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Stock of the Week
The Best Stock to Buy Now

Cabot Stock of the Week 328

Note: This is our final issue of Cabot Stock of the Week this year. Next week we get a little “vacation.”

But rest assured we’ll be keeping an eye on the market, where market trends remain very positive as we head toward the end of the year.

Today’s recommendation is a low-risk water company in a foreign country, so it may be the perfect diversification move if you’ve got a lot of U.S. growth stocks.

But to fit it into the portfolio, we’ve got to sell something, and the victim this week is Eli Lilly (LLY), which has brought us a decent profit in a fairly short time.

Full details in the issue.

Cabot Stock of the Week 328

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Next week there will be no Cabot Stock of the Week published; it’s one of the two weeks we get “off.” But rest assured I will be monitoring the markets and will send an update if there is any change in my recommendations. As we approach the year-end, market trends remain strong (notwithstanding today’s opening action), and odds are that the strength will continue a little longer, as our tax laws favor delaying profit-taking until the new year. After the calendar turns, however, the odds of a major correction increase. In the meantime, I continue to recommend that you be heavily invested in a diversified portfolio of good stocks. Last week’s recommendation was a fast-growing firm in the hot cybersecurity market, and this week we cool down with a low-risk dividend-paying water company—a solid conservative investment. The stock was originally recommended by Carl Delfeld in Cabot Global Stocks Explorer and here are Carl’s latest thoughts.

Companhia de Saneamento Basico do Estado de Sao Paulo:SABESP (SBS)
During the last century, oil was at the heart of the global economy and oil prices led the financial news. But in the 21st century, the price and supply of another scarce commodity is beginning to generate headlines. This will be a commodity even more important than oil, at the heart of everything we do from growing food to manufacturing.

While we take an inexpensive and steady supply of water as a birthright, in much of the world this is anything but the case. In America, water prices are heavily subsidized but in Switzerland, water prices are about four times those in America because it costs that much more to produce clean water. As a result, Americans as a group are water wasters, using 80 to 100 gallons of water per day per person, on average.

Water is a hot issue all over the world. The United Nations Environment Program has predicted that half the globe’s population could face severe water stress by 2030. Take China, for example. Waters originating in Tibet supply around 30% of China’s fresh water but Tibet is a long way from China’s arid regions in the industrial northeast. In Jakarta, Indonesia, roughly 60% of the people in this sprawling 11-million-plus city have no access to running water.

The world’s per capita water consumption is accelerating – up sixfold in the last century with no end in sight. The World Bank estimates that global water demand is doubling every 20 years.

The high demand/limited supply fundamentals underpinning this story seem unassailable so one would think that investing in water would be a no brainer. Not so fast.

First, while oil is broadly recognized as political, water is five times more so. Governments heavily subsidize water prices and like to keep tight control over water supplies.

The second challenge is that most water investment opportunities are boring, low-growth utilities and water treatment plants. Aging municipal water pipes have been disintegrating causing money to flow away from city water districts as well as contaminated water. As water becomes scarcer and more expensive, an increasing number of water districts are expected to shoulder the cost of detecting and fixing leaks.

This brings us to SABESP, the largest water company in Brazil. This is a great opportunity that is majority owned by the state of Sao Paulo. The company has a monopoly on providing water and sewage services to over 26 million people in 365 of the 645 municipalities in the State of Sao Paulo.

I like SABESP because the company has plenty of room to grow in its monopoly territory of Sao Paulo with 18 million people not yet connected to its services. Sao Paulo has a population over 44 million and represents more than 30% of Brazil’s total economic output. In addition, the company is expanding to other regions in Brazil, and even into neighboring countries. Second, the stock has a stellar record over the past decade with an annual earnings-per-share growth rate of just over 19%.

Since the Brazil market is now back in favor as interest rates have fallen sharply making fixed income (bonds) less attractive, capital and investors are shifting to its stock market and it is a matter of time before they get to this monopoly opportunity.

Today, though, SBS is trading at about 12 times projected earnings, 43% off its 52-week high. In short, this is an undervalued, underappreciated and overlooked Brazilian stock, with great long-term prospects as the world comes to more highly value water.


