Cabot Stock of the Week 322

With the election tomorrow, the biggest cause of uncertainty will soon be behind us, leaving investors able to focus once again on what’s important—growth and valuation.

In the meantime, it’s worth noting that the market’s technical strength deteriorated last week, turning our intermediate-term timing indicator negative once again. For that reason, among others, we have a couple of sell recommendations today.

As for today’s recommendation, it’s one of America’s most well-known companies, and selling for a bargain price as management steers the big old beast into what could be an exciting future.

Cabot Stock of the Week 322

[premium_html_toc post_id="219018"]

With the election tomorrow a nearly universal concern, my optimistic expectation is that it will quickly pass, and investors’ attention will revert to what really matters—growth and valuation. With last week’s selection, I leaned heavily toward the growth side of the ledger, recommending the voice-recognition heavyweight Nuance (NUAN), and with this week’s recommendation, I’m leaning strongly the other way, to a well-known old firm that’s not growing at all, but is selling at a dirt-cheap valuation. The stock was originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and here are Bruce’s latest thoughts.
General Motors (GM)
General Motors under CEO Mary Barra (since 2014) has transformed from a lumbering giant to a well run and (almost) respected auto maker. An important component of the GM story is its improved strategic focus. The first and ongoing component of this shift is reducing its involvement in operations that no longer fit. The company has smartly exited many chronically unprofitable geographies (notably Europe and India) and trimmed its lower-value passenger car roster. Another example is GM’s recent sale of its credit card business to Goldman Sachs, from which it received $2.5 billion in cash while offloading a potential source of credit risk in a segment that was ancillary at best to GM. Such moves have had the side benefit of boosting the profitability and adaptability of the company during the pandemic.

The second component, which increasingly drives the value of GM, is its steady shift toward more valuable businesses. In its core gasoline-powered operations, the company has boosted its North American market share with increasingly competitive vehicles, particularly light trucks. Second quarter results show the merits of this shift: despite a 53% revenue decline during the worst of the pandemic, GM’s operating profits were nearly breakeven – and sharply better than analysts’ estimates. Its China joint venture continues to make good progress, particularly as GM’s car sales there recently posted their first quarterly sales growth in two years.

The GM Financial segment, which provides credit to car buyers, has remained well-managed and well-capitalized, such that it recently sent an $800 million cash dividend back to its GM parent company. While it may yet be tested in the pandemic recession, the second quarter results showed that its credit quality has remained sturdy.

Perhaps most critical to its future, and its appeal to investors, General Motors is making impressive progress in developing electric vehicles (EVs) and autonomous vehicles (AVs), to the extent that they are now considered near industry-leading. One strong indicator is that other companies across the size and quality spectrum, ranging from Honda Motor Company to Nikola Corporation, are working to partner with GM in developing EVs. The recently introduced GM Hummer EV, which lists for $99,995, sold out its entire first year of production in a matter of days, showcasing GM’s ability to successfully compete. As the auto industry and consumer demand will shift toward EVs over the next decade, GM is well-positioned to be one of the market share leaders.

GM Cruise, its AV business, is making impressive progress, as well. While the widespread adoption of these self-driving cars may be a decade or two away, the company appears to have a strong position. GM’s approximately 69% stake in GM Cruise is rising in value as outside investors, including most recently mutual fund company T.Rowe Price, continue to fund its development. Some estimate that GM Cruise alone is worth $20 billion. Reflecting its progress, GM recently received the first permit that allows fully autonomous vehicle tests on regular San Francisco streets.

The company also has a valuable battery business, called Ultium. As batteries become an increasingly critical component of EVs, GM’s position through Ultium bodes well for its future. Adding considerable strength to its efforts, GM recently hired an impressive new CFO, who was instrument as CFO during Delta Airlines’ own transformation.

GM trades at a low 6.5x estimated 2021 earnings. This places little value on its non-earning but highly valuable EV program or its GM Cruise and Ultium segments. GM reports earnings this coming Thursday. Estimates have been increasing, suggested rising confidence in its earning power. Investors will want to hear more about possible plans for any spinoffs (we think this is premature) as well as more color on its core gasoline-powered vehicle business.

Overall, GM is becoming an impressive turnaround story that remains considerably undervalued.

That’s the value proposition as defined by Bruce. But technically, the stock is also attractive. In fact, GM was also recommended just last week in Cabot Top Ten Trader, where Mike Cintolo wrote, “GM spent a long time in the 30 to 40 area before the crash this year, which yanked it as low as 15 in the panic. The rebound back to 32 was swift, but that was followed by what turned out to be a three-month, up-and-down consolidation. And now we see a change in character, with GM bolting to higher highs on excellent volume. As with most stocks, the upcoming earnings report presents a risk, but if you’re game, a small position here or on dips could work.”

