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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 312

The market remains in good health and trending higher, though the rotation from previously hot growth stocks continues, to some degree.

This week’s recommendation is a well-known consumer name whose stock is truly cheap, in part because the company recently discontinued dividend payments (they had been 6%) in response to the pandemic shutdown.

As for the current portfolio, I will now drop Nvidia (which has been very successful but is now sky-high), and downgrade GFL Environmental (GFL) to hold.

Full details in the issue.

Cabot Stock of the Week 312

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The market’s strength has been very impressive, and our market-timing indicators continue to tell us that the market will be higher in the months ahead. Our growth stocks in particular have been enjoying the bull run. However, this portfolio is committed to maintaining a balanced position using a diversified mix of stocks, which means holding a substantial chunk of the portfolio in more conservative undervalued stocks. And that summarizes the logic behind today’s recommendation, a well-known name whose stock is just plain cheap—in part because the company suspended its dividend in response to pandemic pressures. It was originally recommended by Bruce Kaser in Cabot Undervalued Stocks Investor and here are Bruce’s latest thoughts.

Molson Coors Brewing Company (TAP)
The thesis for Molson Coors is straightforward – a reasonably stable company whose shares sell at a highly discounted price.

One of the world’s largest beverage companies, Molson Coors produces the highly recognized Coors, Molson, Miller and Blue Moon brands as well as numerous local, craft and specialty beers. About two-thirds of its $10 billion in net revenues are produced in the United States, where it holds a 24% share of the beer market. Canada produces about 13% of its revenues, with the balance coming largely from Europe.

For a simple business, the company’s history is a bit complicated. In 2005, after years of speculation, two old-line brewing companies, Canada-based Molson (founded in 1786) and Colorado-based Coors (founded in 1873), combined in a merger of equals. In 2016, the company completed its multi-step acquisition of Miller’s global operations.

Enthusiasm for its post-consolidation prospects drove TAP shares to over 110 in October 2016. Supporting the stock was a modestly favorable revenue outlook, substantial opportunities to reduce redundant costs and $2.4 billion in tax benefits. However, since then, the share price has declined, initially due to a lack of growth, weak post-merger integration and continued margin pressure, with more recent weakness coming from Covid-19 stay-at-home orders that temporarily dried up much of the company’s revenues. Elevated debt also weighs on the shares.

However, Molson Coors’ annual revenues will likely remain relatively stable, backed by its highly recognized and popular brands. While revenues will dip from about $10.6 billion last year to perhaps $9.6 billion this year, they will likely recover to $10.2 billion next year. Cash operating profits have also been steady at around $2.3 billion (dipping to perhaps $2.0 billion this year). The profit margin is a healthy 21%, helping the company to generate free cash flow of about $1.0 billion in a typical year. Encouragingly, even with the global closing of restaurants, pubs and sports venues due to the pandemic, second quarter sales fell only 15% from a year ago. Cost-cutting measures and a temporary pullback in marketing spending allowed the company to generate an increase in quarterly profits compared to a year ago.

While its $8.7 billion debt is modestly elevated, at about 4.2x cash operating profits (compared to perhaps 3.5-4.0x being appropriate), it is partly offset by $800 million in cash and can be readily serviced by Molson Coors’ cash flow. The company has an investment grade credit rating, which it has pledged to keep, which is helping to keep the interest rate on its debt relatively low.

In October 2019, the company promoted its U.S. head to oversee the entire company. He is leading an efficiency program to cut as much as $150 million in annual run-rate costs, which includes more fully integrating the combined companies as well as accelerating new product introductions.

Molson Coors had raised its dividend by 39% a year ago, as its cash flow had reached its targeted levels, but suspended it due to the pandemic. We anticipate that the company will resume paying a dividend mid-next year. We think a $0.35 quarterly dividend is possible, providing a generous 3.8% yield on the current price.

At 37, the shares trade at a highly discounted 10.2x estimated 2020 earnings of $3.61/share, and about 9.5x estimated 2021 earnings of $3.87/share. This compares to multiples of 15x and higher for its beer-producing peers. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.8x estimates, again a sizeable discount to its peers. These multiples are also among the lowest in the consumer staples sector. In a market filled with companies that carry the curse of high expectations, TAP offers the blessing of low expectations. BUY.

