Cabot Stock of the Week 310

The market continues to hum along, with the S&P 500 closing in on its February highs. Thus, it makes sense to maintain a full portfolio of 20 stocks. To get there, and make room for our newest recommendation, we have to say goodbye to AbbVie (ABBV), which has given us a nice profit in four months but has started to weaken.

Taking AbbVie’s place is a name that’s likely familiar to you, and one that’s showing greater strength than it has in years thanks in part to a new mega-deal. We’re also upgrading Big Lots (BIG) to Buy after a big second quarter.

Full details in the issue.

Cabot Stock of the Week 310

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Despite a few cracks in growth stocks in the last couple trading days, the overall stock market continues to hum along, with the S&P 500 a mere 1% below all-time highs as of this writing. Thus, there’s no reason to sell any of our stocks – all our charts look pretty good! But our portfolio is full, at its 20-stock capacity, so something has to go to make room for our newest recommendation. The unfortunate casualty is AbbVie (ABBV), which has weakened a bit since its quarterly earnings report, so we’ll go ahead and book our solid profit.

Taking its place is a familiar name, but one that’s showing more strength than it has in years after striking a major deal: Qualcomm (QCOM). The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

Qualcomm (QCOM)
A Steady Liquid Leader
We’re not generally into mega-cap stocks that are well known and well followed. Surprises tend to be relatively minor, and their sheer size means you’re far more likely to get so-so performance than something truly noteworthy. However, there are exceptions to every rule (“the young man knows the rules, the old man knows the exceptions”), and we think Qualcomm (market cap of $122 billion) is one of them—thanks to some catalysts, it looks poised to be a magnet for institutional money flows in the months ahead.

The company, of course, has been one of the leaders of the wireless and smartphone revolution for the past two decades, operating out of two main segments. The first is its QCT operation, which is the “traditional” business, where Qualcomm supplies integrated circuits and software based on its CDMA technology for smartphones, tablets, laptops, wireless infrastructure (routers, network access points) and gaming devices. QCT makes up the vast majority of revenues, though margins here are so-so.

The other segment is dubbed QTL, which is basically Qualcomm’s licensing arm—it cuts deals with various firms (the big ones involve handset makers), allowing them to access the firm’s massive intellectual property portfolio … in exchange for royalties, of course. While QTL revenues are far less than QCT, cash flow is usually much larger.

Qualcomm’s overall position in the industry has helped it remain solidly profitable for years, and with high profit margins to boot (pre-tax profit margins usually in the 25% to 35% range). But growth has been a bugaboo for the past few years, partly due to management, partly due to industry ups and downs and partly due to never-ending lawsuits—sales and earnings both topped back in 2014!

However, that’s the past, and big investors are paying up for what looks like a very bright future. The first catalyst here is the general 5G revolution, including the surge in 5G smartphone sales that’s just beginning—in March, the firm’s chips were being designed into 375 different 5G devices, but as of last month, that figure had lifted to 660. And one of those 660 is Apple, thanks to the legal agreement the two companies hashed out last April that paid Qualcomm north of $4 billion and set the stage for royalties in the future.

And speaking of deals, that’s the second catalyst—when the company announced earnings a couple of weeks ago, it also revealed that it struck a deal with giant Huawei, which (like Apple) had been battling Qualcomm in the courts for a long time. For that, Qualcomm is getting about $1.8 billion of catch-up payments along with royalties going forward. As the CEO said, “With the signing of the Huawei agreement, we are entering a period where we have multi-year licensing agreements with every major handset maker.” And, again, this is happening just as the 5G boom is starting to take off.

The result should be a step function leap in earnings next year, with solid growth after that—analysts see Qualcomm earning $6.32 per share in the fiscal year beginning in October, up 62% from $3.89 this year. As a side benefit, that should also allow the company to return more money to shareholders via share buybacks or boosting the already solid dividend (current yield 2.3%).

As for the stock, it topped back in 2014 around 80 and was in the doghouse for years; it looked to be getting going after last year’s Apple deal, but that move didn’t stick, either. But now QCOM has decisively busted loose, breaking out to all-time highs (even above its 2000 bubble peak) on solid volume. It won’t be the fastest horse, but we think QCOM will do well from here, and the recent wobble as growth stocks have hit a pothole offers a good-looking entry point. BUY.