Current Recommendations

The past week dealt some serious setbacks to many of our growth stocks—and at the same time, Cabot’s intermediate-term market timing indicator gave a sell signal. Thus it’s now important to reduce risk, particularly by cutting back on your riskiest stocks. For starters, we’ll sell Datadog (DDOG) and Quanta (PWR). Details below.

Changes
Datadog (DDOG) to Sell
Digital Realty Trust (DLR) to Hold
Quanta Services (PWR) to Sell

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 worry 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 his Cabot Early Opportunities advisory, has pulled back substantially over the past few weeks, but technically, it hasn’t turned negative yet. And fundamentally, I will believe that the pandemic-related focus on housing will work in Azek’s favor as time goes by. HOLD.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, has not yet gotten going for us, but it still has potential—along with relatively low risk. In his latest update, Tom wrote, “This packaged food company is one of the few stocks that is perfect for the current environment. The business is thriving during the pandemic and with the defensive nature of the business and low beta it should perform well amidst the likely volatility of next several weeks and possibly months. Also, as a high yielding dividend stock with solid growth it should continue to thrive in the post pandemic world as people seek yield in a low interest rate environment. The company is expanding and just purchased the powerful brand Crisco, which is expected to be a significant boost to earnings in 2021.” Third-quarter results will be released after the market close this Thursday. BUY.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, fell sharply on big volume last Friday after reporting third-quarter results, and made little progress today, having found support at 74, which is where the stock bottomed in August. The problem: Analysts’ consensus earnings estimate was $1.26 per share, but the company only managed to deliver $0.94. Following the announcement, some upper level management changes were announced, though CEO Timothy Boyle remains at the helm. If you’ve got it, holding seems sensible for now—but I wouldn’t buy here. I’ll wait for Bruce’s value analysis this week. HOLD.

Datadog (DDOG), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here just two weeks ago, has quickly presented us with a 20% loss, and there’s no rationale for holding on any longer in today’s environment, where growth stocks could easily fall further. Remember, the best rule for growth stock investors is, “Cut losses short.” Mike is also recommending selling today. SELL.

Digital Realty Trust (DLR), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, fell heavily last Friday after reporting third-quarter results, but recovered most of the loss today. Revenues were a record high $1.02 billion (up 27% from the year before) while EPS was $1.54, down 8% from the previous year. I’ll downgrade the stock to hold for now and wait for Tom’s analysis. HOLD.

Eli Lilly & Company (LLY), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, gapped down last Tuesday after some “bad news,” and Tom says that’s created a buying opportunity. Here’s what he wrote. “The stock took a sizeable 6% hit yesterday when the National Institute of Health halted the trial of its most promising Covid treatment. Lilly had been in news as the promising new treatment created some excitement. This is what headline and market hype begets. I didn’t buy Lilly for this drug, but rather for the fact that it has so many promising drugs. Of the 11 new drugs Lilly has brought to market since 2014, 10 of them are growing sales by double digits. The company announced earnings growth of 5% for the third quarter even after writing off the investment for this Covid drug, and it has others.

“You can never bank on one drug no matter how promising it is. And drug disappointments and the selloffs that accompany them are common in the life of any pharmaceutical stock. The market reaction creates a great entry point for this stock. Even after the selloff the stock is up over 20% YTD.” 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 substantial pullback, having fallen through its uptrending 50-day moving average and found support at 39, where it bottomed in mid-September. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, released a third-quarter report last week that exceeded expectations on both sales and earnings and the stock has enjoyed a couple of high-volume up days since. Bruce will provide an update on valuation later this week but there’s little doubt in my mind that on a technical basis, the stock is now more attractive than previously—and if it can close above 39, that would be even better. 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 weeks ago, revealing that selling pressures are minimal. In his latest update, Tom wrote, “The four-for-one split has taken effect. You should have four times as many shares at one quarter of the price. I believe the split will help stock performance going forward as more investors will be able to afford it. Alternative energy will continue to be popular no matter who wins the election. But stocks in the sector could get a boost if Biden wins. Even after running up to all-time highs while the sector floundered, NEE is very strong in this down market so far.” HOLD

Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, is off slightly since then but still attractive on this pullback. BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor and also recommended by Tyler Laundon in Cabot Early Opportunities, thrilled investors with an excellent third-quarter report last week. Revenues were $443 million, up 58% from the year before, while earnings were $0.13 per share, up from a penny the year before. Initially, the stock jumped from 49 to 69, but it’s pulled back to the midpoint of the move since (a normal) pullback), so if you haven’t bought yet, you could buy here. 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 normally from its high of three weeks ago, and remains above its 50-day moving average. In his latest update, Tom wrote, “Considering semiconductor companies are cyclical and can be quite volatile, I find the recent performance very encouraging. In all the recent tumult, QCOM has pulled back from a high of 130 to the current 122. It is particularly impressive that QCOM is holding its own in a down market ahead of the 5G launch of Apple (AAPL) and other smart phones, which just boost earnings and likely the stock. So far so good, but I will keep a sharp eye on this one in the weeks ahead.” BUY.