TAP-082420

TAPRevenue and Earnings
Forward P/E: 10Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 8($bil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 13.5%Latest quarter2.50-15%1.563%
Debt Ratio: 80%One quarter ago2.10-9%0.35-33%
Dividend: NATwo quarters ago2.493%1.0221%
Dividend Yield: NAThree quarters ago2.84-3%1.48-20%

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 8/24/20ProfitRating
B&G Foods (BGS)7/28/20276.2%3012%Buy
Big Lots (BIG)6/30/20422.2%5426%Buy
Bloom Energy (BE)8/2/20140.0%1615%Buy
Brookfield Infrastructure (BIP)Sold
Chegg (CHGG)6/2/20640.0%7314%Hold
Columbia Sportswear (COLM)7/21/20790.0%846%Hold
GFL Environmental (GFL)5/27/20180.2%194%Hold
Global X Cybersecurity ETF (BUG)6/23/20200.0%2211%Buy
Huazhu Group Limited (HTHT)3/30/169.280.0%42349%Hold
LGI Homes (LGIH)7/14/201010.0%11817%Buy
Molson Coors Brewing Company (TAP)New0.0%38Buy
NextEra Energy (NEE)3/27/191942.0%28245%Hold
Nvidia (NVDA)Retired
Qualcomm (QCOM)8/11/201082.3%1156%Buy
RingCentral (RNG)10/23/191530.0%28284%Hold
Sea Ltd (SE)1/21/20410.0%150268%Hold
Taiwan Semiconductor (TSM)8/18/20803.6%79-2%Buy
Tesla (TSLA)12/29/11300.0%20086675%Hold
Trulieve (TCNNF)4/28/2010.420.0%2197%Hold
Virgin Galactic (SPCE)10/11/199.240.0%1789%Buy
Zoom Video (ZM)3/17/201080.0%282161%Buy
Zscaler (ZS)4/14/20650.0%135108%Hold

The portfolio generally looks very healthy, reflecting the state of the overall market, so there are no big changes. I am dropping Nvidia from coverage (though it’s not quite a sell, as Bruce Kaser explains below). And I’m discontinuing the use of the phrase “Heritage Stock,” which I previously used for both Huazhu Group (HTHT) and Tesla (TSLA), because the phrase really doesn’t seem to have helped people—though both companies still have great growth prospects (and everyone now knows it with respect to Tesla). Lastly, because of the Cabot Wealth Summit last week, our analysts’ updates were sometimes fewer and/or smaller. Still, where quantity may be lacking, quality is not.

Changes
GFL Environmental (GFL)
to Hold.
Nvidia (NVDA) to Retired.

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, “Earnings were spectacular. Business is booming and will likely remain at a high level after the pandemic. The stock is still in an uptrend with good momentum. And fundamentally, the stock still isn’t overvalued.” 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. Earnings are out this Friday. 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 is volatile, but the main trend is up (the stock bounced off its 50-day moving average two weeks ago) and you can buy here if you haven’t bought yet. BUY.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, has just pulled back to its 50-day moving average—for the first time since April! This marks a well-deserved rest period for the provider of textbooks and educational resources—and admittedly, the stock can act act squirelly—but the long-term prospects remain bright. Last week at the Cabot Investing Summit, I chose CHGG as my #1 stock for the year ahead. HOLD.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, broke out of its two-month consolidation phase today; now it’s got to punch through its June high of 8. In his latest update, Bruce wrote, “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, fell through its 50-day moving average last week on big volume (not a good sign), but it found buyers under 19, and now seems to have stabilized around that level. With smaller stocks, these things can happen, and since Tyler is still holding, I will too—though I will downgrade it to Hold. HOLD.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is very close to its high of two weeks ago, still in a clear uptrend. 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. BUG is a basket of cybersecurity stocks with its top ten holdings representing 56% of the basket. Think of this as a conservative way to invest in a competitive fast-growing industry.” BUY.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is China’s largest hotel operator, and thus a fine stock for long-term holding. Short-term it’s been strong, too, as the Chinese economy has reopened and recovered. Right now it’s working on breaking out above its December high. HOLD.

LGI Homes (LGIH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to climb higher and is now very close to breaking out to record highs. Homebuilding is a strong sector—for obvious reasons—and LGI is one of the leaders. 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, “The utility sector has been a poor performer through this pandemic. But you would never know owning NEE; it has returned over 18% YTD and blown away the market. It looks like the stock is consolidating somewhat around the all-time high. NEE should continue to be a great stock to own through the rest of this crisis as well as beyond.” HOLD.

