December 13, 2021

Last week we sold four stocks from the portfolio, clearing away the weakest stocks and giving us some breathing room (and cash), so this week there is no need for more selling But I do have two downgrades to hold (CSCO and SE).

As for today’s recommendation, it’s a household name whose stock is temporarily on sale—and you get a nice dividend too.

Details inside.

New Recommendation

The S&P 500 closed at a record high just last Friday, so by that measure, the market is strong. But away from the big well-known stocks, the market’s health remains suspect, with high-flying growth stocks in particular still struggling to get back in an uptrend. All told, I’m still bullish, but cautious, and aware that the weakness could easily spread to the leading stocks as well. But I have no reservation about today’s recommendation, which is a solid stock that’s become temporarily cheap. The stock was recently recommended by Tom Hutchinson of Cabot Dividend Investor and here are Tom’s latest thoughts.

Visa (V)
Visa is a global payments technology company that provides a digital currency instead of cash and checks to individuals and businesses in more than 200 countries and over 160 currencies. It is the largest payment processor in the world. Its systems can process 65,000 transactions per second.

It’s natural to refer to Visa as a credit card company. But that isn’t really true because Visa doesn’t loan money. You can charge things with a Visa card instead of using a debit card, but it is the sponsoring bank that loans the money, not Visa. It’s the bank’s problem if someone can’t pay. Visa simply collects a fee on any debit, credit or mobile transaction. It rings the register every time individuals and business all over the world make a digital transaction with its cards.

That’s a good place to be because the global trend toward cashless transactions is undeniable and unstoppable. In fact, digital payments surpassed cash transactions on a global basis a few years ago. The trend will accelerate going forward and Visa is in the ideal position to benefit.

This is a great stock to own over the long term. It has a commanding market share in the electronics payment industry that still has plenty of runway for growth. Visa’s size and scale should allow the company to improve its already sizable margins. The stock performance reflects these facts. V stock returned more than 856% over the last 10 years, more than double the performance of the S&P 500 over the same period.

But the stock has underperformed lately. V recently pulled back over 40% from the 52-week high. It has since regained about half of that loss, but it is still well below the high. And now it has some upward momentum. That’s what makes it a great opportunity now.

There are several reasons for the pullback. First, although the stock gained a lot after the pandemic low, it has only kept pace with the overall market. Earnings recovered after the pandemic, but not as much as at some other companies. The reason is that Visa does a lot of international business, and the recovery overseas has not kept pace with the American recovery. The very profitable cross-border transactions have been particularly hard hit because of continuing travel restrictions.

In November, V sold off because Amazon (AMZN) announced it will stop accepting Visa credit cards issued in the U.K. starting in late January 2022. The skirmish is regarding high interchange fees that increased as European Union regulations stopped applying because of Brexit. Then the stock took another hit because of fears of further lockdowns and travel restrictions from the Omicron virus.

It seems at this point that the virus is unlikely to prompt a new wave of strict lockdowns. And the other two problems are overblown. First, the international economy will rebound. In fact, much of the rebound overseas still lies ahead. Travel will return. It always does. The U.K. issue is incredibly minor. It doesn’t even apply to debit cards and the revenue loss will be tiny. The real risk is that other companies might also do the same thing. But that’s highly unlikely. The problem is U.K.-specific, and few companies can afford to cut out Visa.

This stock is a monster performer of years past with every reason to believe that the outperformance will continue in the future. In fact, 35 of the 39 analysts who cover the stock rate it a “buy” or “strong buy” with an average price target of $274.50 per share. That’s about 30% higher than the current price.

In a high-priced market, V still sells at valuation levels close to the five-year average, a period over which V provided average annual returns of over 22%. V is a great stock for the longer term. The fact that prospects line up this well in the short term make this an exceptional buying opportunity.

Current Recommendations and Changes

Current Recommendations

After selling four stocks last week, I have no sells today, but I am moving two of our stocks to Hold, one because it’s near its target, and the other because it’s weakened further. Details below.

