Cabot Stock of the Week 318

The intermediate-term negative signal I mentioned last week remains in effect, telling us some caution is appropriate, whether it be holding cash or leaning toward lower-risk stocks. But overall, I can’t say the danger is high yet—and because I sold our three highest-risk stocks last week, this week I am selling none.
As for new buying, this week I’m going with a high-potential fast-growth stock that came public last year and that was recently hitting new highs.

You may not be a user (I’m not) but you’ll almost certainly know the name.

Full details in the issue.

Cabot Stock of the Week 318

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The overall investing environment has improved from last week, but officially, our intermediate-term trend-following indicator remains negative, telling us that some degree of caution is prudent—and coming after a great five-month advance, who can disagree? Still, there are attractive stocks to buy if you’re selective, and today’s recommendation is one of the hot young crop of social media/e-commerce stocks that are changing the landscape of our commerce system. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and these are Mike’s latest thoughts.

Pinterest (PINS)
These days, everyone has an e-commerce site. Some sites, like Amazon’s, are full-featured and host thousands of other businesses on their platform. Others, like millions of small businesses out there, have just a dozen or two products for sale. And they’re all benefiting from the new reality that the virus has thrust upon us; instead of buying a thing or two on Amazon, millions of people are buying everything—from groceries to takeout to cars (even houses!)—via digital means.

Still, all these e-commerce sites are somewhat similar in the sense that they appeal to buyers who generally know what they want; if you’re looking for a kid’s Star Wars Halloween costume, you can search broadly (Google) and specific places (Amazon, Disney) to see their offerings and prices. But what about so-called “social” e-commerce, where consumers go to discover what they might want to buy, often by getting ideas from other users?

That’s really the big idea behind Pinterest: The company brings together traditional e-commerce with social shopping through its best-in-class visual platform where users can “pin” pictures of things they’re doing, inspirations, recipes, room layouts and anything else. That means advertisers can reach users at an earlier stage of the potential buying process (they want to buy, but aren’t exactly sure what to buy quite yet), and the business should be a goldmine going forward.

Also likely to help the cause is a recent partnership with e-commerce pioneer Shopify, allowing the one million merchants on that firm’s platform to upload catalogs to Pinterest, automatically update products daily and advertise, too. Pinterest users can discover, save and directly buy products from these merchants, providing a win-win for all involved.

Like most online firms, the pandemic has helped Pinterest; in Q2, user growth zoomed by 39% as people didn’t simply shop online but searched for ideas on handling the new reality, whether it was looking for masks, or how to put together a home educational space for the kids or how to rearrange a work-from-home office. Most important, though, is that the company has made great strides in advertising tools; we’ve seen this from other e-commerce outfits over the years, and each time it improves monetization. Indeed, one analyst see Pinterest’s revenue per user growing 14% annually for the next five years. (Interestingly, 75% of the firm’s users are overseas, but just 15% of revenue is international—a big opportunity going forward.)

Long story short, Pinterest is joining the ranks of online properties that will become a magnet for advertisers going forward—and the fact that it has a one-of-a-kind offering only reinforces that. In Q2, revenues were up just 4%, but that was virus related, and Wall Street sees boom times ahead: The top line should grow north of 30% starting in Q3 (in fact, most analysts are modeling 30%-ish revenue growth annually through 2024), while earnings are expected to ramp up from here (21 cents per share estimated for 2021, but that’s almost surely too conservative).

Whatever the exact numbers, the point is that this company has likely crossed the perception threshold among big investors, as a ton are taking and building positions; more than 700 mutual funds now own PINS, more than twice the number a year ago.

As for the stock, it came public in early 2019 and didn’t impress, falling sharply late last year and crashing with everything else in March. The comeback from there was solid, but it was the Q2 report that really changed things, as the stock gapped up toward its all-time highs on monstrous volume. The growth stock selloff after that held PINS down a bit, but didn’t hurt it much—shares consolidated nicely for seven weeks before galloping to new highs two weeks ago.

Near-term, further wobbles are possible as the market’s health is still iffy. But bigger picture, we think PINS has started a new sustained advance that should take it nicely higher over time.

Current Recommendations

Overall, our holdings are performing well, so I’m not selling anything this week. But with our intermediate-term timing indicator still negative, I remain alert to the possibility that the market will resume its correction soon—and if so, there’s little doubt we will be selling more. In the meantime, I still see some fine buying opportunities. Details below.

