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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 306

The market remains in good health and trending higher, and our stocks as a whole have been benefitting thoroughly. However, it’s possible that today we may be seeing the beginning of a correction in the leading Nasdaq glamour stocks. Time will tell.

In the meantime, owning a diversified portfolio of high-potential stocks is the best prescription for your financial health, and today’s featured stock is a good one, a leader in the industry of nationwide homebuilders.

As for the current portfolio, there are no changes, though there is one stock I’m downgrading to hold as I keep a close eye on it.

Full details in the issue.

Cabot Stock of the Week 306

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The market’s main trend remains up, and thus I continue to recommend that you be heavily invested in stocks that help you achieve your investment goals. Yes, stocks are increasingly high and risky, but history has proven that trying to identify market tops and get out before stocks fall is a fool’s game. Instead, it’s best to simply continue to own the best stocks—and react when the top has passed. For today’s recommendation, I’m turning to a national homebuilder—an industry we have no exposure to at the moment, but which is booming as COVID spurs a flight to the suburbs. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.

LGI Homes (LGIH)
If someone asks you to think about stocks that have been big winners, it’s unlikely homebuilders will come to the tip of your tongue—they obviously don’t offer anything revolutionary, and most get tossed around by factors outside of their control, including mortgage rates, consumer spending, regulatory factors and more.

Still, if you look at the sector as a whole, the group definitely has the ability to trend. From the lows in late 2011 (after years in the doghouse), the iShares Home Construction Fund (ITB) rallied from 8 to 26 in a year and a half; from 30 to 47 in 2017 and early 2018; and from 28 to 48 in 2019.

Of course, there were also some whopping declines during that time, including this February and March, when everyone thought the housing sector would be one of the biggest losers due to the virus shut-in. But now the homebuilding sector appears to be setting up for a sustained run, bolstered by pent-up demand, a generally healthy consumer and ultra-low mortgage rates (3% or less in many cases). Indeed, early indications of housing demand as states begin to reopen have been excellent, especially when it comes to leading measures (building permits).

One of (if not the) leaders of the move should be LGI Homes, a mid-sized homebuilder ($2 billion in revenue, which makes it the 10th largest in the U.S.) that has many things going for it, not least of which is its area of focus; LGI operates in about three dozen markets (~140 communities total), many of which are in faster-growing areas like Florida (accounted for 12% of home closings last year), southeast states like Georgia, North and South Carolina and Alabama, as well as Texas and Arizona. Over time, it has a goal of being a top-five homebuilder, and given its unblemished track record of growth, there’s no reason to bet against it.

Indeed, even this year, the company is executing very well. In the first quarter, before COVID really hit hard, the company’s home closings actually boomed 49% from a year ago, leading to huge gains in sales (up 58%) and earnings (up 129%). April and May saw some slippage, but not bad (closings down single digits from a year ago), and the slowdown appears to be in the past, with June seeing closings up 16%, pushing Q2 as a whole into positive territory.

“But wait! What about the virus resurgence in many of these states!” Well, we’re not health experts and won’t pretend to know exactly how things will play out. But we will say that, at this point, it appears that (a) the will to completely shut things down like this spring is small, and (b) other factors (mortgage rates, recovering job market) may be overwhelming any fears of some more modest restrictions.

Indeed, before the virus hit, analysts estimated earnings for LGI to come in at $7.07 per share. That figure dipped about 10% as fears of the shut-in spread, but today, the estimate is right back to $7.07 per share. And next year’s estimate is actually at a new high! Thus, there are uncertainties here as with everything (if you’re looking for certainty, 2020 is not your year), but Wall Street is thinking any lost business from the spring will be made up from now through year end. (The next big update will come on August 4, when Q2 results will be released.)

And big investors agree—after LGIH made a stunning comeback to its highs in early June, shares bobbed and weaved for a few weeks, digesting the move as the 50-day line caught up. But last week the buyers were at it again, driving the stock to new highs, one of the first homebuilders to reach virgin turf. If the broad market weakens from here, there’s a chance the stock could pull back to support at 90 (risk-averse buyers could target that level), but overall, the buyers are in control here, so higher prices are expected.

