Cabot Stock of the Week 325

The bull market remains alive and well, and I continue to recommend that you be heavily invested in a diversified portfolio of stocks.

Last week’s recommendation was well-known Coca-Cola (a true value stock) while this week’s is a fast-growing company that’s never made a profit, but is expected to make bundles, someday. You know its name too!

As for our current portfolio, most trends are good, but we do need to sell one stock, just to keep the portfolio at twenty stocks. That’s a process that ensures we always own the best!

Cabot Stock of the Week 325

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The bull market is alive and well, as investors look forward to vaccines that enable economic reopening. So I continue to recommend that you be heavily invested in a diversified portfolio of stocks. Last week we went conservative with Coca-Cola, and today we’re swinging back to the aggressive side with a well-known name that has major growth potential, even though it has no earnings yet. It was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

Uber (UBER)
Every year there are usually one or two super-high-profile IPOs, often well-known companies that millions of investors touch and feel on a daily basis. However, the market is a contrary animal, and more often than not, these popular IPOs (after a week or two of upside) will often fall apart, entering a long hangover stage as (a) insiders cash out, (b) sky-high perception wanes and (c) some fundamental warts appear.

However, after a few months (sometimes a year or two) of flopping around, if these top-notch companies can stage breakouts, they often can go on sustained runs lasting a long time. Many of today’s most respected firms (Visa, Facebook and Alibaba among others) went through this process, and today, it looks like Uber (UBER) is next in line, as the stock has lifted from a year-long post-IPO haze in recent weeks.

Of course, we don’t buy just because of a chart; that can only get you so far in the stock market. But Uber also has plenty of fundamental plusses that should keep big investors putting in buy orders in the months ahead, the biggest of which is that the company appears to be set for major growth no matter what the economy does. The firm’s traditional Rides segment, which revolutionized travel patterns in urban settings all over the world, gives the firm exposure to the economic re-opening/normalization theme, while Uber’s Delivery is riding a secular, long-term change in more people getting delivery instead of takeout.

The good news is that the arrow is pointed up for both businesses today. Rides, as you’d expect, saw sales fall off a cliff as the pandemic hit (gross bookings fell 72% quarter-over-quarter in Q2), but, interestingly, cash flow in that business remained in the black and the recovery is well underway, with bookings up 94% in Q3 vs. Q2 and strength continuing in October (bookings up 10% from September). While current COVID case counts are rising, the market seems to be looking six months ahead to an end (or at least a major lessening) of the pandemic as vaccines hit the mainstream.

That alone should bring about a big rebound in Uber’s results next year, but there’s just as much excitement about the firm’s Delivery business, which is the fastest-growing food delivery operation worldwide. Even as countries opened up somewhat, gross bookings here grew 23% sequentially (up 135% from the year before) and the EBITDA loss continued to shrink. There’s no sign of any slowdown, either, especially as Uber is moving into adjacent areas (such as grocery delivery, which is now up and running in 30 markets with a $1 billion run rate, and business delivery services).

Another positive came from the election, as California voted to allow Uber (and Lyft) not to classify drivers as employees, effectively given the firm a green light to operate as normal in the most populous state in the country.

Looking ahead, Wall Street sees the top line rising 40% in 2021 and, importantly, management continues to stand by its forecast that the overall company (Rides, Delivery and the corporation as a whole) will be EBITDA breakeven sometime next year as it focuses on profitability. Given recent trends, our guess is even these figures will prove very conservative as increased business falls to the bottom line.

Back to the stock, the election referendum helped the stock pop above resistance November 4, ratchet higher in the days that followed, and then the bullish Q3 report sparked a push as high as 50. It’s since chopped around just below that figure, and some near-term wobbles wouldn’t surprise us. But the top-notch growth profile, the long post-IPO base and the recent upside power all bode very well for the months to come.

Current Recommendations

The addition of Uber means we are once more over our cap of 20 stocks and therefore something must go—and this time, the victim is Azek, the alternative building material company whose stock has stalled with the rest of the industry. All told, though, our portfolio is doing quite well, thanks to the bull market, and thus I continue to recommend that you be heavily invested. There will come a time for caution (and cash), but we’re not there yet. Details below.