Quanta Services (PWR), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here just three weeks ago, is hitting new highs today! Unfortunately, I’m now rating the stock a sell, following Bruce’s lead (though I have a caveat below). In last week’s update, he wrote, “Quanta reported strong third-quarter results yesterday, with adjusted per share earnings of $1.40, up 23% from a year ago and well ahead of the $1.09 consensus estimate. Also, the company raised its full-year adjusted earnings per share guidance to a midpoint of $3.58, which includes likely losses of about $0.39 from its Latin America operations that it is exiting, implying that remaining earnings would be close to $4.00/share. The company is clearly executing on its growth strategy. The stock briefly traded above our 64 price target yesterday before closing at 62.66, up about 3% in a choppy but positive overall market. We view the risk/reward trade-off as unfavorable at this point and are moving the shares to a Sell from Hold, with a 54% profit since the stock was recommended last December.” If you’d like to hold PWR longer, you can now treat it like a momentum stock (it’s actually featured in today’s Cabot Top Ten Trader). Hold it as long as it’s going up, and once it stops going up (determined by stops or trendlines), sell it. SELL.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, is still trading above its 50-day moving average but the stock’s momentum has definitely slowed a bit over the past month. In his update last week, Carl wrote, “Founded in Singapore in 2009 as an online gaming company, Sea Limited has since ventured into new business segments, notably e-commerce (Shopee) in 2015 and digital finance (Sea Money) in 2019. Historically, it operates across seven countries in Southeast Asia: Indonesia, Vietnam, Thailand, the Philippines, Malaysia, Singapore, and Taiwan. More recently, it has entered the Latin America and India markets. Its business expansion reflects favorably on its financials. Revenue rose by more than 700% to $2.2 billion between 2015 and 2019. Sea’s strength is its focus on Southeast Asian markets. For instance, Sea launched the Shopee app in 2015 across seven markets simultaneously, in seven different versions and languages. There’s no change in my hold rating but aggressive investors can add to their position and if it pulls back with a weaker market, I will consider moving this back to a buy.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, had a normal three-week correction off its record high, nearly tagged its 50-day moving average on Friday, and is up today, so all seems well technically. In his update last week, Carl wrote, “Shares have pulled back, but I’m not concerned given the company’s impressive third-quarter earnings released last week. Revenue was up 29%, earnings per share were up 36%, and the company’s return on equity expanded to 31%. Taiwan Semiconductor is the world’s leading chipmaker including 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, features an incredible 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, remains in the consolidation pattern that has occupied it over the past two months. Short-term, there’s a lot of investor interest in the myriad competitors that are targeting the EV market (like GM), but long-term, the future remains very bright as Tesla retains a large lead in the EV vehicle business (bringing costs down rapidly even as it expands production), 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. In last week’s issue, I discussed the upcoming 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?”). I also focused on the fact that institutional investment in the sector remains light because of federal illegality—but when it becomes legal, the money will gush in! As for Trulieve, 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). Also, it’s one of the few marijuana stocks that’s actually exceeded its 2018 high, a sign (in my opinion) of how much Wall Street likes profitable companies. Analysts expect third-quarter revenues of $131.4 million for the third quarter, up 85% from the year before, and EPS of $0.20. BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, looks to be stabilizing at the 18 level, so if you haven’t bought yet, this looks like a decent entry point. In his update last week, Carl wrote, “Shares came back this week from 21 to 17 after reaching as high as 24 in the last two weeks, well up from our entry price of 7. SPCE is a long-term speculative holding and a concept stock has been a bit more volatile recently as some targets for the company have slipped from the fourth quarter of 2020 to the first quarter of 2021. This company represents big-time potential and is just one or two flights away from completing all of its necessary Federal Aviation Administration (FAA) milestones. If the next two missions run smoothly, Virgin Galactic plans to send founder Richard Branson up in the first quarter of 2021. Goldman Sachs (GS) initiated research coverage this week with a neutral rating and target price of 19. This analyst’s comments sum up things nicely: ‘Long-term upside potential could be substantial, if SPCE can capture the space travel and supersonic flight opportunity. But the time to realization of the opportunity is very long, customer adoption and recurrence uncertain, and potential for competition not insignificant.’” 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 hit a record high two weeks ago and since then has pulled back to its 50-day moving average. HOLD.

The next Cabot Stock of the Week issue will be published on November 9, 2020.

Cabot Wealth Network
Publishing independent investment advice since 1970.

CEO & Chief Investment Strategist: Timothy Lutts
President & Publisher: Ed Coburn
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2020. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved.