April 5, 2021

The market as a whole is looking healthier, though there are still symptoms of a broad unfolding market top. But our stocks look healthy and all have the potential to move higher from here, so the only change in our portfolio today is the downgrade of DKNG to Hold.

As for today’s recommendation, it’s a company with a great growth story (in the insurance industry) that just came public last May.

Details inside.

Cabot Stock of the Week 342

The Dow and the S&P 500 are hitting record highs—but the Nasdaq and the small-stock indexes aren’t. Growth stocks are demonstrating newfound strength—but volume is lighter than a month ago, and falling especially among the retail traders (using Robinhood, for example) who drove the market to its February peak. Bottom line: The bull market is still intact, but the signs of fraying that often emerge during long topping actions continue. Still, by focusing on the right stocks, we can do well. This week’s recommendation is a fairly recent IPO with a solid growth story and an attractive chart. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

SelectQuote (SLQT)
We continue to monitor a handful of “recent” IPOs—those that came public in the past six to 12 months—that are holding up well during this growth stock correction/consolidation and could provide fresh leadership when the buyers truly retake control. One of my favorites among the group is SelectQuote, which has all the characteristics that will attract big investors. (Indeed, 297 mutual funds came on board in the stock’s first seven months as a public company.)

At its heart, SelectQuote’s story is really about yet another industry moving online. In this case, it’s insurance, but the company doesn’t actually insure anyone (and thus, takes no underwriting risk). Instead, the firm operates the largest marketplace for people to connect with insurers in a variety of fields, giving its 50-plus insurance carrier partners a ton of qualified leads, while offering consumers great, relatively easy options.

Of course, any company can set up a website and run ads and offers from some insurance carriers, but SelectQuote has a couple of unique competitive advantages. One is experience; the company has actually been around for more than 30 years, has served more than three million policyholders and collected more than one billion data points on what sells and what doesn’t. And all of that goes into its technology, both for marketing (real-time quoting and underwriting, etc.) and also for intelligent lead scoring and routing.

And that leads to the firm’s other big advantage. SelectQuote isn’t some faceless online operation, instead employing and training (10-week training programs; ongoing testing drives compensation) 1,500 specialized, internal agents, including 300 retention and cross-selling specialists. Better yet, the program is clearly working, based not only on sales results (in Q4, agent productivity was up 32% despite a 70% rise in the number of agents!) but on agent retention (90%).

As for the business itself, 75% of sales during the past year have come from senior-related health plans that add on to Medicare. And that’s a good thing in our book. With more people hitting retirement age and living longer, more people will be looking for add-on plans. Projections suggest Medicare Advantage and Medicare Supplement enrollment will grow from 36 million in 2018 to 45 million in 2023 and 53 million by 2028. There are also dental, vision and hearing plans, along with some prescription drug plans.

All in, for Q2, senior revenues at SelectQuote boomed 127%, with strong growth across the board; approved plans for Medicare Advantage, Medicare Supplement and dental/vision/hearing lifted 132%, 63% and 115%, respectively.

The next largest slice of the pie is life insurance (20% of revenues), and half of that slice is final expense insurance (more expensive than term, but covers end-of-life things like funeral, burial and some health expenses), which makes it a natural fit with those seniors buying health insurance through the portal. Growth here has been solid, with a 40% revenue hike in the last six months. Then there’s auto and home, which is just 5% of the total and shrinking a bit as the company focuses on faster growth areas.

All told, it’s a pretty straightforward story; SelectQuote is the leader in a steadily growing field with some real competitive advantages. So it’s no surprise that the company has been cranking out huge growth in sales (up 90%, 91% and 103% during the past three quarters) while earnings have begun to take off. Analysts see the bottom line rising 83% in this fiscal year (ends in June) and another 48% next year (up to $1.30 per share).

As mentioned above, SLQT came public relatively recently (last May), went through the wringer for a while but began perking up nicely in February. A non-dilutive share offering and the weakness in growth stocks then smacked it around a bit, but shares held their 50-day line twice and are now gathering strength for what we think could be a sustained move. Volatility is elevated (SLQT can move around a few percent each day), but we think the next big move is up. BUY.

