April 12, 2021

While there are still symptoms of a broad unfolding market top, and the market as a whole is soft today, the main trend is still clearly up and thus I continue to recommend you be substantially invested.

In fact, in our recommended portfolio all our stocks look fine; there are no recommended changes today.

As for today’s recommendation, it’s a technology company that’s a household name, but still small enough to grow very fast.

Details inside.

Cabot Stock of the Week 343

The leading indexes continue to hit record highs, telling us the bull market that began over a year ago, though it is showing some signs of age, remains intact. Thus I continue to recommend that you be heavily invested in stocks that can help you reach your investing goals. And, as always, I recommend diversification among investing strategies as an easy route to reduced risk. Looking at our portfolio this week, I noticed that there were no stocks from the small-cap universe that is the focus of Tyler Laundon’s work (we recently sold a couple), so I looked at his latest recommendations, and found three very attractive charts. I studied the fundamentals—all good. But in the end, I chose not to take the risk of the very smallest companies, which saw revenues of only $12 million and $20 million in the latest quarter. The one I chose (a household name at this point) has revenues many times higher, with almost unlimited growth potential. Here are Tyler’s latest thoughts.

Sonos (SONO)
Sonos was the first company to introduce multi-room wireless audio solutions. Its smart speakers, amplifiers, ports, and other audio accessories are easy to set up and offer a premium sound experience, without all the expense and hassle of running wires throughout a home.

This relative simplicity makes Sonos’ solutions a perfect fit for the millions of homes, apartments and commercial buildings that were not previously hard-wired for audio systems, and for owners that don’t want to invest in hard wiring during construction.

Sonos offers a variety of speaker options. Portable speakers range from $169 for the Roam up to $399 for the indoor/outdoor rated Move. Smart speakers range from $199 for the One up to $1856 for a surround-sound speaker set with subwoofer. For those wanting hidden options, Sonos resells Sonance architectural speakers that fit in ceilings and walls.

Speakers are only as good as the system that powers them. Sonos has you covered there too. The Port ($449) is the company’s streaming component while Amp ($649) is the amplifier.

With over 100 content providers (Pandora, Spotify, Apple Music, etc.) these components will stream podcasts, music, audiobooks and internet radio to any in-range areas of a property that contain Sonos’ speakers, giving owners flexibility to expand their system to suit their needs.

This flexibility is one of the key selling points for first-time buyers. Management says 41% of customers came back to purchase additional products in 2020. That trend with repeat customers also helps illustrate the large opportunity in front of Sonos, which has just expanded its addressable market by up to four times (from $25 billion to $100 billion) by introducing products and partnerships beyond the home audio market and into the global audio market.

The first step here was the introduction of the Roam speaker ($169), which opens the door to younger and less-affluent potential customers that could upgrade with other Sonos products over time. A budding partnership with Ikea to launch Sonos’ smart speakers into household objects sold by Ikea builds on this initiative.

Management also recently disclosed that the company has teamed up with Audi to provide speakers in the 2022 Audi Q4 e-tron. This could signal that more automotive deals are in the works.

Finally, management is working on messaging and additional partnerships (Audi, Disney+, the North Face, etc.) to reach more people. It is also expanding into the commercial space with The Sonos For Business initiative wherein the company aims to help restaurants, shops, salons and offices stream music via legally licensed content.

Sonos management is now pitching the company as no longer owning roughly 5% of the home audio market, but owning a much smaller slice of the much larger global audio market. That’s a compelling proposition for investors, especially as they realize that the company is increasingly open to licensing certain IP, which could drive wider adoption of services, like Sonos radio HD.

Revenue was up 11% in 2019 then expanded by a comparatively meager 5% in 2020 (to $1.3 billion) owing to Covid impacts in the first half of the year.

Analysts are currently looking for sales to grow 18% to $1.56 billion in 2021, then by 11% next year. Adjusted EPS was -$0.18 in 2020 but should flip positive to $0.81 this year and grow by roughly 25% in 2022.

SONO came public in August 2018 at 15 and jumped 33% the first day. After a little dip SONO was trading near the IPO price just prior to the pandemic, then fell below 7 during the market crash. A rebound in sales pushed SONO to 18 in July 2020.