Changes
Azek (AZEK) to Sell.
General Motors (GM) to Hold.
Trulieve (TCNNF) to Hold.

Azek (AZEK), originally recommended by Tyler Laundon in Cabot Early Opportunities advisory, appears to be building a base at 34, but its 50-day moving average is trending down, and now Tyler has recommended selling the stock, writing, “With a few exceptions most of the construction materials manufacturers and construction/home improvement retailers have seen their stocks level off lately, and some have even pulled back significantly since vaccine news has broken. I’m not sure I buy the argument that construction and home renovation activity will abate when the pandemic is gone, but regardless we’ve seen shares of Azek stall out with the group. Let’s step aside and reassess as we work through the next phase of this pandemic.” Technically, the stock doesn’t look bad, so there’s an argument for long-term holding if you’re patient. However, knowing the cyclicality of this industry and these stocks, I’m selling now. SELL.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, has dipped to support at 26, depressed by optimism about the economy reopening. In his update last week, Bruce wrote, “The packaged food company stock has not benefited from the vaccine rallies. The reason it’s being shafted is that the market sees it as a stock that benefited from the pandemic. BGS has returned 58% YTD and 76% over the past year. Such stocks are being cast aside in favor of beaten down stocks that are seen to benefit from the next phase of the recovery. But this stock should be in demand again after this market phase fades because it is now a better company that’s still cheap with a high dividend.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here last week, is technically at an attractive entry point today. And fundamentally, the case presented by Bruce last week still stands. In his update last week, Bruce wrote, “Coca-Cola has a sturdy balance sheet, with its $53 billion in debt well-covered by cash flow and partly offset by over $21 billion in cash/equivalents. Its $0.41/share quarterly dividend is also well-covered by solid free cash flow, and the company is committed to growing this dividend. It is targeting a 75% payout (of free cash flow) over time. The dividend yield is currently a respectable 3.1%. Recent results point to a recovery from pandemic-depressed volumes. While second quarter global volumes fell 16%, and revenues fell 28%, third quarter volumes fell only 4% while revenues were only 9% below the prior year. Management commentary points to continued improvements in October. Third quarter revenues and profits were higher than consensus estimates, suggesting that investors don’t fully appreciate the strength of the company’s fundamentals. Impressively, Coca-Cola’s comparable operating profit margin increased to 30.4% from 28.1% a year ago, despite lower revenues. When the higher-margin away-from-home business returns when restaurants, stadiums, and other venues re-open, the company’s margins could expand further. Comparable earnings per share fell only 2% compared to a year ago. While the near-term outlook is clouded by pandemic-related stay-at-home restrictions, the secular trend away from sugary sodas, high exposure to foreign currencies, and always-aggressive competition, the longer-term picture looks bright. KO shares are not statistically cheap at 25x 2021 estimated earnings, but they are undervalued. They remain about 11% below their February 2020 high, while the company has arguably become more valuable. The shares trade at 25.3x estimated 2021 earnings of $1.89 and 23.0x estimated 2021 earnings of $2.11. The shares pay a 3.1% dividend yield.” BUY.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, continues to rally back from its selloff three weeks ago after a disappointing earnings report, and Bruce still rates it a buy. In his update last week, he wrote, “As price-sensitive investors, we moved Columbia shares back to a BUY. Columbia’s long-term earning power appears unimpeded but is being pushed out into the future. Also, we think the company is being exceptionally conservative with its forward guidance, given the wide range of uncertainties and the danger that another significant “miss” would more severely damage their credibility. Columbia’s shares rose 3% this past week. The shares have about 20% more upside to our 100 price target. The shares trade at 22.2x estimated 2021 earnings of $3.77. The earnings estimate was unchanged from last week. For comparison, the company earned $4.83/share in 2019.” BUY.

