November 1, 2021

With three strong weeks of action behind us, all market trends are now positive—plus we’ve come through the often-tricky September-October period with minimal losses—so I once again recommend that you be heavily invested in a diversified group of stocks that meet your investing needs.

Today’s recommendation is a consumer name you know well, a medical juggernaut that’s cheap and pays a good dividend.

As for selling, I’m doing none today. The portfolio is full, with most stocks going the right direction.

Details inside.

Cabot Stock of the Week 372

All market trends are now positive, and thus I continue to recommend that you be heavily invested in stocks that meet your investing goals. Today’s recommendation comes from Bruce Kaser’s Cabot Undervalued Stocks Advisor, a great source of undervalued companies that often pay good, solid dividends. We recently sold one of them, ConocoPhillips (COP), for a quick profit after I judged the stock to be very extended to the upside, and while I don’t expect the same quick success with BMY, anything is possible, even failure—though I don’t expect it; this stock looks cheap. Here are Bruce’s latest thoughts.

Bristol Myers Squibb (BMY)
Bristol Myers Squibb Company (BMY) is a global biopharmaceutical company with over $46 billion in revenues. In recent years it has divested several major businesses to focus on high-value pharmaceuticals.

The company’s shares remain essentially unchanged from their 2014 price, while the S&P 500 has more than doubled. Investors worry about upcoming patent expirations for Revlimid (starting in 2022) and Opdivo and Eliquis (starting in 2026), particularly as these three treatments currently produce about 65% of the company’s total revenues. A related worry is Bristol’s pipeline of new treatments that would replace the lost revenues.

The shares are attractive for two reasons. First, low expectations (low valuation) minimize the downside risk should the anticipated weak fundamentals actually arrive, yet if the fundamental reality is stronger than feared the shares offer considerable upside potential. BMY shares trade at only 7.5x estimated 2022 earnings, well-below major peers that typically trade at 12x or higher. On EV/EBITDA, Bristol’s shares trade at a modest 6.7x, a sharp discount to major peers that trade around 9-10x or higher. The BMY valuation implies a dour profit outlook.

Second, acknowledging the patent expirations that will arrive this decade, Bristol is reducing its fundamental risk through a multi-pronged revenue-and-profit-replacement strategy. Bristol has a robust pipeline of internally developed treatments that offer potentially sizeable new revenues. Additionally, its acquisitions of Celgene and MyoKardia, and possibly future acquisitions, provide new growth potential that complements Bristol’s research expertise. And, Bristol has signed agreements with several generics competitors that could extend its patent window. These agreements reflect the strong underlying demand for its “key three” products, such that the primary issue is pricing, not volumes.

All-in, it is likely that a reasonable worst-case scenario is for flat revenues and earnings throughout the patent expiration years. Any indication that revenues could sustainably grow should boost BMY’s share price considerably. Brokerage analysts’ revenues and earnings estimates through 2023 show slow but steady growth, suggesting an improving foundation. In its third-quarter earnings report, Bristol’s management reiterated its 2021 earnings guidance. Analysts are modestly raising estimates for next year.

Bristol-Myers has a solid balance sheet. It has an investment-grade credit rating – management has stated its commitment to maintaining this rating. The very reasonable $39.7 billion debt balance is partly offset by a large $15.7 billion cash balance. Bristol generates vast free cash flow of about $15 billion a year. For perspective, this annual free cash flow is equal to nearly 12% of the company’s market value. Bristol is using this cash flow to whittle away further at its debt, repurchase $3.5 billion in shares (this year to date) and maintain (or possibly increase) its dividend. This dividend produces a highly appealing 3.4% dividend yield.

Overall, BMY shares look poised to provide a solid total return to investors with limited downside risk – an attractive prospect in an expensive stock market.

Current Recommendations

With the addition of Bristol Myers Squibb, the portfolio is once again fully invested—and there are no stocks that deserve to be sold today. We’ve come through the seasonally treacherous September-October period with only minimal losses, and odds are now good that the bull market will run right through the end of the year. Details below.

Changes
None.

