Cabot Stock of the Week 316

With this morning’s broad selling, the intermediate-term of the market is now down—but the long-term trend is still up! How you handle this depends partly on your own risk tolerance and partly on how your stocks are acting. If your stocks look good, I favor holding, but if they’re falling, I recommend selling.

In this advisory, the only immediate change is the sale of one stock, LGI Homes (LGI) to create room for our new one.

And that new one, by the way, comes from a sector that is definitely outside our usual hunting ground. But fundamental trends look good, so this just might turn into a great investment!

Full details in the issue.

Cabot Stock of the Week 316

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The older I get, the more I appreciate the value of a well-diversified portfolio—especially at times like the present. While growth stocks continue their well-deserved correction, the safer investments in our portfolio are holding up well, with some even advancing. So in choosing today’s stock, my goal was to find something that could rise if the market kept falling and I found it in this gold stock, which has just pulled back to its 50-day moving average in the midst of a solid uptrend. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor, and these are Mike’s latest thoughts.

Agnico Eagle Mines (AEM)
We’ll never be gold bugs, as the group just comes in and out of favor too quickly (often because their business fortunes are completely out of their control) for us to have long-term commitments here. But there’s no question that, when the sector gets moving in the upside, it can put on a great show, and that appears to be the case today.

Indeed, as measured by the VanEck Gold Miners Fund (symbol GDX), the group began to get its act together last year, and it was on the verge of moving to multi-year highs before crashing with everything else in March. But that decline proved to be a bump in the road, as gold stocks immediately rebounded to new highs and have acted well since.

And why shouldn’t they? There hasn’t been a time in history when there’s been so much coordinated fiscal and (especially) monetary stimulus, and with COVID still hanging around (fears of Europe suffering a second wave spread across the market late last week), the odds of further pedal-to-the-metal action are elevated. Throw in other uncertainties (U.S. elections, etc.) and you pretty much have a tailormade environment for gold. Indeed, the yellow metal remains north of $1,900 an ounce, up from $1,500 or so at the start of the year.

The group is very homogenous (most stocks move together), but our favorite right here is Agnico Eagle Mines, a mid-sized company ($2.7 billion in revenue during the past 12 months) that appears perfectly positioned for a period of elevated (and possibly rising) gold prices. The main reason for that is that Agnico has undergone a big CapEx spending spree in recent years to expand capacity in some of its mines (as well as some acquisitions and investments), which crimped earnings for a while.

But now it’s beginning to reap the rewards of that investment phase in two regards. The first is increased production: For years, Agnico’s handful of mines (five in Canada, two in northern Mexico) have cranked out relatively flat production (around 1.7 million ounces per year), but even with early-year COVID restrictions, production should hit that range this year before rising 20% or more next year and further in the years after that.

The second benefit, of course, is that lower spending means more free cash flow. Total annual CapEx is down 30% to 40% from its peak in 2018, and with higher realized gold prices, Agnico could be raking in $1.5 billion or so of free cash flow, which it can use to reduce debt (though it doesn’t have any maturities until 2022), boost dividends (current annual yield is 1.0% but there’s plenty of upside), buy back shares or use for internal projects.

Thus, if the bull market in gold continues, it’s a sure bet that Agnico will be one of the big beneficiaries, which will be reflected in the stock. Despite the early-year production hiccups, the company’s Q2 revenues were up 6%, while earnings leapt 80%, and Wall Street sees a big pickup going ahead (sales up 40%-plus for the rest of this year; earnings more than doubling in 2021). Obviously, if gold prices go kaput, all bets are off, but the odds favor higher (not lower) gold prices, so even these figures could prove conservative.

As for the stock, it crashed with everything else in March, but like the group, spiked all the way back to new highs in April, which was a great early clue. A pullback after that gave way to another powerful run to the mid 80s in July. Since then, AEM has chopped sideways for five weeks and attempted a breakout last week that was nixed by the overall market’s weakness, and pulled back to its 50-day moving average this morning. That action isn’t unusual in this environment, though—we think AEM’s path of least resistance remains up.

Current Recommendations

Technically, the market is now in an intermediate-term downtrend, which tells us that additional defensive measures would be prudent. In the very short term, however, I expect a bounce from today’s high-profile decline, so I’m mainly holding. But we do need to sell one stock to make room for today’s addition, and the victim today is LGI Homes (LGIH), which has slowly lost strength since we bought it. Details below.

Changes
Azek (AZEK) to Hold.
LGI Homes (LGIH) to Sell.