LGIH-071320

LGIH

Revenue and Earnings

Forward P/E: 14

Qtrly Rev

Qtrly Rev Growth

Qtrly EPS

Qtrly EPS Growth

Current P/E: 13

($mil)

(vs yr-ago-qtr)

($)

(vs yr-ago-qtr)

Profit Margin (latest qtr) 9.4%

Latest quarter

455

58%

1.67

129%

Debt Ratio: 82%

One quarter ago

606

42%

2.52

47%

Dividend: NA

Two quarters ago

483

27%

1.93

27%

Dividend Yield: NA

Three quarters ago

462

10%

1.82

4%

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 7/13/20ProfitRating
AbbVie (ABBV)3/31/20764.9%9930%Hold
Beyond Meat (BYND)6/9/201550.0%128-17%Hold
Big Lots (BIG)6/30/20423.0%38-10%Buy
Brookfield Infrastructure (BIP)6/16/20424.8%41-2%Buy
Chegg (CHGG)6/2/20640.0%7213%Buy
GFL Environmental (GFL)5/27/20180.2%194%Buy
Global X Cybersecurity ETF (BUG)6/23/20200.0%214%Buy
Huazhu Group Limited (HTHT)3/30/169.280.0%35277%Hold
LGI Homes (LGIH)New0.0%101Buy
NextEra Energy (NEE)3/27/191942.2%25833%Hold
Nvidia (NVDA)3/10/202540.0%41463%Hold
RingCentral (RNG)10/23/191530.0%26775%Hold
Sea Ltd (SE)1/21/20410.0%117186%Hold
SelectQuote (SLQT)7/7/20260.0%25-3%Buy
Tesla (TSLA)12/29/11300.0%15815236%Hold
Trulieve (TCNNF)4/28/2010.420.0%1652%Buy
Tyson Foods (TSN)Sold
Vertex Pharmaceuticals (VRTX)1/7/202240.0%28929%Hold
Virgin Galactic (SPCE)10/11/199.240.0%20112%Buy
Zoom Video (ZM)3/17/201080.0%265146%Hold
Zscaler (ZS)4/14/20650.0%12491%Hold

“The trend is your friend,” says the old market axiom, and that’s certainly true today, as most of our stocks are riding the market advance higher—and many are leading the way. One notable exception, however, is BYND, which once again has fallen to support. But I’m not going to sell, mainly because there’s a decent chance for a bounce from here. Back on the positive side, the hottest sector of the market lately has been NASDAQ-based technology glamour stocks, and here we benefit from holding NVDA, RNG, SPCE, TSLA and ZM. Enjoy it while it lasts!

Changes
Beyond Meat (BYND) to Hold.

AbbVie (ABBV), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, pulled back from its highs last week to touch its 25-day moving average, but moved higher again today, so the trend is still very good. In his update last week, Tom wrote, “This biopharmaceutical giant just hit a new 52-week high. Over the past year, ABBV is up over 35% while the S&P 500 is up just under 5% over the same period. The recently completed merger with Allergan diversifies AbbVie from Humira. At the same time, its recently launched drugs are doing gangbusters and look increasingly able to replace Humira’s lost revenue when it comes off patent in the U.S. in 2023. Despite the fact that the stock hit a 52-week high, it is still selling about 40% below the 2018 high and at just 9.2 times forward earnings. Healthcare is also one of the best places to be in this uncertain market and ABBV pays a solid dividend with growth ahead and a 4.8% yield.” HOLD.

Beyond Meat (BYND), originally recommended by Mike Cintolo in Cabot Growth Investor, is our weakest stock, as well as our largest loser—but the stock isn’t broken yet, so I’m going to stick with it, because long-term, the company’s industry leadership should pay off. However, if the stock does break down, I’ll have to sell. For now, I’ll downgrade it to Hold. HOLD.

Big Lots (BIG), originally recommend by Mike Cintolo in Cabot Top Ten Trader and featured here two weeks ago, remains in a shallow correction, above all its moving averages, so this is still a fine entry point for a rare bricks-and-mortar retail chain that’s thriving. BUY.