Ambarella (AMBA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, makes state-of-the-art computer vision chips that are in great demand by intelligent vision systems—and the stock hit another new high today! Last week in Cabot Growth Investor, Mike wrote, “AMBA is off to a good start for us, extending higher as the market has come alive. Helping the cause are some big auto makers (including Ford and Volkswagen) saying the chip shortage is easing; that doesn’t directly impact Ambarella, but as overall production grows, so should demand for its computer vision chips. On the M&A front, the firm is buying a company named Oculii, which offers radar imaging products that boost resolution up to 100 times; once integrated into Ambarella’s chips, it should boost its positioning and broaden its target markets (even into robotics).” BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a much slower grower, and it pays a nice dividend, but it hit a new high last week and has pulled back minimally since. In his update last week, Tom wrote, “Another day, another new high for this chipmaker and software company stock. That’s the way it’s been going for AVGO recently after uninspired performance for most of this year. It’s up over 12% in October. It had a solid quarter reported in September. It’s also likely holding up better during the chip shortage as it’s a priority customer. It had been a good value. Now, it’s finally got some momentum too.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is another slow grower, but it hit new highs on a couple of days last week and has since pulled back normally. In his update last week, Tom wrote, “This infrastructure partnership has risen to uncharted territory. It’s been making a series of new all-time highs over the past week. But even after the recent surge it has performed on par with the overall market YTD, returning 23%. It’s a defensive play and a slow mover. But earnings should grow at a faster clip after the recent Inter Pipeline acquisition. Plus, it could get a boost if an infrastructure bill is passed.” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, dipped as low as 53 a month ago but it’s been rallying back since. And Bruce says it’s still a good value; In his latest update, he wrote, “Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet. CSCO shares have about 7% upside to our 60 price target.” BUY

CrowdStrike (CRWD), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here last week, hit a new high on Tuesday and has pulled back normally since. In his update last week, Mike wrote, “CRWD looked like it wanted to get going earlier this week after deepening a relationship with Amazon Web Services, but that move disappeared as growth stocks sold off. Still, overall, we view these ups and downs as normal, and fundamentally, there’s little doubt demand for its Falcon platform (both from expansion among its 13,000-plus clients and bringing new clients onboard) will soar going forward. Hold on if you own some, and if not you can pick up shares around here.” BUY

Dexcom (DXCM), originally recommended by Mike Cintolo in Cabot Growth Investor, rocketed out to a new high last Friday on big volume after the company reported an excellent third quarter. Revenue was up 30% from the prior year to $650 million (mainly due to new customer additions), while EPS was down 5% from the prior year to $0.89. Going forward, management increased its forecast for 2021 revenue to $2.425 - $2.450 billion as momentum for the company’s continuous glucose monitoring solutions remains strong. HOLD

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, hit another new high today! In his latest update, Mike wrote, “FND has earnings out in a week [on Thursday November 4], which will obviously be key, but we’re impressed with the stock’s action (holding the vast majority of its recent upmove), the action of larger peers (both Home Depot and Lowe’s look great) and the continued rate of new warehouse openings (two more coming this week). The big questions will concern any supply chain issues and when growth will reaccelerate after some tough second-half comparisons this year. In terms of the stock, we’re willing to give FND some wiggle room—it’s a two-steps-forward, one-step-back sort of actor, as are many cookie-cutter plays—but we’ll see what comes.” HOLD

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, gapped down last week after releasing its third-quarter report, but that just makes it a better value in Bruce’s world, where the price target is 69. I’ll relay his full thoughts on the third-quarter results next week. BUY

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, has pulled back modestly from its record high hit last Monday. Third-quarter results will be released Wednesday, November 3. HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, continues to look very strong, trading down just slightly from the record high hit last Tuesday. In Carl’s latest update, he wrote, “Marvell’s semiconductor chips are used in a number of growth applications such as 5G wireless networks, cloud computing, automotive, and industrial markets. Several Wall Street analysts have raised estimates and Credit Suisse recently upgraded the stock, calling Marvell ‘one of the most strategic assets’ in semiconductors.” BUY

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, bounced off its 200-day moving average five weeks ago and is dramatically up since then, primed to break out above resistance in the 87 region where the stock peaked in both January and September. In his latest update, Tom wrote, “It’s tough to figure out this regulated/alternative utility stock recently. It just sort of bounces around like a high-quality utility stock, going in and out of favor. But it used to be more and will be again. It should mainly be a fantastic way for conservative investors to play the growth in clean energy. But investors seem to have forgotten all about clean energy for the time being as conventional energy has gotten red-hot in the recovery. But NEE should be back to its old ways when the market normalizes.” BUY

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, hit a record high two weeks ago, pulled back to its 25-day moving average last week, and is now on course to return to that high and almost certainly break through it. In his update last week, Carl wrote, “SE shares pulled back a bit this week though the stock has gone from 200 to 340 so far in 2021. The company expects that its e-commerce revenue will grow 121% this year. Sea’s aspirations are increasingly global, as its e-commerce arm Shopee plans to expand into Poland, India and Spain and is looking at Brazil and France. I also see further potential upside to Sea because of strong momentum in its gaming portfolio and increasing fintech revenues. I would be an incremental buyer of this stock but long-time holders should definitely take partial profits.” HOLD

