Cabot Stock of the Week 314

The long-awaited market correction has arrived, but whether it will be brief or long, shallow or deep, remains to be seen. The one thing I am sure of is that it won’t be like the previous one! In the meantime, it’s important to treat each stock on its own merits, and today that means selling our weakest, Chegg (CHGG).

As for today’s recommendation, it’s a small company thriving in the homebuilding sector, dominant in its own sub-sector. I think you’ll like it.

Cabot Stock of the Week 314

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Last week in this space I wrote, “a correction is increasingly likely,” and now it’s begun, with the technology sector leading the way. Perhaps this correction will be brief; perhaps it will deepen. But overall, our market-timing indicators remain bullish, and thus the prescription for investing success is to maintain a diversified portfolio of healthy stocks. Last week’s recommendation was a well-known pharmaceutical giant; this week’s is a far smaller (but still dominant in its industry) supplier of materials to the homebuilding industry—a healthy and decidedly non-tech industry. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

The AZEK Company (AZEK)
AZEK has emerged as one of the leading brands of premium construction materials. The stock offers investors exposure to residential and commercial construction, remodeling and select industrial markets.

It was one of the first companies to introduce a premium quality (and premium priced) engineered polymer (plastic) building material that was a viable candidate to replace wooden trim. Soon after the product’s introduction in 1999 the signature white trim gained a foothold in coastal communities, where wood was especially prone to rot, then spread inland.

Today, the brand name AZEK has become synonymous with high-end, low-maintenance trim work. It helped define the PVC trim category because, as the company’s website states, “AZEK … will not rot, split, splinter, delaminate, or warp. It’s unappetizing to destructive insects, moisture-resistant, and doesn’t need staining or sealing. It stays strong whether it’s installed in contact with soil or concrete.”

What more can you ask for?

As with any building material, there are, of course, some drawbacks to AZEK trim. But when used for its intended purposes and installed properly it truly is a miracle product.

That success has led to considerable brand loyalty and a steady growth profile that has afforded AZEK the financial flexibility to expand both organically and through acquisitions. The company now offers products beyond trim, including railings, decking, siding, cladding and sheet goods.

Three of the company’s more significant acquisitions are TimberTech (2012), UltraLox Railing (2017) and Versatex Trim (2018). And this year, AZEK acquired Return Polymers, a leader in PVC recycling and compounding. This acquisition should help profit margins as it brings full-service recycled material processing, sourcing, logistical support and scrap management programs into the AZEK family, which is now on pace to recycle 300 million pounds of waste and scrap into new products every year.

Today, the company’s main brands are AZEK, TimberTech, Versatex, Scranton Products, Ultralox and Vycom. Altogether, the company offers a wide assortment of residential and commercial building materials, marine grade products and plastic playground materials.

Clearly, an investment in AZEK represents a play on construction and remodeling (revenue is split roughly 83%/17% residential/commercial), but it is also a bet on continued demand for high-performance, low maintenance PVC and composite building materials.

The company, which just went public on June 12 and has a market cap of $5.9 billion, grew 2019 revenue by 16% to $794 million. Adjusted EPS rose by 20% to $0.48. In the company’s first quarter as a public company (Q3 2020), reported on August 13, AZEK grew revenue by 1% to $224 million (beating by $13.8 million) while adjusted EPS of $0.13 beat by $0.03. Revenue growth guidance for Q4 of 12% to 17% was well above analyst expectations of 8% and implies full year 2020 revenue growth should also surpass conservative estimates of 8%.

In fact, in the weeks since that report analyst estimates have increased; the consensus now suggests 11% revenue growth this year and 10% in fiscal 2021.

Earnings estimates have also increased. In early August analysts had expected just 6% EPS growth this year. Those expectations have since increased to 11%, to $0.56. In fiscal 2021 analysts see adjusted EPS jumping 41% to $0.79.

The company is on solid financial footing as well. AZEK raised raised $819 million in its IPO, used $783 million of it to pay down debt, and ended Q3 with $215 million in cash and $507 million in total debt.

As for the stock, the company came public at 23 on June 12, closed 18% higher its first day, and has been doing well since. Shares rose steadily through June, then pulled back briefly before climbing up to 36. There was a short retreat into earnings, then the stock walked up near 40 after the event.

Last week’s turbulent market pulled AZEK roughly 10% off its highs, to nearly its 50-day moving average, and the stock was up today, so the correction may be over for the stock. Down the road, we still have the IPO lockup to get through, but taking it all in, investors who want exposure to the construction and remodeling markets will have a hard time finding a better long-term option than The AZEK Company. BUY.