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson for the High Yield tier of Cabot Dividend Investor, is a low-risk way to benefit from the world’s growing infrastructure needs. In last week’s update, Tom wrote, “The global infrastructure partnership is still cheap at 17% below the 52-week high. It may be that investors have shunned MLPs because they associate them with the beleaguered energy sector. But this stock should have nice upside going forward. In an uncertain economy, the company has reliable income-generating assets that are 95% contracted or regulated. It should have solid growth in the future with its asset rotation strategy of replacing mature assets with higher margin new ones. The infrastructure subsector should also become increasingly in vogue as private money is increasingly being raised to accommodate the world’s desperate need for new and upgraded infrastructure. And the yield is rock solid.” BUY.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, has an amazing chart, stepping higher in a straight line in 10 of the past 11 days before rolling over this afternoon. Last week, Mike averaged up in his Cabot Growth Investor portfolio (as I suggested he would), and the stock earned a spot in Cabot Top Ten Trader, where Mike wrote, “Chegg has always had a great growth story, and it’s likely that the virus-related push of everything going online will goose results further going forward…growth has been solid for a while, but the potential remains huge, with 2.9 million subscribers (up 35% from a year ago) out of a potential market of 36 million in the U.S. and another 18 million outside the country.” As for the stock’s action, Mike wrote, “We have a few “heads up” chart clues to identify new leading stocks, and one of those is when a relatively liquid stock breaks out of a big launching pad on volume at least 10 times normal. CHGG did that after earnings in early May, blasting higher and eventually reaching 68 before a tedious pullback. Shares did hold key support in the mid 50s, though, and have since ratcheted back to new highs. CHGG does move around quite a bit, so aim to start small and use a loose leash.” BUY.

GFL Environmental (GFL), originally recommended by Tyler Laundon in Cabot Early Opportunities, is moving slowly higher, but it’s not too late to get a piece of North America’s fourth-largest environmental services (waste management) company. BUY.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, hit another new high last week and has pulled back normally since. In last week’s update, Carl wrote, “The formula driving this ETF forward is that higher activity online requires more cybersecurity measures. The companies in the BUG basket address online security as cybercrime, which has reached an all-time high. The top 10 companies in the BUG basket represent 56% of BUG’s market value. The stocks are not cheap and on average trade at more than six times book value. I’m fine with new subscribers buying BUG, which represents a conservative way to invest in a competitive 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 rallied higher last week as Chinese stocks saw an influx of buying and has pulled back normally since. HOLD.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is very close to breaking out above its June high today, so this is not a good entry point for the stock. Long-term, however, it’s a fine conservative holding. In Tom’s latest update, he wrote, “This is the world’s largest utility company. It’s actually a combination of two companies, regulated electric utility Florida Power and Light and alternative energy company NextEra Energy resources. The regulated utility provides great steady cash flow and the alternative energy business provides a higher level of growth. It’s a hot summer in Florida. And people are cranking those air conditioners. Business is good and should stay good as alternative energy production costs continue to decrease. This is a great stock to own through the recession and beyond. I’m still waiting for some weakness in the stock to upgrade it to a buy.” HOLD.

Nvidia (NVDA), originally recommended for the Special Situation and Movie Star portfolio of Cabot Undervalued Stocks Advisor, may have been the strongest stock in the portfolio coming into today, up eight out of nine days—but this afternoon it rolled over. In last week’s update, chief analyst Bruce Kaser wrote, “Nvidia is the pioneer and leading designer of graphics processing unit (GPU) chips, which initially were built into computers to improve video gaming quality. However, they were discovered to be nearly ideal for other uses that required immense and accelerated processing power, including data centers and artificial intelligence applications such as professional visualization, robotics and self-driving cars. In April, Nvidia completed the $6.9 billion acquisition of Mellanox Technologies, an 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-P/E, aggressive growth/momentum stock. Its shares have increased 17x since the start of 2015 and now have surged past their former all-time high of 385. Yet, part of the reason behind the gains is that cloud-based computing is the biggest secular trend in technology, and the most powerful. No one knows how large the industry will ultimately become, but “larger than it is today” seems like the correct answer for many days and years into the future. Until this open-ended growth appears to peak, it would be difficult to bet against it. The only question for momentum investors is when to stop betting on it. The valuation of 34.3x estimated fiscal year 2022 earnings is high but not astronomical. Wall Street now expects EPS to grow 21% in fiscal 2022 (January year-end) compared to fiscal 2021.” HOLD.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is the lower-risk alternative to Zoom Video Communications (ZM), because RingCentral is more diversified. The stock hit a new high Friday (just shy of 300) and has pulled back normally since. HOLD.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, hit another record high last Thursday—the day after Chinese stocks as a whole were very strong—and has pulled back minimally since. In Carl’s update last week, he wrote, “”Citi raised its target price to 138 and Bank of America increased its target to 135. Sea is at the sweet spot of Southeast Asia’s e-commerce, gaming and digital banking all moving briskly downstream due to the impact of COVID-19. This growth in top-line revenue and stock price has been more than impressive, but just a note of caution: Sea has incurred net losses over the last 12 months of $1 billion along with a negative free cash flow of $340 million. Profits will likely follow as it builds out its market share, which is growing day by day aided by its partnership with Tencent. I encourage owners of Sea to take some profits if they have not already done so and only the most aggressive investors to buy at these levels.” HOLD.