Changes
Cisco Systems (CSCO) to Hold
Sea, Ltd. (SE) to Hold

Ambarella (AMBA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, makes state-of-the-art computer vision chips that are in great demand by intelligent vision systems. The stock closed at a record high last Wednesday, and has pulled back minimally since. BUY

Bristol Myers Squibb Company (BMY), originally recommended by Bruce Kaser in Cabot Undervalued Stocks Advisor, and featured here four weeks ago, is back up to where we bought it, and is almost certainly going higher. In his update last week, Bruce wrote, “BMY shares sell at a low valuation due to worries over patent expirations for Revlimid (starting in 2022) and Opdivo and Eliquis (starting in 2026). However, the company is working to replace the eventual revenue losses by developing its robust product pipeline while also acquiring new treatments (notably with its acquisitions of Celgene and MyoKardia), and by signing agreements with generics competitors to forestall their competitive entry. BMY shares have about 36% upside to our 78 price target. Valuation remains remarkably low at 7.3x estimated 2022 earnings, compared to 11x or better for its major peer companies. The stock’s 6.7x EV/EBITDA multiple is similarly cheap, compared to 9-10x or better for peers.” And then this morning, the company announced that the dividend would be raised 10.2%, from a quarterly rate of $0.49 per share to $0.54 per share (marking the 13th consecutive fiscal year that the company has increased its dividend) and that the company would repurchase an additional $15 billion of its own stock. The stock was up on the news. BUY

Broadcom (AVGO), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, announced excellent third-quarter results last Thursday after the market close. Revenues were $7.4 billion, up 15% from the year before, while EPS was $7.81, up 23% from the year before, both exceeding expectations. Additionally, management raised the dividend 14% to $4.10 per share, and authorized a $10 billion share repurchase program. I’ll pass on Tom’s comments on the results next week, but the market has already commented (very loudly), gapping the stock up on heavy volume on Friday. BUY

Brookfield Infrastructure Partners (BIP), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, hit a record high five weeks ago and has pulled back normally since. In his latest update, Tom wrote, “This infrastructure partnership is in an unmistakable longer-term uptrend, albeit a bouncy one. It soars to new highs and then pulls back, rinse and repeat. At this point, it appears to have hit the low in the retreat from recent highs and is now on its way back up. But that’s all short-term noise. It is a great defensive business and earnings should accelerate in the quarters ahead because of a recent acquisition. Let’s just keep bouncing higher with this one.” HOLD

Cisco Systems (CSCO), originally recommended by Bruce Kaser in the Growth/Income Portfolio of Cabot Undervalued Stocks Advisor, gapped down through its 200-day moving average four weeks ago, but it’s been climbing back ever since and is now close to equaling its August high. In his latest update, Bruce wrote, “Cisco is facing revenue pressure as customers migrate to the cloud and thus need less of Cisco’s equipment and one-stop-shop services. Cisco’s prospects are starting to improve under a relatively new CEO, who is shifting Cisco toward a software and subscription model and is rolling out new products, helped by its strong reputation and entrenched position within its customers’ infrastructure. CSCO shares have about 3% upside to our 60 price target and offer a 2.6% dividend yield.” That’s all good, but in recognition of the thin profit potential from here, I’ll now downgrade it to hold. HOLD

Coinbase (COIN), originally recommended by Tyler Laundon in Cabot Early Opportunities, and featured here just two weeks ago, was expected to be a volatile stock, and it’s quickly met those expectations—by dropping like a stone. Today it’s our largest loss, and thus a candidate for sale—remember my lessons about cutting losses short. At the same time, the stock is near support, and with volatile stocks like this I tend to tolerate a loss of up to 30%. So I’m once again sticking with it. And if you haven’t bought yet, you can buy here. As the exchange where all the major cryptocurrencies are traded, the company has great prospects for growth as the industry expands. BUY

Floor & Décor (FND), originally recommended in Cabot Growth Investor by Mike Cintolo, has slipped a little from its little base in the 130 area, but we can’t count it out yet. In his update last week, Mike wrote, “FND hasn’t been exciting recently, but we’re viewing that as a good thing—the stock has actually closed relatively tightly the past few weeks even as the market went haywire. Moreover, it doesn’t hurt that the housing-related sector has perked up, too. Still, we need to see FND get a head of steam going before concluding the next upmove has begun—right here, we’ll hold and continue to follow our plan, with a mental stop in the 120 area.” HOLD

