April 19, 2021

Recent crosscurrents in the market have seen changes among sector leadership, and today we have a broad selloff, but overall, the main trend of the market is up and thus I continue to recommend that you be heavily invested.

Today’s recommendation is an attempt to benefit from sector rotation, by targeting a sector that’s still down; if the sector turns up soon, today’s buyers should profit handsomely.

As for our current holdings, two stocks are upgraded to buy today, while two are downgraded to sell as we cut our losses short. The adage that applies: There’s nothing wrong with being wrong; what’s wrong is staying wrong.

Details inside.

Cabot Stock of the Week 344

The bull market rolls on—but it’s not a perfect bull market. In fact, it’s showing signs of age, with divergences and rotations that alternately reward and retard various sectors from time to time. Still, it is a bull market, and today’s recommendation is targeting a sector that’s been out of favor for a couple of months—which means the stocks are a lot cheaper than they used to be. The stock was originally recommended by yours truly—just last week—in Cabot Marijuana Investor and this is the full story behind the stock.

Columbia Care (CCHWF)
Columbia Care is a vertically integrated multistate operator in the marijuana industry. It’s not a first-tier company; the industry leaders, which I also hold in Cabot Marijuana Investor, averaged $184 million in revenue in the latest quarter, up 185% from the year before (this is an industry that is growing fast). Columbia, by comparison, had “only” $76 million in revenue, but that was up 228% from the year before, so it’s catching up.

And, because it’s smaller, it’s not as well-known as the big four—which means it may not be as “expensive” as the industry leaders. Still, an investment here is a major speculation, at least in the short term. A simple glance at the price, around six dollars a share, can tell you that.

But long term, I think the prospects for Columbia are extremely good, as they are for most of my marijuana stocks—and one reason is this: To date, because marijuana is still illegal under U.S. federal law, these stocks trade on smaller exchanges—thus the 5-letter tickers.

Lots of stocks on these exchanges are small, kind of sketchy—and thus institutional investors have generally avoided them; if they wanted to invest in marijuana, they chose a fully legal Canadian company, like Canopy Growth (CGC), which is the institutional favorite. (Canopy, by some measures, is the most overvalued of the leaders.)

But someday, when marijuana becomes legal under U.S. federal law, these five-letter ticker stocks will be able to uplist to the major exchanges (NYSE and NASDAQ), the institutions will come piling in, and the stocks will soar—and almost certainly top out for a while. So the time to buy is before then. And the best time to buy is at a correction low, which is where I think we are now. Here’s why.

Back on February 10, the marijuana sector topped out, with some stocks showing clear unsustainable parabolic patterns. (The NASDAQ also topped that week.) I told my marijuana investors to raise cash then, and I’ve kept them heavily in cash since. Since that top, the Marijuana Index has lost 50% of its value.

But in recent weeks, selling pressures have abated, the NASDAQ has recovered, and while marijuana stocks have not yet shown any strength, most stocks in the sector have found support—which to me means the next big move is likely to be up. That’s what I told my marijuana readers last week, when I advised moving back into the sector. And that’s why I’m recommending Columbia today—and putting current holding Trulieve back on buy as well.

Turning to the company, Columbia is based in New York City and led by some very smart people; the co-founders both came from Goldman Sachs. The company has 87 dispensary locations, 27 cultivation and manufacturing facilities, 111 state-issued licenses and over 1,800 employees—and it’s growing. In the fourth quarter of last year, for example, the company opened three dispensaries in Florida and one in Virginia and added four in California through its acquisition of Project Cannabis. In January, the company acquired the Healing Center of San Diego, and for the rest of 2021, the company has five planned openings (two in New Jersey, and one each in Virginia, Utah and Missouri), four pending acquisitions (two in Maryland and one each in Ohio and Virginia) and the potential to expand in at least 9 locations in Virginia, West Virginia and Georgia.

Revenue, as I noted earlier, has been growing fast, and while there are no earnings yet, they will definitely materialize as soon as the company reduces its spending on growth.

As for the chart, it hit a record high at 7.9 back on February 10, bottomed at 5.3 at the end of March, bounced sharply off that bottom, and has been building a base at the 6 level since. If this bottom fails (which I think would only happen if the sector weakened), the stock could fall as low as its 200-day moving average, now at 4.8, which would be a tolerable 20% loss. But if it strengthens from here, as I expect the sector to do, the first target is 8, and after that, the sky’s the limit.

Current Recommendations

While the broad market remains in a healthy bull market (notwithstanding today’s selloff), we do have a couple of stocks going the wrong way that should be sold. Cutting losses short, particularly when it comes to growth stocks, is a very smart policy. The rest of the portfolio, however, is in fine shape, and there are plenty of buys for new readers. Details below.