SBSRevenue and Earnings
Forward P/E: 10Qtrly RevQtrly Rev GrowthQtrly EPSQtrly EPS Growth
Current P/E: 12($mil)(vs yr-ago-qtr)($)(vs yr-ago-qtr)
Profit Margin (latest qtr) 5.2%Latest quarter791-39%0.11-74%
Debt Ratio: 59%One quarter ago811-22%0.10-41%
Dividend: $0.25Two quarters ago777-22%-0.18NA
Dividend Yield: 2.3%Three quarters ago1169-8%0.39-32%

Current Recommendations

StockDate BoughtPrice BoughtYieldPrice on 12/21/20ProfitRating
B&G Foods (BGS)7/28/20276.3%3010%Buy
Berkeley Lights (BLI)12/8/20870.0%10218%Buy
Coca-Cola (KO)11/17/20533.1%53-1%Buy
Columbia Sportswear (COLM)7/21/20790.0%8912%Buy
Companhia de Saneamento Básico
do Estado de São Paulo - SABESP (SBS)
CrowdStrike (CRWD)12/15/201740.0%21020%Buy
Eli Lilly & Co (LLY)9/1/201481.8%16914%Sell
General Motors (GM)11/3/20353.4%4116%Hold
Huazhu Group Limited (HTHT)3/30/169.280.0%47409%Hold
Molson Coors Brewing Co (TAP)8/25/20380.0%4518%Buy
NextEra Energy (NEE)3/27/19497.5%7453%Hold
NovoCure (NVCR)11/10/201230.0%16736%Sell
Nuance Communications (NUAN)10/27/20330.0%4433%Buy
Pinterest (PINS)10/6/20430.0%6960%Buy
Qualcomm (QCOM)8/11/201081.8%14736%Buy
Sea Ltd (SE)1/21/20410.0%198385%Hold
Taiwan Semiconductor (TSM)8/18/20802.7%10430%Buy
Tesla (TSLA)12/29/115.931.0%66211055%Hold
Trulieve (TCNNF)4/28/2010.420.0%32205%Hold
Uber (UBER)11/24/2051.320.0%521%Buy
Virgin Galactic (SPCE)10/11/199.240.0%25171%Buy
Zoom Video (ZM)3/17/201080.0%409279%Hold

Overall, our holdings continue to perform very well—but I continue to recommend that you consider taking partial profits in some, because there is a correction ahead, somewhere. As for outright sells, none of our stocks deserve it, but we need to make room for SBS, so I’m selling LLY, taking a fairly quick profit after the recent surge. Details below.

Eli Lilly & Company (LLY) to Sell.

B&G Foods Inc. (BGS), originally recommended by Tom Hutchinson for the High Yield Tier of Cabot Dividend Investor, continues to close in on its August high of 31. In his update last week, Tom wrote, “This packaged food company stock has been stronger lately and is at the top of its recent range since the August high. It seems to be getting a bit of a boost from the worsening virus situation, as people continue to eat more at home and the pandemic earnings spike is expected to last longer. I think this will still be a good stock after the pandemic as people will still eat at home more and growth rates should be higher for a long time. But if the market wants to give it a boost over short-term considerations, let it.” BUY.

Berkeley Lights (BLI), originally recommended by Tyler Laundon in Cabot Early Opportunities, broke out to a record high today. Long-term prospects look great for the little company focused on supplying equipment for harvesting, culturing, imaging, sequencing and characterizing cells, but short-term, if you haven’t bought yet, I suggest waiting for the next correction. BUY.

Coca-Cola (KO), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, pulled back with the market today but remains in the basing pattern of the past month, and still above its 50-day moving average. In his update last week, Bruce wrote, “Coca-Cola’s sturdy balance sheet carries $53 billion in debt that is well-covered by cash flow and partly offset by over $21 billion in cash. The $0.41/share quarterly dividend is also well-covered by solid free cash flow. The stock has about 19% upside to our 64 price target. While the valuation is not statistically cheap, at 25.4x estimated 2021 earnings of $2.11 and 23.0x estimated 2022 earnings of $2.33 (the 2022 estimate ticked up a cent in the past week), they are undervalued while also offering an attractive 3.1% dividend yield.” BUY.

Columbia Sportswear (COLM), originally recommended by Bruce Kaser for the Buy Low Opportunities portfolio of Cabot Undervalued Stocks Advisor, continues to recover from its low of late October. In his update last week, Bruce wrote, “Columbia shares have about 18% more upside to our 100 price target. The shares trade at 22.9x estimated 2021 earnings of $3.71. The earnings estimate is unchanged from last week. For comparison, the company earned $4.83/share in 2019.” BUY.

CrowdStrike (CRWD), originally recommended in Cabot Growth Investor by Mike Cintolo, and featured here last week, gapped up on big volume last Friday after the news of the hacking of Solar Winds (SWI), so short-term, we’re off to a good start. In last week’s issue of Cabot Growth Investor (before the news), Mike wrote, “There are many good-looking names in the new-age cybersecurity space—including Okta (OKTA), which we’ve made money with a couple of times—but CRWD is our pick of the litter right now, as we think it has emerging blue chip written all over it. Indeed, management is thinking big, believing the company’s Falcon platform could be similar to the platforms of (customer relationship), ServiceNow (in operations) and Workday (human resources)—i.e., a key back-office service that tens of thousands of firms (especially big, global ones) will become reliant on in years to come. And because the firm sells mostly via subscriptions, that means recurring revenue (up north of 80% in Q3) and earnings should kite higher from here. As for the stock, it’s shown excellent strength since earnings, and while it’s had a big run from its pandemic lows in March, shares just emerged from a huge post-IPO base in August.” BUY.

