Last week’s sharp market selloff may have made headlines, but far more important than any one day’s action are patterns and trends, and today the patterns and trends I look at are still positive.
Still, diversification remains a key factor in successful portfolios, so today’s recommendation swings back to the conservative side; it’s a big global company with a healthy 4.8% dividend.
As for the current portfolio, while we sold two stocks last week just before the big drop, today I have no changes. All our stocks are behaving well.
Full details in the issue.
Cabot Stock of the Week 302
Big market moves make big headlines, but very few market stories go beyond the daily news to look at the big picture—the major trend. For us, the major trend remains positive, and thus being heavily invested is now desirable, especially if you can put some cash to work now that the market has had a good pullback. Last week’s recommendation was a hot growth stock, so today, to balance the scales a bit, my recommendation is a high-yielding slow mover that’s at a great entry point. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.
Brookfield Infrastructure Partners (BIP)
Bermuda-based Brookfield Infrastructure Partners owns and operates infrastructure assets all over the world. The master limited partnership (MLP) focuses on high quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.
Brookfield operates a current portfolio of over 1,000 properties in 30 countries on five continents. It is well diversified geographically with roughly 25% in North America, 30% South America, 25% Europe and 20% Asia Pacific. The partnership operates four segments, Utilities, Transport, Energy Services and Data Infrastructure.
- Toll roads in South America
- Telecom towers in France
- Railroads in Australia and North America
- Utilities in Brazil
- Natural gas pipelines in North America
- Ports in Europe, Australia and North America
- Data centers on five continents
These are some of the most reliable revenue generating assets in the world. But the story is even better than it appears. In addition to dependable revenue, of which over 90% is regulated or contracted, there’s solid growth.
The world is in desperate need of updated infrastructure. Developed economies have badly aging systems in need of replacement and have infrastructure that is woefully insufficient to accommodate growing urban populations and more advanced economies. The G-20’s global infrastructure hub estimates that a global investment of $94 trillion will need to be invested in the next several decades.
The private sector is an essential part of the solution as governments don’t have all those trillions lying around. Limited partnerships, giant sovereign-wealth funds, multilateral and development-finance institutions are raising billion of dollars a year for infrastructure investments. It’s almost becoming a new asset class.
But talk is cheap. Let’s go to the video tape.
Since its IPO in January of 2008, BIP has returned 513% (with dividends reinvested) compared to a return of just 176% for the S&P 500 over the same period. Things should be good going forward too. As the asset class is becoming increasingly in vogue with investors, BIP is an old, tested and true hand at this. And the stock is still reasonably valued with several valuation measures still below the 5-year averages
Then there’s the distribution. As a Master Limited Partnership (BIP), Brookfield pays no income taxes at the corporate level provided it pays out the bulk of earnings in the form of distributions. The partnership can pay a higher distribution than a regular corporation because it pays out money normally lost to taxes. The current payout has a solid 4.8% yield.
Looking ahead, there are actually more opportunities for growth than ever before. Infrastructure assets and projects are popping up all over the world. BIP has recently adapted an “asset rotation” strategy whereby the partnership sells more mature assets for newer, higher margin assets, helping BIP to upgrade the existing portfolio.
The company is targetinga 12% to 15% return on equity over the long term as well as 5% to 9% annual distribution growth. That’s a realistic goal, and one that Brookfield has been consistently able to achieve in the past. Those metrics should produce returns on par with those of the past.
But these are unusual times. The pandemic is having a slight impact. Revenues on transportation assets are down slightly as global trade has been disrupted. But the revenue loss is relatively slight and temporary. The other assets are rolling along without any problem. As well, the asset rotation strategy is somewhat disrupted as the pandemic shutdowns gum up the works of just about everything. But the temporary disruption in growth should be more than offset over the longer term as new assets become cheaper and BIP takes advantage.
