Cabot Stock of the Week 317

This morning brought some broad buying to the market, though not enough to reverse the negative signal by our intermediate-term trend-following indicator last week. And that means that raising cash—by selling your weakest growth stocks—is still a good idea.

For Cabot Stock of the Week, I’ve singled out three to sell today (Big Lots - BIG), (RingCentral – RNG) and (Global X Cybersecurity ETF – BUG), but you may have others in your own portfolio.

As for new buying, this week I’m going with a low-risk recommendation from Cabot Dividend Investor, which has a good growth story and pays a 3.1% dividend.

Cabot Stock of the Week 317

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Officially, Cabot’s trend-following indicators now tell us that the intermediate-term trend of the market is down—and this means it’s prudent to increase your cash position, while leaning toward caution in new investments. And that means it’s a perfect occasion for a low-risk recommendation from Tom Hutchinson’s Cabot Dividend Investor. My selection was a company that has a great combination of real estate and technology, and these are Tom’s latest thoughts on the stock.

Digital Realty Trust (DLR)
Digital Realty is a REIT that specializes in technology related real estate. Specifically, it owns and operates over 270 data centers in 44 metropolitan areas across the world. It is the fifth largest REIT on the U.S. market with $3.4 billion in annual revenues. Its largest customers include dominant industry players such as Facebook (FB), Verizon (VZ) and Oracle (ORCL).

Data center is one of those terms we never heard of just a few years ago. Let me explain what it is. A data center is a facility used to house computer systems and related components. We now live in an age when large (and small) institutions operate massive technology systems that require specialized infrastructure. Companies like Facebook and AT&T (T) can’t house the core of their operations just any place.

They need a top-notch facility with the proper temperature systems for the equipment, a dependable power supply with adequate backup systems, fire suppression and various security devices. Large data centers often require as much electricity as a small town. The operational integrity of some of today’s most prominent companies depends on such facilities.

Digital Realty is one of the largest providers of this new and growing type of property. In addition to the property itself, Digital also offers crucial co-location and interconnectivity services. Co-location refers to servers and other equipment from many different companies that are “co-located” in one date center. Interconnectivity is a crucial service that provides access to multiple ISPs (internet service providers) that enables a strong presence both domestically and worldwide.

It may sound complicated but the thing to realize is that these properties provide increasingly necessary services to companies involved in cloud and information technology services, communications and social networking, financial services, manufacturing, energy and healthcare.

Obviously, this kind of technology and support is a growing business. Digital also has a strong and growing presence across the world. Since 2005, Digital has grown earnings at a compound annual growth rate of 12% and the dividend has grown 11% per year over the same period.

Since the IPO in 2004, the stock has returned over 2000% compared to a 300% return for the S&P 500 during the same period. Of course, it isn’t as much of a high growth REIT now. But returns have been solid of late. It consistently dwarfs the performance of its REIT peers and returned 170% over the past five years, compared to a return of 93% for the S&P 500 during that time. It’s also up over 20% year to date.

While the returns are strong, that’s only half the story. DLR has been able to outperform with significantly less volatility. The stock sports a beta of just 0.21, meaning it is less than one quarter as volatile as the overall market. That’s a fantastic feature in these uncertain times.

But the future is what matters. And there is good reason to believe the company can continue to grow strongly going forward. Technology begets more technology. The more it advances, the greater the likelihood of further advancement. Companies involved will continue to need the proper facilities and more and more companies will need them. Here are some estimates for annual growth rates in certain emerging technologies; artificial intelligence (45% 2016-2025), internet of things (34% 2016-2020), autonomous vehicles (37% 2018-2025) and virtual reality (78% 2016-2022).

Digital’s growth comes from both expansions and acquisitions. In fact, it recently acquired European data center company Interxion, which offers collocation and interconnectivity services. It has a strong balance sheet with an investment grade rating that supports the growing dividend, currently yielding 3.15%.

The stock has been a good performer and provides a conservative way of investing in technology. It provides a great mix of growth and defense and that makes it a favored holding going into this crazy election.

Current Recommendations

Overall, our holdings are performing well (outliers are Nikola (NKLA) which has been a big loser so far, and Virgin Galactic (SPCE), which was a big winner today), so raising cash is not particularly easy today. Still, I think it’s appropriate now, as we enter October (often a tricky month) and our market timing system signals a bit of caution. So I’ve found three stocks to sell—but if you’re not inclined to sell immediately, you could set a mental stop. Details below.

