The market remains quite weak, and thus ripe for a major rally at any time. But until we see real strength, continued caution is advised.

In the meantime, you may want to nibble on today’s innovative consumer footwear stock, especially if you’re a customer.

As for the portfolio, we’re selling two stocks, cutting losses short so they don’t grow larger.

Note: next week’s issue will be published on Tuesday, due to the Memorial Day holiday.

Cabot Stock of the Week Issue: May 23, 2022

Market trends remain down, so I continue to recommend a cautious attitude, which means holding cash and favoring defensive stocks. As mentioned previously, conditions are ripe for a rebound—and maybe we’re seeing the start of it today—but until we actually see a new uptrend, any aggressive buying is no better than speculation. Today’s recommendation is a small company with a mass-market product and good growth prospects whose stock just came public in November, and is vastly cheaper now. It was originally recommended by Tyler Laundon in Cabot Early Opportunities and here are Tyler’s latest thoughts.

Allbirds (BIRD)
Allbirds is a neat little footwear and apparel company that was founded in 2015 and currently has a market cap near $650 million.

The company just came public at 15 last November and popped 92% the first day. But the stock has since been pulled down well below the IPO price by the general malaise in growth stocks.

With shares having sold off so much (86% below the all-time high and 70% below the IPO price) but the growth story more or less intact (23% to 30% revenue growth expected over the coming years), I think it’s worth taking a swing here.

The backstory is that Allbirds is extremely focused on sustainability, something investors and consumers are caring more and more about.

The company uses materials that are sustainably grown/harvested or recycled (merino wool, eucalyptus tree, sugar cane, recycled plastic bottles, recycled nylon, castor bean oil and more) and which still allow it to develop comfortable and in-style products. Its sneakers are estimated to have a 30% lower carbon footprint than the average sneaker.

Allbirds’ first hit was the Wool Runner shoe, which enjoyed a publicity boost when Time magazine called it the world’s most comfortable shoe. Other innovations include the Trail Runner SWT performance shoe and several apparel lines, such as the Wool Cardi and the R&R Sweatshirt and Sweatpant. And the company just released another potential hit, the Tree Flyer, a performance-oriented sneaker.

The company has a direct-to-consumer retail distribution strategy. This helps it control both the customer experience and pricing. Over 95% of sales are completed at full price.

Around 80% of sales are generated online, but Allbirds is also building out physical stores. It has 39 open now and expects to end the year with closer to 52 stores, then have around 73 open by the end of 2023. Over time the mix of online to store revenue should move from 80/20 to closer to 60/40.

Roughly two-thirds of new stores will be in the U.S., implying international revenue of 20% to 25% of total sales. That said, in Q1 2022 (reported two weeks ago) management talked about how demand in Europe has been slowed by the Ukraine war and sales in China (second largest market outside of the U.S.) have been hurt by lockdowns. While momentum in the EU picked up in recent weeks and China should be a temporary situation, there are clearly some moving pieces in international markets.

The bottom line from Q1 2022 was that revenue was up 26% to $63 million (slight beat) and GAAP EPS came in at -$0.15 (slight miss). Management lowered their full-year guidance, citing supply chain cost pressures and international market turbulence.

Still, revenue growth should be around 23% this year then accelerate toward 28% in 2023 and tick up from there as more physical stores are added. Management also reiterated a commitment to EBITDA break-even next year.

BIRD came public on November 3 at 15 and jumped 93% to 28.9 the first day. The stock was back near its IPO price in December, had a quick rally to 19.7 right before the end of 2021, then slid all the way to 5 by March 15. BIRD has been back in the 6s a few times since then, but the most notable move was a drop to 3.99 on May 11 following the earnings report. There’s a chance that was a bottom for the stock as it was an incredibly volatile period.

BIRD has linked together several positive days since the post-earnings selloff and was able to hold above its previous low last week. That’s saying something as many consumer retail stocks were absolutely demolished. Calling a bottom is a fool’s errand but with a good story and numbers there’s ample potential for BIRD to be a leader when the market turns around.

Current Recommendations

I’ve long preached that cutting losses short is a key practice for investors in growth stocks, particularly in bear markets like the one we’re in—so making the decision to cut our loss short in PTLO today is relatively easy. But making the decision to hold or sell stocks that are supposedly good values is more difficult, and today I’ve wrestled with decisions on F, CSCO and INTC, in the end deciding that F is not truly a value stock, but that CSCO and INTC still are. Details below.

Big Lots (BIG), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, operates 1,431 stores across 47 states and generates about $6.1 billion in annual revenues. In last week’s update, Bruce wrote, “Management guided for weak first-quarter results and investors expect the full year guidance may be too high, as well. On conservative fiscal 2022 (ending in January 2023) estimates, the shares currently trade at 3.1x EV/EBITDA and 7.3x per-share earnings. These multiples imply a dour recessionary future for the company. The EV/EBITDA multiple is sharply below an average of perhaps 5x-9x for its peers. Even adjusting for scale and quality, a discount of this size for BIG is unwarranted. Big Lots is scheduled to report earnings pre-market open on Friday, May 27, when many investors may be away or less attentive in advance of the long Memorial Day weekend. We hope this timing doesn’t indicate bad news is coming, but we are aware of this risk. Big Lots shares have 38% upside to our 45 price target. The dividend produces an attractive 3.7% yield.” BUY

Bristol-Myers Squibb (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Growth/Income Portfolio, has been beating the market handily this year and hit another new high last week! In his update last week, Bruce wrote, “Berkshire Hathaway sold the balance of its stake in Bristol-Myers in the first quarter of 2022. We appreciate their attention to value. As BMY is now trading just above our 78 price target, we are inclined to be a bit patient before selling. As such, we are moving the shares to Hold.” Generally, I would follow Bruce’s lead and also move to Hold, but Mike Cintolo recently had the stock rated Buy in Cabot Top Ten Trader because of its strong momentum, so I’ll leave it on buy for momentum traders. BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, plunged through its 200-day moving average as technology stocks were hit hard last week. In his update last week, Tom wrote, “The crummy tech sector market is obscuring the fact that Broadcom is growing earnings very strongly and will likely continue to do so for some time. Many technology stocks have now been oversold and we are still amid a technological revolution. Things might get worse before they get better, but stocks like AVGO are likely to be a lot higher in six months. AVGO will have its day in the sun again and patience should be rewarded.” HOLD

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, fell through its 200-day moving average two weeks ago but is back above it now and heading higher again. In his update last week, Tom wrote, “Recent selling has taken everything down. Even a defensive company with bankable and growing earnings with a strong dividend hasn’t been safe. The stock is down about 12% from the recent high. Earnings were up 3% on a per share basis but 22% excluding weather-related effects for last year’s quarter. Everything is still solid. (This security generates a K-1 form at tax time).” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, reported first-quarter results last Wednesday and the stock gapped down in response on Thursday, as investors were disappointed at the lack of growth—and fearful that the company might even shrink. But the stock is very cheap! In his update last week, Bruce wrote, “The company is highly profitable, generates vast cash flow (which it returns to shareholders through dividends and buybacks) and has a very strong balance sheet. CSCO shares have 30% upside to our 66 price target. The dividend yield is an attractive 3.0%.” HOLD

CVS Health (CVS), originally recommended by Carl Delfeld in Cabot Explorer, fell through its 200-day moving average last week but is back up to the average today. In his update last week, Carl wrote, “CVS stock remains a conservative buy as it sells for less than 12 times forward earnings.” BUY

Fanuc (FANUY), originally recommended by Carl Delfeld in Cabot Explorer and featured here last week, 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. The Japanese company has more than 240 joint ventures and offices in over 46 countries with a commanding 65% share of the world market, and prospects for slow and steady growth are good as the “robotization” of labor continues. The stock has only been trading on the OTC market since the end of March, so its history is short, but it’s up strongly from its early May low, with gaps up both Friday and today. If you haven’t bought yet, I suggest waiting for a pullback. Carl’s six-month target for this high-quality conservative stock is 25. BUY

Ford Motor (F), originally recommended by Carl Delfeld in Cabot Explorer, last week hit a new low for the year so the stock is definitely not strong. Part of Carl’s argument for holding is that Ford’s valuation is low relative to other electric vehicle companies, and that is true. But Ford is still largely a traditional automaker, with traditional assets that will slowly lose value as the market pivots to electric vehicles, and I fear that the stock could continue to fall as the market reappraises those assets. I’m cutting the loss short here by selling. SELL

Intel (INTC), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a new low last week, so this great company is now an even better value. In his update last week, Tom wrote, “It’s been an awful year for technology, but INTC is down less than the sector. That’s because the stock crashed before the sector selloff and didn’t have any excess to burn off. INTC is oversold and undervalued ahead of what is likely to be several strong years for earnings growth. Things could get worse in the near term, but I like the stock very much as a longer-term play.” BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor for his Buy Low Opportunities Portfolio, has put together four strong weeks and is nearing its old high. In his update last week, Bruce wrote, “Organon was recently spun off from Merck. OGN shares have about 26% upside to our 46 price target. The shares continue to trade at a remarkably low valuation while offering an attractive 3.1% 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 is now trading above all its moving averages, and it yields 3.2%! BUY

Portillo’s (PTLO), originally recommended by Tyler Laundon in Cabot Early Opportunities, is a Chicago-based restaurant chain that came public last October and is planning on using the proceeds from that offering to expand from its current nine states to many more. But the stock continues to suffer from a lack of buying power, and our loss has now grown so large that I must cut it short here. SELL

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, fell to a new low for the year last week, dragged down by both the weak market and news that the lockdowns in China are throttling sales in that country. Still, I’ve got it on a long-term hold, thinking that while the automobile aspect of the business may be overvalued, the company has great, underappreciated growth potential in the energy business. HOLD

Ulta Beauty (ULTA), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, is the largest beauty retailer in the U.S., with north of 1,300 stores as well as more than 100 “store in store” locations at certain Targets. Yet the stock gapped down through its 200-day moving average in last week’s punishing market. As a momentum stock, it’s a potential sell here, yet I’m going to hold because there’s support in this area, because the company has a dependable long-term growth story, and because I expect to get more clarity on that when management reports first-quarter results on May 26. Downgrade to 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, and looks like it may be starting a new uptrend. In his update last week, Tom wrote, “Growth concerns damage this stock whenever the market selling gets intense. But this stock should recover and remain strong this year. The tremendous earnings boost it gets globally from the removal of Covid restrictions easily outweighs slower global growth of geopolitical uncertainty. Visa’s earnings blew away expectations with YOY revenue growth of 25% and 30% earnings growth.” HOLD

The next Cabot Stock of the Week issue will be published on May 31, 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.