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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 295

The market’s rebound continues and our stocks, as a whole, continue to perform well. Someday, however, a correction will begin and it will pay to be alert—and to react—when it does.

In the meantime, I will keep recommending the best stocks, a system that has worked quite well in recent weeks. This week, we continue to diversify with a recommendation of a marijuana stock, a group that went through a two-plus year correction and in the process got relatively cheap.

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

Full details in the issue.

Cabot Stock of the Week 295

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The market’s rebound continues and thus Cabot’s intermediate-term market timing indicator remains in a positive mode, telling us some buying is definitely warranted. At the same time, our long-term market timing indicator remains in a negative mode, telling us it’s still prudent to hold some cash. For this advisory, the bottom line is that new buying is fine, but we’re on high alert to be prepared for weakness should a serious correction begin. As for this week’s stock, it comes from my other advisory, Cabot Marijuana Investor, which is full of generally high-risk, high-reward stocks that are in line to benefit from the country’s fastest-growing industry (at least it was the fastest-growing before the coronavirus came along). Here are my latest thoughts.
Trulieve (TCNNF)
Marijuana is now legal for recreational use in 11 U.S. states and legal for medical use in 25 more—leaving only 14 states where it’s still totally illegal. In Canada, marijuana is legal across the country. And business is booming, with analysts expecting the average publicly traded U.S. marijuana company to see revenue growth of 154% this year, while the average Canadian marijuana company sees revenues grow 183%.

Yet the stocks in the sector haven’t looked so hot lately, and that’s because they peaked two years ago, soon after Canada went legal. Investors were anticipating great growth back then, but there were some hiccups, most notably the Canadian government’s failure to license enough legal outlets, which led to a glut of unsaleable legal cannabis. In the U.S., major disappointments included failed legalization efforts in New York and New Jersey as well as layers of taxes that made legal product uncompetitive (price-wise) with illegal. As a result, the stocks cooled off for more than two years, with the index eventually shedding 87% of its value.

But the sector bottomed last month (a few days ahead of the broad market), enjoyed a very powerful rebound in the first week, and then built a month-long base, from which another upleg is now beginning to develop. Bottom line: for investors who can handle the volatility inherent in this young sector—in which the majority of stocks are low-priced and lacking institutional support—this is a decent time to step on board.

Trulieve is the largest seller of medical marijuana in Florida (our country’s third-most populous state), with a market share exceeding 50% thanks to a vertically operated operation that features 1.7 million sq. ft. of growing area in the state and 45 stores. (In California, by contrast, taxes are so high that the black market still exceeds the legal market, and competition is so tough that companies are failing to pay their bills.)

Seven of Trulieve’s Florida stores were opened in the fourth quarter (and one since), and the company has also ramped up its delivery capabilities, to provide what the customers want in this time of coronavirus.

Skilled management, combined with a state licensing process that rewarded “connected” people, has clearly been a factor in the company’s success, and thus credit goes to CEO Kim Rivers. The downside of this connectedness is that the stock was hit by a short-seller’s report last year that alleged improprieties between Ms. Rivers’s husband—a developer—and public officials, but that’s blown over and the company is now the odds-on favorite to dominate the Florida marijuana landscape in the years ahead, carrying a distinct advantage when the state eventually legalizes the drug for recreational use as well.

Additionally, the company has nascent operations in California (one store in Palm Springs), Connecticut (one store in Bristol) and Massachusetts (one store expected to open in Northampton this year).

2019 revenues were $253 million, up 146% from the year before, while earnings were $1.54 per share, up 470% from the year before. That pace of growth, of course, won’t last, but Trulieve says its customer base grows about 10% each month and analysts are looking for revenue growth of 56% this year.

The stock’s market capitalization is currently near $1 billion, down from over $2 billion in 2018 (when the company was far smaller), and the current P/E ratio is a rock-bottom 6—a third of the level of the average P/E ratio in the Dow Industrials, none of which are growing this fast!

As for the chart, after bottoming below 6 last month, TCNNF bounced to 10.5, pulled back to 8.5 and is now preparing to break out above that 10.5 level. The best time to buy would be on a pullback to support at 8.5 (which might not happen) or a breakout on good volume above 10.5. But Cabot Stock of the Week can’t wait (or cherry-pick days), so we’ll buy, as usual, at tomorrow’s average price.

