April 26, 2021

The market’s main trend remains up and thus I continue to recommend that you be heavily invested, always working to “upgrade” your portfolio by selling weak stocks and buying healthier ones.

Today’s recommendation is a well-known big technology stock that’s spent the past eight months going sideways, despite the fact that revenue growth has been accelerating. To me, it’s a very attractive setup.

As for our current holdings, there are no changes. After selling two stocks last week, everything looks good today.

Details inside.

Cabot Stock of the Week 345

The bull market is alive and well, though divergences and rotation continue to add a challenge to the process of identifying the market’s leaders. Nevertheless, Cabot’s analysts continue to find attractive stocks using a variety of proven techniques and I continue to recommend that you hold a diversified group of them. Today’s recommendation is a big, well-known growth stock that has spent the past eight months building a base and looks poised to begin a new uptrend. It was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.

Nvidia (NVDA)
Nvidia needs no introduction, as it’s been the pick of the litter among big investors when it comes to growth-oriented chip stocks for a few years now. That growth story seems to have at least a few more quarters to play out, which, combined with an intriguing chart (one of the few liquid growth names that’s shown clear-cut buying in recent weeks), points to higher prices ahead.

Usually, a chip stock will come into favor when it has a solution for a new type of gadget. OmniVision Technologies was a massive winner in 2003-2004 as its chips were found in all the initial cell phones that had cameras, while some other names have benefited from their position in Apple’s ecosystem.

But Nvidia has thrived because it has exposure (usually a top position) in a couple of long-term growth areas. The first is gaming, where Nvidia has long been a major player. As gaming systems have become more advanced, they’ve generally leveraged use of the company’s many graphics processors. The industry as a whole (especially with cloud gaming) is growing, and now there’s a “chip upgrade cycle” going on, too, with the Nvidia RTX the next big thing in 4K gaming. (RTX makes up just 15% of the installed base, so there’s plenty of growth potential ahead.) Gaming revenues wobbled a couple of years ago but have been pushing higher of late, rising 67% in Q4 and making up half of total revenue.

Next up is the data center, which has basically become the central location of all the processing power of the Internet. Nvidia’s chips (especially its A100 series) help customers power so-called deep learning, machine learning and high-performance computing workloads. (A deal with Cloudflare recently should help, integrating Nvidia’s capabilities into that company’s Workers offering.) Many industries are big customers (including financial services and higher education), and while overall data center growth of 97% was partially boosted by its buyout of Mellanox last April, most pieces of the segment were up 40% or more.

There are other catalysts, too, including its automotive business, which is small right now (just 3% of revenue, which actually fell in Q4), but that’s widely expected to ramp in the years ahead thanks to its autonomous driving and AI cockpit platform. Indeed, the company has struck a ton of deals and in a recent presentation said it’s booked a whopping $8 billion of design wins in this area. (Revenues in Q4 were just $145 million.)

There are some uncertainties, including what will happen with Nvidia’s proposed takeover of Softbank’s Arm chip unit; the U.K.is likely to block the deal, though many think that could be a good thing given the proposed price tag ($40 billion). But the big-picture view is that Nvidia should continue to drive rapid growth for a long time to come.

Encouragingly, revenue growth has actually been accelerating of late (up 50%, 57% and 61% during the past three quarters), while earnings are surging at a 60%-plus clip. Analysts see the top and bottom lines rising 35% or so this year, though those figures usually prove conservative—indeed, the firm already hiked Q1 revenue guidance a bit.

As for the stock, NVDA broke out above 300 last May and soared to nearly 600 by Labor Day, but that was it for a while. Shares ended up going straight sideways for months, with a failed breakout in February and a shakeout to multi-month lows in March. But that move may have gotten rid of the remaining weak hands, as NVDA came all the way back to new highs two weeks ago on huge volume (heaviest weekly volume since last September) before backing off a bit last week on very light volume. We’re OK taking a swing at the stock on the current pullback.

