Stocks finally had a bad week on the heels of a two-month, off-the-bottom rally that hadn’t relented since mid-June. One bad week doesn’t mean we’re destined to return to the kind of selling we saw in the first half of 2022. But the retreat was sharp enough to sell three of our weakest performers and add some safety in the form of another dividend stock. But the newest addition to the portfolio, courtesy of Tom Hutchinson, isn’t some stodgy utility company. It’s a fast-growing technology company whose stock is starting to regain traction with investors.

Details inside.

Cabot Stock of the Week Issue: August 22, 2022

After more than a month of gains, stocks hit a wall last week, and the selling continued today. The S&P 500 is down more than 3% since our last issue; true to recent form, the Nasdaq fell even further, down more than 5%.

Is it the start of a much deeper correction that could take stocks back near their mid-June lows? Or is this simply some end-of-summer consolidation on the heels of an impressive 17%, two-month rally? The next couple weeks should tell us a lot, especially as institutional investors finally return from their vacations in the Hamptons and get their portfolios ready for fall.

Regardless, with the market doing another unwanted about-face and with a full portfolio as of last week, we have three outright sells today. And we are adding a bit of safety to our portfolio with another dividend pick courtesy of Cabot Dividend Investor Chief Analyst Tom Hutchinson. It’s not some boring utility company, though; it’s a technology stock with some nice recent momentum, but still trading about 24% off its 2022 highs.

Here is the stock, and Tom’s latest thoughts on it.

Qualcomm (QCOM)
Technology stocks are having a bad year. The industry is one of the worst performing S&P 500 sectors YTD, down more than 15%.

There are several reasons for the recent poor performance. One is simply a comeuppance. The sector boomed through the pandemic as people relied on technology more than ever during the lockdowns. That aberration put the sector on a different schedule. Technology stocks have also driven the market higher as the best performing sector for the past three-, five- and 10-year periods even after the recent selloff.

In addition, inflation and higher interest rates tend to decrease growth rates as costs increase. That’s why growth stocks in general are struggling in this environment. But technology has driven this market for more than a decade for good reason. We are in a technological revolution and that’s where all the growth is.

Inflation, a hawkish Fed, and recession may be all the rage right now. But things change, and investors will again gravitate to companies that will own the future, especially at a bargain price. It’s also likely that technology will lead this market higher after leading it lower. A shift may already be beginning, as the sector is the second-best performer over the last three months.

Qualcomm (QCOM) is the world’s largest supplier of chips for mobile devices. It also holds the patents for the key technology systems that are the backbone of all 3G and 4G networks. Chips account for over 70% of revenues while licensing from patents accounts for the rest, although the smaller area is more profitable and better insulated from competition.

Big deal, there are lots of semiconductor companies. And competition is fierce. But Qualcomm has an enormous advantage going for it right now. It is the undisputed king of the chips that will enable 5G technology.

Qualcomm’s 5G Snapdragon 855 chipset uniquely offers modularity, the ability to mitigate the existing spectrum to accommodate 5G. It offers a bridge between older 3G and 4G and the 5G upgrade that virtually every company will need. In order to effectively compete in the fierce race between countries and companies to develop the new technology, equipment makers must have Qualcomm’s chips.

Analysts estimate that the 5G chipset market will grow from $2.1 billion in 2020 to over $23 billion by 2026. Qualcomm has already partnered with 30 smartphone makers that will use its chips and equipment. And the new 5G-enabled phones have rocketed earnings for over a year and will continue to do so for a while.

The most recent quarter beat expectations on 36% higher revenues and 54% higher earnings than last year’s quarter as smartphone royalties soared 59%. Although the company expects slower 5G phone sales the rest of the year, it still sees 23% revenue growth in the next two quarters. The company has sold off all year in anticipation of these slow sales, and the stock now sells at a dirt-cheap multiple.

In addition to booming smartphone sales, the company has done a stellar job of diversifying by selling a lot more Samsung chips. Also, future business looks very promising. The company increased automobile chip sales by 41% and Internet of Things (IoT) by 61% versus the year-ago quarter. These are areas with the most growth potential in future years.