TCNNF-042720

TCNNFRevenue and Earnings
Forward P/E: 18Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 6($mil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 57.1%Latest quarter79.7122%0.35289%
Debt Ratio: 13%One quarter ago70.7150%0.55817%
Dividend: NATwo quarters ago57.9149%0.52767%
Dividend Yield: NAThree quarters ago44.5192%0.13117%

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 4/27/20ProfitRating
AbbVie (ABBV)3/31/20765.6%8411%Hold
Blackline Inc (BL)3/24/20520.0%6016%Hold
Fanuc Corp. (FANUY)4/21/20131.6%1615%Buy
Huazhu Group Limited (HTHT)3/30/1690.0%31231%Hold
Luckin Coffee (LK)6/19/19200.0%4.39-78%Hold
Marathon Petroleum (MPC)4/7/20248.8%2610%Buy
NextEra Energy (NEE)3/27/191942.3%24426%Hold
Nvidia (NVDA)3/10/202540.0%29817%Buy
RingCentral (RNG)10/23/191530.0%23553%Hold
Sea Ltd (SE)1/21/20410.0%5536%Hold
Tesla (TSLA)12/29/11300.0%7932575%Hold
Trulieve (TCNNF)New0.0%10.07Buy
Vertex Pharmaceuticals (VRTX)1/7/202240.0%27121%Hold
Virgin Galactic (SPCE)10/11/199.240.0%1895%Hold
Zoom Video (ZM)03/17/201080.0%16553%Buy
Zscaler (ZS)4/14/20650.0%719%Buy

Coming into today, the portfolio held 15 stocks out of a possible 20—which corresponds to a roughly 25% 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. If the market turns south, on the other hand, I’ll be selling our weakest stocks and raising cash. Today, however, all looks well, so the only change is a downgrade of AbbVie (ABBV) to Hold. Details below.

Changes
AbbVie (ABBV) 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 is now two-thirds of the way back to its old high of February—though trading volume has been waning recently. In last week’s update, Tom wrote, “I like the stock of this biopharmaceutical giant right now, for several reasons. Drugs and treatments don’t go out of style in a bad economy. Health care is one of the most defensive businesses of all. As well, AbbVie is firmly established yet cutting edge in its products amidst the enormous tailwind of an aging population. Plus, the stock was cheap even before the crisis, although it had moved up a lot in the preceding months. It has a secure and high dividend and it should be a solid hold through the remaining uncertain market as well as the post-crisis market.” Recognizing the fact that the waning volume and other factors suggest a moderate pullback is likely, I’ll downgrade ABBV to Hold now. HOLD.

BlackLine (BL), originally recommended by Tyler Laundon in Cabot Early Opportunities, offers cloud-based automated accounting services that are used by larger companies to automate financial/accounting processes. The stock remains well above all its moving averages, and is thus a solid hold. HOLD.

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, and featured here last week, 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. In last week’s update to his readers, Carl wrote, “Fanuc offers investors a pristine balance sheet with zero debt and a whopping $7 billion in cash. Profit margins are impressive and the company also bought back 72 million shares last month. In short, Fanuc is a high quality play on what seems to be an unstoppable trend.” Today the stock gapped up strongly on no news—which is good. If you didn’t buy yet, you can still buy. 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 has been trending higher since the March low. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is still not trading, pending the release of more information from the company. HOLD