Current Recommendations

Changes
AbbVie (ABBV) to Sell.
Big Lots (BIG) to Buy.

AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of his Cabot Dividend Investor advisory, has been good to us since we added it to the portfolio in late March. We recommended it at 76; today it trades at 92, good for a 21% return. However, it’s been heading in the wrong direction since earnings, topping out at 100 in mid-July and sinking back below its 50-day moving average since. Long-term investors can still hold ABBV (Tom still very much likes it, despite the drop-off), but we’ll pocket the profit and move on, with Qualcomm taking its place. SELL.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor advisory, gathered some initial momentum after releasing terrific second-quarter earnings in late July, but has since retreated slightly. No matter. Perhaps the strong growth numbers – 38% revenue growth, 87% earnings per share growth – were already priced into the stock after shares had done nothing but rise for six weeks. Couple the superb growth with the high (6.5% yield) dividend, and there’s a lot to like about BGS. BUY.

Big Lots (BIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, just broke to new highs, jumping from 39 to 48 so far this month, highlighted by today’s 7% gap up on no obvious news. This sudden move could signal a change in character for this retail stock, so we’ll adjust accordingly and bump it back to a Buy rating. BUY.

Bloom Energy (BE), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is down slightly in its first week in the portfolio. It’s a small-cap energy company that offers an advanced distributed energy generation platform composed of fuel cells that are used by businesses such as Walmart, Apple and Home Depot. The stock has traded in a range between 12 and 14 since pulling back from new highs above 18 in late July. As I wrote last week, this stock has high potential in the long term, but is going through some expected short-term turbulence. The current pullback looks like a decent buying opportunity. BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, got a nice boost from second-quarter earnings last week, despite some modest results—always an encouraging sign. Here are Tom’s latest thoughts on the earnings results, and the stock: “Adjusted funds from operations were up 3% over last year’s quarter. The reason for the lower rate of growth is diminished revenue from the transportation segment during the lockdowns. But that’s as bad as it gets during an economic catastrophe; earnings are only up 3%. The company is proving its resilience and the transport sector should pick right back up as economies continue to restart across the globe.” BUY.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, reported excellent second-quarter earnings last week, but it appears the strong results were already baked into the cake, as shares have tumbled from 85 to 81 since. Still, the results were stellar, with sales up 63% and earnings up 61%, both easily topping estimates. Plus, management hiked full-year guidance, and said it thinks the current move to online learning could be more of a permanent shift than a one-time boost. Overall, the trend for CHGG remains very much up. BUY.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, has recovered nicely since we downgraded it to hold last week on the heels of some post-earnings selling. At 79, it’s back up near pre-earnings highs (82). Here are Bruce’s latest thoughts on the stock: “Full-year estimates are $2.11 and $4.16 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 17.8x. 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 their sensitivity to consumer and economic re-opening trends.” Bruce rates COLM a buy. But I’m keeping at hold, for now. HOLD.

GFL Environmental (GFL), originally recommended by Tyler Laundon in Cabot Early Opportunities, has fallen sharply since reporting second-quarter earnings last Wednesday. However, the stock is still comfortably above the 50-day line. Here are Tyler’s latest thoughts: “GFL Environmental (GFL) reported results that came in ahead of expectations. Adjusted EPS of $0.03 (Canadian) was well ahead of consensus of -$0.22, largely because of lower costs and 20% revenue growth to $993 million. A recent refinancing has lowered the company’s cost of capital and while COVID-19 has impacted some operations the growth story here remains intact. The stock was volatile after reporting as it looks like some institutional selling may have taken place. … I’ll keep an eye on the stock but am keeping at buy.” So will I. BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, scratched off a point since our last issue, nosing lower from 22 to 21. Considering it’s up from 12 in March, however, the trend is still up in this fund comprised of cybersecurity companies. Keeping at 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 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, has been chopping around in a range between 110 and 118 for most of the past month, though it remains well clear of its 50-day line (99). The current pullback to 113 looks like a good entry point. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, made some good progress in the past week despite some ups and downs. Here are Tom’s latest thoughts: “This regulated and alternative energy utility continues to get the job done. It has returned over 37% for the past year and about 16% over the last month, and is now very near the all-time high with great momentum. Steady and predictable earnings complimented by growth from the alternative energy business remains popular with investors. Analysts are also expecting earnings growth of 10% for the year. That’s 10% per share earnings growth for a utility, in a pandemic.” HOLD.

