April 25, 2022

The market was hit hard last week, so all trends are down, and increased caution is advised.
In the portfolio this week, we’re selling four stocks, which will both reduce risk and raise cash.

As for the new recommendation, it’s one of the world’s leading uranium companies, which has a great growth story thanks to growing negative attitudes toward Russian energy and growing positive attitudes toward carbon-free energy.

Details inside.

New Recommendation

Market action last week was ugly; we remain in a clear downtrend. And that means this portfolio will continue to invest cautiously, holding some cash and favoring defensive stocks. But there’s always something going up. Today’s recommendation, which recently hit new highs, has a crystal-clear story that ties into both the war in Ukraine and the long-term trend away from fossil fuels. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.

Cameco (CCJ)
Nuclear energy has had a meaningful place in the world’s energy production for a long time, but it has always taken a back seat to fossil fuels or, when it comes to the future, alternative energies, like wind and solar. The result: Like most other commodities, uranium stocks have had a few moments in the sun when prices for the radioactive metal headed up for a few months, but the industry as a whole has been mainly stuck in the mud for many years.

But now things do look different, on two fronts. First, nuclear is becoming accepted among more environmentalists as a legitimate, carbon-neutral energy supply. That in and of itself is causing many new reactors to be built worldwide; as of year end, 52 were under construction, including 14 in China, which will eventually boost that country’s total by more than 25%.

Then you have the Russian invasion of Ukraine, along with the accompanying sanctions, which have served as a double positive. First, European countries want to move away from all Russian energy sources, and some demand will shift to nuclear. Second, uranium supplies from Russia to the rest of the world will be replaced by supplies in the rest of the world, where low prices in the sector have had firms curtailing production and investment in recent years, a trend which is fast being reversed.

Long story short, demand is set to pick up over many years while supply should remain tight, so the fundamentals for uranium are as good as they’ve been in a long time; indeed, uranium prices have moved up a lot of late, with the spot price rising to $58 (up from $31 a year ago) and even the long-term contract price (for utilities aiming to secure supply) up to $49. That’s a boon for Cameco, the world’s second-largest uranium producer thanks to its McArthur River (world’s largest, high-grade uranium mine; Cameco owns 70% of it) and Cigar Lake (extremely high-grade uranium; owns 50%) mines. It also has a big fuel services segment

As always, spot prices can come down, but that’s not where Cameco plays; in fact, the firm says it’s typically a net buyer on the spot market as it’s often over-contracted for longer-term deals. Indeed, since the start of last year, it’s inked contracts for a total of 70 million pounds, which is leading it to finally boost production after years of cutbacks. The firm’s output last year was just 20% of its capacity (!), and this year, it sees production up a whopping 75%, with another 56% increase by 2024 (mainly by restarting production from McArthur River). And if bigger and better contracts are inked going forward, there’s no reason Cameco won’t be able to boost output further after that.

For the here and now, the company’s results have been poor, partly due to Covid and the low-price environment for uranium. But CCJ is trading on the future, with analysts seeing the turnaround having started in Q1 (report due May 5). For 2022 as a whole, the top line is seen rising 22%, with growth accelerating to 28% in 2023, while earnings move firmly into profitability. Given how long it takes to build nuclear reactors (years), more important than sales and earnings will be any new contracts inked in the months ahead, which will build Cameco’s future earnings power.

As for the stock, CCJ got going in late 2020 and had a good run for much of last year, though it topped with the market in mid-November and pulled back a sharp 37% into the late-January low. The initial bounce wasn’t anything to write home about, but then buying volume went bananas following the start of the war, driving the stock to new highs in mid-March and up to 32.5 two weeks ago. The past two weeks have seen CCJ correcting while the overall market has been weak, but it’s still holding its 50-day line which, in this environment, is a solid show of relative strength. Technically, a dip to the 200-day moving average at 23 is possible, so more risk-averse investors could wait and hope for that, but I’m happy buying here.

Current Recommendations and Changes

Current Recommendations

The addition of CCJ brings the portfolio to 19 stocks (from a maximum of 20), and that’s high in this environment, where much of the market is trending lower. But the sale of four stocks, three of which are in the formerly hot oil and gas sector, will bring the number down to 15, and that feels better. In your own portfolio, of course, what matters is not just the number of stocks you own, but the quality of those stocks—and their potential to move on the upside or the downside. For now, I’m favoring stocks with limited downside risk. Details below.