Current Recommendations

Last week we sold two stocks from the portfolio, but this week there are no changes at all—not even rating changes—and that’s because overall, trends are positive. There may be some turbulence in individual stocks as quarterly earnings reports are released (Tesla announces after the close today), and there may even be another broad selloff to dampen investor enthusiasm a bit, but the important thing to bear in mind is that the broad market is trending up and thus staying invested is the smart choice. Details below.

Changes
None

Barrick Gold (GOLD), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has been trending up since mid-February. The stock hit a new high for this cycle last Wednesday and has pulled back minimally since, so the trend looks fine. In his update last week, Bruce wrote, “Barrick provided preliminary first quarter sales data that showed sales and production volumes in line with their plan and guidance. Historically, gold miners have over-promised and under-delivered, so when miners re-affirm that they will meet their guidance, investors rightfully view this as an indicator of a more reliable management team. Barrick shares have about 22% 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 about 2% to $1,775 this past week. On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.6% 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, as the stock has found support at 450 several times. In his update last week, Tom wrote, “The technology sector can’t seem to get any real traction. The sector has performed well since the selloff in February, but it keeps getting knocked back every time it looks like it’s breaking out. But I don’t expect technology to be down for long, and AVGO is a stellar stock to own. 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.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has pulled back normally since hitting a record high last Monday. In Tom’s latest update, he wrote, “This infrastructure partnership is a great place to be right now. It’s near the all-time high and still trending higher ahead of what is likely to be rising earnings and greater popularity with the new administration in Washington. But it’s sort of like rooting for a turtle in a race. It moves so slow that you have to look at a chart to realize it’s trending higher. That’s okay. It’s going in the right direction.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, released its first quarter report last week, and the stock was up for the next two days, so all is well here. In his latest update, Bruce wrote, “Coca-Cola reported adjusted first-quarter earnings of $0.55/share, up 8% from a year ago and 10% above the $0.50/share consensus estimate. Revenues of $9.0 billion increased by 5% from a year ago and were 4% above consensus estimates. On an organic basis, which removes the effects of currency changes and acquisitions/ divestitures, revenues grew 6%. Coke’s results were flattered by a calendar quirk which added five days to the quarter, compared to a year ago. Excluding this effect, volumes were unchanged and profits would likely have been only incrementally above a year ago. However, these results showed that investors have underestimated the speed of the company’s recovery – especially as the year-ago quarter was almost entirely pre-pandemic (the lockdowns hit full stride in mid-March 2020). As much as half of Coke’s revenues come from on-premise sales, so a flat result with on-premise still subdued is highly encouraging. Once the recovery is fully underway, the company will likely see higher volumes and profits compared to the pre-pandemic periods. However, with the recovery outside of the U.S. still sluggish, it could be several quarters yet until that strength arrives. The company’s efficiency programs are working. Underlying operating margins expanded by 30 basis points (100 basis points = 1 percentage point) even though the underlying gross margin fell 110 basis points on unfavorable changes in the product mix. Coke alerted investors to rising input costs but was fairly confident in their ability to offset them with higher pricing and through hedging. Coke re-affirmed its full-year guidance, which calls for 8-9% organic revenue growth and perhaps 8-12% comparable earnings per share growth which includes a 2-3% positive effect from a weaker dollar (this in effect is a raise, as prior guidance assumed a 3-4% positive effect from a weaker dollar). The company’s free cash flow production improved sharply to $1.4 billion, up from $200 million a year ago due to higher profits, improved working capital and lower capital spending. Coke’s balance sheet remains strong, with $12.6 billion in cash, and $32 billion in debt net of cash. To help monetize some latent value and also streamline its operations, the company will spin off its South Africa-based bottling operations. KO shares have about 18% upside to our 64 price target. While the valuation is not statistically cheap, at 25.1x estimated 2021 earnings of $2.17 (up 3 cents in the past week) and 23.1x estimated 2022 earnings of $2.35 (up 2 cents), the shares are undervalued while also offering an attractive 3.1% dividend yield.” BUY.

