The Fed has raised the Fed Funds rate six times this year to combat inflation and the last four times at a 0.75% clip. The current 4% rate is the highest in well over a decade. But inflation hasn’t budged even after the rate hikes, a shrinking GDP, and a bear market.

At the November meeting, the Fed Chairmen stated that the previous 4.5% to 5.0% Fed Funds goal no longer applies. It will have to go higher. The U.S. economy is resilient, but it will eventually give way to the forces aligned against it. It is almost certain that there will be a recession in 2023.

Meanwhile, for the first time since forever, you can get investment-grade, fixed-rate investments that pay 5% or even 6%, for now. But recessions put downward pressure on longer interest rates as loan demand dries up.

In this issue, I highlight a rare opportunity to lock in a high fixed rate while it lasts and add balance and diversification to the portfolio. Let’s not miss it.

Today, I’m recommending a financial that is taking advantage of a special opportunity that is only available to small community banks.

Key points:

• Due to a special program (Emergency Capital Investment Program), earnings are expected to grow by 250% over the next three years.
• Cheap valuation. Stock trades at current P/E multiple of 13.2x.
• Downside is limited given high cash levels on bank balance sheet.

All the details are inside this month’s Issue. Enjoy!

Last week’s “big” market-moving events (Federal Reserve and Jobs Report) brought further selling as the S&P 500 fell 3.25%, the Dow lost 2.25%, and the Nasdaq dropped 5.88%.

It’s an extremely pivotal week for stocks, as the midterm elections and latest round of inflation data could go a long way toward determining how markets will finish out this difficult year. In the meantime, we’re adding the rare growth stock that has held up well amidst all the ups and downs of late, which should bode well for the coming months. It’s a retail favorite of Cabot Growth Investor Chief Analyst Mike Cintolo – and thus may look familiar to some of you.

Details inside.

The major indexes quickly retreated after the prior couple of good weeks, with growth-oriented areas falling the most, a lot of stocks being rejected near resistance and some old winners being taken out and shot. Despite that, there are some green shoots out there—by the letter of the law, some broad indexes (like small- and mid-caps) are in intermediate-term uptrends, and we’re also seeing some sectors assert themselves, especially in the commodity space. We’re not bullish, and will leave our Market Monitor at a level 4, though our overall advice remains basically unchanged: Hold plenty of cash, honor your stops and, if you do some buying, keep it small.


This week’s list is again heavy on commodity-type names, though we’re also seeing a few recent earnings winners that have some growth to them. Our Top Pick straddles the line between growth and commodity and is one of the few names to move out to recently all-time highs.

It was another good week for our positions. And now it’s time to finally add a few more positions to the mix. I plan on adding two new positions this week: one to the Income Wheel Portfolio, the other will be a short-term trade with roughly 45-60 days until expiration. There are several good opportunities from our weekly watch list that I’ll be sifting through with the intent to add something mid-week, after the elections have passed.

Last week, prior to the Fed announcement, I decided to close out our two remaining positions for the November expiration cycle. While, in hindsight, holding on through the event would have been the best path for maximizing profits, we did manage to lock in two small gains.

The returns makes it 14 profitable trades out of 15 for a cumulative return of 71.3% since starting Quant Trader back in the beginning of June. Not bad given the wildly volatile market we’ve experienced over the past five months.

This week we will ramp back up opening new positions, this time for the December expiration cycle. I want to stay flat until the elections are over but intend on adding at least three new positions over the next week or so. Stay tuned!

The upcoming week of earnings is a fairly slow one, with only a few real choices on the docket. Disney (DIS) is definitely the highlight of the week and the one I will be focusing on.

However, the following week we see lots of the big boys due to report, including Walmart (WMT), Home Depot (HD), Lowe’s (LOW), Target (TGT), Cisco Systems (CSCO) and several others. As I stated in the last webinar, I expect to see at least three, if not more, trades that week as earnings season slows down significantly afterwards.

As for this past week, we were able to get out for a small 2.7% loss in SBUX. So far this earnings season, we are averaging a one-day return of roughly 4% per trade, or what has been 4% per week for this earnings cycle. Certainly nothing to write home about, but respectable nonetheless given the overall performance of the market. I anticipate that we will make at least four more trades, if not more, before the earnings cycle slows down in two weeks.

The Fed’s latest roundhouse to the market this week has caused another round of selling, but we think more damage was done to sentiment to this point than the evidence; we remain defensive and patient, but we’re also keeping a close eye on things, as a few good days (and some real breakouts from potential leading stocks) could give us something to work with.

In the meantime, we sit with just two stocks but are spending many hours filling up our watch list and monitoring earnings season for new potential leaders. We’re eager to add some exposure, but we’ll wait for things to stabilize first; in the meantime, check out all our latest thoughts in tonight’s issue.

With market jitters returning following the Fed’s meeting yesterday, we’re going back to a segment that’s served us well so far this year – MedTech.

Today’s portfolio addition is another highly specialized company that’s doing things far better than the competition and growing by over 30%.

Enjoy!

Thank you for subscribing to the Cabot Undervalued Stocks Advisor. We hope you enjoy reading the November 2022 issue.

