Cabot Stock of the Week 315

After a sharp two-week correction that targeted growth stocks in particular (and high-flyers like TSLA and ZM above all), the market may or may not be ready to resume its uptrend. For now, however, I’m keeping it simple and staying heavily invested.
Today’s recommendation is a stock that’s been in the news recently and might be viewed as the next Tesla, but I don’t like that comparison, as there are numerous differences. In any case, it has great potential and I think you’ll like the story.

As for the current portfolio, something’s got to go to keep the portfolio at or below 20 stocks and the victim this week is Zscaler (ZS), which has brought us a fine profit in five months and is now at risk of giving some back.

Full details in the issue.

Cabot Stock of the Week 315

[premium_html_toc post_id="215274"]

The sharp technology stock selloff that kicked off just two weeks ago may or may not be over, but it has brought opportunities in former high-flyers, and today’s recommendation is one of them. The stock, which was originally recommended by Tyler Laundon in Cabot Early Opportunities, is not for beginners—but the company behind it has a chance to change the world so it’s worth knowing about. Here are Tyler’s latest thoughts.

Nikola Corporation (NKLA)
Nikola is a development-stage automotive company looking to shake up the industry with innovative electric and hydrogen powered vehicles.

The company is starting with battery electric heavy-duty trucks, with production of the Nikola Tre semi-truck anticipated to begin in 2021. The Nikola Two, a hydrogen-powered semi-truck, is built on the same platform and is expected to see prototypes shipped in late-2021, with production slated to begin in 2023. The first trucks are being built in Ulm, Germany, then production will begin to shift to Arizona.

Depending on the model, Nikola’s semi-trucks are expected to sport twice the acceleration of diesel competitors, have a range of 500 to 700 miles, and refill in 10 to 15 minutes (when hydrogen becomes available).

Nikola is also working on a consumer-oriented pickup truck, the Badger—think of it as a traditionally-styled alternative to the edgy Tesla Cybertruck. The Badger will have up to 906 horsepower, a 300 to 600 mile range (depending on power system), and accelerate from zero to 60 in under three seconds. The truck is expected to enter production with partner General Motors (GM) in late 2022.

Finally, the company is working on building out hydrogen fueling infrastructure using equipment from Norwegian hydrogen specialist Nel. Management says it should announce a construction partner by the end of 2020.

Nikola’s unique business model features bundled pricing, which is said to make the total cost of ownership for a Nikola FCEV similar to that of a diesel truck. The bundle includes a 7-year, 700,000-mile lease, the cost of the truck, hydrogen fuel, repairs, and maintenance. Based on an estimated lease cost of $665,000, Nikola is projected to produce a 30% profit ($200,000 per vehicle).

Republic Services has placed an order for 2,500 BEV waste trucks, with an option to increase to 5,000 units. Testing begins in early 2022, shipments are scheduled for 2023 and the average price tag per vehicle is said to be around $250K. AB Inbev is also expected to order hundreds of trucks when they are ready.

On September 8, Nikola revealed that GM will build the Badger pickup truck. GM will take a $2 billion equity stake in the company and will engineer, validate, and build both the BEV and fuel cell variants. Nikola claims around $4 billion in savings on battery and powertrain costs over a decade, plus $1 billion in engineering and validation costs. GM projects $4 billion in benefits from the deal and will be the ex-Europe exclusive supplier of fuel cells to Nikola for Class 7/8 trucks. Nikola will handle sales and marketing.

Based on balanced projections, Nikola could be generating $300 million in revenue in 2022 and get to $10 billion by 2030. There are sure to be equity raises along the way, though Nikola has nearly $1 billion in cash today.

NKLA came public via a merger with VectorIQ at around 10. Post-merger, NKLA went ballistic, surging to an all-time high of 94 on the news that the company was taking reservations for the Badger and then seeing another spike to 55 when the GM deal was announced.

Then last week, short-selling firm Hindenburg (whose only goal is to make money by selling short and putting out negative opinions) launched an attack that alleged Nikola is a fraud. (Obviously, the company’s partners would argue otherwise.) That drove the stock down to support at 30 (where it bottomed this morning), and this looks like a decent entry point.

Still, this is a relatively risky investment given that it’s a young company that hasn’t yet reached commercial production. Expect a wild ride!

