Cabot Stock of the Week 327

Market trends remain very positive as we head toward the end of the year, so I continue to recommend that you remain heavily invested—but with one eye on the exit door. The fact is, sentiment is very high, which means risk is growing—but I can’t argue with trends.

Today’s recommendation is a fast-growing cybersecurity stock with a special focus on the cloud, and great upside potential. Aggressive investors should like it.

But to fit it into the portfolio, I’ve got to sell something, and the victim is another hot growth stock, recommended just five weeks ago and now being sold for a quick 39% profit.

Full details in the issue.

Cabot Stock of the Week 327

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The overall investing environment remains quite positive, with all major indexes in strong uptrends as we head toward the end of the year—and the closer we get to that turning point, the better the odds that investors will delay selling winners until next near. Thus I continue to recommend that you be heavily invested in a diversified portfolio of good stocks. Today’s recommendation is a fast-growing firm in the very healthy cybersecurity market, with a particular focus on the security of cloud-based data and operations. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

CrowdStrike Holdings (CRWD)
Cybersecurity is one of the most dependable long-lasting growth themes out there, and it’s easy to understand why. With the world growing more and more digital, the number of e-thefts continues to increase (including a few high-profile breaches each year). But the problem is not just the greater number of targets; it’s also that as the world has moved to the cloud, all of the systems previously bought and built (many of them patches to firm’s networks) have become outdated.

Just a few years ago, a company’s network was the center of the corporate universe; all security products (VPNs, firewalls) were built to protect that and were placed on-premise. Today, of course, the opposite is true, with people accessing all sorts of apps from a variety of devices from home and the road. In effect, then, large and mid-sized firms have to upgrade and replace all their wares with new-age systems.

There are a few players in this area, some with narrower solutions and some focusing on particular niches. But right here our favorite is CrowdStrike (CRWD), whose Falcon platform we think will be a must-have solution for most blue chip firms (and thousands of others) in the years ahead—in effect, CrowdStrike has the makings of another ServiceNow, Salesforce.com or Workday.

The technology details can be a bit of an ice cream headache, but suffice it to say that the platform is able to protect endpoints (basically any device or server that connects to a network) from even the most sophisticated attacks. And it’s seamless and easy for users—CrowdStrike has every endpoint device download a piece of software that runs in the background and serves as the shield to attacks.

But the real secret sauce is (as the company’s name suggests) the crowdsourcing element. The software on all the endpoint devices communicate data to the firm’s cloud-based system dubbed Threat Graph, which, via a combination of artificial intelligence algorithms and pattern-matching, analyzes it and “updates” all devices with any new threat information and protections. Thus, Falcon as a whole becomes “smarter” the more users it has, and all users benefit from any learning that occurs. In all, Threat Graph processes more than four trillion high fidelity events per week!

CrowdStrike has many different modules it licenses on a subscription basis (indeed, 61% of customers now use more than four modules, while 22% use more than six of them!), allowing clients to get the protection they need as the firm expands into more areas. Endpoint security will always be key, but a big newer focus is cloud workload protection, which involves keeping safe apps and work being done across different cloud environments.

As for competition, there obviously is some, but CrowdStrike seems to have positioned itself as key—indeed, Okta (OKTA), the leader in Identity protection, actually uses Falcon (!), while Zscaler (ZS), which has a cloud security network, has partnered with CrowdStrike to integrate Falcon into some of its offerings. And besides, the bigger picture here is the opportunity to upgrade all the legacy security patches that are still out there.

The company’s growth has been both rapid and reliable; sales have risen between 84% and 88% each of the past five quarters, while earnings have been in the black three straight quarters. The big driver is subscription revenue, with the company’s annualized recurring revenue up 81% in Q3, thanks to a big jump in both clients and the money those clients are spending (same-customer revenue growth remains north of 20%). Analysts see the growth continuing, with earnings up 45% next year and revenues up 40%, both of which are likely very conservative.

As for the stock, CRWD came public in June 2019 and spent the next 14 months going up and down. The breakout came in late summer (nine weeks up in a row was a great clue of persistent buying), and after a six-week rest, the stock catapulted to new highs following earnings. Near-term, some further wobbles aren’t out of the question, but overall, we think CRWD has emerging blue chip written all over it.

Current Recommendations

Overall, our holdings are performing very well, with many hitting new highs, and that’s a sign that you should consider taking partial profits in some stocks. But stay heavily invested—until the market changes course. This week the only change is the sale of NVCR, to make room for CRWD. Details below.

