Cabot Stock of the Week 320

The bull market is alive and well, as both of Cabot’s trend-following market-timing indicators are now positive, so I continue to recommend that you be heavily invested.

Today’s recommendation is a fast-growing company helping businesses in the cloud, one of today’s major growth themes. Aggressive investors should love it.

However, the addition of this stock means I need to sell one, and the unfortunate victim is the stock that’s our biggest loser (not that we have many).

Full details in the issue.

Cabot Stock of the Week 320

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The overall investing environment remains quite positive, with both of Cabot’s main trend-following indicators now in positive mode. Obviously, there’s a major event coming up that adds the risk of unexpected outcomes, but everyone knows about that, which means investors have discounted the most likely results. Bottom line: trends are good and continued heavy investment in a diversified portfolio of stocks is recommended. Today’s recommendation is a fast-growing company from the selections of Mike Cintolo, who recently added it to his portfolio in Cabot Growth Investor. Here are Mike’s latest thoughts.

Datadog (DDOG)
Some of the best stock performers throughout history have been what are known as “follow-on” opportunities—companies that thrive as a secondary effect of some major change going on in the world. A classic example was hotels; when flying became commonplace decades ago for both leisure and business, there was a need for places to stay. Voila! Hotels began to be built up all over the place, launching some of the biggest, well-known chains that are still around to this day.

It’s a similar (but more complicated) story with Datadog. The catalyst was cloud computing; as companies have moved to the cloud, it’s allowed them to build all sorts of custom apps for their operations. That’s been a great thing, but it’s presented a new challenge: how to monitor all of them, not only to make sure that they’re working as designed but also whether they’re working with each other. More important still, tracing specific events that could hinder performance and gaining general insight on how the apps are being used (and hence, how they could be improved).

Broadly speaking, this sector is known as infrastructure monitoring and application performance management, and Datadog has one of the top platforms to address these issues. And the market is huge and growing—basically every piece of cloud infrastructure has to be constantly monitored, so as firms get rid of on-premise setups, demand for Datadog’s offerings only increases.

Of course, unless you’re a tech aficionado, the details of the company’s platform can give you the proverbial ice cream headache. Some of the things it can provide include auto-generated service overviews of app performance, graphical error rates and latency reports, automatically collected logs from a variety of sources, alerts on any performance issues (including testing user journeys and experiences online), visual reports on load times and frontend errors, traffic flow monitoring, new code problem detection and a variety of real-time interactive dashboards.

As investors, what counts more than the nitty-gritty is that the solution is (a) regarded as best-in-class, especially for infrastructure monitoring, and (b) is very well rounded, offering clients more of a one-stop shopping destination, which is becoming more attractive as clients are moving huge amounts of technology to the cloud.

Sure to help the cause is a recent partnership with Microsoft; Datadog’s services are now available as a so-called first-class service on that firm’s Azure cloud platform, basically making it easy for all of Azure’s customers to use Datadog. It’s likely to attract many new customers, and it’s also a perception-changer, as it’s the first third-party vendor to be integrated into one of the huge public cloud providers.

Not that Datadog was thirsty for growth—revenues had been booming for many quarters (even the slowdown in Q2 saw 68% revenue growth), earnings are in the black (six cents and five cents per share in the past two quarters) and the sub-metrics have been very impressive. In fact, Datadog has now had a same-customer growth rate above 30% for 12 straight quarters (!) as clients expand their usage, mainly due to the company continually expanding its offerings (68% of clients are now using at least two products vs. just 40% a year ago).

Analysts see growth slowing some going forward (revenues up “only” 35% in 2021), though we tend to think that will prove very conservative, especially as the pandemic drives everything online and the Microsoft deal helps attract new customers. The firm’s next quarterly report is likely out in early November.

As for the stock, it exploded out of a base in early May and basically doubled in just a few weeks. The 11-week rest that followed was normal given that advance, and the Azure deal prompted a massive-volume breakout near the end of September. We think DDOG is a decent buy around here. BUY.

Current Recommendations

Overall, our holdings are performing quite well, but the addition of Datadog to the portfolio means I must now choose something to sell to keep the portfolio at 20 (my limit). At first glance, it’s a tough choice; the stocks that are strong look too healthy to sell (and none are at blowoff levels), while the stocks that are weak have compelling stories that promise they will be higher eventually. But in the end, the decision is easy, made by adhering to one of the most important rules of all for growth investors—cut losses short. That means Nikola (NKLA) gets the axe. Details below.

Changes
Nikola (NKLA) to Sell.

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 since then both the stock and the average are up modestly. But the moving average has flattened out, as AEM is basically where it was at the start of August. Technically, this could prove to be a great launching pad, so if you haven’t bought yet, it’s not too late. BUY.

Azek (AZEK), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, continues to trend higher, and that’s not surprising; I think the firm’s plastic-based construction productions should see higher demand. Still, it’s worth remembering that this small stock can be volatile. 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, “B&G will report third-quarter earnings around the end of this month. Those earnings are likely to be very strong and the company has said that 2020 earnings will be significantly higher than the year before. The stock pulled back during the selloff in early September but has since climbed back. Despite the fact that BGS has returned over 70% YTD, it is still reasonably valued. This stock was 50 a few years ago (currently 29). The good earnings and likely continuing strong results post Covid should make this one a solid performer.” BUY.