Columbia Care (CCHWF), originally recommended in Cabot Marijuana Investor by yours truly and featured here last week, continues to build a base at 6, though it is certainly possible that the stock could dip to its recent low of 5.3 before buyers take charge. Fundamentally, the future is bright here, as growth is still exceedingly rapid. But the sector as a whole has big swings, and right now, the sector is working on building a base, with the Marijuana Index still 50% off its February high. Overall, it’s a good time to buy. BUY.

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 was one of a handful of growth stocks that appeared ready to get going during the latest market rally, but like nearly all of its peers, its breakout attempt was swatted away, again failing in the 200-205 area and testing its 50-day line this week. Similar to most growth stocks, though, this doesn’t appear to be a major breakdown; at this point the stock is still in the upper reaches of its multi-month range (170 to 205, ballpark). Nothing has changed with our overall thinking that this is an early-stage situation (both fundamentally and chart-wise), so we’re sticking with a Buy rating—but in case we’re wrong and the stock (or the entire market) hits the skids, a move into the upper 160s would be a red flag. For now, though, we’re holding on, and think you can nibble if you’re not yet in.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, is now three weeks off its recent high, just above its 50-day moving average. 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’s shares are likely to start trading on the prospects for President Biden’s $2 trillion infrastructure bill. Estimates point to as much as $100 billion in federal support for electric vehicles – GM would be a major beneficiary. If the bill isn’t passed, or is passed in a diluted format, GM shares could be vulnerable. The chip shortage appears to be spreading, and although GM has said its 2021 guidance factors in $2 billion in direct and indirect impacts, we have no way of knowing what conditions are included in this guidance. GM shares have 13% upside to our 62 price target. 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. Investor enthusiasm for electric and autonomous vehicle stocks appears to be ebbing, partly due to the immense technical and financial challenges of creating viable vehicles in volume, and partly as SPACs are starting to be shunned as over-hyped speculations. In the long run, less competition helps GM, a near-inevitable EV winner, but its shares could be dragged down in the near-term as EV-enthusiastic investors exit all EV-related stocks.” 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, aiming for its February high of 64. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, got as high as 54 last week before pulling back normally, so the trend still looks good. In his update last week, Bruce wrote, “TAP shares have about 11% upside to our 59 price target. Earnings estimates were unchanged this past week. TAP shares trade at 14.0x estimated 2021 earnings of $3.81. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 9.4x 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, topped 80 last week and has pulled back normally since. In his update last week, Tom wrote, “NextEra reported earnings today that soundly beat estimates with 14% year-over-year earnings growth.” BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, came very close to hitting a record high two weeks ago, but sellers took over, so we’ll have to wait a bit longer. In his update last Thursday, Mike wrote, “Pinterest has been a disappointment. Two weeks ago, it was actually testing all-time highs, but a combination of growth stocks coming under renewed pressure and some cautious words from a small analyst outfit (they said Q1 started strong but decelerated toward the end of March) caused a bunch of selling starting last Friday, driving the stock back into the lower half of its overall consolidation. To be sure, the action is a negative; worst-case, this could be a double top, and the business acceleration that came with the pandemic could be fading, changing the long-term perception of the stock. That’s a possibility to be aware of, but we think the odds are against it. Interestingly, another analyst swatted away fears of slowing growth last week while another recently had positive words about the stock. The truth will be revealed next Tuesday (April 27) when the quarterly report is released: Wall Street sees revenues up 74% and earnings of eight cents per share, but the key will be the rest-of-year outlook.” HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, is still working to get above its February high of 285. All indications are that it will eventually succeed, but there’s no knowing when. In his latest update, Carl wrote, “Shares were pretty steady this week in the 240s as the stock continues to be a sought after momentum play. Sea is led by its gaming group Garena which in the fourth quarter of 2020 grew bookings 111% year over year while the number of quarterly users grew 72% year over year to 610 million. The company is projected to double total year-over-year revenue again in 2021, and grow sales fourfold from that figure by 2024. Since mid-February 2019, Sea Limited’s shares have accelerated more than 1,400%, dwarfing the S&P 500’s roughly 50% return. We have taken profits several times over the remarkable rise of this stock. It is a great momentum stock in 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 two weeks ago and has pulled back normally since. In his update last week in Cabot Growth Investor, Mike wrote, “Yes, SLQT has come down a couple of points during the past week as growth stocks have turned weak, and sure, if the sellers stay at it (maybe into the 26 to 27 area), we may choose to cut our loss. But frankly, we’re still as optimistic about the stock as we were a couple of weeks ago. Chart-wise, the stock has now found support near its 50-day line three times during this growth stock downturn, all at higher levels, and the story should lend itself to rapid, reliable growth for many years to come as it grabs market share in the direct-to-consumer Medicare insurance area. As a recent IPO, wobbles are to be expected, but we think SelectQuote can do very well if and when the market can find its footing. We’re holding on to our stake, and if you don’t own any, we’re OK buying a half-sized position here.” BUY.