SelectQuote (SLQT), originally recommended by Tyler Laundon in Cabot Early Opportunities and featured here last week, has pulled back a bit more since then, but has probably hit bottom, so if you haven’t bought yet, and you’d like a small-cap stock with great potential to grow through cloud-based services, you could buy here. BUY.

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 red-hot, up more than 10% this morning and up roughly fourfold this year alone as virtually all analysts recognize the company’s growing advantage over established automakers. The most optimistic are expecting positive earnings for the second quarter, which (being four in a row) would make the stock eligible for inclusion in the S&P 500. Also, the company has announced that its “Battery Day” event, when the company will announce new battery technology, will be September 22 at its Fremont, California factory. If the latest surge has you overweighted in TSLA, and/or you’re reluctant to give back those gains, consider taking partial profits. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, blasted out of its nine-week basing formation Friday on big volume and continued the move today, joined by other leaders of the industry. Aggressive investors can still buy here. BUY.

Vertex Pharmaceuticals (VRTX), originally recommended by Mike Cintolo in Cabot Growth Investor, has made no net progress over the past week, so holding is fine, but Mike says new buyers should look elsewhere. In his update last week, he wrote, “VRTX briefly poked to new highs earlier this week before turtling back below 300. Still, nothing’s really changed—the two-steps-forward, one-step-back advance remains intact, but we wouldn’t say big investors are piling into shares, either. Thus, if you own some, hang on, but we’d focus buying elsewhere.” HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, has been in a long consolidation pattern since mid-April, but if it can break out above 20 soon a new advance might be under way. In Carl’s update last week, he wrote, “While SPCE has announced a number of favorable partnerships and interest in the story remains high, it seems that some targets and milestones may be slipping a bit. Last year, founder Richard Branson said that flights will begin within a year, and he expected profitability by 2021.

“But his intention to fly aboard the first commercial SpaceShipTwo flight for his 70th birthday this month seems improbable. This slippage may not impact the stock since Wall Street seems focused on Virgin Galactic’s potential in hypersonic intercontinental travel. The company said in May that it’s entered into a Space Act Agreement with NASA on developing a sustainable high-mach supersonic vehicle. The U.S. space agency has been working on high-mach flights with its Supersonic X-59 test plane, built by Lockheed.

“I rate SPCE a strong buy for aggressive investors. This is a compelling story with a quality management team in a potentially high-growth market. Vertical Research Partners’ Darryl Genovesi reiterated his buy rating on SPCE with a target price of 29.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, hit another new high today, as the work-from-home trend increasingly seems to be here to stay for many people. Technically, the stock remains overdue for a correction, so partial profit-taking is a good idea for some investors—but long-term, the sky’s the limit. HOLD

Zscaler (ZS) originally recommended by Mike Cintolo in Cabot Growth Investor, hit a record high last Thursday and has pulled back minimally since. If you’re looking for a leading cybersecurity stock to invest in (maybe BUG is too tame for you), Zscaler is one of the best. HOLD.


The next Cabot Stock of the Week issue will be published on July 20, 2020.

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