Azek (AZEK), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, and featured here two weeks ago, was bought as it fell through its 50-day moving average (which followed the news of a public offering) and the stock continues to trend down—though there seems to be decent support in the 30-32 range. As a smaller company with lighter institutional support, this decline is not unusual. But given our modest loss, I’m now going to downgrade the stock to Hold. HOLD.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor advisory, is heading up again. In his latest update (at the very bottom), Tom wrote “The stock of this packaged food company has had a rough two weeks, down 15%. There is no fundamental reason for the decline. It was likely because the stock has run up about 75% YTD and was due for a pullback. But it’s been up for good reasons; the company is killing it during the pandemic and will likely perform at a higher level than before for many years to come. Yet the stock is still valued lower than its peers. Even though the stock is up over 50% for the year, it is down over the last two years. This was a 50-dollar stock in 2016 (currently 26.44) with much lower earnings and projected growth. The pullback is an opportunity to get in.” BUY.

Big Lots (BIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is not as strong as it was when we bought it, but technically it’s still positive, riding its 50-day moving average higher. HOLD.

Bloom Energy (BE), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, enjoyed a big high-volume up day last Friday following an analyst’s upgrade—so it’s not a great buy here. However, the long-term prospects remain great, as fuel cell solutions continue to make headway in the energy industry. If you haven’t bought, you could buy a little here. BUY.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, hit a record high last Wednesday—but then profit-takers stepped in and now the stock has been down for three days. In his latest update, published the day of the top, Bruce wrote, “Columbia’s shares continue to move up, gaining 4% this past week. The shares have gained about 15% since our recommendation and have about 8% more upside to our 100 price target. We will stay with our Buy rating for now, but as the stock is approaching our target, we are evaluating a move to Hold. The shares currently trade at 22.2x estimated 2021 earnings of $4.16. 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, is still attractive for investors who want a big dividend-paying pharmaceutical stock. In his latest update, Tom wrote, “The drug company announced positive trial results for a coronavirus treatment with Incyte that uses an existing arthritis drug in combination with Gilead’s remdesivir, a current popular drug to treat the virus. The drug shortened recovery and relieved symptoms. Of course, no one knows what will happen. But Lilly has so many strong new drugs and more in the pipeline that it won’t matter that much. The stock has pulled back from the high and is again in a good buy range. Lilly has vastly outperformed the market YTD and over the past year but still sells at a price/earnings ratio below that of the overall market.” BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, remains below its 50-day moving average but it’s been essentially flat for over three weeks, revealing support for the sector in general, which is pretty much guaranteed to see growth for years to come. In fact, in his latest update, Carl wrote, “Cybersecurity is one of the fastest-growing segments of IT spending. According to a study by IBM, chief information officers (CIOs) across the U.S. consistently rank cybersecurity as their top spending priority and in 2019, the average total cost of a data breach for a company was $3.9 million, with 36% of the cost coming from the loss of customer trust.” Obviously, avoiding that is a high priority. I’ll continue to hold. HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is China’s largest hotel operator, with 6,187 hotels and 599,235 hotel rooms in operation (including those owned by recent acquisition Deutsche Hospitality) and 2,375 soon-to-be-opened hotels in the pipeline. Second quarter results, released a week ago, saw net revenue down 31.7% from the year before (thanks to COVID) but management reassured investors that recovery trends are strong. There’s been volatility both up and down since the report, but the stock remains above its 50-day moving average, trending up. HOLD.

LGI Homes (LGIH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a record high three weeks ago, but the stock has been trending slowly lower since, and today it looks like it’s ready to fall below support. I’m selling now and getting out with a tiny profit. SELL.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, continues to trend down; it’s just fallen to its low of mid-July. But Bruce remains optimistic. In his latest update, he wrote, “The company announced some alliances this past week. First, it will partner with LA Libations to produce non-alcoholic beverages. And, it will form a joint venture with DG Yuengling & Sons, a nearly 200-year-old family-owned U.S. brewing company based in Pennsylvania. In the deal, Molson Coors will expand Yuengling’s distribution by producing and distributing Yuengling beers across the entire country except for three New England states. Investors pushed down Molson Coors’ shares on the news, likely worried that the company is amenable to making an acquisition. We would be surprised if it did an acquisition, given its legitimate focus on maintaining its investment grade credit rating, as well as the low value of its stock. Essentially, Molson Coors doesn’t have the currency to make a smart acquisition of any size right now. We believe that management knows this, but investors apparently aren’t fully convinced, hence the share price decline. Molson Coors shares sold down by about 9% in the past week.

TAP shares have about 72% upside to our 59 price target. Patience is the key with Molson Coors shares. We think the value is solid although it might take a year or two to be recognized by the market. It is almost bizarre, in our view, that a reasonably stable food and beverage company like Molson Coors trades at perhaps half the multiple of typical consumer staples stocks. At about 34, the shares trade at a highly discounted 9.5x estimated 2020 earnings of $3.62/share, and about 8.8x estimated 2021 per share earnings of $3.88. Curiously, both estimates ticked up a penny in the past week. While this is a microscopic increase, the important point is that they did not decrease. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.7x 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. In his latest update, Tom wrote, “This regulated and alternative energy utility is riding high. It continues to blow away the performance of its peers and the market and is now up close to 30% YTD. It also made like Tesla (TSLA) and Apple (AAPL) and announced a stock split. The stock will split 4-for-1 for shareholders of record on October 19th. Based on yesterday’s close that would mean the price would be reduced to 73.92 (295.70 divided by 4) but if you own 100 shares currently, you will own 400 shares after that date. The idea is to make the share price more attractive to a greater pool of investors. The high-flying utility also raised earnings guidance through 2023.” HOLD.

