Cabot Stock of the Week 311

The market remains in good health and trending higher, though there is some rotation going on from growth stocks to cyclicals—not unusual for this stage of a bull market.

This week’s recommendation is a big cap global technology stock benefitting from both the spread of communications technology and the company’s dominant position in the global supply chain.

As for the current portfolio, there are no stocks that look like they should be sold, but I must sell one to respect my portfolio cap, and the victim will be Brookfield Infrastructure Partners (BIP), where we have a modest profit.

Full details in the issue.

Cabot Stock of the Week 311

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The broad market continues to look very healthy, with good breadth that suggests the ultimate end of this bull run is still months away. And our stocks, overall, are performing very well, with many at or near new highs. There is some rotation going on, with growth stocks slowing and cyclical stocks strengthening, but as long as we remain in the best-looking stocks, that’s nothing to worry about. This week’s recommendation is a big-cap technology stock in a major global industry. It was originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and here are Carl’s latest thoughts.

Taiwan Semiconductor (TSM)
U.S.- China competition will run across many countries as well as battlegrounds such as trade, finance, technology, freedom of navigation, cyber warfare, space, obscure rare earths and semiconductor chips - a market critical to advanced high tech and very much in the news recently.

Intel Corp.’s (INTC) recent announcement that it had fallen a full year behind schedule in the process technology needed to make its next generation of chips was disappointing. And when the company announced that it was considering outsourcing to Taiwan Semiconductor (TSM) all of its chip fabrication, the shock wave reverberated well beyond Silicon Valley to Washington, D.C.

One of the areas where China is still behind America is advanced chip technology—which runs across chip design, computer software and equipment. Semiconductors are crucial and the most strategically important technology because they are the materials and circuitry needed to produce microchips that are at the heart of everything from smart phones to advanced satellites. You might think of these microchips as the brains inside all advanced technology.

Understanding microchips’ intricate and fragile supply chains is important for both policymakers and investors. The chief concern is that while most advanced chips are designed in America, only around 12% of all chips are manufactured here and these tend to be the less advanced chips produced in older plants.

Many American chip designers, such as Nvidia (NVDA), Micron Technology (MU), Qualcomm (QCOM), Texas Instruments (TXN), and Advanced Micro Devices (AMD) outsource manufacturing of chips to Taiwan Semiconductor (TSM), Samsung or smaller players in Asia. With the exception of Intel, most leading U.S. chip companies shut or sold their domestic plants years ago.

The primary reason that Taiwan Semiconductor is successful at smaller transistor sizes is because of its scale in building billions of chips for smart phones – a market vastly larger than those for personal computers and data centers.

Its growth and market share will likely benefit from the recent missteps by Intel. Taiwan’s Commercial Times has also claimed that TSMC had received an order of 180,000 wafers from Intel to produce its upcoming advanced chips, which nearly matched the 200,000 wafers ordered by Advanced Micro Devices.

Then there is the Apple effect. Apple is Taiwan Semi’s largest customer, accounting for 23% of TSM revenue last year. Total smart phone chip revenues accounted for 47% of TSM’s top line last quarter. In addition, Apple recently decided to replace Intel’s chips in its Macs with advanced chips designed by Apple and manufactured by Taiwan Semiconductor.

Another reason to buy TSM is that it generated 33% of its revenue from the high-performance computing (HPC) market last quarter, which translates into higher profit margins. These high-performance chips are linked to some power growth trends such as robotics, artificial intelligence and Internet devices.

The consensus expects TSM’s revenue and earnings to rise 28% and 34%, respectively, this year, which are impressive growth rates for a stock that trades at just 25 times forward earnings.

The chief risk for Taiwan Semiconductor is that geopolitics cuts both ways. This is a powerful company in a strategically important place, so it has to diplomatically balance both customers and countries. For example, roughly 14% of its sales go to Huawei and the U.S. Commerce Department announced that companies would need licenses for sales to Huawei of semiconductors made abroad with U.S. technology. This is probably why TSM announced just weeks ago the possibility of building a new chip plant in Arizona.

Summing up, Taiwan Semiconductor is a dominant company in a critical growth area of advanced tech supply chains selling at a reasonable valuation. I recommend you start with a half position and put in place a 20% trailing stop loss in place.

Tim’s note: TSM was also recommended last week in Cabot Top Ten Trader, where Mike Cintolo wrote, “Unlike many chip stocks that took off immediately after the March bottom, TSM spent the better part of spring establishing a base after the COVID-related selloff. This created a solid launching pad which it blasted off from in early July. And what a blastoff it’s been! TSM has soared more than 20 points since breaking out before hesitating the past couple of weeks. Minor weakness would be tempting.” He suggested a buy range of 75-78 and a loss limit of 68-70.

