Today’s recommendation is a well-known pharmaceutical giant whose stock recently broke out above the high it hit in 2000, 22 years ago! But that’s not why it’s recommended today. Today’s story is all about new drugs and renewed growth.
As for the current portfolio, there are four stocks rated sell!
While last week’s market pullback was sharp, the long-term trend remains up and there are plenty of reasons to believe that stocks will be higher in the months ahead. Thus I’m happy to keep recommending stocks with good growth potential. Today’s recommendation is a big, well-known pharmaceutical name with a good story of renewed growth—and it’s also interesting because the stock just exceeded its 2000 high! The stock was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.
This is the story of a large biopharma company that is coming out of a growth trough (due to the 2019 patent expiration of Lyrica) and re-igniting its growth engines courtesy of COVID-related products and the transformative M&A that those revenue streams should permit.
The short version is that management says Pfizer’s core portfolio should drive 2022 revenue of around $45 billion (and EPS of $2.74) while Comirnaty (Pfizer’s Covid-19 vaccine) should generate 2022 revenue of $32 billion (EPS of $1.50).
Comparing these figures to 2022 revenue guidance of $100 billion leaves a shortfall of $23 billion. That revenue represents management’s early estimate of 2022 Paxlovid sales. This figure is based upon contracts in place as of Q4 fiscal 2021 earnings (February 2, 2022).
For those who don’t know, Paxlovid has been authorized (under emergency use) to treat mild-to-moderate COVID-19 in adults and children 12 years of age and older. It is the clear market leader in terms of oral COVID-19 antivirals based on efficacy (89%).
While vaccines are critical to the battle against COVID-19, treating infection effectively is essential if we’re to win the war. This is partly because there are a lot of places in the world where it’s more practical for sick people to take a pill than it is to deal with the supply chain challenges of shipping an mRNA vaccine.
Analysts see 2022 Paxlovid sales of $28 billion, or 22% higher than management’s early guidance. Actual results could differ materially, depending on how much governments stockpile. We’ll get the next update on May 3 when management reports Q1 2022 results.
Assuming all is about as expected, the punchline here is that, with both Comirnaty and Paxlovid, Pfizer stands to generate free cash flow of around $40 billion in 2022 (peak year), $33 billion in 2023 and $27 billion in 2024.
For reference, free cash flow in 2021 was $30 billion and 2020 (pre-COVID) was $12 billion. In other words, COVID-related products mean Pfizer should have a veritable war chest of cash to pursue transformative M&A.
While there is risk in how management spends it, this cash has the potential to completely reshape Pfizer’s growth profile from a roughly 5% growth business (ex-COVID) into something much more attractive long term.
The recently announced acquisition of Arena Pharma (ARNA), which has a potential blockbuster compound (etrasimod) for atopic dermatitis and ulcerative colitis (UC), is just one example. And just last week Pfizer went shopping again, snagging privately held ReViral for $525 million. ReViral is developing therapeutics for respiratory syncytial virus (RSV), which kills around 160,000 people each year. ReViral’s compound, sisunatovir, received fast-track designation from the FDA in 2020 and could generate $1.5 billion in annual revenue.
While we don’t know exactly what Pfizer will look like in one or two years since there are a lot of shoulds, coulds and what-ifs when it comes to M&A and drug development, the bottom line is that developing and acquiring growth assets is the business Pfizer is in.
Provided Paxlovid and Comirnaty sales meet or exceed expectations, Pfizer management has a lot of options. It just needs to execute.
I expect more investors will come around to Pfizer as it, hopefully, evolves from an interesting early-stage transformation story to a downright fantastic growth story.
As for the stock, PFE was trading at 40 back in March 2020, just prior to the pandemic, not particularly active. After sliding as low as 28 in sync with the market, shares gradually worked their way back to pre-pandemic levels by July 2021. As vaccines became more widely distributed throughout the summer of 2021 shares of PFE strengthened, eventually hitting a record high of 52 in August.
