Cabot Stock of the Week 309

The market remains in good health and trending higher, spurred on by some very impressive second quarter reports.

This week’s recommendation is a high-risk stock with high potential in the energy industry, and I’m trying to get in near a short-term low here.

As for the current portfolio, many of our stocks are hitting new highs today and there’s only one change—a downgrade of Columbia Sportswear (COLM) to hold.

Full details in the issue.

Cabot Stock of the Week 309

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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. This process of diversification is actually fun for me because it allows me to recommend a very wide variety of stocks. Last week’s featured stock, for example, was a low-risk, high-yielding food company with a massive 7.3% yield, while today’s recommendation is a high-risk bet on a small company in a new energy field with great potential. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

Bloom Energy (BE)
Bloom Energy is an up and coming clean energy company with a market cap of $1.5 billion. It offers an advanced distributed energy generation platform composed of fuel cells that are used by businesses, communities and other organizations.

Bloom’s solid oxide fuel cells are designed as server modules, which are linked together to create a power system that’s as large or small as the customer desires. The cells take natural gas and turn it into electricity just as efficiently as gas turbines, but do so in a small and clean package that can be placed anywhere there is a gas supply.

The company’s customers are diverse, ranging from retail chains to datacenters to university campuses. Household names include Walmart, Apple, The Home Depot and AT&T. They turn to Bloom for reliable, clean electricity that reduces reliance on aging grid infrastructure and provides energy security during earthquakes, wildfires, heat waves and other events that take down the grid.

Each energy server produces 200 to 300 kilowatts of power and is roughly the size of half a standard 30-foot shipping container. A Bloom Energy power system occupies roughly 1/12^th the space of a similar capacity solar array.

Management says the electricity its modules generate should be competitively priced with grid electricity in most U.S. markets sometime this decade, meaning a potentially massive addressable market worth over $150 billion. The international market potential is several times that size.

However, Bloom’s potential is growing significantly today due to expansion into the hydrogen and marine solutions markets.

In late June, management disclosed a partnership with Samsung Heavy Industries, which is the world’s third-biggest shipbuilder. Bloom and Samsung Heavy will bring a natural gas and/or hydrogen fuel cell propulsion solution to the shipping industry. This move roughly doubles Bloom’s addressable market. Revenues won’t materialize until customers take delivery of orders (around 2025).

Then, in mid-July, management announced a partnership with SK Engineering to deliver complete hydrogen power solutions to the South Korean market by 2021. This, along with the aforementioned deal with Samsung Heavy, feeds into South Korea’s recent law to build a hydrogen-based power economy that can supply 30% to 35% of the country’s power.

Those announcements helped propel shares of Bloom’s stock—which had fallen nearly 80% from a February high of 14.5 to 3 when the market crashed in March—to a multi-year high of 19 on July 22, and in the days that followed the stock gave back a bit of the gain.

But then on July 29, the company’s quarterly report knocked shares of BE back to 12.5, exactly where they were before the SK Engineering deal was announced.

The culprit was likely management’s lack of forward guidance (due to COVID-19) and the recent drop in profit margins (16.5% versus 19%+ expected), which is a result of Bloom’s selling an “old” technology that is soon to be replaced with the newest server (generation 7.5).

I think the market is interpreting the declining margin trend as Bloom losing pricing power. But that’s temporary and should bounce back as the new servers start to ship. Long-term investors should look past the current turbulence as market expansion, new products and likelihood of improved fundamentals are the real story here.

The rest of the report was largely positive. Management said Bloom accepted 306 systems in Q2, an increase of 13% from a year ago and up almost 20% from the previous quarter (analysts had expected closer to 225). Revenue, which was impacted by the pandemic, fell by 6.2% to $16.7 million while adjusted EPS of -$0.23 beat by $0.06.

Looking forward, analysts now see modest revenue growth of 3% this year, but a re-acceleration in 2021 when sales should jump 26% and top $1 billion. Adjusted EPS will likely be around -$0.85 this year, jump to -$0.04 in 2021, then turn positive in 2022, when roughly 20% revenue growth is expected.

Tim’s note: This stock has high potential in the long term, but short-term volatility makes getting on board challenging. The current pullback (on clear news), which has brought the stock down close to its 50-day moving average, looks like a decent opportunity.