The stock has been hammered in the tech selloff this year. But it was a beloved superstar before then. It had received a slew of analyst upgrades and high price targets after it reported its projections for this year and next. And little has changed except the market’s treatment of the sector. The stock doesn’t deserve to be down as much as it is. When things change, and they always do, the market will come back to Qualcomm and its booming earnings growth.

Current Recommendations

Changes Since Last Week’s Update
Allbirds (BIRD) Moves from HOLD to SELL
Bumble (BMBL) Moves from BUY to SELL
Nio, Inc. (NIO) Moves from BUY to HOLD
Pfizer (PFE) Moves from HOLD to SELL

We are selling three stocks this week, none of which were making us money. With the market possibly changing character in the past week, and more selling potentially to come, it makes sense to trim some of our weaker performers. Chief among them is recent recommendation Bumble (BMBL), which has gotten trounced following a disappointing earnings report. We are also downgrading Nio, Inc. (NIO) to Hold, as it’s had a sluggish couple of weeks.

These changes, plus the addition of Qualcomm (QCOM), leave us with 18 stocks in the portfolio – no longer bumping up against our maximum capacity of 20. It was fun while it lasted!

There’s plenty to like among our remaining stocks. Here’s the latest on all of them.

Updates
Allbirds (BIRD), originally recommended by Tyler Laundon in Cabot Early Opportunities, continued to sell off last week following a rough second-quarter earnings report earlier this month. Inventories only grew by 1%, gross margin plummeted from 56.1% in the same quarter a year ago to 36.1% this year, and the company lowered its 2022 guidance. Since that August 8 report, the stock has fallen about 23%, erasing all of the gains we’d made on BIRD in its first two months-plus in the portfolio. Let’s step aside before it becomes more than a trivial loss, and search for companies with more upbeat immediate futures. MOVE FROM HOLD TO SELL

Allison Transmission (ALSN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, fell slightly this past week, back to our late-June entry price. Recent earnings results were mixed. Here’s what Bruce had to say about them in his latest update: “On August 3, Allison reported good results compared to a year ago but which fell short of consensus estimates. The company reiterated its full-year adjusted EBITDA and adjusted Free Cash Flow guidance although it incrementally narrowed the range. We view this as a confidence-builder in the full-year outlook, but beyond year-end the outlook is murkier. Allison continues to see healthy demand, particularly in its core North American On-Highway segment (about half of sales) which posted a 13% increase in revenues. All segments but Defense (4% of sales) showed reasonably positive sales growth, as well. Operating profits rose 12%, as higher prices and lower overhead spending more than offset elevated materials costs and higher engineering spending.

“Allison’s cash flow remains healthy although weaker than a year ago as the company’s working capital consumed more cash. The balance sheet is strong. As the company continues to repurchase its shares, the share count continues to decline, down 11% from a year ago.

“Allison shares … have 22% upside to our 48 price target. The stock pays an attractive and sustainable 2.1% dividend yield to help compensate investors while waiting for the recovery.” Bruce rates the stock a buy, but we’ll keep it at Hold for now. HOLD

Aris Water Solutions (ARIS), originally recommended by Tyler Laundon in Cabot Early Opportunities, was flat this past week. After dipping from 22 to as low as 15 following underwhelming Q2 results (prompting us to downgrade the stock from Buy to Hold), ARIS rebounded to the mid-17s, leaving us with a small profit on it. It’s possible the market took a second look at some of the positives from the company’s latest quarter – adjusted net income was up 151% from the same quarter a year ago, while adjusted EBITDA improved 21%. We’ll see how it behaves from here, as Q2 earnings get further in the rear-view mirror. Keeping at Hold. HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, tumbled about 3% this week, coughing up all the gains from the previous week. Still, the stock remains well above its early-July bottom in the 475 range. In his latest update, Tom wrote, “Like the rest of the technology sector and the overall market, AVGO got a nice move higher off the June low. The performance among tech stocks has been encouraging. After leading the overall market lower earlier this year, the sector has outperformed the index for the last several months. Broadcom is also very well positioned to benefit in a fundamental way from the 5G rollout and the proliferation of cloud computing. It reports earnings in a couple of weeks. Recent quarterly reports have been excellent and hopefully the stock gets a boost this time.” Those earnings are due out on September 1. We’ll keep it at Buy for now. BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, just continues to climb, up another point last week. BIP shares have now risen 15% in the last two months. Tom likes what he sees from the stock, as he wrote in his latest update, “This defensive infrastructure partnership reported super earnings this month. Funds from operations were up 30% from last year’s quarter and a new record. That’s powerful growth for a highly defensive dividend-paying company. Results were higher across the board and Brookfield got the most growth from the midstream energy sector, powered by last year’s large pipeline company acquisition. BIP is still well off the high but has been trending consistently higher since June. (This security generates a K-1 form at tax time).” BUY