A drawdown to 41 hit in the fall, but PFE then rallied as high as 62 (a gain of 50%!) just before Christmas. Market weakness saw those gains evaporate as the stock was pulled back down to 45 by the end of February. But the turnaround was swift, and PFE roared back to 55 by March 21. A recent dip to 50 pulled buyers back in, so the trend is still up, and last week the stock eclipsed its March high of 55, a positive sign.
|PFE||Revenue and Earnings|
|Forward P/E: 7.2||Qtrly Rev||Qtrly Rev Growth||Qtrly EPS||Qtrly EPS Growth|
|Current P/E: 13.0||($bil)||(vs yr-ago-qtr)||($)||(vs yr-ago-qtr)|
|Profit Margin (latest qtr) 27.0%||Latest quarter||23.8||105%||1.07||143%|
|Debt Ratio: 47%||One quarter ago||24.1||134%||1.34||127%|
|Dividend: $1.60||Two quarters ago||19.0||92%||1.07||73%|
|Dividend Yield: 2.9%||Three quarters ago||14.4||46%||0.98||53%|
Current Recommendations and Changes
|Stock||Date Bought||Price Bought||Yield||Price on 4/11/22||Profit||Rating|
|Arista Networks (ANET)||1/4/21||139||0.0%||128||Hold|
|Bristol Myers Squibb (BMY)||11/2/21||59||2.8%||77||Hold|
|Brookfield Infrastructure Partners (BIP)||1/12/21||51||3.3%||66||Hold|
|Cisco Systems (CSCO)||7/27/21||55||2.9%||53||Hold|
|Devon Energy (DVN)||12/28/21||45||6.6%||61||Hold|
|Intel Corporation (INTC)||3/29/22||52||3.1%||47||Buy|
|Organon & Co. (OGN)||2/1/22||33||3.1%||36||Buy|
|Pioneer Natural Resources (PXD)||1/25/22||210||2.2%||248||Buy|
|Sensata Technologies (ST)||6/15/21||59||0.0%||48||Sell|
|U.S. Bancorp (USB)||9/21/21||57||3.5%||52||Sell|
This week the portfolio is selling four stocks, a fact that surprises even me a little. But that’s what these stocks deserve, according to the “rules” as I see them. As you’ve seen before, I may not exactly follow the advice of the advisor who initially recommended any particular stock, but there is method behind every decision—and with this portfolio, part of the method involves knowing that there’s always a new recommendation coming, every week! Details below.
Changes Since Last Week’s Update
Arista Networks (ANET) to Hold
GlobalFoundries (GFS) to Sell
Harley-Davidson (HOG) to Sell
Sensata Technologies (ST) to Sell
TaskUs (TASK) to Buy
U.S. Bancorp (USB) to Sell
Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, pulled back sharply with the market last week, but remains above its 50-day moving average. In his update last Thursday, Mike wrote, “ANET is an unfortunate example of what we’re seeing out there during the past trading days: The stock was one of the few in growth-land that had a ‘normal’ correction during the first two and a half months of the year, and when the pressure came off the indexes, it quickly spurted back toward its highs. But then came yesterday, with the stock gapping down sharply on big volume—raising the prospects of a big double top in the chart. Overall, ANET still looks better than most growth stocks, so it’s not like all hope is lost. But the question is, with a possible retest (or partial retest) of the market lows underway, are sellers going to come around for stocks that have ‘meat left on the bone,’ meaning they have avoided the worst of the selling in recent months. We’re not going to overreact to one day, but given the stock’s action and the market, we’ll return to a Hold rating; at this point, we’ll be using a mental stop in the low 120s, though the next few days will be key.” I’ll follow Mike’s lead and downgrade to Hold. HOLD
Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, remains one of the strongest stocks in the portfolio—and Bruce says it’s still undervalued. In his update last week, he wrote, “The European Commission approved the company’s Opdivo+Yervoy treatments for certain kinds of cancer. The approval adds credibility to management’s strategy. BMY shares are approaching the all-time closing high of 76.77 set on July 14, 2016 and have about 4% upside to our 78 price target. Valuation remains modest at 9.6x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 8.6x EV/EBITDA multiple is below the 9-10x or better multiple of its peers.” HOLD
Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was pulled down with the market last week but remains in a solid uptrend. In his update last week, Tom wrote, “This exceptional technology stalwart simply cannot overcome the power of the beleaguered tech sector. Tech is in the market crosshairs because of inflation and slower growth projections. Despite the fact that Broadcom should continue to post outstanding results, it can’t swim upstream. The stellar operational performance should prevail in the end and make it worth the wait.” HOLD
Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, finally pulled back last week after an unusually strong four-week run. In his update last week, Tom wrote, “It’s cloudy on some market sectors and sunny on others. BIP has a San Tropez tan from basking in the rays. It recently broke out to a new all-time high and a whole new level. It had been ever-so-slowly trending higher forever. But it got the lead out over the last months and soared over 15%. Brookfield is a great defensive business and investors love that in a volatile and uncertain market. (This security generates a K1 form at tax time).” HOLD
