April 4, 2022

The market remains healthy and thus I continue to recommend that you remain fully invested in a diversified portfolio. My last two recommendations were chip companies that consumers can’t really “see,” but this week’s recommendation is a consumer-facing company, so you can easily “kick the tires.”
As for the current portfolio, there are no sales, but four stocks get downgraded to Hold, for various reasons.

Details inside.

New Recommendation

The market remains healthy and thus I continue to recommend full investment in a diversified portfolio. Today’s selection is a young company in a bricks-and-mortar consumer industry that’s seen great changes thanks to the internet. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

CarGurus (CARG)
Ever since the Internet became not just a go-to place for e-commerce, but also for pre-buying research, we’ve seen a bunch of firms emerge to try to help the many thousands of auto dealerships in the U.S. and overseas better reach consumers. It’s not much different than what Zillow does when it comes to homes—effectively providing more and better-quality leads for sellers (dealerships), replacing the huge inserts in the Sunday paper.

That’s where CarGurus’ story starts: Its website offers consumers transparency for used cars, providing not just data, listings, pictures and the like, but thanks to a proprietary algorithm, also giving consumers a view as to whether the car they’re looking at is a good deal or not. Because of this, CarGurus is nearly three times as likely to be the final website visited before somebody buys a car and it’s the most popular site in the sector in terms of unique users and web visits.

But the site is not slanted just in the direction of the user—it’s a win-win for all involved, with a third-party study showing that listed cars sell 16% faster than cars on Autotrader and 22% faster than those on Cars.com, which of course means better business for dealerships. At year-end, CarGurus had 30,600 paying dealers (23,860 in the U.S.), while revenue per dealer in the U.S. continues to rise, up a decent 6% in Q4.

That core business has taken some hits since the pandemic began, as many smaller dealers cut back on advertising as foot traffic plummeted, and as keeping inventory in stock became an issue. Still, most expect this business to improve from here as the world turns right-side up.

All of that is to the good—but it’s not the main attraction. For that, we turn to CarOffer, a firm that CarGurus bought 51% of back in early 2021 (and has the option to buy the rest of by the end of 2023). The big idea here is two-fold:

The first is that CarOffer is becoming a behemoth in the dealer-to-dealer space, effectively replacing wholesale auctions, which dealers have used to replenish inventory. There are no subscription fees, and thanks to its rapidly growing size, it offers buying and selling dealers a nationwide reach, the ability to get or sell autos without actually standing at an auction, dynamic bidding capabilities and a 45-day guaranteed bid option. Growth here is jaw-dropping, with the number of “rooftops” (all dealership buildings) signed up rising from 5,500 in Q2 of last year to 9,100 by year-end, while gross merchandise sales through the platform totaled $2.3 billion in Q4, up from $1.0 billion in Q2.

Building on that is CarOffer’s Instant Max Cash Offer, which effectively gives all the little dealerships a chance to bid for a consumers’ car just like CarMax and Carvana do. This too has been rolling out quickly, with the service now available to 70% of the U.S. population.

Altogether, the CarOffer subsidiary saw revenues explode to $179 million in Q4, up from just $60-ish million each of the prior two quarters, and net income was solidly in the black, too, at $48 million. That was the driving force behind the overall company’s excellent Q4 results, which saw sales leap 124% and earnings rise 34%. Analysts do see the bottom line stagnating this year, but (a) that’s probably conservative given that the firm has trashed estimates in recent quarters, and (b) they also see the top line nearly doubling in 2022. There’s little doubt CarGurus is going to be a lot bigger from here.

As for the stock, it’s been a nothingburger for a long time; at the start of the year, CARG was little changed from its IPO price back in 2017! But the Q4 report changed everything, with the stock mushrooming higher as it became clear CarOffer was going to be big. There have been downs and ups since then, partly due to the market, but CARG is currently hugging its 25-day line and has consolidated that big gap up nicely.

With rapid growth supported by the tailwind of a recovering economy, and growing market leadership, this stock could go far.

Current Recommendations and Changes

Current Recommendations

The addition of CARG brings the portfolio to its full complement of 20 stocks, and that’s where we’ll stay today. Yes, there are a couple of candidates for sale, if they don’t get going, and we have four downgrades to Hold. But with the market trending up, I like a full portfolio. You can’t catch fish if you don’t have your line in the water. Details below.

