September 13, 2021

The bull market remains intact, so I continue to recommend that you be heavily invested in stocks that help achieve your investing goals.
Today’s featured stock is a small company that’s growing fast and that has huge growth potential as the market for intelligent vision systems booms.
As for the current portfolio, most of our stocks look good, and many are hitting new highs, but I have two sells, Supreme Brands (SPB) and Trulieve (TCNNF).

Details inside.

Cabot Stock of the Week 365

The long bull market continues, with all major indexes looking strong, and thus I continue to recommend that you be heavily invested in a portfolio that meets your investment needs. Today’s recommendation is a young, fast grower in a sector that has enormous growth potential. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader, and here are Mike’s latest thoughts

Ambarella (AMBA)
Chip stocks walk the line between growth and cyclical stocks; while the sector doesn’t get yanked around by a single commodity, it does have big ups and downs and demand has been known to change dramatically in just a few months, which in turn can cause the stocks to have some wild moves. Because of that, we’ve always been a bit cautious with the group.

However, when looking outside of the liquid, well-traded names in the sector (i.e., Nvidia, etc.), there will often be a big winner that emerges by developing a new, leading technology that’s integrated into a new, leading theme. One example from back in the early 2000s was OmniVision, which had chips that were needed for cell phone cameras, which back then were just catching on.

Ambarella looks like the next glamour leader in the chip space, and interestingly, its story is also related to cameras, but it has nothing to do with cell phones.

Ambarella has been around a while, with a specialty in video processing chips, and it’s done good business for years. But instead of resting on its laurels, the firm underwent a big ($550 million invested), prolonged (over four years) R&D spree to develop an artificial intelligence architecture that’s optimized for endpoint applications. Combined with the firm’s video processor, it creates what’s called a computer vision chip that allows machines to visually perceive and make decisions in a sense, which in turn allows for automation in both the Internet of Things and auto markets.

Security cameras are Ambarella’s biggest market, making up about 60% of revenue in the past year, and the potential here is huge: There are 900 million security cameras in the world, and as they’re upgradedto allow for more automation in the years ahead (less need for a person to view it; the system can recognize when something is up), Ambarella is sure to do well.

But the largest prize will likely be the auto market, which is undergoing something of a camera boom. Right now, there are about 1.5 cameras per car, but many newer and more advanced models have five or more, while some future models are likely to have a dozen or more! Ambarella has been making big inroads into this market, with many OEM deals, and this says nothing about the commercial vehicle market, which tends to adopt new technologies before the retail market.

This year, Ambarella’s computer vision chip revenue will probably make up just 25% or so of revenue, but in Q2, both the security camera and auto business showed double digit sequential increases, and the computer vision segment should triple this year. Long-term, there’s no reason demand for these chips won’t continue to boom given the fact that Ambarella seems to have developed a better mousetrap.

The company’s strong core business combined with the new computer vision demand drove a big Q2 beat, which is the main reason the stockhas turned strong; revenues exploded higher by 58%, while earnings lifted more than five-fold (35 cents per share beat by 10 cents). More impressive was the huge guidance raise for Q3; management sees the current quarter bringing in $90 million of revenue vs. the previous consensus of $78.5 million. All in all, it seems that Ambarella is just seeing the fruits of that big investing spree, with analysts anticipating earnings to rise 345% this year (admittedly off a small base) and another 27% next (likely conservative).

As for the stock, AMBA had a nice run late last year and in early 2021 before pulling back sharply and going dead for a few months. But the Q2 report caused a massive blastoff, with the stock exploding to new highs on 18 times average volume, and it’s continued higher since. It’s a bit extended to the upside, but given the upside power, we think AMBA is buyable around here.

Current Recommendations

The portfolio has seen many stocks hitting new highs in recent days (which is great), but I do have two sells this week. Supreme Brands (SPB) has given us an unexpectedly quick profit that I’m going to grab, and Trulieve (TCNNF) continues to underperform, telling me it’s time to take our profits and move on. Details below.

Changes
DocuSign (DOCU) to Hold
Spectrum Brands (SPB) to Sell
Trulieve (TCNNF) to Sell

