August 16, 2021

While the market was weak this morning, the bull market remains intact, so I continue to recommend that you be heavily invested in stocks that help achieve your investing goals.

Today’s featured stock is a low-risk dividend payer whose products you have probably bought—and probably never knowing the company’s name. More importantly, Tom Hutchinson says it’s cheap.

As for the current portfolio, most of our stocks look good, so the only changes is an upgrade of Five Below (FIVE) to Buy.

Cabot Stock of the Week 361

While the market opened weakly this morning, the main trends are still healthy, and thus I continue to recommend that you be heavily invested in a diversified portfolio of good stocks. Today’s recommendation is a diversified provider of consumer products in the U.S. with good growth prospects and a healthy dividend. The stock was originally recommended by Tom Hutchinson of Cabot Dividend Investor and here are Tom’s latest thoughts.

Spectrum Brands (SPB)
Spectrum is a global branded consumer products and home essentials company. It was formed in 2005 when battery company Rayovac added more brands and changed its name. The company offers popular and well-known brands including George Foreman Grill, Kwikset Lock, Cutter Bug Repellent, Remington and Black & Decker.

SPB has been a terrific performer over the last couple of years. The stock outperformed the S&P 500 over the past year. It has returned over 200% since the market bottom during the pandemic in March of 2020, more than doubling the S&P 500 return over the same period. But despite that stellar performance, SPB still sells at a low valuation of just 12.5 times forward earnings.

Spectrum operates in four segments: Home Improvement, Personal Care, Pet Care and Garden Supplies. The products are very home centric. That served it well during the pandemic as people focused on the home during the lockdowns. In fiscal 2020 (which ended last September) earnings increased 43% over the previous year. But lately, the stock has been a victim of that pandemic success.

Shares have languished since May and are currently down more than 15% from the high. It may be getting cast as a pandemic stock whose time is up. As well, last quarter’s earnings missed expectations as the company reported higher costs from commodity and freight inflation. But these issues should fade away. The stock is down for what in my opinion are temporary reasons.

The consumer has been strong with high confidence and near record savings rates. Lately, however, consumer confidence is taking a hit as the Delta variant crowds the headlines and people get the feeling that this virus isn’t done yet. But Spectrum has that covered. If people recoil back toward more home spending, Spectrum is right there.

Plus, business should remain strong even beyond the last remnants of this virus. The fact is that the home focus will likely last beyond the pandemic. Most analysts in the field believe the trend is here to stay. It was a trend likely to grow anyway that was simply accelerated by the lockdowns. Spectrum is in a perfect position to thrive as virus concerns grow, yet it is also well-positioned for the post-pandemic world.

Spectrum is also a turnaround story. The company filed for bankruptcy in 2009 and slowly climbed back. Lately, it has made huge strides. The current management team has cut net debt in half in the last four years. Operating earnings cover debt payments by 3 times today compared to 1.5 times in 2019. The company has also massively cut costs. Internally, Spectrum is reorganizing in a way that should solidly grow earnings if business remains the same, even without the growing home focus.

Then there’s inflation. The supply problems and rising costs are likely to be temporary as economies recover. Even if it lasts, the company will likely be able to pass most of the higher costs on to the consumer. It’s a weird issue with peculiarities to this quarter that are unlikely to have a lasting negative effect.

The dividend yield is a solid 2.1%. It’s not high but it’s better than the S&P 500 average dividend yield. It’s only been paid for three years but the future looks bright. Dividend growth is fueled by earnings growth. The current projected five-year earnings growth rate bodes well for the dividend.

Analysts are expecting earnings-per-share growth of 52% this year despite last year being strong, and an average of 18% over the next five years. Meanwhile, SPB sells at a valuation well below that of its peers. It’s a great chance to buy the stock while it’s caught up in temporary market gyrations. Earnings and results almost always win in the end.

Ten of the 12 analysts covering the stock rate it a “BUY” or “STRONG BUY” with an average target price of 110 per share, 35% higher than the current price. BUY

Current Recommendations

While a few of our stocks look shaky, and are thus rated hold, I don’t see any that deserve to be sold this week, so the addition of SPB brings the portfolio to 19 stocks, one less than our limit. Details below.

