The question of whether robots will replace manufacturing workers is a common one at cocktail parties these days (well, maybe not these days, but back when cocktail parties were allowed before this global pandemic hit). But it shouldn’t be a question. The fact is, they already are. The use of industrial robots has allowed companies like Panasonic to run factories that produce 2 million plasma television sets a month with just 25 people.

Much of the company’s sales are channeled through GE Fanuc, a 50-50 automated machinery joint venture with General Electric Company. Fanuc does most of its manufacturing in Japan, and is building a new factory near Tokyo to double its domestic output capacity of machine tools to produce parts of smartphones.

I have been following Fanuc’s stock for some time but it always seemed expensive.

With the pullback in the market however, we now have a great entry point as the stock is trading just over 13, the lowest point in a decade, and well off its 52-week high of 19.Fanuc offers investors a pristine balance sheet with zero debt and a whopping $7 billion in cash. Profit margins are impressive and Fanuc also bought back 72 million shares last month. In short, Fanuc is a high-quality play on what seems to be an unstoppable trend.

Current Recommendations

Coming into today, the portfolio held 13 stocks out of a possible 20—which corresponds to a roughly 30% cash position. And that cash position will continue to shrink as long as we add good stocks to the portfolio faster than we sell stocks that don’t work out—10 of our 14 stocks were up today, even with the market down, so there’s already a lot of “good” stocks there. As for changes, the only change today is a downgrade of BlackLine to Hold. Details below.

Changes
BlackLine (BL) to Hold

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 two-thirds its crash loss—plus it’s trading above all its moving averages! In last week’s update Tom explained the fundamental reason for this. “Believe it or not, people still have other health afflictions besides Coronavirus. You may stop doing a lot of things during this shutdown, but taking your medication isn’t one of them. Nothing has really changed for this healthcare giant just because the world around it is collapsing. Everything this company had going for it (the pipeline, the merger, better than expected earnings, the safe and high dividend) is still intact. Few companies have such a defensive business along with extremely powerful demographic tailwinds from the aging population. This was a great stock before the crisis, and investors were recognizing that fact. It is also a great stock during and after the crisis.” BUY.

BlackLine (BL), originally recommended by Tyler Laundon in Cabot Early Opportunities, is also above all its moving averages, after stringing together eight up days. Long-term prospects remain great for this provider of cloud-based automated accounting services, but if you haven’t bought yet I recommend waiting for a pullback. In fact, I’m now going to downgrade it to hold, simply because it’s increasingly likely the stock will pause. (Traders could even exit here and take the quick profit.) 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 Friday saw a high-volume gap up and today the stock continued the move—an encouraging sign. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is still not trading, pending the release of more information (true, not fabricated) from the company. In last week’s update, Carl wrote, “A complicating factor is that a substantial amount of Luckin shares were put up as loan collateral, resulting in a block of shares going to Goldman Sachs. Goldman is apparently holding a substantial position and may be seeking clarification on accounting issues or looking to place the stock with another firm.

“Uncertainty is high and the near-term range of possibilities include: 1) trading is resumed with more information regarding the financial and accounting status of the company, 2) the possibility of Luckin being acquired, 3) the delisting of Luckin, whereby it may make an offer to shareholders prior to delisting and trading over-the-counter, or 4) bankruptcy.

“Luckin attracted major investors such as BlackRock and Singapore’s sovereign wealth fund even before it went public last May at 17, and in the last year rose sharply to a high of 51 on January 17, making it one of the Explorer’s best-performing stocks. I advised multiple times selling a part of the LK position to lock in profits, though not the whole thing.

“A special committee has been formed to oversee the investigation and to recommend appropriate actions against the perpetrators.” HOLD (we have no choice).

Marathon Petroleum (MPC), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, continues to work its way slowly higher, even though the news about oil is still terrible all over (except for users, who love the low prices). In her latest update, Crista wrote, “Marathon is profitable, undervalued, providing a big dividend yield (most recently increased in March), and under pressure by activist investors 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. Earnings estimates have declined alongside the decline in oil prices. Consensus estimates currently point to $1.15 and $3.64 EPS in 2020 and 2021, respectively.

“The stock is appropriate for risk-tolerant traders and dividend investors. Shares of energy stocks are on the mend. The MPC price chart exhibited a stable bottoming pattern in March and continues to improve. At a share price of 26, I believe the stock could climb 34% to about 35 within a matter of weeks, influenced by both a rebounding stock market and the new OPEC agreement on oil production.” BUY.

