August 2, 2021

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 provides a cloud-based service that has been in great demand through the pandemic and will continue to grow in popularity as the world’s business becomes more virtual.

As for the current portfolio, all our stocks look good, so there are no sales, just one simple downgrade to Hold.

Details inside.

Lastly, I hope you’ll join me for the 9th Annual Smarter Investing, Greater Profits Online Conference, August 17-19. We have an incredible lineup of experts ready to share their best picks.

Cabot Stock of the Week 359

The bull market is alive and well, with major indexes hitting new highs just last week. Growth stocks are still struggling to put together a cohesive advance, which means it’s easy to enjoy recommending undervalued stocks as we did last week. But it also means that it’s easier to find the exceptional growth stock, like today’s recommendation. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

DocuSign (DOCU)
The market environment is still tricky, challenging and choppy; while big-cap indexes like the S&P 500 and Nasdaq are near their peaks, it’s a fact that most stocks are still stuck in the muck. Coming into this week, less than 40% of NYSE and Nasdaq stocks are above their 50-day lines, while the 15-day average of stocks hitting new highs on both exchanges just tagged an eight-month low!

Thus, we can’t conclude we’re in a sustained uptrend quite yet, but in a way, that makes our job easier; when many stocks are flailing, it’s more straightforward to see which stocks are in pole position to lead the market higher should this upmove keep chugging and broaden out. While there are never any sure things, right now we think DocuSign (DOCU) is one of the cream of the crop when it comes to the market’s leadership—it has one of best combinations of story, numbers and chart action that should lead to good things.

The company, of course, was one of the biggest pandemic winners: The company has long been known as the hands-down leader in e-signatures (there is competition from the likes of Adobe, but DocuSign is clearly #1), which is an idea that simply makes sense—whether it’s signing mortgage refinancing documents, offer letters, work orders, invoices, reviews, contracts or legal documents, e-signatures save ridiculous amounts of time and money, not to mention reducing risk (standardized processes and electronic trails). The company’s own data shows that 44% of e-signature requests were completed in less than 15 minutes (!) and 80% in less than a day, compared to many days or even weeks with paper-based John Hancocks.

E-signatures alone is likely a $25 billion market opportunity, and DocuSign has less than 10% of that market. Indeed, the top brass said that it’s been capacity constrained, with demand outstripping supply in a sales and marketing sense as well as scalability. It’s a good problem to have and (as you’ll see when we go over the numbers) the firm is obviously making headway. Just from e-signatures, there’s no reason this company can’t grow rapidly for many years to come.

But DocuSign isn’t just a one-trick pony: It’s investing heavily in what it calls the Agreement Cloud, which it also pegs as a $25 billion opportunity, allowing clients such services as contract lifecycle management (including document production and negotiation tracking and facilitation), AI-based analytics and filtering/search capabilities for all agreements in the database and even stuff like remote and electronic notarization services.

What’s so attractive about all of these offerings is that they serve a mass market among businesses—just about everything any company or department has to sign off on or negotiate could benefit from some or all of these services. And once clients sign on to e-signatures, the barriers to try one of DocuSign’s other offerings drops significantly.

The momentum in the business right now is hard to match, with the company recently inking its one millionth client; the company has been successful at both getting new clients (Q1’s total was 10% higher from the prior quarter) and having current clients expand their usage (same-customer revenue growth was 25% in Q1, the firm’s highest figure in many years). Contracts average about 18 months in length, so there’s plenty of predictability in the business as well. The bottom line is also exploding despite increased investments, with earnings likely to leap 88% this year and 28% next (probably too low).

As for the stock, it originally broke out in September 2019, dove with everything in March 2020 and then had a massive run into Labor Day before a wild reversal. That was the top, and DOCU spent the next 10 months chopping lower, dipping as low as 180 in May. But since then, shares have completely changed character. The Q1 report kicked off a three-week, big-volume buying spree and DOCU has continued higher since, with no desire to dip below its 25-day line during the rally.

Current Recommendations

A couple of weeks ago we cleared the decks by selling four stocks (our weakest) and those that remain are quite healthy, with the vast majority up today with the broad market. So we have no sales today, just a downgrade of Trulieve (TCNNF) to Hold. Details below.