Current Recommendations

The correction that quickly began last week (and which was very much expected) has taken many of our stocks down toward or through their 50-day moving averages, and that’s a line that will be important in deciding which stocks stay in the portfolio—and which get kicked out—in the days and weeks ahead. At the moment, there’s only one stock (Chegg—CHGG) that is weak anough to sell; Global X Cybersecurity ETF (BUG) and Superstar Zoom (ZM) is downgraded to hold. Details below.

Changes
Chegg (CHGG) to Sell.
Global X Cybersecurity ETF (BUG) to Hold.
Zoom Video (ZM) to Hold.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor advisory, is on a normal correction, heading for its 50-day moving average, now at 28.4. In last week’s update, Tom wrote, “This packaged food company stock pulled back a little over the past week. But the uptrend is still intact. BGS has had a great run of late and it has returned almost 80% YTD. Yet it sells at valuations that are still below the five-year averages despite the fact that growth has picked up dramatically and will likely stay at a level well above the five-year averages for a long time. The stock was over 50 per share in 2016. The trend toward eating at home will likely continue beyond the pandemic, making BGS a transformed and superior stock.” BUY.

Big Lots (BIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has pulled back to its 50-day moving average (as of Friday) and remains just below it today, looking for buyers to return. Fundamentally, all looks well for the discount retailer, but technically, the heavy selling volume right off the top two weeks ago is a red flag. HOLD.

Bloom Energy (BE), originally recommended by Tyler Laundon in 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 to its 50-day moving average last week and remains just under it today. BUY.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, was at “a moment of truth” when I commented last Monday, and the verdict is not good; the stock has fallen through support. In his update last Thursday, Mike wrote, “CHGG isn’t the worst stock out there, and if we had a decent profit cushion, we might hang onto it (our average cost is around 69). But at this point it’s one of our weaker stocks…actually moving to new multi-week lows. Sell.” I agree. SELL.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, was one of the best-performing stocks in the portfolio last week, hitting a new high Thursday before pulling back minimaly with the market. In his latest update, Bruce wrote, “Columbia’s shares have continued to recover and are now about 12% above their price when we initiated our Buy rating at 80. Recent indications that the economy continues to re-open is helping buoy the stock. We are setting a 100 target on COLM shares. Reaching this target would produce a 25% profit from our 80 initial Buy price. The target is based on the company generating cash operating profits (or, EBITDA) of $480 million in 2022 and trading at an EV/EBITDA multiple of about 13x. This translates into a 20.2x multiple on estimated 2022 earnings of $4.95. The shares currently trade at 21.2x estimated 2021 earnings of $4.21. For comparison, the company earned $4.83 per share in 2019. 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.

Eli Lilly & Company (LLY), originally recommended by Tom Hutchinson in Cabot Early Opportunities, and featured here last week, remains at a low-risk entry point, unperturbed by last week’s market volatility. If you haven’t bought yet and you’re looking for a low-risk investment in a quality company, this is your opportunity. BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, fell sharply last week as technology stocks led the way down, closed at its 50-day moving average on Friday, and is a bit lower today. It might appear heroic to buy here, but prudence says it’s better to wait. The risk is too great that the previously hot high-growth tech stocks that make up this ETF will be among the hardest hit if this correction continues. HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is China’s largest hotel operator, and the stock held up very well in last week’s selloff, supported by the conviction of investors that the travel industry in China will continue to rebound. HOLD.