Current Recommendations

The portfolio generally looks very healthy, reflecting the state of the overall market, and today’s addition of Bloom Energy means we’re once again fully invested. But I suspect that won’t last. Some of the hottest stocks are due to cool off (so we might sell some next week if we can get a clue to where the weakness lies), and some of our “safer” stocks are testing our patience slightly, so if they don’t shape up, a sale or two is possible there as well. For now, though, the only change is a downgrade of Columbia Sportswear (COLM) to hold.

Changes
Columbia Sportswear (COLM) to Hold.

AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, reported excellent fourth quarter results last Friday, topping analysts’ views on both revenues and earnings, but then issued guidance for the full year that fell below expectations, and the stock sold off in response. But the drop wasn’t crushing, only taking the stock to its 50-day moving average. And today shares were bouncing. In his latest update (before the report), Tom wrote, “Although the stock has returned over 13% YTD and about 50% over the past year, it’s still cheap at just 10 times forward earnings. This is still a great drug stock to own with a high dividend.” HOLD.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Undervalued Stocks Advisor, also released its second quarter report last week, and as expected for the grocery brands company, results were terrific. Revenues were $513 million, up 38.1% from the year before, while EPS was up a whopping 86.8% to $0.71 for share, beating analysts’ estimate of $0.62. In his update last week (before the report), Tom wrote, “The main reason to buy this company is that a greater level of demand for its products should persist after the lockdowns are over. The company has morphed from just a defensive play to a defensive company with a much higher level of sustainable growth.” The stock is up since the report, but not excessively so. BUY.

Big Lots (BIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is neither strong nor weak, but the stock’s pattern is still positive, and there’s support right here at the 50-day moving average, so I still think it’s worth holding. HOLD.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, is also neither strong nor weak, but it keeps paying that nice dividend and downside risk appears minimal. In last week’s update, Tom wrote, “This is a fantastic reliable cash generator that this market has not yet fully embraced. High dividend stocks have not really been in favor during this market rebound. But that may change as technology and high growth plays bounce around at nose-bleed levels. This infrastructure company will pay and grow the dividend regardless of the pace of the economic restart or who wins the election in November. It also sells at a good value, still 15% below the 52-week high.” BUY.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, is scheduled to announce second quarter results after the market close today, and clearly, investors are expecting great news.; the stock gapped up at the open! In last week’s update, Mike wrote, “analysts see revenues up nearly 46% while earnings are expected to rise 39%, but all eyes will be on the firm’s outlook for the back-to-school time period, especially as so many grade schools and colleges appear to be starting the fall offering virtual-heavy education. A bad break on earnings (down into the 60 area) would probably have us cutting the loss and moving on, but right here, the stock looks fine and we think the odds strongly favor the next big move being up.” He was right! BUY.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, fell Friday after releasing its second quarter report and is even lower today. Interestingly, the loss per share was not as bad as analysts expected, but the stock’s reaction tells us investors’ view of the future is not as rosy as it had been before. I’ll stick with it, to see what Bruce says, but I’ll downgrade to hold until the stock looks better. HOLD.

GFL Environmental (GFL), originally recommended by Tyler Laundon in Cabot Early Opportunities, continues to hit new highs! Second quarter earnings will be released after the market close on August 5, so if you don’t own it yet, I suggest you hold off until after the event. BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, also continues to hit new highs. In last week’s update, Carl wrote, “BUG was up 4% this week on the back of simple business math: pandemic-fueled increases in online activity are boosting the more robust but affordable cybersecurity 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, pulled back minimally last week but remains very close to its recent highs; the buyers remain in control. If you haven’t got it, you could nibble here, though a true pullback would present a lower-risk entry point. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is also just fractionally off its recent high. In Tom’s latest update, he wrote, “This regulated and alternative energy utility is on fire. It’s up 20% over the past month. Analysts are expecting earnings growth of 10% for the year. That’s 10% per share earnings growth for a utility, in a pandemic. It provides the steady and predictable revenue in any economy and makes sense during times of uncertainty. But it also offers strong growth from the alternative energy side that should make this continue to be a sought-after stock even after the pandemic.” HOLD.