Changes
Trulieve (TCNNF) to Hold

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. And the stock just keeps hitting new highs! It’s up 9 days in the past 10! In last week’s Cabot Top Ten Trader, Mike wrote, “ASML Inc. has been called the most important technology company in the world—it’s a classic picks-and-shovels outfit, being a sole provider of one of the most important pieces of technology out there. The product is known as an extreme ultraviolet (EUV) lithography machine, which was launched in 2017 and uses light with wavelengths of just 13.5 nanometers to etch smaller and smaller integrated circuits, which are needed for today’s most advanced and fastest-growing applications. All of the big chip makers are customers and demand is going through the roof as many huge foundries have committed to making massive expansion commitments (we’re talking hundreds of billions of dollars over the next many years), which will surely help ASML. (The firm also does good business supporting its installed base and it makes other lithography systems, but the real driver here is demand for new EUV machines.) As for the here and now, business is excellent—in Q2, sales rose 28% and earnings lifted 49%, and that was despite some revenue not being recognized yet as customers wanted their machines before completing acceptance testing, while the order book came in at record levels. Encouragingly, the firm’s total EUV backlog is now 10.9 billion euros (ASML is a Dutch firm), which covers 80% of planned EUV output through 2022, and the firm is aiming to expand output potential beyond that. The top brass now sees revenues up around 35% this year with years of growth down the road.” 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, “Some of the big tech companies reported earnings that soundly beat expectations. The market expected that and is more focused on future guidance. It’s tough to impress in an environment with such lofty expectations. Broadcom doesn’t report until September. It’s all noise in the short term. The sector is doing great and Broadcom will surely benefit from 5G.” BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a new high on the first day of July and has pulled back normally since. In his update last week, Tom wrote, “BIP recently hit a new high and then pulled back. That has been a consistent pattern. The stock is trending very slowly higher in a bouncy fashion. BIP should trend higher over the next week or two and then pull back again if the same pattern continues. It’s still a good defensive company with a safe dividend that’s headed in the right direction, even if it’s not setting the world on fire.” BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of his Cabot Undervalued Stocks Advisor and featured here last week, has been up 8 of the past 10 days (almost as much as ASML)! In his update last week, Bruce wrote, “CSCO 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. The shares trade at 17.2x estimated FY2021 earnings of $3.21 (unchanged in the past week). On FY2022 earnings (which ends in July 2022) of $3.42 (unchanged), the shares trade at 16.1x. On an EV/EBITDA basis on FY2021 estimates, the shares trade at a 12.1x multiple. CSCO shares offer a 2.7% dividend yield.” 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. Management expects revenue to expand 44% this year, and adjusted EPS to swell by 164%. And the stock was up 8 of the past 10 days. BUY

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to work at breaking out above resistance at 200 that has constrained it since January. In his latest update, in Cabot Growth Investor, Mike wrote, “FIVE is the poster child for the market environment in recent weeks, ping-ponging between the low and high end of its range a couple of times during the past month; the recent 10-point decline came after another rejection near 200. It’s possible this is one big topping process and if the stock melts away back into the upper 170s, we could take the rest of our profit and look for stronger situations. But frankly, we like the overall setup here: There hasn’t been a down week on above-average volume since early April, the biggest volume clue during this consolidation was on the upside after earnings in June and, of course, the cookie-cutter growth story has years to play out—if we see a big-volume move above 200 or so, it should kick off a fresh uptrend. For now, though, we’ll just follow the evidence, and with FIVE’s pattern remaining sideways, we’ll stay on Hold.” HOLD

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, hit a new high last Friday! In his update just before that, Mike wrote, “We had been watching FND for many months before pulling the trigger, and even after our initial buy in April we had to endure two months of frustrating action. But now we think our patience is paying off, as shares have come under strong accumulation in two separate waves (late June and again last week), lifting out of what was essentially a seven-month base-building effort. To be fair, the picture isn’t perfect (the relative performance line is still shy of its highs), and Floor & Décor reports earnings next week (August 5) along with so many other names—revenues are expected to be up 98% from last year’s pandemic-affected quarter, with earnings of 61 cents per share. We always want to have a plan, so a sharp dip back toward the century mark would tell us this breakout attempt has failed, which in turn would make a meaningful decline more likely. But right now, we’re not thinking that way: It’s likely most weak hands have been worn out, and while there can always be some near-term changes in the demand picture, little is standing in the way of the company’s growth outlook. We’ll stay on Buy, though if you’re starting out, keep new positions small this close to the report.” BUY

General Motors (GM), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been a great winner for us this year, but Bruce thinks there’s more in the tank! In his update last week, he wrote, “GM, Cruise and Ford are battling over the ‘cruise’ name. Ford introduced the ‘Blue Cruise’ name for its autonomous vehicle unit, so GM and Cruise are right to fight this. But even if it loses, the heightened publicity that the dispute provides to Ford is worth millions in advertising. GM shares have 26% upside to our 69 price target. The shares have slipped on concerns that production growth will slow (partly due to the chip shortage) and partly due to concerns that economic growth will decelerate. Another risk that is increasing from ‘won’t happen’ to ‘conceivably could happen’ is that China pushes Western car producers out of the country. Following China’s moves in previously Westernized Hong Kong, its crackdown on major capitalist tech companies, and its new restrictions on IPOs in the United States, it isn’t entirely impossible that Western automakers are in line for similar treatment, even if years down the road. Needless to say, such a change would be devastating for GM shares. On a P/E basis, the shares trade at 7.8x estimated calendar 2022 earnings of $7.04 (up 4 cents this past week).” HOLD

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, is very close to breaking out to a new high. Second-quarter results will be released after the market close on Wednesday, August 4, so if you don’t own the stock yet, it’s safer to wait until after the report. BUY