NextEra Energy (NEE),originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, not only remains above its 200-day moving average, but it’s on the verge of climbing above its 50-day moving average as it heads back to its old high of 280. First-quarter results will be released on Wednesday, April 22, before the market open. In his latest update, Tom wrote, “This is one of the best stocks to own, period. Of course, it’s great for safety conscious, income-oriented investors. But it is also a must-own for anyone. It offers steady income from a stellar regulated utility and growth from its world-leading alternative energy business. It’s only down as much as it is because its obvious appeal made it overpriced before the selloff. It is only not a BUY because I expect more trouble ahead in the market. If the market again turns south, I will recommend a BUY on NEE at a cheaper price.”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 strongest stocks before the crash and it’s been one of the strongest since, closing last Thursday just 7% off its February high. In last week’s update, Crista wrote, ”Yesterday, Nvidia reported “Millions of Minecraft gamers across the globe will get to experience their self-created worlds more vividly than ever before when Minecraft with RTX moves to open beta on Windows 10 this week and introduces realistic shadows, lighting and vibrant colors to the best-selling videogame of all time.” NVDA is an aggressive growth stock, great for growth investors and traders. The stock is racing toward its February all-time high of about 315, where it will surely come to a halt and rest.”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 now it’s setting up to break out to a new high—though it’s hard to predict when. As the market leader in Unified Communications platform technology, this company is in one of the sweet spots of coronavirus mitigation services. Thus, as Mike has said, “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, broke out to a new high last Thursday and has held up in that region since, which is very encouraging. 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 Ltd’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.” 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 recent weeks. In fact, the stock strung together 10 consecutive up days before heading down this morning. Technically, this move was not unexpected, given the stock’s big decline in March, but fundamentally, there’s a great reason for it. In short, automotive analysts, seeing the massive impact to legacy automakers from the coronavirus shut-in, are now projecting that these companies’ plans to develop competitive electric cars will take a hit, thus enabling Tesla to maintain leadership for longer than previously expected. Morgan Stanley, for example, noted that “the immense disruption to OEM businesses from COVID-19 favors Tesla’s medium-term EV lead.” And a Goldman Sachs analyst started coverage of Tesla with a price target of 864. HOLD.

Vertex Pharmaceuticals (VRTX),originally recommended by Mike Cintolo in Cabot Growth Investor, broke out to new highs two weeks ago and has made many new highs since, as investors climb on board this medical success story. (Earnings are expected to rise from $5.33 per share last year to north of $10 in 2021 and $12 in 2022.) In his update last week, Mike wrote, “VRTX remains in good shape, bursting to new highs last week and stretching a bit higher since then, despite plenty of volatility. The company hasn’t released its earning date yet, but they usually report before the end of April, FYI. Like many of the strongest growth stocks, VRTX could certainly pull in some, but the overall action is excellent and the story offers both rapid and reliable growth.”HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has doubled from its crash low, but remains well below the lofty highs of February, when the hot stock hit 42. In his latest 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. I would be a bit more cautious after this run-up, buying on dips.”

And last week Tyler Laundon of Cabot Early Opportunities chose to feature the stock, writing, “Virgin Galactic just might be the most exciting stock in recent memory. It is young (just came public in 2019), relatively small (market cap just over $3 billion) and is involved in space tourism. Plus, it’s led by billionaire entrepreneur Richard Branson. What more can you ask for?

“The growth opportunity is undeniably attractive for early-stage investors, though the risks are significant. Success depends on Virgin Galactic essentially pioneering two major markets.

“The first is space tourism. Virgin Galactic plans to launch its first flight into the upper atmosphere later in 2020, with Branson on board. The trips are expected to take around 90 minutes and cost $250,000 per person. The company has over 600 reservations right now and is seen growing that to over 3,000 by 2030.

“The second major market, and the larger opportunity, is the hypersonic point-to-point travel market. This could mean a flight from New York to London in one hour and Los Angeles to Sydney in 2.5 hours. This business relies on transferring “proven” technology from the space tourism business into the high-speed travel market.

“Success on this front could upend the multi-trillion-dollar airline market. High-speed travel could be a roughly $800 billion market within the next two decades and Virgin Galactic is positioning itself to be a major player.

“The amount of investment required is massive (tens of billions of dollars) but given what Virgin Galactic is already doing and the ability of its founder to knock down barriers (he’s already started commercial airline companies) nothing is off the table.

“To succeed Virgin Galactic needs to have technology, reusable spacecraft, infrastructure and cash. It’s well on its way and has been assembling the pieces since 2004, including The Space Company (composite aircraft manufacturing) and Spaceport America (spaceport with personnel and passenger training, aircraft maintenance and flight coordination).

“Management believes Virgin Galactic’s space tourism business could grow to 270 flights by the end of 2023, assuming five aircraft making 54 flights a year. In this scenario revenue could top $500 million in three years.

“Virgin Galactic generated $4 million in revenue in 2019 from transporting scientific payloads. It lost $211 million and ended the year with $480 million in cash. Consensus estimates assume zero revenue in 2020, then $110 million in 2021.

“There are plenty of risks. One in-flight explosion would be a major problem; two or more could be devastating. There are also regulations and customer demand issues that could arise. Competition is on the rise (Blue Origin, SpaceX) and cash flow is far from a guarantee (breakeven might not be for five or more years).

“Still, it’s a hard stock to avoid if you’re even a modest thrill seeker! In terms of when to buy, the honest truth is we don’t know where this is going and what’s a fair price to pay for the stock because so much is up in the air (so to speak). The best advice I can give is to average in.” HOLD.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains 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 three weeks ago, as Mike is continually comparing it to competitor Ring Central, which has a similar business and chart. Zoom has the higher profile of the two, as a business, while RNG’s chart looks a bit more mature. If you choose to buy either, wait for a pullback. BUY.

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, broke out to new highs on Wednesday and extended the move on Thursday and now has pulled back minimally. If you haven’t bought yet and you feel underinvested in strong technology stocks, you can nibble here. BUY.

The next Cabot Stock of the Week issue will be published on April 27, 2020.

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