Bumble (BMBL), originally recommended by Mike Cintolo in Cabot Growth Investor, has been a disaster since we recommended it in this space three weeks ago, and it’s time to sell. A bad quarter has been the culprit, prompting Mike to sell in his update last week. Here’s what he said, “Bumble has a good story, and at some point, we think this relatively recent IPO can be a leader—the underlying fundamentals of its Bumble app (as opposed to its overseas-focused Badoo offering) remain fantastic, and the CEO seems like a top-notch stemwinder. But the Q2 report was clearly a dud, with estimates coming down since then, and the stock is showing us a loss. We’ll keep a distant eye on it down the road, as being the leader in a big mass market like online dating should keep growth humming, but right here we think it best to cut bait and look for stronger situations.” I agree. Let’s let BMBL go before the selling gets even worse. MOVE FROM BUY TO SELL

Centrus Energy (LEU), originally recommended by Carl Delfeld in Cabot Explorer, had its first bad week since we added it to the portfolio a month ago, falling to 37 after reaching as high as 44. Still, we have a nice profit on the stock, and a correction should be no surprise given the furious run-up the previous three weeks, and the fact that the market has again hit a bumpy patch. In his latest update, Carl wrote, “Centrus Energy shares, after an impressive run over the last few weeks, retreated to 38 on some profit taking. The company recently announced quarterly earnings of $2.51 per share, compared to earnings of $0.79 per share a year ago. Based in Bethesda, Maryland, Centrus supplies nuclear fuel and services for the global nuclear power industry.

“The nuclear power industry is anticipating a new generation of advanced reactors under development. Centrus provides an integrated solution for meeting the industry’s engineering, manufacturing and fuel needs. The United States has 94 reactors that generate about 20% of our electricity but we have not built one new plant in the last 25 years. Centrus stock is still trading way off its 52-week high and at just under four times earnings.” BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, continued its slow-but-steady recovery from a massive retreat, this time spurred along by a strong quarterly earnings report last Wednesday. The company reported adjusted earnings per share of 83 cents, just ahead of the 82 cents per share expected. Also, Cisco issued better-than-expected revenue guidance for 2023 (its new fiscal year began this month), anticipating top-line growth in a range of 4% to 6%, ahead of the 3% growth previously estimated.

Wall Street liked what it saw, pushing CSCO shares up from 46 to 48 after the report. Bruce still has a 66 price target on the stock. We’ll keep it at Hold. HOLD

Cleveland-Cliffs (CLF), originally recommended by Clif Droke in his Sector Xpress Gold & Metals Advisor, had a rough first week in the portfolio, falling from 19 to 17. No matter. After rising from 14 to 19 in the month prior, some consolidation in CLF was to be expected. In his latest update, Clif attributed recent performance to a short-covering squeeze. Here’s what he wrote: “Cleveland-Cliffs, North America’s largest flat-rolled steel and iron ore pellet maker, just reported mostly upbeat second-quarter earnings. Revenue for the steelmaker in Q2 rose 26% from a year ago to $6.3 billion, while per-share earnings of $1.31 missed estimates by five cents. Other highlights included free cash flow that more than doubled from the prior quarter, plus the firm’s largest quarterly debt reduction since it began its transformation two years ago. The company, which enjoys a leadership position in providing steel for the U.S. automotive industry, expects the enormous backlog for vehicles will result in higher steel demand in the coming quarters, which could help push prices for the metal higher. The stock, meanwhile, is subject to what looks like a growing short-covering squeeze as 9% of the float is currently sold short.” BUY

CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, pulled back a bit this week after a strong run the prior few weeks. It’s still up 15% in the last two months. In his latest update, Carl wrote, “It was reported that CVS plans on submitting a bid for Signify. Signify conducts in-home health evaluations and has a market value of less than $7 billion. CVS could potentially buy the company in cash, because as of June its cash balance totaled $12.5 billion. The company also hinted that it could also be getting into the primary care business before the end of 2022. CVS Health’s earnings per share has grown 26% each year, compounded, over the past three years.” BUY

Enphase Energy (ENPH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, took it on the chin along with most growth stocks last week, falling from highs above 300 to 280. Here’s how Mike interpreted the pullback in his latest update, “Enphase Energy continues to battle with round-number resistance near 300, which is something to watch; the failure to rally could open the stock up to some short-term gyrations. Even so, the stock acts just fine—to this point, it’s refused to give up any of its huge post-earnings and post-green energy bill rally, which is bullish, and there’s little doubt that demand for its microinverters, energy storage and even EV charger offerings is going through the roof, especially as energy/electricity prices are elevated everywhere. We certainly can’t rule out some near-term weakness (especially if the market pulls in), but if this rally is the real McCoy, all signs point to ENPH being one of the leaders.” BUY

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer, fell sharply this week, from the mid-18s to the low 17s. Having climbed from 14 in the last two months, the pullback isn’t overly concerning. In his latest update, Carl wrote, “This sleep-well-at-night company and stock is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the ‘brains’ of industrial robots Fanuc’s stock offers us a high-quality stock that should be firm with its strong balance sheet with plenty of cash. Fanuc is a play on a clear industrial robotics growth trend and my six-month price target for this low-risk stock remains 25.” BUY

Molson Coors (TAP), originally recommended by Bruce Kaser in the Buy Low Opportunities Portfolio of his Cabot Undervalued Stocks Advisor, lost a point last week, but held within the 55-56 range it’s been in for the last two weeks. In his latest update, Bruce wrote, “On August 2, the company reported in-line results and guidance, but the shares tumbled as investors worried that slowing industry volumes, and perhaps that Molson’s push into premium brands has come at the wrong moment as consumers start to trade down. The decline in the share price does not diminish our appetite for the stock.

“Revenues rose 2.2% excluding currency changes and adjusted earnings fell 25%. The company reaffirmed its full-year revenue, profit and free cash flow guidance. Prices rose 7% but volumes fell 5%. Volumes for the industry as a whole were weak, so it appears that Molson gained share. The company said that it is roughly balanced between premium brands and lower-priced brands – a mix that is more sensible today as many consumers are trading down due to inflation and the weak economy. Profits slipped due to sharply higher materials, transportation and energy costs.

“TAP shares … have about 22% upside to our 69 price target. The stock remains cheap, particularly on an EV/EBITDA basis, or enterprise value/cash operating profits, where it trades at 9.1x estimated 2022 results, still among the lowest valuations in the consumer staples group and below other brewing companies. The 2.7% dividend yield only adds to the appeal.” BUY

Nio, Inc. (NIO), originally recommended by Carl Delfeld in Cabot Explorer, pulled back from 21 to 19 this week, but is still at the bottom of its six-week range. Carl actually sold shares of this Chinese electric vehicle maker earlier this month, citing its “lack of momentum in a growth market” as the reason. We’ll hang on to it for now, since the company accounted for almost 60% of global electric vehicle exports in 2021, and the stock is already more than 70% below its highs. However, with momentum possibly flagging, we’ll downgrade from Buy to Hold. MOVE FROM BUY TO HOLD

ONEOK, Inc. (OKE), originally recommended by Tom Hutchinson in Cabot Dividend Investor, held firm this week after a big gap up last week following a strong earnings report. In his latest update, Tom wrote, “This midstream energy company is solid. But OKE had a sizable 30% decline this year at the low. The stock has since reversed course and has moved about 20% higher from the June low. It sold off because it had such a huge year in 2021, returning over 60%, and earnings growth is sluggish compared to the sector, which has had 299% earnings growth this quarter. The difference is because ONEOK’s earnings didn’t plummet in the pandemic. In fact, they continued to grow. Such resilience shows that OKE should be solid in a recession.” BUY

Pfizer (PFE), originally recommended by Tyler Laundon in Cabot Early Opportunities, hasn’t responded well to earnings last month, with shares falling from 52 to 49 since. That was despite top- and bottom-line earnings beats, with the big pharma company booking $27.7 billion in revenue in the second quarter—up 47% from last year, and the company’s largest quarter on record. Net income was up 78% year over year. What gives? Well, the company merely maintained its 2022 revenue and earnings guidance, which Wall Street didn’t seem to like.

