Inflation stays high, infrastructure week arrives, and Rivian stock surges while markets sold off a bit yesterday. The weakness yesterday halted some good rallies among Explorer stocks. We continue to explore new ideas and for this week’s recommendation, we go into the Cloud for a familiar name.

Today, we are profiling a micro-cap bank that is focused on serving an attractive niche, the litigation industry. It looks highly compelling:

• High insider ownership (insiders own ~12.5% of shares outstanding).
  
• Strong momentum (stock is near 52 week high).
  
• ~20%+ earnings growth for the foreseeable future.
  
• Low valuation: P/E ratio of 12x.
  
• ~60% upside to fair value.

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

Inflation is back. And it might be for real this time.

Inflation has taken off since the end of the lockdowns this past spring. In September, the inflation rate rose to 5.4%, the highest monthly reading in 30 years. Inflation over the last twelve months is also the highest such measure in 30 years.



This inflation may prove to be a temporary side effect of the pandemic recovery that will fade away over the next year. But maybe not. Once that inflation genie gets out of the bottle it can be hard to put back. There are powerfull reasons why it could be worse than most expect.

Gold Shows Signs of Life
Gold prices perked up late last week in the wake of some bullish interest rate developments. While silver and other white metals didn’t confirm the strength, there are reasons for believing that the safety-related move into gold will persist. Lithium, meanwhile, remains the undisputed leader in the broad metals sector as electric vehicle (EV) battery demand continues to accelerate. Rising EV sales from some major auto companies have only served to fuel the lithium bull market.

This week I’m continuing to diversify my overall portfolio exposure by adding American subscription-based software company ZoomInfo (ZI).

There have been a few times this year when the onus was on the bulls to snap the market out of a downturn, correction or choppy period—and, happily, in most cases they did. Now the shoe is on the other foot: Yes, there are some worries out there, with a lot of stuff extended to the upside and some signs of complacency, but the vast majority of rubber-meets-the-road evidence remains positive, with the major indexes in strong uptrends, a ton of fresh breakouts (including many from names that built launching pads for five to eight months) and little in the way of pullbacks. As we’ve been writing, you shouldn’t get crazy and lose all risk discipline or start buying fly-by-night operations, but overall, there’s no question the evidence tells us to remain bullish. We’ll nudge up our Market Monitor to a level 8 today.

This week’s list features a ton of names that have recently lifted off on earnings, and from a variety of industries, too. Our Top Pick is Arista Networks (ANET), which is a high-priced stock but showed extreme power and a change in character after a great quarterly report and multi-quarter outlook last week.

Stock Name	Price	Buy Range	Loss Limit
ABNB (ABNB)	200	195-200	175-178
Arista Networks (ANET)	526	515-535	453-468
Canada Goose Holdings (GOOS)	49	47-49.5	42-43.5
CFLT (CFLT)	88	82.5-85	72-74
Devon Energy (DVN)	44	42-44.5	36-37
EOG Resources, Inc. (EOG)	97	94-97.5	84-85.5
KLA Corp. (KLAC)	413	395-410	357-367
ON Semiconductor (ON)	59	56.5-59.5	50-51.5
Planet Fitness (PLNT)	96	93-96	84-86
ZoomInfo (ZI)	74	71-74	63-64.5

With the often-tricky September-October period behind us, and all trends positive, I’m happy to continue recommending that you be heavily invested in a diversified group of stocks that meet your investing needs.

Today’s recommendation is not a familiar name—it serves global businesses, not individuals—but it’s part of the solution to one of the globe’s biggest problems these days.



As for selling, something’s got to go, and it’s not an easy choice; most of our stocks look great. But rules are rules, so we’ll say farewell to long-time friend (and solid winner), NextEra Energy (NEE).



Details inside.

The market has had some wobbles after a strong three-week run, and finding good buy points and keeping an eye on earnings reports remains vital. But overall, most of the evidence remains bullish, so we do, too. Most of the stocks we own are acting well, though we’re still wading through earnings season and will react if need be. In the meantime, we’re still aiming to add exposure, and are buying a half-sized position in an old friend tomorrow.

Recently, we’ve been adding very aggressive, high-growth names. These potential moonshots are a lot of fun to research and buy, but we need to maintain balance in our portfolio.

This month we’re going with more of a Steady Eddie-type, a small-cap company with a measured growth profile that features sustainable top line growth, significant EPS, and enough cash flow to fund both dividend payments and share repurchases.



