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Stock of the Week
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Cabot Stock of the Week 321

With the election just around the corner, there’s a lot of uncertainty in the air. Nevertheless, the bull market is alive and well, as both of Cabot’s trend-following market-timing indicators remain positive, so I continue to recommend that you be heavily invested.

Today’s recommendation is an old friend that is back in the limelight as the online world is increasingly hungry for software that enables machines to understand human voices. It’s a good story, and the stock is on a good pullback now.

As for the current portfolio, there’s just one sell (for a small profit), to make room for the new recommendation.

Cabot Stock of the Week 321

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The overall investing environment remains positive, though recent weakness in growth stocks in particular means buyers of aggressive stocks should favor low-risk entry points. Obviously, the election next week 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 an old friend that is back in the limelight as its voice-recognition software enjoys growing demand thanks to the pandemic. The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

Nuance Communications (NUAN)
Nuance has a history dating back over 20 years and has gone through numerous changes over that time. Today, it is a story about a software company that has finally begun to find its groove after more than a decade of wallowing in the mud.

The company, which adopted the name Nuance in 2005 following a merger with ScanSoft, was an early pioneer in voice recognition technologies. Today, Nuance develops conversational AI solutions that can understand, analyze and respond to human language.

The stock’s current strong performance follows a 2019 reorganization that has made Nuance a leaner and meaner AI and machine learning company. The transition focused on five things: (1) spinning off of the auto business into a publicly traded company named Cerence (CRNC), (2) selling the imaging business, (3) winding down mobile consumer solutions, (4) cost saving initiatives and (5) debt paydown and/or share repurchases.

With the first four of those items checked off the list Nuance is now completely focused on its two strongest markets – Healthcare Solutions and Enterprise Solutions – as well as migrating to the cloud, new product development and international expansion.

The Healthcare segment includes clinical speech and language understanding solutions, which help clinicians, radiologists and care teams accurately capture clinical information. It also offers Intelligence Solutions that can improve decision-making across the continuum of care. Examples of everyday use cases include collecting patient records, processing reimbursements and sharing previous procedure notes.

Demand is driven by compliance risk, financial pressures, risk of clinician burnout and the pursuit of better experiences for patients. The best-known solution in this market is the company’s Dragon Medical Cloud, which is used by over 550,000 physicians daily and accounts for roughly 86% of segment revenue. Roughly 90% of hospitals and 80% of radiologists rely on Nuance Healthcare solutions daily.

The Enterprise segment offers intelligent engagement solutions that help companies communicate with customers. As in the Healthcare segment, these solutions are grounded in speech and language understanding, but they’re deployed across voice, mobile, web and messaging channels. A prime example is a targeted text message regarding a new product offering for an existing customer, followed by automated customer care guidance to help the individual purchase the new product. Nuance’s Enterprise solutions are used by 85% of the Fortune 100, including 19 of the top 20 financial organizations and the top 10 telecommunications providers outside of China.

Recently, management has struck a positive tone as business in hospitals is improving. Dragon Medical is now over 60% migrated to the cloud, and management is enjoying a successful rollout of new solutions, including Dragon Ambient Experience (DAX), an ambient clinical intelligence solution.

This all translates into a smaller and more focused company that can begin to drive growth in the coming years. Because of the spinoff, impacts of the pandemic and transition to the cloud, analysts expect revenue to be down around 8% to $1.47 billion in 2020. But that growth rate should jump up to 4% in 2021 and then accelerate toward roughly 10% annual growth thereafter. Additionally, the earnings trough should occur in the current year as adjusted EPS dips 9% to $0.82, then improves by 6% to $0.87 in 2021 and heads higher thereafter, likely at a greater pace than revenue.

As for the chart, NUAN has been public since 1995 but spent most of the last eight years trading in the 11 to 18 range. The trend began to improve when the reorganization was announced in 2019. NUAN broke above 20 in February when Q1 earnings came out. The market crash in March pulled the stock back to 13.5, but the turnaround story, coupled with the recovering market, pushed NUAN back to its pre-pandemic high of 23.5 in June.

Shares have been blazing higher since, showcasing a pattern of higher lows and higher highs that should continue provided management keeps delivering on the turnaround story.