Given that we’re sitting on a small loss and that the stock has been on slow decline for the past six weeks, let’s step aside here and make room for better opportunities. MOVE FROM HOLD TO SELL

Samsara (IOT), originally recommended by Tyler Laundon in Cabot Early Opportunities, fell slightly along with most growth stocks this week. As its ticker symbol suggests, Samsara is an Internet of Things (IoT) company that came public late last year and, after a rough start, has righted the ship in the last three months, trading above its 50-day moving average since July 1. The company is growing rapidly, with sales up 108% in fiscal 2021 and another 71% in FY ’22 (Samsara’s fiscal year ends in January).

Samsara has developed a platform of hardware and software for tracking vehicle fleets and other physical assets. These solutions help customers operate more safely and more efficiently, and often pay for themselves through lower accident expenses, less waste and lower fuel and insurance costs. Its target market is valued at roughly $55 billion.

Samsara uses a combination of in-vehicle devices, gateway sensors, video-based AI and a cloud platform – Samsara Connected Operations Cloud – to monitor and manage commercial vehicles and their drivers, worksites, manufacturing equipment, heavy equipment and more.

Earnings are due out next Wednesday, August 31. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, retreated considerably after bumping up against resistance at 925 early last week but remained in its August range of 850-925. The 6% pullback this past week is no surprise given that shares had advanced from a low of 628 in late May. The recent dip presents a nice entry point for those who hadn’t already bought.

The latest bit of good news for the company is that Elon Musk said it has now produced more than 3 million vehicles, a third of which have been delivered in China. June was the company’s most productive month on record, contributing to the 258,000 cars produced in the second quarter, a 25% improvement from the same quarter a year ago, though a 15% drop from the previous quarter. BUY

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gave back some of its gains after gapping up from 375 to 403 the previous week. Second-quarter earnings are due out this Thursday, August 25, so shares probably won’t move much until then. ULTA is above our 382 entry price but well below its June (425) and April (431) highs. We will keep ULTA at Hold until after earnings, which should hopefully bring more clarity on the stock’s direction. HOLD

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, dipped about 3% last week, leaving us almost exactly even on the stock. But it’s still up 11% in the last two months, and the company is coming off a stellar quarter, so we’ll keep hanging on to it. Here’s what Tom wrote about the recent report: “Visa’s earnings knocked it out of the park. It beat expectations on both earnings and revenues, which were up 33% and 19%, respectively. The company continues to benefit from increased global business from the ending of Covid restrictions despite slower global growth. The stock is normally very quick to recover with the overall market, but it has been more sluggish this time around because of a pending bill in the Senate that will limit credit card fees. We’ll see what the bill looks like and gauge the chances of passage. In the meantime, business is still booming despite inflation and recession.” HOLD

The next Cabot Stock of the Week issue will be published on August 29, 2022.

Analyst Bio

Chris Preston

Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.

Chris joined Cabot in 2015, where he previously served as staff analyst, web editor, and Chief Analyst of Cabot Wealth Daily, our free investment advisory, which in 2019 was named “Best Financial/Investing Newsletter or Ezine” at the SIPA (Specialized Information Publishers Association) Awards, with Chris at the helm.

Prior to joining Cabot, Chris was an analyst and assistant managing editor with Wyatt Investment Research. He has been an investment analyst for more than a decade and a professional writer/editor for nearly 20 years, picking up multiple writing awards along the way. His bylines have appeared in Forbes, The Money Show, Time Magazine, U.S. News and World Report and ESPN.com.

Chris lives in Vermont with his wife, two young kids and their golden retriever, Scout. He occasionally sleeps.