Note: Because of the Juneteenth Holiday, which will close all markets next Monday, next week’s issue of Cabot Stock of the Week will be published on Tuesday June, 21.
And I think the market will likely be higher then, because the selling has been so pervasive in recent days that a bounce is overdue.

In the meantime, in continuing to manage our portfolio, we are selling Intel (INTC) today, mainly because it’s our biggest loss and the trend looks bad.

As for today’s recommendation, it’s a Chinese stock in the EV space that has fallen 76% from its high of last year and is ripe for a rebound.

Details in the issue.

Cabot Stock of the Week Issue: June 13, 2022

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The market is down big today on fears of inflation, rising rates and slow growth, but I continue to think that we’re close to a market bottom, in part because so much bad news has been incorporated into market valuations and in part because sentiment is so horrible. So while I will continue to counsel caution until we see a true uptrend, I do think selective buying now has the potential to pay off big as the market turns up again. Today’s stock is a high-potential growth stock that is down 76% from last year’s high; it was originally recommended by Carl Delfeld in Cabot Explorer, and here are Carl’s latest thoughts.

Nio, Inc. (NIO)
Some of you might remember Nio, which went on quite a ride several years ago. Based in Shanghai, Nio is one of the top five Chinese EV makers.

Nio reported a somewhat mixed quarter last week and I believe this is an opportunity since NIO stock is down about 40% so far in 2022. Nio reported a narrower-than-expected first-quarter loss and revenue that exceeded expectations, but with a contraction in gross margin. The Covid lockdown in Shanghai and supply chain and vehicle delivery challenges impacted operations, but the reopening of Shanghai this week means the company can get back up to speed.

The near mania over anything touching electric vehicles (EV) has long worn off, but the fundamentals of the industry have never looked stronger as gas prices have surged along with advances in technology. Furthermore, the working number used by most analysts had been for EV sales to go from 6 million in 2021 (double that of 2020) to 15 million in 2025 but I notice that this estimate has soared to 20 million.

I have always liked Nio and this is an excellent time to reconsider the stock as dynamic Shanghai comes out of its Covid lockdown. Meanwhile, the South China Morning Post reported last week that demand for electric cars looks strong as Covid restrictions began to lift. Nio’s deliveries shot up 38% in May.

Taking a step back, electric vehicles are a winning proposition for China because they help solve two big problems. First, the mandarins in Beijing have a powerful incentive to push EVs due to political pressures to reduce smog in major cities.

Second, EVs can generate significant jobs and help the country capture the commanding heights of the global economy, the key goal of its China 2025 strategic plan.

Already, China’s share of the global electric vehicle production has gone from 1.2% in 2013 to 22.6% in 2017 to 53% in 2021. Many analysts expect China to represent about half of global EV sales going forward, and they also have a commanding share of EV batteries and rare and strategic metals necessary to make EVs.

And China has a huge advantage over America that Japan never had—tremendous scale due to its population of 1.4 billion people. Keep in mind that the four largest cities in America; New York, Los Angeles, Chicago, and Houston have a combined population of about 18 million while Shanghai alone has a population of about 25 million!

Nio had previously mentioned expanding across Europe and it already has a solid presence in Norway. The company plans to open another Nio House in Norway soon. Further, it has plans to enter Netherlands, Germany, Denmark and Sweden this year. Beyond Europe, Nio plans to set up a factory in the United States.

Finally, Nio is competitive in the EV technology game along with Tesla. Its recently launched ET7 and ET5 models offer battery upgrades with ranges of 621 miles on a single charge—better than Tesla’s Model 3 and Model S. Furthermore, since 2020, it has offered consumers its battery-as-a-subscription service whereby buyers can swap batteries rather than wait for recharging. Nio receives a subscription fee for this service and locks in loyalty and recurring revenue.

Even better, Nio will begin manufacturing these battery packs in-house in 2024 and this is also the target date for Nio to roll out more affordable EVs priced at around $30,000 and $45,000. Though we don’t pay all that much attention to Wall Street analysts, it is nice to have their support. Tim Hsiao of Morgan Stanley has a price target of $31 and Vijay Rakesh is even more exuberant with a target of $55.

I think Nio is one of the top EV makers with massive growth potential and my target is for this stock to go from $16 to $40 over the next year if we have a decent market.

Current Recommendations

The addition of NIO to the portfolio brings it up to 16 stocks (from a maximum of 20), while the sale of Intel (INTC) (see below) takes it back to 15, and I’m comfortable with that in this market, particularly because so many of these stocks are lower risk and/or have great upside potential. Details below.

