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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 305

The market remains in good health and trending higher, so while there’s always a possibility of a big correction starting any day, the important thing is to remain heavily invested, because the trend is your friend.

Most of our portfolio stocks have been performing superbly (with three hitting new highs today!), but one that isn’t is Tyson Foods (TSN), so that’s now a sell.

As for the newest recommendation, after last week’s dividend-payer, this week we swing back to the small and aggressive side of the market, with a fast-growing company that’s thriving by providing a great consumer service in the cloud.

Full details in the issue.

Cabot Stock of the Week 305

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The market’s main trend remains up, and thus I continue to recommend that you be heavily invested in stocks that help you achieve your investment goals. Last week’s recommendation was a dividend-paying retailer, so this week I’m swinging back to the other end of the spectrum with a small fast-growing company that’s thriving by taking an old business model online. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

SelectQuote (SLQT)
Direct to consumer (DTC) insurance brokers have been stealing market share from their offline peers for years now, and the trend is likely to continue. With technology-enabled platforms that employ powerful data science and user-friendly chat and voice calling features, consumers can easily go online and comparison shop to find just the right policy for their situation, regardless of carrier.

Add in a pandemic and the pitch to shop online for insurance only gets stronger.

SelectQuote, which has a market cap of $4.2 billion, is arguably the best DTC insurance broker in the healthcare space. It derives roughly two-thirds of revenue from Medicare Advantage (MA) and Medicare Supplement (MS) plans, which fall into the SelectQuote Senior segment, and which collectively represent an $18 billion addressable market.

The structural trends are strong here given that 10,000 people are aging into Medicare every day as they cross the 65-years-young threshold, and they are increasingly turning to private plans over public options.

Just like everybody else, this segment of the population is also increasingly comfortable shopping online or over the phone. Analysts think these factors could help DTC brokers grab 25% of the Medicare market within three years, up from the current market share near 10%.

SelectQuote sells more than just Medicare insurance, however.

SelectQuote Life and SelectQuote Auto & Home are smaller segments, but they play important strategic rolls as cash collection from these products is faster than from Medicare products, and there isn’t the seasonality found in the senior business. This allows SelectQuote to shift internal resources between segments as needed.

Given the company’s current growth trajectory, analysts see Medicare products contributing roughly 80% of growth in the coming years, until they account for three quarters of total revenue. Life could grow at around 20% a year and make up around 24% of revenue, while the Auto & Home will dwindle to roughly 1% as management prioritizes the faster growth segments.

Astute investors will wonder how SelectQuote shapes up against the other publicly traded major DTC player in the health space, Ehealth (EHTH). As it stands now Ehealth has slightly larger market share, but there is room for both to grow as the overall market is expanding. SelectQuote arguably has a better customer service business model as an agent is required to help consumers enroll.

SelectQuote also pulls in leads from a wider variety of sources, and its other products (Life, Auto & Home) further differentiate it from Ehealth, which offers under-65 health plans.

Finally, SelectQuote offers superior growth. Revenue was up 44% last year and should grow by around 50% this year and next. Ehealth’s growth rate is about half that. SelectQuote also sports higher margins, albeit on a smaller revenue base, but has lower cash flow than Ehealth.

Taking it all in, SelectQuote is an expensive stock (valuation roughly 50% higher than EHTH) and having just gone public there is not a lot of trading history to go on. But it’s arguably a higher quality stock given a superior business model and more rapid growth.

In terms of recent performance, we’ve seen a mixed bag from the online brokers. Those that sell personal-lines insurance, including EverQuote (EVER) and red-hot IPO Lemonade (LMND), have been strong. The two main health insurers – EHTH and SLQT – have recently pulled back. This could open the door for new money to flow in.

SLQT came public on May 21 at 20 and jumped 35% the first day. As expected, shares have been volatile since with no real trading pattern emerging (it’s only been public a month and a half). But over time that volatility will fade, and the stock’s true colors will shine through. Averaging into a position between 25 and 28 should work out well.