Current Recommendations

Technically, all Cabot’s trend-following indicators remain bullish—though that could change if today’s upside action fades and the nascent correction resumes. Until then, however, I’m remaining heavily invested, holding a diversified portfolio of high-potential stocks. And they’re all behaving satisfactorily! But my rules say that one has to go to make room for Nikola, so the victim this week is Zscaler, which has brought us a double in just five months. Details below.

Changes
LGI Homes (LGIH) to Hold
Zscaler (ZS) to Sell

Azek (AZEK), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, and featured here last week, is the market leader in low-maintenance building products. The stock has pulled back normally over the past week and is still an attractive buy. BUY.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor advisory, fell below its 50-day moving average last week, but is working to bottom today at 26, a level that served as resistance back in June. Thus, if you haven’t bought yet, and you want a low-risk stock that has the potential to go up when the tech stock downturn continues (whenever that is), this is worth consideration. In last week’s update, Tom wrote, “This formerly stodgy, slow growth packaged food company has been made into something better by Covid. Not only are people eating at home a lot more during the pandemic, but the trend toward more at-home dining will continue. The addition of a higher growth rate transforms BGS to a solid growth stock with a high and sustainable dividend. The market has noticed and the stock has returned over 70% YTD. But the stock is still selling well below its five-year average valuation.” BUY.

Big Lots (BIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, bounced off its 50-day moving average last week and is now working to resume its uptrend. HOLD.

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 to its 50-day moving average a week ago and has been building a base between 13 and 14 since. BUY.

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, and it was hitting more new highs today. In his latest update, Bruce wrote, “The shares currently trade at 21.0x estimated 2021 earnings of $4.21. For comparison, the company earned $4.83/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 Dividend Investor, and featured here two weeks ago, is still attractive for investors who want a big dividend-paying pharmaceutical stock. In his latest update, Tom wrote, “The stock of this drug company held remarkably strong during the market selloff in March and was one of the quickest to move higher afterwards. The stellar recent down-market performance is a comfort ahead of the uncertainty of a high-priced market and the risks that abound this fall. But despite sporting a beta of just 0.18, the company still has a lot going on. It has a tremendous array of drugs and a fantastic pipeline that should continue to power the stock higher in any environment. You get both a strong defense and predictable growth in a sector that will surely benefit from the aging population.” BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, remains below its 50-day moving average and I remain slightly concerned, because if the downtrend in technology stocks continues, this ETF is certainly going down, too. But I won’t anticipate. Right now, the ETF is building a base at 21, and if that holds, continued upside is entirely possible; the cybersecurity industry is booming! HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is China’s largest hotel operator, and long-term prospects for both the business and the stock remain great. Short-term, however, the stock is on a well-deserved correction, which started in early September when the stock was stretched well above its 50-day moving average and continued last week (with some high-volume selling) as the firm announced an IPO for 20 million shares that will trade on the Hong Kong exchange. There’s support for the stock at 38, but a dip to 36 is certainly possible. HOLD.

LGI Homes (LGIH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high two weeks ago, but the stock quickly fell back into the base it’s been building since late July. Technical analysis says the longer a base lasts, the greater the move, once it begins. Trouble is, technical analysis does not say which direction the stock will move—and in the housing sector, big moves in both directions are common. Mike has already sold the stock (Cabot Top Ten Trader being rather short-term-oriented by design) but I’m going to hold it a bit longer, though I will downgrade it to hold. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here three weeks ago, sold off last week, but odds are it will find support soon. In his latest update, Bruce wrote, “The thesis for this company is straightforward – a reasonably stable company whose shares sell at a highly-discounted price. Investors worry about the company’s lack of meaningful revenue growth, weak post-merger integration and continued margin pressure, along with the more recent weakness 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’ relatively stable revenues and cash flow should recover once the world’s economies more fully re-open. The debt on its investment grade balance sheet is readily serviceable and partly offset by $800 million in cash. We anticipate that the company will resume paying a dividend mid-next year. A $0.35/share quarterly dividend is possible, which would provide a generous 3.7% yield on the current price.” 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, as its 50-day moving average has just caught up. In his latest update, Tom wrote, “Will you marry me NEE? What’s not to like about this utility superhero? The regulated business in Florida, where they blast those air conditioners all year long, may be the best in the country. It is also one of the biggest producers of alternative energy in the world. And clean energy seems to get more widely used and cheaper to produce by the day. The stock has leveled off, but it is likely forming a base from which to climb higher. If the market does take a hit so significant that NEE has any kind of a meaningful pullback, I will raise it to a Buy.” HOLD