Nvidia (NVDA), originally recommended for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, just capped a three-week consolidation phase by breaking out to new highs! In last week’s update, chief analyst Bruce Kaser wrote, “Part of the reason behind the recent 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 42.1x estimated fiscal year 2022 earnings is high and on the edge of astronomical, particularly for a company its size. Wall Street expects EPS to grow 21% in fiscal 2022 (January year-end) compared to fiscal 2021. The company reports its earnings in September. We are closer to moving to a “Retired” rating for the stock but are reluctant to move too quickly.” HOLD.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is set to announce second quarter results after the market close today—and the way the stock is acting, they’ll be good. The stock has climbed higher over the past week and is nosing out to a new high this afternoon. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, broke out to a new high today! In Carl’s update last week, Carl wrote, “Shares have, since Monday, gone from 104 to 118 after App Annie, a closely watched app data research platform, said that the Sea-owned title Free Fire was the third-most-downloaded gaming app in the world in the second quarter, and No. 5 in monthly active users. Overall gaming downloads were up 20% from a year ago in the second quarter due to the pandemic, and Free Fire was the fastest-growing title in the action category. In addition to Sea’s gaming and e-commerce growth drivers is its digital payments segment led by SeaMoney, with over 10 million SeaMoney mobile wallet users. Southeast Asia has 416 million internet users and e-commerce growth was 37% in the last quarter. For now, this is a juggernaut and we will hold our position.” 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 consolidate its recent huge gains, which reflected massive increases in public perception by both individual and institutional investors. The latest Morgan Stanley report, for example, began with the phrase, “It’s becoming increasingly obvious that Tesla is going to become a very large company, approaching (if not exceeding) Toyota or VW revenues in the next decade and leaving the world’s largest luxury OEMs behind.” Separately, but impressively, Elon Musk’s SpaceX just returned two NASA astronauts safely to earth. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, broke out to its highest level of the year this morning. In last week’s issue of Cabot Marijuana Investor, I wrote, “The biggest seller of marijuana in Florida (with over 50% market share), Trulieve opened its 53rd dispensary in the state last week, in Tarpon Springs. The company also operates in California, Massachusetts and Connecticut, but Florida (which is still only medical) is where the money is today. In fact, as a result of careful management, Trulieve has been posting annual profits since 2017—and I expect continued progress when recreational use is legal in the state. This great financial performance is one reason the stock is closer to hitting an all-time high than most of its peers (the old high is under 22). Second-quarter results will be released August 12, and the performance of the stock (a big high-volume blast in early July and a new recovery closing high yesterday) says they will be good.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has pulled back normally over the past two weeks but remains well above its 50-day moving average. In Carl’s update last week, he wrote, “SPCE shares, after surging 25% last week, cooled off a bit this week as the company outlined the final stages of a test-flight program before it starts commercial operations. It also unveiled the spectacular interior design of its cabin. The company’s new CEO, Michael Colglazier, formerly president of Disney Parks International, and George Whitesides, Chief Space Officer, are overseeing the one or two rocket-powered test flights that remain before the Federal Aviation Administration can sign off on the final five of 29 requirements to license the vehicle. It is still possible that the inaugural flight of founder Richard Branson himself may take place this year, followed incrementally by a manifest of at least 600 passengers who’ve already paid $200,000 to $250,000 each for a ticket. An additional 400 passengers who’ve placed $1,000 deposits are on the secondary waiting list.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, corrected moderately last week, gapped up this morning and is now close to breaking out to a new high after its three-week consolidation phase. Last week Mike wrote, “We greatly prefer stocks that are just a month or two into their runs and aren’t well known by most investors … and that doesn’t fit Zoom Video, the highly popular video conferencing firm that has become a household name during the pandemic. Thus, it’s a higher-risk situation (any disappointment could send late buyers scurrying away). But ZM has clearly been one of the real leading stocks of the year, and the recent pullback toward its 10-week line is intriguing. The story, of course, is about as good as it gets; while Zoom has had some issues (including security worries), it’s still by far the top in mindshare in the industry. And the numbers have been astounding—even with high expectations, Q1 figures (quarter ending April 30) crushed expectations, with revenues rising 169%, earnings up seven-fold and the sub-metrics wowing (customers with at least 10 employees up 354%, same-customer revenue growth north of 30% for the eighth straight quarter). And management didn’t hold back, either, nearly doubling their forecast for the rest of the year (analysts see full-year revenues up 190%). The question here is whether this proves to be a one-time, step-function move higher that’s already been discounted, or whether the move toward “video everything” is long lasting. The market seems to believe the latter (as do we), which means even the current estimates (sales up 190% this year, but only 25% in 2021) could prove conservative.” BUY.

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, broke out last week from a little three-week basing pattern and is higher now. 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 10, 2020.

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