Cabot Stock of the Week 308

The market remains in good health and trending higher, though as always, fine-tuning of your portfolio is required to continue to stay in the right stocks.

This week, that means selling two stocks (SLQT and VRTX), as well as upgrading one (ZM) to buy.

As for the new recommendation, it’s tailor-made for investors looking to maximize income from dividends (it pays a 7.3% yield) and get capital appreciation potential too.

Full details in the issue.

Cabot Stock of the Week 308

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The market’s main trend remains up, and thus our goal continues to be maintaining a full and diversified portfolio of high-potential stocks. For today’s recommendation, I’m going with a very high-yielding grocery wholesaler whose business has boomed as American dining has shifted from restaurants to the home. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.

B&G Foods Inc. (BGS)
New Jersey-based B&G Foods is an American food manufacturer that sells familiar shelf-stable and frozen foods in the U.S., Canada and Puerto Rico. Founded in 1889 by the Bloch and Guggenheimer families, who sold pickles on the streets of Manhattan, the company now sells 50 well-known and popular food brands including Cream of Wheat, Green Giant, Ortega, Dash, Accent, B&M, Durkee, Emeril’s, Skinny Girl, Underwood, Vermont Maid, Crock-Pot and Weber.

Food is the ultimate defensive consumer staple. People have to eat no matter what goes on in the world. And B&G’s products are essentials and not expensive indulgences. While food generates very reliable revenue for B&G, the company had recently struggled to grow earnings and pay its oversized dividend of 7.3%. Stock performance had been uninspired.

Then the pandemic changed the math.

Business is absolutely booming for B&G now. During the lockdown, people are forced to eat at home. Many are stocking up on nonperishable items as they want to limit visits to the store. The new trend plays right into B&G’s wheelhouse. How big of an impact is this having?

The company reported an overall sales increase in April and May of 58% above the same period last year. Management has also stated that sales and earnings for the year will be astronomically higher than previously anticipated. Analysts are expecting 31% year-over-year earnings growth for this full year. That’s some serious earnings growth for a company that has only grown earnings by an average of 3% per year over the last five years.

But won’t growth fall back when the pandemic is finally over (if that ever happens)? Of course it will, but there is very good reason to believe that sales have broken out to a higher level that will continue after the lockdowns.

Eating at home is cheaper and healthier than eating out or ordering out. People have been forced to refine their eating habits. The pandemic has made this New Year’s resolution finally come true. At the same time, food companies are better at delivering quality and more easily prepared food. Even when people feel safe about eating out again, they have found a better way and will likely continue the behavior.

A recent survey conducted by investment firm Piper Jaffray found that two-thirds of respondents said they intended to eat at home more after the virus than they did before. The survey also predicted a sustainable 15% lift in at-home food consumption. This suggests that, while the numbers we’re seeing during the lockdown will likely come down, a more permanent shift in food consumption is likely underway.

How is all this news affecting B&G’s stock? BGS has returned more than 50% so far this year—not bad for a stock that had only returned an average of 4.3% per year over the previous five years. Have you missed the boat? I don’t think so. The stock still sells at just 13 times forward earnings, less than the five-year average. But that number doesn’t factor in the new level of growth. And there’s something else.

B&G is a different company and stock now. It was a slow growth company that struggled to pay its high dividend. It has now morphed into a solid growth company that can easily handle the outsized payout. A stock like that should garner a higher level of investor demand, especially in these highly uncertain times.

And there are powerful reasons to believe the dividend is sustainable, starting with the fact that management is committed to the dividend. In May, BGS announced a dividend for the 63rd straight quarter since the IPO in 2004. The company has also grown the quarterly dividend by 179% over the last 10 years. Having committed to and maintained the payout through several slow-growth years, it doesn’t make any sense that management would turn around and cut it while the company is in the midst of an earnings and cash bonanza.

Current Recommendations

The portfolio generally looks very healthy, reflecting the state of the overall market. But there’s usually room for fine-tuning, and today that means a couple of sales: SelectQuote (SLQT), which has gone the wrong way since I recommended it, and Vertex Pharmaceutical (VRTX), which has built us a nice profit over the past six months but is now losing momentum. Details below.

Changes
SelectQuote (SLQT) to Sell.
Vertex Pharmaceuticals (VRTX) to Sell.
Zoom Video (ZM) to Buy.

AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, pulled back normally last week but remains in a healthy uptrend. In his update last week, Tom wrote, “I tend to slobber all over this stock. It has everything going for it right now. Healthcare is a great place to be because it offers defense as well as growth, and it should be solid whichever way the market goes from here. Performance has been great. It has returned about 50% over the past year and 23% over the past few months. It’s just made a new 52-week high. Yet despite that performance and sector desirability, the stock is still remarkably cheap. ABBV is still trading more than 20% below the 2018 high and selling at just 10 times forward earnings.” HOLD.

Big Lots (BIG), originally recommend by Mike Cintolo in Cabot Top Ten Trader and featured here a month ago after it broke out on big volume, has pulled back since and then bounced strongly off its 50-day moving average last week, so even though the month-old high still stands, prospects are good. HOLD.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for the High Yield tier of Cabot Dividend Investor, has made no progress over the past seven weeks, but it keeps paying that nice dividend and downside risk appears minimal. In last week’s update, Tom wrote, “This infrastructure juggernaut still offers a compelling value, along with a high yield. It is not the kind of stock that has been embraced by the market recovery so far and it is still trading more than 15% below the 52-week high. Looking ahead, I believe investors will embrace a company that reliably generates growing earnings in any economy and pays a rock-solid high yield. BIP is a great place to be going forward and it’s not too expensive.” BUY.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, briefly hit another new high last Thursday and has pulled back normally since. In last week’s update, Mike wrote, “The debate over school reopening’s is raging across the country, but more and more seem to at least be starting out with a part-virtual option (with some going fully virtual for at least the first few weeks). That’s likely helping perception of Chegg, which rebounded excellently from last week’s selloff, tagging new highs today before reversing (on light volume). Anything is possible, of course, but the trend is up here for the business and the stock. We’ll stay on Buy, though dips toward the 25-day line (near 70 and rising) would mark better entry points. Earnings are likely out in early August.” BUY.

Columbia Sportswear (COLM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here last week, is unlikely to be a barnburner, but it’s moving in the right direction, and Bruce says the future is bright. In his update last week, he wrote, “The company reports on July 30, with analysts expecting an $(0.88)/share loss as the quarter includes the full effect of the stay-at-home orders. Full year estimates are $2.23 and $4.04 for 2020 and 2021, respectively. For comparison, the company earned $4.83/share in 2019. On next year’s estimates, the shares trade at a P/E of 19.2x. The stock has appeal for value investors and for growth investors with patience for what might be a slower recovery than other growth stocks. Traders will find COLM shares appealing given the stock’s sensitivity to consumer and economic re-opening trends.” BUY.

GFL Environmental (GFL), originally recommended by Tyler Laundon in Cabot Early Opportunities, broke out to a new high today! Granted, volume wasn’t impressive, but that’s less important with smaller stocks like this. If you’ve got it, hold on tight, and if not, I suggest waiting for the next pullback to buy. Second-quarter earnings will be released after the market close on August 5. BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, hit a record high last Thursday and has pulled back since. In last week’s update, Carl wrote, “BUG had another good week, up 5%, as increased online activity requires more robust but affordable cyber-security services. 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 fast-growing 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, hit another new high last week and has pulled back minimally since, so all looks good, though volume trends suggest that the stock may be in for a cooling-off period soon. Fundamentally, all trends look good in the housing industry today, with demand high and interest rates low. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, just capped a strong three-week advance by breaking out above its March high! In Tom’s latest update, he wrote, “Utilities have had a lousy time of it this year, but not NEE. This regulated and alternative energy superstar is still blowing away the market. After stumbling somewhat during the selloff, the stock has caught fire again. It’s outperforming the market by about 15% YTD. It also has kicked the market’s butt in the last 15-year, 10-year, 5-year, 3 year and one-year periods. Defense with growth is a winning formula. What can I say?” HOLD.

Nvidia (NVDA), originally recommended for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, has been consolidating its recent gains for two weeks now and remains well above its 50-day moving average. In last week’s update, chief analyst Bruce Kaser wrote, “NVIDIA is a high-P/E, aggressive growth/momentum stock. Its shares have increased 17x since the start of 2015 and now trade essentially at their all-time high. 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 42.6x estimated fiscal year 2022 earnings is high and on the edge of astronomical, particularly for a company its size. Wall Street now expects EPS to grow 21% in fiscal 2022 (January year-end) compared to fiscal 2021. The company reports its earnings in September.” HOLD.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, plunged below its 50-day moving average two weeks ago, climbed back above it last week, and is now trading right at the average, neither strong nor weak but still trending up. I wouldn’t buy here, but I don’t see reason enough to sell either. Quarterly results will be announced August 3. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, had a fantastic run from April through July, as the firm’s online Asian operations proved particularly attractive to investors—but for the past two weeks the stock has been correcting, taking a breath while its 50-day moving average, now at 99, catches up. In Carl’s update last week, he wrote, “In addition to gaming and e-commerce growth drivers, Sea’s digital payments segment is gaining momentum with more than $1 billion in total transactions from over 10 million SeaMoney mobile wallet users in the first quarter of 2020. 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.” HOLD.