HubSpot (HUBS), originally recommended by Tyler Laundon in Cabot Early Opportunities and then by Mike Cintolo in Cabot Top Ten Trader, fell below its 50-day moving average (as well as the 700 level) on big volume two weeks ago but quickly rallied back and now I’m watching to see if that level holds. If not, we’ll sell and move on, but right now, the stock can still be judged healthy—and business prospects are great for the company. HOLD

Marvell Technology (MRVL), originally recommended by Carl Delfeld in Cabot Explorer, continued even higher last week after gapping up the prior week on an outstanding quarterly report. In his update last week, Carl wrote, “’Shares increased from 71 to 91 after the company recently reported that adjusted earnings soared 72% on a 61% increase in sales. In addition, its data center revenue skyrocketed 109% to $500 million, gross margins hit a record 34.5%, and the firm paid down $151 million in long-term debt.” Additionally, the stock was recommended by Mike Cintolo in Cabot Top Ten Trader, where he wrote, “Marvell just reaffirmed its leadership role in the fabless chip design space with yet another blowout quarter. In Q3, the semiconductor firm posted earnings of 43 cents a share, which were an eye-opening 72% above the year-ago level and beat estimates by four cents (the reason for the strength). Revenue of $1.2 billion was 61% higher and surprised by 5%, driven by record growth across all five of its major segments. Enterprise networking sales rose 56%, along with 28% and 20% growth, respectively, for the carrier infrastructure and consumer segments. Data center revenue grew by over 100%, driven by ‘robust demand’ from cloud customers (this year’s purchase of Inphi was big for this segment). The cloud area is Marvell’s most diverse end market with multiple product lines contributing to the growth, including SSD and HDD controllers and ethernet switches, and management emphasized the products are benefiting from new product ramps, which Marvell expects will drive sustained growth. In the auto/industrial segment, Q3 revenue also more than doubled and exceeded the company’s own guidance as the company said it’s benefiting from quick adoption of its ethernet solutions by auto OEMs and which have higher chip content. Marvell sees a multi-hundred-million-dollar revenue stream from its auto ethernet business in the next few years and also believes its next multibillion-dollar opportunity is in automotive computing for autonomous and semi-autonomous vehicles, as well as auto electrification. Bottom line, Marvell is playing in a bunch of fast-growing areas, and Wall Street thinks the good times will continue—after a 68% bump this year, analysts see the firm’s bottom line leaping another 43% in 2022.” BUY

Sea, Ltd. (SE), originally recommended by Mike Cintolo in Cabot Top Ten Trader, and then Carl Delfeld in Cabot Explorer, has fallen 39% from its high in a just eight weeks, but falling trading volumes and logic tell us this correction should end soon. In his update last week, Carl wrote, “Shares have been underperforming the overall market recently… No news except some sense that there’s a bit of a slowing of growth despite the fact that since late 2016 revenue has grown some 2,800%. SE has been a great stock and I have encouraged taking partial profits during its steady rise. Sea still has room for considerable growth as Southeast Asia’s booming internet economy is set to double to $363 billion by 2025, eclipsing the previous forecast of $300 billion, according to research from Google, Temasek Holdings, and Bain. I see further potential upside to Sea because of strong momentum in its gaming portfolio and increasing fintech revenues.” Long-term owners who’ve taken profits can sit tightly here, confident that the stock will eventually bottom and rebound. But I don’t think the stock deserves a buy rating here, so I’ll downgrade to Hold. HOLD