Agnico Eagle Mines (AEM), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here two weeks ago, was bought as the stock had dipped to its 50-day moving average (often a decent short-term buying opportunity), and the stock has risen nicely from that point—though volume is fading. Long-term, it’s a good positive chart, and 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 his Cabot Early Opportunities advisory, has moved slowly higher over the past week, but hasn’t quite broken above its 50-day moving average. The fundamental story remains strong—as overall conditions in the building industry remain quite positive, which should bring big demand for Azek’s alternative building products—but until the stock can climb above that average, Hold is the appropriate rating. 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, “As people continue to eat at home more after the pandemic than they did before, this should become more of a growth company and secure the high dividend. Yet, despite having become a better company, BGS still sells at valuations well below the five year averages.” BUY.

Bloom Energy (BE), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is a rather volatile stock, as many of Tyler’s are, but its major trend is up—and with today’s big jump, the stock is once again close to its old high of 19, ripe for a breakout. 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, remains above its 50-day moving average, heading higher. In his latest update, Bruce wrote, “The stock has about 12% more upside to our 100 price target. The shares currently trade at 21.5x estimated 2021 earnings of $4.16. The earnings estimate is unchanged from last week. 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.

Digital Realty Trust (DLR), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, and featured here last week, pays a nice dividend and has a solid growth story as well. In his latest update, Tom wrote, “This data center REIT is vastly outperforming the market YTD. And the stock still remains in a longer term uptrend. That aside, it’s in a great business. Its data centers are crucial technology infrastructure at a time when innovation and technology are poised to grow at an even stronger clip than in the past. This is a solid REIT that invests in the growth properties of the future. It should continue to do well. Plus, DLR performs with far less volatility than the overall market and should be a strong holding even if the market turns south from here.” BUY.

Eli Lilly & Company (LLY), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, is down a little since our buy, but still attractive for investors who want a big dividend-paying pharmaceutical stock. In his latest update, Tom wrote, “The performance of this health care giant is killing the market YTD, over the past year, and over the past two years. But it does so in a way that can require some patience. It tends to break out and move sharply higher and then go sideways for a long time. That’s okay, especially considering the fact that it has been a stupendous down market performer, not to mention the most well-run big pharma company on the market. It’s rock solid through the uncertain market and a great holding beyond.” BUY.

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 inched out above its month-old high this morning (though it couldn’t hold the gain), and 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 two weeks ago—and has bounced a bit since. In his latest update, Bruce wrote, “Investors’ primary worry about Molson Coors is its lack of meaningful (or any) revenue growth as it has relatively few of the fast-growing hard seltzers and other trendier beverages in its product portfolio. So, 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 revenue and cash-flow stability story. Any indication that it is building its “alternative” beverage capabilities would be positive, as would resilience/recovery in its core beer volumes. Other concerns, like its modestly elevated (but investment grade) debt and the size/stability of its free cash flow, generally stem from the revenue debate. This past week the company announced an exclusive agreement with Coca-Cola to produce and distribute an alcoholic version of Coke’s Topo Chico sparkling water. The new hard seltzer will begin U.S. distribution next year. We think this incremental deal highlights the company’s creative (and low-risk and low-cost, compared to an acquisition) approach to boosting its relevance. The shares trade at 9.3x estimated 2020 earnings of $3.62 and 8.6x estimated 2021 earnings of $3.88. Both estimates are unchanged in the past week. These valuations are remarkably low. One way to look at this low multiple is to think about what it implies about investors’ views on earnings. If investors applied a very conservative 12x multiple on 2021 earnings, it suggests that investors expect about $2.81 in earnings that year. We think it is highly unlikely that earnings would drop 22%, or even drop at all. It is almost bizarre that a company like Molson Coors trades with such low expectations. For investors looking for a stable company trading at an unreasonably low valuation in a momentum-driven market, TAP shares have considerable contrarian appeal. 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.” BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, last week made a bid to buy utility giant Duke Energy (DUK) and was rebuffed. In response, the stock dropped sharply but briefly, and now it’s higher than before the announcement. In his latest update on the day of the news, Tom wrote, “I’m not sure why there is such a powerful market reaction to the fact that a deal that wasn’t known about is not going to happen. As the story unfolds, I will continue to keep you posted. But I don’t see anything at this point that interrupts the positive story for NEE.” HOLD