Sonos (SONO), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here two weeks ago, remains above all its moving averages, primed to break out above its recent high of 44. 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 (it’s in the news every day) and too highly respected to do much on the upside. First quarter results will be released tonight and analysts expect record earnings. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, has been one of the most profitable vertically integrated multistate operators in the U.S., mainly a result of restricting its focus to Florida in its early years. But it’s now expanding to other states (notably California, Connecticut, Massachusetts, West Virginia and Pennsylvania), so it’s likely that record will be dinged. Still, with first quarter revenues up 111% from the year before, there’s no question that earnings will be higher in the quarters ahead. As for the stock, it’s no longer the strongest in the sector, but I upgraded it to buy last week as it sat 30% off its February high, and the stock is up slightly since then. BUY.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has been trading in a range between 50 and 60 for most of this year, and logic says it is likely to eventually break out to the upside. In last Thursday’s update Mike wrote, “It appears UBER may be leaving us at the altar once again, with the stock’s big-volume rally on bullish March statistics (the Rides business saw its biggest month of bookings ever, while the Delivery business continues to grow at 150%-plus rates) leading to yet another sharp dip back into the middle of its consolidation. Maybe we’re wrong and this last pop was the final suck-in before a major failure; if so, we’ll likely cut bait somewhere in the 49 range. But we’re going to stay on Buy because of our view that the next major move is up, which is backed up by the fact that UBER has continued to etch higher lows during its tedious ups and downs. Earnings are due out May 5, and management’s updated outlook for growth (especially as comps become tougher for the Delivery business in Q2 and Q3) will be key. Right now, we advise hanging on, and if you want to start a position here, you can.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Explorer, bottomed at 20 last week, 68% off its February high, and then bounced a bit on good news, but we certainly can’t call this a new uptrend. In his update two days later, Carl wrote, “Shares were up 6% yesterday as the company announced that it is resuming testing next month. 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 a spaceship 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, and the share price is almost four times our entry point, but is 67% off its all-time high so I’m keeping this stock a hold for now.” HOLD.

The next Cabot Stock of the Week issue will be published on May 3, 2021.

Cabot Wealth Network
Publishing independent investment advice since 1970.

President & CEO: Ed Coburn
Chairman & Chief Investment Strategist: Timothy Lutts
176 North Street, PO Box 2049, Salem, MA 01970 USA
800-326-8826 | support@cabotwealth.com | CabotWealth.com

Copyright © 2021. All rights reserved. Copying or electronic transmission of this information is a violation of copyright law. For the protection of our subscribers, copyright violations will result in immediate termination of all subscriptions without refund. No Conflicts: Cabot Wealth Network exists to serve you, our readers. We derive 100% of our revenue, or close to it, from selling subscriptions to its publications. Neither Cabot Wealth Network nor our employees are compensated in any way by the companies whose stocks we recommend or providers of associated financial services. Disclaimer: Sources of information are believed to be reliable but they are not guaranteed to be complete or error-free. Recommendations, opinions or suggestions are given with the understanding that subscribers acting on information assume all risks involved.