ASML Holding (ASML), originally recommended by Mike Cintolo in Cabot Growth Investor, is a Dutch manufacturer of high-end photolithography machines in high demand by semiconductor manufacturers—which, as we all know, are working as quickly as possible to fulfill the world’s demand for chips. The stock has been hot, and hit another new high last Friday. At some point it will have a correction, but I’m leaving it rated buy because strength often persists longer than expected. BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been knocking on the ceiling at 500 since February, and the action over the past few weeks says the long-awaited breakout may finally be at hand. In his update last week, Tom wrote, “The semiconductor and infrastructure software solutions company reported earnings last week that beat expectations, with 16% revenue growth and 29% earnings growth over last year’s quarter. The company is not being hobbled by supply shortages and raised guidance for the year. What’s not to like? This is an expensive tech company that is benefitting from the 5G rollout and should continue to generate strong return for many quarters to come. It should move when 5G becomes a market driver and technology stocks move again.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a slow mover, but it’s hitting new highs! In his update last week, Tom wrote, “BIP acts just like a good dividend stock should. It just ever-so-quietly forges slowly higher while paying a solid dividend. And prospects have improved fundamentally. The Inter Pipeline deal will close this quarter and likely boost earnings to a higher level in the quarters ahead. But the stock does have a tendency to make new highs and then consolidate for a while.” HOLD

ChargePoint (CHPT), originally recommended by Carl Delfeld in Cabot Explorer, gapped up after releasing a great quarterly report two weeks ago, but since then the stock has sunk back down to support at 20—which I think is an attractive buying area. In his update last week, Carl wrote, “ChargePoint shares, despite the company reporting that quarterly revenue grew 61% year over year and raising its full-year revenue guidance by 15%, have been quiet and are trading at a bit less than half their peak share price (44) from January of this year. This is a relatively new Explorer recommendation. With more than 112,000 charging points in North America and Europe, ChargePoint is one of the biggest EV charging companies in the world. The company claims to control 70% of the charging market share in North America. This lead is a huge advantage because of network effects as the company already has partnerships with more than roughly 60% of the Fortune 50 companies. ChargePoint has told prospective investors it believed its revenue would soar from about $135 million in 2020 to almost $1 billion by 2024, and to more than $2 billion in 2026. Therefore, I believe that the stock can be accumulated at its current levels.” BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, has pulled back normally (to its 25-day moving average) since hitting a new high three weeks ago. In his latest update, Bruce wrote, “CSCO shares have about 2% upside to our recently increased 60 price target. The shares trade at 17.2x estimated FY2022 earnings of $3.43 (unchanged in the past week). On FY2023 earnings (which ends in July 2023) of $3.67, the shares trade at 16.1x. On an EV/EBITDA basis on FY2022 estimates, the shares trade at a 12.2x multiple. CSCO shares offer a 2.5% dividend yield. We continue to like Cisco.” BUY

Dexcom (DXCM), originally recommended by Mike Cintolo in Cabot Growth Investor, is a leading maker of diabetes monitoring and controlling tools and the stock is strong, hitting another new high today. I recommend buying on any pullback. BUY.

DocuSign (DOCU), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high five weeks ago, but last week sold off sharply after the quarterly report (though I’m happy to see that the volume of selling is fading). In his update last week, Mike wrote, “DOCU has taken a turn for the worse, experiencing a short-term breakdown that prompted us to place the stock on Hold. Fundamentally, nothing is wrong here—once again in Q2, not only did sales (up 50%) and earnings (up 176%) top expectations, but the sub-metrics impressed, with billings lifting 47%, same-customer revenue growth coming in at 24% and total customers improving 17% just in the first half of the fiscal year. The question here is whether growth will decelerate in a big way after the surge of the past year; analysts hiked their 2022 estimates modestly after the recent report and are looking for “only” 27% earnings growth (down from 94% this year). That could be a reason for the breakout failure this week, but we think it’s probably simpler than that—DOCU has had a big run from its lows in May, and with growth stocks selling off some, the stock may need to rest. The bigger issue to us isn’t the past few days, but the prior two months—shares have now done nothing since the end of June and are showing us a modest loss. We’re not panicking here, but Hold is definitely the right rating, and if all’s well we’d expect DOCU to find support above the 265 to 270 area.” I’ll downgrade to hold as well. HOLD

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, broke out to a new high today! In his update last week, before the breakout, Mike wrote, “FND broke out from a four-month base in April, only to get yanked down by the entire market soon after. Then, after basing out for another two-plus-months, shares lifted to new highs in July … only to be rejected after earnings and fears of a housing slowdown picked up. Now the question is whether the third time will be the charm, as shares have formed a shallower, tighter rest period during the past few weeks, with an encouraging (albeit low volume) rally during the past couple of weeks. As always, we’ll just play it by the book—if the stock fails badly from here and breaks support in the mid-100s then all bets are off, but right now, the path of least resistance remains up and the major cookie-cutter story is in great shape. If you own some, hold on, and if not, we’re OK grabbing a position here.” Obviously, Mike is happy with the breakout. BUY

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, hit a record high back in early June, but it’s been on a correction since then. In his latest update, Bruce wrote, “It appears that the company’s ability to generate ever-higher profits is maxed out. Future profits will not likely be higher, but we see a tapering decay rate rather than a cliff. However, we also wonder about the timing and pace of eventual profits from electric vehicles and the return on GM’s vast capital outlay (the $35 billion in EV spending over the next five years is about $23 per GM share – money that would have been spent on dividends or repurchases in a former era). GM shares have 41% upside to our 69 price target.” HOLD