SelectQuote (SLQT), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here three weeks ago, has been a total flop for us so far. Last week, Tyler wrote, “Peer Ehealth (EHTH) reported last night and had a good quarter but a very messy conference call. Topics of discussion included lower lifetime value (LTV) trend and the mix shift of online customer support versus telephone support. Also, customer churn was discussed (churn is when a customer leaves). This is all relevant because EHTH is off about 30% and that’s hurting SLQT. My read is that there is some noise in the Medicare insurance market due to multiple enrollment opportunities throughout the year, but that Ehealth is having some company-specific issues too. Management’s comments about ‘strategy decisions’ and ‘we need to have’ and ‘working with urgency to address’ support this assertion. Does this mean that all Ehealth’s issues mean customers are flocking to SelectQuote? It might. But that’s likely a very simplified way of looking at it. There are probably market forces that are affecting SelectQuote’s business as well (either positively or negatively). What we do know is that SelectQuote favors agents working with customers, and that tends to mean better retention. SelectQuote also tends to have higher LTV and margins. But it is not generating free cash flow and will likely need to raise capital before it gets there. It is a little risky, but I’m keeping SLQT at buy.” Long-term, Tyler’s patience is likely to pay off, so if you have time, feel free to hold. However, for this portfolio, I can’t afford such patience, particularly with a position that’s so quickly fallen deep in the red. Thus, I’m going to sell and move on. SELL.

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 consolidate its recent huge gains, which coincided with both increased analyst perception and major increases in news coverage—the Gigafactory planned for Austin, Texas being the latest. Taking partial profits here is still an attractive strategy, particularly if you’re overweighted or unwilling to sit through a partial retreat (maybe down to 1,200?), but long-term, all trends are in this company’s favor. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is the biggest seller of medical marijuana in Florida (where recreational use is not yet legal), and it’s now beginning to move into Massachusetts, Connecticut and California. As for the stock, it continues to base in the 15 area, consolidating its gains from the first week of July, so it’s an attractive buy here. Meanwhile, the sector remains strong, with peers Curaleaf (CURLF) and Green Thumb Industries (GTBIF) breaking out to new recovery highs today. BUY.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, notched a record closing high a week ago but since then has dipped below its 50-day moving average—on increased volume. Mike sold two weeks ago, noting that the stock had been weakening for a while, and I’m going to follow his lead now, as this stock has substantial downside potential. SELL.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has had a great run over the past three weeks, and with good reason. In Carl’s update last week, he wrote, “SPCE shares surged 25% this past week as the company announced Michael Colglazier as the new CEO. His previous role was as president of Disney Parks International. Outgoing CEO George Whitesides will fill the newly created role of chief space officer. In that role, he will oversee the company’s high-speed mobility and orbital spaceflight programs. This is a fascinating concept stock with a high-quality management team in a potentially high growth market. In addition to space tourism, Morgan Stanley believes the hypersonic point-to-point market could be worth $400 billion by 2040. For example, a flight from New York to Shanghai that takes 12 hours now might be shorted to as little as 40 minutes. The U.S. space agency has been working on a high-mach flight with its Supersonic X-59 test plane built by Lockheed. I’m fine adding small amounts to your positions at current prices and would be more aggressive on any pullbacks.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, corrected moderately last week, is now two weeks into a correction, so technically it looks quite healthy. Last week Mike wrote, “Zoom Video has been one of the real leaders this year, respecting its 50-day line as it’s put on an amazing show. The stock is now hesitating with all growth titles, but volume has been very light and the 50-day line (now at 228 and rising) is catching up fast. If you want to take a swing at it, you can buy some here or on further weakness and use a stop just under the 50-day line.” Respecting this opportunity, I’ll now upgrade the stock to buy. BUY.

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, is also two-plus weeks into a correction, but so far it’s held up better than ZM; it’s currently just 3% below its recent high. If you’re looking for a leading cybersecurity stock to invest 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 August 3, 2020.

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