Cabot Stock of the Week 319

The bull market is alive and well, as the intermediate-term negative signal I mentioned in recent weeks has been erased by a new positive signal. Happily, we sold very few stocks during the correction (most of ours behaved very well) so today’s recommendation means the portfolio is once again full.

And what is today’s recommendation? A major provider of global infrastructure services whose stock has low risk at this point and good potential for profit as the world slowly gets back to business.

Cabot Stock of the Week 319

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The overall investing environment continues to improve, with our intermediate-term trend-following indicator now back in positive mode and growth stocks in particular seeing strong buying. Risk-tolerant investors can now invest aggressively again (in last week’s PINS recommendation, for example), while more risk-averse investors can commit to stocks like this week’s recommendation, which was recently recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor. Here are Bruce’s latest thoughts.

Quanta Services (PWR)
Based in Houston, Texas, Quanta is a mid-cap ($8.2 billion market cap) provider of specialized engineering and technical services to the electrical power, telecom and natural gas pipeline industries. More than 65% of its revenues are produced from regulated electric, gas and other utility companies. Quanta emphasizes highly predictable, non-discretionary installation, upgrade, maintenance and repair contracts that provide it with a healthy flow of recurring revenues. While construction contracts produce about half of its revenues, these are primarily lower-risk transmission, distribution and substation projects that are essential to its customers.

Quanta’s strategic priorities emphasize growing its base business, increasing its margins and creating new growth platforms. It is migrating toward low capital-intensity contracts, helping reduce its risks. The company recently was awarded a major $6 billion, 15-year service contract to upgrade and maintain Puerto Rico’s national electric grid, which could add $0.25/share in annual earnings starting in 2021, along with the potential for performance-based profits and additional ancillary projects.

The company is well-positioned to benefit from growing demand for renewable energy, including solar, wind and hydro-powered electricity generation, as it provides critical services to integrate these into the power grid.

The company’s small (about 5% of revenue) telecom operations continue to grow sharply, with future growth prospects bolstered by the transition to 5G-based infrastructure.

The company is exiting its small but problematic Latin American operations, which should reduce a modest overhang on its shares.

We like that the company has strong engineering roots (critical to maintaining its expertise and focus) and is led by long-time employees who have risen through the ranks, proving their capabilities along the way. Quanta was created by John Colson, who had joined PAR Electrical Contractors in 1971 as a young engineer carrying stakes for a survey team. Colson eventually became president and then owner of PAR, and in 1997 combined it with three other contracting firms to form Quanta Services. Quanta completed its initial public offering in 1998, grew rapidly from new contracts and over 200 acquisitions and is now an $11 billion (revenues) member of the S&P 500. The current CEO was president of a telephone pole line maintenance company when Quanta acquired it in 2001. An important component of the company’s strategy is ongoing training of its skilled labor force.

Second-quarter results were encouraging. Per-share earnings of $0.74 were well ahead of the $0.47 consensus. While overall revenues fell 12%, the decline was expected by investors and driven by Quanta’s Pipeline and Industrial operations (about 32% of revenues). This segment has struggled with project cancellations and weaker demand from energy companies, but conditions appear to be stabilizing.

The company increased its operating margins, produced strong cash flow and increased its contract backlog. With the healthy first-half results, newly raised full-year guidance and better conditions likely ahead, analysts have begun to increase their 2021 estimates again.

Quanta’s balance sheet is strong, with only $1.4 billion in debt, which is partly offset by $531 million in cash. Net debt is a mere 0.9x estimated 2021 cash operating profits. Recently, the company replaced its variable rate term loans with a low, 2.9% fixed rate note that isn’t due until 2030, providing considerable financial flexibility. The company’s growth and financial strength has allowed them to reduce their share count by 35% over the past six years. A new $500 million share repurchase authorization, in addition to a small $0.05/share quarterly dividend, should continue Quanta’s favorable use of surplus capital.

Primary risks include customer concentration (34% of revenues come from its top 10 customers), its fixed-price construction contracts and weak energy prices.