I think in a few years we’ll look back and say it was one of the better investment decisions we made in 2021.



Enjoy!

Thank you for subscribing to the Cabot Undervalued Stocks Advisor. We hope you enjoy reading the November 2021 issue.



Rivian Automotive’s (RIVN) initial public offering, which arrives next week at a likely $60 billion valuation, has us thinking more deeply about General Motors (GM). Investors are assigning little value to its EV and other advanced technologies, which strikes us as incompatible with the valuations of Tesla, Rivian and other EV start-ups. But, perhaps this is right, due to the enormous capital spending that GM has committed to. These vast cash outflows may eliminate the present value of the EVs. We share some of our thinking on this.

Greentech is looking more bullish than it has in six months as enthusiasm gathers around EVs, solar and governments’ suggestions at the current United Nations Climate Conference to combat global warming.

This issue we look at an American company that has repositioned itself to be one of the primary providers of the next generation of semiconductors. EV makers, renewable energy providers and the aerospace industry in particular are eager to get their hands on this company’s chips and related products. It’s a growth story around electrification and decarbonization.



Given the bullish state of the sector, we also start building our Watch List once more, with three suggestions of securities some of us are already familiar with.

After a nearly 5% drop in September, investors once again stepped in, bought the dip, and have managed to push the market higher for a fourth straight week.



Stocks added to recent gains this past week, driving the Dow and S&P 500 to fresh highs. The S&P 500 rose 1.3%, the Dow climbed 0.4%, and the Nasdaq added 2.7%. And the bullish ways continued Monday as all of the major indexes piled on to recent gains.



Year-to-date the S&P 500, Dow and Nasdaq are up 22.6%, 17.0% and 20.3%, respectively.



And to put things into an even greater perspective the last three years have seen the S&P 500 up 29% in 2019, 16% in 2020 and over 22% in 2021.



The talking heads would have you believe a variety of different reasons for the prolonged rally, but ultimately it comes down to simple supply and demand. Over the past 18 months daily net inflows are triple what they were prior to the pandemic.



And right now, the firepower used to buy the dips, including FOMO (“fear of missing out”) and/or TINA (“there is no alternative”) seem to be enough ammunition to keep pushing the market higher.

The market has undergone a radical personality transformation since I released the July issue last week. I’m not hitting the panic button, yet. But it is certainly a situation I will closely monitor.

Emerging and international markets are holding their own as U.S. markets hit new highs in the wake of modest interest rate cuts by the Fed.

The Federal Reserve is expected to lower interest rates this week, with a likely announcement on July 31. The stock market has fully priced in a rate reduction, which means if the Fed fails to lower rates, investors can expect the market to fall for a few days.

Our portfolio is outperforming the index by roughly 100%, on average. But we’re not the only ones. Many targeted mutual funds are also demolishing the Russell 2000 Small Cap Index.

Remain bullish, but continue to take things on a stock-by-stock basis. Some potholes based on earnings, rotation and news flow are certainly possible, but overall, the bull market is in good shape and most leading stocks act well.

Monday’s overnight market decline of 7% caused several stocks in the Profit Booster portfolio to blow through their stops before we could act.

Hedge fund interest is up 18% in this medical device company. The shares have a current dividend yield of 2.16%, paid quarterly.

It’s time to look at some income ideas and this preferred stock is paying a nice 5% fixed rate.

There aren’t a lot of bright spots out there in today’s market but one datapoint I thought worth sharing is this: Heading into today the average return of our positions was 15% better than that of the S&P 500 Index over a comparable time frame.

This is the type of day where you’d typically want to be just watching and waiting, or even doing a little buying. But we have two positions that are at or near prices where we need to take some action.

Special Bulletin - Audio

The stock market is down again today due to oil price competition and aggression between Russia and Saudi Arabia, which led to plummeting oil prices.

I had already sensed an opportunity in big oil over the weekend and wrote an article that will appear on the Cabot website in the coming days.

The Model Portfolio is holding its own in this storm thus far, but we continue to pare back as needed given the selling wave.

This bank is trading at an undervalued level and has a current dividend yield of 4.91%, paid monthly.

It looks like we’ll be ending this week on a big down note as stocks are heading south once again. The culprit is no surprise; concern that this virus will spark at least a short-term economic downturn.

This financial company is expected to produce growth of more than 27% this year, and recently announced a 3-for-2 stock split.

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.