Changes
DraftKings (DKNG) to Sell
QuantumScape (QS) to Sell
Trulieve (TCNNF) to Buy
Uber (UBER) to Buy

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, “Barrick and the government of Papua New Guinea (PNG) have signed an agreement on the Porgera mine. The PNG government will now take 53% of the economic benefits of the mine, up from about 25% previously. Barrick’s local subsidiary BNL (half-owned by a Chinese entity) will take the remaining 47% and continue to operate the mine. Under the new 10-year agreement, local landowners received an increased allocation of the economic benefits, and the PNG can repurchase BNL’s stake at fair market value after the agreement expires. For Barrick, its effective economic interest declines from about 37.5% to 12.5%. All-in, an acceptable agreement but not one that we hope to see at other mines. Barrick shares have about 28% 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. Commodity gold rose fractionally to $1,743 this past week. 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 been unable to break above its February high of 495 but I still think it’s just a matter of time. In his update last week, Tom wrote, “This semiconductor and business software giant should be a phenomenal holding as technology proliferates at ever higher rates and 5G will enable a host of new technologies. This company grew revenues 16 times over in the last 11 years. It isn’t hard to understand why because, as the company claims, 99.9% of all internet traffic crosses at least one of their chips. Technology has been consolidating recently, but the high-growth sector will be back on the move before long.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, continues to hit new highs. In Tom’s latest update, he wrote, “This desirable infrastructure juggernaut is still very much in the midst of an uptrend that started over a year ago. It had been moving kind of sideways for several months after the vaccine announcement as investors flocked to cyclical stocks. But more defensive plays have come alive again, and BIP is one of very best of that ilk. All this infrastructure talk should also pique investors’ interest in the subsector going forward. For added measure, BIP should have a strong year for earnings growth.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, continues to recover and is now very close to breaking above its December high. In his latest update, Bruce wrote, “Consensus estimates point to 10% revenue and earnings per share growth in 2021. Coca-Cola’s CEO (along with other CEOs) waded into the debate over Georgia’s voting laws. We’re not going to opine on this other than to say that investors will want to be aware of the potential opportunities and risks when CEOs take public stances on such matters. From a fundamental perspective, it is impossible to determine the size and direction of its effect on the company’s revenues, profits and share valuation. KO shares have about 20% upside to our 64 price target. While the valuation is not statistically cheap, at 24.9x estimated 2021 earnings of $2.14 (down a cent in the past week) and 22.8x estimated 2022 earnings of $2.33 (unchanged), the shares are undervalued while also offering an attractive 3.2% dividend yield.” BUY.

DraftKings (DKNG), originally recommended by Mike Cintolo in Cabot Growth Investor, has weakened further and that fact, combined with our growing loss, means it’s now time to sell. In last week’s update, Mike noted he had a maximum loss limit in the 57 area (on a closing basis), so he’ll probably be selling, too—despite the fact that the news is all good. It pays to listen to the stock. SELL.

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to work on breaking through the 200 level for good. In his update last Thursday in Cabot Growth Investor, Mike wrote, “FIVE is again testing the 200 to 205 area, which has basically capped the stock over the past few months, but each dip from that level has become less and less intense, which backs our thought that the stock is steadily absorbing all the selling. Of course, we could be wrong—a dip into the 180s from here would be iffy in the intermediate term, likely having us going back to Hold. But right now, the vast majority of evidence remains bullish. One intermediate-term tidbit we wanted to touch on is that Five Below has been spending a lot of money to expand and upgrade its supply chain in recent years, opening a distribution center last year, opening two more this year, with the last one (in Indiana) opening in 2022. After that, spending should ease, so as we get closer to the completion of these projects, margins likely will have more upside as spending drops off and efficiencies increase. Back to the here and now, FIVE remains choppy, but until proven otherwise, we think the next big move is up.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, is just two weeks off its recent high, looking quite healthy. In his update last week, Bruce wrote, “We are on the border of selling this stock, given the risks, but for now are keeping the Hold rating. GM reports on May 5. If the report is strong, reflecting strong volumes and pricing, the shares will likely surge. If the report is disappointing, the shares will slump, perhaps significantly. We have no way of predicting the quarter and are not in the business of relying on a binary outcome of an upcoming report. On any meaningful strength in the shares, we could move to a Sell. On a P/E basis, the shares trade at 9.3x estimated calendar 2022 earnings of $6.29 (unchanged this past week).” HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Explorer, remains a long-term hold, as growth prospects remain great for the largest operator of hotels in China. The stock is currently riding its 50-day moving average higher. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, bounced off 50 last week and is now above all its moving averages and targeting its January high of 56. 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 5-8% 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 14% upside to our 59 price target. Earnings estimates were unchanged this past week. TAP shares trade at 13.6x estimated 2021 earnings of $3.81. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 9.0x 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 zoomed from 70 to 80 over the past month. 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. It was a rare departure from the normal uptrend ahead of a very promising environment for alternative energy stocks. Washington will likely not only offer tax breaks and other goodies but should make the sector stand out to investors. Plus, everything that was true about the company when it was flying high is still true.” BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, sold off Friday and then today in concert with the broad market, but so far, that’s acceptable. In his update last Thursday, Mike wrote, “The stock actually tested all-time highs this morning before meeting with selling pressures, but as with FND, we think the stock is acting well—the recent run-up from 70 to the upper 80s will likely require a bit of rest, especially with earnings coming up soon (April 27). If the sellers really come back with a vengeance, we’ll change our tune, but at this point it appears PINS has turned the corner after a five month stretch of no net progress. We’ll stay on Buy, but it’s best to keep new buys on the smaller side this close to earnings.” I’ll stay on hold, especially in light of the current weakness. HOLD.