LGI Homes (LGIH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high last Wednesday, pulled back to its 50-day moving average on Friday, and headed up again today, so I think it can still be bought. BUY.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here two weeks ago, continues to trade calmly on its base at 38. If you haven’t bought yet, you can buy here. In his latest update, Bruce wrote, “Molson Coors shares have barely budged in trading over the past week. We see limited downside in the near-term for the shares. Our price target for Molson Coors is 59, about 59% higher than the current price. This target is based on 9x EV/EBITDA and estimated 2022 results, or about 14.9x estimated 2022 earnings of $3.95/share. At about 37, the shares trade at a highly discounted 10.2x estimated 2020 earnings of $3.61/share, and about 9.6x estimated 2021 per share earnings of $3.87. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.8x estimates. This is among the lowest valuations in the consumer staples group and well-below other brewing companies. For investors looking for a stable company trading at an unreasonably low valuation in a strong momentum-driven market, TAP shares have considerable contrarian appeal.” 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, and the stock looks to be at a fine entry point. In his latest update, Tom wrote, “This is about as good-looking a chart for a stock as you’ll see. The longer-term uptrend appears unstoppable. Sure, it’s a great utility, but this is ridiculous. That said, alternative energy is big business that’s growing faster than most people realize. Plus, the cost of delivering it keeps dropping like a rock. NextEra is one of the world’s largest providers and offers a conservative way to play the trend.” HOLD.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high last Wednesday and has pulled back normally since, but remains well above its 50-day moving average. Mike hasn’t written about the stock lately, but it has been recommended by Tom Hutchinson in Cabot Income Advisor, where Tom paired the holding with an options play to create income. Last week he wrote, “The settlement with Huawei has changed the math. This and other legal issue regarding the licensing business had been holding the stock back. With that impediment likely removed, or at least the outlook vastly improved, the stock should be off to the races.” HOLD.

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. Long-term, the prospects look bright. But short-term we’re at a bit of a decision point here, as the stock is sitting right at support, though substantially under its 50-day moving average, a victim of the widespread selling in technology stocks. If I were more concerned about the market, I might raise cash by selling here, but I see support at 250 dating back to mid-July, so I’m going to 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, hit another record high last Wednesday and has pulled back normally since, holding above its 50-day moving average. In his update last week, Carl wrote, “Sea shares briefly moved above 160 this week before settling back; shares are up 275% so far in 2020 and are now are up more than 10-fold from the price at the time of our recommendation last year. The stock’s momentum has been supported by the company’s recent stellar second quarter with revenue up 93.4% and active users increasing of 61% year over year.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, has a very interesting chart—substantially different from other tech stocks. The stock has been trading between 78 and 82 (roughly) since late July, building a firm base that is likely to launch the stock’s next advance—and the textbook says the odds for that event are best for when the stock meets its 50-day moving average, now at 74 and rising. In his latest update, Carl wrote, “This is a well-managed, dominant company selling at a reasonable valuation. I recommend you start with a half position and put in place a 20% trailing stop.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has had a massive correction over the past week, dropping 33% from Tuesday’s high to today’s low—but it still hasn’t touched its 50-day moving average, and that gives you an idea of how strong it was before! Last week I wrote, “the overwhelming bullishness among both retail and professional investors with regard to Tesla today suggests to me that short-term, there’s far more downside potential here than upside.” Today that’s clearly no longer the case, but neither can I say the stock is a great buy here. Much as I’m bullish on the future of the company, I think new money is better directed to less popular stocks. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, peaked with the rest of the red-hot U.S. marijuana sector just over three weeks ago (two weeks ahead of the broad market) and of the four leading stocks in the sector, TCNNF is now the strongest, as it’s the only one not to decline to its 50-day moving average (now down under 18). I suggested that my readers take partial profits both the day before the top and again last week, but if you haven’t, it’s not too late; it appears that the tide is still going out in this volatile sector. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, hit a low of 15 last Friday (23% below its 50-day moving average) before buyers stepped in, and today the stock was up 10%, closing more than half the gap. Traders can have fun with that kind of action if they’re good and lucky, but for most investors, long-term holding is a better bet. In his latest update, Carl wrote, “Based on a Cowen survey, analysts see a total potential market of 2.4 million people (for the company’s service), made up of those with a net worth of more than $5 million globally. It then estimates Virgin Galactic can potentially fly about 3,400 passengers per year to suborbital space by 2030. It is worth noting that Boeing’s venture capital arm HorizonX has a $20 million minority stake in Virgin Galactic. I remain bullish on this company and stock.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was one of the poster stocks of the 2020 COVID-rebound bull market, but no tree grows to the sky; the stock is now down 26% from last Monday’s high. Fundamentally, of course, all is well at Zoom (the company), which has a bright future as much of the COVID-triggered shift to work-and-learn-from-home will remain permanent. But for now, the stock, which is still 28% above its 50-day moving average, needs some cooling-off time. I’ll downgrade to Hold. HOLD.

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, is one of the many cybersecurity stocks that were looking hot until last week. It hit a new high last Tuesday, but then the sellers came along (though not on big volume) and by Friday the stock had tagged its 50-day moving average Friday. It’s still a viable stock; we’ll see what the market brings next. HOLD.

The next Cabot Stock of the Week issue will be published on September 14, 2020.

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