Bloom Energy (BE), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, gapped down last Thursday (soon after I recommended taking partial profits), but the stock is still above its 50-day moving average, which is still trending strongly up. If you haven’t bought yet, you might be able to get it on a pullback to that average, which is now approaching 17. BUY.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, has pulled back minimally from the new high it hit two weeks ago. In his latest update, Bruce wrote, “There was essentially no news on Columbia during the week. We note that other apparel companies like Levi Strauss have had strong earnings reports, suggesting that Columbia will have a similarly favorable report. The shares currently trade at 22.2x estimated 2021 earnings of $4.17. The earnings estimate increased by one cent from a week ago. For comparison, the company earned $4.83/share in 2019.” 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, “Look up “niche player” in the dictionary and you’ll see DLR’s picture. These are weird properties that didn’t even exist a few years ago. Data centers house technology systems, and technology only gets bigger and bigger. DLR got into the business a few years ago and has become one of the largest REITs on the planet. In addition to that, the stock doesn’t care what the overall market does. It has a beta of 0.25. The world can go to hell in a handbasket and DLR couldn’t care less. This is a great stock that should continue to trend higher no matter what.” BUY.

Eli Lilly & Company (LLY), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, spiked higher two weeks ago on news about the company’s Covid-19 antibody treatment—and then gave those gains back last week. In his latest update, Tom wrote, “The stock has been in the news lately for having one of the leading Covid-19 drug candidates. It’s good press and it is reflective of Lilly’s innovation and powerful pipeline. But I’m not buying it because of that. The main reason to consider the stock is the fact that it has lots and lots of potential new drugs. The company spends 25% of sales on R&D every year. The segment employs 23% of its workforce and spends $5.5 to $6.0 billion annually. That’s a significantly larger commitment than its peers. The pipeline is the key to this business. New drugs are how these companies succeed and grow. And Lilly has been spectacular. Lilly specializes in developing drugs and treatments for unmet medial indications, where there is a higher chance of FDA approval and higher market share and profit margins. The drug company has a very strong presence in Diabetes (Trulicity, Basaglar, Jardiance), Oncology (Alimta, Cyramza, Vezenio) and new drugs in Immunology (Taltz and Olumiant). Of particular note, Diabetes treatment Trulicity reported 29% sales growth in the first half of this year with revenues of $2.5 billion. Retevmo recently received FDA approval as a treatment for lung cancer, but also reported very positive phase III results in preventing the recurrence of breast cancer. That could make the drug a blockbuster. The stock tends to thrust higher and then consolidate for a while before doing it again. This should be an ideal time to get in. It’s also worth noting that LLY was highly resilient during the bear market selloff in March. It’s a solid down market performer that you can confidently own in uncertain times. Lilly has a proven ability to actually execute. And I trust it.” 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. And with the latest report on the growth of the Chinese economy (up 4.9% in the third quarter, if the numbers are to be believed), prospects are good. The stock hit a new high two weeks ago and has pulled back to its 50-day moving average since. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, remains soft, but Bruce remains optimistic. In his latest update, he wrote, “Brokerage firm Guggenheim upgraded TAP shares last week to a “Best Idea,” highlighting an improving longer-term outlook due to the Topo Chico and Yuengling joint ventures. The firm also wrote favorably about Molson Coors’ recession-resistant products and the shares’ compelling valuation. Guggenheim raised their price target to 62 from 58. TAP shares rose 2% in the past week. The shares have about 66% upside to our 59 price target. 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, remains very close to the record high it hit a week ago. In his latest update, Tom wrote, “The market hates oil and gas. But it embarrasses itself by fawning all over alternative energy. This regulated and alternative energy utility has now eclipsed Exxon (XOM) in market cap. This company is really feeling its oats and it’s making like Apple (AAPL) and Amazon (AMZN) and splitting its stock four for one, effective October 26. After a terrific 2019, the stock is up almost 30% YTD. The stable earnings combined with growth from alternative energy is making this stock a superstar.” HOLD

Nikola (NKLA), originally recommended by Tyler Laundon in Cabot Early Opportunities , has great potential in the long run as it works to accelerate the growth of America’s hydrogen transportation economy, but we don’t have time to wait. The fact is, this stock remains our biggest loser, and its slot in the portfolio can be better filled by a stock that’s performing better. If NKLA strengthens, perhaps we’ll try again. SELL.