Marathon Petroleum (MPC), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, continues to work its way slowly higher. In her latest update, Crista wrote, “As an industry group, oil refining and marketing stocks look fantastic right now, with price charts showing a strong readiness to begin new run-ups. That’s not the same thing as saying that the companies appear financially healthy, with bright futures. Share prices can act very differently from industry prospects for a variety of reasons. I’m moving MPC from Hold to a Buy recommendation for traders because I believe that there’s immediate upside to the share price.” I already had it on Buy so there it stays. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is now above all its moving averages, but finding a bit of resistance at the 250 level. In his latest update, Tom wrote, “This is one of the best stocks to own, period. It offers the income stability of a stellar regulated utility and growth from its world-leading alternative energy business. Despite the fact that the price had risen to historically high valuations in the bull market, it is only down 4% since the market high in February. 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, hit another recovery high today and is now closing in on its February high near 315. In a special update today, Crista wrote, Last week, Chinese authorities approved NVIDIA’s $6.9 billion acquisition of Israeli chip designer Mellanox Technologies Ltd. The acquisition adds to NVIDIA’s data center and artificial intelligence business. Now that all regulatory hurdles have been cleared, the deal has been completed. NVDA is a high-PE, aggressive growth stock. Profits are expected to grow 31% and 21% in fiscal 2021 and 2022 (January year end). In recent days, Bank of America raised their price target on NVDA to 360. The stock appears ready to rise promptly toward the February all-time high near 315.” BUY.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, continues to trade very close to its highs of February and March, waiting for buyers to push it out to new highs. As the market leader in Unified Communications platform technology, this company benefits from the booming demand for work-from-home services. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, made a repeat appearance in last week’s issue of Cabot Top Ten Trader, where Mike wrote, “Sea has been a glamour leader for much of the past year, and after a sharp correction with the market, it’s been one of the first to reemerge to new highs. The company is all about southeast Asia (mostly Indonesia, Thailand, Philippines, Vietnam, Singapore and Malaysia), where it has the largest digital entertainment and e-commerce platforms in the region, both of which have been driving the massive growth you see in the table below. For digital entertainment, it’s mostly about games—the firm’s Free Fire offering was the most downloaded game in the world in 2019 (!), hit a peak of 60 million daily active users in Q4 and had related content on YouTube that produced about 30 billion views! All in all, paying users were up 180% in Q4, driving a 107% gain in digital entertainment revenue. Still, with no new games, the excitement in 2020 is likely to surround Sea’s e-commerce efforts, where its Shopee platform not only saw great growth to finish up last year (revenues up a whopping 182% as gross merchandise volume rose 65% and gross orders were up 113%), but analyst checks during Q1 point to continued rapid growth as more people have been shopping from home—indeed, the number of stores on Shopee Indonesia grew 30% in just three months, with mostly solid (5% to 15%) growth seen in other countries as well. All told, analysts see revenues growing “only” 38% this year, but given that the company has a history of trashing estimates, we’re guessing that will prove quite conservative. Bigger picture, as e-commerce in southeast Asia booms many-fold in the years ahead, Sea should be the primary beneficiary.” And today the stock hit another new high! Also last week, Carl Delfeld of Cabot Global Stocks Explorer advised his readers to sell half their position for a gain of 306%–so that’s a possibility for early investors. I’ll just hold. 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 continues to impress, as analysts increasingly recognize that Tesla’s hit from the coronavirus will be far less damaging than the damage sustained by legacy manufacturers who were late to the electric car party. And it’s not only legacy manufacturers who are suffering. Byton, a Chinese company that had planned to launch an electric SUV in China this year and then in the U.S. next year, announced delays last week. Lordstown Motors, which had planned to produce an electric pickup truck at an old factory in Ohio, also announced delays. Peripherally, Daimler’s Mercedes-Benz last week announced that it is killing its program to develop passenger cars powered by hydrogen fuel cells—in part a sign of the cost-cutting efforts now required by these companies and in part an admission that Elon Musk had it right a decade ago. Mercedes has been working on fuel-cell vehicles for more than 30 years —but now concedes that building hydrogen cars was too costly. Tesla aims to deliver more than 400,000 cars this year—and in the months ahead to announce the location of its new factory that will build both the Cybertruck and the Model Y. Located “more than halfway” across the country going from west to east, odds currently favor Texas, Oklahoma, Missouri and Tennessee. HOLD.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, has been hitting new highs for several weeks, and while a correction may start any day, odds are that this trend will continue. In his update last week, Mike wrote, “Vertex has been quiet on the news front this month, but in this case, no news is good news; the firm’s early- and late-March updates both said that its supply chain was in good shape and that there was no change to its bullish 2020 financial guidance. And that’s been good enough for big investors, who drove the stock to new highs earlier this month and have kept clicking the buy button since. VRTX will report Q1 results Wednesday, April 29, and while a little post-earnings selling is always a possibility, the odds favor that dips will be supported given the solid earnings outlook. We advise keeping any new positions small given the upcoming report.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is up 80% from its crash low, having traced out a healthy uptrend interrupted by a couple of normal pullbacks. Long-term, the sky’s the limit with this stock, so investors with long horizons who have a profit can sit tight. For short-term investors, however, the future is now a little shaky; Virgin Australia and Virgin Air have both been severely impacted by the global slowdown and Virgin Galactic will report financial results for the first quarter 2020 following the market close on May 5. Last week Carl recommended that his readers sell half their position in the stock for a 142% gain, but I’ll simply hold. 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 and the booming growth in video interactions. The stock hasn’t been in Cabot Top Ten Trader recently, but just last week in Cabot Growth Investor Mike wrote, “ZM has had its ups and downs lately due to security and competitive concerns, but it kissed fresh highs today and every indication is that business is in great shape.” Odds are that volatility will be a continuing factor here, but you can’t argue with the stock’s trend—and as all good growth stock investors know, trends tend to last longer and go farther than expected.. BUY.

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor and featured here two weeks ago, is off to a great start. Mike has written nothing new since then, but if you’re underweighted in internet security stocks, you should definitely consider this one. BUY.


The next Cabot Stock of the Week issue will be published on May 4, 2020.

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