Nvidia (NVDA), originally recommended for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, remains a very strong high-profile stock—but Bruce Kaser says it’s no longer undervalued, so he’s “retiring” it to move on to greener pastures. In his latest update, Bruce wrote, “Shares have increased 17x since the start of 2015 and now trade at their all-time high. The only question for momentum investors is when to stop betting on it. The valuation of 49x estimated fiscal year 2022 earnings is high and on the edge of astronomical, particularly for a company its size. Thus, we are retiring NVDA shares today.” Retired, in brief, means that the stock can still be held by investors looking to reduce short-term transactions, but that Bruce sees better opportunities today. To pursue those opportunities (and others) I’m now dropping NVDA from this portfolio. RETIRED.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a new high last week and has pulled back minimally since, but remains well above its 50-day moving average. If you haven’t bought yet, you can buy now. BUY.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is a major provider of advanced communication solutions, which are more in demand than ever as people work and play from home. But the stock has flattened out over the past few months, dipping time and again to its 50-day moving average. Still, it’s not broken, and the 50-day is still trending up, so I’ll continue to hold. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, is still hot! In his update last week, Carl wrote, “Sea reported stellar second quarter growth as its shares reached 150, but high sales and marketing expenses still keep this company unprofitable. Sea Limited reported $1.29 billion in revenue during the second quarter, up 93.4% year-on-year versus $665.4 in the same quarter last year. In the digital entertainment business, adjusted revenue reached $716.2 million, up 61.6% year-on-year, while adjusted EBITDA grew 65.4% to $436.2 million. Quarterly active users reached 499.8 million, an increase of 61%. Paying users grew by 91.2% year-on-year to 49.9 million. According to App Annie, Free Fire continued to be the top-grossing game in both Latin America and Southeast Asia. Shopee registered accelerating growth during the second quarter, gross orders increased by 150% year over year to reach 615.9 million. Finally, mobile wallet total payment volume increased to more than $1.6 billion in the second quarter versus nearly $1 billion in the first quarter. Quarterly paying users grew by about 50% quarter-on-quarter to more than 15 million. Sea has become the best performing stock in the world over the last eighteen months. I will keep this a hold but will take a closer look at earnings and consider moving to a buy over the next few weeks.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, and featured here last week, continues to trade calmly at the 80 level, building a base in preparation for its next advance. In his latest update, Carl wrote, “TSM is the world’s largest semiconductor manufacturer, with 56% market share. Its most recent earnings surged 81% on 29% higher revenue, as its margins climbed. Apple accounted for 23% of TSM revenue last year and the company decided to replace Intel’s chips in its Macs with advanced chips designed by Apple and manufactured by Taiwan Semiconductor. These high-performance chips are linked to some power growth trends such as robotics, artificial intelligence, and Internet devices. This is a well-managed dominant company in a critical 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.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, broke out above 2,000 last week and as of this morning was up 50% in two weeks! Obviously, this pace can’t last—but it may last until Friday, which is when the stock’s 5-for-1 split takes place (after the market close). Short-term investors should seriously consider some profit-taking here. Long-term investors can hold because Tesla is the spearhead of the world’s shift away from a fossil fuel economy. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is one of the stocks I recommended taking partial profits in last week (mainly because the sector of U.S. marijuana producers was very strong)—and since then the stock has had a nice pullback, though it’s still above its 50-day moving average. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, was trading above 27 a month ago (when Carl recommended taking profits) and today it’s dipped to its 200-day moving average at 17, in what looks like a normal pullback for this volatile stock. In his latest update, Carl wrote, “Shares are up 65% so far in 2020 but have been treading water over the last two weeks due to a recent quarter with little revenue, a new share offering priced at 19.50, and the pushing back of its inaugural flight from 2020 to early 2021. Evolving the company’s technology to enable two-hour hypersonic business flights between distant cities like New York and Sydney has been Virgin’s long-term pitch to investors. While the space economy could generate $800 billion in annual revenue by 2030, the supersonic jet gives Virgin a claim on disrupting the much larger conventional airline market.” If you haven’t bought, you can buy here. BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a new high last Friday and pulled back minimally today. If you haven’t got it and you can handle the volatility, you can still buy. Everyone knows that Zoom is one of the winners of the pandemic shutdown, and someday this strength will end, but until then, momentum investors can win here. BUY.

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, bounced off its 50-day moving average two weeks ago and broke out to a new high last Friday! Zscaler is one of the many cybersecurity stocks that have done well this year. HOLD.


The next Cabot Stock of the Week issue will be published on August 31, 2020.

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