PWR shares trade at a reasonable 14.5x estimated 2021 earnings and about 8.9x estimated 2021 EV/EBITDA. Quanta looks well positioned to continue to prosper.

Current Recommendations

Overall, our holdings are performing well, so I’m not selling anything this week. And the addition of PWR means our portfolio is once again fully invested. The only change is that two stocks are upgraded to buy. Details below.

Changes
Azek (AZEK) to Buy.
Trulieve (TCNNF) to Buy.

Agnico Eagle Mines (AEM), originally recommended by Mike Cintolo in Cabot Growth Investor, was bought as the stock had dipped to its 50-day moving average (often a decent short-term buying opportunity), and AEM has been roughly tracking its 50-day higher since, with a big jump on good volume last Friday. 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 been strong and steady, up in 12 of the past 13 trading days! This advance has put the stock above its 50-day moving average once again, and thus it deserves to be upgraded to a buy. However, I do want to mention that as a smaller stock with less institutional backing, AZEK can be volatile. Upgrading to Buy. BUY.

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, “The stock took a hit with the rest of the market in early September after having run almost 70% higher during the year. But it has been trending up since the low of about 26 in mid-September. The stock had to take a breather and the next few quarters should show more impressive results as business is booming during the pandemic. Business should remain strong even after the pandemic and the stock is still very reasonably valued, with a 6.7% yield.” BUY.

Bloom Energy (BE), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is up 38% from its low of just two weeks ago, thanks to strong performances in the alternative energy sector as a whole. Long-term, the prospects remain bright, but short-term, I’ve got to say the stock looks over-extended and ripe for a rest. Short-term traders could take partial profits now. Long-term investors should just sit tight. As for the stock’s rating, I’ll leave it at buy because the market is so strong, but counsel caution. BUY.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, notched a new closing high last Friday! In his latest update, Bruce wrote, “The shares have about 10% more upside to our 100 price target [less now]. The shares currently trade at 21.6x 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, pays a nice dividend and has a solid growth story as well. In his latest update, Tom wrote, “This data center REIT has consistently moved higher since late September. DLR is still in an uptrend and it is a major player in a major growth property niche that isn’t going out of style. It also has a special bonus of a microscopic beta, which means it doesn’t move with the overall market. That’s a nice feature heading into an uncertain election with this virus. Even yesterday, when the market turned around and went south after the stimulus news, it went higher anyway. I like this both for the short and longer term.” BUY.

Eli Lilly & Company (LLY), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, is up more than 7% from its low last week on good news about the company’s Covid-19 antibody treatment. In his latest update, just as that move was getting going, Tom wrote, “The stock is up over 3% in pre-market trading today as it applied to the FDA for emergency use authorization for its Covid-19 antibody treatment. It wouldn’t be full approval but it is progress in treatment for the virus and it speaks well of Lilly’s terrific R&D. It probably doesn’t move the needle much for the stock but it does put it in a positive spotlight.” 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 hit a new high last week and has pulled back normally since. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, hit a new low three weeks ago—and has bounced so well since that the stock is now above its 50-day moving average, which is still declining. But eventually the stock’s action should pull that up. In his latest update, Bruce wrote, “TAP shares rose 4% in the past week. The shares have about 69% upside to our 59 price target. The shares trade at 9.6x estimated 2020 earnings of $3.62 and 9.0x 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. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 7.8x estimates, 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 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, benefitted (like Bloom Energy) from the surge of buying in alternative energy stocks last week—and today was the stock’s sixth consecutive day up! In his latest update, Tom wrote, “This combination regulated utility and alternative energy juggernaut is a winner, and the stock will likely trend higher from here.” HOLD