Changes Since Last Week’s Update
Intel Corporation (INTC) to Sell

Allbirds (BIRD), originally recommended by Tyler Laundon in Cabot Early Opportunities, makes footwear from sustainable natural materials and is growing at a good pace. But as with any low-priced stock, its percentage moves can be big, in either direction. Last week the stock had climbed above both its 25- and 50-day moving averages, and while it’s fallen back below them today, it’s still above its low of early May. HOLD

Bristol Myers Squibb (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, has been sold by Bruce, for a nice profit. But Mike Cintolo recently recommended it in Cabot Top Ten Trader for its strong chart and that’s our reason for continuing to hold—as long as the stock stays above 73.5. HOLD

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a lower-risk technology stock that has become a good value. In his latest update, Tom wrote, “Broadcom is a technology industry Goliath with $28 billion in annual revenues. It’s an icon of the technology revolution with roots that trace back over 50 years to the old AT&T/Bell Labs. The company has many category-leading products in crucial areas of semiconductors and infrastructure software solutions.

Broadcom essentially provides equipment that enables technology to function as we know it today. It provides components that enable networks to operate together and communicate with each other from the service provider all the way the end user and device. But there is a much simpler way to state this company’s importance in the industry; 90% of all internet traffic uses its systems.

The company is also in the process of a massive acquisition: It’s buying cloud software company VMware (VMW) for $61 billion. The stock fell initially after the deal leaked but has moved nicely higher since as the market has warmed to the idea. The sheer size of the deal is startling. But Broadcom can pull it off.

Broadcom has a long history of being a serial acquirer. Ordinarily, I’m not a huge fan of making a lot of acquisitions. But it’s hard to argue with success. AVGO has returned more than 2,000% over the last 10 years. The acquisition is also a big move away from the chip business, which is notoriously volatile. It bolsters Broadcom’s superior positioning for the future of more cloud-based solutions.

AVGO has also gotten cheap. It’s down 15% YTD and 17% from the high and sells at a forward price/earnings multiple well below the overall market.

There are two simple reasons for buying the stock. One, it is benefitting from the current environment as more businesses move online and into cloud-based applications. Two, it will get a huge benefit from the 5G rollout in both the short and longer term.

The company has blown away expectations in each of the last three quarters as it benefits mightily in the current environment. It has been growing earnings at nearly a 30% clip, which is stupendous for a company of this size. The dividend yield is currently around 2.9%. But the company grows the payout like crazy. The dividend has a 5-year compound annual growth rate of about 30%.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has dipped below its 200-day moving average again, but if history is any guide, it won’t stay there long. In his update last week, Tom wrote, “This infrastructure asset owner seems to trend higher at a snail’s pace no matter what the market does. It had spiked higher in April but then realized it’s BIP and pulled back to resume its torturously slow ascent. Business is solid. The transportation assets are rebounding as Covid restrictions have abated and the recent midstream energy acquisition is accretive and serving it well. BIP is ideally suited for this market. It’s a safe dividend payer with built-in inflation protections. Just hold on and collect the dividend. It should serve you well over time.” HOLD

Chevron (CVX) originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a new high last week and has pulled back with the market today. In his update last week, Tom wrote, “It’s been a tough year for the market but not for CVX. Energy is on fire and CVX is up over 50% YTD. Chevron is the most levered to oil prices of all the oil majors and that’s a good thing when prices continue to soar. The high prices and strong demand are directly related to profits. Chevron expects to grow earnings by 100% this year and is well on track so far. The stock is near the high and it begs the question: Is it time to take profits? We already took profits on half of the position, but it seems worth holding the other half. The great risk to energy prices remains to the upside. Plus, CVX still sells at a price/earnings ratio well below the overall market as well as its five-year average.” BUY

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, gapped down big a month ago after the company reported first-quarter results, but buyers immediately stepped in to support it, so even with today’s market wipeout, the stock is still above that May low. In his update last week, Bruce wrote, “With Cisco, we are stuck with a stock that has fully round-tripped from our initial recommendation at 41.32 to 64 and back to 45 or so. While frustrating, this is not the time to sell the stock. The fundamentals remain reasonably stable and likely to tick back upward, and profits seem likely to improve, as well. If we have a recession in global tech spending, Cisco will likely feel the downturn but not as severely as other technology companies due to the mission-critical nature of its products and services. The valuation is attractive at 9.2x EV/EBITDA and 13.4x earnings, the shares pay a sustainable 3.4% dividend yield, the balance sheet is very strong and Cisco holds a key role in the basic plumbing of technology systems even if its growth rate is only modest. We are keeping our Buy rating. CSCO shares have 46% upside to our 66 price target.” I’ll hold. HOLD

CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, fell through its 200-day moving average four weeks ago, then rallied back above it, but fell again as the market weakened, and now sits right at that May low. In his update last week, Carl wrote, “This is an excellent stock for a struggling economy in that CVS Health is one of the nation’s leading healthcare companies with 300,000 employees including more than 40,000 physicians, pharmacists, nurses, and nurse practitioners. It has almost 10,000 stores and is viewed in a different category than retail companies such as Target. Nearly 70% of Americans live within three miles of a CVS and it has more than 102 million pharmacy plan members. CVS stock is still a buy and my price target is 100.” BUY