Changes
Big Lots (BIG) to Sell
Global X Cybersecurity ETF (BUG) to Sell
Nikola (NKLA) to Hold
RingCentral (RNG) to Sell

Agnico Eagle Mines (AEM), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here last week, hasn’t done much since then, so can still be bought here. Neither Mike nor I are traditionally bullish on gold stocks, but in this case, we can’t ignore the fact that the chart is positive, and that with gold prices up, the prospects for growing earnings at this well-managed company are bright. BUY.

Azek (AZEK), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, remains below its 50-day moving average (which is not good for a growth stock), but the past three days have seen some strong buying power, so I’ll continue to hold. Overall conditions in the building industry remain quite positive, so Azek’s alternative building products should see plenty of demand. HOLD.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, is a good low-risk investment in the future of grocery stores, which are seeing business boom as people eat at restaurants less and cook at home more. In his latest update, Tom wrote, “Operationally, things are terrific. Volume sales were up 34.5% in the second quarter. And the eat-at-home trend is widely expected to continue beyond the pandemic. The stock is also still relatively cheap despite the big YTD move. Currently under 30 per share, this stock was up at 50 a few years ago. And things are vastly improved since then. An under 30 price makes BGS a buying opportunity.” BUY.

Big Lots (BIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is technically still positive, but it’s not strong, and given that Mike has already sold the stock and I’m looking to raise cash by selling our weakest growth stocks, I’ll sell now and take the profit. SELL.

Bloom Energy (BE), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, is a rather volatile stock, as many of Tyler’s are, but its major trend is up. Since June, the stock has been in a consolidation pattern, trading between 20 and 12 (with an upward bias), and eventually it should break out above that 20 level and move to new highs. If you want a piece of one of the leading hydrogen fuel cell companies, 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 correction low last Monday but has been up every day since. In his latest update, Bruce wrote, “The shares have about 12% more upside to our 100 price target. They currently trade at 21.5x 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 for the Dividend Growth Tier of Cabot Early Opportunities, is still attractive for investors who want a big dividend-paying pharmaceutical stock. In his latest update, Tom wrote, “The drug company stock has held up very well in the market downturn and is actually higher over the past month. This is one of the best drug companies on the market with a fantastic pipeline and a proven ability to execute. The performance is killing that of the S&P 500 both YTD and over the past year. Although it has pulled back from the recent high, it is still in a powerful uptrend. At some point the coast will be clear and this stock should start running higher again.” BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has the potential to be a fine long-term holding as this industry evolves. However, with the chart simply flat over the past three weeks, short-term, both Carl and I think cash is more attractive. In his latest update, he wrote, “Due to the recent lack of relative strength and a desire to raise the Explorer’s cash position, I’m moving this to sell, though I believe this is a fine long-term core ETF holding.” I’ll do the same. SELL.

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 unopened hotels in the pipeline. The stock remains above its 50-day moving average, trending up, and the long-term prospects remain bright as the Chinese economy gets rolling again. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, hit a new low last week—but Bruce remains optimistic. In his latest update, he wrote, “Markets may have been spooked by weak sales of Molson Coors products in recent data from Nielsen. In the week ending August 29th, its sales (in dollars) showed a surprising decline of -1.0% year-over-year. However, this appears to have been a one-time anomaly as sales returned to a positive +2.9% the following week. On a volume basis, the trend is similar, although weaker as the company has been successful in raising prices. A similar phenomenon occurred around the July 4th weekend, so perhaps consumers trade-up around holidays. For Molson Coors, the key is for revenues to be stable or slightly positive – rapid growth is not necessary for the stock to work as this is a cash-flow and stability story. 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. TAP shares have about 75% upside to our 59 price target. 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, “Sure, this regulated and alternative energy utility is down from the high of 300, but it had spiked higher after announcing the 4 for 1 stock split and really only gave up that spike. This is one of the best companies to own and I will seriously consider raising it to a BUY if the market has more trouble and the stock dips lower from here.” HOLD.