SLQT-070620

SLQTRevenue and Earnings
Forward P/E: 38Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 58($mil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 16.0%Latest quarter14970%0.148%
Debt Ratio: 8%One quarter ago12137%0.110%
Dividend: NATwo quarters ago12137%0.080%
Dividend Yield: NAThree quarters ago7427%0.1360%

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 7/06/20ProfitRating
AbbVie (ABBV)3/31/20764.8%9930%Hold
Beyond Meat (BYND)6/9/201550.0%142-9%Buy
Big Lots (BIG)6/30/20423.0%40-6%Buy
Brookfield Infrastructure (BIP)6/16/20424.7%41-1%Buy
Chegg (CHGG)6/2/20640.0%7111%Buy
GFL Environmental (GFL)5/27/20180.2%195%Buy
Global X Cybersecurity ETF (BUG)6/23/20201.1%201%Buy
Huazhu Group Limited (HTHT)3/30/169.280.0%36290%Hold
NextEra Energy (NEE)3/27/191942.3%24627%Hold
Nvidia (NVDA)3/10/202540.0%39154%Hold
RingCentral (RNG)10/23/191530.0%29291%Hold
Sea Ltd (SE)1/21/20410.0%114179%Hold
SelectQuote (SLQT)New0.0%26Buy
Tesla (TSLA)12/29/11300.0%13224361%Hold
Trulieve (TCNNF)4/28/2010.420.0%1322%Buy
Tyson Foods (TSN)5/5/20562.9%595%Sell
Verizon Communications (VZ)5/12/20Sold
Vertex Pharmaceuticals (VRTX)1/7/202240.0%29230%Hold
Virgin Galactic (SPCE)10/11/199.240.0%1675%Buy
Zoom Video (ZM)3/17/201080.0%262143%Hold
Zscaler (ZS)4/14/20650.0%11577%Hold

Talk about a hot market—nine of our 20 stocks are hitting new highs today! Partial profit-taking is thus appropriate in some cases, but overall, it’s best to stick with the trend, particularly in cases where companies have great long-term growth potential (those based in the cloud, for example). However, we’ve got to sell something today to stay at my 20-stock limit, and the victim is our weakest stock, Tyson Foods (TSN), which has been sitting out the party over the past three months and shows no sign of getting going.

Changes
Tyson Foods (TSN) to Sell
Vertex Pharmaceuticals (VRTX) to Hold

AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, did succeed in breaking out to new recovery highs last week but remains below its early 2018 highs, so that’s our next target. In his update last week, Tom wrote, “I can’t say enough about this biopharmaceutical giant. Healthcare is a great place to be in this uncertain environment. Biotechnology is one of the hottest sectors of the market. And investors appear to be coming around to realizing that AbbVie has the new drug and pipeline firepower to overcome increasing competition for Humira. As the market bounces around, ABBV is in kissing distance of the 52-week high. But it’s also still cheap at 40% below the 2018 high and yielding 4.8% in a low interest rate world.” HOLD.

Beyond Meat (BYND), originally recommended by Mike Cintolo in Cabot Growth Investor, bounced right back up last week (leaving behind an island reversal) and is now just under its 25-day moving average, which is still trending higher. This is still a decent entry point for the stock of the global market leader in the field of plant-based meat substitutes. BUY.

Big Lots (BIG), originally recommend by Mike Cintolo in Cabot Top Ten Trader and featured here last week, has pulled back minimally since then but remains in a positive pattern and this is a fine entry point for a rare bricks-and-mortar retail chain that’s thriving. Plus the stock pays a nice dividend. BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for the High Yield tier of Cabot Dividend Investor, is a low-risk way to benefit from the world’s growing infrastructure needs. In last week’s update, Tom wrote, “The global infrastructure partnership has pulled off the recent high, like the overall market, but still remains in an uptrend. Although Brookfield’s vital assets that generate predictable income in any economy are a perfect answer for the uncertain environment, the stock is still almost 20% below the 52-week high. When we finally climb out of this pandemic mess, infrastructure will again be a hot market sector. With a solid yield, this is a great stock to hold through the crisis and beyond.” BUY.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, is trading at record highs! In last week’s update, just before the breakout, Mike wrote, “Our initial foray into CHGG in late May was near a high ebb in the stock, so even after the big rebound in the shares we’re only up three bucks or so. That’s not ideal, nor is the stock’s crazy volatility (it moves around nearly 5% per day from high to low, on average), but if you take a step back, the evidence still says that CHGG can be a winner: Shares have effectively consolidated for seven weeks after their huge earnings gap, and fundamentally, there are many reasons to expect the COVID-related surge in business to have legs, with remote/online learning and tutoring hitting the mainstream both in the U.S. and around the world—management says that cutting back on shared accounts (it’s a big opportunity as kids in similar classes often share accounts) and uptake of the firm’s recently released bundle product (Chegg Study Pack) should be a big tailwind over the next year or two. Back to the stock, a drop back into the mid/high 50s would be iffy, but conversely, a push higher from here could have us filling out our position.” Thus it’s likely Mike will be buying more this week. BUY.