CarGurus (CARG), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here last week, operates the most popular website for researching and finding cars (both used and new) and is thus growing fast as it attracts more dealers; it had more than 30,000 at the end of 2021. The portfolio bought when the stock was a little high last week, but it has pulled back to its 50-day moving average since then and this looks like a great entry point. In last week’s update, Mike wrote, “Fears of an economic slowdown or recession obviously aren’t a good thing for CarGurus, whose business is, at least in some respects, tied to the health of used auto sales. Still, while the swings in CARG have been wild, we think it’s holding up fairly well compared to its recent range; shares are above their levels from the start of this rally (near 37.5) and above the 50-day line (near 39), and volume in general has been light as the stock has chopped around. Obviously, if the market continues to keel over, all bets are off, but we think more big investors are coming around to the view that the firm’s CarOffer segment is an emerging blue chip in and of itself, replacing old-school, inefficient auctions and allowing all the small dealers to be able to buy used cars from consumers directly. (The number of funds owning shares leapt from 418 at the end of September to 490 at year-end and has likely grown from there.) Plus, chart-wise, we’d note that the first huge gap on earnings (as CARG enjoyed in February) usually isn’t the last. Long story short, our eyes are obviously peeled given the renewed selling in the market, but so far, the stock’s action is reasonable; if things stabilize, we think shares can do well. A drop into the 37 to 38 range would have us abandoning ship, but right here, we’re holding what we own; if you don’t own any and have lots of cash, we’re OK buying a small position.” BUY
Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, has been up and down since our July recommendation but has made little net progress yet, which just means it’s a better value. In his update last week, Bruce wrote, “Cisco is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet. CSCO shares have 20% upside to our 66 price target. The dividend yield is an attractive 2.8%.” HOLD
Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, remains in a strong uptrend, still above its 25-day moving average. In his update last Thursday, Mike wrote, “DVN has eased a bit during the past couple of weeks, partly due to the market and, of course, because of some wild swings in oil prices, which chopped lower in a volatile fashion during the past few days. We’re open to anything, of course—we took partial profits a few weeks ago and have been on Hold since, recognizing that the spate of ‘good news’ (for oil prices) and the big runs in the stocks could lead to a meaningful correction. That said, we have to say that we’re impressed with the stock’s recent resilience: Despite recession worries, Fed hawkishness and lots of jawboning (including the release of a chunk of the strategic reserve), current oil prices remain in the mid-$90s, and contracts even a year out are still hanging around $88. And that obviously means the prospects for a bunch more beefy dividends and lots of share buybacks are high and increasing. If you don’t own any or have just a small amount, we wouldn’t argue with a nibble around here—DVN is inching down close to its rising 50-day line (now near 56), which has (mostly) contained its multi-month run. That said, officially, we’ll remain on Hold a bit longer and see how the stock (and the sector) handles itself in this environment.” HOLD
Ford Motor (F), originally recommended by Carl Delfeld in Cabot Explorer, sank below all its moving averages last week so the stock is definitely not strong. On the other hand, Carl says it’s a great bargain. In his update last week, he wrote, “Shares gave back two points this week as the company announced plans to produce over 2 million EVs (about one-third of its total auto sales) and generate a 10% adjusted operating profit margin by 2026. By 2030, it expects half of its global sales to be fully electric vehicles and targets $50 billion in EV investment through 2026. Trading at just three times trailing earnings, a fraction of its sales, and just seven times free cash flow, this is perhaps the best value of the leading EV makers so I encourage you to buy if you have not already done so.” BUY