Shares then pulled back and consolidated in the 12 to 17 range until November 18, when a huge earnings report sent SONO above 20. The stock has been making a series of higher highs and higher lows since and the current pullback to support at 40 offers a decent entry point.

Current Recommendations

While most stocks in the portfolio have yet to hit new highs, most are still in positive patterns, with good fundamental stories. So there are no recommended sells today. And for new readers (or if you’re feeling underinvested), there are still nine stocks rated Buy—ranging from very conservative to quite speculative. Details below.

Changes
None.

Barrick Gold (GOLD), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, continues to move in the right direction. In his update last week, Bruce wrote, “The prime minister of Papua New Guinea announced that it is close to a new agreement with Barrick to re-open the Porgera mine, which previously produced about 5% of Barrick’s global output. Barrick’s contract with the country to operate the mine expired in August 2019, which later led to a dispute. The mine was put on ‘care and maintenance.’ New terms haven’t been announced but are likely to allocate a higher proportion of ownership to the government. One of CEO Mark Bristow’s skills is successfully negotiating these complicated agreements – we’ll see more on this agreement once it is finalized. Barron’s magazine wrote favorably about Barrick in its recent edition, speaking highly of its leadership, high-quality mines, attractive valuation and strong free cash flow that may start to flow into shareholders’ pockets. The article described how the CEO, Mark Bristow, reiterated his discipline in making acquisitions. Barrick shares rose 8% this past week and have about 29% upside to our 27 price target. The stock trades at a sizeable discount to our value estimate of 27, based on 7.5x estimated 2021 EBITDA and at a modest premium to its $25/share net asset value. On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.7% dividend yield.” BUY.

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has spent the past week trading fairly tightly around 480, setting up for a breakout above its February high of 495. In his update last week, Tom wrote, “This semiconductor and business software giant is looking good so far. Technology stocks really haven’t had a good time of it in the months since AVGO was added to the portfolio. But the position has still managed to return 8% so far. It’s well set up to benefit from 5G and has a strong and growing order backlog that should keep earnings growing. It also pays a nice dividend. And technology stocks will shine again before long.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, inched out to new highs last week (though volume was unimpressive) and has pulled back minimally since. In Tom’s latest update, he wrote, “This desirable infrastructure gem looks to be finally breaking out. It had gotten cast aside for prettier girls during the market’s cyclical stock bender. It had gone nowhere since mid-January and pretty much nowhere since early November. But BIP just broke out to a new high on positive news about the Inter Pipeline acquisition. Brookfield made a bid for a hostile takeover of $5.65 billion in order to pick up a sizable North American energy asset on the cheap after a tough year. The company originally balked, and investors feared Brookfield would respond by paying a lot more. But BIP stuck to their guns and Inter indicated it would accept the offer and the stock spiked on the news. The deal should be a needle mover for BIP, and the market is taking notice.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, continues to recover from its March 2020 low. In his latest update, Bruce wrote, “KO shares have about 20% upside to our 64 price target. While the valuation is not statistically cheap, at 24.8x estimated 2021 earnings of $2.15 (unchanged in the past week) and 22.9x estimated 2022 earnings of $2.33 (unchanged), the shares are undervalued while also offering an attractive 3.1% dividend yield.” BUY.

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, had climbed back above its 50-day moving average early last week, but as the week wore on, the stock weakened again—which is slightly concerning. Still, the long-term prospects look great. In last week’s update, Mike wrote, “DKNG was the latest in a line of growth stocks that got hit after toying with new highs. While the bounce since then has been modest, shares have steadied themselves, the overall chart looks fine (higher lows over time) and the story remains top notch—New York has legalized sports betting, and while the approval isn’t straightforward (the state will grant licenses to two operators that will then sublicense them out; there could be some lawsuits regarding the bill), analysts seem to agree well-capitalized operators like DraftKings are most likely to benefit, with a late-2021/early-2022 potential launch. Big picture, the company’s growth should remain rapid for many years; near term, further wobbles in the stock wouldn’t surprise us, but we’re sticking with our plan of using a 20% loss limit (in the 57 area on a closing basis). Hold on if you own it, and if not, we’re OK buying a small position in this area.” HOLD.