Nikola (NKLA), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, bounced strongly on high volume late last week, but not enough to erase all the damage from the selling of the previous three weeks. Still, it’s reassuring to see some money coming into the stock. In his update last week, Tyler wrote, “NKLA has morphed from an action movie into a drama that nobody wants any part of. It’s not helping that the broader EV stock universe [with the exception of TSLA] is having a rough go of it right now. The bottom line here is that until there’s some conclusion to the short sellers’ allegations, the stock is likely to get knocked around on all manner of rumors. Should established partners, many of whom are also investors, start to back away that would certainly undermine recovery potential, but public comments from most suggest that won’t happen (yet, at least). This is one of those situations we like to try to avoid but which happen from time to time. I see no reason to get aggressive here right now as we’re not employing a “turnaround” strategy in this portfolio. We much prefer stories going from “good to great,” or at least “just OK to good.” Right now, NKLA is neither. There are plenty of stocks out there to buy that are acting a heck of a lot better. Holding firm at a half-sized position.” I agree. Long-term, the potential is still high, but right now, the stock has no strength. HOLD.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor, looks pretty great, trading above its 50-day moving average, and heading for its old high of 124. Mike no longer has the stock in Cabot Growth Investor, but he recommended it in Cabot Top Ten Trader last week, writing, “In the race to accelerate the commercialization of the 5G phone market, Qualcomm has leapt to the forefront after expanding its portfolio of 5G mobile platforms. The firm is widely known for its integrated circuits, software and licensing services for use in wireless communications, but it has lately become one of the top players for 5G handsets (as well as other “smart” tech-related applications). Qualcomm launched its Snapdragon XR2 (extended range) platform – the first to combine 5G with artificial intelligence – last December. The platform boasts multiple custom features that can be scaled across augmented, virtual and mixed reality (including 360-degree views and 3D audio). The firm also recently announced plans to scale its new Snapdragon 4-series (with high- and mid-tier features) for the mass market to further its goal to make 5G accessible to all smartphone users. Most important of all, Qualcomm announced a patent dispute with Chinese tech giant Huawei a few weeks back, opening the way to big milestone ($1.8 billion) and royalty payments in the years ahead—the company now has licensing agreements with every major handset maker just as 5G smartphone boom takes hold. Qualcomm also just applied for a license to sell semiconductors to Huawei (which will use them in its smart phones if the deal is approved by the U.S. government). The financial outlook for Qualcomm is equally favorable—while Q2 stunk (virus related), management guided for a 12% increase in Q4 revenue, driven by royalty revenues from Huawei. And the big payout comes after that, with analysts seeing a whopping 65% hike in earnings in 2021, which should lead to dividend hikes, share buybacks and, overall, continued interest among big investors. As mega-caps go, we like it.”

Additionally, the stock is now recommended in Cabot Dividend Investor, where Tom Hutchinson recently wrote, “This stock is still in a powerful uptrend and has held up very well through the latest market selloff. Qualcomm had the wind at its back ahead of the proliferation of 5G phones, from which it will earn large royalties. But it recently became a much better company and stock with the legal settlement with Huawei. The favorable legal ruling changes the narrative on an issue that had been holding the stock back. It still looks strong from here.” Swayed by these bullish voices, and the stock’s positive action, I’ll upgrade it to buy. BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, has done nothing over the past week; it’s still up 290% YTD and very close to breaking out to a record high. In his update last week, Carl wrote, “Sea shares continue to climb, moving from 145 to 154 over the past week. Sea is quite a ways from profitability but growth across its core markets is getting better and better. JPMorgan projects that Sea’s e-commerce revenue could grow more than 6X from 2019 through 2022, and gaming remains strong, with its top game Free Fire having downloads in excess of 100 million in the last quarter. Free Fire is also the top game in India now, with more games in the development pipeline. I will keep this a hold for now but aggressive investors can add to their position incrementally. If you are a long-time holder, you should take some profits off the table to lock in some gains.”