Digital Realty Trust (DLR), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, treaded water last week, sitting just on top of its uptrending 50-day moving average. In his update last week, Tom wrote, “This data center REIT has been in a sideways pivot in the midst of a solid longer term uptrend. The stock tends to bounce around a lot on an upward trajectory. Recently, it has moved to the low point of a typical range. It’s worth watching in the event that the stock breaks the trend to the downside. But I believe another upward move is more likely in the weeks and months ahead. By the way, the company also has a great business in the growing technology infrastructure business. I’ll be watching this one closely.” HOLD.

Eli Lilly & Company (LLY), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, remains under its 50-day moving average, but the stock is looking healthier. In his update last week, Tom wrote, “I like health care right now and I love LLY. Lilly has the most consistent pipeline in all of big pharma. It has vastly outperformed its peers of the past several years and I see no reason why it will not continue to do so going forward. After the election, the sector is likely to continue to be back in favor. While some of the other large pharmaceutical companies have sexy stories right now, Lilly is the one with a proven ability to actually execute. The stock just had a nice bounce off the recent low and we’ll see if the momentum continues in the weeks ahead.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here just three weeks ago, is up 25% since our recommendation and up 56% from its low of late September. It’s hot! But it’s no longer cheap and for that reason, it’s no longer as attractive—for value investors. In his update last week, Bruce wrote, “This past week, GM shares rose about 3%, and have gained about 67% since the end of June. The stock has about 7% upside to our 45 price target. GM shares trade at 8.9x estimated 2020 earnings of $4.77 and 7.2x estimated 2021 earnings of $5.84. The 2020 estimate slipped modestly this past week while the 2021 estimate increased modestly. With the price surge, we are reducing our rating to Hold.” I’ll do the same. HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is China’s largest hotel operator, with 6,507 hotels and 637,087 hotel rooms in operation in 16 countries—and we’re in it for the long haul, as the long-term prospects are great. The stock hit a record high last week (on big volume) and has pulled back slightly since. And today Mike Cintolo recommended it in Cabot Top Ten Trader, writing, “In its Q3 update (it hasn’t reported full results yet), Huazhu reported that room rates rose 32% from the prior quarter, occupancy of 88% was up from 69% and the firm restarted its expansion, with 319 net new hotels opening in the quarter (520 opened, 201 closed; the firm now operates near 6,400 hotels across China). There’s always the chance for further virus-related hiccups, but as of now analysts see 63% revenue growth in 2021 while earnings pop well into the black. Over time, this year’s hard times will probably be a good thing, as the cost cuts and closure of underperforming locations means the nascent recovery should push the bottom line much higher than expected.” Thus, aggressive investors could buy here, but I’ll keep it rated hold. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, hit a recovery high last week and has pulled back minimally since. In Bruce’s update last week, he wrote, “We anticipate that the company will resume paying a dividend mid-next year. A $0.35/share quarterly dividend is possible, which would provide a generous 3.1% yield on the current price. Molson Coors’s recent results showed that the company is making progress with its turnaround and that investors underestimate this progress. Net revenues fell 3.1% but were about 4% better than consensus estimates. Adjusted per share earnings were nearly 60% better than estimates. Underlying EBITDA was 1% higher than a year ago and 26% higher than estimates. The shares have about 31% upside to our 59 price target. The shares trade at 10.7x estimated 2020 earnings of $4.21 and 10.8x estimated 2021 earnings of $4.17. Both estimates ticked up from last week. These valuations are low. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.1x 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, 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 fully recognized by the market.” BUY

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, continues to trend slowly higher, as alternative energy boosts returns for the big utility. In his latest update, Tom wrote, “It’s been a crazy year in a crazy world. But NEE doesn’t seem to care. It just continues to forge ever higher, despite the price and despite the wild market. It has a formula that is loved in any environment. It offers the safety and reliability of a great traditional utility with exciting growth in alternative energy. You don’t have to worry about the stock but you get a benefit normally reserved for growth investors. Next year will probably be another great one for the stock.” HOLD.

