September 20, 2021

The bull market remains intact, despite this morning’s sharp selloff, so I continue to recommend that you be heavily invested in stocks that help achieve your investing goals.

Today’s featured stock is a very conservative one, a solid financial institution with a good dividend, and the prospect of growing earnings as interest rates rise.

As for the current portfolio, there are no changes. It will be interesting to see which stocks bounce best after the selling pressures ease.

Cabot Stock of the Week 366

The long bull market continues, despite this morning’s sharp selloff, and thus I continue to recommend that you be heavily invested in a portfolio that meets your investment needs. And I continue to preach the benefits of diversification; hot growth stocks (like my past few recommendations) may be exciting, but it can be reassuring to hold a solid company that pays a healthy dividend, like today’s recommendation. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.

U.S. Bancorp (USB)
The yield curve has flattened significantly since early this year. I believe this interest rate dynamic is temporary and U.S. Bancorp is a great buy ahead of a likely reversal. Let me explain.

A yield curve is the difference between long- and short-term interest rates. Certain companies profit from the difference between the two. They borrow at short-term rates and lend at longer-term rates, profiting from the spread.

Short-term rates, largely defined by the benchmark Fed Funds rate, are currently between 0% and 0.25% and have been since the pandemic hit. The Fed has announced it does not intend to raise that rate until 2023. Longer-term rates, gauged by the benchmark 10-year Treasury rate, have fallen from 1.75% in March to below 1.2% in early August (currently 1.37%), thus flattening the yield curve.

Yet, the economy is booming. Earnings have been spectacular. This is an environment where rates historically rise. Why have rates fallen?

There are several reasons. The market anticipates and is looking beyond this pandemic recovery. The booming growth will fade, and we will be in a more normal growth environment. There’s also the Delta variant, which will curtail growth in the near term as well. Then there’s the Fed, whose $120 billion per month bond buying program effectively puts downward pressure on rates.

Let’s look at those factors. The economy will most certainly normalize after the pandemic recovery. But the 10-year rate averaged between 2% and 3% before the pandemic. That was a normal environment. In fact, the 10-year rate averaged between 2% and 3% during both the Obama and Trump Administrations. Rates are still well below those normal economy levels.

The Fed will also likely start tapering those bond purchases before the end of this year, or at least next year. That will remove a force holding rates down. Plus, there is still persistent inflation. Of course, the current thinking is that this inflation won’t last long. But it is still another force that should put upward pressure on rates in the near term.
In short, I believe interest rates have fallen too far and are likely to trend higher in the months ahead. This will benefit U.S. Bancorp stock.

U.S. Bancorp (USB) is the fifth largest bank in the United States and the country’s largest regional bank, with over 3000 bank branches in 25 states in the Western and Northern US. The Minneapolis bank was founded in 1863 and now has more than 70,000 employees and $543 billion in assets.

The bank offers a wide range of services. There are four main divisions including consumer and business real estate banking, corporate and commercial banking, wealth management services and payment services. That probably sounds more complicated than it is.

Like most regional banks, revenues are generated primarily from net interest income (NII), which is the rate spread between the cost of money and the loan interest charged to customers. Half of the loan volume is to businesses with the rest primarily from residential mortgages and personal loans. The rest of the revenue is derived from banking fees.

Banks took it on the chin in the pandemic as loan activity dried up during the lockdowns and interest rates crashed. They didn’t participate in the recovery until last fall when the vaccines came within sight. From September to May USB stock soared 77% as business recovered with the economy.

Last quarter’s earnings were stellar as loan volume and fee business soared. But net interest income fell amidst the falling rates. The stock has floundered since early May because of the flattening yield curve. And, despite the booming economy, USB is still priced below where it was before the pandemic.

The regional bank is firing on all cylinders except net interest income because of the low long-term rates. The huge recovery in USB was interrupted by falling longer-term interest rates. That recovery should be reignited as rates trend higher.

Current Recommendations

The market sold off sharply this morning and may go lower still; the September-October period often brings such corrections. But there’s no reason to panic. Such corrections bring opportunities, which Cabot’s analysts will surely take advantage of in the weeks ahead. Last week the portfolio sold two stocks, and this week will sell none. We’ll wait to see what bounces after today’s pullback. Details below.

Changes
None.

Ambarella (AMBA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, makes state-of-the-art computer vision chips that are in great demand by intelligent vision systems. If you haven’t bought yet, you can buy now. BUY

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 the current correction to the 25-day moving average presents a decent buying opportunity. 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 last week made its best effort yet at a true breakout, hitting a high of 510 before being pulled down by the market. But if it can hold here, the odds are good that 500 will become a floor. In his update last week, Tom wrote, “This chipmaker and infrastructure software company is bucking the recent market trend. It is currently at the 52-week high. The tech giant announced strong earnings that beat expectations a couple of weeks ago. It has been an underperformer in recent months despite the fact that it will benefit in the near term from 5G. This company is also built for long-term growth.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was hitting new highs a week ago, but five days of selling have pulled it down to near its 200-day moving average, which presents a decent buying opportunity. In his update last week, Tom wrote, “BIP is a great defensive business at a time of uncertainty. Between the rebound in transportation assets in the recovery, new projects coming online, and the recent Inter Pipeline acquisition; earnings should grow nicely in the quarters ahead.” HOLD

ChargePoint (CHPT), originally recommended by Carl Delfeld in Cabot Explorer, is a small stock that’s likely to be volatile—but long-term prospects are very good. 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, trading at a bit less than half their January 2021 share price. ChargePoint has developed an EV-charging network that offers drivers in North America and Europe more than 118,000 places to power up their EVs. The company projects revenue will grow from $145 million in 2019 to $2.1 billion in 2026. 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. Therefore, while competition is intense, 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 50-day moving average) since hitting a new high four weeks ago. In his latest update, Bruce wrote, “CSCO shares have about 4% upside to our recently increased 60 price target. The shares trade at 16.9x estimated FY2022 earnings of $3.43 (unchanged in the past week). On FY2023 earnings (which ends in July 2023) of $3.68, the shares trade at 15.7x. On an EV/EBITDA basis on FY2022 estimates, the shares trade at a 12.0x multiple. CSCO shares offer a 2.6% 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 has been very strong, hitting another new high last week. BUY

DocuSign (DOCU), originally recommended by Mike Cintolo in Cabot Growth Investor, is the biggest loser in the portfolio (and thus a candidate for sale), but it’s sitting right at support from July, so I’m not quite ready to give up on it yet—and Mike feels the same way. In his update last week, he wrote, “DOCU remains our problem child, having skidded another few percent before finding some solid-volume support yesterday. Our leash isn’t limitless here—another few percent and we’ll cut bait—but the overall chart isn’t awful given the run since early June, and the story is still top notch. Really, what we’re looking for here is what type of bounce can the stock enjoy—a sharp downmove from here would have us looking for greener pastures, but if DOCU can bounce decently, it would hint that a normal base-building phase has begun. Right here, we’ll stay on Hold.” HOLD

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, might be called the strongest stock in the portfolio, given that it hit another new high last Friday. Today, of course, it was down with the market. In his update last week, Mike wrote, “FND looks just fine—while there have been plenty of wiggles, the stock notched a new closing high today. While it’s not going to be a runaway-type stock, we’re optimistic (as we wrote last week) that this third breakout attempt will be the charm, as the short-term (strong housing and construction market) and long-term (cookie-cutter story; continued share gains for hard flooring vs. carpet) outlook remain solid. If you own some, hang on, and if not, you can start a position here or on dips.” BUY