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to work on staying above the 200 level—and all signs say it will eventually succeed. In his update last Thursday in Cabot Growth Investor, Mike wrote, “Nothing has changed with Five Below during the past couple of weeks, either on the news front or with the stock, which continues to hack around generally south of 200. Still, the more times resistance is tested the weaker it gets, so the repeated tests of that round number area (we count six tests since the start of March!) are likely eating away at the potential selling pressures, at least in theory. Overall, nothing has changed with our thoughts; Five Below is back on a great growth path, which is probably better than it was before the pandemic due to its e-commerce investments and new Five Beyond product offerings (up to $10). Combined with the fact it had only a four-month rally after lifting from a two-year base in September, we think the next big move is up.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, hit another new high last Tuesday and has pulled back normally since. In his update last week, Bruce wrote, “General Motors is estimated to produce about 14% higher revenues in 2021, but earnings are expected to increase only about 6% (to about $5.21) due to near-term headwinds from tight semiconductor chip supplies. GM Financial will likely continue to be a sizeable profit generator. GM announced that it plans to produce an all-electric Silverado pickup truck when construction is completed at its new flagship EV assembly plant in Detroit. GM shares have 1% upside to our 62 price target.“ HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, remains a long-term hold, as growth prospects remain great for the largest operator of hotels in China. The stock dipped below its 50-day moving average last Friday but volume on the move was light and the main trend remains up. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has pulled back to the 50 level, but remains above all its moving averages. In his update last week, Bruce wrote, “Molson is estimated to produce about 5% revenue growth and a 3% decline in per share earnings in 2021. Profit growth is projected to increase to a 2-3% rate in future years. Weakness this year is closely related to the sluggish re-opening of the European economies, along with higher commodity and marketing costs. The company will likely re-instate its dividend later this year, which could provide a 2.7% yield. TAP shares have about 12% upside to our 59 price target. Earnings estimates ticked down fractionally this past week, with no change to the 2021 estimate and a 2-cent decline in the 2022 estimate. TAP shares trade at 13.9x estimated 2021 earnings of $3.81. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 9.2x current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies.” HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is also above all its moving averages, having surmounted its 50-day moving average last week. In his update last week, Tom wrote, “This combination regulated and alternative energy utility stock had a rare selloff during the cyclical rally in February and early March. I had been waiting for an opportunity to raise NEE to a BUY for a long time. But it was an up-trending juggernaut that never showed any weakness until now. Everything that was true about the company when it was flying high is still true. And I expect alternative energy to be a hot ticket in the market going forward.” BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, has ranged between 60 and 90 over the past few months, but six consecutive up days took it close to its old high last Thursday, and now it’s on a minor pullback. In his update last Thursday, Mike wrote, “We’ve been thinking that Pinterest’s sloppy action the past few months (as of the middle of last week, shares had made no net progress for four months) was a pause that refreshes, and we’re glad to see the market finally beginning to agree with us. While many of its e-commerce/Internet peers fell to (or below) their early-March lows two weeks ago, PINS resisted that decline, and now we see the result, with shares popping 15 points over the past few sessions. As with the overall market, this doesn’t appear to be some sort of blastoff (low volume on the rise; still has some overhead to chew through), so wiggles are obviously possible—but there’s no question the action is positive. Earnings are likely out in early May, which will probably tell the intermediate-term tale, but the evidence is growing that after a tough correction and rest period, the sellers are losing control. Hold on if you own some, and if you don’t, we’re OK starting a position (maybe go with a half-sized one) here or on dips of a couple of points.” HOLD.

QuantumScape (QS), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and featured here two weeks ago, may be the most speculative stock in the portfolio; the company has no revenue. But potential is large, so I continue to recommend that aggressive investors buy a bit near support at 40. In his update last week, Carl wrote, “Last week, the company announced that it has successfully met the technical milestone that was a condition to Volkswagen investing an additional $100 million into QuantumScape. The company’s solid-state battery can achieve greater range, superior reliability and a longer life than their lithium-ion cousins. In addition, they’re also capable of charging to 80% in as little as 15 minutes, half the time the fastest Tesla Supercharger takes to charge.” BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, fell to 199 in the growth stock shakeout a month ago, but the rebound since then has been impressive. In his latest update, Carl wrote, “Shares continued to strongly rebound this week and have zoomed from 199 to 245 in just two weeks. Sea’s gaming group continues to grow its user base and the company now has 610 million quarterly active users, a total that is growing at an annual rate of 120%. Morgan Stanley came out this week with a target price of 305. E-commerce is Sea’s second growth engine with a gross merchandise value of $12 billion last quarter on a record billion orders. We have taken profits several times over the remarkable rise of this stock but after its pullback a few weeks ago, I moved this stock to a buy.” BUY.