GlobalFoundries (GFS), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here three weeks ago, has been a disaster over the past two weeks. Mike sold for his portfolio early last week and later in the week he wrote this update: “We always go back and look through our prior trades (usually after a few weeks or months to let the dust and emotions settle) and look at a few things—first, how the trade did, but equally important, what, if anything, could be improved upon in the selection. In the case of GFS, the results speak for themselves; we cut bait earlier this week when the stock tripped our loss limit and dipped below its 50-day line. Still, in all likelihood, we’d take the same trade again if the circumstances repeated: GFS had the story (long-term contracts + expanding capacity = great growth for at least three years going forward), numbers (big sales and earnings results and estimates) and chart (including big buying volume that drove the stock to new highs soon after the market got going) that suggested it was starting a big run; in our mind’s eye, such a trade will work seven times out of 10 times, and one or two of those will likely morph into bigger winners, too. Don’t get us wrong, that doesn’t excuse the loss—it debited our account just like any other sour trade—but simply to say we think the stock’s recent implosion has mostly to do with the overall market and the sector (ON is another potential chip leader that’s bit the dust). Either way, we think GFS’s recent slide will take time to heal; if you still own some and want to try to sell on a bounce, that’s fine, but we’re out and believe the damage done of late is abnormal.” I’ll sell too. SELL
Halliburton (HAL), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is another strong energy stock. In fact, the sector is so strong that Mike has recommended a few energy stocks in Cabot Top Ten Trader every week lately. HAL hit another new high last week and can be bought on any pullback from here. I’d target 36. BUY
Harley-Davidson (HOG), originally recommended by Carl Delfeld in Cabot Explorer, dipped with the market early last week but bounced right back, so is still hanging with all its moving averages. But Carl has moved on! In his update last week, he wrote, “Based on its lack of performance, we are removing Harley from the portfolio despite its exciting move into LiveWire electric motorcycle to open new markets.” And I’ll follow suit. As much as I like the story, this stock has neither value nor growth on its side. SELL
Intel (INTC), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier and featured here two weeks ago, sold off with the market last week. In his update last week, Tom wrote, “The technology icon is cheap and likely has much stronger growth years ahead. It was already beaten to a stub when it was added to the portfolio. The recent tech sector carnage only took the stock price back to where we bought it. The limited downside is a big part of the appeal in this sour market. It may not move for a while, but it will eventually. In the meantime, it should hold tough and pay a 3% yield.” BUY
Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was up last week while most growth stocks were down! In his update last week, Bruce wrote, “OGN was recently spun off from Merck. It specializes in patented women’s healthcare products and biosimilars, and also has a portfolio of mostly off-patent treatments. Organon will produce better internal growth with some boost through smart yet modest-sized acquisitions. It may eventually divest its Established Brands segment. The management and board appear capable, the company produces robust free cash flow, has modestly elevated debt and will pay a reasonable dividend. Investors have ignored the company, but we believe that Organon will produce at least stable and large free cash flows with a reasonable potential for growth. At our initial recommendation, the stock traded at a highly attractive 4x earnings. OGN shares have about 30% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.2% dividend yield.” BUY
Pioneer Natural Resources (PXD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is our third energy stock, and while it didn’t hit a new high last week, it is trading above all its moving averages. If you haven’t bought, try to get in on a pullback. BUY
Portillo’s (PTLO), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured two weeks ago, is a Chicago-based restaurant chain that came public last October and is planning on using the proceeds from that offering to expand from its current nine states to many more. After peaking at 57 in November, the stock corrected all the way down to 21, and as it works to recover from that low (it’s still building a base), it looks like a good investment. BUY
Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, is being evicted from the portfolio today—but Bruce is hanging on patiently, because the facts that attracted him to the stock have not changed; in fact, the stock is cheaper! But this portfolio doesn’t have quite the patience of Bruce’s (Cabot Top Ten Trader is the least patient of the advisories I draw from, while Cabot Undervalued Stocks Advisor is the most patient). Today, I don’t like last week’s gap down through support at 50 and I don’t like the growing loss, so out it goes. SELL