Changes
Digital Realty Trust (DLR) to Sell.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, has had a great week and is now heading toward its August high of 31. In his update last week, Tom wrote, “The company should continue to earn revenues better than pre-pandemic levels for a long time, securing the high dividend and making B&G a better company.” BUY.

Berkeley Lights (BLI), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, has pulled back normally since then and is an attractive buy now if you’re looking for a small growth company focused on supplying equipment for harvesting, culturing, imaging, sequencing and characterizing cells. BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, looks fine technically, preparing to break free from the basing pattern of the past month. In his update last week, Bruce wrote, “Coca-Cola’s sturdy balance sheet carries $53 billion in debt that is well covered by cash flow and partly offset by over $21 billion in cash. The $0.41/share quarterly dividend is also well covered by solid free cash flow. The stock has about 21% upside to our 64 price target. While the valuation is not statistically cheap, at 25.1x 2021 estimated earnings of $1.89 and 22.8x estimated 2021 earnings of $2.11 (both unchanged in the past week), they are undervalued while also offering an attractive 3.1% dividend yield.” BUY.

Columbia Sportswear (COLM) originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, softened a bit last week but the long-term potential remains substantial. In his update last week, Bruce wrote, “Shares have about 15% more upside to our 100 price target. The shares trade at 23.5x estimated 2021 earnings of $3.71. The earnings estimate is unchanged from last week. For comparison, the company earned $4.83/share in 2019.” BUY.

Eli Lilly & Company (LLY), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, gapped up on big volume last Wednesday after the company announced positive phase III trial results for a new diabetes treatment (Tirzepatide). In his update last week (before the announcement), Tom wrote, “LLY should thrive when the health care sector gets moving again, which should be in the next several months.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has pulled back from 46 to under 42 over the past three weeks, but Bruce remains optimistic that higher prices are ahead. In his update last week, he wrote, “The shares have about 12% upside to our newly-raised 49 price target. GM shares trade at 7.4x estimated 2021 earnings of $5.91. This estimate increased by a cent this past week.” 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. Since hitting a record high near 54 a few weeks ago, the stock has pulled back significantly and is now building a base just above its 50-day moving average. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, closed at another new high last Thursday and has pulled back minimally since. In his update last week, Bruce wrote, “Consensus estimates did not change in the past week. Estimates for each year from 2020 to 2022 are currently $4.17, so, the shares trade at 11.6x this estimate for all three years. These valuations are low, although not the stunning bargain from a few months ago. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.5x 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 a low valuation, TAP shares continue to have 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, spent almost two weeks below its 50-day moving average, but the stock poked its head back above the average this morning—and the long-term trend remains up—so I don’t see much to worry about yet. And long-term, I think the company’s focus on renewable energy will continue to pay off as fossil fuels are slowly abandoned. In his latest update, Tom wrote, “This is the world’s largest producer of wind and solar power. It combines this business with a rock solid regulated utility and provides a unique combination of safety and growth. Alternative energy is the wave of the future and the market loves it. Just look at the performance of some of the industry players like Tesla (TSLA). There’s a reason beyond profitability why that stock is up 10,000% over the last ten years. NEE is a way for conservative investors to benefit from the trend. It also helps that a Biden Administration will be very friendly to the cause. Although NEE has pulled back slightly amidst the reopening euphoria, the uptrend is still intact.” HOLD.

Novocure (NVCR), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was on its tenth consecutive up day this morning (before the market turned down), a powerful sign of accumulation by investors who see big potential for the firm’s Optune technology that uses electric fields to interrupt the cell division process that spreads cancers. But this strength has made the stock substantially extended, so I’m going to sell now (partly because I need to sell something to make room for the new buy), take our quick profit and walk away. You could easily hold if you want to target longer-term gains, but be prepared for volatility. SELL.

