The market was hit hard again last week, so all trends remain down, and increased caution is still advised.

This week I’m selling two stocks that have weakened since reporting first-quarter results last week, but I’m also upgrading one to buy!

As for the new recommendation, it’s a well-known retailer with a slow but solid growth story whose stock is cheap.

Details inside.

Cabot Stock of the Week Issue: May 9, 2022

Market trends remain down, so I continue to recommend a cautious attitude, which means holding cash and favoring defensive stocks with minimal downside potential—like today’s recommendation. But before I get to that, I do want to mention that there are growing signs—mainly from numerous indicators that show that the broad market is not performing as badly as the widely followed indexes—that the market bottom may be near. So when the buyers do take control, I’ll happily recommend more exciting aggressive stocks. Until then, however, you’re safer (and may make money!) in today’s low-risk recommendation. The stock was originally recommended by Mike Cintolo in Cabot Top Ten Trader and here are Mike’s latest thoughts.

Ulta Beauty (ULTA)
In recent writings and videos, I’ve said that, while this market environment is bad, it isn’t 2008. Beyond the numbers (indexes were down 50%-plus back then), the fact is that during the last few months of that bear market, there was nothing doing well, and I mean nothing. Today, though, while the action is horrible, you can still find a few things doing well, including energy-related names and even some defensive growth stocks—those with reasonable valuations, dependable businesses and a bit of growth thrown in.

That’s the gist with Ulta Beauty; it’s not the 20%-plus grower it was a few years ago, but it has a dependable long-term growth story and proven management that gives big investors confidence to hold what they own, despite the bearish action in the market.

Ulta 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. The big attraction here is that Ulta provides whatever you’re looking for when it comes to beauty products, offering a mind-boggling 25,000 products across 600 brands, running the gamut from mass-market items to specialty (higher-priced) ones. Cosmetics make up 43% of sales, followed by haircare (20%), skincare (17%) and fragrances (14%), and it even offers some services at many locations, which along with accessories, make up the rest of the pie.

All in all, Ulta goes after so-called beauty enthusiasts, which the firm believes includes more than half of women who account for three quarters of all beauty spend. Indeed, the company’s loyalty program is one of the more successful in the world of retail, with 37 million members that account for 95% of Ulta’s sales!

Despite its leading position, Ulta has plenty of room for expansion, and that’s because most beauty product sales still happen at non-specialty locations; in fact, specialty operations like Ulta make up just 12% of the market, with places like drug stores (13%) and grocery stores (24%!) accounting for larger market shares. But Ulta has been taking share from those locations for years, and there’s no reason its store footprint and top-notch e-commerce business won’t continue that trend.

Business-wise, Ulta cranked out steady growth for years, and while the pandemic (store closures, etc.) threw a wrench into results for a while, the trend is very much back in force; last year, sales were up 16.6% from 2019 (8% compound growth over two years), while earnings were up a whopping 50% from two years prior. Growth is expected to slow now that the turnaround has run its course, but the top brass is guiding for mid- to upper-single-digit sales growth, modest margin expansion and low double-digit earnings growth annually through 2024. We’ll get the next update on May 26, when the firm will release quarterly results, with analysts looking for 10%-ish sales and earnings growth from a year ago.

As for the stock, ULTA isn’t setting the world on fire, but it’s holding all of its gains from 2020 and 2021, which is more than most stocks can say. Shares rallied as high as 415 last August, leading to a multi-month choppy phase before shares finally gave up ground with the market in January. But that was the low (near 336), with ULTA etching higher lows since then (341 in February, 350 in March, and 380 so far during this leg down) even as the market has done the opposite. The stock has been dragged down of late, but there should be plenty of support in and around this area (200-day line, prior price lows in the 370 range, etc.).

Current Recommendations

Changes Since Last Week’s Update
Arista Networks (ANET) to Sell
Bristol Myers Squibb (BMY) to Buy
Cameco (CCJ) to Sell

