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Stock of the Week
The Best Stock to Buy Now

August 23, 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 is a solid grower whose products help millions of people with diabetes manage their condition in increasingly efficient ways.

As for the current portfolio, most of our stocks look good, and some are hitting new highs, but one has to go and the victim this time is Driven Brands (DRVN).

Details inside.

Cabot Stock of the Week 362

The long bull market continues, unfazed by fears of COVID variants, the Taliban in Afghanistan, or the return of inflation. And that’s not unusual. Markets typically climb a “wall of worry.” It’s only when there’s nothing left to worry about, and everyone agrees that the future is rosy, that you should worry. Thus I continue to recommend that you be heavily invested in a diversified portfolio of good stocks. Today’s recommendation is a solid growth company that is helping millions of diabetics manage their condition in increasingly efficient ways. The stock was originally recommended by Mike Cintolo in Cabot Growth Investor and here are Mike’s latest thoughts.

Dexcom (DXCM)
There are a lot of sectors out there that are in secular (very long-term) growth waves right now. Cybersecurity and cloud software are two obvious and popular examples—both are still in the early- to mid-stages of multi-year expansions as firms put everything in the cloud. However, we’d put the diabetes market—specifically the growth in continuous glucose monitors (CGMs)—up there with any of them, as the idea simply makes sense and provides a huge benefit for users.

Diabetes itself, unfortunately, is a growth industry (151 million diabetics worldwide in 2000, 463 million in 2019, an estimated 700 million in 2045), with wild swings in a person’s glucose leading to long-term consequences like higher risks of heart diseases, stroke, kidney disease and a host of other issues. For years, diabetics had to stick themselves to test a few drops of blood many times during the day to see if their glucose was getting out of hand. But massive technology advances have occurred in recent years to dramatically improve patients’ well-being.

Dexcom was a pioneer of that, offering one of the leading continuous glucose monitors on the market, which does just what it says—continuously monitors a patient’s glucose to drastically decrease the amount of time it’s out of the healthy range. One of the big advancements, which has been around for a while, was Dexcom’s G6 CGM, which was the first not to have a need for patients to stick themselves to calibrate the device. The sensor is small, too, and can easily be worn under a patient’s shirt, with easy data reporting and management if need be, too.

Despite the benefits of current products, there is still huge growth potential ahead. Even years after CGMs were introduced in the U.S. (which itself is ahead of most countries’ adoption curve), less than 50% of the Type 1 diabetics market (still the core market for the industry) has been penetrated, while the Type 2 intensive insulin treatment market has been less than 25% penetrated. Of course, not everyone really needs a CGM if their condition is mild, but there are still millions and millions of potential new users in the U.S. alone, never mind overseas—all while Dexcom continues to pile up the real-world and trial data that shows its CGMs work great.

Now, there is competition, mainly from Abbott Labs, and for many years Dexcom’s stock would get tossed around by news and rumors of new products or results. But that’s dissipated somewhat of late (not totally), partially because the focus has turned to the size of the overall market, and partially because Dexcom’s technology has been integrated into some leading insulin pump devices, such as those from Tandem Diabetes and Omnipod (which has a new device coming this year).

But in the next few quarters, Dexcom is set to take the clear lead once again thanks to its newest product. The firm’s new G7 device offers many advantages, including a smaller size (60% smaller, about the size of a coin), a smaller all-in-one sensor/transmitter with just a 30-minute warm up time before use and (most important) even better accuracy.

The company has been investing heavily, which has crimped earnings of late—analysts see the bottom line down 20% this year—but underlying growth is strong, with sales growth picking up in recent quarters and showing a healthy 32% leap in Q2. And there should be a lot more growth going forward, with the G7 expected to goose demand and with earnings likely to leap 40% in 2022. Beyond that, there’s no reason Dexcom can’t grow manyfold in the years ahead.

As for the stock, it has a history of long consolidations followed by big breakouts and advances, and it appears to be starting a new move now. Shares fell a net of 25% from last May to this May, but DXCM has been a different creature since then, advancing 12 weeks in a row to new highs (including a nice earnings gap) followed by a very reasonable three-week rest.

