Cabot Stock of the Week 307

The market remains in good health and trending higher, though the rotation out of the leading Nasdaq glamour stocks may have further to go—or may be just a false alarm.

In any case, it’s the stocks YOU own that matter, and if you’ve been choosing from our portfolio, you’ve been doing pretty well!

Today’s recommendation is a well-known and well-run company in the apparel business that should benefit from the trend toward more casual clothing. And according to our Cabot expert, it’s undervalued!

As for the current portfolio, there are two changes, a sell recommendation for Beyond Meat (BYND), which has lost momentum and a move to hold for Big Lots (BIG).

Full details in the issue.

Cabot Stock of the Week 307

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The market’s main trend remains up, but there’s a growing disconnect between retail investors, who have focused on glamour stocks like Tesla (TSLA) and Virgin Galactic (SPCE) and Zoom (ZM) and might be labeled “euphoric” at this point, and institutional investors, who have pursued more sober-minded systems of investing and still cannot be labeled particularly optimistic. Thus market sentiment can be seen to be at an extreme — or not. Lacking consensus, it’s best to simply watch the charts, and the charts in general remain positive. For today’s recommendation, I’m turning to a sector heavily damaged by the COVID-19 shutdown—where we find a stock with the potential to come out of the trough bigger and stronger than ever. The stock was originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and here are Bruce’s latest thoughts.

Columbia Sportswear (COLM)
Like many consumer goods producers, companies that make apparel and related products have seen sharply lower sales and profits with the stay-at-home restrictions during the pandemic. Unable to go shopping, along with a seasonally lower need (following the holidays) to buy, consumers not surprisingly have tamped down much of their spending on clothing. This has exacerbated the multi-year trend of declining sales at most brick-and-mortar retailers.

However, for companies that make everyday apparel, particularly those with enduring brands or an outdoor/active lifestyle focus, demand should eventually return to healthy levels. Consumers generate a relatively steady replacement demand for these goods, and growing new demand from lifestyle changes and new innovations should bolster sales. Additionally, the everyday orientation reduces the volatility and risks that fashion-oriented or seasonal products carry, while also lessening the need for costly markdowns to unload time-sensitive inventory. Back-to-school season, even with many schools shifting to on-line only classes, will still produce strong demand.

In complicated times like these, consumers generally migrate to the familiarity and assurances of a quality brand – a fact that also puts the producers of these brands in a stronger bargaining position with retailers. Additionally, the work-from-home movement brings a step down from business casual, helping shift demand toward more casual but quality apparel. Another emerging trend is that consumers are spending more time outdoors, raising demand for the clothing and gear that accompanies these activities.

Like all industry groups, some specialty apparel companies are better positioned than others. In addition to having the right brand quality and product types, those less reliant on sales through department stores or weaker malls, for example, will likely be more resilient. Also, some stocks are more appealing bargains than others. Shares of exceptional companies like Nike (NKE) have returned to near-record highs, while other stocks in the sector may continue to struggle due to weak competitive positions.

With over $3 billion in revenues generated from 90 countries, Columbia Sportswear (COLM) produces the highly recognizable Columbia brand of outdoor and active lifestyle apparel and accessories, as well as SOREL, Mountain Hardware, and prAna products. Its backpacks, shoes, hiking boots and outdoor gear are well-positioned for the current economic environment. For decades, the company was successfully led by the one-of-a-kind Gert Boyle, who passed away late last year. The Boyle family retains a 36% ownership stake and Gert’s capable son Timothy Boyle remains at the helm. The company is likely to remain healthy as consumers seek its highly relevant products.

First quarter sales fell 13% from a year ago, as a high 64% of sales come from the U.S., where Columbia’s reliance on wholesale distribution, and the longer lockdown periods relative to other countries, hurt results. Despite the decline, Columbia still produced a modest profit. The company is rapidly improving its on-line operations, both through its own websites and through third-party online retailers, which combined generated over 20% of sales.

Second quarter revenues are expected to decline a sharp 53% from a year ago, as nearly the entire period was weighed down by stay-at-home orders. Earnings estimates point to an $(0.88)/share loss, compared to a $.23/share profit a year ago. But with over $700 million in cash on its balance sheet, Columbia can easily absorb this $60 million loss. An inventory overhang earlier in the year appears to be mostly worked down. The company will likely produce nearly $80 million in third quarter profits, and is estimated to earn over $100 million, or $1.61/share, in profits in the fourth quarter. Columbia reports its second quarter results on July 30th after the market closes.

For the full year, the company is estimated to earn $2.23/share, rising to $5.31/share by 2022. Higher online sales, as well as efficiencies gained during the pandemic, should help make Columbia a more profitable company than before the pandemic.