Eli Lilly & Company (LLY), originally recommended by Tom Hutchinson for the Dividend Growth Tier of Cabot Dividend Investor, had a couple of hot weeks after announcing positive news, and the result is that we’ve made a decent gain in a fairly short time. Tom remains bullish on the stock, and if it has a long-term place in your portfolio, you can hold on here, but I’m going to sell now and see if our new undervalued water company (SBS) can provide similar performance. SELL.

General Motors (GM), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has pulled back over the past four weeks and is now close to kissing its 50-day moving average, which I believe will offer support. In his update last week, Bruce wrote, “Vehicle sales in China continue to show impressive strength. The China Association of Automobile Manufacturers trade group said that sales would be about 25.3 million units (both passenger and commercial), almost matching last year’s 25.8 million units. The group expects sales to climb 4% next year. GM has a sizeable business in China, so healthy growth in that market is a positive. The United Auto Workers labor union agreed to independent oversight as part of a settlement in the wide-ranging corruption scandal that has led to convictions of former union officials. This may have implications for future labor negotiations with GM, although it’s not clear how, just yet. GM shares have about 18% upside to our newly-raised 49 price target. GM shares trade at 6.9x estimated 2021 earnings of $5.99. This estimate increased by about 1% this past week.” HOLD.

Huazhu Group Limited (HTHT), originally recommended in Cabot Global Stocks Explorer, is China’s largest hotel operator, with 6,507 hotels and 637,087 hotel rooms in operation in 16 countries—and we’re in it for the long haul, as the long-term prospects are great. Since hitting a record high near 54 a few weeks ago, the stock has pulled back 14% and is now building a base just above its moving average. HOLD.

Molson Coors Beverage (TAP), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has pulled back 9% over the past two weeks but remains well above its 50-day moving average. In his update last week, Bruce wrote, “Molson Coors recent results showed that the company is making progress with its turnaround and that investors underestimate this progress. TAP shares have about 29% upside to our 59 price target. The 2020 estimate ticked up a cent to $4.18. Estimates for 2021 to 2022 are unchanged at $4.17. The shares trade at 11.0x estimated earnings for all three years. These valuations are low, although not the stunning bargain from a few months ago. On an EV/EBITDA basis, or enterprise value/cash operating profits, the shares trade for about 8.2 current year estimates, among the lowest valuations in the consumer staples group and well below other brewing companies.” BUY.

NextEra Energy (NEE), originally recommended by Tom Hutchinson of Cabot Dividend Investor for his Safe Income Tier, dipped below its 50-day moving average again today but the main trend remains up. In his latest update, Tom wrote, “Alternative energy is hot stuff. It continues to get cheaper to produce, and more in demand. And the market seems to love anything to do with it. NEE is the best way for conservative investors to play the trend. It has a conventional regulated utility that provides steady income while being the world’s largest producer of wind and solar. The stock has consistently blown away the market returns, and with considerably less volatility. I see no reason for the stock to change behavior going forward and it might get even better.” HOLD.

Pinterest (PINS), originally recommended by Mike Cintolo in Cabot Growth Investor, remains in an uptrend, but the slope has flattened over the past week—and the 50-day moving average is down at 61, so a correction to there is possible. In his update last week, Mike wrote, “Bigger picture, nothing has changed regarding our thoughts with Pinterest—if things fall into place, we think the stock’s initial breakout from a big post-IPO base in September and its one-of-a-kind, idea-generating e-commerce website (my wife has been using Pinterest for ideas on what to do each night with our Elf on the Shelf!) will make this a must-own stock among institutional investors. To be fair, PINS has lost some upside power—despite the market advance, PINS has been churning near the 70 area for three weeks. That’s hardly a death knell (volume has really dried up, so it’s not like there are many sellers out there), and we’re more than willing to give PINS plenty of room to maneuver. Near term though, the stock is a bit of a tossup, so if you’re starting a new position, we’d suggest either going with a small stake or aiming for dips of three or four points.” BUY.

Qualcomm (QCOM), originally recommended by Mike Cintolo in Cabot Growth Investor and now recommended by Tom Hutchinson in Cabot Dividend Investor, has bounced slightly since selling off on the news of Apple developing its own modems (which Qualcomm currently provides)—and remains well above its 50-day moving average. In his update last week, Tom wrote, “There is a contract and Apple won’t be replacing QCOM modems soon. But the writing is on the wall. Apple is also working on developing its own 5G chip, and so is China. They just don’t have one yet, and QCOM remains the only game in town for now. But this was always the story. Eventually, Qualcomm will have to replace the revenues from its 5G chip exclusivity as competition ramps up. And it’s working on it. The market knew this. It just didn’t want to hear it. QCOM has since been recovering from the one-day plunge and is still on track to reap huge benefits from 5G over the next year and beyond.” BUY.

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Global Stocks Explorer, remains in a healthy uptrend, very close to its recent high. In his update last week, Carl wrote, “The company completed a secondary stock offering that raised at least $2.57 billion last week. This dilution, and the fact that the stock is up almost 400% in 2020, leading to profit taking, accounts for most of the weakness this past week. Last week the company announced it has been granted a license to operate a full-service digital bank there by the Monetary Authority of Singapore. I would again recommend that investors take some profits here but this story will likely continue into 2021. Sea is Southeast Asia’s biggest gaming, e-commerce and payments company, with more 40 million daily active users in a region populated by 655 million consumers.” HOLD.

Taiwan Semiconductor (TSM), originally recommended by Carl Delfeld of Cabot Global Stocks Explorer, has built a beautiful base right under its recent high of 107. In his update last week, Carl wrote, “The company, which dominates global chip making, benefits from secular trends of advanced computing and 5G going into next year and beyond. The chip-making business is both capital and brain intensive, with 75% of Taiwan Semiconductor’s staff having finished college, and half its workforce has postgraduate degrees. The company delivered an impressive return on equity of 31% in its most recent quarter. I maintain a buy rating on the stock.” BUY.

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is now part of the S&P 500 (as every media source on the planet seems to have reported), but what comes next? History says that after such an event the stock is likely to underperform the index over the next year, and in Tesla’s case I think that’s particularly likely, given the stock’s sevenfold gain this year and the great love for the stock that’s now evident. Plus, a look at the long-term chart reminds us that after TSLA’s first big run (mid-2012 to early 2014) the stock spent five and a half years building a base—the base that produced this sevenfold gain. Is it time for another long base, or worse? I think so. Yet long-term I’ll continue to hold because fundamentally the future is still bright. HOLD.

Trulieve (TCNNF), recommended by yours truly in Cabot Marijuana Investor, hit a record high last Thursday and has pulled back minimally since. Partial profit-taking is an option here (or least stops) because the sector has had a great year, but long-term, I remain bullish on both TCNNF and the sector as a whole. HOLD.

Uber (UBER), originally recommended by Mike Cintolo in Cabot Growth Investor, has pulled back from its record high of 36 hit two weeks ago but remains above its 50-day moving average at 45. In last week’s update he wrote, “UBER hit some resistance in the mid 50s and has softened a bit since then, likely due to both a $1 billion convertible (dilutive) note offering, as well as the IPO of Doordash (a competitor to Uber Eats), which (a) often causes money to slosh back and forth between the two companies for a bit, and (b) leads investors to focus on the downside of competition. But following the recent advance, this pullback looks more than reasonable, and fundamentally, there’s no question Uber is the leader in both name recognition and size when it comes to Rides and Delivery, both of which should grow nicely in the quarters ahead. A drop into the low 40s would have us changing our tune, but right here, we think UBER is near a good entry point if you’re not yet in.” BUY.

Virgin Galactic (SPCE), originally recommended by Carl Delfeld in Cabot Global Stocks Explorer, is a volatile stock in the short-term, but long-term prospects are huge. In last week’s update, Carl wrote, “SPCE shares hit a little turbulence, falling from 32 to 25, as the company aborted a planned test flight of its space craft last Saturday, delaying a key step needed for Richard Branson’s space tourism company to start commercial service. The test flight was delayed after the rocket motor ignition sequence was aborted. After a swift one-day sell-off, investors seemed to take this delay mostly in stride because the move confirmed the company’s cautious approach, and it has more than enough cash to weather any delays. As the only pure play space tourism stock in the public markets, this remains your best way to gain exposure to this megatrend. Feel free to take some profits if you bought near the recommendation level (7.34 a share). New or aggressive investors can buy at these levels ahead of 2021 developments.” BUY.

Zoom Video (ZM), originally recommended by Mike Cintolo in Cabot Top Ten Trader, has found support twice at the 375 level over the past two months, so I’ll continue to hold. Long-term fundamentals remain strong as video-conferencing is here to stay. HOLD.

The next Cabot Stock of the Week issue will be published on January 4, 2021.

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