NUAN-102620

NUANRevenue and Earnings
Forward P/E: 39Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 35($mil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 15.1%Latest quarter338-25%0.18-10%
Debt Ratio: 37%One quarter ago370-18%0.2191%
Dividend: NATwo quarters ago418-10%0.270%
Dividend Yield: NAThree quarters ago472-12%0.330%

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 10/26/20ProfitRating
Agnico Eagle Mines (AEM)9/22/20791.0%800%Buy
Azek (AZEK)9/9/20350.0%350%Hold
B&G Foods (BGS)7/28/20276.8%283%Buy
Bloom Energy (BE)8/2/20140.0%1610%Sell
Columbia Sportswear (COLM)7/21/20790.0%9620%Hold
Datadog (DDOG)10/20/201100.0%99-10%Buy
Digital Realty Trust (DLR)9/29/201472.9%1524%Buy
Eli Lilly & Co (LLY)9/1/201482.1%141-4%Buy
Huazhu Group Limited (HTHT)3/30/169.280.0%42357%Hold
Molson Coors Brewing Co (TAP)8/25/20380.0%35-9%Buy
NextEra Energy (NEE)3/27/191941.9%30256%Hold
Nikola Corp (NKLA)Sold
Nuance Communications (NUAN)New0.0%33Buy
Pinterest (PINS)10/6/20430.0%5016%Buy
Qualcomm (QCOM)8/11/201082.1%12515%Buy
Quanta Services (PWR)10/13/20610.3%611%Hold
Sea Ltd (SE)1/21/20410.0%162296%Hold
Taiwan Semiconductor (TSM)8/18/20803.3%868%Buy
Tesla (TSLA)12/29/115.931.0%4156898%Hold
Trulieve (TCNNF)4/28/2010.420.0%23123%Buy
Virgin Galactic (SPCE)10/11/199.240.0%1898%Buy
Zoom Video (ZM)3/17/201080.0%520382%Hold

Overall, our holdings are performing quite well, with the majority on shallow corrections over the past week or two. But the addition of Nuance means we’ve got to sell something to keep the portfolio at 20 stocks or fewer, and this time, the choice is easy. It’s Bloom Energy (BE), which Tyler recommends selling in favor of more attractive stocks. Details below.

Changes
Bloom Energy (BE) to Sell.
Quanta Services (PWR) to Hold.

Agnico Eagle Mines (AEM), originally recommended by Mike Cintolo in Cabot Growth Investor, remains in the trading range centered on 80 that has confined it for nearly three months, ripe for an eventual breakout to new highs. If you haven’t bought yet, and you believe that economic policies both in the U.S. and globally will send gold prices higher, you can still buy here. BUY.

Azek (AZEK), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, illustrates perfectly the challenges of investing in stocks with minimal institutional support; volatility tends to be higher. Still, I think the firm’s plastic-based construction products should benefit from higher demand as the housing market booms, so I think holding will pay. HOLD.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, has flattened out at 28 over the past week, trading just under its 50-day moving average, so this looks like a good time to buy, if a low-risk food company is what your portfolio needs. In his latest update, Tom wrote, “The packaged food company announces earnings in the next few weeks. The last report showed massive earnings growth and the stock got a nice pop over the following weeks and months. B&G is benefitting from the lockdowns in the near term as people are eating at home more. The trend should remain strong in this quarter. As well, B&G is likely to benefit from a continuing eat-at-home trend beyond the pandemic.” BUY.

Bloom Energy (BE), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, has continued to sink, and last week Tyler recommended selling and taking the small profit. Here’s what he wrote. “We’ve had a bumpy ride with BE. We got into the stock in mid-July when it was strong but since then we’ve held on through two big pullbacks. The recent rally in clean energy stocks took BE to a fresh high, and it’s retreated 22% since. Overall, I like the story and the potential but I’m not sure the upside potential adequately compensates us for the volatility along the way. There are other clean energy names on my list that seem compelling. Let’s take this opportunity to step aside from BE with a roughly 14% gain. It’ll go back on my watch list.” Ideally, if you bought this, you took partial profits as I suggested back near the peak. If so, you might want to stick with the remainder of your position long-term. But I’ll follow Tyler’s lead and exit here. SELL.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, hit a new high of almost 99 on big volume last Thursday (telling us someone knows something) and has pulled back normally since. In his latest update, Bruce wrote, “With the stock approaching our price target of 100, we are moving COLM shares to a Hold. We think the company remains well-positioned but given its exposure to consumer spending that may remain dampened, we are sticking to our price target and the fundamental assumptions behind it.” Note, Columbia will announce third quarter results this Thursday, October 29 after the market closes.” HOLD.