Nuance Communications (NUAN), originally recommended by Tyler Laundon in Cabot Early Opportunities, closed at a record high last Friday and has pulled back slightly today. If you haven’t bought yet, and you want a piece of a leading voice-recognition stock, it’s not too late. BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, remains in a strong uptrend, with no warning signs. In his update last week, Mike wrote, “A near-term retreat wouldn’t surprise us, but given PINS’ recent breakout (late September) and powerful story, we think any pullback will prove buyable.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, pulled back sharply last Friday, but was flat today and remains well above its 50-day moving average. In his update last week, Tom wrote, “While the stock benefited from the pandemic, it is well positioned for the post pandemic market when 5G becomes a bigger story. Despite the fact that the stock has returned over 90% since being added to the portfolio a little over a year ago, it still sells at about 20 times forward earnings, which is still cheap for a tech stock with strong growth in a hot area.” BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, hit a record high last Wednesday and has pulled back normally since. In his update last week, Carl wrote, “Shares breached 200 for the first time as the company announced it has been granted a license to operate a full-service digital bank by the Monetary Authority of Singapore. I would again recommend that investors take some profits here, but this story will likely continue into 2021. Sea is Southeast Asia’s biggest internet platform with 40 million daily active users. The stock has benefited from strong tailwinds during the COVID pandemic, rising 4x in the last six months. Sea’s business operations are in the e-commerce, gaming, and payments space, which have seen strong user adoption over the last few years.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, pulled back modestly last week but remains in a strong uptrend, well above its 50-day moving average. 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; it benefits from secular trends of advanced computing and 5G going into next year and beyond. In addition, the prospect of a widely distributed COVID-19 vaccine has analysts looking forward to an economic recovery next year. 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, closed at a record high last Tuesday and has lost only a little ground since. Meanwhile, the stock’s 50-day moving average is down at 480, telling us that a drop of 25% is quite possible—though I’m certainly not predicting it. But I will repeat my advice about taking partial profits, particularly if the prospect of losing a chunk of your gains is unappealing. TSLA is the one stock that hordes of amateur investors want to own today—and that doesn’t bode well for the stock’s short-term prospects. Additionally, as I wrote last week, on December 21, the stock will be added to the S&P 500—and history says that after such an event the stock is likely to underperform the index over the next year. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, hit a record high last Friday and held fairly steady today, reflecting both the strong demand for marijuana stocks as 2020 nears an end and the optimism that growing trends to legalization have engendered. Partial profit-taking is an option here (or least raising stops), but long-term, I remain bullish on both TCNNF and the sector as a whole. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high of 36 last Wednesday and has pulled back normally since. And Mike featured it last week in Cabot Top Ten Trader, where he wrote, “Uber continues to have the look and feel of a new leader thanks to two big growth catalysts going forward. The first should involve its Rides segment, which was hammered during the pandemic; revenues fell 68% sequentially in Q2 but began to rebound last quarter and, despite some near-term headwinds (peer Lyft said last week Q4 results will likely come in near the low end of its guidance), big investors seem to be looking over the horizon as the world likely returns to normal in the middle of next year. (Impressively, even during the Q2 plunge, the Rides business was EBITDA positive.) That segment should provide a nice cyclical uplift, but the real driver is Uber’s big move into Delivery services; this is a secular growth area as people become more favorable about having all sorts of things (take-out, groceries, even prescription meds) delivered to their door. Indeed, bookings in this newer segment are tracking about a year and a half ahead of where Rides was at this point in its life, and Uber’s recent $2.6 billion purchase of Postmates only expands the firm’s reach and technology. Bookings growth for Delivery has been accelerating (up 54%, 113% and 135% during the past three quarters) while cash flow is creeping toward breakeven. In fact, taken together, Uber believes it’s on track for overall cash flow breakeven in 2021 as both Rides and Delivery grow in tandem. Analysts see total company revenues up 41% next year, and long-term, the potential for Delivery to grow manyfold is real as take-out delivery hits the mainstream and adjacent opportunities arise for both consumers and small businesses.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, saw its stock double in five weeks leading up to December 7; last week the stock was volatile but made no progress; and then on Saturday the company aborted its first powered test flight—which triggered heavy selling in the stock this morning. Still, the stock remains well above its 50-day moving average, and fundamentally, the company remains in fine shape, with plenty of cash to get it through any delay. In last week’s update, Carl wrote, “As the only pure-play space tourism stock in the public markets, this remains your best way to add exposure to this megatrend. The company’s current plans include space tourism flights for the 700 future passengers who put down refundable deposits. Management plans that a second SpaceShipTwo vehicle will be rolled out for ground and flight testing in the first quarter of 2021, a delay from the end of 2020. A third spacecraft will begin final assembly in 2021. Feel free to take some profits if you bought near the recommendation level; new or aggressive investors can buy at these levels ahead of 2021 developments.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has again pulled back to the 375 level, testing to see if there’s support here. If yes, holding will be easy; there’s still great growth potential for the company as much of the world is likely to stick with Zoom as the pandemic fades. But if the stock can’t hold up above this level (or maybe 350, which was the top of its gap up on September 1), I’ll be tempted to cut it loose. For now, hold. HOLD.

The next Cabot Stock of the Week issue will be published on December 21, 2020.

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