The S&P 500 is on the cusp of a correction, down 10%. The technology- laden NASDAQ is already well beyond a correction. Energy is the only S&P 500 sector in positive territory YTD.



The problem is inflation and the Fed raising rates to combat it. There is a realization that inflation can’t be handled seamlessly. That means we could face continued high inflation, or much slower economic growth induced by a hyperactive Fed making up for lost time. Neither scenario is good for stocks.



While the year might be difficult for the overall market, the energy and financial sectors should shine. These sectors actually like inflation and rising interest rates. While portfolio positions in those sectors have been dragged lower by the recent indiscriminate selling, I expect them to regain momentum when this selloff ends.



Two fantastic portfolio positions in energy and finance are highlighted to buy in this issue. They had momentum going into the selloff and should pick up where they left off when the selling abates.

Thank you for subscribing to the Cabot Turnaround Letter. We hope you enjoy reading the February 2022 issue.



The market seems to be ignoring small- cap stocks. We highlight four high-quality small- cap companies with beaten down share prices. And, amidst the rubble of initial public offerings, we found three worthwhile companies whose shares trade below their IPO price. We also briefly comment on the market’s recent sell-down, and provide an update on the performance of our group of recommended stocks, which have held their value so far this year.



Our featured recommendation this month is Polaris (PII), the leading North American manufacturer of powersports equipment including off-road vehicles, snowmobiles, motorcycles and boats. Investors are overly -discounting near-term issues, leaving the shares significantly undervalued.



We note our recent price target increase for Baker Hughes Company (BKR), from 26 to 31.

Bubbly Conditions for Nickel
The metals needed for the electric vehicle (EV) battery market are on fire right now, as are other industrial metals like tin and aluminum. Other key metals, including copper and steel, are hanging tough as hopes for revived infrastructure demand in China increase. The main story right now is nickel, which appears to be in the early stages of a speculative bubble. In the portfolio, we just added a new position in our favorite gold-tracking fund.

Don’t expect this volatility to subside this week, as the Federal Reserve, economic data releases and a heavy earnings calendar will have traders on their toes.
This week, in an effort to keep the portfolio diversified, I’m adding a pharmaceutical play, AbbVie (ABBV).

In the January Issue of Cabot Early Opportunities I highlight five standout growth stocks that should have meaningful upside from current levels. Recognizing that the current risk-off environment has these types of stocks acting erratically (probably an understatement) I’ve focused first and foremost on companies I like rather than getting hung up on their recent share price performance. In terms of buying, we’ll start very, very slow. The three smaller companies I feature go straight to the Watch List as we’ll try to be opportunistic buyers when things feel more secure. Even with the two larger companies we start with half positions.



Enjoy!

With the market falling like a stone today, it’s tempting to conclude that a bottom is near. But the fact is that identifying bottoms is very difficult to do in real time, so the prudent course is to reduce risk, which we do this week by selling three more stocks.



As for the new recommendation, energy stocks have been a pocket of strength, so energy it is!

When it comes to the market’s action, there’s not much to say—the crash-like action seen in growth stocks since the start of the year has spread out to most every nook and cranny of the market. To be fair, near term, we are starting to see some extremes, plus we’re still seeing a fair number (not a lot) of stocks hanging in there—taking on water for sure, but not definitively cracking. Overall, we continue to advise a cautious/defensive stance; capital preservation is the first goal these days. That said, given how stretched everything is to the downside, we think it’s OK to give things a little more wiggle room on the downside if you already have lots of cash. Our Market Monitor will remain at a level 4.



This week’s list is mostly a mix of energy and defensive-oriented stocks. Our Top Pick is a big energy services outfit that should see growth accelerate going ahead.

The technology-oriented Nasdaq Composite closed yesterday 10.7% below its all-time closing high, set in November. Some technology- related stocks are facing headwinds for multiple reasons. Many trade at high valuations. Most do not offer dividends to buffer the impact of higher interest rates. Some companies are showing great revenue growth but no profits. We are adjusting by selling two positions and adding an international story with enormous promise.

This issue we take an elemental approach, in a sense, featuring two businesses at the beginning and the end of product cycles. One is a start-up that promises to soon be one of the world’s largest producers of an essential EV component. The other finds a use for mothballed power plant waste to save carbon emissions elsewhere. It just got a boon from a new EPA announcement.