Columbia’s balance sheet remains solid, with only $174 million in debt. To preserve its financial flexibility, the company has suspended its $.26/share quarterly dividend, which previously provided a modest 1.3% yield.

COLM shares remain down 22% year-to-date, and have traded in a 75-80 range for about a month.

At 78, the shares trade at 19.3x estimated 2021 earnings, but a more modest 14.6x estimated 2022 earnings, which is more reflective of a post-COVID recovery. For comparison, peer company VF Corp (VFC) trades at 22.7x estimated 2022 earnings even as it carries a higher debt load.

Columbia, and shareholders, are well-positioned to benefit from the company’s attractive valuation and improving fundamentals.

Current Recommendations

The addition of Columbia Sportswear (COLM) to the portfolio today means we’ve got to sell one stock (or more) to honor my cap of 20 stocks, and the victim today is Beyond Meat (BYND), a stock that we bought right near its peak six weeks ago (after a high-volume breakout) and that has weakened steadily since. It’s not broken yet, so if you bought lower, you might still be able to justify holding, but in this portfolio, which is continually throwing out laggards, it gets the hook today. As for our other holdings, generally, trends remain very good, though it will be interesting to see if the initial selloff in growthy tech stocks gathers any momentum from here.

Changes
Beyond Meat (BYND) to Sell.
Big Lots (BIG) to Hold.

AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, remains in a strong uptrend, and is thus a fine choice for any investor looking for big growth-oriented pharmaceutical company. In his update last week, Tom wrote, “This most actively traded big pharma stock is still in an uptrend. It has been slowly dabbling with the 52-week high recently. ABBV was going gangbusters before the bear market and has found its mojo again. Investors are increasingly confident that its new drugs and pipeline along with the recent Allergan merger will enable the drug market to overcome generic completion for Humira. Despite the fact that the stock has returned 47% over the past year, it’s still cheap at more than 30% below the 2018 high.” HOLD.

Beyond Meat (BYND), originally recommended by Mike Cintolo in Cabot Growth Investor, was our weakest stock last week, as well as our largest loser—and the same remains true today. Technically, there’s still a chance that the stock will find support here, or down at 120, but the fact is, it’s going the wrong way now. I recommend selling and moving on. SELL.

Big Lots (BIG), originally recommend by Mike Cintolo in Cabot Top Ten Trader and featured here three weeks ago after it broke out on big volume, has pulled back since then but remains above its 50-day moving average, so the odds are still good here. However, respecting our growing loss, I’ll now downgrade it to Hold. HOLD.

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, and still a good buy from a long-term perspective—though after gaining 11% over the past two weeks, a little pause might be expected. In last week’s update, Tom wrote, “With a portfolio of reliable income-generating assets like cell towers, pipelines and ports, this is a great stock to own during a bad economy. It’s solid if the market turns south and should rally again if the market remains strong.” BUY.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, looks set to notch a new closing high today, as more and more investors see the potential for the firm to thrive in a world where school is not necessarily conducted in the classroom. In last week’s update, Mike wrote, “Back in 2017 and 2018, CHGG had a big move, but it was also known for a lot of trickery, with lots of dead periods and sharp corrections along the way higher. (That’s not a bad thing per se, as some leaders have this personality; we remember Intuitive Surgical doing the same in 2004 on its way to big gains.) Given that, the swings we’ve seen in the stock up and down since our initial entry still look normal to us—in fact, we filled out our position last week (adding another 5% stake), and the stock’s huge blastoff on more than 10 times average volume in May should lead to good things down the road. That said, we’re not complacent: Our average cost on the two buys is just above 69, so a drop to the very low 60s (below the 50-day line) would be iffy. But right here, CHGG’s action looks reasonable, especially given that it comes after a quick 20-point advance from the June lows. We’re sticking with our Buy rating. Earnings are likely out in early August.” BUY.

GFL Environmental (GFL), originally recommended by Tyler Laundon in Cabot Early Opportunities, came close to hitting a new high last Friday and is off slightly today so 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, remains above all its moving averages, primed to hit another new high. In last week’s update, Carl wrote, “BUG is up 29% so far in 2020. Powering this ETF forward is higher activity online that requires more cybersecurity measures. The companies in the BUG basket address online security and cybercrime, which has reached an all-time high in the midst of COVID-19. 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 continues to consolidate its big gains of early June, trading in a range between 33 and 39. HOLD.