NovoCure (NVCR), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, is stepping higher, aiming for its high of 140 from mid-October. And the stock is in Cabot Growth Investor as well, where Mike wrote last week, “Our half position with NovoCure is off to a relatively quiet start—we got in after its first pullback to the 50-day line, and it’s since chopped around with growth stocks. The firm received European approval last week to launch its Optune Lua system (to treat mesothelioma) in that continent, where there are 13,000 new cases annually. It’ll probably take a few months to get things up and running but this should eventually provide a nice bump to business. Back to the stock, NVCR is now six weeks into a normal rest period following an initial breakout; we’ll keep our eyes open, but we continue to think the stock will head higher from here.” BUY.

Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities, surged higher last Thursday on the back of an excellent third-quarter report and has continued higher since, so momentum is good here, but so is the possibility that the stock needs a rest. I’ll relay Tyler’s thoughts on the prospects next week but leave it rated Buy for momentum-lovers. BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, sold off sharply two weeks ago on the original vaccine news but has rallied back since, advancing for eight consecutive days before today. In his update last week, Mike wrote, “We took partial profits in PINS last week, partly because the stock was taking on water and partly because we had a good-sized position after its recent run. But that might have been a mistake, as the stock has bounced excellently off its 25-day line since then and threatened new highs today! There’s a view that Pinterest could be dinged by any economic normalization going forward, and maybe that’s true to some extent; user growth has accelerated nicely during the past two quarters (up nearly 40%) as people looked for ideas in the new work/play-at-home reality. But as opposed to some “pandemic” stocks, we think growth here is likely to remain very strong—an economic recovery will actually boost advertising overall (as we saw in Q3), and the bigger idea here is company-specific, as Pinterest’s website offers advertisers an entirely new step in the buying process to actually get in front of customers (not to mention the company’s improved ad tools and e-commerce related links are helping the cause). Obviously, the stock is not the company, so we don’t rule anything out, but Pinterest has the look and smell of a fresh leader that’s set for years of rapid growth no matter how or when the pandemic ends. If you took some off the table with us, just sit tight and give the stock room to maneuver. If you don’t own any, we’ll restore our Buy rating, but aim to start small and on weakness.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, hit another new high last week and has pulled back minimally since. In Tom’s update last week, he wrote, “Despite fantastic performance of late, this chip maker still sells at a reasonable valuation of 19 times forward earnings. That’s cheap for a fast-growing technology company like this. The company is reaping huge benefits as the 5G iPhones roll out and it gets royalties on the sales. It is also well positioned to benefit from the 5G proliferation in many other ways. It has a great fundamental backdrop and strong momentum.” BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, remains in a long and strong uptrend—attractive for momentum investors but also ripe for profit-taking by investors looking to reduce risk. In his update last week, Carl wrote, “As markets again approach and attempt to move new highs, I remain selective with new ideas and always suggest taking some profits on positions that have done particularly well. Remember that with great success come great expectations. One company that fits that description is Sea Limited (SE), which just reported third-quarter financial results. This Singapore-based company’s revenue doubled to $1.2 billion for the quarter and it boosted annual forecasts for two key businesses. But the stock pulled back a bit as quarter-on-quarter growth in e-commerce gross merchandise value dropped to 16%, from 29% in the second quarter. Nevertheless, the stock is still up more than 300% so far in 2020 and its shares have surged about 1,400% since the start of 2019, sending its market value to more than $80 billion. Revenue at its gaming group, Garena, increased 73% to $569 million while revenue from Shopee and other services climbed 113% to $489.5 million. Still unprofitable, Sea’s total sales and marketing expenses in the third quarter increased 87% to $471 million. But if you look at the quarter on a year-over-year basis, the trend line is both explosive and impressive. In Indonesia, where Shopee is the largest e-commerce platform, it registered over 310 million orders in the third quarter, or a daily average of around 3.4 million orders, an increase of more than 124% year-on-year. Separately, a new report from Google, Temasek Holdings, and Bain & Company showed that demand in Southeast Asia for online services, including e-commerce and digital payments, has skyrocketed. But Garena is their big profit center, thanks mostly to their Free Fire game, which is extremely popular in Latin America and Southeast Asia. More recently, it has entered the India market. While I’ll maintain my hold rating on Sea, aggressive investors may wish to add shares here and if you have not taken any profits along the way of Sea’s tremendous run, I encourage you to sell some shares to book some profits ahead of 2021. At some point, Sea’s growth will slow and management will need to be ahead of the curve in managing the market’s expectations. This may actually help the stock since this might be the inflection point for Sea to see growth balanced with profitability. Aggressive investors can add to their position at these levels, but I will keep Sea as a hold.