April 18, 2022

With the market becoming less supportive, I’m dialing back the aggression, so this week’s recommendation is a lower-risk company in the pharmaceutical sector that pays a solid dividend.
As for the current portfolio, our three energy stocks remain very strong, and there are no changes.

Details inside.

New Recommendation

While the market remains above its March lows, we haven’t seen the strength we’d like to confirm that a renewed uptrend is in place. In fact, the weakness of the past week means our trend-following indicators are now both negative—which means that growth-oriented investors should be somewhat defensive. For this portfolio, that means holding some cash and leaning towards lower-risk stocks, like today’s recommendation, which is undoubtably a household name for all Americans. The stock was originally recommended by Carl Delfeld in Cabot Explorer and here are Carl’s latest thoughts.

CVS Health (CVS)
While Rite Aid (RAD) is shrinking and bleeding red ink, CVS is one of the nation’s leading healthcare companies with almost 10,000 stores. While Rite Aid stock has fallen more than 50% so far in 2022, CVS stock is in the black.

To begin, healthcare is recession resistant. It doesn’t matter whether the economy is expanding or contracting, whether inflation is high or low, or whether interest rates are rising or falling. People who need medical attention will get it one way or another. The demand for medical services is largely steady.

Nearly 70% of Americans live within three miles of a CVS store and the company has more than 102 million pharmacy plan members. Costco, with 115 million members is probably the only larger retail organization (that’s more than the number of Communist Party members in China).

CVS began growing primarily through acquisitions in 1972 and became a $1 billion business in 1981. Starting in the 1990’s acquisitions really took off with CVS acquiring Eckerds, Long Drugs, Caremark and Osco, and becoming Target’s in-house pharmacy.

CVS serves more than 38 million people with health insurance provided by government or private plans, including those offered by Aetna, which CVS bought in 2018. In addition, CVS operates more than 1,100 walk-in clinics in its stores, which are visited by more than 50 million patients – with expanded healthcare offerings, including in-house blood work.

CVS’s digital operations allow its customers to refill prescriptions through an app and pick them up at any store location. It also delivers medications directly to patients’ homes with an electronic prescription from their doctor. Interestingly, online customers spend 2.5 times more than retail customers as well as manage 1.5 times more prescriptions. And they remain loyal customers.

CVS Chief Executive Karen Lynch said the global health crisis deepened loyalty and increased use of the company’s website and app. Visits to CVS’ website grew to more than 2 billion in 2021, up nearly 55% over the prior year. She said CVS now serves 40 million customers digitally, an increase of about 10% over the past six months.

Elaborating, she noted, “Our work to test and vaccinate America for Covid is a powerful example of the relationship we’re building with consumers, which leads to new customers seeking a range of other health services at CVS Health.” Lynch also said that the company is working with “speed and urgency” to create physician-staffed primary-care practices, which she said will be a priority for CVS. For insurance companies, primary-care doctors are valuable partly because they can play a significant role in steering patients to less-costly forms of care, particularly avoiding specialists, imaging and other expensive and sometimes unnecessary services owned by hospitals.

CVS is also a technology leader, using blockchain, cloud migration and intelligent automation to improve operations and results. The company has administered 29 million COVID-19 tests and 30 million vaccines.

The proof is in the pudding; the latest quarterly results were exceptional.

Total revenues grew 11% to $73 billion and earnings of $2.42 a share were 17% ahead of consensus estimates. The company also paid down close to $8 billion of debt and paid out $650 million to shareholders through dividends. But CVS stock sells for about 15 times forward earnings – versus 25 times for the S&P 500 - with a dividend yield of 2.1%.

Summing up, CVS is the Amazon of the pharmacy business, growing through acquisition and intelligent digital technology, the stock is relatively cheap, and it pays a nice dividend.