Changes
Five Below (FIVE) to Buy

ASML Holding (ASML), originally recommended by Mike Cintolo in Cabot Growth Investor, is a Dutch manufacturer of high-end photolithography machines in high demand by semiconductor manufacturers—which, as we all know, are working full speed to fulfill the world’s demand for chips. The stock is on a normal correction from its high of two weeks ago and can be bought here. BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, peaked at 495 back in mid-February, and the stock has been working to break through that level since. In his latest update, Tom wrote, “The chip maker benefits when new technologies proliferate. It should also benefit in the near term as 5G rolls out. Longer term, as 5G enables new technologies, artificial intelligence, self-driving cars and many other things is will prime demand for Broadcom’s products. Remember, 90% of all internet traffic uses Broadcom’s products at some point. The recent lackadaisical performance in the sector and the stock should be short lived. We’re in the midst of a technological revolution and AVGO is a great place to be.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is within pennies of hitting a new high today, so odds are very good that it will do so in the days ahead. In his update last week, Tom wrote, “The infrastructure partnership reported solid earnings last week. The number would have been higher but for recently sold assets where the money had not yet been deployed but will be in future quarters. BIP is a slow mover that has performed on par with the overall market during the recovery. That’s not bad considering all the excitement and focus has been elsewhere. Relative returns should improve as the pace of the bull market recedes. Plus, Congress is on the cusp of passing an infrastructure bill that could make the investment subsector a lot more popular.” BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, has been trending higher since last October—though it’s interesting to note that the stock still hasn’t equaled the high it hit in 2000! In his update last week, Bruce wrote, “Cisco is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. 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 about 8% upside to our 60 price target. The shares trade at 17.3x estimated FY2021 earnings of $3.21 (unchanged in the past week). On FY2022 earnings (which ends in July 2022) of $3.41 (down a cent), the shares trade at 16.3x. On an EV/EBITDA basis on FY2022 estimates, the shares trade at a 11.7x multiple. CSCO shares offer a 2.7% dividend yield. We continue to like Cisco.” BUY

DocuSign (DOCU), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high last Tuesday but then quickly fell to its 50-day moving average. In his update last week, Mike wrote, “For the first time since the May low, DOCU has shown a small change in character—instead of shooting to new highs after a pullback, it found sellers and dipped a touch below its 25-day line before today’s bounce. Admittedly, a lot will come down to the growth stock environment (is this rotation going to go on for weeks or be over in a couple of days?) and, later on, DocuSign’s own quarterly report (likely out in early September). A decisive break of the 50-day line (now nearing 280) would obviously be a yellow flag, but right here, we don’t think the action is abnormal in any sense. Compared to the big-volume buying that came after earnings in June, the recent retreat hasn’t shown much teeth, and the first test of the 10-week (or 50-day) line usually offers a decent entry point. Plus, of course, every sign continues to point to massive growth ahead for its e-signature and agreement cloud solutions. We’re not complacent, but right here we think DOCU is at a nice entry point if you’re not yet in.” BUY

Driven Brands (DRVN), originally recommended by Tyler Laundon in Cabot Early Opportunities, is the largest automotive services company in North Carolina, having acquired big-name brands such as Maaco, Meineke and CARSTAR. But the stock has only been public since January so it’s little-known by investors. Management expects revenue to expand 44% this year, and adjusted EPS to swell by 164%, so the fundamentals are good. But the stock weakened last week because management announced the pricing of a secondary public offering of 12 million shares at a price of $29.50 per share. Driven Brands is not selling any shares of common stock in the offering and following the completion of the offering, the Selling Stockholders will remain Driven Brands’ largest stockholders, owning in the aggregate roughly 65.4% of the outstanding common stock. BUY

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, broke out very strongly last week, finally getting above resistance at 200 that had constrained it since January. In his update last week in Cabot Growth Investor, Mike wrote, “One of the big challenges the market presents is that it’s very streaky—indexes, sectors and stocks will spend months bobbing and weaving before finally making a move. Five Below looks to be the classic case, with its six-and-a-half-month range of 15% finally giving way to a strong breakout and solid follow-through since. Of course, in this choppy environment, there’s still a chance that FIVE will embark on another tedious pullback, but there’s no question that the move is a bullish change of character, and we like the fact that some other retailers are beginning to perk up, too. If you own some, just keep holding on, and for new buyers we’re going to restore our Buy rating, but as has been the case with most stocks, we advise buying dips of a few points if you’re not yet in.” I’ll upgrade to buy too. BUY

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, has pulled back normally since hitting new highs two weeks ago as quarterly results were released. In his update since then, Mike wrote, “FND has taken a couple of lumps, but there’s little doubt the big-picture growth story remains as strong as ever. The quarterly report was fantastic and easily beat expectations, with sales up 86% from the pandemic-affected Q2 of last year (led by same-store sales growth north of 60%), but also up 65% from the Q2 2019 figure. As you’d expect, growth rates will slow as comparisons become more difficult, but there’s little evidence of any business hiccup—indeed, same-store sales for July were up about 11% from a year ago, a time when the company’s results were very strong. It wasn’t all good news (supply chain issues will hike costs and cut margins a bit for the next two or three quarters), but there’s every reason to expect sales and earnings to continue to head higher as the store count (up 20% this year) does. As mentioned above, shares have come down on the good-not-unbelievable numbers, but they’re still holding above even their 25-day line (now just above 116). A bit more retrenchment wouldn’t shock us, but until proven otherwise, we think the path of least resistance is up.” BUY