Datadog (DDOG), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, has pulled back normally since but remains in a strong uptrend. In his latest update, Mike wrote, “DDOG got off to a good start for us, but the weakness in most growth stocks during the past week has pulled it down sharply in recent days. Of course, it’s always possible the latest breakout will fail, but to this point the selling volume has been reasonable, especially compared to the record-setting volume seen as shares took off a few weeks back. Plus, the stock is still above support in the mid/upper 90s—like most names, the evidence favors the next major move being up. Obviously, if growth stocks or the market as a whole really give up the ghost, all bets are off, and the upcoming earnings report (due November 10) will be key. But until proven otherwise, we’re going with the idea that DDOG should find support as it pulls in, especially given the company’s sterling growth profile. If you own some, grit your teeth, and if you’re not yet in, we think picking up a small position here marks a solid risk/reward situation.” BUY.

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, so the recent pullback offers a good buying opportunity if you’re hunting for both yield and appreciation potential. In his latest update, Tom wrote, “This data center REIT is in a growth business as technology infrastructure will only get bigger. But DLR is also a great stock to own in an uncertain market. It doesn’t seem to care what the overall market does. It has a beta of just 0.25. The stock has returned over 32% YTD as well.” BUY.

Eli Lilly & Company (LLY), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, remains soft but Tom’s not worried. In his latest update, he wrote, “The stock got knocked back a little bit as its very promising Covid treatment testing got stalled because of “safety concerns.” The market is overreacting to this drug because of the times. I never put much stock in it, although it could still be successful. Lilly has a fantastic pipeline with lots of promising drugs. In the grand scheme of things, this Covid drug won’t make much difference, whether it’s successful or not. The recent selloff presents a great opportunity to get into one of the best companies in the business at a time when the price is temporarily depressed.” 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 we’re in it for the long haul, as I’m confident the long-term prospects are great. Short-term, the stock is on a normal pullback, sitting right on its uptrending 50-day moving average. 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, “The shares have about 69% upside to our 59 price target. The shares trade at 9.7x estimated 2020 earnings of $3.59 and 9.0x estimated 2021 earnings of $3.88. Both estimates ticked down slightly from last week. These valuations are remarkably low. 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, remains very close to the record high it hit two week ago, revealing that selling pressures are minimal. In his latest update, Tom wrote, “NextEra reported third quarter earnings and beat consensus estimates slightly. The company grew year-over-year earnings by 11%, which is solid growth for a utility, especially during a recession. The alternative energy company grew earnings by 23% over last year’s quarter. While the earnings were solid, there was no big surprise and the stock was down slightly on the day. NEE was already trading near the all-time high with a YTD return of 26%. As a reminder, the stock will split 4 for 1 effective October 26th. You will then have four times as many shares at one quarter of the price. The split should help performance as the price will be affordable for more investors.” HOLD

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, has been very hot in recent days, thanks in part to an excellent earnings report by Snap (SNAP). In his update last week, Mike wrote, “Pinterest will report earnings next Wednesday (October 28), which will be key—analysts are looking for sales growth of 35% and earnings of a couple of cents per share. But investors are already getting indications the wind is at Pinterest’s back: Snap’s (SNAP) bullish quarterly report has most thinking that online advertising demand has recovered much faster than expected, and for Pinterest in particular, some analysts believe user growth has remained strong (it was up 39% in Q2) and the long-term monetization opportunity (it gets far less revenue per user, especially internationally, than other go-to online/e-commerce sites) will drive years of rapid growth. PINS itself looks great, having popped to all-time highs on Wednesday after the SNAP report. We’ll stay on Buy, but given the upcoming report and the fact that the stock is extended, we’d be keeping any new buys small and looking for dips.” Additionally, the stock was recommended last week in Cabot Early Opportunities by Tyler Laundon, who wrote, “With an IPO date in 2019, PINS is still a fresh name as far as public companies go. Most importantly, it looks like the stock is just about to get going.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, has pulled back minimally from its high of two weeks ago, so it’s still in a healthy, attractive uptrend. In his latest update, Tom wrote, “The chipmaker became a better company after the settlement with Chinese firm Huawei. It improved a risk factor that had been holding the stock back. The company also should start benefiting from increased royalties as 5G phones, including Apple’s (AAPL), are coming to market. Of course, Qualcomm announces third quarter earnings the day after the election, so good news might get lost. But this stock should still have more good days ahead.” BUY.

