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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 313

The market remains in fine health, with the major indexes regularly hitting new highs as investors look forward to a recovery from the intentional recession. At some point, that means we’ll have a top, but it’s hard to predict when.

In the meantime, the portfolio continues to recommend a well-diversified group of high-potential stocks, including this week’s—a well-known pharmaceutical giant that is coming off a normal correction.

As for our current stocks, most look great, but something’s got to be sold to keep the portfolio under 21 holdings, and the victim is our weakest stock, GFL Environmental (GFL).

Full details in the issue.

Cabot Stock of the Week 313

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The bull market remains in full force, even as various signs (sentiment and charts) caution that a correction is increasingly likely. But timing corrections accurately (picking both the top and bottom) is exceedingly difficult, so it’s far more profitable to simply stick with the main trend—which is up. Today we continue our process of broad portfolio diversification with the addition of a well-known pharmaceutical giant. The stock was originally recommended by Tom Hutchinson in Cabot Dividend Investor and here are Tom’s latest thoughts.

Eli Lilly and Company (LLY)
Despite the uncertainty regarding the virus and the upcoming election, there are certain select things that you can actually bank on going forward. One of those bankable events is an older and aging population.

The population is older now than ever before and getting still older at warp speed as an average of 10,000 baby boomers turn 65 every single day and the fastest growing segment of the population is 65 and older. The changing human demographic will greatly affect want consumers demand. And older people will surely demand more health care.

Founded in 1876, Indianapolis-based Eli Lilly is a global pharmaceutical giant with $23 billion in annual revenues, 34,000 employees and sales in 120 countries. It stands out from the rest of the large pharmaceutical companies in that it invests much more heavily in Research and Development and its new drugs and pipeline reflect that fact.

The stock has been in the news lately for having one of the leading Covid-19 drug candidates. The drug, for both treatment and prevention of Covid-19, is in late stage trials and is the very first candidate to be tested for the National Institute for Health study. But that’s not why I’m buying it.

I have no idea what will happen with this Covid drug. And I learned long ago with these companies never to bet on the fortunes of one potential drug. That’s why I like Lilly. It’s got lots and lots of potential new drugs.

The company spends 25% of sales on R&D every year. The segment employs 23% of the workforce and spends $5.5 to $6.0 billion annually. That’s a significantly larger commitment than its peers. But the pipeline is the key to this business. New drugs are how these companies succeed and grow. And Lilly has been spectacular.

I actually purchased the stock before back in 2012. It was selling at a depressed price ahead of a huge patent cliff in 2014 (as a large number of existing drugs would lose patent protection and would see falling revenues as generic competitors took market share). But I had faith that Lilly’s R&D and pipeline could make up for the lost revenue. It did. Now over 60% of revenues are generated from drugs launched since 2014. The stock has also returned about 400% since the purchase.

Lilly specializes in developing drugs and treatments for unmet medical indications, where there is a higher chance of FDA approval and higher market share and profit margins. The drug company has a very strong presence in Diabetes (Trulicity, Basaglar, Jardiance), Oncology (Alimta, Cyramza, Vezenio) and new drugs in Immunology (Taltz and Olumiant).

Of particular note, Diabetes treatment Trulicity reported 29% sales growth in the first half of this year with revenues of $2.5 billion. Retevmo recently received FDA approval of treatment of lung cancer but also reported very positive Phase III results in preventing the recurrence of breast cancer. This drug could be a blockbuster; the stock popped over 15% on news of the Phase III study.

Lilly also beat earnings forecasts, with 26% growth over last year’s quarter, and raised 2020 guidance by 11% to reflect anticipated 21% earnings growth over 2019.

The dividend still yields a measly 1.93%. But there are no significant patent expirations in the years ahead and the company will be able to focus on growing the dividend from here. Admittedly, there are a couple of other big pharma companies with sexy stories that some analysts like better right now. But those companies usually tend to foul things up somehow. Lilly is the best run company of its kind and I trust it.

The stock has blown away the performance of its peers in recent years, and for good reason. The stock has pulled back from its highs recently but still remains in a strong longer-term uptrend.