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, remains very healthy, very close to breaking out above its high of last Monday’s big jump. In his update last week, Carl wrote, “Shares made a nice move from 91 to 97 on significant volume—always a good sign. 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% while Samsung’s have gained more than 400%, and Intel’s less than 100%. China recently announced major investments in its semiconductor industry though the country is several generations behind Taiwan Semiconductor, which dominates global chip fabrication with a market share of 56%. The company delivered an impressive return on equity of 31% in its most recent quarter. I maintain a buy rating on the stock.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, broke out to record highs this morning, leaving behind the textbook base it had built since the end of August. One reason behind the move, which started last week, was a Morgan Stanley report that analyzed the potential of the firm’s Network Services businesses (basically all the firm’s software yields recurring income and very high margins) and resulted in a change of its target price from 360 to 540. Another reason is the stock’s forthcoming inclusion in the S&P 500, which will take place December 21. Tesla is changing the world and the market realizes it. 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. And it’s one of the most well-run as well, posting profits since 2017—while many peers are still losing money. But the stock and sector may be due for a pause. Last week in my Cabot Marijuana Investor update I wrote, “Trulieve’s third-quarter revenues were $136.3 million, up 13% from the prior quarter and up 93% from the prior year, and adjusted EBITDA was $67.5 million, or 50% of revenue, representing the 11th quarter of consecutive growth and profitability. The company opened nine stores in the third quarter, achieving its 2020 goal of 68 stores nationwide. It was awarded a processor permit in West Virginia, achieving a presence in six states. And just last week the company announced the closing of the acquisition of PurePenn and Keystone Relief Centers. At a cost of $66 million, this acquisition gets the company a strong foothold in Pennsylvania with a 35,000 sq. ft. growing and processing facility (soon to be expanded to 90,000 sq. ft.) and three operational medical marijuana dispensaries. And from my perspective, the company needs that route to expansion. Focusing almost exclusively on Florida did enable the company to turn profitable years before most of its peers, but Trulieve has lost a step in the race to get bigger in recent quarters and now it’s playing catch-up.” When that update went out my Marijuana Portfolio was up 56.1% YTD, while the Marijuana Index was up 10.1% (post-election buying is what put the index in the black), but since then the sector’s strength has faded a bit. Now, this may just be a normal pullback, but experience tells me that it may be more, so I’m downgrading TCNNF to hold now—and if you haven’t taken partial profits yet, you could consider doing that now. Long-term prospects remain very bright for both Trulieve and the sector, but if there’s a downwave coming for the sector we’ll want to raise cash. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, continues to climb higher; it just topped its mid-October high and is now targeting its July high of 27. In his update last week, Carl wrote, “Shares rose from 21 to 22.6 despite the company’s announcement that it is delaying its first powered test flight scheduled from November 19-23 due to spiking coronavirus cases in New Mexico. But attention on the commercial space sector jumped this week with Elon Musk’s SpaceX launching its first operational crewed mission to the International Space Station. As the only pure play space tourism stock in the public markets, SPCE remains your best way to play for exposure to this megatrend. If the next two missions run smoothly, Virgin Galactic plans to send founder Richard Branson up in the first quarter of 2021. Aggressive investors should be buying at these levels ahead of 2021 developments.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to recover from the big selloff that followed the news of a Covid vaccine—but remains below its 50-day moving average, weighed down perhaps by concerns that business growth will slow in the post-pandemic economy. Long-term, I’m very bullish on the business, but short-term, a lot rests on what management will say when it releases third-quarter results after the market close next Monday, November 30. HOLD.

The next Cabot Stock of the Week issue will be published on December 7, 2020.

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