LGI Homes (LGIH), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, climbed nicely higher last week and has pulled back minimally today. Last week the company announced a new community in Lakeland, Florida and three new communities in the Dallas-Fort Worth area, all composed of single-family homes with prices starting in the $200K to $250K range. Clearly, the COVID-inspired demand for suburban homes has legs. If you didn’t buy last week, you could nibble here or wait for a pullback. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, broke out above its June high last week and is now very close to exceeding its March high! In Tom’s latest update, he wrote, “Like REITs, Utilities have been an underperforming sector in the pandemic. But NEE, with its steady regulated revenues and growth from the alternative energy business, is bucking the trend. While the Utilities Select Sector SPDR Fund (XLU) is down about 5% over the last year, NEE is up 26%. The stock is also outperforming the S&P 500 YTD by double digits. NEE is in an uptrend that could test the old high of 282.” HOLD.

Nvidia (NVDA), originally recommended for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, enjoyed a well-earned pullback last week, but remains above all its moving averages. In last week’s update, chief analyst Bruce Kaser wrote, “In April, NVIDIA completed the $6.9 billion acquisition of Mellanox Technologies, an innovator in high-performance interconnect technology routinely used in supercomputers and hyperscale data centers. NVIDIA’s data center business now represents about 50% of total revenues. NVDA is a high-P/E, aggressive growth/momentum stock. Its shares have increased 17x since the start of 2015 and now have surged past their former all-time high of 385. The pullback earlier this week still leaves the stock above where it was trading only 4 sessions ago. 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 41.7x estimated fiscal year 2022 earnings is high and approaching astronomical. Wall Street now expects EPS to grow 21% in fiscal 2022 (January year-end) compared to fiscal 2021.” Bruce has the stock rated a Strong Buy, but I think the stock needs a bigger cooling-off phase, so I’ll stick with Hold. HOLD.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, plunged below its 50-day moving average last week when leading growth stocks came under pressure, and while it’s bounced a bit since then, the bounce has been unimpressive. And that leaves me with an interesting choice. Do I sell now, take the 70%+ profit and move on? Or do I continue to hold (and perhaps label the stock a Heritage Stock) because the long-term potential is still excellent (and because we’re still in a bull market)? Quarterly results will be announced August 3, but until then, the chart appears to be our best guide. It’s not broken, and the bull market is intact, too, so I’ll hold. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, has finally taken a rest; it pulled back to its 25-day moving average last week, though today it’s up again. In Carl’s update last week, he wrote,” Shares pulled back a bit this week on profit taking but are still up about 180% so far in 2020. Sea’s second-quarter earnings report is expected in August, though the company hasn’t announced a date yet. The consensus among analysts is for revenue to increase 70% and for its loss per share to narrow from $0.52 to $0.48. Sea’s internet market is large and growing fast. 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. Southeast Asia has 416 million internet users and fourth-quarter 2019 e-commerce growth was 37%, or more than three times the rate of increase in the United States. Again, I encourage owners of Sea to take some profits if they have not already done so, and only the most aggressive investors to buy at these levels.” HOLD.

SelectQuote (SLQT), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here two weeks ago, hit a new low this morning, but then reversed higher, so if you haven’t bought yet, and you’d like a small-cap stock with great potential to grow through cloud-based services, you could buy here. BUY.

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 now building a base in the 1500 area, consolidating the big 50% gain from its two-week run that ended July 13. (Clearly, retail investors were a big factor.) Taking partial profits is still an attractive strategy here if you’re overweighted or unwilling to sit through a partial retreat (maybe down to 1200?), but long-term, all trends are in this company’s favor. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, enjoyed a big-volume breakout (with the other big U.S. producers) two weeks ago and has pulled back normally since. If you haven’t bought yet, you can buy here. BUY.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, looks like it’s going to notch a record closing high today—though the low volume suggests it may not stick. In fact, the stock has slowly been losing power for over a month. Mike actually advised selling the stock last week as it was weakening (and took out a 44% profit), but this renewed strength (price trumps volume) is reason enough for me to stay. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, broke out of its three-month-long consolidation pattern last Friday and pulled back minimally today. In Carl’s update last week (before the breakout), he wrote, “Alembic is the third Wall Street firm to pick up coverage of SPCE with a buy rating and a 23 price target. One attraction Alembic noted is that there are more than two million people with a net worth exceeding $10 million and that Galactic only needs about 300 customers a year to hit its initial targets. I reaffirm that SPCE is a strong buy for aggressive investors. This is a fascinating concept stock with a quality management team in a potentially high-growth market. The huge hypersonic point-to-point travel market and Virgin Galactic’s partnerships with Boeing and NASA add considerable credibility to the story.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, corrected moderately last week, but never touched its 25-day moving average, and today it’s trying to break out to a new high. I have previously suggested partial profit-taking in the stock and that is still appropriate for some investors, but long-term, the sky’s the limit. HOLD

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high last Thursday and has pulled back minimally since. If you’re looking for a leading cybersecurity stock to investing in (maybe BUG is too tame for you), Zscaler is one of the best. HOLD.

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

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