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor, is a big high-quality tech stock that hit a record high two weeks ago and has not even come close to its 50-day moving average since, a sign of strength. 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, “Even QCOM sold off in this market. But it scarcely matters. The stock is still in a huge and intact uptrend.” 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 prospects are bright, but short-term, the stock remains in limbo, trading above support at 250 and capable of moving either up or down from here. If it’s down, we’ll sell and take our profit; for now we’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, pulled back with the market two weeks ago but remains well above its 50-day moving average, so it’s still in a clear uptrend. In his update last week, Carl wrote, “Sea shares experienced some profit taking this week, closing yesterday at 142. If you have not yet done so, you should take some profits on this stock, which is up 250% in 2020 and has gone up 10X since it joined the Explorer portfolio in 2019. Sea has put up very impressive growth numbers but is not expected to be profitable until late 2022. Sea’s rise has been supported by its stellar second-quarter growth, 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, continues to trade in a range between 78 and 82 (roughly)—and that’s great for a technology stock. If all is well, this base will eventually launch the stock’s next advance. In his latest update, Carl wrote, “TSM shares held their ground this week as chip makers such as Nvidia (NVDA) and Advanced Micro Devices (AMD) took a tumble. The company’s most recent earnings surged 81% on 29% higher revenue, as its margins climbed. Taiwan Semiconductor is producing chips at a scale of 5 nanometers. In comparison, Intel is making chips at 10 nanometers. Circuit widths on chips are measured in nanometers, which are one-billionth of a meter. Smaller circuits translate to faster, more power-efficient processors.

“Taiwan Semiconductor hopes to stay ahead of rivals such as Samsung by starting to produce 3-nanometer chips in low volumes next year, with sizable production set for the second half of 2022. I recommend you start with a half position and put a 20% trailing stop-loss in place.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has rallied 18% since its low of last week, recovering roughly half the loss sustained in the big tech selloff. In Tesla’s case, I’ve seen a lot of opinions that TSLA’s big decline was the result of its not being added to the S&P 500—but I disagree. The fact is, the stock was simply priced to perfection, a massive 62% above its 50-day moving average—and when growth stocks sold off, TSLA joined the crowd. Now that the weak hands are out, and the stock has hit (and bounced off) its 50-day moving average, the stock has resumed its uptrend. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, has the best-looking chart of the four leading U.S. marijuana companies; it’s the only one that hasn’t declined to its 50-day moving average. Instead, it’s building a base at the 20 level, waiting for its average to catch up. In last week’s issue of Cabot Marijuana Investor, I wrote, “If I had to buy one marijuana stock today, I’d buy TCNNF.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, continues to base in the 17 area. In his latest update, Carl wrote, “UBS initiated coverage on the company with a buy rating and a $25 price target, stating that the company is uniquely positioned over the next five years. The UBS analyst believes that commercial space tourism could become a $38 billion-per-year business by 2030. This follows Cowen Investment Banking picking up and recommending the stock last week. Based on a Cowen survey, analysts see a total potential market of 2.4 million people 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. In other news, Virgin Galactic announced plans to conduct its next crewed spaceflight test on October 22 from Spaceport America in New Mexico. The flight will be the first of two that the space tourism company has planned to complete testing of its SpaceShipTwo spacecraft system, and should have just two test pilots on board. If the next two test spaceflights succeed, Virgin Galactic has said it plans to fly founder Sir Richard Branson in the first quarter of 2021. I remain positive on this company and stock and suggest you build a full position.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was like TSLA two weeks ago—priced to perfection. But just like TSLA, it pulled back to its 50-day moving average in one quick week—and now it’s resumed its uptrend. Fundamentally, the future looks great for Zoom in the post-COVID world, but technically, I think the stock could use a bit more cooling-off time. HOLD.

Zscaler (ZS), originally recommended by Mike Cintolo in Cabot Growth Investor, has doubled since our April recommendation, but now it’s time to say goodbye—though it’s a tough call. Short-term, the chart of this cybersecurity stock looks like many in the tech sector—down to its 50-day moving average and ready to bounce. But it isn’t bouncing, and the big red flag comes from the stock’s weekly chart, which shows ZS still heavily extended to the upside and ripe for a substantial retreat. Investors who want to try to cultivate a longer-term profitable relationship with the stock could take partial profits here and then hang on if the stock’s uptrend resumes, but I’m going to keep it simple and sell now. SELL.

The next Cabot Stock of the Week issue will be published on September 21, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2020. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved.