Issues
As we near the end of 2020, I’m thankful that 2020 was so very good to the leading marijuana stocks, and that we managed, overall, to ride the trend quite profitably.
As I write, the uptrend is intact and we remain fully invested, but as the calendar turns to 2021, there’s a chance that the trend (and the trend of the broad market as well) might turn down.
Thus I’m on alert.
But I learned long ago not to argue with the trend of the market, so until the trend changes, I recommend staying heavily invested.
Full details in the issue.
As I write, the uptrend is intact and we remain fully invested, but as the calendar turns to 2021, there’s a chance that the trend (and the trend of the broad market as well) might turn down.
Thus I’m on alert.
But I learned long ago not to argue with the trend of the market, so until the trend changes, I recommend staying heavily invested.
Full details in the issue.
This is one of the two weeks a year where Cabot Top Ten Trader is not published, which means there won’t be a new Profit Booster covered call trade this week. That being said, I did want to note that our four open positions (AA, UBER, ADNT, CDE) are all in good shape.
The New Year promises to be a great one for dividend stocks. After underperforming the market in 2020, the stars are aligning to make 2021 the year of the dividend.
The distribution of the coronavirus vaccine promises to bring this pandemic to an end and unleash a full and robust recovery in 2021. Energy stocks that had been neglected in the market recovery have caught fire in anticipation of a full recovery in 2021.
A huge and overdue rally in the sector has paused temporarily ahead of a very promising year, giving us an opportunity to get into one of the very best stocks in the sector at a still cheap price.
Global energy giant Chevron (CVX) currently offers the rare combination of great value and momentum, as well as a fat yield. The stock has already moved higher, the rally has a long way to go.
The distribution of the coronavirus vaccine promises to bring this pandemic to an end and unleash a full and robust recovery in 2021. Energy stocks that had been neglected in the market recovery have caught fire in anticipation of a full recovery in 2021.
A huge and overdue rally in the sector has paused temporarily ahead of a very promising year, giving us an opportunity to get into one of the very best stocks in the sector at a still cheap price.
Global energy giant Chevron (CVX) currently offers the rare combination of great value and momentum, as well as a fat yield. The stock has already moved higher, the rally has a long way to go.
This month we review how the capital markets performed in 2020 and provide our outlook for 2021. We look at the broad equity market and trends below the surface, including growth/value, large/small and sector returns. We also briefly discuss the global equity and commodity markets as well as the U.S. fixed income markets. Our outlook starts with a review of how our 2020 outlook turned out, then dives into what we see for 2021 for the S&P 500, touches upon the rising influence of the two “Easts” and our wariness about speculation, and concludes with some timeless perspective about investing.
The issue also reviews the high yield bond market. We follow the high yield bond market as it provides a different perspective on equity markets. Importantly, there is considerable overlap among high yield bond investors, turnaround investors and private equity investors who may acquire undervalued companies.
Each January, we highlight our “Top Five” stocks for the coming year, based on a combination of favorable risk/return and timeliness. For 2021, our Top Five includes Conduent (CNDT), Meredith Publishing (MDP), Newell Brands (NWL), Signet Jewelers (SIG) and Wells Fargo (WFC).
Our feature recommendation is Ironwood Pharmaceuticals (IRWD). The market views Ironwood as a failed pharmaceutical company but its low share valuation, steady/rising profits and the presence of an effective activist investor make the stock a stand-out value, in our view.
The letter also includes a summary of our recent sales of GameStop (GME) and Freeport-McMoran (FCX), our price target increases for Trinity Industries (TRN), Adient (ADNT), DuPont (DD) and General Motors (GM) as well as the full roster of our current recommendations.
Please feel free to send me your questions and comments. This newsletter is written for you. A great way to get more out of your letter is to let me know what you are looking for.
I’m best reachable at Bruce@CabotWealth.com. I’ll do my best to respond as quickly as possible.
The issue also reviews the high yield bond market. We follow the high yield bond market as it provides a different perspective on equity markets. Importantly, there is considerable overlap among high yield bond investors, turnaround investors and private equity investors who may acquire undervalued companies.
Each January, we highlight our “Top Five” stocks for the coming year, based on a combination of favorable risk/return and timeliness. For 2021, our Top Five includes Conduent (CNDT), Meredith Publishing (MDP), Newell Brands (NWL), Signet Jewelers (SIG) and Wells Fargo (WFC).
Our feature recommendation is Ironwood Pharmaceuticals (IRWD). The market views Ironwood as a failed pharmaceutical company but its low share valuation, steady/rising profits and the presence of an effective activist investor make the stock a stand-out value, in our view.
The letter also includes a summary of our recent sales of GameStop (GME) and Freeport-McMoran (FCX), our price target increases for Trinity Industries (TRN), Adient (ADNT), DuPont (DD) and General Motors (GM) as well as the full roster of our current recommendations.
Please feel free to send me your questions and comments. This newsletter is written for you. A great way to get more out of your letter is to let me know what you are looking for.
I’m best reachable at Bruce@CabotWealth.com. I’ll do my best to respond as quickly as possible.
Last Friday was the expiration of our December covered call positions, and I’m happy to report it was yet another great month. Here were our final profits and yields:
Note: This is our final issue of Cabot Stock of the Week this year. Next week we get a little “vacation.”
But rest assured we’ll be keeping an eye on the market, where market trends remain very positive as we head toward the end of the year.
Today’s recommendation is a low-risk water company in a foreign country, so it may be the perfect diversification move if you’ve got a lot of U.S. growth stocks.
But to fit it into the portfolio, we’ve got to sell something, and the victim this week is Eli Lilly (LLY), which has brought us a decent profit in a fairly short time.
Full details in the issue.
But rest assured we’ll be keeping an eye on the market, where market trends remain very positive as we head toward the end of the year.
Today’s recommendation is a low-risk water company in a foreign country, so it may be the perfect diversification move if you’ve got a lot of U.S. growth stocks.
But to fit it into the portfolio, we’ve got to sell something, and the victim this week is Eli Lilly (LLY), which has brought us a decent profit in a fairly short time.
Full details in the issue.
Current Market OutlookNews of travel restrictions due to a new strain of the virus over in Europe hit the major indexes early today, but when it comes to our analysis, the reason for the initial selloff is secondary—the setup for an air pocket has been around for a couple of weeks as sentiment was elevated and most stocks and indexes were extended to the upside. Thus, today’s hiccups weren’t totally unexpected, but the damage was limited; at day’s end, the major indexes held up well and remain in intermediate-term uptrends, as do most stocks. Near term, further reverberations are likely, so we still think it best to pick your spots and stocks carefully, but with the major evidence still positive, we are too.
This week’s list has a nice mix of stocks benefiting from different trends (growth, reopening, cyclical, etc.). Our Top Pick is Elastic (ESTC), which has finally, decisively gotten going from a long 20-month IPO base.
| Stock Name | Price | ||
|---|---|---|---|
| Alcoa (AA) | 22.12 | ||
| Cardlytics (CDLX) | 146.04 | ||
| Coeur Mining (CDE) | 9.88 | ||
| Elastic (ESTC) | 155.91 | ||
| Floor & Décor (FND) | 99.10 | ||
| Kodiak Sciences (KOD) | 149.51 | ||
| PayPal (PYPL) | 237.79 | ||
| Redfin (RDFN) | 78.54 | ||
| Smartsheet (SMAR) | 72.00 | ||
| WESCO International (WCC) | 75.16 |
The evidence remains mostly bullish, with the major indexes and a growing number of leading stocks acting well. To be fair, it’s not 1999 out there, as many stocks are suffering a lot of choppy action and sentiment is buoyant--that’s no reason to be negative, but we’re continuing with our step-by-step buying spree.
Last week, we started a new half position in CrowdStrike (CRWD), and tonight, we’re filling out our position in Novocure (NVCR), leaving us with around 20% in cash.
Last week, we started a new half position in CrowdStrike (CRWD), and tonight, we’re filling out our position in Novocure (NVCR), leaving us with around 20% in cash.
Updates
Interest rates fell back this week after the odds of a December rate hike briefly fell below 90% (they’ve since rebounded). The trigger was a September inflation data release that showed consumer prices excluding food and energy rising just 1.7% year-over-year, and only 0.1% since August.
All investors should be aware of the quality-control scandal emanating from Kobe Steel, in which the company admitted falsifying data on its steel products for a currently-vague amount of time between one and 10 years. On October 11, I predicted that the scandal would be more extensive in reach than initially reported.
The past week was relatively subdued in small-cap land; the asset class, as measured by the S&P 600 Small Cap Index, dropped a modest 0.8%. The biggest declines were seen in the energy, consumer discretionary and healthcare sectors. The latter is likely due to disruption from Hurricane Maria and renewed chatter about reducing federal subsidies that were part of the Affordable Care Act (ACA).
The iShares EM Fund (EEM) has been trending up, keeping the Cabot Emerging Markets Timer a bright green. Our stocks are generally doing well, and we have no changes to the portfolio tonight.
The stock market’s advance slowed a little this week, but the major indexes are still at all-time highs. Strangely enough, after declining for most of September, utilities have been one of the best-performing sectors over the past five days. Technology and real estate are also outperforming.
Notice that the S&P 500 has a very specific pattern this year: advance-rest-pullback-recover, then repeat the cycle, continuing to rise as months pass. The market just completed another advance. Therefore, odds are strong that the market’s now ready for some sideways trading.
After weeks of consultation with Roy Ward, I’ve decided to make the following changes to the Cabot Benjamin Graham Value Investor. I also include updates on two of our stocks.
The general market picture continues to look bright. All three of our key market timing indicators remain bullish—both the market’s intermediate- and longer-term trends are pointed up, and the broad market is in great shape, with the Two-Second Indicator continuing to record fewer than 20 new lows day after day.
The rotation into the year’s underperformers that started last week has continued, while taking on some aspects of a generic risk-on trade. Financial stocks have outperformed all others since our last update, and tech stocks are up again this week. Materials and industrials also continue to do well.
What a week! I’ve been asked a few times by friends and family members (but no subscribers, c’mon guys!) why small caps have suddenly sprung to life. Check out the one-year chart below of the S&P 600 Small Cap Index.
This is my last Weekly Update. I am retiring today after 50 years in the investment business, including 15 years writing the Cabot Benjamin Graham Value Investor.
The iShares EM Fund (EEM) has been in a downtrend since September 22, turning the Cabot Emerging Markets Timer neutral. We will continue to manage our stocks individually, but will curtail new buying and keep stocks on a shorter leash until momentum improves.
Alerts
This construction company beat analysts’ estimates by $0.19 last quarter, and five analysts have raised their EPS forecasts for the company in the past 30 days.
Four stocks in the portfolio reported earnings.
This medical device company beat analysts’ earnings estimates by $0.08 last quarter.
Further bad news on the U.S.-China trade front prompted another sharply lower open today, and unlike Monday, the buyers never showed up. At day’s end, the Dow had fallen 473 points and the Nasdaq plunged 160 points.
Analysts expect this consulting company to grow by 16.9%, annually, over the next five years.
This semiconductor supplier beat analysts’ estimates by $0.47 last quarter.
One portfolio stock reported a great first quarter and moves from Strong Buy to Hold.
Overall, cannabis/marijuana stocks still look fine, even though the stocks were generally soft yesterday, so I’m not doing a full update, but there has been action, both good and bad, in a few stocks worth mentioning.
This e-sports company is expected to grow at a rate of more than 40% annually over the next five years.
Chefs’ Warehouse (CHEF) reported last night and the results were just fine.
One portfolio stock announced a corporate conversion, and three others reported first-quarter results.
We’re selling one-third of the shares and holding the rest of one stock in the portfolio. The move will boost the Model Portfolio’s cash position to 21%.
Portfolios
Strategy
A few Cabot Options Trader subscribers have asked me about ways to protect gains in their portfolios, so I thought I would write to everyone with a couple of strategies using options to hedge your portfolio.
A subscriber recently asked me if I keep a journal of my trades. Many traders keep journals so they can look back at their trades and evaluate what they did right and what they did wrong.
Want to know how the big institutional investors use options? Here is an example of how one trader spent $132 million on three technology stocks.
Options trading has its own vernacular. To know how to do it, you need to know what every options term means. Here are some of the basics.
Our Cabot Momentum Trader’s market timing system consists of two parts—one based on the action of three select, growth-oriented market indexes, and the other based on the action of the fast-moving stocks Cabot Momentum Trader features.