Cabot Stock of the Week 297

The overall market continues to look healthy—though we haven’t yet received an “all-clear” signal from our long-term trend indicator—and our stocks are certainly behaving well, with several hitting new highs and none behaving badly.
So the only sell recommendation I have today is a bit of short-term profit-taking in one of my recent recommendations—a stock that is due for a bit of a rest.

As for today’s recommendation, it’s a very well-known U.S. telecommunications company with a solid yield that has not only held up well in recent months but that has good growth prospects as the communications revolution continues.

Full details in the issue.

Cabot Stock of the Week 297

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The market is acting well, all things considered, looking forward to a future where businesses reopen and commerce resumes. But we won’t have the same economy as before, as bricks and mortar retailers struggle while various digital service providers grow. One of these service providers is one of the most well-known communications names in the whole country and Tom Hutchinson of Cabot Dividend Investor has an excellent argument for owning it now. Here are his latest thoughts:

Verizon Communications (VZ)
Verizon is the largest U.S. wireless carrier. Of the four major U.S. telecom carriers (Verizon, AT&T, Sprint and T-Mobile), Verizon has by far the most wireless revenues with the largest network and coverage. While the company has ancillary businesses in cable and business services, wireless is by far the main event, accounting for about 85% of adjusted earnings.

Everything is about the coronavirus these days. And that plays right into Verizon’s hands.

During this pandemic, cellular wireless service has become an essential consumer staple on a par with food and housing as people rely on smartphones for work, communication and entertainment more than ever. Verizon already was a defensive stock, but this latest crisis has made it even more so.

Of course, the company is being somewhat negatively affected by the pandemic. The last quarter showed a steep drop in new equipment sales and plans as well as postpaid subscribers. But that drop was somewhat offset by reduced business spending and the effect was minimal. Revenues slid 1.6% over last year’s quarter and earnings were flat. The company also lowered earnings guidance for the year from a range of +2% to +4% to a range of -2% to +2%.

But that’s a mere drop in the bucket compared to the earnings carnage being wrought on so many companies in this unprecendeted economic shutdown. And the stock’s performance is reflecting the resiliency of the business. Since the market highs of February 19, the stock price is down just 1.6% compared a 15% drop in the S&P 500. At the market bottom in March, VX fell 14% from the high compared to a 34% decline in the overall market.

Meanwhile, you’re getting a rock solid dividend with a 4.3% yield backed by a company with stable earnings and $7 billion in cash. It’s a defensive income-generating investment proven to have far less downside than the overall market. That alone would make this stock a great investment right now. But there’s something else. Something big.

The 5G Opportunity
5G is the next generation of cellular wireless technology. But it’s far more than just an incremental advancement. Much higher speeds and internet connectivelty will enable a new generation of technology like artificial intellegence, self-driving cars, robotics, smart cities and much more. The technology is a game-changer that will thrust the world into a digital age like nothing we’ve seen before.

Verizon’s focus on wireless not only enables it to achieve better profitablity than its peers, but also allows the company to focus on upgrading its networks and expanding 5G technology. It already built 5G mobile services in 30 cities in 2019, and is building the most expansive 5G network and is first to the party in most cases.

Although delayed somewhat by the pandemic, smartphones with 5G will hit the market like crazy this year and next. Apple (AAPL) is projecting to launch its first 5G enabled phones by the end of the year. The technology is just now descending on us. All the new techologies will need a much higher degree of internet connectivity through cellular networks. They will need Verizon, which controls the largest network. Naturally, Verizon will charge for additional services.

The cellular giant will likely be able to charge higher fees per smartphones, as they will offer more and better services. The Internet of Things involving all things connected to the internet like autonomous cars, smart cities, health monitoring services, and a wide range of other things will ring the register as well. And, being first to the party, Verizon can lock in customers..

Here’s the deal: Verizon by the old rules is a great investment in this market. It’s cheap, high dividend-paying and defensive. And business is solid in the worst economic crash we’ve ever seen. But when you also add the likely growth injection from 5G, it makes the stock a brilliant pick.

Current Recommendations

The broad market continues to act well, with the strongest sector being the well-known technology giants that are powering the Nasdaq higher. We still don’t have a positive “all-clear” signal from our long-term timing indicator, so a measure of caution is still appropriate, but overall, the climate has grown fairly supportive over the past month, and most of our stocks are benefitting. In fact, none of them have disappointed; the one sell I recommend today is simply a bit of quick profit-taking.