Current Recommendations

The portfolio has only one stock hitting new highs today (BIP), so this is not a rip-roaring bull market. Still, given the correction of recent months, our stocks in general look healthy, and capable of hitting new highs in the weeks and months ahead. The only change in the portfolio today is the downgrade of DraftKings (DKNG) to Hold. For new readers (or if you’re feeling underinvested), there are still eight stocks rated Buy. Details below.

Changes
DraftKings (DKNG) to Hold.

Barrick Gold (GOLD), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here two weeks ago, has made a little progress since then and the investment thesis is still intact. In his update last week, Bruce wrote, “At about 20, Barrick shares trade at a sizeable discount to our value estimate of 27, based on 7.5x estimated 2021 EBITDA and on a modest premium to its $25/share net asset value. The combined dividends this year will produce a 3.7% yield. Although the company may not pay a special dividend next year, it could raise its recurring dividend to provide an above-market yield. We think Barrick has a much better future than the market is assuming. Barrick shares have about 38% upside to our 27 price target. On its recurring $.09/quarter dividend, GOLD shares offer a reasonable 1.8% dividend yield.” BUY.

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a large growth stock that has recovered nicely from its post-earnings selloff a few weeks ago—and has been trading between 450 and 500 since, preparing to break out to a new high. In his update last week, Tom wrote, “In the near term AVGO is somewhat at the mercy of the tech sector, and I don’t know if the selling is over yet. But even if there is weakness over the next few weeks, I like AVGO’s prospects very much in the months ahead. Technology won’t be on the outs for long and this is a fantastic company that will continue to benefit from proliferation of technology. The stock should also get a boost from the 5G rollout as new technologies develop and it becomes a bigger story in the market.” BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, may be slow, but it’s going in the right direction, and it may notch a record closing high today. In Tom’s latest update, he wrote, “Sure, the infrastructure partnership stock hasn’t done much lately. But the bigger picture looks great. It’s still on a longer-term uptrend. Earnings will get a boost from the full recovery and new assets coming online. Neglected defensive stocks are coming back. And infrastructure is becoming a bigger story as the new Administration in Washington focuses on it.” BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, is another stock that is unlikely to be a barnburner, but it’s been recovering nicely since the market’s March 2020 low, and right now is looking to break out to a new high above 55. In his latest update, Bruce wrote, “KO shares rose 3% in the past week and have about 21% upside to our 64 price target. While the valuation is not statistically cheap, at 24.6x estimated 2021 earnings of $2.15 (unchanged in the past week) and 22.7x 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 a great growth story but last Monday the stock fell below its 50-day moving average and while it’s since climbed back above it, the volume is unimpressive. In last week’s update, Mike wrote, “DKNG was one of many stocks that got whacked after tasting new-high ground, and then fell further on Monday after reports that gambling legalization in New York was hitting a snag. Overall, the chart is far from a horror show—after the bounce of the past two sessions, shares are near their 50-day line and have etched a series of higher lows in recent weeks. For our part, we’re just following the plan we laid out when we entered—with “just” a half-sized position, we’re using our maximum loss limit (20% on a closing basis; 1% total portfolio risk), which correlates to the 57 to 58 area. A close below there would force our hand, but until then, we’re holding on. If you’re willing to use a tight stop, we’re still OK picking up a small position here.” I’ll downgrade to hold, but if you’re game to use a tight stop as Mike suggests, you can buy here. HOLD.