Changes Since Last Week’s Update
CarGurus (CARG) to Sell
Devon Energy (DVN) to Sell
Halliburton (HAL) to Sell
Pioneer Natural Resources (PXD) to Sell

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, has pulled back with the market over the past three weeks and is nearly touching its 200-day moving average as I write. In his update last Thursday, Mike wrote, “On one hand, ANET has been hit hard since approaching its old high earlier this month just as the latest market (and growth stock) leg lower started, raising the prospects of an ominous double top. On the other hand, the stock currently sits near its 50-day line, well above its February/March lows and just 18% off its peak, which is far better than most every other growth stock out there.” Since then, however, the stock has broken down. And our loss has grown, so this is a definite candidate for sale. But given that we’re selling four other stocks today and ANET is ripe for a bounce off its 50-day moving average (and the fundamental story is still very much intact), I’ll hold a little longer. 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 Bristol Myers Squibb should continue to generate vast free cash flow, has a solid, investment-grade balance sheet, and trades at a sizeable discount to its peers. BMY shares currently trade near their all-time closing high but 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.” Since then, the stock has dipped a bit, but that should have no effect on Bruce’s thinking. HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is going nowhere fast, but long-term prospects remain bright. In his update last week, Tom wrote, “This exceptional technology stalwart is a good company that is hanging out with the wrong crowd right now. The crummy tech sector market is obscuring the fact that Broadcom is growing earnings very strongly and will likely continue to do so for some time. Technology is only getting bigger, and this company runs the essential infrastructure that makes that possible. Plus, it is benefitting especially from the 5G rollout. Just hang on. It should be worth it in the end.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, closed at a record high last Wednesday and has pulled back normally since. In his update last week, Tom wrote, “What down market? The world could go to Hell in a handbasket and this company would continue to generate reliable revenues from its essential infrastructure assets. That’s why this stock has quietly provided average annual returns of over 15% for the last five- and ten-year periods. The timing is great now. It provides a defensive, high dividend when such stocks are in growing demand. And earnings should grow above trend because of a recent acquisition in the energy space. (This security generates a K1 form at tax time).” HOLD

CarGurus (CARG), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here just three weeks ago, was down every day last week as automotive retailing stocks sank on growing pessimism about prospects for the industry in a constrained environment. In last week’s update, Mike wrote, “CARG looked great at the start of the month and was still OK coming into this week, but sellers then took over and caused the stock to break badly on Wednesday, leaving us with no choice but to cut the loss on the half position via a special bulletin. We think the underlying story is very much intact, so if the stock can shape up down the road (not just bounce for a few days) and the market turns the corner, we could revisit it. But at this time, it’s clear the market’s headwinds are too much for the stock.” SELL

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, may be the portfolio’s weakest stock, but Bruce remains confident in his judgement. In his update last week, he wrote, “Cisco said it will shift some employee pay from bonuses to salary in response to surveys of its workers who said they want more cash in hand to deal with inflation. This move has many unmentioned complications. Employees may have said they want the shift so they can then negotiate higher base pay when they jump to competitors. And, employees may eventually want their former bonuses restored. In terms of stock options, weak share prices may incent companies to pay more of their total compensation in cash, which would compress their profit margins. Cisco has had much lower-than-expected numbers of employees returning to their offices, so the company is slashing and shuffling its real estate footprint. They are not the only tech company doing this. CSCO shares have 28% upside to our 66 price target. The dividend yield is an attractive 2.9%.” HOLD

CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer and featured here last week, is one of the nation’s leading healthcare companies with almost 10,000 stores—and sitting right here at the 100 level, it looks like a good buy. In his update last week, Carl wrote, “Nearly 70% of Americans live within three miles of a CVS and it has more than 102 million pharmacy plan members. CVS is also a technology leader using blockchain, cloud migration and intelligent automation to improve operations and results. The proof is in the latest quarterly results. 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. CVS stock sells for about 15 times forward earnings – versus 25 times for the S&P 500 – and sports a dividend yield of 2.4%.” BUY

Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, hit another new high last Thursday, but then turned lower as Mike wrote in his weekly update, saying, “DVN remains in good shape, though we wouldn’t say it’s tearing up the charts and, like many names in the group, volume has been tapering off during the past few weeks. As we’ve written before, it wouldn’t shock us if the group hit a deeper pothole at some point, as the advance among oil (and all commodity) names has become very obvious (the obvious rarely works for long in the market with some shake-the-tree action) and oil prices, while elevated, have done more chopping around than advancing of late. Frankly, if we see some true abnormal action (if today’s selloff carries on), we could shave off some more shares from our position…we sold half of our stake a few weeks back for a big profit.” Well, the abnormal action has certainly continued, with the stock (and most stocks in the sector) gapping down through its 50-day moving average this morning. I say, “Take the money and run.” SELL