LLYRevenue and Earnings
Forward P/E: 20Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 22($bil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 31.3%Latest quarter5.50-2%1.8926%
Debt Ratio: 530%One quarter ago5.8615%1.7532%
Dividend: $2.96Two quarters ago6.118%1.7331%
Dividend Yield: 2.0%Three quarters ago5.483%1.4810%

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 8/31/20ProfitRating
B&G Foods (BGS)7/28/20276.1%3114%Buy
Big Lots (BIG)6/30/20422.5%4711%Hold
Bloom Energy (BE)8/2/20140.0%1610%Buy
Chegg (CHGG)6/2/20640.0%7416%Hold
Columbia Sportswear (COLM)7/21/20790.0%869%Hold
Eli Lilly & Co (LLY)New2.0%148Buy
GFL Environmental (GFL)5/27/20180.2%181%Sell
Global X Cybersecurity ETF (BUG)6/23/20200.0%2314%Buy
Huazhu Group Limited (HTHT)3/30/169.280.0%45384%Hold
LGI Homes (LGIH)7/14/201010.0%11211%Buy
Molson Coors Brewing Co (TAP)8/25/20380.0%38-1%Buy
NextEra Energy (NEE)3/27/191942.0%28044%Hold
Qualcomm (QCOM)8/11/201082.2%12011%Hold
RingCentral (RNG)10/23/191530.0%29291%Hold
Sea Ltd (SE)1/21/20410.0%154276%Hold
Taiwan Semiconductor (TSM)8/18/20803.6%80-1%Buy
Tesla (TSLA)12/29/11300.0%4951570%Hold
Trulieve (TCNNF)4/28/2010.420.0%23119%Hold
Virgin Galactic (SPCE)10/11/199.240.0%1893%Buy
Zoom Video (ZM)3/17/201080.0%319195%Buy
Zscaler (ZS)4/14/20650.0%146125%Hold

The portfolio generally looks very healthy, reflecting the state of the overall market, so there are no big changes. But the addition of Eli Lilly means that something must be sold, and the victim this week is GFL (our weakest stock), which has seen some heavy selling volume recently. Details below.

Big Lots (BIG) to Hold
GFL Environmental (GFL) to Sell
Qualcomm (QCOM) to Hold

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor advisory, closed at record highs several days last week and is now pulling back slightly. In last week’s update, Tom wrote, “This packaged food company sure has some terrific momentum. It’s up 23% since being added to the portfolio in July and has returned 79% YTD. With performance like that from a stodgy food company it may seem like time to start looking for the exits. But the stock still sells at valuation levels well below those of the overall market. BGS was over 50 per share in 2016 with much lower earnings than today. It has become a much stronger growth company because of the shift to more cooking at home.” BUY.

Big Lots (BIG), originally recommended by Mike Cintolo in Cabot Top Ten Trader, was in Cabot Top Ten Trader again last week, where Mike wrote, “Many companies have seen their fortunes rise because of the pandemic, but there might not be a more dramatic example than Big Lots, a closeout and discount retailer that has been around since 1967 but had been struggling for years, even as low-priced/dollar store-type thrived. But the company has turned a 180 of late. First off, the quarter ending in April saw a meaningful acceleration in sales and earnings growth, driven by a 10%-plus gain in same-store sales. And the story has only gotten better since; In June, the firm completed $725 million of sales/leaseback transactions, dramatically boosting liquidity (it paid off debt, could start buying back a bunch of shares and has kept its dividend in place, yielding 2.4%). Then later that month, Big Lots said it expected earnings for the quarter ending in July to be north of $2.50 per share (compared to 53 cents a year ago), well ahead of estimates. And then, in late July, it said business was still humming, with same-store sales at the high end of its mid- to high-20% forecast! Of course, Big Lots isn’t suddenly a great long-term growth story, but perception has steadily improved, with most thinking this uptick in business will stick around. Analysts have been stampeding over each other to hike earnings estimates—they now see $6.46 this year (up 76% from last year and up from $4.25 just two months ago!), and even assuming some backsliding in 2021, see Big Lots earnings about $5 and spinning off a ton of free cash flow. The next big update comes this Friday morning (August 28), when the firm will report earnings.” Well, the earnings report sparked a bit of selling, which pushed BIG into Mike’s recommended buy range (48.5 – 51) on heavy volume on Friday and then down through it this morning, and that’s reason enough to downgrade it to hold, though the fact that the stock remains above its 50-day moving average means I’m not too worried. HOLD.