Nikola (NKLA), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, and featured here two weeks ago, continued to fall last week and our big loss now presents a challenge—Hold or Sell? In his updates last week, Tyler downgraded the stock to Hold, writing, “When we got into Nikola we fully expected a lot of twists and turns. We didn’t expect the current drama. That said, it’s not all that surprising given the high-profile nature of the company and the founder [who resigned last week]. While the loss of Mr. Milton might help reduce headlines in the short-term, it could change the story, depending on how management evolves. Like a lot of early-stage, innovative companies his presence was largely responsible for getting Nikola to where it is today. Part of me thinks this is largely about optics, and that he could return to the company once the dust settles. In the meantime, what we really want to hear is the SEC and Department of Justice saying something along the lines of, “nothing to see here folks.” Or maybe, that Nikola gets a slap on the wrist for speaking too freely in the lead-up to the IPO. In any event, what we know now is that the stock is down, but provided that partners don’t walk away, this is a temporary, albeit somewhat large, speed bump. Taking it all in, aggressive investors may wish to average down here. The news is bad and the story is still (relatively) good. So that strategy could make sense. More conservative investors may wish to just sit pat and see what comes next. That’s the strategy I’m advising. We have a half-sized position, which to me feels like plenty right now.” My thinking is very similar to Tyler’s; I don’t like sitting with the large loss, but the selling pressure is clearly fading, and the long-term potential is still very good, so I’ll simply downgrade it to hold and let it ride. HOLD.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor, bounced off its 50-day moving average and has resumed its uptrend, heading back to its early September high of 124. 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. But the stock hasn’t really been strong since May, and now it’s trading below its 50-day moving average, basically moving sideways, if not down. The long-term trend of the stock remains very healthy, and there’s a decent chance this could evolve into a high-quality long-term holding, but the short-term risk is more than I want to contemplate, so I’m going to sell now and take our profit. SELL.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, is up 290% YTD and very close to breaking out to a record high. In his update last week, Carl wrote, “Sea shares were higher this week – a good sign in a tough market. Sea’s e-commerce arm Shopee has increased commission fees in Taiwan, Vietnam and Indonesia while JP Morgan projects that Sea’s e-commerce revenue could grow more than 6X from 2019 through 2022. Gaming remains strong with the company’s top game Free Fire having downloads in excess of 100 million in the latest quarter. Free Fire is also the top game in India now, with more games in the development pipeline. 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. 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 two weeks ago but pulled back into its base, which is now nine weeks old—and thus very capable of launching an important new advance. In his latest update, Carl wrote, “TSM shares weakened in line with the tech sector as the company has become caught up in the China-U.S. tension and has stopped taking new orders from or shipping new wafers to Huawei. Taiwan Semiconductors accounts for 56% of global chip production and 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 confirm a buy rating for a half position and suggest you 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 healthy, with the stock trading in a range tending toward 400 and the stock’s 50-day moving average still trending up. The firm’s much-advertised Battery Day last week failed to produce any big short-term revelations, but long-term, it provided the road map for a plan to expand the firm’s battery development and production capabilities to the point that automobile range would increase by 56% and cost per kilowatt-hour would decrease by 56%. The implementation of this plan would take three years to full realization (in Elon Musk’s traditionally optimistic scenario) but would enable the production of a $25,000 electric car—and that would be a big deal. I’m holding tight. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, was the healthiest-looking of the U.S. marijuana stocks two weeks ago—but last week saw some big selling, and now the stock is in the same boat as its peers, sitting below its 50-day moving average. Since mid-August I’ve been advising readers to take some profits in the marijuana stocks and raise cash as the sector has weakened, and now my marijuana portfolio is roughly 50% in cash. But long-term prospects for Trulieve (as well as the sector as a whole) remain very bright so I’ll continue to hold. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is today’s big winner, with the stock up some 20% today on the heels of a new recommendation by Bank of America that said, in part, “While Virgin Galactic is not yet operational, the company is gearing up to begin serving customers in early 2021…We believe SPCE’s growth potential is unparalleled vs. our coverage (of current potential) and the current nascent stages of the company provide investors with a unique entry point into the stock.” If you haven’t bought yet, you could nibble here, but it’s probably best to wait for a new basing pattern. BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit another new high last week! The reason, obviously, is that more and more investors are realizing that Zoom’s videoconferencing technology will be a big part of our lives long after the pandemic is gone, and that major earnings will ensue. HOLD.

The next Cabot Stock of the Week issue will be published on October 5, 2020.

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