Sensata Technologies (ST), originally recommended by Bruce Kaser for the Buy Low Opportunities Portfolio of Cabot Undervalued Stocks Advisor, first topped 60 in early January, and since then has been trading in a range between 55 and 60, preparing for its next advance. In his update last week, Bruce wrote, “Sensata is a $3.8 billion (revenues) producer of nearly 47,000 highly engineered sensors used by automotive (60% of revenues), heavy vehicle, industrial and aerospace customers. About two-thirds of its revenues are generated outside of the United States, with China producing about 21%. Sensata has an arguably under-leveraged balance sheet and generates healthy free cash flow. The relatively new CEO will likely continue to expand the company’s growth potential through acquisitions. Electric vehicles are an opportunity as they expand Sensata’s reachable market. Sensata is resuming its share buyback program and will probably resume its dividend, as well as look for more acquisitions. ST shares have about 26% upside to our 75 price target.” BUY

Tesla (TSLA), originally recommended by Mike Cintolo in Cabot Top Ten Trader, is at risk of closing at its lowest point since October 22 today, just as CEO Elon Musk was revealed as Time magazine’s Person of the Year. And that’s not unusual; stocks frequently top when the news is great. Today Tesla stock is highly overvalued by many measures and with competitors both young and old gunning for the company, there’s potential for this correction to go deeper. Long-term, however, I remain bullish on the company, in part because of its potential to disrupt the energy industry, but short-term, there’s risk that the stock falls lower. So if you’re of a shorter-term mindset, note that Mike Cintolo, who recommended the stock in Cabot Top Ten Trader back on October 18 (recommending buying between 845 and 865), suggests using a stop near 950 here. HOLD

U.S. Bancorp (USB), originally recommended by Tom Hutchinson in Cabot Dividend Investor for his Dividend Growth Tier, is a slow-moving stock with a good dividend, and the current pullback to under the 200-day moving average looks like a fine buying opportunity. In his latest update, Tom wrote, “The regional bank stock kind of got clobbered in the last half of November. The yield curve flattened and then the virus news pulled cyclical stocks down more. USB has been recovering in December so far. Business at the bank is booming and will likely get even better as interest rates likely trend higher. The Fed tapering along with rising inflationary pressure is likely to put upward pressure on rates. And the economy should remain strong for a while. These things should be great for USB and the stock price should reflect it in the months ahead.” BUY

Veeco Instruments (VECO), recommended by Carl Delfeld in Cabot Early Opportunities, gapped up big five weeks ago after releasing an excellent third-quarter report and has been treading water since, watching its 50-day moving average draw closer. In his update last week, Carl wrote, “Veeco shares were up this week, which is a good sign of strength in a difficult environment, as the company shipped the first Laser Spike Annealing System (LSA101) from their new San Jose, California facility to a leading semiconductor manufacturer. Veeco’s new facility features 70,000 square feet of manufacturing and engineering lab space and 30,000 square feet of office space. The manufacturing space will be nearly double that of Veeco’s previous San Jose facility, indicating an expected increase in this business. This is an American high-quality provider of state-of-the-art semiconductor fabrication equipment. The company delivers the leading-edge technology to U.S.-based and international high-end chipmakers, some of which are 100% reliant on Veeco technology. Revenue growth for 2021 may be up 30% and earnings are growing at a 20% clip. The stock represents a backdoor play on semiconductors. Our expectation is that Veeco is building a base to move a leg higher.” BUY

Verano Holdings (VRNOF), recommended by yours truly in Cabot Marijuana Investor and featured here four weeks ago, has seen its stock pull back in sympathy with all the marijuana stocks, but the good news is that most remain above the lows of early November, so this new uptrend still has a good chance of surviving. Headquartered in Chicago, Verano is the fifth-largest vertically integrated multistate operator in the U.S. marijuana industry, with 89 retail locations in 11 states (Illinois, Florida, Arizona, New Jersey, Pennsylvania, Ohio, Nevada, Maryland, Massachusetts, Michigan, Arkansas) as well as 12 cultivation and production facilities. The company has completed 13 acquisitions already, and will almost certainly complete more. BUY

WillScot Mobile (WSC), originally recommended by Mike Cintolo in Cabot Top Ten Trader and featured here last week, is the leading provider of mobile storage solutions in the U.S., providing developers and contractors with everything they need at job sites. The stock hit a new high last Tuesday and has pulled back normally since. BUY

The next Cabot Stock of the Week issue will be published on December 20, 2021.