Changes Since Last Week’s Update
GlobalFoundries (GFS) to Hold
Harley-Davidson (HOG) to Hold
TaskUs (TASK) to Hold
U.S. Bancorp (USB) to Hold

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, continues to climb and is now approaching its December high of 148. In his update last Thursday, Mike wrote, “ANET hasn’t set the world on fire, but it’s done well alongside the market during the past three weeks, lifting above a little resistance in the 134 area before hanging around 140 in recent days. There’s been nothing new from the company for a while, and our thoughts here haven’t changed much, with the overall consolidation since the start of the year looking normal; if the market rally keeps chugging, we think ANET will participate. On the downside, a drop into the low- or mid-120s at this point would be iffy, but right here, we think the path of least resistance is up.” BUY

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 are approaching an all-time high that would eclipse the prior high set six years ago. The shares have about 7% upside to our 78 price target. Valuation remains modest at 9.3x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 8.5x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers.” HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, remains in a solid uptrend. In his update last week, Tom wrote, “The recent tech recovery sure lit a fire under AVGO’s butt. It’s up about 20% in the last couple of months while the market has floundered. Business is booming as Broadcom benefits from the 5G rollout and should also benefit from increased internet usage further out. Although still well off the high, AVGO has gained momentum. I believe selling in the tech sector got overdone and expect more good things from the stock in a more friendly environment.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, provides a 3.5% yield and while it usually goes up slowly, it’s gained momentum in recent weeks. In his update last week, Tom wrote, “BIP is a member of the new-high club. It is making another new high today. The stock had been trending very slowly higher for over a year but recently the pace of ascent has accelerated and BIP has broken out. Safety is back in vogue amidst the uncertainty. Utilities are the second-best performing sector of the market YTD next to energy. Brookfield has incredibly reliable crucial assets that bring in steady revenues no matter what, as well as an earning boost for the new acquisition in energy infrastructure. (This security generates a K1 form at tax time.)” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, has been up and down since our July recommendation but has made little net progress yet, which just means it’s a better value. In his update last week, Bruce wrote, “Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet. CSCO shares have 20% upside to our 66 price target. The dividend yield is an attractive 2.8%.” HOLD

Devon Energy (DVN), originally recommended by Mike Cintolo in Cabot Growth Investor, remains in a strong uptrend, still above its 25-day moving average. In his update last Thursday, Mike wrote, “DVN has been fairly calm and collected in recent days despite some wild swings in oil prices, and we think one of the reasons is that the energy market isn’t as volatile as it seems: While the current (front-month) price of oil (which is the one quoted on the news) has been all over the map, prices for contracts due later this year or early next year have been somewhat more stable. Moreover, just looking at the price/cash flow/potential dividend situations, it’s hard to argue investors are discounting triple-digit oil prices for that much longer, so these periodic shake-the-tree movements aren’t freaking out investors. Whatever the reason, the action is encouraging so far, as DVN has held its impressive snapback from two weeks ago, with recent weakness finding support around the 25-day line as volume dries up. We still think Hold is the right rating here given the news-driven action, but the longer the stock can hold up and calm down, the better the chance the advance will continue. If you own some, just sit tight.” HOLD

Ford Motor (F), originally recommended by Carl Delfeld in Cabot Explorer, is still a bargain, trading 356% off its January high. In his update last week, Carl wrote, “Shares were up this week, as the company announced that by 2030 it expects half of its global sales to be fully electric vehicles and targets $50 billion in EV investment through 2026. Ford’s splitting the company into two, with Ford Model e in charge of its EV business and Ford Blue handling its legacy combustion engine business.” BUY