Arista Networks (ANET), previously recommended by Mike Cintolo in Cabot Growth Investor, reported first-quarter results last week, and Mike wrote, “…there were two takeaways: First and foremost, demand for its wares is excellent and should remain that way for many quarters—but, second, the supply chain issues aren’t getting better, which could crimp near-term margins. As for the specifics, the headline numbers (sales up 31%, earnings up 35%) and Q2 outlook were both fine, coming in nicely above expectations thanks in part to continued share gains from Cisco and others. However, the conference call revealed that some suppliers are ‘de-committing’ on orders, often the week that they’re supposed to be delivered—resulting in Arista having to pay up for supplies elsewhere. That’s not ideal, but (a) the firm is hiking some prices to offset higher costs, and (b) clients are still ordering like mad, with purchase commitments totaling $4.3 billion at the end of Q1, up from $2.8 billion at year end, with some of those orders for 2023 and even 2024! Big picture, there’s not much doubt that Arista is going to grow nicely for a long time to come, though the near term could be more challenging. Not surprisingly in this market environment, ANET has taken a hit after the report, moving below its 200-day line—though still barely holding near its lows from this year. With so much cash and a good fundamental outlook, we’ll give ANET a smidge more rope, but shares need to show support right quick.” Last week I wrote that we were keeping the stock on a tight leash and today’s breakdown, through all recent support, combined with our growing loss, means it’s time to sell. SELL

Big Lots (BIG), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor and featured here last week, operates 1,431 stores across 47 states and generates about $6.1 billion in annual revenues. In last week’s update, Bruce wrote, “We are intrigued enough by the shares’ remarkably low valuation to make this stock a Buy. 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. From a historical perspective, Big Lots’ shares trade unchanged from their 2007 price level and are down 50% from their stimulus-boosted peak at over 70 last year.

Big Lots’ balance sheet carries only $4 million of debt compared to $54 million in cash. While the balance sheet ebbs and flows with its inventory needs, the company is operated primarily as a debt-free business. This provides Big Lots with considerable endurance and flexibility. We would rate the management and board quality as ‘good enough.’ Big Lots generates positive free cash flow that is strong enough to provide a reasonably sustainable $0.30/share quarterly dividend and repurchase its own shares. Big Lots shares have 39% 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 was up last week! In his update last week, Bruce wrote, “On April 29, Bristol-Myers reported first-quarter adjusted earnings of $1.96/share, up 13% from a year ago and about 4% above the consensus estimate. Sales rose 5% from a year ago (up 7% on a local market basis which excludes currency changes) and were about 3% above estimates. The company continues to put up respectable and positive numbers even as sales of patent-expired Revlimid fell 5% and sales of new products were a bit lower than we’d like to see.

The company trimmed its revenue guidance from +2% to flat due to modestly faster-than-expected decay of Revlimid and Abraxane sales. Profit guidance was reduced by 3% due entirely to re-including some costs in the adjusted earnings – but lower earnings are, still, lower earnings. We note that other than these ‘new’ costs, the lower sales are not expected to hurt earnings, as Bristol is stepping up its cost-savings initiative. All-in, a reasonable quarter that continues to support our thesis.

The company’s gross profit margin expanded on the higher sales, but this was partly offset by higher overhead costs. Cash net of debt slipped about 9% in the quarter as the company repurchased over $4 billion (about 2.5% of the share count) and refinanced some of its debt. An additional $750 million in repurchases will be completed over the next two quarters.

BMY shares trade just below our 78 price target. Valuation remains reasonable compared to its peers and the company seems to be executing on its strategy while also maintaining a solid financial posture, so we are inclined to let the stock at least reach 78 before deciding on what changes to make to the rating and/or price target.”

Additionally, BMY was recommend in Cabot Top Ten Trader last week, where Mike Cintolo, after recapping the fundamental story, wrote, “BMY isn’t the fastest moving stock, but it could be entering a long-term leg higher. Shares broke over resistance in the highs 60s in February, cracking a ceiling that has blocked BMY since the 2018, and it’s now testing all-time highs from 2016. Moreover, after the persistent rally since the November low, BMY has leveled off a bit, including a little shakeout after last week’s earnings report. We’re OK taking a swing at it here with a relatively tight stop.”

I’ve seen this happen before, where Mike gets interested in a stock just as Bruce is deliberating whether to take profits or hang on, and while there’s no guarantee of success, I can say the odds are good. So I’ll upgrade to Buy. BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, bounced off its 200-day moving average last week and remains above it today. In his update last week, Tom wrote, “This exceptional technology stalwart is a good company that is hanging out with the wrong crowd right now. 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. It 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, also bounced off its 200-day moving average last week and remains above it today, which is encouraging. In his update last week, Tom wrote, “BIP reported earnings today that were solid, and the stock is flat for the day so far. 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 K1 form at tax time).” HOLD