QuantumScape (QS), originally recommended by Carl Delfeld in Cabot Explorer and featured here three weeks ago, fell below support at 40 last week, and that, combined with our growing loss, means the stock should now be sold. In his update last week, Carl wrote, “Shares fell from 47 to 40 this week despite the company recently announcing that it has successfully met the technical milestone that was a condition to close for Volkswagen’s $100 million investment in the company. QuantumScape’s solid-state battery can achieve greater range, superior reliability and a longer life than its 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. If you are a long-term investor, you may want to hold on to this one but we have already fallen below our normal 25% loss limit so I’m moving this to a sell.” SELL.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, fell to 199 in the growth stock shakeout a month ago, but the rebound since then has been impressive and the stock is now above all its moving averages. In his latest update, Carl wrote, “Shares have rebounded sharply over the past three weeks and are now up 26% so far in 2021 after a great 2020. Sea’s gaming group continues to grow its user base and the company now has 610 million quarterly active users, a number 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 gross merchandise value of $12 billion last quarter from a record billion orders. We have taken profits several times over the remarkable rise of this stock. It is a great momentum stock in one of the world’s fastest growth markets of Southeast Asia. “ BUY.

SelectQuote (SLQT), originally recommended by Mike Cintolo in Cabot Top Ten Trader and subsequently in Cabot Growth Investor, hit a record high last Wednesday and has pulled back normally since. In his update last week in Cabot Growth Investor, Mike wrote, SLQT has been mostly quiet since our recommendation late last week, testing new high ground but (like most everything else) unable to really get a head of steam going. Even so, we like the chart clues we see, including (a) the fact that the stock held its 50-day line twice during the growth stock correction, and (b) as the selling pressure has come off the market, SLQT advanced nine of 10 days, a decent show of persistency. A pullback wouldn’t shock us here, especially if today’s rotation back into reopening stocks continues, but the stock acts well and the story and growth numbers are hard to beat.” BUY.

Sonos (SONO), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, hit a record high on Wednesday and has pulled back normally since. BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains a long-term hold for investors with big profits, because there’s still plenty of growth opportunity in both the automotive and the energy business, but short-term, I think the stock is too high-profile and too highly respected to do much on the upside. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, fell below recent support at 40 and thus no longer has one of the best charts in the marijuana sector. Still, I’m upgrading it to buy today because the sector as a whole is ripe for a rebound and Trulieve has some of the best fundamentals among U.S. vertically integrated multistate operators. BUY.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, came very close to hitting a new high last week and has pulled back minimally since. In last Thursday’s update Mike wrote, “UBER has teased us before, but it certainly looks like the stock could be ready to move if the market cooperates. On Monday, the firm released a very bullish business update: After solid sequential gains in January and February, Uber’s Mobility business (Rides) grew another 9% from the prior month, with bookings rising to north of $30 billion on an annual run-rate basis. Moreover, Delivery continues to impress, with run-rate bookings above $52 billion in March, with every month in Q1 showing bookings up at least 150% from a year ago! Both figures were ahead of analyst estimates, and the company also reiterated that it expects to reach EBITDA breakeven later this year. All in all, it appears the big-picture thesis is playing out, with a huge gain in Rides this year while Delivery has shown no signs of slowing despite the easing pandemic. UBER flashed a great-looking volume clue on Monday, though it’s also just sitting in an area of resistance (60 to 63). Maybe this will turn out to be yet another head fake, but given the rally and some other evidence (last week was the smallest range for the stock in months, usually a constructive sign), we’re restoring our buy rating here.” I’ll join him. BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Explorer, fell below its 200-day moving average Thursday and is lower today, with no clear support below, though it’s certainly possible at 20, 17 and 15. In his update last week, Carl wrote, “Shares pulled back a few points as management announced that the next quarterly earnings would be posted on May 4. The company looks to resume test flights in June at its headquarters in New Mexico, but it will likely be summer before the ship, designed and manufactured in California, undergoes glide flight-testing. We need to monitor the situation carefully because while Virgin’s test-flight program in New Mexico remains on hold, its Texas rival, the private company SpaceX, is test-flying Starships at a rapid clip. SpaceX is further from commercialization than Virgin, but it eventually will have spaceships capable of flying 100 tourists at a time on dayslong excursions through space compared to Virgin’s six-seaters able to provide just a few minutes of weightless flight at a time. SpaceX may go public sometime in 2021. We have taken profits several times in SPCE, and the share price is almost four times our entry point, so I’m keeping this stock a hold for now.” HOLD.

The next Cabot Stock of the Week issue will be published on April 26, 2021.

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