Current Recommendations

The portfolio generally looks very healthy, reflecting the state of the overall market, and today’s addition of Taiwan Semiconductor means we once again need to sell a stock to stay at our cap of 20 stocks. But it’s very difficult! One possibility is selling Ring Central (RNG) or Zoom Video (ZM), as they have been leaders of the videoconferencing/communication boom and both stocks are ripe for a correction. But both stocks are still healthy! Another idea is Virgin Galactic (SPCE), which is weaker—but it has such great long-term prospects that I can’t see giving up here. In the end, my choice is Brookfield Infrastructure Partners (BIP), which is still healthy but slowly losing sponsorship according to the chart.

Changes
Brookfield Infrastructure Partners (BIP) to Sell.
Chegg (CHGG) to Hold.
Trulieve (TCNNF) to Hold.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor advisory, offers a big 6.5% dividend yield plus the chance for capital appreciation. In last week’s update, Tom wrote, “Since being added to the portfolio in last month’s issue this stock is up over 17%. It had solid momentum but also announced very positive earnings. Net sales climbed 38% and earnings per share soared 87%. Not bad for a stodgy food stock. The pandemic is bringing boom times for this packaged food company. The company didn’t give full-year guidance but expects earnings to “materially exceed” previous estimates. Business will likely stay strong after the pandemic as trends are expected to continue. Although the stock has had a great run already, it is still relatively cheap.” BUY.

Big Lots (BIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to hit new highs and thus is still attractive to momentum-oriented investors. BUY.

Bloom Energy (BE), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is 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 pulled back toward its 50-day moving average last week but didn’t touch it and is now heading up again. BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, yields 4.3% so is a decent choice for income-oriented investors. But the chart (volume in particular) shows the stock slowly losing power since we bought it. In Tom’s latest update, he wrote, “After a strong rebound from the March lows, this infrastructure company has been wallowing in the low 40s for two months now. The rest of the market recovery left it behind. That’s okay. Technology stocks were on fire and driving the market, but it looks like market leadership is shifting. Utilities were actually a top performing sector over the past month after lagging for a long time. Brookfield continues to be resilient and grow earnings during the pandemic. I expect the relative performance of this stock to improve in the months ahead.” If you’d like to stick with BIP, that’s fine. I’ll sell, take our small profit, and move on. SELL.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, pulled back toward its 50-day moving average last month but didn’t touch it (and hasn’t touched it since April!) and is now heading higher again. In Mike’s latest update, he wrote, “Bigger picture, we think Chegg has a very bright future, and that was confirmed by the Q2 report two weeks ago, which saw revenues accelerate wildly for its key services segment (up 53% vs. up 33% and 31% the prior two quarters), EBITDA grow even faster (up 79%) and, more importantly, had management talking very bullishly about a structural change in online education that should benefit the company for a long time to come. Combine all of that with CHGG being “only” three months into its latest move (breakout from a huge base at the start of May) and we think higher prices are likely down the road. However, we’re also running a portfolio, and like most leaders, CHGG is up huge during the past three months and, this week, has flashed some abnormal action, with a straight-down decline that gobbled up its recent gains before today’s bounce. Because of that, we took partial profits yesterday, selling one-third of our shares, and will follow our usual M.O. from here, giving our remaining position room to maneuver.” Feel free to cut back your position as Mike suggests if that makes sense for your portfolio. I’ll simply reduce the rating to Hold. HOLD.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, is back above its 50-day moving average, which continues to head slowly higher. In his update last week, Bruce wrote, “In its second quarter report, Columbia’s sales fell 40% compared to a year ago, driven by high levels of store and wholesaler closures. Net income turned to a $(0.77)/share loss compared to a $0.34/share profit a year ago. However, both sales and earnings were better than consensus estimates.

At quarter’s end, nearly all of their owned stores were open. Trends in the third quarter are showing meaningful improvement compared to the second quarter. Inventories are higher than a year ago, but the company commented that it is well-positioned for winter gear whereas that can’t be said of some of its competitors. Columbia’s new mobile app is ready for launching, and it is introducing several new products. The company is on track to reduce its operating costs by $100 million, or about 4% of revenues, this year. The company is likely to remain healthy as consumers seek its highly relevant products.

Operating cash flow was a negative $37 million, much of which reflected an increase in inventories. The balance sheet remains sturdy, with $476 million in cash yet a minuscule $3 million (not billion) in total debt.

Columbia’s shares have fully recovered their post-earnings decline, helped by investors shifting toward more cyclical stocks as there appears to be more progress on a Covid vaccine and as government relief appears more likely (but not guaranteed).