Nvidia (NVDA), originally recommended for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, continued to trend higher after breaking out of a three-week consolidation phase, topping 450 for the first time ever. Here’s what Bruce Kaser, the new chief analyst of Cabot Undervalued Stocks Advisor, had to say about Nvidia: “(P)art 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 45x 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’re reducing our rating to HOLD, despite the impressive fundamentals.” I already had NVDA rated hold, so I’ll stay there. HOLD.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, had a very rough week following its second-quarter earnings release. This time a week ago, RNG shares topped out at 305 – a new all-time high – ahead of earnings. Now they’re down in the mid-260s, below the 50-day line (though above support in the 250 area). Were earnings a total flop? Not at all. Earnings per share improved 14% over a year ago, and sales expanded 29%; both figures topped estimates. And full-year guidance increased slightly. So, this looks like a case of the company not beating estimates by “enough,” and being overly punished after hitting new highs for months. It’s still up 57% year to date, and we still have a profit north of 70% since we recommended shares last October. For now, we’ll keep RNG at 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 had a rollercoaster ride in the past week. First they gapped up to new all-time highs at 145; then, they retreated to 124—just above where they were entering August, so not overly concerning. And when you consider that prior to the drop-off SE shares had risen nearly 900% in 18 months, it registers as little more than a speed bump. This is still a great growth story, but we’ll keep an eye on what shares do from 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 continues to consolidate its recent huge gains in fine fashion (recent weakness has been very tame, and on very low volume, compared to the prior advance), which reflected massive increases in public perception by both individual and institutional investors. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, continues to hit new highs, soaring from 16 to 20 in the last week. That included a 10% bump today, which came after the company announced a new partner for its TruVet Program that will educate veterans about the benefits of taking medicinal marijuana. Connective Human is the program’s partner for the month of August; it’s a veteran-owned operation based in Florida, where Trulieve is the biggest seller of marijuana, with better than a 50% market share. The good news just keeps coming for Trulieve. BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has pulled back quite a bit in the last three weeks, falling from 25 to 19, just above its 50-day line. What’s happening? I’ll let Carl explain: “Virgin Galactic (SPCE) shares were a bit volatile this week, settling (just below) 20 after being moved by some positive news and then reporting a quarter that was a bit below expectations. Its second-quarter report reflected a loss of $0.30 per share, while Wall Street expected a loss of $0.26. That said, earnings don’t matter much for this concept stock because Virgin Galactic doesn’t generate sales yet.

“On the positive side, the company expanded its waiting list for space flights, which are expected to begin in the first quarter of 2021. It also unveiled plans for a Mach 3 delta-wing aircraft with capacity for 9 to 19 people traveling at an altitude of 60,000 feet.

“The company also signed a memorandum of understanding with Rolls-Royce, one of the world’s leading aircraft engine makers. Rolls-Royce was responsible for the engine of the Concorde, the only supersonic commercial aircraft ever used for passenger travel. Virgin Galactic also announced in May that it would be partnering with NASA to work towards high-speed, high altitude point-to-point travel for commercial airline passengers.

“In addition to space tourism, Morgan Stanley believes that Virgin Galactic could be a key player in the hypersonic point-to-point market that could be worth $400 billion by 2040. For example, a flight from New York to Shanghai that takes 12 hours now might be shortened to as little as 40 minutes. Take advantage of this week’s pullback to buy more shares.” With a profit of more than 100%, we’ll also keep SPCE at buy. BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continued to fall this week, bumping up against one-month support and its 50-day moving average. We’ll see what it does from here. Mike has a suggested stop of 230, which is still comfortably below the current price of ZM (250). For now, we’ll keep it at buy, with this possibly being a prime entry point, but much more weakness from here could change our mind. BUY.

Zscaler (ZS), originally recommended by Mike Cintolo in Cabot Growth Investor, fell back to earth this week after a nice breakout. At 121, it’s essentially unchanged in the last month, despite plenty of fits and starts. If the more conservative BUG ETF (above) is too tame for you, this is a more aggressive play on the cybersecurity industry. I’ll continue to hold. HOLD.

The next Cabot Stock of the Week issue will be published on August 17, 2020.

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