Global-E Online (GLBE), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, is a small fast grower that’s likely to be volatile. If you haven’t bought yet, I recommend taking advantage of the current pullback. BUY

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, hit a record high two weeks ago and has pulled back normally since. HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, has now pulled back normally from the highs it hit after reporting a great second quarter report. In his latest update, Carl wrote, “MRVL shares have been trading in the low 60s even as the company recently reported a strong quarter. On a year-over-year basis, Marvell earnings jumped 62% while sales surged 48%. Credit Suisse upgraded the stock with a 70 price target, calling Marvell “one of the most strategic assets in semiconductors.” Marvell’s semiconductor products are state-of-the-art and in high demand, allowing businesses and consumers to take advantage of new 5G capabilities, plus the majority of those products are proprietary and made in-house. I recommend buying at current prices if you have not already done so.” BUY

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, came very close to equaling its old January high of 88 last week ago, and has pulled back minimally since. In his latest update, Tom wrote, “This has been a subpar year so far for this alternative energy/regulated utility. Investors seem to have forgotten all about the growth in alternative energy during the pandemic recovery. NEE has been bouncing around with the fortunes of cyclical stocks for most of the year. Lately, that’s been a good thing. And NEE has recently come alive, up around 15% since July. But this isn’t some cyclical alternative stock. It’s a brilliant combination of regulated utility stability and clean energy growth. It had been an up-trending juggernaut as a conservative play on the growth in clean energy. I believe it will return to that Promised Land again.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is still holding up near its recent record high, and I’m still waiting for a pullback to restore its buy rating. HOLD

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, had a well-deserved sharp pullback last week, but that only took the stock down to its 25-day moving average so the main trend is still clearly up. In his update last week, Carl wrote, “SE shares were up 23% in August following an impressive second-quarter earnings report, though shares have pulled back a bit over the last few days. Garena’s popular hit game Free Fire continued to be the highest-grossing game in Southeast Asia, Latin America, and India and achieved a record of over 150 million peak daily active users during the quarter. Total revenue in the quarter was $2.3 billion, up 159% year-on-year, and total gross profit was $930.9 million, up 363% year-on-year. Sea has become both the largest digital entertainment platform and the largest e-commerce operation in Southeast Asia. I would be an incremental buyer of this stock but long-time holders should definitely take partial profits from time to time.” BUY

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 building a base at that level, so technically, this is a good setup. In his update last week, Bruce wrote, “ST shares have about 30% upside to our 75 price target. The stock trades at 13.8x estimated 2022 earnings of $4.17 (unchanged this past week) and 12.6x estimated 2023 earnings of $4.55. We expect this 2023 estimate will move around a lot. On an EV/EBITDA basis, ST trades at 11.0x estimated 2022 EBITDA.” BUY

Spectrum Brands (SPB), originally recommended by Tom Hutchinson in Cabot Dividend Investor, jumped sharply higher last week, briefly hitting a new high, after management announced the sale of its Hardware & Home Improvement segment for $4.3 billion in cash to ASSA ABLOY, a Swedish conglomerate. The sale will reduce Spectrum’s leverage and allow it to focus on three remaining, faster-growing segments, Global Pet Care, Home & Garden, and Home and Personal Care—and the market likes that. I’m pretty confident Tom will retain his buy rating on the stock because Tom has a longer time horizon and the dividend is secure (and might even be raised) but because the Stock of the Week portfolio has to sell an average of one stock a week, I’m going to treat this as a gift and take a quick profit here. SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to trend higher in concert with its 25-, 50- and 200-day moving averages, and I continue to think the company has even greater growth potential in the energy business than in the automotive. Analysts are looking for earnings per share of $5.00 this year and $7.02 in 2022. Also, the stocks of the slew of young competitors that drew interest earlier this year (LCID, NKLA, WKHS, FSR, RIDE, QS, SOLO, ARVL, GOEV, FFIE, PTRA) generally look sick. BUY

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is one of the four leading cannabis companies in the U.S., and trends are terrific in the industry, with the average company in my portfolio growing revenues 135% over the past year. But this is a young industry, unsupported by institutional investors because of the federal prohibition, and the sector has been weak since topping in February. Furthermore, TCNNF is still trending down and our substantial profit is shrinking. Long ago Cabot devised a rule that says that once your profit in a stock exceeds 100%, you shouldn’t lose more than half of it. It’s not a perfect rule by any means, but it does provide clarity enough at this point to say it’s time to get out with the profit we have left. SELL

The next Cabot Stock of the Week issue will be published on September 20, 2021.

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