GlobalFoundries (GFS), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here two weeks ago, pulled back sharply last week but Mike still likes it. In his update last week, he wrote, “GFS etched higher lows during the market downturn, and as soon as the pressure came off the market, it zoomed to new highs on very big volume; combined with a rapid, reliable growth story (for at least the next three or so years thanks to its ever-increasing total of long-term contracts), it all pointed to a high-odds play. But it looks like, despite that, GFS has rolled a 7: Despite being very well-traded, shares became out of control soon after tagging new highs, and the last few days have been poor to say the least, with shares sinking below support today in the mid-60s. To be fair, we are seeing some iffy news/stock action in some spaces of the chip sector (AMD and MU haven’t helped of late), but it is what it is. At this point, with a half position and the prior positives, we’ll stick with GFS tonight—but even though it’s a recent purchase, we think it’s prudent to move to Hold and give it just a couple more points of leeway.” Since then, the stock has slipped a little more, but it’s up today, so maybe 60 is the support level. I’ll follow Mike’s lead and downgrade to hold. HOLD

Halliburton (HAL), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is another strong energy stock. And now Mike is considering it for Cabot Growth Investor, where last week he wrote, “We’re not sure we want two oil names in the portfolio—when the group turns, the exposure will hurt—but we really do like the overall action in HAL, which just got going at the start of the year and should see years of strong earnings growth ahead. The situation reminds us somewhat of the homebuilders in 2012 as they began long, steady runs after a multi-year bust.” BUY

Harley-Davidson (HOG), originally recommended by Carl Delfeld in Cabot Early Opportunities, has an interesting chart, as the stock has converged with all its moving averages to depict a stock that’s gone steadily sideways for many months. Fundamentally, the big story here is that Harley-Davidson will spin off its all-electric LiveWire division into a stand-alone publicly traded company. But now Carl has moved HOG to Hold, thinking that LiveWire may be the better investment. I’ll do the same—and if this doesn’t get rolling soon, I’ll sell. HOLD

Intel (INTC), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier and featured here last week, sold off soon after, so is a better buy here. In his update last week, Tom wrote, “Tech stocks are recovering, and semiconductor stocks in particular have been strong. But the main attraction here is the longer-term story as Intel is still dirt cheap ahead of what is likely to be several years of escalating growth.” BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, was spun off from Merck in June 2021 and is a member of the S&P 500—but undervalued by the market according to Bruce. In his update last week, Bruce wrote, “OGN shares have about 30% 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

Pioneer Natural Resources (PXD), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is our third energy stock, and it hit a new high last week! As noted previously, the sector is strong now, but that won’t last forever, so we’ll just ride the trend until it ends. 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 recovers from that low, it looks like a good investment. BUY

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, remains very close to being evicted from the portfolio—but I’m hanging on a little longer because the stock is now suggesting that 50 is a support level, and of course Bruce still says that the stock is cheap and has about 42% upside to his 75 price target. So I’ll hold a little longer, and if we’re lucky, buyers will appear. HOLD

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 (META) 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) and then gapped up after the company’s fourth-quarter report was released. It’s been consolidating that gain for the past three weeks, and antsy traders could take profits here, but fundamentally there is certainly potential for more gains, so I’ll stick with it—though I will reduce the rating to Hold, given that the bounce is over and the buying power has ebbed. HOLD

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to advance and is closing in on its record high of 1,243 of last November. Last week I mentioned the stock split, which makes the stock appear more affordable, but doesn’t alter the company fundamentals. But more important in my view was Saturday’s news that the company delivered over 310,000 vehicles in the first quarter, an increase of nearly 70% from the year before. By comparison, Ford and GM are having trouble even matching last year’s output. Thus, Tesla’s automotive business looks very strong (with demand still exceeding supply), and I remain very bullish on the company’s prospects for revolutionizing the energy business through deployments of batteries, solar installations and software. HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has fallen out of its trading range between 55 and 60, which has me worried. And Tom is getting worried too. In his update last week, he wrote, “This regional bank stock has gone sideways for about a year. It should be benefiting from higher rates and spreads as well as a still-strong economy. I don’t know why it isn’t. Let’s see how things are going in the quarterly earnings report in a few weeks. If it’s not encouraging, we may have to take a good hard look at this one.” I’ll downgrade to Hold. HOLD

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is once again back above all its moving averages, moving in the right direction. In his update last week, Tom wrote, “Visa is back. V got clobbered after the initial invasion but has been moving higher recently as investors recognize V as a good place to bottom fish in the panic phase of the crisis. I expect business to remain strongly growing this year, and the stock should take off again if this crisis fades. It’s up sharply off the bottom.” HOLD

The next Cabot Stock of the Week issue will be published on April 11, 2022.