DXCM-082321

DXCMRevenue and Earnings
Forward P/E: 238Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 96($mil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 24.5%Latest quarter59532%0.76-4%
Debt Ratio: 91%One quarter ago50525%0.33-25%
Dividend: NATwo quarters ago56923%0.91-21%
Dividend Yield: NAThree quarters ago50126%0.9445%

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 8/23/21ProfitRating
ASML Holding N.V. (ASML)6/8/216840.4%80818%Buy
Broadcom (AVGO)2/23/214653.0%4854%Buy
Brookfield Infrastructure Partners (BIP)1/12/21513.5%5610%Buy
Cisco Systems (CSCO)7/27/21552.5%586%Buy
Dexcom (DXCM)New0.0%510Buy
DocuSign (DOCU)8/3/212950.0%2950%Buy
Driven Brands (DRVN)7/20/21290.0%29-2%Sell
Five Below (FIVE)3/2/211960.0%22716%Buy
Floor & Décor (FND)7/13/211080.0%1189%Buy
General Motors (GM)11/3/20353.2%4835%Hold
HubSpot (HUBS)5/18/214900.0%67237%Buy
Marvell Technology (MRVL)8/10/21600.4%623%Buy
Molson Coors Brewing Co (TAP)8/25/20380.0%4826%Hold
NextEra Energy (NEE)3/27/19496.6%8574%Buy
Nvidia (NVDA)4/27/211550.3%21740%Buy
Sea Ltd (SE)1/21/20410.0%312663%Buy
Sensata Technologies (ST)6/15/21590.0%58-2%Buy
Spectrum Brands (SPB)8/17/21792.2%77-2%Buy
Tesla (TSLA)12/29/1161.0%70911849%Buy
Trulieve (TCNNF)4/28/20100.0%27155%Hold

The addition of DXCM means the portfolio has 21 stocks, so one (at least) has to go, and the choice is easy; it’s Driven Brands, which Tyler Laundon is wisely selling to keep the loss small. Other than that, I have no changes. Details below.

Changes
Driven Brands (DRVN) to Sell

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 as quickly as possible to fulfill the world’s demand for chips. The stock topped 800 three weeks ago, then pulled back to its 25-day moving average in a normal correction, and is now heading back toward that recent high. It 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. If you don’t own it, and you’d like a decent solid grower that yields 3.0%, you can buy here. BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a record high last Wednesday and has pulled back normally since. BIP yields 3.7% and prospects are bright as our country’s infrastructure gets attention from the federal government. BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, blasted out to a new high last week after reporting excellent second-quarter results. Revenues were $13.1 billion, up 8% from the year before, while eps was $0.84 per share, beating analysts’ estimates by a penny. I’ll relay Bruce’s analysis of the report next week, and we’ll see if Bruce raises his price target, which was previously set at 60. BUY

DocuSign (DOCU), originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high two weeks ago, and has now pulled back to its 50-day moving average on low volume. In his update last week, Mike wrote, “DocuSign is one of many liquid growth stocks that has pulled back to key support, testing its 50-day line (near 286 and rising) in recent days. Now, big picture, the stock has done a lot more chopping sideways than retreating, holding the vast majority of its June-July advance. If the sellers really come out of the woodwork from here, we’ll go to Hold, but until proven otherwise, we see DOCU as a leader of this attempted upmove. If you own some, hang on, and if not, you can take a swing at it here.” BUY

Driven Brands (DRVN), originally recommended by Tyler Laundon in Cabot Early Opportunities, has weakened further. In his latest update, Tyler wrote, “Driven Brands was added in June and the bottom line is the stock has traded down since results were reported in late July. A secondary offering from the largest shareholders (no proceeds to Driven) so soon after lockup expiration (July 14) hasn’t helped sentiment. Let’s take the modest loss and move on.” I agree. SELL

Five Below (FIVE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then in Cabot Growth Investor, hit a record high last week, pulled back minimally, and is out to new highs today! In his update last week, Mike wrote, “Five Below’s long-term growth profile is better than ever as the firm’s e-commerce operation has improved and some heavy investments (in new distribution centers, etc.) are winding down.” BUY

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, hit a record high three weeks ago as quarterly results were released, pulled back to its 50-day moving average last week, and is now heading higher again. In his update last week, Mike wrote, “FND is one of the poster children for this environment, with a long, multi-month consolidation, a strong breakout for a couple of weeks … and now a sharp pullback, partially due to its own earnings report two weeks ago (everything looked fine, but margins could be crimped for a bit due to supply chain issues) and partially due to Home Depot’s dud two days ago. It’s not pleasant, but it’s not yet abnormal, with a lot of support under here. We’re not complacent, but we’re staying on Buy, thinking a rebound is more likely than not.” 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 it’s been on a correction since then, and the latest quarterly report didn’t help. In his latest update, Bruce wrote, “On August 4, GM reported strong results that were nevertheless held back by the chip shortage and a large $1.3 billion warranty expense. It appears that the company’s ability to generate ever-higher profits is maxed out. Future profits (adjusted for these one-time costs) will not likely be higher, but we see a tapering decay rate rather than a cliff. However, we also wonder what the eventual profitability of electric vehicles will be and the return on GM’s vast capital outlay. GM Finance and the overall balance sheet both look sturdy.