Additionally, SE was recommended again last week in Cabot Top Ten Trader, where Mike wrote, “Sea Limited (covered in the July 27 issue) is making some big strides as Southeast Asia’s leading e-commerce, online entertainment and financial service provider; it’s also expanding its presence (especially in gaming) in Latin America. Sea’s online shopping (Shopee) and gaming (Garena) segments have been compared to Amazon and Activision, and its digital payments arm, SeaMoney, offers e-wallet services, payment processing and other financial products. Business has been strong for a while, and the move of everyone online during the pandemic has only helped results—Sea reported continued strong user growth in Q2 along with increasing user engagement across its platforms. Total revenue was up 102%, thanks largely to strong paying user quarterly growth, while digital entertainment revenue rose 62% and e-commerce revenue was up 188%. Sea’s digital financial space continued to expand, with paying users of its mobile wallet service surpassing 15 million and segment revenue roaring higher by 328% (due to continued success in integrating the mobile wallet service with the Shopee platform across different markets). Meanwhile, Sea’s distributor for third-party game developers, Garena, achieved several historic highs in quarter, including reaching nearly half-a-billion (!) global active users (up 61%). Management didn’t offer full-year guidance, but analysts see continued triple-digit top-line growth for the rest of 2020, with 40%-ish growth in 2021 (likely conservative). Sea also believes it will continue to benefit from the deepening digitization trend and from consumers looking for online entertainment during the pandemic. This remains a strong story.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, has been climbing strongly for the past two weeks and is now very close to reaching (and hopefully exceeding) its high of three weeks ago. In his latest update, Carl wrote, “TSM shares gained ground this week, going from 77 to 81 as Taiwan President Tsai Ing-wen promised to help the island’s key semiconductor industry overcome difficulties and consolidate its leading position, offering support to a sector increasingly caught up in China-U.S. trade and tech war tensions. The company has stopped taking new orders from or shipping new wafers to Huawei, but will likely remain a step ahead of rivals such as Samsung by starting to produce 3-nanometer chips in low volumes next year. I’ll keep my rating at buy a half position, but recommend 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. And on the fundamental side, last week brought three substantial announcements. The first was that the governor of the state of California signed an executive order mandating that all new vehicles sold in the state beginning in 2035 must be emissions-free. The second was that Walmart Canada, which had ordered 15 electric semi trucks from Tesla back in 2017, expanded its order to 130 trucks. And the third was that Tesla deliveries for the second quarter totaled 139,300, up 44% from the year before. With the stock up roughly 400% YTD, TSLA has every reason to take a long pause to catch its breath—as it has been doing for the past month. But long-term, the future remains bright—and every automobile manufacturer on earth is now playing catch-up. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, remains a bit soft, like all the marijuana stocks. In last week’s issue, I wrote, “The biggest seller of marijuana in Florida (with roughly 50% market share), Trulieve now has 56 dispensaries in that state as well as five others (California and Connecticut) and plans to open in Massachusetts and Pennsylvania as well. By year-end, it’s aiming to have 68 stores. It had the greatest revenues of the four U.S. leaders in the fourth quarter (the company’s average customer spends $3,900 a year!), but the slowest growth (if you can call 109% year-over-year growth slow). And the company has been profitable since 2017, revealing both capable management and the wisdom of focusing on one state (which is still just a medical market). The stock was the best-looking of the four leaders until two weeks ago, when it fell through its 50-day moving average on big volume. But buyers have since stepped in and now (if it follows the pattern of its peers) I’d expect to the stock build a base above 17.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has moved sharply higher over the past six days, but volume is fading so I expect this move to end soon. In Carl’s latest update, he wrote, “SPCE shares gained 25% this week despite a bit of a pullback yesterday. The reason for the move can probably be attributed to two new Wall Street analysts picking up coverage and issuing buy recommendations. The average analyst price target is 26, with the highest at 35. I take these numbers with a grain of salt as the pandemic has put off plans for its first space tourism launch with Sir Richard Branson from later this year into the first quarter of 2021. Still, this concept stock has captured the imagination of many and has significant upside potential. Based on a Cowen survey, the company has a potential market of 2.4 million people, with a net worth of more than $5 million globally. 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, has been cooling off slightly over the past two weeks, but selling pressures are minimal, so odds are good that this is just a base-building phase. Note, however, that the 50-day moving average is way down at 350, so this process could take a while. Short-term traders could still take profits here. HOLD.

The next Cabot Stock of the Week issue will be published on October 12, 2020.

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