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, hit a record high back in early June, but now it’s sitting on its 200-day moving average—and the question is whether the recent uptrend, which saw the stock more than triple from March 2020 to June 2021, is over. In his latest update, Bruce wrote, “GM’s second-quarter earnings report complicates our investment decision-making, but we are retaining our Hold rating for now. The company reported very strong results, which would have been even higher but for the chip shortage and a large $1.3 billion warranty expense. These are probably temporary issues that we can mostly look through. However, it appears that the company’s ability to generate ever-higher profits is maxed out after adjusting for these items, leading to our question about the future decay-rate from this peak. Also, as we learn more about the electric vehicle business, we wonder (doubt?) what the eventual profitability of these cars will be, and hence what kind of return the company will earn on its immense capital outlays.

“From a valuation perspective, the shares are priced to reflect conservative but reasonably strong profits in the gas-powered vehicle segment (with the recognition that this is a cyclical industry) backed by a sturdy balance sheet and healthy profits at GM Financial, but have zero value assigned to the EV business.

“We see GM producing strong gas-powered vehicle profits and cash flow for at least another year or two, although at a tapered downward trajectory. The chip shortage (and perhaps the rising input costs) will eventually ease, and the warranty costs will likely return to normal although the Chevy Bolt warranty issue may be a chronic one for the EV business (but that is outside of the value of the gas-powered car business). GM Financial will also likely continue to produce large profits.

“It seems unreasonable that the EV business actually has zero value, given the investments made by highly credible partners like Honda, but it is nevertheless speculative. Investors have returned to their senses, at least partly, by assigning a near-zero value to independent EV makers but GM has the technical and financial firepower to be an end-game survivor.

“Tesla is generating remarkably high manufacturing profits, but is helped by having zero legacy vehicle costs, zero dealer network costs and zero advertising costs. Once their new factories are filled, they may be more likely to cut prices to expand their sales volumes rather than further boost their margins, potentially shrinking the profit pool for GM and other EV producers. We also wonder whether GM’s high EV investment is more defensive (zero or negative rate of return) rather than offensive (decently positive rate of return).

“We’re keeping GM a Hold for now, as the risk/return balance isn’t as favorable as we would like for the Cabot Undervalued Stocks Advisory. But, we need to think more about this stock. The valuation is too low to warrant a sale, and the fundamentals are by no means deteriorating. Yet, the upside is now murkier for the gas-powered business and especially the EV business. We don’t see a future ‘blow-up’ and the most likely course for the fundamentals and shares is a grinding upward move.

“It seems that investors had hoped for a huge ‘beat-n-raise’ but were caught off guard by the warranty expense and effects of the chip shortage on future production, pushing the share price down sharply on the earnings date. This seems more like an emotional reaction by short-term traders than a fully rational analysis by long-term investors.

“In terms of the numbers, GM reported adjusted earnings of $1.97/share compared to a $(0.50)/share loss a year ago and the $2.25/share consensus. The company raised its full-year EBIT guidance by a generous 19%, and raised their EPS guidance by 21% to $5.90 (midpoint). The cash flow guidance was unchanged due to unpredictability of working capital and chip arrivals. Most analysts had higher estimates for the full year, so these estimates now will be coming down.

“Automotive profits were a record high $2.9 billion, even as volumes were restrained due to the chip shortage and the company had a huge $1.3 billion unexpected warranty expense. GM lost market share in most categories except North American trucks, which smartly became a production priority, where it gained share.

“GM Financial continued to generate large profits, earning $1.6 billion, compared to $226 million a year ago and $1.2 billion in the first quarter of this year. For the trailing four quarters, GM Financial has produced a remarkably high 35.5% return on tangible equity.

“The company continued to invest heavily in EVs and AVs, as it wants the #1 market share in North America. Management anticipates profit margins will be similar to or higher than on gasoline engines. Anytime GM, or any capital-intensive cyclical company, aims for the #1 market share, we almost instinctively add ‘… at the expense of profits.’