Nikola (NKLA), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, remains our biggest loser, but I do think the bottom was seen three weeks ago and that in time, this stock has the potential to be a big winner. Still, I can’t give it a buy rating until buyers turn the stock’s trend positive. HOLD.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, was bought high but was even higher today, hitting a new high this morning. In his update last week, Mike wrote, “Mass market? Check. One-of-a-kind offering? Check. Rapid sales and earnings growth projections and an early-stage chart? Check. There are never any sure things, but Pinterest has just about all of the characteristics of prior big winners, so if management pulls the right levers, we think the stock has a chance to do very well over time. The big idea is that the company is a leader in a new kind of online shopping (social commerce), which attracts people who are at a different stage of the buying process (looking for ideas of what to buy, as opposed to shopping for a specific product)—and that will in turn attract advertisers that are looking to get in front of potential customers earlier in the process. There’s plenty of upside in the monetization of the firm’s user base (especially internationally), and analysts see 30%-plus revenue growth (plus booming earnings) for many quarters to come. A pullback of a couple of points wouldn’t shock us, but the path of least resistance is clearly up.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, looks great, once again hitting new highs. In his latest update, Tom wrote, “This stock is still in a very powerful uptrend. And it should be. It has a big revenue boost to look forward to as 5G phones roll out and Qualcomm earns growing royalties from its chips. Plus, the legal questions surrounding the company, which had been holding back the stock, got a lot better after the recent settlement. The recent behavior is very encouraging and the stock stands to benefit mightily beyond the election and the pandemic.” BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, spent the month of September building a base and now that’s paying off as the stock has hit new highs repeatedly in October. In his update last week, Carl wrote, “Sea shares jumped again this week, from 157 to 167, and are now up 400% in the last year. UBS reiterated a buy rating and a target price of 200 this week. 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. No change in my hold rating but aggressive investors can add to their position incrementally. If you haven’t already done so, you should take some profits off the table to lock in gains.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, has been up 11 of the past 13 trading days! In his update last week, Carl wrote, “TSM shares were up almost 5% yesterday, reaching 87 despite some concerns about the company getting in the middle of the U.S.-China tech cold war. Taiwan Semiconductors 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 maintain my rating of 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 narrowing range centered around 420—while the stock’s 50-day moving average, now at 394, draws closer. Everyone knows by now that Tesla is killing it in the electric car business, and here are a few reasons why. First, the cars are great, as attested by all who have driven them. No, they’re not perfect; they lack the fit and finish mastered by luxury brands like Mercedes, Audi and Lexus—but mechanically, the electric powertrain is far superior to anything possible with a gasoline engine. Second, costs of production are coming down, driven by economies of scale and refinements in the design and manufacturing processes. Third, the company is expanding production as fast as possible, building new Gigafactories in Berlin and Austin and running existing Gigafactories as fast as possible. Four, Tesla is pricing those cars so that they sell as quickly as they are made. Five, it’s taken more than 700,000 pre-orders for its edgy Cybertruck. And six, it’s done all that without any paid marketing and without any dealers. Guess it’s true what they say about building a better mousetrap. Long-term investors can hold tight. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, came alive last week with all the marijuana stocks (after a six-week correction for the group), and is once again rated buy. In fact, last week in Cabot Marijuana Investor, I increased my portfolio position by 50% (and for the four other top U.S. producers as well.) Upgrading to Buy. BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is a squirrely stock, early in its life and prone to sudden sharp moves both up and down. But long-term prospects are huge, if management can make the right decisions. In Carl’s latest update, he wrote, “SPCE shares were up a couple of points this week after a 25% surge last week. Not much news this week though SPCE is getting a lot of attention as one of the earliest in the recent wave of “Special Purpose Acquisition Companies” (SPACs), which I talked about earlier. This concept stock has captured the imagination of many including about eight Wall Street analysts, all of whom have the stock rated a buy. I remain positive on this stock and encourage you to build a position if you have not already done so.” Note: The 50-day moving average is down at 18.4 so the stock could easily retrace its movements to that level. BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has benefitted enormously from the COVID shut-in and will remain a beneficiary in the future as people continue to meet for business and pleasure by video. The stock has moved higher in the past couple of days and is very close to breaking out to a new high. However, as I noted last week, the 50-day moving average is still far below (at 374) so short-term technical risk is substantial. HOLD.

The next Cabot Stock of the Week issue will be published on October 19, 2020.

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