Bloom Energy (BE), originally recommended by Tyler Laundon in his Cabot Early Opportunities advisory, is a small-cap energy company that offers an advanced distributed energy generation platform composed of fuel cells that are used by businesses such as Walmart, Apple and Home Depot. The stock remains in a seven-week consolidation pattern, still trading above its 50-day moving average. If you haven’t bought yet, you can buy here. BUY.

Chegg (CHGG), originally recommended by Mike Cintolo in Cabot Growth Investor, dipped below its 50-day moving average (on light volume) last Friday and remains below it today, at what might be a moment of truth. In his update last week, Mike wrote, “Chegg has been one of our weaker performers during the multi-week growth stock slog; shares didn’t bounce much in the middle of the month and actually probed below their 50-day line before lifting a bit. Near-term, the stock looks like it still has some work to do, especially with its huge convertible share offering ($1 billion, which diluted the share count by a whopping 10%!). But having already taken partial profits, we’re not willing to give the stock the boot—the longer-term outlook has brightened significantly with online learning hitting the mainstream (analysts see earnings up 35% this year and 22% next, and the figures keep creeping up and are likely low), and chart-wise, the overall picture (from 55 after earnings to a high of 90 down to a low of 73) isn’t out of the ordinary. A drop into the upper 60s (maybe a point or two below our average cost of 69) would likely have us cutting bait, but CHGG is notoriously squirrelly, so we’re willing to give it a little rope.” HOLD.

Columbia Sportswear (COLM), originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, closed at its highest level since February last week. In his latest update, Bruce wrote, “Recent indications that the economy continues to re-open are helping to buoy the stock. Full year estimates are $2.05 and $4.21 for 2020 and 2021, respectively. For comparison, the company earned $4.83/share in 2019. On next year’s estimates, the shares trade at a P/E of 20.0x. The stock has appeal for value investors and for growth investors with patience for what might be a slower recovery than other growth stocks. Traders will find COLM shares appealing given their sensitivity to consumer and economic re-opening trends.” HOLD.

GFL Environmental (GFL), originally recommended by Tyler Laundon in Cabot Early Opportunities, failed to rally back above its 50-day moving average last week, though it still has the potential to build a base here at 18. However, the heavy selling volume two weeks ago was a red flag, and that, combined with the fact that it’s our weakest stock, and that our profit is gone, is reason enough to sell. SELL.

Global X Cybersecurity ETF (BUG), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, closed at a record high last Wednesday and has pulled back normally since. In Carl’s latest update, he wrote, “BUG ground out another gain of a point to reach 23 this week as this ETF is now up over 30% so far in 2020. I believe this sector will remain in favor and in an uptrend given that demand for cybersecurity matches or exceeds online activity.” Try to buy on pullbacks. BUY.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is China’s largest hotel operator, and thus a fine stock for long-term holding. As for the short term, the past five weeks have seen the stock soar from 33 to 45 as the reopening of the Chinese economy sparked optimism about travel in that country, and now the stock is right back where it topped in April 2019. HOLD.

LGI Homes (LGIH), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has cooled off a bit in recent weeks, but all volume clues are positive, and the stock remains above its 50-day moving average, so I think it can still be bought. BUY.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here last week, is trading calmly on its base at 38. If you haven’t bought yet, you can buy here. BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, is one of the country’s most forward-looking utilities, with a big alternative energy portfolio, and the stock looks solid; it’s been sitting on a base at 280 for over five weeks. In his latest update, Tom wrote, “What utility underperformance? While the utility sector has lagged badly in the market recovery, NEE is significantly outperforming the market. It is a great regulated utility in a class above the rest. Plus, alternative energy is a rapidly growing business. Investors love the combination and this stock should continue stellar performance. It is fairly valued, but I will likely raise the rating to a BUY on a pullback of any significance.” HOLD.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor, keeps hitting new highs! Mike hasn’t written about the stock lately, but it has been recommended by Tom Hutchinson in Cabot Income Advisor, where Tom paired the holding with an options play to create income. Last week he wrote, “The stock has soared 25% over the past month and broken out. The rollout of 5G always held huge potential for earnings growth in the quarters ahead. But the stock had been held back by anti-trust suits with its licensing business. The favorable ruling and settlement with Chinese technology company Huawei goes a long way to eliminating a major obstacle for the company and the stock. Qualcomm is still rolling into an earnings boom from 5G. But now it is on that path with one of the biggest risks to the company virtually eliminated.” I’m going to downgrade it to Hold because the stock is rather extended. HOLD.