Current Recommendations and Changes

Current Recommendations

The addition of CVS brings the portfolio to 18 stocks (from a maximum of 20), and there are no changes in my ratings this week. Energy stocks remain the darlings of the portfolio, and as I wrote earlier, that’s a trend that could persist for a long time–with normal corrections. But the majority of our holdings remain captive to the broad market’s trend, which has alternated between hopeful and uncertain and difficult in recent weeks. Long-term prospects, however, remain great, in part because the news is so bad these days and sentiment is subdued. Details below.

Changes Since Last Week’s Update
None

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, pulled back with the market over the past two weeks, but remains at its 50-day moving average, so the uptrend can still be considered intact. In his update last Thursday, Mike wrote, “We put ANET on Hold in last week’s issue and we still think that’s appropriate, as the stock was one of many that motored back up close to its old peak only to get whacked as the market retreated. To be fair, shares are still hanging around their 50-day line, which is stronger than most growth titles, and we still think the underlying growth story is intact, which should keep big investors interested. Because of that, we’re fine giving ANET more rope, and a couple of solid up days would do a world of good … but much more weakness would make the past few months look like one big top. Hold on if you own some, but we have a mental stop in the low 120s. Earnings are due May 2.” 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, “BMY shares sell at a low valuation due to worries over patent expirations for Revlimid (starting in 2022) and Opdivo and Eliquis (starting in 2026). However, the company is working to replace the eventual revenue losses by developing its robust product pipeline while also acquiring new treatments (notably with its acquisitions of Celgene and MyoKardia), and by signing agreements with generics competitors to forestall their competitive entry. The shares remain just below our 78 price target. Valuation remains reasonable compared to its peers and the company seems to be executing on its strategy while also maintaining a solid financial posture, so we are inclined to let the stock at least reach 78 before deciding on what changes to make to the rating and/or price target.” 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 long uptrend—and is the strongest stock in the portfolio today. In his update last week, Tom wrote, “Ew. Isn’t this the company that killed it on earnings and then rallied strongly despite a tough market for the tech sector? Well, the tech troubles are getting to AVGO again. Inflation and slowing growth threaten demand and margins for the industry, and as such talk worsens, so does performance in the sector. But Broadcom is one of the few tech companies that can successfully navigate this environment. Profits are not as levered to consumer product demand and should be much more resilient than the overall industry.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is consolidating its gains after an unusually strong 4-week run. In his update last week, Tom wrote, “There has been a shift among investors toward value, safety and income. That shift is quite evident in BIP. Utilities have been the best-performing sector YTD next to energy. BIP has broken out to new highs and has returned double digits YTD. But the price hasn’t gotten too high and there should still be room to run as investors continue to gravitate toward safe income. Brookfield should also get strong earnings growth from the purchase of a large energy pipeline company last year. (This security generates a K-1 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. In last week’s update, Mike wrote, “CARG certainly hasn’t been immune to the recent selling, but overall, the stock looks normal, still consolidating its huge earnings move from February and holding near its 50-day line. The fear here is that, since business is tied to car dealerships, any recession (or sharp economic slowdown) could crimp business, and that could be true for the firm’s traditional offering, which provides dealerships with consumer leads via its website. But the CarOffer subsidiary’s story is much larger than that and should result in rapid growth even if we hit a few economic potholes this year. If the market keels over from here, anything is possible, but right now we think CARG is buyable if you’re not yet in.” Note, in last week’s Cabot Top Ten Trader, Mike suggested a stop at 37.5. BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, is probably the portfolio’s weakest stock, but Bruce remains confident in his judgement. In his update last week, he wrote, “Citibank downgraded Cisco to a ‘sell’ earlier this week on concerns that the company’s products and services will lose market share to rivals. The downgrade added to pressure on the shares. We recognize the Citi analysts’ concerns but are more confident in the company’s future and the merits of its once-again cheap share valuation. CSCO shares have 26% upside to our 66 price target and the dividend yield is an attractive 2.9%.” HOLD

Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, remains in a very healthy uptrend, typical of many energy stocks. In his update last Thursday, Mike wrote, “DVN continues to act fine, though not powerfully—the stock actually tagged new highs this morning, but DVN also is basically hanging near levels seen in early March. You could argue the stock, after a big advance, is losing some steam, so we’re not complacent. But as trend followers, up is good, so we have no complaints, and the tightness seen on the weekly chart during the past month (also seen in other leading energy explorers) is usually a good sign. Looking at some (very rough) back of the envelope math, the firm’s Q1 free cash flow was probably north of $2 per share, of which more than $1 should be paid out in dividends (and some of the rest may have been used to buy back shares)—all of which could keep income-oriented investors interested. If shares continue to chill out for a bit (possibly with a little shakeout at some point) and then rip ahead, we could restore our buy rating, but we’ll once again stay on Hold for now. Earnings are due May 2.” HOLD

Ford Motor (F), originally recommended by Carl Delfeld in Cabot Explorer, remains below all its moving averages 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, “F shares were up marginally this week as Ford recently announced plans to produce more than 2 million EVs – about one-third of its total auto sales. 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 3.5 times trailing earnings, a fraction of its sales, and just 7 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

Halliburton (HAL), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit another new high today, but trading volume has been fading, and with first-quarter earnings due to be reported tomorrow before the market open, it’s now best to wait to buy on a pullback. In Cabot Growth Investor last week (where Mike doesn’t own the stock yet) he wrote, “We’re still watching HAL, but we prefer to buy on some sort of two- or three-week dip, ideally to the 50-day line.” BUY

Intel (INTC), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier and featured here three weeks ago, bottomed at 44 in February and March so technically looks like a good buy here. In his update last week, Tom wrote, “The chip-making behemoth has things going for it in both the long and short terms. Longer term, it should see a much higher level of profitability than it has in the last five years as it goes all-out to compete in high-growth areas. In the short term, it’s cheap. Technology has been struggling. But INTC has already had the stuffing knocked out of it. It may dip further during particularly ugly spates for the sector. But the downside should be very limited. It pays a solid dividend with little downside ahead of what should be a bright future. That’s not a bad way to go in this market.” BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, fell below its 50-day moving average last week, but the stock’s young trend (it only came public last June, remains up. In his update last week, Bruce wrote, “OGN was recently spun off from Merck. 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 31% 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

Pfizer (PFE), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, 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 transformative M&A. The stock is at a decent buy point here, trading near both its 25- and 50-day moving averages. 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. First-quarter results will be released May 5. BUY

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). Since then, it’s developed a modest uptrend and if you don’t own it yet, you can still buy here. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader (way back in 2011 and many times since), peaked at 1,243 in November, bottomed at 700 in February, and is now hanging in the middle of the range, neither strong nor weak (but always in the news!). For short-term traders, Mike suggested a stop at 950 in Cabot Top Ten Trader last week, but for long-term investors, I’m sticking with a strong hold, in part because of Tesla’s great prospects in revolutionizing our energy systems. As for the recent noise about Elon Musk’s interest in owning/running/changing Twitter, my perspective is this: Musk is trained as an engineer and has been immensely successful in revolutionizing systems that use machines. Furthermore, the hard work of getting Tesla launched and profitable (and the envy of all its competitors) has been done, so at some point, just as Steve Jobs did at Apple, turning operations over to a less visionary, more conventional manager should work out fine. But does he have the skills to make Twitter a true platform for free speech? Given that politics (and there’s no way this isn’t a political issue) is messier and doesn’t respect the rules of physics, I have my doubts—but it will be interesting! HOLD

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is trading with its 25- and 50-day moving average averages, ripe to resume its long slow uptrend. In his update last week, Tom wrote, “Growth fears have been hurting V over the past couple of weeks. It recovered strongly after the initial panic over the Russia/Ukraine war. But investors worry that slower growth will reduce economic activity both here and overseas. We’ll see if the slowdown woes continue to gain traction or if economies slow sufficiently to impact Visa’s rather resilient payment processing business. The stock remains a HOLD for now.” HOLD

The next Cabot Stock of the Week issue will be published on April 25, 2022.