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, first topped 60 in early January, and since then has been trading in a range between 55 and 60, preparing for its next advance. In his update last week, Bruce wrote, “Sensata reported a strong third quarter, with revenues rising 21% (17% net of the effects of acquisitions and divestitures) and adjusted earnings increasing 32% to $0.87/share. Revenues were about 2% above the consensus estimate while earnings were 5% above the estimate. However, the company’s fourth-quarter guidance was light – revenues are now expected to be about 3% below the consensus while adjusted earnings per share are expected about 9% below. The mixed news left investors with an unclear near-term direction. We retain our Buy rating as the longer-term outlook remains encouraging.

In the quarter, most metrics were healthy. Revenues were impressively strong considering that the company’s end-markets were mixed – heavy vehicle off-road was strong (up 31%), automotive was weak (down 22%) and aerospace/other was slow (up 3%). Sensata outgrew the market in each of these segments. Gross margins and operating margins also expanded in the two major divisions: Performance Sensing and Sensing Solutions. Sensata attributed much of its strong quarter to good supply chain management, particularly regarding chips.

Corporate expenses increased as Sensata continues to spend on its ‘Megatrends’ projects that offer longer-term growth in attractive yet still emerging product categories. Free cash flow is fine (a sizeable inventory increase drained some cash) and the balance sheet is sturdy and underleveraged, so the company is resuming its share buyback program and will probably resume its dividend, as well as also look for more acquisitions.

The company continues to develop its electrification capabilities. It is working to move up the value chain from supplying components for electric cars and trucks to building subsystems of batteries and eventually to full energy storage solutions for all types of vehicles. Compared to gas-powered vehicles, Sensata said their EV-based orders have 20% more per-vehicle content.

The problem for the fourth quarter is that the company sees little improvement in tight automotive industry conditions, weighing on sales. Also, they suspect that customers have built up extra inventory of Sensata components, which buoyed third-quarter sales but will probably be worked down, reducing fourth-quarter and 2022 sales.

As a side note, there probably is a decent amount of chip stockpiling throughout the entire supply chain, along with double- and triple-ordering. When the chip shortage begins to ease, we anticipate a drop in pricing and volumes as customers work off this extra inventory. Part of this demand taper will be offset by continued strong demand in the auto industry as vehicle inventories are sharply below healthy levels, requiring above-trend car production to restore balance.

Fourth-quarter earnings will be weaker due to the lower revenue guidance, higher component costs and a heavier penalty from the strong dollar which makes overseas profits less valuable in dollar terms. The company’s 2022 outlook remains unchanged. ST shares have about 35% upside to our 75 price target.” BUY

Signet Jewelers (SIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here three weeks ago, hit another new high today, so trends are good for America’s largest jeweler. As Cabot Top Ten Trader is generally not a long-term owner of stocks, this may not be a long investment, but I’ll stick with it as long as the trend is strong. BUY

Snowflake (SNOW), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, is a young, fast-growing stock with great prospects as a cloud enterprise data warehouse services provider. The stock, which is just over a year old, has enjoyed strong buying power recently as the story has become better known, and is now heading for its old high of 429. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has delivered an absolutely astonishing performance recently, climbing 34% since the company released an excellent third-quarter report less than two weeks ago—and it’s up again today. Yes, the stock is highly overvalued by traditional measures, but the automotive industry is in a major transition, and there’s no doubt in anyone’s mind now that Tesla will be a major player going forward, and that’s why buying power has overwhelmed selling power recently. Short term, the fact that buying volume has been shrinking recently tells us this strength is likely to fade soon, but long term, I remain very bullish on the company, in part because of the potential of the firm’s energy business (energy is an even bigger industry than the automobile industry). HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, squeaked out to a new high last week and has pulled back normally since. BUY

Veeco Instruments (VECO), recommended by Carl Delfeld in Cabot Explorer, has just put together a string of strong days and is very close to breaking out to a new high. In his update last week, Carl wrote, “This is an American high-quality provider of state-of-the-art semiconductor fabrication equipment. The company delivers the leading-edge technology to U.S.-based and international high-end class chipmakers, some of which are 100% reliant on Veeco technology. Revenue growth for 2021 may be up 30%, and earnings growth may be even better. Veeco represents a backdoor play on semiconductors. I recommend that you acquire shares if you have not already done so.” BUY

The next Cabot Stock of the Week issue will be published on November 8, 2021.

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