Full year estimates are $2.05 and $4.21 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 19.0x. 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.” HOLD.

GFL Environmental (GFL), originally recommended by Tyler Laundon in Cabot Early Opportunities, sold off sharply after reporting second-quarter earnings two weeks ago, but the stock never fell to its 50-day moving average and now the uptrend has resumed, with a big jump last Thursday on more than four times average volume. BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, pulled back a bit last week but remains well above its 50-day moving average, which is heading higher. In Carl’s latest update, he wrote, “I believe this sector will remain in favor and in an uptrend given that demand for cybersecurity matches or exceeds online activity. 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 blasted out to its highest level since January last week (on big volume) and has pulled back minimally since. HOLD.

LGI Homes (LGIH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, pulled back to 105 last week, but didn’t get to its 50-day moving average, and now it’s heading higher again, though volume seems a bit light. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is one of the country’s most forward-looking utilities, with a big alternative energy portfolio. In his latest update, Tom wrote, “This regulated and alternative energy utility has soared 24% in the last three months and has returned over 33% over the past year. That’s what it has done through the pandemic and crashing economy. The market loves that this stock enables them to have their cake and eat it too. You get the reliable earnings and cash flow of a great regulated utility along with much better earnings growth from the alternative energy side. It’s a little pricey here but the momentum is still great.” HOLD.

Nvidia (NVDA), originally recommended for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, gapped up to new highs this morning after an analyst raised price targets in advance of this week’s second quarter report. In his latest update, 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. 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 44x 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. We are keeping our rating at HOLD, despite the very high valuation. We are closer to moving to a “Retired” rating but are reluctant to move too quickly. NVDA shares are on a short leash.” HOLD.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here last week, hit a new high last Wednesday and has pulled back minimally since. Interestingly, the stock is also recommended (as part of a covered call trade) in Cabot Income Advisor by Tom Hutchinson, who last week noted that the company’s agreement with Huawei will account for an additional $1.00 or more in extra earnings per quarter. BUY.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is back above its 50-day moving avarge and aiming at its old high of 306. Buying volume isn’t what it used to be (and as I said in the section intro, the stock is due for a rest), but the main trend is up, so patience is likely to pay. Ring Central is a major provider of advanced communication solutions, which are more in demand than ever as people work and play from home. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, looks like many of our strong growth stocks; it pulled back last week but didn’t touch its 50-day moving average and now it’s heading higher again. In his update last week, Carl wrote, “Sea’s first self-made mobile game, Free Fire, has attracted as many as 80 million daily active users in more than 130 markets, and the company’s e-commerce and financial services units are now also important engines of its growth story. Feel free to sell some shares to lock in profits, but we will continue to hold a half 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 amaze; it broke out to a new high today as analysts continue to raise their targets. And then there’s the stock split, an increasingly rare bird these days. Last week the company announced a 5-for-1 split; it will bring the stock’s price down out of the stratosphere and increase the number of shares traded, but practically, it will have no effect on the company or its profitability. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, last week released an excellent second quarter report. Revenues were $120.8 million, up 109% from the year before and up 26% from the first quarter. In response, the stock hit new highs on big volume and it’s now more than doubled in two months! But it’s not alone; all the big U.S. vertically integrated multi-state operators have seen their stocks perform similarly. I love the recent action—but I know it can’t continue. So last week in Cabot Marijuana Investor I took partial profits in TCNNF and the other three producers that lead the U.S. market (we had become overweighted in all four), and I now have 20% cash in that portfolio, waiting for a cooling-off phase. For your own portfolio, you might also take some profits here if you’re overweighted, but I do recommend holding some long term, because the potential is still big. For now, I’ll downgrade the stock to Hold. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, dipped below its 50-day moving average last week and remains below it today. In last week’s update, Carl wrote, “Shares took a breather this week as the company sold 23.6 million shares in a secondary offering priced at $19.50 a share, raising about $460 million. This is a good development for the company since it has had to push back the timeline for the beginning of trips to space to the first quarter of 2021. In other positive recent news, the company continues to expand its waiting list for space flights, unveiled plans for a Mach 3 delta-wing aircraft, and signed a memorandum of understanding with Rolls-Royce, one of the world’s leading aircraft engine makers. Take advantage of this week’s small pullback to buy more shares.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, blasted up through its 50-day moving average today, proving correct last week’s speculation that the stock was at “a prime entry point.” If you haven’t got it and you can handle the volatility, you can still buy. BUY.

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, bounced off its 50-day moving average last week and is now up four days in a row, heading for its old high of 135. HOLD.

The next Cabot Stock of the Week issue will be published on August 24, 2020.

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