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer, is the world’s leading manufacturer of computerized numerical control (CNC) devices that are used in machine tools and serve as the “brains” of industrial robots. But the young stock is not heavily supported by institutions yet, so trading is loose, as can be seen by the stock’s gaps down in recent days. In his update last week, Carl wrote, “Fanuc’s stock offers investors a great balance sheet, zero debt and $7 billion in cash. Fanuc is a high-quality, profitable play on a clear growth trend and my six-month price target for this conservative stock remains 25.” BUY

Intel (INTC), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has fallen to new lows in this wave of selling, and while Tom continues to tout its attractive valuation, I can’t rationalize holding this growing loss any longer. SELL

ON Semiconductor (ON), originally recommended by Mike Cintolo in Cabot Growth Investor and featured here two weeks ago, is a Phoenix-based manufacturer of semiconductors, focusing on intelligent power modules, power management chips and sensing semiconductors, which are perfectly suited for high-growth markets like electric and hybrid vehicles. In fact, NIO, today’s featured stock, is a customer. Also big are applications in energy infrastructure: fast charging for EVs, energy storage and solar power. The recent pullback has brought the stock down to all its moving averages. BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, nearly touched its old high three weeks ago, but the market has pulled it back down and it’s now sitting right on its 200-day moving average. In his update last week, Bruce wrote, “Organon was recently spun off from Merck. It specializes in patented women’s healthcare products and biosimilars, and also has a portfolio of mostly off-patent treatments. OGN shares have about 23% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.0% dividend yield.” BUY

Pfizer (PFE), originally recommended by Tyler Laundon in Cabot Early Opportunities, is coming out of a growth trough (due to the 2019 patent expiration of Lyrica) and re-igniting its growth engines courtesy of Covid-related products and transformative M&A. The stock has fallen below its 200-day moving average, but remains in an uptrend, and above its May low—and it yields 3.0%! BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, lost half its value as it fell from last November’s high to its low of three weeks ago and I think that’s enough. In fact, it remains above that low today. If you don’t own TSLA, I think you could buy it here; the long-term prospects for the company are great. However, I’m going to keep it rated hold, thinking there are better opportunities in lower-profile stocks. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, gapped up on big volume three weeks ago after reporting a great first quarter (unlike so many retail stocks) and has pulled back normally since. In fact, it’s still above its 200-day moving average. Last week I wrote, “If you haven’t bought yet, try to get it under 400” —and here’s your opportunity. I’ll keep it rated Hold. HOLD

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, has been building a base at 190 for nearly six months now, but it hasn’t been able to develop an uptrend yet. In his update last week, Tom wrote, “V has been knocked around because of economic growth concerns. But the company itself is killing it. The tremendous earnings boost it gets globally from the removal of Covid restrictions easily outweighs slower global growth or geopolitical uncertainty. Visa’s earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth. This stock is poised to move higher if the market continues to stabilize.” HOLD

The next Cabot Stock of the Week issue will be published on June 21, 2022.

Analyst Bio

Timothy Lutts

Timothy Lutts is Chairman and Chief Investment Strategist of Cabot Wealth Network, leading a dedicated team of professionals who serve individual investors with high-quality investment advice based on time-tested Cabot systems.

Timothy is also the chief analyst for Cabot Stock of the Week and chief analyst of Cabot Marijuana Investor.

Under his leadership, Cabot advisories have been honored numerous times by Hulbert Financial Digest, Dow Jones MarketWatch and Timer Digest as the top investment newsletters in the industry.

After working in this business for more than 33 years, Timothy says, “There are 8 things I know.

1. The business of investing can provide great rewards to those who work at it and are willing to learn. Those who refuse to learn will lose money.
2. To succeed as an investor in growth stocks, it’s best to buy when upside potential dwarfs downside potential, to cut losses short, and to let winners run.
3. To succeed as an investor in value stocks, it’s best to buy low and hold patiently, until the stock is fully valued.
4. Your greatest enemies are your own emotions and the daily news (generally bad) which distracts you from a long-term focus. Try to ignore them both.
5. On the other hand, use your imagination to consider how great companies might evolve, remembering the power of the unforeseeable and the incalculable. When it began renting DVDs by mail, did anyone imagine Netflix could become a leading producer of content? When it began selling books, did anyone imagine Amazon would eventually sell almost everything?
6. For over two centuries, the long trend of the markets has been up, reflecting the growth of asset values, and I recommend that you invest in synch with that trend. Your greatest ally is time.
7. However, there will always be bull markets and bear markets, and you can use these to your advantage, particularly if you pay close attention to both chart patterns and investor sentiment.
8. Lastly, have faith in the ability of intelligent, innovative men and women to adapt, as they always have, and to solve the problems of the future in ways that are unimaginable to people of today. Invest in these people when you can.

Timothy has appeared on numerous podiums as an investing expert, including Bloomberg TV and the World Money Show, led Investor’s Business Daily discussion groups and been interviewed by Dow Jones MarketWatch,TopStockAnalysts.com, VoiceAmerica.com, AOL Finance and numerous other business news organizations.