SelectQuote (SLQT), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and featured here last week, came very close to hitting a new high last Tuesday. Technically, this is good; I love new highs. Unfortunately, that’s the day we recorded our buy. Since then the sock has pulled back minimally, but my guess is that it’s likely to find support at 30. And last Thursday Mike added the stock to Cabot Growth Investor, writing, “We always like to play the odds, and when it comes to individual stocks, that means having as many pieces in place that correlate with great performance as possible. That’s why we’re taking a swing at SelectQuote, which has all the makings of a winner—the story is outstanding, as it operates the biggest insurance marketplace out there, and the firm has legitimate barriers to entry thanks to the network effect and its own technology and history (one billion data points it integrates into its lead generation and routing efforts). Numbers-wise, sales and earnings grew at triple-digit rates in Q4 and analysts see the bottom line up 83% this fiscal year (ending in June) and another 48% next year, both of which are likely conservative. The only hitch here is that about three-quarters of revenue comes from senior-related health plans (especially Medicare Advantage), but SelectQuote is taking share rapidly in that field and, of course, it’s a solid long-term growth area as long as the government doesn’t get overly involved. As for the stock, it’s wild and wooly, but it held its 50-day line twice during the Nasdaq’s downturn and recently popped back toward its old highs. Granted, it’s backed off since then, but that’s par for the course these days. We’ll start a half-sized position (5% of the portfolio) on this dip with a stop in the mid-20s.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was one of the top performers in the portfolio today (up substantially when the majority were down), but I still believe the short-term opportunity here is limited; following last year’s huge advance, the stock needs a longer cooling-off period. Long term, of course, great progress is still likely as the company’s new gigafactories in Austin and Berlin come online and the energy business continues to expand. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, continues to have one of the best-looking charts in my marijuana portfolio—but I still think the sector as a whole needs a longer cooling-off period. In my update last Wednesday, I wrote, “Trulieve announced an agreement to acquire three fully operational dispensaries in the Philadelphia area operating under the name Keystone Shops. Located in Philadelphia, Devon and King of Prussia, the stores will join Trulieve’s current portfolio of 83 dispensaries (mostly in Florida)—and we can assume that as New York and New Jersey open to the industry, Trulieve will be there as well.” Trulieve is one of the two largest holdings in my marijuana portfolio. The second, worth consideration once the sector is uptrending again, is Curaleaf (CURLF). HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, gapped up this morning on the news that demand for rides is recovering faster than driver availability and tat total gross booking hit its highest level ever in March. But the stock is still below its February high of 64. In last Thursday’s update Mike wrote, “While we’re open to anything and will cut bait if necessary (our mental stop remains in the upper 40s), we’d have UBER on our own watch list if we didn’t already own it; fundamentally, the firm has both a true growth platform in Delivery and an economic reopening play in Rides, while technically, we’re thinking the endless ups and downs in recent months (a) have likely worn out many non-believers even though (b) shares haven’t done anything “wrong” following the massive November/December blastoff. The stock isn’t strong enough for a Buy rating, but the odds favor patience eventually paying off.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explore, dipped with the market today and is now touching its 200-day moving average, which is likely to provide support soon. In his update last week, Carl wrote, “While Virgin’s test-flight program in New Mexico remains on hold, its Texas rival, the private SpaceX, is test-flying Starships at a rapid clip. It is further from commercialization than Virgin but it eventually will have a spaceship capable of flying 100 tourists at a time on days-long excursions through space compared to Virgin’s six-seaters able to provide just a few minutes of weightless flight at a time. We have taken profits several times, and the share price is four times our entry point. I’m keeping this stock a hold for now and we can afford to wait as the company has over $660 million in cash.” HOLD.

The next Cabot Stock of the Week issue will be published on April 19, 2021.

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