RingCentral (RNG), originally recommended by Mike Cintolo in Cabot Growth Investor, is a major provider of advanced communication solutions, which are more in demand than ever as people work and play from home. While the advance has certainly flattened out over the past two months, the stock remains above its 50-day moving average, and there are no negative signs. 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 new high last week, so the stock is up nearly 280% year-to-date—and our profit is close to that! In his update last week, Carl wrote, “Sea shares continue their amazing run, going from 110 to 159 over the last month, and are now up more than 10X from the price at the time of our recommendation last year. Sea’s momentum has been supported by its recent stellar quarterly growth, with $1.29 billion in revenue during the second quarter, up 93.4% year-on-year versus $665.4 in the same quarter last year. Quarterly active users reached 499.8 million, an increase of 61%, while paying users grew by 91.2% year-on-year to 49.9 million. Sea has become the best-performing stock in the world over the last 18 months. I will keep this a hold.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, continues to trade calmly at the 80 level, building a base in preparation for its next advance. In his latest update, Carl wrote, “TSM is the world’s largest semiconductor manufacturer, with 56% market share. Its most recent earnings surged 81% on 29% higher revenue, and its margins climbed. This is a well-managed, dominant company in a critical area of advanced tech supply chains selling at a reasonable valuation. I recommend you start with a half position and put a 20% trailing stop loss in place.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, split 5-for-1 last Friday and was up 10% this morning, apparently fueled by buyers who like the new “low” price. Wonderful as the stock’s run has been this year (it’s up 445%), I must say that the overwhelming bullishness among both retail and professional investors with regard to Tesla today suggests to me that short-term, there’s far more downside potential here than upside. That said, to me, this remains a stock with great long-term potential, as Tesla revolutionizes not only the automotive industry but also the energy industry—so I’m holding tight. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, peaked at 26 two weeks ago, bounced off 20 last week, and is now smack in the middle of that range—but the odds are that if will drift lower, perhaps even below 20, as the sector cools off. In last week’s update, I wrote, “Like its peers in the U.S., TCNNF had a great run from the March bottom to the recent August top, climbing from 6 to 26, and as the trend accelerated we piled in, averaging up on May 14 at 10.66 and then selling 25% on August 13 at 22.24. But the sellers came on heavy right after the top on August 14.” Long-term prospects for the biggest seller of marijuana in Florida remain terrific, but short-term, I think you can find a lower-risk entry point. HOLD.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, bounced off its 200-day moving average at 17 two weeks ago, but really hasn’t gotten any new momentum going. Neverthless, the future remains bright, so this is a great entry point. In his latest update, Carl wrote, “Shares have been resilient despite the company’s timetable being pushed back to early 2021. Its shares are up 65% so far in 2020. A recent share offering priced at $19.50 raised capital but diluted shareholders. While the space economy could generate $800 billion in annual revenue by 2030, the supersonic jet gives Virgin an opportunity to disrupt the much larger conventional airline industry. I remain bullish on this company and the stock.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, continues to hit new highs! Everyone knows that Zoom is one of the winners of the pandemic shutdown, and someday this strength will end, but until then, momentum investors are welcome to play here. BUY.

Zscaler (ZS), originally recommended by Mike Cintolo in Cabot Growth Investor, is also hitting new highs, one of the many cybersecurity stocks that look good these days. But Mike no longer has the stock in his portfolio, so the best I can do is rate it Hold. HOLD.

The next Cabot Stock of the Week issue will be published on September 8, 2020.

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