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 this week as the company’s much-awaited EV pick-up, the F-150 Lightning, goes into production. By 2030, Ford expects half of its global sales to be fully electric vehicles and targets $50 billion in EV investment through 2026. Trading at less than four times trailing earnings, a fraction of its sales, and just seven times the 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, gapped down through its 50-day moving average this morning. Combined with our loss, and the chance that the entire formerly hot sector needs a cooling-off period, that’s a sell signal. SELL

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, “It’s been a lousy market for technology stocks. But Intel has a key downside buffer. It has been beaten to a pulp already. It has marvelous prospects for growth over the next few years. In the meantime, it pays a great dividend and has limited downside. Plus, technology stocks are getting oversold and could rally in the months ahead. I like INTC in this market.” BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has fallen with the market in recent weeks, but it looks short-term oversold here—and of course Bruce thinks it’s a better buy now! In his update last week, Bruce wrote, “OGN shares have about 36% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.3% dividend yield.” BUY

Pfizer (PFE), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here two weeks ago, is coming out of a growth trough (due to the 2019 patent expiration of Lyrica) and reigniting its growth engines courtesy of COVID-related products and transformative M&A. The stock has sold off with the market in the past few weeks, so is at a better buy point now. BUY

Pioneer Natural Resources (PXD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is our third energy stock. I’ve previously noted that we would exit this stock, which we bought for its strong momentum, when the uptrend ended. It has, and thus we will. SELL

Portillo’s (PTLO), originally recommended by Tyler Laundon in Cabot Early Opportunities, 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, came public last June, peaked at 85 in September, pulled back to the 30 area in January and February (where we recommended it) and has pulled back to that level once again. Officially, Tyler had the stock on his Watch List when I first recommended it, but now he’s added it to his portfolio, writing, “Shares have held up relatively well despite a difficult market. And enough time has passed since the short attack from Spruce Point Capital and lockup expiration (both in mid-January).

The company is focused on delivering services around customer care, content moderation/security, and data labeling and annotation services. TaskUs grows with clients by taking on incremental work volumes as their businesses scale up.

Clients are attracted to the company because it was born on the web and has grown up in the cloud. There is no legacy software code to work around. This cultural similarity with clients is a large part of what sets TaskUs apart from other IT service providers.

The company is also differentiated by its ability to get new projects going quickly. This ties back to the efficiency of modern technology solutions. Management says that TASK employees are roughly three-times faster than the competition when it’s time to get integrated and start working on customer accounts.

As a leader in the industry, TaskUs has a hiring advantage. The company is able to charge a higher rate than competitors, which can mean more flexibility when looking to bring on staff. At the same time TaskUs is hiring in lower-cost locations (Philippines, India, etc.), which should help margins in 2022 and beyond. In Q4 2021 the company grew headcount by 4,500 and plans to add over 4,000 in each quarter of 2022 (there will likely be natural attrition as well).

Management reported Q4 2021 results on February 28 that surpassed expectations on the top line and gave TASK stock a nice boost. Revenue grew 63% to $227 million ($10.8 million above consensus) while adjusted EPS came in at $0.34. More importantly, 2022 guidance of $980 million – $1 billion (around +30%) came in above consensus. EPS is seen at around $1.36.

In that guidance there isn’t any extra growth embedded for the company’s biggest client, even though TaskUs is adding several hundred employees to service the company in 2022. Also noteworthy is that management said that, among the other top four clients, two are expected to grow above 100% while the other two are expected to grow double-digits.” 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. Mike has a stop at 970, so if you’re in this for the short term, keep that in mind. I’m here for the long term, as I continue to think that while the automobile aspect of the business may be overvalued, the company has great, underappreciated growth potential in the energy business. HOLD

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is weak and cheap, and thus an attractive buy for patient investors. In his update last week, Tom wrote, “V has been bouncing around a lot but it’s well above the recent lows and likely to stay there. It took a hit during the initial panic over the war and then another one amidst downgraded global growth. But business is likely to remain very strong as global covid restrictions have come down.” HOLD

The next Cabot Stock of the Week issue will be published on May 2, 2022.