Cameco (CCJ), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is the world’s second-largest uranium producer, and attractive fundamentally as the world turns away from Russian energy sources and toward green energy in particular to combat climate change. But first-quarter results were reported last Thursday, and the stock has been falling since, cutting through its 200-day moving average and handing us a quick loss. Mike recommended selling last Friday and I’ll do the same today. SELL

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, was previously the portfolio’s weakest stock, but while others have worsened (see today’s sells) CSCO seems to have support at 49, where it bottomed a week ago. In his update last week, Bruce wrote, “CSCO shares have 32% 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, bounced off its 200-day moving average last week and is higher today. In his update last week, Carl wrote, “Shares were up 4.8% yesterday to reach 100 as it reported that first-quarter sales were up 11%. The company raised its 2022 earnings outlook slightly, now expecting per-share earnings between $8.20 and $8.40. CVS reported that it expects demand for Covid testing and vaccines to continue to lift sales throughout 2023. CVS stock remains a conservative buy as it sells for about 11 times forward earnings – versus 19 times for the S&P 500.” BUY

Ford Motor (F), originally recommended by Carl Delfeld in Cabot Explorer, remains below all its moving averages so the stock is definitely not strong. On the other hand, Carl says it’s a great bargain. In his update last week, he wrote, “F shares were up almost a point this week as the company reported mixed April sales reflecting its transition to a greater proportion of sales coming from electric vehicles. Total U.S. sales fell 10.5% with trucks down 17.8%, SUVs up 2.7%, and electric vehicles up 50.2%. Electrified sales represented 9.5% of total sales. Within Electrified, Mustang Mach-E sales were up 95%.

Production is underway on the F-150 Lightning EV at the Rouge Electric Vehicle Center, within the historic Rouge Complex in Michigan, which is where founder Henry Ford perfected the moving assembly line. By 2030, Ford expects half of its global sales to be fully electric vehicles and targets $50 billion in EV investment through 2026. Trading at less than four times trailing earnings, this is perhaps the best value of the leading EV makers so I encourage you to buy if you have not already done so.” BUY

Intel (INTC), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, bottomed at 44 in February and March and is testing that level again today. In his update last week, Tom wrote, “Intel pays a great dividend and has limited downside. Plus, technology stocks are getting oversold and could rally in the months ahead. I like INTC in this market.” BUY

Organon (OGN), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, has 33% upside to Bruce’s target of 46. And it’s trending the right way, thanks in part to first-quarter results that were released last Thursday morning (after Bruce had written his update). I’ll relay his comments next week, but the important point is that the stock immediately rallied, on good volume, so trends remain positive. The stock now yields 3.2%. 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 trading just under its 200-day moving average, so looks like a fine buy here. And it yields 3.3%! 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. First-quarter results were reported last Thursday and were appreciated by both the market (the stock was up) and Tyler, who wrote, “Portillo missed by $950,000 [revenues were $134.5 million] while GAAP EPS of $0.00 beat by $0.04. The chain is selling more food at more stores and new stores are operating well (Florida and Texas discussed specifically on the call). It’s seeing some food inflation but offsetting that with price increases while dealing with higher labor costs with efficiency initiatives. We’ll see how it all goes but management sounds quite confident and the stock price seems beat-up enough to allow a comfortable margin of safety for new buyers in what should be a solid growth story.” BUY

TaskUs (TASK), originally recommended by Tyler Laundon in Cabot Early Opportunities, is due to release first-quarter results after the market close today, and while I’m not particularly optimistic, given the trends in the technology world and the action of the stock, I do recognize that the stock has a long base at 26, and Tyler likes the company’s growth prospects. So I’ll wait. And if the stock is up in response to the report, you can buy. BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is another stock trading near its 200-day moving average. 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—but if you don’t own it yet and you want some, this looks like a decent entry point. HOLD

Visa (V), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, was up last week after releasing its quarterly report, but down with the market this morning, though there’s good support around 190 that should contain it. In his update last week, Tom wrote, “Visa reported earnings this week that impressed the market, and the stock rallied 8% on the day of the announcement. The stock blew away expectations with YOY revenue growth of 25% and 30% earnings growth. The reason for the great quarter is the reason V was purchased in the portfolio. Global business is booming as covid restrictions have come down and travel has returned. U.S. business has already recovered, and the global side was the missing piece of the puzzle. The global business is so strong it overwhelmed higher costs and geopolitical uncertainty from the war. Of course, the stock has pulled back since as this is still a fearful market. The company raised this year’s guidance and should have good days ahead.” HOLD

The next Cabot Stock of the Week issue will be published on May 16, 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.