Quanta Services (PWR), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here two weeks ago, looks great, off a bit from its high of last week. In last week’s update, Bruce wrote, “Quanta, based in Houston, Texas, is a mid-cap provider of specialized engineering and technical services to the electrical power, telecom and natural gas pipeline industries. The stock has essentially reached our 61 price target, but given the fundamental strength of its operations we are raising our target modestly to 64. The company reports on Thursday, October 29, before the market opens. The stock trades at 18.7x estimated 2020 earnings of $3.35 and about 15.4x estimated 2021 earnings of $4.07. The estimates are unchanged in the past week. On estimated 2021 EBITDA, the shares trade at an 9.0x EV/EBITDA multiple. With PWR close to our (new) price target, we are moving the shares to a Hold rating.” I’ll do the same. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, looks fine, still on a modest correction from its high of two weeks ago. In his update last week, Carl wrote, “Shares took a rest this week after surging 10 points the previous week. We need to keep an eye on the progress that Amazon (AMZN) is making 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, and free two-hour delivery on groceries. But Forrest Li, Sea Limited’s CEO, recently summed up the company’s momentum well: “We are moving into the second half of 2020 firing on all cylinders. Each of our businesses is successfully adapting to capture the immediate growth opportunity in front of us. Each of them is also ideally positioned for the long-term with a significant runway ahead … Garena had another excellent quarter and achieved several historical highs.” Keep in mind that a majority of Sea’s sales come from its Garena digital gaming platform, which would not be disrupted by Amazon. There’s no change in my hold rating but aggressive investors can add to their position.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, looks great, on a minor correction from its high of two weeks ago. In his update last week, Carl wrote, “Shares were choppy and flat this past week after impressive third-quarter earnings were released. Revenue was up 29%, earnings per share were up an even higher 36%, and the company’s return on equity expanded 5% to an impressive 31%. Fueling those gains is the company’s leading position at the most advanced semiconductor nodes, which includes the highly popular 7-nanometer node, which made up 35% of sales, and the new 5-nanometer node, which just began volume production and made up 8% of sales. The new Apple (AAPL) 5G phone is powered by the A14 bionic chipset and features 11.5 billion transistors – 40% higher than the A13. I maintain a Buy rating on the stock.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, released a great third quarter report last week, beating analysts’ estimates on both revenue and earnings (the fifth consecutive quarter of earnings) and keeping alive the possibility that the company could deliver 500,000 cars this year. Technically, capacity is now 840,000, and that will increase as the factories in Berlin and Austin come on line. Interestingly, the stock did little in reaction to the great news, partly because a lot of it was expected and partly because growth stocks have been a bit soft. Long-term, however, the future remains very bright as Tesla retains a large lead in the EV business and is ramping up installations in the solar and energy storage business as well. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is one of the leading vertically integrated multi-state operators in the U.S.—with particular strength in Florida, where it has roughly 50% market share. Technically, the chart is healthy, well above its 50-day moving average but still below its peak of 26, hit back in August. But fundamentally, the biggest unknowns revolve around next week’s election. First, how much ground will the Democrats, who are more likely to move legalization forward, gain? Second, will New Jersey voters choose legalization? Third, how will voters lean in the other states with marijuana on the ballot—Arizona, Mississippi, Montana and South Dakota? And finally, will the sector’s uptrend continue, or has the market already discounted significant political change? Time will tell, but right now, the chart still says buy. BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, hit a recovery high last week but has plunged lower since, coming right down to the top of its September gap‚ where support is likely. In Carl’s latest update, he wrote, “This stock has been a bit more volatile as some of the targets for the company have slipped from the fourth quarter of 2020 to the first quarter of 2021. Last week the company gave an update on the next steps for its SpaceShipTwo-powered test flights. I remain positive on this stock and encourage you to build a position if you have not already done so.” Short-term, anything is possible, but long-term, I think the potential is enormous, because this company is well-funded and well-managed. 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 pulled back normally from its high of last week. HOLD.


The next Cabot Stock of the Week issue will be published on November 2, 2020.

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