As always, too, our ESG Three, Greentech Timer and an update on our Real Money and Excelsior portfolios are included.

As a result, this week I’m adding a diversified natural resources company based in Vancouver, British Columbia, Teck Resources (TECK), though because of the recent market weakness, I’m structuring our trade defensively.

Last week was an awful one for growth stocks, many of which had already been sitting well off their highs and then were taken apart as the calendar flipped, with 15% to 20% declines seen in some former leaders last week alone. To be fair, some areas actually acted decently—in our screens this week, it wasn’t hard to find good-looking commodity, semiconductor, financial and industrial stocks—and there are names that may be near good entry points. The trick, though, is that the selling appears to be broadening out: Today saw declines across the board (led again by growth stocks), with even resilient areas getting hit. We never catch falling knives, but in the near term, a bounce wouldn’t shock us, as the selling has beenpunishing and has become very obvious. Still, that’s like picking up nickels in front of a bulldozer—a nibble here or there is fine, but there’s not much to like from an intermediate-term perspective, so caution remains the best stance.

This week’s list contains a bunch of commodity and more reliable performers, a sign that big investors continue to favor steadiness and defense rather than aggressive situations. Our Top Pick is a steady performer with a low valuation and a great cash flow outlook.

With the market down big today, it’s possible that the growth stock correction has done enough damage—but until we see real strength, it’s better to adjust to the trend—and that means going with a value stock today—an old technology name that you’ll recognize. As for our current holdings, there is only one change, a downgrade of one stock, Broadcom (AVGO), to hold.

This has been about as ugly a couple of weeks in the market as you will ever see. On a closing basis, the market hit a low on February 28 and was down 12.5% from the February 19 highs. By total points lost, it was the fastest market correction in history.

The only news anybody seems to care about is the coronavirus. While that’s clearly a concern and not something to take lightly, I don’t think it changes the bigger picture trend that stocks are the place to be over the coming years.

This week is a reminder that markets don’t always go up. The big surprise was that it took so long for global markets to wake up to the threat.

Since January, this market had been merrily whistling along through the coronavirus risk. It was enough to cause a selloff for a day or two but not enough to derail the bull move to new highs that had been in place since early December. This week that changed.

The COVID-19 problem, as it pertains to the U.S. stock markets, is compounded by the fact that the S&P 500 index had risen about 12% since October.

We’re mostly bullish, and are giving our winners room to keep running, but we’re also still looking for decent entry points in stocks that appear to be early-ish in their advances.

Regarding the here and now, we’re starting to see signals that we could have a market dip, which would be entirely normal given that it’s only had two small retreats since stocks began racing higher in September.

It is likely that a pullback in the market, as measured by the indexes, is increasingly likely in the near term. But that would be healthy and welcome. And it would set up things better for the rest of the year.

The coronavirus continues to make headlines, with this week’s victim being Apple Inc. (AAPL) which announced that 2020 revenues are going to take a hit from the work stoppages emanating from China.

Volatility is coming back into the market.

Our second recommendation is profit-taking on a previous pick.

Our first idea today is a global construction materials company that is expected to grow by 109% next year, and has the makings of a good turnaround.

Analysts expect this mega-tech company to grow by 20.4% this year, and five companies have recently increased their EPS forecasts for the company.

With our portfolio having swelled to 29 positions it’s time to trim a little around the edges to keep things manageable. As in the past, many of these decisions are based on lackluster recent performance and uncertainty regarding the near-term.

The strength in marijuana stocks that began two weeks ago with breakouts by the stocks of the four leading U.S. providers has continued this week, so now I’m going to take the portfolio to a fully invested position.

This global engineering and construction company is forecasted to grow by 16.1% next year.

Here is a Top Picks update we missed, on our fourth-place winner, a company that is making great progress with an Alzheimer’s drug.

This blue-chip Hong Kong conglomerate has a current dividend yield of 7.64%, paid annually.

It was another fantastic month for the Cabot Profit Booster portfolio, and with today being the expiration of July options we are likely going to close seven positions for full profits ranging from 5.4% to 12.3%.

Last quarter, this industrial machinery company beat analysts’ estimates by $0.03.

COVID-19 has beaten this REIT stock down, but it has a long track record of success, and while you wait for appreciation, you can enjoy the 5.38% dividend yield, paid quarterly.

Our Cabot Top Ten 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 Top Ten features.