TaskUs (TASK), originally recommended by Tyler Laundon in Cabot Early Opportunities, provides customer support and customer experience (CX) services to “new economy” companies like Zoom (ZM), Uber (UBER), Netflix (NFLX), Coinbase (COIN), DoorDash (DASH) and Meta Platform’s (FB) Instagram, among others. The stock came public last June, peaked at 85 in September, pulled back to the 30 area in January and February (where we recommended it) and then gapped up after the company’s fourth-quarter report was released. Last week’s market action pulled it down a bit, but the stock is now sitting on its 50-day moving average, and this looks like a nice entry point. I’ll upgrade to Buy. BUY
Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, had three very strong weeks but then pulled back late last week and now sits right on its 25-day moving average, which looks like a great entry point from Mike’s current (shorter-term) perspective. In fact, TSLA earned another spot in Cabot Top Ten Trader last Monday, when Mike wrote, “The auto industry isn’t exactly on fire right now, but Tesla (covered in the January 3 report) is an exception. The electric vehicle (EV) maker is making strides even as its competitors remain stuck in neutral, as the latest news attests. Over the weekend, Tesla said it delivered over 310,000 vehicles in the first quarter—a record number of shipments and up 68% from a year ago—with shipments rising 0.5% from Q4. Although the number slightly trailed analyst estimates, it showed that the global chip shortage that’s especially impacting the auto sector hasn’t been an obstacle for Tesla. In fact, the company has been expanding in the face of ongoing supply-chain challenges, as its recent opening of a new plant in Germany shows. A major Wall Street institution hailed the new Gigafactory as one of Tesla’s ‘biggest strategic endeavors’ in the last 10 years, adding that it should further increase the firm’s European market share as more consumers ‘aggressively head down the EV path.’ Moreover, Tesla guided for higher production levels at its existing plants in 2022, with plans to bring more production online as the year progresses (including at its new plant in Texas). Based on the company’s 2021 production, higher output is definitely warranted as Tesla nearly doubled its EV deliveries last year (to 936,172 units, compared to 499,500 units in 2020), even as its competition increased. Revenue, margins and earnings are also still galloping ahead as evidenced by the 65% sales and 218% EPS increase in Q4. When the company reports Q1 earnings on April 20, analysts expect top- and bottom-line growth of 70% and 140%, respectively, with earnings expected to rise 60% for all of 2022, and even that could prove conservative as Tesla’s execution has been top-notch during the past couple of years.
As for the stock, after a much-needed breather last year, TSLA tightened up during the summer and broke out in October, and the rally that followed took the stock to around 1,200 by early November. But that was the market peak, and another correction ensued for four months which took shares to 700 (down over 40%!), but the damage wasn’t as bad as it sounds, with shares holding the 40-week line unlike most growth titles. The snapback since the market low has been impressive, though it’s now sitting in a big resistance area. We suggest aiming for dips with a stop in the low 900s.” Shorter-term traders can buy here, but I’ll stick with hold. HOLD
U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is looking worse; it’s now trading below all its moving averages and hitting its lowest levels in over a year. In his update last week, Tom wrote, “Financials have turned ugly and so has USB. Rates are moving higher but there is growing concern for future economic growth amidst inflation and the Fed. The rate story is playing out, but we are losing the assumption of above-par growth for several more quarters. This may be a short-term overreaction. But it could be a new trend that lasts. In a prudent act of caution, let’s take half of the position off the table and secure some of the profits. The portfolio is selling half.” I don’t do halves in this portfolio. I’m selling all. SELL
Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, might also be classified a financial stock, but it doesn’t look as bad as USB. In his update last week, Tom wrote, “Visa is hanging tough amidst financial sector woes. It got clobbered after the initial war news but has been moving higher recently as investors recognize V as a good place to bottom fish. I expect business to remain strongly growing this year and the stock should trend higher in the absence of more panic or a steep market selloff. It’s up sharply off the bottom.” HOLD
The next Cabot Stock of the Week issue will be published on April 18, 2022.