GFL Environmental (GFL), originally recommended by Tyler Laundon in Cabot Early Opportunities, is moving slowly higher, but it’s not too late to get a piece of North America’s fourth-largest environmental services (waste management) company. BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and featured here two weeks ago, has broken out to new highs. In last week’s update, Carl wrote, “Shares broke 20 this week and are up 14% so far in 2020. The formula driving this ETF forward is that higher activity online requires more cybersecurity measures. The companies in the BUG basket address online security as cybercrime, which has reached an all-time high. The top 10 companies in the BUG basket represent 56% of BUG’s market value. The stocks are not cheap and on average trade at more than six times book value. I’m fine with new subscribers buying BUG, which represents a conservative way to invest in a competitive industry.” 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 of China’s largest hotel operator through normal technical sell signals. The stock has rallied with the market since the March bottom and all its moving averages are trending up. The pop in Chinese shares overnight doesn’t hurt, either. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, was trading below its 50-day moving average last week, but it’s had a great pop since then and is once again trending higher. In his latest update Tom wrote, “This regulated utility and alternative energy giant has both sides covered and is one of the best stocks for conservative income investors to own. Because the steady income and growth is so desirable, the price had gotten very high during the bull market. And utilities have not fared that well so far this year. Because of the increased risk of market volatility in the near term, I’m going to wait until this stock dips below 230 per share to raise the rating to a BUY.” HOLD.

Nvidia (NVDA), originally recommended for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, is once again hitting new highs! In last week’s update, chief analyst Bruce Kaser wrote, “NVDA is a high-P/E, aggressive growth/momentum stock. Its shares have increased 17x since the start of 2015 and now rest near their all-time high of 385. Yet, part of the reason behind the gains is that cloud-based computing is the biggest secular trend in technology, and the most powerful. No one knows how large the industry will ultimately become, but “larger than it is today” seems like the correct answer for many days and years into the future. Until this open-ended growth appears to peak, it would be difficult to bet against it. The only question for momentum investors is when to stop betting on it. The valuation of 38.6x estimated fiscal year 2022 earnings is high but not astronomical. Wall Street now expects EPS to grow 34% and 36% in fiscal 2021 and 2022 (January year-end).” Hold.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is the safer alternative to Zoom Video Communications (ZM). That’s because while Zoom is narrowly focused on video (and succeeding wonderfully), RingCentral is focused on video, telephone, email and text—basically serving all the new-age communications needs of a business, whether people are in an office or working remotely. Once again hitting new highs, the stock is due for a correction, so partial profit-taking is one possible strategy. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, is still overdue for a correction—trading well above all its moving averages. In Carl’s update last week, he wrote, “Shares were up 6.7% yesterday (another 3% in early Thursday trading) on the heels of Stephens analyst Jeff Cohen initiating coverage with an overweight rating and a price target of 130. Cohen noted the favorable demographics in Southeast Asia, with high economic growth and internet penetration. He also sees potential for strong expansion across all three of Sea’s core business lines: gaming, mobile payments, and e-commerce. Sea is strategically positioned to take advantage of this growth in part due to its partnership with China’s Tencent. According to Bain & Company, the digital economy in Southeast Asia has tripled in the past five years to $100 billion and is expected to triple again by 2025 to $300 billion. The stock has nearly tripled this year and we have already taken some profits. Only very aggressive investors or new subscribers should chase it here.” 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 currently red-hot, up more than 30% in the past week after announcing second quarter delivery numbers that crushed analysts’ expectations (while competitors stumbled). Traders could take partial profits on this strength, but I’m going to continue to hold long-term, because while the company is already leading the automotive industry revolution, it also has the potential to revolutionize the energy industry—and that’s an even bigger market! HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is the biggest seller of marijuana in Florida, with real potential to expand in Massachusetts, Connecticut and California. The stock remains in a basing pattern centered on 13, so can be bought here, because eventually it’s going to break out above 14. BUY.