Changes
BlackLine (BL) to Sell

AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, hit a recovery high last Wednesday and has pulled back normally since. It’s now less than 10 points off its high of February. In last week’s update, Tom wrote, “Nothing has really changed for this healthcare giant just because the world around it is collapsing. People won’t stop taking their medicine. And healthcare will likely emerge as the hero of this crisis. Everything this company had going for it (the pipeline, the merger, better than expected earnings, the safe and high dividend) is still intact, only the stock is a lot cheaper now. Maybe it’s now less special because everything is cheap, but few companies have such a defensive business along with extremely powerful demographic headwinds from the aging population. I think this is one of the few stocks you can buy here with the remaining uncertainty.” HOLD.

BlackLine (BL), originally recommended by Tyler Laundon in Cabot Early Opportunities, offers cloud-based automated accounting services that are used by larger companies to automate financial/accounting processes and the chart looks particularly strong, now up five consecutive days. Long-term prospects for the company are great, but I’m going to sell here because the stock is now near its high of February (where it will likely pause) and we’ve accumulated a nice profit in a short seven weeks. You, of course, are free to hold longer if that fits your portfolio strategy. In any case, I’ll look to recommend another of Tyler’s stocks soon. SELL.

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, and featured here two weeks ago, is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and also serve as the brains of industrial robots. The stock hit a recovery high last Friday and is headed for its February high of 19. BUY.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is one of the portfolio’s Heritage Stocks, meaning our profit is so great and the potential so large that I’ve resolved to hold the stock through normal technical sell signals. The stock has made no progress over the past two years, but the business keeps growing, so long-term prospects remain good. HOLD.

Luckin Coffee (LK), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is still not trading, pending the release of more information from the company. HOLD

Marathon Petroleum (MPC), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Advisor, has developed a nice uptrend since the March bottom, in spite of all the bad news about oil. I’m tempted to sell and take our (very) quick profit here, just as I’m doing with BL, but MPC has more upside potential, and Crista has a good argument for holding. In her latest update, she wrote, “Wall Street analysts have been forecasting a 2020 full-year loss of ($2.02) per share, followed by a 2021 profit of $2.52 per share. Those numbers will change in the coming week as analysts rework their forecasts based on first quarter results and corporate guidance. Share repurchases have been suspended, and the dividend payout remains intact. The market is warming up to energy stocks as global business lockdowns ease and the resulting commerce generates a recovering demand for oil. Marathon’s price chart is bullish, with the stock recently rising above the 50-day moving average. Traders and dividend investors should buy now.” BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, sold off two weeks after reporting first-quarter results and is now below all its moving averages. In his latest update, Tom wrote, “This regulated utility/alternative energy superstar is one of the best stocks to own in market like this. People will continue to use heat and air conditioning in any economy. The company is cutting rates to provide aid to customers in this time of crisis. So, earnings will be more impacted than they otherwise would be in the near term. But that will build good will with customers and regulators alike. The stock is down significantly less than the overall market and it should bounce back quickly as the market stabilizes and recovers. If the market takes another significant dip from here, I will likely raise NEE to a BUY.” HOLD.