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, gapped down in today’s broad weakness, but the fundamentals are looking better, thanks to the recent government proposal to favor union-made EVs with tax credits. In his latest update, Bruce wrote, “Lawmakers are debating the merits of sharply increasing the tax credits for buyers of electric vehicles. In the proposed $3.5 billion infrastructure bill is a plan to give an additional $4,500 tax credit for purchases of union-made EVs, for a total of $12,000. This would be a huge benefit for GM, Ford and Chrysler (owned by Stellantis) at the expense of Tesla, Toyota and others. The plan also includes a phasing out of the 200,000 EV limit per manufacturer, which could also significantly boost the demand for EVs. These plans are controversial and may not pass, but if they do, they could be a major tailwind for General Motors. General Motors’ CFO reiterated the company’s 2021 earnings guidance and said that 2022 will be a “more stable year” for its semiconductor supplies. He also said that GM expects to be reimbursed by LG Chem for much (all?) of the cost of the recent recall for Bolt battery fires. GM shares have 35% upside to our 69 price target.” HOLD

Global-E Online (GLBE), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here two weeks ago, is a young stock that’s likely to be volatile, but the company is growing fast in the world of direct-to-consumer cross-border e-commerce software. 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 three weeks ago and has been trading tightly in that area since (even today while the broad market is very weak) which is a very good sign. HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, has been testing support at the 60 level since releasing a great second-quarter report three weeks ago. In his latest update, Carl wrote, “Credit Suisse upgraded the stock to 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.” Additionally, Mike Cintolo wrote in Cabot Top Ten Trader, “MRVL has etched what’s known as an ascending base, with slightly higher highs and higher lows during its three corrections since the end of June. More important, it looks like a solid risk-reward around here—if you don’t own any, you can buy, with a stop around 58.5.” 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 two weeks ago, but as I write it’s pulled back to its 50-day moving average, which looks like a good entry point. In his latest update, Tom wrote, “This regulated/alternative energy utility is benefitting from the recent misfortunes of cyclical stocks. That’s okay. We’ll take it. The stock is up about 15% since July. But NEE is so much better than just a cyclical alternative. It’s a fantastic way for conservative investor to play the huge growth in clean energy. It should get another good move higher when alternative energy inevitably comes back into favor again.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was holding up near its recent record highs last week, but it gapped down this morning, to nearly touch its 50-day moving average. In his update last week, Mike wrote, “NVDA has been underperforming some other chip names, which is a slight worry, but we think it’s buyable around here or on further dips, with a stop near 204 or so.” 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 two weeks ago that took the stock down to its 25-day moving average, and it’s held above that level since—so still in an uptrend. In his update last week, referring to one of SE’s biggest divisions, Carl wrote, “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 in the latest 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. 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 traded in a range between 55 and 60. In his update last week, Bruce wrote, “ST is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%. Investors undervalue Sensata’s durable franchise. Its sensors are typically critical components that generally produce high profit margins. Also, as the sensors’ reliability is vital to safely and performance, customers are reluctant to switch to another supplier that may have lower prices but also lower or unproven quality. Sensata has an arguably under-leveraged balance sheet and generates healthy free cash flow. ST shares have about 31% 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

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 $5.02 this year and $7.11 in 2022. As mentioned above, the government’s proposals to stimulate EV sales do favor union shops like GM, but they would also remove the 200,000-vehicle phase-out, and that would help Tesla. Lastly, I just returned from a four-week road trip in my eight-year-old Tesla Model S, in which I drove 6,380 miles (basically a round trip whose extreme western point was Glacier National Park), and I’ve got to say that the infrastructure for charging Teslas is good now—and will only get better. BUY

The next Cabot Stock of the Week issue will be published on September 27, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chief Investment Strategist: Timothy Lutts
Cabot Heritage Corporation, doing business as Cabot Wealth Network
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2021. All rights reserved. Copying or electronic transmission of this information without permission is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. Disclosures: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to our 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. Employees of Cabot Wealth Network may own some of the stocks recommended by our advisory 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. Buy/Sell Recommendations: are made in regular issues, updates, or alerts by email and on the private subscriber website.

Subscribers agree to adhere to all terms and conditions which can be found on CabotWealth.com and are subject to change. Violations will result in termination of all subscriptions without refund in addition to any civil and criminal penalties available under the law.