Although this is an ideal stock to weather the rest of these uncertain economic times and it should be a winner is the post virus world as well, the stock is still relatively cheap—and still trading 20% below its pre crisis high. BUY.
|BIP||Revenue and Earnings|
|Forward P/E: 17||Qtrly Rev||Qtrly Rev Growth||Qtrly EPS||Qtrly EPS Growth|
|Current P/E: 12||($bil)||(vs yr-ago-qtr)||($)||(vs yr-ago-qtr)|
|Profit Margin (latest qtr) 5.4%||Latest quarter||2.20||38%||0.77||-3%|
|Debt Ratio: 326%||One quarter ago||1.67||16%||0.86||5%|
|Dividend: $1.94||Two quarters ago||1.66||43%||0.82||15%|
|Dividend Yield: 4.8%||Three quarters ago||1.69||61%||0.85||13%|
|Stock||Date Bought||Price Bought||Yield||Price on 6/15/20||Profit||Rating|
|Barrick Gold (GOLD)||—||—||—||—||—||Sold|
|Beyond Meat (BYND)||6/9/20||155||0.0%||152||-2%||Buy|
|Brookfield Infrastructure (BIP)||New||—||4.8%||41||—||Buy|
|GFL Environmental (GFL)||5/27/20||18||0.2%||18||1%||Buy|
|Huazhu Group Limited (HTHT)||3/30/16||9||0.0%||36||291%||Hold|
|Marathon Petroleum (MPC)||—||—||—||—||—||Sold|
|NextEra Energy (NEE)||3/27/19||194||2.2%||248||28%||Hold|
|Sea Ltd (SE)||1/21/20||41||0.0%||99||141%||Hold|
|Tyson Foods (TSN)||5/5/20||56||2.6%||62||11%||Hold|
|Verizon Communications (VZ)||5/12/20||56||4.3%||56||0%||Buy|
|Vertex Pharmaceuticals (VRTX)||1/7/20||224||0.0%||267||19%||Hold|
|Virgin Galactic (SPCE)||10/11/19||9.24||0.0%||15||67%||Buy|
|Zoom Video (ZM)||03/17/20||108||0.0%||237||120%||Hold|
While last week’s big drop made headlines, it was no surprise to market technicians; after three months up, capped by a strong four-week run in which the Nasdaq topped the 10,000 level, the market needed a correction. So now we’ve had it, or at least the start of it. What comes next is harder to predict, though it is helpful to know that all of Cabot’s major market timing indicators are still positive, telling us the market will be higher in the months ahead. What’s important, of course, is what your stocks do, so as always, for us the action of individual stocks is critical. For many of our stocks, this correction simply means stocks are back down to their 25-day moving averages, and that’s absolutely normal and healthy. Details below.
AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, succeeded in breaking out above its February high last Wednesday but the broad market retreat on Thursday brought it right back down, and since then the stock has been sitting on its 25-day moving average, which is a healthy pattern, though if it fell below 90 that might be worrisome. In his update last week, Tom wrote, “AbbVie jumped into the coronavirus race this week, announcing a collaboration to develop a novel antibody therapeutic to prevent and treat COVID-19. AbbVie will have an exclusive license to sell it if and when it is successful. It’s unlikely to move the needle for AbbVie, but you never know, and the market seemed to like it. The move also further established AbbVie as a cutting edge pharmaceutical company at a time such companies are in high demand while the population ages at warp speed. The stock is…still 30% below the 2018 high and selling at a compelling valuation.” HOLD.
Beyond Meat (BYND), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here last week, looks like a case of bad timing on my part in the short term, as the news that the company had secured a major distributor in China sparked big buying on Monday—and Tuesday, when we recorded our buy, the stock was still extended. But the stock has pulled back normally since then, so if you haven’t bought yet, this looks like a good entry point. The company is the global market leader in the field of plant-based meat substitutes, which are better than meat for the health of both humans and the earth. According to a life cycle assessment done at the University of Michigan, the Beyond Burger generates 90% less greenhouse gas emissions, requires 46% less energy, has >99% less impact on water scarcity and 93% less impact on land use than a ¼ pound of U.S. beef. BUY.
Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, and featured here two weeks ago, is now building a normal base between 55 and 60, and how the stock acts as it comes out of this base will be key. In last week’s update, Mike wrote, “CHGG has been slowly sliding since mid-May, but it hasn’t come close to breaking down and has actually found some support near a logical area (the stock’s close on the day of the earnings gap). We think the story is very much intact, and if you step back and look at the weekly chart, the past month appears to be a normal rest after a giant earnings gap. To be clear, we’re not whistling past the graveyard; we’ll cut bait if the stock trips our loss limit (53 to 54 area on a closing basis; about a 17% loss on the half position), but right here we’re still OK grabbing a small position if you’re not yet in.” BUY.
GFL Environmental (GFL), originally recommended by Tyler Laundon in Cabot Early Opportunities, has also pulled back to a level of support, and I think this presents a great entry point. As a smaller and lower-priced stock, GLF can be more volatile than some readers prefer, but long-term, the prospects are bright as this company continues to consolidate the fragmented solid waste industry. 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 of China’s largest hotel operator through normal technical sell signals. The stock has had a good run since the March bottom, and last week it joined the crowd in pulling back to support at its 25-day moving average. HOLD.
NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is one of the most conservative investments in the portfolio, but it’s singing the same tune as most of our stocks; it’s pulled back to its 25-day moving average. In his latest update, Tom wrote, “Utilities are a good place to be during a recession because of the defensive nature of the business. People use the air conditioning in any economy. Yet the utility sector has underperformed the market during the downturn. That’s because they had been wildly popular in the bull market and got pricy. If there is another market downturn, I expect the sector to fare much better. And NEE is the best of the best, offering both stable revenues and growth from the alternative energy business.” HOLD.
Nvidia (NVDA), originally recommended by Crista Huff for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, looks substantially better than most of the stocks in portfolio in that it’s higher than where it started last week—but that’s mainly because it’s been basing for a month, so wasn’t extended like so many stocks going into last week. In her update today, Crista wrote, “NVIDIA is the pioneer and leading designer of graphics processing unit (GPU)-accelerated computing, which has 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. NVIDIA’s data center business now represents about 50% of total revenues. NVDA is a high-PE, aggressive growth stock. Wall Street expects EPS to grow 40% and 21.5% in fiscal 2021 and 2022 (January year-end). Gross margins and revenue are also expected to increase this year. The company has $7 billion remaining in their repurchase authorization.” Hold.
RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is the market leader in the field of Unified Communications as a Service—which means that as more people work at home and from the road, RingCentral will have the job of ensuring that all their communications systems work together. I think of it a more diversified and safer investment than Zoom Video (ZM)—albeit slower-growing. As for the stock, it broke out to record highs in early May and has been consolidating those gains since, trading in a slowly narrowing range centered on 265. HOLD.
Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, is an Asian ecommerce and gaming giant whose stock remains red-hot—so taking partial profits is still one of your options. In Carl’s update last week, he wrote, “Sea shares continue to surge, zooming from 71 to 92 in the last two weeks, and are now up more than 110% so far in 2020. While e-commerce and gaming are Sea’s biggest revenue contributors by a large margin, SeaMoney is one of the fastest-growing digital financial services networks in Southeast Asia. Its offerings include e-wallet services, payment processing, micro-lending, and related digital financial services. These services and products are available in various markets across Southeast Asia under AirPay, ShopeePay, Shopee PayLater, and other related brands. We are in a strong position, having sold half our position a month ago at 55 for gain of 310%. Sea is now a hold but we will be buyers if the stock pulls back. If you have not already sold half your shares, I strongly suggest you do so now.” 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 remains very healthy. In fact, last Wednesday, as the Nasdaq hit a record high of 10,000, TSLA hit a record high above 1,000—and while both have since pulled back, TSLA has pulled back less and remains well above its 25-day moving average. The big news in the electric vehicle sector last week was the debut of potential competitor Nikola (NKLA), which you can read more about here.
Meanwhile, Ford last week announced a delay in the launch of the all-electric version of its F150; now the goal is mid-2022. And Volkswagen’s intended flagship electric hatchback, the ID.3 (not intended for the U.S. market), has been delayed from summer to September, because the car’s software isn’t ready. HOLD.
Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, fell out of its base at 12 this morning as the broad market sold off, but buyers quickly stepped in to bring it back. Remember, stocks in the marijuana sector tend to be immature, with minimal institutional support, so trading can sometimes be a bit wild. Last week in my update in Cabot Marijuana Investor I wrote, “The portfolio averaged up a month ago, but if you’re not on board yet, you can buy here, though getting in at 12.0 would be more attractive.” Well, here you are around 12.0! BUY.
Tyson Foods (TSN), originally recommended by Crista Huff for the Growth Portfolio of Cabot Undervalued Stocks Investor, pulled back with the market last week but remains in the slow and steady recovery that began in March. In her update today, Crista wrote, “Last week, the CEO of U.S. poultry company Pilgrim’s Pride Corp. was among four industry executives indicted by the U.S. Justice Department on price fixing charges. Tyson’s stock fell that day, likely as investors scrambled to learn whether any Tyson executives were caught up in the scandal. Upon learning that no Tyson personnel were named in the indictment, the stock recovered in the next day’s trading, then immediately jumped from the recent trading range toward upside price resistance near 70.Tyson’s profits are expected to fall 22% in 2020 due to pandemic business disruptions, then rise 43% in 2021. The 2020 P/E is 15.2. Last week, Bernstein raised their price target on TSN to 83. I’m moving TSN from Strong Buy to a Buy recommendation, now that most of the expected near-term run-up has taken place. However, the market remains bullish, so the stock could surprise me and keep rising past 70.” I’ll hold. HOLD.
Verizon (VZ), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, is a solid choice for low-risk diversification and high income, and if you haven’t bought yet, the current pullback provides a great entry opportunity. In last week’s update, Tom wrote, “Most companies are getting hurt by this recession, at least temporarily, but not Verizon. Sure, the pace of the 5G buildout has slowed somewhat during the lockdown. It’s also true that sales of new smart phones are down. But people are using cellular service more than ever during the lockdown. And some of that escalated use is likely to become permanent. This company is a great place to be for the duration of the restrictions. But it will also be a beneficiary of the post-lockdown market and economy as the emergence of 5G takes center stage and VZ will be a primary beneficiary.” BUY.
Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, is at risk of falling below its 50-day moving average, and that’s a bit of a concern for Mike, who wrote, “The stock is falling behind—it’s no higher than it was in mid-April and actually dipped a smidge below its 50-day line today. Of course, the stock isn’t that volatile (it’s about 10% off its peak), so it’s hardly a disaster; we still believe the odds favor big investors supporting shares on dips given the steady growth story. Still, given the action, it’s prudent to go to Hold, though we’ll keep our mental stop relatively loose for now (in the 240 area).” HOLD.
Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, remains in a quiet basing pattern while long-term prospects for the business remain bright. In Carl’s update last week, he wrote, “I recommended selling half your shares a few weeks back for a 146% gain so we are now in a strong position to ride this compelling story forward. Galactic plans to send groups of paying customers on brief flights to the edge of space. Perhaps even more important to its future than space tourism is its plan to launch point-to-point hypersonic flights. 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.” Theoretically, the stock could linger down here for months—and it could fall lower if problems arise in the initial flight (which I am skeptical about occurring his year). But for a long-term investment in revolutionary technology, I like this opportunity. BUY.
Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit another new high today and is thus the strongest stock in the portfolio—a true momentum stock. Partial profit-taking is certainly a course you should consider here, especially if you’ve become overweighted in the stock, but aggressive momentum players will stick with it while the trend lasts—because trends often go farther than expected. HOLD.
Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, was the hottest stock in the portfolio two weeks ago thanks to an excellent quarterly report, and and since then the stock has been consolidating that gain, a very positive pattern. If you don’t own it and you’re light on cybersecurity stocks, you could buy here as the 25-day moving average, now at 89, draws near. HOLD.
The next Cabot Stock of the Week issue will be published on June 22, 2020.
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