Nikola (NKLA), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, was featured here last week with the closing sentence, “this is a relatively risky investment given that it’s a young company that hasn’t yet reached commercial production. Expect a wild ride!” Well, the stock was actually quiet for the rest of the week, but then this morning it cratered another 30% after the company announced that founder Trevor Milton had proposed to step aside as Executive Chairman and from the Board of Directors, so that the company could carry on without the distraction of his presence. The Board accepted, putting in his place Board member Stephen Girsky, former Vice chairman of General Motors’ Board. So how do we process these developments? Through several lenses. First and most simply, our loss is nearing 20%, which is generally a cutoff point for our losses, though I can stretch it to 30% for stocks with less institutional support like NKLA. Second, the dip this morning put the stock below support at 30 (which is bad), but it was on known news (which is good), so may be the last gasp of the decline. Third (the factor most people focus on) is the fundamentals. Who’s telling the truth? The short-sellers (there was clearly some creative thinking there) or Nikola and GM (which completed a $2 billion contract just two weeks ago)? I lean toward Nikola and GM, which said due diligence was done. Fourth is the lens of my experience with Tesla beginning in 2011 when I recommended the stock at 30 (cost basis is now 6 thanks to the 5-1 split). I well remember when skepticism of the little money-losing company (and electric cars in general) was sky-high, and I know that buying when the news is terrible and holding until the news is wonderful is the best way to make big profits. But I’m also leery of trying to repeat the feat with such a similar company—with the added wrinkle of fuel cells. For now, I’m sticking with NKLA. And if you haven’t bought yet and you like the risk-reward potential, I suggest you buy here. BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor, has pulled back a little more and is now close to its 50-day moving average, with the main trend still heading in the right direction. HOLD.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is a major provider of advanced communication solutions, and thus a major beneficiary of the work-from-home trend. Last week I wrote, “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.” Well, the stock did plunge through support on big volume last Thursday, getting all the way to 230, but it reversed up, closing above 250 for the day and then was up both yesterday and today! So the question is, now that the weak hands have been washed out, can the stock resume its advance? 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 up 265% YTD and the stock continues to perform quite healthily. In his update last week, Carl wrote, “Sea shares regained their mojo this week, moving from 139 to 147. Part of the advance was likely sparked by a decision made in Sea’s largest market, Indonesia. Jakarta unfortunately went into another lockdown, which benefits Sea’s three digital growth drivers, especially gaming and e-commerce. In addition, the company launched a fresh-food delivery app in Indonesia today, showing its ability to break into new markets and challenging the local leader, Grab. Sea’s rise has been supported by its stellar second-quarter growth, with revenue up 93.4% and active users increasing 61% year over year. I will keep this a hold but any significant pullback will likely move my rating to a buy.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, hit a record high last Tuesday and has pulled back normally since. In his latest update, Carl wrote, “Taiwan Semiconductor, which accounts for a staggering 56% of global chip production, fabricates chips at a scale of 5 nanometers. In comparison, Intel is making chips at 10 nanometers. In chip-making, fewer nanometers is better. TSM plans to stay a step 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 buy 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, continues to look very strong, as public and investor perception of the electric vehicle industry seems to be passing a tipping point and competitors big and small come out of the woodwork to grab of piece of the market. Short-term, I don’t think TSLA has much upside; it’s had a great run this year and now everyone loves the stock. But long-term, I still think it’s worth holding. Tomorrow at the company’s annual meeting, Elon Musk is expected to reveal some great improvements in its battery technology, which would increase range without adding weight. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, has joined its fellow multi-state operators in falling below its 50-day moving average—and it could easily go lower. But this is not the time to sell; the time to sell was back in mid-August, when the stock peaked on an excellent second quarter report and I wrote, “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.” From here, the stock could fall to 15 or 16, but long-term prospects remain bright and I’m here for the long term. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, continues to build its base in the 16 to 17 area. In his latest update, Carl wrote, “SPCE shares didn’t do much this week as both UBS and Cowen have picked the stock up in the last few weeks by recommending it. 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. Virgin Galactic has said it plans to fly founder Sir Richard Branson in the first quarter of 2021. I remain positive on this growth concept stock and suggest you build a full position.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, sold off with the market three weeks ago but for the past two weeks it’s been working its way higher and today it’s close to tagging an all-time high! Thus, it appears I was wrong last week when I wrote, “I think the stock could use a bit more cooling-off time.” If you’ve got it, hang on tight. The world has clearly embraced Zoom in a way that will last well after the pandemic is over. HOLD.

The next Cabot Stock of the Week issue will be published on September 28, 2020.

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