“GM shares have 28% upside to our 69 price target due to the complicated and weak-versus-expectations quarter.” HOLD

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, hit new highs several days last week after releasing a great second-quarter report. Tyler wrote, “HUBS reported Q2 results that beat on the top and bottom lines. Revenue grew 52.6% to $310.8 million (beating by $14.8 million) while adjusted EPS of $0.43 beat by $0.11. Full-year guidance range of $1.27 billion is modestly ahead of $1.24 billion consensus. The stock popped and still looks good.” BUY

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer and featured here last week, is off slightly from its high. In his update last week, Carl wrote, “MRVL shares drifted from 62 to 59 as the company announced a series of acquisitions, including buying startup Innovium for $1.1 billion of stock following its $10 billion purchase of Inphi last year. Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of 5G networks. Marvell’s outlook for the second quarter is $1.06 billion in revenue, up 46% year over year and I recommend buying at current prices if you have not already done so.” BUY

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, bounced back above its 200-day moving average last week but we don’t yet have a renewed uptrend. In his update last week, Bruce wrote, “The company’s second-quarter report on July 29 was encouraging. Revenues rose 14%, powered by a resurgence in Europe. Revenues were about 4% ahead of the consensus estimate. Adjusted net income rose 2% from a year ago and was 17% above the consensus estimate. However, adjusted EBITDA fell 1%, as the company spent more on marketing and battled rising transportation, brewery and packaging materials costs. Beating the revenue and earnings estimates is important as it supports our view that investors don’t fully appreciate the resiliency in Molson’s business. The company reaffirmed its 2021 full-year guidance. Molson’s debt balance is unchanged from year-end, but cash is starting to accumulate. TAP shares have about 36% upside to our 69 price target.” HOLD

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, has been trending strongly higher over the past few months and it’s now within reach of its January high of 88. In his latest update, Tom wrote, “It looks like this alternative energy utility is benefitting as investors sour on the cyclical stocks. NEE has been trending nicely higher since the moment cyclical stocks started to weaken in June. It’s a great stock for the longer term as alternative energy continues to grow at warp speed and it gets cheaper to produce. But NEE has had an uncharacteristic subpar year in the open-up craziness. Recent strength and weakness in the stock has been anchored on short-term sector rotations. But now, the short-term factors are benefitting NEE and the long-term prognosis is excellent.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a new high at 209 in early July, retreated for about two weeks to 179, and then made a run up toward the old high, but didn’t succeed. The stock is now holding at 200, just above both its 25-and 50-day moving averages, with volume rather light, as investors wait for second-quarter results to be released August 18, after the market close. BUY

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, hit another record high last Friday! In Carl’s latest update, he wrote, “SE shares are up 600% over the last 18 months. I see further upside potential to Sea’s share price from strong momentum in its gaming portfolio, the ramp-up of e-commerce revenues and the opportunity for growth through Sea Money. I would be an incremental buyer of this stock, but long-time holders should definitely take partial profits from time to time.” BUY

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, first topped 60 in early January, and since then has been building a base, so technically, all is well here. And fundamentally, Bruce says there’s a lot to like. In his update last week, he wrote, “Sensata is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%. On July 27, Sensata reported encouraging second-quarter results. Its earnings were sharply higher than the pandemic-weakened results a year ago and about 10% above the consensus estimate. Revenues were 72% higher than a year ago and were also above estimates. The company raised its full-year revenue and earnings guidance. Cash flow was robust and net debt increased modestly to fund the Xirgo acquisition. ST shares have about 26% upside to our 75 price target. The stock trades at 14.3x estimated 2022 earnings of $4.17 (unchanged this past week). On an EV/EBITDA basis, ST trades at 11.1x estimated 2022 EBITDA.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was down this morning following the news that the NHTSA is investigating Tesla crashes that occurred while using Autopilot in the vicinity of previous crashes where first-responder vehicles were present. Clearly, the system is still not perfected, and as Tesla management has said many times, drivers still need to pay attention. In any case, demand for vehicles still exceeds supply, and the stock looks good, just above all its moving averages. BUY

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is one of the four leading cannabis companies in the U.S., and trends are terrific in the industry, with the average company in my portfolio growing revenues 135% over the past year. But this is a young industry, and the fact that marijuana is still illegal under federal laws means institutional investors have been unable to step in to support the stocks, and that means they’re very volatile. This morning, for example, the whole sector was soft, with several of my Cabot Marijuana Investor stocks, including TCNNF, hitting new yearly lows. Fundamentally, however, Trulieve is still doing great, as second-quarter results, released last Thursday, revealed. Revenues were $215 million, up 78% from the year before, and EPS was $0.31, up 94% from the year before and marking the company’s sixth consecutive positive quarter. Trulieve currently has 97 stores in the U.S., and when the Harvest Health acquisition is complete, that number will be close to 130. HOLD

The next Cabot Stock of the Week issue will be published on August 23, 2021.

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