Nvidia (NVDA), originally recommended by Crista Huff for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, broke out to a new high today! Last week Crista wrote, “Nvidia is the pioneer and leading designer of graphics processing unit (GPU)-accelerated computing, which ignited modern artificial intelligence (AI). Target markets include gaming, professional visualization, data center, and autonomous driving. In April, NVIDIA completed the $6.9 billion acquisition of Mellanox Technologies Ltd., an early innovator in high-performance interconnect technology, routinely used in supercomputers and hyperscale data centers. The acquisition, which adds to NVIDIA’s data center and artificial intelligence business, is expected to immediately add to NVIDIA’s gross margins and EPS. This week, NVIDIA announced the acquisition of Cumulus Networks, which complements their recent Mellanox acquisition. Cumulus Networks is an open network software provider of Linux-based operating systems. The company beat earnings expectations in each of the last five years and also in the last five quarters, which translates into investor confidence that NVIDIA tends to under-promise and over-deliver. The company is managing its cash flow quite well, maintaining low debt levels and aiming to repurchase $2 billion of its shares once the Mellanox transaction is completed. NVDA is a high-P/E, aggressive growth stock, appropriate for growth investors and traders. Earnings estimates came down a bit from their peaks in early March. Wall Street now expects EPS to grow 31.1% and 20.3% in fiscal 2021 and 2022 (January year-end).” BUY.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is definitely in the class of companies benefitting from the virus shut-in as more and more people work to master the logistics of working at home. The stock broke out to a new high last week and has now strung together six consecutive up days. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is an Asian e-commerce and gaming giant, and the stock looks great, having hit new highs several times over the past few weeks. Mike has since sold the stock, but Carl Delfeld has recommended it in Cabot Global Stocks Explorer and last week he wrote, “Shares surged 12% this week, reaching 62. We are in a strong position, having sold half our position two weeks ago at 55 for a gain of 310%.” HOLD.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the portfolio’s second Heritage Stock (big profits and big potential) and the stock continues to impress, even as CEO Elon Musk battles government figures over the right to restart production at his California factory. This morning I read a Deutsche Bank report that noted the company’s “backlog of orders for existing models was the highest it’s ever been in company history.” HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor and featured here two weeks ago, has now strung together five consecutive up days and is right back up at its April high, trading above all its moving averages. If you haven’t bought yet, I suggest waiting for the next pullback. BUY.

Tyson Foods (TSN), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Investor, is up from last week’s low (we bought right after the earnings-induced selloff) but still at an attractive level from a longer-term perspective. In last week’s update, Crista wrote, “Tyson Foods is the largest U.S. food company, with operations in 20 countries, and a recognized leader in protein with leading brands including Tyson, Jimmy Dean, Hillshire Farm, Ball Park, Wright, Aidells, ibp and State Fair. Management is focused on the growing global need for protein, and fulfilling that need in a sustainable and environmentally conscious manner. The company is expected to deliver record revenues and moderate earnings growth this year. TSN is an undervalued stock, attractive for growth investors and dividend investors.” BUY.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, blasted out to a new high today—though volume was only average. In his update last week, Mike wrote, “In a world where most companies are yanking guidance and building cash in case things get worse, Vertex is a breath of fresh air for big investors, not just beating up on Q1 estimates but also meaningfully hiking guidance for its cystic fibrosis products (mostly Trikafta). And, as opposed to what we wrote last week, it turns out analysts have hiked their estimates for next year by a decent amount (now looking for nearly $11 per share, up a buck from before the report). And there could be more catalysts on the way—a European regulatory body had a positive opinion on expanding one of Vertex’s CF drugs (Kalydeco) to children as young as six months who have a specific gene mutation. VRTX shook out relatively hard before earnings, but found support at its February high (245-250) and has bounced nicely since. It won’t be the fastest horse, but we think the stock will continue to trend higher.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, reported first-quarter results last week, and the stock is up since, so all seems well, particularly if you’re focused on the company’s long-term potential. In his update last week, Carl wrote, “Virgin reported that it lost $60 million, or 30 cents a share, in the first quarter, compared with a loss of $42.5 million, or 22 cents a share, in the first quarter of 2020. Revenue fell to $238,000 from $1.78 million a year ago. Virgin said it had a “strong” cash position, with cash and cash equivalents of $419 million as of March 31. Virgin said it and a subsidiary had entered an agreement with NASA to develop technologies for high speeds for civilian applications. SPCE still plans to make its first commercial space-tourism flight this year, and took a step forward with two test flights from its New Mexico spaceport in the first quarter. During the quarter, the company also launched an initiative for tourist-astronauts to reserve a refundable place in Galactic’s flight queue, attracting commitments for up to $100 million in sales. Also, SPCE received an additional 400 deposits representing an increase of 67% over the 600 prior reservations. After selling half our position in Virgin Galactic (SPCE) two weeks ago at market for a 146% gain, we are in a good position to profit from this remarkable story. We will be an active buyer again on any pullbacks.”HOLD.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, remains one of the highest-profile stocks today, thanks to the coronavirus shut-in and the booming growth in video interactions. The stock hit a new high three weeks ago and is very close to breaking out, though volume has been fading slightly. If you haven’t bought yet, wait for a pullback. BUY.

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, is a fast-growing internet security stock whose stock has now hit new highs three days in a row. If you don’t own it, wait for the next pullback. BUY.

The next Cabot Stock of the Week issue will be published on May 18, 2020.

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