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has poked its head above 200 several times over the past month, but it hasn’t been able to stay above that level yet. Still, all signs say that it will eventually succeed. In his update last Thursday in Cabot Growth Investor, Mike wrote, “FIVE continues to hack around with resistance at 200, though selling pressures have so far lasted just a day or two before easing up. As we wrote in last week’s issue, all signs point to Five Below not just being back on its prior growth path, but on a better growth path than before thanks to improvements made during the pandemic (e-commerce, Five Beyond, etc.). Hold on if you own some, and if you don’t, we’re OK picking up a few shares here.” BUY.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, gapped up this morning and looks like it may notch a record closing high today! In his update last week, Bruce wrote, “On a P/E basis, the shares trade at 9.2x estimated calendar 2022 earnings of $6.27 (up a cent this past week). The P/E multiple is helpful, but not a precise measure of GM’s value, as the company has numerous valuable assets that generate no earnings (like its Cruise unit, which is developing self-driving cars and produces a loss), its nascent battery operations, its Lyft stake and other businesses with a complex reporting structure, nor does it factor in GM’s high but unearning cash balance which offsets its interest-bearing debt. However, it is useful as a rule-of-thumb metric, and provides some indication of the direction of earnings estimates, and so we will continue its use here. Our 62 price target is based on a more detailed analysis of GM’s various components and their underlying valuation.” Bruce was clearly early on the GM story, but now other analysts are jumping on board. Last week I read an analyst’s report noting that the chart of GM (and F as well) has broken out of a long, multi-year downtrend, which is a good technical sign. And today I read a report from Morgan Stanley on the car industry, noting GM’s fundamental lead on other traditional car-makers in the pivot to electrification. HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, remains a long-term hold, as growth prospects remain great for the largest operator of hotels in China. The stock bounced off 50 last week and is now heading back toward its recent high of 65. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, released a disappointing earnings report back in early February that triggered selling that took the stock down to 43—but the stock has been trending up since! In his update last week, Bruce wrote, “The company issued a press release reaffirming its full-year 2021 guidance, but said that its first quarter results will be negatively impacted due to: an 11-day closure of its Fort Worth, Texas brewery due to the winter storms, a cybersecurity incident, and continued pandemic-related pub shutdowns in the United Kingdom. Full year guidance calls for a mid-single-digit sales increase, flat underlying EBITDA and a net debt to underlying EBITDA ratio of 3.25x by the end of 2021. It is assuming that the lost Texas volumes are made up in the second quarter, and that insurance proceeds will cover some of the brewery and cybersecurity losses. It did not specify the nature of the cybersecurity issue. Also, the company stated that it continues to expect to be in a position to reinstate its dividend in the second half of 2021, as we have anticipated. TAP shares jumped 7% in the past week and have about 13% upside to our 59 price target. Earnings estimates ticked down this past week, with a 6-cent decline in the 2021 estimate and a 4-cent decline in the 2022 estimate. TAP shares trade at 13.8x estimated 2021 earnings of $3.81. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 9.2x 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, gapped up this morning, leaving behind (for good, hopefully) the base at 70 that had supported the stock numerous times since last July. In his update last week, Tom wrote, “This combination regulated and alternative energy utility stock got very out of favor during the cyclical stock rally. But it’s a defensive company with growth that offers a conservative way to play the growth of clean energy, and investors love it. It won’t be down for long and this is a good buying opportunity.” Obviously, the stock looks better now, though it will still take time to climb to its old high of 88. BUY.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, has climbed back above its 50-day moving average with three strong days’ action and is now heading for its old high of 90. In his update last Thursday, Mike wrote, “PINS actually showed a bit of relative strength in recent days, dipping as low as 66, which was well above the early-March low (60). (Many other tech/Internet/e-commerce plays slid to lower lows.) And now the stock has begun to bounce back a bit, nosing above its 25-day line for the first time since growth stocks cracked. That’s not a green light in our view—there’s still plenty of resistance to chew through; a move above 76 would be intriguing—but PINS continues to act like this six-week rest should eventually lead to another leg up.” With the stock now well above 76, I would say the light is now green, but with growth stocks still not totally out of the woods, I’ll leave it rated hold until Mike calls the upgrade. HOLD.