The shares reflect conservative but reasonably strong gas-powered vehicle profits but assign essentially no value to the EV operations. This zero-value almost certainly is wrong, but the EV operations have no sales or profits, so the valuation is by definition speculative at this point. We’re keeping GM rated Hold for now, as the risk/return balance isn’t as favorable as we would like for the Cabot Undervalued Stocks Advisor.

GM shares 37% upside to our 69 price target due to the complicated and weak-versus-expectations quarter. On a P/E basis, the shares trade at 7.2x estimated calendar 2022 earnings of $6.96 (up a cent 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, has pulled back minimally from the highs it hit two weeks ago, and now Mike has recommended it again in Cabot Top Ten Trader, writing, “HubSpot’s pivot to software-as-a-service (SaaS) has been a resounding success based on its strong performance in the first half of the year. The provider of single-platform sales, inbound marketing and customer relationship management (CRM) software (mainly for small- and mid-sized outfits) has always had a good story, but the pandemic has supercharged results and any fears of a slowdown were put off by Q2 results. Revenue mushroomed 53% in Q2 from a year ago, to $311 million, thanks to 40% growth in HubSpot’s total customer base to over 121,000 and an 8% hike in average subscription revenue per customer. Meanwhile, earnings of 43 cents beat the consensus by 11 cents. The quarterly report highlighted a number of encouraging trends, including multi-product adoption among over half its customers, plus the company reported strong adoption of programmable automation among larger companies looking to leverage their data and deliver personalized experiences to their customers. The average subscription revenue per customer improved thanks to a ‘positive mix shift’ toward professional- and enterprise-tier plans and strong installed-base selling (and management expects both trends to continue through the second half of 2021). Meanwhile, calculated billings of $334 million grew 65%, partly due to easy comparisons but they did grow faster than revenue. The top brass guided for Q3 revenues to around $326 million (up 43% at the midpoint) and a bottom line of around 43 cents (10% above consensus). Analysts concur, with earnings expected to rise 28% this year and 44% next.

HUBS isn’t thought of as a huge pandemic winner like Zoom or Peloton, but its chart has been superb for over a year now—shares hit new highs by last June and since then have nearly ridden their 50-day line higher, with just brief dips below that support level. Interestingly, the latest dip was shallower than ones seen earlier this year, and the earnings reaction and refusal to give back any ground since is encouraging. If you want in, we suggest aiming for minor weakness.” BUY

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, hit a new high three weeks ago, pulled back to its 50-day moving average, and is now heading up again. In his update last week, Carl wrote, “MRVL shares had a quiet week in the market. Marvell designs, develops and sells a wide variety of semiconductor products that are at the core of the 5G rollout that is moving ahead rapidly as carriers have spent years laying the groundwork for it. Marvell’s products are state-of-the-art and in high demand, allowing businesses and consumers to take advantage of new 5G capabilities, plus the majority of those products are proprietary and made in house. 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, is back below its 200-day moving average, but Bruce is keeping his price target of 69. In his update last week, he wrote, “On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.5x current year estimates, still among the lowest valuations in the consumer staples group and below other brewing companies.” 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, getting increasingly closer to its January high of 88. The company benefits from the shift toward renewable energy and pays a dividend of 1.8%. BUY

Nvidia (NVDA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the star of the day, hitting new highs in the wake of its second-quarter results, which were released last week. Revenues were $6.5 billion, up 68% from the year before, while eps was $1.04, up 8% from the year before. 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 Thursday, and is off minimally since. In his update last week, Carl wrote, “SE shares made a nice move from 298 to 321 on the back of another stellar quarter. Total revenue was $2.3 billion, up 159% year on year, and total gross profit was $930.9 million, up 363% year on year. Shares are now up more than 600% over the last 18 months but pulled back a bit from 300 as the company continues to exceed high expectations. Sea has become both the largest digital entertainment platform and the largest e-commerce operation in the Southeast Asia region, comprising Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore. I see further upside potential to Sea’s share price from strong momentum in its gaming portfolio. 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. In his update last week, Bruce wrote, “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 27% upside to our 75 price target. The stock trades at 14.1x estimated 2022 earnings of $4.17 (unchanged this past week). On an EV/EBITDA basis, ST trades at 11.3x estimated 2022 EBITDA.” BUY

Spectrum Brands (SPB), originally recommended by Tom Hutchinson in Cabot Dividend Investor, and featured here last week, is a global branded consumer products and home essentials company, offering well-known brands like Rayovac, George Foreman Grill, Kwikset Lock, Cutter Bug Repellent, Remington and Black & Decker. The dividend is 2.2% and the stock is now trading an attractive 23% below its recent high. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to trend higher in concert with its 25-, 50- and 200-day moving averages, and I continue to think the company has even greater growth potential in the energy business than in the automotive. 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. TCNNF is now trading 50% off its high. HOLD


The next Cabot Stock of the Week issue will be published on August 30, 2021.

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