Tyson Foods (TSN), originally recommended for the Growth Portfolio of Cabot Undervalued Stocks Investor, remains below all its moving averages, telling us investors don’t want it today. Fundamentally, there’s still an argument that the stock is cheap and will be higher someday, but right now, the stock is going nowhere, so I’m going to sell now and take our small two-month profit. SELL.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, bodied to its 25-day moving average last week and bounced right back up, so it’s still capable of breaking out to more new highs—but power is weakening. In last week’s update, Mike wrote, “We go back and forth on VRTX. On one hand, there’s not much to complain about, as shares remain in a two-steps-forward, one-step-back type of advance, with solid support showing up every time the stock sells off for a week or two; that’s just the kind of action we expected in a bull run in such a big, liquid name with a steady growth story. On the other hand, there’s not a ton of juice here—VRTX’s relative performance line (not shown in the chart) peaked in mid-May and is no higher today than in early April. Overall, though, it’s usually best not to overthink things: At day’s end, the stock is still in an uptrend and has a reliable growth story. A big bout of weakness and/or a market selloff could always have us taking our profit, but at this point we believe holding and giving the stock a chance to keep rising is the best option.” I’m going to downgrade it to Hold. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, remains in a long consolidation pattern, so buying anywhere here is fine, though there’s no telling when the stock will get into a true uptrend again. In Carl’s update last week, he wrote, “shares are up 11% since Monday as Vertical Research Partners analyst Darryl Genovesi reiterated his buy rating. A call he had with Chief Executive George Whitesides supported his bullish stance as Genovesi maintained his stock price target at 29, which is 89% above current levels. SPCE is up 46% so far in 2020 and we already booked some sizable profits on SPCE earlier this year. I rate it a strong buy for aggressive investors.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains red-hot, thanks to its high-visibility position as the number one solution for work (and learn) -from-home meetings. Technically, the stock is overdue for a correction, so partial profit-taking is a good idea for some investors—but long-term, there’s no knowing how far this stock can go if management continues to pull the right levers. HOLD

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, popped up to a new high this morning on good volume, though as the day wore on the stock gave back much of the gain. In today’s Cabot Top Ten Trader, Mike wrote, “Cloud growth has exploded, with cybersecurity firms set to play a giant role as everything goes and stays online. One of the new-age leaders in the group is Zscaler, which uses the cloud to provide security as a service, including firewalls, antivirus, malware and data leak detection offerings. Its products are used by firms in more than 158 countries and growth has been solid for a while, including in Q1 as lockdowns pushed businesses to cloud platforms. Growth is the company’s focus, with billings (up 55%) and revenue (up 40%) up impressively last quarter as it had no trouble upselling existing clients new products. Sub-metrics like deferred revenue (up 42%), total future revenue under contract ($654 million, up 31%) and same-customer revenue growth (up 19%) also impressed, while free cash flow (came in at 8% of revenue last quarter) is far larger than earnings. But possibly most bullish were tidbits that management relayed on its conference call, with some large unnamed customers adding tens and even hundreds of thousands of users in matter of weeks as demand surged with the shut-in. (The firm’s network access solution is used by only about a third of Zscaler’s Global 2000 customers, meaning there’s plenty of cross-sell potential.) Its recent cloud security contract with the U.S. Defense Dept. (potentially adding 500,000 users over time) is also a plus. Short-term, analysts see revenues up 37% in the current quarter (earnings won’t be released until August most likely), but big investors are thinking there should be years of rapid growth ahead as migration to the cloud and work-at-home trends remain strong.” HOLD


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

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