While sharp declines in hyper-growth tech stocks to below their pre-pandemic prices may seem like the proverbial “end of days” has arrived, the fall-off is more a return to normal following a period of vast excesses.

Tomorrow afternoon traders will get another look at how the Federal Reserve perceives the inflation situation, as well as its plans to manage interest rate hikes going forward. Below are the expectations in the options market, the bond market, and from a couple Wall Street firms.

The market still looks strong. But it’s getting a little harder to figure out.

Proxy season is moving into full gear. As a shareholder, you are one of the owners of your companies, so you get to vote on major decisions. Shareholder votes are, of course, much like public government elections, but in most cases your vote has a bigger impact.

Even the S&P 500 is back near all-time highs. So why does it feel like there’s been a pullback in the market? Because there has … if you’re a micro-cap investor. The Russell Micro-cap index has pulled back and has underperformed the S&P 500 by 13% in the past month.

It’s earnings season. So far, it has mainly been just the big banks that have reported. And the results have been largely positive.

Today’s note includes earnings updates and the podcast.

It’s been another mostly constructive week as many of our stocks inch higher and the economic picture continues to improve.

This is an incredible market that just keeps creeping higher. The promise of a booming recovery with trillions in stimulus ahead continues to pull stocks to new all-time highs.

Continue to go slow but have your shopping list ready. Growth stocks are gradually improving their standing, with more popping toward their highs, many holding their gains and a few finding some good-volume buying.

EBITDA, or earnings before interest, taxes, depreciation and amortization, is a straight-forward measure (not a perfect measure, though) of a company’s cash operating profits. But, like seemingly all metrics published by company managements, it is usually adjusted for unusual items that may be non-recurring.

Today’s note includes earnings updates and the podcast.

There’s no doubt things are looking a little better out there as many software, MedTech and other growth stocks retested their March lows late last week then turned north. The timing of that short-term reversal, coinciding with the end of the first quarter, most definitely has me feeling better about the state of things right now.

Nearly 95% of companies in the S&P 500 are now trading above their 200-day moving average, according to Dow Jones Market Data, the highest percentage since May 2013. As if we didn’t have enough to worry about, as of late February, investors had borrowed a record $814 billion against their portfolios. That was up 49% from one year earlier, the fastest annual increase since 2007, during the frothy period before the 2008 financial crisis. Before that, the last time investor borrowing had grown so rapidly was during the dot-com bubble in 1999.

** Because of President’s Day, our offices will be closed next Monday, February 15 — so your next Cabot Profit Booster issue will be published Wednesday, February 17.

Datadog (DDOG) reported Q4 results yesterday afternoon that surpassed expectations but were light in terms of 2021 EPS guidance. Revenue was up 56% to $178 million (beating by $14 million) while adjusted EPS of $0.06 beat by $0.04. Revenue guidance for 2021 of $825 million to $835 million is above consensus of $803 million but adjusted EPS guidance of $0.10 to $0.14 was below consensus of $0.19.

Since reporting earnings earlier this week shares of Avalara (AVLR) have retreated modestly, despite a solid quarter. As I’ve flipped through dozens of charts over the last two days I’ve been struck by the diverging performance of earnings winners.

As marijuana legalization spreads, this grower should reap the benefits.

Zedge (ZDGE) has appreciated a lot faster than I had anticipated. It is up over 100% since we profiled the name last month and is trading above my fair value estimate of $9.80.

Avalara (AVLR) reported results after the close yesterday that handily beat expectations on virtually all metrics. Q4 revenue was up 35% to $144.8 million (beating by $11.4 million) while adjusted EPS of $0.09 beat by $0.15. Billings of $167 million were up 38%. Adjusted gross margin increased from 71% to 74% and free cash flow increased from $14.2 million to $28.6 million.

The top five holdings of this utility ETF are: NextEra Energy Inc (NEE, 18.28% of assets); Duke Energy Corp (DUK, 7.98%), Southern Co (SO, 7.18%), Dominion Energy Inc (D, 6.86%), and Exelon Corp (EXC, 4.68%). The ETF has a current dividend yield of 3.17%, paid quarterly.

As I’ve explained previously, I’ve become increasingly concerned that the blistering advance of the marijuana sector had progressed so far so fast that it was getting increasingly ripe for a correction. But as long as the stocks were advancing, I was happy to stay fully invested.

Lyft (LYFT) reported Q4 2020 earnings after the close yesterday and the results were better than expected even though the numbers look just terrible (thanks pandemic!). Revenue fell 44% to $570 million (but beat expectations by $9 million) while adjusted EPS was -$0.58, $0.05 less than the year ago quarter. We knew getting into this stock that the numbers would be bad and that we were looking to buy into a recovery before it gained too much momentum. That thesis appears to be playing out.

This infrastructure company is expected to report earnings per share of $0.41 on revenues of $457.6 million, for its fourth quarter.

Nuance (NUAN) reported Q1 fiscal 2021 results yesterday that beat expectations on the top and bottom lines. That said, the numbers don’t look that great due to a large, non-strategic coding government contract that did not renew (management previously disclosed on the Q4 fiscal 2020 conference call) and the ongoing transition to a subscription model.

This home builder just reported a great quarter—beating on the top and bottom lines. The shares have a current annual dividend yield of 2.48%, paid quarterly.

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.