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, has been correcting since the start of June, and last week made contact with its 200-day moving average, where it remains today. In his update last week, Bruce wrote, “Boston Beer shares fell sharply last week – the company had way overestimated the demand for its hard seltzer beverages, leading to higher costs and removing a key pillar of its growth story. TAP shares fell only modestly. We see the Boston Beer news as a positive for MolsonCoors. Consumers probably aren’t drinking less, just less of the trendier beverages, meaning that Coors’ slow walk to add some of these beverages may turn out to be the right strategy after all. TAP shares have about 37% upside to our 69 price target.” HOLD

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, peaked at 88 in January and bottomed at 68 in February and has been trending slowly higher since. In his latest update, Tom wrote, “The alternative energy utility delivered strong earnings results last week with 9% earnings growth over last year’s quarter. It’s right on track for its goals and firing on all cylinders. The regulated part shined as new investment in solar and customer growth helped. NEE has moved slightly higher since the announcement to near the highest level since April. It should also get a boost when alternative energy investments inevitably come back into vogue.” BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit a new high in early July, retreated for about two weeks, but is now back on the upswing, having split 4-for-1 two weeks ago. BUY

Progyny (PGNY), originally recommended by Mike Cintolo in Cabot Growth Investor, has been correcting since mid-June, and while it’s possible we see a double bottom over the past couple weeks, we still don’t see real upward strength. In his update last week, in fact, Mike sold his half-position, writing, “Everything we’ve written about Progyny in recent weeks remains true—we think the firm’s overall growth story is excellent and unique, and that should lead to years of solid growth. But whether it was the timing of our half-sized buy, the market environment or a combination of both, PGNY just couldn’t get out of its own way in recent weeks, and we decided to cut the loss this week. We’re not ruling out re-buying if the stock sets up again down the road (it will report earnings next Thursday, August 5, though we’re not sure we’d chase a gap higher in the name at this point), but the fact that PGNY has been slipping while most growth-oriented stocks have perked up has us looking for greener pastures.” I’m going to give it a little more rope, waiting to see what the quarterly report brings. HOLD

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, still has a great chart! In Carl’s latest update, he wrote, “Shares recovered most of the ground after an 8% drop on Tuesday on no news except overall weakness in the market. I see further upside potential to Sea’s share price from: (1) strong momentum in its gaming portfolio; (2) the ramp-up of e-commerce revenues with wider adoption of online services and market share gains; (3) opportunity of growth through Sea Money fintech operations and geographically in India. I would be an incremental buyer of this stock but long-time holders should 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, tagged its 200-day moving average last week and has seen four strong up days since reporting second-quarter results on July 27. In his update last week, Bruce wrote, “Sensata reported second-quarter adjusted earnings per share of $0.95, sharply higher than $0.18 a year ago and above the $0.87 consensus estimate. Revenues of $993 million set a record, were 72% higher than a year ago and were also above estimates. The jump in revenues and profits reflects a rebound from pandemic-weakened conditions a year ago when many of Sensata’s customers were shut down. Compared to the industry, Sensata grew considerably faster. The company raised its full-year guidance. Adjusted EPS guidance was raised by about 5% to $3.52, while sales guidance was raised about 1%. The guidance implies a modest further increase in Sensata’s operating margin to 21.0%, as the company seems confident that it can offset rising costs by raising its own prices. Sensata trimmed its auto industry production outlook. ST shares have about 38% upside to our 75 price target.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, rode its 200-day moving average higher through May, June and July, but over the past four days the stock has pulled up and away from that line and is now aiming for its June high of 900. TSLA is the strongest stock in the portfolio today! Last week the company released an excellent second-quarter report that seems to have put to rest some concerns about the company’s ability to ramp up production, and anecdotally, there’s no question that demand for the company’s vehicles is growing fast. In fact, I’ve been driving a Tesla Model S since 2013, and it’s amazing how many friends have recently confided that their next new car will be a Tesla. BUY

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, is one of the four leading cannabis companies in the U.S., as measured by revenues, but the number one leader as measured by profitability, mainly because it focused solely on Florida in its early years. In my update last week, I wrote, “The biggest seller of marijuana in Florida, with a 51% market share, Trulieve is now expanding into other states (California, Massachusetts, Connecticut, Pennsylvania and West Virginia)—and it’s still expanding in Florida! Last week the company announced the opening of two new dispensaries, in Crystal River and in Winter Haven, bringing its store count to 87 in Florida and 96 nationwide. Additionally, on Monday the company announced that the Georgia Access to Medical Cannabis Commission revealed its intent to award Trulieve one of two Class 1 production licenses in the State of Georgia. The stock, now 40% off its high, has weakened further in the past week, so I wouldn’t buy it here—but long term there’s little doubt that it will be a winner, because management has already posted five consecutive quarters of positive earnings. Second-quarter results will be released before the market open on August 12.” I’ll downgrade to hold and wait for the report. HOLD

The next Cabot Stock of the Week issue will be published on August 9, 2021.

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