Pinterest (PINS), originally recommended by Mike Cointolo in Cabot Growth Investor and featured here two weeks ago, remains within spitting distance of a new high. In his update last week, Mike wrote, “We think the stock has a bright future, but the near-term will likely come down to the Q3 report (due out October 28); analysts see sales up 35% and earnings of two cents a share, but as with every online operator, the key will be whether the huge growth trends seen in the summer (ad revenue up 50% in July) have completely vanished or if there’s been a sea change among advertisers. We’re optimistic, but if you’re a new buyer, it’s prudent to keep new commitments small this close to the report.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, closed at a record high last Wednesday and may eclipse that today. In his latest update, Tom wrote, “Guess what: Apple (AAPL) is rolling out its new 5G phone. Sure, this was anticipated. You could see it coming a mile away. But somehow the actual reality on the ground juices the stock price. The Apple phones use Qualcomm’s chip, and Qualcomm gets royalties as each phone is sold. QCOM stock has coincidentally run up to a new all-time high. This was always going to happen. And now it is happening. Let’s see how far this stock will run. It’s still on a huge uptrend and I’ll bet there’s a lot more gas left in the tank.” BUY.

Quanta Services (PWR), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here last week, is strong, hitting another new high today. In last week’s update, Bruce wrote, “The stock trades at 18.2x estimated 2020 earnings of $3.35 and about 14.9x estimated 2021 earnings of $4.07. The estimates are unchanged in the past week. On estimated 2021 EBITDA, the shares trade at an 8.9x EV/EBITDA multiple. BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, has pulled back moderately from last week’s high but remains in a strong uptrend. In his update last week, Carl wrote, “Sea shares took a rest this week after surging 10 points the previous week. One issue to keep an eye on is the progress that Amazon is having in Southeast Asia, where it launched operations one year ago. Amazon is bringing to Singapore free two- to three-day delivery on a broad assortment of local products for all customers with an order minimum, free one-day delivery for Prime members, free two-hour delivery on groceries and household essentials, and access to Prime Video. Amazon priced its Prime subscription in Singapore at just a little more than $2/month, aiming to grab market share. Keep in mind that a majority of Sea’s sales come from its Garena digital gaming platform, which would not be disrupted by Amazon. 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, hit a record high last Monday and is off slightly since, though selling pressures are not worrisome. In his update last week, Carl wrote, “This company is a dominant global semiconductor chip fabricator with tremendous economies of scale in a capital-intensive industry. Since the beginning of 2004, Taiwan Semiconductor shares have returned almost 1,000%; Samsung’s have gained more than 400%; and Intel’s are up less than 100%. I maintain a buy rating.” 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 409, draws closer. This is a very constructive pattern—so much so that Mike Cintolo highlighted the stock again in Top Ten last week. Here’s what he wrote: “Tesla needs no introduction, as it’s probably one of the most news- (and rumor-) generating stocks out there ... which isn’t our favorite situation. But there’s no question the stock is one of the real leaders of this advance, thanks to two main drivers. The most powerful is that perception of the future of electric vehicles has increased dramatically (one analyst sees the sector growing 20% annually for more than a decade). And with Tesla’s new additions to its lineup, it targets a market of eight million units annually, rapidly taking share as the upper class moves to EVs. The other big reason for the firm’s success is its own operations; after years of tripping over themselves, Tesla’s production efforts have been a big plus, meeting the big demand that’s out there. (Many think the firm should be in the ballpark of its 500,000 annual production goal going forward.) And, finally, also helping is optimism about its other operations, with solar demand expected to rise and Tesla’s latest Battery Day highlighting many advances that could eventually drive prices down meaningfully going forward. As for the numbers, after years of on-and-off performance, earnings have kicked into gear, and that should continue in 2021, with sales (up 39%) and earnings (up 70%) expected to soar. The next big event comes October 21, when Q3 results are due—analysts see sales up 31% and earnings of 56 cents per share, but just as important will be any outlook in demand and reservations…Buying so soon ahead of earnings is a risk, but we’re OK starting with a small position here and buying more if the quarterly report is well received.” HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, surged with the market from late September, peaked at 22 a week ago, and is now holding firm in that neighborhood. Certainly some of the strength in the sector can be attributed to perceptions that Kamala Harris (if elected) would decriminalize marijuana, but I think a bigger factor may be the fact that New Jersey resident will soon vote on legalization—and if they approve it, neighboring states New York, Pennsylvania and Connecticut will soon follow in a grab for tax revenue. If you haven’t bought, you can buy here. BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, jumped higher Friday and continued the move today, hitting its highest price since July. In Carl’s latest update, he wrote, “This week the company gave an update on the next steps for its SpaceShipTwo powered test flights. “We expect our first spaceflight from Spaceport America to occur later this fall and we are pleased to confirm that we are still on track to meet this time frame. The first powered flight will have two pilots on board and will contain three payloads that are part of the NASA Flight Opportunities Program. It will be the first to take off from Virgin Galactic’s Spaceport America in New Mexico. A second powered test flight will follow with a crew of two test pilots in the cockpit and four mission specialists in the cabin. The primary objective of the second powered flight will be to evaluate the full customer cabin and hardware, as well as procedures and training details.” I remain positive on this stock and encourage you to build a position if you have not already done so.” 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 beneficiatry in the future as people continue to meet for business and pleasure by video. The stock has now hit new highs three days in arow, extending its distance above its 50-day moving average. If you’re enjoying the fast profit, I recommend that you lock some of it in now. HOLD.

The next Cabot Stock of the Week issue will be published on October 26, 2020.

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