QuantumScape (QS), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and featured here last week as it tested support at 40, gapped up on Thursday, giving us a nice paper profit—and the reason for the gap is encouraging. In his update Thursday before that gap, Carl wrote, “Futures indicate an opening up more than 15% this morning as the company announced yesterday that it has successfully met the technical milestone that was a condition to close for the investment of an additional $100 million by Volkswagen into QuantumScape. The milestone required VW to successfully test the latest generation of QuantumScape’s solid-state lithium-metal cells in their labs in Germany. QuantumScape’s solid-state battery can achieve greater range, superior reliability and a longer life than their 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. Even better, these batteries will be much cheaper than lithium-ion ones once production scales up because of fewer and cheaper materials. When Volkswagen’s QuantumScape batteries go operational, Volkswagen and its brands such as Audi, Porsche and Bentley could offer cars with 450- to 500-mile range batteries. I recommend that you purchase shares if you have not already done so.” BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, bounced strongly off 200 last week but even that bounce just brought it back to its 50-day moving average. Still, Carl is resolute—and says this is a good buying opportunity. In his latest update, he wrote, “Shares were up 8.9% yesterday, capping a great week as they surged from 199 to 223; the company now has a market value of $116 billion. Sea’s gaming group continues to grow its user base. Sea has 610 million quarterly active users, a number that is growing at an annual rate of 120%. The company’s Free Fire game is often voted the number one downloaded game all around the world. E-commerce is Sea’s second growth engine with gross merchandise value of $12 billion and a billion orders last quarter. We have taken profits several times over the remarkable rise of this stock but after its pullback last week, I moved this stock to a buy.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is currently battling GM to be the portfolio’s top performer today, but the stock remains well below its high of 900, hit in late January. The reason for the strength was an excellent report on Friday detailing the company’s global delivery of 184,800 vehicles in the first quarter, well above analysts’ estimates of 177,822. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, continues to have one of the best-looking charts in my marijuana portfolio—but I still think the sector as a whole needs a longer cooling-off period. In my update last Wednesday, I wrote, “The biggest seller of marijuana in Florida, with a 51% market share and a record of profitability since 2017, Trulieve is a well-managed company with excellent prospects as it expands into other states (California, Massachusetts, Connecticut, Pennsylvania and West Virginia). Revenues are the slowest-growing among the four U.S. industry leaders (Q4 saw $168 million, up “only” 111% from the year before), but the company’s record of profitability has been impressive, and investors value that (as do I; though we took partial profits at the top, selling a third, it remains the largest holding in the portfolio.) As for the stock, it’s the one stock in the portfolio that actually hit a new high in March and it now sits only 14% off that high, the best of the plant-touching stocks in the portfolio. If you don’t own it and you’ve got money burning a hole in your pocket (maybe Federal stimulus money?), you could nibble here.” That’s still true. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, is back above its 50-day moving average—but that moving average has turned slightly down, and volume as a whole is slowly fading. Still, Mike is patient. In last Thursday’s update he wrote, “UBER remains in its wide trading range and has begun to quiet down some, which we take as constructive. Meanwhile, the fundamental story continues to improve, with a couple of bullish moves last week in the Delivery business—Uber became the default delivery service for ScriptDrop in 37 states (an outfit that allows local pharmacies to offer delivery), while it also expanded its partnership with Nimble to include Chicago and Atlanta (it now delivers in nine cities plus Orange County). Nothing has changed with our thoughts here—UBER should enjoy another leg up as business storms ahead, though we’re keeping a mental stop in the upper 40s in case something goes awry.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explore, has been vacillating around the 30 level in recent weeks as its 200-day moving average, now at 26, draws closer. In his update last week, Carl wrote, “SPCE shares went from 28 to 30 this week as the company announced its newest spaceship as it looks to resume test flights in the coming months at its headquarters in New Mexico. It will likely be summer before the ship, designed and manufactured in California, undergoes glide flight-testing. That will coincide with the final round of testing for the current generation of spacecraft, which will be the one that takes British billionaire and Virgin Galactic founder Sir Richard Branson to the edge of space later this year. We have taken profits several times, and the share price is four times our entry point. I’m keeping this stock a hold for now. We can afford to wait as the company has over $660 million.” HOLD.

The next Cabot Stock of the Week issue will be published on April 12, 2021.

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